| 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 made to it throughout the year of management judgements, internal control matters, Internal Audit activities and the reports of the External Auditors. The Committee’s assessment 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 2018 Annual Report is fair, balanced and understandable. Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2018/19 In October 2018, the FRC issued a report which sets out its perspective on key developments for 2018/19 annual reports. As part of our oversight of this area, we received and reviewed a report from management on its work in respect of the areas of interest to the FRC. We are satisfied that management addressed the areas identified by the FRC in the preparation of this Annual Report to the extent appropriate to our ownership structure. | | Going ConcernEffectiveness of the Committee
As noted above, the Committee membership saw two members leave and one member join during the year. I believe that the Committee has an appropriate mix of skills to enable it to operate effectively and to offer appropriate challenge and support to management. In January 2019, we reviewed the Committee’s responsibilities as set out in the Terms of Reference and confirmed that the Committee had discharged its responsibilities in full in 2018. Full terms of reference can be found on our website at www.aboutsantander.co.uk and a summary is given on page 24. We continued to receive regular reports on enterprise wide risk and to call risk owners to our meetings to account for their progress. We have benefited from the perspectives of each of the three lines of defence to gain assurance and confirm progress in respect of material initiatives intended to mitigate key risk exposures. These actions are examples of how we have looked to inform our debate and decision making in the year and contribute to our effectiveness as a Committee. Priorities for 2019 The Committee will continue to focus on the risks and uncertainties surrounding Brexit. We will also continue to monitor Santander UK’s capital adequacy and to assess credit risk in changing economic conditions. Cyber, third party and otherIT-related operational risks will continue to be a priority, including the adoption of cloud services. We satisfied ourselves that it is appropriatealso expect to use the going concern basis of accountingmonitor closely continuing developments in preparing the financial statements, supported by a detailed analysis providedareas such as model risk, pension risk, and enhancements 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 Santander UK. We considered Santander UK’s resilience in the face of potential stress and prominent events. In making our assessment, we took into account all information of which we were aware about the future, which was at least, but not limited to, 12 months from the date that the balance sheet was signed.
| | | Annual Report 2017 on Form 20-F | Governance | | |
Board Audit Committee Chair’s reportcontinued
Internal Audit
The Internal Audit plan, based on a comprehensive risk assessment, was presented in draft and then final form for challenge and approval by the Committee. The plan has been updated at regular intervals throughout the year, in response to changes in the business and the regulatory environment, and at the request of the Committee.
A recalibration of audit ratings was overseen by the Committee in 2016 to ensure that the full rating scale was applied more consistently and to highlight areas that require immediate attention. This has resulted in an increase in unsatisfactory audit reports being issued. These reports are subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee.
The Committee also chose to invite key members of management with any past due recommendations to present on progress with the implementation of Internal Audit’s recommendations, issues encountered with closing them, key milestones and key dependencies including those relating to Banco Santander.
We received regular reports on audit recommendations from our Head of Internal Audit (Quarterly Internal Audit Reports) and monitored findings as part of our oversight. We considered the aggregate number of recommendations, the rationale for any recommendations becoming overdue, and broader root cause analyses. The Committee also requested that the Head of Internal Audit highlight recommendations becoming due.
The Committee continued to review the remainder of conclusions and recommendations of an external Quality Assurance assessment of a sample of internal audits that had been completed during the second half of 2016 at the request of the Committee. Structured feedback was obtained directly from those who had been audited, which was supplemented by periodic external reviews.
We considered the recommendations made as part of our continuous improvement programme, and supported the further strengthening of the Internal Audit resource base.
A strong engagement between the Internal Audit function and the business during 2017 was noted.
The Chartered Institute of Internal Auditors published in 2017 an updated Guidance on Effective Internal Audit in Financial Services – Second Edition (the Code), and a self-assessment exercise was performed by the Head of Internal Audit against the expectations of the revised code and concluded that the function is generally compliant with the Code. Whilst there were no material gaps, improvement opportunities were identified, which have been included in the function’s Continuous Improvement Plan.
We also assumed lead responsibility for and oversaw the objective setting and performance evaluation of the Head of Internal Audit.
Whistleblowing
The Committee received biannual reports on Santander UK’s whistleblowing activities. The reporting includes oversight of progress reports and outcomes, as well as root cause analysis and information on identifiable trends, hot spots and any observable risks. The reporting also covers developments in the regulatory environment and activities to promote enhancements to Santander UK’s whistleblowing arrangements. The Committee is satisfied that Santander UK has complied with the FCA and PRA regulations on whistleblowing during the year.
The Committee considers that the Whistleblowing Policy and training, both enhanced during 2017, play a key role in supporting our culture and behaviours at all levels in the business. Santander UK has, as part of the continuous process of improving its whistleblowing arrangements, recruited two new full time members of staff to the Central Whistleblowing Team. Both staff members have whistleblowing and investigations experience across a range of industries. These appointments are considered a positive step in the right direction as well as demonstrating the ambition of Santander UK in developing and enhancing its whistleblowing arrangements. The Committee also sees the annual report on whistleblowing which the Board receives and considers.
During the year, I continued to act as the Whistleblowers’ Champion. The purpose of this role is to oversee the integrity, independence and effectiveness of the policies and procedures in this area including ensuring procedures are in place to prevent victimisation of those employees who have raised a whistleblowing concern.
I continued to work closely with management, receiving monthly updates on key areas of whistleblowing activity including trends, communications, awareness, training and testing. I supported management’s continuing education and awareness campaign for whistleblowing by recording personal messages for inclusion in the all staff and manager videos.
Effectiveness
The Board has determined that I have the necessary qualifications and skills to qualify as a Board Audit Committee financial expert as defined in Item 16A of Form 20-F and by reference to the NYSE listing standards, based on my professional background as a former senior audit partner at PwC.
In my capacity as Committee Chair, I meet with key members of the management team and the External Auditor in advance of each Committee meeting. I ensure that the Committee meets with management, the Internal Auditors and the External Auditors in private sessions. I also attend meetings with the PRA, the FCA, the FRC and UK Finance, both on an individual basis and together with the Chairs of audit committees of other major UK banks and other financial institutions.
In line with the Committee’s forward-looking agenda and the Board programme, the Committee will continue to meet eight times a year.
Planned activities for 2018
The specific areas of focus for the Committee for 2018 will be the continuous monitoring and reviewing of the implementation of IFRS 9, the level and adequacy of conduct remediation and corporate credit provisions, the financial control and reporting implications of any change in the economy, and ring-fencing.
| | | | | > Directors’ remunerationCorporate governance report |
Board RemunerationAudit Committee Chair’s report The Committee reviews remuneration policiesOur responsibilities include oversight of the integrity of financial reporting and their implementation forcontrols, the long-term sustainabilityeffectiveness of Santander UK.our internal audit function, the relationship with the external auditors and the adequacy of our whistleblowing arrangements.
Chair’s WelcomeOverview of the year
I am pleased to presentIn 2018, the 2017 Directors’ Remuneration Report. This is comprised of:
main activities of the Committee included: | – | | My report as ChairAssessing the appropriateness of the Committee;key management judgements and related reporting each quarter. |
| – | | The Remuneration report which summarisesConsidering our remuneration policies;exposure to, and provisioning for, PPI given a number of factors including claims volumes, publication of additional FCA guidance and the impact of the FCA’s PPI advertising campaign. |
| – | | The Remuneration implementation report, which shows how these policies have been applied during 2017.Overseeing embedding of IFRS 9, including operation of, and key changes to, models and methodologies, impacts and related controls. |
Overview
| – | | Considering other key areas of provision, including for our consumer credit business operations, as well as contingent liability disclosures for both this matter and our historical role in dividend arbitrage transactions. |
| – | | Considering the disclosures required due to an FCA investigation and fine for historical bereavement and probate practices. |
| – | | Considering the disclosure implications of Santander UK’s ring-fencing arrangements. |
| – | | Considering the impact of IFRS 16 upon its introduction on 1 January 2019. |
| – | | Providing oversight on the adequacy and effectiveness of internal controls over financial reporting. |
| – | | Overseeing the performance of the Internal Audit function, including reviewing the findings arising from an External Quality Assessment (EQA) of the function. |
| – | | Continuing oversight of interaction with our External Auditors. |
| – | | Overseeing Santander UK’s whistleblowing arrangements, including an increase in specialist whistleblowing resources and further enhancements in line with FCA guidance and rules on whistleblowing. |
| – | | Reviewing Santander UK’s Recovery Plan and Resolution Pack. |
We also addressed other responsibilities delegated to the yearCommittee by the Board. Membership I succeeded Scott Wheway asAlain Dromer retired on 31 August 2018, having served on the Committee Chair in July 2017. Scott stepped down to become Chair of the Responsible Banking Committee whilst remaining a member of this Committee. Prior to my appointment as Committee Chair, I served as a Committee member for eighteen months and have been a member of other remuneration committees for overnearly five years. In my time asAlain made a member, I observed how Scott presided over the Committee, driving high standards in remuneration governance.valuable contribution during his tenure and I would like to take this opportunity to thank Scott for his contributionhim on behalf of the Committee. We welcomed Julie Chakraverty who joined the Committee in June 2018. Julie brings extensive financial services experience, digital and I value his continued his Committee membership.innovation knowledge, and a background in risk.
In 2017 we continued to build, strengthenrespect of the Revised Statutory Audit Directive, the Board satisfied itself that at least one member of the Committee had competence in accounting and improve upon the solid foundations established in previous years. We maintained our focus on ensuring that our remuneration policy and outcomes were aligned with and supported Santander UK’s strategic objectives, to drive the Company’s long-term success and promote sound and effective risk management.
We enhanced our approach to Material Risk Takers (MRT) identificationauditing, and the increased governance and controls over risk adjustment both atmembers of the Company level and for individuals.
We spent considerable timeCommittee as a whole had competence in the banking sector, in which we are operating.
At 31 December 2018, all four members of the Committee reviewing our Regulated Remuneration Governance Framework. This provides the over-arching framework for remuneration policies, standards and decisions. We satisfied ourselves that this meets all regulatory requirements and remains fit for purpose. were IndependentNon-Executive Directors. The Committee annually approvesmet the operationnecessary requirements of all our variable reward schemes for our customer facing colleagues. This ensures that allindependence throughout the year, in accordance with the requirements of our incentive plans reward appropriate conduct and do not reward behaviours that could lead to unnecessary risk taking. We approved the remuneration packages for a number of key MRT appointments including reviewing the packagesRule10A-3 of the two new Executive Directors to the Board.
Underlying our approach to remuneration is the Company’s aspiration to be Simple, Personal and Fair in all that we do. We therefore focus on delivering a reward framework that is simple to understand, tailored to individual roles and is competitive to attract, retain and motivate employees of the highest calibre.
Whilst encouraging a high performance culture, we also focus on employees displaying conduct and behaviours aligned to Santander UK’s stated strategic objectives, culture and values, The Santander Way.
A significant proportion of our performance-related pay is deferred over the long-term and remains ‘at risk’. Provisions within our Regulated Remuneration Governance Framework allow Santander UK to reduce or cancel variable pay awards for up to ten years and seven years after they are awarded for Senior Management Functions (SMFs) and MRTs respectively.
The following pages explain how our existing remuneration policy was implemented for 2017 and our priorities for 2018.US Securities Exchange Act 1934.
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In 2018, we considered our exposure to PPI, reviewed the provisions and disclosures for other conduct and operational matters, oversaw the embedding of IFRS 9 and reviewed the findings of an External Review of Internal Audit.” | | | | | “ We maintained our focus on ensuring that our remuneration policy and outcomes were aligned with and supported Santander UK’s strategic objectives.”
| | | | Responsibilities | | | | of the Committee | | | | Read more onp27p24 | | | | Committee membership, tenure and attendance | | | | Read more on p49p47 | 
| Chris Jones Board Audit Committee Chair 26 February 2019 | | | | |
Annemarie Durbin
Board Remuneration Committee Chair
27 February 2018
| | | Annual Report 20172018 | Governance | | |
Board Audit Committee Chair’s reportcontinued 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 2018, we focused on the following significant reporting matters in relation to financial accounting and disclosures: | | | | | | | | | | | Financial reporting issue or judgement | | | | Action taken by the Board Audit Committee | | Outcome | | | | | | | | | Conduct provisions The provision for conduct remediation activities for PPI and other products continued to be highly judgemental and requires significant assumptions including claim volumes, Plevin in scope rates, and determination of liability with respect to a specific portfolio of claims. | | | | – Continued to scrutinise the level and adequacy of conduct provisions and challenged the reasonableness of management’s assumptions throughout the year. – In respect of PPI, the Committee: – Reviewed the judgements and estimates in respect of the provision considering management’s assumptions around changes in claim volumes, uphold rates and average cost of redress. This was in the context of key developments in the year, including: – The FCA’s publication of Consultation Paper (CP) 18/33 on Form 20-Fthe treatment of PPI complaints within the scope of the Supreme Court judgement in Plevin v Paragon Personal Finance Limited. – The FCA’s second advertising campaign on PPI, which commenced in April 2018. – Reviewed updates to the provision model in the light of increased PPI enquiries and complaint inflow levels driven by the media advertising campaign and proactive mailings to customers potentially eligible to make a further complaint. – Reviewed the appropriateness of a provision in relation to a specific PPI portfolio. – In respect of other products, the Committee evaluated management’s judgements and estimates in respect of a provision release relating to the sale of interest rate derivatives, following a client contact and sales review exercise. | | – Endorsed management’s recommendation that no additional charge should be made for PPI. – Agreed with management’s judgement on the level of conduct provisions, including PPI and other products. – We continued to monitor the provisioning levels in light of any changes to claims volumes, inflows and average redress costs. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 30 to the Consolidated Financial Statements. | | | | | IFRS 9 credit provisions Ensuring appropriate application and embedding of IFRS 9 is a significant area of judgement given its technical complexity, the number of judgements needed, and their potential impact. Determining the appropriateness of credit provisions is also highly judgemental, requiring management to make a number of assumptions. | | | | Embedding of IFRS 9 – Monitored the embedding of IFRS 9, including changes to the controls environment, throughout the year. – Reviewed management decisions and challenged key assumptions. – Reviewed the operation of, and key changes to, models and methodologies and their impacts. We placed special focus on the evolution of post-model adjustments as models were enhanced, and the internal governance around forward-looking macroeconomic scenarios and weights, as well as the approach to setting them. – Reviewed the proposed approach toyear-end disclosures, including the recommendations of the PRA’s Taskforce on Disclosures about ECL. | | – Satisfied ourselves that management had a robust methodology for evaluating the results of the models given their complexity and a clear trail of their workings, particularly due to the models’ key outputs. – Noted that model and methodology changes had been approved by the Model Risk Management Forum. – Requested and received further clarity around the process and timelines for reviewing assumptions underlying the economic scenarios. – Endorsed the proposedyear-end disclosures. – We will continue to monitor how adoption of IFRS 9 is embedded in internal governance and business processes. See the ‘Credit risk’ section in the Risk review. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. |
| | | | | > Corporate governance report |
| | | | | | | | | | | Financial reporting issue or judgement | | | | Action taken by the Board Audit Committee | | Outcome | | | | | | | | | IFRS 9 credit provisions continued | | | | Retail credit provisions – Reviewed detailed reports from management throughout the year analysing the proposed provisions. – Considered proposals on refinements to the assumptions underpinning the mortgage provision models and the impacts on the provisions required. | | – Agreed with management’s judgement on the level of retail credit provisions, concluding that provisions remain robust and assumptions were appropriate. – We will continue to monitor retail credit provisions. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 14 to the Consolidated Financial Statements. | | | | | | | | | Corporate credit provisions – Reviewed detailed reports from management throughout the year to satisfy ourselves that any impairment triggers had been correctly identified. – Considered reports on specific cases, as well as a review of the rest of the portfolio to identify other cases that could potentially be at risk. – Discussed other exposures and satisfied ourselves that there had been no impairment triggers in the year that warranted significant adjustment to provision levels. | | – Agreed with management’s judgement on the level of corporate credit provisions, concluding that provisions remain robust and assumptions were appropriate. – We will continue to monitor corporate credit provisions. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 14 to the Consolidated Financial Statements. | | | | | Pension obligations Significant judgement is required on the key assumptions underlying defined benefit pension obligation calculations. Outcomes remain inherently uncertain. | | | | – Reviewed detailed reports throughout the year on the key assumptions underlying the defined benefit pension obligation calculations. We recognised that, although some assumptions are based on observable data, others continue to require significant judgement. – Noted that actuaries continue to help assess our pension obligations due to the calculations’ complexity. – Reviewed enhancements to the discount rate assumption methodology. – Reviewed the controls in place around the quality of some key data used to calculate pension liabilities. – Reviewed the proposed change in respect of equalising pension benefits for men and women in relation to Guaranteed Minimum Pensions (GMP) in the context of the High Court judgement in October 2018 concluding that defined benefit schemes should equalise pension benefits in this regard. – Monitored the continued appropriateness of the methodology and reviewed the inflation, discount and mortality rates applied at theyear-end. | | – Requested and received information on the level of debate and challenge concerning the pension models and proposed changes to the actuarial assumptions. – Noted that the discount rate assumption methodology had been reviewed at the Pension Risk Forum and reviewed by Independent Model Risk Review. – Agreed with management’s approach to the assumptions applied, including changes made in 2018. – Agreed with management’s approach to recognising the impact of GMP equalisation and noted that the full exercise is expected to take time due to its complexity. – Endorsed the proposed quantitative and qualitativeyear-end disclosures in respect of pension obligations. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See ‘Pension risk management’ in the Risk Review. See Note 31 to the Consolidated Financial Statements. | | | | | Ring-fencing Ensuring appropriate implementation of UK ring-fencing legislation is a significant area of judgement given its technical complexity and potential impact. | | | | – Monitored the implementation of Santander UK’s ring-fencing plans throughout the year, with a specific focus on the financial reporting implications. – Reviewed the proposed approach toyear-end disclosures. | | – Noted the successful implementation of UK ring-fencing legislation in advance of the legal deadline. – Endorsed the proposedyear-end disclosures. See Note 43 to the Consolidated Financial Statements. | | | | | Other areas | | | | – Considered the provision in relation to our consumer credit business operations. – Considered the disclosures required due to the FCA investigation and fine for historical bereavement and probate practices, and the Cologne Criminal Prosecution Office and German Federal Tax Office investigation into our historical role in dividend tax arbitrage transactions. | | – Endorsed management’s recommendation that a provision of £58m should be made in the year in relation to our consumer credit business operations. – Endorsed the proposedyear-end disclosures in this regard. See Note 30 to the Consolidated Financial Statements. |
| | | | Annual Report 2018 | Governance | | |
Board RemunerationAudit Committee Chair’s reportcontinued 2017 Business Performance and ImpactThe Committee’s focus continues to be on Remuneration
Our management team has deliveredareas of significant judgement which pose the greatest risk of a solid business performance this year and during 2017, Santander UK continuedmaterial financial statement misstatement. In addition to deliver on its mission to provide a long-term, sustainable return for our shareholders while helping people and businesses prosper. Profit before tax was £1,817m, down from £1,917m in 2016. Our 2017 financial results were impacted by a credit impairment charge for Carillion plc, which offset otherwise good profit growth. Customer satisfaction has improved in the last three years to 63%. This has been a year of solid business performance and payments under our single variable pay plan reflect that. Details of the payments to Executive Directors areareas set out in the Remuneration Implementation Reportpreceding table, the Committee also considers other higher risk items. During the 2018year-end process, these included the identification and assessment of risks of material misstatement due to fraud or error. We also received regular reports on page 47.any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities.
Key activities in 2017External Auditor
We continued to develop and oversee the interaction with PwC and with Mr Jonathan Holloway in his third year as the audit partner, following PwC’s appointment in 2016 resulting from there-tendering of the global external audit. The Committee’sindependence of PwC was considered and monitored throughout the year. Oversight of the relationship with our External Auditors As part of our review of our relationship with PwC, our activities in 2017 included: | – | | Receiving reports on cultural changeConsideration of their work and challengingopinion relating to management to ensure that performance management outcomes and incentives and were directly linked to the Santander values and positive behaviours. Time spent on culture reduced as a result of such matters transferring to the Responsible Banking Committee.judgements. |
| – | | Overseeing enhancement of our governance in respect of ex-ante and ex-post risk adjustment through the establishmentReview of the Individual Accountabilitysummary of misstatements not corrected by management. The Committee (IAC). This management committee overseeswas satisfied that they were not quantitatively or qualitatively material, either individually or in the various business accountability forums (BAFs) that investigate, and make recommendations on, individual accountability. The IAC provides the Remuneration Committee with regular updates and recommendations for adjustments to variable remuneration based on individual accountability.aggregate. |
| – | | Enhancing our framework for identifying MRTs. |
– | | RefreshingDiscussion on the variable remuneration risk adjustment process,level of disclosure in the Annual Report and applying thisHalf Yearly Financial Report to the aggregate bonus pool for MRTs.satisfy ourselves that it is appropriate. |
| – | | Proactively engaging with the PRADiscussion of developments in financial reporting including changes to accounting standards, statute and FCA.best practice. |
| – | | Considering,A review of PwC’s reports on findings and where relevant, approving various remuneration-related regulatory submissionsrecommendations on internal control and financial reporting matters identified during their audit and their view of management’s progress in relation to Pillar III disclosures, MiFID II and the Remuneration Code.resolving them. |
| – | | Approval of a new forward-looking pensions strategy, to ensure that the employee value proposition with respect to pensions is appropriately aligned to our objectivesInteractions, including meetings in private session during each Committee meeting, and competitive to attract, retain and motivate employees of the highest calibre. |
– | | Reviewing and approving revisions to the Regulated Remuneration Governance Framework, which sets out the framework for remuneration policies, standards and decisions. This included updates covering buy-outs, termination payments and incentive plans. |
– | | Considering the content and outcomes of the 2017 Gender Pay Gap report. |
– | | Receiving updates from our advisors on proposed changes to the UK Corporate Governance Code as they pertain to remuneration as well asat other regulatory developments duringtimes throughout the year. |
| – | | ApprovingReviewed the remuneration packages for a number of key MRT appointments. |
– | | Approvinglatest results of the variable reward schemes forFRC’s quality inspections and our customer facing colleagues.auditors’ response to the FRC’s challenge on the general quality of banking audits as well as enquired into the results of any audit quality reviews of Santander UK. |
Membership
DuringBased on the yearabove inputs, which were captured in a formalised assessment, the composition of the Board Committees was reviewed following the establishment of the Responsible Banking Committee. The membership of the Committee was reduced from six to four. All four members of the Committee including the Committee Chair are Independent Non-Executive Directors (INEDs).
Remuneration Committee meetings are regularly attended by the Board Chair, Chief Executive Officer, HR Director, Reward Director, Company Secretary, Chief Risk Officer, Chief Legal and Regulatory Officer and Deloitte LLP, as appointed independent Remuneration Committee advisors. The Committee satisfied itself that Deloitte do not have connections withas to the Company that may impair their independence.rigour and quality of PwC’s audit process.
Non-audit fees We have a policy onnon-audit services provided by our External Auditors, which was updated in 2016 in the context of the Revised Ethical Standard issued by the FRC on auditor independence requirements resulting from the new European Audit Regulation and Directive. Non-audit services were under continuous review throughout 2018 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit tonon-audit fees. All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the full Committee. This process is in addition to the requirement for allnon-audit fees to be approved by the Banco Santander Audit Committee. The fees fornon-audit work performed by PwC in the year, which are disclosed in Note 7, other than audit-related assurance services relating principally to the support of various debt issuance programmes, mainly comprised services in respect of enhancing Santander UK culture and behaviours and the evolution of the responsibility and sustainability strategy. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. We also monitored other fees in respect of work performed by EY, to ensure they remained unconflicted in their role as our appointed Independent Expert in relation to the ring-fencing requirements. Fees fornon-audit work performed by PwC in the year, other than those in relation to audit related assurance services, were approximately 5% of the average of the fees approved for Deloitte, EY and KPMG. The Committee considered the findings of the Competition and Markets Authority (CMA) market study into the UK Statutory Audit market and the Kingman independent review of the Financial Reporting Council and responded to the CMA consultation. Internal controls 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 degree of overlap in responsibilities with those of this Committee, particularly regarding financial reporting controls. Section 404 of the Sarbanes-Oxley Act requires management to report on the design and effectiveness of its internal controls over financial reporting (ICFR) framework. During 2018, further enhancements have been introduced to the framework including commencing a review of the internal control set to ensure they remain appropriate in light of structural changes within the organisation during the course of the year. We considered the financial control environment in the year. Finance and our External and Internal Auditors provided regular reports to the Committee on ICFR, including key systems, and provided feedback on remediation and overall improvements required to ensure that the relevant controls were appropriately designed and operating effectively. This included addressing weaknesses in end user computing controls, controls over IFRS 9 and the Client Assets control environment.
| | | | | > Corporate governance report |
| | | | | Disclosure in the Annual Report We received regular reports from the Disclosure Committee, a senior executive committee chaired by the CFO. Its remit is to advise the Committee on the completeness and accuracy of disclosures in Santander UK’s external reporting. This, together with other reports received in the year, and a review of best practice and the approach of our peers, enabled us to conclude that we were satisfied with the disclosures in this Annual Report. Management also engaged the Board and Committee early on concerning the approach to the report which enabled them to provide input into the overall tone and messaging in a timely manner. Fair, balanced and understandable The 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. In this context, the Disclosure Committee considered and advised us whether: – Key messages remained consistent throughout the document, relating both to financial performance and progress against strategic objectives. – All key judgements, significant risks and 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. | | 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 made to it throughout the year of management judgements, internal control matters, Internal Audit activities and the reports of the External Auditors. The Committee’s assessment 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 2018 Annual Report is fair, balanced and understandable. Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2018/19 In October 2018, the FRC issued a report which sets out its perspective on key developments for 2018/19 annual reports. As part of our oversight of this area, we received and reviewed a report from management on its work in respect of the areas of interest to the FRC. We are satisfied that management addressed the areas identified by the FRC in the preparation of this Annual Report to the extent appropriate to our ownership structure. | | Effectiveness of the Committee As noted above, the Committee membership saw two members leave and one member join during the year. I believe that the Committee has an appropriate mix of skills to enable it to operate effectively and to offer appropriate challenge and support to management. In January 2019, we reviewed the Committee’s responsibilities as set out in the Terms of Reference and confirmed that the Committee had discharged its responsibilities in full in 2018. Full terms of reference can be found on our website at www.aboutsantander.co.uk and a summary is given on page 24. We continued to receive regular reports on enterprise wide risk and to call risk owners to our meetings to account for their progress. We have benefited from the perspectives of each of the three lines of defence to gain assurance and confirm progress in respect of material initiatives intended to mitigate key risk exposures. These actions are examples of how we have looked to inform our debate and decision making in the year and contribute to our effectiveness as a Committee. Priorities for 2019 The Committee will continue to focus on the risks and uncertainties surrounding Brexit. We will also continue to monitor Santander UK’s capital adequacy and to assess credit risk in changing economic conditions. Cyber, third party and otherIT-related operational risks will continue to be a priority, including the adoption of cloud services. We also expect to monitor closely continuing developments in areas such as model risk, pension risk, and enhancements to Santander UK’s risk infrastructure.
| | | | | > Corporate governance report |
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 auditors and the adequacy of our whistleblowing arrangements. Overview of the year In 2018, the main activities of the Committee included: | – | | Assessing the appropriateness of key management judgements and related reporting each quarter. |
| – | | Considering our exposure to, and provisioning for, PPI given a number of factors including claims volumes, publication of additional FCA guidance and the impact of the FCA’s PPI advertising campaign. |
| – | | Overseeing embedding of IFRS 9, including operation of, and key changes to, models and methodologies, impacts and related controls. |
| – | | Considering other key areas of provision, including for our consumer credit business operations, as well as contingent liability disclosures for both this matter and our historical role in dividend arbitrage transactions. |
| – | | Considering the disclosures required due to an FCA investigation and fine for historical bereavement and probate practices. |
| – | | Considering the disclosure implications of Santander UK’s ring-fencing arrangements. |
| – | | Considering the impact of IFRS 16 upon its introduction on 1 January 2019. |
| – | | Providing oversight on the adequacy and effectiveness of internal controls over financial reporting. |
| – | | Overseeing the performance of the Internal Audit function, including reviewing the findings arising from an External Quality Assessment (EQA) of the function. |
| – | | Continuing oversight of interaction with our External Auditors. |
| – | | Overseeing Santander UK’s whistleblowing arrangements, including an increase in specialist whistleblowing resources and further enhancements in line with FCA guidance and rules on whistleblowing. |
| – | | Reviewing Santander UK’s Recovery Plan and Resolution Pack. |
We also addressed other responsibilities delegated to the Committee by the Board. Membership Alain Dromer retired on 31 August 2018, having served on the Committee for nearly five years. Alain made a valuable contribution during his tenure and I would like to take this opportunity to thank him on behalf of the Committee. We welcomed Julie Chakraverty who joined the Committee in June 2018. Julie brings extensive financial services experience, digital and innovation knowledge, and a background in risk. In respect of the Revised Statutory Audit Directive, the Board satisfied itself that at least one member of the Committee had competence in accounting and auditing, and the members of the Committee as a whole had competence in the banking sector, in which we are operating. At 31 December 2018, all four members of the Committee were IndependentNon-Executive Directors. The Committee met the necessary requirements of independence throughout the year, in accordance with the requirements of Rule10A-3 of the US Securities Exchange Act 1934. | | | | |
In 2018, we considered our exposure to PPI, reviewed the provisions and disclosures for other conduct and operational matters, oversaw the embedding of IFRS 9 and reviewed the findings of an External Review of Internal Audit.” | | | | Responsibilities of the Committee Read more on p24 Committee membership, tenure and attendance Read more on p47 |
| Chris Jones Board Audit Committee Chair 26 February 2019 | | | | |
| | | | Annual Report 2018 | Governance | | |
Board Audit Committee Chair’s reportcontinued 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 2018, we focused on the following significant reporting matters in relation to financial accounting and disclosures: | | | | | | | | | | | Financial reporting issue or judgement | | | | Action taken by the Board Audit Committee | | Outcome | | | | | | | | | Conduct provisions The provision for conduct remediation activities for PPI and other products continued to be highly judgemental and requires significant assumptions including claim volumes, Plevin in scope rates, and determination of liability with respect to a specific portfolio of claims. | | | | – Continued to scrutinise the level and adequacy of conduct provisions and challenged the reasonableness of management’s assumptions throughout the year. – In respect of PPI, the Committee: – Reviewed the judgements and estimates in respect of the provision considering management’s assumptions around changes in claim volumes, uphold rates and average cost of redress. This was in the context of key developments in the year, including: – The FCA’s publication of Consultation Paper (CP) 18/33 on the treatment of PPI complaints within the scope of the Supreme Court judgement in Plevin v Paragon Personal Finance Limited. – The FCA’s second advertising campaign on PPI, which commenced in April 2018. – Reviewed updates to the provision model in the light of increased PPI enquiries and complaint inflow levels driven by the media advertising campaign and proactive mailings to customers potentially eligible to make a further complaint. – Reviewed the appropriateness of a provision in relation to a specific PPI portfolio. – In respect of other products, the Committee evaluated management’s judgements and estimates in respect of a provision release relating to the sale of interest rate derivatives, following a client contact and sales review exercise. | | – Endorsed management’s recommendation that no additional charge should be made for PPI. – Agreed with management’s judgement on the level of conduct provisions, including PPI and other products. – We continued to monitor the provisioning levels in light of any changes to claims volumes, inflows and average redress costs. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 30 to the Consolidated Financial Statements. | | | | | IFRS 9 credit provisions Ensuring appropriate application and embedding of IFRS 9 is a significant area of judgement given its technical complexity, the number of judgements needed, and their potential impact. Determining the appropriateness of credit provisions is also highly judgemental, requiring management to make a number of assumptions. | | | | Embedding of IFRS 9 – Monitored the embedding of IFRS 9, including changes to the controls environment, throughout the year. – Reviewed management decisions and challenged key assumptions. – Reviewed the operation of, and key changes to, models and methodologies and their impacts. We placed special focus on the evolution of post-model adjustments as models were enhanced, and the internal governance around forward-looking macroeconomic scenarios and weights, as well as the approach to setting them. – Reviewed the proposed approach toyear-end disclosures, including the recommendations of the PRA’s Taskforce on Disclosures about ECL. | | – Satisfied ourselves that management had a robust methodology for evaluating the results of the models given their complexity and a clear trail of their workings, particularly due to the models’ key outputs. – Noted that model and methodology changes had been approved by the Model Risk Management Forum. – Requested and received further clarity around the process and timelines for reviewing assumptions underlying the economic scenarios. – Endorsed the proposedyear-end disclosures. – We will continue to monitor how adoption of IFRS 9 is embedded in internal governance and business processes. See the ‘Credit risk’ section in the Risk review. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. |
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| | | | | | | | | | | Financial reporting issue or judgement | | | | Action taken by the Board Audit Committee | | Outcome | | | | | | | | | IFRS 9 credit provisions continued | | | | Retail credit provisions – Reviewed detailed reports from management throughout the year analysing the proposed provisions. – Considered proposals on refinements to the assumptions underpinning the mortgage provision models and the impacts on the provisions required. | | – Agreed with management’s judgement on the level of retail credit provisions, concluding that provisions remain robust and assumptions were appropriate. – We will continue to monitor retail credit provisions. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 14 to the Consolidated Financial Statements. | | | | | | | | | Corporate credit provisions – Reviewed detailed reports from management throughout the year to satisfy ourselves that any impairment triggers had been correctly identified. – Considered reports on specific cases, as well as a review of the rest of the portfolio to identify other cases that could potentially be at risk. – Discussed other exposures and satisfied ourselves that there had been no impairment triggers in the year that warranted significant adjustment to provision levels. | | – Agreed with management’s judgement on the level of corporate credit provisions, concluding that provisions remain robust and assumptions were appropriate. – We will continue to monitor corporate credit provisions. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 14 to the Consolidated Financial Statements. | | | | | Pension obligations Significant judgement is required on the key assumptions underlying defined benefit pension obligation calculations. Outcomes remain inherently uncertain. | | | | – Reviewed detailed reports throughout the year on the key assumptions underlying the defined benefit pension obligation calculations. We recognised that, although some assumptions are based on observable data, others continue to require significant judgement. – Noted that actuaries continue to help assess our pension obligations due to the calculations’ complexity. – Reviewed enhancements to the discount rate assumption methodology. – Reviewed the controls in place around the quality of some key data used to calculate pension liabilities. – Reviewed the proposed change in respect of equalising pension benefits for men and women in relation to Guaranteed Minimum Pensions (GMP) in the context of the High Court judgement in October 2018 concluding that defined benefit schemes should equalise pension benefits in this regard. – Monitored the continued appropriateness of the methodology and reviewed the inflation, discount and mortality rates applied at theyear-end. | | – Requested and received information on the level of debate and challenge concerning the pension models and proposed changes to the actuarial assumptions. – Noted that the discount rate assumption methodology had been reviewed at the Pension Risk Forum and reviewed by Independent Model Risk Review. – Agreed with management’s approach to the assumptions applied, including changes made in 2018. – Agreed with management’s approach to recognising the impact of GMP equalisation and noted that the full exercise is expected to take time due to its complexity. – Endorsed the proposed quantitative and qualitativeyear-end disclosures in respect of pension obligations. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See ‘Pension risk management’ in the Risk Review. See Note 31 to the Consolidated Financial Statements. | | | | | Ring-fencing Ensuring appropriate implementation of UK ring-fencing legislation is a significant area of judgement given its technical complexity and potential impact. | | | | – Monitored the implementation of Santander UK’s ring-fencing plans throughout the year, with a specific focus on the financial reporting implications. – Reviewed the proposed approach toyear-end disclosures. | | – Noted the successful implementation of UK ring-fencing legislation in advance of the legal deadline. – Endorsed the proposedyear-end disclosures. See Note 43 to the Consolidated Financial Statements. | | | | | Other areas | | | | – Considered the provision in relation to our consumer credit business operations. – Considered the disclosures required due to the FCA investigation and fine for historical bereavement and probate practices, and the Cologne Criminal Prosecution Office and German Federal Tax Office investigation into our historical role in dividend tax arbitrage transactions. | | – Endorsed management’s recommendation that a provision of £58m should be made in the year in relation to our consumer credit business operations. – Endorsed the proposedyear-end disclosures in this regard. See Note 30 to the Consolidated Financial Statements. |
| | | | Annual Report 2018 | Governance | | |
Board Audit Committee Chair’s reportcontinued The Committee’s focus continues to be on areas of significant judgement which pose the greatest risk of a material financial statement misstatement. In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. During the 2018year-end process, these included the identification and assessment of risks of material misstatement due to fraud or error. We also received regular reports on any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities. External Auditor We continued to develop and oversee the interaction with PwC and with Mr Jonathan Holloway in his third year as the audit partner, following PwC’s appointment in 2016 resulting from there-tendering of the global external audit. The independence of PwC was considered and monitored throughout the year. Oversight of the relationship with our External Auditors As part of our review of our relationship with PwC, our activities included: | – | | Consideration of their work and opinion relating to management judgements. |
| – | | Review of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material, either individually or in the aggregate. |
| – | | Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate. |
| – | | Discussion of developments in financial reporting including changes to accounting standards, statute and best practice. |
| – | | A review of PwC’s reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management’s progress in resolving them. |
| – | | Interactions, including meetings in private session during each Committee meeting, and at other times throughout the year. |
| – | | Reviewed the latest results of the FRC’s quality inspections and our auditors’ response to the FRC’s challenge on the general quality of banking audits as well as enquired into the results of any audit quality reviews of Santander UK. |
Based on the above inputs, which were captured in a formalised assessment, the Committee satisfied itself as to the rigour and quality of PwC’s audit process. Non-audit fees We have a policy onnon-audit services provided by our External Auditors, which was updated in 2016 in the context of the Revised Ethical Standard issued by the FRC on auditor independence requirements resulting from the new European Audit Regulation and Directive. Non-audit services were under continuous review throughout 2018 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit tonon-audit fees. All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the full Committee. This process is in addition to the requirement for allnon-audit fees to be approved by the Banco Santander Audit Committee. The fees fornon-audit work performed by PwC in the year, which are disclosed in Note 7, other than audit-related assurance services relating principally to the support of various debt issuance programmes, mainly comprised services in respect of enhancing Santander UK culture and behaviours and the evolution of the responsibility and sustainability strategy. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. We also monitored other fees in respect of work performed by EY, to ensure they remained unconflicted in their role as our appointed Independent Expert in relation to the ring-fencing requirements. Fees fornon-audit work performed by PwC in the year, other than those in relation to audit related assurance services, were approximately 5% of the average of the fees approved for Deloitte, EY and KPMG. The Committee considered the findings of the Competition and Markets Authority (CMA) market study into the UK Statutory Audit market and the Kingman independent review of the Financial Reporting Council and responded to the CMA consultation. Internal controls 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 degree of overlap in responsibilities with those of this Committee, particularly regarding financial reporting controls. Section 404 of the Sarbanes-Oxley Act requires management to report on the design and effectiveness of its internal controls over financial reporting (ICFR) framework. During 2018, further enhancements have been introduced to the framework including commencing a review of the internal control set to ensure they remain appropriate in light of structural changes within the organisation during the course of the year. We considered the financial control environment in the year. Finance and our External and Internal Auditors provided regular reports to the Committee on ICFR, including key systems, and provided feedback on remediation and overall improvements required to ensure that the relevant controls were appropriately designed and operating effectively. This included addressing weaknesses in end user computing controls, controls over IFRS 9 and the Client Assets control environment.
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| | | | | Disclosure in the Annual Report We received regular reports from the Disclosure Committee, a senior executive committee chaired by the CFO. Its remit is to advise the Committee on the completeness and accuracy of disclosures in Santander UK’s external reporting. This, together with other reports received in the year, and a review of best practice and the approach of our peers, enabled us to conclude that we were satisfied with the disclosures in this Annual Report. Management also engaged the Board and Committee early on concerning the approach to the report which enabled them to provide input into the overall tone and messaging in a timely manner. Fair, balanced and understandable The 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. In this context, the Disclosure Committee considered and advised us whether: – Key messages remained consistent throughout the document, relating both to financial performance and progress against strategic objectives. – All key judgements, significant risks and 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. | | 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 made to it throughout the year of management judgements, internal control matters, Internal Audit activities and the reports of the External Auditors. The Committee’s assessment 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 2018 Annual Report is fair, balanced and understandable. Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2018/19 In October 2018, the FRC issued a report which sets out its perspective on key developments for 2018/19 annual reports. As part of our oversight of this area, we received and reviewed a report from management on its work in respect of the areas of interest to the FRC. We are satisfied that management addressed the areas identified by the FRC in the preparation of this Annual Report to the extent appropriate to our ownership structure. | | Going Concern We satisfied ourselves that it is appropriate to use the going concern basis of accounting in preparing the financial statements, supported by a detailed analysis provided 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 Santander UK. We considered Santander UK’s resilience in the face of potential stress and prominent events. In making our assessment, we took into account all information of which we were aware about the future, which was at least, but not limited to, 12 months from the date that the balance sheet was signed. |
| | | | Annual Report 2018 | Governance | | |
Board Audit Committee Chair’s reportcontinued Internal Audit The Internal Audit plan, based on a comprehensive risk assessment, was presented in draft and then final form for challenge and approval by the Committee. The plan has been updated at regular intervals throughout the year in response to changes in the business and the regulatory environment and at the request of the Committee. In 2018, there was an improvement in the overall distribution of audit ratings, in part due to continued focus on building a stronger control environment. All unsatisfactory audit reports issued were subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee. We chose to invite management to present on progress with the implementation of Internal Audit’s recommendations, issues encountered, key milestones and key dependencies. We received regular reports on audit recommendations from our Head of Internal Audit (Quarterly Internal Audit Reports) and monitored findings as part of our oversight. We considered the total number of recommendations, the rationale for any of them becoming overdue, and broader root cause analyses. The Committee also requested that the Head of Internal Audit highlight recommendations becoming due. We noted a strong engagement between Internal Audit and the business in 2018. We also oversaw the objective setting and performance evaluation of the Head of Internal Audit. Internal Audit External Quality Assessment The Committee reviewed the conclusions and recommendations arising from an EQA of the Internal Audit function. This review is conducted every five years and evaluates the Internal Audit function in respect of its conformance with the standards of the Chartered Institute of Internal Auditors (CIIA), as well as its performance and effectiveness in comparison to industry peers and good practice. The outcome of the review was favourable with the function being compliant with the CIIA’s Guidance on Effective Internal Audit in Financial Services – Second Edition and also benchmarked well against peers. Whilst there were no material weaknesses, as expected improvement opportunities were identified, which have been included in the function’s Continuous Improvement Plan. Whistleblowing Santander UK recognises the importance of a culture where colleagues feel able to speak up. In 2018, management continued to make improvements to its whistleblowing framework and arrangements under our oversight. This included increased resource for both the whistleblowing and investigation teams, improved operating procedures, strengthened controls testing and targeted training. There has been significant senior management engagement, with the CEO sponsoring and opening an awareness event in June 2018. The Committee is responsible for reviewing and monitoring the effectiveness of Santander UK’s whistleblowing procedures. It received and consideredbi-annual reports on Santander UK’s whistleblowing arrangements. The reporting included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, changes to proposed legislation and activities to promote and enhance the arrangements to support the culture of speaking up. The Committee also reviewed the annual Whistleblowing Report prepared for the Board to consider. The Committee is satisfied that Santander UK has complied with the FCA and PRA regulations on whistleblowing in the year. I continued to act as the Whistleblowers’ Champion to oversee the integrity, independence, and effectiveness of the whistleblowing arrangements. I remained focused on procedures and governance to prevent victimisation of those employees raising a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of suggested enhancements to continuously improve the arrangements. Effectiveness The Board has determined that I have the necessary qualifications and skills to qualify as a Board Audit Committee financial expert as defined in Item 16A of Form20-F and by reference to the NYSE listing standards. In my capacity as Committee Chair, I meet with key members of the management team and the External Auditors in advance of each Committee meeting. I ensure that the Committee meets with management, the Internal Auditors and the External Auditors in private sessions. I also attend meetings with the PRA, the FCA and the FRC. In line with an assessment of the Committee’s forward-looking agenda and the Board programme, it has been agreed that the number of scheduled meetings of the Committee will increase to nine in 2019. Committee’s Effectiveness Review In accordance with good governance, the Committee’s effectiveness was considered as part of the Board’s annual evaluation exercise. Further information, including conclusions, have been provided in the Board Nomination Committee Chair’s Report. Terms of Reference The Committee reviews its Terms of Reference annually. Following the 2018 review, they were revised primarily to reflect the requirements of Banking Reform. The Committee’s Terms of Reference are available at www.santander.co.uk Planned activities for 2019 Areas of focus for the Committee for 2019 will include: | – | | The ongoing monitoring and reviewing of the operation of IFRS 9, including reviewing our response to the recommendations of the PRA’s Taskforce on Disclosure about ECL. |
| – | | The financial and disclosure consequences of historical conduct issues including PPI. |
| – | | The financial control and reporting implications of any change in the economy, including any arising from the impact of Brexit. |
| – | | Reporting in line with Santander UK’s ring-fencing requirements. |
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Board Responsible Banking Committee Chair’s report The Committee supports the Board with oversight of culture, inclusion, reputation, customer outcomes and the wellbeing of our employees Role and responsibilities The Committee was established in July 2017 to strengthen Santander UK’s focus on culture, conduct and customer outcomes. Its purpose is to monitor, challenge and support actions taken by management to ensure that the business is run in a socially responsible way, in the interests of Santander UK’s customers, people, stakeholders and communities in order to promote Santander UK’s long-term success. The Committee assists the Board with shaping Santander UK’s culture, reputation and customer propositions through oversight of matters related to conduct, compliance, culture, diversity, sustainability, corporate social 
responsibility, reputation, brand and financial crime (including anti-money laundering, sanctions, terrorist financing and anti-bribery and corruption). Interconnectivity between Board Committees The respective Committee Chairs agreed the timing and transition of various items, either in part or whole, from the Board Remuneration Committee (RemCo) and the Board Risk Committee (BRC) to the Board Responsible Banking Committee (RBC). The phased transition took place between July 2017 and February 2018. The Committee Chairs continue to collaborate to prevent any gaps in coverage and to ensure that any areas of overlap are addressed in the appropriate forum. Collaboration is further enhanced by cross-membership of the three respective Committee Chairs. The Committee has oversight for Conduct and Compliance risk within the Risk Appetite and Risk Framework, set by the BRC and will notify the BRC of any material Conduct and Compliance risk matters that require its consideration. Overview of the year The Committee’s first full year of operation was 2018, during which it considered, monitored and challenged a range of matters, including: Customers and customer outcomes The Committee focused on: | – | | Fair customer treatment and outcomes |
| – | | Fraud prevention and detection |
| – | | Probate and bereavement, including oversight of the process improvements driven by management during the last two years |
| – | | Changes to overdraft charges |
| – | | Themes arising from customer complaints whistleblowing and satisfaction metrics including referrals to the Financial Ombudsman Service |
| – | | Open Banking implementation, and |
| – | | Recruitment,up-skilling our people and enhancing technology to support our customer contact colleagues. |
Reputational risk The Committee ensured that adequate and effective control processes were in place to identify and manage reputational risks. | | | | | | | | | 
“During its first full year of operation, the Committee has ensured that appropriate focus has been given to the issues of responsible banking and how Santander UK’s actions have impacted all of our stakeholders.” 
Scott Wheway Responsible Banking Committee Chair 26 February 2019 | | | | Responsibilities of the Committee Read more on p24 Committee membership, tenure and attendance Read more onp47 |
| | | | Annual Report 2018 | Governance | | |
Board Responsible Banking Committee Chair’s reportcontinued It received and considered reports detailing ongoing and possible reputational, brand and franchise risks, including media and public policy issues. The reports also included any key decisions or key risk events that may give rise to reputational risk issues. Financial crime The Committee: | – | | Received regular updates on Financial Crime from the UK Money Laundering Reporting Officer, including his annual report, and endorsed the proposed recommendations. |
| – | | Monitored progress of Santander UK in developing and implementing effective systems, processes and controls to combat financial crime. |
| – | | Received regular updates on financial crime from the retail and corporate businesses, and |
| – | | Reviewed potential financial crime risks and any actions required in response, including in respect of international sanctions compliance. |
Conduct and Compliance The Committee: | – | | Ensured that adequate and effective control processes and policies were in place to manage and measure Conduct and Compliance risk. |
| – | | Considered key emerging Conduct and Compliance risk issues, lessons learned and anticipated risks via horizon scanning and investigations. |
| – | | Received first and second line reporting against Conduct and Compliance risk metrics and reports on conduct-related regulatory interaction matters. |
| – | | Considered the FCA Firm-Wide Evaluation and appropriate response plans. |
| – | | Considered the 2018 Compliance Programme, including resourcing in the 2018 Compliance Monitoring Plan, and |
| – | | Considered any actions in response to regulatory developments, including individual and market developments, on Conduct and Compliance risk matters which may have a material impact on the business. |
Culture, Diversity and Inclusion The Committee: | – | | Received regular updates on culture. Risk culture, previously considered by the BRC, transitioned to the Committee and was considered as part of an holistic culture update; |
| – | | Considered thematic culture and conduct trends, including management-identified cultural drivers and changes in policy and working practices and the Annual Banking Standards Board assessment; |
| – | | Monitored the culture strategy and monitored management efforts to embed and maintain the desired culture throughout the business in line with Santander UK’s purpose, vision, values and the nine Santander behaviours; |
| – | | Monitored the approach to Diversity and Inclusion, including progress towards gender targets which support reducing the gender pay gap. More information can be found on our website; |
| – | | Reviewed programmes relating to the responsible treatment of employees, including diversity, inclusion and wellbeing; and |
| – | | Reviewed key themes arising from employee surveys, focus groups and people metrics in order to evaluate the impact on conduct, brand and culture. |
Brand The Committee: | – | | Considered and guided on brand purpose. |
| – | | Considered the reputation of Santander UK and how reputational risk impacts its brand and market positioning, and |
| – | | Received reports on brand and reputation tracker metrics. |
Sustainability and Corporate Social Responsibility The Committee oversees Santander UK’s alignment to the UN Principles for Responsible Banking and monitors that the Sustainability and Corporate Social Responsibility strategy helps the bank deliver value to all stakeholders and protects its reputation and brand. A separate Sustainability Report will be issued during the first half of 2019. Membership All five members of the Committee, including the Chair, are IndependentNon-Executive Directors (INEDs). A list of members, details of their experience, qualifications and attendance at Committee meetings during the year are shown on pages 19 and 20, and 47. In addition to the Committee members, regular attendees at Committee meetings include the Board Chair, Chief Executive Officer, Chief Legal and Regulatory Officer, Chief Risk Officer, Head of Retail and Business Banking, Company Secretary, Chief HR Officer, Director of Corporate Communications and the Director of Conduct and Compliance. Committee’s Effectiveness Review In accordance with good governance, the Committee’s effectiveness was considered as part of the Board’s annual evaluation exercise. Further information, including conclusions, have been provided in the Board Nomination Committee Chair’s Report. Terms of Reference The Committee reviews its Terms of Reference annually. Following the 2018 review, they were revised primarily to reflect the requirements of Banking Reform. The Committee’s Terms of Reference are available at www.santander.co.uk 2019 priorities In 2019, the Committee will continue to take an holistic approach to gain greater understanding and oversight of all of the key areas that contribute to the experiences felt by our customers, our people and wider stakeholders. Key priorities within this will be: | – | | Ensuring that our customer propositions are ever more Simple, Personal and Fair. |
| – | | Enhancing fraud protection and financial crime prevention and detection processes. |
| – | | Managing conduct and compliance risk. |
| – | | Ensuring that our change and transformation programmes are delivered in a way that enhances the strength of the organisation and the environment for our people; |
| – | | Managing and enhancing our Brand and reputation. |
| – | | Considering the impact of digital disruption threats on our customers; and |
| – | | Enhancing the wellbeing of our employees. |
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Board Remuneration Committee Chair’s report Underlying our approach to remuneration is Santander UK’s aspiration to be Simple, Personal and Fair in all that we do. This year the Committee has reviewed our overall approach to remuneration, whilst also continuing to embed and enhance our underlying remuneration governance processes. The review of our approach to remuneration focused on whether the current framework remains aligned to Santander UK’s strategy as well as considering the recent changes to the UK Corporate Governance Code. In addition, in light of the structural changes due to Banking Reform, we reviewed our remuneration policies and practices to ensure they are appropriate in advance of 2019. 
| * | Oversight for Culture transferred to the Board Responsible Banking Committee in 2018. |
Our approach to remuneration Underlying our approach to remuneration is Santander UK’s aspiration to be Simple, Personal and Fair in all that we do. We therefore focus on delivering a reward framework that is simple to understand, tailored to individual roles and competitive to attract, retain and motivate employees of the highest calibre. Whilst encouraging a high performance culture, we also focus on employees displaying conduct and behaviours aligned to Santander UK’s strategic objectives, culture and values, The Santander Way. A significant proportion of our performance related pay is deferred over the long-term and remains ‘at risk’. Provisions within our Regulated Remuneration Governance Framework (RRGF) allow Santander UK to reduce or cancel variable pay awards for up to ten years and seven years after they are awarded for Senior Management Functions (SMFs) and Material Risk Takers (MRTs) respectively. Overview of the year Remuneration philosophy The Committee and the Board considered whether our approach to remuneration continues to support our business strategy and align management’s interests with those of our shareholder. A full action plan has been developed, setting out when the Committee will consider key areas for review over 2019. This includes a review of our local retail reward schemes and consideration of how our variable pay frameworks could be enhanced to more appropriately reflect individual and collective performance whilst remaining aligned to our risk appetite. The Committee will also review our current Employee Value Proposition, covering reward plus broader considerations at all levels of the organisation. New UK Corporate Governance Code provisions The Committee considered the requirements of the new UK Corporate Governance Code and its implications for Santander UK. Over the coming year we will continue to monitor evolving market practice and consider how we can improve the Committee’s understanding of the broader workforce policies and practices in order to support decisions on executive pay. | | | | | | |
Whilst encouraging a high performance culture, we also focus on employees displaying conduct and behaviours aligned to Santander UK’s strategic objectives, culture and values, The Santander Way.” 
Annemarie Durbin Board Remuneration Committee Chair 26 February 2019 | | Responsibilities of the Committee Read more on p24 Committee membership, tenure and attendance Read more onp47 |
| | | | Annual Report 2018 | Governance | | |
Board Remuneration Committee Chair’s reportcontinued Performance management framework The Committee reviewed theend-to-end performance management process for MRTs and approved enhancements to our current process which applied for 2018 pay decisions. Risk adjustment We further embedded the processes to support our risk adjustment frameworks. This included enhancements to the individual remuneration adjustment governance through which the Committee receives recommendations from the Individual Accountability Committee (IAC) maintaining oversight of management’s approach toin-year risk adjustments. Structural changes Following the acquisition of Santander Services from Banco Santander SA on 1 January 2018 we sought to align their remuneration policy, governance frameworks and processes with our RRGF, and where appropriate looked to harmonise arrangements. Additionally, in light of the changes to the Santander UK Group due to Banking Reform and in order to ensure compliance with the relevant PRA ring-fencing rules under the Banking Reform Act, we reviewed our remuneration governance, policies and processes during the year. This included anend-to-end review of our RRGF to ensure it was appropriate in advance of 2019. Gender pay As a Committee, we considered our inaugural Gender Pay Gap (GPG) report, which was issued in the first quarter of 2018. We published our second GPG report in the final quarter of 2018. Following its establishment in 2017, the Board Responsible Banking Committee has oversight of the programmes aimed at improving diversity across the bank including closing the gender pay gap. Senior appointments During the year the Committee approved the remuneration arrangements for a number of senior appointments. This included the remuneration package for Susan Allen who was appointed as an Executive Director from 1 January 2019. Variable Pay We reviewed the structure and metrics for our variable reward and our local reward schemes, with a focus on enhancing differentiation, simplification and harmonisation. We sought assurance that any proposed changes to our incentive plans rewarded appropriate conduct and did not reward behaviours that could lead to unnecessary risk taking. Bonus pool approval The Committee approved, with appropriate adjustments, the overall bonus pools for Santander UK, Santander Corporate & Investment Bank (UK) and Santander Consumer UK, taking into account the financial andnon-financial performance achieved together with an assessment of current and future risks. Membership All four members of the Committee including the Committee Chair are IndependentNon-Executive Directors (INEDs). Regular attendees include the Board Chair, CEO, Chief HR Officer, Performance & Reward Director, Company Secretary, Chief Legal & Regulatory Officer, Chief Risk Officer, Deloitte LLP, as appointed independent Remuneration Committee advisers. The Committee satisfied itself that Deloitte do not have connections with Santander UK that may impair their independence. 2018 Business Performance and Impact on Remuneration Our management team has delivered solid business performance this year, delivering for our shareholders, people, customers and communities. The continued progress made ontowards our strategic and operational goals (including the actions arising fromestablishment of the evaluationring-fence bank) was achieved despite the competitive and uncertain environment. Effectiveness of Board effectiveness. I believethe Committee In accordance with good governance, the Committee’s effectiveness was considered. This concluded that the Committee retains an appropriate balance of skills and expertise to carry out its role effectively. The Committee also takes the opportunity at the conclusion of each meeting to reflect, together with management, on the quality of papers, meeting management and any other observations of relevance. Terms of reference The terms of reference were reviewed and revised to reflect changes that had taken place induring the year to membership as well asreflect the scope of the Committee’s role with respect to the IAC and BAFs. In addition, we clarified the delegated authorityemployees of the Committee Chair between meetings. Santander UK. Full terms of reference are available at www.santander.co.ukwww.aboutsantander.co.uk. Priorities for 20182019 In 2018,2019, we will: | – | | UndertakeImplement the changes agreed to our remuneration policies and governance structures due to the structural changes as a market reviewresult of the Company’s reward packageBanking Reform legislation, and monitor their implementation to ensure that our remuneration arrangements continue to support our business transformation. We will continue to reviewthey are operating effectively in the balanced scorecardcontext of quantifiable measures focusing on the people and communities metrics.new structure of the Santander UK Group. |
| – | | Continue to focus on drivingmonitor the effectiveness of our overall remuneration framework, including the structure of our current variable pay plans and determine whether any changes should be made for future years. |
| – | | Review the balanced scorecard of quantifiable measures to ensure they drive the right culture and behaviours balancing the needs of our people, customers, communities and shareholders. |
| – | | ReviewIn the end-to-end performance management process for MRTs. |
– | | Oversee the alignmentspirit of remuneration practices for the expanded workforce following integration of certain Banco Santander group subsidiaries into the Santander UK perimeter. |
– | | Focus on the remuneration implications of the ongoing transformation agenda to achieve the strategic objectives we have set for the three years from 2017 to 2020. |
– | | Continue to monitor gender pay reporting analysis. The Committee is cognisant of addressing any gender profile imbalances within the organisation and this is at the centre of the approach to address any gender pay gap. |
– | | Continue to monitorrecent changes to the UK Corporate Governance Code and ensure that ourmarket practice, consider executive pay in relation to the broader employee remuneration structures and governance remain appropriatearrangements. This includes setting the pensions arrangements of new Executive Director hires in line with those of the general employee population. We will continue to monitor changes in market practice as others respond to the new Code. |
| – | | Implement a new reward scheme for our ownership structure.broader employee population to incentivise the delivery of Santander UK’s key strategic priorities. |
| | | | | > Directors’ remunerationCorporate governance report |
Remuneration report and remuneration policies Basis of preparation The Committee presents thisThis report has been prepared on behalf of the Board.Board by the Board Remuneration Committee. We follow UK corporate governance regulations, guidelines and codes to the extent they areconsidered appropriate totaking into account our ownership structure. Accordingly, a number of voluntary disclosures relating to remuneration have been presented in this report.
Executive remuneration policies and principles Our core values of Simple, Personal and Fair drive our remuneration policy which ispolicy. Our policies are designed with the long-term success of the business in mind, to deliver our business strategy and reinforce our values. We apply a consistent approach to the reward of all our employees which upholds our prudent approach to Risk Appetite which is set as part of a SantanderUK-wide Risk Management Framework. The structure of our variable pay plan for our Executive Directors ensures that there is a clear link between the Company’s strategy and remuneration. Awards under the variable pay plan are based on a balanced scorecard of quantitative and qualitative metrics which are aligned totaking into account Santander UK Group Holding plc’s KPIs in the Santander Compass. The Compass sets out the Company’s KPIs across four quadrants covering eachareas of the main stakeholder groups; Customers, Shareholders Communities and People. The CompassThis ensures that ourday-to-day activities align with the overarchingover-arching strategy of the bank and helps us to measure progress towards our strategic priorities and our aim of being the best bank. The allocation of awards under the variable pay plan takes into account an assessment of the Executive Director’s performance against a performance management framework set at the start of the year covering a range of financial,non-financial, quantitative and qualitative criteria. Forward-looking remuneration policies for Executive Directors Our forward lookingforward-looking remuneration policies are outlined in the table below. Our remuneration Remuneration is structured into two main elements: fixed pay and our single variable pay plan.
Our The aim is to set fixed pay at market competitive levels appropriate for the role. The level of fixed pay aims to be sufficient so that inappropriate risk taking is not encouraged.
Executive Directors’ remuneration structure Fixed Pay | | | | | | | | | | | Principle and description | | Policy | | | | | | | | Base salary | | – Reviewed annually to ensure market competitive pay appropriate for the role. – Set at an appropriate level so that inappropriate risk taking is not encouraged. – Reflects the complexity of each role and 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.conditions. | | | | | | | 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. – Unless determined otherwise, pension arrangements for new appointments to the Board will be in line with the level of pension provision available to the broader workforce. | | | | | | | | Other benefits | | – Benefits are offered to Executive Directors as part of a competitive remuneration package. | | – Includes private medical insurance for Executive Directors and their dependants, life assurance, health screening, relocation allowances and expatriate allowances where relevant. – Access to the Company’s Santander UK’sall-employee share schemes on the same terms as all UK employees. |
Variable Pay
| | | | | | | Principle and description
| | PolicyVariable Pay
| | | | | | Principle and description | | Policy | | | | | | | | Variable pay plan | | – To motivate Executive Directors to achieve and exceed annual financial and strategic targets within the Company’sSantander UK’s Risk Appetite and in alignment with our business strategy and Company values. – Multi-year deferral, further performance testing and delivery in Banco Santander SA shares aligns Executive Directors’ interests to the long-term interestinterests of the Company and the Group.Santander UK. – Deferral of part of the award 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. – 40% of the bonus awarded is paid upfront in the year followingafter the performance year ends (year one), delivered half in cash and half in shares. – 60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered half in cash and half in shares. – The final three award tranches of the award are paid subject to further performance testing, which may reduce the level of deferred payout. – 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 for up to ten years following the grant of an award. |
| | | Annual Report 2017 on Form 20-F2018 | Governance | | |
Remuneration report and remuneration policiescontinued OurThe variable pay plan rewards financial andnon-financial performance over the year with additional long-term metrics applied to the deferred element which can reduce, but not increase, the deferred award.
Our remuneration structures, which incorporate significant long-term deferral and use of Banco Santander SA shares align the interests of Executive Directors with shareholders and encourage the building of a long-term shareholding in Banco Santander SA. Our remuneration policy continues to meet regulatory requirements. Santander UK applies a 2:1 variable to fixed pay cap in line with approvals granted to Banco Santander SA. For control function staff, a lower operational ratio of 1:1 is applied.applied, save for in exceptional circumstances. On recruitment When appointing a new Executive Director, base salary is set at a market competitive level appropriate for the role. The appropriate level is determinedrole, taking into consideration a range of factors including scope and responsibilities of the role, internal relativities, the individual’s previous remuneration, relevant experience, and an assessment against relevant comparator groups and cost. In line with the requirements of the new UK Corporate Governance Code and in particular the guidance on executive director pension levels, unless determined otherwise, any new Executive Director will receive pension benefits at a level aligned to the wider employee population. Other elements of remuneration will be established in line with the Remuneration Policy set out in the Executive Directors’ remuneration structure table below.on page 45. Relocation support and international mobility benefits may also be provided. Buy-out awards Compensation may be provided to Executive Directors recruited externally for the forfeiture of any award on leaving their previous employer. The Committee retains discretion to make such compensation as it deems necessary and appropriate to secure the relevant Executive Director’s employment, and ensure any such payments align with the long-term interests of Santander UK and the prevailing regulatory framework. Service agreements Terms and conditions of employment are set out in individual service agreements which include a notice period of six months from both the Executive Director and the Company. The agreements may be terminated immediately with payment 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 are forfeited. Termination payments The impact of an Executive Director leaving the Company on remuneration under various scenarios reflects the service agreements and the relevant scheme rules, and the Committee’s policy in this area. With respect to outstanding variable pay awards, these lapse on termination, other than where an individual is considered to be a ‘good leaver’. The Committee determines whether an Executive Director is a ‘good leaver’good leaver should their employment end due to injury,ill-health, disability, redundancy, retirement, death, or any other reason at the Committee’s discretion. In 2018, the Committee reviewed its approach to determining good leaver status and has approved a framework intended to guide the Committee to determine the discretionary circumstances when good leaver status is appropriate. Other than a payment in the event of redundancy, Santander UK providesthere are no other compensationpayments upon termination of employment for Executive Directors.Directors anticipated in the policy. Risk and Performance adjustment We will continue to ensure that the requirements of the Remuneration Code on risk and performance adjustment are met for our employees. All variable remuneration is subject to adjustment for all current and future risks through our Additional Risk Adjustment Standard (ARAS) which is linked to Santander UK’sour Board approved Risk Appetite and our Individual Remuneration Adjustment Standard (IRAS).Standard. Our ARASAdditional Risk Adjustment Standard provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment overlay that can result in a downward risk adjustment of up to 100% of the bonus pool or individual awards at the discretion of the Committee. Our IRASIndividual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for making decisions in relation to individual performance adjustments following an Incident, including malus and clawback. In 2017, we enhanced the Standard, establishing the Individual Accountability Committee (IAC) which is a management committee which considers and makes recommendations on accountability following investigations. 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 historichistorical LTIP awards) |
| – | | Requiring repayment on demand (on a net basis) of any cash and share awards received at any time during the ten year period after the date of award |
| – | | Requiring a bonus which has been awarded (but not yet paid) to be forfeited. |
The Committee has full discretion to prevent vesting of all or part of an amount of deferred remuneration and/or to freeze an award during an ongoing investigation in any of the following circumstances: | – | | Evidence of employeeEmployee misbehaviour or material error |
| – | | Material downturn in the performance of Santander UK or a relevant business unit’s performance |
| – | | Santander UK or a relevant business unit suffers a material failure of risk management |
| – | | Significant changes in the Banco Santander SA group’sGroup’s or the Santander UK’s economic or regulatory capital base and the qualitative assessment of risk.risk |
| – | | A materialMaterial restatement of the Banco Santander’sSantander Group’s or Santander UK’s financial statements (except when required due to modification of the accounting rules). |
The Committee seeks input from the Chair of the Board Risk Committee, the CROChief Risk Officer, the Chief Legal and Regulatory Officer, and the CLROChief Internal Auditor when determining whether any performance or risk adjustments are required particularly in relation to the application of risk adjustment to the bonus pool. Furthermore, members of the Board Risk Committee (along with the Audit Committee Chair and Whistleblowing Champion, and another member of the Audit Committee) sit on this Committee. The Committee Chair also engages with the Chair of the Board Risk Committee given that he is no longer a formal member of this Committee.required. Policy for all employees Our performance, reward and benefits approach across the Company 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 grade.reward band. The opportunity of performance-rated compensation available is based on the seniority and responsibility of the role. The Remuneration Committee annually approvesapprove the operation of all of our variable reward schemes for our customer facingcustomer-facing colleagues to ensure that all our plans reward appropriate behaviour and do not incentivise unnecessary risk taking.
| | | | | > Directors’ remunerationCorporate governance report |
Remuneration implementation report Introduction This section of the report outlines how we implementedour Remuneration Policy in 2017. The composition and total remuneration received by each Executive Director in office during the year is shown in the table below. This includes the two Executive Directors appointed to the Board on 1 August 2017; Antonio Roman (Chief Financial Officer) and Javier San Felix (Head of Retail and Business Banking and Deputy CEO of Santander UK).was implemented for 2018. Variable Pay Plan Our Executive Directors participate in a single variable payincentive plan. The purpose of the plan is to align participants’ reward with the financial andnon-financial performance of Santander UK as measured over the financial year. Multi-year deferral, further performance testing and delivery in Banco Santander SA shares ensureensures that Executive Directors’ interests alignare aligned to the long-term interest of the Company and theSantander UK Group. Payments to our Executive Directors are made half in cash and half in shares, spread over seven years, with the final three tranches of awards subject to further long termlong-term metrics which can reduce the level of awards. Awards delivered in shares are subject to an additionalone-year retention period from the point of delivery. The 20172018 Variable Pay Plan pool was determined based on a range of metrics using a balanced scorecard approach (explained further below): Quantitative assessment Measured using a balanced scorecard approach of financial andnon-financial measures. The measures are based on Santander UK’s strategy and for 2018 were: | – | | Aquantitative assessment– Measured at UK level using a balanced scorecard approach of financial and non-financial measures. The measures are based on Santander UK’s strategy (the Compass) and for 2017 were: |
| – | | Customers (Customer Satisfaction(Satisfaction and loyal customers) |
| – | | Employees (Employee Engagement and Enablement Scores)Shareholders |
| – | | Communities (number of scholarships and number of people supported) |
| | – | | Risk (Cost of Credit Ratio and Non-performing loanNPL ratio) |
| | – | | Capital (Contribution to Banco Santander Group Capital)capital) |
| | – | | Profitability (Net Profit and Return on Risk-WeightedRisk Weighted Assets) |
| – | | Aqualitative assessment– This adds context to the quantitative assessment to ensure a balanced assessment of performance has been made. |
– | | Agroup multiplieradjusts the pool upwards or downwards to reflect overall group performance. |
– | | Exceptional adjustment– Intended to cover unexpected factors or additional targets not covered by the quantitative or qualitative assessments. This may also include adjustments not covered in the qualitative assessments, including major risk events. This may be requested at a Banco Santander group or Santander UK level.Employees (Employee Engagement and Enablement Scores). |
Threshold performance under the Customer and Shareholder categories must be achieved in order to access payout under the Employee category. Similarly, the Committee considers a discretionary downward adjustment to the Customer and Shareholder categories if satisfactory performance under the Employee category is not achieved. Finally, anQualitative assessment
This adds context to the quantitative assessment of financial andnon-financial measures to ensure a balanced assessment of performance has been made. Banco Santander Group Multiplier This adjusts the pool upwards or downwards to reflect overall Banco Santander performance. Exceptional Adjustment Intended to cover unexpected factors or additional targets not covered by the quantitative or qualitative assessments. This may also include adjustments not covered in the qualitative assessments, including major risk events. An exceptional adjustment, including additional targets, may be requested at a Banco Santander or Santander UK level. UK-focused risk adjustment linked Linked to Santander UK’s Risk Appetite, is applied. Thisthis provides both a formula-based assessment against Risk Appetite and an additional qualitative risk event assessment overlay (including consideration of people, culture, conduct and other relevant factors) that can result in a downward risk adjustment of up to 100% of the bonus pool or individual awards at the discretion of the Committee. The 2018 Variable Pay Plan operated under our remuneration governance and frameworks applicable prior to the changes required as a result of the ring-fencing rules under the Banking Reform Act. The Committee has considered, reviewed and approved changes required to remuneration governance and frameworks in order to comply with the relevant regulatory rules and these will apply from the 2019 performance year. 20172018 Business Performance and Impact on Remuneration
Our management team has delivered solid Companybusiness performance this year, delivering for our shareholders, people, customers and communities. Our business performance in 2018 showed selective growth in an uncertain and competitive operating environment. – | | Our financial results were impacted by a credit impairment charge for Carillion plc which offset otherwise good profit growth and we maintained a strong capital position |
– | | Loyal retail customers and loyal SME and corporate customers increased in 2017 |
– | | Customer satisfaction improved in the last three years to 63% |
– | | More than 281,000 people were supported in 2017 through our skills, knowledge and innovation projects, exceeding our target. Over £1m was raised for our charity partners. |
Payments under our variable pay plan reflect a year of solid performance. Details of theThe Committee approved payments to Executive Directors are set outunder the Santander UK Variable Pay Plan in the table below.context of this performance.
Rewarding Executives appropriatelyExecutive Directors’ remuneration (audited)
We ensureTotal remuneration of each Executive Director for the years ended 31 December 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Executive rewards | | Nathan Bostock(1) | | | | | Antonio Roman(2) (3) | | | | | Javier San Felix(3) | | | | | Total | | | | | 2018 | | | 2017 | | | | | 2018 | | | 2017 | | | | | 2018 | | | 2017 | | | | | 2018 | | | 2017 | | | | | £000 | | | £000 | | | | | £000 | | | £000 | | | | | £000 | | | £000 | | | | | £000 | | | £000 | | Salary and fees | | | 1,680 | | | | 1,653 | | | | | | 629 | | | | 243 | | | | | | 725 | | | | 302 | | | | | | 3,034 | | | | 2,198 | | Taxable benefits (cash andnon-cash) | | | 50 | | | | 55 | | | | | | 5 | | | | 17 | | | | | | 632 | | | | 329 | | | | | | 687 | | | | 401 | | Pension | | | 588 | | | | 581 | | | | | | 157 | | | | 61 | | | | | | – | | | | – | | | | | | 745 | | | | 642 | | Bonus (paid and deferred) | | | 2,317 | | | | 2,425 | | | | | | 1,077 | | | | 400 | | | | | | 1,800 | | | | 861 | | | | | | 5,194 | | | | 3,686 | | Total remuneration | | | 4,635 | | | | 4,714 | | | | | | 1,868 | | | | 721 | | | | | | 3,157 | | | | 1,492 | | | | | | 9,660 | | | | 6,927 | |
| (1) | Nathan Bostock’s remuneration does not include £1,800,000 (2017: £1,800,000) relating to a share basedbuy-out of deferred awards in respect of his previous employment. This was the final payment under this award. |
| (2) | This represents an allocation of 97% (2017: 90%) of Antonio Roman’s remuneration (for his time spent as a Director of the Company in the year) as he spends 97% of his time on Company business. The remaining 3% (£57,785) (2017: 10% and £175,866) has been allocated to Abbey National Treasury Services plc. This results in total remuneration of £1,926,181. |
| (3) | Antonio Roman and Javier San Felix were appointed as Directors on 1 August 2017 and therefore 2017 remuneration is in respect of a part year. To facilitate his move to the UK, Javier San Felix’s package includes certain expatriate benefits, including a housing allowance, life and accident insurance and death and disability benefits, the costs of which are shared with Banco Santander. During 2018, Javier San Felix’s remuneration package was restructured following his transfer out of the Banco Santander defined benefit pension scheme. Banco Santander contributed £231,922 into its defined benefit pension scheme on his behalf in the period in 2017 in which he served as a Santander UK Executive Director. In 2018, Banco Santander paid £215,403 in defined benefit pension scheme contributions, £205,669 to him in lieu of defined benefit pension contributions, and £243,673 other payments in connection with the restructuring. |
| (4) | Susan Allen was appointed as an Executive Director on 1 January 2019. Her remuneration will be disclosed in next year’s annual report. |
| | | | Annual Report 2018 | Governance | | |
Remuneration implementation reportcontinued Context for decision making The Committee ensures that broader remuneration policies and practices for employees across the Santander UK Group are taken into account when setting the policy for Executive Director remuneration. The Committee annually reviews remuneration trends across the Santander UK Group including the relationship between executive remuneration and the remuneration of other Santander UK Group employees as well as remuneration in the wider UK market when making decisions on executive pay. We overseeThe Committee oversees the broader workforce remuneration policies and practices, the implementation of remuneration and related employment policies across the Santander UK Group and the salary and variable pay awards for all MRTs. WeIt also approveapproves the design of any material performance relatedperformance-related pay plans operated by Santander UK.plans.
As part of ourthe monitoring of pay, across the Company, the following is considered: | – | | 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 pension and other benefit provisionprovisions |
| – | | The design of and the overall spend on variable payincentive arrangements |
| – | | An assessment of conduct across the Company. |
Executive Directors’ remuneration (audited)
Total remuneration of each Executive Director for the years ended 31 December 2017 and 2016.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Executive rewards | | Nathan Bostock(1) | | | | | Antonio Roman(2) | | | | | Javier San Felix | | | | | Total | | | | | 2017 | | | 2016 | | | | | 2017 | | | 2016 | | | | | 2017 | | | 2016 | | | | | 2017 | | | 2016 | | | | | £000 | | | £000 | | | | | £000 | | | £000 | | | | | £000 | | | £000 | | | | | £000 | | | £000 | | Salary and fees | | | 1,653 | | | | 1,600 | | | | | | 243 | | | | – | | | | | | 302 | | | | – | | | | | | 2,198 | | | | 1,600 | | Taxable benefits (cash and non-cash) | | | 55 | | | | 46 | | | | | | 17 | | | | – | | | | | | 329 | | | | – | | | | | | 401 | | | | 46 | | Pension | | | 581 | | | | 560 | | | | | | 61 | | | | – | | | | | | – | | | | – | | | | | | 642 | | | | 560 | | Bonus (paid and deferred) | | | 2,425 | | | | 2,330 | | | | | | 400 | | | | – | | | | | | 861 | | | | – | | | | | | 3,686 | | | | 2,330 | | Total remuneration | | | 4,714 | | | | 4,536 | | | | | | 721 | | | | – | | | | | | 1,492 | | | | – | | | | | | 6,927 | | | | 4,536 | |
(1) | The remuneration figure for Nathan Bostock does not include £1,800,000 (2016: £1,800,000) relating to a share based buy-out of deferred awards in respect of his previous employment. |
(2) | This figure represents an allocation of 90% of Antonio Roman’s remuneration (for his time spent as a director of the Company in 2017) given that he spends 90% of his time on Company business. An additional 10% (£175,866) has been allocated to Abbey National Treasury Services plc, which results in a total remuneration of £896,115.bank. |
The Committee is focused on ensuring that employees are not unduly stretched or inappropriately incentivised. This is monitored using existing employee engagement indicators via the Global Engagement Survey, and
| | | Annual Report 2017 on Form 20-F | Governance | | |
Remuneration implementation reportcontinued
Stakeholder views During 2018, Santander UK engagescontinued to engage with key stakeholders.stakeholders on remuneration-related matters including its main regulators the PRA and FCA. During 2017, Management2018, management and the Committee Chair increased ongoing engagementmaintained dialogue with the PRA and FCA. Employee opinion surveys are undertaken annually on employee engagement, and discussions takediscussion on remuneration matters generally takes place with union representatives during the annual pay review cycle and on relevant employee reward matters. During 2018, the Committee will reviewreviewed its approach to engaging with stakeholders on executive remuneration in light of the outcomes of the consultation on the revisednew UK Corporate Governance Code. This is set out in the Governance section of the Board Nomination Committee Chair’s Report. Advice and support provided to the Remuneration Committee As permitted by its Terms of Reference, the Committee has engaged the advice and support of Deloitte LLP (Deloitte) as independent remuneration consultants at the expense of the Company. Total fees (exclusive of(excluding VAT) for advice and support provided to the Remuneration Committee during the financial year2018 were £185,250.£192,600. Deloitte 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. We areThe Committee is comfortable that the Deloitte engagement partner and team that provides remuneration advice to the Committee do not have connections with the CompanySantander UK that may impair their independence. During the year, In 2018, Deloitte also provided unrelated tax, financial and advisory, risk, assurance and consulting services to Santander UK. The Board Chair, CEO, Chief ExecutiveHR Officer, HR Director,Performance Reward Director, Company Secretary, CLROChief Legal and CRORegulatory Officer and Chief Risk Officer attended Committee meetings by invitation in order to support the discussion of the agenda items as appropriate. The Committee Chair also engages with the Chair of the Board Risk Committee given that he is no longer a formal member of the Committee.when required. No individual participates in discussions regarding their own remuneration. Chair andNon-Executive Directors’ remuneration The Chair’s fee is reviewed and approved by the Committee. The fees paid toNon-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. The Chair is paid anall-inclusive base fee.Non-Executive Directors are paid a base fee, with an additionala supplement for serving on or chairing a Board Committee, save for twoCommittee. Three of the four Group NEDs of Santander UK who receive no fees in respect of their Santander UK duties. The Responsible Banking Committee was formed in 2017 and the fee levels approved in April 2017 for chairing/membership of this Committee were £60,000 and £25,000 respectively. This is in line with the fee levels for the other committees. Genevieve Shore receives £30,000 as the Independent Chair of the Customer Innovation Forum, a non-Board forum. No other changes were made to Non-Executive Directors’ remunerationBoard and Board Committee fees in 2017.2018. The 20172018 fee structure is shown in the table below.
AllNon-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 where twelve months’ written notice is required. Neither the Chair nor theNon-Executive Directors are eligible for pension scheme membership, bonus or incentive arrangements, nor do they have the right to compensation on the early termination of their appointment beyond payments in lieu of notice at the option of Santander UK. In addition, neither the Company.Chair nor theNon-Executive Directors are eligible for pension scheme membership, bonus or incentive arrangements. Relative importance of spend on pay | | | | | | | | | | | | | | | | | | | | | | | | 2017 £m | | | 2016 £m | | | Change % | | 2018
£m | | | 2017
£m | | | Change
% | Profit before tax | | | 1,817 | | | | 1,917 | | | (5.22%) | | | 1,545 | | | | 1,817 | | | (15) | Total employee costs | | | 1,134 | | | | 1,122 | | | 1.07% | | | 1,369 | | | | 1,134 | | | 21 |
Highest paid senior executives
The remuneration of the eight highest paid senior executives for the year ended 31 December 2017 is detailed below. Senior executives are defined as members of the ExecutiveChair and Board Committee (excluding Executive Directors).member fees
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | 7 | | | 8 | | Individuals | | £000 | | | £000 | | | £000 | | | £000 | | | £000 | | | £000 | | | £000 | | | £000 | | Fixed remuneration (including any non-cash and taxable benefits) | | | 881 | | | | 707 | | | | 949 | | | | 693 | | | | 740 | | | | 606 | | | | 590 | | | | 410 | | Variable remuneration (cash – paid) | | | 349 | | | | 261 | | | | 192 | | | | 220 | | | | 144 | | | | 139 | | | | 124 | | | | 105 | | Variable remuneration (cash – deferred) | | | 523 | | | | 392 | | | | 287 | | | | 330 | | | | 216 | | | | 209 | | | | 186 | | | | 158 | | Variable remuneration (shares – paid) | | | 349 | | | | 261 | | | | 192 | | | | 220 | | | | 144 | | | | 139 | | | | 124 | | | | 105 | | Variable remuneration (shares – deferred) | | | 523 | | | | 392 | | | | 287 | | | | 330 | | | | 216 | | | | 209 | | | | 186 | | | | 158 | | 2017 remuneration | | | 2,625 | | | | 2,013 | | | | 1,907 | | | | 1,793 | | | | 1,460 | | | | 1,302 | | | | 1,210 | | | | 936 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Chair and Board Committee member fees | | Board
£000 | | Board
Nomination
Committee
£000 | | Board
Risk
Committee
£000 | | Board
Audit
Committee
£000 | | Board
Remuneration
Committee
£000 | | Board
Responsible
Banking
Committee
£000 | | | | | | | Board
£000 | | Board
Nomination
Committee
£000 | | Board
Risk
Committee
£000 | | Board
Audit
Committee
£000 | | Board
Responsible
Banking
Committee
£000 | | Board Remuneration
Committee
£000 | | Chair (inclusive of membership fee) | | | 650 | | | | 60 | | | | 60 | | | | 60 | | | | 60 | | | | 60 | | | | 650 | | | | – | | | | 60 | | | | 60 | | | | 60 | | | | 60 | | Senior Independent Director | | | 30 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 30 | | | | – | | | | – | | | | – | | | | – | | | | – | | Member | | | 90 | | | | 25 | | | | 25 | | | | 25 | | | | 25 | | | | 25 | | | | 90 | | | | – | | | | 25 | | | | 25 | | | | 25 | | | | 25 | |
| | | | | > Directors’ RemunerationCorporate governance report |
Board and Committee membership, tenure, attendance and remuneration 
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Board | | | Nomination
Committee | | | Risk Committee | | | Audit Committee | | | Responsible
Banking
Committee | | | Remuneration
Committee | | | | | | | | | | | | | | | | | | | | | Scheduled
meetings
attended | | | Ad hoc
meetings
attended | | | Scheduled
meetings
attended | | | Ad hoc
meetings
attended | | | Scheduled
meetings
attended | | | Ad hoc
meetings
attended | | | Scheduled
meetings
attended | | | Ad hoc
meetings
attended | | | Scheduled
meetings
attended | | | Ad hoc
meetings
attended | | | Scheduled
meetings
attended | | | Ad hoc
meetings
attended | | Chair | | Shriti Vadera | | | 9/9 | | | | 3/3 | | | | 4/4 | | | | 1/1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Independent Non-Executive Directors | | Julie Chakraverty(1) | | | 5/5 | | | | 3/3 | | | | – | | | | – | | | | 5/5 | | | | – | | | | 4/4 | | | | 2/2 | | | | 4/4 | | | | – | | | | – | | | | – | | | | Annemarie Durbin | | | 9/9 | | | | 3/3 | | | | – | | | | – | | | | 9/9 | | | | – | | | | – | | | | – | | | | 6/6 | | | | 1/1 | | | | 6/6 | | | | 3/3 | | | | Ed Giera | | | 9/9 | | | | 3/3 | | | | – | | | | – | | | | 9/9 | | | | – | | | | 8/8 | | | | 2/2 | | | | 6/6 | | | | 1/1 | | | | – | | | | – | | | | Chris Jones(2) | | | 9/9 | | | | 3/3 | | | | – | | | | – | | | | 9/9 | | | | – | | | | 8/8 | | | | 2/2 | | | | – | | | | – | | | | 6/6 | | | | 3/3 | | | | Genevieve Shore(3) | | | 8/9 | | | | 2/3 | | | | – | | | | – | | | | 9/9 | | | | – | | | | 8/8 | | | | 2/2 | | | | 5/6 | | | | 1/1 | | | | 1/2 | | | | 0/1 | | | | Scott Wheway(4) | | | 9/9 | | | | 3/3 | | | | 4/4 | | | | 1/1 | | | | 9/9 | | | | – | | | | – | | | | – | | | | 6/6 | | | | 1/1 | | | | 6/6 | | | | 3/3 | | | | Alain Dromer(5) | | | 6/6 | | | | 1/1 | | | | – | | | | – | | | | 5/6 | | | | – | | | | 5/6 | | | | 1/2 | | | | – | | | | – | | | | 4/4 | | | | 2/2 | | Banco Santander nominated Non-Executive Directors | | Lindsey Argalas(6) | | | 9/9 | | | | 2/3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | Ana Botín | | | 6/9 | | | | 0/3 | | | | 3/4 | | | | 0/1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | Gerry Byrne | | | 9/9 | | | | 2/3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | Juan RodríguezInciarte(7) | | | 9/9 | | | | 1/3 | | | | – | | | | – | | | | 7/9 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Executive Directors | | Nathan Bostock | | | 9/9 | | | | 3/3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | Antonio Roman | | | 9/9 | | | | 2/3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | Javier San Felix(7) | | | 9/9 | | | | 3/3 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| (1) | Appointed Chaira director, and member of the Board Audit Committee, Board Responsible Banking Committee and Board Risk Committee on 30 March 2015.11 June 2018 |
| (2) | Senior Independent Director since 18 May 2015.Deemed financial expert |
| (3) | Deemed financial expert. |
(5) | Ceased to beAppointed a member of the Committee on 30 June 2017. |
(6) | Ceased to be Chair of the Remuneration Committee on 32 September 2018 |
| (4) | Senior Independent Director |
| (5) | Resigned as a director on 31 August 2017. Remained2018 |
| (6) | Appointed a member of the Committee.director on 1 January 2018 |
| (7) | Appointed Chair of the Remuneration CommitteeResigned as a director on 3 August 2017.31 December 2018 |
| (8) | Ceased to be a member ofOf the Committeenine scheduled Board meetings in 2018, one was the annual Board Strategy Day, which took place on 30 July 2017 but attended the July 2017 meeting as an observer.19 June 2018 |
| (9) | CeasedCommittees have an open invitation to be a membernon-member directors. Therefore, from time to time directors attend committees of which they are not members. This attendance is not formally recorded in the Board, Nomination Committee, Remuneration Committee and Risk Committee on 1 June 2017; and became an observer at Board Meetings for the remainder of 2017. |
(10) | Ceased to be a member of the Board on 28 February 2017.attendance table above. |
| | | | | | | | | | | | | | | | | | | | | | | | | | Non-Executive Directors | | Date of appointment
as Director | | | 2018 Fees £000 | | | 2017 Fees £000 | | | 2018 Expenses £000 | | 2017 Expenses £000 | | 2018 Total £000 | | | 2017 Total £000 | | | Chair | | | | | | | | | | | | | | | | | | | | | | | | | Shriti Vadera(1) | | | 1 January 2015 | | | | 650 | | | | 650 | | | –(1) | | –(1) | | | 650 | | | | 650 | | | IndependentNon-Executive Directors | | | | | | | | | | | | | | | | | | | | | | | | | Julie Chakraverty | | | 11 June 2018 | | | | 92 | | | | – | | | 1 | | – | | | 93 | | | | – | | Annemarie Durbin | | | 13 January 2016 | | | | 200 | | | | 180 | | | – | | – | | | 200 | | | | 180 | | Ed Giera | | | 19 August 2015 | | | | 200 | | | | 202 | | | – | | 3 | | | 200 | | | | 205 | | Chris Jones | | | 30 March 2015 | | | | 200 | | | | 200 | | | 3 | | 1 | | | 203 | | | | 201 | | Genevieve Shore | | | 18 May 2015 | | | | 198 | | | | 180 | | | 1 | | 1 | | | 199 | | | | 181 | | Scott Wheway | | | 1 October 2013 | | | | 230 | | | | 234 | | | 2 | | 25 | | | 232 | | | | 259 | | Alain Dromer | | | 1 October 2013 | | | | 110 | | | | 165 | | | 12 | | 17 | | | 122 | | | | 182 | | | Banco Santander nominatedNon-Executive Directors(2) | | | | | | | | | | | | | | | | | | | | | | | | | Juan Rodríguez Inciarte | | | 1 December 2004 | | | | 115 | | | | 115 | | | 22 | | 38 | | | 137 | | | | 153 | | | Total | | | | | | | 1,995 | | | | 1,926 | | | 41 | | 85 | | | 2,036 | | | | 2,011 | |
| | | Annual Report 2017 on Form 20-F | Governance | | |
Board and Committee membership, tenure, attendance and remunerationcontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017
Fees
£000 | | | 2016
Fees
£000 | | | 2017
Expenses
£000 | | | 2016
Expenses
£000 | | | 2017
Total
£000 | | | 2016
Total
£000 | | Chair | | | | | | | | | | | | | | | | | | | | | | | | | Shriti Vadera | | | 650 | | | | 650 | | | | – | * | | | – | | | | 650 | | | | 650 | | Independent Non-Executive Directors | | | | | | | | | | | | | | | | | | | | | | | | | Scott Wheway | | | 248 | | | | 230 | | | | 25 | | | | 14 | | | | 273 | | | | 244 | | Alain Dromer | | | 165 | | | | 165 | | | | 17 | | | | 19 | | | | 182 | | | | 184 | | Annemarie Durbin | | | 165 | | | | 165 | | | | – | | | | – | | | | 165 | | | | 165 | | Ed Giera | | | 202 | | | | 200 | | | | 3 | | | | – | | | | 205 | | | | 200 | | Chris Jones | | | 200 | | | | 200 | | | | 1 | | | | 30 | | | | 201 | | | | 230 | | Genevieve Shore | | | 180 | | | | 165 | | | | 1 | | | | 1 | | | | 181 | | | | 166 | | Banco Santander nominated Non-Executive Directors | | | | | | | | | | | | | | | | | | | | | | | | | Ana Botín | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Lindsey Argalas | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Gerry Byrne | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Juan Rodríguez Inciarte | | | 115 | | | | 115 | | | | 38 | | | | 33 | | | | 153 | | | | 148 | | Bruce Carnegie-Brown | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Peter Jackson | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Manuel Soto | | | 111 | | | | 115 | | | | 11 | | | | 22 | | | | 122 | | | | 137 | | Total | | | 2,036 | | | | 2,005 | | | | 96 | | | | 119 | | | | 2,132 | | | | 2,124 | |
* | In addition to the above fees, Shriti Vadera was entitled to taxable benefits as follows: private medical cover of £564 (2016: £588)£733 (2017: £564) and transportation of £24,227 (2016: £29,149)£15,931 (2017: £24,227). |
| (2) | None of the Banco Santander nominatedNon-Executive Directors received any fees or expenses, except as shown. |
| (3) | 2017 fees disclosed above for Annemarie Durbin and Scott Wheway arere-stated from those in the prior year accounts to reflect the timing of the adjustment of fee payments following the transfer of Chairmanship of the Board Remuneration Committee |
| (4) | Directors’ expenses are disclosed above when paid. These will be disclosed on an accruals basis in next year’s accounts. |
| | | | Annual Report 2018 | Governance | | > Directors’ report |
Directors’ report Introduction The Directors have pleasure in submittingsubmit their report together with the financial statements for the year ended 31 December 2017. 2018. The information in the Directors’ Report is unaudited, except where marked. History and corporate structure Santander UK plc (incorporated on 12 September 1988) is a subsidiary of Banco Santander SA, a Spanish retail and commercial bank with a meaningful market share in nine core countries in Europe and the Americas. Santander UK was formed from the acquisition of three former building societies, Abbey National, Alliance & Leicester and Bradford & Bingley, and has been operatingoperated under a single brand since 2010. The ordinary shares of the Company are not traded. A list As described in the CFO Review and elsewhere in this report, certain subsidiaries and portfolios were transferred in 2018, as part of the subsidiariesimplementation of the ring-fence arrangements required under the Financial Services (Banking Reform) Act 2013. Following these transfers, the Company where theyand its subsidiaries comprised only entities whose business is permitted under the Act as a ring-fenced bank. Other group entities including Abbey National Treasury Services plc are incorporated, their registered office and details of branches is provided in the Shareholder information section of the Consolidated Financial Statements. Note 30 providesnow directly or indirectly owned by Santander UK Group Holdings plc. Further details of the Company’s share capital. Structural relationship of Santander UK with Banco Santander – the ‘subsidiary model’
Banco Santander operates a ‘subsidiary model’. This involves autonomous units, such as Santander UK, operatingtransfers are set out in core markets, with each unit being responsible for its own liquidity, funding and capital management on an ongoing basis. The model is designed to minimise the risk to Banco Santander, and all its units, from problems arising elsewhere in Banco Santander. The subsidiary model means that Banco Santander SA has no obligation to provide any liquidity, funding or capital assistance, to any of these units, although it enables Banco Santander SA to take advantage selectively of opportunities.Note 43.
Under the subsidiary model, Santander UK plc generates funding and liquidity through retail and corporate deposits, as well as its own debt programmes and facilities.
Santander UK plc does this by relying on the strength of its own balance sheet and profitability. It does not rely on any guarantees from Banco Santander SA or any subsidiaries of the Banco Santander group outside the Santander UK group.
Related party transactions with companies in the Banco Santander group are managed on an arm’s length commercial basis. Transactions which are not in the ordinary course of business must be approved in advance by the Santander UK Board.
The subsidiary model gives Santander UK considerable financial flexibility, yet enables it to continue to take advantage of 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, Banco Santander 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 Banco Santander SA so as to be able to continue operating as viable standalone businesses.
Whilst the Company is a subsidiary of Banco Santander SA, the Company’s corporate governance model ensures that the Board and management make their own decisions on funding, capital and liquidity having regard to what is appropriate for Santander UK’s business and strategy.
UK Group Framework
Santander UK operates a UK Group Framework of corporate governance which defines our responsibilities and relationship with Banco Santander SA, our sole shareholder. This provides Banco Santander with the oversight and controls they need whilst discharging our responsibilities in the UK. The UK Group Framework sets out, amongst other elements:
– | | The principle that at least 50% of the Board should be INEDs and the other 50% either Executive Directors or Banco Santander nominated Non-Executive Directors |
– | | The definition of independence, in recognition of our ownership, is a Director who has no current or recent relationship with Banco Santander and Santander UK, other than through the UK Board role. Under this definition the Chair is considered independent |
– | | The manner in which the Chair, Chief Executive Officer, other 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. |
Result and dividends The consolidated profit after tax for the year was £1,256m (2016: £1,319m)£1,104m (2017: £1,256m). The Directors do not recommend the payment of a final dividend for 2017 (2016:2018 (2017: £nil). TwoThree interim dividends were declared on the Company’s ordinary shares in issue duringin the year. The first dividend of £323m£250m was declared on 276 June 20172018 and the second dividend of £230m£221m was declared on 1518 December 2017. Both2018. Pursuant to Banking Reform, an additional interim dividend of £668m was declared on 18 September 2018. All three interim dividends were paid in 2017.2018. Details of Santander UK’s activities and business performance during 2017,in 2018, together with an indication of future outlook, are set out in the Strategic report on pages 2 to 4 and the Financial review on pages 5 to 17.review. Events after the balance sheet date There have been no material post balance sheet events.events, except as set out in Note 45. Directors The names and biographical details of the current Directors are shown on pages 19 to 23. Particularsin the Board of Directors section. Details of their emoluments and interests in shares can be foundare set out in the Directors’ Remuneration implementation report on pages 47 and 48.report. Changes to the composition of the Board can be found on pages 49 and 50,in the Board of Directors section, with furthermore details in the Chair’s report on Corporate Governance, on pages 24 to 27, and each of the relevant Committee Chair’s reports on pages 28, 30, 37 and 43.Chairs’ reports. Appointment and retirement of Directors All Directors are appointed and retired in accordance with the Company’s Articles of Association, the UK Companies Act 2006 and the UK Group Framework. The appointment of Lindsey Argalas in January 2018 was proposed by Banco Santander. 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 electionA resolution will be proposed at the next Annual General Meeting. The appointmentMeeting to amend the Articles of Gerry Byrne was proposed by Banco Santander.
| | | Annual Report 2017 on Form 20-F | Governance | | |
Association to require Directors to retire every year, with those wishing to serve again submitting themselves for election orDirectors’ reportre-election.continued Directors’ indemnities In addition to Directors’ and Officers’ liability insurance cover in place throughout 2017,2018, individual deeds of indemnity were also in place to provide cover to the Directors for liabilities to the maximum extent permitted by law. These remain in force for the duration of the Directors’ period of office from the date of appointment.appointment until such time as any limitation periods for bringing claims against the Directors have expired. The Directors of the Company, including former Directors who resigned duringin the year, benefit from these deeds of indemnity. They constitute as 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 associatedaffiliated companies, including former Directors who resigned duringin the year and since theyear-end. Qualifying pension scheme indemnities were also granted to the Trustees of the Santander UK group’s pension schemes. Employees We continue to ensure that ourSantander UK’s remuneration policies are consistent with ourits strategic objectives and are designed with theits long-term success of the Company in mind. In doing so, we aim to attract and retain the most talented and committed people with first class development schemes and a customer-focused culture that empowers people, values individuality and encourages collaboration. A highly motivated and engaged workforce provides the best service for our customers.people. 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. Theand the ‘We are Santander’ website connects staff to all the information they need about working for Santander UK. Santander UK also usesface-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 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-wideSantanderUK-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 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. Employee share ownership Santander UK continues to operate twoall-employee, HMRC-approved share schemes: aSave-As-You-Earn (Sharesave) Scheme and a Share Incentive Plan (SIP), the latter of which allows employees to purchase Banco Santander SA shares from gross salary. Eligible senior management can participateparticipated in a Banco Santander long-term incentive plan. See Note 34 to the Consolidated Financial Statements38 for a description of the plans and the related costs and obligations. 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 isWe are committed to giving full and fair consideration to applications for employment madeapplications by disabled people, having particular 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 adjustment within the workplace.
CO2 emissions This yearIn 2018 CO2 emissions, measured in CO2 equivalent tonnes, have decreased by 7.94% year on year11% to 11,4859,718 tonnes. CO2 from fuel has decreased by 5.79%3% to 5,4885,121 tonnes, in 2017, CO2 from business travel has decreased by 9.82%19% to 5,9974,598 tonnes in 2017 and output per employee tonne has reduced by 9.62%12% to 0.47 tonnes in 2017.0.39 tonnes.
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 Conduct, as updated in December 2015. Thiswhich sets out the standardsstandard expected of all employees, and supports The Santander Way and Santander UK’s commitment to being Simple, Personal and Fair.employees. 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. Thesepolicies, which require employees to:
| – | | Abide by all relevant laws and regulations |
| – | | Act with integrity in all their business actions on behalf of Santander UK |
| – | | Not use their authority or office for personal gain |
| – | | Conduct business relationships in a transparent manner |
| – | | Reject all improper practices or dealings to which they may be exposed. |
The SEC requires companies to disclose whether they have a code of ethics that applies to the CEOChief Exective Officer 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.
The Santander UK group 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,Businesses, and the FCA’s PrinciplesStatements of Principle 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
Copies of these documents are available to anyone, free of charge, on application to Santander UK plc, 2 Triton Square, Regent’s Place, London NW1 3AN. Political contributions In 20172018 and 2016,2017, no contributions were made by the Company for political purposes and no political expenditure was incurred. Share 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 30 to the Consolidated Financial Statements.33. DetailsFor details of employee share schemes and how rights are exercisable, can be found insee Note 34 to the Consolidated Financial Statements.38.
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. Subsidiaries and branches The Santander UK group consists of a parent company, Santander UK plc, incorporated in England and Wales, and a number of directly and indirectly held subsidiaries and associates. Santander UKThe Company directly or indirectly holds 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 United States and until October 2017 had a branch office in the Cayman Islands. Santander UK plc has branches in the Isle of Man and in Jersey. For furthermore information, see Note 19 to the Consolidated Financial Statements and ‘Subsidiaries, joint ventures and associates’ in the Shareholder information section of this Annual Report.21. Financial instruments The financial risk management objectives and policies of Santander UK, the policy for hedging, and the exposure of Santander UK to credit risk, market risk and liquidity risk are outlined in the Risk review. Research and development Santander UK has a comprehensive product approval process and policy. New products, campaigns and business initiatives are reviewed by Santander UK’s Proposition Approval Forum. Supervision and regulation Santander UK is authorised by the PRA and regulated by the FCA and the PRA. Some of its subsidiaries and associates are also authorised by the PRA or the FCA, and regulated by the FCA or both the FCA and the PRA. 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. 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. We have carried out a robust assessment of the principal risks facing Santander UK (as set out in ‘How we define our risks’ on page 59in the Risk governance section of the Risk review) including those that would threaten its business model, future performance, solvency or liquidity. For more details, see the Strategic report and the Risk review. 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 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) as issued by the International Accounting Standards Board (IASB) and endorsed by the European Union.EU. Santander UK’s internal control over financial reporting includes: | – | | Policies and procedures that relate to the maintenance of records that fairly and accurately reflect transactions and dispositions of assets |
| – | | 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 management |
| – | | 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.
| | | Annual Report 2017 on Form 20-F2018 | Governance | | |
Directors’ reportcontinued 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 20172018 based on the criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in May 2013 (the 2013 Framework).2013. Based on this assessment, management concluded, at 31 December 2017,2018, that Santander UK’s internal control over financial reporting was effective. Disclosure controls and procedures over financial reporting Santander UKUK’s management has evaluated, with the participation of its CEO and CFO, the effectiveness of Santander UK’sits disclosure controls at 31 December 2017.2018. 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’sthis evaluation, the CEO and the CFO have concluded that, at 31 December 2017,2018, Santander UK’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Santander UK in the reports that it 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 CFO, as appropriate, to allow timely decisions regarding disclosure. Changes in internal control over financial reporting There were no changes to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Directors oversaw the implementation of IFRS 9 and the embedding of changes to processes, internal controls and governance to ensure they remain appropriate for use. 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 on pages 5 to 17.review. 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. 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.financial statements are approved. In making their going concern assessment, the information considered by the Directors includes Santander UK’s forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities, ring-fencing, 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 standalone basis and is subject to regular and rigorous monitoring by external parties. For capital purposes, from 1 January 2019 the Company operates as part of the ring-fenced bank sub-group Capital Support Deed. Funding and liquidity purposes, the Company operates as part of the Domestic Liquidity sub-group. The Directors review the outputs of stress testing as part of the approval processes for the ICAAP, the ILAAP, our Risk Appetite and regulatory stress tests. We exceeded The Directors have a reasonable expectation that Santander UK will be able to continue in operation and meet its liabilities as they fall due over the Bank of England’s 2017 stress test threshold requirement.next three years. The Directors consider 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, for the year ended 31 December 2017,2018, Santander UK has applied those principles and provisions of the UK Corporate Governance Code 2016, as appropriate, given its ownership structure. BBAUK Finance Code for Financial Reporting Disclosure
Santander UK’s financial statements for the year ended 31 December 20172018 have been prepared in compliance with the principles of the BBAUK Finance 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) 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).
The Directors are 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 (which is incorporated into the Strategic report 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 Framework for the preparation and presentation of financial 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 policies |
– | | Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information |
– | | Provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, and other events and conditions on the entity’s financial position and financial performance |
– | | 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 our website.
Legislation in the UK 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 himself or herself 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 PricewaterhouseCoopers LLP have expressed their willingness to continue in the office of auditor and a resolution to reappoint them will be proposed at the Company’s forthcoming Annual General Meeting. By Order of the Board  
Marc Boston Company Secretary 2726 February 20182019
2 Triton Square, Regent’s Place, London NW1 3AN
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| | | | Annual Report 2018 | Risk review | | |
Risk review This Risk review consists of audited financial information except where it is marked as unaudited. The audited financial information is an integral part of our Consolidated Financial Statements. 
| | | Annual Report 2017 on Form 20-F | Risk review | | > Risk governance |
Risk governance INTRODUCTION(unaudited)(UNAUDITED) Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy and have common Boards, albeit the principal business activities of the Santander UK Group Holdings plc group are carried on by Santander UK plc and its subsidiaries. The Santander UK Group Holdings plc Risk Frameworks have been adopted by the Company and its subsidiaries to ensure consistency of application. Prior to November 2018, the Risk Frameworks were applied from the level of Santander UK plc across the Santander UK group and adopted by Santander UK Group Holdings plc. As a result, the review of the principal risks and uncertainties facing the Company, and the description of the Company’s risk management arrangements, are integrated with those of Santander UK Group Holdings plc and are reported in this Annual Report as operating within the Company for all periods presented. 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. RISK FRAMEWORK Key elements(unaudited) 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 our 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. |
In 2017,2018, we updated our Risk Framework partly in preparation for ring-fencing to ensure it remains comprehensive and to improve our focus on key risk issues:issues. This update reflected the establishment of a Senior Management Committee, under the authority of the CEO, to focus on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged. – | | We introduced two new committees: |
| – | | The Board Responsible Banking Committee, which reviews risks relating to conduct, compliance, competition, financial crime and legal matters. It also provides advice, oversight and challenge to maintain a supportive risk culture throughout the business. |
| – | | The Incident Accountability Committee, which considers, calibrates and agrees any appropriate individual remuneration adjustments recommended by the Business Accountability Forum and presents recommendations to the Board Remuneration Committee. |
– | | We now include legal risk as a risk type on its own. This reflects its importance and enables us to give it a higher level of focus. |
– | | We transferred responsibility for reputational risk to the Chief Legal and Regulatory Officer (CLRO) from the Chief Risk Officer (CRO). |
– | | We merged the management of conduct and regulatory risk to take advantage of the synergies between these risk types. This is aligned to the approach used by Banco Santander. |
How we define risk(unaudited) Risk is any uncertainty about us being able to achieve our business objectives. It can be split into a set of key risk types, each of which could affect our results and our financial resources. OurEnterprise wide risk is the aggregate view of all the key risk types are:described below: | | | Key risk types | | Description | Credit | | The risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for which we have assumed a financial obligation. | Market | | Trading market risk – the risk incurred as a result of changes in market factors that affect the value of positions in the trading book.
Banking market risk – the risk of loss of income or economic value due to changes to interest rates in the banking book or to changes in exchange rates, where such changes would affect our net worth through an adjustment to revenues, assets, liabilities and off-balance sheet exposures in the banking book. Trading market risk – the risk incurred as a result of changes in market factors that affect the value of positions in the trading book. | Liquidity | | The risk that 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 types of risk:
– 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, that is 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.
| Capital | | 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. | 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 need to make payments or other contributions with respect to a pension scheme due to a moral obligation or for some other reason. | Conduct and regulatory | | Conduct risk – the risk that our decisions and behaviours lead to a detriment or poor outcome for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk – the risk of financial or reputational loss, or imposition or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. | Other key risk types | | Operational risk – the risk of loss due to inadequate or failed internal processes, people and systems, or external events. Our top three key operational risks are: – Cyber risk
– Third party supplier management
– ProcessWe give a particular focus to process and change management.management risk, third party risk and cyber risk which we mitigate through our management of operational risk.
Financial crime risk – the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, bribery and corruption. Failure to meet our legal and regulatory obligations could result in criminal or civil penalties against Santander UK or individuals, as well as negatively affecting our customers and the communities we serve. Legal risk – the risk of an impact arising from legal deficiencies in contracts; failure to take appropriate measures to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to discharge duties or responsibilities created by law or regulation. Model risk – the risk that the results of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately.
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. Model risk – the risk that the results of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately. |
Enterprise wide risk is the aggregate view of all the key risk types described above.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
How we approach risk – our culture and principles(unaudited) 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, people and communities.communities by acting responsibly. It is vital that everyone in our business understands that.this. 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 will always remain prudent in identifying, assessing, managing and reporting all risks. We proactively encourage our people to take personal responsibility for doing the right thing and to challenge without fear. We ensure decisions and actions take account of the best interests of all our stakeholders and are in line with The Santander Way. |
The Board reviews and approves our Risk Culture Statement every year. The CEO, CRO, CLRO 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 Certifications 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 and 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 Certifications 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 certification lists any exceptions and the agreed actions to be taken to correct them. This is a very tangible sign of the personal accountabilityresponsibility that is such a key part of our risk culture. Making change happen: I AMOur Risk – everyone’s personal responsibility for managing risk
Culture programme, I AM Risk, continues to play a key part in our aim to be the best bank for our people, customers, shareholders and communities. Our I AM Risk approach aims to make sure our people: – | | | – Identifyrisks and opportunities |
– | | Assesstheir probability and impact |
– | | Managethe risks and suggest alternatives |
– | | Report, challenge, review, learn and ‘speak up’. | |  |
We use I AM Risk in our risk certifications, policies, frameworks and governance, and in all our risk-related communications. We also include it in mandatory training and induction courses for our staff, in our codes of conduct and in rewards and incentives.reward arrangements. We embed the behaviours we want to encourage in key processes and documents. I AM Risk is how we make risk management part of everyone’s life as a Santander UK 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, to speak up and to come up with ideas that help us change.ideas. To support this, our learning website includes short films, factsheetse-learning videos and discussion boards. factsheets. As part of I AM Risk, we include mandatory risk objectives for all our people in our performance management processes – from our Executive Risk Control Committee to branch staff. The Santander Way SteeringExecutive Committee coordinatesleads all our culture initiatives under the sponsorship of the CEO. In 2017, we made good progress with continuing to embed personal accountability for managing risk across the business. For all new and existing employees, we enhanced our mandatory risk training and we ensured that the updated performance management risk objectives were used across the business. In our most recent employment engagement survey, 94%over 90% of employees acknowledged their personal responsibility for risk management and 97% of employees confirmed thatthe risks they are aware of how to escalate and report potential risks.face in their day-to-day work. This demonstrates how we are successfully embeddinghave embedded risk management in our culture. 
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 certain responsibilities to Board Level 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 |
| – | | RolesKey senior management roles with defined risk management responsibilities:Senior roles with specific responsibilities for risk
|
| – | | Risk organisational structure:We have ‘three lines of defence’ built into the way we run our business. |
Committees The Board Level Committee responsibilities for risk are: | | | | | | Board Level 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 strategy and advises the Board on both | | | – Reviews the effectiveness of our risk management systems and internal controls. | Board Responsible Banking Committee | | – Responsible for culture and operational risks relating to conduct, compliance, competition, financial crime and legal matters | Committee | | – Reviews reports from the CLRO on the adequacy and effectiveness of the compliance function | | | – Ensures that adequate and effective control processes are in place to identify and manage reputational risks | | | – Oversees our reputation and how this impacts our brand and market positioning. | Board Audit Committee | | – Monitors and reviews the integrity of the financial statements, and any formal announcements relating to the financial performance – Reviews the adequacy and effectiveness of the internal financial controls and whistleblowing arrangements – Monitors and reviews the effectiveness of Santander UK’s internal audit function. |
The Executive Level Committee responsibilities for risk are: | | | | | | Executive Level Committee | | Main risk responsibilities | Executive Committee | | – Reviews and approves business plans in line with our Risk Framework and Risk Appetite before they are sentrecommended to the Board to approvefor approval | | | – Receives updates on key risk issues managed by CEO-level committees and monitors the actions taken. | Senior Management Committee | | – Focuses on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged – Reviews updates on key risk issues, customer, reputational and conduct matters. | Executive Risk Control Committee (ERCC) | | – 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 corrective steps we need to take. | Asset and Liability Committee (ALCO) | | – Reviews liquidity risk appetite (LRA) proposals before they are sent to the Board to approve | Committee (ALCO) | | – Ensures we measure and control structural balance sheet risks, including capital, funding and liquidity, in line with the policies, strategies and plans set by the Board | | | – Reviews and monitors theour 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 reviews 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 risk control processes, reporting systems and risk control 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),ICAAP, before they are sent to the Board to approve. | Incident Accountability Committee | | – Considers, calibrates, challenges and agrees any appropriate individual remuneration adjustments recommended by the Business Accountability Forums | | | – Presents recommendations to the Board Remuneration Committee. | Executive Credit Approval Committee | | – Approves corporate and wholesale credit transactions which exceed levels delegated to lower level approval forums or individuals. | Executive Investment Approval Committee | | – Approves equity type investment transactions which exceed levels delegated to lower level approval forums or individuals. |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
RolesKey senior management roles with risk management responsibilities
Chief Executive Officer The Board delegates responsibility for our business activities and managing risk on a day-to-day basis to the CEO. The main risk responsibilitiesCEO proposes our strategy and business plan, puts them into practice and manages the risks involved. The CEO also has to ensure that we have a suitable system of controls to manage risks and report to the CEO are to:Board on it. – | | Propose our strategy and business plan, put them into practice and manage the risks involved |
– | | Ensure we have a suitable system of controls to manage risk and report to the Board on it |
– | | Foster a culture that promotes ethical practices and social responsibility |
– | | Ensure all our staff are aware of the policies and corporate values approved by the Board. |
Chief Risk Officer As the leader of the Risk Division, the CRO oversees and challenges risk activities, and ensures new lending decisions are made within our Risk Appetite. The CRO reports to the Board through the Board Risk Committee, and also reports to the CEO for operational purposes. The CRO also reports functionally to the global CRO for the Banco Santander group. The main responsibilities of the CRO are to: – | | Propose a Risk Framework to the Board (through the Board Risk Committee) that sets out how we manage the risks from our business activities within our approved Risk Appetite |
– | | Advise the CEO, the Board Risk Committee and Board on our Risk Appetite linked to our strategic business plan and why it is appropriate |
– | | Reassure the Board and our regulators that we identify, assess and measure risk and that our systems, controls and delegated authorities to manage risk are adequate and effective |
– | | Advise the CEO, Board Risk Committee, the Board and our regulators on how we manage key risks and escalate issues or breaches of Risk Appetite |
– | | 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 |
– | | Ensure an appropriate governance structure is in place to make effective credit decisions. |
The CRO is accountable for the control and oversight of credit, market, liquidity, capital, pension, strategic, operational and model risk. The CLRO is accountable for the control and oversight of legal, conduct and regulatory, reputational and financial crime risk, and is responsible for reporting on these risks to the CRO to provide them with a holistic enterprise wide view of all risks.
Chief Legal and Regulatory Officer The CLRO is accountable for the control and oversight of legal, conduct and regulatory, reputational and financial crime risk. The CLRO reports relevant mattersrisk, and is responsible for reporting on these risks to the Board Responsible Banking Committee (BRBC), the Board Risk Committee and the Board. The main responsibilitiesCRO to provide them with a holistic enterprise wide view of the CLRO are to:all risks. – | | Propose a Risk Framework for legal, conduct and regulatory, reputational and financial crime risk to the Board (through the Board Risk Committee and the CRO) that sets out how we manage these risks in line with our Risk Appetite |
– | | Advise the CRO, CEO, the Board Risk Committee and the Board on our risk appetite for legal, conduct and regulatory, reputational and financial crime risk, linked to our strategic business plan and why it is approved |
– | | Reassure the CRO, the BRBC, the Board and our regulators that we identify, assess and measure legal, conduct and regulatory, reputational and financial crime risk appropriately and that our systems, controls and delegated authorities to manage risk are adequate and effective |
– | | Advise the CRO, CEO, the Board Risk Committee, the BRBC, the Board and our regulators on how we manage key legal, conduct and regulatory, reputational and financial crime risks and escalate any issues or breaches of our Risk Appetite |
– | | Ensure that our culture promotes ethical practices and social responsibility and contributes to the management of reputational risk |
– | | 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. |
– | | Provide an assessment on Legal, Conduct & Regulatory, Reputational and Financial Crime risks to the CEO, CRO, BRC, BRBC, Board and our regulators on how these risks are being managed in the Santander UK Group and escalate to the CRO, BRC and Board any issue or breach of appetite. |
Chief Financial Officer The main risk responsibilitiesCFO is responsible for the development of strategy, leadership and management of the CFO are to:Division. In supporting Santander UK’s corporate goals within the constraints of risk appetite, the CFO is responsible for the management of interest rate, liquidity, pension and capital risks. – | | Deliver the strategy approved by the Board, in line with the authority delegated to him by the CEO |
– | | Manage the day-to-day operations of their business division, in line with agreed business plans, delegating appropriate authority prudently |
– | | Manage and control effectively in line with the relevant risk types and activity framework relevant to the CFO Division |
– | | Demonstrate an awareness and understanding of the main risks facing the CFO Division and how to manage the risks involved. The key risk types being: |
| – | | Interest Rate Risk and Forex Risk in the banking book: these risks are managed within the Risk Appetite and limits approved by the Board |
| – | | Liquidity Risk: these risks are managed within the Risk Appetite and limits approved by the Board |
| – | | Pension Risk: oversight of the management of the Pension Scheme by the Trustee and agreement with them to manage Pension Scheme assets and liabilities to minimise volatility in IAS19 funding levels and negative impact on capital. To agree investment strategy with the Trustee to manage risk of additional cash contributions being required because of poor investment performance |
| – | | Capital Risk: the capital position of the UK group and legal entities is managed in accordance with the Capital Risk Appetite and regulatory requirements |
– | | Carries out appropriate contingency planning and balances risk impact with delivery of business as usual |
– | | Promotes and embeds a risk awareness culture within CFO Division and actively encourages people to speak up and challenge without fear. |
Chief Internal Auditor The Chief Internal Auditor (CIA) reports to the Board through the Board Audit Committee,designs and also reports to the CEO for operational purposes.uses an audit system that identifies key risks and evaluates controls. The CIA also reports functionallydevelops an audit plan to assess existing risks that involve producing audit, assurance and monitoring reports. Money Laundering Reporting Officer The Money Laundering Reporting Officer (MLRO) is responsible to the CIACLRO for control and oversight of Banco Santander SA. The main responsibilities ofFinancial crime risk but has regulatory responsibility to report on this risk type to Executive and Board Committees and the CIA are to:FCA. – | | | | Santander UK plc | | Ensure the scope of Internal Audit covers all activities (including outsourced activities) at a legal entity level55 |
– | | | | Annual Report 2018 | Risk review | | Design and use an audit system that identifies key risks and evaluates controls |
– | | Develop an audit plan to assess existing risks that involves producing audit, assurance and monitoring reports |
– | | Carry out all audits, special reviews, reports and commissions that the Board Audit Committee asks for |
– | | Monitor business activities regularly by consulting with internal control teams and our External Auditors |
– | | Develop and run internal auditor training that includes regular skills assessments. |
Risk organisational structure(unaudited) 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 put in place 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: 
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Internal control system(unaudited) Our Risk Framework is an overarching view of our internal control system that helps us manage risk across the business. It sets out at a high level the principles, minimum standards, roles and responsibilities, and governance for internal control. 
| | | | | | | | Category | | Description | Risk Frameworks | | Risk Frameworks | | Set out how we should manage and control risk for: – Thefor the Santander UK group (overall framework)
– Our, our key risk types (risk type frameworks)
– Our and our key risk activities (risk activity frameworks).
| | | Risk Management Responsibilities | | Set out the Line 1 risk management responsibilities for Business Units and Business Support Units. | | | Strategic Commercial Plans | | Plans produced by business areaareas, at least annually, thatwhich describe the forecasted objectives, volumes and risk profile of new and existing business, within the limits defined in our Risk Appetite and policies in place.Appetite. | | | Risk Appetite Statement | | Defines the type and the level of risk that we are willing and able to take on to achieve our business plans. The policies set out what action we must (or must not) take to make sure we stay within
See our Risk Appetite.Appetite section that follows. Risk Control Units set overarching policies. Business and Business Support Units have operational policies, standards and procedures that put these policies into practice. We expect all our people to manage risk within their own work by complying with these policies, standards and procedures.
| | | | | | Delegated Authorities/Mandates | | Define who can do what under the authority delegated to the CEO by the Board. | Risk Certifications | | Risk Certifications | | Business Units, Business Support Units or Risk Control Units set out how they have managed and/or controlled risks in line with the risk frameworksour Risk Frameworks and within our Risk Appetite. They are completed at least once a year. They also explain any action to be taken. This process helps ensure people can be held personally accountable. |
RISK APPETITE(unaudited)(UNAUDITED) 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 and 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. | – | | We always aim to have enough financial resources to survivecontinue to do business in severe but plausible stressed economic and business conditions, as well as to survive a very severe stress that would consumedeplete our capital reserves |
| – | | 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 be based on diverse funding sources and duration of funding.duration. This helps us to avoid relying too much on wholesale markets |
| – | | We set controls on large concentrations of risk, such as tolike single customers or specific industries |
| – | | There are some key risks we take, but for which we do not actively seek any reward, such aslike operational, conduct and regulatory, financial crime, legal and reputational risk. We take a risk-averse approach to all suchthese 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, liquidity and concentration. 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)(EC) |
| – | | Liquidity limits according to the most plausible stress scenario for our business |
| – | | Concentration limits, to determine the maximum concentration level that we are willing to accept. |
These limits apply in normal business conditions, but also when we might be experiencing a far more difficult economic environment. A good example of this might be when the UK economy is performing much worse than we expected. We refer to conditions such aslike this as being under stress. There is more on economic capitalEC and stress scenarios later in this section. Qualitative statements For some riskstypes of risk we also use qualitative statements that describe in words the appetite 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 prohibit or restrict exposure to certain 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 our Risk Appetite Statement every year. This ensures it is consistent with our strategy and reflects the markets in which we operate. Our Executive Risk Control CommitteeERCC 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 against our Risk Appetite, business plans and budgets each month. We also 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, including new joiners, which helps ensure that our Risk Appetite is well understood.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
STRESS TESTING(unaudited)(UNAUDITED) Stress testing helps us understand how different events and economic conditions could affect our business plan, earnings and risk profile. 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, including Board members, when we design and choose our most important scenarios. The scenarios cover a wide range of outcomes, risk factors, time horizons and market conditions. They are designed to test: | – | | The impact of shocks affecting the economy as a whole or the markets we operate in |
| – | | Key potential vulnerabilities of our business model, and the processes and systems which support it |
| – | | Potential impacts on specific risk types. |
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 5%, unemployment reaches over 9%, and house prices fall by around 30% in a context of high inflation and interest rates rising rapidly. We use a comprehensive suite of stress scenarios to explore sensitivities to market risk, including those based on historichistorical 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 Appetite |
| – | | Our capital strength, through our ICAAP |
| – | | Our liquidity position, through our Internal Liquidity Adequacy Assessment Process (ILAAP)ILAAP |
| – | | Impacts on other risk types. |
We 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 to key macroeconomic variables such aslike unemployment rates might affect the number of customers who might fall into arrears on their mortgage. Our stress testing models are subject to a formal review, independent validation and approval process. We highlight the key weaknesses and related model assumptions in the approval 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 analysis of a single factor to a portfolio, to wider exercises that cover all risks across our entire business. We use stress testingtest 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 assess scenarios that are most likely to cause our business model to fail. Board oversight of stress testing The Executive Risk Control CommitteeERCC approves the design of the scenarios in our ICAAP.ICAAP and ILAAP. The Board Risk Committee approves the stress testing framework. The Board reviews thestress test outputs of stress testing as part of the approval processes for the ICAAP, the ILAAP, Recovery and Resolution, our Risk Appetite and regulatory 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 PRA. We also contribute to stress tests of Banco Santander.Santander conducted by the European Banking Authority (EBA). For more on capital and liquidity stress testing, see the ‘Capital risk’ and ‘Liquidity risk’ sections.
HOW RISK IS DISTRIBUTED ACROSS OUR BUSINESS(unaudited)(UNAUDITED) Economic capital As well as assessing how much regulatory capital we are requiredneed to hold, we use an internal Economic Capital (EC)EC model to measure our risk. We use EC to get a consistent measure across different risk types. EC also takes account of how concentrated our portfolios are, and how much diversification there is between our various businesses. As a consequence we can use EC for a range of risk management activities. For example, we can use it to help us compare requirements in our ICAAP or to get a risk-adjusted comparison of income from different activities. Regulatory capital – risk-weighted assets The table below shows the proportion of ourWe hold regulatory capital risk-weighted assets we held in different parts ofagainst our business at 31 December 2017 and 2016. It is split between credit, market and operational risk against which we hold regulatory capital.
2017 compared to 2016
The distribution of risk across our business was broadly unchanged inrisks. In 2018, the year. The largest category continued to be credit risk in Retail Banking, which accounted for mostaround half of our risk-weighted assets. This reflects our business strategy and balance sheet. Market risk arises primarilydecreased in 2018 as partmost of our trading book activities in Global Corporate Banking. Our operational risk capital requirements remained small and were concentrated intransferred to the Banco Santander London Branch as part of our Retail Banking activities.ring-fencing plans.
| | | Annual Report 2017 on Form 20-F | Risk review | | > Credit risk |
Credit risk | | | Overview(unaudited) | | Key metrics(unaudited) | Credit risk is the risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for which we have assumed a financial obligation. Santander UK group level We start by discussing credit risk at a Santander UK group level. We set out how our exposures arise, our types of customer and how we manage them, and our approach to credit risk across the credit risk lifecycle. We also discuss our ECL methodology and the key inputs to our ECL model. We then analyse our key metrics, including maximum and net exposures, credit quality, risk concentrations,as well as credit performance and forbearance. Business segments Then we cover Retail Banking separately from our other business segments in more detail in the sections that follow. Our other segments are– Corporate & Commercial Banking, Global Corporate & Investment Banking and Corporate Centre. Centre – in more detail. | | NPL ratio improved to 1.21% (2017: 1.42%
(2016: 1.50%), partly due to the write-off of the Carillion plc exposures. NPL coverage ratioLoss allowances decreased to £807m (2017: £940m). Loss allowance increased by £211m to 33%
(2016: 31%)
Impairment loss allowances increased£1,151m on transition to £940m
(2016: £921m)IFRS 9 on 1 January 2018.
Average LTV of 63% (2017: 62% (2016: 65%) on new mortgage lendinglending. |
Credit risk – Santander UK group level SANTANDER UK GROUP LEVEL – CREDIT RISK MANAGEMENT Exposures Exposures to credit risk arise in our business segments from: | | | | | | | Retail Banking | | Corporate & Commercial Banking | | Global Corporate & Investment Banking
| | Corporate Centre | – Residential mortgages, business banking, consumer (auto) finance and other unsecured lending (personal(credit cards, personal loans credit cards, and overdrafts). | | – Loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance. | | – Loans, treasury products, and treasury markets activities. | | – Asset and liability management of our balance sheet, as well as ournon-core and Legacy Portfolios being run down. | – We provide these to individuals and small businesses. | | – We provide these to SMEs and mid corporates, as well as Commercial Real Estate customers and Social Housing associations. | | – We provide these to large corporates, and financial institutions, as well as sovereigns and other international organisations. | | – Exposures include sovereign and other international organisation assets that we hold for liquidity. |
The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branches in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in 2018. See Note 2 for more information. Our types of customers and how we manage them We manage credit risk across all our business segments in line with the credit risk lifecycle that we show in the next section. We tailor the way we manage risk across the lifecycle to the type of customer. We classify our customers as standardised or non-standardised: | | | Standardised | | Non-standardised | – Mainly individuals and small businesses. Their transactions are for relatively small amounts of money, and share similar credit characteristics. | | – Mainly medium and large corporate customers and financial institutions.customers. Their transactions are for larger amounts of money,values, and have more diverse credit characteristics. | – In Retail Banking, Corporate & Commercial Banking (for some small,non-complex corporate clients) and Corporate Centre (for our non–corenon-core portfolios). | | – In Retail Banking (for some business banking transactions), Corporate & Commercial Banking, Global Corporate & Investment Banking and Corporate Centre. | – We manage risk using automated decision–makingdecision-making tools. These are backed by teams of analysts who specialise in this type of risk. | | – We manage risk through expert analysis. We support this with decision-making tools based on internal risk assessment models. |
| | | 68 | | The adoption of IFRS 9 | 
| | On 1 January 2018, IFRS 9 replaced IAS 39, and introduced new rules on how to classify and measure financial assets, as well as new concepts, principles and measures for credit impairment charges. Throughout 2018, we enhanced and refined our accounting processes and procedures, internal controls and governance framework to embed the new requirements of IFRS 9 into our business. IFRS 9 was a significant challenge to our Risk and Finance divisions as they had to analyse large volumes of data from various systems, as well as enhance their skills and expertise. | | As IFRS 9 affects the timing of when we recognise credit impairment charges, but not the amount of credit write-offs, its adoption did not materially change our credit risk policies. Our Retail collections and recoveries procedures were unchanged, and we reviewed our risk-adjusted hurdle rates for Corporate lending, but this didn’t lead to a significant change in our credit policy. Our credit risk appetite in terms of target markets, market share and the credit quality of customers we want to lend to, were also not directly impacted. | | The main impacts were on how we monitor credit risk. As part of this, we began to monitor IFRS 9 metrics. These mainly centre on ECL and classification of exposures as Stages 1, 2 and 3. We expect to develop our metrics further in 2019 as how we embed IFRS 9 in our business continues to evolve. We also continued to monitor NPLs in 2018. Our disclosures reflect recommendations made by the DECL Taskforce where it is practical to do so, and we expect to enhance them further in future. |
| | | | Annual Report 2018 | Risk review | | > Credit risk |
Our approach to credit risk  
We manage our portfolios across the credit risk lifecycle (above), from drawing up our risk strategy, plans, budgets and limits to making sure the actual risk profile of our exposures stays in line with our plans and within our Risk Appetite. We further tailor the way we manage risk across the life cyclelifecycle to the type of product. We say more on this in the Credit risk – Retail Banking and the Credit risk – other business segments sections. 1. Risk strategy and planning All relevant areas of the business work together to create our business plans. This includes Risk, Marketing, Products and Finance. We aim to balance our strategy, business goals, and financial and technical resources with our attitude to risk (our Risk Appetite). To do this, we focus particularly on economic and market conditions and forecasts, regulations, conduct considerations, profitability, returns and market share. The result is an agreed set of targets and limits that help us direct our business. 2. 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 things get tighter for them, and are committed to paying us back. We undertake a thorough risk assessment to make sure customers can meet their obligations before we approve a credit application. We make these decisions with authority from the Board and 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 expectexpect. |
We also use stress testing, for example to estimate how a customer might be able to cope if interest rates increase. 3. 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 forums/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 toco-ordinate coordinate issues, trends and developments across each part of the credit risk lifecycle. Credit concentrations A core part of our monitoring and management 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. Managing concentrations of credit risk exposures is a key part of risk management. We track how concentrated our credit risk portfolios are using variousa range of criteria. These include geographical areas,geographies, economic sectors, products and groups of customers.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Geographical concentrations As part of our approach to credit risk management and Risk Appetite, weWe set exposure limits to countries and geographical areas. We set our limitsgeographies, with reference to the country limits set by Banco Santander SA.Santander. 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 Banco Santander wants to offer in that country.
For more geographical information, see the ‘Country risk exposures’ section.. Industry concentrations As part of our approach to credit risk management and Risk Appetite, weWe also set concentrationexposure 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 anyand relevant limitlimits set by Banco Santander SA.
Santander. We provide further portfolio analyses onanalyse committed exposures which are typically higher than the balance sheet value, in the following ‘Credit risk review’ sections.. 4. 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. WeTo do this, by:we: | – | | FindingFind affordable and sustainable ways of repaying to fit their circumstances |
| – | | MonitoringMonitor their finances and usinguse 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 |
| – | | WorkingWork with them to get their account back to normal as soon as possible in a way that works for them and us |
| – | | MonitoringMonitor agreements we make to manage their debt so we know they are working. |
For more, see the Forbearance section on the next page. 5. 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.
Loan modifications We sometimes change the terms of a loan when a customer gets into financial difficulty (this is known as forbearance), or for other commercial reasons. 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 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. We only use foreclosure or repossession as a last resort. We review our approach regularly to make sure it is still effective. In a few 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. We only use foreclosure or repossession as a last resort. When we agree to forbearance, we consider that the account has suffered a Significant Increase in Credit Risk (SICR), as we explain later on. We review our loss allowance for it and report the account separately as forborne. For retail accounts, if an account is in Stage 1 when we agree forbearance, we transfer it to Stage 2. For all accounts, if an account is already in Stage 2 when we agree forbearance, we keep it in Stage 2 unless the forbearance arrangement involves the forgiveness of fees and interest which would put the case into Stage 3. If an account is already in Stage 3 when we agree forbearance, we keep it in Stage 3. We monitor the performance of all forborne loans. A loan moves from a lifetime ECL (Stages 2 or 3) to a 12-month ECL (Stage 1) once the criteria to exit forbearance have been met, as set out below. Exit from forbearance or cure For a loan to exit forbearance, all the following conditions must be met: | – | | The loan has been forborne for at least two years ago or, where theif forbearance was temporary, must have returned to performing under normal contractual terms for at least two years |
| – | | The loan has been performing under the forborne terms for at least two years |
| – | | The account is no longer in arrears, |
– | | The and the customer does not have anyhas no other debts with us which are more than 30 days in arrears. |
5. Debt recoveryOther modifications
Sometimes, even when we have taken all reasonable and responsible stepsWhen a customer is not showing any signs of financial difficulties, we can also change the terms of their loan. We do this to manage arrears, they prove ineffective. If this happens, we have to end ourkeep a good relationship with the customer and try to recover the whole debt, or as much of it as we can.them.
Risk measurement and control We measure and control credit risk at all stages across the credit risk lifecycle. We have a range of tools, processes and 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. |
Key metrics We use twoa number of key metrics to measure and control credit risk: Expected Loss (EL) andNon-Performing Loans (NPLs).risk, as follows: | | | | Metric | | Description | ELECL
| | ELECL tells us what credit risk is likely to cost us.us either over the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR since origination. We explain how we calculate ECL below.
| Stages 1, 2 and 3 | | We assess each facility’s credit risk profile to determine which stage to allocate them to, and we monitor where there is a SICR and transfers between the Stages including monitoring of coverage ratios for each stage. We explain how we allocate a facility to Stage 1, 2 or 3 below. | Expected Loss (EL) | | EL is based on the regulatory capital rules of CRD IV and gives us another view of credit risk. It is the product of: | | | | | – Probabilityof the probability of default, (PD) – how likely customers are to default. We estimate this using customer ratings or the transaction credit scores
| | | – Exposureexposure at default (EAD) – how much customers will owe us if theyand loss given default. We calculate this by comparing how much of their agreed credit (such as an overdraft) customers have used when they default with how much they normally use. This allows us to estimate the final extent of use of credit in the event of default
| | | – Loss given default (LGD) – how much we lose when customers actually default. We work this out using the actual losses on loans that default. We take into account the income we receive, including the collateral we held, the costs we incur and the recovery process timing.
| | | | | PD, EAD and LGD are calculatedeach factor in accordance with CRD IV, and include direct and indirect costs. We base them on our own risk models and our assessment of each customer’s credit quality. There are differences between regulatory EL and IFRS 9 ECL, which we set out below. For the rest of our Risk review, impairments, impairment losses and impairment loss allowances refer to calculations in accordance with IFRS, unless we specifically say they relate to CRD IV. For our IFRS accounting policy on impairment, see Note 1 to the Consolidated Financial Statements. | | | | | The way we calculate impairment under IFRS changed from 1 January 2018 when IFRS 9 took 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. | NPLsNon-Performing Loans (NPLs)
| | We use NPLs – and related write-offs and recoveries – to monitor how our portfolios behave. We classify loans as NPLs wherewhen customers do not make a payment for three months or more, or if we have data to make us doubt they can keep up with their payments. The dataThere are differences between NPL and Stage 3, which we have on customers varies across our business segments. It typically includes where: | | | | | Retail Banking
– They have been reported bankrupt or insolvent
– Their loan term has ended, but they still owe us money more than three months later
– They have had forbearanceset out in the ‘Definition of default used for NPL’ section below. Although we adopted IFRS 9 from 1 January 2018, we continued to monitor NPLs as an NPL, but have not caught up with the payments they had missed before that
– They have had multiple forbearance
– We have suspended their fees and interest because they area key metric in financial difficulties
– We have repossessed the property.
| | | | | Other segments: Commercial Banking, Global Corporate Banking and Corporate Centre
– They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as, another lender calls in a loan
– Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract
– They have regularly missed or delayed payments, even though they have not gone over the three-month limit for NPLs
– Their loan is unlikely to be refinanced or repaid in full on maturity
– Their loan has an excessive LTV and it is unlikely that it will be resolved, such as by a change in planning policy,pay-downs from rental income, or increases in market values.
2018. |
We also assess risks from other perspectives. These comprise internal rating deterioration, geographical location,perspectives, such as geography, business area, product and process. We do this to identify specific areas we need to focus on. We also use stress testing to establish vulnerabilities to economic deterioration. Our business segments tailor their approach to credit risk to their own customers. Wecustomers, as we explain their approaches in the business segment sections later on. Key differences between regulatory EL and IFRS 9 ECL models (unaudited) There are differences between the regulatory EL and the IFRS 9 ECL approaches. Although our IFRS 9 models leverage the existing Basel advanced IRB risk components, we need to make several significant adjustments to ensure the outcome is in line with the IFRS 9 requirements, as follows. | | | | | | | Basel advanced IRB EL | | IFRS 9 ECL | Rating philosophy | | Mix of point-in-time, through-the-cycle or hybrid | | Point-in-time, forward-looking. Considers a range of economic scenarios | Parameters calibration | | Contains regulatory floors and downturn calibration | | Unbiased estimate, based on conditions known at the balance sheet date | Probability of Default (PD) | | Probability of default in the next 12 months | | Includes forward-looking economic information and removes conservatism and bias. Adjusted to convert from 12 months to lifetime for Stages 2 and 3 | Loss Given Default (LGD) | | Lifetime LGD for defaults in the next 12 months | | Removal of regulatory floors and exclusion of indirect costs | Exposure at Default (EAD) | | Exposure at the point of default if the customer defaults in the next 12 months | | Floored at amount owed, except on some revolving facilities. Recognises ability for the exposure to reduce from the balance sheet date to default date | SICR | | Does not include SICR concept | | Includes SICR concept | Discounting applied | | At the weighted average cost of capital to the default date | | At the effective interest rate (EIR) to the balance sheet date |
| | | Annual Report 20172018 | Risk review | | |
Recognising ECL The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR risk since the origination date. The ECL approach estimate takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the likelihood of a loss being incurred even when it is considered unlikely. Multiple economic scenarios and probability weights For all our portfolios, except CIB, we use five forward-looking economic scenarios. They consist of a central base case, two upside scenarios and two downside scenarios. We use five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy. For example, the Downside 2 scenario reflects the possibility of a recession occurring. We believe that our five scenarios, in particular Downside 1 and Downside 2, reflect the range of outcomes that Brexit may take, including a deal with a transition period or a no-deal Brexit. Our scenarios are also in line with a number of scenarios that have been produced by, for example, the Bank of England and its disruptive scenario, and other economic forecasters no deal scenarios. As such our scenarios and weights reflect the range of possible outcomes that the UK may face in 2019. | Base case | – Our base case assumes that the UK will negotiate an orderly exit with the EU that avoids a so-called ‘cliff-edge’ event when the UK leaves the EU and that there will be a relatively smooth transition period. | – GDP forecast for 2018 was lowered in August to reflect disappointing Q1 results, which results in slower growth in the following years until reverting to the long run annual growth of 1.6% in 2024. | – Unemployment continues its current trend over the forecast period, tightening labour markets further and pushing up average earnings growth. This growth along with the expected fall in inflation result in positive real earnings growth for 2019 onwards. | – The UK’s net trade position is expected to fall back as sterling rallies against the dollar reducing the competitiveness of UK exports. Even though the Brexit negotiations are likely to result in some increased trade costs between the EU and UK, these are not projected to significantly impact the downwards trend in the share of UK exports going to the EU. | – For Bank Rate, the base case currently assumes one bank rate rise in 2019 and another in 2020. | – In the medium term, the forecast projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential which is reflected in an average annual growth expectation of less than 2%. | – In summary, the base case assumes that activity will continue to run at this relatively sluggish pace. With CPI inflation likely to slow as we move through 2019, and a positive increase in wage growth predicted, this will provide a boost to household spending power. However, the effect of this will be softened by the continued impact of the UK Government’s welfare reforms and the projected slowing of employment growth. In addition, with the household savings ratio at low levels and with credit conditions starting to tighten these two areas are unlikely to be able to compensate for any downside effects to growth. |
Our methodology to derive the scenarios relies on a set of parameters embodied in GDP fan charts published by the Office for Budget Responsibility (OBR) twice a year. To avoid major changes to the scenarios due to changes in the OBR fan charts, we place more weight on the long-run trend of the fan charts rather than relying on each individual release. We use the OBR fan charts to calculate our GDP paths for each individual scenario. These fan charts reflect the probability distribution of a deviation from the OBR’s central forecast to illustrate the uncertainty regarding the outcome of a variable, in this case GDP. We use the 0.6 and 0.7 fan chart paths for the upside scenarios, and the 0.3 path for Downside 1. However, for Downside 2 we use a blend of the Downside 1 scenario and the recession of the early 1980s as this recession was less extreme than the 2008/09 recession and more in line with what we think could happen. This means that in the longer run the GDP levels in our Downside 1 and 2 scenarios converge. In order to ensure that Downside 2 is kept consistent with any changes to the OBR fan charts, we calculate the Downside 2 GDP by taking the percentage difference between Downside 2 and Downside 1 GDP in the original forecast, and applying this difference to the new Downside 1. Once the GDP paths have been forecast, we run them through the Oxford Global Economic Model (OGEM) to derive the other macroeconomic variables, such as unemployment and house prices, and then impose the Bank Rate for each scenario. The forecasting period for GDP is 5 years and then we revert back to the average trend growth over 3 years based on the OBR’s long-run GDP forecast. The annual growth rates over the 5 year forecast for each of our scenarios are: | | | | | | | | | | | | | | | | | | | | | Assumption | | Upside 2
% | | | Upside 1
% | | | Base case % | | | Downside 1
% | | | Downside 2
% | | House price index(1) | | | 3.40 | | | | 2.30 | | | | 2.00 | | | | (2.00 | ) | | | (9.50 | ) | GDP(1) | | | 2.50 | | | | 2.10 | | | | 1.60 | | | | 0.70 | | | | 0.30 | | Unemployment rate | | | 2.80 | | | | 3.80 | | | | 4.30 | | | | 6.90 | | | | 8.60 | | Interest rate | | | 1.00 | | | | 1.25 | | | | 1.50 | | | | 2.50 | | | | 2.25 | |
| (1) | Compound annual growth rate |
To determine our initial scenario probability weightings, we give the highest weight to the base case, whilst the extreme scenarios typically attract lower weights than the more moderate ones. In addition, due to the current economic position and policy concerns evidenced by the PRA and Financial Policy Committee (FPC), and due to political concerns we have applied a higher weighting to the downside scenarios. We consider this appropriate in light of the consensus view of future performance of the UK economy, including projections for GDP growth. The probability weights we applied to the scenarios are: | | | | | | | | | | | | | | | | | | | | Scenario type | | | | | | | | | | | | | | Probability % | Upside 2 | | | | | | | | | | | | | | | | | | 5 | Upside 1 | | | | | | | | | | | | | | | | | | 15 | Base case | | | | | | | | | | | | | | | | | | 40 | Downside 1 | | | | | | | | | | | | | | | | | | 30 | Downside 2 | | | | | | | | | | | | | | | | | | 10 |
As part of our review of the scenarios and weights that we use, we performed statistical analysis to assess whether the scenarios and weights we use capture the non-linearity of losses implied by the results. The outcome of this analysis, which modelled a number of different scenarios, demonstrated that there is a non-linear relationship between the ECLs based on the GDP growth paths for individual scenarios. In addition, the trend line modelled showed that our base case, Downside 1 and Downside 2 scenarios provide a reasonable fit for the loss distribution.
For our CIB portfolio, our approach was developed centrally by Banco Santander to ensure consistent treatment of these large and/or international counterparties across the organisation. For CIB, we use three scenarios (base, upside and downside). Similar to the UK scenarios, the base case uses the base scenario that has been developed and is used in other work that Banco Santander undertakes for planning and stress testing purposes. To develop the downside scenario, the path of GDP for each country is calculated using the distribution probability of GDP estimated using a Monte Carlo simulation. The path used is the one that falls into a percentile that sits half way between the baseline and global stress we use for our ICAAP. For the upside, the distribution probability of GDP is again used, for each country the GDP path is consistent with the symmetric percentile selected on the downside. This means that the scenarios maintain the asymmetry that comes with the probabilities of distribution. The average annual growth rates over a 4 year forecast for each of the scenarios for our CIB portfolio are: | | | | | | | | | | | | | Assumption | | Upside
% | | | Base case
% | | | Downside % | | GDP | | | 4.2 | | | | 3.6 | | | | 2.7 | |
The probability weights we applied to the scenarios for our CIB portfolio are: | | | | | | | | | | | | | | | | | | | | Scenario type | | | | | | | | | | | | | | Probability % | Upside | | | | | | | | | | | | | | | | | | 20 | Base case | | | | | | | | | | | | | | | | | | 60 | Downside | | | | | | | | | | | | | | | | | | 20 |
We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three year planning processes, or sooner if there is a material change in current or expected economic conditions. We refresh all our economic scenarios each quarter to reflect the latest available data and OBR fan charts, which are then reviewed and approved by ALCO. Probability weights are reassessed by ALCO at least quarterly. We aim to avoid embedding new economic scenarios into our models on a quarter-end month. Instead, we aim to run the model with the new scenarios for two months before the quarter-end to ensure that we can fully validate the output. Significant Increase in Credit Risk (SICR) Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual maturity of the loan, or behavioural term for revolving facilities. Loans which have not experienced a SICR are subject to 12 month ECL. We assess each facility’s credit risk profile to determine which of three stages to allocate them to: | – | | Stage 1: when there has been no SICR since initial recognition. We apply a loss allowance equal to a 12 month ECL i.e. the proportion of lifetime expected losses that relate to that default event expected in the next 12 months |
| – | | Stage 2: when there has been a SICR since initial recognition, but no credit impairment has materialised. We apply a loss allowance equal to the lifetime ECL i.e. lifetime expected loss resulting from all possible defaults throughout the residual life of a facility |
| – | | Stage 3: when the exposure is considered credit impaired. We apply a loss allowance equal to the lifetime ECL. Objective evidence of credit impairment is required. The definition of default (credit impaired) we use to identify an exposure as Stage 3 or NPL are different, although the differences are not material. For more, see the section ‘Definition of default (Credit impaired)’ that follows. These criteria are under review in parallel with the ongoing regulatory changes to the default definition. |
We use a range of quantitative, qualitative and backstop criteria to identify exposures that have experienced a SICR. The Credit Risk Provisions Forum (CRPF) reviews and approves our SICR thresholds periodically. The Board Audit Committee reviews and approves them each year, or more often if we change them. Quantitative criteria We use quantitative criteria to identify where an exposure has increased in credit risk. The quantitative criteria we apply are based on whether any increase in the lifetime PD since the recognition date exceeds a set threshold both in relative and absolute terms. We base the value anticipated from the initial recognition on a similar set of assumptions and data to the ones we used at the reporting date, adjusted to reflect the account surviving to that date. The comparison uses either an annualised lifetime PD, where the lifetime PD is divided by the forecast period, or the absolute change in lifetime PD since initial recognition. For each portfolio, the quantitative criteria are: | | | | | | | | | | | | | Retail Banking(1) | | | | | | | Consumer (auto) finance(2) | | Other unsecured | | Corporate & | | Corporate & Investment Banking | | Mortgages | | Personal loans(2) | | Credit cards | | Overdrafts | | Commercial Banking(2) | 30bps | | 300bps | | 400bps | | 340bps | | 260bps | | 400bps | | Internal rating method |
| (1) | In Business banking, for larger customers we apply the same criteria that we use for Corporate & Commercial Banking. |
| (2) | Consumer (auto) finance, Personal loans and Corporate & Commercial Banking use the comparison of lifetime PDs to determine Stage allocation, unlike other products which first turn the lifetime PD into an average yearly PD (annualised) and then do the comparison. |
We also apply a relative threshold of 100% (doubling the PD) across all portfolios except CIB. Qualitative criteria We also use qualitative criteria to identify where an exposure has increased in credit risk, independent of any changes in PD. For each portfolio, the qualitative criteria are: | | | | | | | | | | | | | Retail Banking(1) | | | | | | | Consumer (auto) finance | | Other unsecured | | Corporate & | | Corporate & Investment Banking | | Mortgages | | Personal loans | | Credit cards | | Overdrafts | | Commercial Banking | In forbearance | | In forbearance | | In Collections | | In forbearance | | Fees suspended | | In forbearance | | | Default in last 24m | | Deceased or Insolvent | | Default in last 12m | | Default in last 12m | | Default in last 12m | | Watchlist – proactive management | | Watchlist – proactive management | >30 Days past due (DPD) in last 12m | | Court ‘Return of goods’ order or Police watchlist | | NPL in last 12m | | In Collections | | Debit dormant >35 days | | NPL in last 12m | | | Bankrupt | | Agreement terminated | | | | | | | | Default at proxy origination | | | £100+ arrears | | Payment holiday | | £50+ arrears | | £100+ arrears | | Any excess in month | | | | | | | Cash Collection | | | | Behaviour score <565 | | | | | | |
| (1) | In Business banking, for larger customers we apply the same criteria that we use for Corporate & Commercial Banking. |
Backstop criteria As a backstop, we classify all exposures more than 30 or 90 DPD in at least Stage 2 or in Stage 3, respectively. This means that we do not rebut the backstop presumptions in IFRS 9 (i.e. credit risk has significantly increased if contractual payments are more than 30 days past due) relating to either a SICR or default.
| | | | Annual Report 2018 | Risk review | | |
Improvement in credit risk or cure In some cases, instruments with a lifetime ECL (in Stage 2 or 3) may be transferred back to 12 month ECL (Stage 1). Financial assets in Stage 3 can only be transferred to Stage 2 or Stage 1 when they are no longer considered to be credit impaired, as defined in the next section. Financial assets in Stage 2 can only be transferred to Stage 1 when they are no longer considered to have experienced a SICR. Where we identified a SICR using quantitative criteria, the instruments automatically transfer back to Stage 1 when the original PD-based transfer criteria are no longer met. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before the instruments can be reclassified to Stage 1. For a loan in forbearance to cure, it must meet the exit conditions set out in the earlier section ‘Forbearance’. Definition of default (Credit impaired) We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt they can keep up with their payments i.e. they are unlikely to pay. The data we have on customers varies across our business segments. It typically includes where: | Retail Banking | – They have been reported bankrupt or insolvent | – Their loan term has ended, but they still owe us money more than three months later | – They have had forbearance while in default, but have not caught up with the payments they had missed before that, or they have had multiple forbearance | – We have suspended their fees and interest because they are in financial difficulties | – We have repossessed the property. |
| Other business segments: Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre | – They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as, another lender calls in a loan | – Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract | – They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default | – Their loan is unlikely to be refinanced or repaid in full on Form 20-Fmaturity | – Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increases in market values. |
Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, we use the same default definitions for ECL purposes. We review and approve the definition of default each quarter. The Board Audit Committee reviews and approves the definition each year, or more often if we change it. Definition of default used for NPL The definition of default we use to identify NPLs is not significantly different to the definition of default we use to identify Stage 3 exposures. The only difference relates to mortgages. For NPL, we classify a mortgage customer as bankrupt for at least two years after first being declared bankrupt before we reassess their position. For Stage 3, the equivalent period is at least seven years before we reassess their position. Measuring ECL For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month over the forecast period. The lifetime ECL is the sum of the monthly ECLs over the forecast period, while the 12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted value for the relevant forecast month of the product of the following factors: | | | Factor | | Description | | | Survival rate (SR) | | The probability that the exposure has not closed or defaulted since the reporting date. | PD | | The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis. | EAD | | The amount we expect to be owed if a default event was to occur. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product type. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an off-balance sheet element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product type and base them on analysis of recent default data. | LGD | | Our expected loss if a default event were to occur. We express it as a percentage and calculate it as the expected loss divided by EAD for each month of the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type. |
We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD to reflect the default status of the account, considering the current DPD and loan to value. PD and SR are not required for accounts in default. Forecast period We base the forecast period for amortising facilities on the remaining contractual term. For revolving facilities, we use an analytical approach based on the behavioural, rather than contractual, characteristics of the facility type. In some cases, we shorten the period to simplify the calculation. If we do this, we apply a post model adjustment to reflect our view of the full lifetime ECL. Forward-looking information Our assessments of a SICR and the calculation of ECL both incorporate forward-looking information. We perform historical analysis and identify the key economic variables that impact credit risk and ECL for each portfolio. These can include GDP, house prices and unemployment. Where applicable, we incorporate these economic variables and their associated impacts into our models. Grouping of instruments for losses measured on a collective basis We measure ECL at the individual financial instrument level. However, we typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in Retail Banking – credit risk management) using one or more statistical models. Where we have used internal capital or similar models as the basis for our IFRS 9 models, this typically results in a large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models. We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed.
Management judgement applied in calculating ECL IFRS 9 recognises that expert management judgement is an essential part of calculating ECL. Specifically, where the historical information that we use in our models does not reflect current or future expected conditions or the data we have does not cover a sufficient period or is not robust enough. We consider the significant management judgements in calculating ECL to be: | – | | Definition of default:We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt they can keep up with their payments. The data we have on customers varies across our business segments. |
| – | | Forward-looking multiple economic scenarios: We use five scenarios, consisting of a central base case, two upside scenarios and two downside scenarios except for our CIB portfolio, where we use three scenarios – a central and a single upside and downside scenario. This symmetry meets the ‘unbiased’ requirement and we consider these scenarios sufficient to account for any non-linear relationships. |
| – | | Probability weights: In determining the initial scenario probability weightings, we assign the highest probability to the base case, whilst the extreme cases typically attract lower probabilities than the more moderate ones. |
| – | | SICR thresholds: We use a combination of quantitative (both absolute and relative), qualitative and backstop criteria to identify exposures that we consider have shown a SICR since initial recognition. |
| – | | Post Model Adjustments: These relate to adjustments which we need to account for identified model limitations – such as those that have arisen due to challenges in obtaining historical data. We expect these to gradually become redundant as we build up more comparative data over future reporting periods. We also apply temporary adjustments for immaterial portfolio exposures still needing ECL models to be built. |
Post Model Adjustments (PMAs) The most significant PMAs that we apply are: | – | | Interest-only maturity default risk: When an interest-only mortgage reaches contractual maturity and the capital payment becomes due, there is a risk that the customer won’t be able to repay the full capital balance. Our model estimates the likelihood of a customer missing a monthly payment, rather than the capital repayment. We hold an incremental provision to address the risk of default on capital repayments on maturity. We use historical evidence of loss experience to estimate the adjustment. At 31 December 2018, this increased ECL by £69m (1 January 2018: £74m). |
| – | | Buy-to-Let: Historical data shows that the risk of default on a buy-to-let mortgage is higher than on a residential mortgage particularly in a downturn. However, our IFRS 9 models have been calibrated over a period of favourable and relatively benign economic conditions during which our buy-to-let mortgage portfolio has continued to grow with limited loss events. To avoid underestimating ECL in an economic downturn, we adjust the loss allowance for our BTL accounts to increase the ECL. We use market data from the last economic crisis to estimate the adjustment. At 31 December 2018, this increased ECL by £20m (1 January 2018: £15m). |
| – | | Long-term indeterminate arrears:To mitigate the risk of model underestimation, accounts in arrears which have neither repaid (cured) or been written-off after a period of 2 years for unsecured or 5 years for secured portfolios, are fully provided for. For our secured portfolios, we use expected security valuations at the point of repossession to estimate the adjustment. At 31 December 2018, we only needed to make an adjustment for mortgages, and this increased ECL by £23m (1 January 2018: £25m). |
The CRPF and the Board Audit Committee review and approve changes in all key management judgements at least each quarter. The creation of new PMAs is a joint responsibility between the Risk Provisions & Forecasting team, as model owners who may identify issues with the historical data, and the Financial Accounting & Control Division, who may identify changes in portfolio or credit quality performance. We use a range of methods to identify whether we need a PMA. These include regular review of model monitoring tools, end-user computing controls monitoring, period-to-period movement and trend analysis, comparison against forecasts, and input from expert teams who monitor and manage key portfolio risks. We only recognise a PMA if the ECL is over £1m. We keep PMAs in place until we no longer need them. This will typically be when they are built into our core credit model or the conditions that impacted the historical data no longer exist. The Risk Provisions & Forecasting team calculates PMAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a consistent and controlled manner. We apply standard end-user computing controls to material and long-standing PMAs i.e. those expected to be in place for more than six months. Our Independent Validations Team may also review material PMAs at their discretion. The CRPF approves all new PMAs. It delegates authority to approve temporary PMAs not expected to last beyond a quarter-end to the Director of Financial Accounting & Control. The Financial Accounting & Control Division reviews all new PMAs to ensure they comply with IFRS 9. We record all PMAs on a central log maintained by the Financial Accounting & Control Division which documents the justification, IFRS 9 compliance assessment, expected life, recalibration frequency, calculation methodology and value of each PMA. The CRPF reviews and approves the log each quarter. Governance around ECL impairment allowances Our Risk Methodology team developed our ECL impairment models (except for the OGEM), and all material models are independently reviewed by our Independent Validations Team. As model owners, our Risk Provisioning & Forecasting team run the models to calculate our ECL impairment allowances each month. The models are sensitive to changes in credit conditions, and reflect various management judgements that give rise to measurement uncertainty in our reportable ECL as set out above. The following committees and forums review the provision drivers and ensure that the management judgements we apply remain appropriate: | – | | Model Risk Control Forum reviews and approves new models and required model changes. |
| – | | ALCO reviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. |
| – | | CRPF reviews management judgements and approves ECL impairment allowances. |
| – | | Board Audit Committee reviews and challenges the appropriateness of the estimates and judgements made by management. |
For more on the governance around specific elements of the ECL impairment allowances, including the frequency of, and thresholds for, reviews, including by these committees and forums, see the detailed sections above. How we assess the performance of our ECL estimation process We assess the reasonableness of our ECL provisions and the results of our Staging analysis using a range of methods. These include: | – | | Benchmarking:we compare our coverage levels with our peers. |
| – | | Stand-back testing:we monitor the level of our coverage against actual write-offs. |
| – | | Back-testing: we compare key drivers periodically as part of model monitoring practices. |
| – | | Monitoring trends: we track ECL and Staged assets over time and against our internal budgets and forecasts, with triggers set accordingly. |
| | | | Annual Report 2018 | Risk review | | |
SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW The introduction of IFRS 9 As set out in Note 44 ‘Transition to IFRS 9’ in the Consolidated Financial Statements, IFRS 9 replaced IAS 39 on 1 January 2018. IFRS 9 introduced a new impairment methodology and rules around classification and measurement of financial assets. As a result of the change from IAS 39 to IFRS 9, some 2018 disclosures in this section are not comparable with prior periods because the methodologies for calculating incurred losses under IAS 39 and ECLs under IFRS 9 are fundamentally different. This means that some IFRS 9 disclosures do not have prior period comparatives and some IAS 39 disclosures are no longer relevant from 1 January 2018. We have included comparative tables at 1 January 2018 reflecting the adoption of IFRS 9, where available and appropriate. Our maximum and net exposure to credit risk The tables below show the main differences between our maximum and net exposure to credit risk. They show the effects of collateral, netting, and risk transfer to mitigate our exposure. The tables only show the financial assets that credit risk affects.affects and to which the impairment requirements in IFRS 9 (2017: IAS 39) are applied. For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances. Off-balance sheet exposures are mortgage offers, guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum amount that we would have to pay if the guarantees were called on. For formal standby facilities, credit lines and other commitments that are irrevocable over the life of the facility, the maximum exposure is the total amount of the commitment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maximum exposure | | | Collateral(1) | | | | | | | | | | | Balance sheet asset | | | | | | | | | | | | | | | | | | 2017 | | Gross
amounts
£bn | | | Impairment loss
allowances and
RV & VT(2)
provisions £bn | | | Net
amounts
£bn | | | Off-balance
sheet £bn | | | Cash
£bn | | | Non-cash
£bn | | | Netting(3)
£bn | | | Net exposure
£bn | | Cash and balances at central banks | | | 32.8 | | | | – | | | | 32.8 | | | | – | | | | – | | | | – | | | | – | | | | 32.8 | | Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Securities repurchased under resale agreements | | | 8.9 | | | | – | | | | 8.9 | | | | – | | | | – | | | | (8.5 | ) | | | (0.4 | ) | | | – | | – Debt securities | | | 5.2 | | | | – | | | | 5.2 | | | | – | | | | – | | | | – | | | | – | | | | 5.2 | | – Cash collateral | | | 6.2 | | | | – | | | | 6.2 | | | | – | | | | – | | | | – | | | | – | | | | 6.2 | | – Short-term loans | | | 0.7 | | | | – | | | | 0.7 | | | | – | | | | – | | | | – | | | | – | | | | 0.7 | | Total trading assets | | | 21.0 | | | | – | | | | 21.0 | | | | – | | | | – | | | | (8.5 | ) | | | (0.4 | ) | | | 12.1 | | Derivative financial instruments | | | 19.9 | | | | – | | | | 19.9 | | | | – | | | | (2.8 | ) | | | – | | | | (14.8 | ) | | | 2.3 | | Financial assets designated at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers | | | 1.6 | | | | – | | | | 1.6 | | | | – | | | | – | | | | (1.6 | ) | | | – | | | | – | | – Debt securities | | | 0.5 | | | | – | | | | 0.5 | | | | – | | | | – | | | | – | | | | – | | | | 0.5 | | Total financial assets designated at fair value | | | 2.1 | | | | – | | | | 2.1 | | | | – | | | | – | | | | (1.6 | ) | | | – | | | | 0.5 | | Loans and advances to banks | | | 5.9 | | | | – | | | | 5.9 | | | | 1.6 | | | | – | | | | (2.5 | ) | | | – | | | | 5.0 | | Loans and advances to customers:(4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Advances secured on residential property | | | 155.4 | | | | (0.2 | ) | | | 155.2 | | | | 12.4 | | | | – | | | | (167.4)(5) | | | | – | | | | 0.2 | | – Corporate loans | | | 31.0 | | | | (0.5 | ) | | | 30.5 | | | | 17.1 | | | | – | | | | (21.8 | ) | | | – | | | | 25.8 | | – Finance leases | | | 6.7 | | | | (0.1 | ) | | | 6.6 | | | | 0.6 | | | | (0.1 | ) | | | (5.8 | ) | | | – | | | | 1.3 | | – Other unsecured loans | | | 6.2 | | | | (0.2 | ) | | | 6.0 | | | | 11.1 | | | | – | | | | (0.1 | ) | | | – | | | | 17.0 | | – Amounts due from fellow Banco Santander group subsidiaries and joint ventures | | | 1.2 | | | | – | | | | 1.2 | | | | – | | | | – | | | | – | | | | – | | | | 1.2 | | Total loans and advances to customers | | | 200.5 | | | | (1.0 | ) | | | 199.5 | | | | 41.2 | | | | (0.1 | ) | | | (195.1 | ) | | | – | | | | 45.5 | | Financial investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and receivables securities(4) | | | 2.2 | | | | – | | | | 2.2 | | | | 0.7 | | | | – | | | | – | | | | – | | | | 2.9 | | –Available-for-sale debt securities | | | 8.8 | | | | – | | | | 8.8 | | | | – | | | | – | | | | – | | | | – | | | | 8.8 | | –Held-to-maturity debt securities | | | 6.5 | | | | – | | | | 6.5 | | | | – | | | | – | | | | – | | | | – | | | | 6.5 | | Total financial investments | | | 17.5 | | | | – | | | | 17.5 | | | | 0.7 | | | | – | | | | – | | | | – | | | | 18.2 | | Total | | | 299.7 | | | | (1.0 | ) | | | 298.7 | | | | 43.5 | | | | (2.9 | ) | | | (207.7 | ) | | | (15.2 | ) | | | 116.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maximum exposure | | | | | | | | | | | | | | | | | Balance sheet asset | | | Off-balance sheet | | | Collateral(1) | | | | | | | | 2018 | | Gross
amounts
£bn | | | Loss
allowance(2) £bn | | | Net
amounts
£bn | | | Gross
amounts
£bn | | | Loss
allowance(2) £bn | | | Net
amounts
£bn | | | Cash
£bn | | | Non-cash
£bn | | | Netting(3)
£bn | | | Net exposure
£bn | | Cash and balances at central banks | | | 19.7 | | | | – | | | | 19.7 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 19.7 | | Financial assets at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers:(4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties(5) | | | 157.9 | | | | (0.2 | ) | | | 157.7 | | | | 11.2 | | | | – | | | | 11.2 | | | | – | | | | (163.8 | ) | | | – | | | | 5.1 | | – Corporate loans | | | 27.8 | | | | (0.2 | ) | | | 27.6 | | | | 17.0 | | | | – | | | | 17.0 | | | | – | | | | (20.2 | ) | | | – | | | | 24.4 | | – Finance leases | | | 6.8 | | | | (0.1 | ) | | | 6.7 | | | | 0.2 | | | | – | | | | 0.2 | | | | (0.1 | ) | | | (6.1 | ) | | | – | | | | 0.7 | | – Other unsecured loans | | | 7.6 | | | | (0.2 | ) | | | 7.4 | | | | 11.6 | | | | (0.1 | ) | | | 11.5 | | | | – | | | | – | | | | – | | | | 18.9 | | – Amounts due from fellow Banco Santander group subsidiaries and joint ventures | | | 2.0 | | | | – | | | | 2.0 | | | | – | | | | – | | | | – | | | | – | | | | (0.6 | ) | | | – | | | | 1.4 | | – Total loans and advances to customers | | | 202.1 | | | | (0.7 | ) | | | 201.4 | | | | 40.0 | | | | (0.1 | ) | | | 39.9 | | | | (0.1 | ) | | | (190.7 | ) | | | – | | | | 50.5 | | – Loans and advances to banks | | | 2.8 | | | | – | | | | 2.8 | | | | 1.6 | | | | – | | | | 1.6 | | | | – | | | | – | | | | – | | | | 4.4 | | – Reverse repurchase agreements – non trading(6) | | | 21.1 | | | | – | | | | 21.1 | | | | – | | | | – | | | | – | | | | – | | | | (18.4 | ) | | | (2.7 | ) | | | – | | – Other financial assets at amortised cost | | | 7.2 | | | | – | | | | 7.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 7.2 | | Total financial assets at amortised cost: | | | 233.2 | | | | (0.7 | ) | | | 232.5 | | | | 41.6 | | | | (0.1 | ) | | | 41.5 | | | | (0.1 | ) | | | (209.1 | ) | | | (2.7 | ) | | | 62.1 | | Financial assets at FVOCI | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers | | | 0.1 | | | | – | | | | 0.1 | | | | 0.1 | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | 0.2 | | – Debt securities | | | 13.2 | | | | – | | | | 13.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 13.2 | | Total financial assets at FVOCI | | | 13.3 | | | | – | | | | 13.3 | | | | 0.1 | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | 13.4 | | Total | | | 266.2 | | | | (0.7 | ) | | | 265.5 | | | | 41.7 | | | | (0.1 | ) | | | 41.6 | | | | (0.1 | ) | | | (209.1 | ) | | | (2.7 | ) | | | 95.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 32.8 | | | | – | | | | 32.8 | | | | – | | | | | | | | | | | | – | | | | – | | | | – | | | | 32.8 | | Loans and advances to customers:(4) (6) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Advances secured on residential property(5) | | | 155.4 | | | | (0.2 | ) | | | 155.2 | | | | 12.4 | | | | | | | | | | | | – | | | | (167.4 | ) | | | – | | | | 0.2 | | – Corporate loans | | | 30.9 | | | | (0.5 | ) | | | 30.4 | | | | 17.1 | | | | | | | | | | | | – | | | | (21.8 | ) | | | – | | | | 25.7 | | – Finance leases | | | 6.7 | | | | – | | | | 6.7 | | | | 0.6 | | | | | | | | | | | | (0.1 | ) | | | (5.8 | ) | | | – | | | | 1.4 | | – Other unsecured loans | | | 6.2 | | | | (0.2 | ) | | | 6.0 | | | | 11.1 | | | | | | | | | | | | – | | | | (0.1 | ) | | | – | | | | 17.0 | | – Amounts due from fellow Banco Santander group subsidiaries and joint ventures | | | 1.2 | | | | – | | | | 1.2 | | | | – | | | | | | | | | | | | – | | | | – | | | | – | | | | 1.2 | | Total loans and advances to customers(6) | | | 200.4 | | | | (0.9 | ) | | | 199.5 | | | | 41.2 | | | | | | | | | | | | (0.1 | ) | | | (195.1 | ) | | | – | | | | 45.5 | | Loans and advances to banks(6) | | | 3.5 | | | | – | | | | 3.5 | | | | 1.6 | | | | | | | | | | | | – | | | | – | | | | – | | | | 5.1 | | Reverse repurchase agreements – non trading(6) | | | 2.6 | | | | – | | | | 2.6 | | | | – | | | | | | | | | | | | – | | | | (2.5 | ) | | | – | | | | 0.1 | | Financial investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and receivables securities(4) | | | 2.2 | | | | – | | | | 2.2 | | | | 0.7 | | | | | | | | | | | | – | | | | – | | | | – | | | | 2.9 | | – Available–for–sale debt securities | | | 8.8 | | | | – | | | | 8.8 | | | | – | | | | | | | | | | | | – | | | | – | | | | – | | | | 8.8 | | – Held–to–maturity debt securities | | | 6.5 | | | | – | | | | 6.5 | | | | – | | | | | | | | | | | | – | | | | – | | | | – | | | | 6.5 | | Total financial investments | | | 17.5 | | | | – | | | | 17.5 | | | | 0.7 | | | | | | | | | | | | – | | | | – | | | | – | | | | 18.2 | | Total | | | 256.8 | | | | (0.9 | ) | | | 255.9 | | | | 43.5 | | | | | | | | | | | | (0.1 | ) | | | (197.6 | ) | | | – | | | | 101.7 | |
| (1) | The forms of collateral we take to reduce credit risk include: residential and commercial property; other physical assets, including motor vehicles; liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. Charges on residential property are most of the collateral we take. |
| (2) | Residual Value (RV) and Voluntary Termination (VT) provisions.Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. The loss allowance for off–balance sheet assets is classified in the balance sheet in provisions – other liabilities. |
| (3) | We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives, we use standard master netting agreements. They allow us to set off our credit risk exposure to a counterparty from a derivative against our obligations to the counterparty in the event of default. This gives us a lower net credit exposure. They may also reduce settlement exposure. For more on this, see ‘Credit risk mitigation’ in the ‘Other business segments – credit risk management’ section. |
| (4) | Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet. |
| (5) | The collateral value we have shown against advances secured on residential property is limited to the balance of each associated individual loan. It does not include the impact of over–collateralisation (where the collateral has a higher value than the loan balance) and includes collateral we would receive on draw down of certain off–balance sheet commitments. |
| (6) | From 1 January 2018, the non-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in the balance sheet, as described in Note 1. Comparatives are re-presented accordingly. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maximum exposure | | | Collateral(1) | | | | | | | | | | | Balance sheet asset | | | | | | | | | | | | | | | | | | 2016 | | Gross
amounts
£bn | | | Impairment loss
allowances and
RV & VT(2)
provisions £bn | | | Net
amounts
£bn | | | Off-balance
sheet £bn | | | Cash
£bn | | | Non-cash
£bn | | | Netting(2)
£bn | | | Net exposure
£bn | | Cash and balances at central banks | | | 17.1 | | | | – | | | | 17.1 | | | | – | | | | – | | | | – | | | | – | | | | 17.1 | | Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Securities repurchased under resale agreements | | | 10.7 | | | | – | | | | 10.7 | | | | – | | | | – | | | | (8.6 | ) | | | (2.1 | ) | | | – | | – Debt securities | | | 6.2 | | | | – | | | | 6.2 | | | | – | | | | – | | | | – | | | | – | | | | 6.2 | | – Cash collateral | | | 6.2 | | | | – | | | | 6.2 | | | | – | | | | – | | | | – | | | | – | | | | 6.2 | | – Short-term loans | | | 0.9 | | | | – | | | | 0.9 | | | | – | | | | – | | | | – | | | | – | | | | 0.9 | | Total trading assets | | | 24.0 | | | | – | | | | 24.0 | | | | – | | | | – | | | | (8.6 | ) | | | (2.1 | ) | | | 13.3 | | Derivative financial instruments | | | 25.5 | | | | – | | | | 25.5 | | | | – | | | | (2.4 | ) | | | – | | | | (17.4 | ) | | | 5.7 | | Financial assets designated at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers | | | 1.7 | | | | – | | | | 1.7 | | | | 0.2 | | | | – | | | | (1.8 | ) | | | – | | | | 0.1 | | – Debt securities | | | 0.4 | | | | – | | | | 0.4 | | | | – | | | | – | | | | – | | | | – | | | | 0.4 | | Total financial assets designated at fair value | | | 2.1 | | | | – | | | | 2.1 | | | | 0.2 | | | | – | | | | (1.8 | ) | | | – | | | | 0.5 | | Loans and advances to banks | | | 4.4 | | | | – | | | | 4.4 | | | | 1.9 | | | | – | | | | (1.5 | ) | | | – | | | | 4.8 | | Loans and advances to customers:(4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Advances secured on residential property | | | 154.7 | | | | (0.3 | ) | | | 154.4 | | | | 10.8 | | | | – | | | | (164.9)(5 | ) | | | – | | | | 0.3 | | – Corporate loans | | | 32.0 | | | | (0.4 | ) | | | 31.6 | | | | 17.1 | | | | – | | | | (23.1 | ) | | | – | | | | 25.6 | | – Finance leases | | | 6.7 | | | | (0.1 | ) | | | 6.6 | | | | 0.4 | | | | (0.1 | ) | | | (5.7 | ) | | | – | | | | 1.2 | | – Other unsecured loans | | | 6.2 | | | | (0.2 | ) | | | 6.0 | | | | 11.5 | | | | – | | | | – | | | | – | | | | 17.5 | | – Amounts due from fellow Banco Santander group subsidiaries and joint ventures | | | 1.1 | | | | – | | | | 1.1 | | | | – | | | | – | | | | – | | | | – | | | | 1.1 | | Total loans and advances to customers | | | 200.7 | | | | (1.0 | ) | | | 199.7 | | | | 39.8 | | | | (0.1 | ) | | | (193.7 | ) | | | – | | | | 45.7 | | Financial investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and receivables securities(4) | | | 0.3 | | | | – | | | | 0.3 | | | | 1.6 | | | | – | | | | – | | | | – | | | | 1.9 | | –Available-for-sale debt securities | | | 10.4 | | | | – | | | | 10.4 | | | | – | | | | – | | | | – | | | | – | | | | 10.4 | | –Held-to-maturity debt securities | | | 6.6 | | | | – | | | | 6.6 | | | | – | | | | – | | | | – | | | | – | | | | 6.6 | | Total financial investments | | | 17.3 | | | | – | | | | 17.3 | | | | 1.6 | | | | – | | | | – | | | | – | | | | 18.9 | | Total | | | 291.1 | | | | (1.0 | ) | | | 290.1 | | | | 43.5 | | | | (2.5 | ) | | | (205.6 | ) | | | (19.5 | ) | | | 106.0 | |
The tables below show the main differences between our maximum and net exposure to credit risk on the financial assets that credit risk affects and to which the impairment requirements in IFRS 9 are not applied. | | | | | | | | | | | | | | | | | | | | | | | | Balance sheet asset gross amount £bn | | | | | | | | | | | | | | | | | Collateral(1) | | | | | | | | | | | | | | | | | | | | Net exposure £bn | | | | | Cash | | | Non–cash | | | Netting(2) | | | 2018 | | £bn | | | £bn | | | £bn | | Financial assets at FVTPL | | | | | | | | | | | | | | | | | | | | | – Derivative financial instruments | | | 5.3 | | | | – | | | | (2.1 | ) | | | (0.9 | ) | | | 2.3 | | – Other financial assets at FVTPL | | | 5.6 | | | | – | | | | (2.3 | ) | | | – | | | | 3.3 | | Total | | | 10.9 | | | | – | | | | (4.4 | ) | | | (0.9 | ) | | | 5.6 | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | Financial assets designated at fair value | | | | | | | | | | | | | | | | | | | | | – Trading assets: | | | | | | | | | | | | | | | | | | | | | – Securities repurchased under resale agreements | | | 8.9 | | | | – | | | | (8.5 | ) | | | (0.4 | ) | | | – | | – Debt securities | | | 5.2 | | | | – | | | | – | | | | – | | | | 5.2 | | – Cash collateral | | | 6.2 | | | | – | | | | – | | | | – | | | | 6.2 | | – Short–term loans | | | 0.7 | | | | – | | | | – | | | | – | | | | 0.7 | | – Total trading assets | | | 21.0 | | | | – | | | | (8.5 | ) | | | (0.4 | ) | | | 12.1 | | – Derivative financial instruments | | | 19.9 | | | | (2.8 | ) | | | – | | | | (14.8 | ) | | | 2.3 | | – Financial assets designated at fair value: | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers | | | 1.6 | | | | – | | | | (1.6 | ) | | | – | | | | – | | – Debt securities | | | 0.5 | | | | – | | | | – | | | | – | | | | 0.5 | | Total financial assets designated at fair value | | | 2.1 | | | | – | | | | (1.6 | ) | | | – | | | | 0.5 | | Total | | | 43.0 | | | | (2.8 | ) | | | (10.1 | ) | | | (15.2 | ) | | | 14.9 | |
| (1) | The forms of collateral we take to reduce credit risk include: residential and commercial property; other physical assets, including motor vehicles; liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. Charges on residential property are most of the collateral we take. |
| (2) | Residual Value (RV) and Voluntary Termination (VT) provisions. |
(3) | We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives, we use standard master netting agreements. They allow us to set off our credit risk exposure to a counterparty from a derivative against our obligations to the counterparty in the event of default. This gives us a lower net credit exposure. They may also reduce settlement exposure. For more on this, see ‘Credit risk mitigation’ in the ‘Other business segments – credit risk management’ section. |
(4) | Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet. |
(5) | The collateral value we have shown is limited to the balance of each associated individual loan. It does not include the impact of over–collateralisation (where the collateral has a higher value than the loan balance) and includes collateral we would receive on draw down of certain off–balance sheet commitments. |
Credit quality
Single credit rating scale(unaudited) 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-defaultednon–defaulted exposures, from 9 (lowest risk) to 2 (highest risk). We define each grade by an upper and lower probability of default (PD)PD value and we scale the grades so that the default risk increases by a factor of ten every time the grade number drops by two steps. For example, risk grade 9 has an average PD of 0.010%, and risk grade 7 has an average PD of 0.100%. 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 & Poor’s Ratings Services (S&P). | | | | | | | | | | | PD range | | | | | | | | PD range | | | | | Mid | | | Lower | | | Upper | | | | | | Santander UK risk grade | | Mid % | | | Lower % | | | Upper % | | S&P equivalent | | | % | | | % | | | % | | | S&P equivalent | | 9 | | | 0.010 | | | | 0.000 | | | | 0.021 | | | | AAA to AA+ | | | | 0.010 | | | | 0.000 | | | | 0.021 | | | | AAA to AA+ | | 8 | | | 0.032 | | | | 0.021 | | | | 0.066 | | | | AA to AA- | | | | 0.032 | | | | 0.021 | | | | 0.066 | | | | AA to AA– | | 7 | | | 0.100 | | | | 0.066 | | | | 0.208 | | | | A+ to BBB | | | | 0.100 | | | | 0.066 | | | | 0.208 | | | | A+ to BBB | | 6 | | | 0.316 | | | | 0.208 | | | | 0.658 | | | | BBB- to BB | | | | 0.316 | | | | 0.208 | | | | 0.658 | | | | BBB– to BB | | 5 | | | 1.000 | | | | 0.658 | | | | 2.081 | | | | BB- | | | | 1.000 | | | | 0.658 | | | | 2.081 | | | | BB– | | 4 | | | 3.162 | | | | 2.081 | | | | 6.581 | | | | B+ to B | | | | 3.162 | | | | 2.081 | | | | 6.581 | | | | B+ to B | | 3 | | | 10.000 | | | | 6.581 | | | | 20.811 | | | | B- | | | | 10.000 | | | | 6.581 | | | | 20.811 | | | | B– | | 2 | | | 31.623 | | | | 20.811 | | | | 99.999 | | | | CCC to C | | | | 31.623 | | | | 20.811 | | | | 99.999 | | | | CCC to C | | 1 (Default) | | | 100.000 | | | | 100.000 | | | | 100.000 | | | | D | | | | 100.000 | | | | 100.000 | | | | 100.000 | | | | D | |
The PDs in the table above are based on Economic Capital (EC) PD mappings which are calculated based on the average probability of default over an economic cycle. This is different to the IFRS 9 PDs which are calculated at a point in time using forward looking economic scenarios. Where possible, the EC PD values are largely aligned to the regulatory capital models however any regulatory floors are removed and PDs are defined at every possible rating rather than categorised into rating buckets.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
Rating distribution The tables below show the credit rating of our financial assets subject to credit risk.which the impairment requirements in IFRS 9 (2017: IAS 39) are applied. For more on the credit rating profiles of key portfolios, see the ‘Credit Riskrisk – Retail Banking’ and ‘Credit Riskrisk – other business segments’ sections. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Santander UK risk grade | | | 2017 | | 9
£bn | | | 8
£bn | | | 7
£bn | | | 6
£bn | | | 5
£bn | | | 4
£bn | | | 3 to 1
£bn | | | Other(1)
£bn | | | Total
£bn | | Cash and balances at central banks | | | 31.8 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.0 | | | | 32.8 | | Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Securities repurchased under resale agreements | | | – | | | | 5.7 | | | | 1.5 | | | | 1.7 | | | | – | | | | – | | | | – | | | | – | | | | 8.9 | | – Debt securities | | | 1.2 | | | | 3.1 | | | | 0.9 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 5.2 | | – Cash collateral | | | 0.1 | | | | 0.9 | | | | 5.1 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | 6.2 | | – Short-term loans | | | 0.7 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.7 | | Total trading assets | | | 2.0 | | | | 9.7 | | | | 7.5 | | | | 1.8 | | | | – | | | | – | | | | – | | | | – | | | | 21.0 | | Derivative financial instruments | | | 0.4 | | | | 9.9 | | | | 7.6 | | | | 1.5 | | | | 0.4 | | | | – | | | | – | | | | 0.1 | | | | 19.9 | | Financial assets designated at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers | | | 0.3 | | | | 1.2 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.6 | | – Debt securities | | | 0.4 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.5 | | Total financial assets designated at fair value | | | 0.7 | | | | 1.3 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.1 | | Loans and advances to banks | | | 1.3 | | | | 1.7 | | | | 1.1 | | | | 0.4 | | | | – | | | | – | | | | – | | | | 1.4 | | | | 5.9 | | Loans and advances to customers:(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Advances secured on residential property | | | 3.2 | | | | 26.7 | | | | 75.2 | | | | 35.2 | | | | 6.2 | | | | 4.5 | | | | 4.4 | | | | – | | | | 155.4 | | – Corporate loans | | | 1.7 | | | | 5.1 | | | | 2.1 | | | | 4.6 | | | | 9.6 | | | | 5.1 | | | | 1.5 | | | | 1.3 | | | | 31.0 | | – Finance leases | | | – | | | | – | | | | 0.4 | | | | 1.3 | | | | 2.0 | | | | 1.8 | | | | 1.1 | | | | 0.1 | | | | 6.7 | | – Other unsecured loans | | | – | | | | 0.1 | | | | 0.8 | | | | 1.6 | | | | 1.6 | | | | 0.7 | | | | 0.5 | | | | 0.9 | | | | 6.2 | | – Amounts due from fellow Banco Santander group subsidiaries and joint ventures | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.2 | | | | 1.2 | | Total loans and advances to customers | | | 4.9 | | | | 31.9 | | | | 78.5 | | | | 42.7 | | | | 19.4 | | | | 12.1 | | | | 7.5 | | | | 3.5 | | | | 200.5 | | Financial investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and receivables securities(2) | | | 1.9 | | | | 0.1 | | | | 0.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.2 | | –Available-for-sale debt securities | | | 6.5 | | | | 1.9 | | | | 0.4 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 8.8 | | –Held-to-maturity debt securities | | | 6.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 6.5 | | Total financial investments | | | 14.9 | | | | 2.0 | | | | 0.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 17.5 | | | | | | 56.0 | | | | 56.5 | | | | 95.4 | | | | 46.4 | | | | 19.8 | | | | 12.1 | | | | 7.5 | | | | 6.0 | | �� | | 299.7 | | Impairment loss allowances and RV & VT provisions(5) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1.0 | ) | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 298.7 | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Neither past due nor impaired: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Cash and balances at central banks | | | 31.8 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.0 | | | | 32.8 | | – Trading assets | | | 2.0 | | | | 9.7 | | | | 7.5 | | | | 1.8 | | | | – | | | | – | | | | – | | | | – | | | | 21.0 | | – Derivative financial instruments | | | 0.4 | | | | 9.9 | | | | 7.6 | | | | 1.5 | | | | 0.4 | | | | – | | | | – | | | | 0.1 | | | | 19.9 | | – Financial assets designated at fair value | | | 0.7 | | | | 1.3 | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.1 | | – Loans and advances to banks | | | 1.3 | | | | 1.7 | | | | 1.1 | | | | 0.4 | | | | – | | | | – | | | | – | | | | 1.4 | | | | 5.9 | | – Loans and advances to customers | | | 4.9 | | | | 31.9 | | | | 78.5 | | | | 42.7 | | | | 19.3 | | | | 12.1 | | | | 3.8 | | | | 3.5 | | | | 196.7 | | – Financial investments | | | 14.9 | | | | 2.0 | | | | 0.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 17.5 | | Total neither past due nor impaired | | | 56.0 | | | | 56.5 | | | | 95.4 | | | | 46.4 | | | | 19.7 | | | | 12.1 | | | | 3.8 | | | | 6.0 | | | | 295.9 | | Past due but not impaired(3) | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | 2.4 | | | | – | | | | 2.5 | | Impaired(4) | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.3 | | | | – | | | | 1.3 | | | | | | 56.0 | | | | 56.5 | | | | 95.4 | | | | 46.4 | | | | 19.8 | | | | 12.1 | | | | 7.5 | | | | 6.0 | | | | 299.7 | | | Impairment loss allowances and RV & VT provisions(5) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1.0 | ) | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 298.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Santander UK risk grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss | | | | | | | | 9 | | | 8 | | | 7 | | | 6 | | | 5 | | | 4 | | | 3 to 1 | | | Other(1) | | | allowance(2) | | | Total | | | 2018 | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | | £bn | | Cash and balances at central banks | | | 19.7 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 19.7 | | – Stage 1 | | | 19.7 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 19.7 | | Financial assets at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers(3) | | | 10.0 | | | | 27.4 | | | | 72.3 | | | | 51.5 | | | | 20.3 | | | | 11.4 | | | | 6.3 | | | | 2.9 | | | | (0.7 | ) | | | 201.4 | | – Stage 1 | | | 10.0 | | | | 27.4 | | | | 72.1 | | | | 50.2 | | | | 17.6 | | | | 6.9 | | | | 1.1 | | | | 2.8 | | | | (0.1 | ) | | | 188.0 | | – Stage 2 | | | – | | | | – | | | | 0.2 | | | | 1.3 | | | | 2.7 | | | | 4.5 | | | | 2.8 | | | | 0.1 | | | | (0.3 | ) | | | 11.3 | | – Stage 3 | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.4 | | | | – | | | | (0.3 | ) | | | 2.1 | | – Loans and advances to banks | | | 0.8 | | | | 0.2 | | | | 0.8 | | | | – | | | | – | | | | – | | | | – | | | | 1.0 | | | | – | | | | 2.8 | | – Stage 1 | | | 0.8 | | | | 0.2 | | | | 0.8 | | | | – | | | | – | | | | – | | | | – | | | | 1.0 | | | | – | | | | 2.8 | | – Reverse repo agreements – non trading(4) | | | 15.2 | | | | 3.8 | | | | 1.3 | | | | 0.4 | | | | – | | | | – | | | | – | | | | 0.4 | | | | – | | | | 21.1 | | – Stage 1 | | | 15.2 | | | | 3.8 | | | | 1.3 | | | | 0.4 | | | | – | | | | – | | | | – | | | | 0.4 | | | | – | | | | 21.1 | | – Other financial assets at amortised cost | | | 7.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 7.2 | | – Stage 1 | | | 7.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 7.2 | | Total financial assets at amortised cost | | | 33.2 | | | | 31.4 | | | | 74.4 | | | | 51.9 | | | | 20.3 | | | | 11.4 | | | | 6.3 | | | | 4.3 | | | | (0.7 | ) | | | 232.5 | | Financial assets at FVOCI: | | | 6.6 | | | | 5.8 | | | | 0.7 | | | | – | | | | – | | | | – | | | | – | | | | 0.2 | | | | – | | | | 13.3 | | – Stage 1 | | | 6.6 | | | | 5.8 | | | | 0.7 | | | | – | | | | – | | | | – | | | | – | | | | 0.2 | | | | – | | | | 13.3 | | Total on balance sheet exposures | | | 59.5 | | | | 37.2 | | | | 75.1 | | | | 51.9 | | | | 20.3 | | | | 11.4 | | | | 6.3 | | | | 4.5 | | | | (0.7 | ) | | | 265.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Off–balance sheet exposures | | | 0.7 | | | | 8.0 | | | | 8.9 | | | | 9.0 | | | | 5.4 | | | | 1.3 | | | | 0.5 | | | | 7.9 | | | | (0.1 | )(5) | | | 41.6 | | – Stage 1 | | | 0.7 | | | | 8.0 | | | | 8.9 | | | | 8.9 | | | | 5.3 | | | | 1.2 | | | | 0.3 | | | | 7.9 | | | | (0.1 | ) | | | 41.1 | | – Stage 2 | | | – | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | – | | | | – | | | | 0.4 | | – Stage 3 | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 60.2 | | | | 45.2 | | | | 84.0 | | | | 60.9 | | | | 25.7 | | | | 12.7 | | | | 6.8 | | | | 12.4 | | | | (0.8 | ) | | | 307.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 31.8 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.0 | | | | – | | | | 32.8 | | Loans and advances to banks | | | 1.3 | | | | 0.2 | | | | 0.7 | | | | – | | | | – | | | | – | | | | – | | | | 1.3 | | | | – | | | | 3.5 | | Loans and advances to customers:(3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential property | | | 3.2 | | | | 26.7 | | | | 75.2 | | | | 35.2 | | | | 6.2 | | | | 4.5 | | | | 4.4 | | | | – | | | | (0.2 | ) | | | 155.2 | | – Corporate loans | | | 1.7 | | | | 5.1 | | | | 2.1 | | | | 4.6 | | | | 9.6 | | | | 5.1 | | | | 1.5 | | | | 1.3 | | | | (0.5 | ) | | | 30.5 | | – Finance leases | | | – | | | | – | | | | 0.4 | | | | 1.3 | | | | 2.0 | | | | 1.8 | | | | 1.1 | | | | 0.1 | | | | (0.1 | ) | | | 6.6 | | – Other unsecured loans | | | – | | | | 0.1 | | | | 0.8 | | | | 1.6 | | | | 1.6 | | | | 0.7 | | | | 0.5 | | | | 0.9 | | | | (0.2 | ) | | | 6.0 | | – Amounts due from fellow Banco | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.2 | | | | – | | | | 1.2 | | Santander group subsidiaries and JVs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans and advances to customers | | | 4.9 | | | | 31.9 | | | | 78.5 | | | | 42.7 | | | | 19.4 | | | | 12.1 | | | | 7.5 | | | | 3.5 | | | | (1.0 | ) | | | 199.5 | | Reverse repo agreements – non trading(4) | | | – | | | | 1.5 | | | | 0.4 | | | | 0.4 | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | 2.4 | | Financial investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and receivables securities(2) | | | 1.9 | | | | 0.1 | | | | 0.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.2 | | – Available–for–sale debt securities | | | 6.5 | | | | 1.9 | | | | 0.4 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 8.8 | | – Held–to–maturity debt securities | | | 6.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 6.5 | | Total financial investments | | | 14.9 | | | | 2.0 | | | | 0.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 17.5 | | Total | | | 52.9 | | | | 35.6 | | | | 80.2 | | | | 43.1 | | | | 19.4 | | | | 12.1 | | | | 7.5 | | | | 5.9 | | | | (1.0 | ) | | | 255.7 | |
| (1) | Other items includeIncludes cash at hand and smaller cases mainly in the consumer (auto) finance and commercial mortgages portfolios. We use scorecards for these items, rather than rating models. |
| (2) | Balances includeLoss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. |
| (3) | Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet. |
(3)(4) | Balances include mortgage loansFrom 1 January 2018, the non-trading repurchase agreements and non-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in arrears which have been assessed for incurred but not observed (IBNO) lossesthe balance sheet, as described in Note 1 to the Consolidated Financial Statements. |
(4) | Impaired loans1. Comparatives are loans we have assessed for observed impairment loss allowances. This included loans individually assessed for impairment of £713m.represented accordingly. |
| (5) | Residual Value (RV)The total rounds to £0.1bn and Voluntary Termination (VT) provisions.is split across all three Stages. In this table, it has been allocated in full to Stage 1 for presentational purposes. For the full detail, see the ‘IFRS 9 Credit Quality’ section. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Santander UK risk grade | | | | | | 2016 | | 9 £bn | | | 8 £bn | | | 7 £bn | | | 6 £bn | | | 5 £bn | | | 4 £bn | | | 3 to 1
£bn | | | Other(1) £bn | | | Total £bn | | Cash and balances at central banks | | | 15.9 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.2 | | | | 17.1 | | Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Securities repurchased under resale agreements | | | – | | | | 5.4 | | | | 4.2 | | | | 0.9 | | | | 0.2 | | | | – | | | | – | | | | – | | | | 10.7 | | – Debt securities | | | 2.8 | | | | 1.5 | | | | 0.3 | | | | 1.6 | | | | – | | | | – | | | | – | | | | – | | | | 6.2 | | – Cash collateral | | | – | | | | 1.5 | | | | 4.3 | | | | 0.4 | | | | – | | | | – | | | | – | | | | – | | | | 6.2 | | – Short-term loans | | | 0.8 | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | 0.9 | | Total trading assets | | | 3.6 | | | | 8.4 | | | | 8.8 | | | | 2.9 | | | | 0.3 | | | | – | | | | – | | | | – | | | | 24.0 | | Derivative financial instruments | | | 1.1 | | | | 10.4 | | | | 9.9 | | | | 3.4 | | | | 0.6 | | | | – | | | | – | | | | 0.1 | | | | 25.5 | | Financial assets designated at fair value: | | | | | | | | | | | | | | | | | | | | | | | – | | | | – | | | | | | | | | | – Loans and advances to customers | | | 0.6 | | | | 0.5 | | | | 0.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.7 | | – Debt securities | | | – | | | | 0.1 | | | | – | | | | 0.3 | | | | – | | | | – | | | | – | | | | – | | | | 0.4 | | Total financial assets designated at fair value | | | 0.6 | | | | 0.6 | | | | 0.6 | | | | 0.3 | | | | – | | | | – | | | | – | | | | – | | | | 2.1 | | Loans and advances to banks | | | 1.7 | | | | 1.5 | | | | 0.5 | | | | 0.2 | | | | – | | | | – | | | | – | | | | 0.5 | | | | 4.4 | | Loans and advances to customers:(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Advances secured on residential property | | | 2.1 | | | | 23.8 | | | | 74.0 | | | | 37.8 | | | | 6.8 | | | | 5.3 | | | | 4.9 | | | | – | | | | 154.7 | | – Corporate loans | | | 3.3 | | | | 3.2 | | | | 1.6 | | | | 10.5 | | | | 7.4 | | | | 3.7 | | | | 0.9 | | | | 1.4 | | | | 32.0 | | – Finance leases | | | – | | | | – | | | | 0.4 | | | | 1.3 | | | | 2.0 | | | | 1.9 | | | | 1.0 | | | | 0.1 | | | | 6.7 | | – Other unsecured loans | | | – | | | | – | | | | 0.2 | | | | 1.5 | | | | 2.4 | | | | 0.9 | | | | 0.4 | | | | 0.8 | | | | 6.2 | | – Amounts due from fellow Banco Santander group subsidiaries and joint ventures | | | 1.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.1 | | Total loans and advances to customers | | | 6.5 | | | | 27.0 | | | | 76.2 | | | | 51.1 | | | | 18.6 | | | | 11.8 | | | | 7.2 | | | | 2.3 | | | | 200.7 | | Financial investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and receivables securities(2) | | | 0.1 | | | | – | | | | 0.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.3 | | –Available-for-sale debt securities | | | 7.8 | | | | 1.8 | | | | 0.7 | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 10.4 | | –Held-to-maturity debt securities | | | 6.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 6.6 | | Total financial investments | | | 14.5 | | | | 1.8 | | | | 0.9 | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 17.3 | | | | | | 43.9 | | | | 49.7 | | | | 96.9 | | | | 57.9 | | | | 19.5 | | | | 11.8 | | | | 7.2 | | | | 4.2 | | | | 291.1 | | | Impairment loss allowances and RV & VT provisions(5) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1.0) | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 290.1 | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Neither past due nor impaired: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Cash and balances at central banks | | | 15.9 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.2 | | | | 17.1 | | – Trading assets | | | 3.6 | | | | 8.4 | | | | 8.8 | | | | 2.9 | | | | 0.3 | | | | – | | | | – | | | | – | | | | 24.0 | | – Derivative financial instruments | | | 1.1 | | | | 10.4 | | | | 9.9 | | | | 3.4 | | | | 0.6 | | | | – | | | | – | | | | 0.1 | | | | 25.5 | | – Financial assets designated at fair value | | | 0.6 | | | | 0.6 | | | | 0.6 | | | | 0.3 | | | | – | | | | – | | | | – | | | | – | | | | 2.1 | | – Loans and advances to banks | | | 1.7 | | | | 1.5 | | | | 0.5 | | | | 0.2 | | | | – | | | | – | | | | – | | | | 0.5 | | | | 4.4 | | – Loans and advances to customers | | | 6.5 | | | | 27.0 | | | | 76.2 | | | | 51.1 | | | | 18.5 | | | | 11.7 | | | | 3.3 | | | | 2.3 | | | | 196.6 | | – Financial investments | | | 14.5 | | | | 1.8 | | | | 0.9 | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 17.3 | | Total neither past due nor impaired | | | 43.9 | | | | 49.7 | | | | 96.9 | | | | 57.9 | | | | 19.4 | | | | 11.7 | | | | 3.3 | | | | 4.2 | | | | 287.0 | | Past due but not impaired(3) | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | | 2.5 | | | | – | | | | 2.7 | | Impaired(4) | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.4 | | | | – | | | | 1.4 | | | | | | 43.9 | | | | 49.7 | | | | 96.9 | | | | 57.9 | | | | 19.5 | | | | 11.8 | | | | 7.2 | | | | 4.2 | | | | 291.1 | | | Impairment loss allowances and RV & VT provisions(5) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1.0) | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 290.1 | |
(1) | Other items include cash at hand and smaller cases mainly in the consumer (auto) 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 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. This included loans individually assessed for impairment of £578m. |
(5) | Residual Value (RV) and Voluntary Termination (VT) provisions. |
Age of loans and advances that are past due but not impaired
At 31 December 2017, loans and advances of £2.5bn (2016: £2.7bn) were past due but not impaired. Of these balances, £0.1bn (2016: £0.1bn) were less than 1 month overdue, £0.7bn (2016: £0.8bn) were 1 to 2 months overdue, £0.4bn (2016: £0.5bn) were 2 to 3 months overdue, £0.7bn (2016: £0.7bn) were 3 to 6 months overdue, and £0.6bn (2016: £0.6bn) were greater than 6 months overdue.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Credit performance The customer loans in the tables below and in the remainder of the ‘Credit risk’ section are presented differently from the balances in the Consolidated Balance Sheet. The main difference is that the customer loans below exclude inter-company balances. We disclose transactions with related parties in Note 36 to the Consolidated Financial Statements. In addition, customer loans are presented on an amortised cost basis and exclude interest we have accrued but not charged to customers’ accounts yet. | | | | | Customer | | | | | | | | | Gross write– | | | Loss | | | | | | loans | | | NPLs(1)(2) | | | NPL ratio(3) | | | offs | | | allowances(4) | | | 2018 | | | £bn | | | £m | | | % | | | £m | | | £m | | Retail Banking: | | | | 172.8 | | | | 2,126 | | | | 1.23 | | | | 182 | | | | 594 | | – of which mortgages | | | | 158.0 | | | | 1,907 | | | | 1.21 | | | | 18 | | | | 237 | | Corporate & Commercial Banking | | | | 17.7 | | | | 264 | | | | 1.49 | | | | 97 | | | | 182 | | Corporate & Investment Banking | | | | 4.6 | | | | – | | | | – | | | | 252 | | | | 18 | | Corporate Centre | | | | 4.5 | | | | 16 | | | | 0.36 | | | | 3 | | | | 13 | | | | | | | 199.6 | | | | 2,406 | | | | 1.21 | | | | 534 | | | | 807 | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | Customer loans
£bn | | NPLs(1)(2)
£m | | NPL ratio(3)
% | | NPL coverage(4)
% | | Gross write-offs
£m | | Impairment
loss allowances
£m | | | | | | | | | | | | | | | | | Retail Banking: | | 169.0 | | | 2,105 | | | 1.25 | | | 23 | | | 195 | | | 491 | | | | 168.7 | | | | 2,104 | | | | 1.25 | | | | 195 | | | | 491 | | – of which mortgages | | 154.9 | | | 1,868 | | | 1.21 | | | 12 | | | 22 | | | 225 | | | | 154.7 | | | | 1,867 | | | | 1.21 | | | | 22 | | | | 225 | | Commercial Banking | | 19.4 | | | 383 | | | 1.97 | | | 51 | | | 35 | | | 195 | | | Global Corporate Banking | | 6.0 | | | 340 | | | 5.67 | | | 69 | | | | – | | | 236 | | | Corporate Centre | | 5.9 | | | 20 | | | 0.34 | | | 90 | | | 23 | | | 18 | | | | | | 200.3 | | | 2,848 | | | 1.42 | | | 33 | | | 253 | | | 940 | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | Retail Banking: | | | 168.6 | | | | 2,340 | | | | 1.39 | | | | 25(5) | | | | 210 | | | | 583(5) | | | – of which mortgages | | | 154.3 | | | | 2,110 | | | | 1.37 | | | | 13 | | | | 33 | | | | 279 | | | Commercial Banking | | | 19.4 | | | | 518 | | | | 2.67 | | | | 42 | | | | 10 | | | | 220 | | | Global Corporate Banking | | | 5.7 | | | | 63 | | | | 1.11 | | | | 90 | | | | – | | | | 57 | | | Corporate & Commercial Banking | | | | 19.4 | | | | 383 | | | | 1.97 | | | | 35 | | | | 195 | | Corporate & Investment Banking | | | | 6.0 | | | | 340 | | | | 5.67 | | | | – | | | | 236 | | Corporate Centre | | | 6.5 | | | | 73 | | | | 1.12 | | | | 84 | | | | 51 | | | | 61 | | | | 6.2 | | | | 21 | | | | 0.34 | | | | 23 | | | | 18 | | | | | | 200.2 | | | | 2,994 | | | | 1.50 | | | | 31(5) | | | | 271 | | | | 921(5) | | | | 200.3 | | | | 2,848 | | | | 1.42 | | | | 253 | | | | 940 | | | | | | | | | | | | | | Of which: Corporate lending | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | 24.1 | | | | 353 | | | | 1.46 | | | | 364 | | | | 253 | | 2017 | | 27.3 | | | 838 | | | 3.07 | | | 58 | | | 56 | | | 485 | | | | 27.3 | | | | 838 | | | | 3.07 | | | | 56 | | | | 485 | | 2016 | | | 27.4 | | | | 689 | | | | 2.51 | | | | 48 | | | | 34 | | | | 334 | | |
| (1) | We define NPLs in the ‘Credit risk management’ section. |
| (2) | All NPLs (excluding personal bank accounts) continue accruing interest. |
| (3) | NPLs as a percentage of customer loans. |
| (4) | ImpairmentLoss allowances for 2017 were on an incurred loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrearsbasis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. The ECL allowance is for both on and performing assets (i.e. the incurred but not observed provision) as well as NPLs, so the ratio can exceed 100%. |
(5) | In the first half of 2017, we reclassified our provisions for residual value and voluntary termination from the consumer (auto) finance impairment loss allowance. In order to facilitate comparison with the current period, the 31 December 2016 consumer (auto) finance loan loss allowance and NPL coverage ratio were amended. This reclassification was also reflected in the Retail Banking loan loss allowance and NPL coverage ratios.off–balance sheet exposures. |
Corporate lending comprises the business banking portfolio of our Retail Banking segment, and our Corporate & Commercial Banking and Global Corporate & Investment Banking segments. 20172018 compared to 2016 2017(unaudited)
Our financial results now reflect the changes in the statutory perimeter, following the ring-fence transfers of activities to Banco Santander London Branch. Prior periods have not been restated. The NPL ratio improved 8bps21bps to 1.42%1.21%, with credit quality remaining strong supported by our predictablemedium-lowprudent approach to risk, profile, proactive management actions and the ongoing resilience of the UK economy. The improvement was also driven by the write-off of the Carillion plc exposures. | – | | The Retail Banking NPL ratio improveddecreased to 1.25%, with a decrease in mortgage NPLs as a result of the ongoing resilience of the UK economy and our strong risk management practices. The1.23%. Retail Banking loan loss rate remained low at 0.02% (2016: 0.01%).allowances increased from the application of IFRS 9. |
| – | | The Corporate & Commercial Banking NPL ratio for Commercial Banking improved to 1.97%1.49%, primarilylargely due to the full repaymenta number of three impairedsmall loans and thewrite-off of somepre-2009 vintages. The loan loss rate improved to 0.07% (2016: 0.15%).which were written-off, without material concentrations across sectors or portfolios. |
| – | | The Global Corporate Banking NPL ratio of 5.67% was severely impactedCIB had no loans in non-performance, predominantly driven by the loans write-off for Carillion plc loans thatand another CIB customer, both of which moved tonon-performance non-performing in the year.2017. |
| – | | The Corporate Centre NPL ratio decreasedincreased slightly to 0.34%, reflecting management ofnon-core corporate and legacy portfolios.0.36%. |
For more on the credit performance of our key portfolios by business segment, see the ‘Retail Banking – credit risk review’ and ‘Other business segments – credit risk review’ sections.
| | | | Annual Report 2018 | Risk review | | |
IFRS 9 credit quality Total on-balance sheet exposures at 31 December 2018 comprise £199.5bn of customer loans, L&A to banks of £2.8bn (reported in CIB) and £28.4bn of sovereign assets measured at amortised cost, £13.3bn of assets measured at fair value through other comprehensive income (FVOCI), and £19.7bn of cash and balances at central banks (all reported in Corporate Centre). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (unaudited) | | | | | | | | | Stage 2 | | | | | | | | | | | Average PD(1) | | | | | | Stage 1 | | | £ 30 DPD | | | >30 DPD | | | Sub total | | | Stage 3(2) | | | Total | | | 31 December 2018 | | % | | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Exposures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | On-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | 0.53 | | | | | | | | 160,212 | | | | 9,375 | | | | 949 | | | | 10,324 | | | | 2,211 | | | | 172,747 | | – of which mortgages | | | 0.48 | | | | | | | | 146,619 | | | | 8,466 | | | | 890 | | | | 9,356 | | | | 1,982 | | | | 157,957 | | Corporate & Commercial Banking | | | 0.92 | | | | | | | | 16,394 | | | | 1,044 | | | | – | | | | 1,044 | | | | 264 | | | | 17,702 | | Corporate & Investment Banking | | | 0.36 | | | | | | | | 28,461 | | | | 78 | | | | – | | | | 78 | | | | – | | | | 28,539 | | Corporate Centre | | | 0.14 | | | | | | | | 44,609 | | | | 120 | | | | 11 | | | | 131 | | | | 15 | | | | 44,755 | | Total on-balance sheet | | | | | | | | | | | 249,676 | | | | 10,617 | | | | 960 | | | | 11,577 | | | | 2,490 | | | | 263,743 | | Off-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking(3) | | | | | | | | | | | 22,819 | | | | 196 | | | | – | | | | 196 | | | | 43 | | | | 23,058 | | – of which mortgages(3) | | | | | | | | | | | 11,120 | | | | 76 | | | | – | | | | 76 | | | | 17 | | | | 11,213 | | Corporate & Commercial Banking | | | | | | | | | | | 4,939 | | | | 182 | | | | – | | | | 182 | | | | 12 | | | | 5,133 | | Corporate & Investment Banking | | | | | | | | | | | 12,923 | | | | 56 | | | | – | | | | 56 | | | | 26 | | | | 13,005 | | Corporate Centre | | | | | | | | | | | 525 | | | | – | | | | – | | | | – | | | | – | | | | 525 | | Total off-balance sheet(4) | | | | | | | | | | | 41, 206 | | | | 434 | | | | – | | | | 434 | | | | 81 | | | | 41,721 | | Total exposures | | | | | | | | | | | 290,882 | | | | 11,051 | | | | 960 | | | | 12,011 | | | | 2,571 | | | | 305,464 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ECL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | On-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | | | 84 | | | | 217 | | | | 39 | | | | 256 | | | | 228 | | | | 568 | | – of which mortgages | | | | | | | | | | | 10 | | | | 98 | | | | 20 | | | | 118 | | | | 106 | | | | 234 | | Corporate & Commercial Banking | | | | | | | | | | | 31 | | | | 26 | | | | – | | | | 26 | | | | 111 | | | | 168 | | Corporate & Investment Banking | | | | | | | | | | | 1 | | | | 1 | | | | – | | | | 1 | | | | – | | | | 2 | | Corporate Centre | | | | | | | | | | | 5 | | | | 3 | | | | – | | | | 3 | | | | 5 | | | | 13 | | Total on-balance sheet | | | | | | | | | | | 121 | | | | 247 | | | | 39 | | | | 286 | | | | 344 | | | | 751 | | Off-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | | | 12 | | | | 13 | | | | – | | | | 13 | | | | 1 | | | | 26 | | – of which mortgages | | | | | | | | | | | 2 | | | | 1 | | | | – | | | | 1 | | | | – | | | | 3 | | Corporate & Commercial Banking | | | | | | | | | | | 6 | | | | 6 | | | | – | | | | 6 | | | | 2 | | | | 14 | | Corporate & Investment Banking | | | | | | | | | | | 4 | | | | 2 | | | | – | | | | 2 | | | | 10 | | | | 16 | | Total off-balance sheet | | | | | | | | | | | 22 | | | | 21 | | | | – | | | | 21 | | | | 13 | | | | 56 | | Total ECL | | | | | | | | | | | 143 | | | | 268 | | | | 39 | | | | 307 | | | | 357 | | | | 807 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Coverage ratio(5) | | | | | | | | % | | | % | | | % | | | % | | | % | | | % | | On-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | | | 0.1 | | | | 2.3 | | | | 4.1 | | | | 2.5 | | | | 10.3 | | | | 0.3 | | – of which mortgages | | | | | | | | | | | – | | | | 1.2 | | | | 2.2 | | | | 1.3 | | | | 5.3 | | | | 0.1 | | Corporate & Commercial Banking | | | | | | | | | | | 0.2 | | | | 2.5 | | | | – | | | | 2.5 | | | | 42.0 | | | | 0.9 | | Corporate & Investment Banking | | | | | | | | | | | – | | | | 1.3 | | | | – | | | | 1.3 | | | | – | | | | – | | Corporate Centre | | | | | | | | | | | – | | | | 2.5 | | | | – | | | | 2.3 | | | | 33.3 | | | | – | | Total on-balance sheet | | | | | | | | | | | – | | | | 2.3 | | | | 4.1 | | | | 2.5 | | | | 13.8 | | | | 0.3 | | Off-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | | | 0.1 | | | | 6.6 | | | | – | | | | 6.6 | | | | 2.3 | | | | 0.1 | | – of which mortgages | | | | | | | | | | | – | | | | 1.3 | | | | – | | | | 1.3 | | | | – | | | | – | | Corporate & Commercial Banking | | | | | | | | | | | 0.1 | | | | 3.3 | | | | – | | | | 3.3 | | | | 16.7 | | | | 0.3 | | Corporate & Investment Banking | | | | | | | | | | | – | | | | 3.6 | | | | – | | | | 3.6 | | | | 38.5 | | | | 0.1 | | Total off-balance sheet | | | | | | | | | | | 0.1 | | | | 4.8 | | | | – | | | | 4.8 | | | | 16.0 | | | | 0.1 | | Total coverage | | | | | | | | | | | – | | | | 2.4 | | | | 4.1 | | | | 2.6 | | | | 13.9 | | | | 0.3 | |
| (1) | Average IFRS 9 PDs are 12-month, scenario-weighted PDs. Weighted averages are determined using EAD for the first year. Financial assets in default are excluded from the calculation, given they are allocated a PD of 100%. |
| (2) | Stage 3 exposures under IFRS 9 and NPLs used in our NPL ratio metric are subject to different criteria. These criteria are under review in parallel with the ongoing regulatory changes to the default definition. |
| (3) | Off-balance sheet exposures include £5.2bn of retail mortgage offers in the pipeline. |
| (4) | Off-balance sheet amounts consist of contingent liabilities and commitments. For more see Note 32 to the Consolidated Financial Statements. |
| (5) | ECL as a percentage of the related exposure. |
Stage 2 analysis | | | | | | | Exposure | | | 31 December 2018 | | £m | | Currently in arrears | | | 960 | | Currently up–to–date: | | | | | – PD deterioration | | | 8,509 | | – Other(1) | | | 2,542 | | Total Stage 2 | | | 12,011 | |
| (1) | Mainly due to forbearance. |
Total on-balance sheet exposures at 1 January 2018 comprise £200.3bn of customer loans, L&A to banks of £3.5bn (reported in CIB) and £11.3bn of sovereign assets measured at amortised cost, £8.9bn of assets measured at FVOCI, and £32.8bn of cash and balances at central banks (all reported in Corporate Centre). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (unaudited) | | | | | | | | Stage 2 | | | | | | | | | | | Average PD(1) | | | | | Stage 1 | | | £ 30 DPD | | | >30 DPD | | | Sub total | | | Stage 3(2) | | | Total | | | 1 January 2018 | | % | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Exposures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | On-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | 0.61 | | | | | | 155,845 | | | | 9,537 | | | | 1,120 | | | | 10,657 | | | | 2,222 | | | | 168,724 | | – of which mortgages | | | 0.55 | | | | | | 142,940 | | | | 8,765 | | | | 991 | | | | 9,756 | | | | 1,986 | | | | 154,682 | | Corporate & Commercial Banking | | | 0.79 | | | | | | 18,362 | | | | 575 | | | | 71 | | | | 646 | | | | 383 | | | | 19,391 | | Corporate & Investment Banking | | | 0.17 | | | | | | 11,684 | | | | 93 | | | | – | | | | 93 | | | | 340 | | | | 12,117 | | Corporate Centre | | | 0.07 | | | | | | 56,325 | | | | 172 | | | | 38 | | | | 210 | | | | 20 | | | | 56,555 | | Total on-balance sheet | | | | | | | | | 242,216 | | | | 10,377 | | | | 1,229 | | | | 11,606 | | | | 2,965 | | | | 256,787 | | Off-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking(3) | | | | | | | | | 23,133 | | | | 223 | | | | 5 | | | | 228 | | | | 41 | | | | 23,402 | | – of which mortgages(3) | | | | | | | | | 12,215 | | | | 126 | | | | 2 | | | | 128 | | | | 18 | | | | 12,361 | | Corporate & Commercial Banking | | | | | | | | | 4,055 | | | | 211 | | | | 9 | | | | 220 | | | | 5 | | | | 4,280 | | Corporate & Investment Banking | | | | | | | | | 14,899 | | | | 16 | | | | – | | | | 16 | | | | 32 | | | | 14,947 | | Corporate Centre | | | | | | | | | 830 | | | | 40 | | | | – | | | | 40 | | | | – | | | | 870 | | Total off–balance sheet(4) | | | | | | | | | 42,917 | | | | 490 | | | | 14 | | | | 504 | | | | 78 | | | | 43,499 | | Total exposures | | | | | | | | | 285,133 | | | | 10,867 | | | | 1,243 | | | | 12,110 | | | | 3,043 | | | | 300,286 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ECL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | On-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | 97 | | | | 206 | | | | 28 | | | | 234 | | | | 266 | | | | 597 | | – of which mortgages | | | | | | | | | 20 | | | | 113 | | | | 16 | | | | 129 | | | | 121 | | | | 270 | | Corporate & Commercial Banking | | | | | | | | | 38 | | | | 17 | | | | 8 | | | | 25 | | | | 173 | | | | 236 | | Corporate & Investment Banking | | | | | | | | | 8 | | | | – | | | | – | | | | – | | | | 242 | | | | 250 | | Corporate Centre | | | | | | | | | 7 | | | | 2 | | | | 2 | | | | 4 | | | | 8 | | | | 19 | | Total on-balance sheet | | | | | | | | | 150 | | | | 225 | | | | 38 | | | | 263 | | | | 689 | | | | 1,102 | | Off-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | 13 | | | | 13 | | | | – | | | | 13 | | | | 2 | | | | 28 | | – of which mortgages | | | | | | | | | – | | | | 2 | | | | – | | | | 2 | | | | – | | | | 2 | | Corporate & Commercial Banking | | | | | | | | | 5 | | | | 8 | | | | – | | | | 8 | | | | – | | | | 13 | | Corporate & Investment Banking | | | | | | | | | 8 | | | | – | | | | – | | | | – | | | | – | | | | 8 | | Total off-balance sheet | | | | | | | | | 26 | | | | 21 | | | | – | | | | 21 | | | | 2 | | | | 49 | | Total ECL | | | | | | | | | 176 | | | | 246 | | | | 38 | | | | 284 | | | | 691 | | | | 1,151 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Coverage ratio(5) | | | | | | | % | | | % | | | % | | | % | | | % | | | % | | On-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | 0.1 | | | | 2.2 | | | | 2.5 | | | | 2.2 | | | | 12.0 | | | | 0.4 | | – of which mortgages | | | | | | | | | – | | | | 1.3 | | | | 1.6 | | | | 1.3 | | | | 6.1 | | | | 0.2 | | Corporate & Commercial Banking | | | | | | | | | 0.2 | | | | 3.0 | | | | 11.3 | | | | 3.9 | | | | 45.2 | | | | 1.2 | | Corporate & Investment Banking | | | | | | | | | 0.1 | | | | – | | | | – | | | | – | | | | 71.2 | | | | 2.1 | | Corporate Centre | | | | | | | | | – | | | | 1.2 | | | | 5.3 | | | | 1.9 | | | | 40.0 | | | | – | | Total on-balance sheet | | | | | | | | | 0.1 | | | | 2.2 | | | | 3.1 | | | | 2.3 | | | | 23.2 | | | | 0.4 | | Off-balance sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | | | | | | | 0.1 | | | | 5.8 | | | | – | | | | 5.7 | | | | 4.9 | | | | 0.1 | | – of which mortgages | | | | | | | | | – | | | | 1.6 | | | | – | | | | 1.6 | | | | – | | | | – | | Corporate & Commercial Banking | | | | | | | | | 0.1 | | | | 3.8 | | | | – | | | | 3.6 | | | | – | | | | 0.3 | | Corporate & Investment Banking | | | | | | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | Total off-balance sheet | | | | | | | | | 0.1 | | | | 4.3 | | | | – | | | | 4.2 | | | | 2.6 | | | | 0.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total coverage | | | | | | | | | 0.1 | | | | 2.3 | | | | 3.1 | | | | 2.3 | | | | 22.7 | | | | 0.4 | |
| (1) | Average IFRS 9 PDs are 12-month, scenario-weighted PDs. Weighted averages are determined using EAD for the first year. Financial assets in default are excluded from the calculation, given they are allocated a PD of 100%. |
| (2) | Stage 3 exposures under IFRS 9 and NPLs used in our NPL ratio metric are subject to different criteria. These criteria are under review in parallel with the ongoing regulatory changes to the default definition. |
| (3) | Off-balance sheet exposures include £6.2bn of retail mortgage offers in the pipeline. |
| (4) | Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 32 to the Consolidated Financial Statements. |
| (5) | ECL as a percentage of the related exposure. |
31 December 2018 compared to 1 January 2018 (unaudited) Key movements in exposures and ECL in the year by Stage were: | – | | The increase in Stage 1 exposures was largely driven by reverse repurchase agreements – non trading in CIB. As part of our ring-fencing implementation, reverse repurchase agreements – non trading are now accounted for at amortised cost, in line with our business model for managing these assets as part of our overall funding and liquidity plans. Previously, similar transactions were mainly classified as trading assets and accounted for at FVTPL. As the impairment requirements in IFRS 9 do not apply to FVTPL assets, they are not included in this table and the change in treatment led to an increase in the Stage 1 CIB exposures. Reverse repurchase agreements carry very low credit risk and the ECL at 31 December 2018 was not material. Stage 1 exposures also increased due to lending growth in mortgages. The increase was partially offset by a decrease in cash and balances at central banks (reported in Corporate Centre) for which the ECL was also not material, and transfers as part of our ring-fencing plans. Stage 1 ECLs decreased, reflecting our prudent approach to lending. |
| – | | Stage 2 exposures and the corresponding ECLs were broadly unchanged from 1 January 2018, with a steady inflow and cure through proactive management action. |
| – | | Stage 3 exposures decreased in part due to the write-off of the Carillion plc exposures and the corresponding ECL, alongside successful refinancing and restructuring of several large cases in Corporate & Commercial Banking, but also as a result of our prudent approach to risk, proactive management actions and the ongoing resilience of the UK economy. |
| | | | Annual Report 2018 | Risk review | | |
Reconciliation of exposures, loss allowance and net carrying amounts The table below shows the relationships between disclosures in this Credit risk review section which refer to drawn exposures and the associated ECL, and the total assets as presented in the Consolidated Balance Sheet. | | | | | | | | | | | | | | | | | | | | | | | | On-balance sheet | | | Off-balance sheet | | | 2018 | | Exposures £m | | | Loss allowance £m | | | Net carrying amount £m | | | Exposures £m | | | Loss allowance £m | | Retail Banking | | | 172,747 | | | | 568 | | | | 172,179 | | | | 23,058 | | | | 26 | | – of which mortgages | | | 157,957 | | | | 234 | | | | 157,723 | | | | 11,213 | | | | 3 | | Corporate & Commercial Banking | | | 17,702 | | | | 168 | | | | 17,534 | | | | 5,133 | | | | 14 | | Corporate & Investment Banking | | | 28,539 | | | | 2 | | | | 28,537 | | | | 13,005 | | | | 16 | | Corporate Centre | | | 44,755 | | | | 13 | | | | 44,742 | | | | 525 | | | | – | | Total exposures presented in IFRS 9 Credit Quality tables | | | 263,743 | | | | 751 | | | | 262,992 | | | | 41,721 | | | | 56 | | Other items(1) | | | | | | | | | | | 2,501 | | | | | | | | | | Adjusted net carrying amount | | | | | | | | | | | 265,493 | | | | | | | | | | Assets classified at FVTPL | | | | | | | | | | | 10,876 | | | | | | | | | | Non–financial assets | | | | | | | | | | | 7,003 | | | | | | | | | | Total assets per the Consolidated Balance Sheet at 31 December 2018 | | | | | | | | | | | 283,372 | | | | | | | | | |
| (1) | These assets carry low credit risk and therefore have an immaterial ECL. |
Movement in total exposures and the corresponding ECL The following table shows changes in total exposures subject to ECL assessment, and the corresponding ECL, during the year. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non–credit impaired | | | Credit impaired | | | | | | | | Stage 1
Subject to 12–month ECL | | | Stage 2
Subject to lifetime ECL | | | Stage 3
Subject to lifetime ECL | | | Total | | | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | At 1 January 2018 | | | 285,133 | | | | 176 | | | | 12,110 | | | | 284 | | | | 3,043 | | | | 691 | | | | 300,286 | | | | 1,151 | | Change in economic scenarios(2) | | | – | | | | 4 | | | | – | | | | (12 | ) | | | – | | | | (8 | ) | | | – | | | | (16 | ) | Changes to model | | | – | | | | (1 | ) | | | – | | | | 2 | | | | – | | | | (8 | ) | | | – | | | | (7 | ) | Transfer to lifetime ECL (not–credit impaired)(3) | | | (4,190 | ) | | | (11 | ) | | | 4,190 | | | | 11 | | | | – | | | | – | | | | – | | | | – | | Transfer to credit impaired(3) | | | (445 | ) | | | (8 | ) | | | (603 | ) | | | (23 | ) | | | 1,048 | | | | 31 | | | | – | | | | – | | Transfer to 12–month ECL(3) | | | 3,325 | | | | 68 | | | | (3,325 | ) | | | (68 | ) | | | – | | | | – | | | | – | | | | – | | Transfer from credit impaired(3) | | | 17 | | | | 6 | | | | 443 | | | | 27 | | | | (460 | ) | | | (33 | ) | | | – | | | | – | | Transfers of financial instruments | | | (1,293 | ) | | | 55 | | | | 705 | | | | (53 | ) | | | 588 | | | | (2 | ) | | | – | | | | – | | Net remeasurement of ECL on stage transfer(4) | | | – | | | | (63 | ) | | | – | | | | 83 | | | | – | | | | 79 | | | | – | | | | 99 | | New assets originated or purchased (5) | | | 85,933 | | | | 43 | | | | 1,087 | | | | 34 | | | | 19 | | | | 12 | | | | 87,039 | | | | 89 | | Other(6) | | | (24,306 | ) | | | (20 | ) | | | (295 | ) | | | (11 | ) | | | 52 | | | | 171 | | | | (24,549 | ) | | | 140 | | Assets derecognised – closed good(7) | | | (54,585 | ) | | | (51 | ) | | | (1,596 | ) | | | (20 | ) | | | (475 | ) | | | (44 | ) | | | (56,656 | ) | | | (115 | ) | Assets derecognised – written off(7) | | | – | | | | – | | | | – | | | | – | | | | (656 | ) | | | (534 | ) | | | (656 | ) | | | (534 | ) | At 31 December 2018 | | | 290,882 | | | | 143 | | | | 12,011 | | | | 307 | | | | 2,571 | | | | 357 | | | | 305,464 | | | | 807 | | Net movement in the year | | | 5,749 | | | | (33 | ) | | | (99 | ) | | | 23 | | | | (472 | ) | | | (334 | ) | | | 5,178 | | | | (344 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income statement charge/(release) for the year | | | | | | | (33 | ) | | | | | | | 23 | | | | | | | | 200 | | | | | | | | 190 | | Recoveries net of collection costs | | | | | | | – | | | | | | | | – | | | | | | | | (36 | ) | | | | | | | (36 | ) | Charge/(release) to the Income Statement | | | | | | | (33 | ) | | | | | | | 23 | | | | | | | | 164 | | | | | | | | 154 | |
| (1) | Exposures that have attracted an ECL, and as reported in the IFRS 9 Credit Quality table above. |
| (2) | Changes to assumptions from the start of the year to the end of the year. Isolates the impact on ECL from changes to the economic variables for each scenario, changes to the scenarios themselves as well as changes in the probability weights from all other movements. The impact of changes in economics on exposure Stage allocations are shown within Transfers of financial instruments. |
| (3) | Total impact of facilities that moved Stage(s) in the year. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the year. Transfers between each Stage are based on opening balances and ECL at the start of the period. |
| (4) | Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another. |
| (5) | Exposures and ECL at reporting date of facilities that did not exist at the start of the year, but did at the end. Amounts in Stage 2 and 3 represent assets which have deteriorated during the year subsequent to origination in Stage 1. |
| (6) | Residual movements on facilities that did not change Stage in the year, and which were neither acquired nor purchased in the year. Includes the impact of changes in risk parameters in the year, repayments, draw downs on accounts open at the start and end of the year, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the period. |
| (7) | Exposures and ECL for facilities that existed at the start of the year, but not at the end. |
COUNTRY RISK EXPOSURES 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 affect 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. We consider Banco Santander related risk separately. The tables below show our total exposures, which are the total of balance sheet andoff-balance off–balance sheet values. We calculate balance sheet values in accordance with IFRS (i.e. after netting allowed under IAS 32) except for credit provisions which we add back.Off-balance Off–balance sheet values are undrawn facilities and letters of credit. We classify location by country of risk – the country where each client has its main business 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. If a client has operations in many countries, we use their country of incorporation. The tables below exclude balances with other Banco Santander companies. We show them separately in the ‘Balances with other Banco Santander companies’ section. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | 2017 | | | | | 2017 | | 2016 | | | | | | | Financial
institutions | | | | | | | | | | | | Financial
institutions | | | | | | | | | | | | | | | Financial
institutions | | | | | | | | | | | | Financial
institutions | | | | | | | | | Governments
£bn | | Government
guaranteed
£bn | | Banks(1)
£bn | | Other
£bn | | Retail
£bn | | Corporate
£bn | | Total(2)
£bn | | Governments
£bn | | Government
guaranteed
£bn | | Banks(1)
£bn | | Other
£bn | | Retail
£bn | | Corporate
£bn | | Total(2)
£bn | | | | | Governments
£bn | | Government
guaranteed
£bn | | Banks(1)
£bn | | Other
£bn | | Retail
£bn | | Corporate
£bn | | Total(2)
£bn | | Governments
£bn | | Government
guaranteed
£bn | | Banks(1)
£bn | | Other
£bn | | Retail
£bn | | Corporate
£bn | | Total(2)
£bn | | | | Eurozone | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ireland | | | – | | | | – | | | 0.2 | | | 1.1 | | | | – | | | 0.8 | | | 2.1 | | | | – | | | | – | | | | 0.5 | | | | 0.4 | | | | – | | | | 0.5 | | | | 1.4 | | | | – | | | | – | | | | – | | | 12.3 | | | | – | | | 0.4 | | | 12.7 | | | | – | | | | – | | | | 0.2 | | | | 1.1 | | | | – | | | | 0.8 | | | | 2.1 | | Italy | | 0.4 | | | | – | | | | – | | | 0.1 | | | | – | | | 0.1 | | | 0.6 | | | | 1.0 | | | | – | | | | – | | | | 0.1 | | | | – | | | | 0.2 | | | | 1.3 | | | | – | | | | – | | | | – | | | 0.1 | | | | – | | | 0.2 | | | 0.3 | | | | 0.4 | | | | – | | | | – | | | | 0.1 | | | | – | | | | 0.1 | | | | 0.6 | | | Spain (excl. Santander) | | | – | | | | – | | | 0.3 | | | 0.1 | | | | – | | | 0.1 | | | 0.5 | | | | – | | | | – | | | | 0.3 | | | | 0.1 | | | | – | | | | 0.2 | | | | 0.6 | | | | – | | | | – | | | | – | | | 0.2 | | | | – | | | | – | | | 0.2 | | | | – | | | | – | | | | 0.3 | | | | 0.1 | | | | – | | | | 0.1 | | | | 0.5 | | Portugal | | | – | | | | – | | | 0.1 | | | | – | | | | – | | | | – | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | 0.1 | | France | | | – | | | 0.3 | | | 2.0 | | | 0.2 | | | | – | | | 2.2 | | | 4.7 | | | | 0.1 | | | | 0.3 | | | | 1.8 | | | | 0.2 | | | | – | | | | 0.1 | | | | 2.5 | | | | – | | | | – | | | 1.0 | | | | – | | | | – | | | | – | | | 1.0 | | | | – | | | | 0.3 | | | | 2.0 | | | | 0.2 | | | | – | | | | 2.2 | | | | 4.7 | | Germany | | | – | | | | – | | | 2.8 | | | | – | | | | – | | | 0.1 | | | 2.9 | | | | – | | | | – | | | | 2.5 | | | | – | | | | – | | | | – | | | | 2.5 | | | | – | | | | – | | | 1.6 | | | | – | | | | – | | | | – | | | 1.6 | | | | – | | | | – | | | | 2.8 | | | | – | | | | – | | | | 0.1 | | | | 2.9 | | Luxembourg | | | – | | | | – | | | | – | | | 1.3 | | | | – | | | 0.4 | | | 1.7 | | | | – | | | | – | | | | – | | | | 2.3 | | | | – | | | | 0.3 | | | | 2.6 | | | | – | | | | – | | | | – | | | 0.9 | | | | – | | | 0.2 | | | 1.1 | | | | – | | | | – | | | | – | | | | 1.3 | | | | – | | | | 0.4 | | | | 1.7 | | Other(3) | | 0.3 | | | | – | | | 1.1 | | | 0.2 | | | | – | | | 1.4 | | | 3.0 | | | | 0.3 | | | | – | | | | 1.1 | | | | 0.3 | | | | – | | | | 1.1 | | | | 2.8 | | | 0.3 | | | | – | | | 1.2 | | | 0.2 | | | | – | | | 1.1 | | | 2.8 | | | | 0.3 | | | | – | | | | 1.1 | | | | 0.2 | | | | – | | | | 1.4 | | | | 3.0 | | | | | 0.7 | | | 0.3 | | | 6.5 | | | 3.0 | | | | – | | | 5.1 | | | 15.6 | | | | 1.4 | | | | 0.3 | | | | 6.3 | | | | 3.4 | | | | – | | | | 2.4 | | | | 13.8 | | | 0.3 | | | | – | | | 3.8 | | | 13.7 | | | | – | | | 1.9 | | | 19.7 | | | | 0.7 | | | | 0.3 | | | | 6.5 | | | | 3.0 | | | | – | | | | 5.1 | | | | 15.6 | | | Other countries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | UK | | 44.7 | | | | – | | | 9.1 | | | 13.0 | | | 191.3 | | | 42.9 | | | 301.0 | | | | 33.6 | | | | 0.4 | | | | 12.0 | | | | 13.5 | | | | 189.1 | | | | 41.3 | | | | 289.9 | | | 27.7 | | | | – | | | 3.8 | | | 15.7 | | | 194.3 | | | 37.4 | | | 278.9 | | | | 44.7 | | | | – | | | | 9.1 | | | | 13.0 | | | | 191.3 | | | | 42.9 | | | | 301.0 | | US | | 6.3 | | | 0.1 | | | 8.2 | | | 2.3 | | | | – | | | 0.1 | | | 17.0 | | | | 4.8 | | | | 0.2 | | | | 10.6 | | | | 2.5 | | | | – | | | | 0.1 | | | | 18.2 | | | 1.1 | | | | – | | | 1.5 | | | 1.5 | | | | – | | | 0.2 | | | 4.3 | | | | 6.3 | | | | 0.1 | | | | 8.2 | | | | 2.3 | | | | – | | | | 0.1 | | | | 17.0 | | Japan(4) | | 3.0 | | | | – | | | 2.6 | | | 0.2 | | | | – | | | 0.8 | | | 6.6 | | | | 2.8 | | | | – | | | | 3.2 | | | | 0.1 | | | | – | | | | 1.4 | | | | 7.5 | | | 3.8 | | | | – | | | 2.6 | | | | – | | | | – | | | | – | | | 6.4 | | | | 3.0 | | | | – | | | | 2.6 | | | | 0.2 | | | | – | | | | 0.8 | | | | 6.6 | | Switzerland | | 0.2 | | | | – | | | 0.2 | | | | – | | | | – | | | 0.2 | | | 0.6 | | | | 0.2 | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.2 | | | | 0.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.1 | | | 0.1 | | | | 0.2 | | | | – | | | | 0.2 | | | | – | | | | – | | | | 0.2 | | | | 0.6 | | Denmark | | | – | | | | – | | | 0.1 | | | | – | | | | – | | | 0.4 | | | 0.5 | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.4 | | | | 0.5 | | | | – | | | | – | | | 0.2 | | | | – | | | | – | | | 0.5 | | | 0.7 | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.4 | | | | 0.5 | | Russia | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | Other | | 0.1 | | | | – | | | 2.3 | | | 0.9 | | | | – | | | 1.9 | | | 5.2 | | | | 0.1 | | | | – | | | | 2.6 | | | | 0.6 | | | | – | | | | 2.3 | | | | 5.6 | | | 0.1 | | | | – | | | 1.9 | | | 0.4 | | | | – | | | 1.0 | | | 3.4 | | | | 0.1 | | | | – | | | | 2.3 | | | | 0.9 | | | | – | | | | 1.9 | | | | 5.2 | | | | | 54.3 | | | 0.1 | | | 22.5 | | | 16.4 | | | 191.3 | | | 46.3 | | | 330.9 | | | | 41.5 | | | | 0.6 | | | | 28.6 | | | | 16.8 | | | | 189.1 | | | | 45.7 | | | | 322.3 | | | 32.7 | | | | – | | | 10.0 | | | 17.6 | | | 194.3 | | | 39.2 | | | 293.8 | | | | 54.3 | | | | 0.1 | | | | 22.5 | | | | 16.4 | | | | 191.3 | | | | 46.3 | | | | 330.9 | | Total | | 55.0 | | | 0.4 | | | 29.0 | | | 19.4 | | | 191.3 | | | 51.4 | | | 346.5 | | | | 42.9 | | | | 0.9 | | | | 34.9 | | | | 20.2 | | | | 189.1 | | | | 48.1 | | | | 336.1 | | | 33.0 | | | | – | | | 13.8 | | | 31.3 | | | 194.3 | | | 41.1 | | | 313.5 | | | | 55.0 | | | | 0.4 | | | | 29.0 | | | | 19.4 | | | | 191.3 | | | | 51.4 | | | | 346.5 | |
| (1) | Excludes balances with central banks. |
| (2) | Excludes cash at hand, interests in other entities, intangible assets, property, plant and equipment, tax assets, retirement benefit assets and other assets. Loans are included gross of credit provisions. |
| (3) | Includes The Netherlands of ��1.8bn (2016: £1.4bn)£1.2bn (2017: £1.8bn), CyprusBelgium of £nil (2016: £28m)£0.9bn (2017: £nil), Greece of £nil (2016:(2017: £nil). |
| (4) | Balances are mainlyMainly equity instruments listed in Japan and reverse repos with Japanese banks, held as part of our Short Term Markets business. The equity exposures are hedged using derivatives and the additional reverse repos are fully collateralised. |
2018 compared to 2017: The increase in the Ireland exposure and the decrease in the US exposure are a result of ring-fencing. Balances with other Banco Santander companies We deal with other Banco Santander companies in the ordinary course of business. We do this where we have a particular business advantage or expertise and where they can offer us commercial opportunities. This is done on the same terms as for similar transactions with third parties. These transactions also arise where we support the activities of, or with, larger multinational corporate clients and financial institutions which may deal with other Banco Santander companies. We also dealt with Banco Santander SA as part of our ring–fencing plans as described in Note 43 to the Consolidated Financial Statements. We conduct these activities in a way that manages the credit risk within limits acceptable to the PRA. At 31 December 20172018 and 2016,2017, we had gross balances with other Banco Santander companies as follows: | | | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | | | Financial institutions | | | | | | | | | Financial institutions | | | | | | | | | Financial institutions | | | | | | | | | Financial institutions | | | | | | | | | | | Banks £bn | | | Other £bn | | | Corporate
£bn | | | Total
£bn | | | Banks £bn | | | Other £bn | | | Corporate
£bn | | | Total
£bn | | | Banks £bn | | Other £bn | | | Corporate
£bn | | | Total
£bn | | | Banks £bn | | | Other £bn | | | Corporate
£bn | | | Total
£bn | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Spain | | | 4.4 | | | | – | | | | – | | | | 4.4 | | | | 2.1 | | | | – | | | | – | | | | 2.1 | | | 2.5 | | | – | | | | – | | | | 2.5 | | | | 4.4 | | | | – | | | | – | | | | 4.4 | | UK | | | – | | | | 1.3 | | | | – | | | | 1.3 | | | | – | | | | 1.1 | | | | – | | | | 1.1 | | | – | | | 2.0 | | | | – | | | | 2.0 | | | | – | | | | 1.3 | | | | – | | | | 1.3 | | Chile | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | Other <£100m | | | – | | | | – | | | | – | | | | – | | | | 0.2 | | | | – | | | | – | | | | 0.2 | | | | | | | 4.4 | | | | 1.3 | | | | – | | | | 5.7 | | | | 2.4 | | | | 1.1 | | | | – | | | | 3.5 | | | 2.5 | | | 2.0 | | | | – | | | | 4.5 | | | | 4.4 | | | | 1.3 | | | | – | | | | 5.7 | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Spain | | | 5.1 | | | | 0.3 | | | | 0.1 | | | | 5.5 | | | | 2.9 | | | | 0.2 | | | | 0.1 | | | | 3.2 | | | 3.6 | | | 0.1 | | | | – | | | | 3.7 | | | | 5.1 | | | | 0.3 | | | | 0.1 | | | | 5.5 | | UK | | | 0.1 | | | | 7.6 | | | | 0.1 | | | | 7.8 | | | | – | | | | 6.2 | | | | 0.1 | | | | 6.3 | | | – | | | 11.5 | | | | – | | | | 11.5 | | | | 0.1 | | | | 7.6 | | | | 0.1 | | | | 7.8 | | Uruguay | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | | 0.2 | | | | – | | | | – | | | | 0.2 | | | 0.2 | | | – | | | | – | | | | 0.2 | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | Chile | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | Other <£100m | | | – | | | | 0.1 | | | | – | | | | 0.1 | | | | 0.2 | | | | 0.1 | | | | – | | | | 0.3 | | | – | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | 0.1 | | | | | | 5.3 | | | | 8.0 | | | | 0.2 | | | | 13.5 | | | | 3.4 | | | | 6.5 | | | | 0.2 | | | | 10.1 | | | 3.8 | | | 11.6 | | | | – | | | | 15.4 | | | | 5.3 | | | | 8.0 | | | | 0.2 | | | | 13.5 | |
We consider the dissolution of the eurozone and widespread redenomination of our euro-denominatedeuro–denominated assets and liabilities to be 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. Determining which balances would be legally redenominated is complex and depends on a number of factors, including 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.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
Credit risk – Retail Banking | | | | | 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. CreditRetail Banking – credit risk management
In this section, we explain how we manage and mitigate credit risk. CreditRetail Banking – credit risk review
In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance and portfolios of particular interest. Our main portfolios are: | | Residential mortgages– This is our largest portfolio. We lend to customers of good credit quality (prime lending). Most of our mortgages are for owner-occupied homes. We also have somebuy-to-let mortgages where we focus onnon-professional landlords with small portfolios. Business banking– This portfolio is comprised of small businesses with an annual turnover of up to £6.5m per annum. Consumer (auto) finance and other unsecured lending– Consumer (auto) finance includes financing for cars, vans, motorbikes and caravans – so long as they are privately bought. Other unsecured lending includes personal loans, credit cards and bank account overdrafts. | | |
The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branches in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in 2018. See Note 2 for more information. RETAIL BANKING – CREDIT RISK MANAGEMENT  
In Retail Banking, our customers are individuals and small businesses. We have a high volume of customers and transactions and they share similar credit characteristics, likesuch as 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 risk 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. 1. 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. 2. Assessment and origination We undertake a thorough risk assessment to make sure customersa customer can meet their obligations before we approve a credit application. We do this mainly by looking at affordability and the customer’s credit profile: Affordability We take proportionate steps to establishmake sure 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. For unsecured products that have fixed interest rates,During 2018, for Unsecured Personal Loans and Credit Cards the affordability reviews for these products do not considerreview was enhanced to include the impactstressing of increases in interest rates.accommodation costs on a proportionate basis. 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. When they apply, we use the data they give us, 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: based on statistics about the factors that make people fail to pay off debt. We use them to build models of what is likely to happen in the future. These models give a credit score to the customer orfor the loan they want, to show how likely it is to be repaid. We regularly review them |
| – | | 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. |
How we make the decision Many of our decisions are automated as our risk systems contain data about affordability and credit history. We tailor the process and how we assess the application based on the type of product being taken. 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: | | | | | | Portfolio | | 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 valuehave the property.property valued. We have our own guidelines for surveyor valuations, which build on guidance from the Royal Institution of Chartered Surveyors (RICS). For remortgages and some loans where the LTV is 75% or less,But we mightalso make use anof automated valuation instead.methodologies where our confidence in the accuracy of this method is high. | Business banking | | Includes secured and unsecured lending. We can take mortgage debentures as collateral if the business is incorporated. These are charges over a company’s assets. We can 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 a tangible asset. We base our lending decision on the customer’s trading cash flow. If a customer defaults, we work with them to consider debt restructuring options. We generally do not enforce our security over their assets except as a last resort. In which case we might appoint an administrator or receiver. | Consumer (auto) finance | | Collateral is in the form of legal ownership of the vehicle for most consumer (auto) finance loans, with the customer being the registered keeper. Only a very small proportion of the consumer (auto) 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. | Unsecured lending | | Unsecured lending 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. |
3. Monitoring Our risk assessment does not end once we have made the decision to lend. We monitor credit risk across the credit risk lifecycle, mainly 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 |
| – | | 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, (suchsuch as missing a payment to another bank)lender |
| – | | 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. |
For secured lending, our monitoring also needs to taketakes account of changes in property prices. We estimate the property’s current value every three months. We 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 level, and in that case we use the House Price Index (HPI) instead. The way we use thisour 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. This can influence whether we approve an application for refinancing.a refinancing application. In these ways we can balance our customers’a customer’s needs and their ability to manage credit. If we find evidence that a customer is in financial difficulties, we contact them about arrears management including forbearance, which we explain in more detail below. Ourday-to-day retail credit risk monitoring relies on a mix of product, customer and portfolio performance measures as described above. However, changes in the wider UK macro-economy also have an impact on our retail portfolios. In response to the increased uncertainty in the economic landscape inTo reflect this, since 2017 we introducedhave used a Retail Risk Playbook tolerance framework to enhance ourday-to-day risk monitoring. This is a formal, structured framework that sets out the macroeconomic variables that are most relevant to retail portfolio performance. We monitor these variables against the related forecasts that we have used in our business plans. If the economy deviates materially from our forecasts, we will formally review and reconsider our retail risk management policy and strategy. This framework will remainremains in place and will continue to do so for as long as we consider is necessary. 4. Arrears management We have several strategies for managing arrears and these can be used before the customer has formally defaulted, or as early as the day after a missed payment. We assess the problems a customer is having, so we can offer them the right help to bring their accountup-to-date as soon as possible. The most common way to bring an accountup-to-date is to agree an affordable repayment plan with the customer. The strategy we use depends on the risk and the customer’s circumstances. We providehave a range of tools to assisthelp customers in reachingto reach an affordable and acceptable solution. ThatThis could mean visiting the customer, offering debt counselling by a third party, or paying off the debt using money from their other accounts with us, (wherewhere we have the right to do so).so. 5. Debt recovery When a customer cannot or will not keep to an agreement for paying off their arrears, we consider recovery options. We only do this once we have tried to get the account back in order. To recover what we are owed, we may use a debt collection agency, sell the debt, or take the customer to court. For secured retail loans (most of which are mortgages), we can delay legal action. That can happen if the customer shows that they will be able to pay off the loan or the arrears. We aim to repossess only as a last resort or if necessary to protect the property from damage or third party claims. 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 loss allowances calculations. Where we do enforce the possession of properties held as collateral, we use external agents to realise the value and settle the debt. During this process we do not own the property but we do administer the sale process. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with insolvency regulations.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
Loan modifications Forbearance If a customer lets us know they are having financial difficulty, we aim to come to an arrangement with them before they actually default. Their problems can be the result of 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 offer forbearance in line with our risk policies, and on a case by casecase-by-case basis to ensure we continue to lend responsibly and help customers be able to continue to afford their payments. We may offer the following types of forbearance, but only if our assessments show the customer can meet the revised payments: | | | Action | | Description | Capitalisation | | We offer two main types, which are often combined with term extensions and, in the past, 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 isup-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.option. Instead, interest-only is only 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 forbearance, we review our impairment loss allowances for them. These accounts may stay in our performing portfolio but we report them separately as forborne. 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.
Other changes in contract termsmodifications Apart from forbearance, we have sometimes changed the contract terms to keep a good relationship with a customer. These customers showed no signs of financial difficulties at the time, so we do not classify the contract changes as forbearance, and most of the loans were repaid without any problems. We do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines on the treatment of customers experiencingin insolvency or bankruptcy. 5. Debt recovery
When a customer cannot or will not keep to an agreement for paying off their arrears, we consider recovery options. We only do this once we have tried 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 (most of which are mortgages), we can delay legal action. That can happen if the customer shows evidence that they will be able to pay off the mortgage or pay back the arrears. We aim to repossess only as a last resort when other options have been exhausted or if necessary to protect the property from damage or third party claims.
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. Where we do enforce the possession of properties held as collateral, we use external agents to realise the value and settle the debt. During this process we do not own the property but we do administer the sale process. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with insolvency regulations.
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 risk lifecycle. We use: | – | | Risk strategy and planning: econometric models |
| – | | Assessment and origination: application scorecards, and attrition, pricing, impairmentloss allowance 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. |
We assess and review our impairment loss allowances regularly and have them independently reviewed. We look at a number of factors, including the cash flow available to service debt. We also use an agency to value any collateral – mainly mortgages.
RETAIL BANKING – CREDIT RISK REVIEW Movement in total exposures and the corresponding ECL The following table shows changes in total exposures subject to ECL assessment, and the corresponding ECL in the period. The footnotes to the Santander UK group level table on page 72 also apply to this table. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-credit impaired | | | | | | Credit impaired | | | | | | | | | | | Stage 1 Subject to 12-month ECL | | | Stage 2 Subject to lifetime ECL | | | | | | Stage 3 Subject to lifetime ECL | | | Total | | | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | | | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2018 | | | 178,978 | | | | 110 | | | | 10,885 | | | | 247 | | | | | | | | 2,263 | | | | 268 | | | | 192,126 | | | | 625 | | Change in economic scenarios(2) | | | – | | | | (1 | ) | | | – | | | | (9 | ) | | | | | | | – | | | | (8 | ) | | | – | | | | (18 | ) | Changes to model | | | – | | | | (1 | ) | | | – | | | | 2 | | | | | | | | – | | | | 1 | | | | – | | | | 2 | | Transfer to lifetime ECL(not-credit impaired)(3) | | | (3,407 | ) | | | (7 | ) | | | 3,407 | | | | 7 | | | | | | | | – | | | | – | | | | – | | | | – | | Transfer to credit impaired(3) | | | (403 | ) | | | (7 | ) | | | (569 | ) | | | (22 | ) | | | | | | | 972 | | | | 29 | | | | – | | | | – | | Transfer to12-month ECL(3) | | | 2,992 | | | | 58 | | | | (2,992 | ) | | | (58 | ) | | | | | | | – | | | | – | | | | – | | | | – | | Transfer from credit impaired(3) | | | 15 | | | | 5 | | | | 438 | | | | 26 | | | | | | | | (453 | ) | | | (31 | ) | | | – | | | | – | | Transfers of financial instruments | | | (803 | ) | | | 49 | | | | 284 | | | | (47 | ) | | | | | | | 519 | | | | (2 | ) | | | – | | | | – | | Net remeasurement of ECL on stage transfer(4) | | | – | | | | (54 | ) | | | – | | | | 73 | | | | | | | | – | | | | 60 | | | | – | | | | 79 | | New assets originated or purchased (5) | | | 33,366 | | | | 26 | | | | 670 | | | | 26 | | | | | | | | 15 | | | | 11 | | | | 34,051 | | | | 63 | | Other(6) | | | (8,253 | ) | | | (15 | ) | | | (312 | ) | | | (10 | ) | | | | | | | 97 | | | | 104 | | | | (8,468 | ) | | | 79 | | Assets derecognised – closed good(7) | | | (20,257 | ) | | | (18 | ) | | | (1,007 | ) | | | (13 | ) | | | | | | | (390 | ) | | | (23 | ) | | | (21,654 | ) | | | (54 | ) | Assets derecognised – written off(7) | | | – | | | | – | | | | – | | | | – | | | | | | | | (250 | ) | | | (182 | ) | | | (250 | ) | | | (182 | ) | At 31 December 2018 | | | 183,031 | | | | 96 | | | | 10,520 | | | | 269 | | | | | | | | 2,254 | | | | 229 | | | | 195,805 | | | | 594 | | Net movement in the year | | | 4,053 | | | | (14 | ) | | | (365 | ) | | | 22 | | | | | | | | (9 | ) | | | (39 | ) | | | 3,679 | | | | (31 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Charge/(release) to the Income Statement | | | | | | | (14 | ) | | | | | | | 22 | | | | | | | | | | | | 143 | | | | | | | | 151 | | Recoveries net of collection costs | | | | | | | – | | | | | | | | – | | | | | | | | | | | | (27 | ) | | | | | | | (27 | ) | Income Statement charge/(release) for the year | | | | | | | (14 | ) | | | | | | | 22 | | | | | | | | | | | | 116 | | | | | | | | 124 | |
RESIDENTIAL MORTGAGES We offer mortgages to people who want to buy a property, and offer additional borrowing (known as further advances) to existing mortgage customers. The property must be in the UK, except for a small amount of lending in the Isle of Man and Jersey.UK. 20172018 compared to 20162017(unaudited)
Credit risk is at very low levels historically. The benign credit environment has supported our customers and helped to reduce credit risk. In particular, unemployment has been below 5% for 2 years. From our experience we know that unemployment is one of the most important factors in defaults on mortgages, our biggest loan book. Whilst the UK market continues to show resilience, we are cautious on the outlook in light of recent economic uncertainty. Mortgage lending increased £0.6bn£3.3bn in 2017 (2016: £1.5bn)2018 (2017: £0.6bn), driven by managementthrough a combination of well positioned service and product pricing, actions in a competitive environment and anas well as our ongoing focus on customer service and retention. Mortgage gross lending was £25.5bn (2016: £25.8bn)£28.8bn (2017: £25.5bn) and we retained 78% of mortgages reaching the end of their incentive period.period were retained. Borrower profile In this table, ‘home movers’ include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house. ‘Remortgagers’ are external customers who are remortgaging with us. We have not included internal remortgages, further advances and any flexible mortgage drawdowns in the new business figures. | | | | Stock | | New business | | | Stock | | New business | | | | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | | | | | £m | | | % | | £m | | | % | | £m | | | % | | £m | | | % | | | £m | | | % | | £m | | | % | | £m | | | % | | £m | | | % | | First-time buyers | | 28,768 | | | | 19 | | | | 29,143 | | | | 19 | | | 4,046 | | | | 17 | | | | 4,193 | | | | 17 | | | Home movers | | 68,901 | | | | 44 | | | | 68,158 | | | | 44 | | | 10,730 | | | | 44 | | | | 11,072 | | | | 45 | | | 69,198 | | | | 44 | | | | 68,752 | | | | 44 | | | 10,854 | | | | 39 | | | | 10,704 | | | | 44 | | Remortgagers | | 50,473 | | | | 33 | | | | 50,325 | | | | 33 | | | 8,071 | | | | 33 | | | | 7,092 | | | | 29 | | | 51,272 | | | | 32 | | | | 50,424 | | | | 33 | | | 9,237 | | | | 34 | | | | 8,065 | | | | 33 | | First-time buyers | | | 29,235 | | | | 19 | | | | 28,704 | | | | 19 | | | 4,848 | | | | 18 | | | | 4,034 | | | | 17 | | Buy-to-let | | 6,802 | | | | 4 | | | | 6,648 | | | | 4 | | | 1,371 | | | | 6 | | | | 2,212 | | | | 9 | | | 8,252 | | | | 5 | | | | 6,802 | | | | 4 | | | 2,335 | | | | 9 | | | | 1,371 | | | | 6 | | | | | 154,944 | | | | 100 | | | | 154,274 | | | | 100 | | | 24,218 | | | | 100 | | | | 24,569 | | | | 100 | | | 157,957 | | | | 100 | | | | 154,682 | | | | 100 | | | 27,274 | | | | 100 | | | | 24,174 | | | | 100 | |
In addition to the new business included in the table above, there were £26.0bn (2016: £18.1bn)£27.2bn (2017: £26.0bn) of internal remortgages where we kept existing customers with maturing products on new mortgages. We also provided £1.3bn (2016: £1.2bn)£1.5bn (2017: £1.3bn) of further advances and flexible mortgage drawdowns. 20172018 compared to 20162017(unaudited)
The mortgage borrower mix remained broadly unchanged, reflecting underlying stability in target market segments, product pricing and distribution strategy. We helped 24,00027,200 (2017: 24,000) first-time buyers (£4.0bn of gross lending) purchase their new home.home with £4.8bn of gross lending (2017: £4.0bn).
| | | | Annual Report 2018 | Risk review | | |
Interest rate profile The interest rate profile of our mortgage asset stock was: | | | | 2017 | | 2016 | | | 2018 | | | | | | 2017 | | | | | £m | | | % | | £m | | | % | | | £m | | | % | | | | | £m | | | % | | Fixed rate | | 102,268 | | | | 66 | | | | 91,817 | | | | 59 | | | | 115,178 | | | | 73 | | | | | | 102,036 | | | | 66 | | Variable rate | | 29,370 | | | | 19 | | | | 33,627 | | | | 22 | | | | 24,396 | | | | 15 | | | | | | 29,370 | | | | 19 | | Standard Variable Rate (SVR) | | 23,306 | | | | 15 | | | | 28,830 | | | | 19 | | | | 18,383 | | | | 12 | | | | | | 23,276 | | | | 15 | | | | | 154,944 | | | | 100 | | | | 154,274 | | | | 100 | | | | 157,957 | | | | 100 | | | | | | 154,682 | | | | 100 | | 2018 compared to 2017 (unaudited) The SVR balances, which includes balances relating to our Follow-on-Rate product, declined by £4.9bn (2017: £5.5bn). We continue to see increased customer refinancing into fixed rate products influenced by low mortgage rates and the competitive mortgage market. Geographical distribution The geographical distribution of our mortgage asset stock was: | | 2018 compared to 2017 (unaudited) The SVR balances, which includes balances relating to our Follow-on-Rate product, declined by £4.9bn (2017: £5.5bn). We continue to see increased customer refinancing into fixed rate products influenced by low mortgage rates and the competitive mortgage market. Geographical distribution The geographical distribution of our mortgage asset stock was: | | | | | | Stock | | | | | | New business | | | | | | 2018 | | | 2017 | | | | | 2018 | | | 2017 | | | UK region | | | £bn | | | £bn | | | | | £bn | | | £bn | | London | | | | 39.0 | | | | 37.6 | | | | | | 7.1 | | | | 5.8 | | Midlands and East Anglia | | | | 21.1 | | | | 20.6 | | | | | | 3.8 | | | | 3.4 | | North | | | | 22.2 | | | | 22.2 | | | | | | 3.4 | | | | 3.0 | | Northern Ireland | | | | 3.4 | | | | 3.6 | | | | | | 0.2 | | | | 0.2 | | Scotland | | | | 6.7 | | | | 6.8 | | | | | | 1.0 | | | | 1.0 | | South East excluding London | | | | 48.7 | | | | 47.2 | | | | | | 9.0 | | | | 8.2 | | South West, Wales and other | | | | 16.9 | | | | 16.7 | | | | | | 2.8 | | | | 2.6 | | | | | | 158.0 | | | | 154.7 | | | | | | 27.3 | | | | 24.2 | | | Average loan size for new business | | | | | | | | | | | £’000 | | | £’000 | | South East including London | | | | | | | | | | 270 | | | | 260 | | Rest of the UK | | | | | | | | | | 150 | | | | 146 | | UK as a whole | | | | | | | | | | 203 | | | | 196 | | 2018 compared to 2017 (unaudited) The geographical distribution of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East, in line with the distribution of the population across the UK. Theloan-to-income multiple of mortgage lending during the year, representing average earnings of new business at inception, was 3.24 (2017: 3.16). Larger loans The mortgage asset stock of larger loans was: | | 2018 compared to 2017 (unaudited) The geographical distribution of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East, in line with the distribution of the population across the UK. Theloan-to-income multiple of mortgage lending during the year, representing average earnings of new business at inception, was 3.24 (2017: 3.16). Larger loans The mortgage asset stock of larger loans was: | | | | | | South East including London | | | | | | UK | | | Individual mortgage loan size | | | 2018 £m | | | 2017 £m | | | | | 2018
£m | | | 2017
£m | | <£0.25m | | | | 45,851 | | | | 46,766 | | | | | | 105,181 | | | | 106,838 | | £0.25m to £0.50m | | | | 30,488 | | | | 27,562 | | | | | | 39,841 | | | | 36,036 | | £0.50m to £1.0m | | | | 10,103 | | | | 9,214 | | | | | | 11,551 | | | | 10,532 | | £1.0m to £2.0m | | | | 1,168 | | | | 1,046 | | | | | | 1,236 | | | | 1,111 | | >£2.0m | | | | 146 | | | | 163 | | | | | | 148 | | | | 165 | | | | | | | 87,756 | | | | 84,751 | | | | | | 157,957 | | | | 154,682 | |
At 31 December 2018, there were 57 (2017: 64) individual mortgages greater than £2.0m. In 2018, there were 9 (2017: 13) new mortgages over £2.0m. 2017 compared to 2016Loan-to-value(unaudited) analysis
The proportion of SVR loan balances decreased to 15%, including attrition of £5.5bn (2016: £7.0bn). This was driven by customer refinancing and sentiment over expected future interest rate movements.
Geographicaltable shows the LTV distribution
The geographical distribution of for our mortgage asset stock, was:NPL stock and new business. We use our estimate of the property value at the balance sheet date. We include fees that have been added to the loan in the LTV calculation. For flexible products, we only include the drawn amount, not undrawn limits.
| | | | | | | | | | | | | | | | | | | | Stock | | | New business | | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | UK region | | £bn | | | £bn | | | £bn | | | £bn | | London | | | 37.6 | | | | 37.2 | | | | 5.8 | | | | 6.7 | | Midlands and East Anglia | | | 20.6 | | | | 20.6 | | | | 3.4 | | | | 3.2 | | North | | | 22.2 | | | | 22.8 | | | | 3.0 | | | | 3.0 | | Northern Ireland | | | 3.6 | | | | 3.8 | | | | 0.2 | | | | 0.2 | | Scotland | | | 6.8 | | | | 7.0 | | | | 1.0 | | | | 0.9 | | South East excluding London | | | 47.2 | | | | 46.1 | | | | 8.2 | | | | 8.1 | | South West, Wales and other | | | 16.9 | | | | 16.8 | | | | 2.6 | | | | 2.5 | | | | | | 154.9 | | | | 154.3 | | | | 24.2 | | | | 24.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | 2017 | | | | | | | Of which: | | | | | | | | Of which: | | | | Stock | | | NPL stock | | New business | | | | | Stock | | | NPL stock | | New business | | LTV | | % | | | % | | % | | | | | % | | | % | | % | Up to 50% | | | 45 | | | 43 | | 20 | | | | | | | 49 | | | 44 | | 19 | >50-75% | | | 41 | | | 35 | | 41 | | | | | | | 39 | | | 34 | | 43 | >75-85% | | | 9 | | | 8 | | 22 | | | | | | | 7 | | | 8 | | 19 | >85-100% | | | 4 | | | 7 | | 17 | | | | | | | 4 | | | 7 | | 19 | >100% | | | 1 | | | 7 | | – | | | | | | | 1 | | | 7 | | – | | | | | 100 | | | 100 | | 100 | | | | | | | 100 | | | 100 | | 100 | Collateral value of residential properties(1) | | £ | 157,787m | | | £1,850m | | £27,274m | | | | | | £ | 154,459m | | | £1,823m | | £24,174m | | | | | | | | | | | | | | | | | | | | | | | | | % | | | % | | % | | | | | % | | | % | | % | Simple average(2) LTV (indexed) | | | 42 | | | 43 | | 63 | | | | | | | 42 | | | 44 | | 62 | Valuation weighted average(3) LTV (indexed) | | | 39 | | | 38 | | 59 | | | | | | | 38 | | | 38 | | 58 |
2017 compared
| (1) | Collateral value shown is limited to the balance of each associated loan. Excludes the impact of over-collateralisation (where the collateral is higher than the loan balance). Includes collateral against loans in negative equity of £969m (2017: £1,248m). |
| (2) | Total of all LTV% divided by the total of all accounts. |
| (3) | Total of all loan values divided by the total of all valuations. |
At 31 December 2018, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances reduced to 2016(unaudited)£170m (2017: £223m). The geographical distribution of the lending profile of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Larger loans
The mortgage asset stock of larger loans was:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | South East including London | | | | | UK | | Stock – individual mortgage loan size | | | | | | | | 2017 £m | | | | | | 2016 £m | | | | | 2017 £m | | | 2016 £m | <£0.25m | | | | | | | | | | | 46,766 | | | | | | | | 48,355 | | | | | | 107,050 | | | 110,415 | £0.25m to £0.50m | | | | | | | | | | | 27,562 | | | | | | | | 25,040 | | | | | | 36,083 | | | 32,871 | £0.50m to £1.0m | | | | | | | | | | | 9,214 | | | | | | | | 8,438 | | | | | | 10,535 | | | 9,668 | £1.0m to £2.0m | | | | | | | | | | | 1,046 | | | | | | | | 1,099 | | | | | | 1,111 | | | 1,161 | >£2.0m | | | | | | | | | | | 163 | | | | | | | | 157 | | | | | | 165 | | | 159 | | | | | | | | | | | | | 84,751 | | | | | | | | 83,089 | | | | | | 154,944 | | | 154,274 | At 31 December 2017, there were 64 (2016: 65) individual mortgages greater than £2.0m. In 2017, there were 13 (2016: 13) new mortgages over £2.0m. Average loan size for new business The average loan size for new business in 2017 and 2016 was: | | UK region | | | | | | | | | | | | | | | | | | | 2017
£000 | | | 2016 £000 | South East including London | | | | | | | | | | | | | | | | | | | | | | | | | 260 | | | 264 | Rest of the UK | | | | | | | | | | | | | | | | | | | | | | | | | 146 | | | 144 | UK as a whole | | | | | | | | | | | | | | | | | | | | | | | | | 196 | | | 198 | Theloan-to-income multiple of mortgage lending during the year, representing average earnings of new business at inception, was 3.16 (2016: 3.16). Loan-to-value analysis This table shows the LTV distribution for our mortgage stock, NPL stock and new business. We use our estimate of the property value at the balance sheet date. We include fees added to the loan in the calculation. For flexible products, we only include the drawn amount, not undrawn limits. | | | | 2017 | | | | | | 2016 | | | | | | | Of which: | | | | | | | | | Of which: | | LTV | | Stock % | | | NPL stock
% | | | New business
% | | | | | | Stock % | | | NPL stock % | | | New business
% | Up to 50% | | | 48 | | | | 44 | | | | 19 | | | | | | | | 46 | | | 39 | | | 17 | >50-75% | | | 39 | | | | 34 | | | | 43 | | | | | | | | 41 | | | 36 | | | 43 | >75- 85% | | | 8 | | | | 8 | | | | 19 | | | | | | | | 8 | | | 9 | | | 23 | >85-100% | | | 4 | | | | 7 | | | | 19 | | | | | | | | 4 | | | 8 | | | 17 | >100% | | | 1 | | | | 7 | | | | – | | | | | | | | 1 | | | 8 | | | – | | | | | 100 | | | | 100 | | | | 100 | | | | | | | | 100 | | | 100 | | | 100 | Collateral value of residential properties(1)(2) | | £ | 154,721m | | | £ | 1,824m | | | £ | 24,218m | | | | | | | £ | 153,989m | | | £2,043m | | | £24,569m | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | % | | | % | | | | | | % | | | % | | | % | Simple average(3)LTV (indexed) | | | 42 | | | | 44 | | | | 62 | | | | | | | | 43 | | | 46 | | | 65 | Valuation weighted average(4)LTV (indexed) | | | 38 | | | | 38 | | | | 58 | | | | | | | | 39 | | | 40 | | | 60 | (1) Includes collateral against loans in negative equity of £1,248m at 31 December 2017 (2016: £1,588m). (2) The collateral value we have shown is limited to the balance of each associated individual loan. It does not include the impact of over-collateralisation (where the collateral has a higher value than the loan balance). (3) Total of all LTV% divided by the total of all accounts. (4) Total of all loan values divided by the total of all valuations. At 31 December 2017, the parts of the loans in negative equity which were effectively uncollateralised before taking account of impairment loss allowances reduced to £223m (2016: £285m). Credit performance | | | | | | | | | | | | | | | | | | | | | 2017 £m | | | 2016 £m | Mortgage loans and advances to customers of which: | | | | | | | | | | | | | | | | | | | | | | | | | 154,944 | | | 154,274 | Performing(1) | | | | | | | | | | | | | | | | | | | | | | | | | 151,948 | | | 150,895 | Early arrears: | | | | | | | | | | | | | | | | | | | | | | | | | 1,128 | | | 1,269 | – 31 to 60 days | | | | | | | | | | | | | | | | | | | | | | | | | 702 | | | 793 | – 61 to 90 days | | | | | | | | | | | | | | | | | | | | | | | | | 426 | | | 476 | NPLs:(2) | | | | | | | | | | | | | | | | | | | | | | | | | 1,868 | | | 2,110 | – By arrears | | | | | | | | | | | | | | | | | | | | | | | | | 1,427 | | | 1,578 | – By bankruptcy | | | | | | | | | | | | | | | | | | | | | | | | | 14 | | | 21 | – By maturity default | | | | | | | | | | | | | | | | | | | | | | | | | 303 | | | 316 | – By forbearance | | | | | | | | | | | | | | | | | | | | | | | | | 95 | | | 160 | – By properties in possession (PIPs) | | | | | | | | | | | | | | | | | | | | | | | | | 29 | | | 35 | Impairment loss allowances | | | | | | | | | | | | | | | | | | | | | | | | | 225 | | | 279 | Early arrears ratio(3) | | | | | | | | | | | | | | | | | | | | | | | | | 0.73% | | | 0.82% | NPL ratio(4) | | | | | | | | | | | | | | | | | | | | | | | | | 1.21% | | | 1.37% | Coverage ratio(5) | | | | | | | | | | | | | | | | | | | | | | | | | 12% | | | 13% | (1) Excludes mortgages where the customer did not pay for between 31 and 90 days, arrears, bankruptcy, maturity default, forbearance and PIPs NPLs. Includes £2,661m of mortgages (2016: £2,959m) where the customer did not pay for 30 days or less. (2) We define NPLs in the ‘Credit risk management’ section. All NPLs are in the UK and continue accruing interest. (3) Mortgages in early arrears as a percentage of mortgages. (4) Mortgage NPLs as a percentage of mortgages. (5) Impairment loss allowances as a percentage of NPLs. |
| | | | | | | | | | | NPL movements in 2017 We analyse NPL movements in 2017 in the table below. ‘Entries’ are loans which we have classified as NPL in the year and exclude ‘Policy entries’ that are due to definition changes. ‘PIP sales’ are loans that have been legally discharged when we have sold the property, and include anywritten-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. | | | | | | | | | | | | £m | At 1 January 2017 | | | | | | | | | | 2,110 | Entries | | | | | | | | | | 817 | PIP sales | | | | | | | | | | (66) | Exits | | | | | | | | | | (993) | At 31 December 2017 | | | | | | | | | | 1,868 | 2017 compared to 2016(unaudited) Mortgage NPLs decreased to £1,868m (2016: £2,110m) and the NPL ratio decreased to 1.21% (2016: 1.37%). Lower NPL and coverage ratios were driven by the ongoing resilience of the UK economy and our strong risk management practices. Forbearance(1) The balances at 31 December 2017 and 2016, analysed by their payment status at theyear-end and the forbearance we applied, were: | | 2017 | | Capitalisation
£m | | Term extension
£m | | Interest-only
£m | | Total
£m | | Impairment
loss allowances
£m | In arrears | | 260 | | 63 | | 175 | | 498 | | 22 | Performing | | 392 | | 178 | | 407 | | 977 | | 5 | | | | 652 | | 241 | | 582 | | 1,475 | | 27 | Proportion of portfolio | | 0.4% | | 0.2% | | 0.4% | | 1.0% | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | In arrears | | 293 | | 78 | | 226 | | 597 | | 24 | Performing | | 466 | | 222 | | 481 | | 1,169 | | 7 | | | | 759 | | 300 | | 707 | | 1,766 | | 31 | Proportion of portfolio | | 0.5% | | 0.2% | | 0.4% | | 1.1% | | |
Credit performance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 £m | | | 2017 £m | | Mortgage loans and advances to customers of which: | | | | | | | | | | | | | | | | | | 157,957 | | | | 154,682 | | – Stage 1 | | | | | | | | | | | | | | | | | | | | | 146,619 | | | | | | – Stage 2 | | | | | | | | | | | | | | | | | | | | | 9,356 | | | | | | – Stage 3 | | | | | | | | | | | | | | | | | | | | | 1,982 | | | | | | Performing(1) | | | | | | | | | | | | | | | | | | | | | | | | | 151,688 | | Early arrears: | | | | | | | | | | | | | | | | | | | | | | | | | 1,126 | | – 31 to 60 days | | | | | | | | | | | | | | | | | | | | | | | | | 700 | | – 61 to 90 days | | | | | | | | | | | | | | | | | | | | | | | | | 426 | | NPLs:(2) | | | | | | | | | | | | | | | | | | | | | 1,907 | | | | 1,868 | | – By arrears | | | | | | | | | | | | | | | | | | | | | 1,392 | | | | 1,427 | | – By bankruptcy | | | | | | | | | | | | | | | | | | | | | 18 | | | | 14 | | – By maturity default | | | | | | | | | | | | | | | | | | | | | 392 | | | | 303 | | – By forbearance | | | | | | | | | | | | | | | | | | | | | 80 | | | | 95 | | – By properties in possession (PIPs) | | | | | | | | | | | | | | | | | | | | | 25 | | | | 29 | | Loss allowances(3) | | | | | | | | | | | | | | | | | | | | | 234 | | | | 225 | | Stage 2 ratio | | | | | | | | | | | | | | | | | | | | | 5.92% | | | | | | Stage 3 ratio | | | | | | | | | | | | | | | | | | | | | 1.25% | | | | | | Early arrears ratio(4) | | | | | | | | | | | | | | | | | | | | | | | | | 0.73% | | NPL ratio(5) | | | | | | | | | | | | | | | | | | | | | 1.21% | | | | 1.21% | |
| (1) | Excludes mortgages where the customer did not pay for between 31 and 90 days, arrears, bankruptcy, maturity default, forbearance and PIPs NPLs. Includes £2,661m of mortgages at 31 December 2017 where the customer did not pay for 30 days or less. |
| (2) | We define NPLs in the ‘Credit risk management’ section. All NPLs are in the UK and continue accruing interest. Our Stage 3 exposures under IFRS 9 and NPLs are subject to different criteria. These criteria are under review in parallel with the ongoing regulatory changes to the default definition. |
| (3) | Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. The loss allowance is for both on andoff-balance sheet exposures. |
| (4) | Mortgages in early arrears as a percentage of mortgages. |
| (5) | Mortgage NPLs as a percentage of mortgages. |
Movement in total exposures and the corresponding ECL The following table shows changes in total exposures subject to ECL assessment, and the corresponding ECL, for residential mortgages in the period. The footnotes to the Santander UK group level analysis on page 72 are also applicable to this table. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-credit impaired | | | | | | Credit impaired | | | | | | | | | | | Stage 1
Subject to 12-month ECL | | | | | | Stage 2
Subject to lifetime ECL | | | | | | Stage 3 Subject to lifetime ECL | | | | | | Mortgages | | Exposures(1) £m | | | ECL £m | | | | | | Exposures(1) £m | | | ECL
£m | | | | | | Exposures(1) £m | | | ECL
£m | | | Exposures(1)
£m | | | ECL £m | | At 1 January 2018 | | | 155,155 | | | | 20 | | | | | | | | 9,884 | | | | 131 | | | | | | | | 2,004 | | | | 121 | | | | 167,043 | | | | 272 | | Change in economic scenarios(2) | | | – | | | | (6 | ) | | | | | | | – | | | | (7 | ) | | | | | | | – | | | | (8 | ) | | | – | | | | (21 | ) | Changes to model | | | – | | | | – | | | | | | | | – | | | | 2 | | | | | | | | – | | | | 2 | | | | – | | | | 4 | | Transfer to lifetime ECL(not-credit impaired)(3) | | | (2,941 | ) | | | (1 | ) | | | | | | | 2,941 | | | | 1 | | | | | | | | – | | | | – | | | | – | | | | – | | Transfer to credit impaired(3) | | | (329 | ) | | | (6 | ) | | | | | | | (512 | ) | | | (12 | ) | | | | | | | 841 | | | | 18 | | | | – | | | | – | | Transfer to12-month ECL(3) | | | 2,628 | | | | 21 | | | | | | | | (2,628 | ) | | | (21 | ) | | | | | | | – | | | | – | | | | – | | | | – | | Transfer from credit impaired(3) | | | 4 | | | | – | | | | | | | | 405 | | | | 14 | | | | | | | | (409 | ) | | | (14 | ) | | | – | | | | – | | Transfers of financial instruments | | | (638 | ) | | | 14 | | | | | | | | 206 | | | | (18 | ) | | | | | | | 432 | | | | 4 | | | | – | | | | – | | Net remeasurement of ECL on stage transfer(4) | | | – | | | | (20 | ) | | | | | | | – | | | | 20 | | | | | | | | – | | | | 14 | | | | – | | | | 14 | | New assets originated or purchased (5) | | | 28,330 | | | | 2 | | | | | | | | 446 | | | | 5 | | | | | | | | 3 | | | | 1 | | | | 28,779 | | | | 8 | | Other(6) | | | (7,327 | ) | | | 6 | | | | | | | | (244 | ) | | | (4 | ) | | | | | | | (36 | ) | | | 3 | | | | (7,607 | ) | | | 5 | | Assets derecognised – closed good(7) | | | (17,781 | ) | | | (4 | ) | | | | | | | (860 | ) | | | (10 | ) | | | | | | | (327 | ) | | | (13 | ) | | | (18,968 | ) | | | (27 | ) | Assets derecognised – written off(7) | | | – | | | | – | | | | | | | | – | | | | – | | | | | | | | (77 | ) | | | (18 | ) | | | (77 | ) | | | (18 | ) | At 31 December 2018 | | | 157,739 | | | | 12 | | | | | | | | 9,432 | | | | 119 | | | | | | | | 1,999 | | | | 106 | | | | 169,170 | | | | 237 | | Net movement in the year | | | 2,584 | | | | (8 | ) | | | | | | | (452 | ) | | | (12 | ) | | | | | | | (5 | ) | | | (15 | ) | | | 2,127 | | | | (35 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Charge/(release) to the Income Statement | | | | | | | (8 | ) | | | | | | | | | | | (12 | ) | | | | | | | | | | | 3 | | | | | | | | (17 | ) | Recoveries net of collection costs | | | | | | | – | | | | | | | | | | | | – | | | | | | | | | | | | (4 | ) | | | | | | | (4 | ) | Income Statement charge/(release) for the year | | | | | | | (8 | ) | | | | | | | | | | | (12 | ) | | | | | | | | | | | (1 | ) | | | | | | | (21 | ) |
| | | | Annual Report 2018 | Risk review | | |
Loan modifications The following tables provide information on financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL. | | | | | | | £m | | Financial assets modified during the period: | | – Amortised cost before modification | | | 207 | | – Net modification loss | | | 3 | | | Financial assets modified since initial recognition: | | – Gross carrying amount of financial assets for which the ECL allowance has changed to12-month measurement during the year | | | 158 | |
Forbearance(1) The balances at 31 December 2018 and 2017, analysed by their staging (2017: payment status) at theyear-end and the forbearance we applied, were: | | | | | | | | | | | | | | | | | | | | | | | | Capitalisation | | | Term extension | | | Interest-only | | | Total | | | Loss allowance | | | 2018 | | £m | | | £m | | | £m | | | £m | | | £m | | Stage 2 | | | 375 | | | | 161 | | | | 389 | | | | 925 | | | | 9 | | Stage 3 | | | 212 | | | | 95 | | | | 113 | | | | 420 | | | | 20 | | | | | | 587 | | | | 256 | | | | 502 | | | | 1,345 | | | | 29 | | Proportion of portfolio | | | 0.4% | | | | 0.2% | | | | 0.3% | | | | 0.9% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | In arrears | | | 260 | | | | 63 | | | | 175 | | | | 498 | | | | 22 | | Performing | | | 392 | | | | 178 | | | | 407 | | | | 977 | | | | 5 | | | | | | 652 | | | | 241 | | | | 582 | | | | 1,475 | | | | 27 | | Proportion of portfolio | | | 0.4% | | | | 0.2% | | | | 0.4% | | | | 1.0% | | | | | |
| (1) | We base forbearance type on the first forbearance on the accounts. |
20172018 compared to 20162017(unaudited)
In 2017,2018, the accounts in forbearance decreased, with the proportion of the mortgage portfolio in forbearance reducing slightly to 0.9% (2017: 1.0% (2016: 1.1%). | – | | At 31 December 2017,2018, the proportion of accounts in forbearance for more than six months that had made their last six months’ contractual payments increased slightly to 79% (2017: 78% (2016: 74%). |
| – | | The weighted average LTV of all accounts in forbearance was 35% (2016: 36%(2017: 35%) compared to the weighted average portfolio LTV of 39% (2017: 38% (2016: 39%). |
| – | | At 31 December 2017,2018, the carrying value of mortgages classified as multiple forbearance decreasedincreased slightly to £123m (2016: £128m) |
– | | At 31 December 2017, impairment loss allowances as a percentage of the overall mortgage portfolio were 0.15% (2016: 0.18%)£126m (2017: £123m). The equivalent ratio for performing accounts in forbearance was 0.50% (2016: 0.60%), and for accounts in arrears in forbearance was 4.40% (2016: 4.02%). The higher ratios for accounts in forbearance reflect the higher levels of impairment loss allowances we hold on these accounts. This reflects the higher risk on them. |
Other changes in contract termsloan modifications At 31 December 2017,2018, there were £4.7bn (2016: £5.1bn)£4.5bn (2017: £4.7bn) of other mortgages on the balance sheet that we had modified since January 2008. We agreed these modifications in order to keep a good relationship with the customer. The customers were not showing any signs of financial difficulty at the time, so did not classify these changes as forbearance. We keep the performance and profile of the accounts under review. At 31 December 2017:2018:
| – | | The average LTV was 32% (2017: 33% (2016: 35%) and 95% (2016: 94%(2017: 95%) of accounts had made their last six months’ contractual payments |
| – | | The proportion of accounts that were 90 days or more in arrears was 1.50% (2017: 1.52% (2016: 1.57%). |
| | | Annual Report 2017 on Form 20-F | Risk review | | > Credit risk |
RESIDENTIAL MORTGAGES -– PORTFOLIOS OF PARTICULAR INTEREST Introduction(unaudited) We are mainly a residential prime lender and we do not originatesub-prime or second charge mortgages. Despite that, some types of mortgages have higher risks and others stand out for different reasons. These are: | | | | 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. This means there is a higher credit risk on these loans as we depend on the customers to pay back a lump sum. We design new account LTV maximums to mitigate this credit risk. We also make sure the customer has a plausible repayment plan before we lend to them, and remains on track for the life of the loan. | | | | | 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. | | | | | In 2013, we contacted all our customers whose mortgages were due to mature before 2020. Since 2016, we have extended these campaigns to periodically contact all interest-only customers. We increase our contact frequency as customers approach term maturity. Outside of sending out annual mortgage statements, we contact more than 100,000 interest-only customers per year. | | | | | 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(such as an investment plan or bonds, for example)bonds) to mature, it can just mean extending it. | 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. | | | | | We no longer offer flexible loan products for new mortgages. | | | | | This is an area of interest in order to identify customers who might be using these facilities to self-forbear, (suchsuch as regularly drawing down small amounts).amounts. If there is any sign that the credit risk has significantly increased, we reflect this in our provision calculations. | Loans with an LTV >100% | | Where the mortgage balance is more than the property is now worth, we cannot recover the full value of the loan by repossessing and selling the property. This means there is a higher credit risk on these loans. In some cases, property prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs greater than 100%. Before 2009, we sometimes allowed customers to borrow more than the price of the property. | | | | | We monitor existing accounts with LTVs >100% as part of our assessment of ongoing portfolio performance. We design new account LTV maximums to mitigate an increase in the volume of accounts with an LTV >100%. | Buy-to-Let (BTL) loans | | Given that we have a relatively small share of the BTL market, we believe that we still have an opportunity to grow our presence in a controlled manner. We focus onnon-professional landlords (landlords with a small number of properties), as this segment is more closely aligned with residential mortgages and covers most of the BTL market. Our policy is that BTL 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, for example, if the landlord cannot find tenants for a while.
In recent years, we have refined our BTL proposition to appeal to a wider catchment, and we have improved our systems to cater for this segment.segment with a particular focus onnon-professional landlords. We have prudent lending criteria, and specific policies for BTL. We only lend tonon-professional landlords, to a maximum 75% LTV. The first applicant must earn a minimum income of £25,000 per year, and we require evidence of income in all cases. We also use a BTL affordability rate as part of our assessment about whether or not to lend. This means that the rental income must cover the monthly mortgage interest payments by a prescribed amount when calculated using a stressed interest rate. TheWe regularly review the prescribed amount is regularly reviewed and adjustedadjust it as necessary.needed. |
| | | | Annual Report 2018 | Risk review | | |
Credit performance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Portfolio of particular interest(1) | | | | | | 2018 | | Total £m | | | Interest-only £m | | | Part interest- only, part repayment(2) (3) £m | | | Flexible(3) £m | | | LTV >100% £m | | | Buy-to-let £m | | | Other portfolio £m | | | | | | | | | | | | | | | | | | Mortgage portfolio | | | 157,957 | | | | 38,035 | | | | 13,201 | | | | 12,926 | | | | 1,140 | | | | 8,252 | | | | 101,158 | | | | | | | | | | – Stage 1 | | | 146,619 | | | | 33,001 | | | | 11,824 | | | | 11,558 | | | | 740 | | | | 7,906 | | | | 96,767 | | | | | | | | | | – Stage 2 | | | 9,356 | | | | 4,029 | | | | 1,115 | | | | 1,082 | | | | 273 | | | | 317 | | | | 3,802 | | | | | | | | | | – Stage 3 | | | 1,982 | | | | 1,005 | | | | 262 | | | | 286 | | | | 127 | | | | 29 | | | | 589 | | | | | | | | | | Stage 3 ratio | | | 1.25% | | | | 2.64% | | | | 1.98% | | | | 2.21% | | | | 11.14% | | | | 0.35% | | | | 0.58% | | | | | | | | | | PIPs | | | 25 | | | | 12 | | | | 5 | | | | 3 | | | | 8 | | | | – | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | Mortgage portfolio | | | 154,682 | | | | 38,885 | | | | 13,785 | | | | 14,785 | | | | 1,471 | | | | 6,802 | | | | 95,535 | | Performing | | | 151,688 | | | | 37,497 | | | | 13,372 | | | | 14,438 | | | | 1,302 | | | | 6,768 | | | | 94,530 | | Early arrears: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – 31 to 60 days | | | 700 | | | | 317 | | | | 93 | | | | 67 | | | | 22 | | | | 9 | | | | 295 | | – 61 to 90 days | | | 426 | | | | 203 | | | | 57 | | | | 35 | | | | 15 | | | | 4 | | | | 167 | | NPLs | | | 1,868 | | | | 868 | | | | 263 | | | | 245 | | | | 132 | | | | 21 | | | | 543 | | NPL ratio | | | 1.21% | | | | 2.23% | | | | 1.91% | | | | 1.66% | | | | 8.97% | | | | 0.31% | | | | 0.57% | | PIPs | | | 29 | | | | 17 | | | | 5 | | | | 3 | | | | 10 | | | | 1 | | | | 6 | | (1) Where a loan falls into more than one category, we have included it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the total mortgage portfolio. (2) Mortgage balance includes both the interest-only part of £9,756m (2017: £10,116m) and thenon-interest-only part of the loan. (3) Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product. 2018 compared to 2017(unaudited) – In 2018, the value and proportion of interest-only loans together with part interest-only, part repayment and flexible loans reduced, reflecting our strategy to manage down the overall exposure to these lending profiles. – Buy-to-Let (BTL) mortgage balances increased £1.5bn to £8.3bn (2017: £6.8bn). We continue to focus our BTL book onnon-professional landlords, as this segment is closely aligned with mortgages and accounts for the majority of the volume in the BTL market. In 2018, we completed 11,400 BTL mortgages (2017: 7,500), representing 9% of the value of our new business flow (2017: 6%), at an average LTV of 62% (2017: 61%). Interest-only sub analysis(unaudited) Full interest-only new business in the year | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | | | | | £m | | | £m | | Full interest-only loans | | | | | | | | | | | | | | | | | | | | | | | 3,810 | | | | 2,698 | | | | | Full interest-only maturity profile | | | | | | | | | | | | | | | | Term
expired | | | Within
2 years | | | Between
2-5 years | | | Between
5-15 years | | | Greater than
15 years | | | Total | | | 2018 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Full interest-only portfolio | | | | | | | 541 | | | | 1,346 | | | | 3,761 | | | | 21,711 | | | | 10,676 | | | | 38,035 | | of which value weighted average LTV (indexed) is >75% | | | | | | | 43 | | | | 110 | | | | 265 | | | | 2,029 | | | | 642 | | | | 3,089 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | Full interest-only portfolio | | | | | | | 508 | | | | 1,586 | | | | 3,508 | | | | 21,795 | | | | 11,488 | | | | 38,885 | | of which value weighted average LTV (indexed) is >75% | | | | | | | 47 | | | | 147 | | | | 255 | | | | 2,318 | | | | 948 | | | | 3,715 | | 2018 compared to 2017(unaudited) For full interest-only mortgages, of the total £541m that was term expired at 31 December 2018, 89% continued to pay the interest due under the expired contract terms. Interest-only mortgages that matured in 2018 totalled £830m, of which: £418m was subsequently repaid, £5m was refinanced under normal credit terms, £73m was refinanced under forbearance arrangements and £334m remained unpaid and was classified as term expired at 31 December 2018. At 31 December 2018, there were 84,773 (2017: 93,779) flexible mortgage customers, with undrawn facilities of £6,000m (2017: £6,192m). The portfolio’s value weighted LTV (indexed) was 28% (2017: 28%). Forbearance(1) The balances at 31 December 2018 and 2017 were: | | | | | | | | | | | | | | Interest-only(2) | | | Flexible | | | LTV >100% | | | Buy-to-Let | | | | | | | | | | | | | | £m | | | £m | | | £m | | | £m | | 2018 | | | | | | | | | | | | | | | 229 | | | | 32 | | | | 10 | | | | 9 | | – Stage 2 | | | | | | | | | | | | | | | 136 | | | | 18 | | | | 3 | | | | 6 | | – Stage 3 | | | | | | | | | | | | | | | 93 | | | | 14 | | | | 7 | | | | 3 | | | | | | | | | | 2017 | | | | | | | | | | | | | | | 208 | | | | 34 | | | | 13 | | | | 8 | |
| (1) | Where a loan falls into more than one category, we have included it in all the categories that apply. |
| (2) | Comprises full interest-only loans and part interest-only, part repayment loans. |
Credit performance
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment of particular interest(1) | | | | | 2017 | | Total £m | | | Interest-only
£m | | | Part interest-
only, part
repayment
£m | | | Flexible(2) £m | | | LTV >100%
£m | | | Buy-to-let
£m | | | Other
portfolio
£m | Mortgage portfolio | | | 154,944 | | | | 38,893 | | | | 13,794(3) | | | | 14,787 | | | | 1,472 | | | | 6,802 | | | 95,779 | Performing | | | 151,948 | | | | 37,505 | | | | 13,379 | | | | 14,440 | | | | 1,303 | | | | 6,768 | | | 94,772 | Early arrears: | | | | | | | | | | | | | | | | | | | | | | | | | | | – 31 to 60 days | | | 702 | | | | 317 | | | | 94 | | | | 67 | | | | 22 | | | | 9 | | | 296 | – 61 to 90 days | | | 426 | | | | 203 | | | | 58 | | | | 35 | | | | 15 | | | | 4 | | | 168 | NPLs | | | 1,868 | | | | 868 | | | | 263 | | | | 245 | | | | 132 | | | | 21 | | | 543 | NPL ratio | | | 1.21% | | | | 2.23% | | | | 1.91% | | | | 1.66% | | | | 8.97% | | | | 0.31% | | | 0.57% | PIPs | | | 29 | | | | 17 | | | | 5 | | | | 3 | | | | 10 | | | | 1 | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | Mortgage portfolio | | | 154,274 | | | | 41,707 | | | | 14,535(3 | ) | | | 16,853 | | | | 1,873 | | | | 6,648 | | | 90,570 | Performing | | | 150,895 | | | | 40,185 | | | | 14,066 | | | | 16,472 | | | | 1,661 | | | | 6,621 | | | 89,483 | Early arrears: | | | | | | | | | | | | | | | | | | | | | | | | | | | – 31 to 60 days | | | 793 | | | | 360 | | | | 111 | | | | 71 | | | | 33 | | | | 7 | | | 314 | – 61 to 90 days | | | 476 | | | | 224 | | | | 70 | | | | 45 | | | | 22 | | | | 2 | | | 191 | NPLs | | | 2,110 | | | | 938 | | | | 288 | | | | 265 | | | | 157 | | | | 18 | | | 582 | NPL ratio | | | 1.37% | | | | 2.25% | | | | 1.98% | | | | 1.57% | | | | 8.38% | | | | 0.27% | | | 0.64% | PIPs | | | 35 | | | | 15 | | | | 7 | | | | 4 | | | | 13 | | | | 1 | | | 9 | (1) Where a loan falls into more than one category, we have included it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the total mortgage portfolio. (2) Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product. (3) Mortgage balance includes both the interest-only part of £10,121m (2016: £10,560m) and thenon-interest-only part of the loan. 2017 compared to 2016(unaudited) – In 2017, the value and proportion of interest-only loans together with part interest-only, part repayment loans and flexible loans reduced, reflecting our strategy to manage down the overall exposure to these lending profiles. – BTL mortgage balances increased £0.2bn to £6.8bn (2016: £6.6bn). We continue to focus our BTL book onnon-professional landlords, as this segment is closely aligned with mortgages and accounts for the majority of the volume in the BTL market. In 2017, we completed 7,500 BTL mortgages, representing 6% of the value of our new business flow, at an average LTV of 61%. Interest-only sub analysis(unaudited) Full interest-only new business in the year | | | | | | | | | | | | | | | | | | | 2017 £m | | | 2016 £m | Full interest-only loans | | | | | | | | | | | | | | | | | | | | | | | 2,698 | | | 3,404 | | | | | | | Full interest-only maturity profile | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | Term expired £m | | | Within 2 years £m | | | Between
2 - 5 years
£m | | | Between
5 -15 years
£m | | | Greater than
15 years £m | | | Total £m | Full interest-only portfolio | | | | 509 | | | | 1,585 | | | | 3,508 | | | | 21,803 | | | | 11,488 | | | 38,893 | of which value weighted average LTV (indexed) is >75% | | | | 47 | | | | 147 | | | | 255 | | | | 2,318 | | | | 948 | | | 3,715 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | Full interest-only portfolio | | | | 506 | | | | 1,884 | | | | 3,308 | | | | 21,154 | | | | 14,855 | | | 41,707 | of which value weighted average LTV (indexed) is >75% | | | | 36 | | | | 241 | | | | 239 | | | | 2,483 | | | | 1,957 | | | 4,956 | 2017 compared to 2016(unaudited) For full interest-only mortgages, of the total £509m that was term expired at 31 December 2017, 90% continued to pay the interest due under the expired contract terms. Interest-only mortgages that matured in 2017 totalled £859m, of which: – £466m was subsequently repaid – £nil was refinanced under normal credit terms – £28m was refinanced under forbearance arrangements – £365m remained unpaid and was classified as term expired at 31 December 2017. At 31 December 2017, there were 93,779 (2016: 103,213) flexible mortgage customers, with undrawn facilities of £6,192m (2016: £6,373m). The portfolio’s value weighted LTV (indexed) was 31% (2016: 31%). Forbearance(1)(2) The balances at 21 December 2017 and 2016 were: | | | | | | | | | | | | | Interest-only(3)
£m | | | Flexible £m | | | LTV >100%
£m | | | Buy-to-Let
£m | 2017 | | | | | | | | | | | | | | | 208 | | | | 34 | | | | – | | | 8 | 2016 | | | | | | | | | | | | | | | 322 | | | | 56 | | | | – | | | 9 |
(1) | The figures reflect the amount of forbearance in the year, regardless of whether any forbearance on the accounts before. |
(2) | Where a loan falls into more than one category, we have included it in all the categories that apply. |
(3) | Comprises full interest-only loans and part interest-only, part repayment loans. |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
BUSINESS BANKING
2017 compared to 2016(unaudited)
– | | NPLs increased by 6% to £115m (2016: £108m) with a NPL ratio of 6.01% (2016: 4.64%). |
– | | Following a periodic review in 2017, a number of business banking customers were transferred to Commercial Banking, where their ongoing needs can be better served. The balance associated was £200m and prior periods have not been amended. |
Within our Retail Banking segment we provide business banking services through the Santander Business franchise to small businesses with a turnover of up to £6.5m per annum. We offer current accounts, savings accounts, card acceptance services, insurance and loans.
In 2017, we embedded a new operating model and streamlined our portfolio to provide more capacity and enable greater support to our customers. We also introduced a fast track process for asset finance up to £150,000 and simplified the credit application process for smaller exposures to facilitate quicker lending decisions.
Our business banking customers are an integral part of the UK economy and our dedication to meeting their everyday banking needs has seen us recognised as Best Business Current Account Provider by Moneyfacts for the last 15 years.
We have also been recognised as the Business Bank of the Year for three years running by Moneyfacts and Most Trusted Bank for Small Businesses 2016 by Moneywise, demonstrating our commitment to becoming the bank of choice for UK companies. We are also working to make our award-winning accounts even better by adapting to changing trends.
Credit performance
| | | | | | | | | | 2017 | | 2017
£m | | | 2016
£m | | Loans and advances to customers of which: | | | 1,912 | | | | 2,327 | | – Performing(1) | | | 1,793 | | | | 2,216 | | – Early arrears | | | 4 | | | | 3 | | – NPLs(2) | | | 115 | | | | 108 | | Impairment loss allowances | | | 54 | | | | 57 | | NPL ratio(3) | | | 6.01% | | | | 4.64% | | Coverage ratio(4) | | | 47% | | | | 53% | | Gross write-offs | | | 21 | | | | 24 | |
(1) | Excludes loans and advances to customers where the customer did not pay for between 0 and 90 days and NPLs. |
(2) | We define NPLs in the ‘Credit risk management’ section. |
(3) | NPLs as a percentage of loans and advances to customers. |
(4) | Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e the IBNO provision) as well as NPLs, so the ratio can exceed 100%. |
Forbearance
The balances at 31 December 2017 and 2016 were:
| | | Enhancing risk management
| | | | | In 2017, we enhanced our risk management function, to tailor it specifically to business banking due to our enhanced strategic focus. In line with our risk governance framework, and our three lines of defence model, this included independent assurance support. | | The training around financial crime and other operational risks provided to our people in 2017 enables them to understand and manage all risk types more effectively. This will continue as a central feature in 2018. | | | This new model will move away from the local management of risk and controls by both the branch network (for Business Relationship Managers) and corporate banking (for Business Relationship Directors) into a centralised Business Assurance and Control Model. Our Business Assurance and Control Model is important to helping us achieve the commercial objectives of our business strategy by providing an enhanced framework for more robust and well-defined controls. We plan to support this with more training for staff in customer-facing roles.
Financial crime continues to be an area of focus within business banking, and identifying and implementing appropriate enhancement remains a priority for us. This focus has highlighted the need to strengthen and enhance systems (both short and long term) to reduce our risk exposure.
At the same time, we have begun a programme to focus on minimising any potential emerging risks.
| | 
| | |
CONSUMER (AUTO) FINANCE AND OTHER UNSECURED LENDING 2017 compared to 2016(unaudited)
– | | Consumer (auto) finance balances increased £0.2bn with higher retail loans, partially offset by a decrease in the stock of new car registrations. In 2017, consumer (auto) finance gross lending was £3,133m (2016: £3,111m). NPLs increased slightly to £34m (2016: £32m). |
– | | Other unsecured lending was steady as a result of controlled management actions. |
– | | Forbearance levels were broadly similar to last year with balances at 31 December 2017 of £77m (2016: £75m). |
Consumer (auto) finance We provideRetail Banking provides auto finance through Santander Consumer (UK) plc (SCUK), which is part of our Retail Banking segment.. SCUK provides a range of wholesale (stock finance) and retail products designed for the purchase of both new and used personal, business and commercial vehicles, motorcycles, bicycles and caravans through an extensive network of motor dealers and manufacturer partners. SCUK’s products are predominantlymainly distributed viathrough intermediary introducers at the point of sale, and through partnerships with selected car and motorcycle manufacturers. At 31 December 2017,2018, the business operated with seven13 Original Equipment Manufacturer partners which includes two joint venture arrangements.
Through SCUK’s Hyundai Capital UK Ltd (HCUK) and PSA Finance UK Ltd (PSAF) joint ventures, we provide retail point of sale customer finance as well as wholesale finance facilities (Stock Finance) for Hyundai and Kia, managed by HCUK, as well as Peugeot, Citroën and DS, managed by PSAF. WeSCUK holds a 50% share in each of these joint ventures. However, due to the varying structures of the joint ventures, we equity account for HCUK and consolidate PSAF. SCUK, including PSAF, with total outstanding lending of £7.0bn at 31 December 2017 represented 4% of our total Retail Banking loans and 3% of total customer loans. Conditional sale and Personal Contract Purchase (PCP) lending was approximately 35% and 45%, respectively, of our lending. Wholesale loans to car dealerships at 31 December 2017 were approximately 15% of the loan book.
We maintained our prudent underwriting criteria through the year. The product mix was broadly unchanged in the year. This reflected underlying stability in target market segments, product pricing and distribution strategy. There was a slight shift in the year from new car loans into second hand car loans, both reflecting reduced consumer confidence linked to the underlying economic uncertainty in the UK.
The top risk to SCUK continues to be Residual Value (RV) risk. SCUKrisk remains conservative in setting future asset values, and has embedded a prudent provisioning model as well as robust monitoring processes. Thethe top risk for SCUK. We monitor the RV portfolio is monitored on a monthly basis, withand we use key risk triggers in place to identify any material change in trends. SCUK’sWe have a conservative approach to setting Guaranteed Minimum Future Values (GMFV) also protects the customerRV amounts, and the business, by creating projected equity in the vehicle at the endmaintain a prudent provisioning policy to mitigate potential losses on disposal of the loan agreement forasset. We use a leading independent vehicle valuation company to assess the customer to use as a deposit on their next vehicle. SCUK typically sets the GMFVestimated future value of the asset, at 85%prior to inception and periodically throughout the life of the future value provided by CapHPI (valuation specialists). This creates equity in the asset from day one. In addition to this, SCUK takes an upfront RV provision of the GMFV value, based on a potential fall in car prices and an estimated percentage of hand-backs.agreement.
Other unsecured lending OurRetail Banking also provides other unsecured lending, business consists of personal loans, credit cards and overdrafts, which is also part of our Retail Banking business segment:includes:
| – | | personalPersonal loans: we offer personal loans for most purposes, such as debt consolidation, home improvement, and to support significant life events such as weddings |
| – | | creditCredit cards: we offer a wide range of credit cards designed to suit a variety of customers, including balance transfer cards and cards that offer rewards |
| – | | overdrafts:Overdrafts: we also offer arranged overdrafts for customers who have a bank account with us. We evaluate our customers’ circumstances to decide how much they can borrow. In other cases, a customer may have overdrawn their bank account without arranging it with us first. |
For both Consumer (auto) finance and Other unsecured lending, we maintain rigorous credit scoring and affordability assessment criteria that we monitor and report regularly. There were no significant changes to our risk policy or appetite in these portfolios. This approach continued to result in stable, good credit quality consumer credit portfolios. We use a combination of internal, Credit Reference Agency and application data in our credit assessments. Scorecards supported by policy rules give us confidence that customers are creditworthy and can afford their repayments. We closely monitor and manage the performance of our consumer credit portfolios using a range of data that includes portfolio and key segments performance, macroeconomic indicators and customer risk data. Nonetheless, we are not complacent about the prospect for future risk events and are always looking at ways to strengthen our approach. Credit performance | | | | | | | | Other unsecured | | | | | | 2018 | | | Consumer
(auto) finance
£m | | | Personal
loans
£m | | | Credit
cards
£m | | | Overdrafts
£m | | | Total other
unsecured
£m | | | Total £m | | Loans and advances to customers of which: | | | 7,347 | | | | 2,182 | | | | 2,865 | | | | 593 | | | | 5,640 | | | | 12,987 | | – Stage 1 | | | 6,950 | | | | 2,113 | | | | 2,560 | | | | 422 | | | | 5,095 | | | | 12,045 | | – Stage 2 | | | 354 | | | | 48 | | | | 256 | | | | 144 | | | | 448 | | | | 802 | | – Stage 3 | | | 43 | | | | 21 | | | | 49 | | | | 27 | | | | 97 | | | | 140 | | NPLs(1) | | | 43 | | | | 16 | | | | 49 | | | | 22 | | | | 87 | | | | 130 | | Loss allowances | | | 85 | | | | 47 | | | | 112 | | | | 61 | | | | 220 | | | | 305 | | | Stage 3 ratio(2) | | | 0.59% | | | | | | | | | | 1.72% | | | | 1.08% | | NPL ratio(3) | | | 0.59% | | | | | | | | | | 1.54% | | | | 1.00% | | Gross write-offs | | | 24 | | | | | | | | | | 125 | | | | 149 | | (1) We define NPLs in the ‘Credit risk management’ section. (2) Stage 3 as a percentage of loans and advances to customers. (3) NPLs as a percentage of loans and advances to customers. | | (1) We define NPLs in the ‘Credit risk management’ section. (2) Stage 3 as a percentage of loans and advances to customers. (3) NPLs as a percentage of loans and advances to customers. | | | | | | | | | | | | Other unsecured | | | | | | | | | Other unsecured | | | | | | 2017 | | Consumer
(auto) finance
£m | | | Personal
loans £m | | | Credit
cards
£m | | | Overdrafts
£m | | | Total other
unsecured
£m | | | Total
£m | | | Consumer
(auto) finance
£m | | | Personal
loans £m | | | Credit
cards
£m | | | Overdrafts
£m | | | Total other
unsecured
£m | | | Total £m | | Loans and advances to customers of which: | | | 6,957 | | | | 2,169 | | | | 2,444 | | | | 565 | | | | 5,178 | | | | 12,135 | | | | 6,957 | | | | 2,169 | | | | 2,444 | | | | 565 | | | | 5,178 | | | | 12,135 | | – Performing(1) | | | 6,861 | | | | 2,129 | | | | 2,377 | | | | 516 | | | | 5,022 | | | | 11,883 | | | | 6,861 | | | | 2,129 | | | | 2,377 | | | | 516 | | | | 5,022 | | | | 11,883 | | – Early arrears | | | 62 | | | | 24 | | | | 19 | | | | 25 | | | | 68 | | | | 130 | | | | 62 | | | | 24 | | | | 19 | | | | 25 | | | | 68 | | | | 130 | | – NPLs(2) | | | 34 | | | | 16 | | | | 48 | | | | 24 | | | | 88 | | | | 122 | | | | 34 | | | | 16 | | | | 48 | | | | 24 | | | | 88 | | | | 122 | | Impairment loss allowances | | | 77 | | | | 44 | | | | 62 | | | | 29 | | | | 135 | | | | 212 | | | Loss allowances | | | | 77 | | | | 44 | | | | 62 | | | | 29 | | | | 135 | | | | 212 | | | NPL ratio(3) | | | 0.49% | | | | | | | | | | 1.69% | | | | 1.00% | | | | 0.49% | | | | | | | | | | 1.69% | | | | 1.00% | | Coverage ratio(4) | | | 226% | | | | | | | | | | 153% | | | | 174% | | | Gross write-offs | | | 32 | | | | | | | | | | 120 | | | | 152 | | | | 32 | | | | | | | | | | 120 | | | | 152 | |
| (1) | Excludes loans and advances to customers where the customer did not pay for between 0 and 90 days and NPLs. |
| (2) | We define NPLs in the ‘Credit risk management’ section. |
| (3) | NPLs as a percentage of loans and advances to customers. |
(4) | Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio exceeds 100%. |
At 31 December 2018, the average consumer finance loan size was £11,400 (2017: £12,500) and the NPL ratio increased slightly to 0.59% (2017: 0.49%). The average unsecured loan and credit card balances in 2018 were broadly stable at £9,500 (2017: £9,300) and £1,500 (2017: £1,200), respectively.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
Loan modifications | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other unsecured | | | | | | 2016 | | Consumer
(auto) finance
£m | | | Personal
loans £m | | | Credit
cards
£m | | | Overdrafts
£m | | | Total other
unsecured
£m | | | Total
£m | | Loans and advances to customers of which: | | | 6,764 | | | | 2,229 | | | | 2,493 | | | | 551 | | | | 5,273 | | | | 12,037 | | – Performing(1) | | | 6,682 | | | | 2,188 | | | | 2,422 | | | | 501 | | | | 5,111 | | | | 11,793 | | – Early arrears | | | 50 | | | | 24 | | | | 23 | | | | 25 | | | | 72 | | | | 122 | | – NPLs(2) | | | 32 | | | | 17 | | | | 48 | | | | 25 | | | | 90 | | | | 122 | | Impairment loss allowances | | | 78(5) | | | | 55 | | | | 77 | | | | 37 | | | | 169 | | | | 315 | | | | | | | | | NPL ratio(3) | | | 0.47% | | | | | | | | | | | | | | | | 1.71% | | | | 1.01% | | Coverage ratio(4) | | | 244%(5 | ) | | | | | | | | | | | | | | | 188% | | | | 258% | | Gross write-offs | | | 30 | | | | | | | | | | | | | | | | 123 | | | | 153 | |
The following table provides information on financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL. (1) | Excludes loans and advances to customers where the customer did not pay for between 0 and 90 days and NPLs. |
(2) | We define NPLs in the ‘Credit risk management’ section. |
(3) | NPLs as a percentage of loans and advances to customers. |
(4) | Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio exceeds 100%. |
(5) | In 2017, we reclassified our provisions for residual value and voluntary termination from the consumer finance loan loss allowance. In order to facilitate comparison with the current period, December 2016 consumer finance loan loss allowance and NPL coverage ratio were amended. This reclassification is reflected in the Retail Banking loan loss allowance and NPL coverage ratio. |
At 31 December 2017, the average retail loan size was £12,500 (2016: £12,000) and the NPL ratio was broadly stable at 0.49% (2016: 0.47%). The average unsecured loan and credit card balances in 2017 were broadly stable at £9,300 (2016: £9,400) and £1,200 (2016: £1,300), respectively.
| | | | | | | | | | | | | | | | Credit cards £m | | | Overdrafts
£m | | | Total other unsecured £m | | Financial assets modified during the period: | | | | | | – Amortised cost before modification | | | 26 | | | | 17 | | | | 43 | | – Net modification loss | | | 12 | | | | 8 | | | | 20 | | | | Financial assets modified since initial recognition: | | | | | | – Gross carrying amount of financial assets for which the ECL allowance has changed to12-month measurement during the year | | | 2 | | | | 3 | | | | 5 | |
Forbearance The balances at 31 December 20172018 and 20162017 were: | | | | | | | Other unsecured | | | | | | | | | Other unsecured | | | | | | | | Consumer
(auto) finance
£m | | | Personal
loans £m | | | Credit
cards
£m | | | Overdrafts
£m | | | Total other
unsecured
£m | | | Total
£m | | | Consumer
(auto) finance
£m | | | Personal
loans
£m | | | Credit
cards
£m | | | Overdrafts
£m | | | Total other
unsecured
£m | | | Total £m | | 2018 | | | | – | | | | – | | | | 53 | | | | 26 | | | | 79 | | | | 79 | | – Stage 2 | | | | – | | | | – | | | | 10 | | | | 7 | | | | 17 | | | | 17 | | – Stage 3 | | | | – | | | | – | | | | 43 | | | | 19 | | | | 62 | | | | 62 | | | 2017 | | | – | | | | 1 | | | | 48 | | | | 28 | | | | 77 | | | | 77 | | | | – | | | | 1 | | | | 48 | | | | 28 | | | | 77 | | | | 77 | | 2016 | | | – | | | | 1 | | | | 46 | | | | 28 | | | | 75 | | | | 75 | | |
2018 compared to 2017(unaudited) | | | | | | | | | | | | | Managing growth in consumer credit | | | | | | | | | | | The UK consumer credit market continued to grow strongly in 2017. Dealership car finance saw the biggest growth in the year, although credit cards and personal loans also saw significant increases. This growth was much faster than the growth in household incomes. This prompted some discussions across the industry and amongst regulators around the possibility that customer affordability may become more stretched, particularly in a stress, and lead to higher losses to lenders in future. | | For these reasons, we are confident that the below market growth in our consumer credit portfolios is the result of our prudent approach to risk management and control. Nonetheless, we are not complacent about the prospect for future risk events and are always looking at ways in which we can strengthen our approach. | | | | | | | | | At Santander UK, we did not see the same levels of consumer credit growth. Vehicle finance increased by 3% in 2017, and credit card and personal loan assets decreased slightly by 2.5% and 1%, respectively.
We maintained our prudent Consumer (auto) finance underwriting criteria through the year. The product mix was broadly unchanged in the year. This reflected underlying stability in target market segments, product pricing and distribution strategy. There was a slight shift in the year from new car loans into second hand (used) car loans, both reflecting reduced consumer confidence linked to the underlying economic uncertainty in the UK and a reduction in new car registrations in the UK, driven by manufacturer strategic supply plans for the UK and Europe. At 31 December 2018, Consumer (auto) finance balances represented 4% (2017: 4%) of our total Retail Banking loans and 4% (2017: 3%) of total customer loans. In 2018, Consumer (auto) finance balances increased by £390m (6%) on 2017. In 2018, Consumer (auto) finance gross lending (new business) was £3,444m (2017: £3,133m). Wholesale loans (Stock finance) to car dealerships at 31 December 2018 were approximately 18% of the Consumer loan book, an increase of £124m on 2017. NPLs remain within Risk Appetite limit, increasing to £43m (2017: £34m). The portfolio continues to perform satisfactorily with the overall risk profile remaining broadly stable. Other unsecured lending increased in 2018, with credit cards growth of £421m which was ahead of the market. Forbearance levels were broadly stable in 2018. We maintain rigorous credit scoring and affordability assessment criteria that we monitor and report continuously. For our consumer credit portfolios there were no significant changes to our risk policy or appetite in 2017. This approach resulted in stable, good credit quality consumer credit portfolios.
Our credit assessments use a combination of internal, Credit Reference Agency and application data. Scorecards supported by policy rules give us confidence that customers are creditworthy and can afford their repayments.
We closely monitor and manage the performance of our consumer credit portfolios using a range of information that includes portfolio and key segments performance, macroeconomic indicators and customer risk data.
| | 
| | |
BUSINESS BANKING We provide business banking services through the Santander Business franchise to small businesses with a turnover of up to £6.5m per annum. Our risk management is tailored to the complexity of the customer and their product holdings. We review applications from customers who have more straightforward borrowing needs and lower debt exposures on an automated basis. We do this by using an application scorecard to ensure an efficient customer journey, combined with a cost-effective credit decisioning process. Post approval, we review revolving credit facilities each year to ensure the customer’s facilities remain appropriate for their financial circumstances. We perform a full manual underwriting process for applications from customers who have more complex borrowing needs or who wish to borrow larger amounts. This is due to the levels of credit exposure and other considerations, such as the need for security to support the facilities requested. In line with our risk management framework and standard policies for this more complex segment, we review exposures above certain values and relating to certain product types at least each year, or more often where the borrower shows signs of financial distress. Our aim is to help businesses prosper through the provision of Simple, Personal and Fair banking solutions to existing, new and prospective customers. We believe in building lasting relationships and take time to understand our customers’ banking needs. This sets us apart from others as, no matter how small or large a business, we have people available in our branch network and our CBCs to provide aface-to-face relationship management service to our customers. In order to improve our offering in the business current account market, we recently launched our innovative 1I2I3 Business Current Account. This is the only business current account in the market to offer regular cashback to businesses. By basing the cashback on business turnover, we are incentivising and rewarding business growth.Start-ups and switching businesses benefit from a reduced monthly fee for 12 months and, as part of our 1I2I3 Business World, customers have access to preferential loan and deposit rates. In this way, we continue to support new businesses at an important time in their lifecycle. We aim to support businesses with all their financial needs through our range of lending products from overdrafts and credit cards, to invoice finance and asset finance. Credit performance | | | | | | | | | | | | | | | 2018 £m | | | 2017 £m | | | | | Loans and advances to customers of which: | | | 1,802 | | | | 1,912 | | – Stage 1 | | | 1,548 | | | | | | – Stage 2 | | | 165 | | | | | | – Stage 3 | | | 89 | | | | | | – Performing(1) | | | | | | | 1,793 | | – Early arrears | | | | | | | 4 | | – NPLs(2) | | | 89 | | | | 115 | | Loss allowances(3) | | | 53 | | | | 54 | | | | | | | | | | | | Stage 3 ratio(4) | | | 4.94% | | | | | | NPL ratio(5) | | | 4.94% | | | | 6.01% | | Gross write offs | | | 15 | | | | 21 | |
| (1) | Excludes loans and advances to customers where the customer did not pay for between 0 and 90 days and NPLs. |
| (2) | We define NPLs in the ‘Credit risk management’ section. |
| (3) | Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. |
| (4) | Stage 3 as a percentage of loans and advances to customers. |
| (5) | NPLs as a percentage of loans and advances to customers. |
Loan modifications The following table provides information on financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL. | | | | | | | | | £m | | Financial assets modified during the period: | | | | | – Amortised cost before modification | | | 14 | | – Net modification loss | | | 1 | | | | Financial assets modified since initial recognition: | | | | | – Gross carrying amount of financial assets for which the ECL allowance has changed to12-month measurement during the year | | | 3 | |
Forbearance The balances at 31 December 2018 and 2017 were: | | | | | | | | | | £m | | | | 2018 | | | 74 | | – Stage 2 | | | 20 | | – Stage 3 | | | 54 | | | | 2017 | | | 85 | |
| | | | Annual Report 2018 | Risk review | | |
Credit risk – other business segments | | | | | | | Overview | | | | | | | | In Corporate & Commercial Banking, we are exposed to credit risk through providing overdraft, loan, invoice discounting, trade finance, asset finance and treasury products. We offer bank accounts and cash transmission services to further support clients. In Global Corporate & Investment Banking, we are mainly exposed to credit risk through lending and selling treasury products to large corporates, and throughcorporates. In 2018, we sold our treasury market activities.activities, and the Crown Dependencies branches as part of our ring-fencing implementation. For more, see Note 43 to the Consolidated Financial Statements. | | In Corporate Centre, our exposures come from asset and liability management of our balance sheet and ournon-core and Legacy Portfolios inrun-off. | | Credit risk management In this section, we explain how we manage and mitigate credit risk. Credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance and portfolios of particular interest. |
Our main portfolios are: | | | | | Commercial Banking | | Global | Corporate & Commercial Banking | | Corporate & Investment Banking | | Corporate Centre | – SME and mid corporate – banking, lending and treasury services mainly to enterprises with an annual turnover of up to £500m. – Commercial Real Estate – lending to experienced, professional landlords mainly secured by tenanted UK customers, mainly on tenanted property. We focus onproperty in the office, retail, industrial and residential sectors.sub-sectors. – Social Housing – lending and treasury services for UK Housing Associations who ownhousing association groups secured by tenanted UK residential real estateproperty. Borrowers are mainly charitable entities and registered with the appropriate regulator for rent.the part of the UK in which they operate. | | – Sovereign and Supranational– securities issued by local and central governments, and government guaranteed counterparties. We hold them to help meet our liquidity needs and for 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. | | – Sovereign and Supranational – securities issued by local and central governments, and government guaranteed counterparties. We hold them to help meet our liquidity needs. – Structured Products – we have two portfolios. The ALCO portfolio is high quality assets. We chose themassets, chosen for diversification and liquidity. The Legacy Treasury asset portfolio is mainly asset-backed securities. – DerivativesSocial Housing – older total return swaps we held for liquidity,legacy Social Housing loans that we are running down.do not fit with our strategy. – Legacy Portfolios inrun-off – assets from acquisitions that do not fit with our strategy. These include some commercial mortgages. – Social HousingDerivatives – legacy Social Housing loansolder total return swaps we held for liquidity, that do not fit with our strategy.we are running down. – Crown Dependencies – mainly residential mortgages to individuals in Jersey and the Isle of Man. |
The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branches in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in 2018. See Note 2 for more information. OTHER BUSINESS SEGMENTS – CREDIT RISK MANAGEMENT  
In Corporate & Commercial Banking, we classify most of our customers as non-standardised. We also have SME customers, which we mainly classify as standardised as it is a high volume portfolio with smaller exposures. In Global Corporate BankingCIB and Corporate Centre, we classify all our customers as non-standardised, except for the commercial mortgages in our Legacy Portfolios inrun-off. We set out how we manage the credit risk on our standardised customers in the previous section ‘Credit risk – Retail Banking’. We manage the credit risk on our standardised customers in Corporate & Commercial Banking and Corporate Centre in the same way, except that we do not use scorecards or credit reference agencies. In the rest of this section, we explain how we manage the credit risk on our non-standardised customers.
| | | Annual Report 2017 on Form 20-F | Risk review | | > Credit risk |
1. Risk strategy and planning For details of how we set risk strategy and plans, see the ‘Santander UK group level – credit risk management’ section. For treasury products, we take credit risk 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. 2. Assessment and origination We do a thorough risk assessment to make sure customers can meet their obligations before we approve a credit application. We do this mainly by assigning each customer a credit rating, using our internal rating scale (see ‘Credit quality’ in ‘Santander UK group level – credit risk review’ section). To do this, we look at the customer’s financial history and 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 following tables) – 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 ControlCredit Approval Committee is responsible for setting those limits. In Global Corporate BankingCIB and Corporate Centre, 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. Credit risk mitigation The types of credit risk mitigation, including collateral, across each of our portfolios are as follows. Corporate & Commercial Banking: | | | | | | Portfolio | | Description | | | SME and mid corporate | | Includes secured and unsecured lending. We can use covenants (financial ornon-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 can take mortgage debentures as collateral. These are charges over a company’s assets. We can 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 a tangible asset. We base our lending decision on the customer’s trading cash flow. If they default,a customer defaults, we will work with defaulted customersthem to consider debt restructuring options. We generally do not take control of their assets except when restructuring options have been exhausted or to protect our position in relation to third party claims. In this case, we might appoint an administrator. We also lend against assets (like vehicles and equipment) and invoices for some 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 collect on 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 property condition, age and location, tenant quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before agreeing the loan, we visit the property and get an independent professional valuation which assesses the property, the tenant and future demand (such as comparing market rent to current rent). Loan agreements typically allow us to get revaluations every two to three years, or more often if it is likely covenants may be breached, and to 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.collateral, in most cases. We revalue 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 more than 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. |
| Global Corporate & Investment Banking:
| | | | 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. We also have 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. This means 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 arrangements 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. For derivatives, we use ISDA Master Agreements; for repos and reverse repos, we use Global Master Repurchase Agreements; and for stock borrowing/lending and other securities financing, we use Global Master Securities Lending Agreements. 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. We revalue our exposures and collateral daily, adjusting the collateral to reflect deficits or surpluses. We have processes to control how we value and manage collateral, including documentation reviews and reporting. Collateral has to meet our ‘eligibleour‘eligible collateral, haircuts and margining’ policy which 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 if a client defaults. We have these controls for equities and debt securities. The collateral held for reverse repos 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. |
| | | | Annual Report 2018 | Risk review | | > Credit risk |
Corporate Centre: | | | 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. 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 accountthe portfolios and we consider the structure and assets backing each individual security. We set up an impairment loss allowance if we know an issuer has financial difficulties or they are not keeping to the terms of the contract. | DerivativesSocial Housing
| | We manage the risk on this portfolio in the same way as for the derivativesSocial Housing portfolio in Global Corporate & Commercial Banking. | Legacy Portfolios inrun-off | | We often hold collateral through a first legal charge over the underlying asset or cash. We get independent third party valuations on fixed charge security like aircraft or ships 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 HousingDerivatives
| | We manage the risk on this portfolio in the same way as for the Social Housingderivatives in CIB. | Crown Dependencies | | We managed the risk on this portfolio in Commercialthe same way as for mortgages in Retail Banking. This portfolio was sold in 2018. |
3. Monitoring We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our Executive Risk Control CommitteeERCC 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 WatchlistCommercial Real Estate
| | We take a first legal charge on commercial property as collateral. The loan is subject to strict criteria, including the property condition, age and location, tenant quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before agreeing the loan, we visit the property and get an independent professional valuation which assesses the property, the tenant and future demand (such as comparing market rent to current rent). Loan agreements typically allow us to get revaluations every two to three years, or more often if it is likely covenants may be breached, and to 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, in most cases. We revalue 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. 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. | | Corporate & Investment Banking: | | | | 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. We also have 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. This means 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 arrangements 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. For non-standardised customers,derivatives, we alsouse ISDA Master Agreements; for repos and reverse repos, we use Global Master Repurchase Agreements; and for stock borrowing/lending and other securities financing, we use Global Master Securities Lending Agreements. 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. We revalue our exposures and collateral daily, adjusting the collateral to reflect deficits or surpluses. We have processes to control how we value and manage collateral, including documentation reviews and reporting. Collateral has to meet our‘eligible collateral, haircuts and margining’ policy which 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 if a client defaults. We have these controls for equities and debt securities. The collateral held for reverse repos 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. | |
| | | | Annual Report 2018 | Risk review | | |
Corporate Centre: | | | 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. 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 Watchlist to help us identify potential problem debt early. Just because a customer is on our Watchlist does not mean they have defaulted. It just means that something has happened that has increased the probability of default. 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 casedetailed expected cash flow analysis to assess the potential financial impact.portfolios and we consider the structure and assets backing each individual security. | Social Housing | | We classify Watchlist cases as:manage the risk on this portfolio in the same way as for the Social Housing portfolio in Corporate & Commercial Banking. – | | Enhanced monitoring:for less urgent cases. If they are significant, we monitor them more often |
– | | Proactive management: for more urgent or serious cases. We may take steps to restructure debt including extending the term, taking more collateral, agreeing a lower credit limit or seeking repayment of the loan through refinancing or other means. |
| Legacy Portfolios inrun-off | | We assess casesoften hold collateral through a first legal charge over the underlying asset or cash. We get independent third party valuations on the Watchlist for impairment collectively, unless they arefixed charge security like aircraft or ships 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 included in proactive management, we usually review the value of any collateral as part of working out what to do next.line with industry guidelines. We also assess whetherthen decide if we need to set up an impairment loss allowance. ThisTo do that, we bear in mind:
– The borrower’s ability to generate cash flow – The age of the assets – Whether the loan is based onstill performing satisfactorily – Whether or not the expected future cash flows andreduction in value is likely to be temporary – Whether there are other ways to solve the valueproblem. Where a borrower gets into difficulty we look to dispose of the collateral, compared toeither with agreement or through the loan balance.insolvency process. 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. In Global Corporate Banking and Corporate Centre 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.
4. 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 aim 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. We use restructuring and 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 aim to identify warning signs early by monitoring 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 more serious cases to them.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Forbearance
If a customer is having financial difficulty, we will work with them before they actually default to see if the difficulty can be addressed through forbearance. 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. 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.as early as possible, to minimise any loss. We rarely take ownership of collateral.
| | | We may offer this option if the customer isup-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 customer’s 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 interestroll-up. In rare cases, we agree to forgive or reduce part of the debt.
|
When we agree to any forbearance, we review our impairment loss allowances for them. These accounts may stay in our performing portfolio but we report them separately as forborne. If an account is performing when we agree forbearance and there is clear evidence that the customer is consistently meeting their new terms and the risk profile is improving, we classify 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 we reclassify the loan as performing.
Other forms of debt management
When customers are in financial difficulty 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 on the use of any 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 new or extra collateral in return for revised financing 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. |
5. Debt recovery
Consensual arrangements
Where we cannot find a solution like any of the ones we describe above, we look for an exit. If circumstances permit, we aim to do this by agreeing with the borrower that they will sell some or all of their assets on a voluntary basis or agreeing 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 consider recovery options. This can be through:
– | | Enforcing over any collateral |
– | | Selling the debt on the secondary market |
– | | Considering other legal action available to recover what we are owed from debtors and guarantors. |
If there is a shortfall, we write it off against the impairment loss allowance held, once the sale has gone through. In certain very rare instances we may act as mortgagee in possession of assets held as collateral againstnon-performing commercial lending. In such cases the assets are carried on our balance sheet and are classified according to our accounting policies.
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.
We assess our impairment 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. |
OTHER SEGMENTS – CREDIT RISK REVIEW
2017 compared to 2016 (unaudited)
Corporate lending growth has been impacted by uncertainty in the UK economy in relation to the UK’s future relationship with the EU. UK businesses face ongoing uncertainty over future trade arrangements, and how the transition to these new rules will be managed. This has impacted business investment, although this is still forecasted to grow. In 2017, there were signs certain vulnerable sectors could be impacted in the context of the changing macro-economic environment.
Committed exposures
Credit risk arises on asset balances andoff-balance sheet transactions such as credit facilities or guarantees. As a result, committed exposures are typically higher than asset balances. However, committed exposures can be smaller than the asset balances on the balance sheet due to netting. We show Sovereigns and Supranationals net of short positions and Large Corporate reverse repurchase agreement exposures are shown net of repurchase agreement liabilities and include OTC derivatives. In addition, the derivative and other treasury product exposures (which are classified as ‘Financial Institutions’) shown are also typically lower than the asset balances. This is because we show our overall risk exposure which takes into account our procedures to mitigate credit risk. The asset balances on our balance sheet only reflect the more restrictive netting permitted by IAS 32.
Rating distribution
These tables show our credit risk exposure according to our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.
Underlying credit quality has remained stable within our Commercial Banking, Global Corporate Banking and Corporate Centre portfolios. In the second half of 2017 a number of enhancements were made to better harmonise treatments across our reporting classifications. This has resulted in some migrations as shown in the tables below, but on a like for like basis, no deterioration in credit quality has been observed. An exception to this resides in the Large Corporate portfolio where the increase in band1-3 is driven by 3 new NPL cases in 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Santander UK risk grade | | | | | 2017 | | 9 £m | | | 8 £m | | | 7 £m | | | 6 £m | | | 5 £m | | | 4 £m | | | 3 to 1
£m | | | Other(1)
£m | | | Total £m | | Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | – | | | | – | | | | 259 | | | | 2,183 | | | | 5,402 | | | | 3,574 | | | | 998 | | | | 214 | | | | 12,630 | | Commercial Real Estate | | | – | | | | – | | | | – | | | | 395 | | | | 6,135 | | | | 2,014 | | | | 60 | | | | 2 | | | | 8,606 | | Social Housing | | | 499 | | | | 2,600 | | | | 171 | | | | – | | | | – | | | | – | | | | 4 | | | | – | | | | 3,274 | | | | | | 499 | | | | 2,600 | | | | 430 | | | | 2,578 | | | | 11,537 | | | | 5,588 | | | | 1,062 | | | | 216 | | | | 24,510 | | Global Corporate Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 590 | | | | 3,321 | | | | 444 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4,355 | | Large Corporate | | | 260 | | | | 2,979 | | | | 8,391 | | | | 8,879 | | | | 573 | | | | 2 | | | | 355 | | | | – | | | | 21,439 | | Financial Institutions | | | 2,362 | | | | 1,463 | | | | 2,494 | | | | 33 | | | | 103 | | | | – | | | | – | | | | – | | | | 6,455 | | | | | | 3,212 | | | | 7,763 | | | | 11,329 | | | | 8,912 | | | | 676 | | | | 2 | | | | 355 | | | | – | | | | 32,249 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 44,477 | | | | 18 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 44,495 | | Structured Products | | | 2,487 | | | | 1,560 | | | | 300 | | | | 32 | | | | – | | | | – | | | | – | | | | – | | | | 4,379 | | Derivatives | | | – | | | | 212 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 212 | | Legacy Portfolios inrun-off(2) | | | – | | | | – | | | | 1 | | | | 359 | | | | 104 | | | | 124 | | | | 37 | | | | 400 | | | | 1,025 | | Social Housing | | | 1,841 | | | | 3,641 | | | | 451 | | | | 43 | | | | – | | | | – | | | | – | | | | – | | | | 5,976 | | | | | | 48,805 | | | | 5,431 | | | | 752 | | | | 434 | | | | 104 | | | | 124 | | | | 37 | | | | 400 | | | | 56,087 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 22 | | | | 112 | | | | 344 | | | | 2,826 | | | | 4,219 | | | | 3,142 | | | | 533 | | | | 130 | | | | 11,328 | | Commercial Real Estate | | | – | | | | – | | | | 302 | | | | 5,852 | | | | 2,754 | | | | 498 | | | | 118 | | | | 1 | | | | 9,525 | | Social Housing | | | 1,355 | | | | 1,499 | | | | 215 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 3,069 | | | | | | 1,377 | | | | 1,611 | | | | 861 | | | | 8,678 | | | | 6,973 | | | | 3,640 | | | | 651 | | | | 131 | | | | 23,922 | | Global Corporate Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 1,025 | | | | 3,111 | | | | 977 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 5,113 | | Large Corporate | | | 204 | | | | 2,028 | | | | 5,347 | | | | 9,493 | | | | 4,296 | | | | 56 | | | | 75 | | | | 1 | | | | 21,500 | | Financial Institutions | | | 439 | | | | 3,877 | | | | 2,913 | | | | 597 | | | | 49 | | | | – | | | | – | | | | – | | | | 7,875 | | | | | | 1,668 | | | | 9,016 | | | | 9,237 | | | | 10,090 | | | | 4,345 | | | | 56 | | | | 75 | | | | 1 | | | | 34,488 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 34,474 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 34,474 | | Structured Products | | | 1,597 | | | | 1,755 | | | | 654 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4,006 | | Derivatives | | | – | | | | 175 | | | | 312 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 487 | | Legacy Portfolios inrun-off(2) | | | 2 | | | | 1 | | | | 5 | | | | 540 | | | | 215 | | | | 69 | | | | 63 | | | | 480 | | | | 1,375 | | Social Housing | | | 3,313 | | | | 2,707 | | | | 548 | | | | 43 | | | | – | | | | – | | | | – | | | | – | | | | 6,611 | | | | | | 39,386 | | | | 4,638 | | | | 1,519 | | | | 583 | | | | 215 | | | | 69 | | | | 63 | | | | 480 | | | | 46,953 | |
(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 2017 on Form 20-F | Risk review | | |
Geographical distributionDerivatives
| | We typically classify geographical location according tomanage the counterparty’s country of domicile unless there is a full risk transfer guaranteeon this portfolio in place,the same way as for the derivatives in which case we use the guarantor’s country of domicile instead.CIB. | | | | | | | | | | | | | | | | | | | | | 2017 | | UK £m | | | Europe £m | | | US £m | | | Rest of World £m | | | Total £m | | Commercial Banking | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 12,513 | | | | 116 | | | | 1 | | | | – | | | | 12,630 | | Commercial Real Estate | | | 8,606 | | | | – | | | | – | | | | – | | | | 8,606 | | Social Housing | | | 3,274 | | | | – | | | | – | | | | – | | | | 3,274 | | | | | | 24,393 | | | | 116 | | | | 1 | | | | – | | | | 24,510 | | Global Corporate Banking | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | – | | | | 1,032 | | | | 1 | | | | 3,322 | | | | 4,355 | | Large Corporate | | | 17,430 | | | | 3,699 | | | | 111 | | | | 199 | | | | 21,439 | | Financial Institutions | | | 3,102 | | | | 2,121 | | | | 614 | | | | 618 | | | | 6,455 | | | | | | 20,532 | | | | 6,852 | | | | 726 | | | | 4,139 | | | | 32,249 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 35,659 | | | | 1,514 | | | | 6,091 | | | | 1,231 | | | | 44,495 | | Structured Products | | | 2,086 | | | | 1,217 | | | | – | | | | 1,076 | | | | 4,379 | | Derivatives | | | – | | | | 63 | | | | 149 | | | | – | | | | 212 | | Legacy Portfolios inrun-off | | | 909 | | | | – | | | | – | | | | 116 | | | | 1,025 | | Social Housing | | | 5,976 | | | | – | | | | – | | | | – | | | | 5,976 | | | | | | 44,630 | | | | 2,794 | | | | 6,240 | | | | 2,423 | | | | 56,087 | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | Commercial Banking | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 11,188 | | | | 83 | | | | 57 | | | | – | | | | 11,328 | | Commercial Real Estate | | | 9,525 | | | | – | | | | – | | | | – | | | | 9,525 | | Social Housing | | | 3,069 | | | | – | | | | – | | | | – | | | | 3,069 | | | | | | 23,782 | | | | 83 | | | | 57 | | | | – | | | | 23,922 | | Global Corporate Banking | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 332 | | | | 1,643 | | | | – | | | | 3,138 | | | | 5,113 | | Large Corporate | | | 17,793 | | | | 3,356 | | | | 73 | | | | 278 | | | | 21,500 | | Financial Institutions | | | 4,282 | | | | 1,629 | | | | 1,175 | | | | 789 | | | | 7,875 | | | | | | 22,407 | | | | 6,628 | | | | 1,248 | | | | 4,205 | | | | 34,488 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 26,693 | | | | 1,569 | | | | 4,770 | | | | 1,442 | | | | 34,474 | | Structured Products | | | 1,352 | | | | 1,529 | | | | – | | | | 1,125 | | | | 4,006 | | Derivatives | | | 312 | | | | 12 | | | | 163 | | | | – | | | | 487 | | Legacy Portfolios inrun-off | | | 1,205 | | | | – | | | | – | | | | 170 | | | | 1,375 | | Social Housing | | | 6,611 | | | | – | | | | – | | | | – | | | | 6,611 | | | | | | 36,173 | | | | 3,110 | | | | 4,933 | | | | 2,737 | | | | 46,953 | |
| 2017 compared to 2016(unaudited)
Commercial BankingCrown Dependencies
In 2017, we saw solid lending growth to trading business customers, offset by active management of our Commercial Real Estate portfolio. Committed exposures increased, despite the uncertain operating environment after the UK’s decision to leave the EU and the resulting slowdown in SME activity.
| | – | | Our SME and mid corporate exposures increased by 12% as growth in the Mid Corporate portfolio more than offset a reduction in SME exposures. |
– | | Our Commercial Real Estate portfolio decreased by 10% as we continue to actively manage exposures in line with our proactive risk management practices and strive to maintain portfolio quality. |
– | | Our Social Housing portfolio increased by 7%, driven by refinancing of longer-dated loans, previously managed in Corporate Centre, onto shorter maturities and current market terms. |
Global Corporate Banking
Our committed exposures decreased by 7% mainly due to decreases in our Sovereign and Supranational and Financial Institutions portfolios.
– | | Sovereign and Supranational exposures decreased by 15%. The portfolio profile stayed mainly short-term, reflecting the purpose of the holdings. |
– | | Large Corporate exposures decreased slightly. Credit quality was relatively stable overall, except for the impairment of three customers that moved tonon-performance, including Carillion plc. |
– | | Financial Institutions exposures decreased by 18%, largely driven by the transfer of prohibited activity to Banco Santander as part of ring-fencing. |
Corporate Centre
In 2017, committed exposures increased by 19% mainly driven by our Sovereign and Supranational portfolio.
– | | Sovereign and Supranational exposures are mainly cash at central banks and highly-rated liquid assets we hold as part of normal liquid asset portfolio management. The increase of 29% in the overall exposure was driven by an increase in deposits in the UK. |
– | | Legacy Portfolios inrun-off reduced by 24% in 2017. The disposal of all aviation deals withinWe managed the risk on this portfolio is now complete. |
– | | Social Housing exposures reduced in 2017 to £6.0bn (2016: £6.6bn) as we continue to refinance longer-dated loans onto shorter maturities and current market terms that are then managed in Commercial Banking. |
Credit risk mitigation
Commercial Banking
As discussed above, we only hold collateral on Commercial Real Estate loans within our Commercial Banking portfolio. Impaired loans in the Commercial Real Estatesame way as for mortgages in Retail Banking. This portfolio reduced from 2016, resulting in a decrease in the collateral we held against impaired loans. At 31 December 2017, the collateral we held against impaired loans was 15% (2016: 42%) of the carrying amount of the impaired loan balances.
Global Corporate Banking
At 31 December 2017, the top 20 clients with derivative exposure made up 65% (2016: 69%) of our total derivative exposure, all of which were banks and CCPs. The weighted-average credit rating was 7.2 (2016: 7.3). At 31 December 2017 and 2016, we held no collateral against impaired loans in the Large Corporate portfolio.
Corporate Centre
We reduce credit risk in derivatives with netting agreements, collateralisation and the use of CCPs. At 31 December 2017, we had cash collateral of £348m (2016: £457m) held against our Legacy Portfolios inrun-off. The collateral we held against impaired loans was 100% (2016: 100%) of the carrying amount of the impaired loan balances.
Credit performance
We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in ‘Monitoring’ in the ‘Credit risk management’ section). The table below shows the exposures we monitor, and those we classify asnon-performing by portfolio at 31 December 2017 and 2016.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Committed exposure | | | | | | | | | | | Watchlist | | | | | | | | | Observed | | 2017 | | Fully
performing
£m | | | Enhanced
monitoring
£m | | | Proactive management £m | | | Non-
performing
exposure(1)
£m | | | Total(2) £m | | | impairment loss allowances £m | | Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 11,185 | | | | 815 | | | | 296 | | | | 334 | | | | 12,630 | | | | 128 | | Commercial Real Estate | | | 8,254 | | | | 160 | | | | 133 | | | | 59 | | | | 8,606 | | | | 27 | | Social Housing | | | 3,274 | | | | – | | | | – | | | | – | | | | 3,274 | | | | – | | | | | | 22,713 | | | | 975 | | | | 429 | | | | 393 | | | | 24,510 | | | | 155 | | Global Corporate Banking | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 4,355 | | | | – | | | | – | | | | – | | | | 4,355 | | | | – | | Large Corporate | | | 20,757 | | | | 284 | | | | 8 | | | | 390 | | | | 21,439 | | | | 236 | | Financial Institutions | | | 6,354 | | | | 1 | | | | 100 | | | | – | | | | 6,455 | | | | – | | | | | | 31,466 | | | | 285 | | | | 108 | | | | 390 | �� | | | 32,249 | | | | 236 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 44,495 | | | | – | | | | – | | | | – | | | | 44,495 | | | | – | | Structured Products | | | 4,379 | | | | – | | | | – | | | | – | | | | 4,379 | | | | – | | Derivatives | | | 212 | | | | – | | | | – | | | | – | | | | 212 | | | | – | | Legacy Portfolios inrun-off | | | 977 | | | | 22 | | | | 6 | | | | 20 | | | | 1,025 | | | | 6 | | Social Housing | | | 5,972 | | | | 4 | | | | – | | | | – | | | | 5,976 | | | | – | | | | | | 56,035 | | | | 26 | | | | 6 | | | | 20 | | | | 56,087 | | | | 6 | | | Total observed impairment loss allowances | | | | | | | | | | | | | | | | | | | | | | | 397 | | Allowance for IBNO(3) | | | | | | | | | | | | | | | | | | | | | | | 52 | | | Total impairment loss allowances | | | | | | | | | | | | | | | | | | | | | | | 449 | |
(1) | Non-performing exposure includes committed facilities and derivative exposures. So it can exceed the NPLs in the table on page 96 which only include drawn balances. |
(2) | Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Monitoring‘ section. |
(3) | Allowance for IBNO losses as described in Note 1 to the Consolidated Financial Statements. |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Committed exposure | | | | | | | | | | | Watchlist | | | | | | | | | Observed | | 2016 | | Fully
performing
£m | | | Enhanced
monitoring
£m | | | Proactive management £m | | | Non- performing exposure(1)
£m | | | Total(2) £m | | | impairment loss allowances £m | | Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 9,744 | | | | 892 | | | | 331 | | | | 361 | | | | 11,328 | | | | 139 | | Commercial Real Estate | | | 9,136 | | | | 161 | | | | 49 | | | | 179 | | | | 9,525 | | | | 44 | | Social Housing | | | 2,930 | | | | 139 | | | | – | | | | – | | | | 3,069 | | | | – | | | | | | 21,810 | | | | 1,192 | | | | 380 | | | | 540 | | | | 23,922 | | | | 183 | | Global Corporate Banking | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 5,113 | | | | – | | | | – | | | | – | | | | 5,113 | | | | – | | Large Corporate | | | 20,702 | | | | 659 | | | | 70 | | | | 69 | | | | 21,500 | | | | 33 | | Financial Institutions | | | 7,671 | | | | 202 | | | | 2 | | | | – | | | | 7,875 | | | | – | | | | | | 33,486 | | | | 861 | | | | 72 | | | | 69 | | | | 34,488 | | | | 33 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 34,474 | | | | – | | | | – | | | | – | | | | 34,474 | | | | – | | Structured Products | | | 4,006 | | | | – | | | | – | | | | – | | | | 4,006 | | | | – | | Derivatives | | | 487 | | | | – | | | | – | | | | – | | | | 487 | | | | – | | Legacy Portfolios inrun-off | | | 1,273 | | | | 20 | | | | 9 | | | | 73 | | | | 1,375 | | | | 31 | | Social Housing | | | 6,447 | | | | 164 | | | | – | | | | – | | | | 6,611 | | | | – | | | | | | 46,687 | | | | 184 | | | | 9 | | | | 73 | | | | 46,953 | | | | 31 | | Total observed impairment loss allowances | | | | | | | | | | | | | | | | | | | | | | | 247 | | Allowance for IBNO(3) | | | | | | | | | | | | | | | | | | | | | | | 91 | | Total impairment loss allowances | | | | | | | | | | | | | | | | | | | | | | | 338 | |
(1) | Non-performing exposure includes committed facilities and derivative exposures. So it can exceed the NPLs in the table below which only include drawn balances. |
(2) | Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Monitoring‘ section. |
(3) | Allowance for IBNO losses as described in Note 1 to the Consolidated Financial Statements. |
2017 compared to 2016(unaudited)
Commercial Banking
Our SME and mid corporate portfolio improved across all categories as a result of a number of successful exits and the write off of somepre-2009 vintages. In our Commercial Real Estate portfolio,non-performing exposures (NPEs) reduced by 67% to £59m (2016: £179m) driven by a number of successful exits. A single legacy case, where the collateral exceeded the value of the loan, was downgraded to NPE in 2016. The asset was sold and the loan repaid in full in 2017.
Global Corporate Banking
Large Corporate exposures subject to enhanced monitoring decreased by 57% driven by the return of a number of cases to performing as a result of improved trading. However, NPEs increased to £390m (2016: £69m) due to the impairment of three customers that moved tonon-performance, including Carillion plc. Financial Institutions exposures subject to enhanced monitoring decreased to £1m (2016: £202m) driven by two cases returning to performing status.
Corporate Centre
In our Legacy Portfolios inrun-off portfolio, exposures subject to enhanced monitoring and proactive management remained stable. NPE reduced to £20m (2016: £73m) driven by sales of aviation and shipping assets. In our Social Housing portfolio, exposures subject to enhanced monitoring decreased to £4m (2016: £164m), two large cases that were added in 2016 due to governance issues returned to performing in Q2 2017.
Non-performing loans and advances(1) (2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | | | | Commercial Banking £m | | | Global
Corporate
Banking
£m | | | Corporate Centre £m | | | | | Commercial
Banking £m | | | Global
Corporate
Banking
£m | | | Corporate Centre £m | | Loans and advances to customers of which:(2) | | | 19,391 | | | | 6,037 | | | | 5,905 | | | | | | 19,381 | | | | 5,659 | | | | 6,478 | | NPLs(3) | | | 383 | | | | 340 | | | | 20 | | | | | | 518 | | | | 63 | | | | 73 | | Impairment loss allowances | | | 195 | | | | 236 | | | | 18 | | | | | | 220 | | | | 57 | | | | 61 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | % | | | % | | | | | % | | | % | | | % | | NPL ratio(4) | | | 1.98 | | | | 5.63 | | | | 0.34 | | | | | | 2.67 | | | | 1.11 | | | | 1.12 | | Coverage ratio(5) | | | 51 | | | | 69 | | | | 90 | | | | | | 42 | | | | 90 | | | | 84 | |
(1) | We define NPLs in the ‘Credit risk management’ section. |
(2) | Includes Social Housing loans and finance leases. |
(3) | All NPLs continue accruing interest. |
(4) | NPLs as a percentage of loans and advances to customers. |
(5) | | Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio can exceed 100%. |
NPL movements in 2017
We analyse NPL movements in 2017 below. ‘Entries’ are loans which we have classified as NPLs in 2017. ‘Exits’ are the part of loans that has been repaid (in full or in part), and 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 change the NPL status.
| | | | | | | | | | | | | | | | Drawn balances | | | | | Commercial Banking £m | | | Global Corporate Banking £m | | | Corporate Centre £m | | At 1 January 2017 | | | 518 | | | | 63 | | | | 73 | | Entries | | | 194 | | | | 328 | | | | 18 | | Exits | | | (294 | ) | | | (51 | ) | | | (48) | | Write offs | | | (35 | ) | | | – | | | | (23) | | At 31 December 2017 | | | 383 | | | | 340 | | | | 20 | |
2017 compared to 2016(unaudited)
Commercial Banking
The Commercial Banking NPL ratio improved to 1.98%, primarily due to the full repayment of three impaired loans and thewrite-off of somepre-2009 vintages in Q1 2017.
Global Corporate Banking
The Global Corporate Banking NPL ratio of 5.63% was severely impacted by the Carillion plc loans that moved tonon-performance in 2017. Impairment losses on loans and advances increased to £236m, primarily relating to Carillion plc exposures.
Corporate Centre
The Corporate Centre NPL ratio decreased to 0.34%, reflecting management ofnon-core corporate and legacy portfolios.
Forbearance
We only make forbearance arrangements for lending to customers. The balances at 31 December 2017 and 2016, analysed by their payment status at theyear-end and the forbearance we applied, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | | | | Commercial
Banking £m | | | Global
Corporate
Banking
£m | | | Corporate
Centre(2)
£m | | | | | Commercial
Banking £m | | | Global
Corporate
Banking
£m | | | Corporate Centre(2) £m | | Stock(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | – Term extension | | | 136 | | | | 55 | | | | – | | | | | | 168 | | | | 11 | | | | 1 | | – Interest-only | | | 152 | | | | – | | | | 14 | | | | | | 158 | | | | – | | | | 20 | | – Other payment rescheduling | | | 127 | | | | 299 | | | | 13 | | | | | | 208 | | | | 10 | | | | 16 | | | | | | 415 | | | | 354 | | | | 27 | | | | | | 534 | | | | 21 | | | | 37 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | – Non-performing | | | 273 | | | | 347 | | | | 11 | | | | | | 344 | | | | 10 | | | | 15 | | – Performing | | | 142 | | | | 7 | | | | 16 | | | | | | 190 | | | | 11 | | | | 22 | | | | | | 415 | | | | 354 | | | | 27 | | | | | | 534 | | | | 21 | | | | 37 | | Proportion of portfolio | | | 1.7% | | | | 1.1% | | | | 2.6% | | | | | | 2.2% | | | | 0.1% | | | | 2.7% | |
(1) | We base forbearance type on the first forbearance we applied. Tables only show accounts open at theyear-end. Amounts are drawn balances and include off balance sheet balances. |
(2) | Exposure within the Legacy Portfolios inrun-off only. |
2017 compared to 2016(unaudited)
In Commercial Banking, the cumulative forbearance stock reduced by 22% to £415m at 31 December 2017 (2016: £534m). This decrease was mainly due to the successful resolution of NPL cases, and performing cases exiting forbearance according to defined criteria. This impact was offset by an increase in the stock position of forbearance due to the inflows in the year in Global Corporate Banking, where the Carillion plc loans that moved tonon-performance in 2017 had a severe impact. At 31 December 2017, there were five forborne cases (2016: two cases) in Global Corporate Banking.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
PORTFOLIOS OF PARTICULAR INTEREST
Introduction(unaudited)
Some types of lending have higher risk and others stand out for different reasons. In the section below we provide further details of our Commercial Real Estate and Social Housing portfolios.
| | | Product
| | Description
| Commercial Real Estate | | The Commercial Real Estate market experienced a challenging environment in the immediate years after the last financial crisis and has previously seen regular cyclical downturns. In addition to the disclosures on the Commercial Real Estate portfolio earlier in this section, we include below more detail on credit management, credit performance, and LTV and sector analysis. | Social Housing | | The Social Housing sector in the UK is critical in ensuring the supply of affordable housing across the country. Housing associations now play a prominent role in addressing the UK’s shortage of housing stock across all tenures. The sector benefits from azero-loss default history aided by its regulated nature. We hold a significant position in this market. Continued investment in this sector is seen as a direct way to support the UK and, indirectly, the wider community initiatives undertaken by our customers.2018.
|
3. Monitoring We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our ERCC 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. Commercial Real Estate | | Credit performance
We take a first legal charge on commercial property as collateral. The table below showsloan is subject to strict criteria, including the main Commercial Real Estate credit performance metrics at 31 December 2017property condition, age and 2016.location, tenant quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before agreeing the loan, we visit the property and get an independent professional valuation which assesses the property, the tenant and future demand (such as comparing market rent to current rent). Loan agreements typically allow us to get revaluations every two to three years, or more often if it is likely covenants may be breached, and to view the property each year. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Customer
loans(1)
£bn | | | NPLs(2)(3)
£m | | | NPL ratio(4)
% | | | NPL coverage(5)
% | | | Gross write-offs
£m | | | Impairment loss allowances £m | | 2017 | | | 8.1 | | | | 69 | | | | 0.85 | | | | 78 | | | | 11 | | | | 54 | | 2016 | | | 9.0 | | | | 180 | | | | 2.00 | | | | 32 | | | | 1 | | | | 58 | |
(1) | Comprises commercial real estate drawn loans in the business banking portfolio of our Retail Banking segment of £257m (2016: £365m) and in the Commercial Real Estate portfolio of our Commercial Banking segment of £7,886m (2016: £8,678m). |
(2) | We define NPLs in the ‘Credit risk management’ section. |
(3) | All NPLs continue accruing interest. |
(4) | NPLs as a percentage of customer loans. |
(5) | Impairment loss allowances as a percentage of NPLs. Impairment loss allowances relate to early arrears and performing assets (i.e. the IBNO provision) as well as NPLs, so the ratio can exceed 100%. |
Commercial Real Estate loans written before 2009 totalled £380m (2016: £543m). Thepre-2009 loans were written on market terms which, compared with more recent times and following a significant tightening in our lending criteria, included higher original LTVs, lower interest coverage and exposure to development risk.
LTV analysis
This table shows the LTV distribution for our Commercial Real Estate loan stock and NPL stock (based on the drawn balance and our latest estimate of the property’s current value) of the portfolio at 31 December 2017 and 2016.
| | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | Loans and advances to customers | | £m | | | % | | | | | £m | | | % | | <=50% | | | 4,146 | | | | 51 | | | | | | 3,879 | | | | 44 | | >50-70% | | | 3,035 | | | | 37 | | | | | | 4,007 | | | | 44 | | >70-100% | | | 36 | | | | – | | | | | | 194 | | | | 2 | | >100% i.e. negative equity | | | 52 | | | | 1 | | | | | | 88 | | | | 1 | | Standardised portfolio(1) | | | 629 | | | | 8 | | | | | | 652 | | | | 7 | | Total with collateral | | | 7,898 | | | | 97 | | | | | | 8,820 | | | | 98 | | Development loans | | | 246 | | | | 3 | | | | | | 223 | | | | 2 | | | | | | 8,144 | | | | 100 | | | | | | 9,043 | | | | 100 | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | NPLs | | £m | | | % | | | | | £m | | | % | | <=50% | | | 6 | | | | 9 | | | | | | 7 | | | | 4 | | >50-70% | | | 2 | | | | 3 | | | | | | 2 | | | | 1 | | >70-100% | | | 1 | | | | 1 | | | | | | 74 | | | | 41 | | >100% i.e. negative equity | | | 48 | | | | 70 | | | | | | 74 | | | | 41 | | Standardised portfolio(1) | | | 12 | | | | 17 | | | | | | 5 | | | | 3 | | Total with collateral | | | 69 | | | | 100 | | | | | | 162 | | | | 90 | | Development loans | | | – | | | | – | | | | | | 18 | | | | 10 | | | | | | 69 | | | | 100 | | | | | | 180 | | | | 100 | |
(1) | Consists of smaller value transactions, mainly commercial mortgages. |
Sector analysis
The table below shows the sector analysis of the portfolio at 31 December 2017 and 2016.
| | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | Sector | | £m | | | % | | | £m | | | % | | Office | | | 2,181 | | | | 27 | | | | 2,359 | | | | 26 | | Retail | | | 1,389 | | | | 17 | | | | 1,739 | | | | 19 | | Industrial | | | 1,176 | | | | 14 | | | | 1,274 | | | | 14 | | Residential | | | 1,001 | | | | 12 | | | | 1,016 | | | | 11 | | Mixed use | | | 1,146 | | | | 14 | | | | 1,184 | | | | 13 | | Student accommodation | | | 133 | | | | 2 | | | | 224 | | | | 3 | | Hotels and leisure | | | 304 | | | | 4 | | | | 389 | | | | 5 | | Other | | | 185 | | | | 2 | | | | 206 | | | | 2 | | Standardised portfolio(1) | | | 629 | | | | 8 | | | | 652 | | | | 7 | | | | | | 8,144 | | | | 100 | | | | 9,043 | | | | 100 | |
(1) | | Consists of smaller value transactions, mainly commercial mortgages. |
The Commercial Real Estate portfolio of £8,144m (2016: £9,043m) is well diversified across sectors, with no significant regional or single name concentration, representing 30% (2016: 33%) of our total lending to corporates and 4% (2016: 4%) of total customer loans.
At 31 December 2017, the LTV profile of the portfolio remained conservative with £7,181m (2016: £7,886m) of the non-standardised portfolio assets at or below 70% LTV.
Loans with development risk were only 3% (2016: 2%) of the total Commercial Real Estate portfolio. Development lending is typically on a non-speculative basis with significant pre-lets in place and/or pre-sales in place.
The average loan balance at 31 December 2017 was £4.7m (2016: £4.8m) and the top ten exposures made up 10% (2016: 8%) of the total Commercial Real Estate portfolio exposure.
Refinancing risk
As part of our annual review process, for Commercial Real Estate loans approaching maturity, we look at the prospects of refinancing the loan on current market terms and applicable credit policy. Where this seems unlikely we put the case on our Watchlist.
At 31 December 2017, Commercial Real Estate loans of £1,090m (2016: £1,408m) were due to mature within 12 months. Of these, £59m, i.e. 5% (2016: £161m, i.e. 11%) had an LTV ratio higher than is acceptable under our current credit policy. At 31 December 2017, £53m of this (2016: £149m) had been put on our Watchlist or recorded as NPL and had an impairment loss allowance of £27m (2016: £31m).
2017 compared to 2016(unaudited)
In our Commercial Real Estate portfolio, customer loans decreased by 10% as we actively manage exposures to certain segments in line with our proactive risk management practices. In 2017, we maintained a prudent lending approach, with no new business written above 70% LTV (2016: nil) and 91% of new business written at or below 60% LTV (2016: 95%). The weighted average LTV on the CRE portfolio was 48% (2016: 50%) and the average loan size was £4.7m (2016: £4.8m).
Exposures subject to enhanced monitoring remained stable at £160m (2016: £161m). Exposures subject to proactive management increased by 171% to £133m (2016: £49m) largely driven by the downgrade of one customer in Q4 2017 following protracted lease re-negotiations. Non-performing exposures reduced by 67% to £59m (2016: £179m) driven by a number of successful exits. Our non-performing loan ratio was 0.85% (2016: 2.00%). A single legacy case, where the collateral exceeded the value of the loan, was downgraded to NPL in 2016. The asset was sold and the loan repaid in full in 2017.
Social Housing | | At 31 December 2017We take a first legal charge on portfolios of residential real estate owned and 2016,let by UK Housing Associations as collateral, in most cases. We revalue 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. On average, the loan balance is 25% to 50% of the implied market value, using our totalLGD methodology. We have not had a default, loss or repossession on Social Housing. Older Social Housing exposureloans that do not fit our current business strategy are managed and reported in Commercial Banking and Corporate Centre was:Centre.
| | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | | | Drawn £m | | | Total
£m | | | Drawn £m | | | Total
£m | | Commercial Banking | | | 2,118 | | | | 3,274 | | | | 1,897 | | | | 3,069 | | Corporate Centre | | | 5,060 | | | | 5,976 | | | | 5,442 | | | | 6,611 | | | | | | 7,178 | | | | 9,250 | | | | 7,339 | | | | 9,680 | |
| | Corporate & Investment Banking:
| | | Annual Report 2017 on Form 20-F | Risk review | | |
| | | | 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. We also have 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. Market riskNetting
| | | Overview(unaudited)
| | Key metrics(unaudited) | Market risk comprises trading market risk and banking market risk.
Trading market risk is the risk of losses in trading positions, both on and off-balance sheet, due to movements in market prices or other external factors.
Banking market risk is the risk of loss of income or economic value due to changes to interest rates in the banking book or to changes in exchange rates, where such changes would affect our net worth through an adjustment to revenues, assets, liabilities and off-balance sheet exposures in the banking book.
In this section, we set out which of our assets and liabilities are exposed to trading and banking market risk. Then we explain how we manage these risks and discuss our key market risk metrics.
| | Net Interest Margin (NIM) sensitivity to +50bps decreased to £212m and to -50bps increased to £(125)m (2016: £240m and £(82)m)
Economic Value of Equity (EVE) sensitivity to +50bps increased to £95m and to -50bps increased to £(213)m (2016: £54m and £(30)m)
Available-for-sale securities three month stressed loss decreased to £193m (2016: £280m)
|
BALANCE SHEET ALLOCATION BY MARKET RISK CLASSIFICATION
– We analyse ouruse netting agreements where they have legal force – mainly in the UK, the rest of Europe and the US. This means 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 arrangements often do not mean we can offset assets and liabilities exposed tofor accounting purposes, as transactions are usually settled on a gross basis. In line with market risk between tradingpractice, we use standard legal agreements. For derivatives, we use ISDA Master Agreements; for repos and banking market risk as follows:reverse repos, we use Global Master Repurchase Agreements; and for stock borrowing/lending and other securities financing, we use Global Master Securities Lending Agreements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | | | | | 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 | | | – | | | | 32,771 | | | | 32,771 | | | | – | | | | 17,107 | | | | 17,107 | | | FX, Interest rate | Trading assets | | | 30,555 | | | | – | | | | 30,555 | | | | 30,035 | | | | – | | | | 30,035 | | | Equity, FX, interest rate | Derivative financial instruments | | | 14,744 | | | | 5,198 | | | | 19,942 | | | | 18,101 | | | | 7,370 | | | | 25,471 | | | Equity, FX, interest rate | | Financial assets designated at fair value | | | – | | | | 2,096 | | | | 2,096 | | | | 516 | | | | 1,624 | | | | 2,140 | | | Interest rate, credit spread | Loans and advances to banks | | | – | | | | 5,927 | | | | 5,927 | | | | – | | | | 4,348 | | | | 4,348 | | | FX, interest rate | | Loans and advances to customers | | | – | | | | 199,490 | | | | 199,490 | | | | – | | | | 199,738 | | | | 199,738 | | | Interest rate | Financial investments | | | – | | | | 17,611 | | | | 17,611 | | | | – | | | | 17,466 | | | | 17,466 | | | FX, interest rate, inflation, credit spread | | Macro hedge of interest rate risk(1) | | | – | | | | 833 | | | | 833 | | | | – | | | | 1,098 | | | | 1,098 | | | Interest rate | Retirement benefit assets | | | – | | | | 449 | | | | 449 | | | | – | | | | 398 | | | | 398 | | | Equity, FX, interest rate, inflation, credit spread | | | | | 45,299 | | | | 264,375 | | | | 309,674 | | | | 48,652 | | | | 249,149 | | | | 297,801 | | | | Liabilities subject to market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | – | | | | 13,784 | | | | 13,784 | | | | – | | | | 9,769 | | | | 9,769 | | | FX, interest rate | Deposits by customers | | | – | | | | 183,648 | | | | 183,648 | | | | – | | | | 177,172 | | | | 177,172 | | | Interest rate | Trading liabilities | | | 31,109 | | | | – | | | | 31,109 | | | | 15,560 | | | | – | | | | 15,560 | | | Equity, FX, interest rate | Derivative financial instruments | | | 16,891 | | | | 722 | | | | 17,613 | | | | 20,018 | | | | 3,085 | | | | 23,103 | | | Equity, FX, interest rate | | Financial liabilities designated at fair value | | | 1,612 | | | | 703 | | | | 2,315 | | | | 1,665 | | | | 775 | | | | 2,440 | | | Interest rate, credit spread | Debt securities in issue | | | – | | | | 42,633 | | | | 42,633 | | | | – | | | | 50,346 | | | | 50,346 | | | FX, interest rate | Subordinated liabilities | | | – | | | | 3,793 | | | | 3,793 | | | | – | | | | 4,303 | | | | 4,303 | | | FX, interest rate | | Macro hedge of interest rate risk(2) | | | – | | | | – | | | | – | | | | – | | | | 350 | | | | 350 | | | Interest rate | Retirement benefit obligations | | | – | | | | 286 | | | | 286 | | | | – | | | | 262 | | | | 262 | | | Equity, FX, interest rate, inflation, credit spread | | | | | 49,612 | | | | 245,569 | | | | 295,181 | | | | 37,243 | | | | 246,062 | | | | 283,305 | | | |
(1) | This is included in Other assets of £2,511m (2016: £2,571m). |
(2) | This is included in Other liabilities of £2,730m (2016: £3,221m). |
Collateral – We classify assetsuse the Credit Support Annex with the ISDA Master Agreement. This gives us collateral for our net exposures. The collateral can be cash, securities or liabilities as trading market risk (in totalequities. 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. We revalue our exposures and collateral daily, adjusting the collateral to reflect deficits or justsurpluses. We have processes to control how we value and manage collateral, including documentation reviews and reporting. Collateral has to meet our‘eligible collateral, haircuts and margining’ policy which 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 part) as follows:the collateral if a client defaults. We have these controls for equities and debt securities. The collateral held for reverse repos 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. |
| | | | Annual Report 2018 | Risk review | | | Balance sheet classification | | Market risk classification | |
Corporate Centre: Trading assets and liabilities | | | 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. 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 the portfolios and we consider the structure and assets backing each individual security. | Social Housing | | We manage the risk on this portfolio in the same way as for the Social Housing portfolio in Corporate & Commercial Banking. | Legacy Portfolios inrun-off | | We often hold collateral through a first legal charge over the underlying asset or cash. We get independent third party valuations on fixed charge security like aircraft or ships 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. | Derivatives | | We manage the risk on this portfolio in the same way as for the derivatives in CIB. | Crown Dependencies | | We managed the risk on this portfolio in the same way as for mortgages in Retail Banking. This portfolio was sold in 2018. |
3. Monitoring We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our ERCC 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 We also use a Watchlist to help us identify potential problem debt early. Just because a customer is on our Watchlist does not mean they have defaulted. It just means that something has happened that has increased the probability of default. 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: We classify all our trading portfolios as trading market risk. This is mainly because we are planning to sell or repurchase them in the near future. For more, see Notes 11 and 23
| – | | Enhanced monitoring: for less urgent cases. If they are significant, we monitor them more often |
| – | | Proactive management: for more urgent or serious cases. We may take steps to restructure debt including extending the term, taking more collateral, agreeing a lower credit limit or seeking repayment of the loan through refinancing or other means. |
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 transfers to Stage 3 (previously, becomes NPL), we take it off the Watchlist and assess it for impairment individually. When a customer is included in enhanced monitoring, we do not consider that it has suffered a SICR for ECL purposes, so it remains in Stage 1 for purposes of our loss allowance calculations. When a customer is included in proactive management, we consider that it has suffered a SICR. This means we transfer it to Stage 2 and subject it to a lifetime ECL assessment to calculate the new loss allowance. We take into account any forbearance we offer. This includes whether any extra security or guarantees are available, the likelihood of more equity and the potential to enhance value through asset management. In Corporate & Commercial Banking, as part of our annual review process, for CRE loans approaching maturity, we look at the prospects of refinancing the loan on current market terms and applicable credit policy. Where this seems unlikely, we put the case on our Watchlist. In CIB and Corporate Centre, 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. 4. 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 transfers to Stage 3 (previously, to NPL), we transfer it to our Restructuring & Recoveries team. We aim 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. We use restructuring and 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 aim to identify warning signs early by monitoring customers’ financial and trading data, checking to make sure they are not breaching any covenants, and by having regular dialogue with them. We hold regular Watchlist meetings to agree a strategy for each portfolio. Our Restructuring & Recoveries team attend these meetings for CIB cases and a quarterly forum for other cases, and we may hand over more serious cases to them.
5. Debt recovery Consensual arrangements Where we cannot find a solution like any of the ones we describe above, we look for an exit. If we can, we aim to do this by agreeing with the borrower that they will sell some or all of their assets on a voluntary basis or agreeing 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 consider recovery options. This can be through: | – | | Enforcing over any collateral |
| – | | Selling the debt on the secondary market |
| – | | Considering other legal action available to recover what we are owed from debtors and guarantors. |
If there is a shortfall, we write it off against loss allowances we hold, once the sale has gone through. In certain very rare instances we may act as mortgagee in possession of assets held as collateral againstnon-performing commercial lending. In such cases the assets are carried on our balance sheet and are classified according to our accounting policies. Loan modifications Forbearance If a customer is having financial difficulty, we will work with them before they actually default to see if the difficulty can be addressed through forbearance. 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. 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 isup-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 customer’s 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 interestroll-up. In rare cases, we agree to forgive or reduce part of the debt. |
Other forms of debt management When customers are in financial difficulty 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 on the use of any 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 new or extra collateral in return for revised financing 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. |
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. We assess our 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 2018 | Risk review | | |
OTHER BUSINESS SEGMENTS – CREDIT RISK REVIEW Movement in total exposures and the corresponding ECL The following tables show changes in total exposures and ECL in the year. The footnotes to the Santander UK group level table on page 72 also apply to these tables. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non–credit impaired | | | Credit impaired | | | | | | | | Stage 1
Subject to 12–month ECL | | | Stage 2
Subject to lifetime ECL | | | Stage 3 Subject to lifetime ECL | | | Total | | | Corporate & Commercial Banking | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | | Exposures(1) £m | | | ECL £m | | At 1 January 2018 | | | 22,417 | | | | 43 | | | | 866 | | | | 33 | | | | 388 | | | | 173 | | | | 23,671 | | | | 249 | | Change in economic scenarios(2) | | | – | | | | 5 | | | | – | | | | (3 | ) | | | – | | | | – | | | | – | | | | 2 | | Transfer to lifetime ECL (not–credit impaired)(3) | | | (670 | ) | | | (3 | ) | | | 670 | | | | 3 | | | | – | | | | – | | | | – | | | | – | | Transfer to credit impaired(3) | | | (41 | ) | | | – | | | | (31 | ) | | | (1 | ) | | | 72 | | | | 1 | | | | – | | | | – | | Transfer to 12–month ECL(3) | | | 200 | | | | 8 | | | | (200 | ) | | | (8 | ) | | | – | | | | – | | | | – | | | | – | | Transfer from credit impaired(3) | | | 2 | | | | 1 | | | | 2 | | | | 1 | | | | (4 | ) | | | (2 | ) | | | – | | | | – | | Transfers of financial instruments | | | (509 | ) | | | 6 | | | | 441 | | | | (5 | ) | | | 68 | | | | (1 | ) | | | – | | | | – | | Net remeasurement of ECL on stage transfer(4) | | | – | | | | (7 | ) | | | – | | | | 10 | | | | – | | | | 18 | | | | – | | | | 21 | | New assets originated or purchased (5) | | | 9,115 | | | | 12 | | | | 281 | | | | 5 | | | | 3 | | | | 1 | | | | 9,399 | | | | 18 | | Other(6) | | | 879 | | | | (3 | ) | | | (58 | ) | | | (3 | ) | | | (2 | ) | | | 37 | | | | 819 | | | | 31 | | Assets derecognised – closed good(7) | | | (10,569 | ) | | | (19 | ) | | | (304 | ) | | | (5 | ) | | | (76 | ) | | | (18 | ) | | | (10,949 | ) | | | (42 | ) | Assets derecognised – written off(7) | | | – | | | | – | | | | – | | | | – | | | | (105 | ) | | | (97 | ) | | | (105 | ) | | | (97 | ) | At 31 December 2018 | | | 21,333 | | | | 37 | | | | 1,226 | | | | 32 | | | | 276 | | | | 113 | | | | 22,835 | | | | 182 | | Net movement in the year | | | (1,084 | ) | | | (6 | ) | | | 360 | | | | (1 | ) | | | (112 | ) | | | (60 | ) | | | (836 | ) | | | (67 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Charge/(release) to the Income Statement | | | | | | | (6 | ) | | | | | | | (1 | ) | | | | | | | 37 | | | | | | | | 30 | | Recoveries net of collection costs | | | | | | | – | | | | | | | | – | | | | | | | | (7 | ) | | | | | | | (7 | ) | Income statement charge/(release) for the year | | | | | | | (6 | ) | | | | | | | (1 | ) | | | | | | | 30 | | | | | | | | 23 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate & Investment Banking | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January 2018 | | | 26,583 | | | | 16 | | | | 109 | | | | – | | | | 372 | | | | 242 | | | | 27,064 | | | | 258 | | Changes to model | | | – | | | | – | | | | – | | | | – | | | | – | | | | (9 | ) | | | – | | | | (9 | ) | Transfer to lifetime ECL (not–credit impaired)(3) | | | (2 | ) | | | – | | | | 2 | | | | – | | | | – | | | | – | | | | – | | | | – | | New assets originated or purchased(5) | | | 35,926 | | | | 4 | | | | 133 | | | | 3 | | | | – | | | | – | | | | 36,059 | | | | 7 | | Other(6) | | | (2,306 | ) | | | (1 | ) | | | 83 | | | | 1 | | | | (47 | ) | | | 29 | | | | (2,270 | ) | | | 29 | | Assets derecognised – closed good (7) | | | (18,817 | ) | | | (14 | ) | | | (193 | ) | | | (1 | ) | | | – | | | | – | | | | (19,010 | ) | | | (15 | ) | Assets derecognised – written off(7) | | | – | | | | – | | | | – | | | | – | | | | (299 | ) | | | (252 | ) | | | (299 | ) | | | (252 | ) | At 31 December 2018 | | | 41,384 | | | | 5 | | | | 134 | | | | 3 | | | | 26 | | | | 10 | | | | 41,544 | | | | 18 | | Net movement in the year | | | 14,801 | | | | (11 | ) | | | 25 | | | | 3 | | | | (346 | ) | | | (232 | ) | | | 14,480 | | | | (240 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Charge/(release) to the Income Statement | | | | | | | (11 | ) | | | | | | | 3 | | | | | | | | 20 | | | | | | | | 12 | | Recoveries net of collection costs | | | | | | | – | | | | | | | | – | | | | | | | | 2 | | | | | | | | 2 | | Income statement charge/(release) for the year | | | | | | | (11 | ) | | | | | | | 3 | | | | | | | | 22 | | | | | | | | 14 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate Centre | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January 2018 | | | 57,155 | | | | 7 | | | | 250 | | | | 4 | | | | 20 | | | | 8 | | | | 57,425 | | | | 19 | | Change in economic scenarios(2) | | | – | | | | 1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1 | | Transfer to lifetime ECL (not–credit impaired)(3) | | | (111 | ) | | | (1 | ) | | | 111 | | | | 1 | | | | – | | | | – | | | | – | | | | – | | Transfer to credit impaired(3) | | | – | | | | – | | | | (4 | ) | | | – | | | | 4 | | | | – | | | | – | | | | – | | Transfer to 12–month ECL(3) | | | 133 | | | | 3 | | | | (133 | ) | | | (3 | ) | | | – | | | | – | | | | – | | | | – | | Transfer from credit impaired(3) | | | – | | | | – | | | | 3 | | | | 1 | | | | (3 | ) | | | (1 | ) | | | – | | | | – | | Transfers of financial instruments | | | 22 | | | | 2 | | | | (23 | ) | | | (1 | ) | | | 1 | | | | (1 | ) | | | – | | | | – | | Net remeasurement of ECL on stage transfer(4) | | | – | | | | (2 | ) | | | – | | | | – | | | | – | | | | 1 | | | | – | | | | (1 | ) | New assets originated or purchased(5) | | | 7,526 | | | | 1 | | | | 2 | | | | – | | | | 2 | | | | 1 | | | | 7,530 | | | | 2 | | Other(6) | | | (14,626 | ) | | | (2 | ) | | | (6 | ) | | | – | | | | 3 | | | | 1 | | | | (14,629 | ) | | | (1 | ) | Assets derecognised – closed good (7) | | | (4,943 | ) | | | (2 | ) | | | (92 | ) | | | – | | | | (8 | ) | | | (2 | ) | | | (5,043 | ) | | | (4 | ) | Assets derecognised – written off (7) | | | – | | | | – | | | | – | | | | – | | | | (3 | ) | | | (3 | ) | | | (3 | ) | | | (3 | ) | At 31 December 2018 | | | 45,134 | | | | 5 | | | | 131 | | | | 3 | | | | 15 | | | | 5 | | | | 45,280 | | | | 13 | | Net movement in the year | | | (12,021 | ) | | | (2 | ) | | | (119 | ) | | | (1 | ) | | | (5 | ) | | | (3 | ) | | | (12,145 | ) | | | (6 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Charge/(release) to the Income Statement | | | | | | | (2 | ) | | | | | | | (1 | ) | | | | | | | – | | | | | | | | (3 | ) | Recoveries net of collection costs | | | | | | | – | | | | | | | | – | | | | | | | | (4 | ) | | | | | | | (4 | ) | Income statement charge/(release) for the year | | | | | | | (2 | ) | | | | | | | (1 | ) | | | | | | | (4 | ) | | | | | | | (7 | ) |
2018 compared to 2017 (unaudited) Non trading reverse repurchase agreements increased to £21,127m at 31 December 2018 (2017: £2,614m), which reflected the revised classification of the majority of our permitted non trading reverse repurchase agreements at amortised cost in line with our ring-fenced business model. We report reverse repurchase agreements in CIB and the movement in the year is reported in the ‘New assets originated or purchased’ and ‘Assets derecognised – closed good’ lines above. Cash and balances at central banks, which are reported in Corporate Centre, decreased by £13,024m to £19,747m at 31 December 2018 (2017: £32,771m). This movement is reported in the ‘Other’ line above. For more, see the Balance sheet review in the ‘Financial review’ section.
Committed exposures Credit risk arises on both asset balances and off–balance sheet transactions such as guarantees. As a result, committed exposures are typically higher than asset balances. However, committed exposures can be smaller than the asset balances on the balance sheet due to netting. We show Sovereigns and Supranationals net of short positions and Large Corporate reverse repurchase agreement exposures are shown net of repurchase agreement liabilities and include OTC derivatives. In addition, the derivative and other treasury product exposures (which are classified as ‘Financial Institutions’) shown are also typically lower than the asset balances. This is because we show our overall risk exposure which takes into account our procedures to mitigate credit risk. The asset balances on our balance sheet only reflect the more restrictive netting permitted by IAS 32. Rating distribution These tables show our credit risk exposure according to our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Santander UK risk grade | | | | | 2018 | | 9 £m | | | 8 £m | | | 7 £m | | | 6 £m | | | 5 £m | | | 4 £m | | | 3 to 1
£m | | | Other(1) £m | | | Total £m | | Corporate & Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | – | | | | – | | | | 66 | | | | 1,745 | | | | 5,749 | | | | 3,426 | | | | 886 | | | | 36 | | | | 11,908 | | Commercial Real Estate | | | – | | | | – | | | | – | | | | 302 | | | | 4,564 | | | | 1,846 | | | | 31 | | | | – | | | | 6,743 | | Social Housing | | | 680 | | | | 3,899 | | | | 138 | | | | – | | | | – | | | | 2 | | | | 24 | | | | – | | | | 4,743 | | | | | | 680 | | | | 3,899 | | | | 204 | | | | 2,047 | | | | 10,313 | | | | 5,274 | | | | 941 | | | | 36 | | | | 23,394 | | Corporate & Investment Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 393 | | | | 3,807 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4,200 | | Large Corporate | | | 12 | | | | 3,187 | | | | 5,535 | | | | 6,361 | | | | 888 | | | | 3 | | | | 78 | | | | – | | | | 16,064 | | Financial Institutions | | | 836 | | | | 1,355 | | | | 1,479 | | | | 76 | | | | – | | | | – | | | | – | | | | – | | | | 3,746 | | | | | | 1,241 | | | | 8,349 | | | | 7,014 | | | | 6,437 | | | | 888 | | | | 3 | | | | 78 | | | | – | | | | 24,010 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 30,074 | | | | 91 | | | | – | | | | 1 | | | | – | | | | – | | | | – | | | | – | | | | 30,166 | | Structured Products | | | 2,431 | | | | 2,062 | | | | 318 | | | | 24 | | | | – | | | | – | | | | – | | | | – | | | | 4,835 | | Social Housing | | | 1,377 | | | | 2,839 | | | | 76 | | | | 43 | | | | – | | | | – | | | | – | | | | – | | | | 4,335 | | Legacy Portfolios in run–off(2) | | | – | | | | – | | | | – | | | | 203 | | | | 35 | | | | 137 | | | | 126 | | | | 357 | | | | 858 | | Derivatives | | | – | | | | 147 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 147 | | | | | | 33,882 | | | | 5,139 | | | | 394 | | | | 271 | | | | 35 | | | | 137 | | | | 126 | | | | 357 | | | | 40,341 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 35,803 | | | | 17,387 | | | | 7,612 | | | | 8,755 | | | | 11,236 | | | | 5,414 | | | | 1,145 | | | | 393 | | | | 87,745 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stage 1 | | | 35,803 | | | | 17,387 | | | | 7,612 | | | | 8,682 | | | | 10,788 | | | | 4,772 | | | | 521 | | | | 377 | | | | 85,942 | | Stage 2 | | | – | | | | – | | | | – | | | | 73 | | | | 448 | | | | 635 | | | | 318 | | | | 16 | | | | 1,490 | | Stage 3 | | | – | | | | – | | | | – | | | | – | | | | – | | | | 7 | | | | 306 | | | | – | | | | 313 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate & Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | – | | | | – | | | | 259 | | | | 2,183 | | | | 5,402 | | | | 3,574 | | | | 998 | | | | 214 | | | | 12,630 | | Commercial Real Estate | | | – | | | | – | | | | – | | | | 395 | | | | 6,135 | | | | 2,014 | | | | 60 | | | | 2 | | | | 8,606 | | Social Housing | | | 499 | | | | 2,600 | | | | 171 | | | | – | | | | – | | | | – | | | | 4 | | | | – | | | | 3,274 | | | | | | 499 | | | | 2,600 | | | | 430 | | | | 2,578 | | | | 11,537 | | | | 5,588 | | | | 1,062 | | | | 216 | | | | 24,510 | | Corporate & Investment Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 590 | | | | 3,321 | | | | 444 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4,355 | | Large Corporate | | | 260 | | | | 2,979 | | | | 8,391 | | | | 8,879 | | | | 573 | | | | 2 | | | | 355 | | | | – | | | | 21,439 | | Financial Institutions | | | 2,362 | | | | 1,463 | | | | 2,494 | | | | 33 | | | | 103 | | | | – | | | | – | | | | – | | | | 6,455 | | | | | | 3,212 | | | | 7,763 | | | | 11,329 | | | | 8,912 | | | | 676 | | | | 2 | | | | 355 | | | | – | | | | 32,249 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 44,477 | | | | 18 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 44,495 | | Structured Products | | | 2,487 | | | | 1,560 | | | | 300 | | | | 32 | | | | – | | | | – | | | | – | | | | – | | | | 4,379 | | Social Housing | | | 1,841 | | | | 3,641 | | | | 451 | | | | 43 | | | | – | | | | – | | | | – | | | | – | | | | 5,976 | | Legacy Portfolios in run–off(2) | | | – | | | | – | | | | 1 | | | | 359 | | | | 104 | | | | 124 | | | | 37 | | | | 400 | | | | 1,025 | | Derivatives | | | – | | | | 212 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 212 | | Crown Dependencies | | | 13 | | | | 36 | | | | 115 | | | | 71 | | | | 13 | | | | 8 | | | | 6 | | | | – | | | | 262 | | | | | | 48,818 | | | | 5,467 | | | | 867 | | | | 505 | | | | 117 | | | | 132 | | | | 43 | | | | 400 | | | | 56,349 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 52,529 | | | | 15,830 | | | | 12,626 | | | | 11,995 | | | | 12,330 | | | | 5,722 | | | | 1,460 | | | | 616 | | | | 113,108 | |
| (1) | Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model. |
| (2) | Commercial mortgages and residual structured and asset finance loans (shipping, aviation, and structured finance). |
| | | | Annual Report 2018 | Risk review | | |
Geographical distribution We typically classify geographical location according to the counterparty’s country of domicile unless a full risk transfer guarantee is in place, in which case we use the guarantor’s country of domicile instead. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | | | UK £m | | | Europe £m | | | US £m | | | Rest of
World
£m | | | Total £m | | | UK £m | | | Europe £m | | | US £m | | | Rest of
World
£m | | | Total £m | | Corporate & Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 11,833 | | | | 74 | | | | – | | | | 1 | | | | 11,908 | | | | 12,513 | | | | 116 | | | | 1 | | | | – | | | | 12,630 | | Commercial Real Estate | | | 6,743 | | | | – | | | | – | | | | – | | | | 6,743 | | | | 8,606 | | | | – | | | | – | | | | – | | | | 8,606 | | Social Housing | | | 4,743 | | | | – | | | | – | | | | – | | | | 4,743 | | | | 3,274 | | | | – | | | | – | | | | – | | | | 3,274 | | | | | | 23,319 | | | | 74 | | | | – | | | | 1 | | | | 23,394 | | | | 24,393 | | | | 116 | | | | 1 | | | | – | | | | 24,510 | | Corporate & Investment Banking | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | – | | | | 393 | | | | – | | | | 3,807 | | | | 4,200 | | | | – | | | | 1,032 | | | | 1 | | | | 3,322 | | | | 4,355 | | Large Corporate | | | 13,080 | | | | 2,752 | | | | 124 | | | | 108 | | | | 16,064 | | | | 17,430 | | | | 3,699 | | | | 111 | | | | 199 | | | | 21,439 | | Financial Institutions | | | 1,216 | | | | 1,878 | | | | 174 | | | | 478 | | | | 3,746 | | | | 3,102 | | | | 2,121 | | | | 614 | | | | 618 | | | | 6,455 | | | | | | 14,296 | | | | 5,023 | | | | 298 | | | | 4,393 | | | | 24,010 | | | | 20,532 | | | | 6,852 | | | | 726 | | | | 4,139 | | | | 32,249 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 26,154 | | | | 1,409 | | | | 960 | | | | 1,643 | | | | 30,166 | | | | 35,659 | | | | 1,514 | | | | 6,091 | | | | 1,231 | | | | 44,495 | | Structured Products | | | 2,574 | | | | 1,139 | | | | – | | | | 1,122 | | | | 4,835 | | | | 2,086 | | | | 1,217 | | | | – | | | | 1,076 | | | | 4,379 | | Social Housing | | | 4,335 | | | | – | | | | – | | | | – | | | | 4,335 | | | | 5,976 | | | | – | | | | – | | | | – | | | | 5,976 | | Legacy Portfolios in run–off | | | 744 | | | | – | | | | – | | | | 114 | | | | 858 | | | | 909 | | | | – | | | | – | | | | 116 | | | | 1,025 | | Derivatives | | | – | | | | – | | | | 147 | | | | – | | | | 147 | | | | – | | | | 63 | | | | 149 | | | | – | | | | 212 | | Crown Dependencies | | | – | | | | – | | | | – | | | | – | | | | – | | | | 262 | | | | – | | | | – | | | | – | | | | 262 | | | | | | 33,807 | | | | 2,548 | | | | 1,107 | | | | 2,879 | | | | 40,341 | | | | 44,892 | | | | 2,794 | | | | 6,240 | | | | 2,423 | | | | 56,349 | |
2018 compared to 2017 (unaudited) In Corporate & Commercial Banking, we saw solid lending to trading business customers, offset by active management of our Commercial Real Estate (CRE) portfolio. Committed exposures remained broadly flat. Our CRE portfolio decreased by 21% as we continue to manage our exposure in line with proactive risk management policies. Our Social Housing portfolio increased by 45% driven by refinancing of longer–dated loans, previously managed in Corporate Centre, onto shorter maturities and current market terms. In CIB, our committed exposures decreased by 26% mainly due to decreases in our Large Corporate and Financial institutions portfolios driven by the transfer of prohibited activity to Banco Santander London Branch as part of ring–fencing. Credit quality was relatively stable overall, mainly driven by the write-offs of Carillion plc and another CIB customer, both of which moved tonon-performing in 2017. Sovereign and Supranational exposures decreased by 4%. The portfolio profile remained short-term, reflecting the purpose of the holdings. In Corporate Centre, committed exposures decreased by 28% mainly driven by our Sovereign and Supranational portfolio as part of normal liquid asset portfolio management. Legacy Portfolios in run–off reduced by 16%. Social Housing exposures also reduced as we continue to refinance longer–dated loans onto shorter maturities and current market terms that we then manage in Corporate & Commercial Banking. Credit risk mitigation In Corporate & Commercial Banking, we hold collateral on CRE loans and on our healthcare and hotels portfolios. Credit–impaired loans in these portfolios reduced from 2017, resulting in a decrease in the collateral we held against credit–impaired loans. At 31 December 2018, the collateral we held against credit–impaired loans was 43% (2017: 56%) of the carrying amount of the credit–impaired loan exposures. At 31 December 2018, we held collateral of £69m (2017: £134m) against credit–impaired assets of £276m (2017: £393m). In CIB, the top 20 clients with derivative exposure made up 85% (2017: 65%) of our total derivative exposure, all of which were banks and CCPs. The weighted–average credit rating was 7.1 (2017: 7.2). At 31 December 2018 and 2017, we held no collateral against credit–impaired loans in the Large Corporate portfolio. In Corporate Centre, we reduce credit risk in derivatives with netting agreements, collateralisation and the use of CCPs. At 31 December 2018, we had cash collateral of £265m (2017: £348m) held against our performing Legacy Portfolios in run–off. At 31 December 2018, we held collateral of £10m (2017: £13m) against all credit–impaired loan exposure of £16m (2017: £20m).
Credit performance We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in ‘Monitoring’ in the ‘Credit risk management’ section). The table below shows the exposures we monitor, and those we classify as non–performing by portfolio at 31 December 2018 and 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Committed exposure | | | | | | | | | | | Watchlist | | | | | | | | | | | 2018 | | Fully
performing
£m | | | Enhanced
monitoring
£m | | | Proactive
management
£m | | | Non–
performing
exposure(1)
£m | | | Total(2)
£m | | | Loss
allowances(3)
£m | | Corporate & Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 10,350 | | | | 972 | | | | 333 | | | | 253 | | | | 11,908 | | | | 160 | | Commercial Real Estate | | | 6,426 | | | | 247 | | | | 47 | | | | 23 | | | | 6,743 | | | | 22 | | Social Housing | | | 4,626 | | | | 117 | | | | – | | | | – | | | | 4,743 | | | | – | | | | | | 21,402 | | | | 1,336 | | | | 380 | | | | 276 | | | | 23,394 | | | | 182 | | Corporate & Investment Banking | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 4,200 | | | | – | | | | – | | | | – | | | | 4,200 | | | | – | | Large Corporate | | | 15,304 | | | | 548 | | | | 186 | | | | 26 | | | | 16,064 | | | | 18 | | Financial Institutions | | | 3,746 | | | | – | | | | – | | | | – | | | | 3,746 | | | | – | | | | | | 23,250 | | | | 548 | | | | 186 | | | | 26 | | | | 24,010 | | | | 18 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 30,166 | | | | – | | | | – | | | | – | | | | 30,166 | | | | – | | Structured Products | | | 4,835 | | | | – | | | | – | | | | – | | | | 4,835 | | | | – | | Social Housing | | | 4,313 | | | | 22 | | | | – | | | | – | | | | 4,335 | | | | – | | Legacy Portfolios in run–off | | | 809 | | | | 26 | | | | 7 | | | | 16 | | | | 858 | | | | 13 | | Derivatives | | | 147 | | | | – | | | | – | | | | – | | | | 147 | | | | – | | | | | | 40,270 | | | | 48 | | | | 7 | | | | 16 | | | | 40,341 | | | | 13 | | | Total loss allowances(3) | | | | | | | | | | | | | | | | | | | | | | | 213 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | Corporate & Commercial Banking | | | | | | | | | | | | | | | | | | | | | | | | | SME and mid corporate | | | 11,185 | | | | 815 | | | | 296 | | | | 334 | | | | 12,630 | | | | 128 | | Commercial Real Estate | | | 8,254 | | | | 160 | | | | 133 | | | | 59 | | | | 8,606 | | | | 27 | | Social Housing | | | 3,274 | | | | – | | | | – | | | | – | | | | 3,274 | | | | – | | | | | | 22,713 | | | | 975 | | | | 429 | | | | 393 | | | | 24,510 | | | | 155 | | Corporate & Investment Banking | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 4,355 | | | | – | | | | – | | | | – | | | | 4,355 | | | | – | | Large Corporate | | | 20,757 | | | | 284 | | | | 8 | | | | 390 | | | | 21,439 | | | | 236 | | Financial Institutions | | | 6,354 | | | | 1 | | | | 100 | | | | – | | | | 6,455 | | | | – | | | | | | 31,466 | | | | 285 | | | | 108 | | | | 390 | | | | 32,249 | | | | 236 | | Corporate Centre | | | | | | | | | | | | | | | | | | | | | | | | | Sovereign and Supranational | | | 44,495 | | | | – | | | | – | | | | – | | | | 44,495 | | | | – | | Structured Products | | | 4,379 | | | | – | | | | – | | | | – | | | | 4,379 | | | | – | | Social Housing | | | 5,972 | | | | 4 | | | | – | | | | – | | | | 5,976 | | | | – | | Legacy Portfolios in run–off | | | 977 | | | | 22 | | | | 6 | | | | 20 | | | | 1,025 | | | | 6 | | Derivatives | | | 212 | | | | – | | | | – | | | | – | | | | 212 | | | | – | | Crown Dependencies | | | 261 | | | | – | | | | – | | | | 1 | | | | 262 | | | | – | | | | | | 56,296 | | | | 26 | | | | 6 | | | | 21 | | | | 56,349 | | | | 6 | | | Total observed impairment loss allowances | | | | | | | | | | | | | | | | | | | | | | | 397 | | Allowance for IBNO(4) | | | | | | | | | | | | | | | | | | | | | | | 52 | | | Total loss allowances | | | | | | | | | | | | | | | | | | | | | | | 449 | |
| (1) | Non–performing exposure includes committed facilities and derivative exposures. So it can exceed NPLs which only includeon-balance sheet amounts. |
| (2) | Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Monitoring‘ section. |
| (3) | Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. The ECL allowance is for both on and off–balance sheet exposures. |
| (4) | Allowance for IBNO losses as described in Note 1 to the Consolidated Financial Statements. | Financial assets and liabilities designated at fair value | | We classify all our financial assets designated at fair value as banking market risk. We classify our warrant programmes, our Global Structured Solutions Programme and structured customer deposits as trading market risk. This is because we manage them on a fair value basis. We classify all our other financial liabilities designated at fair value as banking market risk. For more, see Notes 13 and 24 to the Consolidated Financial Statements. | 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 derivatives arise from sales and trading activities and are treated as trading market risk. We treat derivatives that we do not manage on a trading intent basis as banking market risk. For more, see Note 12 to the Consolidated Financial Statements. |
2018 compared to 2017 (unaudited) In Corporate & Commercial Banking, the SME and mid corporate portfolio and our CRE portfolio,non-performing exposures (NPEs) reduced, largely due to the workout of a number of smaller loans reaching a conclusion resulting in partial write-offs, without material concentrations across sectors or portfolios. Exposures subject to enhanced monitoring increased due to a social housing case experiencing governance issues plus a small number of CRE cases approaching maturity where repayment or refinance arrangements had yet to be confirmed. In CIB, Large Corporate exposures subject to enhanced monitoring increased due to a small number of cases that were experiencing performance issues. However, NPEs decreased predominantly due to loan write-offs for Carillion plc and another CIB customer, both of which moved to non–performing in 2017. Financial Institutions exposures subject to proactive monitoring decreased, driven by the transfer of one case to Banco Santander London Branch. In Corporate Centre, Legacy Portfolios in run–off subject to enhanced monitoring and proactive management remained stable. NPEs reduced driven by continuing exit of the legacy commercial mortgage portfolio.
| | | | Annual Report 2018 | Risk review | | | 100 | | Santander UK |
Loan modifications The following table provides information on financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL. | | | | | | | | | | | | | | | | Corporate &
Commercial
Banking £m | | | Corporate &
Investment
Banking £m | | | Corporate
Centre
£m | | Financial assets modified during the period: | | | | | | | | | | | | | – Amortised cost before modification | | | 104 | | | | – | | | | 2 | | – Net modification loss | | | 10 | | | | – | | | | – | | | | | | Financial assets modified since initial recognition: | | | | | | | | | | | | | – Gross carrying amount of financial assets for which the ECL allowance has changed to12-month measurement during the year | | | 8 | | | | 7 | | | | 4 | |
Forbearance We only make forbearance arrangements for lending to customers. The balances at 31 December 2018 and 2017, analysed by their staging (2017: payment status) at the year–end and the forbearance we applied, were: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | | 2017 | | | | | Corporate &
Commercial
Banking £m | | | Corporate &
Investment
Banking £m | | | Corporate
Centre
£m | | | | | | | Corporate &
Commercial
Banking £m | | | Corporate &
Investment
Banking £m | | | Corporate Centre(1) £m | | Stock:(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Term extension | | | 67 | | | | 42 | | | | – | | | | | | | | 136 | | | | 55 | | | | – | | – Interest–only | | | 112 | | | | – | | | | 8 | | | | | | | | 152 | | | | – | | | | 14 | | – Other payment rescheduling | | | 163 | | | | 26 | | | | 10 | | | | | | | | 127 | | | | 299 | | | | 13 | | | | | | 342 | | | | 68 | | | | 18 | | | | | | | | 415 | | | | 354 | | | | 27 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Stage 1 | | | 43 | | | | – | | | | 3 | | | | | | | | | | | | | | | | | | – Stage 2 | | | 78 | | | | 42 | | | | 8 | | | | | | | | | | | | | | | | | | – Stage 3 | | | 221 | | | | 26 | | | | 7 | | | | | | | | | | | | | | | | | | – NPL | | | | | | | | | | | | | | | | | | | 273 | | | | 347 | | | | 11 | | – Performing | | | | | | | | | | | | | | | | | | | 142 | | | | 7 | | | | 16 | | | | | | 342 | | | | 68 | | | | 18 | | | | | | | | 415 | | | | 354 | | | | 27 | | Proportion of portfolio | | | 1.5% | | | | 0.3% | | | | 2.1% | | | | | | | | 1.7% | | | | 1.1% | | | | 2.6% | |
| (1) | We base forbearance type on the first forbearance we applied. Tables only show accounts open at the year–end. Amounts are drawn balances and include off balance sheet balances. |
2018 compared to 2017(unaudited) In Corporate & Commercial Banking, the cumulative forbearance stock reduced, mainly due to the resolution of NPL cases, and performing cases exiting forbearance according to defined criteria. Forbearance stock also reduced in CIB, following loan written-offs for Carillion plc and another CIB customer. At 31 December 2018, there were only two forborne cases (2017: five cases) in CIB. PORTFOLIOS OF PARTICULAR INTEREST Introduction(unaudited) Some types of lending have higher risk and others stand out for different reasons. In the section below we provide further details of our CRE and Social Housing portfolios. | | | | Product | | Description | | Commercial Real Estate | | The CRE market experienced a challenging environment in the immediate years after the last financial crisis and has previously seen regular cyclical downturns. In addition to the disclosures on the CRE portfolio earlier in this section, we include below more detail on credit performance, LTV analysis, sector analysis, and refinancing risk. | | Social Housing | | The Social Housing sector in the UK is critical in ensuring the supply of affordable housing across the country. Housing associations now play a prominent role in addressing the UK’s shortage of housing stock across all tenures. The sector benefits from a zero–loss default history aided by its regulated nature. This is a portfolio of particular interest as we hold a significant position in this market. Continued investment in this sector is seen as a direct way to support the UK and, indirectly, the wider community initiatives undertaken by our customers. We manage and report our Social Housing portfolio in Corporate & Commercial Banking, except for older loans that do not fit our current business strategy, which we manage and report in Corporate Centre. We provide detailed disclosures of our Social Housing portfolios in Corporate & Commercial Banking and Corporate Centre in the sections above. We provide a summary of our total Social Housing portfolio below, to give a Santander UK–wide view. |
Commercial Real Estate Credit performance The table below shows the main CRE credit performance metrics at 31 December 2018 and 2017 | | | | | | | | | | | | | | | | | | | | | | | | Customer
loans(1)
£m | | | NPLs(2)
£m | | | NPL ratio(3)
% | | | Gross write–
offs £m | | | Loss
allowances(4)
£m | | 2018 | | | 6,459 | | | | 29 | | | | 0.45 | | | | 23 | | | | 26 | | 2017 | | | 8,144 | | | | 69 | | | | 0.85 | | | | 11 | | | | 54 | |
| (1) | CRE drawn loans in the business banking portfolio of our Retail Banking segment of £257m (2017: £257m) and in the CRE portfolio of our Corporate & Commercial Banking segment of £6,202m (2017: £7,886m). |
| (2) | We define NPLs in the ‘Credit risk management’ section. All NPLs continue accruing interest. | | | > Market risk |
| (3) | NPLs as a percentage of customer loans. |
| (4) | Loss allowances for 2017 were on an incurred loss basis per IAS 39, whilst for 2018 they are on an ECL basis per IFRS 9. The ECL allowance is for both on and off–balance sheet exposures. |
CRE loans written before 2009 totalled £190m (2017: £380m). The pre–2009 loans were written on market terms which, compared with more recent times and following a significant tightening in our lending criteria, included higher original LTVs, lower interest coverage and exposure to development risk, were more generous. LTV analysis The table below shows the LTV distribution for our CRE loan stock and NPL stock (based on the drawn balance and our latest estimate of the property’s current value) of the portfolio at 31 December 2018 and 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | 2017 | | | | | Total stock | | | | | NPL stock | | | | | | | | Total Stock | | | | | | | | NPL stock | | | | | | Loans and advances to customers | | £m | | | % | | | | | £m | | | % | | | | | £m | | | % | | | | | £m | | | % | | <=50% | | | 3,663 | | | | 56 | | | | | | 3 | | | | 11 | | | | | | 4,146 | | | | 51 | | | | | | 6 | | | | 9 | | >50–70% | | | 2,039 | | | | 32 | | | | | | 4 | | | | 14 | | | | | | 3,035 | | | | 37 | | | | | | 2 | | | | 3 | | >70–100% | | | 47 | | | | 1 | | | | | | 1 | | | | 3 | | | | | | 36 | | | | – | | | | | | 1 | | | | 1 | | >100% i.e. negative equity | | | 18 | | | | – | | | | | | 16 | | | | 55 | | | | | | 52 | | | | 1 | | | | | | 48 | | | | 70 | | Standardised portfolio(1) | | | 631 | | | | 10 | | | | | | 5 | | | | 17 | | | | | | 629 | | | | 8 | | | | | | 12 | | | | 17 | | Total with collateral | | | 6,398 | | | | 99 | | | | | | 29 | | | | 100 | | | | | | 7,898 | | | | 97 | | | | | | 69 | | | | 100 | | Development loans | | | 61 | | | | 1 | | | | | | – | | | | – | | | | | | 246 | | | | 3 | | | | | | – | | | | – | | | | | | 6,459 | | | | 100 | | | | | | 29 | | | | 100 | | | | | | 8,144 | | | | 100 | | | | | | 69 | | | | 100 | |
| (1) | Smaller value transactions, mainly commercial mortgages. |
Sector analysis | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | | 2017 | | | Sector | | £m | | | % | | | | | | | £m | | | % | | Office | | | 1,556 | | | | 24 | | | | | | | | 2,181 | | | | 27 | | Retail | | | 1,004 | | | | 16 | | | | | | | | 1,389 | | | | 17 | | Industrial | | | 888 | | | | 14 | | | | | | | | 1,176 | | | | 14 | | Residential | | | 927 | | | | 14 | | | | | | | | 1,001 | | | | 12 | | Mixed use | | | 932 | | | | 14 | | | | | | | | 1,146 | | | | 14 | | Student accommodation | | | 123 | | | | 2 | | | | | | | | 133 | | | | 2 | | Hotels and leisure | | | 309 | | | | 5 | | | | | | | | 304 | | | | 4 | | Other | | | 89 | | | | 1 | | | | | | | | 185 | | | | 2 | | Standardised portfolio(1) | | | 631 | | | | 10 | | | | | | | | 629 | | | | 8 | | | | | | 6,459 | | | | 100 | | | | | | | | 8,144 | | | | 100 | |
| (1) | Smaller value transactions, mainly commercial mortgages. |
The CRE portfolio is well diversified across sectors, with no significant regional or single name concentration, representing 27% (2017: 30%) of our total lending to corporates and 3% (2017: 4%) of total customer loans. At 31 December 2018, the LTV profile of the portfolio remained conservative with £5,702m (2017: £7,181m) of the non–standardised portfolio assets at or below 70% LTV. Loans with development risk were only 1% (2017: 3%) of the total CRE portfolio. Development lending is typically on a non–speculative basis with significant pre–lets and/or pre–sales in place. The average loan balance at 31 December 2018 was £3.2m (2017: £4.7m) and the top ten exposures made up 11% (2017: 10%) of the total CRE portfolio exposure. Refinancing risk At 31 December 2018, CRE loans of £1,144m (2017: £1,090m) were due to mature within 12 months. Of these, £30m, i.e. 3% (2017: £59m, i.e. 5%) had an LTV ratio higher than is acceptable under our current credit policy. At 31 December 2018, £10m of this (2017: £53m) had been put on our Watchlist or recorded as Stage 3 and NPL, and had an impairment loss allowance of £5m (2017: £27m). 2018 compared to 2017 (unaudited) In our CRE portfolio, customer loans decreased by 21% as we continue to manage our exposure in line with proactive risk management policies. In 2018, we maintained a prudent lending approach, with no new business written above 70% LTV (2017: nil) and all new business (2017: 91%) written at or below 60% LTV. The weighted average LTV on the CRE portfolio was 47% (2017: 48%). Exposures subject to enhanced monitoring increased to £247m (2017: £160m). Exposures subject to proactive management decreased by 65% to £47m (2017: £133m) largely driven by a number of successful exits. Non–performing exposures reduced by 61% to £23m (2017: £59m). CRE credit quality remained good with the improvement in the NPL ratio to 0.45% (2017: 0.85%) reflecting loan write-offs. Social Housing We manage and report our Social Housing portfolio in Corporate & Commercial Banking, except for older Social Housing loans that do not fit our current business strategy, which we manage and report in Corporate Centre. We provide detailed disclosures of our Social Housing portfolios in Corporate & Commercial Banking and Corporate Centre in the sections above. At 31 December 2018 and 2017, our total Social Housing exposure in Corporate & Commercial Banking and Corporate Centre was: | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | 2017 | | | | | On-balance
sheet £m | | | Total exposure £m | | | | | On-balance
sheet £m | | | Total exposure £m | | Corporate & Commercial Banking | | | 2,844 | | | | 4,743 | | | | | | 2,118 | | | | 3,274 | | Corporate Centre | | | 3,780 | | | | 4,335 | | | | | | 5,060 | | | | 5,976 | | | | | | 6,624 | | | | 9,078 | | | | | | 7,178 | | | | 9,250 | |
| | | | Annual Report 2018 | Risk review | | |
Market risk | | | TRADING MARKET RISK
OUR KEY TRADING MARKET RISKSOverview(unaudited)
Our main
| | Key metrics(unaudited) | Market risk comprises banking market risk and trading market risk. Banking market risk is the risk of loss of income or economic value due to changes to interest rates in the banking book or to changes in exchange rates, where such changes would affect our net worth through an adjustment to revenues, assets, liabilities andoff-balance sheet exposures in the banking book. Trading market risk is the risk of losses in trading positions, both on andoff-balance sheet, due to movements in market prices or other external factors. In this section, we set out which of our assets and liabilities are exposed to banking and trading market risk. Then we explain how we manage these risks and discuss our key market risk metrics. We also explain how the implementation of our ring-fencing plans in 2018 changed our exposure to trading market risk. | | Net Interest Margin (NIM) sensitivity to +50bps decreased to £207m and to -50bps decreased to £(23)m (2017: £212m and £(125)m) Economic Value of Equity (EVE) sensitivity to +50bps increased to £162m and to -50bps decreased to £(124)m (2017: £95m and £(213)m) |
BALANCE SHEET ALLOCATION BY MARKET RISK CLASSIFICATION We analyse our assets and liabilities exposed to market risk between banking and trading market risk as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | 2017 | | | | Banking
£m | | | Trading
£m | | | Total
£m | | | | | | Banking
£m | | | Trading
£m | | | Total £m | | | Key risk factors | Assets subject to market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 19,747 | | | | – | | | | 19,747 | | | | | | | | 32,771 | | | | – | | | | 32,771 | | | FX, Interest rate | Financial assets at FVTPL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading assets | | | – | | | | – | | | | – | | | | | | | | – | | | | 30,555 | | | | 30,555 | | | Equity, FX, interest rate | – Derivative financial instruments | | | 4,559 | | | | 700 | | | | 5,259 | | | | | | | | 5,198 | | | | 14,744 | | | | 19,942 | | | Equity, FX, interest rate | – Other financial assets at FVTPL | | | 5,617 | | | | – | | | | 5,617 | | | | | | | | 2,096 | | | | – | | | | 2,096 | | | Interest rate, credit spread | Financial assets at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers(1) | | | 201,289 | | | | – | | | | 201,289 | | | | | | | | 199,340 | | | | – | | | | 199,340 | | | Interest rate | – Loans and advances to banks(1) | | | 2,799 | | | | – | | | | 2,799 | | | | | | | | 3,463 | | | | – | | | | 3,463 | | | FX, interest rate | – Reverse repurchase agreements – non trading(1) | | | 21,127 | | | | – | | | | 21,127 | | | | | | | | 2,614 | | | | – | | | | 2,614 | | | FX, Interest rate | – Other financial assets at amortised cost | | | 7,229 | | | | – | | | | 7,229 | | | | | | | | | | | | | | | | | | | FX, interest rate, inflation, credit spread | Financial assets at FVOCI | | | 13,302 | | | | – | | | | 13,302 | | | | | | | | | | | | | | | | | | | FX, interest rate, inflation, credit spread | Financial investments | | | | | | | | | | | | | | | | | | | 17,611 | | | | – | | | | 17,611 | | | FX, interest rate, inflation, credit spread | Macro hedge of interest rate risk(2) | | | 697 | | | | – | | | | 697 | | | | | | | | 833 | | | | – | | | | 833 | | | Interest rate | Retirement benefit assets | | | 842 | | | | – | | | | 842 | | | | | | | | 449 | | | | – | | | | 449 | | | Equity, FX, interest rate, inflation, credit spread | Total assets | | | 277,208 | | | | 700 | | | | 277,908 | | | | | | | | 264,375 | | | | 45,299 | | | | 309,674 | | | | Liabilities subject to market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at FVTPL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading liabilities | | | – | | | | – | | | | – | | | | | | | | – | | | | 31,109 | | | | 31,109 | | | Equity, FX, interest rate | – Derivative financial instruments | | | 650 | | | | 719 | | | | 1,369 | | | | | | | | 722 | | | | 16,891 | | | | 17,613 | | | Equity, FX, interest rate | – Other financial liabilities at FVTPL | | | 6,286 | | | | – | | | | 6,286 | | | | | | | | 703 | | | | 1,612 | | | | 2,315 | | | Interest rate, credit spread | Financial Liabilities at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Deposits by customers | | | 178,090 | | | | – | | | | 178,090 | | | | | | | | 183,648 | | | | – | | | | 183,648 | | | Interest rate | – Deposits by banks(1) | | | 17,221 | | | | – | | | | 17,221 | | | | | | | | 12,708 | | | | – | | | | 12,708 | | | FX, interest rate | – Repurchase agreements – non trading(1) | | | 10,910 | | | | – | | | | 10,910 | | | | | | | | 1,076 | | | | – | | | | 1,076 | | | FX, Interest rate | – Debt securities in issue | | | 46,692 | | | | – | | | | 46,692 | | | | | | | | 42,633 | | | | – | | | | 42,633 | | | FX, interest rate | – Subordinated liabilities | | | 3,601 | | | | – | | | | 3,601 | | | | | | | | 3,793 | | | | – | | | | 3,793 | | | FX, interest rate | Macro hedge of interest rate risk(3) | | | 242 | | | | – | | | | 242 | | | | | | | | – | | | | – | | | | – | | | Interest rate | Retirement benefit obligations | | | 114 | | | | – | | | | 114 | | | | | | | | 286 | | | | – | | | | 286 | | | Equity, FX, interest rate, inflation, credit spread | Total liabilities | | | 263,806 | | | | 719 | | | | 264,525 | | | | | | | | 245,569 | | | | 49,612 | | | | 295,181 | | | |
| (1) | From 1 January 2018, thenon-trading repurchase agreements andnon-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in the balance sheet, as described in Note 1. Comparatives are represented accordingly. |
| (2) | This is included in Other assets of £2,280m (2017: £2,511m). |
| (3) | This is included in Other liabilities of £2,448m (2017: £2,730m). |
We classify assets or liabilities as trading market risk (in total or just in part) as follows: | | | Balance sheet classification | | Market risk classification | | Trading assets and liabilities | | We classify all our trading portfolios as trading market risk. Following the implementation of our ring-fencing plans in 2018, the level of trading activity significantly reduced. Since then, we only classify exposures from product sales or other activities with anticipated short holding periods, as well as any related hedging, as trading market risk. For more, see Notes 11 and 23 to the Consolidated Financial Statements. | | Other financial assets and liabilities at fair value through profit or loss | | We classify all our financial assets designated at fair value as banking market risk. We classify our warrant programmes and structured customer deposits as trading market risk. This is because we manage them on a fair value basis. We classify all our other financial liabilities designated at fair value as banking market risk. For more, see Notes 13 and 24 to the Consolidated Financial Statements. | | Derivative financial instruments | | For accounting purposes, we classify derivatives as held for trading unless they are designated as being in Global Corporate Banking and it is an inherent part of providing financial services for our customers.a hedging relationship. We treat derivatives that we do not manage on a trading intent basis as banking market risk. For more, see Note 12 to the Consolidated Financial Statements. |
BANKING MARKET RISK OUR KEY BANKING MARKET RISKS (UNAUDITED) Banking market risk mainly comes from providing banking products and services to our customers, as well as our structural balance sheet exposures. It arises in all our business segments. In Retail Banking and Corporate & Commercial Banking, it is aby-product of us writing customer business and we transfer most of these risks to Corporate Centre to manage. The only types of banking market risk that we keep in Retail Banking and Corporate & Commercial Banking are short-term mismatches due to forecasting variances in prepayment and launch risk. This is where customers repay their loans at a different point than their expected maturity date or do not take the expected volume of new products. In Corporate & Investment Banking, it arises from short-term markets and lending to corporates, which we also transfer to Corporate Centre to manage. Corporate Centre also manages our structural balance sheet exposures, such as foreign exchange and Income Statement volatility risk. Our key banking market risks are: | | | | Key risks | | Description | | Interest rate risk | | Yield curve risk: comes from providing derivative productstiming mismatches in repricing fixed and services to corporate, businessvariable rate assets, liabilities and financial institution customers.off-balance sheet instruments. It also comes from our short-term market activitiesinvestingnon-rate sensitive liabilities in interest-earning assets. We mainly measure yield curve risk with NIM and the hedging of structured productsEVE sensitivities, which are measures that are designedcommonly used in the financial services industry. We also use other risk measures, like stress testing and VaR, which we explain in the ‘Trading market risk management’ section that follows. Our NIM and EVE sensitivities cover all the material yield curve risk in our banking book balance sheet. | | | Basis risk: comes from pricing assets using a different rate index to the liabilities that fund them. We are exposed to basis risks associated with Base Rate, reserve rate linked assets we deposit with central banks, the Sterling Overnight Index Average (SONIA) rate, and LIBOR rates of different terms. | Spread risks | | Spread risk arises when the value of assets or liabilities which are accounted for onward sale to retailat fair value (either through Other Comprehensive Income or though Profit and wholesale investors. Our exposuresLoss) are mainly affected by market movementschanges in the spread. We measure these spreads as the difference between the discount rate we use to value the asset or liability, and an underlying interest rates, equities, credit spreads,rate curve. Spread risks can be split into Swap Spread (where the instrument has been issued by a Sovereign counterparty) and Credit Spread (where the instrument has been issued by for example a corporate or bank counterparty). It principally arises in the bond portfolios we hold for liquidity purposes. We measure spread risk with sensitivities, stress tests, and VaR measures. | Foreign exchange risk | | Ournon-trading businesses operate mainly in sterling markets, so we do not create significant foreign exchange. exchange exposures. The only exception to this is money we raise in foreign currencies. For more on this, see ‘Wholesale funding’ in the ‘Liquidity risk’ section. | Income statement volatility risk | | We havemeasure most of the assets and liabilities in our banking book balance sheet at amortised cost. We sometimes manage their risk profile by using derivatives. As all derivatives are accounted for at fair value, the mismatch in their accounting treatment can lead to volatility in our Income Statement. This happens even if the derivative is an economic hedge of the asset or liability. |
BANKING MARKET RISK MANAGEMENT Risk appetite Our framework for dealing with market risk is part of our overall Risk Framework. The banking market risk framework sets out our high-level arrangements and standards to manage, control and oversee banking market risk. Our Risk Appetite sets the controls, risk limits and key risk metrics for banking market risk. We articulate risk appetite by the income and value sensitivity limits we set in our Risk Appetite, at both Santander UK and Banco Santander group levels. Risk measurement(unaudited) For banking market risk, we mainly measure our exposures with NIM and EVE sensitivity analysis. We support this with the risk measures we explain in the ‘Trading market risk management’ section that follows. We also monitor our interest rate repricing gap.
| | | | Annual Report 2018 | Risk review | | |
NIM and EVE sensitivities The calculations for NIM and EVE sensitivities involve many assumptions, including expected customer behaviour (such as early repayment of loans) and how interest rates may move. These assumptions are a key part of our overall control framework, so we update and review them regularly. Our NIM and EVE sensitivities include the interest rate risk from all our banking book positions. Our banking book positions generate almost all our reported net interest income. | | | | | NIM sensitivity | – | | NIM sensitivity is an income-based measure we use to forecast the changes to interest income and interest expense in different scenarios. It gives us a combined impact on net interest income over a given period – usually 12 or 36 months. | – | | We calculate NIM sensitivity by simulating the NIM using two yield curves. The difference between the two NIM totals is the NIM sensitivity. | – | | Our main model assumptions are that: | | | – | | The balance sheet is dynamic. This means that it includes therun-off of current assets and liabilities as well as retained and new business | | | – | | We use a behavioural balance sheet rather than contractual one. This means that we adjust balances for behavioural or assumed profile. We do this with most retail products whose behavioural maturity is different to the contractual maturity. This is usually because customers are exercising the option to withdraw or prepay early, or there is no exposurescontractual maturity. |
| | | | EVE sensitivity | – | | We calculate EVE as the change in Retail Banking, Commercial Bankingthe net present value of all the interest rate sensitive items in the banking book balance sheet for a defined set of instantaneous parallel andnon-parallel shifts in the yield curve. | – | | We use a static balance sheet. This means that all balance sheet itemsrun-off according to their contractual, behavioural or Corporate Centre.assumedrun-off behaviour (whichever is appropriate), and there is no retained or new business. |
The limitations of sensitivities We use sensitivities to measure the impact of standard, instantaneous, parallel shifts in relevant yield curves. 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 limit negative interest rates, the yield curve may be ‘floored’. 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 runnon-parallel stress tests too, to calculate the impact of some plausiblenon-parallel scenarios, and over various time periods for income stresses (usually one or three years). 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, such as projected changes over time. Other metrics we can use include VaR and Earnings at Risk (EaR). VaR can be useful because it captures changes in economic values, as we describe in the Trading market risk section below. However, VaR will not reflect the actual impact of most of our banking book assets and liabilities on our Income Statement. This is because we account for them at amortised cost rather than fair value. EaR is similar to VaR but captures changes in income rather than value. We use this approach mainly to generate aone-year EaR measure to assess Basis risk. Stress testing We use stress testing of market risk factors to complement the risk measurement we get from standard sensitivities. Stress testing scenarios 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 give us information about specific potential events. They can also test various outcomes that we might not capture through parallel stresses or VaR-type measures because of data or model limitations. We can also use stress tests to estimate losses in extreme market events beyond the confidence level used in VaR models. We can adapt our stress tests to reflect current concerns such as Brexit and other macroeconomic events or changing market conditions quicker than we can with other risk measures, like VaR. We can include both individual business area stresses and SantanderUK-wide scenarios. We can produce stress tests using either income or value measures. They cover one or more categories of exposures accounted for on an accruals basis or at fair value. We use expert judgement to define appropriate hypothetical stress tests and any adjusting assumptions based on the balance sheet, management actions and customer behaviour. How we use stress testing We discuss stress testing results at senior 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. Risk mitigation(unaudited) We mitigate Income Statement volatility mainly through hedge accounting. We monitor any hedge accounting ineffectiveness that might lead to Income Statement volatility with a VaR measure and trigger, reported monthly. For our accounting policies for derivatives and hedge accounting, see Note 1 to the Consolidated Financial Statements. We typically hedge the interest rate risk of the securities we hold for liquidity and investment purposes with interest rate swaps, retaining spread exposures. These retained exposures are the key drivers of the VaR and stress tests we use to assess the risk of the portfolio. We hedge our foreign currency funding positions back to sterling, so our foreign exchange positions tend to be residual exposures that remain after hedging. These positions could be, for example, to ‘spot’ foreign exchange rates or to cross currency basis. We monitor foreign exchange risk against absolute net exposures and VaR-based limits and triggers. For more, see ‘Our funding strategy and structure’ and ‘Term issuance’ in the ‘Liquidity risk’ section. Risk monitoring and reporting(unaudited) We monitor the banking market risks of the portfolios we hold for liquidity and investment purposes using sensitivities, VaR and stress tests. We report them against limits and triggers to senior management daily and to ALCO and ERCC each month. The VaR we report captures all key sources of volatility (including interest rate and spread risks) to fully reflect the potential volatility.
BANKING MARKET RISK REVIEW 2018 compared to 2017 (unaudited) The reduction in NIM sensitivities in 2018 was largely driven by higher levels of the yield curve over the year and the base rate rise in August 2018. The NIM sensitivities also reflect balance sheet management activities undertaken to manage the net structural position of the business. Each year, we periodically review our risk models and metrics including underlying modelling assumptions to ensure they continue to reflect the risks inherent in the current rate environment and incorporate regulatory expectations. These changes in our underlying assumptions for risk measurement purposes also contributed to the movements in 2018. The movement in EVE sensitivities in 2018 was mainly due to the balance sheet management activities, changes in our underlying modelling assumptions for risk measurement purposes, and the yield curve movements mentioned above. The basis risk EaR in 2018 remained broadly stable. Interest rate risk Yield curve risk The table below shows how our base case income and valuation would be affected by a 50 basis point parallel shift (both up and down) applied instantaneously to the yield curve at 31 December 2018 and 2017. Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable. 50 basis points is the stress we typically focus on for banking market risk controls, although we also monitor sensitivities to other parallel andnon-parallel shifts as well as scenarios. | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | 2017 | | | | | +50bps | | | -50bps | | | | | +50bps | | | -50bps | | | | | £m | | | £m | | | | | £m | | | £m | | | | | | | | NIM sensitivity | | | 207 | | | | (23 | ) | | | | | 212 | | | | (125 | ) | EVE sensitivity (unaudited) | | | 162 | | | | (124 | ) | | | | | 95 | | | | (213 | ) |
Basis risk(unaudited) We report basis risk using the EaR approach. | | | | | | | | | | | | | | | 2018 | | | 2017 | | | | | £m | | | £m | | Basis risk EaR | | | 25 | | | | 24 | |
Interest rate repricing gap(unaudited) The table below shows the interest rate repricing gap of our balance sheet by repricing buckets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3 months | | | 1 year | | | 3 years | | | 5 years | | | >5 years | | | Not sensitive | | | Total | | | 2018 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | 128,173 | | | | 46,354 | | | | 61,946 | | | | 26,048 | | | | 13,705 | | | | 16,607 | | | | 292,833 | | Liabilities | | | 194,362 | | | | 16,762 | | | | 23,987 | | | | 13,508 | | | | 23,345 | | | | 23,845 | | | | 295,809 | | Off-balance sheet | | | 11,096 | | | | (12,204 | ) | | | (2,731 | ) | | | 6,870 | | | | (55 | ) | | | – | | | | 2,976 | | Net gap | | | (55,093 | ) | | | 17,388 | | | | 35,228 | | | | 19,410 | | | | (9,695 | ) | | | (7,238 | ) | | | – | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | Assets | | | 142,195 | | | | 34,661 | | | | 59,253 | | | | 18,746 | | | | 15,453 | | | | 16,782 | | | | 287,090 | | Liabilities | | | 178,179 | | | | 18,003 | | | | 25,487 | | | | 17,746 | | | | 25,559 | | | | 24,801 | | | | 289,775 | | Off-balance sheet | | | (10,383 | ) | | | (3,025 | ) | | | 4,364 | | | | 5,636 | | | | 6,093 | | | | – | | | | 2,685 | | Net gap | | | (46,367 | ) | | | 13,633 | | | | 38,130 | | | | 6,636 | | | | (4,013 | ) | | | (8,019 | ) | | | – | |
Spread risks(unaudited) The table below shows the risk metrics covering the portfolios of securities held for liquidity and investment purposes. | | | | | | | | | | | | 2018 | | | 2017 | | | | | £m | | | £m | | VaR | | | 4 | | | | 3 | | Worst three month stressed loss | | | 190 | | | | 193 | |
| | | | Annual Report 2018 | Risk review | | |
TRADING MARKET RISK OUR KEY TRADING MARKET RISKS(UNAUDITED) Our main exposure to trading market risk is in Corporate & Investment Banking and it is an inherent part of providing financial services for our customers. Our exposures are mainly affected by market movements in interest rates, credit spreads, and foreign exchange. We have no exposures in Retail Banking, Corporate & Commercial Banking or Corporate Centre. Trading market risk can reduce our net income. Its effect can be seen in our Consolidated Income Statement, where it appears in the ‘Net trading and other income’ line, under ‘Net trading and funding of other items by the trading book’. The impact of ring-fencing As part of our ring-fencing plans, activities that can no longer be served by a ring-fenced bank were migrated to the Banco Santander London Branch in 2018. This resulted in most of our market-making activity and the associated trading market risk being transferred outside of the Santander UK group. The implementation of ring-fencing changed our trading market risk profile at 31 December 2018, which can be seen in our VaR disclosures. At 31 December 2018, only a small amount of trading market risk from permitted products and permitted customers remains in the Santander UK ring-fenced bank. The ring-fenced bank has two trading desks, the Link Desk and Retailed Structured Products (RSP) Desk. The Link Desk is a multi-asset trading desk facilitating the trading of ring-fenced bank permissible products (vanilla products) for those clients served by our CIB division. The aim of the desk is to provide a platform for CIB activity within the ring-fenced bank. The desk operates under an appropriate governance framework to ensure all activity adheres to ring-fencing legislation. The Link Desk will enter into hedging transactions with Relevant Financial Institutions, in accordance with ring-fencing legislation. The RSP desk provides a channel to sell CIB hedged investments (such as ISAs and other notes) to retail investors, through our UK branches and elsewhere. Notes are issued by Santander UK plc and hedged with Relevant Financial Institutions, in accordance with ring-fencing legislation. This RSP activity raises funding for the Santander UK group. There is low trading market risk associated with the trading activity as notes are hedged and a price is made before any client transaction which reflects the live execution prices of all hedge and funding unwinds. Following the implementation of our ring-fencing plans, the majority of trading market risk is now from hedging activity andback-to-back trading, with generallysmaller-sized client trading and negligible position-taking. As a result of this reduced activity, we expect to significantly reduce our trading market risk limits for 2019. As a result of ring-fencing, and in response to the significant reduction in trading market risk in Santander UK and the corresponding reduction in market risk-related capital, we applied for and received approval from the ECB and PRA to decommission our Internal Model effective from 1 January 2019. The permission for an internal model was for certain trading book activity that has now been closed. For more on our Internal Model, see the ‘Capital requirement measures’ section below. TRADING MARKET RISK MANAGEMENT Risk appetite 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 CommitteeBRC and the Executive Risk Control Committee (ERCC)ERCC each month. A specific stress scenario has been created to report the XVA related risks in a comprehensive way. The stressed scenario will be monitored against the specific trigger that was set by ERCC during the annual limits review for 2018 and will be reported to both the BRC and ERCC periodically. Risk measurement(unaudited) 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 | | | VaR | | – VaR estimatesshows the maximum losses that we might suffer because of unfavourable changes in the markets under normalnon-stressed market conditions. | | – To calculate VaR we run a historical simulation, at a given confidence level, over a specified time period. We use one or two years of daily price history, with each day given equal weighting. | | – This means we include most market risk factors that could make a difference, and it gives us a consistent way of assessing risk for all these factors in all our portfolios. | | – We work with three main types of VaR, which all use the same calculation models. They are Internal VaR, Regulatory VaR and Stressed VaR. We have governance and controls for all forms of VaR, and we regularly review and assess them. |
| | | Internal VaR | | – We use this to calculate the total VaR in our trading book. It covers all the risk asset classes: interest rate, equity, credit (spread) and foreign exchange. We use two years of data for this simulation. | | – Like the rest of Banco Santander, we use a time horizon of one day and a confidence level of 99%. For any given day’s trading position, we would expect to suffer losses greater than the VaR estimate 1% of the time – once every 100 trading days, or two to three times a year. | | – For Internal VaR, we also calculate a time-weighted VaR using Banco Santander’s method. This gives more weight to the most recent days in the last two years, which means VaR changes more quickly in line with current market volatility. That gives us a better indication of how the market’s behaviour is changing, mitigating some limitations of VaR. | | – We measure Internal VaR every day, comparing the equally-weighted result with the time-weighted result and report the higher against the Santander UK and business unit level limits. The Santander UK limits arewere previously approved by the ExecutiveERCC. Following the completion of the ring-fencing transfer scheme and the significant reduction in trading book activity, the Santander UK limits are now approved by the Market and Structural Risk Control Committee.Forum rather than ERCC. We also report our equally weighted VaR against asset class and individual desk level limits. Whenever we find a limit has been exceeded, we report it, following the market risk framework. The main classes of risk that we measure Internal VaR on are: | – Interest rate risks:this measures the effect of changes in interest rates and how volatile they are. The effects are on cash instruments, securities and derivatives. This includes swap spread risk (the difference between swap rates and government bond rates), basis risk (changes in interest rate, tenor basis)equity and inflation risk (changes in inflation rates).
| – Equity risks:this measures the effect of changes in equity prices, volatility and dividends on stock and derivatives.
| – Credit (spread) risks:this measures the effect of changes in the credit spread of corporate bonds and credit derivatives.risks.
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| | | Regulatory VaR and Stressed VaR | | – We use these VaR models to calculate how much capital we need to hold for trading market risk. For these calculations, we only look at the factors for which we hold approval from the PRA.ECB and PRA (as we operate under their joint supervision). For credit and foreign exchange – factors which are not approved by the PRA for our VaR capital models – we use the standardised approach to calculate how much capital to hold. We also use the standardised approach for the ring-fenced bank. For more on this, see the ‘Capital requirement measures’ section. | | – For Regulatory VaR, we use a time horizon of ten days and a confidence level of 99%. To calculate theten-day time horizon, we use theone-day VaR multiplied by the square root of ten. This is the industry standard approach to scaling known as the ‘square root of time’ approach. We use the same two years of history as with Internal VaR. Stressed VaR is the same, except that we use only one year of history, from a time when markets were stressed relative to our current portfolio. | – The PRA also assesses Regulatory VaR and Stressed VaR.
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| | | Annual Report 2017 on Form 20-F | Risk review | | |
The limitations of VaR The main limitation ofWhilst VaR is thata useful and important market standard measure of risk 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 mightdoes however 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.some limitations, these include:
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 analysis, 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 risks metrics (explained in ‘Other ways of measuring risk’) and stress testing. In addition to using the illiquid risks metrics, to ensure such exposures are adequately included in our regulatory capital requirements, we have developed the Risks Not in VaR (RNIV) framework, in line with the regulatory requirement.
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.
| – | | VaR assumes what happened in the past is a reliable way to predict what will happen in the future, which may not always be the case. |
| – | | VaR is based on positions at the end of the business day so it doesn’t includeintra-day positions. |
| – | | VaR gives no guide to how big the loss could be on the 1% of trading days that it is greater than the VaR. |
| – | | 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. |
Back-testing – comparing VaR estimates with reality Every day,In order to check that the way we estimate VaR is reasonable, we back-test theour one day 99% Internal and Regulatory VaR. That means looking at the VaR estimates for the last year (250 working days)each day by comparing them against both actual and seeing how they compare to the actualhypothetical 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 uselosses, using aone-day time horizon. Our back-testing looks at two different types of profit and loss metrics:
– | | Actual: trading profit and loss, less fees, commissions, brokerage, reserves that are not related to market risk, and Day One sales profits |
– | | Hypothetical: like the ‘Actual’ 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 we need to recalibrate our VaR model. The CRR sets out criteria for how many exceptions are acceptable in the Regulatory VaR model. The PRA’s Supervisory Statements clarify the requirements further. If there are five or more exceptions in 250 days, then points are added to our capital requirement multiplier. In 2017, as It is not normally possible to back-test Stressed VaR, because it is not intended to tell us anything about our performance in 2016, no points were added to our multiplier, and we did not find any trends in the exceptions we experienced.normal conditions. Other ways of measuring risk
As well as VaR, we use the following methods to measure risk:
| | | Method
| | Description
| Profit and loss
| | The value of our tradeable instruments, such as shares and bonds, changes constantly. We report our profits and losses from them every day.
| Non-statistical measures | | We also have ways of measuring risk that do not depend on statistics. That includes looking at how sensitive we are to the variables we use to value our market risk positions. We record all our market risk exposures, set limits to the sensitivities for each, and then check every day whether we are staying within those limits. | Illiquid risks | | The financial instruments that we cannot sell or hedge in a day are classified as ‘illiquid risks’. We measure and monitor those differently depending on how long they would take to sell or hedge. There are three categories: less than a month, one to six months, or greater than six months. We check each category every day against our limits. | Expected shortfall (ES) analysis | | We also use a measurement called ES analysis. It goes some way to mitigate the limitations of the VaR model. ES allows us to better measure how big the loss could be on the 1% of the trading days that it is greater than VaR. |
Stress testing The Basel Capital Accord underlined that stressStress testing is an essential part of our risk management. It helps us to measure and controlevaluate the riskpotential impact on portfolio values of losses in difficult, volatilemore extreme, although plausible, events or unusual markets. It also makes us more transparent as the scenarios are easy to understand in headline terms.market moves.
Stress testing scenarios The scenarios we use for stress testing are part of our process for settingoutlined in our trading market risk appetite. Theyappetite and are central to the monthly Board Risk Appetite reporting. The scenarios are also part of theour daily processes for setting and monitoring risk management limits. We calculate the impact of over 100 scenarios on our CIB trading books each day. Over half of these are reported against limits, and we escalate any breaches. This could lead to our front office being asked to reduce risk. The others are not calibrated to the same severity – for instance to a much longer holding period or for a completely artificial scenario - and so are not in the same limit structure. The scenarios we create are partly inspired by past events, like the global financial crisis. They also include plausible ways that unusual market conditions could occur in future. This includes changes inthe future that impact 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 positions more easily than others. If it would take a long time to reduce a particular position in the stressed circumstances, we need to apply a correspondingly large shock to that position (as prices will move further over a longer time period). That Stress testing helps us to see how different amounts of liquidity in the markets would affect us in a stress event, such as an equity crash. It is important to make sure that the stress result we report is as realistic as possible. For more on how we design our scenarios for stress testing see ‘Stress Testing’ in the Risk Governance section.
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 Risk Control CommitteeERCC, and the Board Risk Committee –BRC about the results of our stress calculations, based on our current positions. Capital requirement measures Whenever we make changes to our models, we assess their effect on our capital requirements. Sometimes that means we need to tell the PRA and ECB and get their approval before we can make the change. | | | | | | Method | | Description | | | The Internal Models Approach (IMA) | | The PRA has given us permission to use the IMA, in line with 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 trading market risk capital requirement for the risk factors and businesses that we have ECB and PRA approval for. Following the implementation of the Ring-Fence Transfer Scheme, we applied to the ECB and PRA and received approval for a reverse extension application in order to decommission our IMA model from 1 January 2019. We no longer have any trading book positions on which to calculate IMA capital requirements. All other trading book positions in the ring-fenced bank are calculated using the standardised approach. | | | 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 Supervisory Statements. At 31 December 2017,2018, this amounted to 34% (2017: 11% (2016: 10%) of our total market risk capital requirement. | Stressed versus Regulatory VaR | | Stressed VaR The increase is due to the biggest partlower level of our tradingtotal market risk capital requirements. In 2017 and 2016, it was an average of six times bigger thanfrom the Regulatory VaR part. The factors that had the biggest effect on Stressed VaR in 2017 and 2016 were interest rate delta and interest rate basis. (For more on each of those factors, see the footnotes to the table in the ‘Trading market risk review’ section.) 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. In 2017 the selected stressed VaR historical window has had three different 250 day periods applied, aligning to the portfolioIMA reduction at the time. | Risks Not in VaR (RNIV) risk capital | | These risk factors can arise when there is not enough (or no) market data from the past, or when the quality of the data is not good enough. They tend to be for products that are not priced regularly, or whose risk structure is more complex.
In 2017, RNIV risk factors made up, on average, less than 3% (2016: 4%) of our IMA capital requirements for trading market risk. The biggest individual risk factors are dividend risk, caused by changes in market expectations about dividends, and Repo, which is the risk of a difference in the markets forward price and our own models’ internal forward price. The VaR approach does not capture these risks very well because of the illiquid nature of the risk factors. 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, and inform the regulator in the appropriate manner.
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 VaR 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.year end.
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Risk mitigation(unaudited) We manage and control trading market risk within clear parameters. We measure and monitor our risk exposures against these limits. There are specific levels that trigger relevant teams to take action or alert people in other functions. This means we can limit the impact of any negative market movements, while also improving our earnings. We keep the business units that originate trading market risk separate from the functions responsible for managing, controlling and overseeing risk. Risk monitoring and reporting(unaudited) We document and maintain a complete set of written policies, procedures and processes to help identify, assess, manage and report trading market risk.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
TRADING MARKET RISK REVIEW 20172018 compared to 20162017(unaudited)
The VaR figures show how much the fair values of all our tradeable instruments could have changed. Since trading instruments are recorded at fair value, these are also the amounts by which they could have increased or reduced our net income. There was only one floor-wide limit breach in 2017, which occurred in January 2017. This limit breach was driven As noted earlier, as part of our ring-fencing plans, activities that can no longer be served by the time weighted VaR metric (which is extremely sensitivea ring-fenced bank were migrated to the Banco Santander London Branch in 2018. This resulted in most recent VaR results),of our market-making activity and wasthe associated trading market risk being driven by a theoretical losstransferred outside of the Santander UK group. The implementation of ring-fencing changed our trading market risk profile at the end of 2016. This loss was caused by 2016 year-end demand for US Dollars during a time of increased illiquidity, and compounded by a three day effect31 December 2018, which can be seen in the VaR tables below. With this reduced activity the market risk sensitivity calculation.limits for 2019 will therefore be significantly reduced (VaR has reduced from £6m to £1m). At 31 December 2018, only a small amount of trading market risk from permitted products and permitted customers remains in the Santander UK ring-fenced bank. The three lossThere were no total VaR limit breaches in 2018. Following the completion of ring-fencing we saw an increase in the number of regulatory back-testing exceptions in 2017 were driven by individual events, and no changes or recalibrations to the VaR model were deemed necessary. The exception which occurred in April 2017 was marginal and was mainly driven by underlying interest rate changes. The changes were due to market reaction to the political and economic uncertainty at that time. The two exceptions that occurred in December 2017 were in cross currency and FX swap basis and were driven by US Dollar liquidity issues at year-end which began in mid-December 2017.exceptions. This was due to year-end volatilitythe profit and losses on the impact of upcoming tax reformsresidual activity in the US. Theretrading book being driven more bynon-market risk drivers, such as fee income, than by market risk drivers, such as changes in interest rates. This meant that VaR fell by more than expected, leading to a higher number of exceptions. For this increase in the number of exceptions (which was also one gain exceptionover the expected2-3 in December 2017, driven by basis spread (delta)a 250 day period) the capital calculations used the associatedCRR-required capital multipliers. As these residual trading books were inrun-off, the number of exceptions reduced in Q4 2018 and FX basis due to volatility leading up to year-end.from 1 January 2019 there are no longer any trading positions in these portfolios that generate trading market risk.
VaR This table and graph shows our Internal VaR for exposure to each of the main classes of risk for 20172018 and 2016.2017. | | | | Year-end exposure | | | | Average exposure | | | | Highest exposure | | | | Lowest exposure | | | Year-end exposure | | | | Average exposure | | | | Highest exposure | | | | Lowest exposure | | | | | 2017 | | 2016 | | | 2017 | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | 2017 | | | 2018 | | 2017 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | Trading instruments | | £m | | £m | | | £m | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | £m | | | £m | | £m | | | £m | | | £m | | | £m | | | £m | | Interest rate risks | | 2.6 | | | 2.9 | | | | | 2.5 | | | 2.5 | | | | | | 3.5 | | | | 3.6 | | | | | | 1.8 | | | | 1.7 | | | 0.5 | | | 2.6 | | | | | 1.4 | | | 2.5 | | | | | | 3.9 | | | | 3.5 | | | | | | 0.2 | | | | 1.8 | | Equity risks | | 0.3 | | | 1.4 | | | | | 0.6 | | | 0.9 | | | | | | 2.0 | | | | 1.5 | | | | | | 0.2 | | | | 0.6 | | | – | | | 0.3 | | | | | 0.2 | | | 0.6 | | | | | | 0.6 | | | | 2.0 | | | | | | – | | | | 0.2 | | Credit (spread) risks | | – | | | – | | | | | – | | | – | | | | | | – | | | | – | | | | | | – | | | | – | | | Foreign exchange risks | | 0.3 | | | 1.5 | | | | | 0.4 | | | 1.4 | | | | | | 1.6 | | | | 2.2 | | | | | | – | | | | 0.1 | | | 0.1 | | | 0.3 | | | | | 0.3 | | | 0.4 | | | | | | 0.9 | | | | 1.6 | | | | | | – | | | | – | | Diversification offsets(1) | | (0.7) | | | (2.3 | ) | | | | (0.8) | | | (2.0 | ) | | | | | – | | | | – | | | | | | – | | | | – | | | (0.2) | | | (0.7 | ) | | | | (0.5) | | | (0.8 | ) | | | | | – | | | | – | | | | | | – | | | | – | | Total correlated one-day VaR | | 2.5 | | | 3.5 | | | | | 2.7 | | | 2.8 | | | | | | 3.7 | | | | 3.6 | | | | | | 2.0 | | | | 1.7 | | | 0.4 | | | 2.5 | | | | | 1.4 | | | 2.7 | | | | | | 3.8 | | | | 3.7 | | | | | | 0.3 | | | | 2.0 | |
| (1) | | The highest and lowest exposures for each risk type did not necessarily happen on the same day as the highest and lowest total correlatedone-day VaR. It is impossible to calculate a corresponding correlation offset effect, so we have not included it in the table.it. |
Back-testing(unaudited)
The graph below shows our one-day 99% Internal VaR compared to the Actual and Hypothetical profit and loss.
 
BANKING MARKET RISK
OUR KEY BANKING MARKET RISKS(unaudited)
Banking market risk mainly comes from providing banking products and services to our customers, as well as our structural balance sheet exposures. It arises in all our business segments. In Retail Banking and Commercial Banking, it is a by-product of us writing customer business and we transfer most of these risks to Corporate Centre to manage. The only types of material banking market risk that we keep in Retail Banking and Commercial Banking are short-term mismatches due to forecasting variances in prepayment and launch risk. This is where customers repay their loans at a different point than their expected maturity date or do not take the expected volume of new products. In Global Corporate Banking, it arises from short-term markets and lending to corporates, which we also transfer to Corporate Centre to manage. Corporate Centre also manages our structural balance sheet exposures, such as foreign exchange and income statement volatility risk.
Our key banking market risks are:
| | | Key risks | | Description | Interest rate risk | | Yield curve risk:comes from timing mismatches in repricing fixed and variable rate assets, liabilities and off-balance sheet instruments. It also comes from investing non rate sensitive liabilities in interest-earning assets. We mainly measure yield curve risk with NIM and EVE sensitivities. We also use other risk measures, like stress testing and VaR. Our NIM and EVE sensitivities cover all the material yield curve risk in our banking book balance sheet.
| | | Basis risk:comes from pricing assets using a different rate index to the liabilities that fund them. We are exposed to basis risks associated with Base Rate, reserve rate linked assets we deposit with central banks, the Sterling Overnight Index Average (SONIA) rate, and LIBOR rates of different terms. | Inflation and spread risks
| | This arises when the value of (or income from) our assets or liabilities is affected by changes in inflation and credit spreads. We hold securities for liquidity and investment purposes that are exposed to these risks. We account for them as available-for-sale (AFS) securities or as held-to-maturity (HTM) investments. For more on our accounting policies, see Note 1 to the Consolidated Financial Statements.
| Foreign exchange risk
| | Our non-trading businesses operate mainly in sterling markets, so we do not create significant foreign exchange exposures. The only exception to this is money we raise in foreign currencies. For more on this, see the ‘Wholesale funding’ section.
| Income statement
volatility risk
| | We measure most of the assets and liabilities in our banking book balance sheet at amortised cost. We sometimes manage their risk profile by using derivatives. As all derivatives are accounted for at fair value, the mismatch in their accounting treatment can lead to volatility in our income statement. This happens even if the derivative is an economic hedge of the asset or liability.
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BANKING MARKET RISK MANAGEMENT
Risk appetite
Our framework for dealing with market risk is part of our overall Risk Framework. The banking market risk framework sets out our high-level arrangements and standards to manage, control and oversee banking market risk. Our Risk Appetite sets the controls, risk limits and key risk metrics for banking market risk. We articulate risk appetite by the income and value sensitivity limits we set in our Risk Appetite, at both Santander UK and Banco Santander group levels.
Risk measurement(unaudited)
For banking market risk, we mainly measure our exposures with NIM and EVE sensitivity analysis. We support this with the risk measures we explained in the ‘Trading market risk management’ section. We also monitor our interest rate repricing gap.
NIM and EVE sensitivities
NIM and EVE sensitivity measures are commonly used in the financial services industry. The calculations for NIM and EVE sensitivities involve many assumptions, including expected customer behaviour (such as early repayment of loans) and how interest rates may move. These assumptions are a key part of our overall control framework, so we update and review them regularly. Our NIM and EVE sensitivities include the interest rate risk from all our banking book positions. Our banking book positions generate almost all our reported net interest income.
| NIM sensitivity
| – NIM sensitivity is an income-based measure we use to forecast the changes to interest income and interest expense in different scenarios. It gives us a combined impact on net interest income over a given period – usually 12 or 36 months.
| – We calculate NIM sensitivity by simulating the NIM using two yield curves. The difference between the two NIM totals is the NIM sensitivity.
| – Our main model assumptions are that:
| – The balance sheet is dynamic. This means that it includes the run-off of current assets and liabilities as well as retained and new business
| – We use a behavioural balance sheet rather than contractual one. This means that we adjust balances for behavioural or assumed profile. We do this with most retail products whose behavioural maturity is different to the contractual maturity. This is usually because customers are exercising the option to withdraw or prepay early, or there is no contractual maturity.
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| EVE sensitivity
| – We calculate EVE as the change in the net present value of all the interest rate sensitive items in the banking book balance sheet for a defined set of instantaneous parallel and non-parallel shifts in the yield curve.
| – We use a static balance sheet. This means that all balance sheet items run-off according to their contractual, behavioural or assumed run-off behaviour (whichever is appropriate), and there is no retained or new business.
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| | | Annual Report 2017 on Form 20-F | Risk review | | |
The limitations of sensitivities
We use sensitivities to measure the impact of standard, instantaneous, parallel shifts in relevant yield curves. 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 limit negative interest rates, the yield curve may be ‘floored’. 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).
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, such as projected changes over time.
Other metrics we can use include VaR and Earnings at Risk (EaR). VaR can be useful because it captures changes in economic values. However, VaR will not reflect the actual impact of most of our banking book assets and liabilities on our Income Statement. This is because we account for them at amortised cost rather than fair value. EaR is similar to VaR but captures changes in income rather than value. This approach is mainly used to generate a one-year EaR measure to assess the capital requirement for Basis Risk.
Stress testing
We use stress testing of market risk factors to complement the risk measurement we get from standard sensitivities.
Stress testing scenarios
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 give us information about specific potential events. They can also test various outcomes that we might not capture through parallel stresses or VaR-type measures because of data or model limitations. We can also use stress tests to estimate losses in extreme market events beyond the confidence level used in VaR models. We can adapt our 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 three categories:
– | | Specific, deterministic stress tests that are not referenced to market history or expectations (such as parallel stresses of a given size) |
– | | Historic, deterministic stress tests with changes in market risk factors based either on specific past events (like the situation in the fourth quarter of 2008) or on our statistical analysis of changes in the past |
– | | Hypothetical, deterministic stress tests with changes in market risk factors based on our judgement of possible future rates in a given scenario. |
We can produce stress tests using either income or value measures. They cover one or more categories of exposures accounted for on an accruals basis or at fair value. We use expert judgement to define appropriate hypothetical stress tests and any adjusting assumptions based on the balance sheet, management actions and customer behaviour.
How we use stress testing
We discuss stress testing results at senior 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.
Risk mitigation(unaudited)
We mitigate Income Statement volatility mainly through hedge accounting. We monitor any hedge accounting ineffectiveness that might lead to Income Statement volatility with a VaR measure and trigger, reported monthly. For our accounting policies for derivatives and hedge accounting, see Note 1 to the Consolidated Financial Statements. We typically hedge the interest rate risk of the securities we hold for liquidity and investment purposes with interest rate swaps, retaining spread and inflation exposures. These retained exposures are the key drivers of the VaR and stress tests we use to assess the risk of the portfolio.
We hedge our foreign currency funding positions back to sterling, so our foreign exchange positions tend to be residual exposures that remain after hedging. These positions could be, for example, to ‘spot’ foreign exchange rates or to cross currency basis. We monitor foreign exchange risk against absolute net exposures and VaR-based limits and triggers. For more, see ‘Our funding strategy and structure’ and ‘Term issuance’ in the ‘Liquidity risk’ section.
Risk monitoring and reporting(unaudited)
We monitor the banking market risks of the portfolios we hold for liquidity and investment purposes using sensitivities, VaR and stress tests. We report them against limits and triggers to senior management daily and to ALCO and Executive Risk Control Committee monthly. The VaR we report captures all key sources of volatility (including interest rate, inflation and credit spread risks) to fully reflect the potential volatility.
BANKING MARKET RISK REVIEW
2017 compared to 2016(unaudited)
The movement in NIM sensitivities in 2017 was largely driven by higher levels of the yield curve over the second half of 2017 and the subsequent base rate rise in November 2017. During 2017, we took actions to prepare for the possibility of negative rates in the UK, including a review of our models to ensure they better reflected the risks inherent in the current low rate environment. These changes in our underlying models also contributed to the movements in the year.
The increase in EVE sensitivities in 2017 was mainly due to the same changes in our underlying models. These movements were partially offset by the impact of the Base Rate rise and the increased volume of fixed rate assets left unhedged over the year.
The increase in the basis risk EaR in 2017 was largely due to changes in the underlying net basis position as a result of the continued reduction in SVR mortgages and growth in bank account liability volumes.
The main risk factors of the portfolios of securities held for liquidity and investment purposes remain the inflation and spread risk exposures. The risk of the portfolios decreased in 2017 due to a reduction in the portfolio size as maturities and sales outweighed purchases, in addition to the portfolio rebalancing away from asset classes with relatively higher risk.
Interest rate risk
Yield curve risk
The table below shows how our base case income and valuation would be affected by a 50 basis point parallel shift (both up and down) applied instantaneously to the yield curve at 31 December 2017 and 2016. Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable. 50 basis points is the stress we typically focus on for banking market risk controls, although we also monitor sensitivities to other parallel and non-parallel shifts as well as scenarios.
| | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | | | | +50bps | | | -50bps | | | | | +50bps | | | -50bps | | | | | £m | | | £m | | | | | £m | | | £m | | NIM sensitivity | | | 212 | | | | (125 | ) | | | | | 240 | | | | (82 | ) | EVE sensitivity (unaudited) | | | 95 | | | | (213 | ) | | | | | 54 | | | | (30 | ) |
Basis risk(unaudited)
We report basis risk using the EaR approach.
| | | | | | | | | | | | 2017 | | | 2016 | | | | | £m | | | £m | | Basis risk EaR | | | 24 | | | | 13 | |
Interest rate repricing gap(unaudited)
The table below shows the interest rate repricing gap of our balance sheet by repricing buckets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3 months | | | 1 year | | | 3 years | | | 5 years | | | >5 years | | | Not sensitive | | | Total | | 2017 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Assets | | | 142,195 | | | | 34,661 | | | | 59,253 | | | | 18,746 | | | | 15,453 | | | | 16,782 | | | | 287,090 | | Liabilities | | | 178,179 | | | | 18,003 | | | | 25,487 | | | | 17,746 | | | | 25,559 | | | | 24,801 | | | | 289,775 | | Off-balance sheet | | | (10,383 | ) | | | (3,025 | ) | | | 4,364 | | | | 5,636 | | | | 6,093 | | | | – | | | | 2,685 | | Net gap | | | (46,367 | ) | | | 13,633 | | | | 38,130 | | | | 6,636 | | | | (4,013 | ) | | | (8,019 | ) | | | – | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | Assets | | | 139,262 | | | | 31,817 | | | | 54,289 | | | | 16,883 | | | | 16,358 | | | | 17,337 | | | | 275,946 | | Liabilities | | | 166,131 | | | | 20,418 | | | | 23,231 | | | | 18,451 | | | | 25,517 | | | | 26,000 | | | | 279,748 | | Off-balance sheet | | | (15,463 | ) | | | 7,596 | | | | (611 | ) | | | 7,361 | | | | 4,919 | | | | – | | | | 3,802 | | Net gap | | | (42,332 | ) | | | 18,995 | | | | 30,447 | | | | 5,793 | | | | (4,240 | ) | | | (8,663 | ) | | | – | |
Inflation and spread risks(unaudited)
The table below shows the risk metrics covering the portfolios of securities held for liquidity and investment purposes.
| | | | | | | | | | | | 2017 | | | 2016 | | | | | £m | | | £m | | VaR | | | 3 | | | | 5 | | Worst three month stressed loss | | | 193 | | | | 280 | |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Liquidity risk | | | Overview(unaudited) | | Key metrics(unaudited) | Liquidity risk is the risk that, while still being solvent, we do not have the liquid financial resources to meet our obligations when they fall due, or we can only obtain them at high cost. In 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)LCR and our eligible liquidity pool. We then explain our funding strategy and structure and we analyse our wholesale funding. Finally, we analyse how we have encumbered some of our assets to support our funding activities. | | LCR decreasedincreased to 164% (2017: 120% (2016: 139%) Wholesale funding with maturity <1 year downup to £14.9bn (2016: £21.4bn) £16.5bn (2017: £14.9bn)
LCR eligible liquidity pool decreasedincreased to £48.5bn (2016: £50.7bn)£54.1bn (2017: £48.5bn)
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OUR KEY LIQUIDITY RISKS(unaudited)(UNAUDITED) Through our Liquidity Risk AppetiteLRA framework, we manage our funding or structural contingent and market liquidity risks wherever they arise. This can be in any of the following areas: | | | Key risks
| | Description
| Retailretail and corporate deposit outflows, wholesale secured and unsecured liquidity outflows andoff-balance sheet activities. Other risks our framework covers include funding concentrations,intra-day cash flows, intra-group commitments and support, and franchise retention.
| | – Outflows if we are seen as more of a credit risk than our peers.
| Wholesale secured and
| | – Wholesale unsecured deposits failing to roll over at maturity date.
| unsecured liquidity outflows
| | – An inability to replace our wholesale secured funding on maturity.
| Off-balance sheet activities
| | – Collateral outflows if our credit rating was downgraded. This could also lead to higher costs or less capacity to raise funding.
| | | – Outflows of collateral we owe but that have not yet been called.
| | | – Outflows of collateral due to market movements.
| | | – Drawdowns on committed facilities based on facility type, and counterparty type and creditworthiness.
| Other risks
| | – Funding concentrations – outflows against concentrations of wholesale secured funding providers.
| | | – Intra-day cash flows – shortfall on the liquidity we need to support intra-day needs.
| | | – Intra-group commitments and support – cash in our subsidiaries becoming unavailable to the wider Santander UK group and contingent calls for funding from our subsidiaries and affiliates.
| | | – Franchise retention – outflows we need to support our future business and reputation.
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Our main sources of liquidity Customer deposits finance most of our customer lending. Although these funds are mostly callable, in practice 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 have a strong wholesale funding investor base, diversified across product types and geographies. Through the wholesale markets, we have active relationships in many sectors including banks, other financial institutions, corporates and investment funds. We access the wholesale funding markets for subordinated debt, longer-datedthrough the issuance of capital, senior unsecured debt, through Santander UK Group Holdings plc, covered bonds, structured notes shorter-dated senior unsecured debt and short-term funding. We also access these markets through Abbey National Treasury Services plc for short-term funding, and through securitisations of certain assets.assets of Santander UK plc and our operating subsidiaries. For more on our programmes, see Notes 16, 2415, 28 and 2529 in the Consolidated Financial Statements. We generate funding on the strength of our own balance sheet, our own profitability and our own network of investors. We do not rely on a guarantee 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 we are a PRA-regulated group, we have to meet PRA liquidity needs on a standalone basis. This means we have to prove to the PRA that we can withstand liquidity and capital stress tests. While we manage our funding and liquidity on a standalone basis, we coordinate our issuance plans with Banco Santander where it is appropriate to do. We also comply with rules set by the PRA, other regulators, and Banco Santander standards. While we manage, consolidate and monitor liquidity risk centrally, we also manage and monitor it in the business area it comes from. For more on our structural relationship with Banco Santander and how that impacts our liquidity management, see the Directors’ report. Our main uses of liquidity Our main uses of liquidity are to fund our lending in Retail Banking and Corporate & Commercial Banking, to pay interest and dividends, and to repay debt. Our ability to pay dividends depends on various factors. These include our regulatory capital needs, the level of our distributable reserves, and our financial performance. We also use liquidity to pay for business combinations.
LIQUIDITY RISK MANAGEMENT Introduction(unaudited) We manageIn 2018 we managed liquidity risk on a consolidated basis.basis in our CFO division, which is our centralised function for managing funding, liquidity and capital. We created our governance, oversight and control frameworks, and our LRA, on the same consolidated basis. Under this model, and the PRA’s liquidity rules, Santander UK plc and its subsidiaries Abbey National Treasury Services plcANTS and Cater Allen Limited form the Domestic LiquiditySub-group (DoLSub), which allows the entities to collectively meet regulatory requirements. Each member of the DoLSub will support the others by transferring surplus liquidity in times of stress.
With effect from 1 January 2019, and in accordance with our ring-fence structure, Santander UK plc was granted a new DoLSub permission, withdrawing ANTS from the existing UK DoLSub.
| | | | Annual Report 2018 | Risk review | | |
Risk appetite Our LRA statement is based on the principles of liquidity management we use to manage our balance sheet. It also supports our need to meet or exceed the rules of our regulators. In line with our liquidity management principles, we:we avoid an over-reliance on funding from a single product, customer or counterparty. We also maintain enough unencumbered customer assets to support current and future funding and collateral requirements, and maintain enough capacity to monetise liquid assets and other counterbalancing capacity within an appropriate timeframe. – | | Ensure that all maturing liabilities can be financed as they fall due, including across currencies and on an intraday basis |
– | | Maintain a level of customer loans versus customer deposits that prevents an over-reliance on wholesale markets |
– | | Maintain sufficient capacity to monetise liquid assets and other counterbalancing capacity within an appropriate timeframe |
– | | Avoid an over-reliance on funding from a single product, customer or counterparty |
– | | Fund long-term assets with long-term liabilities |
– | | Maintain sufficient unencumbered customer assets to support current and future funding and collateral requirements, including under stress |
– | | Ensure that liquidity costs and benefits are allocated to business activities from which they arose. |
TheOur LRA is proposed to the Risk division and the Board, which is then approved under advice from the Board Risk Committee, approves our LRA.Committee. Our LRA, in the context of our overall Risk Appetite, is reviewed and approved by the Board each year, or more often if needed. From 1 January 2019, separate LRAs for Santander UK plc and for ANTS plc have been approved. These are appropriate to their individual business models and consistent with the strategy of Santander UK Group Holdings plc.
Risk measurement(unaudited) We use a number of metrics to manage liquidity risk. These include metrics that show the difference between cash and collateral inflows and outflows in different periods. They also include structural metrics, such as our LDR ratio and our level of encumbered assets. Stress testing
We also have a liquidity stress test framework in place which is central to our LRA measurement and monitoring. It includes three severe but plausible stress test scenarios. To fit with our risk appetite, the liquidity outflows that come from these stress tests must be fully covered with high-quality liquid assets, other liquid assets and management actions sanctioned at the right level of governance. Additionally, a quarterly funding plan disruption stress scenario now forms part of our LRA monitoring.
Our Risk division runs our stress tests. They are:
| | | Test | | Description | Our LRA stress | | Three stress tests that cover idiosyncratic, market wide and combined scenarios and look at all our risks during these events. We reviewed and revised our LRA stresses in 2017 and updated the previous single stress scenario to these three whilst also calculating the outflows resulting from each and introducing regular funding plan disruption stress tests. | Global economic stress | | A stress test that looks at a slowdown in emerging markets which triggers a rapid deterioration in market sentiment globally and reduced confidence in the banking industry. Consumer purchasing power diminishes, resulting in retail and commercial outflows and drawdowns on liquidity facilities. | Acute retail stress | | Stress tests that look at a significant event that damages confidence of retail and commercial depositors, causing a material loss of deposits. | Slow retail stress | | Stress tests that look at the impact of a gradual prolonged period of loss of retail and commercial deposits and reduced wholesale financing. | Wholesale stress | | A stress test that assesses the impact of a significant loss of wholesale market confidence in Santander UK under which wholesale funding is no longer available to us in any currency. | Protracted stress | | A 12-month stress with a three-month period of severe liquidity constraint followed by a slow recovery in confidence in a recessionary economic environment. | Severe combined stress | | A stress test that looks at a deep and prolonged UK recession which impairs confidence in the UK banking sector, and results in a reduction in wholesale funding availability. Simultaneously Santander UK suffers an idiosyncratic shock leading to retail and commercial outflows.
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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 LRA and our regulatory liquidity metrics.
We monitor our LCR to ensure we continue to meet the requirements. Although the Basel Committee published its final Net Stable Funding Ratio (NSFR) standards in October 2014, the NSFR has not yet been implemented within Europe (unlike the LCR). As such there is no formal NSFR requirement applicable to UK or other EU banks until such time as the European Commission adopts appropriate regulatory and technical standards. Nonetheless, we monitor our NSFR on an ongoing basis and stand ready to comply with the standards once agreed.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Risk mitigation(unaudited)
The Board aims to make our balance sheet resilient at all times and for it to be perceived as such by stakeholders. This preserves our short and long-term viability. The Board recognises that as we are involved in maturity transformation, we cannot hold enough liquidity to cover all possible stress scenarios. The Board requires us to hold enough liquidity to make sure we will survive three plausible but severe stress scenarios. We do this by keeping a prudent balance sheet structure and maintaining our approved liquid resources. The three stress scenarios cover a severe idiosyncratic, market wide and combined stress scenario and we hold sufficient liquidity to survive the worst outcome.
Ongoing business management Within our framework of prudent funding and liquidity management, we manage our activities to minimise our liquidity risk. We have clear responsibilities for short-term funding, medium-term funding, encumbrance, collateral and liquid asset management. This ensures we manage liquidity risks as part of our daily operations, strategy and planning. We distinguish Our liquidity management framework is split between short-term and strategic activities. Our short-term activities focus onintra-day collateral; management and maintaining liquid assets to cover unexpected demands on cash in a stress scenario (such as follows:large and unexpected deposit withdrawals by customers and loss of wholesale funding). Our strategic activities focus on ensuring we are not over reliant on any one source for funding and that we avoid excessive concentrations in the maturity of our funding. | | | Short-term tactical liquidity management | | Description | Liquid resources | | We maintain liquid assets, contingent liquidity and defined management actions to source funds. We do this to cover unexpected demands on cash. This is 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 and concentrations. | Intra-day collateral management | | We make sure we have enough collateral to support our involvement in payment and settlement systems.
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| | | Strategic funding management | | Description | Structural balance sheet shape | | We manage our maturity transformation, where we invest shorter-term funding in longer-term assets. We also manage our use of wholesale funding for non-marketable assets, and our 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. We also avoid excessive concentrations in the maturity of our wholesale funding. | Wholesale funding capacity | | We maintain and promote our client relationships. We also monitor our line availability and maintain our funding capacity by using lines and markets.
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We regularly test the liquidity of our eligible liquidity pool, in line with PRA and Basel rules. We do this by realising some of the assets through repurchase or outright sale to the market. We make sure that over any12-month period we realise a significant part of our eligible liquidity pool. As well as our eligible liquidity pool, we hold a portfolio of unencumbered liquid assets at all times. Our LRA and PRA requirements determine the size and composition of this portfolio. These assets give us a source of contingent liquidity, as we can realise some of them in a time of stress to create liquidity through repurchase or outright sale to the market. StructureStress testing
We have a liquidity stress test framework in place which is central to our LRA measurement and organisationmonitoring. It includes three severe but plausible stress test scenarios. To fit with our risk appetite, the liquidity outflows that come from these stress tests must be fully covered with high-quality liquid assets, other liquid assets and management actions sanctioned at the right level of governance. Additionally, a funding plan disruption stress scenario forms part of our LRA monitoring. SantanderOur Risk division runs a range of stress tests. Our LRA stress test is a combination of three test that cover idiosyncratic, market-wide and combined scenarios. Our other tests consider scenarios such as a global economic slowdown that results in reduced confidence in the banking industry, a slowdown in one of the major economies or a deterioration in the availability of liquidity. These are considered on both an acute and protracted basis. We also run severe combined stress tests which look at both a deep and prolonged UK hasrecession that results in a centralised functionreduction in wholesale funding availability and a simultaneous idiosyncratic shock that would lead to retail and commercial outflows.
We also conduct sensitivity analysis and reverse stress testing for instant liquidity shocks by each key liquidity risk. We do this to understand the management of funding,impacts they would have on our LRA and our regulatory liquidity capital – the CFO Division. The division also manages interest rate risk inmetrics. We monitor our banking book. Under this approach, the CFO Division is responsible for centralising and managing these risks on behalf of Santander UK. A robust Funds Transfer Pricing (FTP) framework is criticalLCR to ensure that these risks are appropriately transferred intowe continue to meet the CFO Divisionrequirements. Although the Basel Committee published its final Net Stable Funding Ratio (NSFR) standards in October 2014, the NSFR has not yet been implemented within the EU (unlike the LCR). As such there is no formal NSFR requirement applicable to UK or other EU banks until such time as the European Commission adopts appropriate regulatory and thattechnical standards. Nonetheless, we monitor our NSFR on an ongoing basis and stand ready to comply with the costs and benefits are then passed back to the business (and ultimately our customers) and to incentivise the right behaviours in the businesses.standards once agreed. Risk mitigation(unaudited) The role of the CFO Division is to:Board aims to make our balance sheet resilient at all times and for it to be perceived as such by stakeholders. This preserves our short and long-term viability. The Board recognises that as we are involved in maturity transformation, we cannot hold enough liquidity to cover all possible stress scenarios. The Board requires us to hold enough liquidity to make sure we will survive three plausible but severe stress scenarios (our LRA stress). We do this by maintaining a prudent balance sheet structure and approved liquid resources. – | | Manage the provision of funding in order to meet the requirements of business strategy and plans |
– | | Propose the LRA to the Risk Division and Santander UK Board for approval |
– | | Manage the required liquid asset buffer |
– | | Maintain the Santander UK funding plan, ensuring it is compliant with the LRA and regulatory liquidity and capital requirements |
– | | Manage day-to-day operational liquidity and intra-day liquidity risk |
– | | Manage the Santander UK Recovery Plan and from January 2018 the Resolution Plan and operational continuity processes |
– | | Maintain policy and methodology for liquidity and interest rate FTP |
– | | Manage and submit liquidity regulatory reporting. |
Recovery and resolution framework In the event of a liquidity or capital stress, Santander UK haswe have developed a series of actions that would be taken that form part of theoutlined in our Recovery and Resolution Plan. This enables us to respond to a wide variety of stresses, from mild to severe, in a coordinated and efficient manner. TheOur Recovery and Resolution Plan addresses how we would manage a capital or liquidity stressstress. We would be managed. It would be invokedinvoke it in response to triggers across a range of metrics falling outside threshold levels, or a qualitative assessment of potential serious risks to our financial position and balance sheet strength. All of these metrics are part of our existing risk management processes. The Recovery and Resolution Plan has two phases with the firstwould be invoked as early and proactively as possible in order to mitigate a stress with suitable actions. Phase 2 would be invoked if a stress is severe enough to warrant more significant action. The Recovery Plan is approved by the Board under advice from the Board Audit Committee and is subject to ongoing review and enhancement. The CFO division manages the Recovery Plan and the operational continuity process. Risk monitoring and reporting(unaudited) We monitor liquidity risk daily, weekly and monthly. We do this through different committees and levels of management, including ALCO and the Board Risk Committee.
LIQUIDITY RISK REVIEW(unaudited) 20172018 compared to 20162017
| – | | Throughout 20172018 we maintained robust risk management controls to monitor and manage the levels of our eligible liquidity pool and encumbrance. The LCR decreasedincreased to 120%164% at 31 December 2017 (2016: 139%2018 (2017: 120%), reflectingThis increase reflects prudent planning and somepre-funding of our 2019 wholesale funding requirements. The lower USD balance reported in the increased requirements due to EU adoptioneligible liquidity pool reflects the impact of Regulatory Technical Standards for assessing additional collateral outflows and efficientring-fencing on our liquidity planning. The average LCR was 129%.requirements. |
| – | | Our LCR eligible liquidity pool significantly exceeded our wholesale funding of less than one year, with a coverage ratio of 326%322% at 31 December 2017 (2016: 237%2018 (2017: 326%), the. The coverage ratio increased primarily due to lower term funding maturities in 2018, the ratiowas broadly flat year on year, but continues to be volatile due to the management of normal short-term business commitments. |
| – | | The reductionLRA increased 29%, reflecting prudent planning and somepre-funding of our 2019 wholesale funding requirements offsetting an increase in the LRA was due to the increased severity of the stress scenarios and the extended 90 day term of the stress compared to the 60 day term of the 2016 scenario. There is also a new requirement to hold sufficient liquidity to cover the functioning of the notes circulation scheme.scenarios. |
Liquidity Coverage Ratio This table shows our LCR and LRA at 31 December 20172018 and 2016.2017. It reflects the stress testing methodology in place at that time. | | | | LCR | | | LRA(1) | | | LCR | | | | LRA(1) | | | | | 2017 £bn | | | 2016
£bn | | | 2017 £bn | | | 2016
£bn | | | 2018 £bn | | | 2017
£bn | | | 2018 £bn | | | 2017
£bn | | Eligible liquidity pool (liquidity value) | | | 47.4 | | | | 50.1 | | | | 45.7 | | | | 45.2 | | | | 53.0 | | | | 47.4 | | | | | | 52.2 | | | | 45.7 | | Net stress outflows | | | (39.7 | ) | | | (36.0 | ) | | | (34.7 | ) | | | (27.3 | ) | | | (32.4 | ) | | | (39.7) | | | | | | (32.1 | ) | | | (34.7) | | Surplus | | | 7.7 | | | | 14.1 | | | | 11.0 | | | | 17.9 | | | | 20.6 | | | | 7.7 | | | | | | 20.1 | | | | 11.0 | | Eligible liquidity pool as a percentage of anticipated net cash flows | | | 120% | | | | 139% | | | | 132% | | | | 166% | | | | 164% | | | | 120% | | | | | | 163% | | | | 132% | |
| (1) | | The 2016 LRA was a two month stress horizon, the 2017 LRA is a three month requirement based on the running of three stress scenarios.three-month Santander UK specific requirement. |
LCR eligible liquidity pool This table shows the carrying value and liquidity value of our eligible liquidity pool assets at 31 December 20172018 and 2016.2017. It also shows the weighted average carrying value in the year. | | | | Carrying value | | | Liquidity value(1) | | | Weighted average carrying
value in the year | | | Carrying value | | | | | Liquidity value(1) | | | | | Weighted average carrying
value in the year | | | | | 2017 £bn | | | 2016
£bn | | | 2017 £bn | | | 2016
£bn | | | 2017 £bn | | | 2016 £bn | | | 2018 £bn | | | 2017
£bn | | | 2018 £bn | | | 2017
£bn | | | 2018 £bn | | | 2017
£bn | | Cash and balances at central banks | | | 30.9 | | | | 16.0 | | | | 30.9 | | | | 16.0 | | | | 23.6 | | | | 19.0 | | | | 22.4 | | | | 30.9 | | | | | | 22.4 | | | | 30.9 | | | | | | 24.4 | | | | 23.6 | | Government bonds | | | 12.5 | | | | 29.5 | | | | 12.3 | | | | 29.5 | | | | 19.6 | | | | 18.4 | | | | 26.1 | | | | 12.5 | | | | | | 25.7 | | | | 12.3 | | | | | | 16.8 | | | | 19.6 | | Supranational bonds and multilateral development banks | | | 1.0 | | | | 1.5 | | | | 1.0 | | | | 1.5 | | | | 1.1 | | | | 1.4 | | | | 1.1 | | | | 1.0 | | | | | | 1.1 | | | | 1.0 | | | | | | 1.1 | | | | 1.1 | | Covered bonds | | | 2.7 | | | | 2.9 | | | | 2.3 | | | | 2.6 | | | | 2.7 | | | | 2.6 | | | | 2.7 | | | | 2.7 | | | | | | 2.5 | | | | 2.3 | | | | | | 2.6 | | | | 2.7 | | Asset-backed securities | | | 0.6 | | | | 0.7 | | | | 0.5 | | | | 0.5 | | | | 0.8 | | | | 0.8 | | | | 1.7 | | | | 0.6 | | | | | | 1.3 | | | | 0.5 | | | | | | 1.4 | | | | 0.8 | | Equities | | | 0.8 | | | | 0.1 | | | | 0.4 | | | | – | | | | 1.1 | | | | 0.5 | | | | 0.1 | | | | 0.8 | | | | | | – | | | | 0.4 | | | | | | 2.1 | | | | 1.1 | | | | | | 48.5 | | | | 50.7 | | | | 47.4 | | | | 50.1 | | | | 48.9 | | | | 42.7 | | | | 54.1 | | | | 48.5 | | | | | | 53.0 | | | | 47.4 | | | | | | 48.4 | | | | 48.9 | |
| (1) | | Liquidity value is the carrying value with the applicable LCR haircut applied. |
Currency analysis This table shows the carrying value of our eligible liquidity pool by major currencies at 31 December 20172018 and 2016,2017, the composition of the pool is consistent with the currency profile of our net liquidity outflows. | | | | US Dollar
£bn | | | Euro
£bn | | | Sterling
£bn | | | Other
£bn | | | Total
£bn | | | US Dollar £bn | | | Euro
£bn | | | Sterling
£bn | | | Other
£bn | | | Total
£bn | | 2018 | | | | 5.3 | | | | 3.9 | | | | 42.2 | | | | 2.7 | | | | 54.1 | | 2017 | | | 9.2 | | | | 1.8 | | | | 36.7 | | | | 0.8 | | | | 48.5 | | | | 9.2 | | | | 1.8 | | | | 36.7 | | | | 0.8 | | | | 48.5 | | 2016 | | | 10.1 | | | | 2.4 | | | | 37.6 | | | | 0.6 | | | | 50.7 | | |
Composition of the eligible liquidity pool This table shows the allocation of the carrying value of the assets in our eligible liquidity pool for LRA and LCR purposes at 31 December 20172018 and 2016.2017. | | | | 2017 | | | 2016 | | | 2018 | | | | | | 2017 | | | | | LCR eligible liquidity pool | | | | | | LCR eligible liquidity pool | | | | | | LCR eligible liquidity pool | | | Of which | | | | | LCR eligible liquidity pool | | | Of which | | | | | Level 1
£bn | | | Level 2A
£bn | | | Level 2B
£bn | | | Total
£bn | | | Of which
LRA
eligible
£bn | | | Level 1
£bn | | | Level 2A
£bn | | | Level 2B
£bn | | | Total
£bn | | | Of which
LRA
eligible
£bn | | | Level 1
£bn | | | Level 2A
£bn | | | Level 2B
£bn | | | Total
£bn | | | LRA eligible
£bn | | | | | Level 1
£bn | | | Level 2A
£bn | | | Level 2B
£bn | | | Total
£bn | | | LRA eligible
£bn | | Cash and balances at central banks | | | 30.9 | | | | – | | | | – | | | | 30.9 | | | | 30.3 | | | | 16.0 | | | | – | | | | – | | | | 16.0 | | | | 15.0 | | | | 22.4 | | | | – | | | | – | | | | 22.4 | | | | 21.8 | | | | | | 30.9 | | | | – | | | | – | | | | 30.9 | | | | 30.3 | | Government bonds: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – AAA to AA- | | | 11.0 | | | | – | | | | – | | | | 11.0 | | | | 11.0 | | | | 28.9 | | | | 0.2 | | | | – | | | | 29.1 | | | | 29.1 | | | | 23.6 | | | | – | | | | – | | | | 23.6 | | | | 23.3 | | | | | | 11.0 | | | | – | | | | – | | | | 11.0 | | | | 11.0 | | – A+ to A | | | – | | | | 1.5 | | | | – | | | | 1.5 | | | | 1.5 | | | | – | | | | 0.4 | | | | – | | | | 0.4 | | | | 0.4 | | | | – | | | | 2.5 | | | | – | | | | 2.5 | | | | 2.5 | | | | | | – | | | | 1.5 | | | | – | | | | 1.5 | | | | 1.5 | | Supranational bonds and multilateral development banks: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – AAA to AA- | | | 1.0 | | | | – | | | | – | | | | 1.0 | | | | 1.0 | | | | 1.5 | | | | – | | | | – | | | | 1.5 | | | | 1.5 | | | | 1.1 | | | | – | | | | – | | | | 1.1 | | | | 1.1 | | | | | | 1.0 | | | | – | | | | – | | | | 1.0 | | | | 1.0 | | Covered bonds: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – AAA to AA- | | | 1.5 | | | | 1.2 | | | | – | | | | 2.7 | | | | 2.7 | | | | 1.7 | | | | 1.2 | | | | – | | | | 2.9 | | | | 2.9 | | | | 1.6 | | | | 1.1 | | | | – | | | | 2.7 | | | | 2.7 | | | | | | 1.5 | | | | 1.2 | | | | – | | | | 2.7 | | | | 2.7 | | Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – AAA to AA- | | | – | | | | – | | | | 0.6 | | | | 0.6 | | | | 0.6 | | | | – | | | | – | | | | 0.7 | | | | 0.7 | | | | 0.3 | | | | – | | | | – | | | | 1.7 | | | | 1.7 | | | | 1.7 | | | | | | – | | | | – | | | | 0.6 | | | | 0.6 | | | | 0.6 | | Equities | | | – | | | | – | | | | 0.8 | | | | 0.8 | | | | 0.8 | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | | | – | | | | – | | | | 0.8 | | | | 0.8 | | | | 0.8 | | | | | | 44.4 | | | | 2.7 | | | | 1.4 | | | | 48.5 | | | | 47.9 | | | | 48.1 | | | | 1.8 | | | | 0.8 | | | | 50.7 | | | | 49.3 | | | | 48.7 | | | | 3.6 | | | | 1.8 | | | | 54.1 | | | | 53.2 | | | | | | 44.4 | | | | 2.7 | | | | 1.4 | | | | 48.5 | | | | 47.9 | |
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
FUNDING RISK MANAGEMENT Funding strategy(unaudited) Our funding strategy continues to be based on maintaining a conservatively structuredconservatively-structured balance sheet and diverse sources of funding.funding to meet the need of our business strategy and plans. The CFO Division maintains a funding plan and ensures it is compliant with the LRA and regulatory liquidity and capital requirements. Most of our funding comes from customer deposits. TheWe source the rest is sourced from a mix of secured and unsecured funding in the wholesale markets. Overall, this means that we do not rely too heavily on wholesale funds. This is reflected in our customer LDR ratio which we monitor against budget on a monthly basis. At the same time, it makes sure our sources of funding are not too concentrated on any one product. We also have checks and controls to limit our asset encumbrance from our secured funding operations. As part of maintaining a diverse funding base, we raise funding in a number of currencies, including euro and USD, and convert it into sterling through currency swaps to fund our commercial assets which are largely sterling denominated. Our base of stable retail and corporate deposits is a key funding source for us. We leverage our large and diverse customer base to offer products that give us a long-term sustainable source of funding. We do this by focusing on building long-term relationships. Around 90% of our total core retail customer liabilities are covered by the Financial Services Compensation Scheme (the FSCS). Behavioural maturities The contractual maturity of our balance sheet assets and liabilities highlights the maturity transformation that underpins the role of banks to lend long term, but to fund themselves mainly with shorter-term liabilities, like customer deposits. We achievedo this by diversifying our funding operations across a wide customer base, both in numbers and by type of depositor. In practice, the behavioural profiles of many liabilities show more stability and longer maturity than thetheir contractual maturity. This is especially true of many types of retail and corporate deposits that, while they may be repayable on demand or at short notice, have shown good stability even in times of stress. We model behaviour profiles using our experience of customer behaviour. We use this data to determine the funds transfer pricing interest rates at which we reward and charge our business units for sources and uses of funds. We apply this rate until a customer changes onto a different product or service offered by us or by one of our competitors. We continue to improve the quality of our retail, commercial and wholesale deposits. Across all customer segments, weWe aim to deepen our customer relationships.relationships across all customer segments. We do this to lengthen the contractual and behavioural profile of our liability base. In Retail Banking, we support this aim with attractive products such as the 1l2l3 World offering. Deposit funding OurWe mainly fund our Retail Banking and Corporate & Commercial Banking activities are mainly funded by customer deposits. TheWe fund the rest is funded through wholesale markets.
Wholesale funding Wholesale funding and issuance model(unaudited)(unaudited) Banco Santander is a multiple point of entry resolution group. This means that should it fail, it would be split up into parts. Healthy parts might be sold or be kept as a residual group without their distressed sister companies. The resolution or recapitalisation 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 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 written off or converted into equity as necessaryneeded to recapitalise the group. Those bondholders would become the new owners, and 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.and offers no guarantee to them. This structure is a Bank of England recommended configuration which aims to resolve banks without disrupting the activities of their operating companies, thereby maintaining continuity of services for customers.
Our current structure is:
(1) | | Short-term funding is in the process of being transferred from Abbey National Treasury Services plc to Santander UK plc. |
Composition of wholesale funding(unaudited) 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. Detailscapital. For details of our main programmes, are available insee the Funding Information section of our websitewww.santander.co.uk/uk/about-santander-uk/investor-relations/funding-information. As partFollowing the implementation of our ring-fencing plan, Santander UK plc is now our main operating company issuer of senior unsecured debt, structured notes, short-term funding and covered bonds. Santander UK Group Holdings plc is the issuer of subordinated debtcapital and Minimum Requirement for Own Funds and Eligible Liabilities (MREL)/MREL/Total Loss Absorbing Capacity (TLAC) eligible senior unsecured debt. For more on our ring-fencing plan see Note 39.
We also access the wholesale markets through securitisations of certain assets of the Santander UK group’s operating subsidiaries. In addition, we have access to the UK Government funding schemes. Eligible collateral for these schemes set out below. For each scheme, eligible collateral includes all collateral that is eligible in the Bank of England’s Discount Window Facility. We ensure that sufficient collateral is placed and available at the Discount Window. | | | Scheme106 | | Description | Discount Window Facility (DWF)
| | The DWF is a bilateral on-demand service for firms experiencing either a firm-specific or market-wide shock. It allows firms to borrow highly liquid assets in return for less liquid collateral. This lending can be large in size and for a variable term. | Term Funding Scheme (TFS)
| | The TFS aims to reinforce the transmission of Base Rate cuts to the interest rates actually faced by households and businesses by providing term funding to banks at rates close to Base Rate. The TFS allows participants to borrow central bank reserves in exchange for eligible collateral. It links the price and quantity of funding to net lending to UK households, the non-financial sector and non-bank credit providers over a specified period. | Funding for Lending Scheme (FLS)
| | The FLS is designed to boost lending to UK households and non-financial companies. It does this by giving funding to banks and building societies for an extended period – it links both the price and quantity of funding to the net UK non-financial sector lending over a specified period. The FLS lets participants borrow UK Treasury bills in exchange for eligible collateral in a drawdown window. The FLS was closed on 31 January 2018. | Contingent Term Repo Facility (CTRF)
| | The CTRF will be activated by the Bank of England in response to actual or prospective market-wide stress. It gives short-term liquidity to the market through monthly auctions using eligible collateral as security. | Indexed Long-Term Repo (ILTR)
| | The 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 can borrow using eligible collateral as security.
|
| | | Annual Report 2017 on Form 20-F | Risk review | | > Liquidity risk |
FUNDING RISK REVIEW 20172018 compared to 20162017(unaudited)
| – | | Together with our immediate parent, Santander UK Group Holdings plc, our overall funding strategy remains to develop and sustain a diversified funding base. We also need to fulfil regulatory requirements as well as support our credit ratings. 20172018 presented a positivechallenging market environment for issuance, debt capital markets experienced pockets of volatility throughout the year. However, despite the continuing backdrop of globalgeo-political tensions and other political issues causing intermittent volatility. Despite concerns around political events such as the French and UK elections turbulence and the ongoing negotiation ofconcerns around Brexit, the UK’s exit from the EU, the marketcredit markets remained open and offered excellentwe saw good demand from investors for high quality paper, though at wider credit spreads. The bulk of funding opportunities across all asset classes and currencies, allowing issuers to fund themselvesin 2018 was done in the wholesale markets at the lowest levels since the financial crisis. Equities also proved resilient and endedfirst half of the year, at record highs. In April 2017, we tooktaking advantage of the strong risk appetite for higher risk products and issued £500m Perpetual Capital Securities to our immediate parent, Santander UK Group Holdings plc.more positive market conditions. |
| – | | In 2017, medium term funding balances were lower with TFS drawdown replacing some of2018, our matured funding. Our total term funding was £11.8bn (2016: £12.9bn)£17.1bn (2017: £11.8bn), of which £0.5bn (2016: £nil) was capital issuance, £7.3bn (2016: £8.4bn)£14.8bn (2017: £7.3bn) was medium-term issuance and £4.0bn (2016: £4.5bn)£2.3bn (2017: £4.0bn) was TFS.from the UK Government’s Term Funding Scheme (TFS). |
| – | | The £7.3bn£14.8bn medium-term funding included £2.1bn£2.7bn of downstreamed funding from issuances by our immediate parent (this(since 1 January 2019, Santander UK Group Holdings plc has downstreamed c.£8.7bn to Santander UK plc as ‘secondarynon-preferential debt’ in line with the MREL guidelines of the Bank of England, such debt is currently in the form of loans that rank pari passu withsubordinated to our existing senior unsecured liabilities), £1.2bn£4.5bn of senior unsecured notes, from the Company, £2.3bn£4.3bn of covered bonds and £1.7bn£3.3bn of securitisations.securitisations from the Company. |
| – | | Maturities in 20172018 were £13.1bn (2016: £13.5bn)£6.9bn (2017: £13.1bn). At 31 December 2017,2018, 77% (2017: 75% (2016: 67%) of wholesale funding had a maturity of greater than one year, with an overall residual duration of 4337 months (2016: 41(2017: 43 months). The total drawdown outstanding from the TFS was £8.5bn (2016: £4.5bn)£10.8bn (2017: £8.5bn) and the total drawdowns of UK Treasury Bills under the FLS remainedwere at £3.2bn (2016£1.0bn (2017: £3.2bn). |
| – | | Our level of encumbrance from external and internal issuance of securitisations and covered bonds decreased in 2017, as planned. This reflected greater maturities than new issues in the period. We expect our overall level of encumbrance to remainremained broadly static in 2018.2018, as planned. |
Reconciliation of wholesale funding to the balance sheet This table reconciles our wholesale funding to our balance sheet at 31 December 20172018 and 2016.2017. | | | | | | Balance sheet line item | | | | | Balance sheet line item | | | | | | | | | | | | | Financial | | | | | | | | | | | | | | | Repurchase | | | | Financial | | | | | | | | | | | Funding | | Deposits | | Deposits
by | | Trading | | liabilities designated at | | Debt securities | | Subordinated | | Other equity | | | Funding | | Deposits | | Deposits by | | agreements – non | | Trading | | liabilities designated | | Debt securities | | Subordinated | | Other equity | | | | | analysis | | by banks | | customers(1) | | liabilities | | fair value | | in issue | | liabilities | | instruments(2) | | | analysis | | by banks | | customers(1) | | trading(2) | | liabilities | | at fair value | | in issue | | liabilities | | instruments(3) | | | 2017 | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | | | 2018 | | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | Deposits | | 0.3 | | | 0.2 | | | | – | | | | – | | | 0.1 | | | | – | | | | – | | | | – | | | 1.0 | | | 1.0 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Certificates of deposit and commercial paper | | 8.0 | | | | – | | | | – | | | | – | | | 0.4 | | | 7.6 | | | | – | | | | – | | | 6.4 | | | | – | | | | – | | | | – | | | | – | | | | – | | | 6.4 | | | | – | | | | – | | Senior unsecured – public benchmark | | 17.8 | | | | – | | | 6.0 | | | | – | | | | – | | | 11.8 | | | | – | | | | – | | | 21.2 | | | | – | | | 8.6 | | | | – | | | | – | | | | – | | | 12.6 | | | | – | | | | – | | | – privately placed | | 3.1 | | | | – | | | | – | | | | – | | | 1.1 | | | 2.0 | | | | – | | | | – | | | 4.0 | | | | – | | | 0.1 | | | | – | | | | – | | | 1.0 | | | 2.9 | | | | – | | | | – | | Covered bonds | | 14.2 | | | | – | | | | – | | | | – | | | | – | | | 14.2 | | | | – | | | | – | | | 16.6 | | | | – | | | | – | | | | – | | | | – | | | | – | | | 16.6 | | | | – | | | | – | | Securitisation and structured issuance | | 5.5 | | | | 1.0(3 | ) | | 0.5 | | | | – | | | | – | | | 4.0 | | | | – | | | | – | | | 7.8 | | | | – | | | 0.5 | | | 2.2 | | | | – | | | | – | | | 5.1 | | | | – | | | | – | | Term Funding Scheme | | 8.5 | | | 8.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 10.8 | | | 10.8 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Subordinated liabilities and equity | | 5.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | 3.2 | | | 2.3 | | | 5.0 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 3.0 | | | 2.0 | | Total wholesale funding | | 62.9 | | | 9.7 | | | 6.5 | | | | – | | | 1.6 | | | 39.6 | | | 3.2 | | | 2.3 | | | 72.8 | | | 11.8 | | | 9.2 | | | 2.2 | | | | – | | | 1.0 | | | 43.6 | | | 3.0 | | | 2.0 | | Repos | | 25.6 | | | 0.1 | | | | – | | | 25.5 | | | | – | | | | – | | | | – | | | | – | | | 10.8 | | | | – | | | | – | | | 8.7 | | | | – | | | 2.1 | | | | – | | | | – | | | | – | | Foreign exchange and hedge accounting | | 3.9 | | | | – | | | 0.3 | | | | – | | | | – | | | 3.0 | | | 0.6 | | | | – | | | 4.2 | | | | – | | | 0.5 | | | | – | | | | – | | | | – | | | 3.1 | | | 0.6 | | | | – | | Other | | 10.3 | | | | 4.0(3 | ) | | | – | | | | 5.6(4 | ) | | 0.7 | | | | – | | | | – | | | | – | | | 8.6 | | | 5.4(4) | | | | – | | | | – | | | | – | | | 3.2 | | | | – | | | | – | | | | – | | Balance sheet total | | 102.7 | | | 13.8 | | | 6.8 | | | 31.1 | | | 2.3 | | | 42.6 | | | 3.8 | | | 2.3 | | | 96.4 | | | 17.2 | | | 9.7 | | | 10.9 | | | | – | | | 6.3 | | | 46.7 | | | 3.6 | | | 2.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 0.7 | | | | 0.3 | | | | – | | | | 0.4 | | | | – | | | | – | | | | – | | | | – | | | | 0.3 | | | | 0.2 | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | Certificates of deposit and commercial paper | | | 8.4 | | | | – | | | | – | | | | – | | | | 0.5 | | | | 7.9 | | | | – | | | | – | | | | 8.0 | | | | – | | | | – | | | | – | | | | – | | | | 0.4 | | | | 7.6 | | | | – | | | | – | | Senior unsecured – public benchmark | | | 16.7 | | | | – | | | | 4.1 | | | | – | | | | – | | | | 12.6 | | | | – | | | | – | | | | 17.8 | | | | – | | | | 6.0 | | | | – | | | | – | | | | – | | | | 11.8 | | | | – | | | | – | | – privately placed | | | 4.9 | | | | – | | | | – | | | | – | | | | 1.4 | | | | 3.5 | | | | – | | | | – | | | | 3.1 | | | | – | | | | – | | | | – | | | | – | | | | 1.1 | | | | 2.0 | | | | – | | | | – | | Covered bonds | | | 15.2 | | | | – | | | | – | | | | – | | | | – | | | | 15.2 | | | | – | | | | – | | | | 14.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 14.2 | | | | – | | | | – | | Securitisation and structured issuance | | | 9.6 | | | | 2.1(3 | ) | | | 0.5 | | | | – | | | | – | | | | 7.0 | | | | – | | | | – | | | | 5.5 | | | | – | | | | 0.5 | | | | 1.0 | | | | – | | | | – | | | | 4.0 | | | | – | | | | – | | Term Funding Scheme | | | 4.5 | | | | 4.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 8.5 | | | | 8.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Subordinated liabilities and equity | | | 5.2 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 3.4 | | | | 1.8 | | | | 5.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 3.2 | | | | 2.3 | | Total wholesale funding | | | 65.2 | | | | 6.9 | | | | 4.6 | | | | 0.4 | | | | 1.9 | | | | 46.2 | | | | 3.4 | | | | 1.8 | | | | 62.9 | | | | 8.7 | | | | 6.5 | | | | 1.0 | | | | – | | | | 1.6 | | | | 39.6 | | | | 3.2 | | | | 2.3 | | Repos | | | 8.8 | | | | – | | | | – | | | | 8.8 | | | | – | | | | – | | | | – | | | | – | | | | 25.6 | | | | – | | | | – | | | | 0.1 | | | | 25.5 | | | | – | | | | – | | | | – | | | | – | | Foreign exchange and hedge accounting | | | 5.4 | | | | – | | | | 0.4 | | | | – | | | | – | | | | 4.1 | | | | 0.9 | | | | – | | | | 3.9 | | | | – | | | | 0.3 | | | | – | | | | – | | | | – | | | | 3.0 | | | | 0.6 | | | | – | | Other | | | 9.8 | | | | 2.9(3 | ) | | | – | | | | 6.4(4 | ) | | | 0.5 | | | | – | | | | – | | | | – | | | | 10.3 | | | | 4.0(4) | | | | – | | | | – | | | | 5.6(5) | | | | 0.7 | | | | – | | | | – | | | | – | | Balance sheet total | | | 89.2 | | | | 9.8 | | | | 5.0 | | | | 15.6 | | | | 2.4 | | | | 50.3 | | | | 4.3 | | | | 1.8 | | | | 102.7 | | | | 12.7 | | | | 6.8 | | | | 1.1 | | | | 31.1 | | | | 2.3 | | | | 42.6 | | | | 3.8 | | | | 2.3 | |
| (1) | This is included in our balance sheet total of £183,648m (2016: £177,172m)£178,090m (2017: £183,648m). |
| (2) | This isFrom 1 January 2018, thenon-trading repurchase agreements that are held at amortised cost are now presented as separate lines in the balance sheet, as described in Note 1. Comparatives arere-presented accordingly. |
| (3) | Consists of £14m (2016:(2017: £14m) fixed/floating ratenon-cumulative callable preference shares, £235m (2016:(2017: £235m)Step-up Callable Perpetual Reserve Capital Instruments and £2,046m (2016: £1,550m)£1,756m (2017: £2,046m) Perpetual Capital Securities. See Note 3134 to the Consolidated Financial Statements. |
(3)(4) | Securitisation and structured issuance comprise of repurchase agreements. Other comprisesconsists of items in the course of transmission and other deposits, excluding the Term Funding Scheme.TFS. See Note 2126 to the Consolidated Financial Statements. |
(4)(5) | Short positions in securities and unsettled trades, cash collateral and short-term deposits. See Note 23 to the Consolidated Financial Statements. |
| | | | Annual Report 2018 | Risk review | | > Liquidity risk |
Maturity profile of wholesale funding This table shows our main sources of wholesale funding. It does not include securities financing repurchase and reverse repurchase agreements. The table is based on exchange rates at issue and scheduled repayments and call dates. It does not reflect the final contractual maturity of the funding. | | | | | | >1 and | | >3 and | | >6 and | | >9 and | | Sub-total | | >1 and | | >2 and | | | | | | | < 1 | | >1 and | | >3 and | | >6 and | | >9 and | | Sub-total | | >1 and | | >2 and | | | | | | | | | <=1 month | | <=3 months | | <= 6 months | | <=9 months | | <=12 months | | <=1 year | | <=2 years | | <=5 years | | >5 years | | Total | | | month | | <3 months | | <6 months | | <9 months | | <12 months | | <1 year | | <2 years | | <5 years | | >5 years | | Total | | 2017 | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | | | 2018 | | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | £bn | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1) | | | | | | | | | | | | | | | | | | | | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1) | | | | | | | | | | | | | | Senior unsecured – public benchmark | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 3.8 | | | 2.1 | | | 5.9 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.8 | | | 6.2 | | | 1.6 | | | 8.6 | | – privately placed | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.1 | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.1 | | | 0.1 | | Subordinated liabilities and equity (incl. AT1) | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.8 | | | 0.8 | | | 1.4 | | | 3.0 | | | | – | | | | – | | | 0.2 | | | | – | | | 0.3 | | | 0.5 | | | | – | | | 0.8 | | | 1.5 | | | 2.8 | | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.8 | | | 4.6 | | | 3.6 | | | 9.0 | | | | – | | | | – | | | 0.2 | | | | – | | | 0.3 | | | 0.5 | | | 0.8 | | | 7.0 | | | 3.2 | | | 11.5 | | Other Santander UK plc | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | – | | | 0.1 | | | | – | | | | – | | | | – | | | 0.1 | | | | – | | | | – | | | | – | | | 0.1 | | | | – | | | 1.0 | | | | – | | | | – | | | | – | | | 1.0 | | | | – | | | | – | | | | – | | | 1.0 | | Certificates of deposit and commercial paper | | 0.2 | | | 0.6 | | | 0.6 | | | 0.1 | | | 0.1 | | | 1.6 | | | | – | | | | – | | | | – | | | 1.6 | | | 1.5 | | | 3.6 | | | 1.1 | | | 0.1 | | | 0.1 | | | 6.4 | | | | – | | | | – | | | | – | | | 6.4 | | Senior unsecured – public benchmark | | 0.8 | | | | – | | | | – | | | 1.3 | | | | – | | | 2.1 | | | 2.9 | | | 5.4 | | | 1.5 | | | 11.9 | | | 0.8 | | | 1.5 | | | | – | | | 0.6 | | | | – | | | 2.9 | | | 4.8 | | | 3.5 | | | 1.4 | | | 12.6 | | – privately placed | | | – | | | 0.7 | | | | – | | | | – | | | | – | | | 0.7 | | | 1.3 | | | 0.6 | | | 0.4 | | | 3.0 | | | | – | | | | – | | | 1.0 | | | 0.3 | | | | – | | | 1.3 | | | 1.8 | | | 0.4 | | | 0.4 | | | 3.9 | | Covered bonds | | 0.9 | | | | – | | | 1.0 | | | | – | | | | – | | | 1.9 | | | 1.3 | | | 7.7 | | | 3.3 | | | 14.2 | | | | – | | | | – | | | | – | | | 1.4 | | | | – | | | 1.4 | | | 2.8 | | | 8.4 | | | 4.0 | | | 16.6 | | Securitisation and structured issuance(2) | | | – | | | | – | | | 0.4 | | | | – | | | 0.9 | | | 1.3 | | | 0.6 | | | 1.2 | | | 0.1 | | | 3.2 | | | 0.8 | | | 0.6 | | | 0.6 | | | 0.2 | | | 0.4 | | | 2.6 | | | 0.8 | | | 2.5 | | | | – | | | 5.9 | | Term Funding Scheme | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 8.5 | | | | – | | | 8.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 4.5 | | | 6.3 | | | | – | | | 10.8 | | Subordinated liabilities | | 0.1 | | | | – | | | | – | | | | – | | | 0.1 | | | 0.2 | | | | – | | | | – | | | 2.3 | | | 2.5 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 0.9 | | | 1.3 | | | 2.2 | | | | | 2.0 | | | 1.4 | | | 2.0 | | | 1.4 | | | 1.1 | | | 7.9 | | | 6.1 | | | 23.4 | | | 7.6 | | | 45.0 | | | 3.1 | | | 6.7 | | | 2.7 | | | 2.6 | | | 0.5 | | | 15.6 | | | 14.7 | | | 22.0 | | | 7.1 | | | 59.4 | | Other group entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | 0.1 | | | 0.1 | | | | – | | | | – | | | | – | | | 0.2 | | | | – | | | | – | | | | – | | | 0.2 | | | Certificates of deposit and commercial paper | | 2.7 | | | 2.4 | | | 1.3 | | | | – | | | | – | | | 6.4 | | | | – | | | | – | | | | – | | | 6.4 | | | Securitisation and structured issuance(3) | | | – | | | | – | | | | – | | | | – | | | 0.4 | | | 0.4 | | | 1.0 | | | 0.9 | | | | – | | | 2.3 | | | | – | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.4 | | | 0.4 | | | 1.1 | | | | – | | | 1.9 | | | | | 2.8 | | | 2.5 | | | 1.3 | | | | – | | | 0.4 | | | 7.0 | | | 1.0 | | | 0.9 | | | | – | | | 8.9 | | | Total | | 4.8 | | | 3.9 | | | 3.3 | | | 1.4 | | | 1.5 | | | 14.9 | | | 7.9 | | | 28.9 | | | 11.2 | | | 62.9 | | | Total at 31 December 2018 | | | 3.1 | | | 6.8 | | | 3.0 | | | 2.7 | | | 0.9 | | | 16.5 | | | 15.9 | | | 30.1 | | | 10.3 | | | 72.8 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Secured | | 0.9 | | | | – | | | 1.4 | | | | – | | | 1.3 | | | 3.6 | | | 2.9 | | | 18.3 | | | 3.4 | | | 28.2 | | | 0.8 | | | 0.7 | | | 0.7 | | | 1.7 | | | 0.5 | | | 4.4 | | | 8.5 | | | 18.3 | | | 4.0 | | | 35.2 | | – Unsecured | | 3.9 | | | 3.9 | | | 1.9 | | | 1.4 | | | 0.2 | | | 11.3 | | | 5.0 | | | 10.6 | | | 7.8 | | | 34.7 | | | 2.3 | | | 6.1 | | | 2.3 | | | 1.0 | | | 0.4 | | | 12.1 | | | 7.4 | | | 11.8 | | | 6.3 | | | 37.6 | | | | | 4.8 | | | 3.9 | | | 3.3 | | | 1.4 | | | 1.5 | | | 14.9 | | | 7.9 | | | 28.9 | | | 11.2 | | | 62.9 | | | 3.1 | | | 6.8 | | | 3.0 | | | 2.7 | | | 0.9 | | | 16.5 | | | 15.9 | | | 30.1 | | | 10.3 | | | 72.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1) | | | | | | | | | | | | | | | | | | | | | | Senior unsecured – public benchmark | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2.7 | | | | 1.3 | | | | 4.0 | | | – privately placed | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | Subordinated liabilities and equity (incl. AT1) | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.8 | | | | 1.7 | | | | 2.5 | | | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 3.5 | | | | 3.1 | | | | 6.6 | | | Other Santander UK plc | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | – | | | | – | | | | – | | | | 0.1 | | | Senior unsecured – public benchmark | | | – | | | | 0.9 | | | | – | | | | 0.9 | | | | – | | | | 1.8 | | | | 2.1 | | | | 6.7 | | | | 2.1 | | | | 12.7 | | | – privately placed | | | 0.9 | | | | – | | | | – | | | | 0.4 | | | | 0.2 | | | | 1.5 | | | | 0.6 | | | | 1.4 | | | | 0.2 | | | | 3.7 | | | Covered bonds | | | 1.0 | | | | – | | | | 0.8 | | | | – | | | | 1.4 | | | | 3.2 | | | | 1.8 | | | | 6.1 | | | | 4.1 | | | | 15.2 | | | Securitisation and structured issuance(2) | | | 0.8 | | | | 0.3 | | | | 1.1 | | | | 1.4 | | | | 0.9 | | | | 4.5 | | | | 1.3 | | | | 0.7 | | | | 0.6 | | | | 7.1 | | | Term funding scheme | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 4.5 | | | | – | | | | 4.5 | | | Subordinated liabilities | | | 0.1 | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 0.2 | | | | 0.2 | | | | 2.2 | | | | 2.7 | | | | | | | 2.9 | | | | 1.2 | | | | 1.9 | | | | 2.7 | | | | 2.5 | | | | 11.2 | | | | 6.0 | | | | 19.6 | | | | 9.2 | | | | 46.0 | | | Other group entities | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 0.4 | | | | – | | | | – | | | | 0.2 | | | | – | | | | 0.6 | | | | – | | | | – | | | | – | | | | 0.6 | | | Certificates of deposit and commercial paper | | | 2.9 | | | | 3.1 | | | | 1.3 | | | | 0.7 | | | | 0.4 | | | | 8.4 | | | | – | | | | – | | | | – | | | | 8.4 | | | Senior unsecured – privately placed | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | | | 0.5 | | | | 0.5 | | | | 1.1 | | | Securitisation and structured issuance(3) | | | 0.3 | | | | 0.3 | | | | 0.2 | | | | 0.2 | | | | 0.2 | | | | 1.2 | | | | 0.9 | | | | 0.4 | | | | – | | | | 2.5 | | | | | | | 3.6 | | | | 3.4 | | | | 1.5 | | | | 1.1 | | | | 0.6 | | | | 10.2 | | | | 1.0 | | | | 0.9 | | | | 0.5 | | | | 12.6 | | | Total | | | 6.5 | | | | 4.6 | | | | 3.4 | | | | 3.8 | | | | 3.1 | | | | 21.4 | | | | 7.0 | | | | 24.0 | | | | 12.8 | | | | 65.2 | | | Total at 31 December 2017 | | | | 4.8 | | | | 3.9 | | | | 3.3 | | | | 1.4 | | | | 1.5 | | | | 14.9 | | | | 7.9 | | | | 28.9 | | | | 11.2 | | | | 62.9 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Secured | | | 2.1 | | | | 0.6 | | | | 2.1 | | | | 1.6 | | | | 2.5 | | | | 8.9 | | | | 4.0 | | | | 11.7 | | | | 4.7 | | | | 29.3 | | | | 0.9 | | | | – | | | | 1.4 | | | | – | | | | 1.3 | | | | 3.6 | | | | 2.9 | | | | 18.3 | | | | 3.4 | | | | 28.2 | | – Unsecured | | | 4.4 | | | | 4.0 | | | | 1.3 | | | | 2.2 | | | | 0.6 | | | | 12.5 | | | | 3.0 | | | | 12.3 | | | | 8.1 | | | | 35.9 | | | | 3.9 | | | | 3.9 | | | | 1.9 | | | | 1.4 | | | | 0.2 | | | | 11.3 | | | | 5.0 | | | | 10.6 | | | | 7.8 | | | | 34.7 | | | | | | 6.5 | | | | 4.6 | | | | 3.4 | | | | 3.8 | | | | 3.1 | | | | 21.4 | | | | 7.0 | | | | 24.0 | | | | 12.8 | | | | 65.2 | | | | 4.8 | | | | 3.9 | | | | 3.3 | | | | 1.4 | | | | 1.5 | | | | 14.9 | | | | 7.9 | | | | 28.9 | | | | 11.2 | | | | 62.9 | |
| (1) | | Currently all our senior95% of Senior Unsecured debt issued out offrom Santander UK Group Holdings plc ishas been downstreamed intoto Santander UK plc on an equivalent rankings basis (e.g. senior unsecured is downstreamed as senior unsecured, subordinated capital instruments are downstreamed as subordinated capital instruments, etc.). However, under‘secondarynon-preferential debt’ in line with the end-state MREL/TLAC regime, senior unsecured debt issued outguidelines from the Bank of Santander UK Group Holdings plc will be downstreamed in a form that is subordinated to senior unsecured debt, but senior to subordinated capital instruments issued out of Santander UK plc.England for Internal MREL. |
| (2) | | This includesIncludes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator. |
| (3) | | This includesIncludes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator. |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Currency composition of wholesale funds This table shows our wholesale funding by major currency at 31 December 20172018 and 2016.2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | | | | Sterling
% | | | US Dollar
% | | | Euro
% | | | Other
% | | | | | Sterling
% | | | US Dollar % | | | Euro
% | | | Other
% | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Senior unsecured – public benchmark | | | 9 | | | | 67 | | | | 22 | | | | 2 | | | | | | 12 | | | | 63 | | | | 21 | | | | 4 | | – privately placed | | | – | | | | – | | | | – | | | | 100 | | | | | | – | | | | – | | | | – | | | | 100 | | Subordinated liabilities and equity (incl. AT1) | | | 68 | | | | 32 | | | | – | | | | – | | | | | | 61 | | | | 39 | | | | – | | | | – | | | | | | 28 | | | | 54 | | | | 14 | | | | 4 | | | | | | 31 | | | | 53 | | | | 13 | | | | 3 | | Other Santander UK plc | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 27 | | | | 73 | | | | – | | | | – | | | | | | 33 | | | | 67 | | | | – | | | | – | | Certificates of deposit and commercial paper | | | 89 | | | | 10 | | | | – | | | | 1 | | | | | | | | | | | | | | | | | | | | Senior unsecured – public benchmark | | | 9 | | | | 49 | | | | 42 | | | | – | | | | | | 12 | | | | 49 | | | | 39 | | | | – | | – privately placed | | | 7 | | | | 19 | | | | 70 | | | | 4 | | | | | | 3 | | | | 1 | | | | 93 | | | | 3 | | Covered bonds | | | 47 | | | | – | | | | 52 | | | | 1 | | | | | | 41 | | | | – | | | | 58 | | | | 1 | | Securitisation and structured issuance | | | 80 | | | | 20 | | | | – | | | | – | | | | | | 59 | | | | 29 | | | | 12 | | | | – | | Term Funding Scheme | | | 100 | | | | – | | | | – | | | | – | | | | | | 100 | | | | – | | | | – | | | | – | | Subordinated liabilities | | | 52 | | | | 48 | | | | – | | | | – | | | | | | 55 | | | | 45 | | | | – | | | | – | | | | | | 49 | | | | 19 | | | | 32 | | | | – | | | | | | 39 | | | | 21 | | | | 39 | | | | 1 | | Other group entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | – | | | | 100 | | | | – | | | | – | | | | | | 7 | | | | 93 | | | | – | | | | – | | Certificates of deposit and commercial paper | | | 34 | | | | 65 | | | | 1 | | | | – | | | | | | 31 | | | | 68 | | | | 1 | | | | – | | Senior unsecured – privately placed | | | – | | | | – | | | | – | | | | – | | | | | | 22 | | | | 59 | | | | 19 | | | | – | | Securitisation and structured issuance | | | 91 | | | | – | | | | 9 | | | | – | | | | | | 87 | | | | 5 | | | | 8 | | | | – | | | | | | 47 | | | | 50 | | | | 3 | | | | – | | | | | | 41 | | | | 55 | | | | 4 | | | | – | | Total | | | 45 | | | | 28 | | | | 25 | | | | 2 | | | | | | 39 | | | | 30 | | | | 30 | | | | 1 | |
Term issuance
In 2017, our external term issuance (sterling equivalent) was:
| | | | | | | | | | | | | | | 2018 | | | | | | 2017 | | | | | Sterling
£bn | | US Dollar
£bn | | Euro
£bn | | Other
£bn | | Total 2017
£bn | | Total 2016
£bn | | | Sterling
% | | | US Dollar
% | | | Euro
% | | | Other
% | | | | | Sterling
% | | | US Dollar
% | | | Euro
% | | | Other
% | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc | | | | | | | | | | | | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc | | | | | | | | | | | | Senior unsecured – public benchmark | | | – | | | 1.6 | | | 0.4 | | | | – | | | 2.0 | | | | 3.1 | | | | 11 | | | | 65 | | | | 22 | | | | 2 | | | | | | 9 | | | | 67 | | | | 22 | | | | 2 | | – privately placed | | | – | | | | – | | | | – | | | 0.1 | | | 0.1 | | | | 0.1 | | | | – | | | | – | | | | – | | | | 100 | | | | | | – | | | | – | | | | – | | | | 100 | | Subordinated debt and equity (incl. AT1) | | | 0.5 | | | | – | | | | – | | | | – | | | 0.5 | | | | – | | | Subordinated liabilities and equity (incl. AT1) | | | | 64 | | | | 36 | | | | – | | | | – | | | | | | 68 | | | | 32 | | | | – | | | | – | | | | | | 0.5 | | | 1.6 | | | 0.4 | | | 0.1 | | | 2.6 | | | | 3.2 | | | | 23 | | | | 57 | | | | 17 | | | | 3 | | | | | | 28 | | | | 54 | | | | 14 | | | | 4 | | Other Santander UK plc | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securitisations | | | 0.5 | | | | – | | | | – | | | | – | | | 0.5 | | | | 0.6 | | | Covered bonds | | | 2.3 | | | | – | | | | – | | | | – | | | 2.3 | | | | 0.6 | | | | Deposits by banks | | | | 3 | | | | 97 | | | | – | | | | – | | | | | | 27 | | | | 73 | | | | – | | | | – | | Certificates of deposit and commercial paper | | | | 48 | | | | 52 | | | | – | | | | – | | | | | | 89 | | | | 10 | | | | – | | | | 1 | | Senior unsecured – public benchmark | | | – | | | 1.1 | | | | – | | | | – | | | 1.1 | | | | – | | | | 11 | | | | 56 | | | | 33 | | | | – | | | | | | 9 | | | | 49 | | | | 42 | | | | – | | – privately placed | | | 0.1 | | | | – | | | | – | | | | – | | | 0.1 | | | | – | | | | 13 | | | | 12 | | | | 72 | | | | 3 | | | | | | 7 | | | | 19 | | | | 70 | | | | 4 | | Covered bonds | | | | 50 | | | | – | | | | 49 | | | | 1 | | | | | | 47 | | | | – | | | | 52 | | | | 1 | | Securitisation and structured issuance | | | | 61 | | | | 35 | | | | 4 | | | | – | | | | | | 80 | | | | 20 | | | | – | | | | – | | Term Funding Scheme | | | 4.0 | | | | – | | | | – | | | | – | | | 4.0 | | | | 4.5 | | | | 100 | | | | – | | | | – | | | | – | | | | | | 100 | | | | – | | | | – | | | | – | | Subordinated liabilities | | | | 49 | | | | 51 | | | | – | | | | – | | | | | | 52 | | | | 48 | | | | – | | | | – | | | | | | 6.9 | | | 1.1 | | | | – | | | | – | | | 8.0 | | | | 5.7 | | | | 48 | | | | 25 | | | | 26 | | | | 1 | | | | | | 49 | | | | 19 | | | | 32 | | | | – | | Other group entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securitisations | | | 0.9 | | | 0.3 | | | | – | | | | – | | | 1.2 | | | | 0.8 | | | Covered bonds | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.8 | | | Senior unsecured – public benchmark | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.4 | | | – privately placed | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1.0 | | | Deposits by banks | | | | – | | | | – | | | | – | | | | – | | | | | | – | | | | 100 | | | | – | | | | – | | Certificates of deposit and commercial paper | | | | – | | | | – | | | | – | | | | – | | | | | | 34 | | | | 65 | | | | 1 | | | | – | | Securitisation and structured issuance | | | | 89 | | | | 11 | | | | – | | | | – | | | | | | 91 | | | | – | | | | 9 | | | | – | | | | | | 0.9 | | | 0.3 | | | | – | | | | – | | | 1.2 | | | | 4.0 | | | | 89 | | | | 11 | | | | – | | | | – | | | | | | 47 | | | | 50 | | | | 3 | | | | – | | Total gross issuances | | | 8.3 | | | 3.0 | | | 0.4 | | | 0.1 | | | 11.8 | | | | 12.9 | | | Total | | | | 46 | | | | 30 | | | | 24 | | | | – | | | | | | 45 | | | | 28 | | | | 25 | | | | 2 | |
Term issuance In 2018, our external term issuance (sterling equivalent) was: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sterling
£bn | | | US Dollar
£bn | | | Euro
£bn | | | Other
£bn | | | Total 2018
£bn | | | Total 2017
£bn | | | Downstreamed from Santander UK Group Holdings plc to Santander UK plc | | | | | | | | | | | | | | | | | | | | | | | | | Senior unsecured – public benchmark | | | 0.5 | | | | 1.5 | | | | 0.7 | | | | – | | | | 2.7 | | | | 2.0 | | – privately placed | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.1 | | Subordinated debt and equity (incl. AT1) | | | – | | | | – | | | | – | | | | – | | | | – | | | | 0.5 | | | | | | 0.5 | | | | 1.5 | | | | 0.7 | | | | – | | | | 2.7 | | | | 2.6 | | Other Santander UK plc | | | | | | | | | | | | | | | | | | | | | | | | | Securitisations and other secured funding | | | 1.4 | | | | 1.5 | | | | – | | | | – | | | | 2.9 | | | | 0.5 | | Covered bonds | | | 2.5 | | | | – | | | | 1.8 | | | | – | | | | 4.3 | | | | 2.3 | | Senior unsecured – public benchmark | | | 0.4 | | | | 2.5 | | | | – | | | | – | | | | 2.9 | | | | 1.1 | | – privately placed | | | 0.3 | | | | – | | | | 1.3 | | | | – | | | | 1.6 | | | | 0.1 | | Term Funding Scheme | | | 2.3 | | | | – | | | | – | | | | – | | | | 2.3 | | | | 4.0 | | | | | | 6.9 | | | | 4.0 | | | | 3.1 | | | | – | | | | 14.0 | | | | 8.0 | | Other group entities | | | | | | | | | | | | | | | | | | | | | | | | | Securitisations | | | 0.4 | | | | – | | | | – | | | | – | | | | 0.4 | | | | 1.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total gross issuances | | | 7.8 | | | | 5.5 | | | | 3.8 | | | | – | | | | 17.1 | | | | 11.8 | |
Encumbrance(unaudited) We have encumbered an asset if we have pledged it as collateral against an existing liability. This means it is no longer available to secure funding, meet our collateral needs or be sold to reduce future funding needs. Being able to pledge assets as collateral is an integral part of a financial institution’s operations. It includes asset securitisation or related structured funding, pledging collateral to support using payment or settlement systems and entering into derivatives, securities repurchase agreements and securities borrowing arrangements. We do various things that lead to asset encumbrance. These include where we: | – | | Enter into securitisation, covered bonds, and repurchase agreements (including central bank programmes) to access medium and long-term funding |
| – | | Enter into short-term funding transactions. These include repurchase agreements reverse repurchase agreements and stock borrowing transactions as part of our operational liquidity management |
| – | | ParticipatePledge collateral as part of participating in payment and settlement systems |
| – | | Post collateral as part of derivatives activity. |
We monitor our mix of secured and unsecured funding sources in our funding plan. We aim to use our available collateral efficiently to raise secured funding and to meet our other collateralised obligations. Our biggest source of encumbrance is where we use our mortgage portfolio to raise funds through securitisation, covered bonds or other structured borrowing. We control our levels of encumbrance from these by setting a minimum level of unencumbered assets that must be available after we factor in our future funding plans, whether we can use our assets for our future collateral needs, the impact of a possible stress and our current level of encumbrance. On-balance sheet encumbered and unencumbered assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets encumbered as a result of transactions with counterparties other than central banks | | | | | | Other assets (assets encumbered at the
central bank and unencumbered assets) | | | | | | | | | | | | | | | | | | | | | | | Assets | | | Assets not positioned at the central bank | | | | | | | | 2017 | | As a
result of
covered
bonds
£m | | | As a
result of
securitis-
ations
£m | | | Other
£m | | | Total
£m | | | | | | positioned
at the central bank (i.e. pre-
positioned
plus encumbered)
£m | | | Readily
available for encumbrance
£m | | | Other assets
capable of being
encumbered
£m | | | Cannot be
encumbered
£m | | | Total £m | | | Total
assets
£m | | Cash and balances at central banks(1)(2) | | | – | | | | – | | | | 1,010 | | | | 1,010 | | | | | | | | 395 | | | | 31,366 | | | | – | | | | – | | | | 31,761 | | | | 32,771 | | Trading assets | | | – | | | | – | | | | 17,092 | | | | 17,092 | | | | | | | | – | | | | 903 | | | | 12,560 | | | | – | | | | 13,463 | | | | 30,555 | | Derivative financial instruments | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 19,942 | | | | 19,942 | | | | 19,942 | | Financial assets designated at fair value | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | 1,405 | | | | 691 | | | | – | | | | 2,096 | | | | 2,096 | | Loans and advances to banks | | | – | | | | – | | | | 105 | | | | 105 | | | | | | | | – | | | | 935 | | | | 4,887 | | | | – | | | | 5,822 | | | | 5,927 | | Loans and advances to customers | | | 18,891 | | | | 16,530 | | | | 31 | | | | 35,452 | | | | | | | | 57,644 | | | | 64,412 | | | | 20,459 | | | | 21,523 | | | | 164,038 | | | | 199,490 | | Financial investments | | | – | | | | – | | | | 6,755 | | | | 6,755 | | | | | | | | – | | | | 10,856 | | | | – | | | | – | | | | 10,856 | | | | 17,611 | | Interests in other entities | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 73 | | | | 73 | | | | 73 | | Intangible assets | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 1,742 | | | | 1,742 | | | | 1,742 | | Property, plant and equipment | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | 1,598 | | | | – | | | | 1,598 | | | | 1,598 | | Retirement benefit assets | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 449 | | | | 449 | | | | 449 | | Other assets | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 2,511 | | | | 2,511 | | | | 2,511 | | Total assets | | | 18,891 | | | | 16,530 | | | | 24,993 | | | | 60,414 | | | | | | | | 58,039 | | | | 109,877 | | | | 40,195 | | | | 46,240 | | | | 254,351 | | | | 314,765 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks(1)(2) | | | – | | | | – | | | | 600 | | | | 600 | | | | | | | | 370 | | | | 16,137 | | | | – | | | | – | | | | 16,507 | | | | 17,107 | | Trading assets | | | – | | | | – | | | | 13,582 | | | | 13,582 | | | | | | | | – | | | | 2,807 | | | | 13,646 | | | | – | | | | 16,453 | | | | 30,035 | | Derivative financial instruments | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 25,471 | | | | 25,471 | | | | 25,471 | | Financial assets designated at fair value | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | 1,463 | | | | 677 | | | | – | | | | 2,140 | | | | 2,140 | | Loans and advances to banks | | | – | | | | – | | | | 115 | | | | 115 | | | | | | | | – | | | | 1,030 | | | | 3,203 | | | | – | | | | 4,233 | | | | 4,348 | | Loans and advances to customers | | | 20,234 | | | | 19,996 | | | | 25 | | | | 40,255 | | | | | | | | 23,801 | | | | 96,741 | | | | 18,137 | | | | 20,804 | | | | 159,483 | | | | 199,738 | | Financial investments | | | – | | | | – | | | | 2,684 | | | | 2,684 | | | | | | | | – | | | | 14,782 | | | | – | | | | – | | | | 14,782 | | | | 17,466 | | Interests in other entities | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 61 | | | | 61 | | | | 61 | | Intangible assets(3) | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 1,685 | | | | 1,685 | | | | 1,685 | | Property, plant and equipment | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | 1,491 | | | | – | | | | 1,491 | | | | 1,491 | | Retirement benefit assets | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 398 | | | | 398 | | | | 398 | | Other assets | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 2,571 | | | | 2,571 | | | | 2,571 | | Total assets | | | 20,234 | | | | 19,996 | | | | 17,006 | | | | 57,236 | | | | | | | | 24,171 | | | | 132,960 | | | | 37,154 | | | | 50,990 | | | | 245,275 | | | | 302,511 | |
(1) | Encumbered cash and balances at central banks include minimum cash balances we have 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. |
(3) | Restated to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1 to the Consolidated Financial Statements. |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Assets encumbered as a result of transactions with counterparties other than central banks mainly relate to funding we had secured against our loans and advances to customers. It also includes cash collateral in trading assets that we posted to meet margin needs on derivatives. Other assets classified as readily available for encumbrance 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 LRA, 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.
Other assets that are not classified as readily available for encumbrance are mainly derivatives and loans and advances to customers and banks.
Loans and advances to customers are only classified as readily available for encumbrance 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 ispre-positioned at central banks and is available for use in secured financing.funding. All other loans and advances are classified as not readily available for encumbrance, but some wouldhowever, may still be suitable for use in secured funding structures.
| | | | Annual Report 2018 | Risk review | | |
Encumbrance of customer loans and advances We have issued prime retail mortgage-backed and other asset-backed securitised products to a diverse investor base through our mortgage-backed and other asset-backed funding programmes. We have raised funding with: – | | Mortgage-backed notes, both issued to third parties and retained – the latter being central bank eligible collateral for funding purposes in other Bank of England facilities |
– | | Other asset-backed notes. |
with mortgage-backed notes, both issued to third parties and retained – the latter being central bank eligible collateral for funding purposes in other Bank of England facilities. We also have a covered bond programme. Under this,programme, under which we issue securities to investors secured by a pool of residential mortgages. For more on how we have issued notes from our securedthese programmes, externally and also retained them, and what we have used them for, see Notes 1615 and 3337 to the Consolidated Financial Statements. CREDIT RATINGSOn-balance(unaudited) sheet encumbered and unencumbered assets
Contractual credit rating downgrade exposure (cumulative cash flow)
This table shows the cumulative cash outflows of Santander UK plc due to a credit rating downgrade.
| | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | | | | One-notch
downgrade
£bn | | | Two-notch
downgrade
£bn | | | | | One-notch
downgrade
£bn | | | Two-notch
downgrade
£bn | | Securitisation derivatives | | | 2.3 | | | | 2.3 | | | | | | 3.3 | | | | 3.4 | | Contingent liabilities and derivatives margining | | | 1.6 | | | | 1.8 | | | | | | 1.3 | | | | 1.6 | | Total contractual funding or margin requirements | | | 3.9 | | | | 4.1 | | | | | | 4.6 | | | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Encumbered with counterparties other than
central banks | | | Assets | | | Unencumbered assets not pre-positioned with central
banks | | | | | | 2018 | | Covered
bonds £m | | | Securitis-
ations £m | | | Other
£m | | | Total
£m | | | positioned
at central
banks(4) £m | | | Readily
available
£m | | | Other
available
assets £m | | | Cannot be
encumbered
£m | | | Total
£m | | | Total
assets £m | | | Cash and balances at central banks(1)(2) | | | – | | | | – | | | | 1,080 | | | | 1,080 | | | | 636 | | | | 18,031 | | | | – | | | | – | | | | 18,667 | | | | 19,747 | | | Financial assets at FVTPL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Derivative financial instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 5,259 | | | | 5,259 | | | | 5,259 | | – Other financial assets at FVTPL | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 5,617 | | | | 5,617 | | | | 5,617 | | | Financial assets at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers | | | 21,240 | | | | 14,454 | | | | 256 | | | | 35,950 | | | | 52,497 | | | | 71, 941 | | | | 20,943 | | | | 19,958 | | | | 165,339 | | | | 201,289 | | – Loans and advances to banks | | | – | | | | – | | | | 218 | | | | 218 | | | | – | | | | – | | | | – | | | | 2,581 | | | | 2,581 | | | | 2,799 | | – Repurchase agreements-
non trading(3) | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 21,127 | | | | 21,127 | | | | 21,127 | | – Other financial assets at amortised cost | | | – | | | | – | | | | 3,763 | | | | 3,763 | | | | – | | | | 3,466 | | | | – | | | | – | | | | 3,466 | | | | 7,229 | | | Financial assets at FVOCI | | | – | | | | – | | | | 5,825 | | | | 5,825 | | | | – | | | | 7,477 | | | | – | | | | – | | | | 7,477 | | | | 13,302 | | | Interests in other entities | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 88 | | | | 88 | | | | 88 | | | Intangible assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,808 | | | | 1,808 | | | | 1,808 | | | Property, plant and equipment | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,832 | | | | – | | | | 1,832 | | | | 1,832 | | | Current tax assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 153 | | | | 153 | | | | 153 | | | Retirement benefit assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 842 | | | | 842 | | | | 842 | | | Other assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2,280 | | | | 2,280 | | | | 2,280 | | | Total assets | | | 21,240 | | | | 14,454 | | | | 11,142 | | | | 46,836 | | | | 53,133 | | | | 100,915 | | | | 22,775 | | | | 59,713 | | | | 236,536 | | | | 283,372 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017(5) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks(1)(2) | | | – | | | | – | | | | 1,010 | | | | 1,010 | | | | 395 | | | | 31,366 | | | | – | | | | – | | | | 31,761 | | | | 32,771 | | | Trading assets | | | – | | | | – | | | | 17,092 | | | | 17,092 | | | | – | | | | 903 | | | | – | | | | 12,560 | | | | 13,463 | | | | 30,555 | | | Derivative financial instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 19,942 | | | | 19,942 | | | | 19,942 | | | Other financial assets at FVTPL | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,405 | | | | 691 | | | | – | | | | 2,096 | | | | 2,096 | | | Loans and advances to banks(3) | | | – | | | | – | | | | 105 | | | | 105 | | | | – | | | | – | | | | – | | | | 3,358 | | | | 3,358 | | | | 3,463 | | | Loans and advances to customers(3) | | | 18,891 | | | | 16,530 | | | | 31 | | | | 35,452 | | | | 57,644 | | | | 64,412 | | | | 20,459 | | | | 21,373 | | | | 163,888 | | | | 199,340 | | Repurchase agreements –
non trading(3) | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2,614 | | | | 2,614 | | | | 2,614 | | | Financial investments | | | – | | | | – | | | | 6,755 | | | | 6,755 | | | | – | | | | 10,856 | | | | – | | | | – | | | | 10,856 | | | | 17,611 | | | Interests in other entities | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 73 | | | | 73 | | | | 73 | | | Intangible assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,742 | | | | 1,742 | | | | 1,742 | | | Property, plant and equipment | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,598 | | | | – | | | | 1,598 | | | | 1,598 | | | Retirement benefit assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 449 | | | | 449 | | | | 449 | | | Other assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2,511 | | | | 2,511 | | | | 2,511 | | Total assets | | | 18,891 | | | | 16,530 | | | | 24,993 | | | | 60,414 | | | | 58,039 | | | | 108,942 | | | | 22,748 | | | | 64,622 | | | | 254,351 | | | | 314,765 | |
| (1) | Encumbered cash and balances at central banks include minimum cash balances we have 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. |
| (3) | From 1 January 2018, thenon-trading repurchase agreements that are held at amortised cost are now presented as separate lines in the balance sheet, as described in Note 1. Comparatives arere-presented accordingly. |
| (4) | Comprisespre-positioned assets and encumbered assets. |
| (5) | 2017 data has been restated as a result of enhancement to the internal methodology for reporting encumbered and unencumbered assets. |
Capital risk | | | | | | | | | Overview(unaudited) | | | | Key metrics(unaudited) | | | Capital risk is the risk that we do not have an adequate amount or quality of capital to meet our internal business needs, regulatory requirements and market expectations, including dividend and AT1 distributions. In this section, we set out how we are regulated by the PRA (as a UK banking group) and the European Central Bank (ECB) as a member of the Banco Santander group.regulated. We also give details of the Bankimpact of England’s 2017 stress testing exercise and an updateIFRS 9 on emerging rules. regulatory capital. We explain how we manage capital on a standalone basis as a subsidiary in the Banco Santander group. We then analyse our capital resources and key capital ratios. | | | | CET1 capital ratio of 13.2% (2017: 12.2% (2016: 11.6%) Total capital resources increaseddecreased to £17.1bn (2016: £16.2 bn)£15.9bn (2017: £16.7bn) |
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:
– | | PRA: as a UK banking group |
– | | ECB: as a member of the Banco Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM). |
the PRA, as a UK banking group, and by the European Central Bank (ECB) as a member of the Banco Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM). Although we are part of the Banco Santander group, we do not have a guarantee from our ultimate parent Banco Santander SA and we operate as an autonomous subsidiary. As we are part of the UKsub-group that is regulated by the PRA, we have to meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the support of our parent. Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior management appointments. Santander UK Group Holdings plc is the holding company of Santander UK plc and is the head of the Santander UK group for regulatory capital and leverage purposes. The basis of consolidation for our capital disclosures is substantially the same one we useas for our Consolidated Financial Statements. Following the implementation of our ring-fencing plans, with effect from 1 January 2019 Santander UK plc is now the head of the ring-fenced banksub-group and is subject to regulatory capital and leverage rules. CAPITAL RISK MANAGEMENT The Board is responsible for capital management strategy and policy and ensuring that our capital resources are monitored and controlled within regulatory and internal limits. We manage our funding and maintain capital adequacy on a standalone basis. We operate within the capital risk framework and appetite approved by our Board. This takes into accountreflects the commercial environment we operate in, our strategy for each of our material risksrisk and the potential impact of any adverse scenarios or stresses on our capital position. Management of capital requirements Our capital risk appetite aims to maintain capital levels appropriate to the level of stress applied, and the expected regulatory response. In: | – | | In anAn adverse economic stress, which we might expect to occur once in 20 years, the firm should maintain an economic capital surplus,remain profitable and should exceed all regulatory capital minimum criteriaminimums at all timestimes. |
| – | | In aA very severe economic stress, which we might expect to occur once in 100 years, and which has been designed to test any specific weaknesses of a firm’s business model, the firm should maintain an economic capital surplus, and should meet all regulatory capital minimums at all times. This is subject to the use of regulatory buffers designed for such a stress. |
| | | Annual Report 2017 on Form 20-F | Risk review | | |
Management of capital resources We use a mix of regulatory and economic capitalEC ratios and limits, internal buffers and restrictions to manage our capital resources. We also take account of the costs of differing capital instruments and capital management techniques. We also use these to shape the best structure for our capital needs. We decide how to allocate our capital resources as part of our strategic planning process. We base this in part on the relative returns on capital using both economic and regulatory capital measures. We plan for severe stresses and we set out what action we would take if an extremely severe stress threatened our viability and solvency. This could include not paying dividends, selling assets, reducing our business and issuing more capital. Risk measurement We apply Banco Santander SA’sSantander’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. Key metrics(unaudited) The main metrics we use to measure capital risk are: | | | | Key risk metrics | | Description | | | | CET1 capital ratio | | CET1 capital as a percentage ofdivided by RWAs. | | | | Total capital ratio | | CRD IVend-point Tier 1 capital divided by RWAs. |
Stress testing(unaudited) Each year we create a capital plan, as part of our ICAAP. We also develop a series of macroeconomic scenarios to stress test our capital needs, and confirm that we have enough regulatory capital to meet our projected and stressed capital needs and to meet our obligations as they fall due. We augment our regulatory minimum capital with internally assigned buffers. We hold buffers to ensure we have enough time to take action against unexpected movements.
| | | | Annual Report 2018 | Risk review | | |
Risk mitigation We have designed our capital risk framework, policies and procedures to ensure that we operate within our risk appetite. We manage capital transferability between our subsidiaries in line with our business strategy, our risk and capital management policies, and UK laws and regulations. There are no legal restrictions on us moving capital resources promptly, or repaying liabilities, between the Company and its subsidiaries. For details on our Recovery framework in the event of a capital stress, see the risk mitigation section in the ‘Liquidity risk’ section. At 31 December 2018, Santander UK plc, Abbey National Treasury Services plc,ANTS and Cater Allen Limited, which are the threePRA-regulated entities inwithin the Santander UK group, arewere party to a capital support deed dated 23 December 2015 (the Capital Support Deed)Deed 2015) with Santander UK Group Holdings plc and certain othernon-regulated subsidiaries of Santander UK plc and Santander UK Group Holdings plc. The parties to the Capital Support Deed 2015 were permitted by the PRA to form 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 arewere exempt from large exposure limits that would otherwise apply. The purpose of the Capital Support Deed is2015 was to supportfacilitate the prompt transfer of available capital resources from, or repayment of liabilities by, thenon-regulated parties to any of the regulated parties in the event that one of the regulated parties has breached or iswas at risk of breaching its capital resources requirements or risk concentrations requirements. The core UK group permission expiresas supported by the Capital Support Deed 2015 expired on 31 December 2018. With effect from 1 January 2019, and in accordance with our ring-fenced structure, Santander UK plc, Cater Allen Limited and certain othernon-regulated subsidiaries within the ring-fenced bank entered into a new Capital Support Deed dated 13 November 2018 (the RFBSub-Group Capital Support Deed). From 1 January 2019, the parties to the RFBSub-Group Capital Support Deed were permitted by the PRA to form a new core UK group, a permission which will expire on 31 December 2021. Other than the change of the entities in scope, the purpose of the RFB Sub-Group Capital Support Deed is the same as the Capital Support Deed 2015. Risk monitoring and reporting We monitor and report regularly against our capital plan. We do this to identify any change in our business performance that might affect our capital. Every month, we also review the economic assumptions we use to create and stress test our capital plan. We do this to identify any potential reduction in our capital.
CAPITAL RISK REVIEW 20172018 compared to 20162017(unaudited)
Our CET1 capital ratio improved 60bpsincreased 100bps to 12.2%13.2% at 31 December 2017 (2016: 11.6%2018 (2017: 12.2%), reflecting higherwith ongoing capital accretion and risk management initiatives leaving us strongly capitalised in the current environment. CET1 capital from steady profits and lower RWAs.was broadly in line with the prior year at £10.4bn, with dividend payments largely offset by ongoing capital accretion through retained profits. Our total capital ratio increased to 19.7%20.3% at 31 December 2017 (2016: 18.5%2018 (2017: 19.2%), with higher CET1 and AT1 capital.. BankImpact of England stress testing
The latest PRA stress test results were releasedIFRS 9 on 28 November 2017. We significantly exceeded the PRA’s stress test CET1regulatory capital ratio threshold requirement of 7.6%, with a stressed CET1 capital ratio of 9.6%, before management actions and 9.7% after allowed management actions. We also exceeded the leverage threshold requirement of 3.25%, with a stressed leverage ratio of 3.3%. Once again, we had the lowest stressed CET1 drawdown of all the participating UK banks, demonstrating the resilience of our balance sheet and predictablemedium-low risk profile.
The Bankimplementation of England’s CET1 hurdle rate comprises the CRR Pillar 1 minimum of 4.5% and the Pillar 2A CET1 minimum of 3.1%. The minimum came into effectIFRS 9 on 1 January 2018 and representsresulted in an increaseinitial reduction in our CET1 capital ratio by 8 basis points to 12.13% which, following the application of 0.3 percentage points overEU transitional arrangements for the previous Pillar 2A CET1 minimum of 2.8%, which was applicable until 31 December 2017. Our plans for 2018 include a number of refinements to our regulatory capital models in response to supervisory recommendations and consultations. The FPC announced an increase in the countercyclical buffer from 0% to 1%. IFRS 9 was implemented from 1 January 2018, changing the way in which we raise loan loss provisions, and has the potential to make regulatory stress testing results far morepro-cyclical than the current approach. We are engaging with the PRA regarding disclosures and the need to recalibrate capital requirements as a result of this change in approach. The estimated impact of IFRS 9, on the CET1 capital ratio is 8bps before the application of any regulatory transitional arrangements which the Santander UK group will adopt and which is expectedreduced to reduce the amount impacting the CET1 capital ratio in 2018.12.16%. As a result, the adoption of IFRS 9 isdid not expected to have a material impact on the Santander UK group’sour capital position.
As our ECL methodology takes account of forward-looking data covering a range of possible economic outcomes,ECL-based provisioning is expected to be more volatile than IAS 39 incurred loss-based provisioning and consequently is likely to impact our CET1 capital levels, resulting in increasedpro-cyclicality of risk-based capital and leverage ratios. However, the impact is currently mitigated by our surplus of expected losses over provisions for exposures using IRB approaches. For such exposures (which include residential mortgages) the adverse impact to CET1 capital of provision increases from reserve movements is offset by the associated reduction of the negative CET1 capital adjustment for regulatory expected loss amounts. Furthermore, the EU transitional arrangements for the capital impact of IFRS 9 mean that adverse CET1 effects from increases inECL-based provisions from the level of such provisions at 1 January 2018 are partially reduced until the end of 2022. We reflect projections ofECL-based provisions in our capital position forecasting under base case and stress scenarios for ICAAP and capital management purposes and consider the impact of the dynamics of ECL in how we assess, monitor and manage capital risk. We expect IFRS 9 ECL charges to be more volatile than IAS 39 incurred losses. This could result in material favourable and unfavourable swings to our Income Statement. Whilst the initial impacts of IFRS 9 were based on estimates prepared in a supportive economic environment, a period of economic instability could significantly impact our Income Statement and the net carrying amount of our financial assets. It could also impact the amount of capital we have to hold. We take into account the volatility of ECL in our capital planning strategy. Key capital ratios(unaudited) | | | | 2017 % | | | 2016
% | | | 2018 % | | | 2017 % | | CET1 capital ratio | | | 12.2 | | | | 11.6 | | | | 13.2 | | | | 12.2 | | AT1 | | | 2.4 | | | | 1.8 | | | | 2.2 | | | | 2.4 | | Grandfathered Tier 1 | | | 0.8 | | | | 0.8 | | | | 0.8 | | | | 0.8 | | Tier 2 | | | 4.3 | | | | 4.3 | | | | 4.1 | | | | 3.8 | | Total capital ratio | | | 19.7 | | | | 18.5 | | | | 20.3 | | | | 19.2 | | The total subordination available to Santander UK plc bondholders was 19.7% (2016: 18.5%) of RWAs. | | | | | | The total subordination available to Santander UK plc bondholders was 20.3% (2017: 19.7%) of RWAs. | | | | | |
Regulatory capital resources This table shows our regulatory capital. | | | | 2017
£m | | | 2016
£m | | | 2018 £m | | | 2017 £m | | CET1 capital | | | 10,620 | | | | 10,201 | | | | 10,374 | | | | 10,620 | | AT1 capital | | | 2,762 | | | | 2,271 | | | | 2,349 | | | | 2,762 | | Tier 1 capital | | | 13,382 | | | | 12,472 | | | | 12,723 | | | | 13,382 | | Tier 2 capital | | | 3,741 | | | | 3,772 | | | | 3,223 | | | | 3,334 | | Total regulatory capital | | | 17,123 | | | | 16,244 | | | | 15,946 | | | | 16,716 | |
| (1) | Capital resources include a transitional IFRS 9 benefit at 31 December 2018 of £21m (1 January 2018: £18m). |
AT1 capital These are preference shares and innovative/hybrid Tier 1 securities. None of the instruments we issued before 1 January 2014 fully meet the CRD IV AT1 capital rules, which apply from that date. These instruments will be phased out by CRD IV rules which restrict their recognition as capital. The £750m Perpetual Capital Securities (net of issuance costs), the £800m Perpetual Capital Securities and the £500m Perpetual Capital Securities we issued since then fully meet the CRD IV AT1 capital rules. Tier 2 capital These are fully CRD IV eligible Tier 2 instruments and grandfathered Tier 2 instruments whose recognition as capital is being phased out under CRD IV.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
Pension risk(unaudited) | | | | | Overview | | | | Key metrics | 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 need to 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 and mitigate pension risk, is managedincluding our investment and mitigated.hedging strategies. We also discuss the accounting position. | | | | Funding Deficit at Risk reduced to £1,540m (2016: £1,690m)£1,410m (2017: £1,540m) Both interest rate and inflation hedge ratios on the Funding basis remained stable atimproved, to 68% (2017: 57% (2016: 56%) and 67% (2017: 64% (2016: 62%), respectively. |
OUR KEY PENSION RISKS DefinitionSources of risk
Pension risk is one of our key financial risks and arises mainly because Santander UK plc is the sponsor of the Santander (UK) Group Pension Scheme (the Scheme), a defined benefit scheme. Our risk is that over the long-term the Scheme’s assets, together with future returns and future contributions, might not be enough to meet its liabilities as they fall due. Where the value of the Scheme’s assets is lower than the Scheme’sits liabilities, we could have to (or might choose to) make extra contributions. We might also need to hold more capital to reflect this risk. Sources of risk
The key pension risk factors the Scheme is exposed to are: | | | | | | Key risks | | Description | | | | | | | | Interest rate risk | | The risk that movements in (long-term) interest rates cause changes in the value of the Scheme’s liabilities that are not matched by changes in the value of the Scheme’s assets. | | | | | | | | Inflation risk | | The Scheme’s liabilities are impacted by inflation as annual pension increases are linked to RPI and CPI. The risk is that movements in inflation causes changes in the value of the Scheme’s liabilities that are not matched by changes in the value of the Scheme’s assets. | | | | | | | | Longevity risk | | Due to the long-term nature of the obligation, the value of the Scheme’s liabilities are also impacted by changes to the life expectancy of Scheme members over time. The Scheme’s liabilities are mainly in respect of current and past employees and are expected to stretch beyond 2080. | | | | | | | | Investment risk | | The risk that the return on Scheme’s assets (relative to Scheme’s liabilities) is less than anticipated. | | |
Both our accounting and regulatory capital positions can be sensitive to changes in key economic data and the assumptions we have used in our valuations. These include our accounting assumptions on discount rates, inflation rates and life expectancy. For more on the size of our defined benefit pension schemes, and the nature of these risks, see Note 2831 to the Consolidated Financial Statements. This includes a sensitivity analysis of our key actuarial assumptions. Defined contribution schemes We also have defined contribution schemes for someour employees. Benefits at retirement primarilymainly depend on the contributions made (by both the employees and us) and how well the investments (chosen(typically chosen by employees) perform. These schemes carry far less market risk exposure for us, however,although we remain exposed to operational and reputational risks. To manage these risks, we monitor the performance of defined contribution investment funds and we engage withensure our employees to ensure they are given enough information about their investment choices. For more on our defined contribution pension schemes, see Note 31 to the Consolidated Financial Statements.
PENSION RISK MANAGEMENT Scheme governance The Scheme operates under a trust deed. The corporate trustee, Santander (UK) Group Pension Scheme Trustees Limited (the Trustee), is a wholly owned subsidiary of the Santander UK group. The Trustee is responsible for ensuring that the Scheme is run properly and that members’ benefits are secure. It delegates investment decisions to the board of Santander (CF Trustee) Limited (CF(the CF Trustee). which meets each month. The CF Trustee meets each month and ismeetings are the main forum for the CF Trustee to analyse and agree investment management strategies with input from the companyus as and when required.needed. As well as reviewingOur Pensions Committee reviews our pension risk appetite and approvingapproves actuarial valuations, the Santander UK Pensions Committeevaluations. It also discusses and forms views on the Scheme’s investment strategy. The Pension Risk forum,Forum, a Risk division management forum, monitors our pension risk within our approved risk framework, risk appetite and policies. Although we work with the Trustee to ensure the Scheme is adequately funded, our responsibilities are clearly segregated from those of the Trustee.
Risk appetite Our appetite for pension risk appetite is reviewed by theour Pensions Committee at least once a year. It is then sent to the Board for approval. We ensure that our risk appetite is a key consideration in all decisions and risk management activities related to the Scheme. We measure pension risk on both a technical provisions (funding) basis and an accounting basis (measured under(in line with IAS 19 ‘Employee Benefits’). We manage and hedge pension risk on the funding basis. However, we also consider the impact on the accounting basis. Both the funding and the accounting bases are inputs into our capital calculations. Risk measurement Our key risk metrics include: | | | | Key risk metrics | | Description | | | Funding Deficit at Risk | | We use a VaR and stress testing framework to model the Scheme’s assets and liabilities to show the potential deterioration in the current funding position. This ensures 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. | | | Required Return | | This estimates the return required from the Scheme’s assets each year to reach apre-defined funding target by a fixed date in the future. | | | Pensions CET1 Volatility | | This measures the potential for capital volatility due to the pension risk related capital deduction. |
Our stress testing looks at how the Scheme’s assets and liabilities respond to a range of deterministic financial and demographic shocks. We incorporate the results, and their impact on our balance sheet, income statement and capital, into our overall enterprise wide stress test results. We perform internal forward-looking stress testing each month and historic stress testing each quarter. We also perform stress tests for regulators, including for ICAAPs and PRA stress tests. The stress testing framework allows us to also consider how Brexit and other macroeconomic events could impact the Scheme’s assets and liabilities. For more on our stress testing, see the Risk Governance section.
Risk mitigation The key tools we use to mitigate pension risk are: | | | | Key tools | | Description | | | Investment strategies | | The Trustee has developed the following investment principles:objectives: – To maintainact in the best interests of the Scheme by maintaining a diversified portfolio of assets of appropriate suitability, quality, suitabilitysecurity, liquidity and liquidityprofitability which will generate income and capital growth to meet along with new contributions from members and the employers, the cost of current and future benefits which the Scheme provides, as set out in the trust deed and rules; – To limit the risk that the assets fail to meet the liabilities over the long term, as required by legislation; – To invest in a way that is suitable toachieve the natureinvestment targets for each section, as agreed between the Trustee and duration of the expected future benefit payments;employer at the most recent actuarial valuation or subsequent updates agreed by Santander UK and the Trustee – To minimise the Scheme’s long-term costs of the Scheme to us by maximising the return on the assets net of fees and expenses, whilst having regard to the objectives shown above.above – To seek to control the long-term costs of the Scheme by achieving value for money in the fees paid to investment managers and advisers and by minimising transaction costs. The assets of the funded plans are held independently of the Santander UK group’s assets in separate trustee administeredtrustee-administered funds. The investment strategy is kept under review. The Trustee invests the Scheme’s assets in a diversified portfolio of UK and overseas equities, corporate and government bonds, property, infrastructure development opportunities and other assets. | | | Hedging strategies | | The Trustee has a hedging strategy to reduce inflation and interest ratekey market risks. Hedging decisions are made, following discussions between the Trustee, CF Trustee and us, and executed by the CF Trustee. The main reason for hedging liabilities is to manage the exposure of each of the Scheme’s sections to interest rate and inflation risk. This includes investing in suitable fixed income and inflation-linked assets, and entering into inflation and interest rate swaps.hedging instruments. The CF Trustee may also adopt other hedging to mitigate specific risks, such as equity hedging strategies which are used to reduce market risks from investing in public market equities. The case study on the next page describes thelatter can be achieved by using a range of derivatives strategies such as an equity hedging implemented during 2017. | Other mitigants
| | We continue to mitigate pension risk input option, equity collar or other ways. For example:
– From 1 March 2015, a cap on pensionable pay increasescombinations of 1% each year was applied to staff in the Scheme;
– In 2010 the cap on future pension increases for benefits accrued after 5 April 2010 was lowered;
– In 2008, the Santander (UK) Common Investment Fund was created to pool investments and the CF Trustee was set up to make investment and hedging decisions on behalf of the Trustee. This improved the investment decision making process;
– In 2002, the Scheme was closed to new staff.derivatives that provide downside protection.
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Risk monitoring and reporting We monitor pension risk each month and report on our metrics at Executive Risk Control Committee,ERCC, Pensions Committee and also, where thresholds are exceeded (or likely to be), to the Board Risk Committee and the Board in accordance with our pension risk appetite. Senior management will then decide what, if any, remedial action should be recommended, which we then discuss with the Trustee and, where relevant, the CF Trustee.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
PENSION RISK REVIEW 20172018 compared to 20162017
OurThe level of pension risk profile has grown overin the last few years, mainly driven by the fall of long-term gilt yields. DuringScheme reduced in 2018 and 2017. In 2017, however risk levels reducedthis was due to mitigating strategies employed during the year. Following completionimplementation of the 2016 triennial valuation in March 2017, the CF Trustee began an extensive investment and hedging strategy review. As a result, the CF Trustee has implemented a number of actions, which have already reducedmitigating strategies including, reducing exposure to equity markets by transacting an equity collar. The trend of reducing risk continued in 2018 due to a significant increase in the level of interest rate hedging and the retention of the equity market protection.
On 26 October 2018, the High Court handed down a judgement that defined benefit schemes should equalise pension benefits for men and women in relation to GMP, and concluded on the methods that were appropriate. The resulting increase in the liabilities at theyear-end has been reflected in the risk profile of the Scheme. We are also improving risk management and control, alongmetrics calculated on an accounting basis (in line with associated governance. In addition, during the year we changed the actuarial experts we use to help us assess pension obligations.IAS 19 ‘Employee Benefits’), although it did not have a significant impact. Risk monitoring and measurement We continue to focus on achieving the right balance between risk and reward. In 2017,2018, overall asset returns were slightly negative with positive mainlyperformance from equities.private equity and alternatives offset by falls in the value of gilts and corporate bonds. Our long-term objective is to reduce the risk of the Scheme and eliminate the deficit on the funding basis. The Funding Deficit at Risk decreased to £1,540m (2016: £1,690m)£1,410m (2017: £1,540m). In 2017,2018, the CF Trustee extended the equity collar that was in place, adjusting it for changes in the underlying holdings, and the level of interest rate hedging in the Scheme put in place more equity hedging as partwas increased. In addition, the Scheme moved from using LIBOR-based instruments to gilt-backed instruments, including through the use of a review of the CF Trustee’s investment strategy. This reduced the Funding Deficit at Risk by £300m. During 2017,total return swaps and repurchase agreements. In 2018, interest rate and inflation hedging remained stable.increased. The interest rate hedging ratio was 57%68% at 31 December 2017 (2016: 56%2018 (2017: 57%) on the funding basis, and the inflation hedging ratio was 67% (2017: 64% (2016: 62%). In August 2017, the Pensions Committee considered the impact of potential inflation shocks on the accounting position, both current and forecasted to the end of the recovery plan. The four scenarios varied the levels of RPI inflation, long-term inflation expectations, and expected RPI inflation volatility. The analysis showed small improvements in the current and forecasted accounting positions in three of the four scenarios. In the fourth scenario, high inflation with low volatility, there was a small potential worsening of the current accounting position, which was considered manageable. Under this scenario, the forecast still resulted in a significant accounting surplus by the end of the recovery plan. On an accounting basis, the Scheme is almost fully hedged against movements in inflation.
Triennial funding valuation
The 2016 triennial valuation was completed in March 2017. Santander UK plc has agreed to continue to fund the Scheme at the current rate with the recovery plan extended for a further three years. In addition, Santander UK plc has also agreed to make further contributions if the investment performance is lower than expected.
Accounting position During 2017,In 2018, the accounting surplus of the Scheme and other funded arrangements increased, with sections in surplus of £449m£842m at 31 December 2017 (2016: £398m)2018 (2017: £449m) and sections in deficit of £245m (2016: £223m)£75m (2017: £245m). The overall position was £767m surplus (2017: £204m surplus (2016: £175m)surplus). There were also unfunded scheme liabilities of £41m£39m at 31 December 2017 (2016: £39m)2018 (2017: £41m). The improvement in the overall position was mainly driven by positive investment performance, which more than offset thean increase in Scheme’s liabilities due to the lower discount rate assumption drivenover the year resulting from rising corporate bond yields which reduced the value placed on liabilities. This was partially offset by lower long term interest ratesthe higher assumed inflation rate which acted to increase the value placed on liabilities and credit spreads.the fall in overall asset values over the year. For more on our pension schemes, including the current asset allocation and our accounting assumptions, see Note 2831 to the Consolidated Financial Statements.
Maturity profile of undiscounted benefit payments | | | | | | | | | | | The Scheme’s obligation to make benefit payments extends over the long-term, and is expected to stretch beyond 2080. The maturity profile of the estimated undiscounted benefit payments expected to be paid from the Scheme over its life at 31 December 2018 was: 
Equity portfolio tactical risk management
| | | | | | | The CF Trustee began a strategic review of the Common Investment Fund’s (CIF’s) asset allocation in 2017 to assess its ability to deliver the investment returns needed to meet the agreed 2016 Actuarial Valuation recovery plan. | | The cost to the CIF is minimal because the derivatives basket is structured so that the revenue from selling positive equity returns broadly meets the cost of buying the downside protection.
The derivatives basket can be unwound at any time in its planned holding period and it will be kept under review by the CF Trustee so that it can react if market conditions change.
| | | | | This plan is designed to close the funding gap between the Scheme’s assets and its pension liabilities through a mix of Company contributions and investment returns over the next 10 years. | | | | | | | | | | Listed equity markets have delivered strong investment returns since March 2009 and reached record levels in 2017. Global equity prices now look increasingly expensive across a range of valuation measures. As a result, and whilst the asset allocation review is being completed, the CF Trustee decided to buy a tactical investment to protect part of its listed equity portfolio from falls in equity markets.
This tactical investment was put in place by buying a basket of derivatives whose performance is driven by underlying equity markets.
The combined portfolio of the listed equities and the derivatives basket effectively changes the payout profile that the CIF will earn from its total listed equities whilst the derivatives basket is held over the next 12 months.
The derivatives basket sells positive listed equity returns above the return required by the CIF should they occur and uses the revenue from that sale to buy protection to safeguard the value of the listed equities should equity markets fall below the levels when the derivatives basket was bought.
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| | | | | > Conduct and regulatory risk |
Conduct and regulatory risk(unaudited) | | | | | | | | | Overview | | | | | | | OverviewKey metrics
| In 2017, we merged
We manage the conduct andnon-financial regulatory risk types intoin one framework. We diddo this to better reflect their similarities and to streamline our risk types.similarities. Conduct risk is the risk that our decisions and behaviours lead to a detriment or poor outcome for our customers. It also refers to the risk that we fail to hold and maintain high standards of market integrity. Regulatory risk is the risk of financial or reputational loss, imposition or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. We are committed to ensuring conduct strategy is embedded in our business and that the fair treatment of our customers is at the heart of what we do. In this section, we explain how we manage conduct and regulatory risk. We also describe our main conduct provisions, with a focus on PPI, and give some insight into our support for vulnerable customers.how we are helping to combat financial abuse. | | | | Key metrics
Our PPI provision at 31 December 20172018 amounted to £356m (2016: £457m)£246m (2017: £356m) Other conduct provisions at 31 December 20172018 amounted to £47m (2016: £36m)£30m (2017: £47m) | | |
OUR KEY CONDUCT AND REGULATORY RISKS We believe that delivering a Simple, Personal and Fair bank starts with meeting the needs and expectations of our customers. To achieve this we are committed to making sure that our strategy, proposition and initiative approval process, and systems, operations and controls are well designed and delivered. We see our key exposure to conduct and regulatory risk through (i) the risk of errors in our product design, sales practices, post-sale servicing, operational processes, complaint handling and complaint handling.(ii) failure to supervise, monitor and control the activities of our employees. All of these may result in the risk that we do not meet our customers’ needs, align to the expectations of our regulators or deliver the expected outcomes.outcomes or observe required standards of market behaviour. Our Conduct and Regulatory Framework is built on the following underlying types of risk: | | | | | | Key risks | | Description | | | | Regulatory | | The risk that we fail to adhere with relevant laws, regulations and codes which could have serious financial, reputational and customer impacts. This includes the risk that we may be adversely impacted by changes and related uncertainty aboutaround UK and international regulations. We categorise regulatory risk into financial andnon-financial risk. This is aligned to our main regulators who are the: –the PRA which is responsible for the prudential regulation and supervision. Its main aim is to promote the safety and soundness of the firms it supervises; and
– FCA, which focuses on the regulation of conduct by financial services firms. Its aims include securing an appropriate degree of protection for customers.FCA.
As well as being subject to UK regulation, as part of the Banco Santander group, we are impacted indirectly through regulation by the Banco de España (the Bank of Spain) and, at a corporate level, by the ECB through the Single Supervisory Mechanism.SSM. We also fall within the scope of US regulation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. This places restrictions onrestricts our activities both in the UK and the US. We also have to adhere to the rules and guidance of other regulators and voluntary codes in the UK. | | | | Product | | The risk that we offer products and services that do not result in the right outcomes for our customers. | | | | | | | Sales | | The risk that we sell products and services to our customers without giving them enough information to make an informed decision or we do not provide correct advice. | | | | | | | After-sale and servicing | | The risk that failures of our operations, processes, servicing activity, IT or controls result in poor outcomes for our customers. This includes the risks that: – We do not give appropriate after-sale communications to customers, making it difficult for them to contact us, or we fail to take account of a customer’s vulnerability – We do not have robust systems and controls to detect and prevent fraud.fraud or errors in the customer experience. | | | | | | | Culture | | The risk that we do not maintain a culture that encourages the right behaviour and puts the customer at the heart of what we do. | | | | | | | Competition | | The risk of financial harm, criminal liability, customer harm or reputational damage that we may incur because we fail to comply with relevant competition law or being involved in any competition law investigation or proceedings. | | | | | | | Controls | | The risk that we do not supervise and monitor our employees effectively or do not have robust systems and controls in place to prevent and detect misconduct. | | |
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
CONDUCT AND REGULATORY RISK MANAGEMENT Risk appetite We aim to comply with and exceed all regulatory requirements and we have no appetite to make decisions or operate in a way that leads to unfair outcomes for our customers or negatively impacts the market. Our Board approves our risk appetite on an annual basis, or more often if events mean that we need to revise it, and we cascade it to our business units through our risk framework and policies. Our Board agrees our conduct and regulatory risk appetites and limits each year, or more often if events mean that we need to. We also have lower level risk tolerance thresholds that are agreed at least annually by the Board Risk Committee.ERCC. Our material conduct and regulatory risk exposures are subject to, and reported against, our conduct and regulatory risk appetite statements, as well as lower level triggers and thresholds for management action. Risk measurement Due to the close links between our conduct, regulatory and operational risk frameworks, our tools to identify, assess, manage and report theseoperational risks also apply where such exposures and risks have a conduct and/or regulatory risk impact. We considersupport our conduct and regulatory risk as part of the governance around all our business decisions. We have specific forumsframework and committeespolicies with tools that aim to make decisions onidentify and assess new and emerging conduct and regulatory risk matters. They do this after due consideration by the business, our Business Support Units and Risk Control Units, as well as the Board Responsible Banking Committee.risks. These include: | | | | Key tools | | Description | Strategy and business planning | | Our Strategy and Corporate Development team help align our overall corporate strategy, financial plans, risk appetite and operational capabilities through our annual process to set our strategy. We derive our business unit plans from our overall corporate strategy and they contain a view of conduct and regulatory risk along with our other key risk types. | Sales quality assurance | | We subject our retail sales to internal quality assurance and, as appropriate, external monitoring to ensure the quality of our sales and practices. | Operational risk and control assessments | | Our business and business support units assess our operational risks, systems and controls to give us a consolidated risk view across all our business areas. We complete the assessments through a central tool to evaluate and manage our residual risk exposures. | Scenario testing and horizon scanning | | We consider conduct and regulatory risk in our scenario testing. This reviews possible root causes and assumptions to determine the likelihood and size of the impact, and actions to enhance our controls where required. | Conduct risk reporting | | We use dashboards to give us anend-to-end view of our conduct risks across our business. This allows us to apply a lens to manage conduct risk and understand if it is in line with our risk appetite. | Compliance monitoring | | We carry out an annual assurance programme for conduct and regulatory risk which is approved by the Board and tracked through the year. |
Risk mitigation Our conduct and regulatory risk framework and policies set out the principles, standards, roles and responsibilities and governance for conduct and regulatory risk, such as: | | | | | | Policies | | Description | | | Product approval | | | Product approval | | Our product approval process aims to minimise our exposure to conduct, legal, regulatory or reputational risks in the design, marketing, sales and service of new products and services. We assess all our products and services within a formal framework to make sure they are within our risk appetite and agreed metrics, processes and controls are in place. | Suitable advice for customers | | | | | | Suitable advice | | We give guidance to advisers and staff on the key principles, minimum requirements and ethical behaviours they must follow when they give advice or conduct anon-advised sale.follow. This ensures our customers are sufficiently informed when they make a buying decision. TheIn our Retail Banking division, the main products we cover are mortgages, investments, savings and protection. | | | | | | Training and competence | | In line with the expectations of our regulators, we train our staff and require them to maintain an appropriate level of competence (in line with their role and responsibilities) to ensure customers achieve fair outcomes. We invest in all our people to ensure that we achieve our mandatory risk objectives and that everyone acknowledges their personal responsibility for risk management through our I AM Risk approach. | | | | | | Treating vulnerable customers fairly | | Some customers may be impacted financially or personally as a result of their circumstances. Our guidelines give ourVulnerable Customer Policy gives business areas a clear and consistent understanding of what vulnerability can mean and the types of situations when customers that may need more support. Our guidelines alsofocus on identifying vulnerable customers, and the support we can give to help prevent those customers from enteringthem avoid financial difficulty or any other financial loss.difficulty. We work with key charities and other specialists to develop our understanding of vulnerability. In addition to mandatory training, we train our customer-facing colleagues using real customer scenarios to highlight different vulnerable situations. This enables our colleagues to deal with a wide range of sensitive issues. We have also developed an online Vulnerable Customer Support Tool for our colleagues to give them more information and guidance. Our colleagues have access to our Specialist Support Team who can provide specific help and guidance for the most complex vulnerable customer situations. We consider vulnerability in every new initiative. Adapting our product approval process, and have mandatory training on it for all our people. | | |
We support our conduct and regulatory risk framework and policies with tools that allow us to identify and assess any new and emerging conduct risks. These include:
| | | Key tools | | Description | | | Strategy and business planning | | Our Strategy and Corporate Development team help align our overall corporate strategy, financial plans, risk appetite and operational capabilities through our annual processtechnology to set our strategy. We derive our business unit plans from our overall corporate strategy and they containthe needs of customers with physical disabilities is a view of conduct and regulatory risk along with our other key risk types. | | | Sales quality assurance | | We subject our sales to internal quality assurance and, as appropriate, external monitoring to ensure the qualitypart of our salesdesign and practices. | | | Operational risktesting stages and
control assessments
| | Our business and business support units assess our operational risks and controls to give us a consolidated risk view across all our business areas. we work closely with the Digital Accessibility Centre. We complete the assessments through a central tool to evaluate and manage our residual risk exposures. | | | Scenario testing and
horizon scanning
| | We consider conduct and regulatory risk in our scenario testing. This reviews possible root causes and assumptions to determine the likelihood and size ofhave seen the impact and actions to enhance our controls where required. | | | Conduct risk reporting | | We use dashboards to give us anend-to-end viewof this in areas such as the roll out of our conduct risks (from product, salesvoice-guided, contactless-enabled ATMs and post-sales and servicing) acrossthe development of our business. This allows us to apply a lens to manage conduct risk and understand if it is in line with our risk appetite. | | | Compliance monitoring | | We carry out an annual assurance programme for conduct and regulatory risk. This includes mystery shopping, branch oversight and thematic reviews.Mobile Banking app.
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Risk monitoring and reporting OurWe consider conduct and regulatory risk as part of the governance around all our business decisions. We have specific forums and control forums support managementcommittees to manage risksmake decisions on conduct and controls in their business units. Reporting includes commentary on trendsregulatory risk matters and root causes so that we can take effective action. ultimately report to the Board Responsible Banking Committee.
The data reportedwe report to senior management contains essential information that gives them a clear understanding of current and potential emerging conduct and regulatory risks and issues. WeOur risk and control forums support this withmanagement to control risks in their business units. Reporting includes conduct risk dashboards, which take into account a range of metrics across common areas such asareas. These include policy breaches logged, mystery shopping, quality assurance and complaints. Ourcomplaints, as well as commentary on trends and root causes. The dashboard enables management to take effective action.
As well as the reports issued by the business, our Legal and Regulatory function reports directly to the Board to give a view on legal, conduct and regulatory, reputational and financial crime risks, and to escalate issues or any breach of our risk appetite.
| | | | | > Conduct and regulatory risk |
CONDUCT AND REGULATORY RISK REVIEW 20172018 compared to 20162017
To make sure we fully consider customer impacts across our business, we maintained a strong focus on robust oversight and control over our proposition, and maintaining Compliance teams across all our key business lines. We also embedded conduct risk frameworks across all business divisions, and worked closely with Operational Risk, leveraging the risk toolkit to identify, assess, manage and report conduct and regulatory risk. In 2017,2018, we continued to build on the progress we made in 2016.developed tailored propositions across all of our customer segments. As part of this, we: | – | | AssessedRemoved unarranged overdraft fees fromfee-paying personal current accounts and reduced the views and new policy areas in the FCA’s Business Plan and Mission Statement. We then built them into our business planning, controls and oversight activitiesmonthly maximum charge for unarranged fees |
| – | | Strengthened our workSet up a Mortgage Taskforce to better support positive customer outcomes by empowering customer facing teams to deal with Banco Santander to ensure that we have a consistent approachcustomer queries at first point of contact |
| – | | ImprovedSupported our colleagues with the introduction of the 1I2I3 Business Current Account, in line with our objective to help businesses prosper |
| – | | Supported the launch of our Digital Investment Adviser which is a tool to make investment advice more accessible for our customers. |
We also continued to build on the progress we made in 2017. As part of this, we: | – | | Continued to strengthen our governance from the top down following the establishment of the Board Responsible Banking Committee in 2017 |
| – | | Managed technological change and increased digitalisation in line with new regulatory initiatives including Open Banking and PSD2 |
| – | | Supported the integration of Santander Services and Santander Technology following their acquisition by Santander UK in 2018 to better partner with colleagues across the business and truly deliver for our customers |
| – | | Developed a standardised conduct risk framework across our Corporate & Commercial Banking and guidanceCorporate & Investment Banking divisions to ensure we manage theend-to-end client journey and potential market impacts more consistently |
| – | | Helped to support and implement our Ring-Fenced Bank business model, by performing conduct risk assessments, tracking mitigating actions to completion and delivering a Compliance Framework for how we support vulnerable customers, including ageing customersthe new ring-fence model |
| – | | Enhanced our systems and processes due to the implementation of MiFID II, which introduced significant changes in financial market infrastructure and practices. MiFID II requires more trading to take place on trading venues, greater price transparency, more detailed reporting to regulators, and changes to investor protection practices. We continued to enhance these areas throughout 2018 in line with further regulatory guidance. Senior management information to help us identify forward-looking risks earlier. We also analysed internal and external developments to capture the lessons learntremains focused on this area |
| – | | Carried out faceTook steps to face trainingensure we are well prepared for a likely end of LIBOR in addition2021 and the transition away from LIBOR to mandatory modules(near) Risk Free Reference Rates (RFR). We set up a Senior Management Steering Committee to help colleagues on topical areasensure we are operationally ready for the transition. The LIBOR Transition Programme Office supports the committee, and coordinates and facilitates the work of conduct risk |
– | | Developed a new conductspecific working groups, and compliance centremonitors how the LIBOR transition challenges and risks evolve. We participated in the first phase of excellencethe Sterling Risk Free Reference Rate Working Group, facilitated by the regulatory authorities. We continue to support this initiative through participating in our LegalRFR working groups and Regulatory division |
– | | Refined and improved our product approval process.industry associations. |
We continue to assess the potential customer, client and market impacts of structural reform as part of our ring-fencing programme.
PPIConduct remediation provisions
The remaining provision for PPI redress and related costs amounted to £356m, including anwas £246m (2017: £356m). We made no additional net provision of £40mPPI charges in Q417 bringing the total charge for the year, to £109m. The Q417 provision relates to an increase in estimated futurebased on our recent claims driven byexperience, and having considered the start of the FCA advertising campaign for PPI, offset by an expected decline pertaining to a specific PPI portfolio review.FCA’s Consultation Paper 18/33 issued on 7 November 2018. We will continue to monitor our provision levels, and take account of the impact of any further change in respect of recent claims experience.received and FCA guidance. OtherThe remaining provision for other conduct provisions
Other conduct provisions amounted to £47m (2016: £36m)issues was £30m (2017: £47m), and included a provision of £35m, relatingwhich primarily relates to the sale of interest rate derivatives. This charge followedderivatives, following an ongoing review regardingof the regulatory classification of certain customers potentially eligible for redress. Following further analysis, management assessed the provision requirements resulting in a release of £11m in Q2 2018.
Regulatory provisions A £32.8m fine was levied by the FCA in December 2018. The fine relates to an investigation by the FCA into our historical probate and bereavement practices. For details on how we have responded to this, see the ‘Operational risk’ section. For more on our conduct remediation provision, including sensitivities,provisions, see Note 27 to the Consolidated Financial Statements. We explain more about these sensitivities in ‘Critical accounting policies and areas of significant management judgement’ in Note 130 to the Consolidated Financial Statements. | | | | | | |  | | Support for vulnerable customersCombatting financial abuse
| | | | | In recent yearsFinancial abuse is a very real and damaging form of abuse for many people in the UK and commonly involves financial control or the exploitation of a vulnerable person. We are working hard to look at different ways we can better help and support victims and limit a customer’s exposure to further abuse of this kind.
Since March 2017 we have increasedworked closely with other members of UK Finance, as part of the Financial Abuse Working Party, with a shared vision to help victims regain control of their finances. Through this collaboration we have agreed a Financial Abuse Code of Practice, which we are now working to embed within our focus on consumer vulnerability. We use guidance from the FCA, Money & Mental Health Policy Institute, Citizens Advice and other consumer bodiesbusiness as part of our overall vulnerable customer strategy. As part of our work in this area, we have designed specific training material for colleagues to collaborate at an industry level. We have built on work we started in 2015 increasing ourraise awareness and ability to respond toimprove understanding around the needsdevastating impacts of vulnerable customers. Recognising vulnerability through our contact with customers is key in being able to identifyfinancial abuse and how we can give our customershelp. We are also looking to make it easier for victims to ask for help and get the best support. To equip our customer facing colleagues and give them the confidencesupport they need to dealbe released from joint accounts they may hold with their abuser. Due to the very complex nature of situations involving financial abuse, we also have a range of sensitive issues, we have given them training in this area. To do this, we used real customer scenarios to highlight different vulnerable situations. We have also developed an online Vulnerable Customer Support Tool for our colleagues to give them more information and guidance. We are also piloting adedicated Specialist Support Team for ourthat offers guidance to colleagues when they need more support. This team set up a dedicated helpline for both customers and colleagues to support people affected by the Grenfell Tower Fire in June 2017.
We recognised that ourdealing with customers who were impacted wouldare victims and need easy accesstailored solutions to a dedicated source of information and guidance given their very unique and tragic circumstances. In 2018, we plan to expand our Specialist Support Team to support all our customer facing colleagues. We have also tested a Friends and Family alert service, where a customer can ask us to notify a named and trusted friend or family member when certain transactions occur on their account. This has given peace of mind and a sense of added security for customers who may feel vulnerable or want to keephelp them regain control of their banking with a little support.finances.
Protecting vulnerableThis kind of abuse can take a variety of forms within different relationships including family, partner and carer relationships. While financial abuse can happen to anyone, women are more likely to experience it and amongst older people, those with dementia or reduced cognitive function are the most vulnerable. Research shows that over one third of victims don’t tell anyone at the time and that is why we are fully committed to raising awareness and providing the right support so that customers is a bank wide responsibility and we now have an overarching policy which sets out our principles of good conduct in this area.feel able to speak with us about their personal situation.
| | Through this approach, we now consider vulnerability in every new initiative. We have seen the impact of this in areas such as the roll out of our voice guided, contactless-enabled ATMs and the development of our mobile banking app. We also work closely with the Digital Accessibility Centre, and adapting our technology to the needs of customers with physical disabilities is a key part of our design and testing stages. As an example, the use of fingerprints and Face ID (IOS only), to access our mobile banking app removes the need to remember passwords. The use of voice activation to navigate online services also improves access for people with visual impairments.
We are committed to providing services, products and support to all of our customers who are vulnerable. We look to build on these initiatives and develop even more ways to help them in 2018.
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| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
Other key risks(unaudited) | | | | | Overview | | | | | In this section, we describe how we manage our other key risks and discuss developments in the year. Our other key risks are: – Operational risk:the risk of direct, or indirect, loss due to inadequate or failed internal processes, people and systems, or external events. – Financial crime risk:the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, bribery and corruption. – Strategic risk: the risk of loss or damage due to decisions that impact the long-term interests of our key stakeholders, or from an inability to adapt to external developments. | | – Legal risk:the risk of loss due to legal deficiencies in contracts; failure to take appropriate measures to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to discharge duties or responsibilities created by law or regulation. – Model risk:the risk of loss from decisions mainly based on results of models due to errors in their design, application or use. – Strategic risk: the risk of loss or damage due to 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.
– Model risk: the risk of loss from decisions mainly based on results of models due to errors in their design, application or use. | | |
OPERATIONAL RISK OUR KEY OPERATIONAL RISKS 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. These events can include product misselling, fraud, process failures, system downtime and damage to assets. Our top three key operational risks are: | | | Key risks | | Description | | | Cyber risk | | The use of technology and the internet have changed the way we live and work. They have allowed us to develop and improve the way we deal with our customers. It is critically important that we give our customers a secure environment in which to deal with us. Failure to protect the data assets of the bank and its customers against theft, damage or destruction from cyber-attacks could result in both damage to our reputation and direct financial losses. This applies not only to our own systems but also to those of our third party providers and counterparties in the market. | | | Outsourced and third
party supplier
management
| | We rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of services and goods. These include outsourced services, such as IT infrastructure, software development and banking operations. Third party risk is a key operational risk for us due to the number, complexity and criticality of the services being provided. Many third parties are also shared across the sector and this could increase risk due to complexity and capacity issues at the suppliers. The failure of a supplier may cause operational disruption, breach of data security or regulations, negative customer impact, financial loss or reputational damage. | | | Process and 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. We are also implementing 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. | | | Outsourced and third party supplier management | | We rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of services and goods. These include outsourced services, such as IT infrastructure, software development and banking operations. Regulations require us to classify other legal entities in the Banco Santander group as external suppliers, so we manage them as third parties. Third party risk is a key operational risk for us due to the number, complexity and criticality of the services provided by our third parties. Many are also shared across the sector and this could increase risk due to complexity and capacity issues at the suppliers. The failure of a supplier may cause operational disruption, breach of data security or regulations, negative customer impact, financial loss or reputational damage. | | | | Cyber risk | | The use of technology and the internet have changed the way we live and work. They have allowed us to develop and improve the way we deal with our customers. It is critically important that we give our customers a secure environment in which to deal with us, especially when the threat from cyber criminals is so prevalent and more sophisticated than ever. Failure to protect the data assets of Santander UK and its customers against theft, damage or destruction from cyber-attacks could result in damage to our reputation and direct financial losses. Even small periods of disruption that deny access to our digital services can erode our customers’ trust in us. This applies not only to our own systems but also to those of our third party providers and counterparties in the market. It is therefore critical that we are resilient to cyber-attacks and can withstand and quickly recover from those events that do occur. |
The UK referendum vote in June 2016 to leave the EU was followed by Article 50 being triggered in March 2017. This marked the start of the Brexit process, scheduled for March 2019. As anticipated, the process is impacting the economic, legal and regulatory environment for consumers, businesses and the financial services industry. Given the complexity of the process, we have put in place robust contingency plans and mitigating actions to address the potential risks that could arise across our business. We continue to actively monitor the key risks including operational, credit, market, liquidity, conduct and regulatory, legal, and reputational. As the process becomes clearer, we will update our plans and actions, and implement them if and when we need to. While uncertainty around Brexit remains we are preparing for a number of outcomes in order to minimise the impact on our business. Our Brexit preparations are comprehensive and we have dedicated significant focus to ensure we can continue to serve our customers whatever the outcome. In particular we have taken account of the nationality and location of our people and customers, contract continuity, financial markets infrastructure such as clearing, access to Euro payment systems as well as third party services and flows of data into and out of the European Economic Area. We expect the direct impact on our business to be somewhat lower than for other more diversified UK banks and corporates, given our UK focus. We also expect to benefit from being part of the Banco Santander group, the largest bank in the eurozone with major subsidiaries outside Europe, which will help us to continue to serve our customers’ domestic and international banking needs. The indirect impact on our business remains uncertain and will be linked to the wider UK economic outturn in the years ahead. Nonetheless, we believe we are well prepared and continue to be positioned prudently. We are also exposed to tax risk which, even though it is a lower risk for us, is still a high profile risk and may include legacy items. We define tax risk as the risk that we fail to comply with domestic and international tax regulations because we misinterpret legislation, regulations or guidance, or we report to the tax authorities inaccurately or late. This could lead to financial penalties, additional tax charges or reputational damage. Santander UK adopted the Code of Practice on Taxation for Banks in 2010. For more on this, see our Tax Strategy.
OPERATIONAL RISK MANAGEMENT Risk appetite We set our operational risk appetite at a Santander UK level and we express it through measures approved by the Board. These include risk statements and metrics set against the seven CRD IV loss event types. We cascade our appetite across our business areas by setting out lower level triggers and thresholds and processes by which risks and events must be managed and escalated, and by which they may be formally accepted. Risk measurement and mitigation The key components of the operational risk toolset we use to measure and mitigate risk are: | | | Operational risk toolset | | Description | Operational risk and control assessments | | Our business units identify and assess their operational risks to ensure they manage and control them within our operational risk appetite. They also ensure that we prioritise any actions needed. Every area has to identify their risks, assess their controls for adequacy and then accept the risk or formulate a plan to address any deficiencies. | Risk scenario analysis | | We perform this across all of our business units. It involves a top down assessment of our most significant operational risks. Each business unit has a set of scenarios that it reviews and updates each year. The analysis gives us insight into rare but high impact events. It also allows us to better understand the potential impacts and to address any issues. | Key indicators | | Key indicators and their tolerance levels give us an objective view of the degree of risk exposure or the strength of a control at any point in time. They also show a trendtrends over a period of time and give us early warning of potential increasing risk exposures. TheOur most common key indicators we use are key risk indicators, which highlight the degree of risk, and key control indicators which show how strong and effective the controls are. | Operational risk losses | | Our operational risk loss appetite sets the level of total operational risk loss (expected and unexpected) in any given year (on a 12 monthsmonth rolling basis) that we consider to be acceptable. We track actual losses against our appetite and we escalate as needed. | Operational risk event management | | Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory impacts and/or damage to our reputation. We have processes to capture and analyse loss events. We use data from these processes to identify and correct any control weaknesses. We also use root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments, scenario analysis and risk reporting. | Risk based insurance | | Where appropriate, we use insurance to complement other risk mitigation measures. |
We also mitigate our key operational risks in the following ways: | | | Key risks | | Risk mitigation | Cyber riskProcess and change management | | We operateOur operational risk exposure increases when we engage in new activities, develop new products, enter new markets or change processes or systems. As a layered defence approachresult, we assess the operational risk for material change programmes and new products before they are allowed to cyber risk, which aims to prevent, detect, respond to and recover from cyber-attack. We continually review how effective our controls are against globally recognised security standards. This includes the use of maturity assessments and both internal and external threat analysis. Our comprehensive approach to validating our controls includes tests designed to replicate real-world cyber-attacks. We reflect the test findings in our ongoing improvement plans.
| | | We use robust technology to protect our customers and we continually invest in the fight to counter scams. As part of this, we run an ongoing customer education campaign, and we offer tips and advice on our online security centre. We are successful in preventing the vast majority of fraud and protecting our customers’ money.
| | | Protecting our customers, systems and information is a top priority and in 2017, we undertook a large programme of staff training, customer education and technology improvements. This also included enhanced technical measures to ensure our technology continues to be resilient to online cyber-disruption. Our Cyber Resilience programme continued to evolve and adapt to cyber threats. We also launched a successful ‘Phish and Chips’ campaign designed to raise awareness and give customers the knowledge they need to prevent themselves becoming a victim of fraud. We continue to work with other banks through our membership of the Cyber Defence Alliance, in which we share intelligence on cyber threats and effective mitigation strategies. For more, see the “Protecting our customers” case study.go ahead.
| Outsourced and third party supplier management | | We haveplace emphasis on a third party supplier risk frameworkcarefully controlled and managed Third Party Supplier Risk Framework, and are enhancing our resources in this area in order to manage this risk. We aim to ensure that those with whom we intend to conduct business meet our risk and control standards throughout the life of our relationship with them. We also monitor and manage our ongoing supplier relationships to ensure our standards and contracted service performance continue to be met. | Process and change managementCyber risk
| | Online security and data breaches stories, along with many reports of scams and online fraud, continue to feature strongly in headlines and political debate. As criminals become more sophisticated in their approach, banks and other organisations are in an ongoing race to keep ahead of them. Cyber criminals persist in attempts to deny our customers access to our digital channels, target our online services and data, or steal online credentials by various methods, including social engineering. | | | Protecting our customers, systems and data remains a top priority for us. In 2018, we undertook a large programme to enhance our resilience to cyber-disruption. This includes staff training, customer education and IT improvements. Our operational risk exposure is increasedcyber security training ensures all our staff understand the threats we face, and that we all have the expertise, through practical assessment, to spot criminals’ emails and attacks on our IT systems. We continue to work with other banks as members of the Cyber Defence Alliance, where we engageshare intelligence on cyber threats and effective mitigation strategies. | | | In 2018, we also launched a successful ‘Scam Avoidance School’ campaign to raise awareness and give customers the knowledge they need to avoid becoming victims of fraud. We use robust technology to protect our customers and we continually invest in new activities, develop new products, enter new markets or implement new business processes or systems.the fight to counter scams. As part of this, we run customer education campaigns, and we offer advice on our online security centre. We successfully prevent the vast majority of fraud and protect our customers’ money. For more, see the ‘protecting our customers’ case study. | | | We operate a result, we conduct operational risklayered defence approach to cyber risk. This aims to prevent, detect, respond to and recover from cyber-attack. We continually review how effective our controls are against globally-recognised security standards. We also make use of maturity assessments for material change programmes and new product developments before they receive approvalboth internal and external threat analysis. Our comprehensive approach to proceed. validating our controls includes tests designed to replicate real-world cyber-attacks. Our test findings drive our ongoing improvement plans. |
Risk monitoring and reporting Reporting is a key part of how we manage risk. It ensures we identify, escalate and manage issues on a timely basis. We can identify exposures through our operational risk and control assessments, risk scenario analysis, key indicators and incidents. We report exposures for each business unit through regular risk and control reports. These include details on risk exposures and how we plan to mitigate them. We prioritise and highlight events that have a material impact on our finances, reputation, or customers by reporting them to key executives and committees. These include changes in our cyber risk profile. We have a crisis management framework in place coveringthat covers all levels.levels of the business. This includes the Board, Executive Committee, senior management and our business and support functions. Our framework identifies possible trigger events and sets out the processes tohow we will manage a crisis or major incident, and we test it at least annually. If an event occurs, we have business continuity plans in place to recover the services as quickly as possible. These are aligned with our key customer journeys and delivery of critical IT services. We use the standardised approach for Pillar 1 operational risk capital needs. We use an internal model aligned to the CRD IV advanced measurement approach to assess our Pillar 2 capital needs. We also use it to model our operational risk losses we might incur in a stress.
| | | Annual Report 2017 on Form 20-F2018 | Risk review | | |
OPERATIONAL RISK REVIEW Operational risk event losses The table below shows our operational losses in 20172018 and 20162017 for reportable events with an impact over £10,000, excluding conduct risk events (which we discuss separately in the ‘Conduct and regulatory risk’ section), by CRD IV loss event types. We manage some of these risks in our Risk Framework inusing frameworks for other risk types, including regulatory and financial crime risk even though we report them here. | | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | | | Value % | | | Volume
% | | | Value % | | | Volume
% | | | Value % | | | Volume % | | | Value % | | | Volume % | | Internal fraud | | | 5 | | | | 1 | | | | 4 | | | | 2 | | | | 1 | | | | 2 | | | | 5 | | | | 1 | | External fraud | | | 37 | | | | 49 | | | | 23 | | | | 40 | | | | 4 | | | | 48 | | | | 37 | | | | 49 | | Employment practices and workplace safety | | | – | | | | 1 | | | | – | | | | 1 | | | | – | | | | 2 | | | | – | | | | 1 | | Clients, products, and business practices | | | 24 | | | | 22 | | | | 18 | | | | 34 | | | | 3 | | | | 18 | | | | 24 | | | | 22 | | Business disruption and system failures | | | 1 | | | | – | | | | – | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | – | | Execution, delivery, and process management | | | 33 | | | | 27 | | | | 55 | | | | 22 | | | | 91 | | | | 29 | | | | 33 | | | | 27 | | | | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | | | | 100 | |
20172018 compared to 20162017
InWe experienced a general uplift in the volume ofnon-financial events in 2018, largely due to new regulations and breach reporting requirements relating to GDPR. The volume of losses against each category was broadly in line with industry experience,2017. We saw an overall reduction in 2017 we saw a highthe volume of lowfinancial losses in 2018 compared to 2017, although the proportion attributed to each category was broadly unchanged. In particular, enhancements to our anti-fraud controls have led to a reduction in the number of external fraud losses. In 2018 we also invested in delivering improved solutions to help protect our customers from Authorised Push Payment (APP) fraud and scams. These initiatives will support the new requirements set out by our regulators to help prevent customers from falling victim to APP fraud. The value ‘external fraud’ events. These mainly relateof losses showed a significant change in 2018, with a move away from conduct-related losses (such as PPI) to card, telephone banking and online payment fraud. We continue to look at ways to enhance our fraud prevention strategy in response to the evolving external landscape. Our losses from ‘Execution,those involving Execution, delivery and process management’ events relatemanagement (events relating to historic systemshistorical system functionality and process issues.issues).
In 2017, we enhancedThe £32.8m fine levied by the FCA in December 2018, contributed to this. The fine relates to an investigation by the FCA into our approachhistorical probate and bereavement practices. We acknowledged the findings of the FCA and apologised to operational risk. This included theroll-out families and beneficiaries of more modulesdeceased customers affected by these failings. We have completed a comprehensive tracing exercise and transferred the majority of funds in deceased customers’ accounts to their rightful beneficiaries, with compensatory interest where appropriate. We have also conducted a full review of our operational risk system. This was partbereavement processes and made a number of significant changes, including a complete overhaul of our processes, and creation of a final yearcentralised specialist bereavement team to provide the best service. We now also facilitate necessary payments from a deceased customer’s accounts to cover funeral bills, probate fees and/or inheritance tax.
In 2018 we also provided £58m in relation to a systems-related historical issue, which has also contributed to the shift to losses relating to Execution, Delivery and Process Management. As noted elsewhere, the provision is based on detailed reviews of investmentsystems regarding consumer credit business operations, and relates to implementcompliance with certain aspects of the Consumer Credit Act. For more, see Notes 30 and 32 to the Consolidated Financial Statements. We implemented cheque imaging ahead of the industry milestone of 30 November 2018. With cheque clearing activities in association with other UK banks expected to increase during Q1 2019, our transformation programme. Byfocus is on managing the end of 2017, the programme was substantially complete. related risks. The Open Banking initiativeInitiative and the new Payment Services Directive (PSDII)PSD2, both of which introduced new requirements during 2018, together bring significant opportunity for us to develop new products and services to enhance the ways customers use their data and pay for services, butservices. However, they also introduce a new layer of risk to both customers and Santander. In 2017 we carriedSantander UK. We continued to carry out detailed operational risk assessments in relation to these initiatives, in order to identify, assess, manage and report the key risks involved. Our focus on managing these risks continues, with further assessments planned for 2018.2019. In 2018 we introduced a new early escalation process which has supported more proactive and coordinated incident management within the bank. We conducted one internal crisis exercise and participated in the Bank of England regulatory Simulated Crisis Exercise, which was designed to test the resilience capabilities of the UK financial sector. Additionally we increased our concurrent remote access capability to provide greater resiliency for staff to work away from their office in the event of adverse weather or similar situations. We have also reviewed and responded to the joint regulatory discussion paper titled ‘Building the UK financial sector’s operational resilience’. In 2017,common with the whole financial services industry, change has been a constant feature in line2018 as it continues to gather pace and complexity. Key parts of our change programme include the design and issue to market of innovative new products and services, such as the 1I2I3 Account for Small Businesses; the changes necessary to meet regulatory requirements, not least GDPR; and that related to keeping Santander UK safe and running, and delivering for our customers. We have continued to develop our governance processes to ensure that operational risk is limited to the absolute minimum and we maintain strong mechanisms for oversight and challenge. A significant proportion of our governance is focused on our customers and doing for them what we consider to be Simple, Personal and Fair. Change is also a key factor in the management of our relationships with other large UK banksour key outsourcing partners (Third Party Service Providers), who form an essential part of the service supply chain to our customers. Here too, the pace of change is dramatic. The demand for innovative solutions and other organisations,the provision of digital services which deliver on demand and at the right time and place for our customers means we must benefit from sharing intellectual development with the best in business. This approach will ensure that we develop and prosper, particularly for our customers, the communities in which we operate, and our staff. This brings additional risks, new technologies, widening spans of control across the supply chain, innovation and cyber threats. To enable us to manage these challenges we have focused on further reviewing our governance processes and introducing new systems solutions which provide information and focus on our supplier relationships and performance. This work will continue, develop and strengthen as we progress through the coming year. Cyber and information security remains a top priority for us, especially in light of the new GDPR regulations for which we completed a programme of work to be able to manage related events. We continue to invest to ensure we have the right skills and resources to manage cyber and information security risk effectively across all our lines of defence. In September 2018, we appointed a new Chief Information Security Officer to help enhance our capabilities and ensure continued delivery of secure products and solutions for our customers and the communities that we serve. Whilst we continue to be subject to cyber-attack. Our focus has been on improving our detection capabilities against malicious activitycyber-attack, we did not suffer any material cyber or information security events during 2018 and building a UK intelligence ledwe continue to actively participate in the Cyber Defence Centre,Alliance along with industry peers to protect both our customersshare cyber threat intelligence, expertise and our shareholders. We continually improve our systems, processes, controls and staff training to reduce our cyber risk andexperience to help protect our customers, systemsidentify common features of cyber-attacks and data. As a result we had no significant disruption in 2017 due to cyber-attack. Our Cyber Resilience Programme operates with a layered defence approach, and continually evolves and adapts to cyber threats. We perform cyber security testing and evaluate security event scenarios where the results and insights drive updates to our system security and control remediation plans. We also continue to invest in our security services. Together with our Cyber Defence Centre and our data centres, this gives us a solid foundation to achieve our digital transformation. Our approach will also ensure that we support future growth in an environment of improved cyber resilience and reduced legacy IT issues.effective mitigation strategies. | | | | | | | | | | | | | | | | Protecting our customers | | | | | | | | | | | | | | Fraud, scam and online security stories continued to feature strongly in headlines and political debate in 2017. As criminals have become more sophisticated in their approach, banks and other organisations have been in an ongoing race to keep one step ahead of them.
In 2017, we undertook a large programme of staff training, customer education and technology improvements to protect our customers. This included enhanced technical measures to make sure our online banking services are resilient to online cyber-disruption. Our new cyber security training ensures all our staff understand the threats to financial services and that we all have the expertise, through a practical assessment, to spot criminals’ emails and attempts to compromise our IT systems.
For our customers, we designed a campaign to raise awareness and give them the knowledge they need to avoid becoming a victim of fraud. We knew we needed to create something that would engage people and grab their attention. We created a specially branded Phish & Chips van that toured the UK. It offered free fish and chips to people who could show a suspected phishing email or smishing text message. For people without a suitable email or text, a short quiz let them show that they could identify fraudulent emails and texts. In return for this, they also won fish and chips. The van attracted plenty of interest, enabling us to talk about how to avoid scams to 3,500 people. Our message was also picked up and broadcast across 93 media outlets while social media reached over 1.5 million people.
| | | | Our research revealed that 74% of the UK public have been targeted with phishing emails, smishing texts and vishing calls. Each person targeted received an average of 16 fraudulent emails, texts or calls last year. This adds up to 600 million attempted scams in the last 12 months. Our Phish & Chips initiative is part of our continued commitment to fighting fraud. We also work closely with industry and government. As part of this, we used the UK Finance ‘Take Five’ branding and literature in our Phish & Chips campaign. Looking forward, we aim to lead the way in keeping our customers safe from fraudsters.
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| | Protecting our customers – Scam Avoidance School We believe consumer awareness and education are key to tackling scams and fraud. While we continue to enhance our systems and processes to support our customers, talking to people about protecting themselves is vital to address the issue effectively. We have an ongoing customer communication programme on fraud and scams. Alongside this we have developed initiatives to raise awareness with consumers, as well as across media, government and other authorities. In March 2018, we launched our Scam Avoidance School. Our plan was to educate customers aged over 60 on how to avoid becoming a victim of scams and fraud. We chose this age group as it is one of the more vulnerable when it comes to scam targets – data from the charity Age UK suggests 53% have been targeted by scammers at an average cost to victims of £401. We challenged staff in our branches to deliver a bespoke anti-fraud lesson targeted at theover-60s. We gave each branch a lesson plan and worksheets for ‘pupils’ as well as take away leaflets. We developed the lesson plans with Age UK and a psychologist from Lancashire University. The content and structure of the lesson also took account of independent consumer research carried out with 1,000over-60s. Subjects covered included email, text and phone scams, social engineering methods and psychology as well as cashpoint and contactless fraud. We recruited Len Goodman, of TV’s Strictly Come Dancing, to front the campaign as our first ‘pupil’. He appears in a video and supporting materials. He also joined us at adrop-in event in Parliament where he helped us explain our Scam Avoidance School to 26 Members of Parliament. Our staff carried out 620 events, reaching over 10,000 people, in March 2018. Since then, we have held hundreds more events, and thousands more people have learnt about how to avoid scams. Staff in our branches continue to run events, and we have adapted our lesson plan and literature for other audiences. |
FINANCIAL CRIME RISK OUR KEY FINANCIAL CRIME RISKS We areSantander UK has committed to deter, detect and disrupt criminality as a core pillar of its anti-financial crime strategy. We adopt a risk-based approach in line with UK and international laws and standards and target our resources in a proportionate and effective manner against the strongest possible response tohighest priority risks. We recognise the damage that financial crime risk. does to our customers and communities and we are actively working with government, law enforcement and private sector stakeholders to help meet our commitments.
We recognise that if we faillaunched a new anti-financial crime strategy across the business in this area it could impact2018, endorsed by our finances, reputationsenior leadership. Our Board has supported investment in our anti-financial crime capability which will deliver key elements of the strategy, from improved systems and operations,controls to operational efficiencies through automation, as well as our customers and wider society. Geopolitical factors and new criminal methods can quickly change the risks we face. We have robust systems and controls, formal policies and a governance framework, training and intelligence and risk assessment capabilities, as well as our partnership with UK authorities, to support us to detect and prevent financial crime.promoting an anti-financial crime culture across Santander UK. Our key financial crime risks are: | | | Key risks | | Description | Money laundering | | WeThe risk that we are used by criminals to transform the proceeds of crime into seemingly legitimate money or other assets. | Terrorist financing | | WeThe risk that we are used by terrorists to deposit, distribute or collect funds that are used to fund their activity. | Sanctions | | WeThe risk that we do not identify payments, customers or entities that are subject to economic or internationalfinancial sanctions. | Bribery and corruption | | WeThe risk that we fail to put in place effective controls to prevent or detect bribery and corruption.
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FINANCIAL CRIME RISK MANAGEMENT Risk appetite We are committed in our effortsOur customers and shareholders will be impacted if we do not mitigate the risks of Santander UK being used to counterfacilitate financial crime and tocrime. We comply with applicable UK law, international sanctions and sanctions regulations. other applicable regulations and make sure our risk appetite adapts to external events as appropriate.
We have controls in place to manage this risk as we have a minimal tolerance for residual financial crime risk. We have arisk and zero tolerance fornon-compliance sanctions, and bribery and corruption risk. We also have no appetite for risks associated with sanctions programmesemployees who do not act with integrity, due diligence or care, or those who breach our policy and the restrictions imposed through such instruments. We cascade our risk appetite and policies throughout the business.regulatory requirements. Risk measurement We use a number of different tools to measure our exposure to financial crime risk:risk regularly. We screen and risk rate all our customers and monitor activity to identify potential suspicious behaviour. We completead-hoc reviews based on key trigger events. Our Financial Intelligence Unit conducts assessments of particular types of threat, including drawing on data provided by law enforcement and public authorities.
| | | | Annual Report 2018 | Risk review | | |
Risk mitigation We take a proactive approach to mitigating financial crime risk. Our Financial Crime Risk Framework is supported by policies and standards which explain the requirements for mitigating money laundering, terrorist financing, sanctions and bribery & corruption risks. We update these regularly to ensure they reflect all new external requirements and industry best practice. We support our colleagues to make sure they can make the right decisions at the right time. We raise awareness and provide role specific technical training to build knowledge of emerging risks. Key elements of our financial crime risk mitigation approach are that we: | – | | We conduct risk assessments of customers, sectors, jurisdictions and business units to assess our risk profile and to ensure we comply with all applicable sanctions regimes |
– | | We use monthly key risk indicators to measure and report financial crime risk to senior management |
– | | Our Financial Intelligence Unit conducts assessments of particular types of threat, including drawing on information provided by law enforcement and public authorities. |
Risk mitigation
Our financial crime function is focused on predicting, detecting, preventing and, where possible, disrupting financial crime. We require all our business units to manage their activities in line with the principles and guidance in our financial crime risk framework. These requirements are set out in our anti-money laundering (AML), counter terrorist financing, sanctions, and anti-bribery and corruption policies and standards.
In line with UK and international laws and standards, we adopt a risk-based approach to financial crime risk mitigation. Key elements of this approach include:
– | | Risk assessments– we assess customer, product, business, sector and geographic risk to target efforts to mitigate financial crime most effectively |
– | | CustomerComplete due diligence– ofnew-to-bank customers, where we seek to understand customers’ activities and banking requirements and, in order to minimise the risk that we are used for money laundering or terrorist financing, we conduct regular reviews of our higher-risk customer relationships to ensure any new financial crime considerations are identified and addressed |
| – | | PartnershipsComplete risk assessments of customers, products, businesses, sectors and geographic risks to tailor our mitigation efforts |
| – | | Ensure all our staff complete mandatory Financial Crime training, supporting specialist training and learning opportunities |
| – | | Deploy new systems to better capture, analyse and act on data to mitigate bribery and corruption risks |
| – | | Partner with public authorities, – we Home Office and the wider financial services industry to pool expertise and data. We are an active participantalso operationally involved in partnerships such as the Joint Money Laundering Intelligence Task ForceTaskforce (JMLIT), which supports public-private collaboration to tackle financial crime. The JMLIT was set up in May 2016 and developed with partners in government, UK Finance (formerly the British Bankers’ Association), law enforcement and over 20 major UK and international banks under the leadership of the Financial Sector Forum. |
Risk monitoring and reporting We use key risk indicators to monitor keyour exposure to financial crime developmentsrisks, and enhancewe maintain strengthened governance across both first and second lines of defence to make sure we report all issues in a timely manner. We work closely with relevant subject matter experts across the business on all risk management and monitoring activities alongside more effective communication of policy changes. We have enhanced our controlstarget operating model to complymake sure that our control environment evolves at pace, keeping up with new or amended laws, regulations or industry guidance. We produce and report financial crime risk data by business unit which covers all aspects of the business life cycle. Each month we report an analysis of the key financial crime key risk indicators to the Executive Risk Control CommitteeERCC together with a directional indication of the risk profile and any significant deterioration of the metrics. We are currently introducing an enhanced set of financial crime risk indicators. We also regularly report to the Board Responsible Banking Committee on financial crime risk, the impact to Santander UK and the actions we are taking to mitigate the risk. FINANCIAL CRIME RISK REVIEW
In 2018, we launched our new three year Anti-Financial Crime strategy. Our mission is built on three simple principles, committing to deter, detect and disrupt financial crime. In developing our strategy, we aligned to Santander UK’s commercial strategy and to the external landscape, listening to partners in the public sector, wider industry and communities. We committed to embed our strategy using education, collaboration and innovation. As a result, we increased awareness of financial crime and have encouraged our staff to use their judgement in doing the right thing and have empowered them to make responsible decisions. Our new Anti-Financial Crime Academy seeks to further embed this, supporting colleagues through multiple channels to ensure we have the right tools to tackle financial crime. We embrace public and private partnership opportunities and actively collaborate with the public sector to address a number of financial crime challenges. These mechanisms provide opportunities to pool our collective knowledge, experiences and skills. We actively participate in these collaborations with industry and the UK Government to combat financial crime risk which also helps us further develop our internal capabilities. For example, in 2018 we analysed external intelligence together with our own data to strengthen our controls for cash deposits. In May 2018, we took part in the latest FCA Financial Crime ‘TechSprint’ where we won two awards showcasing innovation by using technological advances around data sharing to disrupt criminals, whilst still protecting personal data. We are engaged on an ongoing basis with groups such as the JMLIT and continue to see a real positive impact of our work, contributing to the UK’s security and prosperity. In 2018, we introduced significant changes to our financial crime control environment and culture. We enhanced our strategic capabilities and supporting infrastructure. Despite challenges, we are well positioned for 2019 where we expect to gain improved data-driven insights from these activities. We are also embedding our new target operating model after restructuring our Financial Crime Compliance teams. The financial crime landscape continues to be difficult and complex, withgeo-political factors and continually evolving criminal methods influencing the risks we face. We will continue to invest in our people and systems, deter the use of our services for financial crime, detect suspicious activity and disrupt those seeking to benefit from financial crime.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
FINANCIAL CRIME RISK REVIEW
2017 compared to 2016
In 2017, we continued to enhance our Financial Crime Framework through our Transformation Programme including review by a newly formed Board Responsible Banking Committee. It aims to deliver a target model for how we manage financial crime across our business. Our target model refines and builds on what we have already delivered. We aim to address the evolving demands of financial crime regulations, as well as the expectations of our regulators and industry practice to achieve a sustainable model. As part of this, we:
– | | Re-affirmed the key financial crime risk management capabilities we need, including ownership and accountabilities across our first and second lines of defence, business areas and operations |
– | | Reviewed the key process steps and features for each business area and customer type, in addition to the main technology and data components that will underpin the operational aspects of the target state |
– | | Enhanced the governance that will be needed to oversee the effective management of our financial crime risks |
– | | Enhanced our financial crime training strategy, with a strong focus on anti-financial crime culture. We also improved our management data and anti-bribery and corruption. |
Whilst we have well established AML systems and controls, there is further investment and work required to complete the Transformation Programme, delivering strengthening measures to ensure ongoing adherence to regulatory standards during a period of intense regulatory change. The delivery of the programme is a key priority and the Board has approved revisions to the Transformation Programme to ensure it is effective and sustainable. Progress will be tracked through key phases of the Transformation Programme with full visibility to the Board, and regular engagement with the FCA. The Financial Crime Steering Committee, chaired by the CLRO and the CEO, with membership from senior management from businesses and technology, has been established to govern Santander UK’s transformation and ensure the adequacy of financial crime systems and controls.
| | | | | | | | | | | | | | Collaborating to combat human trafficking | | | | | | | | | | We are an active participant of the JMLIT, which aims to combat high end organised crime and money laundering. One of the top priorities of the UK government and the JMLIT is taking action against human trafficking. This form of modern slavery is estimated to generate global criminal profits of £110bn a year. Inevitably, some of this makes its way into the UK financial system. It is thought to affect tens of thousands of people in every large town and city in the UK.Intelligence Partnerships
Our Financial Intelligence Unit (FIU)works closely with the JMLIT. This is a government initiative for public and private partnership between law enforcement and the financial industry to combat high end money laundering. In 2018, we worked with the JMLIT in a NCA operation to identify weapons being sent to the UK from overseas. The NCA identified a specific weapons supplier from Eastern Europe and the information was invitedshared with the members of the JMLIT. We completed intelligence investigations on transactions linked to this supplier and identified significant results which were fed back to the NCA in real time, allowing swift action to be a membertaken. Arrests were made alongside the seizure of firearms at UK ports and at addresses of the suspects we supplied data on. The intelligence we provided helped the NCA to identify and seize significant amounts of firearms, ammunition and cash. We received significant praise from the JMLIT, Expert Working Group on human trafficking. The group aims to finds waysincluding feedback from the case officer stating that the intelligence we supplied helped to prevent what they believed would be further serious and potentially violent crime. We are committed to deterring, detecting and disrupting financial sector cancrime. We will continue to work closely with the government and law enforcementJMLIT to identify cases of human trafficking in response to changing trends in criminal behaviour. As a member of the group, our FIU volunteered to analyse intelligence from law enforcement to develop an effective profile of victims and perpetrators of labour exploitation. This is the most common form of human trafficking reported in the UK. The FIU used our analysis to produce a National Crime Agency (NCA) alert, which was published on behalf of the JMLIT and sent to all UK financial institutions. The alert provided a number of key behavioural and transactional indicators of human trafficking. This has since been used as a resource for training and proactive detection of cases. | | | | Our involvement in JMLIT, and initiatives like it, help prevent and reduce our risk of facilitating organised crime. The bigger picture however, is that by identifying suspects and victims of human trafficking, law enforcement can intervene quicker. This helps to catch those who continue to prey on vulnerable people.
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LEGAL RISK Legal risk includes the legal consequences of operational risk (e.g. breach of contract) and operational risk with legal origins (e.g. a legally defective contract). We have always recognised the importance of effectivemanage legal risk management. In 2017, we enhanced our Risk Framework to createas a separate legal risk typestandalone risk-type to reflect the current environment, including the volumecontinued pace and breadth of regulatory change and how significant it isacross financial services. We define legal risk as losses or impacts arising from legal deficiencies in contracts or failure to: take appropriate measures to our business. Legal risk arises from the following main sources:
– | | Legal deficiencies in contracts: the risk that we use inadequate or incorrect documents to enter into or enforce a contract or protect our interests or assets |
– | | Failure to take appropriate steps to protect assets:the risk that we follow an ineffective or incorrect process to protect our interests or assets or those of our customers |
– | | Failure to manage legal disputes appropriately:the risk of mismanagement of legal claims arising from our business |
– | | Failure to assess or implement the requirements of a change of law |
– | | Failure to comply with law or regulationprotect assets; manage legal disputes appropriately; assess, implement or comply with law or regulation; or to discharge duties or responsibilities created by law or regulation. |
| | | | | Legal risk management
| | | – Risk appetite– we apply robust controls to manage legal risks and have a minimal tolerance for legal risk.
| | | – Risk measurement– we measure legal risk under the categories above and assess both how likely the risk is to occur and its potential impact on our business if it does.
| | | – Risk mitigation– legal risk arises throughout our business units and business support units in theirday-to-day activities. Our Legal team give specialist advice and support to those business areas to mitigate legal risk.
| | | – Risk monitoring and reporting– all our business units consider legal risk as part of their operational risk and control assessments. We monitor and report key legal risks and issues on a timely basis. We escalate them to the Executive Risk Control Committee, Board Risk Committee and Board Responsible Banking Committee as needed.
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2017 compared to 2016
In 2017 we further enhanced our approach to legal risk. We:
– | | Developed a standalone legal risk type to reflect the current environment, including the volume and breadth of regulatory change and its significance to our business |
– | | Clarified the line 1 and 2 responsibilities for legal risk and aligned the risk oversight approach with other risk types owned by the CLRO |
– | | Embedded legal risk reporting into a revised governance structure in accordance with other risk types owned by the CLRO. |
MODEL RISK
Our key model risks arise from potential flaws in our modelling techniques, or the incorrect use of a model. They include risks arising from model data, systems, development, performance and governance.
| | | Legal risk management | | ModelDescription
| | Risk appetite | | We have no appetite to make decisions or operate in a way that leads to legal risk, managementwe apply robust controls to manage these risks. We have a low tolerance for residual legal risk. | | Risk measurement | | Due to the close links between our legal and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply where such exposures have a legal risk impact. | | Risk mitigation | | The Legal team provides specialist advice and support to all business units to ensure we effectively manage legal risk. They help to implement a strong legal risk culture throughout our business using guidelines, policies and procedures and specific assistance on a product, service, transaction or arrangement basis and make decisions on whether legal advice should be sourced internally or externally. | Risk monitoring and reporting | | – Risk appetite– we expressWe have developed our appetite for modelinternal legal risk throughreporting framework to improve the visibility of the SantanderUK-wide legal risk assessmentsprofile. We provide regular updates of our most material risk models.key legal risks, issues or breaches, to senior management and the Board through our Legal & Regulatory function. This is agreedin addition to reports issued by the Board at least annually.business.
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2018 compared to 2017 The legal risk profile of the Santander UK group was heightened but broadly stable during the course of 2018. In 2018 we reviewed our panel of law firms we use to obtain external legal advice and services. We also refreshed the process for appointing a firm to the panel, to provide greater control around such engagement. We also made significant progress throughout 2018 to implement or embed new regulation, particularly in the following areas: | – | | – Risk measurement– we consider both the percentage of models that have been independently assessed, as well as the outcome of those reviews,Ensuring Santander UK’s structure, governance frameworks, policies and arrangements adhere to ring-fencing rules or, where necessary, ensuring appropriate waivers are in our measurement of model risk.
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| – | | – Risk mitigation– we mitigate model risk through controls overMeeting key milestones in the useimplementation of models throughout their lifecycle. We maintain a central model inventory that includes data on owners, uses and key dates. We assess how important each model is to our business. Recommendations arising from independent reviews are tracked through to resolution. We also maintain a clear approval path for new model developments, updates and performance tracking.
the PSD2 requirements |
| – | | – Risk monitoringThe initial margin regime under European Market Infrastructure Regulation (EMIR) was implemented in International Swaps and reportingDerivatives Association (ISDA) master agreements with the applicable financial counterparties
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– we report model risks | | The revision of payment account terms and issues using model risk management and control forums. We escalate issuesconditions to address the Executive Risk Control Committee when necessary, or if our risk appetite is breached.standardised terminology requirements under the Payment Accounts Regulations. |
2017 comparedWe plan to 2016
We continued to evolve our approach to model risk management as we identify new model types and modelling techniques. We assess the importance of the model within our business and use this to ensure we follow an effective governance process for each model. This includes having the most material models independently validated. We have clear roles and responsibilities that focus on the model owner, developer and reviewer, and we have clarified the role of the model user. We enhanced our controls and reporting to highlight the top risks. We continue to evolve our modeland embed the legal risk appetite, using lower level performance indicators.
| | | Annual Report 2017 on Form 20-F | Risk review | | |
framework in 2019, with a particular focus on improved legal risk reporting and management. STRATEGIC RISK Strategic risk can adversely affect our long-term success as it could lead to our business model becoming out of date, ineffective, or inconsistent with our strategic goals. This could arise if we: | – | | Have a partial picture of our operating environment. This can include the economy, new rules and regulations, shifting customer expectations, competitor activity and changes in technology |
| – | | Misjudge our own capabilities, or ability to implement our strategy |
| – | | Pursue initiatives like acquisitions that might not fit with our business model or miss opportunities that we could benefit from. |
| | | | | Strategic risk management | | | Description | – Risk appetite– we | | We have a low to moderate appetite for strategic risk. This limits the risks we are prepared to take to achieve our strategic objectives and is aligned to our balanced, customer-centric business model. | | Risk measurement | | – Risk measurement– ourOur Board and senior management regularly review potential riskrisks associated with our operations and our plans to ensure we stay within our risk appetite.
| | Risk mitigation | | – Risk mitigation– weWe manage strategic risk by having a clear and consistent strategy takingthat takes account of both external factors and our own capabilities as we deliver our aim: to be the best retail and commercial bank earning the lasting loyalty of our people, customers, shareholders and communities.capabilities. We have an effective planning process which ensures we refine, strengthen, and adapt our strategy to reflect changes in the environment. It also means that we canenvironment and identify key risks and opportunities to help people and businesses prosper.opportunities.
| | | – Risk monitoring and reporting– we
| | We closely track our business environment, – such as changes in the economy, customer expectations, technology, regulations, government policies and competition. We also look atincluding long-term trends and how theythat might affect us as well as risks arising from our operation or our plans.in the future. As part of this, we report a range of indicators to track our performance. These include our KPIs as set out in the ‘Strategic Report’. |
20172018 compared to 20162017
Our business environment is always changing, and this affects how we do business. | – | | In 2017,2018, the UK economy performedcontinued to perform better than many initial expectations following the UK’s decision to leave the EU howeverreferendum. However, significant uncertainty still remains and there are a range of potentialpossible outcomes, when the UK exits the EU,including some of which could have an adverse economic impact. However, we are well-placed to manage such uncertainties while continuing to deliver our strategy. We areAs the UK’s leading full-service scale challenger, with a continued focus on customers and innovative solutions. We have a resilient balance sheet and a proven track record of achieving consistent profitability through uncertain times.times, we believe we are well-placed to continue to deliver our strategy. |
– | | The post financial crisis regulatory agenda has led to significant change, some of which has the potential to impact our profitability, for example through changing business models. Notable initiatives include Open Banking which could potentially open the market to new entrants, and ring-fencing. We are actively exploring the risks and opportunities that Open Banking creates. During 2017, we made good progress with our ring-fencing plans and intend to implement the necessary changes well in advance of the regulatory deadline. For more on our ring-fencing plans, see Note 39. |
– | | Throughout 2017 customer expectations continued to shift, with the adoption of new technologies and increasing use of digital channels. At the same time, the pace and scale of changes in technology remained intense. We responded to these changes by adopting new technology into our business model to offer real benefit for our customers, for example through our NeoCRM tool, a customer relationship software that enables customer conversations to be seamlessly conducted across different channels. |
| – | | Competitive pressure remained high in 2018. This was mainly from established players, but also from newtechnology-led entrants looking toalso made progress and could disrupt the market.market in the longer term. We expect thisthese trends to continue in 2018,2019; however we believe our customer-focused business model and strategy, together with our adaptable and innovative approach, will enable usour continued success. We continue to thrive in this environment. We are already embracingembrace new technology, for example through the launch of our new Digital Investment Advisor and by regularly reviewing opportunities this creates by partneringto partner with Fintech companies, includingcompanies. This includes opportunities identified through our SantanderBanco Santander’s InnoVentures fund. This fund which invests in companies with proven expertise leveraging technology which could benefit our customers. |
| – | | Overall, we continue to embrace change and are makinghave made good progress towards our strategic goals. For more on this, see the ‘Strategic Report’ section. |
| | | | Annual Report 2018 | Risk review | | > Other key risks |
REPUTATIONAL RISK Our key reputational risks arise from failures in corporate governance or management, failing to treat our customers fairly, the actual or perceived way we do business, and the sectors and countries we deal with. They also result from how our clients and those who act for us conduct themselves, and how business is conducted in our industry. External factors may also present a reputational risk to us. These can include the macro environment and the performance of the sector. 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. | | | | Reputational risk management | | Description | | Risk appetite | | Reputational risk management
| | | – Risk appetite– weWe have a low appetite for reputational risk, which is agreed by the Board at least annually. We express it in terms of the risk measures we describeset out below.
| | Risk measurement | | – Risk measurement– weWe assess our exposure to reputational risk daily. We base this on professional judgement and analysis of social, print, and broadcast media as well asalongside the views of political and market commentators. Our analysis looks atWe also commission independent third parties to analyse our activities and those of our UK peers and is designed to help us identify largesignificant reputational events, or a prolonged deterioration in our reputation.reputation and any sector level or thematic issues that may impact our wider business. We also measure the perception of Santander UK byamongst key stakeholder groups at least annually, using third party research. This includes employees,through regular interactions, and perform annual reviews of staff sentiment. We review our reputation daily through media politicians and customer groups.political interactions and updates, and through weekly reputation reports provided by an external supplier.
| | Risk mitigation | | – Risk mitigation– all ourOur business units consider reputational risk as part of their operational risk and control assessments. We also consider it as part of our new product assessments. Our Corporate Communications, Legal and Legal Teams, supported by our Compliance, Marketing and Risk teams, helpteam helps our business units to mitigate reputational risk, and agree action plans as required.needed. They do this as part of their overall responsibilityrole to monitor, build and protect our reputation and brand.
| Risk monitoring and reporting | | – Risk monitoring and reporting– weWe monitor and report key reputational risks and issues on a timely basis. Our Reputational Risk Forum is responsible for reviewing, monitoring and escalating to Board level key decisions around financial andnon-financial reputational risks. It also has regular andad- hoc meetings to discuss the risks we face. We escalate them to the Executive Risk Control Committee,ERCC and Board RiskResponsible Banking Committee, as needed. Our Corporate Communications, Legal and Marketing Teamteam also reports 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.
|
20172018 compared to 20162017
In 2017,2018, we considered the potential reputational risk impact arising from the FCA publishing their Final Notice announcing the results of their investigation into the issues identified and the subsequent actions we took in relation to our historical probate and bereavement practices. This included the completion of the operational improvements that started in 2015 to our Probate and Bereavement processes and which we describe in more detail in the ‘Operational risk’ section. We further strengthened our governance and cultureapproach to managing reputational risk across the business.business and have successfully embedded the Reputational Risk Forum and wider framework, which was introduced in 2017. We set upenhanced our reputational risk appetite and agreed escalation processes. Our Reputational Risk Forum, meet regularly to discuss any emerging or material risks we face. We also formalised a Reputational Risk CommitteeRegister, which helps us to discusstrack and monitor live risks, and we embedded reputational risk input into the risksERCC and the Board Responsible Banking Committee. This ensure clear visibility and discussion of all material reputational risk issues at Board level. Throughout 2018, we face. These include customer issues, lending decisions and supplier management. It meets regularly and on anad-hoc basis as needed. We also continued to: – | | Work towards our corporate goals for 2018. We acted to improve the way we work, simplify complex processes and develop technology to improve our customers’ experience |
– | | Embed Simple, Personal and Fair across the business through the governance of The Santander Way committee. This included our Executive Committee conversations initiative, and other events and visits that gave our staff the chance to ask questions about topics that are on their mind |
– | | Embed the behaviours that support our purpose, aim and values. We did this most notably by including them in our staff appraisals. From themid-year 2016, behaviours carried equal weighting with achievements in all staff performance management |
– | | Enhance our reputational risk appetite and agreed escalation processes. |
We worked closely with the business on communication plans for key events such as implementing ring-fencing on our operations and preparing for the UK’s exit from the EU.EU and implementing our ring-fencing plans. We also promotedhave made significant announcements in Milton Keynes and Bootle, Merseyside confirming our commitment to these communities and investing in new campuses in both locations. We have continued to promote the community and wider society support that Santander UK provides through itsour Corporate Social Responsibility work, and the Santander Cycles Schemes in London and Milton Keynes.
MODEL RISK
| | | | Model risk management | | Description | | Risk appetite | | We express our model risk appetite through the risk assessments of our most material risk models. The Board agrees this at least annually. | | Risk measurement | | We consider both the percentage of models that have been independently assessed, as well as the outcome of those reviews, in our measurement of model risk. | | Risk mitigation | | We mitigate model risk through controls over the use of models throughout their lifecycle. We maintain a central model inventory that includes data on owners, uses and key dates. We assess how important each model is to our business. We track recommendations from independent reviews through to resolution. We also maintain a clear approval path for new models, updates and performance tracking. | Risk monitoring and reporting | | We report model risks and issues using model risk management and control forums. We escalate issues to the ERCC when necessary, or if our risk appetite is breached. |
2018 compared to 2017 The introduction of IFRS 9 in 2018 increased the level of model risk in our portfolio due to the development of new models. Our Risk division hadpre-existing Basel and behavioural scorecards. We created new variants of these models to deal with significant credit deterioration, lifetime expected credit losses and forward economic guidance as required by IFRS 9. Our impairment models vary in complexity and inputs depending on the size of the portfolio, the amount of data available and the sophistication of the market concerned. The risk modelling function followed our standard governance processes for developing and independently validating new models. In addition to our focus on developing new models for IFRS 9 purposes, we performed a self-assessment against the new regulatory policy and supervisory statement issued by the PRA in 2018 related to stress test models. The principles are closely aligned to our existing model risk framework, so we did not need to make any significant changes. We further clarified the roles of Model Owners and Model Users, and supplemented our Model Risk Appetite with additional performance indicators. We maintain a risk-based approach to both management and control, for example focusing independent model review on the more material models, such as those related to IFRS 9, or those with specific regulatory standards defined.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
| | | | Annual Report 2018 | Financial statements | | >Audit Report |
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Santander UK plc Opinion on the Financial Statements We have audited the accompanying consolidated balance sheetssheet of Santander UK plc and its subsidiaries (the “Company”) as of 31 December 20172018 and 2016,2017, and the related consolidated income statements, statementsstatement, consolidated statement of comprehensive income, consolidated cash flow statements,statement, and consolidated statementsstatement of changes in equity for each of the twothree years in the period ended 31 December 2017,2018, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of 31 December 20172018 and 2016,2017, and the results of its operations and its cash flows for each of the twothree years in the period ended 31 December 20172018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. We also have audited the adjustments to reflect the change in the composition of reportable segments, as described in Note 2 and to apply retrospectively the change in accounting for transactions between entities under common control, as described in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2015 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2015 financial statements taken as a whole.
Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed howthe manner in which it accounts for transactions between entities under common control.financial instruments in 2018. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP
London, UK 711 March 20182019
We have served as the Company’s auditor since 2016. 
| | | Annual Report 2017 on Form20-F | Financial statements | | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Santander UK plc
We have audited, before the effects of the adjustments to retrospectively apply the changes in accounting discussed in Note 41 to the consolidated financial statements, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated cash flow statement, the related Notes 1 to 41 and the 2015 information on page 57 to 135 of the Risk review, except for those items marked as unaudited, of Santander UK plc and subsidiaries (the “Group”) for the year ended December 31, 2015 (the 2015 consolidated financial statements before the effects of the adjustments discussed in Note 41 to the consolidated financial statements are not presented herein). 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 audit.
We conducted our audit 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such 2015 consolidated financial statements, before the effects of the adjustments to retrospectively apply the changes in accounting discussed in Note 41 to the consolidated financial statements, present fairly, in all material respects, the results of operations and cash flows of Santander UK plc and subsidiaries for the year ended December 31, 2015, in conformity with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and IFRS as issued by the International Accounting Standards Board.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the changes in accounting discussed in Note 41 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.
/s/ Deloitte LLP
London, United Kingdom
24 February 2016
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| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
Consolidated Income Statement For the years ended 31 December | | | | | | | | | | | | | | | | | | | | Notes | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Interest and similar income | | | 3 | | | | 5,905 | | | | 6,467 | | | | 6,695 | | Interest expense and similar charges | | | 3 | | | | (2,102 | ) | | | (2,885 | ) | | | (3,120 | ) | Net interest income | | | | | | | 3,803 | | | | 3,582 | | | | 3,575 | | Fee and commission income | | | 4 | | | | 1,222 | | | | 1,188 | | | | 1,115 | | Fee and commission expense | | | 4 | | | | (415 | ) | | | (418 | ) | | | (400 | ) | Net fee and commission income | | | | | | | 807 | | | | 770 | | | | 715 | | Net trading and other income | | | 5 | | | | 302 | | | | 443 | | | | 283 | | Total operating income | | | | | | | 4,912 | | | | 4,795 | | | | 4,573 | | Operating expenses before impairment losses, provisions and charges | | | 6 | | | | (2,499 | ) | | | (2,414 | ) | | | (2,400 | ) | Impairment losses on loans and advances | | | 8 | | | | (203 | ) | | | (67 | ) | | | (66 | ) | Provisions for other liabilities and charges | | | 8 | | | | (393 | ) | | | (397 | ) | | | (762 | ) | Total operating impairment losses, provisions and charges | | | | | | | (596 | ) | | | (464 | ) | | | (828 | ) | Profit before tax | | | | | | | 1,817 | | | | 1,917 | | | | 1,345 | | Tax on profit | | | 9 | | | | (561 | ) | | | (598 | ) | | | (381 | ) | Profit after tax | | | | | | | 1,256 | | | | 1,319 | | | | 964 | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | Equity holders of the parent | | | | | | | 1,235 | | | | 1,292 | | | | 939 | | Non-controlling interests | | | 32 | | | | 21 | | | | 27 | | | | 25 | | Profit after tax | | | | | | | 1,256 | | | | 1,319 | | | | 964 | |
Consolidated Statement of Comprehensive Income
For the years ended 31 December
| | | | | | | | | | | | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Profit after tax | | | 1,256 | | | | 1,319 | | | | 964 | | Other comprehensive income: | | | | | | | | | | | | | Other comprehensive income that may be reclassified to profit or loss subsequently: | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | – Change in fair value | | | 80 | | | | 127 | | | | 14 | | – Income statement transfers | | | (54 | ) | | | (115 | ) | | | 42 | | – Taxation | | | (6 | ) | | | (16 | ) | | | (2 | ) | | | | | 20 | | | | (4 | ) | | | 54 | | Cash flow hedges: | | | | | | | | | | | | | – Effective portion of changes in fair value | | | (238 | ) | | | 4,365 | | | | (307 | ) | – Income statement transfers | | | (94 | ) | | | (4,076 | ) | | | 305 | | – Taxation | | | 89 | | | | (72 | ) | | | (6 | ) | | | | | (243 | ) | | | 217 | | | | (8 | ) | Currency translation on foreign operations | | | – | | | | (3 | ) | | | (5 | ) | Net other comprehensive income that may be reclassified to profit or loss subsequently | | | (223 | ) | | | 210 | | | | 41 | | Other comprehensive income that will not be reclassified to profit or loss subsequently: | | | | | | | | | | | | | – Pension remeasurement | | | (103 | ) | | | (528 | ) | | | 319 | | – Taxation | | | 26 | | | | 133 | | | | (89 | ) | | | | | (77 | ) | | | (395 | ) | | | 230 | | Own credit adjustment: | | | | | | | | | | | | | – Transfers | | | (29 | ) | | | – | | | | – | | – Taxation | | | 7 | | | | – | | | | – | | | | | | (22 | ) | | | – | | | | – | | Net other comprehensive income that will not be reclassified to profit or loss subsequently | | | (99 | ) | | | (395 | ) | | | 230 | | Total other comprehensive income net of tax | | | (322 | ) | | | (185 | ) | | | 271 | | Total comprehensive income | | | 934 | | | | 1,134 | | | | 1,235 | | | | | | Attributable to: | | | | | | | | | | | | | Equity holders of the parent | | | 913 | | | | 1,107 | | | | 1,209 | | Non-controlling interests | | | 21 | | | | 27 | | | | 26 | | Total comprehensive income | | | 934 | | | | 1,134 | | | | 1,235 | |
| | | | | | | | | | | | | | | | | | | | Notes | | 2018
£m | | | 2017
£m | | | 2016
£m | | Interest and similar income | | | 3 | | | | 6,066 | | | | 5,905 | | | | 6,467 | | Interest expense and similar charges | | | 3 | | | | (2,463 | ) | | | (2,102 | ) | | | (2,885 | ) | Net interest income | | | | | | | 3,603 | | | | 3,803 | | | | 3,582 | | Fee and commission income | | | 4 | | | | 1,170 | | | | 1,222 | | | | 1,188 | | Fee and commission expense | | | 4 | | | | (421 | ) | | | (415 | ) | | | (418 | ) | Net fee and commission income | | | | | | | 749 | | | | 807 | | | | 770 | | Net trading and other income | | | 5 | | | | 182 | | | | 302 | | | | 443 | | Total operating income | | | | | | | 4,534 | | | | 4,912 | | | | 4,795 | | Operating expenses before credit impairment losses, provisions and charges | | | 6 | | | | (2,579 | ) | | | (2,499 | ) | | | (2,414 | ) | Credit impairment losses | | | 8 | | | | (153 | ) | | | (203 | ) | | | (67 | ) | Provisions for other liabilities and charges | | | 8 | | | | (257 | ) | | | (393 | ) | | | (397 | ) | Total operating credit impairment losses, provisions and charges | | | | | | | (410 | ) | | | (596 | ) | | | (464 | ) | Profit before tax | | | | | | | 1,545 | | | | 1,817 | | | | 1,917 | | Tax on profit | | | 9 | | | | (441 | ) | | | (561 | ) | | | (598 | ) | Profit after tax | | | | | | | 1,104 | | | | 1,256 | | | | 1,319 | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | Equity holders of the parent | | | | | | | 1,082 | | | | 1,235 | | | | 1,292 | | Non-controlling interests | | | 35 | | | | 22 | | | | 21 | | | | 27 | | Profit after tax | | | | | | | 1,104 | | | | 1,256 | | | | 1,319 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | | > Primary financial statements |
Consolidated Statement of Comprehensive Income For the years ended 31 December | | | | | | | | | | | | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Profit after tax | | | 1,104 | | | | 1,256 | | | | 1,319 | | Other comprehensive income: | | | | | | | | | | | | | Other comprehensive income that may be reclassified to profit or loss subsequently: | | | | | | | | | | | | | Available-for-sale securities:(1) | | | | | | | | | | | | | – Change in fair value | | | | | | | 80 | | | | 127 | | – Income statement transfers | | | | | | | (54 | ) | | | (115 | ) | – Taxation | | | | | | | (6 | ) | | | (16 | ) | | | | | | | | | 20 | | | | (4 | ) | Movement in fair value reserve (debt instruments):(1) | | | | | | | | | | | | | – Change in fair value | | | (74 | ) | | | | | | | | | – Income statement transfers | | | 21 | | | | | | | | | | – Taxation | | | 13 | | | | | | | | | | | | | | (40 | ) | | | | | | | | | Cash flow hedges: | | | | | | | | | | | | | – Effective portion of changes in fair value | | | 793 | | | | (238 | ) | | | 4,365 | | – Income statement transfers | | | (752 | ) | | | (94 | ) | | | (4,076 | ) | – Taxation | | | (13 | ) | | | 89 | | | | (72 | ) | | | | | 28 | | | | (243 | ) | | | 217 | | Currency translation on foreign operations | | | – | | | | – | | | | (3 | ) | Net other comprehensive income that may be reclassified to profit or loss subsequently | | | (12 | ) | | | (223 | ) | | | 210 | | Other comprehensive income that will not be reclassified to profit or loss subsequently: | | | | | | | | | | | | | Pension remeasurement: | | | | | | | | | | | | | – Change in fair value | | | 470 | | | | (103 | ) | | | (528 | ) | – Taxation | | | (118 | ) | | | 26 | | | | 133 | | | | | | 352 | | | | (77 | ) | | | (395 | ) | Own credit adjustment: | | | | | | | | | | | | | – Change in fair value | | | 84 | | | | (29 | ) | | | – | | – Taxation | | | (21 | ) | | | 7 | | | | – | | | | | | 63 | | | | (22 | ) | | | – | | Net other comprehensive income that will not be reclassified to profit or loss subsequently | | | 415 | | | | (99 | ) | | | (395 | ) | Total other comprehensive income net of tax | | | 403 | | | | (322 | ) | | | (185 | ) | Total comprehensive income | | | 1,507 | | | | 934 | | | | 1,134 | | | | | | Attributable to: | | | | | | | | | | | | | Equity holders of the parent | | | 1,486 | | | | 913 | | | | 1,107 | | Non-controlling interests | | | 21 | | | | 21 | | | | 27 | | Total comprehensive income | | | 1,507 | | | | 934 | | | | 1,134 | |
| (1) | | Following the adoption of IFRS 9, a fair value reserve was introduced to replace theavailable-for-sale reserve, as described in Note 1. |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements. 
| | | | Annual Report 2018 | Financial statements | | |
Consolidated Balance Sheet At 31 December | | | | Notes | | | 2017
£m | | | 2016(1)
£m | | | Notes | | 2018
£m | | | 2017
£m | | Assets | | | | | | | | | | | | | Cash and balances at central banks | | | | | 32,771 | | | | 17,107 | | | | | | 19,747 | | | | 32,771 | | Trading assets | | | 11 | | | | 30,555 | | | | 30,035 | | | Derivative financial instruments | | | 12 | | | | 19,942 | | | | 25,471 | | | Financial assets designated at fair value | | | 13 | | | | 2,096 | | | | 2,140 | | | Loans and advances to banks | | | 14 | | | | 5,927 | | | | 4,348 | | | Loans and advances to customers | | | 15 | | | | 199,490 | | | | 199,738 | | | Financial investments | | | 18 | | | | 17,611 | | | | 17,466 | | | Financial assets at fair value through profit or loss: | | | | | | | | – Trading assets | | | | 11 | | | | – | | | | 30,555 | | – Derivative financial instruments | | | | 12 | | | | 5,259 | | | | 19,942 | | – Other financial assets at fair value through profit or loss | | | | 13 | | | | 5,617 | | | | 2,096 | | Financial assets at amortised cost: | | | | | | | | – Loans and advances to customers(1) | | | | 14 | | | | 201,289 | | | | 199,340 | | – Loans and advances to banks(1) | | | | | | 2,799 | | | | 3,463 | | – Reverse repurchase agreements – non trading(1) | | | | 17 | | | | 21,127 | | | | 2,614 | | – Other financial assets at amortised cost(2) | | | | 18 | | | | 7,229 | | | | Financial assets at fair value through other comprehensive income(2) | | | | 19 | | | | 13,302 | | | | Financial investments(2) | | | | 20 | | | | | | 17,611 | | Interests in other entities | | | 19 | | | | 73 | | | | 61 | | | | 21 | | | | 88 | | | | 73 | | Intangible assets | | | 20 | | | | 1,742 | | | | 1,685 | | | | 22 | | | | 1,808 | | | | 1,742 | | Property, plant and equipment | | | | | 1,598 | | | | 1,491 | | | | | | 1,832 | | | | 1,598 | | Current tax assets | | | | 9 | | | | 153 | | | | – | | Retirement benefit assets | | | 28 | | | | 449 | | | | 398 | | | | 31 | | | | 842 | | | | 449 | | Other assets | | | | | 2,511 | | | | 2,571 | | | | | | 2,280 | | | | 2,511 | | Total assets | | | | | 314,765 | | | | 302,511 | | | | | | 283,372 | | | | 314,765 | | Liabilities | | | | | | | | | | | | | Deposits by banks | | | 21 | | | | 13,784 | | | | 9,769 | | | Deposits by customers | | | 22 | | | | 183,648 | | | | 177,172 | | | Trading liabilities | | | 23 | | | | 31,109 | | | | 15,560 | | | Derivative financial instruments | | | 12 | | | | 17,613 | | | | 23,103 | | | Financial liabilities designated at fair value | | | 24 | | | | 2,315 | | | | 2,440 | | | Debt securities in issue | | | 25 | | | | 42,633 | | | | 50,346 | | | Subordinated liabilities | | | 26 | | | | 3,793 | | | | 4,303 | | | Financial liabilities at fair value through profit or loss: | | | | | | | | – Trading liabilities | | | | 23 | | | | – | | | | 31,109 | | – Derivative financial instruments | | | | 12 | | | | 1,369 | | | | 17,613 | | – Other financial liabilities at fair value through profit or loss | | | | 24 | | | | 6,286 | | | | 2,315 | | Financial liabilities at amortised cost: | | | | | | | | – Deposits by customers | | | | 25 | | | | 178,090 | | | | 183,648 | | – Deposits by banks(1) | | | | 26 | | | | 17,221 | | | | 12,708 | | – Repurchase agreements – non trading(1) | | | | 27 | | | | 10,910 | | | | 1,076 | | – Debt securities in issue | | | | 28 | | | | 46,692 | | | | 42,633 | | – Subordinated liabilities | | | | 29 | | | | 3,601 | | | | 3,793 | | Other liabilities | | | | | 2,730 | | | | 3,221 | | | | | | 2,448 | | | | 2,730 | | Provisions | | | 27 | | | | 558 | | | | 700 | | | | 30 | | | | 509 | | | | 558 | | Current tax liabilities | | | 9 | | | | 3 | | | | 54 | | | | 9 | | | | – | | | | 3 | | Deferred tax liabilities | | | 9 | | | | 88 | | | | 128 | | | | 9 | | | | 223 | | | | 88 | | Retirement benefit obligations | | | 28 | | | | 286 | | | | 262 | | | | 31 | | | | 114 | | | | 286 | | Total liabilities | | | | | 298,560 | | | | 287,058 | | | | | | 267,463 | | | | 298,560 | | Equity | | | | | | | | | | | | | Share capital | | | 30 | | | | 3,119 | | | | 3,119 | | | | 33 | | | | 3,119 | | | | 3,119 | | Share premium | | | 30 | | | | 5,620 | | | | 5,620 | | | | 33 | | | | 5,620 | | | | 5,620 | | Other equity instruments | | | 31 | | | | 2,281 | | | | 1,785 | | | | 34 | | | | 1,991 | | | | 2,281 | | Retained earnings | | | | | 4,732 | | | | 4,255 | | | | | | 4,744 | | | | 4,732 | | Other reserves | | | | | 301 | | | | 524 | | | | | | 284 | | | | 301 | | Total shareholders’ equity | | | | | 16,053 | | | | 15,303 | | | | | | 15,758 | | | | 16,053 | | Non-controlling interests | | | 32 | | | | 152 | | | | 150 | | | | 35 | | | | 151 | | | | 152 | | Total equity | | | | | 16,205 | | | | 15,453 | | | | | | 15,909 | | | | 16,205 | | Total liabilities and equity | | | | | 314,765 | | | | 302,511 | | | | | | 283,372 | | | | 314,765 | |
| (1) | | Restated to reflectFrom 1 January 2018, the changenon-trading repurchase agreements andnon-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in accounting policy relating to business combinations between entities under common control,the balance sheet, as described in Note 1. Comparatives are represented accordingly. |
| (2) | | On adoption of IFRS 9, the ‘financial investments’ balance sheet line item was split between ‘other financial assets at amortised cost’ and ‘financial assets at FVOCI’. This approach aligns the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position. |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements. The Financial Statements were approved and authorised for issue by the Board on 2726 February 20182019 and signed on its behalf by: | | | | | | | | Nathan Bostock | | Antonio Roman | | | | | | Chief Executive Officer | | Chief Financial Officer | | | | |
Company Registered Number: 2294747
| | | Annual Report 2017 on Form 20-F | Financial statements | | > Primary financial statements |
Consolidated Cash Flow Statement For the years ended 31 December | | | | Notes | | 2017
£m | | | 2016
£m | | | 2015
£m | | | Notes | | 2018
£m | | | 2017
£m | | | 2016
£m | | Cash flows from operating activities | | | | | | | | | | | | | | | | | Profit after tax | | | | | 1,256 | | | | 1,319 | | | | 964 | | | | | | 1,104 | | | | 1,256 | | �� | | 1,319 | | | Adjustments for: | | | | | | | | | | | | | | | | | Non-cash items included in profit: | | | | | | | | | | | | | | | | | – Depreciation and amortisation | | | | | 354 | | | | 322 | | | | 295 | | | | | | 375 | | | | 354 | | | | 322 | | – Amortisation of premiums on debt securities | | | | | 22 | | | | 29 | | | | 67 | | | – Provisions for other liabilities and charges | | | | | 393 | | | | 397 | | | | 762 | | | | | | 257 | | | | 393 | | | | 397 | | – Impairment losses | | | | | 257 | | | | 132 | | | | 156 | | | | | | 189 | | | | 257 | | | | 132 | | – Corporation tax charge | | | | | 561 | | | | 598 | | | | 381 | | | | | | 441 | | | | 561 | | | | 598 | | – Othernon-cash items | | | | | (230 | ) | | | (628 | ) | | | 151 | | | | | | 238 | | | | (208 | ) | | | (599 | ) | – Pension charge for defined benefit pension schemes | | | | | 32 | | | | 26 | | | | 29 | | | | | | 79 | | | | 32 | | | | 26 | | | | | | | 1,389 | | | | 876 | | | | 1,841 | | | | | | 1,579 | | | | 1,389 | | | | 876 | | Net change in operating assets and liabilities: | | | | | | | | | | | | | | | | | – Cash and balances at central banks | | | | | (25 | ) | | | (30 | ) | | | (22 | ) | | | | | (255 | ) | | | (25 | ) | | | (30 | ) | – Trading assets | | | | | (941 | ) | | | (2,049 | ) | | | (4,237 | ) | | | | | 24,528 | | | | (941 | ) | | | (2,049 | ) | – Derivative assets | | | | | 5,529 | | | | (4,560 | ) | | | 2,110 | | | | | | 14,683 | | | | 5,529 | | | | (4,560 | ) | – Financial assets designated at fair value | | | | | 25 | | | | 257 | | | | 480 | | | – Other financial assets at fair value through profit or loss | | | | | | (3,635 | ) | | | 25 | | | | 257 | | – Loans and advances to banks and customers | | | | | (1,832 | ) | | | (2,265 | ) | | | (7,789 | ) | | | | | (9,129 | ) | | | (1,832 | ) | | | (2,265 | ) | – Other assets | | | | | (246 | ) | | | (121 | ) | | | (532 | ) | | | | | (246 | ) | | | (246 | ) | | | (121 | ) | – Deposits by banks and customers | | | | | 10,900 | | | | 14,434 | | | | 9,399 | | | | | | 926 | | | | 10,900 | | | | 14,434 | | – Derivative liabilities | | | | | (5,490 | ) | | | 1,595 | | | | (1,224 | ) | | | | | (16,244 | ) | | | (5,490 | ) | | | 1,595 | | – Trading liabilities | | | | | 15,017 | | | | 2,837 | | | | (2,606 | ) | | | | | (31,101 | ) | | | 15,017 | | | | 2,837 | | – Financial liabilities designated at fair value | | | | | 717 | | | | 336 | | | | 27 | | | – Other financial liabilities at fair value through profit or loss | | | | | | 4,106 | | | | 717 | | | | 336 | | – Debt securities in issue | | | | | 132 | | | | 409 | | | | (1,166 | ) | | | | | (2,524 | ) | | | 132 | | | | 409 | | – Other liabilities | | | | | (1,397 | ) | | | 1,589 | | | | (138 | ) | | | | | (556 | ) | | | (1,397 | ) | | | 1,589 | | | | | | | 22,389 | | | | 12,432 | | | | (5,698 | ) | | | | | (19,447 | ) | | | 22,389 | | | | 12,432 | | Corporation taxes paid | | | | | (484 | ) | | | (507 | ) | | | (419 | ) | | | | | (391 | ) | | | (484 | ) | | | (507 | ) | Effects of exchange rate differences | | | | | (574 | ) | | | 3,885 | | | | (585 | ) | | | | | 1,750 | | | | (574 | ) | | | 3,885 | | Net cash flows from operating activities | | | | | 23,976 | | | | 18,005 | | | | (3,897 | ) | | | | | (15,405 | ) | | | 23,976 | | | | 18,005 | | Cash flows from investing activities | | | | | | | | | | | | | | | | | Investments in other entities | | 19 | | | – | | | | – | | | | (109 | ) | | | 21 | | | | (66 | ) | | | – | | | | – | | Proceeds from disposal of subsidiaries(1) | | | | | – | | | | 149 | | | | – | | | | | | 348 | | | | – | | | | 149 | | Purchase of property, plant and equipment and intangible assets | | | | | (542 | ) | | | (374 | ) | | | (356 | ) | | | | | (696 | ) | | | (542 | ) | | | (374 | ) | Proceeds from sale of property, plant and equipment and intangible assets | | | | | 52 | | | | 65 | | | | 40 | | | | | | 26 | | | | 52 | | | | 65 | | Purchase of financial investments | | | | | (726 | ) | | | (9,539 | ) | | | (2,021 | ) | | | | | (7,002 | ) | | | (726 | ) | | | (9,539 | ) | Proceeds from sale and redemption of financial investments | | | | | 2,032 | | | | 2,359 | | | | 1,928 | | | | | | 3,708 | | | | 2,032 | | | | 2,359 | | Net cash flows from investing activities | | | | | 816 | | | | (7,340 | ) | | | (518 | ) | | | | | (3,682 | ) | | | 816 | | | | (7,340 | ) | Cash flows from financing activities | | | | | | | | | | | | | | | | | Issue of AT1 Capital Securities | | 31 | | | 500 | | | | – | | | | 750 | | | | 34 | | | | – | | | | 500 | | | | – | | Issuance costs of AT1 Capital Securities | | | | | (4 | ) | | | – | | | | – | | | | | | – | | | | (4 | ) | | | – | | Issue of debt securities and subordinated notes | | | | | 6,645 | | | | 5,547 | | | | 13,267 | | | | | | 10,642 | | | | 6,645 | | | | 5,547 | | Issuance costs of debt securities and subordinated notes | | | | | (15 | ) | | | (17 | ) | | | (33 | ) | | | | | (23 | ) | | | (15 | ) | | | (17 | ) | Repayment of debt securities and subordinated notes | | | | | (13,763 | ) | | | (11,352 | ) | | | (16,098 | ) | | | | | (6,281 | ) | | | (13,763 | ) | | | (11,352 | ) | Repurchase of preference shares and other equity instruments | | 31 | | | – | | | | (7 | ) | | | (99 | ) | | | 34 | | | | (290 | ) | | | – | | | | (7 | ) | Dividends paid on ordinary shares | | 10 | | | (829 | ) | | | (419 | ) | | | (575 | ) | | | 10 | | | | (1,139 | ) | | | (829 | ) | | | (419 | ) | Dividends paid on preference shares and other equity instruments | | | | | (152 | ) | | | (128 | ) | | | (126 | ) | | | | | (157 | ) | | | (152 | ) | | | (128 | ) | Dividends paid onnon-controlling interests | | | | | (19 | ) | | | (12 | ) | | | – | | | | | | (22 | ) | | | (19 | ) | | | (12 | ) | Net cash flows from financing activities | | | | | (7,637 | ) | | | (6,388 | ) | | | (2,914 | ) | | | | | 2,730 | | | | (7,637 | ) | | | (6,388 | ) | Change in cash and cash equivalents | | | | | 17,155 | | | | 4,277 | | | | (7,329 | ) | | | | | (16,357 | ) | | | 17,155 | | | | 4,277 | | Cash and cash equivalents at beginning of the year | | | | | 25,705 | | | | 20,351 | | | | 27,363 | | | | | | 42,226 | | | | 25,705 | | | | 20,351 | | Effects of exchange rate changes on cash and cash equivalents | | | | | (634 | ) | | | 1,077 | | | | 317 | | | | | | 160 | | | | (634 | ) | | | 1,077 | | Cash and cash equivalents at the end of the year | | | | | 42,226 | | | | 25,705 | | | | 20,351 | | | | | | 26,029 | | | | 42,226 | | | | 25,705 | | | Cash and cash equivalents consist of: | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | | | 32,771 | | | | 17,107 | | | | 16,842 | | | | | | 19,747 | | | | 32,771 | | | | 17,107 | | Less: regulatory minimum cash balances | | | | | (395 | ) | | | (370 | ) | | | (340 | ) | | | | | (636 | ) | | | (395 | ) | | | (370 | ) | | | | | | | 32,376 | | | | 16,737 | | | | 16,502 | | | | | | 19,111 | | | | 32,376 | | | | 16,737 | | Net trading and other cash equivalents | | | | | 5,953 | | | | 6,537 | | | | 2,068 | | | Net trading other cash equivalents | | | | | | – | | | | 5,953 | | | | 6,537 | | Netnon-trading other cash equivalents | | | | | 3,897 | | | | 2,431 | | | | 1,781 | | | | | | 6,918 | | | | 3,897 | | | | 2,431 | | Cash and cash equivalents at the end of the year | | | | | 42,226 | | | | 25,705 | | | | 20,351 | | | | | | 26,029 | | | | 42,226 | | | | 25,705 | |
| (1) | | In 2016,2018, the Santander UK group sold a number of subsidiaries for a cash consideration of £149m.£348m (2017: £nil, 2016: £149m). The carrying value of the net assets disposed of consisted of other assets and other liabilities of £138m.was £348m (2017: £nil, 2016: £138m). |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | Annual Report 2018 | Financial statements | | |
Consolidated Statement of Changes in Equity For the years ended 31 December | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other reserves | | | | | | | | | Non- | | | | | | | | Share
capital
£m | | | Share
premium
£m | | | Other equity instruments £m | | | Available- for-sale(1)
£m | | | Fair
value(1)
£m | | | Cash flow
hedging
£m | | | Currency
translation
£m | | | Retained
earnings
£m | | | Total
£m | | | controlling interests £m | | | Total
£m | | At 31 December 2017 | | | 3,119 | | | | 5,620 | | | | 2,281 | | | | 68 | | | | | | | | 228 | | | | 5 | | | | 4,732 | | | | 16,053 | | | | 152 | | | | 16,205 | | | Adoption of IFRS 9 (see Note 1) | | | – | | | | – | | | | – | | | | (68 | ) | | | 63 | | | | – | | | | – | | | | (187 | ) | | | (192 | ) | | | – | | | | (192 | ) | At 1 January 2018 | | | 3,119 | | | | 5,620 | | | | 2,281 | | | | – | | | | 63 | | | | 228 | | | | 5 | | | | 4,545 | | | | 15,861 | | | | 152 | | | | 16,013 | | Profit after tax | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 1,082 | | | | 1,082 | | | | 22 | | | | 1,104 | | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Fair value reserve (debt instruments) | | | – | | | | – | | | | – | | | | | | | | (40 | ) | | | – | | | | – | | | | – | | | | (40 | ) | | | – | | | | (40 | ) | – Cash flow hedges | | | – | | | | – | | | | – | | | | | | | | – | | | | 28 | | | | – | | | | – | | | | 28 | | | | – | | | | 28 | | – Pension remeasurement | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 353 | | | | 353 | | | | (1 | ) | | | 352 | | – Own credit adjustment | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 63 | | | | 63 | | | | – | | | | 63 | | Total comprehensive income | | | – | | | | – | | | | – | | | | | | | | (40 | ) | | | 28 | | | | – | | | | 1,498 | | | | 1,486 | | | | 21 | | | | 1,507 | | Other | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | (45 | ) | | | (45 | ) | | | – | | | | (45 | ) | | Repurchase of other equity instruments | | | – | | | | – | | | | (290 | ) | | | | | | | – | | | | – | | | | – | | | | – | | | | (290 | ) | | | – | | | | (290 | ) | | Dividends on ordinary shares | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | (1,139 | ) | | | (1,139 | ) | | | – | | | | (1,139 | ) | | Dividends on preference shares and other equity instruments | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | (157 | ) | | | (157 | ) | | | – | | | | (157 | ) | | Dividends onnon-controlling interests | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (22 | ) | | | (22 | ) | | Tax on other equity instruments | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | 42 | | | | 42 | | | | – | | | | 42 | | At 31 December 2018 | | | 3,119 | | | | 5,620 | | | | 1,991 | | | | | | | | 23 | | | | 256 | | | | 5 | | | | 4,744 | | | | 15,758 | | | | 151 | | | | 15,909 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2017 | | | 3,119 | | | | 5,620 | | | | 1,785 | | | | 48 | | | | | | | | 471 | | | | 5 | | | | 4,255 | | | | 15,303 | | | | 150 | | | | 15,453 | | Profit after tax | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | 1,235 | | | | 1,235 | | | | 21 | | | | 1,256 | | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | –Available-for-sale securities | | | – | | | | – | | | | – | | | | 20 | | | | | | | | – | | | | – | | | | – | | | | 20 | | | | – | | | | 20 | | – Cash flow hedges | | | – | | | | – | | | | – | | | | – | | | | | | | | (243 | ) | | | – | | | | – | | | | (243 | ) | | | – | | | | (243 | ) | – Pension remeasurement | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (77 | ) | | | (77 | ) | | | – | | | | (77 | ) | – Own credit adjustment | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (22 | ) | | | (22 | ) | | | – | | | | (22 | ) | Total comprehensive income | | | – | | | | – | | | | – | | | | 20 | | | | | | | | (243 | ) | | | – | | | | 1,136 | | | | 913 | | | | 21 | | | | 934 | | | Issue of AT1 Capital Securities | | | – | | | | – | | | | 496 | | | | – | | | | | | | | – | | | | – | | | | – | | | | 496 | | | | – | | | | 496 | | | Dividends on ordinary shares | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (553 | ) | | | (553 | ) | | | – | | | | (553 | ) | | Dividends on preference shares and other equity instruments | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (152 | ) | | | (152 | ) | | | – | | | | (152 | ) | | Dividends onnon-controlling interests | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | – | | | | (19 | ) | | | (19 | ) | | Tax on other equity instruments | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | 46 | | | | 46 | | | | – | | | | 46 | | At 31 December 2017 | | | 3,119 | | | | 5,620 | | | | 2,281 | | | | 68 | | | | | | | | 228 | | | | 5 | | | | 4,732 | | | | 16,053 | | | | 152 | | | | 16,205 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2016 | | | 3,119 | | | | 5,620 | | | | 1,792 | | | | 52 | | | | | | | | 254 | | | | 8 | | | | 4,048 | | | | 14,893 | | | | 135 | | | | 15,028 | | Profit after tax | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | 1,292 | | | | 1,292 | | | | 27 | | | | 1,319 | | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | –Available-for-sale securities | | | – | | | | – | | | | – | | | | (4 | ) | | | | | | | – | | | | – | | | | – | | | | (4 | ) | | | – | | | | (4 | ) | – Cash flow hedges | | | – | | | | – | | | | – | | | | – | | | | | | | | 217 | | | | – | | | | – | | | | 217 | | | | – | | | | 217 | | – Pension remeasurement | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (395 | ) | | | (395 | ) | | | – | | | | (395 | ) | – Currency translation on foreign operations | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | (3 | ) | | | – | | | | (3 | ) | | | – | | | | (3 | ) | Total comprehensive income | | | – | | | | – | | | | – | | | | (4 | ) | | | | | | | 217 | | | | (3 | ) | | | 897 | | | | 1,107 | | | | 27 | | | | 1,134 | | | Repurchase of other equity instruments | | | – | | | | – | | | | (7 | ) | | | – | | | | | | | | – | | | | – | | | | – | | | | (7 | ) | | | – | | | | (7 | ) | | Dividends on ordinary shares | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (593 | ) | | | (593 | ) | | | – | | | | (593 | ) | | Dividends on preference shares and other equity instruments | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | (128 | ) | | | (128 | ) | | | – | | | | (128 | ) | | Dividends onnon-controlling interests | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | – | | | | (12 | ) | | | (12 | ) | | Tax on other equity instruments | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | 31 | | | | 31 | | | | – | | | | 31 | | At 31 December 2016 | | | 3,119 | | | | 5,620 | | | | 1,785 | | | | 48 | | | | | | | | 471 | | | | 5 | | | | 4,255 | | | | 15,303 | | | | 150 | | | | 15,453 | |
(1) Following the adoption of IFRS 9, a fair value reserve was introduced to replace theavailable-for-sale reserve, as described in Note 1. The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | | > Primary financial statements
|
Consolidated Statement of Changes in Equity
For the years ended 31 December
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other reserves | | | | | | | | | | | | | | | | | Share
capital
£m | | | Share
premium
£m | | | Other
equity instruments
£m | | | Available-
for-sale
£m | | | Cash flow
hedging £m | | | Currency
translation
£m | | | Retained
earnings(1)(3)
£m | | | Total
£m | | | Non-
controlling
interests
£m | | | Total
£m | | At 1 January 2017 | | | 3,119 | | | | 5,620 | | | | 1,785 | | | | 48 | | | | 471 | | | | 5 | | | | 4,255(2 | ) | | | 15,303 | | | | 150 | | | | 15,453 | | Profit after tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,235 | | | | 1,235 | | | | 21 | | | | 1,256 | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | –Available-for-sale securities | | | – | | | | – | | | | – | | | | 20 | | | | – | | | | – | | | | – | | | | 20 | | | | – | | | | 20 | | – Cash flow hedges | | | – | | | | – | | | | – | | | | – | | | | (243 | ) | | | – | | | | – | | | | (243 | ) | | | – | | | | (243 | ) | – Pension remeasurement | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (77 | ) | | | (77 | ) | | | – | | | | (77 | ) | – Own credit adjustment | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (22 | ) | | | (22 | ) | | | – | | | | (22 | ) | Total comprehensive income | | | – | | | | – | | | | – | | | | 20 | | | | (243 | ) | | | – | | | | 1,136 | | | | 913 | | | | 21 | | | | 934 | | Issue of AT1 Capital Securities | | | – | | | | – | | | | 496 | | | | – | | | | – | | | | – | | | | – | | | | 496 | | | | – | | | | 496 | | Dividends on ordinary shares | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (553 | ) | | | (553 | ) | | | – | | | | (553 | ) | Dividends on preference shares and other equity instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (152 | ) | | | (152 | ) | | | – | | | | (152 | ) | Dividends onnon-controlling interests | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (19 | ) | | | (19 | ) | Tax on other equity instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 46 | | | | 46 | | | | – | | | | 46 | | At 31 December 2017 | | | 3,119 | | | | 5,620 | | | | 2,281 | | | | 68 | | | | 228 | | | | 5 | | | | 4,732 | | | | 16,053 | | | | 152 | | | | 16,205 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2016 | | | 3,119 | | | | 5,620 | | | | 1,792 | | | | 52 | | | | 254 | | | | 8 | | | | 4,048 | | | | 14,893 | | | | 135 | | | | 15,028 | | Profit after tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,292 | | | | 1,292 | | | | 27 | | | | 1,319 | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | –Available-for-sale securities | | | – | | | | – | | | | – | | | | (4 | ) | | | – | | | | – | | | | – | | | | (4 | ) | | | – | | | | (4 | ) | – Cash flow hedges | | | – | | | | – | | | | – | | | | – | | | | 217 | | | | – | | | | – | | | | 217 | | | | – | | | | 217 | | – Pension remeasurement | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (395 | ) | | | (395 | ) | | | – | | | | (395 | ) | – Currency translation on foreign operations | | | – | | | | – | | | | – | | | | – | | | | – | | | | (3 | ) | | | – | | | | (3 | ) | | | – | | | | (3 | ) | Total comprehensive income | | | – | | | | – | | | | – | | | | (4 | ) | | | 217 | | | | (3 | ) | | | 897 | | | | 1,107 | | | | 27 | | | | 1,134 | | Repurchase of other equity instruments | | | – | | | | – | | | | (7 | ) | | | – | | | | – | | | | – | | | | – | | | | (7 | ) | | | – | | | | (7 | ) | Dividends on ordinary shares | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (593 | ) | | | (593 | ) | | | – | | | | (593 | ) | Dividends on preference shares and other equity instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (128 | ) | | | (128 | ) | | | – | | | | (128 | ) | Dividends onnon-controlling interests | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (12 | ) | | | (12 | ) | Tax on other equity instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 31 | | | | 31 | | | | – | | | | 31 | | At 31 December 2016 | | | 3,119 | | | | 5,620 | | | | 1,785 | | | | 48 | | | | 471 | | | | 5 | | | | 4,255 | | | | 15,303 | | | | 150 | | | | 15,453 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2015 | | | 3,119 | | | | 5,620 | | | | 1,125 | | | | (2 | ) | | | 262 | | | | 13 | | | | 3,425 | | | | 13,562 | | | | – | | | | 13,562 | | Profit after tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 939 | | | | 939 | | | | 25 | | | | 964 | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | –Available-for-sale securities | | | – | | | | – | | | | – | | | | 54 | | | | – | | | | – | | | | – | | | | 54 | | | | – | | | | 54 | | – Cash flow hedges | | | – | | | | – | | | | – | | | | – | | | | (8 | ) | | | – | | | | – | | | | (8 | ) | | | – | | | | (8 | ) | – Pension remeasurement | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 229 | | | | 229 | | | | 1 | | | | 230 | | – Currency translation on foreign operations | | | – | | | | – | | | | – | | | | – | | | | – | | | | (5 | ) | | | – | | | | (5 | ) | | | – | | | | (5 | ) | Total comprehensive income | | | – | | | | – | | | | – | | | | 54 | | | | (8 | ) | | | (5 | ) | | | 1,168 | | | | 1,209 | | | | 26 | | | | 1,235 | | Acquisition of subsidiary | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 109 | | | | 109 | | Issue of AT1 Capital Securities | | | – | | | | – | | | | 750 | | | | – | | | | – | | | | – | | | | – | | | | 750 | | | | – | | | | 750 | | Repurchase of preference shares and other equity instruments | | | – | | | | – | | | | (83 | ) | | | – | | | | – | | | | – | | | | (16 | ) | | | (99 | ) | | | – | | | | (99 | ) | Dividends on ordinary shares | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (427 | ) | | | (427 | ) | | | – | | | | (427 | ) | Dividends on preference shares and other equity instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (126 | ) | | | (126 | ) | | | – | | | | (126 | ) | Tax on other equity instruments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 24 | | | | 24 | | | | – | | | | 24 | | At 31 December 2015 | | | 3,119 | | | | 5,620 | | | | 1,792 | | | | 52 | | | | 254 | | | | 8 | | | | 4,048 | | | | 14,893 | | | | 135 | | | | 15,028 | |
(1) | Includes capital redemption reserve of £nil (2016: £nil, 2015: £21m) arising from the purchase of £300m fixed/floating rate non-cumulative callable preference shares in 2017, 2016 and 2015. |
(2) | The impact of the early adoption of IFRS 9 requirements for the presentation of gains and losses on such financial liabilities relating to own credit in other comprehensive income as described in Note 1, was £18m (net of tax). |
(3) | Restated to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1. |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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| | | | | > Primary financial statements |
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| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
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| | | | | > Notes to thePrimary financial statements |
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| | | | Annual Report 2018 | Financial statements | | |
1. ACCOUNTING POLICIES These financial statements are prepared for Santander UK plc (the Company) and the Santander UK plc group (the Santander UK 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 personal, business and public sectorcorporate customers. Santander UK plc is a public company, limited company,by shares and incorporated in England and Wales having a registered office at 2 Triton Square, Regent’s Place, London, NW1 3AN, phone number0870-607-6000. It is an operating company undertaking banking and financial services transactionstransactions. 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 statementsConsolidated 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,except for financial assets and financial liabilities heldthat have been measured at fair value through profit or loss and all derivative contracts, assets held for sale, retirement benefit obligations and cash-settled share-based payments, where applicable.value. 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 StandardsIFRSs as issued by the International Accounting Standards Board (IASB),IASB, including interpretations issued by the IFRS Interpretations Committee (IFRS IC) of the IASB (together IFRS). The Santander UK group has also complied with its legal obligation to comply with International Financial Reporting StandardsIFRSs 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 StandardsIFRSs 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, and IAS 1 ‘Presentation of Financial Statements’ relating to objectives, policies and processes for managing capital, can be found in the Risk review whichreview. Those disclosures form an integral part of these financial statements. Recent accounting developments On 1 January 2018, the Santander UK group adopted IFRS 9 ‘Financial Instruments’ (IFRS 9) and IFRS 15 ‘Revenue from Contracts with Customers’ (IFRS 15). The new or revised accounting policies are set out below. The impact of applying IFRS 9 is disclosed in Note 44. The accounting policy changes for IFRS 9, set out below, have been applied from 1 January 2018. Comparatives have not been restated. As a result of the change from IAS 39 to IFRS 9, some disclosures presented in respect of certain financial assets are not comparable because their classification may have changed between the two standards. This means that some IFRS 9 disclosures are not directly comparable and some disclosures that relate to information presented on an IAS 39 basis are no longer relevant in the current period. As explained in Note 44, the classification and measurement changes to financial assets that arose on adoption of IFRS 9 have been aligned to the presentation in the balance sheet. The Santander UK group designates certaindecided to continue adopting IAS 39 hedge accounting and consequently there have been no changes to the hedge accounting policies and practices following the adoption of IFRS 9. However, additional hedge accounting disclosure requirements of IFRS 7 ‘Financial Instruments: Disclosures’ (IFRS 7) have been included in these financial liabilities at fair value through profit or loss where they contain embedded derivatives or where associated derivatives used to economically hedge the riskstatements. In addition,non-trading repurchase agreements andnon-trading reverse repurchase agreements that are held at fair value. Followingamortised cost are now presented as separate lines in the endorsementbalance sheet. Previously,non-trading reverse repurchase agreements were included in ‘Loans and advances to banks’ and ‘Loans and advances to customers’, andnon-trading repurchase agreements were included in ‘Deposits by banks’. The new presentation, which is considered to be more relevant to an understanding of IFRS 9 ‘Financial Instruments’ by the EU in December 2016, the Santander UK group has elected to early applyour financial position, was adopted with effect from 1 January 2017 the requirements for the presentation of gains2018, and losses on such financial liabilities relating to own credit in other comprehensive income without applying the other requirements in IFRS 9. The cumulative own credit adjustment component of the cumulative fair value adjustment on financial liabilities designated at fair value through profit or loss was £18m (net of tax) and is included in opening retained earnings. comparatives areChange in accounting policyre-presented During the year, management changed the accounting policy for business combinations between entities under common control. Previously, the Santander UK group applied acquisition accounting under IFRS 3 where the acquisition was for cash consideration. Where the acquisition was for non-cash consideration, the acquisition was accounted for in a manner consistent with group reconstruction relief under the UK GAAP (merger accounting). Management has elected to account for all business combinations between entities under common control at their book values in the acquired entity by including the acquired entity’s results from the date of the business combinations and not restating comparatives. Management believes changing to this basis of accounting is more relevant to accounting for business combinations between entities under common control. Applying acquisition accounting to such transactions where all of the businesses are ultimately controlled by the same party both before and after the business combinations is seen as being less relevant as there are no parties external to Banco Santander SA. accordingly. For the Santander UK group, the effectimpact of changingthisre-presentation on the accounting policy isbalance sheet at 1 January 2017 was to reduce goodwilldecrease loans and advances to banks by £631m and reduce retained earnings£1,462m, increasing non trading reverse repurchase agreements by the same amount, and to decrease deposits by banks by £2,384m, increasing non trading repurchase agreements by the same amount. For the Company, the impact of thisre-presentation on the balance sheet at 1 January 2017 was to decrease loans and advances to banks by £476m, increasing non trading reverse repurchase agreements by the same amount, representingand to decrease deposits by banks by £2,933m, and increase non trading repurchase agreements by the difference between the purchase price and the aggregate book value of the assets and liabilities of Santander Cards Limited, Santander Cards (UK) Limited (and its subsidiaries), Santander Cards Ireland Limited and Santander Consumer (UK) plc, which were acquired from Banco Santander SA in 2010. Each of the comparative periods presented has been restated to reflect the change in accounting policy. same amount.
The application of IFRS 15 had no material impact on the changeSantander UK group as there were no significant changes in the recognition ofin-scope income. The accounting policy did not resultchanges for IFRS 15 are set out in any material change to the accounting for the acquisition of Alliance & Leicester plc from Banco Santander SA in 2009.Revenue recognition policy below. Future accounting developments As atAt 31 December 2017,2018, the Santander UK group has not yet adopted the following significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective for the Santander UK group:
a) | IFRS 9 ‘Financial Instruments’ (IFRS 9) – In July 2014, the International Accounting Standards Board (IASB) approved IFRS 9 to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. |
IFRS 9 sets out the requirements for recognition and measurement of financial instruments. The main new developments of the standard are discussed below.
Classification and measurement of financial assets and financial liabilities:Under IFRS 9, financial assets are classified on the basis of the business model within which they are held and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss. For many financial assets, the classification and measurement outcomes are similar to IAS 39. However, under IFRS 9, embedded derivatives are not separated from host financial assets and equity securities are measured at fair value either through profit or loss or, in certain circumstances, an irrevocable election may be made to present fair value movements in other comprehensive income. The requirements for the classification and measurement of financial liabilities were carried forward unchanged from IAS 39, however, the requirements relating to the fair value option for financial liabilities were changed to address own credit risk and, in particular, the presentation of gains and losses within other comprehensive income. For the Santander UK group:
| – | The vast majority of financial assets which are classified as loans and receivables or held-to-maturity investments under IAS 39 (including certain debt securities) will continue to be measured at amortised cost under IFRS 9; |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
| – | | Most debt securities classified as available-for-sale financial assets will be measured at fair value through other comprehensive income, with some being measured at fair value through profit or loss; |
– | | Treasury and other eligible bills classified as available-for-sale financial assets will be measured at amortised cost or fair value through other comprehensive income depending upon the business model in which they are held; and |
– | | Certain loans currently designated at fair value through profit or loss under IAS 39 may be reclassified to amortised cost where they are held within a business model whose objective is to hold the assets to collect contractual cash flows and those cash flows represent solely payments of principal and interest on the principal outstanding. |
Impairment: IFRS 9 introduces fundamental changes to the impairment of financial assets measured at amortised cost or at fair value through other comprehensive income, lease receivables and certain commitments to extend credit and financial guarantee contracts. It is no longer necessary for losses to be incurred before credit losses are recognised. Instead, under IFRS 9, an entity always accounts for expected credit losses (ECLs), and any changes in those ECLs. 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. The estimate of ECLs, should reflect an unbiased and probability-weighted amount that is 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 current conditions that could affect credit risk.
For financial assets, an ECL is the current value of the difference between the contractual cash flows owed to the entity and the cash flows which the entity expects to receive. For undrawn loan commitments, an ECL is the current value of the difference between the contractual cash flows owed to the entity and the cash flows which the entity expects to receive if the loan is drawn.
An assessment of each facilities’ credit risk profile will determine whether they are to be allocated to one of three stages:
– | | Stage 1: when it is deemed there has been no significant increase in credit risk since initial recognition, a loss allowance equal to a 12-month ECL – i.e. the proportion of lifetime expected losses resulting from possible default events within the next 12-months – will be applied; |
– | | Stage 2: when it is deemed there has been a significant increase in credit risk since initial recognition, but no credit impairment has materialised, a loss allowance equal to the lifetime ECL – i.e. lifetime expected loss resulting from all possible defaults throughout the residual life of a facility – will be applied; and |
– | | Stage 3: when the facility is considered credit impaired, a loss allowance equal to the lifetime ECL will be applied. Similar to incurred losses under IAS 39, objective evidence of credit impairment is required. |
The assessment of whether a significant increase in credit risk has occurred since initial recognition involves the application of both quantitative measures and qualitative factors, requires management judgement and is a key aspect of the IFRS 9 methodology.
Hedge accounting: The general hedge accounting requirements align more closely with risk management practices and establish a more principle-based approach thereby allowing hedge accounting to be applied to a wider variety of hedging instruments and risks. Macro hedge accounting is being dealt with as a separate project. Until such time as that project is complete, and to remove any potential conflict between any existing macro hedge accounting undertaken under IAS 39 and the new general hedge accounting requirements of IFRS 9, entities can choose to continue to apply the existing hedge accounting requirements in IAS 39. Santander UK group has decided to continue IAS 39 hedge accounting and consequently, there are no changes being implemented to hedge accounting policies and practices.
Transition and impact: IFRS 9 has been endorsed for use in the European Union. The mandatory effective date of IFRS 9 is 1 January 2018. The classification, measurement and impairment requirements will be applied retrospectively by adjusting the opening balance sheet at the date of initial application. There is no requirement to restate comparative information.
For the Santander UK group, the application of IFRS 9 decreases shareholders’ equity at 1 January 2018 by £192m (net of tax), comprised of a £49m decrease arising from the application of the new classification and measurement requirements for financial assets (as explained above), and a c£211m decrease arising from the application of the new ECL impairment methodology, these amounts being partially offset by the recognition of a deferred tax asset of £68m.
These impacts take into account the narrow-scope amendments made to IFRS 9 by the IASB in October 2017 entitled ‘Prepayment Features with Negative Compensation (Amendments to IFRS 9)’. These amendments which are not effective until annual periods beginning on or after 1 January 2019 can be adopted early. The amendments permit some prepayable financial assets with negative compensation to be measured at amortised cost that, but for the amendment, would have been measured at fair value through profit or loss. Negative compensation arises where the contractual terms permit the borrower to prepay the instrument before its contractual maturity, but the prepayment amount could be less than unpaid amounts of principal and interest. To qualify for amortised cost measurement, the negative compensation must be “reasonable compensation” for early termination of the contract. The amendments are awaiting EU endorsement.
As referred to in the ‘Compliance with International Financial Reporting Standards’ section above, the Santander UK group elected to early apply from 1 January 2017 the requirements for the presentation of gains and losses on certain financial liabilities relating to own credit in other comprehensive income. This presentational change had no impact on shareholders’ equity.
| | | | | > Notes to the financial statements |
Recommendations of the Enhanced Disclosure Task Force (EDTF) with respect to Expected Credit Losses
The following additional information is provided in accordance with the recommendations of the EDTF in their 30 November 2015 report entitled ‘Impact of Expected Credit Loss Approaches on Bank Risk Disclosures’ regarding applying the key principles within an expected credit loss (ECL) approach and the risk management organisation, processes and key functions.
a) How Santander UK interprets and expects to apply the key principles within an ECL approach
In forecasting ECLs under IFRS 9, Santander UK has leveraged retail and corporate credit risk models used for underwriting, portfolio management and regulatory capital. These credit risk measurement tools principally capture idiosyncratic (customer and facility) risk drivers and when transformed into probability of default (PD), exposure at default (EAD) and loss given default (LGD) estimates, form the basis for quantifying ECL.
Outputs from these models have been incorporated into a new modelling framework developed for IFRS 9, which combines other factors that explicitly capture systemic effects (relating to changes in credit conditions) and the maturity of the exposure. Systemic effects are accounted for by using the outputs of existing macroeconomic stress testing models as factors in the ECL calculation, while the addition of time related factors (such as time since last rating) enable the forecasting of risk, for each individual loan, to be extended over the lifetime of the exposure and reflect economic forecasts.
The ability to forecast beyond 12 months is further supplemented by the introduction of a new survival rate (SR) model which predicts the likelihood that an exposure will still be open and not defaulted at any point during its remaining life (after making allowance for early redemptions).
The calculation of ECL is based on either possible defaults within a period of 12 months following the reporting date (12-month ECL) or defaults arising throughout the residual life of the exposure (Lifetime ECL). The forecast horizon will be determined according to a stage allocation assessment, whereby an underlying facility is assigned to one of three stages as set out above. The assessment of whether there has been significant increase in credit risk since initial recognition, for the purpose of moving exposures between stages, will incorporate a number of quantitative, qualitative and days past due ‘backstop’ tests. The determination incorporates a measure of the change in default risk between initial recognition and the reporting date.
For each term loan the output of the PD, EAD, LGD and SR models are multiplied together to derive a measure of ECL for each month to the end of the contractual period. The resulting ECL forecast is then discounted using the effective interest rate to reflect the time value of money. Summing each monthly ECL to the end of the contractual term gives the lifetime ECL, while the 12-month ECL is calculated by summing the first 12-monthly ECL values only. For revolving credit facilities the lifetime period is determined to be the point at which either the SR model predicts all exposures have closed or the ECL value is zero through the effects of discounting.
ECLs will be based on macroeconomic inputs reflecting a set of scenarios that will incorporate, as a minimum; a base scenario, an upside scenario and a downside scenario based on various macroeconomic variables, e.g. GDP, house prices, unemployment rates, etc. Each scenario will be assigned a probability weighting that reflects the likelihood of occurrence. The resulting ECL for each scenario will be combined to give an unbiased, probability-weighted ECL value.
b) Santander UK’s governance processes over ECL
A separate IFRS 9 Steering Group, was set up to manage the implementation of IFRS 9. With respect to ECL, a number of cross-functional working groups were mobilised to opine and make proposals on model design and integration, technical accounting and implementation. Approvals and ratification were sought at a series of Management Committees and Forums, whilst key risks, assumptions, issues, and dependencies, aligned to material portfolios/key design considerations, have been tracked at the Steering Group.
ECL impairment models are sensitive to changes in credit conditions, and reflect various management judgements that give rise to measurement uncertainty. The governance framework for generating and reviewing the scenarios and weights leverages Santander UK’s existing processes to assess risk appetite and manage stress testing, which incorporate the views of subject matter experts across numerous business functions and a comparison with external benchmarks prior to running forecasting models. The following fora review provision drivers and ensure that management judgements remain appropriate:
– | | The Model Risk Control Forum, which reviews and approves required changes to ECL models; |
– | | The Asset and Liability Committee is responsible for reviewing and approving the economic scenarios and probability weights used to calculate forward-looking scenarios; |
– | | The Credit Provisions Forum reviews management judgements and approves IFRS 9 ECL impairment allowances; and |
– | | The Board Audit Committee reviews and challenges the appropriateness of the estimates and judgements made by management. |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
b) | IFRS 15 ‘Revenue from Contracts with Customers’ (IFRS 15) – In May 2014, the IASB issued IFRS 15. The effective date of IFRS 15 is 1 January 2018. The standard establishes a principles-based approach for revenue recognition and introduces the concept of recognising revenue for performance obligations as they are satisfied. Revenue relating to lease contracts, insurance contracts and financial instruments is outside the scope of IFRS 15. For Santander UK group’s fee and commission income, which is within the scope of the standard, income is recognised as services are provided and this continues under the performance obligation approach in IFRS 15. There have been no significant changes in the recognition of in scope income and, consequently, IFRS 15 has no material impact for the Santander UK group. |
c) | IFRS 16 ‘Leases’ (IFRS 16) – In January 2016, the IASB issued IFRS 16. The standard is effective for annual periods beginning on or after 1 January 2019. Earlier adoption is permitted for entities that apply IFRS 15 at or before the date of initial application of IFRS 16. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. For lessee accounting, IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise aright-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases with a term of more than 12 months, unless the underlying asset is of low value. For lessor accounting, IFRS 16 substantially carries forward the lessor accounting requirements from the existing leasing standard (IAS 17) and a lessor continues to classify its leases as operating leases or finance leases and to account for those two types of leases differently. At |
The Santander UK group has elected to apply the modified retrospective approach whereby the ROU asset at the date of initial application is measured at an amount equal to the lease liability. The ROU asset is adjusted for any prepaid lease payments and incentives relating to the relevant leases that were recognised on the balance sheet at 31 December 2018. It includes the estimated costs of restoring the underlying assets to the condition required by the lease terms and conditions. For the Santander UK group, the application of IFRS 16 at 1 January 2019 is expected to increase property, plant and equipment by £210m (being the net increase in ROU assets referred to above), reduce other assets by £12m, increase other liabilities by £181m from recognising lease liabilities, and increase provisions by £17m. There is expected to be no impact on shareholders’ equity. For the Company, the application of IFRS 16 is expected to increase property, plant and equipment by £223m, reduce other assets by £12m, increase other liabilities by £194m, from recognising lease liabilities, and increase provisions by £17m, with no impact on shareholders’ equity. In arriving at the estimated impact, as well as excluding leases whose terms end within 12 months, the Santander UK group applies a single discount rate to a portfolio of leases with similar remaining lease terms. In addition to the choice of transition approach, the determination of the discount rate is the most significant area of judgement. The Santander UK group applies an incremental borrowing rate (based on3-month GBP LIBOR plus a credit spread to reflect the cost of raising unsecured funding in the wholesale markets) appropriate to the relevant remaining lease term. The lease liabilities shown above differ from the amount of operating lease commitments disclosed in Note 32 due to the effects of discounting the lease liabilities and excluding short-term leases that are outside the scope of IFRS 16.
| | | | | > Notes to the datefinancial statements |
| – | | Amendment to IAS 12 ‘Income Taxes’ (part of publication‘Annual Improvements to IFRS Standards 2015-2017 Cycle’) – In December 2017, as part of these Consolidated Financial Statementsits annual improvements project, the impactIASB issued an amendment to IAS 12 to clarify that the income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the standardpast transactions or events that generated distributable profits were recognised. This means that, to the extent that profits from which dividends on equity instruments were recognised in the income statement, the income tax consequences would be similarly recognised in the same statement. The amendment, which is currently being assessedapplied retrospectively and it is not yet practicable to quantifyeffective for annual reporting periods beginning on or after 1 January 2019, is awaiting EU endorsement at the effecttime of IFRS 16 onapproving these Consolidated Financial Statements. DetailsThe effects of existing operating lease commitmentsthe amendment are expected to lead to a reduction in the effective tax rate where the tax relief on coupons in respect of leases whereAT1 capital securities would be recognised in the Santander UK group is lessee and that are likely to come on the balance sheet under IFRS 16 are set outincome statement rather than in Note 29.equity. |
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. Consolidation a) Subsidiaries The Consolidated Financial Statements incorporate the financial statements of Santander UK plcthe Company and entities (including structured entities) controlled by the Companyit 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 holders |
| – | | Potential voting rights held by the Company, other vote holders or other parties |
| – | | Rights arising from other contractual arrangements |
| – | | 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. 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 relatedAcquisition-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 anynon-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 thea 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’IFRS 9 or, when applicable, the costs on initial recognition of an investment in an associate or jointly controlled entity.joint venture. Business combinations between entities under common control (i.e. fellow subsidiaries of Banco Santander SA, (thethe ultimate parent)) are outside the scope of IFRS 3 – ‘Business Combinations’, and there is no other guidance for such transactions under IFRS. The Santander UK group elects to account for business combinations between entities under common control at their book values in the acquired entity by including the acquired entity’s results from the date of the business combination and not restating comparatives. Reorganisations of entities within the Santander UK group are also accounted for at their book values. 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. b) Joint ventures Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to theits net assets of the joint arrangement.assets. 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 of joint ventures have been aligned to the extent there are differences from the Santander UK group’s policies. The Santander UK group’s investments Investments in 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 thetheir post-acquisition results of the joint venture.results. When the Santander UK group’s share of losses of a joint venture exceed the Santander UK group’sits interest in that joint venture, the Santander UK group discontinues recognising its share of further losses. AdditionalFurther 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 joint venture.
| | | | | > Notes to the financial statements |
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). 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 fromon 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 retranslated. Exchange rate differences arising onnon-monetary items measured at fair value are recognised in the consolidated income statement except for differences arising on available-for-sale equity securities measured at FVOCI (2017:available-for-sale), which are recognised in other comprehensive income.
| | | | Annual Report 2018 | Financial statements | | |
Revenue recognition a) Interest income and expense Interest and similar income comprises interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI (2017:available-for-sale) and interest income on hedging derivatives. Interest expense and similar charges comprises interest expense on financial liabilities measured at amortised cost, and interest expense on hedging derivatives. Interest income on financial assets that are classified as loans and receivables, held-to-maturitymeasured at amortised cost, investments or available-for-sale securities,in debt instruments measured at FVOCI (2017:available-for-sale) and interest expense on financial liabilities other than those at fair value through profit or loss are(FVTPL) is determined using the effective interest rate 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 netgross carrying amount of the financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding futureexpected 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 onis calculated by applying the effective interest rate to the gross carrying amount of financial assets, classified as loans and receivables and available-for-sale,except for financial assets that have subsequently become credit-impaired (or ‘stage 3’), for which interest expense on liabilities classified atrevenue is calculated by applying the effective interest rate to their amortised cost and interest income and expense(i.e. net of the ECL provision). For more information on hedging derivatives are recognisedstage allocations of credit risk exposures, see ‘Significant increase in interest and similar income and interest expense and similar chargescredit risk’ in the income statement. In accordance with IFRS, the Santander‘Santander UK group recognises interest income on assets after they have been written down as a resultlevel – credit risk management’ section 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.Risk Review
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, or on the performance ofperformed. Most fee and commission income is recognised at a significant act.point in time. Certain commitment, upfront and management fees are recognised over time but are not material. 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 fornon-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 onand profit share arising from the sale of building and contents insurance and life protection insurance. Commissions arising from the sale of buildings and contents insurance are recognised over the period of insurance cover, adjusted to take account of cancelled policies. Profit share income from the sale of buildings and payment cover insurance. Revenue from these income streamscontents insurance which is not subject to any adjustment is recognised when the serviceprofit share income is provided.earned. Commissions and profit share arising from the sale of life protection insurance is subject to adjustment for cancellations of policies within 3 years from inception. Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (e.g.(for example 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 theex-dividend date for equity securities. d) Net trading and other income Net trading and other income comprisesincludes all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss (including(comprising financial assets and liabilities held for trading, trading derivatives and designated asother financial assets and liabilities at 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 includeincludes income from operating lease assets, and profits/(losses)profits and 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. Thea) Defined benefit schemes are generally funded through payments to insurance companies or trustee-administered funds, as determined by periodic actuarial calculations.
A defined benefit scheme is a pension scheme 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 scheme 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 ‘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.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
a) Defined benefit schemes
The asset or liability recognised in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date, less the fair value of scheme 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 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 the yield 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 life expectancy, inflation, discount rates, pension increases and earnings growth, based on past experience and future expectations. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively. 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 demographic assumptions, the impact of scheme experience and changes in financial 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 scheme 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 scheme, or amendments to the terms of the scheme 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.
| | | | | > Notes to the financial statements |
b) Defined contribution plans ForA defined contribution plans,plan is a pension scheme under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund). The pension paid to publicly or privately administered pension insurance plansthe member at retirement is based on a mandatory, contractual or voluntary basis. Once the contributions have been paid,amount in the separate fund for each member. The Santander UK group has no legal or constructive obligations to pay further payment obligation.contributions into the fund to ‘top up’ benefits to a certain guaranteed level. 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 Administrationwithin Operating expenses in the income statement.
c) Post-retirement medical benefit plans Post-retirement medical benefit liabilities are determined using the Projected Unit Credit Method,projected unit credit method, with actuarial valuations updated at eachyear-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 SA are purchased in the open market by the Santander UK group (for the Employee Sharesave scheme) or are purchased by Banco Santander SA or another Banco Santander company (for awards granted under the Long-Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options or awards 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 settledcash-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 withinin administration expenses over the period that the services are received which isi.e. 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 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 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 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 vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market–related vesting conditions are met, provided that thenon-market vesting conditions are met. 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 duringCancellations in the vesting period isare treated as an acceleration of vesting, and recognised immediately for the amount that would otherwise have been recognised for services over the vesting period.
| | | | | > Notes to the financial statements |
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 contractedcontractual 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 thetheir 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 thesethose 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 withof maintaining software programmes are expensed as incurred. 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‘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 (e.g.(for example operating system of a computer). 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.
| | | | Annual Report 2018 | Financial statements | | |
Financial assetsinstruments a) Initial recognition and liabilitiesmeasurement 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. Financialrecognition and measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs of financial assets are classified asand financial assetsliabilities carried at fair value through profit or loss loans and receivables, available-for-saleare expensed in profit or loss. Immediately after initial recognition, an expected credit loss (ECL) allowance is recognised for financial assets measured at amortised cost and held-to-maturity investments. Financial assets that are classifiedinvestments in debt instruments measured 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 expired.FVOCI.
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)b) Financial assets and liabilities at fair value through profit or loss
i) Classification and subsequent measurement From 1 January 2018, the Santander UK group has applied IFRS 9 Financial Instruments and classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL. Financial assets and financial liabilities are classified as fair value through profitFVTPL where there is a requirement to do so or loss ifwhere they are either held for trading or otherwise designated at fair value through profit or lossFVTPL on initial recognition. Financial assets and financial liabilities which are required to be held at FVTPL include: | – | | Financial assets and financial liabilities held for trading |
| – | | Debt instruments that do not have solely payments of principal and interest (SPPI) characteristics. Otherwise, such instruments are measured at amortised cost or FVOCI, and |
| – | | Equity instruments that have not been designated as held at FVOCI. |
Financial assets and financial liabilities are classified as held for trading if they are derivatives or if 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, other financial assets and financial liabilities other than those that are held for trading are designated at fair value through profit or lossFVTPL where this results in more relevant informationinformation. This may arise 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 orand liabilities are managed and their performance evaluated on a fair value basis or, in the case of financial liabilities, where a financial asset or financial liabilityit contains one or more embedded derivatives which are not closely related to the host contract. Financial assetsThe classification and measurement requirements for financial asset debt and equity instruments and financial liabilities classifiedare set out below.
a) Financial assets: debt instruments Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as fair value through profitloans and government and corporate bonds. Classification and subsequent measurement of debt instruments depend on the Santander UK group’s business model for managing the asset, and the cash flow characteristics of the asset. Business model The business model reflects how the Santander UK group manages the assets in order to generate cash flows and, specifically, whether the Santander UK group’s objective is solely to collect the contractual cash flows from the assets or loss are initially recognised at fair valueis to collect both the contractual cash flows and transaction costs are taken directly to the income statement. Gains and lossescash flows arising from changes in fair value are included directly in the income statement except for gains and losses on financial liabilities designated at fair value through profit and loss relating to own credit which are presented in other comprehensive income. Derivative financial instruments, trading assets and liabilities andsale of the assets. If neither of these is applicable, such as where the financial assets and liabilities designated at fair valueare held for trading purposes, then the financial assets are classified as fairpart of an ‘other’ business model and measured at FVTPL. Factors considered in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the assets’ performance is evaluated and reported to key management personnel, and how risks are assessed and managed.
SPPI Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Santander UK group assesses whether the assets’ cash flows represent SPPI. In making this assessment, the Santander UK group considers whether the contractual cash flows are consistent with a basic lending arrangement (i.e. interest includes only consideration for the time value throughof money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement). Where the contractual terms introduce exposure to risk or loss.volatility that is inconsistent with a basic lending arrangement, the related asset is classified and measured at FVTPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI. Based on these factors, the Santander UK group classifies its debt instruments into one of the following measurement categories: | – | | Amortised cost – Financial assets that are held for collection of contractual cash flows where those cash flows represent SPPI, and that are not designated at FVTPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any ECL recognised and measured as presented in Note 14. Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method. When estimates of future cash flows are revised, the carrying amount of the respective financial assets or financial liabilities is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in the income statement. |
| – | | FVOCI – Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent SPPI, and that are not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are recognised in OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Net trading and other income’. Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method. |
| – | | FVTPL – Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument that is subsequently measured at FVTPL, including any debt instruments designated at fair value, is recognised in profit or loss and presented in the income statement in ‘Net trading and other income’ in the period in which it arises. |
| | | Annual Report 2017 on Form 20-F | Financial statements | | > Notes to the financial statements |
b) LoansFinancial assets: equity instruments Equity instruments are instruments that meet the definition of equity from the issuer’s perspective, being instruments that do not contain a contractual obligation to pay cash and receivables Loans and receivablesthat evidence a residual interest in the issuer’s net assets. All equity investments are non-derivative financial assets with fixed or determinable payments, that are not quoted insubsequently measured at FVTPL, except where management has elected, at initial recognition, to irrevocably designate an active market and which are not classified as available-for-sale orequity investment at FVOCI. When this election is used, 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. Loansgains and receivableslosses 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-salein OCI and are not categorised into anysubsequently reclassified to profit or loss, including on disposal. ECLs (and reversal of theECLs) are not reported separately from other categories described. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held atchanges in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the right to receive payments is established. Gains and losses arising from changeson equity investments at FVTPL are included 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‘Net trading 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 recognisedincome’ line in the income statement.
d) Held-to-maturity investmentsc) Financial liabilities
Held-to-maturity investmentsFinancial liabilities are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Santander UK group’s management has the positive intention and ability to hold to maturity other than:classified as subsequently measured at amortised cost, except for:
| – | | Those that the Santander UK group designates upon initial recognition asFinancial liabilities at fair value through profit or loss;loss: this classification is applied to derivatives, financial liabilities held for trading and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability) and partially in profit or loss (the remaining amount of change in the fair value of the liability) |
| – | | Those thatFinancial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Santander UK group designates as available-for-sale;recognises any expense incurred on the financial liability, and |
| – | | Those that meet the definition of loansFinancial guarantee contracts and receivables.loan commitments. |
These are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method, less any provision for impairment.
A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments to available-for-sale 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. Savings accounts and time deposits are interest-bearing.
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. The cash principal element is 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.derivatives. g)d) Sale and repurchase agreements (including stock borrowing and lending)
Securities sold subject to a commitment to repurchase them at a predetermined price (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) 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 takingin 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)e) Day One profit 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 One gain or loss), being the difference between the transaction price and the fair value. When significant unobservable parameters are used, the entire Day One 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 thean offsetting transaction is entered into. ii) Impairment of debt instrument financial assets The Santander UK group entersassesses on a forward-looking basis the ECL associated with its debt instrument assets carried at amortised cost and FVOCI and with the exposure arising from financial guarantee contracts and loan commitments. The Santander UK group recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects: | – | | An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes |
| – | | The time value of money, and |
| – | | Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. |
Grouping of instruments for losses measured on a collective basis We typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in Retail Banking – credit risk management in the Risk review) using one or more statistical models. Where we have used internal capital or similar models as the basis for our IFRS 9 models, this typically results in a large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models. We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed, as described below. Individually assessed impairments (IAIs) We assess significant Stage 3 cases individually. We do this for CIB and Corporate & Commercial Banking cases, but not for Business Banking cases in Retail Banking which we assess collectively. To calculate the estimated loss, we estimate the future cash flows under several scenarios each of which uses case-specific factors and circumstances. We then probability-weight the net present value of the cash flows under each scenario to arrive at a weighted average provision requirement. We update our assessment process every quarter and more frequently if there are changes in circumstances that might affect the scenarios, cash flows or probabilities we apply. For more on how ECL is calculated, see the Credit risk section of the Risk review. a)Write-off For secured loans, awrite-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 awrite-off occurs for other reasons, such as following a consensual restructure or refinancing of the debt or where the debt is sold for strategic reasons into an offsetting transaction.the secondary market at a value lower than its face value.
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
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, awrite-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 assessed / made on acase-by-case basis, taking account of the exposure at the date ofwrite-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 investigations have been completed and the probability of recovery is minimal. The time span between discovery andwrite-off will be short and may not result in an impairment loss allowance being raised. Thewrite-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances. b) Recoveries Recoveries of credit impairment losses are not included in the impairment loss allowance, but are taken to income and offset against credit impairment losses. Recoveries of credit impairment losses are classified in the income statement as ‘Credit impairment losses’. iii) Modifications of financial assets The treatment of a renegotiation or modification of the contractual cash flows of a financial asset normally depends upon whether the renegotiation or modification is due to financial difficulties of the borrower or for other commercial reasons. | – | | Contractual modifications due to financial difficulties of the borrower: where Santander UK modifies the contractual conditions to enable the borrower to fulfil their payment obligations, the asset is not derecognised. The gross carrying amount of the financial asset is recalculated as the present value of the renegotiated/modified contractual cash flows that are discounted at the financial asset’s original EIR and any gain or loss arising from the modification is recognised in the income statement. |
| – | | Contractual modifications for other commercial reasons: such modifications are treated as a new transaction resulting in derecognition of the original financial asset, and the recognition of a ‘new’ financial asset. Any difference between the carrying amount of the derecognised asset and the fair value of the new asset is recognised in the income statement as a gain or loss on derecognition. |
Any other contractual modifications, such as where a regulatory authority imposes a change in certain contractual terms or due to legal reasons, are assessed on acase-by-case basis to establish whether or not the financial asset should be derecognised. iv) Derecognition other than on a modification 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 expired. c) Financial guarantee contracts and loan commitments 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. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of the amount of the loss allowance, and the premium received on initial recognition less income recognised in accordance with the principles of IFRS 15. Loan commitments are measured as the amount of the loss allowance. The Santander UK group has not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument. For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision and charged to credit impairment losses in the income statement. The loss allowance in respect of revolving facilities is classified in loans and advances to customers to the extent of any drawn balances. The loss allowance in respect of undrawn amounts is classified in provisions. When amounts are drawn, any related loss allowance is transferred from provisions to loans and advances to customers. Derivative financial instruments (derivatives) 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 accounting relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described within ‘hedgein ‘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 ofover-the-counter derivatives are obtainedestimated using valuation techniques, including discounted cash flow and option pricing models. DerivativesCertain derivatives may be embedded in other financial instruments,hybrid contracts, such as the conversion option in a convertible bond. EmbeddedIf the hybrid contract contains a host that is a financial asset, then the Santander UK group assesses the entire contract as described in the financial asset section above for classification and measurement purposes. Otherwise, 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).
| | | | | > Notes to the financial statements |
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 gainsGains 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. 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 The Santander UK 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 value hedges); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedges); or (iii) a hedge of a net investment in a foreign operation (net investment 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 in macro hedge of interest rate risk and recognised in the income statement within net trading and 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.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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 financialnon-financial assets At each balance sheet date the Santander UK group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired.
Assets carried at amortised cost
For loans and advances, loans and receivables securities and held-to-maturity investments, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss.
More detailed policies for certain portfolios measured at amortised cost are described below.
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 distress |
– | | Request from a borrower to change contractual terms as a result of the borrower’s financial difficulty (i.e. forbearance) |
– | | Arrears on other accounts held by the borrower. |
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 not observed (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 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) basis for groups of loans with similar credit risk characteristics. The length of time before a loan is regarded as non-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 the Risk review.
For mortgages and other secured advances, the allowance for observed losses is calculated 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 percentage of exposure which will result in a loss (the loss ratio). 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, or repossessed for secured advances. 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 ratio is based on actual cases which have been repossessed and sold using the most recent twelve month average data, segmented by LTV, and is then discounted using the effective interest rate.
| | | | | > Notes to the financial statements |
For unsecured advances, such as unsecured personal loans, credit cards and overdrafts, 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, the estimated proportion of such cases that will result in a loss (the loss factor) and the average loss incurred (the loss per case). The loss per case is based on actual cases using the most recent six month average data of losses that have been incurred, 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 are known from past experience to have deteriorated since the initial decision to lend was made (for example, where a borrower has not yet missed a payment but is experiencing financial difficulties at the reporting date, e.g. due to a loss of employment, divorce or bereavement), or |
– | | In arrears and not classified as non-performing. |
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 off |
– | | Where the account is delinquent, the loss propensity represents the percentage of such cases that will ultimately be written off. |
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 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 where:
– | | An asset has a payment default which has been outstanding for three months or more |
– | | Non-payment defaults have occurred but where it has become evident that a forbearance exercise will be undertaken due to the inability of the borrower to meet its current contractual repayment schedule |
– | | It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation |
– | | The borrower has a winding up notice issued or insolvency event |
– | | The borrower has had event(s) occur which are likely to adversely impact upon their ability to meet their financial obligations (e.g. where a customer loses a key client or contract) |
– | | The borrower has regularly and persistently missed/delayed payments but where the account has been maintained below three months past due |
– | | The customer loan is due to mature within six months and where the prospects of achieving a refinancing are considered low. |
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.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
The allowance for IBNO 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.
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.
Retail assets
Mortgages
The main types of forbearance offered are capitalisation or a term extension, subject to customer negotiation and vetting. These accounts are 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 the payments received post forbearance equate to the 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, accounts are grouped according to their credit risk characteristics. For each category of loans, accounts are individually assigned a loss propensity based 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.
Unsecured personal loans (UPLs)
The main type of forbearance offered is reduced repayment 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 type of forbearance offered is reduced repayment arrangements. 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.
| | | | | > Notes to the financial statements |
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’.
b) Loans and receivables securities and held-to-maturity investments
Loans and receivables securities and held-to-maturity investments 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 asset. 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 and held-to-maturity investments are monitored for potential impairment through a detailed expected cash flow analysis, where appropriate, 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 asset.
c) Assets classified as available-for-sale
The Santander UK group assesses at each balance sheet date whether there is objective evidence that an 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 there has been a significant or prolonged decline in the fair value of the security below its 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 whichnon-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 apre-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.
| | | | Annual Report 2018 | Financial statements | | |
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.value. 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. A provision is recognised to reflect a reduction in any anticipated unguaranteed RV. A provision is also recognised for voluntary termination of the contract by the customer, where appropriate. 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.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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. A current tax liability for the current or prior period is measured at the amount expected to be paid to the tax authorities. Where the amount of the final tax liability is uncertain or where a position is challenged by a taxation authority, the liability recognised is the most likely outcome. Where a most likely outcome cannot be determined, a weighted average basis is applied. 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 valuere-measurements of available-for sale investmentsfinancial instruments accounted for at FVOCI 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 andnon-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, at 31 December 2017, 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 forProvisions include amounts in respect of irrevocable loan commitments, other than those classified as held for trading, within impairment loss allowances if itcommitments. The provision is probablethe present value of the difference between the contractual cash flows based on the expected drawdowns and the cash flows that the facility will be drawn and the resulting loan will be recognised at a value less than the cash advanced.Santander UK group expects to receive.
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
| | | | | > Notes to the financial statements |
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. Accounting policies relating to comparatives – IAS 39 On 1 January 2018, Santander UK group adopted IFRS 9, which replaced IAS 39. In accordance with the transition requirements of IFRS 9, comparatives were not restated. The accounting policies applied in accordance with IAS 39 for periods before the adoption of IFRS 9 are set out below: Financial assets and liabilities – IAS 39 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 financial assets andheld-to-maturity investments. 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 asavailable-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 orheld-to-maturity categories. 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. a) Financial assets and liabilities at fair value through profit or loss Financial assets and financial liabilities are classified as FVTPL if they are either held for trading or otherwise designated at FVTPL on initial recognition. Financial assets and financial liabilities are classified as held for trading if they are derivatives or if 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 FVTPL 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 FVTPL 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 except for gains and losses on financial liabilities designated at FVTPL relating to own credit which are presented in other comprehensive income. Derivative financial instruments, trading assets and liabilities and financial assets and liabilities designated at fair value are classified as FVTPL. b) Loans and receivables Loans and receivables arenon-derivative financial assets with fixed or determinable payments, that are not quoted in an active market and which are not classified asavailable-for-sale or FVTPL. 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 arenon-derivative financial assets that are designated asavailable-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, and subsequently held at fair value. Gains and losses arising from changes in fair value 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. d)Held-to-maturity investments Held-to-maturity investments arenon-derivative financial assets with fixed or determinable payments and fixed maturities that the Santander UK group’s management has the positive intention and ability to hold to maturity other than those that meet the definition of loans and receivables or that the Santander UK group designates upon initial recognition as at fair value through profit or loss, oravailable-for-sale. They are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method, less any provision for impairment. A sale or reclassification of a more than insignificant amount ofheld-to-maturity investments would result in the reclassification of allheld-to-maturity investments toavailable-for-sale financial assets. Impairment of financial assets – IAS 39 At each balance sheet date, the Santander UK group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. In the case of equity investments classified asavailable-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired. a) Assets carried at amortised cost For loans and advances, loans and receivables securities andheld-to-maturity investments, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan orheld-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. Subsequent to the recognition of an impairment loss on a financial asset or a group of financial assets, interest income continues to be recognised on an effective interest rate basis, on the asset’s carrying value net of impairment provisions. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss.
| | | | Annual Report 2018 | Financial statements | | |
Impairment allowances are assessed individually for financial assets that are individually significant. Impairment allowances for portfolios of smaller balance homogenous loans such as most residential mortgages, personal loans and credit card balances that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis. 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. The factors considered in determining whether a loan is individually significant for the purpose of assessing impairment include the size of the loan, the number of loans in the portfolio, the importance of the individual loan relationship and how this is managed. Potential indicators of loss events which may be evidence of impairment for retail borrowers may include missed payments of capital and interest and borrowers notifying the Santander UK group of current or likely financial stress. For corporate assets, when a specific observed impairment is established, the asset is transferred to the Corporate & 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 loss allowance. 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 orsub-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 grouped 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 not observed (IBNO) losses. Such losses will only be individually identified in the future. Observed impairment loss allowance An impairment loss allowance for observed losses is established for all NPLs 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) basis for groups of loans with similar credit risk characteristics. For more on the definition of NPLs, see ‘Credit risk management – risk measurement and control’ in the Risk review. For mortgages and other secured advances, the allowance for observed losses is calculated 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 percentage of exposure which will result in a loss (the loss ratio). The loss propensities for the observed segment (i.e. where the loan is classified asnon-performing) represent the percentage that will 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 most recent 12 months in the year under review. The loss ratio is based on actual cases which have been repossessed and sold using the most recent 12 month average data, segmented by LTV, and is then discounted using the effective interest rate. 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 are known from past experience to have deteriorated since the initial decision to lend was made (for example, where a borrower has not yet missed a payment but is experiencing financial difficulties at the reporting date, for example due to a loss of employment, divorce or bereavement), or |
| – | | In arrears and not classified asnon-performing. |
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 off. Where the account is delinquent, the loss propensity represents the percentage of such cases that will ultimately be written off. b) Loans and receivables securities andheld-to-maturity investments Loans and receivables securities andheld-to-maturity investments 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 asset. 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 andheld-to-maturity investments are monitored for potential impairment through a detailed expected cash flow analysis, where appropriate, 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 asset. c) Assets classified asavailable-for-sale The Santander UK group assesses at each balance sheet date whether there is objective evidence that anavailable-for-sale financial asset is impaired. 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 there has been a significant or prolonged decline in the fair value of the security below its 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 asavailable-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 asavailable-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.
| | | | | > Notes to the financial statements |
CRITICAL JUDGEMENTS AND ACCOUNTING POLICIES AND AREAS OF SIGNIFICANT MANAGEMENT JUDGEMENTESTIMATES The preparation of the Consolidated Financial Statements requires management to make estimatesjudgements and judgementsaccounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, and judgements on an ongoing basis. Management bases its estimates and judgementswhich are based on historical experience and on various other factors that are believed to be reasonable under the circumstances.circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions. In the course of preparing the Consolidated Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, conduct remediation and pensions as set out below. The following accounting estimates, andas well as the judgements inherent within them, 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 accounting estimate, a range of outcomes was calculated based principally on management’s conclusions regarding the input assumptions relative to historichistorical experience. The actual estimates were based on what management concluded to be the most probable assumptions within the range of reasonably possible assumptions. a) Impairment loss allowances for loans and advances to customersCredit impairment allowance The application of the ECL impairment methodology for calculating credit impairment allowances is highly susceptible to change from period to period. The methodology requires management to make a number of judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group’s future financial results and financial condition. Key areas of judgement in accounting estimates The key judgements made by management in applying the ECL impairment methodology are set out below. | – | | Forward-looking information |
For more on each of these key judgements, see the ‘Credit risk – Santander UK group estimates impairment losses for loans and advances to customers, loans and receivables securities, and loans and advances to banks as described inlevel – credit risk management’ section of the accounting policy ‘ImpairmentRisk review. Sensitivity 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.ECL allowance At 31 December 2017, impairment allowances held against loans2018, the probability-weighted ECL allowance totalled £807m, of which £789m related to exposures in Retail Banking, Corporate & Commercial Banking and advancesCorporate Centre, and £18m related to customers totalled £940m (2016: £921m).exposures in Corporate & Investment Banking. The net impairment loss (i.e. after recoveries)ECL allowance is sensitive to the methods, assumptions and estimates underlying its calculation. For example, management could have applied different probability weights to the economic scenarios and, depending on the weights chosen, this could have a material effect on the ECL allowance. In addition, the ECL allowance for loans and advances to customers recognisedresidential mortgages, in 2017 was £203m (2016: £67m, 2015: £66m). In calculating impairment loss allowances, a range of outcomes was calculated, either for each individual loan orparticular, is significantly affected by portfolio taking account of the uncertainty relating to economic conditions. For retail lending,HPI assumptions which determine the range was based on different management assumptions as to loss propensity and loss ratio relative to historic experience. For corporate lending, the range reflects different realisation assumptions in respectvaluation of collateral held.used in the calculations. IfHad management had used different assumptions on probability weights and HPI, a larger or smaller impairment loss allowanceECL charge would have resulted that could have had a material impact on the Santander UK group’s reported ECL allowance and profit before tax. Specifically, if management’s conclusionsSensitivities to these assumptions are set out below.
Probability weights The amounts shown in the tables below illustrate the ECL allowances that would have arisen had management applied a 100% weighting to each economic scenario. The allowances were different, butcalculated using a stage allocation appropriate to each economic scenario presented and differs from the probability-weighted stage allocation used to determine the ECL allowance shown above. For exposures subject to individual assessment, the distribution of ECL which could reasonably be expected has also been considered, assuming no change in the number of cases subject to individual assessment, and within the rangecontext of whata potential best to worst case outcome. | | | | | | | | | | | | | | | | | | | | | | Retail Banking, Corporate & Commercial Banking and Corporate Centre | | Upside 2
£m | | | Upside 1
£m | | | Base case
£m | | | Downside 1
£m | | | Downside 2
£m | | ECL | | | 554 | | | | 596 | | | | 648 | | | | 843 | | | | 1,930 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate & Investment Banking(1) | | | | | | | | Upside
£m | | | Base case
£m | | | Downside
£m | | ECL | | | | | | | | | | | 8 | | | | 17 | | | | 27 | | | | | | | |
| (1) | | As described in more detail in the ‘Santander UK Group Level – Credit Risk Management’ section, our Corporate & Investment Banking segment uses three forward-looking economic scenarios, whereas our other segments use five scenarios. The results of the 100% weighting ECL for the Corporate & Investment Banking segment are therefore presented separately. |
HPI Given the relative size of our residential mortgage portfolio, management deemed to be reasonably possible,considers that changes in HPI assumptions underpinning the impairment losscalculation of the ECL allowance for loans and advances couldresidential mortgages of £237m at 31 December 2018 would have decreased by £162m (2016: £193m, 2015: £221m), with a consequential increase inthe most significant impact on the ECL allowance. The table below shows the impact on profit before tax or increased by £229m (2016: £223m, 2015: £167m), with a consequentialof applying an immediate and permanent house price increase / decrease in profit before tax.to our base case economic scenario, and assumes no changes to the staging allocation of exposures: | | | | | | | | | | | | | | | | | | | | | | | | Increase/decrease in house prices | | | | | | | | +20% | | | +10% | | | -10% | | | -20% | | | | | | | | | | | £m | | | £m | | | £m | | Increase/(decrease) in profit before tax | | | | | | | 20 | | | | 12 | | | | (20 | ) | | | (52 | ) | | | | | | |
| | | | Annual Report 2018 | Financial statements | | |
b) Provision forProvisions (i) PPI conduct remediation The provision charge for conduct remediation relating to past activities and products sold recognised in 2017 was £144m (2016: £146m, 2015: £500m) before tax, comprising charges for Payment Protection Insurance (PPI) of £109m (2016: £144m, 2015: £450m) and other products of £35m (2016: £2m, 2015: £50m). The balance sheet provision amounted to £403m (2016: £493m, 2015: £637m), of which £356m (2016: £457m, 2015: £465m) related to PPI. Detailed disclosures on the provision for conduct remediation can be found in Note 27.
The provision mainly represents management’s best estimate of Santander UK’s future liability in respect of mis-selling of PPI policies. 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.
The most critical factor in determining the level of PPI provision is the volume of claims.claims that fall in scope for Santander UK. The uphold rate is informed by historical experience 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 untilto the end of thetime-bar period in August 2019. Key areas of judgement in accounting estimates The provision mainly represents management’s best estimate of Santander UK’s future liability in respect of misselling of PPI policies and Plevin complaints. 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 (reflecting legal and regulatory responsibilities, including the determination of liability and the effect of the time bar), as well as the redress costs for each of the different populations of customers identified. These are described in more detail in the ‘PPI assumptions’ section in Note 30. Sensitivity of PPI conduct remediation provision We made no additional provision charges for PPI conduct remediation relating to past activities and products sold recognised in 2018 (2017: £109m, 2016: £144m). The balance sheet provision amounted to £246m (2017: £356m, 2016: £457m). Detailed disclosures on the provision for PPI conduct remediation can be found in Note 30. 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 27.30. (ii) Other As set out in Note 30, an amount of £58m (2017: £nil) was charged in 2018 and arose from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act (CCA). This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2018 of potential costs in respect of the identified issue. However, as detailed in Note 32, these reviews and the related analysis are not yet complete, such that the approach and timing to any remediation has not yet been finalised, although it is expected to commence in 2019. c) Pensions The Santander UK group operates a number of defined benefit pension schemes as described in Note 2831 and estimates their position as described in the accounting policy ‘Pensions and other post retirement benefits’. The defined benefit pension schemes which wereKey areas of judgement in a net asset position had a surplus of £449m (2016: £398m) and the defined benefit pension schemes which were in a net liability position had a deficit of £286m (2016: £262m).accounting estimates
Accounting for defined benefit pension schemes requires management to make assumptions principally about the discount rate adopted, but also about mortality, price inflation, pension increases, life expectancy and earnings growth. Management’s assumptions are based on past experience and current economic trends, which are not necessarily an indication of future experience. These are described in more detail in the ‘Actuarial assumptions’ section in Note 31. During the year the methodology to derive the inflation rate was changed to better reflect management’s viewSensitivity of inflation expectations. Atdefined benefit pension scheme estimates
The defined benefit pension schemes which were in a net asset position at 31 December 2017 this2018 had a negativesurplus of £842m (2017: £449m) and the defined benefit pension schemes which were in a net liability position at 31 December 2018 had a deficit of £114m (2017: £286m). Had management used different assumptions, a larger or smaller pension remeasurement gain or loss would have resulted that could have had a material impact on the accounting surplus of £125m. Santander UK group’s reported financial position. Detailed disclosures on the current year service cost and deficit/surplus, includingactuarial assumption sensitivities and the date of the last formal actuarial valuations of the assets and liabilities of the schemes can also be found in the ‘Actuarial assumption sensitivities’ section in Note 28.31.
| | | Annual Report 2017 on Form 20-F | Financial statements | | > Notes to the financial statements |
2. SEGMENTS TheSantander UK’s principal activity of the Santander UK group is financial services, predominantlymainly in the United Kingdom.UK. The Santander UK group’s business is managed and reported on the basis of the following segments:segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies:
| – | | Retail Banking offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with an annual turnover of up to £6.5m, and Santander Consumer Finance, predominantly a vehicle finance business. |
| – | | Corporate & Commercial Banking To better align reporting to the nature of the business segment following ring-fence transfers, Commercial Banking has beenre-branded as Corporate & Commercial Banking. Corporate & Commercial Banking covers businesses with an annual turnover of £6.5m to £500m. Corporate & Commercial Banking offers a wide range of products and financial services provided by relationship teams that are based in a network of regional Corporate Business Centres (CBCs)CBCs and through telephony and digital channels. The management of our customers is organised across two relationship teams - the Regional Corporate Bank (RCB) that covers non-property backed trading businesses that are UK domiciled with annual turnover above £6.5m and Specialist Sector Groups (SSG) that cover real estate, social housing, education, healthcare, and hotels. |
| – | | Corporate & Investment Banking As part of a rebrand across the Banco Santander group, Global Corporate Banking (the UK segment of Santander Global Corporate Banking) has been branded as Corporate & Investment Banking. CIB services corporate clients with aan annual turnover of £500m and above per annum and financial institutions. GCBabove. CIB clients require specially tailored solutions and value-added services due to their size, complexity and sophistication. We provide these clients with products to manage currency fluctuations, protect against interest rate risk, and arrange capital markets finance and specialist trade finance solutions, as well as providing support to the rest of Santander UK’s business segments. |
| – | | Corporate Centre predominantly consists ofmainly includes the treasury,non-core corporate and treasury legacy portfolios.portfolios, including Crown Dependencies. Corporate Centre is also responsible for managing capital and funding, balance sheet composition, structure, pension and strategic liquidity risk. To enable a more targeted and strategically aligned apportionment of capital and other resources, revenues and costs incurred in Corporate Centre are allocated to the three business segments. Thenon-core corporate and treasury legacy portfolios are beingrun-down and/or managed for value. |
The 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 basis of presentation in this Annual Report has been changed, and the prior periods restated to reflect a change in the internal transfer of revenues and costs from Corporate Centre to the three customer business segments. This enables a more targeted apportionment of capital and other resources in line with the strategy of each segment.
The segmental informationdata below is presented in a manner consistent with the internal reporting provided to the committee which is responsible for allocating resources and assessing performance of the operating segments and has been identified as the chief operating decision maker. The segmental informationdata is prepared on a statutory basis of accounting.
accounting, in line with the accounting policies set out in Note 1. 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 beenare reflected in the performanceresults 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’sUK’s cost of wholesale funding. Interest income and interest expense have not been reported separately. The majority of thesegment revenues from the segments are interest income in nature and net interest income is relied on primarily to assess thesegment performance of the segment and to make decisions regardingon the allocation of segmentalsegment resources. Revenue by productsThe segmental basis of presentation in this Annual Report has been changed, and services
Detailsprior periods restated, to report our Jersey and Isle of revenue by product or service are disclosedMan branches in Notes 3Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to 5.ANTS in December 2018. Prior periods have not been restated for the changes in our statutory perimeter in the third quarter of 2018, following the ring-fence transfers to Banco Santander London Branch, as described in Note 43.
Results by segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | Retail
Banking
£m | | | Commercial
Banking £m | | | Global
Corporate
Banking
£m | | | Corporate
Centre
£m | | | Total
£m | | | | 2018 | | | Retail
Banking
£m | | Corporate & Commercial
Banking £m | | Corporate & investment
Banking £m | | Corporate
Centre
£m | | Total
£m | | Net interest income | | | 3,302 | | | | 395 | | | | 74 | | | | 32 | | | | 3,803 | | | 3,126 | | | 403 | | | 69 | | | 5 | | | 3,603 | | Non-interest income | | | 615 | | | | 74 | | | | 364 | | | | 56 | | | | 1,109 | | | Total operating income | | | 3,917 | | | | 469 | | | | 438 | | | | 88 | | | | 4,912 | | | Operating expenses before impairment losses, provisions and charges | | | (1,871 | ) | | | (223 | ) | | | (304 | ) | | | (101 | ) | | | (2,499 | ) | | Impairment (losses)/releases on loans and advances | | | (36 | ) | | | (13 | ) | | | (174 | ) | | | 20 | | | | (203 | ) | | Non-interest income/(expense) | | | 638 | | | 82 | | | 272 | | | (61 | ) | | 931 | | Total operating income/(expense) | | | 3,764 | | | 485 | | | 341 | | | (56 | ) | | 4,534 | | | Operating expenses before credit impairment losses, provisions and charges | | | (1,929 | ) | | (258 | ) | | (262 | ) | | (130 | ) | | (2,579 | ) | Credit impairment (losses)/releases | | | (124 | ) | | (23 | ) | | (14 | ) | | 8 | | | (153 | ) | Provisions for other liabilities and charges | | | (342 | ) | | | (55 | ) | | | (11 | ) | | | 15 | | | | (393 | ) | | (230 | ) | | (14 | ) | | (8 | ) | | (5 | ) | | (257 | ) | Total operating impairment losses, provisions and (charges)/releases | | | (378 | ) | | | (68 | ) | | | (185 | ) | | | 35 | | | | (596 | ) | | | Total operating credit impairment losses, provisions and (charges)/releases(1) | | | (354 | ) | | (37 | ) | | (22 | ) | | 3 | | | (410 | ) | Profit/(loss) before tax | | | 1,668 | | | | 178 | | | | (51 | ) | | | 22 | | | | 1,817 | | | 1,481 | | | 190 | | | 57 | | | (183 | ) | | 1,545 | | | Revenue from external customers | | | 4,505 | | | | 631 | | | | 506 | | | | (730 | ) | | | 4,912 | | | 4,421 | | | 638 | | | 386 | | | (911 | ) | | 4,534 | | Inter-segment revenue | | | (588 | ) | | | (162 | ) | | | (68 | ) | | | 818 | | | | – | | | (657 | ) | | (153 | ) | | (45 | ) | | 855 | | | | – | | Total operating income | | | 3,917 | | | | 469 | | | | 438 | | | | 88 | | | | 4,912 | | | Total operating income/(expense) | | | 3,764 | | | 485 | | | 341 | | | (56 | ) | | 4,534 | | | | Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | | | | | | | | | | | | – Current account and debit card fees | | | 697 | | | 27 | | | 29 | | | | – | | | 753 | | – Insurance, protection and investments | | | 105 | | | | – | | | | – | | | | – | | | 105 | | – Credit cards | | | 85 | | | | – | | | | – | | | | – | | | 85 | | –Non-banking and other fees(3) | | | 75 | | | 62 | | | 87 | | | 3 | | | 227 | | Total fee and commission income | | | 962 | | | 89 | | | 116 | | | 3 | | | 1,170 | | Fee and commission expense | | | (382 | ) | | (25 | ) | | (14 | ) | | | – | | | (421 | ) | Net fee and commission income | | | 580 | | | 64 | | | 102 | | | 3 | | | 749 | | | Customer loans | | | 168,991 | | | | 19,391 | | | | 6,037 | | | | 5,905 | | | | 200,324 | | | 172,747 | | | 17,702 | | | 4,613 | | | 4,524 | | | 199,586 | | Total assets(1) | | | 174,524 | | | | 19,391 | | | | 51,078 | | | | 69,772 | | | | 314,765 | | | Total assets(4) | | | 201,261 | | | 17,702 | | | 27,569 | | | 36,840 | | | 283,372 | | Customer deposits | | | 149,315 | | | | 18,697 | | | | 4,546 | | | | 3,363 | | | | 175,921 | | | 142,065 | | | 17,606 | | | 4,853 | | | 2,791 | | | 167,315 | | Total liabilities | | | 150,847 | | | | 18,697 | | | | 45,603 | | | | 83,413 | | | | 298,560 | | | 142,839 | | | 17,634 | | | 8,480 | | | 98,510 | | | 267,463 | | | Average number of staff | | | 20,694 | | | 1,732 | | | 1,108 | | | 111 | | | 23,645 | |
| (1) | Credit impairment losses for 2018 are calculated on an IFRS 9 basis and for 2017 and earlier on an IAS 39 basis. For more on this methodology change, see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 44. |
| (2) | The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments. |
| (3) | Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance. |
| (4) | Includes customer loans, net of credit impairment loss allowances. |
| | | | Annual Report 2018 | Financial statements | | |
| | | | | | | | | | | | | | | | | | | | | | 2017 | | Retail
Banking(5)
£m | | | Corporate &
Commercial
Banking £m | | | Corporate &
Investment
Banking £m | | | Corporate
Centre(5)
£m | | | Total
£m | | Net interest income | | | 3,270 | | | | 391 | | | | 74 | | | | 68 | | | | 3,803 | | Non-interest income | | | 615 | | | | 74 | | | | 364 | | | | 56 | | | | 1,109 | | Total operating income | | | 3,885 | | | | 465 | | | | 438 | | | | 124 | | | | 4,912 | | | Operating expenses before credit impairment losses, provisions and charges | | | (1,856 | ) | | | (223 | ) | | | (304 | ) | | | (116 | ) | | | (2,499 | ) | Credit impairment (losses)/releases(1) | | | (36 | ) | | | (13 | ) | | | (174 | ) | | | 20 | | | | (203 | ) | Provisions for other liabilities and charges | | | (342 | ) | | | (55 | ) | | | (11 | ) | | | 15 | | | | (393 | ) | | Total operating credit impairment losses, provisions and (charges)/releases | | | (378 | ) | | | (68 | ) | | | (185 | ) | | | 35 | | | | (596 | ) | Profit/(loss) before tax | | | 1,651 | | | | 174 | | | | (51 | ) | | | 43 | | | | 1,817 | | Revenue from external customers | | | 4,534 | | | | 639 | | | | 506 | | | | (767 | ) | | | 4,912 | | Inter-segment revenue | | | (649 | ) | | | (174 | ) | | | (68 | ) | | | 891 | | | | – | | Total operating income | | | 3,885 | | | | 465 | | | | 438 | | | | 124 | | | | 4,912 | | Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | | | | | | | | | | | | | | | | | | | | | – Current account and debit card fees | | | 737 | | | | 27 | | | | 27 | | | | – | | | | 791 | | – Insurance, protection and investments | | | 100 | | | | – | | | | – | | | | – | | | | 100 | | – Credit cards | | | 92 | | | | – | | | | – | | | | – | | | | 92 | | –Non-banking and other fees(3) | | | 45 | | | | 63 | | | | 123 | | | | 8 | | | | 239 | | Total fee and commission income | | | 974 | | | | 90 | | | | 150 | | | | 8 | | | | 1,222 | | Fee and commission expense | | | (367 | ) | | | (31 | ) | | | (17 | ) | | | – | | | | (415 | ) | Net fee and commission income | | | 607 | | | | 59 | | | | 133 | | | | 8 | | | | 807 | | Customer loans | | | 168,729 | | | | 19,391 | | | | 6,037 | | | | 6,167 | | | | 200,324 | | Total assets(4) | | | 174,524 | | | | 19,391 | | | | 51,078 | | | | 69,772 | | | | 314,765 | | Customer deposits | | | 143,834 | | | | 17,760 | | | | 4,546 | | | | 9,781 | | | | 175,921 | | Total liabilities | | | 150,847 | | | | 18,697 | | | | 45,603 | | | | 83,413 | | | | 298,560 | | | | | | | | Average number of staff | | | 17,194 | | | | 1,240 | | | | 1,006 | | | | 119 | | | | 19,559 | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 3,117 | | | | 380 | | | | 73 | | | | 12 | | | | 3,582 | | Non-interest income | | | 559 | | | | 76 | | | | 312 | | | | 266 | | | | 1,213 | | Total operating income | | | 3,676 | | | | 456 | | | | 385 | | | | 278 | | | | 4,795 | | | Operating expenses before credit impairment losses, provisions and charges | | | (1,785 | ) | | | (215 | ) | | | (281 | ) | | | (133 | ) | | | (2,414 | ) | Credit impairment (losses)/releases(1) | | | (21 | ) | | | (29 | ) | | | (21 | ) | | | 4 | | | | (67 | ) | Provisions for other liabilities and charges | | | (338 | ) | | | (26 | ) | | | (11 | ) | | | (22 | ) | | | (397 | ) | Total operating credit impairment losses, provisions and charges | | | (359 | ) | | | (55 | ) | | | (32 | ) | | | (18 | ) | | | (464 | ) | Profit before tax | | | 1,532 | | | | 186 | | | | 72 | | | | 127 | | | | 1,917 | | | | | | | | Revenue from external customers | | | 4,387 | | | | 651 | | | | 474 | | | | (717 | ) | | | 4,795 | | Inter-segment revenue | | | (711 | ) | | | (195 | ) | | | (89 | ) | | | 995 | | | | – | | Total operating income | | | 3,676 | | | | 456 | | | | 385 | | | | 278 | | | | 4,795 | | | | | | | | | Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | | | | | | | | | | | | | | | | | | | | | – Current account and debit card fees | | | 697 | | | | 27 | | | | 23 | | | | – | | | | 747 | | – Insurance, protection and investments | | | 94 | | | | – | | | | – | | | | – | | | | 94 | | – Credit cards | | | 95 | | | | – | | | | – | | | | – | | | | 95 | | –Non-banking and other fees(3) | | | 53 | | | | 57 | | | | 132 | | | | 10 | | | | 252 | | Total fee and commission income | | | 939 | | | | 84 | | | | 155 | | | | 10 | | | | 1,188 | | Fee and commission expense | | | (369 | ) | | | (31 | ) | | | (17 | ) | | | (1 | ) | | | (418 | ) | Net fee and commission income | | | 570 | | | | 53 | | | | 138 | | | | 9 | | | | 770 | | | | | | | | Customer loans | | | 168,389 | | | | 19,382 | | | | 5,659 | | | | 6,726 | | | | 200,156 | | Total assets(4) | | | 175,100 | | | | 19,381 | | | | 39,777 | | | | 68,253 | | | | 302,511 | | Customer deposits | | | 143,996 | | | | 16,082 | | | | 4,054 | | | | 8,219 | | | | 172,351 | | Total liabilities | | | 149,793 | | | | 17,203 | | | | 36,506 | | | | 83,556 | | | | 287,058 | | | | | | | | Average number of staff | | | 17,424 | | | | 1,435 | | | | 916 | | | | 88 | | | | 19,863 | |
| (1) | Credit impairment losses for 2018 are calculated on an IFRS 9 basis and for 2017 and earlier on an IAS 39 basis. For more on this methodology change, see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 44. |
| (2) | The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments. |
| (3) | Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance. |
| (4) | Includes customer loans, net of credit impairment loss allowances. |
| (5) | There-segmentation to report our Jersey and Isle of Man branches in Corporate Centre, rather than in Retail Banking, has resulted in profit before tax of £21m beingre-presented in Corporate Centre in 2017 (2016: £15m), as well as customer loans of £262m (2016: £248m) and customer deposits of £6,418m (2016: £5,188m). |
| | | | | > Notes to the financial statements |
| | | | | | | | | | | | | | | | | | | | | | 2016 | | Retail
Banking(2)
£m | | | Commercial
Banking £m | | | Global
Corporate
Banking
£m | | | Corporate
Centre
£m | | | Total
£m | | Net interest income/(expense) | | | 3,140 | | | | 383 | | | | 73 | | | | (14 | ) | | | 3,582 | | Non-interest income | | | 562 | | | | 76 | | | | 312 | | | | 263 | | | | 1,213 | | Total operating income | | | 3,702 | | | | 459 | | | | 385 | | | | 249 | | | | 4,795 | | | Operating expenses before impairment losses, provisions and charges | | | (1,800 | ) | | | (215 | ) | | | (280 | ) | | | (119 | ) | | | (2,414 | ) | Impairment (losses)/releases on loans and advances | | | (20 | ) | | | (29 | ) | | | (21 | ) | | | 3 | | | | (67 | ) | Provisions for other liabilities and charges | | | (338 | ) | | | (26 | ) | | | (12 | ) | | | (21 | ) | | | (397 | ) | Total operating impairment losses, provisions and charges | | | (358 | ) | | | (55 | ) | | | (33 | ) | | | (18 | ) | | | (464 | ) | Profit before tax | | | 1,544 | | | | 189 | | | | 72 | | | | 112 | | | | 1,917 | | | | | | | | Revenue from external customers | | | 4,369 | | | | 644 | | | | 466 | | | | (684 | ) | | | 4,795 | | Inter-segment revenue | | | (667 | ) | | | (185 | ) | | | (81 | ) | | | 933 | | | | – | | Total operating income | | | 3,702 | | | | 459 | | | | 385 | | | | 249 | | | | 4,795 | | | | | | | | Customer loans | | | 168,638 | | | | 19,381 | | | | 5,659 | | | | 6,478 | | | | 200,156 | | Total assets(1) | | | 175,100 | | | | 19,381 | | | | 39,777 | | | | 68,253 | | | | 302,511 | | Customer deposits | | | 148,063 | | | | 17,203 | | | | 4,054 | | | | 3,031 | | | | 172,351 | | Total liabilities | | | 149,793 | | | | 17,203 | | | | 36,506 | | | | 83,556 | | | | 287,058 | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 3,097 | | | | 399 | | | | 52 | | | | 27 | | | | 3,575 | | Non-interest income | | | 526 | | | | 91 | | | | 303 | | | | 78 | | | | 998 | | Total operating income | | | 3,623 | | | | 490 | | | | 355 | | | | 105 | | | | 4,573 | | | Operating expenses before impairment losses, provisions and (charges)/releases | | | (1,898 | ) | | | (217 | ) | | | (287 | ) | | | 2 | | | | (2,400 | ) | Impairment (losses)/releases on loans and advances | | | (90 | ) | | | (25 | ) | | | 13 | | | | 36 | | | | (66 | ) | Provisions for other liabilities and (charges)/releases | | | (728 | ) | | | (23 | ) | | | (14 | ) | | | 3 | | | | (762 | ) | | Total operating impairment losses, provisions and (charges)/releases | | | (818 | ) | | | (48 | ) | | | (1 | ) | | | 39 | | | | (828 | ) | Profit before tax | | | 907 | | | | 225 | | | | 67 | | | | 146 | | | | 1,345 | | | | | | | | Revenue/(charges) from external customers | | | 4,529 | | | | 626 | | | | 437 | | | | (1,019 | ) | | | 4,573 | | Inter-segment revenue | | | (906 | ) | | | (136 | ) | | | (82 | ) | | | 1,124 | | | | – | | Total operating income | | | 3,623 | | | | 490 | | | | 355 | | | | 105 | | | | 4,573 | | | | | | | | Customer loans | | | 167,093 | | | | 18,680 | | | | 5,470 | | | | 7,391 | | | | 198,634 | | Total assets(1) | | | 173,479 | | | | 18,680 | | | | 36,593 | | | | 52,023 | | | | 280,775 | | Customer deposits | | | 140,358 | | | | 15,076 | | | | 3,013 | | | | 3,808 | | | | 162,255 | | Total liabilities | | | 143,157 | | | | 15,076 | | | | 32,290 | | | | 75,224 | | | | 265,747 | |
(1) | Includes customer loans, net of impairment loss allowances. |
(2) | Restated to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1. |
3. NET INTEREST INCOME | | | | | | | | | | | | | | | | | | | | | | Group | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Interest and similar income: | | | | | | | | | | | | | Loans and advances to customers | | | | 5,458 | | | | 5,494 | | | | 6,198 | | Loans and advances to banks | | | 184 | | | | 127 | | | | 115 | | | | 202 | | | | 164 | | | | 112 | | Loans and advances to customers | | | 5,494 | | | | 6,198 | | | | 6,491 | | | Reverse repurchase agreements – non trading | | | | 124 | | | | 20 | | | | 15 | | Other | | | 227 | | | | 142 | | | | 89 | | | | 282 | | | | 227 | | | | 142 | | Total interest and similar income | | | 5,905 | | | | 6,467 | | | | 6,695 | | | Total interest and similar income(1) | | | | 6,066 | | | | 5,905 | | | | 6,467 | | Interest expense and similar charges: | | | | | | | | | | | | | Deposits by customers | | | | (1,433 | ) | | | (1,330 | ) | | | (1,891 | ) | Deposits by banks | | | (46 | ) | | | (56 | ) | | | (63 | ) | | | (117 | ) | | | (35 | ) | | | (18 | ) | Deposits by customers | | | (1,330 | ) | | | (1,891 | ) | | | (1,979 | ) | | Repurchase agreements – non trading | | | | (42 | ) | | | (5 | ) | | | (38 | ) | Debt securities in issue | | | (590 | ) | | | (771 | ) | | | (926 | ) | | | (721 | ) | | | (590 | ) | | | (771 | ) | Subordinated liabilities | | | (134 | ) | | | (143 | ) | | | (138 | ) | | | (142 | ) | | | (134 | ) | | | (143 | ) | Other | | | (2 | ) | | | (24 | ) | | | (14 | ) | | | (8 | ) | | | (8 | ) | | | (24 | ) | Total interest expense and similar charges | | | (2,102 | ) | | | (2,885 | ) | | | (3,120 | ) | | Total interest expense and similar charges(2) | | | | (2,463 | ) | | | (2,102 | ) | | | (2,885 | ) | Net interest income | | | 3,803 | | | | 3,582 | | | | 3,575 | | | | 3,603 | | | | 3,803 | | | | 3,582 | |
Interest
| (1) | This includes £209m of interest income on financial assets at fair value through other comprehensive income. |
| (2) | This includes £298m of interest expense on financial assets at fair value through other comprehensive income. |
In 2017, interest and similar income includesincluded £66m (2016: £79m, 2015: £81m)£79m) on impaired loans.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
4. NET FEE AND COMMISSION INCOME | | | | | | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Fee and commission income: | | | | | | | | | | | | | Retail and corporate products | | | 1,167 | | | | 1,123 | | | | 1,043 | | Insurance products | | | 55 | | | | 65 | | | | 72 | | Total fee and commission income | | | 1,222 | | | | 1,188 | | | | 1,115 | | Fee and commission expense: | | | | | | | | | | | | | Retail and corporate products | | | (406 | ) | | | (408 | ) | | | (392 | ) | Other | | | (9 | ) | | | (10 | ) | | | (8 | ) | Total fee and commission expense | | | (415 | ) | | | (418 | ) | | | (400 | ) | Net fee and commission income | | | 807 | | | | 770 | | | | 715 | |
| | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Fee and commission income: | | | | | | | | | | | | | Current account and debit card fees | | | 753 | | | | 791 | | | | 747 | | Insurance, protection and investments | | | 105 | | | | 100 | | | | 94 | | Credit cards | | | 85 | | | | 92 | | | | 95 | | Non-banking and other fees(1) | | | 227 | | | | 239 | | | | 252 | | Total fee and commission income | | | 1,170 | | | | 1,222 | | | | 1,188 | | Total fee and commission expense | | | (421 | ) | | | (415 | ) | | | (418 | ) | Net fee and commission income | | | 749 | | | | 807 | | | | 770 | |
| (1) | | Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance. |
5. NET TRADING AND OTHER INCOME | | | | | | | | | | | | | | | | | | | | | | Group | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Net trading and funding of other items by the trading book | | | 205 | | | | 75 | | | | 252 | | | | 245 | | | | 205 | | | | 75 | | Net income from operating lease assets | | | 44 | | | | 35 | | | | 46 | | | Net gains on assets designated at fair value through profit or loss | | | 80 | | | | 253 | | | | 33 | | | Net (losses)/gains on liabilities designated at fair value through profit or loss | | | (97 | ) | | | 28 | | | | (65 | ) | | Net (losses)/gains on derivatives managed with assets/liabilities held at fair value through profit or loss | | | (17 | ) | | | (135 | ) | | | 26 | | | Net (losses)/gains on other financial assets at fair value through profit or loss | | | | (6 | ) | | | 80 | | | | 253 | | Net (losses)/gains on other financial liabilities at fair value through profit or loss | | | | (44 | ) | | | (97 | ) | | | 28 | | Net losses on derivatives managed with assets/liabilities held at fair value through profit or loss | | | | (128 | ) | | | (17 | ) | | | (135 | ) | Hedge ineffectiveness | | | 5 | | | | 28 | | | | (20 | ) | | | 34 | | | | 5 | | | | 28 | | Net profit on sale of available-for-sale assets | | | 54 | | | | 115 | | | | – | | | | | | 54 | | | | 115 | | Net profit on sale of financial assets at fair value through other comprehensive income | | | | 19 | | | | | | Net income from operating lease assets | | | | 86 | | | | 44 | | | | 35 | | Other | | | 28 | | | | 44 | | | | 11 | | | | (24 | ) | | | 28 | | | | 44 | | | | | | 302 | | | | 443 | | | | 283 | | | | 182 | | | | 302 | | | | 443 | |
‘Net trading and funding of other items by the trading book’ includes fair value gains of £22m (2017: losses of £27m, (2016: £50m, 2015: £5m)2016: losses of £50m) on embedded derivatives bifurcated from certain equity index-linked deposits, as described in the 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 losses of £21m (2017: gains of £28m, (2016: £51m, 2015: £7m)2016: gains of £51m). As a result, the net fair value movements recognised on the equity index-linked deposits and the related economic hedges were net gains of £1m (2016:(2017: £1m, 2015: £2m)2016: £1m). In 2017, ‘Net profit on sale ofavailable-for-sale assets’ includesincluded a gain of £48m in respect of the sale of Vocalink shares. In 2016, ‘Net profit on sale ofavailable-for-sale assets’ included the gain of £119m in respect of the sale of Visa shares.
| | | | Annual Report 2018 | Financial statements | | |
In November 2018, pursuant to a Partnership Special Redemption Event, the Abbey National Capital Trust I 8.963%Non-cumulative Trust Preferred Securities were fully redeemed. In September 2017, as part of a capital management exercise, we purchased 91% of the 7.375% 20 YearStep-up perpetual callable subordinated notes.notes were purchased and redeemed. In May 2016, as part of a liability management exercise, certain debt instruments were purchased pursuant to a tender offer. These had no significant impact on the income statement. Exchange rate differences recognised in the Consolidated Income Statement on items not at fair value through profit or loss were £689m expense (2017: £109m expense, (2016:2016: £4,051m expense, 2015: £477m income)expense) and are presented in the line ‘Net trading and funding of other items by the trading book.’ These are principally offset by related releases from the cash flow hedge reserve of £752m income (2017: £94m income, (2016:2016: £4,076m income, 2015: £305m expense)income) as set out in the Consolidated Statement of Comprehensive Income, which are also presented in ‘Net trading and funding of other items by the trading book’. Exchange rate differences on items measured at fair value through profit or loss are included in the line items relating to changes in fair value. 6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES | | | | | | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Staff costs: | | | | | | | | | | | | | Wages and salaries | | | 743 | | | | 728 | | | | 723 | | Performance-related payments | | | 157 | | | | 157 | | | | 163 | | Social security costs | | | 93 | | | | 94 | | | | 92 | | Pensions costs – defined contribution plans | | | 54 | | | | 52 | | | | 50 | | – defined benefit plans | | | 32 | | | | 26 | | | | 29 | | Other share-based payments | | | 10 | | | | 3 | | | | (5 | ) | Other personnel costs | | | 45 | | | | 62 | | | | 63 | | | | | 1,134 | | | | 1,122 | | | | 1,115 | | Other administration expenses | | | 1,011 | | | | 970 | | | | 990 | | Depreciation, amortisation and impairment | | | 354 | | | | 322 | | | | 295 | | | | | | 2,499 | | | | 2,414 | | | | 2,400 | |
| | | | | > Notes to the financial statements |
| | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | �� | 2017
£m | | | 2016
£m | | Staff costs: | | | | | | | | | | | | | Wages and salaries | | | 898 | | | | 743 | | | | 728 | | Performance-related payments | | | 159 | | | | 157 | | | | 157 | | Social security costs | | | 111 | | | | 93 | | | | 94 | | Pensions costs – defined contribution plans | | | 67 | | | | 54 | | | | 52 | | – defined benefit plans | | | 79 | | | | 32 | | | | 26 | | Other share-based payments | | | 3 | | | | 10 | | | | 3 | | Other personnel costs | | | 52 | | | | 45 | | | | 62 | | | | | 1,369 | | | | 1,134 | | | | 1,122 | | Other administration expenses | | | 835 | | | | 1,011 | | | | 970 | | Depreciation, amortisation and impairment | | | 375 | | | | 354 | | | | 322 | | | | | | 2,579 | | | | 2,499 | | | | 2,414 | |
Staff costs ‘Performance-related’Performance-related payments’ include bonuses paid in the form of cash and share awards granted under the Long-Term Incentive Plan.Plan, as described in Note 38. Included in this are the Santander UK group’s equity-settled share-based payments, none of which related to option-based schemes. These are disclosed in the table below as ‘Shares award’‘Share awards’. ‘OtherPerformance-related payments above include amounts related to deferred performance awards as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Costs recognised in 2018 | | | Costs expected to be recognised in 2019 or later | | | | Arising from awards in current year £m | | | Arising from awards in prior year £m | | Total £m | | | Arising from awards in current year £m | | Arising from awards in prior year £m | | | Total £m | | Cash | | | 4 | | | | 8 | | | | 12 | | | | 10 | | | | 10 | | | | 20 | | Shares | | | 3 | | | | 10 | | | | 13 | | | | 8 | | | | 9 | | | | 17 | | | | | | 7 | | | | 18 | | | | 25 | | | | 18 | | | | 19 | | | | 37 | | The following table shows the amount of bonus awarded to employees for the performance year 2018. 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 | | | | | 2018 £m | | | 2017 £m | | 2018 £m | | | 2017 £m | | 2018 £m | | | 2017 £m | | Cash award – not deferred | | | 123 | | | | 116 | | | | – | | | | – | | | | 123 | | | | 116 | | – deferred | | | 12 | | | | 13 | | | | 20 | | | | 17 | | | | 32 | | | | 30 | | Share awards – not deferred | | | 11 | | | | 12 | | | | – | | | | – | | | | 11 | | | | 12 | | – deferred | | | 13 | | | | 16 | | | | 17 | | | | 18 | | | | 30 | | | | 34 | | Total discretionary bonus | | | 159 | | | | 157 | | | | 37 | | | | 35 | | | | 196 | | | | 192 | |
On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to guaranteed minimum pension (GMP), and concluded on the methods that were appropriate. The estimated increase in liabilities at the date of the judgement was £40m and is based on a number of assumptions and the actual impact may be different. This has been reflected in ‘Pensions costs – defined benefit plans’ and in the closing net accounting surplus of the Santander (UK) Group Pension Scheme. ‘Other share-based payments’ consist of options granted under the Employee Sharesave scheme which comprise the Santander UK group’s cash-settled share-based payments. Further details can be found inFor more, see Note 34. Performance-related payments above include amounts related to deferred performance awards as follows:38. | | | | | | | | | | | | | | | | | | Costs recognised in 2017 | | | | Costs expected to be recognised in 2018 or later | | | | Arising from
awards in
current year £m | | Arising from
awards in
prior year £m | | Total £m | | | | Arising from
awards in
current year £m | | Arising from
awards in
prior year £m | | Total £m | Cash | | 5 | | 8 | | 13 | | | | 10 | | 7 | | 17 | Shares | | 3 | | 13 | | 16 | | | | 8 | | 10 | | 18 | | | | 8 | | 21 | | 29 | | | | 18 | | 17 | | 35 |
The following table shows the amount of bonus awarded to employees for the performance year 2017. 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 | | | | | 2017 £m | | | 2016 £m | | | | | | 2017 £m | | | 2016 £m | | | | | | 2017 £m | | | 2016 £m | | Cash award – not deferred | | | 116 | | | | 118 | | | | | | | | – | | | | – | | | | | | | | 116 | | | | 118 | | – deferred | | | 13 | | | | 15 | | | | | | | | 17 | | | | 18 | | | | | | | | 30 | | | | 33 | | Shares award – not deferred | | | 12 | | | | 11 | | | | | | | | – | | | | – | | | | | | | | 12 | | | | 11 | | – deferred | | | 16 | | | | 13 | | | | | | | | 18 | | | | 14 | | | | | | | | 34 | | | | 27 | | Total discretionary bonus | | | 157 | | | | 157 | | | | | | | | 35 | | | | 32 | | | | | | | | 192 | | | | 189 | |
The average number of full-time equivalent staff was 23,645 (2017: 19,559, (2016: 19,863, 2015: 20,405)2016: 19,863). For the Company, the average number of full-time equivalent staff was 22,745 (2017: 17,759). The increase in staff numbers in 2018 reflected Santander UK plc’s acquisition of Santander Services on 1 January 2018. Following the acquisition, the costs relating to the staff associated with these businesses are now recognised as staff costs. In 2017 and earlier years, the equivalent costs were included in other administrative expenses. For more details, see Note 21. Depreciation, amortisation and impairment No impairments were charged in 2018. In 2017, an impairment charge of £32m was recognised that primarily related to capitalised software costs for a credit risk management system, part of which was no longer in use. In 2016, an impairment charge of £45m was recognised that primarily related to a multi-entity banking platform developed for our non-ring-fenced bank under the original ring-fencing structure.
| | | | | > Notes to the financial statements |
7. AUDIT AND OTHER SERVICES | | | | | | | | | | | | | | | | | | | | | | Group | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Audit fees: | | | | | | | | | | | | | | Fees payable to the Company’s auditor(1) and its associates for the audit of the Santander UK group’s annual accounts | | | 7.4 | | | | 4.6 | | | | 3.6 | | | | Fees payable to the Company’s auditor(1) and its associates for other services to the Santander UK group: | | | | | | | | | Fees payable to the Company’s auditor and its associates for the audit of the Santander UK group’s annual accounts | | | | 7.2 | | | | 7.4 | | | | 4.6 | | | Fees payable to the Company’s auditor and its associates for other services to the Santander UK group: | | | | | | | | – Audit of the Santander UK group’s subsidiaries | | | 1.4 | | | | 1.1 | | | | 1.8 | | | | 1.1 | | | | 1.4 | | | | 1.1 | | Total audit fees(2)(1) | | | 8.8 | | | | 5.7 | | | | 5.4 | | | | 8.3 | | | | 8.8 | | | | 5.7 | | Non-audit fees: | | | | | | | | | | | | | Audit-related assurance services(3)(2) | | | 0.7 | | | | 0.6 | | | | 2.7 | | | | 0.7 | | | | 0.7 | | | | 0.6 | | Taxation compliance services | | | – | | | | 0.1 | | | | 0.2 | | | | – | | | | – | | | | 0.1 | | Other assurance services | | | 0.1 | | | | – | | | | – | | | | 0.1 | | | | 0.1 | | | | – | | Other non-audit services | | | 0.4 | | | | 1.9 | | | | 1.7 | | | | 1.0 | | | | 0.4 | | | | 1.9 | | Total non-audit fees | | | 1.2 | | | | 2.6 | | | | 4.6 | | | | 1.8 | | | | 1.2 | | | | 2.6 | |
| (1) | PricewaterhouseCoopers LLP became the Santander UK group’s principal auditor in 2016. Deloitte LLP was the principal auditor during 2015. Excluded from 2016 fees are amounts of £0.2m payable to Deloitte LLP in relation to the 2015 statutory audit. |
(2) | The 20172018 audit fees included £0.6m (2016: £nil)£nil (2017: £0.6m) which related to the prior year. |
(3)(2) | The 20172018 audit-related assurance services included £0.1m (2016: £nil)(2017: £0.1m) which related to the prior year. |
Total audit fees of £8.8m include fees of £1.6m in respect of the audit of the application of IFRS 9. Audit-related assurance services relate to services performed in connection with the statutory and regulatory filings of the Company and its associates. Of this category, £0.1 m (2016: £0.1m 2015: £1.2m)(2017: £0.1m, 2016: £0.1m) accords with the definition of ‘Audit fees’ per US Securities and Exchange Commission (SEC) guidance. The remaining £0.6m (2016: £0.5 m, 2015: £1.5m)(2017: £0.6m, 2016: £0.5m) accords with the definition of ‘Audit-related fees’ per that guidance and relates to services performed in connection with securitisation, debt issuance and related work and reporting to prudential and conduct regulators which is in accordance with the definition ‘Audit-related fees’ per SEC guidance. regulators.
Taxation compliance services accord with the SEC definition of ‘Tax fees’ and relate to compliance services performed in respect of US Taxtax returns and other similar tax compliance services. Other assurance services and othernon-audit services accord with the SEC definition of ‘All other fees’. In 2017 and 2016 these included services performed in respect of the Global Corporate Banking remediation programme. 2015 included services provided by the predecessor auditor in respect of Santander UK’s preparation for MiFiD II and IFRS 9 Implementation. In 20172018, the Company’s auditors also earned fees of £45,000 (2016: £893,000)£150,000 (2017: £45,000) payable by entities outside the Santander UK group for the review of the financial position of corporate and other borrowers. 8. CREDIT IMPAIRMENT LOSSES AND PROVISIONS | | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Credit impairment losses: | | | | | | | | | | | | | Loans and advances to customers (See Note 14) | | | 189 | | | | 257 | | | | 132 | | Recoveries of loans and advances, net of collection costs (See Note 14) | | | (42 | ) | | | (54 | ) | | | (65 | ) | Off-balance sheet exposures (See Note 30) | | | 6 | | | | | | | | | | | | | | 153 | | | | 203 | | | | 67 | | Provisions for other liabilities and charges (excludingoff-balance sheet credit exposures) (See Note 30) | | | 257 | | | | 385 | | | | 397 | | Provisions for RV and voluntary termination (See Note 14) | | | – | | | | 8 | | | | – | | | | | | 257 | | | | 393 | | | | 397 | | | | | | 410 | | | | 596 | | | | 464 | |
The credit impairment loss allowance requirements introduced by IFRS 9 mandated a change from recognising impairment losses on an incurred loss basis (as reflected in 2017) to an expected credit loss (ECL) basis (as reflected in 2018). For more on this change in methodology, see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition disclosures in Note 44. There were no material credit impairment losses on loans and advances to banks,non-trading reverse repurchase agreements, other financial assets at amortised cost and financial assets at fair value through other comprehensive income.
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
8. IMPAIRMENT LOSSES AND PROVISIONS
| | | | | | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Impairment losses on loans and advances: | | | | | | | | | | | | | Loans and advances to customers (See Note 15) | | | 257 | | | | 132 | | | | 156 | | Recoveries of loans and advances, net of collection costs (See Note 15) | | | (54 | ) | | | (65 | ) | | | (90 | ) | | | | | 203 | | | | 67 | | | | 66 | | Provisions for other liabilities and charges (See Note 27) | | | 385 | | | | 397 | | | | 762 | | Provisions for residual value and voluntary termination (See Note 15) | | | 8 | | | | – | | | | – | | | | | | 393 | | | | 397 | | | | 762 | | | | | | 596 | | | | 464 | | | | 828 | |
There were no impairment losses on loans and advances to banks and financial investments.
Impairment losses on loans and advances increased by £136m to £203m (2016: £67m) primarily due to Carillion plc exposures.
9. TAXATION | | | | | | | | | | | | | | | | | | | | | | Group | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Current tax: | | | | | | | | | | | | | UK corporation tax on profit for the year | | | 556 | | | | 611 | | | | 346 | | | | 450 | | | | 556 | | | | 611 | | Adjustments in respect of prior years | | | (27 | ) | | | (13 | ) | | | (16 | ) | | | (20 | ) | | | (27 | ) | | | (13 | ) | Total current tax | | | 529 | | | | 598 | | | | 330 | | | | 430 | | | | 529 | | | | 598 | | Deferred tax: | | | | | | | | | | | | | Charge/(credit) for the year | | | 23 | | | | (11 | ) | | | 54 | | | | 16 | | | | 23 | | | | (11 | ) | Adjustments in respect of prior years | | | 9 | | | | 11 | | | | (3 | ) | | | (5 | ) | | | 9 | | | | 11 | | Total deferred tax | | | 32 | | | | – | | | | 51 | | | | 11 | | | | 32 | | | | – | | Tax on profit | | | 561 | | | | 598 | | | | 381 | | | | 441 | | | | 561 | | | | 598 | |
The standard rate of UK corporation tax was 27% for banking entities and 19% fornon-banking entities (2017: 27.25% for banking entities and 19.25% fornon-banking entities (2016: 28.00% for banking entities and 20.00% for non-banking entities) following the introduction of an 8% surcharge to be applied to banking companies from 1 January 2016. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. The Finance (No.2) Act 2015 introduced reductions in the corporation tax rate from 20% to 19% in 2017 and 18% by 2020. The Finance Act 2016, which was substantively enacted on 6 September 2016, introduced a further reduction in the standard rate of corporation tax rate to 17% from 2020. The effects of the changes in tax rates are included in the deferred tax balances at both 31 December 20172018 and 2016.2017. The Santander UK group’s effective tax rate for 2017,2018, based on profit before tax, was 28.5% (2017: 30.9% (2016: 31.2%, 2015: 28.3%2016: 31.2%). 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 | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Profit before tax | | | 1,817 | | | | 1,917 | | | | 1,345 | | | | 1,545 | | | | 1,817 | | | | 1,917 | | Tax calculated at a tax rate of 19.25% (2016: 20.00%, 2015: 20.25%) | | | 350 | | | | 384 | | | | 272 | | | Tax calculated at a tax rate of 19% (2017: 19.25%, 2016: 20.00%) | | | | 294 | | | | 350 | | | | 384 | | Bank surcharge on profits | | | 132 | | | | 134 | | | | – | | | | 109 | | | | 132 | | | | 134 | | Non-deductible preference dividends paid | | | 9 | | | | 8 | | | | 6 | | | | 8 | | | | 9 | | | | 8 | | Non-deductible UK Bank Levy | | | 25 | | | | 30 | | | | 20 | | | | 20 | | | | 25 | | | | 30 | | Non-deductible conduct remediation | | | 35 | | | | 39 | | | | 90 | | | Other non-equalised items | | | 30 | | | | 8 | | | | 8 | | | Effect of non-UK profits and losses | | | – | | | | (1 | ) | | | (1 | ) | | Utilisation of capital losses for which credit was not previously recognised | | | – | | | | – | | | | (4 | ) | | Non-deductible conduct remediation, fines and penalties | | | | 6 | | | | 35 | | | | 39 | | Othernon-deductible costs andnon-taxable income | | | | 30 | | | | 30 | | | | 7 | | Effect of change in tax rate on deferred tax provision | | | (2 | ) | | | (2 | ) | | | 9 | | | | (1 | ) | | | (2 | ) | | | (2 | ) | Adjustment to prior year provisions | | | (18 | ) | | | (2 | ) | | | (19 | ) | | | (25 | ) | | | (18 | ) | | | (2 | ) | Tax charge | | | 561 | | | | 598 | | | | 381 | | | | 441 | | | | 561 | | | | 598 | |
The decrease in effective tax rate from 20162017 to 2017 is2018 was largely due to the reduction in the statutory tax rate, reductions in the bank levy, the reduced impact ofnon-deductible conduct remediation, fines and penalties and also the effect of releases in accruals for prior periods offset by the impact of non-deductible conduct remediation in 2017.periods. It is anticipated that the Santander UK group’s effective tax rate in future periods will continue to be impacted by the 8% surcharge, the level of anynon-deductible conduct remediation, fines and penalties, changes to the cost of the Bank Levy and reductions in the statutory rate as noted above. In addition, the effects of amendments to IAS 12, in accordance with the IASB’s Annual Improvements to IFRS Standards 2015-2017 Cycle, are expected to lead to a reduction in the effective tax rate where the tax relief on coupons in respect of AT1 capital securities would be recognised in the income statement rather than in equity. The adjustment to prior year provisions in 2018 principally related to the reassessment of prior year tax provision estimates following the filing of relevant tax returns. In 2017 and 2016, it also related to the resolution of certain legacy matters with tax authorities.
| | | | | > Notes to the financial statements |
Current tax assets and liabilities Movements in current tax assets and liabilities during the year were as follows: | | | | Group | | | Group | | | | | 2017
£m | | 2016
£m | | | 2018 £m | | 2017 £m | | Assets | | – | | | 49 | | | – | | | – | | Liabilities | | (54) | | | (1) | | | (3) | | | (54) | | At 1 January | | (54) | | | 48 | | | (3) | | | (54) | | Income statement charge | | (529) | | | (598) | | | (430) | | | (529) | | Other comprehensive income credit/(charge) | | 44 | | | (49) | | | 76 | | | 44 | | Corporate income tax paid | | 484 | | | 507 | | | 391 | | | 484 | | Other movements | | 52 | | | 38 | | | 119 | | | 52 | | | | | (3) | | | (54) | | | 153 | | | (3) | | Assets | | – | | | – | | | 153 | | | – | | Liabilities | | (3) | | | (54) | | | – | | | (3) | | At 31 December | | (3) | | | (54) | | | 153 | | | (3) | |
The amount of corporation income tax paid differs from the tax charge for the period as a result of the timing of payments due to the tax authorities together with the effects of movements in deferred tax, adjustments to prior period current tax provisions and current tax recognised directly in other comprehensive income. Other movements primarily arose as part of the transfer of subsidiaries to fellow subsidiaries of Banco Santander SA outside of the Santander UK Group as part of the move to a ring-fence structure, as detailed in Note 43. Santander UK proactively engages with HM Revenue & Customs to resolve tax matters relating to prior years. The accounting policy for recognising provisions for such matters are described in Note 1 to the Consolidated Financial Statements.1. It is not expected that there will be any material movement in such provisions within the next twelve12 months. Santander UK adopted the Code of Practice on Taxation for Banks in 2010.
| | | | | > Notes to the financial statements |
Deferred tax The table below shows the deferred tax assets and liabilities including the movement in the deferred tax account during the year:year. 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 offset and intends to settle on a net basis. | | | | Group | | Group | | | | | | | Fair value of financial instruments £m | | Pension remeasurement £m | | Cash flow hedges £m | | Available- for-sale £m | | Fair value reserve £m | | Tax losses carried forward £m | | Accelerated tax depreciation £m | | Other temporary differences £m | | Total £m | | At 31 December 2017 | | | (41 | ) | | (41 | ) | | 3 | | | (26 | ) | | | | 25 | | | (4 | ) | | (4 | ) | | (88 | ) | Adoption of IFRS 9 (see Note 1) | | | | – | | | | – | | | | – | | | 26 | | | (26 | ) | | | – | | | | – | | | 68 | | | 68 | | At 1 January 2018 | | | (41 | ) | | (41 | ) | | 3 | | | | | (26 | ) | | 25 | | | (4 | ) | | 64 | | | (20 | ) | Income statement (charge)/credit | | | (10 | ) | | (24 | ) | | | – | | | | | | – | | | (5 | ) | | | – | | | 28 | | | (11 | ) | Transfers/reclassifications | | | | – | | | | – | | | | – | | | | | | – | | | | – | | | (2 | ) | | (18 | ) | | (20 | ) | | Credited/(charged) to other comprehensive income | | | | – | | | (118 | ) | | (46 | ) | | | | 13 | | | | – | | | | – | | | (21 | ) | | (172 | ) | At 31 December 2018 | | | (51 | ) | | (183 | ) | | (43 | ) | | | | (13 | ) | | 20 | | | (6 | ) | | 53 | | | (223 | ) | | | | Fair value of
financial
instruments
£m | | Pension
remeasurement
£m | | Cash flow
hedges
£m | | Available-
for-sale
£m | | Tax losses
carried
forward
£m | | Accelerated
tax
depreciation
£m | | Other
temporary
differences
£m | | Total
£m | | At 1 January 2017 | | (31) | | | (35) | | | (50) | | | (27) | | | 5 | | | (5) | | | 15 | | | (128) | | | (31 | ) | | | (35 | ) | | | (50 | ) | | | (27 | ) | | | | | 5 | | | | (5 | ) | | | 15 | | | | (128 | ) | Income statement (charge)/credit | | (10) | | | (32) | | | | – | | | | – | | | 20 | | | 1 | | | (11) | | | (32) | | | (10 | ) | | | (32 | ) | | | – | | | | – | | | | | | 20 | | | | 1 | | | | (11 | ) | | | (32 | ) | Transfers/reclassifications | | | – | | | | – | | | | – | | | 7 | | | | – | | | | – | | | (7) | | | – | | | – | | | | – | | | | – | | | | 7 | | | | | | – | | | | – | | | | (7 | ) | | | – | | Credited/(charged) to other comprehensive income | | | – | | | 26 | | | 53 | | | (6) | | | | – | | | | – | | | (1) | | | 72 | | | – | | | | 26 | | | | 53 | | | | (6 | ) | | | | | – | | | | – | | | | (1 | ) | | | 72 | | At 31 December 2017 | | (41) | | | (41) | | | 3 | | | (26) | | | 25 | | | (4) | | | (4) | | | (88) | | | (41 | ) | | | (41 | ) | | | 3 | | | | (26 | ) | | | | | 25 | | | | (4 | ) | | | (4 | ) | | | (88 | ) | | | | | At 1 January 2016 | | | (76) | | | | (115) | | | | (27) | | | | (11) | | | | 8 | | | | 3 | | | | (5) | | | (223) | | Income statement (charge)/credit | | | 44 | | | | (53) | | | | – | | | | – | | | | (3) | | | | (8) | | | | 20 | | | – | | Credited/(charged) to other comprehensive income | | | 1 | | | | 133 | | | | (23) | | | | (16) | | | | – | | | | – | | | | – | | | 95 | | At 31 December 2016 | | | (31) | | | | (35) | | | | (50) | | | | (27) | | | | 5 | | | | (5) | | | | 15 | | | (128) | |
The deferred tax assets/(liabilities) scheduledassets and liabilities above have been recognised in both the Company 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 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 20)22) would not cause a reduction in the deferred tax assets recognised. At 31 December 2017,2018, both the Santander UK group and a trading subsidiary Santander Lending Limited recognised a deferred tax asset of £4m (2016: £5m) in respect of prior year trading losses. Future profit forecasts are such that recognition criteria under IAS 12 have been met. These tax losses do not time expire. At 31 December 2017, the Santander UK group hasCompany had a recognised deferred tax asset in respect of UK capital losses carried forward of £21m (2016: £nil).£17m (2017: £21m) included within tax losses carried forward. There are no unrecognised deferred tax assets on capital losses carried forward (2016:(2017: £nil).
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
In the November 2018 budget, the UK government proposed changes that could restrict the use of capital losses. Based on the changes indicated, the Santander UK group does not believe that such changes would have a material impact on the recognition of deferred tax assets on such capital losses once enacted. In addition, the Santander UK group hashad net operating losses carried forward in the US of $76m (2016: $80m).$nil (2017: $76m) as such losses expired on the closure of the ANTS US Branch. A deferred tax asset was not previously recognised on these losses has not been recognised as the Santander UK group doesdid not currently anticipate being able to offset the losses against future profits or gains in order to realise any economic benefit in the foreseeable future and in particular these losses will expire on closure of the Abbey National Treasury Services plc US Branch.future.
| | | | Annual Report 2018 | Financial statements | | |
10. DIVIDENDS ON ORDINARY SHARES Dividends on ordinary shares declared and paid during the year were as follows: | | | | Group | | | | Group | | | Group | | | | Group | | | | | 2017
Pence per
share | | | 2016
Pence per
share | | | 2015
Pence per
share | | | 2017 £m | | | 2016 £m | | | 2015 £m | | | 2018
Pence per
share | | 2017
Pence per
share | | 2016
Pence per
share | | 2018 £m | | 2017 £m | | 2016 £m | | In respect of current year – first interim | | | 1.04 | | | | 1.02 | | | | 1.05 | | | | | | 323 | | | | 317 | | | | 325 | | | 0.81 | | | | 1.04 | | | | 1.02 | | | | | 250 | | | | 323 | | | | 317 | | | – second interim | | | 0.74 | | | | 0.89 | | | | 0.33 | | | | | | 230 | | | | 276 | | | | 102 | | | 2.15 | | | | 0.74 | | | | 0.89 | | | | | 668 | | | | 230 | | | | 276 | | | | | | 1.78 | | | | 1.91 | | | | 1.38 | | | | | | 553 | | | | 593 | | | | 427 | | | | | | | – third interim | | | 0.71 | | | | – | | | | – | | | | | 221 | | | | – | | | | – | | | | | | | | 3.67 | | | | 1.78 | | | | 1.91 | | | | | 1,139 | | | | 553 | | | | 593 | | 11. TRADING ASSETS | | | | | | | | | | | | | | | | In 2018, and in addition to the dividends of £250m and £221m that were made as part of our policy to pay 50% of recurring earnings, we also paid a dividend of £668m that related to the ring-fencing transfers to Banco Santander London Branch. For more on our ring-fencing implementation, see Note 43. 11. TRADING ASSETS | | In 2018, and in addition to the dividends of £250m and £221m that were made as part of our policy to pay 50% of recurring earnings, we also paid a dividend of £668m that related to the ring-fencing transfers to Banco Santander London Branch. For more on our ring-fencing implementation, see Note 43. 11. TRADING ASSETS | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | 2017 £m | | | 2016 £m | | | | | | | | | | | 2018 £m | | 2017 £m | | Securities purchased under resale agreements | | | | | | | | | | | | | 8,870 | | | | 10,712 | | | | | | | | | | | | | | – | | | | 8,870 | | Debt securities | | | | | | | | | | | | | 5,156 | | | | 6,248 | | | | | | | | | | | | | | – | | | | 5,156 | | Equity securities | | | | | | | | | | | | | 9,662 | | | | 5,986 | | | | | | | | | | | | | | – | | | | 9,662 | | Cash collateral | | | | | | | | | | | | | 6,156 | | | | 6,169 | | | Cash collateral associated with trading balances | | | | | | | | | | | | | | – | | | | 6,156 | | Short-term loans | | | | | | | | | | | | | 711 | | | | 920 | | | | | | | | | | | | | | – | | | | 711 | | | | | | | | | | | | | | | | 30,555 | | | | 30,035 | | | | | | | | | | | | | | – | | | | 30,555 | |
AIn 2018, as part of our ring-fencing plans, the trading business in the Santander UK group was run down as the prohibited elements moved to the Banco Santander London Branch. For more on our ring-fence implementation, see Note 43. In 2017, a significant portion of the debt and equity securities arewere held in our eligible liquidity pool. They compriseconsisted mainly of government bonds and quoted stocks. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review.
12. DERIVATIVE FINANCIAL INSTRUMENTS
a) Use of derivatives
The Santander UK group transacts derivatives for four primary purposes:
– | | To manage the portfolio risks arising from customer business |
– | | To manage and hedge the Santander UK group’s own risks |
– | | To create risk management solutions for customers |
– | | To generate profits through sales activities. |
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:
– | | Those used in sales activities and those providing risk solutions for customers |
– | | Those used for own risk management purposes but, for various reasons, either the Santander UK group does not elect to claim hedge accounting for or they do not meet the qualifying criteria for hedge accounting. These consist of: |
| – | Non-qualifying hedging derivatives (economic hedges), whose terms match otheron-balance sheet instruments but do not meet the technical criteria for hedge accounting, or which use natural offsets within otheron-balance sheet instruments containing the same risk features as part of an integrated approach to risk management, and hence do not require the application of hedge accounting to achieve a reduction in income statement volatility |
| – | Derivatives managed in conjunction with financial instruments designated at fair value (the fair value option). The fair value option is described more fully in the Accounting Policy ‘Financial assets’ and Notes 13 and 24. The Santander UK group’s business model is primarily structured to maximise use of the fair value option, rather than electing to apply hedge accounting, in order to reduce the administrative burden on the Santander UK group associated with complying with the detailed hedge accounting requirements of IAS 39 |
| – | Derivatives that do not meet the qualifying criteria for hedge accounting, including ineffective hedging derivatives and any components of hedging derivatives that are excluded from assessing hedge effectiveness |
| – | Derivative contracts that represent theclosing-out of existing positions through the use of matching deals. |
| | | | | > Notes to the financial statements |
12. DERIVATIVE FINANCIAL INSTRUMENTS The following table summarises the activities undertaken, the related risks associated with such activities and the typesa) Use of derivatives used in managing such
The Santander UK group undertakes derivative activities primarily to provide customers with risk management solutions, and to manage and hedge the Santander UK group’s own risks. These risks may also be managed usingon-balance sheet instrumentsIn 2018, as part of an integrated approachour ring-fencing implementation, we transferred the majority of our derivatives held for trading to risk management.the Banco Santander London Branch as these constituted transactions that Santander UK plc would not be able to retain as a ring-fenced bank. For more on our ring-fence implementation, see Note 43. | | | | | Activity
| | Risk
| | Type of derivative
| Management of the return on variable rate assets financed by shareholders’ funds and netnon-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 currencies. | | Sensitivity to changes in foreign exchange rates.
| | Cross currency swaps. | 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 dealstransactions being utilisedused to achieve this where necessary. When entering into derivative transactions,derivatives, the Santander UK group employs the same credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending. b) TradingAnalysis of derivatives Most of the Santander UK group’s derivative transactions relate to sales activities and derivative contracts that represent theclosing-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.
Commercial Banking and Global Corporate Banking deal with 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 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 efficiently |
– | | The management of trading exposure reflected on the Santander UK group’s balance sheet. |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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. Such risks may also be managed using natural offsets within otheron-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.
d) Analysis of derivative financial instruments
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.
| | | | Group | | | Group | | | | | 2017 | | | | | | 2016 | | | 2018 | | | | 2017 | | | | | | | | Fair value | | | | | | | | | Fair value | | | | | | Fair value | | | | | | Fair value | | | | | Notional amount
£m | | | Assets
£m | | | Liabilities
£m | | | | | Notional amount
£m | | | Assets
£m | | | Liabilities
£m | | | Notional amount
£m | | | Assets
£m | | | Liabilities
£m | | Notional amount
£m | | | Assets
£m | | | Liabilities
£m | | Derivatives held for trading: | | | | | | | | | | | | | | | | Derivatives held for trading | | | | | | | | | | | | | | | | Exchange rate contracts | | | 144,160 | | | | 2,559 | | | | 4,130 | | | | | | 165,521 | | | | 3,664 | | | | 6,022 | | | 13,830 | | | | 454 | | | | 351 | | | | | | 144,160 | | | | 2,559 | | | | 4,130 | | Interest rate contracts | | | 863,151 | | | | 11,612 | | | | 11,140 | | | | | | 942,798 | | | | 14,117 | | | | 14,341 | | | 79,038 | | | | 1,421 | | | | 1,105 | | | | | | 863,151 | | | | 22,091 | | | | 21,619 | | Equity and credit contracts | | | 19,814 | | | | 888 | | | | 693 | | | | | | 15,325 | | | | 1,321 | | | | 860 | | | 2,762 | | | | 251 | | | | 168 | | | | | | 19,814 | | | | 888 | | | | 693 | | Total derivatives held for trading | | | 1,027,125 | | | | 15,059 | | | | 15,963 | | | | | | 1,123,644 | | | | 19,102 | | | | 21,223 | | | 95,630 | | | | 2,126 | | | | 1,624 | | | | | | 1,027,125 | | | | 25,538 | | | | 26,442 | | | Derivatives held for hedging | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Designated as fair value hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange rate contracts | | | 2,641 | | | | 312 | | | | 6 | | | | | | 3,819 | | | | 751 | | | | – | | | 3,010 | | | | 357 | | | | – | | | | | | 2,641 | | | | 312 | | | | 6 | | Interest rate contracts | | | 59,610 | | | | 1,272 | | | | 1,470 | | | | | | 70,849 | | | | 1,578 | | | | 1,790 | | | 86,422 | | | | 1,065 | | | | 1,315 | | | | | | 59,610 | | | | 1,272 | | | | 1,470 | | Equity derivative contracts | | | 16 | | | | – | | | | 4 | | | | | | 74 | | | | 4 | | | | – | | | | – | | | | – | | | | – | | | | | | 16 | | | | – | | | | 4 | | | | | | 62,267 | | | | 1,584 | | | | 1,480 | | | | | | 74,742 | | | | 2,333 | | | | 1,790 | | | 89,432 | | | | 1,422 | | | | 1,315 | | | | | | 62,267 | | | | 1,584 | | | | 1,480 | | Designated as cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange rate contracts | | | 23,117 | | | | 3,206 | | | | 55 | | | | | | 23,786 | | | | 3,907 | | | | 8 | | | 33,901 | | | | 3,537 | | | | 200 | | | | | | 23,117 | | | | 3,206 | | | | 55 | | Interest rate contracts | | | 12,884 | | | | 84 | | | | 115 | | | | | | 12,683 | | | | 120 | | | | 82 | | | 18,808 | | | | 46 | | | | 102 | | | | | | 12,884 | | | | 84 | | | | 115 | | Equity derivative contracts | | | 26 | | | | 9 | | | | – | | | | | | 24 | | | | 9 | | | | – | | | | – | | | | – | | | | – | | | | | | 26 | | | | 9 | | | | – | | | | | | 36,027 | | | | 3,299 | | | | 170 | | | | | | 36,493 | | | | 4,036 | | | | 90 | | | 52,709 | | | | 3,583 | | | | 302 | | | | | | 36,027 | | | | 3,299 | | | | 170 | | Total derivatives held for hedging | | | 98,294 | | | | 4,883 | | | | 1,650 | | | | | | 111,235 | | | | 6,369 | | | | 1,880 | | | 142,141 | | | | 5,005 | | | | 1,617 | | | | | | 98,294 | | | | 4,883 | | | | 1,650 | | Total derivative financial instruments | | | 1,125,419 | | | | 19,942 | | | | 17,613 | | | | | | 1,234,879 | | | | 25,471 | | | | 23,103 | | | Derivative netting(1) | | | | | | (1,872 | ) | | | (1,872 | ) | | | | | | | (10,479 | ) | | | (10,479 | ) | Total derivatives | | | 237,771 | | | | 5,259 | | | | 1,369 | | | | | | 1,125,419 | | | | 19,942 | | | | 17,613 | |
| (1) | | Derivative netting excludes the effect of cash collateral, which is offset against the gross derivative position. The amount of cash collateral received that had been offset against the gross derivative assets was £9m (2017: £333m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £354m (2017: £706m). |
For information about the impact of netting arrangements on derivative assets and liabilities are reportedin the table above, see Note 42.
| | | | Annual Report 2018 | Financial Statements | | |
The table below analyses the notional and fair values of derivatives by trading and settlement method. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional | | | | | | | | | | | | | | | | | | | | Traded over the counter | | | | | | Asset | | | Liability | | | 2018 | | 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 | | | – | | | | – | | | | 50,741 | | | | 50,741 | | | | – | | | | 4,349 | | | | – | | | | 551 | | Interest rate contracts | | | – | | | | 154,106 | | | | 30,162 | | | | 184,268 | | | | – | | | | 659 | | | | – | | | | 650 | | Equity and credit contracts | | | – | | | | – | | | | 2,762 | | | | 2,762 | | | | – | | | | 251 | | | | – | | | | 168 | | | | | | – | | | | 154,106 | | | | 83,665 | | | | 237,771 | | | | – | | | | 5,259 | | | | – | | | | 1,369 | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange rate contracts | | | – | | | | – | | | | 169,918 | | | | 169,918 | | | | – | | | | 6,077 | | | | – | | | | 4,191 | | Interest rate contracts | | | 71,618 | | | | 626,600 | | | | 237,427 | | | | 935,645 | | | | – | | | | 12,968 | | | | – | | | | 12,725 | | Equity and credit contracts | | | 30 | | | | – | | | | 19,826 | | | | 19,856 | | | | – | | | | 897 | | | | 1 | | | | 696 | | | | | | 71,648 | | | | 626,600 | | | | 427,171 | | | | 1,125,419 | | | | – | | | | 19,942 | | | | 1 | | | | 17,612 | |
c) Analysis of derivatives designated as hedges The Santander UK group applies hedge accounting on both a grossfair value and cash flow basis depending on the balance sheet unless therenature of the underlying exposure. We establish the hedge ratio by matching the notional of the derivative with the underlying position being hedged. Only the designated risk is a legally enforceable right to set off the recognised amountshedged and there is an intention to settle on a net basis, or to realise thetherefore other risks, such as credit risk, are managed but not hedged. Fair value hedges Portfolio hedges of interest rate risk Santander UK holds various portfolios of fixed rate assets and settleliabilities which expose it to changes in fair value due to movements in market interest rates. We manage these exposures by entering into interest rate swaps. Each portfolio contains assets or liabilities that are similar in nature and share the risk exposure that is designated as being hedged. The interest rate risk component is the change in fair value of fixed rate instruments for changes in the designated benchmark rate. Such changes are usually the largest component of the overall change in fair value. Separate hedges are maintained for each underlying currency. Effectiveness is assessed by comparing changes in fair value of the hedged item attributable to changes in the designated benchmark interest rate, with changes in the fair value of the interest rate swaps. The following table shows the fixed rate instruments hedged, their underlying currency and the respective hedged benchmark rates: | | | | | | | | | | | | Instrument | | | | Currency | | | | | | Designated benchmark instrument rate | Fixed rate mortgages | | | | GBP | | | | | | 3-month LIBOR | Fixed rate loans | | | | GBP, EUR | | | | | | 3-month LIBOR & EURIBOR | Reverse repurchase agreements | | | | GBP, USD | | | | | | SONIA, USD Fed Funds | Investment assets | | | | GBP, EUR, USD | | | | | | SONIA, 3-month LIBOR, Eonia & USD Fed Funds | Fixed rate savings | | | | GBP, USD | | | | | | 3-month LIBOR, SONIA |
Micro hedges of interest rate risk and foreign currency risk Santander UK accesses international markets to obtain funding, issuing fixed rate debt in its functional currency and other currencies. We are therefore exposed to changes in fair value due to changes in market interest rates and/or foreign exchange rates, principally in USD and EUR, which we mitigate through the use of receive fixed/pay floating rate interest rate swaps and/or receive fixed/pay floating rate cross currency swaps. The interest rate risk component is the change in fair value of the fixed rate debt due to changes in the benchmark LIBOR rate. The foreign exchange component is the change in the fair value of the fixed rate debt issuance due to changes in foreign exchange rates prevailing from the time of execution. Effectiveness is assessed by using linear regression techniques to compare changes in the fair value of the debt caused by changes in the benchmark interest rate and foreign exchange rates, with changes in the fair value of the interest rate swaps and/or cross currency swaps. Cashflow hedges Hedges of interest rate risk Santander UK manages its exposure to the variability in cash flows of floating rate assets and liabilities simultaneously. Further information about offsettingattributable to movements in market interest rates by entering into interest rate swaps. The interest rate risk component is presenteddetermined with reference to the underlying benchmark rate attributable to the floating rates asset or liability. Designated benchmark rates referenced are currently SONIA or LIBOR. Effectiveness is assessed by comparing changes in Note 38.the fair value of the interest rate swap with changes in the fair value of the hedged item attributable to the hedged risk, applying a hypothetical derivative method using linear regression techniques. Hedges of foreign currency risk As Santander UK obtains funding in international markets, we assume significant foreign currency risk exposure, mainly in USD and EUR. In addition, the Santander UK group also holds debt securities for liquidity purposes which assumes foreign currency exposure, principally in JPY. Santander UK manages the exposures to the variability in cash flows of foreign currency denominated assets and liabilities to movements in foreign exchange rates by entering into either foreign exchange contracts (spot, forward and swaps) or cross currency swaps. These instruments are entered into to match the cash flow profile and maturity of the estimated interest and principal repayments of the hedged item. The foreign currency risk component is the change in cash flows of the foreign currency debt arising from changes in the relevant foreign currency forward exchange rate. Such changes constitute a significant component of the overall changes in cash flows of the instrument. Effectiveness is assessed by comparing changes in the fair value of the cross currency or foreign exchange swaps with changes in the fair value of the hedged debt attributable to the hedged risk applying a hypothetical derivative method using linear regression techniques.
| | | | | > Notes to the financial statements |
Equity risk on cash settled share-based transactions Santander Equity Investments Limited (SEIL) offers employees the chance to buy shares in Banco Santander SA at a discount under Sharesave schemes. This exposes Santander UK to equity price risk. The equity risk is managed by purchasing share options which allow Santander UK to buy shares at a fixed price. These instruments are entered into to match the amount of employee share options expected to be exercised. The equity price risk is the change in cash flows arising from the change in share price over time. Santander UK established the hedge ratio by matching the notional of the derivative with the notional of the employee share options being hedged. Effectiveness is assessed by comparing the changes in fair value of the share options with changes in the fair value of the employee share options by using a hypothetical derivative method. Following the acquisition of SEIL by Santander UK Group Holdings plc in 2018, the Santander UK plc group is no longer exposed to equity risk on cash settled share-based transactions. Possible sources of hedge ineffectiveness Possible sources of hedge ineffectiveness for each type of hedge relationship are set out below: | | | | | | | | | | | | | | | | | Fair value hedges | | Cash flow hedges | | Possible sources of ineffectiveness | | | | Portfolio hedges of interest rate risk | | Micro hedges of Interest rate and foreign currency risk | | Micro hedges of interest rate risk | | Micro hedges of foreign currency risk | | Equity risk on cash settled share-based transactions | | Hedging derivatives with anon-zero fair value at date of initial designation | | | | ● | | ● | | ● | | ● | | ● | | Differences in discounting between hedged item and hedging instrument as cash collateralised swaps discount using Overnight Indexed Swaps (OIS) discount curves, not applied to underlying hedged item | | | | ● | | ● | | | | | | | | Counterparty credit risk impacts fair value of derivative but not hedged item | | | | ● | | ● | | | | | | | | Differences in expected and actual volume of prepayments | | | | ● | | | | | | | | | | Differences in discounting between hedged item and hedging instrument as cash collateralised cross currency swaps discount using OIS discount curves, not applied to underlying hedged item | | | | | | ● | | | | | | | | Differences in timing of cash flows between hedged item and hedging instrument | | | | | | | | ● | | ● | | ● | | Differences in basis of cash flows between hedged items and hedging instruments | | | | | | | | ● | | | | | | Changes in the expected number of Sharesave options to be exercised | | | | | | | | | | | | ● |
| | | | Annual Report 2018 | Financial statements | | |
Maturity profile and average price/rate of hedging instruments The following table sets out the maturity profile and average price/rate of the hedging instruments used in the Santander UK group’s hedging strategies: | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | 2018 | | Hedging Instruments | | Less than one
month | | | Later than one
month and not later
than three months | | | Later than
three months
and not later
than one year | | Later than
one year
and not later
than five years | | Later than
five years | | | Total | Fair value hedges: | | | | | | | | | | | | | | | | | | | | | Interest rate risk | | Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | 6,162 | | | | 8,411 | | | 14,611 | | 39,508 | | | 15,652 | | | 84,344 | | | Average fixed interest rate – GBP (%) | | | 0.63% | | | | 0.79% | | | 1.06% | | 1.59% | | | 2.85% | | | | | | Average fixed interest rate – EUR (%) | | | (0.22)% | | | | 0.67% | | | 0.91% | | 1.09% | | | 1.26% | | | | | | | Average fixed interest rate – USD (%) | | | 1.51% | | | | 1.31% | | | 1.34% | | 2.68% | | | 2.18% | | | | Interest rate/foreign | | Exchange rate contracts: | | | | | | | | | | | | | | | | | | | currency (FX) risk | | – Nominal amount (£m) | | | 392 | | | | 1,295 | | | – | | 1,101 | | | 222 | | | 3,010 | | | Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | 392 | | | | 1,295 | | | – | | 90 | | | 301 | | | 2,078 | | | Average GBP - EUR exchange rate | | | – | | | | – | | | – | | 1.1827 | | | 1.1682 | | | | | | Average GBP - USD exchange rate | | | 1.5800 | | | | 1.3325 | | | – | | 1.5110 | | | – | | | | | | Average fixed interest rate – EUR (%) | | | – | | | | – | | | – | | 3.89% | | | 3.92% | | | | | | | Average fixed interest rate – USD (%) | | | 3.62% | | | | 2.50% | | | – | | 2.38% | | | 7.95% | | | | Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | Interest rate risk | | Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | – | | | | 1,715 | | | 1,991 | | 3,100 | | | – | | | 6,806 | | | | Average fixed interest rate – GBP (%) | | | – | | | | 0.73% | | | 0.73% | | 1.33% | | | – | | | | FX risk | | Exchange rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | 3,916 | | | | 2,552 | | | 2,961 | | 5,596 | | | – | | | 15,025 | | | Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | – | | | | – | | | – | | 785 | | | – | | | 785 | | | Average GBP – JPY exchange rate | | | – | | | | 147.2149 | | | 146.3718 | | 145.3191 | | | – | | | | | | Average GBP – EUR exchange rate | | | – | | | | – | | | 1.2803 | | 1.1349 | | | – | | | | | | | Average GBP – USD exchange rate | | | 1.3035 | | | | 1.3067 | | | 1.3099 | | 1.3049 | | | – | | | | Interest rate/FX risk | | Exchange rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | – | | | | – | | | 1,773 | | 11,481 | | | 5,622 | | | 18,876 | | | Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | – Nominal amount (£m) | | | – | | | | – | | | 784 | | 7,562 | | | 2,871 | | | 11,217 | | | Average GBP – EUR exchange rate | | | – | | | | – | | | 1.2523 | | 1.2707 | | | 1.2167 | | | | | | Average GBP – USD exchange rate | | | – | | | | – | | | 1.6333 | | 1.5447 | | | 1.5109 | | | | | | | Average fixed interest rate – GBP (%) | | | – | | | | – | | | 2.34% | | 2.66% | | | 2.90% | | | |
| | | | | > Notes to the financial statements |
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| | | | Annual Report 2018 | Financial statements | | |
Net gains or losses arising from fair value and cash flow hedges included in net trading and other income | | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | Fair value hedging: | | | | | | | | | | | | | Gains/(losses) on hedging instruments | | | 4 | | | | 56 | | | | (274 | ) | (Losses)/gains on hedged items attributable to hedged risks | | | 75 | | | | (2 | ) | | | 335 | | Fair value hedging ineffectiveness | | | 79 | | | | 54 | | | | 61 | | Cash flow hedging ineffectiveness | | | (45 | ) | | | (49 | ) | | | (33 | ) | | | | | 34 | | | | 5 | | | | 28 | |
Hedge ineffectiveness can be analysed by risk category as follows: | | | | | | | | | | | | Group | 2018 | | Changes in FV of hedging
instruments to calculate
hedge ineffectiveness
£m | | | Changes in FV of hedged
items to calculate hedge
ineffectiveness
£m | | Hedge ineffectiveness
recognised in income
statement £m | Fair value hedges: | | | | | | | | | Interest rate risk | | | 26 | | | 15 | | 41 | Interest rate/FX risk | | | (22 | ) | | 60 | | 38 | | | | | 4 | | | 75 | | 79 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | 2018 | | | | | Income statement line item
affected by the reclassification | | | | | Changes in FV of hedging
instruments to calculate
hedge ineffectiveness
£m | | | Changes in value of
hedging instrument
recognised in OCI
£m | | | Hedge ineffectiveness
recognised in income
statement
£m | | | Amount reclassified from
cash flow hedging reserve
to income statement
£m | | Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | Interest rate risk | | | | | | Net interest income | | | | | | | 20 | | | | (14 | ) | | | 6 | | | | 26 | | FX risk | | | | | | Net interest income/net trading and other income | | | | | | | 18 | | | | (20 | ) | | | (2 | ) | | | 9 | | Equity risk | | | | | | Operating expenses | | | | | | | (12 | ) | | | 12 | | | | – | | | | (9 | ) | Interest rate/FX risk | | | | | | Net interest income/net trading and other income | | | | | | | 722 | | | | (771 | ) | | | (49 | ) | | | 726 | | | | | | | | | | | | | | | | 748 | | | | (793 | ) | | | (45 | ) | | | 752 | |
In 2018, cash flow hedge accounting of £12m (2017: £nil) had to cease due to foreign currency denominated cash flows relating to IT project expenditure no longer being expected to occur.
| | | | | > Notes to the financial statements |
The following table below analyses the notionalprovides a reconciliation by risk category of components of equity and fair valuesanalysis of derivatives by trading and settlement method.OCI items (before tax) resulting from hedge accounting. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional | | | | | | | | | | | | | | | | | Traded over the counter | | | | | | Asset | | | Liability | | | 2017 | | 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 | | | – | | | | – | | | | 169,918 | | | | 169,918 | | | | – | | | | 6,077 | | | | – | | | | 4,191 | | Interest rate contracts | | | 71,618 | | | | 626,600 | | | | 237,427 | | | | 935,645 | | | | – | | | | 12,968 | | | | – | | | | 12,725 | | Equity and credit contracts | | | 30 | | | | – | | | | 19,826 | | | | 19,856 | | | | – | | | | 897 | | | | 1 | | | | 696 | | | | | | 71,648 | | | | 626,600 | | | | 427,171 | | | | 1,125,419 | | | | – | | | | 19,942 | | | | 1 | | | | 17,612 | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange rate contracts | | | – | | | | – | | | | 193,126 | | | | 193,126 | | | | – | | | | 8,322 | | | | – | | | | 6,030 | | Interest rate contracts | | | 69,501 | | | | 725,626 | | | | 231,203 | | | | 1,026,330 | | | | 1 | | | | 15,814 | | | | – | | | | 16,213 | | Equity and credit contracts | | | 34 | | | | – | | | | 15,389 | | | | 15,423 | | | | – | | | | 1,334 | | | | 1 | | | | 859 | | | | | | 69,535 | | | | 725,626 | | | | 439,718 | | | | 1,234,879 | | | | 1 | | | | 25,470 | | | | 1 | | | | 23,102 | |
| | | | | | | Cash flow
hedging
reserve | | | | Group | | | | 2018 £m | | Balance at 1 January 2018 | | | 285 | | Effective portion of changes in fair value: | | | | | – Interest rate risk | | | 14 | | – Foreign currency risk | | | 20 | | – Equity risk | | | (12 | ) | – Interest rate/foreign currency risk | | | 771 | | | | | 793 | | Income statement transfers | | | | | – Interest rate risk | | | (26 | ) | – Foreign currency risk | | | (9 | ) | – Equity risk | | | 9 | | – Interest rate/foreign currency risk | | | (726 | ) | | | | (752 | ) | Balance at 31 December 2018 | | | 326 | |
e) Analysis of derivatives designated as hedgesHedged exposures
Net gains or losses arising from fair value and cash flow hedges included in net trading and other income
| | | | | | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Fair value hedging: | | | | | | | | | | | | | Gains/(losses) on hedging instruments | | | 56 | | | | (274 | ) | | | (26 | ) | (Losses)/gains on hedged items attributable to hedged risks | | | (2 | ) | | | 335 | | | | 87 | | Fair value hedging ineffectiveness | | | 54 | | | | 61 | | | | 61 | | Cash flow hedging ineffectiveness | | | (49 | ) | | | (33 | ) | | | (81 | ) | | | | | 5 | | | | 28 | | | | (20 | ) |
Santander UK 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 debt 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 table shows whensets out the hedged cash flows are expected to affectexposures covered by the income statement for designated cash flow hedges.Santander UK group’s hedging strategies: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | 2017 | | Up to 1
year £m | | | 1 to 2
years
£m | | | 2 to 3
years
£m | | | 3 to 4
years
£m | | | 4 to 5
years
£m | | | Over 5
years
£m | | | Total
£m | | Forecast receivable cash flows | | | 275 | | | | 280 | | | | 262 | | | | 197 | | | | 160 | | | | 668 | | | | 1,842 | | Forecast payable cash flows | | | (3,486 | ) | | | (5,288 | ) | | | (3,912 | ) | | | (3,572 | ) | | | (2,224 | ) | | | (7,364 | ) | | | (25,846 | ) | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Forecast receivable cash flows | | | 240 | | | | 220 | | | | 217 | | | | 202 | | | | 146 | | | | 668 | | | | 1,693 | | Forecast payable cash flows | | | (4,059 | ) | | | (3,392 | ) | | | (3,681 | ) | | | (2,998 | ) | | | (2,274 | ) | | | (5,611 | ) | | | (22,015 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | Carrying value | | | | | Accumulated amount of FV
hedge adjustments on
hedged item in carrying
value of hedged item | | | | | | Accumulated amount of FV
hedge adjustments for
portfolio hedge of interest
rate risks | | | | | | Change in
value used
for
calculating | | | Accumulated
amount of FV
hedge
adjustments on | | | 2018 | | Hedged item balance sheet line item | | | | Assets £m | | | Liabilities
£m | | | | | Assets £m | | | Liabilities £m | | | | | | Assets £m | | | Liabilities £m | | | | | | hedge
ineffective-
ness £m | | | balance sheet for
discontinued
hedges £m | | Fair value hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate risk: | | Loans and advances to customers | | | | | 42,075 | | | | – | | | | | | – | | | | – | | | | | | | | 638 | | | | – | | | | | | | | (149 | ) | | | 729 | | | | Other financial assets at amortised cost | | | | | 6,640 | | | | – | | | | | | – | | | | – | | | | | | | | 59 | | | | – | | | | | | | | 59 | | | | – | | | | Reverse repo agreements – non trading | | | | | 10,954 | | | | – | | | | | | – | | | | – | | | | | | | | – | | | | – | | | | | | | | – | | | | – | | | | Other financial assets at FVOCI | | | | | 7,447 | | | | – | | | | | | 10 | | | | – | | | | | | | | – | | | | – | | | | | | | | (46 | ) | | | 123 | | | | Deposits by customers | | | | | – | | | | 702 | | | | | | – | | | | – | | | | | | | | – | | | | (1 | ) | | | | | | | – | | | | – | | | | Deposits by banks | | | | | – | | | | 516 | | | | | | – | | | | 15 | | | | | | | | – | | | | – | | | | | | | | 9 | | | | (23 | ) | Interest rate/FX risk: | | Debt securities in issue | | | | | – | | | | 15,112 | | | | | | – | | | | 369 | | | | | | | | – | | | | 191 | | | | | | | | 158 | | | | (548 | ) | | | | Subordinated liabilities | | | | | – | | | | 685 | | | | | | – | | | | 152 | | | | | | | | – | | | | 52 | | | | | | | | 44 | | | | (214 | ) | | | | | | | | | 67,116 | | | | 17,015 | | | | | | 10 | | | | 536 | | | | | | | | 697 | | | | 242 | | | | | | | | 75 | | | | 67 | |
There were no transactions for which cash flow hedge accounting had to be ceased during the years ended 31 December 2017 and 2016 as a result of the cash flows no longer being expected to occur. In 2015, there was one cash flow hedge of equity price risk for which hedge accounting ceased as a result of the 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 £183m (2016: £167m, 2015: £157m) and to net trading and other income were a net loss of £89m (2016: gain of £3,909m, 2015: loss of £462m).
| | | | | | | | | | | | | | | | | | | | Group | | | 2018 | | Hedged item balance sheet line item | | Change in value used for
calculating hedge
ineffectiveness £m | | | Cash flow
hedge reserve
£m | | | Balances on cash flow
hedge reserve where
hedge accounting is no
longer applied £m | | | Cash flow hedges: | | | | | | | | | | | | | | | Interest rate risk: | | Loans and advances to customers | | | (19 | ) | | | (4 | ) | | | (2 | ) | | | Loans and advances to banks | | | – | | | | (2 | ) | | | – | | | | Deposits by banks | | | 6 | | | | (1 | ) | | | – | | | | Debt securities in issue | | | (1 | ) | | | – | | | | – | | | FX risk: | | Other financial assets at FVOCI | | | 199 | | | | (1 | ) | | | – | | | | Not applicable – highly probable forecast transactions | | | (1 | ) | | | – | | | | – | | | | Debt securities in issue | | | (218 | ) | | | 22 | | | | 3 | | | Equity risk: | | Other liabilities | | | 12 | | | | – | | | | – | | | Interest rate/FX risk: | | Debt securities in issue/loans and advances to customers | | | (564 | ) | | | 233 | | | | 50 | | | | | Subordinated liabilities/loans and advances to customers | | | (207 | ) | | | 79 | | | | – | | | | | | | | (793 | ) | | | 326 | | | | 51 | |
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
13. OTHER FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS | | | | Group | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2018
£m | | | 2017
£m | | Loans and advances to customers: | | | | | | | | | Loans to housing associations | | | 1,034 | | | | 1,215 | | | | 13 | | | | 1,034 | | Other loans | | | 515 | | | | 516 | | | | 81 | | | | 515 | | | | | 1,549 | | | | 1,731 | | | | 94 | | | | 1,549 | | Debt securities | | | 547 | | | | 409 | | | | 3,251 | | | | 547 | | Equity securities | | | | – | | | | – | | Reverse repurchase agreements – non trading | | | | 2,272 | | | | – | | | | | | 2,096 | | | | 2,140 | | | | 5,617(1) | | | | 2,096 | |
| (1) | | For the Santander UK group, this comprises £1,095m of financial assets designated at FVTPL and £4,522m of financial assets mandatorily at FVTPL. For the Company, this comprises £1,095m of financial assets designated at FVTPL and £4,380m of financial assets mandatorily at FVTPL. |
Loans and advances to customers representprincipally represented other loans, being a portfolio ofroll-up mortgages and associated receivables that is managed, and has its performance evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them is provided on that basis to housing associations securedmanagement. Since 2009, the Santander UK group’s policy has been not to designate similar new loans at fair value through profit or loss. The associated receivables were transferred outside the Santander UK group as part of the sale of the share capital of ANTS by Santander UK plc to Santander UK Group Holding plc. For more, see Note 21. As part of the establishment of credit protection vehicles sponsored by Santander UK, we retained £3,053m of senior tranches of credit linked notes, classified as debt securities in the table above. These vehicles provide credit protection on residential propertyreference portfolios of Santander UK group loans with junior notes sold to external investors. As these notes do not have SPPI characteristics they are mandatorily held at fair value. These credit linked notes are valued using the same parameters as the related collateral and other loans.financial guarantees described in Note 24, such that changes in their respective valuations are offset exactly, and there is no charge or credit to the income statement. For more, see ‘Credit protection entities’ in Note 21. – | | Loans to housing associations secured on residential property which, at the date of their origination, were managed, and their performance evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them was provided on that basis to management. |
– | | Other loans representing a portfolio ofroll-up mortgages and associated receivables, are managed, and their performance evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them is provided on that basis to management. Since 2009, the Santander UK group’s policy has been not to designate similar new loans at fair value through profit or loss. |
The net (loss)/gain duringin the year attributable to changes in credit risk for loans and advances designated at fair value through profit or loss was £(1m) (2017: £49m, (2016: £40m, 2015: £39m)2016: £40m). The cumulative net loss attributable to changes in credit risk for loans and advances designated at fair value through profit or loss at 31 December 20172018 was £120m (2016: £169m)£2m (2017: £120m). 14. LOANS AND ADVANCES TO BANKS
| | | | | | | | | | | | Group | | | | | 2017 £m | | | 2016 £m | | Securities purchased under resale agreements | | | 2,464 | | | | 1,462 | | Placements with other banks | | | 3,463 | | | | 2,886 | | | | | | 5,927 | | | | 4,348 | |
15. LOANS AND ADVANCES TO CUSTOMERS
| | | | | | | | | | | | Group | | | | | 2017 £m | | | 2016 £m | | Loans secured on residential properties | | | 155,355 | | | | 154,727 | | Corporate loans | | | 31,006 | | | | 31,978 | | Finance leases | | | 6,710 | | | | 6,730 | | Secured advances | | | – | | | | 10 | | Other unsecured loans | | | 6,230 | | | | 6,165 | | Amounts due from fellow Banco Santander subsidiaries and joint ventures | | | 1,199 | | | | 1,112 | | Amounts due from Santander UK Group Holdings plc | | | 8 | | | | 5 | | Loans and advances to customers | | | 200,508 | | | | 200,727 | | Impairment loss allowances | | | (940 | ) | | | (921) | | Residual value and voluntary termination provisions(1) | | | (78 | ) | | | (68) | | Net loans and advances to customers | | | 199,490 | | | | 199,738 | |
(1) | | In the first half of 2017, we reclassified our provisions for residual value and voluntary termination from the consumer finance impairment loss allowance. In order to facilitate comparison with the current period, prior year comparatives were amended. |
| | | | | > Notes to the financial statements |
14. LOANS AND ADVANCES TO CUSTOMERS | | | | | | | | | | | | Group | | | | | 2018 £m | | | 2017 £m | | Loans secured on residential properties | | | 157,957 | | | | 155,355 | | Corporate loans | | | 27,763 | | | | 30,856 | | Finance leases | | | 6,821 | | | | 6,710 | | Secured advances | | | – | | | | – | | Other unsecured loans | | | 7,554 | | | | 6,230 | | Amounts due from fellow Banco Santander subsidiaries and joint ventures | | | 1,997 | | | | 1,199 | | Amounts due from Santander UK Group Holdings plc | | | 17 | | | | 8 | | Loans and advances to customers | | | 202,109 | | | | 200,358 | | Credit impairment loss allowances on loans and advances to customers | | | (751 | ) | | | (940 | ) | RV and voluntary termination provisions on finance leases | | | (69 | ) | | | (78 | ) | Net loans and advances to customers | | | 201,289 | | | | 199,340 | |
Movement in credit impairment loss allowances: | | | | Group | | | Group | | | | | Loans secured
on residential
properties £m | | | Corporate
loans £m | | | Finance
leases
£m | | | Other
unsecured
loans £m | | | Total
£m | | | Loans secured
on residential
properties £m | | | Corporate
loans £m | | | Finance
leases
£m | | | | | | Other
unsecured
loans £m | | | Total
£m | | At 31 December 2017 | | | | 225 | | | | 490 | | | | 46 | | | | | | 179 | | | | 940 | | Adoption of IFRS 9 (see Note 1)(1) | | | | 47 | | | | 99 | | | | 11 | | | | | | 54 | | | | 211 | | Re-allocation of ECL onoff-balance sheet exposures(1) | | | | (3 | ) | | | (25 | ) | | | – | | | | | | (22 | ) | | | (50 | ) | At 1 January 2018 | | | | 269 | | | | 564 | | | | 57 | | | | | | 211 | | | | 1,101 | | (Release)/charge to the income statement (see Note 8) | | | | (18 | ) | | | 17 | | | | 51 | | | | | | 139 | | | | 189 | | Write-offs and other items(2)(3) | | | | (17 | ) | | | (355 | ) | | | (23 | ) | | | | | (144 | ) | | | (539 | ) | At 31 December 2018 | | | | 234 | | | | 226 | | | | 85 | | | | | | 206 | | | | 751 | | | Recoveries, net of collection costs (see Note 8) | | | | 2 | | | | 1 | | | | 6 | | | | | | 33 | | | | 42 | | | | | | | | | | | | | | | | | At 1 January 2017 | | 279 | | | | 382 | | | | 45 | | | | 215 | | | | 921 | | | | 279 | | | | 382 | | | | 45 | | | | | | 215 | | | | 921 | | (Release)/charge to the income statement | | (37 | ) | | | 172 | | | | 20 | | | | 102 | | | | 257 | | | Write-offs and other items(1) | | (17 | ) | | | (64 | ) | | | (19 | ) | | | (138 | ) | | | (238) | | | (Release)/charge to the income statement (see Note 8) | | | | (37 | ) | | | 172 | | | | 20 | | | | | | 102 | | | | 257 | | Write-offs and other items(2) | | | | (17 | ) | | | (64 | ) | | | (19 | ) | | | | | (138 | ) | | | (238 | ) | At 31 December 2017 | | 225 | | | | 490 | | | | 46 | | | | 179 | | | | 940 | | | | 225 | | | | 490 | | | | 46 | | | | | | 179 | | | | 940 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | – Observed | | 105 | | | | 433 | | | | 12 | | | | 59 | | | | 609 | | | | 105 | | | | 433 | | | | 12 | | | | | | 59 | | | | 609 | | – Incurred but not yet observed | | 120 | | | | 57 | | | | 34 | | | | 120 | | | | 331 | | | | 120 | | | | 57 | | | | 34 | | | | | | 120 | | | | 331 | | | | | 225 | | | | 490 | | | | 46 | | | | 179 | | | | 940 | | | | 225 | | | | 490 | | | | 46 | | | | | | 179 | | | | 940 | | | | | | | | | | | | | | Recoveries, net of collection costs | | 3 | | | | 1 | | | | 6 | | | | 44 | | | | 54 | | | Recoveries, net of collection costs (see Note 8) | | | | 3 | | | | 1 | | | | 6 | | | | | | 44 | | | | 54 | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2016 | | | 424 | | | | 395 | | | | 20 | | | | 269 | | | | 1,108 | | | | 424 | | | | 395 | | | | 20 | | | | | | 269 | | | | 1,108 | | (Release)/charge to the income statement | | | (116 | ) | | | 59 | | | | 47 | | | | 142 | | | | 132 | | | Write-offs and other items(1) | | | (29 | ) | | | (72 | ) | | | (22 | ) | | | (196 | ) | | | (319) | | | (Release)/charge to the income statement (see Note 8) | | | | (116 | ) | | | 59 | | | | 47 | | | | | | 142 | | | | 132 | | Write-offs and other items(2) | | | | (29 | ) | | | (72 | ) | | | (22 | ) | | | | | (196 | ) | | | (319 | ) | At 31 December 2016 | | | 279 | | | | 382 | | | | 45 | | | | 215 | | | | 921 | | | | 279 | | | | 382 | | | | 45 | | | | | | 215 | | | | 921 | | Of which: | | | | | | | | | | | | | | | | | | | | | | | – Observed | | | 130 | | | | 287 | | | | 13 | | | | 73 | | | | 503 | | | | 130 | | | | 287 | | | | 13 | | | | | | 73 | | | | 503 | | – Incurred but not yet observed | | | 149 | | | | 95 | | | | 32 | | | | 142 | | | | 418 | | | | 149 | | | | 95 | | | | 32 | | | | | | 142 | | | | 418 | | | | | | 279 | | | | 382 | | | | 45 | | | | 215 | | | | 921 | | | | 279 | | | | 382 | | | | 45 | | | | | | 215 | | | | 921 | | | | | | | | | | | | | | Recoveries, net of collection costs | | | 4 | | | | 3 | | | | 2 | | | | 56 | | | | 65 | | | Recoveries, net of collection costs (see Note 8) | | | | 4 | | | | 3 | | | | 2 | | | | | | 56 | | | | 65 | |
| (1) | | The adjustment for the adoption of IFRS 9 related to there-measurement of loss allowances on loans and advances to customers at amortised cost. There-allocation of ECL onoff-balance sheet exposures was a transfer to provisions following the adoption of a methodology to enable their separate identification from ECL on drawn exposures. See Note 30. |
| (2) | | Mortgage write-offs exclude the effect of the unwind over time of the discounting in estimating losses, as described in the accounting policy ‘Impairment of financial assets’‘Financial instruments’ in Note 1. Mortgage write-offs including this effect were £18m (2017: £22m, (2016: £33m, 2015: £40m).2016: £33m) |
| (3) | | The contractual amount outstanding on financial assets that were written off in the year, and are still subject to enforcement activity was £76m. |
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
Finance lease and hire purchase contract receivables may be analysed as follows: | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | Group | | | | | 2017 | | | | 2016 | | | 2018 | | | | 2017 | | | | | Gross
investment
£m | | | Unearned
finance
income £m | | | Net
investment
£m | | | Gross
investment
£m | | | Unearned
finance
income £m | | | Net
investment
£m | | | Gross
investment
£m | | Unearned
finance income £m | | | Net
investment
£m | | | Gross
investment
£m | | | Unearned
finance income £m | | | Net investment £m | | Not later than one year | | | 3,633 | | | | (177 | ) | | | 3,456 | | | | | | 3,047 | | | | (183 | ) | | | 2,864 | | | | 3,730 | | | (210 | ) | | | 3,520 | | | | | | 3,633 | | | | (177 | ) | | | 3,456 | | Later than one year and not later than five years | | | 3,316 | | | | (226 | ) | | | 3,090 | | | | | | 3,906 | | | | (236 | ) | | | 3,670 | | | | 3,415 | | | (278 | ) | | | 3,137 | | | | | | 3,316 | | | | (226 | ) | | | 3,090 | | Later than five years | | | 214 | | | | (50 | ) | | | 164 | | | | | | 264 | | | | (68 | ) | | | 196 | | | | 210 | | | (46 | ) | | | 164 | | | | | | 214 | | | | (50 | ) | | | 164 | | | | | | 7,163 | | | | (453 | ) | | | 6,710 | | | | | | 7,217 | | | | (487 | ) | | | 6,730 | | | | 7,355 | | | (534 | ) | | | 6,821 | | | | | | 7,163 | | | | (453 | ) | | | 6,710 | |
At 31 December 2018 and 2017, 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 tofor its corporate customers. Included in the carrying value of net investment in finance leases and hire purchase contracts is £886m (2016: £748m)£1,034m (2017: £886m) of unguaranteed residual valueRV at the end of the current lease terms, which is expected to be recovered through repayment,re-payment,re-financing or sale. Contingent rent income of £nil (2017: £5m, (2016: £4m, 2015:2016: £4m) was earned during the year, which was classified in ‘Interest and similar income’. 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 assetmortgage-backed or mortgage-backedother asset-backed securities madeissued by the Santander UK group. SeeFor more, see Note 16 for further details.15.
| | | | | > Notes to the financial statements |
16.15. SECURITISATIONS AND COVERED BONDS
The Santander UK group uses structured entities to securitise some of the mortgage and other loans to customers that it originates. The Santander UK group also issues covered bonds, which are guaranteed by, and secured against, a pool of the Santander UK group’s mortgage loans that it has transferred intoto Abbey Covered Bonds LLP. The Santander UK group issues mortgage-backed securities, other asset-backed securities and covered bonds mainly in order to obtain diverse, low cost funding, but also to be useduse as collateral for raising funds via third party bilateral secured funding transactions or for creating collateral which couldliquidity purposes in the future be used for liquidity purposes.future. The Santander UK group has successfully used bilateral secured transactions as an additional form of medium-term funding; this has allowed the Santander UK group to further diversify its medium-term funding investor base. The Santander UK group’s principal securitisation programmes and covered bond programme, together with the balances of the advances subject to securitisation and the carrying value of the notes in issue at 31 December 2017 and 2016 are listed below. The related notes in issue are set out in Note 25. 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 tonon-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, other asset-backed securities or covered bonds. No gain or loss has been recognised as a result of these sales. The structured entities and Abbey Covered Bonds LLP are consolidated as subsidiaries. The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the structured entities. a) Securitisations The gross assets securitised at 31 December 2017 and 2016 under the structures described below were:
| | | | | | | | | | | | 2017
£m | | | 2016
£m | | Master trust structures: | | | | | | | | | – Holmes | | | 4,299 | | | | 5,560 | | – Fosse | | | 5,732 | | | | 7,182 | | – Langton | | | 3,893 | | | | 5,211 | | | | | | 13,924 | | | | 17,953 | | Other securitisation structures: | | | | | | | | | – Motor | | | 1,318 | | | | 1,117 | | – Auto ABS UK Loans | | | 1,498 | | | | 1,260 | | | | | | 2,816 | | | | 2,377 | | Total gross assets securitised | | | 16,740 | | | | 20,330 | |
i) Master trust structures The Santander UK group makes use of a type of securitisation known as a master trust structure. In this structure,structures, whereby a pool of assetsresidential mortgage loans 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 assetsswitch or further advance, if a securitised and notesloan is in issue(non-recourse finance) at 31 December 2017 and 2016 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | Securitisation company | | Closing date
of securitisation | | | Gross assets
securitised £m | | Notes in
issue £m | | | Issued to
Santander
UK plc as
collateral
£m | | | | | Gross assets
securitised £m | | Notes in
issue
£m | | | Issued to
Santander
UK plc as
collateral
£m | | Holmes Master Issuer plc – 2010/1 | | | 12 November 2010 | | | – | | | – | | | | – | | | | | 318 | | | 383 | | | | – | | Holmes Master Issuer plc – 2011/3 | | | 21 September 2011 | | | 534 | | | 561 | | | | – | | | | | 512 | | | 618 | | | | – | | Holmes Master Issuer plc – 2012/1 | | | 24 January 2012 | | | – | | | – | | | | – | | | | | 98 | | | 118 | | | | – | | Holmes Master Issuer plc – 2012/2 | | | 17 April 2012 | | | – | | | – | | | | – | | | | | 585 | | | 706 | | | | – | | Holmes Master Issuer plc – 2012/3 | | | 7 June 2012 | | | – | | | – | | | | – | | | | | 426 | | | 514 | | | | – | | Holmes Master Issuer plc – 2013/1 | | | 30 May 2013 | | | – | | | – | | | | – | | | | | 28 | | | – | | | | 34 | | Holmes Master Issuer plc – 2016/1 | | | 26 May 2016 | | | 694 | | | 340 | | | | 389 | | | | | 1,017 | | | 644 | | | | 584 | | Holmes Master Issuer plc – 2017/1 | | | 16 October 2017 | | | 474 | | | 499 | | | | – | | | | | – | | | – | | | | – | | Beneficial interest in mortgages held by Holmes Trustees Ltd | | | | | | 2,597 | | | – | | | | – | | | | | 2,576 | | | – | | | | – | | | | | | | | | 4,299 | | | 1,400 | | | | 389 | | | | | 5,560 | | | 2,983 | | | | 618 | | Less: Held by the Santander UK group | | | | | | | | | – | | | | | | | | | | | | – | | | | | | Total securitisations (SeeNote 25) | | | | | | | | | 1,400 | | | | | | | | | | | | 2,983 | | | | | |
| | | Annual Report 2017 on Form 20-F | Financial statements
| | |
Usingarrears for over two months or if 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 holdssecuritised loan does not comply with the portfolios of mortgages on trustliquidity coverage requirements for Santander UK plc and Holmes Funding Limited. Proceeds from notes issued to third party investors or the Santander UK group by structured entities under the Holmes master trust structure have been loaned to Holmes Funding Limited, which in turn used the funds to purchase its referred beneficial interests in the portfolio of assets held by Holmes Trustees Limited. The minimum value of assets required to be held by Holmes Trustees Limited is a function of the notes in issue under the Holmes master trust structure and Santander UK plc’s required minimum share. The Holmes securitisation companies have placed cash deposits totalling £nil (2016: £231m), which have been accumulated to finance the redemption of a number of securities issued by the Holmes securitisation companies. The share of Holmes Funding Limited in the trust assets is therefore reduced by this amount.credit institutions.
Holmes Funding Limited has a beneficial interest of £1.7bn (2016: £3.0bn) in the residential mortgage loans held by Holmes Trustees Limited, the remaining share of the beneficial interest in residential mortgage loans held by Holmes Trustees Limited belongs to Santander UK plc.
In 2017, £0.5bn (2016: £1.2bn) of mortgage-backed notes were issued from Holmes Master Issuer plc. Mortgage-backed securities totalling £2.0bn (2016: £3.7bn) equivalent were redeemed during the year.
Fosse
Outstanding balances of assets securitised and notes in issue(non-recourse finance) at 31 December 2017 and 2016 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | Securitisation company | | Closing date of securitisation | | | Gross assets
securitised £m | | Notes in
issue
£m | | | Issued to
Santander
UK plc as
collateral
£m | | | | | Gross assets
securitised £m | | Notes in
issue
£m | | | Issued to
Santander
UK plc as
collateral
£m | | Fosse Master Issuer plc – 2010/1 | | | 12 March 2010 | | | – | | | – | | | | – | | | | | 446 | | | 535 | | | | – | | Fosse Master Issuer plc – 2011/2 | | | 6 December 2011 | | | 176 | | | 191 | | | | 34 | | | | | 204 | | | 211 | | | | 34 | | Fosse Master Issuer plc – 2012/1 | | | 22 May 2012 | | | – | | | – | | | | – | | | | | 700 | | | 738 | | | | 105 | | Fosse Master Issuer plc – 2014/1 | | | 19 June 2014 | | | – | | | – | | | | – | | | | | 366 | | | 441 | | | | – | | Fosse Master Issuer plc – 2015/1 | | | 24 March 2015 | | | 333 | | | 425 | | | | – | | | | | 559 | | | 673 | | | | – | | Beneficial interest in mortgages held by Fosse Master Trust Ltd | | | | | | 5,223 | | | – | | | | – | | | | | 4,907 | | | – | | | | – | | | | | | | | | 5,732 | | | 616 | | | | 34 | | | | | 7,182 | | | 2,598 | | | | 139 | | Less: Held by the Santander UK group | | | | | | | | | – | | | | | | | | | | | | – | | | | | | Total securitisations (See Note 25) | | | | | | | | | 616 | | | | | | | | | | | | 2,598 | | | | | |
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 (UK) Limited. Both Fosse Funding (No.1) Limited and Santander UK plc have a beneficial interest in the mortgages held in trust by Fosse Trustee (UK) Limited. The minimum value of assets required to be held by Fosse Trustee Limited is a function of the notes in issue under the Fosse master trust structure and Santander UK plc’s required minimum share.
Fosse Master Issuer plc has cash deposits totalling £24m (2016: £260m), which have been accumulated to finance the redemption of a number of securities issued by Fosse Master Issuer plc. Fosse Funding (No.1) Limited’s beneficial interest in the assets held by Fosse Trustee (UK) Limited is therefore reduced by this amount.
In 2017 and 2016 there were no mortgage-backed notes issued from Fosse Master Issuer plc. Mortgage-backed notes totalling £1.9bn (2016: £2.9bn) equivalent were redeemed during the year.
Langton
Outstanding balances of assets securitised and notes in issue(non-recourse finance) at 31 December 2017 and 2016 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | 2016 | | Securitisation company | | Closing date of securitisation | | | Gross assets
securitised £m | | Notes in
issue
£m | | | Issued to
Santander
UK plc as
collateral
£m | | | | | Gross assets
securitised £m | | Notes in
issue
£m | | | Issued to
Santander
UK plc as
collateral
£m | | Langton Securities(2010-1) plc (1) | | | 1 October 2010 | | | 986 | | | – | | | | 984 | | | | | 987 | | | – | | | | 984 | | Langton Securities(2008-1) plc (2) | | | 23 March 2011 | | | 1,373 | | | – | | | | 1,371 | | | | | 1,376 | | | – | | | | 1,372 | | Beneficial interest in mortgages held by Langton Master Trust Ltd | | | | | | 1,534 | | | – | | | | – | | | | | 2,848 | | | – | | | | – | | | | | | | | | 3,893 | | | – | | | | 2,355 | | | | | 5,211 | | | – | | | | 2,356 | |
The Langton Master Trust securitisation structure was established in 2008. Notes were issued by the Langton Securities entities to Santander UK plc for the purpose of creating collateral to be used for funding and liquidity. Each entity loaned the proceeds of the Notes issued to Langton Funding (No.1) Limited, which in turn used the funds to purchase a beneficial interest in the mortgages held by Langton Mortgages Trustee (UK) Limited. Both Langton Funding (No.1) Limited and Santander UK plc have a beneficial interest in the mortgages held in trust by Langton Mortgages Trustee (UK) Limited. The minimum value of assets required to be held by Langton Mortgages Trustee Limited (UK) is a function of the notes in issue under the Langton master trust structure and Santander UK plc’s required minimum share.
In 2017 and 2016, there were no issuances from any of the Langton issuing companies. Mortgage-backed notes totalling £nil (2016: £3.4bn) equivalent were redeemed during the year.
| | | | | > Notes to the financial statements |
ii) Other securitisation structures The Santander UK group issues notes through pass-through stand-alone vehicles for the securitisation of receivables derived from credit agreements with retail customers for the purchase of financed vehicles. Motor
Outstanding balances of assets securitised and notes in issue(non-recourse finance) at 31 December 2017 and 2016 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | 2016 | Securitisation company | | Closing date
of securitisation | | | Gross assets
securitised
£m | | Notes in
issue
£m | | | Issued to
Santander
Consumer
(UK) plc
as collateral
£m | | | | Gross assets
securitised
£m | | Notes in
issue
£m | | | Issued to
Santander
Consumer
(UK) plc
as collateral
£m | Motor2014-1 plc | | | 16 April 2014 | | | – | | | – | | | – | | | | 125 | | | – | | | 136 | Motor2015-1 plc | | | 2 March 2015 | | | 164 | | | 38 | | | 136 | | | | 436 | | | 352 | | | 136 | Motor2016-1 plc | | | 15 December 2016 | | | 578 | | | 300 | | | 300 | | | | 556 | | | 298 | | | 300 | Motor2017-1 plc | | | 20 September 2017 | | | 576 | | | 514 | | | 78 | | | | – | | | – | | | – | | | | | | | | 1,318 | | | 852 | | | 514 | | | | 1,117 | | | 650 | | | 572 | Less: Held by the Santander UK group | | | | | | | | | – | | | | | | | | | | – | | | | Total securitisations (See Note 25) | | | | | | | | | 852 | | | | | | | | | | 650 | | | |
In 2017 there were issuances of £0.5bn (2016: £0.6bn) of asset-backed notes from the Motor securitisation structures. Asset-backed notes totalling £0.3bn (2016: £0.5bn) equivalent were redeemed during the year. In 2016 Motor2016-1M Limited borrowed £0.2bn through an asset-backed senior loan facility under the Motor securitisation arrangement. This was repaid in full in August 2017.
Auto ABS Santander UK Loans
Outstanding balances of assets securitised and notes in issue(non-recourse finance) at 31 December 2017 and 2016 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | 2016 | | Securitisation company | | Closing date
of securitisation | | Gross assets
securitised
£m | | Notes in
issue
£m | | | Issued to PSA
Finance UK
Limited
as collateral £m | | | | Gross assets
securitised
£m | | Notes in
issue
£m | | | Issued to PSA
Finance UK
Limited
as collateral £m | Auto ABS UK Loans plc | | 30 April 2017 | | 1,111 | | | 925 | | | 221 | | | | 1,260 | | | 1,275 | | | 113 | Auto ABS UK Loans 2017 plc | | 15 November 2017 | | 387 | | | 315 | | | 85 | | | | – | | | – | | | – | | | | | | 1,498 | | | 1,240 | | | 306 | | | | 1,260 | | | 1,275 | | | 113 | Less: Held by the Santander UK group | | | | | | | – | | | | | | | | | | – | | | | Total securitisations (See Note 25) | | | | | | | 1,240 | | | | | | | | | | 1,275 | | | |
In 2017, asset-backed notes totalling £0.5bn (2016: £0.5bn) were issued from Auto ABS UK Loans plc and £0.4bn (2016: £nil) were issuedits subsidiaries are under no obligation to support any losses that may be incurred by Auto ABS UK loans 2017 plc. Asset-backed notes totalling £0.7bn (2016: £0.4bn) were redeemed during the year by Auto ABS UK Loans plc.master trust or other structures, securitisation companies or holders of the securities, and do not intend to provide such further support.
b) Covered bonds Santander UK plc (the Issuer) also issues covered bonds, which are aits direct, unsecured and unconditional obligation of the Issuer.obligation. The covered bonds benefit from a guarantee from Abbey Covered Bonds LLP. The IssuerSantander UK plc makes a term advance to Abbey Covered Bonds LLP equal to the sterling proceeds of each issue of covered bonds. Abbey Covered Bonds LLP uses the proceeds of the term advance to purchase portfolios of residential mortgage loans and their security from Santander UK plc. Under the terms of the guarantee, Abbey Covered Bonds LLP has agreed to pay an amount equal to the guaranteed amounts when the same shall become due for payment but which would otherwise be unpaid by the Issuer.Santander UK plc. Outstanding balancesc) Analysis of loanssecuritisations and advances assigned to thecovered bonds
The Santander UK group’s principal securitisation programmes and covered bond programme, together with the balances of the advances subject to securitisation and the carrying value of the notes in issue at 31 December 2018 and 2017 and 2016 were:are listed below. | | | | | | | | | | | | | | | | | | | | 2017 | | | | 2016 | | | | | Gross assets
assigned £m | | | Notes in issue £m | | | | Gross assets
assigned £m | | | Notes in
issue
£m | | Euro 35bn Global Covered Bond Programme | | | 19,772 | | | 16,866 | | | | | 20,263 | | | | 17,941 | | Less: Held by the Santander UK group | | | | | | (1,067) | | | | | | | | | (1,313 | ) | Total covered bonds (See Note 25) | | | | | | 15,799 | | | | | | | | | 16,628 | |
In 2017, there were issuances of £2.3bn (2016: £2.2bn) from the covered bond programme. Covered bonds totalling £3.3bn (2016: £0.8bn) equivalent were redeemed during the year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross assets | | | | | | External notes in issue | | | | | | Notes issued to Santander UK
plc/subsidiaries as collateral | | | | | 2018
£m | | | 2017
£m | | | | | | 2018
£m | | | 2017
£m | | | | | | 2018 £m | | | 2017 £m | | Mortgage-backed master trust structures: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Holmes | | | 4,414 | | | | 4,299 | | | | | | | | 3,182 | | | | 1,400 | | | | | | | | 463 | | | | 389 | | – Fosse | | | 4,646 | | | | 5,732 | | | | | | | | 199 | | | | 616 | | | | | | | | 34 | | | | 34 | | – Langton | | | 3,034 | | | | 3,893 | | | | | | | | – | | | | – | | | | | | | | 2,354 | | | | 2,355 | | | | | | 12,094 | | | | 13,924 | | | | | | | | 3,381 | | | | 2,016 | | | | | | | | 2,851 | | | | 2,778 | | Other asset-backed securitisation structures: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Motor | | | 1,055 | | | | 1,318 | | | | | | | | 738 | | | | 852 | | | | | | | | 374 | | | | 514 | | – Auto ABS UK Loans | | | 1,468 | | | | 1,498 | | | | | | | | 1,212 | | | | 1,240 | | | | | | | | 316 | | | | 306 | | | | | | 2,523 | | | | 2,816 | | | | | | | | 1,950 | | | | 2,092 | | | | | | | | 690 | | | | 820 | | Total securitisation programmes | | | 14,617 | | | | 16,740 | | | | | | | | 5,331 | | | | 4,108 | | | | | | | | 3,541 | | | | 3,598 | | Covered bond programme: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Euro 35bn Global Covered Bond Programme | | | 21,578 | | | | 19,772 | | | | | | | | 18,653 | | | | 16,866 | | | | | | | | – | | | | – | | | Total securitisation and covered bond programmes | | | 36,195 | | | | 36,512 | | | | | | | | 23,984 | | | | 20,974 | | | | | | | | 3,541 | | | | 3,598 | | Less: held by the Santander UK group: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Euro 35bn Global Covered Bond Programme | | | | | | | | | | | | | | | (539 | ) | | | (1,067 | ) | | | | | | | | | | | | | | Total securitisation and covered bond programmes (see Note 28) | | | | | | | | | | | | | | | 23,445 | | | | 19,907 | | | | | | | | | | | | | |
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
17.The following table sets out the internal and external issuances and redemptions in 2018 and 2017 for each securitisation and covered bond programme.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Internal issuances | | | | | External issuances | | | | | Internal
redemptions | | | | | External
redemptions | | | | | 2018
£bn | | | 2017
£bn | | | | | 2018
£bn | | | 2017
£bn | | | | | 2018 £bn | | | 2017
£bn | | | | | 2018
£bn | | | 2017
£bn | | Mortgage-backed master trust structures: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Holmes | | | 0.1 | | | | – | | | | | | 1.8 | | | | 0.5 | | | | | | – | | | | 0.2 | | | | | | 0.1 | | | | 1.8 | | – Fosse | | | – | | | | – | | | | | | – | | | | – | | | | | | – | | | | 0.1 | | | | | | 0.4 | | | | 1.8 | | Other asset-backed securitisation structures: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Motor | | | – | | | | 0.1 | | | | | | – | | | | 0.5 | | | | | | 0.1 | | | | 0.1 | | | | | | 0.1 | | | | 0.3 | | – Auto ABS UK Loans | | | – | | | | 0.2 | | | | | | 0.4 | | | | 0.7 | | | | | | – | | | | – | | | | | | 0.4 | | | | 0.7 | | Covered bond programme | | | – | | | | – | | | | | | 4.3 | | | | 2.3 | | | | | | 0.5 | | | | 0.3 | | | | | | 1.9 | | | | 3.2 | | | | | | 0.1 | | | | 0.3 | | | | | | 6.5 | | | | 4.0 | | | | | | 0.6 | | | | 0.7 | | | | | | 2.9 | | | | 7.8 | |
Holmes Funding Ltd has a beneficial interest of £3.2bn (2017: £1.7bn) in the residential mortgage loans held by Holmes Trustees Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Holmes Trustees Ltd belongs to Santander UK plc. Fosse Funding (No.1) Ltd has a beneficial interest of £0.2bn (2017: £0.6bn) in the residential mortgage loans held by Fosse Trustee (UK) Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Fosse Trustee (UK) Ltd belongs to Santander UK plc. Langton Funding (No.1) Ltd has a beneficial interest of £2.3bn (2017: £2.3bn) in the residential mortgage loans held by Langton Mortgage Trustee (UK) Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Langton Mortgage Trustee (UK) Ltd belongs to Santander UK plc. The Holmes securitisation companies have cash deposits of £218m (2017: £nil), which have been accumulated to finance the redemption of a number of securities issued by the Holmes securitisation companies. The share of Holmes Funding Ltd in the trust assets is therefore reduced by this amount. Fosse Master Issuer plc has cash deposits of £nil (2017: £24m), which have been accumulated to finance the redemption of a number of securities issued by Fosse Master Issuer plc. Fosse Funding (No.1) Ltd’s beneficial interest in the assets held by Fosse Trustee (UK) Ltd is therefore reduced by this amount. 16. TRANSFERS OF FINANCIAL ASSETS NOT QUALIFYING FOR DERECOGNITION 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 thethose financial assets concerned. – | | Full derecognition occurs when the Santander UK group transfers its contractual right to receive cash flows from theassets. Transferred financial assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment and other price risks |
– | | Partial derecognition occurs when the Santander UK group sells or otherwise transfers financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of the Santander UK group’s continuing involvement. There are no assets subject to partial derecognition. |
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: | | | | | Group | | | | | | | | | | | | 2018 | | | | 2017 | | | | | Group | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | Nature of transaction | | 2017 £m | | | 2017 £m | | | 2016 £m | | | 2016 £m | | | £m | | | £m | | | £m | | | £m | | Sale and repurchase agreements | | | 10,808 | | | | (7,734 | ) | | | 5,600 | | | | (3,831 | ) | | | 7,642 | | | | (7,188 | ) | | | | | 10,808 | | | | (7,734 | ) | Securities lending agreements | | | 302 | | | | (235 | ) | | | 244 | | | | (117 | ) | | | 144 | | | | (120 | ) | | | | | 302 | | | | (235 | ) | Securitisations (See Notes 16 and 25) | | | 12,847 | | | | (4,108 | ) | | | 15,066 | | | | (7,434 | ) | | Securitisations (See Notes 15 and 28) | | | | 11,583 | | | | (5,331 | ) | | | | | 12,847 | | | | (4,108 | ) | | | | | 23,957 | | | | (12,077 | ) | | | 20,910 | | | | (11,382 | ) | | | 19,369 | | | | (12,639 | ) | | | | | 23,957 | | | | (12,077 | ) |
18. FINANCIAL INVESTMENTS
| | | | | > Notes to the financial statements |
| | | | | | | | | | | | Group | | | | | 2017 £m | | | 2016 £m | | Loans and receivables securities | | | 2,180 | | | | 257 | | Debt securities: | | | | | | | | | –Available-for-sale | | | 8,772 | | | | 10,449 | | –Held-to-maturity | | | 6,578 | | | | 6,648 | | Available-for-sale equity securities | | | 81 | | | | 112 | | | | | | 17,611 | | | | 17,466 | |
17. REVERSE REPURCHASE AGREEMENTS – NON TRADING | | | | | | | | Group | | | | 2018
£m | | 2017 £m | Agreements with banks | | 3,254 | | 2,464 | Agreements with customers | | 17,873 | | 150 | | | | 21,127 | | 2,614 |
In 2018, as part of our ring-fencing implementation, Santander UK plc revised the classification of the majority of our permitted non trading reverse repurchase agreements at amortised cost, in line with our ring-fenced business model for managing these assets as part of our overall funding and liquidity plans. For more on our ring-fence implementation, see Note 43. 18. OTHER FINANCIAL ASSETS AT AMORTISED COST | | | | | | | Group | | | 2018 £m | | 2017 £m | Asset backed securities(1) | | 720 | | | Debt securities(2) | | 6,509 | | | | | 7,229 | | |
| (1) | These securities were previously classified as ‘Financial investments’ under IAS 39. See Note 44. |
| (2) | These debt securities were previously classified asheld-to-maturity investments within ‘Financial investments’ under IAS 39. See Note 44. |
On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item (Note 20) between ‘other financial assets at amortised cost’ and ‘financial assets at fair value through other comprehensive income’. This aligned the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position. In addition, certainavailable-for-sale securities were mandatorily measured at FVTPL. For more information, see Note 44. A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review. The Company’s asset backed securities includes investments in debt securities issued by Santander UK group entities. 19. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME | | | | | | | Group | | | 2018 £m | | 2017 £m | Debt securities(1) | | 13,229 | | | Loans and advances to customers(2) | | 73 | | | | | 13,302 | | |
| (1) | These debt securities were previously classified asavailable-for-sale within ‘Financial investments’ under IAS 39. See Note 44. |
| (2) | These comprise other loans and receivables mainly held within hold to collect and sell business models that were moved from trading assets and loans and advances to customers at amortised cost, to ‘Financial assets at FVOCI’, due to their reclassification to FVOCI on adoption of IFRS 9. See Note 44. |
On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item (Note 20) between ‘other financial assets at amortised cost’ and ‘financial assets at fair value through other comprehensive income’. For more information, see Note 44. A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review. 20. FINANCIAL INVESTMENTS | | | | | | | Group | | | 2018 £m | | 2017 £m | Asset backed securities(1) | | | | 2,180 | Debt securities: | | | | | –Available-for-sale(2) | | | | 8,772 | –Held-to-maturity(3) | | | | 6,578 | Available-for-sale equity securities(4) | | | | 81 | | | | | 17,611 |
| (1) | These were reclassified to ‘Other financial assets at amortised cost’ and ‘Other financial assets at fair value through profit or loss’ on adoption of IFRS 9. See Note 44. |
| (2) | These were reclassified to ‘Financial assets at FVOCI’ and ‘Other financial assets at fair value through profit or loss’ on adoption of IFRS 9. See Note 44. |
| (3) | These were reclassified to ‘Other financial assets at amortised cost’ on adoption of IFRS 9. See Note 44. |
| (4) | These were reclassified to ‘Other financial assets at fair value through profit or loss’ on adoption of IFRS 9. See Note 44. |
On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item between ‘other financial assets at amortised cost’ and ‘financial assets at FVOCI’. For more information, see Note 44. A significant portion of the debt securities were held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review.
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
19.21. INTERESTS IN OTHER ENTITIES
| | | | | | | | Group | | | | 2017
£m | | 2016 £m | Joint ventures | | 73 | | 61 | | | | 73 | | 61 |
| | | | | | | | Group | | | | 2018 £m | | 2017 £m | Joint ventures | | 88 | | 73 | | | | 88 | | 73 |
The Santander UK group consists of a parent company, Santander UK plc, incorporated and domiciled in the UK and a number of subsidiaries and joint ventures held directly and indirectly by the Company. The Company has no individually significant associates. Details of subsidiaries, joint ventures and associates are set out in the Shareholder Information section and form an integral part of these financial statements. a) Interests in subsidiaries The Company 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. On 1 January 2018, Santander UK plc acquired 100% of the share capital of Santander UK Operations Ltd (formerly Geoban UK Ltd, a subsidiary of Geoban SA) and Santander UK Technology Ltd (formerly Isban UK Ltd, a subsidiary of Ingenieria Dede Software Bancario SL), for an aggregatea final cash consideration of £55m.£66m. Immediately prior to this, the UK branchbusiness of Produban Servicios Informaticos Generales SL was acquired by Santander UK Technology Ltd for a final cash consideration of £17m.£13m. These acquisitions will enablebusinesses are referred to as Santander Services. In addition, during the year the following restructures were carried out as part of the Santander UK group to begroup’s ring-fencing implementation: | – | | Santander Equity Investments Limited (SEIL), a subsidiary of ANTS plc, acquired 100% of the share capital of a number of subsidiaries of Santander UK plc, with aggregate net assets of £9m at the acquisition date. |
| – | | Santander UK plc sold 100% of the share capital of ANTS plc to Santander UK Group Holdings plc, for a consideration of £337m, which was equivalent to the book value of the associated assets and liabilities. Prior to this, the prohibited business of ANTS plc was transferred to Banco Santander London Branch, save for a small pool of residual assets, and the permitted business of ANTS plc was transferred to Santander UK plc. ANTS plc paid Santander UK plc dividends of £3,546m relating to these transfers. As a result, the carrying value of Santander UK plc’s investment in ANTS plc was reduced by £2,512m to £337m (2017: £2,849m), and this is included in dissolutions/disposals in the table above. |
| – | | The business of the Jersey and Isle of Man branches of Santander UK plc was acquired by ANTS plc. No consideration was paid as the book value of the associated assets and liabilities was £nil. |
For more customer-centric by having greater business alignment andend-to-end control of IT and operations. In each case, the cash consideration is subject to the finalisation of the book values of the businesses transferred.on our ring-fencing implementation, see Note 43. Subsidiaries with significantnon-controlling interests The only subsidiary with significantnon-controlling interests is PSA Finance UK Limited, which operates in the UK. In 20172018 and 2016,2017, the proportion of ownership interests and voting rights held bynon-controlling interests was 50%. | | | | 2017 £m | | 2016 £m | | 2018 £m | | 2017 £m | Profit attributable tonon-controlling interests | | 21 | | 27 | | 22 | | 21 | Accumulatednon-controlling interests of the subsidiary | | 152 | | 150 | | 151 | | 152 | Dividends paid tonon-controlling interests | | 19 | | 12 | | 22 | | 19 | Summarised financial information: | | | | | | | | | – Total assets | | 3,215 | | 3,450 | | 3,289 | | 3,215 | – Total liabilities | | 2,909 | | 3,417 | | 2,987 | | 2,909 | – Profit for the year | | 43 | | 55 | | 43 | | 43 | – Total comprehensive income for the year | | 43 | | 55 | | 43 | | 43 |
| | | | | > Notes to the 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 1615 which are used for securitisation and covered bond programmes, the only other structured entities consolidated by the Santander UK group are described below. All the external assets in these entities are included in the financial statements and in relevant Notes of these Consolidated Financial Statements.Notes. Other than as set out below, no significant judgements were required with respect to control or significant influence. i) Guaranteed Investment Products 1 PCC Limited (GIP) 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.UK plc. 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.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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 the Company, although its control was transferred to Santander UK Group Holdings plc in June 2018, and all its revenue arises through donations fromit is therefore no longer consolidated by Santander UK and its third party assets are minimal, comprising ofavailable-for-sale assets of £16m (2016: £15m). This entity has been consolidated as Santander UK directs its activities.plc from that date. b) 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 2017,2018, Santander UK’s share in the profit after tax of its joint ventures was £12m (2016: £13m)£15m (2017: £12m) before elimination of transactions between Santander UK and the joint ventures. At 31 December 2017,2018, the carrying amount of Santander UK’s interest was £73m (2016: £61m)£88m (2017: £73m). At 31 December 20172018 and 2016,2017, the joint ventures had no commitments and contingent liabilities. c) 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. Other than as set out below, no significant judgements were required with respect to control or significant influence. The structured entities sponsored but not consolidated by Santander UK are as follows. i) Santander (UK) Common Investment Fund In 2008,The Santander (UK) Common Investment Fund (the Fund) is a common investment fund that was established to hold the assets of the Santander UK(UK) Group Pension Scheme. The Santander (UK) Common Investment Fund is not consolidated by Santander UK, but its assets of £11,626m (2016: £11,125m)£11,433m (2017: £11,626m) are accounted for as part of the defined benefit assets and obligations recognised on Santander UK’s balance sheet. SeeFor more on the Fund, see Note 28 for further information about31. As the entity. As this entityFund holds the assets of the pension scheme, it is outside the scope of IFRS 10. Santander UK’s maximum exposure to loss is equal to the sum of the carrying amount of the assets held.
ii) Trust preferred entities The trust preferred entities, Abbey National Capital Trust I and Abbey National Capital LP I arewere 100% owned finance subsidiaries (as defined in RegulationRegulation 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 ofto issue 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 beenwere 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 arewere not consolidated by Santander UK as Santander UK plc iswas not exposed to variability of returns from them. In 2018, following a Partnership Special Redemption Event, the entities.outstanding US$104m Abbey National Capital Trust I 8.963%Non-cumulative Trust Preferred Securities were redeemed in full in accordance with their terms. The trust preferred entities were liquidated later in 2018. iii) Credit Protectionprotection entities Santander UK has established twothree (2017: two) credit protection vehicles, Grafton CLO2016-1 Designated Activity Company (Grafton) and Red 1 Finance CLO2017-1 Designated Activity Company (Red 1),entities which are private limited companies incorporated in Ireland. Grafton and Red 1 haveEach entity has issued £100m and £87m Credit Linked Notes respectively to third party investorsa series of credit linked notes varying in seniority which reference portfolios of Santander UK group loans. Concurrently, these vehiclesentities sell credit protection to Santander UK in respect of the referenced loans and, in return for a fee, are liable to make protection payments to the Santander UK group upon the occurrence of a credit event in relation to any of the referenced loans. Senior credit linked notes, which amounted to £3,053m (2017: £830m), are issued to, and held by, Santander UK. These notes are included within ‘Other financial assets at fair value through profit or loss’ on the balance sheet (see Note 13). Junior credit linked notes, which amounted to £408m (2017: £187m), are all held by third party investors and suffer the first losses incurred in the referenced portfolios. Funds raised by the sale of the credit linked notes are deposited with Santander UK as collateral for the credit protection. Deposits and associated guarantees in respect of the senior credit linked notes are included within ‘Other financial liabilities at fair value through profit or loss’ (see Note 24), and in respect of the junior credit linked notes are included within ‘Deposits by customers’ (see Note 25). The entities are not consolidated by Santander UK because the third party investors have the exposure, or rights, to toall of the variability of returns from the performance of the entity.entities. No assets are transferred to, or income received from, these vehicles. TheBecause the credit linked notes (including those held by Santander UK) are fully cash collateralised, Santander UK’s maximum exposure to loss is equal to any unamortised fees paid to the credit protection entities in connection with the credit protection outlined above. Structured entities not sponsored by the Santander UK group Santander UK 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-backedasset backed securities issued by entities that were established and/or sponsored by other unrelated financial institutions. These securities comprise the loans and receivablesasset backed securities included in Note 18. Management has concluded that the Santander UK group has no control or significant influence over these entities and that the carrying value of the interests held in these entities represents the maximum exposure to loss. 20.
| | | | Annual Report 2018 | Financial statements | | |
22. INTANGIBLE ASSETS a) Goodwill | | | | | | | | | | | | | | | | Group | | | | | Cost £m | | | Accumulated
impairment £m | | | Net book value
£m | | At 31 December 2016(1), 1 January 2017(1) and 31 December 2017 | | | 1,285 | | | | (82) | | | | 1,203 | |
(1) | | Comparative periods restated to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1. |
| | | | | | | | | | | | | | | | Group | | | | | Cost
£m | | | Accumulated
impairment
£m | | | Net book value
£m | | At 31 December 2017, 1 January 2018 and 31 December 2018 | | | 1,285 | | | | (82 | ) | | | 1,203 | |
Impairment of goodwill DuringIn 2018 and 2017, and 2016, no impairment of goodwill was recognised. Impairment testing in respect of goodwill allocated to each cash-generating unit (CGU) is performed annually or more frequently if there are impairment indicators present. For the purpose of impairment testing, the CGUs are based on customer groups within the relevant business divisions.
The cash flow projections for each CGU are based on the five-year plan prepared for regulatory purposes, based on Santander UK’s3-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 apre-tax rate that reflects the weighted average cost of capital allocated by Santander UK to investments in the business division in which the CGU 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.
| | | | | > Notes to the financial statements |
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 (all within Retail Banking) 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. The calculations have been based on value in use using cash flows based on the five-year plan. | | | | Goodwill | | | | | Discount rate | | | | | Growth rate(2) | | | Goodwill | | | | Discount rate | | | | Growth rate(1) | | | CGU | | 2017 £m | | | 2016(1) £m | | | | | 2017 % | | | 2016 % | | | | | 2017 % | | | 2016 % | | | 2018
£m | | | 2017
£m | | | 2018
% | | | 2017
% | | | 2018
% | | | 2017
% | | Personal financial services | | | 1,169 | | | | 1,169 | | | | | | 10.8 | | | | 11.4 | | | | | | 1 | | | | 2 | | | | 1,169 | | | | 1,169 | | | | | | 10.5 | | | | 10.8 | | | | | | 2 | | | | 1 | | Private banking | | | 30 | | | | 30 | | | | | | 10.8 | | | | 11.4 | | | | | | 1 | | | | 1 | | | | 30 | | | | 30 | | | | | | 10.5 | | | | 10.8 | | | | | | 2 | | | | 1 | | Other | | | 4 | | | | 4 | | | | | | 10.8 | | | | 11.4 | | | | | | 1 | | | | 2 | | | | 4 | | | | 4 | | | | | | 10.5 | | | | 10.8 | | | | | | 2 | | | | 1 | | | | | | 1,203 | | | | 1,203 | | | | | | | | | | | | | | | | 1,203 | | | | 1,203 | | | | | | | | | | | | | |
| (1) | Restated to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1. |
(2) | Average growth rate based on the five-year plan for the first five years and a growth rate of 2.0 % (2017: 1.5% (2016: 2.0%) applied thereafter. |
In 2017,2018, the discount rate decreased by 0.60.3 percentage points to 10.5% (2017: 10.8% (2016: 11.4%). The decrease reflected changes in current market and economic conditions. In 2017,2018, the change in growth rates reflected Santander UK’s updated strategic priorities in the context of forecast economic conditions. b) Other intangibles | | | | Group | | | Group | | | | | | Cost
£m | | Accumulated
amortisation/
impairment
£m | | Net book value
£m | | At 1 January 2018 | | | 962 | | | (423 | ) | | 539 | | Additions | | | 204 | | | | – | | | 204 | | Write offs | | | (76 | ) | | 76 | | | | – | | Charge | | | | – | | | (138 | ) | | (138 | ) | Sales | | | | – | | | | – | | | | – | | At 31 December 2018 | | | 1,090 | | | (485 | ) | | 605 | | | | | Cost
£m | | | Accumulated
amortisation/
impairment
£m | | Net book value £m | | | At 1 January 2017 | | | 760 | | | | (278 | ) | | 482 | | | | 760 | | | | (278 | ) | | | 482 | | Additions | | | 205 | | | | – | | | 205 | | | | 205 | | | | – | | | | 205 | | Disposals | | | (3 | ) | | | 3 | | | | – | | | | (3 | ) | | | 3 | | | | – | | Charge | | | – | | | | (116 | ) | | (116 | ) | | | – | | | | (116 | ) | | | (116 | ) | Impairment | | | – | | | | (32 | ) | | (32 | ) | | | – | | | | (32 | ) | | | (32 | ) | At 31 December 2017 | | | 962 | | | | (423 | ) | | 539 | | | | 962 | | | | (423 | ) | | | 539 | | | | | | | | At 1 January 2016 | | | 601 | | | | (204 | ) | | | 397 | | | Additions | | | 213 | | | | – | | | | 213 | | | Disposals | | | (54 | ) | | | 47 | | | | (7 | ) | | Charge | | | – | | | | (76 | ) | | | (76 | ) | | Impairment | | | – | | | | (45 | ) | | | (45 | ) | | At 31 December 2016 | | | 760 | | | | (278 | ) | | | 482 | | |
Other intangible assetsintangibles 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 2017, intangible asset impairments primarily related to capitalised software costs for a credit risk management system, part of which was no longer in use. In 2016, intangible asset impairments primarily related to a multi-entity banking platform developed for ournon-ring-fenced bank under the original ring-fencing structure. 21. DEPOSITS BY BANKS
| | | | | | | | | | | | Group | | | | | 2017 | | | 2016 | | | | | £m | | | £m | | Items in the course of transmission | | | 303 | | | | 308 | | Securities sold under repurchase agreements | | | 1,076 | | | | 2,384 | | Deposits held as collateral | | | 1,760 | | | | 778 | | Other deposits(1) | | | 10,645 | | | | 6,299 | | | | | | 13,784 | | | | 9,769 | |
(1) | | Includes drawdown from the TFS of £8.5bn (2016: £4.5bn). |
| | | Annual Report 2017 on Form 20-F | Financial statements | | > Notes to the financial statements |
22. DEPOSITS BY CUSTOMERS23. TRADING LIABILITIES
| | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | Current and demand accounts – interest-bearing | | | 85,749 | | | | 85,967 | | –non-interest-bearing | | | 2 | | | | 67 | | Savings accounts(1) | | | 70,461 | | | | 58,305 | | Time deposits | | | 19,951 | | | | 27,203 | | Securities sold under repurchase agreements | | | 502 | | | | 502 | | Amounts due to Santander UK Group Holdings plc(2) | | | 6,256 | | | | 4,464 | | Amounts due to fellow Banco Santander subsidiaries | | | 727 | | | | 664 | | | | | | 183,648 | | | | 177,172 | |
| | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | Securities sold under repurchase agreements | | | – | | | | 25,504 | | Short positions in securities and unsettled trades | | | – | | | | 3,694 | | Cash collateral | | | – | | | | 1,911 | | | | | | – | | | | 31,109 | |
In 2018, as part of our ring-fence plans, the trading business in the Santander UK group was run down, and the gilt-edged market making business was transferred to Banco Santander London Branch. For more on our ring-fencing transition, see Note 43. 24. OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | US$10bn Euro Commercial Paper Programme | | | – | | | | 387 | | US$30bn Euro Medium Term Note Programme | | | 165 | | | | 169 | | Structured Notes Programmes | | | 696 | | | | 932 | | Eurobonds | | | 129 | | | | 147 | | Structured deposits | | | 133 | | | | 680 | | Collateral and associated financial guarantees | | | 3,053 | | | | – | | Repurchase agreements – non trading | | | 2,110 | | | | – | | | | | | 6,286(1) | | | | 2,315 | |
| (1) | | Includes equity index-linked deposits of £1,301m (2016: £1,618m). The capital amount guaranteed/protected andFor the amount of return guaranteed in respect of the equity index-linked deposits were £1,301m and £67m (2016: £1,618m and £129m) respectively. |
(2) | | Includes downstreamed funding from our immediate parent company Santander UK Group Holdings plc.group, this comprises £6,286m of financial liabilities designated at fair value through profit or loss and £nil of financial liabilities mandatorily at fair value through profit or loss. For the Company, this comprises £6,286m of financial liabilities designated at fair value through profit or loss and £nil of financial liabilities mandatorily at fair value through profit or loss. |
23. TRADING LIABILITIES
| | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | Securities sold under repurchase agreements | | | 25,504 | | | | 8,798 | | Short positions in securities and unsettled trades | | | 3,694 | | | | 2,801 | | Cash collateral | | | 1,911 | | | | 3,535 | | Short-term deposits | | | – | | | | 426 | | | | | | 31,109 | | | | 15,560 | |
24. FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE
| | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | US$10bn Euro Commercial Paper Programmes | | | 387 | | | | 454 | | US$30bn Euro Medium Term Note Programme | | | 169 | | | | 184 | | Structured Notes Programmes | | | 932 | | | | 1,137 | | Warrants programme | | | – | | | | 2 | | Eurobonds | | | 147 | | | | 137 | | Structured deposits | | | 680 | | | | 526 | | | | | | 2,315 | | | | 2,440 | |
The collateral and associated financial guarantees relates to collateral received, together with associated credit protection guarantees, relating to the proceeds of the retained senior tranches of credit linked notes described in Note 13, and have been designated at fair value through profit or loss. The financial guarantees are valued using the same parameters as the related credit linked notes, such that changes in the respective valuations are offset exactly, and there is no charge or credit to the income statement. For more, see ‘Credit protection entities’ in Note 21, and ‘Internal models based on quoted pricesinformation other than market data (Level 3)’ in an active market for the specific instrument concerned, if available. When quoted market prices are unavailable, the fair value is estimated 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 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.Note 41. As part of our ring-fencing plans, with effect from 1 November 2017, all outstanding structured notes and warrants issued by Abbey National Treasury Services plc under the Structured Notes Programmes and the Warrants Programme were novated to Santander UK plc. All rights, obligations and liabilities of Abbey National Treasury Services plc under these structured notes and warrants have been taken over and assumed by Santander UK plc and all future structured notes will be issued by Santander UK plc. In addition, during 2017 Santander UK plc established separate commercial paper and certificate of deposit programmes, with similar terms to the existing Abbey National Treasury Services plc programmes. For more information on our ring-fencing plans, see Note 39.
Gains and losses arising from changes in the credit spread of securities 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 lossgain during the year attributable to changes in the Santander UK group’s own credit risk on the above securities was £84m (2017: £29m (2016:loss, 2016: £6m gain, 2015: £23m gain). The cumulative net lossgain attributable to changes in the Santander UK group’s own credit risk on the above securities at 31 December 20172018 was £77m (2017: £7m (2016: £22m gain)loss). Of the change in carrying value during the year ended 31 December 2017, cash andnon-cash changes amounted to £(263)m and £138m respectively.Non-cash changes consist of £(46)m of unrealised foreign exchange differences, £37m for changes in fair value and £147m of other changes predominantly accrued interest. At 31 December 2017,2018, the amount that would be required to be contractually paid at maturity of the securities above was £128m lower (2017: £4m lower (2016: £35m)lower) than the carrying value. 25. DEPOSITS BY CUSTOMERS | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | Current and demand accounts | | | 86,207 | | | | 85,751 | | Savings accounts(1) | | | 66,039 | | | | 70,461 | | Time deposits | | | 15,485 | | | | 20,453 | | Amounts due to other Santander UK Group Holdings plc subsidiaries | | | 83 | | | | – | | Amounts due to Santander UK Group Holdings plc(2) | | | 9,206 | | | | 6,256 | | Amounts due to fellow Banco Santander subsidiaries and joint ventures | | | 1,070 | | | | 727 | | | | | | 178,090 | | | | 183,648 | |
| (1) | | Includes equity index-linked deposits of £1,176m (2017: £1,301m). The capital amount guaranteed/protected and the amount of return guaranteed in respect of the equity index-linked deposits were £1,176m and £28m (2017: £1,301m and £67m) respectively. |
| (2) | | Includes downstreamed funding from our immediate parent company Santander UK Group Holdings plc. |
26. DEPOSITS BY BANKS | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | Items in the course of transmission | | | 262 | | | | 303 | | Deposits held as collateral | | | 4,048 | | | | 1,760 | | Other deposits(1) | | | 12,891 | | | | 10,645 | | Amounts due to Santander UK subsidiaries | | | 20 | | | | – | | | | | | 17,221 | | | | 12,708 | |
| (1) | | Includes drawdown from the TFS of £10.8bn (2017: £8.5bn). |
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
25.27. REPURCHASE AGREEMENTS – NON TRADING
| | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | Agreements with banks | | | 5,865 | | | | 1,076 | | Agreements with customers | | | 5,045 | | | | – | | | | | | 10,910 | | | | 1,076 | |
In 2018, as part of our ring-fencing implementation, Santander UK plc revised the classification of the majority of our permitted non trading repurchase agreements at amortised cost, in line with our ring-fenced business model for managing these liabilities as part of our overall funding and liquidity plans. For more on our ring-fence implementation, see Note 43. 28. DEBT SECURITIES IN ISSUE | | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | Medium-term notes: | | | | | | | | | – US$30bn Euro Medium Term Note Programme | | | 8,816 | | | | 10,818 | | – USSEC-registered – Santander UK plc | | | 6,280 | | | | 7,499 | | – US$20bn Commercial Paper Programmes | | | 2,906 | | | | 2,678 | | | | | | 18,002 | | | | 20,995 | | Euro 35bn Global Covered Bond Programme (See Note 16) | | | 15,799 | | | | 16,628 | | Certificates of deposit | | | 4,681 | | | | 5,217 | | Credit Linked Notes | | | 43 | | | | – | | Securitisation programmes (See Note 16) | | | 4,108 | | | | 7,506 | | | | | | 42,633 | | | | 50,346 | |
As part of our ring-fencing plans, during 2017 Santander UK plc established separate commercial paper and certificate of deposit programmes, with similar terms to the existing Abbey National Treasury Services plc programmes. For more information on our ring-fencing plans, see Note 39.
| | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | Medium-term notes: | | | | | | | | | – US$30bn Euro Medium Term Note Programme | | | 7,229 | | | | 8,816 | | – Euro 30bn Euro Medium Term Note Programme | | | 1,975 | | | | – | | – USSEC-registered – Santander UK plc | | | 7,649 | | | | 6,280 | | – US$20bn Commercial Paper Programmes | | | 3,131 | | | | 2,906 | | | | | | 19,984 | | | | 18,002 | | Euro 35bn Global Covered Bond Programme (See Note 15) | | | 18,114 | | | | 15,799 | | Certificates of deposit | | | 3,221 | | | | 4,681 | | Credit linked notes | | | 42 | | | | 43 | | Securitisation programmes (See Note 15) | | | 5,331 | | | | 4,108 | | | | | | 46,692 | | | | 42,633 | |
The credit linked note wasnotes were issued by PSA Finance UK Limited and referencesreference a pool of auto loans and leases originated by PSA Finance UK Limited that, in return for a fee, provides credit protection on the first 7.6% of losses in the reference portfolio. Of the change in carrying value in 2017, cash andnon-cash changes amounted to £(6,688)m and £(1,025)m respectively.Non-cash changes comprised £(929)m of unrealised foreign exchange differences and £(96)m of other changes, mainly accrued interest.
| | | | | > Notes to the financial statements |
26.
29. SUBORDINATED LIABILITIES | | | | Group | | | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2018 £m | | 2017 £m | | £325m Sterling Preference Shares | | | 344 | | | | 344 | | | 344 | | | | 344 | | £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities | | | 2 | | | | 2 | | | | – | | | | 2 | | Undated subordinated liabilities | | | 584 | | | | 768 | | | 574 | | | | 584 | | Dated subordinated liabilities | | | 2,863 | | | | 3,189 | | | 2,683 | | | | 2,863 | | | | | | 3,793 | | | | 4,303 | | | 3,601 | | | | 3,793 | |
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.issuer. 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 generally 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 ratenon-cumulative callable preference shares and £300mStep-up Callable Perpetual Reserve Capital Instruments classified as share capital and/or other equity instruments, as described in Note 31.Notes 33 and 34. DuringIn 2018 and 2017, and 2016, the Santander UK group had no defaults of principal, interest or other breaches with respect to its subordinated liabilities. No repayment or purchase by the issuer of the subordinated liabilities may be made prior to their stated maturity without the consent of the PRA.
DuringIn 2017, Santander UK exercised its option to call the £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities. These were fully redeemed on 9 February 2018.
Of the change in carrying value during the year ended 31 December 2017, cash andnon-cash changes amounted to £(52)m and £(458)m respectively.Non-cash changes included £(235)m in respect of unrealised foreign exchange differences and £(223)m of other changes.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
Undated subordinated liabilities | | | | Group | | | | | | | Group | | | | | Call date | | | 2017 £m | | | 2016 £m | | | | | First call date | | 2018 £m | | 2017 £m | | 10.0625% Exchangeable subordinated capital securities | | | Any interest payment date | | | | 205 | | | | 205 | | | 10.0625% Exchangeable capital securities | | | | | | n/a | | | 205 | | | | 205 | | 7.375% 20 YearStep-up perpetual callable subordinated notes | | | 2020 | | | | 17 | | | | 198 | | | | | | 2020 | | | 16 | | | | 17 | | 7.125% 30 YearStep-up perpetual callable subordinated notes | | | 2030 | | | | 362 | | | | 365 | | | | | | 2030 | | | 353 | | | | 362 | | | | | | | | 584 | | | | 768 | | | | | | | 574 | | | | 584 | |
In common with other debt securities issued by Santander UK group companies and notwithstanding the undatedissuer’s first call dates in the table above, in the event of certain tax changes affecting the treatment of payments of interest on subordinated liabilities in the UK, the 7.375% 20 YearStep-up perpetual callable subordinated notes and the 7.125% 30 YearStep-up perpetual callable subordinated notes are redeemable at any time, and the 10.0625% Exchangeable capital securities are redeemable on any interest payment date – each in whole at the option of Santander UK plc, at their principal amount together with any accrued interest. The 10.0625% Exchangeable capital securities are exchangeable into fully paid 10.375%non-cumulativenon-redeemable sterling preference shares of £1 each, at the option of Santander UK plc, on the business day immediately following any interest payment date. Dated subordinated liabilities | | | | | | | | | | | | | | | | | | | Group | | | | | Maturity | | | 2018 £m | | | 2017 £m | | 10.125% Subordinated guaranteed bonds | | | 2023 | | | | – | | | | 78 | | 9.625% Subordinated notes | | | 2023 | | | | – | | | | 129 | | 5% Subordinated notes (US$1,500m) | | | 2023 | | | | 1,173 | | | | 1,103 | | 4.75% Subordinated notes (US$1,000m) | | | 2025 | | | | 791 | | | | 745 | | 7.95% Subordinated notes (US$1,000m) | | | 2029 | | | | 278 | | | | 275 | | 6.50% Subordinated notes | | | 2030 | | | | 38 | | | | 40 | | 8.963% Subordinated notes (US$1,000m) | | | 2045 | | | | – | | | | 113 | | 5.875% Subordinated notes | | | 2031 | | | | 9 | | | | 9 | | 5.625% Subordinated notes (US$500m) | | | 2045 | | | | 394 | | | | 371 | | | | | | | | | | 2,683 | | | | 2,863 | |
The dated subordinated liabilities are redeemable in whole at the option of Santander UK plc at any time and, in the case of the 7.95% Subordinated notes, 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. During 2017,In 2018, Santander UK plc exercised its option to call the 9.625% Subordinated notes and 8.963% Subordinated notes. These were fully redeemed 91% of the 7.375% 20 YearStep-up perpetual callable subordinated notes.on 30 October 2018 and 15 November 2018 respectively.
Dated subordinated liabilities
| | | | | | | | | | | | | | | | | | | Group | | | | | Maturity | | | 2017 £m | | | 2016 £m | | 11.50% Subordinated guaranteed bond | | | 2017 | | | | – | | | | 58 | | 10.125% Subordinated guaranteed bond | | | 2023 | | | | 78 | | | | 84 | | 9.625% Subordinated notes | | | 2023 | | | | 129 | | | | 134 | | 5% Subordinated notes (US$1,500m) | | | 2023 | | | | 1,103 | | | | 1,208 | | 4.75% Subordinated notes (US$1,000m) | | | 2025 | | | | 745 | | | | 816 | | 7.95% Subordinated notes (US$1,000m) | | | 2029 | | | | 275 | | | | 307 | | 6.50% Subordinated notes | | | 2030 | | | | 40 | | | | 40 | | 8.963% Subordinated notes (US$1,000m) | | | 2030 | | | | 113 | | | | 126 | | 5.875% Subordinated notes | | | 2031 | | | | 9 | | | | 10 | | 5.625% Subordinated notes (US$500m) | | | 2045 | | | | 371 | | | | 406 | | | | | | | | | | 2,863 | | | | 3,189 | |
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.
DuringIn 2017, Santander UK plc exercised its option to call the 10.125% Subordinated guaranteed bond.bonds. These were fully redeemed on 4 January 2018.
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
27.30. PROVISIONS
| | | | Group | | | Group | | | | | | Conduct remediation | | | | | | | | | | | | | | | | | | | | | PPI
£m | | | Other
products
£m | | | FSCS and
Bank Levy
£m | | | Vacant
property
£m | | | Off-balance
sheet ECL
£m | | | Regulatory
and other
£m | | | Total
£m | | At 31 December 2017 | | | | 356 | | | | 47 | | | | 57 | | | | 39 | | | | | | 59 | | | | 558 | | Reallocation of ECL onoff-balance sheet exposures(1) | | | | – | | | | – | | | | – | | | | – | | | | 50 | | | | – | | | | 50 | | At 1 January 2018 | | | | 356 | | | | 47 | | | | 57 | | | | 39 | | | | 50 | | | | 59 | | | | 608 | | Additional provisions (see Note 8) | | | | – | | | | – | | | | 69 | | | | 12 | | | | 6 | | | | 209 | | | | 296 | | Provisions released (see Note 8) | | | | – | | | | (14 | ) | | | (4 | ) | | | – | | | | – | | | | (15 | ) | | | (33 | ) | Utilisation | | | | (110 | ) | | | (3 | ) | | | (91 | ) | | | (14 | ) | | | – | | | | (158 | ) | | | (376 | ) | Other | | | | – | | | | – | | | | 14(2) | | | | – | | | | – | | | | – | | | | 14 | | At 31 December 2018 | | | | 246 | | | | 30 | | | | 45 | | | | 37 | | | | 56 | | | | 95 | | | | 509 | | To be settled: | | | | | | | | | | | | | | | | – Within 12 months | | | | 246 | | | | 22 | | | | 45 | | | | 22 | | | | 56 | | | | 95 | | | | 486 | | – In more than 12 months | | | | – | | | | 8 | | | | – | | | | 15 | | | | – | | | | – | | | | 23 | | | | | Conduct remediation | | | | | | | | | | | | | | | | 246 | | | | 30 | | | | 45 | | | | 37 | | | | 56 | | | | 95 | | | | 509 | | | | | PPI
£m | | | Wealth and
Investment
£m | | | Other
products
£m | | | Regulatory-
related £m | | | Vacant
property
£m | | | Other
£m | | | Total
£m | | | | | | | | | | | | | | | | At 1 January 2017 | | | 457 | | | | 22 | | | | 14 | | | | 96 | | | | 47 | | | | 64 | | | | 700 | | | | 457 | | | | 36 | | | | 96 | | | | 47 | | | | | | 64 | | | | 700 | | Additional provisions | | | 109 | | | | – | | | | 35 | | | | 93 | | | | 4 | | | | 144 | | | | 385 | | | | 109 | | | | 35 | | | | 93 | | | | 4 | | | | | | 144 | | | | 385 | | Utilisation | | | (210 | ) | | | (29 | ) | | | (5 | ) | | | (132 | ) | | | (12 | ) | | | (149 | ) | | | (537 | ) | | | (210 | ) | | | (34 | ) | | | (132 | ) | | | (12 | ) | | | | | (149 | ) | | | (537 | ) | Transfers | | | – | | | | 10 | | | | – | | | | – | | | | – | | | | – | | | | 10 | | | | – | | | | 10 | | | | – | | | | – | | | | | | – | | | | 10 | | At 31 December 2017 | | | 356 | | | | 3 | | | | 44 | | | | 57 | | | | 39 | | | | 59 | | | | 558 | | | | 356 | | | | 47 | | | | 57 | | | | 39 | | | | | | 59 | | | | 558 | | To be settled: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Within 12 months | | | 167 | | | | 3 | | | | 35 | | | | 57 | | | | 23 | | | | 59 | | | | 344 | | | | 167 | | | | 38 | | | | 57 | | | | 23 | | | | | | 59 | | | | 344 | | – In more than 12 months | | | 189 | | | | – | | | | 9 | | | | – | | | | 16 | | | | – | | | | 214 | | | | 189 | | | | 9 | | | | – | | | | 16 | | | | | | – | | | | 214 | | | | | | 356 | | | | 3 | | | | 44 | | | | 57 | | | | 39 | | | | 59 | | | | 558 | | | | 356 | | | | 47 | | | | 57 | | | | 39 | | | | | | 59 | | | | 558 | | | | | | | | | | | | | | | | | | | At 1 January 2016 | | | 465 | | | | 146 | | | | 26 | | | | 93 | | | | 68 | | | | 72 | | | | 870 | | | Additional provisions | | | 144 | | | | – | | | | 2 | | | | 141 | | | | (6 | ) | | | 116 | | | | 397 | | | Utilisation | | | (152 | ) | | | (124 | ) | | | (14 | ) | | | (138 | ) | | | (15 | ) | | | (124 | ) | | | (567 | ) | | At 31 December 2016 | | | 457 | | | | 22 | | | | 14 | | | | 96 | | | | 47 | | | | 64 | | | | 700 | | | To be settled: | | | | | | | | | | | | | | | | – Within 12 months | | | 294 | | | | 22 | | | | 4 | | | | 96 | | | | 25 | | | | 59 | | | | 500 | | | – In more than 12 months | | | 163 | | | | – | | | | 10 | | | | – | | | | 22 | | | | 5 | | | | 200 | | | | | | | 457 | | | | 22 | | | | 14 | | | | 96 | | | | 47 | | | | 64 | | | | 700 | | |
| (1) | | ECL onoff-balance sheet exposures following the adoption of a methodology to enable their separate identification from ECL on drawn exposures. See Note 14. |
| (2) | | Santander UK plc recharged £14m (2017: £nil) in respect of the UK Bank Levy paid on behalf of other UK entities of Banco Santander SA. |
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 represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including related costs.
| | | | | > Notes to the financial statements |
(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.
In November 2015, the FCA issued a Consultation Paper 15/39 (Rules and guidance on payment protection insurance complaints) which introduced the concept of unfair commission in relation to Plevin decision for customer redress plus a deadline by which customers would need to make their PPI complaints. On 2 August 2016, the FCA issued Consultation Paper 16/20 (Rules and Guidance on payment protection insurance complaints: Feedback on CP 15/39 and further consultation). The paper outlined the FCA’s proposed approach to PPI in light of the 2014 decision of the Supreme Court in Plevin v Paragon Personal Finance Ltd (Plevin) and also recommended atwo-year deadline period starting in June 2017, which was later than proposed in CP 15/39. In July 2018 the FCA issued Consultation Paper 18/18 (Guidance on Regular Premium PPI complaints and recurringnon-disclosure (RND) of commission). The paper also included proposalsoutlined that to the extent of any omission relating to RND occurring on or after April 2007, that aspect of any complaint is within the scope of the FCA complaint handling rules even if the PPI was sold before that date and the firm was not subject to the ombudsman’s jurisdiction before this time. Final guidance was issued in relation to how redress for Plevin-related claims should be calculated including considerationNovember 2018 under CP18/33 (Regular premium PPI complaints and recurringnon-disclosure of how profit share arrangements should be reflected in commission levels. The– feedback on CP18/18, final rules releasedguidance, and consultation on 2 March 2017 in Policy Statement 17/3 (Payment Protection Insurance Complaints: Feedbackproposed mailing requirements) with a further consultation on CP16/20 and final rules and guidance) confirmed that thetwo-year deadline period would start in August 2017. There was also a requirement to proactively mail previously rejected complainants in scope of s140A of the Consumer Credit Act to explain they are eligible to complain again in light of Plevin. Lastly there are some clarifications to the profit share percentage calculations. These changes may impact on the future amounts expected to be paid.mailing. PPI assumptions A provision for conduct remediation has been recognised in respect of themis-selling misselling of PPI policies. The provision is calculated based on a number of key assumptions which involve significant management judgement.assumptions. These are: | – | | Claim volumes – the estimated number of customer complaints received |
| – | | Uphold ratePlevin in scope rates – the estimated percentagenumber of complaintsrejected misselling claims that are, or will be upheld in favour of the customerscope for Plevin redress |
| – | | Average costThe determination of redress – the estimated paymentliability with respect to customers, including compensation for any direct loss plus interest.a specific portfolio of claims. |
The assumptions have been based on the following: | – | | Analysis completed of the causes of complaints, uphold rates, industry factors, FCA activity/guidance and how these are likely to vary in the future;future |
| – | | Actual claims activity registered to date |
| – | | The level of redress paid to customers, together with a forecast of how this is likely to change over time |
| – | | The impact on complaints levels of proactive customer contact |
| – | | The effect media coverage and the August 2019 time bar are expected to have on the complaints inflows |
| – | | Commission and profit share earned from Insurance providers over the lifetime of the products and related legal and regulatory guidance |
| – | | In relation to a specific PPI portfolio of complaints, an analysis of the relevant facts and circumstances including legal and regulatory responsibilities.responsibilities, informed by external legal advice. |
The key assumptions are kept under review, and are regularly reassessed and validated against actual customer data. The provision represents management’s best estimate of Santander UK’s future liability in respect ofmis-selling misselling of PPI policies. The most critical factorfactors in determining the level of provision isare the volume of claims for future inflow levels, and the determination of liability with respect to a specific portfolio of PPI claims. The uphold rate is informed by historical experience 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 until August 2019.2019 i.e. the date on which the time bar for claims takes effect. 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. It reflects a blended view across all our retail products and portfolios and includes redress for Plevin-related claims. The PPI misselling redress element of the provision linked to future claims levels and any associated Plevin redress is £101m. Expected future complaints through to the August 2019 time bar are estimated to be at a level consistent with the highest individual monthly inflow level in 2018. Were this level to be 20% higher or lower, the impact on the PPI misselling element of the provision of £101m would be an increase or decrease of £16m. The remainder of the provision relates to portfolios of complaints which were on hold pending further regulatory clarification in respect of which utilisation will begin in 2019, and to our best estimate of liability in respect of a legal dispute regarding allocation of responsibility for a specific portfolio further described in Note 32. No further information regarding the best estimate has been provided on the basis it would be seriously prejudicial.
| | | | | | | | | | | | | | | | Cumulative to
31 December 2018 | | | Future expected
(unaudited) | | | Sensitivity analysis
Increase/decrease
in provision | | Inbound complaints(1)(‘000) | | | 2,141 | | | | 415 | | | | 25 = £7.4m | | Outbound contact (‘000) | | | 488 | | | | 217 | | | | 25 = £5.4m | | Response rate to outbound contact | | | 54% | | | | 64% | | | | 1% = £0.8m | | Average uphold rate per claim(2) | | | 37% | | | | 76% | | | | 1% = £2.7m | | Average redress per claim(3) | | | £1,474 | | | | £545 | | | | £50 = £16.4m | |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
A provision for conduct remediation has been recognised in respect of themis-selling of PPI policies. The provision is calculated based on a number of key assumptions which involve significant management judgement. These are:
– | | Claim volumes –(1) Includes all claims, including the estimated number of customer complaints received |
– | | Uphold rate – the estimated percentage of complaints that are, or will be, upheld in favour of the customer |
– | | Average cost of redress – the estimated payment to customers, including compensation for any direct loss plus interest. |
The assumptions have been based on the following:
– | | Analysis completed of the causes of complaints, uphold rates, industry factors, FCA activity/guidance and how these are likely to vary in the future; |
– | | Actual claims activity registered to date |
– | | The level of redress paid to customers, together with a forecast of how this is likely to change over time |
– | | The impact on complaints levels of proactive customer contact |
– | | The effect media coverage and time bar are expected to have on the complaints inflows |
– | | Commission and profit share earned from Insurance providers over the lifetime of the products |
– | | In relation to a specific PPI portfolio of complaints an analysis of the relevant facts and circumstances including legal and regulatory responsibilities. |
The key assumptions are kept under review, and are regularly reassessed and validated against actual customer data. The provision represents management’s best estimate of Santander UK’s future liability in respect ofmis-selling of PPI policies.
The most critical factor in determining the level of provision is the volume of claims. The uphold rate is informed by historical experience 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 until August 2019.
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. It reflects a blended view across all our retail products and portfolios and includes redress for Plevin-related claims.
| | | | | | | | | | | | | | | | Cumulative to
31 December 2017 | | | Future expected
(unaudited) | | | Sensitivity analysis
Increase/decrease
in provision | | Inbound complaints(1) (‘000) | | | 1,623 | | | | 660 | | | | 25 = £9m | | Outbound contact (‘000) | | | 487 | | | | 127 | | | | 25 = £5m | | Response rate to outbound contact | | | 54% | | | | 100% | | | | 1% = £0.3m | | Average uphold rate per claim(2) | | | 47% | | | | 68% | | | | 1% = £2.6m | | Average redress per claim(3) | | | £1,378 | | | | £564 | | | | £100 = £50m | |
(1) | Includes all claims received regardless of whether we expectreferred to make a payment; i.e.above, regardless of the likelihood of the Santander UK group incurring a liability. Excludes claims where the complainant has not held a PPI policy. |
(2) | Claims include inbound and responses to outbound contact. |
(3) | The average redress per claim reduced from the cumulative average value at 31 December 20172018 of £1,378m£1,474 to a future average value of £564£545 due to the inclusion of Plevin cases in the provision, as well as a shift in the complaint mix to a greater proportion of storecards, which typically held lower average balances. |
The Santander UK overturn rate at the Financial Ombudsman Service was 16% in the first half of 2018, and 12% in the second half of 2018, reflecting reducing inflows over the same period. 2018 compared to 2017 The remaining provision for PPI redress and related costs was £246m (2017: £356m). We made no additional PPI charges in the year, based on our recent claims experience and having considered the FCA Consultation paper CP18/33 issued on 7 November 2018. We will continue to monitor our provision levels, and take account of the impact of any further claims received and FCA guidance. 2017 compared to 2016 The remaining provision for PPI redress and related costs amounted to £356m. The total charge for the year was £109m (2016: £144m) and was driven by an increase in estimated future claims driven by the start of the FCA advertising campaign for PPI, offset by an expected decline relating to a specific PPI portfolio review. We continue to monitor our provision levels in respect of recent claims experience. In 2016, a provision of £114m was made when we applied the principles published in the August 2016 FCA papers, and a further £32m was made in relation to a past business review. Monthly utilisation increased from the 2016 average following the confirmation of a deadline for customer complaints, broadly in line with our assumptions. We continue to monitor our provision levels in respect of recent claims experience. 2016 compared to 2015
We made an additional £144m provision charge in the year, which included our best estimate of Plevin related claim costs and a £30m charge for a portfolio under a past business review. With the FCA consultation that was expected to close in the first quarter of 2017, we assessed the adequacy of our provision and applied the principles published in the August 2016 FCA consultation paper to our current assumptions. We continued to review our provision levels in respect of recent claims experience and noted that once the final FCA guidance was published it was possible furtherPPI-related provision adjustments would be required in future years.
Monthly utilisation during the year, excluding the impact of past business review activity, was slightly higher than the 2015 average and in line with our assumptions.
(ii) Wealth and investment
During 2012, the FCA (then known as the FSA) undertook an industry-wide thematic review of the sale of investment products, and subsequently sales of premium investment funds. The FCA’s review included Santander UK, and identified shortcomings in the collection of customer information and risk profile alignment and concerns about product suitability, fees and charges. As a result, Santander UK initiated customer contact exercises to provide appropriate redress to customers who had suffered detriment.
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:
– | | Customer communications – the results of contact with affected customers |
– | | Acceptance of offers made – acceptances by affected customers and additional losses claimed from some customers |
– | | Average redress paid – the estimated payment to customers, including compensation for any direct loss plus interest. |
At 31 December 2017, the provision was £3m (2016: £22m), reflecting the remediation exercise being close to completion.
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
(iii)(ii) Other products
A provision for conduct remediation has also been recognised in respect of sales of other products. The provision represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including related costs. A number of uncertainties remain as to the eventual costs with respect to conduct remediation in respect of these products given the inherent difficulties in determining the number of customers involved and the amount of any redress to be provided to them. ProvisionsThe remaining provision for other liabilities and charges of £35m in the second quarter of 2017 relateconduct was £30m (2017: £47m), which primarily related to the sale of interest rate derivatives, following an ongoing review regardingof the regulatory classification of certain customers potentially eligible for redress. Following further analysis, management assessed the provision requirements resulting in a release of £11m in the second quarter of 2018.
b) Regulatory-relatedFSCS and Bank Levy (i)(I) Financial Services Compensation Scheme (FSCS)
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, based on information received from the FSCS, and the Santander UK group’s historic share of industry protected deposits.
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. On 25 April 2017, following the sale of certain Bradford & Bingley mortgage assets, the amount that the FSCS owed to HM Treasury reduced to £4.7bn, from £15.7bn. The interest payable on the borrowings with HM Treasury is now assessed at the higher of 12 month LIBOR plus 111 basis pointsloan, and the relevant rate published bySantander UK group’s share of that interest, fell accordingly. Based on the Debt Management Office. Whilst it is expected thatlatest estimates from the substantial majority ofFSCS the principalbalance outstanding will be repaid from funds the FSCS receivesearlier mostly through recoveries from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted,defaulted. According to the extent that there remains a shortfall,new estimates, the FSCS can recover any shortfall ofamount to be provided by the principal by levying the deposit-taking sector in instalments. The Santander UK group made capital contributions in August 2013, August 2014 and August 2015.
The FSCS and HM Treasury have agreed thatfor 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 were paid to HM Treasury and the FSCS has an obligation to contribute to the costs of the resolution, subject to a statutory cap. The Santander UK group’s contributions in 2015 included payments for this resolution.
On 31 March 2017 UK Asset Resolution announced the sale by Bradford & Bingley of certain mortgage assets. On 25 April 2017, as a result of that transaction, the amount that FSCS owes to HM Treasury reduced to £4.7bn, from the previous £15.7bn. The interest payable on the loan andwas lower than initially expected. As a result, there was a release of £4m (2017: £1m charge, 2016: £34m charge) to bring the Santander UK group’s share of that interest, fell accordingly.provision down to the amount now expected to be charged for the remaining interest. The Santander UK group purchased £1.5bnprovided for a liability for the FSCS of the securities issued by UK Asset Resolution.
For the year ended£4m at 31 December 2017, the Santander UK group charged £1m (2016: £34m, 2015: £76m) to the income statement in respect of the costs of the FSCS. The charge includes the effect of adjustments to provisions made in prior years as a result of more accurate information now being available, and is net of a refund of £12m in respect of recoveries made by the FSCS from Icelandic banks.2018 (2017: £13m).
(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 UKsub-group parented by Santander UK Group Holdings plc. 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.
In addition to changes in UK corporation tax rates, Finance (No.2) Act 2015 reduced the UK Bank Levy rate from 0.21% via subsequent annual reductions to 0.10% from 1 January 2021. As a result, a rate of 0.17%0.16% applies for 2017 (2016: 0.18%2018 (2017: 0.17%). Certain liabilities are subject to only a half rate, namely any deposits not otherwise excluded, (except for those from financial institutions and financial traders) and liabilities with a maturity greater than one year at the balance sheet date. The UK Bank Levy is not charged on the first £20bn of chargeable equity and liabilities. The cost of the UK Bank Levy for 20172018 was £69m (2017: £92m, (2016: £107m, 2015: £101m)2016: £107m). The Santander UK group paid £109m£86m in 2017 (2016: £101m)2018 (2017: £109m) and provided for a liability of £44m£40m at 31 December 2017 (2016: £60m)2018 (2017: £44m). c) Vacant property Vacant property provisions are made by reference to an estimate of any expectedsub-let income, compared to the head rent, and the possibility of disposing of Santander UK’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a semi-annual basis and will normally run off over the period of the leases concerned, whereconcerned. Where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released. d) OtherOff-balance sheet ECL OtherFollowing the adoption of IFRS 9 on 1 January 2018, provisions include expected credit losses relating to guarantees given to third parties and undrawn loan commitments.
e) Regulatory and other Regulatory and other provisions principally comprise amounts in respect of regulatory charges (including fines), operational loss and operational risk provisions, restructuring charges and litigation and related expenses. A number of uncertainties exist with respect to these provisions given the uncertainties inherent in operational, restructuring and litigation matters that affect the amount and timing of any potential outflows with respect to which provisions have been established. These provisions are reviewed periodically. Regulatory and other provisions charged in 2018 included the following items:
| | | Santander UK plc– | | 191In the fourth quarter of 2018, we were fined £33m by the FCA in relation to an investigation into our historical probate and bereavement practices. We acknowledged the findings of the FCA and apologised to the families and beneficiaries of deceased customers affected by these failings. This amount was charged and paid in the year. |
| | | Annual Report 2017 on Form 20-F | Financial statements– | | An amount of £58m (2017: £nil) that was charged in 2018 and arose from a systems related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act (CCA). This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2018 of potential costs in respect of the identified issue. However, as detailed in Note 32, these reviews and the related analysis are not yet complete, such that the approach and timing to any remediation has not yet been finalised, although it is expected to commence in 2019. |
28.31. RETIREMENT BENEFIT PLANS
The amounts recognised in the balance sheet were as follows: | | | | | | | Group | | | | | | Group | | | | | | | | 2017 £m | | | 2016 £m | | | | | | 2018
£m | | | 2017
£m | | Assets/(liabilities) | | | | | | | | | | | | | Funded defined benefit pension scheme – surplus | | | | | 449 | | | | 398 | | | | | | 842 | | | | 449 | | Funded defined benefit pension scheme – deficit | | | | | (245 | ) | | | (223 | ) | | | | | (75 | ) | | | (245 | ) | Unfunded defined benefit pension scheme | | | | | (41 | ) | | | (39 | ) | | | | | (39 | ) | | | (41 | ) | Total net assets | | | | | 163 | | | | 136 | | | | | | 728 | | | | 163 | | Remeasurement (gains)/losses recognised in other comprehensive income during the year were as follows: | Remeasurement (gains)/losses recognised in other comprehensive income during the year were as follows: | | Remeasurement (gains)/losses recognised in other comprehensive income during the year were as follows: | | | | | Group | | | Group | | | | | 2017 £m | | | 2016 £m | | | 2015 £m | | | 2018 £m | | | 2017
£m | | | 2016
£m | | Pension remeasurement | | | 103 | | | | 528 | | | | (319 | ) | | | (470 | ) | | | 103 | | | | 528 | |
| | | | | > Notes to the financial statements |
a) Defined contribution pension plans The Santander UK group operates a number of defined contribution pension plans. The assets of the defined contribution pension plans are held and administered separately from those of the Santander UK group. In December 2017, the Santander UK group ceased to contribute to the Santander Retirement Plan, an occupational defined contribution plan, and future contributions are paid into a defined contribution Master Trust, LifeSight. This Master Trust is the plan into which eligible employees are enrolled automatically. During the year the Santander Retirement Plan was wound up and all assets were transferred to LifeSight. The assets of the Santander Retirement Plan and theLifeSight Master Trust are held in separate trustee-administered funds. An expense of £67m (2017: £54m, (2016: £52m, 2015: £50m)2016: £52m) was recognised for defined contribution plans in the year, and is included in staff costs classified within operating expenses (see Note 6). None of this amount was recognised in respect of key management personnel for the years ended 31 December 2018, 2017 2016 and 2015.2016. 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 Scheme (“the Scheme”)(the Scheme). It comprises seven legally segregated sections under the terms of a merger of former schemes operated by Santander UK plc agreed in 2012. The Scheme covers 13% (2017: 17% (2016: 18%) of the Santander UK group’s employees, and is a closed funded defined benefit scheme. Under the projected unit method, the current service cost when expressed as a percentage of pensionable salaries will gradually increase over time.scheme which is closed to new members. The corporate trustee of the Santander (UK) Group Pension Scheme is Santander (UK) Group Pension Scheme Trustees Limited (the Trustee), a private limited company incorporated in 1996 and a wholly-owned subsidiary of Santander UK Group Holdings plc. During 2017, the Trustee was a wholly-owned subsidiary of Santander UK plc, but was transferred as part of the ring-fencing implementation. The principal duty of the Trustee is to act in the best interests of the members of the Scheme. The Trustee board comprises sevensix Directors selected by Santander UK plc, plus sevensix member-nominated Directors selected from eligible members who apply for the role. Formal actuarial valuations 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 2016 was finalised in March 2017. The next triennial funding valuation will be as at 31 March 2019.
The assets of the funded schemes including the Scheme are held independently of the Santander UK group’s assets in separate trustee administered funds. Investment strategy across the sections of the Scheme remains under regular review. Investment decisions are delegated by the Trustee to a common investment fund, managed by Santander (CF Trustee) Limited, a private limited company owned by five Trustee directors, three appointed by Santander UK plc and two by the Trustee. The Santander (CF Trustee) Limited 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 Scheme. Ultimate responsibility for investment policy and strategy rests with the Trustee of the Scheme who is required under the Pensions Act 2004 to prepare a statement of investment principles. The Trustee has developed the following investment principles: – | | To maintain a portfolio of suitable assets of appropriate quality, suitability and liquidity which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future benefits which the Scheme provides, as set out in the trust deed and rules |
– | | To limit the risk of the assets failing to meet the liabilities, over the long-term and on a shorter-term basis as required by prevailing legislation |
– | | To invest in a manner appropriate to the nature and duration of the expected future retirement benefit payments |
– | | To minimise the long-term cash costs of the Scheme to us by maximising the return on the assets whilst having regard to the objectives shown above. |
The Santander UK group’s defined benefit pension schemes expose usthe Santander UK group to actuarial risks such as investment risk, interest rate risk, longevity risk salary risk and inflation risk:risk. The Santander UK group does not hold material insurance policies over the defined benefit pension schemes, and has not entered into any significant transactions with them.
Formal actuarial valuations 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. 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 latest formal actuarial valuation for the Scheme at 31 March 2016 was finalised in March 2017, with a deficit to be funded of £1,739m. The next triennial funding valuation will be at 31 March 2019. Any funding surpluses can be recovered by Santander UK plc from the Scheme through refunds as the Scheme is run off over time or could be used to pay for the cost of benefits which are accruing. The total amount charged to the income statement was as follows: | | | | | | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | | | | | Net interest income | | | (7 | ) | | | (5 | ) | | | (18 | ) | Current service cost | | | 41 | | | | 31 | | | | 33 | | Past service and GMP costs | | | 41 | | | | 1 | | | | 1 | | Administration costs | | | 8 | | | | 8 | | | | 8 | | | | | | 83 | | | | 35 | | | | 24 | | | | On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to GMP, and concluded on the methods that were appropriate. The estimated increase in liabilities at the date of the judgement was £40m and is based on a number of assumptions and the actual impact may be different. This has been reflected in the income statement and in the closing net accounting surplus of the Scheme. | | | The amounts recognised in other comprehensive income were as follows: | | | | | Group | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | | | | | Return on plan assets (excluding amounts included in net interest expense) | | | 246 | | | | (435 | ) | | | (1,447 | ) | Actuarial (gains)/losses arising from changes in demographic assumptions | | | (56 | ) | | | (151 | ) | | | 30 | | Actuarial gains arising from experience adjustments | | | 15 | | | | (11 | ) | | | (80 | ) | Actuarial (gains)/losses arising from changes in financial assumptions | | | (675 | ) | | | 700 | | | | 2,025 | | Pension remeasurement | | | (470 | ) | | | 103 | | | | 528 | |
| | | Investment risk
Santander UK plc | | Scheme assets are invested in a diversified portfolio of debt securities, equities and other return-seeking assets. If the assets underperform the discount rate used to calculate the defined benefit obligation, it will reduce the surplus or increase the deficit. Volatility in asset values and the discount rate will lead to volatility in the net pension liability on the Santander UK group’s balance sheet and in other comprehensive income. To a lesser extent this will also lead to volatility in the pension expense in the Santander UK group’s income statement. The actual performance of assets will impact the amount the Santander UK group needs to contribute to the Scheme in the future.185 |
| | | Interest rate risk
Annual Report 2018 | Financial statements | | The present value of the Scheme’s liability is calculated using a discount rate determined by reference to high quality corporate bond yields. A decrease in the bond yield will increase the present value of the Scheme’s liability; however this will be partially offset by an increase in the value of the Scheme’s debt investments. |
| | | | | | | | | Movements in the present value of defined benefit scheme obligations were as follows: | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | At 1 January | | | (11,583 | ) | | | (11,082 | ) | Current service cost paid by Santander UK plc | | | (27 | ) | | | (30 | ) | Current service cost paid by subsidiaries | | | (14 | ) | | | (1 | ) | Current service cost paid by fellow Banco Santander subsidiaries | | | – | | | | (12 | ) | Interest cost | | | (282 | ) | | | (305 | ) | Employer salary sacrifice contributions | | | (6 | ) | | | (6 | ) | Past service cost | | | (1 | ) | | | (1 | ) | GMP equalisation cost | | | (40 | ) | | | – | | Remeasurement due to actuarial movements arising from: | | | | | | | | | – Changes in demographic assumptions | | | 56 | | | | 151 | | – Experience adjustments | | | (15 | ) | | | 11 | | – Changes in financial assumptions | | | 675 | | | | (700 | ) | Benefits paid | | | 433 | | | | 392 | | At 31 December | | | (10,804 | ) | | | (11,583 | ) | | Movements in the fair value of the schemes’ assets were as follows: | | | | | Group | | | | | 2018
£m | | | 2017
£m | | At 1 January | | | 11,746 | | | | 11,218 | | Interest income | | | 289 | | | | 310 | | Contributions paid by employer and scheme members | | | 184 | | | | 171 | | Contributions paid by fellow Banco Santander subsidiaries | | | – | | | | 12 | | Administration costs paid | | | (8 | ) | | | (8 | ) | Return on plan assets (excluding amounts included in net interest expense) | | | (246 | ) | | | 435 | | Benefits paid | | | (433 | ) | | | (392 | ) | At 31 December | | | 11,532 | | | | 11,746 | |
The composition and fair value of the schemes’ assets by category was: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | Quoted prices in
active markets | | | | | Prices not quoted in
active markets | | | | | Total | | | 2018 | | £m | | | % | | | | | £m | | | % | | | | | £m | | | % | | UK equities | | | 159 | | | | 1 | | | | | | – | | | | – | | | | | | 159 | | | | 1 | | Overseas equities | | | 1,854 | | | | 16 | | | | | | 878 | | | | 8 | | | | | | 2,732 | | | | 24 | | Corporate bonds | | | 1,536 | | | | 13 | | | | | | 311 | | | | 3 | | | | | | 1,847 | | | | 16 | | Government fixed interest bonds | | | 2,636 | | | | 23 | | | | | | – | | | | – | | | | | | 2,636 | | | | 23 | | Government index-linked bonds | | | 4,248 | | | | 37 | | | | | | – | | | | – | | | | | | 4,248 | | | | 37 | | Property | | | – | | | | – | | | | | | 1,143 | | | | 10 | | | | | | 1,143 | | | | 10 | | Derivatives | | | – | | | | – | | | | | | 65 | | | | – | | | | | | 65 | | | | – | | Cash | | | – | | | | – | | | | | | 662 | | | | 6 | | | | | | 662 | | | | 6 | | Repurchase agreements | | | – | | | | – | | | | | | (2,981 | ) | | | (26 | ) | | | | | (2,981 | ) | | | (26 | ) | Other | | | – | | | | – | | | | | | 1,021 | | | | 9 | | | | | | 1,021 | | | | 9 | | | | | | 10,433 | | | | 90 | | | | | | 1,099 | | | | 10 | | | | | | 11,532 | | | | 100 | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | UK equities | | | 187 | | | | 1 | | | | | | – | | | | – | | | | | | 187 | | | | 1 | | Overseas equities | | | 2,204 | | | | 19 | | | | | | 706 | | | | 6 | | | | | | 2,910 | | | | 25 | | Corporate bonds | | | 1,665 | | | | 14 | | | | | | 209 | | | | 2 | | | | | | 1,874 | | | | 16 | | Government fixed interest bonds | | | 255 | | | | 2 | | | | | | – | | | | – | | | | | | 255 | | | | 2 | | Government index-linked bonds | | | 3,506 | | | | 30 | | | | | | – | | | | – | | | | | | 3,506 | | | | 30 | | Property | | | – | | | | – | | | | | | 1,547 | | | | 13 | | | | | | 1,547 | | | | 13 | | Derivatives | | | – | | | | – | | | | | | 512 | | | | 4 | | | | | | 512 | | | | 4 | | Cash | | | – | | | | – | | | | | | 206 | | | | 2 | | | | | | 206 | | | | 2 | | Other | | | – | | | | – | | | | | | 749 | | | | 7 | | | | | | 749 | | | | 7 | | | | | | 7,817 | | | | 66 | | | | | | 3,929 | | | | 34 | | | | | | 11,746 | | | | 100 | |
| | | | | > Notes to the financial statements |
| | | Longevity risk | | The present value of the Scheme’s liability is calculated by reference to the best estimate of the life expectancy of scheme participants both during and after their employment. An increase in life expectancy of the Scheme participants will increase the present value of the Scheme’s liability as benefits will be paid for longer. | | | Salary risk | | The present value of the Scheme’s liability is calculated by reference to the future salaries of scheme participants. As such, an increase in the salary of the Scheme participants will increase the present value of the Scheme’s liability. This risk has been minimised by the introduction of a salary increase cap of 1% p.a. from 1 March 2015. | | | Inflation risk | | An increase in inflation rate will increase the Scheme’s liability as benefits will increase more quickly, accompanied by an expected increase in the return on the Scheme’s investments. |
The Santander UK group does not hold material insurance policies over the schemes, and has not entered into any significant transactions with the schemes.
The total amount charged to the Income Statement, including any amounts classified as redundancy costs was as follows:
| | | | | | | | | | | | | | | | Group | | | | | 2017 £m | | | 2016 £m | | | 2015 £m | | Net interest income | | | (5 | ) | | | (18 | ) | | | (4 | ) | Current service cost | | | 31 | | | | 33 | | | | 37 | | Past service cost | | | 1 | | | | 1 | | | | 2 | | Administration costs | | | 8 | | | | 8 | | | | 6 | | | | | | 35 | | | | 24 | | | | 41 | | | The amounts recognised in other comprehensive income during the year were as follows: | | | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | Return on plan assets (excluding amounts included in net interest expense) | | | (435 | ) | | | (1,447 | ) | | | 164 | | Actuarial (gains)/losses arising from changes in demographic assumptions | | | (151 | ) | | | 30 | | | | (67 | ) | Actuarial gains arising from experience adjustments | | | (11 | ) | | | (80 | ) | | | (202 | ) | Actuarial losses/(gains) arising from changes in financial assumptions | | | 700 | | | | 2,025 | | | | (211 | ) | Cumulative actuarial reserve acquired with subsidiary | | | – | | | | – | | | | (3 | ) | Pension remeasurement | | | 103 | | | | 528 | | | | (319 | ) | | | Movements in the present value of defined benefit obligations during the year were as follows: | | | | | | | | | | | Group | | | | | | | | 2017 £m | | | 2016 £m | | At 1 January | | | | | | | (11,082 | ) | | | (9,004 | ) | Current service cost paid by Santander UK plc | | | | | | | (30 | ) | | | (23 | ) | Current service cost paid by subsidiaries | | | | | | | (1 | ) | | | (2 | ) | Current service cost paid by fellow Banco Santander subsidiaries | | | | | | | (12 | ) | | | (8 | ) | Interest cost | | | | | | | (305 | ) | | | (333 | ) | Employer salary sacrifice contributions | | | | | | | (6 | ) | | | (7 | ) | Past service cost | | | | | | | (1 | ) | | | (1 | ) | Remeasurement: | | | | | | | | | | | | | – Actuarial movements arising from changes in demographic assumptions | | | | | | | 151 | | | | (30 | ) | – Actuarial movements arising from experience adjustments | | | | | | | 11 | | | | 80 | | – Actuarial movements arising from changes in financial assumptions | | | | | | | (700 | ) | | | (2,025 | ) | Benefits paid | | | | | | | 392 | | | | 271 | | At 31 December | | | | | | | (11,583 | ) | | | (11,082 | ) | | Movements in the fair value of scheme assets during the year were as follows: | | | | | | | | Group | | | | | | | | 2017
£m | | | 2016
£m | | At 1 January | | | | | | | 11,218 | | | | 9,450 | | Interest income | | | | | | | 310 | | | | 351 | | Contributions paid by employer and scheme members | | | | | | | 171 | | | | 236 | | Contributions paid by fellow Banco Santander subsidiaries | | | | | | | 12 | | | | 13 | | Administration costs paid | | | | | | | (8 | ) | | | (8 | ) | Return on plan assets (excluding amounts included in net interest expense) | | | | | | | 435 | | | | 1,447 | | Benefits paid | | | | | | | (392 | ) | | | (271 | ) | At 31 December | | | | | | | 11,746 | | | | 11,218 | |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
The following tables provide information on the composition and fair value of the plan assets by category at 31 December 2017 and 2016.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | Quoted prices in
active markets | | | Prices not quoted in
active markets | | | | | Total | | | 2017 | | £m | | | % | | | £m | | | % | | | | | £m | | | % | | UK equities | | | 187 | | | | 1 | | | | – | | | | – | | | | | | 187 | | | | 1 | | Overseas equities | | | 2,204 | | | | 19 | | | | 706 | | | | 6 | | | | | | 2,910 | | | | 25 | | Corporate bonds | | | 1,665 | | | | 14 | | | | 209 | | | | 2 | | | | | | 1,874 | | | | 16 | | Government fixed interest bonds | | | 255 | | | | 2 | | | | – | | | | – | | | | | | 255 | | | | 2 | | Government index-linked bonds | | | 3,506 | | | | 30 | | | | – | | | | – | | | | | | 3,506 | | | | 30 | | Property | | | – | | | | – | | | | 1,547 | | | | 13 | | | | | | 1,547 | | | | 13 | | Cash | | | – | | | | – | | | | 206 | | | | 2 | | | | | | 206 | | | | 2 | | Other | | | – | | | | – | | | | 1,261 | | | | 11 | | | | | | 1,261 | | | | 11 | | | | | | 7,817 | | | | 66 | | | | 3,929 | | | | 34 | | | | | | 11,746 | | | | 100 | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | UK equities | | | 148 | | | | 1 | | | | – | | | | – | | | | | | 148 | | | | 1 | | Overseas equities | | | 2,064 | | | | 19 | | | | 597 | | | | 5 | | | | | | 2,661 | | | | 24 | | Corporate bonds | | | 1,778 | | | | 16 | | | | 162 | | | | 1 | | | | | | 1,940 | | | | 17 | | Government fixed interest bonds | | | 226 | | | | 2 | | | | – | | | | – | | | | | | 226 | | | | 2 | | Government index-linked bonds | | | 3,294 | | | | 29 | | | | – | | | | – | | | | | | 3,294 | | | | 29 | | Property | | | – | | | | – | | | | 1,361 | | | | 12 | | | | | | 1,361 | | | | 12 | | Cash | | | – | | | | – | | | | 197 | | | | 2 | | | | | | 197 | | | | 2 | | Other | | | – | | | | – | | | | 1,391 | | | | 13 | | | | | | 1,391 | | | | 13 | | | | | | 7,510 | | | | 67 | | | | 3,708 | | | | 33 | | | | | | 11,218 | | | | 100 | |
Scheme assets are stated at fair value based upon quoted prices in active markets with the exception of property funds, derivatives and those classified under ‘Other’. The ‘Other’ category consists of asset-backed securities, annuities and 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 assetsInvestments in absolute return funds that are included in the ‘Other’ category, and investments in absolute return funds and foreign exchange, inflation, equity and interest rate derivatives that are included in the ��Derivatives’ category, 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 forA strategy is in place to manage interest rate and inflation risk relating to the Santander UK groupliabilities. In addition, the Scheme entered into an equity collar in 2017 which was extended and resized in 2018. At 31 December 2018, the equity collar had a notional value of £1,795m (2017: £2,000m). In addition, the level of interest rate hedging in the Scheme was increased, and the Scheme moved from using LIBOR-based instruments to gilt-backed instruments, including through the use of total return swaps and repurchase agreements. At 31 December 2018, repurchase agreements were £746m (2016: £1,798m, 2015: £177m).entered into by the Scheme over an equivalent value of Government fixed interest and index-linked bonds and have therefore been included in the table above. A strategy is also in place to manage currency risk.
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 20172018 and 2016.2017. The Santander UK group’s pension scheme assets do not include any property or other assets that are occupied or used by the Santander UK group. 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 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 up to 20% quoted equities, at least 50% debt instruments (including gilts, index–linked gilts, and corporate bonds) and up to 30% property and alternatives. A strategy is in place to manage interest rate and inflation risk relating to the liabilities. At 31 December 2017, the Scheme held interest rate swaps with a gross notional value of £2,116m (2016: £1,945m) and inflation swaps with a gross notional value of £1,030m (2016: £1,030m) for the purposes of liability matching. In addition the Scheme entered into an equity collar in 2017 which had a notional value of £2bn at 31 December 2017.
| | | | | > Notes to the financial statements |
Funding In March 2017, in compliance with the Pensions Act 2004, the Trustee and the Santander UK group agreed to a new recovery plan in respect of the Scheme and schedule of contributions following the finalisation of the 31 March 2016 actuarial valuation. The funding target for this actuarial valuation is for the Scheme to have sufficient assets to make payments to members in respect of the accrued benefits as and when they fall due. In accordance with the terms of the Trustee agreement in place at the time, the Santander UK group contributed £163m£176m in 2017 (2016: £199m)2018 (2017: £163m) to the Scheme, of which £123m (2016: £101m)(2017: £123m) was in respect of agreed deficit repair contributions. The agreed schedule of the Santander UK group’s remaining contributions to the Scheme broadly comprises contributions of £119m each year from 1 April 2017 increasing by 5% to 31 March 2026 plus contributions of £28m per annum increasing at 5% from 1 April 2021 to 31 March 2023 followed by £66m per annum increasing at 5% per annum from 1 April 2023 to 31 March 2026. In addition, the Santander UK group havehas agreed to pay further contingent contributions should investment performance be worse than expected, or should the funding position have fallen behind plan at the next formal actuarial valuation. Actuarial assumptions The principal actuarial assumptions used for the defined benefit schemes were as follows:were: | | | | Group | | Group | | | | 2017 % | | 2016 % | | 2015 % | | 2018 % | | 2017 % | | 2016 % | To determine benefit obligations: | | | | | | | | | | | | | – Discount rate for scheme liabilities | | 2.5 | | 2.8 | | 3.7 | | 2.9 | | 2.5 | | 2.8 | – General price inflation | | 3.2 | | 3.1 | | 3.0 | | 3.2 | | 3.2 | | 3.1 | – General salary increase | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | – Expected rate of pension increase | | 2.9 | | 2.9 | | 2.8 | | 2.9 | | 2.9 | | 2.9 | | | | | | | | Years | | Years | | Years | | Years | | Years | | Years | Longevity at 60 for current pensioners, on the valuation date: | | | | | | | | | | | | | – Males | | 27.4 | | 27.8 | | 27.7 | | 27.3 | | 27.4 | | 27.8 | – Females | | 30.1 | | 30.3 | | 30.2 | | 30.1 | | 30.1 | | 30.3 | | Longevity at 60 for future pensioners currently aged 40, on the valuation date: | | | | | | | | | | | | | – Males | | 28.9 | | 30.0 | | 29.9 | | 28.7 | | 28.9 | | 30.0 | – Females | | 31.7 | | 32.2 | | 32.2 | | 31.6 | | 31.7 | | 32.2 |
| | | | Annual Report 2018 | Financial statements | | |
Discount rate for scheme liabilities The rate used to discount the retirement benefit obligation is based on the annual yield at the balance sheet date of high quality corporate bonds on that date, adjusted to match the terms of the Scheme liabilities. date. There are only a limited number of higher quality Sterling denominatedSterling-denominated corporate bonds, particularly those that are longer dated.longer-dated. Therefore, in order to set a suitable discount rate, we need to construct a corporate bond yield curve. We consider a number of different data sources and methods of projecting forward the corporate bond curve. When considering the different models,an appropriate assumption, we project forward the expected cash flows of the Scheme and adopt a single equivalent cash flow weighted discount rate, subject to management judgement. During 2018 we reduced the level of management adjustment to the discount rate, noting the expanded range of different models used by UK companies, and the relatively higher discount rates being adopted. At 31 December 2018 this increased the discount rate applied and had a positive impact of £104m on the accounting surplus. General price inflation Consistent with our discount rate methodology, we set the inflation assumption using the expected cash flows of the Scheme, fitting them to an inflation curve to give a weighted average inflation assumption. We then deduct an inflation risk premium. Duringpremium to reflect the year the methodologycompensation holders of fixed rate instruments expect to receive for determiningtaking on the inflation riskrisk. This premium was changed. Ais subject to a cap, was introduced to better reflect management’s view of inflation expectations. As partDuring the year, the assumptions for setting the inflation risk premium were updated to reflect management’s current views of long term inflation. At 31 December 2018, this had a negative impact of £65m on the triennial actuarial valuationsaccounting surplus.
Expected rate of pension increase During the year, the methodology for setting the expected rate of pension increases was changed to better represent the current expectations for inflation volatility and the impact of caps and collars on pension increases. The revised pension increase assumption methodology uses a stochastic model, which is calibrated to consider both the observed historical volatility term structure and derivative pricing. The model provides an improvement in estimate because it allows for the likelihood that high or low inflation in one year feeds into inflation remaining high or low in the next year. At 31 December 2018 this had a negative impact of £85m on the accounting surplus. Mortality assumptions The mortality assumptions are based on an independent analysis of the Santander (UK) Group Pension Scheme’s actual mortality experience, was carried out. Duringout as part of the year, and following the March 2016triennial actuarial valuation review,valuations, together with recent evidence from the Continuous Mortality Investigation Table “S2 Light” was adopted (updated from the S1 Light tables used previously). To reflect experience, and including a margin for prudence, for the funding basis, the adjustment adopted was a loading for the probability of death of 104% for male members and 82% for female members. The‘S2 Light’ mortality assumption for accounting purposes was also updated to be in line with the best estimate assumptions and is now assumed to follow 108% for males and 86% for females of the standard “S2 Light” All Pensioners tables, based on the experience of Self–Administered Pension Schemes (SAPS) and projected in line with CMI 2016 improvements to the measurement date. Allowancetables. An allowance is then made for expected future improvements to life expectancy based on the Continuous Mortality Investigation TableTables.
During 2018 we adopted the CMI 20162017 projection model for future improvements in life expectancy with a long–termlong-term rate of future improvements to life expectancy of 1.25% for male and female members. This has been updated since 31 December 2016 whenmodel incorporates the CMI 2015 table was adopted with long–term rate of future improvements of 1.5% for male and 1.25% for female members. In addition to updating the mortality assumptions during the year, adjustments were also made to the allowance for commutation to reflect actual Scheme experience over the intervaluation period from 2013 to 2016. The table above shows that a participant retiring at age 60 at 31 December 2017 is assumed to live for,latest available data on average, 27.4 yearstrends in the case of a male member and 30.1 years in the case of a female member (2016: 27.8 years male and 30.3 years female). In practice, there will be variation between individual members but these assumptions are expected to be appropriate across all participants. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 40 now, when they retire in 20 years’ time at age 60.
expectancy. At 31 December 2017 the change in the inflation rate methodology above had a negative impact of £125m, and the changes in the mortality and commutation assumptions2018, this had a positive impact of £150m,£57m on the accounting surplus of £163m (2016: surplus of £136m).
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
surplus. Actuarial assumption sensitivities The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. | | | | | | | | | | | | | | | | | | | | | Increase/(decrease) | | | | Increase/(decrease) | | | | | | 2017 £m | | 2016 £m | | | | Assumption | | | Change in pension obligation atyear-end from | | 2018
£m | | | 2017
£m | | | Discount rate | | Change in pension obligation atyear-end from a 25 bps increase | | (550) | | | (593 | ) | | | | 25 bps increase | | | (483 | ) | | | (550 | ) | | | Change in pension cost for the year from a 25 bps increase | | (19) | | | (21 | ) | | | | General price inflation | | Change in pension obligation atyear-end from a 25 bps increase | | 365 | | | 405 | | | | | 25 bps increase | | | 350 | | | | 365 | | | | Change in pension cost for the year from a 25 bps increase | | 12 | | | 13 | | | | | General salary increase | | Change in pension obligation atyear-end from a 25 bps increase | | n/a | | | n/a | | | | | 25 bps increase | | | n/a | | | | n/a | | | | Mortality | | Change in pension obligation atyear-end from each additional year of longevity assumed | | 367 | | | 369 | | | | | Each additional year of longevity assumed | | | 335 | | | | 367 | |
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the changechanges in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above sensitivity analyses,analysis, 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 calculatingmethod used to calculate the defined benefit obligation liability recognised in the balance sheet. There waswere no changechanges 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: | | | | | | | | Year ending 31 December | | £m | | | £m | | 2018 | | | 252 | | | 2019 | | | 253 | | | | 266 | | 2020 | | | 270 | | | | 269 | | 2021 | | | 290 | | | | 287 | | 2022 | | | 313 | | | | 309 | | Five years ending 2027 | | | 1,836 | | | 2023 | | | | 325 | | Five years ending 2028 | | | | 1,903 | |
The average duration of the defined benefit obligation at 31 December 20172018 was 19.1 years (2017: 20.1 years (2016: 21.0 years) and comprised: | | | | | | | | | | 2017
years | | 2016
years | | Active members | | 26.5 | | | 26.8 | | Deferred members | | 24.4 | | | 25.7 | | Retired members | | 13.9 | | | 14.6 | |
Maturity profile of undiscounted benefit payments (unaudited)
The maturity profile of the estimated undiscounted benefit payments expected to be paid from the Scheme over its life at 31 December 2017 was:
| | | | | > Notes to the financial statements |
29.32. CONTINGENT LIABILITIES AND COMMITMENTS
| | | | Group | | | Group | | | | | 2017
£m | | | 2016
£m | | | 2018(1)
£m | | | 2017
£m | | Guarantees given to third parties | | | 1,557 | | | | 1,859 | | | | 1,610 | | | | 1,557 | | Formal standby facilities, credit lines and other commitments with original term to maturity of: | | | | | | | | | | | | | – One year or less | | | 10,664 | | | | 9,462 | | | | 8,550 | | | | 10,664 | | – Later than one year | | | 31,278 | | | | 32,154 | | | | 31,561 | | | | 31,278 | | | | | | 43,499 | | | | 43,475 | | | | 41,721 | | | | 43,499 | |
| (1) | For segmental and credit risk staging analysis relating tooff-balance sheet exposures, see the IFRS 9 credit quality table in the ‘Santander UK group level – credit risk review’ section. |
At 31 December 2018, the Santander UK group had credit impairment loss provisions relating to guarantees given to third parties and undrawn loan commitments. See Note 30 for further details. The Company has no material expected credit losses on guarantees provided to fellow Banco Santander group subsidiaries. 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 and fellow subsidiaries of Santander UK Group Holdings plc Santander UK plc has fully and unconditionally guaranteed the unsubordinated liabilities of Cater Allen Limited, a wholly owned subsidiary, that have been or will be incurred before 31 December 2020. Santander UK plc had previously fully and unconditionally guaranteed the unsubordinated liabilities of ANTS that had been incurred before 31 December 2018. As part of our ring-fencing implementation, this guarantee was terminated and was of no further force and effect such that, with effect from 1 January 2019, Santander UK plc was released and discharged from all related present and future obligations and liabilities. Capital Support Deed At 31 December 2018, Santander UK plc, ANTS and Cater Allen Limited, which are the threePRA-regulated entities within the Santander UK group, were party to a capital support deed dated 23 December 2015 (the Capital Support Deed 2015) with Santander UK Group Holdings plc and certain othernon-regulated subsidiaries of Santander UK plc. The parties to the Capital Support Deed 2015 were permitted by the PRA to form 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 were exempt from large exposure limits that would otherwise apply. The purpose of the Capital Support Deed 2015 was to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, thenon-regulated parties to any of the regulated parties in the event that one of the regulated parties breached or was at risk of breaching its capital resources requirements or risk concentrations requirements. The core UK group permission as supported by the Capital Support Deed 2015 expired on 31 December 2018. With effect from 1 January 2019, and in accordance with our ring-fenced structure, Santander UK plc, Cater Allen Limited and certain othernon-regulated subsidiaries within the ring-fenced bank entered into a new Capital Support Deed dated 13 November 2018 (the RFBSub-Group Capital Support Deed). From 1 January 2019, the parties to the RFBSub-Group Capital Support Deed were permitted by the PRA to form a new core UK group, a permission which will expire on 31 December 2021. Other than the change of the entities in scope, the purpose of the RFB SubGroup Capital Support Deed is the same as the Capital Support Deed 2015. Domestic LiquiditySub-group (DoLSub) As a firm subject to the liquidity obligations in the Capital Requirements Regulation (CRR), Santander UK plc applied for, and was granted, a CRR Article 8 DoLSub CRR permission (DoLSub Article 8 permission). At 31 December 2018, the UK DoLSub comprised the entities Santander UK plc, ANTS plc and Cater Allen Limited. With effect from 1 January 2019, and in accordance with our ring-fenced structure, Santander UK plc was granted a new DolSub permission, withdrawing ANTS plc from the UK DoLSub. The DoLSub waiver replaces the requirement for liquidity adequacy and reporting on an individual basis. 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. Ongoing assessments are made to ensure that credit limits remain appropriate considering any change in the security value or the customer’s financial circumstances. For unsecured overdraft facilities 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 can comprise standby and revolving facilities which are subject to ongoing compliance with covenants and may require 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 27,30, the Santander UK group participates in the UK’s national resolution scheme, the FSCS, and is thus subject to levies to fund the FSCS. In the event that the FSCS significantly increase the levies to be paid by firms, the associated costs to the Santander UK group would rise. Loan representations and warranties In connection with the securitisations and covered bond transactions described in Note 16,15, the Santander UK group entities selling the relevant loans into the applicable securitisation or covered bond portfolios make representations and warranties with respect to such loans, in each case as of the date of the sale of the loans into the applicable portfolio. These representations and warranties cover, among other 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 made by Santander UK group companies which act as sellers of loans in these securitisations and covered bond transactions depend in each case on the nature of the transaction and the requirements of the transaction structure. In addition, market conditions and credit rating agency requirements may affect the representations and warranties required of the relevant Santander UK group companies in these transactions. 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–backedmortgage-backed securitisations or the covered bond transaction included in Note 16,15, 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 ofsub-prime business. In addition, Santander UK plc’s credit policy explicitly prohibits such lending.
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
Similarly, under the auto loan securitisations in Note 16,15, in the event that there is a breach or inaccuracy in respect of a representation or warranty relating to the loans, the relevant Santander UK group entity who sold the auto loans into the securitisation portfolio will be required to repurchase such loans from the structure (also at their outstanding principal balance plus accrued interest). In addition to breaches of representation and warranties, under the auto loan securitisations, the seller may also have a repurchase obligation if certain portfolio limits are breached (which include, amongst other things, limits as to the size of a loan given to an individual customer, LTV ratio, average term to maturity and average seasoning). 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 such loan. The Santander UK group manages and monitors its securitisation and covered bond activities closely to minimise potential claims. The outstanding balances under the securitisation and covered bond transactions originated by the Santander UK group are set out in Note 16.
Other legal actions and regulatory matters The Santander UK group engages in discussion, andco-operates, with the FCA, PRA and other bodiesregulators and government agencies in various jurisdictions in their supervision and review of the Santander UK group, including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and services.activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations.investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability. It is not currently practicable to estimate the possible financial effect of these matters.
In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made. Payment Protection Insurance Note 2730 details our provisions including those in relation to PPI. In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is in its early stages. There are factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is difficult to reliably predict the resolution of the matter including timing or the significance of the possible impact. The PPI provision includes our best estimate of Santander UK’s liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial. German dividend tax arbitrage transactions Santander UK plc, ANTS and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) are currently under investigation by the Cologne Criminal Prosecution Office and the German Federal Tax Office in relation to historical involvement in German dividend tax arbitrage transactions (known as cum/ex transactions). We are cooperating with the German authorities and are conducting our own internal investigation into the matters in question. There are factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict with reasonable certainty the resolution of the matter including timing or the significance of the possible impact. Consumer credit The Santander UK group’s unsecured lending and other consumer credit business is governed by consumer credit law and related regulations.regulations, including the CCA. 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. ItThe CCA includes very detailed and prescriptive requirements for lenders, including in relation to post contractual information. As described in Note 30, other provisions includes an amount of £58m arising from a systems related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, but these reviews are not yet complete, such that the approach and timing to any remediation has not yet been finalised. As a result, the actual cost of customer compensation could differ materially from the amount provided, and it is not possiblecurrently practicable to provide any meaningfula reliable estimate or range of the possible cost.amount or timing of any additional financial effects. Taxation The Santander UK group engages in discussion, andco-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. Other On 2 November 2015, Visa Europe Ltd agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Ltd, Santander UK received upfront consideration made up of cash and convertible preferred stock. Additional deferred cash consideration is also payable following the third anniversary of closing. Conversion of the preferred stock into Class A Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK & Ireland (UK&I) multilateral interchange fees (MIFs). Santander UK and certain other UK&I banks have agreed to indemnify Visa Inc. in the event that the preferred stock is insufficient to meet the costs of this litigation. Visa Inc. has recourse to this indemnity once more than€1bn of losses relating to UK&I MIFs have arisen or once the total value of the preferred stock issued to UK&I banks on closing has been reduced to nil. In valuing the preferred stock, Santander UK makes adjustments for illiquidity and the potential for changes in conversion. Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism. As part of the sale of subsidiaries, and as is normal in such circumstances, Santander UK 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 33.37.
| | | | | > Notes to the financial statements |
Otheroff-balance sheet commitments The Santander UK group has commitments to lend at fixed interest rates which expose us to interest rate risk. For further information,more, see the Risk review. Operating lease commitments | | | | | | | | | | | | | | | | Group | | | Group | | | Rental commitments undernon-cancellable operating leases | | 2017
£m | | | 2016
£m | | | 2018
£m | | | 2017
£m | | Not later than one year | | | 73 | | | | 82 | | | | 72 | | | | 73 | | Later than one year and not later than five years | | | 160 | | | | 252 | | | | 114 | | | | 160 | | Later than five years | | | 70 | | | | 134 | | | | 60 | | | | 70 | | | | | | 303 | | | | 468 | | | | 246 | | | | 303 | |
Under the termsThe majority of these leases are subject to a third party outsourcing contract whereby the Santander UK group has the opportunityright to extend itsthe occupation of properties by a minimum of three years subject to 12 months’ notice and a lease renewal being available from external landlords duringlandlords. Where leases expire after the termexpiry of the lease. At expiry,outsourcing contract in 2020 and occupation is still required, negotiations will be held with the Santander UK group has the optionlandlords to reacquire the freehold of certain properties.agree renewal terms.
During 2017, Santander UK groupIn 2018, rental expense amounted to £61m (2016:(2017: £61m, 2015:2016: £61m) in respect, including minimum rentals of minimum rentals. There was no£63m (2017: £61m, 2016: £61m), offset bysub-lease rental income andof £2m (2017: £nil, 2016: £nil). There was no contingent rent expense included in this rental expense.amount.
| | | | | > Notes to the financial statements |
30.33. SHARE CAPITAL
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | Ordinary shares of £0.10 each | | | | | | £300m Preference shares
of £1,000 each | | | Total | | | Issued and fully paid share capital | | No. | | | £m | | | | | | No. | | | £m | | | £m | | At 1 January 2016 | | | 31,051,768,866 | | | | 3,105 | | | | | | | | 13,797 | | | | 14 | | | | 3,119 | | Repurchases | | | – | | | | – | | | | | | | | (17 | ) | | | – | | | | – | | At 31 December 2016, 1 January 2017 and 31 December 2017 | | | 31,051,768,866 | | | | 3,105 | | | | | | | | 13,780 | | | | 14 | | | | 3,119 | |
| | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | Ordinary shares
of £0.10 each | | | £300m Preference shares
of £1,000 each | | | Total | | | Issued and fully paid share capital | | No. | | | £m | | | No. | | | £m | | | £m | | | At 1 January 2017, 31 December 2017, 1 January 2018 and 31 December 2018 | | | 31,051,768,866 | | | | 3,105 | | | | 13,780 | | | | 14 | | | | 3,119 | |
| | | | Group | | | Group | | | Share premium | | 2017
£m | | | 2016
£m | | | 2018
£m | | | 2017
£m | | At 1 January and 31 December | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | |
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 29. £300m Fixed/Floating RateNon-Cumulative Callable Preference Shares The preference shares entitle the holders to a fixednon-cumulative dividend, at the discretion of Santander UK plc, of 6.22%6.222% 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. 31.
| | | | Annual Report 2018 | Financial statements | | |
34. OTHER EQUITY INSTRUMENTS | | | | Group | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | Initial interest rate
% | | | First call date | | | 2018 £m | | | 2017 £m | | £300mStep-up Callable Perpetual Reserve Capital Instruments | | | 235 | | | 235 | | | 7.037 | | | | February 2026 | | | | 235 | | | | 235 | | AT1 securities: | | | | | | | | | | | | | – £500m Perpetual Capital Securities | | | 496 | | | – | | | 6.75 | | | | June 2024 | | | | 496 | | | | 496 | | – £750m Perpetual Capital Securities | | | 750 | | | 750 | | | 7.375 | | | | June 2022 | | | | 750 | | | | 750 | | – £300m Perpetual Capital Securities | | | 300 | | | 300 | | | 7.60 | | | | December 2019 | | | | 300 | | | | 300 | | – £500m Perpetual Capital Securities | | | 500 | | | 500 | | | 6.475 | | | | June 2019 | | | | 210 | | | | 500 | | | | | | 2,281 | | | 1,785 | | | | | | | 1,991 | | | | 2,281 | |
£300mStep-up Callable Perpetual Reserve Capital Instruments
The £300mStep-up Callable Perpetual Reserve Capital Instruments were issued in 2001 by Santander UK plc. Reserve Capital InstrumentsThese instruments are redeemable by Santander UK plc on 14 February 2026 or on any coupon payment date thereafter, subject to the prior approval of the PRAPRA. They are perpetual and provided that the auditors have reported to the trustee within the previous six months that the solvency condition is met.pay interest annually. The Reserve Capital Instruments bear interest at acoupon rate of 7.037% per annum, payable annually in arrears, from 14 February 2001 to 14 February 2026. Thereafter, the reserve capital instruments will bear interest at a rate, resetresets every five years, of 3.75% per annum above the gross redemption yieldbased on the UK five-year benchmark gilt rate. Interest payments may be deferred by Santander UK plc. The Reserve Capital Instrumentsinstruments are not redeemable at the option of the holders and the holders do not have any rights against other Santander UK group companies. Upon the occurrence of certain tax or regulatory events, the Reserve Capital Instruments may be exchanged, their terms varied, or redeemed. Where interest payments have been deferred, the Company may not declare or pay dividends on or redeem or repurchase any junior
AT1 securities until it next makes a scheduled payment on the Reserve Capital Instruments and Tier One Preferred Income Capital Securities. The Reserve Capital Instruments 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 Reserve Capital Instruments will rank pari passu with the holders of the most senior class(es) of preference shares (if any) of Santander UK plc then in issue and in priority to all other Santander UK plc shareholders. No such redemption may be made without the consent of the PRA.
| | | Annual Report 2017 on Form20-F | Financial statements | | |
Other equity instruments includeThe AT1 securities issued by the Company. The £500m and £300m Perpetual Capital Securities issued in 2014 and the £750m and £500m Perpetual Capital Securities issued in 2015 and 2017Company were subscribed by its immediate parent company, Santander UK Group Holdings plc, meet the CRD IV AT1 rules and are fully recognised as AT1 capital.
£500m Perpetual Capital Securities
On 10 April 2017, the Company issued £500m Perpetual Capital Securities, all of which were 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. 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 6.75% per annum until 24 June 2024; thereafter, the distribution rate resets every five years to a rate of 5.792% 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 2024 or on any reset date thereafter. No such redemption may be made without the consent of the PRA.
£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 isnon-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 thenbased on prevailing 5 year sterling mid swap rate.rates. The Perpetual Capital Securities will be automatically written down if 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 any reset date thereafter. No such redemption may be made without the PRA’s consent.
£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 isnon-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 1CET1 capital ratio of the Santander UK prudential consolidation group as defined in the PRA’s rules fall below 7%. The Perpetual Capital SecuritiesThey are redeemable at the option of the Company on 24 December 2019their first call date or on eachany reset date thereafter in the cases of the 6.75% and 7.375% Perpetual Capital Securities, and on any distribution payment date thereafter.thereafter in the cases of the 7.60% and 6.475% Perpetual Capital Securities. No such redemption may be made without the consent of the PRA. In turn,
During 2018, as part of a capital management exercise, Santander UK Group Holdings plc issued a similar security. The issuance was 100% subscribed by Banco Santander SA. £500mpurchased and redeemed 58% of the 6.475% Perpetual Capital Securitiessecurities.
On 24 June 2014, the Company issued £500m 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 6.475% per annum until 24 June 2019; thereafter, the distribution rate resets every five years to a rate 4.291% 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 June 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.
32. NON–CONTROLLING35.NON-CONTROLLING INTERESTS
| | | | | | | | | | | | Group | | | | | 2017
£m | | | 2016
£m | | PSA Finance UK Limited | | | 152 | | | | 150 | | | | | | 152 | | | | 150 | |
| | | | | | | | | | | | 2018
£m | | | 2017
£m | | PSA Finance UK Limited | | | 151 | | | | 152 | | | | | | 151 | | | | 152 | |
PSA Finance UK Limited is the only subsidiary in the Santander UK group that gives rise to significantnon-controlling interests. See Note 1921 for summarised financial information of PSA Finance UK Limited.
| | | | | > Notes to the financial statements |
33.36. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
The table below shows the changes in liabilities arising from financing activities. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | 2018 | | | 2017 | | | | | Balance sheet line item | | | | | | | | | Balance sheet line item | | | | | | | | | | | Debt
securities | | | Subordinated | | | Other equity | | | Dividends | | | | | | Debt
securities | | | Subordinated | | | Other equity | | | Dividends | | | | | | | | in issue | | | liabilities | | | instruments | | | paid | | | Total | | | in issue | | | liabilities | | | instruments | | | paid | | | Total | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | At 1 January | | | 42,633 | | | | 3,793 | | | | 2,281 | | | | – | | | | 48,707 | | | | 50,346 | | | | 4,303 | | | | 1,785 | | | | – | | | | 56,434 | | Cash flows from financing activities | | | 4,615 | | | | (277 | ) | | | (290 | ) | | | (1,318 | ) | | | 2,730 | | | | (7,081 | ) | | | (52 | ) | | | 496 | | | | (1,000 | ) | | | (7,637 | ) | Cash flows from operating activities | | | (2,522 | ) | | | 69 | | | | – | | | | – | | | | (2,453 | ) | | | 115 | | | | 254 | | | | – | | | | – | | | | 369 | | Non-cash changes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Unrealised foreign exchange | | | 1,371 | | | | 149 | | | | – | | | | – | | | | 1,520 | | | | (255 | ) | | | (235 | ) | | | – | | | | – | | | | (490 | ) | – Other changes | | | 595 | | | | (133 | ) | | | – | | | | 1,318 | | | | 1,780 | | | | (492 | ) | | | (477 | ) | | | – | | | | 1,000 | | | | 31 | | At 31 December | | | 46,692 | | | | 3,601 | | | | 1,991 | | | | – | | | | 52,284 | | | | 42,633 | | | | 3,793 | | | | 2,281 | | | | – | | | | 48,707 | |
37. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS SECURITY FOR ASSETS 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 foron-balance sheet andoff-balance sheet in accordance with IFRS.sheet. | | | | | | | | Group | | | | 2017
£m | | 2016
£m | On-balance sheet: | | | | | Treasury bills and other eligible securities | | 12,576 | | 6,491 | Cash | | 3,658 | | 4,123 | Loans and advances to customers – securitisations and covered bonds (See Note 16) | | 35,421 | | 40,230 | Loans and advances to customers | | 15,047 | | 10,601 | Debt securities | | 130 | | 755 | Equity securities | | 8,629 | | 5,637 | Totalon-balance sheet | | 75,461 | | 67,837 | Off-balance sheet: | | | | | Treasury bills and other eligible securities | | 30,220 | | 15,013 | Debt securities | | 850 | | 331 | Equity securities | | 1,943 | | 1,557 | Totaloff-balance sheet | | 33,013 | | 16,901 |
| | | | | | | | | | | | Group | | | | | 2018
£m | | | 2017
£m | | On-balance sheet: | | | | | | | | | Cash and balances at central banks | | | 1,080 | | | | 1,010 | | Trading assets | | | – | | | | 17,092 | | Loans and advances to customers – securitisations and covered bonds (See Note 15) | | | 35,694 | | | | 35,421 | | Loans and advances to customers – other | | | 15,175 | | | | 15,078 | | Loans and advances to banks | | | 218 | | | | 105 | | Other financial assets at amortised cost | | | 3,763 | | | | | | Financial assets at fair value through other comprehensive income | | | 5,825 | | | | | | Financial investments | | | | | | | 6,755 | | Totalon-balance sheet | | | 61,755 | | | | 75,461 | | Totaloff-balance sheet | | | 15,220 | | | | 33,013 | |
| | | | Annual Report 2018 | Financial statements | | |
The Santander UK group provides assets as collateral in the following areas of the business. Sale and repurchase agreements Subsidiaries of the Company enterThe Santander UK group enters 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 provideSantander UK group provides collateral in excess of the borrowed amount. The carrying amount of assets that were so provided at 31 December 20172018 was £34,310m (2016: £17,359m)£17,485m (2017: £34,310m), of which £2,931m (2016: £4,949m)£2,383m (2017: £2,931m) was classified within ‘Loans and advances to customers – securitisations and covered bonds’ in the table above.
Securitisations and covered bonds As described in Note 16,15, Santander UK plc and certain of its subsidiaries enter into securitisation transactions whereby portfolios of residential mortgage loansissue securitisations and other loans are purchased by or assigned to structured securitisation companies, and have been funded through the issue of mortgage-backed securities and other asset–backed securities. Holders of the securities are only entitled to obtain payments of principal and interest to the extent that the resources of the securitisation companies are sufficient to support such payments and the holders of the securities have agreed in writing not to seek recourse in any other form.covered bonds. At 31 December 2017, £1,091m (2016: £363m)2018, there were £36,195m (2017: £36,512m) of loansgross assets in these secured programmes and £501m (2017: £1,091m) of these related to internally retained issuances and were so assigned byavailable for use as collateral for liquidity purposes in the Santander UK group. Santander UK plc also has a covered bond programme, whereby securities are issued to investors and are secured by a pool of residential mortgages. future. At 31 December 2017, the pool of residential mortgages for the covered bond programme was £19,772m (2016: £20,263m). At 31 December 2017, total notes issued externally from secured programmes (securitisations and covered bonds) decreased to £19,907m (2016: £24,134m), including gross issuance of £3,980m (2016: £2,771m) and redemptions of £10,030m (2016: £6,844m). At 31 December 2017,2018, a total of £4,359m (2016: £4,998m)£4,039m (2017: £4,359m) of notes issued under securitisation and covered bond programmes had also been retained internally, a proportion of which had been used as collateral for raising funds via third party bilateral secured funding transactions, which totalled £1,834m at 31 December 2017 (2016: £2,764m)2018 (2017: £1,834m), or for creatinguse as collateral which couldfor liquidity purposes in the future be used for liquidity purposes.future. 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 £38,016m£24,714m at 31 December 2017 (2016: £27,975m)2018 (2017: £38,016m) and are offset by contractual commitments to return stock borrowed or cash received. Derivatives business In addition to the arrangements described, collateral is also provided in the normal course of derivative business to counterparties. At 31 December 2017, £3,658m (2016: £3,523m)2018, £1,465m (2017: £3,658m) of such collateral in the form of cash had been provided by the Santander UK group and is included in the table. 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 andoff-balance sheet, in accordance with IFRS.was: | | | | | | | | Group | | | | 2017
£m | | 2016
£m | On-balance sheet: | | | | | Trading liabilities | | 1,911 | | 3,535 | Deposits by banks | | 1,760 | | 785 | Deposits by customers | | 8 | | – | Totalon-balance sheet | | 3,679 | | 4,320 | Off-balance sheet: | | | | | Trading liabilities | | 36,230 | | 26,980 | Deposits by banks | | 2,425 | | 1,167 | Totaloff-balance sheet | | 38,655 | | 28,147 |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
| | | | | | | | Group | | | | 2018
£m | | 2017
£m | On-balance sheet: | | | | | Trading liabilities | | – | | 1,911 | Deposits by customers | | – | | 8 | Deposits by banks | | 4,048 | | 1,760 | Totalon-balance sheet | | 4,048 | | 3,679 | Totaloff-balance sheet | | 23,236 | | 38,655 |
Purchase and resale agreements Subsidiaries of the CompanyThe Santander UK group also enterenters 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 receiveSantander UK group receives collateral in excess 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 2017,2018, the fair value of such collateral received was £16,356m (2016: £15,483m)£15,728m (2017: £16,356m). Of the collateral received, almost all was sold or repledged. The subsidiaries have an obligation to return collateral that they have sold or pledged.
Stock borrowing and lending agreements Obligations under stock borrowing and lending agreements representrepresenting contractual commitments to return stock borrowed. These obligations totalled £22,299mborrowed by the Santander UK group amounted to £7,508m at 31 December 2017 (2016: £12,664m)2018 (2017: £22,299m) and are offset by a contractual right to receive stock lent by the Santander UK group.lent. Derivatives business In addition to the arrangements described, collateral is also received from counterparties in the normal course of derivative business. At 31 December 2017, £3,679m (2016: £4,320m)2018, £4,048m (2017: £3,679m) of such collateral in the form of cash had been received by the Santander UK group and is included in the table. Lending activities In addition to the 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 risk’ section of the Risk review. 34.
| | | | | > Notes to the financial statements |
38. SHARE-BASED COMPENSATION 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 LTIP), the Deferred Shares Bonus Plan. The Santander UK group’s other current arrangementPlan and scheme, respectively, are free shares awarded to eligible employees and partnership shares.the Partnership Shares scheme. All the share options and awards relate to shares in Banco Santander SA. In 2018, as part of the implementation of our ring-fencing plans, the Sharesave Schemes were transferred to SEIL, which was subsequently transferred outside of the Santander UK group, but remained within the Santander UK Group Holdings plc group. 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 £16.7m (2016: £4.4m)£nil (2017: £16.7m), none of which £nil had vested at 31 December 2017 (2016:2018 (2017: £nil). Cash received from the exercise of share options was £2.3m (2016: £nil, 2015: £nil). The main schemes are:
a) Sharesave Schemes The Santander UK group launched its tenth HM Revenue & Customs approved Sharesave Scheme under Banco Santander SA ownership in September 2017. The first nine Sharesave Schemes were launched each year from 2008 to 2016 in the month of September2017 under broadly similar terms as the 2017 Scheme.terms. Under the Sharesave Scheme’s current HMRC-approved savings limits, eligible employees may enter into contracts to save between £5 and £500 per month. For all schemes, at the expiryend of a fixed term of three or five years after the grant date, the employees have the option tocan use these savings to acquirebuy shares in Banco Santander SA at a discount, calculated in accordance with the rules of the scheme. The discount is currently 20%10% of the average middle market quoted price of Banco Santander SA shares over the first three dealing days prior to invitation. The vesting of awards under the scheme depends on continued employment with the Banco Santander SA group. Participants in the scheme have six months from the date of vest in whichto exercise the option can be exercised.option.
The fair value of each Sharesave option for 2017, 2016 and 2015 has been estimated at the date of acquisition or grant using a Partial Differentiation Equation model with the following assumptions: | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | Risk free interest rate | | | 0.89% – 1.08% | | | | 0.31% – 0.41% | | | | 1.06% – 1.37% | | Dividend yield | | | 5.48% – 5.51% | | | | 6.28% – 6.46% | | | | 6.91% – 7.36% | | Expected volatility of underlying shares based on implied volatility to maturity date of each scheme | | | 26.16% – 26.31% | | | | 31.39% – 32.00% | | | | 28.54% – 29.11% | | Expected lives of options granted under 3 and 5 year schemes | | | 3 and 5 years | | | | 3 and 5 years | | | | 3 and 5 years | |
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 market–related vesting conditions are met, provided that thenon-market vesting conditions are met. Share price volatility has been based upon the range of implied volatility for the Banco Santander SA shares at the strikes and tenors in which the majority of the sensitivities lie.
The following table below summarises movements in the number of share options during the year, and changes in weighted average exercise price over the same period.
| | | | 2017 | | | | | | 2016 | | | | | | 2015 | | | 2018 | | | | 2017 | | | | 2016 | | | | | Number of
options
‘000 | | Weighted
average
exercise price
£ | | | | | Number of
options
‘000 | | Weighted
average
exercise price
£ | | | | | Number of
options
‘000 | | Weighted
average
exercise price
£ | | | Number of
options
‘000 | | | Weighted
average
exercise price
£ | | | Number of
options
‘000 | | | Weighted
average
exercise price
£ | | | Number of
options
‘000 | | | Weighted
average
exercise price
£ | | Outstanding at 1 January | | | 28,916 | | | 3.08 | | | | | | 24,762 | | | | 3.53 | | | | | | 19,122 | | | | 4.19 | | | | 27,201 | | | | 3.12 | | | | | | 28,916 | | | | 3.08 | | | | | | 24,762 | | | | 3.53 | | Granted | | | 3,916 | | | 4.02 | | | | | | 17,296 | | | | 4.91 | | | | | | 14,074 | | | | 3.13 | | | | – | | | | – | | | | | | 3,916 | | | | 4.02 | | | | | | 17,296 | | | | 4.91 | | Exercised | | | (1,918 | ) | | 3.77 | | | | | | (338 | ) | | | 3.67 | | | | | | (1,839 | ) | | | 3.75 | | | | (334 | ) | | | 3.47 | | | | | | (1,918 | ) | | | 3.77 | | | | | | (338 | ) | | | 3.67 | | Forfeited/expired | | | (3,713 | ) | | 3.40 | | | | | | (12,804 | ) | | | 3.51 | | | | | | (6,595 | ) | | | 4.50 | | | | (2,618 | ) | | | 3.83 | | | | | | (3,713 | ) | | | 3.40 | | | | | | (12,804 | ) | | | 3.51 | | Transferred to SEIL | | | | (24,249 | ) | | | 3.04 | | | | | | – | | | | – | | | | | | – | | | | – | | Outstanding at 31 December | | | 27,201 | | | 3.12 | | | | | | 28,916 | | | | 3.08 | | | | | | 24,762 | | | | 3.53 | | | | – | | | | – | | | | | | 27,201 | | | | 3.12 | | | | | | 28,916 | | | | 3.08 | | Exercisable at 31 December | | | 5,200 | | | 3.17 | | | | | | 2,334 | | | | 4.30 | | | | | | 2,807 | | | | 3.76 | | | | 10,370 | | | | 2.81 | | | | | | 5,200 | | | | 3.17 | | | | | | 2,334 | | | | 4.30 | |
| | | | | > Notes to the financial statements |
The weighted average grant-date fair value of options granted under the Sharesave scheme during the year was £1.02 (2016: £0.65, 2015: £0.50). The weighted average share price at the date the share options were exercised was £4.74 (2017: £4.96, (2016: £3.79, 2015:2016: £3.79).
The following table summarises the range of exercise prices and weighted average remaining contractual life of the options outstanding at 31 December 2018 and 2017. | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | 2017 | | | Range of exercise prices | | Weighted average
remaining
contractual life
Years | | | Weighted
average
exercise price
£ | | | | | | Weighted average
remaining
contractual life
Years | | | Weighted
average
exercise price
£ | | £2 to £3 | | | – | | | | – | | | | | | | | 3 | | | | 2.75 | | £3 to £4 | | | – | | | | – | | | | | | | | 1 | | | | 3.17 | | £4 to £5 | | | – | | | | – | | | | | | | | 3 | | | | 4.21 | |
The fair value of each option for 2018, 2017 and 2016.2016 has been estimated at the date of acquisition or grant using a partial differentiation equation model. This model uses assumptions on the risk free interest rate, dividend yields, the expected volatility of the underlying shares and the expected lives of options granted under 3 and 5 year schemes. The weighted average grant-date fair value of options granted during the year was £nil (2017: £1.02, 2016: £0.65). | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | 2016 | | | Range of exercise prices | | Weighted average
remaining
contractual life
Years | | | Weighted
average
exercise price £ | | | | | | Weighted average
remaining
contractual life
Years | | | Weighted
average
exercise price £ | | £2 to £ 3 | | | 3 | | | | 2.75 | | | | | | | | 4 | | | | 2.75 | | £3 to £4 | | | 1 | | | | 3.17 | | | | | | | | 3 | | | | 3.28 | | £4 to £5 | | | 3 | | | | 4.21 | | | | | | | | 2 | | | | 4.82 | |
b) Long–Term Incentive Plan (LTIP)LTIP The LTIP was reintroduced inIn 2014 and amended for 2015, awards under which conditional cash awards were made to certain Executive Directors, Key Management Personnel (as defined in Note 35)39) and other nominated individuals which are converted into shares in Banco Santander SA at the time of vesting and deferred for three years. There have been no LTIP awards granted since 2015 due to the introduction of a single variable remuneration framework across the Banco Santander group in 2016.
The LTIP plans granted in 20152014 and 20142015 involve aone-year performance cycle for vesting, withdeferred for a further three-year period dependent upon performance conditions applied to the deferral of 2015 awards.applied. Beneficiaries were granted an initial award determined in GBP which was converted into shares in Banco Santander SA in January 2015 and January 2016 respectively based on performance over the performance cycle. The 2014 LTIP vested at 100% in January 2015 based on Banco Santander SA’s relative Total Shareholder Return (TSR) performance in 2014 versus a comparator group and was deferred over three years. The awards lapsed during 2018 due to the performance conditions not being satisfied. The 2015 LTIP vested in January 2016, was deferred over three years and is payable in 2018 based on furtherwas subject to performance testing. The 2015 LTIP vested at 91.5% in January 2016conditions based on Banco Santander SA’s Earnings Per Share (EPS) and Return on Tangible Equity (RoTE) performance against budget in 2015, was deferred over three years and is payable in 2019 based on further performance testing. 2015 LTIP
Employees were granted an initial award determined in GBP in 2015 which was converted into shares in Banco Santander SA, in January 2016, based on Banco Santander SA’s relative EPS and RoTE performance in 2015 versus a comparator group.budget. The conditions of the 2015 LTIP vestedhave been met and will be paid out to the remaining eligible population in the first quarter of 2019 at 91.5% in January 2016. The vested award is payable in 2019 subject to Banco Santander SA’s continuing relative performance to comparators.65.78% of the original award.
The following table summarises the movement in the value of conditional awards in the 2015 LTIP duringLTIPs in 2018, 2017 2016 and 2015:2016: | | | | | | | | | | | | | | | | 2017 £000 | | | 2016
£000 | | | 2015
£000 | | Outstanding at 1 January | | | 6,718 | | | | 6,769 | | | | – | | Granted | | | – | | | | – | | | | 6,769 | | Forfeited/cancelled | | | (215) (1 | ) | | | (51 | ) | | | – | | Outstanding at 31 December | | | 6,503 | | | | 6,718 | | | | 6,769 | |
(1) | | The outstanding shares have been updated to compensate for the equity dilution caused by the shares issued by Banco Santander SA in July 2017. |
The amount that could vest after the deferral period will depend 25% on EPS growth vs Peers, 25% on RoTE, 20% on Top 3 best bank to work for, 15% on Top 3 bank in customer satisfaction and 15% on loyal customers. The peer group against whom the EPS growth will be measured is a comparator group of 17 financial institutions. EPS and RoTE will be measured over a three-year period from 2015 to 2017, others will be tested once for performance to 2017. Performance testing will take place during 2018.
| | | Banco Santander SA’s place in the EPS ranking | | Maximum shares in that tranche to be delivered
%
| 1st to 5th
| | 100 | 6th
| | 87.5 | 7th
| | 75 | 8th
| | 62.5 | 9th
| | 50 | 10th and below
| | – | | | | Banco Santander SA’s RoTE | | Maximum shares in that tranche to be delivered
%
| 12% or above
| | 100 | 11% to 12%
| | 75 | Below 11%
| | – |
On a country level, 100% vests if Banco Santander SA is rated a top 3 best bank to work for and top 3 in customer satisfaction. 100% vests if the target for loyal customers is met by December 2018 weighted equally between retail and corporate customers. For full vesting at the Banco Santander group level, at least 6 of the 10 core countries for Banco Santander should get the top 3 best bank to work for, must be top 3 in customer satisfaction in all 10 countries, must have 17 million retail and 1.1 million corporate loyal customers. A sliding scale applies below this threshold with 50% vesting if there are 15 million retail and 1 million corporate loyal customers, any less would lead to no vesting.
2014 LTIP
Employees were granted an initial award determined in GBP in 2014 which was converted into shares in Banco Santander SA in January 2015 based on Banco Santander SA’s relative TSR performance in 2014 versus a comparator group. The 2014 LTIP vested at 100% in January 2015. The vested award has been deferred over three years and payable in equal tranches in 2016, 2017 and 2018 subject to Banco Santander SA’s continuing relative TSR performance to comparators and continuing employment. Relative TSR performance to 31 December 2017 will be tested during 2018 to determine the final tranche of the award vesting and will be paid in June 2018 subject to continued employment.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
The following table summarises the movement in the value of conditional awards in the 2014 LTIP during 2017, 2016 and 2015:
| | | | | | | | | 2015 LTIP | | | | | 2014 LTIP | | | | | 2017 £000 | | | 2016 £000 | | | 2015 £000 | | | 2018
£000 | | | 2017
£000 | | | 2016
£000 | | | | | 2018
£000 | | | 2017
£000 | | | 2016
£000 | | Outstanding at 1 January | | | 3,193 | | | | 5,102 | | | | 5,355 | | | | 6,503 | | | | 6,718 | | | | 6,769 | | | | | | 1,910 | | | | 3,193 | | | | 5,102 | | Forfeited/cancelled | | | (1,283) (1 | ) | | | (1,909 | ) | | | (253 | ) | | | (129 | ) | | | (215 | )(1) | | | (51 | ) | | | | | (1,910 | ) | | | (1,283 | )(1) | | | (1,909 | ) | Outstanding at 31 December | | | 1,910 | | | | 3,193 | | | | 5,102 | | | | 6,374 | | | | 6,503 | | | | 6,718 | | | | | | – | | | | 1,910 | | | | 3,193 | |
| (1) | | The outstanding shares have been updated to compensate for the equity dilution caused by the shares issued by Banco Santander SA in July 2017. |
See Note 3539 for details of conditional share awards made to certain Executive Directors, Other Key Management Personnel and other individuals under the LTIP.
| | | | Annual Report 2018 | Financial statements | | |
c) Deferred shares bonus plan Deferred incentivebonus awards are designed to align employee performance with shareholder value and encourage increased retention of senior employees. During 20162017 and 2017, in compliance with the PRA Rulebook and Remuneration Code,2018, conditional share awards were made to Santander UK employees (designated as Code Staff)Material Risk Takers). Such employees receive part of their annual bonus as a deferred award comprising 50% in shares, and 50% in cash. Any deferred awards including those in Banco Santander SA shares, are dependent on future service. For 20162017 and 20172018 bonus awards, deferral of the award is over a three, five or seven-year period dependent on Code Staff categorisation or Senior Manager Function designation, with delivery of equal tranches of shares taking place on or aroundfrom the anniversary of the initial award. Deferred bonus awards in shares are subject to an additionalone-year retention period from the point of delivery. Code StaffMaterial Risk Takers are required to defer either 40% or 60% of any annual bonus (40% for variable pay of less than £500,000, 60% for variable pay at or above this amount). Vesting of both deferred incentivebonus awards and long-term incentivebonus awards is subject to risk and performance adjustment in the event of deficient performance and prudent financial control provisions in accordance with the PRA Rulebook and Remuneration Code. For Code Staff, any variable remuneration paid for performance after 1 January 2015, is also subject to clawback in line with the PRA Rulebook and Remuneration Code.provisions.
d) Other arrangements and schemes The Santander UK group also operates a Partnership Shares scheme
A Partnership Shares scheme is operated for eligible employees under the Share Incentive Plan (SIP) umbrella. Participants can electchoose to invest up to £1,800 per tax year (or no more than 10% of an employee’s salary for the tax year) frompre-tax salary to purchasebuy Banco Santander SA shares. Shares are held in trust for the participants. There are no vesting conditions attached to these shares, and no restrictions as to when the shares can be removed from the trust. However, if a participant chooses to sell the shares before the end of five years, they will be liable for the taxable benefit received when the shares are taken out of the trust. The shares can be released from trust after five years free of income tax and national insurance contributions. 2,147,3992,346,108 shares were outstanding at 31 December 2017 (2016: 2,110,6172018 (2017: 2,147,399 shares). 35.39. TRANSACTIONS WITH DIRECTORS AND OTHER KEY MANAGEMENT PERSONNEL
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. | | Directors’ remuneration | | 2017 £ | | | 2016 £ | | | 2015 £ | | | 2018 £ | | | 2017 £ | | | 2016 £ | | Salaries and fees | | | 4,406,908 | | | | 3,604,999 | | | | 4,694,260 | | | | 5,028,434 | | | | 4,406,908 | | | | 3,604,999 | | Performance-related payments(1) | | | 3,685,464 | | | | 2,330,000 | | | | 2,607,407 | | | | 5,194,317 | | | | 3,685,464 | | | | 2,330,000 | | Other fixed remuneration (pension and other allowances &non-cash benefits) | | | 1,580,321 | | | | 635,493 | | | | 1,002,320 | | | | 1,467,011 | | | | 1,580,321 | | | | 635,493 | | Expenses | | | 96,358 | | | | 120,302 | | | | 115,382 | | | | 25,198 | | | | 96,358 | | | | 120,302 | | Total remuneration | | | 9,769,051 | | | | 6,690,794 | | | | 8,419,369 | | | | 11,714,960 | | | | 9,769,051 | | | | 6,690,794 | | | | | | | | | | | | | | | | Directors’ and Other Key Management Personnel compensation | | 2017 £ | | | 2016 £ | | | 2015 £ | | | 2018 £ | | | 2017 £ | | | 2016 £ | | Short-term employee benefits(2) | | | 24,642,085 | | | | 24,757,161 | | | | 19,950,608 | | | | 24,445,189 | | | | 24,642,085 | | | | 24,757,161 | | Post-employment benefits | | | 2,292,857 | | | | 1,918,144 | | | | 1,825,688 | | | | 2,399,261 | | | | 2,292,857 | | | | 1,918,144 | | Share-based payments | | | – | | | | – | | | | 400,948 | | | Total compensation | | | 26,934,942 | | | | 26,675,305 | | | | 22,177,244 | | | | 26,844,450 | | | | 26,934,942 | | | | 26,675,305 | |
| (1) | In line with the Code, a proportion of the performance-related payment was deferred. Further details can be found in Note 34.38. |
| (2) | Excludes grants of shares in Banco Santander SA made asbuy-outs of deferred performance-related payments in 20172018 of 603,614189,381 shares in connection with previous employment for fourfive individuals (2016: nil 2015:(2017: 603,614; 2016: nil). Excludes payments made asbuy-outs of deferred performance-related payments of £52,100£266,667 in connection with previous employment for one individual (2016:(2017: £52,100 for one individual; 2016: £2,732,357 for five individuals; 2015: £3,453,956 for five individuals). |
| (3) | Termination payments of £847,388 were paid in 2018 to two key management persons (2017: nil). |
In 2017,2018, the remuneration, excluding pension contributions, of the highest paid Director, was £4,714,578 (2016: £4,535,756)£4,635,497 (2017: £4,714,578) of which £2,425,000 (2016: £2,330,000)£2,317,000 (2017: £2,425,000) was performance related. In 2017,2018, there was no pension benefit accrued for the highest paid Director but in respect of the qualifying past services to Santander UK to 31 May 2009 he has a deferred pension benefit accruing under a defined benefit scheme of £20,402 p.a. (2017: £15,450 p.a. (2016: £15,450 p.a)). b) Retirement benefits Defined benefit pension schemes are provided to certain employees. See Note 2831 for a descriptiondetails of the schemes and the related costs and obligations. OneAs described above, one director, being the highest paid director, has a deferred pension benefit accruing under a defined benefit scheme of £15,450 p.a. in respect of the qualifying services to Santander UK and based on previous service with Santander UK to 31 May 2009 (2016: £15,450).scheme. Ex gratia pensions paid to former Directors of Santander UK plc in 2017,2018, which have been provided for previously, amounted to £2,482 (2016: £14,893, 2015:£87,300 (2017: £2,482; 2016: £14,893). In 1992, the Board decided not to award any new such ex gratia pensions.
| | | | | > Notes to the 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 ordinary course of normal banking business. | | | | | | | | | | | | | 2018 | | | | 2017 | | | | | 2017 | | | | 2016 | | | No. | | | £000 | | | No. | | | £000 | | Secured loans, unsecured loans and overdrafts | | No. | | | £000 | | | No. | | | £000 | | | | | | | | | | | | At 1 January | | | 17 | | | | 5,195 | | | | | | 18 | | | | 5,492 | | | | 7 | | | | 1,216 | | | | | | 17 | | | | 5,195 | | Net movements | | | (10 | ) | | | (3,979 | ) | | | | | (1 | ) | | | (297 | ) | | | 9 | | | | 1,819 | | | | | | (10 | ) | | | (3,979 | ) | At 31 December | | | 7 | | | | 1,216 | | | | | | 17 | | | | 5,195 | | | | 16 | | | | 3,035 | | | | | | 7 | | | | 1,216 | | | Deposit, bank and instant access accounts and investments | | | | | | | | | | | | | | | | | | | | | At 1 January | | | 26 | | | | 9,138 | | | | | | 26 | | | | 14,678 | | | | 25 | | | | 13,184 | | | | | | 26 | | | | 9,138 | | Net movements | | | (1 | ) | | | 4,046 | | | | | | – | | | | (5,540 | ) | | | 5 | | | | (2,221 | ) | | | | | (1 | ) | | | 4,046 | | At 31 December | | | 25 | | | | 13,184 | | | | | | 26 | | | | 9,138 | | | | 30 | | | | 10,963 | | | | | | 25 | | | | 13,184 | |
During 2017, no Directors undertook sharedealing transactions through the Santander UK group’s execution-only stockbroker (2016: two Directors) with an aggregate net value of £nil (2016: £10,080). Any transactions were on normal business terms
| | | | | > Notes to the financial statements |
In 2018 and standard commission rates were payable. In 2017, and 2016, no Director held any interest in the shares of any company withinin the Santander UK at any timegroup and no Director exercised or was granted any rights to subscribe for shares in any company withinin the Santander UK.UK group. In addition, in 20172018 and 2016,2017, no Directors exercised share options over shares in Banco Santander SA, the ultimate parent company of the Company. At 31 December 2018, one interest-free loan from Banco Santander SA had been advanced to a Director, amounting to £344,348 (2017: £510,901). Two Directors and one Key Management Person received benefits in kind from Banco Santander SA totalling £485,334 and £2,024, respectively, in 2018.
Secured loans, unsecured loans and overdrafts 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 withinin 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 withinin the Santander UK group. Deposits, bank and instant access accounts and 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 withinin Santander UK group. In 2017,2018, loans were made to twoeight Directors (2016: five(2017: two Directors), with a principal amount of £53,452£65,232 outstanding at 31 December 2017 (2016: £25,560)2018 (2017: £53,452). In 2017,2018, loans were made to five members of Santander UK’seight Other Key Management Personnel (2016: twelve)(2017: five), with a principal amount of £1,162,384£2,969,462 outstanding at 31 December 2017 (2016: £5,169,234)2018 (2017: £1,162,384). In 20172018 and 2016,2017, there were no other transactions, arrangements or agreements with Santander UK in which Directors, Other Key Management Personnel or personstheir connected with thempersons had a material interest. In addition, in 20172018 and 2016,2017, no Director had a material interest in any contract of significance with Santander UK other than a service contract with Santander UK at any time during the year.contract. d) Santander Long-Term Incentive Plan
In 2017, no Executive Directors (2016: nil, 2015: one) or Other Key Management Personnel (2016: nil, 2015: thirteen) were granted conditional awards under the Santander LTIP. No LTIP award was granted in 2017 or 2016.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
36.40. RELATED PARTY DISCLOSURES
a) Parent undertaking and controlling party The Company’s immediate parent is Santander UK Group Holdings plc, a company incorporated in England and Wales. Its ultimate parent and controlling party is Banco Santander SA, a company incorporated in Spain. The smallest and largest groups into which the Santander UK group’s results are included are the group accounts of Santander UK Group Holdings plc and Banco Santander SA, respectively, copies of which may be obtained from Shareholder Relations, 2 Triton Square, Regent’s Place, London NW1 3AN, on the corporate website (www.santander.co.uk) or on the Banco Santander corporate website (www.santander.com).3AN. b) Transactions with related parties Transactions with related parties during the year and balances outstanding at theyear-end: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | Interest, fees and other income received | | | | Interest, fees and other expenses paid | | | | Amounts owed by related parties | | | | Amounts owed to related parties | | | Interest, fees and
other income received | | | | | Interest, fees and
other expenses paid | | | | | Amounts owed
by related parties | | | | | Amounts owed
to related parties | | | | | 2017 £m | | 2016 £m | | 2015 £m | | 2017 £m | | 2016 £m | | 2015 £m | | 2017 £m | | 2016 £m | | 2017 £m | | 2016 £m | | | 2018
£m | | 2017
£m | | 2016
£m | | 2018
£m | | 2017
£m | | 2016
£m | | 2018 £m | | 2017 £m | | 2018 £m | | 2017 £m | | Ultimate parent | | (60 | ) | | | (81 | ) | | | (76 | ) | | | | 321 | | | | 188 | | | | 99 | | | | | 4,398 | | | | 2,148 | | | | | (5,079 | ) | | | (2,882 | ) | | (72 | ) | | | (60 | ) | | | (81 | ) | | | | 217 | | | | 321 | | | | 188 | | | | | 2,491 | | | | 4,398 | | | | | (3,594 | ) | | | (5,079 | ) | Immediate parent | | (3 | ) | | | (3 | ) | | | (3 | ) | | | | 207 | | | | 139 | | | | 19 | | | | | 8 | | | | 5 | | | | | (7,374 | ) | | | (5,962 | ) | | (3 | ) | | | (3 | ) | | | (3 | ) | | | | 275 | | | | 207 | | | | 139 | | | | | | – | | | | 8 | | | | | (10,392 | ) | | | (7,374 | ) | Fellow subsidiaries | | (76 | ) | | | (271 | ) | | | (439 | ) | | | | 491 | | | | 653 | | �� | | 743 | | | | | 102 | | | | 363 | | | | | (981 | ) | | | (1,101 | ) | | (86 | ) | | | (76 | ) | | | (271 | ) | | | | 178 | | | | 491 | | | | 653 | | | | | 57 | | | | 102 | | | | | (689 | ) | | | (981 | ) | Associates & joint ventures | | (20 | ) | | | (27 | ) | | | (24 | ) | | | | | – | | | | 1 | | | | – | | | | | 1,175 | | | | 1,090 | | | | | (33 | ) | | | (37 | ) | | (28 | ) | | | (20 | ) | | | (27 | ) | | | | | – | | | | – | | | | 1 | | | | | 1,986 | | | | 1,175 | | | | | (718 | ) | | | (33 | ) | | | | (159 | ) | | | (382 | ) | | | (542 | ) | | | | 1,019 | | | | 981 | | | | 861 | | | | | 5,683 | | | | 3,606 | | | | | (13,467 | ) | | | (9,982 | ) | | (189 | ) | | | (159 | ) | | | (382 | ) | | | | 670 | | | | 1,019 | | | | 981 | | | | | 4,534 | | | | 5,683 | | | | | (15,393 | ) | | | (13,467 | ) |
Further informationFor more on balances due from/(to) other Banco Santander group companies is set out in the sectionthis, see ‘Balances with other Banco Santander companies’ in the Risk review. In addition, transactions with pension schemes operated by the Santander UK group are described in Note 28.31.
The above transactions were made in the ordinary course of business, and substantially on the same terms as for comparable transactions with third party counterparties, except those carried out with Banco Santander SA and subsidiaries of the Company as part of our ring-fencing plansimplementation as described in Note 39,43, on substantially the same terms as for comparable transactions with third party counterparties, and within limits acceptable to the PRA. Such transactions do not involve more than the normal risk of collectability or present any unfavourable features. In addition, in July 2018 we transferred £1.4bn of customer loans, £21.5bn of other assets and £20.7bn of liabilities from Santander UK to Banco Santander London Branch. Of these transfers, £19.7bn of assets and £18.8bn of liabilities related to derivatives business. These transfers reduced RWAs by £5.5bn and we paid an associated dividend of £668m. Furthermore, and as described in more detail in Note 39, on 16 October 201721, Santander UK plc Abbey National Treasury Servicessold 100% of the share capital of ANTS plc to Santander UK Group Holdings plc, and Banco Santander SA entered intofor a ring-fencing transfer scheme which formalisedconsideration of £337m, and the business transfers required to implementof the planned ring-fenced structure.Jersey and Isle of Man branches of Santander UK plc was subsequently acquired by ANTS plc. For more on ring-fencing, see Note 43.
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
37.41. FINANCIAL INSTRUMENTS
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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | 2017 | | | | | 2016(1) | | | | | Held at
fair value
£m | | | Held at
amortised
cost £m | | | Total
£m | | | | | Held at
fair value
£m | | | Held at
amortised cost £ m | | | Total £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | – | | | | 32,771 | | | | 32,771 | | | | | | – | | | | 17,107 | | | | 17,107 | | Trading assets | | | 30,555 | | | | – | | | | 30,555 | | | | | | 30,035 | | | | – | | | | 30,035 | | Derivative financial instruments | | | 19,942 | | | | – | | | | 19,942 | | | | | | 25,471 | | | | – | | | | 25,471 | | Financial assets designated at fair value | | | 2,096 | | | | – | | | | 2,096 | | | | | | 2,140 | | | | – | | | | 2,140 | | Loans and advances to banks | | | – | | | | 5,927 | | | | 5,927 | | | | | | – | | | | 4,348 | | | | 4,348 | | Loans and advances to customers | | | – | | | | 199,490 | | | | 199,490 | | | | | | – | | | | 199,738 | | | | 199,738 | | Financial investments | | | 8,853 | | | | 8,758 | | | | 17,611 | | | | | | 10,561 | | | | 6,905 | | | | 17,466 | | | | | | 61,446 | | | | 246,946 | | | | 308,392 | | | | | | 68,207 | | | | 228,098 | | | | 296,305 | | Non-financial assets | | | | | | | | | | | 6,373 | | | | | | | | | | | | | | 6,206 | | Total assets | | | | | | | | | | | 314,765 | | | | | | | | | | | | | | 302,511 | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | – | | | | 13,784 | | | | 13,784 | | | | | | – | | | | 9,769 | | | | 9,769 | | Deposits by customers | | | – | | | | 183,648 | | | | 183,648 | | | | | | – | | | | 177,172 | | | | 177,172 | | Trading liabilities | | | 31,109 | | | | – | | | | 31,109 | | | | | | 15,560 | | | | – | | | | 15,560 | | Derivative financial instruments | | | 17,613 | | | | – | | | | 17,613 | | | | | | 23,103 | | | | – | | | | 23,103 | | Financial liabilities designated at fair value | | | 2,315 | | | | – | | | | 2,315 | | | | | | 2,440 | | | | – | | | | 2,440 | | Debt securities in issue | | | – | | | | 42,633 | | | | 42,633 | | | | | | – | | | | 50,346 | | | | 50,346 | | Subordinated liabilities | | | – | | | | 3,793 | | | | 3,793 | | | | | | – | | | | 4,303 | | | | 4,303 | | | | | | 51,037 | | | | 243,858 | | | | 294,895 | | | | | | 41,103 | | | | 241,590 | | | | 282,693 | | Non-financial liabilities | | | | | | | | | | | 3,665 | | | | | | | | | | | | | | 4,365 | | Total liabilities | | | | | | | | | | | 298,560 | | | | | | | | | | | | | | 287,058 | |
(1) | | Restated to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1. |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
b) Valuation of financial instrumentsFair value measurement and hierarchy Financial instruments that are classified or designated at fair(i) Fair value through profit or loss, including those held for trading purposes, ormeasurement
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 itsnon-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 Consolidated Income Statement or in ‘Other comprehensive income’ in the Consolidated 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:
| | | Level 1 | | Unadjusted quoted prices for identical assets or liabilities in an active market that the Santander UK group can access at the measurement date. Level 1 positions include debt securities, equity securities, exchange traded derivatives and short positions in securities. | | | Level 2 | | Quoted prices in inactive markets, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. Level 2 positions include loans and advances to banks, loans and advances to customers, equity securities, exchange rate derivatives, interest rate derivatives, equity and credit derivatives, debt securities, deposits by banks, deposits by customers and debt securities in issue. | | | Level 3 | | Significant inputs to the pricing or valuation techniques are unobservable. Level 3 positions include exchange rate derivatives, equity and credit derivatives, loans and advances to customers, debt securities, equity securities and debt securities in issue. |
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 thebid-offer spreads allow consideration of the liquidity of a financial instrument.
Underlying assets and liabilities are reviewed to consider the appropriate adjustment to mark themid-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 appropriate measurement levels are regularly reviewed. Underlying assets and liabilities are regularly reviewed to determine whether a position should be regarded as illiquid; the most important practical consideration being the observability of trading. Where thebid-offer spread is observable, this is tested against actual trades. Changes in the observability of significant valuation inputs during the reporting period may result in a transfer of assets and liabilities within the fair value hierarchy. The Santander UK group recognises transfers between levels of the fair value hierarchy when there is a significant change in either its principal market or the level of observability of the inputs to the valuation techniques as at the end of the reporting period.
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. 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. Santander UK 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. (ii) Fair value hierarchy Santander UK 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. Santander UK categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as follows: | | | 208Level 1 | | Unadjusted quoted prices for identical assets or liabilities in an active market that Santander UK can access at the measurement date. Level 1 positions include debt securities, equity securities, exchange traded derivatives and short positions in securities. Active markets are assessed by reference to average daily trading volumes in absolute terms and, where applicable, by reference to market capitalisation for the instrument. | | | | Level 2 | | Quoted prices in inactive markets, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. Level 2 positions include loans and advances to banks, loans and advances to customers, equity securities, exchange rate derivatives, interest rate derivatives, equity and credit derivatives, debt securities, deposits by banks and debt securities in issue. | | | | Level 3 | | Significant inputs to the pricing or valuation techniques are unobservable. These unobservable inputs reflect the assumptions that market participants would use when pricing assets or liabilities and are considered significant to the overall valuation. Level 3 positions include exchange rate derivatives, property related derivatives, loans and advances to customers, debt securities, equity securities, deposits by customers and debt securities in issue. |
Changes in the observability of significant valuation inputs during the reporting period may result in a transfer of assets and liabilities within the fair value hierarchy. The Santander UK group recognises transfers between levels of the fair value hierarchy when there is a significant change in either its principal market or the level of observability of the inputs to the valuation techniques as at the end of the reporting period.
| | | | | > Notes to the financial statements |
Unrecognised gains as a result of the use of valuation models using unobservable inputs (Day One profits)
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 Income Statement without immediate reversal of deferred Day One profits and losses.
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 2017 and 2016, including their levels in the fair value hierarchy – Level 1, Level 2 and Level 3. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Cash and balances at central banks which comprise of demand deposits with the Bank of England and the US Federal Reserve together with cash in tills and ATMs have been excluded from the table, as the carrying amount of cash and balances at central banks is deemed an appropriate approximation of fair value. The fair value of the portfolio of UK Government debt securities classified asheld-to-maturity investments, as referred to in Note 1, is categorised in Level 1 of the fair value hierarchy. Apart from these securities, there were no other financial instruments carried at amortised cost whose fair values would be classified in Level 1.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | 2016 | | | | | Fair value | | | Carrying | | | Fair value | | | Carrying | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total
£m | | | value
£m | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total
£m | | | value
£m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to banks | | | – | | | | 5,358 | | | | 556 | | | | 5,914 | | | | 5,927 | | | | – | | | | 3,737 | | | | 478 | | | | 4,215 | | | | 4,348 | | Loans and advances to customers – unimpaired | | | – | | | | 6,481 | | | | 194,551 | | | | 201,032 | | | | 198,629 | | | | – | | | | 6,739 | | | | 195,673 | | | | 202,412 | | | | 198,788 | | – impaired | | | – | | | | – | | | | 784 | | | | 784 | | | | 861 | | | | – | | | | – | | | | 824 | | | | 824 | | | | 950 | | Financial investments | | | 6,435 | | | | 2,211 | | | | – | | | | 8,646 | | | | 8,758 | | | | 6,436 | | | | 272 | | | | – | | | | 6,708 | | | | 6,905 | | | | | | 6,435 | | | | 14,050 | | | | 195,891 | | | | 216,376 | | | | 214,175 | | | | 6,436 | | | | 10,748 | | | | 196,975 | | | | 214,159 | | | | 210,991 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | – | | | | 13,249 | | | | 557 | | | | 13,806 | | | | 13,784 | | | | – | | | | 9,360 | | | | 438 | | | | 9,798 | | | | 9,769 | | Deposits by customers | | | – | | | | 564 | | | | 183,226 | | | | 183,790 | | | | 183,648 | | | | – | | | | 582 | | | | 176,883 | | | | 177,465 | | | | 177,172 | | Debt securities in issue | | | – | | | | 44,296 | | | | – | | | | 44,296 | | | | 42,633 | | | | – | | | | 51,053 | | | | 1,196 | | | | 52,249 | | | | 50,346 | | Subordinated liabilities | | | – | | | | 4,256 | | | | – | | | | 4,256 | | | | 3,793 | | | | – | | | | 4,562 | | | | – | | | | 4,562 | | | | 4,303 | | | | | | – | | | | 62,365 | | | | 183,783 | | | | 246,148 | | | | 243,858 | | | | – | | | | 65,557 | | | | 178,517 | | | | 244,074 | | | | 241,590 | |
There are no loans and advances to banks and financial investments that are impaired.
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 included in other assets on the balance sheet.
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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 section below.
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:
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 valuation technique A as described below. The carrying amount of the other items is deemed a reasonable approximation of their fair value, as the transactions are very short-term in duration.
Loans and advances to customers
The approach to estimating the fair value of loans and advances to customers has been determined by discounting expected cash flows to reflect current market rates for lending of a similar credit quality. The determination of their fair values is an area of considerable estimation and uncertainty as there is no observable market and values are significantly affected by customer behaviour.
i) Advances secured on residential property
The mortgage portfolio is stratified into tranches by LTV; (being a significant driver of market pricing) and the fair value of each tranche is calculated by discounting contractual cash flows, after taking account of expected customer prepayment rates, using a valuation spread based on new business interest rates derived from competitor market information adjusted for the implied cost of funding. Adjustments have also been made to:
– | | Reduce the weighted average lives of low LTV loans on SVR to reflect the uncertainty inherent in the value that could be achieved, given that the borrower could refinance at any time. |
– | | Discount the value of performing loans with a LTV over 90% (with the exception of loans under the UK Government’s Help to Buy scheme) to reflect the higher risk of this part of the portfolio. |
– | | For impaired loans, we apply a discount to reflect the fact that the model does not fully take into account the higher risk nature of these loans and, in addition, discount the collateral value of loans with a LTV over 80% to reflect the greater possibility of repossession and recovery value. |
ii) Corporate loans
The corporate loan portfolio is stratified by product. The determination of the fair values of performing loans takes account of the differential between existing margins and estimated 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 sought by distressed bond funds, who are the typical purchaser of the assets.
With respect to Social Housing, part of this portfolio is held at fair value for historic reasons. The same methodology has been applied to calculate the fair value of loans held at amortised cost. The fair value of this part of the portfolio has been determined using valuation technique A as described below.
With respect to the othernon-core corporate and legacy portfolios, including commercial mortgages, their market value is estimated, based on an orderly three year disposal process. In addition, the same discount has been applied to the impaired book as for the corporate loans above.
iii) Other loans
These consist 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 nomark-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 or deficit has been recognised based on the differential between existing margins and an estimate of new business rates for similar loans. A discount has been applied to the impaired part of the book.
| | | | | > Notes to the financial statements |
Financial investments
Loans and receivable securities consist of asset-backed securities. These are complex products and are valued with the assistance of an independent, specialist valuation firm. These fair values are determined using industry-standard valuation techniques, including discounted cash flow models. The inputs to these models used in these valuation techniques include quotes from market makers, prices of similar assets, adjustments for differences in credit spreads, and additional quantitative and qualitative research.
Held-to-maturity investments consist of a portfolio of government debt securities. 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 valuation technique A as described below.
Liabilities:
Deposits by banks
The fair value of deposits by banks, including repos, has been estimated using valuation technique A as described below.
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 valuation technique A as described below.
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 valuation technique A as described below.
d) Fair values of financial instruments measured at fair value on a recurring basis
The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 31 December 2017 and 2016, analysed by their levels in the fair value hierarchy – Level 1, Level 2 and Level 3.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | 2016 | | | | | | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total
£m | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total
£m | | | Valuation
technique | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trading assets | | Loans and advances to banks | | | – | | | | 6,897 | | | | – | | | | 6,897 | | | | | | – | | | | 7,478 | | | | – | | | | 7,478 | | | | A | | | | Loans and advances to customers | | | 656 | | | | 8,184 | | | | – | | | | 8,840 | | | | | | 762 | | | | 9,561 | | | | – | | | | 10,323 | | | | A | | | | Debt securities | | | 5,156 | | | | – | | | | – | | | | 5,156 | | | | | | 6,248 | | | | – | | | | – | | | | 6,248 | | | | – | | | | | Equity securities | | | 9,662 | | | | – | | | | – | | | | 9,662 | | | | | | 5,986 | | | | – | | | | – | | | | 5,986 | | | | – | | | | | | | | 15,474 | | | | 15,081 | | | | – | | | | 30,555 | | | | | | 12,996 | | | | 17,039 | | | | – | | | | 30,035 | | | | | | Derivative financial instruments | | Exchange rate contracts | | | – | | | | 6,061 | | | | 16 | | | | 6,077 | | | | | | – | | | | 8,300 | | | | 22 | | | | 8,322 | | | | A | | | | Interest rate contracts | | | – | | | | 12,956 | | | | 12 | | | | 12,968 | | | | | | 1 | | | | 15,795 | | | | 19 | | | | 15,815 | | | | A & C | | | | Equity and credit contracts | | | – | | | | 861 | | | | 36 | | | | 897 | | | | | | – | | | | 1,272 | | | | 62 | | | | 1,334 | | | | B & D | | | | | | | | – | | | | 19,878 | | | | 64 | | | | 19,942 | | | | | | 1 | | | | 25,367 | | | | 103 | | | | 25,471 | | | | | | Financial assets designated at fair value | | Loans and advances to customers | | | – | | | | 1,485 | | | | 64 | | | | 1,549 | | | | | | – | | | | 1,668 | | | | 63 | | | | 1,731 | | | | A | | | | Debt securities | | | 184 | | | | 187 | | | | 176 | | | | 547 | | | | | | – | | | | 208 | | | | 201 | | | | 409 | | | | A & B | | | | | | | | 184 | | | | 1,672 | | | | 240 | | | | 2,096 | | | | | | – | | | | 1,876 | | | | 264 | | | | 2,140 | | | | | | Financial investments | | Available-for-sale equity securities | | | 19 | | | | 9 | | | | 53 | | | | 81 | | | | | | 17 | | | | 63 | | | | 32 | | | | 112 | | | | B | | | | | Available-for-sale debt securities | | | 8,770 | | | | 2 | | | | – | | | | 8,772 | | | | | | 10,449 | | | | – | | | | – | | | | 10,449 | | | | C | | | | | | | | 8,789 | | | | 11 | | | | 53 | | | | 8,853 | | | | | | 10,466 | | | | 63 | | | | 32 | | | | 10,561 | | | | | | Total assets at fair value | | | 24,447 | | | | 36,642 | | | | 357 | | | | 61,446 | | | | | | 23,463 | | | | 44,345 | | | | 399 | | | | 68,207 | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trading liabilities | | Deposits by banks | | | – | | | | 1,885 | | | | – | | | | 1,885 | | | | | | – | | | | 4,200 | | | | – | | | | 4,200 | | | | A | | | | Deposits by customers | | | – | | | | 25,530 | | | | – | | | | 25,530 | | | | | | – | | | | 8,559 | | | | – | | | | 8,559 | | | | A | | | | | Short positions | | | 3,694 | | | | – | | | | – | | | | 3,694 | | | | | | 2,801 | | | | – | | | | – | | | | 2,801 | | | | – | | | | | | | | 3,694 | | | | 27,415 | | | | – | | | | 31,109 | | | | | | 2,801 | | | | 12,759 | | | | – | | | | 15,560 | | | | | | Derivative financial | | Exchange rate contracts | | | – | | | | 4,176 | | | | 15 | | | | 4,191 | | | | | | – | | | | 6,009 | | | | 21 | | | | 6,030 | | | | A | | instruments | | Interest rate contracts | | | – | | | | 12,720 | | | | 5 | | | | 12,725 | | | | | | – | | | | 16,202 | | | | 11 | | | | 16,213 | | | | A & C | | | | | Equity and credit contracts | | | 1 | | | | 653 | | | | 43 | | | | 697 | | | | | | 1 | | | | 817 | | | | 42 | | | | 860 | | | | B & D | | | | | | | | 1 | | | | 17,549 | | | | 63 | | | | 17,613 | | | | | | 1 | | | | 23,028 | | | | 74 | | | | 23,103 | | | | | | Financial liabilities | | Debts securities in issue | | | – | | | | 1,629 | | | | 6 | | | | 1,635 | | | | | | – | | | | 1,908 | | | | 6 | | | | 1,914 | | | | A | | designated at fair value | | Structured deposits | | | – | | | | 680 | | | | – | | | | 680 | | | | | | – | | | | 526 | | | | – | | | | 526 | | | | A | | | | | | | | – | | | | 2,309 | | | | 6 | | | | 2,315 | | | | | | – | | | | 2,434 | | | | 6 | | | | 2,440 | | | | | | Total liabilities at fair value | | | 3,695 | | | | 47,273 | | | | 69 | | | | 51,037 | | | | | | 2,802 | | | | 38,221 | | | | 80 | | | | 41,103 | | | | | |
| | | Annual Report 2017 on Form 20-F | 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 period in which they occur.
In 2017, there were no transfers of financial instruments between Levels 1 and 2. During 2016,‘Available-for-sale debt securities – Debt securities’ with fair values of £25m were transferred from Level 1 to Level 2 principally due to a lack of market transactions in these instruments.
During 2017 and 2016, there were no transfers of financial instruments between Levels 2 and 3.
| | | | | > Notes to the financial statements |
e) Valuation techniques
The main valuation techniques employed in internal models to measure the fair value of the financial instruments disclosed above at 31 December 20172018 and 20162017 are set out below. In substantially all cases, the principal inputs into these models are derived from observable market data. The Santander UK group did not make any material changes to the valuation techniques and internal models it used during the years ended 31 Decemberin 2018, 2017 2016 and 2015.2016. | A | In the valuation of financial instruments requiring static hedging (for example interest rate, currency derivatives and commodity swaps) and in the valuation of loans and advances and deposits, the ‘present value’ method is used. Expected future cash flows are discounted using the interest rate curves of the applicable currencies or forward commodity prices.prices, as well as credit spreads. The interest rate curves are generally observable market data and reference yield curves derived from quoted interest rates in appropriate time bandings, which match the timings of the cash flows and maturities of the instruments. The forward commodity prices are generally observable market data. |
| B | In the valuation of equity financial instruments requiring dynamic hedging (principally equity securities, options and other structured instruments), 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 thebid-offer spread, foreign currency exchange rates, volatility and correlation between indices. In limited circumstances, other inputs may be used in these models that are based on data other than observableunobservable market data, such as the Halifax’s UK House Price Index (HPI)HPI volatility, HPI forward growth, HPI spot rate, mortality, mean reversion and contingent litigation risk. |
| C | In the valuation of financial instruments exposed to interest rate risk that require either static or dynamic hedging (such as interest rate futures, caps and floors, and options), the present value method (futures), Black’s model (caps/floors) and the Hull/White and Markov functional models (Bermudan options) are used. These types of models are widely accepted in the financial services industry. The significant inputs used in these models are observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates. In limited circumstances, other inputs may be used in these models that are based on data other than observableunobservable market data, such as HPI volatility, HPI forward growth, HPI spot rate and mortality. |
| D | In the valuation of linear instruments such as credit risk and fixed-income derivatives, credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case ofnon-linear instruments, if the portfolio is exposed to credit risk such as credit derivatives, the probability of default is determined using the parcredit default spread level.market. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted credit risk premiums and the correlation between the quoted credit derivatives of various issuers. |
The fair values of the financial instruments arising from the Santander UK group’sUK’s internal models take into account, among other things, contract terms and observable market data, which include such factors asbid-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 Santander UK group believes its valuation methods are appropriate and consistent with other market participants. Nevertheless, the use of different valuation methods or assumptions, including imprecision in estimating unobservable market inputs, to determine the fair value of certain financial instruments could result in different estimates of fair value at the reporting date and the amount of gain or loss recorded for a particular instrument. Most of the valuation models are not significantly subjective, because they can be tested and, if necessary, recalibrated by the internal calculation of and subsequent comparison to market prices of actively traded securities, where available.
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 that are not incorporated in the valuation model.
The Santander UK group classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The majority of these adjustments relate to Global Corporate Banking. The magnitude and types of fair value adjustment adopted by Global Corporate Banking are listed in the following table:
| | | | | | | | | | | | 2017 £m | | | 2016
£m | | Risk-related: | | | | | | | | | –Bid-offer and trade specific adjustments | | | 34 | | | | 37 | | – Uncertainty | | | 43 | | | | 49 | | – Credit risk adjustment | | | 36 | | | | 50 | | – Funding fair value adjustment | | | 6 | | | | 20 | | | | | | 119 | | | | 156 | | Model-related | | | 8 | | | | 1 | | Day One profit | | | 1 | | | | 4 | | | | | | 128 | | | | 161 | |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
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
IFRS 13 requires that portfolios are marked at bid or offer, as appropriate. Valuation models will typically generatemid-market values. Thebid-offer adjustment reflects the cost that would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position. The majority of thebid-offer adjustment relates to OTC derivative portfolios. For each portfolio, the major risk types are identified. For each risk type, the net portfolio risks are first classified into buckets, and then abid-offer spread is applied to each risk bucket based upon the marketbid-offer spread for the relevant hedging instrument.
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 the risk management practice undertaken, the granularity of risk bucketing in the risk reporting process, and the extent of correlation between risk buckets. Within a risk type, thebid-offer adjustment for each risk bucket may be aggregated without offset or limited netting may be applied to reflect correlation between buckets. There is no netting applied between risk types or between portfolios that are not managed together for risk management purposes. There is no netting across legal entities.
(ii) Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, there exists a range of possible values that the financial instrument or market parameter may assume and an adjustment may be necessary to reflect the likelihood that in estimating the fair value of the financial instrument, market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model.
(iii) Credit risk adjustment
Credit risk adjustments comprise credit and debit valuation adjustments. The credit valuation adjustment (CVA) is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that the counterparty may default, and the Santander UK group may not receive the full market value of the transactions. The debit valuation adjustment (DVA) is an adjustment to the valuation of the OTC derivative contracts to reflect within the fair value the possibility that the Santander UK group may default, and that the Santander UK group may not pay full market value of the transactions.
The Santander UK group calculates a separate CVA and DVA for each Santander UK legal entity, and within each entity for each counterparty to which the entity has exposure. The Santander UK group calculates the CVA by applying the probability of default of the counterparty to the expected positive exposure to the counterparty, and multiplying the result by the loss expected in the event of default i.e. LGD. Conversely, the Santander UK group calculates the DVA by applying the PD of the Santander UK group, conditional on thenon-default of the counterparty, to the expected positive exposure of the counterparty to the Santander UK group and multiplying the result by the LGD. Both calculations are performed over the life of the potential exposure.
For most products the Santander UK group uses a simulation methodology to calculate the expected positive exposure to a counterparty. This incorporates a range of potential exposures across the portfolio of transactions with the counterparty over the life of the portfolio. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty.
For certain types of exotic derivatives where the products are not currently supported by the standard methodology, the Santander UK group adopts alternative methodologies. These may involve mapping transactions against the results for similar products which are valued using the standard methodology. In other cases, a simplified version of the standard methodology is applied. The calculation is applied at a trade level, with more limited recognition of credit mitigants such as netting or collateral agreements than used in the standard methodology.
The methodologies do not, in general, account forwrong-way risk.Wrong-way risk arises where the underlying value of the derivative prior to any credit risk adjustment is positively correlated to the probability of default of the counterparty. When there is significantwrong-way risk, a trade-specific approach is applied to reflect thewrong-way risk within the valuation. Exposure towrong-way risk is limited via internal governance processes and deal pricing. The Santander UK group considers that an appropriate adjustment to reflectwrong-way risk is currently £nil (2016: £nil).
(iv) Funding fair value adjustment (FFVA)
The FFVA is an adjustment to the valuation of OTC derivative positions to include the net cost of funding uncollateralised derivative positions. This is calculated by applying a suitable funding cost to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio.
Model-related adjustments
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. Additionally, markets evolve, and models that were adequate in the past may require development to capture all material market characteristics in current market conditions. In these circumstances, model limitation adjustments are adopted. The Quantitative Risk Group (QRG), an independent quantitative support function reporting into the Risk Department, highlights the requirement for model limitation adjustments and develops the methodologies employed. As model development progresses, model limitations are addressed within the core revaluation models and a model limitation adjustment is no longer needed.
Day One profit adjustments
Day One profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant unobservable inputs. Day One profit adjustments are calculated and reported on a portfolio basis.
| | | | | > Notes to the financial statements |
g)d) 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 extent to which prices may be expected to represent genuine traded or tradeable prices |
| – | | The degree of similarity between financial instruments |
| – | | The degree of consistency between different sources |
| – | | The process followed by the pricing provider to derive the data |
| – | | The elapsed time between the date to which the market data relates and the balance sheet date |
| – | | The manner in which the data was sourced. |
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 currentmark-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 estimate a realisable value over time. Adjustments for illiquid positions are regularly reviewed to reflect changing market conditions. Internal valuation model review
For fair values determined using a valuation model, the control framework may include, as applicable, independent development and / or validation of: (i) the logic within the models; (ii) the inputs to those models; and (iii) any adjustments required outside the models; and (iv) where possible, model outputs.models. Internal valuation models are validated independently bywithin the QRG.Risk Department. A validation report is produced for each model-derived valuation that assesses the mathematical assumptions behind the model, 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, the input parameters are regularly reviewed by the QRG. The results of the independent valuation process and any changes to the fair value adjustments methodology are approved in line with the model risk framework and policy. 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 consist of repos and reverse repos as part of trading activities. The fair value is estimated by using the ‘present value’ method. Future cash flows are evaluated taking into consideration any derivative features of the reverse repos and are then discounted using the appropriate market rates for the applicable maturity and currency. Under these agreements, the Santander UK group receives collateral with a market value equal to, or in excess of, the principal amount loaned. 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. As a result, there would be no adjustment, or an immaterial adjustment, to reflect the credit quality of the counterparty related to these agreements. As the inputs are based on observable market data, these reverse repos are classified as Level 2.
Loans and advances to banks and loans and advances to customers – other
These consist of term deposits placed which are short-term in nature and are both utilised and managed as part of the funding requirements of the trading book. The fair value is estimated using the ‘present value’ method. Expected future cash flows are discounted using the interest rate curves of the applicable currencies. The interest rate curves are generally observable market data and reference yield curves derived from quoted interest rates in appropriate time bandings, which match the timings of the cash flows and maturities of the instruments. As the inputs are based on observable market data, these loans are classified as Level 2.
Deposits by banks and deposits by customers – securities sold under repurchase agreements
These consist of repos with both professionalnon-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 principal amount borrowed. As a result, there would be no adjustment, or an immaterial adjustment, to reflect the credit quality of the Santander UK group related to these agreements. As the inputs are based on observable market data, these repos are classified as Level 2.
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 financial instruments
These consist of exchange rate, interest rate, equity and credit and commodity contracts. The models used in estimating the fair value of these derivatives do not contain a high level of subjectivity as the methodologies used do not require significant judgement, and the inputs used are observable market data such as plain vanilla interest rate swaps and option contracts. As the inputs are based on observable market data, these derivatives are classified as Level 2. Certain cross currency swaps, reversionary property interests, credit default swaps and options and forwards contain significant unobservable inputs or are traded less actively or traded in less-developed markets, and so are classified as Level 3. The valuation of such instruments is further discussed in the ‘internal models based on information other than market data’ section below.
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
e) 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 2018 and 2017, including their levels in the fair value hierarchy – Level 1, Level 2 and Level 3. FinancialIt does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Cash and balances at central banks, which consist of demand deposits with the Bank of England and, in 2017, the US Federal Reserve, together with cash in tills and ATMs, have been excluded from the table as the carrying amount is deemed an appropriate approximation of fair value. The fair value of the portfolio of UK Government debt securities, included in other financial assets at amortised cost, is the only financial instrument categorised in Level 1 of the fair value hierarchy. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | | 2017 | | | | | Fair value | | | Carrying | | | | | | Fair value | | | Carrying | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total £m | | | value
£m | | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total £m | | | value £m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers | | | – | | | | – | | | | 204,061 | | | | 204,061 | | | | 201,289 | | | | | | | | – | | | | 6,331 | | | | 195,335 | | | | 201,666 | | | | 199,340 | | Loans and advances to banks | | | – | | | | 2,739 | | | | 60 | | | | 2,799 | | | | 2,799 | | | | | | | | – | | | | 2,894 | | | | 556 | | | | 3,450 | | | | 3,463 | | Reverse repurchase agreements – non trading | | | – | | | | 21,130 | | | | – | | | | 21,130 | | | | 21,127 | | | | | | | | – | | | | 2,614 | | | | – | | | | 2,614 | | | | 2.614 | | Other financial assets at amortised cost | | | 6,390 | | | | 721 | | | | – | | | | 7,111 | | | | 7,229 | | | | | | | | | | | | | | | | | | | | | | | | | | Financial investments | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,435 | | | | 2,211 | | | | – | | | | 8,646 | | | | 8,758 | | | | | | 6,390 | | | | 24,590 | | | | 204,121 | | | | 235,101 | | | | 232,444 | | | | | | | | 6,435 | | | | 14,050 | | | | 195,891 | | | | 216,376 | | | | 214,175 | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by customers | | | – | | | | 21 | | | | 178,160 | | | | 178,181 | | | | 178,090 | | | | | | | | – | | | | – | | | | 183,790 | | | | 183,790 | | | | 183,648 | | Deposits by banks | | | – | | | | 16,243 | | | | 989 | | | | 17,232 | | | | 17,221 | | | | | | | | – | | | | 12,164 | | | | 557 | | | | 12,721 | | | | 12,708 | | Repurchase agreements – non trading | | | – | | | | 10,923 | | | | – | | | | 10,923 | | | | 10,910 | | | | | | | | – | | | | 1,085 | | | | – | | | | 1,085 | | | | 1,076 | | Debt securities in issue | | | – | | | | 47,787 | | | | – | | | | 47,787 | | | | 46,692 | | | | | | | | – | | | | 44,296 | | | | – | | | | 44,296 | | | | 42,633 | | Subordinated liabilities | | | – | | | | 3,877 | | | | – | | | | 3,877 | | | | 3,601 | | | | | | | | – | | | | 4,256 | | | | – | | | | 4,256 | | | | 3,793 | | | | | | – | | | | 78,851 | | | | 179,149 | | | | 258,000 | | | | 256,514 | | | | | | | | – | | | | 61,801 | | | | 184,347 | | | | 246,148 | | | | 243,858 | |
The carrying value above of any financial assets and liabilities that are designated atas hedged items in a portfolio (or macro) fair value (FVTPL)hedge relationship excludes gains and losses attributable to the hedged risk, as this is included in other assets on the balance sheet. Valuation methodology for financial instruments carried at amortised cost 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 valuation approach to specific categories of financial instruments is described below.
| | | | | > Notes to the financial statements |
Assets: Loans and advances to customers These consist of loans secured on residential propertyThe approach to housing associations. Theestimating the fair value of these loans is estimated using the ‘present value’ model based on a credit curve derived from current market spreads observable in the Social Housing loan data. Observable market data include current market spreads for new accepted mandates and bids for comparable loans and are used to support or challenge the benchmark level. This provides a range of reasonably possible estimates of fair value. As the inputs are based on market observable data, these loans are classified as Level 2. Certain loans and advances to customers which representhas been determined by discounting expected cash flows to reflect current market rates for lending of a portfoliosimilar credit quality. The determination of roll-up mortgages contain significant unobservable inputstheir fair values is an area of considerable estimation and souncertainty as there is no observable market and values are classified as Level 3. The valuation of such instruments is further discussed below.significantly affected by customer behaviour.
Debt securitiesi) Advances secured on residential property
The fair value of the mortgage portfolio is calculated by discounting contractual cash flows by different spreads, each representing a LTV band, after taking account of expected customer prepayment rates. The spread is based on new business interest rates derived from competitor market information. Further discounting is applied for certain higher risk mortgage portfolios. ii) Corporate loans The corporate loan portfolio is stratified by product. The determination of the fair values of performing loans takes account of the differential between existing margins and estimated 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 sought by distressed bond funds, who are the typical purchaser of the assets. iii) Other loans These consist of unsecured personal loans, credit cards, overdrafts and consumer (auto) finance. 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 nomark-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 or deficit has been recognised based on the differential between existing margins and an estimate of new business rates for similar loans. A discount has been applied to the impaired part of the book. 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 valuation technique A as described above. The carrying amount of the other items is deemed a reasonable approximation of their fair value, as the transactions are very short-term in duration. Reverse repurchase agreements – non trading The fair value of the reverse repurchase agreements – non trading has been estimated using valuation technique A as described above. Other financial assets at amortised cost and financial investments These consist of holdings of asset-backedasset backed securities and debt securities. A significant portion of theseThe asset backed securities are pricedcomplex products and in some instances are valued with the assistance of an independent, specialist valuation firm. These fair values are determined using the ‘present value’industry-standard valuation techniques, including discounted cash flow models. The inputs to these models basedused in these valuation techniques include quotes from market makers, prices of similar assets, adjustments for differences in credit spreads, and additional quantitative and qualitative research. The debt security investments consist of a portfolio of government debt securities. The fair value of this portfolio has been determined using valuation technique A as described above. Liabilities: Deposits by customers The majority of deposit liabilities are payable on observable market data e.g. LIBOR, credit spreads. Where there are quoted prices, the model value is checked against the quoted prices for reference purposes, but is not used asdemand and therefore can be deemed short-term in nature with the fair value asequal to the carrying value. 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 these instruments is lacking in liquidity and depth. As the inputs are based on observable market data, these debt securities are classified as Level 2. Certain debt securities which represent reversionary property securities and securities issued by Banco Santander entities contain significant unobservable inputs, and so are classified as Level 3.similar deposit liabilities of similar maturities. The valuationfair value of such instruments is further discussed below.deposit liabilities has been estimated using valuation technique A as described above. Deposits by banks The fair value of deposits by banks, including repos, has been estimated using valuation technique A as described above. 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 valuation technique A as described above. Repurchase agreements – non trading The fair value of the repurchase agreements – non trading has been estimated using valuation technique A as described above.
| | | | Annual Report 2018 | Financial statements | | |
f) Fair values of financial instruments measured at fair value The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 31 December 2018 and 2017, analysed by their levels in the fair value hierarchy – Level 1, Level 2 and Level 3. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | | | | 2017 | | | | | | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total
£m | | | | | Level 1
£m | | | Level 2
£m | | | Level 3
£m | | | Total
£m | | | Valuation
technique | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trading assets | | Securities purchased under resale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | agreements | | | – | | | | – | | | | – | | | | – | | | | | | – | | | | 8,870 | | | | – | | | | 8,870 | | | | A | | | | Debt securities | | | – | | | | – | | | | – | | | | – | | | | | | 5,156 | | | | – | | | | – | | | | 5,156 | | | | – | | | | Equity securities | | | – | | | | – | | | | – | | | | – | | | | | | 9,662 | | | | – | | | | – | | | | 9,662 | | | | – | | | | Cash collateral | | | – | | | | – | | | | – | | | | – | | | | | | – | | | | 6,156 | | | | – | | | | 6,156 | | | | A | | | | | Short-term loans | | | – | | | | – | | | | – | | | | – | | | | | | 656 | | | | 55 | | | | – | | | | 711 | | | | A | | | | | | | | – | | | | – | | | | – | | | | – | | | | | | 15,474 | | | | 15,081 | | | | – | | | | 30,555 | | | | | | Derivative financial | | Exchange rate contracts | | | – | | | | 4,323 | | | | 25 | | | | 4,348 | | | | | | – | | | | 6,061 | | | | 16 | | | | 6,077 | | | | A | | instruments | | Interest rate contracts | | | – | | | | 2,526 | | | | 6 | | | | 2,532 | | | | | | – | | | | 23,435 | | | | 12 | | | | 23,447 | | | | A & C | | | | Equity and credit contracts | | | – | | | | 188 | | | | 63 | | | | 251 | | | | | | – | | | | 861 | | | | 36 | | | | 897 | | | | B & D | | | | | Netting | | | – | | | | (1,872 | ) | | | – | | | | (1,872 | ) | | | | | – | | | | (10,479 | ) | | | – | | | | (10,479 | ) | | | | | | | | | | | – | | | | 5,165 | | | | 94 | | | | 5,259 | | | | | | – | | | | 19,878 | | | | 64 | | | | 19,942 | | | | | | Other financial assets at | | Loans and advances to customers | | | – | | | | 12 | | | | 82 | | | | 94 | | | | | | – | | | | 1,485 | | | | 64 | | | | 1,549 | | | | A | | FVTPL | | Debt securities | | | 18 | | | | 2,339 | | | | 894 | | | | 3,251 | | | | | | 184 | | | | 187 | | | | 176 | | | | 547 | | | | A, B & D | | | | Equity securities | | | – | | | | – | | | | – | | | | – | | | | | | | | | | | | | | | | | | | | | | B | | | | Reverse repurchase agreements – | | | – | | | | 2,272 | | | | – | | | | 2,272 | | | | | | – | | | | – | | | | – | | | | – | | | | A | | | | | non trading | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18 | | | | 4,623 | | | | 976 | | | | 5,617 | | | | | | 184 | | | | 1,672 | | | | 240 | | | | 2,096 | | | | | | Financial assets at | | Debt securities | | | 12,487 | | | | 742 | | | | – | | | | 13,229 | | | | | | | | | | | | | | | | | | | | | | D | | FVOCI | | Loans and advances to customers | | | – | | | | – | | | | 73 | | | | 73 | | | | | | | | | | | | | | | | | | | | | | D | | | | | | | | 12,487 | | | | 742 | | | | 73 | | | | 13,302 | | | | | | | | | | | | | | | | | | | | | | | | Financial investments | | Available-for-sale – debt securities | | | | | | | | | | | | | | | | | | | | | 8,770 | | | | 2 | | | | – | | | | 8,772 | | | | C | | | | Available-for-sale – equity | | | | | | | | | | | | | | | | | | | | | 19 | | | | 9 | | | | 53 | | | | 81 | | | | B | | | | | securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,789 | | | | 11 | | | | 53 | | | | 8,853 | | | | | | Total assets at fair value | | | 12,505 | | | | 10,530 | | | | 1,143 | | | | 24,178 | | | | | | 24,447 | | | | 36,642 | | | | 357 | | | | 61,446 | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trading liabilities | | Securities sold under repurchase | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | agreements | | | – | | | | – | | | | – | | | | – | | | | | | – | | | | 25,504 | | | | – | | | | 25,504 | | | | A | | | | Short positions in securities and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | unsettled trades | | | – | | | | – | | | | – | | | | – | | | | | | 3,694 | | | | – | | | | – | | | | 3,694 | | | | – | | | | Cash collateral | | | – | | | | – | | | | – | | | | – | | | | | | – | | | | 1,911 | | | | – | | | | 1,911 | | | | A | | | | | Short-term deposits | | | – | | | | – | | | | – | | | | – | | | | | | – | | | | – | | | | – | | | | – | | | | – | | | | | | | | – | | | | – | | | | – | | | | – | | | | | | 3,694 | | | | 27,415 | | | | – | | | | 31,109 | | | | | | Derivative financial | | Exchange rate contracts | | | – | | | | 528 | | | | 23 | | | | 551 | | | | | | – | | | | 4,176 | | | | 15 | | | | 4,191 | | | | A | | instruments | | Interest rate contracts | | | – | | | | 2,515 | | | | 7 | | | | 2,522 | | | | | | – | | | | 23,199 | | | | 5 | | | | 23,204 | | | | A & C | | | | Equity and credit contracts | | | – | | | | 132 | | | | 36 | | | | 168 | | | | | | 1 | | | | 653 | | | | 43 | | | | 697 | | | | B & D | | | | | Netting | | | – | | | | (1,872 | ) | | | – | | | | (1,872 | ) | | | | | – | | | | (10,479 | ) | | | – | | | | (10,479 | ) | | | | | | | | | | | – | | | | 1,303 | | | | 66 | | | | 1,369 | | | | | | 1 | | | | 17,549 | | | | 63 | | | | 17,613 | | | | | | Other financial liabilities | | Debt securities in issue | | | – | | | | 983 | | | | 7 | | | | 990 | | | | | | – | | | | 1,629 | | | | 6 | | | | 1,635 | | | | A | | at FVTPL | | Structured deposits | | | – | | | | 104 | | | | 29 | | | | 133 | | | | | | – | | | | 680 | | | | – | | | | 680 | | | | A | | | | Repurchase agreements – non | | | – | | | | 2,110 | | | | – | | | | 2,110 | | | | | | – | | | | – | | | | – | | | | – | | | | A | | | | trading | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Collateral and associated financial | | | – | | | | 3,040 | | | | 13 | | | | 3,053 | | | | | | | | | | | | | | | | | | | | | | D | | | | | guarantees | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – | | | | 6,237 | | | | 49 | | | | 6,286 | | | | | | – | | | | 2,309 | | | | 6 | | | | 2,315 | | | | | | Total liabilities at fair value | | | – | | | | 7,540 | | | | 115 | | | | 7,655 | | | | | | 3,695 | | | | 47,273 | | | | 69 | | | | 51,037 | | | | | |
| | | | | > Notes to the 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 period in which they occur. In 2018, there were no significant (2017: none) transfers of financial instruments between Levels 1 and 2. In 2018, the main transfers of financial instruments between Levels 2 and 3 were Derivatives assets of £35m and Derivative liabilities of £31m which were transferred from Level 2 to Level 3 following enhancements to the fair value hierarchy classification process.
| | | | Annual Report 2018 | Financial statements | | |
g) Fair value adjustments The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model. Santander UK classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table: | | | | | | | | | | | | 2018
£m | | | 2017
£m | | Risk-related: | | | | | | | | | –Bid-offer and trade specific adjustments | | | 13 | | | | 34 | | – Uncertainty | | | 36 | | | | 43 | | – Credit risk adjustment | | | 9 | | | | 36 | | – Funding fair value adjustment | | | 4 | | | | 6 | | | | | | 62 | | | | 119 | | Model-related | | | 5 | | | | 8 | | Day One profit | | | – | | | | 1 | | | | | | 67 | | | | 128 | |
Risk-related adjustments Risk-related adjustments are driven, in part, by the magnitude of Santander UK’s market or credit risk exposure, and by external market factors, such as the size of market spreads. (i)Bid-offer and trade specific adjustments Portfolios are marked at bid or offer, as appropriate. Valuation models will typically generatemid-market values. Thebid-offer adjustment reflects the cost that would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position. For debt securities, thebid-offer spread is based on a consensus market price at an individual security level. For other products, the major risk types are identified. For each risk type, the net portfolio risks are first classified into buckets, and then abid-offer spread is applied to each risk bucket based upon the marketbid-offer spread for the relevant hedging instrument. (ii) Uncertainty Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, a range of possible values exists that the financial instrument or market parameter may assume, and an adjustment may be needed to reflect the likelihood that in estimating the fair value of the financial instrument, market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model. (iii) Credit risk adjustment Credit risk adjustments comprise credit and debit valuation adjustments. The credit valuation adjustment (CVA) is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that the counterparty may default, and Santander UK may not receive the full market value of the transactions. The debit valuation adjustment (DVA) is an adjustment to the valuation of the OTC derivative contracts to reflect within the fair value the possibility that Santander UK may default, and that Santander UK may not pay full market value of the transactions. Santander UK calculates a separate CVA and DVA for each Santander UK legal entity, and within each entity for each counterparty to which the entity has exposure. Santander UK calculates the CVA by applying the probability of default of the counterparty to the expected positive exposure to the counterparty, and multiplying the result by the loss expected in the event of default i.e. LGD. Conversely, Santander UK calculates the DVA by applying the PD of the Santander UK group, conditional on thenon-default of the counterparty, to the expected positive exposure of the counterparty to Santander UK and multiplying the result by the LGD. Both calculations are performed over the life of the potential exposure. For most products Santander UK uses a simulation methodology to calculate the expected positive exposure to a counterparty. This incorporates a range of potential exposures across the portfolio of transactions with the counterparty over the life of the portfolio. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty. For certain types of exotic derivatives where the products are not currently supported by the standard methodology, Santander UK adopts alternative methodologies. These include commercial paper, medium-term notes and other bonds andmay involve mapping transactions against the results for similar products which are valued using the same techniques as those instruments in financial assets at FVTPL – debt securities discussed above. As the inputs used are based on observable market data, these debt securities are classified as Level 2. 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. Structured deposits
These consist of certain structured term deposits utilised and managed as partstandard methodology. In other cases, a simplified version of the funding requirementsstandard methodology is applied. The calculation is applied at a trade level, with more limited recognition of credit mitigants such as netting or collateral agreements than used in the standard methodology.
The methodologies do not, in general, account forwrong-way risk.Wrong-way risk arises where the underlying value of the trading book. These instruments are valued usingderivative prior to any credit risk adjustment is positively correlated to the same techniques as those instruments in trading assets – loansprobability of default of the counterparty. When there is significantwrong-way risk, a trade-specific approach is applied to reflect thewrong-way risk within the valuation. Exposure towrong-way risk is limited via internal governance processes and advancesdeal pricing. Santander UK considers that an appropriate adjustment 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. reflect4. Financial investmentswrong-way risk is £nil (2017: £nil). Available-for-sale equity securities(iv) Funding fair value adjustment (FFVA)
These consist of unquoted equity investments in companies providing infrastructure servicesThe FFVA is an adjustment to the financial services industry and a small portfolio held within the Santander UK Foundation (which is consolidated by the Santander UK group). In the valuation of equity financial instruments requiring dynamic hedging, proprietary local volatilityOTC derivative positions to include the net cost of funding uncollateralised derivative positions. This is calculated by applying a suitable funding cost to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio.
Model-related adjustments Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. Additionally, markets evolve, and stochastic volatility models are used. These types of models are widely acceptedthat were adequate in the financial services industry.past may require development to capture all material market characteristics in current market conditions. In these circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are addressed within the core revaluation models and a model limitation adjustment is no longer needed. Observable market inputs used in these models includeDay One profit adjustments
Day One profit adjustments are adopted where the bid-offer spread, foreign currency exchange rates, volatility and correlation between indices. As the inputs arefair value estimated by a valuation model is based on observable market data, these equity securitiesone or more significant unobservable inputs. Day One profit adjustments are classified as Level 2.calculated and reported on a portfolio basis. Available-for-sale debt securities
| | | | | > Notes to the financial statements |
These consist
The timing of certain asset backed securities where quoted market prices are not available, for which valuation techniques are used to determinerecognition 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 where these techniques use inputs thatloss. Subsequent changes in fair value are based significantly on observable market data.recognised immediately in the Income Statement without immediate reversal of deferred Day One profits and losses. i)h) 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 further details on the subsequent valuation techniquetechniques used for each type of instrument. Each instrument is initially valued at transaction price: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance sheet value | | | | | | Fair value movements
recognised in profit/(loss) | | Balance sheet line item | | Category | | Financial instrument product type | | 2017 £m | | | 2016 £m | | | | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 1. Derivative assets | | Exchange rate contracts | | Cross-currency swaps | | | 1 | | | | 1 | | | | | | | | – | | | | 1 | | | | 3 | | | 2. Derivative assets | | Exchange rate contracts | | Securitisation cross currency swaps | | | 15 | | | | 21 | | | | | | | | (11 | ) | | | 12 | | | | – | | | 3. Derivative assets | | Interest rate contracts | | Bermudan swaptions | | | 6 | | | | 7 | | | | | | | | (1 | ) | | | (3 | ) | | | (9 | ) | | 4. Derivative assets | | Interest rate contracts | | Securitisation swaps | | | 6 | | | | 12 | | | | | | | | (8 | ) | | | – | | | | – | | | 5. Derivative assets | | Equity and credit contracts | | Reversionary property interests | | | 31 | | | | 36 | | | | | | | | (6 | ) | | | 12 | | | | 2 | | | 6. Derivative assets | | Credit contracts | | Credit default swaps | | | – | | | | 5 | | | | | | | | (5 | ) | | | 1 | | | | (2 | ) | | 7. Derivative assets | | Equity contracts | | Property-related options and forwards | | | 5 | | | | 21 | | | | | | | | (1 | ) | | | (5 | ) | | | (4 | ) | | 8. FVTPL | | Loans and advances to customers | | Roll-up mortgage portfolio | | | 64 | | | | 63 | | | | | | | | 2 | | | | 4 | | | | 2 | | | 9. FVTPL | | Debt securities | | Reversionary property securities | | | 176 | | | | 201 | | | | | | | | (18 | ) | | | – | | | | 17 | | | 10. Financial investments | | Available-for-sale equity securities | | Unlisted equity shares | | | 53 | | | | 32 | | | | | | | | – | | | | –(1) | | | | –(1) | | | 11. Derivative liabilities | | Exchange rate contracts | | Securitisation cross currency swaps | | | (15 | ) | | | (21 | ) | | | | | | | 11 | | | | (12 | ) | | | – | | | 12. Derivative liabilities | | Interest rate contracts | | Bermudan swaptions | | | (1 | ) | | | (2 | ) | | | | | | | 1 | | | | 2 | | | | – | | | 13. Derivative liabilities | | Interest rate contracts | | Securitisation swaps | | | (4 | ) | | | (9 | ) | | | | | | | 7 | | | | – | | | | – | | | 14. Derivative liabilities | | Equity contracts | | Property-related options and forwards | | | (43 | ) | | | (42 | ) | | | | | | | (5 | ) | | | (5 | ) | | | (3 | ) | | 15. FVTPL | | Debt securities in issue | | Non-vanilla debt securities | | | (6 | ) | �� | | (6 | ) | | | | | | | – | | | | – | | | | (4 | ) | | Total net assets | | | | | | | 288 | | | | 319 | | | | | | | | | | | | | | | | | | | Total (expense)/income | | | | | | | | | | | | | | | | | | | (34 | ) | | | 7 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance sheet value | | | | | | Fair value movements
recognised in profit/(loss) | | | Balance sheet line item | | Category | | Financial instrument product type | | 2018
£m | | | 2017
£m | | | | | | 2018
£m | | | 2017
£m | | | 2016
£m | | | 1. Derivative assets | | Equity and credit contracts | | Reversionary property interests | | | 54 | | | | 31 | | | | | | | | 30 | | | | (6 | ) | | | 12 | | | 2. FVTPL assets | | Loans and advances to customers | | Roll-up mortgage portfolio | | | 53 | | | | 64 | | | | | | | | 8 | | | | 2 | | | | 4 | | | 3. FVTPL assets | | Debt securities | | Reversionary property securities | | | 142 | | | | 176 | | | | | | | | (28 | ) | | | (18 | ) | | | – | | | 4. FVTPL assets(1) | | Equity securities(1) | | Unlisted equity shares | | | – | | | | 53 | | | | | | | | – | | | | – | | | | – | | | 5. FVTPL assets | | Debt securities | | Credit linked notes | | | 752 | | | | – | | | | | | | | 13 | | | | – | | | | – | | | 6. FVOCI assets | | Loans and advances to customers | | Other loans | | | 73 | | | | – | | | | | | | | (5 | ) | | | – | | | | – | | | 7. Derivative liabilities | | Equity contracts | | Property-related options and forwards | | | (35 | ) | | | (43 | ) | | | | | | | – | | | | (5 | ) | | | (5 | ) | | 8. FVTPL liabilities | | Financial guarantees | | Credit protection guarantee | | | (13 | ) | | | – | | | | | | | | (13 | ) | | | – | | | | – | | | | | | | | | | 1,026 | | | | 281 | | | | | | | | 5 | | | | (27 | ) | | | 11 | | | Other Level 3 assets | | | | | 69 | | | | 33 | | | | | | | | – | | | | (26 | ) | | | 6 | | | Other Level 3 liabilities | | | | | (67 | ) | | | (26 | ) | | | | | | | 1 | | | | 19 | | | | (10 | ) | | Total net assets | | | | | 1,028 | | | | 288 | | | | | | | | | | | | | | | | | | | Total income/(expense) | | | | | | | | | | | | | | | | | 6 | | | | (34 | ) | | | 7 | |
| (1) | | GainsPrior to 1 January 2018, these unlisted equity shares were classified asavailable-for-sale equity securities and losses arising from changespresented in the fair value of securities classifiedbalance sheet as available-for–sale are recognised in ‘Other comprehensive income’.financial investments. |
| | | | | > Notes to the financial statements |
Valuation techniques 1. Derivative assets – Exchange rate contracts These are used to hedge the foreign currency risks arising from the PRDC notes issued, as described in Instrument 15 below. These derivatives are valued using a standard valuation model valuing each leg of the swap, with expected future cash flows less notional amount exchanged at maturity date discounted using an appropriate floating rate. The floating rate is adjusted by the relevant cross currency basis spread. Interest rates, foreign exchange rates, cross currency basis spread and long-dated foreign exchange (FX) volatility are used as inputs to determine fair value. Interest rates, foreign exchange rates are market observable.
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 are the long-dated FX volatility and the correlation between the underlying assets. 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 market observable. Short-dated FX volatility is observable from the trading of FX options. As there is no active market for FX options with maturities greater than five years (long-dated FX options), long-dated FX volatility is not market observable. Furthermore, as historical prices are not relevant in determining the cost of hedging long-dated FX risk, long-dated FX volatility cannot be inferred from historical volatility. The long-dated FX volatility is extrapolated from the shorter-dated FX volatilities using Black’s model.
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 swaps 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 are options giving the holder the right to enter into an interest rate swap on any one of a number of predetermined dates. These Bermudan swaptions are valued using a standard valuation model. In valuing the Bermudan swaptions, the main inputs used are market observable information in the vanilla swaption market and a mean reversion parameter. The significant unobservable input for the valuation of these financial instruments is mean reversion.
Mean reversion – The input used reflects the level of de-correlation in the swaption market. This parameter is not directly observable in the market but can be deduced from broker quotes or using expert judgement. An adjustment is made to reflect this uncertainty by stressing the parameter.
4. Derivative assets – Interest rate contracts
These derivatives are the same as Instrument 2.
5. Derivative assets – Equity and credit contracts
These are valued using a probability weighted set of HPI forward prices, which are assumed to be a reasonable representation of the increase in value of the Santander UK group’s reversionary interest portfolio underlying the derivatives. The probability used reflects the likelihood of the home owner vacating the property and is calculated from mortality rates and acceleration rates which are a function of age and gender, obtained from the relevant mortality tables. Indexing is felt to be appropriate due to the size and geographical dispersion of the reversionary interest portfolio. These are determined using HPI Spot Rates adjusted to reflect estimated forward growth. The Halifax’s UK HPI is the UK’s longest running monthly house price data series covering the whole country. The indices calculated are standardised and represent the price of a typically transacted house. Both national and regional HPI are published. The national HPI is published monthly. The regional HPI reflects the national HPI disaggregated into 12 UK regions and is published quarterly. Both indices are published on two bases, including and excluding seasonal adjustments in the housing market. Non-seasonally adjusted (NSA) national and regional HPI are used in the valuation model to avoid any subjective judgement in the adjustment process which is made by Markit, (which nowwhich publishes the Halifax House Price Index).Index. 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 Rate2. FVTPL assets – Loans and advances to customers –roll-up mortgage portfolio
These representroll-up mortgages (sometimes referred to as lifetime mortgages), which are an equity release scheme under which a property owner takes out a loan secured against their home. The HPI spot rate usedowner may not make any interest payments during their lifetime in which case the fixed interest payments are rolled up into the mortgage. The loan or mortgage (capital androlled-up interest) is a weighted average of NSA regional HPI spot rates i.e. adjusted for difference inrepaid upon the actual regional compositionowner’s vacation of the property underlying the reversionary interest portfolio and the compositionvalue of the published regional indices. loan is only repaid from the value of the property. This is known as a ‘no negative equity guarantee’. Santander UK suffers a loss if the sale proceeds from the property are insufficient to repay the loan, as it is unable to pursue the homeowner’s estate or beneficiaries for the shortfall. The regionalvalue of the mortgage ‘rolls up’ or accretes until the owner vacates the property. In order to value theroll-up mortgages, Santander UK uses a probability-weighted set of European option prices (puts) determined using the Black-Scholes model, in which the ‘no negative equity guarantee’ 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, rate (whichHPI forward growth, HPI volatility, mortality rates and repayment rates. The principal pricing parameter is observable market data) is only published on specific quarterly dates. In between these dates, its value is estimated by applying the growth rate over the relevant time period inferred from the national HPI spot rates (which are observable market data and published monthly) to the most recently calculated weighted average regional HPI spot rate based on published regional indices. 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 reversionary interest portfolio and their assumed index-linked growth, based on the regional HPI. This adjustment is based on the average historical deviation of price changes of the actual property portfolio from that of the published indices over the time period since the last valuation date. HPI Forward Growth Rate – Long-datedforward growth. The HPI forward growth rate used is not directly observableunobservable and is the same as used in the market but is estimated. 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 volatilityvaluation of the HPI. An adjustment is made to reflect the specific property risk as for the HPI spot rateInstrument 1 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 The other parameters do not have a significant effect on the value of the instruments.
3. FVTPL assets – Debt securities These consist of reversionary property securities and are an equity release scheme, where the property owner receives an upfront lump sum in return for paying a fixed percentage of the sales proceeds of the property when the owner vacates the property. These reversionary property securities are valued using a probability-weighted set of HPI forward prices which are assumed to be a reasonable representation of the increase in value of Santander UK’s reversionary interest portfolio underlying the derivatives. The probability weighting used reflects the probability of the home owner vacating the property through death or moving into care and is calculated from mortality rates and acceleration factors which are a function of age and gender, obtained from the relevant mortality table. 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 2 above. An adjustment is also made to reflect the specific property risk. 4. FVTPL assets – Equity securities (2017:Available-for-sale equity securities) 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 in respect of convertible preferred stock in Visa Inc, as described in Note 32. This is estimated by reference to best estimates received from third party legal counsel.
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
6. Derivative5. FVTPL assets – Credit contractsDebt securities (Credit linked notes)
These are credit default swaps held against certain bonds. The credit default swaps are valued using the credit spreadsconsist of the referenced bonds. These referenced bonds are valued with the assistance of valuations prepared by an independent, specialist valuation firm as a deep and liquid market does not exist. In valuing the credit default swaps, the main inputs used to determine the underlying costretained senior tranches of credit linked notes in respect of credit protection vehicles sponsored by Santander UK, and are quoted risk premiums and the correlation between the quotedmandatorily held at fair value through profit or loss. These vehicles provide credit derivativesprotection on reference portfolios of various issuers.Santander UK group loans with junior notes sold to external investors. The assumptionsnotes retained by Santander UK are classified as level 3 financial instruments as their valuation depends upon unobservable parameters relating to the correlation betweenunderlying reference portfolios of loans, including credit spreads, correlations and prepayment speed, which have a significant effect on the valuesoverall valuation. For more information, see ‘Credit protection entities’ in Note 21. 6. FVOCI assets – Loans and advances to customers – other loans The changes to the classification and measurement of quotedfinancial assets on transition to IFRS 9 as set out in Note 44 resulted in some loans and unquoted assets areadvances to customers, primarily consisting of utilities and shipping counterparties, being reclassified from amortised cost to FVOCI. The fair value of these loans is estimated using the ‘present value’ model based on historical correlations between the impact of adverse changes ina credit curve derived from current market variablesspreads. Loan specific credit data is unobservable, so a proxy population is applied based on industry sector 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.rating.
7. Derivative assetsliabilities – Equity contracts There are three types of derivatives within this category: European options – These are valued using a modified Black-Scholes model where the HPI islog-normally distributed with the forward rates determined from the HPI forward growth. 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.volatility, as described in instrument 1 above. The principal pricing parameter is HPI forward growth rate. HPI Spot Rate – The HPI spot rate used is8. FVTPL liabilities –Financial guarantees
These relate to credit protection guarantees in respect of the NSA national HPI spot rate which is published monthlyproceeds of the retained senior tranches of credit linked notes described in Instrument 5 above, and directly observablehave been designated at fair value through profit or loss. These instruments are valued using the same unobservable parameters described in the market. This HPI rate used is different from the weighted average regional HPI spot rate usedInstrument 5 above, such that changes in the valuation of Instrument 5 above, as the underlying of these derivatives is the UK national HPI spot rate. HPI Forward Growth Rate – The HPI forward growth rate used is unobservable and is the same as used in the valuation of Instrument 5 above.
HPI Volatility – Long-dated HPI volatility is not directly observable in the market and is estimated. 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 valuesenior tranches of the instruments.
8. FVTPL – Loans and advances to customers
These represent roll-up mortgages (sometimes referred to as lifetime mortgages), whichcredit linked notes are an equity release scheme under which a property owner takes out a loan secured against their home. The owner does not make any interest payments during their lifetime and the fixed interest payments are rolled up into the mortgage. The loan or mortgage (capital and rolled-up interest) is repaid upon the owner’s vacation of the property and the value of the loan is only repaid from the value of the property. This is known as a ‘no negative pledge’. The Santander UK group suffers a loss if the sale proceeds from the property are insufficient to repay the loan, as it is unable to pursue the homeowner’s estate or beneficiaries for the shortfall.
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,offset by changes 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 usedcredit protection guarantees. For more information, see ‘Credit protection entities’ in the valuationNote 21.
Reconciliation of Instrument 5 above. The other parameters do not have a significant effect on thefair value measurement in Level 3 of the instruments. 9. FVTPL – Debt securities
These consisting of reversionary property securities are an equity release scheme, where the property owner receives an upfront lump sum in return for paying a fixed percentage of the sales proceeds of the property when the owner vacates the property. These reversionary property securities are valued using a probability-weighted set of HPI forward prices which are assumed to be a reasonable representation of the increase infair value of the Santander UK group’s reversionary interest portfolio underlying the derivatives. The probability weighting used reflects the probability of the home owner vacating the property through death and is calculated from death rates and acceleration factors which are a function of age and gender, obtained from the relevant mortality table.hierarchy
The inputs used to determinefollowing table sets out 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 5 above. An adjustment is also made to reflect the specific property risk. Discussion of the specific property risk adjustment is the same as Instrument 5 above. 10. Available-for-sale financial assets – Equity securities
These consist of unquoted equity investmentsmovements in companies providing infrastructure services to the financial services industry. In the valuation of equityLevel 3 financial instruments requiring dynamic hedging, proprietary local volatilityin 2018 and stochastic volatility models are used. These types of models are widely accepted in the financial services industry.2017:
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.
Contingent litigation costs and related expenses are estimated by reference to best estimates received from third party legal counsel.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets | | | | Liabilities | | | | | Derivatives
£m | | | Other financial
assets at
FVTPL £m | | | Financial
assets at
FVOCI
£m | | | Financial
investments
£m | | | Total
£m | | | | Derivatives
£m | | Other financial
liabilities at
FVTPL £m | | | Total £m | | At 31 December 2017 | | | 64 | | | | 240 | | | | | | | | 53 | | | 357 | | | | (63) | | | (6 | ) | | | (69 | ) | Adoption of IFRS 9 | | | – | | | | 598 | | | | 199 | | | | (53 | ) | | 744 | | | | – | | | – | | | | – | | At 1 January 2018 | | | 64 | | | | 838 | | | | 199 | | | | – | | | 1,101 | | | | (63) | | | (6 | ) | | | (69 | ) | Total (losses)/gains recognised in profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Fair value movements | | | 28 | | | | (5 | ) | | | (5 | ) | | | | | | 18 | | | | 1 | | | (13 | ) | | | (12 | ) | – Foreign exchange and other movements | | | (5 | ) | | | – | | | | – | | | | | | | (5) | | | | 5 | | | (1 | ) | | | 4 | | Transfers in | | | 35 | | | | 18 | | | | – | | | | | | | 53 | | | | (31) | | | (29 | ) | | | (60 | ) | Additions | | | – | | | | 280 | | | | 17 | | | | | | | 297 | | | | – | | | – | | | | – | | Sales | | | – | | | | (95 | ) | | | – | | | | | | | (95) | | | | – | | | – | | | | – | | Settlements | | | (28 | ) | | | (60 | ) | | | (138 | ) | | | | | | (226) | | | | 22 | | | – | | | | 22 | | At 31 December 2018 | | | 94 | | | | 976 | | | | 73 | | | | | | | 1,143 | | | | (66) | | | (49 | ) | | | (115 | ) | | | | | | | | | | | | (Losses)/gains recognised in profit or loss relating to assets and liabilities held at the end of the year | | | 23 | | | | (5 | ) | | | (5 | ) | | | | | | 13 | | | | 6 | | | (14 | ) | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2017 | | | 103 | | | | 264 | | | | | | | | 32 | | | 399 | | | | (74) | | | (6 | ) | | | (80 | ) | Total (losses)/gains recognised in profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Fair value movements | | | (32 | ) | | | (16 | ) | | | | | | | – | | | (48) | | | | 14 | | | – | | | | 14 | | – Foreign exchange and other movements | | | 32 | | | | – | | | | | | | | – | | | 32 | | | | (32) | | | – | | | | (32 | ) | Gains recognised in other comprehensive income | | | – | | | | – | | | | | | | | 21 | | | 21 | | | | – | | | – | | | | – | | Additions | | | 9 | | | | – | | | | | | | | – | | | 9 | | | | (2) | | | – | | | | (2 | ) | Sales | | | – | | | | (8 | ) | | | | | | | – | | | (8) | | | | – | | | – | | | | – | | Settlements | | | (48 | ) | | | – | | | | | | | | – | | | (48) | | | | 31 | | | – | | | | 31 | | At 31 December 2017 | | | 64 | | | | 240 | | | | | | | | 53 | | | 357 | | | | (63) | | | (6 | ) | | | (69 | ) | | | | | | | | | | | | (Losses)/gains recognised in profit or loss relating to assets and liabilities held at the end of the year | | | – | | | | (16 | ) | | | | | | | – | | | (16) | | | | (18) | | | – | | | | (18 | ) |
| | | | | > Notes to the financial statements |
11. Derivative liabilities – Exchange rate contracts
These derivatives are the same as Instrument 2 with the exception that they have a negative fair value.
12. Derivative liabilities – Interest rate contracts
These derivatives are the same as Instrument 3 with the exception that they have a negative fair value.
13. Derivative liabilities – Interest rate contracts
These derivatives are the same as Instrument 2 with the exception that they have a negative fair value.
14. Derivative liabilities – Equity contracts
These derivatives are the same as Instrument 7 with the exception that they have a negative fair value.
15. FVTPL – Debt securities in issue
These are PRDC notes. These notes are financial structured products where an investor is seeking a better return and a borrower/issuer a lower rate by taking advantage of the interest rate differential between two countries. The note pays a foreign interest rate in the investor’s domestic currency. The power component of the name denotes higher initial coupons and the fact that coupons rise as the domestic/foreign exchange rate depreciates. The power feature comes with a higher risk for the investor. Cash flows may have a digital cap feature where the rate gets locked once it reaches a certain threshold. Other add-on features are barriers such as knockouts and cancellation provisions for the issuer.
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.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | Assets | | | | | Liabilities | | | | | Derivatives
£m | | | Fair value
through profit
and loss £m | | | Financial
investments
£m | | | Total
£m | | | | | Derivatives
£m | | Fair value
through profit
and loss £m | | | Total
£m | | At 1 January 2017 | | | 103 | | | | 264 | | | | 32 | | | | 399 | | | | | (74) | | | (6 | ) | | | (80 | ) | Total (losses)/gains recognised in profit/(loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Fair value movements | | | (32 | ) | | | (16 | ) | | | – | | | | (48 | ) | | | | 14 | | | – | | | | 14 | | – Foreign exchange and other movements | | | 32 | | | | – | | | | – | | | | 32 | | | | | (32) | | | – | | | | (32 | ) | Gains recognised in other comprehensive income | | | – | | | | – | | | | 21 | | | | 21 | | | | | – | | | – | | | | – | | Additions | | | 9 | | | | – | | | | – | | | | 9 | | | | | (2) | | | – | | | | (2 | ) | Sales | | | – | | | | (8 | ) | | | – | | | | (8 | ) | | | | – | | | – | | | | – | | Settlements | | | (48 | ) | | | – | | | | – | | | | (48 | ) | | | | 31 | | | – | | | | 31 | | At 31 December 2017 | | | 64 | | | | 240 | | | | 53 | | | | 357 | | | | | (63) | | | (6 | ) | | | (69 | ) | | | | | | | | | | (Losses)/gains recognised in profit/(loss) relating to assets and liabilities held at the end of the year | | | – | | | | (16 | ) | | | – | | | | (16 | ) | | | | (18) | | | – | | | | (18 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2016 | | | 188 | | | | 267 | | | | 100 | | | | 555 | | | | | (105) | | | (5 | ) | | | (110 | ) | Total gains/(losses) recognised in profit/(loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Fair value movements | | | 18 | | | | 4 | | | | – | | | | 22 | | | | | (15) | | | – | | | | (15 | ) | – Foreign exchange and other movements | | | (32 | ) | | | – | | | | – | | | | (32 | ) | | | | 32 | | | (1 | ) | | | 31 | | Gains recognised in other comprehensive income | | | – | | | | – | | | | 26 | | | | 26 | | | | | – | | | – | | | | – | | Additions | | | 4 | | | | – | | | | 25 | | | | 29 | | | | | (3) | | | – | | | | (3 | ) | Sales | | | – | | | | (7 | ) | | | (119 | ) | | | (126 | ) | | | | – | | | – | | | | – | | Settlements | | | (75 | ) | | | – | | | | – | | | | (75 | ) | | | | 17 | | | – | | | | 17 | | At 31 December 2016 | | | 103 | | | | 264 | | | | 32 | | | | 399 | | | | | (74) | | | (6 | ) | | | (80 | ) | | | | | | | | | | (Losses)/gains recognised in profit/(loss) relating to assets and liabilities held at the end of the year | | | (14 | ) | | | 4 | | | | – | | | | (10 | ) | | | | 17 | | | (1 | ) | | | 16 | |
Total gains or losses are included in ‘Net trading and other income’ (see Note 5).
| | | Annual Report 2017 on Form 20-F | 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Significant unobservable input | | | | | | Sensitivity | | | | | | | | | | Assumption value | | | | | | Favourable | | | Unfavourable | | 2017 | | Fair value
£m | | | Assumption description | | Range(1) | | | Weighted
average | | | Shift | | | changes
£m | | | changes £m | | 3. Derivative assets– Interest rate contracts: | | | 6 | | | Mean reversion | | | (2)% – 2% | | | | 0% | | | | (2)% | | | | 1 | | | | (1 | ) | – Bermudan swaptions | | | | | | | | | | | | | | | | | | | | | | | | | | | 5. Derivative assets– Equity and credit contracts: | | | 31 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.42% | | | | 1% | | | | 10 | | | | (10 | ) | – Reversionary property derivatives | | | | | | HPI Spot rate | | | n/a | | | | 773(2) | | | | 10% | | | | 8 | | | | (8 | ) | 7. Derivative assets– Equity contracts: | | | 5 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.32% | | | | 1% | | | | 1 | | | | (1 | ) | – Property-related options and forwards | | | | | | HPI Spot rate | | | n/a | | | | 727(2) | | | | 10% | | | | 2 | | | | – | | 8. FVTPL– Loans and advances to customers: | | | 64 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.57% | | | | 1% | | | | 2 | | | | (2 | ) | – Roll-up mortgage portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | 9. FVTPL– Debt securities: | | | 176 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.42% | | | | 1% | | | | 3 | | | | (3 | ) | – Reversionary property securities | | | | | | HPI Spot rate | | | n/a | | | | 773(2) | | | | 10% | | | | 11 | | | | (11 | ) | 10. Financial investments– AFS equity securities: | | | 53 | | | Contingent litigation risk | | | 0% – 100% | | | | 35% | | | | 20% | | | | 6(3 | | | | (6)(3 | | – Unlisted equity shares | | | | | | | | | | | | | | | | | | | | | | | | | | | 12. Derivative liabilities– Interest rate contracts: | | | (1 | ) | | Mean reversion | | | (2)% – 2% | | | | 0% | | | | (2)% | | | | 1 | | | | (1 | ) | – Bermudan swaptions | | | | | | | | | | | | | | | | | | | | | | | | | | | 14. Derivative liabilities– Equity contracts: | | | (43 | ) | | HPI Forward growth rate | | | 0% – 5% | | | | 2.32% | | | | 1% | | | | 3 | | | | (3 | ) | – Property-related options and forwards | | | | | | HPI Spot rate | | | n/a | | | | 727(2) | | | | 10% | | | | 7 | | | | (8 | ) | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | 3. Derivative assets– Interest rate contracts: | | | 7 | | | Mean reversion | | | (2)% – 2% | | | | 0% | | | | (2)% | | | | 1 | | | | (1 | ) | – Bermudan swaptions | | | | | | | | | | | | | | | | | | | | | | | | | | | 5. Derivative assets– Equity and credit contracts: | | | 36 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.79% | | | | 1% | | | | 11 | | | | (11 | ) | – Reversionary property derivatives | | | | | | HPI Spot rate | | | n/a | | | | 748(2) | | | | 10% | | | | 9 | | | | (9 | ) | 6. Derivative assets– Credit contracts: | | | 5 | | | Probability of default | | | 0% – 5% | | | | 0.39% | | | | 20% | | | | 1 | | | | (1 | ) | – Credit default swaps | | | | | | | | | | | | | | | | | | | | | | | | | | | 7. Derivative assets– Equity contracts: | | | 21 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.71% | | | | 1% | | | | 1 | | | | (1 | ) | – Property-related options and forwards | | | | | | HPI Spot rate | | | n/a | | | | 702(2) | | | | 10% | | | | 1 | | | | (1 | ) | 8. FVTPL– Loans and advances to customers: | | | 63 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.84% | | | | 1% | | | | 2 | | | | (2 | ) | – Roll-up mortgage portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | 9. FVTPL– Debt securities: | | | 201 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.79% | | | | 1% | | | | 12 | | | | (12 | ) | – Reversionary property securities | | | | | | HPI Spot rate | | | n/a | | | | 748(2) | | | | 10% | | | | 18 | | | | (18 | ) | 10. Financial investments– AFS equity securities: | | | 32 | | | Contingent litigation risk | | | 0% – 100% | | | | 48% | | | | 20% | | | | 7(3) | | | | (7)(3) | | – Unlisted equity shares | | | | | | | | | | | | | | | | | | | | | | | | | | | 12. Derivative liabilities– Interest rate contracts: | | | (2 | ) | | Mean reversion | | | (2)% – 2% | | | | 0% | | | | (2)% | | | | 1 | | | | (1 | ) | – Bermudan swaptions | | | | | | | | | | | | | | | | | | | | | | | | | | | 14. Derivative liabilities– Equity contracts: | | | (42 | ) | | HPI Forward growth rate | | | 0% – 5% | | | | 2.71% | | | | 1% | | | | 4 | | | | (4 | ) | – Property-related options and forwards | | | | | | HPI Spot rate | | | n/a | | | | 702(2) | | | | 10% | | | | 8 | | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Significant unobservable input | | | | | | Sensitivity | | | | | | | | | | Assumption value | | | | | | Favourable | | | Unfavourable | | 2018 | | Fair value
£m | | | Assumption description | | Range(1) | | | Weighted
average | | | Shift | | | changes
£m | | | changes £m | | 1. Derivative assets– Equity and credit contracts: | | | 54 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.68% | | | | 1% | | | | 8 | | | | (8 | ) | – Reversionary property derivatives | | | | | | HPI Spot rate | | | n/a | | | | 783 | | | | 10% | | | | 7 | | | | (7 | ) | 2. FVTPL– Loans and advances to customers: | | | 53 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.77% | | | | 1% | | | | 2 | | | | (2 | ) | –Roll-up mortgage portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | 3. FVTPL – Debt securities: | | | 142 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.68% | | | | 1% | | | | 6 | | | | (6 | ) | – Reversionary property securities | | | | | | HPI Spot rate | | | n/a | | | | 783(2) | | | | 10% | | | | 10 | | | | (10 | ) | 6. FVOCI– Loans and advances to customers: | | | 73 | | | Credit spreads | | | 0% – 2% | | | | 0.80% | | | | 20% | | | | – | | | | – | | – Other loans | | | | | | | | | | | | | | | | | | | | | | | | | | | 7. Derivative liabilities – Equity contracts: | | | (35 | ) | | HPI Forward growth rate | | | 0% – 5% | | | | 2.59% | | | | 1% | | | | 2 | | | | (2 | ) | – Property-related options and forwards | | | | | | HPI Spot rate | | | n/a | | | | 722(2) | | | | 10% | | | | 3 | | | | (4 | ) | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | 1. Derivative assets– Equity and credit contracts: | | | 31 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.42% | | | | 1% | | | | 10 | | | | (10 | ) | – Reversionary property derivatives | | | | | | HPI Spot rate | | | n/a | | | | 773 | | | | 10% | | | | 8 | | | | (8 | ) | 2. FVTPL– Loans and advances to customers: | | | 64 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.57% | | | | 1% | | | | 2 | | | | (2 | ) | –Roll-up mortgage portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | 3. FVTPL – Debt securities: | | | 176 | | | HPI Forward growth rate | | | 0% – 5% | | | | 2.42% | | | | 1% | | | | 3 | | | | (3 | ) | – Reversionary property securities | | | | | | HPI Spot rate | | | n/a | | | | 773(2) | | | | 10% | | | | 11 | | | | (11 | ) | 4. Financial investments– AFS equity securities: | | | 53 | | | Contingent litigation risk | | | 0% – 100% | | | | 35% | | | | 20% | | | | 6 | | | | (6 | ) | – Unlisted equity shares | | | | | | | | | | | | | | | | | | | | | | | | | | | 7. Derivative liabilities – Equity contracts: | | | (43 | ) | | HPI Forward growth rate | | | 0% – 5% | | | | 2.32% | | | | 1% | | | | 3 | | | | (3 | ) | – Property-related options and forwards | | | | | | HPI Spot rate | | | n/a | | | | 727(2) | | | | 10% | | | | 7 | | | | (8 | ) |
| (1) | | The range of actual assumption values used to calculate the weighted average disclosure. |
| (2) | | Represents the HPI spot rate index level at 31 December 20172018 and 2016. |
(3) | | Gains and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in ‘Other comprehensive income’; for all other assets and liabilities shown in the tables above, gains and losses arising from changes in their fair value are recognised in the Consolidated Income Statement.2017. |
No sensitivities are presented for DerivativeFVTPL assets – cross currency swapsDebt securities, Credit linked Notes (instrument 1), Derivative assets – securitisation cross currency swaps5) and FVTPL liabilities –financial guarantees (instrument 2)8), Derivative assets –securitisation swaps (instrument 4) and the FVTPL – debt securities in issue (instrument 15) and related exchange rate and interest rate derivatives (instruments 1, 11 and 13) as the terms of these instruments are fully matched. As a result, any changes in the valuation of the debt securities in issuecredit linked notes would be exactly offset by an equal and opposite change in the valuation of the exchange rate derivatives.financial guarantees.
| | | | Annual Report 2018 | Financial statements | | > Notes to the financial statements |
j)i) Maturities of financial liabilities andoff-balance sheet commitments
The table below analyses the maturities of the undiscounted cash flows relating to financial liabilities andoff-balance sheet commitments of the Santander UK group based on the remaining period to the contractual maturity date at the balance sheet date. Deposits by customers largely consist of retail deposits. There are no significant financial liabilities related to financial guarantee contracts. This table is not intended to show the liquidity of the Santander UK group.UK. | | | | Group | | | Group | | 2017 | | On demand
£m | | | Not later than
three months
£m | | | Later than
three months
and not later
than one year
£m | | | Later than one year
and not later
than five years
£m | | | Later than
five years
£m | | | Total
£m | | | Liabilities | | | | | | | | | | | | | | | 2018 | | | On demand
£m | | | Not later than
3 months £m | | | Later than
3 months
and not later
than 1 year
£m | | | Later than
1 year
and not later
than 5 years
£m | | | Later than
5 years
£m | | | Total
£m | | Financial liabilities | | | | | | | | | | | | | | Trading liabilities | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Derivative financial instruments | | | | – | | | | 431 | | | | 57 | | | | 41 | | | | 1,003 | | | | 1,532 | | Other financial liabilities at fair value through profit or loss | | | | 11 | | | | 2,146 | | | | 76 | | | | 408 | | | | 3,855 | | | | 6,496 | | Deposits by customers | | | | 159,009 | | | | 3,422 | | | | 9,491 | | | | 5,216 | | | | 1,305 | | | | 178,443 | | Deposits by banks | | | 2,452 | | | | 1,466 | | | | 914 | | | | 8,874 | | | | 208 | | | | 13,914 | | | | 5,096 | | | | 1,100 | | | | 90 | | | | 11,100 | | | | 52 | | | | 17,438 | | Deposits by customers | | | 154,114 | | | | 4,764 | | | | 13,869 | | | | 6,720 | | | | 4,604 | | | | 184,071 | | | Trading liabilities | | | 1,520 | | | | 26,914 | | | | 152 | | | | 161 | | | | 2,580 | | | | 31,327 | | | Derivative financial instruments: | | | | | | | | | | | | | | – Held for trading | | | 9 | | | | 620 | | | | 1,203 | | | | 2,505 | | | | 12,701 | | | | 17,038 | | | – Held for hedging(1) | | | 6 | | | | 11 | | | | 27 | | | | 420 | | | | 1,300 | | | | 1,764 | | | Financial liabilities designated at fair value | | | 7 | | | | 545 | | | | 222 | | | | 789 | | | | 814 | | | | 2,377 | | | Repurchase agreements – non trading | | | | 2 | | | | 9,101 | | | | 972 | | | | 849 | | | | 517 | | | | 11,441 | | Debt securities in issue | | | – | | | | 8,395 | | | | 4,821 | | | | 22,927 | | | | 7,933 | | | | 44,076 | | | | – | | | | 9,157 | | | | 5,520 | | | | 23,051 | | | | 10,921 | | | | 48,649 | | Subordinated liabilities | | | – | | | | 289 | | | | 147 | | | | 783 | | | | 5,571 | | | | 6,790 | | | | – | | | | 255 | | | | 134 | | | | 709 | | | | 5,279 | | | | 6,377 | | Total financial liabilities | | | 158,108 | | | | 43,004 | | | | 21,355 | | | | 43,179 | | | | 35,711 | | | | 301,357 | | | | 164,118 | | | | 25,612 | | | | 16,340 | | | | 41,374 | | | | 22,932 | | | | 270,376 | | Off-balance sheet commitments given | | | 2,082 | | | | 6,874 | | | | 1,844 | | | | 12,399 | | | | 18,860 | | | | 42,059 | | | | 1,106 | | | | 5,843 | | | | 670 | | | | 13,413 | | | | 18,987 | | | | 40,019 | | | 2016 | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | Financial liabilities | | | | | | | | | | | | | | Trading liabilities | | | | 1,520 | | | | 26,914 | | | | 152 | | | | 161 | | | | 2,580 | | | | 31,327 | | Derivative financial instruments | | | | 15 | | | | 631 | | | | 1,230 | | | | 2,925 | | | | 14,001 | | | | 18,802 | | Other financial liabilities at fair value through profit or loss | | | | 7 | | | | 545 | | | | 222 | | | | 789 | | | | 814 | | | | 2,377 | | Deposits by customers | | | | 154,114 | | | | 4,764 | | | | 13,869 | | | | 6,720 | | | | 4,604 | | | | 184,071 | | Deposits by banks | | | 2,366 | | | | 916 | | | | 677 | | | | 5,833 | | | | 96 | | | | 9,888 | | | | 2,452 | | | | 1,465 | | | | 82 | | | | 8,626 | | | | 208 | | | | 12,833 | | Deposits by customers | | | 145,810 | | | | 4,996 | | | | 13,420 | | | | 11,077 | | | | 2,390 | | | | 177,693 | | | Trading liabilities | | | 3,535 | | | | 10,042 | | | | 21 | | | | 602 | | | | 1,474 | | | | 15,674 | | | Derivative financial instruments: | | | | | | | | | | | | | | – Held for trading | | | 41 | | | | 904 | | | | 1,569 | | | | 4,352 | | | | 15,494 | | | | 22,360 | | | – Held for hedging(1) | | | – | | | | 14 | | | | 38 | | | | 575 | | | | 1,357 | | | | 1,984 | | | Financial liabilities designated at fair value | | | 9 | | | | 404 | | | | 229 | | | | 1,117 | | | | 759 | | | | 2,518 | | | Repurchase agreements – non trading | | | | – | | | | 1 | | | | 832 | | | | 248 | | | | – | | | | 1,081 | | Debt securities in issue | | | – | | | | 9,189 | | | | 7,010 | | | | 21,889 | | | | 14,775 | | | | 52,863 | | | | – | | | | 8,395 | | | | 4,821 | | | | 22,927 | | | | 7,933 | | | | 44,076 | | Subordinated liabilities | | | – | | | | 450 | | | | 554 | | | | 1,739 | | | | 6,054 | | | | 8,797 | | | | – | | | | 289 | | | | 147 | | | | 783 | | | | 5,571 | | | | 6,790 | | Total financial liabilities | | | 151,761 | | | | 26,915 | | | | 23,518 | | | | 47,184 | | | | 42,399 | | | | 291,777 | | | | 158,108 | | | | 43,004 | | | | 21,355 | | | | 43,179 | | | | 35,711 | | | | 301,357 | | Off-balance sheet commitments given | | | 1,692 | | | | 5,128 | | | | 2,642 | | | | 23,584 | | | | 8,570 | | | | 41,616 | | | | 2,082 | | | | 6,874 | | | | 1,844 | | | | 12,399 | | | | 18,860 | | | | 42,059 | |
(1) | | Comprises the derivatives liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows. |
| | | Annual Report 2017 on Form 20-F | Financial statements | | |
As the above table is based on contractual maturities, no account is taken of call features related to subordinated liabilities. In addition, the repayment terms of debt securities may be accelerated in line with the covenants described in Note 26.29. Further, no account is taken of the possible early repayment of the Santander UK group’sUK’s mortgage-backednon-recourse finance which is redeemed by the Santander UK group as funds become available from redemptions of the residential mortgages. The Santander UK group has no control over the timing and amount of redemptions of residential mortgages.
| | | | | > Notes to the financial statements |
38.42. OFFSETTING FINANCIAL ASSETS AND LIABILITIES
Financial assets and financial liabilities are reported on a net basis on the balance sheet only if 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 asset and settle the liability simultaneously. The following table shows the impact of netting arrangements on: | – | | All financial assets and liabilities that are reported net on the balance sheet |
| – | | All derivative financial instruments and repurchase agreements and other similar secured lending and borrowing agreements that are subject to enforceable master netting arrangements or similar agreements, but do not qualify for balance sheet netting. |
The table identifies the amounts that have been offset in the balance sheet and also those amounts that are covered by enforceable netting arrangements (offsetting arrangements and financial collateral) but do not qualify for netting under the requirements described above. 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 andclose-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 andnon-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 andclose-out netting applied across all outstanding transactions 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’sUK’s actual credit exposure.
| | | | Group | | | Group | | | | | | Amounts subject to enforceable netting arrangements | | | | | | | | | | | | Effects of offsetting on balance sheet | | | | Related amounts not offset | | | | | | | | 2018 | | | Gross
amount
£m | | | Amount
offset
£m | | Net amount on the balance
sheet £m | | Financial
instruments
£m | | Financial
collateral(1)
£m | | Net amount
£m | | | Assets not subject to
enforceable
netting arrangements(2) £m | | | Balance
sheet
total(3)
£m | | Assets | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | | 7,026 | | | | (1,872 | ) | | 5,154 | | | | | (933) | | | (2,133 | ) | | 2,088 | | | | 105 | | | | 5,259 | | Reverse repurchase, securities borrowing & similar agreements: | | | | | | | | | | | | | | | | | | | | – Amortised cost | | | | 24,733 | | | | (3,606 | ) | | 21,127 | | | | | (2,721) | | | (18,406 | ) | | | – | | | | – | | | | 21,127 | | – Fair value | | | | 2,272 | | | | – | | | 2,272 | | | | | – | | | (2,272 | ) | | | – | | | | – | | | | 2,272 | | Loans and advances to customers and banks(4) | | | | 6,021 | | | | (1,293 | ) | | 4,728 | | | | | – | | | – | | | 4,728 | | | | 199,360 | | | | 204,088 | | | | | | | 40,052 | | | | (6,771 | ) | | 33,281 | | | | | (3,654) | | | (22,811 | ) | | 6,816 | | | | 199,465 | | | | 232,746 | | | Liabilities | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | | 3,187 | | | | (1,872 | ) | | 1,315 | | | | | (933) | | | (303 | ) | | 79 | | | | 54 | | | | 1,369 | | Repurchase, securities lending & similar agreements: | | | | | | | | | | | | | | | | | | | | – Amortised cost | | | | 14,516 | | | | (3,606 | ) | | 10,910 | | | | | (2,721) | | | (8,189 | ) | | | – | | | | – | | | | 10,910 | | – Fair value | | | | 2,110 | | | | – | | | 2,110 | | | | | – | | | (2,110 | ) | | | – | | | | – | | | | 2,110 | | Deposits by customers and banks(4) | | | | 12,174 | | | | (1,293 | ) | | 10,881 | | | | | – | | | (502 | ) | | 10,379 | | | | 184,430 | | | | 195,311 | | | | | Amounts subject to enforceable netting arrangements | | | | | | | | | | 31,987 | | | | (6,771 | ) | | 25,216 | | | | | (3,654) | | | (11,104 | ) | | 10,458 | | | | 184,484 | | | | 209,700 | | | | | Effects of offsetting on balance sheet | | | | Related amounts not offset | | | | | | | | | | | 2017 | | Gross
amounts
£m | | | Amounts
offset
£m | | Net amounts
reported on the balance sheet £m | | Financial
instruments
£m | | Financial
collateral(1)
£m | | Net amount
£m | | | Assets not
subject to
enforceable
netting arrangements(2)
£m | | | Balance
sheet
total(3) £m | | | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | 30,155 | | | | (10,479 | ) | | 19,676 | | | | | (14,772) | | | (2,785 | ) | | 2,119 | | | | 266 | | | | 19,942 | | | | 30,155 | | | | (10,479 | ) | | | 19,676 | | | | | (14,772) | | | (2,785 | ) | | | 2,119 | | | | 266 | | | | 19,942 | | Reverse repurchase, securities borrowing & similar agreements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading assets | | | 15,224 | | | | (6,354 | ) | | 8,870 | | | | | (355) | | | (8,515 | ) | | – | | | | – | | | | 8,870 | | | – Loans and advances to banks | | | 2,464 | | | | – | | | 2,464 | | | | | – | | | (2,464 | ) | | – | | | | – | | | | 2,464 | | | – Amortised cost | | | | 2,614 | | | | – | | | | 2,614 | | | | | – | | | (2,614 | ) | | | – | | | | – | | | | 2,614 | | – Fair value | | | | 15,224 | | | | (6,354 | ) | | | 8,870 | | | | | (355) | | | (8,515 | ) | | | – | | | | – | | | | 8,870 | | Loans and advances to customers and banks(4) | | | 6,121 | | | | (1,459 | ) | | 4,662 | | | | | – | | | – | | | 4,662 | | | | 198,291 | | | | 202,953 | | | | 5,971 | | | | (1,459 | ) | | | 4,512 | | | | | – | | | – | | | | 4,512 | | | | 198,291 | | | | 202,803 | | | | | | 53,964 | | | | (18,292 | ) | | 35,672 | | | | | (15,127) | | | (13,764 | ) | | 6,781 | | | | 198,557 | | | | 234,229 | | | | 53,964 | | | | (18,292 | ) | | | 35,672 | | | | | (15,127) | | | (13,914 | ) | | | 6,631 | | | | 198,557 | | | | 234,229 | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | 27,839 | | | | (10,479 | ) | | 17,360 | | | | | (14,772) | | | (1,951 | ) | | 637 | | | | 253 | | | | 17,613 | | | | 27,839 | | | | (10,479 | ) | | | 17,360 | | | | | (14,772) | | | (1,951 | ) | | | 637 | | | | 253 | | | | 17,613 | | Repurchase, securities lending & similar agreements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading liabilities | | | 31,858 | | | | (6,354 | ) | | 25,504 | | | | | (355) | | | (25,149 | ) | | – | | | | – | | | | 25,504 | | | – Deposits by banks and customers | | | 1,578 | | | | – | | | 1,578 | | | | | – | | | (1,578 | ) | | – | | | | – | | | | 1,578 | | | – Amortised cost | | | | 1,076 | | | | – | | | | 1,076 | | | | | – | | | (1,076 | ) | | | – | | | | – | | | | 1,076 | | – Fair value | | | | 31,858 | | | | (6,354 | ) | | | 25,504 | | | | | (355) | | | (25,149 | ) | | | – | | | | – | | | | 25,504 | | Deposits by customers and banks(4) | | | 8,440 | | | | (1,459 | ) | | 6,981 | | | | | – | | | – | | | 6,981 | | | | 188,873 | | | | 195,854 | | | | 8,942 | | | | (1,459 | ) | | | 7,483 | | | | | – | | | (502 | ) | | | 6,981 | | | | 188,873 | | | | 196,356 | | | | | | 69,715 | | | | (18,292 | ) | | 51,423 | | | | | (15,127) | | | (28,678 | ) | | 7,618 | | | | 189,126 | | | | 240,549 | | | | 69,715 | | | | (18,292 | ) | | | 51,423 | | | | | (15,127) | | | (28,678 | ) | | | 7,618 | | | | 189,126 | | | | 240,549 | | | 2016 | | | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | 34,125 | | | | (8,819 | ) | | | 25,306 | | | | | (17,417) | | | (2,384 | ) | | | 5,505 | | | | 165 | | | | 25,471 | | | Reverse repurchase, securities borrowing & similar agreements: | | | | | | | | | | | | | | | | | | | | – Trading assets | | | 12,607 | | | | (1,895 | ) | | | 10,712 | | | | | (2,113) | | | (8,599 | ) | | | – | | | | – | | | | 10,712 | | | – Loans and advances to banks | | | 1,462 | | | | – | | | | 1,462 | | | | | – | | | (1,462 | ) | | | – | | | | – | | | | 1,462 | | | Loans and advances to customers and banks(4) | | | 5,494 | | | | (1,491 | ) | | | 4,003 | | | | | – | | | – | | | | 4,003 | | | | 198,621 | | | | 202,624 | | | | | | | 53,688 | | | | (12,205 | ) | | | 41,483 | | | | | (19,530) | | | (12,445 | ) | | | 9,508 | | | | 198,786 | | | | 240,269 | | | | Liabilities | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | 31,635 | | | | (8,819 | ) | | | 22,816 | | | | | (17,417) | | | (2,565 | ) | | | 2,834 | | | | 287 | | | | 23,103 | | | Repurchase, securities lending & similar agreements: | | | | | | | | | | | | | | | | | | | | – Trading liabilities | | | 10,693 | | | | (1,895 | ) | | | 8,798 | | | | | (2,113) | | | (6,685 | ) | | | – | | | | – | | | | 8,798 | | | – Deposits by banks and customers | | | 2,886 | | | | – | | | | 2,886 | | | | | – | | | (2,886 | ) | | | – | | | | – | | | | 2,886 | | | Deposits by customers and banks(4) | | | 6,643 | | | | (1,491 | ) | | | 5,152 | | | | | – | | | – | | | | 5,152 | | | | 178,903 | | | | 184,055 | | | | | | | 51,857 | | | | (12,205 | ) | | | 39,652 | | | | | (19,530) | | | (12,136 | ) | | | 7,986 | | | | 179,190 | | | | 218,842 | | |
| (1) | Financial collateral is reflected at its fair value, but has been limited to the net balance sheet exposure so as not to include any over-collateralisation. |
| (2) | This column includes contractual rights ofset-off that are subject to uncertainty under the laws of the relevant jurisdiction. |
| (3) | The balance sheet total is the sum of ‘Net amounts reported on the balance sheet’ that are subject to enforceable netting arrangements and ‘Amounts not subject to enforceable netting arrangements’. |
| (4) | The amounts offset within loans and advances to customers/banks or deposits by customers/banks relate to offset mortgages which are classified as either and that are subject to netting. |
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
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| | | | | > Notes to the financial statements |
39.43. RING-FENCING
Regulation The Financial Services (Banking Reform) Act 2013 inserted provisions into the Financial Services and Markets Act 2000 (FSMA) and related legislation (the Banking Reform Legislation) requiring the Santander UK group amongst a number of other UK banking groups, to operationally and legally separate certain retail banking activities from certain wholesale or investment banking activities by 1 January 2019. This is known as ‘ring-fencing’. The Banking Reform Legislation specifies: | – | | Certain banking services or activities the performance of(principally deposit taking from individuals and SMEs) which will cause a UK bank tomust be undertaken by a ring-fenced bank (RFB); andbank. |
| – | | Certain banking services and activities, along with certain types of credit risk exposure oroff-balance sheet items, which an RFBa ring-fenced bank will be prohibited from carrying on or incurring (prohibited business). |
As a result, under the ring-fencing regime, an RFBa ring-fenced bank is only permitted to carry on banking services or activities that are not prohibited (permitted business). Proposed Santander UK group model
UnderOur ring-fence structure was completed ahead of the model chosen by the1 January 2019 regulatory deadline. Its implementation involved a ring-fencing transfer scheme (RFTS) between Santander UK group to implement its ring-fencing plan:plc, ANTS and Banco Santander SA, as well as asset sales and the rundown of certain short-term positions. Under our chosen model:
| – | | Santander UK plc will beis the primary RFBring-fenced bank within an RFB a ring-fenced banksub-group will continue and serves all of our personal customers in the UK, and the majority of our business banking customers. Santander UK plc also broadly, to the extent allowed by the legislation, continues to hold and serve Santander’s corporate banking business in the UK. Any products Santander UK can’t offer, or customers it can’t serve, from within the ring-fenced bank (which includes some Corporate & Investment Banking business and some Corporate & Commercial Banking customers) are, in most cases, provided or served by the wider Banco Santander group, notably through its Banco Santander London Branch. Santander UK plc continues to be a subsidiary of Santander UK Group Holdings plc, will continue to accept deposits from the public and will beis the holding company of the Santander UK RFB ring-fenced banksub-group. Cater Allen Limited willis also be an RFBa ring-fenced bank and part of the Santander UK RFB ring-fenced banksub-group. Neither Santander UK plc nor Cater Allen Limited will conduct prohibited business;business. |
| – | | ANTS was emptied of most assets and liabilities, except for a small pool of residual assets and liabilities, and became a wholly-owned direct subsidiary of Santander UK Group Holdings plc, outside the ring-fenced bank. The prohibited business of ANTS, which principally included our derivatives business with financial institutions, certain corporates and our short term markets business, was either transferred to Banco Santander London Branch or, in the case of the majority of our short term markets business, was run down. The majority of the permitted business of ANTS transferred to Santander UK plc, with a small amount of the permitted business of ANTS transferring to Banco Santander London Branch. |
| – | | The business of the Crown Dependency branches (Jersey and Isle of Man) of Santander UK plc will be transferred outside the Santander UK plc groupwas sold to ANTS pursuant to transfer schemes effected under relevant Jersey and Isle of Man law; |
– | | Abbey National Treasury Services plc will become a wholly-owned direct subsidiary of Santander UK Group Holdings plc,law, and will be emptied of all material assets, save for a small pool of residual assets. The prohibited business of Abbey National Treasury Services plc, which principally includes our derivatives business with financial institutions, certain corporates and elements of our short term markets business, will transfer to Banco Santander SA or its London branch (SLB). The majoritytherefore transferred out of the permitted business of Abbey National Treasury Services plc will transfer to Santander UK plc, with a small amount of the permitted business of Abbey National Treasury Services plc transferring to SLB. The branch of Abbey National Treasury Services plc in the US will be closed by the end of December 2018; and |
– | | Except for the business of the Crown Dependency branches, SLB will carry on all business that constitutes prohibited business, save for a small pool of assets in Abbey National Treasury Services plc.ring-fenced bank. |
Implementation plan
TheAny associated business transfers to Banco Santander UK group is on trackLondon Branch were made for a cash consideration equivalent to enable the ring-fencing structure to be implemented in advancebook value of the regulatory deadline.
On 16 October 2017, Santander UK plc, Abbey National Treasury Services plc, Santander UK Group Holdings plcassociated assets and Banco Santander S.A. entered into a ring-fencing transfer scheme (RFTS)liabilities, which formalised the business transfers required to implement the planned ring-fenced structure. These business transfers will be made at book value which represents appropriate and reasonable compensation and a fair value for the Santander UK group.
The RFTS Costs to sell were immaterial. Our ring-fence structure is a transfer scheme under Part VII of FSMA that enables UK banks to implement thenow in place with all required transfers completed. Compliance with ring-fencing requirements. This islegislation has involved significant effort over a court process that requires (i) the PRA to approve the scheme (in consultation with the FCA); (ii) the appropriate regulatory authority in respect of each transferee to provide a certificate of adequate financial resources in relation to that transferee; and (iii) an independent expert (approved by the PRA, after consultation with the FCA) to provide a scheme report stating whether any adverse effect on persons affected by the scheme is likely to be greater than is reasonably necessary to achieve the ring-fencing purposes of the scheme.
For the prohibited business transfers, additional approvals will be required from the Spanish Ministry of Economy, the Bank of Spain and the European Central Bank. In the case of the Crown Dependency branches, approvals will be required from either the Jersey Financial Services Commission and the Royal Court of Jersey, or the Isle of Man Financial Services Authority and the Isle of Man High Court of Justice.
In January 2018, the PRA approved the application to the court, and in February 2018 the court approved the communication of the proposed scheme to relevant stakeholders to allow them to express their views in court in relation to the scheme. However, until final court approvals have been obtained, which is not expected until the end of the second quarter of 2018, there remains uncertainty regarding the final ring-fenced structure of the Santander UK group.
The RFTS will also unwind Cross Guarantees, releasing each of Santander UK plc and Abbey National Treasury Services plc from all liabilities under those guarantees, with effect from 1 January 2019.
In addition to the transfers above, a small number of business transfers will be effected in advance where court or regulator approvals are not required. Negotiationsyears, with counterparties are ongoing, and until those negotiations are complete, uncertainty remains about the mechanisms by which those transfers will be effected.
As a resulttotal cost of these uncertainties, management considers that no transfers have reached the stage of being regarded as highly probable and, as such, assets and liabilities associated with those proposed transfers have not been classified as held for sale at 31 December 2017.
Furthermore, the management of certain banking services or activities, typically short term markets activities, will be transferred by concurrently running-off existing business in Abbey National Treasury Services plc and writing new business in Santander UK plc or SLB.c£240m.
| | | Annual Report 2017 on Form 20-F2018 | Financial statements | | |
44. TRANSITION TO IFRS 9 BalanceStatutory balance sheet impactreconciliation under IAS 39 and IFRS 9
AsThe measurement categories and carrying amounts of financial assets determined in accordance with IAS 39 and IFRS 9 are compared below, illustrating a total net assets decrease of £192m as a result of ring-fencing, it is intended that all prohibited business will be transferred to SLB, savethe application of IFRS 9:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Group | | | | | IAS 39 | | | | | | | | | IFRS 9 | | | | | | | | | Assets | | Measurement
category | | Carrying
amount (31 December 2017) £m | | | Reclassifications(1)
£m | | | Remeasurement(2) £m | | | Measurement category | | Carrying
amount
(1 January
2018) £m | | | Re-presentation
(6) £m | | | IFRS 9
Balance Sheet
(1 January
2018) £m | | Cash and balances with central banks | | Loans & receivables | | | 32,771 | | | | – | | | | – | | | Amortised cost | | | 32,771 | | | | – | | | | 32,771 | | | | | | | | | | | Trading assets | | FVTPL | | | 30,536 | | | | – | | | | – | | | FVTPL (Mandatory) | | | 30,536 | | | | – | | | | 30,536 | | | | | FVTPL | | | 19 | | | | – | | | | – | | | FVOCI | | | 19 | | | | (19)(a) | | | | – | | | | | | | | 30,555 | | | | – | | | | – | | | | | | 30,555 | | | | (19) | | | | 30,536 | | | Derivative financial instruments | | FVTPL (Trading) | | | 19,942 | | | | – | | | | – | | | FVTPL (Mandatory) | | | 19,942 | | | | – | | | | 19,942 | | | Other financial assets at | | FVTPL (Designated) | | | 1,022 | | | | (45)(b) | | | | – | | | Amortised cost | | | 977 | | | | (977)(b) | | | | – | | FVTPL(3) | | FVTPL (Designated) | | | 836 | | | | – | | | | – | | | FVTPL (Designated) | | | 836 | | | | – | | | | 836 | | | | | FVTPL (Designated) | | | 238 | | | | – | | | | – | | | FVTPL (Mandatory) | | | 238(c) | | | | 1,181(d) | | | | 1,419 | | | | | | | | 2,096 | | | | (45) | | | | – | | | | | | 2,051 | | | | 204 | | | | 2,255 | | | Loans and advances to | | Loans & receivables | | | 199,068 | | | | – | | | | (211 | ) | | Amortised cost | | | 198,857 | | | | 977(b) | | | | 199,834 | | customers(4) | | Loans & receivables | | | 181 | | | | (1)(a) | | | | – | | | FVOCI | | | 180 | | | | (180)(a) | | | | – | | | | | Loans & receivables | | | 91 | | | | – | | | | – | | | FVTPL (Mandatory) | | | 91 | | | | (91)(d) | | | | – | | | | | | | | 199,340 | | | | (1) | | | | (211 | ) | | | | | 199,128 | | | | 706 | | | | 199,834 | | | Loans and advances to banks | | Loans & receivables | | | 3,463 | | | | – | | | | – | | | Amortised cost | | | 3,463 | | | | – | | | | 3,463 | | | Reverse repurchase agreements – non trading | | Loans & receivables | | | 2,614 | | | | – | | | | – | | | Amortised cost | | | 2,614 | | | | – | | | | 2,614 | | | Other financial assets at amortised cost | | | | | | | | | | | | | | | | Amortised cost | | | – | | | | 7,776(e) | | | | 7,776 | | | Financial assets at FVOCI | | | | | | | | | | | | | | | | FVOCI | | | – | | | | 8,942(a)(f) | | | | 8,942 | | | Financial investments | | Loans & receivables | | | 1,198 | | | | – | | | | – | | | Amortised cost | | | 1,198 | | | | (1,198)(e) | | | | | | | | Loans & receivables | | | 982 | | | | (2)(d) | | | | – | | | FVTPL (Mandatory) | | | 980 | | | | (980)(d) | | | | | | | | Available-for-sale | | | 8,743 | | | | – | | | | – | | | FVOCI | | | 8,743 | | | | (8,743)(f) | | | | | | | | Available-for-sale | | | 29 | | | | – | | | | – | | | FVTPL (Mandatory) | | | 29 | | | | (29)(d) | | | | | | | | Held-to-maturity | | | 6,578 | | | | – | | | | – | | | Amortised cost | | | 6,578 | | | | (6,578)(e) | | | | | | | | | Available-for-sale | | | 81 | | | | – | | | | – | | | FVTPL (Mandatory) | | | 81 | | | | (81)(d) | | | | | | | | | | | | 17,611 | | | | (2) | | | | – | | | | | | 17,609 | | | | (17,609) | | | | | | Other assets | | Other assets | | | 6,373 | | | | (1) | | | | | | | Other assets | | | 6,372 | | | | – | | | | 6,372 | | Total assets
(pre-deferred tax asset)(5) | | | | | 314,765 | | | | (49) | | | | (211 | ) | | | | | 314,505 | | | | – | | | | 314,505 | |
| (1) | | Gross(pre-tax) impact on assets resulting from facilities impacted by the IFRS 9 classification and measurement rules. |
| (2) | | Gross(pre-tax) impact of facilities that were subject to an incurred loss assessment under IAS 39, and are now subject to an ECL assessment under IFRS 9; and facilities that have been reclassified from a non-amortised cost basis to an amortised cost basis. There is no loss allowance movement attributable toheld-to-maturity investments oravailable-for-sale financial assets reclassified to amortised cost. |
| (3) | | The balance sheet category for ‘Financial assets designated at fair value’ has been changed to ‘Other financial assets at fair value through profit or loss’ following the adoption of IFRS 9. |
| (4) | | Of the £211m increase in loss allowance, £50m related tooff-balance sheet exposures which, for presentation purposes, have been aggregated in the assets section. For more on this, see Note 14. |
| (5) | | The impact of transition to IFRS 9 gave rise to a deferred tax asset of £68m, of which £14m is attributable to ‘Reclassifications’, and £54m to ‘Remeasurement’. This deferred tax asset was offset against our deferred tax liabilities. |
| (6) | | Gross(pre-tax) impact ofre-presentations resulting from the adoption of IFRS 9. |
Reclassification andre-presentation The columns for ‘Reclassifications’ and ‘Re-presentations’ in the businesstable above capture the following changes resulting from the adoption of the Crown Dependency branches which will be transferred outside the Santander UK plc group, and a small pool of residual assets that will remain in Abbey National Treasury Services plc. Santander UK Group Holdings plc will also acquire 100% of the ordinary share capital of Abbey National Treasury Services plc from Santander UK plc. At 31 December 2017:IFRS 9: –(a) | | The prohibited business that is expected to move to SLB mainly comprised: |
| – | | A small numberOf the financial assets at FVOCI of the£8,942m, £199m was previously classified as trading assets of £31bn£19m (measured at FVTPL) and trading liabilities of £31bn that related to prohibited business. |
| – | | £15bn of the derivative assets of £20bn and £17bn of the derivative liabilities of £18bn which related to the derivatives business with financial institutions |
| – | | A small amount (less than £1bn) of loans and advances to customers of £8bn relating£180m (measured at amortised cost). As these financial assets were held within hold to prohibited corporate loans.collect and sell business models, they werere-measured at FVOCI on adoption of IFRS 9 (which also resulted in a £1m downward remeasurement of loans and receivables). |
–(b) | | The Santander UK group elected tore-measure Social Housing loans from FVTPL to amortised cost to reflect the hold to collect business model. This resulted in a £45m downward remeasurement of the Crown Dependency branches mainly comprised customer depositsfinancial asset and a reclassification of £6bn.the remaining balance of £977m from other financial assets at FVTPL to loans and advances to customers at amortised cost. |
–(c) | | The small pool of residual business that it is anticipated will not be capable of transfer mainly comprised netOther financial assets of less than £1bn |
In addition, almost all of the permitted business of Abbey National Treasury Services plc will move to Santander UK plc. At 31 December 2017, this business mainly comprised:
– | | All£238m, previously designated at FVTPL under IAS 39, are now mandatorily held at FVTPL, as there is no longer an option to bifurcate embedded derivatives under IFRS 9 and they fail the remaining non-prohibited trading assets of £31bn and trading liabilities of £31bn that related to the permitted elements of Abbey National Treasury Services plc’s short term markets business.SPPI test. |
–(d) | | All the remainingOther financial assets at FVTPL of £1,181m were previously classified as financial investments of £980m (measured at amortised cost), financial investments of £110m (measured atavailable-for-sale), and loans and advances to customers of Abbey National Treasury Services plc£91m (measured at amortised cost). As these financial assets do not have SPPI characteristics, they were mandatorily measured at FVTPL on adoption of £8bn that relatedIFRS 9 (which also resulted in a £2m downward remeasurement of loans and receivables) and were reclassified to permitted corporate loans.other financial assets at FVTPL. |
–(e) | | £1bnOther financial assets at amortised cost of £7,776m were previously classified as financial investments (measured at amortised cost). On adoption of IFRS 9, the derivativeSantander UK group split the ‘financial investments’ balance sheet line item between ‘other financial assets of £20bnat amortised cost’ and £1bn of‘financial assets at FVOCI’. This aligned the derivative liabilities of £18bn which relatedbalance sheet line items to the derivatives business withIFRS 9 accounting classifications and provides a clearer understanding of our financial institutions.position. |
–(f) | | MostOf the financial assets at FVOCI of £8,942m, £8,743m was previously classified as financial investments (and measured atavailable-for-sale). The reclassification was part of the £1bnalignment of financial liabilities designated at fair valuethe balance sheet line items and £6bn of debt securities in issue that related to short term funding in Abbey National Treasury Services plc.IFRS 9 accounting classifications described above. |
40. EVENTS AFTER THE BALANCE SHEET DATE
There have been no significant events between 31 December 2017 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements.
| | | | | > Notes to the financial statements |
41. CHANGES TO COMPARATIVE DATAReclassifications of debt instruments
TheFor financial assets that were reclassified on transition to IFRS 9, the following sets out changes to comparative data from those presented in our 2015 Form 20-F.
The tables below set outtable shows their fair value at 31 December 2018 and the changes to comparative data from those presented in our 2015 Form 20-F due to the following:fair value gain or loss that would have been recognised if these financial assets had not been reclassified:
– | | | | | | | In the fourth quarter of 2017, the basis of presentation of the segmental information was changed, and the prior period restated, to reflect a change in the internal transfer of revenues and costs from the Corporate Centre to the three customer business segments. This enables a more targeted apportionment of capital and other resources in line with the strategy of each segment.Group | |
– | | In the fourth quarter of 2016, certain customers were transferred between our Retail Banking and Commercial Banking business segments, in line with how we now manage our customers. Small business customers with turnover up to £6.5m per annum (previously up to £250,000) are now served as business banking customers in Retail Banking. The balances transferred2018
£m | | To amortised cost from Commercial Banking to Retail Banking were £2.2bn in customer loans and £3.2bn in customer depositsFVTPL: | | | | | Fair value at 31 December 2016 (2015: £2.3bn and £3.0bn, respectively). The segmental analyses for Retail Banking and Commercial Banking2018 | | | 1,347 | | Fair value gain that would have been adjusted to reflect these changes for prior years. |
–recognised during the year if the financial asset had not been reclassified | | As described in Note 1, during 2017 management changed the accounting policy for business combinations between entities under common control. For the Santander UK group, the effect of changing the accounting policy is to reduce goodwill by £631m and reduce retained earnings by the same amount. | 120 | |
Consolidated StatementThe effective interest rate of Changes in Equity
Forthese debt instruments on the year ended 31 December 2015date of initial application of IFRS 9 was 3.35%. In 2018, interest income of £21m was recognised for these debt instruments.
| | | | | | | | | | | | | | | | Retained
earnings
£m | | | Total
shareholders’
equity £m | | | Total
equity
£m | | At 1 January 2015 – as reported in 2015 | | | 4,056 | | | | 14,193 | | | | 14,193 | | Adjustment | | | (631 | ) | | | (631 | ) | | | (631 | ) | At 1 January 2015 – as reported in 2017 | | | 3,425 | | | | 13,562 | | | | 13,562 | | | | | | | | | | | | | | | | At 31 December 2015 – as reported in 2015 | | | 4,679 | | | | 15,524 | | | | 15,659 | | Adjustment | | | (631 | ) | | | (631 | ) | | | (631 | ) | At 31 December 2015 – as reported in 2017 | | | 4,048 | | | | 14,893 | | | | 15,028 | |
| | | Annual Report 2017 on Form 20-F2018 | Shareholder informationFinancial statements | | |
Note 2. Segments45. EVENTS AFTER THE BALANCE SHEET DATE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Retail Banking | | | Commercial Banking | | 2015 | | As reported
in 2017 £m | | | Adjustment
£m | | | As reported
in 2015 £m | | | As reported
in 2017 £m | | | Adjustment
£m | | | As reported
in 2015 £m | | Net interest income | | | 3,097 | | | | 112 | | | | 2,985 | | | | 399 | | | | (61 | ) | | | 460 | | Non-interest income | | | 526 | | | | 5 | | | | 521 | | | | 91 | | | | (18 | ) | | | 109 | | Total operating income | | | 3,623 | | | | 117 | | | | 3,506 | | | | 490 | | | | (79 | ) | | | 569 | | Operating expenses before impairment losses, provisions and charges | | | (1,898 | ) | | | (115 | ) | | | (1,783 | ) | | | (217 | ) | | | 115 | | | | (332 | ) | Impairment (losses)/releases on loans and advances | | | (90 | ) | | | (14 | ) | | | (76 | ) | | | (25 | ) | | | 14 | | | | (39 | ) | Provisions for other liabilities and (charges)/releases | | | (728 | ) | | | (1 | ) | | | (727 | ) | | | (23 | ) | | | 1 | | | | (24 | ) | Total operating impairment losses, provisions and (charges)/releases | | | (818 | ) | | | (15 | ) | | | (803 | ) | | | (48 | ) | | | 15 | | | | (63 | ) | Profit before tax | | | 907 | | | | (13 | ) | | | 920 | | | | 225 | | | | 51 | | | | 174 | | | | | | | | | Revenue from external customers | | | 4,529 | | | | 94 | | | | 4,435 | | | | 626 | | | | (94 | ) | | | 720 | | Inter-segment revenue | | | (906 | ) | | | 23 | | | | (929 | ) | | | (136 | ) | | | (15 | ) | | | (151 | ) | Total operating income | | | 3,623 | | | | 117 | | | | 3,506 | | | | 490 | | | | (79 | ) | | | 569 | | | | | | | | | Customer loans | | | 167,093 | | | | 2,263 | | | | 164,830 | | | | 18,680 | | | | (2,263 | ) | | | 20,943 | | Total assets | | | 173,479 | | | | 1,632 | | | | 171,847 | | | | 18,680 | | | | (2,263 | ) | | | 20,943 | | Customer deposits | | | 140,358 | | | | 3,026 | | | | 137,332 | | | | 15,076 | | | | (3,026 | ) | | | 18,102 | | Total liabilities | | | 143,157 | | | | 3,026 | | | | 140,131 | | | | 15,076 | | | | (3,026 | ) | | | 18,102 | |
There have been no significant events between 31 December 2018 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except for the following: In January 2019, we announced plans to reshape our branch network and close 140 branches in response to changes in how customers are choosing to carry out their banking. Our future branch network, with approximately 615 branches, will be made up of a combination of larger branches offering improved community facilities to support local businesses and customers, and smaller branches using the latest technology to offer customers more convenient access to banking services. Furthermore, in order to deliver a branch network for the future, 100 branches will be refurbished over the next two years through an investment of £55m. At 31 December 2018, no provision was recognised in respect of these plans as the relevant criteria under IAS 37 ‘Provisions, contingent liabilities and contingent assets’ had not been met. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Global Corporate Banking | | | Corporate Centre | | | Total | | 2015 | | As reported
in 2017 £m | | | Adjustment
£m | | | As reported
in 2015 £m | | | As reported
in 2017 £m | | | Adjustment
£m | | | As reported
in 2015 £m | | | As reported
in 2017 £m | | | Adjustment
£m | | | As reported
in 2015 £m | | Net interest income | | | 52 | | | | (20 | ) | | | 72 | | | | 27 | | | | (31 | ) | | | 58 | | | | 3,575 | | | | – | | | | 3,575 | | Non-interest income | | | 303 | | | | (4 | ) | | | 307 | | | | 78 | | | | 17 | | | | 61 | | | | 998 | | | | – | | | | 998 | | Total operating income | | | 355 | | | | (24 | ) | | | 379 | | | | 105 | | | | (14 | ) | | | 119 | | | | 4,573 | | | | – | | | | 4,573 | | Operating expenses before impairment losses, provisions and (charges)/releases | | | (287 | ) | | | – | | | | (287 | ) | | | 2 | | | | – | | | | 2 | | | | (2,400 | ) | | | – | | | | (2,400 | ) | Impairment releases/(losses) on loans and advances | | | 13 | | | | – | | | | 13 | | | | 36 | | | | – | | | | 36 | | | | (66 | ) | | | – | | | | (66 | ) | Provisions for other liabilities and (charges)/releases | | | (14 | ) | | | – | | | | (14 | ) | | | 3 | | | | – | | | | 3 | | | | (762 | ) | | | – | | | | (762 | ) | Total operating impairment losses, provisionsand (charges)/releases | | | (1 | ) | | | – | | | | (1 | ) | | | 39 | | | | – | | | | 39 | | | | (828 | ) | | | – | | | | (828 | ) | Profit before tax | | | 67 | | | | (24 | ) | | | 91 | | | | 146 | | | | (14 | ) | | | 160 | | | | 1,345 | | | | – | | | | 1,345 | | | | | | | | | | | | Revenue from external customers | | | 437 | | | | – | | | | 437 | | | | (1,019 | ) | | | – | | | | (1,019 | ) | | | 4,573 | | | | – | | | | 4,573 | | Inter-segment revenue | | | (82 | ) | | | (24 | ) | | | (58 | ) | | | 1,124 | | | | (14 | ) | | | 1,138 | | | | – | | | | – | | | | – | | Total operating income | | | 355 | | | | (24 | ) | | | 379 | | | | 105 | | | | (14 | ) | | | 119 | | | | 4,573 | | | | – | | | | 4,573 | | | | | | | | | | | | Customer loans | | | 5,470 | | | | – | | | | 5,470 | | | | 7,391 | | | | – | | | | 7,391 | | | | 198,634 | | | | – | | | | 198,634 | | Total assets | | | 36,593 | | | | – | | | | 36,593 | | | | 52,023 | | | | – | | | | 52,023 | | | | 280,775 | | | | (631 | ) | | | 281,406 | | Customer deposits | | | 3,013 | | | | – | | | | 3,013 | | | | 3,808 | | | | – | | | | 3,808 | | | | 162,255 | | | | – | | | | 162,255 | | Total liabilities | | | 32,290 | | | | – | | | | 32,290 | | | | 75,224 | | | | – | | | | 75,224 | | | | 265,747 | | | | – | | | | 265,747 | |
| | | Annual Report 2017 on Form 20-F2018 | Shareholder information | | |
Selected financial data The financial information set forth below for the years ended 31 December 2018, 2017 2016 and 20152016 and at 31 December 20172018 and 20162017 has been derived from the audited Consolidated Financial Statements of Santander UK plc (the Company) and its subsidiaries (together, the Santander UK group) prepared in accordance with IFRS included elsewhere in this Annual Report. The information should be read in connection with, and is qualified in its entirety by reference to, the Santander UK group’s Consolidated Financial Statements and the notesNotes thereto. Financial information set forth below for the year ended 31 December 2013 and at 31 December 2014 and 2013, has been derived from the audited Consolidated Financial Statements with adjustment for the adoption of IFRIC 21 of the Santander UK group for 20132014 not included in this Annual Report. The financial information in this selected consolidated financial and statistical data does not constitute statutory accounts within the meaning of the Companies Act 2006.
BALANCE SHEETS | | | | 2017(2)
US$m | | | 2017
£m | | | 2016(1)
£m | | | 2015(1)
£m | | | 2014(1)
£m | | | 2013(1)
£m | | | 2018(2, 3)
£m | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2014
£m | | Assets | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | 44,336 | | | | 32,771 | | | | 17,107 | | | | 16,842 | | | | 22,562 | | | | 26,374 | | | | 19,747 | | | | 32,771 | | | | 17,107 | | | | 16,842 | | | | 22,562 | | Trading assets | | | 41,338 | | | | 30,555 | | | | 30,035 | | | | 23,961 | | | | 21,700 | | | | 22,294 | | | Derivative financial instruments | | | 26,980 | | | | 19,942 | | | | 25,471 | | | | 20,911 | | | | 23,021 | | | | 20,049 | | | Financial assets designated at fair value | | | 2,836 | | | | 2,096 | | | | 2,140 | | | | 2,398 | | | | 2,881 | | | | 2,747 | | | Loans and advances to banks | | | 8,019 | | | | 5,927 | | | | 4,348 | | | | 3,548 | | | | 2,057 | | | | 2,347 | | | Loans and advances to customers | | | 269,890 | | | | 199,490 | | | | 199,738 | | | | 198,045 | | | | 188,691 | | | | 184,587 | | | Financial assets at fair value through profit or loss: | | | | | | | | | | | | – Trading assets | | | | – | | | | 30,555 | | | | 30,035 | | | | 23,961 | | | | 21,700 | | – Derivative financial instruments | | | | 5,259 | | | | 19,942 | | | | 25,471 | | | | 20,911 | | | | 23,021 | | – Other financial assets at fair value through profit or loss | | | | 5,617 | | | | 2,096 | | | | 2,140 | | | | 2,398 | | | | 2,881 | | Financial assets at amortised cost: | | | | | | | | | | | | – Loans and advances to customers(1) | | | | 201,289 | | | | 199,340 | | | | 199,738 | | | | 198,045 | | | | 188,691 | | – Loans and advances to banks(1) | | | | 2,799 | | | | 3,463 | | | | 4,348 | | | | 3,548 | | | | 2,057 | | – Reverse repurchase agreements – non trading(1) | | | | 21,127 | | | | 2,614 | | | | | | | | – Other financial assets at amortised cost | | | | 7,229 | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | | 13,302 | | | | | | | | | | Financial investments | | | 23,826 | | | | 17,611 | | | | 17,466 | | | | 9,064 | | | | 9,062 | | | | 6,106 | | | | | | 17,611 | | | | 17,466 | | | | 9,064 | | | | 9,062 | | Interests in other entities | | | 99 | | | | 73 | | | | 61 | | | | 48 | | | | 38 | | | | 27 | | | | 88 | | | | 73 | | | | 61 | | | | 48 | | | | 38 | | Intangible assets | | | 2,357 | | | | 1,742 | | | | 1,685 | | | | 1,600 | | | | 1,556 | | | | 1,704 | | | | 1,808 | | | | 1,742 | | | | 1,685 | | | | 1,600 | | | | 1,556 | | Property, plant and equipment | | | 2,162 | | | | 1,598 | | | | 1,491 | | | | 1,597 | | | | 1,624 | | | | 1,521 | | | | 1,832 | | | | 1,598 | | | | 1,491 | | | | 1,597 | | | | 1,624 | | Current tax assets | | | – | | | | – | | | | – | | | | 49 | | | | – | | | | 114 | | | | 153 | | | | – | | | | – | | | | 49 | | | | – | | Deferred tax assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | 16 | | | Retirement benefit assets | | | 607 | | | | 449 | | | | 398 | | | | 556 | | | | 315 | | | | 118 | | | | 842 | | | | 449 | | | | 398 | | | | 556 | | | | 315 | | Other assets | | | 3,397 | | | | 2,511 | | | | 2,571 | | | | 2,156 | | | | 1,839 | | | | 1,651 | | | | 2,280 | | | | 2,511 | | | | 2,571 | | | | 2,156 | | | | 1,839 | | Total assets | | | 425,847 | | | | 314,765 | | | | 302,511 | | | | 280,775 | | | | 275,346 | | | | 269,655 | | | | 283,372 | | | | 314,765 | | | | 302,511 | | | | 280,775 | | | | 275,346 | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 18,648 | | | | 13,784 | | | | 9,769 | | | | 8,278 | | | | 8,214 | | | | 8,696 | | | Deposits by customers | | | 248,457 | | | | 183,648 | | | | 177,172 | | | | 164,074 | | | | 153,606 | | | | 147,167 | | | Trading liabilities | | | 42,087 | | | | 31,109 | | | | 15,560 | | | | 12,722 | | | | 15,333 | | | | 21,278 | | | Derivative financial instruments | | | 23,829 | | | | 17,613 | | | | 23,103 | | | | 21,508 | | | | 22,732 | | | | 18,863 | | | Financial liabilities designated at fair value | | | 3,132 | | | | 2,315 | | | | 2,440 | | | | 2,016 | | | | 2,848 | | | | 3,407 | | | Debt securities in issue | | | 57,678 | | | | 42,633 | | | | 50,346 | | | | 49,615 | | | | 51,790 | | | | 50,870 | | | Subordinated liabilities | | | 5,132 | | | | 3,793 | | | | 4,303 | | | | 3,885 | | | | 4,002 | | | | 4,306 | | | Financial liabilities at fair value through profit or loss: | | | | | | | | | | | | – Trading liabilities | | | | – | | | | 31,109 | | | | 15,560 | | | | 12,722 | | | | 15,333 | | – Derivative financial instruments | | | | 1,369 | | | | 17,613 | | | | 23,103 | | | | 21,508 | | | | 22,732 | | – Other financial liabilities at fair value through profit or loss | | | | 6,286 | | | | 2,315 | | | | 2,440 | | | | 2,016 | | | | 2,848 | | Financial liabilities at amortised cost: | | | | | | | | | | | | – Deposits by customers | | | | 178,090 | | | | 183,648 | | | | 177,172 | | | | 164,074 | | | | 153,606 | | – Deposits by banks(1) | | | | 17,221 | | | | 12,708 | | | | 9,769 | | | | 8,278 | | | | 8,214 | | – Repurchase agreements – non trading(1) | | | | 10,910 | | | | 1,076 | | | | | | | | – Debt securities in issue | | | | 46,692 | | | | 42,633 | | | | 50,346 | | | | 49,615 | | | | 51,790 | | – Subordinated liabilities | | | | 3,601 | | | | 3,793 | | | | 4,303 | | | | 3,885 | | | | 4,002 | | Other liabilities | | | 3,693 | | | | 2,730 | | | | 3,221 | | | | 2,445 | | | | 2,441 | | | | 1,883 | | | | 2,448 | | | | 2,730 | | | | 3,221 | | | | 2,445 | | | | 2,441 | | Provisions | | | 755 | | | | 558 | | | | 700 | | | | 870 | | | | 491 | | | | 550 | | | | 509 | | | | 558 | | | | 700 | | | | 870 | | | | 491 | | Current tax liabilities | | | 4 | | | | 3 | | | | 54 | | | | 1 | | | | 69 | | | | 4 | | | | – | | | | 3 | | | | 54 | | | | 1 | | | | 69 | | Deferred tax liabilities | | | 119 | | | | 88 | | | | 128 | | | | 223 | | | | 59 | | | | – | | | | 223 | | | | 88 | | | | 128 | | | | 223 | | | | 59 | | Retirement benefit obligations | | | 387 | | | | 286 | | | | 262 | | | | 110 | | | | 199 | | | | 672 | | | | 114 | | | | 286 | | | | 262 | | | | 110 | | | | 199 | | Total liabilities | | | 403,921 | | | | 298,560 | | | | 287,058 | | | | 265,747 | | | | 261,784 | | | | 257,696 | | | | 267,463 | | | | 298,560 | | | | 287,058 | | | | 265,747 | | | | 261,784 | | Equity | | | | | | | | | | | | | | | | | | | | | | | Share capital | | | 4,220 | | | | 3,119 | | | | 3,119 | | | | 3,119 | | | | 3,140 | | | | 3,405 | | | | 3,119 | | | | 3,119 | | | | 3,119 | | | | 3,119 | | | | 3,140 | | Share premium | | | 7,604 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | | | 5,620 | | Other equity instruments | | | 3,087 | | | | 2,281 | | | | 1,785 | | | | 1,792 | | | | 1,104 | | | | 304 | | | | 1,991 | | | | 2,281 | | | | 1,785 | | | | 1,792 | | | | 1,104 | | Retained earnings | | | | 4,744 | | | | 4,732 | | | | 4,255 | | | | 4,048 | | | | 3,425 | | Other reserves | | | 407 | | | | 301 | | | | 524 | | | | 314 | | | | 273 | | | | (116 | ) | | | 284 | | | | 301 | | | | 524 | | | | 314 | | | | 273 | | Retained earnings | | | 6,402 | | | | 4,732 | | | | 4,255 | | | | 4,048 | | | | 3,425 | | | | 2,746 | | | Total shareholders’ equity | | | 21,720 | | | | 16,053 | | | | 15,303 | | | | 14,893 | | | | 13,562 | | | | 11,959 | | | | 15,758 | | | | 16,053 | | | | 15,303 | | | | 14,893 | | | | 13,562 | | Non-controlling interests | | | 206 | | | | 152 | | | | 150 | | | | 135 | | | | – | | | | – | | | | 151 | | | | 152 | | | | 150 | | | | 135 | | | | – | | Total equity | | | 21,926 | | | | 16,205 | | | | 15,453 | | | | 15,028 | | | | 13,562 | | | | 11,959 | | | | 15,909 | | | | 16,205 | | | | 15,453 | | | | 15,028 | | | | 13,562 | | Total liabilities and equity | | | 425,847 | | | | 314,765 | | | | 302,511 | | | | 280,775 | | | | 275,346 | | | | 269,655 | | | | 283,372 | | | | 314,765 | | | | 302,511 | | | | 280,775 | | | | 275,346 | |
| (1) | Restated to reflectFrom 1 January 2018, the changenon-trading repurchase agreements andnon-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in accounting policy relating to business combinations between entities under common control,the balance sheet, as described in Note 1. Comparatives are represented accordingly. |
| (2) | On 1 January 2018, the Santander UK group adopted IFRS 9, as described in Note 44 to the Consolidated Financial Statements. |
(2)(3) | Amounts statedIn 2018, the Santander UK group completed the implementation of its ring-fencing plans, as described in US dollars have been translated from sterling atNote 43 to the rate of £1.00 – US$1.3529, the noon buying rate on 31 December 2017.Consolidated Financial Statements. |
| | | | | > Selected financial data |
INCOME STATEMENTS | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017(1)
US$m | | | 2017
£m | | | 2016
£m | | | 2015
£m | | | 2014
£m | | | 2013
£m | | Net interest income | | | 5,145 | | | | 3,803 | | | | 3,582 | | | | 3,575 | | | | 3,434 | | | | 2,963 | | Net fee and commission income | | | 1,092 | | | | 807 | | | | 770 | | | | 715 | | | | 739 | | | | 758 | | Net trading and other income | | | 409 | | | | 302 | | | | 443 | | | | 283 | | | | 297 | | | | 308 | | Total operating income | | | 6,646 | | | | 4,912 | | | | 4,795 | | | | 4,573 | | | | 4,470 | | | | 4,029 | | Operating expenses before impairment losses, provisions and charges | | | (3,381 | ) | | | (2,499 | ) | | | (2,414 | ) | | | (2,400 | ) | | | (2,397 | ) | | | (2,195 | ) | Impairment losses on loans and advances | | | (275 | ) | | | (203 | ) | | | (67 | ) | | | (66 | ) | | | (258 | ) | | | (475 | ) | Provisions for other liabilities and charges | | | (532 | ) | | | (393 | ) | | | (397 | ) | | | (762 | ) | | | (416 | ) | | | (250 | ) | Total operating impairment losses, provisions and charges | | | (807 | ) | | | (596 | ) | | | (464 | ) | | | (828 | ) | | | (674 | ) | | | (725 | ) | Profit from continuing operations before tax | | | 2,458 | | | | 1,817 | | | | 1,917 | | | | 1,345 | | | | 1,399 | | | | 1,109 | | Tax on profit from continuing operations | | | (759 | ) | | | (561 | ) | | | (598 | ) | | | (381 | ) | | | (289 | ) | | | (211 | ) | Profit from continuing operations after tax | | | 1,699 | | | | 1,256 | | | | 1,319 | | | | 964 | | | | 1,110 | | | | 898 | | Loss from discontinued operations after tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | (8 | ) | Profit after tax | | | 1,699 | | | | 1,256 | | | | 1,319 | | | | 964 | | | | 1,110 | | | | 890 | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | | | | | | | | Equity holders of the parent | | | 1,671 | | | | 1,235 | | | | 1,292 | | | | 939 | | | | 1,110 | | | | 890 | | Non-controlling interests | | | 28 | | | | 21 | | | | 27 | | | | 25 | | | | – | | | | – | | Profit after tax | | | 1,699 | | | | 1,256 | | | | 1,319 | | | | 964 | | | | 1,110 | | | | 890 | | (1) Amounts stated in US dollars have been translated from sterling at the rate of £1.00 – US$1.3529, the noon buying rate on 31 December 2017. SELECTED STATISTICAL INFORMATION | | | | | | | | 2017
% | | | 2016
% | | | 2015
% | | | 2014
% | | | 2013
% | | Capital ratios: | | | | | | | | | | | | | | | | | | | | | | | | | CET1 capital ratio(1) | | | | | | | 12.2 | | | | 11.6 | | | | 11.6 | | | | 11.9 | | | | n/a | | Total capital ratio | | | | | | | 19.7 | | | | 18.5 | | | | 18.2 | | | | 17.9 | | | | n/a | | Equity to assets ratio(2)(10) | | | | | | | 4.35 | | | | 4.40 | | | | 4.47 | | | | 4.26 | | | | 3.90 | | Ratio of earnings to fixed charges:(3) | | | | | | | | | | | | | | | | | | | | | | | | | – Excluding interest on retail deposits | | | | | | | 333 | | | | 292 | | | | 218 | | | | 208 | | | | 172 | | – Including interest on retail deposits | | | | | | | 186 | | | | 166 | | | | 143 | | | | 142 | | | | 126 | | Profitability ratios: | | | | | | | | | | | | | | | | | | | | | | | | | Return on assets(4) | | | | | | | 0.40 | | | | 0.44 | | | | 0.34 | | | | 0.40 | | | | 0.30 | | Return on ordinary shareholders’ equity(5)(10) | | | | | | | 9.1 | | | | 9.7 | | | | 7.3 | | | | 9.2 | | | | 8.2 | | Dividend payout ratio(6) | | | | | | | 45 | | | | 46 | | | | 51 | | | | 44 | | | | 48 | |
| | | | | | | | | | | | | | | | | | | | | | | | 2018(1, 2) £m | | | 2017 £m | | | 2016 £m | | | 2015 £m | | | 2014 £m | | Net interest income | | | 3,603 | | | | 3,803 | | | | 3,582 | | | | 3,575 | | | | 3,434 | | Net fee and commission income | | | 749 | | | | 807 | | | | 770 | | | | 715 | | | | 739 | | Net trading and other income | | | 182 | | | | 302 | | | | 443 | | | | 283 | | | | 297 | | Total operating income | | | 4,534 | | | | 4,912 | | | | 4,795 | | | | 4,573 | | | | 4,470 | | Operating expenses before credit impairment losses, provisions and charges | | | (2,579 | ) | | | (2,499 | ) | | | (2,414 | ) | | | (2,400 | ) | | | (2,397 | ) | Credit impairment losses | | | (153 | ) | | | (203 | ) | | | (67 | ) | | | (66 | ) | | | (258 | ) | Provisions for other liabilities and charges | | | (257 | ) | | | (393 | ) | | | (397 | ) | | | (762 | ) | | | (416 | ) | Total operating credit impairment losses, provisions and charges | | | (410 | ) | | | (596 | ) | | | (464 | ) | | | (828 | ) | | | (674 | ) | Profit before tax | | | 1,545 | | | | 1,817 | | | | 1,917 | | | | 1,345 | | | | 1,399 | | Tax on profit | | | (441 | ) | | | (561 | ) | | | (598 | ) | | | (381 | ) | | | (289 | ) | Profit after tax | | | 1,104 | | | | 1,256 | | | | 1,319 | | | | 964 | | | | 1,110 | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | | | | Equity holders of the parent | | | 1,082 | | | | 1,235 | | | | 1,292 | | | | 939 | | | | 1,110 | | Non-controlling interests | | | 22 | | | | 21 | | | | 27 | | | | 25 | | | | – | | Profit after tax | | | 1,104 | | | | 1,256 | | | | 1,319 | | | | 964 | | | | 1,110 | | (1) On 1 January 2018, the Santander UK group adopted IFRS 9, as described in Note 44 to the Consolidated Financial Statements. (2) In 2018, the Santander UK group completed the implementation of its ring-fencing plans, as described in Note 43 to the Consolidated Financial Statements. SELECTED STATISTICAL INFORMATION | | | | | 2018(1, 2) % | | | 2017 % | | | 2016 % | | | 2015 % | | | 2014 % | | Capital ratios: | | | | | | | | | | | | | | | | | | | | | CET1 capital ratio | | | 13.2 | | | | 12.2 | | | | 11.6 | | | | 11.6 | | | | 11.9 | | Total capital ratio | | | 20.3 | | | | 19.2 | | | | 18.5 | | | | 18.2 | | | | 17.9 | | Equity to assets ratio(3) | | | 4.53 | | | | 4.35 | | | | 4.40 | | | | 4.47 | | | | 4.26 | | Profitability ratios: | | | | | | | | | | | | | | | | | | | | | Return on assets(4) | | | 0.36 | | | | 0.40 | | | | 0.44 | | | | 0.34 | | | | 0.40 | | Return on ordinary shareholders’ equity(5) | | | 7.9 | | | | 9.1 | | | | 9.7 | | | | 7.3 | | | | 9.2 | | Dividend payout ratio per SEC Guide 3(6) | | | 105 | | | | 45 | | | | 46 | | | | 51 | | | | 44 | |
| (1) | Regulatory capital is calculated in accordance with the requirements of CRD IV, following the adoption of CRD IV with effect fromOn 1 January 2014.2018, the Santander UK group adopted IFRS 9, as described in Note 44 to the Consolidated Financial Statements. |
| (2) | In 2018, the Santander UK group completed the implementation of its ring-fencing plans, as described in Note 43 to the Consolidated Financial Statements. |
| (3) | Average ordinary shareholders’ equity divided by average total assets. Average balances are based on monthly data. |
(3) | For the purpose of calculating the ratios of earnings to fixed charges, earnings consist of profit from continuing operations before tax and before adjustment for non-controlling interests plus fixed charges. Fixed charges consist of interest expense, including the amortisation of discounts and premiums on debt securities in issue and related capitalised expenses and including or excluding interest on retail deposit as appropriate. |
| (4) | Profit after tax divided by average total assets. Average balances are based on monthly data. |
| (5) | Profit after tax divided by average ordinary shareholders’ equity. |
| (6) | Ordinary equity dividends approved divided by profit after tax attributable to equity holders of the parent. |
 
| | | Annual Report 2017 on Form 20-F2018 | Shareholder information | | |
Subsidiaries, joint ventures and associates In accordance with Section 409 of the Companies Act 2006, a listdetails of Santander UK plc’s subsidiaries, joint ventures and associates the registered office, the country of incorporation and the effective percentage of equity owned at 31 December 2017 is disclosed2018 are set out 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: | | | | | | | | | | | | | | | Name of subsidiary | | Registered
office(1) | | Direct/indirect
ownership | | Share class through
which ownership is held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | 2 & 3 Triton Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | A & L CF December (1) Limited (in liquidation) | | K | | Indirect | | Ordinary £1 | | | – | | | | 100 | | A & L CF June (2) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | A & L CF June (3) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | A & L CF March (5) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | A & L CF September (4) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Abbey National Beta Investments Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National Business Office Equipment Leasing Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National Nominees Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National PLP (UK) Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National Property Investments | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National Treasury (Structured Solutions) Limited | | A | | Direct | | Ordinary £0.01 | | | – | | | | 100 | | Abbey National Treasury Services Investments Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National Treasury Services Overseas Holdings | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | | | | | | Non–redeemable | | | | | | | | | | | | | | | preference £1 | | | | | | | | | | | | | | | | Minority £1 | | | | | | | | | Abbey National Treasury Services plc | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National UK Investments | | A | | Indirect | | Ordinary€0.20 | | | 100 | | | | 100 | | | | | | | | | Ordinary £1 | | | | | | | | | Abbey Stockbrokers (Nominees) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Abbey Stockbrokers Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | | | | | | A Preference £1 | | | | | | | | | | | | | | | | B Preference £1 | | | | | | | | | Alliance & Leicester Cash Solutions Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Alliance & Leicester Commercial Bank plc | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Alliance & Leicester Investments (Derivatives) Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Alliance & Leicester Investments (No.2) Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Alliance & Leicester Investments Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | | | | | | Non–cumulative fixed | | | | | | | | | | | | | | | | rate preference £1 | | | | | | | | | Alliance & Leicester Limited | | L | | Direct | | Ordinary £0.50 | | | 100 | | | | 100 | | Alliance & Leicester Personal Finance Limited | | L | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | AN (123) Limited | | A | | Direct | | Ordinary £0.10 | | | 100 | | | | 100 | | ANITCO Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Cater Allen Holdings Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Cater Allen International Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Cater Allen Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Cater Allen Lloyd’s Holdings Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Cater Allen Syndicate Management Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | | | | | | | Preference £1 | | | | | | | | | First National Motor Business Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | First National Motor Contracts Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | First National Motor Facilities Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | First National Motor Finance Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | First National Motor Leasing Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | First National Motor plc | | B | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | First National Tricity Finance Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | Girobank Investments Limited (in liquidation) | | K | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Insurance Funding Solutions Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Liquidity Limited | | A | | Direct | | Ordinary A £0.10 | | | 100 | | | | 100 | | | | | | | | Ordinary B1 £0.10 | | | | | | | | | | | | | | | Ordinary B2 £0.10 | | | | | | | | | | | | | | | | Preference £1 | | | | | | | | |
| | | | | | | | | | | | | | | Name of subsidiary | | Registered
office(1) | | Direct/indirect
ownership | | Share class through
which ownership is held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | 2 & 3 Triton Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | A & L CF December (1) Limited (in liquidation) | | F | | Indirect | | Ordinary £1 | | | – | | | | 100 | | A & L CF June (3) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | A & L CF September (4) Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Abbey National Nominees Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Abbey National Property Investments | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Alliance & Leicester Personal Finance Limited | | G | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Cater Allen Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | First National Tricity Finance Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | PSA Finance UK Limited | | H | | Indirect | | Ordinary £1 | | | – | | | | 50 | | Santander Asset Finance (December) Limited | | G | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Santander Asset Finance plc | | A | | Direct | | Ordinary £0.10 | | | 100 | | | | 100 | | Santander Cards Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Santander Cards UK Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander Consumer (UK) plc | | B | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander Consumer Credit Services Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Santander Estates Limited | | G | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander Global Consumer Finance Limited | | A | | Indirect | | Ordinary £0.0001 | | | – | | | | 100 | | Santander Guarantee Company | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander Lending Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander Private Banking UK Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander UK Operations Limited | | A | | Direct | | Ordinary A £1 | | | 100 | | | | 100 | | | | | | | | | Ordinary B £1 | | | 100 | | | | 100 | | Santander UK (Structured Solutions) Limited | | A | | Direct | | Ordinary £0.01 | | | 100 | | | | 100 | | Santander UK Technology Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | The Alliance & Leicester Corporation Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Time Retail Finance Limited (in liquidation) | | F | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | | | | | | | Ordinary £0.0001 | | | – | | | | 100 | | (1)Refer to the key at the end of this section for the registered office address. Incorporated and registered outside England and Wales: | | Name of subsidiary | | Registered
office(1) | | Direct/indirect
ownership | | Share class through which ownership
is held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | Santander Cards Ireland Limited | | J | | Indirect | | Ordinary €1 | | | – | | | | 100 | | | | | | | | | Ordinary €1.27 | | | | | | | | | Santander ISA Managers Limited | | I | | Direct | | Ordinary £1 | | | 100 | | | | 100 | |
| (1) | | Refer to the key at the end of this section for the registered office address, including the country. |
| | | | | > Subsidiaries, joint ventures and associates |
| | | | | | | | | | | | | | | Name of subsidiary | | Registered
office(1) | | Direct/indirect
ownership | | Share class through which ownership is held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | | Mortgage Engine Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | PSA Finance UK Limited | | M | | Indirect | | Ordinary £1 | | | – | | | | 50 | | | Santander (CF Trustee Property Nominee) Limited | | D | | Trust relationship | | Ordinary £1 | | | – | | | | – | | | Santander (CF Trustee) Limited | | D | | Trust relationship | | Ordinary £1 | | | – | | | | – | | | Santander (UK) Group Pension Scheme Trustees Limited | | D | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Asset Finance (December) Limited | | L | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | Santander Asset Finance plc | | A | | Direct | | Ordinary £0.10 | | | 100 | | | | 100 | | | Santander Cards Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | Santander Cards UK Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Consumer (UK) plc | | B | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Consumer Credit Services Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | Santander Equity Investments Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Estates Limited | | L | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Global Consumer Finance Limited | | A | | Indirect | | Ordinary £0.0001 | | | – | | | | 100 | | | Santander Guarantee Company | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Lending Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Private Banking UK Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | Santander Secretariat Services Limited | | A | | Indirect | | A Ordinary US$0.01 | | | – | | | | 100 | | | Santander UK Foundation Limited | | A | | Direct | | Guarantee ownership | | | 100 | | | | 100 | | | Sheppards Moneybrokers Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | | | | | | | Non-voting preference | | | | | | | | | | | | | | | | £1 | | | | | | | | | | Solarlaser Limited | | A | | Indirect | | Ordinary £1 | | | 100 | | | | 100 | | | SCF Eastside Locks GP Limited | | D | | Trust relationship | | Ordinary £1 | | | – | | | | – | | | The Alliance & Leicester Corporation Limited | | A | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | | The National & Provincial Building Society Pension Fund Trustees Limited (in liquidation) | | K | | Trust relationship | | Ordinary £1 | | | – | | | | – | | | Time Retail Finance Limited (in liquidation) | | K | | Indirect | | Ordinary £1 | | | – | | | | 100 | | | | | | | | | Ordinary £0.0001 | | | – | | | | 100 | | | Tuttle and Son Limited | | A | | Indirect | | Ordinary £1 | | | – | | | | 100 | |
(1) | | Refer to the key at the end of this section for the registered office address. |
Incorporated and registered outside England and Wales:
| | | | | | | | | | | | | | | Name of subsidiary | | Registered
office(1) | | Direct/indirect
ownership | | Share class through
which ownership is
held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | A & L CF (Guernsey) Limited | | F | | Indirect | | Ordinary £1 | | | – | | | | 100 | | Abbey Business Services (India) Private Limited | | N | | Indirect | | Ordinary INR 10 | | | – | | | | 100 | | Abbey National International Limited | | G | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | ALIL Services Limited | | P | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Carfax (Guernsey) Limited | | F | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Santander Cards Ireland Limited | | Q | | Indirect | | Ordinary€1 | | | – | | | | 100 | | | | | | | | | Ordinary€1.27 | | | | | | | | | Santander ISA Managers Limited | | O | | Direct | | Ordinary £1 | | | 100 | | | | 100 | | Sovereign Spirit Limited | | H | | Indirect | | Ordinary BMD 1 | | | – | | | | 100 | | Whitewick Limited | | G | | Direct | | Ordinary £1 | | | 100 | | | | 100 | |
(1) | | Refer to the key at the end of this section for the registered office address, including the country. |
| | | Annual Report 2017 on Form 20-F | Shareholder information | | |
Other subsidiary undertakings All these entities are registered in England and Wales, except where noted. 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. | | | | | | | Name of entity | | Registered office(1) | | Name of entity | | Registered office(1) | Abbey Covered Bonds LLP | | A | | Langton PECOHFunding (No.1) Limited | | C | Abbey Covered Bonds (LM) Limited | | JE | | Langton Securities (2008-1) plcMortgages Trustee (UK) Limited | | CA | Abbey Covered Bonds (Holdings) Limited | | JE | | Langton Securities (2010-1) plcPECOH Limited | | C | Auto ABS UK Loans plc | | C | | Langton Securities (2010-2)(2008-1) plc | | C | Auto ABS UK Loans 2017 Holdings Limited | | C | | Langton Securities (2012-1)(2010-1) plc (in liquidation) | | C | Auto ABS UK Loans 2017 plc | | C | | Langton Securities(2010-2) plc | | C | Fosse (Master Issuer) Holdings Limited | | C | | Langton Securities Holdings Limited | | C | Fosse (Master Issuer) HoldingsFunding (No.1) Limited | | C | | MAC No. 1 Limited | | A | Fosse Funding (No.1) Limited | | C | | Motor 2012 Holdings Limited (in liquidation) | | E | Fosse Master Issuer plc
| | C | | Motor 2012 plc (in liquidation)2015-1 Holdings Limited | | EC | Fosse PECOH Limited | | C | | Motor 2014-1 Holdings Limited2015-1 plc | | C | Fosse Trustee (UK) Limited | | A | | Motor 2014-1 plc (in liquidation) | | S | HCUK Auto Funding 2015 Limited
| | C | | Motor 2015-12016-1 Holdings Limited | | C | HCUK Auto Funding2016-1 Limited (In liquidation) | | CD | | Motor 2015-12016-1 plc | | C | Holmes Funding Limited | | A | | Motor 2016-1 Holdings2016-1M Limited (In liquidation) | | CD | Holmes Holdings Limited | | A | | Motor 2016-1 plc2017-1 Holdings Limited | | C | Holmes Master Issuer plc | | A | | Motor 2016-1M Limited2017-1 plc | | C | Holmes Trustees Limited | | A | | Motor 2017-1 Holdings Limited | | C | Langton Funding (No.1) Limited
| | C | | Motor 2017-1 plc | | C | Langton Mortgages Trustee (UK) Limited
| | A | | PECOH Limited | | A |
| (1) | | Refer to the key at the end of this section for the registered office address. |
Joint ventures and associates All these entities are registered in England and Wales and are accounted for by the equity method of accounting. | Name of joint venture | | Registered
office(1) | | Direct/indirect
ownership | | Share class through which ownership
is held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | | Registered
office(1) | | Direct/indirect
ownership | | Share class through which ownership
is held | | Proportion
of ownership
interest % | | | Ultimate
proportion of
ownership
% | | Hyundai Capital UK Limited | | R | | Indirect | | Ordinary £1 | | | – | | | | 50 | | | K | | Indirect | | Ordinary £1 | | | – | | | | 50 | | PSA UK Number 1 plc | | M | | Direct | | B Ordinary £1 | | | 50 | | | | 50 | | | H | | Direct | | B Ordinary £1 | | | 50 | | | | 50 | | | | | | | | | C Ordinary £1 | | | | | | | | | | C Ordinary £1 | | | | | Syntheo Limited | | I | | Direct | | Ordinary £1 | | | 50 | | | | 50 | | | A | | Direct | | Ordinary £1 | | | 50 | | | | 50 | |
| (1) | | Refer to the key at the end of this section for the registered office address. |
All entities are joint ventures, except for PSA UK Number 1 plc which is an associate. Overseas branches Santander UK plcThe Company has branches in the Isle of Man and Jersey. Abbey National Treasury Services plc has a branch office in the US.no overseas branches.
Key of registered office addresses | A | 2 Triton Square, Regent’s Place, London NW1 3AN |
| B | Santander House, 86 Station Road, Redhill RH1 1SR |
| C | 35 Great St. Helen’s, London EC3A 6AP |
| D | Santander House, 201 Grafton Gate East, Milton Keynes MK9 1AN40a Station Road, Upminster, Essex RM14 2TR |
| E | The Shard, 32 London Bridge Street, London SE1 9SG |
F | Fourth Floor, The Albany, South Esplanade, St. Peter Port, Guernsey GY1 4NF |
G | 19-21 Commercial Street, St. Helier, Jersey JE2 3RU |
H | Clarendon House, 2 Church Street, Hamilton HM11, Bermuda |
I | Medius House, 2 Sheraton Street, London W1F 8BH |
J | Wilmington Trust SP Services (London) Limited, 1 Kings Arms Yard, London EC2R 7AF |
KF | Griffins, Tavistock House South, Tavistock Square, London WC1H 9LG |
LG | Building 3, Floor 2, Carlton Park, Narborough, Leicester LE19 0AL |
MH | Quadrant House, Princess Way,61 London Road, Redhill RH1 1QA |
NI | The Residency, 7th Floor, 133/1 Residency Road, Bangalore, KA 560 025, India |
O | 287 St. Vincent Street, Glasgow, Scotland G2 5NB |
PJ | 19/21 Prospect Hill, Douglas, Isle of Man IM99 1RY |
Q | 25/28 North Wall Quay, Dublin 1, Ireland |
RK | London Court, 39 London Road, Reigate RH2 9AQ |
S | 40a Station Road, Upminster, Essex RM14 2TR |
| | | | Annual Report 2018 | Shareholder information | | > Forward-looking statements |
Forward-looking statements The Company and its subsidiaries (together Santander UK)UK may from time to time make written or oral forward-looking statements. The CompanySantander UK makes written forward-looking statements in this Annual Report and may also make forward-looking statements in its periodic reports to the SEC on Forms20-F and6-K, in its offering circulars and prospectuses, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Examples of such forward-looking statements include, but are not limited to: projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios; statements of plans, objectives or goals of Santander UK or its management, including those related to products or services; statements of future economic performance; and statements of assumptions underlying such statements.
Words such as ‘believes’, ‘anticipates’, ‘expects’, ‘intends’, ‘aims’, ‘plans’, ‘targets’ and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on its behalf. Some of these factors, which could affect Santander UK’s business, financial condition and/or results of operation, are considered in detail in the Risk review, and they include: | – | the disruptions and volatility in the global financial markets |
| – | the effects of UK economic conditions |
| – | Santander UK’s exposure to UK political developments, including the outcome of the ongoing UK EU Article 50 negotiations on Brexit |
| – | the effects of the financial services laws, regulations, governmental oversight, administrative actions and policies and any changes thereto in each location or market in which Santander UK operates |
| – | the effects of any new reforms to the UK mortgage lending market |
| – | Santander UK’s exposure to any risk of loss from legal and regulatory proceedings |
| – | the power of the FCA, the PRA, the CMA or an overseas regulator to potentially intervene in response to e.g. attempts by customers to seek redress from financial service institutions, including Santander UK, in case of industry-wide issues |
| – | the effects which the Banking Act 2009 may have on Santander UK’s business and the value of securities issued |
| – | the effects which thebail-in and write down powers under the Banking Act 2009 and the BRRD may have on Santander UK’s business and the value of securities issued |
| – | the extent to which regulatory capital and leverage requirements and any changes to these requirements may limit and adversely affect Santander UK’s operations |
| – | Santander UK’s ability to access liquidity and funding on acceptable financial terms |
| – | the extent to which liquidity requirements and any changes to these requirements may limit and adversely affect Santander UK’s operations |
| – | Santander UK’s exposure to UK Government debt |
| – | the effects of the ongoing political, economic and sovereign debt tensions in the eurozone |
| – | Santander UK’s exposure to risks faced by other financial institutions |
| – | the effects of an adverse movement in external credit rating assigned to Santander UK, any Santander UK member or any of their respective debt securities |
| – | the effects of fluctuations in interest rates and other market risks |
| – | the extent to which Santander UK may be required to record negative fair value adjustments for its financial assets due to changes in market conditions |
| – | the risk of failing to successfully implement and continue to improve Santander UK’s credit risk management systems |
| – | the risks associated with Santander UK’s derivative transactions |
| – | the extent to which Santander UK may be exposed to operational risks, including risks relating to data and information collection, processing, storage and security |
| – | the risk of third parties using Santander UK as a conduit for illegal or improper activities without Santander UK’s knowledge |
| – | the risk of failing to effectively improve or upgrade Santander UK’s information technology infrastructure and management information systems in a timely manner |
| – | Santander UK’s exposure to unidentified or unanticipated risks despite its risk management policies, procedures and methods |
| – | the effects of competition with other financial institutions |
| – | the various risks facing Santander UK as it expands its range of products and services (e.g. risk of new products and services not being responsive to customer demands or successful, risk of changing customer needs) |
| – | Santander UK’s ability to control the level ofnon-performing or poor credit quality loans and whether Santander UK’s loan loss reserves are sufficient to cover loan losses |
| – | the extent to which Santander UK’s loan portfolio is subject to prepayment risk |
| – | the risk that the value of the collateral, including real estate, securing Santander UK’s loans may not be sufficient and Santander UK may be unable to realise the full value of the collateral securing its loan portfolio |
| – | the ability of Santander UK to realise the anticipated benefits of its organic growth or business combinations and the exposure, if any, of Santander UK to any unknown liabilities or goodwill impairments relating to acquired businesses |
| – | the extent to which members of Santander UK may be responsible for contributing to compensation schemes in the UK in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers |
| – | the effects of taxation requirements and other assessments and any changes thereto in each location in which Santander UK operates |
| – | the effects of any changes in the pension liabilities and obligations of Santander UK |
| – | the ability of Santander UK to recruit, retain and develop appropriate senior management and skilled personnel |
| – | the effects of any changes to the reputation of Santander UK, any Santander UK member or any affiliate operating under the Santander UK brands |
| – | the basis of the preparation of the Company’s and Santander UK’s financial statements and information available about Santander UK, including the extent to which assumptions and estimates made during such preparation are accurate |
| – | the extent to which disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud |
| – | the extent to which changes in accounting standards could impact Santander UK’s reported earnings |
| – | the extent to which Santander UK relies on third parties and affiliates for important infrastructure support, products and services |
| – | the possibility of risk arising in the future in relation to transactions between the Company and its parent, subsidiaries or affiliates |
| – | the extent to which different disclosure and accounting principles between the UK and the US may provide you with different or less information about us than you expected |
| – | the risk associated with enforcement of judgmentsjudgements in the US. |
Please refer to our latest filings with the SEC (including, without limitation, our Annual Report on Form20-F for the year ended 31 December 2017)2018) for a discussion of certain risk factors and forward-looking statements. Undue reliance should not be placed on forward-looking statements when making decisions with respect to any Santander UK member and/or its securities. Investors and others should take into account the inherent risks and uncertainties of forward-looking statements and should carefully consider the foregoingnon-exhaustive list of important factors. Forward-looking statements speak only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such knowledge, information and views may change at any time. Santander UK does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
Other information for US investors
| | | | | | > Risk factors | | Santander UK plc | | | 221 | | | | | | | | | | |
| | | | Annual Report 2018 | Other information for US investors | | |
Risk factors An investment in Santander UK plc (the Company) and its subsidiaries (us, we, our or the Santander UK group) involves a number of risks, the material ones of which are set out below. We are vulnerable to disruptions and volatility in the global financial markets Over the past 10 years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to periods of reduced liquidity and greater volatility (such as(including volatility in spreads) and, in some cases, a lack of price transparency on interbank lending rates.. Uncertainties remain concerning the outlook and the future economic environment despite recent improvements in certain segments of the global economy, including in the United Kingdom (the UK).economy. Investors remain cautious and a slowing or failing of the global economic recovery would likely aggravate the adverse effects of difficult economic and market conditions on us and on others in the financial services industry. Financial markets over the past twothree years have been affected, and still are, by a series of political events, includingwhich include the UK’sUnited Kingdom’s (UK) vote in June 2016 to leave the European Union (EU), and the general election in the UK in June 2017, which caused significant volatility in the global stock and foreign exchange markets (for more information, see the risk factor entitled ‘Exposure to UK political developments, including the ongoing negotiations between the UK and EU, could have a material adverse effect on us’). Further, there continues to be significant uncertainty as to the respective legal and regulatory environments in which we and our subsidiaries will operate going forward as a result of the UK’s vote to leave the EU.EU, as the delay in any agreement continues. Such uncertainties have had, and may continue to have, a negative impact on macroeconomic conditions and our operating results,operations, financial condition and prospects, and the global economic environment may continue to be adversely affected by political developments (for more information, see the risk factor entitled ‘We may suffer adverse effects as a result of the political, economic and sovereign debt tensions in the eurozone’). 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, particularly if interest rates continue to rise in 20182019 following repeated comments by the Bank of England’s decisionEngland (BoE) to increase the base rate from 25bpsraise rates, “at a gradual pace and to 50bps in November 2017.a limited extent”. Any such increase in capital markets funding costs or deposit rates could have a material adverse effect on our interest margins, liquidity and profitability, particularly given the sustained low interest rate environment expected in the medium term. If all or some of the foregoing risks were to materialise in the global financial markets, this could have a material adverse effect on our operating results, financial condition and prospects.
Our operating results,operations, financial condition and prospects may be materially impacted by economic conditions in the UK Our business activities are concentrated in the UK, where we offer a range of banking and financial products and services to UK retail and corporate customers. As a consequence, our operating results,operations, 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 prosperity and confidence of consumers and businesses. The state of the UK economy, along with its related impacts on our profitability, remains a risk. Conversely, a strengthened UK economic performance may increase the possibility of a higher interest rate environment and we note that the Bank of EnglandBoE has commented that it expects to continue to raise interest rates at a steady pace if the economy performs in 2018.line with its expectations. In such a scenario, there is a risk that other market participants might offer more competitive product pricing resulting in increased customer attrition and the potential for an increase in defaults on our mortgage and/or loan repayments. In particular, we may face, among others, the following risks related to any future economic downturn: | – | | Increased regulation of our industry. Compliance with such regulation will continue to increase our costs, may affect the pricing of our products and services, increase our conduct and regulatory risks related tonon-compliance, reduce investment available to enhance our product offerings, and limit our ability to pursue business opportunities and impact our strategy |
| – | | Reduced demand for our products and services |
| – | | Inability of our borrowers to comply fully or in a timely manner with their existing obligations |
| – | | The process we use to estimate losses inherent in our credit exposure requires complex judgements and assumptions, including forecasts of economic conditions and how such economic conditions may impair the ability of our borrowers to repay their loans |
| – | | The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances |
| – | | The value and liquidity of the portfolio of investment securities that we hold may be adversely affected |
| – | | The recovery of the international financial industry may be delayed and impact our operating results,operations, financial condition and prospects |
| – | | Adverse macroeconomic shocks may negatively impact the household income of our retail customers and the profitability of our business customers, which may adversely affect the recoverability of our loans and other extensions of credit and result in increased credit losses. |
The possibility of a renewed economic downturn resulting in negative economic growth in the UK remains a real risk.risk, particularly given an agreement for exiting the EU has yet to be reached. This has, to a certain extent, been reflected in the downgrade of the Office for Budget Responsibility (OBR) forecasts in November 2017for economic growth for 2018, published with the Budget at the end of October 2018 and the downgrade of the UK’s sovereign credit rating in September 2017 (for more information, see the risk factor entitled ‘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 operating results,operations, financial condition and prospects’). Uncertainty surrounding the future of the eurozone is less acute than before, but a slow increase in growth may pose a risk of a further slowdown in the UK’s principal export markets which would have an adverse effect on the broader UK economy, and could cause uncertainty in relation to the terms of the UK’s exit from the EU. The future trading arrangements agreed between the EU and the UK could also have an adverse impact, particularly if the UK has to resort to using World Trade OrganisationOrganization (WTO) rules from the EU. The future trading arrangements agreed between the EU and the UK could also have an adverse impact, particularly if the UK has to resort to using WTO rules. Adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in UK, EU 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. 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 innon-performing loans and/or for other reasons beyond our control. Material increases in our provisions for loan losses and write-offs or charge-offs could have an adverse effect on our operating results,operations, financial condition and prospects. Any significant related reduction in the demand for our products and services could have a material adverse effect on our operating results,operations, financial condition and prospects.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | > Risk factors |
Exposure to UK political developments, including the ongoing negotiations between the UK and EU, could have a material adverse effect on us On 23 June 2016, the UK held a referendum (the UK EU Referendum) on its membership of the EU, in which a majority voted for the UK to leave the EU. Immediately following the result, the UK and global stock and foreign exchange markets commenced a period of significant volatility, including a steep devaluation of the pound sterling. There remains significant uncertainty relating to the process, timing and negotiation of the UK’s exit from, and future relationship with, the EU and the basis of the UK’s future trading relationship with the rest of the world. On 29 March 2017, the UK Prime Minister gave notice under Article 50(2) of the Treaty on European Union of the UK’s intention to withdraw from the EU. The delivery of the Article 50(2) notice has triggered a two year period of negotiation which willto determine the terms on which the UK will exit the EU taking account ofand the framework for the UK’s future relationship with the EU. Unless extended, the UK’s EU membership will cease after this two year period. The timing of, and process for, such negotiations and the resulting terms of the UK’s future economic, trading and legal relationships are uncertain, as is the basis of the UK’s future trading relationship with the rest of the world. There is a possibility that the UK’s EU membership ends at such time without reaching any agreement on the terms of its relationship with the EU going forward, although we note that movement to phase two ofand currently the negotiations - with focus on finalising withdrawal issues, transition arrangements andWithdrawal Agreement, which provides for a framework fortransitional period whilst the UK’s future relationship withFuture Relationship is negotiated, has not been ratified by the EU - was agreed on 15 December.UK Parliament. A general election in the UK was held on 8 June 2017 (theGeneral Election)Election). The General Election resulted in a hung parliament with no political party obtaining the majority required to form an outright government. On 26 June 2017 it was announced that the Conservative party had reached an agreement with the Democratic Unionist Party (the DUP) in order for the Conservative party to form a minority government with legislative support (‘confidence and supply’) from the DUP. There is an ongoing possibility of an early general election ahead of 2022 and of a change of government. The long term effects ofcontinuing uncertainty surrounding the General Election, which resulted in a minority government, are difficult to predict due to significant uncertainty and the impactBrexit outcome has had an effect on the negotiationUK economy, particularly towards the end of 2018, and this may continue into 2019. Consumer and Business confidence indicators have continued to fall, for example the UK’s exit from the EU. The outcome of the General Election could haveGfK consumer confidence index fell to-14 in January 2019, and this has had a significant impact on the future internationalconsumer spending and domestic political agendasinvestment, both of the government (including the UK’swhich are vital components of economic growth. The outcome of Brexit remains unclear, however, a UK exit from the EU),EU with ano-deal continues to remain a possibility and the consensus view is that this would have a negative impact on the ability ofUK economy, affecting its growth prospects, based on scenarios put forward by such institutions as the government to pass legislation in the House of Commons, as well as increasing the risk of further early general electionsBoE, HM Government and a period of political instability and/or a change of government.other economic forecasters. While the longer term effects of the UKUK’s imminent departure from the EU Referendum are difficult to predict, the effects of this Referendum, in addition to the uncertainty created as a resultthere is short term political and economic uncertainty. The Governor of the outcome ofBoE warned that the General Election,UK exiting the EU without a deal could include furtherlead to considerable financial instability, and slowera very significant fall in property prices, rising unemployment, depressed economic growth, as well as higher unemploymentinflation and inflation ininterest rates. The Governor also warned that the UK. For instance, the UK Government has stated its intention for the UKBank would not be able to leave both the Single Market and the Customs Union (thereby ceasing to be party to the global trade deals negotiated by the EU on behalf of its members) and thisapply interest rate reductions. This could inevitably affect the UK’s attractiveness of the UK as a global investment centre, and increase tariff and non-tariff barriers for the UK’s trading relationships and, as a result, couldwould likely have a detrimental impact on UK economic growth. Sustained low or negative interest rates If ano-deal Brexit did occur it would put further pressure on our interest marginsbe likely that the UK’s economic growth would slow significantly, and adversely affect our operating results, financial condition and prospects. Equally, further rises in interest rates (in addition to the rate rise in November 2017) could result in larger default losses whichit would also impact our operating results, financial condition and prospects.be possible that there would be severely adverse economic effects. The UKUK’s imminent departure from the EU Referendum has also given rise to further calls for a second referendum on Scottish independence.independence and raised questions over the future status of Northern Ireland. These developments, or the perception that they could occur, could have a material adverse effect on economic conditions and the stability of financial markets, and could significantly reduce market liquidity and restrict the ability of key market participants to operate in certain financial markets (for more information, see the risk factor entitled ‘We are vulnerable to disruptions and volatility in the global financial markets”markets’). Asset valuations, currency exchange rates and credit ratings may be particularly subject to increased market volatility during the period ofif the negotiation of the UK’s exit from the EU.EU continues in therun-up to 29 March 2019 as a result of Parliament’snon-ratification of the Withdrawal Agreement. The major credit rating agencies downgraded and changed their outlook to negative on the UK’s sovereign credit rating following the UK EU Referendum, and there is a risk that this may recur during the negotiation of the UK’s exit from the EU as the potential terms of the exit (and any transition period) become publichas not changed (for more information, see the risk factor entitled ‘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 operating results,operations, financial condition and prospects’). In addition, we are subject to substantialEU-derived regulation and oversight. ThereAlthough legislation has now been passed transferring the EU acquis into UK law, there remains significant uncertainty as to the respective legal and regulatory environments in which we and our subsidiaries will operate when the UK is no longer a member of the EU. This may cause potentially divergent national lawsEU, and regulations across Europe should EU laws be replaced, in whole or in part, bythe basis on which cross-border financial business will take place after the UK laws onleaves the same (or substantially similar) issues. For example, we are in the process of implementing a number of key restructuring and strategic initiatives, such as the ring-fencing of our retail banking activities, all of which will be carried out throughout this period of significant uncertainty. This may impact the prospects for successful execution and impose additional pressure on management (for more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operating results, financial condition and prospects’).EU.
Operationally, there is a significant risk that we and other financial institutions may no longer be able to rely on the European passporting framework for financial services, (or an equivalent regime) and it is unclear what alternative regime may be required to apply for authorisation in multiple EU jurisdictions,place following the costs, timing and viability of which is uncertain.UK’s departure from the EU. This uncertainty, and any actions taken as a result of this uncertainty, as well as new or amended rules, may have a significant impact on our operating results, financial condition and prospects. In addition, Ongoing uncertainty within the lack of clarityUK Government and Parliament, and the rejection of the impactWithdrawal Agreement by the House of Commons, and the UK EU Referendum on foreign nationals’ long-term residency permissionsrisk that this results in the UK may make it challenging for usGovernment falling could cause significant market and economic disruption, which could have a material adverse effect on our operations, financial condition and prospects. Continued ambiguity relating to retain and recruit adequate staff, which may adversely impact our business. The UK political developments described above,the UK’s withdrawal from the EU, along with any further changes in government structure and policies, may lead to further market volatility and changes to the fiscal, monetary and regulatory landscape in which we operate and could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us and, more generally, on our operating results,operations, financial condition and prospects.
| | | | Annual Report 2018 | Other information for US investors | | |
We are subject to substantial regulation and governmental oversight which could adversely affect our operating results,operations, financial condition and prospects.prospects Supervision and new regulation As a financial services group, we are subject to extensive financial services laws, regulations, administrative actions and policies in the UK, the EU and in each other location in which we operate, including in the US.operate. As well as being subject to UK regulation, as part of the Banco Santander group, we are also impacted through regulation by the Banco de España (the Bank of Spain) and, at a corporate level, by the European Central Bank (ECB), and various legal and regulatory regimes (including the US) that have extra-territorial effect. The laws, regulations and policies to which we are subject may be changed at any time. In addition, the interpretation and the application of those laws, regulations and policies by regulators are also subject to change. Furthermore, there is uncertainty regarding the future relevanceon-shoring of EU regulations and reforms followinginto the UK upon the UK’s exit from the EU (andand the changes that will be implemented in that process (including the further powers that will be given to UK regulators), as well as regarding the level of convergence or divergence with EU regulations, initiatives and reforms (including during any transitional period). Extensive legislation and implementing regulations affecting the financial services industry have recently been adopted in regions that directly or indirectly affect our business, including Spain, the US, the EU, Latin America and other jurisdictions.
The manner in which financial services laws, regulations and policies are applied to the operations of financial institutions is still evolving. Moreover, to the extent these laws, regulations and policies are implemented inconsistently in the UK,apply to us, we may face higher compliance costs. Any legislative or regulatory actions and any required changes to our business operations resulting from such laws, regulations and policies as well as any deficiencies in our compliance with such laws, regulations and policies, could result in significant loss of revenue, impact our strategy, limit our ability to pursue business opportunities in which we might otherwise consider engaging and limit our ability to provide certain products and services. They may also affect the value of assets that we hold, requiring us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our operating results,operations, financial condition and prospects. Accordingly, there can be no assurance that future changes in laws, regulations and policies or in their interpretation or application will not adversely affect us. During periods of market turmoil in the past 10 years, 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, regulatory and governmental authorities have continued to consider further enhanced or new legal or regulatory requirements intended to preventreduce the probability and impact of future crises or otherwise assure the stability of institutions under their supervision. This intensive approach to supervision is maintained by the Prudential Regulation Authority (PRA) and, the Financial Conduct Authority (FCA), the Payment Systems Regulator (PSR) and the Competition and Markets Authority (CMA). 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 and compliance 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 industry. Although we work closely with our regulators and continually monitor the situation, future changes in law, regulation, fiscal or other policies can be unpredictable and are beyond our control. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have ana material adverse effect on our operating results,operations, financial condition and prospects. Banking Reform On 18 December 2013, theThe Financial Services (Banking Reform) Act 2013 (the Banking Reform Act) was enacted. The Banking Reform Act implemented the recommendations of the Independent Commission on Banking (ICB) and of the Parliamentary Commission on Banking Standards. Among other things, the Banking Reform Act established a ring-fencing framework under the Financial Services and Markets Act 2000 (FSMA) pursuant to which UK banking groups that hold significant retail and/or small business deposits arewere required to separate or ring-fence‘ring-fence’ their retail banking activities from their wholesale banking activities by 1 January 2019, established a new Payment Systems Regulator (the PSR) and amended the Banking Act 2009 (the Banking Act) to include a bail-in stabilisation power forming part of the special resolution regime (for more information, see the risk factor entitled ‘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’).
On 7 July 2016, the PRA published a policy statement (PS20/16) entitled ‘The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures’ containing its final ring-fencing rules designed to make provision for the group ring-fencing purposes outlined in the Banking Reform Act ahead of the implementation date for ring-fencing on 1 January 2019. The group ring-fencing purposes are intended to insulate a ring-fenced back from, and ensure that a ring-fenced bank is able to take decisions independently of, other members of its group.
Finally, the Banking Reform Act introduced a new form of transfer scheme, the ring-fencing transfer scheme, under Part VII of FSMA to enable UK banks to implement the ring-fencing requirements. This is a court process that requires (i) the PRA to approve the scheme (in consultation with the FCA); (ii) the appropriate regulatory authority in respect of each transferee to provide a certificate of adequate financial resources in relation to that transferee; and (iii) an independent expert (approved by the PRA, after consultation with the FCA) to provide a scheme report stating whether any adverse effect on persons affected by the scheme is likely to be greater than is reasonably necessary to achieve the ring-fencing purposes of the scheme. The PRA published its final statement of policy on its approach to ring-fencing transfer schemes on 4 March 2016.
The Santander UK group is subject to the ring-fencing requirementregulatory regime introduced under the Banking Reform Act and as a consequence,adopted through secondary legislation which it is required to comply with from 1 January 2019. Accordingly, the Santander UK group will need to separatehas implemented the separation – or ring-fencing – of its core retail and small business deposit-takingdeposit taking activities from its prohibitedwholesale markets and investment banking activities. In light The Company, being the main banking entity within the ring-fenced part of the changeable macro-environment, the board of the Company concluded in December 2016 that we could provide greater certainty for our customers with a ‘wide’ ring-fence structure, rather than the ‘narrow’ ring-fence structure it had originally envisaged in early 2016. Under this revised model, Santander UK plc, the main ring-fenced bank,group, will serve our retail, commercial and corporate customers. The majority of our customer loans and assets as well as customer deposits and liabilities will remain within the Company or Cater Allen Limited, aswhich is also a ring-fenced banks. Prohibitedbank. Wholesale markets and investment banking activities which, cannot continue to befrom 1 January 2019, are prohibited from being transacted within the ring-fenced bank principally includeincluded our derivatives business with financial institutions and certain corporates, elements of our short term markets business, and ourthe Company’s branches in Jersey and the Isle of Man, and the United States (US). The implementation branch of the new ring-fencing model, entails a legal and organisational restructuring of the Santander UK group’s businesses and operations, including through a ring-fencing transfer scheme. It is expected that Abbey National Treasury Services plc will cease(ANTS). Implementation of ring-fencing has involved material structural and operational changes to the activitiesCompany’s business and the corporate group structure in the UK during 2018. Following consent from the PRA to the application to the High Court of England and Wales (the Court) for approval of our ring-fencing transfer scheme (the Scheme), our Scheme was approved by the its US branch and transferCourt on 12 June 2018. In accordance with the Scheme: (i) ANTS has transferred the majority of its other business; with products, transactions, and arrangements withand customers and other stakeholders which are permitted in the ring-fencering fence transferred to Santander UK,the Company and products, transactions, or arrangements withand customers and other stakeholders which are prohibited within the ring-fenced bankring-fence transferred to the London branch of Banco Santander S.A. orSA; and (ii) the Company has transferred its prohibited business and certain specified business that is permitted within the ring-fence to the London Branch. Our current intention is tobranch of Banco Santander SA. These transfers of business were implemented during July 2018. On 11 December 2018, the Royal Court of Jersey approved the transfer of the business of the Jersey and Islebranch of Man branchesthe Company to a new Jersey branch of ANTS, which is a member of the Santander UK Group Holdings plc group outside the ring-fence, usingby way of a court-sanctioned transfer schemesscheme under Jersey law (the Jersey Scheme). On 13 December 2018, the applicable laws. Our target remainsIsle of Man High Court of Justice approved the transfer of the business of the Isle of Man branch of the Company to completea new Isle of Man branch of ANTS, by way of a court-sanctioned transfer scheme under Isle of Man law (the Isle of Man Scheme). The effective date of the implementationJersey Scheme and the Isle of Man Scheme was 17 December 2018. ANTS has ceased the activities of its US branch, and surrendered its US licence with effect from 14 December 2018. We completed our ring-fencing plans in advance of the legislative deadline of 1 January 2019. However, implementationgiven the complexity of the ring-fencing model continues to dependregulatory regime and the material impact on a number of factors, including approvals from applicable regulators and court sanctions. There can be no assurance that these approvals or sanctions will be obtained in line with our implementation plan and other factors such as economic conditionsthe way the group now conducts its business operations in the UK, and globally, and developmentsthere is a risk that the Company and/or Cater Allen Limited may be found to be in relationbreach of one or more ring-fencing requirements. This might occur, for example, if prohibited business activities are found to be taking place within the negotiationsring-fence or core, mandated retail banking activities are found being carried on in a UK entity outside the termsring-fenced part of the UK’s exit from the EU may have a bearing on the implementation of the ring-fence. In light of the scale and complexity of this process, the operational and execution risks forgroup.
From 1 January 2019, if the Santander UK group maywere found to be material. Thisin breach of any of the ring-fencing requirements placed upon it under the ring-fencing regime, it could be subject to enforcement action by the PRA, the consequences of which might include substantial financial penalties, imposition of a suspension or restriction on the group’s UK activities or, in the most serious of cases, forced restructuring of the UK group, entitling the PRA (subject to the consent of the UK Government) to require the sale of a Santander ring-fenced bank or other parts of the UK group. Any of those sanctions could, if imposed, have a material adverse effect on our operations, financial condition and migrationprospects. The restructuring activities and migrations of customersbusinesses, assets and transactions couldcustomer relationships mentioned above have had a material impact on how the Santander UK group conducts its business. TheWhile it has sought to implement each of the required changes with minimal impact on customers, the Santander UK group is unable to predict with certainty the attitudes and reaction of its customers. The restructuring of the Santander UK group’s business pursuant to the ring-fencing regime has taken, and will continue to take, a substantial amount of time and has been, and will continue to be, costly to implement. The separation process and the structural changes which arehave been required could have a material adverse effect on our operating results,operations, financial condition and prospects.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
EU fiscal and banking union The European banking union is expected to be achieved through new harmonised 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 (comprising both the ECB and the national competent authorities) is designed to assist in making the banking sector more transparent, unified and safer. On 4 November 2014, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular direct supervision of 119 significant banks (at 5 December 2017) in the eurozone, including Banco Santander SA. Regulation (EU) No. 806/2014 of the European Parliament and the Council of the EU (the SRM Regulation) became effective from 1 January 2015 and 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). The new Single Resolution Board (SRB), which is the central decision-making body of the SRM fully assumed its resolution powers on 1 January 2016. The SRB is responsible for managing the SRF. Further, regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as Banco Santander SA’s main supervisory authority may have a material impact on our operating results,operations, financial condition and prospects and may be impacted by the terms of the UK’s exit from the EU (for more information, see the risk factor entitled ‘Exposure to UK political developments, including the ongoing negotiations between the UK and EU, could have a material adverse effect on us’). Other regulatory reforms adopted or proposed in the wake of the financial crisis The revised andre-enacted Markets in Financial Instruments legislation (MiFID) replaces the existing MiFID framework and comprises the Directive 2014/65 of the European Parliament and of the Council, of 15 May 2014 and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID2) and the Regulation 600/2014 of the European Parliament and of the Council of 15 May 2014 and amending Regulation (EU) No 648/2012 (MiFIR). The substantive provisions of MiFID came into force on 3 January 2018 and introduced an obligation to trade certain classes of OTCOver-the-Counter (OTC) derivative contracts on trading venues. Certain details remain to be clarified in further binding technical standards to be adopted by the Commission. Although the full impact of MiFID2 and MiFIR on us is not yet known,European Commission (the Commission). MiFID2 and MiFIR may lead to changes which negatively impact our profit margins, require itus to adjust itsour business practices or increase itsour costs (including compliance costs). It is possible that the measures and procedures we have introduced might, in future, be deemed to be misaligned with MiFID obligations, or that individuals within the business may not fully comply with the new procedures. If there are breaches of our MiFID obligations or of other existing laws and regulations relating to financial crime, we could face significant administrative, regulatory and criminal sanctions and restrictions on the conduct of our business and operations, as well as reputational damage whichdamage. Therefore, any such breaches could have a material adverse effect on our operations, financial condition and prospects. US regulation In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) enacted in 2010, has been implemented in part and continues to be implemented by various US federal regulatory agencies. The Dodd-Frank Act, among other things, imposes a regulatory framework on swap transactions, including swaps of the sort that we enter into, requires regulators to adopt new rules governing the retention of credit risk by securitisers or originators of securitisations and significantly expands the coverage and scope of regulations that limit affiliate transactions within a banking organisation. Over 2012-2015, theThe US Commodity Futures Trading Commission (the CFTC) and other US regulators have adopted a host of new regulations for swaps markets, including swap dealer registration, business conduct, mandatory clearing, exchange trading and margin regulations. Most of these regulations are either already effective, although regulations applicable to ‘security-based swaps’ (i.e., swaps based on securities or willnarrow-based security indices) required to be implemented by the US Securities and Exchange Commission (SEC)) are generally not yet effective, but many of those requirements are expected to come into effect in 2018.2019. Abbey National Treasury Services plc, which became provisionally registered as a swap dealer with the CFTC on 4 November 2013, is currently subject to theseswaps regulations for its US facing swaps activities. These rules have already increased and could continue to increase the costs associated with our swaps business.business, and continued compliance with those rules, as well as pending SEC security-based swaps rules, could further increase those costs. In addition, certain cross-border regulatory conflicts could adversely affect the profitability of our swaps business by reducing the range of counterparties with which we can trade effectively. In October 2014, US regulators adopted a joint final rule requiring sponsors of asset-backed securitisation transactions, which includes the Company Santander UK plc in relation to its residential mortgage-backed securities programmes, to retain 5% of the credit risk of the assets subject to the securitisation. The rule permits sponsors to satisfy the risk retention requirement through the acquisition and retention of either 5% (measured by fair value) of the most subordinated interest in the securitisation, or 5% (measured by nominal value) of each tranche of interests issued by the securitisation, or some combination of the two. The rule also permits certain exceptions and methods of compliance in respect of specific types of asset-backed securities transactions. Within the Dodd-Frank Act, theso-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 US. The final rules contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in US government and agency obligations as well as certain foreign government obligations, trading solely outside the US, and also permit ownership interests in certain types of funds to be retained. Banking entities must bring their activities and investmentsThe Santander UK group was generally required to come into compliance with the requirements ofVolcker Rule by July 2015, although the Federal Reserve extended the conformance deadline forpre-2014 ‘legacy’ investments in and relationships with private equity funds and hedge funds until 21 July 2017 and additional extensions for illiquid funds may be requested. On 30 May 2018, the Federal Reserve and other federal regulators requested comment on proposed modifications to the Volcker Rule, byincluding modifications to the endscope of the applicable conformance period. We have assessed how the final rules implementingrestrictions on proprietary trading and investments in covered funds. It cannot be predicted at this time what, if any, modifications to the Volcker Rule affect our businesses and havemay be adopted or what the necessary measures to bring our activities into compliance with the rules.impact of such changes would be for us.
| | | | Annual Report 2018 | Other information for US investors | | |
Each of these aspects of the Dodd-Frank Act, as well as the changes in US banking regulations, and increased uncertainty surrounding future changes, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the Dodd-Frank Act including(including the Volcker Rule poseand any modifications to it) poses to us is not yet known, however, such risks could be materialsignificant 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. 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. The Competition and Markets Authority (CMA) is the UK’s main competition authority responsible for ensuring that competition and markets work well for consumers. In addition, under the Banking Reform Act, as of 1 April 2015, the FCA has the power to enforce against breaches of the Competition Act 1998 and to refer markets to the CMA forin-depth investigation in the areas of financial services in the UK. As of 1 April 2015, the PSR also has an objective and powers equivalent to those of the FCA to promote competition in the payments industry. In August 2016, the CMA published the final report in its market investigation into competition in the personal current account and SME retail banking markets, which identified a number of features of the markets for the supply of personal current accounts, business current accounts and SME lending that, in combination, were having an adverse effect on competition. The CMA is currently implementing a comprehensive package of remedies including, among other things, Open Banking and the introduction of requirements to prompt customers to review the services that they receive from their bank at certain trigger points and to promote customer awareness of account switching. Further work on overdraft charges – which remain under political scrutiny – is ongoing by the FCA. In December 2018, the FCA published a consultation and policy paper regarding overdraft charges, which remains under political scrutiny. included final rules and guidance to address low awareness and engagement in this market and a consultation on proposals to reform the ways banks and building societies charge for overdrafts. The FCA has recently announcedis also undertaking more general work on fair pricing in financial services, including in relation to savings, mortgages and insurance. This is also an area of priority for the CMA, which made recommendations for further work by the FCA in its December 2018 response to a super-complaint by Citizens Advice. The FCA is conducting a Strategic Review of Retail Banking Business Models. Over the next year, the FCA will lookModels, looking at the business modelspotential effect of firms to identify any potential conduct or competition issues, explore how technological change, increased digitalisation andfree-if-in-credit banking is paid for and understand the impact on business models of changes such as digital conversion and reduced branch usage onfirms’ business models. It is also looking to secure an appropriate degree of consumer protection for consumers in vulnerable circumstancescircumstances. This review will inform the FCA’s ongoing policy work in retail banking and at the role such vulnerable customers have on banks’ profitability. The FCA will then consider potential consequences for its consumer protection and competition objectives. It intends to share the results of its analysis in Q2 2018.related areas. There can be no assurance that we will not be required to make changes to our business model as a result of this review or related work, and that such changes would not materially and adversely affect us. In addition, the FCA and PSR continue to undertake a number of competition related studies and reviews across a number of our businesses. Intervention as a result of these studies and reviews, in addition to regulatory reforms, investigations and court cases affecting the UK financial services industry, could have an adverse effect on our operating results,operations, financial condition and prospects, or on our relations with our customers and potential customers. Payments The Second Payment Services Directive II (PSD2) is a fundamental piece of payments-related legislation in Europe, thatthe first part of which came into force in January 20182018. The regulation aims to harmonise payment processing across Europe, and is being implemented in the UK by the FCA. In the UK, PSD2 introduced Open Banking, which requires providers to openopened up access to customers’ online account and payments data to third party providers (TPPs). Customers will beare able to give secure access to certain TPPs authorised by the FCA or other European regulators to access account information and to make payments from current accounts. Following the CMA’s retail banking market investigation, Santander UK is one of the nine largest current account providers in the UK that was(theCMA-9) were required to accelerate certain of the PSD2 requirements and implement Open Banking by 13 January 2018. As a new payments ecosystem, The access method for customer accounts by TPPs is via an established Application Programme Interface (API) and, as one of theCMA-9, we have been required to undertake significant technical build to create these APIs and extend them to all categories of customers, account types and currencies.
Open Banking/Banking and PSD2 hasboth have the potential to exacerbate a number of existing risks for the industry and for individual providers, including data loss/data protection, cyber security, fraud and wider financial crime risk. Thisrisk, which in turn could give rise to increased costs, litigation risk and risk of regulatory investigation and enforcement activity. An exampleExamples of the heightened risk isinclude the risk of fraud relating to activities of a TPP pursuant to which funds are redirected to a third party not chosen by the customer; orand the risk of data misuse by a TPP/other third party where the TPP has requested the data from Santander and this is provided to the TPP. The liability model for unauthorised payments by TPPs is untested. There can be no assurance If the arrangements that the risks associatedwe have made to comply with our Open Banking will not give riseobligation prove to be inadequate or incompatible with legal and regulatory requirements or expectations, we could be required to make extensive and costly changes to our systems and controls, policies, and practices. We might also be fined by regulators, sued by customers, and might suffer reputational damage. Any requirement to make such changes, any liability to customers, any regulatory fines, or any reputational damage suffered, could have a material adverse effect on our operations, financial liability or reputational risks for Santander UK.condition and prospects. Financial Crime There are aA number of EU and UK regulatory change proposals and measures targeted at preventing and countering financial crime (including anti-money laundering (AML) and countering the financing of terrorism (CTF) provisions) which came into effect in 2017 or are expected to come into effect inand 2018.
As part of the EU’s revision of its AML / AML/CTF rules, Directive (EU) No 2015 / 2015/849 (the Fourth EU Money Laundering Directive) and Regulation (EU) No 847 / 847/2015 (the EU Wire Transfer Regulation) came into effect on 26 June 2017. The Fourth EU Money Laundering Directive replaced Directive (EC) No 60 / 60/2005 and significantly expanded the existing AML / AML/CTF regime applicable to financial institutions by, among other things: | – | | Increasing the customer due diligence checks required for particular transactions |
| – | | Introducing a requirement to take appropriate steps to identify and assess the risks of money laundering and terrorist financing and to have in place policies, controls and procedures to mitigate and manage those risks effectively |
| – | | Having EU Member States hold beneficial ownership details on a central register for entities incorporated within their territory |
| – | | Applying the UK’s AML / AML/CTF requirements to the branches and majority-owned subsidiaries of financial institutions that are located innon-EEA countries with less strict regimes. |
The EU Wire Transfer Regulation replaced the existing Regulation (EC) No 1781 / 2006. The regulation applies to all transfers of funds in any currency which are sent or received by a payment service provider (PSP) or an intermediary PSP established in the EU, subject to certain exceptions for low-risk and low-value payments. The payer’s PSP is required to ensure that any transfer of funds is accompanied by the identification information prescribed in the regulation and must verify the accuracy of this information from a reliable and independent source. Obligations are also imposed on the payee’s PSP to implement effective procedures to detect whether the information about the payer or payee in the messaging or payment and settlement system is incomplete and to take a risk-based approach to determining whether to execute, reject or suspend a transfer of funds with missing information.
On 22 June 2017, the final text of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 was published in the UK, which came into force on 26 June 2017 and implemented the requirements of thosethe Fourth EU measuresMoney Laundering Directive and the EU Wire Transfer Regulation into nationalUK law. On 15 December,30 May 2018, the Council of EU and the European Parliament reached a political agreement on the EU Commission’s proposal to amend the Fourth Anti-Money Laundering Directive.Directive (the Directive). The amended directive (‘5th AMLD’)(5th AMLD) seeks to prevent large scale concealment of funds and to introduce increased corporate transparency rules, whereby corporate and other legal entities will be required by law to publicly disclose information on beneficial ownership. The amended directive also introduces the application of AML rules to firms providing services associated with virtual currencies and further extends enhanced due diligence requirements to all transactions with natural persons or legal entities established in third countries identified as high risk countries pursuant to Article 9 (2)9(2) of the Directive. Following the political agreement between the co-legislators, EU member states will have until mid-2019The UK Government has confirmed their intention to implement the 5th AMLD into national legislation. UK regulations and/or guidancelaw as the EU deadline of 10 January 2020 for transposition falls within the expected transition period of Brexit. The UK Sanctions and AML Act received Royal Assent on 23 May 2018. The Act enables the UK to continue to implement United Nations sanctions regimes. The Act also gives the UK the ability to impose its own sanctions regime plan which is expected laterlikely to follow the approach of the EU but could deviate in 2018.some areas. The Act also introduces certain new measures to address money laundering, including in relation to company ownership information. The Act also provides powers to take actions against ‘human rights abusers’.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
The current US administration has increased the use of sanctions against individuals, entities and countries, which in many instances have been different to the policy approach of the EU and UK. In particular there-introduction of primary and secondary sanctions against Iran which occurred in November 2018, following the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA), has been most significant. These sanctions are substantially similar to those that were in force in 2013, prior to the initial Iran nuclear agreement, though the secondary sanctions are broader in scope in some areas. In response the EU amended the EU Blocking Regulation, reflecting its support for the continuation of the JCPOA, making it a potential criminal offence in the UK to comply with there-introduced US sanctions on Iran. The UK Government has indicated that it will reflect the Blocking Regulation into UK law post-Brexit, though the precise details of this are yet to be seen. The UK Policing and Crime Act 2017 which received Royal Assent on 31 January 2017, contains severalstrengthened the measures to strengthenfor the enforcement of financial sanctions, including enhanced criminal penalties and the power to impose monetary penalties for breaches of financial sanctions, deferred prosecution agreements and serious crime prevention orders for such breaches and the power to temporarily implement UN financial sanctions in the absence of EU implementing measures. Banks are expected to take a proactive approach to reporting any potential sanctions breachesrelation to the newcriminal enforcement and civil powers. Under the Act the Office of Financial Sanctions Implementation (OFSI), as set out in recent OFSI Guidance. Under the Policing and Crime Act OFSI has powers to fine banksinstitutions a maximum of £1 million or 50 per cent50% of the estimated value of the funds or resources, whichever is greater, as well as criminal enforcement powers. The penalty powers apply to offences aftergreater. Separately, the 1st April 2017. In 2016, just over one hundred suspected breaches were reported by firms to OFSI, of which 95 were deemed actual breaches, totalling £75 million. The UK Immigration Act 2016 requires banks to conduct checks on their current account holders and report any persons unlawfully present in the UK to the Home Office. Banks are required to perform quarterly checks to determine whether they are operating a current account for a person known by the Home Office to be in the UK illegally. If a bank establishes that a customer is an illegal migrant, they will have a duty to report the match and details of any other accounts they provide to the Home Office. The FCA has responsibility for supervising banks adherence to the requirements of the Act. The Home Office may require the bank to close the accounts of such individuals as soon as reasonably practicable. The regulations implementing these changes are expected to be published in 2017.
The Criminal Finances Act 2017 (the CF Act), which received Royal Assentupdated the primary UK legislation in April 2017, makes provision for a numberrespect of important changes to the law governinginvestigation and enforcement against money laundering civiland terrorist financing. The Act provided law enforcement with new powers in regard to asset recovery and enforcement powers concerning terrorist property.introduced ‘Unexplained Wealth Orders’. The CF Act introducesalso created a new offence (modelled on the corporate offence under section 7 of the Bribery Act 2010), which will be committed by a corporation which failsrelating to failure to prevent the criminal facilitation of tax evasion by its associated persons (which includes its employees, agents and other persons who perform services for or on behalfevasion. The UK Government also asked the Law Commission to conduct a review of it) regardless of whether the taxlegislation relating to the ‘Suspicious Activity Reporting’ regime (SAR), which review is owedexpected to be completed in late 2019.
The UK Parliament Treasury Select Committee is concluding an Inquiry into Economic Crime, with the report expected in the first half of 2019. The Foreign Affairs Committee has also initiated an Inquiry into UK Sanctions post-Brexit. The Select Committees may make recommendations for further legislative change or another country. There is a defence where the corporation has putGovernment policy change in place reasonable prevention procedures. If an offence is committed, unlimited financial penalties or ancillary orders could be imposed. The CF Act came into force on 30 September 2017 and includes a range of further provisions targeted at improving the UK Government’s ability to tackle money laundering and corruption, recover the proceeds of crime and counter terrorist financing and enable greater sharing of information between entities within the regulated sector and enforcement agencies. Failure to comply with the requirements of the CF Act could expose Santander UK to significant criminal or civil sanctions.these areas. The implementation of the foregoing measures (whether in their current form or as amended) will materially increase our regulatory and compliance burden. The regulatory changesnew UK legislation related to financial crime has required substantial amendments to our AML / AML/CTF procedures and policies, with additional training and may yet require furtherguidance required for employees. Further such amendments.amendments will likely be required in 2019 to reflect changes to UK laws and Government policy post-Brexit. The changes could adversely impact our business by increasing our operational and compliance costs and reducing the value of our assets and operations. These challenges are exacerbated by The complexity in the complexity arising fromarea of financial crime policy is a significant challenge, involving overlapping requirements between different legislation, and, in some instances, conflicts of laws. There are also some requirements which have extra-territorial effect, for example,The divergence of policy approaches between the EU/UK Bribery Act. There are challengesand US in ensuring the compliancearea of entities over which we do not have full control or wherefinancial sanctions is exacerbated by the UK rules do not align easily withlack of clear guidance from the local requirements. There is aOFSI. The growing complexity increases the risk that the required measures will not be implemented correctly or on time or that individuals within the business will not be fully compliant with the new procedures. If there are breaches of these measures or existing law and regulation relating to financial crime, we could face significant administrative, regulatory and criminal sanctions and restrictions on the conduct of our business and operations, as well as reputational damage whichdamage. The civil and criminal penalties for failures have increased and any such breaches could have a material adverse effect on our operations, financial condition and prospects. EU General Data Protection Regulation The EU General Data Protection Regulation (the GDPR) will havecame into direct effect in all EU Member States fromon 25 May 2018, and will replace currentreplacing previous EU data privacy laws. Although a number of basic existing principles will remainhave remained the same, the GDPR introduceshas introduced new obligations on data controllers and rights for data subjects, including, among others:subjects. – | | Accountability and transparency requirements, which will require data controllers to demonstrate and record compliance with the GDPR and to provide more detailed information to data subjects regarding processing |
– | | Enhanced data consent requirements, which includes “explicit” consent in relation to the processing of sensitive data |
– | | Obligations to consider data privacy as any new products or services are developed and limit the amount of information collected, processed, stored and its accessibility |
– | | Constraints on using data to profile data subjects |
– | | Providing data subjects with personal data in a useable format on request and erasing personal data in certain circumstances |
– | | Reporting of breaches without undue delay. |
The GDPR has also introducesintroduced new fines and penalties for a breach of requirements, including fines for systematic breaches of up to the higher of 4% of annual worldwide turnover or€20m and fines of up to the higher of 2% of annual worldwide turnover or€10m (whichever is highest) for other specified infringements. The GDPR identifies a list of points to consider when imposing fines (including the nature, gravity and duration of the infringement). The implementation of the GDPR will requirehas required substantial and ongoing amendments to our procedures and policies. The changes have impacted, and could further adversely impact, our business by increasing our operational and compliance costs. Further, there is a risk that the measures will not be implemented correctly or that there may be partial non-compliance with the new procedures. If there are breaches of the GDPR obligations, we could face significant administrative and monetary sanctions as well as reputational damage which could have a material adverse effect on our operations, financial condition and prospects.
| | | | Annual Report 2018 | Other information for US investors | | > Risk factors |
Further reforms to the mortgage lending market could require significant implementation costs or changes to our business strategy Mortgage Lending The final rules in relation to the FCA Mortgage Market Review (MMR) came into force on 26 April 2014. These rules required a number of material changes to the mortgages sales process, both in terms of advice provision in nearly all scenarios and significantly enhanced affordability assessment and evidencing. The new rules permit interest-only loans. However, there is a clear requirement for a clearly understood and credible strategy for repaying the capital (evidence of which the lender must obtain before making the loan). We haveThe Santander UK group has implemented certain changes to implement the MMR requirements. The FCA continues to assess firms’ implementation of the rules introduced as a result of the MMR and commenced a review of responsible lending practices in April 2015, publishing its report in May 2016. This is in addition to regulatory reforms being made as a result of the implementation of the Mortgage Credit Directive from 21 March 2016. In December 2016, the FCA published terms of reference for a market study into competition in the mortgages sector, which is focusingwill focus on consumers’ ability to make effective decisions and whether commercial arrangements between lenders, brokers and other players leadleads to conflicts of interest or misaligned incentives to the detriment of consumers. TheFollowing a deferral, the FCA aims to publishpublished its interim report setting out its preliminary conclusions in May 2018. The FCA has stated that it will publish its final report in Q1 2019.
It is possible that further changes may be made to the FCA’s Mortgage Conduct of Business (MCOB) rules as a result of these reviews and other related future regulatory reforms. To the extent that any proposed solutionsnew rules do apply to address any concerns identifiedof the loans, failure to comply with these rules may entitle a borrower to claim damages for loss suffered orset-off the amount of the claim against the amount owing under the loan. Any further changes to the FCA’s MCOB rules or to MCOB or the FSMA or changes in the spring of 2018, withregulatory structure or the final report due in Q4 2018.Financial Services Act 2012, may adversely affect the Santander UK group’s operating results, financial condition and prospects. There can be no assurance that wethe Santander UK group will not be required to make any future changes to ourits mortgage lending business, whether as a result of the MMR or other mortgage lending reforms, and that such changes would not materially and adversely affect our operating results, financial condition and prospects.the Santander UK group. Consumer credit On 1 April 2014, consumer credit regulation was transferred from the OFT to the FCA in accordance with the Financial Services Act 2012. Firms that held an OFT licence and had registered with the FCA by 31 March 2014, including Santander UK, were granted an interim permission under the new regime and had to apply to the FCA for full authorisation during an application period notified by the FCA. Under the new regime: (i) carrying on certain credit- relatedcredit-related activities (including in relation to servicing credit agreements) otherwise than in accordance with permission from the FCA will render the credit agreement unenforceable without FCA approval; and (ii) the FCA has the power to make rules providing that contracts made in contravention of its rules on cost and duration of credit agreements, or in contravention of its product intervention rules, are unenforceable. Santander UK is fully authorised to carry out consumer credit-related regulated activities, however, if the FCA were to impose conditions on that authorisation and/or make changes to the FCA rules applicable to authorised firms with consumer credit permissions, this could have an adverse effect on the Group’s operating results,Santander UK group’s operations, financial condition and prospects. We are exposed to risk of loss and damage from civil litigation and/or criminal legal and regulatory proceedings We face various legal and regulatory issues that may give rise to risk of restrictions on our business and operations, loss and damage (including damage to our reputation) from civil or criminal litigation, arbitration, and/or criminal, tax, administrative and/or regulatory investigations, inquiries or proceedings. Failure to adequately manage the risks arising in connection with legal and regulatory proceedings. These issues, could include failing to comply withincluding our obligations under existing applicable legallaw and regulatory requirementsregulation or our contractual obligations including arrangements with suppliers, or failing to properly implement new applicable lawslaw and regulations, andregulation could result in claims against ussignificant loss or subject us to regulatory or criminal investigations, enforcement actions, fines and/or penalties.damage including reputational damage, all of which could have a material adverse effect on our operations, financial condition and prospects. Additionally, the current regulatory environment, with its increasedthe continuing heightened supervisory focus and associated enforcement activity, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs. TheseRelevant risks include: | – | | Regulators, agencies and authorities with jurisdiction over us, including the Bank of England (BoE),BoE, the PRA and the FCA, HM Treasury, HM Revenue & Customs (HMRC), the CMA, the Commission, the Information Commissioner’s Office, the Financial Ombudsman Service (FOS), the PSR, the Serious Fraud Office (SFO), the National Crime Agency (NCA) or the courts,Courts, may determine that certain aspects of our business have not been or are not being conducted in accordance with applicable laws or regulations, or, in the case of the FOS, with what is fair and reasonable in the FOS’s opinionopinion. Proposed changes in policy, law and regulation including in relation to SME dispute resolution and liability for authorised push payment fraud and unauthorised payment fraud, may have significant consequences and lead to material operational and compliance costs. |
| – | | GivenAn adverse finding by a regulator, agency or authority could result in the recentneed for extensive changes in systems and controls, business policies, and practices coupled with suspension of sales, restrictions on conduct of business and operations, withdrawal of services, customer redress, fines and reputational damage. |
| – | | The increased focus on competition law in financial services and concurrent competition enforcement powers for the FCA and PSR there is an increased focus on competition law in financial services which may increase the likelihood of competition law related inquiries or investigationsinvestigations. |
| – | | The alleged historical or current misselling of financial products, such as Payment Protection Insurance (PPI), including as a result of having sales practices and/or rewards structures that are deemed to have been inappropriate, presents a risk of civil litigation (including claims management company driven legal campaigns) and/or in enforcement action (including fines) or requires us to amend sales processes, withdraw products or provide restitution to affected customers, all of which may require additional provisions to be recorded in our financial statements and could adversely impact future revenues from affected productsproducts. |
| – | | We hold bank accounts for entities that might be or are subject to scrutiny from various regulators and authorities, including the SFO, the NCA and regulators in the US and elsewhere, which could lead to our conduct being reviewed as part of any such scrutinyscrutiny. |
| – | | We may be liable for damages to third parties harmed by the conduct of our business. For competition law, there are efforts by governments across Europe to promote private enforcement as a means of obtaining redress for harm suffered as a result of competition law breaches. Consequently, since 1 October 2015,Under the Consumer Rights Act, has allowedthere is scope for class actions to be used to allow the claims of a whole class of claimants to be heard in a single action in bothfollow-on and standalone competition cases. |
We are from time to time subject to certain legal or regulatory investigations, and claims (civil and criminal) and party to certain legalinquiries or proceedings brought by private individuals or regulators or governmental authorities in the normal course of our business, including in connection with our lending and payment activities, treatment of customers, relationships with our employees, financial crime, and other commercial or tax matters. These canmay be brought against us under UK legal or regulatory processes, or in the UK courts,under legal or under regulatory processes in other jurisdictions, such as the EU and the US, where some Santander UK group entities operate.overseas regulators and authorities may have jurisdiction by virtue of our activities or operations. In view of the inherent difficulty of predicting the outcome of legal matters andor regulatory investigations and actions,proceedings, particularly where theopportunistic claimants or authorities seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, or where the approaches of regulators or authorities to legal or regulatory issues and sanctions applied are subject to change, we cannot state with confidence what the eventual outcome of theseany pending matters will be or what the eventual loss, fines, restrictions and/or penalties related to each pending matter may be and theseany such pending matters are not disclosed by name because they are under assessment. We believe that we haveOur provisions in respect of any pending legal or regulatory proceedings are made adequate provisions related to these various claims, investigations and legal proceedings where we are reasonably able to estimate them.in accordance with relevant accounting requirements. These provisions are reviewed periodically. However, in light of the uncertainties involved in such claims, investigations andlegal or regulatory proceedings, there can be no assurance that the ultimate resolution of these matters will not exceed the provisions currently accrued by us. As a result, the outcome of a particular matter (whether currently provided or otherwise) may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period. The FCA carries out regular and frequent firm-specific and thematic 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, restrictions on conduct of business and operations, withdrawal of services, customer redress, fines and reputational damage.
Failure to adequately manage the risks arising in connection with our obligations under existing applicable law and regulation or failing to properly implement new applicable law and regulation could result in significant losses including in relation to administrative, regulatory or criminal sanctions and civil penalties, as well as reputational damage, all of which could have a material adverse effect on our operating results, financial condition and prospects.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | > Risk factors |
Potential intervention by the FCA, the PRA, the CMA or an overseas regulator may occur, particularly in response to customer complaints The PRA and the FCA continue to have an outcome-focused regulatory approach. This involves proactive intervention, investigation and enforcement, and punitive penalties for infringement. As a result, we and otherPRA-authorised orFCA-authorised firms continue to face increased supervisory intrusion and scrutiny (resulting in higher costs, including supervision fees), and in the event of a breach of relevant law or regulation, we are likely to face more stringent penalties and regulatory actions. The developing legal and regulatory regime in which we operate requires us to be compliant across all aspects of our business, including the training, authorisation and supervision of personnel, systems, processes and documentation. If we fail to be compliant with relevant law or regulation, there is a risk of an adverse impact on our business from more proactive regulatory intervention (including by any overseas regulator which establishes jurisdiction), investigation and enforcement activity leading to sanctions, fines, civil or criminal penalties, or other action imposed by or agreed with the regulatory authorities, as well as increased costs associated with responding to regulatory inquiries and defending regulatory actions. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss for example as a result of the misselling of a particular product, or through incorrect application or enforcement of the terms and conditions of a particular product or in connection with a competition law infringement. In particular, the FCA has operational objectives to protect consumers and to promote competition, and it is taking a more interventionist approach in its increasing scrutiny of product terms and conditions and monitoring compliance with competition law. FSMA (as amended by the Financial Services Act 2012) gives the FCA the power to make temporary product intervention rules either to improve a firm’s systems and controls in relation to product design, product management and implementation, or to address problems identified with products which may potentially cause significant detriment to consumers because of certain product features or firms’ flawed governance and distribution strategies. Such rules may prevent firms from entering into product agreements with consumers until such problems have been rectified. Since April 2015 the FCA (and the PSR) also has concurrent competition law enforcement powers. This is in addition to the CMA, the UK’s main competition authority, and the Commission which continue to have jurisdiction, respectively, to enforce competition law infringements in the UK or which have an effect on trade between EU Member States. Following a report by the National Audit Office, the CMA has stated it will seek to shift its focus toward enforcement of competition law breaches. As a result, the UK financial services sector now operates in an environment of heightened competition law scrutiny. Under the Financial Services Act 2010, the FCA also has the power to impose its own customer redress scheme on authorised firms, including us, if it considers that consumers have suffered loss or damage as a consequence of a regulatory failing, including misselling. In recent years there has been FCA focus on the misselling of PPI. In November 2015, the FCA issued a consultation paper (CP15/39) outlining its proposed approach to PPI in light of the 2014 decision of the Supreme Court in Plevin v Paragon Personal Finance Ltd (Plevin) and its proposal to set a two year deadline for PPI claims. In Plevin, the Supreme Court ruled that a failure to disclose a large commission payment on a single premium PPI policy sold in connection with a secured personal loan made the relationship between the lender and the borrower unfair under section 140A of the Consumer Credit Act 1974 (CCA). We applied our interpretation of the proposed rules and guidance in CP15/39 to our assumptions, and made a £450m provision charge in December 2015, notwithstanding the ongoing nature of the consultation. New legislation was introduced in 2015 which has the effect of restricting the corporation tax deductibility for a large proportion of this cost (for more information see the risk factor entitled ‘Changes in taxes and other assessments may adversely affect us’). In August 2016, the FCA issued feedback on CP15/39 and commenced a further consultation (CP16/20) on amendments to the proposed rules and guidance set out in CP15/39, addressing (among other things) the inclusion of profit share in the FCA’s proposed approach to the assessment of fairness and redress and the extension of the deadline for making PPI-related complaints to the end of June 2019. In December 2016 we made an additional £114m provision charge, which represented our best estimate of the cost of future PPI complaints, taking into account the FCA’s proposals in CP16/20. On 2 March 2017, the FCA published its policy statement (PS17/3) and final rules and guidance, confirming that there would be a two year deadline for PPI complaints, and that this would take effect from 29 August 2017, and include the commencement of a consumer communications campaign. The FCA’s approach to Plevin/unfair relationships under s140A CCA remains largely as set out in CP16/20, so profit share is included in the FCA’s approach to the assessment of fairness and redress. In addition, firms are nowwere required to write to customers whose misselling complaints were previously rejected, and who are within scope of s140A CCA, to inform them of their right to complain again in light of Plevin. The PPI provision was increased by a further £32m in March 2017 to take account of PS17/3 and the FCA’s final rules and guidance. In June 2017, we made a further net charge of £37m, following a review of claims handling procedures in relation to a specific PPI portfolio including the impact of a past business review. In Q4 2017, we made a further PPI provision of £40m, relating to an increase in estimated future claims activity following the commencement of the FCA advertising campaign for PPI. 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 rate at which new complaints arise, the length of any complaints, the content and quality of the complaints (including the availability of supporting evidence) and the average uphold rates and redress costs. We can make no assurance that expenses associated with PPI complaints will not exceed the provisions made relating to these claims. More generally, we can make no assurance that estimates for potential liabilities, based on the key assumptions used, are correct, and the reserves taken as a result may prove inadequate. If additional expenses that exceed provisions for PPI liabilities or other provisions were to be incurred, these expenses could have a material adverse effect on our operating results,operations, financial condition and prospects. If additional expenses that exceed provisions for PPI liabilities or other provisions were to be incurred, these expenses could have a material adverse effect on our operations, financial condition and prospects. For further information about the provisions for PPI complaint liabilities and other conduct remediation, see Note 2730 to the Consolidated Financial Statements. The potential financial impact may be relevant to any future industry-wide misselling or other infringement that could affect our businesses. Any such issues may lead from time to time to: (i) significant costs or liabilities; and (ii) changes in the practices of such businesses which benefit customers at a cost to shareholders. Decisions taken by the FOS (or any equivalent overseas regulator that has jurisdiction) could, if applied to a wider class or grouping of customers, have a material adverse effect on our operating results,operations, financial condition and prospects. The Financial Services and Markets Act 2000 (Designated Consumer Bodies) Order 2013 (the Designated Consumer Bodies Order) was made on 16 December 2013 and came into force on 1 January 2014. The Designated Consumer Bodies Order designates the National Association of Citizens Advice Bureaux, the Consumers’ Association, the General Consumer Council for Northern Ireland and the National Federation of Self Employed and Small Businesses as consumer bodies that may submit a ‘super-complaint’ to the FCA. A ‘super-complaint’ is a complaint made by any of these designated consumer bodies to the FCA on behalf of consumers of financial services where it considers that a feature, or a combination of features, of the market for financial services in the UK is seriously damaging the interests of these customers. Complaints about damage to the interests of individual consumers will continue to be dealt with by the FOS. If a ‘super-complaint’ were to be made against a Santander UK group entity by a designated consumer body under the Designated Consumer Bodies Order, any response published or action taken by the FCA could have a material adverse effect on our operating results,operations, financial condition and prospects. Given the: (i) requirement for compliance with an increasing volume of relevant laws and regulation; (ii) more proactive regulatory intervention and enforcement and more punitive sanctions and penalties for infringement; (iii) inherent unpredictability of litigation; and (iv) evolution of the jurisdiction of FOS and related impacts (including the changes proposedidentified by the FCA in a consultation paper (CP18/3)the policy statements (PS 18/21) on 22 January16 October 2018 proposingand (PS18/22) on 14 December 2018, setting out changes to the eligibility criteria to access FOS), it is possible that related costs or liabilities could have a material adverse effect on our operating results,operations, financial condition and prospects.
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 BoE, the PRA and the FCA (and their successor bodies) with a variety of powers for dealing with UK deposit taking institutions (and, in certain circumstances, their holding companies) that are failing or likely to fail, including: (i) to take a bank or bank holding company into temporary public ownership; (ii) to transfer all or part of the business of a bank to a private sector purchaser; or (iii) to transfer all or part of the business of a bank to a ‘bridge bank’. The special resolution regime also comprises a separate insolvency procedure and administration procedure each of which is of specific application to banks. These insolvency and administration measures may be invoked prior to the point at which an application for insolvency proceedings with respect to a relevant institution could be made.
| | | | Annual Report 2018 | Other information for US investors | | |
In addition, pursuant to amendments made to the Banking Act, which came into force on 1 August 2014, provision has been made for various tools to be used in respect of a wider range of UK entities, including investment firms and certain banking group companies, provided that certain conditions are met. Secondary legislation specifies that the Banking Act powers can be applied to investment firms that are required to hold initial capital of€730,000 or more and to certain UK incorporatednon-bank companies in the Group.Santander UK group. 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, among other things: (i) result in a compulsory transfer of shares or other securities or property of the Company or such other entity; (ii) impact on the rights of the holders of shares or other securities in the Company or such other entity or result in the nullification or modification of the terms and conditions of such shares or securities; or (iii) result in thede-listing of the shares and/or other securities of the Company or such other entity in the Santander UK group. In addition, such an order may affect matters in respect of the Company or such other entity and/or other aspects of the shares or other securities of the Company or such other entity in the Santander UK group, which may negatively affect the ability of the Company or such other entity to meet its obligations in respect of such shares or securities. 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‘bail-in power’. On 6 May 2014, the Council adopted the EU Bank Recovery and Resolution Directive (BRRD), which contains a similarbail-in power and requires EU Member States to provide resolution authorities with the power to write down the claims of unsecured creditors of a failing institution and to convert unsecured claims to equity (subject to certain parameters). The UK Government decided to implement the BRRDbail-in power from 1 January 2015, with the final phase of rules implemented on 1 January 2016. The UKbail-in power is an additional power available to the UK resolution authorities under the special resolution regime provided for in the Banking Act to enableAct. This enables 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 abail-in compensation order. Such an order which iswould be 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 thebail-in power. Thebail-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 relevant institution under resolution and the power to convert certain liabilities into shares (or other instruments of ownership) of the relevant institution. The conditions for use of the UKbail-in power are generally that (i) the regulator determines the relevant institution is failing or likely to fail; (ii) it is not reasonably likely that any other action can be taken to avoid such relevant institution’s failure; and (iii) the relevant UK resolution authority determines that it is in the public interest to exercise thebail-in power. Certain liabilities are excluded from the scope of thebail-in powers, including liabilities to the extent that they are secured. 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 UKbail-in power. The insolvency treatment principles are that: (i) the exercise of the UKbail-in power should be consistent with treating all liabilities of the relevant 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 UKbail-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 UKbail-in power, it must report to the Chancellor of the Exchequer stating the reasons for its departure. Thebail-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 Santander UK group, regardless of when they were issued. Accordingly, thebail-in power under the Banking Act and the BRRD could be exercised in respect of our debt securities. Public financial support would only be used as a last resort, if at all, after having assessed and exploited, to the maximum extent practicable, the resolution tools including thebail-in tool, and the occurrence of circumstances in whichbail-in powers would need to be exercised in respect of us would have a material adverse effect on our operating results,operations, financial condition and prospects. The BRRD also contains a mandatory write down power which requires EU 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 ofnon-viability by permanently writing down Tier 1 and Tier 2 capital instruments issued by such institutions and/or their EEA parent holding companies, or converting those capital instruments into shares (or other instruments of ownership). The mandatory write down provision has been implemented in the UK through the Banking Act. Before taking any form of resolution action or applying any resolution power set out in the BRRD, the UK resolution authorities have the power (and are obliged when specified conditions are determined to have been met) to write down, or convert Tier 1 and Tier 2 capital instruments issued by the relevant institution into CET1 capital instruments before, or simultaneously with, the entry into resolution of the relevant entity. These measures could be applied to certain of our debt securities. The occurrence of circumstances in which write down powers would need to be exercised in respect of us would be likely to have a negative impact on our business. In contrast to the creditor protections afforded in the event of thebail-in powers being exercised, holders of capital instruments will not be entitled to the ‘no creditorworse-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 abail-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 thebail-in powers in resolution, resulting in their cancellation, significant dilution or transfer away from the investors therein.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
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, these ex ante powers would have a material adverse effect on our operating results,operations, financial condition and prospects.
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,operations, 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 PRA. We are required to maintain a minimum ratio of Common Equity Tier 1 (CET1) capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and Tier 1 capital to total adjusted assets for leverage monitoring purposes. Any failure by us to maintain such ratios above prescribed regulatory minimum levels may result in administrative actions or sanctions. These could potentially include requirements on us to cease all or certain lines of new business, to raise new capital resources or, in certain circumstances, a requirement for our existing capital instruments (potentially including our debt securities) to be subjected tobail-in or write down (for more information, see the risk factor entitled ‘Bail-in‘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 Capital Requirements Directive IV (CRD IV Directive) and the Capital Requirements Regulation (the CRR and together with the CRD IV Directive, CRD IV) implemented changes proposed by the Basel Committee on Banking Supervision (the Basel Committee) to the capital adequacy framework, known as ‘Basel III’ in the EU. The CRR is directly applicable in each EU Member State and does not therefore require national implementing measures, whilst the CRD IV Directive has been implemented by EU Member States through national legislative processes. CRD IV was published in the Official Journal on 27 June 2013 and came into effect on 1 January 2014, with particular requirements expected to be fully effective by the end of 2019. CRD IV substantially reflects the Basel III capital and liquidity standards and facilitates the applicable implementation timeframes. On 19 December 2013, the PRA published the initial version of its rules and supervisory statements associated with the implementation of CRD IV, which cover prudential rules for banks, building societies and investment firms. Binding technical standards adopted by the European Commission have also impacted, and may further impact, the capital requirements which apply under CRD 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 have 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 CET1 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. 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 counter-cyclical, 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. In March 2017,2018, the BoE published its guidance on its 20172018 stress tests, which contained both anthe annual cyclical scenario and a new biennial exploratory scenario, the latter assessing the banks’ long-term resilience to financial risks.scenario. The BoE published results of the stress test in November 2017.2018. Though the results of the PRA’s 20172018 stress test did not impact on the level of capital that we are required to hold, the PRA could, in the future, as a result of stress testing exercises (both in the UK and EU wide) and as part of the exercise of UK macro-prudential capital regulation tools, or through supervisory actions (beyond the changes described below), require UK banks and banking groups, including us, to increase our/their capital resources further. The Financial Services Act 2012 (the FS Act) empowers the Financial Policy Committee of the BoE (FPC), which is asub-committee of the Court of Directors of the BoE, to give directions to the PRA and the FCA so as to ensure implementation of macroprudential measures intended to manage systemic risk. For the UK, the FPC sets the countercyclical capital buffer rate on a quarterly basis. Following its meeting in June 2017, the FPC announced that the UK countercyclical capital buffer rate would be increased from 0% to 0.5%, with binding effect from June 2018. On 28 November 2017, it further increased the level to 1% with binding effect from November 2018. As a consequence of our UK-focused business, ourFollowing its meetings on 20 and 27 November 2018, the FPC maintained the UK countercyclical capital buffer rate will reflect substantially all of this increase.at 1% and indicated it stood ready to move the rate in either direction as the risk environment evolved. The FS Act also provides the FPC with certain other macro-prudential tools for the management of systemic risk. Since 6 April 2015, these tools have included powers of direction relating to leverage ratios. In July 2015, the FPC made certain directions to the PRA in relation to the leverage ratio. In December 2015, the PRA issued a policy statement setting out how it would implement the FPC’s direction and recommendations on the leverage ratio. All major UK banks and banking groups (including us) are required to hold enough Tier 1 capital (75% of which must be CET1 capital) to satisfy a minimum leverage requirement of 3.25% (following the PRA’s decision to increase the leverage ratio requirement from 3% to 3.25%, announced in October 2017) and enough CET1 capital to satisfy a countercyclical leverage ratio buffer of 35% of each bank’s institution-specific countercyclical capital buffer rate. The FPC has also previously directed the PRA to require UK globally systemically important banks(G-SIBs) and domestically systemically important banks, building societies andPRA-regulated investment firms (including us) to hold enough CET1 capital to meet a supplementary leverage ratio buffer of 35% of the institution-specificG-SIB buffer rate or Systemic Risk Buffer (SRBF) for domestically systemically important banks. The supplementary leverage ratio buffer was implemented on 1 January 2016, in line with theG-SIB buffer rate imposed by the Financial Stability Board (FSB), with the SRBF to be applicable from 1 January 2019. The FPC finalised and published its SRBF framework on 25 May 2016. Systemic importance is measured using the total assets of ring-fenced banksub-groups in scope of the SRBF, with higher SRBF rates applicable as total assets increase. In December 2016, the PRA published its statement of policy on the SRBF relevant to ring-fenced bodies. The PRA will reviewbodies and in November 2018 published its statement of policy in 2018, followingfor reflecting the review ofSRBF for the FPC’s SRBF framework.UK Leverage Ratio. The FPC can also direct the PRA to adjust capital requirements in relation to particular sectors through the imposition of sectoral capital requirements. Action taken in the future by the FPC in exercise of any of its powers could result in the regulatory capital requirements applied to us being further increased.
In June 2017, the PRA issued a consultation (CP11/17) proposing to implement recommendations made by the FPC in the same document, that the PRA increase the minimum leverage ratio to 3.25%. In that consultation document, the PRA confirmed that, as currently, firms will need to meet the increased requirement with Tier 1 capital, at least 75% of which must be in the form of CET1.
Regulators in the UK and worldwide have also proposed that additional loss absorbency requirements should be applied to systemically important institutions to ensure that there is sufficient loss absorbing and recapitalisation capacity available in resolution. The BRRD requires that EU Member States ensure that EU banks meet a Minimum Requirement for Eligible Liabilities (MREL). The BRRD was transposed into UK law in January 2015, with the provisions on MREL taking effect from 1 January 2016. On 9 November 2015, the FSB also published its final Total Loss-Absorbing Capital (“TLAC”) standards for G-SIBs. On 11 December 2015, the BoE published a consultation paper on its proposed statement of policy on its The BoE’s approach to setting MRELa minimum requirement for own funds and eligible liabilities (MREL) Policy Statement was published in November 2016 and was subsequently updated in June 2018. This sets out how the PRA publishedBoE expects to use its power to direct a consultation paper‘relevant person’ to maintain a minimum requirement for own funds and a draft supervisory statement on the relationship between MREL and capital and leverage buffers.eligible liabilities (MREL). The BoE has indicated that it will set MREL on a case-by-case basis, and that it intendsBank is required to set MREL for G-SIBs as necessaryall institutions and will set the loss absorption amount to implementcover the TLAC standard. losses that would need to be absorbed up to and in resolution. MREL eligible liabilities should be issued externally from the resolution entity.
| | | | Annual Report 2018 | Other information for US investors | | |
There are two types of MREL: ‘external MREL’, issued by a resolution entity, and internal MREL, issued by legal entities in a group that are not themselves resolution entities. Should a firm fail, external MREL helps to ensure that the firm’s own financial resources can be used to absorb losses and recapitalise the business, so that it can continue to provide critical functions without relying on public funds. Internal MREL provides for the recapitalisation of subsidiaries and has the effect of passing up losses within the group, so that they can be absorbed by the shareholders and creditors of the resolution entity through the use of resolution tools. The BoE has also indicated that it intendsexpects banks to set consolidatedcomply withend-state MREL generally no higher than institutions’ current regulatory minimum capital requirements in the period prior to the interim requirement coming into force and consequently there should be no immediate change in regulatory requirements for loss absorbency capacity. For most institutions, the BoE proposes to set a final MREL conformance date of 1 January 2020, although it expects UK G-SIBs, and UK subsidiaries of G-SIBs which are resolution entities (including Santander UK) to meet the interim TLAC minimum requirement by 1 January 2019. In November 2016,2022, with the BoE published its responsesfollowing interim transition (noting scalars may apply to the consultation (thePolicy Statement). A key change to the BoE’s policy oninternal MREL isamounts): From 1 January 2019 UK resolution entities that firmsareG-SIBs will now be required to meet the interim MRELminimum requirements byset out in the FSB TLAC standard, being the higher of 16% of RWAs or 6% of leverage exposures. The Santander UK group is part of aG-SIB Banking Group and as such will need to meet these minimum requirements. From 1 January 2020 and to meet full MREL requirements by 1 January 2022. The BoE expects to conduct a review of its general approach to calibrating MREL and to set the final transition date by the end of 2020. In May 2017, the BoE published indicative data on the minimum amount of MRELUK resolution entities that the larger UK banks and building societiesareG-SIBs orD-SIBs will be required to hold. Also in November 2016,maintain MREL equal to the PRA publishedhigher of: two times their Pillar 1 capital requirements and one times their Pillar 2Aadd-ons or if subject to a supervisory statement (SS16/16) on the relationship between MREL and regulatory buffers, in which the PRA set out its policy, based on key aspects of the FSB standards, that CET1 used to meet the MREL requirement cannot also be used to meet the CRD IV combined buffer, the PRA buffer or the leverage ratio buffers. However, a firm which does not have or expects that itrequirement, two times the applicable requirement.
From 1 January 2022:G-SIBs will not have sufficient CET1, in addition to the CET1 counted towards its MREL, to meet its CRD IV combined buffer or the PRA buffer can expect enhanced supervisory action and to be required to prepare a capital restoration plan. On 27 July 2017,meet an external MREL equivalent to the PRA published a consultation paper (CP15/17) on its proposals with regard to, amongst other things,higher of: two times the relationship betweensum of Pillar 1 and Pillar 2A, or the MREL and CRD IV combined buffer,higher of two times the PRA buffer and theapplicable leverage ratio buffers. In particular,requirement or 6.75% of leverage exposures. The BoE intends to take forward for internal MREL eligible liabilities the PRA proposes to update its previously expressed policies to clarify its expectations regardingrequirement that they be issued with a contractual trigger that provides the amount of CET1 that firms should not count simultaneously towards those buffer requirements and MREL (i.e. an amount equal to the sizeresolution authority of the usable buffer derived frommaterial subsidiary with the two going-concern regimes). On 6 July 2017, the FSB published its Guiding Principles on the Internal Total Loss-Absorbing Capacity of G-SIBs, suggesting that material subsidiaries of G-SIB groups issue internal TLAC (i.e. equity and TLAC compliant debt instrumentsopportunity to the resolution entitiesdirect a write-down and/or conversion in the group) so that losses and recapitalisation needs of material entities or sub-groups may be passed with legal certainty tocircumstances specified in the resolution entity of a G-SIB resolution group, without entry into resolution of the subsidiaries within the material sub-group. The BoE noted in its Policy Statement that it was not comprehensive with regard to the requirements relating to MREL. These issues included reporting, disclosure and the treatment of institutions’ holdings of MREL liabilities. The BoE noted that its work would continue to develop in this regard — as well as its approach to the calibration of MREL within groups (internal MREL) — taking into account international standards including, the FSB’s guidance on internal TLAC. The final impact of the TLAC and MREL requirements is not yet known and will depend on the way in which regulators of the Group choose to implement these requirements.Statement.
On 23 November 2016, the European Commission also published legislative proposals for amendments to CRD IV, the BRRD and the SRM and proposed an additional amending directive to facilitate the creation of a new asset class of “nonpreferred”‘nonpreferred’ senior debt. The package of reforms is aimed at further strengthening the resilience of EU credit institutions and is expected to enterbe finalised in 2019 with entry into force (with certain exceptions) no earlier than 2019.2020. Among other things, the proposed package of reforms includes proposals to introduce a binding 3% leverage ratio and a requirement for institutions that trade in securities and derivatives to have more risk- sensitiverisk-sensitive own funds. In line with the BoE’s Policy Statement and the PRA consultation, the proposed reforms also include measures to align the MREL requirements with the FSB TLAC standards. The proposed reforms are to be considered by the European Parliament and the Council of the EU and remain subject to change, although Directive 2017/2399 amending Directive 2014/59/EU, implementing the “non-preferred”‘non-preferred’ senior debt class came into force in December 2017. The final package of reforms may not include all elements of the proposals and new or amended elements may be introduced. Until the proposals are in final form, it is uncertain how they will affect us. Further, since 31 December 2014, the PRA has had the power under the FSMA to make rules requiring a parent undertaking of a bank to make arrangements to facilitate the exercise of resolution powers, including a power to require a group to issue debt instruments. Such powers could have an impact on the liquidity of our debt instruments and could materially increase our cost of funding. 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,operations, financial condition and prospects. These changes, which could affect the Santander UK group as a whole, include the EU implementation of the Basel Committee’s new market risk framework, which reflects rules made as a result of the Basel Committee’s fundamental review of the trading book. In addition, in December 2017 the Basel Committee published their finalisation of the Basel III framework, with proposed implementation from 1 January 2022. This includes the following elements: | – | | Revisions to the standardised approach for credit risk, credit valuation adjustment risk and operational risk to address certain weaknesses identified by the Basel Committee |
| – | | Additional constraints on the use of internal model approaches for credit risk, and removing the use of internal model approaches for credit valuation adjustment risk and operational risk |
| – | | The use of an output floor based on standardised approaches |
| – | | The introduction of a leverage ratio buffer for global systemically important banks and refinements to the definition of the leverage ratio exposure measure. |
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
The foregoing measures could have a material adverse effect on our operating results, and consequently, on our financial condition and prospects. There is a risk that changes to the UK’s capital adequacy regime (including any increase to minimum leverage ratios) may result in increased minimum capital requirements, which could reduce available capital for business purposes and thereby adversely affect our cost of funding, profitability and ability to pay dividends, continue organic growth (including increased lending), or pursue acquisitions or other strategic opportunities (alternatively we could restructure our balance sheet to reduce the capital charges incurred pursuant to the PRA’s rules in relation to the assets held, or raise additional capital but at increased cost and subject to prevailing market conditions). In addition, changes to the eligibility criteria for Tier 1 and Tier 2 capital may affect our ability to raise Tier 1 and Tier 2 capital and impact the recognition of existing Tier 1 and Tier 2 capital resources in the calculation of our capital position. Furthermore increased capital requirements may negatively affect our return on equity and other financial performance indicators. 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 more on our capital position and capital management, see ‘Risk review —– Capital risk’ on pages 119111 to 121.113. 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 otherwise 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. During the period 2008 to 2013, continued constraints in the supply of liquidity, including inter-bank lending, materially and adversely affected the cost of
funding our business. There can be no assurance that such constraints will not reoccur. Extreme liquidity constraints may affect our operations and our ability to fulfil regulatory liquidity requirements, as well as limit growth possibilities. 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. Our cost of funding is directly related to prevailing 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 be 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) and therefore on our operating results,operations, financial condition and prospects. In response to the financial crisis, central banks around the world, including the BoE, US Federal Reserve Bank (the Fed) and the ECB, made coordinated efforts to increase liquidity in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and ensuring that currency swaps markets remain liquid. Over the course of 20172018 central banks have signalled the start,either started or in some cases (such as the Fed) a continuation, ofcontinued to unwinding such stimulus. In additionstimulus, however towards the end of 2018 was that the near-term outlook for global growth had started to show signs of softening, this could lead to a slowdown in the expected tightening of global monetary policy. The BoE increased their Base Rate in August 2018 to 0.75%, this was the only UK rate rise on 2 November 2017,in 2018. Additionally the Bank of EnglandBoE voted to maintain the stock of the quantitative easing programme of £445bn of assets, comprising £10bn of corporate bonds and £435bn of gilts. In October 2017,December 2018, the ECB announcedconfirmed that it would reduceend its monthly volumeasset purchase programme. In the US, the Fed increased its short-term interest rate by 25 basis points in each of bond purchases from JanuaryMarch 2018, June 2018, September 2018 and December 2018 to€30bn (from€60bn). If these current facilities were rapidly removed 2.50%, and has forecast gradual additional interest rate increases in 2019. A rapid removal or significantly reduced, thissignificant reduction, in outstanding quantitative easing asset purchase programmes could have an adverse effect on our ability to access liquidity and on our funding costs. In the US, the Federal Reserve increased its short-term interest rate by 25 basis points in each of December 2016, March 2017, June 2017 and December 2017, and has forecast additional interest rate increases in 2018. In October 2013, the BoE updated its Sterling Monetary Framework to provide more transparent liquidity insurance support in exceptional circumstances. The Indexed Long-Term Repo Facility will now be available to support regular bank requirements for liquidity while the Discount Window Facility has been reinforced as support for banks experiencing idiosyncratic stress. The Collateralised Term Repo Facility will be made available to support markets in the event of a market wide liquidity stress. Further, on 4 August 2016,On 28 February 2018, the Bank of England announceddrawdown period closed for the BoE’s Term Funding Scheme(1) (TFS), which allowsallowed participants to borrow central bank reserves in exchange for eligible collateral.(1) At 31 December 2017,2018, we had drawn £8.5bn£10.8bn under the TFS. In addition to the TFS, we participated in the Funding for Lending Scheme (FLS). At 31 December 2017,2018, we had drawn £3.2bn£1.0bn of UK treasury bills under the FLS. The availability of the BoE facilities described above for UK financial institutions, to the extent that they provide us with access to cheaper and more attractive funding than other sources, reduces our reliance on retail and/or wholesale markets. It is our current working assumption that the TFS will close for drawdowns after 28 February 2018, as scheduled. However, toTo the extent that we makehave made use of these BoE facilities described above, any significant reduction or withdrawal of those facilities wouldcould increase our funding costs.
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 quantitative easing and/or lending schemes or an increase in base interest rates) could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us and, more generally, on our operating results,operations, financial condition and prospects. Further, 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 the financial services industry in general, confidence in the company specifically, the Company’s credit rating and the availability and extent of deposit guarantees, as well as competition between banks for deposits or competition with other products, such as mutual funds. A change in any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future, and therefore have a material adverse effect on our operating results,operations, financial condition and prospects. (1) | The drawdown period under the TFS ran from 19 September 2016 to 28 February 2018. The TFS was made available to banks and building societies that are participants in the Bank of England’s Sterling Monetary Framework and signed up to the Discount Window Facility. |
In our liquidity planning we assume that our customers will continue to make a volume of deposits with us (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are withdrawn at short notice or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, there may be a material adverse effect on our operating results,operations, financial condition and prospects. For additional information about our liquidity position and other liquidity matters, including the policies and procedures we use to manage our liquidity risks, see ‘Risk review —– Liquidity risk’ on pages 108103 to 118.105. A sudden or unexpected shortage of funds in the banking system could threaten the stability of the banking system, and lead to increased funding costs, a reduction in the term of funding instruments or require us to liquidate certain assets, thereby impacting our liquidity position and ability to pay our debts. If these circumstances were to arise, this could have a material adverse effect on our operating results,operations, financial condition and prospects. 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,operations, financial condition and prospects The PRA has responsibility for the micro-prudential regulation of banks and certain other financial institutions. 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. Under CRD IV, banks are, or under transitional measures will be, required to meet two new liquidity standards, consisting of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) metrics, which are aimed to promote: | – | | The short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario |
| – | | A longer-term resilience by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. |
| (1) | The drawdown period under the TFS ran from 19 September 2016 to 28 February 2018. The TFS was made available to banks and building societies that are participants in the Bank of England’s Sterling Monetary Framework and signed up to the Discount Window Facility. |
| | | | Annual Report 2018 | Other information for US investors | | |
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 was introduced in the UK on 1 October 2015. The PRA has opted to impose higher liquidity coverage requirements than the minimum required by CRD IV during the phase-in period to 1 January 2018. The current minimum requirement for UK banksLCR is set at 90% from 1 January 2017 and rising to 100% from 1 January 2018.. Our current liquidity position is in excess of the minimum requirements set by the PRA, however there can be no assurance that future changes to the applicable liquidity requirements would not have an adverse effect on our financial performance. NSFR In October 2014, the Basel Committee published its final NSFR standard. The NSFR has not yet been implemented within Europe (unlike the LCR). As such there is no formal NSFR requirement applicable to UK or other EU banks until such time as the European Commission adopts appropriate regulatory / regulatory/technical standards. The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. Banks are expected to hold an NSFR of at least 100% on an ongoing basis and report its NSFR at least quarterly. Ahead of its planned implementation, the NSFR will remain subject to an observation period. Santander UK monitors its NSFR on an ongoing basis and stands ready to comply with the standards once agreed. 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,operations, 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. At 31 December 2017,2018, approximately 1%2% of our total assets and 35%36% of our securities portfolio were comprised of debt securities issued by the UK Government. Any failure by the UK Government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on our operating results,operations, financial condition and prospects. We may suffer adverse effects as a result of the political, economic and sovereign debt tensions in the eurozone Conditions in the capital markets and the economy generally in the eurozone, though improving recently, continue to show signs of fragility and volatility. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies. This could have a material adverse effect on our operating results,operations, financial condition and prospects. The UK EU Referendum caused significant volatility in the global stock and foreign exchange markets (for more information, see the risk factorsfactor entitled ‘We are vulnerable to disruptions and volatility in the global financial markets’ and ‘Exposure to UK political developments, including the ongoing negotiations between the UK and EU, could have a material adverse effect on us’). This volatility couldre-occur depending on the outcome of the continuing exit negotiations. In the past, the ECB and European Council have taken actions with the aim of reducing the risk of contagion in the eurozone and beyond and improving economic and financial stability. Notwithstanding these measures, a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by the eurozone (and other) nations, which may be under financial stress. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be adversely affected, with wider possible adverse consequences for global financial market conditions. 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 economies, including as a result of Banco Santander SA, and other affiliates being situated in the eurozone. Concerns relating to sovereign defaults or a partial or completebreak-up of the European Monetary Union, including potential accompanying redenomination risks and uncertainties, may recur in light of the political and economic factors mentioned above. For a further description of our country risk exposures, including eurozone and peripheral eurozone exposures and redenomination risk, see ‘Risk review —– Country risk exposure’ on page 77.73. In addition, general financial and economic conditions in the UK, which directly affect our operating results,operations, financial condition and prospects, may deteriorate as a result of conditions in the eurozone.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
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 incidents of market-wide liquidity problems over the last 10 years 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. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on our operating results,operations, 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 operating results,operations, financial condition and prospects Credit ratings 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, the strength 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 operating results,operations, financial condition and prospects. For example, a credit rating downgrade could have a material adverse effect on 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 and other financial commitments, we may be required to maintain a minimum credit rating or otherwise our counterparties may be able to terminate such contracts or require the posting of collateral. Any of these results of a credit rating downgrade could, in turn, result in outflows and reduce our liquidity and have an adverse effect on us, including our operating results,operations, financial condition and prospects. For example, we estimate that at 31 December 2017,2018, if Fitch, Moody’s and Standard & Poor’s were concurrently to downgrade the long-term credit ratings of Santander UK plcthe Company by one notch, and thereby trigger a short-term credit rating downgrade, this could result in an outflow of £3.9bn£3.6bn of cash and collateral.collateral (2017: £3.9bn). A hypothetical two notch downgrade would result in a further outflow of £0.2bn of cash and collateral at 31 December 2017.2018 (2017: £0.2bn). These potential outflows are captured under the LCR regime. However, while certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they
depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, whether any downgrade precipitates changes to the way that the financial institutions sector is rated, and assumptions about the ratings of other financial institutions and the potential behaviours of various customers, investors and counterparties. Actual outflows will also depend upon certain other 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. Santander UK Group Holdings plc’s long-term debt is currently rated investment grade by the major rating agencies: Baa1 with positive outlook by Moody’s Investors Service, BBB with stable outlook by S&P Global Ratings and A with stable outlook by Fitch Ratings. The Company’s long-term debt is currently rated investment grade by the major rating agencies: Aa3 with stablepositive outlook by Moody’s Investors Service, A with stable outlook by S&P Global Ratings and AA+ with rating watch positivestable outlook by Fitch Ratings. If a downgrade of any Santander UK group member’s long-term credit ratings were to occur, it could also impact the short-term credit ratings of other members of the Santander UK group. There can be no assurance that the credit rating agencies will maintain our current credit ratings or outlooks. A failure to maintain favourable credit ratings and outlooks could increase our cost of funding, and adversely affect our interest margins, and reduce our ability to secure both long term and short term funding, any of which could have a material adverse effect on our operating results,operations, financial condition and prospects. In September 2017, Moody’s Investors Service downgraded the UK’s sovereign credit rating due to their concerns around the government’s fiscal consolidation plans and challenges to policy-making from the UK’s exit from the EU. ChangesNegative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could have a material adverse effect on our operating results, financial condition, prospects and the marketability and trading value of our securities. This might also impact on our own credit rating, borrowing costs and our ability to secure funding. ChangesNegative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could also have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and companies, further depressing economic activity, increasing unemployment and/or reducing asset prices.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially adversely affect us and our profitability 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: | – | | The value of our derivatives transactions |
| – | | The market value of our securities holdings |
| – | | The value of our loans and deposits |
| – | | The volume of loans originated. |
Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors. Variations in interest rates could affect the interest earned on our assets and the interest paid on our borrowings, thereby affecting our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. In addition, costs we incur as we implement strategies to reduce interest rate exposure could increase in the future (which, in turn, will impact our results). 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. Due to the historically low interest rate environment in the UK in recent years, the rates on many of our interest-bearing deposit products have been priced at or near zero, which may limit our ability to further reduce customer rates in the event of further cuts in BoE Base Rate and thus negatively impacting our margins. Notwithstanding the November 2017August 2018 increase in BoE Base Rate to 0.5%0.75%, if a generally low interest rate environment in the UK persists in the long term, it may be difficult to increase our net interest income, which will impact our results. LIBOR and other benchmarks are subject to national, international and other regulatory guidance and proposals for reform and transition to alternative rates. On 29 November 2017, the FCA announced that its Working Group on Sterling Risk-Free Rates will be mandated with implementing a broad-based transition to the Sterling Overnight Index Average (“SONIA”) over the next four years across sterling bond, loan and derivative markets, so that SONIA is established as the primary sterling interest rate benchmark. As set out in Andrew Bailey’s speech on 12 July 2018, the introduction of SONIA as the primary sterling interest rate benchmark is planned to take place before the end of 2021. Any such changes to, or replacement of benchmarks may cause them to perform differently than in the past, or may have other consequential effects on any of our rights and obligations which depend on such benchmarks. In particular, the potential transition from LIBOR to SONIA or the elimination of the LIBOR benchmark, or changes in the manner of administration of such benchmark, could require an adjustment to the terms of financial instruments to which the Santander UK group is a party and to such contractual obligations of the Santander UK group which relate to LIBOR. This could have a material adverse effect on our operations, financial condition and prospects. It is not yet clear whether LIBOR will cease to exist entirely before the end of 2021, whether the use of LIBOR will be made unlawful or impermissible in future, and whether there will be any transitional arrangements set out by law, regulation or market practice. In particular, it is not yet clear what the effect will be on legacy contracts and agreements. If LIBOR were to be discontinued or replaced without the regulators making clear provision for automatically transitioning legacy contracts and agreements, this could have a material adverse effect on our business.
| | | | Annual Report 2018 | Other information for US investors | | |
If LIBOR is replaced, ceases to exist or if the methodology for calculating LIBOR changes for any reason, interest rates on our floating rate obligations, loans, deposits, derivatives, and other financial instruments linked to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. In addition, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments linked to LIBOR rates. Any such issues relating to LIBOR or other benchmarks (including SONIA) could have a material adverse effect on our operations, financial condition and prospects. 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 resource is stated in pounds sterling and we do not fully hedge our capital position against changes in currency exchange rates. Although we seek to hedge most of our currency risk, through hedging and the purchase of cross-currency swaps, these hedges do not eliminate currency risk and we can make no assurance that we will not suffer adverse financial consequences as a result of currency fluctuations. The volatility in the value of the pound sterling following the result of the UK EU Referendum may persist as negotiations for exit continue and continued significant exchange rate volatility and the depreciation of the pound sterling in particular could have an adverse impact on our operating results and our ability to meet our US dollar and euro-denominated obligations, and which could have a material adverse effect on our operating results,operations, financial condition and prospects. We are also exposed to price risk in our investments in equity and debt securities in the banking book and in the trading portfolio.securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets, due to the continued economic uncertainty and sovereign debt tensions, has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity and debt securities and, depending on their fair value and future recovery expectations, could become a permanent impairment, which would be subject to write-offs against our results. To the extent any of these risks materialise, our net interest income or the market value of our assets and liabilities could be adversely affected. 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,operations, financial condition and prospects In the past 10 years, financial markets have been subject to periods of significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities, loans, derivatives and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting thenthe prevailing market conditions, may result in negative changes in the fair values of our financial assets. In addition, the value ultimately realised by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which could have a material adverse effect on our operating results,operations, financial condition and prospects. 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. 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,operations, 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 banking group, one of the main types of risks inherent in our business is credit risk. For example, an important feature of the Group’sour credit risk management system is to employ the Group’sour own credit rating system to assess the particular risk profile of a customer. This system is primarily generated internally, but, in the case of counterparties with a global presence, also builds off the credit assessment assigned by other Banco Santander Groupgroup members. As this process involves detailed analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgement on current or future credit risk behaviour of the Group’sour customers, the Group’sour employees may not always be able to assign a correct credit rating, which may result in a larger exposure to higher credit risks than indicated by our risk rating system. In addition, we continuously refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to detect all possible risks before they occur, or our employees may not be able to effectively implement our credit policies and guidelines due to limited tools available to us, which may increase our credit risk. Any failure to effectively implement, consistently monitor and refine our credit risk management systems may result in an increase in the level ofnon-performing loans and higher losses than expected, which could have a material adverse effect on our operating results,operations, financial condition and prospects.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
We are subject to various risks associated with our derivative transactions that could have a material adverse effect on our operating results,operations, financial condition and prospects 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 depend on our ability to develop adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyse and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on our operating results,operations, financial condition and prospects.
Operational risks, including risks relating to data and information collection, processing, storage and security, are inherent in our business Like other financial institutions with a large customer base, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as the personal information of other individuals, such as staff, and a large number of assets. Accordingly, our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our people, digital technologies, computer and email services, software and networks, as well asnetworks. We also rely on the secure processing, storage and transmission of confidential, sensitive personal data and other information using our computer systems and networks, and through the adoption of cloud computing services. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, human error, inadequate or failed internal control processes and systems or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequatedesigned inadequately or are circumvented such that our data and/or client records are incomplete, not recoverable or not securely stored. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure data and information processing, storage and transmission capabilities to prevent against information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted hacking. Adoption of cloud based computing services in order to improve technological resilience and cost-effectiveness could bring with it risks to the information we process if we do not take care to implement appropriate controls such as strong authentication and encryption. If we cannot maintain an effective and secure electronic data and information, management and processing system or if we fail to maintain complete physical and electronic records, this could result in regulatory sanctions, including under the General Data Protection Regulation, which will comecame into force on 25th25 May 2018. Any such failures or sanctions could result in serious reputational or financial harm to us, as well as to those whose data we hold, and could have a material adverse effect on our operating results,operations, financial condition and prospects. Infrastructure and technology resilience We take protective measures and continuously monitor and develop our systems to safeguard our technology infrastructure, data and information from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorised access, misuse, computer viruses or other malicious code and other events that could have a security impact. 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, and therefore have a material adverse effect on our operating results,operations, financial condition and prospects. Furthermore, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures. We expect our programmes of change to have an effect on our risk profile, both technological and regulatory. Whether it is the opportunities from adoption of cloud technology, systems to support important regulatory initiatives, or the desire to identify, prioritise and remove obsolete systems from operations, the operational risk associated with systems change is likely to increase and this will therefore remain an area of key focus in our risk management. There can be no assurance that we will not suffer material losses from such operational risks in the future, including those relating to any security breaches, which could have a material adverse effect on our operating results,operations, financial condition and prospects. Cyber security In particular, we have seen in recent years the computer systems of companies and organisations being targeted, not only by cyber criminals, but also by activists and rogue nation states. In common with other financial institutions, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Accordingly we have been and continue to be subject to a range of cyber-attacks, such as malware, phishing and denial of service, malware and phishing.service. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our electronic systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in order to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to effectively manage our cyber security risk, the impact could be significant and may include harm to our reputation and have an adverse effect on our operating results,operations, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. Factors such as failing to apply critical security patches from our technology providers, to manage out obsolete technology or to update our processes in response to new threats could give rise to these impacts. In addition, we may also be impacted by cyber-attacks against national critical infrastructures in the UK, for example, the telecommunications network. In common with other financial institutions we are dependent on such networks and any cyber-attack against these networks could negatively affect our ability to service our customers. As we do not operate these networks, we have limited ability to protect our business from the adverse effects of cyber-attack against them. Further, the domestic and global financial services industry, including key financial market infrastructure, may be the target of cyber disruption and attack by cyber criminals, activists and rogue states looking to cause economic instability. We have limited ability to protect our business from the adverse effects of cyber disruption or attack against our counterparties and key financial market infrastructure. If such a disruption or attack were to occur it could cause serious operational and financial harm to us.
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 and reputational harm that could materially and adversely affect our operating results,operations, financial condition and prospects. Further, our business is exposed to risk from potentialnon-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and cause serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. 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 have a material adverse effect on our operating results,operations, financial condition and prospects.
| | | | Annual Report 2018 | Other information for US investors | | |
We may fail to detect or prevent money laundering and other financial crime activities due to not correctly identifying our financial crime risks, failing to implement effective systems and controls to mitigate those risks or failing to recruit and retain resource with the necessary skills and experience. This could expose us to significant fines, additional regulatory scrutiny, restrictions on the conduct of our business and operations, increased liability, civil claims, criminal actions and reputational risk We are obligated to comply with applicable anti-money laundering (AML), anti-terrorism, anti-bribery and corruption, sanctions,anti-tax evasion and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to conduct customer due diligence (including in respect of sanctions and politically-exposed person screening), ensure account and transaction information is kept up to date and implement effective financial crime policies and procedures detailing what is required from those responsible in order to counter financial crime risks. We are also required to conduct financial crime training for our staff and to report suspicious transactions and activity to appropriate law enforcement. Over the last decade, financial crime risk has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML/CTF, anti-bribery and corruption and 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. Political and policy maker focus on the topic in the UK, EU and within international bodies has intensified over the past year. For more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operating results,operations, financial condition and prospects’. We have developed policies and procedures designed to detect and prevent the use of our banking network for money laundering and financial crime related activities. However, emerging technologies, such as cryptocurrenciesactivities, which are reviewed to ensure that all current requirements are fully reflected. The approach is also informed by intelligence assessment and blockchain, could limit our ability to trackrisk assessment, including the movementrecent UK Government National Risk Assessment of funds. Our ability to comply with the legal requirements depends on our ability to improve detectionMoney Laundering and reporting capabilitiesTerrorist Financing. The policies and reduce variation in control processes and oversight accountability. Theseprocedures require the implementation and embedding within the business of effective controls and monitoring, which requires ongoing changes to systems, technology and operational activities. Comprehensive and risk based financial crime training at a bank wide and business unit level is a key element of this, with the FCA providing guidance on expectations within its Financial Crime Guide. Financial crime is continually evolving, and the expectation of regulators is increasing (for more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operating results,operations, financial condition and prospects’). This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our staff to assist us by identifying such activities and reporting them, and our staff have varying degrees of experience in recognising criminal tactics and understanding the level of sophistication of criminal organisations. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight there remains a risk of regulatory breach and this could have a material adverse effect on our operating results,operations, financial condition and prospects. If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to pursue civil and criminal proceedings against us, to impose significant fines and other penalties on us, including requiring a complete review of our business systems,day-to-day supervision by external consultants, imposing restrictions on the conduct of our business and operations and ultimately the revocation of our banking licence, which could have a material adverse effect on our operating results,operations, financial condition and prospects. The reputational damage to our business and brand could be severe if we were found to have materially breached AML, anti-bribery and corruption 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. In addition, while we review our relevant counterparties’ internal policies and procedures (for example, under our correspondent banking relationships) with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-financial-crime procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without our (or our relevant counterparties’) knowledge. There are also risks that other third parties, such as suppliers, could be involved in financial crime. If we are associated with, or even accused of being associated with, financial crime (or a business involved in financial crime), then our reputation could suffer and/or we could become subject to civil or criminal proceedings that could result in penalties, sanctions and/or legal enforcement (including being added to “black lists”‘black lists’ that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results,operations, financial condition and prospects. As described in the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operations, financial condition and prospects’, there were a number of changes and updates to UK law in 2018 for financial crime. The divergence between the UK/EU and the US in regard to sanctions policy adds to the complexity in this area and poses potential risks. Constant monitoring of external laws and regulations is therefore a key area of focus to ensure internal policies, procedures and training are up to date with emerging requirements. At an operational level,geo-political, economic and social changes can provide opportunities to financial criminals and alter the risks posed to banks. Effective intelligence and monitoring systems within strengthened public/private partnerships to share knowledge on emerging risks are required to help mitigate these risks. However, there can be no guarantee that any intelligence shared by public authorities or other financial institutions will be accurate or effective in helping us to combat financial crime, and if, as a result, we fail to combat financial crime effectively then this could have a material adverse effect on our operations, financial condition and prospects.
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 our operating results,operations, financial condition and prospects 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 the Santander UK group and Banco Santander SA), and on our ability to upgrade and expand the capacity of our information technology on a timely and cost-effective basis. The proper functioning of our financial control, risk management, credit analysis and reporting, accounting, customer service, financial crime, conduct and compliance and other information technology systems, as well as the communication networks between branches and main data processing centres, are critical to our businesses and our ability to compete. Investments and improvements in our information technology infrastructure are regularly required in order to remain competitive. We cannot be certain that in the future we will be able to maintain the level of capital expenditure necessary to support the improvement, expansion or upgrading of our information technology infrastructure as effectively as our competitors; this may result in a loss of any competitive advantages that our information technology systems provide. Any failure to effectively improve, expand or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on our operating results,operations, financial condition and prospects.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
We may be exposed to unidentified or unanticipated risks despite our risk management policies, procedures and methods and to risk related to errors in our modelling 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 a further description of our risk management framework see the ‘Risk review’ on pages 5752 to 135.126. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our 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 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 include errors or are otherwise 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 elsewhere or seek to limit their transactions with us. This could have a material adverse effect on our operating results,operations, financial condition and prospects. Competition with other financial institutions could adversely affect us The markets for UK financial services are very competitive and we have seen strong competition from incumbent banks and large building societies. In addition, we face competition from a number of new entrants,non-banks and other providers. Management expects such competition to continue or intensify as a result of customer behaviour and trends, technological changes, competitor behaviour, new entrants (includingnon-traditional financial services providers such as large retail or technology companies or financial technology companies), new lending models and changes in regulation (including the recent introduction of Open Banking and changes arising from PSD2). We consider our competitive position in our management actions as appropriate, such as pricing and product decisions. Increasing competition could mean that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on our profitability, operating results,operations, financial condition and prospects. It may also negatively affect our operating results,operations, financial condition and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities. 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 our operating results,operations, financial condition and prospects 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 that they will be successful once they are offered to our customers. 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. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Technological changes may further intensify and complicate the competitive landscape and influence customer choices. 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 impact our operating results,operations, financial condition and prospects. 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 misselling or incorrect application of the terms and conditions of a particular product. This could in turn subject us to risks of potential legal action by our customers, or to intervention by our regulators. 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 known, 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. Any or all of the above factors, individually or collectively, could have a material adverse effect on our operating results,operations, financial condition and prospects.
| | | | Annual Report 2018 | Other information for US investors | | |
If the level ofnon-performing loans increases or the credit quality of our loans deteriorates in the future, or if our loan loss reserves are insufficient to cover loan losses, this could have a material adverse effect on our operating results,operations, financial condition and prospects 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 could continue to, negatively impact our operating results,operations, financial condition and prospects. In particular, the amount of our reportednon-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (the credit quality of which may turn out to be worse than we had anticipated), or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties, a general deterioration in the UK or global economic conditions, the impact of political events, events affecting certain industries or events affecting financial markets and global economies. We cannot be sure that we will be able to effectively control the level of impaired loans in, or the credit quality of, our total loan portfolio, which could have a material adverse effect on our operating results,operations, financial condition and prospects. Interest rates payable on a significant portion of our outstanding mortgage loan products fluctuate over time due to, among other factors, changes in the BoE Base Rate. As a result, borrowers with variable interest rate mortgage loans are exposed to increased monthly payments when the related mortgage interest rate adjusts upward. Similarly, borrowers of mortgage loans with fixed or introductory rates adjusting to variable rates after an initial period are exposed to the risk of increased monthly payments at the end of this period. This risk may be slightly greater following the BoE Base Rate increase to 0.5%increases in November 2017.2017 and 2018. Over the last few years both variable and fixed interest rates have been at historically low levels, which has benefited borrowers of new loans and those repaying existing variable rate loans regardless of special or introductory rates. Future increases in borrowers’ required monthly payments may result in higher delinquency rates and losses related tonon-performing loans 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 the Group,Santander UK group, which could have a material adverse effect on our operating results,operations, financial condition and prospects.
Our current loan loss reserves may not be adequate to cover an increase in the amount ofnon-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 various factors affecting the quality of our loan portfolio, including our borrowers’ financial condition, repayment abilities, 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 global financial crisis 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 provide any assurance that our current or future loan loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above mentioned factors differ from actual developments we may need to increase our loan loss reserves, which may adversely affect our operating results,operations, financial condition and prospects. Additionally, in calculating our loan loss reserves, we employ qualitative tools and statistical models which may not be reliable in all circumstances and which are dependent upon data that may not be complete. If we are unable to control or reduce the level of ournon-performing or poor credit quality loans, this could have a material adverse effect on our operating results,operations, financial condition and prospects. Our loan portfolio is subject to risk of prepayment, which could have a material adverse effect on our operating results,operations, financial condition and prospects Our loan portfolio is subject to prepayment risk resulting from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on our operating results,operations, financial condition and prospects. As a result we could be required to amortise net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income and there is a risk that we are not able to accurately forecast amortisation schedules for these purposes which may affect our profitability. Prepayment risk also has a significant adverse impact on credit card and collateralised mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. The risk of prepayment and our ability to accurately forecast amortisation schedules is inherent to our commercial activity and an increase in prepayments or a failure to accurately forecast amortisation schedules could have a material adverse effect on our operating results,operations, financial condition and prospects. 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 77%79% of our loan portfolio at 31 December 2017.2018. As a result, we are highly exposed to developments in the residential property market in the UK. House price growth has slowed since the UK EU Referendum, most noticeably in London, although UK house prices have generally continued to be supported by certain economic fundamentals including low mortgage rates (notwithstanding the recent BoE Base Rate increase to 0.5%0.75%) and low unemployment rates. Nevertheless, any increase in house prices may be limited given low levels of consumer confidence and negativelow levels of real earnings growth. The depth of the previous house price declines as well as the continuing uncertainty as to the extent and sustainability of the UK economic recovery will mean that losses could be incurred on loans should they go into possession. 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 sufficientlyup-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,operations, financial condition and prospects.
If we are unable to manage the growth of our operations, this could have a material adverse impact on our profitability We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses when necessary. From time to time, we evaluate acquisition, disposal, 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 relating to the acquired businesses, including legal claims and regulatory investigations. We can give no assurances that our expectations with regards to integration and synergies will materialise. We cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth decisions including our ability to: – Manage efficiently our operations and employees of expanding businesses – | | Manage efficiently our operations and employees of expanding businesses |
– | | Maintain or grow our existing customer base |
– | | Fully due diligence and assess the value, strengths and weaknesses of investment or acquisition candidates |
– | | Finance strategic opportunities, investments or acquisitions |
– | | Fully integrate strategic investments, or newly-established entities or acquisitions, in line with our strategy |
– | | Align our current information technology systems adequately with those of an enlarged group |
– | | Apply our risk management policy effectively to an enlarged group |
– | | Manage a growing number of entities without over-committing management or losing key personnel. |
– Maintain or grow our existing customer base – Formulate and execute our strategy – Fully due diligence and assess the value, strengths and weaknesses of investment or acquisition candidates – Finance strategic opportunities, investments or acquisitions – Fully integrate strategic investments, or newly-established entities or acquisitions, in line with our strategy – Align our current information technology systems adequately with those of an enlarged group – Apply our risk management policy effectively to an enlarged group – Manage a growing number of entities without over-committing management or losing key personnel. 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,operations, financial condition and prospects. In addition, any acquisition, disposal or venturepartnership 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 our operating results,operations, financial condition and prospects.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
Goodwill impairments may be required in relation to businesses acquired businessesfrom third parties We have made business acquisitions from third parties in past 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 2016 or 2017,the current period and prior periods presented, there can be no assurances that we will not have to write down the value attributed to goodwill in the future, which could adversely affect our results and net assets. 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, theThe UK’s Financial Services Compensation Scheme (FSCS) was established under FSMA and is the UK’s statutorycompensation fund of last resort for customers of authorised financial services firms. The FSCS canIt may pay compensation to customers if a PRA-authorised or FCA-authorised firm is unable, or likely to be unable, to pay claims against it. This is usually because it (for instance, an authorised bank is unable to pay claims by depositors).has stopped trading or has been declared in default. The FSCS is funded by levies on firms authorised by the PRA or the FCA (i.e. participant firms), including members of the Santander UK group.
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. The substantial majority of the principal should 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, the FSCS 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 capital contribution in each of 2013, 2014, 2015 and 2016. In the year ending 31 December 2016,2017, our contribution was £34m.£23m. For the year ended 31 December 2017, our2018, we made a contribution decreased, and we charged £1mof £5m to the interest cost of the levy, and, on our income statement, in respectreleased £4m of provisions to reflect the costs ofreduced amount now expected to be charged for the FSCS.remaining interest. The FSCS also has the power to impose ‘management expensesHowever, 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 participant firms or increases the levies to be paid by such firms or the frequency at which the levies are to be paid, the associated cost to us could have a material adverse effect on our operating results,operations, financial condition and prospects. Since 2008, measures taken to protect the depositors of deposit-taking institutions involving the FSCS, such as the borrowing from HM Treasury mentioned above, have resulted in a significant increase in the levies made by the FSCS on the industry and such levies may continue to go up if similar measures are required to protect depositors of other institutions. In addition, following amendments to the preferred credit status of depositors that came into force on 31 December 2014, the FSCS stands in the place of depositors of a failing institution andbut has preferred status over an institution’s other creditors.
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 announced its intention that revisions to the EU Deposit Guarantee Scheme Directive should be adopted by the end of 2013. The recast EU Deposit Guarantee Scheme Directive (the DGSD) entered into force on 2 July 2014, introducing a tighter definition of deposits, a requirement that the Deposit Guarantee Scheme pay customers within a week, and a requirement that banks must be able to provide information on the aggregated deposits of a depositor. These revisions are likely to affect the methodology employed by the FSCS for determining levies on institutions. In addition, the DGSD also required EU Member States to ensure that, by 3 July 2014, the available financial means of deposit guarantee schemes reach a minimum target level of 0.8% of the covered deposits of their members and requires deposit guarantee schemes to be ex-ante funded. Between April and July 2015, the PRA published its final rules implementing the DGSD, most of which took effect on 3 July 2015. The final rules enable the FSCS to use the existing bank levy to meet the ex-ante funding requirements in the DGSD. Changes as a result of this may affect our profitability.
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 members of the Santander UK group. The levies may also increase. In addition, it is possible that other jurisdictions where we operate could introduce or amend their similar compensation, contributory or reimbursement schemes. As a result of any such developments, we may incur additional costs and liabilities which may adversely affect our operating results,operations, financial condition and prospects.
| | | | Annual Report 2018 | Other information for US investors | | |
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. Some of these changes may be specific to the banking/financial services sectors and therefore result in us incurring an additional tax burden when compared to other industry sectors. 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 ournon-performing credit portfolio. The following paragraphs discuss fourfive major reforms (the Bank Levy, Restriction of Tax Deductions for Compensation Payments, Corporation Tax Surcharge and two possible future changes in the taxation of banking groups in the EU) which could have a material adverse effect on our operating results,operations, financial condition and prospects, and the competitive position of UK banking groups, including us. Bank Levy HM Treasury introduced an annual UK bank levy (the Bank Levy) via legislation in the Finance Act 2011. The Bank Levy is imposed on (among other entities) UK banking groups and subsidiaries, and therefore applies to us. The amount of the Bank Levy is based on a bank’s total liabilities, excluding (among other things) Tier 1 capital, insured retail deposits and repos secured on sovereign debt. With effect from 1 April 2015, the Finance Act 2015 increased the rate (for short-term liabilities) to 0.21% (a reduced rate is applied to long-term equity and liabilities). Subsequently the Finance (No.2) Act 2015 (Finance No.2 Act), which was enacted on 18 November 2015, reduced the Bank Levy rate from 0.21% to 0.18% from 1 January 2016 with subsequent annual reductions to 0.1% from 1 January 2021.
Restriction of Tax Deductions for Compensation Payments The Finance (No.2) Act implemented measures so that certain compensation expenditure incurred by banking companies (including ANTS and the Company) on or after 7 July 2015 is: (i) no longer deductible for corporation tax purposes; and (ii) subject to a deemed taxable receipt equivalent to 10% of such compensation expenditure. Corporation Tax Surcharge With effect from 1 January 2016, banks (as defined in the Corporation Tax Act 2010 and including Santander UK plc,the Company, ANTS and Cater Allen Limited) are subject to a surcharge at a rate of 8% on their taxable profits for corporation tax purposes (with certain reliefs added back and subject to annual allowance). European Taxation On 14 February 2013, the Commission published a proposal (the Commission Proposal) for a directive for a common system of financial transactions tax (FTT) in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the Participating Member States). However, Estonia has since stated that it will not participate. The FTT may give rise to tax liabilities for Santander UK plc or Santander UK Group Holdings plc with respect to certain transactions (including concluding swap transactions and/or purchases or sales of securities (such as authorised investments)) if it is adopted based on the Commission’s Proposal. Under the Commission’s proposal, the FTT could apply in certain circumstances to persons both within and outside of the Participating Member States. Whilst the UK is not a Participating Member State, the Commission’s proposal is broad and as such may impact transactions completed by financial institutions operating innon-Participating Member States. Recent mediaMedia reports have increasingly focused on how revenues raised by the EU FTT could constitute an independent revenue stream for the Participating Member States, potentially offsetting their contributions to the EU and/or providing a new income stream for the EU. This is seen as important in the context of the UK’s financial contributions ceasing in connection with its exit from the EU. Recent reports suggest the European Commission is intending to publish a revised legislative proposal with only share transactions being subject to the EU FTT. As such, the EU FTT appears likely to remain on the ECOFIN agenda for the foreseeable future.
We are monitoring developmentsSeparately, the European Commission wrote to the Netherlands on 22 June 2018 to inform them that it is their view that the Netherlands domestic tax legislation, which gives tax deductions for coupons paid on conditionally convertible bonds issued by financial institutions, may benon-compliant with the EU’s State Aid regime as the Netherlands legislation only applies to financial institutions and thus gives preference to one sector over others.
Santander UK benefits from tax deductions on certain of its capital instruments under UK domestic law. The relevant UK law also restricts tax deductibility to instruments issued specifically by the regulated sector and thus could be subject to a similar EU challenge. This potential EU State Aid vulnerability has now been largely addressed by the Budget day announcement on the 29 October 2018 and accompanying draft legislation that will repeal the sector specific legislation and replace with new tax rules for hybrid capital instrument that can be issued by any likely impactsector. This new legislation should ensure that, subject to these instruments meeting certain specified conditions, any interest payable will be deductible. This should reduce this risk although there can be no guarantee that the EU will not successfully challenge the relevant UK law. Any removal of this tax deductibility might have a material adverse effect on us.our operations, financial condition and prospects. Changes in our pension liabilities and obligations could have a materially adverse effect on our operating results,operations, financial condition and prospects The majority of current employees are provided with pension benefits through defined contribution arrangements. Under these arrangements our legal obligation is limited to the cash contributions paid. 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. The majority of current employees are provided with pension benefits through defined contribution arrangements. Under these arrangements the risk sits with the member rather than the employer and our legal obligation is limited to the cash contributions paid. We are the principal employer under the majority of 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 rate can be set by the Pensions Regulator. The scheme trustees may, in the course of discussions about future valuations, seek higher employer contributions. The scheme trustees’ power in relation to the payment of pension contributions depends on the terms of the trust deed and rules governing the pension schemes, however,but, in some cases, the scheme trustees may have the unilateral right to set our relevant contribution. 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 schemes where that employer is a service company, or is otherwise ‘insufficiently resourced’ (as defined for the purposes of the relevant legislation). As some of the employers within the Santander UK group are service companies, if the Pensions Regulator determines that they have become insufficiently resourced and no suitable mitigating action is undertaken, other companies within the Santander UK group which are connected with or an associate of those employers are at risk of a financial support direction in respect of those employers’ liabilities to the defined benefit pension schemes in circumstances where the Pensions Regulator properly considers it reasonable to issue one. Such a financial support direction could require the companies to guarantee or provide security for the pension liabilities of those employers, or could require additional amounts to be paid into the relevant pension schemes in respect of them.
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 issued to any company or individual that is connected with or an associate of such employer in circumstances where the Pensions Regulator considers it reasonable to issue and multiple notices could be issued to connected companies or individuals for the full amount of the debt. The risk of a contribution notice being imposed may inhibit our freedom to restructure or to undertake certain corporate activities. Should the value of assets to liabilities in respect of the defined benefit schemes operated by us record a deficit or an increased deficit (as appropriate), 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 scheme liabilities due to changes in legislation, mortality assumptions, discount rate assumptions, inflation, market variables such as exchange rates or equity prices, the expected rate of return on scheme assets, or other factors, or there is a change in the actual or perceived strength of the employer’s covenant, this could result in us having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we have no or limited control. Although the trustees of the defined benefit pension schemes are obliged to consult with us before changing the pension schemes’ investment strategy, the trustees have the final say and ultimate responsibility for investment strategy rests with them. Our principal defined pension scheme is the Santander (UK) Group Pension Scheme and its corporate trustee is Santander (UK) Group Pension Scheme Trustees Limited (the Pension Scheme Trustee), a wholly-owned subsidiary of the Company. At 31 December 2017, the Pension Scheme Trustee had 13 directors, comprising six Santander UK appointed directors and seven member-elected directors.Group Holdings plc. Investment decisions are delegated by the Pension Scheme Trustee to Santander (CF Trustee) Limited, a private limited company owned by the Santander (CF Trustee) Limited directors. The Santander (CF Trustee) Limited board comprises five directors, three of whom are appointed by the Principal Employer (“A” Directors) and two appointed by the Pension Scheme Trustee (“B” Directors). Santander (CF Trustee) Limited’s articles of association states that there should be at least three Directors appointed by the Principal Employer and at least two appointed by the Pension Scheme Trustee. At any one time, the maximum number of “A” Directors can only be one more than the number of “B” Directors. The Santander (CF Trustee) Limited directors’ principal duty, within the investment powers delegated to them, is to act in the best interest of the members of the Santander UK(UK) Group Pension Scheme and not that of the Company.Santander UK Group Holdings plc. Any increase in our pension liabilities and obligations could have a material adverse effect on our operating results,operations, financial condition and prospects. 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 our structure and business which could have an impact on our pension schemes or liabilities. (For a discussion of the ICB’s recommendations see ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operating results,operations, financial condition and prospects’.)
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
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 senior executive team and other key employees. 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 and of a culture of Simple, Personal and Fair depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. There is also an increasing demand for Santander to hire individuals with digital skills such as data scientist, engineering and designer skill sets in the future. Such individuals are very sought after by all organisations, not just the banking industry, and thus our ability to attract and hire this talent will determine how quickly we transform to a digital bank. 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 or other key employees and fails to replace them in a satisfactory and timely manner, our operating results,operations, financial condition and prospects, 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 operating results,operations, financial condition and prospects could be adversely affected. Damage to our reputation could cause harm to our business prospects Maintaining a positive reputation is critical to attracting and retaining customers, investors and employees and conducting business transactions with counterparties. Damage to the reputation of the Santander UK group or Banco Santander SA (as the majority shareholder in the Company), the reputation of affiliates operating under the ‘Santander’ brand or any of our other brands could therefore cause significant harm to our business and prospects. Harm to our reputation can arise directly or indirectly from numerous sources, including, among others, employee misconduct (including the possibility of employee fraud), litigation, regulatory interventions and enforcement action, failure to deliver minimum standards of service and quality, disruption to service due to a cyber-attack, wider IT failures, compliance failures, third party fraud, financial crime, breach of legal or regulatory requirements, unethical behaviour (including adopting inappropriate sales and trading practices), and the activities of customers, suppliers and counterparties. Further, negative publicity regarding us, whether true or not, may result in harm to our operating results,operations, financial condition and prospects. 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 has caused public perception of us and others in the financial services industry to decline. We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of customers to deal with us, or give rise to litigation or regulatory enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to our operating results,operations, financial condition and prospects. Our financial statements are based in part on assumptionsjudgements and accounting estimates which, if inaccurate, could cause material misstatement of theour future financial results of our operations and financial condition The preparation of financial statementsthe Consolidated Financial Statements requires management to make judgements estimates and assumptionsaccounting estimates that affect the reported amounts of assets and liabilities provisions,at the date of the financial statements and the reported amount of income and expenses. Due toexpenses during the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates,reporting period. Management evaluates its judgements and assumptions are continually evaluated andaccounting estimates, which are based on historical experience and on various other factors including expectations of future events that are believed to be reasonable under the circumstances.circumstances, on an ongoing basis. Actual amounts may differ from these accounting estimates under different assumptions or conditions. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The As explained in Note 1 to the Consolidated Financial Statements, no significant judgements have been made in the process of applying our accounting policies, deemed criticalother than those involving estimations about credit impairment losses, conduct remediation and pensions. Those accounting estimates, as well as the judgements inherent within them, are considered important to ourthe portrayal of the financial results and financial condition based upon materialitybecause: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates; and (ii) any significant judgementsdifference between the estimated amounts and estimates, include impairment of loans and advances, valuation ofactual amounts could have a material impact on the future financial instruments, provision for conduct remediation and pensions. 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.condition.
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 operating results and a corresponding effect on our funding requirements and capital ratios.
| | | | Annual Report 2018 | Other information for US investors | | |
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 provide reasonable assurance that information required to be disclosed by us within our financial statements or under other accounting, regulatory, supervisory or listing authority requirements, including in reports filed or submitted under the US Securities Exchange Act of 1934, as amended (the Exchange Act), is accumulated and communicated to management, and recorded, processed, summarised and reported within the time periods specified in the US Securities and Exchange Commission’s rules and forms and other applicable accounting, regulatory, supervisory or listing authority requirements. We adoptedOur control framework is based on the Committee of Sponsoring Organisations of the Treadway Commission 2013 internal control —– integrated framework with effect from 15 December 2014, replacing the previous framework. The revised frameworkwhich is designed to recognise the many changes in business and operating environments since the issuance of the original framework and is intended to broaden and enhance the application of controls over financial reporting. However, 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. Consequently, our business is exposed to risk from potentialnon-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions, regulatory and law enforcement investigations, civil claims and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter or detect employee misconduct in a timely manner and the precautions we take to prevent and detect this activity may not always be effective. As a result of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.
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 operating results. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. For further information about future accounting developments, see Note 1 to the Consolidated Financial Statements. We rely on third parties and affiliates for important infrastructure support, products and services TPPs and certain affiliates provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections and network access. Relying on these TPPs and affiliates is a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting our TPPs and affiliates, and other parties that interact with these parties. As our interconnectivity with these third parties and affiliates increases, including through the use of cloud based services, we increasingly face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties or affiliates, 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 our business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third party vendors or affiliates could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Any restructuring could involve significant expense to us and entail significant delivery and execution risk which could have a material adverse effect on our operating results,operations, financial condition and prospects. We are part of a group and we may engage in transactions with our subsidiaries or affiliates 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 and other services. Also, we rely upon certain outsourced services (including information technology support, maintenance, and consultancy services) provided by certain other members of the Banco Santander group (for more information, see the risk factor entitled ‘We rely on third parties and affiliates for important infrastructure support, products and services’). In addition, we are utilising a ring-fencing transfer scheme and other agreements with our subsidiaries and affiliates to implement the ring-fencing requirements of the Banking Reform Act (for more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operating results,operations, financial condition and prospects’). The foregoing arrangements may be considered by some not to be on an arms-length basis. 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. Future conflicts of interests between us and any of our subsidiaries or affiliates, or between 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 US may provide different or less information about us than you expected There may be less publicly available information about us than is regularly published about companies in the US. Issuers of securities in the UK are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in countries with a relatively more developed capital market, including the US. While we are subject to the periodic reporting requirements of the Exchange Act, we are not subject to the same disclosure requirements in the US as a domestic US registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic US registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available will not be the same as the information available to holders of securities of a US company and may be reported in a manner that is not familiar. Risks concerning enforcement of judgmentsjudgements made in the US The Company is a public limited company registered in England and Wales and allWales. Most of the Company’s directors have their principal residence outsideand officers named herein are residents of the US. ThereUK, and there is no assurance that any director of the Company will live in the US at any given time in the future. As a result, it may not be possible to serve process on such persons in the US or to enforce judgmentsjudgements obtained in US courts against them or us based on the civil liability provisions of the US federal securities laws or other laws of the US or any state thereof.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | > Articles of Association |
Articles of Association The following is a summary of the Articles of Association (the Articles) of the Company. Santander UK Group Holdings plc is a public limited company incorporated and registered in England and Wales under the Companies Act 2006, with registered number 2294747. The Articles specifically state and limit the objects of the Company which are therefore restricted. 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, except if no conflict of interest could reasonably be expected to arise from that 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. Directors are entitled to such remuneration as the directors determine for their services to the Company as directors and for any other service which they undertake for the Company. Directors may delegate to a person or committee the determination of any fee, remuneration or other benefit which may be paid or provided to any Director. No Director is required to retire by reason of his or her age, nor do any special formalities apply to the appointment orre-election of any Director who is over any age limit. No shareholding qualification for Directors is required. The Company may issue shares with such rights or restrictions as may be determined by ordinary resolution or, if no such resolution has been passed or so far as the resolution does not make specific provision, as the Directors may decide. The Company may by ordinary resolution declare dividends, and the Directors may decide to declare or pay interim dividends. No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. If dividends are unclaimed for twelve years, the right to the dividend ceases. All dividends or other sums which are payable in respect of shares, and unclaimed after having been declared or become payable, may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed. 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 ornon-cumulative. 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 benon-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). Ordinary shares are transferable. Holders of ordinary shares are entitled to receive notice of and to attend any general meeting of the Company. Subject to any special terms as to voting upon which any shares may be issued or may for the time being be held, or any suspension or any abrogation of special 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. Where the shares are partly paid, the Board may make further calls upon the holders in respect of any sum whether in respect of nominal value or premium that is unpaid on their shares. There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares of any class. 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-quarters 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 95% in nominal value of the shares giving the right. The notice shall specify the date, time and place of the meeting and the general nature of the business to be transacted. There are no restrictions on the rights to own securities for either resident ornon-resident shareholders, other than those to which they may be subject as a result of laws and regulations in their home jurisdiction.
| | | | Annual Report 2018 | Other information for US investors | | > Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act |
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 Exchange Act), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. The following activities are disclosed in response to Section 13(r) with respect to the Company and its affiliates within the Banco Santander group.group: (a) Santander UK holds two savings accounts and one current account for two customers. Both of the customers, who are resident in the UK, are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 2018 were negligible relative to the overall profits of Santander UK. (b) During the period covered by this annual report:report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53 for another customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The customer relationshippre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts, and the accounts were subsequently closed on 14 January 2019. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 2018 were negligible relative to the overall profits of Santander UK. (c) Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions programme. The accounts held by each customer have been frozen since their designation and have remained frozen through 2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended 31 December 2018. (a) | Santander UK holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2017 were negligible relative to the overall profits of Banco Santander SA. |
(b) | Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through 2017. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2017. |
(d) The Banco Santander group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by(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 April 27, 2007. In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended 31 December 31, 20172018 that were negligible relative to the overall revenues and profits of the Banco Santander SA.group. The Banco Santander group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Banco Santander group is not contractually permitted to cancel these arrangements without eithereither: (i) paying the guaranteed amount (in the case of the performance guarantees),; or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Banco Santander group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | > New York Stock Exchange (NYSE) Corporate Governance – differences in UK and NYSE corporate governance practice |
New York Stock Exchange (NYSE) Corporate Governance – differences in UK and NYSE corporate governance practice The Company issues notes in the US from time to time pursuant to a shelf registration statement filed with the SEC. As these notes are listed on the NYSE, the Company is required to comply with NYSE corporate governance standards. Under the NYSE corporate governance standards, the Company must disclose any significant ways in which its corporate governance practices differ from those followed by US companies under the NYSE corporate governance standards. We believe the following to be the significant differences between our current corporate governance practices and those applicable to US companies under the NYSE corporate governance standards. Under the NYSE corporate governance standards, independent directors must comprise a majority of the Board. As at 31 December 2017,2018, our Board was comprised of a Chair (who is also aNon-Executive Director), three Executive Directors and nineten otherNon-Executive Directors. The Chair, Shriti Vadera, and six of the otherNon-Executive Directors, Alain Dromer,Julie Chakraverty, Annemarie Durbin, Ed Giera, Chris Jones, Genevieve Shore and Scott Wheway, were independent as defined in the NYSE corporate governance standards. The other three fourNon-Executive Directors were not independent according to NYSE corporate governance standards as they are representatives of the ultimate parent company, Banco Santander SA. Directors as at 31 December 2018 include Juan Inciarte, who resigned on 31 December 2018, see the ‘Board and Committee membership, tenure, attendance and remuneration’ section. Following his resignation, there will be nine otherNon-Executive Directors in addition to the Chair and threeNon-Executive Directors who are not independent according to NYSE corporate governance standards. The NYSE corporate governance standards require that listed US companies have a nominating or corporate governance committee composed entirely of independent directors and with a written charter addressing certain corporate governance matters. Applicable UK rules do not require companies without equity shares listed on the London Stock Exchange, such as the Company, to have a nominating committee. However, the Company has a Board Nomination Committee, which leads the process for Board appointments. This Committee has written Terms of Reference setting out its role to identify and nominate candidates for Board and Board Committee appointments. As at 31 December 2017,2018, the following Directors made up the Board Nomination Committee: Shriti Vadera (Chair), Ana Botín and Scott Wheway. Of these Directors, Shriti Vadera and Scott Wheway were independent according to NYSE corporate governance standards as at 31 December 2017.2018. 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 companies have a compensation committee composed entirely of independent directors and with a written charter addressing certain corporate governance matters. Under its written Terms of Reference, the Company’s Board Remuneration Committee is primarily responsible for overseeing and supervising Santander UK’s policies and frameworks covering remuneration and reward. As at 31 December 2017,2018, the Board Remuneration Committee was made up of four independentNon-Executive Directors according to NYSE corporate governance standards (Annemarie Durbin (Chair), Alain Dromer, Chris Jones, Genevieve Shore and Scott Wheway). The NYSE corporate governance standards require that listed US companies have an audit committee that satisfies the requirements of Rule10A-3 under the US Securities Exchange Act of 1934, as amended (Rule10A-3), with a written charter addressing certain corporate governance matters, and whose members are all independent as defined in Rule10A-3. As a wholly-owned subsidiary of a parent that satisfies the requirements of RuleRule 10A-3(c)(2), the Company is exempt from the requirements of Rule10A-3. However, the Company does have a Board Audit Committee. As at 31 December 2017,2018, the Board Audit Committee was made up of fourNon-Executive Directors: Chris Jones (Chair), Alain Dromer,Julie Chakraverty, Ed Giera and Genevieve Shore. All four members were independent in 20172018 as defined in Rule10A-3. The scope of the Board Audit Committee’s Terms of Reference as well as the duties and responsibilities of such committee are more limited than that required of audit committees under the NYSE corporate governance standards. For example, the Board Audit Committee does not provide an audit committee report as required by the NYSE corporate governance standards to be included in the Company’s annual proxy statement. The NYSE corporate governance standards require that listed US companies adopt and disclose corporate governance guidelines, including with respect to the qualification, training and evaluation of their Directors. The NYSE corporate governance standards also require that the Board conducts a self-evaluation at least annually to determine whether it and its committees are functioning effectively. The Board has undertaken regular reviews of Board effectiveness primarily through an internal process led by the Chair. In 2013, the first external Board effectiveness review was conducted by Bvalco Limited, an external evaluator. The Board undertook an external review of Board effectiveness in 2016 and agreed on a plan for continuous improvement. In 2017,2018, we reviewed the progress made on implementing the recommendations from 2016’s extensive external evaluation of Board effectiveness and carried out an internal assessment of effectiveness. 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 materialnon-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 2018 | Other information for US investors | | > Contact and other information |
Contact and otherOther information
Santander Shareholder Relations
| | | | | Address: | | Phone numbers: | | Email: | 2 Triton Square | | 0371-384-2000 | | santandershareholders@equiniti.com | Regent’s Place | | +44 (0) 121-415-7188 (outside the UK) | | | London | | | | | NW1 3AN | | | | |
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.Corporation System, 111 Eighth Avenue, New York, New York. Trustee/paying agent The names and addresses of the Trustee/Paying Agent for each class of security registered are set out below: | – | | Senior: Wells Fargo Bank, National Association, 150 East 42nd Street, 40th Floor, New York, New York 10017, United States |
| – | | With respect to certain earlier outstanding senior notes: The Bank of New York Mellon, 240 Greenwich Street, Floor 7E, New York 10286, United States (US80283LAK98, US80283LAL71, US80283LAH69, US80283LAN38, US80283LAJ26) |
| – | | With respect to 7.95% Term Subordinated Securities due October 26, 2029 (US002920AC09): Trustee: The Bank of New York Mellon, One Canada Square, London, E14 5AL and Paying Agent: Citibank, N.A. 13th Floor, Citigroup Centre, Canada Square, London E14 5LB |
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 20549-0102.20549. 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+1-202-551-8090 or by looking at the US Securities and Exchange Commission’s websitewebsite. The US Securities and Exchange Commission maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with it. This is accessible at www.sec.gov. None of the websites referred to in this Annual Report on Form20-F for the year ended 31 December 20172018 (the Form20-F), including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form20-F. Legal proceedings We are party to various legal proceedings in the ordinary course of business, the ultimate resolution of which is not expected to have a material adverse effect on our financial position or our results of operations.business. See Notes 2730 and 2932 to the Consolidated Financial Statements. Material contracts We are party to various contracts in the ordinary course of business. For the two years ended 31 December 20172018, there have been no material contracts entered into outside the ordinary course of business. Audit fees See Note 7 to the Consolidated Financial Statements. Accounting developments under IFRS See Note 1 to the Consolidated Financial Statements. Share capital Details of the Company’s share capital are set out in Note 3033 to the Consolidated Financial Statements. Major shareholders At 31 December 2017,2018, the Company was a subsidiary of Banco Santander SA and Santusa Holding SL.UK Group Holdings plc. On 12 November 2004, Banco Santander SA acquired the then entire issued ordinary share capital of 1,485,893,636 ordinary shares of £110 pence each. On 2112 October 2008, a further 10 billion ordinary shares of £110 pence each were issued to Banco Santander SA and an additional 12,631,375,230 ordinary shares of £110 pence each were issued to Banco Santander SA on 9 January on 2009. On 3 August 2010, 6,934,500,000 ordinary shares of £110 pence each were issued to Santusa Holding SL. With effect from 10 January 2014, Santander UK Group Holdings Limited, a subsidiary of Banco Santander SA and Santusa Holding SL, became the beneficial owner of 31,051,768,866 of £110 pence each, being the entire issued ordinary share capital of the Company, by virtue of a share exchange agreement between Santander UK Group Holdings Limited, Banco Santander SA and Santusa Holding SL. Santander UK Group Holdings Ltd became the legal owner of the entire issued ordinary share capital of the Company on 1 April 2014 and on 25 March 2015 became a public limited company and changed its name from Santander UK Group Holdings Ltd to Santander UK Group Holdings plc. Exchange controls There are no UK laws, decrees or regulations that restrict our export or import of capital, including the availability of cash and cash equivalents for use by us, or that affect the remittance of dividends or other shareholder payments tonon-UK holders of Company shares, except as outlined in the section on Taxation for US Investors below.
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| | | Annual Report 2017 on Form 20-F | Other information for US investors | | > Additional balance sheet analysis |
Additional balance sheet analysis RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET In this section, we summarise our assets and liabilities by their nature, rather than by how we classify them in the Consolidated Balance Sheet. These two presentations can be reconciled as follows, including cross references to the Notes to the Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | Note | | | Securities
£m | | | Loans and
advances
to banks
£m | | | Loans and
advances to
customers
£m | | | Derivatives
£m | | | Other
£m | | | Balance
sheet total
£m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | | | | | – | | | | – | | | | – | | | | – | | | | 32,771 | | | | 32,771 | | Trading assets | | | 11 | | | | 14,818 | | | | 6,897 | | | | 8,840 | | | | – | | | | – | | | | 30,555 | | Derivative financial instruments | | | 12 | | | | – | | | | – | | | | – | | | | 19,942 | | | | – | | | | 19,942 | | Financial assets designated at fair value | | | 13 | | | | 547 | | | | – | | | | 1,549 | | | | – | | | | – | | | | 2,096 | | Loans and advances to banks | | | 14 | | | | – | | | | 5,927 | | | | – | | | | – | | | | – | | | | 5,927 | | Loans and advances to customers | | | 15 | | | | – | | | | – | | | | 199,490 | | | | – | | | | – | | | | 199,490 | | Financial investments | | | 18 | | | | 15,431 | | | | – | | | | 2,180 | | | | – | | | | – | | | | 17,611 | | Interests in other entities | | | 19 | | | | – | | | | – | | | | – | | | | – | | | | 73 | | | | 73 | | Property, plant and equipment | | | | | | | – | | | | – | | | | – | | | | – | | | | 1,598 | | | | 1,598 | | Retirement benefit assets | | | 28 | | | | – | | | | – | | | | – | | | | – | | | | 449 | | | | 449 | | Tax, intangibles and other assets | | | | | | | – | | | | – | | | | – | | | | – | | | | 4,253 | | | | 4,253 | | | | | | | | | | 30,796 | | | | 12,824 | | | | 212,059 | | | | 19,942 | | | | 39,144 | | | | 314,765 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by
banks £m | | | Deposits by
customers
£m | | | Derivatives
£m | | | Other
£m | | | Balance
sheet total
£m | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 21 | | | | | | | | 13,784 | | | | – | | | | – | | | | – | | | | 13,784 | | Deposits by customers | | | 22 | | | | | | | | – | | | | 183,648 | | | | – | | | | – | | | | 183,648 | | Trading liabilities | | | 23 | | | | | | | | 1,885 | | | | 25,530 | | | | – | | | | 3,694 | | | | 31,109 | | Derivative financial instruments | | | 12 | | | | | | | | – | | | | – | | | | 17,613 | | | | – | | | | 17,613 | | Financial liabilities designated at fair value | | | 24 | | | | | | | | – | | | | 680 | | | | – | | | | 1,635 | | | | 2,315 | | Debt securities in issue | | | 25 | | | | | | | | – | | | | – | | | | – | | | | 42,633 | | | | 42,633 | | Subordinated liabilities | | | 26 | | | | | | | | – | | | | – | | | | – | | | | 3,793 | | | | 3,793 | | Retirement benefit obligations | | | 28 | | | | | | | | – | | | | – | | | | – | | | | 286 | | | | 286 | | Tax, other liabilities and provisions | | | | | | | | | | | – | | | | – | | | | – | | | | 3,379 | | | | 3,379 | | | | | | | | | | | | | | 15,669 | | | | 209,858 | | | | 17,613 | | | | 55,420 | | | | 298,560 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | Note | | | Securities
£m | | | Loans and
advances to banks £m | | | Loans and
advances to
customers
£m | | | Derivatives
£m | | | Other(1)
£m | | | Balance
sheet total
£m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | | | | | – | | | | – | | | | – | | | | – | | | | 17,107 | | | | 17,107 | | Trading assets | | | 11 | | | | 12,234 | | | | 7,478 | | | | 10,323 | | | | – | | | | – | | | | 30,035 | | Derivative financial instruments | | | 12 | | | | – | | | | – | | | | – | | | | 25,471 | | | | – | | | | 25,471 | | Financial assets designated at fair value | | | 13 | | | | 409 | | | | – | | | | 1,731 | | | | – | | | | – | | | | 2,140 | | Loans and advances to banks | | | 14 | | | | – | | | | 4,348 | | | | – | | | | – | | | | – | | | | 4,348 | | Loans and advances to customers | | | 15 | | | | – | | | | – | | | | 199,738 | | | | – | | | | – | | | | 199,738 | | Financial investments | | | 18 | | | | 17,209 | | | | 2 | | | | 255 | | | | – | | | | – | | | | 17,466 | | Interests in other entities | | | 19 | | | | – | | | | – | | | | – | | | | – | | | | 61 | | | | 61 | | Property, plant and equipment | | | | | | | – | | | | – | | | | – | | | | – | | | | 1,491 | | | | 1,491 | | Retirement benefit assets | | | 28 | | | | – | | | | – | | | | – | | | | – | | | | 398 | | | | 398 | | Tax, intangibles and other assets | | | | | | | – | | | | – | | | | – | | | | – | | | | 4,256 | | | | 4,256 | | | | | | | | | | 29,852 | | | | 11,828 | | | | 212,047 | | | | 25,471 | | | | 23,313 | | | | 302,511 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by
banks £m | | | Deposits by
customers
£m | | | Derivatives
£m | | | Other
£m | | | Balance
sheet total
£m | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | 21 | | | | | | | | 9,769 | | | | – | | | | – | | | | – | | | | 9,769 | | Deposits by customers | | | 22 | | | | | | | | – | | | | 177,172 | | | | – | | | | – | | | | 177,172 | | Trading liabilities | | | 23 | | | | | | | | 4,200 | | | | 8,559 | | | | – | | | | 2,801 | | | | 15,560 | | Derivative financial instruments | | | 12 | | | | | | | | – | | | | – | | | | 23,103 | | | | – | | | | 23,103 | | Financial liabilities designated at fair value | | | 24 | | | | | | | | – | | | | 526 | | | | – | | | | 1,914 | | | | 2,440 | | Debt securities in issue | | | 25 | | | | | | | | – | | | | – | | | | – | | | | 50,346 | | | | 50,346 | | Subordinated liabilities | | | 26 | | | | | | | | – | | | | – | | | | – | | | | 4,303 | | | | 4,303 | | Retirement benefit obligations | | | 28 | | | | | | | | – | | | | – | | | | – | | | | 262 | | | | 262 | | Tax, other liabilities and provisions | | | | | | | | | | | – | | | | – | | | | – | | | | 4,103 | | | | 4,103 | | | | | | | | | | | | | | 13,969 | | | | 186,257 | | | | 23,103 | | | | 63,729 | | | | 287,058 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | Note | | | Securities
£m | | | Loans and
advances to banks £m | | | Loans and
advances to
customers £m | | | Derivatives £m | | | Other
£m | | | Balance
sheet total
£m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | | | | | – | | | | – | | | | – | | | | – | | | | 19,747 | | | | 19,747 | | Financial assets at fair value through profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading assets | | | 11 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | – Derivative financial instruments | | | 12 | | | | – | | | | – | | | | – | | | | 5,259 | | | | – | | | | 5,259 | | – Other financial assets at fair value through profit or loss | | | 13 | | | | 3,251 | | | | 1,458 | | | | 908 | | | | – | | | | – | | | | 5,617 | | Financial assets at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers(1) | | | 14 | | | | – | | | | – | | | | 201,289 | | | | – | | | | – | | | | 201,289 | | – Loans and advances to banks(1) | | | | | | | – | | | | 2,799 | | | | – | | | | – | | | | – | | | | 2,799 | | – Reverse repurchase agreements – non trading(1) | | | 17 | | | | – | | | | 3,254 | | | | 17,873 | | | | – | | | | – | | | | 21,127 | | – Other financial assets at amortised cost(2) | | | 18 | | | | 7,229 | | | | – | | | | – | | | | – | | | | – | | | | 7,229 | | Financial assets at fair value through other comprehensive income(2) | | | 19 | | | | 13,229 | | | | – | | | | 73 | | | | – | | | | – | | | | 13,302 | | Financial investments(2) | | | 20 | | | | | | | | | | | | | | | | | | | | | | | | | | Interests in other entities | | | 21 | | | | – | | | | – | | | | – | | | | – | | | | 88 | | | | 88 | | Property, plant and equipment | | | | | | | – | | | | – | | | | – | | | | – | | | | 1,832 | | | | 1,832 | | Retirement benefit assets | | | 31 | | | | – | | | | – | | | | – | | | | – | | | | 842 | | | | 842 | | Tax, intangibles and other assets | | | | | | | – | | | | – | | | | – | | | | – | | | | 4,241 | | | | 4,241 | | | | | | | | | | 23,709 | | | | 7,511 | | | | 220,143 | | | | 5,259 | | | | 26,750 | | | | 283,372 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by
banks £m | | | Deposits by
customers
£m | | | Derivatives
£m | | | Other
£m | | | Balance
sheet total
£m | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading liabilities | | | 23 | | | | | | | | – | | | | – | | | | – | | | | – | | | | – | | – Derivative financial instruments | | | 12 | | | | | | | | – | | | | – | | | | 1,369 | | | | – | | | | 1,369 | | – Other financial liabilities at fair value through profit or loss | | | 24 | | | | | | | | – | | | | 5,296 | | | | – | | | | 990 | | | | 6,286 | | Financial liabilities at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Deposits by customers | | | 25 | | | | | | | | – | | | | 178,090 | | | | – | | | | – | | | | 178,090 | | – Deposits by banks(1) | | | 26 | | | | | | | | 17,221 | | | | – | | | | – | | | | – | | | | 17,221 | | – Repurchase agreements – non trading(1) | | | 27 | | | | | | | | 1,535 | | | | 9,375 | | | | – | | | | – | | | | 10,910 | | – Debt securities in issue | | | 28 | | | | | | | | – | | | | – | | | | – | | | | 46,692 | | | | 46,692 | | – Subordinated liabilities | | | 29 | | | | | | | | – | | | | – | | | | – | | | | 3,601 | | | | 3,601 | | Retirement benefit obligations | | | 31 | | | | | | | | – | | | | – | | | | – | | | | 114 | | | | 114 | | Tax, other liabilities and provisions | | | | | | | | | | | – | | | | – | | | | – | | | | 3,180 | | | | 3,180 | | | | | | | | | | | | | | 18,756 | | | | 192,761 | | | | 1,369 | | | | 54,577 | | | | 267,463 | |
| (1) | | Adjusted to reflectFrom 1 January 2018, the changenon-trading repurchase agreements andnon-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in accounting policy relating to business combinations between entities under common control,the balance sheet, as described in Note 11. Comparatives arere-presented accordingly. |
| (2) | On adoption of IFRS 9, the ‘financial investments’ balance sheet line item was split between ‘other financial assets at amortised cost’ and ‘financial assets at fair value through other comprehensive income’. This approach aligns the balance sheet line items to the Consolidated Financial Statements.IFRS 9 accounting classifications and provides a clearer understanding of our financial position. |
| | | | Annual Report 2018 | Other information for US investors | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | Note | | | Securities
£m | | | Loans and
advances
to banks
£m | | | Loans and
advances to
customers
£m | | | Derivatives
£m | | | Other
£m | | | Balance
sheet total
£m | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances at central banks | | | | | | | – | | | | – | | | | – | | | | – | | | | 32,771 | | | | 32,771 | | Financial assets at fair value through profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading assets | | | 11 | | | | 14,818 | | | | 6,897 | | | | 8,840 | | | | – | | | | – | | | | 30,555 | | – Derivative financial instruments | | | 12 | | | | – | | | | – | | | | – | | | | 19,942 | | | | – | | | | 19,942 | | – Other financial assets at fair value through profit or loss | | | 13 | | | | 547 | | | | – | | | | 1,549 | | | | – | | | | – | | | | 2,096 | | Financial assets at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Loans and advances to customers(1) | | | 14 | | | | – | | | | – | | | | 199,340 | | | | – | | | | – | | | | 199,340 | | – Loans and advances to banks(1) | | | | | | | – | | | | 3,463 | | | | – | | | | – | | | | – | | | | 3,463 | | – Reverse repurchase agreements – non trading(1) | | | 17 | | | | – | | | | 2,464 | | | | 150 | | | | – | | | | – | | | | 2,614 | | – Other financial assets at amortised cost(2) | | | 18 | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income(2) | | | 19 | | | | | | | | | | | | | | | | | | | | | | | | | | Financial investments(2) | | | 20 | | | | 15,431 | | | | – | | | | 2,180 | | | | – | | | | – | | | | 17,611 | | Interests in other entities | | | 21 | | | | – | | | | – | | | | – | | | | – | | | | 73 | | | | 73 | | Property, plant and equipment | | | | | | | – | | | | – | | | | – | | | | – | | | | 1,598 | | | | 1,598 | | Retirement benefit assets | | | 31 | | | | – | | | | – | | | | – | | | | – | | | | 449 | | | | 449 | | Tax, intangibles and other assets | | | | | | | – | | | | – | | | | – | | | | – | | | | 4,253 | | | | 4,253 | | | | | | | | | | 30,796 | | | | 12,824 | | | | 212,059 | | | | 19,942 | | | | 39,144 | | | | 314,765 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by
banks £m | | | Deposits by
customers
£m | | | Derivatives
£m | | | Other
£m | | | Balance
sheet total
£m | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Trading liabilities | | | 23 | | | | | | | | 1,885 | | | | 25,530 | | | | – | | | | 3,694 | | | | 31,109 | | – Derivative financial instruments | | | 12 | | | | | | | | – | | | | – | | | | 17,613 | | | | – | | | | 17,613 | | – Other financial liabilities at fair value through profit or loss | | | 24 | | | | | | | | – | | | �� | 680 | | | | – | | | | 1,635 | | | | 2,315 | | Financial liabilities at amortised cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Deposits by customers | | | 25 | | | | | | | | – | | | | 183,648 | | | | – | | | | – | | | | 183,648 | | – Deposits by banks(1) | | | 26 | | | | | | | | 12,708 | | | | – | | | | – | | | | – | | | | 12,708 | | – Repurchase agreements – non trading(1) | | | 27 | | | | | | | | 1,076 | | | | – | | | | – | | | | – | | | | 1,076 | | – Debt securities in issue | | | 28 | | | | | | | | – | | | | – | | | | – | | | | 42,633 | | | | 42,633 | | – Subordinated liabilities | | | 29 | | | | | | | | – | | | | – | | | | – | | | | 3,793 | | | | 3,793 | | Retirement benefit obligations | | | 31 | | | | | | | | – | | | | – | | | | – | | | | 286 | | | | 286 | | Tax, other liabilities and provisions | | | | | | | | | | | – | | | | – | | | | – | | | | 3,379 | | | | 3,379 | | | | | | | | | | | | | | 15,669 | | | | 209,858 | | | | 17,613 | | | | 55,420 | | | | 298,560 | |
| (1) | From 1 January 2018,non-trading repurchase agreements andnon-trading reverse repurchase agreements are now presented as separate lines in the balance sheet, as described in Note 1. Comparatives arere-presented accordingly. |
| (2) | On adoption of IFRS 9, the ‘financial investments’ balance sheet line item was split between ‘other financial assets at amortised cost’ and ‘financial assets at fair value through other comprehensive income’. This approach aligns the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position. |
| | | | | > Additional balance sheet analysis |
SECURITIES Securities are a small proportion of our total assets. We hold securitiesassets, held mainly in our trading portfoliowithin other financial assets at fair value through profit or withinloss, other financial investments, classified as either available-for-saleassets at amortised cost or held-to-maturity.financial assets at fair value through other comprehensive income. Analysis by type of issuer The following table sets out our securities at 31 December 2018, 2017 2016 and 2015.2016. We hold these securities for trading and liquidity purposes. Prior to the implementation of our ring-fence structure, as described in Note 43 to the Consolidated Financial Statements, we also held these securities for trading purposes. For more information, see ‘Country risk exposures’ in the ‘Credit risk’ section of the Risk review. | | | | | | | | 2017
£m | | | 2016
£m | | | 2015 £m | | | 2018
£m | | | 2017
£m | | | 2016
£m | | UK Government | | | | | | | 9,449 | | | | 10,014 | | | | 3,512 | | | | 7,479 | | | | 9,449 | | | | 10,014 | | US Treasury and other US Government agencies and corporations | | | | | | | 1,155 | | | | 1,268 | | | | 311 | | | | 916 | | | | 1,155 | | | | 1,268 | | Other OECD governments | | | | | | | 4,091 | | | | 4,504 | | | | 4,051 | | | | 4,162 | | | | 4,091 | | | | 4,504 | | Bank and Building Society: | | | | | | | | | | | | | | | | | – Bonds | | | | | | | 4,395 | | | | 5,051 | | | | 4,271 | | | | 5,278 | | | | 4,395 | | | | 5,051 | | Other issuers: | | | | | | | | | | | | | | | | | – Fixed and floating rate notes – Government guaranteed | | | | | | | 426 | | | | 898 | | | | 968 | | | | – | | | | 426 | | | | 898 | | – Fixed and floating rate notes – Other | | | | | | | – | | | | – | | | | – | | | – Mortgage-backed securities | | | | | | | 107 | | | | 133 | | | | 209 | | | | 3,748 | | | | 107 | | | | 133 | | – Other asset-backed securities | | | | | | | 38 | | | | 36 | | | | 62 | | | | 69 | | | | 38 | | | | 36 | | – Other securities | | | | | | | 1,392 | | | | 1,850 | | | | 1,468 | | | | 2,056 | | | | 1,392 | | | | 1,850 | | Ordinary shares and similar securities | | | | | | | 9,743 | | | | 6,098 | | | | 7,235 | | | | – | | | | 9,743 | | | | 6,098 | | | | | | | | | | 30,796 | | | | 29,852 | | | | 22,087 | | | | 23,708 | | | | 30,796 | | | | 29,852 | |
Ordinary shares and similar securities mainly comprise of equity securities listed in the UK and other countriescountries. Prior to the implementation of our ring-fence structure these were principally held for trading purposes. See Note 11 to the Consolidated Financial Statements. | | | Debt securities | | Description | UK Government | | Treasury Bills and UK Government guaranteed issues by other UK banks. | US Treasury and other US Government agencies and corporations | | US Treasury Bills, including cash management bills. | Other OECD governments | | Issues by OECD governments, other than the US and UK governments. | Bank and Building Society | | Bonds are fixed securities with short to medium-term maturities issued by banks and building societies. | 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. | Mortgage-backed securities | | Mainly comprises UK residential mortgage-backed securities. These securities are of good quality and contain nosub-prime element. | Other asset-backed securities | | Mainly comprises floating-rate asset-backed securities. | Other securities | | Mainly comprises reversionary UK property securities. |
Contractual maturities Debt securities can be analysed by contractual maturity and the related weighted average yield for the year as follows: | | | | One year
or less
£m | | | After one
year through
five years
£m | | | After five
years through
ten years £m | | | After
ten years
£m | | | Total
£m | | | One year
or less
£m | | | After one
year through
five years
£m | | | After five
years through
ten years £m | | | After
ten years
£m | | | Total
£m | | Issued by public bodies: | | | | | | | | | | | | | | | | | | | | | – UK Government | | | 583 | | | | 1,380 | | | | 6,874 | | | | 612 | | | | 9,449 | | | | – | | | | 190 | | | | 7,120 | | | | 169 | | | | 7,479 | | – Other governments | | | 4,781 | | | | 368 | | | | – | | | | 97 | | | | 5,246 | | | | 2,924 | | | | 2,047 | | | | 108 | | | | – | | | | 5,079 | | Banks, Building Societies and Other issuers | | | 2,902 | | | | 1,923 | | | | 637 | | | | 896 | | | | 6,358 | | | | 780 | | | | 3,928 | | | | 3,803 | | | | 2,639 | | | | 11,150 | | | | | | 8,266 | | | | 3,671 | | | | 7,511 | | | | 1,605 | | | | 21,053 | | | | 3,704 | | | | 6,165 | | | | 11,031 | | | | 2,808 | | | | 23,708 | | Weighted average yield | | | 1.02% | | | | 2.00% | | | | 1.85% | | | | 1.19% | | | | 1.58% | | | | 0.39% | | | | 1.84% | | | | 1.51% | | | | 1.60% | | | | 1.43% | | 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 2017 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 | | | Financial
investments
£m | | | Total
£m | | | UK Government and UK Government guaranteed | | | | | | | 1,068 | | | | 8,381 | | | | 9,449 | | | Japanese Government | | | | | | | 3,036 | | | | – | | | | 3,036 | | |
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 2018 as set out in the Consolidated Balance Sheet. The table also shows where we classify the securities in the Consolidated Balance Sheet. | | | | | | | | | | | | | | | | Financial
assets at FVOCI
£m | | | Other financial assets at
amortised cost £m | | | Total
£m | | UK Government and UK Government guaranteed | | | 970 | | | | 6,509 | | | | 7,479 | | Japanese Government | | | 3,687 | | | | – | | | | 3,687 | |
| | | Annual Report 2017 on Form 20-F2018 | Other information for US investors | | |
LOANS AND ADVANCES TO BANKS 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). The balances include loans and advances to banks classified in the balance sheet as reverse repurchase agreements – non trading. Prior to the implementation of our ring-fence structure it also included loans and advances to banks classified as trading assets, financial assets designated at fair value or financial investments.assets. | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans and advances to banks | | | 12,824 | | | | 11,828 | | | | 8,982 | | | | 8,002 | | | | 11,919 | |
Geographical analysis is no longer provided following the reduction in our non-UK activities.
| | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans and advances to banks | | | 7,511 | | | | 12,824 | | | | 11,828 | | | | 8,982 | | | | 8,002 | |
Maturity analysis The following table shows loans and advances to banks by maturity at 31 December 2017.2018. | | | | On demand | | | Not later than
three months | | | Later than
three months
and not later
than one year | | | Later than
one year
and not later
than five years | | | Later than
five years
and not later
than ten years | | | Later than
ten years | | | Total | | | On demand | | | Not later than
three months | | Later than
three months
and not later
than one year | | Later than
one year
and not later
than five years | | Later than
five years
and not later
than ten years | | | Later than
ten years | | | Total | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | £m | | £m | | £m | | | £m | | | £m | | Fixed interest rate | | | 4,396 | | | | 3 | | | | 1,133 | | | | – | | | | – | | | | – | | | | 5,532 | | | | 228 | | | | 2,637 | | | 103 | | | 1 | | | | – | | | | 52 | | | | 3,021 | | Variable interest rate | | | 3,388 | | | | 742 | | | | 324 | | | | 2,074 | | | | – | | | | 226 | | | | 6,754 | | | | 1,732 | | | | 251 | | | 516 | | | 1,983 | | | | – | | | | 8 | | | | 4,490 | | Non-interest-bearing | | | 538 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 538 | | | | | | | 8,322 | | | | 745 | | | | 1,457 | | | | 2,074 | | | | – | | | | 226 | | | | 12,824 | | | | 1,960 | | | | 2,888 | | | 619 | | | 1,984 | | | | – | | | | 60 | | | | 7,511 | |
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 professionalnon-bank customers byas part of the Short-Term-Markets business.liquidity risk management function. The balances are stated before deducting impairment loss allowances and residual valueRV and voluntary termination provisions, and include loans and advances to customers classified in the balance sheet as trading assets,other financial assets designated at fair value through profit or loss, reverse repurchase agreements – non trading and financial investments.assets at fair value through other comprehensive income. Prior to the implementation of our ring-fence structure they also included loans and advances to customers classified as trading assets. | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans secured on residential properties | | | 155,355 | | | | 154,727 | | | | 153,261 | | | | 150,440 | | | | 149,022 | | | | 157,957 | | | | 155,355 | | | | 154,727 | | | | 153,261 | | | | 150,440 | | Corporate loans | | | 32,555 | | | | 33,709 | | | | 33,801 | | | | 32,262 | | | | 29,799 | | | | 27,877 | | | | 32,555 | | | | 33,709 | | | | 33,801 | | | | 32,262 | | Finance leases | | | 6,710 | | | | 6,730 | | | | 6,306 | | | | 2,639 | | | | 3,158 | | | | 6,821 | | | | 6,710 | | | | 6,730 | | | | 6,306 | | | | 2,639 | | Secured advances | | | – | | | | 10 | | | | 13 | | | | 15 | | | | – | | | | – | | | | – | | | | 10 | | | | 13 | | | | 15 | | Other unsecured loans | | | 7,334 | | | | 8,533 | | | | 7,951 | | | | 7,043 | | | | 5,763 | | | | 7,554 | | | | 7,334 | | | | 8,533 | | | | 7,951 | | | | 7,043 | | Purchase and resale agreements | | | 7,736 | | | | 7,955 | | | | 4,352 | | | | 2,200 | | | | 4,210 | | | | 18,740 | | | | 7,736 | | | | 7,955 | | | | 4,352 | | | | 2,200 | | Loans and receivables securities | | | 2,180 | | | | 255 | | | | 51 | | | | 109 | | | | 855 | | | | – | | | | 2,180 | | | | 255 | | | | 51 | | | | 109 | | Amounts due from immediate parent | | | | 17 | | | | – | | | | – | | | | – | | | | – | | Amounts due from fellow subsidiaries and joint ventures | | | 1,207 | | | | 1,117 | | | | 1,369 | | | | 797 | | | | 813 | | | | 1,997 | | | | 1,207 | | | | 1,117 | | | | 1,369 | | | | 797 | | Loans and advances to customers | | | 213,077 | | | | 213,036 | | | | 207,104 | | | | 195,505 | | | | 193,620 | | | | 220,963 | | | | 213,077 | | | | 213,036 | | | | 207,104 | | | | 195,505 | | Impairment loss allowances | | | (940 | ) | | | (921 | ) | | | (1,108 | ) | | | (1,415 | ) | | | (1,538 | ) | | | (751 | ) | | | (940 | ) | | | (921 | ) | | | (1,108 | ) | | | (1,415 | ) | Residual value and voluntary termination provisions | | | (78 | ) | | | (68 | ) | | | (49 | ) | | | (24 | ) | | | (17 | ) | | RV and voluntary termination provisions on finance leases | | | | (69 | ) | | | (78 | ) | | | (68 | ) | | | (49 | ) | | | (24 | ) | Net loans and advances to customers | | | 212,059 | | | | 212,047 | | | | 205,947 | | | | 194,066 | | | | 192,065 | | | | 220,143 | | | | 212,059 | | | | 212,047 | | | | 205,947 | | | | 194,066 | |
No single concentration of loans and advances above, except for loans 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. Geographical analysis is no longer provided following the reduction in our non-UK activities.
| | | | | > Additional balance sheet analysis |
Maturity analysis The following table shows loans and advances to customers by maturity at 31 December 2017.2018. Overdrafts are included as ‘on-demand’‘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 demand | | | Not later than
three months | | | Later than
three months
and not later
than one year | | | Later than
one year
and not later
than five years | | | Later than
five years
and not later
than ten years | | | Later than
ten years | | | Total | | | On demand | | | Not later than
three months | | | Later than
three months
and not later
than one year | | | Later than
one year
and not later
than five years | | | Later than
five years
and not later
than ten years | | | Later than
ten years | | | Total | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | Loans secured on residential properties | | | 3 | | | | 687 | | | | 766 | | | | 6,581 | | | | 18,650 | | | | 128,668 | | | | 155,355 | | | | 2 | | | | 655 | | | | 585 | | | | 6,914 | | | | 19,568 | | | | 130,233 | | | | 157,957 | | | Corporate loans | | | 1,299 | | | | 1,778 | | | | 1,940 | | | | 15,853 | | | | 4,297 | | | | 7,388 | | | | 32,555 | | | | 852 | | | | 1,297 | | | | 2,894 | | | | 12,290 | | | | 4,820 | | | | 5,724 | | | | 27,877 | | | Finance leases | | | – | | | | 1,269 | | | | 2,187 | | | | 3,090 | | | | 92 | | | | 72 | | | | 6,710 | | | | – | | | | 894 | | | | 2,157 | | | | 3,600 | | | | 74 | | | | 96 | | | | 6,821 | | | Other unsecured loans | | | 1,140 | | | | 2,577 | | | | 485 | | | | 2,553 | | | | 391 | | | | 188 | | | | 7,334 | | | | 656 | | | | 2,597 | | | | 873 | | | | 3,195 | | | | 141 | | | | 92 | | | | 7,554 | | | Purchase and resale agreements | | | – | | | | 3,638 | | | | 4,098 | | | | – | | | | – | | | | – | | | | 7,736 | | | | – | | | | 13,674 | | | | 5,066 | | | | – | | | | – | | | | – | | | | 18,740 | | | Loans and receivables securities | | | – | | | | – | | | | – | | | | – | | | | 288 | | | | 1,892 | | | | 2,180 | | | | Amounts due from immediate parent | | | | 17 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 17 | | | Amounts due from fellow subsidiaries and joint ventures | | | 8 | | | | 274 | | | | 420 | | | | 505 | | | | – | | | | – | | | | 1,207 | | | | 2 | | | | 415 | | | | 753 | | | | 827 | | | | – | | | | – | | | | 1,997 | | | Loans and advances to customers | | | 2,450 | | | | 10,223 | | | | 9,896 | | | | 28,582 | | | | 23,718 | | | | 138,208 | | | | 213,077 | | | | 1,529 | | | | 19,532 | | | | 12,328 | | | | 26,826 | | | | 24,603 | | | | 136,145 | | | | 220,963 | | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Fixed interest rate | | | 110 | | | | 5,191 | | | | 6,702 | | | | 9,069 | | | | 9,419 | | | | 94,066 | | | | 124,557 | | | | – | | | | 14,485 | | | | 8,625 | | | | 4,100 | | | | 11,573 | | | | 101,379 | | | | 140,162 | | | – Variable interest rate | | | 2,340 | | | | 5,032 | | | | 3,194 | | | | 19,513 | | | | 14,299 | | | | 44,142 | | | | 88,520 | | | | 1,529 | | | | 5,047 | | | | 3,703 | | | | 22,726 | | | | 13,030 | | | | 34,766 | | | | 80,801 | | | Total | | | 2,450 | | | | 10,223 | | | | 9,896 | | | | 28,582 | | | | 23,718 | | | | 138,208 | | | | 213,077 | | | | 1,529 | | | | 19,532 | | | | 12,328 | | | | 26,826 | | | | 24,603 | | | | 136,145 | | | | 220,963 | | | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Interest-only loans secured on residential properties | | | – | | | | 220 | | | | 344 | | | | 4,266 | | | | 9,307 | | | | 34,943 | | | | 49,080 | | | | – | | | | 321 | | | | 253 | | | | 4,211 | | | | 9,715 | | | | 33,348 | | | | 47,848 | |
Our policy is to hedge fixed-rate loans and advances to customers using derivatives, or by matching with otheron-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. 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 the elements of our loan portfolios with a greater risk of loss. The main classifications of credit risk elements presented are: – Impaired loans – Unimpaired loans contractually past due 90 days or more as to interest or principal – Forbearance – Troubled debt restructurings
– Potential problem loans and advances – Cross borderCross-border outstandings. Impaired loans LoansFollowing adoption of IFRS 9 on 1 January 2018, we define a loan as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt they can keep up with their payments i.e. they are unlikely to pay. We classify credit impaired loans as Stage 3. For details of loans classified as Stage 3, see the ‘Credit risk’ section of the Risk review. Prior to the adoption of IFRS 9, we used a different definition of default to identify loans as credit impaired when there is objective evidence that(although the two definitions are not all contractual cash flows will be received. Undersignificantly different), and we classified credit impaired loans as NPLs. Although we adopted IFRS separate disclosure is required9 from 1 January 2018, we continued to monitor NPLs as a key metric in 2018. For more, see ‘Key metrics’ and ‘Definition of loans that are neither past due nor impaired, past due but not impaired, and impaired. This disclosure may be founddefault (Credit impaired)’ in the ‘Credit risk – Santander UK group level – credit risk review’level’ in the ‘Credit risk’ section of the Risk review.
In accordance with IFRS, we recognise 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 £8m (2017: £9m, (2016: £11m, 2015: £15m)2016: £11m). Unimpaired loans contractually past due 90 days or more as to interest or principal We classify such loans as NPLs where customers don’t make a payment for three months or more, or if we have data to make us doubt they can keep up with their payments. We describe this in more detail in the ‘Credit risk – Santander UK group level – credit risk management’ section of the Risk review. Details of our NPLs are set out below and in the ‘Credit risk – Santander UK group level – credit risk review’ section of the Risk review. | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans and advances to customers(1) of which: | | | 200,325 | | | | 200,156 | | | | 198,634 | | | | 190,651 | | | | 187,048 | | NPLs | | | 2,848 | | | | 2,994 | | | | 3,056 | | | | 3,424 | | | | 3,823 | | Total impairment loan loss allowances | | | 940 | | | | 921(4) | | | | 1,108(4) | | | | 1,415(4) | | | | 1,538(4) | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | % | | | % | | | % | | | % | | NPL ratio(2) | | | 1.42 | | | | 1.50 | | | | 1.54 | | | | 1.80 | | | | 2.04 | | Coverage ratio(3) | | | 33 | | | | 31(4) | | | | 36(4) | | | | 41(4) | | | | 40(4) | |
(1) | Includes Social Housing loans and finance leases, and excludes trading assets. |
(2) | NPLs as a percentage of loans and advances to customers. |
(3) | Impairment loss allowances as a percentage of NPLs. |
(4) | In the first half of 2017, we reclassified our provisions for residual value and voluntary termination from the consumer (auto) finance impairment loss allowance. To facilitate comparison with the current period, the impairment loss allowances and NPL coverage ratios in the comparative periods were amended. |
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
Forbearance
To support customers that encounter difficulties, we operate forbearance programmes to amend contractual amounts or timings where a customer’s financial distress indicates the potential that satisfactory repayment may not be made within the original terms and conditions of the contract. We employ a range of forbearance strategies in order to improve the management of customer relationships, maximise collection opportunities within customers’ affordability and, if possible, avoid foreclosure or repossession. For more on this, see the ‘Credit risk management – Retail Banking’ and ‘Credit risk management – Other segments’ sections of the Risk review.impaired.
Troubled debt restructurings TheUnder US Securitiesaccounting practice and Exchange Commission requires separate disclosure of anyclassifications, troubled debt restructurings are 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 classifiedWe classify such loans as troubled debt restructurings.in forbearance. For disclosuredetails of loans that would otherwise have been classified as past due or impaired whose terms have been renegotiatedin forbearance, see ‘Forbearance’ in ‘Credit risk – Santander UK group level’, ‘Credit risk – Retail Banking’ and disclosure on forbearance, see‘Credit risk – Other business segments’ in the ‘Credit risk’ section of the Risk review.
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 problemWe classify such loans other than those discussed above, and as discussed in the ‘Credit risk’ section of the Risk review.impaired.
| | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans and advances to customers(1)of which: | | | 199,869 | | | | 200,325 | | | | 200,156 | | | | 198,634 | | | | 190,651 | | – Stage 3 | | | 2,491 | | | | | | | | | | | | | | | | | | – NPLs | | | 2,408 | | | | 2,848 | | | | 2,994 | | | | 3,056 | | | | 3,424 | |
| (1) | Includes Social Housing loans and finance leases, and excludes trading assets. |
| | | | Annual Report 2018 | Other information for US investors | | |
Cross borderCross-border outstandings
The disclosure of cross border outstandings in this section reflects US accounting practice and classifications. Cross border outstandings, as defined by bank regulatory rules, are amounts payable to us by residents of foreign countries, regardless of the currency in which the claim is denominated, and local country claims in excess of local country obligations. Cross border outstandings consist mainly of loans and advances to customers and banks, finance lease debtors, interest-bearing investments and other monetary assets. 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 more on our country risk exposures, see ‘Country risk exposures’ in the ‘Credit risk’ section of the Risk review. (i) Cross border outstandings exceeding 1% of total assets At 31 December 2018, 2017 2016 and 20152016 cross border outstandings exceeding 1% of total assets were as follows: | | 2018 | | | Governments
and official
institutions
£bn | | Banks and other
financial
institutions £bn | | | Other
£bn | | | Total
£bn | | US | | | | 1.1 | | | 3.0 | | | | 0.2 | | | | 4.3 | | Japan | | | | 3.8 | | | 2.6 | | | | – | | | | 6.4 | | Ireland | | | | – | | | 12.3 | | | | 0.4 | | | | 12.7 | | | | | | | | | | | | | | | | | | | | 2017 | | Governments
and official
institutions
£bn | | Banks and other
financial
institutions £bn | | Other £bn | | Total £bn | | | | | | | | | | | | US | | | 6.4 | | | 10.5 | | | 0.1 | | 17.0 | | | 6.4 | | | | 10.5 | | | | 0.1 | | | | 17.0 | | Japan | | | 3.0 | | | 2.8 | | | 0.8 | | 6.6 | | | 3.0 | | | | 2.8 | | | | 0.8 | | | | 6.6 | | Spain | | | – | | | 4.8 | | | 0.1 | | 4.9 | | | – | | | | 4.8 | | | | 0.1 | | | | 4.9 | | France | | | 0.3 | | | 2.2 | | | 2.2 | | 4.7 | | | 0.3 | | | | 2.2 | | | | 2.2 | | | | 4.7 | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | US | | | 5.0 | | | | 13.1 | | | 0.1 | | 18.2 | | | 5.0 | | | | 13.1 | | | | 0.1 | | | | 18.2 | | Japan | | | 2.8 | | | | 3.3 | | | 1.4 | | 7.5 | | | 2.8 | | | | 3.3 | | | | 1.4 | | | | 7.5 | | | | | | | | | | | | | 2015 | | | | | | | US | | | 2.7 | | | | 12.2 | | | 0.1 | | 15.0 | | Japan | | | 2.7 | | | | 1.1 | | | 1.7 | | 5.5 | | France | | | 0.4 | | | | 2.2 | | | 1.6 | | 4.2 | |
(ii) Cross border outstandings between 0.75% and 1% of total assets At 31 December 2018, 2017 and 2016, cross border outstandings between 0.75% and 1% of total assets were as follows: | | | | | | | | | | | | | | | | | | | | Governments
and official
institutions | | | Banks and
other financial
institutions | | | Other | | | Total | | | 2018 | | £bn | | | £bn | | | £bn | | | £bn | | Spain | | | – | | | | 2.5 | | | | 0.2 | | | | 2.7 | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | Germany | | | – | | | | 2.8 | | | | 0.1 | | | | 2.9 | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | Spain | | | – | | | | 2.5 | | | | 0.2 | | | | 2.7 | | Luxembourg | | | – | | | | 2.3 | | | | 0.3 | | | | 2.6 | | Germany | | | – | | | | 2.5 | | | | – | | | | 2.5 | | France | | | 0.4 | | | | 2.0 | | | | 0.1 | | | | 2.5 | |
(iii) Cross border outstandings between 0.5% and 0.75% of total assets At 31 December 2018, 2017 and 2016, cross border outstandings between 0.5% and 0.75% of total assets were as follows: | | | | | | | | | | | | | | | | | | | | Governments
and official
institutions | | | Banks and
other financial
institutions | | | Other | | | Total | | | 2018 | | £bn | | | £bn | | | £bn | | | £bn | | Germany | | | – | | | | 1.6 | | | | – | | | | 1.6 | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | Ireland | | | – | | | | 1.3 | | | | 0.8 | | | | 2.1 | | Netherlands | | | – | | | | 0.6 | | | | 1.2 | | | | 1.8 | | Luxembourg | | | – | | | | 1.3 | | | | 0.4 | | | | 1.7 | |
There were no cross border outstandings between 0.5% and 0.75% of total assets at 31 December 2016.
| | | | | > Additional balance sheet analysis |
(ii) Cross border outstandings between 0.75% and 1% of total assets
At 31 December 2017, 2016 and 2015, cross border outstandings between 0.75% and 1% of total assets were as follows:
| | | | | | | | | | | | | | | | | | | | Governments
and official
institutions | | | Banks and
other financial
institutions | | | Other | | | Total | | | 2017 | | £bn | | | £bn | | | £bn | | | £bn | | Germany | | | – | | | | 2.8 | | | | 0.1 | | | | 2.9 | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | Spain | | | – | | | | 2.5 | | | | 0.2 | | | | 2.7 | | Luxembourg | | | – | | | | 2.3 | | | | 0.3 | | | | 2.6 | | Germany | | | – | | | | 2.5 | | | | – | | | | 2.5 | | France | | | 0.4 | | | | 2.0 | | | | 0.1 | | | | 2.5 | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | Germany | | | 0.1 | | | | 2.2 | | | | 0.5 | | | | 2.8 | |
(iii) Cross border outstandings between 0.5% and 0.75% of total assets
At 31 December 2017, 2016 and 2015, cross border outstandings between 0.5% and 0.75% of total assets were as follows:
| | | | | | | | | | | | | | | | | | 2017 | | Governments
and official
institutions £bn | | | Banks and
other financial
institutions
£bn | | | Other
£bn | | | Total
£bn | | Ireland | | | – | | | | 1.3 | | | | 0.8 | | | | 2.1 | | Netherlands | | | – | | | | 0.6 | | | | 1.2 | | | | 1.8 | | Luxembourg | | | – | | | | 1.3 | | | | 0.4 | | | | 1.7 | | 2016 | | | | | | | | | | | | | | | | | None. | | | | | | | | | | | | | | | | | | 2015 | | Governments
and official
institutions
£bn | | | Banks and
other financial
institutions
£bn | | | Other
£bn | | | Total
£bn | | Spain | | | – | | | | 1.7 | | | | 0.2 | | | | 1.9 | |
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. For geographical analysis by the domicile of the borrower rather than the office of lending, see the ‘Country risk exposure’ section in the Risk review.
ImpairmentCredit impairment loss allowances on loans and advances to customers
An analysis of impairment loss allowances on loans and advances to customers is presented below. | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Observed impairment loss allowances: | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | 105 | | | | 130 | | | | 159 | | | | 248 | | | | 303 | | – Corporate loans | | | 433 | | | | 287 | | | | 282 | | | | 412 | | | | 482 | | – Finance leases | | | 12 | | | | 13 | | | | 12 | | | | 7 | | | | 8 | | – Other unsecured advances | | | 59 | | | | 73 | | | | 78 | | | | 85 | | | | 80 | | Total observed impairment loss allowances | | | 609 | | | | 503 | | | | 531 | | | | 752 | | | | 873 | | Incurred but not yet observed impairment loss allowances: | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | 120 | | | | 149 | | | | 265 | | | | 331 | | | | 290 | | – Corporate loans | | | 57 | | | | 95 | | | | 113 | | | | 146 | | | | 151 | | – Finance leases | | | 34 | | | | 32(1) | | | | 8(1) | | | | 23(1) | | | | 19(1) | | – Other unsecured advances | | | 120 | | | | 142 | | | | 191 | | | | 163 | | | | 205 | | Total incurred but not yet observed impairment loss allowances | | | 331 | | | | 418 | | | | 577 | | | | 663 | | | | 665 | | Total impairment loss allowances | | | 940 | | | | 921 | | | | 1,108 | | | | 1,415 | | | | 1,538 | |
(1) | | In the first half of 2017, we reclassified our provisions for residual value and voluntary termination from the consumer (auto) finance impairment loss allowance. To facilitate comparison with the current period, the impairment loss allowances in the comparative periods were amended. |
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
| | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Total credit impairment loss allowances: | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | 234 | | | | 225 | | | | 279 | | | | 424 | | | | 579 | | – Corporate loans | | | 226 | | | | 490 | | | | 382 | | | | 395 | | | | 558 | | – Finance leases | | | 85 | | | | 46 | | | | 45 | | | | 20 | | | | 30 | | – Other unsecured advances | | | 206 | | | | 179 | | | | 215 | | | | 269 | | | | 248 | | Total credit impairment loss allowances | | | 751 | | | | 940 | | | | 921 | | | | 1,108 | | | | 1,415 | |
Movements in credit impairment loss allowances on loans and advances to customers An analysis of movements in impairment loss allowances on loans and advances to customers is presented below. | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 2016(1) | | | 2015(1) | | | 2014(1) | | | 2013(1) | | | | £m | | | £m | | | £m | | | £m | | | £m | Impairment loss allowances at 1 January | | | 921 | | | | 1,108 | | | | 1,415 | | | | 1,538 | | | 1,785 | Amounts written off: | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | (17 | ) | | | (29 | ) | | | (32 | ) | | | (56 | ) | | (89) | – Corporate loans | | | (64 | ) | | | (72 | ) | | | (157 | ) | | | (150 | ) | | (382) | – Finance leases | | | (19 | ) | | | (22 | ) | | | (30 | ) | | | (14 | ) | | (10) | – Other unsecured advances | | | (138 | ) | | | (196 | ) | | | (244 | ) | | | (272 | ) | | (342) | Total amounts written off | | | (238 | ) | | | (319 | ) | | | (463 | ) | | | (492 | ) | | (823) | Observed impairment losses charged against profit: | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | (8 | ) | | | – | | | | (57 | ) | | | 1 | | | 93 | – Corporate loans | | | 210 | | | | 77 | | | | 24 | | | | 80 | | | 130 | – Finance leases | | | 20 | | | | 12 | | | | 12 | | | | 6 | | | 12 | – Other unsecured advances | | | 123 | | | | 174 | | | | 248 | | | | 277 | | | 316 | Total observed impairment losses charged against profit | | | 345 | | | | 263 | | | | 227 | | | | 364 | | | 551 | Incurred but not yet observed impairment losses charged against/(released into) profit | | | (88 | ) | | | (131 | ) | | | (71 | ) | | | 5 | | | 25 | Total impairment losses charged against profit | | | 257 | | | | 132 | | | | 156 | | | | 369 | | | 576 | Impairment loss allowances at 31 December | | | 940 | | | | 921 | | | | 1,108 | | | | 1,415 | | | 1,538 | | | | | | | | | | | | | | | | | | | | | | | % | | | % | | | % | | | % | | | % | Ratio of amounts written off to average loans during the year | | | 0.12 | | | | 0.15 | | | | 0.22 | | | | 0.26 | | | 0.43 | (1) In the first half of 2017, we reclassified our provisions for residual value and voluntary termination from the consumer (auto) finance impairment loss allowance. To facilitate comparison with the current period, the impairment loss allowances in the comparative periods were amended. Recoveries, net of collection costs An analysis of recoveries, net of collection costs is presented below. | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | £m | | | £m | | | £m | | | £m | | | £m | Loans secured on residential properties | | | 3 | | | | 4 | | | | 2 | | | | 3 | | | 4 | Corporate loans | | | 1 | | | | 3 | | | | 3 | | | | 4 | | | 8 | Finance leases | | | 6 | | | | 2 | | | | 2 | | | | 2 | | | 2 | Other unsecured advances | | | 44 | | | | 56 | | | | 83 | | | | 102 | | | 87 | Total amount recovered | | | 54 | | | | 65 | | | | 90 | | | | 111 | | | 101 | DEPOSITS BY BANKS The balances below include deposits by banks classified in the balance sheet as trading liabilities. | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | £m | | | £m | | | £m | Average balance(1) | | | | | | | | | | | 15,708 | | | | 12,634 | | | 8,680 | Average interest rate(1) | | | | | | | | | | | 0.46% | | | | 0.62% | | | 0.99% |
| | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Credit impairment loss allowances at 31 December | | | 940 | | | | 921 | | | | 1,108 | | | | 1,415 | | | | 1,538 | | Adoption of IFRS 9 (see Note 1 to the Consolidated Financial Statements) | | | 211 | | | | | | | | | | | | | | | | | | Reallocation of ECL on off balance sheet exposures(1) | | | (50 | ) | | | | | | | | | | | | | | | | | Credit impairment loss allowances at 1 January | | | 1,101 | | | | 921 | | | | 1,108 | | | | 1,415 | | | | 1,538 | | Amounts written off: | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | (17 | ) | | | (17 | ) | | | (29 | ) | | | (32 | ) | | | (56 | ) | – Corporate loans | | | (355 | ) | | | (64 | ) | | | (72 | ) | | | (157 | ) | | | (150 | ) | – Finance leases | | | (23 | ) | | | (19 | ) | | | (22 | ) | | | (30 | ) | | | (14 | ) | – Other unsecured advances | | | (144 | ) | | | (138 | ) | | | (196 | ) | | | (244 | ) | | | (272 | ) | Total amounts written off | | | (539 | ) | | | (238 | ) | | | (319 | ) | | | (463 | ) | | | (492 | ) | Credit impairment losses (released)/charged against profit: | | | | | | | | | | | | | | | | | | | | | – Loans secured on residential properties | | | (18 | ) | | | (37 | ) | | | (116 | ) | | | (123 | ) | | | 42 | | – Corporate loans | | | 17 | | | | 172 | | | | 59 | | | | (6 | ) | | | 75 | | – Finance leases | | | 51 | | | | 20 | | | | 47 | | | | 20 | | | | 17 | | – Other unsecured advances | | | 139 | | | | 102 | | | | 142 | | | | 265 | | | | 235 | | Total credit impairment losses charged against profit | | | 189 | | | | 257 | | | | 132 | | | | 156 | | | | 369 | | Credit impairment loss allowances at 31 December | | | 751 | | | | 940 | | | | 921 | | | | 1,108 | | | | 1,415 | |
| (1) | | Calculated using monthly data.This relates to ECL onoff-balance sheet exposures following the adoption of a methodology to enable their separate identification from ECL on drawn exposures. |
At 31 December 2017, deposits by foreign banks were £2,159m (2016: £1,995m, 2015: £6,629m).
| | | | | | | | | | | | | | | | | | | | | | | | % | | | % | | | % | | | % | | | % | | Ratio of amounts written off to average loans during the year | | | 0.27 | | | | 0.12 | | | | 0.15 | | | | 0.22 | | | | 0.26 | |
Recoveries, net of collection costs An analysis of recoveries, net of collection costs is presented below. | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Loans secured on residential properties | | | 2 | | | | 3 | | | | 4 | | | | 2 | | | | 3 | | Corporate loans | | | 1 | | | | 1 | | | | 3 | | | | 3 | | | | 4 | | Finance leases | | | 6 | | | | 6 | | | | 2 | | | | 2 | | | | 2 | | Other unsecured advances | | | 33 | | | | 44 | | | | 56 | | | | 83 | | | | 102 | | Total amount recovered | | | 42 | | | | 54 | | | | 65 | | | | 90 | | | | 111 | |
| | | | Annual Report 2018 | Other information for US investors | | |
DEPOSITS BY CUSTOMERS The balances below include deposits by customers classified in the balance sheet as other financial liabilities at fair value through profit or loss and repurchase agreements – non trading. Prior to the implementation of our ring-fence structure they also included deposits by customers classified as trading liabilities. The following tables show the average balances of deposits by customer type. | | | | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Demand deposits | | | 150,389 | | | | 131,521 | | | | 118,464 | | | | 153,539 | | | | 150,389 | | | | 131,521 | | Time deposits | | | 22,720 | | | | 29,287 | | | | 33,459 | | | | 18,310 | | | | 23,224 | | | | 29,760 | | Other deposits | | | 28,771 | | | | 22,791 | | | | 8,747 | | | | 30,342 | | | | 28,267 | | | | 22,318 | | Average balance(1) | | | 201,880 | | | | 183,599 | | | | 160,670 | | | | 202,191 | | | | 201,880 | | | | 183,599 | | Average interest rate(1) | | | 0.72% | | | | 1.03% | | | | 1.24% | | | | 0.79% | | | | 0.72% | | | | 1.03% | |
| (1) | | Calculated using monthly data. |
We obtain retail demand and time deposits either through our branch network, cahoot or remotely. 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.
| | | | | > Additional balance sheet analysis |
| | | Deposits | | Description | | | | 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. |
DEPOSITS BY BANKS The balances below include deposits by banks classified in the balance sheet as repurchase agreements – non trading. Prior to the implementation of our ring-fence structure they also included deposits by banks classified as trading liabilities. | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2017 | | | 2016 | | | | | | | | | £m | | | £m | | | £m | | Average balance(1) | | | | | | | 19,622 | | | | 15,708 | | | | 12,634 | | Average interest rate(1) | | | | | | | 0.72% | | | | 0.46% | | | | 0.62% | |
| (1) | | Calculated using monthly data. |
At 31 December 2018, deposits by foreign banks were £4,593m (2017: £2,159m, 2016: £1,995m).
| | | | | > Additional balance sheet analysis |
SHORT-TERM BORROWINGS We include short-term borrowings in other financial liabilities at fair value through profit or loss, deposits by banks, repurchase agreements – non trading liabilities, financial liabilities designated at fair value and debt securities in issue. Prior to the implementation of our ring-fence structure short-term borrowings were also included in trading liabilities. We do not show short-term borrowings separately on our balance sheet. Short-term borrowings are amounts payable for short-term obligations that are US Federal funds purchased and securities sold under repurchase agreements, commercial paper, borrowings from banks, borrowing 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 2018, 2017 2016 and 2015.2016. | | | | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Securities sold under repurchase agreements | | | | | | | | | | | | | – Year-end balance | | | 26,334 | | | | 10,104 | | | | 10,567 | | | | 12,175 | | | | 26,334 | | | | 10,104 | | – Year-end interest rate | | | 0.52% | | | | 0.11% | | | | 0.23% | | | | 0.77% | | | | 0.52% | | | | 0.11% | | – Average balance(1) | | | 23,281 | | | | 16,109 | | | | 15,833 | | | | 21,684 | | | | 23,281 | | | | 16,109 | | – Average interest rate(1) | | | 0.42% | | | | 0.44% | | | | 0.39% | | | | 0.76% | | | | 0.42% | | | | 0.44% | | – Maximum balance(1) | | | 28,793 | | | | 23,385 | | | | 23,677 | | | | 32,550 | | | | 28,793 | | | | 23,385 | | Commercial paper | | | | | | | | | | | | | – Year-end balance | | | 3,293 | | | | 3,132 | | | | 2,744 | | | | 3,131 | | | | 3,293 | | | | 3,132 | | – Year-end interest rate | | | 0.80% | | | | 0.88% | | | | 0.41% | | | | 2.43% | | | | 0.80% | | | | 0.88% | | – Average balance(1) | | | 3,592 | | | | 3,220 | | | | 3,772 | | | | 4,314 | | | | 3,592 | | | | 3,220 | | – Average interest rate(1) | | | 0.76% | | | | 0.74% | | | | 0.30% | | | | 1.71% | | | | 0.76% | | | | 0.74% | | – Maximum balance(1) | | | 4,180 | | | | 3,858 | | | | 5,066 | | | | 5,898 | | | | 4,180 | | | | 3,858 | | Borrowings from banks (Deposits by banks)(2) | | | | | | | | | | | | | – Year-end balance | | | 3,968 | | | | 2,619 | | | | 3,711 | | | | 6,208 | | | | 3,968 | | | | 2,619 | | – Year-end interest rate | | | 0.34% | | | | 0.09% | | | | 0.07% | | | | 0.72% | | | | 0.34% | | | | 0.09% | | – Average balance(1) | | | 3,278 | | | | 3,350 | | | | 3,004 | | | | 5,190 | | | | 3,278 | | | | 3,350 | | – Average interest rate(1) | | | 0.23% | | | | 0.10% | | | | 0.05% | | | | 0.54% | | | | 0.23% | | | | 0.10% | | – Maximum balance(1) | | | 4,222 | | | | 4,861 | | | | 3,905 | | | | 6,871 | | | | 4,222 | | | | 4,861 | | Negotiable certificates of deposit | | | | | | | | | | | | | – Year-end balance | | | 4,706 | | | | 5,217 | | | | 4,468 | | | | 3,221 | | | | 4,706 | | | | 5,217 | | – Year-end interest rate | | | 0.69% | | | | 0.31% | | | | 0.43% | | | | 0.56% | | | | 0.69% | | | | 0.31% | | – Average balance(1) | | | 4,710 | | | | 3,970 | | | | 4,468 | | | | 3,914 | | | | 4,710 | | | | 3,970 | | – Average interest rate(1) | | | 0.66% | | | | 0.36% | | | | 0.41% | | | | 0.54% | | | | 0.66% | | | | 0.36% | | – Maximum balance(1) | | | 5,335 | | | | 5,614 | | | | 5,666 | | | | 6,108 | | | | 5,335 | | | | 5,614 | | Other debt securities in issue | | | | | | | | | | | | | – Year-end balance | | | 7,536 | | | | 7,904 | | | | 5,238 | | | | 7,378 | | | | 7,536 | | | | 7,904 | | – Year-end interest rate | | | 1.42% | | | | 1.57% | | | | 2.60% | | | | 1.58% | | | | 1.42% | | | | 1.57% | | – Average balance(1) | | | 9,124 | | | | 7,806 | | | | 4,133 | | | | 5,573 | | | | 9,124 | | | | 7,806 | | – Average interest rate(1) | | | 1.65% | | | | 1.76% | | | | 2.60% | | | | 1.77% | | | | 1.65% | | | | 1.76% | | – Maximum balance(1) | | | 10,761 | | | | 8,267 | | | | 5,238 | | | | 7,378 | | | | 10,761 | | | | 8,267 | |
| (1) | Calculated using monthly weighted average data. |
| (2) | | Theyear-end deposits by banks balance includesnon-interest bearing items in the course of transmission of £262m (2017: £303m, (2016: £308m, 2015: £326m)2016: £308m). |
Abbey National Treasury Services plcDuring 2018 and as part of our ring-fencing plans ANTS and its US Branch issueceased issuing commercial paper. Abbey National Treasury ServicesAll commercial paper is now issued by Santander UK plc. Santander UK plc issues euro commercial paper with a minimum issuance amount of€100,000 with a maximum maturity of 364 days. Abbey National Treasury Services plc, US Branch issuesdays, and US$ commercial paper with a minimum denomination of US$250,000, with a maximum maturity of 270 days. As part of our ring-fencing plans, during 2017 Santander UK plc established separate commercial paper and certificate of deposit programmes, with similar terms to the existing Abbey National Treasury Services plc programmes. For more information on our ring-fencing plans, see Note 39 to the Consolidated Financial Statements.
Certificates of deposit and certain time deposits The following table shows the maturities of our certificates of deposit and other large wholesale time deposits fromnon-banks over £50,000 (or thenon-sterling equivalent of £50,000) at 31 December 2017.2018. 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 2017.2018. 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. | | | | 3 months
or less
£m | | | Over 3
through
6 months
£m | | | Over 6
through
12 months
£m | | | Over
12 months
£m | | | Total
£m | | | 3 months
or less
£m | | | Over 3
through
6 months
£m | | | Over 6
through
12 months
£m | | | Over
12 months
£m | | | Total
£m | | Certificates of deposit | | | 2,552 | | | | 1,955 | | | | 199 | | | | – | | | | 4,706 | | | | 2,587 | | | | 394 | | | | 240 | | | | – | | | | 3,221 | | Wholesale time deposits | | | 1,239 | | | | 296 | | | | 231 | | | | – | | | | 1,766 | | | | 1,428 | | | | 219 | | | | 113 | | | | – | | | | 1,760 | | | | | | 3,791 | | | | 2,251 | | | | 430 | | | | – | | | | 6,472 | | | | 4,015 | | | | 613 | | | | 353 | | | | – | | | | 4,981 | |
| | | Annual Report 2017 on Form 20-F2018 | Other information for US investors | | |
CONTRACTUAL OBLIGATIONS For the amounts and maturities of contractual obligations in respect of guarantees, see Notes 2932 and 3741 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 | | | Payments due by period | | | | | Less than
1 year £m | | | 1 – 3 years
£m | | | 3 – 5 years
£m | | | More than
5 years
£m | | | Total
£m | | | Less than
1 year £m | | | 1–3 years
£m | | | 3–5 years
£m | | | More than
5 years
£m | | | Total
£m | | Deposits by banks(1)(2) | | | 30,302 | | | | 4,754 | | | | 4,027 | | | | 205 | | | | 39,288 | | | Deposits by customers – repos(1) | | | – | | | | – | | | | 502 | | | | – | | | | 502 | | | Deposits by customers – other(2) | | | 172,882 | | | | 2,765 | | | | 3,659 | | | | 4,520 | | | | 183,826 | | | Derivative financial instruments | | | 1,872 | | | | 1,792 | | | | 1,061 | | | | 12,888 | | | | 17,613 | | | | 501 | | | | 70 | | | | 11 | | | | 787 | | | | 1,369 | | Debt securities in issue(3) | | | 13,305 | | | | 16,030 | | | | 6,680 | | | | 8,253 | | | | 44,268 | | | Deposits by customers(1) | | | | 177,641 | | | | 4,496 | | | | 1,132 | | | | 3,839 | | | | 187,108 | | Deposits by banks(1) | | | | 12,559 | | | | 9,362 | | | | 2,269 | | | | 219 | | | | 24,409 | | Debt securities in issue(2) | | | | 14,219 | | | | 18,887 | | | | 3,757 | | | | 10,819 | | | | 47,682 | | Subordinated liabilities | | | 53 | | | | – | | | | – | | | | 3,740 | | | | 3,793 | | | | – | | | | – | | | | 1,173 | | | | 2,428 | | | | 3,601 | | Retirement benefit obligations | | | 252 | | | | 523 | | | | 603 | | | | 10,205 | | | | 11,583 | | | | 266 | | | | 556 | | | | 634 | | | | 9,348 | | | | 10,804 | | Operating lease obligations | | | 73 | | | | 130 | | | | 30 | | | | 70 | | | | 303 | | | | 72 | | | | 85 | | | | 29 | | | | 60 | | | | 246 | | Purchase obligations | | | 273 | | | | – | | | | – | | | | – | | | | 273 | | | | 276 | | | | – | | | | – | | | | – | | | | 276 | | | | | | 219,012 | | | | 25,994 | | | | 16,562 | | | | 39,881 | | | | 301,449 | | | | 205,534 | | | | 33,456 | | | | 9,005 | | | | 27,500 | | | | 275,495 | |
| (1) | Securities sold under repurchase agreements. |
(2) | Includes deposits by banks and deposits by customers classified in the balance sheet as trading liabilities, other financial liabilities at fair value through profit or loss and financial liabilities designated at fair value.amortised cost (including repurchase agreements – non trading). |
(3)(2) | Includes debt securities in issue classified in the balance sheet as trading liabilities and other financial liabilities designated at fair value.value through profit or loss. |
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 customers, deposits by banks, and deposits by customers,repurchase agreements - non trading, see Notes 2125, 26 and 2227 to the Consolidated Financial Statements. We have entered into outsourcing contracts where, in some circumstances,cases, there is no minimum specified spending requirement. In these cases, anticipated spending volumes have been included withinin 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 and performance bonds under which we take on credit on behalf of customers when actual funding is not required. This is normally because a third party won’twill not 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 2932 to the Consolidated Financial Statements for more information on our guarantees, commitments and contingencies. See Note 1921 to the Consolidated Financial Statements for more information on ouroff-balance sheet arrangements. In the ordinary course of business, we also enter into securitisation transactions as set out in Note 1615 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 and/or the ability to manage capital efficiently.
| | | | | > Additional balance sheet analysis |
INTEREST RATE SENSITIVITY 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 overallnon-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. 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. | | | | 2017/2016 | | | | 2016/2015 | | | 2018/2017 | | | | 2017/2016 | | | | | | | | Changes due to | | | | | | Changes due to | | | | | | Changes due to | | | | | | Changes due to | | | | | Total | | | increase/(decrease) in | | | | Total | | | increase/(decrease) in | | | Total change £m | | | increase/(decrease) in | | | | Total change £m | | | increase/(decrease) in | | | | | change | | | Volume | | | Rate | | | change | | | Volume | | | Rate | | | Volume | | | Rate | | | Volume | | | Rate | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | Interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers | | | | (36 | ) | | | 62 | | | | (98 | ) | | | | | (704 | ) | | | (8 | ) | | | (696 | ) | Loans and advances to banks | | | 57 | | | | 38 | | | | 19 | | | | | | 12 | | | | 4 | | | | 8 | | | | 38 | | | | (27 | ) | | | 65 | | | | | | 52 | | | | 34 | | | | 18 | | Loans and advances to customers | | | (704 | ) | | | (21 | ) | | | (683 | ) | | | | | (293 | ) | | | 153 | | | | (446 | ) | | Reverse repurchase agreements – non trading | | | | 104 | | | | 118 | | | | (14 | ) | | | | | 5 | | | | (2 | ) | | | 7 | | Other interest-earning financial assets | | | 85 | | | | 50 | | | | 35 | | | | | | 53 | | | | 34 | | | | 19 | | | | 55 | | | | 30 | | | | 25 | | | | | | 85 | | | | 50 | | | | 35 | | Total interest income | | | (562 | ) | | | 67 | | | | (629 | ) | | | | | (228 | ) | | | 191 | | | | (419 | ) | | | 161 | | | | 183 | | | | (22 | ) | | | | | (562 | ) | | | 74 | | | | (636 | ) | Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | (10 | ) | | | 29 | | | | (39 | ) | | | | | (7 | ) | | | – | | | | (7 | ) | | Deposits by customers – demand | | | (420 | ) | | | 198 | | | | (618 | ) | | | | | 42 | | | | 159 | | | | (117 | ) | | | 73 | | | | 20 | | | | 53 | | | | | | (420 | ) | | | 198 | | | | (618 | ) | Deposits by customers – time | | | (192 | ) | | | (87 | ) | | | (105 | ) | | | | | (144 | ) | | | (67 | ) | | | (77 | ) | | | (30 | ) | | | (41 | ) | | | 11 | | | | | | (192 | ) | | | (85 | ) | | | (107 | ) | Deposits by customers – other | | | 51 | | | | (31 | ) | | | 82 | | | | | | 14 | | | | 71 | | | | (57 | ) | | | 60 | | | | 73 | | | | (13 | ) | | | | | 51 | | | | (33 | ) | | | 84 | | Deposits by banks | | | | 82 | | | | 20 | | | | 62 | | | | | | 17 | | | | 31 | | | | (14 | ) | Repurchase agreements – non trading | | | | 37 | | | | 11 | | | | 26 | | | | | | (33 | ) | | | (14 | ) | | | (19 | ) | Subordinated debt | | | (9 | ) | | | (15 | ) | | | 6 | | | | | | 5 | | | | 10 | | | | (5 | ) | | | 8 | | | | (14 | ) | | | 22 | | | | | | (9 | ) | | | (15 | ) | | | 6 | | Debt securities in issue | | | (181 | ) | | | (104 | ) | | | (77 | ) | | | | | (155 | ) | | | 2 | | | | (157 | ) | | | 131 | | | | 17 | | | | 114 | | | | | | (181 | ) | | | (104 | ) | | | (77 | ) | Other interest-bearing financial liabilities | | | (22 | ) | | | (6 | ) | | | (16 | ) | | | | | 10 | | | | 4 | | | | 6 | | | | – | | | | (3 | ) | | | 3 | | | | | | (16 | ) | | | (6 | ) | | | (10 | ) | Total interest expense | | | (783 | ) | | | (16 | ) | | | (767 | ) | | | | | (235 | ) | | | 179 | | | | (414 | ) | | | 361 | | | | 83 | | | | 278 | | | | | | (783 | ) | | | (28 | ) | | | (755 | ) | Net interest income | | | 221 | | | | 83 | | | | 138 | | | | | | 7 | | | | 12 | | | | (5 | ) | | | (200 | ) | | | 100 | | | | (300 | ) | | | | | 221 | | | | 102 | | | | 119 | |
| | | Annual Report 2017 on Form 20-F2018 | Other information for US investors | | |
AVERAGE BALANCE SHEET 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. Geographical analysis is no longer provided following the reduction in our non-UK activities. | | | | 2017 | | | | 2016 | | | | 2015 | | | 2018 | | | | 2017 | | | | 2016 | | | | | Average
balance(1)
£m | | | Interest(2,3)
£m | | | Average
rate % | | | Average
balance(1)(6)
£m | | | Interest(2,3)
£m | | | Average
rate % | | | Average
balance(1)(6)
£m | | | Interest(2,3)
£m | | | Average
rate % | | | Average
balance(1)
£m | | | Interest(2,3)
£m | | | Average
rate % | | | Average
balance(1)
£m | | | Interest(2,3)
£m | | | Average
rate % | | | Average
balance(1)
£m | | | Interest(2,3)
£m | | | Average
rate % | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers(4) | | | | 202,341 | | | | 5,458 | | | | 2.70 | | | | | | 200,082 | | | | 5,494 | | | | 2.75 | | | | | | 200,343 | | | | 6,198 | | | | 3.09 | | | Loans and advances to banks | | | 37,041 | | | | 184 | | | | 0.50 | | | | | | 28,509 | | | | 127 | | | | 0.45 | | | | | | 27,291 | | | | 115 | | | | 0.42 | | | | 29,659 | | | | 202 | | | | 0.68 | | | | | | 35,524 | | | | 164 | | | | 0.46 | | | | | | 27,161 | | | | 112 | | | | 0.41 | | | Loans and advances to customers(4) | | | 200,416 | | | | 5,494 | | | | 2.74 | | | | | | 201,108 | | | | 6,198 | | | | 3.08 | | | | | | 196,327 | | | | 6,491 | | | | 3.30 | | | | Reverse repurchase agreements – non trading | | | | 12,759 | | | | 124 | | | | 0.97 | | | | | | 1,851 | | | | 20 | | | | 1.08 | | | | | | 2,113 | | | | 15 | | | | 0.71 | | | Debt securities | | | 17,281 | | | | 227 | | | | 1.31 | | | | | | 12,792 | | | | 142 | | | | 1.11 | | | | | | 9,300 | | | | 89 | | | | 0.96 | | | | 19,589 | | | | 282 | | | | 1.44 | | | | | | 17,281 | | | | 227 | | | | 1.31 | | | | | | 12,792 | | | | 142 | | | | 1.11 | | | Total average interest-earning assets, interest income(5) | | | 254,738 | | | | 5,905 | | | | 2.32 | | | | | | 242,409 | | | | 6,467 | | | | 2.67 | | | | | | 232,918 | | | | 6,695 | | | | 2.87 | | | | 264,348 | | | | 6,066 | | | | 2.29 | | | | | | 254,738 | | | | 5,905 | | | | 2.32 | | | | | | 242,409 | | | | 6,467 | | | | 2.67 | | | Impairment loss allowances and RV & VT provisions | | | (903 | ) | | | – | | | | – | | | | | | (1,095 | ) | | | – | | | | – | | | | | | (1,315 | ) | | | – | | | | – | | | | Credit impairment loss allowances and RV & VT provisions | | | | (862 | ) | | | – | | | | – | | | | | | (903 | ) | | | – | | | | – | | | | | | (1,095 | ) | | | – | | | | – | | | Trading assets | | | 25,149 | | | | – | | | | – | | | | | | 21,798 | | | | – | | | | – | | | | | | 19,756 | | | | – | | | | – | | | | 12,235 | | | | – | | | | – | | | | | | 25,149 | | | | – | | | | – | | | | | | 21,798 | | | | – | | | | – | | | Financial assets designated at fair value | | | 2,158 | | | | – | | | | – | | | | | | 2,439 | | | | – | | | | – | | | | | | 2,737 | | | | – | | | | – | | | | Derivatives and other non-interest-earning assets | | | 32,519 | | | | – | | | | – | | | | | | 36,697 | | | | – | | | | – | | | | | | 31,647 | | | | – | | | | – | | | | 24,151 | | | | – | | | | – | | | | | | 32,519 | | | | – | | | | – | | | | | | 36,697 | | | | – | | | | – | | | Other financial assets at fair value through profit or loss | | | | 4,048 | | | | – | | | | – | | | | | | 2,158 | | | | – | | | | – | | | | | | 2,439 | | | | – | | | | – | | | Total average assets | | | 313,661 | | | | – | | | | – | | | | | | 302,248 | | | | – | | | | – | | | | | | 285,743 | | | | – | | | | – | | | | 303,920 | | | | – | | | | – | | | | | | 313,661 | | | | – | | | | – | | | | | | 302,248 | | | | – | | | | – | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits by banks | | | (11,526 | ) | | | (46 | ) | | | 0.40 | | | | | | (7,555 | ) | | | (56 | ) | | | 0.74 | | | | | | (7,261 | ) | | | (63 | ) | | | 0.87 | | | | Deposits by customers – demand | | | (150,389 | ) | | | (961 | ) | | | 0.64 | | | | | | (131,521 | ) | | | (1,381 | ) | | | 1.05 | | | | | | (118,464 | ) | | | (1,339 | ) | | | 1.13 | | | | (153,540 | ) | | | (1,034 | ) | | | 0.67 | | | | | | (150,389 | ) | | | (961 | ) | | | 0.64 | | | | | | (131,521 | ) | | | (1,381 | ) | | | 1.05 | | | Deposits by customers – time | | | (22,720 | ) | | | (194 | ) | | | 0.85 | | | | | | (29,287 | ) | | | (386 | ) | | | 1.32 | | | | | | (33,459 | ) | | | (530 | ) | | | 1.58 | | | | (18,310 | ) | | | (164 | ) | | | 0.90 | | | | | | (23,224 | ) | | | (194 | ) | | | 0.84 | | | | | | (29,760 | ) | | | (386 | ) | | | 1.30 | | | Deposits by customers – other | | | (7,629 | ) | | | (175 | ) | | | 2.29 | | | | | | (10,213 | ) | | | (124 | ) | | | 1.21 | | | | | | (6,795 | ) | | | (110 | ) | | | 1.62 | | | | (10,084 | ) | | | (235 | ) | | | 2.33 | | | | | | (7,126 | ) | | | (175 | ) | | | 2.46 | | | | | | (9,709 | ) | | | (124 | ) | | | 1.28 | | | Deposits by banks | | | | (15,945 | ) | | | (117 | ) | | | 0.73 | | | | | | (10,137 | ) | | | (35 | ) | | | 0.35 | | | | | | (3,728 | ) | | | (18 | ) | | | 0.48 | | | Repurchase agreements – non trading | | | | (8,924 | ) | | | (42 | ) | | | 0.47 | | | | | | (2,826 | ) | | | (5 | ) | | | 0.18 | | | | | | (4,435 | ) | | | (38 | ) | | | 0.86 | | | Debt securities | | | (44,076 | ) | | | (590 | ) | | | 1.34 | | | | | | (50,985 | ) | | | (771 | ) | | | 1.51 | | | | | | (50,958 | ) | | | (926 | ) | | | 1.82 | | | | (45,342 | ) | | | (721 | ) | | | 1.59 | | | | | | (44,075 | ) | | | (590 | ) | | | 1.34 | | | | | | (50,986 | ) | | | (771 | ) | | | 1.51 | | | Subordinated liabilities | | | (3,729 | ) | | | (134 | ) | | | 3.59 | | | | | | (4,163 | ) | | | (143 | ) | | | 3.44 | | | | | | (3,871 | ) | | | (138 | ) | | | 3.56 | | | | (3,343 | ) | | | (142 | ) | | | 4.25 | | | | | | (3,729 | ) | | | (134 | ) | | | 3.59 | | | | | | (4,163 | ) | | | (143 | ) | | | 3.44 | | | Other interest-bearing liabilities | | | (250 | ) | | | (2 | ) | | | 0.80 | | | | | | (340 | ) | | | (24 | ) | | | 7.06 | | | | | | (269 | ) | | | (14 | ) | | | 5.20 | | | | (152 | ) | | | (8 | ) | | | 5.26 | | | | | | (250 | ) | | | (8 | ) | | | 3.20 | | | | | | (340 | ) | | | (24 | ) | | | 7.06 | | | Total average interest-bearing liabilities, interest expense(5) | | | (240,319 | ) | | | (2,102 | ) | | | 0.87 | | | | | | (234,064 | ) | | | (2,885 | ) | | | 1.23 | | | | | | (221,077 | ) | | | (3,120 | ) | | | 1.41 | | | | (255,640 | ) | | | (2,463 | ) | | | 0.96 | | | | | | (241,756 | ) | | | (2,102 | ) | | | 0.87 | | | | | | (234,642 | ) | | | (2,885 | ) | | | 1.23 | | | Trading liabilities | | | (28,160 | ) | | | – | | | | – | | | | | | (19,068 | ) | | | – | | | | – | | | | | | (18,873 | ) | | | – | | | | – | | | | (12,009 | ) | | | – | | | | – | | | | | | (26,723 | ) | | | – | | | | – | | | | | | (18,491 | ) | | | – | | | | – | | | Financial liabilities designated at fair value | | | (2,592 | ) | | | – | | | | – | | | | | | (2,467 | ) | | | – | | | | – | | | | | | (2,391 | ) | | | – | | | | – | | | | Derivatives and other non-interest-bearing liabilities | | | (25,449 | ) | | | – | | | | – | | | | | | (31,068 | ) | | | – | | | | – | | | | | | (28,876 | ) | | | – | | | | – | | | | (14,436 | ) | | | – | | | | – | | | | | | (25,449 | ) | | | – | | | | – | | | | | | (31,067 | ) | | | – | | | | – | | | Other financial liabilities at fair value through profit or loss | | | | (5,344 | ) | | | – | | | | – | | | | | | (2,592 | ) | | | – | | | | – | | | | | | (2,467 | ) | | | – | | | | – | | | Equity | | | (17,141 | ) | | | – | | | | – | | | | | | (15,581 | ) | | | – | | | | – | | | | | | (14,526 | ) | | | – | | | | – | | | | (16,491 | ) | | | – | | | | – | | | | | | (17,141 | ) | | | – | | | | – | | | | | | (15,581 | ) | | | – | | | | – | | | Total average liabilities and equity | | | (313,661 | ) | | | – | | | | – | | | | | | (302,248 | ) | | | – | | | | – | | | | | | (285,743 | ) | | | – | | | | – | | | | (303,920 | ) | | | – | | | | – | | | | | | (313,661 | ) | | | – | | | | – | | | | | | (302,248 | ) | | | – | | | | – | |
| (1) | Average balances are based on monthly data. |
| (2) | The net interest marginNIM for the year ended 31 December 20172018 was 1.36% (2017: 1.49% (2016: 1.48%, 2015: 1.53%2016: 1.48%). Net interest marginNIM is calculated as net interest income divided by average interest earning assets. |
| (3) | The interest spread for the year ended 31 December 20172018 was 1.33% (2017: 1.45% (2016: 1.44%, 2015: 1.46%2016: 1.44%). 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. |
| (4) | Loans and advances to customers include non-performing loans.NPLs. See the ‘Credit risk’ section of the Risk review. |
| (5) | The ratio of average interest-earning assets to interest-bearing liabilities at 31 December 20172018 was 106.00% (2016: 103.57%103% (2017: 106%, 2015: 105.36%2016: 104%). |
(6) | Adjusted to reflect the change in accounting policy relating to business combinations between entities under common control, as described in Note 1 to the Consolidated Financial Statements. |
| | | | | > Taxation for US investors |
Taxation for US investors The following is a summary, under current law, of the main UK tax considerations relating to the beneficial ownership by a US taxpayer of the shares of the Company. This summary is provided for general guidance and does not address investors that are subject to special rules or that do not hold the shares as capital assets. US residents should consult their local tax advisers, particularly in connection with any potential liability to pay US taxes on disposal, lifetime gift or bequest of their shares. UK taxation on dividends 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. UK taxation on capital gains 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: – An individual who is neither resident nor ordinarily resident in the UK or
| – | | An individual who is not resident in the UK or |
– A company which is not resident in the UK,
| – | | A company which is not resident in the UK, |
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). UK inheritance tax Under the current estate and gift tax convention between the US and the UK, shares held by an individual shareholder who is: | – | | Domiciled for the purposes of the convention in the US and |
| – | | Is not for the purposes of the convention a national of the UK |
will not be subject to UK inheritance tax on: | – | | The individual’s death or |
| – | | On a gift of the shares during the individual’s lifetime. |
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. Exchange rates
The following table sets 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 2 March 2018 was US$1.3769.
| | | | | | | | | | | | | | | | | | | | High | | | Low | | | Average | | | Period-end | | | Calendar period | | US$ Rate | | | US$ Rate | | | US$ Rate(1) | | | US$ Rate | | Years ended 31 December: | | | | | | | | | | | | | | | | | – 2017 | | | 1.36 | | | | 1.21 | | | | 1.30 | | | | 1.35 | | – 2016 | | | 1.48 | | | | 1.22 | | | | 1.34 | | | | 1.23 | | – 2015 | | | 1.59 | | | | 1.46 | | | | 1.53 | | | | 1.47 | | – 2014 | | | 1.72 | | | | 1.55 | | | | 1.65 | | | | 1.56 | | – 2013 | | | 1.66 | | | | 1.48 | | | | 1.56 | | | | 1.66 | | Months ended: | | | | | | | | | | | | | | | | | – March 2018(2) | | | 1.38 | | | | 1.38 | | | | 1.38 | | | | 1.38 | | – February 2018 | | | 1.42 | | | | 1.38 | | | | 1.40 | | | | 1.38 | | – January 2018 | | | 1.43 | | | | 1.35 | | | | 1.38 | | | | 1.42 | | – December 2017 | | | 1.35 | | | | 1.33 | | | | 1.34 | | | | 1.35 | | – November 2017 | | | 1.35 | | | | 1.31 | | | | 1.32 | | | | 1.35 | | – October 2017 | | | 1.33 | | | | 1.31 | | | | 1.32 | | | | 1.33 | | – September 2017 | | | 1.36 | | | | 1.30 | | | | 1.33 | | | | 1.34 | |
(1) | The average of the noon buying rates on the last business day of each month during the relevant period. |
(2) | For March 2018, for the period from 1 March to 2 March. |
| | | Annual Report 2017 on Form 20-F2018 | Other information for US investors | | |
Glossary of financial services industry terms | | | | | Term | | Definition | | | 1I2I3 Business World | | 1I2I3 Business World is the marketing name to describe customers who hold a 1I2I3 Business Account. This will give our 1I2I3 businesses access to preferential rates and special offers, for example on our loans and savings products. | | | 1I2I3 World | | 1I2I3 World is the marketing name to describe customers that hold a 1I2I3 Current Account, 1I2I3 Lite Current Account, Select Current Account, Private Current Account, 1I2I3 Student/Graduate/Student / Graduate / Post-Graduate Current Account, 1I2I3 Mini Current Account or 1I2I3 Credit Card. Customers in 1I2I3 World have access to a range of products with preferential rates and/and / or special deals such as cashback. | | | Additional Tier 1 (AT1) capital | | Instruments other than Common Equity Tier 1 that meet the Capital Requirements Regulation (CRR) criteria for inclusion in Tier 1 capital. | | | Advanced Internal Rating Based (AIRB) approach | | A method of calculation using internal estimates for all risk components. | | | Any excess in month | | Accounts that were overdrawn for more than their overdraft for everyday in the previous month. | | | Arrears | | Customers are said to be in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Such a customer is also said to be in a state of delinquency. When a customer is in arrears, his entire outstanding balance is said to be delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue. | | | Asset Backed Securities (ABS) | | Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages but could also include leases, credit card receivables, motor vehicles or student loans. | | | UK Bank Levy | | The government levy that applies to certain UK banks, UK building societies and the UK operations of foreign banks from 1 January 2011. The levy is payable based on a percentage of the chargeable equity and liabilities of the bank at the balance sheet date. | Banking NIM
| | Banking net interest margin. Net interest income divided by average customer assets.
| Basel III | | In December 2010, the Basel Committee on Banking Supervision issued the Basel III rules text, which presents the details of strengthened global regulatory standards on bank capital adequacy and liquidity. The standards were implemented in the EU in January 2014. | | | Basis point (bp) | | One hundredth of a per cent (i.e. 0.01%), so 100 basis points is 1%. Used in quoting movements in interest rates or yields on securities. | | | Brexit | | The withdrawal of the United Kingdom from the European Union. | | | Business Banking | | Division, managed under Retail Banking, serving enterprises with a turnover of up to £6.5m per annum. | | | Colleague engagement | | Colleague engagement is measured on an annual basis in the Group Engagement Survey (GES), conducted by Korn FerryMercer for Banco Santander. Results are benchmarked against other firms in the UK financial sector and other high performing firms. | | | Collectively assessed loan impairment provisions | | Impairment losses assessment on a collective basis for loans that are part of homogeneous pools of similar loans and that are not individually significant, using appropriate statistical techniques. See ‘Impairment of financial assets’ in Note 1 to the Consolidated Financial Statements. | | | Commercial Paper | | An unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date. Commercial paper can be issued as an unsecured obligation of Santander UK and is usually issued for periods ranging from one week up to nine months. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively achieve longer term funding. CP can be issued in a range of denominations and can be discounted or interest-bearing. | | | Commercial Real Estate (CRE) | | Lending to UK customers, primarily on tenanted property assets, with a focus on the office, retail, industrial and residential sectors. | | | Common Equity Tier 1 (CET1) capital | | Thecalled-up share capital and eligible reserves less deductions calculated in accordance with the CRD IV implementation rules as per the PRA Policy Statement PS7/13. CET1 capital ratio is CET1 capital as a percentage of risk-weighted assets. | | | CET1 capital ratio | | CET1 capital as a percentage of risk weighted assets. | | | Contractual maturity | | The final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is due to be paid. | Corporate customer satisfaction
| | Measured by the Charterhouse UK Business Banking Survey, an ongoing telephone based survey designed to monitor usage and attitude of UK businesses towards banks. 17,000 structured telephone interviews are conducted each year among businesses of all sizes from new start-ups to large corporates with annual sales of £1bn.
| Corporates | | The sum of enterprises served by our Business Banking, Corporate & Commercial Banking and Global Corporate Banking divisions.& Investment Banking. | | | Cost-to-income ratioCountercyclical capital buffer
| | Total operating expenses as a percentageA capital buffer required under Basel III to ensure that capital requirements take account of total income.the macro-financial environment in which banks operate.
| | | Coverage ratio | | Impairment loss allowances as a percentage of totalnon-performing loans and advances. Seenon-performing loans and advances tables in the Risk review for industry specific definitions of individual products. | | | Covered bonds | | Debt securities backed by a portfolio of mortgages that is segregated from the issuer’s other assets solely for the benefit of the holders of the covered bonds. The Santander UK group issues covered bonds as part of its funding activities. | | | Credit Default Swap (CDS) | | A credit derivative contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer in the event of a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency. | | | Credit spread | | The yield spread between securities with the same coupon rate and maturity structure but with different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to accept a lower credit quality. | | | Credit Valuation Adjustment (CVA) | | Adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. | | | Capital Requirements Directive IV (CRD IV) | | An EU legislative package covering prudential rules for banks, building societies and investment firms. | | | Cash collection | | Agents have been instructed to collect cash from the customer. | | | Currency swap | | An arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments on the principal amounts. Often, one party will pay a fixed interest rate, while the other will pay a floating exchange rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usuallyre-exchanged. | | | Current Account Switch Service (CASS) guarantee | | On 16 September 2013, Bacs (previously Payments Council) launched CASS. The service isfree-to-use for consumers, small charities, small businesses and small trusts, and is designed to make switching current accounts from one bank or building society to another, simpler, reliable and hassle-free, thus removing customers’ perceived barriers to switching. The new service is backed by a customer guarantee and aims to increase competition in the high street, support the entry of new banks in the current account marketplace and give customers greater choice if they want to switch. | | | Customer loans/loans / customer deposits | | Money lent to or deposited by all individuals and companies that are not credit institutions. Such funds are predominantly recorded as assets and liabilities in the balance sheet under Loans and advances to customers and Deposits by customers, respectively. | | | Customer funding gap | | Customer loans less customer deposits. | | | Customer satisfactionDays past due
| | See ‘Corporate customer satisfaction’ and ‘Retail customer satisfaction’.One or more days that interest and/or principal payments are overdue based on the contractual terms.
| | | Debt restructuring | | This occurs when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as reducing the debt or interest charged on the loan. | | | Debt securities | | Transferable instruments creating or acknowledging indebtedness. They include debentures, bonds, certificates of deposit, notes and commercial paper. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities can be secured or unsecured. | | | Debt securities in issue | | Transferable certificates of indebtedness of the Santander UK group to the bearer of the certificates. These are liabilities of the Santander UK group and include commercial paper, certificates of deposit, bonds and medium-term notes. | | | Defined benefit obligationDefault
| | Financial assets in default represent those that are at least 90 days past due in respect of principal or interest and/or where the assets are otherwise considered to be unlikely to pay, including those that are credit impaired. |
| | | | | > Glossary of financial services industry terms |
| | | | | | | | Term | | Definition | | | | | | Default at proxy origination | | IFRS 9 requires us to compare lifetime probability of default at origination with our view of lifetime probability of default now. If we do not have data at origination then a proxy origination is defined. | | | | | | Defined benefit obligation | | The present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service. | | | | | | Defined benefit plan | | A pension plan that defines 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. The employer’s obligation can be more or less than its contributions to the fund. | | | | | | Defined contribution plan | | A pension plan under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions, i.e. the employer’s obligation is limited to its contributions to the fund. | | | | | | Delinquency Delinquency
| | See ‘Arrears’. | | | | | | Deposits by banks | | Money deposited by banks and other credit institutions. They include money-market deposits, securities sold under repurchase agreements, and other short-term deposits. Such funds are recorded as liabilities in the Santander UK group’s balance sheet under Deposits by Banks, Trading Liabilities or Financial Liabilities designated at Fair Value. | | | | | | Derivative Derivative
| | A contract or agreement whose value changes with changes in an underlying index such as interest rates, foreign exchange rates, share prices or indices and which requires no initial |
| | | | | > Glossary of financial services industry terms |
| | | | | Term
| | Definition
| | | | | investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options. | | | | | | | Digital customers | | Digital customers reflect the number of customers who have logged onto Retail or Business online banking or mobile app at least once in the month. | | | | | | | Distributable items | | Equivalent to distributable profits under the Companies Act 2006. | | | | | | | Dividend payout ratio
| | Equity dividend declared as a percentage of earnings attributable to ordinary shareholders (profit after tax less payment of dividend on equity accounted instruments and non-controlling interests).
| | | | | | Economic capital | | An internal measure of the minimum equity and preference capital required for the Santander UK group to maintain its credit rating based upon its risk profile. | | | | | | | Effective tax rate | | The tax on profit/(losses) on ordinary activities as a percentage of profit/(loss) on ordinary activities before taxation. | | | | | | Expected credit loss (ECL) | | Represents what the credit risk is likely to cost us either over the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a significant increase in credit risk since origination. | | | | | | Expected loss | | The Santander UK group measureproduct of anticipatedthe probability of default, exposure at default and loss for exposures captured under an internal ratings-basedgiven default. We calculate each factor in accordance with CRD IV, and include direct and indirect costs. We base them on our risk models and our assessment of each customer’s credit risk approach for capital adequacy calculations. It is measured as the Santander UK group-modelled view of anticipated loss based on Probability of Default, Loss Given Default and Exposure at Default, with a one-year time horizon.quality. | | | | | | | Exposure | | The maximum loss that a financial institution might suffer if a borrower, counterparty or group fails to meet their obligations or assets andoff-balance sheet positions have to be realised. | | | | | | | Exposure at default (EAD) | | The estimation of the extent to which the Santander UK group may be exposed to a customer or counterparty in the event of, and at the time of, that counterparty’s default. At default, the customer may not have drawn the loan fully or may already have repaid some of the principal, so that exposure is typically less than the approved loan limit. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product type. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an undrawn element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product type and base them on analysis of recent default data. | | | | | | | Fair value adjustment | | An adjustment to the fair value of a financial instrument which is determined using a valuation technique (level 2 and level 3) to include additional factors that would be considered by a market participant that are not incorporated within the valuation model. | | | | | | | Financial Conduct Authority (FCA) | | A UK quasi-governmental agency formed as one of the successors to the Financial Services Authority (FSA). The FCA regulates financial firms providing services to UK consumers and maintains the integrity of the UK’s financial markets. It focuses on the regulation of conduct by both retail and wholesale financial services firms. | | | | | | | Financial Services Compensation Scheme (FSCS) | | The UK’s statutory fund of last resort for customers of authorised financial services firms, established under the Financial Services and Markets Act (FSMA) 2000. The FSCS can pay compensation to customers if a UK PRA authorised firm is unable, or likely to be unable, to pay claims against it (for instance, an authorised bank is unable to pay claims by depositors). The FSCS is funded by levies on firms authorised by the PRA, including Santander UK plc and other members of the Santander UK group. | | | | | | | First/First / Second Charge
| | First charge (also known as first lien): debt that places its holder first in line to collect compensation from the sale of the underlying collateral in the event of a default on the loan. Second charge (also known as second lien): debt that is issued against the same collateral as a higher charge debt but that is subordinate to it. In the case of default, compensation for this debt will only be received after the first charge has been repaid and thus represents a riskier investment than the first charge. | | | | | | | Follow-on Rate (FoR) | | A mortgage product that tracks and is directly linked to the Bank of England base rate. | | | | | | | Forbearance | | Forbearance takes place when a concession is made on the contractual terms of a loan in response to an obligor’s financial difficulties. | | | | | | | Full time equivalent | | Full time equivalent employee units are theon-job hours paid for employee services divided by the number of ordinary-time hours normally paid for a full-time staff member when on the job (or contract employee where applicable). | | | | | | | Funded/Funded / unfunded
| | Exposures where the notional amount of the transaction is either funded or unfunded. Represents exposures where a commitment to provide future funding has been made and the funds have been released/released / not released. | | | | | | | Funding for Lending Scheme (FLS) | | A scheme designed by the Bank of England and HM Treasury to incentivise banks and building societies to boost their lending to UK households andnon-financial companies. It aims to do this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their performance in lending to the UK non-financial sector. | | | | | | | Home loan (Residential mortgage) | | A loan to purchase a residential property which is then used as collateral to guarantee repayment of the loan. The borrower gives the lender a lien against the property and the lender can foreclose on the property if the borrower does not repay the loan per the agreed terms. Also known as a residential mortgage. | | | | | | | Impaired loans | | Loans where the Santander UK group does not expect to collect all the contractual cash flows or to collect them when they are contractually due. | | | | | | | Impairment loss allowance (Loan loss allowance) | | An impairment loss allowance held on the balance sheet as a result of the raising of a charge against profit for the incurredan expected credit loss in the lending book. An impairment loss allowance may be either identified or unidentified and individual or collective. | | | | | | | Impairment losses | | For 2017 and prior periods, the IAS 39 definition of impairment losses applies. This is superseded by the IFRS 9 definition of credit impairment losses. The raising of a charge against profit for the incurred loss inherent in the lending book following an impairment review. For financial assets carried at amortised cost, impairment losses are recognised in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for impairment losses. For available- for-saleavailable-for-sale financial assets, the cumulative loss including impairment losses is removed from equity and recognised in the income statement. | | | | | | | Individually assessed loan impairment provisions | | Impairment is measured individually for assets that are individually significant. For these assets, the Santander UK group measures the amount of the impairment loss as the difference between the carrying amount of the asset or group of assets and the present value of the estimated future cash flows from the asset or group of assets discounted at the original effective interest rate of the asset. | | | | | | | Internal Capital Adequacy Assessment Process (ICAAP) | | The Santander UK group’s own assessment of its regulatory capital requirements, as part of CRD IV. It takes into account the regulatory and commercial environment in which the Santander UK group operates, the Santander UK group’s Risk Appetite, the management strategy for each of the Santander UK group’s material risks and the impact of appropriate adverse scenarios and stresses on the Santander UK group’s capital requirements. | | | | | | | Internal Liquidity Adequacy Assessment Process (ILAAP) | | The Santander UK group’s own assessment of the prudent level of liquidity that is consistent with the Santander UK group’s LRA. It documents and demonstrates the Santander UK group’s overall liquidity adequacy – an appropriate level of liquid resources, a prudent funding profile and comprehensive management and control of liquidity and funding risks. | | | | | | | Internal ratings-based approach (IRB) | | The Santander UK group’s method, under the CRD IV framework, for calculating credit risk capital requirements using the Santander UK group’s internal Probability of Default models but with supervisory estimates of Loss Given Default and conversion factors for the calculation of Exposure at Default. | | | | | | | International Financial Reporting Standards (IFRS) | | A set of international accounting standards developed and issued by the International Accounting Standards Board, consisting of principles-based guidance. | | | | | | Investment grade | | A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of AAA to BBB. | | | | | | | ISDA Master agreement | | Standardised contract developed by ISDA (International Swaps and Derivatives Association) used as an umbrella under which bilateral derivatives contracts are entered into. | | | | | | | Lending to corporates | | The sum of our Business banking, Corporate & Commercial Banking and Global Corporate & Investment Banking loan balances. | | | | | | | Level 1 | | The fair value of these financial instruments is based on unadjusted quoted prices for identical assets or liabilities in an active market that the Santander UK group has the ability to access at the measurement date. | | |
| | | | Annual Report 2018 | Other information for US investors | | |
| | | | | Term | | Definition | | | | | Level 2 | | The fair value of these financial instruments is based on quoted prices in markets that are not active or quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. | | | | | | | Level 3 | | The fair value of these financial instruments is based on inputs to the pricing or valuation techniques that are significant to the overall fair value measurement of the asset or liability are unobservable. | | | | | | | Liquid assets coverage of wholesale funding of less than one year | | LCR eligible liquidity pool divided by wholesale funding with a residual maturity of less than one year. | | | | | | | Liquidity Coverage Ratio (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. | | | | | | | LCR eligible liquidity pool | | Assets eligible for inclusion in the LCR as high quality liquid assets. The LCR eligible liquidity pool also covers both Pillar 1 and Pillar 2 risks. | | | | | | | Loan loss rate | | Defined as a rolling twelve months impairment charge on loans and advances divided by average loans and advances. | | | | | | | Loan-to-deposit ratio (LDR)
| | LDR is calculated as loans and advances to customers (excluding reverse repos) divided by deposits by customers (excluding repos).
| | | | | | Loan to value ratio (LTV) | | The amount of a first mortgage charge as a percentage of the total appraised value of real property. The LTV ratio is used in determining the appropriate level of risk for the loan and therefore the price of the loan to the borrower. LTV ratios may be expressed in a number of ways, including origination LTV and indexed LTV. | | | | | | | Loss Given Default (LGD) | | The fraction of Exposure at Default that will not be recovered following default. LGD comprises the actual loss (the part that is not recovered), together with the economic costs associated with the recovery process. | | | | | | Loyal retail customers
| | Primary banking current It is calculated as the expected loss divided by EAD for each month of the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account customers who hold an additional product.
| | |
| | | Annual Report 2017 on Form 20-F | Other information for US investors | | |
| | | Term
| | Definition
| | | Loyal SME and corporate customers
| | Santander Business Banking customers, managed under Retail Banking, who have three month average Credit Turnover of at least £1,000 across their Banking accounts. Corporate customers, who have at least three products and, for those incollateral values as well as the trade business, must also have a current account with a minimum activity threshold specifichistorical discounts to their customer segment.market/book values due to forced sales type.
| | | | Master netting agreement | | An industry standard agreement which facilitates netting of transactions (such as financial assets and liabilities including derivatives) 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. | | | | Medium-Term Funding (MTF) | | Shown at a sterling equivalent value. Consists of senior debt issuance, asset-backed issuance (including securitisation and covered bond issuance) and structured issuance (including firm financing repurchase agreements). MTF excludes any collateral received from the Bank of England’s Funding for Lending Scheme (FLS) or Term Funding Scheme (TFS). | | | | Medium-Term Notes (MTNs) | | Corporate notes (or debt securities) continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years. They can be issued on a fixed or floating coupon basis or with an exotic coupon; with a fixed maturity date(non-callable) or with embedded call or put options or early repayment triggers. MTNs are most generally issued as senior, unsecured debt. | | | Minimum requirement for own funds and eligible liabilities (MREL) | | A requirement under the Bank Recovery and Resolution Directive for EU resolution authorities to set a minimum requirement for own funds and eligible liabilities for banks, implementing the Financial Stability Board’s Total Loss Absorbing Capacity (TLAC) standard. The purpose of MREL is to help ensure that when banks, building societies and investment firms fail, that failure can be managed in an orderly way while minimising risks to financial stability, disruption to critical economic functions, and risks to public funds. | | | | Mortgages | | Refers to residential and buy to let retail mortgages only and excludes social housing and commercial mortgage assets.properties. | | | | Mortgage-Backed Securities (MBS) | | Securities that represent interests in groups of mortgages, which may be on residential or commercial properties. Investors in these securities have the right to cash received from future mortgage payments (interest and/and / or principal). When the MBS references mortgages with different risk profiles, the MBS is classified according to the highest risk class. | | | | Mortgage retention | | The proportion of customers with a maturing mortgage that remain with Santander. Applied to mortgages four months post maturity and is calculated as a twelve-month average of retention rates. | | | | n.m. | | Not meaningful when the change is above 100%. | | | | Net fee and commission income | | Fee and commission income minus other fees paid that are not an integral part of the effective interest rate. 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 fornon-banking financial products. | | | | Net interest income | | The difference between interest received on assets and interest paid on liabilities. | | | | Net Interest Margin (NIM) | | Net interest income as a percentage of average interest-earning assets. | | | | Net Promoter Score | | The ‘Net Promoter score’ is based on11-point scale(0-10). The calculation used here is the percentage top two promoters (customers scoring 9 or 10) minus detractors, defined as percentage bottom seven (customers scoring0-6) and excluding passives (customers scoring 7 or 8). This is scored across mortgages, savings, main current accounts, home insurance, UPLs and credit cards, based on a weighting of those products calculated to reflect the average product distribution across Santander UK and competitor brands. | | | Net Stable Funding Ratio (NSFR) | | The ratio of available stable funding resources to stable funding requirements over a one year time horizon, assuming a stressed scenario. The Basel III rules require this ratio to be over 100%. | | | | Non-performing loans (NPLs) | | Loans and advances are classified asnon-performing typically when the counterparty fails to make payments when contractually due for three months or longer, although there can be additional qualifying criteria depending upon the business segment and product. For additional information on the definition of NPLs, see ‘Santander UK Group Level - Credit risk management – risk measurement and control’ in the Risk review section of the Annual Report. | | | | NPL ratio | | NPLs as a percentage of loans and advances to customers. | | | | Other retail products | | Other Retail products include Cater Allen, cahoot and crown dependencies (Jersey branch and Isle of Man). | | | | Over the counter (OTC) derivatives | | Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They offer flexibility because, unlike standardised exchange-traded products, they can be tailored to fit specific needs. | | | | Own credit | | The effect of the Santander UK group’s own credit standing on the fair value of financial liabilities. | | | | Past due | | A financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually due. | | | | People Supported | | People supported through our charity partnerships and leading Explorer, Transformer and Changemakersponsored programmes. Employee volunteer activities are organised through our flagship Discovery Project programme, the Santander Foundation and Santander Universities. | | | Pillar 1 | | The first pillar of the Basel III approach which provides the approach to the calculation of the minimum capital requirements. This is 8% of the bank’s risk-weighted assets. | | | | Pillar 2 | | The part of the CRD IV Accord which sets out the process by which a bank should review its overall capital adequacy and the processes under which the supervisors evaluate how well financial institutions are assessing their risks and take appropriate actions in response to the assessments. | | | | Pillar 3 | | The part of the CRD IV Accord which sets out the disclosure requirements for firms to publish details of their risks, capital and risk management. The aims are greater transparency and strengthening market discipline. | | | | Potential problem loans | | Loans other thannon-accrual loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings where known information about possible credit problems of the borrower causes management to have serious doubts about the borrower’s ability to meet the loan’s repayment terms. | | | | Primary banking customers | | Adult Banking Customers who have a three month average credit turnover of at least £500 and set up a minimum of two Direct Debits (one paid out in the last three months) or at least one Standing Order (paid out in the last three months). Student Banking Customers who have a twelve month average credit turnover of at least £500 and as a minimum three active Debit Card transactions in the last month. | | | | Prime/Prime / prime mortgage loans
| | A US description for mortgages granted to the most creditworthy category of borrowers. | | | | Private customers | | Customers who have investments or savings of over £500,000 or a gross annual income in excess of £250,000. | | | | Private equity investments | | Equity holdings in operating companies not quoted on a public exchange. | | | | UK leverage ratioProbability of default (PD)
| | CRD IV end-point Tier 1 capital divided by exposures as defined by the European Commission Delegated Regulation 2015/62The likelihood of October 2014. In July 2016, the definition was amended to exclude from the calculation for total exposure those assets held against central banks that are matched by depositsa borrower defaulting in the same currencyfollowing month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and of equal or longer maturity.factors for changing economics. We support this with historical data analysis.
| | | | Prudential Regulation Authority (PRA) | | The UK financial services regulator formed as one of the successors to the FSA. The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of |
| | | | | > Glossary of financial services industry terms |
| | | | | | | | Term | | Definition | | | | | | (PRA) | | banks, building societies, credit unions, insurers and major investment firms. It sets standards and supervises financial institutions at the level of the individual firm. | | | | | | | Regulatory capital | | The amount of capital that the Santander UK group holds, determined in accordance with rules established by the UK PRA for the consolidated Santander UK group and by local regulators for individual Santander UK group companies. | | | | | | | Remuneration Code | | FCA Remuneration Code for dual regulated firms SYSC19D.3.44 and PRA Rulebook-Remuneration Part 15.7 | | | | | | Repurchase agreement (Repo) | | In a sale and repurchase agreement one party, the seller, sells a financial asset to another party, the buyer, under commitments to reacquire the asset at a later date. The buyer at the same time agrees to resell the asset at the same later date. From the seller’s perspective such agreements are securities sold under repurchase agreements (repos) and from the buyer’s securities purchased under commitments to resell (reverse repos). | | | | | | | Residential Mortgage-Backed Securities (RMBS) | | Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/and / or principal). | | | | | | Retail customer satisfaction
| | Measured through the Financial Research Survey (FRS), a monthly personal finance survey of around 5,000 consumers prepared by the independent market research agency, GfK. The ‘Overall Satisfaction’ score refers to proportion of extremely and very satisfied customers across mortgages, savings, main current accounts, home insurance, UPLs and credit cards, based on a weighting of those products calculated to reflect the average product distribution across Santander UK and competitor brands.
| | | Retail deposit spread | | Retail Banking customer deposit spreads against the relevant swap rate or LIBOR. Retail Banking customer deposits include savings and bank accounts for personal and business banking customers. | | | | | | | Retail IRB approach | | The Santander UK group’s internal method of calculating credit risk capital requirements for its key retail portfolios. The FSA approved the Santander UK group’s application of the Retail IRB approach to the Santander UK group’s credit portfolios with effect from 1 January 2008. | | | | | | | Retail loans | | Loans to individuals rather than institutions, including residential mortgage lending and banking and consumer credit. | | | | | | Return on average tangible equity (RoTE)
| | The profit after tax attributable to equity holders of the parent, divided by average shareholders’ equity less non-controlling interests, other equity instruments and average goodwill and other intangible assets.
| | | Risk Appetite | | The level of risk (types and quantum) that the Santander UK group is willing to accept (or not accept) to safeguard the interests of shareholders whilst achieving business objectives. | | | | | | | Risk-weighted assets (RWA) | | A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as implemented by the PRA. | | | | | | | Santander UK | | Refers to Santander UK plc and its subsidiaries. | | | | | | | Securitisation | | A process by which a group of assets, usually loans, are aggregated into a pool, which is used to back the issuance of new securities. A company sells assets to a structured entity which then |
| | | | | > Glossary of financial services industry terms |
| | | | | Term
| | Definition
| | | | | | | | issues securities backed by the assets, based on their value. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors. Assets used in securitisations include mortgages to create mortgage-backed securities. Santander UK has established securitisation structures as part of its funding and capital management activities. | | | | | | | Select customers | | Customers who have a Select Current Account and pay their main income of at least £5,000 per month into their Select Current Account or keep £75,000 in any Santander investment(s), savings or current account. | | | | | | | Significant increase in credit risk (SICR) | | Assessed by comparing the risk of default of an exposure at the reporting date to the risk of default at origination (after considering the passage of time). | | | | | | Small andmedium-sized businesses (SMEs) | | Small andmedium-sized businesses with <£10m turnover or <250 employees. | | | | | | Sovereign exposures | | Exposures to local and central governments, and government guaranteed counterparties. | | | | | | Stage 1 | | Assets have not experienced a significant increase in credit risk since origination. A loss allowance equal to a 12 month ECL is applied. | | | | | | Stage 2 | | Assets have experienced a significant increase in credit risk since origination but no credit impairment has materialised. A loss allowance equal to the lifetime ECL is applied. | | | | | | Stage 3 | | Assets that are in default and considered credit impaired. A loss allowance equal to the lifetime ECL is applied. Objective evidence of credit impairment is required. | | | | | | | Standardised approach | | In relation to credit risk, a method for calculating credit risk capital requirements under CRD IV, using External Credit Assessment Institutions ratings and supervisory risk weights. The Standardised approach is less risk-sensitive than IRB (see ‘IRB’ above). In relation to operational risk, a method of calculating the operational capital requirement under CRD IV, by the application of a supervisory defined percentage charge to the gross income of eight specified business lines. | | | | | | | Stress testing | | Stress testing is a management tool that facilitates a forward looking perspective on risk management, strategic planning, capital, and liquidity and funding planning. | | | | | | | Structured entity | | An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. | | | | | | | Structured finance/notes | | A structured note is an instrument which pays a return linked to the value or level of a specified asset or index and sometimes offers capital protection if the value declines. Structured notes can be linked to a range of underlying assets, including equities, interest rates, funds, commodities and foreign currency. | | | | | | | Subordinated liabilities | | Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. | | | | | | | Sub-prime | | Loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as court judgements and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, highdebt-to-income ratios, or other criteria indicating heightened risk of default. | | | | | | | Supranational | | An international organisation where member states transcend national boundaries or interests to share in decision-making and vote on issues relating to the organisation’s geographical focus. | | | | | | | SVR | | Standard Variable Rate for mortgages. | | | | | | | Tier 1 capital | | A measure of a bank’s financial strength defined by the PRA. It captures Core Tier 1 capital plus other Tier 1 securities in issue, but is subject to a deduction in respect of material holdings in financial companies. | | | | | | | Tier 1 capital ratio | | The ratio expresses Tier 1 capital as a percentage of risk weighted assets. | | | | | | | Tier 2 capital | | Defined by the PRA. Broadly, it includes qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available for sale equity gains and revaluation reserves. It is subject to deductions relating to the excess of expected loss over regulatory impairment allowance, securitisation positions and material holdings in financial companies. | | | | | | | Total loss absorbing capacity (TLAC) | | An international standard for TLAC issued by the Financial Stability Board, which requires global systemically important banks(G-SIBs) to have sufficient loss-absorbing and recapitalisation capacity available in resolution, to minimise impacts on financial stability, maintain the continuity of critical functions and avoid requiring taxpayer support. | | | | | | Total wholesale funding | | Comprises the sum of all outstanding debt securities, structured issuance (including firm financing repurchase agreements), subordinated debt and capital issuance, TFS and noncustomer deposits. Total wholesale funding excludes any collateral received as part of the FLS. | | | | | | | Trading book | | Positions in financial instruments held either with trading intent or in order to hedge other elements of the trading book, which must be free of restrictive covenants on their tradability or ability to be hedged. | | | | | | | Troubled debt restructurings | | A US description for restructuring a debt whereby the creditor for economic or legal reasons related to a debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. | | | | | | | Value at Risk (VaR) | | An estimate of the potential loss which might arise from market movements under normal market conditions, if the current positions were to be held unchanged for one business day, measured to a confidence level. | | | | | | | Wholesale funding with a residual maturity of less than
one year | | Wholesale funding which has a residual maturity of less than one year at the balance sheet date. | | | | | | | Write-down | | After an advance has been identified as impaired and is subject to an impairment allowance, the stage may be reached whereby it is concluded that there is no realistic prospect of further recovery. Write-downs will occur when, and to the extent that, the whole or part of a debt is considered irrecoverable. | | | | | | | Wrong-way risk | | An aggravated form of concentration risk and arises when there is an adverse correlation between the counterparty’s probability of default and themark-to-market value of the underlying transaction. | | |
| | | Annual Report 2017 on Form 20-F2018 | Other information for US investors | | |
Cross-reference to Form20-F | Form 20-F Item Number and Caption | Form 20-F Item Number and Caption | | Page | Form20-F Item Number and Caption | | Page | PART I | PART I | | | | | PART I | | | | | 1 | | Identity of Directors, Senior Management and Advisers | | | | * | | Identity of Directors, Senior Management and Advisers | | | | * | 2 | | Offer Statistics and Expected Timetable | | | | * | | Offer Statistics and Expected Timetable | | | | * | 3 | | Key Information | | Selected financial data | | 228 | | Key Information | | Selected financial data | | 216 | | | | | | Capitalisation and indebtedness | | * | | | | Capitalisation and indebtedness | | * | | | | | | Reasons for the offer and use of proceeds | | * | | | | Reasons for the offer and use of proceeds | | * | | | | | | Risk factors | | 235 | | | | Risk factors | | 222 | 4 | | Information on the Company | | History and development of the company | | 51, 183 | | Information on the Company | | History and development of the company | | 48, 142, 176 (Note 21), 248 | | | | | | Business overview | | 6, 9, 10, 11, 12, 13, 14, 15 | | | | Business overview | | 9, 10, 11, 12, 13 | | | | | | Organisational structure | | 25, 51, 63, 113 | | | | Organisational structure | | 48, 106, 218 | | | | | | Property, plant and equipment | | Not applicable | | | | Property, plant and equipment | | Not applicable | 4A | | Unresolved Staff Comments | | | | Not applicable | | Unresolved Staff Comments | | | | Not applicable | 5 | | Operating and Financial Review and Prospects | | Operating results | | 6, 144 | | Operating and Financial Review and Prospects | | Operating results | | 6, 134, 163 (Note 12), 180 (Note 28) | | | | | | Liquidity and capital resources | | 108, 119 | | | | Liquidity and capital resources | | 103, 111, 257 | | | | | | Research and development, patents and licenses, etc. | | Not applicable | | | | Research and development, patents and licenses, etc. | | Not applicable | | | | | | Trend information | | 6, 9, 10, 11, 12, 13, 14 | | | | Trend information | | 3, 6, 9, 10, 11, 12, 13 | | | | | | Off-balance sheet arrangements | | 270 | | | | Off-balance sheet arrangements | | 176 (Note 21), 189 (Note 32), 258 | | | | | | Tabular disclosure of contractual obligations | | 270 | | | | Tabular disclosure of contractual obligations | | 258 | | | | | | Safe harbor | | Not applicable | | | | Safe harbor | | Not applicable | 6 | | Directors, Senior Management and Employees | | Directors and senior management | | 19 | | Directors, Senior Management and Employees | | Directors and senior management | | 19 | | | | | | Compensation | | 43 | | | | Compensation | | 41 | | | | | | Board practices | | 24 | | | | Board practices | | 22 | | | | | | Employees | | 52, 168 | | | | Employees | | 48, 158 (Note 6) | | | | | | Share ownership | | 202 | | | | Share ownership | | 48, 195 (Note 38) | 7 | | Major Shareholders and Related Party Transactions | | Major shareholders | | 261 | | Major Shareholders and Related Party Transactions | | Major shareholders | | 248 | | | | | | Related party transactions | | 206 | | | | Related party transactions | | 197 (Note 40), 211 (Note 43) | | | | | | Interests of experts and counsel | | * | | | | Interests of experts and counsel | | * | 8 | | Financial Information | | Consolidated Statements and Other Financial Information | | 144, 145, 146, 147 | | Financial Information | | Consolidated Statements and Other Financial Information | | 134, 135, 136, 137, 138 | | | | | | Significant Changes | | 226a | | | | Significant Changes | | 214 (Note 45) | 9 | | The Offer and Listing | | Offer and listing details | | * | | The Offer and Listing | | Offer and listing details | | * | | | | | | Plan of distribution | | * | | | | Plan of distribution | | * | | | | | | Markets | | Not applicable | | | | Markets | | Not applicable | | | | | | Selling shareholders | | * | | | | Selling shareholders | | * | | | | | | Dilution | | * | | | | Dilution | | * | | | | | | Expenses of the issue | | * | | | | Expenses of the issue | | * | 10 | | Additional Information | | Share capital | | * | | Additional Information | | Share capital | | * | | | | | | Memorandum and articles of association | | 258 | | | | Memorandum and articles of association | | 245 | | | | | | Material contracts | | 261 | | | | Material contracts | | 248 | | | | | | Exchange controls | | 261 | | | | Exchange controls | | 248 | | | | | | Taxation | | 273 | | | | Taxation | | 261 | | | | | | Dividends and paying agents | | * | | | | Dividends and paying agents | | * | | | | | | Statements by experts | | * | | | | Statements by experts | | * | | | | | | Documents on display | | 261 | | | | Documents on display | | 248 | | | | | | Subsidiary Information | | Not applicable | | | | Subsidiary Information | | Not applicable | 11 | | Quantitative and Qualitative Disclosures about Market Risk | | | | 100 | | Quantitative and Qualitative Disclosures about Market Risk | | | | 96 | 12 | | Description of Securities Other Than Equity Securities | | Debt Securities | | * | | Description of Securities Other Than Equity Securities | | Debt Securities | | * | | | | | | Warrants and Rights | | * | | | | Warrants and Rights | | * | | | | | | Other Securities | | * | | | | Other Securities | | * | | | | | | American Depositary Shares | | * | | | | American Depositary Shares | | * | PART II | PART II | | | | | PART II | | | | | 13 | | Defaults, Dividend Arrearages and Delinquencies | | | | Not applicable | | Defaults, Dividend Arrearages and Delinquencies | | | | Not applicable | 14 | | Material Modifications to the Rights of Security Holders and Use of Proceeds | | Not applicable | | Material Modifications to the Rights of Security Holders and Use of Proceeds | | 247 | 15 | | Controls and Procedures | | | | 53 | | Controls and Procedures | | | | 49 | 16A | | Audit Committee financial expert | | | | 37 | | Audit Committee financial expert | | | | 33 | 16B | | Code of Ethics | | | | 52 | | Code of Ethics | | | | 49 | 16C | | Principal Accountant Fees and Services | | | | 169 | | Principal Accountant Fees and Services | | | | 159 (Note 7) | 16D | | Exemptions from the Listing Standards for Audit Committees | | | | Not applicable | | Exemptions from the Listing Standards for Audit Committees | | | | Not applicable | 16E | | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | | | | Not applicable | | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | | | | Not applicable | 16F | | Change in Registrant’s Certifying Accountant | | | | 40, 55 | | Change in Registrant’s Certifying Accountant | | | | Not applicable | 16G | | Corporate Governance | | | | 260 | | Corporate Governance | | | | 247 | 16H | | Mine Safety Disclosure | | | | Not applicable | | Mine Safety Disclosure | | | | Not applicable | PART III | PART III | | | | | PART III | | | | | 17 | | Financial Statements | | | | Not applicable | | Financial Statements | | | | Not applicable | 18 | | Financial Statements | | | | 6 | | Financial Statements | | | | 6 | 19 | | Exhibits | | | | Filed with SEC | | Exhibits | | | | Filed with SEC |
* Not required for an Annual Report.
| Further Information | Designed and produced by CONRAN DESIGN GROUP |
EXHIBIT INDEXContact us
Customer services For more information on our products and services, please visit our website: | | |  | | santander.co.uk | | customerservices@santander.co.uk | | |  | | +44 (0)800 389 7000 |
Shareholders Information for UK shareholders of Banco Santander can be found at our website: | | | | | santandershareview.com | | santandershareholders@equiniti.com |
By post, please write to: Santander Nominee Service Aspect House Spencer Road Lancing BN99 6DA | | | | | +44 (0)371 384 2000 | | +44 (0)121 415 7188 (From outside the UK) |
Key dates | | | | 30 April 2019 | | Q1 2019 results | | 24 July 2019 | | Q2 2019 results | | 31 October 2019 | | Q3 2019 results |
Community involvement To find out more about applying for donations and the Santander UK Foundation, please visit our website: | | | | | santanderfoundation.org.uk |
Media centre Contacts for the media relations team are available at our website via the media section: | | | | | aboutsantander.co.uk | | mediarelations@santander.co.uk |
Investor relations For financial results and presentations, stock exchange announcements, credit ratings and information for debt investors, please visit the investor relations section of our website: | | | | | aboutsantander.co.uk | | ir@santander.co.uk |
Registered address Santander UK 2 Triton Square Regent’s Place London NW1 3AN
| | | | | 
santander.co.uk | Santander UK 2 Triton Square Regent’s Place London NW1 3AN | | |
EXHIBIT INDEX | 1 | Documents concerning Santander UK plc referred to within the Annual Report on Form20-F for the year ended 31 December, 20172018 may be inspected at 2 Triton Square, Regent’s Place, London NW1 3AN, the principal executive offices and registered address of Santander UK plc. |
| 2 | Incorporated by reference into Registration Statement Nos.333-10232,333-11320,333-190509333-10232,333-190509 and333-213861 on FormF-3. |
| * | As permitted by Rule 405(a)(2)(ii) of Regulation S-T, the registrant’s XBRL (eXtensible Business Reporting Language) information will be furnished in an amendment to this Form 20-F that will be filed no more than 30 days after the date hereof. In accordance with Rule 402 of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
SIGNATURE The registrant hereby certifies that it meets all the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. | | | | SANTANDER UK plc | | | | By: | | /s/ Nathan Bostock | | | Nathan Bostock | | | Chief Executive Officer |
Dated: 711 March, 20182019 | 
Shriti Vadera
Julie Chakraverty
Annemarie Durbin
Ed Giera
Chris Jones
Genevieve Shore
Scott Wheway
Ana Botín
Lindsey Argalas
Gerry Byrne
Nathan Bostock
Susan Allen
Antonio Roman
