Current, Quarterly or Annual Report by a Foreign Issuer — Form 6-K — SEA’34
Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 6-K Current, Quarterly or Annual Report by a Foreign HTML 5.15M Issuer
7: R1 Cover Page HTML 47K
8: R2 Consolidated Income Statement Unaudited HTML 83K
9: R3 Consolidated Statement of Comprehensive Income HTML 104K
Unaudited
10: R4 Consolidated Balance Sheet Unaudited HTML 122K
11: R5 Consolidated Cash Flow Statement Unaudited HTML 106K
12: R6 Consolidated Statement of Changes in Equity HTML 77K
Unaudited
13: R7 Accounting Policies HTML 67K
14: R8 Segments HTML 170K
15: R9 Other Operating Income HTML 36K
16: R10 Operating Expenses Before Credit Impairment HTML 46K
Losses, Provisions and Charges
17: R11 Credit Impairment Losses and Provisions HTML 47K
18: R12 Taxation HTML 49K
19: R13 Dividends on Ordinary Shares HTML 37K
20: R14 Derivative Financial Instruments HTML 82K
21: R15 Other Financial Assets at Fair Value Through HTML 45K
Profit or Loss
22: R16 Loans and Advances to Customers HTML 45K
23: R17 Securitisations and Covered Bonds HTML 83K
24: R18 Reverse Repurchase Agreements - Non Trading HTML 41K
25: R19 Other Financial Assets at Amortised Cost HTML 41K
26: R20 Financial Assets at Fair Value Through Other HTML 41K
Comprehensive Income
27: R21 Interests in Other Entities HTML 36K
28: R22 Intangible Assets HTML 36K
29: R23 Property, Plant and Equipment HTML 65K
30: R24 Other Financial Liabilities at Fair Value Through HTML 44K
Profit or Loss
31: R25 Deposits by Customers HTML 45K
32: R26 Deposits by Banks HTML 44K
33: R27 Repurchase Agreements - Non Trading HTML 41K
34: R28 Debt Securities in Issue HTML 46K
35: R29 Subordinated Liabilities HTML 39K
36: R30 Provisions HTML 62K
37: R31 Retirement Benefit Plans HTML 74K
38: R32 Contingent Liabilities and Commitments HTML 57K
39: R33 Other Equity Instruments HTML 51K
40: R34 Notes to Cash Flows HTML 38K
41: R35 Assets Charged as Security for Liabilities and HTML 37K
Collateral Accepted as Security for Assets
42: R36 Related Party Disclosures HTML 38K
43: R37 Financial Instruments HTML 238K
44: R38 Interest Rate Benchmark Reform HTML 111K
45: R39 Discontinued Operations and Assets Held for Sale HTML 62K
46: R40 Events After the Balance Sheet Date HTML 36K
47: R41 Accounting Policies (Policies) HTML 81K
48: R42 Accounting Policies (Tables) HTML 51K
49: R43 Segments (Tables) HTML 168K
50: R44 Operating Expenses Before Credit Impairment HTML 45K
Losses, Provisions and Charges (Tables)
51: R45 Credit Impairment Losses and Provisions (Tables) HTML 46K
52: R46 Taxation (Tables) HTML 48K
53: R47 Derivative Financial Instruments (Tables) HTML 81K
54: R48 Other Financial Assets at Fair Value Through HTML 44K
Profit or Loss (Tables)
55: R49 Loans and Advances to Customers (Tables) HTML 44K
56: R50 Securitisations and Covered Bonds (Tables) HTML 83K
57: R51 Reverse Repurchase Agreements - Non Trading HTML 41K
(Tables)
58: R52 Other Financial Assets at Amortised Cost (Tables) HTML 41K
59: R53 Financial Assets at Fair Value Through Other HTML 41K
Comprehensive Income (Tables)
60: R54 Property, Plant and Equipment (Tables) HTML 65K
61: R55 Other Financial Liabilities at Fair Value Through HTML 44K
Profit or Loss (Tables)
62: R56 Deposits by Customers (Tables) HTML 44K
63: R57 Deposits by Banks (Tables) HTML 43K
64: R58 Repurchase Agreements - Non Trading (Tables) HTML 41K
65: R59 Debt Securities in Issue (Tables) HTML 46K
66: R60 Subordinated Liabilities (Tables) HTML 39K
67: R61 Provisions (Tables) HTML 61K
68: R62 Retirement Benefit Plans (Tables) HTML 81K
69: R63 Contingent Liabilities and Commitments (Tables) HTML 41K
70: R64 Other Equity Instruments (Tables) HTML 50K
71: R65 Financial Instruments (Tables) HTML 236K
72: R66 Interest Rate Benchmark Reform (Tables) HTML 113K
73: R67 Discontinued Operations and Assets Held for Sale HTML 61K
(Tables)
74: R68 Segments (Details) HTML 141K
75: R69 Other Operating Income (Details) HTML 37K
76: R70 Operating Expenses Before Credit Impairment HTML 43K
Losses, Provisions and Charges - Summary of
Operating Expenses Before Credit Impairment
Losses, Provisions and Charges (Details)
77: R71 Operating Expenses Before Credit Impairment HTML 40K
Losses, Provisions and Charges - Additional
Information (Details)
78: R72 Credit Impairment Losses and Provisions - Summary HTML 49K
of Impairment Losses and Provisions (Details)
79: R73 Credit Impairment Losses and Provisions - HTML 41K
Additional Information (Details)
80: R74 Taxation - Additional Information (Details) HTML 38K
81: R75 Taxation - Schedule of Tax on Profit Before Tax HTML 56K
Differs from Theoretical Amount that Arise Using
Basic Corporation Tax Rate (Details)
82: R76 Dividends on Ordinary Shares (Details) HTML 36K
83: R77 Derivative Financial Instruments (Details) HTML 88K
84: R78 Other Financial Assets at Fair Value Through HTML 46K
Profit or Loss (Details)
85: R79 Loans and Advances to Customers (Details) HTML 41K
86: R80 Securitisations and Covered Bonds - Disclosure of HTML 53K
Analysis of Securitisations and Covered Bonds
(Details)
87: R81 Securitisations and Covered Bonds - Summary of HTML 63K
Issuances and Redemptions of Securitisation and
Covered Bond Programme (Details)
88: R82 Securitisations and Covered Bonds - Additional HTML 42K
Information (Details)
89: R83 Reverse Repurchase Agreements - Non Trading HTML 40K
(Details)
90: R84 Other Financial Assets at Amortised Cost (Details) HTML 41K
91: R85 Financial Assets at Fair Value Through Other HTML 41K
Comprehensive Income (Details)
92: R86 Intangible Assets (Details) HTML 41K
93: R87 Property, Plant and Equipment (Details) HTML 96K
94: R88 Other Financial Liabilities at Fair Value Through HTML 51K
Profit or Loss (Details)
95: R89 Deposits by Customers (Details) HTML 51K
96: R90 Deposits by Banks (Details) HTML 48K
97: R91 Repurchase Agreements - Non Trading (Details) HTML 40K
98: R92 Debt Securities in Issue (Details) HTML 56K
99: R93 Subordinated Liabilities - Schedule of HTML 36K
Subordinated Liabilities (Details)
100: R94 Subordinated Liabilities - Additional Information HTML 37K
(Details)
101: R95 Provisions - Summary of Provisions Reconciliation HTML 64K
(Details)
102: R96 Provisions - Additional Information (Details) HTML 40K
103: R97 Retirement Benefit Plans - Summary of Retirement HTML 43K
Benefit Plans (Details)
104: R98 Retirement Benefit Plans - Additional Information HTML 39K
(Details)
105: R99 Retirement Benefit Plans - Summary of Amounts HTML 46K
Recognised in Other Comprehensive Income (Details)
106: R100 Retirement Benefit Plans - Summary of Net Assets HTML 40K
Recognised (Details)
107: R101 Retirement Benefit Plans - Summary of Principal HTML 54K
Actuarial Assumptions Used for Defined Benefit
Schemes (Details)
108: R102 Retirement Benefit Plans - Summary of Actuarial HTML 49K
Assumption Sensitivities (Details)
109: R103 Contingent Liabilities and Commitments - Summary HTML 43K
of Contingent Liabilities and Commitments
(Details)
110: R104 Contingent Liabilities and Commitments - HTML 56K
Additional Information (Details)
111: R105 Other Equity Instruments - Summary of Other Equity HTML 64K
Instruments (Details)
112: R106 Other Equity Instruments - Additional Information HTML 50K
(Details)
113: R107 Notes to Cash Flows (Details) HTML 49K
114: R108 Assets Charged as Security for Liabilities and HTML 49K
Collateral Accepted as Security for Assets
(Details)
115: R109 Related Party Disclosures (Details) HTML 41K
116: R110 Financial Instruments - Disclosure of Analysis of HTML 142K
Fair Value of Financial Instruments Carried at
Amortised Cost (Details)
117: R111 Financial Instruments - Disclosure of Analysis of HTML 159K
Fair Value of Financial Instruments Measured at
Fair Value on a Recurring Basis (Details)
118: R112 Financial Instruments - Additional Information HTML 52K
(Details)
119: R113 Financial Instruments - Summary of Fair Value HTML 46K
Adjustment (Details)
120: R114 Financial Instruments - Summary of Reconciliation HTML 91K
of Fair Value Measurement in Level 3 of the Fair
Value Hierarchy (Details)
121: R115 Interest Rate Benchmark Reform - Schedule of HTML 76K
Amounts Affected by IBOR Reform (Details)
122: R116 Interest Rate Benchmark Reform - Schedule of HTML 72K
Derivatives Directly Affected by IBOR Reform
Uncertainties (Details)
123: R117 Discontinued Operations and Assets Held for Sale - HTML 60K
Disclosure of Financial Performance Relating to
Discontinued Operations (Details)
124: R118 Discontinued Operations and Assets Held for Sale - HTML 44K
Additional Information (Details)
125: R119 Discontinued Operations and Assets Held for Sale - HTML 38K
Disclosure of Assets Held for Sale (Details)
126: R120 Events After the Balance Sheet Date (Details) HTML 36K
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‘6-K’ — Current, Quarterly or Annual Report by a Foreign Issuer
Indicate
by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F . . . .X. . . . Form 40-F . . . . . . . .
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
THE REGISTRANT HEREBY INCORPORATES ALL PARTS OF THIS REPORT ON FORM 6-K BY REFERENCE INTO REGISTRATION STATEMENT NO. 333-265891 FILED BY THE REGISTRANT WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM F-3ASR UNDER THE SECURITIES ACT OF 1933.
This Report on Form 6-K contains references to websites of the
registrant and its affiliates. The registrant is not incorporating by reference any information posted on such websites.
Santander UK plc
Half Yearly Financial Report 2022
Important
information for readers
Santander UK plc and its subsidiaries (collectively called Santander UK or the Santander UK group) operate primarily in the UK and are part of Banco Santander (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA.
This Half Yearly Financial Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See ‘Forward-looking statements’ in the Shareholder information
section.
None of the websites referred to in this Half Yearly Financial Report on Form 6-K for the six months ended 30 June 2022 (the Form 6-K), including where a link is provided, nor any of the information contained on such websites, is incorporated by reference into the Form 6-K.
“We are living through uncertain economic times and our priority remains doing all we can to support our customers and people. We know many of them are worried about the rising costs of living and doing business, so we have increased the support available through our digital channels on a range of key issues including energy costs, spending and budget planning.
“We are also supporting British businesses with our new pioneering Santander Navigator platform, helping them explore new markets and grow internationally with a wide range of expertise, information and practical support through our extensive global network.
“Despite the uncertain operating environment, the hard work of our teams across the business has helped us deliver a strong set of results for the first
half of the year. We have driven a 32% increase in profit from continuing operations before tax, to £982m, underpinned by £6.7bn of net mortgage lending, and enabled over 18,000 customers to take that first step onto the housing ladder in H122.
“The increase in the Bank of England’s base rate has enabled us to increase the interest rate on our 1I2I3 Current Account which continues to provide up to 3% cashback on household bills. We have also been able to increase rates right across our savings range, which are amongst the most competitive on the high street.
“Our ongoing transformation programme has realised £572m savings which has helped to mitigate the impact of rising inflation and allowed us to continue improving our customer experience whilst delivering on our strategic priorities of being a responsible and sustainable business.”
Business
highlights
Supporting our customers with what matters most
–Outreach to over 776,000 customers most likely to be impacted by the cost of living crisis, highlighting the support we have available.
–Dedicated support to help customers stay on top of their spending, plan budgets and manage their energy bills.
–Increased the customer interest rate on our 1I2I3 Current Account to 0.75% and on our Regular eSaver account to 2.50%.
A clear focus on our communities and being a sustainable and responsible bank for our customers and colleagues
–Over £6.5bn of green finance since 2020, helping
our customers reduce their carbon footprint, targeting £20bn by 20251.
–Launched a home improvement loan with a 25bp discount for mortgage customers improving the energy efficiency of their home.
–Raised and donated over £440k in H122 for the Red Cross and UNHCR to help those affected by the conflict in Ukraine.
–Announced Macmillan Cancer Support as our new charity partner to help transform financial support for those affected by cancer.
–Additional 4% pay increase for 60% of our lower paid employees to help them with the increased cost of living.
–Won Working Families ‘Best for Mental
Health & Wellbeing’ award for our physical, mental, social and financial health people support.
H122 financial highlights
Profit from continuing operations before tax2 up 32% to £982m
–Net interest income improved.
–Operating expenses down 12%, reflecting lower transformation spend following significant restructuring in 2021.
–Credit impairment charges of £118m (H121: £70m write-backs) due to deterioration in economic outlook.
–Provisions for other liabilities and charges down 38%, as a result of the lower transformation spend.
–Ongoing
transformation programme savings of £572m from £837m investment since 2019.
Proven balance sheet resilience with strong capital and liquidity
–Prudent approach to risk across our businesses and operations with lower Stage 3 ratio of 1.23% (2021: 1.45%).
–Resilient asset quality with low arrears and no material corporate defaults.
–CET1 capital ratio of 15.8% (2021: 16.1%), well above regulatory requirements.
–Strong LCR of 166%.
2022 outlook
–We expect our net mortgage lending will be broadly in line with market
growth for the year.
–We expect Net interest income to continue to be above 2021.
–Inflation will impact 2022 operating expenses, although we expect this will be offset by savings from our transformation programme.
–The rising cost of living is impacting our customers, although we have not seen any significant deterioration of credit quality to date.
–The resilience of our balance sheet is underpinned by 85% of customer loans consisting of retail mortgages with a weighted average LTV of 51% (simple average 40%). We have relatively small unsecured lending and BTL portfolios and the £2.9bn of outstanding BBLS and CBILS was made to pre-existing customers which we expect to significantly mitigate potential
fraud losses.
1.Includes lending to finance properties with an EPC rating of A and B, renewable energy and electric vehicles as well as financing raised and facilitated.
2.CIB is presented as a discontinued operation after its transfer to SLB under a Part VII banking business transfer scheme, completed on 11 October 2021.
Santander UK plc 2
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
Financial overview
Duke Dayal,
Chief Financial Officer, commented
"Thanks to the hard work of all our people across the bank, we have produced a strong set of results for the first six months of 2022 which again demonstrates the sustainability of our results in a challenging environment and how far we’ve come in transforming the bank. Despite the macroeconomic pressures we face, our prudent approach to risk and the strength of our capital and liquidity gives us confidence in our resilience. This leaves us well positioned to continue to support our customers and fulfil our purpose to help people and businesses prosper."
Income statement review
SUMMARISED
CONSOLIDATED INCOME STATEMENT
Half Year to
30 June 2022
30 June 2021
£m
£m
Net interest income
2,120
1,905
Non-interest income(1)
270
286
Total
operating income
2,390
2,191
Operating expenses before credit impairment (losses)/write-backs, provisions and charges
(1,172)
(1,328)
Credit impairment (losses)/write-backs
(118)
70
Provisions for other liabilities and charges
(118)
(190)
Total
operating credit impairment (losses)/write-backs, provisions and charges
(236)
(120)
Profit from continuing operations before tax
982
743
Tax on profit from continuing operations
(232)
(205)
Profit from continuing operations after tax
750
538
Profit/(loss)
from discontinued operations after tax
—
24
Profit after tax
750
562
(1)Comprises
'Net fee and commission income' and 'Other operating income'.
A more detailed Consolidated Income Statement is contained in the Condensed Consolidated Interim Financial Statements.
H122 compared to H121
Profit from continuing operations after tax up 39%.
–Net interest income up 11%, following the impact of base rate increases and higher mortgage lending.
–Non-interest income down 6%, as the £71m gain on sale of our UK head office in H121 was not repeated.
–Operating expenses before credit impairment (losses) / write-backs, provisions and charges down 12% largely due to lower transformation programme
spend following significant restructuring in 2021.
–Credit impairment losses of £118m driven by the deterioration in the economic outlook, including the higher interest rate environment, and reflecting the risk that higher inflation could impact lending repayments. New to arrears flows remain low. The Stage 3 ratio reduced by 22bps due to the movement of corporate loans to Stage 2 (ECL outlined in the Credit risk section of the Risk review).
–Provisions for other liabilities and charges decreased 38%, largely related to lower transformation programme charges following significant restructuring in 2021.
–The effective tax rate for H122 reduced to 23.6% (H121: 27.6%) driven by the favourable timing impact on deferred tax of a legislative reduction in the bank surcharge
rate (effective 1 April 2023). This timing benefit will be offset by a higher overall tax rate of 28%, effective 1 April 2023. Tax on profit from continuing operations increased by £27m, driven by higher taxable profits.
Discontinued operations relate to the CIB segment which was moved to SLB under a Part VII banking business transfer scheme, which completed on 11 October 2021.
Santander UK plc 3
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
PROFIT BEFORE TAX BY SEGMENT
Continuing operations
The
segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Condensed Consolidated Interim Financial Statements.
Half Year to
Retail Banking(2)
Consumer Finance (2)
Corporate
& Commercial Banking
Corporate Centre
Total
30 June 2022
£m
£m
£m
£m
£m
Net interest income
1,784
92
242
2
2,120
Non-interest
income(1)
116
101
69
(16)
270
Total operating income
1,900
193
311
(14)
2,390
Operating
expenses before credit impairment (losses)/write-backs, provisions and charges
(831)
(73)
(181)
(87)
(1,172)
Credit impairment (losses)/write-backs
(126)
(13)
19
2
(118)
Provisions
for other liabilities and charges
(101)
—
(2)
(15)
(118)
Total operating credit impairment (losses)/write-backs, provisions and charges
(227)
(13)
17
(13)
(236)
Profit
from continuing operations before tax
842
107
147
(114)
982
30 June 2021
Net
interest income/(expense)
1,602
135
202
(34)
1,905
Non-interest income(1)
109
77
51
49
286
Total
operating income/(expense)
1,711
212
253
15
2,191
Operating expenses before credit impairment (losses)/write-backs, provisions and charges
(858)
(90)
(181)
(199)
(1,328)
Credit
impairment (losses)/write-backs
28
20
23
(1)
70
Provisions for other liabilities and charges
(67)
—
(5)
(118)
(190)
Total operating
credit impairment (losses)/write-backs, provisions and charges
(39)
20
18
(119)
(120)
Profit from continuing operations before tax
814
142
90
(303)
743
(1)Comprises
'Net fee and commission income' and 'Other operating income'.
(2)The segmental basis of presentation has changed following a management review of our structure in Q4 2021. Segmental income statements for H121 have been restated to reflect the resegmentation of the Retail Banking segment into the Retail Banking and Consumer Finance segments, as reflected in Note 2 to the Condensed Consolidated Interim Financial Statements.
H122 compared to H121
–Retail Banking: Profit increased driven by higher mortgage volumes, base rate rises and lower operating costs.
–Consumer Finance: Profit decreased which included the £32m impact of the sale of our PSA shareholding in July 2021. Non-interest income was higher from
the increase in the value of second hand cars and we made a charge for credit impairment losses following write-backs in H121.
–CCB: Profit increased primarily due to higher interest margins including the impact of base rate increases and higher fee income with the growth of high value clients.
–Corporate Centre: Loss decreased due to lower transformation programme spending, partially offset by the H121 gain on property sale.
Santander UK plc 4
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
Balance sheet review
CUSTOMER
BALANCES
This section analyses customer loans and customer deposits at a consolidated level and by business segment. The customer balances below exclude Joint ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the customer's account, and cash collateral. A reconciliation between the customer balances below and the total assets as presented in the Condensed Consolidated Interim Balance Sheet is set out in the Risk review.
Consolidated
30 June 2022
31
December 2021
£bn
£bn
Customer loans
213.5
207.3
Other assets(1)
70.8
79.8
Total assets
284.3
287.1
Customer
deposits
184.0
186.2
Total wholesale funding
68.5
65.2
Other liabilities
16.1
19.6
Total liabilities
268.6
271.0
Shareholders'
equity
15.7
16.1
Total liabilities and equity
284.3
287.1
(1) At 30 June 2022, includes £49m of property assets classified as held for sale.
Further analysis of credit risk on customer loans is set out in the Credit risk section of the Risk review.
30 June 2022 compared to 31 December 2021
–Customer
loans increased £6.2bn, with £6.7bn of net mortgage lending (£18.1bn of gross mortgage lending), supported by a strong mortgage market.
–Customer deposits decreased £2.2bn, largely due to competitive pressures in Retail Banking deposits, which we expect to stabilise going forward.
–Other assets and other liabilities fell, primarily reflecting our approach to liquidity management in H122.
Customer loans by segment
30 June 2022
31 December
2021
£bn
£bn
Retail Banking
189.3
183.0
Consumer Finance
5.1
5.0
CCB 1
17.4
17.0
Corporate
Centre 2
1.7
2.3
Total
213.5
207.3
(1) CCB customer loans includes £4.5bn of CRE loans (31 December 2021: £4.4bn).
(2) Corporate Centre customer loans includes Social Housing lending of £1.7bn (31 December 2021: £2.2bn).
Customer deposits by segment
30
June 2022
31 December 2021
£bn
£bn
Retail Banking
154.8
157.0
CCB
25.3
25.6
Corporate Centre
3.9
3.6
Total
184.0
186.2
Retail
Banking customer loans and customer deposits by portfolio
30 June 2022
31 December 2021
£bn
£bn
Mortgages
181.4
174.7
Business banking
3.0
3.5
Other
unsecured lending
4.9
4.8
Retail Banking customer loans
189.3
183.0
Current accounts
79.7
80.7
Savings accounts
57.1
57.8
Business
banking accounts
12.5
13.1
Other retail products
5.5
5.4
Retail Banking customer deposits
154.8
157.0
Santander UK plc 5
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
Treasury
Key capital
metrics
30 June 2022
31 December 2021
£bn
£bn
Capital
CET1 capital
10.9
10.8
Total
qualifying regulatory capital
14.5
14.8
CET1 capital ratio
15.8
%
16.1
%
Total capital ratio
21.0
%
21.9
%
Risk-weighted assets
69.2
67.1
30
June 2022 compared to 31 December 2021
Capital ratios impacted by the change in treatment of software assets
–The CET1 capital ratio decreased 30bp to 15.8%, largely due to the regulatory changes that took effect from January 2022. RWA growth in Retail Banking and Consumer Finance was offset by retained profit. The business remains strongly capitalised.
–Total capital ratio decreased by 90bp to 21.0%, due to the one-off regulatory changes that took effect on 1 January 2022 and the reduction in Additional Tier 1 and Tier 2 capital securities recognised following the end of the CRR Grandfathering period on 1 January 2022.
–2022 ordinary share dividends are expected to be in line with our existing dividend
policy of 50% of recurring profit after tax.
Key funding and liquidity metrics
30 June 2022
31 December 2021
£bn
£bn
Total wholesale funding and AT1
70.4
67.4
of
which TFSME
31.9
31.9
of which with a residual maturity of less than one year
9.8
10.2
RFB DolSub LCR(1)
166
%
166
%
LCR eligible liquidity pool
47.1
51.4
(1) LCR
impacted by sale of a £0.6bn retail mortgage portfolio from Santander UK plc to Santander Financial Services plc in May 2022.
30 June 2022 compared to 31 December 2021
Strong funding across a range of diverse products
–Total wholesale funding increased although funding costs improved with buy backs and maturities being refinanced at lower cost.
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, withstand stresses, such as the impacts of the Covid-19 pandemic, 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
How we define risk
Key risk types
Our key risk types help us define the risks
to which we are exposed. For definitions of our key risk types, see ‘How we define risk’ on page 43 of the 2021 Annual Report.
Top and emerging risks
Several of our risk types also have top and/or emerging risks associated with them. For details, see 'Top and emerging risks' on page 44 of the 2021 Annual Report.
30 June 2022 compared to 31 December 2021
In H122, there were no significant changes in our risk governance, including our key risk types and our top and emerging risks, as described in the 2021 Annual Report, except as follows:
Top risks
In H122, we introduced two new Top risks: Inflationary and supply chain pressures, which was added following the onset of the conflict in Ukraine which exacerbated already elevated inflation
levels; and Fraud risk, reflecting industry wide increases in fraud levels and losses. Capacity and Capability challenges exist across the business, against a backdrop of a tight labour market and intense competition for expertise in many specialist areas. These issues continue to be reflected in our People and Change Agenda Delivery Top risks.
Inflationary and Supply Chain Pressures
This covers potential impacts on our retail customers from cost-of-living increases and rising interest rates and on our corporate and commercial customers from business cost increases and supply chain pressures. We have also incorporated into this newly recognised risk the remaining Covid-19 and Brexit related impacts, which were Top risks in 2021. We have taken actions to adjust affordability criteria in our retail lending decisions, increased customer support capacity, and continue close monitoring
of our credit portfolios for any indications of stress in our customer base.
Fraud risk
Changes in the external and regulatory environment have had a direct impact on losses across the banking industry. Fraud losses now consistently form a significant proportion of our operational losses. We continue to take actions to improve our fraud prevention capabilities and reduce case volumes under our Fraud Transformation programme.
Other Top risk profile movements
Financial Crime risk: ongoing developments related to the implementation of Russian sanctions have added further complexity to mitigating our compliance risks and maintaining operational resilience in our Financial Crime Centre of Excellence. We continue to execute our Financial Crime Transformation and Remediation programme in order to enhance
controls and provide additional analytics capacity.
IT risk: The importance of IT continued to be re-iterated by some outages to customer services in H122, although there has been a continued trend downwards in such incidents from H221. We are finalising a multi-year IT Infrastructure remediation plan, for Board approval, with the aim of securing risk reduction benefits which will accrue throughout the plan period.
Emerging risks
In H122, the emerging risk landscape evolved rapidly in terms of complexity and uncertainty. This is particularly pertinent in the Macro and Geopolitical risk environment, with the conflict in Ukraine likely becoming more protracted, along with collateral impacts on energy, food and commodity prices. This is occurring against a back-drop of global industrial sector transition (decarbonisation). We are focused on
incorporating the associated risks into our business plans and stress testing exercises, where relevant.
Uncertain Macro and Geopolitical risks - the conflict in Ukraine has also highlighted the potential for additional inflationary and supply chain risks. De-globalisation trends also appear to be accelerating with energy and food security being significant drivers. The political environment in the UK has also become more uncertain, with the Prime Minister's resignation in early July.
The May 2022 ECB Financial Stability Review highlighted the risks of potential economic stress, impacting financial stability in the Euro area and globally. Wider credit spreads could increase wholesale funding costs for the banking industry. Our funding plans and liability strategies are regularly reviewed and challenged.
Modelling risks in the current environment
are also becoming more challenging to manage, particularly given the recent escalation in inflation to 40-year highs, and subsequent rapid monetary policy tightening.
In addition to Climate Change risk, which we manage as one of our Top risks, there is increasing regulatory and stakeholder focus on broader ESG risk, particularly the financial impacts related to nature-related risks which could impact our suppliers and customers to whom we lend. We are developing a risk capability gap assessment to facilitate mitigation of these risks, and in anticipation of regulatory reporting requirements. A separate Half Year ESG Supplement is available on our website.
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Credit risk
Overview
Credit
risk is the risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for which we assumed a financial obligation.
Credit risk management
In H122, there were no significant changes in the way we manage credit risk as described in the 2021 Annual Report, except that we updated our definition of default and revised our Post Model Adjustments, as described below.
Credit risk review
In this section, we analyse our key credit risk metrics.
Key metrics
Stage 3 ratio of 1.23% (2021: 1.45%).
Loss
allowances of £922m (2021: £865m).
Balance weighted average LTV of68% (2021: 66%) on new mortgage lending.
Introduction
We manage credit risk across all our business segments in line with the credit risk lifecycle. We tailor the way we manage risk across the lifecycle to the type of customer. There have been no significant changes in the way we manage credit risk as described in the 2021 Annual Report, except that we updated our definition of default and revised our Post Model Adjustments, as described below.
We
provide an update on the key changes to the inputs to our ECL model below.
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 Significant Increase in Credit Risk (SICR) since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the risk of a loss being incurred even when it is considered unlikely.
Multiple
economic scenarios and probability weights
For all our portfolios we use five forward-looking economic scenarios. For H122, they consist of a central base case, one upside scenario and three downside scenarios. We use five scenarios to reflect a wide range of possible outcomes for the UK economy.
The UK economy has faced a range of challenges over the last two years, including from Brexit and, most significantly, the Covid-19 pandemic. Attention has now switched to the high rates of inflation seen globally, exacerbated by the conflict in Ukraine which triggered a sharp increase in commodity prices.
GDP grew by 0.5% in May 2022, with all sectors posting growth for the first time since January. The outlook remains uncertain, with inflation hitting record levels and real disposable income set to drop by c2% this year.
A much larger increase in the energy price cap in October 2022 is expected, creating additional challenges for our customers and leading to a further spike in inflation in late 2022, creating further cost of living challenges for households and businesses well into 2023.
The scenarios continue to encapsulate different potential outcomes from the base case. The stubborn inflation scenario is based on higher inflation which is persistently above the Bank of England target. This results in the base rate peaking at 5%, further adding to the cost of living crisis and reducing consumer demand. The other downside scenarios capture a range of risks, including continuing weaker investment reflecting the turbulent political global environment; emergence of new Covid-19 strains which are immune to vaccines leading to further restrictions; a larger negative impact from the EU trade deal given ongoing issues such as in Northern Ireland;
and a continuing and significant mismatch between vacancies and skills, as well as a smaller labour force.
Our five scenarios capture a range of inflation outcomes through the different base rate profiles used. For example, in the stubbornly high inflation scenario, base rate peaks at 5% in response to the greater persistence of above target inflation compared to the base case.
The scenario weights for 30 June 2022 have not changed given many of the risks to the base case have not materially changed, including the impacts of stubborn inflation. The scenario weights for 31 March 2022 were adjusted to reflect market forecasts for lower growth and higher inflation as outlined below. A scenario for stubborn inflation was introduced, replacing the downside 3 scenario.
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Base case
For our base case, the forecasts are based on the
following assumptions: that there are no further lockdowns due to rising Covid infections; that supply constraints continue easing in H2 2022; that inflation remains above target until the end of 2023; and that the conflict in Ukraine does not escalate into further areas. It is normal practice to review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances, and we will continue to follow that approach particularly as the advice the UK Government issues is subject to change in this fluid environment.
Base case key macroeconomic assumptions
–House price growth:Despite the prospect of tougher
times ahead, there has not been a significant slowdown in house price growth in H122. With unemployment continuing to remain low; conditions for buying still favourable, albeit with mortgage rates increasing in line with Bank Rate rises, and with the supply side remaining weak, this is expected to help keep house prices from falling dramatically. On this basis we are projecting an increase of 5% by the end of 2022 but with growth reducing to 2% in 2023 due to the income squeeze and higher mortgage rates, although this will vary across the UK regions.
–GDP: Although the start to 2022 was positive with strong growth in January as the Omicron restrictions were lifted, the outlook is far less positive. With inflation continuing to be significantly above target; a further increase in the Ofgem price cap for October likely; rising interest rates;
and the negative spillovers from the ongoing conflict in Ukraine, UK growth is expected to struggle through 2022 and into 2023. Households and businesses will look to mitigate these effects by reducing consumption where possible and potentially using savings or credit to bolster falling real incomes. This is likely, along with the additional costs, to weigh on businesses with some firms falling into insolvency. In terms of growth for 2022, Q1 saw some catch up in growth, but for Q2 the cost-of-living increase has started to bite, and growth rates will fall back to below average levels over 2022. Although a recession is not forecast, in part due to the support offered by the government, there is the potential for negative growth in Q2 as the additional bank holiday will have the effect of reducing growth. A technical recession remains a risk throughout this year.
–Unemployment
rate: Unemployment has now fallen to its pre-pandemic rate. Vacancies remain at high levels despite lower business confidence and the inactive workforce is still much larger than pre-pandemic levels. However, with the triple effect of rising energy costs; continuing supply constraints pushing up input prices; and increases in taxes and interest rates, it is likely that demand from firms for jobs will fall back in H222 as some firms become insolvent and others find that demand for goods and services reduce as households restrict spending as real earnings fall. Whilst the forecast does not assume a large rise in unemployment, the rate increases to 4.3% by the end of 2023 as demand and supply conditions for labour change, including a shift into work of some of the current inactive workforce.
–Bank Rate: For the Bank
Rate forecast, the last actual data point that could be used was June 2022. Since then, the MPC raised rates further to 1.75% in early August 2022. The base case has Bank Rate at 2% at the end of 2022 which is broadly in line with consensus views and assumes three further rises in rates of 25bps from June 2022. In 2023 it assumes one additional rise of 25bps, taking the terminal rate to 2.25%. These further increases are designed to bring CPI inflation back towards target by the end of 2023/beginning of 2024. Bank rate remains flat at 2.25% over the rest of the forecast period as inflation starts to drop back. The Bank of England look to bed in these new rates and to understand its effects on businesses.
In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. For instance, it is likely that the reduction
in the UK workforce continues and that this will have a knock-on impact for the economy, particularly if there are shortages of skilled workers in particular sectors. This is reflected in an average annual growth expectation of 1.6%, the OBR’s latest estimate of the UK’s long run average growth rate. CPI inflation is forecast to be significantly above the 2% target rate in the initial forecast period but then falls to target by the end. With higher levels of savings, consumers use a proportion of these to help support household spending power through 2022.
Key changes to our base case in H122
The key changes to our base case assumptions in H122 were: (i) weaker GDP growth in 2022 and 2023 which largely reflects the bigger hit to consumer spending from the squeeze on real incomes; (ii) higher inflation in response to rising food, fuel and utility bills that is likely to push the peak to c.11-12%
in the autumn; (iii) a steeper Bank Rate profile with rates now reaching 2% by the end of 2022 with a further 25 bps rise to 2.25%. Thereafter, rates are held flat over the remainder of the forecast period. This had the effect of increasing the weighted average of the Bank Rate across the five scenarios to 2.75%; and (iv) house price growth is lower in 2023 at 2%.
Other scenarios
Based on this revised base case, we have reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These include (i) reflecting persistent above target inflation over the forecast period; (ii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iii) labour market frictions due to skills mismatches and a shrinking workforce as some discouraged workers leave altogether (for example EU workers returning to their native countries and older UK-born workers
retiring early); and (iv) the global economy recovering more swiftly from higher inflation.
To reflect these potential outcomes, we decided to continue to use the base case and four additional scenarios, which management considers provides a range wide enough to reflect all the above potential outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we concluded that only one upside scenario would be needed to reflect the upside risks to the base case. As with the base case, the scenarios are forecast over a five-year period and then mean revert over the next three years to the OBR's latest estimate of the UK's long run average growth rate.
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The four scenarios are as follows:
One upside scenario
Our
modest upside scenario remains appropriate given supply side constraints may fall back quicker than expected, with a faster global recovery and inflation falling more rapidly than expected, along with the UK quickly concluding trade agreements with several countries, with minimum effective tariffs. It is also based on productivity growth recovering and consumers feeling more confident to spend a higher proportion of the savings that were enforced during the pandemic. Combined with a strong supply side response, it allows interest rates to rise in a gradual and well managed fashion. In this scenario, GDP remains stronger than the base case with house prices remaining relatively stable despite a modest increase in unemployment. HPI for Upside 1 is less positive than for the base case and is based on the HPI equations built into the Oxford Global Economic Model (OGEM) and the particular GDP profile used, whereas our base case reflects our planning view which allows for
flexibility to align what is currently seen in the market to the outlook of the economic variable forecast.
Three downside scenarios
Downside 1 assumes that inflation takes longer to fall back, which exacerbates the cost-of-living crisis and leads to a technical recession in early 2023. The scenario also assumes that further lockdowns among some of the UK’s key trading partners exacerbate supply constraints and means inflation runs higher and for longer, which in turn depresses UK trade and delays the recovery in growth. While global monetary conditions start to tighten, the Bank of England keeps monetary policy accommodative (rates are held at 1%) to support the flagging UK economy. Business and consumer confidence remain low given the subdued economic outlook. House prices start to decline, with business investment continuing to fall. As a result, annual GDP growth struggles to approach typical
estimates of trend growth for an extended period until the process of rebalancing the UK economy away from the EU and the Single Market is complete.
Downside 2 reflects a severe downturn with a marked fall in GDP, rising unemployment and falling house prices, with higher inflation creating negative wage growth which feeds across the whole economy. It also assumes that the incidence of major risk events, for example those caused by climate change, exposing further risks to countries’ vulnerable fiscal position and the means to respond to such events, which results in growth taking far longer to recover. For businesses, it reflects a slower return to profitability and more insolvencies with companies struggling to adapt to the new trading conditions with the EU, which create supply bottlenecks and push up manufacturing costs that businesses can no longer absorb, forcing them to pass this burden onto consumers. With business confidence
weak and investment contracting, a reduction in investor appetite for UK assets causes a sharp depreciation in sterling which pushes up imported inflation and causes the MPC to raise rates significantly. There is a substantial rise in interest rates of up to 3%, which results in a large increase in debt-service costs to households and a rapid undermining of demand in the housing market. House values fall sharply and the combination of rising interest rates and unemployment with falling house prices results in a rising profile of credit impairment losses.
Downside 3 which was related to Covid-19 has been replaced by a stubborn inflation scenario. The scenario is based on higher inflation, which is persistently above target, due to a combination of factors including higher energy costs exacerbated by the conflict in Ukraine; continuous wage rises resulting in a spiral effect; falling productivity; and supply constraints pushing
up input prices. Inflation has a negative effect on economic growth that is exacerbated by the need to raise Bank Rate quickly to try and reduce the spike in inflation, with Bank Rate reaching 5% in Q1 2024 and remaining at that level until the end of 2024. GDP remains negative for all of 2023 causing a recession as more than two consecutive quarters are negative and there is an increase in unemployment as higher costs push some businesses into insolvency. Unemployment peaks at a little over 6% towards the end of the forecast period as Bank Rate remains at higher levels compared to recent history and growth is still weak due to low productivity as investment remains low. The large increases in Bank Rate and falling real incomes result in house prices falling and growth remaining negative until the end of 2026. Thereafter Bank Rate falls back as inflation is brought under control and growth returns to average quarterly levels, although there may be some permanent scarring
in terms of catch-up growth.
Key changes to our alternative scenarios in H122
The key changes to our alternative scenarios in H122 were to Downside 3, which was changed from a pandemic scenario to one considering the effects of persistently above target inflation; to the Bank Rate profile of the scenarios to reflect current levels; and changes to the base case, historical data for each variable, and the OGEM. We did not make any other methodological changes to the scenarios. The combination of these different inputs will mean differences across the variables for each of the alternative scenarios when we update them each quarter. We continue to compare the variables between each quarter and review any large changes to ensure they are not erroneous.
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The table below sets out our macroeconomic assumptions for each of the five scenarios at 30
June 2022:
Upside 1
Base case
Downside 1
Downside 2
Stubborn Inflation
%
%
%
%
%
GDP(1)
2021
7.4
7.4
7.4
7.4
7.4
2022
3.7
3.5
3.3
0.5
2.5
2023
1.1
0.9
0.0
(3.3)
(1.7)
2024
1.8
1.3
0.4
1.4
0.1
2025
1.8
1.4
0.3
1.4
0.7
2026
2.0
1.5
0.4
1.5
1.0
Bank
Rate(1)
2021
0.25
0.25
0.25
0.25
0.25
2022
1.50
2.00
1.00
1.75
2.50
2023
1.75
2.25
1.00
2.75
4.50
2024
2.00
2.25
1.00
3.00
5.00
2025
2.00
2.25
1.00
2.50
3.50
2026
2.00
2.25
1.00
2.25
2.50
HPI(1)
2021
8.7
8.7
8.7
8.7
8.7
2022
6.2
5.0
5.9
3.6
5.3
2023
(1.9)
2.0
(3.7)
(12.6)
(7.4)
2024
(1.8)
3.0
(5.4)
(10.2)
(8.7)
2025
0.5
3.5
(3.8)
(1.5)
(4.1)
2026
3.0
3.5
(1.3)
4.9
1.0
Unemployment(1)
2021
4.1
4.1
4.1
4.1
4.1
2022
3.7
4.2
3.9
5.2
4.3
2023
3.8
4.3
4.4
6.7
5.4
2024
4.0
4.1
5.1
6.7
6.0
2025
4.1
4.1
5.6
6.6
6.3
2026
4.0
4.1
5.9
6.4
6.3
The
table below sets out our macroeconomic assumptions for each of the five scenarios at 31 December 2021:
Upside 1
Base case
Downside 1
Downside 2
Downside 3
%
%
%
%
%
GDP(1)
2020
(9.7)
(9.7)
(9.7)
(9.7)
(9.7)
2021
7.0
6.9
6.8
6.2
5.6
2022
4.8
4.6
4.1
(0.7)
(7.5)
2023
2.2
1.7
0.9
0.5
3.1
2024
1.9
1.5
0.5
1.6
1.5
2025
2.1
1.6
0.5
1.7
1.5
Bank
Rate(1)
2020
0.10
0.10
0.10
0.10
0.10
2021
0.25
0.25
0.25
0.25
0.25
2022
0.75
0.75
0.75
1.00
(0.50)
2023
0.75
0.75
0.75
2.00
0.00
2024
1.25
0.75
1.00
3.00
0.00
2025
1.75
0.75
1.00
2.75
0.00
HPI(1)
2020
6.9
6.9
6.9
6.9
6.9
2021
5.4
5.0
5.4
5.4
(2.5)
2022
(0.8)
2.0
(1.8)
(8.3)
(19.6)
2023
(2.0)
2.0
(4.6)
(13.1)
(9.3)
2024
1.0
2.0
(3.1)
(4.8)
2.4
2025
3.8
2.0
(0.7)
4.3
3.3
Unemployment(1)
2020
5.2
5.2
5.2
5.2
5.2
2021
4.4
4.7
4.4
4.4
6.8
2022
4.4
4.5
4.8
6.9
11.4
2023
4.2
4.4
5.0
6.9
8.7
2024
3.9
4.3
5.1
6.4
8.0
2025
3.7
4.3
5.4
6.1
7.4
(1)GDP
is the calendar year annual growth rate, HPI is Q4 annual growth rate and all other data points are at 31 December in the year indicated.
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Our macroeconomic assumptions and their evolution throughout the forecast period
Our macroeconomic assumptions and their evolution throughout the forecast period for 30 June 2022 and 31 December 2021 were:
Upside 1
Base case
Downside 1
Downside 2
Stubborn
Inflation
30 June 2022
%
%
%
%
%
House price growth
5-year average increase/decrease
1.14
3.39
(1.74)
(3.41)
(2.92)
Peak/(trough)
at (1)
(3.83)
0.00
(13.51)
(23.94)
(19.28)
GDP
5-year average increase/decrease
2.08
1.71
0.87
0.29
0.51
Cumulative
growth/(fall) to peak/(trough) (2)
10.83
8.84
4.44
1.47
2.56
Unemployment rate
5-year end period
3.98
4.10
5.95
6.37
6.30
Peak/(trough)
at (1)
4.14
4.30
5.95
6.70
6.33
Bank of England bank rate
5-year end period
2.00
2.25
1.00
2.25
2.50
Peak/(trough)
at (1)
2.00
2.25
1.00
3.00
5.00
Upside
1
Base case
Downside 1
Downside 2
Downside 3
31 December 2021
%
%
%
%
%
House price growth
5-year average increase/decrease
1.30
2.00
(1.78)
(3.27)
(6.00)
Peak/(trough)
at (1)
(3.07)
0.00
(9.87)
(24.03)
(32.12)
GDP
5-year average increase/decrease
2.33
1.89
0.93
0.49
(0.58)
Cumulative
growth/(fall) to peak/(trough) (2)
12.19
9.83
4.75
2.48
(2.85)
Unemployment rate
5-year end period
3.60
4.30
5.65
5.95
6.80
Peak/(trough)
at (1)
4.45
4.70
5.65
7.27
11.90
Bank of England bank rate
5-year end period
2.00
0.75
1.00
2.25
0.25
Peak/(trough)
at (1)
2.00
0.75
1.00
3.00
(0.50)
(1)For GDP and house price growth it is the peak to trough change within the 5-year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.
(2)This is the cumulative growth for the 5-year period.
Scenario
weights
Each quarter, we undertake a full review of the probability weights applied to all the scenarios. The setting of probability weights needs to consider the probability of the economic scenarios occurring, while ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support the initial assessment of how likely a scenario is to occur, we typically undertake a Monte Carlo analysis which would ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring and therefore assign a probability weight to that scenario. However, a key challenge with this approach in a stressed environment like the one seen in 2020 is that extreme GDP forecasts can occur.
We
continue to use the entire historical GDP data set available for the Monte Carlo analysis to smooth out the large GDP data swings that the pandemic gave. For H122, the base case sits around the 30th percentile having dropped down slightly now that both 2020 and 2021 growth rates are captured. Under the longer period, the Downside 2 scenario, which has the lowest CAGR, now sits below the 10th percentile suggesting that a lower weight than the base case remains appropriate.
We also need to consider the UK economic and political environment when applying weights. Given the current cost of living crisis, we remain of the view that the risks to UK growth are still biased to the downside and include: a substantial increase in inflation staying above target for longer, which raises the cost of living reducing consumer demand; continuing weak investment reflecting the turbulent political global environment; further development of
Covid strains that are immune to vaccines leading to further restrictions; a larger negative impact from the EU trade deal given ongoing issues such as in NI; a continuing and significant mismatch between vacancies and skills along with a smaller labour force; and the increasing possibility of a second Scottish referendum which may bring disruption to any recovery in the latter years of the forecast. As such, it remains appropriate to reflect this with a 55% cumulative weighting for the downside scenarios. The stubborn inflation scenario has a heavier weight compared to the old downside 3 scenario as, firstly, this scenario is more representative of the current climate of potential stagflation and, secondly, the old downside 3 scenario was a more severe stress scenario and had a lower likelihood of occurring.
The
scenario weights we applied for 30 June 2022 and 31 December 2021 were:
Upside 1
Base case
Downside 1
Downside 2
Stubborn Inflation
Scenario weights
%
%
%
%
%
30
June 2022
5
40
15
20
20
Upside 1
Base case
Downside 1
Downside
2
Downside 3
Scenario weights
%
%
%
%
%
31 December 2021
5
45
25
20
5
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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 the customer 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 and Consumer Finance
–They have been reported bankrupt or insolvent and are in arrears
–Their loan term has ended, but they still owe us money more than three months later
–They
have had forbearance while in default and have failed to perform under the new arrangement terms, or have had multiple forbearance. Performing forborne accounts while not in default are reported in Stage 2
–We have suspended their fees and interest because they are in financial difficulties
–We have repossessed the property.
Corporate & Commercial 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 maturity
–Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increase in market value
–Loans restructured
under financial difficulties, classified as forborne transactions, in last 12 months.
Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, there are differences with the default definitions for ECL purposes. The main differences are as follows:
–Performing forborne accounts while not in default are in Stage 2 until they cure their forbearance status (measured as 12 consecutive months of successful payments).
–Performing non-forborne accounts, which under our internal rating-based basis are subject to a 3-month cure period, for accounting purposes we classify them in Stage 2 until they cure all SICR triggers.
The CRPF reviews and approves the definition of default each year, or more
often if we change it.
Following the implementation of a new definition of default in early 2022, the Stage 3 ratio increased by 7bps (£0.2bn). This was due to the inclusion of non-performing forbearance accounts which were previously reported in Stage 2 and are now reported in Stage 3, subject to a 12-month probation period in line with our regulatory default definition. The change in definition was a change in estimate and therefore prior periods have not been amended.
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Post Model Adjustments (PMAs)
In
H122, there were no changes to the PMAs that we apply as described in the 2021 Annual Report, except for the following:
–Affordability of unsecured lending repayments: We introduced new PMAs to account for the potential repayment affordability risk among those customers with low disposable income. These PMAs increased our ECL by £42m.
–Mortgage probability of default: We uplifted our modelled mortgage probability of default as back testing and monitoring shows a risk of model underestimation. This PMA increased our ECL by £20m.
–Corporate sector staging risks: We introduced new PMAs to reflect the corporate lending risks to those sectors which are susceptible to high inflation and energy prices,
higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. This PMA increased our ECL by £128m.
–Corporate lending to segments affected by Covid-19: Following a successful 18 month probation period, with no material observed defaults, we released all corporate sector staging PMAs related to Covid-19 as the risks from lockdowns has reduced.
The PMAs that we applied at 30 June 2022 and 31 December 2021 were:
30
June 2022
31 December 2021
PMAs
£m
£m
Non Covid-19 PMAs
Long-term indeterminate arrears
12
14
12+ months in arrears
22
29
Cladding
risk
15
15
Mortgages affordability
18
18
Affordability of unsecured lending repayments
42
—
UPL loss floor
18
21
Mortgage
probability of default
20
—
Corporate sector staging risks
128
—
Other PMA
69
8
Total non Covid-19 PMAs
344
105
Covid-19
PMAs
Corporate lending to segments affected by Covid-19
—
176
Corporate single large exposure
23
23
Model underestimation
35
28
SME
debt burden
10
9
Total Covid-19 PMAs
68
236
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Sensitivity of ECL allowance
The 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 residential mortgages, in particular, is significantly affected by the HPI assumptions which determine the valuation of collateral used in the calculations.
Had management used different assumptions on probability weights and HPI, a larger or smaller ECL charge would have resulted that could have had a material impact on the Santander UK group’s reported ECL allowance and profit before tax. Sensitivities to these assumptions are set out below.
Scenario
sensitivity
The amounts shown in the tables below illustrate the ECL allowances that would have arisen had management applied a 100% weight to each economic scenario. The allowances were calculated 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 context of a potential best to worst case outcome. All exposures in 'Credit quality' in 'Santander UK group level - Credit risk review' are included in the tables below.
Weighted
Upside
1
Base case
Downside 1
Downside 2
Stubborn Inflation
30 June 2022
£m
£m
£m
£m
£m
£m
Exposure
309,214
309,214
309,214
309,214
309,214
309,214
Retail
Banking
218,250
218,250
218,250
218,250
218,250
218,250
–Homes
196,753
196,753
196,753
196,753
196,753
196,753
–Everyday
Banking
21,497
21,497
21,497
21,497
21,497
21,497
Consumer Finance
5,475
5,475
5,475
5,475
5,475
5,475
Corporate
& Commercial Banking
25,166
25,166
25,166
25,166
25,166
25,166
Corporate Centre
60,323
60,323
60,323
60,323
60,323
60,323
ECL
922
786
793
850
1,074
1,099
Retail
Banking
464
380
376
408
493
501
–Homes
204
155
149
180
233
245
–Everyday
Banking
260
225
227
228
260
256
Consumer Finance
61
60
60
60
62
64
Corporate
& Commercial Banking
396
345
356
381
518
533
Corporate Centre
1
1
1
1
1
1
%
%
%
%
%
%
Proportion
of assets in Stage 2
4.8
4.4
4.5
4.5
5.6
5.9
Retail Banking
5.6
5.2
5.2
5.3
6.4
6.7
–Homes
6.0
5.6
5.6
5.7
6.8
7.2
–Everyday
Banking
2.0
2.2
1.7
1.8
2.6
2.4
Consumer Finance
5.6
5.6
5.6
5.6
5.6
5.6
Corporate
& Commercial Banking
9.2
7.8
8.3
7.9
11.6
12.4
Corporate Centre
0.1
0.1
0.1
0.1
0.1
0.1
Weighted
Upside
1
Base case
Downside 1
Downside 2
Downside 3
30 June 2021
£m
£m
£m
£m
£m
£m
Exposure
313,347
313,347
313,347
313,347
313,347
313,347
Retail
Banking
212,395
212,395
212,395
212,395
212,395
212,395
–Homes
190,663
190,663
190,663
190,663
190,663
190,663
–Everyday
Banking
21,732
21,732
21,732
21,732
21,732
21,732
Consumer Finance
5,298
5,298
5,298
5,298
5,298
5,298
Corporate
& Commercial Banking
24,691
24,691
24,691
24,691
24,691
24,691
Corporate Centre
70,963
70,963
70,963
70,963
70,963
70,963
ECL
865
740
738
849
1,123
1,288
Retail
Banking
388
307
286
375
510
662
–Homes
190
134
125
177
283
437
–Everyday
Banking
198
173
161
198
227
225
Consumer Finance
52
50
51
51
53
54
Corporate
& Commercial Banking
423
381
399
421
558
570
Corporate Centre
2
2
2
2
2
2
%
%
%
%
%
%
Proportion
of assets in Stage 2
5.2
4.9
4.9
5.1
6.2
7.0
Retail Banking
5.5
5.2
5.2
5.4
6.6
7.7
–Homes
5.8
5.5
5.5
5.7
6.9
8.2
–Everyday
Banking
2.6
2.3
2.1
3.0
3.5
3.0
Consumer Finance
3.8
3.8
3.8
3.8
3.8
3.8
Corporate & Commercial Banking
17.8
16.3
16.2
16.9
20.8
20.9
Corporate
Centre
0.3
0.3
0.3
0.3
0.3
0.3
Changes to Stage 3 instruments are part of the sensitivity analysis but we do not disclose the proportion of assets in Stage 3, because their values do not move due to changes in macroeconomic assumptions, i.e. they are either in default or not in default at the reporting date.
We have incorporated our PMAs into the sensitivity analysis.
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SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW
Rating
distribution
The tables below show the credit rating of our financial assets to which the impairment requirements in IFRS 9 apply. PMAs are incorporated in the balances. For more on the credit rating profiles of key portfolios, see the credit risk review section for each business segment.
The Santander UK risk grade consists of eight grades for non-defaulted exposures ranging from 9 (lowest risk) to 2 (highest risk). For details, including the approximate equivalent credit rating grade used by Standard & Poor's Rating Services, see 'Single credit rating scale' in the 'Santander UK group level - credit risk review' section of the Risk review in the 2021 Annual Report.
Santander
UK risk grade
Loss allowance
Total
9
8
7
6
5
4
3 to 1
Other(1)
30 June 2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Exposures
On
balance sheet
Financial
assets at amortised cost:
–Loans and advances to customers(2)
10.2
34.8
84.7
48.8
12.6
8.8
5.3
7.5
(0.9)
211.8
–Stage
1
10.2
34.6
83.0
45.3
9.4
4.2
0.7
7.1
(0.1)
194.4
–Stage
2
—
0.2
1.7
3.4
3.2
4.5
2.5
0.2
(0.5)
15.2
–Stage
3
—
—
—
0.1
—
0.1
2.1
0.2
(0.3)
2.2
Of
which mortgages:
10.1
31.9
81.8
43.9
6.9
3.8
3.0
—
(0.2)
181.2
–Stage
1
10.1
31.7
80.3
40.6
4.3
0.7
—
—
—
167.7
–Stage
2
—
0.2
1.5
3.3
2.6
3.0
1.2
—
(0.1)
11.7
–Stage
3
—
—
—
—
—
0.1
1.8
—
(0.1)
1.8
ECL
On
balance sheet
Financial
assets at amortised cost:
–Loans and advances to customers(2)
—
—
—
—
0.2
0.2
0.5
—
0.9
–Stage
1
—
—
—
—
0.1
—
—
—
0.1
–Stage
2
—
—
—
—
0.1
0.2
0.2
—
0.5
–Stage
3
—
—
—
—
—
—
0.3
—
0.3
Of
which mortgages:
—
—
—
—
—
0.1
0.1
—
0.2
–Stage
1
—
—
—
—
—
—
—
—
—
–Stage
2
—
—
—
—
—
0.1
—
—
0.1
–Stage
3
—
—
—
—
—
—
0.1
—
0.1
Santander
UK risk grade
Total
9
8
7
6
5
4
3 to 1
Other(1)
30 June 2022
%
%
%
%
%
%
%
%
%
Coverage
ratio
On balance sheet
Financial
assets at amortised cost:
–Loans and advances to customers(2)
—
—
—
—
1.6
2.3
9.4
—
0.4
–Stage
1
—
—
—
—
1.1
—
—
—
0.1
–Stage
2
—
—
—
—
3.1
4.4
8.0
—
3.3
–Stage
3
—
—
—
—
—
—
14.3
—
13.6
Of
which mortgages:
—
—
—
—
—
2.6
3.3
—
0.1
–Stage
1
—
—
—
—
—
—
—
—
—
–Stage
2
—
—
—
—
—
3.3
—
—
0.9
–Stage
3
—
—
—
—
—
—
5.6
—
5.6
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Santander
UK risk grade
Loss allowance
9
8
7
6
5
4
3 to 1
Other(1)
Total
31 December 2021
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Exposures
On
balance sheet
Financial
assets at amortised cost:
–Loans and advances to customers⁽²⁾
9.0
32.5
84.5
48.0
12.8
10.2
6.0
8.0
(0.9)
210.1
–Stage
1
9.0
31.7
83.1
44.9
10.0
5.0
0.6
7.4
(0.1)
191.6
–Stage 2
—
0.8
1.4
3.1
2.8
5.2
2.8
0.3
(0.4)
16.0
–Stage
3
—
—
—
—
—
—
2.6
0.3
(0.4)
2.5
Of which mortgages:
9.0
29.7
79.3
42.5
6.4
4.7
3.1
—
(0.2)
174.5
–Stage
1
9.0
29.5
78.0
39.6
4.1
1.6
—
—
—
161.8
–Stage 2
—
0.2
1.3
2.9
2.3
3.1
1.3
—
(0.1)
11.0
–Stage
3
—
—
—
—
—
—
1.8
—
(0.1)
1.7
ECL
On
balance sheet
Financial
assets at amortised cost:
–Loans and advances to customers⁽²⁾
—
—
—
—
0.2
0.1
0.6
—
0.9
–Stage
1
—
—
—
—
0.1
—
—
—
0.1
–Stage 2
—
—
—
—
0.1
0.1
0.2
—
0.4
–Stage
3
—
—
—
—
—
—
0.4
—
0.4
Of which mortgages:
—
—
—
—
—
0.1
0.1
—
0.2
–Stage
1
—
—
—
—
—
—
—
—
—
–Stage 2
—
—
—
—
—
0.1
—
—
0.1
–Stage
3
—
—
—
—
—
—
0.1
—
0.1
31
December 2021
%
%
%
%
%
%
%
%
%
Coverage ratio
On
balance sheet
Financial
assets at amortised cost:
–Loans and advances to customers⁽²⁾
—
—
—
—
1.6
1.0
10.0
—
0.4
–Stage
1
—
—
—
—
1.0
—
—
—
0.1
–Stage 2
—
—
—
—
3.6
1.9
7.1
—
2.5
–Stage
3
—
—
—
—
—
—
15.4
—
16.0
Of which mortgages:
—
—
—
—
—
2.1
3.2
—
0.1
–Stage
1
—
—
—
—
—
—
—
—
—
–Stage 2
—
—
—
—
—
3.2
—
—
0.9
–Stage
3
—
—
—
—
—
—
5.6
—
5.9
(1)Includes
cash at hand and smaller cases mainly in the Consumer (auto) finance and commercial mortgages portfolios, as well as loans written as part of the UK Government Covid-19 support schemes for micro-SMEs. We use scorecards for these items, rather than rating models.
(2)Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet.
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Customer
Loans
Gross write- offs
Loan Loss Allowances
Total
Stage 1
Stage 2
Stage 3
30 June 2022
£bn
£bn
£bn
£bn
£m
£m
Retail Banking
189.3
174.6
12.5
2.2
54
464
–Homes
181.4
167.8
11.7
1.9
1
204
–Everyday
Banking(1)
7.9
6.8
0.8
0.3
53
260
Consumer Finance
5.1
4.8
0.3
—
7
61
Corporate
& Commercial Banking
17.4
13.9
3.1
0.4
9
396
Corporate Centre
1.7
1.6
0.1
—
—
1
213.5
194.9
16.0
2.6
70
922
Undrawn
Balances
37.7
36.9
0.7
0.1
Stage 1, Stage 2 and Stage 3(2) ratios %
91.29
7.49
1.23
31
December 2021
£bn
£bn
£bn
£bn
£m
£m
Retail Banking
183.0
169.2
11.7
2.1
108
388
–Homes
174.7
161.8
11.1
1.8
5
190
–Everyday
Banking(1)
8.3
7.4
0.6
0.3
103
198
Consumer Finance
5.0
4.8
0.2
—
25
52
Corporate
& Commercial Banking
17.0
11.8
4.4
0.8
58
423
Corporate & Investment Banking
Corporate Centre
2.3
2.1
0.2
—
—
2
207.3
187.9
16.5
2.9
191
865
Undrawn
Balances
37.7
36.1
1.5
0.1
Stage 1, Stage 2 and Stage 3(2) ratios %
90.65
7.93
1.45
(1)Everyday
Banking includes BBLS lending through Business Banking.
(2) Stage 3 ratio is the sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets.
For more on the credit performance of our key portfolios by business segment, see the credit risk review section for each business segment.
30 June 2022 compared to 31 December 2021
The ECL provision at 30 June 2022 was stable at £0.9bn (2021: £0.9bn). The notable changes to ECL in H122 which impacted credit impairment were:
–Corporate lending to segments affected by Covid-19: net release of £176m. Following a successful 18 month probation period, with no material observed defaults,
we released all corporate sector staging PMAs related to Covid-19 as the risks from lockdowns have reduced. This release resulted in the movement of £0.4bn corporate Stage 3 loans to Stage 2 and £1.7bn of corporate loans transferred from Stage 2 to Stage 1.
–Corporate sector staging risks: charge of £128m. We have introduced new PMAs to reflect the corporate lending risks to those sectors which are susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. As a result, £1.5bn of higher risk Stage 1 loans were moved to Stage 2 following an assessment of their client and sector risks given current economic conditions.
–Affordability of unsecured lending repayments: charge of £42m. We
introduced new PMAs to account for the potential repayment affordability risk among those customers with low disposable income. After stressing their expected expenditure by 10% inflation, £0.2bn of unsecured loans, overdrafts and credit cards moved from Stage 1 to Stage 2. In addition, £4bn of mortgages moved from Stage 1 to Stage 2 in 2021 following an assessment of customer indebtedness.
–Economic scenarios and weights: charge of £32m. The update of economic metrics including higher base rate and lower GDP was partially offset by expected higher house prices.
–Other PMAs: charge of £61m mainly due to the release of a temporary PMA which reduced mortgage model ECL by £32m relating to a data limitation on historical payment holiday accounts which were incorrectly overstating Stage 2 entries
and are no longer materially impacting our models. In addition, there was an £11m holdback of Credit Card ECL release caused by an update in the macroeconomic scenarios due to changes in unsecured market size assumptions. These movements were offset by changes in the modelled ECL and had no overall impact on net ECL movements.
–Write-offs against provision: Gross write-off utilisation of £71m remained significantly lower than pre-Covid-19 levels.
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Credit quality
Total on-balance sheet
exposures at 30 June 2022 comprised £213.5bn of customer loans, loans and advances to banks of £0.8bn, £8.9bn of sovereign assets measured at amortised cost, £4.9bn of assets measured at FVOCI, and £43.4bn of cash and balances at central banks.
Stage 1
Stage 2
Stage 3
Total
30 June 2022
£m
£m
£m
£m
Exposures
On-balance
sheet
Retail Banking
174,615
12,550
2,154
189,319
–Homes
167,785
11,749
1,861
181,395
–Everyday
Banking
6,830
801
293
7,924
Consumer Finance
4,798
304
27
5,129
Corporate
& Commercial Banking
13,900
3,092
366
17,358
Corporate Centre
59,673
83
—
59,756
Total
on-balance sheet
252,986
16,029
2,547
271,562
Off-balance sheet
Retail Banking(1)
28,567
311
53
28,931
–Homes(1)
15,252
87
19
15,358
–Everyday
Banking
13,315
224
34
13,573
Consumer Finance
346
—
—
346
Corporate
& Commercial Banking
7,408
366
34
7,808
Corporate Centre
567
—
—
567
Total
off-balance sheet(2)
36,888
677
87
37,652
Total exposures
289,874
16,706
2,634
309,214
ECL
On-balance
sheet
Retail Banking
51
253
135
439
–Homes
15
102
83
200
–Everyday
Banking
36
151
52
239
Consumer Finance
18
23
20
61
Corporate &
Commercial Banking
56
209
110
375
Corporate Centre
1
—
—
1
Total
on-balance sheet
126
485
265
876
Off-balance sheet
Retail Banking
10
14
1
25
–Homes
3
1
—
4
–Everyday
Banking
7
13
1
21
Consumer Finance
—
—
—
—
Corporate & Commercial
Banking
8
8
5
21
Total off-balance sheet
18
22
6
46
Total
ECL
144
507
271
922
Coverage ratio(3)
%
%
%
%
On-balance
sheet
Retail Banking
—
2.0
6.3
0.2
–Homes
—
0.9
4.5
0.1
–Everyday
Banking
0.5
18.9
17.7
3.0
Consumer Finance
0.4
7.6
74.1
1.2
Corporate
& Commercial Banking
0.4
6.8
30.1
2.2
Corporate Centre
—
—
—
—
Total
on-balance sheet
—
3.0
10.4
0.3
Off-balance sheet
Retail Banking
—
4.5
1.9
0.1
–Homes
—
1.1
—
—
–Everyday
Banking
0.1
5.8
2.9
0.2
Consumer Finance
—
—
—
—
Corporate & Commercial
Banking
0.1
2.2
14.7
0.3
Total off-balance sheet
—
3.2
6.9
0.1
Total
coverage
—
3.0
10.3
0.3
(1)Off-balance sheet exposures include£10.1bn of residential mortgage offers in the pipeline.
(2)Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 26 to the Condensed Consolidated Interim Financial Statements.
(3)ECL as a percentage of the related exposure.
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Total on-balance sheet exposures at 31 December 2021 comprised £207.3bn of customer loans, loans
and advances to banks of £1.2bn, £13.2bn of sovereign assets measured at amortised cost, £5.9bn of assets measured at FVOCI, and £48.1bn of cash and balances at central banks.
Stage 1
Stage 2
Stage 3
Total
31 December 2021
£m
£m
£m
£m
Exposures
On-balance
sheet
Retail Banking
169,255
11,646
2,122
183,023
–Homes
161,845
11,071
1,796
174,712
–Everyday
Banking
7,410
575
326
8,311
Consumer Finance
4,760
200
24
4,984
Corporate & Commercial Banking
11,812
4,395
790
16,997
Corporate
Centre
70,427
207
—
70,634
Total on-balance sheet
256,254
16,448
2,936
275,638
Off-balance sheet
Retail
Banking(1)
29,123
204
45
29,372
–Homes(1)
15,851
81
19
15,951
–Everyday Banking
13,272
123
26
13,421
Consumer
Finance
314
—
—
314
Corporate & Commercial Banking
6,392
1,266
36
7,694
Corporate Centre
283
46
—
329
Total
off-balance sheet(2)
36,112
1,516
81
37,709
Total exposures
292,366
17,964
3,017
313,347
ECL
On-balance
sheet
Retail Banking
52
178
137
367
–Homes
8
88
89
185
–Everyday
Banking
44
90
48
182
Consumer Finance
18
17
17
52
Corporate & Commercial Banking
43
119
245
407
Corporate
Centre
2
—
—
2
Total on-balance sheet
115
314
399
828
Off-balance sheet
Retail Banking
12
8
1
21
–Homes
5
0
—
5
–Everyday
Banking
7
8
1
16
Consumer Finance
—
—
—
—
Corporate & Commercial Banking
5
8
3
16
Total
off-balance sheet
17
16
4
37
Total ECL
132
330
403
865
%
%
%
%
Coverage
ratio(3)
On-balance sheet
Retail Banking
—
1.5
6.5
0.2
–Homes
—
0.8
5.0
0.1
–Everyday
Banking
0.6
15.7
14.7
2.2
Consumer Finance
0.4
8.5
70.8
1.0
Corporate & Commercial Banking
0.4
2.7
31.0
2.4
Corporate
Centre
—
—
—
—
Total on-balance sheet
—
1.9
13.6
0.3
Off-balance sheet
Retail Banking
0.0
3.9
2.2
0.1
–Homes
—
0.0
—
—
–Everyday
Banking
0.1
6.5
3.8
0.1
Consumer Finance
—
0.0
—
—
Corporate & Commercial Banking
0.1
0.6
8.3
0.2
Total
off-balance sheet
0.0
1.1
4.9
0.1
Total coverage
—
1.8
13.4
0.3
(1)Off-balance sheet exposures include £10.6bn of residential mortgage offers in the pipeline.
(2)Off-balance
sheet amounts consist of contingent liabilities and commitments. For more, see Note 26 to the Condensed Consolidated Interim Financial Statements.
(3)ECL as a percentage of the related exposure.
Santander UK plc 22
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Financial overview
Risk review
Financial statements
Shareholder information
30 June 2022 compared to 31 December 2021
Key movements in exposures
and ECL in the period by Stage were:
–Stage 1 exposures reduced mainly due to changes in Corporate Centre as part of normal liquid asset portfolio management, partially offset by growth in Homes in Retail Banking and Corporate & Commercial Banking. Stage 1 ECL increased mainly due to the increase in Corporate & Commercial Banking as a result of unwinding the Covid-19 risk PMA that placed more vulnerable accounts into Stage 2.
–Stage 2 exposures reduced mainly due to the unwinding of the Covid-related PMAs in Corporate & Commercial Banking. However, this was partially offset by a new PMA introduced to reflect the corporate lending risks to those sectors that are susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges.
The decrease was also partially offset by an increase in Retail Banking Stage 2 exposures due to the implementation of cost of living PMAs to cover the affordability risk associated with the increase in interest rates and energy prices. Stage 2 ECL increased mainly due to a worsening economic outlook with the inclusion of a stubborn inflation scenario and revised scenario weights, as well as the new Retail Banking cost of living PMAs.
–Stage 3 exposures reduced due to releasing the Stages 2 and 3 Corporate & Commercial Banking Covid-19 PMA. Stage 3 ECL reduced for the same reasons.
Stage 2 analysis
The following table analyses our Stage 2 exposures
and ECL by the reason the exposure is classified as Stage 2.
Retail
Banking
Consumer Finance
Corporate & Commercial Banking
Corporate Centre
Total
Exposure
ECL
Coverage
Exposure
ECL
Coverage
Exposure
ECL
Coverage
Exposure
ECL
Coverage
Exposure
ECL
Coverage
30
June 2022
£m
£m
%
£m
£m
%
£m
£m
%
£m
£m
%
£m
£m
%
PD
deterioration
6,420
166
2.6
147
9
6.1
1,458
141
9.7
61
—
—
8,086
316
3.9
Forbearance
588
4
0.7
—
—
—
193
16
8.3
—
—
—
781
20
2.6
Other
415
1
0.2
136
6
4.4
—
—
—
—
—
—
551
7
1.3
30
DPD
669
36
5.4
21
8
38.1
257
18
7.0
22
—
—
969
62
6.4
Mortgage
affordability
4,571
18
0.4
—
—
—
—
—
—
—
—
—
4,571
18
0.4
Retail
Unsecured affordability
198
42
21.2
—
—
—
—
—
—
—
—
—
198
42
21.2
High
risk corporate
—
—
—
—
—
—
1,550
42
2.7
—
—
—
1,550
42
2.7
12,861
267
2.1
304
23
7.6
3,458
217
6.3
83
—
—
16,706
507
3.0
31
December 2021
PD deterioration
5,644
125
2.2
42
6
14.3
1,522
20
1.3
214
—
—
7,422
151
2.0
Forbearance
664
4
0.6
11
2
18.2
272
8
2.9
—
—
—
947
14
1.5
Other
556
5
0.9
130
4
3.1
445
19
4.3
—
—
—
1,131
28
2.5
30
DPD
745
33
4.4
17
5
29.4
313
2
0.6
39
—
—
1,114
40
3.6
Mortgage
affordability
4,241
19
0.4
—
—
—
—
—
—
—
—
—
4,241
19
0.4
High
risk corporate
—
—
—
—
—
—
3,109
78
2.5
—
—
—
3,109
78
2.5
11,850
186
1.6
200
17
8.5
5,661
127
2.2
253
—
—
17,964
330
1.8
Where
balances satisfy more than one of the criteria above for determining a SICR, we have assigned the corresponding gross carrying amount and ECL in order of the categories presented.
The following table analyses our Stage 2 exposures and the related ECL by whether or not they are in a cure period at the balance sheet date.
30 June 2022
31
December 2021
Exposure
ECL
Coverage
Exposure
ECL
Coverage
£m
£m
%
£m
£m
%
Stage 2 not in cure period
9,893
405
4.1
13,302
286
2.2
Stage
2 in cure period (for transfer to Stage 1)
6,813
102
1.5
4,662
44
0.9
16,706
507
3.0
17,964
330
1.8
30
June 2022 compared to 31 December 2021
In Retail Banking, mortgage Stage 2 exposures increased to £4.6bn (2021: £4.2bn) driven by the increased base rate and affordability pressures as a result of anticipated persistent inflation, in line with the evolution of the PD deterioration. In addition, £0.2bn of unsecured lending were moved from Stage 1 to Stage 2, due to a potential repayment affordability risk among those retail customers with low disposable income. Stage 2 ECL increased for similar reasons.
In Consumer Finance, Stage 2 exposures increased due to a PD deterioration as a result of a higher base rate environment.
In Corporate & Commercial Banking, Stage 2 exposures decreased mainly due to the unwinding of all the corporate sector staging PMAs related to
Covid-19, as the risks from lockdowns have reduced. However, this was partially offset by a new PMA introduced to reflect the corporate lending risks to those sectors that are susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. As result of these changes, £400m of stage 3 cures back into stage 2 with higher ECL coverage than transfers back to Stage 1 or redemptions in the period.
In Corporate Centre, Stage 2 exposures decreased due to curing of single name deals.
Coverage increased in H122 for the reasons set out above.
Santander UK plc 23
CEO's
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Financial overview
Risk review
Financial statements
Shareholder information
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. The Credit risk review disclosuresexclude Joint ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the customer's account, and cash collateral.
On-balance
sheet
Off-balance sheet
Exposures
Loss allowance
Net carrying amount
Exposures
Loss allowance
30 June 2022
£m
£m
£m
£m
£m
Retail Banking
189,319
439
188,880
28,931
25
–Homes(1)
181,395
200
181,195
15,358
4
–Everyday
Banking(2)
7,924
239
7,685
13,573
21
Consumer Finance
5,129
61
5,068
346
—
Corporate
& Commercial Banking
17,358
375
16,983
7,808
21
Corporate Centre
59,756
1
59,755
567
—
Total
exposures presented in Credit Quality tables
271,562
876
270,686
37,652
46
Joint ventures
3,698
Other
items
673
Adjusted net carrying amount
275,057
Assets classified at FVTPL
2,426
Non-financial
assets
6,834
Total assets per the Consolidated Balance Sheet
284,317
31 December 2021
Retail
Banking
183,023
367
182,656
29,372
21
–Homes(1)
174,712
185
174,527
15,951
5
–Everyday
Banking(2)
8,311
182
8,129
13,421
16
Consumer Finance
4,984
52
4,932
314
—
Corporate
& Commercial Banking
16,997
407
16,590
7,694
16
Corporate Centre
70,634
2
70,632
329
—
Total
exposures presented in Credit Quality tables
275,638
828
274,810
37,709
37
Joint ventures
3,079
Other items
553
Adjusted
net carrying amount
278,442
Assets classified at FVTPL
1,866
Non-financial assets
6,790
Total assets per the Consolidated
Balance Sheet
287,098
(1)Off-balance sheet exposures include offers in the pipeline and undrawn flexible mortgages products.
(2)Off-balance sheet exposures include credit cards.
Santander UK plc 24
CEO's
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Financial overview
Risk review
Financial statements
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Movement in total exposures and the corresponding ECL
The
following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the period. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.
Stage
1
Stage 2
Stage 3
Total
Exposures(1)
ECL
Exposures(1)
ECL
Exposures(1)
ECL
Exposures(1)
ECL
£m
£m
£m
£m
£m
£m
£m
£m
At
1 January 2022
292,364
133
17,964
330
3,017
403
313,345
866
Transfers
from Stage 1 to Stage 2(3)
(5,634)
(15)
5,634
15
—
—
—
—
Transfers
from Stage 2 to Stage 1(3)
5,884
66
(5,884)
(66)
—
—
—
—
Transfers
to Stage 3(3)
(283)
(2)
(513)
(19)
796
21
—
—
Transfers from Stage 3(3)
8
—
708
150
(716)
(150)
—
—
Transfers
of financial instruments
(25)
49
(55)
80
80
(129)
—
—
Net ECL remeasurement on stage transfer(4)
—
(42)
—
100
—
52
—
110
Change
in economic scenarios(2)
—
1
—
28
—
3
—
32
New
lending and assets purchased(5)
27,650
25
234
35
32
12
27,916
72
Redemptions,
repayments and assets sold(7)
(31,130)
(19)
(1,586)
(34)
(586)
(48)
(33,302)
(101)
Changes in risk parameters and other movements(6)
1,015
(3)
149
(32)
277
49
1,441
14
Assets
written off(7)
—
—
—
—
(186)
(71)
(186)
(71)
At 30 June 2022
289,874
144
16,706
507
2,634
271
309,214
922
Net
movement in the period
(2,490)
11
(1,258)
177
(383)
(132)
(4,131)
56
ECL
charge/(release) to the Income Statement
11
177
(61)
127
Less: Discount unwind
—
—
(6)
(6)
Less:
Recoveries net of collection costs
—
—
(3)
(3)
Total ECL charge/(release) to the Income Statement
11
177
(70)
118
Discontinued
operations ECL adjustment
—
—
—
—
ECL charge/(release) to the Income Statement from continued operations
11
177
(70)
118
At
1 January 2021
301,413
216
18,336
592
2,996
569
322,745
1,377
Transfers from Stage 1 to Stage 2(3)
(3,680)
(9)
3,680
9
—
—
—
—
Transfers
from Stage 2 to Stage 1(3)
4,961
140
(4,961)
(140)
—
—
—
—
Transfers to Stage 3(3)
(156)
(5)
(475)
(30)
631
35
—
—
Transfers
from Stage 3(3)
10
1
287
23
(297)
(24)
—
—
Transfers of financial instruments
1,135
127
(1,469)
(138)
334
11
—
—
Net
remeasurement of ECL on stage transfer(4)
—
(122)
—
108
—
40
—
26
Change in economic scenarios(2)
—
(6)
—
(86)
—
(12)
—
(104)
New
lending and assets purchased(5)
28,910
25
623
10
11
9
29,544
44
Redemptions, repayments and assets sold(7)
(34,471)
(29)
(1,781)
(55)
(285)
(31)
(36,537)
(115)
Changes
in risk parameters and other movements(6)
(653)
(28)
450
68
69
15
(134)
55
Assets written off(7)
—
—
—
—
(147)
(91)
(147)
(91)
At
30 June 2021
296,334
183
16,159
499
2,978
510
315,471
1,192
Net movement in the period
(5,079)
(33)
(2,177)
(93)
(18)
(59)
(7,274)
(185)
ECL
charge/(release) to the Income Statement
(33)
(93)
32
(94)
Less: Discount unwind
—
—
(6)
(6)
Less:
Recoveries net of collection costs
—
—
23
23
Total ECL charge/(release) to the Income Statement
(33)
(93)
49
(77)
Discontinued
operations ECL adjustment
—
7
—
7
ECL charge/(release) to the Income Statement from continued operations
(33)
(86)
49
(70)
(1)Exposures
that have attracted an ECL, and as reported in the Credit Quality table above.
(2)Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, the scenarios themselves, and the probability weights from all other movements. Also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in Transfers of financial instruments.
(3)Total impact of facilities that moved Stage(s) in the period. 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 period. Transfers between
Stages 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 of facilities that did not exist at the start of the period but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6)Residual movements on existing facilities that did not change Stage in the period, and which were not acquired in the period. Includes the net increase or decrease in the period of cash at central banks, the impact of changes in risk parameters in the period, 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 period but not at the end.
Santander UK plc 25
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
RETAIL BANKING – CREDIT RISK REVIEW
We set out below
credit risk analysis in separate sections for:
–Homes, our largest portfolio in 'Retail Banking: Homes - credit risk review', and
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.
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 new customers who are taking a new mortgage with us.
Stock
New
business
30 June 2022
31 December 2021
30 June 2022
30 June 2021
£m
%
£m
%
£m
%
£m
%
Home
movers
75,963
42
74,657
42
6,178
34
8,005
50
Remortgagers
52,988
29
50,645
29
6,234
34
2,977
18
First-time
buyers
35,976
20
34,517
20
3,607
20
3,133
19
Buy-to-let
16,467
9
14,893
9
2,088
12
2,195
13
181,394
100
174,712
100
18,107
100
16,310
100
As
well as the new business in the table above, there were £11.0bn (H121: £14.2bn) of remortgages where we moved existing customers with maturing products onto new mortgages. We also provided £0.7bn (H121: £0.7bn) of further advances and flexible mortgage drawdowns.
30 June 2022 compared to 31 December 2021
in H122, the mortgage asset stock increased across all sectors, with the stock borrower profile unchanged. Our new business profile also increased, mainly in remortgagers, reflecting market conditions and in particular a strong demand for purchase activity for both residential and BTL mortgages, driven by customers securing fixed rate products in a rising interest rate environment. In H122, we helped first-time buyers purchase their new home with £3.6bn of gross lending (H121: £3.1bn).
Interest
rate profile
The interest rate profile of our mortgage asset stock was:
30 June 2022
31 December 2021
£m
%
£m
%
Fixed
rate
157,361
86
147,147
84
Variable rate
14,356
8
17,010
10
Standard
Variable Rate (SVR)
6,769
4
7,836
4
Follow on Rate (FoR)
2,908
2
2,719
2
181,394
100
174,712
100
30
June 2022 compared to 31 December 2021
In H122 , we continued to see customers refinance from variable rate and SVR to fixed rate products influenced by low mortgage rates and the competitive mortgage market. Within fixed rate products, we continued to see an increase in the proportion of 5 year fixed rate mortgages in H122.
Geographical distribution
The geographical distribution of our mortgage asset stock was:
Stock
New
business
30 June 2022
31 December 2021
30 June 2022
30 June 2021
Region
£bn
£bn
£bn
£bn
London
46.5
44.6
4.5
4.4
Midlands
and East Anglia
24.9
23.8
2.8
2.3
North
23.8
23.1
2.4
1.9
Northern Ireland
3.0
3.0
0.1
0.1
Scotland
6.8
6.6
0.6
0.4
South
East excluding London
57.6
55.5
5.7
5.5
South West, Wales and other
18.8
18.1
2.0
1.7
181.4
174.7
18.1
16.3
30
June 2022 compared to 31 December 2021
The portfolio's geographical distribution continued to represent a broad footprint across the UK, with a concentration around London and the South East. The loan-to-income multiple of mortgage lending in the period, based on average earnings of new business at inception, was 3.34 (2021: 3.35).
Santander UK plc 26
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
Mortgage loan size
The table shows split of mortgage asset
by size
Mortgage loan size
30 June 2022
31 December 2021
>£1.0m
2
%
2
%
£0.5m to £1.0m
9
%
9
%
£0.25m
to £0.5m
30
%
30
%
<£0.25m
59
%
59
%
Average loan size (stock)
£179k
£174k
Average loan size (new business)
£234k
£234k
Loan-to-value
analysis
This table shows the LTV distribution for the gross carrying amount and the related ECL of our total mortgage portfolio and Stage 3 mortgages, as well as the LTV distribution for new business. We also show the collateral value and simple average LTV for our mortgage stock, Stage 3 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.
30
June 2022
31 December 2021
Stock
Stage 3
New
Stock
Stage 3
New
Total
ECL
Total
ECL
Business
Total
ECL
Total
ECL
Business
LTV
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Up to 50%
82,946
33
1,051
11
2,619
78,911
25
942
9
4,997
>50-60%
32,924
21
308
8
2,204
30,328
22
301
10
4,379
>60-70%
35,331
31
213
12
3,619
32,803
25
227
11
6,517
>70-80%
21,690
34
135
12
5,729
24,217
30
154
14
10,242
>80-90%
6,515
22
60
9
2,776
6,565
21
68
10
4,558
>90-100%
1,558
16
37
9
1,149
1,360
16
39
9
1,270
>100%
430
47
57
22
11
528
51
65
26
50
181,394
204
1,861
83
18,107
174,712
190
1,796
89
32,013
Collateral
value of residential properties (1)
181,334
1,850
18,106
174,637
1,784
32,012
%
%
%
%
%
%
Simple
Average(2) LTV (indexed)
40
35
65
41
38
64
Balance weighted average LTV stock
51
49
68
52
51
66
(1)Collateral
value shown is limited to the balance of each related loan. Excludes the impact of over-collateralisation, where the collateral is higher than the loan. Includes collateral against loans in negative equity of £371m (2021: £455m).
(2)Total of all LTV% divided by the total of all accounts.
At 30 June 2022, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances was £60m (2021: £75m). The balance weighted average LTV of new business in the period in London was 65% (2021: 64%).
30 June 2022 compared to 31 December 2021
There were no significant changes in the quality of collateral in H122. Despite economic pressures, both simple average LTV and balance weighted average LTV were broadly flat over the period. We monitor the
LTV profile of new lending and take action as needed to ensure the LTV mix of completions is appropriate.
Credit performance
30 June 2022
31 December 2021
£m
£m
Mortgage loans and advances to customers of which:
181,395
174,712
–Stage
1
167,785
161,845
–Stage 2
11,749
11,071
–Stage 3
1,861
1,796
Loss allowances(1)
204
190
%
%
Stage
1 ratio(2)
92.50
92.64
Stage 2 ratio(2)
6.48
6.34
Stage 3 ratio(3)
1.03
1.04
(1)The ECL allowance is for both on and off–balance
sheet exposures.
(2)Stage 1/Stage 2 exposures as a percentage of customer loans.
(3)The sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets.
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Movement in total exposures and the corresponding ECL
The
following table shows changes in total on and off-balance sheet 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 25 are also applicable to this table.
Stage
1
Stage 2
Stage 3
Total
Exposures(1)
ECL
Exposures(1)
ECL
Exposures(1)
ECL
Exposures(1)
ECL
£m
£m
£m
£m
£m
£m
£m
£m
At
1 January 2022
177,696
13
11,152
88
1,814
89
190,662
190
Transfers from Stage 1 to Stage 2(3)
(3,968)
(1)
3,968
1
—
—
—
—
Transfers
from Stage 2 to Stage 1(3)
2,560
7
(2,560)
(7)
—
—
—
—
Transfers to Stage 3(3)
(127)
(1)
(340)
(4)
467
5
—
—
Transfers
from Stage 3(3)
3
—
197
7
(200)
(7)
—
—
Transfers of financial instruments
(1,532)
5
1,265
(3)
267
(2)
—
—
Net
ECL remeasurement on stage transfer(4)
—
(6)
—
19
—
4
—
17
Change in economic scenarios(2)
—
(1)
—
(17)
—
(2)
—
(20)
New
lending and assets purchased(5)
18,880
5
42
2
—
—
18,922
7
Redemptions, repayments and assets sold(7)
(11,760)
(2)
(766)
(2)
(209)
(6)
(12,735)
(10)
Changes
in risk parameters and other movements(6)
(247)
4
143
16
11
1
(93)
21
Assets written off (7)
—
—
—
—
(3)
(1)
(3)
(1)
At
30 June 2022
183,037
18
11,836
103
1,880
83
196,753
204
Net movement in the period
5,341
5
684
15
66
(6)
6,091
14
Charge/(release)
to the Income Statement
5
15
(5)
15
Less: Discount unwind
—
—
(1)
(1)
Less:
Recoveries net of collection costs
—
—
(1)
(1)
Total ECL charge/(release) to the Income Statement
5
15
(7)
13
At
1 January 2021
167,766
17
10,427
131
1,813
132
180,006
280
Transfers from Stage 1 to Stage 2(3)
(2,098)
(2)
2,098
2
—
—
—
—
Transfers
from Stage 2 to Stage 1(3)
2,803
19
(2,803)
(19)
—
—
—
—
Transfers to Stage 3(3)
(113)
(1)
(392)
(6)
505
7
—
—
Transfers
from Stage 3(3)
2
—
251
10
(253)
(10)
—
—
Transfers of financial instruments
594
16
(846)
(13)
252
(3)
—
—
Net
ECL remeasurement on stage transfer(4)
—
(18)
18
—
9
—
9
Change in economic scenarios(2)
—
(1)
—
(25)
—
(12)
—
(38)
New
lending and assets purchased (5)
17,129
3
12
—
—
—
17,141
3
Redemptions, repayments and assets sold(7)
(12,591)
(2)
(673)
(5)
(185)
(9)
(13,449)
(16)
Changes
in risk parameters and other movements(6)
(91)
(4)
88
27
10
(7)
7
16
Assets written off (7)
—
—
—
—
(12)
(4)
(12)
(4)
At
30 June 2021
172,807
11
9,008
133
1,878
106
183,693
250
Net movement in the period
5,041
(6)
(1,419)
2
65
(26)
3,687
(30)
Charge/(release)
to the Income Statement
(5)
2
(22)
(25)
Less: Discount unwind
—
—
(1)
(1)
Less:
Recoveries net of collection costs
—
—
(1)
(1)
Total ECL charge/(release) to the Income Statement
(5)
2
(24)
(27)
Loan
modifications
Forbearance and other loan modifications
At 30 June 2022, there were £1.6bn (2021: £1.5bn) of mortgages on the balance sheet that we had forborne. The majority of customers who have taken a payment holiday had no material impact on forbearance in H122. At 30 June 2022, there were £2.1bn (2021: £2.4bn) of other mortgages on the balance sheet that we had modified since January 2008.
Santander UK plc 28
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RETAIL BANKING: HOMES – PORTFOLIOS OF PARTICULAR INTEREST
Credit
performance
Portfolio of particular interest(1)
Total
Interest-only
Part
interest-only, part repayment (2) (3)
Flexible(3)
LTV >100%
Buy-to-let
Other portfolio
30 June 2022
£m
£m
£m
£m
£m
£m
£m
Mortgage portfolio
181,395
41,743
13,718
7,812
430
16,467
122,564
–Stage
1
167,785
37,092
12,453
6,769
285
15,820
115,144
–Stage 2
11,749
3,794
1,035
806
88
606
6,692
–Stage
3
1,861
857
230
237
57
41
728
Stage 3 ratio(4)
1.04
%
2.07
%
1.68
%
3.27
%
13.36
%
0.25
%
0.59
%
PIPs
27
10
4
3
4
1
12
Simple
average LTV (indexed)
40
%
44
%
42
%
22
%
116
%
58
%
41
%
Balance weighted
LTV (indexed)
51
%
48
%
51
%
38
%
118
%
60
%
52
%
31
December 2021
Mortgage portfolio
174,712
40,654
13,638
8,549
528
14,893
116,767
–Stage 1
161,845
36,212
12,391
7,509
354
14,363
109,878
–Stage
2
11,071
3,626
1,020
796
109
489
6,188
–Stage 3
1,796
816
227
244
65
41
701
Stage
3 ratio(4)
1.04
%
2.03
%
1.66
%
3.06
%
12.34
%
0.27
%
0.60
%
PIPs
2
1
1
0
1
—
0
Simple
average LTV (indexed)
41
%
44
%
43
%
23
%
116
%
59
%
41
%
(1)Where a loan falls into more than one category, we include 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 £10,147m (2021: £10,106m) and the non-interest-only part of the loan.
(3)Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product.
(4)The sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets.
30 June 2022 compared to 31 December 2021
–In H122, the combined total proportion of interest-only loans, part interest-only, part repayment loans and flexible loans remained stable.
–BTL
mortgage balances increased £1.6bn to £16.5bn (2021: £14.9bn) driven by continued focus in growing this portfolio. In H122, the simple average LTV of mortgage total new BTL lending was 66% (2021: 68%).
(1)The ECL allowance is for both on and off–balance sheet exposures
(2)The sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets.
30 June 2022 compared to 31 December 2021
Business banking balances reduced mainly from the repayment of BBLS loans. Stage 3 assets reduced, mainly from BBLS loans, with no impact on ECL due to the 100% government backed guarantee which covers credit risk events.
The PMAs covering the additional debt burden on accounts taking BBLS, and the risk of breaching the BBLS policy while originating these loans, also started to reduce.
Other unsecured balances increased, mainly in Stage 2. This was due to our PMA to move higher risk Stage 1 accounts into Stage 2 to cover affordability and cost of living risks. The ECL increased due to the changes in base rate, and incorporating a stubborn inflation scenario into our economic outlook.
Santander UK plc 30
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CONSUMER FINANCE – CREDIT RISK REVIEW
Credit
performance
30 June 2022
31 December 2021
£m
£m
Loans and advances to customers of which:
5,129
4,984
–Stage 1
4,798
4,760
–Stage
2
304
200
–Stage 3
27
24
Loss allowances(1)
61
52
Stage 3 undrawn exposures
—
—
Stage 3 ratio(2)
0.53
%
0.49
%
Gross
write offs
7
25
(1)The ECL allowance is for both on and off–balance sheet exposures.
(2)The sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets.
30 June 2022 compared to 31 December 2021
In H122, we maintained our prudent underwriting criteria throughout the period. The product mix was broadly unchanged, with wholesale balances remaining steady. We monitor residual values on
all types of vehicles, including diesel, petrol, hybrid and electric, with electric vehicle content of new business production of 8.1% (H121: 4.3%).
At 30 June 2022, total loans increased by £145m (3%) compared to 31 December 2021. Gross lending new business in H122 was £1,287m (H121: £1,806m). Wholesale loans (stock finance) to car dealerships were approximately 8% of the loan book, unchanged since 31 December 2021. The average Consumer (auto) finance loan size was £17,003 (2021: £16,182) with 82% (2021: 83%) of collateral being secured on vehicle.
The risk profile remained stable in terms of our credit scoring acceptance policies. The overall risk performance was good with the vast majority of customers paying.
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
9
8
7
6
5
4
3 to 1
Other(1)
Total
30 June 2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
SME
and mid corporate
2
735
697
2,714
3,489
5,204
1,962
111
14,914
Commercial
Real Estate
—
—
21
2,146
1,939
626
129
3
4,864
Social
Housing
52
3,183
2,298
—
—
—
1
—
5,534
54
3,918
3,016
4,860
5,428
5,830
2,092
114
25,312
Of
which:
Stage 1
54
3,880
2,908
4,727
4,917
4,335
522
112
21,455
Stage
2
—
38
108
107
509
1,482
1,211
2
3,457
Stage
3
—
—
—
26
2
13
359
—
400
31
December 2021
SME and mid corporate
—
592
954
3,060
3,166
3,559
2,465
733
14,529
Commercial
Real Estate
—
—
55
21
2,172
2,064
181
4
4,497
Social Housing
52
2,985
2,471
—
—
1
—
—
5,509
52
3,577
3,480
3,081
5,338
5,624
2,646
737
24,535
Of
which:
Stage 1
52
2,890
3,168
2,750
4,796
3,388
309
577
17,930
Stage
2
—
687
312
331
542
2,236
1,511
160
5,779
Stage 3
—
—
—
—
—
—
826
—
826
(1)Smaller
exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.
30 June 2022 compared to 31 December 2021
Committed exposure increased by 3.2%, with increases predominantly in the SME mid corporate and CRE portfolios. Our CRE portfolio increased by 8% reversing the trend seen in previous periods. The rating distribution improved in both the CRE and SME and mid corporate portfolios following continued recovery in the credit quality of a number of names initially downgraded as a result of Covid-19.
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.
30
June 2022
31 December 2021
UK
Europe
US
Rest of World
Total
UK
Europe
US
Rest of World
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
SME
and mid corporate
14,872
42
—
—
14,914
14,486
43
—
—
14,529
Commercial
Real Estate
4,864
—
—
—
4,864
4,497
—
—
—
4,497
Social
Housing
5,534
—
—
—
5,534
5,509
—
—
—
5,509
25,270
42
—
—
25,312
24,492
43
—
—
24,535
Santander
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Financial overview
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Financial statements
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Credit performance
We monitor exposures
that show potentially higher risk characteristics using our Watchlist process. The table below shows the exposures we monitor, and those we classify as Stage 3 by portfolio at 30 June 2022 and 31 December 2021.
Committed exposure
Watchlist
Fully
performing
Enhanced monitoring
Proactive management
Stage 3
Total(1)
Loss allowances
30 June 2022
£m
£m
£m
£m
£m
£m
SME
and mid corporate
12,114
450
1,969
381
14,914
352
Commercial Real Estate
4,419
29
397
19
4,864
44
Social
Housing
5,446
—
88
—
5,534
—
21,979
479
2,454
400
25,312
396
31
December 2021
SME and mid corporate
11,131
531
2,144
723
14,529
378
Commercial Real Estate
3,989
193
212
103
4,497
43
Social
Housing
5,344
—
165
—
5,509
2
20,464
724
2,521
826
24,535
423
(1) Includes
committed facilities and derivatives.
30 June 2022 compared to 31 December 2021
Exposures subject to enhanced monitoring decreased by 34%. This was mainly in SME and mid corporate. Accommodation and food service activities have been particularly heavily impacted by Covid-19 related restrictions despite the measures taken by the government to support industries through the pandemic. Exposures subject to proactive monitoring however decreased by 3% across both the SME and mid corporate portfolio and the CRE portfolio. This followed the upgrading of a number of names initially downgraded as a result of Covid-19 uncertainty but which have since stabilised.
Loan loss allowances decreased by £27m (6%). This reflected the improved economic assumptions and scenario weightings applied within the ECL model due to the improved economic outlook, as well as Stage
reclassifications for some corporate loans as they emerged from lockdown, and the release of some Covid-19 related PMAs.
PORTFOLIOS OF PARTICULAR INTEREST
Commercial Real Estate
In H122, our CRE portfolio increased by 8% reversing the trend seen in previous periods. The rating distribution improved in the portfolio following continued recovery in the credit quality of a number of names initially downgraded as a result of Covid-19.
Santander UK plc 33
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CORPORATE CENTRE – CREDIT RISK REVIEW
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
9
8
7
6
5
4
3 to 1
Other(1)
Total
30 June 2022
£m
£m
£m
£m
£m
£m
£m
£m
£m
Sovereign
and Supranational
49,954
764
—
—
—
—
—
—
50,718
Structured
Products
182
1,064
211
40
—
—
—
10
1,507
Social
Housing
—
1,199
1,056
9
—
—
—
—
2,264
Financial
Institutions
604
697
405
12
—
—
—
—
1,718
Legacy
Portfolios in run-off(2)
—
—
—
—
—
1
14
—
15
50,740
3,724
1,672
61
—
1
14
10
56,222
Of
which:
Stage 1
50,740
3,724
1,589
61
—
1
13
10
56,138
Stage
2
—
—
83
—
—
—
1
—
84
Stage 3
—
—
—
—
—
—
—
—
—
31
December 2021
Sovereign and Supranational
55,061
1,051
—
—
—
—
—
—
56,112
Structured
Products
573
1,064
197
41
—
—
—
—
1,875
Social Housing
—
1,290
1,568
—
—
—
—
—
2,858
Financial
Institutions
479
533
345
7
—
—
—
—
1,364
Legacy Portfolios in run-off(2)
—
—
—
6
—
—
—
44
50
56,113
3,938
2,110
54
—
—
—
44
62,259
Of
which:
Stage 1
56,113
3,731
2,066
54
—
—
—
38
62,002
Stage
2
—
207
44
—
—
—
—
4
255
Stage 3
—
—
—
—
—
—
—
2
2
(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).
30 June 2022 compared to 31 December 2021
Committed exposures decreased by 10% mainly driven by UK Sovereign and Supranational exposures held as part of normal liquid asset portfolio management, which reduced by 10%. The portfolio profile remained short-term, reflecting the purpose of the holding
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.
30
June 2022
31 December 2021
UK
Europe
US
Rest of World
Total
UK
Europe
US
Rest of World
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Sovereign
and Supranational
47,770
818
165
1,965
50,718
52,297
950
469
2,396
56,112
Structured
Products
795
522
—
190
1,507
1,219
656
—
—
1,875
Social
Housing
2,264
—
—
—
2,264
2,858
—
—
—
2,858
Financial
Institutions
639
667
218
194
1,718
504
565
81
214
1,364
Legacy
Portfolios in run-off
15
—
—
—
15
50
—
—
—
50
51,483
2,007
383
2,349
56,222
56,928
2,171
550
2,610
62,259
Santander
UK plc 34
CEO's
review
Financial overview
Risk review
Financial statements
Shareholder information
Credit performance
We monitor exposures
that show potentially higher risk characteristics using our Watchlist process. The table below shows the exposures we monitor, and those we classify as Stage 3 by portfolio at 30 June 2022 and 31 December 2021.
Committed exposure
Watchlist
Fully
performing
Enhanced monitoring
Proactive management
Stage 3
Total(1)
Loss allowances
30 June 2022
£m
£m
£m
£m
£m
£m
Sovereign
and Supranational
50,718
—
—
—
50,718
—
Structured Products
1,507
—
—
—
1,507
—
Social
Housing
2,264
—
—
—
2,264
—
Financial Institutions
1,718
—
—
—
1,718
—
Legacy
Portfolios in run-off
15
—
—
—
15
1
56,222
—
—
—
56,222
1
31
December 2021
Sovereign and Supranational
56,112
—
—
—
56,112
—
Structured Products
1,875
—
—
—
1,875
—
Social
Housing
2,858
—
—
—
2,858
1
Financial Institutions
1,364
—
—
—
1,364
—
Legacy
Portfolios in run-off
48
—
—
2
50
1
62,257
—
—
2
62,259
2
(1) Includes
committed facilities and derivatives.
30 June 2022 compared to 31 December 2021
Committed exposures reduced by 10% mainly driven by UK Sovereign and Supranational exposures held as part of normal liquid asset portfolio management, which also reduced by 10%. The portfolio profile remained short-term, reflecting the purpose of the holdings.
Santander UK plc 35
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Financial overview
Risk review
Financial statements
Shareholder information
Market risk
Overview
Market
risk comprises banking market risk and trading market risk.
Market risk management
In H122, there were no significant changes in the way we manage market risk as described in the 2021 Annual Report.
Market risk review
In this section, we analyse our key banking and trading market risk metrics.
Key metrics
Net Interest Margin (NIM) sensitivity to +25bps was £94m and to ‑25bps was £(93)m (2021: £89m and £(94)m)
Economic Value of Equity (EVE) sensitivity to +25bps was £82m and to ‑25bps was £(102)m (2021: £89m and £(125)m)
NON-TRADED
MARKET RISK REVIEW
Interest rate risk
Yield curve risk
The table below shows how our net interest income would be affected by a 25 basis points (bps) and a 50bps parallel shift (both up and down) applied instantaneously to the yield curve at 30 June 2022 and 31 December 2021. Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable. From 2021, we have typically focused on a 25bps stress for non-traded market risk controls that reflects a more plausible yield curve stress in the current low rate environment. We continue to monitor sensitivities to other parallel and non-parallel shifts as well as scenarios. Sensitivities to a 50bps shift are also provided.
30
June 2022
31 December 2021
+25bps
-25bps
+50bps
-50bps
+25bps
-25bps
+50bps
-50bps
£m
£m
£m
£m
£m
£m
£m
£m
NIM
sensitivity(1)
94
(93)
191
(192)
89
(94)
167
(205)
EVE sensitivity
82
(102)
161
(230)
89
(125)
148
(301)
(1)RFB
metric. Based on modelling assumptions of repricing behaviour.
30 June 2022 compared to 31 December 2021
The movement in Santander UK plc group NIM and EVE sensitivities in H122 was largely due to reduced margin compression risk as a result of higher yield curve levels, partially offset by a lower structural position. The benefit from reduced margin compression risk was greater for Santander UK plc group EVE sensitivities due to the longer time horizon considered under the EVE metric.
Our structural hedge position (average over the last year) remained broadly stable at c£109bn, with an average duration of c2.6 years.
TRADED
MARKET RISK REVIEW
30 June 2022 compared to 31 December 2021
In H122, there were no significant changes to our traded market risk exposures. Our exposure to traded market risk is small, and arises from permitted transactions under the ring-fencing regime, offset by permitted market risk hedges.
The Internal VaR for exposure to traded market risk in H122 was less than £1m (2021: less than £1m).
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Financial overview
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Financial statements
Shareholder information
Liquidity risk
Overview
Liquidity risk is the risk that, while still being solvent, we do not have the liquid financial resources to meet our obligations when they fall due, or we can only obtain them at high cost.
Liquidity risk management
In H122, there were no significant changes in the way we manage liquidity risk as described in the 2021 Annual Report.
Liquidity risk review
In this section, we analyse our key liquidity metrics, including our Liquidity Coverage Ratio (LCR), our Liquidity Risk Appetite (LRA) and our wholesale funding. We also provide information on asset encumbrance.
Key metrics
LCR of 166% (2021:166%)
Wholesale
funding with maturity <1 year £9.8bn (2021: £10.2bn)
LCR eligible liquidity pool carrying value of £47.1bn (2021: £51.4bn)
LIQUIDITY RISK REVIEW
Liquidity Coverage Ratio
This table shows our LCR and LRA at 30 June 2022 and 31 December 2021.The LRA data reflect the stress testing methodology in place at that time.
RFB
DoLSub LCR(1)
RFB LRA(2)
30 June 2022
31 December 2021
30 June 2022
31 December 2021
£bn
£bn
£bn
£bn
Eligible liquidity pool (liquidity value)(3)
47.0
51.3
47.7
52.5
Net
stress outflows
(28.3)
(30.9)
(29.6)
(30.4)
Surplus
18.7
20.4
18.1
22.1
Eligible liquidity pool as a percentage of anticipated net cash flows
166
%
166
%
161
%
173
%
(1)The
RFB LCR was 171% (31 December 2021:168%).
(2)The LRA is calculated for the Santander UK plc group (the RFB Group) and is a three-month Santander UK specific requirement.
(3)The liquidity value is calculated as applying an applicable haircut to the carrying value.
RFB DoLSub LCR
30 June 2022
31
December 2021
£bn
£bn
Eligible liquidity pool (carrying value)
47.1
51.4
30 June 2022 compared to 31 December 2021
The RFB DoLSub LCR of 166% was unchanged and remains significantly above regulatory requirements. We also monitor the Net Stable Funding Ratio (NSFR), which was implemented on 1 January 2022 and we exceed the requirements. At 30 June 2022, the RFB DoLSub NSFR was 131%. We remain in a strong liquidity position. We hold sufficient liquid
resources and have adequate governance and controls in place to manage the liquidity risks arising from our business and strategy.
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FUNDING RISK REVIEW
Our funding strategy continues to be based
on maintaining a conservatively structured balance sheet and diverse sources of funding to meet the needs 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.
Maturity profile of wholesale funding
This table shows our main sources of wholesale funding. It does not include securities finance 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 month
>1 and ≤ 3 months
>3 and ≤ 6 months
>6 and ≤ 9 months
>9 and ≤ 12 months
Sub-total ≤ 1 year
>1 and ≤ 2 years
>2 and ≤ 5 years
>5 years
Total
30 June 2022
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Downstreamed
from Santander UK Group Holdings plc to Santander UK plc(1)
Senior unsecured – public benchmark
—
—
—
1.4
—
1.4
2.7
3.7
2.3
10.1
–privately
placed
—
—
—
—
—
—
—
0.1
—
0.1
Subordinated
liabilities and equity (incl. AT1)
—
—
—
—
—
—
0.5
1.2
1.0
2.7
—
—
—
1.4
—
1.4
3.2
5.0
3.3
12.9
Other
Santander UK plc
Deposits by banks
0.7
0.1
—
—
—
0.8
—
—
—
0.8
Certificates
of deposit and commercial paper
1.1
3.2
0.7
0.1
—
5.1
—
—
—
5.1
Senior
unsecured – public benchmark
—
—
—
0.3
—
0.3
0.8
0.3
0.4
1.8
–privately
placed
—
—
—
—
—
—
0.1
0.3
0.1
0.5
Covered
bonds
—
—
0.9
1.0
—
1.9
2.7
9.9
1.2
15.7
Securitisation
& structured issuance(2)
—
—
0.1
—
0.1
0.2
0.1
0.1
—
0.4
TFSME
—
—
—
—
—
—
—
31.9
—
31.9
Subordinated
liabilities
—
—
—
—
—
—
0.5
—
0.7
1.2
1.8
3.3
1.7
1.4
0.1
8.3
4.2
42.5
2.4
57.4
Other
group entities
Securitisation & structured issuance(3)
—
—
—
0.1
—
0.1
—
—
—
0.1
Total
at 30 June 2022
1.8
3.3
1.7
2.9
0.1
9.8
7.4
47.5
5.7
70.4
Of
which:
–Secured
—
—
1.0
1.1
0.1
2.2
2.8
41.9
1.2
48.1
–Unsecured
1.8
3.3
0.7
1.8
—
7.6
4.6
5.6
4.5
22.3
31
December 2021
Total at 31 December 2021
3.1
3.2
2.8
0.2
0.9
10.2
5.9
40.7
10.6
67.4
Of
which:
–Secured
0.2
—
0.9
0.1
0.9
2.1
2.1
33.7
7.2
45.1
–Unsecured
2.9
3.2
1.9
0.1
—
8.1
3.8
7.0
3.4
22.3
(1)95% of senior unsecured debt issued from Santander UK Group Holdings plc has been downstreamed to Santander
UK plc as ‘secondary non-preferential debt’ in line with the guidelines from the Bank of England for Internal MREL.
(2)Includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator.
(3)Includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator.
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Term issuance
In H122, our external term issuance
(sterling equivalent) was:
Sterling
US Dollar
Euro
Other
Total H122
Total H121
£bn
£bn
£bn
£bn
£bn
£bn
Downstreamed
from Santander UK Group Holdings plc to Santander UK plc
Senior unsecured – public benchmark
0.5
0.7
—
—
1.2
2.1
Subordinated
debt and equity (inc. AT1)
0.8
—
—
—
0.8
0.3
1.3
0.7
—
—
2.0
2.4
Other
Santander UK plc
Securitisations and other secured funding
—
—
—
—
—
—
Covered bonds
1.8
0.8
1.5
—
4.1
—
Senior
unsecured – public benchmark
—
—
—
—
—
—
–privately placed
—
—
—
—
—
0.1
TFSME
—
—
—
—
—
3.5
1.8
0.8
1.5
—
4.1
3.6
Other
group entities
Securitisations
—
—
—
—
—
—
Total gross issuances
3.1
1.5
1.5
—
6.1
6.0
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. We also have a covered bond 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 secured programmes externally and also retained them, and what we have used them for, see Notes 11 and 22 to the Consolidated Financial Statements in the 2021 Annual Report.
30
June 2022 compared to 31 December 2021
Our level of encumbrance from external and internal issuance of mortgage securitisations and covered bonds increased in H122 to £24.2bn (2021: £20.2bn). For more, see Note 11 to the Consolidated Financial Statements in the 2021 Annual Report.
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Capital risk
Overview
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.
Capital risk management
In H122, there were no significant changes in the way we manage capital risk as described in the 2021 Annual Report.
Capital risk review
In this section, we analyse our capital resources and key capital ratios including our RWAs.
Key metrics
CET1 capital ratio of 15.8% (2021: 16.1%)
Total qualifying regulatory capital to £14.5bn (2021: £14.8bn)
CAPITAL
RISK REVIEW
Meeting evolving capital requirements
We target a CET1 management buffer of sufficient size to absorb volatility in CET1 deductions, capital supply and capital demand whilst remaining above the current and expected future regulatory CET1 requirement. Distribution restrictions would be expected to be applied if we were unable to meet both our minimum requirement, which consists of the Pillar 1 minimum plus Pillar 2A, the CRD IV buffers consisting of the Capital Conservation Buffer (CCB), the Countercyclical Capital Buffer (CCyB), and the Other Systemically Important Institutions Buffer (O-SII). Expected future regulatory CET1 requirements are impacted by the removal of the temporary PRA buffer by the end of 2022 and the projected increases
in the UK CCyB to 1% in December 2022 and 2% in July 2023.
MREL recapitalisation
To date, we have down streamed £9.9bn of senior unsecured bonds from Santander UK Group Holdings plc as Internal MREL compliant, secondary non-preferential debt to Santander UK plc.
Key capital ratios
30 June 2022
31 December 2021
%
%
CET1
capital ratio
15.8
16.1
AT1
2.8
2.9
Grandfathered Tier 1
—
0.2
Tier 2
2.4
2.7
Total
capital ratio
21.0
21.9
The total subordination available to Santander UK plc senior unsecured bondholders was 21.0% (2021: 21.9%) of RWAs.
Return on assets - profit after tax dividedby average total assets was 0.26% (31 December 2021: 0.48%).
30 June 2022 compared to 31 December 2021
The CET1 capital ratio decreased 30bps to 15.8%, largely due to the regulatory changes that took effect from January 2022. RWA growth in Retail Banking and Consumer Finance were offset by retained profit. The business remains
strongly capitalised.
Total capital ratio decreased by 90bps to 21.0%, due to the one-off regulatory changes that took effect on 1 January 2022 and the reduction in Additional Tier 1 and Tier 2 capital securities recognised following the end of the CRR Grandfathering period on 1 January 2022.
2022 ordinary share dividends are expected to be in line with our existing dividend policy of 50% of recurring profit after tax.
Regulatory capital resources
This table shows our qualifying regulatory capital:
30
June 2022
31 December 2021
£m
£m
CET1 capital
10,908
10,820
AT1 capital
1,956
2,119
Tier 1 capital
12,864
12,939
Tier
2 capital
1,676
1,816
Total regulatory capital(1)
14,540
14,755
(1) Capital resources include a transitional IFRS 9 benefit at 30 June 2022 of £58m(2021: £21m).
Risk-weighted assets
The tables below are consistent with our
regulatory filings for 30 June 2022 and 31 December 2021.
30 June 2022
31 December 2021
£bn
£bn
Total RWAs
69.2
67.1
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Pension risk
Overview
Pension risk is the risk caused by our statutory contractual or other liabilities with respect to a pension scheme (whether set up 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 some other reason.
Pension risk management
In H122, there were no significant changes in the way we manage pension risk as described in the 2021 Annual Report.
Pension risk review
In this section, we provide an update on key movements in pension risk profile in H122.
Key
metrics
Funding Deficit at Risk was £890m (2021: £1,190m)
Funded defined benefit pension scheme accounting surplus was £2011m (2021: £1,572m)
PENSION RISK REVIEW
30 June 2022 compared to 31 December 2021
Interest and inflation hedging continue to increase in H122 as part of the long-term goal to reduce the risk of the Santander (UK) Group Pension Scheme (the Scheme). In H122, the Scheme purchased a second annuity policy covering the remaining uninsured pensioner liabilities in the SMA and SPI sections based on membership data at 30 June 2021.
Risk monitoring
and measurement
Our main focus is to ensure the Scheme achieves the right balance between risk and reward whilst minimising the impact on our capital and financial position. At 30 June 2022, the Funding Deficit at Risk decreased to £890m (2021: £1,190m), mainly due to actions such as interest rate and inflation hedging, and £0.4bn sale of growth assets. Our long-term objective is to reduce the risk of the Scheme and eliminate the deficit on the funding basis. On the funding basis, the interest rate hedging ratio was107% (2021: 93%) and the inflation hedging ratio was100% (2021: 94%) at 30 June 2022.
We also monitor the potential impact from variations in the IAS 19 position on CET1 capital. The impact on CET1 capital was not significant in H122. For more on the impact of our defined benefit schemes on capital, see the ‘Capital risk’ section.
Accounting position
The
accounting position improved over H122. The Scheme sections in surplus had an aggregate surplus of £2,011m at 30 June 2022 (2021: £1,572m) while there were no sections in deficit (2021: £0m). The overall funded position was a £2,011m surplus (2021: £1,572m surplus). There were also unfunded liabilities of £29m at 30 June 2022 (2021: £37m). The improvement in the overall position was mainly driven by an increase in the discount rate and deficit contributions paid into the Scheme, partially offset by negative asset returns over the period.
There remains considerable market uncertainty and while the actions above mitigate some of the impact of market movements in yields, our position could change materially over a short period.
For more on our pension schemes, including the current asset allocation and our accounting assumptions, see Note 25 to the Condensed Consolidated Interim Financial
Statements.
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Operational risk & resilience
Overview
Operational risk is the risk of loss due to inadequate or failed internal processes, people and systems, or external events.
Operational risk management
In H122, there were no significant changes in the way we manage operational risk as described in the 2021 Annual Report.
Operational risk review
In this section, we provide an update on key movements in operational risk in H122.
Key metrics
Fraud reimbursement charges were £63m (H121: £37m)
OPERATIONAL
RISK REVIEW
30 June 2022 compared to 31 December 2021
Operational risk event losses
In H122 we did not experience any material operational risk losses with the exception of fraud. The losses in H122 remained within our risk appetite. In addition, provisions continue to be managed to cover existing customer remediation programmes and associated costs.
People risk
This risk continues to be compounded by changes in operating models and the execution of our strategies. In particular, the potential people and attrition risks associated with the phased re-location of our Head Office to Unity Place in Milton Keynes are under close monitoring
and management. We continue to adapt and respond to these risk factors, along with the potential impact on productivity with our wellbeing and inclusion strategy centred on supporting colleagues through change. Following the pandemic, we are starting to see improved levels of wellbeing-related absence but, in line with our peers, we continue to see an increase in levels of attrition reflecting a degree of suppressed leavers during Covid-19 and a more buoyant job market. As appropriate, we advocate a hybrid approach to working to encourage colleagues to return to central offices. We are also considering support initiatives as external economic factors start to impact some of our colleagues.
Cyber risk
Information and cyber security remain a top risk and a priority. We experienced no notable information and cyber security incidents in H122. We continue to see increasing ransomware attacks across
all sectors driven by supply chain tools compromises and we expect this trend to continue. We also continue monitoring closely the cyber threat from the conflict in Ukraine. As a result, we continue to review and enhance our controls based on the latest intelligence. We continue to invest to maintain the right skills and resources to manage information and cyber security risk effectively across all our lines of defence.
Fraud risk
Fraud against our customers and the bank remains a top risk and a priority. Fraud levels across all UK banks continued to increase in H122. We continued to see fraudsters using various techniques to commit fraud and scams. In line with industry, Authorised Push Payment Fraud is now our most significant single fraud losses area. In response, we are designing new fraud prevention tools. We are the first bank to deploy dynamic ‘scam warnings’ in our online banking payment
process, to prevent customers falling victim to purchase and investment scams. These enhance the fraud prevention controls for high risk digital payments where the customer is given a number of questions and warnings in their payment journey, tailored to their circumstances. We actively work with industry partners on fraud management through UK Finance and our membership of Stop Scams UK. In H122 we continued our customer awareness campaigns that cover the most common fraud and scam types. We increased our fraud messaging and scam education to help our customers and we continued to run virtual fraud awareness sessions to provide information on how they can protect themselves. In May 2022, our fraud team appeared on the ITV Tonight programme, to show our 'Break the Spell' process, and how we tackle social engineering and protect our customers from fraud.
IBOR transition
In 2021, we – along
with our customers and counterparties – agreed the transition to alternative reference rates for the vast majority of our post-2021 LIBOR agreements. The focus shifted in H122 to finalising the transition of agreements still referencing the continuing USD LIBOR tenors, and to managing down the small ‘tough legacy’ position in GBP LIBOR. In March, all remaining actions were transitioned to BAU and the LIBOR Transition Programme was closed.
Information Technology risk
The importance of IT continued to be reiterated by some outages to customer services in H122 and we continue progressing a wide programme to address the root causes and further reduce key risks within our IT estate. The programme is expected to deliver risk reduction over a three year horizon and progress is closely monitored though our comprehensive risk governance.
Data management risk
In
H122, our Data Programme progressed with clear deliverables defined that will improve our ability to manage data and to improve our data management capabilities in line with our approved Data Strategy.
Operational resilience
We have committed that by 2025, we will address the vulnerabilities identified in the first operational resilience self-assessment approved by the Board and submitted to our regulators in March 2022. Achieving this will enhance our resilience, i.e. the ability of Santander UK to recover its Important Business Services (IBS) within Impact Tolerance levels to avoid intolerable harm to customers, the firm, or the market, with focus on vulnerable customers. A programme is in progress to remediate identified asset vulnerabilities which could directly affect our ability to recover our IBS within Impact Tolerances in the event of an outage. We have introduced resilience assessments
across technology, data, people, third parties, and premises, which enhance our ability to monitor, oversee and action issues. Input to these assessments include scenario test outputs, post incident reviews, metrics, risk and control self assessments, and event data. We monitor trigger thresholds in any incident which may affect our ability to provide our IBS. These practices inform our annual operational resilience self-assessment. Our operational resilience programme received a satisfactory rating from Internal Audit and through independent external review in H122.
Third party risk
We continue to rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of goods and services. In H122, we continued to evolve our processes. This included implementing a new Third Party Risk Management process and amending contracts
with suppliers.
Climate related risk
We continue to embed climate change within all our risk types and monitor progress against our implementation plans on a regular basis.
Santander UK plc 42
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Conduct and regulatory risk
Overview
We
manage the conduct and non-financial regulatory risk types in one framework. We do this to reflect their similarities.
Conduct and regulatory risk management
In H122, there were no significant changes in the way we manage conduct and regulatory risk as described in the 2021 Annual Report.
Conduct and regulatory risk review
In this section, we provide an update on key developments in conduct and regulatory risk in H122.
Key metrics
Customer remediation provision was £49m (2021: £44m)
Litigation and other regulatory provision was £166m (2021: £166m)
CONDUCT
AND REGULATORY RISK REVIEW
30 June 2022 compared to 31 December 2021
To ensure we fully consider customer and conduct impacts across our business, we continue to maintain a strong focus on robust oversight and control of the full customer journey on all our products and services portfolio. In H122, we continued to build on our progress in 2021 and remained vigilant in taking a customer-focused approach in developing strategy, products and policies that support fair customer outcomes and market integrity, in particular in the context of regulator and government driven initiatives. As part of this, we:
–Assessed the views and new policy areas in the FCA’s 2022/23 Business Plan. The key focus this year is on three main areas: reducing and preventing serious consumer harm; setting and testing higher standards; and promoting competition
and positive change. We continue to consider and address these in our controls, product processes and frameworks, and we continue to adapt in line with the evolution of a digital economy.
–Further evolved our Financial Support team and SME support, with further investment in people and technology to ensure we continue to drive fair and consistent outcomes, whilst managing the anticipated increased inflow of customers who continue to be affected post the Covid-19 pandemic, as well as by the rising cost of living.
–Proactively identified and contacted customers who may be experiencing early signs of financial stress, to support them and try to help to prevent longer term financial difficulty. Our engagement makes internal referrals to Santander UK online support material, and referrals to external support via PayPlan. Between early April
and early June 2022, we contacted over 776,000 customers and issued over 1.7 million customer communications and there are plans for ongoing customer engagement and support.
–Continued to support mortgage customers with money worries through a dedicated Financial Support team, where required, to make arrangements to address any arrears and to help them with solutions with us or with our debt charity partners.
–Focused on collections and further financial support, including Pay As You Grow options for BBLS customers, as well as action arising from the FCA's recent multi-firm review of SMEs Collection and Recoveries. In addition, CCB will be participating in the next phase of the Government's Recovery Loans Scheme.
–Continued to actively participate in pilot schemes,
as part of the industry Access to Cash Action Group (CAG) and Design Authority, including input into the future UK Wholesale Cash Distribution Model, which includes supporting industry-wide commitments.
–Continued to take steps to maintain appropriate monitoring and surveillance capability for our market and customer facing staff that continue to work from home to support hybrid working arrangements.
–Continued to manage technological change and increased digitisation in line with regulatory initiatives.
–Delivered change to meet the evolving regulatory landscape, including changes brought about by Payment Systems Regulator (PSR): Confirmation of Payee Phase 2, Open Banking and PSD2, and the FCA Consumer Protection Agenda.
–Our
Consumer Duty programme also continues, and considering the recently published FCA final rules, remains focused on ensuring that our product and services, communications, and respective control frameworks are further enhanced to continue to support good customer outcomes
–Successfully transitioned to alternate reference rates for the vast majority of LIBOR agreements. Our focus remains on transitioning a small group of customers whose agreements still reference older Sterling LIBOR or USD LIBOR. We continue to contribute to FCA consultation papers on both.
–Continued to consult with HM Treasury on the Future UK Regulatory Framework, along with the industry and peers on how regulatory rulemaking powers will be distributed post-Brexit, and the mechanisms for improving accountability and scrutiny of the rule-makers.
Following
the implementation of the Contingent Reimbursement Model, a voluntary code of practice to deal with authorised push payment fraud, we continue to engage with the industry and authorities, giving input and support to further develop the code's framework.
Like all UK banks, we continue to see a demanding regulatory agenda focused on consumer outcomes, addressing customer detriment, price regulation and vulnerability. Conduct risks will likely continue to rise in the near and medium-term, as banks deal with a large volume of personal and business borrowers who continue to be impacted post pandemic and by the rising cost of living crisis. When implementing regulatory change, we focus on ensuring that our strategy, leadership, governance arrangements, and approach to managing and rewarding staff does not lead to a detrimental impact on our customers, competition, or to market integrity. We expect all our staff to take responsibility
for identifying, assessing, managing and reporting risks and our I AM Risk programme supports them in doing so.
For an update on key movements in our financial crime risk profile, see the 'Financial crime risk review' section.
Accounting position
For more on our provisions, see Note 24 to the Condensed Consolidated Interim Financial Statements. For more on our contingent liabilities, see Note 26 to the Condensed Consolidated Interim Financial Statements.
Santander UK plc 43
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Shareholder information
Financial crime risk
Overview
Financial
crime risk is the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, facilitation of tax evasion, bribery and corruption.
Financial crime risk management
In H122, there were no significant changes in the way we manage financial crime risk as described in the 2021 Annual Report.
Financial crime risk review
In this section, we provide an update on key developments in financial crime risk in H122.
Key developments
Senior management and the Board engagement in the management of financial crime risk has remained high, appropriate for one of our top risks.
We continue to enhance our financial crime risk management capabilities with material investment across data, systems, subject matter expertise, and back book remediation.
FINANCIAL CRIME RISK REVIEW
30 June 2022 compared to 31 December 2021
Financial institutions (FIs) remain under intense regulatory scrutiny to demonstrate the steps they are taking to prevent and detect financial crime. Legal and regulatory expectations regarding the need for FIs to maintain effective financial crime systems and controls, including adapting these to identify and respond to new and emerging threats, have been reinforced through a number of high-profile regulatory enforcements,
such as the conclusion of the first criminal prosecution of a FI in the UK for breaches of the UK Money Laundering Regulations. In H122, we continued to cooperate with the FCA's civil regulatory investigation into our financial crime systems, processes and controls focused primarily on the period from 2012 to 2017. For more, see Note 26 to the Condensed Consolidated Interim Financial Statements.
The financial crime landscape continues to be complex, with evolving regulatory and legal requirements, geo-political factors and changing criminal methods influencing the risks we face. Rapid deployment of government relief measures to support individuals and businesses during the Covid-19 pandemic increased the risk of financial crime. Developments around virtual and digital currencies have continued, with the industry’s financial crime risk assessment and management frameworks in their early stages. Changes to sanctions regimes continue
to add complexity. We continue to monitor external developments and respond to their impacts on our financial crime controls and have increased our resources to do so.
Senior management and the Board engagement in the management of financial crime risk has remained high, appropriate for one of our top risks. We continue to enhance our financial crime risk management capabilities with material investment across data, systems, subject matter expertise, and back book remediation.
Purchase of property, plant and equipment and intangible assets
(i263)
(i350)
Proceeds
from sale of property, plant and equipment and intangible assets
i103
i272
Purchase
of financial assets at amortised cost and financial assets at FVOCI
(i1,146)
(i1,016)
Proceeds
from sale and redemption of financial assets at amortised cost and financial assets at FVOCI
i2,421
i3,789
Net
cash flows from investing activities
i1,115
i2,695
Cash
flows from financing activities
Issue of other equity instruments
i750
i210
Issue
of debt securities and subordinated notes
i4,116
i36
Issuance
costs of debt securities and subordinated notes
(i8)
(i3)
Repayment
of debt securities and subordinated notes
(i1,977)
(i8,031)
Repurchase
of other equity instruments
(i985)
(i210)
Dividends
paid on ordinary shares
(i389)
i—
Dividends
paid on preference shares and other equity instruments
(i88)
(i83)
Principal
elements of lease payments
(i33)
(i13)
Net
cash flows from financing activities
i1,386
(i8,094)
Change
in cash and cash equivalents
(i6,424)
i542
Cash
and cash equivalents at beginning of the period
i49,254
i46,696
Effects
of exchange rate changes on cash and cash equivalents
i37
(i10)
Cash
and cash equivalents at the end of the period
i42,867
i47,228
Cash
and cash equivalents consist of:
Cash and balances at central banks
i43,390
i39,021
Less:
restricted balances
(i2,137)
(i1,677)
i41,253
i37,344
Other
cash equivalents: Loans and advances to banks - Non trading
i733
i1,437
Other
cash equivalents: Reverse repurchase agreements
i881
i8,447
Cash
and cash equivalents at the end of the period
i42,867
i47,228
(1)
For more information on cash flows and amounts restated see Note 28.
The accompanying Notes to the Financial Statements form an integral part of these Condensed Consolidated Interim Financial Statements.
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Condensed Consolidated Statement of Changes in Equity (unaudited)
For
the Half Year to
Non-controlling
interests
Share capital
Share premium
Other equity instruments
Fair value
Cash flow hedging
Currency translation
Retained earnings
Total
Total
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
At 1 January 2022
i3,105
i5,620
i2,191
i25
i107
i1
i5,053
i16,102
i—
i16,102
Profit
after tax
—
—
—
—
—
—
i750
i750
—
i750
Other
comprehensive (expense)/income, net of tax:
– Fair value reserve (debt instruments)
—
—
—
(i5)
—
—
—
(i5)
—
(i5)
–
Cash flow hedges
—
—
—
—
(i782)
—
—
(i782)
—
(i782)
–
Pension remeasurement
—
—
—
—
—
—
i300
i300
—
i300
–
Own credit adjustment
—
—
—
—
—
—
i20
i20
—
i20
Total
comprehensive income
—
—
—
(i5)
(i782)
i—
i1,070
i283
i—
i283
Issue
of other equity instruments
—
—
i750
—
—
—
—
i750
—
i750
Repurchase
of other equity instruments
—
—
(i985)
—
—
—
—
(i985)
—
(i985)
Dividends
on ordinary shares
—
—
—
—
—
—
(i389)
(i389)
—
(i389)
Dividends
on preference shares and other equity instruments
—
—
—
—
—
—
(i88)
(i88)
—
(i88)
At
30 June 2022
i3,105
i5,620
i1,956
i20
(i675)
i1
i5,646
i15,673
i—
i15,673
At
1 January 2021
i3,105
i5,620
i2,191
i28
i481
i1
i4,348
i15,774
i162
i15,936
Profit
after tax
—
—
—
—
—
—
i545
i545
i17
i562
Other
comprehensive income, net of tax:
– Fair value reserve (debt instruments)
—
—
—
(i4)
—
—
—
(i4)
—
(i4)
–
Cash flow hedges
—
—
—
—
(i200)
—
—
(i200)
—
(i200)
–
Pension remeasurement
—
—
—
—
—
—
i496
i496
i1
i497
Total
comprehensive income
—
—
—
(i4)
(i200)
i—
i1,041
i837
i18
i855
Issue
of other equity instruments
—
—
i210
—
—
—
—
i210
—
i210
Repurchase
of other equity instruments
—
—
(i210)
—
—
—
—
(i210)
—
(i210)
Dividends
on preference shares and other equity instruments
—
—
—
—
—
—
(i83)
(i83)
—
(i83)
At
30 June 2021
i3,105
i5,620
i2,191
i24
i281
i1
i5,306
i16,528
i180
i16,708
The
accompanying Notes to the Financial Statements form an integral part of these Condensed Consolidated Interim Financial Statements.
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i1.
ACCOUNTING POLICIES
i
The financial information in these Condensed Consolidated Interim Financial Statements is unaudited and does not constitute statutory accounts as defined in section 434 of the UK Companies Act 2006. These Condensed Consolidated Interim Financial Statements were approved by the Board of Directors on 11 August 2022. Statutory accounts
for the year ended 31 December 2021 have been delivered to the Registrar of Companies.
The Condensed Consolidated Interim Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of operations for the interim period. All such adjustments to the financial information are of a normal, recurring nature. Because the results from common banking activities are so closely related and responsive to changes in market conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the year.
The Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard IAS 34 ‘Interim Financial Reporting', as issued by the International Accounting Standards Board (IASB) and adopted in the UK, and the Disclosure Guidance
and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA). They do not include all the information and disclosures normally required for full annual financial statements and should be read in conjunction with the Consolidated Financial Statements of Santander UK plc (the Company) and its subsidiaries (collectively Santander UK or the Santander UK group) for the year ended 31 December 2021 which were prepared in accordance with UK-adopted International Accounting Standards (IAS). Those consolidated financial statements were also prepared in accordance with IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, as there were no applicable differences from IFRSs as issued by the IASB for the periods presented.
Except
as noted below, the same accounting policies, presentation and methods of computation are followed in these Condensed Consolidated Interim Financial Statements as were applied in the presentation of Santander UK’s 2021 Annual Report.
i
Property, plant and equipment
During H122, Santander UK expanded its accounting policy for 'Property, plant and equipment' to separately address properties which it no longer occupies, and to identify such properties as ‘Investment property’. This
change had no financial impact on these Condensed Consolidated Interim Financial Statements.
Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the companies in the Santander UK group, is classified as investment property and included in property, plant and equipment. Investment property is accounted for in the same manner as owner-occupied property. In addition, rental income from investment property is recognised as other revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease.
i
Cash
and cash equivalents
Following a decision by the IFRS Interpretations Committee in April 2022, Santander UK updated its accounting policy to exclude from cash and cash equivalents Reserves Collateralisation Accounts (RCAs) balances held at the BoE relating to Santander UK’s participation in certain payments schemes. Instead, RCAs balances are classified as restricted balances and included within 'change in operating assets' in the cash flow statement. Prior periods have been restated.
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks and short-term investments in securities. Balances with central banks represent amounts held at the BoE as part of the
Santander UK group’s liquidity management activities. It includes certain minimum cash ratio deposits held for regulatory purposes and reserves collateralised accounts in respect of Santander UK’s participation in certain payments schemes which are required to be maintained with the BoE and are restricted balances.
i
Non-current
assets held for sale
Non-current assets (or disposal groups) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction rather than continuing use. In order to be classified as held for sale, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary, and the sale must be highly probable. Non-current assets (or disposal groups) held for sale are measured at the lower of carrying amount and fair value less cost to sell, with the exception of financial instruments which remain governed by the requirements of IFRS 9 and are held at their IFRS 9 carrying value.
Future accounting developments
Disclosure
of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2
In February 2021, the IASB amended IAS 1 Presentation of Financial Statements to require entities to disclose their material rather than their significant accounting policies. To support this amendment, the IASB also amended IFRS Practice Statement 2 Making Materiality Judgements to provide guidance on how to apply the concept of materiality. The amendments are effective for annual periods beginning on or after 1 January 2023 with earlier application permitted. The amendments are awaiting UK endorsement. The amendments are expected to streamline and improve our accounting policy disclosures by making them more specific to the Santander UK group.
i
Going
concern
In light of the continuing economic uncertainty, the Directors updated their going concern assessment in preparing these Condensed Consolidated Interim Financial Statements. After making enquiries, the Directors have a reasonable expectation that Santander UK has adequate resources to continue in operational existence for at least twelve months from the date of this report and, therefore, having reassessed the principal risks and uncertainties, the Directors consider it appropriate for the Condensed Consolidated Interim Financial Statements to be prepared on a going concern basis.
In making their going concern assessment in connection with preparing the Condensed Consolidated Interim Financial Statements, the Directors considered a wide range of information that included Santander UK’s long-term business and strategic plans, forecasts and projections, estimated capital, funding
and liquidity requirements, contingent liabilities and the reasonably possible changes in trading performance arising from potential economic, market and product developments.
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i
CRITICAL
JUDGEMENTS AND ACCOUNTING ESTIMATES
The preparation of the Condensed Consolidated Interim Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the reporting date and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions. In preparing the Condensed Consolidated Interim Financial Statements, no significant judgements were made in applying the accounting policies, other than those involving estimations about credit impairment losses, provisions and contingent liabilities, pensions and goodwill. There has been no
change in the inherent sensitivity of the areas of judgement in the period. Management have considered the impact of developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting estimates.
a) Credit impairment losses
i
Key
judgements
–Determining an appropriate definition of default
–Establishing the criteria for a significant increase in credit risk (SICR) and, for corporate borrowers, internal credit risk rating
–Probability weights assigned to multiple economic scenarios
For more on each of these key judgements and estimates, see 'Critical judgements and accounting estimates applied in calculating ECL' in the ‘Credit risk – credit risk management’ section of the Risk review in the 2021 Annual Report.
Sensitivity of ECL allowance
For detailed disclosures, see 'Sensitivity of ECL allowance' in the ‘Credit risk – credit risk management’ section of the Risk review.
b) Provisions and
contingent liabilities
Key judgements
–Determining whether a present obligation exists
–Assessing the likely outcome of future legal decisions
Key estimates
–Probability, timing, nature and amount of any outflows that may arise from past events
Included in Litigation and other regulatory provisions in Note 24 are amounts
in respect of management’s best estimates of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints, and Plevin related litigation. Note 26 provides disclosure relating to ongoing factual issues and reviews that could impact the timing and amount of any outflows.
Note 26 includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions, as well as an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering
and financial crime systems and controls.
These judgements are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters. As a result, it is often not possible to make reliable estimates of the likelihood and amount of any potential outflows, or to calculate any resulting sensitivities. For more on these key judgements and estimates, see Notes 24 and 26.
c) Pensions
Key
judgements
–Setting the criteria for constructing the corporate bond yield curve used to determine the discount rate
–Determining the methodology for setting the inflation assumption
Key estimates
–Discount rate applied to future cash flows
–Rate of price inflation
–Expected lifetime of the schemes' members
–Valuation
of pension fund assets whose values are not based on market observable data
For more on each of these key judgements and estimates, see Note 25.
Sensitivity of defined benefit pension scheme estimates
For detailed disclosures, see ‘Actuarial assumption sensitivities’ in Note 25. The Scheme was invested in certain assets whose values are not based on market observable data, such as investments in private equity funds and property. Due diligence has been conducted to ensure the values obtained in respect of these assets are appropriate and represent fair value. Given the nature of these investments, we are unable to prepare sensitivities on how their values could vary as market conditions or other variables change.
d)
Goodwill
Key judgements:
–Determining the basis of goodwill impairment calculation assumptions, including management's planning assumptions considering internal capital allocations needed to support Santander UK's strategy, current market conditions and the macro-economic outlook.
Key estimates:
–Forecast cash flows for cash generating units, including estimated allocations of regulatory capital
–Growth
rate beyond initial cash flow projections
–Discount rates which factor in risk-free rates and applicable risk premiums
All of these variables are subject to fluctuations in external market rates and economic conditions beyond management’s control
For more on each of these key judgements and estimates, see Note 16.
Sensitivity of goodwill
For detailed disclosures, see ‘Sensitivities of key assumptions in calculating VIU’ in Note 20 to the Consolidated Financial Statements in the 2021 Annual Report.
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i
2.
SEGMENTS
Santander UK’s principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of four segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies.
i
As reflected in the 2021 Annual Report, the segmental basis of
presentation in these Condensed Consolidated Interim Financial Statements changed following a management review of our structure in Q4 2021. Previously, Consumer Finance was managed as part of Retail Banking.
Santander UK plc transferred a significant part of its Corporate & Investment Banking business to the London branch of Banco Santander SA under a Part VII banking business transfer scheme, which completed on 11 October 2021. The residual parts of the Corporate & Investment Banking business have been wound down or transferred to other segments. For the periods prior to its sale, the Corporate & Investment Banking business met the requirements for presentation as discontinued operations. For more details, see Note 33.
i
Results
by segment
For the Half Year to
Retail Banking
Consumer Finance
Corporate & Commercial Banking
Corporate Centre
Total
30
June 2022
£m
£m
£m
£m
£m
Net interest income
i1,784
i92
i242
i2
i2,120
Non-interest
income
i116
i101
i69
(i16)
i270
Total
operating income
i1,900
i193
i311
(i14)
i2,390
Operating
expenses before credit impairment (losses)/write-backs, provisions and charges
(i831)
(i73)
(i181)
(i87)
(i1,172)
Credit
impairment (losses)/write-backs
(i126)
(i13)
i19
i2
(i118)
Provisions
for other liabilities and charges
(i101)
i—
(i2)
(i15)
(i118)
Total
operating credit impairment (losses)/write-backs, provisions and charges
(i227)
(i13)
i17
(i13)
(i236)
Profit/(loss)
from continuing operations before tax
i842
i107
i147
(i114)
i982
Revenue
from external customers
i2,033
i243
i318
(i204)
i2,390
Inter-segment
revenue
(i133)
(i50)
(i7)
i190
i—
Total
operating income
i1,900
i193
i311
(i14)
i2,390
Revenue
from external customers includes the following fee and commission income disaggregated by income type:(1)
–Current account and debit card fees
i218
i—
i29
i—
i247
–Insurance,
protection and investments
i31
i—
i—
i—
i31
–Credit
cards
i46
i—
i—
i—
i46
–Non-banking
and other fees(2)
i4
i8
i36
i5
i53
Total
fee and commission income
i299
i8
i65
i5
i377
Fee
and commission expense
(i191)
i—
(i11)
(i7)
(i209)
Net
fee and commission income/(expense)
i108
i8
i54
(i2)
i168
Customer
loans
i189,318
i5,129
i17,358
i1,711
i213,516
Total
assets(3)
i196,505
i9,652
i17,358
i60,802
i284,317
Of
which assets held for sale
i—
i—
i—
i49
i49
Customer
deposits
i154,759
i—
i25,305
i3,940
i184,004
Total
liabilities
i155,199
i1,153
i25,326
i86,966
i268,644
(1)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.
(2)Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)Includes customer loans, net of credit impairment loss allowances.
/
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Retail
Banking(4)
Consumer Finance(4)
Corporate & Commercial Banking
Corporate & Investment Banking
Corporate Centre
Total
30 June 2021
£m
£m
£m
£m
£m
£m
Net interest income/(expense)
i1,602
i135
i202
i—
(i34)
i1,905
Non-interest
income
i109
i77
i51
i—
i49
i286
Total
operating income
i1,711
i212
i253
i—
i15
i2,191
Operating
expenses before credit impairment (losses)/write-backs, provisions and charges
(i858)
(i90)
(i181)
i—
(i199)
(i1,328)
Credit
impairment (losses)/write-backs
i28
i20
i23
i—
(i1)
i70
Provisions
for other liabilities and charges
(i67)
i—
(i5)
i—
(i118)
(i190)
Total
operating credit impairment (losses)/write-backs, provisions and charges
(i39)
i20
i18
i—
(i119)
(i120)
Profit/(loss)
from continuing operations before tax
i814
i142
i90
i—
(i303)
i743
Revenue
from external customers
i1,939
i255
i272
i—
(i275)
i2,191
Inter-segment
revenue
(i228)
(i43)
(i19)
i—
i290
i—
Total
operating income/(expense)
i1,711
i212
i253
i—
i15
i2,191
Revenue
from external customers includes the following fee and commission income disaggregated by income type:(1)
–Current account and debit card fees
i172
i—
i23
i—
i—
i195
–Insurance,
protection and investments
i32
i—
i—
i—
i—
i32
–Credit
cards
i37
i—
i—
i—
i—
i37
–Non-banking
and other fees(2)
i1
i4
i29
i—
i7
i41
Total
fee and commission income
i242
i4
i52
i—
i7
i305
Fee
and commission expense
(i136)
i—
(i10)
i—
(i8)
(i154)
Net
fee and commission income
i106
i4
i42
i—
(i1)
i151
31
December 2021
Customer loans
i183,023
i4,984
i16,997
i—
i2,284
i207,288
Total
assets(3)
i190,629
i8,873
i16,997
i—
i70,599
i287,098
Customer
deposits
i156,991
i—
i25,597
i—
i3,627
i186,215
Total
liabilities
i157,622
i1,173
i25,613
i—
i86,588
i270,996
(1)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.
(2)Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)Includes customer loans, net of credit impairment loss allowances.
(4)Restated to reflect the resegmentation of the Retail Banking segment into the Retail Banking and Consumer Finance segments described above, and a refinement of our fee and commission income disaggregation.
Geographical information is not provided, as substantially
all of Santander UK’s activities are in the UK.
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i
3.
OTHER OPERATING INCOME
In H122, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £i1m. In H121, the Santander UK group repurchased certain debt securities as part of ongoing liability management exercises, resulting in a loss of £i27m.
/
i
4.
OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES
For the Half Year to
i
30
June 2022
30 June 2021
£m
£m
Staff
costs
i556
i577
Other
administration expenses
i458
i431
Depreciation,
amortisation and impairment
i158
i320
i1,172
i1,328
/
/
In
H122, 'Depreciation, amortisation and impairment' included an impairment charge of £i10m (H121: £i105m)
associated with branch and head office site closures as part of the transformation programme. For more, see Note 17.
i
5. CREDIT IMPAIRMENT LOSSES AND PROVISIONS
For the Half Year to
i
30
June 2022
30 June 2021
£m
£m
Credit impairment losses/(write-backs):
Loans and advances to customers
i114
(i33)
Recoveries
of loans and advances, net of collection costs
(i6)
(i13)
Off-balance
sheet exposures (See Note 24)
i10
(i24)
i118
(i70)
Provisions
for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 24)
i121
i191
Releases
for residual value and voluntary termination
(i3)
(i1)
i118
i190
i236
i120
/
In
H122 and H121 there were iiiiiiiino///////
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 FVOCI.
/
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i6.
TAXATION
i
The Santander UK group’s effective tax rate for H122 was i23.6%
(H121: i27.6%). The tax on profit from continuing operations before tax differs from the theoretical amount that would arise using the basic corporation tax rate as follows:
For the Half Year to
30
June 2022
30 June 2021
£m
£m
Profit from continuing operations before tax
i982
i743
Tax
calculated at a tax rate of 19% (H121: 19%)
i187
i141
Bank
surcharge on profits
i70
i49
Non-deductible
preference dividends paid
i5
i6
Non-deductible
UK Bank Levy
i8
i14
Non-deductible
conduct remediation, fines and penalties
(i1)
i—
Other
non-deductible costs and non-taxable income
i8
i14
Effect
of change in tax rate on deferred tax provision
(i23)
i13
Tax
relief on dividends in respect of other equity instruments
(i22)
(i32)
Tax
on profit from continuing operations
i232
i205
/
Interim
period corporation tax is accrued based on the estimated average annual effective corporation tax for the year of i26.0% (H121: i25.8%) before including
both the impact of the changes in the standard rate of corporation tax (substantively enacted in 2021) and the bank surcharge (substantively enacted in 2022). See Note 9 to the Consolidated Financial Statements in the 2021 Annual Report.
i
7. DIVIDENDS ON ORDINARY SHARES
£i389minterim dividend was declared on the Company’s ordinary shares in issue (H121: £inil).
(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 £i557m (2021: £i189m)
and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £i557m (2021: £i202m).
/
IBOR
Reform
Note 32 includes details of the notional value of hedging instruments by benchmark interest rate impacted by IBOR reform and the notional amounts of assets, liabilities and off-balance sheet commitments affected by IBOR reform that have yet to transition to an alternative benchmark interest rate.
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i
9.
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
i
30
June 2022
31 December 2021
£m
£m
Loans and advances to customers:
Loans to housing associations
i11
i12
Other
loans
i49
i62
i60
i74
Debt
securities
i95
i111
i155
i185
/
/
i
10.
LOANS AND ADVANCES TO CUSTOMERS
i
30
June 2022
31 December 2021
£m
£m
Loans
and advances to customers
i217,910
i210,947
Credit
impairment loss allowances on loans and advances to customers
(i876)
(i828)
Residual
value and voluntary termination provisions on finance leases
(i22)
(i25)
Net
loans and advances to customers
i217,012
i210,094
/
For
movements in expected credit losses, see the 'Movement in total exposures and the corresponding ECL' table in the Santander UK group level - Credit risk review section of the Risk review.
/
i
11.
SECURITISATIONS AND COVERED BONDS
The information in this Note relates to securitisations and covered bonds for consolidated structured entities, used to obtain funding or collateral. It excludes structured entities relating to credit protection transactions.
iThe gross assets
securitised, or for the covered bond programme assigned at 30 June 2022 and 31 December 2021 were:
30 June 2022
31 December 2021
£m
£m
Mortgage-backed
master trust structures:
–Holmes
i2,010
i2,294
–Fosse
i1,910
i2,154
i3,920
i4,448
Other
asset-backed securitisation structures:
–Motor
i18
i38
i18
i38
Total
securitisation programmes
i3,938
i4,486
Covered
bond programmes
–Euro ii35/bn
Global Covered Bond Programme
i20,245
i15,713
Total
securitisation and covered bond programmes
i24,183
i20,199
i
The
following table sets out the internal and external issuances and redemptions in H122 and H121 for each securitisation and covered bond programme.
Internal
issuances
External issuances
Internal redemptions
External redemptions
H122
H121
H122
H121
H122
H121
H122
H121
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
Mortgage-backed
master trust structures:
–Holmes
i—
i—
i—
i—
i—
i—
i—
i0.3
–Langton
i—
i—
i—
i—
i—
i2.4
i—
i—
Other
asset-backed securitisation structures:
–Motor
i—
i—
i—
i—
i—
i0.1
i—
i—
–Auto
ABS UK Loans
i—
i—
i—
i—
i—
i0.1
i—
i0.1
Covered
bond programme
i—
i—
i—
i—
i—
i—
i—
i4.5
i—
i—
i—
i—
i—
i2.6
i—
i4.9
/
In
H121, all the remaining Langton bonds were redeemed and all the remaining associated mortgages were repurchased by Santander UK plc. There was ino gain or loss on redemption.
Auto ABS UK Loans was held in PSA Finance UK Limited (PSA), which was a subsidiary of the Santander UK group. On 30 July 2021, the Santander UK group through Santander Consumer (UK) plc sold its entire i50%
shareholding in PSA to PSA Financial Services Spain EFC SA, a joint venture between Santander Consumer Finance SA, a fellow subsidiary of Banco Santander SA, and Banque PSA Finance SA, the auto finance arm of Group PSA Peugeot Citroën.
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i
12.
REVERSE REPURCHASE AGREEMENTS – NON TRADING
i
30
June 2022
31 December 2021
£m
£m
Agreements with banks
i475
i447
Agreements
with customers
i8,318
i12,236
i8,793
i12,683
/
/
i
13.
OTHER FINANCIAL ASSETS AT AMORTISED COST
i
30
June 2022
31 December 2021
£m
£m
Asset backed securities
i94
i443
Debt
securities
i62
i63
0
i156
i506
/
/
i
14.
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
i
30
June 2022
31 December 2021
£m
£m
Debt securities
i4,894
i5,833
Loans
and advances to customers
i19
i18
i4,913
i5,851
/
/
i
15.
INTERESTS IN OTHER ENTITIES
There have been no significant changes to the Santander UK group's interests in subsidiaries, joint ventures and unconsolidated structured entities, as set out in Note 19 to the Consolidated Financial Statements in the 2021 Annual Report.
i
16.
INTANGIBLE ASSETS
At 30 June 2022, intangible assets comprised goodwill of £i1,199m (2021: £i1,203m) and computer software of £i339m
(2021: £i342m).
/
At 30 June 2022, a review was performed to identify any potential impairment indicators for goodwill. No indicators of impairment were identified and so a full impairment test was not performed for the half year. At 30
June 2022, there were no significant changes in key assumptions that gave rise to an indicator of impairment. Details of the sensitivity of VIU changes to assumptions to achieve nil headroom are set out in Note 20 to the Consolidated Financial Statements in the 2021 Annual Report.
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i
17.
PROPERTY, PLANT AND EQUIPMENT
i
Property
Office
fixtures and equipment
Computer software
Operating lease assets
Right-of-use assets
Total(1)
£m
£m
£m
£m
£m
£m
Cost:
At
1 January 2022
i978
i1,049
i434
i755
i254
i3,470
Additions
i31
i29
i—
i112
i32
i204
Reclassification
to assets held for sale
(i109)
(i31)
i—
i—
i—
(i140)
Disposals
(i25)
(i268)
(i363)
(i126)
(i23)
(i805)
At
30 June 2022
i875
i779
i71
i741
i263
i2,729
Accumulated
depreciation:
At 1 January 2022
i334
i857
i434
i160
i137
i1,922
Charge
for the period
i10
i34
i—
i41
i9
i94
Impairment
during the period
i8
i2
i—
i—
i—
i10
Reclassification
to assets held for sale
(i62)
(i29)
i—
i—
i—
(i91)
Disposals
(i16)
(i265)
(i363)
(i51)
(i1)
(i696)
At
30 June 2022
i274
i599
i71
i150
i145
i1,239
Net
book value
i601
i180
i—
i591
i118
i1,490
(1)Property, plant and equipment includes assets under construction of £i155m (2021: £i106m) and investment properties of £i20m
(2021: £i17m)./
/
i
18.
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
i
30
June 2022
31 December 2021
£m
£m
US$ii30/bn
Euro Medium Term Note Programme
i3
i5
Structured
Notes Programmes
i353
i413
Eurobonds
i110
i142
Structured
deposits
i346
i223
Collateral
and associated financial guarantees
i15
i20
i827
i803
/
/
i
19.
DEPOSITS BY CUSTOMERS
i
30
June 2022
31 December 2021
£m
£m
Demand and time deposits(1)
i183,553
i185,843
Amounts
due to other Santander UK Group Holdings plc subsidiaries
i63
i59
Amounts
due to Santander UK Group Holdings plc(2)
i4,987
i5,874
Amounts
due to fellow Banco Santander subsidiaries and joint ventures
i1,126
i1,150
i189,729
i192,926
(1)Includes
equity index-linked deposits of £i520m (2021: £i549m). The capital amount guaranteed/protected and the amount of return guaranteed in respect of the equity index-linked deposits were £i520m
and £i2m (2021: £i549m
and £i2m) respectively.
(2)Includes downstreamed funding from our immediate parent company Santander UK Group Holdings plc.
(1)Includes
drawdown from the TFS of £i0.0bn (2021:£i0.0bn) and drawdown from the TFSME of £i31.9bn
(2021: £i31.9bn).
/
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i
21.
REPURCHASE AGREEMENTS – NON TRADING
i
30
June 2022
31 December 2021
£m
£m
Agreements with banks
i2,558
i4,145
Agreements
with customers
i4,352
i7,573
i6,910
i11,718
/
/
i
22.
DEBT SECURITIES IN ISSUE
i
30 June 2022
31 December
2021
£m
£m
Medium-term
notes
i7,972
i6,851
Euro
ii35/bn Global Covered Bond Programme
i15,952
i12,760
US$ii20/bn
Commercial Paper Programmes
i3,434
i2,704
Certificates
of deposit
i1,667
i2,387
Credit
linked notes
i60
i59
Securitisation
programmes
i436
i759
i29,521
i25,520
/
/
i
23.
SUBORDINATED LIABILITIES
i
30 June 2022
31
December 2021
£m
£m
i2,335
i2,228
/
/
In
H122, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £i1m. In H121, the Santander UK group repurchased certain debt securities as part of ongoing liability management exercises, resulting in a loss of £i27m.
i
24.
PROVISIONS
i
Customer
remediation
Litigation and other regulatory
Bank Levy
Property
ECL on undrawn facilities and guarantees
Restructuring
Other
Total
£m
£m
£m
£m
£m
£m
£m
£m
At
1 January 2022
i44
i166
i1
i74
i38
i28
i13
i364
Additional
provisions (See Note 5)
i25
i16
i—
i1
i10
i8
i84
i144
Provisions
released (See Note 5)
(i12)
(i1)
i—
i—
i—
i—
i—
(i13)
Utilisation
and other
(i8)
(i15)
(i1)
(i11)
(i2)
(i12)
(i83)
(i132)
At
30 June 2022
i49
i166
i—
i64
i46
i24
i14
i363
/
/
A
£i25m customer remediation provision was recognised in H122 relating to the proposed refund of certain charges historically paid by cohorts of mortgage customers.
In H122, Other provisions included charges for operational risk provisions of £i78m
(H121: £i50m), including fraud losses of £i63m (H121: £i37m).
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i
25.
RETIREMENT BENEFIT PLANS
i
The amounts recognised in the balance sheet were as follows:
30
June 2022
31 December 2021
£m
£m
Assets/(liabilities)
Funded defined benefit pension scheme - surplus
i2,011
i1,572
Unfunded
pension and post-retirement medical benefits
(i29)
(i37)
Total
net assets
i1,982
i1,535
//
a)
Defined contribution pension plans
An expense of £i30m (H121: £i33m)
was recognised for defined contribution plans in the period and is included in staff costs within operating expenses (see Note 4).
b) Defined benefit pension schemes
The total amount charged to the income statement was £i4m (H121: £i23m).
i
The
amounts recognised in other comprehensive income were as follows:
30 June 2022
30 June 2021
£m
£m
Return on plan assets (excluding amounts included in net interest expense)
i3,352
i383
Actuarial
gains arising from experience adjustments
i296
(i30)
Actuarial
gains arising from changes in financial assumptions
(i3,974)
(i1,098)
Pension
remeasurement
(i326)
(i745)
/
i
The
net assets recognised in the balance sheet were determined as follows:
30 June 2022
31 December 2021
£m
£m
Present value of defined benefit obligations
(i9,138)
(i12,878)
Fair
value of scheme assets
i11,120
i14,413
Net
defined benefit assets
i1,982
i1,535
/
Actuarial
assumptions
i
The principal actuarial assumptions used for the defined benefit schemes were:
30 June 2022
31
December 2021
%
%
To determine benefit obligations(1):
–Discount rate for scheme liabilities
i3.8
i1.9
–General
price inflation
i3.1
i3.4
–General
salary increase
i1.0
i1.0
–Expected
rate of pension increase
i3.0
i3.2
Years
Years
Longevity
at 60 for current pensioners, on the valuation date:
–Males
i27.5
i27.5
–Females
i30.2
i30.1
Longevity
at 60 for future pensioners currently aged 40, on the valuation date:
–Males
i29.1
i29.0
–Females
i31.7
i31.6
(1)
The discount rate and inflation related assumptions set out in the table above reflect the assumptions calculated based on the Scheme’s duration and cash flow profile as a whole. The actual
assumptions used were determined for each section independently based on each section’s duration and cash flow profile.
/
The majority of the liability movement over the half year was due to changes in market conditions.
Actuarial assumption sensitivities
i
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.
(Decrease)/increase
Change in pension obligation at period end from
30 June 2022
31 December 2021
Assumption
£m
£m
Discount
rate
i25 bps increase
(i335)
(i571)
General
price inflation
i25 bps increase
i239
i392
Mortality
iEach
additional year of longevity assumed
i256
i478
/
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i
26.
CONTINGENT LIABILITIES AND COMMITMENTS
i
30
June 2022
31 December 2021
£m
£m
Guarantees given to third parties
i428
i363
Formal
standby facilities, credit lines and other commitments
i37,224
i37,346
i37,652
i37,709
/
/
Where
the items set out below can be reliably estimated, they are disclosed in the table above.
There have been no significant changes to the contingent liabilities as set out in Note 31 to the Consolidated Financial Statements in the 2021 Annual Report, except as set out below:
Other legal actions and regulatory matters
Santander UK engages in discussion, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK 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 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 or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.
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.
FCA civil regulatory investigation into Santander UK plc financial crime systems, processes and controls, and compliance with the Money Laundering Regulations 2007
During HY 2022 Santander UK plc continued to cooperate with an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. The FCA’s investigation focuses primarily on the period 2012 to 2017 and includes consideration of high-risk customers including Money Service Businesses. It is not currently possible to make a reliable assessment of any liability resulting from the investigation including any financial penalty.
Payment Protection
Insurance
In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is in its early stages. The dispute relates to the liability for PPI mis-selling complaints relating to pre-2005 PPI policies underwritten by AXA France IARD and AXA France Vie (together, AXA France - previously Financial Insurance Company Ltd and Financial Assurance Company Ltd respectively) and involves Santander Cards UK Limited (a former GE Capital Corporation entity and distributor of pre-2005 PPI known as GE Capital Bank Limited which was acquired by Banco Santander SA in 2008 and subsequently transferred to Santander UK plc) and a Banco Santander SA subsidiary Santander Insurance Services UK Limited (together the Santander Entities). During the relevant period, AXA France were owned by Genworth Financial International Holdings, Inc (Genworth).
In September 2015,
AXA SA acquired AXA France from Genworth. In July 2017, the Santander Entities notified AXA France that they did not accept liability for losses on PPI policies relating to the relevant period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with AXA France pursuant to which it agreed to handle complaints on their behalf, and AXA France agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis. A standstill agreement was entered into between the Santander Entities and AXA France as a condition of the CHA.
In July 2020, Genworth announced that it had agreed to pay AXA SA circa £i624m
in respect of PPI mis-selling losses in settlement of the related dispute concerning obligations under the sale and purchase agreement pursuant to which Genworth sold AXA France to AXA SA. The CHA between Santander UK plc and AXA France terminated on 26 December 2020. On 30 December 2020, AXA France provided written notice to the Santander Entities to terminate the standstill agreement. During 2021, AXA France commenced litigation against the Santander Entities seeking recovery of £i636m and any further losses relating to pre-2005 PPI. Judgment
in respect of the Santander Entities application for AXA France’s claim to be struck out/summarily dismissed, was handed down by the Commercial Court on 12 July 2022. In summary, the Commercial Court upheld a significant part of the Santander Entities’ strike-out application, striking out AXA France’s claim for contribution against Santander for alleged losses and requiring AXA France to re-plead a significant portion of its other pleadings. The Santander Entities are seeking permission to appeal aspects of the strike out decision on which they were unsuccessful. Overall the dispute remains at an early stage and there are ongoing 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 outcome or the timing of the resolution of the matter. The litigation and other regulatory provision in Note 24 includesour
best estimate of the Santander Entities’ liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial to the Santander Entities’ interests in connection with the dispute.
In addition, and in relation to PPI more generally the PPI provision includes an amount relating to legal claims challenging the FCA’s industry guidance on the treatment of Plevin / recurring non-disclosure assessments. This provision is based on current stock levels, future projected claims, and average redress. There remains a risk that volumes received in future may be higher than forecast. The provision in Note 24 includes our best estimate of Santander UK’s liability for the specific issue. The actual cost of customer compensation could differ from the amount provided. It is not currently practicable to provide an estimate of the risk and amount of any further financial impact.
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German dividend tax arbitrage transactions
In June 2018 the
Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a loophole of a specific German settlement mechanism through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.
During H122
we continued to cooperate with the German authorities and, with the assistance of external experts, to progress an internal investigation into the matters in question. From Santander UK plc’s perspective, the investigation is focused principally on the period 2009-2011 and remains on-going. There remain 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 the resolution of the matter including timing or the significance of the possible impact. Any potential losses, claims or expenses suffered or incurred by Santander Financial Services plc in respect of these matters have been fully indemnified by Santander UK plc, as part of the ring-fencing transfer scheme between Santander UK plc, Santander Financial Services plc and Banco Santander SA.
Taxation
The
Santander UK group engages in discussion, and co-operates, with HM Revenue & Customs (HMRC) 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.
Certain leases in which the Santander UK group is or was the lessor have been under review by HMRC in connection with claims for tax allowances. Under the terms of the lease agreements, the Santander UK group is fully indemnified in all material respects by the respective lessees for any liability arising from the disallowance of tax allowances plus accrued interest. During 2021, an outline agreement in principle in respect of a number of these lease arrangements was reached directly between the lessee and HMRC. This agreement was executed in April 2022, resulting in a final payment by the lessee to HMRC and the conclusion of HMRC’s review. There is no financial impact for the Santander
UK group.
Other
On 2 November 2015, Visa Europe Ltd agreed to sell i100% 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. 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). Following ring-fencing, all Visa stock is now held by Santander Equity Investments Limited (SEIL), outside the ring fenced bank.
In addition, 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 €i1bn
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 inil. Whilst Santander UK's liability under this indemnity is capped at €i39.85m,
Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism. At this stage, it is unclear whether the litigation will give rise to more than €i1bn of losses relating to UK&I MIFs which means it is difficult to predict the resolution of the matter including the timing or the significance of the possible impact.
As part of the sale of subsidiaries,
businesses and other entities, and as is normal in such circumstances, Santander UK plc (and/or, where relevant, its subsidiaries) has given warranties and indemnities to the purchasers.
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i
27.
OTHER EQUITY INSTRUMENTS
i
Interest rate
30
June 2022
31 December 2021
%
Next call date
£m
£m
£ii300/m
Step-up Callable Perpetual Reserve Capital Instruments
ii7.037/
iiFebruary
2026/
i—
i235
AT1
securities:
- £ii500/m
Perpetual Capital Securities
ii6.75/
iiJune
2024/
i496
i496
-
£ii750/m Perpetual Capital Securities
ii7.375/
iiJune
2022/
i—
i750
-
£ii500/m Perpetual Capital Securities
ii5.18/
n/a
i—
i—
-
£ii500/m Perpetual Capital Securities
ii6.30/
iiMarch
2025/
i500
i500
-
£ii210/m Perpetual Capital Securities
ii4.25/
iiMarch
2026/
i210
i210
-
£ii750/m Perpetual Capital Securities
ii6.50/
iiSeptember
2027/
i750
i—
i1,956
i2,191
/
/
During
H122, the £i300m Step-up Callable Perpetual Reserve Capital Instruments were called for value on 14 February 2022 and redeemed at their principal amount.
In June 2022, Santander UK plc purchased and redeemed the £i750m
i7.375% Perpetual Capital Securities and issued £i750m i6.50%
Perpetual Capital Securities, which were fully subscribed by the Company’s immediate parent company, Santander UK Group Holdings plc.
i28. NOTES TO CASH FLOWS
Restatements
in the consolidated cash flow
Reverse repurchase agreements with a contractual maturity of greater than 3 months and repurchase agreements were previously included in cash and cash equivalents. As set out in the 2021 Annual Report, with effect from 31 December 2021, such agreements are no longer included in cash and cash equivalents, and have been included in the cash flow statement within ‘change in operating assets' and 'change in operating liabilities’ for ‘reverse repurchase agreements - non trading’ and ‘repurchase agreements - non trading’. Prior periods have been restated. As a result, at 30 June 2021, cash and cash equivalents have been increased by £i4,339m.
The
presentation of the consolidated cash flow statement has changed to present 'profit before tax' within cash flows from operating activities instead of 'profit after tax'. Prior periods have been restated. As a result, at 30 June 2021, the adjustment for 'non-cash items included in profit' within cash flows from operating activities has been decreased by £i214m.
Following a decision by the IFRS Interpretations Committee in April 2022, Santander
UK updated its accounting policy to exclude from cash and cash equivalents Reserves Collateralisation Accounts (RCAs) balances held at the BoE relating to Santander UK’s participation in certain payments schemes. Instead, RCAs balances are classified as restricted balances and included within 'change in operating assets' in the cash flow statement. Prior periods have been restated. As a result, opening cash and cash equivalents at 1 January 2022 and 1 January 2021 have been restated by £i1,580m
and £i985m respectively. At 30 June 2021, cash and cash equivalents were reduced by £i780m
and restricted balances were increased by £i780m.
i29.
ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS SECURITY FOR ASSETS
Securitisations and covered bonds
As described in Note14 to the Consolidated Financial Statements in the 2021 Annual Report, Santander UK plc and certain of its subsidiaries issue securitisations and covered bonds. At 30 June 2022, there were £i24,183m
(2021: £i20,199m) of gross assets in these secured programmes, of which £i751m
(2021: £i767m) related to internally retained issuances that were available for use as collateral for liquidity purposes in the future.
At 30 June 2022, a total of £i1,780m
(2021: £i1,855m) of notes issued under securitisation and covered bond programmes had been retained internally, a proportion of which had been used as collateral via third party bilateral secured funding transactions, which totalled £i500m
at 30 June 2022 (2021: £i500m), or for use as collateral for liquidity purposes in the future.
i
30.
RELATED PARTY DISCLOSURES
The financial position and performance of the Santander UK group were not materially affected in H122 by any related party transactions, or changes to related party transactions, except for the following:
In May 2022, Santander UK plc transferred a portfolio of mortgage assets with a book value of £i624m to Santander Financial Services plc for a cash consideration of £i631m,
including a purchase price premium of£i7m.
/
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i
31.
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 to the Consolidated Financial Statements in the 2021 Annual Report describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.
Disclosures relating to fair value measurement and hierarchy, valuation techniques and the control framework and related aspects pertaining to financial instruments at fair value are included in the 2021 Annual Report. Valuation, sensitivity methodologies and inputs at 30 June 2022 are consistent
with those described in Note 40 to the Consolidated Financial Statements in the 2021 Annual Report. Details regarding fair value measurement under a valuation technique of groups of financial assets and liabilities with offsetting positions in market risks or credit risks, on the basis of net exposure using the exception under IFRS 13, can be found in Note 40(b) to the Consolidated Financial Statements in the 2021 Annual Report.
b) Fair values of financial instruments carried at amortised cost
iThe
following tables analyse the fair value of the financial instruments carried at amortised cost at 30 June 2022 and 31 December 2021. 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. Details of the valuation methodology of the financial assets and financial liabilities carried at amortised cost can be found in Note 40(e) to the Consolidated Financial Statements in the 2021 Annual Report.
30
June 2022
31 December 2021
Fair value
Carrying
Fair value
Carrying
Level 1
Level 2
Level 3
Fair value
value
Level
1
Level 2
Level 3
Fair value
value
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Assets
Loans
and advances to customers
i—
i—
i215,234
i215,234
i217,012
i—
i—
i212,811
i212,811
i210,094
Loans
and advances to banks
i—
i793
i—
i793
i793
i—
i1,169
i—
i1,169
i1,169
Reverse
repurchase agreements - non trading
i—
i8,785
i—
i8,785
i8,793
i—
i12,453
i226
i12,679
i12,683
Other
financial assets at amortised cost
i151
i—
i—
i151
i156
i164
i348
i—
i512
i506
i151
i9,578
i215,234
i224,963
i226,754
i164
i13,970
i213,037
i227,171
i224,452
Liabilities
Deposits
by customers
i—
i210
i189,516
i189,726
i189,729
i—
i48
i192,898
i192,946
i192,926
Deposits
by banks
i—
i35,012
i63
i35,075
i35,182
i—
i33,770
i85
i33,855
i33,855
Repurchase
agreements - non trading
i—
i6,910
i—
i6,910
i6,910
i—
i11,718
i—
i11,718
i11,718
Debt
securities in issue
i2,349
i22,569
i4,622
i29,540
i29,521
i963
i23,926
i1,218
i26,107
i25,520
Subordinated
liabilities
i19
i2,610
i—
i2,629
i2,335
i37
i2,350
i238
i2,625
i2,228
i2,368
i67,311
i194,201
i263,880
i263,677
i1,000
i71,812
i194,439
i267,251
i266,247
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c) Fair values of financial instruments measured at fair value
i
The
following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 30 June 2022 and 31 December 2021, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.
Transfers
between levels of the fair value hierarchy
In H122 there were iiiiiiiino///////significant
(H121: iiiiiiiino///////
significant) transfers of financial instruments between levels of the fair value hierarchy.
d) Valuation techniques
The main valuation techniques employed in internal models to measure the fair value of the financial instruments are disclosed in Note 40(c) to the Consolidated Financial Statements in the 2021 Annual Report. The Santander UK group did not make any material changes to the valuation techniques and internal models it used in H122.
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e) 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.iThe
magnitude and types of fair value adjustment are listed in the following table:
30 June 2022
31 December 2021
£m
£m
Risk-related:
- Bid-offer and trade specific adjustments
(i15)
(i9)
-
Uncertainty
i15
i20
- Credit risk
adjustment
i6
i6
- Funding fair
value adjustment
i4
i3
i10
i20
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. For more details, see ‘Risk-related adjustments’ in Note 40(g) to the Consolidated Financial Statements in the 2021 Annual Report.
f) Internal models based on information other than market data (Level 3)
Valuation techniques
There have been no significant changes to the valuation techniques as set out in Note 40(h) to the Consolidated Financial Statements in the 2021 Annual Report.
Reconciliation
of fair value measurement in Level 3 of the fair value hierarchy
i
The following table sets out the movements in Level 3 financial instruments in H122:
Assets
Liabilities
Derivatives
Other
financial assets at FVTPL
Financial assets at FVOCI
Total
Derivatives
Other financial liabilities at FVTPL
Total
£m
£m
£m
£m
£m
£m
£m
At
1 January 2022
i46
i185
i18
i249
(i32)
(i6)
(i38)
Total
(losses)/gains recognised:
Fair value movements(2)
(i2)
(i18)
i1
(i19)
i—
i5
i5
Transfers
in
i—
i—
i—
i—
(i2)
i—
(i2)
Netting(1)
i—
i—
i—
i—
i—
(i4)
(i4)
Settlements
(i3)
(i12)
i—
(i15)
i18
i2
i20
At
30 June 2022
i41
i155
i19
i215
(i16)
(i3)
(i19)
Gains/(losses)
recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period(2)
(i2)
(i18)
i1
(i19)
i—
i5
i5
(1)This
relates to the effect of netting on the fair value of the credit linked notes due to a legal right of set-off between the principal amounts of the senior notes and the associated cash deposits. For more, see ‘ii) Credit protection entities’ in Note 19 to the Consolidated Financial Statements in the 2021 Annual Report.
/
(2)Fair value movements relating to derivatives and other financial assets at FVTPL are recognised in other operating income in the income statement. Fair value movements relating to financial assets at FVOCI are recognised in the movement in fair value reserve (debt instruments).
Effect
of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3)
There has been no significant change to the unobservable inputs and sensitivities used in Level 3 fair values as set out in Note 40(h) to the Consolidated Financial Statements in the 2021 Annual Report.
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i
32.
INTEREST RATE BENCHMARK REFORM
i
The following tables show the notional amounts of assets, liabilities and off-balance sheet commitments at 30 June 2022 and 31 December 2021 affected by IBOR reform that have yet to transition to an alternative benchmark interest rate as provided internally to key management personnel.
30
June 2022
GBP(2)
LIBOR
USD(2)
LIBOR
Other(2)
Total
£m
£m
£m
£m
Assets
Derivatives(1)
i—
i1,650
i—
i1,650
Financial
assets at amortised cost
i85
i17
i—
i102
i85
i1,667
i—
i1,752
Liabilities
Derivatives(1)
i130
i1,830
i—
i1,960
Other
financial liabilities at fair value through profit and loss
i—
i3
i—
i3
i130
i1,833
i—
i1,963
Off-balance
sheet commitments given
i8
i79
i—
i87
31
December 2021
GBP(2)
LIBOR
USD(2)
LIBOR
Other(2)
Total
£m
£m
£m
£m
Assets
Derivatives(1)
i—
i1,480
i—
i1,480
Other
financial assets at fair value through profit and loss
i8
i—
i—
i8
Financial
assets at amortised cost
i1,373
i81
i1
i1,455
i1,381
i1,561
i1
i2,943
Liabilities
Derivatives(1)
i338
i1,831
i—
i2,169
Other
financial liabilities at fair value through profit and loss
i—
i5
i—
i5
Financial
liabilities at amortised cost
i34
i185
i—
i219
i372
i2,021
i—
i2,393
Off-balance
sheet commitments given
i338
i59
i—
i397
(1) Many
of the Santander UK group's derivatives subject to IBOR reform are standard ISDA contracts and are subject to supplementary ISDA fallback provisions which became effective on 25 January 2021 setting out what floating rates apply on the permanent discontinuation of key IBORs. The Santander UK group adhered to the protocol and implemented the fallback provisions to derivative contracts entered into before 25 January 2021. Where derivative counterparties also adhered to the protocol, fallback provisions were automatically implemented in existing derivative contracts when the supplement became effective. 1-month, 3-month and 6-month GBP & JPY settings for certain legacy contracts
have been extended until at least the end of 2022 but not for cleared derivative contracts.
(2) Settings for GBP, JPY & NOK LIBOR & 1-week and 2-month USD LIBOR ceased on 31 December 2021 and for EONIA on 3 January 2022, however, for certain legacy contracts, 1-month, 3-month and 6-month settings for GBP & JPY LIBOR have been extended until at least 31 December 2022. Remaining USD LIBOR settings (overnight, 1-month, 3-month, 6-month and 12-month) will cease on 30 June 2023.
/
IBOR Reform
i
The
table below shows the notional amount of derivatives in hedging relationships directly affected by uncertainties related to IBOR reform.
30
June 2022
31 December 2021
GBP LIBOR
USD LIBOR
Other
Total
GBP LIBOR
USD LIBOR
Other
Total
£m
£m
£m
£m
£m
£m
£m
£m
Total
notional value of hedging instruments
–Cash flow hedges
i—
i2,881
i—
i2,881
i—
i2,586
i—
i2,586
–Fair
value hedges
i—
i176
i—
i176
i—
i160
i—
i160
i—
i3,057
i—
i3,057
i—
i2,746
i—
i2,746
Maturing
after cessation date(1)
–Cash flow hedges
i—
i2,881
i—
i2,881
i—
i2,586
i—
i2,586
–Fair
value hedges
i—
i176
i—
i176
i—
i160
i—
i160
i—
i3,057
i—
i3,057
i—
i2,746
i—
i2,746
(1) Settings
for GBP, JPY & NOK LIBOR & 1-week and 2-month USD LIBOR ceased on 31 December 2021 and for EONIA on 3 January 2022, however, for certain legacy contracts, 1-month, 3-month and 6-month
settings for GBP & JPY LIBOR have been extended until at least 31 December 2022. Remaining USD LIBOR settings (overnight, 1-month, 3-month, 6-month and 12-month) will cease on 30 June 2023.
/
For more details on interest rate benchmark reform and the Santander UK group’s transition from IBORs to alternative benchmark
rates, see Note 42 to the Consolidated Financial Statements in the 2021 Annual Report.
/
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i
33.
DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued operations
Transfer of the CIB Business
Santander UK plc transferred a significant part of its Corporate & Investment Banking business to the London branch of Banco Santander SA under a Part VII banking business transfer scheme, which completed on 11 October 2021. The residual parts of the Corporate & Investment Banking business have been wound down or transferred to other segments.
i
For
the periods prior to its sale, the Corporate & Investment Banking business met the requirements for presentation as discontinued operations.
The financial performance and cash flow information relating to the discontinued operations were as follows:
For the Half Year to
30 June 2022
30 June 2021
£m
£m
Net
interest income
i—
i24
Net
fee and commission income
i—
i27
Total
operating income
i—
i51
Operating
expenses before credit impairment losses, provisions and charges
i—
(i22)
Credit
impairment losses
i—
i7
Provisions
for other liabilities and charges
i—
(i3)
Total
operating credit impairment losses, provisions and charges
i—
i4
Profit
from discontinued operations before tax
i—
i33
Tax
on profit from discontinued operations
i—
(i9)
Profit
from discontinued operations after tax
i—
i24
/
There
were iino/
gains or losses recognised on the measurement to fair value less costs to sell or on the disposal of the asset groups constituting the discontinued operations.
In H122, the net cash flows attributable to the operating activities, investing activities and financing activities in respect of discontinued operations were £inil outflow (H121: £i1,754m
outflow), £inil (H121: £inil)
and £inil ( H121: £inil)
respectively.
/
Assets held for sale
Sale of property
Management considered the sale of Santander House and Shenley Wood freehold land and buildings to be highly probable at the balance sheet date. As such, the Santander UK group reclassified these properties as held for sale.
The sale is expected to complete in H2 2023 with no gain or loss.
i
At
30 June 2022, assets held for sale comprised:
£m
Assets
Property,
plant and equipment
i49
Total
assets held for sale
i49
/
i
34.
EVENTS AFTER THE BALANCE SHEET DATE
iThere have been no significant events between 30 June 2022 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements.
Our glossary of industry and other main terms is available
in our 2021 Annual Report.
Forward-looking statements
The Company and its subsidiaries (together Santander UK) may from time to time make written or oral forward-looking statements. The Company makes written forward-looking statements in this Half Yearly Financial Report and may also make forward-looking statements in its periodic reports to the SEC on Forms 20-F and 6-K, in its offering circulars and prospectuses, in press releases and other written materials and in oral statements made by its officers,
directors or employees to third parties.
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, such as the Covid-19 pandemic and ongoing challenges and uncertainties posed by the Covid-19 pandemic for businesses and governments around the world, 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. For more, see ‘Forward-looking statements’ in the Shareholder information section of the 2021 Annual Report.
Please
also refer to our latest filings with the SEC (including, without limitation, our Annual Report on Form 20-F for the year ended 31 December 2021) 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 non-exhaustive list of important factors in the 2021 Annual Report, as well as the war in Ukraine and how it could affect our operations and financial position. 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.
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Risk factors
An investment in Santander UK plc (the
Company) and its subsidiaries (us, we or Santander UK) involves a number of risks. A summary of the material risks is set out in the ‘Shareholder information’ section of the 2021 Annual Report on Form 20-F. The principal risks described in these risk factors remain unchanged, except for the following risk factor which has been added:
The war in Ukraine could materially affect our operations and financial position.
On 24 February 2022, Russia launched a large-scale military action against Ukraine. The Russian military action has caused an ongoing humanitarian crisis in Europe. It has also significantly impacted global commodity and financial markets, leading to supply chain disruptions and increases in the prices of energy, oil, gas and raw materials.
This has led to heightened inflation, which has created further challenges for monetary authorities and our customers.
We do not have a presence in Russia and Ukraine and we have negligible direct exposure to Russian and Ukrainian markets and assets. However, the effect of Russia’s military action against Ukraine on global commodity and financial markets and general macroeconomic conditions remains uncertain, and there is a risk that the economic effects of Russia's military action against Ukraine could precipitate a recession in parts of the global economy, which would adversely affect our businesses, results of operations and financial position.
Price pressures on the energy, oil and gas sectors resulting from the Russian military action against Ukraine underline the need to accelerate the decarbonisation transition and present opportunities to finance new energy solutions that can
improve energy security in the medium to long term. However, historic reliance on stable and cheap energy has meant that price pressures on the energy, oil and gas sectors resulting from the Russian military action against Ukraine and the resulting increases in energy prices pose risks to economic growth and debt sustainability, contributing to the challenges our customers are facing in terms of cost of living.
The continuation or escalation of the conflict between Russia and Ukraine, including the extension of the conflict to other countries in the region, could lead to further increases in energy prices (particularly gas prices, if supplies to Europe remain interrupted) and heightened inflationary pressures. This could lead to further increases in interest rates, impact financial market stability in the Eurozone and worsen the current cost of living crisis our customers are facing. Such developments would negatively affect
the payment capacity of some of our customers, whose likely need for increased support will place additional pressures on the staff in our financial support and call centres.
In response to the Russian military action against Ukraine, the United States, the European Union, the United Kingdom and other jurisdictions have imposed, and may further impose, financial and economic sanctions and export controls against Russia, Belarus and the so-called Luhansk People’s Republic. Russia has implemented certain countermeasures in response. The scale of sanctions is unprecedented, complex and rapidly evolving, posing continuously increasing operational and compliance risks to Santander UK. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, have resulted in an increasingly fragmented macroeconomic, trade and regulatory
environment. Currently, we do not have any loans, credits or contingencies affected by the recent sanctions imposed on Russia. However, we cannot predict whether any of the countries in which we operate will enact additional economic sanctions or trade restrictions in response to the Russian military action against Ukraine or the impact such additional sanctions or restrictions may have on us which may include increased costs and regulatory burdens associated with the compliance of the evolving and complex sanctions landscape. The heightened regulatory, political and media focus on our response to this crisis may also increase our exposure to conduct and reputational risks.
Furthermore, the disruption and volatility in the global financial markets caused by the Russian invasion and the potential of further tightening of financial market conditions due to the conflict could have a material adverse effect on Santander UK’s ability
to access funding, capital and liquidity on financial terms acceptable to it and result in an increase in Santander UK’s cost of funding due to widening of credit spreads. This could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, the risk of cyberattacks on companies and institutions could also increase as a result of Russia’s military action against Ukraine and in response to the consequent sanctions imposed by the United States, the European Union, the United Kingdom and other jurisdictions. Such attacks could adversely affect our ability to maintain or enhance our cyber security and data protection measures. While we also continue to see increasing ransomware attacks across sectors driven by supply chain tool compromises, and expect this trend to continue, we have not experienced any notable information or cyber security incidents in H122. We are actively monitoring
this situation.
Santander UK plc 73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
