UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM20-F
(Mark One)
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedDecember 31, 20182019
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report to
Commission file number001-37595
Santander UK Group Holdings plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
2 Triton Square, Regent’s Place, London NW1 3AN, England
(Address of principal executive offices)
Julian Curtis
2 Triton Square, Regent’s Place, London NW1 3AN, England
Tel: +44 (0) 20 7756 4272
E-mail: julian.curtis@santander.co.uk
(Name, Telephone,E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| 2.875% Notes due 2020 | SAN/20 | New York Stock Exchange | ||
| 3.125% Notes due 2021 | SAN/21 | New York Stock Exchange | ||
| 2.875% Notes due 2021 | SAN/21A | New York Stock Exchange | ||
| 3.571% Notes due 2023 | SAN/23 | New York Stock Exchange | ||
| 3.373% Fixed Rate/Floating Rate Notes due 2024 | SAN/24A | New York Stock Exchange | ||
| 4.796% Fixed Rate/Floating Rate Notes due 2024 | SAN/24B | New York Stock Exchange | ||
| 3.823% Fixed Rate/Floating Rate Notes due 2028 | SAN/28 | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary shares of nominal value of £1 each | 7,060,000,000 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes☒ No☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes☐ No☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer☐ Accelerated filer☐ Non-accelerated filer☒ Emerging growth company☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP☐ International Financial Reporting Standards as issued by the International Accounting Standards Board☒ Other☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17☐ Item 18☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in RuleRule 12b-2 of the Exchange Act).
Yes☐ No☒
Annual Report 2018 | Strategic Report
About this report The Strategic Report outlines the key elements of the Annual Report and provides context for the related financial statements. The report highlights key financial andnon-financial metrics which help to explain the business’s performance over the past year. It also highlights the external environmental factors affecting the business along with Santander UK’s position in the UK banking market. At all times we try to treat our stakeholders fairly and meet our environmental responsibilities. Sustainability and our strategic direction are inseparable, and we continue to embed sustainability across our business. We have included information to demonstrate this within our Strategic Report and further information is also available in our ESG Supplement. By order of the Board. Shriti Vadera Chair 2 March 2020 | ||
| Important information for readers | ||
None of the websites referred to in this Annual Report on Form20-F for the year ended 31 December 2019 (the Form20-F) including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form20-F. Santander UK Group Holdings plc (the Company) and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of Banco Santander (comprising Banco Santander SA and its subsidiaries). Santander UK plc and Santander Financial Services plc are regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Certain other companies within the Santander UK group are regulated by the FCA and the PRA. This Annual Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See Forward-looking statements on page 243. The Company is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy, albeit the principal business activities of the Santander UK group are carried on by Santander UK plc and its subsidiaries (the Santander UK plc group). The Board and Committees of the two companies run substantially simultaneously to ensure efficiency and effectiveness, whilst ensuring the independence and autonomy of Santander UK plc, our ring-fenced bank, are appropriately protected. The Company’s Corporate Governance and Risk Frameworks have been adopted by its subsidiaries to ensure consistency of application. Prior to November 2018, the Corporate Governance and Risk Frameworks were applied from the level of Santander UK plc across the Santander UK plc group and adopted by the Company. As a result, the review of the business and principal risks and uncertainties facing the Company, and the description of the Company’s Corporate Governance, including the activities of the Board and risk management arrangements, are integrated with those of Santander UK plc and are reported in this document as operating within the Company for all periods presented. | ||
Annual Report 2018 | Strategic Report
Santander UK’s business performance in
2018 reflects our prudent approach with
a strategy of selective growth given the
uncertain macroeconomic and political
environment.
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Annual Report 2019| Strategic Report
2019 marked the first year of delivery of a
multi-year transformation to make us simpler,
more agile and better able to continually
improve our customer service.
Refined strategy
In 2019, we began to implement a refined strategy that focuses on core business and customer experience in mortgage provision, trade and SME banking, supported by investment in our technology platform.
We have accelerated the pace at which we are embedding social, ethical and environmental impacts in all aspects of our decision-making, risk analysis and financial transactions, the results of which have included increasing our support for renewable energy. We know that loyalty and trust is increasingly won by companies which make sustainable investments in customers’ own financial resilience, and the environmental and economic resilience of wider society. The focus of our communities programme remains supporting financial inclusion, literacy and education. For example, the Santander Universities programme is the largest private sector contributor to UK universities, donating £88m over the past 12 years. We have a team of Relationship Managers across our 85 university partners to support students and the university community.
A low risk strategy is integral to our business and we have maintained prudent risk management, high credit quality and balance sheet resilience throughout the year. This was reflected in the Bank of England 2019 stress test results, where the impact on Santander UK’s CET1 capital
ratio(1) was the lowest of all participating banks.
2019, however, saw a 37% decline in profit before tax as a result of the adverse impact of a combination of factors. These include margin pressures within the mortgage market, the costs of addressing PPI claims and our upfront investment in transformation. In addition, the operational costs of continuing regulatory changes disproportionately affect scale challengers such as Santander UK.
Transformation programme
The year saw our CEO, Nathan Bostock, and his leadership team deliver significant progress in this transformation as we reshape the bank to support our customers better. Technology is
| (1) | CET1 ratio drawdown is defined as CET1 ratio at 31 Dec 18 less minimum stressed CET1 ratio (before strategic management actions or AT1 conversions) |
changing the way our customers want to engage with us. The volume of transactions carried out through Santander UK branches has fallen by 41% over the past three years, while transactions through digital channels have grown by 93% over the same period. We now have 5.8 million digital customers(2) and 62% of 2019(3)account openings were digital.
In adapting to how our customers are choosing to engage with us, we have restructured and reduced our branch network by 140 to 616 branches as part of our multi-year programme to simplify and digitise the business. We are focused on investing to improve our systems, processes and infrastructure through innovation to increase efficiency and deepen engagement with our customers, while continuing to allow them to choose how they transact with us. We are also leveraging new technology developed within Banco Santander, our shareholder, to increase our ability to deliver exceptional outcomes for our customers.
| (2) | We define a ‘digital customer’ as someone who has logged on to digital banking (either via the mobile app or online bank) in the |
| (3) | Refers to all new Retail & SME1 products opened |
| 2 | Santander UK Group Holdings plc |
The commitment of our people is helping to transform the business and make us better able to serve our customers going forward. Continuing to create the right culture Having the right culture is essential to our success in transforming the bank, and we have made steady progress so far. However, we need to remain relentless in our commitment to embedding the right values and behaviours across all aspects of our business. Our employee engagement surveys provide the Board with an understanding of the progress we are making in building a diverse and inclusive bank and helps to inform our priorities. Our Board Responsible Banking Committee continues to develop metrics that enable it to monitor cultural change and help ensure that we remain on track. As we enter a period of significant change, we remain committed to ensuring the well-being of our people through fostering a culture of speaking up and supporting initiatives such as the promotion of mental health. The flow and volume of regulatory change The flow and volume of regulatory change continues to pose significant challenges and operational risks to the sector, not least for scale challengers like Santander UK. We have continued to manage a large volume of over one hundred different regulatory initiatives that are driven by a number of separate regulatory bodies. Theco-ordination of this activity remains a concern for the sector given the need to respond to increasing threats of economic and cyber-crime. I am pleased that HM Treasury is undertaking a review of the regulatory framework, as announced last summer. The right recommendations from the review have the potential to strengthen the resilience and competitiveness of the sector and I look forward to its conclusions. Ring-fencing During the year we developed a revised strategy for Santander Financial Services plc (SFS), formerly Abbey National Treasury Services plc (ANTS), in effect ournon-ring-fenced bank, which will be completed in 2020. As a result, in order to comply with regulatory requirements, we are required to make certain changes to our governance arrangements, | including the composition of our holding company and ring-fenced bank Boards. In December 2019, Susan Allen, Gerry Byrne, Garrett Curran, Annemarie Durbin, Dirk Marzluf and Genevieve Shore stepped down from the Board of Santander UK Group Holdings plc, but remain Directors of the ring-fenced bank, Santander UK plc. In order to ensure efficiency and effectiveness, the Santander UK Group Holdings plc and Santander UK plc Board meetings are run largely simultaneously. Changes to governance and ring-fencing arrangements are described further in my report on corporate governance on page 36. Board changes in 2019 We appointed Susan Allen as Executive Director and Head of Retail and Business Banking with effect from 1 January 2019, replacing Javier San Felix who returned to a Group role at Banco Santander at the end of 2018, as reported last year. On 7 May 2019, we appointed Garrett Curran as an INED replacing Julie Chakraverty and Dirk Marzluf (Banco Santander Group Head of Technology and Operations) as Group nominated Non-Executive Director (GNED) who took the place of Lindsey Argalas. Duke Dayal (Chief Financial Officer) was appointed to the Board on 16 September 2019 as Executive Director, replacing Antonio Roman who moved to a role at Banco Santander. Bruce Carnegie-Brown also re-joined the Board on that date as a GNED replacing Juan Inciarte who had stepped down at the end of 2018. These appointments maintain the Board’s skills and experience in financial services, digital and innovation, strategy and transformation and our connectivity with our shareholder. On behalf of the Board, I would like to thank Lindsey Argalas, Julie Chakraverty and Antonio Roman who stood down in 2019 for their invaluable service to the Board and the Company. As I will be stepping down as Chair before the end of 2020, I would like to take this opportunity to extend my gratitude to the Board, Nathan Bostock, his leadership team, and all our people for their continued commitment to serving our customers and communities. It has been an enormous privilege to work with all my colleagues and serve the Company. I have every confidence that the dedication of our teams will ensure its future success.
Shriti Vadera Chair 2 March 2020 | |||||
Simple | Personal | Fair Our culture is built on doing things The Santander Way | Simple We offer our customers products that are easy to understand and a service which is convenient, no matter when or how they want to engage with us. We make our processes better so they are easy and clear for our customers and our people. | Personal We treat our customers as valued individuals, providing a professional service they can trust. We support our colleagues to develop their skills and achieve their ambitions. | Fair We are open, honest and treat others as we would like to be treated. We earn our investors a sustainable return and do our part to support our communities. | |||
The Board Responsible Banking Committee, which we set up in 2017, has continued to work on the perennial challenge of measuring and monitoring cultural change.
In 2018, we have focused on increasing the internal resonance of our values and awareness of our expectations of behaviours throughout the organisation. We have also continued to make excellent progress in helping to build a diverse and inclusive culture across the bank, with our sixemployee-led diversity and support networks growing further.
Ring-fencing implementation
The business achievements of the last year have been delivered in the context of significant organisational change as we prepared for the start of ring-fencing in January 2019. The transition to ring-fencing is a result of four years of intensive effort and commitment from management and our people, and has been the largest single change programme delivered by Santander UK in recent years. There is more information on the governance changes we have implemented under ring-fencing in my Corporate Governance Report on page 33.
Market competitiveness
The last year has seen competitive pressures in the market increase as the Big Four banks have refocused on the domestic market and used their dominant scale and lower cost of funds, to absorb sector-wide change and regulatory costs and attempt to increase market share.
The flow and volume of regulatory change
Competitive pressure from the incumbents has been compounded by the flow and volume of regulatory projects which impact the whole sector but which proportionally have a greater impact on challenger banks, even those of our scale.
In 2018, banks have had to implement ring-fencing, MiFID II, PSD2, Open Banking, GDPR, IFRS 9 and various initiatives on Anti-Money Laundering and fraud protection and prevention. We are currently implementing c90 separate regulatory, risk and control projects, 19 of which are in the areas of payments alone and are being driven by six separate authorities. We remain strongly supportive of the role of regulation and regulators in driving the change essential for the sector’s prudential stability and conduct standards. However, improving customer services, competition and ensuring operational resilience needs greater coordination between various regulators and policymakers.
This is especially so given that the volume of regulatory initiatives takes up systems capability that would otherwise be deployed for improvements to processes and infrastructure and provide a more innovative, digital experience that a majority of our customers expect.
Board changes
During the year, we appointed Susan Allen as an Executive Director and Head of Retail and Business Banking with effect from 1 January 2019, to replace Javier San Felix who returned to a role at Banco Santander SA. We also appointed Julie Chakraverty as an IndependentNon-Executive Director (INED) on 11 June 2018. The appointments add to the Board’s skills and experience in financial services, digital and innovation and risk management.
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During the year, two of ourNon-Executive Directors stepped down from the Board. Alain Dromer, an INED, resigned with effect from 31 August 2018 after 5 years. Juan Inciarte, one of our Banco Santander nominatedNon-Executive Directors, retired on 31 December 2018 having been a Director of the bank since Banco Santander’s acquisition of Abbey National plc in 2004.
On behalf of the Board, I would like to thank Juan Inciarte, Javier San Felix and Alain Dromer for their invaluable service to the Board and the Company.
Finally, I would like to thank all our people across the country for their contribution in what has been a challenging and uncertain external environment. The dedication and commitment of our people has been the driving force of our success in 2018 and will continue to be the source of our strength in the years ahead.
Shriti Vadera
Chair
26 February 2019
Annual Report 2018 | Strategic Report
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Annual Report 2019| Strategic Report
at a glance | We are uniquely placed as a leading scale challenger bank
Our business model focuses on customer loyalty and our core business franchise |
We provide high quality, seamless service across our branch network, digital
and telephony channels
 | 14.4 million |  | £205.3bn |  | 616 | |||||
| active UK customers | customer loans | branches | ||||||||
 | 5.8 million |  | £177.8bn |  | 4.8/5 | |||||
| digital customers | customer deposits | App rating(1) | ||||||||
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| largest mortgage provider | largest current account provider | largest commercial lender(2) | ||||||||
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We offer innovative products and services to help people and businesses prosper
We are a large customer-focused bank and possess the scale and breadth of proposition to challenge the big four UK banks. We serve our customers through digital channels, alongside a network of branches and Corporate Business Centres.
We play an important role in the UK economy and in the communities in which we operate. We help people purchase their home, save for the future and support business growth. We employ 23,500 people and we paid £309m of corporation tax and £90m through the UK Bank Levy in 2019.
Our innovative international proposition facilitates access to a range of markets and offers invaluable expertise and insight.
First time buyer events
As part of our work to champion first-time buyers, we launched regularin-branch events to help people access information about the home-buying process. Held in branches across the UK, the events are free of charge.
Read more on page 27.
1I2I3 Business Current Account
Our SME offering continues to go from strength to strength. Aside from winning best Business Bank of the Year for the fifth consecutive year at the Business Moneyfacts Awards, we picked up an award for best innovation in the SME Finance Sector for our 1I2I3 Business Current Account.
Santander university support
This year we announced funding to help establish MK:U, the UK’s first university focused on digital skills, further strengthening Milton Keynes’ position as Europe’s leading Smart City. MK:U is expected to serve at least 5,000 students and be open by 2023.
Cyber security and fraud awareness
We are working to help educate our customers about how to avoid becoming victims of scams. In 2019 we launched ‘For Your Eyes Alone’, a campaign designed to reach the under 25 audience to help them to understand the importance of keeping personal data ‘for your eyes alone’.
Our refined strategy
 | Customers Grow customer loyalty by providing an outstanding customer experience |
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Our Santander Behaviours outline how we bring to life The Santander Way: Simple, Personal and Fair
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|  | Speak Up and challenge where necessary | |||
 | Embrace Change and look for better ways to do things |  | Show Respect including through the little things | |||
 | Actively Collaborate with others to get the best outcome for the customer |  | Truly Listen for different and new opinions and be open to challenge | |||
 | Give Support to colleagues by taking a in them and their contribution |  | Talk Straight and think about the | |||
 | Keep Promises and make decisions | |||||
Our structure – we manage our bank through three customer business segments supported by the Corporate Centre
 | Communities Further embed sustainability across our | Read more in our Sustainability review on pages26-31 |
and more
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banking facilities alongside free
entrepreneurs. Both Santander and
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| Santander UK Group Holdings plc | 5 |
Annual Report 2018 2019| Strategic Report
We have achieved much
Our 2019 results were impacted by the ongoing
income pressure on mortgages and legacy PPI charges,
but they also include the investment we are making
as a businesspart of our plan to transform the bank for the
in 2018future, driven by our focus on delivering great
products and continueservice to help our
customers at the moments that matter
most to them. customers.
Q. 2018 marksToday, consumers face greater choice of banking provider than ever before, yet relative uniformity in products and services. This competitive challenge for the endbanking sector has been compounded by a lack of your three-year targets. What progresseconomic confidence and slower rate of growth; inevitably impacting performance. Our 2019 results, with 37% reduction in profit before tax, further reflect the ongoing income pressure on mortgages and PPI charges, alongside the important investment we are making in transforming our bank for the future. In recent years, we have you made towards meeting them, and how does this deliver against your overall purpose?
A.We have made significant progresspurposefully operated a low risk strategy; making prudent investments in our ambition to become the best retailcore competencies, and commercial bank in the UK. I am proud of what we have achieved across all areas of the business, including meeting the majority of our targets set in 2015, despite the uncertain and competitive operating environment.
I am also pleased with the overall progress of our digital transformation, with 41% growth in digital customers. Although this did not reach our ambitious 2018 digital customer target, we benefitted from having a bold goal to work towards. For example, following the roll out of NeoCRM in 2017, we are facilitating greater digital adoption through a seamless,joined-up serviceembedding sustainable, long-term value across all our channels.
We wantbusiness activities. In doing this, we will enhance our standing as a responsible and resilient choice for our retail customers, and also position ourselves well to help peoplesupport the growth and businesses prosper, throughtrading strategies of our ongoing commitment to deliver customer-centric products and services, and bringing competition to the market. Recent launches of innovative digital products and services have improved our customer experience, as demonstrated by our strong customer satisfaction scores. Our loyal SMEbusiness customers.
and corporate customers increased 5%Our cautious approach to 320,000; achievingrisk has been affirmed by the Bank of England’s stress tests, which illustrate our 2018 target early in the year and ahead of time. This clearly demonstrates the value ofbank’s resilience to a significant economic downturn. We remain focused on restoring our targeted digital investments, which are an overriding priority for our business.
We have also delivered for our shareholders with a return on tangible equity(1) within to our target range over the medium-term, and aI’m pleased that our CET1 capital ratio in excess of 13%.has increased to 14.3% through capital accretion and strong capital discipline. This has been done without compromising dividend payments or our credit quality, while delivering our strategy of selective growth.
Q. GivenIn the uncertain UKcurrent environment, how are you building resiliencetaking the time to leverage effectively our competitive points of difference has never been more important in earning and retaining customer loyalty. This is at the heart of our bank’s strategic priorities; providing a comprehensive retail offering, as well as growth-focused support for the bank and its customers?
A. This has been a particularly challenging period for the banking industry and many of the business and personalcorporate customers, we support. while developing products which make banking simpler, fairer, and far more personalised than ever before.
We are building on our depth of expertise in key market segments such as residential mortgage and SME banking in order to ensure innovation is truly customer-centric, better integrated across our own and related industries, and supported with first class customer service.
We have not been immune from these issues, as shown by a 14% reductionparticular focus on helping people across the country achieve their homeownership dream and, in profits for 2018, but there has been encouraging results2019, supported over 37,000 first time buyers; up 47% in our targeted growth areas.
Net mortgage lending in 2018 was £3.3bn, our strongest in more than three years. We also achieved solidincreased simplicity and ease of online mortgage services, with 60% of customers choosing to retain their mortgage online; up from 41% in 2016. This has all helped reinforce our position as the third largest mortgage lender; achieving £7.4bn net mortgage growth in lending2019, which is our strongest for a decade. Meanwhile, customer deposits have increased by £5.7bn; our highest growth in three years, thanks to trading businesses and continue to support export
ambitions of UK SMEs. Meanwhile, we have managed down our exposure to Commercial Real Estate by focusing on risk-weighted returns.
For our retail customers, we recently launched our Digital Investment Adviser – transforming investment choices for those who would not normally invest their money via an online platform. I’m extremely proud of this innovative, customer-centric product, which offers something truly different to the rest of the market.
Our ring-fencing structure is now in place with all required transfers from Santander UK to the Banco Santander group completed, which alongside a risk management initiative, resulted in a £2.7bn reduction in customer loans.
13.2%
CET1 capital ratio
(1)Non-IFRS measure, see page 236.successful ISA
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We are confident in our ability
to succeed by providing our
customers with an experience
that is second to none,
through a relentless focus
on improving our efficiency
and competitiveness.
campaign, 1I2I3 Business Current Account inflows and strong performance in our corporate business.
Fundamentally, the products and services which provide financial security and prosperity to retail and business customers, also generate greater resilience and sustainable growth for our bank. All high-performing business activity stems from sustainable goals and, as a responsible business, we know the paramount importance of allocating capital and financing the transition towards a low carbon and more inclusive economy. In recent times, extreme weather events and other consequences of the climate crisis have reinforced a business-critical need to protect our communities and environment. The PRA, FCA and Task Force on Climate-related Financial Disclosures have rightly called for far greater effort and, in advance of the UN Climate Change Conference in the UK this year, we are committed to the UK’s ongoing climate goals, as well as Banco Santander’s target to raise and facilitate€120bn in green finance by 2025.
In 2019, our Corporate and Investment Banking (CIB) and Corporate and Commercial Banking (CCB) units originated business for renewable energy transactions in excess of £1bn; ranking as the third highest financial lender in Europe for the renewables market(1). Along with Banco Santander, we were also ranked the number one financial adviser in Europe for wind, solar and biofuel projects(1).
We want to represent the sustainable choice for all customers and colleagues, from macro-financial activity, to the way we run our own business. For example, we are pleased to source 100% of our electricity from green supplies, such as biomass, wind and water. In 2019, we reduced electricity use by 6.6% and aim to do the same again this year, as well as maintaining our green energy certification for using solely renewable electricity.
As you would expect, our sustainability strategy underpins the analysis and evolution of our core business propositions, through a £400m, multi-year transformation programme. To date, we have invested £155m on restructuring the branch network, reshaping our corporate business, and simplifying, digitising and automating the bank. This has already realised over £80m in savings through increased efficiency and, as programme momentum continues to build, we expect efficiency improvements to offset inflationary and other cost pressures.
We know that being fit for the immediate and long-term future means making strides in our sector’s use of new technologies to augment the customer experience in their channel of choice, in order to bring genuine, inclusive benefit to all, and as a driver for efficiency. 2019 saw a strong increase in our ability to fulfil customers’ changing expectations, with a 21% increase in total digital interactions. This encompasses a 5%year-on-year increase in online mortgage
| (1) | Inframation league tables 2019, combining both Banco Santander and Santander UK. |
Four years ago, we launched the Santander behaviours to create an environment where our Simple, Personal, Fair values can flourish and be sustained. The culture that they have achieved has never been so relevant today with the opportunities and challenges we face, our behaviours continue to underpin everything we do.
Each day when I talk to our colleagues, I hear and see inspiring stories of As we transform the organisation, it is more important than ever that we hold firm to the principles that make Santander a great place to work. While transformation brings opportunities, the journey of change is rarely easy. Our set of behaviours are intricately embedded in our approach to both building a bank and workforce of the future. A bank of the future that is driven by outcomes, breaking down silos and delivering an agile working environment. A workforce of the future that has determination, collaboration and resilience that can sustain the pace of change with a relentless focus on our customers. I want Santander to be a company of choice for people, attracting and retaining key talent and skills, who share our values and passion for helping people and businesses prosper. This is crucial for our future success and the culture we have is key in achieving this. We will continue to embrace our behaviours through transformation and in our everyday interactions in order to maintain and build upon the culture that we have at Santander, one that I am very proud of. We have made fantastic progress in embedding the right culture within the organisation, and through our Board Responsible Banking Committee we continue to monitor this cultural change to help ensure that we remain on track. |
| Santander UK Group Holdings plc | 7 |
Annual Report 2019| Strategic Report
CEO reviewcontinued
retention, and 8%year-on-year increase in retail current account openings. Our pioneering use of financial technology will support this upward trajectory, including the launch of ‘Mortgage Engine’ in November 2019: a platform we built and financed which, for the first time, enables intermediaries to source simultaneous decisions in principle from multiple lenders. The pilot phase currently connects 22% of the market, and we have ambitious targets for 2020.
Through innovative, intuitive digital products and services such as these, together with targeted support and campaigns, we want to continue improving our customer experience. In 2019, our Net Promoter Score (NPS) places us in the top four for Retail customer satisfaction(1), and I am delighted that our NPS ranks us first for Business and Corporate customer satisfaction(2). This reflects the invaluable contribution of programmes
such as ‘Breakthrough’, which provides advice, workshops and growth opportunities to thousands ofstart-ups and small businesses. Breakthrough’s beneficiaries include those supported in collaboration with the British Library Business and Intellectual Property Centre, with whom we have signed a new three year partnership. We are also helping to meet the ambitions of UK Government’s Investing in Women Code with a new ‘Women in Business’ mentoring programme, supporting female founders and company leaders across the UK.
In recent years, many UK small andmedium-sized enterprises have been buffeted by sterling volatility and weakness, whilst a prolonged lack of clarity has made it difficult to make long-term investment and planning decisions. Our international proposition is therefore an important investment in businesses with high-growth
| (1) | The Financial Research Survey (FRS) prepared by the independent market research agency, IPSOS MORI. |
| (2) | Measured by the MarketVue Business Banking from Savanta. |
potential which are helping to expand the UK economy, namely trade and export led SMEs. Through our exceptional depth and breadth of market knowledge and connectivity, we aim to get businesses operations-ready within six months of introduction to a new market. We provide a pioneering suite of support for trailblazing businesses through regular trade missions,SME-targeted research in our biannual Trade Barometer, and facilitation of seamless financial and related services through Banco Santander andin-market partners.
In addition, in October 2019, we launched the Trade Club Alliance of fourteen global banks across 60 countries; cooperating via a digital platform to fulfil or signpost the facilitation of trade. Of course, the strength of our international proposition in the UK is reinforced by the global strength of Banco Santander, whose resource and reach benefit our customers. For example, its recent investment in UK FinTech and global transaction banking platform, ‘Ebury’, in order to further simplify the process for all businesses aspiring to enter or expand their operations in global markets.
With rapid industry evolution due to new regulation, technology, innovation and competition, there are a host of new ways to manage everyday banking, but also new areas of vulnerability for the customer. That is why we are rethinking our digital, physical and community infrastructure, and refining our customer offer with bold solutions. This includes making tough decisions, such as closing 140 branches, in order to reinvest in the branch offerings of the future. For example, our first ‘Work Café’ which launched in Leeds in July 2019 and hosted over 30,000 people last year for a combination of branch, business creation and networking services.
We are also tailoring our provision of customer education and support through events such as First Time Buyer Classes and Scam Avoidance Schools. As those aged18-24 are particularly susceptible to online fraud and scams, we launched a ground-breaking social media campaign for this audience in July 2019. In partnership with characters from the BBC’s ‘Kurupt FM’, well-known by our target audience, we reached millions of young people with educational films focused on personal financial and data security. This followed
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The current operating environment remains uncertain,
on from our 2018 campaign for the over 60s, which requires extensive planningfocused on helping older people who are vulnerable to build resilience withinfalling victim to fraudsters and scammers. Meanwhile, in partnership with Age UK and the business. There is noAlzheimer’s Society, we developed a module to help older customers feel more obvious example of this than our preparations for Brexit.confident with digital banking. We are planning for all potential outcomes, including ano-deal Brexit, so that we can give our customersaim to become the UK’s best service possible. Butdigitally dementia-friendly bank; supported by dementia ambassadors in every branch region and contact centre.
Going forward, we are inequipping our people with the necessary knowledge and skills to deploy digital capabilities effectively; ensuring artificial intelligence and machine-learning are carefully managed to increase efficiencies, improve quality and reduce risks. To this end, we recently signed a strong position, as demonstrated inpartnership with the latest PRA stress test, which confirmed our readiness to deal with any sudden changes torenowned digital skills platform ‘Pluralsight’, and are hosting a large and growing number of digital apprenticeships. We also launched the UK economy.
Q. What have been the key areas of challenge and opportunity for Santander UK over the past year?
A. Given the current environment, we have worked particularly closely with our SME customers,new ‘MIO’ internal training tool in order to alleviate uncertaintyprovide ongoing learning which is tailored to colleagues’ individual skills needs. Our eight employee networks, with around 40% of all colleagues in membership, are also invaluable forums for support and to identify opportunities for growthdevelopment. Each is focused on a particular aspect of diversity and trade. Theinclusion, and sponsored by one of my executive team. This is an important investment in all our people, which is supporting talent across business environment and customer behaviourdisciplines.
Meanwhile, Santander Universities UK is continuing to changemake an invaluable investment in responsethe next generation of talent. In addition to rapid technological developments.the thousands of student entrepreneurs andME-internships supported across the UK,
we launched in July 2019 the first STEMships programme to support more female engineering students to enter directly related careers, including the data science required urgently in financial services. I feel strongly that this kind of investment in higher, applied and technical education is business-critical, and we must work more closely with colleges and universities to support development of the skills we need. That is why we are pioneering a new model for partnership between business and academia through our multi-million pound investment in MK:U, the first UK University for digital skills.
As a scale challenger, we want to inject true market competition in fostering a healthy banking culture, supporting small businesses to create jobs, helping more people to access finance easily and safely, and investing in the low carbon economy. This means significant introspection and willingness to do things differently, and it also undertakingmeans taking a significant transformationstand on matters of the greatest importance for our sector and the people we serve. We are pleased, for example, that our call for greater regulatory coordination has been heard by Government, and we are continuing to meetspearhead new industry solutions in partnership with peers and regulators.
With this in mind, I would like to take this opportunity to thank our aimoutgoing CFO, Antonio Roman, for his invaluable leadership throughout the ring-fencing process and other structural changes. He returns to Spain as Head of becomingRetail and Commercial Banking for Santander Spain, and I am glad to welcome Duke Dayal, formerly CFO of Santander Holdings USA and President and CEO for Santander Bank NA, as his replacement.
As the UK’s best open financial services platform.
We needregulatory, technological and wider geopolitical world evolves at pace, we have an important role to become leanerplay in empowering and more agile, focusing onsafeguarding our customers, colleagues and wider stakeholders. I believe that shrewd investments in our core business areas and becoming a simpler, more automated and digital business. This means providing more personalisation, 24/7 availability and immediate delivery of products and services. We plan to utilise digital and automated solutions to maximise our efficiency, optimise systems and processes, delivering operational excellence.
We have launched comprehensive programmes across the bank to transform our cost base and intend to increase our usage of cloud-based solutions to reduce costs.
We have also initiated changes in our branch network which has included closing those branches that are not fully utilised. I fully appreciate how this impacts customers and how difficult these decisions are for our own people, but these changescompetencies will enableposition us to focus our resources on those key branches that serve the broadest spectrum of our individual and business customers. The branch network will continue to play a crucial role in how we deliver products and services, with a renewed focus on personal service, convenience and social engagement.
There is always more to do and more to learn, in order to serve our customers better. There are lessons to be learnt from the FCA’s investigation into our probate and bereavement processes, and subsequent fine, which served as a sharp remindertrusted point of what can happen to our customers when our systems do not work as they should.
Q. How are you supporting the UK’s business community?
A. Our business customers benefit from a bank which isUK-focused, yet part of wider global group. This provides them with personalknowledge and efficient access to expertise, experiencesupport, and technology across the Banco Santander group. Our International team has leveraged Banco Santander’s footprint in 10 markets, and wider network of partnership banks, to create robust trade channels into new markets for UK SMEs.
We are helping UK businesses explore new export opportunities through trade corridors, together with our virtual Trade Missions, Webinars and Inward Trade visits. Last year alone, we ran international trade missions to India, Poland, Singapore, Argentina, the US, China, Chile and the UAE, establishing three new trade corridors. We are also proud of our innovative SME products; such as the new 1I2I3
Business Current Account, which has attracted over 8,000 new customers since its launch last October. Meanwhile, our participation in the Business Banking Switch is expected to attract many more new customers who would benefit from our unique proposition.
Q. How are you nurturing a healthy business culture at Santander UK; supporting your people and communities?
A. Three years ago we launched the Santander Behaviours to embed our values – Simple, Personal and Fair – into everything we do. We want our customers to trust us to do the right thing, to be a company who our people are proud to work for and know they are valued.
I believe sustainability is an important measure of success, in how we support our staff, customers and communities. That is why we have begun work to integrate sustainable goals and perspectives into every single aspect of our business.
We want Santander UK to be the bank of choice for everyone – individuals who trust usthe broadest spectrum of society. This year, we were proud to manage their financial healthbe placed in the top 20 organisations in the Social Mobility Employer Index 2019, just one of the ways we have been recognised for our commitment to being an inclusive employer. We have always prided ourselves on doing business in a way that is simple, personal and security, businesses whofair, and our customers can rely on our support forus when they take their strength and growth, and young people looking to enhance their knowledge and skills.
I am incredibly gratefulnext financial steps for the hard work of all those who are making our bank a trusted and valued partner for customers and communities across the UK.future.
Nathan Bostock
Chief Executive Officer
26 February 2019
Santander UK Group Holdings plc |
Annual Report 2018 2019| Strategic Report
As part of Banco Santander, we are helping to establish a key role in the fight against climate change Protecting ecosystems, promoting financial empowerment and furthering gender equality are among the 17 Sustainable Development Goals defined by the United Nations to protect the planet and foster social well-being. The United Nations Principles for Responsible Banking were developed to engage the financial sector in achieving these objectives. Banco Santander, as a company committed to people, businesses and the planet, is a founding signatory of the initiative. The signing of the Responsible Banking Principles marked the most significant cooperation between the global banking industry and the United Nations to date. More than 130 banks from all over the world, including Santander, representing US $47tn in capital, have committed to assume a key role in achieving a sustainable and inclusive future. These principles will influence how the global banking industry behaves and will help to shape the |
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3.1 million users
Exclusively using mobile app
What we have seen
As customer behaviours change, banks arere-evaluating their service and operating models. The move away from traditionalin-branch banking towards online24-hour service continues. Customers are demanding more customised products and, with more information to hand, are increasingly likely to shop around for products that meet a particular need, rather than relying on their main bank to provide everything. This in turn creates the need for banks to be competitive across all areas of their offering, ensuring they create a range of products that meet a variety of customer needs.
Our response and looking ahead
We aim to serve our customers through the most suitable channel, whether that be through mobile, online, branch or telephone.
The number of transactions carried out via Santander branches has fallen by 41% over the past three years, while transactions via digital channels have grown by 93% over the same period. In response to the changes in how customers are choosing to carry out their banking, this year we havere-shaped our branch network and closed 140 branches. We have also begun to refurbish 100 branches with a focus on personal service, convenience and community engagement.
For our corporate customers we have a network of Corporate Business Centres (CBCs) across the UK and have recently opened our first Work Café, offering an innovative space for clients andnon-customers, which brings a bank,co-working area and coffee house together in a single place.
81bps
Average net mortgage margin for 2019(1)
What we have seen
The UK banking sector remains highly competitive with continuing pressure on margins experienced throughout the year. Competition in the mortgage market has continued to be intense with rates for fixed term products decreasing since the start of the year.
There have been new entrants into the banking market, challenging existing providers in areas such as current accounts and savings products. This has put pressure onnon-interest generated income along with rates paid on savings accounts.
Our response and looking ahead
As a leading scale challenger we are well-positioned despite a competitive market. We are focusing on our core franchises and in mortgages delivered our best net mortgage lending for a decade. This year we launched an innovative advertising campaign featuring Ant and Dec, initially focused on mortgage lending and raising brand awareness.
We understand the importance of knowing our customers and responding to their changing needs through continuous innovation of products and services.
We have begun a multi-year transformation programme to reduce costs and improve returns. Decisive actions will translate into improved efficiency in the medium-term along with a better customer experience.
Changing customer behaviour
Customer expectations and behaviours are evolving as new technologies are more widely adopted and through changes in the UK’s demographics
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2/3
UK adults now use contactless payments(1)
What we have seen
Technology continues to advance rapidly across the financial services sector. Offering digital platforms has become essential, not only forday-to-day banking but for all banking needs, including mortgage applications and investment advice and servicing.
Disruptors are challenging the way banks traditionally serve their customers. They are increasing digital interaction through the use of innovative technology and data from multiple sources such as Open Banking.
Cyber security remains a key priority as customers move towards more digital activity. The ability to adapt to new risks is essential to meet new challenges faced across the industry.
Our response and looking ahead
Recognising the changing behaviour of customers, we are focused on digitally transforming the business. By utilising innovative digital solutions allied with our customer-centric approach, we aim to deliver excellence in customer experience.
We collaborate with FinTech companies through open IT architecture to help bring greater personalisation to our services. We benefit from our relationships with a number of innovative technology companies which Banco Santander’s $200m Santander InnoVentures fund invests in.
| (1) | UK Finance (2019). UK Payment Markets Summary 2019. |
Over 100
Regulatory initiatives in progress
What we have seen
Regulation in the UK remains focused on promoting positive customer outcomes by raising awareness, encouraging the financial education of customers and promoting competition. By removing barriers to exit for customers they can more easily change products and services to suit their needs.
The changes in the UK banking sector bring both risks and opportunities to existing providers. Advances in technology enable bothstart-ups and established banks to better tailor their offerings to their customers.
In 2019, the FCA announced measures to change the way banks and building societies charge their customers for using overdrafts. They will no longer be able to charge higher fees for unarranged overdrafts than for arranged overdrafts. The new rules will come into force in 2020.
Our response and looking ahead
We expect the regulatory agenda to continue to evolve and encourage more competition in the banking sector, opening it up further to new entrants. We also expect increased regulatory compliance costs as new regulation is implemented.
In 2020 we announced changes to the way we charge our customers for using overdrafts. From 6 April 2020, we will introduce a single interest rate for an arranged overdraft on all adult accounts, making the cost of using an overdraft more proportionate to the amount borrowed.
+0.5% to +1.9%
Range of HM Treasury consensus for 2020 growth in annual GDP(1)
What we have seen
The UK economy has experienced volatile activity due topre-Brexit preparations with an average 0.2% quarterly growth in 2019, roughly half the pace seen in the previous two years. In January 2020, the UK left the EU and has entered a period of negotiation on a future trading relationship.
The Bank of England base rate remained flat in 2019 at 0.75%, due to slower global growth and Brexit uncertainties. The rate rose 25bps in both 2017 and 2018.
Our response and looking ahead
We expect UK growth to remain relatively subdued in 2020, with continued Brexit uncertainty and a weaker global economy. UK inflation is expected to remain below the 2% target in the near-term, with lower energy price inflation the main driver.
In early 2020 we announced changes to the 1I2I3 Current Account as a result of a number of factors, including a persistently low interest rate environment.
In our core lending markets we anticipate modest growth, with the mortgage market continuing to grow at c3%, with weaker buyer demand and subdued house price growth likely to continue. The corporate borrowing market is also expected to grow by c4%, as uncertainty continues to dampen investment intentions.
| (1) | HM Treasury Forecasts for the UK economy: a comparison of independent forecasts. |
| Santander UK Group Holdings plc | 11 |
Annual Report 2019| Strategic Report
Our purpose is to help people and businesses prosper
Our aim is to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our stakeholders
Our resources | What we do | |||||
 | People | Provide financial products and services Mortgages, consumer auto finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products for individuals and specialised services for companies How we do it Build strong customer relationships Leveraging our experience and scale to drive customer loyalty Offer a differentiated proposition Anticipating customer needs and tailoring our products and services to be more meaningful and relevant Take a prudent approach to risk Making the right lending decisions. Identifying, assessing, managing and reporting the risks which could impact our business, results, reputation or sustainability Do things The Santander Way Living the Santander behaviours in how we interact with all our stakeholders, ensuring everything we do is simple, personal and fair Our competitive advantage Leading scale challenger bank An optimised footprint and scale in our core banking businesses combined with an innovative mindset Resilient balance sheet and prudent approach Strength of capital and liquidity demonstrated by the lowest CET1 drawdown in the 2019 BoE stress tests International expertise for UK companies Helping UK companies expand into overseas markets | ||||
Our 23,500 people bring skills relevant to all aspects of our business, from deep personal relationships with customers to the innovative approach necessary to drive growth and efficiency | ||||||
 | Infrastructure | |||||
Our technology, operating centres and optimised branch network serve customers and their rapidly changing needs | ||||||
 | Banco Santander family | |||||
Being an important part of a well-diversified global bank, sharing management experience and providing synergies by leveraging group technology and brand | ||||||
 | UK presence | |||||
Our established presence in the UK and our valuable relationships with our people, customers, suppliers and partners as well as regulators and the government | ||||||
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97%
Increase in use of contactless payments in the UK in 2017(1)
What we have seen
Using digital platforms has become integral to many customers’day-to-day banking, and 5.5 million customers are now using our digital services. Technology presents opportunities and challenges in our relationships with customers, and will also shape our organisation going forward.
Society is becoming increasingly cashless with debit cards now being used more often for payments than cash, each representing around a third of all payments. This is in contrast to 2007 where cash was used in over half of payments, and over the next ten years it is expected to continue to decline to 16% of all payments.(1) Almost two thirds of people in the UK now use contactless technology to make payments, and it is expected that this will make up 36% of all payments in 2027.(1)
Our response and looking ahead
By utilising innovative digital solutions allied with our customer-centric approach, we aim to deliver excellence in customer experience.
Our ongoing collaboration with FinTech companies through open IT architecture will allow us to bring greater personalisation to our services, anticipating our customers’ needs, and providing a frictionless experience. We are looking to adopt new ways of working to be able to respond quicker to our customer needs, leveraging the latest technologies and accelerating our own digital transformation.
(1) UK Finance. (2018). UK Payment Markets 2018
c90
Regulatory initiatives in progress
What we have seen
UK banks have undergone significant structural change and invested considerable resources to ensure compliance with ring-fencing legislation, ahead of the deadline of 1 January 2019.
Digital advances and Open Banking have opened up the door of financial services for bothstart-ups and established technology companies, to leverage customer data and improve competition, efficiency and stimulate innovation.
In 2018, we have also seen the implementation of three major pieces of regulation in General Data Protection Regulation (GDPR), Second Payment Services Directive (PSD2) and Markets in Financial Instruments Directive (MiFID II), and received confirmation of two more:non-binding indicative minimum requirement for own funds and eligible liabilities (MREL) requirements and the final rules and guidance on Payment Protection Insurance (PPI) from the FCA.
Our response and looking ahead
We expect our returns to continue to be impacted by increased regulatory compliance costs and the demanding regulatory change agenda, including the transfer of business for ring-fencing. However, we remain confident that we continue to have a profitable and resilient business.
+0.8% to +1.9%
Range of HMT consensus for
2019 growth in annual GDP
What we have seen
The UK economy has experienced moderate growth over the past three years, coupled with record low levels of unemployment. Inflation was very low in 2016, but has since risen above 2% which prompted the Bank of England to increase the Bank Rate twice by 25bps, in both 2017 and 2018, to 0.75%.
House price growth has also slowed from high single digit figures to a much more modest level, withBuy-to-Let (BTL) lending in particular slowing largely due to changes in tax legislation.
Business investment has continued to be affected by the ongoing uncertainty in the UK economy following the UK’s referendum on EU membership, which has dampened corporate borrowing.
Our response and looking ahead
We have a track record of being consistently profitable, with a resilient balance sheet and a relentless focus on customers. We believe that we are well-placed to manage any potential uncertainties and deliver for our stakeholders.
In light of the uncertain outlook we continued a strategy of selective growth. We believe that our proactive risk management policies andmedium-low risk profile will deliver a resilient performance in the business.
Annual Report 2018 | Strategic Report
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Value creation
Annual Report 2018 2019| Strategic Report
Our refined
strategy
Our refined priorities are aligned to Banco Santander’s European strategy announced in April 2019. We are focused on customer loyalty, simplification, improved efficiency and sustainable growth,
while being the best bank for all our stakeholders. Our four strategic priorities are set out below along with corresponding KPIs on pages 16 and 17.
Our strategic priorities
Evolving our strategy
Our strategy set in 2015 built upon the significant commercial transformation over the previous three years. We are further honing our strategic priorities and leveraging the changes we have delivered over the past three years.
We are facing a competitive and uncertain external environment, which has placed various pressures on UK banks. These pressures, and the challenges they present, require us to continue to evolve and adapt to our operating environment in order to become fit for the future.
The vast majority of our assets are within our ring-fenced bank, Santander UK plc, which gives us a robust platform to deliver the next phase in our strategy.
Our long-term vision remains unchanged
Our strategy is evolving to focus on our core franchise and enhanced returns. Back in 2015, we set out our purpose which is to help people and business prosper – this vision remains unchanged. Building upon this customer-centric approach, we aim to deliver sustainable returns in a responsible manner.
Our approach has enabled us to build a strong platform to continue towards our long-term vision of becoming the UK’s best open financial services platform. We need to meet the needs and expectations of our customers which are being driven by the standards set by the largest digital companies across the world. This will mean increasing the level of personalisation, making our services available 24/7 and ensuring instant delivery for all our products and services.
Generate growth through valuable and loyal relationships across chosen business segments
This means focusing more on our core business. We are engaging even more with our retail customers, gaining greater insights into what they need, utilising analytics such as our NeoCRM tool. Alongside this, we are continuing to deploy our omni-channel model. Whether it is to our digital, contact centre or branch channel, we are continually upgrading and enhancing our platform to provide a better service.
We are also increasing the specialisation of our corporate business to be able to better serve our customers. Our focus will be on developing propositions, such as our asset finance and trade finance businesses. Another important strand to our corporate strategy will be leveraging our international franchise, where we have already established eight trade corridors. These improvements will help drive customer primacy, leveraging our relationship model, local presence and expertise.
Deliver operational excellence by maximising efficiency and customer satisfaction through digital transformation
To support our ambition, we will need to become a more agile organisation. This will involve further simplification, automation and digitalisation of the bank. These initiatives will enable us to maximise efficiency and deliver operational excellence.
To transform our cost base, we have initiated comprehensive programmes across the bank. We will look to optimise operating models and systems, utilising automation and robotics to improve productivity with increased usage
of paperless and cloud-based solutions to reduce overheads.
Being part of a global group is expected to help us in making these changes, as we can leverage technology and best practices used globally through the Banco Santander group.
Consistent profitability and prudent risk management
Generating growth through customer loyalty requires the delivery of the products and services our customers need and demand. Growth in our core retail business and greater specialisation in our corporate business will help improve returns. Together with operational excellence, we aim to have the solid foundations needed to remain consistently profitable and to deliver improved returns.
We have a prudent and proactive approach to risk management, and this means continually upgrading our skills and infrastructure to support both the evolution of the business and our capability to deal with emerging threats, such as cybersecurity.
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Be the best bank to work for and have a strong internal culture
We need to make sure that our organisation is ready for the future whilst ensuring we attract, develop and retain the best people. For example, we are looking at new digital recruitment approaches, leveraging our partnerships with universities. We want to create a bank that is representative of the society we operate in, and foster a culture which promotes diversity and inclusion.
Our investments in the future will help us enable agile ways of working and we aspire to stand out as an employer of choice. By helping
to balance work and home lives, supporting mental and physical wellbeing and enabling our people to keep growing and developing, we can ultimately create a culture and environment where everyone can thrive.
Supporting communities
Our ambition to make a positive difference to our communities remains a crucial part of our work. As part of our sustainability strategy we aim to go beyond traditional volunteering and fundraising to deliver long-term, meaningful value to society. Through our initiatives and programmes, such as DigiWise and our fraud and scam workshops, we want to help improve the financial resilience to our communities.
Becoming a more
Our sustainability strategy
“A successful business is one that creates sustainable growth and takes decisions thinkingnot only about our customers and business, but the wider economy and the environment.
As CEO of Santander UK, I want those decisions to help drive prosperity for current and future generations.”
Nathan Bostock, Chief Executive Officer
Embedding our sustainability approach
We know that financial institutions have an important role to play in addressing areas such as financial crime and financial inclusion, as well as broader systemic issues such as the effect that technological change and climate change are having on our lives, our communities and our planet.responsible bank
At Santander UK we understand that the decisions we take have an impact on society, the UK economy, and our environment. This is why in 2017 we embarked on an exciting journey,
We continue to embed sustainability across our purpose in every business, decision. In 2018, we used artificial intelligence to understand which social and environmental challenges are most important to our customers, shareholders, people and communities, and where we can have a real impact.
Our new sustainability approach sets a framework for action around these issues.
See more on our new sustainability approach onpage 25
focusing on four pillars, which are explained below with links to the relevant United Nations Sustainable Development Goals.
To find out more, see our 2019 ESG Supplement.
Annual Report 2019| Strategic Report
Strategic review
We have taken decisive steps in 2019 to progress our strategic priorities and our focus on cost efficiency is starting to deliver tangible benefits.
We are confident in our ability to succeed through a relentless focus on improving our efficiency and competitiveness.
| (1) | See page 257 for KPI definitions. |
| (2) | NPS measure became a KPI during 2019, replacing customer satisfaction to incorporate a broader measure of advocacy. |
| (3) | Non-IFRS measure. See ‘Alternative Performance Measures’ on page 169 for details and reconciliation to the nearest IFRS measure for ROE and cost-to-income ratio. 2019 ROE was 4.9% and cost-to-income ratio was 61%. |
| Key Performance Indicator(1) | 2019 result | |||
Customers
| Loyal customers | 32% | ||
Digital customers | 5.8 million | |||
Retail NPS(2) | Top 4 | |||
Business and corporate NPS(2) | 1st | |||
Shareholders
| Adjusted RoTE(3) | |||
Adjusted cost-to-income ratio(3) | ||||
People
| Top 10 company to work for | Accreditation aim over the medium-term | ||
Communities
| Financially empowered people | 248,100 | ||
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| Why it matters and how we performed | Results | |||
 Loyal customers (as a % of Active customers) measures the proportion of our customers who have a primary banking relationship with us alongside another product. Loyal customers stay with us longer and their current account usage gives usin-depth insight which allows us to tailor our services to their needs. Loyal customers increased in 2019, building on previous years progress and laying a solid foundation for us to achieve our target of 34% in the medium-term. |  | |||
Digital customers are increasingly important given the benefits that mobile and digital can bring to customer experience alongside more efficient operational delivery of 24/7 service. Customers in the UK are increasingly moving towards mobile and digital banking and we have increased digital customers to 5.8 million in 2019. |  | |||
Retail net promoter score is a widely-used measure of customer experience and customer advocacy of our retail customers. We ranked in the top four amongst our peers as we focus on building stronger customer relationships and a seamless customer experience. | Top 4 out of 9 competitors | |||
Business and corporate net promoter score is a widely-used measure of customer experience and advocacy for our business and corporate customers. We ranked first amongst our peers, a testament to the comprehensive proposition and our focus on small andmedium-sized businesses. | 1st out of 6 competitors | |||
Return on ordinary shareholders equity (ROE) was 4.9% in 2019 (2018: 8.2%).Adjusted RoTE(1)was 7.8% in 2019 (2018: 10.2%). Adjusted RoTE is a measure of income generation on shareholder investment. The ROE of 4.9% and adjusted RoTE of 7.8%(1)in 2019 were lower than 2018 due to ongoing mortgage income pressure, partially offset by low credit costs which reflect our prudent risk management. ROE also reduced due to changes in transformation charges and PPI provision charges. We are focused on improving returns through our multi-year transformation programme to achieve a9-11%(1)adjusted RoTE in the medium-term. | ||||
Cost-to-income ratio was 61% in 2019 (2018: 56%).Adjustedcost-to-income ratio(1)was 59% in 2019 (2018: 54%). Adjustedcost-to-income ratio is an efficiency measure to capture the amount spent to generate income. Cost-to-income ratio increased to 61% and adjustedcost-to-income ratio increased to 59% in 2019 largely due to income pressure. In the low rate environment, we are focused on costs as we invest in our multi-year transformation programme to improve returns going forward. | ||||
Top 10 company to work for is an important measure of employee satisfaction and our participation forms part of a wider Banco Santander goal. To measure this we will seek to participate in an industry-wide ranking survey for accreditation in 2022 to check our progress towards our over arching global medium-term target. In 2019, Santander UK was accredited in the Top Employers Survey for 2020. |  | |||
Financially empowered people are those unbanked, underbanked or vulnerable people who we are supporting with access to the financial system, tailored products and financial education. In 2019, we continued to support and invest in communities across the UK to foster sustainable economic growth, | ||||
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| Santander UK Group Holdings plc |
Annual Report 2018 2019| Strategic Reportreport
Sound risk management is at the centre of
ourday-to-day
activities. It benefits our
business and our customers by
helping to
ensure balanced and responsible growth.
Top risks
We regularly review the top risks whichthat could impact our stakeholders.customers and shareholders. Risks we actively monitored over the course of 2018 included:2019 include:
Brexit
The UK is scheduledWe continue to leavemonitor Brexit as a top risk, following the UK’s exit from the EU on 29 March 2019. Due to our main risk exposures arising in31 January 2020. Our Brexit planning is now focused on the potential outcomes of the UK retail and commercial banking market, we consider our Brexit-related risks to be manageable. However, given the ongoing uncertainty, we have continued to focus on the refinement of our Brexit contingency plans and also separately on actions that we would take,EU negotiations in the eventrespect of ano-deal Brexit. In such a scenario, we could experience increased levels Free Trade Agreement (FTA) and equivalence in financial services, by the end of activity, as our customers seek to deal with changes in their financial circumstances. Our planning has included testing our operational readiness to ensure that we can continue to operate effectively in the event of this heightened activity. We have also undertaken stress tests to ensure we remain financially resilient, in the event of an economic shock following Brexit.2020. We are also working with our regulatorsmaintaining and industry bodiesrefining existing plans to manage relevant changes to the regulatory frameworks.
Mitigating the impactaddress a number of a low rate environment
In August 2018, the Bank of England increased Bank Rate from 50bps to 75bps. The path of any future rate increases, according to the Bank of England, is currently expected to be gradual, particularly given ongoing uncertainties over future relationship with the EU. In comparison to 2017, the prospects for further rate increases, however gradual, mean that our risk exposure to lower interest rates has reduced. We assess the potential impacts of future rate increasesareas requiring cross-divisional communication including financial markets infrastructure, data, payments, third-party services, cyber, and internal and external communications. For more details on our customers to help ensure their borrowing remains affordable.assessment and management of Brexit risks, see page 19.
Ring-fencing implementation
We have executed our ring-fencering-fencing plans, in order to meet the 1 January 2019 legislative deadline. The majority of customer assets and liabilities remain within the ring-fenced bank, providing longer-term flexibility with minimal disruption for our customers. Corporate and wholesale markets business,
which is prohibited from inclusion in the ring-fenced bank, was transferred to Banco Santander London Branch. Ring-fencing resulted in significant change to our structure, people and operations, and we have retained it as a top risk to ensure continued focus on the ongoing embedding of ring-fencing culture throughout our governance and operations. This has included continued emphasis on related controls, procedures, reporting, and additional internal communications and staff training.
Building and maintaining capital strength
DecisionsRegulatory uncertainty arising from decisions made by regulators on the implementation and interpretation of capital rules and on macro-prudential issues can impact upon our capital management, such as adjustments to the countercyclical capital buffer.management. We continuously review our capital position on a forward-lookingforward looking basis, and it is also subject to the Bank of England’s stress testing regime. ThePublication
of the 2019 stress test results published in November 2018, showed that we passed the stress tests, and were not required to undertake any capital actions.
For the fourth year in a row, we had the lowest stressed CET1 capital ratio impact of all participating firms, demonstrating our resilient balance sheet and prudent approach to risk, in an extremely competitive and uncertain environment. On both IFRS 9 transitional andnon-transitional bases, our lowest post-stressend-point CET1 capital ratio, before and after management actions, was in excess of the CET1 hurdle rates established by the Bank of England. On both IFRS 9 bases, but after management actions, our lowest post-stressend-point leverage ratio also exceeded the regulatoryBank of England hurdle rate set byrates. Given the PRAcomposition of our balance sheet, the leverage ratio is growing in importance, in terms of the binding capital constraint for our projected CET1 and UK leverage ratios.business.
Pension schemerisk
During 2018,Over the course of the past two years a number ofde-risking actions have been taken to reduce the levelundertaken including execution of risk. These included the execution ofvarious hedging strategies and strategic asset reallocation which has reduced the pension schemefund’s exposure topro-cyclical assets.assets, and improved the fund’s resilience. Despite falls in long term interest rates, the funding deficit position (2016 valuation basis) was broadly stable over the year as long term inflation also fell and asset values increased. The IAS 19 accounting position improved duringdid however worsen, as in addition to these factors credit spreads narrowed, increasing the value of the liabilities. During the year we completed and agreed the Triennial Valuation process with the Trustees, which resulted in a lower funding deficit on the updated valuation basis. We have also continued to a lesser degree,take actions to improve risk management and control, along with the funding position. Following the High Court judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to Guaranteed Minimum Pension (GMP) equalisation, we have reflected the impact of this decision in operating expenses and in retirement benefit assets.associated governance procedures.
Financial crime
Aligned withWe recognise that financial crime activities can have a significant impact on our customers. Criminals are also increasingly using the evolving regulatory environmentfinancial system to launder the profits of illegal activity such as human
trafficking and terrorism. Significant investment in the UK, we continuedongoing enhancement continues to upgradebe made to our Financial Crimefinancial crime control framework. A centralised SantanderUK-wide programme with direct oversightframework, and governance has been established,to key controls including review by the Board Responsible Banking Committee. We enhanced systemsanti-bribery and controls to aid compliance with our legalcorruption measures, customer risk assessment, and regulatory obligations.screening and transaction monitoring.
Managing a complex change agenda
As part of our business planning strategy we have continued to invest in a project portfolio that supports risk, regulatory and growth requirements. In order to effectively manage
our complex change agenda, we have established robust processes and controls that allow us to track any potential issues and mitigate implementation risk. In delivering key projects, we keep pace with developments in the regulatory environment and technological advances, whilst focusing on maintaining our market position and remaining competitive.
Cyber-attacks
In 2018,2019, threats from the external cyber environment continued to evolve, due to heightenedgeo-political geopolitical tension, and active well-established cyber-crime groups. There were also high profile incidents duringWe monitor a range of cyber threats including attacks on payment systems, ATM networks and customer data where insider threat and network intrusion are the year impacting airlines, social mediamost common attack methods; an emerging threat from a new method, aimed at breaching organisations’on-line customer services, (such as internet banking) and other UK banks. Specificcausing denial of service. In addition, Data Security and General Data Protection Regulation (GDPR) compliance continue to be key areas of concern. We have taken mitigating actions against these various threats including deployment of a cyber threat intelligence platform, increased intelligence through chairing the Geopolitical Financial Services working group and robust online service access construction utilising anti Distributed Denial of Service (DDoS) techniques. The mitigants implemented in our Cyber Security Plans are currently proving effective and we have experienced no significant disruption to date. We also help our customers stay safe online through a range of our own and industry-wide initiatives.
Conduct risks
We are subject to a demanding regulatory agenda, combined with uncertainty over outcomes in several areas. Implementation of new, often complex, regulatory changes can affect all areas of our business, including operational resilience, products and services; risk management and controls; and culture and behaviours. When implementing regulatory change we focus on ensuring that our strategy, leadership, governance, and approach to managing and rewarding staff do not lead to poor outcomes for our customers, competition, or to market integrity. We expect all our people to take personal responsibility for managing risk through our I AM Risk programme.
Third party risks
In common with other UK banks, we rely on a number of major suppliers, to continue to deliver products and services to our customers. The complexity and criticality of services provided by third-parties to the industry is a key operational risk that has been recognised by ourselves, our peers, and the regulators. We place emphasis on a carefully controlled and managed Third Party Supplier Risk
| Santander UK Group Holdings plc |
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Conduct risks Like all UK banks we continue to see a demanding regulatory agenda focused on fair customer outcomes, avoiding customer harm (including from inertia), vulnerability and consumer protection in general. We aim to comply with all applicable regulatory requirements and we have no appetite to operate in a way that leads to unfair outcomes for our customers or that negatively impacts the market or breaches regulatory or legislative requirements. A major conduct issue that has impacted UK banks over the past few years related to Payment Protection Insurance (PPI).A deadline for customer complaints at the end of August 2019 was set by the FCA, and in the run up to this date we saw an uplift in the volume of claims to unprecedented levels, which resulted in us making an additional provision of £70m in Q2 2019 and £99m in Q3 2019 to cover this. When implementing regulatory change we are focused 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 people in our organisation to take responsibility for managing risk through our I AM Risk programme.
Like other banks, we rely on a number of |
Brexit
With the general election behind us, there is less uncertainty and more clarity in the political environment. Following the UK’s exit from the EU on 31 January 2020, early indications are that the UK may seek a degree of divergence from the status quo, in its pursuit of a Free Trade Agreement. The UK and the EU will also be assessing their regulatory equivalence, in order to determine the level of access afforded to financial markets. Given the limited time available, and the Government’s stance that it does not want an extension beyond the end of 2020, a ‘no deal’ Brexit remains a risk.
Experience has shown that trading concerns for businesses and investors can have negative consequences for the economic outlook and also impact the market’s perception of future interest rates. There was a bias towards monetary easing by global central banks during the latter half of 2019, and this bias still remains at the beginning of 2020.
However, the Conservative Government’s election pledge to inject stimulus into the UK economy to smooth the UK’s exit from the EU could, if it materialises, temper the market’s expectations for lower interest rates in the future. Should rates remain relatively low for an extended period, it could prove challenging for the banking industry to achieve the longer term targets set out in their business plans.
We have executed interest rate hedging programmes for both our Balance Sheet and Pension Fund to help mitigate exposure to lower rates over the medium-term.
There are additional risks that may arise for our customers as a result of Brexit, in both Northern Ireland and Scotland. The arrangements for Northern Ireland could have impacts on its economy and could lead to a referendum on independence. In the longer term, our business interests in Scotland could also be impacted, should momentum for a second referendum on Scottish independencere-emerge. There have been renewed calls for a second vote, but the UK Prime Minister has sincere-iterated his commitment to strengthening the Union.
Our Brexit planning is overseen by the Board, Board Risk Committee and Senior Management Committee. Our Brexit Working Group, comprised of representatives from across the business and support functions, completed our preparations and ensured operational readiness ahead of previous potential ‘no deal’ risk junctures in 2019. These plans will be maintained should they be required again in preparation for a‘no-deal’ scenario later this year. Further plans will be developed when there is clarity on the future trading arrangements and their potential impacts on the bank and its customers.
| Santander UK Group Holdings plc | 19 |
Annual Report 2019| Strategic report
Risk management overview continued
Risk types
All our activities involve identifying, assessing, managing
and reporting risks. Of the Risk Types covered here several
also have Top Risks associated with them, including Operational,
Capital, Pension, Conduct, and Financial Crime risk.
The cost of inaction: Recognising the value at risk from climate change, The Economist
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Framework, and are enhancing our resources in this area in order to manage this risk. This framework seeks to ensure that those with whom we intend to conduct business meet our risk and control standards throughout the life of our relationship with them. We monitor and manage our ongoing supplier relationships to ensure our standards and contracted service performance continue to be met.
Emerging risks in 2018
We regularly review the emerging risks that could impact our stakeholders. Risks actively monitored over 2018 included:
Changing customer behaviour
There are signs that customer loyalty is diluting across the banking industry, as expectations shift and population demographics evolve. Increasingly, customers require greater accessibility, simplicity, customer-centricity and automation when interacting with their banking services provider, which has the potential to disrupt the banking sector. Our customer centric transformation is well underway, with further digital enhancements planned for deployment in 2019 designed around customer needs.
Strong market competition
The UK banking market continues to be highly competitive. At present, our main competition comes from incumbent banks who have strengthened and restructured their activity with a greater focus on the UK, and building societies. New entrants are also making progress, with lower barriers to entry and reduced customer inertia. Margins across the industry continue to come under pressure as a result of this competitive environment. Areas of particular competitive focus include mortgages, a significant driver of profits in the UK retail banking industry, and costs, as a key strategic lever in protecting or improving financial returns. Competition for deposits also remains
intense and may escalate as competitors replace funding received from Government schemes. In the longer term, there is also potential for new types of competitors, such as major digital organisations, to gain market presence by leveraging their large customer bases and digital customer interfaces.
Rapid technological change
Consumer expectations are being reshaped by technology-enabled experiences, including those from other industries. Successful organisations will be those that invest in platforms that satisfy customers expectations and at the same time deliver substantial cost reduction in order to sustain profitability. We continue to grow our digital customer base, develop new digital channels, and improve existing digital services, as well as automating physical channels. We also place a high priority on cyber security, including obsolescence management, in order to protect our customers and our reputation.
Demanding regulatory agenda
We continue to face a complex regulatory change agenda. The FCA has been carrying out a number of significant reviews such as a Strategic Review of Retail Banking Models, which will impact our business. The conduct regulator also continues to progress a heavy policy agenda, with proposals at varying stages including but not limited to, a basic savings rate and duty of care. The implementation of PSD2 and Open Banking remains a key focus in the competition and payments agenda. The Payment Systems Regulator is progressing the development of a contingent reimbursement model for victims of authorised push payment fraud. The Bank of England and PRA are working with other regulators to develop the supervisory framework for operational resilience, climate change risk management. We are focused on managing our regulatory
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risks, coordinated and prioritised through specific project groups with both risk and regulatory oversight.
Uncertain economic environment
UK economic growth was lower in 2018, compared to 2017, as uncertainty over Brexit adversely impacted upon business confidence, with industry investment plans being delayed. Unemployment remains low and average weekly earnings have continued to trend higher since early 2017. Arrears remain at historically low levels, with good credit quality being maintained across our lending portfolios, supported by our prudent approach to lending. Some normalisation from these cyclically low levels could arise over the medium term, should the credit cycle reach a turning point. Regulatory bodies have cited potential emerging risks to the global financial system from leveraged loans in the Corporate Debt markets, contagion from high levels ofnon-performing loans in the Eurozone, and a general repricing of risk premia in the markets. Wholesale funding costs for banks have increased as long-term funding spreads widened in 2018 due to the pace and scale of banks’ debt issuance.
Annual Report 2018 | Strategic Report
Risk overviewcontinued
Risk types
All our activities involve identifying, assessing, managing and reporting risks.
Strategic priority key:
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What we have seen Credit quality remained strong, supported by our prudent approach to risk, proactive management actions as well as the ongoing resilience of the UK economy. Low interest rates and falling unemployment have contributed to a benign credit environment resulting in low levels of default in both the mortgage and corporate portfolios. This has also been reflected in a low cost of credit of
How We manage our exposures carefully to ensure we stay within our risk appetite and agreed concentration limits. We have thorough credit checking and approval processes to understand the risk we take on when we lend.
We closely monitor the economy and where we see areas of stress we take action to reduce our exposure or to adapt our pricing to adequately reflect the risk. | What we have seen
Our balance sheet is positioned to benefit from a rising interest rate environment,
How We use a variety of approaches to protect the bank from interest rate risk. These include using financial instruments or by matching fixed rate deposits with fixed rate loans of a similar term. | In addition, stress testing is an essential part of our risk management, helping us to measure and evaluate the potential impact of extreme events or market moves. | What we have seen Regulatory capital requirements, including leverage, have continued to increase. This trend is set to continue across the course of 2020, with the forecast increase We have generated capital consistently, whilst undertaking risk management initiatives, including securitisations, to further strengthen our capital position.
How We utilise a capital risk framework that informs and monitors our capital risk appetite. Capital and leverage ratios are monitored to ensure we meet current and future regulatory requirements. We also undertake wide-ranging stress testing analyses to confirm our capital adequacy under various adverse scenarios. | |||||
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In recent years, UK pension funds have experienced headwinds as a result of falling long-term gilt yields driving an increase in the value of pension liabilities. In many cases these increases in liability values have only been partially offset by increases in the value of hedging assets and return-seeking assets. Where funding positions have deteriorated, additional contributions may be required. The accounting
How We monitor pension risk on both the accounting and funding bases monthly against the overall risk appetite set by the Board. A range of investment strategies are used to generate income and capital growth to contribute to the funding of the scheme benefits. Hedging strategies are used to mitigate the impact of inflation and changing interest rates, as well as currency movements and falls in equity values. | ||||||||||||
| 20 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
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What we have seen In recent years, a major conduct issue faced by banks
We made
How Our culture of Simple, Personal and Fair, underpinned by our nine behaviours, enables us to embed a conduct strategy within the business where we place the fair treatment of customers at the heart of what we do. We always look to improve our processes and training to ensure this, integrating fair treatment into our product and service design reviews. | What we have seen Cyber risk has become an increasingly prominent issue, with various well-known companies targeted
In May 2019, the Contingent Reimbursement Model (CRM) Code for Authorised Push Payments (APP) came into effect, the main change being that where neither bank nor customer is to blame in a case of fraud, the bank will refund the customer. How As one of the top three risks we face, we To support the CRM code, we have improved our |
UK regulatory change post Brexit may add further complexity to
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Annual Report 2018 | Strategic Report
We made solid progress towards our strategic
and operational goals in 2018, delivering
shareholder value despite the competitive
and uncertain environment.
Prudently positioned in an uncertain and competitive environment
Income pressures continue to be felt, mainly from the competitive mortgage market, and costs were impacted by regulatory projects completed this year.
The business performed well despite the competitive market. Net mortgage growth was £3.3bn, our strongest lending in over three years, and we continued to see lending growth tonon-CRE trading businesses whilst we managed down our CRE exposure.
We completed a significant milestone this year with the implementation of our ring-fence structure and the transfers to Banco Santander London Branch. This means that our 2018 financial results reflect the new statutory perimeter within which we will operate going forwards.
Profit before tax was £1,567m, down 14% from £1,814m in 2017. The generation of sustainable earnings and reduced RWAs meant our CET1 capital ratio increased 100bps to 13.2%. The quality and strength of our balance sheet was again demonstrated in the Bank of England
stress test results. For the third year running, we were the most resilient of the UK banks with the lowest drawdown of 1.4% on our CET1 ratio.(2)
Delivering shareholder value
Net interest income was down 5%, impacted by lower new mortgage margins, Standard Variable Rate (SVR) mortgage attrition and the £39m of accrued interest release on a foreign tax liability in 2017, which was not repeated in 2018. These were partially offset by management pricing actions on customer deposits and strong mortgage lending volumes.
Summarised consolidated income statement
| For the years ended 31 December | | 2018 £m |
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(1) Comprised of ‘Net fee and commission income’ and ‘Net trading and other income’. (2) CET1 drawdown is defined as CET1 ratio at 31 December 2018 less minimum stress ratio on an IFRS 9 basis (before the impact of ‘strategic’ management actions and conversion of AT1). | |||||
Net interest income | 3,606 | 3,803 | ||||||||||
Non-interest income(1) | 937 | 1,109 | ||||||||||
Total operating income | 4,543 | 4,912 | ||||||||||
Operating expenses before impairment losses, provisions and charges | (2,563 | ) | (2,502 | ) | ||||||||
Credit impairment losses | (153 | ) | (203 | ) | ||||||||
Provisions for other liabilities and charges | (260 | ) | (393 | ) | ||||||||
Total operating impairment losses, provisions and charges | (413 | ) | (596 | ) | ||||||||
Profit before tax | 1,567 | 1,814 | ||||||||||
Tax on profit | (446 | ) | (560 | ) | ||||||||
Profit after tax for the year | 1,121 | 1,254 | ||||||||||
Non-interest income was down 16% impacted by a gain of £48m following the sale of our shareholding in Vocalink Holdings Limited in 2017, which was not repeated in 2018, and regulatory changes in overdrafts. This was partially offset by increased income in consumer (auto) finance and asset finance.
Operating expenses before credit impairment losses, provisions and charges increased 2%. The impact of higher regulatory, risk and control costs and £40m of costs relating to GMP equalisation were partially offset by cost management programmes and operational and digital efficiencies, as well as lower Banking Reform costs.
Credit impairment losses were down 25%, with Carillion plc charges in 2017, partially offset by a number of charges and lower releases across portfolios in 2018. All portfolios continue to perform well, supported by our prudent
approach to risk and the resilience of the UK economy. The NPL ratio improved to 1.20%, down 22bps from 2017.
Provisions for other liabilities and charges decreased 34%, largely due to £109m PPI and £35m other conduct provision charges in 2017, which were not repeated in 2018. These were partially offset by provision charges in Q418 of £58m in relation to our consumer credit business operations and £33m relating to historical probate and bereavement processes.
We are delivering shareholder value despite the competitive and uncertain environment, with return on ordinary shareholders’ equity of 7.9% (2017: 8.9%), and return on tangible equity of 9.0% (2017: 10.2%).
Strategy of selective growth
Customer loans decreased slightly to £199.9bn (2017: £200.3bn), largely due to managed reductions of £1.1bn(2) in Commercial Real Estate (CRE) and £1.4bn innon-core loans, as well as £1.4bn of ring-fence transfers. In Sep18, we also transferred £1.3bn of customer loans to Banco Santander London Branch under a risk management initiative. Lending growth of £3.3bn in mortgages and lending growth tonon-CRE trading businesses partially offset these decreases.
Customer deposits decreased to £172.1bn (2017: £175.9bn) and theloan-to-deposit ratio increased to 116% (2017: 113%). This was due to lower corporate deposits and management pricing actions resulting in a reduction in retail savings products. This was partially offset by a £0.9bn increase in personal current account balances.
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Summary of segmental balance sheet assets and liabilities
| At 31 December | | 2018 £bn |
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| (1) Non-controlling interests refers to other equity instruments issued by Santander UK plc and PSA Finance UK Limited (PSA cooperation), a cooperation between Santander Consumer (UK) plc and Banque PSA Finance SA (accounted for as a subsidiary).
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Customer loans | ||||||||||||||
Retail Banking | 172.8 | 168.7 | ||||||||||||
Corporate & Commercial Banking | 17.7 | 19.4 | ||||||||||||
Corporate & Investment Banking | 4.6 | 6.0 | ||||||||||||
Corporate Centre | 4.8 | 6.2 | ||||||||||||
Total customer loans | 199.9 | 200.3 | ||||||||||||
Other assets | 89.5 | 114.5 | ||||||||||||
Total assets | 289.4 | 314.8 | ||||||||||||
Customer deposits | ||||||||||||||
Retail Banking | 142.1 | 143.8 | ||||||||||||
Corporate & Commercial Banking | 17.6 | 17.8 | ||||||||||||
Corporate & Investment Banking | 4.8 | 4.5 | ||||||||||||
Corporate Centre | 7.6 | 9.8 | ||||||||||||
Total customer deposits | 172.1 | 175.9 | ||||||||||||
Medium-Term Funding | 49.0 | 40.6 | ||||||||||||
Other liabilities | 52.1 | 82.1 | ||||||||||||
Total liabilities | 273.2 | 298.6 | ||||||||||||
Shareholders’ equity | 15.8 | 15.8 | ||||||||||||
Non-controlling interest(1) | 0.4 | 0.4 | ||||||||||||
Total liabilities and equity | 289.4 | 314.8 | ||||||||||||
| Santander UK Group Holdings plc | 21 |
Annual Report 2018 2019| Strategic Reportreport
CFO reviewRisk management overviewcontinued
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Other assetsEmerging risks in 2019
We regularly review emerging risks that could impact our business and liabilities both decreased predominantly dueour customers. We maintain an active dialogue with key Corporate customers to ring-fence transfersaid our overall understanding of derivatives contracts to Banco Santander London Branch. Shareholders’ equity remained broadly flatthe issues that could arise. As well as those risks identified below, we also consider the potential impacts of various economic scenarios that could arise from other factors, for example a global health emergency (such as the recent coronavirus outbreak), geopolitical conflicts or other significant global events. During the year we reviewed a range of risks associated with ongoing capital accretion through retained profits offset by dividend payments.LIBOR transition, which are being actively managed at the Asset and Liability Committee (ALCO).
Maintaining balance sheet strengthChanging customer behaviour
Customer loyalty is diluting across the Banking industry, as expectations are shifting and population demographics evolve. Increasingly customers require first class digital experiences when interacting with their banking services provider, as their expectations are increasingly defined by experiences outside of banking. This is causing disruption to the banking sector with higher demands for: digital product offerings and solutions to manage customer finances; data security and trustworthiness; immediacy and convenience; tailored value products in return for loyalty; price transparency and comparisons across providers. Santander’s customer-centric transformation is well underway, with further digital enhancements planned for deployment in 2020, truly designed around customer needs.
Rapid technological change
Successful financial service providers will be those that invest in platforms that satisfy customer expectations and at the same time deliver substantial cost reduction in order to sustain profitability. Santander UK continues to increase its number of digital customers, develop new digital channels, and improve existing digital services, as well as automating existing physical channels. We also place a high priority on technology risk management, especially cyber security, in order to protect our customers and our reputation.
Strong market competition
The CET1 capital ratio increased 100bpsUK banking market continues to 13.2%. This reflected steady profit growthbe highly competitive, with an increasing concentration of revenues in mortgages. At present, our main competition comes from incumbent banks who have strengthened and risk weighted assets which reduced by £8.2bnrestructured their activity, and also from building societies. Margins across the industry, particularly in mortgages, continue to £78.8bn. RWAs decreased largelycome under pressure as a result of ring-fence transfers (£5.5bn), risk management initiatives, including securitisations (£3.0bn),this
competitive environment, and the widening of scope of our large corporate risk model earlierthis trend is expected to continue for several years ahead. Competition for deposits also remains intense and may escalate as many challenger and specialist banks need to replace funding from Government schemes in the year. Thenear future. In the longer term, there is also potential for new types of competitors, such as scale digital players, to gain market presence by leveraging their large customer bases and digital customer interfaces. Digital banks are emerging globally, with many targeting the UK, leverage ratio remained stable at 4.5%.as London is seen as Europe’s FinTech hub. We are focused on delivering sustainable, predictable growth in a responsible manner, and achieving consistent profitability through balance sheet strength.
Wholesale funding with a residual maturity of less than one year increased to £16.8bn and the liquidity coverage ratio (LCR) increased 44 percentage points to 164%. This reflected prudent planning and somepre-funding of our 2019 wholesale funding requirements, in light of potential market disruption from Brexit.
Robust funding plan executed in 2018Demanding regulatory agenda
We issued £14.8bncontinue to face a complex regulatory change agenda. The FCA, PRA and other regulatory bodies have been progressing industry reviews across a number of medium-term funding,areas during the year. Some key areas of which £2.7bn (sterling equivalent) was senior unsecured notes from our holding company,
£4.5bn from our operating company, £4.3bn were covered bonds, £2.2bn were securitised fundingfocus include: PPI; High Cost of Credit Review involving the reform of overdraft charges and £1.1bn from other secured funding.contingent reimbursement model for authorised push payment fraud. We are well placed to meet MREL requirements,focused on managing our regulatory risks, coordinated and prioritised through specific project groups with £9.2bn of senior unsecured funding from our holding company issued to date. Medium-term funding is likely to beboth risk and regulatory oversight.
Uncertain economic and geopolitical environment
UK economic growth was lower in 2019, givencompared to 2018, as uncertainty over Brexit continued to subdue business confidence and investment. However, unemployment remains at historical lows and strong real wage growth has continued to support consumption. UK Housing market indicators have generally shown signs of improvement, in thepre-funding completed early part of this year, including the level of transactions and price growth. The performance of the broader UK economy during the year, and the government’s housing policies, will likely have an impact upon the full extent and duration of these improvements.
Various global institutions have cited potential emerging risks to the global economic and financial system during the year, including: increasing levels of Corporate Sector Debt; a tightening of financial conditions in 2018.repo markets; China’s financial imbalances; and limited capacity of central banks going forward to prevent a fall in economic growth. Many of the risks regularly cited by these institutions may not have a direct impact on Santander UK, however they
could result in an increase in the cost of funding generally in the wholesale markets. We maintain prudent and resilient Funding and Liquidity Policies to protect the bank and our customers.
LIBOR transition
In Q4 2018, we launched our LIBOR transition programme, which includes identified Senior Managers within the bank who oversee the implementation of our transition plans. The Project has the full support of the Board and Executive Management across the bank. We recognise that there are potential risks to our customers as we transition from LIBOR to risk free rates going forward. Our Brexit preparations
The UKLIBOR transition programme is duein place to leaveensure a smooth transition, and to anticipate and address any potential customer and conduct related issues that could arise from the European Union on 29 March 2019. While uncertainty around Brexit remains wechange. There are preparing foralso a number of outcomes in orderother thematic risks involved including; legal and compliance; reputational; operational and financial accounting and control. There is also some uncertainty about the likely path of evolution for the set ofnon-LIBOR benchmarks and markets fornon-LIBOR products (including liquidity or illiquidity related issues).
In January 2020, the Working Group on Sterling Risk-Free Reference Rates set targets for 2020, including ceasing the issuance of sterling LIBOR-based cash products maturing beyond 2021 by the end of Q3 2020. The FCA and Bank of England have stated their support for these targets. We have established detailed plan timelines and milestones, including a Project Governance structure, to minimiseenable the impact on our customers and our business. Our Brexit preparations are comprehensive and we have dedicated significant focustransition to ensure we can continue to serve our customers whatever the outcome. In particular we have taken accountalternative rates ahead of the nationalityend of 2021.
Climate change risk
Reflecting the significant potential risks posed by Climate Change to the economy and locationto the financial system, in April 2019, the PRA became the first regulator in the world to publish supervisory expectations setting out how banks need to develop an enhanced approach to managing the financial risks from Climate Change. In 2019, our programme of work focused on enhancing our understanding of the most material climate change related drivers of our peoplebusiness model, and customers, contract continuity,producing an implementation plan to fully deliver the PRA’s expectations under Supervisory Statement (SS) 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial markets infrastructure such as clearing, access to Euro payment systems as well as third party servicesrisks from climate change’. We are addressing climate change related risk issues through ongoing engagement across our business and flows of data intosupport functions,co-ordinated and outled by the Risk Division. Our focus will be on implementation of the European Economic Area.
Ring-fence implementation
As part of ring-fencing implementation,plan that we delivered to the PRA in July 2018 we transferred £1.4bn of customer loans, £21.5bn of other assets and £20.7bn of liabilities from Santander UK to Banco Santander London Branch, which included £19.7bnOctober 2019.
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Task Force on Climate-related Financial Disclosures
Introduction
As a group, Banco Santander supports the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which were published with the aim of improving disclosure of climate financial risk and opportunities. As part of our strategy in the UK we have prioritised embedding sustainability in everything we do and welcome the developments of the PRA and FCA to improve management and disclosure of climate change related risks.
In October 2019, we submitted an initial UK implementation plan to the PRA to address the expectations set out in SS 3/19. Alongside this plan, responsibility for climate related financial risks was added to the Statement of Responsibility of the Chief Risk Officer (CRO) as Senior Management Function (SMF) holder. Delivering on our plan will be a multi-year programme. We are targeting the end of 2022 to achieve full adoption, aligned to the implementation path as set out in the TCFD recommendations. We are working alongside Banco Santander with a shared ambition of being a leading global bank for tackling climate change.
Governance
The CRO, as the SMF holder, is responsible for climate-related financial risks. The management of these risks lies in the first line of defence. It is therefore expected that the CRO will be supported by the business division heads to fulfil these responsibilities.
To address TCFD recommendations and PRA expectations, a Climate Change Working Group (CCWG) was launched in 2019 andre-launched in Q1 2020. This CCWGco-ordinates the efforts to deliver the implementation plan and will report on progress to the CRO, Executive Risk Control Committee and Board Risk Committee.
The first half of 2020 will see the documentation of firm-wide climate change risk management governance arrangements. This will articulate the roles and responsibilities and the committees involved across the three lines of defence.
During the second half of 2020, the link between climate change related metrics and remuneration will be defined.
| (1) | Inframation league tables 2019, combining both Banco Santander and Santander UK. |
Strategy
In 2019, we have developed a high-level analysis of our credit portfolios based on various climate scenarios: abusiness-as-usual (BAU) scenario (which trends towards 3.7°C of average global warming by 2100) and alow-carbon transition scenario (which trends towards 2°C of warming). This analysis is referred to as the ‘Climate Portfolio Screen’.
The aim of the Climate Portfolio Screen was to identify sectors and segments of the Santander UK lending book where there could be greater potential opportunities and risks associated with both the transition to a lower carbon economy and changes in physical climatic conditions.
According to this analysis, the sectors of most concern based on exposure and or potential risks are mortgages, real estate, consumer finance and automotives. For the mortgage portfolio, we are working on a project that will help us understand the physical and transition risks in our mortgage book under different climate scenarios.
We are committed to strategically aligning our business with the UN Sustainable Development Goals and the Paris Agreement. This means recognising the opportunities for climate financing. In October 2019, Banco Santander issued a€1bn green bond, focused on financing renewable energy projects from wind and solar.
Banco Santander is one of the largest renewable energy financiers, ranking as the 3rd largest lender to the sector by volume (2nd by number) of transactions in 2019 in the UK, and also ranked 1st by volume for advisory services in Europe and the UK(1). Santander UK originated £1.09bn of debt financing to 21 renewable energy projects in 2019.
Risk Management
Climate-related risks could eventually manifest in credit, market and operational risks for financial institutions. We are reviewing the appropriate parts of the Risk Framework, Risk Type Frameworks (in particular Credit and Operational risk) and the Risk Appetite Statement to explicitly include climate-related risks.
Our commitment to fight climate change is articulated in the Banco Santander and Santander UK Energy, Mining and Metals and Soft Commodities sector policies. The policies apply strict criteria to transactions related to fossil fuels, for example, prohibiting the financing of any new project for coal power plants or thermal coal mines. In 2020 we will review and update the UK Environmental Policy and Sustainability Policy to reflect climate considerations.
Metrics and targets
In disclosing metrics and targets we will look to cover both internal environmental footprint as well as the climate-related risks and opportunities of our lending activities. We aim to expand on the latter metrics in 2020 following further analysis and developments with our strategy and risk appetite.
We use 100% renewable electricity and target to maintain this for 2020. We report annually on greenhouse gas emissions, including Scope 3, in our ESG Supplement 2019. Santander in the UK will also contribute to Banco Santander’s global renewable financing target of over€120bn in green finance from 2019 to 2025.
Estimated present value losses resulting from 6°C of warming, according to: The cost of inaction: Recognising the value at risk from climate change, The Economist.
Annual Report 2019| Strategic Report
We are improving efficiency while actively
managing our funding and liquidity portfolios
and capital consumption
Our 2019 financial results reflect competitive and regulatory pressures
Profit before tax was £981m, down 37% from £1,567m in 2018. Profitability was impacted by the ongoing competitive income pressure on mortgages and PPI charges, but also includes the investment we are making as part of our plan to transform the bank for the future. In what was a competitive and uncertain environment, adjusted profit before tax(2) was £1,300m, down 24% from £1,707m in 2018. This was largely due to mortgage income pressure and was reflected in the Banking NIM of 1.64% (2018: 1.80%) ROE of 4.9% in 2019 (2018: 8.2%) and adjusted return on tangible equity(2) of 7.8% (2018: 10.2%).
Net interest income was down 9%, largely impacted by mortgage back book pressure and £3.9bn of SVR attrition (2018: £4.9bn).
Non-interest income was down 7%, largely due to £58m of ring-fencing perimeter changes in 2018, partially offset by £15m additional Vocalink consideration received in Q2 2019.
Operating expenses before credit impairment losses, provisions and charges were down 1%, with the absence of £48m of ring-fencing perimeter changes, £40m of GMP equalisation costs and £38m of Banking Reform costs all
incurred in 2018. This was partially offset by £50m transformation costs(3) in 2019 and £40m higher operating lease depreciation.
Credit impairment losses were up 44% to £220m, largely due to lower mortgage releases as well as a few single name corporate exposures.
Provisions for other liabilities and charges were up £183m to £443m, largely due to additional PPI provisions of £169m and £105m of transformation programme charges(3) (predominantly restructuring costs) as well as an additional £10m other provision charge in 2019 pertaining to our retail credit business operations. Other adjustments to provisions amounted to £80m in 2018.
Supporting our customers while growing our business
Customer loans increased £5.4bn, with mortgage lending in Retail Banking up £7.4bn. This was partially offset by a reduction in corporate lending which included managed reductions in Commercial Real Estate (CRE) of £1.1bn. Customer deposits increased £5.7bn, with £3.0bn growth in Retail Banking supported by a successful ISA campaign and 1I2I3 Business Current Account inflows. Corporate deposits also increased as we focused on building strong customer relationships.
Summarised consolidated income statement
| For the years ended 31 December | 2019 £m | 2018 £m | ||||||
Net interest income | 3,295 | 3,606 | ||||||
Non-interest income(1) | 875 | 937 | ||||||
Total operating income | 4,170 | 4,543 | ||||||
Operating expenses before impairment losses, provisions and charges | (2,526 | ) | (2,563 | ) | ||||
Credit impairment losses | (220 | ) | (153 | ) | ||||
Provisions for other liabilities and charges | (443 | ) | (260 | ) | ||||
Profit before tax | 981 | 1,567 | ||||||
Adjusted profit before tax(2) | 1,300 | 1,707 | ||||||
| (1) | Comprised of ‘Net fee and commission income’ and ‘Net trading and other income’. |
| (2) | Non-IFRS measure, see page 169 the financial results were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £319m in 2019 and £140m in 2018. See ‘Alternative Performance Measures’ for details and reconciliation to the nearest IFRS measure. |
| (3) | Transformation programme investment of £155m, of which £50m is operating expenses and £105m is provisions for other liabilities and charges. |
Maintaining balance sheet strength
CET1 capital was stable at £10.4bn, with ongoing capital accretion through profits retained after dividend payments, offset by market-driven pension movements. RWAs reduced largely as a result of significant risk transfer (SRT) securitisations and lower corporate lending as we continue to focus on risk-weighted returns. This was partially offset by increased RWAs in Retail Banking in line with mortgage lending growth. The CET1 capital ratio increased 110bps to 14.3%, through active RWA management. The UK leverage ratio increased 20bps to 4.7%. The quality and strength of our balance sheet was again demonstrated by the Bank of England stress test results.
| Financial highlights | ||||
| 1.64% | ||||
| Banking NIM | ||||
| (2018: 1.80%) | ||||
| 61% | ||||
| Cost-to-income ratio | ||||
| (2018: 56%) | ||||
| £165.4bn | ||||
| UK mortgage loans | ||||
| (2018: £158.0bn) | ||||
| £68.7bn | ||||
| Retail Banking current account balances | ||||
| (2018: £68.4bn) | ||||
| £7.9bn | ||||
| MREL eligible senior unsecured debt | ||||
| (2018: £9.2bn) | ||||
| £73.2bn | ||||
| Risk-weighted assets (RWAs) | ||||
| (2018: £78.8bn) | ||||
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The Stage 3 ratio of assets1.15% (2018: 1.29%) and £18.8bncost of liabilities relatedrisk of 11bps (2018: 8bps) demonstrate our prudent approach to risk.
2019 funding
In late 2018 and early 2019 there was a market expectation that a disorderly Brexit was a likely outcome. As a result wepre-fundedour derivatives business. These transfers reduced RWAsissuance in 2018 and held extra liquidity throughout the year to prepare for potential market disruption. This meant that we had a relatively light funding plan for 2019 with issuance of around £4.0bn, well below normal levels.
We are well placed to meet MREL requirements, with £7.9bn of senior unsecured funding from our holding company issued to date. Total wholesale funding decreased in 2019, reflecting maturities in the period, partially offset by £5.5bncovered bond issuances of £1bn in February 2019,€1bn in May 2019 and £1bn in November 2019, along with a senior unsecured issuance of $1bn in June 2019. In August 2019, we paid an associated dividendincreased our AT1 outstanding by £200m via the issuance of £668m. In June 2018, we also transferred £1.3bn of customer assetsa new £500m 6.3% AT1 to Banco Santander London Branch under a risk management initiative, which reduced RWAs by £1.2bn.and the repurchase of the £300m 7.6% AT1 from Banco Santander.
20192020 outlook remains uncertain
We expect global economic activity to continue to expand in 2019, albeit at a slower pace with a number of heightened risks to the outlook from the ongoing imposition of trade restrictions, geopolitical tensions and slower growth in developed economies. These risks, together with the uncertain environment, highly competitive banking market and demanding regulatory agenda in the UK, mean we are cautious in our outlook.
In our core lending markets, we anticipate modest growth, with mortgage market growth of c3%, with weaker buyer demand and subdued house price growth likely to continue. Corporate borrowing market growth is expected to slow to c2%, as uncertainty continues to dampen investment intentions, particularly in the short term
Our base case anticipates a slight improvement in economic growth, predicated on the UK’s orderly exit from the European Union. The low levels of unemployment should continue with inflation on a downward path which, coupled with rising wages, should result in real earnings growth. Extrapolating from the economic outlook at the end of 2018, our assumption is that there will be a 25bps rise in base rate in H219.
Banking NIM is expected to be lower than the 1.80% seen in 2018, as a result of competition in new mortgage pricing, SVR attrition and limited capacity for further liability margin improvement. SVR attrition is expected to be lower than the net £4.9bn reduction in 2018.
We expect costs to increase slightly as we invest further in our business transformation, face an intensifying regulatory change agenda and manage inflationary pressures. Incremental digital and strategic investments in process automation as well as system and platform rationalisation are also planned. These actions, together with global Banco Santander group initiatives, will improve our customer experience and deliver operational efficiencies over time. We expect to provide further guidance on cost management initiatives in the next few months.
We expect our net mortgage lending to be broadly in line with 2018,market growth, as we focus on quality customer service, retention and improvedour
comprehensive proposition for first-time buyers. We will continue to actively manage our CRE exposures whileand focus on supporting our lending growthto non-CRE trading business customerscustomers.
We expect pressures on Banking NIM to continue, although at a slower rate and predicated on a stable rate environment. With the SVR portfolio now 9% of the total mortgage book, we expect SVR attrition to be proportionally lower along with signs of front book margins improving. Recently announced changes to deposit pricing should also begin to offset some of these pressures in the second half of 2020. Lastly, the implementation of regulatory changes regarding the high cost of credit will also increase net interest income, although it is expectedworth noting that this will be more than offset by a reduction innon-interest income.
We expect adjusted operating expenses to remain robust.be lower in 2020 as the momentum behind our transformation programme builds and improved efficiency begins to outweigh inflationary and other pressures.
OverCredit impairments are likely to increase from the last fewvery low levels seen in recent years, in addition to the significant changesalthough we implemented for ring-fence compliance, we have takendo not anticipate a numbermaterial worsening of actions to position the bank for the uncertain environment. I believe these actions together withcredit quality given our prudent approach to risk leave us well placed forand the future.
Antonio Roman
Chief Financial Officer
26 February 2019supportive environment.
Summary of segmental balance sheet assets and liabilities
| At 31 December | 2019 £bn | 2018 £bn | ||||||
Customer loans | ||||||||
Retail Banking | 180.4 | 172.8 | ||||||
Corporate & Commercial Banking | 16.3 | 17.7 | ||||||
Corporate & Investment Banking | 4.1 | 4.6 | ||||||
Corporate Centre | 4.5 | 4.8 | ||||||
Total customer loans | 205.3 | 199.9 | ||||||
Other assets | 83.2 | 89.5 | ||||||
Total assets | 288.5 | 289.4 | ||||||
Customer deposits | ||||||||
Retail Banking | 145.1 | 142.1 | ||||||
Corporate & Commercial Banking | 18.2 | 17.6 | ||||||
Corporate & Investment Banking | 6.1 | 4.8 | ||||||
Corporate Centre | 8.4 | 7.6 | ||||||
Total customer deposits | 177.8 | 172.1 | ||||||
Total wholesale funding | 65.3 | 70.9 | ||||||
Other liabilities | 29.1 | 30.2 | ||||||
Total liabilities | 272.2 | 273.2 | ||||||
Shareholders’ equity | 15.9 | 15.8 | ||||||
Non-controlling interest(1) | 0.4 | 0.4 | ||||||
Total liabilities and equity | 288.5 | 289.4 | ||||||
| (1) | Non-controlling interests refers to other equity instruments issued by Santander UK plc and PSA Finance UK Limited (PSA cooperation), a cooperation between Santander Consumer (UK) plc and Banque PSA Finance SA (accounted for as a subsidiary). |
Since 31 December 2019, trends evident in the business operating results have not changed significantly.
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the 2019 Bank of
The results of the latest
With a stressed CET1 ratio of 10.8% | As a result of the exercise, the Bank of England did not require Santander UK to undertake any actions.
The outcome of the stress test underlines the quality of ourUK-based balance sheet as well as our strong risk management practices.
(1) CET1 ratio drawdown is defined as CET1 ratio at 31 |
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Annual Report 2018 2019| Strategic Report
We believe that our business performance should not be considered separately from the prosperity of all our stakeholders and sustainability of the wider environment.
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  | Customers |
We want to help people and businesses prosper and we aim to do so by being Simple, Personal and Fair in everything we do.
Digital innovationInclusive digitalisation
We continue to innovate to make our digital offerings more customer-friendly, secure and accessible. In 2018 we launched2019, Santander became the first UK high street bank to introduce tailored fraud warnings on our mobile app. We’ve also introduced customer-friendly authentication, including the ability to authorise online shopping transactions using a new mortgage servicing hub infingerprint or facial recognition. We have extended these authentication capabilities to customers initiating payment requests via Online Banking.
In 2020, we’ll launch a quicker online banking to givelogon experience. Following the launch of Voice ID in April 2019, 226,490 customers more control and flexibility to manage their mortgage online. As well as providing real-time information about their mortgage, customers can now makeone-off extra payments, saving them money over the life of their mortgage. This service has been well-received,have registered with over £3m1.4m Voice ID
verifications during 2019. Our mobile banking app scores highly with users, ranking 4.8 on iOS and 4.5 on Android, both out of payments made by5.0. In Q4 2019 we completed the work to deliver card controls to our mobile app, including the ability for customers to temporarily block their card when lost or stolen. This was piloted in 2019 and will be fully rolled out in the first two weeks. quarter of 2020. Customers can also apply blocks to online, contactless, international and gambling transactions.
In 2019, we launched Santander Chat to all Online Banking customers, made up of an automated virtual assistant ‘Bot’ and messaging via a live agent. This provides an authenticated platform for secure conversations and transactions. In 2020, we plan to bring this service to our mobile app, and increase theend-to-end transactions that the Bot can perform on behalf of customers.
Cyber security collaboration
We alsorecognise that, in parallel with the increase in digital banking, we must continually improve our cyber defences and data protection. Our response to the cyber threat is to continue to see moreimplement a global, multilayered and agile resilience framework.
Improved awareness is the foundation of cyber defence so we engage with customers, choosingregulators, partners and everyone across the organisation to stay with us with 55% choosing to take a new deal online, up 7pp on 2017.
As moreenhance their understanding of our customers choose to bank online, our aim is to give them more options and flexibility in managing their money.cyber security. We have enabled the setting up of regular overpayments, instant decisions in principle on an additional loan, and notifications of when their mortgage deal is coming to an end. Alongside other digital innovations such as our Digital Investment Advisor and Santander Chatbot, we have continued to improve our banking app, which resulted in our iOS rating improving to 4.8 in Dec18, based on 181,000 reviews.
Optimisinghosted nine Cyber Awareness workshop sessions across our branch network in 2019 to help educate our
customers on the threats they face online. We continued to invest in emerging cyber security talent, and the first cohort of our Digital Apprentices will graduate in 2020 with the skills to become the next generation of cyber experts.
Transforming our branch network across
The way customers are choosing to bank with us is changing. With more people choosing to engage through our digital platforms, there’s been an impact on the UK, completing the refurbishment of over 72%use of our branch network. We conducted an extensive review of the network to reshape it to meet our customer needs. Our network is evolving, made up of a combination of larger branches since 2013. We also
updatedoffering community facilities to support local businesses and customers as well as smaller branches using the latest technology to offer customers more convenient access to banking services. As part of this, we’ve refurbished 87% of our 52 Universitynetwork.
The introduction of Work Café demonstrates how we’re exploring different ways to use our branches by introducing more digital services.to meet customer needs. Santander opened its first UK Work Café in Leeds in July 2019. Since launch we’ve had 30,000 customer visits to use theco-working and bookable rooms, attend an event, or talk to our specialists.
We areWe’re a signatory to the Access to Banking Standard which ensures open and fair communication where banks decide to close branches. In 20182019, we closed 46140 branches in line with this standard, following ongoing reviews to ensure our resources are targeted efficiently to best meet the changing needs of customers.
We have embraced the joint initiative between HM Treasury and UK banks to raise awareness and confidence in everyday banking services available at the Post Office by jointly funding a marketing campaign ‘Bank at your local Post Office’ and increasing the prominence of the Post Office services on our website and branch literature. In areas where we close branches, our branch teams work closely with the local Post Office to ensure customers are aware of the banking services available locally.
In early 2019, we announced plans on reshaping our branch network and closing 140 branches, in response to changes in how customers are choosing to carry out their banking. We plan to have a combination of larger branches and smaller branches to offer customers more convenient access to banking services. Furthermore, in order to deliver a branch network for the future we are refurbishing 100 branches over the next two years through a £55m investment.
Supporting our vulnerable customers
We remain committed to providing support for our vulnerable customers and have continued to progress in this area in 2018. Rolling out our Specialist Support Team to all branch colleagues has been a key focus. The team provide dedicated support to over 7,500 branch
colleagues when they are dealing with customers who have complex needs and are in vulnerable situations. In 2018, we have supported almost 900 customers with this specialist approach.
We are also active members of the Financial Abuse Working Party, through UK Finance, and have committed to the resulting Code of Practice to better support and protect victims of financial abuse.
We are championing British businesses
Santander Breakthrough helps ambitious businesses grow and prosper through a range of activities focused on building connections, gaining knowledge, finding and retaining talent, international growth and finance. During 2018, we were proud to have supported 7,902 businesses across all of our Breakthrough activities. This included more than 4,200 attendees joining 193 Breakthrough in Branch events, which continue to connect business owners to their local business community.
We know how challenging it can be to start and grow a business. Our Liverpool City Incubator helps steerstart-up founders in the right direction and throughout 2018 provided tailored support to 28 businesses. More than 1,700 SMEs have benefited from the Santander Universities Internship Programme with access to subsidised internships from one of more than 80 partner universities. Some of our customers have the potential for significant growth and require capital as well asnon-financial support. In 2018, our Growth Capital Team provided £20.7m of growth capital and £100.7m of senior debt to 35 SMEs.
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resources are targeted to meet the changing needs of customers. We’ve signed up to the Banking Framework 2, an agreement that allows customers to access 11,000 Post Office outlets to take out or pay in cash and cheques and obtain a balance. We’re also working with UK Finance and other banks to support communities’ access to cash. Supporting our vulnerable customers Building capability across the bank to better support vulnerable customers is a focus of our Vulnerable Customer Strategy. In 2019, we launched an award-winning internal training programme, ‘Perspectives’, featuring real customer stories. This covers dementia, autism, PTSD, financial abuse and confusion and aims to raise awareness, reduce stigma and equip colleagues to better identify and respond to those who need support. Since launch in May 2019 these films were viewed 46,755 times. We have been working with Alzheimer’s Society to become a more dementia-friendly bank, auditing our branches and improving our products and services for people living with dementia (find out more on page 30). | ||||
We’ve also been working with charities and industry forums to respond to challenges such as harmful gambling and financial abuse. Our approach to tackling harmful gambling is informed by a bespoke social insights approach in collaboration with gambling charities, the gambling industry and people with first-hand experience. This allows us to better understand our role in this area and how we can be effective in the detection and prevention of gambling-related financial harm. Throughout 2020 we will continue our work on the underlying initiatives that support our overall Vulnerable Customer Strategy, providing colleagues the tools and support they need to deliver for all our customers. Championing ambitious SMEs SMEs are at the heart of our country’s economy, but starting and running a business presents a wide range of challenges. Santander Breakthrough is designed to provide support at every step through events, insights and partnerships. In 2019, we supported over 5,600 businesses from their light bulb moment through to starting up, scaling up and beyond. Our Growth Capital Team provided financial support with £24.3m of growth capital and £90.8m of senior debt to 27 companies. | The launch of our Breakthrough online platform gives business owners better access to support and insights. It also provides the ability to find local Breakthrough business events, of which we ran 188 in 2019. We also launched our Trade Club Alliance, a new digital platform to help businesses boost global trade with market data on over 180 countries. We supported over 650 businesses in 2019 in trade events. We entered a three year partnership with the British Library’s Business and IP Centre network, aimed at supporting early stage businesses with key skills such as marketing and managing finances. We are a proud signatory to the Investing in Women Code and support female entrepreneurs with initiatives such as our national mentoring programme. |
Supporting first time buyers Offering unparalleled support to new buyers First time buyers (FTBs) are a key strategic focus for us, and in 2019 we were proud to win Your Mortgage’s Best First-Time Buyer lender. In 2019, we helped over 37,000 customers into their new home by lending £5.5bn, supporting 37% more customers than the year before. In 2019, Santander was the first lender to launch a free home condition report that helps FTBs identify any potential issues with the home before they buy, avoiding unexpected costs. We also continued to improve our online mortgage servicing hub, including the retention service, with 60% of customers choosing to change their deal online, an increase of 10% from 2018. The convenience of online mortgage services means over 50% of regular overpayments are now made online. Our ambition is for branches to become an integral part of the local community providing unbiased financial education. Since launch in September 2019, we’ve completed over 1,000 FTB events in our branches, providing unbiased advice for those interested in buying their first home. |
| Santander UK Group Holdings plc | 27 |
Sustainability reviewcontinued
  | Shareholders |
We aim to deliver a long-term, sustainable return for our shareholders while helping people and businesses prosper.
Being an important partPart of a global bank
We are a subsidiary of Banco Santander SA and part of the Banco Santander group. Alongside its London Branch and Wealth Management business, we form its UK presence. The Banco Santander group, is a leading retail and commercial bank founded in 1857, headquartered in Spain. As of 31 December, it was the largest bank in the eurozone by market capitalisation (€64.5bn) and 16th in the world and maintains a leadership position in our local markets in Europe and the Americas.
Our ordinary shares are all held by Banco Santander group companies and are not listed. Ourlisted, although our preference shares however, are listed on the London Stock Exchange. We also have
other equity instruments in the form of four AT1 securities issued in 2014, 2015, 2017 and 2017.2019.
Under the subsidiary model operated by Banco Santander, autonomous subsidiaries are responsible for their own liquidity, capital management and funding. This not only mitigates the risk of difficulties in one subsidiary affecting another, it allows local market knowledge and expertise to be utilised and provides considerable operational flexibility.
We benefit from the strong Santander brand along with experience and expertise from a global banking group. Systems development capacity can be shared along with common technology platforms and innovations, creating a significant competitive advantage.
Consistent shareholder returns
Santander UK has a track record ofOur consistent profitability which is built on the strength of our proposition, cost discipline and our prudent approach to risk.
Our track record of profitability has enabled us to pay a dividend every year since 2008. Our policy is to declare a dividend of 50% of earnings attributable to ordinary shareholders.
In 2019, we began a multi-year transformation programme to reshape the bank to support our customers better. By focusing on simplification, digitisation and customer experience, we aim to improve returns in the medium-term.
BenefitingInvestor engagement
Our UK Investor Relations team actively engages with institutional investors across the globe, working alongside our funding and capital teams for new issuances and building and maintaining relationships with fixed income investors and analysts.
The UK Investor Relations team provides atwo-way link between investors and senior management, focusing on both external messaging and communication whilst providing feedback from being an independent subsidiary of a large groupinvestors to the Board.
The Banco Santander group has a well-balanced distribution across mature and developing markets, and mix of products for individuals
£1,121m709m
profit after tax
(2017: £1,254m)2018: £1,164m)
and companies. Our model of legally independent subsidiaries, autonomous in liquidity and capital, means that we can mitigate the risk that difficulties affecting one subsidiary impact another. Subsidiaries are managed locally, so that the expertise and knowledge of local markets is fully utilised, with each subsidiary also having its own resolution plan.
The subsidiary model gives us considerable financial and operational flexibility while also allowing us to take advantage of the significant synergies and strengths that come from being part of a major, well-diversified banking group.
Importantly we benefit from Banco Santander’s strong brand, products and platforms as well as their systems development capacity – we utilise common technology platforms. Taken together, these constitute a major competitive advantage for us.
Fair pay We offer our people a fair and competitive reward package Our Reward Framework is reviewed annually against the external marketplace. Salary reviews, and changes to reward policies, are assessed for any adverse impacts on a particular group. Salary ranges and Pay Progression arrangements are visible to all colleagues. We embrace transparent reporting, evidenced by our detailed Gender Pay Gap report, voluntary disclosure of our CEO pay ratio in our Remuneration Implementation Report, input to government consultations on ethnicity pay reporting, and testing of potential reporting methodology. We work in partnership with recognised trade unions and consult on any changes to our Reward Framework. We are proud to have been an accredited Real Living Wage employer since 2015. Recent pay changes for colleagues include increases to entry level starting salaries, and improvements to our Pay Progression scheme. | ||||
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Annual Report 2018 | Strategic Report
Stakeholder reviewcontinued
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We aim to create a thriving workplace that attracts, retains and rewards the most talented and committed people. Our culture promotes diversity and inclusion, prioritises wellbeing and develops our people’s skills.
Helping our people prosper
We provide our people with a competitive package of pay and benefits, to reward them for their individual contribution to the business and our sustainable performance. In 2018, 35% of our people participated in one or both of our two HMRC-approved share save schemes and 88% of our people participated in our pension schemes. We are a Living Wage and London Living Wage employer. We have positive strategic relationships with Advance and the Communication Workers Union (CWU), our two recognised trade unions.
In 2018, our people undertook 73,933 development days and we invested £10.6m, equipping them with the skills they need for now and in the future, including digital skills. We are enabling people to work in a way that suits their individual needs and helps to create a thriving workplace. We also announced plans to upgrade two of our main offices with newstate-ofthe-art buildings; Milton Keynes will become our flagship technology hub and Bootle, our contact centre and operations hub.
Building a bank for everyone
We want to create a bank that is representative of the society we operate in. In our 2018 engagement survey, 85% of our people agreed that we created an environment where people of diverse backgrounds can succeed (+6pp to external benchmark) and 87% agreed that we act responsibly and make a positive contribution to society (+12pp to benchmark).(1)
We recognise the potential that everyone can bring to the organisation. A number of initiatives, programmes and training build inclusivity across our business. These include our sixemployee-led diversity networks, returnships programme, women’s leadership development training and our cutting-edge research in partnership with Business in the Community (BiTC): ‘Equal Lives’ which uncovered the societal and organisational biases that exist among men and women with caring responsibilities and how these can impact women’s career progression.
Our commitment to driving racial diversity has seen us listed again as a Top Employer for Race.(2) In 2018, we built on this by signing the BiTC Race at Work Charter, committing to taking more action to support ethnic minority career progression and analyse our ethnicity pay gap data. In 2018, we were the only financial services provider to feature on the Social Mobility Employer Index 2018. Across our business, we have continued to increase our support for Apprenticeship schemes in
2018 and have 15 apprenticeship schemes in place with over 500 apprentices.
Gender diversity
In June 2016, we signed the HMT Women in Finance Charter – setting a 50%(+/-10%) gender target for our senior female population over five years. Women made up 30.7% of senior managers, 35.7% of executive committee and 54% of our Board at 1 January 2019. In recognition of our approach to creating a gender diverse bank, we were a Times Top 50 Employer for Women in 2018.
Prioritising wellbeing
We aim to provide a wellbeing proposition that covers Physical, Mental, Financial and Social Wellbeing. In 2018, we launched our Mental Wellbeing Network, a hub to provide support, raise awareness and help people Speak Up. The network is rapidly growing with over 1,200 members. Over 2,400 managers completed ‘Positive about Mental Health Training’. In 2018, we partnered with Nudge to offer an interactive tool to support financial wellbeing.
87%
Of employees agree that we act responsibly and make a positive contribution to society (+12pp above external benchmark)
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 | People | employee-led diversity networks, which collectively have over 10,000 members across the bank. This year we launched our network for Social Mobility to help create a level playing field for all colleagues irrespective of their background. We are a signatory to the Social Mobility Pledge and benchmark as a top 20 employer in the Social Mobility Index (up from 49th in 2018). We continued with a number of targeted actions to improve our gender diversity. Our progress is detailed in our latest Gender Pay Gap report. Women made up 32.1% of senior managers, 26.7% of our Executive Committee and 25% of our Board (including Executive andNon-Executive Directors) at 31 December 2019. For the Business in the Community (BiTC) ‘Race at Work Charter, One Year on’, we continue to make good progress, having achieved two actions. We also were the headline sponsor of Pride:MK, the first Pride event in Milton Keynes, and were classed as a Top Ten Employer at the British LGBT Awards. We support a range of apprenticeship schemes up to degree level and provide a graduate development programme ‘Accelerating Capability’. We have 421 apprentices, of which 46% are female, and recruited 97 graduates, of which 59% are female, through partnerships with 86 UK universities. Learning In 2019, our people undertook 144,703 training days and we invested £10.6m, equipping them with the skills they need for now and in the future, including digital skills. We launched a new learning platform, MIO, which is a key enabler of a continuous learning environment. MIO provides a variety of training styles, from2-3 minute bursts to themed box set content to support colleagues. In 2019, 484 people managers
85% Of employees felt positive that Santander has created an environment where people of diverse backgrounds can succeed. | completed our new ‘Leading our Future’ toolkit for building inclusive and resilient teams. Our Leadership Development focus was on digital knowledge and skills, leading change and transformation capability and driving collaboration, with initiatives including a Digital Leaders Academy for senior leaders. Prioritising wellbeing In a time of change at Santander and in financial services, we aim to help colleagues build personal resilience and feel supported. In 2019, we repositioned our wellbeing proposition to cover Physical, Mental, Financial and Social Wellbeing and held a number of wellbeing events. We supported Public Health England’s Every Mind Matters Campaign and signed the BiTC Mental Health at Work Commitment at launch. We’re building a Wellbeing Hub that brings all of our support into one place. This will help colleagues to proactively access support and information across diverse topics such as nutrition, sleep, stress, finances, body image and more. Our Mental Wellbeing colleague network now has over 2,190 members. Working in partnership During 2019, we consulted our recognised trade unions Advance and Communication Workers Union (CWU) on restructuring proposals as the bank simplifies to become more efficient. Our mutual focus is to minimise job losses by prioritising redeployment orre-training of colleagues affected. Outplacement support is offered to all colleagues affected by change. | |||
We aim to create a thriving workplace that attracts, retains and rewards talented and committed people. Our culture promotes inclusion and diversity, prioritises wellbeing and develops the skills of our people. Culture Our culture of Simple, Personal and Fair is underpinned by our nine behaviours, enabling our colleagues to thrive. In 2019, we were again recognised as a Top Employer by the Top Employers Institute. Our goal to be a high-performing and responsible business is reflected in the 2019 Global Engagement Survey (GES) with 85% of colleagues feeling ‘We act responsibly and make a positive contribution to society’, 13% above the external benchmark(1). In 2020, we will focus on transformation through simplification, driving a learning culture and being an inclusive and responsible organisation. Employee engagement We foster an open dialogue between employees and our Executive Committee. In 2019, we held a series of internal roadshows and a virtual ‘Santander Conversation’, reaching over 2,800 employees. This gave the Executive Committee the opportunity to discuss our vision and roadmap and hear from colleagues. Colleague engagement levels remained relatively stable in a period of transformation and change. Additionally, 992 colleagues participated in virtual focus groups in 2019 to help better understand employee experience. Building a bank for everyone Our approach to Inclusion and Diversity is to be a workplace where anyone and everyone can learn, grow and succeed, while being themselves. In 2019, our employee survey results showed that 88% of employees felt positive that their line manager is open and inclusive, promoting diversity. We have seven (1) Financial sector benchmark taken from the survey provider Mercer Sirota. The financial services sector norms are based on more than one million employees answering 114 surveys over the last five years. | ||||||
Annual Report 2019| Strategic Report
Sustainability reviewcontinued
  | Communities |
We support and invest in communities across the UK to foster sustainable economic growth.
Helping our communities prosper
We’re changing the way we partner with charities to ensure strategic collaborations which help us to become a more responsible bank. On top of employee fundraising and volunteering, we have developed joint strategic initiatives to address pressing challenges. For instance, in January 2019 we appointed Alzheimer’s Society as our new charity partner for 2019-2021. Our volunteeringaim is to leverage the charity’s expertise to help us become a digitally dementia-friendly bank.
Financial inclusion and fundraising in 2018literacy
Financial inclusion and literacy are critical elements of our strategy. Santander colleagues supported over 25,000 students through ourin-school mentoring programme focused on building skills, developing knowledge and supporting innovation, through a number of partnerships to support this strategy. All employees benefit from the opportunity to volunteer in teams for local community organisations, and we saw 11,561 staff engage with this programme during 2018. Through work experience initiatives with our partners National Citizen Service and Career Ready, we offered students from all backgrounds work opportunities, which in turn will create talent pools that businesses and the economy need.
In 2018, the Santander Foundation awarded over £3.3m in grants to almost 700 organisations to deliver projects that improvemoney management, digital skills and knowledgecareers. We also reached almost 200,000 young people during My Money Week, helping 4 – 19 year olds to gain confidence in money matters.
We used our UEFA Champions League flagship sponsorship and promote innovative solutionspartnered with National Numeracy to help disadvantagedbring the power of football and education together and tackle the fact that 40% of people in the UK.UK don’t feel ‘fully confident’ with everyday budgeting and money management. We created The foundation donatedNumbers Game: 13UK-wide roadshows through which we engaged over £2.1m through20,000 children, families and young adults, resulting in over 11,900 people completing the Staff Matched Donation Schemeexperience.
Use of National Numeracy online learning materials increased 31% since we started our tour, doubling their engagement rate. Ouron-site research showed that 85% of people gained a better understanding of the importance of numbers in everyday life, while 87% believed that being confident with numbers helped them to support our employees’ fundraising.manage their money better.
We developed our popularin-school mentoring program (Wise workshops), where Santander volunteers teach students about topics such as responsible money management or career planning, to include a new module around staying safe online. DigiWise sessions help 13 and 14 year old students understand their
digital footprint, data protection rules and intellectual property law. We partner with Young Citizens, an education charity working in schools to educate, inspire and motivate the citizens of tomorrow.
FraudInnovative fraud and scams education
In June 2019, Santander teamed up with Kurupt FM from BAFTA-winning BBC TV show People Just Do Nothing to create its latest fraud awareness campaign, ‘MC Grindah’s Deadliest Dupes’. Statistics show
that Generation Z are among the most likely to fall victim to scams, and their behaviours online can make them vulnerable to fraudsters. In the last year, identity theft among people under 21 has risen by 26% while 50% of money mules are aged 26 or under and 27% are aged 21 or under.
We continue to volunteer in communities to raise awareness of fraud and scams. Our people supported local organisations and community groups by delivering our Fraud and Scam Awareness Workshops. We also worked extensivelypartnered with Age UK, our2016-18 charity partner,Barnardo’s to deliver educational sessions on fraud and scamsthe content we created with Kurupt FM to groups of older people.
We also run a Scam Avoidance School (SAS), an engaging campaign to raise awarenesssome of the sophisticationmost vulnerable young people, reaching approximately 220,000 in their network. We ran seven workshops with Barnardo’s, resulting in 83% of scammers. This is runattendees saying they now felt more confident on how to avoid these scams.
In 2019, the Santander Foundation, a separate legal entity that operates independently from Santander UK, reviewed its strategy and explored how to deliver a greater positive impact within our communities. Following this, the Foundation will launch a new Grants Giving programme in all of our branches2020 to support digital and is free forfinancial skills. During 2019, the publicFoundation continued to attend. The popularity of these events was recognisedsupport local charities via the Matched Donations programme, approving 1,694 in July 2018, when members of our Fraud and Customer Interactions team presented the campaign to Members of Parliament.employee-submitted requests.
OurSantander Universities programme
Santander Universities is our global programme to supportsupporting education, employability and advanceentrepreneurship across students in higher education. Since 2002 Banco Santander has donated over€1.6bn1.7bn to universities, across the globe. This made the programmemaking us one of the largest global corporate contributors to higher education.(1) In the UK, we donated over £88m to 86 partner universities in the last 12 years.
£3.2m
Total fundraising for our charity partners between2016-18
Our Vision 2020 sets out our aim to provide impactful, diverse and inclusive support to higher education, through education, entrepreneurship and employability. Our goal is to provide life-changing opportunities, to more people overensuring by the next three years than we have in the previous ten. We will ensureend of 2020 that 80% of individual recipients are from widening participation backgrounds and aspireaspiring to an equal gender balance.
In the UK we’ve donated over £79m to 84 UK partner universities in the last eleven years. In 2018,2019, we directly supported more than 29,000 students, graduates and university staff through initiatives focusing on education, employability and entrepreneurship. We also funded internships for students and graduates in15,000 students. Over 1,400 SMEs acrosshave benefited from the UK, supporting 2,811 internshipsSantander Universities Internship scheme with 38%1,700 student interns, of students goingwhich over 50% went on to further employment. Our aspiration is to achieve a 75% employment, rate by 2020.
Looking to the futureexceeding our target.
In 2019, we aim to go beyond traditional volunteering and fundraising to deliver even more long-term, meaningful value to society. We are redefining the purpose and activity oflaunched the Santander Foundation,Universities two year Women in Engineering Programme. This initiative focuses on dedicated support for women undertaking an engineering degree, addressing the gender gap in engineering studies. Of the 81 female students supported, 30 were selected for a scholarship, an internship and a trip to ensure the greatest positive impact in our communities. Moving beyond skills, knowledge and innovation, we will seekUSA to focus our resources on topics where we can make a difference such as financial inclusion and education, digital inclusion and fighting financial crime.an engineering company.
Becoming the best dementia-friendly bank in the UK 850,000 people are estimated to be living with dementia in the UK, a figure set to increase. In 2019, we launched a three year partnership with leading dementia charity Alzheimer’s Society and
£745,000 Raised for Alzheimer’s Society in the first year of partnership, exceeding our target with record employee engagement. |
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 | Ethics and Environment |
We are committed to upholding the highest ethical standards.
Responsible lending
As part of the Banco Santander group, we comply with the Equator Principles, factoring social, ethical and environmental impacts into our risk analysis and decision making process for financial transactions. These principles address climate change, prevention of pollution and toxic waste emissions, biodiversity, indigenous peoples and human rights.
Our policy on Aerospace and Defence, Energy, Mining & Metals and Soft Commodities and our Sensitive Social and Ethical Sectors policy continue to define our approach towards creating long-term value while managing reputational, social and environmental risks.
In 2019, we further improved these policies by introducing prohibitions and strengthening restrictions on a range of activities. Prohibited activities now include the provision of products or services for new Coal Fired Power Plant (CFPP) projects and taking on new clients with existing CFPPs. Restricted activities include transactions specific to CFPPs for existing clients which do not significantly improve environmental impacts, such as a significant reduction of CO2. Our Reputational Risk Forum reviews and approves all restricted activities to ensure that they fall within our risk appetite. This forum reviews, monitors and escalates key decisions around financial andnon-financial reputational risks to the Board.
Renewable financing
In 2019, Santander was the 3rd largest lender among renewable energy financiers in the sector by volume (2nd by number of transactions) in the UK, and also ranked first by volume for advisory services in Europe and the UK(1). As part of this, Santander UK originated £1.09bn of debt financing to 21 renewable energy projects in 2019. We provide advisory and financing solutions for renewable and alternative energy clients across a range of renewable schemes, including onshore and offshore wind, solar and biofuel projects. In 2019, we further
enhanced our services by increasing the range of technologies we support and at the same time introduced a number of innovative funding structures. In particular, Santander advised in the refinancing and acquisition of 2 offshore wind farms in the UK and 2 onshore wind portfolio financings across the whole of Europe, which will afford clients flexibility to fund their future growth in this sector.
Environmental performance
We strive to reduce our operational impact on the environment. In 2019, our offices and data centres successfully recertified for ISO 14001 and transitioned to the new ISO 50001 standard.
Our energy data platforms allow us to accurately manage each of our properties that have a smart meter installed, and we reduced electricity use by 6.6% and gas usage by 10.7% in 2019. We also use lifecycle assessment to maximise energy saving opportunities when upgrading facilities. Our water use also reduced by 8.3% in 2019 with installation of efficient water fittings in three offices. We have a network of over 2,800 Green Champions to embed sustainability and green behaviour into site culture. These Champions ran 12 roadshows across our offices in 2019.
Ethical supply chain
We want to do business with companies who share our values. Our standard supplier contracts include specific requirements to respect human rights and ethical labour practice based on the principles of the UN Global Compact.
In 2019 we improved our Third-Party Risk Management (TPRM) framework, processes and policies, including enhancements to meet new European Banking Authority outsourcing requirements. Our third-party policy reflects our Board-approved Risk Appetite Statements, including specific provisions on forced labour. Our Third-Party Code of Conduct was launched this year, with reference to Banco Santander group Human Rights Policy and International Labor Organization (ILO) standards.
We completed a full review and update of our third-party supplier control assessment approach as part of improvements to third-party due diligence. The new framework was effective in August 2019 and with an
external partner we completed 15on-site suppliers assessments in 2019, with further assessments scheduled for 2020.
Anti-Financial Crime,
Anti-Bribery and Corruption
Our Anti-Financial Crime (AFC) strategy is set around the three principles of ‘Deter, Detect and Disrupt’. In 2019, we continued to drive a culture of AFC across the business and with partners. We ran 10 events for the UK’s Regional Organised Crime Units to better work with law enforcement to protect customers. We also held 8 AFC Culture roadshows with 510 colleagues attending, of which 96% better understood the AFC Vision and 69% said they will change behaviour.
We enhanced our governance of AFC by launching a Strategy & Policy forum in September covering strategy, anti-money laundering, counter-terrorism financing and sanctions. We also engaged with government and law enforcement stakeholders to shape the reforms that are part of the government’s Economic Crime Plan, which aims to improve the resilience of the UK’s overall defences against financial crime.
Tackling modern slavery and human trafficking This year we worked withnon-profit ‘Stop the Traffik’ to raise awareness and expertise in Santander on modern slavery and human trafficking (MSHT). As a financial institution, we are uniquely placed to deter, detect and disrupt those profiting from this criminal industry. We ran a targeted campaign with Stop the Traffik to raise awareness and capability in branch staff in a location at high risk for MSHT. Stop the Traffik also held masterclasses at our AFC roadshows. We work closely with law enforcement and the Joint Money Laundering Intelligence Taskforce (JMLIT). In 2019 our Financial Crime team were actively involved in cases, including one which resulted in the arrest of suspects after migrants were found in the back of a lorry. Our Modern Slavery Statement is published online and subject to approval from the Board and Responsible Banking Committee. |
| (1) | Inframation league tables 2019, combining both Banco Santander and Santander UK. |
The Directors, in preparing this Strategic Report, have complied with s414C of the Companies Act 2006.Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Strategic Report. Under English law the Directors would be liable to the Company, but not to any third party, if this report contained errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would otherwise not be liable. The Strategic Report has been drawn up and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with these reports shall be subject to the limitations and restrictions provided by such law.
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Annual Report 2019| Strategic Report
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Our governance
The UK Corporate Governance Code 2018 (the Code) sets out the framework for premium listed companies in the UK. The Code is the corporate governance code applied by the Company, with appropriate amendments as a fully owned subsidiary, and the standard against which we measure ourselves.
This Governance section (including the Chair’s report on Corporate Governance, the Committee Chair Reports and the Remuneration Policy and Remuneration Implementation reports) detail how the Company has applied and complied with the principles and provisions of the Code.
Any principles and provisions of the Code that are not precisely followed are detailed in the Directors’ Report on page 68.
How our governance supports the delivery of our strategy
All Directors are collectively responsible for the success of the Company.The Non-Executive Directors exercise objective judgement in respect of Board decisions, and scrutinise and challenge management. They also have various responsibilities concerning the integrity of financial information, internal controls and risk management.
The Board is responsible for setting our strategy and policies, overseeing risk and corporate governance, and monitoring progress towards meeting our objectives and annual plans. It is accountable to our shareholder for the proper conduct of the business and our long-term success, and seeks to represent the interests of all stakeholders.
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| Governance | 33 | |||||
| Board of Directors | 34 | |||||
| Corporate Governance report | 36 | |||||
| Chair’s report on corporate governance | 36 | |||||
| Board Nomination Committee Chair’s report | 40 | |||||
| Board Risk Committee Chair’s report | 42 | |||||
| Board Audit Committee Chair’s report | 48 | |||||
| Board Responsible Banking Committee Chair’s report | 54 | |||||
| Directors’ Remuneration report | 56 | |||||
| Board Remuneration Committee Chair’s report | 56 | |||||
| Remuneration policy report | 57 | |||||
| Remuneration implementation report | 60 | |||||
| Board and Committee membership and attendance | 64 | |||||
| Directors’ report | 65 | |||||
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Annual Report 2018 2019| Strategic Report
Environment and ethics Governance
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Annual Report 2018 | Governance
| 1 Shriti Vadera |
Chair
Chair
Appointed as Chair in March 2015, previously IndependentNon-Executive Director and Deputy Chair from 1 January 2015
Skills and experience
Shriti was an investment banker with SG Warburg/UBS from 1984 to 1999, on the Council of Economic Advisers, HM Treasury from 1999 to 2007, Minister in the UK Government from 2007 to 2009 (Cabinet Office, Business Department and International Development Department), G20 Adviser from 2009 to 2010, and advised governments, banks and investors on the Eurozone crisis, banking sector, debt restructuring and markets from 2010 to 2014. She was aNon-Executive Director of AstraZeneca plc between 2011 and 2018.
Other principal appointments
DirectorChair of Santander UK plc* since January 2015 and Chair since March 2015,Non-Executive Director of BHP Group Plc (formerly BHP Billiton plc) since 2011 and. Senior Independent Director since 2015.of BHP.
Board Committee memberships
Board Nomination Committee
2 Ed Giera
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IndependentNon-Executive Director
Appointed 19 August 2015
Skills and experience
Julie brings extensive experienceEd is currently Principal of EJ Giera LLC, providing corporate finance advisory and knowledge infiduciary services, and the Manager of Boscobel Place Capital LLC, a private investment partnership focused on the global financial services digital and innovation, business leadership and in risk management. She was aNon-Executive Director of Standard Life Aberdeen plc between 2017 and 2018.
Julie was aNon-Executive Director of Aberdeen Asset Management plc from 2011 and its Senior Independent Director from October 2016 until her retirement from the Board in 2018. She chaired its Risk and Innovation committees.
She has served on the Boards of MS Amlin plc (where she chaired their Remuneration Committee), Spirit Pub Company Limited and Paternoster Limited. Hersector. Formerly, his executive career was spent with UBS, where she held a number of global leadership positions, and JP Morgan.
Other principal appointments
IndependentNon-Executive Director of Santander UK plc* since 11 June 2018. Founder and Chief Executive of Rungway Limited.
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IndependentNon-Executive Director
Skills and experience
Annemarie has 30 years’ international retail, commercial, corporate and institutional banking experience culminating in membership of Standard Chartered’s Group Executive Committee. She was Group Company Secretary at Standard Chartered and an independentNon-Executive Director on the board of Fleming Family and Partners Limited. She was a member of the Listing Authority Advisory Panel from 2015, and Chair between 2016 and 2018.
Annemarie is an executive leadership coach and a Board governance consultant. She brings broad based international banking, executive remuneration, internal audit, crisis management and governance capabilities to the Board.
Other principal appointments
IndependentNon-Executive Director of Santander UK plc* since January 2016. Chair of Cater Allen Limited* since 15 November 2018.Non-Executive Director of WH Smith PLC since 2012.
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IndependentNon-Executive Director
Skills and experience
Ed is an experiencedNon-Executive Director, having held a number of Board roles following his career with JP Morgan Securities, the investment banking affiliate of JP Morgan Chase & Co. He provided corporate finance advisory and fiduciary services
Ed also previously served as Principal of EJ Giera LLC and was formerly aNon-Executive Director forat Pension Corporation Group Limited, ICBC Standard Bank plc, the Renshaw Bay Structured Finance Opportunity Fund, NovaTech LLC and the Life and Longevity Markets Association. Ed was also a director of Pension Corporation Group Ltd from 2012 to 2015, and Pension Insurance Corporation Holdings Ltd from 2008 to 2012. He was aNon-Executive Director of ICBC Standard Bank Plc and aNon-Executive Director of Pension Insurance Corporation Group Limited from 2015 to 2018, respectively.
Other principal appointments
IndependentNon-Executive Director of Santander UK plc* since August 2015..Non-Executive Director of the Renshaw Bay Real Estate Finance Fund since 2012.Fund.
Board Committee memberships
Board Audit Committee
Board Responsible Banking Committee
Board Risk Committee
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IndependentNon-Executive Director Santander UK’s Whistleblower’s Champion
Appointed 30 March 2015
Skills and experience
Chris was a partner at PwC from 1989 to 2014. He focused on the financial services industry from themid-1980s2014 and was a Senior Audit Partner specialising in the audit of banks and other financial services companies. He also led PwC’s EMEA Financial Services practice and was a member of their Financial Services global leadership team.practice. He is a past president of the Association of Corporate Treasurers and wasa former Chairman of the Advisory Board of the Association of Corporate Treasurers between January 2010 and July 2018.Treasurers.
Other principal appointments
IndependentNon-Executive Director of Santander UK plc* since March 2015.. Audit and Risk Committee member of the Wellcome Trust since 2016.Trust.Non-Executive Director of Redburn (Europe) Ltd since 2014. Investment Trustee of the Civil Service Benevolent Fund since 2015.Limited. Board member of the Audit Committee Chair’sChairs’ Independent Forum since January 2019.Forum.
Board Committee memberships
Board Audit Committee Board Remuneration Committee Board Risk Committee
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IndependentNon-Executive Director4 Scott Wheway
Skills and experience
Genevieve brings digital, technology and commercial expertise to Santander UK from a career in the media, publishing and technology sectors, most recently as Chief Product and Marketing Officer of Pearson plc, and previously as Director of Digital Strategy and Chief Information Officer. Genevieve has also advised and invested in Education Technologystart-ups and works with female executives as a coach and mentor.
Other principal appointments
IndependentNon-Executive Director of Santander UK plc* since May 2015.Non-Executive Director of Next Fifteen Communications Group plc since 2015.Non-Executive Director of Moneysupermarket.com Group plc since 2014.Non-Executive Director of Arup Group Limited since 2017. IndependentNon-Executive Director of the Rugby Football Union since 2017.
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IndependentNon-Executive Director Senior Independent Director
Appointed 10 January 2014
Skills and experience
Scott brings extensive retail and consumer knowledge to the Board, having formerly held various senior roles at Tesco plc, including Operations Director and CEO, Tesco Japan. Following this, heHe was then CEO of Best Buy Europe and Managing Director and Retail Director of The Boots Company plc and Managing Director of Boots the Chemist at Alliance Boots plc. Scott is also has experience of the financial services sector through his past roles at Aviva plca former(Non-Executive Director from 2007 to 2016)of Aviva plc and Chairman of Aviva Insurance Limited (Chairman from 2015 to 2017).Limited.
Other principal appointments
IndependentNon-Executive Director of Santander UK plc* since 2014.Non-Executive Director. Interim Chairman of Centrica plc since 2016.plc. Chairman of AXA UK plc since 2017.plc.
Board Committee memberships
Board Nomination Committee
Board Remuneration Committee
Board Responsible Banking Committee
Board Risk Committee
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5 Ana Botín
Banco Santander Nominated
Non-Executive Director
Appointed 10 January 2014, NED from 29 September 2014
Skills and experience
Ana joined the Banco Santander group in 1988 and was appointed Executive Chair of Banco Santander SA in September 2014. AnaShe has been a member of Banco Santander SA’s Board and Executive Committee since 1989 and previously served as Chief Executive Officer and Executive DirectorCEO of Santander UK plc between 2010 and 2014. She has extensive financial services experience. SheAna directed Banco Santander SA’sSantander’s Latin American expansion in the 1990s and was responsible for the Latin American Corporate Banking, Asset Management and Treasury divisions.1990s.
Other principal appointments
Executive Director of Santander UK plc* in 2014.Non-Executive Director of Santander UK plc* since September 2014.. Executive Chair of Banco Santander SA* since 2014 and Director since 1989.Director.Non-Executive Director of The Coca-Cola Company since 2013.Company. Vice-Chair of the Empresa y Crecimiento Foundation since 2000.Foundation. Vice-Chair of the World Business Council for Sustainable Development since 2016.Development. Member of the MIT’s CEO Advisory Board.
Board since 2015.Committee memberships
Board Nomination Committee
6 Bruce Carnegie-Brown
Non-Executive Director
Skills and experience
* PartBruce has served asNon-Executive Chairman of Moneysupermarket.com Group plc and aNon-Executive Director of JLT Group plc. He was alsoNon-Executive Chairman of Aon UK Ltd, and was Senior Independent Director at Close Brothers Group plc and Catlin Group Ltd. As an executive, he wasco-founder and managing partner of the Banco Santander group.
Annual Report 2018 | Governance
Boardlisted private equity division of Directorscontinued
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Banco Santander Nominated3i Group plc, President and CEO of Marsh Europe and a managing director of JP Morgan.
He was previously aNon-Executive Director of Santander UK plc* between 2012 and 2017, and aNon-Executive Director of Santander UK Group Holdings plc* between 2014 and 2017.
Skills and experience
Lindsey joined Banco Santander SA in 2017 as Chief Digital and Innovation Officer in charge of digital transformation and innovation. She joined from the Silicon Valley-based software company Intuit Inc, where she held a number of senior positions from 2008 to 2017, most recently as Chief of Staff to the CEO. Prior to that, Lindsey worked as a Principal at the Boston Consulting Group for 10 years.
Lindsey brings extensive international experience of driving growth and leading transformational change with particular expertise in new market entry, customer-driven innovation and digital experiences.
Other principal appointments
Non-Executive Director of Santander UK plc* since 1 January 2018.September 2019. Vice Chairman and Lead Independent Director of Santander Fintech Limited* since September 2017.
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Banco Santander NominatedSA*. Chairman of Lloyd’s of London.
7 Nathan Bostock
Non-ExecutiveExecutive Director
Chief Executive Officer
Appointed 19 August 2014
Skills and experience
Gerry has been Chairman of the Supervisory Board of Santander Bank Polska SA* (SBP) since 2011 having joined the SBP Board as Deputy Chairman in 2001. He held several senior management roles at AIB Group, both in Ireland (from 1973 to 2000) and in Poland (from 2001 to 2010), latterly as Managing Director of the Central Eastern Europe Division in 2009-2010. He is a member of the Irish Institute of Bankers, Irish Management Institute and an alumnus of Harvard Business School.
Other principal appointments
Non-Executive Director of Santander UK plc* since December 2017. Chairman of the Supervisory Board of SBP since 2011.
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Executive Director
Chief Executive Officer
Skills and experience
Nathan joined Santander UK from RBS, where he was an Executive Director and Group Finance Director. He joined RBS in 2009 as Head of Restructuring and Risk, and Group Chief Risk Officer. He previously spent eight years with Abbey National plc (now Santander UK plc*) and served on the Board as an Executive Director from 2005. During his time with Abbey National plc, he held other senior positions including Chief Financial Officer.
He was also at RBS from 1991 to 2001 in a number of senior positions and spent seven years before that with Chase Manhattan Bank, having previously qualified as a Chartered Accountant at Coopers & Lybrand (now PwC).
Other principal appointments
Chief Executive Officer of Santander UK plc* since September 2014. Member of the PRA Practitioner Panel since 2014 and a. Member of the Financial Services Trade Investment Board (FSTIB) since 2015.
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Executive DirectorBoard.
Head of Retail and Business Banking
Skills and experience
Susan has substantial experience in the banking sector following a career spanning over 25 years. She joined Santander UK in 2015 as MD, Retail Banking before being appointed as Chief Transformation Officer the same year. In March 2017 she was appointed as Head of Retail Distribution. Prior to joining Santander UK, she held a number of senior roles at RBS including CEO, Customer Solutions Group Corporate Banking and MD, UK Retail.
Other principal appointments8 Madhukar (Duke) Dayal
Executive Director of Santander UK plc* since 1 January 2019. Director of Cater Allen Limited* since December 2017.
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Executive Director
Chief Financial Officer
Appointed 16 September 2019
Skills and experience
AntonioDuke has extensive financial services experience acrossin a wide range of areas including Finance, Investor Relations and Retail Banking. He was appointed Treasurerareas. Before joining Santander UK*, he worked for Santander US* in Boston as CFO of Santander UK plc in 2014,Holdings* (April 2016 – July 2019) and President and CEO of Santander Bank NA* (September 2017 – July 2019).
Prior to joining Santander, Duke was with responsibilityBNP Paribas for the management of interest risk, liquidity, funding, economics and investor relations. Antonio joined Santander UK plc in 2013 as Deputy Treasurer and prior to that held the position of Head of Financial Management at Banco Español de Credito SA*. He also worked for Grupo Caja Madridsix years, where he served as Chief Financial Controller from 2007Officer for BNP Paribas USA Holdings, BancWest and Bank of the West. Before that he helped lead a private equitystart-up for JP Morgan Chase & Co, Brysam Global Partners. Prior to 2010.that, he spent eight years with Citi.
Duke also served as a member of the Executive Committee on the Board of Trustees for the Institute of International Banking in New York as a Board member of the Federal Home Loan Bank of Pittsburgh.
Other principal appointments
Chief Financial Officer of Santander UK plc* since 2015 and Executive Director since August 2017. Director of Cater Allen Limited* since December 2017 and Abbey National Treasury Services plc* since July 2014. Member of UK Finance’s Financial and Risk Policy Committee since 2015..
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Annual Report 2019| Governance
Chair’s report on corporate governance
My report describes the roles, responsibilities
and activities of the Board and its Committees.
The Board focuses on supporting and challenging management to achieve our strategy and transformation programme.
Shriti Vadera Chair 2 March 2020
(1) In addition, ad hoc Board Committee meetings were held to consider the Company’s application for the RBS Alternative Remedies Incentivised Switching Scheme and conduct matters. | ||||
Board activities Read more onp39 Board and Committee membership and attendance Read more onp64 |
Our governance
Santander UK voluntarily complies withMaintaining high standards of corporate governance is an essential element underpinning the long-term sustainable success of the Company.
In addition to the UK Corporate Governance Code 2018 (the Code) wherever applicable in order to practice best standards of corporate governance. Although, as anon-listed subsidiary of a European banking group,standard against which we are not required to comply with the Code. In addition to the Code,measure ourselves), our governance practices and rules are set out in a number of our key documents, principally:
| – | The UK Group Framework, which defines clearly our responsibilities and relationship with Banco Santander SA, our |
| – | The Corporate Governance Framework, which is designed to assist the Board of Directors in discharging their responsibilities |
The Board’s schedule and activities are planned to ensure that directors have regard to the matters necessary to promote the success of the Company, including the broader implications of their decisions for all the Company’s stakeholders including its shareholder.
Ring-fencing implementation
AsFollowing ring-fencing requirements which came into force on 1 January 2019, the Boards and Committees of Santander UK Group Holdings plc and Santander UK plc operated simultaneously with 100% common director membership because the substantive business of the Santander UK group was conducted by Santander UK plc, our ring-fenced bank. The Boards consisted of 7 IndependentNon-Executive Directors (INEDs) including the Chair, 3 Executive Directors (EDs) and 4 Group-appointedNon-Executive Directors (GNEDs). These arrangements were agreed by our regulators, and ensured the efficient management of Board activities, promoting the effective oversight of the
business, and were enabled by means of compliance with various ring-fencing rule modifications granted by the PRA. Under the UK Group Framework, in light of the fact that Santander UK Group Holdings plc is fully owned by Banco Santander and that the Chair is independent of the shareholder, the Chair is counted as an INED. This does not comply with Code provisions.
During the year, we developed a revised strategy to optimise the business of Santander Financial Services plc (formerly Abbey National Treasury Services plc), in effect ournon-ring-fenced bank, which will be completed in 2020. In order to comply with regulatory requirements to ensure the integrity of ring-fencing in Santander UK plc, our ring-fenced bank, we are required to make changes to the Santander UK Group Holdings plc Board, such that it will no longer have complete membership in common with Santander UK plc. Three INEDs stepped down from the Santander UK Group Holdings plc Board with effect from 31 December 2019 and will therefore be Directors of the ring-fenced bank only (Double INEDs). At the same time, in order to ensure that its Board continues to comprise 50:50 INEDs andnon-independent directors, in accordance with the UK Group Framework, one ED and two GNEDs also stood down and serve only the ring-fenced bank. The Board of Santander UK Group Holdings plc therefore has 4 INEDs, including the Chair, 2 EDs and 2 GNEDs. These changes are summarised opposite.
The Board and Committees of the two companies continue to be run substantially simultaneously to ensure efficiency and effectiveness whilst ensuring the independence and autonomy of our ring-fenced bank are appropriately protected. The Company will therefore continue to benefit from the knowledge, skills and experience of the 6 Directors that have stepped down from the Board through their contribution, where appropriate, in the simultaneous Board and Committee meetings of both companies. We shadow ran these arrangements in December 2019 to ensure efficient parallel running upon implementation in January 2020.
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We appointed Annemarie Durbin (Double INED) as Senior Ring-fencing Director (SRD) of Santander UK plc in order to comply with additional ring-fencing requirements set by the PRA. These relate primarily to ensuring that processes to identify and manage any conflicts of interest between the ring-fenced bank group and other members of the Santander UK group are operating effectively.
The reduction in Board membership arising from implementation of ring-fencing requirements has resulted in the Board Audit Committee and Board Remuneration Committee comprising 2 INEDs each. Having assessed this in the light of Code recommendations, and as the substantive business of the Santander UK group is currently conducted by Santander UK plc, our ring-fenced bank under our current
business model,we are satisfied that the PRA has granted a numberCommittees will continue to be able to discharge their duties professionally, effectively and efficiently particularly as the Chairs of rule modifications to enable Santander UK plc andthe Santander UK Group Holdings plc to operate simultaneous boardsBoard Audit Committee and board committees with common director membership. This enables them to run efficiently and supports effective oversightBoard Risk Committee are also chairs of the business.
We have reviewed our governance arrangements to ensure full compliance withSantander UK plc Committees. As the Banking Reform Act. This included elevating the Corporate Governance Framework to operate at the level of Santander UK Group Holdings plc whereas previously it operated at theand Santander UK plc level. This provides coverageCommittees will run substantively simultaneously, they will also continue to entities withinhave the Santander UK group that sit outside ofopportunity to benefit from the ring-fence. Further details are set out in the Board Nomination Committee Chair’s report.broader INED group’s skills and experience.
Board membership
Through the Board Nomination Committee, we ensure we have the right composition of individuals on the Board, providing an appropriate balance of knowledge, skills, experience and perspectivesperspectives. Our aim of ensuring orderly succession for Board
positions is supported by continuous and proactive processes. We take into account our strategic priorities and the main trends and factors affecting the sustainability and success of the business. We oversee and regularly review succession planning in order to maintain a strong Board and executive talent pipeline. Board and senior management succession was also the focusdevelopment of a number ofdiverse pipeline for succession.
Changes to Board dinners during the year.
We have appointed Susan Allen as Executive Director and Head of Retail and Business Banking with effect from 1 January 2019, in place of Javier San Felix who returned to a Group role at Banco Santander SA. We also appointed Julie Chakraverty as an IndependentNon-Executive Director (INED)membership are set out on 11 June 2018. Thepage 65. These appointments add to the Board’s skillsmaintain valuable skill and experience inof financial services, digital and innovation, strategy development and risk management.
During 2018, two of ourNon-Executive Directors stepped down from the Board. Alain Dromer, an INED, resigned with effect from 31 August 2018 after five yearsexecution and Juan Inciarte, one of our Group NEDs, retired on 31 December 2018 after fourteen years on the Board.
transformation. On behalf of the Board, I would like to thank Javier San Felix, Juan InciarteLindsey Argalas, Julie Chakraverty and Alain DromerAntonio Roman who stepped down during 2019 for their invaluable service to the Board and the Company.
As awas announced on 30 January 2020, I will be stepping down before the end of the year as Chair after five years. A search has been initiated by Scott Wheway, as the Senior Independent Director, allowing for an orderly transition with my successor.
All aspects of diversity form part of our Board succession planning process, which is explained in the Board Nomination Committee Chair’s report. In 2016 we set ourselves a diversityan aspirational target of having 33% female representationwomen on the Board by 2020. We have exceeded this target, wellAs anticipated in advancelast year’s report, the level we achieved at that time (54%) reduced during 2019 as a result of Julie Chakraverty and Lindsey Argalas stepping down from the Board, and we ended the year at 36%. As a result of changes to the membership of the deadline, with a current female representation of 54%.
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Santander UK Group Holdings plc Board (see page 65),
Board Committees
The Board delegates certain responsibilities to Board Committees to help discharge its duties, as set out later in this section. The Committees play an essential role in supporting the Board in these duties, providing focused oversight of key areas and aspects of the business. The role and responsibilities of the Board and Board Committees are set out in formal Terms of Reference. These are reviewed at least annually as part of the review of the Corporate Governance Framework. Except for the Board Nomination Committee which has one GNED, all Committees are composed of INEDs only.
Board activities
The Board considered a range of options for implementing the Code requirement that boards must engage with employees to ensure that the views of the workforce are appropriately represented in discussions and decision-making. In view of the designation of Annemarie Durbin as Santander UK plc Double INED with this responsibility, and as the overwhelming majority of colleagues within the Santander UK group are employed in the UK by Santander UK plc, the Board concluded that it did not need to implement separate arrangements to ensure appropriate representation. During 2019, in addition to
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Annual Report 2018 2019| Governance
Chair’s report on corporate governancecontinued
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Summary of Board activities in 2018
The Board’s activities in 2018 included the following themes:
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The Board ensures regular contact with senior management through a number of means. These include inviting relevant business and function heads to present to the Board or its Committees on current developments; permitting observers as part of individual senior managers’ development plans; scheduling regular meetings for Committee Chairs to meet with relevant senior managers; site visits by one or more Directors; and topical or technical workshops.
In addition, senior leaders make themselves available to the NEDs throughout the year. The Board also held one of its meetings in our Milton Keynes office where it met with local staff to understand further the work they were doing in relation to Innovation, Keep It Simple Santander (KISS), Financial Crime and Complaints.
Board strategic priorities
The Board aspires to become the best governed bank, supporting Santander UK’s aim to be the best retail and commercial bank in the UK for our people, customers, shareholder and communities, helping people and business prosper and earning their lasting loyalty. In order to achieve this aspiration, the Board revised its strategic priorities including its focus on strategy and transformation, performance monitoring, management succession and responsibility to our stakeholders.
Director inductions and training
The delivery of our tailored NED induction programmes for our new appointments continued through 2018. As a new INED, Julie Chakraverty benefited from a tailored induction programme.
This included meetings with senior management and a number of site visits. All other NEDs have ongoing development plans. The Company Secretary supports the Chair in designing individual inductions for NEDs, which include site visits and cover topics such as strategy, key risks and current issues including the legal and regulatory landscape.
Throughout 2018, we continued to deliver regular workshops for all NEDs to further develop their knowledge and understanding of key business issues including the use of data in financial services, platforms & systems architecture, financial crime, ring-fencing, significant risk transfers and risk models. In 2018 this was supplemented with visits to corporate sites and branches. A summary of the Board’s activities in 2018 is set on page 34.
Board Committee responsibilities
| Key responsibilities | ||||||||
Board Nomination Committee Chair’s report Read more on | Board Nomination Committee | – Review the Board’s structure, size and composition, including skills, knowledge, experience and diversity. – Consider succession planning for Directors and Senior Executives. – Identify and nominate candidates to fill Board vacancies as and when they arise. – Assess the performance of the Board. – Review each year whether NEDs have dedicated enough time to their duties to have been effective. – Oversee governance arrangements. | ||||||
Board Risk Committee Chair’s report Read more on | Board Risk Committee | – Advise the Board on the enterprise wide risk profile, Risk Appetite and strategy. – Review the enterprise wide risk profile through business updates from the First Line of Defence and regular reports and updates on each key risk type from the Second Line of Defence. – Provide advice, oversight and challenge to embed and maintain a supportive risk culture. – Review the Risk Framework and recommend it to the Board for approval. – Review and approve the key risk type and risk activity frameworks identified in the Risk Framework. – Review the capability to identify and manage new risks and risk types. – Oversee and challenge theday-to-day risk management actions and oversight arrangements and adherence to risk frameworks and policies. | ||||||
Board Audit Committee Chair’s report Read more on | Board Audit Committee | – Monitor and review the integrity of the financial reporting. – Keep under review the adequacy and effectiveness of the internal financial controls. – Review the adequacy of Whistleblowing arrangements. – Monitor and review the effectiveness of the Internal Audit function. – Assess the performance of the External Auditors and oversight of their independence. | ||||||
Board Responsible Banking Committee Chair’s report Read more on | Board
Banking Committee | – Oversee culture and operational risks relating to conduct, compliance, competition, financial crime and legal matters set within the Risk Appetites and Risk Framework. – Ensure adequate and effective control processes and policies for conduct and compliance risk, fair customer treatment and customer outcomes. – Monitor, challenge and support management in its efforts to evolve conduct, culture and ethical standards through sustained effectiveness of Santander UK’s values and nine behaviours. – Oversee the reputation of Santander UK and how it impacts its brand and market positioning, and the Corporate and Social Responsibility Programme. | ||||||
Board Remuneration Committee Chair’s report Read more on | Board Remuneration Committee | – Approve and oversee the remuneration governance framework. – Oversee implementation of remuneration policies, ensuring they promote sound, effective risk management. – Consider and approve specific remuneration packages for EDs and other senior management. – Review and approve regulatory submissions in relation to remuneration. – Approve the variable pay pools for EDs and other senior management, including the application of risk adjustment as appropriate. | ||||||
extensive reporting on people issues to the Board, Annemarie Durbin participated in focus groups, management fora and development workshops covering simplification, employee engagement and leadership.
The Chair, with the CEO and Company Secretary, supported by the Directors and senior management, ensure that the Board has an appropriate schedule, which is focused on the opportunities and risks to the future success of the business, business performance and risk mitigation, and ensuring that the Company’s culture is aligned with its purpose, values and
strategy. The Board regularly monitors progress against the strategic priorities and performance targets of the business. In June we held an offsite meeting that focused on future retail business models in the context of the medium-term strategy, our longer-term plans and aspirations, recognising the internal and external challenges faced in light of our competitive and uncertain external operating environment.
To ensure the most effective use of the time at Board meetings, in addition to the delegation of certain responsibilities to the Board Committees, the Board holds Board dinners, lunches and external speaker
workshops to consider important topics in depth and engage with key stakeholders. The Board ensures regular contact with management and colleagues through a number of means. These include inviting relevant business and function heads to present to the Board or its Committees on current developments; permitting observers as part of individual senior managers’ development plans; scheduling regular meetings for Committee Chairs to meet with relevant senior managers; site visits by one or more NEDs; and topical or technical workshops. In addition, senior leaders are available to the NEDs throughout the year.
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Summary of Board activities in 2019
The Board endeavoured to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole. The Board’s activities in 2019 included the following themes:
| Theme | Actions taken by the Board and outcomes | |
Business and customer | – Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities and developments with customer experience. – Reviewed, challenged and remained apprised of all aspects of the Company’s transformation programme. – Reviewed, challenged and approved the3-year business plan (2020-2022) and the annual Budget, including cost efficiencies and associated risk assessments. – Conducted strategic reviews of loyalty products and digital developments, including approval of new strategies and monitoring of progress. | |
| Strategy | – Reviewed, challenged and approved a refined business strategy focusing on mortgages and core products. – Considered options and approved a refined strategy to develop the business of Santander Financial Services plc. – Received regular updates on the competitive landscape, the UK economy and banking sector including changes resulting from regulatory change requirements and digital developments. – Following an off site strategy meeting in June, considered an overview of the UK banking market including banking trends, competition and Santander UK’s position in the current banking market, the future of Banking in the UK market (including technological developments and simplification), an in depth review of Mortgages; and M&A market opportunities. – Regularly reviewed progress in delivering the strategic priorities of Santander UK including the future Retail business model and technological journey and associated investments required (for example, people skills required to achieve the technological journey). – Regularly reviewed organic and inorganic growth opportunities. | |
Regulation, Balance Sheet and capital | – Reviewed, challenged and approved the ICAAP, ILAAP, and the Recovery Plan; adequacy and effectiveness of stress-testing and capital management; Dividends and AT1 Payments. – Provided an attestation to the PRA on effective implementation of ring-fencing. – Received regular updates on capital planning. – Considered asset and liability management activities and was appraised of regulatory developments. – Approved policies including the Volcker Policy, Modern Slavery Statement, Money Laundering, climate change and ring-fencing related policies. – Agreed key assumptions and capabilities and approved the final 2019 BoE Concurrent Stress Test submission. – Approved the Annual Report and Accounts and otheryear-end related matters. – Received and discussed regular updates on ring-fencing implementation. – Approved the Surplus Capital Allocation Framework and Dividend Policy. | |
Risk and control | – Received regular enterprise wide risk updates from the CRO, together with updates on specific risks, such as pensions, cyber security, financial crime, climate change and Brexit. | |
People and Culture | – Received updates on issues including talent management and succession planning, gender pay, and diversity and inclusion. – Received updates on culture, considering our long-term strategic direction and assessment findings from the Banking Standards Board. – Considered Succession Planning across all key control and support functions. | |
| Governance | – Considered the impact of ring-fencing legislation on governance arrangements, and made consequential changes to Board and Board Committee composition. – Considered and approved revisions to the Corporate Governance Framework and UK Group Framework arising from implementation of ring-fencing. – Approved the appointment of new directors and the Company Secretary. – Reviewed, challenged and approved Santander UK’s Annual Report. – Received regular updates from Board Committees, via the Chairs. – Approved revised Board strategic priorities and terms of reference for the Board and its committees. | |
Director inductions and training
The Company Secretary supports the Chair in designing individual inductions for NEDs, which include site visits and cover topics such as strategy, key risks and current issues including the legal and regulatory landscape. The delivery of our tailored NED induction programmes for our new appointments continued through 2019. Garrett Curran and Dirk Marzluf benefited from tailored induction programmes phased over an initial period of 12 months, which includes meeting
Throughout 2019, we continued to deliver workshops for all NEDs to further develop their knowledge and understanding of key business issues including model risks, regulatory challenges and stress testing; technological transformation opportunities and intervention; cyber risks; and recovery planning, strategies and tools.
Following a discussion arising from the publication of Slaughter and May’s report into TSB’s April 2018 new IT platform migration, the Board will receive a detailed briefing on lessons that can be learned from TSB Board’s handling of that situation. These activities were supplemented with visits to corporate sites (including Banco Santander group headquarters) and branches. A summary of the Board’s activities in 2019 is set out above.
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Annual Report 2018 2019| Governance
Board Nomination Committee Chair’s report
The Committee has focused on Succession Planning
and Governance
 | The Committee has focused on succession planning and governance throughout the year |
We continue to ensure that diversity of thinking and skills remain front of mind in our succession planning.
Shriti Vadera Chair 2 March 2020 | ||||
Responsibilities of the Committee Read more onp38 Committee membership and attendance Read more onp64 |
Overview of the year
During 2019, the Committee’s work included: leading the process for several appointments to the Board and for orderly Board succession planning; continuing to develop our long-term Board and management succession planning; reviewing the collective skills and experience of the Board; Board Committee membership and the Board’s Diversity & Inclusion Policy and reviewing various governance arrangements as set out on page 36, including for ring-fencing rule modifications granted by the PRA resulting from changes to the business strategy. In addition, the Committee has ensured arrangements relating to Directors, such as Directors’ interests, terms of appointment and fee and time commitments remain appropriate and take account of good governance standards.
The Committee met on foureight occasions in 2018. 2019. Detail’s of the Committee’s members and meeting attendance are set out on page 64.
Board changes and Succession planning
The Committee leads the process for Board appointments and ensures plans are in place for orderly succession to both the Board and senior management positions. Board appointments follow a structured, rigorous and transparent procedure designed to ensure they are based on merit and objective criteria and they promote broad diversity to complement and strengthen the Board’s and its Committees’ combination of skills, experience and knowledge. The Committee takes account of views of all the Company’s stakeholders in the recommendations it makes to the Board. The Board retains responsibility for and approves final decisions on these matters.
The Committee instructed Russell Reynolds(1) to lead a search for Julie Chakraverty’s replacement, resulting in its recommendation to the Board to appoint Garrett Curran as an INED.
As I will have completed five years as Chair in 2020, the Senior Independent Director commenced a planned search for my successor, assisted by Spencer Stuart(1), in order to ensure an orderly transition.
To support orderly succession planning for Board and senior management positions, the Committee assesses the challenges and opportunities facing the Company and evaluates the skills and expertise that will be needed in the future alongside internal capabilities, including board evaluation feedback. Increasing diversity in all respects in the boardroom and executive pipeline is a key factor we consider. Board appointments and succession planning during 2019 were conducted consistently with this approach, tailored as appropriate in each case.
The Committee reviewed executive succession planning, including a thorough assessment of the skill sets that would be required in light of the strategic direction of the business, together with development planning for identified talent, to ensure a strong and diverse leadership pipeline.
As a result of our revised strategy to develop the business of Santander Financial Services plc, (see page 36), and in order to ensure Santander UK plc’s continued compliance with ring-fencing requirements, the Committee reviewed and recommended changes to the Board and Committee memberships of Santander UK Group Holdings plc which took effect from 1 January 2020.
| (1) | Russell Reynolds and Spencer Stuart do not have any connection with Santander UK. |
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It also considered and recommended designation of specific roles to Santander UK plc INEDs as required by the regulator. Full details are set out on page 36 of my report on corporate governance.
There were no changes to the Committee’s membership during the year. With effect from 1 January 2020, and following changes described on page 36, 3 Double INEDs stepped off the Board and Committees. As a result, Scott Wheway will now chair the Board Remuneration Committee, while Annemarie Durbin will remain as Chair of the Santander UK plc Board Remuneration Committee. This Committee will continue to handle all substantive remuneration business, as Santander UK plc, together with its subsidiaries, employs the majority of our people.
Board Effectiveness
During 2019, the Committee considered feedback gained from the 2018 performance evaluations, which concluded that the performance of the Board, its time was spent overseeingCommittees, the Chair and each of the Directors continues to be effective. The Committee reviewed with the Board the areas identified for greater focus in 2019 (monitoring business performance, efficiency,in-depth strategic consideration of digital and technological disruption on business strategy, customers, people and wider engagement with management) and recommended a series of actions which were then led by the Board and its Committees in meeting agendas and activities arranged accordingly. Individual Directors’ assessments were also conducted, and the Senior Independent Director undertook his twice-yearly assessment of my performance as Chair.
Having just implemented the changes in Board membership, as described on page 36 in order to continue to comply with ring-fencing requirements, the membershipCommittee determined that an external evaluation of the operation of the Board and Board Committees and on senior management succession planning and mosttowards the end of its business was conducted virtually.
The Committee also reviewed2020, following the collective skillsimplementation of the Board, time commitments and Directors’ conflicts of interest and reviewednew governance arrangements in lightJanuary 2020, would provide more meaningful observations for the ongoing operational effectiveness of ring-fencing and changes to the UK Corporate Governance Code.
Furthermore, the Committee also undertookBoard. As a consequence, an internal Board Effectiveness review during the first quarter of 2020 will provide the Boardfeedback mechanism for continuous improvement and its Committees’ Effectiveness.to keep areas for development in focus.
Committee membership, Board changesDiversity, inclusion and Succession Planningengagement with stakeholders
There have been no changes to the Committee’s membership in 2018.
During the year, Alain Dromer (INED), Juan Inciarte (a Banco Santander nominated NED) and Javier San Felix (Executive Director (ED)) stepped down from the Board.
As referred to in my report on Corporate Governance on page 33, following assessment by the Committee as to suitability, the Committee recommended to the Board the appointments of Julie Chakraverty (INED) and Susan Allen (ED). Between them, Susan and Julie add a wealth of experience in financial services, digital and innovation, risk management and retail banking. In making the appointments, the Committee considered the overall mix of skills, experience and diversity on the Board.
The Committee continued to review the membership of the Board’s Committees during the course of the year. This resulted in certain Committee membership changes as explained in the respective Committee reports.
All Committees continue to be chaired by INEDs and have only INEDs as members, other than the Board Nomination Committee and Board Risk Committee where the membership has included one Group nominated NED. The membership of the Committees is set out on page 58.
The Committee also kept under review executive succession planning with a number of changes being made during the year to the CEO’s direct reports.
Diversity and inclusion
In 2016, we set an aspirational target of having 33% women on the Board by 2020. FollowingAs anticipated in last year’s report, the appointmentlevel we achieved at that time (54%) reduced during 2019 as a result of Julie Chakraverty in June 2018 and Susan Allen in January 2019Lindsey Argalas stepping down from the Board, and we achievedended the year at 36%. As a ratioresult of 54%, ahead of target, although we anticipate that this will decline during the year.
We also signed upchanges to the HM Treasurymembership of the Board (see page 37), this reduced further to 25% with effect from 1 January 2020, while the Board of Santander UK plc remained at 36%. Despite this reduction we remain committed to our aspirational target. The Boards of the two companies are run largely simultaneously for efficiency. Our Senior Manager female population (Executive Committee) is 26.7%. 30.1% of the Executive Committee’s direct reports are female as at 31 December 2019. We are a signatory to the Women in Finance Charter, and aim to create gender balance by setting a target of 50%(+/\-10%) women inby 2021 for our wider senior roles (excluding Board members) – by 2021.
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We will continue to strive toward gender balance. Santander UK has committed to gender targets for our senior female management population, and we have embedded these into our Executive Committee annual performance objectives.
We willalso continue to ensure that gender and all aspects of diversity remain front of mind in our succession planning. In this regard, theThe Board havehas signed up to the Business in the Community ‘Race at Work’ Charter.Charter and made good progress, having achieved two of our five actions with good progress on the other three. In February 2019, the Board confirmed our ambition to increase senior manager representation of Black, Asian and Minority Ethnic (BAME) employees to 14%(+/-2%) across mid to senior manager roles by 2025.
Governance
During the year, the Committee has been focused on changes to ring-fencing arrangements described on page 36 and on ensuring that governance including monitoring corporate governance developments, considering the impacts of ring-fencingarrangements continued to be efficient and conducting theeffective.
We also conducted our annual review of our Corporate Governance Framework.
In 2018,Framework and of the Committee consideredterms of reference for the Board and its Committees. On the Committee’s recommendation, the Board endorsed changes to the 2016 UK Corporate Governance Codethese documents and gave particular focus to the recommendations in respect of Employee engagement methods. Plans are being developed to enable the Board to have more dialogue with employees on topics requiring direct feedback such as the Board exploring emerging subjects of interest with a group of volunteer employees via virtual orface-to-face focus groups.
The Committee also considered changes to our Corporate Governance Framework and UK Group Framework described in my report on Corporate Governance to ensure continued compliance with ring-fencing rules.
Annual review of director interests, time commitment,fees and conflicts of interest and fees
During the year, the Committee continued to review any potential conflicts of interestDirectors’ interests and to ensure any conflicts are managed appropriately and in compliance with CRD IV and ring-fencing requirements. The time commitments of the Directors were also reviewed to ensure they have sufficient time available to discharge their responsibilities and to be effective members of the Board. The review of time commitments showed that Directors are able to dedicate sufficient time to their commitments on the Board and Board Committees.
Santander UK’sCompany’s Articles of Association contain provisions that allow the Board to consider and, if it sees fit, to authorise situational conflicts. The Board confirms that such powers have operated effectively and that a formal system for Directors to declare their interests and for thenon-conflicted Directors to authorise situational conflicts continues to be in place. Any authorisations given are recorded by the Company Secretary.
The Chair, CEO and Group NED (who does not get paid a Board Effectiveness (actionsfee) reviewed the level of fees paid to INEDs for Board and review)
During 2018,Board Committee chairmanship and membership, together with the Committee continued to review progress against the actions from the 2016 and 2017 evaluations, which concluded that the performancerole of the SID. In doing so, they considered whether NED fees were at an appropriate level, having regard to a number of factors including the challenge of recruiting INEDs into the sector and the increasing regulatory and ring-fencing-related expectations and the associated time commitments for INEDs. In light of this, increases to the INED base fee, the Board its Committees, theRisk Committee Chair and each ofmember fee and an increase to the Directors continues to be effective.
In addition, duringSID fee were approved. Further details are contained in the year, the Board conducted an internally facilitated evaluation of its own performance and that of its Committees. Individual Directors’ assessments were also conducted and the Senior Independent Director undertook his twice-yearly assessment of the performance of the Chair.
The performance assessment results show that the Committee, the Board and its Committees continue to operate effectively. The actions arising from the review include rebalancing time spentRemuneration Implementation Report on strategic, business performance, regulatory and other matters following implementation of ring-fencing, together with further enhancement of Board reporting andco-ordination of Board Committee agendas.
The Board intends to comply with the UK Corporate Governance Code guidance that the evaluation should be externally facilitated at least every three years and expects to commission the next externally facilitated review in 2020.page 63.
Priorities for 20192020
Over the next year we will continue to work on talent and succession planning, in particular on executive and senior management succession and NEDs’ continuing development.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Governance
Board Risk Committee Chair’s report
The Committee supports the Board in ensuring that
the business operates within agreed Risk Appetite while reviewing
the capability to identify
 | The Committee supports the Board in ensuring that the business operates within agreed Risk Appetite while reviewing the capability to identify and manage new and emerging risks. |
We challenged management as to whether the investment, prioritisation and pace of change relating to digitisation and systems improvement was appropriate.
Ed Giera Board Risk Committee Chair 2 March 2020 | ||||
Responsibilities of the Committee Read more onp38 Committee membership and attendance Read more onp64 |
Overview of the year
The Committee considered a wide range of risks to our customers and our business in 2018,2019, including:
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We reviewed the top risks at each meeting and also received regular updates on specific matters such as stress testing, market risk, pension risk and pension risk.business risk reviews.
The Board Risk Committee maintains a holistic view of Enterprise-Wide risks and, to help achieve this, there is appropriate cross-membership between this Committee and both the Board Responsible Banking Committee and the Board Audit Committee.
Responsibility forWhilst the Board Responsible Banking Committee has oversight of financial crime risk, transitioned to the Board Responsible Banking Committee in Q3 2017; however, the Board Risk Committee retains ultimate oversight, including oversight of risk appetite with respect to conduct and regulatory, reputational and financial crime risks considered by the Board Responsible Banking Committee.risks.
Membership
There have been threetwo changes to the membership of the Committee during the year: Julie ChakravertyGarrett Curran became a member in June, Alain DromerMay and Julie Chakraverty left the Committee on hisher retirement from the Board in August, and Juan Inciarte stepped down on his retirement from the Board at the end of the year.
AlainMay. Julie had been a member of the Committee since January 2016 and Juan since September 2015.June 2018. I would like to take this opportunity to thank both Alain and Juan,Julie, on behalf of the Committee, for their valuableher contributions to our discussions. I would also like to welcome Julie.Garrett.
I believe that the Committee retains an appropriate balance of skills and expertise to carry out its role effectively.
The Terms of Reference require the majority of the members to be IndependentNon-Executive Directors. This criterion was met throughout the year.
| * | Reporting includes Enterprise-Wide Risk Management, Top Risks and Risk Disclosures. |
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Meeting our key responsibilities in 20182019
The Committee addressed our key responsibilities relating to Risk Appetite and the Risk Framework, as well as our oversight of stress testing and liquidity, as set out below, together withwell as a selection of challenges raised relating to certain risk categories. For more on our responsibilities relating to risk management and internal controls see page 43.47.
Significant areas of focus
| Area of focus | Action taken by the Board Risk Committee | Outcome | ||
| Risk Appetite | – Considered a number of changes proposed to the Board’s Risk Appetite Statement as part of the Annual Risk Appetite Review. – Noted – Challenged management in relation to making changes in single name management framework. – Requested the introduction of metrics to improve the Committee’s oversight and – Queried proposed revisions to operational risk appetite and – Received management’s
– Discussed the PRA expectations for implementing the recommendations of the Task Force on Climate-related Financial Disclosures relating to managing financial and strategic risks from climate change. | – Noted and were satisfied that a more detailed single name exposure framework had been implemented. – Management developed a metric to monitor the maximum potential fall in the CET1 capital ratio if regulatory or execution risks arose with current or planned SRTs. – Following challenge,
– – Received a recalibration of Operational and Financial Crime risk appetite –
For more,see | ||
| Risk Framework | – Received an update following the annual certification process, and assessed the extent to which the Risk Framework had been effectively implemented and embedded across the business. – – Received management’s proposal for changes to the suite of Risk Type and Risk Activity Frameworks and their delineation between Santander UK Group Holdings plc and Santander UK plc. | – – Noted there was transparency and ownership of – Recommended the proposed changes to the Board for approval.
For more,see | ||
| Stress testing | – Monitored the – Considered the results of the stress test both on an IFRS 9 transitional basis and on an IFRS 9 basis without transitional arrangements. – Received a specific paper, produced by the Risk team, with details of risk management in stress testing. – Noted that risks associated with Santander UK’s suite of stress testing models had generally improved across the last – Questioned whether sufficient resource was planned and available for the ongoing multi-year effort to improve | – Recommended the governance, – Committee members were provided with greater insight to review the most significant models. – Supported management on the allocation of resources for planned stress testing model enhancements and requested a holistic view of the resource requirements as part of the next update.
For more,see | ||
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Governance
Board Risk Committee Chair’s reportcontinued
| Area of focus | Action taken by the Board Risk Committee | Outcome | ||
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| Santander Services | – – – Requested further detail on management’s risk acceptance in respect of projects that were deferred or unfunded and the – Received updates on cyber risk and the strategy and risk management relating to cloud usage. – – – Considered reports on the
– Received updates on third party supplier risks, noted the additional governance and mandatory training programme, and supported management’s efforts to ensure successful embedding and awareness of third party risk management across the workforce. – Received regular updates from the Chief Data | – –
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| Brexit | – Received regular updates on management’s contingency – Continued to monitor the risks and potential impact to Santander UK of the negotiation of terms for the Withdrawal Agreement setting out the basis – Noted management actions to enhance infrastructure, improve data and respond dynamically to reflect local regulations in overseas jurisdictions. – Requested a report on controls over cross-border financial promotions. – Discussed access to financial markets infrastructure,
– Emphasised the need for coordination with Banco Santander on any actions taken impacting customers and our employees working in the UK as EU nationals, in particular. | – We continue to monitor political developments, and to review and challenge management’s contingency plans for
For more, see | ||
| Ring-fencing | – Received frequent updates on the ring-fencing programme both as part of the Enterprise Wide Risk Management Reports and separately. These updates focused on the programme’s top risks and mitigating actions, including operational, legal, execution and regulatory risks related to completion of the programme. – Reviewed the risks of revised options in respect of the Crown Dependencies business comprising branches of Santander Financial Services plc in Jersey and the Isle of Man. – Considered further proposals for how both the Risk Framework and Risk Appetite would need to be updated to reflect ring-fencing. – Received the annual Ring-Fenced Body Permitted Exceptions and Arm’s Length policies and associated reports from Internal Audit. We noted the governance and waterfall of attestation processes and management’s increasing awareness of ring-fencing related compliance obligations. We challenged the pace of implementing certain recommendations from the audit reports on the Arm’s Length Policy. | – In the course of monitoring progress on the execution of the ring-fencing programme, we: – Recommended further the changes to the Risk Appetite and Risk Framework to the Board. – Agreed for expediency to delegate to the Committee Chair certain out of cycle permitted exceptions – Recommended the Ring-Fenced Body Permitted Exceptions Policy and the Arm’s Length Policy to the Board for approval. | ||
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| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Oversight and advice to the Board on Santander UK’s current risk exposure and future risk strategy
In 2018,2019, we reviewed Santander UK’s exposure to the risks outlined below and analysed emerging themes, including regulatory, macro-economicmacroeconomic and global risks, which could affect Santander UK’s ability to achieve its strategic goals.
| Risk | Action taken by the Board Risk Committee | Outcome | ||
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| Credit risk | – Received regular credit risk updates
– Received updates on the retail mortgage book, including – Monitored concentration risks, reviewed growth strategies and challenged management in relation to – – | – Counselled management on the need for a comprehensive approach with the Banco Santander Risk function, and
For more,see | ||
| Strategic risk | – Considered strategic risk as part of risk reports on M&A opportunities, Data, Change and Operational Risk. – Noted the critical importance of data and systems to ensuring the long term success of the Company and encouraged management to ensure appropriate prioritisation. – Discussed the strategic threats to Santander UK’s capacity to defend and build further franchise value. | – Requested a substantive update on Strategic risk in Q1 2020. For more, see the ‘Strategic risk’ section of the Risk review. | ||
| Pension risk | – Considered papers on pension investment strategy and governance. – Sought assurance around the – Noted the company and – Received updates on the transition to new investment managers and improvements in the transparency of | –
For more,see | ||
| Liquidity risk | – – Questioned management about material liquidity stress test assumptions, and the flexibility and – Received half yearly updates on asset and liability management activities and confirmed the liquid asset buffer portfolio remained within risk appetite, and appropriately hedged against duration risks and LIBOR decommissioning risks, respectively. | – Agreed to recommend the
For more,see | ||
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Governance
Board Risk Committee Chair’s reportcontinued
| Risk | Action taken by the Board Risk Committee | Outcome | ||
| Capital risk | – Considered, from a capital risk perspective, dividends payable on AT1 securities, and the ordinary dividends proposed to be paid by Santander UK Group Holdings plc and Santander UK plc – Requested management develop a framework to address and provide additional rigour to the consideration of and allocation of surplus available capital. – Approved this Surplus Capital Allocation Framework. – Reviewed the Internal Capital Adequacy Assessment Process (ICAAP) and noted material enhancements to the previous process made by management. –
– Received updates on model risk including – Received updates on progress in respect of the | – Recommended the payment of dividends to the Board for approval.
– Agreed to recommend the ICAAP to the Board for – Agreed to recommend the plans for potential risk and capital management actions to the Board for approval. – For more, see the ‘Capital risk’ section of the
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| Operational risk | – Noted the design and implementation of the Operational Risk Framework, the downward trend of operational losses excluding PPI and management’s shift in focus toward business continuity as opposed to appetite for financial loss in respect of operational resiliency. – – Received regular updates on management’s strategies for mitigating cyber risk and third party – Considered crystallised operational risk incidents impacting other companies, and – – Highlighted the elevated risk presented by the confluence of regulatory change requirements, change risk more generally and – Considered and noted good progress on the
| – Monitored the impacts on operational risk and key controls associated with management’s execution of the high volume of significant transformation and remediation programmes.
For more,see For more on our LIBOR transition, see the ‘Managing LIBOR transition’ case study in the ‘Market risk’ section of the Risk review. | ||
| Model risk | – Considered an update on the regular monitoring of capital adequacy models. – Received – Considered the | – The Committee will continue to monitor progress in respect of regulatory For more, see the ‘Model risk’ section of the Risk review. | ||
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Effectiveness of risk management system and internal controls
FollowingThe Committee considered, as part of the H2 2017Operational Risk Profile & Analysis update, the results of the 2018 year end Risk and Control Self Assessment (RCSA), the Committee received updates on. This highlighted the risk and exposure issues reported through the 2018 RCSA processes. Based on thoseour assessments of the risk and exposure issues reported, we considered that there had been an increase in critical and high risks versus the prior year’s assessment, however, overall critical and high risks had decreased (via awere well managed via risk mitigation and reassessment process) and that theprocess, respectively. The remaining high risks related primarilymainly to addressing residual IT obsolescence. Whilerisks, relating to legacy systems and data management, and new operational risks resulting from ring-fencing requirements. Whilst the self-assessment acknowledged a number of control weaknesses, in particular for Financial Crime, we were satisfied that appropriate actions were planned and being progressed by management to address these. We will continue to monitor the position.position, including with respect to overall risk appetite. Notwithstanding these considerations, the Committee subsequently requested, and management implemented, additional controls and limitations on certain activities intended to further mitigate exposure to Financial Crime risk relative to risk appetite.
We noted an increase in reported risks, partly due to the result of a dynamic transformation and change risk profile, increased reporting across the business as a result of improved systems, and noted further the need for additional classification improvements. The Committee wasManagement also advised the Committee that alloverall operational controls improved following system enhancements, but notedhowever, the Committee highlighted the need to make further progress.
In addition to the RCSA updates, during 2018 theThe Committee also reviewedreaffirmed its view and discussed the continuation of management’s dialogue with the regulator regarding enhancements to core areas of the corporate credit risk management infrastructure in the wake of the regulator’s reviews of certain corporate credit portfolios and the corporate credit risk management function in 2017 and 2018, respectively.
The Committee concurred with the regulator’s expectation of a comprehensive approach reflecting appropriate prioritisation of investment in management’s strategic plan.plan, particularly with reference to the plan for bank-wide risk infrastructure. The Committee will continue to review management’s reports on the execution of the overall bank-wide risk infrastructure investment programme, as well as the status of management’s regulatory dialogue, and will continue to request management to evidence the effectiveness of controls and improvements driven by the programme over the investment period.
Change Programme
The Committee maintained its oversight of the changing scale, scope and critical nature of the various change initiatives undertaken by Santander UK to meet regulatory and other requirements that continued to pose significant risk.risk in 2019.
Reports from the Transformation Office and Operational Risk identified similar themes with respect to root cause issues underpinning the execution of change programmes. The Committee expressed concern at management’s capacity to effectively resource and execute the number of strategic transformation programmes in progress concurrently with the execution of Banking Reformregulatory change requirements including customer alerts and a rangethe high cost of other mandatory regulatory initiatives. credit review.
The Committee considered thatin-house project improved management improvements mitigated this riskinformation would assist management to better plan and sequence the developmentimplementation of an agile work environment is continuing to enhance the organisation’s capacity to adapt.complex and often time critical and interdependent deliverables.
Effectiveness of the Committee
As noted above, the Committee membership saw two membersone member leave and one member join during the year. I believe that the Committee has an appropriate mix of skills to enable it to operate effectively and to offer appropriate challenge and support to management.
In JanuaryDecember 2019, we reviewed the Committee’s responsibilities as set out in the Terms of Reference and confirmed that the Committee had discharged its responsibilities in full in 2018.2019.
An internal review of the Committee’s effectiveness during 2019 will take place during the first quarter of 2020 to provide the feedback mechanism for continuous improvement and to keep areas for development in focus.
Full terms of reference can be found on our website at www.aboutsantander.co.uk and a summary is given on page 35.38.
We continued to receive regular reports on enterprise wide risk and to call risk owners to our meetings to account for their progress.
We have benefited from the perspectives of each of the three lines of defence to gain assurance and confirm progress in respect of material initiatives intended to mitigate key risk exposures.
These actions are examples of how we have looked to inform our debate and decision making in the year and contribute to our effectiveness as a Committee.
Priorities for 20192020
The CommitteeIn 2020, we will continue to focus on the risks and uncertainties surrounding Brexit. We will also continue to monitor Santander UK’s capital and liquidity adequacy and to assess credit risk in changing economic conditions.conditions and extremely competitive operating environment including the risks and uncertainties surrounding Brexit and the UK regulatory landscape.
Cyber,Data, cyber, third party, operational resilience and otherIT-related operational risks will continue to be a priority, including the adoption of cloud services.
We also expect to monitor closelyreview continuing developments in areas such as model risk, pension risk, and enhancements to Santander UK’s risk infrastructure.infrastructure and management of transformation risks.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Governance
Board Audit Committee Chair’s report
Our responsibilities include oversight of the integrity of financial reporting and controls, the effectiveness of our internal audit function, the relationship with the external auditors and the
adequacy
 | Our responsibilities include oversight of the integrity of financial reporting and controls, the effectiveness of our internal audit function, the relationship with the external auditors and the adequacy of our whistleblowing arrangements.
Overview of the year In 2019, the main activities of the Committee included:
We also addressed other responsibilities delegated to the Committee by the Board. Committee Membership Julie Chakraverty retired on 7 May 2019 and I would like to thank her for her service on behalf of the Committee. We welcomed Garrett Curran, who joined the Committee in May 2019. Garrett brings extensive financial services experience and strong risk management credentials. At 31 December 2019, all four members of the Committee were IndependentNon-Executive Directors. The Committee also met the necessary requirements of independence throughout the year, in accordance with the requirements of Rule10A-3 under the US Securities Exchange Act 1934.
Significant financial reporting issues and judgements The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. In
Annual Report
Board Audit Committee Chair’s reportcontinued
The Committee’s focus continues to be on areas of significant judgement which pose the greatest risk of a material financial statement misstatement. In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. During the External Auditor We continued to develop and oversee the interaction with PwC and with Mr Oversight of the relationship with our External Auditors As part of our review of our relationship with PwC, our activities included:
Based on the above inputs, which were captured in a formalised assessment, the Committee satisfied itself as to the rigour and quality of PwC’s audit process. Non-audit fees We have a robust policy onnon-audit services provided by our External Auditors, which was updated in 2016 in the context of the Revised Ethical Standard issued by the FRC on auditor independence requirements resulting from the Non-audit services were under continuous review throughout All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the full Committee. This process is in addition to the requirement for allnon-audit fees to be approved by the Banco Santander Audit Committee. The fees fornon-audit work performed by PwC in the year, which are disclosed in Note 7 In 2019, PwC’snon-audit related fees were 22% of their
Fees fornon-audit work performed by PwC in the year, other than those in relation to audit related assurance services, were approximately The Committee considered the findings of the Competition and Markets Authority (CMA) market study into the UK Statutory Audit market and subsequent Business Energy & Industrial Strategy (BEIS) consultation as well as the Kingman independent review of the Financial Reporting Council and Internal controls The Board Risk Committee has overall responsibility for the effectiveness of the internal control systems. However, due to the nature of internal control matters, there is a degree of overlap in responsibilities with those of this Committee, particularly regarding financial reporting controls. Section 404 of the Sarbanes-Oxley Act requires management to report on the design and effectiveness of its internal controls over financial reporting (ICFR) framework. During We considered the financial control environment in the year. Finance and our External and Internal Auditors provided regular reports to the Committee on ICFR, including key systems, and provided feedback on remediation and overall improvements required to ensure that the relevant controls were appropriately designed and operating effectively. This included
Annual Report
Board Audit Committee Chair’s reportcontinued
Disclosure in the Annual Report We received regular reports from the Disclosure Committee, a senior executive committee chaired by the CFO. Its remit is to advise the Committee on the completeness and accuracy of disclosures in Santander UK’s external reporting. This, together with other reports received in the year, and a review of best practice and the approach of our peers, enabled us to conclude that we were satisfied with the disclosures in this Annual Report. Management also engaged the Board and Committee early on concerning the approach to the report which enabled them to provide input into the overall tone and messaging in a timely manner. Fair, balanced and understandable The Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable, aligns with the quarterly results and whether it provides the information necessary for readers to assess Santander UK’s position and performance, business model and
In addition to the above review process, the Committee’s assessment of fair, balanced and understandable is underpinned by the understanding it gains through the reporting made to it throughout the year of management judgements, internal control matters, Internal Audit activities and the reports of the External Auditors. The Committee’s assessment also considers the robustness and outcomes of the assurance, review and verification processes conducted by management and considers whether the key risks reflected those that were of a concern to the Committee and were consistent with those reported by management. Following our assessment we concluded that the Financial Reporting Council (FRC) Annual Review of Corporate Reporting In October
This Annual Report includes
Suchnon-IFRS measures are APMs and Management reviews these APMs in order to measure Santander UK’s overall performance, position and profitability, as well as to show business growth excluding ring-fence transfers, and believes that their presentation provides useful information to investors on the Santander UK group. Definition of these APMs and, where such APMs are adjusted, reconciliations to the nearest comparable IFRS measures are presented in ‘Selected financial data’ in the We are satisfied that the APMs provide useful information to investors, and that management has clearly identified the APMs presented in this Annual Report and, where such APMs are adjusted, reconciled them to the nearest comparable IFRS measures. Going Concern We satisfied ourselves that it is appropriate to use the going concern basis of accounting in preparing the financial statements, supported by a detailed analysis provided to the Committee by senior finance management. As part of the assessment, we considered whether there are sufficient financial resources, including liquidity and capital, available to continue the operations of Santander UK. We considered Santander UK’s resilience in the face of potential stress and prominent events. In making our assessment, we took into account all information of which we were aware about the future, which was at least, but not limited to, 12 months from the date that the balance sheet was signed.
Internal Audit The Internal Audit plan, based on a comprehensive risk assessment, was presented in draft and then final form for challenge and approval by the Committee. The plan has been updated at regular intervals throughout the year in response to changes in the business and the regulatory environment and at the request of the Committee.
We chose to invite management to present on progress with the implementation of Internal Audit’s recommendations, issues encountered, key milestones and key dependencies. We received regular reports on audit recommendations from our Chief Internal Auditor (the Head of Internal We noted a strong engagement between Internal Audit and the business in We also oversaw the objective setting and performance evaluation of the
Internal Audit External Quality Assessment
Whistleblowing Santander UK recognises the importance of a culture where colleagues feel able to speak up. In The Committee is responsible for reviewing and monitoring the effectiveness of Santander UK’s whistleblowing procedures. It received and consideredbi-annual reports on Santander UK’s whistleblowing arrangements. The reporting included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, changes to proposed legislation and activities to promote and enhance the arrangements to support the culture of speaking up. The Committee also reviewed the annual Whistleblowing Report prepared for the Board to consider. The Committee is satisfied that Santander UK has complied with the FCA and PRA regulations on whistleblowing in the year. I continued to act as the Whistleblowers’ Champion to oversee the integrity, independence, and effectiveness of the whistleblowing arrangements. I remained focused on procedures and governance to prevent victimisation of those employees raising a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of suggested enhancements to continuously improve the arrangements. Effectiveness of the Committee The Board has determined that I have the necessary qualifications and skills to qualify as a Board Audit Committee financial expert as defined in Item 16A of Form20-F and by reference to the NYSE listing standards. In respect of the Revised Statutory Audit Directive, the Board satisfied itself that at least one member of the Committee had competence in accounting and auditing, and the members of the Committee as a whole had competence in the banking sector, in which we are operating. In my capacity as Committee Chair, I meet with key members of the management team and the External Auditors in advance of each Committee meeting. I ensure that the Committee meets with management, the Internal Auditors and the External Auditors in private sessions. I also attend meetings with the PRA, the FCA and the FRC. In line with an assessment of the Committee’s forward-looking agenda and the Board programme, it has been agreed that the number of scheduled meetings of the Committee will
Terms of Reference The Committee reviews its Terms of Reference annually. Following the
Areas of focus for the Committee for
Annual Report
Board Responsible Banking Committee Chair’s report
Role and responsibilities The purpose of the Committee is to strengthen focus on culture, conduct and customer outcomes. It monitors, challenges and supports actions taken by management to ensure that the business is run in a responsible way, in the interests of all of our stakeholders including customers, our people and communities in order to promote Santander UK’s long-term success. The Committee supports the Board with shaping Santander UK’s culture, reputation and customer propositions through oversight of matters related to conduct, compliance, culture, diversity and inclusion, sustainability, corporate social responsibility, reputation, brand and financial crime. The oversight of financial crime includes anti-money laundering, sanctions, terrorist financing, anti-bribery and corruption and a key transformation programme of our controls and systems. In December, the Committee’s Terms of Reference were updated to include oversight of reputational aspects of climate change. The Committee Chairs collaborate to prevent any gaps in coverage and to ensure that any areas of overlap are addressed in the appropriate forum. Committee Chairs are members of other Board Committees to ensure breadth of visibility and open channels of communication. Overview of the year In 2019, the Committee considered, monitored and challenged a range of matters, including: Customers and Customer Outcomes The Committee focused on:
Reputational risk The Committee ensured that adequate and effective control processes were in place to identify and manage reputational risks. It received and considered reports detailing ongoing and possible reputational, brand and franchise risks, including media and public policy issues. The reports also included any key decisions or key risk events that may give rise to reputational risk issues. Financial crime The Committee:
Conduct and Compliance The Committee:
The Committee:
Brand, Sustainability and Corporate Social Responsibility The Committee:
All five members of the Committee, including the Chair, are IndependentNon-Executive In addition to the Committee members, during 2019, regular attendees at Committee meetings Committee’s Effectiveness Review
Terms of Reference
In Key priorities
Annual Report
Board Remuneration Committee Chair’s
strategic priorities and reinforce the
I am pleased to present the Directors’ Remuneration Report for 2019. Santander UK continues to undergo significant transformational change, following ring-fencing and other strategic priorities. Against this backdrop, the role of the Committee evolved in 2019. Role and responsibility The purpose of the Committee is to maintain oversight of the over-arching remuneration policies and frameworks for the Santander UK group. The Committee is also responsible for the remuneration arrangements of employing entities outside the Ring-Fenced Bank (Santander UK plc) perimeter. The remuneration activities of the Ring-Fenced Bank are now governed by the Santander UK plc Board Remuneration Committee. More information is set out in the Santander UK plc Annual Report, which does not form part of this Annual Report. Overview of the year Through its monitoring and challenging of remuneration matters, the Committee delivered the following outcomes:
During 2019, there was no change to the
Bank, of which Annemarie remains Chair. The Committee is satisfied
Effectiveness of the Committee
Terms of reference The terms of reference were reviewed and revised during the year to reflect the scope of the Committee’s role with respect to Priorities for
Remuneration policy report
Basis of preparation This report has been prepared on behalf of the Board by the Board Remuneration Committee. We comply with the statutory reporting obligations for large private companies. In addition, we follow the UK ownership
Forward-looking remuneration Our forward-looking remuneration
Executive Directors’ remuneration structure
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| Variable Pay | Principle and description | Policy | ||
Variable pay plan | – To motivate Executive Directors to achieve and exceed annual financial and strategic targets within Santander UK’s Risk Appetite and in alignment with our business strategy and values. – Multi-year deferral, further performance testing and delivery in Banco Santander SA shares aligns Executive Directors’ interests to the long-term interests of Santander UK. – Deferral of part of the award is applied in accordance with the requirements of the PRA Remuneration Code. | – Awards are discretionary and determined by reference to performance against a scorecard of financial and strategic – 40% of the bonus awarded is paid upfront after the performance year ends (year one), delivered half in cash and half in shares. – 60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered half in cash and half in shares. – – – Malus and clawback provisions apply to | ||
– The structure of variable pay awards ensures that Executives acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. As such, a formal post-employment shareholding requirement is not in place at this time. | ||||
| Santander UK Group Holdings plc | 57 |
Annual Report 2019| Governance
Remuneration policy reportcontinued
The variable pay plan rewards financial andnon-financial performance over the year with additional long-term metrics applied to the deferred element which can reduce, but not increase, the deferred award.
Our remuneration structures, which incorporate significant long-term deferral and use of Banco Santander SA shares align the interests of Executive Directors with shareholders and encourage the building of a long-term shareholding in Banco Santander SA.
Our remuneration policy continues to meet regulatory requirements. Santander UK applies a 2:1 variable to fixed pay cap in line with approvals granted to Banco Santander SA. For control function staff,colleagues, a lower operational ratio of 1:1 is applied, save for in exceptional circumstances.
Executive remuneration policies and principles
Our core values of Simple, Personal and Fair drive our remuneration policy. We focus on delivering a reward framework that is simple to understand, tailored to individual roles and competitive yet fair.
The key drivers of our Remuneration Policy
Alignment to culture
| – | To design policies aligned to the long-term success of the business which support the delivery of our strategy and reinforce our values. |
| – | To base variable pay on a balanced scorecard of quantitative and qualitative metrics which reflect our KPIs across Customers, Shareholders and People. For 2020, Communities has beenre-introduced into the bonus scorecard (previously considered as part of risk adjustment). This ensures that ourday-to-day activities align with Santander UK’s over-arching strategy and our aim of being the best bank. |
Simplicity
| – | To ensure our approach to remuneration is transparent and easily understood. |
| – | To operate simple and clear structures for all Santander UK colleagues. |
Risk
| – | To apply a consistent approach to reward for all our employees which upholds our prudent approach to Risk Appetite set as part of a SantanderUK-wide Risk Framework. Risk adjustment occurs at both an individual and bonus pool level. |
| – | To provide a balanced package between fixed and variable pay, and short-term and long-term pay horizons to align with our strategic goals whilst promoting prudent risk management. |
| – | To ensure remuneration is compliant with applicable regulations and legislation. |
Fairness
| – | To take into account an assessment of the Executive Director’s performance against a performance management framework set at the start of the year covering a range of financial,non-financial, quantitative and qualitative criteria. |
| – | To set robust and stretching targets which reward exceptional performance. |
| – | To attract, retain and motivate employees of the highest calibre by providing total remuneration which reflects individual and Company performance, is competitive, reflects the responsibilities of the role and drives the organisation’s growth. |
| – | To consider wider employee pay when determining pay of our Executives. |
Clarity
The Committee reviews remuneration reporting on an annual basis against principles of best practice and developments in corporate governance, including the Code. Our reporting is designed to be transparent to promote effective stakeholder engagement but reflective of our subsidiary structure.
Predictability
The Committee reviews the variable pay opportunity for individuals annually and the basis of the pool calculation. However, due to commercial sensitivity, these are not disclosed as per the requirements of the Code. Directors’ remuneration is within the variable pay cap as approved by Banco Santander SA shareholders and set out above on this page.
Executive Director pension alignment
In 2018, following developments in corporate governance and best practice, the Committee took the decision to reduce pension allowances for new Executive Directors to 9% of salary, in line with the wider workforce average. This pension level applied on the appointment to the Board of Susan Allen, Head of Retail and Business Banking, on 1 January 2019 and Duke Dayal, Chief Financial Officer, on 16 September 2019.
In 2019, the Committee decided to extend this approach to existing Executive Directors, namely the Chief Executive Officer. This reduction shall be phased with the Chief Executive Officer’s allowance reducing from 35% to 22% of salary, effective 1 January 2020. From 1 January 2021, the Chief
Executive Officer’s pension will be reduced further to the employee average of 9% of salary p.a.. No other changes to the Chief Executive Officer’s remuneration are proposed for 2020.
On recruitment
When appointing a new Executive Director, base salary is set at a market competitive level appropriate for the role, taking into consideration a range of factors including scope and responsibilities of the role, internal relativities, the individual’s previous remuneration, relevant experience, and an assessment against relevant comparator groups and cost. In line with the requirements of the new UK Corporate Governance Code and in particular the guidance on executive director pension levels, unless
Unless determined otherwise, any new Executive Director will receive a pension benefits at a levelallowance in line with the wider workforce average, being 9% of salary. Benefits available will typically be aligned to the wider employee population.
Other elements of remuneration will be established in line with the Remuneration Policy, set out in the Executive Directors’ remuneration structure table on page 56. 57.
Relocation support and international mobility benefits may also be provided. Where provided, relocation assistance will normally be for a capped amount and/or limited time. For an overseas appointment, the Committee will have discretion to offer cost effective benefits and pension provisions which reflect local market practice and relevant legislation.
Buy-out awards
Compensation may be provided to Executive Directors recruited externally for the forfeiture of any award on leaving their previous employer. The Committee retains discretion to make such compensation as it deems necessary anddeemed appropriate to secure the relevant Executive Director’s employment and ensure any such payments align with the long-term interests of Santander UK and the prevailing regulatory framework.
Such payments will be in line with the benefits foregone from leaving the previous employer taking into account value, vesting dates and the extent to which performance conditions applied to the original awards.
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Service agreements
Terms and conditions of employment are set out in individual service agreements which include a notice period of six months from both the Executive Director and the Company.
The agreements may be terminated immediately with payment of fixed pay in lieu of notice. In the event of termination for gross misconduct, neither notice nor payment in lieu of notice is required, and any deferred awards are forfeited.
Termination payments
The impact on remuneration of an Executive Director leaving the Company on remuneration under various scenarios reflects the service agreements, and the relevant scheme rules, and the Committee’s policy in this area.
With respect to outstanding variable pay awards, these generally lapse on termination, other than where an individual is considered to be a ‘good leaver’. The Committee determines whether an Executive Director is a good leaver should their employment end due tounder certain circumstances including but not limited to: injury,ill-health, disability, redundancy, retirement, death, or any other reason at the Committee’s discretion. In 2018, the Committee reviewed its approach to determining good leaver status and has approved
There is a framework in place which is intended to guide the Committee to determine the discretionary circumstances when good leaver status is appropriate. Other than a payment in the event of redundancy, there are generally no other payments upon termination of employment for Executive Directors anticipatedDirectors.
In the event of a change in control, variable pay awards may continue to be paid in respect of the policy.full financial year (pre and post change of control), or an award may be made in respect of the portion of the year that has elapsed at the point of change in control. Exceptionally the Committee may exercise its discretion to waivepro-rating. In the event of a change in control, outstanding share awards may lapse and be replaced with equivalent awards over shares in a new company, subject to Committee discretion. Alternatively, outstanding awards may vest on a change in control, subject to the assessment of performance andpro-rating of awards where appropriate.
Risk and Performance adjustment
We will continue to ensure that the requirements of the Remuneration Code on risk and performance adjustment are met for our employees. All variable remuneration is subject to adjustment for current and future risks through our Additional Risk Adjustment Standard which is linked to our Board approved Risk Appetite and our Individual Remuneration Adjustment Standard.Appetite.
Our Additional Risk Adjustment Standard (the Standard) provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment overlay that can result in a downward risk adjustment of up to 100% ofreduce the bonus pool or individual awards to nil at the Committee’s discretion. The Standard also considers a range of factors deemed relevant by the Committee such as evolution of complaints, progress on remediation projects, ring-fencing compliance and people, culture and communities metrics. Given commercial sensitivity, the Committee does not provide annual detail on the application of discretion ofas required by the Committee.Code.
Our Individual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for making decisions in relation to individual performance adjustments following an Incident,incident, including the application of malus and clawback.
Performance adjustments may include, but are not limited to:
| – | Reducing a bonus for the current |
| – | Reducing the amount of any unvested deferred variable |
| – | Requiring a bonus which has been awarded (but not yet paid) to be forfeited; and |
| – | Requiring repayment on demand (on a net basis) of any cash and share awards received at any time |
|
The Committee has full discretion to prevent vesting of all or part of an amount of deferred remuneration and/or to freeze an award during an ongoing investigation in anya number of the following circumstances:circumstances, including:
| – | Employee misbehaviour or material |
| – | Material downturn in the performance of Santander UK or a relevant business unit’s |
| – | Santander UK or a relevant business unit suffers a material failure of risk |
| – | Significant changes in |
| – | Material restatement of the |
When determining variable pay awards for individuals performing roles across Santander UK plc and Santander UK Group Holdings, the Holdings Remuneration Committee will apply any necessary discretion based on factors related to UK Group entities outside of Santander UK plc. This discretion is subject to validation by the Santander UK plc Remuneration Committee.
The Committee seeks input from the Chair of the Board Risk Committee, the Chief Risk Officer, the Chief Legal and Regulatory Officer, Chair of the Board Audit Committee, Chief HR Officer, Chair of the Board and the Chief Internal Auditor when determining whether any performance or risk adjustments are required.
Policy for all employees
Our performance, reward and benefits approach across the Company supports and drives our business strategy, rewards strong performance and reinforces our values inwithin the contextapproved risk management framework. The general principles of a clearly articulated Risk Appetite. Wethe Remuneration Policy broadly apply a consistent approachacross all colleagues where appropriate and are designed to rewardfacilitate recruitment, motivation and retention whilst driving performance.
The composition of remuneration packages for all employees. Employees are entitled to a basethe Executive Directors is aligned with the broader colleague population, comprising salary, pensions and benefits and have the opportunity to receive an element of performance-related compensation, subject to theireligibility for discretionary variable pay dependent on role and reward band.responsibility. The opportunitylevel of performance-rated compensation availablepension allowance for newly appointed Executives is based onaligned with the seniority and responsibility ofaverage employer contribution for the role. wider workforce.
The Remuneration Committee annually approve the operation of all of our variable reward schemes for our customer-facing colleagues to ensure that all our plans reward appropriate behaviour and do not incentivise unnecessary risk taking.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Governance
Remuneration implementation report
Introduction
This section of the report outlines how our Remuneration Policy was implemented for 2018.2019.
Variable Pay Plan
OurTo incentivise and reward Executive Directors for achieving superior and sustained performance, our Directors participate in a single variable incentive plan. The purposeA balance of the plan is to align participants’ reward with the financial andnon-financial performance of Santander UKmetrics are selected annually by the Committee and are aligned with our strategy as measured over the financial year. Multi-year deferral, further performance testing and delivery in Banco Santander SA shares ensures that Executive Directors’ interests are aligned to the long-term interestinterests of the Santander UK Group. Payments to our Executive Directorsbusiness. Both upfront and deferred awards are made half in cash and half in shares, spreadshares. The deferred element is delivered over seven years, with the finalfirst three deferred tranches of awards subject to further performance testing against long-term metrics which can reduce but not increase the level of awards. Awards delivered in shares are subject to an additionalone-year retention period from the point of delivery.
The 2018structure of the plan is illustrated below. The 2019 Variable Pay Plan pool was determined based on a range of metrics using a balanced scorecard approach (explained further below):as follows:
Quantitative assessment
Measured usingA quantitative assessment is undertaken against a balanced scorecard approach of financial andnon-financial measures. The measuresmetrics that are based onkey to Santander UK’s strategy and for 2018 were:2019 strategy:
| – | Customers |
| – | Shareholders |
| – | Risk (Cost of |
| – | Capital (Contribution to Banco Santander |
| – | Profitability (Net |
| – | Employees (Employee |
Threshold performance under the CustomerPerformance metrics are reviewed annually to ensure continued alignment with KPIs and Shareholder categories must be achieved in order to access payout under the Employee category. Similarly, the Committee considers a discretionary downward adjustment to the Customer and Shareholder categories if satisfactory performance under the Employee category is not achieved.strategy.
Qualitative assessment
ThisA qualitative assessment adds context to the quantitative assessment of financial andnon-financial measures to ensure ensures a balanced assessmentview of performance has been made.
Banco Santander Group Multiplier
This adjustsThe Committee has the discretion to adjust the pool upwards or downwards to reflect overall Banco Santander performance.performance if appropriate.
Exceptional Adjustment
Intended to cover unexpected factors or additional targets not covered by the quantitative or qualitative assessments. This may also include adjustments not covered in the qualitative assessments, including major risk events. AnNo exceptional adjustment, including additional targets, may be requested at a Banco Santander or Santander UK level.metrics were applied to the 2019 variable pay awards.
UK-focused risk adjustment
Linked to Santander UK’s Risk Appetite, this provides both a formula-based assessment against Risk Appetite and an additional qualitative risk event assessment overlay (including consideration of people, culture, contribution to communities, conduct and other relevant factors) that can result in a downward risk adjustment of up to 100% of the bonus pool or individual awards at the discretion of the Committee.
The 2018 Variable Pay Plan operated under our remuneration governance and frameworks applicable prior to the changes required as a result of the ring-fencing rules under the Banking Reform Act.
The Committee has considered, reviewed and approved changes required to remuneration governance and frameworks in order to comply with the relevant regulatory rules, including for ring-fencing and these will applyhave applied from the 2019 performance year.
Deferred long-term awards
The payment of the first three deferred tranches of the 2019 awards (36% of the total award), payable in 2023, 2024 and 2025, is conditional on the achievement of long-term objectives measured over the three-year period 2020 to 2022. The performance measures for 2019 awards are EPS, relative TSR and compliance with the fully-loaded Common Equity Tier 1 (CET1) capital. Following performance assessment, the level of awards will be adjusted accordingly. The measures can reduce but not increase the value of the deferred awards. The payment of the final two deferred tranches (24% of the total award), payable in 2026 and 2027 are subject to continued employment only.
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20182019 Business Performance and Impact on Remuneration
Our management team hasSantander UK delivered solid business performance this year, delivering fora strong balance sheet in 2019 despite results being impacted by a challenging banking environment. Whilst competitive pressures on mortgages and PPI charges coupled with continued investment in our shareholders, people,transformation programme impacted on profit, we are continuing to support customers whilst growing and communities.
Our business performance in 2018 showed selectiveoperating a sustainable business. Santander UK achieved its strongest net mortgage growth in a decade, reinforcing its position as the UK’s third largest mortgage lender. Our drive to deliver tailored products and customer service with an uncertain and competitive operating environment, as describedenhanced digital offering was reflected in the CFO review in the Strategic Report.growth of customer deposits.
The Committee approved payments to Executive Directors under the Santander UK Variable Pay Plan in the context of this performance.
In addition the Committee confirmed that the remuneration policy operated as intended, demonstrating pay for performance alignment.
Executive Directors’ remuneration (audited)
Total remuneration of each Executive Director for the years ended 31 December 2018 and 2017.
| Executive rewards | Nathan Bostock(1) | Antonio Roman(2) (3) | Javier San Felix(3) | Total | ||||||||||||||||||||||||||||||||||
2018 £000 | 2017 £000 | 2018 £000 | 2017 £000 | 2018 £000 | 2017 £000 | 2018 £000 | 2017 £000 | |||||||||||||||||||||||||||||||
Salary and fees | 1,680 | 1,653 | 629 | 243 | 725 | 302 | 3,034 | 2,198 | ||||||||||||||||||||||||||||||
Taxable benefits (cash andnon-cash) | 50 | 55 | 5 | 17 | 632 | 329 | 687 | 401 | ||||||||||||||||||||||||||||||
Pension | 588 | 581 | 157 | 61 | – | – | 745 | 642 | ||||||||||||||||||||||||||||||
Bonus (paid and deferred) | 2,317 | 2,425 | 1,077 | 400 | 1,800 | 861 | 5,194 | 3,686 | ||||||||||||||||||||||||||||||
Total remuneration | 4,635 | 4,714 | 1,868 | 721 | 3,157 | 1,492 | 9,660 | 6,927 | ||||||||||||||||||||||||||||||
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Context for decision making
The Committee ensures that broader remuneration policies and practices for employees across the Santander UK Groupgroup are taken into account when setting the policy for Executive Director remuneration. The Committee annually reviews remuneration trends across the Santander UK Groupgroup including the relationship between executiveExecutive remuneration and the remuneration of other Santander UK Groupgroup employees as well as remuneration in the wider UK market when making decisions on executiveExecutive pay.
The Committee oversees the broader workforce remuneration policies and practices, the implementation of remuneration and related employment policies across the Santander UK Groupgroup and the salary and variable pay awards for all MRTs. It also approves the design of any material performance-related pay plans.
As part of the monitoring of pay, the following is considered:
| – | Santander UK’s engagement with its recognised trade unions on matters relating to pay and benefits for all |
| – | Annual pay reviews for the general employee |
| – | Santander UK |
| – | The design of and overall spend on variable incentive |
| – | An assessment of conduct across the |
The Committee is focused on ensuring that employees are not unduly stretched or inappropriately incentivised. This is monitored using existing employee engagement indicators via the Global Engagement Survey, and The Santander Way survey which provides
an indication of our progress in performance against the nine Santander behaviours.
Stakeholder views
During 2018,2019, Santander UK continued to engage with key stakeholders on remuneration-relatedremuneration related matters including its main regulators the PRA and FCA. During 2018, management and the Committee Chair maintained dialogue with the PRA and FCA.
Employee opinion surveys are undertaken annually on employee engagement, and discussion on remuneration matters generally takes place with union representatives during the annual pay review cycle and on relevant employee reward matters. The Committee receives updates on these discussions during the year.
During 2018,Executive Directors’ remuneration
Total remuneration of each Executive Director for the years ended 31 December 2019 and 2018.
| Executive rewards | Nathan Bostock(3) | Susan Allen(4) | Antonio Roman(5) | Duke Dayal(6) | Total | |||||||||||||||||||||||||||||||||||||||||||
| 2019 £000 | 2018 £000 | 2019 £000 | 2018 £000 | 2019 £000 | 2018 £000 | 2019 £000 | 2018 £000 | 2019 £000 | 2018 £000 | |||||||||||||||||||||||||||||||||||||||
Salary and fees | 1,680 | 1,680 | 800 | – | 378 | 629 | 277 | – | 3,135 | 2,309 | ||||||||||||||||||||||||||||||||||||||
Taxable benefits(1) | 56 | 50 | 3 | – | 22 | 5 | 504 | – | 585 | 55 | ||||||||||||||||||||||||||||||||||||||
Pension | 588 | 588 | 72 | – | 95 | 157 | 25 | – | 780 | 745 | ||||||||||||||||||||||||||||||||||||||
Total fixed pay | 2,324 | 2,318 | 875 | – | 495 | 791 | 806 | – | 4,500 | 3,109 | ||||||||||||||||||||||||||||||||||||||
Bonus (paid and deferred)(2) | 1,990 | 2,317 | 859 | – | 693 | 1,077 | 354 | – | 3,896 | 3,394 | ||||||||||||||||||||||||||||||||||||||
Total remuneration | 4,314 | 4,635 | 1,734 | – | 1,188 | 1,868 | 1,160 | – | 8,396 | 6,503 | ||||||||||||||||||||||||||||||||||||||
| (1) | Taxable Benefits for the Executive Directors comprises a range of benefits including private health care, life and critical illness cover, health insurance, car allowance and relocation allowances where applicable. Included in the benefits figure for Duke Dayal is a relocation allowance of £500,000. |
| (2) | The bonus value shown is the total variable pay award made in respect of 2019. As set out in this report, a portion of this award (36% of the value shown) is subject to further performance testing which may reduce, but not increase, the value delivered. |
| (3) | As detailed in the Remuneration Policy report, the pension contribution received by Nathan Bostock will be reduced from 35% to 22% of salary, effective 1 January 2020 and to 9% of salary effective 1 January 2021. |
| (4) | Susan Allen was appointed as an Executive Director on 1 January 2019 and resigned on 31 December 2019 from the Board of Santander UK Group Holdings plc. She remains an executive director of Santander UK plc. |
| (5) | Antonio Roman left the Board on 15 September 2019 and returned to a Group role with Banco Santander. His remuneration is shown in respect of his service in the UK. |
| (6) | Duke Dayal was appointed as an Executive Director on 16 September 2019 and his remuneration is shown from this date. |
Relative importance of spend on pay
| 2019 £m | 2018 £m | Change % | ||||||||||
Profit before tax | 981 | 1,567 | -37% | |||||||||
Total employee costs | 1,288 | 1,376 | -6% | |||||||||
| Santander UK Group Holdings plc | 61 |
Annual Report 2019| Governance
Remuneration implementation reportcontinued
CEO pay ratio
Santander UK is committed to delivering fair pay which attracts, retains and motivates employees of the highest calibre across all grades. In line with this commitment, the Remuneration Committee has oversight of compensation across the organisation, including pay ratios, and considers fair pay when determining reward outcomes. For the first time this year, Santander UK is voluntarily disclosing the pay ratio of the CEO’s total remuneration to the remuneration of UK employees.
In assessing the pay ratio, the Committee reviewed itsis confident that the Company’s policy on remuneration is fair and that improvements to pay progression will continue to ensure that lower paid colleagues receive a greater share of pay awards. A summary of our approach to engaging with stakeholdersFair Pay is included on executive remuneration in light of the outcomes of the new UK Corporate Governance Code. This is set out in the Governance section of the Board Nomination Committee Chair’s Report.page 28.
Advice and support provided to the Committee
As permitted by its Terms of Reference, the Committee has engaged the advice and support of Deloitte LLP (Deloitte) as independent remuneration consultants at the expense of the Company. Total fees (excluding VAT) for advice and support provided to the Committee during 20182019 were £192,600.£157,500 (2018: £192,600). Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executiveExecutive remuneration consulting in the UK.
The Committee is comfortable that the Deloitte engagement partner and team that provides remuneration advice to the Committee do not have connections with Santander UK that may impair their independence.
Relative importance of spend on pay
2018 £m | 2017 £m | Change % | ||||||||
Profit before tax | 1,567 | 1,814 | (14) | |||||||
Total employee costs | 1,376 | 1,137 | 21 | |||||||
Chair and Board Committee member fees
| Board £000 | Board Nomination Committee £000 | Board Risk Committee £000 | Board Audit Committee £000 | Board Responsible Banking Committee £000 | Board Remuneration | |||||||||||||||||||
Chair (inclusive of membership fee) | 650 | – | 60 | 60 | 60 | 60 | ||||||||||||||||||
Senior Independent Director | 30 | – | – | – | – | – | ||||||||||||||||||
Member | 90 | – | 25 | 25 | 25 | 25 | ||||||||||||||||||
In 2018,2019, Deloitte also provided unrelated tax, financial and advisory, risk, assurance and consulting services to Santander UK.
The Chair, CEO,Chief Executive Officer, Chief HR Officer, Performance & Reward Director, Company Secretary, Chair of the Board, Chair of the Board Audit Committee, Chief Legal and Regulatory Officer and Chief Risk Officer attended Committee meetings by invitation in order to support the discussion of the agenda items as appropriate. The Committee Chair also engages with the Chair of the Board Risk Committee when required.
No individual participates in discussions regarding their own remuneration.
Chair andNon-Executive Directors’ Director remuneration
The Chair’s fee is reviewed and approved by the Committee. The fees paid toNon-Executive Directors are reviewed and approved by the Chief Executive DirectorsOfficer and the Chair. Fees are reviewed annually taking into account information on fees paid in similar companies, as well as the market rate and time commitment for the role. The Chair is paid anall-inclusive base fee.Non-Executive Directors are paid a base fee, with a supplement for serving on or chairing a Board Committee. Three of the four Group NEDs whoNon-Executive Directors do not receive no fees in respect of their Santander UK duties.
No changesAn increase to the Board Chair’s fees of 3.8% was approved in 2019. This reflects the increased complexity of the role, particularly in the context of Banking Reform, greater time commitment and that no increase has been awarded since her appointment in 2015. Additionally, in recognition of the increasing
regulatory expectation ofNon-Executive Directors and the associated time commitment, targeted increases toNon-Executives’ fees were awarded. TheNon-Executive Directors base fee was increased from £90,000 to £95,000 and the fee for the Senior Independent Director fee increased from £30,000 to £35,000. Targeted increases were made to the Board Risk Committee Chair fee and Board Committeemembership fee, each increased by £5,000 to £65,000 and £30,000 respectively. No other changes to fees in 2018. The 2018 fee structure is shown inwere made during the table below.year.
AllNon-Executive Directors and the Chair serve under letters of appointment and either party can terminate on three months’ written notice, except in the case of the Chair where twelve months’ written notice is required.
Neither the Chair nor theNon-Executive Directors have the right to compensation on the early termination of their appointment beyond payments in lieu of notice at the option of Santander UK. In addition, neither the Chair nor theNon-Executive Directors are eligible for pension scheme membership, bonus or other incentive arrangements.
CEO pay ratio
CEO Pay
| 25th
| Median
| 75th
| |||||
2019 pay ratio | 183.1 | 132.1 | 77.3 | |||||
Total salary £ | 1,680,000 | 20,030 | 26,368 | 42,708 | ||||
Total pay £ | 4,313,993 | 23,562 | 32,662 | 55,786 | ||||
| (1) | Employee pay is calculated based on ‘Methodology A,’ calculating a comparable single figure for each employee, as set out in the reporting requirements. |
| (2) | Employee pay data is based on full time equivalent pay for Santander UK plc employees at 31 December 2019. This excludes a small number of employees in the rest of the Santander UK Group. Including those employees’ results in a ratio consistent with the above. For each employee, total pay is calculated based on fixed pay accrued during the financial year whilst variable pay is based on the previous financial year (i.e. paid in 2019 in respect of 2018 performance). |
| (3) | The CEO’s total remuneration is aligned to that disclosed in the Executive Directors’ remuneration table on the previous page. |
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Annual Report 2018 | Governance
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Chair and Board and Committee membership, tenure,
attendance and remunerationmember fees
| Board | Nomination Committee | Risk Committee | Audit Committee | Responsible Banking Committee | Remuneration Committee | |||||||||||||||||||||||||||||||||||||||||||||
| Scheduled | Ad hoc | Scheduled | Ad hoc | Scheduled | Ad hoc | Scheduled | Ad hoc | Scheduled | Ad hoc | Scheduled | Ad hoc | |||||||||||||||||||||||||||||||||||||||
| meetings | meetings | meetings | meetings | meetings | meetings | meetings | meetings | meetings | meetings | meetings | meetings | |||||||||||||||||||||||||||||||||||||||
| attended | attended | attended | attended | attended | attended | attended | attended | attended | attended | attended | attended | |||||||||||||||||||||||||||||||||||||||
Chair | Shriti Vadera | 9/9 | 3/3 | 4/4 | 1/1 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
Independent | Julie Chakraverty(1) | 5/5 | 3/3 | – | – | 5/5 | – | 4/4 | 2/2 | 4/4 | – | – | – | |||||||||||||||||||||||||||||||||||||
Non-Executive | Annemarie Durbin | 9/9 | 3/3 | – | – | 9/9 | – | – | – | 6/6 | 1/1 | 6/6 | 3/3 | |||||||||||||||||||||||||||||||||||||
Directors | Ed Giera | 9/9 | 3/3 | – | – | 9/9 | – | 8/8 | 2/2 | 6/6 | 1/1 | – | – | |||||||||||||||||||||||||||||||||||||
| Chris Jones(2) | 9/9 | 3/3 | – | – | 9/9 | – | 8/8 | 2/2 | – | – | 6/6 | 3/3 | ||||||||||||||||||||||||||||||||||||||
| Genevieve Shore(3) | 8/9 | 2/3 | – | – | 9/9 | – | 8/8 | 2/2 | 5/6 | 1/1 | 1/2 | 0/1 | ||||||||||||||||||||||||||||||||||||||
| Scott Wheway(4) | 9/9 | 3/3 | 4/4 | 1/1 | 9/9 | – | – | – | 6/6 | 1/1 | 6/6 | 3/3 | ||||||||||||||||||||||||||||||||||||||
| Alain Dromer(5) | 6/6 | 1/1 | – | – | 5/6 | – | 5/6 | 1/2 | – | – | 4/4 | 2/2 | ||||||||||||||||||||||||||||||||||||||
Banco Santander nominated Non-Executive Directors | Lindsey Argalas(6) | 9/9 | 2/3 | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Ana Botín | 6/9 | 0/3 | 3/4 | 0/1 | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Gerry Byrne | 9/9 | 2/3 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Juan Rodríguez Inciarte(7) | 9/9 | 1/3 | – | – | 7/9 | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
Executive | Nathan Bostock | 9/9 | 3/3 | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
Directors | Antonio Roman | 9/9 | 2/3 | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Javier San Felix(7) | 9/9 | 3/3 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
Fees effective from 1 May 2019
Non-Executive Directors | Board £000
| Board
| Board Risk
| Board
|
Board
| Board Remuneration
| ||||||||||||||||||||||||||
Chair (inclusive of membership fee) | 675 | – | 65 | 60 | 60 | 60 | ||||||||||||||||||||||||||
Senior Independent Director | 35 | – | – | – | – | – | ||||||||||||||||||||||||||
Member | 95 | – | 30 | 25 | 25 | 25 | ||||||||||||||||||||||||||
2019 Fees £000 | 2018 Fees £000 | 2019 Expenses £000(6) | 2018 Expenses £000 | 2019 Benefits £000 | 2018 Benefits £000 | 2019 Total £000 | 2018 Total £000 | |||||||||||||||||||||||||
Chair | ||||||||||||||||||||||||||||||||
Shriti Vadera(1) | 667 | 650 | – | – | 22 | 17 | 689 | 667 | ||||||||||||||||||||||||
IndependentNon-Executive Directors | ||||||||||||||||||||||||||||||||
Garett Curran(2) | 114 | – | 2 | – | – | – | 116 | – | ||||||||||||||||||||||||
Annemarie Durbin(7) | 222 | 200 | – | – | – | 222 | 200 | |||||||||||||||||||||||||
Ed Giera | 207 | 200 | 29 | – | – | 236 | 200 | |||||||||||||||||||||||||
Chris Jones | 207 | 200 | – | 3 | – | – | 207 | 203 | ||||||||||||||||||||||||
Genevieve Shore(7) | 197 | 198 | 3 | 1 | – | – | 200 | 199 | ||||||||||||||||||||||||
Scott Wheway | 240 | 230 | 8 | 2 | – | – | 248 | 232 | ||||||||||||||||||||||||
Julie Chakraverty(3) | 58 | 92 | – | 1 | – | – | 58 | 93 | ||||||||||||||||||||||||
Banco Santander nominatedNon-Executive Directors(4) | ||||||||||||||||||||||||||||||||
Ana Botin | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Lindsey Argalas | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Bruce Carnegie-Brown(5) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Dirk Marzluf(2) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Gerry Byrne(7) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Total | 1,912 | 1,770 | 42 | 7 | 22 | 17 | 1,976 | 1,794 | ||||||||||||||||||||||||
| (1) |
|
|
|
|
|
|
|
|
|
| Date of | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||
| appointment | Fees | Fees | Expenses | Expenses | Total | Total | ||||||||||||||||||||||
| Non-Executive Directors | as Director | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||||||||||||||
Chair | ||||||||||||||||||||||||||||
Shriti Vadera(1) | 1 January 2015 | 650 | 650 | – | (1) | – | (1) | 650 | 650 | |||||||||||||||||||
IndependentNon-Executive Directors | ||||||||||||||||||||||||||||
Julie Chakraverty | 11 June 2018 | 92 | – | 1 | – | 93 | – | |||||||||||||||||||||
Annemarie Durbin | 13 January 2016 | 200 | 180 | – | – | 200 | 180 | |||||||||||||||||||||
Ed Giera | 19 August 2015 | 200 | 202 | – | 3 | 200 | 205 | |||||||||||||||||||||
Chris Jones | 30 March 2015 | 200 | 200 | 3 | 1 | 203 | 201 | |||||||||||||||||||||
Genevieve Shore | 18 May 2015 | 198 | 180 | 1 | 1 | 199 | 181 | |||||||||||||||||||||
Scott Wheway | 10 January 2014 | 230 | 234 | 2 | 25 | 232 | 259 | |||||||||||||||||||||
Alain Dromer | 10 January 2014 | 110 | 165 | 12 | 17 | 122 | 182 | |||||||||||||||||||||
Banco Santander nominatedNon-Executive Directors(2) | ||||||||||||||||||||||||||||
Juan Rodríguez Inciarte | 10 January 2014 | 115 | 115 | 22 | 38 | 137 | 153 | |||||||||||||||||||||
Total | 1,995 | 1,926 | 41 | 85 | 2,036 | 2,011 | ||||||||||||||||||||||
|
| (2) | Garrett Curran and Dirk Marzluf were appointed on 7 May 2019 and resigned on 31 December 2019 from the Board of Santander UK Group Holdings plc. Fees received are in respect of services from this date. |
| (3) | Julie Chakraverty and Lindsey Argalas resigned on 7 May 2019. Fees received are in respect of services to this date. |
| (4) | None of the Banco Santander nominatedNon-Executive Directors received any fees or expenses, except as shown. |
|
Directors’ expenses are disclosed above |
| (7) | Annemarie Durbin, Genevieve Shore and Gerry Byrne resigned on |
| (8) | The 2018 total shown above has been restated to reflect the fees received by those directors who served in 2019. |
| 63 |
Annual Report 2019| Governance
Board and Committee membership and attendance
| Board |
Nomination Committee | Risk Committee | Audit Committee | Responsible Banking Committee | Remuneration Committee | |||||||||||||||||||||||||||||||||||||||||||||
| | Scheduled meetings attended |
| | Ad hoc meetings attended | | | Scheduled meetings attended | | | Ad hoc meetings attended | | | Scheduled meetings attended | | | Ad hoc meetings attended | | | Scheduled meetings attended | | | Ad hoc meetings attended | | | Scheduled meetings attended |
| | Ad hoc meetings attended | | | Scheduled meetings attended | | | Ad hoc meetings attended | | |||||||||||||||
Chair |
Shriti Vadera | 8/8 | 3/3 | 6/6 | 2/2 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
Independent Non-Executive Directors | Julie Chakraverty(1) | 3/3 | 0/0 | – | – | 3/3 | 0/0 | 3/3 | 0/0 | 2/2 | 0/0 | – | – | |||||||||||||||||||||||||||||||||||||
| Garrett Curran(2) | 5/5 | 3/3 | – | – | 6/6 | 0/0 | 6/6 | 0/0 | 3/3 | 0/0 | – | – | ||||||||||||||||||||||||||||||||||||||
| Annemarie Durbin(3) | 8/8 | 3/3 | – | – | 7/9 | 0/0 | – | – | 5/5 | 0/0 | 6/6 | 2/2 | ||||||||||||||||||||||||||||||||||||||
| Ed Giera | 8/8 | 3/3 | – | – | 9/9 | 0/0 | 9/9 | 0/0 | 5/5 | 0/0 | – | – | ||||||||||||||||||||||||||||||||||||||
| Chris Jones(4) | 8/8 | 3/3 | – | – | 9/9 | 0/0 | 9/9 | 0/0 | – | – | 6/6 | 2/2 | ||||||||||||||||||||||||||||||||||||||
| Genevieve Shore(5) | 7/8 | 3/3 | – | – | 8/9 | 0/0 | 8/9 | 0/0 | 5/5 | 0/0 | 5/6 | 2/2 | ||||||||||||||||||||||||||||||||||||||
| Scott Wheway(6) | 8/8 | 2/3 | 6/6 | 2/2 | 8/9 | 0/0 | – | – | 5/5 | 0/0 | 5/6 | 2/2 | ||||||||||||||||||||||||||||||||||||||
Banco Santander nominated Non-Executive Directors | Lindsey Argalas(7) | 2/3 | 0/0 | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Ana Botín | 5/8 | 1/3 | 2/6 | 0/2 | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Gerry Byrne(8) | 7/8 | 1/3 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Bruce Carnegie-Brown(9) | 3/3 | 0/0 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Dirk Marzluf(10) | 5/5 | 3/3 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
Executive Directors | Nathan Bostock | 8/8 | 3/3 | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||
| Susan Allen(11) | 8/8 | 3/3 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Duke Dayal(12) | 3/3 | 0/0 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Antonio Roman(13) | 5/5 | 2/3 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| (1) | Resigned as a director on 7 May 2019. |
| (2) | Appointed as a director on 7 May 2019, resigned on 31 December 2019. |
| (3) | Resigned as a director on 31 December 2019. |
| (4) | Deemed financial expert. |
| (5) | Resigned as a director on 31 December 2019. |
| (6) | Senior Independent Director. |
| (7) | Resigned as a director on 7 May 2019. |
| (8) | Resigned as a director on 31 December 2019. |
| (9) | Appointed as a director on 16 September 2019. |
| (10) | Appointed as a director on 7 May 2019, resigned on 31 December 2019. |
| (11) | Appointed as a director on 1 January 2019, resigned on 31 December 2019. |
| (12) | Appointed as a director on 16 September 2019. |
| (13) | Resigned as a director on 15 September 2019. |
| 64 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk Review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Introduction
The Directors submit their report together with the financial statements for the year ended 31 December 2018.2019. The information in the Directors’ Report is unaudited, except where marked.
History and corporate structure
Santander UK Group Holdings plc (incorporated on 23 September 2013) is a subsidiary of Banco Santander SA, a Spanish retail and commercial bank with a meaningful market share in nineten core countries in Europe and the Americas. Santander UK was formed from the acquisition of threetwo former building societies, Abbey National and Alliance & Leicester andtogether with the branch network of Bradford & Bingley, and has operated under a single brand since 2010. The ordinary shares of the Company are not traded.
As described in the CFO Review and elsewhere in this report,In 2018, certain subsidiaries and portfolios were transferred in 2018, as part of the implementation of the ring-fence arrangements required under the Financial Services (Banking Reform) Act 2013. Following these transfers, Santander UK plc and its subsidiaries comprisedcomprise only entities whose business is permitted under the Act as a ring-fenced bank. Other group entities including Santander Financial Services plc (previously named Abbey National Treasury Services plcplc) are now directly or indirectly owned by the Company. Further details of the transfers are set out in Note 43.
Result and dividends
The audited consolidated profit after tax for the year was £1,121m (2017: £1,254m)£709m (2018: £1,164m). The Directors do not recommend the payment of a final dividend for 2018 (2017:2019 (2018: £nil). ThreeTwo interim dividends were declared on the Company’s ordinary shares in issue in the year. The first dividend of £250m£138m was declared on 618 June 20182019 and the second dividend of £205m£124m was declared on 185 December 2018. Pursuant to Banking Reform, an additional interim dividend of £668m was declared on 18 September 2018. All three2019. Both interim dividends were paid in 2018.2019.
Details of Santander UK’s activities and business performance in 2018,2019, together with an indication of future outlook, are set out in the Strategic report and the Financial review.
Events after the balance sheet date
There have been no material post balance sheet events, except as set out in Note 45.40.
Directors
The names and biographical details of the current Directors are shown in the Board of Directors section. Details of their emoluments and interests in shares are set out in the Directors’ Remuneration implementation report. Changes to the composition of the Board can be found in the Board of Directors section with more details in the Chair’s report on Corporate Governance, and the relevant Committee Chairs’ reports.
Appointment and retirement of Directors
All Directors are appointed and retired in accordance with the Company’s Articles of Association, the UK Companies Act 2006 and the UK Group Framework. The appointment offollowing appointments took place in 2019: Bruce Carnegie-Brown, Garrett Curran, Dirk Marzluf, Susan Allen and Duke Dayal. The following resignations took place in 2019: Julie Chakraverty, Lindsey Argalas in January 2018 was proposed by Banco Santander.and Antonio Roman. In addition, as part of a Board restructure, Annemarie Durbin, Genevieve Shore, Garrett Curran, Dirk Marzluf, Gerry Byrne and Susan Allen resigned from the Santander UK Group Holdings plc Board. All of these six Directors remained on the Board of Santander UK plc. Further details are outlined on page 64.
A resolution will be proposedwas passed at the nextlast Annual General Meeting, on 2 May 2019 to amend the Articles of Association to require Directors to retire every year, with those wishing to serve again submitting themselves for electionor re-election.
Directors’ indemnities
In addition to Directors’ and Officers’ liability insurance cover in place throughout 2018,2019, individual deeds of indemnity were also in place to provide cover to the Directors for liabilities to the maximum extent permitted by law. These remain in force for the duration of the Directors’ period of office from the date of appointment until such time as any limitation periods for bringing claims against
the Directors have expired. The Directors of the Company, including former Directors who resigned in the year, benefit from these deeds of indemnity.
They constitute as qualifying third party indemnity provisions for the purposes of the Companies Act 2006. Deeds for existing Directors are available for inspection at the Company’s registered office.
The Company has also granted an indemnity which constitutes ‘qualifying third party indemnity provisions’ to the Directors of its subsidiary and affiliated companies, including former Directors who resigned in the year and since theyear-end. Qualifying pension scheme indemnities were also granted to the Trustees of Santander UK’s pension schemes.
Executive Management
Day-to-day management of the Company’s business is delegated by the Directors to certain executives, principally the Chief Executive Officer. In support of the discharge of the Chief Executive Officer’s responsibilities to the Directors and the Company’s external regulators, executive management decisions are informed and taken by the Senior Management Committee (SMC). The SMC is made up of the Chief Executive Officer (as Chair) and those members of Santander UK group’s pension schemes.plc executive management who also hold Senior Management Functions (SMF) under the Senior Managers & Certification Regime. The Executive Committee comprises members of the SMC plus additional management executives who do not hold SMF accountabilities.
Employees
We continue to ensure that Santander UK’s remuneration policies are consistent with its strategic objectives and are designed with its long-term success in mind. In doing so, we aim to attract and retain the most talented and committed people.
Communication
Santander UK wants to involve and inform employees on matters that affect them. The intranet is a focal point for communications and the ‘We are Santander’ website connects staff to all the information they need about working for Santander UK. Santander UKWe also usesuseface-to-face communication, such as team meetings, regional roadshows and annual staff conventions for strategic updates.
| Santander UK Group Holdings plc | 65 |
Annual Report 2019| Governance
Directors’ reportcontinued
Santander UK considers employees’ opinions and asks for their views on a range of issues through regular SantanderUK-wide surveys.
Consultation
Santander UK has a successful history of working in partnership with its recognised trade unions, Advance and the Communication Workers Union (CWU). Both trade unions are affiliated to the Trades Union Congress. We consult Advance and the CWU on significant proposals and change initiatives withinin the business at both national and local levels.
Employee share ownership
Santander UK continues to operate twoall-employee, HMRC-approved share schemes: aSave-As-You-Earn (Sharesave) Scheme and a Share Incentive Plan (SIP), the latter of which allows employees to purchase Banco Santander SA shares from gross salary. Eligible senior management participated in a Banco Santander long-term incentive plan. See Note 3835 for a description of the plans and the related costs and obligations.
Disability
Santander UK is committed to equality of access and quality of service for disabled people and embraces the spirit of the UK Equality Act 2010 throughout its business operations. Santander UK has processes in place to help train, develop, retain and promote employees with disabilities. We are committed to giving full and fair consideration to employment applications by disabled people, having regard to their particular aptitudes and abilities, and for continuing the employment of employees who have become disabled by arranging appropriate training and making reasonable adjustment within the workplace.
Annual Report 2018 | Governance
Directors’ reportcontinued
CO2 emissions
In 20182019 CO2 emissions, measured in CO2 equivalent tonnes, decreased by 11%15% to 10,1868,643 tonnes. CO2 from fuel decreased by 3%11% to 5,3674,688 tonnes, CO2 from business travel decreased by 20%18 % to 4,8193,955 tonnes and output per employee reduced by 13%10% to 0.410.37 tonnes.
Ethical Code of Conduct
Santander UK is committed to maintaining high ethical standards – adhering to laws and regulations, conducting business in a responsible way, and treating all stakeholders with honesty and integrity. These principles are further reflected in Santander UK’s Ethical Code of Conduct, which sets out the standard expected of all employees. Under their terms and conditions of employment, staff are required to act at all times with the highest standards of business conduct in order to protect Santander UK’s reputation and ensure a Company culture which is free from any risk of corruption, compromise or conflicts of interest.
Staff are also required to comply with all Company policies, which require employeesthem to:
| – | Abide by all relevant laws and regulations |
| – | Act with integrity in all their business actions on behalf of Santander UK |
| – | Not use their authority or office for personal gain |
| – | Conduct business relationships in a transparent manner |
| – | Reject all improper practices or dealings to which they may be exposed. |
The SEC requires companies to disclose whether they have a code of ethics that applies to the Chief Executive Officer and senior financial officers which promotes honest and ethical conduct, full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, prompt internal reporting of violations, and accountability for adherence to such a code of ethics.
The Santander UK group meets these requirements through its Ethical Code of Conduct, the Anti-Bribery and Corruption Policy, the Whistleblowing Policy, the FCA’s Principles for Businesses, and the FCA’s Statements of Principle and Code of Practice for Approved Persons, with which the CEO and senior financial officers must comply.
These include requirements to manage conflicts of interest appropriately and to disclose any information the FCA may want to know about.
Copies of these documents are available to anyone, free of charge, on application to Santander UK Group Holdings plc, 2 Triton Square, Regent’s Place, London NW1 3AN.
Political contributions
In 20182019 and 2017,2018, no contributions were made by the Company for political purposes and no political expenditure was incurred.
Share capital
Details about the structure of the Company’s capital can be found in Note 33.30.
For details of employee share schemes and how rights are exercisable, see Note 38.35.
The powers of the Directors in relation to share capital are set out in the Company’s Articles of Association as determined by the Companies Act 2006.
Subsidiaries and branches
The Santander UK group consists of a parent company, Santander UK Group Holdings plc, incorporated in England and Wales, and a number of directly and indirectly held subsidiaries and associates. The Company directly or indirectly holds 100% of the issued ordinary share capital of its principal subsidiaries.
All companies operate principally in their country of incorporation or registration. Abbey National TreasurySantander Financial Services plc, a subsidiary of the Company, also has branch offices in the Isle of Man and in Jersey. These branches were transferred from the Company to Abbey National Treasury Services plc on 17 December 2018. Abbey National Treasury Services plc had a branch office in the United States until December 2018. For more information, see Note 21.19.
Financial instruments
The financial risk management objectives and policies of Santander UK, the policy for hedging, and the exposure of Santander UK to credit risk, market risk and liquidity risk are outlined in the Risk review.
| 66 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk Review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Research and development
Santander UK has a comprehensive product approval process and policy. New products, campaigns and business initiatives are reviewed by Santander UK’s Proposition Approval Forum.
Supervision and regulation
Some of Santander UK’sthe Company’s subsidiaries and associates are authorised by the PRA or the FCA, and regulated by the FCA or both the FCA and the PRA.
WhileAs a financial services group, Santander UK operates primarilyis subject to extensive financial services laws, regulations, administrative actions and policies in the UK, itthe EU and in each other location In which Santander UK operates. This intensive approach to supervision is maintained in the United Kingdom by the PRA and the FCA. Santander UK complies with the FCA Conduct rules and the Senior Managers Certification Regime.
As well as being subject to UK regulation, as part of the Banco Santander group, Santander UK is also subject to the laws and regulations of theaffected by other jurisdictions in which it operates,regulators, such as Banco de Espana and the requirements ofECB, as well as various legal and regulatory regimes (including the SEC for its activitiesUS) that have extra-territorial effect. Extensive legislation and implementing regulations affecting the financial services industry have recently been adopted in regions that directly or indirectly affect Santander UK’s business, including Spain, the US.US, the EU and other jurisdictions.
Internal controls
Risk management and internal controls
The Board and its Committees are responsible for reviewing and ensuring the effectiveness of management’s system of risk management and internal controls.
We have carried out a robust assessment of the principal and emerging risks facing Santander UK (as set out in ‘How we define our risks’ in the Risk governance section of the Risk review) including those that would threaten its business model, future performance, solvency or liquidity. Details of our principal risks, our procedures to identify emerging risks, and an explanation of how these are being managed or mitigated are set out in the Risk review. A summary of our Top and Emerging Risks is also set out in the Strategic report. For more details, see the Strategic report and the Risk review.
Management’s report on internal control over financial reporting
As a registrant under the US Securities Exchange Act of 1934, Santander UK Group Holdings Plc’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting in order to ensure the accuracy and reliability of Santander UK Group Holdings plc’s Financial Statements and the Form20-F submitted to the US Securities and Exchange Commission.
Management is responsible for establishing and maintaining adequate internal control over the financial reporting of Santander UK. Management assessed the effectiveness of Santander UK’s internal control over financial reporting at 31 December 2019 based on the criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in May 2013.
Internal control over financial reporting is a component of an overall system of internal control. Santander UK’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation and fair presentation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and endorsed by the EU.EU and in order to comply with its obligations under the Sarbanes-Oxley Act of 2002.
Santander UK’s internal control over financial reporting includes:
| – | Policies and procedures that relate to the maintenance of records that fairly and accurately reflect transactions and dispositions of assets |
| – | Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only as authorised by management |
| – | Controls providing reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or because the degree of compliance with policies or procedures may deteriorate.
Management is responsible for establishingIn line with COSO and maintaining adequate internal control overSEC requirements, those controls recognised as Sarbanes-Oxley applicable are subject to annual testing and certification by management including an attestation by the financial reporting of Santander UK. Management assessedChief Executive Officer (CEO) and the effectiveness of Santander UK’sChief Financial Officer (CFO) that the controls are operating effectively and that the internal control over financial reporting at 31 December 2018 based oncan be relied on.
Any Sarbanes-Oxley control weaknesses identified are captured, assessed and included within the criteria established inyear end assessment of the reliability of the Internal Control – Integrated Framework issued byenvironment. These weaknesses are reported on an ongoing basis to the Audit Committee of Sponsoring Organizations ofto ensure continuous improvements to the Treadway Commission (COSO) in May 2013.control environment are achieved.
Based on this assessment, managementManagement concluded, at 31 December 2018,2019, that Santander UK’s internal control over financial reporting was effective.
| Santander UK Group Holdings plc | 67 |
Annual Report 2019| Governance
Directors’ reportcontinued
Disclosure controls and procedures over financial reporting
Santander UK’s management has evaluated, with the participation of its CEO and CFO, the effectiveness of its disclosure controls at 31 December 2018.2019. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error, and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon this evaluation, the CEO and the CFO have concluded that, at 31 December 2018,2019, Santander UK’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Santander UK in the reports that it files and submits under the US Securities Exchange Act of 1934 is recorded, processed, summarised and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Santander UK’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.
Changes in internal control over
financial reporting
There were no changes to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Directors oversaw the implementation of IFRS 9 and the embedding of changes to processes, internal controls and governance to ensure they remain appropriate for use.
Going concern
The going concern of Santander UK is reliant on preserving a sufficient level of capital and adequately funding the balance sheet. Santander UK’s business activities and financial position, together with the factors likely to affect its future development and performance, are set out in the Financial review. Santander UK’s objectives, policies and processes for managing the financial risks to which it is exposed, including capital, funding and liquidity, are described in the Risk review.
In assessing going concern, the Directors take account of all information of which they are aware about the future, which is at least, but is not limited to, 12 months from the date that the financial statements are approved.
In making their going concern assessment, the information considered by the Directors includesconsider a wide range of information that including Santander UK’s long-term business and strategic plans, forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities ring-fencing, and possible economic, market and product developments, taking account ofthe reasonably possible changes in trading performance.performance arising from potential economic, market and product developments.
Annual Report 2018 | Governance
Directors’ reportcontinued
For capital, funding and liquidity purposes, Santander UK operates on a standalone basis and is subject to regular and rigorous monitoring by external parties. For capital purposes, from 1 January 2019 the Company operates as part of the Non ring-fenced bank Capital Support Deed with Abbey National TreasurySantander Financial Services plc and Santander Equity Investments Limited. The Directors review the outputs of stress testing as part of the approval processes for the ICAAP, the ILAAP, our Risk Appetite and regulatory stress tests. We exceeded the Bank of England’s 20182019 stress test threshold requirement.requirement, as described in the Capital risk section of the Risk review.
The Directors have a reasonable expectationare satisfied that the Santander UK will be ablegroup has adequate resources to continue in operationoperations for a period of at least twelve months from that date of this report and meet its liabilities as they fall due over the next three years.
The Directorstherefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
StatementStatements of Compliance
The UK Corporate Governance Code
The Board confirms that, for the year ended 31 December 2018,2019, Santander UK has applied those principles and provisions of the UK Corporate Governance Code 2016,2018 (the Code), as appropriate, given its ownership structure.and has provided an explanation where there has been an omission in compliance with the Code. Further information on how the Code was complied with can be found in the Chair’s report on Corporate Governance on page 36.
Santander UK has applied those principles and complied with those provisions of the Code as appropriate, with the exception of:
| – | Provision 5: The Company has not appointed aNon-Executive Director to represent the views of the workforce (for details see page 37); |
| – | Provision 11: The Company does not comply with the requirement for at least half the Board, excluding the Chair, to beNon-executive Directors whom the Board considers to be independent. For details see page 57; |
| – | Provision 24: With effect from 1 January 2020, the BAC does not meet the membership requirements of the Code (for details see page 37); |
| – | Provision 36: The development of a formal policy for post-employment shareholding requirements - whilst Directors have a meaningful interest in Banco Santander SA Shares, we do not intend to introduce a formal policy (for details see page 59); |
| – | Provision 40: When determining remuneration policy, a range of factors are considered although not all are publicly disclosed (for details see page 58); and |
| – | Provision 41: The Remuneration Committee’s activities are set out in the Remuneration report although not all Committee decisions are disclosed (see Remuneration Policy Report). |
UK Finance Code for Financial Reporting Disclosure
Santander UK’s financial statements for the year ended 31 December 20182019 have been prepared in compliance with the principles of the UK Finance Code for Financial Reporting Disclosure.
Engagement with stakeholders and employees
Santander UK recognises the importance of fostering relationships with their principal stakeholders and how this is key to the long term success of our business. The Directors understand the importance to act fairly and responsibly between members of the company.
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Disclosure of information to Auditors
Each of the Directors at the date of approval of this report confirms that:
| – | So far as the Director is aware, there is no relevant audit information of which Santander UK’s auditor is unaware |
| – | The Director has taken all steps that they ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that Santander UK’s auditor is aware of that information. |
This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the UK Companies Act 2006.
Auditor
PricewaterhouseCoopers LLP have expressed their willingness to continue in the office of auditor and a resolution to reappoint them will be proposed at the Company’s forthcoming Annual General Meeting.
By Order of the Board
Marc BostonKatie Jackson-Turner
Company Secretary
26 February 20192 March 2020
2 Triton Square, Regent’s Place,
London NW1 3AN
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This Risk review consists of audited financial information except where it is marked as unaudited. The audited financial information is an integral part of our Consolidated Financial Statements.
We aim to continually enhance our disclosures and their usefulness to readers in the light of developing market practice and areas of focus. As a result, our disclosures go beyond the minimum required by accounting standards and other regulatory requirements.
We support the recommendations and guidance made by the Taskforce on Disclosures about ECL (DECL Taskforce) and have adopted its recommendations where it is practical to do so. The DECL Taskforce was formed in 2017 by the FCA, FRC and PRA with a remit to help encourage high-quality ECL-related disclosures following adoption of IFRS 9.
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governance
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Annual Report 2018 | Risk review
Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy and have common Boards,with some overlap in membership, albeit the principal business activities of the Santander UK group are carried on by Santander UK plc and its subsidiaries (the Santander UK plc group).
The Company’s Risk Frameworks have been adopted by its subsidiaries to ensure consistency of application. Prior to November 2018, the Risk Frameworks were applied from the level of Santander UK plc across the Santander UK plc group and adopted by Santander UK Group Holdings plc.
As a result, the review of the principal risks and uncertainties facing the Company, and the description of the Company’s risk management arrangements, are integrated with those of Santander UK plc and are reported in this Annual Report as operating within the Company for all periods presented.
As a financial services provider, managing risk is a core part of ourday-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance and build sustainable value for our stakeholders.
We aim to keep a predictablemedium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.priorities.
Key elements(unaudited)
Our Risk Framework sets out how we manage and control risk. In 2018, we updated our Risk Framework partly in preparation for ring-fencing to ensure it remains comprehensive and to improve our focus on key risk issues. This update reflected the establishment of a Senior Management Committee, under the authority of the CEO, to focus on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged.
How we define risk(unaudited)
Risk is any uncertainty about us being able to achieve our business objectives. It can be split into a set of key risk types, each of which could affect our results and our financial resources. Enterprise wide risk is the aggregate view of all the key risk types described below:
| Key risk types | Description | |||
Credit | The risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for which we have assumed a financial obligation. | |||
Market | Banking market risk– the risk of loss of income or economic value due to changes to interest rates in the banking book or to changes in exchange rates, where such changes would affect our net worth through an adjustment to revenues, assets, liabilities andoff-balance sheet exposures in the banking book. | |||
| Trading market risk– the risk | ||||
Liquidity | The risk that we do not have sufficient liquid financial resources available to meet our obligations as they fall due, or we can only secure such resources at excessive cost. | |||
Capital | The risk that we do not have an adequate amount or quality of capital to meet our internal business objectives, regulatory requirements, market expectations and dividend payments, including AT1 coupons. | |||
Pension | The risk caused by our contractual or other liabilities with respect to a pension scheme (whether | |||
Conduct and regulatory | Conduct risk– the risk that our decisions and behaviours lead to a detriment or poor outcome for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. | |||
| Regulatory risk– the risk of financial or reputational loss, or imposition or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. | ||||
Operational risk | ||||
| Process and change management risk– A key part of our business strategy is to develop and deliver new banking channels and products. We are also implementing a large number of regulatory and legal changes, impacting all areas of our business. | ||||
| Third party risk– We rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of services and goods. | ||||
| Cyber risk– We rely extensively on the use of technology across our business. It is critically important that we give our customers a secure environment in which to deal with us, especially when the threat from cyber criminals is so prevalent and more sophisticated than ever. Failure to protect the data assets of Santander UK and its customers against theft, damage or destruction from cyber-attacks could result in damage to our reputation and direct financial losses. | ||||
Other key risk types | Financial crime risk– the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, bribery and corruption. Failure to meet our legal and regulatory obligations could result in criminal or civil penalties against Santander UK or individuals, as well as | |||
| Legal risk– the risk of an impact arising from legal deficiencies in contracts; failure | ||||
| Strategic and business risk– the risk of significant loss or damage arising from strategic decisions that impact the long-term interests of our key stakeholders or from an inability to adapt to external developments. | ||||
| Reputational risk– the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors or any other interested party. | ||||
Model risk– the risk that the results of our models may be inaccurate, causing us to makesub-optimal decisions, or that a model may be used inappropriately. | ||||
Top and emerging risks
Several of our risk types also have top risks associated with them. We regularly review the top risks that could impact our business, customers and shareholders. Top risks actively monitored over 2019 are set out in the relevant section of this Risk review and summarised in the ‘Top Risks’ section in the Strategic report. We also regularly review emerging risks that could impact our business, customers and shareholders. The identification of Emerging Risks isco-ordinated by the Risk Division. A key part of the process is continual scanning of the external environment, focusing on emerging risk drivers such as regulation, markets, technology, competition, customers,geo-politics, climate change and the economy. Emerging risks actively monitored over 2019 are set out in the relevant section of this Risk review and summarised in the ‘Emerging Risks’ section in the Strategic report.
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Key elements(unaudited)
Our Risk Framework sets out how we manage and control risk. In 2019, we updated our Risk Framework with the introduction of new minimum standards to strengthen controls around independence of decision-making following the introduction of ring-fencing on 1 January 2019.
As a group, Banco Santander supports the recommendations of the TCFD, which were published with the aim of improving disclosure of climate financial risk and opportunities. We also welcome the UK developments of the PRA and FCA to improve management and disclosure of climate change related risks. In October 2019, we submitted an initial implementation plan to the PRA to address the expectations set out Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’. Alongside this plan, responsibility for climate related financial risks was added to the Statement of Responsibility of the CRO as SMF holder. Delivering on our plan will be a multi-year programme. We are targeting the end of 2022 to achieve full adoption, aligned to the implementation path as set out in the TCFD recommendations. For more, see the case study ‘Addressing climate risk’ in the Risk appetite section that follows.
In addition, in 2020, we introduced a new standard to consider the impact of risks related to climate change.
How we approach risk – our culture and principles(unaudited)
The complexity and importance of the financial services industry demands a strong risk culture. We have extensive systems, controls and safeguards in place to manage and control the risks we face, but it is also crucial that everyone takes personal responsibility for managing risk. Our risk culture plays a key role in our aim to be the best bank for our customers, shareholders, people and communities by acting responsibly. It is vital that everyone in our business understands this. To achieve this, our people have a strong, shared understanding of what risk is, and what their role is in helping to control it. We express this in our Risk Culture Statement:
Risk Culture Statement |
Santander UK will only take risks that it understands and will always remain prudent in identifying, assessing, managing and reporting all risks. We proactively encourage our people to take personal responsibility for doing the right thing and to challenge without fear. We ensure decisions and actions take account of the best interests of all our stakeholders and are in line with The Santander Way. |
The Board reviews and approves our Risk Culture Statement every year. The CEO, CRO, CLRO and other seniorSenior executives are responsible for promoting our risk culture from the top. They drive cultural change and increased accountability across the business. We reinforce our Risk Culture Statement and embed our risk culture in all our business units through our Risk Framework, Risk Certifications and other initiatives. This includes highlighting that:
| – | It is everyone’s personal responsibility to play their part in managing risk |
| – | We must Identify, Assess, Manage and Report risk quickly and accurately |
| – | We make risk part of how we assess our people’s performance and how we recruit, develop and reward them |
| – | Our internal control system is essential to |
We use Risk Certifications to confirm how we manage and control risks in line with our Risk Framework and within our Risk Appetite. As an example, every year, each member of our Executive Committee confirms in writing that they have managed risk in line with the Risk Framework in the part of the business for which they are responsible. Their certification lists any exceptions and the agreed actions to be taken to correct them. This is a tangible sign of the personal responsibility that is such a key part of our risk culture.
Our Risk Culturerisk culture programme – I AM Risk
I AM Risk continues to play a key part in our aim to be the best bank for our people, customers, shareholders and communities. Our I AM Risk approach aims to make sure our people:
–Identifyrisks and opportunities –Assesstheir probability and impact –Managethe risks and suggest alternatives –Report, challenge, review, learn and ‘speak up’. |   |
We use I AM Risk in our risk certifications, policies, frameworks and governance, and risk-related communications. We also include it in mandatory training and induction courses for our staff, in our codes of conduct and in reward arrangements. We embed behaviours we want to encourage in key processes and documents.
I AM Risk is how we make risk management part of everyone’s life as a Santander UK employee from how we recruit them and manage their performance to how we develop and reward them. It is also how we encourage people to take personal responsibility for risk to speak up and to come up with ideas. We use I AM Risk in our risk certifications, policies, frameworks and governance, and risk-related communications. We also include it in reward arrangements and in mandatory training and induction courses for our staff. To support this, our learning website includese-learning videos and factsheets.
As part of I AM Risk, we include mandatory risk objectives for all our people in our performance management processes – from our Executive Committee to branch staff. The Executive Committee leads all our culture initiatives under the sponsorship of the CEO.
CEO’s sponsorship. In our most recent employment engagement survey, over 90% of employees acknowledgedrecognised their personal responsibility for the risks they face in theirday-to-day work. This demonstrates how we have embedded risk management in our culture.
I AM Risk Month
In November 2019, we once again joined colleagues from across the Banco Santander group to celebrate our risk culture, with an emphasis on what I AM Risk means to each of us. As a business, we are going through a significant period of transformation, whilst dealing with a highly competitive financial services sector and a challenging political and regulatory environment. At times of change, it is natural for people to feel under more pressure; to act quickly, to deliver and to succeed. We know that we need to deliver, but how we make the decisions that help us achieve our goals is also critical, and considering the risks involved is a key part of that process. We also recognise that managing our risks can result in broader benefits for the business.
Simplifying our processes, reducing the number of systems we use, improving the quality of our data or automating controls; these are all examples of ways we can reduce the risks we face, whilst also making things more efficient and simpler, for both our customers and our colleagues. We recognise that we need to remain vigilant in identifying, assessing, managing and reporting all risks. We need to speak up when we see a risk, so we can work together to do the right thing for our colleagues, customers and shareholders. It is by working together across the business that we can get the best from each other, be confident in the decisions we make and help the business achieve its goals.
Over the four weeks of I AM Risk Month, we encouraged our colleagues to use our I AM Risk resources to:
| – | Join our new I AM Risk Hub to help each other become more risk aware |
| – | Recognise a colleague for good risk behaviour |
| – | Share a story of how an individual or team have taken personal accountability for risk |
| – | Use our Speak Up Matrix to help find the right channels to raise any concerns. |
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Risk governance |
Our risk governance structure
We are committed to the highest standards of corporate governance in every part of our business. This includes risk management. For details of our governance, including the Board and its Committees, see the ‘Governance’ section of this Annual Report. The Board delegates certain responsibilities to Board Level Committees as needed and where appropriate. Our risk governance structure strengthens our ability to identify, assess, manage and report risks, as follows:
| – | Committees:A number of Board and Executive committees are responsible for specific parts of our Risk Framework |
| – | Key senior management roles: A number of senior roles |
| – | Risk organisational structure: We have the ‘three lines of defence’ model built into the way we run our business. |
Committees
The Board Level Committee responsibilities for risk are:
| Board Level Committee | Main risk responsibilities | |
The Board (including the Santander UK plc Board) |
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Board Risk Committee |
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Board Responsible Banking Committee |
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Board Audit Committee |
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Board Remuneration Committee | - Oversees implementation of remuneration policies, ensuring they promote sound, effective risk management. | ||
Annual Report 2018 | Risk review
The Executive Level Committee responsibilities for risk are:
| Executive Level Committee | Main risk responsibilities | |
Executive Committee |
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Senior Management Committee |
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Executive Risk Control Committee
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Asset and Liability Committee
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Pensions Committee |
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Capital Committee |
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Incident Accountability Committee |
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Approval Committee |
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Approval Committee |
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Key senior management roles
Senior roles with specific responsibilities for risk management responsibilities
Chief Executive Officer
The Board delegates responsibility for our business activities and managing risk on aday-to-day basis to the CEO. The CEO proposes our strategy and business plan, puts them into practice and manages the risks involved. The CEO also has to ensure that we have a suitable system of controls to manage risks and report to the Board on it.
Chief Risk Officer
As the leader of the Risk Division, the CRO oversees and challenges risk activities, and ensures new lending decisions are made within our Risk Appetite. The CRO is accountable for the control and oversight of credit, market, liquidity, capital, pension, strategic, operational and model risk.
Chief Legal and Regulatory Officer
The CLRO is accountable for the control and oversight of legal, conduct and regulatory, reputational and financial crime risk, and is responsible for reporting on these risks to the CRO to provide them with a holistic enterprise wide view of all risks.
Chief Financial Officer
The CFO is responsible for the development of strategy, leadership and management of the CFO Division. In supporting Santander UK’s corporate goals within the constraints of risk appetite, the CFO is responsible for the management of interest rate, liquidity, pension and capital risks.
Chief Internal Auditor
The Chief Internal Auditor (CIA) designs and uses an audit system that identifies key risks and evaluates controls. The CIA also develops an audit plan to assess existing risks that involve producing audit, assurance and monitoring reports.
Money Laundering Reporting Officer
The Money Laundering Reporting Officer (MLRO) is responsible to the CLRO for control and oversight of Financial crime risk but has regulatory responsibility to report on this risk type to Executive and Board Committees and the FCA.are:
| Role | Main risk responsibilities | |
Chief Executive Officer | The Board delegates responsibility for our business activities and managing risk on aday-to-day basis to the CEO. The CEO proposes our strategy and business plan, puts them into practice and manages the risks involved. The CEO must also ensure we have a suitable system of controls to manage risks and report to the Board on it. | |
Chief Risk Officer (CRO) | As the Risk Division leader, oversees and challenges risk activities, and ensures new lending decisions are made within our Risk Appetite. Accountable for the control and oversight of credit, market, liquidity, capital, pension, strategic and business, operational and model risks. | |
Chief Legal and Regulatory Officer (CLRO) | Accountable for the control and oversight of legal, conduct and regulatory, reputational and financial crime risk, and is responsible for reporting on these risks to the CRO to provide them with a holistic enterprise wide view of all risks. | |
Chief Financial Officer | Responsible for developing strategy, leadership and management of the CFO and Financial Accounting & Control Divisions. In supporting our corporate goals within our risk appetite, the CFO is responsible for managing interest rate, liquidity, pension and capital risks. | |
Chief Internal Auditor (CIA) | Designs and uses an audit system that identifies key risks and evaluates controls. The CIA also develops an audit plan to assess existing risks that involve producing audit, assurance and monitoring reports. | |
Money Laundering Reporting Officer (MLRO) | Responsible to the CLRO for control and oversight of financial crime risk but has regulatory responsibility to report on this risk type to Executive and Board Committees and the FCA. | |
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Risk organisational structure(unaudited)
We use the ‘three lines of defence’ model to manage risk. This model is widely used in the banking industry and has a clear set of principles to put in place a cohesive operating model across an organisation. It does this by separating risk management, risk control and risk assurance.
The diagram below shows the reporting lines to the Board (including the Santander UK plc Board) with respect to risk:
Internal control system(unaudited)
Our Risk Framework is an overarching view of our internal control system that helps us manage risk across the business. It sets out at a high level the principles, minimum standards, roles and responsibilities, and governance for internal control. Our Risk Framework covers the categories below:
| Category | Description | |
Risk Frameworks | Set out how we should manage and control risk | |
Risk Management Responsibilities | Set out the Line 1 risk management responsibilities for Business Units and Business Support Units. | |
Strategic Commercial Plans | Plans produced by business areas, at least annually, which describe the forecasted objectives, volumes and risk profile of new and existing business, within the limits defined in our Risk Appetite. | |
Risk Appetite | See our Risk Appetite section that follows. | |
Delegated Authorities/Mandates | Define who can do what under the authority delegated to the CEO by the Board. | |
Risk Certifications | Business Units, Business Support Units or Risk Control Units set out how they have managed and/or controlled risks in line with our | |
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Risk governance
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How we control the risks we are prepared to take
When our Board sets our strategic objectives, it is important that we are clear about the risks we are prepared to take to achieve them. We express this through our Risk Appetite Statement, which defines the amount and kind of risk we are willing to take. Our Risk Appetite and strategy are closely linked, and our strategy must be achievable within the limits set out in our Risk Appetite.
The principles of our Risk Appetite
Our Risk Appetite Statement lists ten principles that we use to set our Risk Appetite.
| – | We always aim to have enough financial resources to continue to do business in |
| – | We should be able to predict how our income and losses might vary – that is, how volatile they are. That applies to all our risks and lines of business |
| – | Our earnings and dividend payments should be stable, and in line with the return we aim to achieve |
| – | We are an autonomous business, so we always aim to have strong capital and liquidity resources |
| – | The way we fund our business should be based on diverse funding sources and duration. This helps us avoid relying too much on wholesale markets |
| – | We set controls on large concentrations of risk, like single customers or specific industries |
| – | There are some key risks we take, but for which we do not actively seek any reward, like operational, conduct and regulatory, financial crime, legal and reputational risk. We take a risk-averse approach to these risks |
| – | We comply with all regulations – and aim to exceed the standards they set |
| – | Our pay and bonus schemes should support these principles and our risk culture |
| – | We always aim to earn the trust of our people, customers, shareholders and communities. |
How we describe the limits in our Risk Appetite
Our Risk Appetite sets out detailed limits for different types of risk, using metrics and qualitative statements.
Metrics
We use metrics to set limits on losses, capital, liquidity and concentration. We set:
| – | Limits for losses for our most important risks, including credit, market, operational and conduct risk |
| – | Capital limits, reflecting both the capital that regulators expect us to hold (regulatory capital) and our own internal measure economic capital (EC) |
| – | Liquidity limits according to |
| – | Concentration limits, to determine the maximum concentration level that we are willing to accept. |
These limits apply in normal business conditions, but also when we might be experiencing a far more difficult economic environment. A good example of this might be when the UK economy is performing much worse than we expected. We refer to conditions like this as being under stress. There is more on EC and stress scenarios later in this section.
Qualitative statements
For some types of risk we also use qualitative statements that describe in words the appetite we want to set. For example, in conductoperational risk, we use them to describe our Risk Appetiterisk-averse appetite for products, sales, after-sales service, and culture.cyber risk. We also use them to prohibit or restrict exposure to certain sectors, types of customer and activities.
How we set our Risk Appetite, and stay within it
We control our Risk Appetite through our Risk Appetite Framework. Our Board approves and oversees our Risk Appetite Statement every year. This ensures it is consistent with our strategy and reflects the markets in which we operate. Our ERCC is responsible for ensuring that our risk profile (the level of risk we are prepared to accept) is consistent with our Risk Appetite Statement. To do this they monitor our performance against our Risk Appetite, business plans and budgets each month.
We also use stress testing to review how our business plan performs against our Risk Appetite Statement. This shows us if we would stay within our Risk Appetite under stress conditions. It also helps us to identify any adverse trends or inconsistencies.
We embed our Risk Appetite by setting more detailed risk limits for each business unit and key portfolio. These are set in a way so that if we stay within each detailed limit, we will stay within our overall Risk Appetite. When we use qualitative statements to describe our appetite for a risk, we link them to lower-level key risk indicators, so that we can monitor and report our performance against them.
We provide a programme of communication and training for our staff, including new joiners, which helps ensure that our Risk Appetite is well understood.
| The CRO, as the SMF holder, is responsible for climate-related financial risks. The management of these risks lies in the first line of defence. It is therefore expected that the CRO will be supported by the business division heads to fulfil these responsibilities. To address TCFD recommendations and PRA expectations a Climate Change Working Group (CCWG) was launched in 2019 andre-launched in Q1 2020. This CCWGco-ordinates the efforts to deliver the implementation plan and will report on progress to the CRO, ERCC and Board Risk Committee. The first half of 2020 will see the documentation of firm-wide climate change risk management governance arrangements. This will articulate the roles and responsibilities and the committees involved across the three lines of defence. During the second half of 2020, the link between climate change related metrics and remuneration will be defined. Climate-related risks could eventually manifest in credit, market and operational risks for financial institutions. We are reviewing the appropriate parts of the Risk Framework, Risk Type Frameworks (in particular Credit and Operational risk) and the Risk Appetite Statement to explicitly include climate-related risks. |
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Stress testing helps us understand how different events and economic conditions could affect our business plan, earnings and risk profile. This helps us plan and manage our business better.business.
Scenarios for stress testing
To see how we might cope with difficult conditions, we regularly develop challenging scenarios that we might face. We consult a broad range of internal stakeholders, including Board members, when we design and choose our most important scenarios. The scenarios cover a wide range of outcomes, risk factors, time horizons and market conditions. They are designed to test:
| – | The impact of shocks affecting the economy as a whole or the markets we operate in |
| – | Key potential vulnerabilities of our business model, and the processes and systems which support it |
| – | Potential impacts on specific risk types. |
We describe each scenario using a narrative setting out how events might unfold, as well as a market and/or economic context. For example, the key economic factors we reflect in our ICAAP scenarios include house prices, interest rates, unemployment levels and the size of the UK economy. One scenario looks at what might happen in a recession where the output of the economy shrinks by around 5%, unemployment reaches over 9%, and house prices fall by around 30% in a context of high inflation and interest rates rising rapidly. We use a comprehensive suite of stress scenarios to explore sensitivities to market risk, including those based on historical market events.
How we use stress testing
We use stress testing to estimate the effect of these scenarios on our business and financial performance, including:
| – | Our business plan, and its assessment against our Risk Appetite |
| – | Our capital strength, through our ICAAP |
| – | Our liquidity position, through our ILAAP |
| – | Impacts on other risk types. |
We use a wide range of models, approaches and assumptions. These help us interpret the links between factors in markets and the economy, and our financial performance. For example, one model looks at how changes to key macroeconomic variables like unemployment rates might affect the number of customers who might fall into arrears on their mortgage.
Our stress testing models are subject to a formal review, independent validation and approval process. We highlight the key weaknesses and related model assumptions in the approval process for each stress test. In some cases, we overlay expert judgement onto the results of our models. Where this is material to the outcome of the stress test, the approving governance committee reviews it. We take a multi-layered approach to stress testing to capture risks at various levels. This ranges from sensitivity analysis of a single factor to a portfolio, to wider exercises that cover all risks across our entire business. We use stress test outputs to design plans that aim to mitigate damaging effects.
We also conduct reverse stress tests. These are tests in which we identify and assess scenarios that are most likely to cause our business model to fail.
Board oversight of stress testing
The ERCC approves the design of the scenarios in our ICAAP and ILAAP. The Board Risk Committee approves the stress testing framework. The Board reviews stress test outputs as part of the approval processes for the ICAAP, ILAAP, Recovery and Resolution, our Risk Appetite and regulatory stress tests.
Regulatory stress tests
We take part in a number of external stress testing exercises. These can include stress tests of the UK banking system conducted by the PRA. We also contribute to stress tests of Banco Santander conducted by the European Banking Authority (EBA).
For more on capital and liquidity stress testing, see the ‘Capital risk’ and ‘Liquidity risk’ sections.
HOW RISK IS DISTRIBUTED ACROSS OUR BUSINESS(UNAUDITED)
Economic capital
As well as assessing how much regulatory capital we need to hold, we use an internal EC model to measure our risk. We use EC to get a consistent measure across different risk types. EC also takes account of how concentrated our portfolios are, and how much diversification there is between our various businesses.businesses and risk types. As a consequence, we can use EC for a range of risk management activities. For example, we can use it to help us compare requirements in our ICAAP or to get a risk-adjusted comparison of income from different activities.
Regulatory capital – risk-weighted assets
We hold regulatory capital against our credit, market and operational risks. In 2018,2019, the largest category continued to be credit risk in Retail Banking, which accounted for aroundmore than half of our risk-weighted assets. This reflects our business strategy and balance sheet. Market risk decreased in 2018 as most of our trading book activities were transferred to the Banco Santander London Branch as part of our ring-fencing plans.
For more on this, see ‘Risk-weighted assets’ in the ‘Capital risk’ section.
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Credit risk
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Overview(unaudited)
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.
Santander UK group level We start by discussing credit risk at a Santander UK group level. We set out how our exposures arise, our types of customer and how we manage them, and our approach to credit risk across the credit risk lifecycle. We provide an introduction into how climate change could impact credit risk. We also discuss our ECL
Business segments Then we cover Retail Banking separately from our other business segments – Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre – in more detail. | Key metrics(unaudited)
Loss allowances
Average LTV of 65% (2018: 63% mortgage lending. | |||
Credit risk – Santander UK group level
SANTANDER UK GROUP LEVEL – CREDIT RISK MANAGEMENT
Exposures
Exposures to credit risk arise in our business segments from:
| Retail Banking | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | |||
– Residential mortgages, business banking, consumer (auto) finance and other unsecured lending (credit cards, personal loans and overdrafts). | – Loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance. | – Loans, bank accounts, treasury | – Asset and liability management of our balance sheet, as well as ournon-core and Legacy Portfolios being run down. | |||
– We provide these to individuals and small businesses. | – We provide these to SMEs and mid corporates, Commercial Real Estate and Social Housing associations. | – We provide these to large corporates | – Exposures include sovereign and other international organisation assets that we hold for liquidity. | |||
The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branchesshort term markets business in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in 2018.Corporate & Investment Banking. See Note 2 for more information.
Our types of customers and how we manage them
We manage credit risk across all our business segments in line with the credit risk lifecycle that we show in the next section. We tailor the way we manage risk across the lifecycle to the type of customer. We classify our customers as standardised or non-standardised:
| Standardised | Non-standardised | |
– Mainly individuals and small businesses. Their transactions are for relatively small amounts of money and share similar credit characteristics. | – Mainly medium and large corporate customers. Their transactions are for larger values and have more diverse credit characteristics. | |
– In Retail Banking, Corporate & Commercial Banking (for some small,non-complex corporate clients) and Corporate Centre (for ournon-core portfolios). | – In Retail Banking (for some business banking transactions), Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre. | |
– We manage risk using automated decision-making tools. These are backed by teams of | – We manage risk through expert analysis. We support this with decision-making tools based on internal risk assessment models. | |
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The According to this analysis, the sectors of most concern based on mortgage book under different climate scenarios. | |
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Our approach to credit risk
We manage our portfolios across the credit risk lifecycle (above), from drawing up our risk strategy, plans, budgets and limits to making sure the actual risk profile of our exposures stays in line with our business plans and within our Risk Appetite. We further tailor the way we manage risk across the lifecycle to the type of product. We say more on this in the Credit risk – Retail Banking and the Credit risk – otherOther business segments sections.
1. Risk strategy and planning
All relevant areas of the business work together to create our business plans. We aim to balance our strategy, business goals, and financial and technical resources with our attitude to risk (our Risk Appetite).Appetite. To do this, we focus particularly on economic and market conditions and forecasts, regulations, conduct considerations,matters, profitability, returns and market share. The result is an agreed set of targets and limits that help us direct our business.
2. Assessment and origination
Managing credit risk begins with lending responsibly. That means only lending to customers who can afford to pay us back, even if things get tighter for them, and are committed to paying us back. We undertakeperform a thorough risk assessment to make sure customers can meet their obligations before we approve a credit application. We make these decisions with authority from the Board and we consider:
| – | The credit quality of the customer |
| – | The underlying risk – and |
| – | Our risk policy, limits and appetite |
| – | Whether we can balance the amount of risk we face with the returns we |
| – | Assessment of customer affordability. |
We also use stress testing, for example to estimate how a customer might be able to cope if interest rates increase.rise.
3. Monitoring
We measure and monitor changes in our credit risk profile on a regular and systematic basis against our budgets, limits and benchmarks. We monitor credit performance by portfolio, segment, customer or transaction. If our portfolios do not perform as we expect, we investigate to understand the reasons. Then we take action to mitigate it as far as possible and bring performance back on track. We monitor and review our risk profile through a formal structure of governance forums and forums/committees across our business segments.business. These agree and track any steps we need to take to manage our portfolios, to make sure the impact is prompt and effective. This structure is a vital feedback tool to coordinate issues, trends and developments across each part of the credit risk lifecycle.
Credit concentrations
A core part of our monitoring and management is a focus on credit concentrations, such as the proportion of our lending that goes to specific borrowers, groups or industries. We set concentration limits in line with our Risk Appetite and review them on a regular basis. We track how concentrated our portfolios are using a range of criteria. These include geographies, economic sectors, products and groups of customers.
Geographical concentrations
We set exposure limits to countries and geographies, with reference to the country limits set by Banco Santander. These are determined according to how the country is classified (whether it is a developed OECD country or not), its credit rating, its gross domestic product, and the products and services we or Banco Santander wantswant to offer in that country. For more geographical information, see ‘Country risk exposures’.
Industry concentrations
We also set exposure limits by industry sector. TheseWe set these limits are set based on the industry outlook, our strategic aims and desired level of concentration, and relevant limits set by Banco Santander. We analyse committed exposures in the ‘Credit risk review’.
4. Arrears management
Sometimes our customers face financial difficulty and they may fall into payment arrears or breach the conditions of their credit facility. If this happens, we work with them to get their account back on track. We aim to support our customers and keep our relationship with them. To do this, we:
| – | Find affordable and sustainable ways of repaying to fit their circumstances |
| – | Monitor their finances and use models to predict how they will |
| – | Work with them to get their account back |
| – | Monitor agreements we make to manage their debt, so we know they are working. |
For more, see the Forbearance section on the next page.
5. Debt recovery
Sometimes, even when we have taken all reasonable and responsible steps we can to manage arrears, they prove ineffective.are not effective. If this happens, we have to end our relationshipagreement with the customer and try to recover the whole debt, or as much of it as we can.
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Credit risk
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Loan modifications
We sometimes change the terms of a loan when a customer gets into financial difficulty (this is known as forbearance), or for other commercial reasons.
Forbearance
When a customer gets into financial difficulties, we can change the terms of their loan, either temporarily or permanently. We do this to help customers through temporary periods of financial difficulty so they can get back on to sustainable terms and fully pay off the loan over its lifetime, with support if needed. We try to do this before the customer defaults. Whatever we offer, we assess it to make sure the customer can afford the repayments. Forbearance improves our customer relationships and our credit risk profile. We review our approach regularly to make sure it is still effective. In a few cases, we can help a customer in this way more than once. This can happen if the plan to repay their debt doesn’t work and we have to draw up another one. When this happens more than once in a year, or more than three times in five years, we call it multiple forbearance. We only use foreclosure or repossession as a last resort.
When we agree to forbearance, we consider that the account has suffered a Significant Increase in Credit Risk (SICR), as we explain later on. We review our loss allowance for it and report the account separately as forborne. For retail accounts, if an account is in Stage 1 (a12-month ECL) when we agree forbearance, we transfer it to Stage 2.2 (a lifetime ECL). For all accounts, if an account is already in Stage 2 when we agree forbearance, we keep it in Stage 2 unless the forbearance arrangement involves the forgiveness of fees and interest which would put the case into Stage 3.3 (a lifetime ECL). If an account is already in Stage 3 when we agree forbearance, we keep it in Stage 3. We monitor the performance of all forborne loans. A loan moves from a lifetime ECL (Stages 2 or 3) to a12-month ECL (Stage 1) once the criteria to exit forbearance have been met, as set out below.
Exit from forbearance or cure
For a loan to exit forbearance, all the following conditions must be met:
| – | The loan has been forborne for at least two years or, if forbearance was temporary, must have returned to performing under normal terms for at least two years |
| – | The loan has been performing under the forborne terms for at least two years |
| – | The account is no longer in arrears, and the customer has no other material debts with us which are more than 30 days in arrears. |
Other modifications
When a customer is not showing any signs of financial difficulties, we can also change the terms of their loan. We do this to keep a good relationship with them.
Risk measurement and control
We measure and control credit risk at all stages across the credit risk lifecycle. We have a range of tools, processes and approaches, but we rely mainly on:
| – | Credit control:as a core part of risk management we generate, extract and store accurate, comprehensive and timely data to |
| – | Models:we use models widely to measure credit risk and capital needs. They range from statistical and expert models to |
| – | Review: we use formal and informal forums to approve, validate, review and challenge our risk management. We do this to help |
Key metrics
We use a number of key metrics to measure and control credit risk, as follows:
| Metric | Description | |||
(ECL) | ECL tells us what credit risk is likely to cost us either over the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR since origination. We explain how we calculate ECL below. | |||
Stages 1, 2 and 3 | We assess each facility’s credit risk profile to determine which stage to allocate them to, and we monitor where there is a SICR and transfers between the Stages including monitoring of coverage ratios for each stage. We explain how we allocate a facility to Stage 1, 2 or 3 below. | |||
Stage 3 ratio | The Stage 3 ratio is total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures. We changed our definition of the Stage 3 ratio in 2019 and restated 2018 for consistency. The Stage 3 ratio was previously calculated as Stage 3 exposures as a percentage of customer loans. The Stage 3 ratio at 31 December 2018 using the new definition was 1.29%, compared to 1.20% using the previous definition. Following the introduction of IFRS 9 in 2018, the Stage 3 ratio became the main indicator of credit quality performance and replaces the NPL ratio which is no longer reported. | |||
Expected Loss (EL) | EL is based on the regulatory capital rules of CRD IV and gives us another view of credit risk. It is the product of the probability of default, exposure at default and loss given default. We calculate each factor in accordance with CRD IV and include direct and indirect costs. We base them on our risk models and our assessment of each customer’s credit quality. There are differences between regulatory EL and IFRS 9 ECL, which we set out below. For the rest of our Risk review, impairments, losses and loss allowances refer to calculations in accordance with IFRS, unless we specifically say they relate to CRD IV. For our IFRS accounting policy on impairment, see Note 1 to the Consolidated Financial Statements. | |||
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We also assess risks from other perspectives, such as geography, business area, product and process. We do thisprocess to identify areas we need to focus on. We also use stress testing to establish vulnerabilities to economic deterioration. Our business segments tailor their approach to credit risk to their own customers, as we explain later on.
Key differences between regulatory EL and IFRS 9 ECL models (unaudited)
There are differences between the regulatory EL and the IFRS 9 ECL approaches. Although our IFRS 9 models leverageuse the existing Basel advanced IRB risk components, we need to make several significant adjustments to ensure the outcome is in line with the IFRS 9 requirements, as follows.
| Basel advanced IRB EL | IFRS 9 ECL | |||
Rating philosophy | Mix ofpoint-in-time,through-the-cycle or hybrid | Point-in-time, forward-looking. Considers a range of economic scenarios | ||
Parameters calibration | Contains regulatory floors and downturn calibration | Unbiased estimate, based on conditions known at the balance sheet date | ||
Calculation timing | Considers aggregation of possible default events in the next 12 months | Considers monthly calculation of parameters, for all possible future default dates. First 12 months are used for Stage 1, full lifetime for Stages 2 and 3. | ||
Probability of Default (PD) | Includes forward-looking economic | |||
Loss Given Default (LGD) | Lifetime LGD for defaults in the next 12 months | |||
Exposure at Default (EAD) | Exposure at the point of default if the customer defaults in the next 12 months | Floored at amount owed, except on some revolving facilities. Recognises ability for | ||
SICR | Does not include SICR concept | Includes SICR concept | ||
Discounting applied | At the weighted average cost of capital to the default date | At the effective interest rate (EIR) to the balance sheet date | ||
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Recognising ECL
The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR risk since the origination date. The ECL approach estimate takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the likelihoodrisk of a loss being incurred even when it is considered unlikely.
Multiple economic scenarios and probability weights
For all our portfolios, except CIB (which we cover in more depth below), we use five forward-looking economic scenarios. They consist of a central base case, two upside scenarios and two downside scenarios. We use five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy. For example, the Downside 2 scenario reflects the possibility of a recession occurring. We believe that our five scenarios, in particular Downside 1 and Downside 2, reflect the range of outcomes that Brexit may take, including a deal with a transition period or ano-deal Brexit.
Base case
Our scenarios are also in line with a number of scenarios that have been produced by, for example, the Bank of England and its disruptive scenario, and other economic forecasters no deal scenarios. As such our scenarios and weights reflect the range of possible outcomesbase case assumes that the UK may face in 2019.will negotiate a trade deal with the EU and that there will be an orderly exit.
| Base case | key macroeconomic assumptions for 2019 | |
– – GDP: GDP is forecast to follow a similar growth path to last year over 2020 as uncertainty over the UK’s future trading relationship with the EU –
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In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. This is reflected in an average growth expectation of less than 1.6% pa, the OBR’s latest estimate of the UK’s long run average growth rate.
We expect the low value of sterling to continue into 2020. However, we would expect some improvement if the economic data continues to recover and there is constructive dialogue between the UK and the EU on agreeing the terms of a future trade deal. Even though the continuing Brexit negotiations on a future trade deal are likely to result in some increased trade costs between the EU and UK, these are not expected to significantly impact the downwards trend in the share of UK exports going to the EU.
CPI inflation is forecast to remain around the 2% target rate and nominal earnings growth of approximately 3% is expected to continue over the forecast horizon. This implies positive real earnings growth, which in turn will support household spending power. However, the effect of limited business investment on growth will continue until the final outcome of Brexit is known. Furthermore, with the household savings ratio stabilising and consumer credit growth slowing, consumer demand will be driven increasingly by the fundamentals of household income growth.
In summary, the base case assumes that activity will continue to run at a relatively slow pace as we move through 2020 but will pick up further in subsequent years.
Key changes to our base case in 2019
The key changes to our base case assumptions in 2019 were that we lowered our GDP forecasts for 2019, 2020 and 2021 to reflect the slower growth we have been seeing given the continuing Brexit uncertainty and the decline in global growth. We also reduced house price growth slightly for 2020 and 2021 and the unsecured lending path was amended to reflect Bank of England revisions to historic estimates.
(i) For all our portfolios, except CIB
Our methodology toforecasting approach
We derive theour scenarios relies onin part by using a set of parameters embodied in GDP fan charts published by the Office for Budget Responsibility (OBR) twice a year. To avoid major changes to the scenarios due to changes in the OBR fan charts, we place more weight on what thelong-run trendoutlook of the fan charts are rather than relying solely on each individual release.release as this can create large swings in the scenarios which may not be appropriate. We use the OBR fan charts to calculate our GDP paths for each individual scenario. These fan charts reflect the probability distribution of a deviation from the OBR’s central forecast to illustrate the uncertainty regarding the outcome of a variable, in this case GDP.
We use the 0.6 and 0.7 fan chart paths for the upsideour Upside scenarios, and the 0.3 path for Downside 1. However, for Downside 2 we use a blend of the Downside 1 scenario and the recession of the early 1980s as this1980s. We believe that a recession was less extremeof that order of magnitude is more likely than a repeat of the 2008/09 recession and more in line with what we think could happen.recession. This means that in the longer run the GDP levels in our Downside 1 and 2 scenarios converge. In order toTo ensure that Downside 2 is kept consistent with any changes to the OBR fan charts, we calculate the Downside 2 GDP by taking the percentage difference between Downside 2 and Downside 1 GDP in the original forecast and applying this difference to the new Downside 1.
Our use of five scenarios is designed to reflect different possible outcomes to the base case forecast highlighting the upside and downside risks associated with the central scenario. The downside risks include unfavourable developments for Brexit, a further and sharper downturn in global growth, continuation of the very low productivity growth seen in the UK, and a move to a more protectionist agenda for trade. The upside risks are more muted at present and include the quick implementation of a new free trade agreement with the EU and an upturn in global growth, coupled with a move to more open trade.
The two upside scenarios are based on a faster global recovery and the UK quickly concluding trade agreements with a number of countries after leaving the EU, along with minimum effective tariffs. It is also based on productivity growth recovering. If this is combined with a strong supply side response, interest rate normalisation can occur in a gradual and well managed fashion. The difference between the two scenarios is how quickly the recovery happens and the strength of global recovery.
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Credit risk |
Regarding the two downside scenarios, Downside 1 reflects slower growth for longer, representing a period of continued uncertainty as the Brexit process continues to mute expectations. It also assumes ‘lower for longer’ global growth. With sterling under continuing pressure, this causes the Monetary Policy Committee (the MPC) to raise rates to quell further inflation even though a looser stance would be more beneficial to growth. Business and household confidence continue to be negative and business investment struggles. In terms of trade, the UK defaults to WTO rules with the EU but maintains an open trade policy pursuing bilateral trade agreements with countries rather than pure free trade agreements. Downside 2 assumes the UK economy goes into outright recession. Here global growth is undermined by further weakness among the advanced economies and the emerging markets slowing more markedly than expected. This scenario also assumes that the UK leaves the EU without a trade deal and that business investment contracts further given the continued uncertainty over future trading arrangements. There is also widespread and substantial capital flight as overseas investors sell UK assets, which in turn leads to a tightening in domestic financial conditions. As overseas investors’ appetite for UK assets diminishes, this causes asell-off in sterling and pushes up inflation, with the MPC forced to raise rates to mitigate this. Rising interest rates trigger an increase in debt-servicing costs for households with variable rate mortgages. This combined with the additional negative shock of higher unemployment leads to rising impairments, with some borrowers forced to sell their properties which leads to a fall in property values. The UK continues to negotiate trade deals with other countries, including the EU, and the successful implementation of these goes some way to restoring stability and business confidence with the UK returning to trend growth in the outer years.
Given the above, our scenarios and weights reflect the range of possible outcomes that the UK may face in 2020 and beyond.
Once we have established the GDP paths have been forecast,for each scenario, we run them through the Oxford Global Economic Model (OGEM) to derive the other macroeconomic variables, such as unemployment and house prices, and then imposeprices. These variables are the Bank Rate for each scenario. The forecasting period for GDP is 5 years and then we revert back to the average trend growth over 3 years based on the OBR’slong-run GDP forecast.
The annual growth rates over the 5 year forecast for eachproduct of our scenarios are:
Upside 2 | Upside 1 | Base case | Downside 1 | Downside 2 | ||||||||||||||||
| Assumption | % | % | % | % | % | |||||||||||||||
House price index(1) | 3.40 | 2.30 | 2.00 | (2.00 | ) | (9.50 | ) | |||||||||||||
GDP(1) | 2.50 | 2.10 | 1.60 | 0.70 | 0.30 | |||||||||||||||
Unemployment rate | 2.80 | 3.80 | 4.30 | 6.90 | 8.60 | |||||||||||||||
Interest rate | 1.00 | 1.25 | 1.50 | 2.50 | 2.25 | |||||||||||||||
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To determine our initial scenario probability weightings, we give the highest weight to the base case, whilst the extreme scenarios typically attract lower weights than the more moderate ones. In addition, due to the current economic position and policy concerns evidenced by the PRA and Financial Policy Committee (FPC), and due to political concerns we have applied a higher weighting to the downside scenarios. We consider this appropriate in light of the consensus view of future performance of the UK economy, including projections for GDP growth.
The probability weights we applied to the scenarios are:
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As part of our review of the scenarios and weights that we use, we performed statistical analysis to assess whether the scenarios and weights we use capture the non-linearity of losses implied by the results. The outcome of this analysis, which modelled a number of different scenarios, demonstrated that there is anon-linear relationship between the ECLs based on the GDP growth paths we have forecast and the output of the OGEM for individual scenarios. In addition,these particular growth paths. We then impose a Bank Rate profile for each scenario using expert judgement. We determine the trend line modelled showed that our base case, Downside 1 and Downside 2 scenarios provide a reasonable fit for the loss distribution.
Annual Report 2018 | Risk review
For our CIB portfolio, our approach was developed centrallyBank Rate by Banco Santander to ensure consistent treatment of these large and/or international counterparties across the organisation. For CIB, we use three scenarios (base, upside and downside). Similar to the UK scenarios,using the base case uses the base scenario that has been developedBank Rate profile and is used in other work that Banco Santander undertakes for planning and stress testing purposes. To develop the downside scenario, the path of GDP for each country is calculated using the distribution probability of GDP estimated using a Monte Carlo simulation. The path used is the one that falls into a percentile that sits half way between the baseline and global stress we use for our ICAAP. For the upside, the distribution probability of GDP is again used, for each country the GDP path is consistent with the symmetric percentile selected on the downside. This means that the scenarios maintain the asymmetry that comes with the probabilities of distribution.
The average annual growth rates over a 4 year forecastadjusting this for each of the scenarios for our CIB portfolio are:
| Upside | Base case | Downside | ||||||||||
| Assumption | % | % | % | |||||||||
GDP | 4.2 | 3.6 | 2.7 | |||||||||
The probability weightsfour scenarios. To do this, we applied tofirstly consider what each of the scenarios is trying to achieve.
For the upside scenarios which have a higher growth path and rising productivity growth, a strengthening of sterling keeps CPI inflation low and allows for our CIB portfolio are:a managed tightening of the monetary stance. In contrast, the downside scenarios show monetary policy forced into a reactive stance to contain CPI inflation at a time of weakening output growth, so we assume the Bank of England would raise rates in this scenario in order to bring the inflation rate back to its target rate. The rising Bank Rate profiles are based on forward guidance from the Bank of England where increases are assumed to be gradual and incremental.
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We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three yearthree-year planning processes, or sooner if there is a material change in current or expected economic conditions. We refresh all our economic scenarios each quarter to reflect the latest available data and OBR fan charts if these have changed, which are then reviewed and approved by ALCO. ProbabilityALCO also assess the probability weights are reassessed by ALCO at least quarterly.once a quarter. We aim to avoid embedding new economic scenarios into our models on aquarter-end month. Instead, we aim to run the model with the new scenarios for two months before thequarter-end to ensure that we can fully validate the output.
We do not use consensus forecasts as inputs to our models, but we do compare the outputs of our models against consensus views for the base case, to make sure that we understand any significant differences and address them, where needed. In 2019, there were no significant differences between our base case forecasts and the consensus views.
Key changes to our forecasting approach in 2019
In 2019, there were no significant changes in our forecasting approach, except that for the two upside scenarios we have changed the Bank Rate profiles. Initially, we had a falling Bank Rate profile for the upside scenarios to maintain symmetry with the downside scenarios, which showed a rising Bank Rate. However, it was later decided that symmetrical outcomes were no longer required for the upside and downside scenarios; rather it was more logical to have Bank Rate rising when the economy is growing strongly, and inflation is picking up.
Scenario weights
To determine our initial scenario weights, we give the highest weight to the base case, whilst the outer scenarios typically attract lower weights than the more moderate ones. We also consider how the GDP five-year average growth rates for each scenario fits with the average growth rates over the last 10 years in helping to determine the weights to apply. We use a10-year period as we consider this more reflective of the current UK economic environment. For example, our recent analysis shows that the likelihood that growth is positive occurs 90% of the time, so there could be negative growth 10% of the time. Therefore, using this approach would suggest we apply a 10% weight to the scenario with negative growth, in this case Downside 2. We also consider changes in the economic and political environment and whether such forces suggest further small changes to the weights would be appropriate. For example, due to the current economic position both in the UK and globally and policy concerns around securing a trade deal with the EU by the end of 2020, we have applied a higher weight to the downside scenarios than focusing on historical experience as a guide would suggest. We consider this appropriate in light of the consensus view of the future performance of the UK economy and the balance of risks, which are currently more heavily weighted to the downside.
As part of our review of the scenarios and weights that we use, we perform statistical analysis to assess whether their use ensures that we capture thenon-linearity of losses implied by the results. The outcome of this analysis, which modelled several additional scenarios, showed that there is anon-linear relationship between the ECLs based on the GDP growth paths for the individual scenarios for mortgages. In addition, the trend line modelled showed that our Base case, Downside 1 and Downside 2 scenarios provided a good fit for the loss distribution profile. For example, the base case scenario provides a good fit for losses in distribution for GDP between1-2%; that Downside 1 does this for0-1% and Downside 2 does this for less than 0%.
In terms of applying scenario weights to this for, say, Downside 1 we consider how much weight should be attached to an outcome where GDP is between 0-1%. To determine this, we run the GDP five-year average growth rates, as discussed above. Taking this approach and applying it to Downside 1, where GDP is between 0-1%, would be considered to happen between20-40% of the time. Then using the actual GDP five-year average growth rate for the Downside 1 scenario (0.70%) this fits with a 30% likelihood which aligns with the current weight. However, as discussed above, we then review the outcome of the analysis against the global and domestic economic back drop which may mean making small changes to the weights profile to encompass the upside or downside risks associated with these events.
The scenario weights we applied for 2019 and 2018 were:
| Scenario weights | Upside 2 % | Upside 1 % | Base case % | Downside 1 % | Downside 2 % | |||||||||||||||||
2019 | 5 | 10 | 40 | 30 | 15 | |||||||||||||||||
2018 | 5 | 15 | 40 | 30 | 10 | |||||||||||||||||
Key changes to our scenario weights in 2019
The key changes to our scenario weights were made in Q3 2019 to reduce the Upside 1 weight by 5% to reflect the lower upside risk to the base case forecast from global economic conditions and increase the Downside 2 weight by 5% to reflect the higher downside risks relating to Brexit and the risk of global recession.
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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 2019 and 2018 were:
| 2019 | Upside 2 % | Upside 1 % | Base case % | Downside 1 % | Downside 2 % | |||||||||||||||||
House price growth | 5-year average increase/decrease | 4.90 | 3.70 | 1.60 | (1.20 | ) | (9.30 | ) | ||||||||||||||
| Peak/(trough) (1)at | 8.10 | 5.80 | 2.00 | (2.80 | ) | (13.50 | ) | |||||||||||||||
GDP | 5-year average increase/decrease | 2.40 | 2.00 | 1.60 | 0.70 | 0.20 | ||||||||||||||||
| Cumulative growth/(fall) to peak/(trough)(2) | 1.50 | 1.00 | 0.70 | (1.10 | ) | (5.60 | ) | |||||||||||||||
Unemployment rate | 5-year end period | 1.90 | 2.70 | 4.00 | 5.60 | 7.40 | ||||||||||||||||
| Peak/(trough) at | 1.88 | 2.73 | 4.10 | 5.64 | 7.84 | |||||||||||||||||
Bank of England base rate | 5-year end period | 2.00 | 2.00 | 0.75 | 2.00 | 2.25 | ||||||||||||||||
| Peak/(trough) at | 2.00 | 2.00 | 0.75 | 2.00 | 3.00 | |||||||||||||||||
| 2018 | ||||||||||||||||||||||
House price growth | 5-year average increase/decrease | 3.40 | 2.30 | 2.00 | (2.00 | ) | (9.50 | ) | ||||||||||||||
| Peak/(trough) at | 7.40 | 4.60 | 2.00 | (5.80 | ) | (15.60 | ) | |||||||||||||||
GDP | 5-year average increase/decrease | 2.50 | 2.10 | 1.60 | 0.70 | 0.30 | ||||||||||||||||
| Cumulative growth/(fall) to peak/(trough) | 1.60 | 1.10 | 0.60 | (0.60 | ) | (6.10 | ) | |||||||||||||||
Unemployment rate | 5-year end period | 2.80 | 3.80 | 4.30 | 6.90 | 8.60 | ||||||||||||||||
| Peak/(trough) at | 2.58 | 3.71 | 4.39 | 7.30 | 8.65 | |||||||||||||||||
Bank of England base rate | 5-year end period | 1.00 | 1.25 | 1.50 | 2.50 | 2.25 | ||||||||||||||||
| Peak/(trough) at | 2.00 | 2.00 | 1.50 | 2.50 | 3.00 | |||||||||||||||||
| (1) | Peak/(trough) refers to the peak that the variable will reach in the upside scenario and the trough that the variable will reach in the downside scenario. |
| (2) | Cumulative growth/(fall) refers to the cumulative change from the last historical data point for GDP growth to the peak (for Upside scenarios) or to the trough (for Downside scenarios). |
The historical and forecast growth rates for the GDP assumptions we use for scenario modelling
The evolution of the historical and forecast growth rates for the GDP assumptions we used for scenario modelling at 31 December 2019 was:
Our forecasting period for GDP is five years and then we revert to the average trend growth over three years based on the OBR’slong-run GDP forecast.
In the Upside 1 and Upside 2 scenarios, the economy is assumed to peak by the end of Q4 2022, after which GDP declines. In the Downside 1 the trough occurs in Q4 2020 and in Downside 2 a trough is assumed to occur in Q2 2020. In all scenarios, we assume that GDP will have reverted to the OBR’slong-run forecast rate after Q4 2027. The reversion to mean for all macroeconomic variables is expected to take three years after the initial five-year forecast period.
Key changes to our alternative scenarios in 2019
In terms of key changes to our alternative scenarios in 2019, these only related to changes to the base case, historic data for each variable, OBR fan charts and the OGEM. We did not make any 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. As such it is not possible topin-point a specific reason for each change as we do not run the inputs in isolation. However, we compare the variables between each quarter and review any large changes to ensure they are not erroneous.
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Credit risk |
(ii) For our CIB portfolios
Our forecasting approach
For our CIB portfolios, we adopted the approach developed centrally by Banco Santander to ensure consistent treatment of these large and/or international counterparties across the Banco Santander group. For CIB, we use three scenarios (Base case, Upside and Downside). Like the UK scenarios, the base case uses the base scenario that has been developed and is used in other work that Banco Santander performs for planning and stress testing purposes. To develop the Downside scenario, the path of GDP for each country is calculated using the distribution probability of GDP estimated using a Monte Carlo simulation. The path used is the one that falls into a percentile that sits halfway between the baseline and global stress we use for our ICAAP. For the Upside, the distribution probability of GDP is again used, for each country the GDP path is consistent with the symmetric percentile selected on the Downside. This means that the scenarios maintain the asymmetry that comes with the probabilities of distribution.
Key changes to our forecasting approach in 2019
In 2019, there were no significant changes in our forecasting approach.
Scenario weights
For our CIB portfolios, to determine our initial scenario weights, we give the highest weight to the base case. As set out above, we base the GDP path associated with the Upside scenario on the distribution probability of GDP consistent with the symmetric percentile selected on the Downside. This allows us to maintain the asymmetry of the scenarios that has been introduced in the probabilities of distribution. It also enables us to assign centred weights.
The scenario weights we applied to the scenarios for our CIB portfolio for 2019 and 2018 were:
| Scenario weights | Upside % | Base case % | Downside % | |||||||||||
2019 | 30 | 40 | 30 | |||||||||||
2018 | 20 | 60 | 20 | |||||||||||
| Our macroeconomic assumptions and their evolution throughout the forecast period | ||||||||||||||
| Our macroeconomic assumptions and their evolution throughout the forecast period for our CIB portfolio for 2019 and 2018 were: |
| |||||||||||||
| GDP assumption | Upside % | Base case % | Downside % | |||||||||||
2019 | 5 year average increase/decrease | 3.7 | 3.5 | 3.0 | ||||||||||
| Cumulative growth/(fall) to peak/(trough)(1) | 0.3 | 0.5 | (1.2 | ) | ||||||||||
2018 | 5 year average increase/decrease | 4.2 | 3.6 | 2.7 | ||||||||||
| Cumulative growth/(fall) to peak/(trough) | 0.4 | 0.3 | (0.8 | ) | ||||||||||
| (1) | Cumulative growth/(fall) refers to the cumulative change from the last historical data point for GDP growth to the peak (for upside scenarios) or to the trough (for downside scenarios). |
Key changes to our alternative scenarios in 2019
There were no key changes to our alternative scenarios in 2019.
Significant Increase in Credit Risk (SICR)
Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual maturityterm of the loan, or the behavioural term for a revolving facilities.facility. Loans which have not experienced a SICR are subject to 12 month ECL. We assess each facility’sthe credit risk profile of each facility to determine which of three stages to allocate them to:
| – | Stage 1:when there has been no SICR since initial recognition. We apply a loss allowance equal to a 12 month ECL i.e. the proportion of lifetime expected losses that relate to that default event expected in the next 12 months |
| – | Stage 2:when there has been a SICR since initial recognition, but no credit impairment has materialised. We apply a loss allowance equal to the lifetime ECL i.e. lifetime expected loss resulting from all possible defaults throughout the residual life of a facility |
| – | Stage 3: when the exposure is considered credit impaired. We apply a loss allowance equal to the lifetime ECL. Objective evidence of credit impairment is required. |
We use a range of quantitative, qualitative and backstop criteria to identify exposures that have experienced a SICR. The Credit Risk Provisions Forum (CRPF) reviews and approves our SICR thresholds periodically. The Board Audit Committee reviews and approveschallenges the appropriateness of them each year, or more often if we change them.
Quantitative criteria
We use quantitative criteria to identify where an exposure has increased in credit risk. The quantitative criteria we apply are based on whether any increase in the lifetime PD since the recognition date exceeds a set threshold both in relative and absolute terms. We base the value anticipated from the initial recognition on a similar set of assumptions and data to the ones we used at the reporting date, adjusted to reflect the account surviving to that date. The comparison uses either an annualised lifetime PD, where the lifetime PD is divided by the forecast period, or the absolute change in lifetime PD since initial recognition. For each portfolio, the quantitative criteria are:we used for 2019 were:
| Retail Banking(1) | ||||||||||||||||||||||||||||
| Consumer (auto) | Other unsecured | Corporate & | Corporate & | |||||||||||||||||||||||||
| Mortgages | finance(2) | Personal loans | Credit cards | Overdrafts | Commercial Banking | Investment Banking | ||||||||||||||||||||||
30bps | 300bps | 340bps | 260bps | 30bps | Internal rating method | |||||||||||||||||||||||
| (1) |
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| (2) |
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The criteria above are absolute (rather than relative) increases in lifetime PD since initial recognition. These are all absolute values.
We also applied a relative threshold of 100% (doubling the PD) across all portfolios except CIB.
In 2019, there were no changes to the way that we measure SICR, except that we changed the absolute thresholds for unsecured personal loans and Corporate & Commercial Banking exposures to be calculated on an annualised basis to bring them into line with our other portfolios with no material impact on Stage allocation or ECL.
Qualitative criteria
We also use qualitative criteria to identify where an exposure has increased in credit risk, independent of any changes in PD. For each portfolio, the qualitative criteria are:
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Annual Report 2019| Risk review
Qualitative criteria
We also use qualitative criteria to identify where an exposure has increased in credit risk, independent of any changes in PD. For each portfolio, the criteria we used for 2019 and 2018 were:
| Retail Banking(1) | ||||||||||||||||||||||||||
| Consumer (auto) | Other unsecured | Corporate & | Corporate & | |||||||||||||||||||||||
| Mortgages | finance | Personal loans | Credit cards | Overdrafts | Commercial Banking | Investment Banking | ||||||||||||||||||||
In forbearance | In forbearance | In Collections | In forbearance | Fees suspended | In forbearance | |||||||||||||||||||||
Default in last 24m | Deceased or Insolvent | | Default in last 12m | |
| Default in last 12m | | |||||||||||||||||||
>30 Days past due (DPD) in last 12m | Court ‘Return of goods’ order or Police watchlist | In Collections | Debit dormant >35 days | Watchlist – proactive management | ||||||||||||||||||||||
Bankrupt | Agreement terminated | Default at proxy origination | ||||||||||||||||||||||||
£100+ arrears | Payment holiday | £50+ arrears | £100+ arrears | Any excess in month | ||||||||||||||||||||||
| Cash Collection | ||||||||||||||||||||||||||
| (1) | In Business |
Backstop criteria
As a backstop, we classify all exposures more than 30 or 90 DPD in at least Stage 2 or in Stage 3, respectively. This means that we do not rebut the backstop presumptions in IFRS 9 (i.e. credit risk has significantly increased if contractual payments are more than 30 days past due)DPD) relating to either a SICR or default.
|
Improvement in credit risk or cure
In some cases, instruments with a lifetime ECL (in Stage 2 or 3) may be transferred back to 12 month ECL (Stage 1). Financial assets in Stage 3 can only be transferred to Stage 2 or Stage 1 when they are no longer considered to be credit impaired, as defined in the next section.below. Financial assets in Stage 2 can only be transferred to Stage 1 when they are no longer considered to have experienced a SICR. Where we identified a SICR using quantitative criteria, the instruments automatically transfer back to Stage 1 when the originalPD-based transfer criteria are no longer met. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before the instruments can be reclassified to Stage 1. For a loan in forbearance to cure, it must meet the exit conditions set out in the earlier section ‘Forbearance’.
Definition of default (Credit impaired)
We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt theythe 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 |
– They have been reported bankrupt or – Their loan term has ended, but they still owe us money more than three months later – They have had forbearance while in default, but have not caught up with the payments they had missed before that, or they have had multiple forbearance – We have suspended their fees and interest because they are in financial difficulties – We have repossessed the property. |
| Other business segments: Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre |
– They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as another lender calls in a loan – Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract – They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default – Their loan is unlikely to be refinanced or repaid in full on maturity – Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy,pay-downs, or |
Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, we use the same default definitions for ECL purposes. We reviewThe CRPF reviews and approveapproves the definition of default each quarter.at least annually. The Board Audit Committee reviews and approveschallenges the appropriateness of the definition each year, or more often if we change it.
Definition of default used for NPL
The definition of default we use to identify NPLs is not significantly different to the definition of default we use to identify Stage 3 exposures. The only difference relates to mortgages. For NPL, we classify a mortgage customer as bankrupt for at least two years after first being declared bankrupt before we reassess their position. For Stage 3, the equivalent period is at least seven years before we reassess their position.
Measuring ECL
For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month over the forecast period. The lifetime ECL is the sum of the monthly ECLs over the forecast period, while the12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted value for the relevant forecast month of the product of the following factors:
| Factor | Description | |||
Survival rate (SR) | The probability that the exposure has not closed or defaulted since the reporting date. | |||
PD | The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis. | |||
EAD | The amount we expect to be owed if a default event was to occur. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product type. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with anoff-balance sheet element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product type and base them on analysis of recent default data. | |||
LGD | Our expected loss if a default event were to occur. We express it as a percentage and calculate it as the expected loss divided by EAD for each month of the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type. | |||
We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD to reflect the default status of the account, considering the current DPD and loan to value. PD and SR are not required for accounts in default.
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Credit risk |
Forecast period
We base the forecast period for amortising facilities on the remaining contractualcontract term. For revolving facilities, we use an analytical approach based on the behavioural, rather than contractual, characteristics of the facility type. In some cases, we shorten the period to simplify the calculation. If we do this, we apply a post model adjustment to reflect our view of the full lifetime ECL.
Forward-looking information
Our assessments of a SICR and the calculation of ECL both incorporate forward-looking information.data. We perform historical analysis and identify the key economic variables that impact credit risk and ECL for each portfolio. These can include the house price growth, GDP, house pricesunemployment rate and unemployment.Bank of England base rate. Where applicable, we incorporate these economic variables and their associated impacts into our models.
Economic forecasts have the most impact on the measurement of ECL for residential mortgages and, to a lesser extent, corporate loans. This is due to the long behavioural lives and large sizes of these portfolios. Economic forecasts have less impact on the measurement of ECL for our other portfolios. This is due to the shorter behavioural lives and smaller sizes of these portfolios.
Grouping of instruments for losses measured on a collective basis
We measure ECL at the individual financial instrument level. However, we typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in Retail Banking – credit risk management) using one or more statistical models. Where we have used internal capital or similar models as the basis for our IFRS 9ECL models, this typically results in a large number of relatively small homogenous groups which are determined by the permutations of the underlyinggroups. We typically group instruments where they share risk characteristics in theusing one or more statistical models. models and assess them for impairment collectively.
We use this approach for:
| – | all our Retail Banking portfolios (as described in Retail Banking – credit risk management) |
| – | SME customers in Corporate & Commercial Banking |
| – | Legacy Portfolios inrun-off and the Crown Dependencies mortgage portfolio in Corporate Centre. |
We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed.
Annual Report 2018 | Risk review
As described above, for our CIB portfolios (whether we assess them for impairment individually or collectively) we use three forward-looking economic scenarios for forecasting. For all our other portfolios (whether we assess them for impairment individually or collectively) we use five forward-looking economic scenarios.
Management judgement applied in calculating ECL
IFRS 9 recognises that expert management judgement is an essential part of calculating ECL. Specifically, where the historical informationdata that we use in our models does not reflect current or future expected conditions, or the data we have does not cover a sufficient period or is not robust enough. We consider the significant management judgements in calculating ECL to be:
| – | Definition of default:We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt they can keep up with their payments. The data we have on customers varies across our business segments. |
| – | Forward-looking multiple economic scenarios:We use five scenarios, consisting of a central base case, two upside scenarios and two downside scenarios except for our CIB portfolio, where we use three scenarios – a central and a single upside and downside scenario. This symmetry meets the ‘unbiased’ requirement and we consider these scenarios sufficient to account for anynon-linear relationships. |
| – | Probability weights: In determining the initial scenario probability |
| – | SICR thresholds:We use a combination of quantitative (both absolute and relative), qualitative and backstop criteria to identify exposures that we consider have shown a SICR since initial recognition. |
| – | Post Model Adjustments: These relate to adjustments which we need to account for identified model limitations – such as those that have arisen due to challenges in obtaining historical data. We expect these to gradually |
Post Model Adjustments (PMAs)
The most significant PMAs that we apply are:
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The CRPF and the Board Audit Committee review and approve changes in all key management judgements at least each quarter. The creation of new PMAs is a joint responsibility between the Risk Provisions & Forecasting team, as model owners who may identify issues with the historical data, and the Financial Accounting & Control Division, who may identify changes in portfolio or credit quality performance.
We use a range of methods to identify whether we need a PMA. These include regular review of model monitoring tools,end-user computing controls monitoring,period-to-period movement and trend analysis, comparison against forecasts, and input from expert teams who monitor and manage key portfolio risks. We only recognise a PMA if the ECL is over £1m. We keep PMAs in place until we no longer need them. This will typically be when they are built into our core credit model or the conditions that impacted the historical data no longer exist.
The Risk Provisions & Forecasting team calculates PMAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a consistent and controlled manner. We apply standardend-user computing controls to material and long-standing PMAs i.e. those expected to be in place for more than six months. Our Independent Validations Team may also review materialsignificant PMAs at their discretion. The CRPF approves all new PMAs. It delegates authority to approve temporary PMAs not expected to last beyond aquarter-end to the Director of Financial Accounting & Control.CFO. The Financial Accounting & Control DivisionConsolidated Reporting team reviews all new PMAs to ensure they comply with IFRS 9. We record all PMAs on a central log maintained by the Financial Accounting & Control DivisionConsolidated Reporting team which documents the justification, IFRS 9 compliance assessment, expected life, recalibration frequency, calculation methodology and value of each PMA. The CRPF reviews and approves the log each quarter.
The CRPF reviews and approves changes in all key management judgements at least each quarter. The Board Audit Committee reviews and challenges the appropriateness of changes in all key management judgements at least each quarter. The creation of new PMAs is a joint responsibility between the Risk Provisions & Forecasting team, as model owners who may identify issues with the historical data, and the Consolidated Reporting team who may identify changes in portfolio or credit quality performance.
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Annual Report 2019| Risk review
The most significant PMAs that we applied at 31 December 2019 and 2018 were:
| PMAs | 2019 £m | 2018 £m | ||||||
Interest-only maturity default risk | 51 | 69 | ||||||
Buy-to-Let | 21 | 20 | ||||||
Long-term indeterminate arrears | 19 | 23 | ||||||
12+ months in arrears | 23 | 11 | ||||||
| – | Interest-only maturity default risk: When an interest-only mortgage reaches contractual maturity and the capital payment becomes due, there is a risk that the customer won’t be able to repay the full capital balance. Our model estimates the likelihood of a customer missing a monthly payment, rather than the capital repayment. We hold an incremental provision to address the risk of default on capital repayments on maturity ultimately leading towrite-off. We calculate it using a Judgement Model which uses historically observed experience and expert judgement to determine the proportion of customers who won’t be able to repay. Over time, as we continue to enhance our model, we expect the need for this PMA will diminish. This PMA increases our ECL. |
| – | Buy-to-Let (BTL): Historical data shows that the risk of default on a BTL mortgage is higher than on a residential mortgage particularly in a downturn. However, our IFRS 9 models have been calibrated over a period of favourable and relatively benign economic conditions during which our BTL mortgage portfolio has continued to grow with limited loss events. To avoid underestimating ECL in an economic downturn, we adjust the loss allowance for our BTL accounts to increase the ECL. We use market data from the last economic crisis to estimate the adjustment. Over time, as our historical data grows and covers a wider range of economic conditions, we expect the need for this PMA will diminish. This PMA increases our ECL. |
| – | Long-term indeterminate arrears: To mitigate the risk of model underestimation, we fully provide for accounts in arrears which have neither repaid (cured) or beenwritten-off after a period of 180 days for unsecured portfolios or 5 years for secured portfolios. For our secured portfolios, we use expected security valuations at the point of repossession to estimate the adjustment. At 31 December 2019 and 2018, we only needed to make an adjustment for mortgages. Over the medium term, as we continue to address long term arrears in the portfolio, we expect the need for this PMA will diminish. This PMA increases our ECL. |
| – | 12+ months in arrears: To mitigate the risk of underestimating ECL, mortgage accounts which are more than 12 months past due are fully provided for after deducting a historically observed self-cure rate. Over the medium term, as we continue to address long term arrears in the portfolio, we expect the need for this PMA will diminish. This PMA increases our ECL. |
Governance around ECL impairment allowances
Our Risk Methodology team developed our ECL impairment models (except for the OGEM)external models we use, such as OGEM which we described earlier in ‘Our forecasting approach’), and all material models are independently reviewed by our Independent Validations Team.Team independently reviews all material models. As model owners, our Risk Provisioning & Forecasting team run the models to calculate our ECL impairment allowances each month. The models are sensitive to changes in credit conditions and reflect various management judgements that give rise to measurement uncertainty in our reportable ECL as set out above. The following committees and forums review the provision drivers and ensure that the management judgements we apply remain appropriate:
| – | Model Risk Control Forum (MRCF) reviews and approves new models and required model changes. It also reviews the use of OGEM as a reliable model on which to base our other forecast macroeconomic variables. It is used across all stress testing and planning so it is subject to model risk criteria. MRCF will delegate responsibility of approvals to Model Risk Management Forum (MRMF) for changes of low risk materiality or less complex changes. |
| – | ALCOreviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. |
| – | CRPF reviews management judgements and approves ECL impairment allowances. |
| – | Board Audit Committee reviews and challenges the appropriateness of the estimates and judgements made by management. |
For more on the governance around specific elements of the ECL impairment allowances, including the frequency of, and thresholds for, reviews, including by these committees and forums, see the detailed sections above.
How we assess the performance of our ECL estimation process
We assess the reasonableness of our ECL provisions and the results of our Staging analysis using a range of methods. These include:
| – | Benchmarking:we compare our coverage levels with our peers. |
| – | Stand-back testing:we monitor the level of our coverage against actual write-offs. |
| – | Back-testing: we compare key drivers periodically as part of model monitoring practices. |
| – | Monitoring trends: we track ECL and Staged assets over time and against our internal budgets and forecasts, with triggers set accordingly. |
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Credit risk
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SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW
The introduction of IFRS 9
As set out in Note 44 ‘Transition to IFRS 9’ in the Consolidated Financial Statements, IFRS 9 replaced IAS 39 on 1 January 2018. IFRS 9 introduced a new impairment methodology and rules around classification and measurement of financial assets. As a result of the change from IAS 39 to IFRS 9, some 2018 disclosures in this section are not comparable with prior periods because the methodologies for calculating incurred losses under IAS 39 and ECLs under IFRS 9 are fundamentally different. This means that some IFRS 9 disclosures do not have prior period comparatives and some IAS 39 disclosures are no longer relevant from 1 January 2018. We have included comparative tables at 1 January 2018 reflecting the adoption of IFRS 9, where available and appropriate.
Our maximum and net exposure to credit risk
The tables below show the main differences between our maximum and net exposure to credit risk. They show the effects of collateral, netting, and risk transfer to mitigate our exposure. The tables only show the financial assets that credit risk affects and to which the impairment requirements in IFRS 9 (2017: IAS 39) are applied.
For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances.Off-balance sheet exposures are mortgage offers, guarantees, formal standby facilities, credit lines and other commitments. Foroff-balance sheet guarantees, the maximum exposure is the maximum amount that we would have to pay if the guarantees were called on. For formal standby facilities, credit lines and other commitments that are irrevocable over the life of the facility, the maximum exposure is the total amount of the commitment.
| Maximum exposure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance sheet asset | Off-balance sheet | Collateral(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Gross amounts £bn | Loss allowance £bn | Net amounts £bn | Gross amounts £bn | Loss allowance £bn | Net amounts £bn | Cash £bn | Non-cash £bn | Netting(2) £bn | Net exposure £bn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 26.4 | – | 26.4 | – | – | – | – | – | – | 26.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers:(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential properties(4) | 165.6 | (0.2 | ) | 165.4 | 13.4 | – | 13.4 | – | (168.9 | ) | – | 9.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Corporate loans | 27.0 | (0.2 | ) | 26.8 | 14.3 | (0.1 | )(5) | 14.2 | (0.1 | ) | (19.4 | ) | – | 21.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Finance leases | 6.3 | (0.2 | ) | 6.1 | 0.3 | – | 0.3 | (0.1 | ) | (6.3 | ) | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other unsecured loans | 7.2 | (0.2 | ) | 7.0 | 12.4 | – | 12.4 | – | – | – | 19.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 2.2 | – | 2.2 | – | – | – | – | – | – | 2.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and advances to customers | 208.3 | (0.8 | ) | 207.5 | 40.4 | (0.1 | ) | 40.3 | (0.2 | ) | (194.6 | ) | – | 53.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 2.5 | – | 2.5 | 1.2 | – | 1.2 | – | – | – | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Reverse repurchase agreements – non trading | 23.6 | – | 23.6 | – | – | – | – | (23.1 | ) | (0.5 | ) | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other financial assets at amortised cost | 7.1 | – | 7.1 | – | – | – | – | – | – | 7.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets at amortised cost | 241.5 | (0.8 | ) | 240.7 | 41.6 | (0.1 | ) | 41.5 | (0.2 | ) | (217.7 | ) | (0.5 | ) | 63.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at fair value at FVOCI: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 0.1 | – | 0.1 | – | – | – | – | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Debt securities | 9.6 | – | 9.6 | – | – | – | – | – | – | 9.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets at FVOCI | 9.7 | – | 9.7 | – | – | – | – | – | – | 9.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 277.6 | (0.8 | ) | 276.8 | 41.6 | (0.1 | ) | 41.5 | (0.2 | ) | (217.7 | ) | (0.5 | ) | 99.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Maximum exposure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance sheet asset | Off-balance sheet | Collateral(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Gross amounts £bn | Loss allowance(2) £bn | Net amounts £bn | Gross amounts £bn | Loss £bn | Net amounts £bn | Cash £bn | Non-cash £bn | Netting(3) £bn | Net exposure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 24.2 | – | 24.2 | – | – | – | – | – | – | 24.2 | 24.2 | – | 24.2 | – | – | – | – | – | – | 24.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers:(4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential properties(5) | 158.2 | (0.2 | ) | 158.0 | 11.2 | – | 11.2 | – | (164.1 | ) | – | 5.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers:(3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential properties(4) | 158.2 | (0.2 | ) | 158.0 | 11.2 | – | 11.2 | – | (164.1 | ) | – | 5.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Corporate loans | 27.8 | (0.2 | ) | 27.6 | 17.0 | – | 17.0 | – | (20.2 | ) | – | 24.4 | 27.8 | (0.2 | ) | 27.6 | 17.0 | – | 17.0 | – | (20.2 | ) | – | 24.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Finance leases | 6.8 | (0.1 | ) | 6.7 | 0.2 | – | 0.2 | (0.1 | ) | (6.1 | ) | – | 0.7 | 6.8 | (0.1 | ) | 6.7 | 0.2 | – | 0.2 | (0.1 | ) | (6.1 | ) | – | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other unsecured loans | 7.6 | (0.2 | ) | 7.4 | 11.6 | (0.1 | ) | 11.5 | – | – | – | 18.9 | 7.6 | (0.2 | ) | 7.4 | 11.6 | (0.1 | ) | 11.5 | – | – | – | 18.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 2.0 | – | 2.0 | – | – | – | – | (0.6 | ) | – | 1.4 | 2.0 | – | 2.0 | – | – | – | – | (0.6 | ) | – | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Total loans and advances to customers | 202.4 | (0.7 | ) | 201.7 | 40.0 | (0.1 | ) | 39.9 | (0.1 | ) | (191.0 | ) | – | 50.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and advances to customers | 202.4 | (0.7 | ) | 201.7 | 40.0 | (0.1 | ) | 39.9 | (0.1 | ) | (191.0 | ) | – | 50.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to banks | 3.5 | – | 3.5 | 1.6 | – | 1.6 | – | – | – | 5.1 | 3.5 | – | 3.5 | 1.6 | – | 1.6 | – | – | – | 5.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Reverse repurchase agreements – non trading(6) | 21.1 | – | 21.1 | – | – | – | – | (18.4 | ) | (2.7 | ) | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Reverse repurchase agreements – non trading | 21.1 | – | 21.1 | – | – | – | – | (18.4 | ) | (2.7 | ) | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other financial assets at amortised cost | 7.2 | – | 7.2 | – | – | – | – | – | – | 7.2 | 7.2 | – | 7.2 | – | – | – | – | – | – | 7.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets at amortised cost: | 234.2 | (0.7 | ) | 233.5 | 41.6 | (0.1 | ) | 41.5 | (0.1 | ) | (209.4 | ) | (2.7 | ) | 62.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at FVOCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets at amortised cost | 234.2 | (0.7 | ) | 233.5 | 41.6 | (0.1 | ) | 41.5 | (0.1 | ) | (209.4 | ) | (2.7 | ) | 62.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at FVOCI: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers | 0.1 | – | 0.1 | 0.1 | – | 0.1 | – | – | – | 0.2 | 0.1 | – | 0.1 | 0.1 | – | 0.1 | – | – | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Debt securities | 13.2 | – | 13.2 | – | – | – | – | – | – | 13.2 | 13.2 | – | 13.2 | – | – | – | – | – | – | 13.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets at FVOCI | 13.3 | – | 13.3 | 0.1 | – | 0.1 | – | – | – | 13.4 | 13.3 | – | 13.3 | 0.1 | – | 0.1 | – | – | – | 13.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 271.7 | (0.7 | ) | 271.0 | 41.7 | (0.1 | ) | 41.6 | (0.1 | ) | (209.4 | ) | (2.7 | ) | 100.4 | 271.7 | (0.7 | ) | 271.0 | 41.7 | (0.1 | ) | 41.6 | (0.1 | ) | (209.4 | ) | (2.7 | ) | 100.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 32.8 | – | 32.8 | – | – | – | – | 32.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers:(4)(6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Advances secured on residential property(5) | 155.4 | (0.2 | ) | 155.2 | 12.4 | – | (167.4 | ) | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Corporate loans | 30.9 | (0.5 | ) | 30.4 | 17.1 | – | (21.8 | ) | – | 25.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Finance leases | 6.7 | – | 6.7 | 0.6 | (0.1 | ) | (5.8 | ) | – | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other unsecured loans | 6.2 | (0.2 | ) | 6.0 | 11.1 | – | (0.1 | ) | – | 17.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 1.2 | – | 1.2 | – | – | – | – | 1.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and advances to | 200.4 | (0.9 | ) | 199.5 | 41.2 | (0.1 | ) | (195.1 | ) | – | 45.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to banks(6) | 3.5 | – | 3.5 | 1.6 | – | – | – | 5.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse repurchase agreements – non trading(6) | 2.6 | – | 2.6 | – | – | (2.5 | ) | – | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial investments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Loans and receivables securities(4) | 2.2 | – | 2.2 | 0.7 | – | – | – | 2.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Available–for–sale debt securities | 8.8 | – | 8.8 | – | – | – | – | 8.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Held–to–maturity debt securities | 6.5 | – | 6.5 | – | – | – | – | 6.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial investments | 17.5 | – | 17.5 | 0.7 | – | – | – | 18.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 256.8 | (0.9 | ) | 255.9 | 43.5 | (0.1 | ) | (197.6 | ) | – | 101.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | The forms of collateral we take to reduce credit risk include: residential and commercial property; other physical assets, including motor vehicles; liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. Charges on residential property are most of the collateral we take. |
| (2) |
|
We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives, we use standard master netting agreements. They allow us to set off our credit risk exposure to a counterparty from a derivative against our obligations to the counterparty in the event of default. This gives us a lower net credit exposure. They may also reduce settlement exposure. For more on this, see ‘Credit risk mitigation’ in the ‘Other business segments – credit risk management’ section. |
Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet. |
The collateral value we have shown against advances secured on residential property is limited to the balance of each associated individual loan. It does not include the impact of over–collateralisation (where the collateral has a higher value than the loan balance) and includes collateral we would receive on draw down of certain off–balance sheet commitments. |
|
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
The tables below show the main differences between our maximum and net exposure to credit risk on the financial assets that credit risk affects and to which the impairment requirements in IFRS 9 are not applied.
Balance sheet asset | Collateral(1) | |||||||||||||||||||
| gross | Net | |||||||||||||||||||
| amount | Cash | Non-cash | Netting(2) | exposure | ||||||||||||||||
| 2018 | £bn | £bn | £bn | £bn | £bn | |||||||||||||||
Financial assets at FVTPL | ||||||||||||||||||||
– Derivative financial instruments | 5.3 | – | (2.1 | ) | (0.9 | ) | 2.3 | |||||||||||||
– Other financial assets at FVTPL | 6.1 | – | (2.3 | ) | – | 3.8 | ||||||||||||||
Total | 11.4 | – | (4.4 | ) | (0.9 | ) | 6.1 | |||||||||||||
| 2017 | ||||||||||||||||||||
Financial assets designated at fair value | ||||||||||||||||||||
– Trading assets: | ||||||||||||||||||||
– Securities repurchased under resale agreements | 8.9 | – | (8.5 | ) | (0.4 | ) | – | |||||||||||||
– Debt securities | 5.2 | – | – | – | 5.2 | |||||||||||||||
– Cash collateral | 6.2 | – | – | – | 6.2 | |||||||||||||||
– Short–term loans | 0.7 | – | – | – | 0.7 | |||||||||||||||
– Total trading assets | 21.0 | – | (8.5 | ) | (0.4 | ) | 12.1 | |||||||||||||
– Derivative financial instruments | 19.9 | (2.8 | ) | – | (14.8 | ) | 2.3 | |||||||||||||
– Financial assets designated at fair value: | ||||||||||||||||||||
– Loans and advances to customers | 1.6 | – | (1.6 | ) | – | – | ||||||||||||||
– Debt securities | 0.5 | – | – | – | 0.5 | |||||||||||||||
Total financial assets designated at fair value | 2.1 | – | (1.6 | ) | – | 0.5 | ||||||||||||||
Total | 43.0 | (2.8 | ) | (10.1 | ) | (15.2 | ) | 14.9 | ||||||||||||
| Balance sheet asset | Collateral(1) | |||||||||||||||||||||||||||||||
| 2019 | gross amount £bn | Cash £bn | Non–cash £bn | Netting(2) £bn | Net exposure £bn | |||||||||||||||||||||||||||
Financial assets at FVTPL: | ||||||||||||||||||||||||||||||||
– Derivative financial instruments | 3.4 | – | (1.9 | ) | (0.8 | ) | 0.7 | |||||||||||||||||||||||||
– Other financial assets at FVTPL | 1.0 | – | – | – | 1.0 | |||||||||||||||||||||||||||
Total | 4.4 | – | (1.9 | ) | (0.8 | ) | 1.7 | |||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||
Financial assets at FVTPL: | ||||||||||||||||||||||||||||||||
– Derivative financial instruments | 5.3 | – | (2.1 | ) | (0.9 | ) | 2.3 | |||||||||||||||||||||||||
– Other financial assets at FVTPL | 6.1 | – | (2.3 | ) | – | 3.8 | ||||||||||||||||||||||||||
Total | 11.4 | – | (4.4 | ) | (0.9 | ) | 6.1 | |||||||||||||||||||||||||
| (1) | The forms of collateral we take to reduce credit risk include: liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. |
| (2) | We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives, we use standard master netting agreements. They allow us to set off our credit risk exposure to a counterparty from a derivative against our obligations to the counterparty in the event of default. This gives us a lower net credit exposure. They may also reduce settlement exposure. For more on this, see ‘Credit risk mitigation’ in the ‘Other business segments – credit risk management’ section. |
Single credit rating scale(unaudited)
In the table below, we have used a single rating scale to ensure we are consistent across all our credit risk portfolios in how we report the risk of default. It has eight grades for non–defaulted exposures, from 9 (lowest risk) to 2 (highest risk). We define each grade by an upper and lower PD value and we scale the grades so that the default risk increases by a factor of ten every time the grade number drops by two steps. For example, grade 9 has an average PD of 0.010%, and grade 7 has an average PD of 0.100%. We give defaulted exposures a grade 1 and a PD value of 100%. In the final column of the table we show the approximate equivalent credit rating grade used by Standard & Poor’s Ratings Services (S&P).
| PD range | PD range | |||||||||||||||||||||||||||||||
| Mid | Lower | Upper | ||||||||||||||||||||||||||||||
| Santander UK risk grade | % | % | % | S&P equivalent | Mid % | Lower % | Upper % | S&P equivalent | ||||||||||||||||||||||||
9 | 0.010 | 0.000 | 0.021 | AAA to AA+ | 0.010 | 0.000 | 0.021 | AAA to AA+ | ||||||||||||||||||||||||
8 | 0.032 | 0.021 | 0.066 | AA to AA– | 0.032 | 0.021 | 0.066 | AA to AA– | ||||||||||||||||||||||||
7 | 0.100 | 0.066 | 0.208 | A+ to BBB | 0.100 | 0.066 | 0.208 | A+ to BBB | ||||||||||||||||||||||||
6 | 0.316 | 0.208 | 0.658 | BBB– to BB | 0.316 | 0.208 | 0.658 | BBB– to BB | ||||||||||||||||||||||||
5 | 1.000 | 0.658 | 2.081 | BB– | 1.000 | 0.658 | 2.081 | BB– | ||||||||||||||||||||||||
4 | 3.162 | 2.081 | 6.581 | B+ to B | 3.162 | 2.081 | 6.581 | B+ to B | ||||||||||||||||||||||||
3 | 10.000 | 6.581 | 20.811 | B– | 10.000 | 6.581 | 20.811 | B– | ||||||||||||||||||||||||
2 | 31.623 | 20.811 | 99.999 | CCC to C | 31.623 | 20.811 | 99.999 | CCC to C | ||||||||||||||||||||||||
1 (Default) | 100.000 | 100.000 | 100.000 | D | 100.000 | 100.000 | 100.000 | D | ||||||||||||||||||||||||
The PDs in the table above are based on Economic Capital (EC) PD mappings which are calculated based on the average probability of default over an economic cycle. This is different to the IFRS 9 PDs which are calculated at a point in time using forward looking economic scenarios. Where possible, the EC PD values are largely aligned to the regulatory capital models however any regulatory floors are removed and PDs are defined at every possible rating rather than categorised into rating buckets.
| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
| �� | ||||||||||||||||||||
Credit risk
|
Rating distribution
The tables below show the credit rating of our financial assets to which the impairment requirements in IFRS 9 (2017: IAS 39) are applied. For more on the credit rating profiles of key portfolios, see the ‘Credit risk – Retail Banking’ and ‘Credit risk – other business segments’ sections.
| Santander UK risk grade | ||||||||||||||||||||||||||||||||||||||||
2018 | 9 £bn | 8 £bn | 7 £bn | 6 £bn | 5 £bn | 4 £bn | 3 to 1 £bn | Other(1) £bn | Loss allowance(2) £bn | Total £bn | ||||||||||||||||||||||||||||||
Cash and balances at central banks | 24.2 | – | – | – | – | – | – | – | – | 24.2 | ||||||||||||||||||||||||||||||
– Stage 1 | 24.2 | – | – | – | – | – | – | – | – | 24.2 | ||||||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(3) | 10.0 | 27.5 | 72.4 | 51.6 | 20.3 | 11.4 | 6.3 | 2.9 | (0.7 | ) | 201.7 | |||||||||||||||||||||||||||||
– Stage 1 | 10.0 | 27.5 | 72.2 | 50.3 | 17.6 | 6.9 | 1.1 | 2.8 | (0.1 | ) | 188.3 | |||||||||||||||||||||||||||||
– Stage 2 | – | – | 0.2 | 1.3 | 2.7 | 4.5 | 2.8 | 0.1 | (0.3 | ) | 11.3 | |||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 2.4 | – | (0.3 | ) | 2.1 | |||||||||||||||||||||||||||||
– Loans and advances to banks | 0.9 | 0.2 | 1.4 | – | – | – | – | 1.0 | – | 3.5 | ||||||||||||||||||||||||||||||
– Stage 1 | 0.9 | 0.2 | 1.4 | – | – | – | – | 1.0 | – | 3.5 | ||||||||||||||||||||||||||||||
– Reverse repo agreements – non trading(4) | 15.2 | 3.8 | 1.3 | 0.4 | – | – | – | 0.4 | – | 21.1 | ||||||||||||||||||||||||||||||
– Stage 1 | 15.2 | 3.8 | 1.3 | 0.4 | – | – | – | 0.4 | – | 21.1 | ||||||||||||||||||||||||||||||
– Other financial assets at amortised cost | 7.2 | – | – | – | – | – | – | – | – | 7.2 | ||||||||||||||||||||||||||||||
– Stage 1 | 7.2 | – | – | – | – | – | – | – | – | 7.2 | ||||||||||||||||||||||||||||||
Total financial assets at amortised cost | 33.3 | 31.5 | 75.1 | 52.0 | 20.3 | 11.4 | 6.3 | 4.3 | (0.7 | ) | 233.5 | |||||||||||||||||||||||||||||
Financial assets at FVOCI: | 6.6 | 5.8 | 0.7 | – | – | – | – | 0.2 | – | 13.3 | ||||||||||||||||||||||||||||||
– Stage 1 | 6.6 | 5.8 | 0.7 | – | – | – | – | 0.2 | – | 13.3 | ||||||||||||||||||||||||||||||
Total on balance sheet exposures | 64.1 | 37.3 | 75.8 | 52.0 | 20.3 | 11.4 | 6.3 | 4.5 | (0.7 | ) | 271.0 | |||||||||||||||||||||||||||||
Off–balance sheet exposures | 0.7 | 8.0 | 8.9 | 9.0 | 5.4 | 1.3 | 0.5 | 7.9 | (0.1)(5) | 41.6 | ||||||||||||||||||||||||||||||
– Stage 1 | 0.7 | 8.0 | 8.9 | 8.9 | 5.3 | 1.2 | 0.3 | 7.9 | (0.1 | ) | 41.1 | |||||||||||||||||||||||||||||
– Stage 2 | – | – | – | 0.1 | 0.1 | 0.1 | 0.1 | – | – | 0.4 | ||||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||
Total | 64.8 | 45.3 | 84.7 | 61.0 | 25.7 | 12.7 | 6.8 | 12.4 | (0.8 | ) | 312.6 | |||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 31.8 | – | – | – | – | – | – | 1.0 | – | 32.8 | ||||||||||||||||||||||||||||||
Loans and advances to banks | 1.3 | 0.2 | 0.7 | – | – | – | – | 1.3 | – | 3.5 | ||||||||||||||||||||||||||||||
Loans and advances to customers:(3) | ||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential property | 3.2 | 26.7 | 75.2 | 35.2 | 6.2 | 4.5 | 4.4 | – | (0.2 | ) | 155.2 | |||||||||||||||||||||||||||||
– Corporate loans | 1.7 | 5.1 | 2.1 | 4.6 | 9.6 | 5.1 | 1.5 | 1.3 | (0.5 | ) | 30.5 | |||||||||||||||||||||||||||||
– Finance leases | – | – | 0.4 | 1.3 | 2.0 | 1.8 | 1.1 | 0.1 | (0.1 | ) | 6.6 | |||||||||||||||||||||||||||||
– Other unsecured loans | – | 0.1 | 0.8 | 1.6 | 1.6 | 0.7 | 0.5 | 0.9 | (0.2 | ) | 6.0 | |||||||||||||||||||||||||||||
– Amounts due from fellow Banco Santander group subsidiaries and JVs | – | – | – | – | – | – | – | 1.2 | – | 1.2 | ||||||||||||||||||||||||||||||
Total loans and advances to customers | 4.9 | 31.9 | 78.5 | 42.7 | 19.4 | 12.1 | 7.5 | 3.5 | (1.0 | ) | 199.5 | |||||||||||||||||||||||||||||
Reverse repo agreements – non trading(4) | – | 1.5 | 0.4 | 0.4 | – | – | – | 0.1 | – | 2.4 | ||||||||||||||||||||||||||||||
Financial investments: | ||||||||||||||||||||||||||||||||||||||||
– Loans and receivables securities(2) | 1.9 | 0.1 | 0.2 | – | – | – | – | – | – | 2.2 | ||||||||||||||||||||||||||||||
– Available–for–sale debt securities | 6.5 | 1.9 | 0.4 | – | – | – | – | – | – | 8.8 | ||||||||||||||||||||||||||||||
– Held–to–maturity debt securities | 6.5 | – | – | – | – | – | – | – | – | 6.5 | ||||||||||||||||||||||||||||||
Total financial investments | 14.9 | 2.0 | 0.6 | – | – | – | – | – | – | 17.5 | ||||||||||||||||||||||||||||||
Total | 52.9 | 35.6 | 80.2 | 43.1 | 19.4 | 12.1 | 7.5 | 5.9 | (1.0 | ) | 255.7 | |||||||||||||||||||||||||||||
| Santander UK risk grade | Loss | |||||||||||||||||||||||||||||||||||||||
| 2019 | 9 £bn | 8 £bn | 7 £bn | 6 £bn | 5 £bn | 4 £bn | 3 to 1 £bn | Other(1) £bn | allowance £bn | Total £bn | ||||||||||||||||||||||||||||||
Exposures | ||||||||||||||||||||||||||||||||||||||||
On balance sheet | ||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 26.4 | – | – | – | – | – | – | – | – | 26.4 | ||||||||||||||||||||||||||||||
– Stage 1 | 26.4 | – | – | – | – | – | – | – | – | 26.4 | ||||||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(2) | 11.4 | 30.6 | 75.4 | 52.1 | 18.8 | 10.9 | 6.2 | 2.9 | (0.8 | ) | 207.5 | |||||||||||||||||||||||||||||
– Stage 1 | 11.4 | 30.6 | 75.0 | 50.9 | 16.1 | 6.2 | 1.2 | 2.9 | (0.1 | ) | 194.2 | |||||||||||||||||||||||||||||
– Stage 2 | – | – | 0.4 | 1.2 | 2.7 | 4.7 | 2.7 | – | (0.3 | ) | 11.4 | |||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 2.3 | – | (0.4 | ) | 1.9 | |||||||||||||||||||||||||||||
Of which mortgages: | 9.8 | 25.0 | 71.9 | 42.9 | 7.7 | 4.2 | 3.9 | – | (0.2 | ) | 165.2 | |||||||||||||||||||||||||||||
– Stage 1 | 9.8 | 25.0 | 71.7 | 42.0 | 5.7 | 1.1 | 0.2 | – | – | 155.5 | ||||||||||||||||||||||||||||||
– Stage 2 | – | – | 0.2 | 0.9 | 2.0 | 3.1 | 2.0 | – | (0.1 | ) | 8.1 | |||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 1.7 | – | (0.1 | ) | 1.6 | |||||||||||||||||||||||||||||
– Loans and advances to banks | 0.1 | 0.2 | 1.0 | – | – | – | – | 1.2 | – | 2.5 | ||||||||||||||||||||||||||||||
– Stage 1 | 0.1 | 0.2 | 1.0 | – | – | – | – | 1.2 | – | 2.5 | ||||||||||||||||||||||||||||||
– Reverse repo agreements – non trading | 15.3 | 2.4 | 4.2 | 1.5 | – | – | – | 0.2 | – | 23.6 | ||||||||||||||||||||||||||||||
– Stage 1 | 15.3 | 2.4 | 4.2 | 1.5 | – | – | – | 0.2 | – | 23.6 | ||||||||||||||||||||||||||||||
– Other financial assets at amortised cost | 7.1 | – | – | – | – | – | – | – | – | 7.1 | ||||||||||||||||||||||||||||||
– Stage 1 | 7.1 | – | – | – | – | – | – | – | – | 7.1 | ||||||||||||||||||||||||||||||
Total financial assets at amortised cost | 33.9 | 33.2 | 80.6 | 53.6 | 18.8 | 10.9 | 6.2 | 4.3 | (0.8 | ) | 240.7 | |||||||||||||||||||||||||||||
Financial assets at FVOCI: | 6.1 | 3.2 | 0.4 | – | – | – | – | – | – | 9.7 | ||||||||||||||||||||||||||||||
– Stage 1 | 6.1 | 3.2 | 0.4 | – | – | – | – | – | – | 9.7 | ||||||||||||||||||||||||||||||
Total on balance sheet | 66.4 | 36.4 | 81.0 | 53.6 | 18.8 | 10.9 | 6.2 | 4.3 | (0.8 | ) | 276.8 | |||||||||||||||||||||||||||||
Total off–balance sheet | 0.9 | 8.5 | 8.3 | 8.1 | 5.0 | 1.1 | 0.6 | 9.1 | (0.1 | )(3) | 41.5 | |||||||||||||||||||||||||||||
– Stage 1 | 0.9 | 8.5 | 8.3 | 8.0 | 4.7 | 1.0 | 0.3 | 9.1 | – | 40.8 | ||||||||||||||||||||||||||||||
– Stage 2 | – | – | – | 0.1 | 0.3 | 0.1 | 0.2 | – | (0.1 | ) | 0.6 | |||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||
Total exposures | 67.3 | 44.9 | 89.3 | 61.7 | 23.8 | 12.0 | 6.8 | 13.4 | (0.9 | ) | 318.3 | |||||||||||||||||||||||||||||
ECL | ||||||||||||||||||||||||||||||||||||||||
On balance sheet | ||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(2) | – | – | – | – | 0.1 | 0.2 | 0.5 | – | 0.8 | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | 0.1 | – | – | 0.1 | |||||||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | 0.1 | 0.1 | 0.1 | – | 0.3 | |||||||||||||||||||||||||||||||
– 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 | |||||||||||||||||||||||||||||||
– Loans and advances to banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Reverse repo agreements – non trading | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Other financial assets at amortised cost | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Total financial assets at amortised cost | – | – | – | – | 0.1 | 0.2 | 0.5 | – | 0.8 | |||||||||||||||||||||||||||||||
Financial assets at FVOCI: | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Total on balance sheet | – | – | – | – | 0.1 | 0.2 | 0.5 | – | 0.8 | |||||||||||||||||||||||||||||||
Total off–balance sheet | – | – | – | – | – | – | 0.1 | – | 0.1 | |||||||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | – | – | 0.1 | – | 0.1 | |||||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
Total ECL | – | – | – | – | 0.1 | 0.2 | 0.6 | – | 0.9 | |||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc | 89 |
Annual Report 2019| Risk review
| Santander UK risk grade | ||||||||||||||||||||||||||||||||||||
| 2019 | 9 % | 8 % | 7 % | 6 % | 5 % | 4 % | 3 to 1 % | Other(1) % | Total % | |||||||||||||||||||||||||||
Coverage ratio | ||||||||||||||||||||||||||||||||||||
On balance sheet | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(2) | – | – | – | – | 0.5 | 1.8 | 8.1 | – | 0.4 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | 1.6 | – | – | 0.1 | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | 3.7 | 2.1 | 3.7 | – | 2.6 | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 17.4 | – | 21.1 | |||||||||||||||||||||||||||
Of which mortgages: | – | – | – | – | – | 2.4 | 2.6 | – | 0.1 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | – | 3.2 | – | – | 1.2 | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 5.9 | – | 6.3 | |||||||||||||||||||||||||||
– Loans and advances to banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Reverse repo agreements – non trading | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other financial assets at amortised cost | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total financial assets at amortised cost | – | – | – | – | 0.5 | 1.8 | 8.1 | – | 0.3 | |||||||||||||||||||||||||||
Financial assets at FVOCI: | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total on balance sheet | – | – | – | – | 0.5 | 1.8 | 8.1 | – | 0.3 | |||||||||||||||||||||||||||
Total off–balance sheet | – | – | – | – | – | – | 16.7 | – | 0.2 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | – | – | 50.0 | – | 16.7 | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total coverage ratio | – | – | – | – | 0.4 | 1.7 | 8.8 | – | 0.3 | |||||||||||||||||||||||||||
| (1) | Includes cash at hand and smaller cases mainly in the consumer (auto) finance and commercial mortgages portfolios. We use scorecards for these items, rather than rating models. |
| (2) |
|
| Santander UK risk grade | Loss | |||||||||||||||||||||||||||||||||||||||
| 2018 | 9 £bn | 8 £bn | 7 £bn | 6 £bn | 5 £bn | 4 £bn | 3 to 1 £bn | Other(1) £bn | allowance £bn | Total £bn | ||||||||||||||||||||||||||||||
Exposures | ||||||||||||||||||||||||||||||||||||||||
On balance sheet | ||||||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | 24.2 | – | – | – | – | – | – | – | – | 24.2 | ||||||||||||||||||||||||||||||
– Stage 1 | 24.2 | – | – | – | – | – | – | – | – | 24.2 | ||||||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(2) | 10.0 | 27.5 | 72.4 | 51.6 | 20.3 | 11.4 | 6.3 | 2.9 | (0.7 | ) | 201.7 | |||||||||||||||||||||||||||||
– Stage 1 | 10.0 | 27.5 | 72.2 | 50.3 | 17.6 | 6.9 | 1.1 | 2.8 | (0.1 | ) | 188.3 | |||||||||||||||||||||||||||||
– Stage 2 | – | – | 0.2 | 1.3 | 2.7 | 4.5 | 2.8 | 0.1 | (0.3 | ) | 11.3 | |||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 2.4 | – | (0.3 | ) | 2.1 | |||||||||||||||||||||||||||||
Of which mortgages: | 7.7 | 21.8 | 69.0 | 42.8 | 7.8 | 4.7 | 4.2 | – | (0.2 | ) | 157.8 | |||||||||||||||||||||||||||||
– Stage 1 | 7.7 | 21.8 | 68.8 | 41.6 | 5.5 | 1.2 | 0.2 | – | – | 146.8 | ||||||||||||||||||||||||||||||
– Stage 2 | – | – | 0.2 | 1.2 | 2.3 | 3.5 | 2.1 | – | (0.1 | ) | 9.2 | |||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 1.9 | – | (0.1 | ) | 1.8 | |||||||||||||||||||||||||||||
– Loans and advances to banks | 0.9 | 0.2 | 1.4 | – | – | – | – | 1.0 | – | 3.5 | ||||||||||||||||||||||||||||||
– Stage 1 | 0.9 | 0.2 | 1.4 | – | – | – | – | 1.0 | – | 3.5 | ||||||||||||||||||||||||||||||
– Reverse repo agreements – non trading | 15.2 | 3.8 | 1.3 | 0.4 | – | – | – | 0.4 | – | 21.1 | ||||||||||||||||||||||||||||||
– Stage 1 | 15.2 | 3.8 | 1.3 | 0.4 | – | – | – | 0.4 | – | 21.1 | ||||||||||||||||||||||||||||||
– Other financial assets at amortised cost | 7.2 | – | – | – | – | – | – | – | – | 7.2 | ||||||||||||||||||||||||||||||
– Stage 1 | 7.2 | – | – | – | – | – | – | – | – | 7.2 | ||||||||||||||||||||||||||||||
Total financial assets at amortised cost | 33.3 | 31.5 | 75.1 | 52.0 | 20.3 | 11.4 | 6.3 | 4.3 | (0.7 | ) | 233.5 | |||||||||||||||||||||||||||||
Financial assets at FVOCI: | 6.6 | 5.8 | 0.7 | – | – | – | – | 0.2 | – | 13.3 | ||||||||||||||||||||||||||||||
– Stage 1 | 6.6 | 5.8 | 0.7 | – | – | – | – | 0.2 | – | 13.3 | ||||||||||||||||||||||||||||||
Total on balance sheet | 64.1 | 37.3 | 75.8 | 52.0 | 20.3 | 11.4 | 6.3 | 4.5 | (0.7 | ) | 271.0 | |||||||||||||||||||||||||||||
Total off–balance sheet | 0.7 | 8.0 | 8.9 | 9.0 | 5.4 | 1.3 | 0.5 | 7.9 | (0.1 | )(4) | 41.6 | |||||||||||||||||||||||||||||
– Stage 1 | 0.7 | 8.0 | 8.9 | 8.9 | 5.3 | 1.2 | 0.3 | 7.9 | (0.1 | ) | 41.1 | |||||||||||||||||||||||||||||
– Stage 2 | – | – | – | 0.1 | 0.1 | 0.1 | 0.1 | – | – | 0.4 | ||||||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||||||
Total exposures | 64.8 | 45.3 | 84.7 | 61.0 | 25.7 | 12.7 | 6.8 | 12.4 | (0.8 | ) | 312.6 | |||||||||||||||||||||||||||||
| 90 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk |
| Santander UK risk grade | ||||||||||||||||||||||||||||||||||||
| 2018 | 9 £bn | 8 £bn | 7 £bn | 6 £bn | 5 £bn | 4 £bn | 3 to 1 £bn | Other(1) £bn | Total £bn | |||||||||||||||||||||||||||
ECL | ||||||||||||||||||||||||||||||||||||
On balance sheet | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(2) | – | – | – | – | 0.1 | 0.2 | 0.4 | – | 0.7 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | 0.1 | – | – | 0.1 | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | 0.1 | 0.1 | 0.1 | – | 0.3 | |||||||||||||||||||||||||||
– 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 | |||||||||||||||||||||||||||
– Loans and advances to banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Reverse repo agreements – non trading | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other financial assets at amortised cost | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total financial assets at amortised cost | – | – | – | – | 0.1 | 0.2 | 0.4 | – | 0.7 | |||||||||||||||||||||||||||
Financial assets at FVOCI: | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total on balance sheet | – | – | – | – | 0.1 | 0.2 | 0.4 | – | 0.7 | |||||||||||||||||||||||||||
Total off–balance sheet | – | – | – | – | – | – | 0.1 | – | 0.1 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | 0.1 | – | 0.1 | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
| – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||
Total ECL | – | – | – | – | 0.1 | 0.2 | 0.5 | – | 0.8 | |||||||||||||||||||||||||||
| % | % | % | % | % | % | % | % | % | ||||||||||||||||||||||||||||
Coverage ratio | ||||||||||||||||||||||||||||||||||||
On balance sheet | ||||||||||||||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||||||||||
– Loans and advances to customers(2) | – | – | – | – | 0.5 | 1.8 | 6.3 | – | 0.3 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | 1.4 | – | – | 0.1 | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | 3.7 | 2.2 | 3.6 | – | 2.7 | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 12.5 | – | 14.3 | |||||||||||||||||||||||||||
Of which mortgages: | – | – | – | – | – | 2.1 | 2.4 | – | 0.1 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | – | 2.9 | – | – | 1.1 | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | 5.3 | – | 5.6 | |||||||||||||||||||||||||||
– Loans and advances to banks | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Reverse repo agreements – non trading | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Other financial assets at amortised cost | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total financial assets at amortised cost | – | – | – | – | 0.5 | 1.8 | 6.3 | – | 0.3 | |||||||||||||||||||||||||||
Financial assets at FVOCI: | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total on balance sheet | – | – | – | – | 0.5 | 1.8 | 6.3 | – | 0.3 | |||||||||||||||||||||||||||
Total off–balance sheet | – | – | – | – | – | – | 20.0 | – | 0.2 | |||||||||||||||||||||||||||
– Stage 1 | – | – | – | – | – | – | 33.3 | – | 0.2 | |||||||||||||||||||||||||||
– Stage 2 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
– Stage 3 | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Total coverage ratio | – | – | – | – | 0.4 | 1.6 | 7.4 | – | 0.3 | |||||||||||||||||||||||||||
| (1) | Includes cash at hand and smaller cases mainly in the consumer (auto) finance and commercial mortgages portfolios. We use scorecards for |
Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet. |
|
The total rounds to £0.1bn and is split across all three Stages. In this table, it has been allocated in full to Stage 1 for presentational purposes. For the full detail, see the |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
Credit performance
The customer loans in the tables below and in the remainderrest of the ‘Credit risk’ section are presented differently from the balances in the Consolidated Balance Sheet. The main difference is that customer loans exclude interest we have accrued but not charged to customers’ accounts yet.
| 2018 | Customer loans £bn | NPLs(1)(2) £m | NPL ratio(3) % | Gross write– offs £m | Loss £m | |||||||||||||||||||||||||||||||||||||||
| 2019 | Customer £bn | Stage 3 drawn £m | Stage 3 £m | Stage 3 % | Gross £m | Total loss allowances £m | ||||||||||||||||||||||||||||||||||||||
Retail Banking: | 172.8 | 2,126 | 1.23 | 182 | 594 | 180.4 | 1,936 | 38 | 1.09 | 206 | 591 | |||||||||||||||||||||||||||||||||
– of which mortgages | 158.0 | 1,907 | 1.21 | 18 | 237 | 165.4 | 1,722 | 12 | 1.05 | 14 | 218 | |||||||||||||||||||||||||||||||||
– of which business banking | 1.8 | 78 | 1 | 4.28 | 24 | 52 | ||||||||||||||||||||||||||||||||||||||
– of which consumer (auto) finance | 7.7 | 42 | – | 0.55 | 34 | 88 | ||||||||||||||||||||||||||||||||||||||
– of which other unsecured lending | 5.5 | 94 | 25 | 2.15 | 134 | 233 | ||||||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 17.7 | 264 | 1.49 | 97 | 182 | 16.3 | 335 | 27 | 2.22 | 41 | 210 | |||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 4.6 | – | – | 252 | 18 | 4.1 | – | 15 | 0.36 | – | 50 | |||||||||||||||||||||||||||||||||
Corporate Centre | 4.8 | 18 | 0.38 | 3 | 13 | 4.5 | 18 | – | 0.40 | 2 | 12 | |||||||||||||||||||||||||||||||||
| 199.9 | 2,408 | 1.20 | 534 | 807 | 205.3 | 2,289 | 80 | 1.15 | 249 | 863 | ||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking: | 168.7 | 2,104 | 1.25 | 195 | 491 | 172.8 | 2,211 | 43 | 1.30 | 182 | 594 | |||||||||||||||||||||||||||||||||
– of which mortgages | 154.7 | 1,867 | 1.21 | 22 | 225 | 158.0 | 1,982 | 17 | 1.27 | 18 | 237 | |||||||||||||||||||||||||||||||||
– of which business banking | 1.8 | 89 | – | 4.99 | 15 | 53 | ||||||||||||||||||||||||||||||||||||||
– of which consumer (auto) finance | 7.3 | 43 | – | 0.58 | 24 | 85 | ||||||||||||||||||||||||||||||||||||||
– of which other unsecured lending | 5.7 | 97 | 26 | 2.17 | 125 | 219 | ||||||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 19.4 | 383 | 1.97 | 35 | 195 | 17.7 | 264 | 12 | 1.56 | 97 | 182 | |||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 6.0 | 340 | 5.67 | – | 236 | 4.6 | – | 26 | 0.56 | 252(4) | 18 | |||||||||||||||||||||||||||||||||
Corporate Centre | 6.2 | 21 | 0.34 | 23 | 18 | 4.8 | 16 | – | 0.33 | 3 | 13 | |||||||||||||||||||||||||||||||||
| 200.3 | 2,848 | 1.42 | 253 | 940 | 199.9 | 2,491 | 81 | 1.29 | 534 | 807 | ||||||||||||||||||||||||||||||||||
Of which: Corporate lending | ||||||||||||||||||||||||||||||||||||||||||||
2019 | 22.3 | 413 | 43 | 2.04 | 65 | 311 | ||||||||||||||||||||||||||||||||||||||
2018 | 24.1 | 353 | 1.46 | 364 | 253 | 24.1 | 353 | 38 | 1.62 | 364 | 253 | |||||||||||||||||||||||||||||||||
2017 | 27.3 | 838 | 3.07 | 56 | 485 | |||||||||||||||||||||||||||||||||||||||
| (1) | We define |
| (2) |
|
| (3) |
|
| (4) |
|
Corporate lending comprises the business banking portfolio ofin our Retail Banking segment, and our Corporate & Commercial Banking and Corporate & Investment Banking segments.
2018 compared to 2017 (unaudited)
Our financial results now reflect the changes in the statutory perimeter, following the ring-fence transfers of activities to Banco Santander London Branch. Prior periods have not been restated. The NPL ratio improved 22bps to 1.20%, with credit quality remaining strong supported by our prudent approach to risk, proactive management actions and the ongoing resilience of the UK economy. The improvement was also driven by thewrite-off of the Carillion plc exposures.
|
|
|
|
For more on the credit performance of our key portfolios by business segment, see the ‘Retail Banking – credit risk review’ and ‘Other business segments – credit risk review’ sections.
| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
IFRS 9 creditCredit quality
Totalon-balance sheet exposures at 31 December 2019 comprised £205.3bn of customer loans, L&A to banks of £2.6bn, £30.7bn of sovereign assets measured at amortised cost, £9.7bn of assets measured at FVOCI, and £26.4bn of cash and balances at central banks.
| 2019 | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | ||||||||||||
Exposures | ||||||||||||||||
On-balance sheet | ||||||||||||||||
Retail Banking | 169,003 | 9,459 | 1,936 | 180,398 | ||||||||||||
– of which mortgages | 155,477 | 8,157 | 1,722 | 165,356 | ||||||||||||
Corporate & Commercial Banking | 14,068 | 1,894 | 335 | 16,297 | ||||||||||||
Corporate & Investment Banking | 3,916 | 198 | – | 4,114 | ||||||||||||
Corporate Centre | 73,759 | 129 | 18 | 73,906 | ||||||||||||
Totalon-balance sheet | 260,746 | 11,680 | 2,289 | 274,715 | ||||||||||||
Off–balance sheet | ||||||||||||||||
Retail Banking(1) | 25,849 | 194 | 38 | 26,081 | ||||||||||||
– of which mortgages(1) | 13,353 | 67 | 12 | 13,432 | ||||||||||||
Corporate & Commercial Banking | 5,249 | 282 | 27 | 5,558 | ||||||||||||
Corporate & Investment Banking | 9,129 | 198 | 15 | 9,342 | ||||||||||||
Corporate Centre | 626 | – | – | 626 | ||||||||||||
Total off–balance sheet(2) | 40,853 | 674 | 80 | 41,607 | ||||||||||||
Total exposures | 301,599 | 12,354 | 2,369 | 316,322 | ||||||||||||
| ||||||||||||||||
ECL | ||||||||||||||||
On-balance sheet | ||||||||||||||||
Retail Banking | 85 | 255 | 224 | 564 | ||||||||||||
– of which mortgages | 11 | 100 | 103 | 214 | ||||||||||||
Corporate & Commercial Banking | 34 | 35 | 126 | 195 | ||||||||||||
Corporate & Investment Banking | 2 | 12 | – | 14 | ||||||||||||
Corporate Centre | 3 | 3 | 6 | 12 | ||||||||||||
Totalon-balance sheet | 124 | 305 | 356 | 785 | ||||||||||||
Off–balance sheet | ||||||||||||||||
Retail Banking | 13 | 13 | 1 | 27 | ||||||||||||
– of which mortgages | 3 | 1 | – | 4 | ||||||||||||
Corporate & Commercial Banking | 7 | 6 | 2 | 15 | ||||||||||||
Corporate & Investment Banking | 3 | 24 | 9 | 36 | ||||||||||||
Total off–balance sheet | 23 | 43 | 12 | 78 | ||||||||||||
Total ECL | 147 | 348 | 368 | 863 | ||||||||||||
| % | % | % | % | |||||||||||||
Coverage ratio(3) | ||||||||||||||||
On-balance sheet | ||||||||||||||||
Retail Banking | 0.1 | 2.7 | 11.6 | 0.3 | ||||||||||||
– of which mortgages | – | 1.2 | 6.0 | 0.1 | ||||||||||||
Corporate & Commercial Banking | 0.2 | 1.8 | 37.6 | 1.2 | ||||||||||||
Corporate & Investment Banking | 0.1 | 6.1 | – | 0.3 | ||||||||||||
Corporate Centre | – | 2.3 | 33.3 | – | ||||||||||||
Totalon-balance sheet | – | 2.6 | 15.6 | 0.3 | ||||||||||||
Off–balance sheet | ||||||||||||||||
Retail Banking | 0.1 | 6.7 | 2.6 | 0.1 | ||||||||||||
– of which mortgages | – | 1.5 | – | – | ||||||||||||
Corporate & Commercial Banking | 0.1 | 2.1 | 7.4 | 0.3 | ||||||||||||
Corporate & Investment Banking | – | 12.1 | 60.0 | 0.4 | ||||||||||||
Totaloff-balance sheet | 0.1 | 6.4 | 15.0 | 0.2 | ||||||||||||
Total coverage | – | 2.8 | 15.5 | 0.3 | ||||||||||||
| (1) | Off-balance sheet exposures include £7.6bn of retail mortgage offers in the pipeline. |
| (2) | Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 29 to the Consolidated Financial Statements. |
| (3) | ECL as a percentage of the related exposure. |
| Santander UK Group Holdings plc | 93 |
Annual Report 2019| Risk review
Totalon-balance sheet exposures at 31 December 2018 comprisecomprised £199.9bn of customer loans, L&A to banks of £3.5bn, (reported in CIB) and £28.4bn of sovereign assets measured at amortised cost, £13.3bn of assets measured at FVOCI, and £24.2bn of cash and balances at central banks (all reported in Corporate Centre).banks.
| Stage 2 | ||||||||||||||||||||||||||||||||||||||||||||
| 31 December 2018 | (unaudited) Average PD(1) % | Stage 1 £m | £ 30 DPD £m | >30 DPD £m | Sub total £m | Stage 3(2) £m | Total £m | |||||||||||||||||||||||||||||||||||||
| 2018 |
Stage 1 | Stage 2 £m | Stage 3 £m | Total £m | ||||||||||||||||||||||||||||||||||||||||
Exposures | ||||||||||||||||||||||||||||||||||||||||||||
On-balance sheet | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | 0.53 | 160,212 | 9,375 | 949 | 10,324 | 2,211 | 172,747 | 160,212 | 10,324 | 2,211 | 172,747 | |||||||||||||||||||||||||||||||||
– of which mortgages | 0.48 | 146,619 | 8,466 | 890 | 9,356 | 1,982 | 157,957 | 146,619 | 9,356 | 1,982 | 157,957 | |||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 0.92 | 16,394 | 1,044 | – | 1,044 | 264 | 17,702 | 16,394 | 1,044 | 264 | 17,702 | |||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 0.36 | 29,177 | 78 | – | 78 | – | 29,255 | 4,535 | 78 | – | 4,613 | |||||||||||||||||||||||||||||||||
Corporate Centre | 0.14 | 49,368 | 122 | 11 | 133 | 16 | 49,517 | 74,010 | 133 | 16 | 74,159 | |||||||||||||||||||||||||||||||||
Totalon-balance sheet | 255,151 | 10,619 | 960 | 11,579 | 2,491 | 269,221 | 255,151 | 11,579 | 2,491 | 269,221 | ||||||||||||||||||||||||||||||||||
Off–balance sheet | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | 22,819 | 196 | – | 196 | 43 | 23,058 | 22,819 | 196 | 43 | 23,058 | ||||||||||||||||||||||||||||||||||
– of which mortgages | 11,120 | 76 | – | 76 | 17 | 11,213 | 11,120 | 76 | 17 | 11,213 | ||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 4,939 | 182 | – | 182 | 12 | 5,133 | 4,939 | 182 | 12 | 5,133 | ||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 12,923 | 56 | – | 56 | 26 | 13,005 | 12,923 | 56 | 26 | 13,005 | ||||||||||||||||||||||||||||||||||
Corporate Centre | 531 | – | – | – | – | 531 | 531 | – | – | 531 | ||||||||||||||||||||||||||||||||||
Total off–balance sheet | 41,212 | 434 | – | 434 | 81 | 41,727 | 41,212 | 434 | 81 | 41,727 | ||||||||||||||||||||||||||||||||||
Total exposures | 296,363 | 11,053 | 960 | 12,013 | 2,572 | 310,948 | 296,363 | 12,013 | 2,572 | 310,948 | ||||||||||||||||||||||||||||||||||
ECL | ||||||||||||||||||||||||||||||||||||||||||||
On-balance sheet | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | 84 | 217 | 39 | 256 | 228 | 568 | 84 | 256 | 228 | 568 | ||||||||||||||||||||||||||||||||||
– of which mortgages | 10 | 98 | 20 | 118 | 106 | 234 | 10 | 118 | 106 | 234 | ||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 31 | 26 | – | 26 | 111 | 168 | 31 | 26 | 111 | 168 | ||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 1 | 1 | – | 1 | – | 2 | 1 | 1 | – | 2 | ||||||||||||||||||||||||||||||||||
Corporate Centre | 5 | 3 | – | 3 | 5 | 13 | 5 | 3 | 5 | 13 | ||||||||||||||||||||||||||||||||||
Totalon-balance sheet | 121 | 247 | 39 | 286 | 344 | 751 | 121 | 286 | 344 | 751 | ||||||||||||||||||||||||||||||||||
Off–balance sheet | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | 12 | 13 | – | 13 | 1 | 26 | 12 | 13 | 1 | 26 | ||||||||||||||||||||||||||||||||||
– of which mortgages | 2 | 1 | – | 1 | – | 3 | 2 | 1 | – | 3 | ||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 6 | 6 | – | 6 | 2 | 14 | 6 | 6 | 2 | 14 | ||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 4 | 2 | – | 2 | 10 | 16 | 4 | 2 | 10 | 16 | ||||||||||||||||||||||||||||||||||
Total off–balance sheet | 22 | 21 | – | 21 | 13 | 56 | 22 | 21 | 13 | 56 | ||||||||||||||||||||||||||||||||||
Total ECL | 143 | 268 | 39 | 307 | 357 | 807 | 143 | 307 | 357 | 807 | ||||||||||||||||||||||||||||||||||
| Coverage ratio(5) | % | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||||
| % | % | % | % | |||||||||||||||||||||||||||||||||||||||||
Coverage ratio(3) | ||||||||||||||||||||||||||||||||||||||||||||
On-balance sheet | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | 0.1 | 2.3 | 4.1 | 2.5 | 10.3 | 0.3 | 0.1 | 2.5 | 10.3 | 0.3 | ||||||||||||||||||||||||||||||||||
– of which mortgages | – | 1.2 | 2.2 | 1.3 | 5.3 | 0.1 | – | 1.3 | 5.3 | 0.1 | ||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 0.2 | 2.5 | – | 2.5 | 42.0 | 0.9 | 0.2 | 2.5 | 42.0 | 0.9 | ||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | – | 1.3 | – | 1.3 | – | – | – | 1.3 | – | – | ||||||||||||||||||||||||||||||||||
Corporate Centre | – | 2.5 | – | 2.3 | 31.3 | – | – | 2.3 | 31.3 | – | ||||||||||||||||||||||||||||||||||
Totalon-balance sheet | – | 2.3 | 4.1 | 2.5 | 13.8 | 0.3 | – | 2.5 | 13.8 | 0.3 | ||||||||||||||||||||||||||||||||||
Off–balance sheet | ||||||||||||||||||||||||||||||||||||||||||||
Retail Banking | 0.1 | 6.6 | – | 6.6 | 2.3 | 0.1 | 0.1 | 6.6 | 2.3 | 0.1 | ||||||||||||||||||||||||||||||||||
– of which mortgages | – | 1.3 | – | 1.3 | – | – | – | 1.3 | – | – | ||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 0.1 | 3.3 | – | 3.3 | 16.7 | 0.3 | 0.1 | 3.3 | 16.7 | 0.3 | ||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | – | 3.6 | – | 3.6 | 38.5 | 0.1 | – | 3.6 | 38.5 | 0.1 | ||||||||||||||||||||||||||||||||||
Totaloff-balance sheet | 0.1 | 4.8 | – | 4.8 | 16.0 | 0.1 | ||||||||||||||||||||||||||||||||||||||
Total off–balance sheet | 0.1 | 4.8 | 16.0 | 0.1 | ||||||||||||||||||||||||||||||||||||||||
Total coverage | – | 2.4 | 4.1 | 2.6 | 13.9 | 0.3 | – | 2.6 | 13.9 | 0.3 | ||||||||||||||||||||||||||||||||||
| (1) |
|
|
Off-balance sheet exposures include |
Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note |
ECL as a percentage of the related exposure. |
Stage 2 analysis
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Annual Report 2018 | Risk review
Totalon-balance sheet exposures at 1 January 2018 comprise £200.3bn of customer loans, L&A to banks of £3.5bn (reported in CIB) and £11.3bn of sovereign assets measured at amortised cost, £8.9bn of assets measured at FVOCI, and £32.8bn of cash and balances at central banks (all reported in Corporate Centre).
| (unaudited) | Stage 2 | |||||||||||||||||||||||||||
| 1 January 2018 | Average PD(1) % | Stage 1 £m | £ 30 DPD £m | >30 DPD £m | Sub total £m | Stage 3(2) £m | Total £m | |||||||||||||||||||||
Exposures | ||||||||||||||||||||||||||||
On-balance sheet | ||||||||||||||||||||||||||||
Retail Banking | 0.61 | 155,845 | 9,537 | 1,120 | 10,657 | 2,222 | 168,724 | |||||||||||||||||||||
– of which mortgages | 0.55 | 142,940 | 8,765 | 991 | 9,756 | 1,986 | 154,682 | |||||||||||||||||||||
Corporate & Commercial Banking | 0.79 | 18,362 | 575 | 71 | 646 | 383 | 19,391 | |||||||||||||||||||||
Corporate & Investment Banking | 0.17 | 11,684 | 93 | – | 93 | 340 | 12,117 | |||||||||||||||||||||
Corporate Centre | 0.07 | 56,325 | 172 | 38 | 210 | 20 | 56,555 | |||||||||||||||||||||
Totalon-balance sheet | 242,216 | 10,377 | 1,229 | 11,606 | 2,965 | 256,787 | ||||||||||||||||||||||
Off–balance sheet | ||||||||||||||||||||||||||||
Retail Banking(3) | 23,133 | 223 | 5 | 228 | 41 | 23,402 | ||||||||||||||||||||||
– of which mortgages(3) | 12,215 | 126 | 2 | 128 | 18 | 12,361 | ||||||||||||||||||||||
Corporate & Commercial Banking | 4,055 | 211 | 9 | 220 | 5 | 4,280 | ||||||||||||||||||||||
Corporate & Investment Banking | 14,899 | 16 | – | 16 | 32 | 14,947 | ||||||||||||||||||||||
Corporate Centre | 830 | 40 | – | 40 | – | 870 | ||||||||||||||||||||||
Total off–balance sheet(4) | 42,917 | 490 | 14 | 504 | 78 | 43,499 | ||||||||||||||||||||||
Total exposures | 285,133 | 10,867 | 1,243 | 12,110 | 3,043 | 300,286 | ||||||||||||||||||||||
ECL | ||||||||||||||||||||||||||||
On-balance sheet | ||||||||||||||||||||||||||||
Retail Banking | 97 | 206 | 28 | 234 | 266 | 597 | ||||||||||||||||||||||
– of which mortgages | 20 | 113 | 16 | 129 | 121 | 270 | ||||||||||||||||||||||
Corporate & Commercial Banking | 38 | 17 | 8 | 25 | 173 | 236 | ||||||||||||||||||||||
Corporate & Investment Banking | 8 | – | – | – | 242 | 250 | ||||||||||||||||||||||
Corporate Centre | 7 | 2 | 2 | 4 | 8 | 19 | ||||||||||||||||||||||
Totalon-balance sheet | 150 | 225 | 38 | 263 | 689 | 1,102 | ||||||||||||||||||||||
Off-balance sheet | ||||||||||||||||||||||||||||
Retail Banking | 13 | 13 | – | 13 | 2 | 28 | ||||||||||||||||||||||
– of which mortgages | – | 2 | – | 2 | – | 2 | ||||||||||||||||||||||
Corporate & Commercial Banking | 5 | 8 | – | 8 | – | 13 | ||||||||||||||||||||||
Corporate & Investment Banking | 8 | – | – | – | – | 8 | ||||||||||||||||||||||
Totaloff-balance sheet | 26 | 21 | – | 21 | 2 | 49 | ||||||||||||||||||||||
Total ECL | 176 | 246 | 38 | 284 | 691 | 1,151 | ||||||||||||||||||||||
| Coverage ratio(5) | % | % | % | % | % | % | ||||||||||||||||||||||
On-balance sheet | ||||||||||||||||||||||||||||
Retail Banking | 0.1 | 2.2 | 2.5 | 2.2 | 12.0 | 0.4 | ||||||||||||||||||||||
– of which mortgages | – | 1.3 | 1.6 | 1.3 | 6.1 | 0.2 | ||||||||||||||||||||||
Corporate & Commercial Banking | 0.2 | 3.0 | 11.3 | 3.9 | 45.2 | 1.2 | ||||||||||||||||||||||
Corporate & Investment Banking | 0.1 | – | – | – | 71.2 | 2.1 | ||||||||||||||||||||||
Corporate Centre | – | 1.2 | 5.3 | 1.9 | 40.0 | – | ||||||||||||||||||||||
Totalon-balance sheet | 0.1 | 2.2 | 3.1 | 2.3 | 23.2 | 0.4 | ||||||||||||||||||||||
Off-balance sheet | ||||||||||||||||||||||||||||
Retail Banking | 0.1 | 5.8 | – | 5.7 | 4.9 | 0.1 | ||||||||||||||||||||||
– of which mortgages | – | 1.6 | – | 1.6 | – | – | ||||||||||||||||||||||
Corporate & Commercial Banking | 0.1 | 3.8 | – | 3.6 | – | 0.3 | ||||||||||||||||||||||
Corporate & Investment Banking | 0.1 | – | – | – | – | 0.1 | ||||||||||||||||||||||
Totaloff-balance sheet | 0.1 | 4.3 | – | 4.2 | 2.6 | 0.1 | ||||||||||||||||||||||
Total coverage | 0.1 | 2.3 | 3.1 | 2.3 | 22.7 | 0.4 | ||||||||||||||||||||||
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31 December 20182019 compared to 1 January 2018 (unaudited)
Key movements in exposures and ECL in the year by Stage were:
| – | The increase in Stage 1 exposures was largely driven by |
| – | Stage 2 exposures marginally increased due to a single name CIB case moving onto our Watchlist and an update to our economics scenarios to reflect lower Commercial Property Index impacting corporate accounts, offset by a reduction in mortgages due to improved HPI economic scenarios. Stage 2 ECLs increased reflecting the |
| – | Stage 3 exposures |
| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
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 | Other business segments | Total | ||||||||||||||||||||||||||||||||||
| 2019 | Exposure £m | ECL £m | Coverage % | Exposure £m | ECL £m | Coverage % | Exposure £m | ECL £m | Coverage % | |||||||||||||||||||||||||||
PD deterioration | 6,844 | 194 | 2.8 | 1,998 | 25 | 1.3 | 8,842 | 219 | 2.5 | |||||||||||||||||||||||||||
Forbearance | 516 | 4 | 0.8 | 45 | 1 | 2.2 | 561 | 5 | 0.9 | |||||||||||||||||||||||||||
Other | 1,239 | 24 | 1.9 | 498 | 52 | 10.4 | 1,737 | 76 | 4.4 | |||||||||||||||||||||||||||
30 DPD | 1,054 | 46 | 4.4 | 160 | 2 | 1.3 | 1,214 | 48 | 4.0 | |||||||||||||||||||||||||||
| 9,653 | 268 | 2.8 | 2,701 | 80 | 3.0 | 12,354 | 348 | 2.8 | ||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||
PD deterioration | 7,854 | 196 | 2.5 | 655 | 15 | 2.3 | 8,509 | 211 | 2.5 | |||||||||||||||||||||||||||
Forbearance | 450 | 3 | 0.7 | 12 | 1 | 8.3 | 462 | 4 | 0.9 | |||||||||||||||||||||||||||
Other | 1,267 | 31 | 2.4 | 815 | 22 | 2.7 | 2,082 | 53 | 2.5 | |||||||||||||||||||||||||||
30 DPD | 949 | 39 | 4.1 | 11 | – | – | 960 | 39 | 4.1 | |||||||||||||||||||||||||||
| 10,520 | 269 | 2.6 | 1,493 | 38 | 2.5 | 12,013 | 307 | 2.6 | ||||||||||||||||||||||||||||
Where balances satisfy more than one of the criteria above for determining a significant increase in credit risk, 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.
| 2019 | 2018 | |||||||||||||||||||||||||
| Exposure £m | ECL £m | Coverage % | Exposure £m | ECL £m | Coverage % | |||||||||||||||||||||
Stage 2 not in cure period | 12,020 | 342 | 2.8 | 11,839 | 301 | 2.5 | ||||||||||||||||||||
Stage 2 in cure period (for transfer to Stage 1) | 334 | 6 | 1.8 | 174 | 6 | 3.4 | ||||||||||||||||||||
| 12,354 | 348 | 2.8 | 12,013 | 307 | 2.6 | |||||||||||||||||||||
2019 compared to 2018 (unaudited)
In 2019, total Stage 2 accounts triggered by PD deterioration increased slightly. This was due to an increase in ‘Other business segments’ mainly driven by single name cases entering Stage 2, which was partly offset by an improvement in Retail Banking led by Stage 2 mortgages.
We do not have any cure period criteria for exiting Stage 3.
Reconciliation of exposures, loss allowance and net carrying amounts
The table below shows the relationships between disclosures in this Credit risk review section which refer to drawn exposures and the associated ECL, and the total assets as presented in the Consolidated Balance Sheet.
| On-balance sheet | Off-balance sheet | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Exposures £m | Loss allowance £m | Net carrying £m | Exposures £m | Loss allowance £m | |||||||||||||||||||||||||||||||||||||||||
Retail Banking | 180,398 | 564 | 179,834 | 26,081 | 27 | |||||||||||||||||||||||||||||||||||||||||
– of which mortgages | 165,356 | 214 | 165,142 | 13,432 | 4 | |||||||||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 16,297 | 195 | 16,102 | 5,558 | 15 | |||||||||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 4,114 | 14 | 4,100 | 9,342 | 36 | |||||||||||||||||||||||||||||||||||||||||
Corporate Centre | 73,906 | 12 | 73,894 | 626 | – | |||||||||||||||||||||||||||||||||||||||||
Total exposures presented in Credit Quality tables | 274,715 | 785 | 273,930 | 41,607 | 78 | |||||||||||||||||||||||||||||||||||||||||
Other items(1) | 2,985 | |||||||||||||||||||||||||||||||||||||||||||||
Adjusted net carrying amount | 276,915 | |||||||||||||||||||||||||||||||||||||||||||||
Assets classified at FVTPL | 4,336 | |||||||||||||||||||||||||||||||||||||||||||||
Non–financial assets | 7,237 | |||||||||||||||||||||||||||||||||||||||||||||
Total assets per the Consolidated Balance Sheet | 288,488 | |||||||||||||||||||||||||||||||||||||||||||||
| On-balance sheet | Off-balance sheet | |||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Exposures £m | Loss allowance £m | Net carrying £m |
| Exposures £m | Loss allowance £m | ||||||||||||||||||||||||||||||||||||||||
Retail Banking | 172,747 | 568 | 172,179 | 23,058 | 26 | 172,747 | 568 | 172,179 | 23,058 | 26 | ||||||||||||||||||||||||||||||||||||
– of which mortgages | 157,957 | 234 | 157,723 | 11,213 | 3 | 157,957 | 234 | 157,723 | 11,213 | 3 | ||||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | 17,702 | 168 | 17,534 | 5,133 | 14 | 17,702 | 168 | 17,534 | 5,133 | 14 | ||||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | 29,255 | 2 | 29,253 | 13,005 | 16 | 4,613 | 2 | 4,611 | 13,005 | 16 | ||||||||||||||||||||||||||||||||||||
Corporate Centre | 49,517 | 13 | 49,504 | 531 | – | 74,159 | 13 | 74,146 | 531 | – | ||||||||||||||||||||||||||||||||||||
Total exposures presented in IFRS 9 Credit Quality tables | 269,221 | 751 | 268,470 | 41,727 | 56 | |||||||||||||||||||||||||||||||||||||||||
Total exposures presented in Credit Quality tables | 269,221 | 751 | 268,470 | 41,727 | 56 | |||||||||||||||||||||||||||||||||||||||||
Other items(1) | 2,501 | 2,501 | ||||||||||||||||||||||||||||||||||||||||||||
Adjusted net carrying amount | 270,971 | 270,971 | ||||||||||||||||||||||||||||||||||||||||||||
Assets classified at FVTPL | 11,458 | 11,458 | ||||||||||||||||||||||||||||||||||||||||||||
Non–financial assets | 6,952 | 6,952 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets per the Consolidated Balance Sheet at 31 December 2018 | 289,381 | |||||||||||||||||||||||||||||||||||||||||||||
Total assets per the Consolidated Balance Sheet | 289,381 | |||||||||||||||||||||||||||||||||||||||||||||
| (1) | These assets mainly relate to loans as part of a JV agreement and the accrued interest on them. They carry low credit risk and therefore have an immaterial ECL. |
| Santander UK Group Holdings plc | 95 |
Annual Report 2019| Risk review
Movement in total exposures and the corresponding ECL
The following table shows changes in total on andoff-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, duringin the year. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.
| Non-credit impaired | Credit impaired | |||||||||||||||||||||||||||||||||||||||
| Stage 1 Subject to 12-month ECL | Stage 2 Subject to lifetime ECL | Stage 3 Subject to lifetime ECL | Total | |||||||||||||||||||||||||||||||||||||
| Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | |||||||||||||||||||||||||||||||||
At 1 January 2018 | 285,133 | 176 | 12,110 | 284 | 3,043 | 691 | 300,286 | 1,151 | ||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 4 | – | (12 | ) | – | (8 | ) | – | (16 | ) | |||||||||||||||||||||||||||||
Changes to model | – | (1 | ) | – | 2 | – | (8 | ) | – | (7 | ) | |||||||||||||||||||||||||||||
Transfer to lifetime ECL (not–credit impaired)(3) | (4,190 | ) | (11 | ) | 4,190 | 11 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer to credit impaired(3) | (445 | ) | (8 | ) | (603 | ) | (23 | ) | 1,048 | 31 | – | – | ||||||||||||||||||||||||||||
Transfer to 12–month ECL((3) | 3,325 | 68 | (3,325 | ) | (68 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer from credit impaired(3) | 17 | 6 | 443 | 27 | (460 | ) | (33 | ) | – | – | ||||||||||||||||||||||||||||||
Transfers of financial instruments | (1,293 | ) | 55 | 705 | (53 | ) | 588 | (2 | ) | – | – | |||||||||||||||||||||||||||||
Net remeasurement of ECL on stage transfer(4) | – | (63 | ) | – | 83 | – | 79 | – | 99 | |||||||||||||||||||||||||||||||
New assets originated or purchased(5) | 85,933 | 43 | 1,087 | 34 | 19 | 13 | 87,039 | 90 | ||||||||||||||||||||||||||||||||
Other(6) | (19,867 | ) | (20 | ) | (295 | ) | (11 | ) | 52 | 170 | (20,110 | ) | 139 | |||||||||||||||||||||||||||
Assets derecognised – closed good(7) | (53,543 | ) | (51 | ) | (1,594 | ) | (20 | ) | (474 | ) | (44 | ) | (55,611 | ) | (115 | ) | ||||||||||||||||||||||||
Assets derecognised – written off(7) | – | – | – | – | (656 | ) | (534 | ) | (656 | ) | (534 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 296,363 | 143 | 12,013 | 307 | 2,572 | 357 | 310,948 | 807 | ||||||||||||||||||||||||||||||||
Net movement in the year | 11,230 | (33 | ) | (97 | ) | 23 | (471 | ) | (334 | ) | 10,662 | (344 | ) | |||||||||||||||||||||||||||
Income statement charge/(release) for the year | (33 | ) | 23 | 200 | 190 | |||||||||||||||||||||||||||||||||||
Recoveries net of collection costs | – | – | (36 | ) | (36 | ) | ||||||||||||||||||||||||||||||||||
Charge/(release) to the Income Statement | (33 | ) | 23 | 164 | 154 | |||||||||||||||||||||||||||||||||||
| Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||||||||||||
Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | |||||||||||||||||||||||||||||||
| At 1 January 2019 | 296,363 | 143 | 12,013 | 307 | 2,572 | 357 | 310,948 | 807 | ||||||||||||||||||||||||||||||
| Transfers from Stage 1 to Stage 2(3) | (4,101 | ) | (11 | ) | 4,101 | 11 | – | – | – | – | ||||||||||||||||||||||||||||
| Transfers from Stage 2 to Stage 1(3) | 3,458 | 74 | (3,458 | ) | (74 | ) | – | – | – | – | ||||||||||||||||||||||||||||
| Transfers to Stage 3(3) | (361 | ) | (2 | ) | (595 | ) | (24 | ) | 956 | 26 | – | – | ||||||||||||||||||||||||||
| Transfers from Stage 3(3) | 10 | 1 | 516 | 23 | (526 | ) | (24 | ) | – | – | ||||||||||||||||||||||||||||
| Transfers of financial instruments | (994 | ) | 62 | 564 | (64 | ) | 430 | 2 | – | – | ||||||||||||||||||||||||||||
| Net ECL remeasurement on stage transfer(4) | – | (66 | ) | – | 130 | – | 96 | – | 160 | |||||||||||||||||||||||||||||
| Change in economic scenarios(2) | – | 5 | – | (15 | ) | – | (9 | ) | – | (19) | ||||||||||||||||||||||||||||
| Changes to model | – | – | – | – | – | 13 | – | 13 | ||||||||||||||||||||||||||||||
| New lending and assets purchased(5) (8) | 42,415 | 29 | 827 | 32 | 15 | 9 | 43,257 | 70 | ||||||||||||||||||||||||||||||
| Other(6) | 4,195 | 6 | 295 | (14 | ) | 171 | 191 | 4,661 | 183 | |||||||||||||||||||||||||||||
| Redemptions and repayments(7) | (40,379 | ) | (32 | ) | (1,344 | ) | (28 | ) | (458 | ) | (42 | ) | (42,181 | ) | (102) | |||||||||||||||||||||||
| Assets written off(7) | (1 | ) | – | (1 | ) | – | (361 | ) | (249 | ) | (363 | ) | (249) | |||||||||||||||||||||||||
| At 31 December 2019 | 301,599 | 147 | 12,354 | 348 | 2,369 | 368 | 316,322 | 863 | ||||||||||||||||||||||||||||||
| Net movement in the year | 5,236 | 4 | 341 | 41 | (203 | ) | 11 | 5,374 | 56 | |||||||||||||||||||||||||||||
| ECL charge/(release) to the Income Statement | 4 | 41 | 260 | 305 | ||||||||||||||||||||||||||||||||||
| Less: ECL relating to derecognised income | – | – | (14 | ) | (14) | |||||||||||||||||||||||||||||||||
| Less: Recoveries net of collection costs | (10 | ) | (15 | ) | (46 | ) | (71) | |||||||||||||||||||||||||||||||
| Total ECL charge/(release) to the Income Statement | (6 | ) | 26 | 200 | 220 | |||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||
| At 1 January 2018 | 285,133 | 176 | 12,110 | 284 | 3,043 | 691 | 300,286 | 1,151 | ||||||||||||||||||||||||||||||
| Transfers from Stage 1 to Stage 2(3) | (4,190 | ) | (11 | ) | 4,190 | 11 | – | – | – | – | ||||||||||||||||||||||||||||
| Transfers from Stage 2 to Stage 1(3) | 3,325 | 68 | (3,325 | ) | (68 | ) | – | – | – | – | ||||||||||||||||||||||||||||
| Transfers to Stage 3(3) | (445 | ) | (8 | ) | (603 | ) | (23 | ) | 1,048 | 31 | – | – | ||||||||||||||||||||||||||
| Transfers from Stage 3(3) | 17 | 6 | 443 | 27 | (460 | ) | (33 | ) | – | – | ||||||||||||||||||||||||||||
| Transfers of financial instruments | (1,293 | ) | 55 | 705 | (53 | ) | 588 | (2 | ) | – | – | |||||||||||||||||||||||||||
| Net remeasurement of ECL on stage transfer(4) | – | (63 | ) | – | 83 | – | 79 | – | 99 | |||||||||||||||||||||||||||||
| Change in economic scenarios(2) | – | 4 | – | (12 | ) | – | (8 | ) | – | (16) | ||||||||||||||||||||||||||||
| Changes to model | – | (1 | ) | – | 2 | – | (8 | ) | – | (7) | ||||||||||||||||||||||||||||
| New lending and assets purchased(5) (8) | 57,280 | 43 | 1,084 | 34 | 17 | 12 | 58,381 | 89 | ||||||||||||||||||||||||||||||
| Other(6) | 11,021 | (27 | ) | (173 | ) | (16 | ) | 268 | 208 | 11,116 | 165 | |||||||||||||||||||||||||||
| Redemptions and repayments(7) | (55,778 | ) | (44 | ) | (1,713 | ) | (15 | ) | (688 | ) | (81 | ) | (58,179 | ) | (140) | |||||||||||||||||||||||
| Assets written off(7) | – | – | – | – | (656 | ) | (534 | ) | (656 | ) | (534) | |||||||||||||||||||||||||||
| At 31 December 2018 | 296,363 | 143 | 12,013 | 307 | 2,572 | 357 | 310,948 | 807 | ||||||||||||||||||||||||||||||
| Net movement in the year | 11,230 | (33 | ) | (97 | ) | 23 | (471 | ) | (334 | ) | 10,662 | (344) | ||||||||||||||||||||||||||
| ECL charge/(release) to the Income Statement | (33 | ) | 23 | 200 | 190 | |||||||||||||||||||||||||||||||||
| Less: Recoveries net of collection costs | – | – | (36 | ) | (36) | |||||||||||||||||||||||||||||||||
| Total credit impairment charge/(release) | (33 | ) | 23 | 164 | 154 | |||||||||||||||||||||||||||||||||
| (1) | Exposures that have attracted an ECL, and as reported in the |
| (2) | Changes to assumptions |
| (3) | Total impact of facilities that moved Stage(s) in the year. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the year. Transfers between |
| (4) | Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another. |
| (5) | Exposures and ECL |
| (6) | Residual movements on facilities that did not change Stage in the year, and which were neither acquired nor purchased in the year. Includes the impact of changes in risk parameters in |
| (7) | Exposures and ECL for facilities that existed at the start of the year, but not at the end. |
| (8) | Basis of preparation for this line item is changed to report new lending for corporate loans at the opening balance rather than the year-end closing balance and non-customer assets in Corporate Centre on a net basis rather than a gross basis. |
| 96 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
COUNTRY RISK EXPOSURES
We manage our country risk exposure under our global limits framework. Within this framework, we set our Risk Appetite for each country, taking into account factors that may affect its risk profile. These can include political events, macroeconomics and the nature of the risk. We actively manage exposures if we think we need to. We consider Banco Santander related risk separately.
The tables below show our total exposures, which are the total of balance sheet and off–balance sheet values. We calculate balance sheet values in accordance with IFRS (i.e. after netting allowed under IAS 32) except for credit provisions which we add back. Off–balance sheet values are undrawn facilities and letters of credit. We classify location by country of risk – the country where each client has its main business or assets. That is unless there is a full risk transfer guarantee in place, in which case we use the guarantor’s country of domicile. If a client has operations in many countries, we use their country of incorporation. The tables below exclude balances with other Banco Santander companies. We show them separately in the ‘Balances with other Banco Santander companies’ section.
| 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial institutions | Financial institutions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government guaranteed | Financial institutions | Government guaranteed | Financial institutions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Governments £bn | Government guaranteed £bn | Banks(1) £bn | Other £bn | Retail £bn | Corporate £bn | Total(2) £bn | Governments £bn | Government guaranteed £bn | Banks(1) £bn | Other £bn | Retail £bn | Corporate £bn | Total(2) £bn | Governments £bn | Banks(1) £bn | Other £bn | Retail £bn | Corporate £bn | Total(2) £bn | Governments £bn | Banks(1) £bn | Other £bn | Retail £bn | Corporate £bn | Total(2) £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Eurozone | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ireland | – | – | – | 12.3 | – | 0.4 | 12.7 | – | – | 0.2 | 1.1 | – | 0.8 | 2.1 | – | – | – | 7.5 | – | 0.1 | 7.6 | – | – | – | 12.3 | – | 0.4 | 12.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Italy | – | – | – | 0.1 | – | 0.2 | 0.3 | 0.4 | – | – | 0.1 | – | 0.1 | 0.6 | – | – | – | 0.1 | – | – | 0.1 | – | – | – | 0.1 | – | 0.2 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Spain (excl. Santander) | – | – | – | 0.2 | – | – | 0.2 | – | – | 0.3 | 0.1 | – | 0.1 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Portugal | – | – | – | – | – | – | – | – | – | 0.1 | – | – | – | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Spain | – | – | – | – | – | – | – | – | – | – | 0.2 | – | – | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
France | – | – | 1.0 | – | – | – | 1.0 | – | 0.3 | 2.0 | 0.2 | – | 2.2 | 4.7 | 0.1 | – | 0.6 | 0.5 | – | – | 1.2 | – | – | 1.0 | – | – | – | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Germany | – | – | 1.6 | – | – | – | 1.6 | – | – | 2.8 | – | – | 0.1 | 2.9 | – | – | 1.2 | 0.1 | – | 0.1 | 1.4 | – | – | 1.6 | – | – | – | 1.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Luxembourg | – | – | – | 0.9 | – | 0.2 | 1.1 | – | – | – | 1.3 | – | 0.4 | 1.7 | – | – | 0.1 | 2.7 | – | 0.1 | 2.9 | – | – | – | 0.9 | – | 0.2 | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other(3) | 0.3 | – | 1.2 | 0.2 | – | 1.1 | 2.8 | 0.3 | – | 1.1 | 0.2 | – | 1.4 | 3.0 | 0.3 | – | 1.1 | – | – | – | 1.4 | 0.3 | – | 1.2 | 0.2 | – | 1.1 | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.3 | – | 3.8 | 13.7 | – | 1.9 | 19.7 | 0.7 | 0.3 | 6.5 | 3.0 | – | 5.1 | 15.6 | 0.4 | – | 3.0 | 10.9 | – | 0.3 | 14.6 | 0.3 | – | 3.8 | 13.7 | – | 1.9 | 19.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other countries | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK | 32.1 | – | 4.3 | 16.3 | 194.2 | 37.5 | 284.4 | 44.7 | – | 9.1 | 13.0 | 191.3 | 42.9 | 301.0 | 33.5 | – | 3.6 | 15.6 | 204.6 | 38.2 | 295.5 | 32.1 | – | 4.3 | 16.3 | 194.2 | 37.5 | 284.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
US | 1.1 | – | 1.5 | 1.5 | – | 0.3 | 4.4 | 6.3 | 0.1 | 8.2 | 2.3 | – | 0.1 | 17.0 | 1.0 | – | 1.1 | 0.1 | – | 0.1 | 2.3 | 1.1 | – | 1.5 | 1.5 | – | 0.3 | 4.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan(4) | 3.8 | – | 2.6 | – | – | – | 6.4 | 3.0 | – | 2.6 | 0.2 | – | 0.8 | 6.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan | 2.3 | – | 1.6 | – | – | – | 3.9 | 3.8 | – | 2.6 | – | – | – | 6.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Switzerland | – | – | – | – | – | 0.1 | 0.1 | 0.2 | – | 0.2 | – | – | 0.2 | 0.6 | – | – | – | – | – | – | – | – | – | – | – | – | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Denmark | – | – | 0.2 | – | – | 0.5 | 0.7 | – | – | 0.1 | – | – | 0.4 | 0.5 | – | – | – | – | – | 0.5 | 0.5 | – | – | 0.2 | – | – | 0.5 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 0.1 | – | 1.9 | 0.4 | 0.3 | 1.0 | 3.7 | 0.1 | – | 2.3 | 0.9 | – | 1.9 | 5.2 | 0.1 | – | 0.5 | 0.1 | 0.3 | 0.8 | 1.8 | 0.1 | – | 1.9 | 0.4 | 0.3 | 1.0 | 3.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 37.1 | – | 10.5 | 18.2 | 194.5 | 39.4 | 299.7 | 54.3 | 0.1 | 22.5 | 16.4 | 191.3 | 46.3 | 330.9 | 36.9 | – | 6.8 | 15.8 | 204.9 | 39.6 | 304.0 | 37.1 | – | 10.5 | 18.2 | 194.5 | 39.4 | 299.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 37.4 | – | 14.3 | 31.9 | 194.5 | 41.3 | 319.4 | 55.0 | 0.4 | 29.0 | 19.4 | 191.3 | 51.4 | 346.5 | 37.3 | – | 9.8 | 26.7 | 204.9 | 39.9 | 318.6 | 37.4 | – | 14.3 | 31.9 | 194.5 | 41.3 | 319.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Excludes balances with central banks. |
| (2) | Excludes cash at hand, interests in other entities, intangible assets, property, plant and equipment, tax assets, retirement benefit assets and other assets. Loans are included gross of credit provisions. |
| (3) | Includes The Netherlands of |
|
2018 compared to 2017:
The increase in the Ireland exposure and the decrease in the US exposure are a result of ring-fencing.
Balances with other Banco Santander companies
We deal with other Banco Santander companies in the ordinary course of business. We do this where we have a particular business advantage or expertise and where they can offer us commercial opportunities. This is done on the same terms as for similar transactions with third parties. These transactions also arise where we support the activities of, or with, larger multinational corporate clients and financial institutions which may deal with other Banco Santander companies. We also dealt with Banco Santander SA as part of implementing our ring–fencing plans as described in Note 43 to the Consolidated Financial Statements.plans. We conduct these activities on the same terms as for similar transactions with third parties, and in a way that manages the credit risk within limits acceptable to the PRA.
At 31 December 20182019 and 2017,2018, we had gross balances with other Banco Santander companies as follows:
| 2018 | 2017 | |||||||||||||||||||||||||||||||||
| Financial institutions | Financial institutions | |||||||||||||||||||||||||||||||||
| Banks | Other | Corporate | Total | Banks | Other | Corporate | Total | |||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||
Spain | 2.7 | – | – | 2.7 | 4.4 | – | – | 4.4 | ||||||||||||||||||||||||||
UK | – | 2.0 | – | 2.0 | – | 1.3 | – | 1.3 | ||||||||||||||||||||||||||
| 2.7 | 2.0 | – | 4.7 | 4.4 | 1.3 | – | 5.7 | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||
Spain | 3.9 | 0.1 | – | 4.0 | 5.1 | 0.3 | 0.1 | 5.5 | ||||||||||||||||||||||||||
UK | – | 1.0 | – | 1.0 | 0.1 | 0.2 | 0.1 | 0.4 | ||||||||||||||||||||||||||
Uruguay | 0.2 | – | – | 0.2 | 0.1 | – | – | 0.1 | ||||||||||||||||||||||||||
Other <£100m | – | – | – | – | – | 0.1 | – | 0.1 | ||||||||||||||||||||||||||
| 4.1 | 1.1 | – | 5.2 | 5.3 | 0.6 | 0.2 | 6.1 | |||||||||||||||||||||||||||
We consider the dissolution of the eurozone and widespread redenomination of our euro–denominated assets and liabilities to be highly improbable. However, we have analysed the redenomination risk that might arise from an exit of a member state from the euro or a total dissolution of the euro and how that would be implemented. It is not possible to predict what the total financial impact on us might be. Determining which balances would be legally redenominated is complex and depends on a number of factors, including the precise exit scenario. This is because the effects on contracts of a disorderly exit or one sanctioned under EU law may differ. We monitor these risks and have taken steps to mitigate them.
| 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Financial institutions | Financial institutions | |||||||||||||||||||||||||||||||||
Banks £bn | Other £bn | Corporate £bn | Total £bn | Banks £bn | Other £bn | Corporate £bn | Total £bn | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||
Spain | 1.8 | – | – | 1.8 | 2.7 | – | – | 2.7 | ||||||||||||||||||||||||||
UK | – | 2.2 | – | 2.2 | – | 2.0 | – | 2.0 | ||||||||||||||||||||||||||
| 1.8 | 2.2 | – | 4.0 | 2.7 | 2.0 | – | 4.7 | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||
Spain | 2.4 | 0.1 | – | 2.5 | 3.9 | 0.1 | – | 4.0 | ||||||||||||||||||||||||||
UK | – | 1.2 | – | 1.2 | – | 1.0 | – | 1.0 | ||||||||||||||||||||||||||
Uruguay | 0.2 | – | – | 0.2 | 0.2 | – | – | 0.2 | ||||||||||||||||||||||||||
| 2.6 | 1.3 | – | 3.9 | 4.1 | 1.1 | – | 5.2 | |||||||||||||||||||||||||||
| Santander UK Group Holdings plc | 97 |
Annual Report 2019| Risk review |
Overview | ||||||
We offer a full range of retail products and services through our branches, the internet, digital devices and over the phone, as well as through intermediaries.
Retail Banking – credit risk management In this section, we explain how we manage and mitigate credit risk.
Retail Banking – credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance and portfolios of particular interest. Our main portfolios are: |
Residential mortgages– This is our largest portfolio. We lend to customers of good credit quality (prime lending). Most of our mortgages are for owner-occupied homes. We also have
Consumer (auto) finance and other unsecured lending– Consumer (auto) finance includes financing for cars, vans, motorbikes and caravans – so long as they are privately bought. Other unsecured lending includes personal loans, credit cards and bank account overdrafts.
| Business banking– This portfolio consists of small businesses with an annual turnover of up to £6.5m. |
The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branchesshort term markets business in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in 2018.Corporate & Investment Banking. See Note 2 for more information.
RETAIL BANKING – CREDIT RISK MANAGEMENT
 | For more on our approach to credit risk at a Santander UK group level See pages 78 to 86 |
In Retail Banking, our customers are individuals and small businesses. We have a high volume of customers and transactions and they share similar credit characteristics, such as their credit score or LTV. As a result, we manage our overall credit risk by looking at portfolios or groups of customers who share similar credit characteristics. Where we take this approach, we call them ‘standardised’ customers.
Exactly how we group customers into segments depends on the portfolio and the stage of the credit risk lifecycle. For example, we may segment customers at origination by their credit score. For accounts in arrears, we may segment them by how fast they improve or worsen. We regularly review each segment compared with our expectations for its performance, budget or limit.
1. Risk strategy and planning
For more on how we set our risk strategy and plans for Retail Banking, see the ‘Santander UK group level – credit risk management’ section.
2. Assessment and origination
We undertake a thorough risk assessment to make sure a customer can meet their obligations before we approve a credit application. We do this mainly by looking at affordability and the customer’s credit profile:
Affordability
We take proportionate steps to make sure that the customer will be able to make all the repayments on the loan over its full term. As part of this, we assess the risk that they will not pay us back. We do this by a series of initial affordability and credit risk assessments. If the loan is secured, we assess affordability by reviewing the customer’s income and spending, their other credit commitments, and what would happen if interest rates went up. During 2018, for Unsecured Personal LoansFor unsecured personal loans and Credit Cards the affordability review was enhanced to include the stressing ofcredit cards, we stress accommodation costs on a proportionate basis.basis as part of the affordability assessment. We regularly review the way we calculate affordability and refine it when we need to. This can be due to changes in regulations, the economy or our risk profile.
Credit profile
We look at each customer’s credit profile and signs of how reliable they are at repaying credit. When they apply, we use the data they give us, and:
| – | Credit policy: these are our rules and guidelines. We review them regularly to make sure our decisions are consistent and fair and align to the risk profile we want. For secured lending, we look at the property and the LTV as well as the borrower |
| – | Credit scores: based on statistics about the |
| – | Credit reference agencies: data from credit reference agencies about how the borrower has handled credit in the past |
| – | Other Santander accounts:we look at how the customer is using their other accounts with us. |
| 98 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
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How we make the decision
Many of our decisions are automated as our risk systems contain data about affordability and credit history. We tailor the process and how we assess the application based on the type of product being taken. More complex transactions often need greater manual assessment. This means we have to rely more on our credit underwriters’ skill and experience in making the decision. This is particularly true for secured lending, where we might need to do more checks on the customer’s income, or get a property valuation from an approved surveyor, for example.
Credit risk mitigation
The types of credit risk mitigation, including collateral, across each of our portfolios is:
| Portfolio | Description | |||
| Residential mortgages | Collateral is in the form of a first legal charge over the property. Before we grant a mortgage, we have the property valued. We have our own guidelines for surveyor valuations, which build on guidance from the Royal Institution of Chartered Surveyors (RICS). But we also make use of automated valuation methodologies where our confidence in the accuracy of this method is high. | |||
Unsecured lending means there is no collateral or security tied to the loan that can | pay us back. | |||
| Consumer (auto) finance | Collateral is in the form of legal ownership of the vehicle for most consumer (auto) finance loans, with the customer being the registered keeper. Only a very small proportion of the consumer (auto) finance business is underwritten as a personal loan. In these cases, there is no collateral or security tied to the loan. We use a leading vehicle valuation company to assess the LTV at the proposal stage. | |||
In addition, from time to time at a portfolio level we execute significant risk transfer transactions, which typically reduce RWAs. | ||||
| ||||
3. Monitoring
Our risk assessment does not end once we have made the decision to lend. We monitor credit risk across the credit risk lifecycle, mainly using IT systems. There are three main parts:
| – | Behaviour scoring: we use statistical models that help to predict whether the customer will have problems repaying, based on data about how they use their accounts |
| – | Credit reference agencies: we often use data from agencies on how the borrower is handling credit from other lenders in our behaviour scoring models. We also buy services like proprietary scorecards or account alerts, which tell us as soon as the customer does something that concerns us, such as missing a payment to another lender |
| – | Other Santander accounts: |
For secured lending, our monitoring also takes account of changes in property prices. We estimate the property’s current value every three months. WeIn most cases, we use statistical models based on recent sales prices and valuations in that local area. AUse of this model is subject to Model Risk Governance. Where a lack of data can mean our confidence inmeans the model’s valuation drops below a certain minimum level, and in that caseis not available, we use the original surveyor valuation with a House Price Index (HPI) instead.adjustment as appropriate.
The way we use our monitoring to manage risk varies by product. For revolving credit facilities like credit cards and overdrafts, it might lead us to raise or lower credit limits. Our monitoring can also mean we change our minds about whether a product is still right for a customer. This can influence whether we approve a refinancing application. In these ways we can balance a customer’s needs and their ability to manage credit. If we find evidence that a customer is in financial difficulties, we contact them about arrears management including forbearance, which we explain in more detail below.
Ourday-to-day retail credit risk monitoring relies on a mix of product, customer and portfolio performance measures as described above. However, changes in the wider UK macro-economy also have an impact on our retail portfolios. To reflect this, since 2017 we have used a Retail Risk Playbook tolerance framework to enhance ourday-to-day risk monitoring. This is a formal, structured framework that sets out the macroeconomic variables that are most relevant to retail portfolio performance. We monitor these variables against the related forecasts that we have used in our business plans. If the economy deviates materially from our forecasts, we will formally review and reconsider our retail risk management policy and strategy. This framework remains in place and will continue to do so for as long as we consider isit necessary.
4. Arrears management
We have several strategies for managing arrears and these can be used before the customer has formally defaulted, or as early as the day after a missed payment. We assess the problems a customer is having, so we can offer them the right help to bring their accountup-to-date up to date as soon as possible. The most common way to bring an accountup-to-date up to date is to agree an affordable repayment plan with the customer.
The strategy we use depends on the risk and the customer’s circumstances. We have a range of tools to help customers to reach an affordable and acceptable solution. This could mean visiting the customer or offering debt counselling by a third party, or paying off the debt using money from their other accounts with us, where we have the right to do so.party.
5. Debt recovery
When a customer cannot or will not keep to an agreement for paying off their arrears, we consider recovery options. We only do this once we have tried to get the account back in order. To recover what we are owed, we may use a debt collection agency, sell the debt, or take the customer to court.
For secured retail mortgage loans, (most of which are mortgages), we can delay legal action. That can happen if the customer shows that they will be able to pay off the loan or the arrears. We aim to repossess only as a last resort or, if necessary, to protect the property from damage or third partythird-party claims.
We make sure our estimated losses from repossessed properties are realistic by getting two independent valuations on each property, as well as the estimated cost of selling it. These form the basis of our loss allowances calculations. Where we do enforce the possession of properties held as collateral, we use external agents to realise the value and settle the debt. During this process we do not own the property, but we do administer the sale process. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with insolvency regulations.
| Santander UK Group Holdings plc | 99 |
Annual Report 2019| Risk review
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Loan modifications
Forbearance
If a customer lets us know they are having financial difficulty, we aim to come to an arrangement with them before they actually default. Their problems can be the result of losing their job, falling ill, a relationship breaking down, or the death of someone close to them.
Forbearance is mainly for mortgages and unsecured loans. We offer forbearance in line with our risk policies, and on acase-by-case basis to ensure we continue to lend responsibly and help customers be able to continue to afford their payments.
We may offer the following types of forbearance, but only if our assessments show the customer can meet the revised payments:
| Action | Description | |
| Capitalisation | We offer two main types, which are often combined with term extensions and, in the past, interest-only concessions: – If the customer cannot afford to increase their monthly payment enough to pay off their arrears in a reasonable time but has been making their monthly payments (usually for at least six months), then we can add the arrears to the mortgage balance. – We can also add to the mortgage balance at the time of forbearance unpaid property charges which are due to a landlord and which we pay on behalf of the customer to avoid the lease being forfeited. | |
| Term extension | We can extend the term of the loan, making each monthly payment smaller. At a minimum, we expect the customer to pay the interest in the short-term and have a realistic chance of repaying the full balance in the long-term. We may offer this option if the customer is | |
Customers with interest-only mortgages have to make arrangements to repay the principal at the end of the mortgage. If customers know they will not be able to repay their mortgage in full when it ends, or if their mortgage has already passed the date when it should have ended, we talk to them, and if we think it is in the customer’s interests (and they can afford it) we look at other ways of managing it, such as term extensions. | ||
| Interest-only | In the past, if it was not possible or affordable for a customer to have a term extension, we may have agreed to let them pay only the interest on the loan for a short time – usually less than a year. We only agreed to this where we believed their financial problems were temporary and they were likely to recover. Since March 2015 we no longer provide this option. Instead, interest-only is only offered as a short-term standard collections arrangement. We now record any related shortfall in monthly payments as arrears and report them to the credit reference agencies. As a result, we no longer classify new interest-only arrangements agreed since March 2015 as forbearance. We continue to manage and report all interest-only arrangements offered before this date as forbearance. | |
| ||
Other modifications
Apart from forbearance, we have sometimes changed the contract terms to keep a good relationship with a customer. These customers showed no signs of financial difficulties at the time, so we do not classify the contract changes as forbearance, and most of the loans were repaid without any problems. We do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines on the treatment of customers in insolvency or bankruptcy.
Risk measurement and control
Retail Banking involves managing large numbers of accounts, so it produces a huge amount of data. This allows us to take a more analytical and data intense approach to measuring risk. This is reflected in the wide range of statistical models we use across the credit risk lifecycle. We use:
| – | Risk strategy and planning: econometric models |
| – | Assessment and origination:application scorecards, and attrition, pricing, loss allowance and capital models |
| – | Monitoring: behavioural scorecards and profitability models |
| – | Arrears management:models to estimate the proportion of cases that will result in possession (known as roll rates) |
| – | Debt recovery: recovery models. |
We assess and review our loss allowances regularly and have them independently reviewed. We look at a number of factors, including the cash flow available to service debt. We also use an agency to value any collateral – mainly mortgages.
| 100 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
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RETAIL BANKING – CREDIT RISK REVIEW
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.year. The footnotes to the Santander UK group level table on page 8396 also apply to this table.
| Non-credit impaired | Credit impaired | |||||||||||||||||||||||||||||||||
| Stage 1 Subject to 12-month ECL | Stage 2 Subject to lifetime ECL | Stage 3 Subject to lifetime ECL | Total | |||||||||||||||||||||||||||||||
| Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | |||||||||||||||||||||||||||
At 1 January 2018 | 178,978 | 110 | 10,885 | 247 | 2,263 | 268 | 192,126 | 625 | ||||||||||||||||||||||||||
Change in economic scenarios(2) | – | (1 | ) | – | (9 | ) | – | (8 | ) | – | (18 | ) | ||||||||||||||||||||||
Changes to model | – | (1 | ) | – | 2 | – | 1 | – | 2 | |||||||||||||||||||||||||
Transfer to lifetime ECL(not-credit impaired)(3) | (3,407 | ) | (7 | ) | 3,407 | 7 | – | – | – | – | ||||||||||||||||||||||||
Transfer to credit impaired(3) | (403 | ) | (7 | ) | (569 | ) | (22 | ) | 972 | 29 | – | – | ||||||||||||||||||||||
Transfer to12-month ECL(3) | 2,992 | 58 | (2,992 | ) | (58 | ) | – | – | – | – | ||||||||||||||||||||||||
Transfer from credit impaired(3) | 15 | 5 | 438 | 26 | (453 | ) | (31 | ) | – | – | ||||||||||||||||||||||||
Transfers of financial instruments | (803 | ) | 49 | 284 | (47 | ) | 519 | (2 | ) | – | – | |||||||||||||||||||||||
Net remeasurement of ECL on stage transfer(4) | – | (54 | ) | – | 73 | – | 60 | – | 79 | |||||||||||||||||||||||||
New assets originated or purchased(5) | 33,366 | 26 | 670 | 26 | 15 | 11 | 34,051 | 63 | ||||||||||||||||||||||||||
Other(6) | (8,253 | ) | (15 | ) | (312 | ) | (10 | ) | 97 | 104 | (8,468 | ) | 79 | |||||||||||||||||||||
Assets derecognised – closed good(7) | (20,257 | ) | (18 | ) | (1,007 | ) | (13 | ) | (390 | ) | (23 | ) | (21,654 | ) | (54 | ) | ||||||||||||||||||
Assets derecognised – written off(7) | – | – | – | – | (250 | ) | (182 | ) | (250 | ) | (182 | ) | ||||||||||||||||||||||
At 31 December 2018 | 183,031 | 96 | 10,520 | 269 | 2,254 | 229 | 195,805 | 594 | ||||||||||||||||||||||||||
Net movement in the year | 4,053 | (14 | ) | (365 | ) | 22 | (9 | ) | (39 | ) | 3,679 | (31 | ) | |||||||||||||||||||||
Charge/(release) to the Income Statement | (14 | ) | 22 | 143 | 151 | |||||||||||||||||||||||||||||
Recoveries net of collection costs | – | – | (27 | ) | (27 | ) | ||||||||||||||||||||||||||||
Income Statement charge/(release) for the year | (14 | ) | 22 | 116 | 124 | |||||||||||||||||||||||||||||
| Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||||||
Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | |||||||||||||||||||||||||
At 1 January 2019 | 183,031 | 96 | 10,520 | 269 | 2,254 | 229 | 195,805 | 594 | ||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (3,132 | ) | (8 | ) | 3,132 | 8 | – | – | – | – | ||||||||||||||||||||||
Transfers from Stage 2 to Stage 1(3) | 3,289 | 69 | (3,289 | ) | (69 | ) | – | – | – | – | ||||||||||||||||||||||
Transfers to Stage 3(3) | (322 | ) | (2 | ) | (500 | ) | (20 | ) | 822 | 22 | – | – | ||||||||||||||||||||
Transfers from Stage 3(3) | 11 | 1 | 509 | 23 | (520 | ) | (24 | ) | – | – | ||||||||||||||||||||||
Transfers of financial instruments | (154 | ) | 60 | (148 | ) | (58 | ) | 302 | (2 | ) | – | – | ||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (61 | ) | – | 76 | – | 63 | – | 78 | |||||||||||||||||||||||
Change in economic scenarios(2) | – | (3 | ) | – | (24 | ) | – | (9 | ) | – | (36 | ) | ||||||||||||||||||||
Changes to model | – | – | – | – | – | 13 | – | 13 | ||||||||||||||||||||||||
New lending and assets purchased(5) | 37,230 | 23 | 479 | 27 | 14 | 9 | 37,723 | 59 | ||||||||||||||||||||||||
Other(6) | 2,670 | 6 | 68 | (2 | ) | 128 | 162 | 2,866 | 166 | |||||||||||||||||||||||
Redemptions and repayments(7) | (27,924 | ) | (23 | ) | (1,265 | ) | (20 | ) | (449 | ) | (34 | ) | (29,638 | ) | (77 | ) | ||||||||||||||||
Assets written off(7) | (1 | ) | – | (1 | ) | – | (275 | ) | (206 | ) | (277 | ) | (206 | ) | ||||||||||||||||||
At 31 December 2019 | 194,852 | 98 | 9,653 | 268 | 1,974 | 225 | 206,479 | 591 | ||||||||||||||||||||||||
Net movement in the year | 11,821 | 2 | (867 | ) | (1 | ) | (280 | ) | (4 | ) | 10,674 | (3 | ) | |||||||||||||||||||
ECL charge/(release) to the Income Statement | 2 | (1 | ) | 202 | 203 | |||||||||||||||||||||||||||
Less: ECL relating to derecognised income | – | – | (9 | ) | (9 | ) | ||||||||||||||||||||||||||
Less: Recoveries net of collection costs | (2 | ) | – | (32 | ) | (34 | ) | |||||||||||||||||||||||||
Income statement charge/(release) for the year | – | (1 | ) | 161 | 160 | |||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 178,978 | 110 | 10,885 | 247 | 2,263 | 268 | 192,126 | 625 | ||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (3,407 | ) | (7 | ) | 3,407 | 7 | – | – | – | – | ||||||||||||||||||||||
Transfers from Stage 2 to Stage 1(3) | 2,992 | 58 | (2,992 | ) | (58 | ) | – | – | – | – | ||||||||||||||||||||||
Transfers to Stage 3(3) | (403 | ) | (7 | ) | (569 | ) | (22 | ) | 972 | 29 | – | – | ||||||||||||||||||||
Transfers from Stage 3(3) | 15 | 5 | 438 | 26 | (453 | ) | (31 | ) | – | – | ||||||||||||||||||||||
Transfers of financial instruments | (803 | ) | 49 | 284 | (47 | ) | 519 | (2 | ) | – | – | |||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (54 | ) | – | 73 | – | 60 | – | 79 | |||||||||||||||||||||||
Change in economic scenarios(2) | – | (1 | ) | – | (9 | ) | – | (8 | ) | – | (18 | ) | ||||||||||||||||||||
Changes to model | – | (1 | ) | – | 2 | – | 1 | – | 2 | |||||||||||||||||||||||
New lending and assets purchased(5) | 33,366 | 26 | 670 | 26 | 15 | 11 | 34,051 | 63 | ||||||||||||||||||||||||
Other(6) | (27 | ) | (19 | ) | (125 | ) | (14 | ) | 143 | 100 | (9 | ) | 67 | |||||||||||||||||||
Redemptions and repayments(7) | (28,483 | ) | (14 | ) | (1,194 | ) | (9 | ) | (436 | ) | (19 | ) | (30,113 | ) | (42 | ) | ||||||||||||||||
Assets written off(7) | – | – | – | – | (250 | ) | (182 | ) | (250 | ) | (182 | ) | ||||||||||||||||||||
At 31 December 2018 | 183,031 | 96 | 10,520 | 269 | 2,254 | 229 | 195,805 | 594 | ||||||||||||||||||||||||
Net movement in the year | 4,053 | (14 | ) | (365 | ) | 22 | (9 | ) | (39 | ) | 3,679 | (31 | ) | |||||||||||||||||||
ECL charge/(release) to the Income Statement | (14 | ) | 22 | 143 | 151 | |||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | (27 | ) | (27 | ) | ||||||||||||||||||||||||||
Income statement charge/(release) for the year | (14 | ) | 22 | 116 | 124 | |||||||||||||||||||||||||||
| (1) | Exposures that have attracted an ECL, and as reported in the Credit Quality table above. |
| (2) | Changes to assumptions from the start of the year to the end of the year. Includes changes to the economic variables for each scenario, changes to the scenarios themselves as well as changes in the probability weightings. Also includes changes in risk parameters and model changes. |
| (3) | Total impact of facilities that moved stage(s) in the year. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the year. Transfers from each stage are based on opening balances, and transfers in are based on closing balances, giving rise to a net movement on transfer. |
| (4) | Relates to the revaluation of ECL following the transfer of an exposure from one stage to another. |
| (5) | Exposures and ECL at reporting date of facilities that did not exist at the start of the year, but did at the end. Amounts in Stage 2 and 3 represent assets which have deteriorated during the year subsequent to origination in Stage 1. |
| (6) | Residual movements on facilities that did not change stage in the year, and which were neither acquired nor purchased in the year. |
| (7) | Exposures and ECL for facilities that existed at the start of the year, but not at the end. |
| Santander UK Group Holdings plc | 101 |
Annual Report 2019| Risk review
RESIDENTIAL MORTGAGES
We offer mortgages to people who want to buy a property and offer additional borrowing (known as further advances) to existing mortgage customers. The property must be in the UK, except for a small number of loans in the Isle of Man and Jersey.
20182019 compared to 20172018 (unaudited)
Credit risk is at very low levels historically. The benign credit environment has supported our customers and helped to reduce credit risk. From our experience we know that unemployment is one of the most important factors in defaults on mortgages, our biggest loan book. Whilst the UK market continues to show resilience, we are cautious on the outlook in light of recent economic uncertainty. Mortgage lending increased £3.3bn£7.4bn net mortgage growth in 2018 (2017: £0.6bn), through2019 (2018: £3.3bn) was our strongest for a combination of well positioned service and product pricing, as well as our ongoingdecade, with a focus on pricing, customer retention. Mortgage gross lending was £28.8bn (2017: £25.5bn)retention and 78% of mortgages reaching the end of their incentive period were retained.service.
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 externalnew customers who are remortgagingtaking a new mortgage with us.
| Stock | New business | Stock | New business | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | % | £m | % | £m | % | £m | % | £m | % | £m | % | £m | % | £m | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home movers | 69,198 | 44 | 68,752 | 44 | 10,854 | 39 | 10,704 | 44 | 70,860 | 43 | 69,198 | 44 | 11,192 | 38 | 10,854 | 39 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Remortgagers | 51,272 | 32 | 50,424 | 33 | 9,237 | 34 | 8,065 | 33 | 52,480 | 32 | 51,272 | 32 | 9,197 | 31 | 9,237 | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
First-time buyers | 29,235 | 19 | 28,704 | 19 | 4,848 | 18 | 4,034 | 17 | 32,112 | 19 | 29,235 | 19 | 6,952 | 23 | 4,848 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Buy-to-let | 8,252 | 5 | 6,802 | 4 | 2,335 | 9 | 1,371 | 6 | 9,904 | 6 | 8,252 | 5 | 2,473 | 8 | 2,335 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 157,957 | 100 | 154,682 | 100 | 27,274 | 100 | 24,174 | 100 | 165,356 | 100 | 157,957 | 100 | 29,814 | 100 | 27,274 | 100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In addition toAs well as the new business included in the table above, there were £27.2bn (2017: £26.0bn)£31.6bn (2018: £27.2bn) of internal remortgages where we keptmoved existing customers with maturing products ononto new mortgages. We also provided £1.5bn (2017: £1.3bn)£1.3bn (2018: £1.5bn) of further advances and flexible mortgage drawdowns.
20182019 compared to 20172018 (unaudited)
The mortgage borrower mixprofile of stock remained broadly unchanged, reflecting underlying stabilityunchanged. The change in target market segments,borrower profile of new business reflected product pricinginitiatives designed to help first-time buyers and distribution strategy. Wechanges to credit policy in 2019 to increase the maximum loan term from 35 to 40 years. In 2019, we helped 27,200 (2017: 24,000) first-time buyers purchase their new home with £4.8bn£7.0bn of gross lending (2017: £4.0bn)(2018: £4.8bn).
|
Interest rate profile
The interest rate profile of our mortgage asset stock was:
| 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| £m | % | £m | % | £m | % | £m | % | |||||||||||||||||||||||||||||||||
Fixed rate | 115,178 | 73 | 102,036 | 66 | 128,798 | 78 | 115,178 | 73 | ||||||||||||||||||||||||||||||||
Variable rate | 24,396 | 15 | 29,370 | 19 | 22,116 | 13 | 24,396 | 15 | ||||||||||||||||||||||||||||||||
Standard Variable Rate (SVR) | 18,383 | 12 | 23,276 | 15 | 14,442 | 9 | 18,383 | 12 | ||||||||||||||||||||||||||||||||
| 157,957 | 100 | 154,682 | 100 | 165,356 | 100 | 157,957 | 100 | |||||||||||||||||||||||||||||||||
20182019 compared to 20172018 (unaudited)
The SVR balances, which includes balances relating to our Follow-on-Rate product, declined by £4.9bn (2017: £5.5bn). We continueIn 2019, we continued to see increased customer refinancing from SVR products into fixed rate products influenced by low mortgage rates and the competitive mortgage market.
Geographical distribution
The geographical distribution of our mortgage asset stock was:
| Stock | New business | Stock | New business | |||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
| UK region | £bn | £bn | £bn | £bn | ||||||||||||||||||||||||||||||||||||
| Region | 2019 £bn | 2018 £bn | 2019 £bn | 2018 £bn | ||||||||||||||||||||||||||||||||||||
London | 39.0 | 37.6 | 7.1 | 5.8 | 41.4 | 39.0 | 7.5 | 7.1 | ||||||||||||||||||||||||||||||||
Midlands and East Anglia | 21.1 | 20.6 | 3.8 | 3.4 | 22.1 | 21.1 | 4.3 | 3.8 | ||||||||||||||||||||||||||||||||
North | 22.2 | 22.2 | 3.4 | 3.0 | 22.7 | 22.2 | 3.8 | 3.4 | ||||||||||||||||||||||||||||||||
Northern Ireland | 3.4 | 3.6 | 0.2 | 0.2 | 3.3 | 3.4 | 0.3 | 0.2 | ||||||||||||||||||||||||||||||||
Scotland | 6.7 | 6.8 | 1.0 | 1.0 | 6.8 | 6.7 | 1.2 | 1.0 | ||||||||||||||||||||||||||||||||
South East excluding London | 48.7 | 47.2 | 9.0 | 8.2 | 51.7 | 48.7 | 9.7 | 9.0 | ||||||||||||||||||||||||||||||||
South West, Wales and other | 16.9 | 16.7 | 2.8 | 2.6 | 17.4 | 16.9 | 3.0 | 2.8 | ||||||||||||||||||||||||||||||||
| 158.0 | 154.7 | 27.3 | 24.2 | 165.4 | 158.0 | 29.8 | 27.3 | |||||||||||||||||||||||||||||||||
| Average loan size for new business | £’000 | £’000 | £’000 | £’000 | ||||||||||||||||||||||||||||||||||||
South East including London | 270 | 260 | 277 | 270 | ||||||||||||||||||||||||||||||||||||
Rest of the UK | 150 | 146 | 154 | 150 | ||||||||||||||||||||||||||||||||||||
UK as a whole | 203 | 196 | 207 | 203 | ||||||||||||||||||||||||||||||||||||
20182019 compared to 20172018 (unaudited)
The geographical distribution of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East, in line with the distribution of the population across the UK.East. Theloan-to-income multiple of mortgage lending during the year, representing average earnings of new business at inception, was 3.24 (2017: 3.16)3.27 (2018: 3.24).
| 102 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk |
Larger loans
The mortgage asset stock of larger loans was:
| South East including London | UK | |||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | South East including London | UK | |||||||||||||||||||||||||||||||||||
| Individual mortgage loan size | £m | £m | £m | £m | 2019 £m | 2018 £m | 2019 £m | 2018 £m | ||||||||||||||||||||||||||||||||
<£0.25m | 45,851 | 46,766 | 105,181 | 106,838 | 45,828 | 45,851 | 105,855 | 105,181 | ||||||||||||||||||||||||||||||||
£0.25m to £0.50m | 30,488 | 27,562 | 39,841 | 36,036 | 34,027 | 30,488 | 44,549 | 39,841 | ||||||||||||||||||||||||||||||||
£0.50m to £1.0m | 10,103 | 9,214 | 11,551 | 10,532 | 11,471 | 10,103 | 13,114 | 11,551 | ||||||||||||||||||||||||||||||||
£1.0m to £2.0m | 1,168 | 1,046 | 1,236 | 1,111 | 1,538 | 1,168 | 1,644 | 1,236 | ||||||||||||||||||||||||||||||||
>£2.0m | 146 | 163 | 148 | 165 | 186 | 146 | 194 | 148 | ||||||||||||||||||||||||||||||||
| 87,756 | 84,751 | 157,957 | 154,682 | 93,050 | 87,756 | 165,356 | 157,957 | |||||||||||||||||||||||||||||||||
At 31 December 2018,2019, there were 57 (2017: 64)76 (2018: 57) individual mortgages greater thanover £2.0m. In 2018,2019, there were 9 (2017: 13)32 (2018: 9) new mortgages over £2.0m.
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, NPLStage 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.
| 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Of which: | Of which: | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock | NPL stock | New business | Stock | NPL stock | New business | Stock | Stage 3 | New | Stock | Stage 3 | New | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LTV | % | % | % | % | % | % | Total £m | ECL £m | Total £m | ECL £m | business £m | Total £m | ECL £m | Total £m | ECL £m | business £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Up to 50% | 45 | 43 | 20 | 49 | 44 | 19 | 70,714 | 24 | 743 | 11 | 5,113 | 72,613 | 25 | 872 | 11 | 5,124 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>50-75% | 41 | 35 | 41 | 39 | 34 | 43 | 67,311 | 65 | 626 | 24 | 11,876 | 63,505 | 67 | 698 | 24 | 11,512 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>75- 85% | 9 | 8 | 22 | 7 | 8 | 19 | 17,436 | 31 | 136 | 13 | 6,130 | 14,191 | 32 | 156 | 13 | 5,955 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>85-100% | 4 | 7 | 17 | 4 | 7 | 19 | 9,011 | 34 | 110 | 17 | 6,650 | 6,508 | 36 | 125 | 16 | 4,648 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>100% | 1 | 7 | – | 1 | 7 | – | 884 | 64 | 107 | 38 | 45 | 1,140 | 77 | 131 | 42 | 35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 100 | 100 | 100 | 100 | 100 | 100 | 165,356 | 218 | 1,722 | 103 | 29,814 | 157,957 | 237 | 1,982 | 106 | 27,274 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateral value of residential properties(1) | £ | 157,787m | £ | 1,850m | £ | 27,274m | £ | 154,459m | £ | 1,823m | £ | 24,174m | 165,229 | 1,702 | 29,813 | 157,787 | 1,850 | 27,274 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % | % | % | % | % | % | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Simple average(2)LTV (indexed) | 42 | 43 | 63 | 42 | 44 | 62 | 43 | 42 | 65 | 42 | 43 | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation weighted average(3)LTV (indexed) | 39 | 38 | 59 | 38 | 38 | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Collateral value shown is limited to the balance of each |
| (2) | Total of all LTV% divided by the total of all accounts. |
|
At 31 December 2018,2019, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances reduced to £170m (2017: £223m)£127m (2018: £170m).
In 2019, the simple average LTV of mortgage total new lending in London was 61% (2018: 58%).
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
Credit performance
2018 £m | 2017 £m | |||||||
Mortgage loans and advances to customers of which: | 157,957 | 154,682 | ||||||
– Stage 1 | 146,619 | |||||||
– Stage 2 | 9,356 | |||||||
– Stage 3 | 1,982 | |||||||
Performing(1) | 151,688 | |||||||
Early arrears: | 1,126 | |||||||
– 31 to 60 days | 700 | |||||||
– 61 to 90 days | 426 | |||||||
NPLs:(2) | 1,907 | 1,868 | ||||||
– By arrears | 1,392 | 1,427 | ||||||
– By bankruptcy | 18 | 14 | ||||||
– By maturity default | 392 | 303 | ||||||
– By forbearance | 80 | 95 | ||||||
– By properties in possession (PIPs) | 25 | 29 | ||||||
Loss allowances(3) | 234 | 225 | ||||||
Stage 2 ratio | 5.92% | |||||||
Stage 3 ratio | 1.25% | |||||||
Early arrears ratio(4) | 0.73% | |||||||
NPL ratio(5) | 1.21% | 1.21% | ||||||
2019 £m | 2018 £m | |||||||
Mortgage loans and advances to customers of which: | 165,356 | 157,957 | ||||||
– Stage 1 | 155,477 | 146,619 | ||||||
– Stage 2 | 8,157 | 9,356 | ||||||
– Stage 3 | 1,722 | 1,982 | ||||||
Loss allowances(3) | 218 | 234 | ||||||
| % | % | |||||||
Stage 1 ratio(1) | 94.03 | 92.82 | ||||||
Stage 2 ratio(1) | 4.93 | 5.92 | ||||||
Stage 3 ratio(2) | 1.05 | 1.27 | ||||||
| (1) |
|
| (2) |
|
| (3) |
|
|
|
Movement in total exposures and the corresponding ECL
The following table shows changes in total on andoff-balance sheet exposures subject to ECL assessment, and the corresponding ECL, for residential mortgages in the period.year. The footnotes to the Santander UK group level analysis on page 8396 are also applicable to this table.
| Non-credit impaired | Credit impaired | |||||||||||||||||||||||||||||||||||||||
| Stage 1 Subject to 12-month ECL | Stage 2 Subject to lifetime ECL | Stage 3 Subject to lifetime ECL | ||||||||||||||||||||||||||||||||||||||
| Mortgages | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 155,155 | 20 | 9,884 | 131 | 2,004 | 121 | 167,043 | 272 | ||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | (6 | ) | – | (7 | ) | – | (8 | ) | – | (21 | ) | ||||||||||||||||||||||||||||
Changes to model | – | – | – | 2 | – | 2 | – | 4 | ||||||||||||||||||||||||||||||||
Transfer to lifetime ECL(not-credit impaired)(3) | (2,941 | ) | (1 | ) | 2,941 | 1 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer to credit impaired(3) | (329 | ) | (6 | ) | (512 | ) | (12 | ) | 841 | 18 | – | – | ||||||||||||||||||||||||||||
Transfer to12-month ECL(3) | 2,628 | 21 | (2,628 | ) | (21 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer from credit impaired(3) | 4 | – | 405 | 14 | (409 | ) | (14 | ) | – | – | ||||||||||||||||||||||||||||||
Transfers of financial instruments | (638 | ) | 14 | 206 | (18 | ) | 432 | 4 | – | – | ||||||||||||||||||||||||||||||
Net remeasurement of ECL on stage transfer(4) | – | (20 | ) | – | 20 | – | 14 | – | 14 | |||||||||||||||||||||||||||||||
New assets originated or purchased(5) | 28,330 | 2 | 446 | 5 | 3 | 1 | 28,779 | 8 | ||||||||||||||||||||||||||||||||
Other(6) | (7,327 | ) | 6 | (244 | ) | (4 | ) | (36 | ) | 3 | (7,607 | ) | 5 | |||||||||||||||||||||||||||
Assets derecognised – closed good(7) | (17,781 | ) | (4 | ) | (860 | ) | (10 | ) | (327 | ) | (13 | ) | (18,968 | ) | (27 | ) | ||||||||||||||||||||||||
Assets derecognised – written off(7) | – | – | – | – | (77 | ) | (18 | ) | (77 | ) | (18 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 157,739 | 12 | 9,432 | 119 | 1,999 | 106 | 169,170 | 237 | ||||||||||||||||||||||||||||||||
Net movement in the year | 2,584 | (8 | ) | (452 | ) | (12 | ) | (5 | ) | (15 | ) | 2,127 | (35 | ) | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||
Charge/(release) to the Income Statement | (8 | ) | (12 | ) | 3 | (17 | ) | |||||||||||||||||||||||||||||||||
Recoveries net of collection costs | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||
Income Statement charge/(release) for the year | (8 | ) | (12 | ) | (1 | ) | (21 | ) | ||||||||||||||||||||||||||||||||
| Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgages | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | ||||||||||||||||||||||||||||||||||||
At 1 January 2019 | 157,739 | 12 | 9,432 | 119 | 1,999 | 106 | 169,170 | 237 | ||||||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (2,345 | ) | (1 | ) | 2,345 | 1 | – | – | – | – | ||||||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1((3) | 2,921 | 24 | (2,921 | ) | (24 | ) | – | – | – | – | ||||||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | (231 | ) | – | (429 | ) | (8 | ) | 660 | 8 | – | – | |||||||||||||||||||||||||||||||||
Transfers from Stage 3(3) | 5 | (1 | ) | 485 | 16 | (490 | ) | (15 | ) | – | – | |||||||||||||||||||||||||||||||||
Transfers of financial instruments | 350 | 22 | (520 | ) | (15 | ) | 170 | (7 | ) | – | – | |||||||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (23 | ) | – | 16 | – | 12 | – | 5 | |||||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | (5 | ) | – | (22 | ) | – | (9 | ) | – | (36 | ) | ||||||||||||||||||||||||||||||||
Changes to model | – | – | – | – | – | 13 | – | 13 | ||||||||||||||||||||||||||||||||||||
New lending and assets purchased(5) | 31,090 | 5 | 198 | 3 | 2 | – | 31,290 | 8 | ||||||||||||||||||||||||||||||||||||
Other(6) | 2,090 | 4 | 153 | 6 | 31 | 14 | 2,274 | 24 | ||||||||||||||||||||||||||||||||||||
Redemptions and repayments(7) | (22,439 | ) | (1 | ) | (1,039 | ) | (6 | ) | (396 | ) | (12 | ) | (23,874 | ) | (19 | ) | ||||||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (72 | ) | (14 | ) | (72 | ) | (14 | ) | ||||||||||||||||||||||||||||||||
At 31 December 2019 | 168,830 | 14 | 8,224 | 101 | 1,734 | 103 | 178,788 | 218 | ||||||||||||||||||||||||||||||||||||
Net movement in the year | 11,091 | 2 | (1,208 | ) | (18 | ) | (265 | ) | (3 | ) | 9,618 | (19 | ) | |||||||||||||||||||||||||||||||
Charge/(release) to the Income Statement | 2 | (17 | ) | 11 | (4 | ) | ||||||||||||||||||||||||||||||||||||||
Less: ECL relating to derecognised income | – | – | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | 2 | (17 | ) | 7 | (8 | ) | ||||||||||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2018 | 155,155 | 20 | 9,884 | 131 | 2,004 | 121 | 167,043 | 272 | ||||||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (2,941 | ) | (1 | ) | 2,941 | 1 | – | – | – | – | ||||||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1((3) | (329 | ) | (6 | ) | (512 | ) | (12 | ) | 841 | 18 | – | – | ||||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | 2,628 | 21 | (2,628 | ) | (21 | ) | – | – | – | – | ||||||||||||||||||||||||||||||||||
Transfers from Stage 3(3) | 4 | – | 405 | 14 | (409 | ) | (14 | ) | – | – | ||||||||||||||||||||||||||||||||||
Transfers of financial instruments | (638 | ) | 14 | 206 | (18 | ) | 432 | 4 | – | – | ||||||||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (20 | ) | – | 20 | – | 14 | – | 14 | |||||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | (6 | ) | – | (7 | ) | – | (8 | ) | – | (21 | ) | ||||||||||||||||||||||||||||||||
Changes to model | – | – | – | 2 | – | 2 | – | 4 | ||||||||||||||||||||||||||||||||||||
New lending and assets purchased(5) | 28,330 | 2 | �� | 446 | 5 | 3 | 1 | 28,779 | 8 | |||||||||||||||||||||||||||||||||||
Other(6) | (249 | ) | 6 | (81 | ) | (5 | ) | (5 | ) | 1 | (335 | ) | 2 | |||||||||||||||||||||||||||||||
Redemptions and repayments(7) | (24,859 | ) | (4 | ) | (1,023 | ) | (9 | ) | (358 | ) | (11 | ) | (26,240 | ) | (24 | ) | ||||||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (77 | ) | (18 | ) | (77 | ) | (18 | ) | ||||||||||||||||||||||||||||||||
At 31 December 2018 | 157,739 | 12 | 9,432 | 119 | 1,999 | 106 | 169,170 | 237 | ||||||||||||||||||||||||||||||||||||
Net movement in the year | 2,584 | (8 | ) | (452 | ) | (12 | ) | (5 | ) | (15 | ) | 2,127 | (35 | ) | ||||||||||||||||||||||||||||||
Charge/(release) to the Income Statement | (8 | ) | (12 | ) | 3 | (17 | ) | |||||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (8 | ) | (12 | ) | (1 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
Loan modifications
The following tables provide information ontable sets out the financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL.
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2019 £m | 2018 £m | |||||||
Financial assets modified in the year: | ||||||||
– Amortised cost before modification | 384 | 207 | ||||||
– Net modification loss | 7 | 3 | ||||||
Financial assets modified since initial recognition: | ||||||||
– Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the year | 89 | 158 | ||||||
Forbearance(1)
The balances at 31 December 20182019 and 2017,2018, analysed by their staging (2017: payment status) at theyear-end and the forbearance we applied, were:
| 2019 | Capitalisation £m | Term extension £m | Interest- only £m | Concessionary interest rate £m | Total £m | Loss allowance £m | ||||||||||||||||||||||||||||||||||||||
Stage 2 | 405 | 338 | 342 | 1 | 1,086 | 12 | ||||||||||||||||||||||||||||||||||||||
Stage 3 | 197 | 91 | 97 | 10 | 395 | 24 | ||||||||||||||||||||||||||||||||||||||
| 602 | 429 | 439 | 11 | 1,481 | 36 | |||||||||||||||||||||||||||||||||||||||
Proportion of portfolio | 0.4% | 0.3% | 0.3% | 0.0% | 0.9% | |||||||||||||||||||||||||||||||||||||||
| Capitalisation | Term extension | Interest-only | Total | Loss allowance | ||||||||||||||||||||||||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||
Stage 2 | 375 | 161 | 389 | 925 | 9 | 375 | 161 | 389 | – | 925 | 9 | |||||||||||||||||||||||||||||||||
Stage 3 | 212 | 95 | 113 | 420 | 20 | 212 | 95 | 113 | – | 420 | 20 | |||||||||||||||||||||||||||||||||
| 587 | 256 | 502 | 1,345 | 29 | 587 | 256 | 502 | – | 1,345 | 29 | ||||||||||||||||||||||||||||||||||
Proportion of portfolio | 0.4% | 0.2% | 0.3% | 0.9% | 0.4% | 0.2% | 0.3% | 0.0% | 0.9% | |||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||||||
In arrears | 260 | 63 | 175 | 498 | 22 | |||||||||||||||||||||||||||||||||||||||
Performing | 392 | 178 | 407 | 977 | 5 | |||||||||||||||||||||||||||||||||||||||
| 652 | 241 | 582 | 1,475 | 27 | ||||||||||||||||||||||||||||||||||||||||
Proportion of portfolio | 0.4% | 0.2% | 0.4% | 1.0% | ||||||||||||||||||||||||||||||||||||||||
| (1) | We base forbearance type on the first forbearance on the accounts. |
20182019 compared to 20172018 (unaudited)
In 2018,2019, the accounts in forbearance decreased, with theincreased due to a new term extension forbearance solution we introduced in August 2018 that is applied to interest-only past maturity customers. The proportion of the mortgage portfolio in forbearance reducing slightly toremained flat at 0.9% (2017: 1.0%(2018: 0.9%).
| – | At 31 December |
| – | The weighted average LTV of all accounts in forbearance was 35% |
| – | At 31 December |
Other loan modifications
At 31 December 2018,2019, there were £4.5bn (2017: £4.7bn)(2018: £4.5bn) of other mortgages on the balance sheet that we had modified since January 2008. At 31 December 2018:2019:
| – | The average LTV was 32% |
| – | The proportion of accounts that were 90 days or more in arrears was 1.30% (2018: 1.50% |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
RESIDENTIAL MORTGAGES – PORTFOLIOS OF PARTICULAR INTEREST
Introduction(unaudited)
We are mainly a residential prime lender and we do not originatesub-prime or second charge mortgages. Despite that, some types of mortgages have higher risks and others stand out for different reasons. These are:
| Product | Description | |||
Interest-only loans and part interest-only, part repayment loans | With an interest-only mortgage, the customer pays interest every month but | |||
Since 2009, we have reduced the risk from new interest-only mortgages by lowering the maximum | ||||
Customers with interest-only mortgages have to make arrangements to repay the principal at the end of the mortgage. We have a strategy to make sure that we tell these customers that they have to do this. We send them messages with their annual mortgage statements, and we run contact campaigns to encourage them to tell us how they plan to repay. | ||||
In 2013, we contacted all our customers whose mortgages were due to mature before 2020. Since 2016, we have extended these campaigns to periodically contact all interest-only customers. We increase our contact frequency as customers approach term maturity. Outside of sending out annual mortgage statements, we contact more than 100,000 interest-only customers per year. | ||||
If customers know they will not be able to repay their mortgage in full when it ends, or if their mortgage has already passed the date when it should have ended, we talk to them. If we think it is in the customer’s interests
| ||||
Flexible loans | Flexible mortgages allow customers to pay more or less than their usual amount each month, or even to take ‘payment holidays’ when they pay nothing at all. Customers do not have to take | |||
– There are often limits on how much can be drawn down in any month | ||||
– The customer cannot be in payment arrears | ||||
– The customer cannot have insolvency problems, such as a county court judgement, bankruptcy, an individual voluntary arrangement, an administration order or a debt relief order. | ||||
A customer can ask us to increase their credit limit, but that means we will go through our full standard credit approval process. We can also lower the customer’s credit limit at any time, so it never goes above 90% of the property’s current market value. | ||||
We no longer offer flexible loan products for new mortgages. | ||||
This is an area of interest in order to identify customers who might be using these facilities to self-forbear, such as regularly drawing down small amounts. If there is any sign that the credit risk has significantly increased, we reflect this in our provision calculations.
| ||||
Loans with an LTV | Where the mortgage balance is more than the property is now worth, we cannot recover the full value of the loan by repossessing and selling the property. This means there is a higher credit risk on these loans. In some cases, property prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs greater than 100%. Before 2009, we sometimes allowed customers to borrow more than the price of the property. | |||
We monitor existing accounts with LTVs >100% as part of our assessment of ongoing portfolio performance. We design new account LTV maximums to mitigate an increase in the volume of accounts with an LTV >100%.
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Buy-to-Let (BTL) loans | In recent years, we have refined our BTL proposition to appeal to a wider catchment, and we have improved our systems to cater for this segment with a
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| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
Credit performance
| Portfolio of particular interest(1) | Portfolio of particular interest(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Part interest- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| only, part | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Total £m | Interest-only £m | Part interest- only, part repayment(2) (3) £m | Flexible(3) £m | LTV >100% £m | Buy-to-let £m | Other £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage portfolio | 165,356 | 38,062 | 13,247 | 11,273 | 884 | 9,904 | 109,234 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
– Stage 1 | 155,477 | 33,739 | 12,112 | 10,183 | 594 | 9,593 | 105,114 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
– Stage 2 | 8,157 | 3,502 | 888 | 873 | 183 | 285 | 3,526 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
– Stage 3 | 1,722 | 821 | 247 | 217 | 107 | 26 | 594 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 3 ratio(4) | 1.05% | 2.17% | 1.87% | 2.03% | 12.11% | 0.26% | 0.54% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
PIPs | 32 | 14 | 9 | 2 | 13 | 1 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Simple average LTV (indexed) | 43% | 45% | 45% | 28% | 117% | 60% | 44% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Interest-only | repayment(2) (3) | Flexible(3) | LTV >100% | Buy-to-let | portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage portfolio | 157,957 | 38,035 | 13,201 | 12,926 | 1,140 | 8,252 | 101,158 | 157,957 | 38,035 | 13,201 | 12,926 | 1,140 | 8,252 | 101,158 | ||||||||||||||||||||||||||||||||||||||||||||||
– Stage 1 | 146,619 | 33,001 | 11,824 | 11,558 | 740 | 7,906 | 96,767 | 146,619 | 33,001 | 11,824 | 11,558 | 740 | 7,906 | 96,767 | ||||||||||||||||||||||||||||||||||||||||||||||
– Stage 2 | 9,356 | 4,029 | 1,115 | 1,082 | 273 | 317 | 3,802 | 9,356 | 4,029 | 1,115 | 1,082 | 273 | 317 | 3,802 | ||||||||||||||||||||||||||||||||||||||||||||||
– Stage 3 | 1,982 | 1,005 | 262 | 286 | 127 | 29 | 589 | 1,982 | 1,005 | 262 | 286 | 127 | 29 | 589 | ||||||||||||||||||||||||||||||||||||||||||||||
Stage 3 ratio | 1.25% | 2.64% | 1.98% | 2.21% | 11.14% | 0.35% | 0.58% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 3 ratio(4) | 1.27% | 2.67% | 1.99% | 2.34% | 11.18% | 0.35% | 0.58% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
PIPs | 25 | 12 | 5 | 3 | 8 | – | 7 | 25 | 12 | 5 | 3 | 8 | – | 7 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage portfolio | 154,682 | 38,885 | 13,785 | 14,785 | 1,471 | 6,802 | 95,535 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Performing | 151,688 | 37,497 | 13,372 | 14,438 | 1,302 | 6,768 | 94,530 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Early arrears: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– 31 to 60 days | 700 | 317 | 93 | 67 | 22 | 9 | 295 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
– 61 to 90 days | 426 | 203 | 57 | 35 | 15 | 4 | 167 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
NPLs | 1,868 | 868 | 263 | 245 | 132 | 21 | 543 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
NPL ratio | 1.21% | 2.23% | 1.91% | 1.66% | 8.97% | 0.31% | 0.57% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
PIPs | 29 | 17 | 5 | 3 | 10 | 1 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Simple average LTV (indexed) | 42% | 44% | 44% | 29% | 118% | 58% | 43% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Where a loan falls into more than one category, we |
| (2) | Mortgage balance includes both the interest-only part of |
| (3) | Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product. |
| (4) | Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures. The way we calculate the Stage 3 ratio was changed from 1 January 2019, and 2018 restated for consistency. See ‘Key metrics’ in the ‘Credit risk – Santander UK group level’ section. |
20182019 compared to 20172018 (unaudited)
| – | In |
| – |
|
Interest-only sub analysis(unaudited)
Full interest-only new business in the year
| 2018 | 2017 | |||||||
| £m | £m | |||||||
Full interest-only loans | 3,810 | 2,698 | ||||||
2019 £m | 2018 £m | |||||||
Full interest-only loans | 4,000 | 3,810 | ||||||
Full interest-only maturity profile
| Term | Within | Between | Between | Greater than | ||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Term expired £m | Within 2 years £m | Between 2-5 years £m | Between 5-15 years £m | Greater than £m | Total £m | ||||||||||||||||||||||||||||||||||||||||||
Full interest-only portfolio | 338 | 1,541 | 3,706 | 20,984 | 11,493 | 38,062 | ||||||||||||||||||||||||||||||||||||||||||
– of which value weighted average LTV (indexed) is > 75% | 11 | 111 | 219 | 1,793 | 1,051 | 3,185 | ||||||||||||||||||||||||||||||||||||||||||
| expired | 2 years | 2-5 years | 5-15 years | 15 years | Total | |||||||||||||||||||||||||||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||
Full interest-only portfolio | 541 | 1,346 | 3,761 | 21,711 | 10,676 | 38,035 | 541 | 1,346 | 3,761 | 21,711 | 10,676 | 38,035 | ||||||||||||||||||||||||||||||||||||
of which value weighted average LTV (indexed) is >75% | 43 | 110 | 265 | 2,029 | 642 | 3,089 | ||||||||||||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Full interest-only portfolio | 508 | 1,586 | 3,508 | 21,795 | 11,488 | 38,885 | ||||||||||||||||||||||||||||||||||||||||||
of which value weighted average LTV (indexed) is >75% | 47 | 147 | 255 | 2,318 | 948 | 3,715 | ||||||||||||||||||||||||||||||||||||||||||
– of which value weighted average LTV (indexed) is > 75% | 43 | 110 | 265 | 2,029 | 642 | 3,089 | ||||||||||||||||||||||||||||||||||||||||||
20182019 compared to 20172018 (unaudited)
For full interest-only mortgages, of the total £541m£338m that was term expired at 31 December 2018, 89%2019, 84% continued to pay the interest due under the expired contract terms. Interest-only mortgages that matured in 20182019 totalled £830m,£731m, of which: £418m£314m was subsequently repaid, £5m was refinanced under normal credit terms, £73m£213m was refinanced under forbearance arrangements and £334m£199m remained unpaid and was classified as term expired at 31 December 2018.2019.
At 31 December 2018,2019, there were 84,773 (2017: 93,779)76,767 (2018: 84,773) flexible mortgage customers, with undrawn facilities of £6,000m (2017: £6,192m)£5,841m (2018: £6,000m). The portfolio’s value weighted LTV (indexed) was 28% (2017:27% (2018: 28%).
Forbearance(1)
The balances at 31 December 20182019 and 20172018 were:
| Interest-only(2) | Flexible | LTV >100% | Buy-to-Let | |||||||||||||||||||||||||||||
| 2019 | Interest-only(2) £m | Flexible £m | LTV >100% £m | Buy-to-Let £m | ||||||||||||||||||||||||||||
Total | 392 | 73 | 17 | 10 | ||||||||||||||||||||||||||||
– Stage 2 | 285 | 56 | 8 | 8 | ||||||||||||||||||||||||||||
– Stage 3 | 107 | 17 | 9 | 2 | ||||||||||||||||||||||||||||
| £m | £m | £m | £m | |||||||||||||||||||||||||||||
2018 | 229 | 32 | 10 | 9 | ||||||||||||||||||||||||||||
Total | 229 | 32 | 10 | 9 | ||||||||||||||||||||||||||||
– Stage 2 | 136 | 18 | 3 | 6 | 136 | 18 | 3 | 6 | ||||||||||||||||||||||||
– Stage 3 | 93 | 14 | 7 | 3 | 93 | 14 | 7 | 3 | ||||||||||||||||||||||||
2017 | 208 | 34 | 13 | 8 | ||||||||||||||||||||||||||||
| (1) | Where a loan falls into more than one category, we have included it in all the categories that apply. |
| (2) | Comprises full interest-only loans and part interest-only, part repayment loans. |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
CONSUMER (AUTO) FINANCE AND OTHER UNSECURED LENDING
Consumer (auto) finance
Retail Banking provides auto finance through Santander Consumer (UK) plc (SCUK). SCUK provides a range of wholesale finance facilities (stock finance) and retail products designed for the purchase of new and used personal, business and commercial vehicles, motorcycles, bicycles and caravans through an extensive network of motor dealers and manufacturer partners. SCUK’s products are mainly distributed through intermediary introducers at the point of sale, and through partnerships with selected car and motorcycle manufacturers. At 31 December 2018,2019, the business operated with 1314 Original Equipment Manufacturer partners which includes two joint venture arrangements.
Through SCUK’s Hyundai Capital UK Ltd (HCUK) and PSA Finance UK Ltd (PSAF) joint ventures, we provide retail point of sale customer finance as well as wholesale finance facilities (Stock Finance)(stock finance) for Hyundai and Kia, managed by HCUK, as well as Peugeot, Citroën and DS, managed by PSAF. SCUK holds a 50% share in each of these joint ventures. However, due to the varying structures of the joint ventures, we equity account for HCUK and consolidate PSAF.
Residual Value (RV) risk remains the top risk for SCUK. We monitor the RV portfolio on a monthly basis, and we use key risk triggers to identify any material change in trends. We have a conservative approach to setting RV amounts and maintain a prudent provisioning policy to mitigate potential losses on disposal of the asset. We use a leading independent vehicle valuation company to assess the estimated future value of the asset, prior to inception and periodically throughout the life of the agreement.
Other unsecured lending
Retail Banking also provides other unsecured lending, which includes:
| – | Personal loans: we offer personal loans for most purposes, such as debt consolidation, home improvement, and to support significant life events such as weddings |
| – | Credit cards: we offer a wide range of credit cards designed to suit a variety of customers, including balance transfer cards and cards that offer rewards |
| – | Overdrafts: we also offer arranged overdrafts for customers who have a bank account with us. We evaluate our customers’ circumstances to decide how much they can borrow. In other cases, a customer may have overdrawn their bank account without arranging it with us first. |
For both Consumer (auto) finance and Other unsecured lending, we maintain rigorous credit scoring and affordability assessment criteria that we monitor and report regularly. There were no significant changes to our risk policy or appetite in these portfolios. This approach continued to result in stable, good credit quality consumer credit portfolios.
We use a combination of internal, Credit Reference Agencycredit reference agency and application data in our credit assessments. Scorecards supported by policy rules give us confidence that customers are creditworthy and can afford their repayments. We closely monitor and manage the performance of our consumer credit portfolios using a range of data that includes portfolio and key segments performance, macroeconomic indicators and customer risk data. Nonetheless, we are not complacent about the prospect for future risk events and are always lookinglook at ways to strengthen our approach.
Credit performance
| Other unsecured | ||||||||||||||||||||||||
| Consumer | Personal | Credit | Total other | |||||||||||||||||||||
| (auto) finance | loans | cards | Overdrafts | unsecured | Total | |||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
Loans and advances to customers of which: | 7,347 | 2,182 | 2,865 | 593 | 5,640 | 12,987 | ||||||||||||||||||
– Stage 1 | 6,950 | 2,113 | 2,560 | 422 | 5,095 | 12,045 | ||||||||||||||||||
– Stage 2 | 354 | 48 | 256 | 144 | 448 | 802 | ||||||||||||||||||
– Stage 3 | 43 | 21 | 49 | 27 | 97 | 140 | ||||||||||||||||||
NPLs(1) | 43 | 16 | 49 | 22 | 87 | 130 | ||||||||||||||||||
Loss allowances | 85 | 47 | 112 | 61 | 220 | 305 | ||||||||||||||||||
Stage 3 ratio(2) | 0.59% | 1.72% | 1.08% | |||||||||||||||||||||
NPL ratio(3) | 0.59% | 1.54% | 1.00% | |||||||||||||||||||||
Gross write-offs | 24 | 125 | 149 | |||||||||||||||||||||
(1) We define NPLs in the ‘Credit risk management’ section. (2) Stage 3 as a percentage of loans and advances to customers. (3) NPLs as a percentage of loans and advances to customers.
| ||||||||||||||||||||||||
| Other unsecured | ||||||||||||||||||||||||
| Consumer | Personal | Credit | Total other | |||||||||||||||||||||
| (auto) finance | loans | cards | Overdrafts | unsecured | Total | |||||||||||||||||||
| 2017 | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
Loans and advances to customers of which: | 6,957 | 2,169 | 2,444 | 565 | 5,178 | 12,135 | ||||||||||||||||||
– Performing(1) | 6,861 | 2,129 | 2,377 | 516 | 5,022 | 11,883 | ||||||||||||||||||
– Early arrears | 62 | 24 | 19 | 25 | 68 | 130 | ||||||||||||||||||
– NPLs(2) | 34 | 16 | 48 | 24 | 88 | 122 | ||||||||||||||||||
Loss allowances | 77 | 44 | 62 | 29 | 135 | 212 | ||||||||||||||||||
NPL ratio(3) | 0.49% | 1.69% | 1.00% | |||||||||||||||||||||
Gross write-offs | 32 | 120 | 152 | |||||||||||||||||||||
| Other unsecured | ||||||||||||||||||||||||
| 2019 | Consumer (auto) finance £m | Personal £m | Credit £m | Overdrafts £m | Total other unsecured £m | Total £m | ||||||||||||||||||
Loans and advances to customers of which: | 7,684 | 2,135 | 2,788 | 590 | 5,513 | 13,197 | ||||||||||||||||||
– Stage 1 | 7,038 | 2,020 | 2,473 | 404 | 4,897 | 11,935 | ||||||||||||||||||
– Stage 2 | 604 | 95 | 267 | 160 | 522 | 1,126 | ||||||||||||||||||
– Stage 3 | 42 | 20 | 48 | 26 | 94 | 136 | ||||||||||||||||||
Loss allowances(2) | 88 | 51 | 120 | 62 | 233 | 321 | ||||||||||||||||||
Stage 3 undrawn exposures | – | 25 | ||||||||||||||||||||||
Stage 3 ratio(1) | 0.55% | 2.15% | 1.21% | |||||||||||||||||||||
Gross write-offs | 34 | 134 | 168 | |||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
Loans and advances to customers of which: | 7,347 | 2,182 | 2,865 | 593 | 5,640 | 12,987 | ||||||||||||||||||
– Stage 1 | 6,950 | 2,113 | 2,560 | 422 | 5,095 | 12,045 | ||||||||||||||||||
– Stage 2 | 354 | 48 | 256 | 144 | 448 | 802 | ||||||||||||||||||
– Stage 3 | 43 | 21 | 49 | 27 | 97 | 140 | ||||||||||||||||||
Loss allowances(2) | 85 | 47 | 112 | 61 | 220 | 305 | ||||||||||||||||||
Stage 3 undrawn exposures | – | 26 | ||||||||||||||||||||||
Stage 3 ratio(1) | 0.58% | 2.17% | 1.28% | |||||||||||||||||||||
Gross write-offs | 24 | 125 | 149 | |||||||||||||||||||||
| (1) |
|
|
|
At 31 December 2018, the average consumer finance loan size was £11,400 (2017: £12,500) and the NPL ratio increased slightly to 0.59% (2017: 0.49%). The average unsecured loan and credit card balances in 2018 were broadly stable at £9,500 (2017: £9,300) and £1,500 (2017: £1,200), respectively.
| (2) | The ECL allowance is for both on and off–balance sheet exposures. |
| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
Loan modifications
The following table provides information onsets out the financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL.
Credit £m | Overdrafts £m | Total other unsecured £m | ||||||||||||||||||||||
Financial assets modified during the period: | ||||||||||||||||||||||||
| 2019 | Credit £m | Overdrafts £m | Total other unsecured £m | |||||||||||||||||||||
Financial assets modified in the year: | ||||||||||||||||||||||||
– Amortised cost before modification | 26 | 17 | 43 | 23 | 15 | 38 | ||||||||||||||||||
– Net modification loss | 12 | 8 | 20 | 12 | 8 | 20 | ||||||||||||||||||
Financial assets modified since initial recognition: | ||||||||||||||||||||||||
– Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the year | 3 | 2 | 5 | |||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
Financial assets modified in the year: | ||||||||||||||||||||||||
– Amortised cost before modification | 26 | 17 | 43 | |||||||||||||||||||||
– Net modification loss | 12 | 8 | 20 | |||||||||||||||||||||
Financial assets modified since initial recognition: | ||||||||||||||||||||||||
– Gross carrying amount of financial assets for which the ECL allowance has changed to12-month measurement during the year | 2 | 3 | 5 | |||||||||||||||||||||
– Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the year | 2 | 3 | 5 | |||||||||||||||||||||
Forbearance
The balances at 31 December 20182019 and 20172018 were:
| Other unsecured | Other unsecured | |||||||||||||||||||||||||||||||||||||
| Consumer | Personal | Credit | Total other | |||||||||||||||||||||||||||||||||||
| (auto) finance | loans | cards | Overdrafts | unsecured | Total | |||||||||||||||||||||||||||||||||
| 2019 | Consumer (auto) finance £m | Personal £m | Credit £m | Overdrafts £m | Total other unsecured £m | Total £m | ||||||||||||||||||||||||||||||||
Total | 7 | – | 51 | 25 | 76 | 83 | ||||||||||||||||||||||||||||||||
– Stage 2 | 5 | – | 10 | 7 | 17 | 22 | ||||||||||||||||||||||||||||||||
– Stage 3 | 2 | – | 41 | 18 | 59 | 61 | ||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||
2018 | – | – | 53 | 26 | 79 | 79 | ||||||||||||||||||||||||||||||||
Total | 6 | – | 53 | 26 | 79 | 85 | ||||||||||||||||||||||||||||||||
– Stage 2 | – | – | 10 | 7 | 17 | 17 | 4 | – | 10 | 7 | 17 | 21 | ||||||||||||||||||||||||||
– Stage 3 | – | – | 43 | 19 | 62 | 62 | 2 | – | 43 | 19 | 62 | 64 | ||||||||||||||||||||||||||
2017 | – | 1 | 48 | 28 | 77 | 77 | ||||||||||||||||||||||||||||||||
20182019 compared to 20172018 (unaudited)
We maintained our prudent Consumer (auto) finance underwriting criteria through the year. TheIn 2019, the product mix was broadly unchanged in the year.unchanged. This reflected underlying stability in target market segments, product pricing and distribution strategy. ThereThe car finance market saw challenges in 2019 mainly due to Brexit and changing emission standards, and there was a slight shiftfall in the year fromsupply of new car loans into second hand (used) car loans, both reflecting reduced consumer confidence linked to the underlying economic uncertainty in the UK and a reduction in new car registrations in the UK, driven by manufacturer strategic supply plans for the UK and Europe.vehicles.
At 31 December 2018,2019, Consumer (auto) finance balances represented 4% (2017:(2018: 4%) of our total Retail Banking loans and 4% (2017: 3%(2018: 4%) of total customer loans. In 2018,2019, Consumer (auto) finance balances increased by £390m (6%£337m (5%) on 2017.. In 2018,2019, Consumer (auto) finance gross lending (new business) was £3,444m (2017: £3,133m)£3,308m (2018: £3,444m). Wholesale loans (Stock finance) to car dealerships at 31 December 20182019 were approximately 18%16.8% of the Consumer loan book, an increasea decrease of £124m£33m on 2017. NPLs remain within Risk Appetite limit, increasing to £43m (2017: £34m).2018. The portfolio continues to perform satisfactorily with the overall risk profile remaining broadly stable.
Other unsecured lending increased in 2018, with credit cards growth of £421m whichAt 31 December 2019, the average Consumer (auto) finance loan size was ahead of the market.£13,900 (2018: £11,400).
Forbearance levels were broadly stable in 2018.2019.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
BUSINESS BANKING
We provide business banking services through the Santander Business franchise to small businesses with a turnover of up to £6.5m per annum. Our risk management is tailored to the complexity of the customer and their product holdings.
We review applications from customers who have more straightforward borrowing needs and lower debt exposures on an automated basis. We do this by using an application scorecard to ensure an efficient customer journey, combined with a cost-effective credit decisioning process. Post approval, we review revolving credit facilities each year to ensure the customer’s facilities remain appropriate for their financial circumstances. We perform a full manual underwriting process for applications from customers who have more complex borrowing needs or who wish to borrow larger amounts. This is due to the levels of credit exposure and other considerations, such as the need for security to support the facilities requested. In line with our risk management framework and standard policies for this more complex segment, we review exposures above certain values and relating to certain product types at least each year, or more often where the borrower shows signs of financial distress.
Our aim is to help businesses prosper through the provision of Simple, Personal and Fair banking solutions to existing, new and prospective customers. We believe in building lasting relationships and take time to understand our customers’ banking needs. This sets us apart from others as, no matter how small or large a business, we have people available in our branch network and our CBCs to provide aface-to-face relationship management service to our customers.
In order to improve our offering in the business current account market, we recently launched our innovative 1I2I3 Business Current Account. This is the only business current account in the market to offer regular cashback to businesses. By basing the cashback on business turnover, we are incentivising and rewarding business growth.Start-ups and switching businesses benefit from a reduced monthly fee for 12 months and, as part of our 1I2I3 Business World, customers have access to preferential loan and deposit rates. In this way, we continue to support new businesses at an important time in their lifecycle.
We aim to support businesses with all their financial needs through our range of lending products from overdrafts and credit cards, to invoice finance and asset finance.
Credit performance
| 2018 £m | 2017 £m | |||||||
Loans and advances to customers of which: | 1,802 | 1,912 | ||||||
– Stage 1 | 1,548 | |||||||
– Stage 2 | 165 | |||||||
– Stage 3 | 89 | |||||||
– Performing(1) | 1,793 | |||||||
– Early arrears | 4 | |||||||
– NPLs(2) | 89 | 115 | ||||||
Loss allowances(3) | 53 | 54 | ||||||
Stage 3 ratio(4) | 4.94% | |||||||
NPL ratio(5) | 4.94% | 6.01% | ||||||
Gross write offs | 15 | 21 | ||||||
2019 £m | 2018 £m | |||||||
Loans and advances to customers of which: | 1,845 | 1,802 | ||||||
– Stage 1 | 1,590 | 1,548 | ||||||
– Stage 2 | 177 | 165 | ||||||
– Stage 3 | 78 | 89 | ||||||
Loss allowances(2) | 52 | 53 | ||||||
Stage 3 undrawn exposures | 1 | – | ||||||
Stage 3 ratio(1) | 4.28% | 4.99% | ||||||
Gross write offs | 24 | 15 | ||||||
| (1) |
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| (2) |
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Loan modifications
The following table provides information on financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL.
| ||||
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| 2019 £m | 2018 £m | |||||||
Financial assets modified in the year: | ||||||||
– Amortised cost before modification | 15 | 14 | ||||||
– Net modification loss | – | 1 | ||||||
Financial assets modified since initial recognition: | ||||||||
– Gross carrying amount of financial assets for which the ECL allowance changed to12-month measurement in the year | 2 | 3 | ||||||
Forbearance
The balances at 31 December 20182019 and 20172018 were:
| £m | 2019 £m | 2018 £m | ||||||||||
2018 | 74 | |||||||||||
Total | 67 | 74 | ||||||||||
– Stage 2 | 20 | 26 | 20 | |||||||||
– Stage 3 | 54 | 41 | 54 | |||||||||
2017 | 85 | |||||||||||
2019 compared to 2018 (unaudited)
Business banking balances remained broadly flat and Stage 3 exposures decreased slightly.
| Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk
|
Credit risk – other business segments
Overview
In Corporate & Commercial Banking, we are exposed to credit risk through providing overdraft, loan, invoice discounting, trade finance, asset finance and treasury products. We offer bank accounts and cash transmission services to further support clients.
In Corporate & Investment Banking, we are mainly exposed to credit risk through lending and selling treasury products to large corporates.
| In Corporate Centre, our exposures come from asset and liability management of our balance sheet and ournon-core and Legacy Portfolios inrun-off. |
Credit risk management In this section, we explain how we manage and mitigate credit risk.
Credit risk review In this section, we analyse our credit risk exposures and how they are performing. We also focus on forbearance and portfolios of particular interest. |
Our main portfolios are:
| Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | ||
– SME and mid corporate– banking, lending and treasury services mainly to enterprises with an annual turnover of up to £500m. – Commercial Real Estate– lending to experienced, professional landlords mainly secured by tenanted UK property in the office, retail, industrial and residentialsub-sectors. – Social Housing– lending and treasury services for UK housing association groups secured by tenanted UK residential property. Borrowers are mainly charitable entities and registered with the appropriate regulator for the part of the UK in which they operate. | –
– Financial Institutions– mainly derivatives, | – Sovereign and Supranational– securities issued by local and central governments, and government guaranteed counterparties. We hold some of them to help meet our liquidity needs. –Structured Products– we have two portfolios. The – Social Housing– legacy – Financial Institutions– mainly derivatives, repurchase and reverse repurchase transactions (known as repos and reverse repos), and stock borrowing/lending, under approved ring-fenced bank exceptions policy to facilitate hedging or liquidity management. – Legacy Portfolios inrun-off– assets from acquisitions that do not fit with our strategy. These include some commercial mortgages. – Derivatives– older total return swaps we held for liquidity, that we are running down. – Crown Dependencies– mainly residential mortgages to individuals in Jersey and the Isle of Man.
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The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branchesshort term markets business in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in 2018.Corporate & Investment Banking. See Note 2 for more information.
OTHER BUSINESS SEGMENTS – CREDIT RISK MANAGEMENT
 | For more on our approach to credit risk at a Santander UK group level See pages 78 to 86 |
In Corporate & Commercial Banking, we classify most of our customers asnon-standardised. We also have some SME customers, which we mainly classify as standardised as it is a high volumehigh-volume portfolio with smaller exposures. In CIB and Corporate Centre, we classify all our customers asnon-standardised, except for the commercial mortgages in our Legacy Portfolios inrun-off.run-off, and the Crown Dependencies mortgage portfolio.
We set out how we manage the credit risk on our standardised customers in the previous section ‘Credit risk – Retail Banking’. We manage the credit risk on our standardised customers in Corporate & Commercial Banking and Corporate Centre in the same way, except that we do not use scorecards or credit reference agencies. In the rest of this section, we explain how we manage the credit risk on ournon-standardised customers.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
1. Risk strategy and planning
For details of how we set risk strategy and plans, see the ‘Santander UK group level – credit risk management’ section. For treasury products, we take credit risk up to limits for each client. We control, manage and report risks on a counterparty basis, regardless of which part of our business takes the risk.
2. Assessment and origination
We do a thorough risk assessment to make sure customers can meet their obligations before we approve a credit application. We do this mainly by assigning each customer a credit rating, using our internal rating scale (see ‘Credit quality’ in ‘Santander UK group level – credit risk review’ section). To do this, we look at the customer’s financial history and trends in the economy – backed up by the expert judgement of a risk analyst. We review our internal ratings at least every year. We also assess the underlying risk of the transaction, taking into account any mitigating factors (see the following tables) –tables below) and how it fits with our risk policies, limits and Risk Appetite, as set by the Board.Board and lower level committees and fora. We consider transactions in line with credit limits approved by the relevant credit authority. Our Executive Credit Approval Committee is responsible for setting those limits. In CIB and Corporate Centre, a specialist analyst usually reviews a transaction at the start and over its life. They base their review on the financial strength of the client, its position in its industry, and its management strengths.
We lend to a wide range of sectors and industries, including those that are intrinsic or of strategic importance to the economy of the UK or another country or territory. As part of lending responsibly, we comply with the Equator Principles, factoring social, ethical and environmental impacts into our risk analysis and decision-making process for financial transactions. These principles address climate change, prevention of pollution and toxic waste emissions, biodiversity, indigenous peoples and human rights. Our policy on Aerospace and Defence, Energy, Mining & Metals and Soft Commodities and our Sensitive Social and Ethical Sectors policy continue to define our approach towards creating long-term value while managing reputational, social and environmental risks. In 2019, we further improved these policies by introducing prohibitions and strengthening restrictions on a range of activities. Prohibited activities now include the provision of products or services for new Coal Fired Power Plant (CFPP) projects and taking on new clients with existing CFPPs. Restricted activities include transactions specific to CFPPs for existing clients which do not significantly improve environmental impacts, such as a significant reduction of CO2. Our Reputational Risk Forum reviews and approves all restricted activities to ensure that they fall within our risk appetite. This forum reviews, monitors and escalates key decisions around financial andnon-financial reputational risks to the Board
Credit risk mitigation
The types of credit risk mitigation, including collateral, across each of our portfolios are as follows. In addition, from time to time at a portfolio level we execute significant risk transfer transactions, which typically reduce RWAs.
Corporate & Commercial Banking:
| Portfolio | Description | |
SME and mid corporate | Includes secured and unsecured lending. We can use covenants (financial ornon-financial) to support a customer’s credit rating. For example, we can set limits on how much they can spend or borrow, or how they operate as a business. We can take mortgage debentures as collateral. These are charges over a company’s
We also lend against assets (like vehicles and equipment) and invoices for some customers. For assets, we value them before we lend. For invoices, we review the customer’s ledgers regularly and lend against debtors that meet agreed criteria. If the customer defaults, we repossess and sell their assets or collect on their invoices. | |
Commercial Real Estate | We take a first legal charge on commercial property as collateral. The loan is subject to strict criteria, including the property condition, age and location, tenant quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before agreeing the loan, we visit the property and get an independent professional valuation which assesses the property, the tenant and future demand (such as comparing market rent to current rent). Loan agreements typically allow us to view the property each year and get revaluations every two to three years, or more often if it is likely covenants may be | |
Social Housing | We take a first legal charge on portfolios of residential real estate owned and let by UK Housing Associations as collateral, in most cases. We revalue this every three to five years (in line with industry practice), using the standard methods for property used for Social Housing. The value would be considerably higher if we based it on normal residential use. On average, the loan balance is 25% to 50% of the implied market value, using our LGD methodology. We have not had a default, loss or repossession on Social Housing. | |
Corporate & Investment Banking:
| Portfolio | Description | |
Large Corporate | Most of these corporate loans and products are unsecured. We also have a structured finance portfolio, where we typically hold legal charges over the assets we finance. For all customer segments, the bank monitors borrowers are in line with expected performance and (where applicable) documented covenants so we detect any financial distress early. | |
Financial Institutions | We manage the risk on derivatives in this portfolio in the same way as for the derivatives in the Financial Institutions in Corporate Centre. | |
| 112 | Santander UK Group Holdings plc |
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Credit risk |
Corporate Centre:
| Portfolio | Description | |
Sovereign and Supranational | In line with market practice, there is no collateral against these assets. | |
|
| |
Social Housing | We manage the risk on this portfolio in the same way as for the Social Housing portfolio in Corporate & Commercial Banking. | |
Financial Institutions | We use standard legal agreements to reduce credit risk on derivatives, repos and reverse repos, and stock borrowing/lending. We also hold collateral and trade through central counterparties (CCPs) to reduce risk.
Netting– We use netting agreements where they have legal force,
Collateral– We use the Credit Support Annex with the ISDA Master Agreement. This gives us collateral for our net exposures. The collateral can be cash, securities or equities. For stock borrowing/lending and repos and reverse repos, it includes high quality liquid debt securities and highly liquid equities listed on major developed markets. We revalue our exposures and collateral daily, adjusting the collateral to reflect deficits or surpluses. We have processes to control how we value and manage collateral, including documentation reviews and reporting. Collateral has to meet our
CCPs– These are intermediaries between a buyer and a seller – generally a clearing house. We use CCPs | |
|
Corporate Centre:
| ||
| ||
| Legacy Portfolios inrun-off | We often hold collateral through a first legal charge over the underlying asset or cash. We get independent
| |
– The borrower’s ability to generate cash flow | ||
– The age of the assets | ||
– Whether the loan is still performing satisfactorily | ||
– Whether or not the reduction in value is likely to be temporary | ||
– Whether there are other ways to solve the problem.
| ||
Where a borrower gets into difficulty we look to dispose of the collateral, either with agreement or through the insolvency process. We do this as early as possible, to minimise any loss. We rarely take ownership of collateral. | ||
Derivatives | We manage the risk on this portfolio in the same way as for the derivatives in | |
Crown Dependencies | We manage the risk on this portfolio in the same way as for mortgages in Retail Banking.
| |
3. Monitoring
We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our ERCC a detailed analysis of our credit exposures and risk trends every month. We also report our larger exposures and risks to the Board Risk Committee every month.
Our WatchlistCommercial Real Estate
Social Housing
We classify Watchlist cases as:
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|
We assess cases on the Watchlist for impairment collectively, unless they are in the hands of our Restructuring & Recoveries team at which point we assess them individually. If a case transfers to Stage 3 (previously, becomes NPL), we take it off the Watchlist and assess it for impairment individually.
When a customer is included in enhanced monitoring, we do not consider that it has suffered a SICR for ECL purposes, so it remainsfit our current business strategy in Stage 1 for purposes of our loss allowance calculations. When a customer is included in proactive management, we consider that it has suffered a SICR. This means we transfer it to Stage 2 and subject it to a lifetime ECL assessment to calculate the new loss allowance. We take into account any forbearance we offer. This includes whether any extra security or guarantees are available, the likelihood of more equity and the potential to enhance value through asset management.
In Corporate & Commercial Banking, as part of our annual review process, for CRE loans approaching maturity, we look at the prospects of refinancing the loan on current market terms and applicable credit policy. Where this seems unlikely, we put the case on our Watchlist.Centre.
Corporate & Investment Banking:
In CIB and Corporate Centre, we monitor the credit quality of our portfolios of treasury products daily. We use both internal and third-party data to detect any potential credit deterioration.
4. Arrears management
We identify problem debt by close monitoring, supported by our Watchlist process. When there is a problem, our relationship managers are the first to act, supported by the relevant credit risk expert. If a case becomes more urgent or needs specialist attention, and if it transfers to Stage 3 (previously, to NPL), we transfer it to our Restructuring & Recoveries team.
We aim to act before a customer actually defaults (to prevent it, if possible). The strategy we use depends on the type of customer, their circumstances and the level of risk. We use restructuring and rehabilitation tools to try to help our customers find their own way out of financial difficulty and agree on a plan that works for both of us.
We aim to identify warning signs early by monitoring customers’ financial and trading data, checking to make sure they are not breaching any covenants, and by having regular dialogue with them. We hold regular Watchlist meetings to agree a strategy for each portfolio.
Our Restructuring & Recoveries team attend these meetings for CIB cases and a quarterly forum for other cases, and we may hand over more serious cases to them.
| Portfolio | Description | |
Large Corporate | Most of these corporate loans and products are unsecured. We also have a structured finance portfolio, where we typically hold legal charges over the assets we finance. For all customer segments, the bank monitors borrowers are in line with expected performance and (where applicable) documented covenants so we detect any financial distress early. | |
Financial Institutions | We manage the risk on derivatives in this portfolio in the same way as for the derivatives in the Financial Institutions in Corporate Centre. | |
| 112 | Santander UK Group Holdings plc |
Annual Report 2018 | Risk review
5. Debt recovery
Consensual arrangements
Where we cannot find a solution like any of the ones we describe above, we look for an exit. If we can, we aim to do this by agreeing with the borrower that they will sell some or all of their assets on a voluntary basis or agreeing to give them time to refinance their debt with another lender.
Enforcement and recovery
Where we cannot find a way forward or reach a consensual arrangement, we consider recovery options. This can be through:
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If there is a shortfall, we write it off against loss allowances we hold, once the sale has gone through. In certain very rare instances we may act as mortgagee in possession of assets held as collateral againstnon-performing commercial lending. In such cases the assets are carried on our balance sheet and are classified according to our accounting policies.
Loan modifications
Forbearance
If a customer is having financial difficulty, we will work with them before they actually default to see if the difficulty can be addressed through forbearance. Their problems might be clear from the results of covenant testing, reviews of trading and other data they give us under the terms of their loan or as part of our ongoing conversations with them.
We may offer the following types of forbearance. We only do this if our assessments indicate the customer can meet the revised payments:
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk | ||||||||||||||||||||
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Corporate Centre:
We can agree to let a customer pay only
| Portfolio | Description | |
Sovereign and Supranational | In line with market practice, there is no collateral against these assets. | |
Structured Products | These are our HQLA and Legacy Treasury asset portfolios. These assets are primarily ABS and covered bonds, which benefit from senior positions in the creditor hierarchy. Their credit rating reflects the over-collateralisation in the structure, and the assets that underpin their cash flows and repayment schedules. We use a detailed expected cash flow analysis to assess the portfolios and we consider the structure and assets backing each individual security. | |
Social Housing | We manage the | |
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Other forms of debt management
When customers are in financial difficulty we can also manage debt in other ways, depending on the facts of the specific case:
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Risk measurement and control
We measure the credit risk on treasury products by adding their potential future exposure to market movements over their lives to their fair value. Then we add it to any other exposure and measure the total against our credit limits for each client.
We assess our loss allowances regularly and have them independently reviewed. We look at a number of factors, including the:
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OTHER BUSINESS SEGMENTS – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL
The following tables show changes in total exposures and ECLthis portfolio in the year. The footnotes tosame way as for the Santander UK group level table on page 83 also apply to these tables.
| Non-credit impaired | Credit impaired | |||||||||||||||||||||||||||||||||||||||
| Stage 1 Subject to 12–month ECL | Stage 2 Subject to lifetime ECL | Stage 3 Subject to lifetime ECL | Total | |||||||||||||||||||||||||||||||||||||
| Corporate & Commercial Banking | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 22,417 | 43 | 866 | 33 | 388 | 173 | 23,671 | 249 | ||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 5 | – | (3 | ) | – | – | – | 2 | |||||||||||||||||||||||||||||||
Transfer to lifetime ECL (not–credit impaired)(3) | (670 | ) | (3 | ) | 670 | 3 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer to credit impaired(3) | (41 | ) | – | (31 | ) | (1 | ) | 72 | 1 | – | – | |||||||||||||||||||||||||||||
Transfer to 12–month ECL(3) | 200 | 8 | (200 | ) | (8 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer from credit impaired(3) | 2 | 1 | 2 | 1 | (4 | ) | (2 | ) | – | – | ||||||||||||||||||||||||||||||
Transfers of financial instruments | (509 | ) | 6 | 441 | (5 | ) | 68 | (1 | ) | – | – | |||||||||||||||||||||||||||||
Net remeasurement of ECL on stage transfer(4) | – | (7 | ) | – | 10 | – | 18 | – | 21 | |||||||||||||||||||||||||||||||
New assets originated or purchased(5) | 9,115 | 12 | 281 | 5 | 3 | 1 | 9,399 | 18 | ||||||||||||||||||||||||||||||||
Other(6) | 879 | (3 | ) | (58 | ) | (3 | ) | (2 | ) | 37 | 819 | 31 | ||||||||||||||||||||||||||||
Assets derecognised – closed good(7) | (10,569 | ) | (19 | ) | (304 | ) | (5 | ) | (76 | ) | (18 | ) | (10,949 | ) | (42 | ) | ||||||||||||||||||||||||
Assets derecognised – written off(7) | – | – | – | – | (105 | ) | (97 | ) | (105 | ) | (97 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 21,333 | 37 | 1,226 | 32 | 276 | 113 | 22,835 | 182 | ||||||||||||||||||||||||||||||||
Net movement in the year | (1,084 | ) | (6 | ) | 360 | (1 | ) | (112 | ) | (60 | ) | (836 | ) | (67 | ) | |||||||||||||||||||||||||
Charge/(release) to the Income Statement | (6 | ) | (1 | ) | 37 | 30 | ||||||||||||||||||||||||||||||||||
Recoveries net of collection costs | – | – | (7 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (6 | ) | (1 | ) | 30 | 23 | ||||||||||||||||||||||||||||||||||
| Corporate & Investment Banking | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 26,583 | 16 | 109 | – | 372 | 242 | 27,064 | 258 | ||||||||||||||||||||||||||||||||
Changes to model | – | – | – | – | – | (9 | ) | – | (9 | ) | ||||||||||||||||||||||||||||||
Transfer to lifetime ECL (not–credit impaired)(3) | (2 | ) | – | 2 | – | – | – | – | – | |||||||||||||||||||||||||||||||
New assets originated or purchased(5) | 35,926 | 4 | 133 | 3 | – | – | 36,059 | 7 | ||||||||||||||||||||||||||||||||
Other(6) | (2,306 | ) | (1 | ) | 83 | 1 | (47 | ) | 29 | (2,270 | ) | 29 | ||||||||||||||||||||||||||||
Assets derecognised – closed good(7) | (18,101 | ) | (14 | ) | (193 | ) | (1 | ) | – | – | (18,294 | ) | (15 | ) | ||||||||||||||||||||||||||
Assets derecognised – written off(7) | – | – | – | – | (299 | ) | (252 | ) | (299 | ) | (252 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 42,100 | 5 | 134 | 3 | 26 | 10 | 42,260 | 18 | ||||||||||||||||||||||||||||||||
Net movement in the year | 15,517 | (11 | ) | 25 | 3 | (346 | ) | (232 | ) | 15,196 | (240 | ) | ||||||||||||||||||||||||||||
Charge/(release) to the Income Statement | (11 | ) | 3 | 20 | 12 | |||||||||||||||||||||||||||||||||||
Recoveries net of collection costs | – | – | 2 | 2 | ||||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (11 | ) | 3 | 22 | 14 | |||||||||||||||||||||||||||||||||||
| Corporate Centre | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 57,155 | 7 | 250 | 4 | 20 | 8 | 57,425 | 19 | ||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 1 | – | – | – | – | – | 1 | ||||||||||||||||||||||||||||||||
Transfer to lifetime ECL (not–credit impaired)(3) | (111 | ) | (1 | ) | 111 | 1 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer to credit impaired(3) | – | – | (4 | ) | – | 4 | – | – | – | |||||||||||||||||||||||||||||||
Transfer to 12–month ECL(3) | 133 | 3 | (133 | ) | (3 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfer from credit impaired(3) | – | – | 3 | 1 | (3 | ) | (1 | ) | – | – | ||||||||||||||||||||||||||||||
Transfers of financial instruments | 22 | 2 | (23 | ) | (1 | ) | 1 | (1 | ) | – | – | |||||||||||||||||||||||||||||
Net remeasurement of ECL on stage transfer(4) | – | (2 | ) | – | – | – | 1 | – | (1 | ) | ||||||||||||||||||||||||||||||
New assets originated or purchased(5) | 7,526 | 1 | 2 | – | 2 | 1 | 7,530 | 2 | ||||||||||||||||||||||||||||||||
Other(6) | (10,187 | ) | (2 | ) | (6 | ) | – | 3 | 1 | (10,190 | ) | (1 | ) | |||||||||||||||||||||||||||
Assets derecognised – closed good(7) | (4,617 | ) | (2 | ) | (90 | ) | – | (7 | ) | (2 | ) | (4,714 | ) | (4 | ) | |||||||||||||||||||||||||
Assets derecognised – written off(7) | – | – | – | – | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 49,899 | 5 | 133 | 3 | 16 | 5 | 50,048 | 13 | ||||||||||||||||||||||||||||||||
Net movement in the year | (7,256 | ) | (2 | ) | (117 | ) | (1 | ) | (4 | ) | (3 | ) | (7,377 | ) | (6 | ) | ||||||||||||||||||||||||
Charge/(release) to the Income Statement | (2 | ) | (1 | ) | – | (3 | ) | |||||||||||||||||||||||||||||||||
Recoveries net of collection costs | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (2 | ) | (1 | ) | (4 | ) | (7 | ) | ||||||||||||||||||||||||||||||||
2018 compared to 2017 (unaudited)
Non trading reverse repurchase agreements increased to £21,127m at 31 December 2018 (2017: £2,614m), which reflected the revised classification of the majority of our permitted non trading reverse repurchase agreements at amortised cost in line with our ring-fenced business model. We report reverse repurchase agreements in CIB and the movement in the year is reported in the ‘New assets originated or purchased’ and ‘Assets derecognised – closed good’ lines above.
Cash and balances at central banks, which are reported in Corporate Centre, decreased by £7,961m to £24,180m at 31 December 2018 (2017: £32,771m). This movement is reported in the ‘Other’ line above. For more, see the Balance sheet review in the ‘Financial review’ section.
Annual Report 2018 | Risk review
Committed exposures
Credit risk arises on both asset balances and off–balance sheet transactions such as guarantees. As a result, committed exposures are typically higher than asset balances. However, committed exposures can be smaller than the asset balances on the balance sheet due to netting. We show Sovereigns and Supranationals net of short positions and Large Corporate reverse repurchase agreement exposures are shown net of repurchase agreement liabilities and include OTC derivatives. In addition, the derivative and other treasury product exposures (which are classified as ‘Financial Institutions’) shown are also typically lower than the asset balances. This is because we show our overall risk exposure which takes into account our procedures to mitigate credit risk. The asset balances on our balance sheet only reflect the more restrictive netting permitted by IAS 32.
Rating distribution
These tables show our credit risk exposure according to our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.
| Santander UK risk grade | ||||||||||||||||||||||||||||||||||||
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total | ||||||||||||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||||||||||||||
SME and mid corporate | – | – | 66 | 1,745 | 5,749 | 3,426 | 886 | 36 | 11,908 | |||||||||||||||||||||||||||
Commercial Real Estate | – | – | – | 302 | 4,564 | 1,846 | 31 | – | 6,743 | |||||||||||||||||||||||||||
Social Housing | 680 | 3,899 | 138 | – | – | 2 | 24 | – | 4,743 | |||||||||||||||||||||||||||
| 680 | 3,899 | 204 | 2,047 | 10,313 | 5,274 | 941 | 36 | 23,394 | ||||||||||||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 393 | 3,807 | – | – | – | – | – | – | 4,200 | |||||||||||||||||||||||||||
Large Corporate | 12 | 3,187 | 5,535 | 6,361 | 888 | 3 | 78 | – | 16,064 | |||||||||||||||||||||||||||
Financial Institutions | 856 | 1,392 | 1,490 | 76 | – | – | – | – | 3,814 | |||||||||||||||||||||||||||
| 1,261 | 8,386 | 7,025 | 6,437 | 888 | 3 | 78 | – | 24,078 | ||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 34,512 | 91 | – | 1 | – | – | – | – | 34,604 | |||||||||||||||||||||||||||
Structured Products | 2,436 | 2,062 | 318 | 24 | – | – | – | – | 4,840 | |||||||||||||||||||||||||||
Social Housing | 1,377 | 2,847 | 76 | 43 | – | – | – | – | 4,343 | |||||||||||||||||||||||||||
Legacy Portfolios in run–off(2) | – | – | – | 203 | 35 | 137 | 126 | 357 | 858 | |||||||||||||||||||||||||||
Derivatives | – | 147 | – | – | – | – | – | – | 147 | |||||||||||||||||||||||||||
Crown Dependencies | 14 | 39 | 124 | 77 | 14 | 8 | 7 | – | 283 | |||||||||||||||||||||||||||
| 38,339 | 5,186 | 518 | 348 | 49 | 145 | 133 | 357 | 45,075 | ||||||||||||||||||||||||||||
Total | 40,280 | 17,471 | 7,747 | 8,832 | 11,250 | 5,422 | 1,152 | 393 | 92,547 | |||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Stage 1 | 40,280 | 17,471 | 7,747 | 8,759 | 10,802 | 4,780 | 527 | 377 | 90,743 | |||||||||||||||||||||||||||
Stage 2 | – | – | – | 73 | 448 | 635 | 318 | 16 | 1,490 | |||||||||||||||||||||||||||
Stage 3 | – | – | – | – | – | 7 | 307 | – | 314 | |||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||||||||||||||
SME and mid corporate | – | – | 259 | 2,183 | 5,402 | 3,574 | 998 | 214 | 12,630 | |||||||||||||||||||||||||||
Commercial Real Estate | – | – | – | 395 | 6,135 | 2,014 | 60 | 2 | 8,606 | |||||||||||||||||||||||||||
Social Housing | 499 | 2,600 | 171 | – | – | – | 4 | – | 3,274 | |||||||||||||||||||||||||||
| 499 | 2,600 | 430 | 2,578 | 11,537 | 5,588 | 1,062 | 216 | 24,510 | ||||||||||||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 590 | 3,321 | 444 | – | – | – | – | – | 4,355 | |||||||||||||||||||||||||||
Large Corporate | 260 | 2,979 | 8,391 | 8,879 | 573 | 2 | 355 | – | 21,439 | |||||||||||||||||||||||||||
Financial Institutions | 2,362 | 1,463 | 2,494 | 33 | 103 | – | – | – | 6,455 | |||||||||||||||||||||||||||
| 3,212 | 7,763 | 11,329 | 8,912 | 676 | 2 | 355 | – | 32,249 | ||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 44,477 | 18 | – | – | – | – | – | – | 44,495 | |||||||||||||||||||||||||||
Structured Products | 2,487 | 1,560 | 300 | 32 | – | – | – | – | 4,379 | |||||||||||||||||||||||||||
Social Housing | 1,841 | 3,641 | 451 | 43 | – | – | – | – | 5,976 | |||||||||||||||||||||||||||
Legacy Portfolios in run–off(2) | – | – | 1 | 359 | 104 | 124 | 37 | 400 | 1,025 | |||||||||||||||||||||||||||
Derivatives | – | 212 | – | – | – | – | – | – | 212 | |||||||||||||||||||||||||||
Crown Dependencies | 13 | 36 | 115 | 71 | 13 | 8 | 6 | – | 262 | |||||||||||||||||||||||||||
| 48,818 | 5,467 | 867 | 505 | 117 | 132 | 43 | 400 | 56,349 | ||||||||||||||||||||||||||||
Total | 52,529 | 15,830 | 12,626 | 11,995 | 12,330 | 5,722 | 1,460 | 616 | 113,108 | |||||||||||||||||||||||||||
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Geographical distribution
We typically classify geographical location according to the counterparty’s country of domicile unless a full risk transfer guarantee is in place, in which case we use the guarantor’s country of domicile instead.
2018 | 2017 | |||||||||||||||||||||||||||||||||||||||
| Rest of | Rest of | |||||||||||||||||||||||||||||||||||||||
| UK | Europe | US | World | Total | UK | Europe | US | World | Total | |||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||||||||||||||||||
SME and mid corporate | 11,833 | 74 | – | 1 | 11,908 | 12,513 | 116 | 1 | – | 12,630 | ||||||||||||||||||||||||||||||
Commercial Real Estate | 6,743 | – | – | – | 6,743 | 8,606 | – | – | – | 8,606 | ||||||||||||||||||||||||||||||
Social Housing | 4,743 | – | – | – | 4,743 | 3,274 | – | – | – | 3,274 | ||||||||||||||||||||||||||||||
| 23,319 | 74 | – | 1 | 23,394 | 24,393 | 116 | 1 | – | 24,510 | |||||||||||||||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | – | 393 | – | 3,807 | 4,200 | – | 1,032 | 1 | 3,322 | 4,355 | ||||||||||||||||||||||||||||||
Large Corporate | 13,080 | 2,752 | 124 | 108 | 16,064 | 17,430 | 3,699 | 111 | 199 | 21,439 | ||||||||||||||||||||||||||||||
Financial Institutions | 1,237 | 1,886 | 198 | 493 | 3,814 | 3,102 | 2,121 | 614 | 618 | 6,455 | ||||||||||||||||||||||||||||||
| 14,317 | 5,031 | 322 | 4,408 | 24,078 | 20,532 | 6,852 | 726 | 4,139 | 32,249 | |||||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 30,587 | 1,409 | 965 | 1,643 | 34,604 | 35,659 | 1,514 | 6,091 | 1,231 | 44,495 | ||||||||||||||||||||||||||||||
Structured Products | 2,576 | 1,142 | – | 1,122 | 4,840 | 2,086 | 1,217 | – | 1,076 | 4,379 | ||||||||||||||||||||||||||||||
Social Housing | 4,343 | – | – | – | 4,343 | 5,976 | – | – | – | 5,976 | ||||||||||||||||||||||||||||||
Legacy Portfolios in run–off | 744 | – | – | 114 | 858 | 909 | – | – | 116 | 1,025 | ||||||||||||||||||||||||||||||
Derivatives | – | – | 147 | – | 147 | – | 63 | 149 | – | 212 | ||||||||||||||||||||||||||||||
Crown Dependencies | 283 | – | – | – | 283 | 262 | – | – | – | 262 | ||||||||||||||||||||||||||||||
| 38,533 | 2,551 | 1,112 | 2,879 | 45,075 | 44,892 | 2,794 | 6,240 | 2,423 | 56,349 | |||||||||||||||||||||||||||||||
2018 compared to 2017 (unaudited)
In Corporate & Commercial Banking, we saw solid lending to trading business customers, offset by active management of our Commercial Real Estate (CRE) portfolio. Committed exposures remained broadly flat. Our CRE portfolio decreased by 21% as we continue to manage our exposure in line with proactive risk management policies. Our Social Housing portfolio increased by 45% driven by refinancing of longer–dated loans, previously managed in Corporate Centre, onto shorter maturities and current market terms.
In CIB, our committed exposures decreased by 25% mainly due to decreases in our Large Corporate and Financial institutions portfolios driven by the transfer of prohibited activity to Banco Santander London Branch as part of ring–fencing. Credit quality was relatively stable overall, mainly driven by the write-offs of Carillion plc and another CIB customer, both of which moved tonon-performing in 2017. Sovereign and Supranational exposures decreased by 4%. The portfolio profile remained short-term, reflecting the purpose of the holdings.
In Corporate Centre, committed exposures decreased by 20% mainly driven by our Sovereign and Supranational portfolio as part of normal liquid asset portfolio management. Legacy Portfolios in run–off reduced by 16%. Social Housing exposures also reduced as we continue to refinance longer–dated loans onto shorter maturities and current market terms that we then manage in Corporate & Commercial Banking.
CreditFinancial Institutions
We use standard legal agreements to reduce credit risk mitigation
In Corporate & Commercial Banking, weon derivatives, repos and reverse repos, and stock borrowing/lending. We also hold collateral and trade through central counterparties (CCPs) to reduce risk.
Netting – We use netting agreements where they have legal force, mainly in the UK, the rest of Europe and the US. This means that if a counterparty defaults, we can legally offset what we owe them and what they owe us and settle the net amount. However, netting arrangements often do not mean we can offset assets and liabilities for accounting purposes, as transactions are usually settled on CRE loansa gross basis. In line with market practice, we use standard legal agreements. For derivatives, we use ISDA Master Agreements; for repos and reverse repos, we use Global Master Repurchase Agreements; and for stock borrowing/lending and other securities financing, we use Global Master Securities Lending Agreements.
Collateral – We use the Credit Support Annex with the ISDA Master Agreement. This gives us collateral for our net exposures. The collateral can be cash, securities or equities. For stock borrowing/lending and repos and reverse repos, it includes high quality liquid debt securities and highly liquid equities listed on major developed markets. We revalue our healthcareexposures and hotels portfolios. Credit–impaired loans in these portfolios reduced from 2017, resulting in a decreasecollateral daily, adjusting the collateral to reflect deficits or surpluses. We have processes to control how we value and manage collateral, including documentation reviews and reporting. Collateral has to meet our ‘Liquid Assets and Eligible Collateral’ policy, which controls the quality and how much of any one kind of collateral we can hold. That gives us confidence we will be able to cash in the collateral weif a client defaults. We have these controls for equities and debt securities. The collateral held against credit–impaired loans. At 31 December 2018, the collateral we held against credit–impaired loans was 43% (2017: 56%) of the carrying amount of the credit–impaired loan exposures. At 31 December 2018, we held collateral of £69m (2017: £134m) against credit–impaired assets of £276m (2017: £393m).
In CIB, the top 20 clients with derivative exposure made up 85% (2017: 65%)for reverse repos is worth at least 100% of our total derivative exposure, all of which were banksexposure.
CCPs – These are intermediaries between a buyer and CCPs. The weighted–average credit rating was 7.1 (2017: 7.2). At 31 December 2018 and 2017, we held no collateral against credit–impaired loans in the Large Corporate portfolio.
In Corporate Centre, wea seller – generally a clearing house. We use CCPs to reduce counterparty credit risk in derivatives with netting agreements, collateralisation and the use of CCPs.derivatives.
At 31 December 2018, we had cash collateral of £265m (2017: £348m) held against our performing Legacy Portfolios in run–off. At 31 December 2018,run-off
We often hold collateral through a first legal charge over the underlying asset or cash. We get independent third-party valuations on fixed charge security in line with industry guidelines. We then review our impairment loss allowance. To do that, we held collateral of £10m (2017: £13m) against all credit–impaired loan exposure of £16m (2017: £20m).
Annual Report 2018 | Risk reviewbear in mind:
– The borrower’s ability to generate cash flow
– The age of the assets
– Whether the loan is still performing satisfactorily
– Whether or not the reduction in value is likely to be temporary
– Whether there are other ways to solve the problem.
Where a borrower gets into difficulty we look to dispose of the collateral, either with agreement or through the insolvency process. We do this as early as possible, to minimise any loss. We rarely take ownership of collateral.
Credit performanceDerivatives
Crown Dependencies
Committed exposure | ||||||||||||||||||||||||
| Watchlist | ||||||||||||||||||||||||
| Non– | ||||||||||||||||||||||||
| Fully | Enhanced | Proactive | performing | Loss | ||||||||||||||||||||
| performing | monitoring | management | exposure(1) | Total(2) | allowances(3) | |||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||
SME and mid corporate | 10,350 | 972 | 333 | 253 | 11,908 | 160 | ||||||||||||||||||
Commercial Real Estate | 6,426 | 247 | 47 | 23 | 6,743 | 22 | ||||||||||||||||||
Social Housing | 4,626 | 117 | – | – | 4,743 | – | ||||||||||||||||||
| 21,402 | 1,336 | 380 | 276 | 23,394 | 182 | |||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||
Sovereign and Supranational | 4,200 | – | – | – | 4,200 | – | ||||||||||||||||||
Large Corporate | 15,304 | 548 | 186 | 26 | 16,064 | 18 | ||||||||||||||||||
Financial Institutions | 3,814 | – | – | – | 3,814 | – | ||||||||||||||||||
| 23,318 | 548 | 186 | 26 | 24,078 | 18 | |||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||
Sovereign and Supranational | 34,604 | – | – | – | 34,604 | – | ||||||||||||||||||
Structured Products | 4,840 | – | – | – | 4,840 | – | ||||||||||||||||||
Social Housing | 4,321 | 22 | – | – | 4,343 | – | ||||||||||||||||||
Legacy Portfolios in run–off | 809 | 26 | 7 | 16 | 858 | 13 | ||||||||||||||||||
Derivatives | 147 | – | – | – | 147 | – | ||||||||||||||||||
Crown Dependencies | 281 | – | – | 2 | 283 | – | ||||||||||||||||||
| 45,002 | 48 | 7 | 18 | 45,075 | 13 | |||||||||||||||||||
Total loss allowances(3) | 213 | |||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||
SME and mid corporate | 11,185 | 815 | 296 | 334 | 12,630 | 128 | ||||||||||||||||||
Commercial Real Estate | 8,254 | 160 | 133 | 59 | 8,606 | 27 | ||||||||||||||||||
Social Housing | 3,274 | – | – | – | 3,274 | – | ||||||||||||||||||
| 22,713 | 975 | 429 | 393 | 24,510 | 155 | |||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||
Sovereign and Supranational | 4,355 | – | – | – | 4,355 | – | ||||||||||||||||||
Large Corporate | 20,757 | 284 | 8 | 390 | 21,439 | 236 | ||||||||||||||||||
Financial Institutions | 6,354 | 1 | 100 | – | 6,455 | – | ||||||||||||||||||
| 31,466 | 285 | 108 | 390 | 32,249 | 236 | |||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||
Sovereign and Supranational | 44,495 | – | – | – | 44,495 | – | ||||||||||||||||||
Structured Products | 4,379 | – | – | – | 4,379 | – | ||||||||||||||||||
Social Housing | 5,972 | 4 | – | – | 5,976 | – | ||||||||||||||||||
Legacy Portfolios in run–off | 977 | 22 | 6 | 20 | 1,025 | 6 | ||||||||||||||||||
Derivatives | 212 | – | – | – | 212 | – | ||||||||||||||||||
Crown Dependencies | 261 | – | – | 1 | 262 | – | ||||||||||||||||||
| 56,296 | 26 | 6 | 21 | 56,349 | 6 | |||||||||||||||||||
Total observed impairment loss allowances | 397 | |||||||||||||||||||||||
Allowance for IBNO(4) | 52 | |||||||||||||||||||||||
Total loss allowances | 449 | |||||||||||||||||||||||
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2018 compared to 2017 (unaudited)
In Corporate & Commercial Banking,We manage the SME and mid corporaterisk on this portfolio and our CRE portfolio,non-performing exposures (NPEs) reduced, largely due toin the workout of a number of smaller loans reaching a conclusion resultingsame way as for mortgages in partial write-offs, without material concentrations across sectors or portfolios. Exposures subject to enhanced monitoring increased due to a social housing case experiencing governance issues plus a small number of CRE cases approaching maturity where repayment or refinance arrangements had yet to be confirmed.
In CIB, Large Corporate exposures subject to enhanced monitoring increased due to a small number of cases that were experiencing performance issues. However, NPEs decreased predominantly due to loan write-offs for Carillion plc and another CIB customer, both of which moved to non–performing in 2017. Financial Institutions exposures subject to proactive monitoring decreased, driven by the transfer of one case to Banco Santander London Branch.
In Corporate Centre, Legacy Portfolios in run–off subject to enhanced monitoring and proactive management remained stable. NPEs reduced driven by continuing exit of the legacy commercial mortgage portfolio.
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Loan modifications
The following table provides information on financial assets that were forborne while they had a loss allowance measured at an amount equal to lifetime ECL.
| Corporate & | Corporate & | |||||||||||
| Commercial | Investment | Corporate | ||||||||||
| Banking | Banking | Centre | ||||||||||
| £m | £m | £m | ||||||||||
Financial assets modified during the period: | ||||||||||||
– Amortised cost before modification | 104 | – | 2 | |||||||||
– Net modification loss | 10 | – | – | |||||||||
Financial assets modified since initial recognition: | ||||||||||||
– Gross carrying amount of financial assets for which the ECL allowance has changed to12-month measurement during the year | 8 | 7 | 4 | |||||||||
Forbearance
We only make forbearance arrangements for lending to customers. The balances at 31 December 2018 and 2017, analysed by their staging (2017: payment status) at the year–end and the forbearance we applied, were:
2018 | 2017 | |||||||||||||||||||||||||||
| Corporate & | Corporate & | Corporate & | Corporate & | |||||||||||||||||||||||||
| Commercial | Investment | Corporate | Commercial | Investment | Corporate | |||||||||||||||||||||||
| Banking | Banking | Centre | Banking | Banking | Centre(1) | |||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||
Stock:(1) | ||||||||||||||||||||||||||||
– Term extension | 67 | 42 | – | 136 | 55 | – | ||||||||||||||||||||||
– Interest–only | 112 | – | 8 | 152 | – | 14 | ||||||||||||||||||||||
– Other payment rescheduling | 163 | 26 | 10 | 127 | 299 | 13 | ||||||||||||||||||||||
| 342 | 68 | 18 | 415 | 354 | 27 | |||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Stage 1 | 43 | – | 3 | |||||||||||||||||||||||||
– Stage 2 | 78 | 42 | 8 | |||||||||||||||||||||||||
– Stage 3 | 221 | 26 | 7 | |||||||||||||||||||||||||
– NPL | 273 | 347 | 11 | |||||||||||||||||||||||||
– Performing | 142 | 7 | 16 | |||||||||||||||||||||||||
| 342 | 68 | 18 | 415 | 354 | 27 | |||||||||||||||||||||||
Proportion of portfolio | 1.5% | 0.3% | 2.1% | 1.7% | 1.1% | 2.6% | ||||||||||||||||||||||
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2018 compared to 2017 (unaudited)
In Corporate & Commercial Banking, the cumulative forbearance stock reduced, mainly due to the resolution of NPL cases, and performing cases exiting forbearance according to defined criteria. Forbearance stock also reduced in CIB, following loan written-offs for Carillion plc and another CIB customer. At 31 December 2018, there were only two forborne cases (2017: five cases) in CIB.
PORTFOLIOS OF PARTICULAR INTEREST
Introduction(unaudited)
Some types of lending have higher risk and others stand out for different reasons. In the section below we provide further details of our CRE and Social Housing portfolios.
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3. Monitoring
We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our ERCC a detailed analysis of our credit exposures and risk trends every month. We also report our larger exposures and risks to the Board Risk Committee every month.
Commercial Real Estate
Credit performanceSocial Housing
| Customer | Gross write- | Loss | ||||||||||||||||||
| loans(1) | NPLs(2) | NPL ratio(3) | offs | allowances(4) | ||||||||||||||||
| £m | £m | % | £m | £m | ||||||||||||||||
2018 | 6,459 | 29 | 0.45 | 23 | 26 | |||||||||||||||
2017 | 8,144 | 69 | 0.85 | 11 | 54 | |||||||||||||||
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Corporate & Investment Banking: |
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| Portfolio | Description | |
Large Corporate | Most of these corporate loans and products are unsecured. We also have a structured finance portfolio, where we typically hold legal charges over the assets we finance. For all customer segments, the bank monitors borrowers are in line with expected performance and (where applicable) documented covenants so we detect any financial distress early. | |
Financial Institutions | We manage the risk on derivatives in this portfolio in the same way as for the derivatives in the Financial Institutions in Corporate Centre. | |
| 112 | Santander UK Group Holdings plc |
Annual
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk |
Corporate Centre:
| Portfolio | Description | |
Sovereign and Supranational | In line with market practice, there is no collateral against these assets. | |
Structured Products | These are our HQLA and Legacy Treasury asset portfolios. These assets are primarily ABS and covered bonds, which benefit from senior positions in the creditor hierarchy. Their credit rating reflects the over-collateralisation in the structure, and the assets that underpin their cash flows and repayment schedules. We use a detailed expected cash flow analysis to assess the portfolios and we consider the structure and assets backing each individual security. | |
Social Housing | We manage the risk on this portfolio in the same way as for the Social Housing portfolio in Corporate & Commercial Banking. | |
Financial Institutions | We use standard legal agreements to reduce credit risk on derivatives, repos and reverse repos, and stock borrowing/lending. We also hold collateral and trade through central counterparties (CCPs) to reduce risk. Netting – We use netting agreements where they have legal force, mainly in the UK, the rest of Europe and the US. This means that if a counterparty defaults, we can legally offset what we owe them and what they owe us and settle the net amount. However, netting arrangements often do not mean we can offset assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis. In line with market practice, we use standard legal agreements. For derivatives, we use ISDA Master Agreements; for repos and reverse repos, we use Global Master Repurchase Agreements; and for stock borrowing/lending and other securities financing, we use Global Master Securities Lending Agreements. Collateral – We use the Credit Support Annex with the ISDA Master Agreement. This gives us collateral for our net exposures. The collateral can be cash, securities or equities. For stock borrowing/lending and repos and reverse repos, it includes high quality liquid debt securities and highly liquid equities listed on major developed markets. We revalue our exposures and collateral daily, adjusting the collateral to reflect deficits or surpluses. We have processes to control how we value and manage collateral, including documentation reviews and reporting. Collateral has to meet our ‘Liquid Assets and Eligible Collateral’ policy, which controls the quality and how much of any one kind of collateral we can hold. That gives us confidence we will be able to cash in the collateral if a client defaults. We have these controls for equities and debt securities. The collateral held for reverse repos is worth at least 100% of our exposure. CCPs – These are intermediaries between a buyer and a seller – generally a clearing house. We use CCPs to reduce counterparty credit risk in derivatives. | |
Legacy Portfolios inrun-off | We often hold collateral through a first legal charge over the underlying asset or cash. We get independent third-party valuations on fixed charge security in line with industry guidelines. We then review our impairment loss allowance. To do that, we bear in mind: – The borrower’s ability to generate cash flow – The age of the assets – Whether the loan is still performing satisfactorily – Whether or not the reduction in value is likely to be temporary – Whether there are other ways to solve the problem. Where a borrower gets into difficulty we look to dispose of the collateral, either with agreement or through the insolvency process. We do this as early as possible, to minimise any loss. We rarely take ownership of collateral. | |
Derivatives | We manage the risk on this portfolio in the same way as for the derivatives in Financial Institutions in Corporate Centre. | |
Crown Dependencies | We manage the risk on this portfolio in the same way as for mortgages in Retail Banking. | |
3. Monitoring
We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our ERCC a detailed analysis of our credit exposures and risk trends every month. We also report our larger exposures and risks to the Board Risk Committee every month.
Our Watchlist
We also use a Watchlist to help us identify potential problem debt early. Just because a customer is on our Watchlist does not mean they have defaulted. It just means that something has happened that has increased the probability of default. There are several reasons we might put customers on this list. For example, if they suffer a downturn in trade, breach a covenant, lose a major contract, slip into early arrears, or their key management resign. Whatever the trigger, we review the case to assess the potential financial impact.
We classify Watchlist cases as:
| – | Enhanced monitoring: for less urgent cases. If they are significant, we monitor them more often |
| – | Proactive management: for more urgent or serious cases. We may take steps to restructure debt including extending the term, taking more collateral, agreeing a lower credit limit or seeking repayment of the loan through refinancing or other means. |
We assess cases on the Watchlist for impairment in accordance with IFRS 9 as explained in ‘Significant Increase in Credit Risk (SICR)’ in the ‘Santander UK group level – Credit risk management’ section.
When a customer is included in enhanced monitoring, we do not consider that it has suffered a SICR for ECL purposes, so it remains in Stage 1 for purposes of our loss allowance calculations. When a customer is included in proactive management, we consider that it has suffered a SICR. This means we transfer it to Stage 2 and subject it to a lifetime ECL assessment to calculate the new loss allowance. We take into account any forbearance we offer. This includes whether any extra security or guarantees are available, the likelihood of more equity and the potential to enhance value through asset management.
In Corporate & Commercial Banking, as part of our client review process, for loans approaching maturity, we look at the prospects of refinancing the loan on current market terms and applicable credit policy. Where this seems unlikely, we put the case on our Watchlist.
In CIB and Corporate Centre, we monitor the credit quality of our exposures daily. We use both internal and third-party data to detect any potential credit deterioration. In Corporate Centre, we manage the credit quality of our Crown Dependencies mortgages in the same way as for mortgages in Retail Banking.
| Santander UK Group Holdings plc | 113 |
Annual Report 2019| Risk review
4. Arrears management
We identify problem debt by close monitoring, supported by our Watchlist process. When there is a problem, our relationship managers are the first to act, supported by the relevant credit risk expert. If a case becomes more urgent or needs specialist attention, and if it transfers to Stage 3, we transfer it to our Restructuring & Recoveries team.
We aim to act before a customer defaults (to prevent it, if possible). The strategy we use depends on the type of customer, their circumstances and the level of risk. We use restructuring and rehabilitation tools to try to help our customers find their own way out of financial difficulty and agree on a plan that works for both of us. We aim to identify warning signs early by monitoring customers’ financial and trading data, checking to make sure they are not breaching any covenants, and by having regular dialogue with them. We hold regular Watchlist meetings to agree a strategy for each portfolio.
Our Restructuring & Recoveries team are engaged as appropriate on Watchlist cases and we may hand over more serious cases to them.
5. Debt recovery
Consensual arrangements
Where we cannot find a solution like any of the ones we describe above, we look for an exit. If we can, we aim to do this by agreeing with the borrower that they will sell some or all of their assets on a voluntary basis or agreeing to give them time to refinance their debt with another lender.
Enforcement and recovery
Where we cannot find a way forward or reach a consensual arrangement, we consider recovery options. This can be through:
| – | The insolvency process |
| – | Enforcing over any collateral |
| – | Selling the debt on the secondary market |
| – | Considering other legal action available to recover what we are owed from debtors and guarantors. |
If there is a shortfall, we write it off against loss allowances we hold. In certain very rare instances, we may act as mortgagee in possession of assets held as collateral againstnon-performing commercial lending. In such cases the assets are carried on our balance sheet and are classified according to our accounting policies.
Loan modifications
Forbearance
If a customer is having financial difficulty, we will work with them before they default to see if the difficulty can be addressed through forbearance. Their problems might be clear from the results of covenant testing, reviews of trading and other data they give us under the terms of their loan or as part of our ongoing conversations with them.
We may offer the following types of forbearance. We only do this if our assessments indicate the customer can meet the revised payments:
| Action | Description | |
Term extension | We can extend the term of the loan. At a minimum, we expect the customer to be able to pay the interest in the short-term and have a realistic chance of repaying the full balance in the long-term. We may offer this option if the customer is up to date with their payments but showing signs of financial difficulties. We may also offer this option where the loan is about to mature and near-term refinancing is not possible on market terms. | |
Interest-only | We can agree to let a customer pay only the interest on the loan for a short time – usually less than a year. We only agree to this if we believe their financial problems are temporary and they are going to recover. After the interest-only period, we expect the customer to go back to making full payments of interest and capital once they are in a stronger financial position. We regularly look at the customer’s financial situation to see when they can afford to do that. | |
Other payment rescheduling (including capitalisation) | If a customer is having cash flow issues, we may agree to lower or stop their payments until they have had time to recover. We may: – Reschedule payments to better match the customer’s cash flow – for example if the business is seasonal – Provide a temporary increase in facilities to cover peak demand ahead of the customer’s trading improving. We might do this by adding their arrears to their loan balance (we call this arrears capitalisation) or drawing from an overdraft. We may also offer other types of forbearance, including providing new facilities, interest rate concessions, seasonal profiling and interestroll-up. In rare cases, we agree to forgive or reduce part of the debt. | |
Other forms of debt management
When customers are in financial difficulty, we can also manage debt in other ways, depending on the facts of the specific case:
| Action | Description | |
Waiving or changing covenants | If a borrower breaks a covenant, we can either waive it or change it, taking their latest and future financial position into account. We may also add a condition on the use of any surplus cash (after operating costs) to pay down their debt to us. | |
Asking for more collateral or guarantees | If a borrower has unencumbered assets, we may accept new or extra collateral in return for revised financing terms. We may also take a guarantee from other companies in the same group and/or major shareholders. We only do this where we believe the guarantor will be able to meet their commitment. | |
Asking for more equity | Where a borrower can no longer pay the interest on their debt, we may accept fresh equity capital from new or existing investors to change the capital structure in return for better terms on the existing debt. | |
Risk measurement and control
We measure the credit risk on treasury products by adding their potential future exposure to market movements over their lives to their fair value. Then we add it to any other exposure and measure the total against our credit limits for each client. In Corporate Centre, we manage the credit quality of our Crown Dependencies mortgages in the same way as for mortgages in Retail Banking.
We assess our loss allowances regularly and have them independently reviewed. We look at a number of factors, including the:
| – | Cash flow available to service debt |
| – | Value of collateral based on third-party professional valuations. |
| 114 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk |
OTHER BUSINESS SEGMENTS – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL
The following tables show changes in total on andoff-balance sheet exposures and ECL in the year. The footnotes to the Santander UK group level table on page 96 also apply to these tables.
| Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||||||||||||||
| Corporate & Commercial Banking | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | ||||||||||||||||||||||||||||||||
At 1 January 2019 | 21,333 | 37 | 1,226 | 32 | 276 | 113 | 22,835 | 182 | ||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (747 | ) | (3 | ) | 747 | 3 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1(3) | 120 | 5 | (120 | ) | (5 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | (33 | ) | – | (92 | ) | (3 | ) | 125 | 3 | – | – | |||||||||||||||||||||||||||||
Transfers from Stage 3(3) | – | – | 6 | – | (6 | ) | – | – | – | |||||||||||||||||||||||||||||||
Transfers of financial instruments | (660 | ) | 2 | 541 | (5 | ) | 119 | 3 | – | – | ||||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (4 | ) | – | 17 | – | 32 | – | 45 | |||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 7 | – | 9 | – | – | – | 16 | ||||||||||||||||||||||||||||||||
New lending and assets purchased(5) | 5,129 | 4 | 350 | 6 | 2 | 1 | 5,481 | 11 | ||||||||||||||||||||||||||||||||
Other(6) | 1,293 | 4 | 63 | (11 | ) | 49 | 29 | 1,405 | 22 | |||||||||||||||||||||||||||||||
Redemptions and repayments(7) | (7,778 | ) | (9 | ) | (4 | ) | (7 | ) | (3 | ) | (9 | ) | (7,785 | ) | (25 | ) | ||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (81 | ) | (41 | ) | (81 | ) | (41 | ) | ||||||||||||||||||||||||||||
At 31 December 2019 | 19,317 | 41 | 2,176 | 41 | 362 | 128 | 21,855 | 210 | ||||||||||||||||||||||||||||||||
Net movement in the year | (2,016 | ) | 4 | 950 | 9 | 86 | 15 | (980 | ) | 28 | ||||||||||||||||||||||||||||||
ECL charge/(release) to the Income Statement | 4 | 9 | 56 | 69 | ||||||||||||||||||||||||||||||||||||
Less: ECL relating to derecognised income | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | (8 | ) | (8 | ) | (12 | ) | (28 | ) | ||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (4 | ) | 1 | 40 | 37 | |||||||||||||||||||||||||||||||||||
| Corporate & Investment Banking | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
At 1 January 2019 | 17,458 | 5 | 134 | 3 | 26 | 10 | 17,618 | 18 | ||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (208 | ) | – | 208 | – | – | – | – | – | |||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1((3) | 41 | – | (41 | ) | – | – | – | – | – | |||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Transfers from Stage 3(3) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Transfers of financial instruments | (167 | ) | – | 167 | – | – | – | – | – | |||||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | – | – | 37 | – | – | – | 37 | ||||||||||||||||||||||||||||||||
Changes to model | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
New lending and assets purchased(5) | 54 | – | – | – | – | – | 54 | – | ||||||||||||||||||||||||||||||||
Other(6) | 376 | – | 171 | (1 | ) | (6 | ) | (1 | ) | 541 | (2 | ) | ||||||||||||||||||||||||||||
Redemptions and repayments(7) | (4,676 | ) | – | (76 | ) | (3 | ) | (5 | ) | – | (4,757 | ) | (3 | ) | ||||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
At 31 December 2019 | 13,045 | 5 | 396 | 36 | 15 | 9 | 13,456 | 50 | ||||||||||||||||||||||||||||||||
Net movement in the year | (4,413 | ) | – | 262 | 33 | (11 | ) | (1 | ) | (4,162 | ) | 32 | ||||||||||||||||||||||||||||
ECL charge/(release) to the Income Statement | – | 33 | (1 | ) | 32 | |||||||||||||||||||||||||||||||||||
Less: ECL relating to derecognised income | – | – | – | – | ||||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | (8 | ) | (2 | ) | (10 | ) | |||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | – | 25 | (3 | ) | 22 | |||||||||||||||||||||||||||||||||||
| Corporate Centre | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
At 1 January 2019 | 74,541 | 5 | 133 | 3 | 16 | 5 | 74,690 | 13 | ||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (15 | ) | – | 15 | – | – | – | – | – | |||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1(3) | 7 | – | (7 | ) | – | – | – | – | – | |||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | (3 | ) | – | (4 | ) | – | 7 | – | – | – | ||||||||||||||||||||||||||||||
Transfers from Stage 3(3) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Transfers of financial instruments | (11 | ) | – | 4 | – | 7 | – | – | – | |||||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | – | – | – | – | 2 | – | 2 | ||||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 1 | – | – | – | – | – | 1 | ||||||||||||||||||||||||||||||||
Changes to model | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
New lending and assets purchased(5)(8) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Other(6) | (145 | ) | (3 | ) | (8 | ) | – | (1 | ) | 1 | (154 | ) | (2 | ) | ||||||||||||||||||||||||||
Redemptions and repayments(7) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (4 | ) | (2 | ) | (4 | ) | (2 | ) | ||||||||||||||||||||||||||||
At 31 December 2019 | 74,385 | 3 | 129 | 3 | 18 | 6 | 74,532 | 12 | ||||||||||||||||||||||||||||||||
Net movement in the year | (156 | ) | (2 | ) | (4 | ) | – | 2 | 1 | (158 | ) | (1 | ) | |||||||||||||||||||||||||||
ECL charge/(release) to the Income Statement | (2 | ) | – | 3 | 1 | |||||||||||||||||||||||||||||||||||
Less: ECL relating to derecognised income | – | – | – | – | ||||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | – | – | ||||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (2 | ) | – | 3 | 1 | |||||||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc | 115 |
Annual Report 2019| Risk review
| Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||||||||||||||
| Corporate & Commercial Banking | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | Exposures(1) £m | ECL £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 22,417 | 43 | 866 | 33 | 388 | 173 | 23,671 | 249 | ||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (670 | ) | (3 | ) | 670 | 3 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1(3) | 200 | 8 | (200 | ) | (8 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | (41 | ) | – | (31 | ) | (1 | ) | 72 | 1 | – | – | |||||||||||||||||||||||||||||
Transfers from Stage 3(3) | 2 | 1 | 2 | 1 | (4 | ) | (2 | ) | – | – | ||||||||||||||||||||||||||||||
Transfers of financial instruments | (509 | ) | 6 | 441 | (5 | ) | 68 | (1 | ) | – | – | |||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (7 | ) | – | 10 | – | 18 | – | 21 | |||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 5 | – | (3 | ) | – | – | – | 2 | |||||||||||||||||||||||||||||||
New lending and assets purchased(5) | 9,115 | 12 | 281 | 5 | 3 | 1 | 9,399 | 18 | ||||||||||||||||||||||||||||||||
Other(6) | 1,642 | (5 | ) | (37 | ) | (4 | ) | 23 | 33 | 1,628 | 24 | |||||||||||||||||||||||||||||
Redemptions and repayments(7) | (11,332 | ) | (17 | ) | (325 | ) | (4 | ) | (101 | ) | (14 | ) | (11,758 | ) | (35 | ) | ||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (105 | ) | (97 | ) | (105 | ) | (97 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 21,333 | 37 | 1,226 | 32 | 276 | 113 | 22,835 | 182 | ||||||||||||||||||||||||||||||||
Net movement in the year | (1,084 | ) | (6 | ) | 360 | (1 | ) | (112 | ) | (60 | ) | (836 | ) | (67 | ) | |||||||||||||||||||||||||
ECL charge/(release) to the Income Statement | (6 | ) | (1 | ) | 37 | 30 | ||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | (7 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (6 | ) | (1 | ) | 30 | 23 | ||||||||||||||||||||||||||||||||||
| Corporate & Investment Banking | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 20,503 | 16 | 109 | – | 372 | 242 | 20,984 | 258 | ||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (2 | ) | – | 2 | – | – | – | – | – | |||||||||||||||||||||||||||||||
Changes to model | – | – | – | – | – | (10 | ) | – | (10 | ) | ||||||||||||||||||||||||||||||
New lending and assets purchased(5) | 14,799 | 4 | 133 | 3 | – | – | 14,932 | 7 | ||||||||||||||||||||||||||||||||
Other(6) | (1,876 | ) | (1 | ) | 83 | 1 | 103 | 76 | (1,690 | ) | 76 | |||||||||||||||||||||||||||||
Redemptions and repayments(7) | (15,966 | ) | (14 | ) | (193 | ) | (1 | ) | (150 | ) | (46 | ) | (16,309 | ) | (61 | ) | ||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (299 | ) | (252 | ) | (299 | ) | (252 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 17,458 | 5 | 134 | 3 | 26 | 10 | 17,618 | 18 | ||||||||||||||||||||||||||||||||
Net movement in the year | (3,045 | ) | (11 | ) | 25 | 3 | (346 | ) | (232 | ) | (3,366 | ) | (240 | ) | ||||||||||||||||||||||||||
ECL charge/(release) to the Income Statement | (11 | ) | 3 | 20 | 12 | |||||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | 2 | 2 | ||||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (11 | ) | 3 | 22 | 14 | |||||||||||||||||||||||||||||||||||
| Corporate Centre | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||
At 1 January 2018 | 63,236 | 7 | 250 | 4 | 20 | 8 | 63,506 | 19 | ||||||||||||||||||||||||||||||||
Transfers from Stage 1 to Stage 2(3) | (111 | ) | (1 | ) | 111 | 1 | – | – | – | – | ||||||||||||||||||||||||||||||
Transfers from Stage 2 to Stage 1(3) | 133 | 3 | (133 | ) | (3 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Transfers to Stage 3(3) | – | – | (4 | ) | – | 4 | – | – | – | |||||||||||||||||||||||||||||||
Transfers from Stage 3(3) | – | – | 3 | 1 | (3 | ) | (1 | ) | – | – | ||||||||||||||||||||||||||||||
Transfers of financial instruments | 22 | 2 | (23 | ) | (1 | ) | 1 | (1 | ) | – | – | |||||||||||||||||||||||||||||
Net ECL remeasurement on stage transfer(4) | – | (2 | ) | – | – | – | 1 | – | (1 | ) | ||||||||||||||||||||||||||||||
Change in economic scenarios(2) | – | 1 | – | – | – | – | – | 1 | ||||||||||||||||||||||||||||||||
Changes to model | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
New lending and assets purchased(5)(8) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Other(6) | 11,283 | (3 | ) | (94 | ) | – | (2 | ) | – | 11,187 | (3 | ) | ||||||||||||||||||||||||||||
Redemptions and repayments(7) | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Assets written off(7) | – | – | – | – | (3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||
At 31 December 2018 | 74,541 | 5 | 133 | 3 | 16 | 5 | 74,690 | 13 | ||||||||||||||||||||||||||||||||
Net movement in the year | 11,305 | (2 | ) | (117 | ) | (1 | ) | (4 | ) | (3 | ) | 11,184 | (6 | ) | ||||||||||||||||||||||||||
ECL charge/(release) to the Income Statement | (2 | ) | (1 | ) | – | (3 | ) | |||||||||||||||||||||||||||||||||
Less: Recoveries net of collection costs | – | – | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||
Income statement charge/(release) for the year | (2 | ) | (1 | ) | (4 | ) | (7 | ) | ||||||||||||||||||||||||||||||||
| 116 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk |
Committed exposures
Credit risk arises on both asset balances and off–balance sheet transactions such as guarantees. As a result, committed exposures are typically higher than asset balances. However, committed exposures can be smaller than the asset balances on the balance sheet due to netting. We show Sovereigns and Supranationals net of short positions and Large Corporate reverse repurchase agreement exposures are shown net of repurchase agreement liabilities and include OTC derivatives. The derivative and other treasury product exposures (which are classified as ‘Financial Institutions’) shown are also typically lower than the asset balances. This is because we show our overall risk exposure which takes into account our procedures to mitigate credit risk. The balances on our balance sheet only reflect the more restrictive netting permitted by IAS 32.
Rating distribution
These tables show our credit risk exposure according to our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section) for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.
| Santander UK risk grade | ||||||||||||||||||||||||||||||||||||
| 2019 | 9 £m | 8 £m | 7 £m | 6 £m | 5 £m | 4 £m | 3 to 1 £m | Other(1) £m | Total £m | |||||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||||||||||||||
SME and mid corporate | – | 25 | 790 | 1,914 | 4,414 | 3,348 | 946 | 32 | 11,469 | |||||||||||||||||||||||||||
Commercial Real Estate | – | – | – | 426 | 3,708 | 1,363 | 94 | – | 5,591 | |||||||||||||||||||||||||||
Social Housing | 1,231 | 3,655 | 26 | – | – | 2 | 4 | – | 4,918 | |||||||||||||||||||||||||||
| 1,231 | 3,680 | 816 | 2,340 | 8,122 | 4,713 | 1,044 | 32 | 21,978 | ||||||||||||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||||||||||||||
Large Corporate | 281 | 2,356 | 4,419 | 4,558 | 842 | 75 | 115 | – | 12,646 | |||||||||||||||||||||||||||
Financial Institutions | 383 | 822 | 718 | 11 | – | – | – | – | 1,934 | |||||||||||||||||||||||||||
| 664 | 3,178 | 5,137 | 4,569 | 842 | 75 | 115 | – | 14,580 | ||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 37,359 | 2,255 | – | – | – | – | – | – | 39,614 | |||||||||||||||||||||||||||
Structured Products | 1,166 | 981 | 396 | 29 | – | – | – | – | 2,572 | |||||||||||||||||||||||||||
Social Housing | 934 | 3,036 | 90 | – | – | – | – | – | 4,060 | |||||||||||||||||||||||||||
Financial Institutions | 542 | 246 | 43 | 25 | 1 | – | – | – | 857 | |||||||||||||||||||||||||||
Legacy Portfolios inrun-off(2) | – | – | – | 130 | 27 | 98 | 140 | 303 | 698 | |||||||||||||||||||||||||||
Crown Dependencies | – | – | – | – | – | – | 1 | 288 | 289 | |||||||||||||||||||||||||||
| 40,001 | 6,518 | 529 | 184 | 28 | 98 | 141 | 591 | 48,090 | ||||||||||||||||||||||||||||
Total | 41,896 | 13,376 | 6,482 | 7,093 | 8,992 | 4,886 | 1,300 | 623 | 84,648 | |||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Stage 1 | 41,896 | 13,376 | 6,456 | 6,901 | 8,263 | 3,586 | 466 | 608 | 81,552 | |||||||||||||||||||||||||||
Stage 2 | – | – | 26 | 192 | 729 | 1,300 | 439 | 15 | 2,701 | |||||||||||||||||||||||||||
Stage 3 | – | – | – | – | – | – | 395 | – | 395 | |||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||||||||||||||
SME and mid corporate | – | – | 66 | 1,745 | 5,749 | 3,426 | 886 | 36 | 11,908 | |||||||||||||||||||||||||||
Commercial Real Estate | – | – | – | 302 | 4,564 | 1,846 | 31 | – | 6,743 | |||||||||||||||||||||||||||
Social Housing | 680 | 3,899 | 138 | – | – | 2 | 24 | – | 4,743 | |||||||||||||||||||||||||||
| 680 | 3,899 | 204 | 2,047 | 10,313 | 5,274 | 941 | 36 | 23,394 | ||||||||||||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||||||||||||||
Large Corporate | 12 | 3,187 | 5,535 | 6,361 | 888 | 3 | 78 | – | 16,064 | |||||||||||||||||||||||||||
Financial Institutions | 500 | 1,047 | 1,443 | 55 | – | – | – | – | 3,045 | |||||||||||||||||||||||||||
| 512 | 4,234 | 6,978 | 6,416 | 888 | 3 | 78 | – | 19,109 | ||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 34,905 | 3,898 | – | 1 | – | – | – | – | 38,804 | |||||||||||||||||||||||||||
Structured Products | 2,436 | 2,062 | 318 | 24 | – | – | – | – | 4,840 | |||||||||||||||||||||||||||
Social Housing | 1,377 | 2,847 | 76 | 43 | – | – | – | – | 4,343 | |||||||||||||||||||||||||||
Financial Institutions | 356 | 345 | 47 | 21 | – | – | – | – | 769 | |||||||||||||||||||||||||||
Legacy Portfolios inrun-off(2) | – | – | – | 203 | 35 | 137 | 126 | 357 | 858 | |||||||||||||||||||||||||||
Derivatives | – | 147 | – | – | – | – | – | – | 147 | |||||||||||||||||||||||||||
Crown Dependencies | 14 | 39 | 124 | 77 | 14 | 8 | 7 | – | 283 | |||||||||||||||||||||||||||
| 39,088 | 9,338 | 565 | 369 | 49 | 145 | 133 | 357 | 50,044 | ||||||||||||||||||||||||||||
Total | 40,280 | 17,471 | 7,747 | 8,832 | 11,250 | 5,422 | 1,152 | 393 | 92,547 | |||||||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Stage 1 | 40,280 | 17,471 | 7,747 | 8,759 | 10,802 | 4,780 | 527 | 377 | 90,743 | |||||||||||||||||||||||||||
Stage 2 | – | – | – | 73 | 448 | 635 | 318 | 16 | 1,490 | |||||||||||||||||||||||||||
Stage 3 | – | – | – | – | – | 7 | 307 | – | 314 | |||||||||||||||||||||||||||
| (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). |
| Santander UK Group Holdings plc | 117 |
Annual Report 2019| Risk review
Geographical distribution
We typically classify geographical location according to the counterparty’s country of domicile unless a full risk transfer guarantee is in place, in which case we use the guarantor’s country of domicile instead.
2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
UK £m | Europe £m | US £m | Rest of World £m | Total £m | UK £m | Europe £m | US £m | Rest of World £m | Total £m | |||||||||||||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||||||||||||||||||||||
SME and mid corporate | 11,384 | 84 | – | 1 | 11,469 | 11,833 | 74 | – | 1 | 11,908 | ||||||||||||||||||||||||||||||||||
Commercial Real Estate | 5,591 | – | – | – | 5,591 | 6,743 | – | – | – | 6,743 | ||||||||||||||||||||||||||||||||||
Social Housing | 4,918 | – | – | – | 4,918 | 4,743 | – | – | – | 4,743 | ||||||||||||||||||||||||||||||||||
| 21,893 | 84 | – | 1 | 21,978 | 23,319 | 74 | – | 1 | 23,394 | |||||||||||||||||||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||||||||||||||||||||||
Large Corporate | 10,665 | 1,922 | 2 | 57 | 12,646 | 13,080 | 2,752 | 124 | 108 | 16,064 | ||||||||||||||||||||||||||||||||||
Financial Institutions | 611 | 849 | 169 | 305 | 1,934 | 891 | 1,528 | 187 | 439 | 3,045 | ||||||||||||||||||||||||||||||||||
| 11,276 | 2,771 | 171 | 362 | 14,580 | 19,971 | 4,280 | 311 | 547 | 19,109 | |||||||||||||||||||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||||||||||||||||||||||
Sovereign and Supranational | 33,202 | 1,549 | 855 | 4,008 | 39,614 | 30,587 | 1,802 | 965 | 5,450 | 38,804 | ||||||||||||||||||||||||||||||||||
Structured Products | 1,710 | 811 | – | 51 | 2,572 | 2,576 | 1,142 | – | 1,122 | 4,840 | ||||||||||||||||||||||||||||||||||
Social Housing | 4,060 | – | – | – | 4,060 | 4,343 | – | – | – | 4,343 | ||||||||||||||||||||||||||||||||||
Financial Institutions | 329 | 335 | 157 | 36 | 857 | 346 | 358 | 11 | 54 | 769 | ||||||||||||||||||||||||||||||||||
Legacy Portfolios in run–off | 587 | – | – | 111 | 698 | 744 | – | – | 114 | 858 | ||||||||||||||||||||||||||||||||||
Derivatives | – | – | – | – | – | – | – | 147 | – | 147 | ||||||||||||||||||||||||||||||||||
Crown Dependencies | – | – | – | 289 | 289 | – | – | – | 283 | 283 | ||||||||||||||||||||||||||||||||||
| 39,888 | 2,695 | 1,012 | 4,495 | 48,090 | 38,596 | 3,302 | 1,123 | 7,023 | 50,044 | |||||||||||||||||||||||||||||||||||
2019 compared to 2018 (unaudited)
In Corporate & Commercial Banking, we saw a 6% reduction in committed exposure, mainly driven by active management of our Commercial Real Estate (CRE) portfolio. Our CRE portfolio decreased by 17% as we continue to manage our exposure in line with proactive risk management policies.
In CIB, committed exposures decreased by 24% mainly due to reductions in our Large Corporate portfolio, driven by facilities that werere-booked in Banco Santander London Branch. Credit quality was stable.
In Corporate Centre, committed exposures decreased by 4% mainly driven by our Structured Products portfolio due to sale of assets following an ALCO strategy change in H219. Sovereign and Supranational exposures decreased by 2% as part of normal liquid asset portfolio management. The portfolio profile remained short-term, reflecting the purpose of the holdings. Legacy Portfolios in run–off reduced by 19%. Social Housing exposures also reduced.
| 118 | Santander UK Group Holdings plc |
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Credit risk
|
Credit risk mitigation
| 2019 | Gross Exposure Stage 3 £m | Collateral Stage 3 £m | Net Exposure Stage 3 £m | |||||||||
Corporate & Commercial Banking | ||||||||||||
SME and mid corporate | 279 | 51 | 228 | |||||||||
Commercial Real Estate | 83 | 56 | 27 | |||||||||
| 362 | 107 | 255 | ||||||||||
Corporate & Investment Banking | ||||||||||||
Large Corporate | 15 | – | 15 | |||||||||
| 15 | – | 15 | ||||||||||
Corporate Centre | ||||||||||||
Legacy Portfolios in run–off | 17 | 11 | 6 | |||||||||
Crown Dependencies | 1 | – | 1 | |||||||||
| 18 | 11 | 7 | ||||||||||
| 2018 | ||||||||||||
Corporate & Commercial Banking | ||||||||||||
SME and mid corporate | 253 | 55 | 198 | |||||||||
Commercial Real Estate | 23 | 14 | 9 | |||||||||
| 276 | 69 | 207 | ||||||||||
Corporate & Investment Banking | ||||||||||||
Large Corporate | 26 | – | 26 | |||||||||
| 26 | – | 26 | ||||||||||
Corporate Centre | ||||||||||||
Legacy Portfolios in run–off | 16 | 9 | 6 | |||||||||
Crown Dependencies | – | – | – | |||||||||
| 16 | 9 | 6 | ||||||||||
In CIB, the top 20 clients with derivative exposure made up 90% (2018: 85%) of our total derivative exposure. The weighted–average credit rating of these top 20 clients was 6.1 (2018: 7.1).
| Santander UK Group Holdings plc | 119 |
Annual Report 2019| Risk review
Credit performance
We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in ‘Monitoring’ in the ‘Credit risk management’ section). The table below shows the exposures we monitor, and those we classify as Stage 3 by portfolio at 31 December 2019 and 2018.
| Committed exposure | ||||||||||||||||||||||||
| Watchlist | ||||||||||||||||||||||||
| 2019 | Fully performing £m | Enhanced monitoring £m | Proactive management £m | Stage 3 £m | Total(1) £m | Loss allowances £m | ||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||
SME and mid corporate | 9,864 | 1,056 | 270 | 279 | 11,469 | 164 | ||||||||||||||||||
Commercial Real Estate | 5,338 | 89 | 81 | 83 | 5,591 | 46 | ||||||||||||||||||
Social Housing | 4,828 | 90 | – | – | 4,918 | – | ||||||||||||||||||
| 20,030 | 1,235 | 351 | 362 | 21,978 | 210 | |||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||
Large Corporate | 11,834 | 252 | 545 | 15 | 12,646 | 50 | ||||||||||||||||||
Financial Institutions | 1,924 | – | 10 | – | 1,934 | – | ||||||||||||||||||
| 13,758 | 252 | 555 | 15 | 14,580 | 50 | |||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||
Sovereign and Supranational | 39,614 | – | – | – | 39,614 | – | ||||||||||||||||||
Structured Products | 2,572 | – | – | – | 2,572 | – | ||||||||||||||||||
Social Housing | 4,047 | 13 | – | – | 4,060 | – | ||||||||||||||||||
Financial Institutions | 854 | – | 3 | – | 857 | – | ||||||||||||||||||
Legacy Portfolios in run–off | 656 | 17 | 8 | 17 | 698 | 12 | ||||||||||||||||||
Derivatives | – | – | – | – | – | – | ||||||||||||||||||
Crown Dependencies | 288 | – | – | 1 | 289 | – | ||||||||||||||||||
| 48,031 | 30 | 11 | 18 | 48,090 | 12 | |||||||||||||||||||
Total loss allowances | 272 | |||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
Corporate & Commercial Banking | ||||||||||||||||||||||||
SME and mid corporate | 10,350 | 972 | 333 | 253 | 11,908 | 160 | ||||||||||||||||||
Commercial Real Estate | 6,426 | 247 | 47 | 23 | 6,743 | 22 | ||||||||||||||||||
Social Housing | 4,626 | 117 | – | – | 4,743 | – | ||||||||||||||||||
| 21,402 | 1,336 | 380 | 276 | 23,394 | 182 | |||||||||||||||||||
Corporate & Investment Banking | ||||||||||||||||||||||||
Large Corporate | 15,304 | 548 | 186 | 26 | 16,064 | 18 | ||||||||||||||||||
Financial Institutions | 3,045 | – | – | – | 3,045 | – | ||||||||||||||||||
| 18,349 | 548 | 186 | 26 | 19,109 | 18 | |||||||||||||||||||
Corporate Centre | ||||||||||||||||||||||||
Sovereign and Supranational | 38,804 | – | – | – | 38,804 | – | ||||||||||||||||||
Structured Products | 4,840 | – | – | – | 4,840 | – | ||||||||||||||||||
Social Housing | 4,321 | 22 | – | – | 4,343 | – | ||||||||||||||||||
Financial Institutions | 769 | – | – | – | 769 | – | ||||||||||||||||||
Legacy Portfolios in run–off | 809 | 26 | 7 | 16 | 858 | 12 | ||||||||||||||||||
Derivatives | 147 | – | – | – | 147 | – | ||||||||||||||||||
Crown Dependencies | 283 | – | – | – | 283 | 1 | ||||||||||||||||||
| 49,973 | 48 | 7 | 16 | 50,044 | 13 | |||||||||||||||||||
Total loss allowances | 213 | |||||||||||||||||||||||
(1) Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’ and ‘Proactive Management’ in the ‘Monitoring‘ section.
2019 compared to 2018 (unaudited)
In Corporate & Commercial Banking, Stage 3 exposures increased in the ‘SME and mid Corporate’ portfolio and our ‘CRE’ portfolio, largely due to underlying structural changes impacting some sectors. Exposures subject to enhanced monitoring were broadly unchanged, with increases in the SME and mid Corporate portfolio offset by reductions in the CRE and Social Housing portfolios.
In CIB, Large Corporate exposures subject to enhanced monitoring reduced. Exposures subject to proactive management increased, due to the downgrade of a number of cases that were experiencing performance issues. Stage 3 exposure decreased following a reduction in exposure of a single deal. Financial Institutions exposures subject to enhanced monitoring were unchanged. Exposures subject to proactive management increased due to the downgrade of a single case.
In Corporate Centre, exposures subject to enhanced monitoring and proactive management reduced slightly as the related portfolios continued to be managed for value.
| 120 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Credit risk |
Loan modifications
The following table sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.
| 2019 | 2018 | |||||||||||||||||||||||||||
Corporate & £m | Corporate & £m | Corporate Centre £m | Corporate & £m | Corporate & £m | Corporate Centre £m | |||||||||||||||||||||||
Financial assets modified in the year: | ||||||||||||||||||||||||||||
– Amortised cost before modification | 135 | – | 10 | 104 | – | 2 | ||||||||||||||||||||||
– Net modification loss | 8 | – | 1 | 10 | – | – | ||||||||||||||||||||||
Financial assets modified since initial recognition: | ||||||||||||||||||||||||||||
– Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the year | 34 | – | 2 | 8 | 7 | 4 | ||||||||||||||||||||||
Forbearance We only make forbearance arrangements for lending to customers. The balances at 31 December 2019 and 2018, analysed by their staging at the year–end and the forbearance we applied, were:
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| 2019 | 2018 | |||||||||||||||||||||||||||
Corporate & £m | Corporate & £m | Corporate Centre £m |
| Corporate & £m | Corporate & £m | Corporate Centre £m | ||||||||||||||||||||||
Stock:(1) | ||||||||||||||||||||||||||||
– Term extension | 60 | 42 | – | 67 | 42 | – | ||||||||||||||||||||||
– Interest–only | 110 | – | 13 | 112 | – | 8 | ||||||||||||||||||||||
– Other payment rescheduling | 192 | 15 | 9 | 163 | 26 | 10 | ||||||||||||||||||||||
| 362 | 57 | 22 | 342 | 68 | 18 | |||||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Stage 1 | 57 | 42 | 1 | 43 | – | 3 | ||||||||||||||||||||||
– Stage 2 | 75 | – | 11 | 78 | 42 | 8 | ||||||||||||||||||||||
– Stage 3 | 230 | 15 | 10 | 221 | 26 | 7 | ||||||||||||||||||||||
| 362 | 57 | 22 | 342 | 68 | 18 | |||||||||||||||||||||||
Proportion of portfolio | 1.6% | 0.4% | 3.2% | 1.5% | 0.4% | 2.1% | ||||||||||||||||||||||
(1) We base forbearance type on the first forbearance we applied. Tables only show accounts open at theyear-end. Amounts are drawn balances and include off balance sheet balances.
2019 compared to 2018 (unaudited)
In Corporate & Commercial Banking, the cumulative forbearance stock increased slightly. Forbearance stock reduced in CIB, following a reduction in exposure for the one forborne customer in Stage 3. At 31 December 2019, there were only two forborne cases (2018: two cases) in CIB.
| Santander UK Group Holdings plc | 121 |
Annual Report 2019| Risk review
PORTFOLIOS OF PARTICULAR INTEREST (UNAUDITED)
Introduction
Some types of lending have higher risk and others stand out for other reasons. We give more detail below on two areas of particular interest.
| Portfolio | Description | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | The CRE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Social Housing | The
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We see continued investment in this sector as a direct way to
support the UK and, indirectly, the wider community initiatives undertaken by our customers. We manage and report our Social Housing portfolio in Corporate & Commercial Banking, except for older | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Real Estate
Credit performance
The table below shows the main CRE credit performance metrics at 31 December 2019 and 2018.
Customer loans(1) £m | Stage 3(2) £m | Stage 3 Ratio(3) % | Gross write–offs £m | Total loss allowance £m | ||||||||||||||||
2019 | 5,350 | 89 | 1.55 | 8 | 49 | |||||||||||||||
2018 | 6,459 | 29 | 0.41 | 23 | 26 | |||||||||||||||
| (1) | CRE drawn loans in the business banking portfolio of our Retail Banking segment of £241m (2018: £257m) and in the CRE portfolio of our Corporate & Commercial Banking | |
| (2) | We define Stage 3 in the | |
| (3) | Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures. The way we calculate the Stage 3 ratio was changed from 1 January 2019, and 2018 | |
| Santander UK group level’ section. |
LTV analysis
The table below shows the LTV distribution for our CRE total stock and Stage 3 stock (based on the drawn balance and our latest estimate of the property’s current value) of the portfolio at 31 December 2019 and 2018.
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
| Stock | Stage 3 | Stock | Stage 3 | |||||||||||||||||||||||||||||||||||||||||
| LTV | Total £m | ECL £m | Total £m | ECL £m | Total £m | ECL £m | Total £m | ECL £m | ||||||||||||||||||||||||||||||||||||
Up to 50% | 3,133 | 17 | 15 | 8 | 3,663 | 5 | �� | 3 | – | |||||||||||||||||||||||||||||||||||
>50–70% | 1,557 | 24 | 63 | 17 | 2,039 | 4 | 4 | – | ||||||||||||||||||||||||||||||||||||
>70–100% | 29 | 1 | 1 | – | 47 | 2 | 1 | 1 | ||||||||||||||||||||||||||||||||||||
>100% | 9 | 1 | 3 | 1 | 18 | 7 | 16 | 7 | ||||||||||||||||||||||||||||||||||||
Standardised portfolio(1) | 617 | 6 | 7 | 3 | 631 | 7 | 5 | 2 | ||||||||||||||||||||||||||||||||||||
Total with collateral | 5,345 | 49 | 89 | 29 | 6,398 | 25 | 29 | 10 | ||||||||||||||||||||||||||||||||||||
Development loans | 5 | – | – | – | 61 | 1 | – | – | ||||||||||||||||||||||||||||||||||||
| 5,350 | 49 | 89 | 29 | 6,459 | 26 | 29 | 10 | |||||||||||||||||||||||||||||||||||||
(1) Smaller value transactions, mainly commercial mortgages.
| 2018 | 2017 | |||||||||||||||||||
| On-balance sheet | Total exposure | On-balance sheet | Total exposure | |||||||||||||||||
| £m | £m | £m | £m | |||||||||||||||||
Corporate & Commercial Banking | 2,844 | 4,743 | 2,118 | 3,274 | ||||||||||||||||
Corporate Centre | 3,780 | 4,343 | 5,060 | 5,976 | ||||||||||||||||
| 6,624 | 9,086 | 7,178 | 9,250 | |||||||||||||||||
Risk monitoring and reporting
Reporting is a key part of how we manage risk. It ensures we identify, escalate and manage issues on a timely basis. We can identify exposures through our operational risk and control assessments, risk scenario analysis, key indicators and incidents. We report exposures for each business unit through regular risk and control reports. These include details on risk exposures and how we plan to mitigate them. We prioritise and highlight events that have a material impact on our finances, reputation or customers by reporting them to key executives and committees. These include changes in our cyber risk profile.
We have a crisis management framework that covers all levels of the business. This includes the Board, Executive Committee, senior management and business and support functions. Our framework identifies possible trigger events and sets out how we will manage a crisis or major incident and we test it at least annually. If an event occurs, we have business continuity plans in place to recover as quickly as possible. These are aligned with our key customer journeys and delivery of critical IT services.
We use the standardised approachThe Standardised Approach (TSA) for Pillar 1 operational risk capital needs. We use an internal model aligned to the CRD IV advanced measurement approach to assess our Pillar 2 capital needs.
Process and change management risk
We monitor and report process and change management risk in the relevant governance stream for the type of change. For example, changes from products and services and technological changes have specific governance which have their own operational risk reporting requirements. We report an aggregated view of change risk by every business division, at least each quarter, using our Principal Operational Risk Dashboard. We capture risks related to process and change management identified by the business in our RCSAs, and we report operational risk events related to change using the SEEN process
Outsourced and third-party supplier management
We set up a Third-Party Risk Management Team in 2018 to more effectively manage this risk. It operates as a Line 1 Control Function responsible for the identification, assessment, management, and reporting of third-party risks across Santander UK. Part of this remit includes developing and maintaining an effective Third-Party Risk Management Framework.
Our Third-Party Outsourcing & Risk Management Policy, supported by a series of Standards, sets out detailed requirements and guidance to support our colleagues through theend-to-end third-party lifecycle. We have specific Standards forOn-Boarding Management, Risk Provider Certification,In-Service Management,Off-Boarding & Exit Management and Outsourcing of Critical Services.
We formally track our third-party risk profile against our risk appetite through a monthly risk and control forum. This includes monitoring compliance with our policy and standards. We use key risk indicators to support our monitoring activity and we report them to this forum. We escalate any significant risks, or changes in the risk profile, to the relevant senior risk committees such as ERCC, BRC and the Board.
We also updated our Third-Party Risk Management System to improve the completeness and quality of data that we capture and use itfor the Operational Risk Indicators we report to modelsenior management. This also supports central oversight of our supplier portfolio.
Cyber risk
We base our monitoring and reporting on the metrics and operational dashboards in our cyber security and IT functions. Our Cyber Threat Unit and experts carry out analysis within the worldwide Santander Security Operations Centre in Madrid. We use a wide range of key risk losses we might incurindicators, threat intelligence reports and results from security testing to identify improvements to our cyber defences. Our operational teams, with input from Risk, review these trends and steer management activity where required.
We also formally track our cyber and technological risks against our risk appetite through a monthly risk control forum. Part of the forum’s remit is to identify changes in risk posture and to inform senior risk committees of any significant changes. Issues such as technological obsolescence and the challenges in keeping our technologies free from known vulnerabilities, are examples of where a stress.metric driven approach to reporting through our risk management frameworks has led to proactive mitigation of risk.
| To raise awareness of fraud and educate younger adults about how to avoid becoming victims of scams, we launched ‘For Your Eyes Alone’, a campaign designed to reach the under 25 (Generation Z) audience via the outlets and channels they use the most. This age group love to share: 40% have shared their online banking passwords, and 85% have shared personal data on social media that could leave them vulnerable to scammers. To underline the importance of keeping personal data ‘for your eyes alone’ we launched the world’s first invisible cinema – only visible through special polarised glasses – and toured it around UK universities. We teamed up with Love Islander, Wes Nelson to create a scam awareness film to be screened at cinema events and used on his social media channels. Alongside the social reach that Wes achieved, the campaign attracted wide media coverage and we were able to provide detail directly, either via the film or supporting materials, to over 560,000 students through our university activity. |
| 154 | Santander UK Group Holdings plc |
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Operational risk
|
OPERATIONAL RISK REVIEW
Operational risk event losses
The table below shows our operational losses in 20182019 and 20172018 for reportable events with an impact over £10,000, excluding conduct risk events (which we discuss separately in the ‘Conduct and regulatory risk’ section), by CRD IV loss event types. We manage some of these risks using frameworks for other risk types, including regulatory and financial crime risk even though we report them here.
| 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||
| Value % | Volume % | Value % | Volume % | Value % | Volume % | Value % | Volume % | |||||||||||||||||||||||||||||||
Internal fraud | 1 | 2 | 5 | 1 | – | – | 1 | 2 | ||||||||||||||||||||||||||||||
External fraud | 4 | 48 | 37 | 49 | 30 | 80 | 4 | 48 | ||||||||||||||||||||||||||||||
Employment practices and workplace safety | – | 2 | – | 1 | – | – | – | 2 | ||||||||||||||||||||||||||||||
Clients, products, and business practices | 3 | 18 | 24 | 22 | 39 | 6 | 3 | 18 | ||||||||||||||||||||||||||||||
Business disruption and system failures | 1 | 1 | 1 | – | ||||||||||||||||||||||||||||||||||
Business disruption and systemsfailures | 2 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||
Execution, delivery, and process management | 91 | 29 | 33 | 27 | 29 | 13 | 91 | 29 | ||||||||||||||||||||||||||||||
| 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||||||||||||||||
20182019 compared to 20172018
We experiencedIn 2019, we did not experience material losses similar to those in 2018, such as the FCA fine of £32m and the Consumer Credit Act breach of £58m. As a general upliftresult, the value of our operational risk losses (Events over £10,000 but excluding PPI) fell by 63%year-on-year. However, we saw a significant increase of 103% in the volume ofnon-financial events in 2018, largely due to new regulations and breach reporting requirements relating to GDPR. Theoverall volume of losses against each category was broadlydue to external fraud. This reflects trends and industry direction in line with 2017. We saw an overall reduction in the volume of financial losses in 2018 comparedrelation to 2017, although the proportion attributedscams and we continue to each category was broadly unchanged. In particular, enhancements toenhance our anti-fraud controls have ledmeasures to help protect our customers. We also saw a reductionrise in the number of external fraud losses. In 2018 we also invested in delivering improved solutions to help protect our customers from Authorised Push Payment (APP) fraudevents and scams. These initiatives will support the new requirements set out by our regulators to help prevent customers from falling victim to APP fraud. The value of losses showed a significant change in 2018, with a move away from conduct-related losses (such as PPI) to those involving Execution, delivery and process management (events relating to historical system functionality and process issues).
The £32.8m fine leviedprompted by the FCAincreasing level of change, due to enhanced regulation, industry developments and the need to digitalise the business. We discuss developments on PPI in December 2018, contributed to this. The fine relates to an investigation by the FCA into our historical probateconduct and bereavement practices. We acknowledgedregulatory risk section of this Risk review.
In addition, as discussed earlier, climate-related risks could eventually manifest in risks for financial institutions. During 2020, we will review the findingsappropriate parts of the FCARisk Framework, Risk Type Frameworks (in particular Credit and apologisedOperational risk) and the Risk Appetite Statement to the familiesexplicitly include climate-related risks.
Process and beneficiaries of deceased customers affected by these failings. We have completedchange management risk
Business, regulatory and legal change continues to gather pace and 2019 saw a comprehensive tracing exercise and transferred the majority of funds in deceased customers’ accounts to their rightful beneficiaries, with compensatory interest where appropriate. We have also conducted a fullsubstantial review of our bereavement processesportfolio of change initiatives tore-focus, concentrate and made a number of significant changes, including a complete overhaul of our processes, and creation of a centralised specialist bereavement team to providere-prioritise scarce capital resources at the best service. We now also facilitate necessary payments from a deceased customer’s accounts to cover funeral bills, probate fees and/or inheritance tax.
In 2018 we also provided £58m in relation to a systems-related historical issue, which has also contributed to the shift to losses relating to Execution, Delivery and Process Management. As noted elsewhere, the provision is based on detailed reviews of systems regarding consumer credit business operations, and relates to compliance with certain aspects of the Consumer Credit Act. For more, see Notes 30 and 32 to the Consolidated Financial Statements.
We implemented cheque imaging ahead of the industry milestone of 30 November 2018. With cheque clearing activities in association with other UK banks expected to increase during Q1 2019, our focus is on managing the related risks.
most pressing initiatives. The Open Banking Initiative and the new PSD2, both of which introduced newfurther requirements during 2018,in 2019, together bring significant opportunity for us to develop new products and services to enhance the ways customers use their data and pay for services. However, they also introduce a new layer of risk to both customers and Santander UK.us. We continued to carry out detailed operational risk assessments in relation to these initiatives, in order to identify, assess, manage and report the key risks involved. Our focus on managing these risks continues, with further assessments planned for 2019. In 2018 we introduced aThese regulatory requirements were enhanced by significant new early escalation process which has supported more proactive and coordinated incident management within the bank. We conducted one internal crisis exercise and participated in the Bank of England regulatory Simulated Crisis Exercise, which was designed to test the resilience capabilities of the UK financial sector. Additionally we increased our concurrent remote access capability to provide greater resiliency for staff to work away from their office in the event of adverse weather or similar situations. We have also reviewed and responded to the joint regulatory discussion paper titled ‘Building the UK financial sector’s operational resilience’.
In common with the whole financial services industry, change has been a constant feature in 2018 as it continues to gather pace and complexity. Key parts of our change programme include the design and issue to market of innovative new products and services,initiatives such as the 1I2I3 Account for Small Businesses;high cost of credit review and the changes necessarymigration of a certain segment of customers across to meet regulatory requirements, not least GDPR;a new banking platform. As we must deliver new and that relatedinnovative solutions to keeping Santander UK safe and running, and delivering formarket faster than ever before, we recognise the need to manage the risks associated with change as a priority in our customers.design processes. We have continuedconcentrated effort on further refining our Operational Risk Management identification and assessment methodologies to develop our governance processes to ensure that operationalstreamline, remove inefficiency, and focus on risk.
Third party risk is limited to the absolute minimum and we maintain strong mechanisms for oversight and challenge. A significant proportion of our governance is focused on our customers and doing for them what we consider to be Simple, Personal and Fair.
Change is alsoThird Party Risk Management remains a key factor in the management of our relationshipswhen we engage with our key outsourcing partners (Third Party Service Providers), who form an essential part of the service supply chain to our customers. Here too, the pace of change is dramatic.. The demand for innovative solutions and the provision of digital services which deliver on demand and at the right time and place for our customers means we must benefit from sharing intellectual development with the best in business. This approach will ensure that we develop and prosper, particularly for our customers, the communities in which we operate, and our staff. This brings additional risks, new technologies, widening spans of control across the supply chain, innovation and cyber threats. To enable us to manage these challenges we have focused on further reviewingcontinue to review our governance processes and introducingintroduce new systems solutions which provide informationdata and focus on our supplier relationships and performance. This work will continue, develop and strengthen asin 2020, aligned with the requirements of the EBA Outsourcing Guidelines that became effective on 30 September 2019. In 2019, we progress throughenhanced our Third Party Risk Management Framework and our resources in this area in order to manage this increased risk. We also updated our Third-Party Risk Management system to improve the coming year.completeness and quality of data that we capture and use for the Operational Risk Indicators we report to senior management. This also supports central oversight of our supplier portfolio.
Cyber risk
Cyber and information security also remains a top priority for us, especially in light of the new GDPR regulations for which we completed a programme of work to be able to manage related events.us. We continue to invest to ensure we have the right skills and resources to manage cyber and information security risk effectively across all our lines of defence. In September 2018, we appointed a new Chief Information Security Officer to help enhanceOur cyber transformation programme enhances our capabilities and ensure continued delivery ofwe deliver secure products and solutions for our customers and the communities that we serve.
Whilst we continue to be subject to cyber-attack, we did not suffer any material cyber or information security events during 2018in 2019 and we continue to actively participate in the Cyber Defence Alliance along with industry peers to share cyber threat intelligence, expertise and experience to help identify common features of cyber-attacks and effective mitigation strategies.
In 2019, threats from the external cyber environment continued to evolve, due to heightenedgeo-political tension, and active well-established cyber-crime groups. We monitor a range of cyber threats including; attacks on payment systems, ATM networks and customer data where insider threat and network intrusion are the most common attack methods; an emerging threat from a new method, aimed at breaching organisations’on-line customer services, (such as internet banking) and causing denial of service; and in addition Data Security and GDPR compliance continue to be key areas of concern. We have taken mitigating actions against these various threats including deploying a Cyber threat intelligence platform; increased intelligence through chairing the Geopolitical Financial Services working group; robust online service access construction utilising anti Distributed Denial of Service techniques. The mitigants implemented in our Cyber Security Plans are proving effective and we have experienced no significant disruption to date.
The Bank of England, PRA and FCA recently published a consultation paper, following their 2018 joint discussion paper to help financial firms evolve their approach to operational resilience. They expect firms to assume disruptive operational incidents will occur, and be able to show that they can withstand, absorb, recover and manage these in a way which considers the needs of all affected parties. We are improving our operational resilience by enhancing our operational risk framework and implementing a Board-approved strategy. This will focus on defining our key business services, providing enriched management data, and mapping our dependenciesend-to-end. It will also set, approve and test the impact tolerances of our ability to provide those services to the limit. In addition to regulatory compliance, this will achieve business and operational benefits through a programme of work in 2020 designed to embed operational resilience in our Digital Transformation programme as well asbusiness-as-usual activities.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Risk review
 Overview In this section, we describe how we manage our other key risks and discuss developments in the year. Our other key risks are: – Financial crime risk: the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, bribery and corruption. – Legal risk: the risk of loss due to legal deficiencies in contracts; failure to take appropriate measures to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to discharge duties or responsibilities created by law or regulation. |
– Reputational risk: the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors, or any other interested party. – Model risk: the risk of loss from decisions mainly based on
|
OUR KEY FINANCIAL CRIME RISKS
Santander UK hasFinancial crime is a high priority risk for us. We recognise that financial crime activities can have a significant impact on our customers. Criminals are also increasingly using the financial system to launder the profits of illegal activity such as human trafficking and terrorism. We may be adversely affected if we fail to effectively mitigate the risk that third parties or our employees facilitate, or that our products and services are used to facilitate financial crime. This includes money laundering, terrorist financing and proliferation financing, breaches of economic and financial sanctions, bribery and corruption, and the facilitation of tax evasion. Therefore, we are committed to deter, detect‘Deter, Detect and disruptDisrupt’ criminality as a core pillar of itsour anti-financial crime (AFC) strategy. Our AFC strategy is a vehicle for change, initiating new ways of working to deliver this vision. We adopt a risk-based approach in line with UK and international laws and standards, and we target our resources in a proportionate and effective manner againstat the highest priority risks. We recognise the damage that financial crime does to our customers and communities and we are actively workingwork with government, law enforcement and the private sector stakeholders to help meet our commitments.
We launched a new anti-financial crime strategy across the business in 2018, endorsed by our senior leadership. Our Board has supported investment in our anti-financial crime capability which will deliver key elements of the strategy, from improved systems and controls to operational efficiencies through automation, as well as promoting an anti-financial crime culture across Santander UK.
Our key financial crime risks are:
| Key risks | Description | |
| Money laundering |
| |
| Terrorist financing |
| |
| Sanctions |
| |
| Bribery and corruption |
| |
FINANCIAL CRIME RISK MANAGEMENT
Risk appetite
Financial Crime risk appetite is the level of risk which we are prepared to accept in carrying out our activities in respect to financial crime risk. This is approved and disseminated across legal entities and businesses, with limits specified to control exposures and activities that have material concentration risk implications for us and the communities we are part of. Our customers and shareholders will be impacted if we do not mitigate the risks of Santander UK being used to facilitate financial crime. We comply with applicable UK law, international sanctions and other applicable regulations and make sure our risk appetite adapts to external events as appropriate.
events. We have minimal tolerance for residual financial crime risk and zero tolerance for sanctions, and bribery and corruption risk. We also have no appetite for risks associated with employees who do not act with integrity, due diligence or care, or those who breach our policy and regulatory requirements.
Risk measurement
We measure our exposure to financial crime risk regularly. Our anti-financial crime strategy along with frameworks sets the strategic direction for risk management by defining standards, objectives and responsibilities for all areas of the business. It supports senior management in effective risk management and developing a strong risk culture. We screen and risk rate all our customers and monitor activity to identify potential suspicious behaviour. We completead-hoc reviews based on key trigger events. Our Financial Intelligence Unit conducts assessments of particularassesses specific types of threat, including drawing on data provided byfrom law enforcement and public authorities.
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Risk mitigation
We take a proactive approach to mitigating financial crime risk. Our Financial Crime Risk Framework isfinancial crime risk frameworks are supported by policies and standards which explain the requirements for mitigating money laundering, terrorist financing, sanctions, facilitation of tax evasion and bribery & corruption risks. We update these regularly to ensure they reflect all new external requirements and industry best practice. We support our colleagues to make sure they can make the right decisions at the right time. We raise awareness and provide role specific technicalrole-specific training to build knowledge of emerging risks.
Key elements of our financial crime risk mitigation approach are that we:
| – | Complete due diligence of |
| – | Complete risk assessments of customers, products, businesses, sectors and geographic risks to tailor our mitigation efforts |
| – | Ensure all our staff complete mandatory Financial Crime training, supporting specialist training and learning |
| – | Deploy new systems to better capture, analyse and act on data to mitigate bribery and corruption risks |
| – | Partner with public authorities, the Home Office and the wider financial services industry to pool expertise and data. We are also |
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Other key risks |
Risk monitoring and reporting
We use key risk indicators to monitor our exposure to financial crime risks, and we maintain strengthened governance across both first and second lines of defence to make sure we report all issues in a timely manner. We work closely with relevant subject matter experts across the business on all risk management and monitoring activities alongside more effective communication of policy changes. Regulators around the world continue to emphasise the importance of effective risk culture, personal accountability and the adoption and enforcement of risk-based requirements and adequate internal reporting processes and procedures. We have enhancedremained focused to enhance our targetfinancial crime operating and governance model, to make sureensure that our control environment evolves at pace, keeping up with new or amended laws, regulations or industry guidance.
Each month we report anWe adhere to a strong governance and reporting schedule to our ERCC and Senior Management Committee, including analysis of the risks on the horizon, key financial crime risk indicators to the ERCC together withand a directional indication of the risk profileprofile. Throughout the year, management continued to update the risk committees on management and any significant deteriorationmitigation of the metrics.financial crime risks. We are currently introducinghave introduced an enhanced set of financial crime risk indicators.indicators for effective risk reporting to senior management. We also regularly report to the Board Responsible Banking Committee on financial crime risk, the impact to Santander UKon the business and the actions we are taking to mitigate the risk.
FINANCIAL CRIME RISK REVIEW
20182019 compared to 2017
In 2018 we launched our new three year Anti-Financial Crime strategy. Our mission is built on three simple principles, committing to deter, detect and disrupt financial crime.
In developing our strategy, we aligned to Santander UK’s commercial strategy and to the external landscape, listening to partners in the public sector, wider industry and communities. We committed to embed our strategy using education, collaboration and innovation. As a result, we increased awareness of financial crime and have encouraged our staff to use their judgement in doing the right thing and have empowered them to make responsible decisions. Our new Anti-Financial Crime Academy seeks to further embed this, supporting colleagues through multiple channels to ensure we have the right tools to tackle financial crime.
We embrace public and private partnership opportunities and actively collaborate with the public sector to address a number of financial crime challenges. These mechanisms provide opportunities to pool our collective knowledge, experiences and skills. We actively participate in these collaborations with industry and the UK Government to combat financial crime risk which also helps us further develop our internal capabilities. For example, in 2018 we analysed external intelligence together with our own data to strengthen our controls for cash deposits.
In May 2018, we took part in the latest FCA Financial Crime ‘TechSprint’ where we won two awards showcasing innovation by using technological advances around data sharing to disrupt criminals, whilst still protecting personal data. We are engaged on an ongoing basis with groups such as the JMLIT and continue to see a real positive impact of our work, contributing to the UK’s security and prosperity.
In 2018, we introduced significant changes to our financial crime control environment and culture. We enhanced our strategic capabilities and supporting infrastructure. Despite challenges, we are well positioned for 2019 where we expect to gain improved data-driven insights from these activities. We are also embedding our new target operating model after restructuring our Financial Crime Compliance teams.
The financial crime landscape continues to be difficult and complex, withgeo-political factors and continually evolving criminal methods influencing the risks we face. We willcontinued embedding our anti-financial crime strategy, policies and training across the business in 2019, endorsed by our senior leaders. Our Board has been supporting investment in our anti-financial crime capabilities that deliver key elements of the strategy, from improved systems and controls to increased efficiency through automation, as well as promoting an anti-financial crime culture across the business. We made a £75m investment in financial crime enhancements in 2019 through our ongoing Financial Crime Transformation Programme.
In 2019, we placed a significant focus on driving an anti-financial crime culture across the business. We increased awareness of financial crime through culture focus programmes and encouraged our staff to use their judgement to do the right thing and make responsible decisions. We aim to redefine the way we all think and behave in ourday-to-day activities by combating financial crime risk. Our vision is that Deterring, Detecting and Disrupting financial crime is part of our DNA.
Throughout the year, we continued to raise awareness and provide role-specific training to colleagues to build knowledge of emerging risks to support their effective mitigation.
There are four underlying key messages driving our anti-financial crime culture:
| – | Collaboration: We must work together across business lines. Tackling financial crime is a common goal |
| – | Integrity: Act with bravery, integrity and without fear of recrimination |
| – | Responsibility: We are all liable at both an individual and organisational level |
| – | Instinct: Trust your instinct. If it feels wrong, it probably is. |
Our financial crime control environment is evolving but still needs significant enhancement and investment. Our Financial Crime Transformation Programme delivered improvements across the control environment in 2019 and the foundations of key strategic controls are now in place. Enhancements continue to investbe made to our Financial Crime control framework, and to key controls including anti-bribery and corruption measures, customer risk assessment, and screening and transaction monitoring.
In 2019, we continued to drive a culture of AFC across the business and with partners. We ran ten events for the UK police’s regional organised crime units to better work with law enforcement to protect customers. We worked closely with law enforcement to develop an education programme to all financial investigators, explaining the way banks identify, investigate and respond to financial crime. These events were facilitated by SME’s from across Financial Crime and Fraud and led to senior managers presenting at the UK’s National Police Chiefs’ conference. This was a first for a bank to deliver such training to a wide audience and has been significantly welcomed. We also held a series of eight AFC Culture roadshows for colleagues across the UK to drive with 510 colleagues attending, of which 96% better understood the AFC Vision and 69% said they would change behavioural change. We enhanced our governance of AFC by launching a Strategy & Policy forum in our peopleSeptember covering AFC strategy and systems, deterpolicy challenges and developments, anti-money laundering, counter-terrorism financing and sanctions. We also engaged with government and law enforcement stakeholders to shape the usereforms that are part of our services forthe government’s Economic Crime Plan, which aims to improve the resilience of the UK’s overall defences against financial crime. We continued to work with the with industry and the UK Government to combat financial crime detect suspicious activitywhich also helps us further develop our own capabilities. For example, we increased our work with the industry and disrupt those seekinglaw enforcement. We ran a targeted campaign withnon-profit ‘Stop the Traffik’ to benefitraise branch colleagues’ awareness and capability to identify trafficking in branch staff in a location area at high risk for modern slavery and human trafficking (MSHT). Stop the Traffik also held masterclasses at our anti-financial crime roadshows.
We worked closely with law enforcement to develop an education programme to all financial investigators, explaining the way banks identify, investigate and respond to financial crime. This resulted in SME’s from financial crime.across Financial Crime and Fraud conducting ten events for across the UK’s Regional Organised Crime Units and then senior managers presenting at the UK’s National Police Chiefs’ conference. This was a first for a bank to deliver such training to a wide audience and has been significantly welcomed.
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Our Financial Intelligence Unit
The
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Annual Report 2018 2019| Risk review
Legal risk includes the legal consequences of operational risk (e.g.(such as breach of contract) and operational risk with legal origins (e.g.(such as a legally defective contract). We manage legal risk as a standalone risk-type to reflect the continued pace and breadth of regulatory change across financial services.
We define legal risk as losses or impacts arising from legal deficiencies in contracts or failure to: take appropriate measures to protect assets; manage legal disputes appropriately; assess, implement or comply with law or regulation; or to discharge
| – | Take appropriate measures to protect assets |
| – | Manage legal disputes appropriately |
| – | Assess, implement or comply with law or regulation |
| – | Discharge duties or responsibilities created by law or regulation. |
| Legal risk management | Description | |
| Risk appetite | We have no appetite to make decisions or operate in a way that leads to legal risk, we apply robust controls to manage these risks. We have a low tolerance for residual legal risk. | |
| Risk measurement | Due to the close links between our legal and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply where such exposures have a legal risk impact. | |
| Risk mitigation | The Legal team provides specialist advice and support to all business units to ensure we effectively manage legal risk. They help to implement a strong legal risk culture throughout our business using guidelines, policies and procedures and specific | |
| Risk monitoring and reporting | We have developed our internal legal risk reporting framework to improve the visibility of the SantanderUK-wide legal risk profile. We provide regular updates of our key legal risks, issues or breaches, to senior management and the Board through our Legal & Regulatory function. This is in addition to reports issued by the business. | |
20182019 compared to 20172018
TheOur legal risk profile of the Santander UK group was heightened butremained broadly stable duringin 2019, with continued uncertainty relating to Brexit, LIBOR transition risks, the coursequantum of 2018. In 2018regulation change applicable to our Retail Banking business and an upward trajectory ofPPI-related litigation and ongoing customer remediation issues balancing out the mitigation of existing legal risks we reviewed our panel of law firms we use to obtain external legal advice and services. We also refreshed the process for appointing a firm to the panel, to provide greater control around such engagement. We also made significant progress throughout 2018 to implement or embed new regulation, particularlyreported in the following areas:2018.
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We plan to continuetook significant steps throughout 2019 to evolve and embed the legal risk framework in 2019, with a particular focus onacross the business. As part of this, we improved our quantitative and qualitative legal risk reporting, legal risk management and accountability.
We also renewed the approved law firm panel inmid-2019, renewing existing contracts and entering into contracts with new specialist firms and legal suppliers in order to diligently manage legal risks. We introduced improved processes to ensure that instructions outside of these panel relationships are on an exceptional basis only and always approved by senior management.
Further, we created a small specialist mortgage panel of law firms and other legal suppliers for secured collections and recoveries work, together with other mortgage related issues such as forfeiture,un-registered charges and professional negligence. The concentration of such issues under a specialist panel mitigates legal risk and increases control and visibility over our processes. This work forms part of a wider collections and recoveries transformation programme which began in 2019 and will continue into 2020.
We also introduced further rigour into the court orders and requests unit, embedding tighter controls, processes and accountability.
Strategic and business risk can adversely affectcould impact our long-term success asif it could lead tocaused our business model becomingto become out of date, ineffective, or inconsistent with our strategic goals. This could arise if we:
| – | Have |
| – | Misjudge our capabilities, or ability to implement our strategy |
| – | Pursue initiatives like acquisitions that |
Strategic and business risk management | Description | |
| Risk appetite | We have a low to moderate appetite for strategic and business risk. This limits the risks we are prepared to take to achieve our strategic objectives and is aligned to our balanced, customer-centric business model. | |
| Risk measurement | Our Board and senior management regularly review potential risks | |
| Risk mitigation | We manage strategic and business risk by having a clear and consistent strategy that takes account of | |
| Risk monitoring and reporting | We closely track our business environment, including long-term trends that might affect us in the future. As part of this, we report a range of | |
20182019 compared to 20172018
Our business environment is always changing, and this affects how we do business.
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| – | Competitive pressure remained high in |
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Other key risks
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Our key reputational risks arise from failures in corporate governance or management, failing to treat our customers fairly, the actual or perceived way we do business, and the sectors and countries we deal with. They also result from how our clients and those who act for us conduct themselves, and how business is conducted in our industry. External factors may also present a reputational risk to us. These can include the macro environment and the performance of the sector. Sustained damage to our reputation could have a material impact on our ability to operate fully. In turn, this could affect our financial performance and prospects. Reputational risk is not static; today’s decisions may be judged by different standards tomorrow. We build this into our risk culture, evaluation and sanction procedures.
| Reputational risk management | Description | |
| Risk appetite | We have a low appetite for reputational risk, which is agreed by the Board at least | |
| Risk measurement | We assess our exposure to reputational risk daily. We base this on | |
| Risk mitigation | Our business units consider reputational risk as part of their operational risk and control assessments. We also consider it as part of our new product assessments. Our Corporate Communications, Legal and Marketing team helps our business units to mitigate | |
| Risk monitoring and reporting | We monitor and report reputational risks and issues on a timely basis. Our Reputational Risk Forum | |
20182019 compared to 20172018
In 2018,2019 we consideredworked with the potential reputational riskbusiness to manage the impact arisingof the UK’s departure from the FCA publishing their Final Notice announcingEU. We developed communications for our customers to advise them how we think Brexit will impact the resultsproducts and services they enjoy, but also to reassure them of their investigation intoour ongoing commitment to serving the UK.
We also handled the communications issues identifiedaround the deadline for customers to make PPI claims. The volume of customer interaction slowed down our website and the subsequent actionsresulted in extended call-waiting times for customers using our contact centre, but we took in relation to our historical probate and bereavement practices. This included the completionadvised media of the operational improvementssteps we were taking to resolve the problem.
In January 2019, we worked with the business to deliver the communication for the restructuring of our branch network. Following a wide-ranging review into how our customers were choosing to do business with us, we announced in March 2019 that started in 2015we would be closing 140 branches. We handled the communications with affected MPs, Members of the Scottish Parliament and Welsh Assembly members as well as national and local media. We highlighted our commitment to our Probate and Bereavement processes and which we describe in more detailinvesting in the ‘Operational risk’ section. We further strengthened our approach to managing reputational risk acrossnetwork, including refurbishing branches and opening a new Work Café in Leeds, as well as the business and have successfully embeddedservices that customers can access through the Reputational Risk Forum and wider framework, which was introduced in 2017. We enhanced our reputational risk appetite and agreed escalation processes. Post Office.
Our Reputational Risk Forum continued to meet regularly to discuss anyour emerging orand material risks, we face. We also formalised abringing together senior representatives from across the business, alongside the use of our formal Reputational Risk Register, which helps us to track and monitor live risks, and we embeddedRegister. This has ensured that reputational risk input intois a leading consideration with both the ERCC and the Board Responsible Banking Committee. This ensure clearmaintains the visibility and discussion of all material reputational risk issues at Board level.
Throughout 2018, we worked closely with the business on communication plans for key events such as preparing for the UK’s exit from the EU and implementing our ring-fencing plans. We have made significant announcements in Milton Keynes and Bootle, Merseyside confirming our commitment to these communities and investing in new campuses in both locations. We have continued to promote the community and wider society support that Santander UK provides through our Corporate Social Responsibility work, and the Santander Cycles Schemes in London and Milton Keynes.
Our key model risks arise from potential flawsweaknesses and limitations in our modelling techniques,models, or the incorrect use of a model. They include risks arisingstemming from model data, systems, development, performance and governance. The most material models we use help us calculate our regulatory capital (IRB),and credit losses, and perform stress tests and estimate our credit impairments.tests. Increased regulatory standards have influencedinfluence how we manage model risk. We have respondedcontinue to this by improvingenhance our governance documentation, investing in additionalalign our resources to new, demands and improvingimprove our systems for managementto manage and control our activities.
| Model risk management | Description | |
| Risk appetite | We express our model risk appetite through | |
| Risk measurement | We consider both the percentage of models that have been independently assessed, | |
| Risk mitigation | We mitigate model risk through controls over | |
| Risk monitoring and reporting | We report model risks and issues using | |
20182019 compared to 2017
The introduction of IFRS 9 in 2018 increased the level of model risk in our portfolio due to the development of new models. Our Risk division hadpre-existing Basel and behavioural scorecards. We created new variants of these models to deal with significant credit deterioration, lifetime expected credit losses and forward economic guidance as required by IFRS 9. Our impairment models vary in complexity and inputs depending on the size of the portfolio, the amount of data available and the sophistication of the market concerned. The risk modelling function followed our standard governance processes for developing and independently validating new models.
In addition to our focus on developing new models for IFRS 9 purposes, we performed a self-assessment against the new PRA regulatory policy and supervisory statement issued by the PRA in 2018 related toon stress test models. The principles are closely aligned to our existing model risk framework, so we did not need to make any significant changes. We further clarified the roles of Model Owners and Model Users and supplementedenhanced our Model Risk Appetite with additionalmore performance indicators. We maintain a risk-based approach to both management and control, forcontrol. For example, focusingwe focus independent model reviewreviews on theour more material models, such as those related to IFRS 9,for credit losses, or those with specific regulatory standards defined.
The redevelopment of the suite of regulatory capital models to account for new regulations is a key model project for the Bank. This focuses on several different regulations across both the PRA and ECB including the Hybrid Philosophy for Secured Residential Real Estate and the new Definition of Default requirements. The majority of work for this is expected to complete in 2020 and will then be subject to regulatory review
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial review
Critical factors affecting results The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, 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.
Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in ‘Critical Judgements and Accounting Estimates’ in Note 1 to the Consolidated Financial Statements. |
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SUMMARISED CONSOLIDATED INCOME STATEMENT
2018 £m | 2017 £m | 2016 £m | 2019 £m | 2018(2) £m | ||||||||||||||||
| Net interest income | 3,606 | 3,803 | 3,582 | 3,295 | 3,606 | |||||||||||||||
| Non-interest income(1) | 937 | 1,109 | 1,213 | 875 | 937 | |||||||||||||||
| Total operating income | 4,543 | 4,912 | 4,795 | 4,170 | 4,543 | |||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (2,563 | ) | (2,502 | ) | (2,417 | ) | (2,526 | ) | (2,563 | ) | ||||||||||
| Credit impairment losses | (153 | ) | (203 | ) | (67 | ) | (220 | ) | (153 | ) | ||||||||||
| Provisions for other liabilities and charges | (260 | ) | (393 | ) | (397 | ) | (443 | ) | (260 | ) | ||||||||||
| Total operating credit impairment losses, provisions and charges | (413 | ) | (596 | ) | (464 | ) | (663 | ) | (413 | ) | ||||||||||
| Profit before tax | 1,567 | 1,814 | 1,914 | 981 | 1,567 | |||||||||||||||
| Tax on profit | (446 | ) | (560 | ) | (597 | ) | (272 | ) | (403 | ) | ||||||||||
| Profit after tax | 1,121 | 1,254 | 1,317 | 709 | 1,164 | |||||||||||||||
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| Equity holders of the parent | 1,082 | 1,215 | 1,272 | 672 | 1,125 | |||||||||||||||
| Non-controlling interests | 39 | 39 | 45 | 37 | 39 | |||||||||||||||
| Profit after tax | 1,121 | 1,254 | 1,317 | 709 | 1,164 | |||||||||||||||
| (1) | Comprised of Net fee and commission income and Net trading and other income. |
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| (3) | Non-IFRS measure financial results were impacted by a number of specific income, expenses and |
A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.
20182019 compared to 20172018
As described in more detail below, and in Note 43 to the Consolidated Financial Statements, the financial results reflect the changes in our statutory perimeter that we made in the third quarter of 2018, following the ring-fence transfers to Banco Santander London Branch. Prior periods have not been restated. Profit before tax was down 14% at £1,567m. Adjusting for the specific income, expenses37% to £981m and provision charges outlined below, adjusted profit(3) before tax was down 12% at £1,725m(3) (2016: £1,952m(3)).24% to £1,300m due to the factors outlined below. By income statement line item, the movements were:
| – | Net interest income was down |
| – | Non-interest income was down |
When adjusted for these items and £103m (2018: £63m) of operating lease depreciation(4),non-interest income(3) was down 7%, largely due to the |
| – | Operating expenses before credit impairment losses, provisions and charges |
Operating expenses were up 3%, when adjusted for Banking Reform and GMP equalisation costs(3).
When adjusted for these items, operating expenses(3) were flat as higher depreciation costs and inflationary pressures were offset by lower staff costs and efficiency savings. |
| – | Credit impairment losses were |
| – | Provisions for other liabilities and charges were |
When adjusted for these items, provisions |
The remaining provision for£169m charged in respect of PPI redress and related costs was £246m. We made no additional PPI charges in the year, based on our recent claims experience, and having considered the FCA’s Consultation Paper 18/33 issued on 7 November 2018. We will continue to monitor our provision levels, and take account of the impact of any further change in claims received and FCA guidance.comprised:
The remaining provision for other conduct issues was £30m, which primarily relates to the sale of interest rate derivatives, following an ongoing review of the regulatory classification of customers potentially eligible for redress. Following further analysis, management assessed the provision requirements resulting in a release of £11m in the second quarter of 2018.
In the fourth quarter of 2018 we were fined £32.8m by the FCA in relation to an investigation into our historical probate and bereavement practices. We acknowledged the findings of the FCA and apologised to the families and beneficiaries of deceased customers affected by these failings. We have completed a comprehensive tracing exercise and transferred the majority of funds in deceased customers’ accounts to their rightful beneficiaries, with compensatory interest where appropriate.
In the fourth quarter of 2018 we made a £58m provision in relation to our consumer credit business operations. This charge is management’s current best estimate as we continue to assess the scope of this issue.
| – | In Q219 we reported an additional provision of £70m reflecting an increase in PPI claim volumes, additional industry activities and having considered guidance provided by the FCA and our specific approach to PPI claims, in advance of the PPI claims deadline on 29 August 2019. |
| – | In Q3 2019, and in line with industry experience, we received unprecedented volumes of information requests in August 2019 and saw a significant spike in both these requests and complaints in the final days prior to the complaint deadline. Our best estimate of the additional provision required was £99m. |
| – | Tax on profit decreased |
Please refer to the Financial review section of our Annual Report on Form20-F for the year ended 31 December 2018 for a comparative discussion of 2018 financial results compared to 2017.
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Annual Report 2018 2019| Financial review
2017 compared to 2016
Profit before tax was down 5% at £1,814m, primarily impacted by a large credit impairment charge and higher operating expenses. Adjusting for the specific income, expenses and conduct provision charges outlined below, adjusted profit before tax was down 4% at £1,952m(2) (2016: £2,031m(2)). By income statement line, the movements were:
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The remaining provision for PPI redress and related costs amounted to £356m, including an additional net provision of £40m in Q4 2017 bringing the total charge for the year to £109m. The Q4 2017 provision relates to an increase in estimated future claims driven by the start of the FCA advertising campaign for PPI, offset by an expected decline pertaining to a specific PPI portfolio review.
The remainingnon-PPI related conduct provisions amounted to £47m, including the Q2 2017 provision of £35m outlined above, relating to the sale of interest rate derivatives. This charge followed an ongoing review regarding regulatory classification of certain customers potentially eligible for redress.
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Critical factors affecting results
The preparation of our Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the balance sheet date and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in ‘Critical Judgements and Accounting Estimates’ in Note 1 to the Consolidated Financial Statements.
The rest of this section contains a summary of the results, and commentary thereon, by income statement line item for each segment.
Basis of results presentation
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented.
The basis of presentation in this Annual Report has been changed, and the prior periods restated, to report our Jersey and Isle of Man branches in Corporate Centre rather than in Retail Banking as in previous years, as a result of their transfer from Santander UK plc to ANTS in December 2018 as part of the implementation of ring-fencing.
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| 2018 | Retail Banking £m | Corporate & £m | Corporate & £m | Corporate Centre £m | Total £m | |||||||||||||||
| Net interest income | 3,126 | 403 | 69 | 8 | 3,606 | |||||||||||||||
| Non-interest income(1) | 638 | 82 | 272 | (55 | ) | 937 | ||||||||||||||
| Total operating income | 3,764 | 485 | 341 | (47 | ) | 4,543 | ||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (1,929 | ) | (258 | ) | (262 | ) | (114 | ) | (2,563 | ) | ||||||||||
| Credit impairment (losses)/releases(2) | (124 | ) | (23 | ) | (14 | ) | 8 | (153 | ) | |||||||||||
| Provisions for other liabilities and (charges)/releases | (230 | ) | (14 | ) | (8 | ) | (8 | ) | (260 | ) | ||||||||||
| Total operating credit impairment losses, provisions and (charges)/releases | �� | (354 | ) | (37 | ) | (22 | ) | – | (413 | ) | ||||||||||
| Profit/(loss) before tax | 1,481 | 190 | 57 | (161 | ) | 1,567 | ||||||||||||||
| 2017 | ||||||||||||||||||||
| Net interest income | 3,270 | 391 | 74 | 68 | 3,803 | |||||||||||||||
| Non-interest income(1) | 615 | 74 | 364 | 56 | 1,109 | |||||||||||||||
| Total operating income | 3,885 | 465 | 438 | 124 | 4,912 | |||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (1,856 | ) | (223 | ) | (304 | ) | (119 | ) | (2,502 | ) | ||||||||||
| Credit impairment (losses)/releases | (36 | ) | (13 | ) | (174 | ) | 20 | (203 | ) | |||||||||||
| Provisions for other liabilities and (charges)/releases | (342 | ) | (55 | ) | (11 | ) | 15 | (393 | ) | |||||||||||
| Total credit impairment losses, provisions and (charges)/releases | (378 | ) | (68 | ) | (185 | ) | 35 | (596 | ) | |||||||||||
| Profit/(loss) before tax | 1,651 | 174 | (51 | ) | 40 | 1,814 | ||||||||||||||
| 2016 | ||||||||||||||||||||
| Net interest income | 3,117 | 380 | 73 | 12 | 3,582 | |||||||||||||||
| Non-interest income(1) | 559 | 76 | 312 | 266 | 1,213 | |||||||||||||||
| Total operating income | 3,676 | 456 | 385 | 278 | 4,795 | |||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (1,785 | ) | (215 | ) | (281 | ) | (136 | ) | (2,417 | ) | ||||||||||
| Credit impairment (losses)/releases | (21 | ) | (29 | ) | (21 | ) | 4 | (67 | ) | |||||||||||
| Provisions for other liabilities and charges | (338 | ) | (26 | ) | (11 | ) | (22 | ) | (397 | ) | ||||||||||
| Total credit impairment losses, provisions and (charges)/releases | (359 | ) | (55 | ) | (32 | ) | (18 | ) | (464 | ) | ||||||||||
| Profit before tax | 1,532 | 186 | 72 | 124 | 1,914 | |||||||||||||||
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Annual Report 2018 | Financial review
Retail Banking offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with an annual turnover up to £6.5m, and Santander Consumer Finance, predominantly a vehicle finance business.
Summarised income statement
| 2019 | Retail Banking £m | Corporate & £m | Corporate & £m | Corporate Centre £m | Total £m | |||||||||||||||||||||||||||
| Net interest income/(expense) | 2,876 | 359 | 63 | (3 | ) | 3,295 | ||||||||||||||||||||||||||
| Non-interest income/(expense)(1) | 698 | 78 | 112 | (13 | ) | 875 | ||||||||||||||||||||||||||
| Total operating income/(expense) | 3,574 | 437 | 175 | (16 | ) | 4,170 | ||||||||||||||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (1,994 | ) | (264 | ) | (171 | ) | (97 | ) | (2,526 | ) | ||||||||||||||||||||||
| Credit impairment losses | (160 | ) | (37 | ) | (22 | ) | (1 | ) | (220 | ) | ||||||||||||||||||||||
| Provisions for other liabilities and charges | (292 | ) | (20 | ) | (17 | ) | (114 | ) | (443 | ) | ||||||||||||||||||||||
| Total operating credit impairment losses, provisions and charges | (452 | ) | (57 | ) | (39 | ) | (115 | ) | (663 | ) | ||||||||||||||||||||||
| Profit/(loss) before tax | 1,128 | 116 | (35 | ) | (228 | ) | 981 | |||||||||||||||||||||||||
2018 £m | 2017 £m | 2016 £m | ||||||||||||||||||||||||||||||
| 2018(2) | ||||||||||||||||||||||||||||||||
| Net interest income | 3,126 | 3,270 | 3,117 | 3,126 | 403 | 69 | 8 | 3,606 | ||||||||||||||||||||||||
| Non-interest income(1) | 638 | 615 | 559 | 638 | 82 | 183 | 34 | 937 | ||||||||||||||||||||||||
| Total operating income | 3,764 | 3,885 | 3,676 | 3,764 | 485 | 252 | 42 | 4,543 | ||||||||||||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (1,929 | ) | (1,856 | ) | (1,785 | ) | (1,929 | ) | (258 | ) | (250 | ) | (126 | ) | (2,563 | ) | ||||||||||||||||
| Credit impairment losses | (124 | ) | (36 | ) | (21 | ) | ||||||||||||||||||||||||||
| Credit impairment (losses)/releases | (124 | ) | (23 | ) | (14 | ) | 8 | (153 | ) | |||||||||||||||||||||||
| Provisions for other liabilities and charges | (230 | ) | (342 | ) | (338 | ) | (230 | ) | (14 | ) | (8 | ) | (8 | ) | (260 | ) | ||||||||||||||||
| Total operating credit impairment losses, provisions and charges | (354 | ) | (378 | ) | (359 | ) | ||||||||||||||||||||||||||
| Profit before tax | 1,481 | 1,651 | 1,532 | |||||||||||||||||||||||||||||
| Total operating credit impairment losses, provisions and (charges)/releases | (354 | ) | (37 | ) | (22 | ) | – | (413 | ) | |||||||||||||||||||||||
| Profit/(loss) before tax | 1,481 | 190 | (20 | ) | (84 | ) | 1,567 | |||||||||||||||||||||||||
| (1) | Comprised of Net fee and commission income and Net trading and other income. |
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20182019 compared to 20172018
Profit before tax decreased by £170m to £1,481m in 2018 (2017: £1,651m). By income statement line, the movements were:
| – | For Retail Banking, profit before tax decreased, largely due to pressure from the mortgage back book, including £3.9bn of SVR attrition as well as additional PPI provision charges and lower credit impairment releases. Higher operating lease volumes and a change in accounting treatment(3) of residual value risk resulted in increasednon-interest income, partially offset by higher depreciation in operating expenses. |
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| – | For Corporate & Investment Banking, loss before tax increased to £35m driven by |
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The remaining provision for PPI redress and related costs was £246m. We made no additional PPI charges in the year, based on our recent claims experience, and having considered the FCA’s Consultation Paper 18/33 issued on 7 November 2018. We will continue to monitor our provision levels, and take account of the impact of any further change in claims received and FCA guidance.
The remaining provision for other conduct issues was £30m, which primarily relates to the sale of interest rate derivatives, following an ongoing review of the regulatory classification of customers potentially eligible for redress. Following further analysis, management assessed the provision requirements resulting in a release of £11m in the second quarter of 2018.
In the fourth quarter of 2018 we were fined £32.8m by the FCA in relation to an investigation into our historical probate and bereavement practices. We acknowledged the findings of the FCA and apologised to the families and beneficiaries of deceased customers affected by these failings. We have completed a comprehensive tracing exercise and transferred the majority of funds in deceased customers’ accounts to their rightful beneficiaries, with compensatory interest where appropriate.
In the fourth quarter of 2018 we made a £58m provision in relation to our consumer credit business operations. This charge is management’s current best estimate as we continue to assess the scope of this issue.
2017 compared to 2016
Profit before tax increased by £119m to £1,651m in 2017 (2016: £1,532m). By income statement line, the movements were:
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The remaining provision for PPI redress and related costs amounted to £356m, including an additional net provision of £40m in Q4 2017 bringing the total charge for the year to £109m. The Q4 2017 provision relates to an increase in estimated future claims driven by the start of the FCA advertising campaign for PPI, offset by an expected decline pertaining to a specific PPI portfolio review.
The remainingnon-PPI related conduct provisions amounted to £47m, including the Q2 2017 provision of £35m, relating to the sale of interest rate derivatives. This charge followed an ongoing review regarding regulatory classification of certain customers potentially eligible for redress.
| Santander UK Group Holdings plc |
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Customer balances
| 2018 £bn | 2017 £bn | |||||||
| Mortgages | 158.0 | 154.7 | ||||||
| Business banking | 1.8 | 1.9 | ||||||
| Consumer (auto) finance | 7.3 | 7.0 | ||||||
| Other unsecured lending | 5.7 | 5.1 | ||||||
| Customer loans | 172.8 | 168.7 | ||||||
| Current accounts(3) | 68.4 | 67.5 | ||||||
| Savings(3) | 56.0 | 59.3 | ||||||
| Business banking accounts | 11.9 | 11.2 | ||||||
| Other retail products(3) | 5.8 | 5.8 | ||||||
| Customer deposits | 142.1 | 143.8 | ||||||
| Risk-weighted assets (RWAs) | 46.2 | 44.1 | ||||||
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2018 compared to 2017
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| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Annual Report 2018 | Financial review
CORPORATE & COMMERCIAL BANKINGBalance sheet review
To better align reporting to the nature of the business segment following ring-fence transfers, Commercial Banking has beenre-branded as Corporate & Commercial Banking. Corporate & Commercial Banking covers businesses with an annual turnover of £6.5m to £500m. Corporate & Commercial Banking offers a wide range of products and financial services provided by relationship teams that are based in a network of regional CBCs and through telephony and digital channels.
Summarised income statement
| 2018 £m | 2017 £m | 2016 £m | ||||||||||
| Net interest income | 403 | 391 | 380 | |||||||||
| Non-interest income(1) | 82 | 74 | 76 | |||||||||
| Total operating income | 485 | 465 | 456 | |||||||||
| Operating expenses before credit impairment losses, provisions and charges | (258 | ) | (223 | ) | (215 | ) | ||||||
| Credit impairment losses(2) | (23 | ) | (13 | ) | (29 | ) | ||||||
| Provisions for other liabilities and charges | (14 | ) | (55 | ) | (26 | ) | ||||||
| Total operating credit impairment losses, provisions and charges | (37 | ) | (68 | ) | (55 | ) | ||||||
| Profit before tax | 190 | 174 | 186 | |||||||||
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2018 compared to 2017
Profit before tax increased by £16m to £190m in 2018 (2017: £174m). By income statement line, the movements were:
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2017 compared to 2016
Profit before tax decreased by £12m to £174m in 2017 (2016: £186m). By income statement line, the movements were:
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Customer balances
| 2018 £bn | 2017 £bn | |||||||
| Non-Commercial Real Estate trading businesses | 11.5 | 11.5 | ||||||
| Commercial Real Estate(3)(4) | 6.2 | 7.9 | ||||||
| Customer loans | 17.7 | 19.4 | ||||||
| Customer deposits | 17.6 | 17.8 | ||||||
| RWAs | 17.0 | 19.4 | ||||||
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2018 compared to 2017
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Alongside the ring-fence transfers and a risk management initiative, we have continued our solid lending growth tonon-Commercial Real Estate trading businesses of £0.5bn, ahead of the market.(4)
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CORPORATE & INVESTMENT BANKING
As part of a rebrand across the Banco Santander group, Global Corporate Banking (the UK segment of Santander Global Corporate Banking) has been branded as Corporate & Investment Banking (CIB). CIB services corporate clients with an annual turnover of £500m and above. CIB clients require specially tailored solutions and value-added services due to their size, complexity and sophistication. We provide these clients with products to manage currency fluctuations, protect against interest rate risk, and arrange capital markets finance and specialist trade finance solutions, as well as providing support to the rest of Santander UK’s business segments.
Summarised income statement
| 2018 £m | 2017 £m | 2016 £m | ||||||||||
| Net interest income | 69 | 74 | 73 | |||||||||
| Non-interest income(1) | 272 | 364 | 312 | |||||||||
| Total operating income | 341 | 438 | 385 | |||||||||
| Operating expenses before credit impairment losses, provisions and charges | (262 | ) | (304 | ) | (281 | ) | ||||||
| Credit impairment losses(2) | (14 | ) | (174 | ) | (21 | ) | ||||||
| Provisions for other liabilities and charges | (8 | ) | (11 | ) | (11 | ) | ||||||
| Total operating credit impairment losses, provisions and charges | (22 | ) | (185 | ) | (32 | ) | ||||||
| Profit/(loss) before tax | 57 | (51 | ) | 72 | ||||||||
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2018 compared to 2017
As described in more detail below, and in Note 43 to the Consolidated Financial Statements, the financial results reflect the changes in our statutory perimeter that we made in the third quarter of 2018, following the ring-fence transfers to Banco Santander London Branch which principally impacted Corporate & Investment Banking. Prior periods have not been restated. Profit before tax increased by £108m to £57m in 2018 (2017: £51m loss). By income statement line, the movements were:
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2017 compared to 2016
Profit before tax decreased by £123m to a loss of £51m in 2017 (2016: £72m). By income statement line, the movements were:
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Customer balances
| 2018 £bn | 2017 £bn | |||||||
| Customer loans | 4.6 | 6.0 | ||||||
| Customer deposits | 4.8 | 4.5 | ||||||
| RWAs | 7.2 | 16.5 | ||||||
2018 compared to 2017
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Annual Report 2018 |Financial review
Corporate Centre mainly includes the treasury,non-core corporate and legacy portfolios, including Crown Dependencies. Corporate Centre is also responsible for managing capital and funding, balance sheet composition, structure, pension and strategic liquidity risk. To enable a more targeted and strategically aligned apportionment of capital and other resources, revenues and costs incurred in Corporate Centre are allocated to the three business segments. Thenon-core corporate and legacy portfolios are beingrun-down and/or managed for value.
Summarised income statement
| 2018 £m | 2017 £m | 2016 £m | ||||||||||
| Net interest income | 8 | 68 | 12 | |||||||||
| Non-interest (expense)/income(1) | (55 | ) | 56 | 266 | ||||||||
| Total operating (expense)/income | (47 | ) | 124 | 278 | ||||||||
| Operating expenses before credit impairment losses, provisions and charges | (114 | ) | (119 | ) | (136 | ) | ||||||
| Credit impairment releases(2) | 8 | 20 | 4 | |||||||||
| Provisions for other liabilities and charges | (8 | ) | 15 | (22 | ) | |||||||
| Total operating credit impairment releases/(losses), provisions and charges | – | 35 | (18 | ) | ||||||||
| (Loss)/profit before tax | (161 | ) | 40 | 124 | ||||||||
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2018 compared to 2017
Corporate Centre made a loss before tax of £161m in 2018 (2017: £40m profit). By income statement line, the movements were:
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2017 compared to 2016
Profit before tax decreased by £84m to £40m in 2017 (2016: £124m). By income statement line, the movements were:
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Customer balances
| 2018 £bn | 2017 £bn | |||||||
| Customer loans(4) | 4.8 | 6.2 | ||||||
– of which Social Housing | 3.8 | 5.1 | ||||||
– of which Crown Dependencies | 0.3 | 0.3 | ||||||
– of whichnon-core | 0.7 | 0.8 | ||||||
Customer deposits(4) | 7.6 | 9.8 | ||||||
– of which Crown Dependencies | 4.8 | 6.4 | ||||||
RWAs | 8.4 | 7.0 | ||||||
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2018 compared to 2017
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SUMMARISED CONSOLIDATED BALANCE SHEET
2018 £m | 2017 £m | |||||||
| Assets | ||||||||
| Cash and balances at central banks | 24,180 | 32,771 | ||||||
| Financial assets at fair value through profit or loss: | ||||||||
– Trading assets | – | 30,555 | ||||||
– Derivative financial instruments | 5,321 | 19,942 | ||||||
– Other financial assets at fair value through profit or loss | 6,137 | 2,096 | ||||||
Financial assets at amortised cost: | ||||||||
– Loans and advances to customers(1) | 201,619 | 199,332 | ||||||
– Loans and advances to banks(1) | 3,515 | 3,466 | ||||||
– Reverse repurchase agreements – non trading(1) | 21,127 | 2,614 | ||||||
– Other financial assets at amortised cost(2) | 7,228 | |||||||
| Financial assets at fair value through other comprehensive income(2) | 13,302 | |||||||
| Financial investments(2) | 17,611 | |||||||
| Interest in other entities | 88 | 73 | ||||||
| Property, plant and equipment | 1,835 | 1,598 | ||||||
| Retirement benefit assets | 842 | 449 | ||||||
| Tax, intangibles and other assets | 4,187 | 4,253 | ||||||
| Total assets | 289,381 | 314,760 | ||||||
| Liabilities | ||||||||
| Financial liabilities at fair value through profit or loss: | ||||||||
– Trading liabilities | – | 31,109 | ||||||
– Derivative financial instruments | 1,594 | 17,613 | ||||||
– Other financial liabilities at fair value through profit or loss | 6,286 | 2,315 | ||||||
Financial liabilities at amortised cost: | ||||||||
– Deposits by customers | 173,692 | 177,421 | ||||||
– Deposits by banks(1) | 17,824 | 12,708 | ||||||
– Repurchase agreements – non trading(1) | 10,910 | 1,076 | ||||||
– Debt securities in issue | 55,906 | 48,860 | ||||||
– Subordinated liabilities | 3,601 | 3,793 | ||||||
| Retirement benefit obligations | 115 | 286 | ||||||
| Tax, other liabilities and provisions | 3,233 | 3,377 | ||||||
| Total liabilities | 273,161 | 298,558 | ||||||
| Equity | ||||||||
| Total shareholders’ equity | 15,820 | 15,801 | ||||||
| Non-controlling interests | 400 | 401 | ||||||
| Total equity | 16,220 | 16,202 | ||||||
| Total liabilities and equity | 289,381 | 314,760 | ||||||
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2019 £m | 2018 £m | |||||||
Assets | ||||||||
Cash and balances at central banks | 26,395 | 24,180 | ||||||
Financial assets at fair value through profit or loss | 4,336 | 11,458 | ||||||
Financial assets at amortised cost | 240,773 | 233,489 | ||||||
Financial assets at fair value through other comprehensive income | 9,747 | 13,302 | ||||||
Interest in other entities | 117 | 88 | ||||||
Property, plant and equipment | 1,971 | 1,835 | ||||||
Retirement benefit assets | 670 | 842 | ||||||
Tax, intangibles and other assets | 4,479 | 4,187 | ||||||
Total assets | 288,488 | 289,381 | ||||||
Liabilities | ||||||||
Financial liabilities at fair value through profit or loss | 3,422 | 7,880 | ||||||
Financial liabilities at amortised cost | 265,350 | 261,933 | ||||||
Retirement benefit obligations | 280 | 115 | ||||||
Tax, other liabilities and provisions | 3,095 | 3,233 | ||||||
Total liabilities | 272,147 | 273,161 | ||||||
Equity | ||||||||
Total shareholders’ equity | 15,946 | 15,820 | ||||||
Non-controlling interests | 395 | 400 | ||||||
Total equity | 16,341 | 16,220 | ||||||
Total liabilities and equity | 288,488 | 289,381 | ||||||
A more detailed Consolidated Balance Sheet is contained in the Consolidated Financial Statements.
20182019 compared to 2017
As described in more detail below, and in Note 43 to the Consolidated Financial Statements, the balances at 31 December 2018 excluded assets and liabilities transferred outside of the Santander UK group as part of ring-fencing implementation.
Assets
Cash and balances at central banks
Cash and balances at central banks decreasedincreased by 26%9% to £24,180m£26,395m at 31 December 2018 (2017: £32,771m) due to no balances being held with US Federal Reserve following the closure of the ANTS branch office2019 (2018: £24,180m). This was driven by cash inflows generated from profits in the US,year, higher customer deposits and lower balances with the Banknet disposal of England,certain asset backed securities, offset by additional retail lending and net cash outflows relating to debt securities in accordance with our liquidity and funding plans.issue.
TradingFinancial assets at fair value through profit or loss:
TradingFinancial assets at fair value through profit or loss decreased by 62% to £nil£4,336m at 31 December 2018 (2017: £30,555m). This reflected2019 (2018: £11,458m), mainly due to:
| – | £2.1bn of senior tranches of credit linked notes, which were previously classified as other financial assets at fair value through profit or loss, are now presented on a net basis as a result of changes to legal agreements. For more information see Note 12 to the Consolidated Financial Statements. |
| – | The maturity ofnon-trading reverse repurchase agreements held at FVTPL, which totalled £2.3bn at 31 December 2018. |
Financial assets at amortised cost:
Financial assets at amortised cost increased by 3% to £240,773m at 31 December 2019 (2018: £233,489m), mainly due to:
| – | An increase in customer loans, with mortgage lending in Retail Banking up £7.4bn. This was partially offset by a reduction in corporate lending which included managed reductions in Commercial Real Estate of £1.1bn. |
| – | Reverse repurchase agreements – non trading increasing by £2.5bn, reflecting the classification of all newnon-trading reverse repurchase agreements at amortised cost in line with our ring-fenced model and as part of normal liquidity risk management. |
Financial assets at fair value through other comprehensive income
Financial assets at fair value through other comprehensive income decreased by 27% to £9,747m at 31 December 2019 (2018: £13,302m) mainly due to therun-down or transfer disposal of our trading business, including the transfer of our gilt-edged market making business to Banco Santander London Branch,certain asset backed securities as part of our transitionnormal liquid asset portfolio management.
Property, plant and equipment
Property, plant and equipment increased by 7% to our ring-fenced model.£1,971m at 31 December 2019 (2018: £1,835m) mainly due to an increase in operating lease assets and the recognition ofright-of-use assets following the adoption of IFRS 16 on 1 January 2019.
Derivative financial instruments –Retirement benefit assets
DerivativeRetirement benefit assets decreased by 73%20% to £5,321m£670m at 31 December 2018 (2017: £19,942m)2019 (2018: £842m), reflecting a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme). This was mainly relateddue to a decrease in corporate bond yields, resulting in a higher value being placed on the transferliabilities in the Scheme. This was partially offset by asset growth, mainly driven by the decrease in corporate bond yields.
Tax, intangibles and other assets
Tax, intangibles and other assets increased by 7% to £4,479m at 31 December 2019 (2018: £4,187m), mainly due to an increase in the carrying value of the prohibited partmacro hedge of our derivatives business with certain corporates and financial institutions to Banco Santander London Branch as part of the transition to our ring-fenced model.interest rate risk.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial review
Other financial assetsLiabilities
Financial liabilities at fair value through profit or lossloss:
Other financial assetsFinancial liabilities at fair value through profit or loss increaseddecreased by 57% to £6,137m£3,422m at 31 December 2018 (2017: £2,096m)2019 (2018: £7,880m), mainly due to the following:to:
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Loans and advances to customersFinancial liabilities at amortised cost
Loans and advances to customersFinancial liabilities at amortised cost increased slightlyby 1% to £201,619m£265,350m at 31 December 2018 (2017: £199,332m)2019 (2018: £261,933m). This was mainly due to:
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| – | Deposits by banks decreasing by £3.5bn due to |
Reverse repurchase agreements – non trading
Non trading reverse repurchase agreements increased to £21,127m at 31 December 2018 (2017: £2,614m), which reflected the revised classification of the majority of our permitted non trading reverse repurchase agreements at amortised cost, in line with our ring-fenced business model for managing these assets as part of our overall funding and liquidity plans.
Other financial assets at amortised cost
Debt securities in issue decreasing by £5.7bn, reflecting maturities in the period, partially offset by covered bond issuances of £1bn in February 2019,€1bn in May 2019 and £1bn in November 2019, along with a senior unsecured issuance of $1bn in June 2019. Retirement benefit obligations Retirement benefit obligations Tax, other liabilities and provisions Tax, other liabilities and provisions decreased by 4% to Equity Total shareholders’ equity Total shareholders’ equity On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item between ‘other financial assets at amortised cost’ and ‘financial assets at FVOCI. This aligned the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position. At 1 January 2018, this resulted in £7,776m of other financial assets at amortised cost beingre-classified– from financial investments measured at amortised cost. When compared to 1 January 2018, the balance reduced slightly to £7,228m at 31 December 2018.Financial assets at fair value through other comprehensive incomeAt 1 January 2018 and on adoption of IFRS 9, financial investments of £8,743m that were previously measured atavailable-for-sale under IAS 39 werere-classified at FVOCI. When compared to 1 January 2018, the balance increased to £13,302m at 31 December 2018 due to higher volumes of short-dated bonds within the eligible liquidity pool.Retirement benefit assetsRetirement benefit assets increased by 88% to £842m at 31 December 2018 (2017: £449m). This was mainly due to actuarial gains in the year driven by rising corporate bond yields, partially offset by a higher assumed inflation rate, which when combined reduced the value placed on Scheme liabilities.LiabilitiesTrading liabilitiesTrading liabilities decreased to £nil at 31 December 2018 (2017: £31,109m). This reflected therun-down or transfer of the majority of our trading business, including the transfer of our gilt-edged market making business to Banco Santander London Branch, as part of our transition to our ring-fenced model.Derivative financial instruments – liabilitiesDerivative liabilities decreased to £1,594m at 31 December 2018 (2017: £17,613m). This mainly related to the transfer of the prohibited part of our derivatives business with certain corporates and financial institutions to Banco Santander London Branch, as part of the transition to our ring-fenced model.Other financial liabilities at fair value through profit or lossOther financial liabilities at fair value through profit or loss increased to £6,286m at 31 December 2018 (2017: £2,315m), due to the classification of £1.7bn ofnon-trading repurchase agreements at FVTPL to minimise accounting mismatches during our ring-fencing transition, and also higher structured deposit balances following the establishment of a new credit protection vehicle in the year.Deposits by customersDeposits by customers at amortised cost decreased by 2% to £173,692m at 31 December 2018 (2017: £177,421m), with lower corporate deposits and management pricing actions driving a reduction in retail savings products. This was partially offset by a £0.9bn increase in personal current account balances.Deposits by banksDeposits by banks increased by 40% to £17,824m at 31 December 2018 (2017: £12,708m), driven by further drawdowns of the Term Funding Scheme with the Bank of England, and higher deposits held as collateral.Repurchase agreements – non tradingNon trading repurchase agreements increased to £10,910m at 31 December 2018 (2017: £1,076m), which reflected the revised classification of the majority of our permitted non trading repurchase agreements at amortised cost, in line with our ring-fenced business model for managing these liabilities as part of our overall funding and liquidity plans.Debt securities in issueDebt securities in issue increased by 14% to £55,906m at 31 December 2018 (2017: £48,860m) reflecting thepre-funding of our 2019 requirements.decreasedincreased by 60%143% to £115m£280m at 31 December 2018 (2017: £286m).2019 (2018: £115m), reflecting a decrease in the overall accounting surplus of the Scheme. This was principallymainly due to actuarial gainsa decrease in corporate bond yields, resulting in a higher value being placed on the liabilities in the yearScheme. This was partially offset by asset growth, mainly driven by widening credit spreads on the discount rate useddecrease in corporate bond yields.value scheme liabilities.£3,095m at 31 December 2019 (2018: £3,233m) mainly due to changes in unsettled financial transactions as well as tax balances.remained broadly flat at £15,820mincreased by 1% to £15,946m at 31 December 2018 (2017: £15,801m)2019 (2018: £15,820m). Total comprehensive incomeThis was principally due to the profit after tax for the year and a net increase in the period wasother equity instruments being offset by downward defined benefit pension remeasurements and dividend payments, including £668m associated with ring-fencing transfers to Banco Santander London Branch.payments.(1)Non-IFRS measure. See page 238.150164 Santander UK Group Holdings plc
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| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Consolidated
2019 £bn | 2018 £bn | |||||||
Customer loans | 205.3 | 199.9 | ||||||
Other assets | 83.2 | 89.5 | ||||||
Total assets | 288.5 | 289.4 | ||||||
Customer deposits | 177.8 | 172.1 | ||||||
Total wholesale funding | 65.3 | 70.9 | ||||||
Other liabilities | 29.1 | 30.2 | ||||||
Total liabilities | 272.2 | 273.2 | ||||||
Shareholders’ equity | 15.9 | 15.8 | ||||||
Non-controlling interest | 0.4 | 0.4 | ||||||
Total liabilities and equity | 288.5 | 289.4 | ||||||
Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.
2019 compared to 2018
| – | Customer loans increased £5.4bn, with mortgage lending in Retail Banking up £7.4bn. This was partially offset by a reduction in corporate lending which included managed reductions in CRE of £1.1bn. |
| – | Customer deposits increased £5.7bn, with £3.0bn growth in Retail Banking supported by a successful ISA campaign and 1I2I3 Business Current Account inflows. Corporate deposits also increased as we focused on building strong customer relationships. |
Retail Banking
2019 £bn | 2018 £bn | |||||||
Mortgages | 165.4 | 158.0 | ||||||
Business banking | 1.8 | 1.8 | ||||||
Consumer (auto) finance | 7.7 | 7.3 | ||||||
Other unsecured lending | 5.5 | 5.7 | ||||||
Customer loans | 180.4 | 172.8 | ||||||
Current accounts | 68.7 | 68.4 | ||||||
Savings | 57.2 | 56.0 | ||||||
Business banking accounts | 12.9 | 11.9 | ||||||
Other retail products | 6.3 | 5.8 | ||||||
Customer deposits | 145.1 | 142.1 | ||||||
Corporate & Commercial Banking
2019 £bn | 2018 £bn | |||||||
Non-Commercial Real Estate trading businesses | 11.2 | 11.5 | ||||||
Commercial Real Estate | 5.1 | 6.2 | ||||||
Customer loans | 16.3 | 17.7 | ||||||
Customer deposits | 18.2 | 17.6 | ||||||
Corporate & Investment Banking
2019 £bn | 2018 £bn | |||||||
Customer loans | 4.1 | 4.6 | ||||||
Customer deposits | 6.1 | 4.8 | ||||||
Corporate Centre
2019 £bn | 2018 £bn | |||||||
Social Housing | 3.6 | 3.8 | ||||||
Crown Dependencies (Isle of Man and Jersey) | 0.3 | 0.3 | ||||||
Non-core | 0.6 | 0.7 | ||||||
Customer loans | 4.5 | 4.8 | ||||||
Customer deposits | 8.4 | 7.6 | ||||||
– of which Crown Dependencies | 6.1 | 4.8 | ||||||
| Santander UK Group Holdings plc | 165 |
Annual Report 2019| Financial review
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
2018 £m | 2017 £m | 2016 £m | 2019 £m | 2018 £m | ||||||||||||||||
| Net cash flows from operating activities | (13,182 | ) | 21,880 | 14,777 | 3,523 | (13,182 | ) | |||||||||||||
| Net cash flows from investing activities | (3,925 | ) | 816 | (7,340 | ) | 2,885 | (3,925 | ) | ||||||||||||
| Net cash flows from financing activities | 5,687 | (5,543 | ) | (3,159 | ) | (4,091 | ) | 5,687 | ||||||||||||
| Change in cash and cash equivalents | (11,420 | ) | 17,153 | 4,278 | 2,317 | (11,420 | ) | |||||||||||||
A more detailed Consolidated Cash Flow Statement is contained in the Consolidated Financial Statements.
The major activities and transactions that affected cash flows during 2018, 20172019 and 20162018 were as follows:
In 2019, the net cash inflows from operating activities of £3,523m resulted from net cash inflows generated from profits in the year and higher customer deposits, offset by additional retail lending. The net cash inflows from investing activities of £2,885m mainly reflected the net disposal of certain asset backed securities as part of normal liquid asset portfolio management. The net cash outflows from financing activities mainly reflected net cash outflows relating to debt securities in issue. These resulted in cash and cash equivalents increasing by £2,317m in the year.
In 2018, the net cash outflows from operating activities of £13,182m resulted from net cash outflows relating to trading and derivative assets and liabilities. The net cash outflows from investing activities of £3,925m mainly reflectingreflected purchases of financial investments in the year as part of normal liquidity management. The net cash inflows from financing activities of £5,687m reflected the net inflows from debt securities following thepre-funding of our 2019 requirements. This was offset by payments of dividends on ordinary shares, preference shares, other equity instruments andnon-controlling interests. Cash and cash equivalents decreased by £11,420m principally from the decrease in cash held at central banks.
In 2017, the net cash inflows from operating activities
| 166 | Santander UK Group Holdings plc |
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2019 £bn | 2018 £bn | |||||||
Capital and leverage | ||||||||
CET1 capital | 10.4 | 10.4 | ||||||
Total qualifying regulatory capital | 15.8 | 15.0 | ||||||
CET1 capital ratio | 14.3% | 13.2% | ||||||
Total capital ratio | 21.6% | 19.1% | ||||||
UK leverage ratio | 4.7% | 4.5% | ||||||
RWAs | 73.2 | 78.8 | ||||||
– of which Retail Banking(1) | 49.0 | 47.9 | ||||||
– of which Corporate & Commercial Banking | 12.5 | 17.0 | ||||||
– of which Corporate & Investment Banking(1) | 4.9 | 6.9 | ||||||
– of which Corporate Centre(1) | 6.8 | 7.0 | ||||||
Funding | ||||||||
Total wholesale funding | 67.8 | 73.2 | ||||||
– of which with a residual maturity of less than one year | 22.5 | 16.8 | ||||||
| (1) | Segmental RWAs for 2018 have been restated to reflect the transfer of our short term markets activity from CIB to Corporate Centre and the reallocation of an equity stake in a joint venture from Corporate Centre to Retail Banking. |
Further analysis of £21,880m resulted from the increase in trading balances, increased customer lendingcapital and customer savings and deposits from other banks. The net cash inflows from investing activities of £816m mainly reflected sale and redemption of financial investments offset by purchases of property, plant and equipment and intangible assets. The net cash outflows from financing activities of £5,543m principally reflected the repayment of debt securities maturingfunding is included in the year of £13,763 offset by new issues of debt securities of £8,748m, the payment of interim dividends on ordinary shares, preference shares, other equity instrumentsCapital risk andnon-controlling interests of £1,001m. Cash and cash equivalents increased by £17,153m principally from the increase in cash and balances at central banks, which is held as part Liquidity risk sections of the Risk review.
2019 compared to 2018
| – | CET1 capital was stable at £10.4bn, with ongoing capital accretion through profits retained after dividend payment, offset by market-driven pension movements. |
| – | RWAs reduced largely as a result of SRT securitisations and lower corporate lending as we continue to focus on risk-weighted returns. This was partially offset by increased RWAs in Retail Banking in line with mortgage lending growth. |
| – | CET1 capital ratio increased 110bps to 14.3%, through active RWA management. UK leverage ratio increased 20bps to 4.7%. |
| – | Total wholesale funding decreased, reflecting maturities in the period, partially offset by covered bond issuances of £1bn in February 2019,€1bn in May 2019 and £1bn in November 2019, along with senior unsecured issuance of $1bn in June 2019. In August 2019, we increased our AT1 outstanding by £200m via the issuance of a new £500m 6.3% AT1 to Banco Santander and the repurchase of the £300m 7.6% AT1 from Banco Santander. |
| 2019 £bn | 2018 £bn | |||||||
Santander UK Domestic Liquidity Sub Group (RFB DoLSub) | ||||||||
Liquidity Coverage Ratio (LCR) | 142% | 164% | ||||||
LCR eligible liquidity pool | 42.0 | 54.1 | ||||||
Santander Financial Services (SFS) | ||||||||
LCR | 471% | – | ||||||
LCR eligible liquidity pool | 5.7 | – | ||||||
Further analysis of liquidity pool. This increase was mainly due to a changeis included in the mix of assets held for liquidity purposes as part of normal portfolio management activity.
In 2016, the net cash inflows from operating activities of £14,777m resulted from the increase in trading balances, increased customer lending and customer savings and deposits from other banks. The net cash outflows from investing activities of £7,340m principally reflected the purchase ofheld-to-maturity investments. The net cash outflows from financing activities of £3,159m principally reflected the repayment of debt securities maturing in the year of £11,352m offset by new issues of debt securities of £8,788m, the payment of interim dividends on ordinary shares, preference shares, other equity instruments andnon-controlling interests of £560m. Cash and cash equivalents increased by £4,278m principally from the increase in cash held at central banks and also debt securities, both of which are held as partLiquidity risk section of the liquidity pool. This has increased dueRisk review.
2019 compared to an increase in wholesale funding with a maturity of less than 30 days.2018
| – | While LCR remains high at 142%, it is lower than 2018 reflecting reduced uncertainty. |
| – | The RFB DoLSub LCR and LCR eligible liquidity pool both decreased following the transfer of our Isle of Man and Jersey businesses (Crown Dependencies) into SFS in 2018 as part of ring-fencing implementation. |
| – | SFS liquidity benefited from £6.1bn of deposits in our Crown Dependencies business, which increased £1.3bn in 2019 in preparation for the planned transfer of some RFB assets to SFS in 2020. |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial review
2018 business development highlightsSelected financial data
Retail BankingThe financial information set forth below for the years ended 31 December 2019, 2018 and 2017 and at 31 December 2019 and 2018 has been derived from the audited Consolidated Financial Statements of Santander UK Group Holdings plc (the Company) and its subsidiaries (together, the Santander UK group) prepared in accordance with IFRS included elsewhere in this Annual Report. The information should be read in connection with, and is qualified in its entirety by reference to, the Santander UK group’s Consolidated Financial Statements and the Notes thereto.
BALANCE SHEETS
2019(1) £m | 2018(2,3) £m | 2017 £m | 2016 £m | 2015 £m | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and balances at central banks | 26,395 | 24,180 | 32,771 | 17,107 | 16,842 | |||||||||||||||
Financial assets at fair value through profit or loss | 4,336 | 11,458 | 52,593 | 57,646 | 47,270 | |||||||||||||||
Financial assets at amortised cost | 240,773 | 233,489 | 205,412 | 204,085 | 201,594 | |||||||||||||||
Financial assets at fair value through other comprehensive income | 9,747 | 13,302 | ||||||||||||||||||
Financial investments | 17,611 | 17,466 | 9,064 | |||||||||||||||||
Interests in other entities | 117 | 88 | 73 | 61 | 48 | |||||||||||||||
Intangible assets | 1,776 | 1,814 | 1,742 | 1,685 | 1,600 | |||||||||||||||
Property, plant and equipment | 1,971 | 1,835 | 1,598 | 1,491 | 1,597 | |||||||||||||||
Current tax assets | 186 | 106 | – | – | 51 | |||||||||||||||
Retirement benefit assets | 670 | 842 | 449 | 398 | 556 | |||||||||||||||
Other assets | 2,517 | 2,267 | 2,511 | 2,571 | 2,156 | |||||||||||||||
Total assets | 288,488 | 289,381 | 314,760 | 302,510 | 280,778 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Financial liabilities at fair value through profit or loss | 3,422 | 7,880 | 51,037 | 41,103 | 36,246 | |||||||||||||||
Financial liabilities at amortised cost | 265,350 | 261,933 | 243,858 | 241,590 | 225,852 | |||||||||||||||
Other liabilities | 2,373 | 2,507 | 2,728 | 3,221 | 2,445 | |||||||||||||||
Provisions | 577 | 515 | 558 | 700 | 870 | |||||||||||||||
Current tax liabilities | – | – | 3 | 53 | 1 | |||||||||||||||
Deferred tax liabilities | 145 | 211 | 88 | 128 | 223 | |||||||||||||||
Retirement benefit obligations | 280 | 115 | 286 | 262 | 110 | |||||||||||||||
Total liabilities | 272,147 | 273,161 | 298,558 | 287,057 | 265,747 | |||||||||||||||
Equity | ||||||||||||||||||||
Total shareholders’ equity | 15,946 | 15,820 | 15,801 | 15,054 | 14,640 | |||||||||||||||
Non-controlling interests | 395 | 400 | 401 | 399 | 391 | |||||||||||||||
Total equity | 16,341 | 16,220 | 16,202 | 15,453 | 15,031 | |||||||||||||||
Total liabilities and equity | 288,488 | 289,381 | 314,760 | 302,510 | 280,778 | |||||||||||||||
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Our future branch network, with c615 branches, will be made up of a combination of larger branches offering improved community facilities to support local businesses and customers, and smaller branches using the latest technology to offer customers more convenient access to banking services. Furthermore, in order to deliver a branch network for the future, 100 branches will be refurbished over the next two years through an investment of £55m.
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INCOME STATEMENTS
2019(1) £m | 2018(2,3,4) £m | 2017(2) £m | 2016 £m | 2015 £m | ||||||||||||||||
Net interest income | 3,295 | 3,606 | 3,803 | 3,582 | 3,575 | |||||||||||||||
Net fee and commission income | 689 | 749 | 807 | 770 | 715 | |||||||||||||||
Net trading and other income | 186 | 188 | 302 | 443 | 283 | |||||||||||||||
Total operating income | 4,170 | 4,543 | 4,912 | 4,795 | 4,573 | |||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | (2,526 | ) | (2,563 | ) | (2,502 | ) | (2,417 | ) | (2,403 | ) | ||||||||||
Credit impairment losses | (220 | ) | (153 | ) | (203 | ) | (67 | ) | (66 | ) | ||||||||||
Provisions for other liabilities and charges | (443 | ) | (260 | ) | (393 | ) | (397 | ) | (762 | ) | ||||||||||
Total operating credit impairment losses, provisions and charges | (663 | ) | (413 | ) | (596 | ) | (464 | ) | (828 | ) | ||||||||||
Profit before tax | 981 | 1,567 | 1,814 | 1,914 | 1,342 | |||||||||||||||
Tax on profit | (272 | ) | (403 | ) | (514 | ) | (597 | ) | (380 | ) | ||||||||||
Profit after tax | 709 | 1,164 | 1,300 | 1,317 | 962 | |||||||||||||||
| (1) | On 1 January 2019, the |
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Corporate & Commercial Banking
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We are developing these initiatives in collaboration with the Banco Santander group and key strategic partners to leverage global expertise and contacts to help our customers grow their businesses.
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Corporate & Investment Banking
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| Santander UK Group Holdings plc |
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ALTERNATIVE PERFORMANCE MEASURES (APMs)
In addition to the financial information prepared under IFRS, this Annual Report contains financial measures that constitute APMs, as defined in US Securities and Exchange Commission (SEC) and European Securities and Markets Authority (ESMA) guidelines. The financial measures contained in this Annual Report that qualify as APMs have been calculated using the financial information of the Santander UK group but are not defined or detailed in the applicable financial information framework or under IFRS.
We use these APMs when planning, monitoring and evaluating our performance. We consider these APMs to be useful metrics for management and investors to facilitate operating performance comparisons from period to period. Whilst we believe that these APMs are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for IFRS measures.
Adjusted APMs
A description of the Santander UK group’s adjusted APMs, the reasons why management feel they provide useful information and their calculation are set out below.
| Adjusted APM | Description and calculation | |
| Adjusted net interest income | Net interest income adjusted for items management believe to be significant, to facilitate underlying operating performance comparisons from period to period. | |
| Adjustednon-interest income | Non-interest income adjusted for items management believe to be significant, to facilitate underlying operating performance andcost-to-income comparisons from period to period. | |
| Adjusted operating expenses before credit impairment losses, provisions and charges | Operating expenses before credit impairment losses, provisions and charges adjusted for items management believe to be significant, to facilitate underlying operating performance andcost-to-income comparisons from period to period. | |
| Adjusted provisions for other liabilities and charges | Provisions for other liabilities and charges adjusted for items management believe to be significant, to facilitate underlying operating performance comparisons from period to period. | |
| Adjusted profit before tax | Profit before tax adjusted for items management believe to be significant, to facilitate underlying operating performance comparisons from period to period. | |
| Adjustedcost-to-income ratio | Adjusted total operating expenses before credit impairment losses and provisions for other liabilities and charges as a percentage of the total of adjusted net interest income and adjustednon-interest income. We consider this metric useful for management and investors as an efficiency measure to capture the amount spent to generate income, as we invest in our multi-year transformation programme. | |
| Adjusted Return on Tangible equity (RoTE) | Adjusted profit before tax, less tax on profit, attributable to equity holders of the parent, divided by average shareholders’ equity lessnon-controlling interests, other equity instruments and average goodwill and other intangible assets. We consider this adjusted measure useful for management and investors as a measure of income generation on shareholder investment, as we focus on improving returns through our multi-year transformation programme. | |
Reconciliation of adjusted APMs to nearest IFRS measure
a) Adjusted profit metrics
2019 £m | 2018 £m | |||||||
Net interest income | ||||||||
Reported | 3,295 | 3,606 | ||||||
Adjusted for ring-fencing perimeter changes | – | (8 | ) | |||||
Adjusted | 3,295 | 3,598 | ||||||
Non-interest income | ||||||||
Reported | 875 | 937 | ||||||
Adjust for ring-fencing perimeter changes | – | (58 | ) | |||||
Adjust for Vocalink Holdings Limited shareholding | (15 | ) | – | |||||
Adjust for operating lease depreciation | (103 | ) | (63 | ) | ||||
Adjusted | 757 | 816 | ||||||
Operating expenses before credit impairment losses, provisions and charges | ||||||||
Reported | (2,526 | ) | (2,563 | ) | ||||
Adjust for Banking Reform costs | – | 38 | ||||||
Adjust for GMP equalisation costs | – | 40 | ||||||
Adjust for transformation costs | 50 | – | ||||||
Adjust for ring-fencing perimeter changes | – | 48 | ||||||
Adjust for operating lease depreciation | 103 | 63 | ||||||
Adjusted | (2,373 | ) | (2,374 | ) | ||||
Provisions for other liabilities and charges | ||||||||
Reported | (443 | ) | (260 | ) | ||||
Adjust for transformation charge | 105 | – | ||||||
Adjust for PPI provision charge | 169 | – | ||||||
Adjust for other conduct provision release | – | (11 | ) | |||||
Adjust for other provision charges | 10 | 91 | ||||||
Adjusted | (159 | ) | (180 | ) | ||||
Profit before tax | ||||||||
Reported | 981 | 1,567 | ||||||
Specific income, expenses and charges | 319 | 140 | ||||||
Adjusted profit before tax | 1,300 | 1,707 | ||||||
| Santander UK Group Holdings plc | 169 |
Annual Report 2019| Financial review
The financial results for 2019 and 2018 were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £319m in 2019 and £140m in 2018. The specific income, expenses and charges are outlined below:
| – | Ring-fencing perimeter changes |
As part of our ring-fencing implementation programme, in July 2018 we transferred £1.4bn of customer loans, £21.5bn of other assets and £20.7bn of liabilities from Santander UK to Banco Santander London Branch. The associated income and costs related to the businesses transferred amounted to a net profit before tax of £18m in 2018.
| – | Vocalink Holdings Limited shareholding |
Santander UK was part of the consortium of banks that sold a majority of the shares in Vocalink Holdings Limited to Mastercard in 2017. Under the terms of the sale agreement, we retained a shareholding of 0.775%. In respect of the shares we sold in 2017, we were entitled to receive additional consideration where Vocalink’s 2018 earnings performance exceeded an agreed amount and in June 2019 we received additional consideration of £15m.
| – | Operating lease depreciation |
In Q4 2019 we began to adjust operating expenses andnon-interest income for operating lease depreciation. We believe this provides a clearer explanation of expenses and income as operating lease depreciation is a direct cost associated with growing business volumes largely in consumer (auto) finance.
| – | Banking Reform costs |
These 2018 costs of £38m related to a multi-year investment needed to comply with the Banking Reform Act implemented on 1 January 2019.
| – | GMP equalisation costs |
On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to guaranteed minimum pension (GMP) and concluded on the methods that were appropriate. The estimated increase in liabilities at the date of the judgement was £40m and is based on a number of assumptions and the actual impact may be different.
| – | Transformation costs and charges |
Transformation costs and charges relate to a multi-year project to deliver on our strategic priorities and enhance efficiency in order for us to better serve our customers and meet our medium-term targets. Q1 2019 charges largely related to restructuring of our branch network. Further charges in Q2 2019 were largely associated with the announced plans to reshape our Corporate & Commercial Banking business.
| – | PPI |
We have been closely involved in the additional industry activities to support the regulatorytime-bar for claims and orderly closure of the FCA remediation campaign. We made an additional provision of £70m in Q2 2019 reflecting an increase of claims volumes and additional industry activities and having considered guidance provided by the FCA and our specific approach to PPI claims, in advance of the PPI claims deadline on 29 August 2019. In Q3 2019, and in line with industry experience, we received unprecedented volumes of information requests in August 2019 and saw a significant spike in both these requests and complaints in the final days prior to the complaint deadline. Our best estimate of the additional provision required was £99m.
| – | Other conduct provision release |
Provisions for other liabilities and charges in 2018 included a release of £11m in the second quarter or 2018 relating to provisions for the sale of interest rate derivatives, following ongoing reviews regarding the regulatory classification of certain customers eligible for redress.
| – | Other provision charges |
In Q4 2019 we made a £10m provision in relation to our consumer credit business operations. This follows a £58m charge in Q4 2018 (included in the total adjustment of £91m).
b) Adjustedcost-to-income ratio
Adjustedcost-to-income ratio is a new KPI in 2019 and an adjusted APM. We consider this useful for management and investors as an efficiency measure to capture the amount spent to generate income. In the low rate environment, we are focused on costs as we invest in our multi-year transformation programme to improve returns going forward.
2019 £m | 2018 £m | |||||||
Adjusted net interest income | 3,295 | 3,598 | ||||||
Adjustednon-interest income | 757 | 816 | ||||||
Adjusted total operating income | 4,052 | 4,414 | ||||||
Adjusted operating expenses before credit impairment losses, provisions and charges | (2,373 | ) | (2,374 | ) | ||||
Adjustedcost-to-income ratio | 59% | 54% | ||||||
Cost-to-income ratio | 61% | 56% | ||||||
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c) Adjusted RoTE
We changed the calculation of adjusted RoTE in 2019 and it now includes the adjustments to profit described above, for all periods presented. We consider this adjusted measure useful for management and investors as we focus on improving returns through our multi-year transformation programme.
| Specific income, | As adjusted | |||||||||||
| expenses and | ||||||||||||
| charges | ||||||||||||
| 2019 | £m | £m | £m | |||||||||
Profit after tax | 709 | 270 | 979 | |||||||||
Lessnon-controlling interests of annual profit | (37 | ) | (37 | ) | ||||||||
Profit due to equity holders of the parent (A) | 672 | 942 | ||||||||||
| Equity | As adjusted | |||||||||||
| adjustments | ||||||||||||
| 2019 | £m | £m | £m | |||||||||
Average shareholders’ equity | 16,281 | |||||||||||
Less average AT1 securities | (2,141 | ) | ||||||||||
Less averagenon-controlling interests | (398 | ) | ||||||||||
Average ordinary shareholders’ equity (B) | 13,742 | |||||||||||
Average goodwill and intangible assets | (1,795 | ) | ||||||||||
Average tangible equity (C) | 11,947 | 68 | 12,015 | |||||||||
Return on ordinary shareholders’ equity (A/B) | 4.9% | – | ||||||||||
Adjusted RoTE (A/C) | – | 7.8% | ||||||||||
| Specific income, | As adjusted | |||||||||||
| expenses and | ||||||||||||
| charges | ||||||||||||
| 2018 | £m | £m | £m | |||||||||
Profit after tax | 1,164 | 107 | 1,271 | |||||||||
Lessnon-controlling interests of annual profit | (39 | ) | (39 | ) | ||||||||
Profit due to equity holders of the parent (A) | 1,125 | 1,232 | ||||||||||
| Equity | As adjusted | |||||||||||
| adjustments | ||||||||||||
| 2018 | £m | £m | £m | |||||||||
Average shareholders’ equity | 16,211 | |||||||||||
Less average AT1 securities | (2,041 | ) | ||||||||||
Less averagenon-controlling interests | (401 | ) | ||||||||||
Average ordinary shareholders’ equity (B) | 13,769 | |||||||||||
Average goodwill and intangible assets | (1,778 | ) | ||||||||||
Average tangible equity (C) | 11,991 | 37 | 12,028 | |||||||||
Return on ordinary shareholders’ equity (A/B) | 8.2% | – | ||||||||||
Adjusted RoTE (A/C) | – | 10.2% | ||||||||||
| – | Specific income, expenses, charges |
Details of these items are outlined on the previous page with a total impact on profit before tax of £319m. The tax on these items is c£49m (PPI remediation charges are not deductible for corporation tax) and profit after tax on these items is £270m.
| – | Equity adjustments |
These adjustments are made to reflect the impact of adjustments to profit on average tangible equity.
Management does not assess forward-looking ‘Return on ordinary shareholders’ equity (ROE) as a performance indicator of the business, and therefore a reconciliation of the forward-lookingnon-IFRS Adjusted RoTE targets for the medium term to an equivalent IFRS measure for ROE is not available without unreasonable efforts.
Measures no longer considered to be APMs
In 2018, CRE lending and lending tonon-CRE trading businesses measures were presented which excluded the impact of transfers of customer loans to Banco Santander London Branch. These measures were adjusted APMs. The transfers related to ring-fence implementation and were completed in Q318 as outlined in our Q418 results. No adjustments were made in 2019 and these measures are therefore no longer APMs. In addition, in 2018 the Dividend payout ratio was presented excluding the interim dividend payment of £668m in the third quarter of 2018, associated with the ring-fence transfers. This measure was an adjusted APM. No adjustments were made in 2019 and this measure is no longer an APM.
| Santander UK Group Holdings plc | 171 |
Annual Report 2019| Financial statements
| Contents | ||||
| Audit report | 173 | |||
| Primary financial statements | 180 | |||
| Consolidated Income Statement | 180 | |||
| Consolidated Statement of Comprehensive Income | ||||
| 184 | ||||
| Notes to the financial statements | ||||
| Notes to the company financial statements | 249 | |||
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Annual Report 2018 | Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Santander UK Group Holdings plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Santander UK Group Holdings plc and its subsidiaries (the “Company”) as of 31 December 20182019 and 2017,2018, and the related consolidated income statement, consolidated statement of comprehensive income, consolidated cash flow statement, and consolidated statement of changes in equity for each of the three years in the period ended 31 December 2018,2019, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of 31 December 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the three years in the period ended 31 December 20182019 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and with International Financial Reporting Standards as adopted by the European Union.
ChangeChanges in Accounting PrinciplePrinciples
As discussed in Note 1 to the consolidated financial statements, in 2019 the Companycompany changed the manner in which it accounts for leases and in which it accounts for tax on dividends received on financial instruments classified as equity and in 2018.2018 the manner in which it accounts for financial instruments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
London, UK
810 March 20192020
We have served as the Company’s auditorauditors since 2016.
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Annual Report 2019| Financial statements
For the years ended 31 December
| Notes | 2018 £m | 2017 £m | 2016 £m | Notes | 2019 £m | 2018(1) £m | 2017(1) £m | |||||||||||||||||||||||||
Interest and similar income | 3 | 6,072 | 5,905 | 6,467 | 3 | 5,972 | 6,072 | 5,905 | ||||||||||||||||||||||||
Interest expense and similar charges | 3 | (2,466 | ) | (2,102 | ) | (2,885 | ) | 3 | (2,677 | ) | (2,466 | ) | (2,102 | ) | ||||||||||||||||||
Net interest income | 3,606 | 3,803 | 3,582 | 3,295 | 3,606 | 3,803 | ||||||||||||||||||||||||||
Fee and commission income | 4 | 1,170 | 1,222 | 1,188 | 4 | 1,117 | 1,170 | 1,222 | ||||||||||||||||||||||||
Fee and commission expense | 4 | (421 | ) | (415 | ) | (418 | ) | 4 | (428 | ) | (421 | ) | (415 | ) | ||||||||||||||||||
Net fee and commission income | 749 | 807 | 770 | 689 | 749 | 807 | ||||||||||||||||||||||||||
Net trading and other income | 5 | 188 | 302 | 443 | 5 | 186 | 188 | 302 | ||||||||||||||||||||||||
Total operating income | 4,543 | 4,912 | 4,795 | 4,170 | 4,543 | 4,912 | ||||||||||||||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | 6 | (2,563 | ) | (2,502 | ) | (2,417 | ) | 6 | (2,526 | ) | (2,563 | ) | (2,502 | ) | ||||||||||||||||||
Credit impairment losses | 8 | (153 | ) | (203 | ) | (67 | ) | 8 | (220 | ) | (153 | ) | (203 | ) | ||||||||||||||||||
Provisions for other liabilities and charges | 8 | (260 | ) | (393 | ) | (397 | ) | 8 | (443 | ) | (260 | ) | (393 | ) | ||||||||||||||||||
Total operating credit impairment losses, provisions and charges | (413 | ) | (596 | ) | (464 | ) | (663 | ) | (413 | ) | (596 | ) | ||||||||||||||||||||
Profit before tax | 1,567 | 1,814 | 1,914 | 981 | 1,567 | 1,814 | ||||||||||||||||||||||||||
Tax on profit | 9 | (446 | ) | (560 | ) | (597 | ) | 9 | (272 | ) | (403 | ) | (514 | ) | ||||||||||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | 709 | 1,164 | 1,300 | ||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of the parent | 1,082 | 1,215 | 1,272 | 672 | 1,125 | 1,261 | ||||||||||||||||||||||||||
Non-controlling interests | 35 | 39 | 39 | 45 | 32 | 37 | 39 | 39 | ||||||||||||||||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | 709 | 1,164 | 1,300 | ||||||||||||||||||||||||||
| (1) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Primary financial statements
|
Consolidated Statement of Comprehensive Income
For the years ended 31 December
| 2018 £m | 2017 £m | 2016 £m | 2019 £m | 2018(2) £m | 2017(2) £m | |||||||||||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | 709 | 1,164 | 1,300 | ||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Other comprehensive income that may be reclassified to profit or loss subsequently: | ||||||||||||||||||||||||
Available-for-sale securities:(1) | ||||||||||||||||||||||||
Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently: | ||||||||||||||||||||||||
Available-for-sale securities(1) | ||||||||||||||||||||||||
– Change in fair value | 80 | 127 | 80 | |||||||||||||||||||||
– Income statement transfers | (54 | ) | (115 | ) | (54 | ) | ||||||||||||||||||
– Taxation | (6 | ) | (16 | ) | (6 | ) | ||||||||||||||||||
| 20 | (4 | ) | 20 | |||||||||||||||||||||
Movement in fair value reserve (debt instruments):(1) | ||||||||||||||||||||||||
– Change in fair value | (74 | ) | 147 | (74 | ) | |||||||||||||||||||
– Income statement transfers | 21 | (147 | ) | 21 | ||||||||||||||||||||
– Taxation | 14 | – | 14 | |||||||||||||||||||||
| (39 | ) | – | (39 | ) | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||
– Effective portion of changes in fair value | 788 | (238 | ) | 4,365 | (864 | ) | 788 | (238 | ) | |||||||||||||||
– Income statement transfers | (751 | ) | (94 | ) | (4,076 | ) | 1,021 | (751 | ) | (94 | ) | |||||||||||||
– Taxation | (14 | ) | 89 | (72 | ) | (40 | ) | (14 | ) | 89 | ||||||||||||||
| 23 | (243 | ) | 217 | 117 | 23 | (243 | ) | |||||||||||||||||
Currency translation on foreign operations | – | – | (3 | ) | (3 | ) | – | – | ||||||||||||||||
Net other comprehensive income that may be reclassified to profit or loss subsequently | (16 | ) | (223 | ) | 210 | |||||||||||||||||||
Other comprehensive income that will not be reclassified to profit or loss subsequently: | ||||||||||||||||||||||||
Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently | 114 | (16 | ) | (223 | ) | |||||||||||||||||||
Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently: | ||||||||||||||||||||||||
Pension remeasurement: | ||||||||||||||||||||||||
– Change in fair value | 469 | (103 | ) | (528 | ) | (523 | ) | 469 | (103 | ) | ||||||||||||||
– Taxation | (117 | ) | 26 | 133 | 131 | (117 | ) | 26 | ||||||||||||||||
| 352 | (77 | ) | (395 | ) | (392 | ) | 352 | (77 | ) | |||||||||||||||
Own credit adjustment: | ||||||||||||||||||||||||
– Change in fair value | 84 | (29 | ) | – | (77 | ) | 84 | (29 | ) | |||||||||||||||
– Taxation | (21 | ) | 7 | – | 19 | (21 | ) | 7 | ||||||||||||||||
| 63 | (22 | ) | – | (58 | ) | 63 | (22 | ) | ||||||||||||||||
Net other comprehensive income that will not be reclassified to profit or loss subsequently | 415 | (99 | ) | (395 | ) | |||||||||||||||||||
Total other comprehensive income net of tax | 399 | (322 | ) | (185 | ) | |||||||||||||||||||
Net other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently | (450 | ) | 415 | (99 | ) | |||||||||||||||||||
Total other comprehensive (expense)/income net of tax | (336 | ) | 399 | (322 | ) | |||||||||||||||||||
Total comprehensive income | 1,520 | 932 | 1,132 | 373 | 1,563 | 978 | ||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||
Equity holders of the parent | 1,481 | 893 | 1,087 | 334 | 1,524 | 939 | ||||||||||||||||||
Non-controlling interests | 39 | 39 | 45 | 39 | 39 | 39 | ||||||||||||||||||
Total comprehensive income | 1,520 | 932 | 1,132 | 373 | 1,563 | 978 | ||||||||||||||||||
| (1) | Following the adoption of IFRS 9, a fair value reserve was introduced to replace theavailable-for-sale |
| (2) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
At 31 December
| Notes | 2018 £m | 2017 £m | ||||||||||
Assets | ||||||||||||
Cash and balances at central banks | 24,180 | 32,771 | ||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||
– Trading assets | 11 | – | 30,555 | |||||||||
– Derivative financial instruments | 12 | 5,321 | 19,942 | |||||||||
– Other financial assets at fair value through profit or loss | 13 | 6,137 | 2,096 | |||||||||
Financial assets at amortised cost: | ||||||||||||
– Loans and advances to customers(1) | 14 | 201,619 | 199,332 | |||||||||
– Loans and advances to banks(1) | 3,515 | 3,466 | ||||||||||
– Reverse repurchase agreements – non trading(1) | 17 | 21,127 | 2,614 | |||||||||
– Other financial assets at amortised cost(2) | 18 | 7,228 | ||||||||||
Financial assets at fair value through other comprehensive income(2) | 19 | 13,302 | ||||||||||
Financial investments(2) | 20 | 17,611 | ||||||||||
Interests in other entities | 21 | 88 | 73 | |||||||||
Intangible assets | 22 | 1,814 | 1,742 | |||||||||
Property, plant and equipment | 1,835 | 1,598 | ||||||||||
Current tax assets | 9 | 106 | – | |||||||||
Retirement benefit assets | 31 | 842 | 449 | |||||||||
Other assets | 2,267 | 2,511 | ||||||||||
Total assets | 289,381 | 314,760 | ||||||||||
Liabilities | ||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||
– Trading liabilities | 23 | – | 31,109 | |||||||||
– Derivative financial instruments | 12 | 1,594 | 17,613 | |||||||||
– Other financial liabilities at fair value through profit or loss | 24 | 6,286 | 2,315 | |||||||||
Financial liabilities at amortised cost: | ||||||||||||
– Deposits by customers | 25 | 173,692 | 177,421 | |||||||||
– Deposits by banks(1) | 26 | 17,824 | 12,708 | |||||||||
– Repurchase agreements – non trading(1) | 27 | 10,910 | 1,076 | |||||||||
– Debt securities in issue | 28 | 55,906 | 48,860 | |||||||||
– Subordinated liabilities | 29 | 3,601 | 3,793 | |||||||||
Other liabilities | 2,507 | 2,728 | ||||||||||
Provisions | 30 | 515 | 558 | |||||||||
Current tax liabilities | 9 | – | 3 | |||||||||
Deferred tax liabilities | 9 | 211 | 88 | |||||||||
Retirement benefit obligations | 31 | 115 | 286 | |||||||||
Total liabilities | 273,161 | 298,558 | ||||||||||
Equity | ||||||||||||
Share capital | 33 | 7,060 | 7,060 | |||||||||
Other equity instruments | 34 | 2,041 | 2,041 | |||||||||
Retained earnings | 6,439 | 6,399 | ||||||||||
Other reserves | 280 | 301 | ||||||||||
Total shareholders’ equity | 15,820 | 15,801 | ||||||||||
Non-controlling interests | 35 | 400 | 401 | |||||||||
Total equity | 16,220 | 16,202 | ||||||||||
Total liabilities and equity | 289,381 | 314,760 | ||||||||||
|
|
| Notes | 2019 £m | 2018 £m | ||||||||||
Assets | ||||||||||||
Cash and balances at central banks | 26,395 | 24,180 | ||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||
– Derivative financial instruments | 11 | 3,363 | 5,321 | |||||||||
– Other financial assets at fair value through profit or loss | 12 | 973 | 6,137 | |||||||||
Financial assets at amortised cost: | ||||||||||||
– Loans and advances to customers | 13 | 207,498 | 201,619 | |||||||||
– Loans and advances to banks | 2,583 | 3,515 | ||||||||||
– Reverse repurchase agreements – non trading | 16 | 23,636 | 21,127 | |||||||||
– Other financial assets at amortised cost | 17 | 7,056 | 7,228 | |||||||||
Financial assets at fair value through other comprehensive income | 18 | 9,747 | 13,302 | |||||||||
Interests in other entities | 19 | 117 | 88 | |||||||||
Intangible assets | 20 | 1,776 | 1,814 | |||||||||
Property, plant and equipment | 1,971 | 1,835 | ||||||||||
Current tax assets | 9 | 186 | 106 | |||||||||
Retirement benefit assets | 28 | 670 | 842 | |||||||||
Other assets | 2,517 | 2,267 | ||||||||||
Total assets | 288,488 | 289,381 | ||||||||||
Liabilities | ||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||
– Derivative financial instruments | 11 | 1,709 | 1,594 | |||||||||
– Other financial liabilities at fair value through profit or loss | 21 | 1,713 | 6,286 | |||||||||
Financial liabilities at amortised cost: | ||||||||||||
– Deposits by customers | 22 | 179,006 | 173,692 | |||||||||
– Deposits by banks | 23 | 14,359 | 17,824 | |||||||||
– Repurchase agreements – non trading | 24 | 18,286 | 10,910 | |||||||||
– Debt securities in issue | 25 | 50,171 | 55,906 | |||||||||
– Subordinated liabilities | 26 | 3,528 | 3,601 | |||||||||
Other liabilities | 2,373 | 2,507 | ||||||||||
Provisions | 27 | 577 | 515 | |||||||||
Deferred tax liabilities | 9 | 145 | 211 | |||||||||
Retirement benefit obligations | 28 | 280 | 115 | |||||||||
Total liabilities | 272,147 | 273,161 | ||||||||||
Equity | ||||||||||||
Share capital | 30 | 7,060 | 7,060 | |||||||||
Other equity instruments | 31 | 2,241 | 2,041 | |||||||||
Retained earnings | 6,251 | 6,439 | ||||||||||
Other reserves | 394 | 280 | ||||||||||
Total shareholders’ equity | 15,946 | 15,820 | ||||||||||
Non-controlling interests | 32 | 395 | 400 | |||||||||
Total equity | 16,341 | 16,220 | ||||||||||
Total liabilities and equity | 288,488 | 289,381 | ||||||||||
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
The Financial Statements were approved and authorised for issue by the Board on 26 February 20192 March 2020 and signed on its behalf by:
| Nathan Bostock | ||||||
| Chief Executive Officer | Chief Financial Officer | |||||
Company Registered Number: 08700698
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Primary financial statements
|
Consolidated Cash Flow Statement
For the years ended 31 December
| Notes | 2018 £m | 2017 £m | 2016 £m | 2019 £m | 2018(1) £m | 2017(1) £m | ||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | 709 | 1,164 | 1,300 | ||||||||||||||||||||||
Adjustments for: | ||||||||||||||||||||||||||||
Non-cash items included in profit: | ||||||||||||||||||||||||||||
– Depreciation and amortisation | 378 | 354 | 322 | 545 | 378 | 354 | ||||||||||||||||||||||
– Provisions for other liabilities and charges | 260 | 393 | 397 | 443 | 260 | 393 | ||||||||||||||||||||||
– Impairment losses | 189 | 257 | 132 | 238 | 189 | 257 | ||||||||||||||||||||||
– Corporation tax charge | 446 | 560 | 597 | 272 | 403 | 514 | ||||||||||||||||||||||
– Othernon-cash items | (68 | ) | (218 | ) | (599 | ) | (345 | ) | (68 | ) | (218 | ) | ||||||||||||||||
– Pension charge for defined benefit pension schemes | 81 | 32 | 26 | 35 | 81 | 32 | ||||||||||||||||||||||
| 1,286 | 1,378 | 875 | 1,188 | 1,243 | 1,332 | |||||||||||||||||||||||
Net change in operating assets and liabilities: | ||||||||||||||||||||||||||||
– Cash and balances at central banks | (161 | ) | (25 | ) | (30 | ) | (84 | ) | (161 | ) | (25 | ) | ||||||||||||||||
– Trading assets | 24,528 | (941 | ) | (2,049 | ) | – | 24,528 | (941 | ) | |||||||||||||||||||
– Derivative assets | 14,621 | 5,529 | (4,560 | ) | 1,959 | 14,621 | 5,529 | |||||||||||||||||||||
– Other financial assets at fair value through profit or loss | (3,467 | ) | 25 | 257 | 1,637 | (3,467 | ) | 25 | ||||||||||||||||||||
– Loans and advances to banks and customers | (8,221 | ) | (1,829 | ) | (2,262 | ) | (605 | ) | (8,221 | ) | (1,829 | ) | ||||||||||||||||
– Other assets | 203 | (246 | ) | (121 | ) | 240 | 203 | (246 | ) | |||||||||||||||||||
– Deposits by banks and customers | 1,845 | 8,805 | 11,201 | 2,225 | 1,845 | 8,805 | ||||||||||||||||||||||
– Derivative liabilities | (16,018 | ) | (5,490 | ) | 1,595 | 115 | (16,018 | ) | (5,490 | ) | ||||||||||||||||||
– Trading liabilities | (31,101 | ) | 15,017 | 2,837 | – | (31,101 | ) | 15,017 | ||||||||||||||||||||
– Other financial liabilities at fair value through profit or loss | 4,480 | 717 | 336 | (959 | ) | 4,480 | 717 | |||||||||||||||||||||
– Debt securities in issue | (2,760 | ) | 132 | 399 | (548 | ) | (2,760 | ) | 132 | |||||||||||||||||||
– Other liabilities | (824 | ) | (1,388 | ) | 1,604 | (600 | ) | (824 | ) | (1,388 | ) | |||||||||||||||||
| (16,875 | ) | 20,306 | 9,207 | 3,380 | (16,875 | ) | 20,306 | |||||||||||||||||||||
Corporation taxes paid | (445 | ) | (484 | ) | (507 | ) | (309 | ) | (445 | ) | (484 | ) | ||||||||||||||||
Effects of exchange rate differences | 1,731 | (574 | ) | 3,885 | (1,445 | ) | 1,731 | (574 | ) | |||||||||||||||||||
Net cash flows from operating activities | (13,182 | ) | 21,880 | 14,777 | 3,523 | (13,182 | ) | 21,880 | ||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||
Investments in other entities | 21 | (66 | ) | – | – | – | (66 | ) | – | |||||||||||||||||||
Proceeds from disposal of subsidiaries(1) | – | – | 149 | |||||||||||||||||||||||||
Purchase of property, plant and equipment and intangible assets | (699 | ) | (542 | ) | (374 | ) | (510 | ) | (699 | ) | (542 | ) | ||||||||||||||||
Proceeds from sale of property, plant and equipment and intangible assets | 26 | 52 | 65 | 108 | 26 | 52 | ||||||||||||||||||||||
Purchase of financial investments | (7,002 | ) | (726 | ) | (9,539 | ) | ||||||||||||||||||||||
Proceeds from sale and redemption of financial investments | 3,816 | 2,032 | 2,359 | |||||||||||||||||||||||||
Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income(2) | (5,013 | ) | (7,002 | ) | (726 | ) | ||||||||||||||||||||||
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income(2) | 8,300 | 3,816 | 2,032 | |||||||||||||||||||||||||
Net cash flows from investing activities | (3,925 | ) | 816 | (7,340 | ) | 2,885 | (3,925 | ) | 816 | |||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||||||
Issue of AT1 Capital Securities | 34 | – | 500 | – | ||||||||||||||||||||||||
Issuance costs of AT1 Capital Securities | – | (4 | ) | – | ||||||||||||||||||||||||
Issue of other equity instruments | 500 | – | 500 | |||||||||||||||||||||||||
Issuance costs of other equity instruments | – | – | (4 | ) | ||||||||||||||||||||||||
Issue of debt securities and subordinated notes | 13,329 | 8,748 | 8,788 | 4,145 | 13,329 | 8,748 | ||||||||||||||||||||||
Issuance costs of debt securities and subordinated notes | (31 | ) | (23 | ) | (28 | ) | (15 | ) | (31 | ) | (23 | ) | ||||||||||||||||
Repayment of debt securities and subordinated notes | (6,303 | ) | (13,763 | ) | (11,352 | ) | (7,969 | ) | (6,303 | ) | (13,763 | ) | ||||||||||||||||
Repurchase ofnon-controlling interests | 35 | – | – | (7 | ) | |||||||||||||||||||||||
Repurchase ofnon-controlling interests and other equity instruments | (318 | ) | – | – | ||||||||||||||||||||||||
Dividends paid on ordinary shares | 10 | (1,123 | ) | (829 | ) | (419 | ) | (262 | ) | (1,123 | ) | (829 | ) | |||||||||||||||
Dividends paid on other equity instruments | (145 | ) | (135 | ) | (111 | ) | (142 | ) | (145 | ) | (135 | ) | ||||||||||||||||
Dividends paid onnon-controlling interests | (40 | ) | (37 | ) | (30 | ) | (30 | ) | (40 | ) | (37 | ) | ||||||||||||||||
Net cash flows from financing activities | 5,687 | (5,543 | ) | (3,159 | ) | (4,091 | ) | 5,687 | (5,543 | ) | ||||||||||||||||||
Change in cash and cash equivalents | (11,420 | ) | 17,153 | 4,278 | 2,317 | (11,420 | ) | 17,153 | ||||||||||||||||||||
Cash and cash equivalents at beginning of the year | 42,228 | 25,709 | 20,354 | 30,969 | 42,228 | 25,709 | ||||||||||||||||||||||
Effects of exchange rate changes on cash and cash equivalents | 161 | (634 | ) | 1,077 | (53 | ) | 161 | (634 | ) | |||||||||||||||||||
Cash and cash equivalents at the end of the year | 30,969 | 42,228 | 25,709 | 33,233 | 30,969 | 42,228 | ||||||||||||||||||||||
Cash and cash equivalents consist of: | ||||||||||||||||||||||||||||
Cash and balances at central banks | 24,180 | 32,771 | 17,107 | 26,395 | 24,180 | 32,771 | ||||||||||||||||||||||
Less: regulatory minimum cash balances | (636 | ) | (395 | ) | (370 | ) | (720 | ) | (636 | ) | (395 | ) | ||||||||||||||||
| 23,544 | 32,376 | 16,737 | 25,675 | 23,544 | 32,376 | |||||||||||||||||||||||
Net trading other cash equivalents | – | 5,953 | 6,537 | – | – | 5,953 | ||||||||||||||||||||||
Netnon-trading other cash equivalents | 7,425 | 3,899 | 2,435 | 7,558 | 7,425 | 3,899 | ||||||||||||||||||||||
Cash and cash equivalents at the end of the year | 30,969 | 42,228 | 25,709 | 33,233 | 30,969 | 42,228 | ||||||||||||||||||||||
| (1) |
|
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
Annual Report 2018 | Financial statements
Consolidated Statement of Changes in Equity
For the years ended 31 December
| Other reserves | ||||||||||||||||||||||||||||||||||||||||
| Share capital £m | Other equity instruments £m | Available- £m | Fair value(1) £m | Cash flow hedging | Currency translation £m | Retained earnings £m | Total £m | Non- controlling interests £m | Total £m | |||||||||||||||||||||||||||||||
At 31 December 2017 | 7,060 | 2,041 | 68 | 228 | 5 | 6,399 | 15,801 | 401 | 16,202 | |||||||||||||||||||||||||||||||
Adoption of IFRS 9 (see Note 1) | – | – | (68 | ) | 63 | – | – | (187 | ) | (192 | ) | – | (192 | ) | ||||||||||||||||||||||||||
At 1 January 2018 | 7,060 | 2,041 | – | 63 | 228 | 5 | 6,212 | 15,609 | 401 | 16,010 | ||||||||||||||||||||||||||||||
Profit after tax | – | – | – | – | – | 1,082 | 1,082 | 39 | 1,121 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||||||||||
– Fair value reserve (debt instruments) | – | – | (39 | ) | – | – | – | (39 | ) | – | (39 | ) | ||||||||||||||||||||||||||||
– Cash flow hedges | – | – | – | 23 | – | – | 23 | – | 23 | |||||||||||||||||||||||||||||||
– Pension remeasurement | – | – | – | – | – | 352 | 352 | – | 352 | |||||||||||||||||||||||||||||||
– Own credit adjustment | – | – | – | – | – | 63 | 63 | – | 63 | |||||||||||||||||||||||||||||||
Total comprehensive income | – | – | (39 | ) | 23 | – | 1,497 | 1,481 | 39 | 1,520 | ||||||||||||||||||||||||||||||
Other | – | – | – | – | – | (45 | ) | (45 | ) | – | (45 | ) | ||||||||||||||||||||||||||||
Dividends on ordinary shares | – | – | – | – | – | (1,123 | ) | (1,123 | ) | – | (1,123 | ) | ||||||||||||||||||||||||||||
Dividends on other equity instruments | – | – | – | – | – | (145 | ) | (145 | ) | – | (145 | ) | ||||||||||||||||||||||||||||
Dividends onnon-controlling interests | – | – | – | – | – | – | – | (40 | ) | (40 | ) | |||||||||||||||||||||||||||||
Tax onnon-controlling interests and other equity instruments | – | – | – | – | – | 43 | 43 | – | 43 | |||||||||||||||||||||||||||||||
At 31 December 2018 | 7,060 | 2,041 | 24 | 251 | 5 | 6,439 | 15,820 | 400 | 16,220 | |||||||||||||||||||||||||||||||
At 1 January 2017 | 7,060 | 1,545 | 48 | 471 | 5 | 5,925 | 15,054 | 399 | 15,453 | |||||||||||||||||||||||||||||||
Profit after tax | – | – | – | – | – | 1,215 | 1,215 | 39 | 1,254 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||||||||||
–Available-for-sale securities | – | – | 20 | – | – | – | 20 | – | 20 | |||||||||||||||||||||||||||||||
– Cash flow hedges | – | – | – | (243 | ) | – | – | (243 | ) | – | (243 | ) | ||||||||||||||||||||||||||||
– Pension remeasurement | – | – | – | – | – | (77 | ) | (77 | ) | – | (77 | ) | ||||||||||||||||||||||||||||
– Own credit adjustment | – | – | – | – | – | (22 | ) | (22 | ) | – | (22 | ) | ||||||||||||||||||||||||||||
Total comprehensive income | – | – | 20 | (243 | ) | – | 1,116 | 893 | 39 | 932 | ||||||||||||||||||||||||||||||
Issue of AT1 Capital Securities | – | 496 | – | – | – | – | 496 | – | 496 | |||||||||||||||||||||||||||||||
Dividends on ordinary shares | – | – | – | – | – | (553 | ) | (553 | ) | – | (553 | ) | ||||||||||||||||||||||||||||
Dividends on other equity instruments | – | – | – | – | – | (135 | ) | (135 | ) | – | (135 | ) | ||||||||||||||||||||||||||||
Dividends onnon-controlling interests | – | – | – | – | – | – | – | (37 | ) | (37 | ) | |||||||||||||||||||||||||||||
Tax onnon-controlling interests and other equity instruments | – | – | – | – | – | 46 | 46 | – | 46 | |||||||||||||||||||||||||||||||
At 31 December 2017 | 7,060 | 2,041 | 68 | 228 | 5 | 6,399 | 15,801 | 401 | 16,202 | |||||||||||||||||||||||||||||||
At 1 January 2016 | 7,060 | 1,545 | 52 | 254 | 8 | 5,721 | 14,640 | 391 | 15,031 | |||||||||||||||||||||||||||||||
Profit after tax | – | – | – | – | – | 1,272 | 1,272 | 45 | 1,317 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||||||||||
–Available-for-sale securities | – | – | (4 | ) | – | – | – | (4 | ) | – | (4 | ) | ||||||||||||||||||||||||||||
– Cash flow hedges | – | – | – | 217 | – | – | 217 | – | 217 | |||||||||||||||||||||||||||||||
– Pension remeasurement | – | – | – | – | (395 | ) | (395 | ) | – | (395 | ) | |||||||||||||||||||||||||||||
– Currency translation on foreign operations | – | – | – | – | (3 | ) | – | (3 | ) | – | (3 | ) | ||||||||||||||||||||||||||||
Total comprehensive income | – | – | (4 | ) | 217 | (3 | ) | 877 | 1,087 | 45 | 1,132 | |||||||||||||||||||||||||||||
Repurchase ofnon-controlling interests | – | – | – | – | – | – | – | (7 | ) | (7 | ) | |||||||||||||||||||||||||||||
Dividends on ordinary shares | – | – | – | – | – | (593 | ) | (593 | ) | – | (593 | ) | ||||||||||||||||||||||||||||
Dividends on other equity instruments | – | – | – | – | – | (111 | ) | (111 | ) | – | (111 | ) | ||||||||||||||||||||||||||||
Dividends onnon-controlling interests | – | – | – | – | – | – | – | (30 | ) | (30 | ) | |||||||||||||||||||||||||||||
Tax onnon-controlling interests and other equity instruments | – | – | – | – | – | 31 | 31 | – | 31 | |||||||||||||||||||||||||||||||
At 31 December 2016 | 7,060 | 1,545 | 48 | 471 | 5 | 5,925 | 15,054 | 399 | 15,453 | |||||||||||||||||||||||||||||||
|
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| 183 |
Annual Report 2019| Financial statements
Consolidated Statement of Changes in Equity
For the years ended 31 December
| Other reserves | Non- | |||||||||||||||||||||||||||||||||||||||
| Share | Other equity | Available- | Fair | Cash flow | Currency | Retained | controlling | |||||||||||||||||||||||||||||||||
| capital | instruments | for-sale(1) | Value(1) | hedging | translation | earnings(2) | Total | interests | Total | |||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
1 January 2019 | 7,060 | 2,041 | 24 | 251 | 5 | 6,439 | 15,820 | 400 | 16,220 | |||||||||||||||||||||||||||||||
Profit after tax | – | – | – | – | – | 672 | 672 | 37 | 709 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||||||||||
– Cash flow hedges | – | – | – | 117 | – | – | 117 | – | 117 | |||||||||||||||||||||||||||||||
– Pension remeasurement | – | – | – | – | – | (394 | ) | (394 | ) | 2 | (392 | ) | ||||||||||||||||||||||||||||
– Own credit adjustment | – | – | – | – | – | (58 | ) | (58 | ) | – | (58 | ) | ||||||||||||||||||||||||||||
– Currency translation on foreign operations | – | – | – | – | (3 | ) | – | (3 | ) | – | (3 | ) | ||||||||||||||||||||||||||||
Total comprehensive income | – | – | – | 117 | (3 | ) | 220 | 334 | 39 | 373 | ||||||||||||||||||||||||||||||
Issue of other equity instruments | – | 500 | – | – | – | – | 500 | – | 500 | |||||||||||||||||||||||||||||||
Repurchase ofnon-controlling interests and other equity instruments | – | (300 | ) | – | – | – | (4 | ) | (304 | ) | (14 | ) | (318 | ) | ||||||||||||||||||||||||||
Dividends on ordinary shares | – | – | – | – | – | (262 | ) | (262 | ) | – | (262 | ) | ||||||||||||||||||||||||||||
Dividends on other equity instruments | – | – | – | – | – | (142 | ) | (142 | ) | – | (142 | ) | ||||||||||||||||||||||||||||
Dividends onnon-controlling interests | – | – | – | – | – | – | – | (30 | ) | (30 | ) | |||||||||||||||||||||||||||||
At 31 December 2019 | 7,060 | 2,241 | 24 | 368 | 2 | 6,251 | 15,946 | 395 | 16,341 | |||||||||||||||||||||||||||||||
At 31 December 2017 | 7,060 | 2,041 | 68 | 228 | 5 | 6,399 | 15,801 | 401 | 16,202 | |||||||||||||||||||||||||||||||
Adoption of IFRS 9(3) | – | – | (68 | ) | 63 | – | – | (187 | ) | (192 | ) | – | (192 | ) | ||||||||||||||||||||||||||
At 1 January 2018 | 7,060 | 2,041 | – | 63 | 228 | 5 | 6,212 | 15,609 | 401 | 16,010 | ||||||||||||||||||||||||||||||
Profit after tax | – | – | – | – | – | 1,125 | 1,125 | 39 | 1,164 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||||||||||
– Fair value reserve (debt instruments) | – | – | (39 | ) | – | – | – | (39 | ) | – | (39 | ) | ||||||||||||||||||||||||||||
– Cash flow hedges | – | – | – | 23 | – | – | 23 | – | 23 | |||||||||||||||||||||||||||||||
– Pension remeasurement | – | – | – | – | – | 352 | 352 | – | 352 | |||||||||||||||||||||||||||||||
– Own credit adjustment | – | – | – | – | – | 63 | 63 | – | 63 | |||||||||||||||||||||||||||||||
Total comprehensive income | – | – | (39 | ) | 23 | – | 1,540 | 1,524 | 39 | 1,563 | ||||||||||||||||||||||||||||||
Other | – | – | – | – | – | (45 | ) | (45 | ) | – | (45 | ) | ||||||||||||||||||||||||||||
Dividends on ordinary shares | – | – | – | – | – | (1,123 | ) | (1,123 | ) | – | (1,123 | ) | ||||||||||||||||||||||||||||
Dividends on other equity instruments | – | – | – | – | – | (145 | ) | (145 | ) | – | (145 | ) | ||||||||||||||||||||||||||||
Dividends onnon-controlling interests | – | – | – | – | – | – | – | (40 | ) | (40 | ) | |||||||||||||||||||||||||||||
At 31 December 2018 | 7,060 | 2,041 | 24 | 251 | 5 | 6,439 | 15,820 | 400 | 16,220 | |||||||||||||||||||||||||||||||
At 1 January 2017 | 7,060 | 1,545 | 48 | 471 | 5 | 5,925 | 15,054 | 399 | 15,453 | |||||||||||||||||||||||||||||||
Profit after tax | – | – | – | – | – | 1,261 | 1,261 | 39 | 1,300 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||||||||||
–Available-for-sale securities | – | – | 20 | – | – | – | 20 | – | 20 | |||||||||||||||||||||||||||||||
– Cash flow hedges | – | – | – | (243 | ) | – | – | (243 | ) | – | (243 | ) | ||||||||||||||||||||||||||||
– Pension remeasurement | – | – | – | – | – | (77 | ) | (77 | ) | – | (77 | ) | ||||||||||||||||||||||||||||
– Own credit adjustment | – | – | – | – | – | (22 | ) | (22 | ) | – | (22 | ) | ||||||||||||||||||||||||||||
Total comprehensive income | – | – | 20 | (243 | ) | – | 1,162 | 939 | 39 | 978 | ||||||||||||||||||||||||||||||
Issue of other equity instruments | – | 496 | – | – | – | – | 496 | – | 496 | |||||||||||||||||||||||||||||||
Dividends on ordinary shares | – | – | – | – | – | (553 | ) | (553 | ) | – | (553 | ) | ||||||||||||||||||||||||||||
Dividends on other equity instruments | – | – | – | – | – | (135 | ) | (135 | ) | – | (135 | ) | ||||||||||||||||||||||||||||
Dividends onnon-controlling interests | – | – | – | – | – | – | – | (37 | ) | (37 | ) | |||||||||||||||||||||||||||||
At 31 December 2017 | 7,060 | 2,041 | 68 | 228 | 5 | 6,399 | 15,801 | 401 | 16,202 | |||||||||||||||||||||||||||||||
| (1) | Following the adoption of IFRS 9, a fair value reserve was introduced to replace the available-for-sale reserve. |
| (2) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
| (3) | The adoption of IFRS 9 decreased shareholders’ equity at 1 January 2018 by £192m (net of tax), comprised of a £49m decrease arising from the application of the new classification and measurement requirements for financial assets, and a £211m decrease arising from the application of the new ECL impairment methodology, these amounts being partially offset by the recognition of a deferred tax asset of £68m. |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| 184 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
financial statements
|
1. ACCOUNTING POLICIES
These financial statements are prepared for Santander UK Group Holdings plc (the Company) and the Santander UK Group Holdings plc group (the Santander UK group) under the UK Companies Act 2006. The principal activity of the Santander UK group is the provision of an extensive range of personal financial services, and a wide range of banking and financial services to personal, business and corporate customers. Santander UK Group Holdings plc is a public company, limited by shares and incorporated in England and Wales having a registered office at 2 Triton Square, Regent’s Place, London, NW1 3AN, phone number0870-607-6000. It is a financial services holding company.
Basis of preparation
These financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. The Consolidated Financial Statements have been prepared on the going concern basis using the historical cost convention, except for financial assets and liabilities that have been measured at fair value. An assessment of the appropriateness of the adoption of the going concern basis of accounting is disclosed in the statement of going concern in the Directors’ Report.
Compliance with International Financial Reporting Standards
The Santander UK group Consolidated Financial Statements have been prepared in accordance with IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee (IFRS IC) of the IASB (together IFRS). The Santander UK group has also complied with its legal obligation to comply with IFRSs as adopted by the European Union as there are no applicable differences between the two frameworks for the periods presented.
The Company financial statements have been prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provision of the UK Companies Act 2006. Disclosures required by IFRS 7 ‘Financial Instruments: Disclosure’ relating to the nature and extent of risks arising from financial instruments, and IAS 1 ‘Presentation of Financial Statements’ relating to objectives, policies and processes for managing capital, can be found in the Risk review. Those disclosures form an integral part of these financial statements.
Recent accounting developments
IFRS 16 ‘Leases’ (IFRS 16)
On 1 January 2018,2019 the Santander UK group adopted IFRS 9 ‘Financial Instruments’ (IFRS 9)16 and IFRS 15 ‘Revenue from Contracts with Customers’ (IFRS 15). The new orthe revised accounting policies are set out below.
The impact of applying IFRS 9 is disclosed in Note 44. The accounting policy changes for IFRS 9, set out below,as lessee which have been applied from 1 January 2018.2019 are set out below. Comparatives have not been restated. The impact of applying IFRS 16 is disclosed in section (ii).
As a result of the change from IAS 39 todescribed below, IFRS 9, some disclosures presented in respect of certain financial assets are not comparable because their classification may have changed between the two standards. This means that some IFRS 9 disclosures are not directly comparable16 impacted property and some disclosures that relate to information presented on an IAS 39 basis are no longer relevant in the current period. As explained in Note 44, the classification and measurement changes to financial assets that arose on adoption of IFRS 9 have been aligned to the presentation in the balance sheet. The Santander UK group decided to continue adopting IAS 39 hedge accounting and consequently there have been no changes to the hedge accounting policies and practices following the adoption of IFRS 9. However, additional hedge accounting disclosure requirements of IFRS 7 ‘Financial Instruments: Disclosures’ (IFRS 7) have been included in these financial statements.
In addition,non-trading repurchase agreements andnon-trading reverse repurchase agreements that are held at amortised cost are now presented as separate lines in the balance sheet. Previously,non-trading reverse repurchase agreements were included in ‘Loans and advances to banks’ and ‘Loans and advances to customers’, andnon-trading repurchase agreements were included in ‘Deposits by banks’. The new presentation, which is considered to be more relevant to an understanding of our financial position, was adopted with effect from 1 January 2018, and comparatives arere-presented accordingly. Forequipment leases where the Santander UK group is the impact of thisre-presentation on the balance sheet at 1 January 2017 was to decrease loans and advances to banks by £1,462m, increasing non trading reverse repurchase agreements by the same amount, and to decrease deposits by banks by £2,384m, increasing non trading repurchase agreements by the same amount.
The application oflessee. IFRS 1516 had no material impact onfor leases where the Santander UK group as there were no significant changes inis the recognition ofin-scope income. The accountinglessor.
i) Accounting policy changes for IFRS 15 are set out in the Revenue recognition policy below.change
Future accounting developments
At 31 December 2018, the Santander UK group has not yet adopted the following significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective for the Santander UK group:
|
The Santander UK group hasas lessee
The Santander UK group assesses whether a contract is or contains a lease at the inception of the contract and recognises aright-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases, except for short-term leases, being those with a term of 12 months or less, or leases for which the underlying asset is of low value which are expensed in the income statement on a straight-line basis over the lease terms. Lease payments exclude irrecoverable VAT which is expensed in the income statement as lease payments are made.
The lease liability, which is included within Other liabilities on the balance sheet, is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate appropriate to the lease term. The lease liability is subsequently measured at amortised cost using the effective interest rate method. Remeasurement of the lease liability occurs if there is a change in the lease payments (when a corresponding adjustment is made to the ROU asset), the lease term or in the assessment of an option to purchase the underlying asset.
At inception, the ROU asset, which is included within Property, plant and equipment on the balance sheet, comprises the lease liability, initial direct costs and the obligations to restore the asset, less any incentives granted by the lessor. The ROU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset and is reviewed for indications of impairment as for owned assets. The obligation to restore the asset is included within Provisions on the balance sheet.
ii) Impact of adoption
The Santander UK group elected to apply the modified retrospective approach whereby the ROU asset at the date of initial application iswas measured at an amount equal to the lease liability. The ROU asset iswas adjusted for any prepaid lease payments and incentives relating to the relevant leases that were recognised on the balance sheet at 31 December 2018. It includes2018 and included an estimate of the estimated costs of restoring the underlying assets to the condition required by the lease terms and conditions.of the lease. In addition, the following practical expedients permitted by the standard were applied:
| – | a single discount rate being the incremental borrowing rate was applied to a portfolio of leases with reasonably similar characteristics; and |
| – | operating leases with a remaining lease term of less than 12 months as at 1 January 2019 were treated as short term leases. |
For the Santander UK group, the application of IFRS 16 at 1 January 2019 is expected to increaseincreased property, plant and equipment by £211m (being the net increase in ROU assets referred to above), reducereduced other assets by £12m increaseand increased other liabilities by £182m from recognising lease liabilities, and increaseliabilities. In addition, we also increased provisions by £17m.£17m (see Note 27). There is expected to bewas no impact on shareholders’ equity. In arrivingThe amount of the lease liabilities above differed from the amount of operating lease commitments at the estimated impact,31 December 2018 and is reconciled as well as excluding leases whose terms end within 12 months, the Santander UK group applies a single discount rate to a portfolio of leases with similar remaining lease terms. follows:
| Group | ||||
| £m | ||||
Rental commitments undernon-cancellable operating leases under IAS 17 at 31 December 2018 (see Note 29) | 247 | |||
Recognition exemption for short-term leases | (73 | ) | ||
Effect from discounting at the incremental borrowing rate at 1 January 2019 | 8 | |||
Additional liabilities recognised based on the initial application of IFRS 16 at 1 January 2019 | 182 | |||
| Santander UK Group Holdings plc | 185 |
Annual Report 2019| Financial statements
In addition to the choice of transition approach, the determination of the discount rate is the most significant area of judgement. The Santander UK group applies an incremental borrowing rate (based on3-month GBP LIBOR plus a credit spread to reflect the cost of raising unsecured funding in the wholesale markets) appropriate to the relevant remaining lease term.
IAS 12
The lease liabilities shown above differ fromSantander UK group has also applied the amountamendment to IAS 12 ‘Income Taxes’ (part of operating lease commitments disclosed‘Annual Improvements to IFRS Standards 2015-2017 Cycle’) in Note 32 duethese Condensed Consolidated Interim Financial Statements. The amendment clarifies that the income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the past transactions or events that generated distributable profits were recognised. This means that, to the effectsextent that profits from which dividends on equity instruments were recognised in the income statement, the income tax consequences would be similarly recognised in the same statement. The amendment, which has been applied retrospectively, reduces the effective tax rate where the tax relief on dividends in respect of discountingother equity instruments is recognised in the lease liabilitiesincome statement rather than as a separate line item within the statement of changes in equity. Overall, there was no impact on shareholders’ equity for the Santander UK group from applying the amendment to IAS 12 at 1 January 2019. For the Santander UK group, the impact of the amendment to IAS 12 on the income statement for the year ended 31 December 2019 was to reduce tax on profit by £39m (2018: £43m, 2017: £46m), increasing profit after tax by the same amount.
London Inter-Bank Offered Rate (LIBOR) reform
In September 2019, the IASB issued Interest Rate Benchmark Reform: Amendments to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial Instruments: Recognition and excluding short-term leasesMeasurement’ and IFRS 7 ‘Financial Instruments: Disclosure’. Santander UK applies IAS 39 hedge accounting so the amendments to IFRS 9 do not apply. The IAS 39 amendments provide temporary exceptions from applying specific hedge accounting requirements to hedging relationships that are outsidedirectly affected by the scope of IFRS 16.
Annual Report 2018 | Financial statements
reform to LIBOR and other Interbank Offered Rates, hereinafter referred to as LIBOR reform. The exceptions have the effect that LIBOR reform should not generally cause hedge accounting to terminate, however any hedge ineffectiveness continues to be recognised in the income statement. The exceptions end at the earlier of:
| – |
|
| – | discontinuance of |
The IAS 39 amendments apply to all hedging relationships directly affected by uncertainties related to LIBOR reform and must be applied for annual periods beginning on or after 1 January 2020. However, following their endorsement for use in the European Union, Santander UK has elected to apply the IAS 39 and IFRS 7 amendments in the preparation of the financial statements for the year ended 31 December 2019. The exceptions given by the IAS 39 amendments mean that LIBOR reform had no impact on hedge relationships for affected hedges at and for the year ended 31 December 2019. The main assumptions or judgements made by Santander UK in applying the IAS 39 amendments are outlined below.
| – | For cash flow hedges affected by LIBOR reform, Santander UK management has assumed that the |
| – | In making its prospective hedge effectiveness assessments, Santander UK assumes that the interest rate benchmark on which the hedged item and the hedging instrument are based is not altered as a result of LIBOR reform. |
| – | Santander UK will not discontinue hedge accounting during the period of LIBOR-related uncertainty solely because the retrospective effectiveness falls outside the required80-125% range. |
| – | For hedges of anon-contractually specified benchmark portion of an interest rate, Santander UK only considers at inception of such a hedging relationship whether the separately identifiable requirement is met. |
Details of the significant interest rate benchmarks to which hedging relationships are exposed, the extent of risk exposure that is affected by LIBOR reform, and how Santander UK’s transition to alternative benchmark interest rates is being managed, are disclosed in the Banking market risk section of the Risk review. The nominal amount of the hedging instruments in hedging relationships directly affected by uncertainties related to LIBOR reform is disclosed in Note 11.
Future accounting developments
At 31 December 2019, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective or which have otherwise not been early adopted where permitted.
Comparative information
As required by US public company reporting requirements, these financial statements include two years of comparative information for the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related Notes.
Consolidation
a) Subsidiaries
The Consolidated Financial Statements incorporate the financial statements of the Company and entities (including structured entities) controlled by it and its subsidiaries. Control is achieved where the Company (i) has (i) power over the investee; (ii) is exposed, or has rights, to variable returns from its involvement with the investee; and (iii) has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including:
| – | The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders |
| – | Potential voting rights held by the Company, other vote holders or other parties |
| – | Rights arising from other contractual arrangements |
| – | Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. |
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and the consolidated statement of comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. Inter-company transactions, balances and unrealised gains on transactions between Santander UK group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.
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Notes to the financial statements |
The acquisition method of accounting is used to account for the acquisition of subsidiaries which meet the definition of a business. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. Acquisition-related costs are expensed as incurred. The excess of the cost of acquisition, as well as the fair value of any interest previously held, over the fair value of the Santander UK group’s share of the identifiable net assets of the subsidiary at the date of acquisition is recorded as goodwill. When the Santander UK group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and anynon-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in a former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 or, when applicable, the costs on initial recognition of an investment in an associate or joint venture.
Business combinations between entities under common control (i.e. fellow subsidiaries of Banco Santander SA, the ultimate parent) are outside the scope of IFRS 3 – ‘Business Combinations’, and there is no other guidance for such transactions under IFRS. The Santander UK group elects to account for business combinations between entities under common control at their book values in the acquired entity by including the acquired entity’s results from the date of the business combination and not restating comparatives. Reorganisations of entities within the Santander UK group are also accounted for at their book values.
Interests in subsidiaries are eliminated during the preparation of the Consolidated Financial Statements. Interests in subsidiaries in the Company unconsolidated financial statements are held at cost subject to impairment.
b) Joint ventures
Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to its net assets. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Accounting policies of joint ventures have been aligned to the extent there are differences from the Santander UK group’s policies. Investments in joint ventures are accounted for by the equity method of accounting and are initially recorded at cost and adjusted each year to reflect the Santander UK group’s share of their post-acquisition results. When the Santander UK group’s share of losses of a joint venture exceed its interest in that joint venture, the Santander UK group discontinues recognising its share of further losses. Further losses are recognised only to the extent that the Santander UK group has incurred legal or constructive obligations or made payments on behalf of the joint venture.
Foreign currency translation
Items included in the financial statements of each entity (including foreign branch operations) in the Santander UK group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the functional currency). The Consolidated Financial Statements are presented in sterling, which is the functional currency of the Company.
Income statements and cash flows of foreign entities are translated into the Santander UK group’s presentation currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences on the translation of the net investment in foreign entities are recognised in other comprehensive income. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Foreign currency transactions are translated into the functional currency of the entity involved at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement unless recognised in other comprehensive income in connection with a cash flow hedge.Non-monetary items denominated in a foreign currency measured at historical cost are not retranslated. Exchange rate differences arising onnon-monetary items measured at fair value are recognised in the consolidated income statement except for differences arising on equity securities measured at FVOCIfair value through other comprehensive income (FVOCI) (2017:available-for-sale)available-for-sale asset measured at fair value), which are recognised in other comprehensive income.
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Revenue recognition
a) Interest income and expense
Interest and similar income comprises interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI (2017:available-for-sale)available-for-sale measured at fair value) and interest income on hedging derivatives. Interest expense and similar charges comprises interest expense on financial liabilities measured at amortised cost, and interest expense on hedging derivatives. Interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI (2017:available-for-sale)available-for-sale measured at fair value) and interest expense on financial liabilities other than those at fair value through profit or loss (FVTPL) is determined using the effective interest rate method.
The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the gross carrying amount of the financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding expected credit losses. The calculation includes all amounts paid or received by the Santander UK group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of the financial instrument and all other premiums or discounts.
Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have subsequently become credit-impaired (or ‘stage‘Stage 3’), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of the ECL provision). For more information on stage allocations of credit risk exposures, see ‘Significant increase in credit risk’ in the ‘Santander UK group level – credit risk management’ section of the Risk ReviewReview.
b) Fee and commission income and expense
Fees and commissions that are not an integral part of the effective interest rate are recognised when the service is performed. Most fee and commission income is recognised at a point in time. Certain commitment, upfront and management fees are recognised over time but are not material. For retail and corporate products, fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK group’s branch and ATM networks, annual fees payable by credit card holders and fees fornon-banking financial products.
For insurance products, fee and commission income consists principally of commissions and profit share arising from the sale of building and contents insurance and life protection insurance. Commissions arising from the sale of buildings and contents insurance are recognised over the period of insurance cover, adjusted to take account of cancelled policies. Profit share income from the sale of buildings and contents insurance which is not subject to any adjustment is recognised when the
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profit share income is earned. Commissions and profit share arising from the sale of life protection insurance is subject to adjustment for cancellations of policies within 3 years from inception.
Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (for example certain loan commitment fees) is recognised as an adjustment to the effective interest rate and recorded in ‘Interest income’.
c) Dividend income
Except for equity securities classified as trading assets or financial assets held at fair value through profit or loss, described below, dividend income is recognised when the right to receive payment is established. This is theex-dividend date for equity securities.
d) Net trading and other income
Net trading and other income includes all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss (comprising financial assets and liabilities held for trading, trading derivatives and other financial assets and liabilities at fair value through profit or loss), together with related interest income, expense, dividends and changes in fair value of any derivatives managed in conjunction with these assets and liabilities. Changes in fair value of derivatives in a fair value hedging relationship are also recognised in net trading and other income. Net trading and other income also includes income from operating lease assets, and profits and losses arising on the sales of property, plant and equipment and subsidiary undertakings.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, including computer software, which are assets that necessarily take a substantial period of time to develop for their intended use, are added to the cost of those assets, until the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period in which they occur.
Pensions and other post-retirement benefits
a) Defined benefit schemes
A defined benefit scheme is a pension scheme that guarantees an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. Pension costs are charged to ‘Administration expenses’, within the line item ‘Operating expenses before impairment losses, provisions and charges’ with the net interest on the defined benefit asset or liability included within ‘Net interest income’ in the income statement. The asset or liability recognised in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date, less the fair value of scheme assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The assets of the schemes are measured at their fair values at the balance sheet date.
The present value of the defined benefit obligation is estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, then discounted to present value using the yield applicable to high-quality AA rated corporate bonds of the same currency and which have terms to maturity closest to the terms of the scheme liabilities, adjusted where necessary to match those terms. In determining the value of scheme liabilities, demographic and financial assumptions are made by management about life expectancy, inflation, discount rates, pension increases and earnings growth, based on past experience and future expectations. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively.
Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme. The income statement includes the net interest income/expense on the net defined benefit liability/asset, current service cost and any past service cost and gain or loss on settlement. Remeasurement of defined benefit pension schemes, including return on scheme assets (excludes amounts included in net interest), actuarial gains and losses (arising from changes in demographic assumptions, the impact of scheme experience and changes in financial assumptions) and the effect of the changes to the asset ceiling (if applicable), are recognised in other comprehensive income. Remeasurement recognised in other comprehensive income will not be reclassified to the income statement. Past-service costs are recognised as an expense in the income statement at the earlier of when the scheme amendment or curtailment occurs and when the related restructuring costs or termination benefits are recognised. Curtailments include the impact of significant reductions in the number of employees covered by a scheme, or amendments to the terms of the scheme so that a significant element of future service will no longer qualify for benefits or will qualify only for reduced benefits. Curtailment gains and losses on businesses that meet the definition of discontinued operations are included in profit or loss for the year from discontinued operations. Gains and losses on settlements are recognised when the settlement occurs.
Annual Report 2018 | Financial statements
b) Defined contribution plans
A defined contribution plan is a pension scheme under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund). The pension paid to the member at retirement is based on the amount in the separate fund for each member. The Santander UK group has no legal or constructive obligations to pay further contributions into the fund to ‘top up’ benefits to a certain guaranteed level. The regular contributions constitute net periodic costs for the year in which they are due and are included in staff costs within Operating expenses in the income statement.
c) Post-retirement medical benefit plans
Post-retirement medical benefit liabilities are determined using the projected unit credit method, with actuarial valuations updated at eachyear-end. The expected benefit costs are accrued over the period of employment using an accounting methodology similar to that for the defined benefit pension scheme.
Share-based payments
The Santander UK group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its employees. Shares of the Santander UK group’s parent, Banco Santander SA are purchased in the open market by the Santander UK group (for the Employee Sharesave scheme) or are purchased by Banco Santander SA or another Banco Santander company (forsubsidiary (including awards granted under the Long-Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options or awards as they vest.
Options granted under the Employee Sharesave scheme are accounted for as cash-settled share-based payment transactions. Awards granted under the Long-Term Incentive Plan and Deferred Shares Bonus Plan are accounted for as equity-settled share-based payment transactions.
The fair value of the services received is measured by reference to the fair value of the shares or share options initially on the date of the grant for both the cash and equity settled share-based payments and then subsequently at each reporting date for the cash-settled share-based payments. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement in administration expenses over the period that the services are received i.e. the vesting period.
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A liability equal to the portion of the services received is recognised at the fair value determined at each balance sheet date for cash-settled share-based payments. A liability equal to the amount to be reimbursed to Banco Santander SA is recognised at the fair value determined at the grant date for equity-settled share-based payments.
The fair value of the options granted under the Employee Sharesave scheme is determined using an option pricing model, which takes into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the Banco Santander SA share price over the life of the option and the dividend growth rate. The fair value of the awards granted for the Long-Term Incentive Plan was determined at the grant date using an option pricing model, which takes into account the share price at grant date, the risk free interest rate, the expected volatility of the Banco Santander SA share price over the life of the award and the dividend growth rate. Vesting conditions included in the terms of the grant are not taken into account in estimating fair value, except for those that include terms related to market conditions.Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee service so that, ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market–related vesting conditions are met, provided that thenon-market vesting conditions are met.
Where an award has been modified, as a minimum, the expense of the original award continues to be recognised as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or increase the number of equity instruments, the incremental fair value of the award or incremental fair value of the modification of the award is recognised in addition to the expense of the original grant, measured at the date of modification, over the modified vesting period.
Cancellations in the vesting period are treated as an acceleration of vesting, and recognised immediately for the amount that would otherwise have been recognised for services over the vesting period.
Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition, as well as the fair value of any interest previously held, over the fair value of the share of the identifiable net assets of the acquired subsidiary, associate, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in intangible assets. Goodwill on acquisitions of associates is included as part of investment in associates. Goodwill is tested for impairment at each balance sheet date,annually, or more frequently when events or changes in circumstances dictate, and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business sold.
Other intangible assets are recognised if they arise from contractual or other legal rights or if they are capable of being separated or divided from the Santander UK group and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over their useful economic life of three to seven years. Other intangible assets are reviewed annually for impairment indicators and tested for impairment where indicators are present.
Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of those products can be measured reliably. These costs include payroll, materials, services and directly attributable overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of three to seven years, unless the software is an integral part of the related computer hardware, in which case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended. Costs of maintaining software are expensed as incurred.
Property, plant and equipment
Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software. Property, plant and equipment also includes operating leases where the Santander UK group is the lessor andright-of-use assets where the Santander UK group is the lessee, as described further in ‘Leases’ below. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. A review for indications of impairment is carried out at each reporting date. Gains and losses on disposal are determined by reference to the carrying amount and are reported in net trading and other income. Repairs and renewals are charged to the income statement when the expenditure is incurred. Internally developed software meeting the criteria set out in ‘Goodwill and other intangible assets’ above and externally purchased software are classified in property, plant and equipment where the software is an integral part of the related computer hardware (for example operating system of a computer). Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life, as follows:
Owner-occupied properties | Not exceeding 50 years | |
Office fixtures and equipment | 3 to 15 years | |
Computer software | 3 to 7 years | |
Right-of-use assets (see ‘Leases – The Santander UK group as lessee’ below) | Shorter of the lease term or the useful life of the underlying asset |
Depreciation is not charged on freehold land and assets under construction. Depreciation on operating lease assets where the Santander UK group is the lessor is described in ‘Leases’ below.
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Financial instruments
a) Initial recognition and measurement
Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander UK group determines the classification of its financial assets and liabilities at initial recognition and measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are incremental and directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs of financial assets and financial liabilities carried at fair value through profit or lossFVTPL are expensed in profit or loss. Immediately after initial recognition, an expected credit loss (ECL) allowance is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI.
A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the market place concerned. Regular way purchases of financial assets classified as loans and receivables, issues of equity or financial liabilities measured at amortised cost are recognised on settlement date; all other regular way purchases and issues are recognised on trade date.
b) Financial assets and liabilities
i) Classification and subsequent measurement
From 1 January 2018, theThe Santander UK group has applied IFRS 9 Financial Instruments and classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL.
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Financial assets and financial liabilities are classified as FVTPL where there is a requirement to do so or where they are otherwise designated at FVTPL on initial recognition. Financial assets and financial liabilities which are required to be held at FVTPL include:
| – | Financial assets and financial liabilities held for trading |
| – | Debt instruments that do not have solely payments of principal and interest (SPPI) characteristics. Otherwise, such instruments are measured at amortised cost or FVOCI, and |
| – | Equity instruments that have not been designated as held at FVOCI. |
Financial assets and financial liabilities are classified as held for trading if they are derivatives or if they are acquired or incurred principally for the purpose of selling or repurchasing in the near-term, or form part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.
In certain circumstances, other financial assets and financial liabilities are designated at FVTPL where this results in more relevant information. This may arise because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on a different basis, where the assets and liabilities are managed and their performance evaluated on a fair value basis or, in the case of financial liabilities, where it contains one or more embedded derivatives which are not closely related to the host contract.
The classification and measurement requirements for financial asset debt and equity instruments and financial liabilities are set out below.
a) Financial assets: debt instruments
Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as loans and government and corporate bonds. Classification and subsequent measurement of debt instruments depend on the Santander UK group’s business model for managing the asset, and the cash flow characteristics of the asset.
Business model
The business model reflects how the Santander UK group manages the assets in order to generate cash flows and, specifically, whether the Santander UK group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of the assets. If neither of these is applicable, such as where the financial assets are held for trading purposes, then the financial assets are classified as part of an ‘other’ business model and measured at FVTPL. Factors considered in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the assets’ performance is evaluated and reported to key management personnel, and how risks are assessed and managed.
SPPI
Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Santander UK group assesses whether the assets’ cash flows represent SPPI. In making this assessment, the Santander UK group considers whether the contractual cash flows are consistent with a basic lending arrangement (i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement). Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the related asset is classified and measured at FVTPL.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.
Based on these factors, the Santander UK group classifies its debt instruments into one of the following measurement categories:
| – | Amortised cost – Financial assets that are held for collection of contractual cash flows where those cash flows represent SPPI, and that are not designated at FVTPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any ECL recognised and measured as presented in Note |
| – | FVOCI – Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent SPPI, and that are not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are recognised in OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Net trading and other income’. Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method. |
| – | FVTPL – Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument that is subsequently measured at FVTPL, including any debt instruments designated at fair value, is recognised in profit or loss and presented in the income statement in ‘Net trading and other income’ in the period in which it arises. |
The Santander UK group reclassifies financial assets when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent.
Annual Report 2018 | Financial statements
b) Financial assets: equity instruments
Equity instruments are instruments that meet the definition of equity from the issuer’s perspective, being instruments that do not contain a contractual obligation to pay cash and that evidence a residual interest in the issuer’s net assets. All equity investments are subsequently measured at FVTPL, except where management has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. When this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal. ECLs (and reversal of ECLs) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the right to receive payments is established. Gains and losses on equity investments at FVTPL are included in the ‘Net trading and other income’ line in the income statement.
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Notes to the financial statements |
c) Financial liabilities
Financial liabilities are classified as subsequently measured at amortised cost, except for:
| – | Financial liabilities at fair value through profit or loss: this classification is applied to derivatives |
| – | Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Santander UK group recognises any expense incurred on the financial liability, and |
| – | Financial guarantee contracts and loan commitments. |
Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits. The principal products are Capital Guaranteed/Protected Products which give the customers a limited participation in the upside growth of an equity index. In the event the index falls in price, a cash principal element is guaranteed/protected. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers. The cash principal element is accounted for as deposits by customers at amortised cost. The embedded derivatives are separated from the host instrument and are separately accounted for as derivatives.
d) Sale and repurchase agreements (including stock borrowing and lending)
Securities sold subject to a commitment to repurchase them at a predetermined price (repos) under which substantially all the risks and rewards of ownership are retained by the Santander UK group remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (reverse repos) are not recognised on the balance sheet and the consideration paid is recorded as an asset. The difference between the sale and repurchase price is treated as trading income in the income statement, except where the repo is not treated as part of the trading book, in which case the difference is recorded in interest income or expense.
Securities lending and borrowing transactions are generally secured, with collateral in the form of securities or cash advanced or received. Securities lent or borrowed are not reflected on the balance sheet. Collateral in the form of cash received or advanced is recorded as a deposit or a loan. Collateral in the form of securities is not recognised.
e) Day One profit adjustments
The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However, sometimes the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When such evidence exists, the Santander UK group recognises a trading gain or loss at inception (Day One gain or loss), being the difference between the transaction price and the fair value. When significant unobservable parameters are used, the entire Day One gain or loss is deferred and is recognised in the income statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable or an offsetting transaction is entered into.
ii) Impairment of debt instrument financial assets
The Santander UK group assesses on a forward-looking basis the ECL associated with its debt instrument assets carried at amortised cost and FVOCI and with the exposure arising from financial guarantee contracts and loan commitments. The Santander UK group recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects:
| – | An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes |
| – | The time value of money, and |
| – | Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. |
Grouping of instruments for losses measured on a collective basis
We typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in Retail Banking – credit risk management in the Risk review) using one or more statistical models. Where we have used internal capital or similar models as the basis for our IFRS 9 models, this typically results in a large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models. We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed, as described below.
Individually assessed impairments (IAIs)
We assess significant Stage 3 cases individually. We do this for CIB and Corporate & Commercial Banking cases, but not for Business Banking cases in Retail Banking which we assess collectively. To calculate the estimated loss, we estimate the future cash flows under several scenarios each of which uses case-specific factors and circumstances. We then probability-weight the net present value of the cash flows under each scenario to arrive at a weighted average provision requirement. We update our assessment process every quarter and more frequently if there are changes in circumstances that might affect the scenarios, cash flows or probabilities we apply.
For more on how ECL is calculated, see the Credit risk section of the Risk review.
a)Write-off
For secured loans, awrite-off is only made when all collection procedures have been exhausted and the security has been sold and/or from claiminga claim made on any mortgage indemnity guarantee or other insurance. In the corporate portfolio, there may be occasions where awrite-off occurs for other reasons, such as following a consensual restructure or refinancing of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than its face value.
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There is no threshold based on past due status beyond which all secured loans are written off as there can be significant variations in the time needed to enforce possession and sale of the security, especially due to the different legal frameworks that apply in different regions of the UK. For unsecured loans, awrite-off is only made when all internal avenues of collecting the debt have been exhausted andexhausted. Where appropriate the debt is passed over to external collection agencies. A past due threshold is applied to unsecured debt where accounts that are 180 days past due are written off unless there is a dispute awaiting resolution. Contact is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried out only when the steps described above have been undertaken without success.
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All write-offs are assessed / made on acase-by-case basis, taking account of the exposure at the date ofwrite-off, after accounting for the value from any collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once investigations have been completed and the probability of recovery is minimal. The time span between discovery andwrite-off will be short and may not result in an impairment loss allowance being raised. Thewrite-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances.
b) Recoveries
Recoveries of credit impairment losses are not included in the impairment loss allowance, but are taken to income and offset against credit impairment losses. Recoveries of credit impairment losses are classified in the income statement as ‘Credit impairment losses’.
iii) Modifications of financial assets
The treatment of a renegotiation or modification of the contractual cash flows of a financial asset normally depends upon whether the renegotiation or modification is due to financial difficulties of the borrower or for other commercial reasons.
| – | Contractual modifications due to financial difficulties of the borrower: where Santander UK modifies the contractual conditions to enable the borrower to fulfil their payment obligations, the asset is not derecognised. The gross carrying amount of the financial asset is recalculated as the present value of the renegotiated/modified contractual cash flows that are discounted at the financial asset’s original EIR and any gain or loss arising from the modification is recognised in the income statement. |
| – | Contractual modifications for other commercial reasons:such modifications are treated as a new transaction resulting in derecognition of the original financial asset, and the recognition of a ‘new’ financial asset. Any difference between the carrying amount of the derecognised asset and the fair value of the new asset is recognised in the income statement as a gain or loss on derecognition. |
Any other contractual modifications, such as where a regulatory authority imposes a change in certain contractual terms or due to legal reasons, are assessed on acase-by-case basis to establish whether or not the financial asset should be derecognised.
iv) Derecognition other than on a modification
Financial assets are derecognised when the rights to receive cash flows have expired or the Santander UK group has transferred its contractual right to receive the cash flows from the assets and either: (1) substantially all the risks and rewards of ownership have been transferred; or (2) the Santander UK group has neither retained nor transferred substantially all of the risks and rewards, but has transferred control.
Financial liabilities are derecognised when extinguished, cancelled or expired.
c) Financial guarantee contracts and loan commitments
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities.
Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of the amount of the loss allowance, and the premium received on initial recognition less income recognised in accordance with the principles of IFRS 15. Loan commitments are measured as the amount of the loss allowance.allowance (determined in accordance with IFRS 9 as described in Credit risk section of the Risk review). The Santander UK group has not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument.
For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision and charged to credit impairment losses in the income statement. The loss allowance in respect of revolving facilities is classified in loans and advances to customers to the extent of any drawn balances. The loss allowance in respect of undrawn amounts is classified in provisions. When amounts are drawn, any related loss allowance is transferred from provisions to loans and advances to customers.
Derivative financial instruments (derivatives)
Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures, and equity index options.
Derivatives are held for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge accounting relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described in ‘Hedge accounting’ below.
Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values ofover-the-counter derivatives are estimated using valuation techniques, including discounted cash flow and option pricing models.
Certain derivatives may be embedded in hybrid contracts, such as the conversion option in a convertible bond. If the hybrid contract contains a host that is a financial asset, then the Santander UK group assesses the entire contract as described in the financial asset section above for classification and measurement purposes. Otherwise, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement.
Contracts containing embedded derivatives are not subsequently reassessed for separation unless either there has been a change in the terms of the contract which significantly modifies the cash flows (in which case the contract is reassessed at the time of modification) or the contract has been reclassified (in which case the contract is reassessed at the time of reclassification).
Annual Report 2018 | Financial statements
All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, except where netting is permitted. The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments and, if the latter, the nature of the risks being hedged. Gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement, and included within net trading and other income.
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Offsetting financial assets and liabilities
Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. The Santander UK group is party to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.
Hedge accounting
The Santander UK group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of its risk management strategies. Derivatives are used to hedge exposures to interest rates, exchange rates and certain indices such as retail price indices.
At the time a financial instrument is designated as a hedge (i.e. at the inception of the hedge), the Santander UK group formally documents the relationship between the hedging instrument(s) and hedged item(s), its risk management objective and strategy for undertaking the hedge. The documentation includes the identification of each hedging instrument and respective hedged item, the nature of the risk being hedged (including the benchmark interest rate being hedged in a hedge of interest rate risk) and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk is to be assessed. Accordingly, the Santander UK group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been and will be highly effective in offsetting changes in the fair value attributable to the hedged risk during the period that the hedge is designated. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Santander UK group can expect, and actual results indicate, that changes in the fair value or cash flow of the hedged items are effectively offset by changes in the fair value or cash flow of the hedging instrument. If at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.
Where derivatives are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the derivatives may be designated as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (fair value hedges); (ii) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedges); or (iii) a hedge of a net investment in a foreign operation (net investment hedges). The Santander UK group applies fair value and cash flow hedge accounting, but not hedging of a net investment in a foreign operation.
a) Fair value hedge accounting
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Where the hedged item is measured at amortised cost, the fair value changes due to the hedged risk adjust the carrying amount of the hedged asset or liability. Changes in the fair value of portfolio hedged items are presented separately in the consolidated balance sheet in macro hedge of interest rate risk and recognised in the income statement within net trading and other income. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. For fair value hedges of interest rate risk, the cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity. For portfolio hedged items, the cumulative adjustment is amortised to the income statement using the straight line method over the period to maturity.
b) Cash flow hedge accounting
The effective portion of changes in the fair value of qualifying cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. The Santander UK group is exposed to cash flow interest rate risk on its floating rate assets, and foreign currency risk on its fixed rate debt issuances denominated in foreign currency.currency and equity price risk arises from the Santander UK group operating the Employee Sharesave scheme. Cash flow hedging is used to hedge the variability in cash flows arising from both these risks.
Securitisation transactions
The Santander UK group has entered into arrangements where undertakings have issued mortgage-backed and other asset-backed securities or have entered into funding arrangements with lenders in order to finance specific loans and advances to customers. As the Santander UK group has retained substantially all the risks and rewards of the underlying assets, such financial instruments continue to be recognised on the balance sheet, and a liability recognised for the proceeds of the funding transaction.
Impairment ofnon-financial assets
At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment (including operating lease assets) and intangible assets (including goodwill) are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review. The impairment review comprises a comparison of the carrying amount of the asset or cash generating unit with its recoverable amount: the higher of the asset’s or cash-generating unit’s fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at whichnon-financial assets, including goodwill, isare monitored for internal management purposes and is not larger than an operating segment.
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Value in use is calculated by discounting management’s expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market basedmarket-based discount rate on apre-tax basis. The recoverable amounts of goodwill have been based on value in use calculations.
The carrying values of property, plant and equipment, goodwill and other intangible assets are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss relating to property, plant and equipment may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the property, plant and equipment’s recoverable amount. The carrying amount of the property, plant and equipment will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.
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Annual Report 2019| Financial statements
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Leases
a) The Santander UK group as lessor
Operating lease assets are recorded at cost and depreciated over the life of the asset after taking into account anticipated residual value.value (RV). Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset. After initial recognition, residual values are reviewed regularly, and any changes are recognised prospectively through remaining depreciation charges.
Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Santander UK group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Santander UK group’s net investment outstanding in respect of the leases and hire purchase contracts. A provision is recognised to reflect a reduction in any anticipated unguaranteed RV. A provision is also recognised for voluntary termination of the contract by the customer, where appropriate.
b) The Santander UK group as lessee
The Santander UK group enters into operatingassesses whether a contract is or contains a lease at the inception of the contract and recognises aright-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases, except for the rentalleases with a term of equipment12 months or real estate. Payments made under such leasesless which are charged toexpensed in the income statement on a straight-line basis over the period of the lease. When an operating lease terms. Lease payments exclude irrecoverable VAT which is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognised as an expenseexpensed in the period inincome statement as lease payments are made.
The lease liability, which termination takes place.
Ifis included within Other liabilities on the lease agreement transfers the risk and rewards of the asset, the leasebalance sheet, is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recordedinitially measured at the lower of the present value of the minimum lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate appropriate to the lease term. The lease liability is subsequently measured at amortised cost using the effective interest rate method. Remeasurement of the lease liability occurs if there is a change in the lease payments (when a corresponding adjustment is made to the ROU asset), the lease term or fair valuein the assessment of an option to purchase the underlying asset.
At inception, the ROU asset, which is included within Property, plant and equipment on the balance sheet, comprises the lease liability, initial direct costs and the obligations to restore the asset, less any incentives granted by the lessor. The ROU asset is depreciated over the lowershorter of the estimatedlease term or the useful life and the life of the lease.underlying asset and is reviewed for indications of impairment as for owned assets. The corresponding rental obligations are recorded as borrowings. The aggregate benefit of incentives, if any,obligation to restore the asset is recognised as a reduction of rental expense overincluded within Provisions on the lease term on a straight-line basis.balance sheet.
Income taxes, including deferred taxes
The tax expense represents the sum of the income tax currently payable and deferred income tax.
Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Current taxes associated with the repurchase of equity instruments are reported directly in equity.
A current tax liability for the current or prior period is measured at the amount expected to be paid to the tax authorities. Where the amount of the final tax liability is uncertain or where a position is challenged by a taxation authority, the liability recognised is the most likely outcome. Where a most likely outcome cannot be determined, a weighted average basis is applied.
Deferred income tax is the tax expected to be payable or recoverable on income tax losses available to carry forward and on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the assets may be utilised as they reverse. Such deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. Deferred tax assets and liabilities are not recognised from the initial recognition of other assets (other than in a business combination) and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on rates enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Santander UK group is able to control reversal of the temporary difference and it is probable that it will not reverse in the foreseeable future. The Santander UK group reviews the carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax relating to actuarial gains and losses on defined benefits is recognised in other comprehensive income. Deferred tax relating to fair value re-measurementsremeasurements of financial instruments accounted for at FVOCI and cash flow hedging instruments is charged or credited directly to other comprehensive income and is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash andnon-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks and short-term investments in securities.
Balances with central banks represent amounts held at the Bank of England and, at 31 December 2017, the US Federal Reserve as part of the Santander UK group’s liquidity management activities. In addition, it includes certain minimum cash balances held for regulatory purposes required to be maintained with the Bank of England.
Provisions
Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefits will be necessary to settle the obligation, and it can be reliably estimated.
Conduct provisions are made for the estimated cost of making redress payments with respect to the past sales of products, based onusing conclusions regardingsuch as the number of claims that will be received, including the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the anticipated cost of
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Notes to the financial statements |
restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main features.
When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.
Provisions include amounts in respect of irrevocable loan commitments. The provision isLoan commitments are measured as the present valueamount of the difference betweenloss allowance (determined in accordance with IFRS 9 as described in Credit risk section of the contractual cash flows based on the expected drawdowns and the cash flows that the Santander UK group expects to receive.Risk review).
Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.
Annual Report 2018 | Financial statements
Share capital
a) Share issue costs
Incremental external costs directly attributable to the issue of new shares are deducted from equity net of related income taxes.
b) Dividends
Dividends on ordinary shares are recognised in equity in the period in which the right to receive payment is established.
Accounting policies relating to comparatives – IAS 39
On 1 January 2018, the Santander UK group adopted IFRS 9, which replaced IAS 39. In accordance with the transition requirements of IFRS 9, comparatives were not restated. The principal accounting policies applied in accordance with IAS 39 for periods before the adoption of IFRS 9 are set out below:
FinancialClassification and measurement of financial assets and liabilities – IAS 39
Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander UK group determines the classification of its financial assets and liabilities at initial recognition. Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables andavailable-for-sale financial assets andheld-to-maturity investments. Financial assets that are classified at fair value through profit or loss, which have not been designated as such or are not accounted for as derivatives, or assets classified asavailable-for-sale, may subsequently in rare circumstances, be reclassified from the fair value through profit or loss category to the loans and receivables,available-for-sale orheld-to-maturity categories.assets. Financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition.
a) Financial assets and liabilities at fair value through profit or loss
Financial assets and financial liabilities are classified as FVTPL if they are either held for trading or otherwise designated at FVTPL on initial recognition. Financial assets and financial liabilities are classified as held for trading if they are derivatives or if they are acquired or incurred principally for the purpose of selling or repurchasing in the near-term, or form part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking. In certain circumstances, financial assets and financial liabilities other than those that are held for trading are designated at FVTPL where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on a different basis, where the assets or liabilities are managed and their performance evaluated on a fair value basis, or where a financial asset or financial liability contains one or more embedded derivatives which are not closely related to the host contract.
Financial assets and financial liabilities classified as FVTPL are initially recognised at fair value and transaction costs are taken directly to the income statement. Gains and losses arising from changes in fair value are included directly in the income statement except for gains and losses on financial liabilities designated at FVTPL relating to own credit which are presented in other comprehensive income.
Derivative financial instruments, trading assets and liabilities and financial assets and liabilities designated at fair value are classified as FVTPL.
b) Loans and receivables
Loans and receivables arenon-derivative financial assets with fixed or determinable payments, that are not quoted in an active market and which are not classified asavailable-for-sale or FVTPL. They arise when the Santander UK group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. Loans and receivables consist of loans and advances to banks, loans and advances to customers, and loans and receivables securities.
c)Available-for-sale financial assets
Available-for-sale financial assets arenon-derivative financial assets that are designated asavailable-for-sale and are not categorised into any of the other categories described. They are initially recognised at fair value including direct and incremental transaction costs, and subsequently held at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income until sale or until determined to be impaired when the cumulative gain or loss or impairment losses are transferred to the income statement. Where the financial asset is interest-bearing, interest is determined using the effective interest method. Income on investments in equity shares, debt instruments and other similar interests is recognised in the income statement as and when dividends are declared and interest is accrued. Impairment losses and foreign exchange translation differences on monetary items are recognised in the income statement.
d)Held-to-maturity investments
Held-to-maturity investments arenon-derivative financial assets with fixed or determinable payments and fixed maturities that the Santander UK group’s management has the positive intention and ability to hold to maturity other than those that meet the definition of loans and receivables or that the Santander UK group designates upon initial recognition as at fair value through profit or loss, oravailable-for-sale. They are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method, less any provision for impairment. A sale or reclassification of a more than insignificant amount ofheld-to-maturity investments would result in the reclassification of allheld-to-maturity investments toavailable-for-sale financial assets.
Impairment of financial assets – IAS 39
At each balance sheet date, the Santander UK group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. In the case of equity investments classified asavailable-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired.
a) AssetsFor assets carried at amortised cost,
For including loans and advances and loans and receivables securities, andheld-to-maturity investments, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan or
held-to-maturityForavailable-for-sale investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
Subsequent to the recognition of an impairment loss on a financial asset or a group of financial assets, interest income continues to be recognised on an effective interest rate basis, on the asset’s carrying value net of impairment provisions. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss.
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Impairment allowances are assessed individually for financial assets that are individually significant. Impairment allowances for portfolios of smaller balance homogenous loans such as most residential mortgages, personal loans and credit card balances that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis.
Individual assessment
For individually assessed assets, the Santander UK group measures the amount of the loss as the difference between the carrying amount of the asset and the present value of the estimated future cash flows from the asset discounted at the asset’s original effective interest rate.
The factors considered in determining whether a loan is individually significant for the purpose of assessingassesses impairment include the size of the loan, the number of loans in the portfolio, the importance of the individual loan relationship and how this is managed. Potential indicators of loss events which may be evidence of impairment for retail borrowers may include missed payments of capital and interest and borrowers notifying the Santander UK group of current or likely financial stress.
For corporate assets, when a specific observed impairment is established, the asset is transferred to the Corporate & Commercial Banking Restructuring & Recoveries team. As part of their impairment reviews, an assessment is undertaken of the expected future cash flows (including, where appropriate, cash flows through enforcement of any applicable security held) in relation to the relevant asset, discounted at the loan’s original effective interest rate. The result is compared to the current carrying value of the asset. Any shortfall evidenced as a result of such a review will be assessed and recorded as an observed specific loss allowance.
Collective assessment
In making a collective assessment for impairment, financial assets are grouped together according to their credit risk characteristics. These can include grouping by product,loan-to-value, brand, geography, type of customer and previous insolvency events. For each such portfolio orsub-segment of the portfolio, future cash flows are estimated through the use of historical loss experience. The historical loss experience is adjusted to include the effects of changes in current economic, behavioural and other conditions that cannot be successfully depicted solely from historical experience. The loss is discounted at the effective interest rate, except where portfolios meet the criteria for short-term receivables. The unwind of the discount over time is reported through interest and other similar income within the income statement, with an increase to the impairment loss allowances on the balance sheet. Loans for which evidence of potential loss have been specifically identified are grouped together for the purpose of calculating an allowance for observed losses. Loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an allowance for incurred but not observed (IBNO) losses. Such losses will only be individually identified in the future.
Observed impairment loss allowance
An impairment loss allowance for observed losses is established for all NPLs where it is increasingly probable that some of the capital or interest will not be repaid or recovered through enforcement of any applicable security. The allowance for observed losses is determined on a collective (or portfolio) basis for groups of loans with similar credit risk characteristics. For more on the definition of NPLs, see ‘Credit risk management – risk measurement and control’ in the Risk review.
For mortgages and other secured advances, the allowance for observed losses is calculated as the product of the account outstanding balance (exposure) at the reporting date, the estimated proportion that will be repossessed (the loss propensity) and the percentage of exposure which will result in a loss (the loss ratio). The loss propensities for the observed segment (i.e. where the loan is classified asnon-performing) represent the percentage that will ultimately be written off, or repossessed for secured advances. Loss propensities are based on recent historical experience, typically covering a period of no more than the most recent 12 months in the year under review. The loss ratio is based on actual cases which have been repossessed and sold using the most recent 12 month average data, segmented by LTV, and is then discounted using the effective interest rate.
IBNO impairment loss allowances
An allowance for IBNO losses is established for loans which are either:
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The impairment loss calculation resembles the one explained above for the observed segment except that for the IBNO segment, where the account is currently up to date, the loss propensity represents the percentage of such cases that are expected to miss a payment in the appropriate emergence period and which will ultimately be written off. Where the account is delinquent, the loss propensity represents the percentage of such cases that will ultimately be written off.
b) Loans and receivables securities andheld-to-maturity investments
Loans and receivables securities andheld-to-maturity investments are assessed individually for impairment. An impairment loss is incurred if there is objective evidence that a loss event has occurred since initial recognition of the assets that has an impact on the estimated future cash flows of the asset. Potential indicators of loss events include significant financial distress of the issuer and default or delinquency in interest and principal payments (breach of contractual terms).
Loans and receivables securities andheld-to-maturity investments are monitored for potential impairment through a detailed expected cash flow analysis, where appropriate, taking into account the structure and underlying assets of each individual security. Once specific events give rise to a reasonable expectation that future anticipated cash flows may not be received, the asset originating these doubtful cash flows will be deemed to be impaired with the impairment loss being measured as the difference between the expected future cash flows discounted at the original effective interest rate and the carrying value of the asset.
c) Assets classified asavailable-for-sale
The Santander UK group assesses at each balance sheet date, whether there is objective evidence that anavailable-for-sale financial asset is impaired. The assessmentwhich involves reviewing the financial circumstances (including creditworthiness) and future prospects of the issuer, assessing the future cash flows expected to be realised and, in the case of equity shares, considering whether there has been a significant or prolonged decline in the fair value of the security below its cost. The cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously reported in the income statement and is removed from other comprehensive income and recognised in the income statement. For impaired debt instruments, further impairment losses
IAS 17
On 1 January 2019, Santander UK group adopted IFRS 16, which replaced IAS 17. Having chosen to apply the modified retrospective approach, in accordance with the transition requirements of IFRS 16, comparatives were not restated. The accounting policies for the Santander UK group as lessee applied in accordance with IAS 17 for periods before the adoption of IFRS 16 are recognised where there has been a further negative impact on expected future cash flows.set out below:
If, in a subsequent period,The Santander UK group as lessee – IAS 17
The Santander UK group enters into operating leases for the fair valuerental of a debt instrument classified asavailable-for-sale increases and the increase is dueequipment or real estate. Payments made under such leases are charged to an event occurring after the impairment loss was recognised in the income statement (with objective evidenceon a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to support this),be made to the impairment losslessor by way of penalty is reversed throughrecognised as an expense in the income statement.period in which termination takes place. If inthe lease agreement transfers the risk and rewards of the asset, the lease is recorded as a subsequent period,finance lease and the related asset is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease payments or fair value and depreciated over the lower of an equity instrument classifiedthe estimated useful life and the life of the lease. The corresponding rental obligations are recorded asavailable-for-sale increases, all such increases in the fair value are treated borrowings. The aggregate benefit of incentives, if any, is recognised as a revaluation, and are recognised in other comprehensive income. Impairment losses recognisedreduction of rental expense over the lease term on equity instruments are not reversed through the income statement.a straight-line basis.
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Annual Report 2018 2019| Financial statements
CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATES
The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, 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 the course of preparing the Consolidated Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, conduct remediation and pensions as set out below.
The following accounting estimates, as well as the judgements inherent within them, are considered important to the portrayal of the Santander UK group’s financial results and financial condition because: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates, and (ii) any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group’s future financial results and financial condition.
In calculating each accounting estimate, a range of outcomes was calculated based principally on management’s conclusions regarding the input assumptions relative to historical experience. The actual estimates were based on what management concluded to be the most probable assumptions within the range of reasonably possible assumptions.
a) Credit impairment allowance
The application of the ECL impairment methodology for calculating credit impairment allowances is highly susceptible to change from period to period. The methodology requires management to make a number of judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group’s future financial results and financial condition.
Key areas of judgement in accounting estimates
The key judgements made by management in applying the ECL impairment methodology are set out below.
| – | Definition of default |
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| – | Probability weights |
| – | SICR |
| – | Post model adjustments. |
For more on each of these key judgements, see the ‘Credit risk – Santander UK group level – credit risk management’ section of the Risk review.
Sensitivity of ECL allowance
At 31 December 2018,2019, the probability-weighted ECL allowance totalled £807m,£863m (2018: £807m), of which £789m£813m (2018: £789m) related to exposures in Retail Banking, Corporate & Commercial Banking and Corporate Centre, and £18m£50m (2018: £18m) related to exposures in Corporate & Investment Banking. 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.
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| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
Probability weights
The amounts shown in the tables below illustrate the ECL allowances that would have arisen had management applied a 100% weighting to each economic scenario. The allowances were 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.
As described in more detail in the ‘Santander UK group level – Credit risk management’ section in the Risk review, our CIB segment uses three forward-looking economic scenarios, whereas our other segments use five scenarios. In order to present a consolidated view in a single table, the data for CIB in the table below presents the CIB Upside scenario in the Upside 2 column, the CIB downside scenario in the Downside 2 column, and interpolated data for CIB in the Upside 1 and Downside 1 columns.
| Retail Banking, Corporate & Commercial Banking and Corporate Centre | Upside 2 £m | Upside 1 £m | Base case £m | Downside 1 £m | Downside 2 £m | |||||||||||||||
ECL
|
| 554
|
|
| 596
|
|
| 648
|
|
| 843
|
|
| 1,930
|
| |||||
| Corporate & Investment Banking(1) | Upside £m | Base case £m | Downside £m | |||||||||||||||||
ECL | 8 | 17 | 27 | |||||||||||||||||
| Weighted | Upside 2 | Upside 1 | Base case | Downside 1 | Downside 2 | |||||||||||||||||||
| 2019 | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
Exposure | ||||||||||||||||||||||||
Retail Banking | 206,479 | 206,479 | 206,479 | 206,479 | 206,479 | 206,479 | ||||||||||||||||||
– of which: mortgages | 178,788 | 178,788 | 178,788 | 178,788 | 178,788 | 178,788 | ||||||||||||||||||
CCB | 21,855 | 21,855 | 21,855 | 21,855 | 21,855 | 21,855 | ||||||||||||||||||
CIB | 13,456 | 13,456 | 13,456 | 13,456 | 13,456 | 13,456 | ||||||||||||||||||
Corporate Centre | 74,532 | 74,532 | 74,532 | 74,532 | 74,532 | 74,532 | ||||||||||||||||||
ECL | ||||||||||||||||||||||||
Retail Banking | 591 | 456 | 467 | 485 | 570 | 1,148 | ||||||||||||||||||
– of which: mortgages | 218 | 122 | 127 | 137 | 196 | 660 | ||||||||||||||||||
CCB | 210 | 156 | 169 | 183 | 219 | 317 | ||||||||||||||||||
CIB | 50 | 19 | 34 | 48 | 53 | 58 | ||||||||||||||||||
Corporate Centre | 12 | 9 | 10 | 10 | 13 | 18 | ||||||||||||||||||
| % | % | % | % | % | % | |||||||||||||||||||
Proportion of assets in Stage 2 | ||||||||||||||||||||||||
Retail Banking | 4.7 | 3.2 | 3.3 | 3.3 | 3.7 | 8.3 | ||||||||||||||||||
– of which: mortgages | 4.6 | 3.1 | 3.1 | 3.1 | 3.6 | 8.7 | ||||||||||||||||||
CCB | 10.0 | 7.4 | 7.4 | 7.4 | 8.5 | 16.3 | ||||||||||||||||||
CIB | 2.9 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | ||||||||||||||||||
Corporate Centre | 0.2 | 0.1 | 0.1 | 0.1 | 0.2 | 0.3 | ||||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
Exposure | ||||||||||||||||||||||||
Retail Banking | 195,805 | 195,805 | 195,805 | 195,805 | 195,805 | 195,805 | ||||||||||||||||||
– of which: mortgages | 169,170 | 169,170 | 169,170 | 169,170 | 169,170 | 169,170 | ||||||||||||||||||
CCB | 22,835 | 22,835 | 22,835 | 22,835 | 22,835 | 22,835 | ||||||||||||||||||
CIB | 17,618 | 17,618 | 17,618 | 17,618 | 17,618 | 17,618 | ||||||||||||||||||
Corporate Centre | 74,690 | 74,690 | 74,690 | 74,690 | 74,690 | 74,690 | ||||||||||||||||||
ECL | ||||||||||||||||||||||||
Retail Banking | 594 | 431 | 452 | 480 | 637 | 1,607 | ||||||||||||||||||
– of which: mortgages | 237 | 121 | 131 | 137 | 273 | 1,105 | ||||||||||||||||||
CCB | 182 | 115 | 135 | 157 | 192 | 302 | ||||||||||||||||||
CIB | 18 | 8 | 12 | 17 | 22 | 27 | ||||||||||||||||||
Corporate Centre | 13 | 8 | 9 | 11 | 13 | 21 | ||||||||||||||||||
| % | % | % | % | % | % | |||||||||||||||||||
Proportion of assets in Stage 2 | ||||||||||||||||||||||||
Retail Banking | 5.4 | 3.4 | 3.5 | 3.7 | 4.7 | 15.1 | ||||||||||||||||||
– of which: mortgages | 5.6 | 3.4 | 3.6 | 3.7 | 4.9 | 16.5 | ||||||||||||||||||
CCB | 5.4 | 3.0 | 3.0 | 3.1 | 4.3 | 10.7 | ||||||||||||||||||
CIB | 0.8 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | ||||||||||||||||||
Corporate Centre | 0.2 | 0.1 | 0.1 | 0.1 | 0.2 | 0.4 | ||||||||||||||||||
Changes to Stage 3 instruments are excluded from the disclosure because they are not specifically sensitive to changes in macroeconomic assumptions.
We have incorporated our post model adjustments into the sensitivity analysis.
| ||
| Santander UK Group | 197 |
Annual Report 2019| Financial statements
HPI
Given the relative size of our residential mortgage portfolio, management considers that changes in HPI assumptions underpinning the calculation of the ECL allowance for residential mortgages of £237m£218m at 31 December 20182019 (2018: £237m) would have the most significant impact on the ECL allowance. The table below shows the impact on profit before tax of applying an immediate and permanent house price increase / decrease to our base case economic scenario, and assumes no changes to the staging allocation of exposures:
| Increase/decrease in house prices | ||||||||||||||||
+20%
| +10% £m | -10% £m | -20% £m | |||||||||||||
Increase/(decrease) in profit before tax | 20 | 12 | (20 | ) | (52 | ) | ||||||||||
|
| Increase/decrease in house prices | ||||||||||||||||
| +20% | +10% | -10% | -20% | |||||||||||||
| Increase/(decrease) in profit before tax | £m | £m | £m | £m | ||||||||||||
31 December 2019 | 16 | 10 | (16 | ) | (43 | ) | ||||||||||
31 December 2018 | 20 | 12 | (20 | ) | (52 | ) | ||||||||||
b) Provisions and contingent liabilities
Significant judgment may be required when accounting for provisions, including in determining whether a present obligation exists and in estimating the probability and amount of any outflows. These judgments 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.
The main areas of judgement relating to provisions and contingent liabilities are set out below. For more details, see Notes 27 and 29.
(i) PPI conduct remediation
The most critical factor in determining the level of PPI provision is the volume of claims that fall in scope for Santander UK. The uphold rate is informed by historical experience and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population. In setting the provision, management estimated the total claims that were likely to be received to the end of thetime-bar period in August 2019.
Key areas of judgement in accounting estimates
The provision mainly represents management’s best estimate of Santander UK’s future liability in respect of misselling of PPI policies and Plevin complaints. It requires significant judgement by management in determining appropriate assumptions, which includealthough the level of judgement has reduced with the passing of the FCA deadline of
29 August 2019 for PPI complaints. The key assumption in calculating the provision was the estimated number of complaints expected tothat would be received of those, the number that will be upheld and redressed (reflecting legal and regulatory responsibilities, including the determination of liability and the effect of the time bar), as well as the redress costs for each of the different populationsin respect of customers identified. These are described in more detail in the ‘PPI assumptions’ section in Note 30.with successful information requests that were still eligible to make a complaint.
Sensitivity of PPI conduct remediation provision
We made no additional provision charges for PPI conduct remediation relating to past activities and products sold recognised in 2018 (2017: £109m, 2016: £144m). The balance sheet provision amounted to £246m (2017: £356m, 2016: £457m). Detailed disclosures on the provision for PPI conduct remediation can be found in Note 30.
Had management used different assumptions, a larger or smaller provision charge would have resulted that could have had a material impact on the Santander UK group’s reported profit before tax. Detailed disclosures on the assumptions used, including sensitivities,
More details can be found in the PPI section of Note 30.27.
(ii) Other
As set outIncluded in Regulatory and other provisions in Note 30,27 is an amount in respect of £58m (2017: £nil) was charged in 2018 and arose from a systems-related historical issue identified by Santander UK,management’s best estimate of liability relating to compliance with certain requirements of the Consumer Credit Act (CCA). This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2018 of potential costsAct. It also includes an amount in respect of management’s best estimate of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints. For both items, Note 29 provides disclosure relating to ongoing factual issues and reviews that could impact the identified issue. However, as detailedtiming and amount of any outflows.
In addition, Note 29 includes disclosure relating to an investigation in Note 32, these reviewsrelation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited in German dividend tax arbitrage transactions. It also includes disclosure relating to certain leases in which current and former Santander UK group members were the related analysislessor that are not yet complete, such that the approach and timing to any remediation has not yet been finalised, although it is expected to commencecurrently under review by HMRC in 2019.connection with claims for tax allowances.
c) Pensions
The Santander UK group operates a number of defined benefit pension schemes as described in Note 3128 and estimates their position as described in the accounting policy ‘Pensions and other post retirement benefits’.
Key areas of judgement in accounting estimates
Accounting for defined benefit pension schemes requires management to make assumptions principally about the discount rate adopted, but also about price inflation, pension increases, life expectancy and earnings growth. Management’s assumptions are based on past experience and current economic trends, which are not necessarily an indication of future experience. These are described in more detail in the ‘Actuarial assumptions’ section in Note 31.28.
Sensitivity of defined benefit pension scheme estimates
The defined benefit pension schemes which were in a net asset position at 31 December 2018 had a surplus of £842m (2017: £449m) and the defined benefit pension schemes which were in a net liability position at 31 December 2018 had a deficit of £115m (2017: £286m).
Had management used different assumptions, a larger or smaller pension remeasurement gain or loss would have resulted that could have had a material impact on the Santander UK group’s reported financial position. Detailed disclosures on the actuarial assumption sensitivities of the schemes can be found in the ‘Actuarial assumption sensitivities’ section in Note 31.28.
| 198 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
2. SEGMENTS
Santander UK’s principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of the following segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies:
| – | Retail Banking offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with an annual turnover up to £6.5m, and Santander Consumer Finance, predominantly a vehicle finance business. |
| – | Corporate & Commercial Banking |
| – | Corporate & Investment Banking |
| – | Corporate Centre mainly includes the treasury,non-core corporate and legacy portfolios, |
The segmental data below is presented in a manner consistent with the internal reporting to the committee which is responsible for allocating resources and assessing performance of the segments and has been identified as the chief operating decision maker. The segmental data is prepared on a statutory basis of accounting, in line with the accounting policies set out in Note 1. Transactions between segments are on normal commercial terms and conditions. Internal charges and internal UK transfer pricing adjustments are reflected in the results of each segment. Revenue sharing agreements are used to allocate external customer revenues to a segment on a reasonable basis. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on Santander UK’s cost of wholesale funding. Interest income and interest expense have not been reported separately. The majority of segment revenues are interest income in nature and net interest income is relied on primarily to assess segment performance and to make decisions on the allocation of segment resources.
The segmental basis of presentation in this Annual Report has beenwas changed, and the prior periods restated, to report our Jersey and Isle of Man branchesshort term markets business in Corporate Centre rather than in Retail Banking as in previous years, as a result of theirCorporate & Investment Banking. This reflects the run down or transfer from Santander UK plc to ANTS in December 2018. Prior periods have not been restated for the changes in our statutory perimeter in the third quarter of 2018, following the ring-fence transfers to Banco Santander London Branch of the prohibited part of the business in 2018, as described in Note 43.part of the transition to our ring-fenced model, with the remaining permitted business forming part of our liquidity risk management function.
Results by segment
| 2018 | Retail Banking £m | Corporate & £m | Corporate & £m | Corporate Centre £m | Total £m | |||||||||||||||||||||||||||||||||||
Net interest income | 3,126 | 403 | 69 | 8 | 3,606 | |||||||||||||||||||||||||||||||||||
| Corporate & | Corporate & | |||||||||||||||||||||||||||||||||||||||
| Retail | Commercial | Investment | Corporate | |||||||||||||||||||||||||||||||||||||
| Banking | Banking | Banking | Centre | Total | ||||||||||||||||||||||||||||||||||||
| 2019 | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||
Net interest income/(expense) | 2,876 | 359 | 63 | (3 | ) | 3,295 | ||||||||||||||||||||||||||||||||||
Non-interest income/(expense) | 638 | 82 | 272 | (55 | ) | 937 | 698 | 78 | 112 | (13 | ) | 875 | ||||||||||||||||||||||||||||
Total operating income/(expense) | 3,764 | 485 | 341 | (47 | ) | 4,543 | 3,574 | 437 | 175 | (16 | ) | 4,170 | ||||||||||||||||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | (1,929 | ) | (258 | ) | (262 | ) | (114 | ) | (2,563 | ) | (1,994 | ) | (264 | ) | (171 | ) | (97 | ) | (2,526 | ) | ||||||||||||||||||||
Credit impairment (losses)/releases | (124 | ) | (23 | ) | (14 | ) | 8 | (153 | ) | |||||||||||||||||||||||||||||||
Credit impairment losses | (160 | ) | (37 | ) | (22 | ) | (1 | ) | (220 | ) | ||||||||||||||||||||||||||||||
Provisions for other liabilities and charges | (230 | ) | (14 | ) | (8 | ) | (8 | ) | (260 | ) | (292 | ) | (20 | ) | (17 | ) | (114 | ) | (443 | ) | ||||||||||||||||||||
Total operating credit impairment losses, provisions and (charges)/releases(1) | (354 | ) | (37 | ) | (22 | ) | – | (413 | ) | |||||||||||||||||||||||||||||||
Total operating credit impairment losses, provisions and charges(1) | (452 | ) | (57 | ) | (39 | ) | (115 | ) | (663 | ) | ||||||||||||||||||||||||||||||
Profit/(loss) before tax | 1,481 | 190 | 57 | (161 | ) | 1,567 | 1,128 | 116 | (35 | ) | (228 | ) | 981 | |||||||||||||||||||||||||||
Revenue from external customers | 4,421 | 638 | 386 | (902 | ) | 4,543 | 4,311 | 530 | 181 | (852 | ) | 4,170 | ||||||||||||||||||||||||||||
Inter-segment revenue | (657 | ) | (153 | ) | (45 | ) | 855 | – | (737 | ) | (93 | ) | (6 | ) | 836 | – | ||||||||||||||||||||||||
Total operating income/(expense) | 3,764 | 485 | 341 | (47 | ) | 4,543 | 3,574 | 437 | 175 | (16 | ) | 4,170 | ||||||||||||||||||||||||||||
Revenue from external customers includes the following fee and commission income disaggregated by income | ||||||||||||||||||||||||||||||||||||||||
– Current account and debit card fees | 697 | 27 | 29 | – | 753 | 702 | 27 | 29 | – | 758 | ||||||||||||||||||||||||||||||
– Insurance, protection and investments | 105 | – | – | – | 105 | 76 | – | – | 1 | 77 | ||||||||||||||||||||||||||||||
– Credit cards | 85 | – | – | – | 85 | 86 | – | – | – | 86 | ||||||||||||||||||||||||||||||
–Non-banking and other fees(3) | 75 | 62 | 87 | 3 | 227 | 61 | 56 | 71 | 8 | 196 | ||||||||||||||||||||||||||||||
Total fee and commission income | 962 | 89 | 116 | 3 | 1,170 | 925 | 83 | 100 | 9 | 1,117 | ||||||||||||||||||||||||||||||
Fee and commission expense | (382 | ) | (25 | ) | (14 | ) | – | (421 | ) | (373 | ) | (23 | ) | (17 | ) | (15 | ) | (428 | ) | |||||||||||||||||||||
Net fee and commission income | 580 | 64 | 102 | 3 | 749 | |||||||||||||||||||||||||||||||||||
Net fee and commission income/(expense) | 552 | 60 | 83 | (6 | ) | 689 | ||||||||||||||||||||||||||||||||||
Customer loans | 172,747 | 17,702 | 4,613 | 4,807 | 199,869 | 180,398 | 16,297 | 4,114 | 4,489 | 205,298 | ||||||||||||||||||||||||||||||
Total assets(4) | 201,261 | 17,702 | 33,657 | 36,761 | 289,381 | 187,556 | 16,297 | 4,727 | 79,908 | 288,488 | ||||||||||||||||||||||||||||||
Customer deposits | 142,065 | 17,606 | 4,853 | 7,607 | 172,131 | 145,050 | 18,234 | 6,101 | 8,437 | 177,822 | ||||||||||||||||||||||||||||||
Total liabilities | 142,839 | 17,634 | 14,222 | 98,466 | 273,161 | 145,917 | 18,260 | 6,500 | 101,470 | 272,147 | ||||||||||||||||||||||||||||||
Average number of staff | 20,694 | 1,732 | 1,108 | 114 | 23,648 | 20,832 | 1,796 | 901 | 177 | 23,706 | ||||||||||||||||||||||||||||||
| (1) | Credit impairment losses for 2018 and later are calculated on an IFRS 9 basis and for 2017 |
| (2) | The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments. |
| (3) | Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance. |
| (4) | Includes customer loans, net of credit impairment loss allowances. |
| Santander UK Group Holdings plc | 199 |
Annual Report 2019| Financial statements |
| 2017 | Retail Banking(5) £m | Corporate & £m | Corporate & £m | Corporate Centre(5) £m | Total £m | |||||||||||||||
Net interest income | 3,270 | 391 | 74 | 68 | 3,803 | |||||||||||||||
Non-interest income | 615 | 74 | 364 | 56 | 1,109 | |||||||||||||||
Total operating income | 3,885 | 465 | 438 | 124 | 4,912 | |||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | (1,856 | ) | (223 | ) | (304 | ) | (119 | ) | (2,502 | ) | ||||||||||
Credit impairment (losses)/releases(1) | (36 | ) | (13 | ) | (174 | ) | 20 | (203 | ) | |||||||||||
Provisions for other liabilities and charges | (342 | ) | (55 | ) | (11 | ) | 15 | (393 | ) | |||||||||||
Total operating credit impairment losses, provisions and (charges)/releases | (378 | ) | (68 | ) | (185 | ) | 35 | (596 | ) | |||||||||||
Profit/(loss) before tax | 1,651 | 174 | (51 | ) | 40 | 1,814 | ||||||||||||||
Revenue from external customers | 4,534 | 639 | 506 | (767 | ) | 4,912 | ||||||||||||||
Inter-segment revenue | (649 | ) | (174 | ) | (68 | ) | 891 | – | ||||||||||||
Total operating income | 3,885 | 465 | 438 | 124 | 4,912 | |||||||||||||||
Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | ||||||||||||||||||||
– Current account and debit card fees | 737 | 27 | 27 | – | 791 | |||||||||||||||
– Insurance, protection and investments | 100 | – | – | – | 100 | |||||||||||||||
– Credit cards | 92 | – | – | – | 92 | |||||||||||||||
–Non-banking and other fees(3) | 45 | 63 | 123 | 8 | 239 | |||||||||||||||
Total fee and commission income | 974 | 90 | 150 | 8 | 1,222 | |||||||||||||||
Fee and commission expense | (367 | ) | (31 | ) | (17 | ) | – | (415 | ) | |||||||||||
Net fee and commission income | 607 | 59 | 133 | 8 | 807 | |||||||||||||||
Customer loans | 168,729 | 19,391 | 6,037 | 6,167 | 200,324 | |||||||||||||||
Total assets(4) | 174,524 | 19,391 | 51,078 | 69,767 | 314,760 | |||||||||||||||
Customer deposits | 143,834 | 17,760 | 4,546 | 9,781 | 175,921 | |||||||||||||||
Total liabilities | 150,847 | 18,697 | 45,603 | 83,411 | 298,558 | |||||||||||||||
Average number of staff | 17,194 | 1,240 | 1,006 | 119 | 19,559 | |||||||||||||||
| 2016 | ||||||||||||||||||||
Net interest income | 3,117 | 380 | 73 | 12 | 3,582 | |||||||||||||||
Non-interest income | 559 | 76 | 312 | 266 | 1,213 | |||||||||||||||
Total operating income | 3,676 | 456 | 385 | 278 | 4,795 | |||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | (1,785 | ) | (215 | ) | (281 | ) | (136 | ) | (2,417 | ) | ||||||||||
Credit impairment (losses)/releases(1) | (21 | ) | (29 | ) | (21 | ) | 4 | (67 | ) | |||||||||||
Provisions for other liabilities and charges | (338 | ) | (26 | ) | (11 | ) | (22 | ) | (397 | ) | ||||||||||
Total operating credit impairment losses, provisions and charges | (359 | ) | (55 | ) | (32 | ) | (18 | ) | (464 | ) | ||||||||||
Profit before tax | 1,532 | 186 | 72 | 124 | 1,914 | |||||||||||||||
Revenue from external customers | 4,387 | 651 | 474 | (717 | ) | 4,795 | ||||||||||||||
Inter-segment revenue | (711 | ) | (195 | ) | (89 | ) | 995 | – | ||||||||||||
Total operating income | 3,676 | 456 | 385 | 278 | 4,795 | |||||||||||||||
Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | ||||||||||||||||||||
– Current account and debit card fees | 697 | 27 | 23 | – | 747 | |||||||||||||||
– Insurance, protection and investments | 94 | – | – | – | 94 | |||||||||||||||
– Credit cards | 95 | – | – | – | 95 | |||||||||||||||
–Non-banking and other fees(3) | 53 | 57 | 132 | 10 | 252 | |||||||||||||||
Total fee and commission income | 939 | 84 | 155 | 10 | 1,188 | |||||||||||||||
Fee and commission expense | (369 | ) | (31 | ) | (17 | ) | (1 | ) | (418 | ) | ||||||||||
Net fee and commission income | 570 | 53 | 138 | 9 | 770 | |||||||||||||||
Customer loans | 168,389 | 19,382 | 5,659 | 6,726 | 200,156 | |||||||||||||||
Total assets(4) | 175,100 | 19,381 | 39,777 | 68,252 | 302,510 | |||||||||||||||
Customer deposits | 143,996 | 16,082 | 4,054 | 8,219 | 172,351 | |||||||||||||||
Total liabilities | 149,793 | 17,203 | 36,506 | 83,555 | 287,057 | |||||||||||||||
Average number of staff | 17,424 | 1,435 | 916 | 88 | 19,863 | |||||||||||||||
| Corporate & | Corporate & | |||||||||||||||||||
| Retail | Commercial | Investment | Corporate | |||||||||||||||||
| Banking | Banking | Banking(5) | Centre(5) | Total | ||||||||||||||||
| 2018 | £m | £m | £m | £m | £m | |||||||||||||||
Net interest income | 3,126 | 403 | 69 | 8 | 3,606 | |||||||||||||||
Non-interest income | 638 | 82 | 183 | 34 | 937 | |||||||||||||||
Total operating income | 3,764 | 485 | 252 | 42 | 4,543 | |||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | (1,929 | ) | (258 | ) | (250 | ) | (126 | ) | (2,563 | ) | ||||||||||
Credit impairment (losses)/releases | (124 | ) | (23 | ) | (14 | ) | 8 | (153 | ) | |||||||||||
Provisions for other liabilities and charges | (230 | ) | (14 | ) | (8 | ) | (8 | ) | (260 | ) | ||||||||||
Total operating credit impairment losses, provisions and (charges)/releases(1) | (354 | ) | (37 | ) | (22 | ) | – | (413 | ) | |||||||||||
Profit/(loss) before tax | 1,481 | 190 | (20 | ) | (84 | ) | 1,567 | |||||||||||||
Revenue from external customers | 4,421 | 638 | 297 | (813 | ) | 4,543 | ||||||||||||||
Inter-segment revenue | (657 | ) | (153 | ) | (45 | ) | 855 | – | ||||||||||||
Total operating income | 3,764 | 485 | 252 | 42 | 4,543 | |||||||||||||||
Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | ||||||||||||||||||||
– Current account and debit card fees | 697 | 27 | 29 | – | 753 | |||||||||||||||
– Insurance, protection and investments | 105 | – | – | – | 105 | |||||||||||||||
– Credit cards | 85 | – | – | – | 85 | |||||||||||||||
–Non-banking and other fees(3) | 75 | 62 | 87 | 3 | 227 | |||||||||||||||
Total fee and commission income | 962 | 89 | 116 | 3 | 1,170 | |||||||||||||||
Fee and commission expense | (382 | ) | (25 | ) | (14 | ) | – | (421 | ) | |||||||||||
Net fee and commission income | 580 | 64 | 102 | 3 | 749 | |||||||||||||||
Customer loans | 172,747 | 17,702 | 4,613 | 4,807 | 199,869 | |||||||||||||||
Total assets(4) | 179,572 | 17,702 | 8,607 | 83,500 | 289,381 | |||||||||||||||
Customer deposits | 142,065 | 17,606 | 4,853 | 7,607 | 172,131 | |||||||||||||||
Total liabilities | 142,839 | 17,634 | 8,885 | 103,803 | 273,161 | |||||||||||||||
Average number of staff | 21,215 | 1,732 | 1,083 | 180 | 24,210 | |||||||||||||||
| 2017 | ||||||||||||||||||||
Net interest income | 3,270 | 391 | 67 | 75 | 3,803 | |||||||||||||||
Non-interest income | 615 | 74 | 261 | 159 | 1,109 | |||||||||||||||
Total operating income | 3,885 | 465 | 328 | 234 | 4,912 | |||||||||||||||
Operating expenses before credit impairment losses, provisions and charges | (1,856 | ) | (223 | ) | (292 | ) | (131 | ) | (2,502 | ) | ||||||||||
Credit impairment (losses)/ releases(1) | (36 | ) | (13 | ) | (174 | ) | 20 | (203 | ) | |||||||||||
Provisions for other liabilities and charges | (342 | ) | (55 | ) | (11 | ) | 15 | (393 | ) | |||||||||||
Total operating credit impairment losses, provisions and (charges)/releases | (378 | ) | (68 | ) | (185 | ) | 35 | (596 | ) | |||||||||||
Profit/(loss) before tax | 1,651 | 174 | (149 | ) | 138 | 1,814 | ||||||||||||||
Revenue from external customers | 4,534 | 639 | 396 | (657 | ) | 4,912 | ||||||||||||||
Inter-segment revenue | (649 | ) | (174 | ) | (68 | ) | 891 | – | ||||||||||||
Total operating income | 3,885 | 465 | 328 | 234 | 4,912 | |||||||||||||||
Revenue from external customers includes the following fee and commission income disaggregated by income type:(2) | ||||||||||||||||||||
– Current account and debit card fees | 737 | 27 | 27 | – | 791 | |||||||||||||||
– Insurance, protection and investments | 100 | – | – | – | 100 | |||||||||||||||
– Credit cards | 92 | – | – | – | 92 | |||||||||||||||
–Non-banking and other fees(3) | 45 | 63 | 123 | 8 | 239 | |||||||||||||||
Total fee and commission income | 974 | 90 | 150 | 8 | 1,222 | |||||||||||||||
Fee and commission expense | (367 | ) | (31 | ) | (17 | ) | – | (415 | ) | |||||||||||
Net fee and commission income | 607 | 59 | 133 | 8 | 807 | |||||||||||||||
Customer loans | 168,729 | 19,391 | 6,037 | 6,167 | 200,324 | |||||||||||||||
Total assets(4) | 174,524 | 19,391 | 25,368 | 95,477 | 314,760 | |||||||||||||||
Customer deposits | 143,834 | 17,760 | 4,546 | 9,781 | 175,921 | |||||||||||||||
Total liabilities | 150,847 | 18,697 | 24,388 | 104,626 | 298,558 | |||||||||||||||
Average number of staff | 17,194 | 1,240 | 1,006 | 119 | 19,559 | |||||||||||||||
| (1) | Credit impairment losses for 2018 and later are calculated on an IFRS 9 basis and for 2017 |
| (2) | The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments. |
| (3) | Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance. |
| (4) | Includes customer loans, net of credit impairment loss allowances. |
| (5) | There-segmentation |
| 200 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
3. NET INTEREST INCOME
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Interest and similar income: | ||||||||||||||||||||||||
Loans and advances to customers | 5,459 | 5,494 | 6,198 | 5,237 | 5,459 | 5,494 | ||||||||||||||||||
Loans and advances to banks | 207 | 164 | 112 | 182 | 207 | 164 | ||||||||||||||||||
Reverse repurchase agreements – non trading | 124 | 20 | 15 | 244 | 124 | 20 | ||||||||||||||||||
Other | 282 | 227 | 142 | 309 | 282 | 227 | ||||||||||||||||||
Total interest and similar income(1) | 6,072 | 5,905 | 6,467 | 5,972 | 6,072 | 5,905 | ||||||||||||||||||
Interest expense and similar charges: | ||||||||||||||||||||||||
Deposits by customers | (1,224 | ) | (1,183 | ) | (1,809 | ) | (1,331 | ) | (1,224 | ) | (1,183 | ) | ||||||||||||
Deposits by banks | (120 | ) | (35 | ) | (18 | ) | (135 | ) | (120 | ) | (35 | ) | ||||||||||||
Repurchase agreements – non trading | (37 | ) | (5 | ) | (38 | ) | (126 | ) | (37 | ) | (5 | ) | ||||||||||||
Debt securities in issue | (936 | ) | (737 | ) | (853 | ) | (938 | ) | (936 | ) | (737 | ) | ||||||||||||
Subordinated liabilities | (141 | ) | (134 | ) | (143 | ) | (137 | ) | (141 | ) | (134 | ) | ||||||||||||
Other | (8 | ) | (8 | ) | (24 | ) | (10 | ) | (8 | ) | (8 | ) | ||||||||||||
Total interest expense and similar charges(2) | (2,466 | ) | (2,102 | ) | (2,885 | ) | (2,677 | ) | (2,466 | ) | (2,102 | ) | ||||||||||||
Net interest income | 3,606 | 3,803 | 3,582 | 3,295 | 3,606 | 3,803 | ||||||||||||||||||
| (1) | This includes |
| (2) | This includes |
In 2017, interest and similar income included £66m (2016: £79m) on impaired loans.
4. NET FEE AND COMMISSION INCOME
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Fee and commission income: | ||||||||||||||||||||||||
Current account and debit card fees | 753 | 791 | 747 | 758 | 753 | 791 | ||||||||||||||||||
Insurance, protection and investments | 105 | 100 | 94 | 77 | 105 | 100 | ||||||||||||||||||
Credit cards | 85 | 92 | 95 | 86 | 85 | 92 | ||||||||||||||||||
Non-banking and other fees(1) | 227 | 239 | 252 | 196 | 227 | 239 | ||||||||||||||||||
Total fee and commission income | 1,170 | 1,222 | 1,188 | 1,117 | 1,170 | 1,222 | ||||||||||||||||||
Total fee and commission expense | (421 | ) | (415 | ) | (418 | ) | (428 | ) | (421 | ) | (415 | ) | ||||||||||||
Net fee and commission income | 749 | 807 | 770 | 689 | 749 | 807 | ||||||||||||||||||
| (1) | Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance. |
5. NET TRADING AND OTHER INCOME
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Net trading and funding of other items by the trading book | 263 | 205 | 75 | (48 | ) | 263 | 205 | |||||||||||||||||
Net (losses)/gains on other financial assets at fair value through profit or loss | (18 | ) | 80 | 253 | ||||||||||||||||||||
Net (losses)/gains on other financial liabilities at fair value through profit or loss | (44 | ) | (97 | ) | 28 | |||||||||||||||||||
Net losses on derivatives managed with assets/liabilities held at fair value through profit or loss | (128 | ) | (17 | ) | (135 | ) | ||||||||||||||||||
Net gains/(losses) on other financial assets at fair value through profit or loss | 103 | (18 | ) | 80 | ||||||||||||||||||||
Net losses on other financial liabilities at fair value through profit or loss | (83 | ) | (44 | ) | (97 | ) | ||||||||||||||||||
Net gains/(losses) on derivatives managed with assets/liabilities held at fair value through profit or loss | 29 | (128 | ) | (17 | ) | |||||||||||||||||||
Hedge ineffectiveness | 34 | 5 | 28 | 8 | 34 | 5 | ||||||||||||||||||
Net profit on sale ofavailable-for-sale assets | 54 | 115 | 54 | |||||||||||||||||||||
Net profit on sale of financial assets at fair value through other comprehensive income | 19 | 15 | 19 | |||||||||||||||||||||
Net income from operating lease assets | 86 | 44 | 35 | |||||||||||||||||||||
Income from operating lease assets | 124 | 86 | 44 | |||||||||||||||||||||
Other | (24 | ) | 28 | 44 | 38 | (24 | ) | 28 | ||||||||||||||||
| 188 | 302 | 443 | 186 | 188 | 302 | |||||||||||||||||||
Following the implementation of our ring-fencing plans in 2018, assets and liabilities held at fair value through profit or loss, including derivatives, are predominantly used to provide customers with risk management solutions, and to manage and hedge the Santander UK group’s own risks, and do not give rise to significant overall net gains/(losses) in the income statement.
‘Net trading and funding of other items by the trading book’ includes fair value losses of £42m (2018: gains of £22m, (2017:2017: losses of £27m, 2016: losses of £50m)£27m) on embedded derivatives bifurcated from certain equity index-linked deposits, as described in the derivatives accounting policy in Note 1. The embedded derivatives are economically hedged, the results of which are also included in this line item, and amounted to gains of £43m (2018: losses of £21m, (2017:2017: gains of £28m, 2016: gains of £51m)£28m). As a result, the net fair value movements recognised on the equity index-linked deposits and the related economic hedges were net gains of £1m (2017:(2018: £1m, 2016:2017: £1m).
In 2019, ‘net profit on sale of financial assets at fair value through other comprehensive income’ included additional consideration of £15m in connection with the 2017 Vocalink Holdings Limited shareholding sale. In 2017, ‘Net profit on sale ofavailable-for-sale assets’ included a gain of £48m in respect of the sale of the Vocalink shares. In 2016, ‘Net profit on sale ofavailable-for-sale assets’ included the gain of £119m in respect of the sale of Visa shares.
|
In November 2018, pursuant to a Partnership Special Redemption Event, the Abbey National Capital Trust I 8.963%Non-cumulative Trust Preferred Securities were fully redeemed. In September 2017, as part of a capital management exercise, 91% of the 7.375% 20 YearStep-up perpetual callable subordinated notes were purchased and redeemed. In May 2016, as part of a liability management exercise, certain debt instruments were purchased pursuant to a tender offer. These had no significant impact on the income statement.Holdings Limited shareholding.
Exchange rate differences recognised in the Consolidated Income Statement on items not at fair value through profit or loss were £1,102m income (2018: £689m expense, (2017:2017: £109m expense, 2016: £4,051m expense) and are presented in the line ‘Net trading and funding of other items by the trading book.’ These are principally offset by related releases from the cash flow hedge reserve of £1,021m expense (2018: £751m income, (2017:2017: £94m income, 2016: £4,076m income) as set out in the Consolidated Statement of Comprehensive Income, which are also presented in ‘Net trading and funding of other items by the trading book’. Exchange rate differences on items measured at fair value through profit or loss are included in the line items relating to changes in fair value.
| Santander UK Group Holdings plc | 201 |
Annual Report 2019| Financial statements
In 2019, our accounting treatment for residual value risk changed. This resulted in a £24m reversal of RV provisions recognised in other income (of which £22m relates to charges taken in prior periods) which was partially offset by £7.5m accelerated depreciation of the underlying asset (prior periods: £2.3m). The net adjustment is not considered material and therefore the 2018 accounts were not restated.
6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Staff costs: | ||||||||||||||||||||||||
Wages and salaries | 905 | 746 | 731 | 866 | 905 | 746 | ||||||||||||||||||
Performance-related payments | 160 | 157 | 157 | 160 | 160 | 157 | ||||||||||||||||||
Social security costs | 111 | 93 | 94 | 112 | 111 | 93 | ||||||||||||||||||
Pensions costs – defined contribution plans | 66 | 54 | 52 | 67 | 66 | 54 | ||||||||||||||||||
– defined benefit plans | 81 | 32 | 26 | 35 | 81 | 32 | ||||||||||||||||||
Other share-based payments | 3 | 10 | 3 | 7 | 3 | 10 | ||||||||||||||||||
Other personnel costs | 50 | 45 | 62 | 41 | 50 | 45 | ||||||||||||||||||
| 1,376 | 1,137 | 1,125 | 1,288 | 1,376 | 1,137 | |||||||||||||||||||
Other administration expenses | 809 | 1,011 | 970 | 693 | 809 | 1,011 | ||||||||||||||||||
Depreciation, amortisation and impairment | 378 | 354 | 322 | 545 | 378 | 354 | ||||||||||||||||||
| 2,563 | 2,502 | 2,417 | 2,526 | 2,563 | 2,502 | |||||||||||||||||||
Staff costs
‘Performance-related payments’ include bonuses paid in the form of cash and share awards granted under the Long-Term Incentive Plan and the Deferred shares bonus plan, as described in Note 38.35. Included in this are the Santander UK group’s equity-settled share-based payments, none of which related to option-based schemes. These are disclosed in the table below as ‘Share awards’. Performance-related payments above include amounts related to deferred performance awards as follows:
| Costs recognised in 2019 | Costs expected to be recognised in 2020 or later | |||||||||||||||||||||||||||||||||||||||||||||||||
| Arising from | Arising from | Arising from | Arising from | |||||||||||||||||||||||||||||||||||||||||||||||
| awards in | awards in | awards in | awards in | |||||||||||||||||||||||||||||||||||||||||||||||
| Costs recognised in 2018 | Costs expected to be recognised in 2019 or later | current year | prior year | Total | current year | prior year | Total | |||||||||||||||||||||||||||||||||||||||||||
Arising from awards in current year £m | Arising from awards in prior year £m | Total £m |
| Arising from £m | Arising from awards in prior year £m | Total £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||
Cash | 4 | 9 | 13 | 10 | 10 | 20 | 3 | 7 | 10 | 7 | 10 | 17 | ||||||||||||||||||||||||||||||||||||||
Shares | 3 | 10 | 13 | 8 | 9 | 17 | 3 | 6 | 9 | 7 | 10 | 17 | ||||||||||||||||||||||||||||||||||||||
| 7 | 19 | 26 | 18 | 19 | 37 | 6 | 13 | 19 | 14 | 20 | 34 | |||||||||||||||||||||||||||||||||||||||
The following table shows the amount of bonus awarded to employees for the performance year 2018.2019. In the case of deferred cash and share awards, the final amount paid to an employee is influenced by forfeiture provisions and any performance conditions to which these awards are subject. The deferred share award amount is based on the fair value of these awards at the date of grant.
| Expenses charged in the year | Expenses deferred to future periods | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expenses charged in the year | Expenses deferred to future periods | Total | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 £m | 2017 £m | 2018 £m | 2017 £m |
| 2018 £m | 2017 £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash award – not deferred | 123 | 116 | – | – | 123 | 116 | 131 | 123 | – | – | 131 | 123 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
– deferred | 13 | 13 | 20 | 17 | 33 | 30 | 10 | 13 | 17 | 20 | 27 | 33 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Share awards – not deferred | 11 | 12 | – | – | 11 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares award – not deferred | 10 | 11 | – | – | 10 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– deferred | 13 | 16 | 17 | 18 | 30 | 34 | 9 | 13 | 17 | 17 | 26 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total discretionary bonus | 160 | 157 | 37 | 35 | 197 | 192 | 160 | 160 | 34 | 37 | 194 | 197 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to guaranteed minimum pension (GMP),GMP and concluded on the methods that were appropriate. The estimated increase in liabilities at the date of the judgement was £40m and iswas based on a number of assumptions and the actual impact may be different. This has beenwas reflected in ‘Pensions costs – defined benefit plans’the income statement and in the closing net accounting surplus of the Santander (UK) Group Pension Scheme.Scheme in 2018. The allowance included in the Scheme liabilities at 31 December 2019 increased by £5m to £45m (2018: £40m) to reflect the latest assumptions. This change was recognised in other comprehensive income. We continue to await implementation guidance on the judgement from the UK Government and HMRC.
‘Other share-based payments’ consist of options granted under the Employee Sharesave scheme which comprise the Santander UK group’s cash-settled share-based payments. For more, see Note 38.35.
The average number of full-time equivalent staff was 23,648 (2017: 19,559, 2016: 19,863)23,706 (2018: 24,210, 2017: 19,559). The increase in staff numbers in 2018 reflected Santander UK plc’s acquisition of Santander Services on 1 January 2018. Following the acquisition, the costs relating to the staff associated with these businesses are now recognised as staff costs. In 2017UK Operations Ltd (formerly Geoban UK Ltd, a subsidiary of Geoban SA) and earlier years, the equivalent costs were included in other administrative expenses. For more details, see Note 21.Santander UK Technology Ltd (formerly Isban UK Ltd, a subsidiary of Ingenieria de Software Bancario SL).
Depreciation, amortisation and impairment
No impairments were charged in 2018. In 2017, an2019, depreciation, amortisation and impairment chargewas impacted by operating lease depreciation of £32m£103m (2018: £63m) on operating lease assets (where the Santander UK group is the lessor) with a net book value of £574m at 31 December 2019 (2018: £470m). It was recognised that primarily related to capitalised software costs foralso impacted by depreciation of £61m onright-of-use assets with a credit risk management system, partnet book value of which was no longer in use.£153m at 31 December 2019, following the adoption of IFRS 16 on 1 January 2019.
| 202 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
7. AUDIT AND OTHER SERVICES
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Audit fees: | ||||||||||||||||||||||||
Fees payable to the Company’s auditor and its associates for the audit of the Santander UK group’s annual accounts | 7.7 | 7.8 | 4.9 | 8.5 | 7.7 | 7.8 | ||||||||||||||||||
Fees payable to the Company’s auditor and its associates for other services to the Santander UK group: | ||||||||||||||||||||||||
– Audit of the Santander UK group’s subsidiaries | 1.6 | 1.4 | 1.1 | 1.9 | 1.6 | 1.4 | ||||||||||||||||||
Total audit fees(1) | 9.3 | 9.2 | 6.0 | 10.4 | 9.3 | 9.2 | ||||||||||||||||||
Non-audit fees: | ||||||||||||||||||||||||
Audit-related assurance services(2) | 2.2 | 1.6 | 1.3 | 1.7 | 2.2 | 1.6 | ||||||||||||||||||
Taxation compliance services | – | – | 0.1 | |||||||||||||||||||||
Other assurance services | 0.1 | 0.1 | – | 0.4 | 0.1 | 0.1 | ||||||||||||||||||
Othernon-audit services | 1.0 | 0.4 | 1.9 | 0.2 | 1.0 | 0.4 | ||||||||||||||||||
Totalnon-audit fees | 3.3 | 2.1 | 3.3 | 2.3 | 3.3 | 2.1 | ||||||||||||||||||
| (1) |
|
| (2) |
|
Audit fees payable for the statutory audit of Santander UK Group Holdings plc were £0.5m (2017: £0.4m, 2016: £0.3m)(2018: £0.5m, 2017: £0.4m).
Audit-related assurance services relate tomainly comprises services performed in connection with review of the statutory and regulatory filingsinterim financial information of the Company and its associates. reporting to the Company’s UK regulators.
Of this category,the totalnon-audit fees, £1.6m (2018: £1.1m, (2017: £0.8m, 2016: £0.6m)2017: £0.8m) accords with the definition of ‘Audit fees’“Audit Fees” per US Securities and Exchange Commission (SEC) guidance. The remainingguidance, £0.5m (2018: £1.1m, (2017: £0.8m, 2016: £0.7m)2017: £0.8m) accords with the definition of ‘Audit-related fees’“Audit related fees” per that guidance and relates to services performed in connection with securitisation, debt issuance and related work and reporting to prudential and conduct regulators.
Taxation compliance services accord£0.2m (2018: £1.1m, 2017: £0.5m) accords with the SEC definition of ‘Tax fees’ and relate to compliance services performed in respect of US tax returns and“All other similar tax compliance services.
Other assurance services and othernon-audit services accord with the SEC definition of ‘All other fees’.fees” per that guidance.
In 2018,2019, the Company’s auditors also earned no fees of(2018: £150,000, (2017:2017: £45,000) payable by entities outside the Santander UK group for the review of the financial position of corporate and other borrowers.
8. CREDIT IMPAIRMENT LOSSES AND PROVISIONS
| Group | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| £m | £m | £m | ||||||||||
Credit impairment losses:(1) | ||||||||||||
Loans and advances to customers | 238 | 189 | 257 | |||||||||
Recoveries of loans and advances, net of collection costs | (40 | ) | (42 | ) | (54 | ) | ||||||
Off-balance sheet exposures (See Note 27) | 22 | 6 | ||||||||||
| 220 | 153 | 203 | ||||||||||
Provisions for other liabilities and charges (excludingoff-balance sheet credit exposures) (See Note 27) | 437 | 260 | 385 | |||||||||
Provisions for RV and voluntary termination | 6 | – | 8 | |||||||||
| 443 | 260 | 393 | ||||||||||
| 663 | 413 | 596 | ||||||||||
| 2018 £m | 2017 £m | 2016 £m | ||||||||||
Credit impairment losses: | ||||||||||||
Loans and advances to customers (See Note 14) | 189 | 257 | 132 | |||||||||
Recoveries of loans and advances, net of collection costs (See Note 14) | (42 | ) | (54 | ) | (65 | ) | ||||||
Off-balance sheet exposures (See Note 30) | 6 | |||||||||||
| 153 | 203 | 67 | ||||||||||
Provisions for other liabilities and charges (excludingoff-balance sheet credit exposures) (See Note 30) | 260 | 385 | 397 | |||||||||
Provisions for RV and voluntary termination (See Note 14) | – | 8 | – | |||||||||
| 260 | 393 | 397 | ||||||||||
| 413 | 596 | 464 | ||||||||||
| (1) | Credit impairment losses for 2018 and later are calculated on an IFRS 9 basis and for 2017 and earlier on an IAS 39 basis. |
The credit impairment loss allowance requirements introduced by IFRS 9 mandated a change from recognising impairment losses on an incurred loss basis (as reflected in 2017) to an expected credit loss (ECL) basis (as reflected in 2018). For more on this change in methodology, see the IFRS 9 accounting policy changes in Note 1In 2019 and the IFRS 9 transition disclosures in Note 44. There2018 there were no material credit impairment losses on loans and advances to banks,non-trading reverse repurchase agreements, other financial assets at amortised cost and financial assets at fair value through other comprehensive income.
| Santander UK Group Holdings plc | 203 |
Annual Report 2019| Financial statements
|
9. TAXATION
| Group | ||||||||||||||||||||||||
| 2019 | 2018(1) | 2017(1) | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Current tax: | ||||||||||||||||||||||||
UK corporation tax on profit for the year | 456 | 555 | 610 | 255 | 413 | 509 | ||||||||||||||||||
Adjustments in respect of prior years | (22 | ) | (27 | ) | (13 | ) | (30 | ) | (22 | ) | (27 | ) | ||||||||||||
Total current tax | 434 | 528 | 597 | 225 | 391 | 482 | ||||||||||||||||||
Deferred tax: | ||||||||||||||||||||||||
Charge/(credit) for the year | 11 | 23 | (11 | ) | ||||||||||||||||||||
Charge for the year | 51 | 11 | 23 | |||||||||||||||||||||
Adjustments in respect of prior years | 1 | 9 | 11 | (4 | ) | 1 | 9 | |||||||||||||||||
Total deferred tax | 12 | 32 | – | 47 | 12 | 32 | ||||||||||||||||||
Tax on profit | 446 | 560 | 597 | 272 | 403 | 514 | ||||||||||||||||||
| (1) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
The standard rate of UK corporation tax was 27% for banking entities and 19% fornon-banking entities (2017:(2018: 27% for banking entities and 19% fornon-banking entities; 2017: 27.25% for banking entities and 19.25% fornon-banking entities) following the introduction of an 8% surcharge to be applied to banking companies from 1 January 2016. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions. The Finance (No.2) Act 2015 introduced reductions in the corporation tax rate from 20% to 19% in 2017 and 18% by 2020. The Finance Act 2016 introduced a further reduction in the standard rate of corporation tax rate to 17% from 2020. The effects of the changes in tax rates are included in the deferred tax balances at both 31 December 20182019 and 2017.2018.
The Santander UK group’s effective tax rate for 2018,2019, based on profit before tax, was 28.5% (2017: 30.9%27.7% (2018: 25.7%, 2016: 31.2%2017: 28.3%). The tax on profit before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows:
| Group | ||||||||||||||||||||||||
| 2019 | 2018(1) | 2017(1) | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Profit before tax | 1,567 | 1,814 | 1,914 | 981 | 1,567 | 1,814 | ||||||||||||||||||
Tax calculated at a tax rate of 19% (2017: 19.25%, 2016: 20.00%) | 298 | 349 | 383 | |||||||||||||||||||||
Tax calculated at a tax rate of 19% (2018: 19%, 2017: 19.25%) | 186 | 298 | 349 | |||||||||||||||||||||
Bank surcharge on profits | 111 | 132 | 134 | 64 | 111 | 132 | ||||||||||||||||||
Non-deductible preference dividends paid | 8 | 9 | 8 | 8 | 8 | 9 | ||||||||||||||||||
Non-deductible UK Bank Levy | 20 | 25 | 30 | 24 | 20 | 25 | ||||||||||||||||||
Non-deductible conduct remediation, fines and penalties | 6 | 35 | 39 | 44 | 6 | 35 | ||||||||||||||||||
Othernon-deductible costs andnon-taxable income | 26 | 30 | 7 | 29 | 26 | 30 | ||||||||||||||||||
Effect of change in tax rate on deferred tax provision | (2 | ) | (2 | ) | (2 | ) | (10 | ) | (2 | ) | (2 | ) | ||||||||||||
Tax relief on dividends in respect of other equity instruments | (39 | ) | (43 | ) | (46 | ) | ||||||||||||||||||
Adjustment to prior year provisions | (21 | ) | (18 | ) | (2 | ) | (34 | ) | (21 | ) | (18 | ) | ||||||||||||
Tax charge | 446 | 560 | 597 | 272 | 403 | 514 | ||||||||||||||||||
| (1) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
The decreaseincrease in effective tax rate from 20172018 to 20182019 was largely due to the reduction in the statutory tax rate, reductions in the bank levy, the reducedincreased impact ofnon-deductible conduct remediation, fines and penalties and also the effectnet of releases in accruals for prior periods. It is anticipated that the Santander UK group’s effective tax rate in future periods will continue to be impacted by the 8% surcharge, the level of anynon-deductible conduct remediation, fines and penalties, changes to the cost of the Bank Levy and reductions in the statutory rate as noted above. In addition, the effects of amendments to IAS 12, in accordance with the IASB’s Annual Improvements to IFRS Standards 2015-2017 Cycle, are expected to lead to a reduction in the effective tax rate where the tax relief on coupons in respect of AT1 capital securities would be recognised in the income statement rather than in equity. The adjustment to prior year provisions in 2019 and 2018 principally related to the reassessment of prior year tax provision estimates following the filing of relevant tax returns. In 2017returns and 2016, it also related to the resolution of certain legacy matters with tax authorities.
Current tax assets and liabilities
Movements in current tax assets and liabilities during the year were as follows:
| Group | ||||||||||||||||
| 2018 | 2017 | 2019 | 2018(1) | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
Assets | – | – | 106 | – | ||||||||||||
Liabilities | (3 | ) | (53 | ) | – | (3 | ) | |||||||||
At 1 January | (3 | ) | (53 | ) | 106 | (3 | ) | |||||||||
Income statement charge | (434 | ) | (528 | ) | (225 | ) | (391 | ) | ||||||||
Other comprehensive income credit/(charge) | 75 | 44 | ||||||||||||||
Other comprehensive income (charge)/credit | (3 | ) | 32 | |||||||||||||
Corporate income tax paid | 445 | 484 | 309 | 445 | ||||||||||||
Other movements | 23 | 50 | (1 | ) | 23 | |||||||||||
| 106 | (3 | ) | 186 | 106 | ||||||||||||
Assets | 106 | – | 186 | 106 | ||||||||||||
Liabilities | – | (3 | ) | – | – | |||||||||||
At 31 December | 106 | (3 | ) | 186 | 106 | |||||||||||
| (1) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
The amount of corporation income tax paid differs from the tax charge for the period as a result of the timing of payments due to the tax authorities together with the effects of movements in deferred tax, adjustments to prior period current tax provisions and current tax recognised directly in other comprehensive income.
Santander UK proactively engages with HM Revenue & Customs to resolve tax matters relating to prior years. The accounting policy for recognising provisions for such matters are described in Note 1. It is not expected that there will be any material movement in such provisions within the next 12 months. Santander UK adopted the Code of Practice on Taxation for Banks in 2010.
| 204 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
Deferred tax
The table below shows the deferred tax assets and liabilities including the movement in the deferred tax account during the year. Deferred tax balances are presented in the balance sheet after offsetting assets and liabilities where the Santander UK group and Company has the legal right to offset and intends to settle on a net basis.
| Fair value of financial instruments £m | Pension remeasurement £m | Cash flow hedges £m | Available- for-sale £m | Fair value reserve £m | Tax losses carried forward £m | Accelerated tax depreciation £m | Other temporary differences £m | Total £m | Group | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of | Tax losses | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| financial | Pension | Cash flow | Available- | Fair value | carried | Accelerated tax | temporary | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| instruments | remeasurement | hedges | for-sale | reserve | forward | depreciation | differences | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2019 | (51 | ) | (182 | ) | (43 | ) | (12 | ) | 20 | (4 | ) | 61 | (211 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income statement (charge)/credit | (1 | ) | (47 | ) | – | – | (7 | ) | 22 | (14 | ) | (47 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers/reclassifications | – | – | 22 | 4 | – | – | (26 | ) | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credited/(charged) to other comprehensive income | – | 131 | (37 | ) | – | – | – | 19 | 113 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2019 | (52 | ) | (98 | ) | (58 | ) | (8 | ) | 13 | 18 | 40 | (145 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2017 | (41 | ) | (41 | ) | 3 | (26 | ) | 25 | (4 | ) | (4 | ) | (88 | ) | (41 | ) | (41 | ) | 3 | (26 | ) | 25 | (4 | ) | (4 | ) | (88 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Adoption of IFRS 9 (see Note 1) | – | – | – | 26 | (26 | ) | – | – | 68 | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adoption of IFRS 9 | – | – | – | 26 | (26 | ) | – | – | 68 | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2018 | (41 | ) | (41 | ) | 3 | (26 | ) | 25 | (4 | ) | 64 | (20 | ) | (41 | ) | (41 | ) | 3 | (26 | ) | 25 | (4 | ) | 64 | (20 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Income statement (charge)/credit | (10 | ) | (24 | ) | – | – | (5 | ) | – | 27 | (12 | ) | (10 | ) | (24 | ) | – | – | (5 | ) | – | 27 | (12 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfers/reclassifications | – | – | – | – | – | – | (9 | ) | (9 | ) | – | – | – | – | – | – | (9 | ) | (9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Credited/(charged) to other comprehensive income | – | (117 | ) | (46 | ) | 14 | – | – | (21 | ) | (170 | ) | – | (117 | ) | (46 | ) | 14 | – | – | (21 | ) | (170 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2018 | (51 | ) | (182 | ) | (43 | ) | (12 | ) | 20 | (4 | ) | 61 | (211 | ) | (51 | ) | (182 | ) | (43 | ) | (12 | ) | 20 | (4 | ) | 61 | (211 | ) | ||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2017 | (31 | ) | (35 | ) | (50 | ) | (27 | ) | 5 | (5 | ) | 15 | (128 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income statement (charge)/credit | (10 | ) | (32 | ) | – | – | 20 | 1 | (11 | ) | (32 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers/reclassifications | – | – | – | 7 | – | – | (7 | ) | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credited/(charged) to other comprehensive income | – | 26 | 53 | (6 | ) | – | – | (1 | ) | 72 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2017 | (41 | ) | (41 | ) | 3 | (26 | ) | 25 | (4 | ) | (4 | ) | (88 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The deferred tax assets and liabilities above have been recognised in the Santander UK group on the basis that sufficient future taxable profits are forecast within the foreseeable future, in excess of the profits arising from the reversal of existing taxable temporary differences, to allow for the utilisation of the assets as they reverse. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions underlying the estimated future taxable profits in the Santander UK group’s five-year plan (described in Note 22)20) would not cause a reduction in the deferred tax assets recognised. At 31 December 2018,2019, the Santander UK group had a recognised deferred tax asset in respect of UK capital losses carried forward of £17m (2017: £21m)£11m (2018: £17m) included within tax losses carried forward. There are no unrecognised deferred tax assets on capital losses carried forward (2017:(2018: £nil).
InAs part of the November 2018 budget,election campaign, the UK government proposed changesindicated that could restrictit would look to reverse or defer the usefuture tax rate reduction due to apply from 1 April 2020. The next UK Budget scheduled for 11 March 2020 is likely to clarify the position and give an indication of capital losses. Basedthe possible impact on the changes indicated,deferred tax position. It is estimated that the effect could increase the Santander UK group does not believe that such changes would have a material impact on the recognition ofGroup’s deferred tax assets on such capital losses once enacted.
In addition, the Santander UK group had net operating losses carried forward in the US of $nil (2017: $76m) as such losses expired on the closure of the ANTS US Branch. A deferred tax asset was not previously recognised on these losses as the Santander UK group did not anticipate being ableliability by up to offset the losses against future profits or gains in order to realise any economic benefit in the foreseeable future.£12m.
10. DIVIDENDS ON ORDINARY SHARES
Dividends on ordinary shares declared and paid duringin the year were as follows:
| Group | Group | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
| Pence per | Pence per | Pence per | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
| 2018 Pence per Share | 2017 Pence per Share | 2016 Pence per share | 2018 £m | 2017 £m | 2016 £m | share | share | share | £m | £m | £m | |||||||||||||||||||||||||||||||||||||
In respect of current year – first interim | 3.54 | 4.58 | 4.49 | 250 | 323 | 317 | 1.95 | 3.54 | 4.58 | 138 | 250 | 323 | ||||||||||||||||||||||||||||||||||||
– second interim | 9.46 | 3.26 | 3.91 | 668 | 230 | 276 | 1.76 | 9.46 | 3.26 | 124 | 668 | 230 | ||||||||||||||||||||||||||||||||||||
– third interim | 2.90 | – | – | 205 | – | – | – | 2.90 | – | – | 205 | – | ||||||||||||||||||||||||||||||||||||
| 15.90 | 7.84 | 8.40 | 1,123 | 553 | 593 | 3.71 | 15.90 | 7.84 | 262 | 1,123 | 553 | |||||||||||||||||||||||||||||||||||||
In 2018, and in addition to the dividends of £250m and £205m that were made as part of our policy to pay 50% of recurring earnings, we also paid a dividend of £668m that related to the ring-fencing transfers to Banco Santander, London Branch. For more on our ring-fencing implementation, see Note 43.
11. TRADING ASSETS
| 2018 £m | 2017 £m | |||||||
Securities purchased under resale agreements | – | 8,870 | ||||||
Debt securities | – | 5,156 | ||||||
Equity securities | – | 9,662 | ||||||
Cash collateral associated with trading balances | – | 6,156 | ||||||
Short-term loans | – | 711 | ||||||
| – | 30,555 | |||||||
In 2018, as part of our ring-fencing plans, the trading business in the Santander UK group was run down as the prohibited elements moved to the Banco Santander London Branch. For more on our ring-fence implementation, see Note 43. In 2017, a significant portion of the debt and equity securities were held in our eligible liquidity pool. They consisted mainly of government bonds and quoted stocks. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review.
| Santander UK Group Holdings plc | 205 |
Annual Report 2019| Financial statements |
12.
11. DERIVATIVE FINANCIAL INSTRUMENTS
a) Use of derivatives
The Santander UK group undertakes derivative activities primarily to provide customers with risk management solutions and to manage and hedge the Santander UK group’s own risks. In 2018, as part of our ring-fencing implementation, we transferred the majority of our derivatives held for trading to the Banco Santander London Branch as these constituted transactions that Santander UK plc would not be able to retain as a ring-fenced bank. For more on our ring-fence implementation, see Note 43.
The Santander UK group’s derivative activities do not give rise to significant open positions in portfolios of derivatives. Any residual position is managed to ensure that it remains within acceptable risk levels, with matching transactions being used to achieve this where necessary. When entering into derivatives, the Santander UK group employs the same credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending.
For information on how the Santander UK group is managing the transition to alternative benchmark interest rates, see ‘Managing LIBOR transition’ in the Banking market risk section of the Risk review.
b) Analysis of derivatives
The table below includes the notional amounts in the tables below indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent actual exposures.
| 2018 | 2017 | Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value | Fair value | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional amount | Assets | Liabilities | Notional amount | Assets | Liabilities | Fair value | Fair value | |||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | Notional | Notional | |||||||||||||||||||||||||||||||||||||||||||||||
Derivatives held for trading | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| amount | Assets | Liabilities | amount | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives held for trading: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | 14,165 | 455 | 351 | 144,160 | 2,559 | 4,130 | 14,249 | 136 | 199 | 14,165 | 455 | 351 | ||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 79,522 | 1,455 | 1,326 | 863,151 | 22,091 | 21,619 | 47,045 | 754 | 566 | 79,522 | 1,455 | 1,326 | ||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | 2,854 | 278 | 168 | 19,814 | 888 | 693 | 2,583 | 292 | 167 | 2,854 | 278 | 168 | ||||||||||||||||||||||||||||||||||||||||||
Total derivatives held for trading | 96,541 | 2,188 | 1,845 | 1,027,125 | 25,538 | 26,442 | 63,877 | 1,182 | 932 | 96,541 | 2,188 | 1,845 | ||||||||||||||||||||||||||||||||||||||||||
Derivatives held for hedging | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Designated as fair value hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | 3,010 | 357 | – | 2,641 | 312 | 6 | 1,482 | 166 | 2 | 3,010 | 357 | – | ||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 86,422 | 1,065 | 1,315 | 59,610 | 1,272 | 1,470 | 94,550 | 1,022 | 1,488 | 86,422 | 1,065 | 1,315 | ||||||||||||||||||||||||||||||||||||||||||
Equity derivative contracts | – | – | – | 16 | – | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 89,432 | 1,422 | 1,315 | 62,267 | 1,584 | 1,480 | 96,032 | 1,188 | 1,490 | 89,432 | 1,422 | 1,315 | |||||||||||||||||||||||||||||||||||||||||||
Designated as cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | 33,901 | 3,537 | 200 | 23,117 | 3,206 | 55 | 28,502 | 2,023 | 462 | 33,901 | 3,537 | 200 | ||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 18,808 | 46 | 102 | 12,884 | 84 | 115 | 17,451 | 184 | 35 | 18,808 | 46 | 102 | ||||||||||||||||||||||||||||||||||||||||||
Equity derivative contracts | 69 | – | 4 | 26 | 9 | – | 49 | – | 4 | 69 | – | 4 | ||||||||||||||||||||||||||||||||||||||||||
| 52,778 | 3,583 | 306 | 36,027 | 3,299 | 170 | 46,002 | 2,207 | 501 | 52,778 | 3,583 | 306 | |||||||||||||||||||||||||||||||||||||||||||
Total derivatives held for hedging | 142,210 | 5,005 | 1,621 | 98,294 | 4,883 | 1,650 | 142,034 | 3,395 | 1,991 | 142,210 | 5,005 | 1,621 | ||||||||||||||||||||||||||||||||||||||||||
Derivative netting(1) | (1,872 | ) | (1,872 | ) | (10,479 | ) | (10,479 | ) | (1,214 | ) | (1,214 | ) | (1,872 | ) | (1,872 | ) | ||||||||||||||||||||||||||||||||||||||
Total derivatives | 238,751 | 5,321 | 1,594 | 1,125,419 | 19,942 | 17,613 | 205,911 | 3,363 | 1,709 | 238,751 | 5,321 | 1,594 | ||||||||||||||||||||||||||||||||||||||||||
| (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 |
Annual Report 2018 | Financial statements
For information about the impact of netting arrangements on derivative assets and liabilities in the table above, see Note 42.39. The reduction in the notional value of interest rate derivatives held for trading reflected the completion of a series of derivative trade compressions to reduce our gross LIBOR exposure.
The table below analyses the notional and fair values of derivatives by trading and settlement method.
Notional | Notional | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traded over the counter | Asset | Liability | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traded on | Settled | Not settled by | Traded on | Traded on | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| recognised | by central | central | recognised | Traded over | recognised | Traded over | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| exchanges | counterparties | counterparties | Total | exchanges | the counter | exchanges | the counter | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | – | – | 44,233 | 44,233 | – | 2,325 | – | 663 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | – | 131,538 | 27,508 | 159,046 | – | 747 | – | 876 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | – | – | 2,632 | 2,632 | – | 291 | – | 170 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traded over the counter | Asset | Liability | – | 131,538 | 74,373 | 205,911 | – | 3,363 | – | 1,709 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Traded on recognised exchanges £m | Settled by central counterparties £m | Not settled by central counterparties £m | Total £m | Traded on recognised exchanges £m | Traded over the counter £m | Traded on recognised exchanges £m | Traded over the counter £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | – | – | 51,076 | 51,076 | – | 4,349 | – | 551 | – | – | 51,076 | 51,076 | – | 4,349 | – | 551 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | – | 154,106 | 30,646 | 184,752 | – | 694 | – | 871 | – | 154,106 | 30,646 | 184,752 | – | 694 | – | 871 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | – | – | 2,923 | 2,923 | – | 278 | – | 172 | – | – | 2,923 | 2,923 | – | 278 | – | 172 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | 154,106 | 84,645 | 238,751 | – | 5,321 | – | 1,594 | – | 154,106 | 84,645 | 238,751 | – | 5,321 | – | 1,594 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange rate contracts | – | – | 169,918 | 169,918 | – | 6,077 | – | 4,191 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | 71,618 | 626,600 | 237,427 | 935,645 | – | 12,968 | – | 12,725 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity and credit contracts | 30 | – | 19,826 | 19,856 | – | 897 | 1 | 696 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 71,648 | 626,600 | 427,171 | 1,125,419 | – | 19,942 | 1 | 17,612 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
c) Analysis of derivatives designated as hedges
The Santander UK group applies hedge accounting on both a fair value and cash flow basis depending on the nature of the underlying exposure. We establish the hedge ratio by matching the notional of the derivative with the underlying position being hedged. Only the designated risk is hedged and therefore other risks, such as credit risk are managed but not hedged. For interest rate hedges, the designated hedged risk is determined with reference to the underlying benchmark rate.
Fair value hedges
Portfolio hedges of interest rate risk
Santander UK holds various portfolios of fixed rate assets and liabilities which expose it to changes in fair value due to movements in market interest rates. We manage these exposures by entering into interest rate swaps. Each portfolio contains assets or liabilities that are similar in nature and share the risk exposure that is designated as being hedged.
| 206 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
The interest rate risk component is the change in fair value of fixed rate instruments for changes in the designated benchmark rate. Such changes are usually the largest component of the overall change in fair value. Separate hedges are maintained for each underlying currency. Effectiveness is assessed by comparing changes in fair value of the hedged item attributable to changes in the designated benchmark interest rate, with changes in the fair value of the interest rate swaps.
The following table shows theSantander UK group is exposed to changes in fair value of financial assets and liabilities due to movements in market interest rates and / or FX rates. These exposures arise from holding either fixed rate instruments hedged, their underlyingassets and liabilities ornon-GBP denominated assets and liabilities. These exposures are managed by entering into interest rate swaps and cross currency and the respective hedged benchmark rates:swaps.
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Micro hedges of interest rate risk and foreign currency risk
Santander UK accesses international markets to obtain funding, issuing fixed rate debt in its functional currency and other currencies. We are therefore exposed to changes in fair value due to changes in market interest rates and/or foreign exchange rates, principally in USD and EUR, which we mitigate through the use of receive fixed/pay floating rate interest rate swaps and/or receive fixed/pay floating rate cross currency swaps.
The interest rate risk component is the change in fair value of the fixed rate debt due to changes in the benchmark LIBOR rate. The foreign exchange component is the change in the fair value of the fixed rate debt issuance due to changes in foreign exchange rates prevailing from the time of execution. Effectiveness is assessed by using linear regression techniques to compare changes in the fair value of the debt caused by changes in the benchmark interest rate and foreign exchange rates, with changes in the fair value of the interest rate swaps and/or cross currency swaps.
CashflowCash flow hedges
Hedges of interest rate risk
Santander UK manages its exposure to the variability in cash flows of floating rate assets and liabilities attributable to movements in market interest rates by entering into interest rate swaps. The interest rate risk component is determined with reference to the underlying benchmark rate attributable to the floating rates asset or liability. Designated benchmark rates referenced are currently SONIA or LIBOR. Effectiveness is assessed by comparing changes in the fair value of the interest rate swap with changes in the fair value of the hedged item attributable to the hedged risk, applying a hypothetical derivative method using linear regression techniques.
Hedges of foreign currency risk
As Santander UK obtains funding in international markets, we assume significant foreign currency risk exposure, mainly in USD and EUR. In addition, the Santander UK group also holds debt securities for liquidity purposes which assumes foreign currency exposure, principally in JPY.
Santander UK manages the exposures to the variability in cash flows of foreign currency denominated assets and liabilities to movements in foreign exchange rates by entering into either foreign exchange contracts (spot, forward and swaps) or cross currency swaps. These instruments are entered into to match the cash flow profile and maturity of the estimated interest and principal repayments of the hedged item.
The foreign currency risk component is the change in cash flows of the foreign currency debt arising from changes in the relevant foreign currency forward exchange rate. Such changes constitute a significant component of the overall changes in cash flows of the instrument. Effectiveness is assessed by comparing changes in the fair value of the cross currency or foreign exchange swaps with changes in the fair value of the hedged debt attributable to the hedged risk applying a hypothetical derivative method using linear regression techniques.
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Equity risk on cash settled share-based transactions
Santander Equity Investments Limited (SEIL) offers employees the chance to buy shares in Banco Santander SA at a discount under Sharesave schemes. This exposes Santander UK to equity price risk. The equity risk is managed by purchasing share options which allow Santander UK to buy shares at a fixed price. These instruments are entered into to match the amount of employee share options expected to be exercised.
The equity price risk is the change in cash flows arising from the change in share price over time. Santander UK established the hedge ratio by matching the notional of the derivative with the notional of the employee share options being hedged. Effectiveness is assessed by comparing the changes in fair value of the share options with changes in the fair value of the employee share options by using a hypothetical derivative method.
PossibleLIBOR Reform
As described above, the Santander UK group designates both fair value and cash flow hedges with reference to the underlying benchmark rate. Where these benchmark rates are subject to uncertainty as a result of LIBOR reform (as explained in Note 1) we have early adopted the amendments to IAS 39 which provide temporary relief from applying specific hedge accounting requirements to those affected hedge relationships. Hedge relationships that are impacted comprise fair value hedges where fixed rate exposures are hedged to a benchmark rate subject to reform and cash flow hedges, where future hedged cash flows are benchmarked to interest rates impacted by the reform. It is assumed that the cash flows will remain highly probable and that the hedge relationship will remain highly effective. The table below shows the notional value of hedging instruments by benchmark interest rate impacted by the reform.
| Group | ||||||||||||||||
| GBP | USD | |||||||||||||||
| LIBOR | LIBOR | Other | Total | |||||||||||||
| 2019 | £m | £m | £m | £m | ||||||||||||
Total notional value of hedging instruments: | ||||||||||||||||
– Cash flow hedges | 23,396 | 8,001 | – | 31,397 | ||||||||||||
– Fair value hedges | 53,244 | 5,070 | 1,187 | 59,501 | ||||||||||||
| 76,640 | 13,071 | 1,187 | 90,898 | |||||||||||||
Maturing after 31 December 2021: | ||||||||||||||||
– Cash flow hedges | 11,773 | 2,644 | – | 14,417 | ||||||||||||
– Fair value hedges | 16,455 | 1,897 | 740 | 19,092 | ||||||||||||
| 28,228 | 4,541 | 740 | 33,509 | |||||||||||||
Hedge effectiveness measurement and possible sources of hedge ineffectiveness
Hedge effectiveness is assessed by using either dollar offset or linear regression techniques to compare changes in the fair value of the hedged item attributable to changes in the designated hedged risk and the hedging instrument. For cash flow hedges, a hypothetical derivative method is used to model the cash flows of the hedged item.
Possible sources of hedge ineffectiveness for each typearise from differences in discounting and timing of hedge relationship are set out below:
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| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
Maturity profile and average price/rate of hedging instruments
The following table sets out the maturity profile and average price/rate of the hedging instruments used in the Santander UK group’s hedging strategies:
| Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| >1 and £3 | >3 and £12 | >1 and £5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Hedging Instruments | £1 month | months | months | years | >5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk | Interest rate contracts – Notional amount (£m) | 4,354 | 5,804 | 27,405 | 43,652 | 13,099 | 94,314 | |||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – GBP | 0.77% | 0.90% | 0.88% | 1.33% | 3.00% | |||||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – EUR | (0.41)% | 0.29% | 2.21% | 1.36% | 2.36% | |||||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – USD | – | 1.54% | 1.99% | 2.69% | 4.56% | |||||||||||||||||||||||||||||||||||||||||||||||
Interest rate/FX risk | Exchange rate contracts – Notional amount (£m) | – | 755 | – | 317 | 410 | 1,482 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts – Notional amount (£m) | – | – | – | 18 | 218 | 236 | ||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – EUR exchange rate | – | – | – | 1.1781 | 1.1603 | |||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – USD exchange rate | – | 1.5110 | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – EUR | – | – | – | 3.52% | 2.12% | |||||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – USD | – | 2.38% | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk | Interest rate contracts – Notional amount (£m) | – | 339 | 1,066 | 4,671 | 500 | 6,576 | |||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – GBP | – | 0.76% | 0.82% | 1.46% | 0.40% | |||||||||||||||||||||||||||||||||||||||||||||||
FX risk | Exchange rate contracts – Notional amount (£m) | 1,187 | 2,119 | 3,758 | 5,217 | – | 12,281 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts – Notional amount (£m) | – | – | – | 755 | – | 755 | ||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – JPY exchange rate | – | 145.9275 | 143.0857 | 140.8152 | – | |||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – EUR exchange rate | – | 1.1444 | 1.1167 | 1.1526 | – | |||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – USD exchange rate | 1.2856 | 1.2624 | 1.2925 | 1.2991 | – | |||||||||||||||||||||||||||||||||||||||||||||||
Equity risk | Equity derivative contracts – Notional amount (£m) | – | – | 7 | 41 | 1 | 49 | |||||||||||||||||||||||||||||||||||||||||||||
Interest rate/FX risk | Exchange rate contracts – Notional amount (£m) | 812 | – | 3,367 | 8,009 | 4,033 | 16,221 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts – Notional amount (£m) | – | – | 3,121 | 4,829 | 2,170 | 10,120 | ||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – EUR exchange rate | 1.2742 | – | 1.1689 | 1.3114 | 1.2090 | |||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – USD exchange rate | – | – | 1.5357 | 1.5811 | 1.4499 | |||||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – GBP | 2.49% | – | 2.16% | 2.87% | 2.96% | |||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Hedging Instruments | Less than one month | Later than one month and not later than three months | Later than three months and not later than one year | Later than one year and not later than five years | Later than five years | Total | |||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges: | Fair value hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk | Interest rate contracts: | Interest rate contracts – Notional amount (£m) | 6,162 | 8,411 | 14,611 | 39,508 | 15,652 | 84,344 | ||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | 6,162 | 8,411 | 14,611 | 39,508 | 15,652 | 84,344 | Average fixed interest rate – GBP | 0.63% | 0.79% | 1.06% | 1.59% | 2.85% | ||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – GBP (%) | 0.63% | 0.79% | 1.06% | 1.59% | 2.85% | Average fixed interest rate – EUR | (0.22)% | 0.67% | 0.91% | 1.09% | 1.26% | |||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – EUR (%) | (0.22)% | 0.67% | 0.91% | 1.09% | 1.26% | Average fixed interest rate – USD | 1.51% | 1.31% | 1.34% | 2.68% | 2.18% | |||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – USD (%) | 1.51% | 1.31% | 1.34% | 2.68% | 2.18% | |||||||||||||||||||||||||||||||||||||||||||||||
Interest rate/foreign currency (FX) risk | Exchange rate contracts: | |||||||||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | 392 | 1,295 | – | 1,101 | 222 | 3,010 | ||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate/FX risk | Exchange rate contracts – Notional amount (£m) | 392 | 1,295 | – | 1,101 | 222 | 3,010 | |||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | 392 | 1,295 | – | 90 | 301 | 2,078 | Interest rate contracts – Notional amount (£m) | 392 | 1,295 | – | 90 | 301 | 2,078 | |||||||||||||||||||||||||||||||||||||||
| Average GBP - EUR exchange rate | – | – | – | 1.1827 | 1.1682 | Average GBP – EUR exchange rate | – | – | – | 1.1827 | 1.1682 | |||||||||||||||||||||||||||||||||||||||||
| Average GBP - USD exchange rate | 1.5800 | 1.3325 | – | 1.5110 | – | Average GBP – USD exchange rate | 1.5800 | 1.3325 | – | 1.5110 | – | |||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – EUR (%) | – | – | – | 3.89% | 3.92% | Average fixed interest rate – EUR | – | – | – | 3.89% | 3.92% | |||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – USD (%) | 3.62% | 2.50% | – | 2.38% | 7.95% | Average fixed interest rate – USD | 3.62% | 2.50% | – | 2.38% | 7.95% | |||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | Cash flow hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk | Interest rate contracts: | Interest rate contracts – Notional amount (£m) | – | 1,715 | 1,991 | 3,100 | – | 6,806 | ||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | – | 1,715 | 1,991 | 3,100 | – | 6,806 | Average fixed interest rate – GBP | – | 0.73% | 0.73% | 1.33% | – | ||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – GBP (%) | – | 0.73% | 0.73% | 1.33% | – | |||||||||||||||||||||||||||||||||||||||||||||||
FX risk | Exchange rate contracts: | Exchange rate contracts – Notional amount (£m) | 3,916 | 2,552 | 2,961 | 5,596 | – | 15,025 | ||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | 3,916 | 2,552 | 2,961 | 5,596 | – | 15,025 | Interest rate contracts – Notional amount (£m) | – | – | – | 785 | – | 785 | |||||||||||||||||||||||||||||||||||||||
| Interest rate contracts: | Average GBP – JPY exchange rate | – | 147.2149 | 146.3718 | 145.3191 | – | ||||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | – | – | – | 785 | – | 785 | Average GBP – EUR exchange rate | – | – | 1.2803 | 1.1349 | – | ||||||||||||||||||||||||||||||||||||||||
| Average GBP – JPY exchange rate | – | 147.2149 | 146.3718 | 145.3191 | – | Average GBP – USD exchange rate | 1.3035 | 1.3067 | 1.3099 | 1.3049 | – | |||||||||||||||||||||||||||||||||||||||||
| Average GBP – EUR exchange rate | – | – | 1.2803 | 1.1349 | – | |||||||||||||||||||||||||||||||||||||||||||||||
| Average GBP – USD exchange rate | 1.3035 | 1.3067 | 1.3099 | 1.3049 | – | |||||||||||||||||||||||||||||||||||||||||||||||
Equity risk | Equity derivative contracts | Equity derivative contracts – Notional amount (£m) | – | – | 37 | 32 | – | 69 | ||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | – | – | 37 | 32 | – | 69 | ||||||||||||||||||||||||||||||||||||||||||||||
Interest rate/FX risk | Exchange rate contracts: | Exchange rate contracts – Notional amount (£m) | – | – | 1,773 | 11,481 | 5,622 | 18,876 | ||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | – | – | 1,773 | 11,481 | 5,622 | 18,876 | Interest rate contracts – Notional amount (£m) | – | – | 784 | 7,562 | 2,871 | 11,217 | |||||||||||||||||||||||||||||||||||||||
| Interest rate contracts: | Average GBP – EUR exchange rate | – | – | 1.2523 | 1.2707 | 1.2167 | ||||||||||||||||||||||||||||||||||||||||||||||
| – Nominal amount (£m) | – | – | 784 | 7,562 | 2,871 | 11,217 | Average GBP – USD exchange rate | – | – | 1.6333 | 1.5447 | 1.5109 | ||||||||||||||||||||||||||||||||||||||||
| Average GBP – EUR exchange rate | – | – | 1.2523 | 1.2707 | 1.2167 | Average fixed interest rate – GBP | – | – | 2.34% | 2.66% | 2.90% | |||||||||||||||||||||||||||||||||||||||||
| Average GBP – USD exchange rate | – | – | 1.6333 | 1.5447 | 1.5109 | |||||||||||||||||||||||||||||||||||||||||||||||
| Average fixed interest rate – GBP (%) | – | – | 2.34% | 2.66% | 2.90% | |||||||||||||||||||||||||||||||||||||||||||||||
| 208 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
Net gains or losses arising from fair value and cash flow hedges included in net trading and other income
| Group | ||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
Fair value hedging: | ||||||||||||||||||||||||
Gains/(losses) on hedging instruments | 4 | 56 | (274 | ) | ||||||||||||||||||||
(Losses)/gains on hedged items attributable to hedged risks | 75 | (2 | ) | 335 | ||||||||||||||||||||
(Losses)/gains on hedging instruments | (360 | ) | 4 | 56 | ||||||||||||||||||||
Gains/(losses) on hedged items attributable to hedged risks | 414 | 75 | (2 | ) | ||||||||||||||||||||
Fair value hedging ineffectiveness | 79 | 54 | 61 | 54 | 79 | 54 | ||||||||||||||||||
Cash flow hedging ineffectiveness | (45 | ) | (49 | ) | (33 | ) | (46 | ) | (45 | ) | (49 | ) | ||||||||||||
| 34 | 5 | 28 | 8 | 34 | 5 | |||||||||||||||||||
Hedge ineffectiveness can be analysed by risk category as follows:
| 2018 | Changes in FV of hedging £m | Changes in FV of hedged hedge ineffectiveness £m | Hedge ineffectiveness £m | |||||||||||||||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||
| Change in FV of hedging | Change in FV of | Recognised in income | Change in FV of hedging | Change in FV of | Recognised in income | |||||||||||||||||||||||||||||||||||
| instruments | hedged items | statement | instruments | hedged items | statement | |||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||||
Interest rate risk | 26 | 15 | 41 | (264 | ) | 284 | 20 | 26 | 15 | 41 | ||||||||||||||||||||||||||||||
Interest rate/FX risk | (22 | ) | 60 | 38 | (96 | ) | 130 | 34 | (22 | ) | 60 | 38 | ||||||||||||||||||||||||||||
| 4 | 75 | 79 | (360 | ) | 414 | 54 | 4 | 75 | 79 | |||||||||||||||||||||||||||||||
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| 2018 | Income statement line item affected by the reclassification | Changes in FV of hedging instruments to calculate hedge ineffectiveness £m | Changes in value of hedging instrument recognised in OCI £m | Hedge ineffectiveness £m | Amount reclassified from £m | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedging Instruments | Hedging Instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassified | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recognised | Reclassified | Recognised | from | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recognised | in income | from reserves | Change | Recognised | in income | reserves to | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Income statement line item | Change in FV | in OCI | statement | to income | in FV | in OCI | statement | income | ||||||||||||||||||||||||||||||||||||||||||||||||
| affected by reclassification | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk | Net interest income | 20 | (14 | ) | 6 | 26 | Net interest income | 34 | (33 | ) | 1 | 13 | 20 | (14 | ) | 6 | 26 | |||||||||||||||||||||||||||||||||||||||
FX risk | Net interest income/net trading and other income | 17 | (19 | ) | (2 | ) | 9 | Net interest income/net trading and other income | (333 | ) | 329 | (4 | ) | (316 | ) | 17 | (19 | ) | (2 | ) | 9 | |||||||||||||||||||||||||||||||||||
Equity risk | Operating expenses | (16 | ) | 16 | – | (10 | ) | Operating expenses | (7 | ) | 7 | – | (9 | ) | (16 | ) | 16 | – | (10 | ) | ||||||||||||||||||||||||||||||||||||
Interest rate/FX risk | Net interest income/net trading and other income | 722 | (771 | ) | (49 | ) | 726 | Net interest income/net trading and other income | (604 | ) | 561 | (43 | ) | (709 | ) | 722 | (771 | ) | (49 | ) | 726 | |||||||||||||||||||||||||||||||||||
| 743 | (788 | ) | (45 | ) | 751 | (910 | ) | 864 | (46 | ) | (1,021 | ) | 743 | (788 | ) | (45 | ) | 751 | ||||||||||||||||||||||||||||||||||||||
In 2018,2019, cash flow hedge accounting of £12m (2017: £nil)£4m (2018: £12m) had to cease due to foreign currency denominated cash flows relating to IT project expenditure no longer being expected to occur.
The following table provides a reconciliation by risk category of components of equity and analysis of OCI items (before tax) resulting from hedge accounting.
| Group | ||||||||
| 2019 | 2018 | |||||||
| £m | £m | |||||||
Balance at 1 January | 322 | 285 | ||||||
Effective portion of changes in fair value: | ||||||||
– Interest rate risk | 33 | 14 | ||||||
– Foreign currency risk | (329 | ) | 19 | |||||
– Equity risk | (7 | ) | (16 | ) | ||||
– Interest rate/foreign currency risk | (561 | ) | 771 | |||||
| (864 | ) | 788 | ||||||
Income statement transfers: | ||||||||
– Interest rate risk | (13 | ) | (26 | ) | ||||
– Foreign currency risk | 316 | (9 | ) | |||||
– Equity risk | 9 | 10 | ||||||
– Interest rate/foreign currency risk | 709 | (726 | ) | |||||
| 1,021 | (751 | ) | ||||||
Balance at 31 December | 479 | 322 | ||||||
| Santander UK Group Holdings plc |
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Annual Report 2019| Financial statements
Hedged exposures
Santander UK hedges its exposures to various risks, including interest rate risk and foreign currency risk, as set out in connection with certain mortgage assets, covered bond issuances, subordinated debt and senior debt securities in issue.
Thethe following table sets out the exposures covered by the Santander UK group’s hedging strategies:table.
| Carrying value | Accumulated amount of FV hedge adjustments on hedged item in carrying value of hedged item | Accumulated amount of FV interest rate risks | Change in value used for | Accumulated amount of FV hedge adjustments on | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Hedged item balance sheet line item | Assets £m | Liabilities £m | Assets £m | Liabilities £m | Assets £m | Liabilities £m | calculating £m | balance sheet £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk: | Loans and advances to customers | 42,075 | – | – | – | 638 | – | (149 | ) | 729 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other financial assets at amortised cost | 6,640 | – | – | – | 59 | – | 59 | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reverse repo agreements – non trading | 10,954 | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other financial assets at FVOCI | 7,447 | – | 10 | – | – | – | (46 | ) | 123 | Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits by customers | – | 702 | – | – | – | (1 | ) | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deposits by banks | – | 516 | – | 15 | – | – | 9 | (23 | ) | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate/FX risk: | Debt securities in issue | – | 15,112 | – | 369 | – | 191 | 158 | (548 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated liabilities | – | 685 | – | 152 | – | 52 | 44 | (214 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 67,116 | 17,015 | 10 | 536 | 697 | 242 | 75 | 67 | Accumulated amount of FV hedge | Change in | Accumulated amount of FV hedge | Change in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| adjustments | value to | adjustments | value to | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portfolio | calculate | Portfolio | calculate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| hedge of | Of which | hedge | hedge of | Of which | hedge | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged | interest | Discontinued | ineffective- | Carrying | Hedged | interest | Discontinued | ineffective- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Carrying value | item | rate risks | hedges | ness | value | item | rate risks | hedges | ness | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate risk: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers | 43,098 | – | 870 | 630 | 258 | 42,075 | – | 638 | 729 | (149 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial assets at amortised cost | 6,627 | – | 142 | 121 | 83 | 6,640 | – | 59 | – | 59 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse repos – non trading | 17,121 | – | (2 | ) | – | (2 | ) | 10,954 | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial assets at FVOCI | 5,944 | 102 | – | 82 | 125 | 7,429 | 10 | – | 123 | (46 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers | (6,261 | ) | – | 4 | – | 3 | (702 | ) | – | 1 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks | (517 | ) | (16 | ) | – | (17 | ) | (1 | ) | (516 | ) | (15 | ) | – | (23 | ) | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities in issue | (11,782 | ) | (388 | ) | (166 | ) | (311 | ) | (163 | ) | (11,920 | ) | (199 | ) | (191 | ) | (369 | ) | 121 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | (707 | ) | (181 | ) | (48 | ) | (204 | ) | (19 | ) | (694 | ) | (161 | ) | (52 | ) | (223 | ) | 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate/FX risk: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial assets at FVOCI | 241 | 3 | – | – | (4 | ) | 18 | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities in issue | (1,396 | ) | (135 | ) | – | (122 | ) | 136 | (3,192 | ) | (170 | ) | – | (179 | ) | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | 7 | 7 | – | 7 | (2 | ) | 9 | 9 | – | 9 | 23 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 52,375 | (608 | ) | 800 | 186 | 414 | 50,101 | (526 | ) | 455 | 67 | 75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||
| Balances on cash | Balances on cash | |||||||||||||||||||||||||||||
| flow hedge | flow hedge | |||||||||||||||||||||||||||||
| Change in value to | Cash flow | reserve for | Change in value to | Cash flow | reserve for | |||||||||||||||||||||||||
| calculate hedge | hedge | discontinued | calculate hedge | hedge | discontinued | |||||||||||||||||||||||||
| ineffectiveness | reserve | hedges | ineffectiveness | reserve | hedges | |||||||||||||||||||||||||
| Hedged item balance sheet line item | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||
Interest rate risk: | Loans and advances to customers | (34 | ) | 21 | (11 | ) | (19 | ) | (4 | ) | (2 | ) | ||||||||||||||||||
Loans and advances to banks | (2 | ) | – | – | – | (2 | ) | – | ||||||||||||||||||||||
Deposits by banks | 3 | (2 | ) | – | 6 | (1 | ) | – | ||||||||||||||||||||||
Debt securities in issue | – | – | – | (1 | ) | – | – | |||||||||||||||||||||||
FX risk: | Other financial assets at FVOCI | (122 | ) | 3 | – | 199 | (1 | ) | – | |||||||||||||||||||||
Not applicable – highly probable forecast transactions | 267 | 2 | – | (1 | ) | – | – | |||||||||||||||||||||||
Deposits by customers | 3 | – | – | – | – | – | ||||||||||||||||||||||||
Deposits by banks | 4 | – | – | – | – | – | ||||||||||||||||||||||||
Debt securities in issue | 177 | (3 | ) | – | (217 | ) | 21 | 3 | ||||||||||||||||||||||
Equity risk: | Other liabilities | 7 | (2 | ) | (1 | ) | 16 | (3 | ) | (2 | ) | |||||||||||||||||||
Interest rate/FX risk: | Debt securities in issue/loans and advances to customers | 630 | 280 | 20 | (564 | ) | 233 | 50 | ||||||||||||||||||||||
Subordinated liabilities/loans and advances to customers | (69 | ) | 180 | – | (207 | ) | 79 | – | ||||||||||||||||||||||
| 864 | 479 | 8 | (788 | ) | 322 | 49 | ||||||||||||||||||||||||
| 210 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
| 2018 | Hedged item balance sheet line item | Change in value used for £m | Cash flow hedge reserve £m | Balances on cash flow £m | ||||||||||
Cash flow hedges: | ||||||||||||||
Interest rate risk: | Loans and advances to customers | (19 | ) | (4 | ) | (2 | ) | |||||||
| Loans and advances to banks | – | (2 | ) | – | ||||||||||
| Deposits by banks | 6 | (1 | ) | – | ||||||||||
| Debt securities in issue | (1 | ) | – | – | ||||||||||
FX risk: | Other financial assets at FVOCI | 199 | (1 | ) | – | |||||||||
| Not applicable – highly probable forecast transactions | (1 | ) | – | – | ||||||||||
| Debt securities in issue | (217 | ) | 21 | 3 | ||||||||||
Equity risk: | Other liabilities | 16 | (3 | ) | (2 | ) | ||||||||
Interest rate/FX risk: | Debt securities in issue/loans and advances to customers | (564 | ) | 233 | 50 | |||||||||
| Subordinated liabilities/loans and advances to customers | (207 | ) | 79 | – | ||||||||||
| (788 | ) | 322 | 49 | |||||||||||
13.12. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
2018 £m | 2017 £m | £m | £m | |||||||||||||
Loans and advances to customers: | ||||||||||||||||
Loans to housing associations | 13 | 1,034 | 12 | 13 | ||||||||||||
Other loans | 496 | 515 | 528 | 496 | ||||||||||||
| 509 | 1,549 | 540 | 509 | |||||||||||||
Debt securities | 3,263 | 547 | 298 | 3,263 | ||||||||||||
Equity securities | 93 | – | 135 | 93 | ||||||||||||
Reverse repurchase agreements – non trading | 2,272 | – | – | 2,272 | ||||||||||||
| 6,137(1) | 2,096 | 973 | 6,137 | |||||||||||||
|
Loans and advances to customers principally represented other loans, being a portfolio ofroll-up mortgages and associated receivables that isdeferred consideration following the partial sale of the portfolio. These are managed, and has itshave their performance evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them is provided on that basis to management. Since 2009, the Santander UK group’s policy has been not to designate similar new loans at fair value through profit or loss.
As part of the establishment of credit protection vehicles sponsored by Santander UK, we retained £3,053mIn 2019 £2.1bn of senior tranches of credit linked notes related to an SRT securitisation, which were previously classified as debt securities in the table above. These vehicles provide credit protectionabove, were presented on reference portfoliosa net basis. This followed a deed of Santander UK group loans with junior notes sold to external investors. As these notes do not have SPPI characteristics they are mandatorily held at fair value. Theseamendment, including a legal right ofset-off between the principal amounts of the senior tranches of credit linked notes are valued using the same parameters asand the related cash deposits included as collateral and financial guarantees described in Note 24, such that changes in their respective valuations are offset exactly, and there is no charge or credit to21. At 31 December 2019 the income statement. For more, see ‘Credit protection entities’ in Note 21.amount of this netting was £1.5bn.
The net (loss)/gain in the year attributable to changes in credit risk for loans and advances at fair value through profit or loss was £(1m) (2017: £49m, 2016: £40m)£nil (2018: £(1)m, 2017: £49m). The cumulative net loss attributable to changes in credit risk for loans and advances at fair value through profit or loss at 31 December 20182019 was £2m (2017: £120m)(2018: £2m).
14.13. LOANS AND ADVANCES TO CUSTOMERS
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
2018 £m | 2017 £m | £m | £m | |||||||||||||
Loans secured on residential properties | 158,248 | 155,355 | 165,645 | 158,248 | ||||||||||||
Corporate loans | 27,819 | 30,856 | 27,043 | 27,819 | ||||||||||||
Finance leases | 6,821 | 6,710 | 6,264 | 6,821 | ||||||||||||
Secured advances | – | – | – | – | ||||||||||||
Other unsecured loans | 7,554 | 6,230 | 7,188 | 7,554 | ||||||||||||
Amounts due from fellow Banco Santander subsidiaries and joint ventures | 1,997 | 1,199 | 2,204 | 1,997 | ||||||||||||
Loans and advances to customers | 202,439 | 200,350 | 208,344 | 202,439 | ||||||||||||
Credit impairment loss allowances on loans and advances to customers | (751 | ) | (940 | ) | (785 | ) | (751 | ) | ||||||||
RV and voluntary termination provisions on finance leases | (69 | ) | (78 | ) | (61 | ) | (69 | ) | ||||||||
Net loans and advances to customers | 201,619 | 199,332 | 207,498 | 201,619 | ||||||||||||
|
MovementFor movements in expected credit impairment loss allowances:losses, see the Credit risk section of the Risk review. The contractual amount outstanding on financial assets that were written off in the year and are still subject to enforcement activity was £72m (2018: £76m).
| Loans secured | Other | |||||||||||||||||||
| on residential | Corporate | Finance | unsecured | |||||||||||||||||
| properties | loans | leases | loans | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
At 31 December 2017 | 225 | 490 | 46 | 179 | 940 | |||||||||||||||
Adoption of IFRS 9 (see Note 1)(1) | 47 | 99 | 11 | 54 | 211 | |||||||||||||||
Re-allocation of ECL onoff-balance sheet exposures(1) | (3 | ) | (25 | ) | — | (22 | ) | (50 | ) | |||||||||||
At 1 January 2018 | 269 | 564 | 57 | 211 | 1,101 | |||||||||||||||
(Release)/charge to the income statement (see Note 8) | (18 | ) | 17 | 51 | 139 | 189 | ||||||||||||||
Write-offs and other items(2)(3) | (17 | ) | (355 | ) | (23 | ) | (144 | ) | (539 | ) | ||||||||||
At 31 December 2018 | 234 | 226 | 85 | 206 | 751 | |||||||||||||||
Recoveries, net of collection costs (see Note 8) | 2 | 1 | 6 | 33 | 42 | |||||||||||||||
At 1 January 2017 | 279 | 382 | 45 | 215 | 921 | |||||||||||||||
(Release)/charge to the income statement (see Note 8) | (37 | ) | 172 | 20 | 102 | 257 | ||||||||||||||
Write-offs and other items(2) | (17 | ) | (64 | ) | (19 | ) | (138 | ) | (238 | ) | ||||||||||
At 31 December 2017 | 225 | 490 | 46 | 179 | 940 | |||||||||||||||
Of which: | ||||||||||||||||||||
– Observed | 105 | 433 | 12 | 59 | 609 | |||||||||||||||
– Incurred but not yet observed | 120 | 57 | 34 | 120 | 331 | |||||||||||||||
| 225 | 490 | 46 | 179 | 940 | ||||||||||||||||
Recoveries, net of collection costs (see Note 8) | 3 | 1 | 6 | 44 | 54 | |||||||||||||||
At 1 January 2016 | 424 | 395 | 20 | 269 | 1,108 | |||||||||||||||
(Release)/charge to the income statement (see Note 8) | (116 | ) | 59 | 47 | 142 | 132 | ||||||||||||||
Write-offs and other items(2) | (29 | ) | (72 | ) | (22 | ) | (196 | ) | (319 | ) | ||||||||||
At 31 December 2016 | 279 | 382 | 45 | 215 | 921 | |||||||||||||||
Of which: | ||||||||||||||||||||
– Observed | 130 | 287 | 13 | 73 | 503 | |||||||||||||||
– Incurred but not yet observed | 149 | 95 | 32 | 142 | 418 | |||||||||||||||
| 279 | 382 | 45 | 215 | 921 | ||||||||||||||||
Recoveries, net of collection costs (see Note 8) | 4 | 3 | 2 | 56 | 65 | |||||||||||||||
|
|
|
Finance lease and hire purchase contract receivables may be analysed as follows:
| 2018 | 2017 | |||||||||||||||||||||||||||
| Gross investment £m | Unearned finance income £m | Net investment £m | Gross investment £m | Unearned finance income £m | Net investment £m | |||||||||||||||||||||||
Not later than one year | 3,730 | (210 | ) | 3,520 | 3,633 | (177 | ) | 3,456 | ||||||||||||||||||||
Later than one year and not later than five years | 3,415 | (278 | ) | 3,137 | 3,316 | (226 | ) | 3,090 | ||||||||||||||||||||
Later than five years | 210 | (46 | ) | 164 | 214 | (50 | ) | 164 | ||||||||||||||||||||
| 7,355 | (534 | ) | 6,821 | 7,163 | (453 | ) | 6,710 | |||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||
Unearned | Unearned | |||||||||||||||||||||||||||
| Gross | finance | Net | Gross | finance | Net | |||||||||||||||||||||||
| investment | income | investment | investment | income | investment | |||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||
No later than one year | 2,650 | (371 | ) | 2,279 | 3,730 | (210 | ) | 3,520 | ||||||||||||||||||||
Later than one year and not later than two years | 1,829 | (207 | ) | 1,622 | 1,839 | (148 | ) | 1,691 | ||||||||||||||||||||
Later than two years and not later than three years | 1,047 | (119 | ) | 928 | 1,056 | (87 | ) | 969 | ||||||||||||||||||||
Later than three years and not later than four years | 473 | (54 | ) | 419 | 488 | (39 | ) | 449 | ||||||||||||||||||||
Later than four years and not later than five years | 41 | (4 | ) | 37 | 32 | (4 | ) | 28 | ||||||||||||||||||||
Later than five years | 1,116 | (137 | ) | 979 | 210 | (46 | ) | 164 | ||||||||||||||||||||
| 7,156 | (892 | ) | 6,264 | 7,355 | (534 | ) | 6,821 | |||||||||||||||||||||
The Santander UK group enters into finance leasing arrangements primarily for the financing of motor vehicles and a range of assets for its corporate customers. Included in the carrying value of net investment in finance leases and hire purchase contracts is £1,034m (2017: £886m)£1,219m (2018: £1,034m) of unguaranteed RV at the end of the current lease terms, which is expected to be recovered throughre-payment,re-financing or sale. Contingent rent income of £nil (2017: £5m, 2016: £4m)(2018: £nil, 2017: £5m) was earned during the year, which was classified in ‘Interest and similar income’. Finance income on the net investment in finance leases was £299m (2018: £346m, 2017: £201m).
Finance lease receivable balances are secured over the asset leased. The Santander UK group is not permitted to sell or repledge the asset in the absence of default by the lessee. The Directors consider that the carrying amount of the finance lease receivables approximates to their fair value.
Included within loans and advances to customers are advances assigned to bankruptcy remote structured entities and Abbey Covered Bonds LLP. These loans provide security to issues of covered bonds and mortgage-backed or other asset-backed securities issued by the Santander UK group. For more, see Note 15.14.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
15.14. 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 vehicles that are described in more detail in Note 19.
The Santander UK group uses structured entities to securitise some of the mortgage and other loans to customers that it originates. The Santander UK group also issues covered bonds, which are guaranteed by, and secured against, a pool of the Santander UK group’s mortgage loans transferred to Abbey Covered Bonds LLP. The Santander UK group issues mortgage-backed securities, other asset-backed securities and covered bonds mainly in order to obtain diverse, low cost funding, but also to use as collateral for raising funds via third party bilateral secured funding transactions or for liquidity purposes in the future. The Santander UK group has successfully used bilateral secured transactions as an additional form of medium-term funding; this has allowed the Santander UK group to further diversify its medium-term funding investor base.
Loans and advances to customers include portfolios of residential mortgage loans, and receivables derived from credit agreements with retail customers for the purchases of financed vehicles, which are subject tonon-recourse finance arrangements. These loans and receivables have been purchased by, or assigned to, structured entities or Abbey Covered Bonds LLP, and have been funded primarily through the issue of mortgage-backed securities, other asset-backed securities or covered bonds. No gain or loss has been recognised as a result of these sales. The structured entities and Abbey Covered Bonds LLP are consolidated as subsidiaries. The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the structured entities.
a) Securitisations i)
i) Master trust structures
The Santander UK group makes use of master trust structures, whereby a pool of residential mortgage loans is assigned to a trust company by the asset originator. A funding entity acquires a beneficial interest in the pool of assets held by the trust company with funds borrowed from qualifying structured entities, which at the same time issue asset-backed securities to third-party investors or the Santander UK group.
Santander UK plc and its subsidiaries receive payments from the securitisation companies in respect of fees for administering the loans, and payment of deferred consideration for the sale of the loans. Santander UK plc and its subsidiaries have no right or obligation to repurchase any securitised loan, except if certain representations and warranties given by Santander UK plc or its subsidiaries at the time of transfer are breached and, in certain cases, if there is a product switch or further advance, if a securitised loan is in arrears for over two months or if a securitised loan does not comply with the liquidity coverage requirements for credit institutions.regulatory requirements.
ii) Other securitisation structures
The Santander UK group issues notes through pass-through stand-alone vehicles for the securitisation of receivables derived from credit agreements with retail customers for the purchase of financed vehicles. Santander UK plc and its subsidiaries are under no obligation to support any losses that may be incurred by the master trust or other structures, securitisation companies or holders of the securities, and do not intend to provide such further support.
b) Covered bonds
Santander UK plc also issues covered bonds, which are its direct, unsecured and unconditional obligation. The covered bonds benefit from a guarantee from Abbey Covered Bonds LLP. Santander UK plc makes a term advance to Abbey Covered Bonds LLP equal to the sterling proceeds of each issue of covered bonds. Abbey Covered Bonds LLP uses the proceeds of the term advance to purchase portfolios of residential mortgage loans and their security from Santander UK plc. Under the terms of the guarantee, Abbey Covered Bonds LLP has agreed to pay an amount equal to the guaranteed amounts when the same shall become due for payment but which would otherwise be unpaid by Santander UK plc.
c) Analysis of securitisations and covered bonds
The Santander UK group’s principal securitisation programmes and covered bond programme, together with the balances of the advances subject to securitisation (or for the covered bond programme assigned) and the carrying value of the notes in issue at 31 December 20182019 and 20172018 are listed below.
| Notes issued to Santander UK | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross assets | External notes in issue | plc/subsidiaries as collateral | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross assets | External notes in issue | Notes issued to Santander UK plc/subsidiaries as collateral | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 £m | 2017 £m | 2018 £m | 2017 £m | 2018 £m | 2017 £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed master trust structures: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Holmes | 4,414 | 4,299 | 3,182 | 1,400 | 463 | 389 | 4,262 | 4,414 | 1,931 | 3,182 | 463 | 463 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
– Fosse | 4,646 | 5,732 | 199 | 616 | 34 | 34 | 3,708 | 4,646 | 295 | 199 | 1,404 | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
– Langton | 3,034 | 3,893 | – | – | 2,354 | 2,355 | 3,076 | 3,034 | – | – | 2,354 | 2,354 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 12,094 | 13,924 | 3,381 | 2,016 | 2,851 | 2,778 | 11,046 | 12,094 | 2,226 | 3,381 | 4,221 | 2,851 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed securitisation structures: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Motor | 1,055 | 1,318 | 738 | 852 | 374 | 514 | 490 | 1,055 | 324 | 738 | 197 | 374 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
– Auto ABS UK Loans | 1,468 | 1,498 | 1,212 | 1,240 | 316 | 306 | 1,532 | 1,468 | 1,229 | 1,212 | 368 | 316 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,523 | 2,816 | 1,950 | 2,092 | 690 | 820 | 2,022 | 2,523 | 1,553 | 1,950 | 565 | 690 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securitisation programmes | 14,617 | 16,740 | 5,331 | 4,108 | 3,541 | 3,598 | 13,068 | 14,617 | 3,779 | 5,331 | 4,786 | 3,541 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Covered bond programme: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Covered bond programmes: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Euro 35bn Global Covered Bond Programme | 21,578 | 19,772 | 18,653 | 16,866 | – | – | 23,323 | 21,578 | 19,004 | 18,653 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securitisation and covered bond programmes | 36,195 | 36,512 | 23,984 | 20,974 | 3,541 | 3,598 | 36,391 | 36,195 | 22,783 | 23,984 | 4,786 | 3,541 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: held by the Santander UK group: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: held by Santander UK group: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Euro 35bn Global Covered Bond Programme | (539 | ) | (1,067 | ) | – | (539 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securitisation and covered bond programmes (see Note 28) | 23,445 | 19,907 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securitisation and covered bond programmes (See Note 25) | 22,783 | 23,445 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
The following table sets out the internal and external issuances and redemptions in 20182019 and 20172018 for each securitisation and covered bond programme.
| Internal issuances | External issuances | Internal redemptions | External redemptions | Internal issuances | External issuances | Internal redemptions | External redemptions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed master trust structures: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Holmes | 0.1 | – | 1.8 | 0.5 | – | 0.2 | 0.1 | 1.8 | – | 0.1 | – | 1.8 | – | – | 1.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Fosse | – | – | – | – | – | 0.1 | 0.4 | 1.8 | 1.4 | – | 0.1 | – | – | – | – | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed securitisation structures: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Motor | – | 0.1 | – | 0.5 | 0.1 | 0.1 | 0.1 | 0.3 | – | – | – | – | 0.2 | 0.1 | 0.4 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Auto ABS UK Loans | – | 0.2 | 0.4 | 0.7 | – | – | 0.4 | 0.7 | 0.1 | – | 0.2 | 0.4 | 0.1 | – | 0.2 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Covered bond programme | – | – | 4.3 | 2.3 | 0.5 | 0.3 | 1.9 | 3.2 | – | – | 2.9 | 4.3 | 0.5 | 0.5 | 1.5 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.1 | 0.3 | 6.5 | 4.0 | 0.6 | 0.7 | 2.9 | 7.8 | 1.5 | 0.1 | 3.2 | 6.5 | 0.8 | 0.6 | 3.2 | 2.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Holmes Funding Ltd has a beneficial interest of £3.2bn (2017: £1.7bn)£2.1bn (2018: £3.2bn) in the residential mortgage loans held by Holmes Trustees Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Holmes Trustees Ltd belongs to Santander UK plc.
Fosse Funding (No.1)(No. 1) Ltd has a beneficial interest of £0.2bn (2017: £0.6bn)£1.7bn (2018: £0.2bn) in the residential mortgage loans held by Fosse Trustee (UK) Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Fosse Trustee (UK) Ltd belongs to Santander UK plc.
Langton Funding (No.1) Ltd has a beneficial interest of £2.3bn (2017:£2.4bn (2018: £2.3bn) in the residential mortgage loans held by Langton Mortgage Trustee (UK) Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Langton Mortgage Trustee (UK) Ltd belongs to Santander UK plc.
The Holmes securitisation companies have cash deposits of £218m (2017: £nil)£283m (2018: £218m), which have been accumulated to finance the redemption of a number of securities issued by the Holmes securitisation companies. The share of Holmes Funding Ltd in the trust assets is therefore reduced by this amount.
Fosse Master Issuer plc has cash deposits of £nil (2017: £24m)(2018: £nil), which have been accumulated to finance the redemption of a number of securities issued by Fosse Master Issuer plc. Fosse Funding (No.1) Ltd’s beneficial interest in the assets held by Fosse Trustee (UK) Ltd is therefore reduced by this amount.
16.15. TRANSFERS OF FINANCIAL ASSETS NOT QUALIFYING FOR DERECOGNITION
The Santander UK group enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to structured entities. These transfers may give rise to the full or partial derecognition of those financial assets. Transferred financial assets that do not qualify for derecognition consist of (i) securities held by counterparties as collateral under repurchase agreements, (ii) securities lent under securities lending agreements, and (iii) loans that have been securitised under arrangements by which the Santander UK group retains a continuing involvement in such transferred assets. As the substance of the sale and repurchase and securities lending transactions is secured borrowings, the asset collateral continues to be recognised in full and the related liability reflecting the Santander UK group’s obligation to repurchase the transferred assets for a fixed price at a future date is recognised in deposits from banks or customers, as appropriate. As a result of these transactions, the Santander UK group is unable to use, sell or pledge the transferred assets for the duration of the transaction. The Santander UK group remains exposed to interest rate risk and credit risk on these pledged instruments. The counterparty’s recourse is not limited to the transferred assets.
The Santander UK group securitisation transfers do not qualify for derecognition. The Santander UK group remains exposed to credit risks arising from the mortgage loans or credit agreements and has retained control of the transferred assets. Circumstances in which the Santander UK group has continuing involvement in the transferred assets may include retention of servicing rights over the transferred assets, entering into a derivative transaction with the securitisation vehicle, retaining an interest in the securitisation vehicle or providing a cash reserve fund. Where the Santander UK group has continuing involvement it continues to recognise the transferred assets to the extent of its continuing involvement and recognises an associated liability. The net carrying amount of the transferred assets and associated liabilities reflects the rights and obligations that the Santander UK group has retained.
The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:
| 2018 | 2017 | |||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||
| Nature of transaction | £m | £m | £m | £m | ||||||||||||||||
Sale and repurchase agreements | 7,642 | (7,188 | ) | 10,808 | (7,734 | ) | ||||||||||||||
Securities lending agreements | 144 | (120 | ) | 302 | (235 | ) | ||||||||||||||
Securitisations (See Notes 15 and 28) | 11,583 | (5,331 | ) | 12,847 | (4,108 | ) | ||||||||||||||
| 19,369 | (12,639 | ) | 23,957 | (12,077 | ) | |||||||||||||||
| Group | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||
| Nature of transaction | £m | £m | £m | £m | ||||||||||||||||
Sale and repurchase agreements | 7,592 | (6,739 | ) | 7,642 | (7,188 | ) | ||||||||||||||
Securities lending agreements | 195 | (143 | ) | 144 | (120 | ) | ||||||||||||||
Securitisations (See Notes 14 and 25) | 9,992 | (3,779 | ) | 11,583 | (5,331 | ) | ||||||||||||||
| 17,779 | (10,661 | ) | 19,369 | (12,639 | ) | |||||||||||||||
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
17.16. REVERSE REPURCHASE AGREEMENTS – NON TRADING
| Group | ||||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
Agreements with banks | 3,254 | 2,464 | 2,161 | 3,254 | ||||||||||||
Agreements with customers | 17,873 | 150 | 21,475 | 17,873 | ||||||||||||
| 21,127 | 2,614 | 23,636 | 21,127 | |||||||||||||
In 2018, as part of our ring-fencing implementation, Santander UK plc revised the classification of the majority of our permitted non trading reverse repurchase agreements at amortised cost, in line with our ring-fenced business model for managing these assets as part of our overall funding and liquidity plans. For more on our ring-fence implementation, see Note 43.
18.17. OTHER FINANCIAL ASSETS AT AMORTISED COST
| 2018 | 2017 | |||||||
| £m | £m | |||||||
Asset backed securities(1) | 719 | |||||||
Debt securities(2) | 6,509 | |||||||
| 7,228 | ||||||||
|
|
On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item (Note 20) between ‘other financial assets at amortised cost’ and ‘financial assets at fair value through other comprehensive income’. This aligned the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position. In addition, certainavailable-for-sale securities were mandatorily measured at FVTPL. For more information, see Note 44.
| Group | ||||||||
| 2019 | 2018 | |||||||
| £m | £m | |||||||
Asset backed securities | 532 | 719 | ||||||
Debt securities | 6,524 | 6,509 | ||||||
| 7,056 | 7,228 | |||||||
A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review.
19.18. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
| 2018 | 2017 | |||||||
| £m | £m | |||||||
Debt securities(1) | 13,229 | |||||||
Loans and advances to customers(2) | 73 | |||||||
| 13,302 | ||||||||
|
|
On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item (Note 20) between ‘other financial assets at amortised cost’ and ‘financial assets at fair value through other comprehensive income’. For more information, see Note 44.
| Group | ||||||||
| 2019 | 2018 | |||||||
| £m | £m | |||||||
Debt securities | 9,691 | 13,229 | ||||||
Loans and advances to customers | 56 | 73 | ||||||
| 9,747 | 13,302 | |||||||
A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review.
20. FINANCIAL INVESTMENTS
| 2018 | 2017 | |||||||
| £m | £m | |||||||
Asset backed securities(1) | 2,180 | |||||||
Debt securities: | ||||||||
–Available-for-sale(2) | 8,772 | |||||||
–Held-to-maturity(3) | 6,578 | |||||||
Available-for-sale equity securities(4) | 81 | |||||||
| 17,611 | ||||||||
|
|
|
|
On adoption of IFRS 9, the Santander UK group split the ‘financial investments’ balance sheet line item between ‘other financial assets at amortised cost’ and ‘financial assets at FVOCI’. For more information, see Note 44.
A significant portion of the debt securities were held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures can be found in the ‘Liquidity risk’ section of the Risk review.
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
21.19. INTERESTS IN OTHER ENTITIES
| 2018 | 2017 | |||||||
| £m | £m | |||||||
Joint ventures | 88 | 73 | ||||||
| 88 | 73 | |||||||
| Group | ||||||||
| 2019 | 2018 | |||||||
| £m | £m | |||||||
Joint ventures | 117 | 88 | ||||||
| 117 | 88 | |||||||
The Santander UK group consists of a parent company, Santander UK Group Holdings plc, incorporated and domiciled in the UK and a number of subsidiaries and joint ventures held directly and indirectly by the Company. The Company has no individually significant associates. Details of subsidiaries, joint ventures and associates are set out in the Shareholder Information section.
a) Interests in subsidiaries
The Company holds directly or indirectly 100% of the issued ordinary share capital of its principal subsidiaries. All companies operate principally in their country of incorporation or registration. ANTSSFS has branch offices in Jersey and the Isle of Man, and had a branch office in the US which closed in 2018.
On 1 January 2018, Santander UK plc acquired 100% of the share capital of Santander UK Operations Ltd (formerly Geoban UK Ltd, a subsidiary of Geoban SA) and Santander UK Technology Ltd (formerly Isban UK Ltd, a subsidiary of Ingenieria de Software Bancario SL), for a final cash consideration of £66m. Immediately prior to this, the UK business of Produban Servicios Informaticos Generales SL was acquired by Santander UK Technology Ltd for a final cash consideration of £13m. These businesses are referred to as Santander Services.Man.
Subsidiaries with significantnon-controlling interests
The only subsidiary with significantnon-controlling interests is PSA Finance UK Limited, which operates in the UK. In 20182019 and 2017,2018, the proportion of ownership interests and voting rights held bynon-controlling interests was 50%.
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
Profit attributable tonon-controlling interests | 22 | 21 | 19 | 22 | ||||||||||||
Accumulatednon-controlling interests of the subsidiary | 151 | 152 | 160 | 151 | ||||||||||||
Dividends paid tonon-controlling interests | 22 | 19 | 12 | 22 | ||||||||||||
Summarised financial information: | ||||||||||||||||
– Total assets | 3,289 | 3,215 | 3,228 | 3,289 | ||||||||||||
– Total liabilities | 2,987 | 2,909 | 2,905 | 2,987 | ||||||||||||
– Profit for the year | 43 | 43 | 40 | 43 | ||||||||||||
– Total comprehensive income for the year | 43 | 43 | 40 | 43 | ||||||||||||
| Santander UK Group Holdings plc | 215 |
Annual Report 2019| Financial statements
Interests in consolidated structured entities
Structured entities are formed by Santander UK to accomplish specific and well-defined objectives. Santander UK consolidates these structured entities when the substance of the relationship indicates control, as described in Note 1. In addition to the structured entities disclosed in Note 1514 which are used for securitisation and covered bond programmes, the only other structured entities consolidated by Santander UK are described below. All the external assets and liabilities in these entities are included in the financial statements and in relevant Notes. Other than as set out below, no significant judgements were required with respect to control or significant influence.
i) Guaranteed Investment Products 1 PCC Limited (GIP)
GIP is a Guernsey-incorporated, closed-ended, protected cell company. The objective of each cell is to achieve capital growth for retail investors. In order to achieve the investment objective, GIP, on behalf of the respective cells, has entered into transactions with Santander UK plc. Santander Guarantee Company, a Santander UK group company, also guarantees the shareholders of cells a fixed return on their investment and/or the investment amount. GIP has no third party assets. Although the share capital is owned by the retail investors, Santander UK continues to have exposure to variable risks and returns through Santander Guarantee Company’s guarantee and has therefore consolidated this entity.
ii) Motor Securities2018-1 Designated Activity Company (Motor 2018)
Motor 2018 is a credit protection entity, and a Designated Activity Company limited by shares, incorporated in Ireland. It has issued a series of credit linked notes varying in seniority which reference portfolios of Santander UK Foundation Limited
Santander UK Foundation Limited supports disadvantaged people throughout the UK through the charitable priorities of education and financial capability. The entity was set up by Santander UK plc, although its control was transferredgroup loans. Concurrently, these entities sell credit protection to Santander UK Group Holdings plc in June 2018. Allrespect of its revenue since that date arises through donations fromthe referenced loans and, in return for a fee, are liable to make protection payments to Santander UK Group Holdings plc. Its third party assetsupon the occurrence of £15m (2017: £16m) are not materiala credit event in relation to the resultsany of the Santander UK group. Thisreferenced loans. The entity has been consolidated as Santander UK Group Holdings plc directs its activities.holds a variable interest by retaining the junior tranche of notes issued by the entity.
b) Interests in joint ventures
Santander UK does not have any individually material interests in joint ventures. As set out in the accounting policies in Note 1, interests in joint ventures are accounted for using the equity method. In 2018,2019, Santander UK’s share in the profit after tax of its joint ventures was £15m (2017: £12m)£30m (2018: £15m) before elimination of transactions between Santander UK and the joint ventures. At 31 December 2018,2019, the carrying amount of Santander UK’s interest was £88m (2017: £73m)£117m (2018: £88m). At 31 December 20182019 and 2017,2018, the joint ventures had no commitments and contingent liabilities.
c) Interests in unconsolidated structured entities
Structured entities sponsored by the Santander UK group
Santander UK has interests in structured entities which it sponsors but does not control. Santander UK considers itself a sponsor of a structured entity when it facilitates the establishment of the structured entity. Other than as set out below, no significant judgements were required with respect to control or significant influence. The structured entities sponsored but not consolidated by Santander UK are as follows.
i) Santander (UK) Common Investment Fund
The Santander (UK) Common Investment Fund (the Fund) is a common investment fund that was established to hold the assets of the Santander (UK) Group Pension Scheme. The Fund is not consolidated by Santander UK, but its assets of £11,433m (2017: £11,626m)£12,446m (2018: £11,433m) are accounted for as part of the defined benefit assets and obligations recognised on Santander UK’s balance sheet. For more on the Fund, see Note 31.28. As the Fund holds the assets of the pension scheme, it is outside the scope of IFRS 10. Santander UK’s maximum exposure to loss is the carrying amount of the assets held.
Annual Report 2018 | Financial statements
ii) Trust preferred entities
The trust preferred entities, Abbey National Capital Trust I and Abbey National Capital LP I, were 100% owned finance subsidiaries (as defined in RegulationS-X under the US Securities Act 1933, as amended) of Santander UK plc which were set up by Santander UK solely to issue trust preferred securities to third parties and lend the funds on to other Santander UK companies. On 7 February 2000, Abbey National Capital Trust I issued US$1bn of 8.963%Non-cumulative Trust Preferred Securities, which were registered under the US Securities Act 1933, as amended. The trust preferred entities were not consolidated by Santander UK as Santander UK plc was not exposed to variability of returns from them.
In 2018, following a Partnership Special Redemption Event, the outstanding US$104m Abbey National Capital Trust I 8.963%Non-cumulative Trust Preferred Securities were redeemed in full in accordance with their terms. The trust preferred entities were liquidated later in 2018.
iii) Credit protection entities
Santander UK has established three (2017: two)four (2018: three) unconsolidated credit protection entities, which are privateDesignated Activity Companies limited companiesby shares, incorporated in Ireland. Each entity has issued a series of credit linked notes varying in seniority which reference portfolios of Santander UK group loans. Concurrently, these entities sell credit protection to Santander UK in respect of the referenced loans and, in return for a fee, are liable to make protection payments to Santander UK upon the occurrence of a credit event in relation to any of the referenced loans.
Senior credit linked notes, which amounted to £3,053m (2017: £830m)£3,766m (2018: £3,053m), are issued to, and held by, Santander UK. These notes are included within ‘Other financial assets at fair value through profit or loss’ on the balance sheet (see Note 13). Junior credit linked notes, which amounted to £408m (2017: £187m)£825m (2018: £408m), are all held by third party investors and suffer the first losses incurred in the referenced portfolios. Funds raised by the sale of the credit linked notes are deposited with Santander UK as collateral for the credit protection.
£110m (2018: £3,053m) of the senior credit linked notes are presented on a gross basis and included within ‘Other financial assets at fair value through profit or loss’ on the balance sheet (see Note 12). Deposits and associated guarantees in respect ofrelating to the senior credit linked notes are included within ‘Other financial liabilities at fair value through profit or loss’ (see Note 24),21). The remainder of the senior credit linked notes, along with the deposits and associated guarantees, are presented on a net basis, to reflect a legal right ofset-off between the principal amounts of senior notes and the cash deposits. Deposits and associated guarantees in respect of the junior credit linked notes are included within ‘Deposits by customers’ (see Note 25)22).
The entities are not consolidated by Santander UK because the third party investors have the exposure, or rights, to all of the variability of returns from the performance of the entities. No assets are transferred to, or income received from, these vehicles. BecauseSince the credit linked notes (including those held by Santander UK) are fully cash collateralised, Santander UK’s maximum exposure to loss is equal to any unamortised fees paid to the credit protection entities in connection with the credit protection outlined above.
Structured entities not sponsored by the Santander UK group
Santander UK also has interests in structured entities which it does not sponsor or control. These largely relate to the legacy treasury asset portfolio and consist of holdings of mortgage and other asset backed securities issued by entities that were established and/or sponsored by other unrelated financial institutions. These securities comprise the asset backed securities included in Note 18.17. Management has concluded that the Santander UK group has no control or significant influence over these entities and that the carrying value of the interests held in these entities represents the maximum exposure to loss.
22.
| 216 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
20. INTANGIBLE ASSETS
a) Goodwill
Cost £m | Accumulated £m | Net book value £m | ||||||||||
At 31 December 2017, 1 January 2018 and 31 December 2018 | 1,285 | (82 | ) | 1,203 | ||||||||
| Group | ||||||||||||
| Accumulated | ||||||||||||
| Cost | impairment | Net book value | ||||||||||
| £m | £m | £m | ||||||||||
At 31 December 2018, 1 January 2019 and 31 December 2019 | 1,285 | (82 | ) | 1,203 | ||||||||
Impairment of goodwill
In 20182019 and 2017,2018, no impairment of goodwill was recognised. Impairment testing in respect of goodwill allocated to each cash-generating unit (CGU) is performed annually or more frequently if there are impairment indicators present. For the purpose of impairment testing, the CGUs are based on customer groups within the relevant business divisions.
The cash flow projections for each CGU are based on the five-year plan prepared for regulatory purposes, based on Santander UK’s3-Year Plan and approved by the Santander UK plc Board. The assumptions included in the expected future cash flows for each CGU take into consideration the UK economic environment and financial outlook within which the CGU operates. KeyThe base case economic scenario used in the3-Year Plan includes key assumptions includesuch as projected house price and GDP growth rates, the level of interest rates and the level and change in unemployment rates in the UK. UK and the forecast Bank of England base rates. For more on Santander UK’s base case economic scenario, including information on our forecasting approach and the assumptions in place at 31 December 2019, see the Credit risk – Santander UK group level section of the Risk review.
The rate used to discount the cash flows is based on apre-tax rate that reflects the weighted average cost of capital allocated by Santander UK to investments in the business division in which the CGU operates. The growth rate used reflects management’s five-year forecasts, with a terminal growth rate for each year applied thereafter, in line with the estimated long-term average UK GDP growth rate.
Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment of goodwill to be recognised.
The following CGUs (all within Retail Banking) include in their carrying values goodwill that comprises the goodwill reported by Santander UK. The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives. The calculations have been based on value in use using cash flows based on the five-year plan.
| Goodwill | Discount rate | Growth rate(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | Discount rate | Growth rate(1) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CGU | 2018 £m | 2017 £m | 2018 % | 2017 % | 2018 % | 2017 % | £m | £m | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Personal financial services | 1,169 | 1,169 | 10.5 | 10.8 | 2 | 1 | 1,169 | 1,169 | 9.8 | 10.5 | 3 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Private banking | 30 | 30 | 10.5 | 10.8 | 2 | 1 | 30 | 30 | 9.8 | 10.5 | 4 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 4 | 4 | 10.5 | 10.8 | 2 | 1 | 4 | 4 | 9.8 | 10.5 | 3 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1,203 | 1,203 | 1,203 | 1,203 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Average growth rate based on the five-year plan for the first five years and a growth rate of |
In 2018,2019, the discount rate decreased by 0.30.7 percentage points to 9.8% (2018: 10.5% (2017: 10.8%). The decrease reflected changes in current market and economic conditions. In 2018,2019, the change in growth rates reflected Santander UK’s updated strategic priorities in the context of forecast economic conditions.
b) Other intangibles
| Group | ||||||||||||
| Accumulated | ||||||||||||
| amortisation/ | ||||||||||||
| Cost | impairment | Net book value | ||||||||||
| £m | £m | £m | ||||||||||
At January 2019 | 1,099 | (488 | ) | 611 | ||||||||
Additions | 178 | – | 178 | |||||||||
Disposals | (14 | ) | – | (14 | ) | |||||||
Charge | – | (192 | ) | (192 | ) | |||||||
Impairment | – | (10 | ) | (10 | ) | |||||||
At 31 December 2019 | 1,263 | (690 | ) | 573 | ||||||||
At 1 January 2018 | 962 | (423 | ) | 539 | ||||||||
Additions | 213 | – | 213 | |||||||||
Write offs | (76 | ) | 76 | – | ||||||||
Charge | – | (141 | ) | (141 | ) | |||||||
At 31 December 2018 | 1,099 | (488 | ) | 611 | ||||||||
Other intangibles consist of computer software.
| Santander UK Group Holdings plc | 217 |
Annual Report 2019| Financial statements |
b) Other intangibles
Cost £m | Accumulated amortisation/ impairment £m | Net book value £m | ||||||||||
At 1 January 2018 | 962 | (423 | ) | 539 | ||||||||
Additions | 213 | – | 213 | |||||||||
Write offs | (76 | ) | 76 | – | ||||||||
Charge | – | (141 | ) | (141 | ) | |||||||
Sales | – | – | – | |||||||||
At 31 December 2018 | 1,099 | (488 | ) | 611 | ||||||||
At 1 January 2017 | 760 | (278 | ) | 482 | ||||||||
Additions | 205 | – | 205 | |||||||||
Disposals | (3 | ) | 3 | – | ||||||||
Charge | – | (116 | ) | (116 | ) | |||||||
Impairment | – | (32 | ) | (32 | ) | |||||||
At 31 December 2017 | 962 | (423 | ) | 539 | ||||||||
Other intangibles consist of computer software. In 2017, impairments primarily related to capitalised software costs for a credit risk management system, part of which was no longer in use.
23. TRADING LIABILITIES
2018 £m | 2017 £m | |||||||
Securities sold under repurchase agreements | – | 25,504 | ||||||
Short positions in securities and unsettled trades | – | 3,694 | ||||||
Cash collateral | – | 1,911 | ||||||
| – | 31,109 | |||||||
In 2018, as part of our ring-fence plans, the trading business in the Santander UK group was run down, and the gilt-edged market making business was transferred to Banco Santander London Branch. For more on our ring-fencing transition, see Note 43.
24.21. OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
2018 £m | 2017 £m | Group | ||||||||||||||
US$10bn Euro Commercial Paper Programme | – | 387 | ||||||||||||||
| 2019 | 2018 | |||||||||||||||
| £m | £m | |||||||||||||||
US$30bn Euro Medium Term Note Programme | 165 | 169 | 159 | 165 | ||||||||||||
Structured Notes Programmes | 696 | 932 | 809 | 696 | ||||||||||||
Eurobonds | 129 | 147 | 137 | 129 | ||||||||||||
Structured deposits | 133 | 680 | 435 | 133 | ||||||||||||
Collateral and associated financial guarantees | 3,053 | – | 173 | 3,053 | ||||||||||||
Repurchase agreements – non trading | 2,110 | – | – | 2,110 | ||||||||||||
| 6,286(1) | 2,315 | 1,713 | 6,286 | |||||||||||||
For the Santander UK group, all (2018: all) of the other financial liabilities at fair value through profit or loss were designated as such.
|
The collateralCollateral and associated financial guarantees relates toin the table above represent collateral received, together with associated credit protection guarantees, relating toin respect of the proceeds of the retained senior tranches of credit linked notes described in Note 13, and have been designated at fair value through profit or loss.12. The financial guarantees are valued using the same parameters as the related credit linked notes, such that changes in the respective valuations are offset exactly, and there is no charge or credit to the income statement. In 2019 £2.1bn of cash deposits, which were previously included within collateral and associated financial guarantees in the table above, were presented on a net basis. This followed a deed of amendment, including a legal right ofset-off between the principal amounts of senior tranches of credit linked notes, classified as debt securities in Note 12, and the cash deposits. At 31 December 2019 the amount of this netting was £1.5bn. For more, see ‘Credit protection entities’ in Note 21, and ‘Internal models based on information other than market data (Level 3)’ in Note 41.19.
Gains and losses arising from changes in the credit spread of securities issued by the Santander UK group reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount. The net gainloss during the year attributable to changes in the Santander UK group’s own credit risk on the above securities was £77m (2018: £84m (2017:gain, 2017: £29m loss, 2016: £6m gain)loss). The cumulative net gain attributable to changes in the Santander UK group’s own credit risk on the above securities at 31 December 20182019 was £77m (2017: £7m loss)£nil (2018: £77m).
At 31 December 2018,2019, the amount that would be required to be contractually paid at maturity of the securities above was £128m£4m lower (2017: £4m(2018: £128m lower) than the carrying value.
Annual Report 2018 | Financial Statements
25.22. DEPOSITS BY CUSTOMERS
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
2018 £m | 2017 £m | £m | £m | |||||||||||||
Current and demand accounts | 87,316 | 85,780 | 90,332 | 87,316 | ||||||||||||
Savings accounts(1) | 69,102 | 70,461 | 69,319 | 69,102 | ||||||||||||
Time deposits | 16,204 | 20,453 | 18,121 | 16,204 | ||||||||||||
Amounts due to fellow Banco Santander subsidiaries and joint ventures | 1,070 | 727 | 1,234 | 1,070 | ||||||||||||
| 173,692 | 177,421 | 179,006 | 173,692 | |||||||||||||
| (1) | Includes equity index-linked deposits of |
26.23. DEPOSITS BY BANKS
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| 2018 £m | 2017 £m | £m | £m | |||||||||||||
Items in the course of transmission | 262 | 303 | 337 | 262 | ||||||||||||
Deposits held as collateral | 4,058 | 1,760 | 2,175 | 4,058 | ||||||||||||
Other deposits(1) | 13,504 | 10,645 | 11,847 | 13,504 | ||||||||||||
| 17,824 | 12,708 | 14,359 | 17,824 | |||||||||||||
| (1) | Includes drawdown from the TFS of £10.8bn |
27.24. REPURCHASE AGREEMENTS – NON TRADING
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| 2018 £m | 2017 £m | £m | £m | |||||||||||||
Agreements with banks | 5,865 | 1,076 | 10,227 | 5,865 | ||||||||||||
Agreements with customers | 5,045 | – | 8,059 | 5,045 | ||||||||||||
| 10,910 | 1,076 | 18,286 | 10,910 | |||||||||||||
In 2018, as part of our ring-fencing implementation, Santander UK plc revised the classification of the majority of our permitted non trading repurchase agreements at amortised cost, in line with our ring-fenced business model for managing these liabilities as part of our overall funding and liquidity plans. For more on our ring-fence implementation, see Note 43.
| 218 | Santander UK Group Holdings plc |
28.
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
25. DEBT SECURITIES IN ISSUE
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| 2018 £m | 2017 £m | £m | £m | |||||||||||||
Medium-term notes: | ||||||||||||||||
– US$30bn Euro Medium Term Note Programme | 7,229 | 8,816 | 4,679 | 7,229 | ||||||||||||
– Euro 30bn Euro Medium Term Note Programme | 5,348 | 2,177 | 5,175 | 5,348 | ||||||||||||
– USSEC-registered – Santander UK Group Holdings plc | 5,841 | 4,050 | 5,763 | 5,841 | ||||||||||||
– USSEC-registered – Santander UK plc | 7,649 | 6,280 | 5,891 | 7,649 | ||||||||||||
– US$20bn Commercial Paper Programmes | 3,131 | 2,906 | 3,014 | 3,131 | ||||||||||||
| 29,198 | 24,229 | 24,522 | 29,198 | |||||||||||||
Euro 35bn Global Covered Bond Programme (See Note 15) | 18,114 | 15,799 | ||||||||||||||
Euro 35bn Global Covered Bond Programme (See Note 14) | 19,004 | 18,114 | ||||||||||||||
Certificates of deposit | 3,221 | 4,681 | 2,806 | 3,221 | ||||||||||||
Credit linked notes | 42 | 43 | 60 | 42 | ||||||||||||
Securitisation programmes (See Note 15) | 5,331 | 4,108 | ||||||||||||||
Securitisation programmes (See Note 14) | 3,779 | 5,331 | ||||||||||||||
| 55,906 | 48,860 | 50,171 | 55,906 | |||||||||||||
The funding from the Euro 30bn Euro Medium Term Note Programme and the USSEC-registered debt shelfDebt Programme in the name of Santander UK Group Holdings plc has been downstreamed to our operating company Santander UK plc.
The credit linked notes were issued by PSA Finance UK Limited and reference a pool of auto loans and leases originated by PSA Finance UK Limited that, in return for a fee, provides credit protection on the first 7.6% of losses in the reference portfolio.
|
29.26. SUBORDINATED LIABILITIES
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| 2018 £m | 2017 £m | £m | £m | |||||||||||||
£325m Sterling Preference Shares | 344 | 344 | 344 | 344 | ||||||||||||
£175m Fixed/Floating Rate Tier One Preferred Income Capital Securities | – | 2 | ||||||||||||||
Undated subordinated liabilities | 574 | 584 | 581 | 574 | ||||||||||||
Dated subordinated liabilities | 2,683 | 2,863 | 2,603 | 2,683 | ||||||||||||
| 3,601 | 3,793 | 3,528 | 3,601 | |||||||||||||
The above securities will, in the event of the winding up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination amongst each of specificthe subordinated liabilities is determined in respectupon a winding up of the issuer. The claims of holders of preference shares are generally junior to those of the holders of undated subordinated liabilities, whichissuer is specified in turn are generally junior to the claims of holders of the dated subordinated liabilities. The subordination of the preference shares ranks equally with that of the £300m fixed/floating ratenon-cumulative callable preference sharestheir respective terms and £300mStep-up Callable Perpetual Reserve Capital Instruments classified asnon-controlling interests, as described in Note 35.conditions.
In 20182019 and 2017,2018, the Santander UK group had no defaults of principal, interest or other breaches with respect to its subordinated liabilities. No repayment or purchase by the issuer of the subordinated liabilities may be made prior to their stated maturity without the consent of the PRA.
In 2017, Santander UK exercised its option to call the £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities. These were fully redeemed on 9 February 2018.
Undated subordinated liabilities
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| First call date | 2018 £m | 2017 £m | First call date | £m | £m | |||||||||||||||||||
10.0625% Exchangeable capital securities | n/a | 205 | 205 | n/a | 205 | 205 | ||||||||||||||||||
7.375% 20 YearStep-up perpetual callable subordinated notes | 2020 | 16 | 17 | 2020 | 15 | 16 | ||||||||||||||||||
7.125% 30 YearStep-up perpetual callable subordinated notes | 2030 | 353 | 362 | 2030 | 361 | 353 | ||||||||||||||||||
| 574 | 584 | 581 | 574 | |||||||||||||||||||||
In common with other debt securities issued by Santander UK group companies and notwithstanding the issuer’s first call dates in the table above, in the event of certain tax changes affecting the treatment of payments of interest on subordinated liabilities in the UK, the 7.375% 20 YearStep-up perpetual callable subordinated notes and the 7.125% 30 YearStep-up perpetual callable subordinated notes are redeemable at any time, and the 10.0625% Exchangeable capital securities are redeemable on any interest payment date – each in whole at the option of Santander UK plc, at their principal amount together with any accrued interest.
The 10.0625% Exchangeable capital securities are exchangeable into fully paid 10.375%non-cumulativenon-redeemable sterling preference shares of £1 each, at the option of Santander UK plc, on the business day immediately following any interest payment date.
Dated subordinated liabilities
| Maturity | 2018 £m | 2017 £m | Group | |||||||||||||||||||||
10.125% Subordinated guaranteed bonds | 2023 | – | 78 | |||||||||||||||||||||
9.625% Subordinated notes | 2023 | – | 129 | |||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Maturity | £m | £m | ||||||||||||||||||||||
5% Subordinated notes (US$1,500m) | 2023 | 1,173 | 1,103 | 2023 | 1,132 | 1,173 | ||||||||||||||||||
4.75% Subordinated notes (US$1,000m) | 2025 | 791 | 745 | 2025 | 763 | 791 | ||||||||||||||||||
7.95% Subordinated notes (US$1,000m) | 2029 | 278 | 275 | 2029 | 280 | 278 | ||||||||||||||||||
6.50% Subordinated notes | 2030 | 38 | 40 | 2030 | 40 | 38 | ||||||||||||||||||
8.963% Subordinated notes (US$1,000m) | 2045 | – | 113 | |||||||||||||||||||||
5.875% Subordinated notes | 2031 | 9 | 9 | 2031 | 9 | 9 | ||||||||||||||||||
5.625% Subordinated notes (US$500m) | 2045 | 394 | 371 | 2045 | 379 | 394 | ||||||||||||||||||
| 2,683 | 2,863 | 2,603 | 2,683 | |||||||||||||||||||||
The dated subordinated liabilities are redeemable in whole at the option of Santander UK plc at any time and, in the case of the 7.95% Subordinated notes, on any interest payment date, in the event of certain tax changes affecting the treatment of payments of interest on the subordinated liabilities in the UK, at their principal amount together with any accrued interest.
Each of the subordinated liabilities issued by Santander UK Group Holdings plc has been downstreamed to Santander UK plc by means of Santander UK plc issuing equivalent subordinated liabilities to Santander UK Group Holdings plc.
In 2018, Santander UK plc exercised its option to call the 9.625% Subordinated notes and 8.963% Subordinated notes. These were fully redeemed on 30 October 2018 and 15 November 2018 respectively.
In 2017, Santander UK plc exercised its option to call the 10.125% Subordinated guaranteed bonds. These were fully redeemed on 4 January 2018.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
30.27. PROVISIONS
| Conduct remediation | ||||||||||||||||||||||||||||
| PPI £m | Other products £m | FSCS and Bank Levy £m | Vacant property £m | Off-balance sheet ECL £m | Regulatory and other £m | Total £m | ||||||||||||||||||||||
At 31 December 2017 | 356 | 47 | 57 | 39 | 59 | 558 | ||||||||||||||||||||||
Reallocation of ECL onoff-balance sheet exposures(1) | – | – | – | – | 50 | – | 50 | |||||||||||||||||||||
At 1 January 2018 | 356 | 47 | 57 | 39 | 50 | 59 | 608 | |||||||||||||||||||||
Additional provisions (see Note 8) | – | – | 69 | 15 | 6 | 208 | 298 | |||||||||||||||||||||
Provisions released (see Note 8) | – | (14 | ) | (4 | ) | – | – | (14 | ) | (32 | ) | |||||||||||||||||
Utilisation | (110 | ) | (3 | ) | (92 | ) | (14 | ) | – | (154 | ) | (373 | ) | |||||||||||||||
Other | – | – | 14(2) | – | – | – | 14 | |||||||||||||||||||||
At 31 December 2018 | 246 | 30 | 44 | 40 | 56 | 99 | 515 | |||||||||||||||||||||
To be settled: | ||||||||||||||||||||||||||||
– Within 12 months | 246 | 22 | 44 | 25 | 56 | 99 | 492 | |||||||||||||||||||||
– In more than 12 months | – | 8 | – | 15 | – | – | 23 | |||||||||||||||||||||
| 246 | 30 | 44 | 40 | 56 | 99 | 515 | ||||||||||||||||||||||
At 1 January 2017 | 457 | 36 | 96 | 47 | 64 | 700 | ||||||||||||||||||||||
Additional provisions | 109 | 35 | 93 | 4 | 144 | 385 | ||||||||||||||||||||||
Utilisation | (210 | ) | (34 | ) | (132 | ) | (12 | ) | (149 | ) | (537 | ) | ||||||||||||||||
Transfers | – | 10 | – | – | – | 10 | ||||||||||||||||||||||
At 31 December 2017 | 356 | 47 | 57 | 39 | 59 | 558 | ||||||||||||||||||||||
To be settled: | ||||||||||||||||||||||||||||
– Within 12 months | 167 | 38 | 57 | 23 | 59 | 344 | ||||||||||||||||||||||
– In more than 12 months | 189 | 9 | – | 16 | – | 214 | ||||||||||||||||||||||
| 356 | 47 | 57 | 39 | 59 | 558 | |||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||
| Conduct remediation | ||||||||||||||||||||||||||||
| FSCS and | Off–balance | Regulatory | ||||||||||||||||||||||||||
| PPI | Other products | Bank Levy | Property | sheet ECL | and other | Total | ||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
At 31 December 2018 | 246 | 30 | 44 | 40 | 56 | 99 | 515 | |||||||||||||||||||||
Adoption of IFRS 16 (see Note 1) | – | – | – | 17 | – | – | 17 | |||||||||||||||||||||
At 1 January 2019 | 246 | 30 | 44 | 57 | 56 | 99 | 532 | |||||||||||||||||||||
Additional provisions (see Note 8) | 169 | – | 87 | 44 | 22 | 166 | 488 | |||||||||||||||||||||
Provisions released (see Note 8) | – | – | (5 | ) | (21 | ) | – | (3 | ) | (29 | ) | |||||||||||||||||
Utilisation and other(1) | (226 | ) | (5 | ) | (90 | ) | (19 | ) | – | (86 | ) | (426 | ) | |||||||||||||||
Recharge(2) | – | – | 12 | – | – | – | 12 | |||||||||||||||||||||
At 31 December 2019 | 189 | 25 | 48 | 61 | 78 | 176 | 577 | |||||||||||||||||||||
To be settled: | ||||||||||||||||||||||||||||
– Within 12 months | 189 | 18 | 48 | 45 | 78 | 172 | 550 | |||||||||||||||||||||
– In more than 12 months | – | 7 | – | 16 | – | 4 | 27 | |||||||||||||||||||||
| 189 | 25 | 48 | 61 | 78 | 176 | 577 | ||||||||||||||||||||||
| (1) |
|
| (2) |
|
a) Conduct remediation
The amounts in respect of conduct remediation comprise the estimated cost of making redress payments, including related costs, with respect to the past sales or administration of products. The provision for conduct remediation represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including related costs.
(i) Payment Protection Insurance (PPI)
In November 2015, theThe FCA issued a Consultation Paper 15/39 (Rules and guidance on payment protection insurance complaints) which introduced the concept of unfair commission in relation to Plevin decision for customer redress plusset a deadline by which customers would need to make their PPI complaints. On 2of 29 August 2016, the FCA issued Consultation Paper 16/20 (Rules and Guidance on payment protection insurance complaints: Feedback on CP 15/39 and further consultation). The paper outlined the FCA’s proposed approach to PPI in light of the 2014 decision of the Supreme Court in Plevin v Paragon Personal Finance Ltd (Plevin) and also recommended atwo-year deadline period starting in June 2017, which was later than proposed in CP 15/39. In July 2018 the FCA issued Consultation Paper 18/18 (Guidance on Regular Premium2019 for PPI complaints and recurringnon-disclosure (RND)delivered a nationwide communications campaign to raise awareness of commission). The paper outlined thatthis deadline among consumers. In line with industry experience, we received unprecedented volumes of information requests in August 2019 and saw a significant spike in both these requests and complaints in the final days prior to the extentcomplaint deadline, with the processing of any omission relating to RND occurring on or after April 2007, that aspect of any complaint is within the scope of the FCA complaint handling rules even if the PPI was sold before that date and the firm was not subject to the ombudsman’s jurisdiction before this time. Final guidance was issued in November 2018 under CP18/33 (Regular premium PPI complaints and recurringnon-disclosure of commission –feedback on CP18/18, final guidance, and consultation on proposed mailing requirements) with a further consultation on a previously rejected mailing.these claims ongoing.
PPI assumptions
A provision for conduct remediation has been recognised in respect of the misselling of PPI policies. The provision is calculated based on a number of key assumptions. These are:
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The assumptions have been based on the following:
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|
|
|
|
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The key assumptions are kept under review, and are regularly reassessed and validated against actual customer data. The provision representsto represent management’s best estimate of Santander UK’s future liability in respect of misselling of PPI policies. The most critical factors in determining
Given the passing of the FCA’s August 2019 time bar, the level of judgment required by management in determining appropriate assumptions has reduced. At 31 December 2019, the key assumption in calculating the provision arewas around the volumeestimated number of claims for future inflow levels, and the determinationcustomer complaints that would be received in respect of liabilitycustomers with respectsuccessful information requests that were still eligible to submit a specific portfolio of PPI claims. complaint.
The uphold rate isrates are informed by historical experience and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneoushomogenous population. In setting
Cumulative complaints from the provision, management estimatedinception of the total claimsPPI complaints process to 31 December 2019, regardless of the likelihood of Santander UK incurring a liability and including the specific PPI portfolio of complaints referred to below, were 3.5m. This includes c.327,000 that were likely to be received until August 2019 i.e. the date on which the time bar forstill being reviewed. Future expected claims takes effect.
|
The table below sets out the key drivers of the provision balance and forecast assumptions used in calculating the provision, as well as the sensitivity of the provision to changeswere c.49,000. For every additional 10,000 inbound PPI complaints, we would expect an additional charge in the assumptions. It reflects a blended view across all our retail products and portfolios and includes redress for Plevin-related claims. The PPI misselling redress elementorder of the provision linked£4m.
2019 compared to future claims levels and any associated Plevin redress is £101m. Expected future complaints through to the August2018
In 2019, time bar are estimated to be at a level consistent with the highest individual monthly inflow level in 2018. Were this level to be 20% higher or lower, the impact on the PPI misselling element of the provision of £101m would bewe charged an increase or decrease of £16m.
The remainder of the provision relates to portfolios of complaints which were on hold pending further regulatory clarificationadditional £169m in respect of which utilisation will begin in 2019, and to our best estimate of liability in respect of a legal dispute regarding allocation of responsibility for a specific portfolio further described in Note 32. No further information regarding the best estimate has been provided on the basis it would be seriously prejudicial.
| Cumulative to 31 December 2018 | Future expected (unaudited) | Sensitivity analysis Increase/decrease in provision | ||||||||
Inbound complaints(1)(‘000) | 2,141 | 415 | 25 = £7.4m | |||||||
Outbound contact (‘000) | 488 | 217 | 25 = £5.4m | |||||||
Response rate to outbound contact | 54% | 64% | 1% = £0.8m | |||||||
Average uphold rate per claim(2) | 37% | 76% | 1% = £2.7m | |||||||
Average redress per claim(3) | £ | 1,474 | £ | 545 | £ 50 = £16.4m | |||||
PPI:
|
|
|
The Santander UK overturn rate at the Financial Ombudsman Service was 16% in the first half of 2018, and 12% in the second half of 2018, reflecting reducing inflows over the same period.
2018 compared to 2017
The remaining provision for PPI redress and related costs was £246m (2017: £356m). We made no additional PPI charges in the year, based on our recent claims experience and having considered the FCA Consultation paper CP18/33 issued on 7 November 2018. We will continue to monitor our provision levels, and take account of the impact of any further claims received and FCA guidance.
2017 compared to 2016
The remaining provision for PPI redress and related costs amounted to £356m. The total charge for the year was £109m (2016: £144m) and was driven by an increase in estimated future claims driven by the start of the FCA advertising campaign for PPI, offset by an expected decline relating to a specific PPI portfolio review. In 2016, a provision of £114m was made when we applied the principles published in the August 2016 FCA papers, and a further £32m was made in relation to a past business review.
Monthly utilisation increased from the 2016 average following the confirmation of a deadline for customer complaints, broadly in line with our assumptions.
(ii) Other products
A provision for conduct remediation has also been recognised in respect of sales of other products. A number of uncertainties remain as to the eventual costs with respect to conduct remediation in respect of these products given the inherent difficulties in determining the number of customers involved and the amount of any redress to be provided to them.
The remaining provision for other conduct was £30m (2017: £47m)£25m (2018: £30m), which primarily related to the sale of interest rate derivatives, following an ongoing review of the regulatory classification of certain customers potentially eligible for redress. Following further analysis, management assessed the provision requirements resulting in a release of £11m in the second quarter of 2018.derivatives.
| 220 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
b) FSCSFinancial Services Compensation Scheme (FSCS) and Bank Levy
(I) Financial Services Compensation Scheme (FSCS)(i) FSCS
The FSCS is the UK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate).
Following the default of a number of deposit takers since 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. On 25 April 2017, followingThe remaining debt due to the saleFSCS, that related to the failure of certain Bradford & Bingley mortgage assets, the amount thatplc, has now been repaid. This has enabled the FSCS owedto make a corresponding repayment of the balance of its loan to HM Treasury reduced to £4.7bn, from £15.7bn. The interest payable on the loan, and the Santander UK group’s share of that interest, fell accordingly. Based on the latest estimates from the FSCS the balance outstanding will be repaid earlier mostly through recoveries from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted. According to the new estimates, the amount to be provided by the Santander UK group for the interest payable on the loan was lower than initially expected.Treasury. As a result, there was a releasethe opening provision of £4m (2017:was released in 2019 (2018: £4m release, 2017: £1m charge, 2016: £34m charge), to bring the provision downbalance to the amount now expected to be charged for the remaining interest. The Santander UK group provided for a liability for the FSCS of £4m at 31 December 2018 (2017: £13m)£nil (2018: £4m).
(ii) UK Bank Levy
In addition to changes in UK corporation tax rates, Finance (No.2) Act 2015 reduced the UK Bank Levy rate from 0.21% via subsequent annual reductions to 0.10% from 1 January 2021. As a result, a rate of 0.16%0.15% applies for 2018 (2017: 0.17%2019 (2018: 0.16%). The cost of the UK Bank Levy for 20182019 was £87m (2018: £69m, (2017: £92m, 2016: £107m)2017: £92m). The Santander UK group paid £86m£90m in 2018 (2017: £109m)2019 (2018: £86m) and provided for a liability of £40m£48m at 31 December 2018 (2017: £44m)2019 (2018: £40m).
c) Vacant propertyProperty
Property provisions include vacant property provisions and property dilapidation provisions for leased properties within the scope of IFRS 16. Vacant property provisions are made by reference to an estimate of any expectedsub-let income, compared to the head rent, and the possibility of disposing of Santander UK’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a semi-annual basis and will normally run off over the period of the leases concerned. Where a property is disposed of earlier than anticipated, any remaining provision relating to that property is released.
Property provisions were impacted by £40m of transformation charges in 2019. These relate to a multi-year project to deliver on our strategic priorities and enhance efficiency in order for us to better serve our customers and meet our medium-term targets. These charges largely related to restructuring of our branch network associated with the announcement made in 2019.
d)Off-balance sheet ECL
Following the adoption of IFRS 9 on 1 January 2018, provisionsProvisions include expected credit losses relating to guarantees given to third parties and undrawn loan commitments.
e) Regulatory and other
Regulatory and other provisions principally comprisecomprised amounts in respect of regulatory charges (including fines), operational loss and operational risk provisions, restructuring charges and litigation and related expenses. A number of uncertainties exist with respect to these provisions given the uncertainties inherent in operational, restructuring and litigation matters that affect the amount and timing of any potential outflows with respect to which provisions have been established. These provisions are reviewed periodically.at least quarterly.
At 31 December 2019 the balance included an amount of £68m (2018: £58m) that arose from a systems related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act. This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2019 of potential costs in respect of the identified issue. As detailed in Note 29, there are aspects of the issue which remain under review.
Regulatory and other provisions charged in 2019 included £65m of transformation charges in 2019, relating to the multi-year project described above in ‘c) Property’. In addition to charges largely related to the restructuring of our branch network, further charges were largely associated with the announced plans to reshape our Corporate & Commercial Banking business. Regulatory and other provisions charged in 2019 also included £68m of operational loss and operational risk provisions.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
Regulatory and other provisions charged in 2018 included the following items:
|
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31.28. RETIREMENT BENEFIT PLANS
The amounts recognised in the balance sheet were as follows:
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| 2018 £m | 2017 £m | £m | £m | |||||||||||||
Assets/(liabilities) | ||||||||||||||||
Funded defined benefit pension scheme – surplus | 842 | 449 | 670 | 842 | ||||||||||||
Funded defined benefit pension scheme – deficit | (76 | ) | (245 | ) | (239 | ) | (76 | ) | ||||||||
Unfunded defined benefit pension scheme | (39 | ) | (41 | ) | ||||||||||||
Unfunded pension and post retirement medical benefits | (41 | ) | (39 | ) | ||||||||||||
Total net assets | 727 | 163 | 390 | 727 | ||||||||||||
Remeasurement losses/(gains)/losses recognised in other comprehensive income during the year were as follows:
| 2018 £m | 2017 £m | 2016 £m | ||||||||||
Pension remeasurement | (469 | ) | 103 | 528 | ||||||||
| Group | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| £m | £m | £m | ||||||||||
Pension remeasurement | 523 | (469 | ) | 103 | ||||||||
a) Defined contribution pension plans
The Santander UK group operates a number of defined contribution pension plans. The assets of the defined contribution pension plans are held and administered separately from those of the Santander UK group. In December 2017, the Santander UK group ceased to contribute to the Santander Retirement Plan, an occupational defined contribution plan, and future contributionsThe majority of employees are paid intomembers of a defined contribution Master Trust, LifeSight. This Master Trust is the plan into which eligible employees are enrolled automatically. During the year the Santander Retirement Plan was wound up and all assets were transferred to LifeSight. The assets of the LifeSight Master Trust are held in separate trustee-administered funds.
An expense of £67m (2018: £66m, (2017: £54m, 2016: £52m)2017: £54m) was recognised for defined contribution plans in the year and is included in staff costs classified within operating expenses (see Note 6). None of this amount was recognised in respect of key management personnel for the years ended 31 December 2019, 2018 2017 and 2016.2017.
b) Defined benefit pension schemes
The Santander UK group operates a number of defined benefit pension schemes. The main scheme is the Santander (UK) Group Pension Scheme (the Scheme). It comprises seven legally segregated sections under the terms of a merger of former schemes operated by Santander UK plc agreed in 2012.sections. The Scheme covers 11% (2018: 13% (2017: 17%) of the Santander UK group’s current employees and is a funded defined benefit scheme which is closed to new members.
The corporate trustee of the Scheme is Santander (UK) Group Pension Scheme Trustees Limited (the Trustee), a private limited company incorporated in 1996 and a wholly-owned subsidiary of Santander UK Group Holdings plc. During 2017, the Trustee was a wholly-owned subsidiary of Santander UK plc, but was transferred as part of the ring-fencing implementation. The principal duty of the Trustee is to act in the best interests of the members of the Scheme. The Trustee board comprises sixfive (2018: six) Directors selected by Santander UK Group Holdings plc, plus sixfive (2018: six) member-nominated Directors selected from eligible members who apply for the role.
The assets of the funded schemes including the Scheme are held independently of the Santander UK group’s assets in separate trustee administered funds. Investment strategy across the sections of the Scheme remains under regular review. Investment decisions are delegated by the Trustee to a common investment fund, managed by Santander (CF Trustee) Limited, a private limited company owned by five Trustee directors, three appointed by Santander UK plc and two by the Trustee. The Santander (CF Trustee) Limited directors’ principal duty, within the investment powers delegated to them, is to act in the best interest of the members of the Scheme. Ultimate responsibility for investment policy and strategy rests with the Trustee of the Scheme who is required under the Pensions Act 2004 to prepare a statement of investment principles. The defined benefit pension schemes expose the Santander UK group to risks such as investment risk, interest rate risk, longevity risk and inflation risk. The Santander UK group does not hold material insurance policies over the defined benefit pension schemes and has not entered into any significant transactions with them.
Formal actuarial valuations of the assets and liabilities of the defined benefit schemes are carried out on at least a triennial basis by independent professionally-qualified actuaries and valued for accounting purposes at each balance sheet date. Each scheme’s trustee is responsible for the actuarial valuations and in doing so considers, or relies in part on, a report of a third-party expert. The latest formal actuarial valuation for the Scheme at 31 March 20162019 was finalised in March 2017,August 2019, with a deficit to be funded of £1,739m.£1,136m. The next triennial funding valuation will be at 31 March 2019.2022. Any funding surpluses can be recovered by Santander UK plc from the Scheme through refunds as the Scheme is run off over time or could be used to pay for the cost of benefits which are accruing.
|
The total amount charged to the income statement was as follows:
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | £m | £m | £m | |||||||||||||||||||
Net interest income | (7 | ) | (5 | ) | (18 | ) | (24 | ) | (7 | ) | (5 | ) | ||||||||||||
Current service cost | 41 | 31 | 33 | 34 | 41 | 31 | ||||||||||||||||||
Past service and GMP costs | 41 | 1 | 1 | 1 | 41 | 1 | ||||||||||||||||||
Administration costs | 8 | 8 | 8 | 8 | 8 | 8 | ||||||||||||||||||
| 83 | 35 | 24 | 19 | 83 | 35 | |||||||||||||||||||
On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to GMP and concluded on the methods that were appropriate. The estimated increase in liabilities at the date of the judgement was £40m and iswas based on a number of assumptions and the actual impact may be different. This has beenwas reflected in the income statement and in the closing net accounting surplus of the Scheme.Scheme in 2018. The allowance included in the Scheme liabilities at 31 December 2019 increased by £5m to £45m (2018: £40m) to reflect the latest assumptions. This change was recognised in other comprehensive income. We continue to await implementation guidance on the judgement from the UK Government and HMRC.
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Notes to the financial statements |
The amounts recognised in other comprehensive income were as follows:
| 2018 £m | 2017 £m | 2016 £m | ||||||||||
Return on plan assets (excluding amounts included in net interest expense) | 246 | (435 | ) | (1,447 | ) | |||||||
Actuarial (gains)/losses arising from changes in demographic assumptions | (56 | ) | (151 | ) | 30 | |||||||
Actuarial gains arising from experience adjustments | 15 | (11 | ) | (80 | ) | |||||||
Actuarial (gains)/losses arising from changes in financial assumptions | (674 | ) | 700 | 2,025 | ||||||||
Pension remeasurement | (469 | ) | 103 | 528 | ||||||||
| Group | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| £m | £m | £m | ||||||||||
Return on plan assets (excluding amounts included in net interest expense) | (873 | ) | 246 | (435 | ) | |||||||
Actuarial losses/(gains) arising from changes in demographic assumptions | 42 | (56 | ) | (151 | ) | |||||||
Actuarial (gains)/losses arising from experience adjustments | (40 | ) | 15 | (11 | ) | |||||||
Actuarial losses/(gains) arising from changes in financial assumptions | 1,394 | (674 | ) | 700 | ||||||||
Pension remeasurement | 523 | (469 | ) | 103 | ||||||||
Movements in the present value of defined benefit scheme obligations were as follows:
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| 2018 £m | 2017 £m | £m | £m | |||||||||||||
At 1 January | (11,583 | ) | (11,082 | ) | (10,805 | ) | (11,583 | ) | ||||||||
Current service cost paid by Santander UK plc | (27 | ) | (30 | ) | (22 | ) | (27 | ) | ||||||||
Current service cost paid by other subsidiaries | (14 | ) | (1 | ) | (12 | ) | (14 | ) | ||||||||
Current service cost paid by fellow Banco Santander subsidiaries | – | (12 | ) | – | – | |||||||||||
Interest cost | (282 | ) | (305 | ) | (308 | ) | (282 | ) | ||||||||
Employer salary sacrifice contributions | (6 | ) | (6 | ) | (8 | ) | (6 | ) | ||||||||
Past service cost | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
GMP equalisation cost | (40 | ) | – | – | (40 | ) | ||||||||||
Remeasurement due to actuarial movements arising from: | ||||||||||||||||
– Changes in demographic assumptions | 56 | 151 | (42 | ) | 56 | |||||||||||
– Experience adjustments | (15 | ) | 11 | 40 | (15 | ) | ||||||||||
– Changes in financial assumptions | 674 | (700 | ) | (1,394 | ) | 674 | ||||||||||
Benefits paid | 433 | 392 | 387 | 433 | ||||||||||||
At 31 December | (10,805 | ) | (11,583 | ) | (12,165 | ) | (10,805 | ) | ||||||||
Movements in the fair value of the schemes’ assets were as follows:
| 2018 £m | 2017 £m | |||||||
At 1 January | 11,746 | 11,218 | ||||||
Interest income | 289 | 310 | ||||||
Contributions paid by employer and scheme members | 184 | 171 | ||||||
Contributions paid by fellow Banco Santander subsidiaries | – | 12 | ||||||
Administration costs paid | (8 | ) | (8 | ) | ||||
Return on plan assets (excluding amounts included in net interest expense) | (246 | ) | 435 | |||||
Benefits paid | (433 | ) | (392 | ) | ||||
At 31 December | 11,532 | 11,746 | ||||||
| Group | ||||||||
| 2019 | 2018 | |||||||
| £m | £m | |||||||
At 1 January | 11,532 | 11,746 | ||||||
Interest income | 332 | 289 | ||||||
Contributions paid by employer and scheme members | 213 | 184 | ||||||
Contributions paid by fellow Banco Santander subsidiaries | – | – | ||||||
Administration costs paid | (8 | ) | (8 | ) | ||||
Return on plan assets (excluding amounts included in net interest expense) | 873 | (246 | ) | |||||
Benefits paid | (387 | ) | (433 | ) | ||||
At 31 December | 12,555 | 11,532 | ||||||
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
The composition and fair value of the schemes’ assets by category was:
Quoted prices in active markets | Prices not quoted in active markets | Total | Group | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quoted prices in active markets | Prices not quoted in active markets | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | £m | % | £m | % | £m | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK equities | 128 | 1 | – | – | 128 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Overseas equities | 1,742 | 14 | 933 | 7 | 2,675 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 1,333 | 11 | 444 | 4 | 1,777 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government fixed interest bonds | 2,710 | 22 | – | – | 2,710 | 22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government index–linked bonds | 4,543 | 35 | – | – | 4,543 | 35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property | – | – | 1,332 | 11 | 1,332 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives | – | – | 94 | 1 | 94 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash | – | – | 984 | 8 | 984 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements(1) | – | – | (3,263 | ) | (26 | ) | (3,263 | ) | (26 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | – | – | 1,575 | 12 | 1,575 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10,456 | 83 | 2,099 | 17 | 12,555 | 100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | £m | % | £m | % | £m | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK equities | 159 | 1 | – | – | 159 | 1 | 159 | 1 | – | – | 159 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Overseas equities | 1,854 | 16 | 878 | 8 | 2,732 | 24 | 1,854 | 16 | 878 | 8 | 2,732 | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 1,536 | 13 | 311 | 3 | 1,847 | 16 | 1,536 | 13 | 311 | 3 | 1,847 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Government fixed interest bonds | 2,636 | 23 | – | – | 2,636 | 23 | 2,636 | 23 | – | – | 2,636 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Government index-linked bonds | 4,248 | 37 | – | – | 4,248 | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government index–linked bonds | 4,248 | 37 | – | – | 4,248 | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property | – | – | 1,143 | 10 | 1,143 | 10 | – | – | 1,143 | 10 | 1,143 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives | – | – | 65 | – | 65 | – | – | – | 65 | – | 65 | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash | – | – | 662 | 6 | 662 | 6 | – | – | 662 | 6 | 662 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements | – | – | (2,981 | ) | (26 | ) | (2,981 | ) | (26 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements(1) | – | – | (2,981 | ) | (26 | ) | (2,981 | ) | (26 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | – | – | 1,021 | 9 | 1,021 | 9 | – | – | 1,021 | 9 | 1,021 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10,433 | 90 | 1,099 | 10 | 11,532 | 100 | 10,433 | 90 | 1,099 | 10 | 11,532 | 100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK equities | 187 | 1 | – | – | 187 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Overseas equities | 2,204 | 19 | 706 | 6 | 2,910 | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 1,665 | 14 | 209 | 2 | 1,874 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government fixed interest bonds | 255 | 2 | – | – | 255 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government index-linked bonds | 3,506 | 30 | – | – | 3,506 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property | – | – | 1,547 | 13 | 1,547 | 13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives | – | – | 512 | 4 | 512 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash | – | – | 206 | 2 | 206 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | – | – | 749 | 7 | 749 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 7,817 | 66 | 3,929 | 34 | 11,746 | 100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Sale and repurchase agreements net of purchase and resale agreements. |
Scheme assets are stated at fair value based upon quoted prices in active markets with the exception ofexcept for property, property funds, derivatives, private equity and those classified under ‘Other’. The ‘Other’ category consistsincludes of asset-backed securities, annuities and funds (including private equity funds).hedge funds. The property funds were valued using market valuations prepared by an independent expert. Investments in absolute return funds that are included in the ‘Other’ category, and investments in foreign exchange, inflation, equity and interest rate derivatives that are included in the ‘Derivatives’ category, were valued by investment managers by reference to market observable data. Private equity funds were valued by reference to their latest published accounts whilst the insured annuities were valued by actuaries based on the liabilities insured.
A strategy is in place to manage interest rate and inflation risk relating to the liabilities. In addition, theThe Scheme entered intoalso has in place an equity collar in 2017 which was extendedto manage equity risk and resized in 2018.hedges a proportion of its foreign exchange exposure to manage currency risk. At 31 December 2018,2019, the equity collar had a notional value of £1,795m (2017: £2,000m)£1,560m (2018: £1,795m) and the currency futures had a notional value of £2,079m (2018: £2,112m). In addition,2018, the level of interest rate hedging in the Scheme was increased, and the Scheme moved from using LIBOR-based instruments to gilt-backed instruments, including through the use of total return swaps and repurchase agreements. At 31 December 2018,In addition, repurchase agreements were entered into by the Scheme over an equivalent value of Government fixed interest and index-linked bonds and haveare therefore been included in the table above. A strategy is also in place to manage currency risk.
The Santander UK group’s pension schemes did not directly hold any equity securities of the Company or any of its related parties at 31 December 20182019 and 2017.2018. The Santander UK group’s pension scheme assets do not include any property or other assets that are occupied or used by the Santander UK group.
Funding
In March 2017,August 2019, in compliance with the Pensions Act 2004, the Trustee and the Santander UK group agreed to a new recovery plan in respect of the Scheme and schedule of contributions following the finalisation of the 31 March 20162019 actuarial valuation. The funding target for this actuarial valuation is for the Scheme to have sufficient assets to make payments to members in respect of the accrued benefits as and when they fall due. In accordance with the terms of the Trustee agreement in place at the time, the Santander UK group contributed £176m£203m in 2018 (2017: £163m)2019 (2018: £176m) to the Scheme, of which £123m (2017:£153m (2018: £123m) was in respect of agreed deficit repair contributions. The agreed schedule of the Santander UK group’s remaining contributions to the Scheme broadly comprises contributions of £119m£187m each year from 1 April 2017 increasing by 5% to 31 March 2026 plus contributions of £28m per annum increasing at 5% from 1 April 2021 to 31 March 2023 followed by £66m per annum increasing at 5% per annum from 1 April 202330 September 2019 to 31 March 2026. In addition, the Santander UK group has agreed to pay further contingent contributions should investment performance be worse than expected, or should the funding position have fallen behind plan at the next formal actuarial valuation.plan.
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Notes to the financial statements |
Actuarial assumptions
The principal actuarial assumptions used for the defined benefit schemes were:
| Group | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| 2018 % | 2017 % | 2016 % | % | % | % | |||||||||||||||||||
To determine benefit obligations: | ||||||||||||||||||||||||
– Discount rate for scheme liabilities | 2.9 | 2.5 | 2.8 | 2.1 | 2.9 | 2.5 | ||||||||||||||||||
– General price inflation | 3.2 | 3.2 | 3.1 | 3.0 | 3.2 | 3.2 | ||||||||||||||||||
– General salary increase | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | ||||||||||||||||||
– Expected rate of pension increase | 2.9 | 2.9 | 2.9 | 2.9 | 2.9 | 2.9 | ||||||||||||||||||
| Years | Years | Years | Years | Years | Years | |||||||||||||||||||
Longevity at 60 for current pensioners, on the valuation date: | ||||||||||||||||||||||||
– Males | 27.3 | 27.4 | 27.8 | 27.3 | 27.3 | 27.4 | ||||||||||||||||||
– Females | 30.1 | 30.1 | 30.3 | 29.8 | 30.1 | 30.1 | ||||||||||||||||||
Longevity at 60 for future pensioners currently aged 40, on the valuation date: | ||||||||||||||||||||||||
– Males | 28.7 | 28.9 | 30.0 | 28.9 | 28.7 | 28.9 | ||||||||||||||||||
– Females | 31.6 | 31.7 | 32.2 | 31.3 | 31.6 | 31.7 | ||||||||||||||||||
|
Discount rate for scheme liabilities
The rate used to discount the retirement benefit obligation for accounting purposes is based on the annual yield at the balance sheet date of high qualityhigh-quality corporate bonds on that date. There are only a limited number of higher quality Sterling-denominated corporate bonds, particularly those that are longer-dated. Therefore, in order to set a suitable discount rate, we need to construct a corporate bond yield curve. We consider a number of different data sources and methods of projecting forwardThe model which we use for constructing the curve uses corporate bond curve.data but excludes most convertible and asset-backed bonds. The curve is then constructed from this data by extrapolating the horizontal forward curve from 30 years, with the level of this forward rate being the average of the fitted forward rates over the 15 to 30 year range. When considering an appropriate assumption, we project forward the expected cash flows of the Scheme and adopt a single equivalent cash flow weighted discount rate, subject to management judgement.
During 2018 we reduced the level of management adjustment to the discount rate, noting the expanded range of different models used by UK companies, and the relatively higher discount rates being adopted. At 31 December 2018 this increased the discount rate applied and had a positive impact of £104m on the accounting surplus.
General price inflation
Consistent with our discount rate methodology, we set the inflation assumption using the expected cash flows of the Scheme, fitting them to an inflation curve to give a weighted average inflation assumption. We then deduct an inflation risk premium to reflect the compensation holders of fixed rate instruments expect to receive for taking on the inflation risk. This premium is subject to a cap, to better reflect management’s view of inflation expectations.
DuringGeneral salary increase
From 1 March 2015, a cap on pensionable pay increases of 1% each year was applied to staff in the year, the assumptions for setting the inflation risk premium were updated to reflect management’s current views of long term inflation. At 31 December 2018, this had a negative impact of £65m on the accounting surplus.Scheme.
Expected rate of pension increase
During the year, the methodology for setting the expected rate of pension increases was changed to better represent the current expectations for inflation volatility and the impact of caps and collars on pension increases. The revised pension increase assumption methodology uses a stochastic model, which is calibrated to consider both the observed historical volatility term structure and derivative pricing. The model provides an improvement in estimate because it allows for the likelihood that high or low inflation in one yearone-year feeds into inflation remaining high or low in the next year. At 31 December 2018 this had a negative impact of £85m on the accounting surplus.
Mortality assumptions
The mortality assumptions are based on an independent analysis of the Santander (UK) Group Pension Scheme’s actual mortality experience, carried out as part of the triennial actuarial valuations,valuation, together with recent evidence from the Continuous Mortality Investigation Table ‘S2 Light’ mortality tables.Investigation. An allowance is then made for expected future improvements to life expectancy based on the Continuous Mortality Investigation Tables.
During 2018 we Following this review the S3 Medium all pensioner mortality table was adopted with appropriate adjustments to reflect the actual mortality experience. For future improvements, the CMI 20172018 projection model for futurewas adopted, with model parameters selected having had regard to the Scheme’s membership profile with an initial addition to improvements in life expectancyof 0.15% per annum, together with a long-term rate of future improvements to life expectancy of 1.25% for male and female members. This model incorporatesBoth of these are published by the latest available dataContinuous Mortality Investigation.
In 2019, the methodology for setting the demographic assumptions was changed to better represent current expectations, following a review carried out by the Trustee as part of the 2019 triennial valuation and a separate review conducted on trendsearly retirement experience. These reviews resulted in life expectancy.changes in the assumptions for commutation, family statistics and early retirement, in addition to the changes described above for mortality. At 31 December 2018, this2019, these changes combined had a positivenegative impact of £57m£44m on the accounting surplus.
Actuarial assumption sensitivities
The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.
| Increase/(decrease) | (Decrease)/increase | |||||||||||||||||||||
| Assumption | Change in pension obligation at year-end from | 2018 £m | 2017 £m | Change in pension obligation atyear-end from | 2019 £m | 2018 £m | ||||||||||||||||
Discount rate | 25 bps increase | (483 | ) | (550 | ) |
| 25 bps increase | (564 | ) | (483 | ) | |||||||||||
General price inflation | 25 bps increase | 350 | 365 | 25 bps increase | 407 | 350 | ||||||||||||||||
General salary increase | 25 bps increase | n/a | n/a | |||||||||||||||||||
Mortality | Each additional year of longevity assumed | 335 | 367 | Each additional year of longevity assumed | 419 | 335 | ||||||||||||||||
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same method used to calculate the defined benefit obligation recognised in the balance sheet. There were no changes in the methods and assumptions used in preparing the sensitivity analyses from prior years.
| Santander UK Group Holdings plc | 225 |
Annual Report 2019| Financial statements
The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are:
| Year ending 31 December | £m | £m | ||||||
2019 | 266 | |||||||
2020 | 269 | 332 | ||||||
2021 | 287 | 308 | ||||||
2022 | 309 | 330 | ||||||
2023 | 325 | 343 | ||||||
Five years ending 2028 | 1,903 | |||||||
2024 | 364 | |||||||
Five years ending 2029 | 2,083 | |||||||
The average duration of the defined benefit obligation at 31 December 20182019 was 19.118.8 years (2017: 20.1(2018: 19.1 years).
Annual Report 2018 | Financial statements
32.29. CONTINGENT LIABILITIES AND COMMITMENTS
| Group | ||||||||||||||||
2018(1) £m | 2017 £m | 2019 £m | 2018 £m | |||||||||||||
Guarantees given to third parties | 1,611 | 1,557 | 1,198 | 1,611 | ||||||||||||
Formal standby facilities, credit lines and other commitments with original term to maturity of: | ||||||||||||||||
– One year or less | 8,560 | 10,664 | 18,256 | 8,560 | ||||||||||||
– Later than one year | 31,566 | 31,278 | 22,154 | 31,566 | ||||||||||||
| 41,737 | 43,499 | 41,608 | 41,737 | |||||||||||||
For segmental and credit risk staging analysis relating tooff-balance sheet exposures, see the credit quality table in the ‘Santander UK group level – credit risk review’ section.
|
At 31 December 2018,2019, the Santander UK group had credit impairment loss provisions relating to guarantees given to third parties and undrawn loan commitments. See Note 3027 for further details. For segmental and credit risk staging analysis relating tooff-balance sheet exposures, see the credit quality table in the ‘Santander UK group level – credit risk review’ section.
Where the items set out below can be reliably estimated, they are disclosed in the table above.
Capital support arrangements
From 1 January 2019, following the implementation of ring-fencing, Santander UK plc, Cater Allen Limited and certain othernon-regulated subsidiaries within the ring-fenced bank entered into a capital support deed dated 13 November 2018 (the RFBSub-Group Capital Support Deed). The parties to the RFBSub-Group Capital Support Deed are permitted by the PRA to form a core UK group as defined in the PRA Rulebook, a permission which will expire on 31 December 2021. Exposures of each of the regulated entities to other members of the core UK group are exempt from large exposure limits that would otherwise apply. The purpose of the RFB Sub-Group Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, thenon-regulated parties to any of the regulated parties in the event that one of the regulated parties breaches or is at risk of breaching its capital resources requirements or risk concentrations requirements.
Prior to 1 January 2019, Santander UK plc, SFS and Cater Allen Limited, which are thePRA-regulated entities within the Santander UK Group Holdings plc group, were party to a capital support deed dated 23 December 2015 (the Capital Support Deed 2015) with Santander UK Group Holdings plc and certain othernon-regulated subsidiaries of Santander UK plc. The core UK group permission as supported by the Capital Support Deed 2015 expired on 31 December 2018.
From 1 January 2019 as a result of ring-fencing, Santander UK Group Holdings plc, SFS and Santander Equity Investments Limited entered into a Capital Support Deed dated 13 November 2018 (the NRFB Capital Support Deed) which expires on 31 December 2021. The purpose of the Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, thenon-regulated parties to any of the regulated parties in the event that one of the regulated parties breached or was at risk of breaching its capital resources requirements or risk concentrations requirements.
Other than the change of the entities in scope, the purpose of the RFBSub-Group Capital Support Deed and the NRFB Capital Support Deed is the same as the previous Capital Support Deed 2015.
Liquidity support arrangements
From 1 January 2019, following the implementation of ring-fencing, we monitor and manage liquidity risk for the Santander UK plc group and its former subsidiary SFS separately. Under this model, and the PRA’s liquidity rules, Santander UK plc and its subsidiary Cater Allen Limited form the RFB Domestic LiquiditySub-group (DoLSub)(the RFB DoLSub), which allows the entities to collectively meet regulatory requirements for the purpose of managing liquidity risk. Each member of the RFB DoLSub will support the other by transferring surplus liquidity in times of stress.
As a firm subjectPrior to the liquidity obligations in the Capital Requirements Regulation (CRR),1 January 2019, Santander UK plc, applied for, and was granted, a CRR Article 8 DoLSub CRR permission (DoLSub Article 8 permission). At 31 December 2018, the UK DoLSub comprised the entities Santander UK plc, ANTS plcSFS and Cater Allen Limited. WithLimited formed the Domestic LiquiditySub-group (the DoLSub), which allowed those entities to collectively meet regulatory liquidity requirements. The RFB DoLSub permission granted with effect from 1 January 2019 and in accordance with our ring-fenced structure, Santander UK plc was granted a new DolSub permission, withdrawing ANTS plcwithdrew SFS from the UKprevious DoLSub. The DoLSub waiver replaces the requirement for liquidity adequacy and reporting on an individual basis.
Guarantees given to third parties
Guarantees given to third parties consist primarily of letters of credit, bonds and guarantees granted as part of normal product facilities which are offered to customers.
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Formal standby facilities, credit lines and other commitments
Standby facilities, credit lines and other commitments are also granted as part of normal product facilities which are offered to customers. Retail facilities comprise undrawn facilities granted on flexible mortgages, bank overdrafts and credit cards. On flexible mortgages, the credit limit is set at the point of granting the loan through property value and affordability assessments. Ongoing assessments are made to ensure that credit limits remain appropriate considering any change in the security value or the customer’s financial circumstances. For unsecured overdraft facilities and credit cards, the facilities are granted based on new business risk assessment and are reviewed more frequently based on internal, as well as external data. The delinquency status of the account would result in the withdrawal of the facility. Corporate facilities can comprise standby and revolving facilities which are subject to ongoing compliance with covenants and may require the provision of agreed security. Failure to comply with these terms can result in the withdrawal of the unutilised facility headroom.
FSCS
As described in Note 30,27, the Santander UK group participates in the UK’s national resolution scheme, the FSCS, and is thus subject to levies to fund the FSCS. In the event thatIf the FSCS significantly increase the levies to be paid by firms, the associated costs to the Santander UK group would rise.
Loan representations and warranties
In connection with the securitisations and covered bond transactions described in Note 15,14, the Santander UK group entities selling the relevant loans into the applicable securitisation or covered bond portfolios make representations and warranties with respect to such loans, in each case as of the date of the sale of the loans into the applicable portfolio. These representations and warranties cover, among other things, the ownership of the loan by the relevant Santander UK group entity, absence of a material breach or default by the relevant borrower under the loan, the loan’s compliance with applicable laws and absence of material disputes with respect to the relevant borrower, asset and loan. The specific representations and warranties made by Santander UK group companies which act as sellers of loans in these securitisations and covered bond transactions depend in each case on the nature of the transaction and the requirements of the transaction structure. In addition, market conditions and credit rating agency requirements may affect the representations and warranties required of the relevant Santander UK group companies in these transactions.
In the event that there is a material breach of the representations and warranties given by Santander UK plc as seller of loans under the residential mortgage-backed securitisations or the covered bond transactionprogrammes included in Note 15,14, or if such representations and warranties prove to be materially untrue as at the date when they were given (being the sale date of the relevant mortgage loans), Santander UK plc may be required to repurchase the affected mortgage loans (generally at their outstanding principal balance plus accrued interest). These securitisationsecuritisations and covered bond transactionsprogrammes are collateralised by prime residential mortgage loans. Santander UK plc is principally a retail prime lender and has no appetite or product offering for any type ofsub-prime business. In addition, Santander UK plc’s credit policy explicitly prohibits such lending.
Similarly, under the auto loan securitisations in Note 15,14, in the event that there is a breach or inaccuracy in respect of a representation or warranty relating to the loans, the relevant Santander UK group entity who sold the auto loans into the securitisation portfolio will be required to repurchase such loans from the structure (also at their outstanding principal balance plus accrued interest). In addition to breaches of representation and warranties, under the auto loan securitisations, the seller may also have a repurchase obligation if certain portfolio limits are breached (which include, amongst other things, limits as to the size of a loan given to an individual customer, LTV ratio, average term to maturity and average seasoning).
In the case of a repurchase of a loan from the relevant securitisation or covered bond portfolio,programmes, the Santander UK group may bear any subsequent credit loss on such loan. The Santander UK group manages and monitors its securitisation and covered bond activities closely to minimise potential claims.
Other legal actions and regulatory matters
Santander UK engages in discussion, andco-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.
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Payment Protection Insurance
Note 30 details our provisions including those in relation to PPI. In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is ongoing and remains in its early stages. ThereThe dispute relates to the liability for PPImis-selling complaints relating topre-2005 PPI policies underwritten by Financial Insurance Company Ltd (FICL) and Financial Assurance Company Ltd (FACL) and involves two Santander UK plc subsidiaries, Santander Cards UK Limited and Santander Insurance Services Limited (the Santander Entities). During the relevant period, FICL and FACL were owned by Genworth Financial International Holdings, Inc. In July 2015 AXA S.A. (AXA) acquired FICL and FACL from Genworth. In July 2017, Santander UK plc notified AXA that the Santander Entities did not accept liability for losses on PPI policies relating to this period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with FICL and FACL pursuant to which it agreed to handle complaints on their behalf, and FICL and FACL agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis.
A related dispute between AXA and (1) Genworth Financial International Holdings, Inc. and (2) Genworth Financial, Inc. (Genworth) concerning, inter alia, the proper construction of an alleged obligation to make payment on demand of a sum equal to 90% of all applicable PPImis-selling losses (the Construction Issue) in a sale and purchase agreement dated 17 September 2015 (SPA) was determined by the High Court (Court) in December 2019. The Santander Entities were joined as third parties in connection with an application for declaratory relief by Genworth. This application related to Genworth’s assertion that upon any payment to AXA under the SPA, Genworth would have rights of subrogation against the Santander Entities (the Subrogation Issue). The Court found against Genworth and in favour of AXA on the Construction Issue, and against Genworth and in favour of the Santander Entities in relation to the Subrogation Issue. In documents before the Court, AXA’s claim was stated to be £265 million as at the end of 2018, noting further significantly larger sums would be demanded. During the Court hearing in November 2019, AXA noted that it had sought further sums, bringing the outstanding sum of its claim against Genworth to around £350 million at that time, with such figure likely to increase significantly.
Genworth’s application for permission to appeal was refused by the Court. Genworth made an application for permission to appeal to the Court of Appeal on 10 January 2020. The application for permission to appeal has not yet been determined. Most recently in its US SEC filing of 27 February 2020, Genworth noted that AXA had at that date submitted invoices claiming aggregate losses of approximately US$560 million.
More generally, 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 difficultnot currently practicable to reliably predict the resolution of the matter including timing or the significance of the possible impact.
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The PPIRegulatory and other provision in Note 27 includes our best estimate of Santander UK’s liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial.prejudicial to Santander UK’s interests in connection with the dispute.
In addition, and in relation to PPI more generally, there are legal claims being made by Claims Management Companies challenging the FCA’s industry guidance on the treatment of Plevin /recurringnon-disclosure assessments. No provision has been made as it is not possible to make a reliable estimate of the possible outflow of economic resource relating to this risk.
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, ANTSSantander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) are currently under investigation by the Cologne Criminal Prosecution Office and the German Federal Tax Office in relation to historical involvement in German dividend tax arbitrage transactions (known as cum/ex transactions). WeThese transactions allegedly exploited a feature 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 cooperatinginvestigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.
During 2019 we have continued to cooperate with the German authorities and, are conducting our ownwith 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 remainson-going.There areremain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict with reasonable certainty the resolution of the matter including timing or the significance of the possible impact.
Consumer credit
The Santander UK group’s unsecured lending and other consumer credit business is governed by consumer credit law and related regulations, including the CCA. Claims brought by customers in relation to these requirements, including potential breaches, of these requirements could result in costs to the Santander UK group where such potential breaches are not found to be de minimis. The CCA includes very detailed and prescriptive requirements for lenders, including in relation to post contractual information.
As described in Note 30,27, other provisions includesinclude an amount of £58m£68m arising from a systems relatedsystems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, but these reviewsadvice. Reviews of systems, commercial agreements and the legal and regulatory position are not yet complete,ongoing, such that the approachpotential for additional remedial action is still being determined. The Regulatory and timing to any remediation has not yet been finalised. As a result,other provision in Note 27 includes our best estimate of Santander UK’s liability for the specific issue. The actual cost of customer compensation could differ materially from the amount provided, and itprovided. It is not currently practicable to provide a reliablean estimate of the risk and amount or timing of any additionalfurther financial effects.impact.
Taxation
The Santander UK group engages in discussion, andco-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 are currently 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, which could be up to £146m. Whilst legal opinions have been obtained to support the Santander UK group’s position, the matter remains uncertain pending formal resolution with HMRC and any subsequent litigation. It is anticipated that the matters will move to formal litigation in 2020 as required under the terms of the leases.
Other
On 2 November 2015, Visa Europe Ltd agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Ltd, Santander UK received upfront consideration made up of cash and convertible preferred stock. Additional deferred cash consideration is also payable following the third anniversary of closing. Conversion of the preferred stock into Class A Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK & Ireland (UK&I) multilateral interchange fees (MIFs). Santander UK and certain other UK&I banks have agreed to indemnify Visa Inc. in the event that the preferred stock is insufficient to meet the costs of this litigation. Visa Inc. has recourse to this indemnity once more than€1bn of losses relating to UK&I MIFs have arisen or once the total value of the preferred stock issued to UK&I banks on closing has been reduced to nil. In valuing the preferred stock, Santander UK makes adjustments for illiquidity and the potential for changes in conversion. Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism.
As part of the sale of subsidiaries, businesses and other entities, and as is normal in such circumstances, Santander UK has given warranties and indemnities to the purchasers.
Obligations under stock borrowing and lending agreements
Obligations under stock borrowing and lending agreements represent contractual commitments to return stock borrowed. These obligations are offset by a contractual right to receive stock under other contractual agreements. See Note 37.34.
Otheroff-balance sheet commitments
The Santander UK group has commitments to lend at fixed interest rates which expose us to interest rate risk. For more, see the Risk review.
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Operating lease commitments
The table below shows the rental commitments undernon-cancellable operating leases at 31 December 2018. Following the application of IFRS 16 at 1 January 2019, Santander UK now recognises a lease liability on the balance sheet to represent its obligation to make lease payments. For more information, including a reconciliation of operating lease commitments at 31 December 2018 to lease liabilities recognised at 1 January 2019, see Note 1.
| Rental commitments undernon-cancellable operating leases | 2018 £m | 2017 £m | ||||||
Not later than one year | 73 | 73 | ||||||
Later than one year and not later than five years | 114 | 160 | ||||||
Later than five years | 60 | 70 | ||||||
| 247 | 303 | |||||||
| Group | ||||
| 2018 | ||||
| Rental commitments undernon-cancellable operating leases | £m | |||
Not later than one year | 73 | |||
Later than one year and not later than five years | 114 | |||
Later than five years | 60 | |||
| 247 | ||||
The majority of leases are subject to a third party outsourcing contract wherebywhich expires in December 2020 and the remainder are held directly by the Santander UK group has the right to extend the occupation of properties by a minimum of three years subject to 12 months’ notice and a lease renewal being available from externalwith third party landlords. Where leases subject to the outsourcing contract expire on or after the expiry of the outsourcing contract in December 2020 and occupation is still required, negotiations will be held directly with the landlords of these properties, to agree renewal terms.
Negotiations will be in accordance with a conventional landlord and tenant negotiation on lease expiry, subject to a lease renewal being available from the external landlords. Where a freehold interest in the property is held by the outsourcing company, a notice has been served under the contract confirming the properties where a new lease is required post-2020. The terms for the leases of these properties will also be negotiated during 2020. In 2018, rental expense amounted to £61m (2017: £61m, 2016: £61m), including minimum rentals of £63m (2017: £61m, 2016: £61m), offset bysub-lease rental income of £2m (2017: £nil, 2016: £nil). There was no contingent rent expense included in this amount.
30. SHARE CAPITAL
| Group | ||||||||
| Ordinary shares | ||||||||
| of £1 each | ||||||||
| Issued and fully paid share capital | No. | £m | ||||||
At 31 December 2018, 1 January 2019 and 31 December 2019 | 7,060,000,000 | 7,060 | ||||||
31. OTHER EQUITY INSTRUMENTS
| Group | ||||||||||||||||
Interest rate % | Next call date | 2019 £m | 2018 £m | |||||||||||||
AT1 securities: | ||||||||||||||||
– £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.75 | June 2024 | 496 | 496 | ||||||||||||
– £750m Fixed Rate Reset Perpetual AT1 Capital Securities | 7.375 | June 2022 | 745 | 745 | ||||||||||||
– £300m Fixed Rate Reset Perpetual AT1 Capital Securities | 7.60 | n/a | – | 300 | ||||||||||||
– £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 5.33 | March 2020 | 500 | 500 | ||||||||||||
– £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.30 | March 2025 | 500 | – | ||||||||||||
| 2,241 | 2,041 | |||||||||||||||
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Annual Report 2018 2019| Financial statements
33. SHARE CAPITAL
| Ordinary shares of £1 each | ||||||||
| Issued and fully paid share capital | No. | £m | ||||||
At 31 December 2017, 1 January 2018 and 31 December 2018 | 7,060,000,000 | 7,060 | ||||||
34. OTHER EQUITY INSTRUMENTS
| Initial interest rate % | First call date | 2018 £m | 2017 £m | |||||||||||||
AT1 securities: | ||||||||||||||||
– £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.75 | June 2024 | 496 | 496 | ||||||||||||
– £750m Fixed Rate Reset Perpetual AT1 Capital Securities | 7.375 | June 2022 | 745 | 745 | ||||||||||||
– £300m Perpetual Capital Securities | 7.60 | December 2019 | 300 | 300 | ||||||||||||
– £500m Perpetual Capital Securities | 6.625 | June 2019 | 500 | 500 | ||||||||||||
| 2,041 | 2,041 | |||||||||||||||
AT1 securities
The AT1 securities issued by the Company meet the CRD IV AT1 rules and are fully recognised as AT1 capital. The securities are perpetual and pay a distribution on 24 March, June, September and December. At each distribution payment date, the Company can decide whether to pay the distribution, which isnon-cumulative, in whole or in part. The distribution rate resets every five years based on prevailing 5 year sterling mid swap rates.years. The securities will be automatically written down and the investors will lose their entire investment in the securities should the CET1 capital ratio of the Santander UK prudential consolidation group fall below 7%. They are redeemable at the option of the Company on their first call date or on any reset date thereafter in the cases of the 6.75% and 7.375% Fixed Rate Reset Perpetual AT1 Capital Securities, and on any distribution payment date thereafter in the cases of the 7.60%5.33% and 6.625%6.30% Fixed Rate Reset Perpetual AT1 Capital Securities. No such redemption may be made without the consent of the PRA.
The £300m and £500m 5.33% Fixed Rate Reset Perpetual AT1 Capital Securities and the £500m 6.30% Fixed Rate Reset Perpetual AT1 Capital Securities were fully subscribed by the Company’s immediate parent company, Banco Santander SA. £100m of the £750m 7.375% Fixed Rate Reset Perpetual AT1 Capital Securities were subscribed by Banco Santander SA.
In August 2019, as part of a capital management exercise, the Company’s immediate parent company,Company purchased and redeemed the £300m 7.60% Fixed Rate Reset Perpetual AT1 Capital Securities, and issued a further £500m 6.30% Fixed Rate Reset Perpetual AT1 Capital Securities to Banco Santander SA.
35.32.NON-CONTROLLING INTERESTS
| Initial interest rate % | First call date | 2018 £m | 2017 £m | Initial interest rate % | First call date | 2019 £m | 2018 £m | |||||||||||||||||||||||||
Santander UK plc issued: | ||||||||||||||||||||||||||||||||
– £300m Fixed/Floating RateNon-Cumulative Callable Preference Shares | 6.222 | May 2019 | 14 | 14 | 6.222 | May 2019 | – | 14 | ||||||||||||||||||||||||
– £300mStep-up Callable Perpetual Reserve Capital Instruments | 7.037 | February 2026 | 235 | 235 | 7.037 | February 2026 | 235 | 235 | ||||||||||||||||||||||||
PSA Finance UK Limited | 151 | 152 | 160 | 151 | ||||||||||||||||||||||||||||
| 400 | 401 | 395 | 400 | |||||||||||||||||||||||||||||
Fixed/Floating RateNon-Cumulative Callable Preference Shares
These shares entitleentitled the holders to a fixednon-cumulative dividend, at the discretion of Santander UK plc, of 6.222% per annum payable annually from 24 May 2010 until 24 May 2019 and quarterly thereafter at a rate of 1.13% per annum above three month sterling LIBOR. The remaining preference shares are redeemablewere redeemed at the option of Santander UK plc on 24 May 2019 or on each quarterly dividend payment date thereafter. No such redemption may be made without the consent of the PRA.2019.
Step-up Callable Perpetual Reserve Capital Instruments
These instruments are redeemable by Santander UK plc on 14 February 2026 or on any coupon payment date thereafter, subject to the prior approval of the PRA. They are perpetual and pay interest annually. The coupon rate resets every five years, based on the UK five-year benchmark gilt rate. Interest payments may be deferred by Santander UK plc. The instruments are not redeemable at the option of the holders and the holders do not have any rights against other Santander UK group companies.
PSA Finance UK Limited
PSA Finance UK Limited is the only subsidiary in the Santander UK group that gives rise to significantnon-controlling interests. See Note 2119 for summarised financial information of PSA Finance UK Limited.
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36.33. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
The table below shows the changes in liabilities arising from financing activities.
| Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance sheet line item | Balance sheet line item | Balance sheet line item | Balance sheet line item | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities in issue £m | Subordinated £m | Other instruments | Dividends £m | Total £m | Debt securities in issue £m | Subordinated liabilities £m | Other equity instruments £m | Dividends £m | Total £m | Debt securities in issue £m | Subordinated £m | Other equity instruments | Dividends £m | Total £m | Debt securities | Subordinated liabilities £m | Other equity | Dividends £m | Total £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January | 48,860 | 3,793 | 2,041 | – | 54,694 | 54,792 | 4,303 | 1,545 | – | 60,640 | 55,906 | 3,601 | 2,041 | – | 61,548 | 48,860 | 3,793 | 2,041 | – | 54,694 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flows from financing activities | 7,272 | (277 | ) | – | (1,308 | ) | 5,687 | (4,986 | ) | (52 | ) | 496 | (1,001 | ) | (5,543 | ) | (3,839 | ) | – | 196 | (434 | ) | (4,077 | ) | 7,272 | (277 | ) | – | (1,308 | ) | 5,687 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | (2,760 | ) | (2 | ) | – | – | (2,762 | ) | 112 | 254 | – | – | 366 | (548 | ) | – | – | – | (548 | ) | (2,760 | ) | (2 | ) | – | – | (2,762 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash changes: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non–cash changes: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Unrealised foreign exchange | (2,085 | ) | 149 | – | – | (1,936 | ) | (685 | ) | (235 | ) | – | – | (920 | ) | (1,647 | ) | (94 | ) | – | – | (1,741 | ) | (2,085 | ) | 149 | – | – | (1,936 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Other changes | 4,619 | (62 | ) | – | 1,308 | 5,865 | (373 | ) | (477 | ) | – | 1,001 | 151 | 299 | 21 | 4 | 434 | 758 | 4,619 | (62 | ) | – | 1,308 | 5,865 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December | 55,906 | 3,601 | 2,041 | – | 61,548 | 48,860 | 3,793 | 2,041 | – | 54,694 | 50,171 | 3,528 | 2,241 | – | 55,940 | 55,906 | 3,601 | 2,041 | – | 61,548 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
37.34. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS SECURITY FOR ASSETS
The following transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and repurchase agreements.
a) Assets charged as security for liabilities
The financial assets below are analysed between those assets accounted foron-balance sheet andoff-balance sheet.
2018 £m | 2017 £m | |||||||
On-balance sheet: | ||||||||
Cash and balances at central banks | 1,080 | 1,010 | ||||||
Trading assets | – | 17,092 | ||||||
Loans and advances to customers – securitisations and covered bonds (See Note 15) | 35,694 | 35,421 | ||||||
Loans and advances to customers – other | 16,402 | 15,078 | ||||||
Loans and advances to banks | 402 | 105 | ||||||
Other financial assets at amortised cost | 3,763 | |||||||
Financial assets at fair value through other comprehensive income | 5,825 | |||||||
Financial investments | 6,755 | |||||||
Totalon-balance sheet | 63,166 | 75,461 | ||||||
Totaloff-balance sheet | 15,221 | 33,013 | ||||||
Annual Report 2018 | Financial statements
| Group | ||||||||
| 2019 | 2018 | |||||||
| £m | £m | |||||||
On-balance sheet: | ||||||||
Cash and balances at central banks | 1,080 | 1,080 | ||||||
Loans and advances to banks | 615 | 402 | ||||||
Loans and advances to customers – securitisations and covered bonds (See Note 14) | 36,225 | 35,694 | ||||||
Loans and advances to customers – other | 16,315 | 16,402 | ||||||
Other financial assets at amortised cost | 3,026 | 3,763 | ||||||
Financial assets at fair value through other comprehensive income | 6,020 | 5,825 | ||||||
Total on–balance sheet | 63,281 | 63,166 | ||||||
Totaloff-balance sheet | 15,111 | 15,221 | ||||||
The Santander UK group provides assets as collateral in the following areas of the business.
Sale and repurchase agreements
The Santander UK group enters into sale and repurchase agreements and similar transactions of equity and debt securities, which are accounted for as secured borrowings. Upon entering into such transactions, the Santander UK group provides collateral in excess of the borrowed amount. The carrying amount of assets that were so provided at
31 December 20182019 was £17,485m (2017: £34,310m)£20,634m (2018: £17,485m), of which £2,383m (2017: £2,931m)£2,067m (2018: £2,383m) was classified within ‘Loans and advances to customers – securitisations and covered bonds’ in the table above.
Securitisations and covered bonds
As described in Note 15,14, Santander UK plc and certain of its subsidiaries issue securitisations and covered bonds. At 31 December 2018,2019, there were £36,195m (2017: £36,512m)£36,391m (2018: £36,195m) of gross assets in these secured programmes and £501m (2017: £1,091m)£166m (2018: £501m) of these related to internally retained issuances andthat were available for use as collateral for liquidity purposes in the future.
At 31 December 2018,2019, a total of £4,039m (2017: £4,359m)£4,728m (2018: £4,039m) of notes issued under securitisation and covered bond programmes had been retained internally, a proportion of which had been used as collateral for raising funds via third party bilateral secured funding transactions, which totalled £1,834m£1,581m at 31 December 2018 (2017:2019 (2018: £1,834m), or for use as collateral for liquidity purposes in the future.
Stock borrowing and lending agreements
Asset balances under stock borrowing and lending agreements represent stock lent by the Santander UK group. These balances amounted to £25,910m£21,639m at 31 December 2018 (2017: £38,016m)2019 (2018: £25,910m) and are offset by contractual commitments to return stock borrowed or cash received.
Derivatives business
In addition to the arrangements described, collateral is also provided in the normal course of derivative business to counterparties. At 31 December 2018, £1,681m (2017: £3,658m)2019 £1,961m (2018: £1,681m) of such collateral in the form of cash had been provided by the Santander UK group and is included in the table.
| Santander UK Group Holdings plc | 231 |
Annual Report 2019| Financial statements
b) Collateral accepted as security for assets
The collateral held as security for assets, analysed between those liabilities accounted for on balance sheet andoff-balance sheet, was:
| Group | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
2018 £m | 2017 £m | £m | £m | |||||||||||||
On-balance sheet: | ||||||||||||||||
Trading liabilities | – | 1,911 | ||||||||||||||
Deposits by customers | – | 8 | ||||||||||||||
Deposits by banks | 4,058 | 1,760 | 2,175 | 4,058 | ||||||||||||
Totalon-balance sheet | 4,058 | 3,679 | 2,175 | 4,058 | ||||||||||||
Totaloff-balance sheet | 23,473 | 38,655 | 25,461 | 23,473 | ||||||||||||
Purchase and resale agreements
The Santander UK group also enters into purchase and resale agreements and similar transactions of equity and debt securities, which are accounted for as collateralised loans. Upon entering into such transactions, the Santander UK group receives collateral in excess of the loan amount. The level of collateral held is monitored daily and if required, further calls are made to ensure the market values of collateral remains at least equal to the loan balance. The subsidiaries are permitted to sell or repledge the collateral held in the absence of default. At 31 December 2018,2019, the fair value of such collateral received was £15,728m (2017: £16,356m)£20,444m (2018: £15,728m). Of the collateral received, almost all was sold or repledged. The subsidiaries have an obligation to return collateral that they have sold or pledged.
Stock borrowing and lending agreements
Obligations representing contractual commitments to return stock borrowed by the Santander UK group amounted to £7,745m£5,017m at 31 December 2018 (2017: £22,299m)2019 (2018: £7,745m) and are offset by a contractual right to receive stock lent.
Derivatives business
In addition to the arrangements described, collateral is also received from counterparties in the normal course of derivative business. At 31 December 2018, £4,058m (2017: £3,679m)2019, £2,175m (2018: £4,058m) of such collateral in the form of cash had been received by the Santander UK group and is included in the table.
Lending activities
In addition to the collateral held as security for assets, the Santander UK group may obtain a charge over a customer’s property in connection with its lending activities. Details of these arrangements are set out in the ‘Credit risk’ section of the Risk review.
|
38.35. SHARE-BASED COMPENSATION
The Santander UK group operates share schemes and arrangements for eligible employees. The main current schemes are the Sharesave Schemes, the Long-Term Incentive Plan (the LTIP), the Deferred Shares Bonus Plan and the Partnership Shares scheme. All the share options and awards relate to shares in Banco Santander SA.
The amount charged to the income statement in respect of share-based payment transactions is set out in Note 6. The total carrying amount at the end of the year for liabilities arising from share-based payment transactions was £7.7m (2017: £16.7m), of which £0.7m had vested at 31 December 2018 (2017: £nil).
a) Sharesave Schemes
The Santander UK group launched its eleventhtwelfth HM Revenue & Customs approved Sharesave Scheme under Banco Santander SA ownership in September 2018.2019. The first teneleven Sharesave Schemes were launched each year from 2008 to 20172018 under broadly similar terms. Under the Sharesave Scheme’s HMRC-approved savings limits, eligible employees may enter into contracts to save between £5 and £500 per month. For all schemes, at the end of a fixed term of three or five years after the grant date, the employees can use these savings to buy shares in Banco Santander SA at a discount, calculated in accordance with the rules of the scheme. The discount is currently 10% of the average middle market quoted price of Banco Santander SA shares over the first three dealing days prior to invitation. The vesting of awards under the scheme depends on continued employment with the Banco Santander SA group. Participants in the scheme have six months from the date of vest to exercise the option.
The table below summarises movements in the number of options, during the year, and changes in weighted average exercise price over the same period.
| 2018 | 2017 | 2016 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of options ‘000 | Weighted average exercise price £ | Number of ‘000 | Weighted average exercise price £ | Number of ‘000 | Weighted average exercise price £ | Number of options ‘000 | Weighted average £ | Number of options ‘000 | Weighted average £ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding at 1 January | 27,201 | 3.12 | 28,916 | 3.08 | 24,762 | 3.53 | 26,838 | 3.12 | 27,201 | 3.12 | ||||||||||||||||||||||||||||||||||||||||||
Granted | 6,210 | 3.46 | 3,916 | 4.02 | 17,296 | 4.91 | 9,594 | 2.83 | 6,210 | 3.46 | ||||||||||||||||||||||||||||||||||||||||||
Exercised | (3,340 | ) | 3.16 | (1,918 | ) | 3.77 | (338 | ) | 3.67 | (7,978 | ) | 2.83 | (3,340 | ) | 3.16 | |||||||||||||||||||||||||||||||||||||
Forfeited/expired | (3,233 | ) | 3.76 | (3,713 | ) | 3.40 | (12,804 | ) | 3.51 | (5,081 | ) | 3.42 | (3,233 | ) | 3.76 | |||||||||||||||||||||||||||||||||||||
Outstanding at 31 December | 26,838 | 3.12 | 27,201 | 3.12 | 28,916 | 3.08 | 23,373 | 3.03 | 26,838 | 3.12 | ||||||||||||||||||||||||||||||||||||||||||
Exercisable at 31 December | 10,370 | 2.81 | 5,200 | 3.17 | 2,334 | 4.30 | 2,519 | 3.62 | 10,370 | 2.81 | ||||||||||||||||||||||||||||||||||||||||||
The weighted average share price at the date the options were exercised was £3.79 (2017: £4.96, 2016:£3.18 (2018: £3.79).
| 232 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
The following table summarises the range of exercise prices and weighted average remaining contractual life of the options at 31 December 20182019 and 2017.2018.
| 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Range of exercise prices | Weighted average remaining contractual life Years | Weighted average exercise price £ | Weighted average remaining contractual life Years | Weighted average exercise price £ | Weighted average remaining contractual life Years | Weighted average exercise price £ | Weighted average remaining contractual life Years | Weighted average exercise price £ | ||||||||||||||||||||||||||||||||
£2 to £3 | 2 | 2.75 | 3 | 2.75 | 3 | 2.80 | 2 | 2.75 | ||||||||||||||||||||||||||||||||
£3 to £4 | 3 | 3.36 | 1 | 3.17 | 2 | 3.38 | 3 | 3.36 | ||||||||||||||||||||||||||||||||
£4 to £5 | 3 | 4.11 | 3 | 4.21 | 2 | 4.13 | 3 | 4.11 | ||||||||||||||||||||||||||||||||
The fair value of each option for 2018, 2017 and 2016 has been estimated at the date of acquisition or grant is estimated using a partial differentiation equation model. This model uses assumptions on the share price, the EUR/GBP FX rate, the risk free interest rate, dividend yields, the expected volatility of the underlying shares and the expected lives of options granted under 3 and 5 year schemes.granted. The weighted average grant-date fair value of options granted during the year was £0.53 (2017: £1.02, 2016: £0.65)£0.49 (2018: £0.53).
At 31 December 2019, the carrying amount of liabilities arising from share-based payment transactions in the Santander UK Group Holdings plc group was £2.4m (2018: £7.7m), of which £1.4m had vested at 31 December 2019 (2018: £0.7m).
b) LTIP
In 2014 and 2015, conditional cash awards were made to certain Executive Directors, Key Management Personnel (as defined in Note 39)36) and other nominated individuals which are converted into shares in Banco Santander SA at the time of vesting and deferred for three years. There have been no LTIP awards granted since 2015 due to the introduction of a single variable remuneration framework across the Banco Santander group in 2016.
The LTIP plans granted in 2014 and 2015 involveinvolved aone-year performance cycle for vesting, deferred for a further three-year period dependent upon performance conditions applied. Beneficiaries were granted an initial award determined in GBP which was converted into shares in Banco Santander SA in January 2015 and January 2016 respectively based on performance over the performance cycle. The 2014 LTIP vested at 100% in January 2015 based on Banco Santander SA’s relative Total Shareholder Return (TSR) performance in 2014 versus a comparator group and was deferred over three years. The awards lapsed during 2018 due to the performance conditions not being satisfied. The 2015 LTIP vested in January 2016, was deferred over three years and was subject to performance conditions based on Banco Santander SA’s Earnings Per Share (EPS) and Return on Tangible Equity (RoTE) performance against budget. The conditions of the 2015 LTIP have beenwere met and will be paid outpayment was made to the remaining eligible population in the first quarter ofMarch 2019 at 65.78% of the original award.
The following table summarises the movement in the value of conditional awards in the LTIPs in 2018, 20172019 and 2016:2018:
2015 LTIP | 2014 LTIP | |||||||||||||||||||||||||||
2018 £000 | 2017 £000 | 2016 £000 | 2018 £000 | 2017 £000 | 2016 £000 | |||||||||||||||||||||||
Outstanding at 1 January | 6,503 | 6,718 | 6,769 | 1,910 | 3,193 | 5,102 | ||||||||||||||||||||||
Forfeited/cancelled | (129 | ) | (215 | )(1) | (51 | ) | (1,910 | ) | (1,283 | )(1) | (1,909 | ) | ||||||||||||||||
Outstanding at 31 December | 6,374 | 6,503 | 6,718 | – | 1,910 | 3,193 | ||||||||||||||||||||||
|
See Note 39 for details of conditional share awards made to certain Executive Directors, Other Key Management Personnel and other individuals under the LTIP.
Annual Report 2018 | Financial statements
| 2015 LTIP | 2014 LTIP | |||||||||||||||||||
2019 £000 | 2018 £000 | 2019 £000 | 2018 £000 | |||||||||||||||||
Outstanding at 1 January | 6,374 | 6,503 | – | 1,910 | ||||||||||||||||
Payments made | (4,578 | ) | – | – | – | |||||||||||||||
Forfeited/cancelled | (1,796 | ) | (129 | ) | – | (1,910 | ) | |||||||||||||
Outstanding at 31 December | – | 6,374 | – | – | ||||||||||||||||
c) Deferred shares bonus plan
Deferred bonus awards are designed to align employee performance with shareholder value and encourage increased retention of senior employees. During 20172018 and 2018,2019, conditional share awards were made to employees (designated as Material Risk Takers). Such employees receive part of their annual bonus as a deferred award comprising 50% in shares, and 50% in cash. Any deferred awards are dependent on future service.continued employment or subject to Santander’s discretion for leavers. For 20172018 and 20182019 bonus awards, deferral of the award is over a three, five or seven-year period from the anniversary of the initial award. Deferred bonus awards in shares are subject to an additionalone-year retention period from the point of delivery.
Material Risk Takers are required to defer either 40% or 60% of any annual bonus (40% for variable pay of less than £500,000, 60% for variable pay at or above this amount). Vesting of both deferred bonus awards and long-term bonus awards is subject to risk and performance adjustment in the event of deficient performance and prudent financial control provisions.
d) Partnership Shares scheme
A Partnership Shares scheme is operated for eligible employees under the Share Incentive Plan (SIP) umbrella. Participants can choose to invest up to £1,800 per tax year (or no more than 10% of an employee’s salary for the tax year) frompre-tax salary to buy Banco Santander SA shares. Shares are held in trust for the participants. There are no vesting conditions attached to these shares, and no restrictions as to when the shares can be removed from the trust. However, if a participant chooses to sell the shares before the end of five years, they will be liable for the taxable benefit received when the shares are taken out of the trust. The shares can be released from trust after five years free of income tax and national insurance contributions. 2,346,1082,396,909 shares were outstanding at 31 December 2018 (2017: 2,147,3992019 (2018: 2,346,108 shares).
39.
| Santander UK Group Holdings plc | 233 |
Annual Report 2019| Financial statements
36. TRANSACTIONS WITH DIRECTORS AND OTHER KEY MANAGEMENT PERSONNEL
The Directors of Santander UK Group Holdings plc did not receive any remuneration in respect of their services to the Company. The remuneration disclosures in these financial statements reflect their remuneration in respect of the Santander UK plc group.
a) Remuneration of Directors and Other Key Management Personnel
The remuneration of the Directors and Other Key Management Personnel of the Santander UK group is set out in aggregate below.
| Directors’ remuneration | 2018 £ | 2017 £ | 2016 £ | 2019 £ | 2018 £ | 2017 £ | ||||||||||||||||||
Salaries and fees | 5,028,434 | 4,406,908 | 3,604,999 | 5,045,302 | 5,028,434 | 4,406,908 | ||||||||||||||||||
Performance-related payments(1) | 5,194,317 | 3,685,464 | 2,330,000 | 3,896,382 | 5,194,317 | 3,685,464 | ||||||||||||||||||
Other fixed remuneration (pension and other allowances &non-cash benefits) | 1,467,011 | 1,580,321 | 635,493 | 1,386,439 | 1,467,011 | 1,580,321 | ||||||||||||||||||
Expenses | 25,198 | 96,358 | 120,302 | 42,526 | 25,198 | 96,358 | ||||||||||||||||||
Total remuneration | 11,714,960 | 9,769,051 | 6,690,794 | 10,370,649 | 11,714,960 | 9,769,051 | ||||||||||||||||||
| Directors’ and Other Key Management Personnel compensation | 2018 £ | 2017 £ | 2016 £ | 2019 £ | 2018 £ | 2017 £ | ||||||||||||||||||
Short-term employee benefits(2) | 24,445,189 | 24,642,085 | 24,757,161 | 23,238,187 | 24,445,189 | 24,642,085 | ||||||||||||||||||
Post-employment benefits(3) | 2,399,261 | 2,292,857 | 1,918,144 | 3,674,772 | 2,399,261 | 2,292,857 | ||||||||||||||||||
Total compensation | 26,844,450 | 26,934,942 | 26,675,305 | |||||||||||||||||||||
Total Compensation | 26,912,959 | 26,844,450 | 26,934,942 | |||||||||||||||||||||
| (1) | In line with the Code, a proportion of the performance-related payment was deferred. Further details can be found in Note |
| (2) |
|
| (3) | Termination payments of |
In 2018,2019, the remuneration, excluding pension contributions, of the highest paid Director, was £4,635,497 (2017: £4,714,578)£3,725,993 (2018: £4,635,497) of which £2,317,000 (2017: £2,425,000)£1,989,900 (2018: £2,317,000) was performance related. In 2018,2019, there was no pension benefit accrued for the highest paid Director but in respect of the qualifying past services to Santander UK to 31 May 2009 he has a deferred pension benefit accruing under a defined benefit scheme of £20,402£20,973 p.a. (2017: £15,450(2018: £20,402 p.a.).
b) Retirement benefits
Defined benefit pension schemes are provided to certain employees. See Note 3128 for details of the schemes and the related costs and obligations. As described above, one director, being the highest paid director, has a deferred pension benefit accruing under a defined benefit scheme. Ex gratia pensions paid to former Directors of Santander UK plc in 2018,2019, which have been provided for previously, amounted to £87,300 (2017: £2,482; 2016: £14,893)£ 335,202 (2018: £87,300; 2017: £2,482). In 1992, the Board decided not to award any new such ex gratia pensions.
c) Transactions with Directors, Other Key Management Personnel and each of their connected persons
Directors, Other Key Management Personnel (Defined as the Executive Committee of Santander UK plc who served during the year) and their connected persons have undertaken the following transactions with the Santander UK group in the ordinary course of business.
| 2018 | 2017 | |||||||||||||||||||
| No. | £000 | No. | £000 | |||||||||||||||||
Secured loans, unsecured loans and overdrafts | ||||||||||||||||||||
At 1 January | 7 | 1,216 | 17 | 5,195 | ||||||||||||||||
Net movements | 9 | 1,819 | (10 | ) | (3,979 | ) | ||||||||||||||
At 31 December | 16 | 3,035 | 7 | 1,216 | ||||||||||||||||
Deposit, bank and instant access accounts and investments | ||||||||||||||||||||
At 1 January | 25 | 13,184 | 26 | 9,138 | ||||||||||||||||
Net movements | 5 | (2,221 | ) | (1 | ) | 4,046 | ||||||||||||||
At 31 December | 30 | 10,963 | 25 | 13,184 | ||||||||||||||||
|
| 2019 | 2018 | |||||||||||||||||||
| No. | £000 | No. | £000 | |||||||||||||||||
Secured loans, unsecured loans and overdrafts | ||||||||||||||||||||
At 1 January | 16 | 3,035 | 7 | 1,216 | ||||||||||||||||
Net movements | 2 | 1,885 | 9 | 1,819 | ||||||||||||||||
At 31 December | 18 | 4,920 | 16 | 3,035 | ||||||||||||||||
Deposit, bank and instant access accounts and investments | ||||||||||||||||||||
At 1 January | 30 | 10,963 | 25 | 13,184 | ||||||||||||||||
Net movements | 2 | 1,012 | 5 | (2,221 | ) | |||||||||||||||
At 31 December | 32 | 11,975 | 30 | 10,963 | ||||||||||||||||
In 20182019 and 2017,2018, no Director held any interest in the shares of any company in the Santander UK group and no Director exercised or was granted any rights to subscribe for shares in any company in the Santander UK group. In addition, in 20182019 and 2017,2018, no Directors exercised share options over shares in Banco Santander SA, the ultimate parent company of the Company. At 31 December 2018, one interest-free loan from Banco Santander SA had been advanced to a Director, amounting to £344,348 (2017: £510,901). Two Directors and one Key Management Person received benefits in kind from Banco Santander SA totalling £485,334 and £2,024, respectively, in 2018.
Secured loans, unsecured loans and overdrafts are made to Directors, Other Key Management Personnel and their connected persons, in the ordinary course of business, with terms prevailing for comparable transactions and on the same terms and conditions as applicable to other employees in the Santander UK group. Such loans do not involve more than the normal risk of collectability or present any unfavourable features. Amounts deposited by Directors, Other Key Management Personnel and their connected persons earn interest at the same rates as those offered to the market or on the same terms and conditions applicable to other employees in the Santander UK group. Deposits, bank and instant access accounts and investments are entered into by Directors, Other Key Management Personnel and their connected persons on normal market terms and conditions, or on the same terms and conditions as applicable to other employees in Santander UK group.
In 2018,2019, loans were made to eightnine Directors (2017: two(2018: eight Directors), with a principal amount of £65,232£1,767,066 outstanding at 31 December 2018 (2017: £53,452)2019 (2018: £65,232). In 2018,2019, loans were made to eightnine Other Key Management Personnel (2017: five)(2018: eight), with a principal amount of £2,969,462£3,153,343 outstanding at 31 December 2018 (2017: £1,162,384)2019 (2018: £2,969,462).
In 20182019 and 2017,2018, there were no other transactions, arrangements or agreements with Santander UK in which Directors, Other Key Management Personnel or their connected persons had a material interest. In addition, in 20182019 and 2017,2018, no Director had a material interest in any contract of significance with Santander UK other than a service contract.
40.
| 234 | Santander UK Group Holdings plc |
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Notes to the financial statements |
37. RELATED PARTY DISCLOSURES
a) Parent undertaking and controlling party
The Company’s immediate and ultimate parent and controlling party is Banco Santander SA, a company incorporated in Spain. The smallest and largest groups into which the Santander UK group’s results are included are the group accounts of Banco Santander SA, copies of which may be obtained from Shareholder Relations, 2 Triton Square, Regent’s Place, London NW1 3AN.
b) Transactions with related parties
Transactions with related parties during the year and balances outstanding at theyear-end:
| Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest, fees and other income received | Interest, fees and other expenses paid | Amounts owed by related parties | Amounts owed to related parties | Interest, fees and other income received | Interest, fees and other expenses paid | Amounts owed by related parties | Amounts owed to related parties | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 £m | 2017 £m | 2016 £m | 2018 £m | 2017 £m | 2016 £m | 2018 £m | 2017 £m | 2018 £m | 2017 £m | 2019 £m | 2018 £m | 2017 £m | 2019 £m | 2018 £m | 2017 £m | 2019 £m | 2018 £m | 2019 £m | 2018 £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ultimate parent | (73 | ) | (60 | ) | (81 | ) | 231 | 321 | 188 | 2,737 | 4,398 | (3,854 | ) | (5,082 | ) | (150 | ) | (73 | ) | (60 | ) | 334 | 231 | 321 | 1,817 | 2,737 | (2,409 | ) | (3,854 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fellow subsidiaries | (81 | ) | (76 | ) | (271 | ) | 169 | 491 | 653 | 39 | 102 | (591 | ) | (981 | ) | (58 | ) | (81 | ) | (76 | ) | 158 | 169 | 491 | 34 | 39 | (500 | ) | (591 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Associates & joint ventures | (28 | ) | (20 | ) | (27 | ) | – | – | 1 | 1,986 | 1,175 | (718 | ) | (33 | ) | (29 | ) | (28 | ) | (20 | ) | – | – | – | 2,194 | 1,986 | (930 | ) | (718 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (182 | ) | (156 | ) | (379 | ) | 400 | 812 | 842 | 4,762 | 5,675 | (5,163 | ) | (6,096 | ) | (237 | ) | (182 | ) | (156 | ) | 492 | 400 | 812 | 4,045 | 4,762 | (3,839 | ) | (5,163 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For more on this, see ‘Balances with other Banco Santander companies’ in the Risk review. In addition, transactions with pension schemes operated by the Santander UK group are described in Note 31.28.
The above transactions were made in the ordinary course of business, except those carried out with Banco Santander SA as part of our ring-fencing implementation as described in Note 43,2018, on substantially the same terms as for comparable transactions with third party counterparties, and within limits acceptable to the PRA. Such transactions do not involve more than the normal risk of collectability or present any unfavourable features.
In addition, in July 2018 we transferred £1.4bn of customer loans, £21.5bn of other assets and £20.7bn of liabilities from Santander UK to Banco Santander London Branch. Of these transfers, £19.7bn of assets and £18.8bn of liabilities related to derivatives business. These transfers reduced RWAs by £5.5bn and we paid an associated dividend of £668m. For more on ring-fencing, see Note 43.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
41.38. FINANCIAL INSTRUMENTS
a) Measurement basis of financial assets and liabilities
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.
b) Fair value measurement and hierarchy
(i) Fair value measurement
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which Santander UK has access at that date. The fair value of a liability reflects itsnon-performance risk.
Financial instruments valued using observable market prices
If a quoted market price in an active market is available for an instrument, the fair value is calculated as the current bid price multiplied by the number of units of the instrument held.
Financial instruments valued using a valuation technique
In the absence of a quoted market price in an active market, management uses internal models to make its best estimate of the price that the market would set for that financial instrument. In order to make these estimations, various techniques are employed, including extrapolation from observable market data and observation of similar financial instruments with similar characteristics. Wherever possible, valuation parameters for each product are based on prices directly observable in active markets or that can be derived from directly observable market prices. Chosen valuation techniques incorporate all the factors that market participants would take into account in pricing transactions.
Santander UK manages certain groups of financial assets and liabilities on the basis of its net exposure to either market risks or credit risk. As a result it has elected to use the exception under IFRS 13 which permits the fair value measurement of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position for a particular risk exposure or paid to transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions.
(ii) Fair value hierarchy
Santander UK applies the following fair value hierarchy that prioritises the inputs to valuation techniques used in measuring fair value. The hierarchy establishes three categories for valuing financial instruments, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three categories are: quoted prices in active markets (Level 1), internal models based on observable market data (Level 2) and internal models based on other than observable market data (Level 3). If the inputs used to measure an asset or a liability fall to different levels within the hierarchy, the classification of the entire asset or liability will be based on the lowest level input that is significant to the overall fair value measurement of the asset or liability.
Santander UK categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as follows:
| Level 1 | Unadjusted quoted prices for identical assets or liabilities in an active market that Santander UK can access at the measurement date. | |
| Level 2 | Quoted prices in inactive markets, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. | |
| Level 3 | Significant inputs to the pricing or valuation techniques are unobservable. These unobservable inputs reflect the assumptions that market participants would use when pricing assets or liabilities and are considered significant to the overall valuation. | |
Changes in the observability of significant valuation inputs during the reporting period may result in a transfer of assets and liabilities within the fair value hierarchy. The Santander UK group recognises transfers between levels of the fair value hierarchy when there is a significant change in either its principal market or the level of observability of the inputs to the valuation techniques as at the end of the reporting period.
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
c) Valuation techniques
The main valuation techniques employed in internal models to measure the fair value of the financial instruments at 31 December 20182019 and 20172018 are set out below. In substantially all cases, the principal inputs into these models are derived from observable market data. Santander UK did not make any material changes to the valuation techniques and internal models it used in 2019, 2018 2017 and 2016.2017.
| A | In the valuation of financial instruments requiring static hedging (for example interest rate, currency derivatives and |
| B | In the valuation of equity financial instruments requiring dynamic hedging (principally equity securities, options and other structured instruments), proprietary local volatility and stochastic volatility models are used. These types of models are widely accepted in the financial services industry. Observable market inputs used in these models include thebid-offer spread, foreign currency exchange rates, volatility and correlation between indices. In limited circumstances, other inputs may be used in these models that are based on unobservable market data, such as the Halifax’s UK HPI volatility, HPI forward growth, HPI spot rate, mortality, mean reversion and contingent litigation risk. |
| C | In the valuation of financial instruments exposed to interest rate risk that require either static or dynamic hedging (such as interest rate futures, caps and floors, and options), the present value method (futures), Black’s model (caps/floors) and the Hull/White and Markov functional models (Bermudan options) are used. These types of models are widely accepted in the financial services industry. The significant inputs used in these models are observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates. In limited circumstances, other inputs may be used in these models that are based on unobservable market data, such as HPI volatility, HPI forward growth, HPI spot rate and mortality. |
| D | In the valuation of linear instruments such as credit risk and fixed-income derivatives, credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case ofnon-linear instruments, if the portfolio is exposed to credit risk such as credit derivatives, the probability of default is determined using the credit default spread market. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted credit risk premiums and the correlation between the quoted credit derivatives of various issuers. |
The fair values of the financial instruments arising from Santander UK’s internal models take into account, among other things, contract terms and observable market data, which include such factors asbid-offer spread, interest rates, credit risk, exchange rates, the quoted market price of raw materials and equity securities, volatility and prepayments. In all cases, when it is not possible to derive a valuation for a particular feature of an instrument, management uses judgement to determine the fair value of the particular feature. In exercising this judgement, a variety of tools are used including proxy observable data, historical data and extrapolation techniques. Extrapolation techniques take into account behavioural characteristics of equity markets that have been observed over time, and for which there is a strong case to support an expectation of a continuing trend in the future. Estimates are calibrated to observable market prices when they become available.
Santander UK believes its valuation methods are appropriate and consistent with other market participants. Nevertheless, the use of different valuation methods or assumptions, including imprecision in estimating unobservable market inputs, to determine the fair value of certain financial instruments could result in different estimates of fair value at the reporting date and the amount of gain or loss recorded for a particular instrument. Most of the valuation models are not significantly subjective, because they can be tested and, if necessary, recalibrated by the internal calculation of and subsequent comparison to market prices of actively traded securities, where available.
| Santander UK Group Holdings plc | 237 |
Annual Report 2019| Financial statements
d) Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk-taker. To this end, ultimate responsibility for the determination of fair values lies with the Risk Department. For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilised. In inactive markets, direct observation of a traded price may not be possible. In these circumstances, Santander UK will source alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable.
The factors that are considered in this regard include:
| – | The extent to which prices may be expected to represent genuine traded or tradeable prices |
| – | The degree of similarity between financial instruments |
| – | The degree of consistency between different sources |
| – | The process followed by the pricing provider to derive the data |
| – | The elapsed time between the date to which the market data relates and the balance sheet date |
| – | The manner in which the data was sourced. |
The source of pricing data is considered as part of the process that determines the classification of the level of a financial instrument. Consideration is given to the quality of the information available that provides the currentmark-to-model valuation and estimates of how different these valuations could be on an actual trade, taking into consideration how active the market is. For spot assets that cannot be sold due to illiquidity, forward estimates are discounted to estimate a realisable value over time. Adjustments for illiquid positions are regularly reviewed to reflect changing market conditions.
For fair values determined using a valuation model, the control framework may include, as applicable, independent development and / or validation of: (i) the logic within the models; (ii) the inputs to those models; and (iii) any adjustments required outside the models. Internal valuation models are validated independently within the Risk Department. A validation report is produced for each model-derived valuation that assesses the mathematical assumptions behind the model, the implementation of the model and its integration within the trading system. The results of the independent valuation process and any changes to the fair value adjustments methodology are approved in line with the model risk framework and policy.
Annual Report 2018 | Financial statements
e) Fair values of financial instruments carried at amortised cost
The following tables analyse the fair value of the financial instruments carried at amortised cost at 31 December 20182019 and 2017,2018, including their levels in the fair value hierarchy – Level 1, Level 2 and Level 3. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Cash and balances at central banks, which consist of demand deposits with the Bank of England, and, in 2017, the US Federal Reserve, together with cash in tills and ATMs, have been excluded from the table as the carrying amount is deemed an appropriate approximation of fair value. The fair value of the portfolio of UK Government debt securities, included in other financial assets at amortised cost, is the only material financial instrument categorised in Level 1 of the fair value hierarchy.
| Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value | Carrying | Fair value | Carrying | Fair value | Carrying | Fair value | Carrying | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1 £m | Level 2 £m | Level 3 £m | Total £m | value £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | value £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | value £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | value £m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers | – | – | 204,391 | 204,391 | 201,619 | – | 6,331 | 195,327 | 201,658 | 199,332 | – | – | 212,007 | 212,007 | 207,498 | – | – | 204,391 | 204,391 | 201,619 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to banks | – | 3,028 | 448 | 3,476 | 3,515 | – | 2,897 | 556 | 3,453 | 3,466 | – | 2,039 | 539 | 2,578 | 2,583 | – | 3,028 | 448 | 3,476 | 3,515 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse repurchase agreements – non trading | – | 21,130 | – | 21,130 | 21,127 | – | 2,614 | – | 2,614 | 2,614 | – | 23,634 | – | 23,634 | 23,636 | – | 21,130 | – | 21,130 | 21,127 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial assets at amortised cost | 6,390 | 720 | – | 7,110 | 7,228 | 6,575 | 535 | – | 7,110 | 7,056 | 6,390 | 720 | – | 7,110 | 7,228 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial investments | 6,435 | 2,211 | – | 8,646 | 8,758 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 6,390 | 24,878 | 204,839 | 236,107 | 233,489 | 6,435 | 14,053 | 195,883 | 216,371 | 214,170 | 6,575 | 26,208 | 212,546 | 245,329 | 240,773 | 6,390 | 24,878 | 204,839 | 236,107 | 233,489 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers | – | 21 | 173,762 | 173,783 | 173,692 | – | – | 177,563 | 177,563 | 177,421 | – | 96 | 179,040 | 179,136 | 179,006 | – | 21 | 173,762 | 173,783 | 173,692 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks | – | 16,859 | 977 | 17,836 | 17,824 | – | 12,164 | 557 | 12,721 | 12,708 | – | 13,962 | 407 | 14,369 | 14,359 | – | 16,859 | 977 | 17,836 | 17,824 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements – non trading | – | 10,923 | – | 10,923 | 10,910 | – | 1,085 | – | 1,085 | 1,076 | – | 18,292 | – | 18,292 | 18,286 | – | 10,923 | – | 10,923 | 10,910 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities in issue | – | 56,695 | – | 56,695 | 55,906 | – | 50,641 | – | 50,641 | 48,860 | – | 51,736 | – | 51,736 | 50,171 | – | 56,695 | – | 56,695 | 55,906 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | – | 3,825 | – | 3,825 | 3,601 | – | 4,373 | – | 4,373 | 3,793 | – | 4,220 | – | 4,220 | 3,528 | – | 3,825 | – | 3,825 | 3,601 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| – | 88,323 | 174,739 | 263,062 | 261,933 | – | 68,263 | 178,120 | 246,383 | 243,858 | – | 88,306 | 179,447 | 267,753 | 265,350 | – | 88,323 | 174,739 | 263,062 | 261,933 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The carrying value above of any financial assets and liabilities that are designated as hedged items in a portfolio (or macro) fair value hedge relationship excludes gains and losses attributable to the hedged risk, as this is included in other assets on the balance sheet.
| 238 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements |
Valuation methodology for financial instruments carried at amortised cost
The fair value exposures set out in the tables above are managed by using a combination of hedging derivatives and offsetting on balance sheet positions. The valuation approach to specific categories of financial instruments is described below.
Assets:
Loans and advances to customers
The approach to estimating the fair value of loans and advances to customers has been determined by discounting expected cash flows to reflect either current market rates for lendingor credit spreads relevant to the specific industry of a similar credit quality.the borrower. The determination of their fair values is an area of considerable estimation and uncertainty as there is no observable market and values are significantly affected by customer behaviour.
i) Advances secured on residential property
The fair value of the mortgage portfolio is calculated by discounting contractual cash flows by different spreads for each representing a LTV band,Band, after taking account of expected customer prepayment rates. The spread is based on new business interest rates derived from competitor market information. Further discounting is applied for certain higher risk mortgage portfolios.
ii) Corporate loans
The corporate loan portfolio is stratified by product. The determination of the fair values of performing loans takes account of the differential between existing margins and estimated new business rates for similar loans in terms of segment maturity and structure.maturity. Provisions are considered appropriate for the book that is not impaired. A discount has been applied to impaired loans. Although exits have generally been achieved at carrying value, this does not reflect the discount a purchaser would require. A discount has therefore been applied based on the target return sought by distressed bond funds, who are the typical purchaser of the assets.
iii) Other loans
These consist of unsecured personal loans, credit cards, overdrafts and consumer (auto) finance. The weighted average lives of these portfolios are short and the business was writtenrelate to relatively recently.new business. As a result, contractual interest rates approximate new business interest rates, and therefore nomark-to-market surplus or deficit has been recorded with respect to the performing book, with the exception of unsecured personal loans and consumer (auto) finance loans, where a small surplus or deficit has been recognised based on the differential between existing portfolio margins and an estimate of new business rates for similar loans. A discount has been applied to the impaired part of the book.current contractual interest rates.
|
Loans and advances to banks
These comprise secured loans, short-term placements with banks including collateral and unsettled financial transactions. The secured loans have been valued based on the basis of spreads on credit default swapsa discounted spread for the term of the loans using valuation technique A as described above. The carrying amount of the other items is deemed a reasonable approximation of their fair value, as the transactions are very short-term in duration.
Reverse repurchase agreements – non trading
The fair value of the reverse repurchase agreements – non trading has been estimated using valuation technique A as described above.above, using a spread appropriate to the underlying collateral.
Other financial assets at amortised cost and financial investments
These consist of asset backed securities and debt securities. The asset backed securities arecan be complex products and in some instances are valued with the assistance of an independent, specialist valuation firm. These fair values are determined using industry-standard valuation techniques, including discounted cash flow models. The inputs to these models used in these valuation techniques include quotes from market makers, prices of similar assets, adjustments for differences in credit spreads, and additional quantitative and qualitative research.
The debt security investments consist of a portfolio of government debt securities. The fair value of this portfolio has been determined using valuation technique A as described above.quoted market prices.
Liabilities:
Deposits by customers
The majority of deposit liabilities are payable on demand and therefore can be deemed short-term in nature with the fair value equal to the carrying value. Certain of the deposit liabilities are at a fixed rate until maturity. The deficit/surplus of fair value over carrying value of these liabilities has been estimated by reference to the market rates available at the balance sheet date for similar deposit liabilities of similar maturities. The fair value of such deposit liabilities has been estimated using valuation technique A as described above.
Deposits by banks
The fair value of deposits by banks, including repos, has been estimated using valuation technique A as described above.above, discounted at the appropriate credit spread.
Repurchase agreements – non trading
The fair value of the repurchase agreements – non trading has been estimated using valuation technique A as described above, discounted at a spread appropriate to the underlying collateral.
Debt securities in issue and subordinated liabilities
Where reliable prices are available, the fair value of debt securities in issue and subordinated liabilities has been calculated using quoted market prices. Other market values have been determined using valuation technique A as described above.
Repurchase agreements – non trading
The fair value of the repurchase agreements – non trading has been estimated using valuation technique A as described above.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
f) Fair values of financial instruments measured at fair value
The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 31 December 20182019 and 2017,2018, analysed by their levels in the fair value hierarchy – Level 1, Level 2 and Level 3.
| 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||
| Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Valuation technique | ||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Trading assets | Securities purchased under resale agreements | – | – | – | – | – | 8,870 | – | 8,870 | A | ||||||||||||||||||||||||||||||
| Debt securities | – | – | – | – | 5,156 | – | – | 5,156 | – | |||||||||||||||||||||||||||||||
| Equity securities | – | – | – | – | 9,662 | – | – | 9,662 | – | |||||||||||||||||||||||||||||||
| Cash collateral | – | – | – | – | – | 6,156 | – | 6,156 | A | |||||||||||||||||||||||||||||||
| Short-term loans | – | – | – | – | 656 | 55 | – | 711 | A | |||||||||||||||||||||||||||||||
| – | – | – | – | 15,474 | 15,081 | – | 30,555 | |||||||||||||||||||||||||||||||||
Derivative financial | Exchange rate contracts | – | 4,324 | 25 | 4,349 | – | 6,061 | 16 | 6,077 | A | ||||||||||||||||||||||||||||||
instruments | Interest rate contracts | – | 2,560 | 6 | 2,566 | – | 23,435 | 12 | 23,447 | A & C | ||||||||||||||||||||||||||||||
| Equity and credit contracts | – | 194 | 84 | 278 | – | 861 | 36 | 897 | B & D | |||||||||||||||||||||||||||||||
| Netting | – | (1,872 | ) | – | (1,872 | ) | – | (10,479 | ) | – | (10,479 | ) | ||||||||||||||||||||||||||||
| – | 5,206 | 115 | 5,321 | – | 19,878 | 64 | 19,942 | |||||||||||||||||||||||||||||||||
Other financial assets | Loans and advances to customers | – | 427 | 82 | 509 | – | 1,485 | 64 | 1,549 | A | ||||||||||||||||||||||||||||||
at FVTPL | Debt securities | 26 | 2,343 | 894 | 3,263 | 184 | 187 | 176 | 547 | A, B & D | ||||||||||||||||||||||||||||||
| Equity securities | 14 | – | 79 | 93 | B | |||||||||||||||||||||||||||||||||||
| Reverse repurchase agreements – non trading | – | 2,272 | – | 2,272 | – | – | – | – | A | |||||||||||||||||||||||||||||||
| 40 | 5,042 | 1,055 | 6,137 | 184 | 1,672 | 240 | 2,096 | |||||||||||||||||||||||||||||||||
Financial assets at | Debt securities | 12,487 | 742 | – | 13,229 | D | ||||||||||||||||||||||||||||||||||
FVOCI | Loans and advances to customers | – | – | 73 | 73 | D | ||||||||||||||||||||||||||||||||||
| 12,487 | 742 | 73 | 13,302 | |||||||||||||||||||||||||||||||||||||
Financial investments | Available-for-sale – debt securities | 8,770 | 2 | – | 8,772 | C | ||||||||||||||||||||||||||||||||||
| Available-for-sale – equity securities | 19 | 9 | 53 | 81 | B | |||||||||||||||||||||||||||||||||||
| 8,789 | 11 | 53 | 8,853 | |||||||||||||||||||||||||||||||||||||
Total assets at fair value | 12,527 | 10,990 | 1,243 | 24,760 | 24,447 | 36,642 | 357 | 61,446 | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Trading liabilities | Securities sold under repurchase agreements | – | – | – | – | – | 25,504 | – | 25,504 | A | ||||||||||||||||||||||||||||||
| Short positions in securities and unsettled trades | – | – | – | – | 3,694 | – | – | 3,694 | – | |||||||||||||||||||||||||||||||
| Cash collateral | – | – | – | – | – | 1,911 | – | 1,911 | A | |||||||||||||||||||||||||||||||
| Short-term deposits | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||
| – | – | – | – | 3,694 | 27,415 | – | 31,109 | |||||||||||||||||||||||||||||||||
Derivative financial | Exchange rate contracts | – | 528 | 23 | 551 | – | 4,176 | 15 | 4,191 | A | ||||||||||||||||||||||||||||||
instruments | Interest rate contracts | – | 2,736 | 7 | 2,743 | – | 23,199 | 5 | 23,204 | A & C | ||||||||||||||||||||||||||||||
| Equity and credit contracts | – | 132 | 40 | 172 | 1 | 653 | 43 | 697 | B & D | |||||||||||||||||||||||||||||||
| Netting | – | (1,872 | ) | – | (1,872 | ) | – | (10,479 | ) | – | (10,479 | ) | ||||||||||||||||||||||||||||
| – | 1,524 | 70 | 1,594 | 1 | 17,549 | 63 | 17,613 | |||||||||||||||||||||||||||||||||
Other financial liabilities | Debt securities in issue | – | 983 | 7 | 990 | – | 1,629 | 6 | 1,635 | A | ||||||||||||||||||||||||||||||
at FVTPL | Structured deposits | – | 104 | 29 | 133 | – | 680 | – | 680 | A | ||||||||||||||||||||||||||||||
| Repurchase agreements – non trading | – | 2,110 | – | 2,110 | – | – | – | – | A | |||||||||||||||||||||||||||||||
| Collateral and associated financial guarantees | – | 3,040 | 13 | 3,053 | D | |||||||||||||||||||||||||||||||||||
| – | 6,237 | 49 | 6,286 | – | 2,309 | 6 | 2,315 | |||||||||||||||||||||||||||||||||
Total liabilities at fair value | – | 7,761 | 119 | 7,880 | 3,695 | 47,273 | 69 | 51,037 | ||||||||||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||
| Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Valuation technique | ||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | Exchange rate contracts | – | 2,319 | 6 | 2,325 | – | 4,324 | 25 | 4,349 | A | ||||||||||||||||||||||||||||||
| Interest rate contracts | – | 1,951 | 9 | 1,960 | – | 2,560 | 6 | 2,566 | A & C | |||||||||||||||||||||||||||||||
| Equity and credit contracts | – | 223 | 69 | 292 | – | 194 | 84 | 278 | B & D | |||||||||||||||||||||||||||||||
| Netting | – | (1,214 | ) | – | (1,214 | ) | – | (1,872 | ) | – | (1,872 | ) | ||||||||||||||||||||||||||||
| – | 3,279 | 84 | 3,363 | – | 5,206 | 115 | 5,321 | |||||||||||||||||||||||||||||||||
Other financial assets at FVTPL | Loans and advances to customers | – | 448 | 92 | 540 | – | 427 | 82 | 509 | A | ||||||||||||||||||||||||||||||
| Debt securities | 2 | 2 | 294 | 298 | 26 | 2,343 | 894 | 3,263 | A, B & D | |||||||||||||||||||||||||||||||
| Equity securities | 16 | – | 119 | 135 | 14 | – | 79 | 93 | B | |||||||||||||||||||||||||||||||
Reverse repurchase agreements – non trading | – | – | – | – | – | 2,272 | – | 2,272 | A | |||||||||||||||||||||||||||||||
| 18 | 450 | 505 | 973 | 40 | 5,042 | 1,055 | 6,137 | |||||||||||||||||||||||||||||||||
Financial assets at FVOCI | Debt securities | 9,209 | 482 | – | 9,691 | 12,487 | 742 | – | 13,229 | D | ||||||||||||||||||||||||||||||
| Loans and advances to customers | – | – | 56 | 56 | – | – | 73 | 73 | D | |||||||||||||||||||||||||||||||
| 9,209 | 482 | 56 | 9,747 | 12,487 | 742 | 73 | 13,302 | |||||||||||||||||||||||||||||||||
Total assets at fair value | 9,227 | 4,211 | 645 | 14,083 | 12,527 | 10,990 | 1,243 | 24,760 | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | Exchange rate contracts | – | 659 | 4 | 663 | – | 528 | 23 | 551 | A | ||||||||||||||||||||||||||||||
| Interest rate contracts | – | 2,087 | 2 | 2,089 | – | 2,736 | 7 | 2,743 | A & C | |||||||||||||||||||||||||||||||
| Equity and credit contracts | – | 142 | 29 | 171 | – | 132 | 40 | 172 | B & D | |||||||||||||||||||||||||||||||
| Netting | – | (1,214 | ) | – | (1,214 | ) | – | (1,872 | ) | – | (1,872 | ) | ||||||||||||||||||||||||||||
| – | 1,674 | 35 | 1,709 | – | 1,524 | 70 | 1,594 | |||||||||||||||||||||||||||||||||
Other financial liabilities at FVTPL | Debt securities in issue | – | 1,099 | 6 | 1,105 | – | 983 | 7 | 990 | A | ||||||||||||||||||||||||||||||
| Structured deposits | – | 406 | 29 | 435 | – | 104 | 29 | 133 | A | |||||||||||||||||||||||||||||||
Repurchase agreements – non trading | – | – | – | – | – | 2,110 | – | 2,110 | A | |||||||||||||||||||||||||||||||
Collateral and associated financial | ||||||||||||||||||||||||||||||||||||||||
| guarantees | – | 147 | 26 | 173 | – | 3,040 | 13 | 3,053 | D | |||||||||||||||||||||||||||||||
| – | 1,652 | 61 | 1,713 | – | 6,237 | 49 | 6,286 | |||||||||||||||||||||||||||||||||
Total liabilities at fair value | – | 3,326 | 96 | 3,422 | – | 7,761 | 119 | 7,880 | ||||||||||||||||||||||||||||||||
Transfers between levels of the fair value hierarchy
Transfers between levels of the fair value hierarchy are reported atregularly throughout the beginning of the period in which they occur.year. In 2018,2019, there were no significant (2017: none) transfers of financial instruments between Levels 1 and 2.2 or between Levels 2 and 3. In 2018, the main transfers of financial instruments between Levels 2 and 3 were DerivativesDerivative assets of £56m and Derivative liabilities of £35m which were transferred from Level 2 to Level 3 following enhancements to the fair value hierarchy classification process.
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Notes to the financial statements
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g) Fair value adjustments
The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model.
Santander UK classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table:
2018 £m | 2017 £m | 2019 £m | 2018 £m | |||||||||||||
Risk-related: | ||||||||||||||||
–Bid-offer and trade specific adjustments | 13 | 34 | (12 | ) | 13 | |||||||||||
– Uncertainty | 36 | 43 | 37 | 36 | ||||||||||||
– Credit risk adjustment | 9 | 36 | 6 | 9 | ||||||||||||
– Funding fair value adjustment | 4 | 6 | 6 | 4 | ||||||||||||
| 62 | 119 | 37 | 62 | |||||||||||||
Model-related | 5 | 8 | – | 5 | ||||||||||||
Day One profit | – | 1 | ||||||||||||||
| 67 | 128 | 37 | 67 | |||||||||||||
Risk-related adjustments
Risk-related adjustments are driven, in part, by the magnitude of Santander UK’s market or credit risk exposure, and by external market factors, such as the size of market spreads.
(i)Bid-offer and trade specific adjustments
Portfolios are marked at bid or offer, as appropriate. Valuation models will typically generatemid-market values. Thebid-offer adjustment reflects the cost that would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position. For debt securities, thebid-offer spread is based on a consensus market price at an individual security level. For other products, the major risk types are identified. For each risk type, the net portfolio risks are first classified into buckets, and then abid-offer spread is applied to each risk bucket based upon the marketbid-offer spread for the relevant hedging instrument.
(ii) Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, a range of possible values exists that the financial instrument or market parameter may assume, and an adjustment may be needed to reflect the likelihood that in estimating the fair value of the financial instrument, market participants would adopt more conservative values for uncertain parameters and/or model assumptions than those used in the valuation model.
(iii) Credit risk adjustment
Credit risk adjustments comprise credit and debit valuation adjustments. The credit valuation adjustment (CVA) is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that the counterparty may default, and Santander UK may not receive the full market value of the transactions. The debit valuation adjustment (DVA) is an adjustment to the valuation of the OTC derivative contracts to reflect within the fair value the possibility that Santander UK may default, and that Santander UK may not pay full market value of the transactions.
Santander UK calculates a separate CVA and DVA for each Santander UK legal entity, and within each entity for each counterparty to which the entity has exposure. Santander UK calculates the CVA by applying the probability of default of the counterparty to the expected positive exposure to the counterparty, and multiplying the result by the loss expected in the event of default i.e. LGD. Conversely, Santander UK calculates the DVA by applying the PD of the Santander UK group, conditional on thenon-default of the counterparty, to the expected positive exposure of the counterparty to Santander UK and multiplying the result by the LGD. Both calculations are performed over the life of the potential exposure.
For most products Santander UK uses a simulation methodology to calculate the expected positive exposure to a counterparty. This incorporates a range of potential exposures across the portfolio of transactions with the counterparty over the life of the portfolio. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty.
For certain types of exotic derivatives where the products are not currently supported by the standard methodology, Santander UK adopts alternative methodologies. These may involve mapping transactions against the results for similar products which are valued using the standard methodology. In other cases, a simplified version of the standard methodology is applied. The calculation is applied at a trade level, with more limited recognition of credit mitigants such as netting or collateral agreements than used in the standard methodology.
The methodologies do not, in general, account forwrong-way risk.Wrong-way risk arises where the underlying value of the derivative prior to any credit risk adjustment is positively correlated to the probability of default of the counterparty. When there is significantwrong-way risk, a trade-specific approach is applied to reflect thewrong-way risk within the valuation. Exposure towrong-way risk is limited via internal governance processes and deal pricing. Santander UK considers that an appropriate adjustment to reflectwrong-way risk is £nil (2017:(2018: £nil).
(iv) Funding fair value adjustment (FFVA)
The FFVA is an adjustment to the valuation of OTC derivative positions to include the net cost of funding uncollateralised derivative positions. This is calculated by applying a suitable funding cost to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio.
Model-related adjustments
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics. Additionally, markets evolve, and models that were adequate in the past may require development to capture all material market characteristics in current market conditions. In these circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are addressed within the core revaluation models and a model limitation adjustment is no longer needed.
Day One profit adjustments
Day One profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant unobservable inputs. Day One profit adjustments are calculated and reported on a portfolio basis.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
The timing of recognition of deferred Day One profit and loss is determined individually. It is deferred until either the instrument’s fair value can be determined using market observable inputs or is realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred Day One profit and loss. Subsequent changes in fair value are recognised immediately in the Income Statement without immediate reversal of deferred Day One profits and losses.
h) Internal models based on information other than market data (Level 3)
The table below provides an analysis of financial instruments valued using internal models based on information other than market data together with further details on the valuation techniques used for each type of instrument. Each instrument is initially valued at transaction price:
| Balance sheet value | Fair value movements recognised in profit/(loss) | |||||||||||||||||||||||||
| Balance sheet line item | Category | Financial instrument product type | 2018 £m | 2017 £m | 2018 £m | 2017 £m | 2016 £m | |||||||||||||||||||
1. Derivative assets | Equity and credit contracts | Reversionary property interests | 54 | 31 | 30 | (6 | ) | 12 | ||||||||||||||||||
2. FVTPL assets | Loans and advances to customers | Roll-up mortgage portfolio | 53 | 64 | 8 | 2 | 4 | |||||||||||||||||||
3. FVTPL assets | Debt securities | Reversionary property securities | 142 | 176 | (28 | ) | (18 | ) | – | |||||||||||||||||
4. FVTPL assets(1) | Equity securities(1) | Unlisted equity shares | 79 | 53 | 19 | – | – | |||||||||||||||||||
5. FVTPL assets | Debt securities | Credit linked notes | 752 | – | 13 | – | – | |||||||||||||||||||
6. FVOCI assets | Loans and advances to customers | Other loans | 73 | – | (5 | ) | – | – | ||||||||||||||||||
7. Derivative liabilities | Equity contracts | Property-related options and forwards | (35 | ) | (43 | ) | – | (5 | ) | (5 | ) | |||||||||||||||
8. FVTPL liabilities | Financial guarantees | Credit protection guarantee | (13 | ) | – | (13 | ) | – | – | |||||||||||||||||
| 1,105 | 281 | 24 | (27 | ) | 11 | |||||||||||||||||||||
Other Level 3 assets | 90 | 33 | – | (26 | ) | 6 | ||||||||||||||||||||
Other Level 3 liabilities | (71 | ) | (26 | ) | 1 | 19 | (10 | ) | ||||||||||||||||||
Total net assets | 1,124 | 288 | ||||||||||||||||||||||||
Total income/(expense) | 25 | (34 | ) | 7 | ||||||||||||||||||||||
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| Balance sheet value | Fair value movements recognised in profit/(loss) | |||||||||||||||||||||||||
| Balance sheet line item | Category | Financial instrument product type | 2019 £m | 2018 £m | 2019 £m | 2018 £m | 2017 £m | |||||||||||||||||||
1. Derivative assets | Equity and credit contracts | Reversionary property interests | 52 | 54 | 2 | 30 | (6 | ) | ||||||||||||||||||
2. FVTPL assets | Loans and advances to customers | Roll-up mortgage portfolio | 51 | 53 | – | 8 | 2 | |||||||||||||||||||
3. FVTPL assets | Loans and advances to customers | Other loans | 41 | 29 | 1 | 2 | – | |||||||||||||||||||
4. FVTPL assets | Debt securities | Reversionary property securities | 120 | 142 | (17 | ) | (28 | ) | (18 | ) | ||||||||||||||||
5. FVTPL assets | Equity securities | Unlisted equity shares | 119 | 79 | 42 | 19 | – | |||||||||||||||||||
6. FVTPL assets | Debt securities | Credit linked notes | 174 | 752 | 7 | 13 | – | |||||||||||||||||||
7. FVOCI assets | Loans and advances to customers | Other loans | 56 | 73 | (2 | ) | (5 | ) | – | |||||||||||||||||
8. Derivative liabilities | Equity contracts | Property options and forwards | (26 | ) | (35 | ) | – | – | (5 | ) | ||||||||||||||||
9. FVTPL liabilities | Financial guarantees | Credit protection guarantee | (26 | ) | (13 | ) | (7 | ) | (13 | ) | – | |||||||||||||||
| 561 | 1,134 | 26 | 26 | (27 | ) | |||||||||||||||||||||
Other Level 3 assets | 32 | 61 | 15 | (2 | ) | (26 | ) | |||||||||||||||||||
Other Level 3 liabilities | (44 | ) | (71 | ) | (7 | ) | 1 | 19 | ||||||||||||||||||
Total net assets | 549 | 1,124 | – | – | – | |||||||||||||||||||||
Total income/(expense) | 34 | 25 | (34 | ) | ||||||||||||||||||||||
Valuation techniques
1. Derivative assets – Equity and credit contracts
These are valued using a probability weighted set of HPI forward prices, which are assumed to be a reasonable representation of the increase in value of the Santander UK group’s reversionary interest portfolio underlying the derivatives. The probability used reflects the likelihood of the home owner vacating the property and is calculated from mortality rates and acceleration rates which are a function of age and gender, obtained from the relevant mortality tables. Indexing is felt to be appropriate due to the size and geographical dispersion of the reversionary interest portfolio. These are determined using HPI Spot Ratesspot rates adjusted to reflect estimated forward growth.Non-seasonally adjusted (NSA) national and regional HPI are used in the valuation model to avoid any subjective judgement in the adjustment process which is made by Markit, which publishes the Halifax House Price Index.
The inputs used to determine the value of the reversionary property derivatives are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward growth.
2. FVTPL assets – Loans and advances to customers –roll-up mortgage portfolio
These representroll-up mortgages (sometimes referred to as lifetime mortgages), which are an equity release scheme under which a property owner takes out a loan secured against their home. The owner may not make any interest payments during their lifetime in which case the fixed interest payments are rolled up into the mortgage. The loan or mortgage (capital androlled-up interest) is repaid upon the owner’s vacation of the property and the value of the loan is only repaid from the value of the property. This is known as a ‘no negative equity guarantee’. Santander UK suffers a loss if the sale proceeds from the property are insufficient to repay the loan, as it is unable to pursue the homeowner’s estate or beneficiaries for the shortfall.
The value of the mortgage ‘rolls up’ or accretes until the owner vacates the property. In order to value theroll-up mortgages, Santander UK uses a probability-weighted set of European option prices (puts) determined using the Black-Scholes model, in which the ‘no negative equity guarantee’ are valued as short put options. The probability weighting applied is calculated from mortality rates and acceleration rates as a function of age and gender, taken from mortality tables.
The inputs used to determine the value of these instruments are HPI spot, HPI forward growth, HPI volatility, mortality rates and repayment rates. The principal pricing parameter is HPI forward growth. The HPI forward growth rate used is unobservable and is the same as used in the valuation of Instrument 1 above. The other parameters do not have a significant effect on the value of the instruments.
3. FVTPL assets – Loans and advances to customers – other loans
These relate to loans to transport and education companies. The fair value of these loans is estimated using the ‘present value’ model based on a credit curve derived from current market spreads. Loan specific credit data is unobservable, so a proxy population is applied based on industry sector and credit rating.
4. FVTPL assets – Debt securities
These consist of reversionary property securities and are an equity release scheme, where the property owner receives an upfront lump sum in return for paying a fixed percentage of the sales proceeds of the property when the owner vacates the property. These reversionary property securities are valued using a probability-weighted set of HPI forward prices which are assumed to be a reasonable representation of the increase in value of Santander UK’s reversionary interest portfolio underlying the derivatives. The probability weighting used reflects the probability of the home owner vacating the property through death or moving into care and is calculated from mortality rates and acceleration factors which are a function of age and gender, obtained from the relevant mortality table.
The inputs used to determine the value of these instruments are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward growth. Discussion of the HPI spot rate, HPI forward growth rate and mortality rates for this financial instrument is the same as Instrument 21 above. An adjustment is also made to reflect the specific property risk. Discussion of the specific property risk adjustment is the same as Instrument 1 above.
4.
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Notes to the financial statements |
5. FVTPL assets – Equity securities (2017:Available-for-sale equity securities)
These consist of unquoted equity investments in companies providing infrastructure services to the financial services industry. In the valuation of equity financial instruments requiring dynamic hedging, proprietary local volatility and stochastic volatility models are used. These types of models are widely accepted in the financial services industry. Observable market inputs used in these models include equity prices,bid-offer spread, foreign currency exchange rates. The significant unobservable input is contingent litigation costs and related expenses in respect of convertible preferred stock in Visa Inc, as described in Note 32.29. This is estimated by reference to best estimates received from third party legal counsel.
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5.6. FVTPL assets – Debt securities (Credit linked notes)
These consist of the retained senior tranches of credit linked notes in respect of credit protection vehicles sponsored by Santander UK, and are mandatorily held at fair value through profit or loss. These vehicles provide credit protection on reference portfolios of Santander UK group loans with junior notes sold to external investors. The notes retained by Santander UK are classified as level 3 financial instruments as their valuation depends upon unobservable parameters relating to the underlying reference portfolios of loans, including credit spreads, correlations and prepayment speed, which have a significant effect on the overall valuation. For more information, see ‘Credit protection entities’ in Note 21.19.
6.7. FVOCI assets – Loans and advances to customers – other loans
The changesThese relate to the classificationshipping and measurement of financial assets on transition to IFRS 9 as set out in Note 44 resulted in some loans and advances to customers, primarily consisting of utilities and shipping counterparties, being reclassified from amortised cost to FVOCI.construction loans. The fair value of these loans is estimated using the ‘present value’ model based on a credit curve derived from current market spreads. Loan specific credit data is unobservable, so a proxy population is applied based on industry sector and credit rating.
7.8. Derivative liabilities – Equity contracts
There are three types of derivatives withinin this category:
European options – These are valued using a modified Black-Scholes model where the HPI islog-normally distributed with the forward rates determined from the HPI forward growth.
Asian options – Asian (or average value) options are valued using a modified Black-Scholes model, with an amended strike price and volatility assumption to account for the average exercise period, through a closed form adjustment that reflects the strike price relative to the distribution of stock prices at each relevant date. This is also known as the Curran model.
Forward contracts – Forward contracts are valued using a standard forward pricing model.
The inputs used to determine the value of the above instruments are HPI spot rate, HPI forward growth rate and HPI volatility, as described in instrument 1 above.volatility. The principal pricing parameter is HPI forward growth rate.
8.9. FVTPL liabilities – Financial–Financial guarantees
These relate to credit protection guarantees in respect of the proceeds of the retained senior tranches of credit linked notes described in Instrument 56 above, and have been designated at fair value through profit or loss. These instruments are valued using the same unobservable parameters described in Instrument 56 above, such that changes in the valuation of the senior tranches of the credit linked notes are offset by changes in the value of these credit protection guarantees. For more information, see ‘Credit protection entities’ in Note 21.19.
Reconciliation of fair value measurement in Level 3 of the fair value hierarchy
The following table sets out the movements in Level 3 financial instruments in 20182019 and 2017:2018:
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives £m | Other financial £m | Financial assets at FVOCI £m | Financial investments £m | Total £m | Derivatives £m | Other financial £m | Total £m | Derivatives £m | Other financial £m | Financial assets at FVOCI £m | Total £m | Derivatives £m | Other financial £m | Total £m | ||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2017 | 64 | 240 | 53 | 357 | (63 | ) | (6 | ) | (69 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adoption of IFRS 9 | – | 598 | 199 | (53 | ) | 744 | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2019 | 115 | 1,055 | 73 | 1,243 | (70 | ) | (49 | ) | (119 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total gains/(losses) recognised in profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Fair value movements | 17 | 33 | (2 | ) | 48 | (8 | ) | (6 | ) | (14 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
– Foreign exchange and other movements | – | 4 | – | 4 | – | (6 | ) | (6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers in | – | 11 | – | 11 | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Netting(1) | – | (430 | ) | – | (430 | ) | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions | 2 | 188 | – | 190 | – | (3 | ) | (3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Settlements | (50 | ) | (356 | ) | (15 | ) | (421 | ) | 43 | 3 | 46 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2019 | 84 | 505 | 56 | 645 | (35 | ) | (61 | ) | (96 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gains/(losses) recognised in profit or loss relating to assets and liabilities held at the end of the year | 17 | 37 | (2 | ) | 52 | (8 | ) | (12 | ) | (20 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2018 | 64 | 838 | 199 | – | 1,101 | (63 | ) | (6 | ) | (69 | ) | 64 | 838 | 199 | 1,101 | (63 | ) | (6 | ) | (69 | ) | |||||||||||||||||||||||||||||||||||||||||||
Total (losses)/gains recognised in profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total gains/(losses) recognised in profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Fair value movements | 28 | 14 | (5 | ) | 37 | 1 | (13 | ) | (12 | ) | 28 | 14 | (5 | ) | 37 | 1 | (13 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||||||
– Foreign exchange and other movements | (5 | ) | – | – | (5 | ) | 5 | (1 | ) | 4 | (5 | ) | – | – | (5 | ) | 5 | (1 | ) | 4 | ||||||||||||||||||||||||||||||||||||||||||||
Transfers in | 56 | 18 | – | 74 | (35 | ) | (29 | ) | (64 | ) | 56 | 18 | – | 74 | (35 | ) | (29 | ) | (64 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Additions | – | 280 | 17 | 297 | – | – | – | – | 280 | 17 | 297 | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | – | (95 | ) | – | (95 | ) | – | – | – | – | (95 | ) | – | (95 | ) | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||
Settlements | (28 | ) | – | (138 | ) | (166 | ) | 22 | – | 22 | (28 | ) | – | (138 | ) | (166 | ) | 22 | – | 22 | ||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2018 | 115 | 1,055 | 73 | 1,243 | (70 | ) | (49 | ) | (119 | ) | 115 | 1,055 | 73 | 1,243 | (70 | ) | (49 | ) | (119 | ) | ||||||||||||||||||||||||||||||||||||||||||||
(Losses)/gains recognised in profit or loss relating to assets and liabilities held at the end of the year | 23 | 14 | (5 | ) | 32 | 6 | (14 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 1 January 2017 | 103 | 264 | 32 | 399 | (74 | ) | (6 | ) | (80 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (losses)/gains recognised in profit or loss: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Fair value movements | (32 | ) | (16 | ) | – | (48 | ) | 14 | – | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Foreign exchange and other movements | 32 | – | – | 32 | (32 | ) | – | (32 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gains recognised in other comprehensive income | – | – | 21 | 21 | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions | 9 | – | – | 9 | (2 | ) | – | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | – | (8 | ) | – | (8 | ) | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Settlements | (48 | ) | – | – | (48 | ) | 31 | – | 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 31 December 2017 | 64 | 240 | 53 | 357 | (63 | ) | (6 | ) | (69 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Losses)/gains recognised in profit or loss relating to assets and liabilities held at the end of the year | – | (16 | ) | – | (16 | ) | (18 | ) | – | (18 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Gains/(losses) recognised in profit or loss relating to assets and liabilities held at the end of the year | 23 | 14 | (5 | ) | 32 | 6 | (14 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | This relates to the effect of netting on the fair value of the credit linked notes due to a legal right ofset-off between the principal amounts of the senior notes and the associated cash deposits. For more, see ‘ii) Credit protection entities’ in Note 19. |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Financial statements
Effect of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3)
As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data and, as such require the application of a degree of judgement. Changing one or more of the inputs to the valuation models to reasonably possible alternative assumptions would change the fair values significantly. The following table shows the sensitivity of these fair values to reasonably possible alternative assumptions.
Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable input as described in the table below. The potential effects do not take into effect any hedged positions.
| Significant unobservable input | Sensitivity | Significant unobservable input | Sensitivity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assumption value | Favourable | Unfavourable | Assumption value | Favourable | Unfavourable | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Fair value £m | Assumption description | Range(1) | Weighted average | Shift | changes £m | changes £m | |||||||||||||||||||||||||||||||||||||||||||||||||
1.Derivative assets – Equity and credit contracts: | 52 | HPI Forward growth rate | 0% – 5% | 2.57% | 1% | 8 | (8) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Reversionary property derivatives | HPI Spot rate(2) | n/a | 802 | 10% | 7 | (7) | ||||||||||||||||||||||||||||||||||||||||||||||||||
2.FVTPL – Loans and advances to customers: | 51 | HPI Forward growth rate | 0% – 5% | 2.69% | 1% | 2 | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
–Roll-up mortgage portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3.FVTPL – Loans and advances to customers: | 41 | Credit spreads | 0% – 1% | 0.35% | 20% | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||
– Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4.FVTPL – Debt securities: | 120 | HPI Forward growth rate | 0% – 5% | 2.57% | 1% | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||
– Reversionary property securities | HPI Spot rate(2) | n/a | 802 | 10% | 6 | (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||
5.FVTPL – Equity securities: | 119 | Contingent litigation risk | 0% – 100% | 20% | 20% | 6 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Unlisted equity shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7.FVOCI – Loans and advances to customers: | 56 | Credit spreads | 0% – 1% | 0.51% | 20% | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||
– Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
8. Derivative liabilities – Equity contracts: | (26 | ) | HPI Forward growth rate | 0% – 5% | 2.44% | 1% | 2 | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
– Property-related options and forwards | HPI Spot rate(2) | n/a | 758 | 10% | 3 | (3) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Fair value £m | Assumption description | Range(1) | Weighted average | Shift | changes £m | changes £m | |||||||||||||||||||||||||||||||||||||||||||||||||
1. Derivative assets – Equity and credit contracts: | 54 | HPI Forward growth rate | 0% – 5% | 2.68% | 1% | 8 | (8) | 54 | HPI Forward growth rate | 0% – 5% | 2.68% | 1% | 8 | (8) | ||||||||||||||||||||||||||||||||||||||||||
– Reversionary property derivatives | HPI Spot rate | n/a | 783 | 10% | 7 | (7) | HPI Spot rate(2) | n/a | 783 | 10% | 7 | (7) | ||||||||||||||||||||||||||||||||||||||||||||
2. FVTPL– Loans and advances to customers: | 53 | HPI Forward growth rate | 0% – 5% | 2.77% | 1% | 2 | (2) | 53 | HPI Forward growth rate | 0% – 5% | 2.77% | 1% | 2 | (2) | ||||||||||||||||||||||||||||||||||||||||||
–Roll-up mortgage portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3. FVTPL– Debt securities: | 142 | HPI Forward growth rate | 0% – 5% | 2.68% | 1% | 6 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||
3.FVTPL – Loans and advances to customers: | 29 | Credit spreads | 0% – 1% | 0.52% | 20% | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||
– Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4.FVTPL – Debt securities: | 142 | HPI Forward growth rate | 0% – 5% | 2.68% | 1% | 6 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Reversionary property securities | HPI Spot rate | n/a | 783(2) | 10% | 10 | (10) | HPI Spot rate(2) | n/a | 783 | 10% | 10 | (10) | ||||||||||||||||||||||||||||||||||||||||||||
4. FVTPL– Equity securities: | 79 | Contingent litigation risk | 0% – 100% | 29% | 20% | 6 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||
5.FVTPL – Equity securities: | 79 | Contingent litigation risk | 0% – 100% | 29% | 20% | 6 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Unlisted equity shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
6. FVOCI– Loans and advances to customers: | 73 | Credit spreads | 0% – 2% | 0.80% | 20% | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||
7.FVOCI – Loans and advances to customers: | 73 | Credit spreads | 0% – 2% | 0.80% | 20% | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||
– Other loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7. Derivative liabilities– Equity contracts: | (35 | ) | HPI Forward growth rate | 0% – 5% | 2.59% | 1% | 2 | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
8.Derivative liabilities – Equity contracts: | (35 | ) | HPI Forward growth rate | 0% – 5% | 2.59% | 1% | 2 | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
– Property-related options and forwards | HPI Spot rate | n/a | 722(2) | 10% | 3 | (4) | HPI Spot rate(2) | n/a | 722 | 10% | 3 | (4) | ||||||||||||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1. Derivative assets– Equity and credit contracts: | 31 | HPI Forward growth rate | 0% – 5% | 2.42% | 1% | 10 | (10) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Reversionary property derivatives | HPI Spot rate | n/a | 773 | 10% | 8 | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||
2. FVTPL– Loans and advances to customers: | 64 | HPI Forward growth rate | 0% – 5% | 2.57% | 1% | 2 | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
–Roll-up mortgage portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3. FVTPL– Debt securities: | 176 | HPI Forward growth rate | 0% – 5% | 2.42% | 1% | 3 | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Reversionary property securities | HPI Spot rate | n/a | 773(2) | 10% | 11 | (11) | ||||||||||||||||||||||||||||||||||||||||||||||||||
4. Financial investments– AFS equity securities: | 53 | Contingent litigation risk | 0% – 100% | 35% | 20% | 6 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||
– Unlisted equity shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7. Derivative liabilities– Equity contracts: | (43 | ) | HPI Forward growth rate | 0% – 5% | 2.32% | 1% | 3 | (3) | ||||||||||||||||||||||||||||||||||||||||||||||||
– Property-related options and forwards | HPI Spot rate | n/a | 727(2) | 10% | 7 | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | The range of actual assumption values used to calculate the weighted average disclosure. |
| (2) |
|
No sensitivities are presented for FVTPL assets – Debt securities, Credit linked Notes (instrument 5)6) and FVTPL liabilities –financial– financial guarantees (instrument 8)9), as the terms of these instruments are fully matched. As a result, any changes in the valuation of the credit linked notes would be exactly offset by an equal and opposite change in the valuation of the financial guarantees.
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the financial statements
|
i) Maturities of financial liabilities andoff-balance sheet commitments
The table below analyses the maturities of the undiscounted cash flows relating to financial liabilities andoff-balance sheet commitments of Santander UK based on the remaining period to the contractual maturity date at the balance sheet date. Deposits by customers largely consist of retail deposits. This table is not intended to show the liquidity of Santander UK.
| 2018 | On demand £m | Not later than £m | Later than 3 months and not later than 1 year £m | Later than 1 year and not later than 5 years £m | Later than 5 years £m | Total £m | ||||||||||||||||||||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | On demand £m | Not later than 3 £m | Later than 3 1 year £m | Later than 1 £m | Later than 5 £m | Total £m | ||||||||||||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Trading liabilities | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | – | 431 | 61 | 104 | 1,170 | 1,766 | 9 | 250 | 294 | 424 | 796 | 1,773 | ||||||||||||||||||||||||||||||||||||
Other financial liabilities at fair value through profit or loss | 11 | 2,146 | 76 | 408 | 3,855 | 6,496 | 1 | 6 | 203 | 617 | 969 | 1,796 | ||||||||||||||||||||||||||||||||||||
Deposits by customers | 151,284 | 4,640 | 11,350 | 5,328 | 1,373 | 173,975 | 162,774 | 3,851 | 7,931 | 3,563 | 1,101 | 179,220 | ||||||||||||||||||||||||||||||||||||
Deposits by banks | 5,692 | 1,108 | 93 | 11,106 | 52 | 18,051 | 2,717 | 487 | 4,765 | 6,339 | 220 | 14,528 | ||||||||||||||||||||||||||||||||||||
Repurchase agreements – non trading | 2 | 9,101 | 972 | 849 | 517 | 11,441 | 6 | 15,878 | 1,578 | 846 | – | 18,308 | ||||||||||||||||||||||||||||||||||||
Debt securities in issue | – | 9,194 | 5,677 | 28,553 | 15,384 | 58,808 | – | 7,211 | 9,815 | 24,676 | 10,989 | 52,691 | ||||||||||||||||||||||||||||||||||||
Subordinated liabilities | – | 255 | 134 | 709 | 5,279 | 6,377 | – | 239 | 131 | 1,539 | 3,961 | 5,870 | ||||||||||||||||||||||||||||||||||||
Total financial liabilities | 156,989 | 26,875 | 18,363 | 47,057 | 27,630 | 276,914 | 165,507 | 27,922 | 24,717 | 38,004 | 18,036 | 274,186 | ||||||||||||||||||||||||||||||||||||
Off-balance sheet commitments given | 1,106 | 5,843 | 670 | 13,418 | 18,987 | 40,024 | 18,907 | 7,829 | 840 | 11,490 | 4,993 | 44,059 | ||||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Trading liabilities | 1,520 | 26,914 | 152 | 161 | 2,580 | 31,327 | ||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments: | 15 | 631 | 1,230 | 2,925 | 14,001 | 18,802 | ||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | – | 431 | 61 | 104 | 1,170 | 1,766 | ||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities at fair value through profit or loss | 7 | 545 | 222 | 789 | 814 | 2,377 | 11 | 2,146 | 76 | 408 | 3,855 | 6,496 | ||||||||||||||||||||||||||||||||||||
Deposits by customers | 154,114 | 4,754 | 13,811 | 3,454 | 1,490 | 177,623 | 151,284 | 4,640 | 11,350 | 5,328 | 1,373 | 173,975 | ||||||||||||||||||||||||||||||||||||
Deposits by banks | 2,452 | 1,465 | 82 | 8,626 | 208 | 12,833 | 5,692 | 1,108 | 93 | 11,106 | 52 | 18,051 | ||||||||||||||||||||||||||||||||||||
Repurchase agreements – non trading | – | 1 | 832 | 248 | – | 1,081 | 2 | 9,101 | 972 | 849 | 517 | 11,441 | ||||||||||||||||||||||||||||||||||||
Debt securities in issue | – | 8,419 | 4,940 | 25,950 | 11,644 | 50,953 | – | 9,194 | 5,677 | 28,553 | 15,384 | 58,808 | ||||||||||||||||||||||||||||||||||||
Subordinated liabilities | – | 289 | 147 | 783 | 5,571 | 6,790 | – | 255 | 134 | 709 | 5,279 | 6,377 | ||||||||||||||||||||||||||||||||||||
Total financial liabilities | 158,108 | 43,018 | 21,416 | 42,936 | 36,308 | 301,786 | 156,989 | 26,875 | 18,363 | 47,057 | 27,630 | 276,914 | ||||||||||||||||||||||||||||||||||||
Off-balance sheet commitments given | 2,082 | 6,874 | 1,844 | 12,399 | 18,860 | 42,059 | 18,667 | 5,843 | 670 | 13,418 | 1,426 | 40,024 | ||||||||||||||||||||||||||||||||||||
As the above table is based on contractual maturities, no account is taken of call features related to subordinated liabilities. In addition, the repayment terms of debt securities may be accelerated in line with the covenants described in Note 29.relevant covenants. Further, no account is taken of the possible early repayment of Santander UK’s mortgage-backednon-recourse finance which is redeemed by Santander UK as funds become available from redemptions of the residential mortgages. Santander UK has no control over the timing and amount of redemptions of residential mortgages.
42.
| Santander UK Group Holdings plc | 245 |
Annual Report 2019| Financial statements
39. OFFSETTING FINANCIAL ASSETS AND LIABILITIES
Financial assets and financial liabilities are reported on a net basis on the balance sheet only if there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. The following table shows the impact of netting arrangements on:
| – | All financial assets and liabilities that are reported net on the balance sheet |
| – | All derivative financial instruments and repurchase agreements and other similar secured lending and borrowing agreements that are subject to enforceable master netting arrangements or similar agreements, but do not qualify for balance sheet netting. |
The table identifies the amounts that have been offset in the balance sheet and also those amounts that are covered by enforceable netting arrangements (offsetting arrangements and financial collateral) but do not qualify for netting under the requirements described above.
For derivative contracts, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements, such as the ISDA Master Agreement or derivative exchange or clearing counterparty agreements, whereby all outstanding transactions with the same counterparty can be offset andclose-out netting applied across all outstanding transactiontransactions covered by the agreements if an event of default or other predetermined events occur. Financial collateral refers to cash andnon-cash collateral obtained, typically daily or weekly, to cover the net exposure between counterparties by enabling the collateral to be realised in an event of default or if other predetermined events occur.
For repurchase and reverse repurchase agreements and other similar secured lending and borrowing, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements, such as global master repurchase agreements and global master securities lending agreements, whereby all outstanding transactions with the same counterparty can be offset andclose-out netting applied across all outstanding transactions covered by the agreements if an event of default or other predetermined events occur. Financial collateral typically comprises highly liquid securities which are legally transferred and can be liquidated in the event ofif a counterparty default.defaults.
Santander UK engages in a variety of counterparty credit mitigation strategies in addition to netting and collateral arrangements. Therefore, the net amounts presented in the tables below do not purport to represent Santander UK’s actual credit exposure.
Annual Report 2018 | Financial statements
| Amounts subject to enforceable netting arrangements | Assets not | Group | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of offsetting on balance sheet | Related amounts not offset | subject | Amounts subject to enforceable netting arrangements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Gross amount £m | Amount offset £m | Net amount on balance £m | Financial instruments £m | Financial collateral(1) | Net amount £m | to enforceable netting arrangements(2) | Balance sheet total(3) £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of offsetting on balance sheet | Related amounts not offset | Assets not subject | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | Gross amounts £m | Amounts offset £m | Net amounts on balance £m | Financial instruments £m | Financial collateral(1) | Net amount £m | to enforceable netting arrangements(2) | Balance sheet total(3) £m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | 7,088 | (1,872 | ) | 5,216 | (933 | ) | (2,133 | ) | 2,150 | 105 | 5,321 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial assets | 4,493 | (1,214 | ) | 3,279 | (768 | ) | (1,915 | ) | 596 | 84 | 3,363 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse repurchase, securities borrowing & similar agreements: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amortised cost | 24,733 | (3,606 | ) | 21,127 | (2,721 | ) | (18,406 | ) | – | – | 21,127 | 25,312 | (1,676 | ) | 23,636 | (537 | ) | (23,099 | ) | – | – | 23,636 | ||||||||||||||||||||||||||||||||||||||||||||||
– Fair value | 2,272 | – | 2,272 | – | (2,272 | ) | – | – | 2,272 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers and banks(4) | 6,820 | (1,308 | ) | 5,512 | – | – | 5,512 | 199,622 | 205,134 | 6,036 | (1,248 | ) | 4,788 | – | – | 4,788 | 205,294 | 210,082 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 40,913 | (6,786 | ) | 34,127 | (3,654 | ) | (22,811 | ) | 7,662 | 199,727 | 233,854 | 35,841 | (4,138 | ) | 31,703 | (1,305 | ) | (25,014 | ) | 5,384 | 205,378 | 237,081 | |||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | 3,412 | (1,872 | ) | 1,540 | (933 | ) | (303 | ) | 304 | 54 | 1,594 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial liabilities | 2,877 | (1,214 | ) | 1,663 | (768 | ) | (572 | ) | 323 | 46 | 1,709 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase, securities lending & similar agreements: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amortised cost | 14,516 | (3,606 | ) | 10,910 | (2,721 | ) | (8,189 | ) | – | – | 10,910 | 19,962 | (1,676 | ) | 18,286 | (537 | ) | (17,749 | ) | – | – | 18,286 | ||||||||||||||||||||||||||||||||||||||||||||||
– Fair value | 2,110 | – | 2,110 | – | (2,110 | ) | – | – | 2,110 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers and banks(4) | 2,879 | (1,308 | ) | 1,571 | – | (502 | ) | 1,069 | 189,945 | 191,516 | 2,482 | (1,248 | ) | 1,234 | – | (502 | ) | 732 | 192,131 | 193,365 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 22,917 | (6,786 | ) | 16,131 | (3,654 | ) | (11,104 | ) | 1,373 | 189,999 | 206,130 | 25,321 | (4,138 | ) | 21,183 | (1,305 | ) | (18,823 | ) | 1,055 | 192,177 | 213,360 | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | 30,155 | (10,479 | ) | 19,676 | (14,772 | ) | (2,785 | ) | 2,119 | 266 | 19,942 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial assets | 7,088 | (1,872 | ) | 5,216 | (933 | ) | (2,133 | ) | 2,150 | 105 | 5,321 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse repurchase, securities borrowing & similar agreements: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amortised cost | 2,614 | – | 2,614 | – | (2,614 | ) | – | – | 2,614 | 24,733 | (3,606 | ) | 21,127 | (2,721 | ) | (18,406 | ) | – | – | 21,127 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Fair value | 15,224 | (6,354 | ) | 8,870 | (355 | ) | (8,515 | ) | – | – | 8,870 | 2,272 | – | 2,272 | – | (2,272 | ) | – | – | 2,272 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers and banks(4) | 5,974 | (1,459 | ) | 4,515 | – | – | 4,515 | 198,283 | 202,798 | 6,820 | (1,308 | ) | 5,512 | – | – | 5,512 | 199,622 | 205,134 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 53,967 | (18,292 | ) | 35,675 | (15,127 | ) | (13,914 | ) | 6,634 | 198,549 | 234,224 | 40,913 | (6,786 | ) | 34,127 | (3,654 | ) | (22,811 | ) | 7,662 | 199,727 | 233,854 | |||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial instruments | 27,839 | (10,479 | ) | 17,360 | (14,772 | ) | (1,951 | ) | 637 | 253 | 17,613 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative financial liabilities | 3,412 | (1,872 | ) | 1,540 | (933 | ) | (303 | ) | 304 | 54 | 1,594 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase, securities lending & similar agreements: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
– Amortised cost | 1,076 | – | 1,076 | – | (1,076 | ) | – | – | 1,076 | 14,516 | (3,606 | ) | 10,910 | (2,721 | ) | (8,189 | ) | – | – | 10,910 | ||||||||||||||||||||||||||||||||||||||||||||||||
– Fair value | 31,858 | (6,354 | ) | 25,504 | (355 | ) | (25,149 | ) | – | – | 25,504 | 2,110 | – | 2,110 | – | (2,110 | ) | – | – | 2,110 | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers and banks(4) | 2,688 | (1,459 | ) | 1,229 | – | (502 | ) | 727 | 188,900 | 190,129 | 2,879 | (1,308 | ) | 1,571 | – | (502 | ) | 1,069 | 189,945 | 191,516 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 63,461 | (18,292 | ) | 45,169 | (15,127 | ) | (28,678 | ) | 1,364 | 189,153 | 234,322 | 22,917 | (6,786 | ) | 16,131 | (3,654 | ) | (11,104 | ) | 1,373 | 189,999 | 206,130 | |||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Financial collateral is reflected at its fair value, but has been limited to the net balance sheet exposure so as not to include any over-collateralisation. |
| (2) | This column includes contractual rights ofset-off that are subject to uncertainty under the laws of the relevant jurisdiction. |
| (3) | The balance sheet total is the sum of ‘Net amounts reported on the balance sheet’ that are subject to enforceable netting arrangements and ‘Amounts not subject to enforceable netting arrangements’. |
| (4) | The amounts offset within loans and advances to customers/banks or deposits by customers/banks relate to offset mortgages which are classified as either and that are subject to netting. |
|
43. RING-FENCING
Regulation
The Financial Services (Banking Reform) Act 2013 inserted provisions into the Financial Services and Markets Act 2000 (FSMA) and related legislation (the Banking Reform Legislation) requiring the Santander UK group amongst a number of other UK banking groups, to operationally and legally separate certain retail banking activities from certain wholesale or investment banking activities by 1 January 2019. This is known as ‘ring-fencing’. The Banking Reform Legislation specifies:
|
|
As a result, under the ring-fencing regime, a ring-fenced bank is only permitted to carry on banking services or activities that are not prohibited (permitted business).
Santander UK group model
Our ring-fence structure was completed ahead of the 1 January 2019 regulatory deadline. Its implementation involved a ring-fencing transfer scheme (RFTS) between Santander UK plc, ANTS and Banco Santander SA, as well as asset sales and the rundown of certain short-term positions. Under our chosen model:
|
|
|
Any associated business transfers to Banco Santander London Branch were made for a cash consideration equivalent to the book value of the associated assets and liabilities, which represents a fair value for the Santander UK group. Costs to sell were immaterial. Our ring-fence structure is now in place with all required transfers completed. Compliance with ring-fencing legislation has involved significant effort over a number of years, with a total cost of c£240m.
Annual Report 2018 | Financial statements
44. TRANSITION TO IFRS 9
Statutory balance sheet reconciliation under IAS 39 and IFRS 9
The measurement categories and carrying amounts of financial assets determined in accordance with IAS 39 and IFRS 9 are compared below, illustrating a total net assets decrease of £192m as a result of the application of IFRS 9:
| IAS 39 | IFRS 9 | |||||||||||||||||||||||||||
| Assets | Measurement category | Carrying amount (31 December 2017) £m | Reclassifications(1) £m | Remeasurement(2) £m | Measurement category | Carrying amount (1 January 2018) £m | Representation(6) £m | IFRS 9 Balance Sheet (1 January 2018) £m | ||||||||||||||||||||
Cash and balances with central banks | Loans & receivables | 32,771 | – | – | Amortised cost | 32,771 | – | 32,771 | ||||||||||||||||||||
Trading assets | FVTPL | 30,536 | – | – | FVTPL (Mandatory) | 30,536 | – | 30,536 | ||||||||||||||||||||
| FVTPL | 19 | – | – | FVOCI | 19 | (19)(a) | – | |||||||||||||||||||||
| 30,555 | – | – | 30,555 | (19) | 30,536 | |||||||||||||||||||||||
Derivative financial instruments | FVTPL (Trading) | 19,942 | – | – | FVTPL (Mandatory) | 19,942 | – | 19,942 | ||||||||||||||||||||
Other financial assets at | FVTPL (Designated) | 1,022 | (45)(b) | – | Amortised cost | 977 | (977)(b) | – | ||||||||||||||||||||
FVTPL(3) | FVTPL (Designated) | 836 | – | – | FVTPL (Designated) | 836 | – | 836 | ||||||||||||||||||||
| FVTPL (Designated) | 238 | – | – | FVTPL (Mandatory) | 238(c) | 1,181(d) | 1,419 | |||||||||||||||||||||
| 2,096 | (45 | ) | – | 2,051 | 204 | 2,255 | ||||||||||||||||||||||
Loans and advances to | Loans & receivables | 199,060 | – | (211 | ) | Amortised cost | 198,849 | 977(b) | 199,826 | |||||||||||||||||||
customers(4) | Loans & receivables | 181 | (1)(a) | – | FVOCI | 180 | (180)(a) | – | ||||||||||||||||||||
| Loans & receivables | 91 | – | – | FVTPL (Mandatory) | 91 | (91)(d) | – | |||||||||||||||||||||
| 199,332 | (1 | ) | (211 | ) | 199,120 | 706 | 199,826 | |||||||||||||||||||||
Loans and advances to banks | Loans & receivables | 3,466 | – | – | Amortised cost | 3,466 | – | 3,466 | ||||||||||||||||||||
Reverse repurchase agreements – non trading | Loans & receivables | 2,614 | – | – | Amortised cost | 2,614 | – | 2,614 | ||||||||||||||||||||
Other financial assets at amortised cost | Amortised cost | – | 7,776(e) | 7,776 | ||||||||||||||||||||||||
Financial assets at FVOCI | FVOCI | – | 8,942(a)(f) | 8,942 | ||||||||||||||||||||||||
Financial investments | Loans & receivables | 1,198 | – | – | Amortised cost | 1,198 | (1,198)(e) | |||||||||||||||||||||
Loans & receivables | 982 | (2)(d) | – | FVTPL (Mandatory) | 980 | (980)(d) | ||||||||||||||||||||||
Available-for-sale | 8,743 | – | – | FVOCI | 8,743 | (8,743)(f) | ||||||||||||||||||||||
Available-for-sale | 29 | – | – | FVTPL (Mandatory) | 29 | (29)(d) | ||||||||||||||||||||||
Held-to-maturity | 6,578 | – | – | Amortised cost | 6,578 | (6,578)(e) | ||||||||||||||||||||||
| Available-for-sale | 81 | – | – | FVTPL (Mandatory) | 81 | (81)(d) | ||||||||||||||||||||||
| 17,611 | (2 | ) | – | 17,609 | (17,609) | |||||||||||||||||||||||
Other assets | Other assets | 6,373 | (1 | ) | Other assets | 6,372 | – | 6,372 | ||||||||||||||||||||
Total assets (pre-deferred tax asset)(5) | 314,760 | (49 | ) | (211 | ) | 314,500 | – | 314,500 | ||||||||||||||||||||
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Reclassification andre-presentation
The columns for ‘Reclassifications’ and‘Re-presentations’ in the table above capture the following changes resulting from the adoption of IFRS 9:
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Reclassifications of debt instruments
For financial assets that were reclassified on transition to IFRS 9, the following table shows their fair value at 31 December 2018 and the fair value gain or loss that would have been recognised if these financial assets had not been reclassified:
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The effective interest rate of these debt instruments on the date of initial application of IFRS 9 was 3.35%. In 2018, interest income of £21m was recognised for these debt instruments.
45.40. EVENTS AFTER THE BALANCE SHEET DATE
There have been no significant events between 31 December 20182019 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except for the following:statements.
In January 2019, we announced plans to reshape our branch network and close 140 branches in response to changes in how customers are choosing to carry out their banking. Our future branch network, with approximately 615 branches, will be made up of a combination of larger branches offering improved community facilities to support local businesses and customers, and smaller branches using the latest technology to offer customers more convenient access to banking services. Furthermore, in order to deliver a branch network for the future, 100 branches will be refurbished over the next two years through an investment of £55m. At 31 December 2018, no provision was recognised in respect of these plans as the relevant criteria under IAS 37 ‘Provisions, contingent liabilities and contingent assets’ had not been met.
| 246 | Santander UK Group Holdings plc |
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| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
financial statements
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At 31 December
| Notes | 2018 £m | 2017 £m | ||||||||||||||
Assets | ||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||
– Loans and advances to banks | 4 | 9,214 | 6,260 | |||||||||||||
– Other financial assets at amortised cost(1) | 5 | 1,185 | ||||||||||||||
Financial investments(1) | 6 | 1,116 | ||||||||||||||
Interests in other entities | 7 | 13,400 | 13,313 | |||||||||||||
Current tax assets | 1 | – | ||||||||||||||
Other assets | 2 | 1 | ||||||||||||||
Total assets | 23,802 | 20,690 | ||||||||||||||
Liabilities | ||||||||||||||||
Financial liabilities at amortised cost: | ||||||||||||||||
– Deposits by banks | 8 | – | 8 | |||||||||||||
– Debt securities in issue | 9 | 9,295 | 6,256 | |||||||||||||
– Subordinated liabilities | 10 | 1,185 | 1,116 | |||||||||||||
Other liabilities | – | – | ||||||||||||||
Total liabilities | 10,480 | 7,380 | ||||||||||||||
Equity | ||||||||||||||||
Share capital | 13 | 7,060 | 7,060 | |||||||||||||
Other equity instruments | 14 | 2,041 | 2,041 | |||||||||||||
Retained earnings | 4,221 | 4,209 | ||||||||||||||
Total shareholders’ equity | 13,322 | 13,310 | ||||||||||||||
Total liabilities and equity | 23,802 | 20,690 | ||||||||||||||
|
| Notes | 2019 £m | 2018 £m | ||||||||||
Assets | ||||||||||||
Financial assets at amortised cost | ||||||||||||
– Loans and advances to banks | 4 | 8,920 | 9,214 | |||||||||
– Other financial assets at amortised cost | 5 | 1,142 | 1,185 | |||||||||
Interests in other entities | 6 | 13,600 | 13,400 | |||||||||
Current tax assets | 6 | 1 | ||||||||||
Other assets | 2 | 2 | ||||||||||
Total assets | 23,670 | 23,802 | ||||||||||
Liabilities | ||||||||||||
Financial liabilities at amortised cost: | ||||||||||||
– Deposits by banks | 7 | 8 | – | |||||||||
– Debt securities in issue | 8 | 8,957 | 9,295 | |||||||||
– Subordinated liabilities | 9 | 1,142 | 1,185 | |||||||||
Total liabilities | 10,107 | 10,480 | ||||||||||
Equity | ||||||||||||
Share capital | 12 | 7,060 | 7,060 | |||||||||
Other equity instruments | 13 | 2,241 | 2,041 | |||||||||
Retained earnings | 4,262 | 4,221 | ||||||||||
Total shareholders’ equity | 13,563 | 13,322 | ||||||||||
Total liabilities and equity | 23,670 | 23,802 | ||||||||||
The accompanying Notes form an integral part of these Financial Statements.
The profit after tax of the Company attributable to shareholders was £1,253m (2017: £659m), which£449m (2018: £1,280m). The profit after tax of the Company attributable to shareholders in 2018 included a dividend receipt of £668m associated with ring-fencing transfers to Banco Santander London Branch (2017: £nil).Branch. As permitted by Section 408 of the UK Companies Act 2006, the Company’s income statement has not been presented.
The Financial Statements were approved and authorised for issue by the Board on 26 February 20192 March 2020 and signed on its behalf by:
| Nathan Bostock | ||||
| Chief Executive Officer | Chief Financial Officer | |||
| Company Registered Number: 08700698 | ||||
| Santander UK Group Holdings plc | 247 |
Annual Report 2019| Financial statements
|
At 31 December
| Notes | 2018 £m | 2017 £m | 2019 £m | 2018(1) £m | ||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||
Profit after tax | 1,253 | 659 | 449 | 1,280 | ||||||||||||||||
Adjustments for: | ||||||||||||||||||||
Non-cash items included in profit | (48 | ) | 50 | 3 | (75 | ) | ||||||||||||||
Net change in operating assets and liabilities | (2,604 | ) | (1,412 | ) | 370 | (2,604 | ) | |||||||||||||
Corporation tax paid | (28 | ) | – | (28 | ) | |||||||||||||||
Effects of exchange rate differences | 419 | (429 | ) | (371 | ) | 419 | ||||||||||||||
Net cash flows from operating activities | (1,008 | ) | (1,132 | ) | 451 | (1,008 | ) | |||||||||||||
Cash flows from investing activities | ||||||||||||||||||||
Investments in other entities | 7 | (377 | ) | (495 | ) | (200 | ) | (377 | ) | |||||||||||
Net cash flows from investing activities | (377 | ) | (495 | ) | (200 | ) | (377 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||||||
Issue of AT1 capital securities | 14 | – | 500 | |||||||||||||||||
Issuance costs of AT1 capital securities | – | (4 | ) | |||||||||||||||||
Issue of other equity instruments | 500 | – | ||||||||||||||||||
Issuance costs of other equity instruments | – | – | ||||||||||||||||||
Issue of debt securities and subordinated notes | 2,679 | 2,103 | – | 2,679 | ||||||||||||||||
Repayment of debt securities | (21 | ) | – | (21 | ) | |||||||||||||||
Repurchase of other equity instruments | (304 | ) | – | |||||||||||||||||
Issuance costs of debt securities and subordinated notes | – | (9 | ) | – | – | |||||||||||||||
Dividends paid on ordinary shares | 3 | (1,123 | ) | (829 | ) | (262 | ) | (1,123 | ) | |||||||||||
Dividends paid on other equity instruments | (145 | ) | (135 | ) | (142 | ) | (145 | ) | ||||||||||||
Net cash flows from financing activities | 1,390 | 1,626 | (208 | ) | 1,390 | |||||||||||||||
Change in cash and cash equivalents | 5 | (1 | ) | 43 | 5 | |||||||||||||||
Cash and cash equivalents at beginning of the year | 3 | 4 | 8 | 3 | ||||||||||||||||
Cash and cash equivalents at the end of the year | 8 | 3 | 51 | 8 | ||||||||||||||||
| (1) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
Company Statement of Changes in Equity
For the years ended 31 December
| Notes | Share capital £m | Other equity instruments £m | Retained earnings £m | Total £m | Share capital £m | Other equity instruments £m | Retained £m | Total £m | ||||||||||||||||||||||||||||
At 1 January 2018 | 7,060 | 2,041 | 4,209 | 13,310 | ||||||||||||||||||||||||||||||||
Total comprehensive income(1): | ||||||||||||||||||||||||||||||||||||
At 1 January 2019 | 7,060 | 2,041 | 4,221 | 13,322 | ||||||||||||||||||||||||||||||||
Total comprehensive income:(1) | ||||||||||||||||||||||||||||||||||||
– Profit after tax | – | – | 1,253 | 1,253 | – | – | 449 | 449 | ||||||||||||||||||||||||||||
Issue of AT1 capital securities | 14 | – | – | – | – | |||||||||||||||||||||||||||||||
Issue of other equity instruments | – | 500 | – | 500 | ||||||||||||||||||||||||||||||||
Repurchase of other equity instruments | – | (300 | ) | (4 | ) | (304 | ) | |||||||||||||||||||||||||||||
Dividends on ordinary shares | 3 | – | – | (1,123 | ) | (1,123 | ) | – | – | (262 | ) | (262 | ) | |||||||||||||||||||||||
Dividends on other equity instruments | – | – | (145 | ) | (145 | ) | – | – | (142 | ) | (142 | ) | ||||||||||||||||||||||||
Tax on other equity instruments | – | – | 27 | 27 | ||||||||||||||||||||||||||||||||
At 31 December 2018 | 7,060 | 2,041 | 4,221 | 13,322 | ||||||||||||||||||||||||||||||||
At 31 December 2019 | 7,060 | 2,241 | 4,262 | 13,563 | ||||||||||||||||||||||||||||||||
At 1 January 2017 | 7,060 | 1,545 | 4,212 | 12,817 | ||||||||||||||||||||||||||||||||
Total comprehensive income(1): | ||||||||||||||||||||||||||||||||||||
At 1 January 2018 | 7,060 | 2,041 | 4,209 | 13,310 | ||||||||||||||||||||||||||||||||
Total comprehensive income:(1) | ||||||||||||||||||||||||||||||||||||
– Profit after tax | – | – | 659 | 659 | – | – | 1,280 | 1,280 | ||||||||||||||||||||||||||||
Issue of AT1 capital securities | 14 | – | 496 | – | 496 | |||||||||||||||||||||||||||||||
Dividends on ordinary shares | 3 | – | – | (553 | ) | (553 | ) | – | – | (1,123 | ) | (1,123 | ) | |||||||||||||||||||||||
Dividends on other equity instruments | – | – | (135 | ) | (135 | ) | – | – | (145 | ) | (145 | ) | ||||||||||||||||||||||||
Tax on other equity instruments | – | – | 26 | 26 | ||||||||||||||||||||||||||||||||
At 31 December 2017 | 7,060 | 2,041 | 4,209 | 13,310 | ||||||||||||||||||||||||||||||||
At 31 December 2018 | 7,060 | 2,041 | 4,221 | 13,322 | ||||||||||||||||||||||||||||||||
| (1) | Total comprehensive income comprises only the profit for the year; no statement of comprehensive income has been shown for the Company, as permitted by Section 408 of the UK Companies Act 2006. |
| (2) | Adjusted to reflect the amendment to IAS 12, as described in Note 1. |
The accompanying Notes form an integral part of these Financial Statements.
| 248 | Santander UK Group Holdings plc |
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financial statements
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1. ACCOUNTING POLICIES
These financial statements are prepared for Santander UK Group Holdings plc (the Company) under the Companies Act 2006. The principal activity of the Company is a financial services holding company. Santander UK Group Holdings plc is a public limited company incorporated in England and Wales having a registered office in England.
Basis of preparation
This basis of preparation differs from that applied in the Consolidated Financial Statements. See Note 1 to the Consolidated Financial Statements for details of the periods for which the Consolidated Financial Statements have been prepared. The accounting policies of the Company are the same as those of the Santander UK Group Holdings plc group which are set out in Note 1 to the Consolidated Financial Statements, to the extent that the Company has similar transactions to the Santander UK Group Holdings plc group. The financial statements have been prepared on the going concern basis using the historical cost convention. An assessment of the appropriateness of the adoption of the going concern basis of accounting is disclosed in the Directors’ statement of going concern set out in the Directors’ Report.
Compliance with International Financial Reporting Standards
The Company’s financial statements have been prepared in accordance with International Financial Reporting StandardsIFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee (IFRIC) of the IASB (together IFRS).IFRIC. The Company has also complied with IFRS as adopted by the European Union as there are no applicable differences between the two frameworks for the periodperiods presented.
Recent accounting developments
See Note 1 to Consolidated Financial Statements.
There was no impact on shareholders’ equity from applying the amendment to IAS 12 at 1 January 2019. The impact of the amendment to IAS 12 on the income statement for the year ended 31 December 2019 was to reduce tax on profit by £28m (2018: £27m, 2017: £26m), increasing profit after tax by the same amount.
The adoption of IFRS 916 did not have any significant impact on the Company.
2. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES
These comprise wages and salaries of £3m (2017:£7m (2018: £3m) recharged by the operating company, Santander UK plc. In 20182019 and 2017,2018, the Company had no full-time staff as they are all employed by Santander UK plc.
3. DIVIDENDS ON ORDINARY SHARES
Dividends on ordinary shares declared and paid during the year are set out in Note 10 to the Consolidated Financial Statements.
4. LOANS AND ADVANCES TO BANKS
| 2018 £m | 2017 £m | |||||||
Placements with other banks | 8 | 3 | ||||||
Amounts due from Santander UK group undertakings | 9,206 | 6,257 | ||||||
| 9,214 | 6,260 | |||||||
Loans and advances to banks principally comprise amounts due from Santander UK group undertakings. The fair values of loans and advances to banks are equal to their carrying amounts. In 20182019 and 2017,2018, no impairment losses were incurred. All of our senior debt issued out of Santander UK Group Holdings plc is downstreamed to our operating company Santander UK plc.
5. OTHER FINANCIAL ASSETS AT AMORTISED COST
These consisted of investments in subordinated notes and have a maturity greater than 10 years. On adoption of IFRS 9, the ‘financial investments’ balance sheet line item was split. This resulted in the inclusion of the ‘other financial assets at amortised cost’ balance sheet line. This approach aligns the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position.
6. FINANCIAL INVESTMENTS
These consisted of investments in subordinated notes and have a maturity greater than 10 years. On adoption of IFRS 9, the ‘financial investments’ balance sheet line item was split. This resulted in the inclusion of the ‘other financial assets at amortised cost’ balance sheet line. This approach aligns the balance sheet line items to the IFRS 9 accounting classifications and provides a clearer understanding of our financial position.
|
7. INTERESTS IN OTHER ENTITIES
2018 £m | 2017 £m | 2019 £m | 2018 £m | |||||||||||||
Interests in ordinary shares of subsidiaries | 11,645 | 11,268 | 11,645 | 11,645 | ||||||||||||
£500m Fixed Rate Reset Perpetual AT1 Capital Securities | 495 | 495 | 495 | 495 | ||||||||||||
£750m Fixed Rate Reset Perpetual AT1 Capital Securities | 750 | 750 | 750 | 750 | ||||||||||||
£300m Perpetual Capital Securities | 300 | 300 | ||||||||||||||
£500m Perpetual Capital Securities | 210 | 500 | ||||||||||||||
£300m Fixed Rate Reset Perpetual AT1 Capital Securities | – | 300 | ||||||||||||||
£500m Fixed Rate Reset Perpetual AT1 Capital Securities | 210 | 210 | ||||||||||||||
£500m Fixed Rate Reset Perpetual AT1 Capital Securities | 500 | – | ||||||||||||||
| 13,400 | 13,313 | 13,600 | 13,400 | |||||||||||||
Interests in subsidiaries are held at cost subject to impairment. During 20182019 and 2017,2018, no impairment was recognised. The Company has no associates.
| Santander UK Group Holdings plc | 249 |
Annual Report 2019| Financial statements
The movement in the Company’s interests in subsidiaries was as follows:
Cost £m | Impairment £m | Net book value £m | Cost £m | Impairment £m | Net book value £m | |||||||||||||||||||
At 1 January 2017, 31 December 2017 and 1 January 2018 | 11,268 | – | 11,268 | |||||||||||||||||||||
At 1 January 2019 and 31 December 2019 | 11,645 | – | 11,645 | |||||||||||||||||||||
At 1 January 2018 | 11,268 | – | 11,268 | |||||||||||||||||||||
Additions | 377 | – | 377 | 377 | – | 377 | ||||||||||||||||||
At 31 December 2018 | 11,645 | – | 11,645 | 11,645 | – | 11,645 | ||||||||||||||||||
Interests in ordinary shares of subsidiaries include the Company’s investment in 100% of the ordinary share capital of Santander UK plc, Abbey National Treasury Services plc (ANTS)SFS and Santander Equity Investments Limited (SEIL).SEIL.
During the year2018, the following restructures were carried out as part of the Santander UK group’s ring-fencing plans:
| – | Santander UK Group Holdings plc acquired 100% of the share capital of SEIL from |
| – | Santander UK Group Holdings plc acquired 100% of the share capital of |
For more on our ring-fencing plans, see Note 43 to the Consolidated Financial Statements. Details of subsidiary undertakings and joint ventures are set out in the Shareholder information section. For information on AT1 and Perpetual Capital Securities, see Note 3431 to the Consolidated Financial Statements.
8.7. DEPOSITS BY BANKS
These consist of amounts due to subsidiaries and are repayable on demand.
9.8. DEBT SECURITIES IN ISSUE
The Company issues notes in the US from time to time pursuant to a shelf registration statement on FormF-3 filed with the SEC in 2018.
10.9. SUBORDINATED LIABILITIES
| Dated subordinated liabilities | Maturity | 2018 £m | 2017 £m | Maturity | 2019 £m | 2018 £m | ||||||||||||||||||
4.75% Subordinated notes (US$1,000m) | 2025 | 791 | 745 | 2025 | 763 | 791 | ||||||||||||||||||
5.625% Subordinated notes (US$500m) | 2045 | 394 | 371 | 2045 | 379 | 394 | ||||||||||||||||||
| 1,185 | 1,116 | 1,142 | 1,185 | |||||||||||||||||||||
11.10. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
The table below shows the changes in liabilities arising from financing activities.
| 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
| Balance sheet line item | Balance sheet line item | |||||||||||||||||||||||||||||||||||||||||||
Debt securities in issue £m | Subordinated liabilities £m | Other equity instruments £m | Dividends paid £m | Total £m | Debt securities in issue £m | Subordinated liabilities £m | Other equity instruments £m | Dividends paid £m | Total £m | |||||||||||||||||||||||||||||||||||
At 1 January | 6,256 | 1,116 | 2,041 | – | 9,413 | 4,464 | 1,222 | 1,545 | – | 7,231 | ||||||||||||||||||||||||||||||||||
Cash flows from financing activities | 2,658 | – | – | (1,268 | ) | 1,390 | 2,103 | – | 496 | (964 | ) | 1,635 | ||||||||||||||||||||||||||||||||
Cash flows from operating activities | (7 | ) | – | – | – | (7 | ) | (3 | ) | – | – | – | (3 | ) | ||||||||||||||||||||||||||||||
Non-cash changes: | ||||||||||||||||||||||||||||||||||||||||||||
– Unrealised foreign exchange | 418 | – | – | – | 418 | (324 | ) | (106 | ) | – | – | (430 | ) | |||||||||||||||||||||||||||||||
– Other changes | (30 | ) | 69 | – | 1,268 | 1,307 | 16 | – | – | 964 | 980 | |||||||||||||||||||||||||||||||||
At 31 December | 9,295 | 1,185 | 2,041 | – | 12,521 | 6,256 | 1,116 | 2,041 | – | 9,413 | ||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
| Balance sheet line item | Balance sheet line item | |||||||||||||||||||||||||||||||||||||||||||
Debt securities in issue £m | Subordinated liabilities £m | Other equity instruments £m | Dividends paid £m | Total £m | Debt securities in issue £m | Subordinated liabilities £m | Other equity instruments £m | Dividends paid £m | Total £m | |||||||||||||||||||||||||||||||||||
At 1 January | 9,295 | 1,185 | 2,041 | – | 12,521 | 6,256 | 1,116 | 2,041 | – | 9,413 | ||||||||||||||||||||||||||||||||||
Cash flows from financing activities | – | – | 196 | (404 | ) | (208 | ) | 2,658 | – | – | (1,268 | ) | 1,390 | |||||||||||||||||||||||||||||||
Cash flows from operating activities | – | – | – | – | – | (7 | ) | – | – | – | (7 | ) | ||||||||||||||||||||||||||||||||
Non-cash changes: | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||
– Unrealised foreign exchange | (327 | ) | (44 | ) | – | – | (371 | ) | 418 | – | – | – | 418 | |||||||||||||||||||||||||||||||
– Other changes | (11 | ) | 1 | 4 | 404 | 398 | (30 | ) | 69 | – | 1,268 | 1,307 | ||||||||||||||||||||||||||||||||
At 31 December | 8,957 | 1,142 | 2,241 | – | 12,340 | 9,295 | 1,185 | 2,041 | – | 12,521 | ||||||||||||||||||||||||||||||||||
| 250 | Santander UK Group Holdings plc |
Annual Report 2018 |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Notes to the Company financial statements |
12.11. CONTINGENT LIABILITIES AND COMMITMENTS
Capital Support Deed
At 31 December 2018, Santander UK plc, Abbey National Treasury Services plc and Cater Allen Limited, which areDetails of the threePRA-regulated entities within the Santander UK group, were party to a capital support deed dated 23 December 2015 (the Capital Support Deed 2015) with Santander UK Group Holdings plc and certain othernon-regulated subsidiaries of Santander UK plc. The partiesarrangements entered into by the Company are set out in Note 29 to the Capital Support Deed 2015 were permitted by the PRA to form a core UK group as defined in the PRA Rulebook. Exposures of each of the three regulated entities to other members of the core UK group were exempt from large exposure limits that would otherwise apply. The purpose of the Capital Support Deed 2015 was to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, thenon-regulated parties to any of the regulated parties in the event that one of the regulated parties breached or was at risk of breaching its capital resources requirements or risk concentrations requirements.Consolidated Financial Statements.
The core UK group permission as supported by the Capital Support Deed 2015 expired on 31 December 2018. With effect from 1 January 2019, and in accordance with our ring-fenced structure, ANTS, Santander UK Group Holdings plc and Santander Equity Investments Limited have entered into a Capital Support Deed dated 13 November 2018 (the NRFBSub-Group Capital Support Deed). From 1 January 2019, the parties to the NRFBSub-Group Capital Support Deed have been permitted by the PRA to form a core UK group, a permission which will expire on 31 December 2021. Other than the change of the entities in scope, the purpose of the NRFBSub-Group Capital Support Deed is the same as the Capital Support Deed 2015.
13.12. SHARE CAPITAL
Details of the Company’s share capital are set out in Note 3330 to the Consolidated Financial Statements.
14.13. OTHER EQUITY INSTRUMENTS
Details of the Company’s other equity instruments are set out in Note 3431 to the Consolidated Financial Statements.
15.14. TRANSACTIONS WITH DIRECTORS AND OTHER KEY MANAGEMENT PERSONNEL
The Directors of Santander UK Group Holdings plc did not receive any remuneration in respect of their services to the Company. The remuneration disclosures in respect of the Santander UK group are set out in Note 3936 to the Consolidated Financial Statements.
16.15. RELATED PARTY TRANSACTIONS
The Company’s only transactions with related parties arise in connection with the receipt of dividends declared by its subsidiaries, payment of dividends on its own ordinary shares and Perpetual Capital Securities, interest payments to its subsidiary on intercompany loans and interest received from its subsidiarysubsidiaries relating to downstreamed funding of senior debt, as well as theany transactions entered into as part of the implementation of Santander UK’s ring-fencing plans as set in Note 43 to the Consolidated Financial Statements.2018.
17.16. EVENTS AFTER THE BALANCE SHEET DATE
See Note 4540 to the Consolidated Financial Statements.
Annual Report 2018 | Shareholder information
The financial information set forth below for the years ended 31 December 2018, 2017 and 2016 and at 31 December 2018 and 2017 has been derived from the audited Consolidated Financial Statements of Santander UK Group Holdings plc (the Company) and its subsidiaries (together, the Santander UK group) prepared in accordance with IFRS included elsewhere in this Annual Report. The information should be read in connection with, and is qualified in its entirety by reference to, the Santander UK group’s Consolidated Financial Statements and the Notes thereto.
The financial information of Santander UK Group Holdings plc and its subsidiaries has been presented at 31 December 2014 as if the Company and Santander UK plc and its subsidiaries have always been part of the same consolidated group using merger accounting principles. The financial information has been derived from the consolidated financial statements of Santander UK plc and its subsidiaries not included in this Annual Report and prepared on the basis set out in Note 1 to the Consolidated Financial Statements.
BALANCE SHEETS
| 2018(2, 3) | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Assets | ||||||||||||||||||||
Cash and balances at central banks | 24,180 | 32,771 | 17,107 | 16,842 | 22,562 | |||||||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||||||||||
– Trading assets | – | 30,555 | 30,035 | 23,961 | 21,700 | |||||||||||||||
– Derivative financial instruments | 5,321 | 19,942 | 25,471 | 20,911 | 23,021 | |||||||||||||||
– Other financial assets at fair value through profit or loss | 6,137 | 2,096 | 2,140 | 2,398 | 2,881 | |||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||
– Loans and advances to customers(1) | 201,619 | 199,332 | 199,733 | 198,043 | 188,691 | |||||||||||||||
– Loans and advances to banks(1) | 3,515 | 3,466 | 4,352 | 3,551 | 2,057 | |||||||||||||||
– Reverse repurchase agreements – non trading(1) | 21,127 | 2,614 | ||||||||||||||||||
– Other financial assets at amortised cost | 7,228 | |||||||||||||||||||
Financial assets at fair value through other comprehensive income | 13,302 | |||||||||||||||||||
Financial investments | 17,611 | 17,466 | 9,064 | 9,062 | ||||||||||||||||
Interests in other entities | 88 | 73 | 61 | 48 | 38 | |||||||||||||||
Intangible assets | 1,814 | 1,742 | 1,685 | 1,600 | 1,556 | |||||||||||||||
Property, plant and equipment | 1,835 | 1,598 | 1,491 | 1,597 | 1,624 | |||||||||||||||
Current tax assets | 106 | – | – | 51 | – | |||||||||||||||
Retirement benefit assets | 842 | 449 | 398 | 556 | 315 | |||||||||||||||
Other assets | 2,267 | 2,511 | 2,571 | 2,156 | 1,839 | |||||||||||||||
Total assets | 289,381 | 314,760 | 302,510 | 280,778 | 275,346 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||||||||||
– Trading liabilities | – | 31,109 | 15,560 | 12,722 | 15,333 | |||||||||||||||
– Derivative financial instruments | 1,594 | 17,613 | 23,103 | 21,508 | 22,732 | |||||||||||||||
– Other financial liabilities at fair value through profit or loss | 6,286 | 2,315 | 2,440 | 2,016 | 2,848 | |||||||||||||||
Financial liabilities at amortised cost: | ||||||||||||||||||||
– Deposits by customers | 173,692 | 177,421 | 172,726 | 163,232 | 153,606 | |||||||||||||||
– Deposits by banks(1) | 17,824 | 12,708 | 9,769 | 8,278 | 8,214 | |||||||||||||||
– Repurchase agreements – non trading(1) | 10,910 | 1,076 | ||||||||||||||||||
– Debt securities in issue | 55,906 | 48,860 | 54,792 | 50,457 | 51,790 | |||||||||||||||
– Subordinated liabilities | 3,601 | 3,793 | 4,303 | 3,885 | 4,002 | |||||||||||||||
Other liabilities | 2,507 | 2,728 | 3,221 | 2,445 | 2,441 | |||||||||||||||
Provisions | 515 | 558 | 700 | 870 | 491 | |||||||||||||||
Current tax liabilities | – | 3 | 53 | 1 | 69 | |||||||||||||||
Deferred tax liabilities | 211 | 88 | 128 | 223 | 59 | |||||||||||||||
Retirement benefit obligations | 115 | 286 | 262 | 110 | 199 | |||||||||||||||
Total liabilities | 273,161 | 298,558 | 287,057 | 265,747 | 261,784 | |||||||||||||||
Equity | ||||||||||||||||||||
Share capital | 7,060 | 7,060 | 7,060 | 7,060 | 11,268 | |||||||||||||||
Other equity instruments | 2,041 | 2,041 | 1,545 | 1,545 | 800 | |||||||||||||||
Merger reserve | – | – | – | – | (2,543 | ) | ||||||||||||||
Retained earnings | 6,439 | 6,399 | 5,925 | 5,721 | 3,425 | |||||||||||||||
Other reserves | 280 | 301 | 524 | 314 | 273 | |||||||||||||||
Total shareholders’ equity | 15,820 | 15,801 | 15,054 | 14,640 | 13,223 | |||||||||||||||
Non-controlling interests | 400 | 401 | 399 | 391 | 339 | |||||||||||||||
Total equity | 16,220 | 16,202 | 15,453 | 15,031 | 13,562 | |||||||||||||||
Total liabilities and equity | 289,381 | 314,760 | 302,510 | 280,778 | 275,346 | |||||||||||||||
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INCOME STATEMENTS
| 2018(1, 2) | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Net interest income | 3,606 | 3,803 | 3,582 | 3,575 | 3,434 | |||||||||||||||
Net fee and commission income | 749 | 807 | 770 | 715 | 739 | |||||||||||||||
Net trading and other income | 188 | 302 | 443 | 283 | 297 | |||||||||||||||
Total operating income | 4,543 | 4,912 | 4,795 | 4,573 | 4,470 | |||||||||||||||
| Operating expenses before credit impairment losses, provisions and charges | (2,563 | ) | (2,502 | ) | (2,417 | ) | (2,403 | ) | (2,397 | ) | ||||||||||
Credit impairment losses | (153 | ) | (203 | ) | (67 | ) | (66 | ) | (258 | ) | ||||||||||
Provisions for other liabilities and charges | (260 | ) | (393 | ) | (397 | ) | (762 | ) | (416 | ) | ||||||||||
Total operating credit impairment losses, provisions and charges | (413 | ) | (596 | ) | (464 | ) | (828 | ) | (674 | ) | ||||||||||
Profit before tax | 1,567 | 1,814 | 1,914 | 1,342 | 1,399 | |||||||||||||||
Tax on profit | (446 | ) | (560 | ) | (597 | ) | (380 | ) | (289 | ) | ||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | 962 | 1,110 | |||||||||||||||
Attributable to: | ||||||||||||||||||||
Equity holders of the parent | 1,082 | 1,215 | 1,272 | 914 | 1,070 | |||||||||||||||
Non-controlling interests | 39 | 39 | 45 | 48 | 40 | |||||||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | 962 | 1,110 | |||||||||||||||
(1) On 1 January 2018, the Santander UK group adopted IFRS 9, as described in Note 44 to the Consolidated Financial Statements. (2) In 2018, the Santander UK group completed the implementation of its ring-fencing plans, as described in Note 43 to the Consolidated Financial Statements.
SELECTED STATISTICAL INFORMATION
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| 2018(1, 2) | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| % | % | % | % | % | ||||||||||||||||
Capital ratios: | ||||||||||||||||||||
CET1 capital ratio | 13.2 | 12.2 | 11.6 | 11.6 | 11.9 | |||||||||||||||
Total capital ratio | 19.1 | 17.8 | 17.3 | 17.4 | 17.3 | |||||||||||||||
Equity to assets ratio(3) | 4.52 | 4.35 | 4.40 | 4.47 | 4.26 | |||||||||||||||
Profitability ratios: | ||||||||||||||||||||
Return on assets(4) | 0.37 | 0.40 | 0.44 | 0.34 | 0.40 | |||||||||||||||
Return on ordinary shareholders’ equity(5) | 7.9 | 8.9 | 9.6 | 7.2 | 9.0 | |||||||||||||||
Cost-to-income ratio(6) | 56 | 51 | 50 | 53 | 54 | |||||||||||||||
NPL ratio(7) | 1.20 | 1.42 | 1.50 | 1.54 | 1.80 | |||||||||||||||
Loan-to-deposit ratio(8) | 116 | 113 | 116 | 121 | 124 | |||||||||||||||
Dividend payout ratio per SEC Guide 3(9) | 104 | 46 | 47 | 50 | 46 | |||||||||||||||
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Annual Report 2018 2019| Shareholder information
Alternative Performance Measures (APMs)
This Annual Report includes certain financial measures which are not accounting measures within the scope of IFRS. Management reviews APMs in order to measure Santander UK’s overall performance, position and profitability, as well as to show business growth excluding ring-fence transfers, and believes that presentation of these financial measures provides useful information to investors on the Santander UK group. APMs are presented to identify and quantify items management believes to be significant, to improve the assessment ofperiod-on-period performance and underlying trends in the business and to align internal and external reporting.
APMs are not accounting measures within the scope of IFRS. These measures show historical or future financial performance, financial position or cashflows, but exclude or include amounts that would not be adjusted in the most comparable IFRS measures, as outlined below in compliance with U.S. Securities and Exchange Commission (SEC) and European Securities and Markets Authority (ESMA) guidelines. The APMs we have identified are outlined below and are not a substitute for IFRS measures.
1. Return on tangible equity (RoTE)
2. Adjusted dividend payout ratio
3. Adjusted profit before tax
4.1 Lending tonon-CRE trading businesses
4.2. CRE lending
| 2018 | 2017 | 2016 | ||||||||||
RoTE | 9.0% | 10.2% | 10.9% | |||||||||
Adjusted dividend payout ratio | 47% | |||||||||||
Adjusted profit before tax | £1,725m | £1,952m | £2,031m | |||||||||
Change in lending tonon-CRE trading businesses | £0.5bn | |||||||||||
Change in CRE lending | £(1.1)bn | |||||||||||
1. RoTE
RoTE is defined as the profit after tax attributable to equity holders of the parent divided by average shareholders’ equity lessnon-controlling interests, other equity instruments and average goodwill and other intangible assets. Reconciliations between RoTE and return on ordinary shareholders’ equity, which is profit after tax divided by average ordinary shareholders’ equity, the nearest IFRS measure, are as follows:
| 2018 | 2017 | 2016 | ||||||||||
| £m | £m | £m | ||||||||||
Profit after tax | 1,121 | 1,254 | 1,317 | |||||||||
Less:non-controlling interests | (39 | ) | (39 | ) | (45 | ) | ||||||
Profit due to equity holders of the parent (A) | 1,082 | 1,215 | 1,272 | |||||||||
Average shareholders’ equity | 16,211 | 15,828 | 15,242 | |||||||||
Less: average AT1 securities | (2,041 | ) | (1,793 | ) | (1,545 | ) | ||||||
Less: averagenon-controlling interests | (401 | ) | (400 | ) | (395 | ) | ||||||
Average ordinary shareholders’ equity(1)(B) | 13,769 | 13,635 | 13,302 | |||||||||
Average goodwill and intangible assets(1) | (1,778 | ) | (1,714 | ) | (1,643 | ) | ||||||
Average tangible equity(1)(C) | 11,991 | 11,921 | 11,659 | |||||||||
Return on ordinary shareholders’ equity (A/B) | 7.9% | 8.9% | 9.6% | |||||||||
RoTE (A/C) | 9.0% | 10.2% | 10.9% | |||||||||
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Management does not assess ‘Return on ordinary shareholders’ equity’ as a key performance indicator of the business, and therefore a reconciliation of the RoTE target for 2018 to an equivalent target for ‘Return on ordinary shareholders’ equity’ is not available without unreasonable efforts.
2. Adjusted dividend payout ratio
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Management does not assess ‘Dividend payout ratio’ as a key performance indicator of the business, and therefore a reconciliation of the ‘Adjusted dividend payout ratio’ target for 2018 to an equivalent target for ‘Dividend payout ratio’ is not available without unreasonable efforts.
Dividend policy is to pay 50% of recurring earnings, which is calculated using forecasted profits during the year. The timing of the declaration and payment of interim dividends is a consequence of Santander UK’s status as a subsidiary. As a result, the ‘Adjusted dividend payout ratio’ calculated using ‘Profit due to ordinary shareholders’ differs slightly from our strategic target of 50%. The interim dividend payment of £668m in the third quarter of 2018, associated with ring-fence transfers, was not included in the calculation of our ‘Adjusted dividend payout ratio’.
Glossary of financial servicesindustry terms
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3. Adjusted profit before tax
Adjusted profit before tax is defined as profit before tax excluding the accrued interest release on a foreign tax liability, the gain on sale of Vocalink Holdings Limited shareholding, the gain on sale of Visa Europe Limited shareholding, Banking Reform costs including intangible asset write-downs, certain PPI provision charges, other conduct provision (releases)/charges and other provision charges. A reconciliation between adjusted profit before tax and profit before tax, the nearest IFRS measure, is as follows:
| 2018 | 2017 | 2016 | ||||||||||
| £m | £m | £m | ||||||||||
Net interest income | ||||||||||||
Reported | 3,606 | 3,803 | 3,582 | |||||||||
Adjust for release of accrued interest on a foreign tax liability | – | (39 | ) | – | ||||||||
Adjusted | 3,606 | 3,764 | 3,582 | |||||||||
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Non-interest income | ||||||||||||
Reported | 937 | 1,109 | 1,213 | |||||||||
Adjust for gain on sale of Vocalink Holdings Limited shareholding | – | (48 | ) | – | ||||||||
Adjust for gain on sale of Visa Europe Limited shareholding | – | – | (119 | ) | ||||||||
Adjusted | 937 | 1,061 | 1,094 | |||||||||
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Operating expenses before credit impairment losses, provisions and charges | ||||||||||||
Reported | (2,563 | ) | (2,502 | ) | (2,417 | ) | ||||||
Adjust for Banking Reform costs | 38 | 81 | 122 | |||||||||
Adjust for GMP equalisation costs | 40 | – | – | |||||||||
Adjusted | (2,485 | ) | (2,421 | ) | (2,295 | ) | ||||||
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Provisions for other liabilities and charges | ||||||||||||
Reported | (260 | ) | (393 | ) | (397 | ) | ||||||
Adjust for PPI provision charge | – | 109 | 114 | |||||||||
Adjust for other conduct provision (release) / charge | (11 | ) | 35 | – | ||||||||
Adjust for other provision charges | 91 | – | – | |||||||||
Adjusted | (180 | ) | (249 | ) | (283 | ) | ||||||
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Profit before tax | ||||||||||||
Reported | 1,567 | 1,814 | 1,914 | |||||||||
Specific gains, expenses and charges | 158 | 138 | 117 | |||||||||
Adjusted profit before tax | 1,725 | 1,952 | 2,031 | |||||||||
The financial results for 2018, 2017 and 2016 included a number of specific income, expenses and charges. Management believes that the operating trends of the business can be better understood if these items are identified separately. The aggregate impact on profit before tax in 2018 was £158m (2017: £138m, 2016: £117m). The specific income, expenses and charges are outlined below:
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The release of interest accrued in relation to a certain foreign tax liability and other associated amounts, where the period to claim expired in 2017. The income of £39m is reported in Corporate Centre net interest income for 2017.
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Santander UK was part of the consortium of banks that sold Vocalink Holdings Limited to Mastercard. Santander UK’s stake in Vocalink Holdings Limited was 7.75%. Under the terms of the sale agreement, Santander UK will retain a shareholding of 0.775% for at least three years. The gain on sale (£48m sterling equivalent) is reported in Corporate Centrenon-interest income for 2017.
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On 2 November 2015, Visa Europe Limited agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Limited, Santander UK received upfront consideration made up of cash and convertible preferred stock. The gain on sale (£119m sterling equivalent) is reported in Corporate Centrenon-interest income for 2016.
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Banking Reform costs relate to multi-year projects and investments needed to comply with the Banking Reform Act due for implementation by 1 January 2019. Banking Reform costs are reported in Corporate Centre operating expenses before credit impairment losses, provisions and charges.
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On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to guaranteed minimum pension (GMP), and concluded on the methods that were appropriate. The estimated increase in liabilities at the date of the judgement was £40m and is based on a number of assumptions and the actual impact may be different. This has been recognised in the closing liability as apre-tax expense.
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Provisions for other liabilities and charges for 2017 were £109m. This included a fourth quarter net provision of £40m relating to an increase in estimated future claims driven by the start of the FCA advertising campaign for PPI, offset by an expected decline pertaining to a specific PPI portfolio review. We also provided £32m in the first quarter of 2017, when we applied the principles published in the March 2017 FCA paper, and £37m in the second quarter of 2017, relating to a specific PPI portfolio review as well.
| 252 | Santander UK Group Holdings plc |
Annual Report 2018 | Shareholder information
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Provisions for other liabilities and charges of £35m in 2017 relate to the sale of interest rate derivatives. This charge follows an ongoing review regarding regulatory classification of certain customers eligible for redress. Following further analysis of the impacted population, management has assessed the provision requirements resulting in a release of £11m in the second quarter of 2018.
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In the fourth quarter of 2018, we were fined £33m by the FCA in relation to an investigation into our historical probate and bereavement practices. We have completed a comprehensive tracing exercise and have already successfully transferred the majority of funds in deceased customers’ accounts to their rightful beneficiaries, with compensatory interest where appropriate.
In the fourth quarter of 2018 we made a £58m provision in relation to our consumer credit business operations. This charge is management’s current best estimate as we continue to assess the scope of this issue.
4. Adjusted CRE andnon-CRE trading businesses lending
| 2018 | 2017 | Change | ||||||||||
| £bn | £bn | £bn | ||||||||||
Lending tonon-CRE trading businesses | ||||||||||||
Reported | 11.5 | 11.5 | – | |||||||||
Adjust for ring-fence transfers and risk management initiative | 0.5 | – | 0.5 | |||||||||
Adjusted | 12.0 | 11.5 | 0.5 | |||||||||
CRE lending | ||||||||||||
Reported | 6.2 | 7.9 | (1.7 | ) | ||||||||
Adjust for ring-fence transfers and risk management initiative | 0.6 | – | 0.6 | |||||||||
Adjusted | 6.8 | 7.9 | (1.1 | ) | ||||||||
In July 2018, we transferred customer loans from Santander UK to Banco Santander London Branch as part of ring-fence implementation.
In September 2018, we also transferred customer loans to Banco Santander London Branch under a risk management initiative.
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Annual Report 2018 | Shareholder information
Subsidiaries, joint ventures and associates
In accordance with Section 409 of the Companies Act 2006, details of Santander UK Group Holdings plc’s subsidiaries, joint ventures and associates at 31 December 20182019 are set out below.
Subsidiaries
All subsidiaries are consolidated by the Santander UK group.
Incorporated and registered in England and Wales:
| Name of subsidiary | Registered office(1) | Direct/indirect ownership | Share class through which ownership is held | Proportion % | Ultimate % | Registered office(1) | Direct/indirect ownership | Share class through which ownership is held | Proportion % | Ultimate % | ||||||||||||||||||
2 & 3 Triton Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
A & L CF December (1) Limited (in liquidation) | F | Indirect | Ordinary £1 | – | 100 | |||||||||||||||||||||||
A & L CF June (2) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
A & L CF June (3) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
A & L CF March (5) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
A & L CF September (4) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Beta Investments Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Business Office Equipment Leasing Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Nominees Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National PLP (UK) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Property Investments | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Treasury Services Investments Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Treasury Services Overseas Holdings | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey National Treasury Services plc | A | Direct | Ordinary £1 | 100 | 100 | |||||||||||||||||||||||
Abbey National UK Investments | A | Indirect | Ordinary€0.20 Ordinary £1 | | – | | | 100 | | A | Indirect | Ordinary€0.20 | – | 100 | ||||||||||||||
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Abbey Stockbrokers (Nominees) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Abbey Stockbrokers Limited | A | Indirect | Ordinary £1 A Preference £1 B Preference £1 | | – | | | 100 | | A | Indirect | Ordinary £1 A Preference £1 B Preference £1 | – | 100 | ||||||||||||||
Alliance & Leicester Cash Solutions Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Alliance & Leicester Commercial Bank Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Alliance & Leicester Investments (Derivatives) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Alliance & Leicester Investments (No.2) Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Alliance & Leicester Investments Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Alliance & Leicester Limited | G | Indirect | Ordinary £0.50 | – | 100 | G | Indirect | Ordinary £0.50 | – | 100 | ||||||||||||||||||
Alliance & Leicester Personal Finance Limited | G | Indirect | Ordinary £1 | – | 100 | G | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
AN (123) Limited | A | Indirect | Ordinary £0.10 | – | 100 | A | Indirect | Ordinary £0.10 | – | 100 | ||||||||||||||||||
ANITCO Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Athena Corporation Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Cater Allen Holdings Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Cater Allen International Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Cater Allen Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Cater Allen Lloyd’s Holdings Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Cater Allen Syndicate Management Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Motor Business Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Motor Contracts Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Motor Facilities Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Motor Finance Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Motor Leasing Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Motor plc | B | Indirect | Ordinary £1 | – | 100 | B | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
First National Tricity Finance Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Insurance Funding Solutions Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
Liquidity Limited | A | Indirect | Ordinary A £0.10 Ordinary B1 £0.10 Ordinary B2 £0.10 Preference £1 | | – | | | 100 | | A | Indirect | Ordinary A £0.10 Ordinary B1 £0.10 Ordinary B2 £0.10 Preference £1 | – | 100 | ||||||||||||||
Mortgage Engine Limited | A | Indirect | Ordinary £1 | – | 100 | A | Indirect | Ordinary £1 | – | 100 | ||||||||||||||||||
PSA Finance UK Limited | H | Indirect | Ordinary £1 | – | 50 | H | Indirect | Ordinary £1 | – | 50 | ||||||||||||||||||
Santander (CF Trustee Property Nominee) Limited | L | Trust relationship | Ordinary £1 | – | – | |||||||||||||||||||||||
Santander (CF Trustee) Limited | L | Trust relationship | Ordinary £1 | – | – | |||||||||||||||||||||||
Santander (UK) Group Pension Scheme Trustees Limited | L | Direct | Ordinary £1 | 100 | 100 | |||||||||||||||||||||||
| Santander UK Group Holdings plc | 253 |
Annual Report 2019| Shareholder information
Subsidiaries, joint ventures and associatescontinued
| Name of subsidiary | Registered office(1) | Direct/indirect ownership | Share class through which ownership is held | Proportion % | Ultimate % | |||||||||
Santander (CF Trustee Property Nominee) Limited | M | Trust relationship | Ordinary £1 | – | – | |||||||||
Santander (CF Trustee) Limited | M | Trust relationship | Ordinary £1 | – | – | |||||||||
Santander (UK) Group Pension Scheme Trustees Limited | M | Direct | Ordinary £1 | 100 | 100 | |||||||||
Santander Asset Finance (December) Limited | G | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Asset Finance plc | A | Indirect | Ordinary £0.10 | – | 100 | |||||||||
Santander Cards Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Cards UK Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Consumer (UK) plc | B | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Consumer Credit Services Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Equity Investments Limited | A | Direct | Ordinary £1 | 100 | 100 | |||||||||
Santander Estates Limited | G | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Financial Services plc | A | Direct | Ordinary £1 | 100 | 100 | |||||||||
Santander Global Consumer Finance Limited | A | Indirect | Ordinary £0.0001 | – | 100 | |||||||||
Santander Guarantee Company | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Lending Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Mortgage Holdings Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Private Banking UK Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Secretariat Services Limited | A | Direct | A Ordinary US$0.01 | 100 | 100 | |||||||||
Santander UK Operations Limited | A | Indirect | Ordinary A £1 Ordinary B £1 | | – – |
| | 100 100 |
| |||||
Santander UK (Structured Solutions) Limited | A | Indirect | Ordinary £0.01 | – | 100 | |||||||||
Santander UK Technology Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander UK plc | A | Direct | Ordinary £0.10 | 100 | 100 | |||||||||
Sheppards Moneybrokers Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Solarlaser Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
SCF Eastside Locks GP Limited | M | Trust relationship | Ordinary £1 | – | – | |||||||||
The Alliance & Leicester Corporation Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Time Retail Finance Limited (In liquidation) | F | Indirect | Ordinary £1 Ordinary £0.0001 | | – – |
| | 100 100 | | |||||
Tuttle and Son Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
| (1) |
Refer to the key at the end of this section for the registered office address. |
Incorporated and registered outside England and Wales:
| Name of subsidiary | Registered office(1) | Direct/indirect ownership | Share class through which ownership is held | Proportion % | Ultimate % | |||||||||
Santander Asset Finance (December) Limited | G | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Asset Finance plc | A | Indirect | Ordinary £0.10 | – | 100 | |||||||||
Santander Cards Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Cards UK Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Consumer (UK) plc | B | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Consumer Credit Services Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Equity Investments Limited | A | Direct | Ordinary £1 | 100 | 100 | |||||||||
Santander Estates Limited | G | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Global Consumer Finance Limited | A | Indirect | Ordinary £0.0001 | – | 100 | |||||||||
Santander Guarantee Company | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Lending Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Mortgage Holdings Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Private Banking UK Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Secretariat Services Limited | A | Direct | A Ordinary US$0.01 | 100 | 100 | |||||||||
Santander UK Foundation Limited | A | Direct | Guarantee ownership | 100 | 100 | |||||||||
Santander UK Operations Limited | A | Indirect | Ordinary A £1 Ordinary B £1 | | – – |
| | 100 100 |
| |||||
Santander UK (Structured Solutions) Limited | A | Indirect | Ordinary £0.01 | – | 100 | |||||||||
Santander UK Technology Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander UK plc | A | Direct | Ordinary £0.10 | 100 | 100 | |||||||||
Sheppards Moneybrokers Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Solarlaser Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
SCF Eastside Locks GP Limited | L | Trust relationship | Ordinary £1 | – | – | |||||||||
The Alliance & Leicester Corporation Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Time Retail Finance Limited (in liquidation) | F | Indirect | Ordinary £1 Ordinary £0.0001 | | – – |
| | 100 100 | | |||||
Tuttle and Son Limited | A | Indirect | Ordinary £1 | – | 100 | |||||||||
Wave SME Holdings Limited | A | Direct | Ordinary £1 | 100 | 100 | |||||||||
Wave SME Technology Limited | A | Direct | Ordinary £1 | 100 | 100 | |||||||||
(1) Refer to the key at the end of this section for the registered office address.
Incorporated and registered outside England and Wales:
|
| |||||||||||||
| Name of subsidiary | Registered office(1) | Direct/indirect ownership | Share class through which ownership is held | Proportion % | Ultimate % | |||||||||
A & L CF (Guernsey) Limited | M | Indirect | Ordinary £1 | – | 100 | |||||||||
Abbey Business Services (India) Private Limited | P | Indirect | Ordinary INR 10 | – | 100 | |||||||||
Abbey National International Limited | N | Indirect | Ordinary £1 | – | 100 | |||||||||
ALIL Services Limited | Q | Indirect | Ordinary £1 | – | 100 | |||||||||
Carfax (Guernsey) Limited | M | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Cards Ireland Limited | J | Indirect | Ordinary€1 Ordinary€1.27 | | – | | | 100 | | |||||
Santander International Limited | N | Direct | Ordinary £1 | 100 | 100 | |||||||||
Santander ISA Managers Limited | I | Indirect | Ordinary £1 | – | 100 | |||||||||
Sovereign Spirit Limited | O | Indirect | Ordinary BMD 1 | – | 100 | |||||||||
Whitewick Limited | N | Indirect | Ordinary £1 | – | 100 | |||||||||
| Name of subsidiary | Registered office(1) | Direct/indirect ownership | Share class through which ownership is held | Proportion % | Ultimate % | |||||||||
A & L CF (Guernsey) Limited | N | Indirect | Ordinary £1 | – | 100 | |||||||||
Abbey Business Services (India) Private Limited | Q | Indirect | Ordinary INR 10 | – | 100 | |||||||||
Abbey National International Limited | O | Indirect | Ordinary £1 | – | 100 | |||||||||
ALIL Services Limited | R | Indirect | Ordinary £1 | – | 100 | |||||||||
Carfax (Guernsey) Limited | N | Indirect | Ordinary £1 | – | 100 | |||||||||
Santander Cards Ireland Limited | J | Indirect | Ordinary€1 Ordinary€1.27 | – | 100 | |||||||||
Santander ISA Managers Limited | I | Indirect | Ordinary £1 | – | 100 | |||||||||
Sovereign Spirit Limited | P | Indirect | Ordinary BMD 1 | – | 100 | |||||||||
Whitewick Limited (In liquidation) | O | Indirect | Ordinary £1 | – | 100 | |||||||||
| (1) | Refer to the key at the end of this section for the registered office address, including the country. |
| 254 | Santander UK Group Holdings plc |
Annual Report 2018 | Shareholder information
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Other subsidiary undertakings
All these entities are registered in England and Wales except where noted.for Guaranteed Investment Products 1 PCC Limited which is registered in Guernsey and Motor Securities2018-1 Designated Activity Company which is registered in Ireland.
The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the entities, however they are consolidated by the Santander UK group because the substance of the relationship indicates control, as described in Note 1 to the Consolidated Financial Statements.
| Name of entity | Registered office(1) | Name of entity | Registered office(1) | |||
Abbey Covered Bonds | ||||||
Abbey Covered Bonds (LM) Limited | E | Langton Funding (No. 1) Limited | C | |||
Abbey Covered Bonds LLP | A | Langton Mortgages Trustee (UK) Limited | A | |||
| Langton PECOH Limited | C | ||||
Auto ABS UK Loans 2017 plc | C | Langton Securities(2008-1) plc | C | |||
Auto ABS UK Loans | Langton Securities(2010-1) plc | C | ||||
Auto ABS UK Loans | Langton Securities(2010-2) plc | C | ||||
| C | Langton Securities Holdings Limited | C | |||
| C | MAC No. 1 Limited | A | |||
Fosse (Master Issuer) Holdings Limited | C | Motor2015-1 Holdings Limited | C | |||
Fosse Funding (No.1) Limited | C | Motor2015-1 plc (In liquidation) | D | |||
Fosse Master Issuer plc | C | Motor | C | |||
Fosse PECOH Limited | C | Motor | C | |||
Fosse Trustee (UK) Limited | A | Motor | C | |||
| Motor | C | ||||
Holmes Funding Limited | A | Motor Securities | ||||
Holmes Holdings Limited | A | |||||
Holmes Master Issuer plc | A | |||||
| ||||||
| (1) | Refer to the key at the end of this section for the registered office address. |
Joint ventures and associates
All these entities are registered in England and Wales and are accounted for by the equity method of accounting.
| Name of joint venture | Registered office(1) | Direct/indirect ownership | Share class through is held | Proportion % | Ultimate % | Registered office(1) | Direct/indirect ownership | Share class through is held | Proportion % | Ultimate % | ||||||||||||||||||
Hyundai Capital UK Limited | K | Indirect | Ordinary £1 | – | 50 | K | Indirect | Ordinary £1 | – | 50 | ||||||||||||||||||
PSA UK Number 1 plc | H | Indirect | B Ordinary £1 C Ordinary £1 | | – | | | 50 | | H | Indirect | B Ordinary £1 | – | 50 | ||||||||||||||
Syntheo Limited | A | Indirect | Ordinary £1 | – | 50 | |||||||||||||||||||||||
| C Ordinary £1 | ||||||||||||||||||||||||||||
Syntheo Limited (In liquidation) | F | Indirect | Ordinary £1 | – | 50 | |||||||||||||||||||||||
| (1) | Refer to the key at the end of this section for the registered office address. |
All entities are joint ventures, except for PSA UK Number 1 plc which is an associate.
Overseas branches
The Company has no overseas branches. Abbey National TreasurySantander Financial Services plc, a subsidiary, has branch offices in Jersey and the Isle of Man.
Key of registered office addresses
| A | 2 Triton Square, Regent’s Place, London NW1 3AN |
| B | Santander House, 86 Station Road, Redhill RH1 1SR |
| C | 35 Great St. Helen’s, London EC3A 6AP |
| D | 40a Station Road, Upminster, Essex RM14 2TR |
| E | Wilmington Trust SP Services (London) Limited, 1 Kings Arms Yard, London EC2R 7AF |
| F | Griffins, Tavistock House South, Tavistock Square, London WC1H 9LG |
| G | Building 3, Floor 2, Carlton Park, Narborough, Leicester LE19 0AL |
| H | 61 London Road, Redhill RH1 1QA |
| I | 287 St. Vincent Street, Glasgow, Scotland G2 5NB |
| J | 25/28 North Wall Quay, Dublin 1, Ireland |
| K | London Court, 39 London Road, Reigate RH2 9AQ |
| L | Level 37, 25 Canada Square, London E14 5LQ |
| M | Santander House, 201 Grafton Gate East, Milton Keynes MK9 1AN |
Fourth Floor, The Albany, South Esplanade, St. Peter Port, Guernsey GY1 4NF |
19-21 Commercial Street, St. Helier, Jersey JE2 3RU |
Clarendon House, 2 Church Street, Hamilton HM11, Bermuda |
The Residency, 7th Floor, 133/1 Residency Road, Bangalore, KA 560 025, India |
19/21 Prospect Hill, Douglas, Isle of Man IM99 1RY |
| S | Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 2HT |
| T | 3rd Floor, Flemming Court, Flemming’s Place, Dublin 4 |
| Santander UK Group Holdings plc | 255 |
Annual Report 2019| Shareholder information
|
The Company and its subsidiaries (together Santander UKUK) may from time to time make written or oral forward-looking statements. Santander UKThe Company makes written forward-looking statements in this Annual Report and may also make forward-looking statements in its periodic reports to the SEC on Forms20-F and6-K, in its offering circulars and prospectuses, in press releases and in other written materials and in oral statements made by its officers, directors or employees to third parties. Examples of such forward-looking statements include, but are not limited to: projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios; statements of plans, objectives or goals of Santander UK or its management, including those related to products or services; statements of future economic performance; and statements of assumptions underlying such statements.
| – | projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios |
| – | statements of plans, objectives or goals of Santander UK or its management, including those related to products or services |
| – | statements of future economic performance, and |
| – | statements of assumptions underlying such statements |
Words such as ‘believes’, ‘anticipates’, ‘expects’, ‘intends’, ‘aims’, ‘plans’, ‘targets’ and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on its behalf. Some of these factors, which could affect Santander UK’s business, financial condition and/or results of operation, are considered in detail in the Risk review, and they include:
| – | the effects of disruptions and volatility in the global economy and global financial markets |
| – | the effects of UK economic conditions |
| – |
|
| – | the effects of competition with other financial institutions, including new entrants into the financial services |
| – | the risk that Santander UK’s new or existing products and |
| – | the risk that Santander UK may be unable to continue offering products and |
| – | the extent to which Santander UK’s loan portfolio is subject to prepayment risk |
| – | the risk that Santander UK |
| – | the effects of any |
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| – | the extent to which regulatory capital, liquidity and leverage requirements, and any changes to these requirements may limit |
| – | Santander UK’s ability to access liquidity and funding on acceptable financial terms |
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| – | the effects of an adverse movement in external credit rating assigned to Santander UK, any Santander UK member or any of their respective debt securities |
| – | the effects of any changes in the pension liabilities and obligations of Santander UK |
| – | the effects of fluctuations in interest rates and other market risks |
| – | risks arising from the integrity and continued existence of reference rates |
| – | the extent to which Santander UK may be required to record negative fair value adjustments for its financial assets due to changes in market conditions |
| – | Santander UK’s ability to control the level ofnon-performing or poor credit quality loans and whether Santander UK’s loan loss reserves are sufficient to cover loan losses |
| – | the risk that the value of the collateral, including real estate, securing Santander UK’s loans may not be sufficient and that Santander UK may be unable to realise the full value of the collateral securing its loan portfolio |
| – | the effects of the financial services laws, regulations, government oversight, administrative actions and policies and any changes thereto in each location or market in which Santander UK operates |
| – | the risk that Santander UK may become subject to the provisions of the Banking Act 2009, including thebail-in and write down powers thereunder |
| – | the effects of any failure to comply with anti-money laundering, anti-terrorism, anti-corruption,anti-tax evasion or sanctions laws or regulations, or the risk of any failure to prevent or detect any illegal or improper activities fully or timeously |
| – | the effects of taxation (and any changes to tax), in each location in which Santander UK operates |
| – | Santander UK’s exposure to any risk of loss from civil litigation and/or criminal legal or regulatory proceedings |
| – | the risk of failing to successfully |
| – | the |
| – | the |
| – | the |
| – | the risk of failing to effectively |
| – | Santander UK’s exposure to unidentified or unanticipated risks despite its risk management policies, procedures and methods |
| – | the |
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| – | the ability of Santander UK to recruit retain and develop appropriate senior management and skilled personnel |
| – | the effects of any |
| – | the |
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Please refer to our latest filings with the SEC (including, without limitation, our Annual Report on Form20-F for the year ended 31 December 2018)2019) for a discussion of certain risk factors and forward-looking statements. Undue reliance should not be placed on forward-looking statements when making decisions with respect to any Santander UK member and/or its securities. Investors and others should take into account the inherent risks and uncertainties of forward-looking statements and should carefully consider the foregoingnon-exhaustive list of important factors. Forward-looking statements speak only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such knowledge, information and views may change at any time. Santander UK does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
| 256 | Santander UK Group Holdings plc |
Annual Report 2018 | Other information for US investors
Other information for US investors
| |||||||||||||||||||||
| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | ||||||||||||||||
|
An investment in Santander UK Group Holdings plc (the Company) and its subsidiaries (us, we, our or the Santander UK group)(Santander UK) involves a number of risks, the material ones of which are set out below.
We are vulnerable to disruptionsGeopolitical and volatility in the global financial marketsmacro-economic risks
Over the past 10 years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to periods of reduced liquidity and greater volatility (including volatility in spreads). Uncertainties remain concerning the outlook and the future economic environment despite recent improvements in certain segments of the global economy. Investors remain cautious and a slowing or failing of the global economic recovery would likely aggravate the adverse effects of difficult economic and market conditions on us and on others in the financial services industry.
Financial markets over the past three years have been affected, and still are, by a series of political events, which include the United Kingdom’s (UK) vote in June 2016 to leave the European Union (EU), and the general election in the UK in June 2017, which caused significant volatility in the global stock and foreign exchange markets (for more information, see the risk factor entitled ‘Exposure to UK political developments, including the ongoing negotiations between the UK and EU, could have a material adverse effect on us’). Further, there continues to be significant uncertainty as to the respective legal and regulatory environments in which we and our subsidiaries will operate going forward as a result of theSantander UK’s vote to leave the EU, as the delay in any agreement continues. Such uncertainties have had, and may continue to have, a negative impact on macroeconomic conditions and our operations, financial condition and prospects, and the global economic environment may continue to be adversely affected by political developments (for more information, see the risk factor entitled ‘We may suffer adverse effects as a result of the political, economic and sovereign debt tensions in the eurozone’).
Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers, particularly if interest rates continue to rise in 2019 following repeated comments by the Bank of England (BoE) to raise rates, “at a gradual pace and to a limited extent”. Any such increase in capital markets funding costs or deposit rates could have a material adverse effect on our interest margins, liquidity and profitability, particularly given the sustained low interest rate environment expected in the medium term.
Our operations, financial condition and prospects may be materially impacted by economic conditions in the UK and disruptions in the global economy and global financial markets
OurSantander UK’s business activities are concentrated in the UK, where we offerit offers a range of banking and financial products and services to UK retail and corporate customers. As a consequence, ourSantander UK’s operations, financial condition and prospects are significantly affected by the general economic conditions in the UK.
Our financial performance is intrinsically linked to the UK economy and the economic prosperity and confidence of consumers and businesses. The state of the UK economy, along with its related impacts on our profitability, remains a risk. Conversely, a strengthened UK economic performance may increase the possibility of a higher interest rate environment and we note that the BoE has commented that it expects to continue to raise interest rates at a steady pace if the economy performs in line with its expectations. In such a scenario, there is a risk that other market participants might offer more competitive product pricing resulting in increased customer attrition and the potential for an increase in defaults on our mortgage and/or loan repayments.
In particular, weSantander UK may face, among others, the following risks related to any future economic downturn:
| – |
|
Reduced demand for |
| – | Inability of |
| – | The process |
| – | The degree of uncertainty concerning economic conditions may adversely affect the accuracy of |
| – | Lower or negative interest rates, reducing Santander UK’s interest margins. |
| – | The value and liquidity of the portfolio of investment securities that |
| – | The recovery of the international financial industry may be delayed and impact |
| – | Adverse macroeconomic |
The possibility of a renewed economic downturn resulting in negative economic growth in the UK remains a real risk, particularly given an agreement for exiting the EU has yet to be reached. This has, to a certain extent, been reflected in the downgrade of the Office for Budget Responsibility (OBR) forecasts for economic growth for 2018, published with the Budget at the end of October 2018 and the downgrade of the UK’s sovereign credit rating in September 2017 (for more information, see the risk factor entitled ‘An adverse movement in our external credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our operations, financial condition and prospects’). Uncertainty surrounding the future of the eurozone is less acute than before, but a slow increase in growth may pose a risk of a further slowdown in the UK’s principal export markets which would have an adverse effect on the broader UK economy, and could cause uncertainty in relation to the terms of the UK’s exit from the EU. The future trading arrangements agreed between the EU and the UK could also have an adverse impact, particularly if the UK has to resort to using World Trade Organization (WTO) rules from the EU. The future trading arrangements agreed between the EU and the UK could also have an adverse impact, particularly if the UK has to resort to using WTO rules.
| – | Accommodative monetary policies leading to extended period of low or lower interest rates, weaker sterling and potentially higher inflation, any of which could have an adverse effect on Santander UK’s profitability. |
Adverse changes in the credit quality of ourSantander UK’s borrowers and counterparties or a general deterioration in UK EU or global economic conditions could reduce the recoverability and value of ourSantander UK’s assets and require an increase in ourits level of provisions for bad and doubtful debts. There can be no assurance that weSantander UK will not have to increase ourits provisions for loan losses in the future as a result of increases innon-performing loans and/or for other reasons beyond ourits control. Material increases in ourSantander UK’s provisions for loan losses and write-offs or charge-offs could have ana material adverse effect on ourits operations, financial condition and prospects. Any significant related reduction in the demand for ourthe its products and services could also have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Economic instability and downturns beyond the UK may also impact the UK economy as a whole. Disruption and volatility in the global financial markets could have a material adverse effect on ourSantander UK, including Santander UK’s ability to access capital and liquidity on financial terms acceptable to Santander UK, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
The UK’s withdrawal from the European Union could have a material adverse effect on Santander UK’s operations, financial condition and prospects
On 31 January 2020 the UK ceased to be a member of the EU, on withdrawal terms which establish a transition period until 31 December 2020. During the transition period the UK will be treated as if it were still a member of the European Union for trading purposes. European Union legislation will continue to apply in the UK and negotiations on a trade agreement will be conducted, as well as negotiations on the extent of legislative and regulatory convergence and regulatory cooperation. The European Union will also carry out regulatory equivalence assessments for financial services. Such assessments, even if positive, do not guarantee that equivalence will be granted to the UK as a third country pursuant to equivalence regimes in existing EU financial services legislation. Although the withdrawal agreement foresees the possibility to extend the transition period for two more years after the 31 January 2020, this is not automatic as the UK has enshrined the 31 December 2020 date in domestic legislation passing the withdrawal agreement as the end of the transition period, signalling a current desire not to extend it.
Uncertainty remains around the terms of the UK’s relationship with the EU at the end of the transition period. If the transition period were to end without a comprehensive trade agreement, the UK’s economic growth may be negatively impacted. At the end of the transition period, even if a trade agreement is entered into and/or if equivalence is granted to certain areas of the UK’s financial services, contingency measures may still be necessary in certain economic or financial matters to avoid uncertainty and adverse economic effects and there may be some changes in the products and services that Santander UK can continue to offer into the EEA and to EEA residents or EEA incorporated entities. Where possible, Santander UK would look to service such EEA customers from Banco Santander SA instead.
While the longer term effects of the UK’s anticipated withdrawal from the EU are difficult to predict, there is ongoing political and economic uncertainty, which is likely to continue in the medium term. Management has identified a number of risks to Santander UK as a consequence of this uncertainty and the result of the withdrawal process, including the following:
| – | Increased market volatility: there could be a negative impact on Santander UK’s cost of or access to funding, especially in an environment in which Santander UK’s credit ratings are impacted, it could affect interest and currency exchange rates and the value of assets in Santander UK’s banking book or of securities held by Santander UK for liquidity purposes. |
| – | Santander UK is subject to substantialEU-derived regulation and oversight: although legislation has now been passed transferring the EU acquis into UK law, there remains significant uncertainty as to the legal and regulatory environment in which Santander UK and its subsidiaries will operate when the transition period ends. |
| – | Uncertainty on cross-border operations: Santander UK and other financial institutions will not be able to rely on the European passporting framework for financial services and may not be able to utilise EU financial markets infrastructure, and it is unclear what alternative regime may be in place following the UK’s departure from the EU, which would limit the ability of Santander UK to carry on cross-border business in the EU. |
| – | An adverse effect on the UK economy impacting on Santander UK’s customers and clients. |
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Annual Report 2018 2019| Other Shareholder information for US investors
ExposureBusiness model risks
Santander UK is exposed to UK political developments,competition from other financial institutions, including new entrants into the ongoing negotiations between the UK and EU, could have a material adverse effect on us
On 23 June 2016, the UK held a referendum (the UK EU Referendum) on its membership of the EU, in which a majority voted for the UK to leave the EU. Immediately following the result, the UK and global stock and foreign exchange markets commenced a period of significant volatility, including a steep devaluation of the pound sterling. There remains significant uncertainty relating to the UK’s exit from, and future relationship with, the EU and the basis of the UK’s future trading relationship with the rest of the world.
On 29 March 2017, the UK Prime Minister gave notice under Article 50(2) of the Treaty on European Union of the UK’s intention to withdraw from the EU. The delivery of the Article 50(2) notice triggered a two year period of negotiation to determine the terms on which the UK will exit the EU and the framework for the UK’s future relationship with the EU. Unless extended, the UK’s EU membership will cease after this two year period.
There is a possibility that the UK’s EU membership ends at such time without reaching any agreement on the terms of its relationship with the EU going forward, and currently the Withdrawal Agreement, which provides for a transitional period whilst the Future Relationship is negotiated, has not been ratified by the UK Parliament.
A general election in the UK was held on 8 June 2017 (the General Election). The General Election resulted in a hung parliament with no political party obtaining the majority required to form an outright government. On 26 June 2017 it was announced that the Conservative party had reached an agreement with the Democratic Unionist Party (the DUP) in order for the Conservative party to form a minority government with legislative support (‘confidence and supply’) from the DUP. There is an ongoing possibility of an early general election ahead of 2022 and of a change of government.
The continuing uncertainty surrounding the Brexit outcome has had an effect on the UK economy, particularly towards the end of 2018, and this may continue into 2019. Consumer and Business confidence indicators have continued to fall, for example the GfK consumer confidence index fell to-14 in January 2019, and this has had a significant impact on consumer spending and investment, both of which are vital components of economic growth.financial services sector
The outcomemarkets for UK financial services are very competitive and Santander UK has seen strong competition from incumbent banks and large building societies. In addition, Santander UK faces competition from a number of Brexit remains unclear, however, anew entrants,non-banks and other providers. The UK exit fromgovernment and regulators are actively supporting the EU with ano-deal continues to remain a possibilityemergence of new entrants into the UK financial services market. The internet and mobile technologies are also changing customer behaviour and the consensus view is that this would havecompetitive environment. There has been a negative impact on thesteep rise in customer use of mobile banking in recent years. Santander UK economy, affecting its growth prospects, based on scenarios put forward by such institutions as the BoE, HM Government and other economic forecasters.
While the longer term effects of the UK’s imminent departurefaces competition from the EU are difficult to predict, there is short term political and economic uncertainty. The Governor of the BoE warned that the UK exiting the EU without a deal could lead to considerable financial instability, a very significant fall in property prices, rising unemployment, depressed economic growth, higher inflation and interest rates. The Governor also warned that the Bank would not be able to apply interest rate reductions. This could inevitably affect the UK’s attractiveness as a global investment centre, and would likely have a detrimental impact on UK economic growth.
If ano-deal Brexit did occur it would be likely that the UK’s economic growth would slow significantly, and it would be possible that there would be severely adverse economic effects.
The UK’s imminent departure from the EU has also given rise to further calls for a second referendum on Scottish independence and raised questions over the future status of Northern Ireland. These developments, or the perception that they could occur, could have a material adverse effect on economic conditions and the stabilityestablished providers of financial markets,services as well as from banking business developed bynon-financial companies, including technology companies and could significantly reduce market liquidity and restrict the ability of key market participantslarge retail companies with strong brand recognition. Management expects such competition to operate in certain financial markets (for more information, see the risk factor entitled ‘We are vulnerable to disruptions and volatility in the global financial markets’).
Asset valuations, currency exchange rates and credit ratings may be particularly subject to increased market volatility if the negotiation of the UK’s exit from the EU continues in therun-up to 29 March 2019continue or intensify as a result of Parliament’snon-ratificationcustomer behaviour and trends, technological changes, competitor behaviour, the growth in digital banking, new lending models and changes in regulation (including the recent introduction of the Withdrawal Agreement. The major credit rating agencies changed their outlook to negative on the UK’s sovereign credit rating following the UK EU Referendum,Open Banking and that has not changed (for more information, see the risk factor entitled ‘An adverse movement in our external credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our operations, financial condition and prospects’)changes arising from PSD2). In addition, we are subject to substantialEU-derived regulation and oversight. Although legislation has now been passed transferring the EU acquis into UK law, there remains significant uncertainty as to the respective legal and regulatory environments in which we and our subsidiaries will operate when the UK is no longer a member of the EU, and the basis on which cross-border financial business will take place after the UK leaves the EU.
Operationally, we and other financial institutions may no longer be able to rely on the European passporting framework for financial services, and it is unclear what alternative regime may be in place following the UK’s departure from the EU. This uncertainty, and any actions taken asAs a result of this uncertainty, as well asany restructuring or evolution in the market, there may emerge one or more new viable competitors in the UK banking market or amended rules, may havea material strengthening of one or more of Santander UK’s existing competitors in that market, limiting Santander UK’s ability to increase its customer base and expand its operations, increasing competition for investment opportunities and potentially reducing Santander UK’s market share.
Any of these factors or a combination thereof could result in a significant impact on our operating results, financial condition and prospects.
Ongoing uncertainty within the UK Government and Parliament, and the rejection of the Withdrawal Agreement by the House of Commons, and the risk that this resultsreduction in the Government fallingprofit of Santander UK. Santander UK gives consideration to the competitive position in its management actions, such as pricing, product decisions and our business model. Increasing competition could cause significant market and economic disruption,mean that Santander UK increases rates offered on deposits or lowers the rates it charges on loans, or changes its cost base, any of which could have a material adverse effect on ourits operations, financial condition and prospects.
Continued ambiguity relatingSantander UK’s ability to maintain its competitive position depends, in part, on the success of new products and services it offers its customers and its ability to continue offering products and services from third parties
The success of Santander UK’s withdrawaloperations and its profitability depends, in part, on the success of new products and services it offers to customers. However, Santander UK cannot guarantee that its new products and services will meet the needs or preferences of Santander UK’s customers which may change over time, and such changes may render Santander UK’s products and services obsolete, outdated or unattractive, and Santander UK may not be able to develop new products that meet its customers’ changing needs in a timely manner. As Santander UK expands the range of its products and services, some of which may be at an early stage of development in the UK market, it will be exposed to known, new and potentially increasingly complex risks, including conduct risk, and development expenses. Santander UK’s employees and risk management systems, as well as its experience and that of its partners, may not be sufficient or adequate to enable it to properly handle or manage such risks. In addition, the cost of developing products that are not launched is likely to affect its operating results.
Any or all of the above factors, individually or collectively, could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s loan portfolio is subject to risk of prepayment
Santander UK’s loan portfolio is subject to prepayment risk resulting from the EU, along with any further changesability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in government structure and policies, may lead to further market volatility and changes toa low interest rate environment, prepayment activity increases, which reduces the fiscal, monetary and regulatory landscape in which we operateweighted average lives of Santander UK’s earning assets and could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us and, more generally, on ourSantander UK’s operations, financial condition and prospects.
As a result Santander UK could be required to amortise net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income and there is a risk that Santander UK is not able to accurately forecast amortisation schedules for these purposes which may affect its profitability. Prepayment risk also has a significant adverse impact on credit card and collateralised mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in Santander UK’s funding obligations and reinvestment at lower yields. The risk of prepayment and its ability to accurately forecast amortisation schedules is inherent in Santander UK’s commercial activity and an increase in prepayments or a failure to accurately forecast amortisation schedules could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
If Santander UK is unable to manage the growth of its operations, this could have a material adverse impact on its profitability
Santander UK allocates management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring its businesses when necessary. From time to time, Santander UK evaluates acquisition, disposal, and partnership opportunities that it believes could offer additional value to its shareholders and customers, and are consistent with its business strategy. However, Santander UK may not be able to identify suitable acquisition or partnership candidates, and may not be able to acquire promising targets or form partnerships on favourable terms, or at all. Furthermore, preparations for acquisitions that Santander UK does not complete can be disruptive. Santander UK bases its assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to value, operations, profitability and other matters that may prove to be incorrect. Santander UK’s ability to benefit from any such acquisitions and partnerships will depend in part on its successful integration of those businesses. Such integration entails significant risks such as challenges in retaining the customers and employees of the acquired businesses, unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims and regulatory investigations. Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond Santander UK’s control. Santander UK can give no assurances that its expectations with regard to integration and synergies will materialise.
| – | Santander UK cannot provide assurance that it will, in all cases, be able to manage its growth effectively or to implement its strategic growth decisions, including its ability to: |
| – | Manage efficiently the operations and employees of expanding businesses |
| – | Maintain or grow its existing customer base |
| – | Successfully execute its strategy |
| – | Fully due diligence and assess the value, strengths and weaknesses of investment or acquisition candidates |
| – | Finance strategic opportunities, investments or acquisitions |
| – | Fully integrate strategic investments, or newly-established entities or acquisitions, in line with its strategy |
| – | Align its current information technology systems adequately with those of an enlarged group |
| – | Apply its risk management policy effectively to an enlarged group |
Any or all of these factors, individually or collectively, could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Damage to Santander UK’s reputation could cause harm to its business prospects
Maintaining a positive reputation is critical to attracting and retaining customers, investors and employees and conducting business transactions with counterparties. Damage to the reputation of Santander UK or Banco Santander SA (as the ultimate parent of Santander UK), the reputation of affiliates operating under the ‘Santander’ brand or any of its other brands could therefore cause significant harm to Santander UK’s business and prospects. Harm to Santander UK’s reputation can arise directly
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or indirectly from numerous sources, including, among others, employee misconduct (including the possibility of employee fraud), litigation, regulatory interventions and enforcement action, failure to deliver minimum standards of service and quality, disruption to service due to a cyber-attack, wider IT failures, compliance failures, third party fraud, financial crime, breach of legal or regulatory requirements, unethical behaviour (including adopting inappropriate sales and trading practices), and the activities of customers, suppliers, counterparties and the perception of the financial services industry as a whole. Further, negative publicity regarding Santander UK, whether true or not, may result in harm to Santander UK’s operations, financial condition and prospects.
Santander UK could suffer significant reputational harm if it fails to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of customers to deal with Santander UK, or give rise to litigation or regulatory enforcement actions against Santander UK. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to Santander UK’s financial condition and prospects.
We areCapital and liquidity risk
Santander UK is subject to substantial regulationregulatory capital, liquidity and governmental oversight whichleverage requirements that could adversely affect ourlimit its operations, and changes to these requirements may further limit and could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Capital Requirements Regulation and Capital Requirements Directive IV
Santander UK is subject to capital adequacy requirements applicable to banks and banking groups under directly applicable EU legislation and as adopted by the PRA. Santander UK is required to maintain a minimum ratio of Common Equity Tier 1 (CET1) capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and Tier 1 capital to total adjusted assets for leverage monitoring purposes. Any failure by Santander UK to maintain such ratios above prescribed regulatory minimum levels may result in administrative actions or sanctions. These could potentially include requirements on Santander UK to cease all or certain lines of new business, to raise new capital resources or, in certain circumstances, a requirement for Santander UK existing capital instruments (potentially including Santander UK’s debt securities) to be subjected tobail-in or write down (for more information, see the risk factor entitled ‘Santander UK may become subject to the provisions of the Banking Act, includingbail-in and write down powers’).
The Capital Requirements Directive IV (CRD IV Directive) and the Capital Requirements Regulation (the CRR and together with the CRD IV Directive, CRD IV) implemented changes proposed by the Basel Committee on Banking Supervision (the Basel Committee) to the capital adequacy framework, known as ‘Basel III’ in the EU. In implementing CRD IV, the PRA has required the capital resources of UK banks to be maintained at levels which exceed the base capital requirements prescribed by CRD IV and to cover relevant risks in their business. In addition, a series of capital buffers have been established under CRD IV and PRA rules to ensure a bank can withstand a period of stress. Though the results of the PRA’s 2019 stress test did not impact on the level of capital that Santander UK is required to hold, the PRA could, in the future, as a result of stress testing exercises (both in the UK and EU wide) and as part of the exercise of UK macro-prudential capital regulation tools, or through supervisory actions, require Santander UK to increase its capital resources further, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Liquidity Coverage Ratio (LCR)
The LCR is intended to ensure that a bank maintains an adequate level of unencumbered, high quality liquid assets which can be used to offset the net cash outflows the bank could encounter under a short-term significant liquidity stress scenario. The current minimum requirement for LCR is set at 100%. Santander UK’s current liquidity position is in excess of the minimum requirements set by the PRA, however there can be no assurance that future changes to the applicable liquidity requirements would not have an adverse effect on Santander UK’s financial performance.
Leverage ratios
The Financial Services Act 2012 (the FS Act) also provides the Financial Policy Committee (FPC) of the BoE with certain other macro-prudential tools for the management of systemic risk including quarterly setting of the countercyclical capital buffer rate and powers of direction relating to leverage ratios. All major UK banks and banking groups (including Santander UK) are required to hold enough Tier 1 capital (75% of which must be CET1 capital) to satisfy a minimum leverage ratio requirement of 3.25% and enough CET1 capital to satisfy a countercyclical leverage ratio buffer of 35% of each bank’s institution-specific countercyclical capital buffer rate. The PRA require UK globally systemically important banks(G-SIBs) and Ring Fenced Bodies to hold enough CET1 capital to meet a additional leverage ratio buffer of 35% of the institution-specificG-SIB buffer rate or Systemic Risk Buffer (SRB) rate, and for consolidated groups which include a Ring Fenced Body to hold enough CET1 capital to meet Leverage Ratio GroupAdd-on. The FPC can also direct the PRA to adjust capital requirements in relation to particular sectors through the imposition of sectoral capital requirements. Action taken in the future by the FPC in exercise of any of its powers could result in the regulatory capital requirements applied to Santander UK being further increased, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Further regulatory changes
Regulators in the UK and worldwide have also proposed that additional loss absorbency requirements should be applied to systemically important institutions to ensure that there is sufficient loss absorbing and recapitalisation capacity available in resolution. The BRRD requires that EU Member States ensure that EU banks meet a Minimum Requirement for Eligible Liabilities (MREL). The BoE is required to set MREL for all institutions. The BoE expects banks to comply withend-state MREL requirements by 1 January 2022.
On 7 June 2019 amendments to CRD IV, BRRD and the single resolution mechanism (SRM) through Regulation (EU) 2019/876 of the European Parliament and of the Council amending CRR (CRR II) and Directive (EU) 2019/878 of the European Parliament and of the Council amending CRD IV (CRD V) were published. CRR II and CRD V introduce changes to the leverage ratio, requirements for own fund and MREL, counterparty credit risk, market risk, exposures to central counterparties, large exposures, reporting and disclosure requirements, remuneration, capital conservation measures and the net stable funding ration (NSFR) amongst others. The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. The majority of the provisions of CRRII will apply from 28 June 2021, although certain provisions, such as those relating to definition or own funds were implemented from 27 June 2019.
In addition to the above, regulators in the UK and worldwide have produced a range of proposals for future legislative and regulatory changes which could force Santander UK to comply with certain operational restrictions or take steps to raise further capital, or could increase Santander UK’s expenses and could have a material adverse effect on Santander UK’s operations, financial condition and prospects. These changes, which could affect Santander UK as a whole, include the EU implementation of the Basel Committee’s new market risk framework, which reflects rules made as a result of the Basel Committee’s fundamental review of the trading book. In addition, in December 2017 the Basel Committee published their finalisation of the Basel III framework, with proposed implementation from 1 January 2022. This includes the following elements:
| – | Revisions to the standardised approach for credit risk, credit valuation adjustment risk and operational risk to address certain weaknesses identified by the Basel Committee |
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| – | Additional constraints on the use of internal model approaches for credit risk, and removing the use of internal model approaches for credit valuation adjustment risk and operational risk |
| – | The use of an output floor based on standardised approaches and |
| – | The introduction of a leverage ratio buffer for global systemically important banks and refinements to the definition of the leverage ratio exposure measure. |
The foregoing measures could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
There is a risk that changes to the UK’s capital adequacy regime (including any increase to minimum leverage ratios) may result in increased minimum capital requirements, which could reduce available capital for new business purposes and adversely affect Santander UK’s cost of funding, profitability and ability to pay dividends, continued organic growth (including increased lending), or pursue acquisitions or other strategic opportunities (alternatively Santander UK could be required to restructure its balance sheet to reduce the capital charges incurred pursuant to the PRA’s rules in relation to the assets held, or raise additional capital but at increased cost and subject to prevailing market conditions). In addition, changes to the eligibility criteria for Tier 1 and Tier 2 capital may affect Santander UK’s ability to raise Tier 1 and Tier 2 capital and impact the recognition of existing Tier 1 and Tier 2 capital resources in the calculation of Santander UK’s capital position. Furthermore increased capital requirements may negatively affect Santander UK’s return on equity and other financial performance indicators.
Santander UK’s business could be affected if its capital is not managed effectively or if these measures limit Santander UK’s ability to manage its balance sheet and capital resources effectively or to access funding on commercially acceptable terms. Effective management of Santander UK’s capital position is important to Santander UK’s ability to operate its business, to continue to grow organically and to pursue its business strategy. There is a risk that implementing and maintaining existing and new liquidity requirements, such as through enhanced liquidity risk management systems, may incur significant costs, and more stringent requirements to hold liquid assets may materially affect Santander UK’s lending business as more funds may be required to acquire or maintain a liquidity buffer, thereby reducing future profitability. This could in turn adversely impact Santander UK’s operations, financial condition and prospects.
Liquidity and funding risks are inherent in Santander UK’s business and could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Liquidity risk is the risk that Santander UK either does not have available sufficient financial resources to meet its obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While Santander UK maintains a liquid asset buffer and implements liquidity management processes to seek to mitigate and control these risks, in particular, unforeseen systemic market factors like those experienced during the last financial crisis make it difficult to eliminate these risks completely. There can be no assurance that such circumstances will not reoccur. Extreme liquidity constraints may affect Santander UK’s operations and its ability to fulfil regulatory liquidity requirements, as well as limit growth possibilities. Disruption and volatility in the global financial markets could have a material adverse effect on Santander UK’s ability to access capital and liquidity on financial terms acceptable to it. A sudden or unexpected shortage of funds in the banking system could threaten the stability of the banking system, and lead to increased funding costs, a reduction in the term of funding instruments or require Santander UK to liquidate certain assets, thereby impacting Santander UK’s liquidity position and its ability to pay its debts. If these circumstances were to arise, this could have a material adverse effect on Santander UK’s results, operations, financial condition and prospects.
Santander UK’s cost of funding is directly related to prevailing interest rates and to its credit spreads. Increases in interest rates and Santander UK’s credit spreads can significantly increase the cost of its funding. Changes in Santander UK’s credit spreads are market-driven and may be influenced by market perceptions of its creditworthiness. Changes to interest rates and Santander UK’s credit spreads occur continuously and may be unpredictable and highly volatile.
If wholesale markets financing ceases to be available, or becomes excessively expensive, Santander UK may be forced to raise the rates it pays on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions, significant increases in capital markets funding costs or deposit rates could have a material adverse effect on Santander UK’s interest margins, its cost of funding, access to liquidity and its profitability and therefore on its operations, financial condition and prospects.
In recent years Santander UK has also made use of central bank funding schemes such as the Bank of England’s Funding for Lending scheme and Term Funding Scheme. As at 31 December 2019, Santander UK had drawn £10.8bn of cash under the Term Funding Scheme and £1.0bn of UK Treasury Bills under Bank of England’s Funding for Lending Scheme. A rapid removal or significant reduction, in outstanding quantitative easing purchase programmes could have an adverse effect on Santander UK’s ability to access liquidity and on its funding costs. Any significant reduction or withdrawal of any central bank funding facilities Santander UK may be utilising at any given time could cause an increased dependence on term funding issues and increase its funding costs.
Each of the factors described above could have a material adverse effect on Santander UK, including its ability to access capital and liquidity on financial terms acceptable to it and, more generally, on its operations, financial condition and prospects.
Further, Santander UK aims for a funding structure that is consistent with its assets, avoids excessive reliance on short-term wholesale funding, attracts enduring retail and commercial deposits and provides diversification in products and tenor. Santander UK therefore relies, and will continue to rely, on retail and commercial deposits to fund a significant proportion of lending activities. Theon-going availability of this type of funding is sensitive to a variety of factors outside Santander UK’s control, such as general economic conditions and the confidence of depositors in the economy, in the financial services industry in general, confidence in Santander UK specifically, Santander UK’s credit rating and the availability and extent of deposit guarantees, as well as competition between banks for deposits or competition with other products, such as mutual funds. A change in any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing its ability to access deposit funding on appropriate terms, or at all, in the future, and therefore have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s liquidity planning assumes that customers will continue to make a volume of deposits with Santander UK (particularly demand deposits and short-term time deposits), and Santander UK intends to maintain its emphasis on the use of deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for Santander UK in the future if deposits are not made in the volumes anticipated or are withdrawn at short notice or are not renewed. If a substantial number of depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, there may be a material adverse effect on Santander UK’s operations, financial condition and prospects.
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An adverse movement in Santander UK’s external credit rating would likely increase its cost of funding, require Santander UK to post additional collateral or take other actions under some of its derivative contracts and adversely affect Santander UK’s operations, financial condition and prospects
Credit ratings affect the cost and other terms upon which Santander UK is able to obtain funding. Credit rating agencies regularly evaluate Santander UK, and their credit ratings of Santander UK and Santander UK’s issued debt are based on a number of factors, including Santander UK’s financial strength, the strength of the UK economy and conditions affecting the financial services industry generally.
Any downgrade in the external credit ratings assigned to Santander UK or any of Santander UK’s debt securities could have an adverse impact on Santander UK. In particular, such downgrade in Santander UK’s credit ratings could increase its borrowing costs and could require it to post additional collateral or take other actions under some of derivatives, loan facilities or other financial contracts, and could limit its access to capital markets and have a material adverse effect on its operations, financial condition and prospects. For example, a credit rating downgrade could have a material adverse effect on Santander UK’s ability to sell or market certain products, engage in certain longer-term or derivatives transactions and retain its customers or investors, particularly those who need a minimum rating threshold in order to transact or invest.
Any of these results of a credit rating downgrade could, in turn, result in outflows and reduce Santander UK’s liquidity and have an adverse effect on Santander UK, including its operations, financial condition and prospects. For example, Santander UK estimates that at 31 December 2019, if Fitch, Moody’s and Standard & Poor’s were concurrently to downgrade the long-term credit ratings of Santander UK plc by one notch, and thereby trigger a short-term credit rating downgrade, this could result in an outflow of £1.5bn of cash and collateral. A hypothetical two notch downgrade would result in a further outflow of £1.6bn of cash and collateral at
31 December 2019. These potential outflows are captured under the LCR regime. However, while certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, whether any downgrade precipitates changes to the way that the financial institutions sector is rated, and assumptions about the ratings of other financial institutions and the potential behaviours of various customers, investors and counterparties. Actual outflows will also depend upon certain other factors including any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from a loss of unsecured funding (such as from money market funds) or loss of secured funding capacity.
There can be no assurance that the credit rating agencies will maintain Santander UK’s current credit ratings or outlooks. A failure to maintain favourable credit ratings or outlooks could increase Santander UK’s cost of funding, adversely affect Santander UK’s interest margins, and reduce its ability to secure both long-term and short-term funding. If a downgrade of a Santander UK’s member’s long-term credit ratings were to occur, it could also impact the short-term credit ratings of other members of Santander UK. The occurrence of any of these events could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Negative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could have a material adverse effect on Santander UK’s operations, financial condition, prospects and the marketability and trading value of its securities. This might also have an impact on Santander UK’s own credit rating, borrowing costs and ability to secure funding. Negative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could also have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and companies, further depressing economic activity, increasing unemployment and reducing asset prices, which could in turn have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Changes in Santander UK’s pension liabilities and obligations could have a materially adverse effect on Santander UK’s operations, financial condition and prospects
The majority of current employees are provided with pension benefits through defined contribution arrangements. Under these arrangements Santander UK’s obligation is limited to the cash contributions paid. Santander UK provides retirement benefits for many of its former and current employees in the UK through a number of defined benefit pension schemes established under trust. Santander UK plc is the principal employer under the majority of these schemes, but it has only limited control over the rate at which it pays into such schemes. Under the UK statutory pension funding requirements employers are usually required to contribute to the schemes at the rate they agree with the scheme trustees although, if they cannot agree, the rate can be set by the Pensions Regulator. The scheme trustees may, in the course of discussions about future valuations, seek higher employer contributions. The scheme trustees’ power in relation to the payment of pension contributions depends on the terms of the trust deed and rules governing the pension schemes, but, in some cases, the scheme trustees may have the unilateral right to set the employer’s relevant contribution.
The Pensions Regulator has the power to issue a financial support direction to companies within a group in respect of the liability of employers participating in the UK defined benefit pension schemes where that employer is a service company, or is otherwise ‘insufficiently resourced’ (as defined for the purposes of the relevant legislation). As some of the employers within Santander UK are service companies, if the Pensions Regulator determines that they have become insufficiently resourced and no suitable mitigating action is undertaken, other companies within Santander UK which are connected with or an associate of those employers are at risk of a financial support direction in respect of those employers’ liabilities to the defined benefit pension schemes in circumstances where the Pensions Regulator properly considers it reasonable to issue one. Such a financial support direction could require the companies to guarantee or provide security for the pension liabilities of those employers, or could require additional amounts to be paid into the relevant pension schemes in respect of them.
The Pensions Regulator can also issue contribution notices if it is of the opinion that an employer has taken actions, or failed to take actions, deliberately designed to avoid meeting its pension promises or which are materially detrimental to the scheme’s ability to meet its pension promises. A contribution notice can be issued to any company or individual that is connected with or an associate of such employer in circumstances where the Pensions Regulator considers it reasonable to issue it and multiple notices could be issued to connected companies or individuals for the full amount of the debt. The risk of a contribution notice being imposed may inhibit Santander UK’s freedom to restructure or to undertake certain corporate activities. There is a risk that Santander UK could incur an obligation to make a contribution to the scheme by virtue of section 75 or 75A of the Pensions Act 1995 as a result of a reorganisation or disposal of Santander UK’s businesses.
Should the value of assets to liabilities in respect of the defined benefit schemes operated by Santander UK record a deficit or an increased deficit (as appropriate), due to either a reduction in the value of the pension fund assets (depending on the performance of financial markets) not matched by a fall in the pension fund liabilities and/or an increase in the scheme liabilities not matched by an increase in the pension fund assets due to changes in legislation, mortality assumptions, discount rate assumptions, inflation, or other factors, or there is a change in the actual or perceived strength of the employer’s covenant, this could result in Santander UK having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of its business and reduce its capital resources. While Santander UK can control a number of the above factors, there are some over which Santander UK has no or limited control. Although the trustees of the defined benefit pension schemes are obliged to consult with Santander UK before changing the pension schemes’ investment strategy, the trustees have the final say and ultimate responsibility for investment strategy rests with them.
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Changes in UK legislation and regulation to address perceived failings in pension protection following recent high profile company insolvencies with large pension deficits may also affect Santander UK’s position, Specific areas where concerns have been raised are levels of dividends where there is a pension scheme with a deficit and the length of time taken to address deficits. Changes in legislation or regulation could result in Santander UK having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of its business and reduce its capital resources.
Any increase in Santander UK’s pension liabilities and obligations as a result of the foregoing factors could have a material adverse effect on Santander UK’s operations, financial conditions and prospects.
Market risks
Santander UK’s financial results are constantly exposed to market risk. Santander UK is subject to fluctuations in interest rates and other market risks, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Market risk refers to the probability of variations in Santander UK’s net interest income or in the market value of its assets and liabilities due to volatility of interest rates, exchange rates or equity prices.
Changes in interest rates would affect the following areas, among others, of Santander UK’s business:
| – | Net interest income |
| – | The value of Santander UK’s derivatives transactions |
| – | The market value of Santander UK securities holdings |
| – | The value of Santander UK’s loans and deposits |
| – | The volume of loans originated |
Interest rates are highly sensitive to many factors beyond Santander UK’s control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors. Variations in interest rates could affect the interest earned on Santander UK’s assets and the interest paid on its borrowings, thereby affecting its net interest income, which comprises the majority of its revenue, reducing its growth rate and profitability and potentially resulting in losses. In addition, costs Santander UK incurs putting into place strategies to reduce interest rate exposure could increase in the future, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Increases in interest rates may reduce the volume of loans originated by Santander UK. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of Santander UK’s customers to prepay or refinance fixed-rate loans, reduce the value of its financial assets and reduce gains or require Santander UK to record losses on sales of Santander UK’s loans or securities, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Due to the historically low interest rate environment in the UK in recent years, the rates on many of Santander UK’s interest-bearing deposit products have been priced at or near zero, which may limit Santander UK’s ability to further reduce customer rates in the event of further cuts in BoE Base Rate. If a generally low interest rate environment in the UK persists in the long term, it may be difficult to increase Santander UK’s net interest income, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK is exposed to risks relating to the integrity and continued existence of reference rates
LIBOR and other interest rates are used in securities issued and held by Santander UK and in contracts with its financial counterparts, customers and investors. Reference rates and indices, including LIBOR and other interest rate benchmarks are subject to national, international and other regulatory guidance and proposals for reform and transition to alternative rates. On 29 November 2017, the FCA announced that its Working Group on Sterling Risk-Free Rates was to be mandated with implementing a broad-based transition to the Sterling Overnight Index Average (SONIA) over the next four years across sterling bond, loan and derivative markets, so that SONIA is established as the primary sterling interest rate benchmark and regulators in the United Kingdom continue to seek the replacement of LIBOR by the end of 2021.
Any such changes to, or replacement of benchmarks may cause contracts in which they are used to perform differently than in the past, or may have other consequential effects on any of Santander UK’s rights and obligations which depend on such benchmarks and any fallbacks. In particular, the transition from GBP LIBOR to SONIA and the elimination of the LIBOR benchmark will require an adjustment to the terms of financial contracts to which Santander UK is a party which relate to LIBOR. This could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
It is not yet clear whether LIBOR will cease to exist entirely before the end of 2021, whether the use of LIBOR will be made unlawful or impermissible in future, and whether there will be any transitional arrangements set out either by law, regulation or market practice. The lack of a legal or regulatory framework for the automatic transition of legacy contracts and agreements, makes such transition more complex and subject to risks that could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK has dedicated considerable bank-wide resources to prepare itself, and its customers, for the cessation of LIBOR and other legacy interest rate benchmarks:
| – | Santander UK has a fully established LIBOR transition governance structure, including Senior Management Forums meeting monthly, and thematic and product-level working groups. In addition, regular reports are received by ALCO and Board Risk Committee. |
| – | Santander UK recognises that LIBOR transitioning presents potential risks for its customers. Santander UK completed a first phase of customer communication with the website publication of an education statement on the replacement of LIBOR, and is actively planning a second phase, tailored to individual customer needs. |
| – | Santander UK rolled out LIBOR transition training to all its staff. Santander UK supported this with regular internal publications and communications, and dedicated workshops to help colleagues work together and share insights on LIBOR transitioning. |
| – | Santander UK has been a highly active contributor to discussions on LIBOR transitioning through direct participation at a wide range of industry forums. |
This approach allowed Santander UK to execute several targeted initiatives in 2019, including becoming the first UK bank to switch an existing LIBOR referencing securitisation to SONIA, switching Santander UK’s pension scheme derivative exposures from LIBOR-linked swaps to gilts, and completing a series of derivative trade compressions to reduce Santander UK’s gross LIBOR exposure.
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Santander UK’s most significant exposures are to GBP LIBOR, and mainly represent derivatives transacted to hedge its balance sheet risks, corporate loans and medium-term funding. At 31 December 2019, Santander estimates the notional value of its contracts referencing post-2021 LIBOR benchmarks to be £88bn. For details of the notional value of derivative hedging instruments by benchmark interest rate, see Note 11 to the Consolidated Financial Statements.
When LIBOR is replaced or ceases to exist (or if the methodology for calculating LIBOR or any successor benchmark rate changes for any reason), interest rates on Santander UK’s floating rate obligations, loans, deposits, derivatives, and other financial instruments linked to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. In addition, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of Santander UK’s floating rate obligations, loans, deposits, derivatives, and other financial instruments linked to LIBOR rates. Any such issues relating to LIBOR or other benchmarks or reference rates (including SONIA) could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Market conditions have resulted in, and could continue to result in, material changes to the estimated fair values of Santander UK’s financial assets. Negative fair value adjustments could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Santander UK has material exposures to securities, loans, derivatives and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting the prevailing market conditions, may result in negative changes in the fair values of Santander UK’s financial assets. In addition, the value ultimately realised by Santander UK on disposal may be lower than the current fair value, during the last global financial crisis, financial markets were subject to periods of significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. Any of these factors could require Santander UK to record negative fair value adjustments, which could have a material adverse effect on its operations, financial condition and prospects.
In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, Santander UK’s valuation methodologies require it to make assumptions, judgements and estimates in order to establish fair value.
Reliable assumptions are difficult to make and are inherently uncertain. Moreover, valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK invests in debt securities of the UK Government largely for liquidity management purposes. At 31 December 2019, approximately 9% of Santander UK’s total assets and 48% of Santander UK’s securities portfolio were comprised of debt securities issued by the UK Government. Any failure by the UK Government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
If the level ofnon-performing loans increases or the credit quality of Santander UK’s loans deteriorates in the future, or if Santander UK’s loan loss reserves are insufficient to cover loan losses, this could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of Santander UK’s businesses.Non-performing or low credit quality loans have in the past, and could continue to, have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In particular, the amount of Santander UK’s reportednon-performing loans may increase in the future as a result of growth in Santander UK’s total loan portfolio, including as a result of loan portfolios that Santander UK may acquire in the future (the credit quality of which may turn out to be worse than Santander UK had anticipated), or factors beyond Santander UK’s control, such as adverse changes in the credit quality of Santander UK’s borrowers and counterparties, a general deterioration in the UK or global economic conditions, the impact of political events, events affecting certain industries or events affecting financial markets and global economies.
There can be no assurance that Santander UK will be able to effectively control the level of impaired loans in, or the credit quality of, its total loan portfolio, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Interest rates payable on a significant portion of Santander UK’s outstanding mortgage loan products fluctuate over time due to, among other factors, changes in the BoE Base Rate. As a result, borrowers with variable interest rate mortgage loans are exposed to increased monthly payments when the related mortgage interest rate adjusts upward. Similarly, borrowers of mortgage loans with fixed or introductory rates adjusting to variable rates after an initial period are exposed to the risk of increased monthly payments at the end of this period. Over the last few years both variable and fixed interest rates have been at historically low levels, which has benefited borrowers of new loans and those repaying existing variable rate loans regardless of special or introductory rates. Future increases in borrowers’ required monthly payments may result in higher delinquency rates and losses related tonon-performing loans in the future. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. These events, alone or in combination, may contribute to higher delinquency rates and losses for Santander UK, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s current loan loss reserves may not be adequate to cover an increase in the amount ofnon-performing loans or any future deterioration in the overall credit quality of Santander UK’s total loan portfolio. Santander UK’s loan loss reserves are based on Santander UK’s current assessment of various factors affecting the quality of its loan portfolio, including its borrowers’ financial condition, repayment abilities, the realisable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. Many of these factors are beyond Santander UK’s control. As a result, there is no precise method for predicting loan and credit losses, and no assurance can be provided that Santander UK’s current or future loan loss reserves will be sufficient to cover actual losses.
If Santander UK’s assessment of and expectations concerning the above mentioned factors differ from actual developments Santander UK may need to increase its loan loss reserves, which may adversely affect Santander UK’s operations, financial condition and prospects. Additionally, in calculating its loan loss reserves, Santander UK employs qualitative tools and statistical models which may not be reliable in all circumstances and which are dependent upon data that may not be complete. If Santander UK is unable to control or reduce the level of itsnon-performing or poor credit quality loans, this could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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The value of the collateral, including real estate, securing Santander UK’s loans may not be sufficient, and Santander UK may be unable to realise the full value of the collateral securing Santander UK’s loan portfolio
The value of the collateral securing Santander UK’s loan portfolio may significantly fluctuate or decline due to factors beyond Santander UK’s control, including macroeconomic factors affecting the UK’s economy. Santander UK’s residential mortgage loan portfolio is one of its principal assets, comprising 81% of Santander UK’s loan portfolio at 31 December 2019. As a result, Santander UK is highly exposed to developments in the residential property market in the UK.
House price growth has slowed since the UK Referendum to exit the EU, most noticeably in London, although UK house prices have generally continued to be supported by certain economic fundamentals including historically low mortgage rates and low unemployment rates. Nevertheless, any increase in house prices may be limited given low levels of consumer confidence and low levels of real earnings growth. The depth of the previous house price declines as well as the continuing uncertainty as to the extent and sustainability of the UK economic recovery will mean that losses could be incurred on loans should they go into possession.
The value of the collateral securing Santander UK’s loan portfolio may also be adversely affected by force majeure events such as natural disasters like floods or landslides exacerbated by climate change trends. Any force majeure event may cause widespread damage and could have an adverse impact on the economy of the affected region and may therefore impair the asset quality of Santander UK’s loan portfolio in that area.
Santander UK may also not have sufficientlyup-to-date information on the value of collateral, which may result in an inaccurate assessment for impairment losses on loans secured by such collateral.
If any of the above events were to occur, Santander UK may need to make additional provisions to cover actual impairment losses of its loans, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Legal & regulatory risks
Santander UK is subject to substantial and evolving regulation and governmental oversight
As a financial services group, we areSantander UK is subject to extensive financial services laws, regulations, administrative actions and policies in the UK, the EU and in each other location in which we operate. As well as being subject toSantander UK regulation, as partoperates. For a discussion of the Banco Santander group, we are also impacted through regulation by the Banco de España (the Bank of Spain)principal laws and at a corporate level, by the European Central Bank (ECB), and various legal and regulatory regimes (including the US) that have extra-territorial effect.
The laws, regulations and policies to which we areSantander UK is subject, may be changed at any time. In addition,see “Regulation of the interpretation and the application of those laws, regulations and policies by regulators are also subject to change. Furthermore, thereSantander UK group”. The sector is uncertainty regarding theon-shoring of EU regulations into the UK upon the UK’s exit from the EU and the changes that will be implemented in that process (including the further powers that will be given to UK regulators), as well as regarding the level of convergence or divergence with EU regulations, initiatives and reforms (including during any transitional period). Extensive legislation and implementing regulations affecting the financial services industry have recently been adopted in regions that directly or indirectly affect our business, including Spain, the US, the EU, Latin America and other jurisdictions.
The manner in which financial services laws, regulations and policies are applied to the operations of financial institutions is still evolving. Moreover, to the extent these laws, regulations and policies apply to us, we may face higher compliance costs. Any legislative or regulatory actions and any required changes to our business operations resulting from such laws, regulations and policies as well as any deficiencies in our compliance with such laws, regulations and policies, could result in significant loss of revenue, impact our strategy, limit our ability to pursue business opportunities in which we might otherwise consider engaging and limit our ability to provide certain products and services. They may also affect the value of assets that we hold, requiring us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our operations, financial condition and prospects. Accordingly, there can be no assurance that future changes in laws, regulations and policies or in their interpretation or application will not adversely affect us.
During periods of market turmoil in the past 10 years, there have beenfacing unprecedented levels of government and regulatory intervention and scrutiny, and changes to the regulations governing financial institutions and the conduct of business. In addition, regulatory and governmental authorities have continued to consider further enhanced or new legal or regulatory requirements intended to reduce the probability and impact of future crises or(or otherwise assure the stability of institutions under their supervision. Thissupervision), enhance consumer protection and improve controls in relation to financial crime-related risks. Santander UK expect regulatory and government intervention in the banking sector to remain high for the foreseeable future. An intensive approach to supervision is maintained in the United Kingdom by the Prudential Regulation Authority (PRA), the Lending Standards Board (LSB), Financial Conduct Authority (FCA), the Payment Systems Regulator (PSR) and the Competition and Markets Authority (CMA).
As well as being subject to UK regulation, as part of the Banco Santander group, Santander UK is also affected by other regulators such as the Banco de España (the Bank of Spain) and the European Central Bank (ECB), as well as various legal and regulatory regimes (including the US) that have extra-territorial effect. Extensive legislation and implementing regulations affecting the financial services industry have recently been adopted in regions that directly or indirectly affect Santander UK’s business, including Spain, the US, the EU and other jurisdictions.
The manner in which financial services laws, regulations and policies are applied to the operations of financial institutions has gone through great change which is still being implemented and reviewed. Recent proposals and measures taken by governmental, tax and regulatory authorities and further future changes in supervision and regulation (in particular in the UK), which are beyond ourSantander UK’s control and could materially affect our business, the value of assets and operations and result in significant increases in operational and compliance costs. Products and services offered by us could also be affected. Santander UK’s business.
Changes in UK legislation and regulation to address the stability of the financial sector may also affect ourSantander UK’s competitive position, particularly if such changes are implemented before international consensus is reached on key issues affecting the industry. Although we work closely
To the extent these laws, regulations and policies apply to it, Santander UK may face higher compliance costs. Santander UK may lack the capacity to readily respond to multiple regulatory or government policy changes simultaneously. Any legislative or regulatory actions and any required changes to Santander UK’s business operations resulting from such laws, regulations and policies as well as any deficiencies in Santander UK’s compliance with our regulatorssuch laws, regulations and continually monitorpolicies could result in significant loss of revenue, could have an impact on Santander UK’s strategy, limit its ability to pursue business opportunities in which Santander UK might otherwise consider engaging, limit Santander UK’s ability to provide certain products and services and result in enforcement action and the situation, future changes in law, regulation, fiscalimposition of financial and other penalties. They may also affect the value of assets that Santander UK holds, requiring Santander UK to increase its prices thereby reducing demand for Santander UK’s products or other policies can be unpredictable and are beyond our control. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will nototherwise have a material adverse effect on ourits operations, financial condition and prospects. Accordingly, there can be no assurance that future changes in laws, regulations and policies or in their interpretation or application by Santander UK or by regulatory authorities will not adversely affect Santander UK.
Specific examples of areas where regulatory changes and increased regulatory scrutiny could have a material adverse effect on Santander UK’s operations, financial condition and prospects include, but are not limited to, the following:
| – | Banking Reform: in accordance with the provisions of the Financial Services (Banking Reform) Act 2013 UK banking groups that hold significant retail deposits, including Santander UK, were required to separate or ‘ring-fence’ their retail banking activities from their wholesale banking activities by 1 January 2019. Santander UK completed its ring-fencing plans in advance of the legislative deadline of 1 January 2019. However, given the complexity of the ring-fencing regulatory regime and the material impact on the way Santander UK now conducts its business operations in the UK, there is a risk that Santander UK and/or Santander UK plc may be found to be in breach of one or more ring-fencing requirements. This might occur, for example, if prohibited business activities are found to be taking place within the ring-fence, mandated retail banking activities are found being carried on in a UK entity outside the ring-fenced part of the group or Santander UK breached a PRA ring-fencing rule. From 1 January 2019, if Santander UK were found to be in breach of any of the ring-fencing requirements placed upon it under the ring-fencing regime, it could be subject to supervisory or enforcement action by the PRA, the consequences of which might include substantial financial penalties, imposition of a suspension or restriction on Santander UK’s UK activities or, in the most serious of cases, forced restructuring of the UK group, entitling the PRA (subject to the consent of the UK Government) to require the sale of a Santander ring-fenced bank or other parts of the UK group. |
| – | Competition: reviews and investigations by competition authorities (which in the United Kingdom include the CMA, the FCA and the PSR) into any aspect of Santander UK’s operations or the functioning of any markets in which Santander UK operates, including, but not limited to, personal current accounts, mortgages and the SME retail banking market. |
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| – | Payments: Santander UK has been required to make systems changes and update processes to comply with a number of new payments regulations at a European as well as domestic UK Level. Within the UK, the Payment Systems Regulator has mandated Santander UK build systems and processes for both Confirmation of Payee as well as the Contingent Reimbursement Model Code (“CRM”) which both aim to reduce the level of customer fraud (particularly through our customer’s manipulation into making payments known as “Authorised Push Payment” fraud). Under these standards, Santander UK will assume responsibility for certain categories of customer losses and any inherent failing in system design may lead to fines from regulators and/or compensation being paid to customers. Any requirement to make such changes, any liability to customers, any regulatory fines, or any reputational damage, could have a material adverse effect on Santander UK’s operations, financial condition and prospects. At a European level, the Second Payment Services Directive (PSD2) is a fundamental piece of payments-related legislation in Europe, the first part of which came into force in January 2018. The regulation aims to harmonise payment processing across Europe, and is being implemented in the UK by the FCA. In the UK, PSD2 introduced Open Banking, which opened up access to customers’ online account and payments data to third party providers (TPPs). Customers are able to give secure access to certain TPPs authorised by the FCA or other European regulators to access account information and to make payments from current accounts. Following the CMA’s retail banking market investigation, the nine largest current account providers in the UK (theCMA-9), including Santander UK, were required to accelerate certain of the PSD2 requirements and implement Open Banking by 13 January 2018. Open Banking and PSD2 both have the potential to exacerbate a number of existing risks including data loss/data protection, cyber security, fraud and wider financial crime risk, which in turn could give rise to increased costs, litigation risk and risk of regulatory investigation and enforcement activity. Examples of the heightened risk include the risk of fraud relating to activities of a TPP pursuant to which funds are redirected to a third party not chosen by the customer; and the risk of data misuse by a TPP/other third party. If the arrangements that Santander UK has made to comply with Santander UK’s Open Banking obligation prove to be inadequate or incompatible with legal and regulatory requirements or expectations, Santander UK could be required to make extensive and costly changes to Santander UK’s systems and controls, policies and practices. Santander UK might also be fined by regulators, be subject to compensation claimed by customers and might suffer reputational damage. Any requirement to make such changes, any liability to customers, any regulatory fines, or any reputational damage, could have a material adverse effect on Santander UK’s operations, financial condition and prospects. |
| – | Data Privacy: Failure to comply with emerging and recently implemented laws and regulations concerning data privacy and localisation in a number of jurisdictions across the globe may result in regulatory sanctions. In particular, the coming into effect of GDPR on 25 May 2018 has introduced new obligations on data controllers and rights for data subjects. The implementation of the GDPR has required substantial amendments to Santander UK’s procedures and policies. The changes have had, and could continue to have, an adverse impact on Santander UK’s business by increasing its operational and compliance costs. If there are breaches of the GDPR obligations, Santander UK could face significant administrative and monetary sanctions as well as reputational damage. The occurrence of any of these events could have a material adverse effect on Santander UK’s operations, financial condition and prospects. |
| – | LIBOR: There is uncertainty as to whether LIBOR will cease to exist entirely before the end of 2021, whether the use of LIBOR will be made unlawful or impermissible in future, and whether there will be any transitional arrangements set out either by law, regulation or market practice. The lack of a legal or regulatory framework for the automatic transition of legacy contracts and agreements makes such transition more complex and subject to risks that could have a material adverse effect on Santander UK’s operations, financial condition and prospects. |
| – | Evolving conduct and regulatory policy: the FCA is currently at various stages (from finalised rules and guidance through to consultation and implementation) in respect of a number of initiatives which could impact or require changes to Santander UK’s approach to products and services. This includes but is not limited to a debate in relation to a Duty of Care for financial services firms or potential changes to the Principles for Business, Price discrimination and Fair Pricing initiatives, Guidance on the Variation of Terms in Financial Services Contracts, and reforms to the overdraft market through the High Cost Credit Review. In parallel, the CMA is developing its role and responsibilities in relation to consumer protection and considering the impact of ‘loyalty penalties’ on consumers, which could result in changes for firms, including those in the financial services sector. Regulatory changes arising from these initiatives could have a material adverse effect on Santander UK’s operations, financial condition and prospects. |
Santander UK may become subject to the provisions of the Banking ReformAct, includingbail-in and write down powers
The special resolution regime set out in the Banking Act 2009 provides HM Treasury, the BoE, the PRA and the FCA with a variety of powers for dealing with UK deposit taking institutions (and, in certain circumstances, their holding companies) that are failing or likely to fail, including: (i) to take a bank or bank holding company into temporary public ownership; (ii) to transfer all or part of the business of a bank to a private sector purchaser; or (iii) to transfer all or part of the business of a bank to a ‘bridge bank’. The special resolution regime also comprises a separate insolvency procedure and administration procedure each of which is of specific application to banks. These insolvency and administration measures may be invoked prior to the point at which an application for insolvency proceedings with respect to a relevant institution could be made.
If an instrument or order were made under the Banking Act in respect of an entity in Santander UK, such instrument or order (as the case may be) may, among other things: (i) result in a compulsory transfer of shares or other securities or property of such entity; (ii) have an impact on the rights of the holders of shares or other securities issued by Santander UK or such entity or result in the nullification or modification of the terms and conditions of such shares or securities; or (iii) result in thede-listing of the shares and/or other securities of such entity. In addition, such an order may affect matters in respect of Santander UK or such entity and/or other aspects of the shares or other securities of Santander UK or such entity, which may negatively affect the ability of Santander UK or such entity to meet its obligations in respect of such shares or securities.
Further, amendments to the Insolvency Act 1986 and secondary legislation have introduced changes to the treatment and ranking of certain debts with the result that certain eligible deposits will rank in priority to the claims of ordinary (i.e.non-preferred) unsecured creditors in the event of an insolvency. This may negatively affect the ability of unsecured creditors to recover sums due to them in an insolvency scenario.
If a‘bail-in’ order were made under the Banking Act 2009 as amended by The Financial Services (Banking Reform) Act 2013 (the Banking Reform Act) established a ring-fencing framework under the Financial Services and Markets Act 2000 (FSMA) pursuant(as to which, UK banking groups that hold significant retail deposits were required to separate or ‘ring-fence’ their retail banking activities from their wholesale banking activities by 1 January 2019. Thesee further ‘Regulation of Santander UK group is subject- The Banking Act’). Such an order would be based on the principle that such creditors should receive no less favourable treatment than they would have received had the bank entered into insolvency immediately before the coming into effect of thebail-in power. Thebail-in power includes the power to cancel or write down (in whole or in part) certain liabilities or to modify the ring-fencing regulatory regime introducedterms of certain contracts for the purposes of reducing or deferring the liabilities of a bank under resolution and the power to convert certain liabilities into shares (or other instruments of ownership) of the bank. Thebail-in power under the Banking Reform Act and adopted through secondary legislation which it is required to comply with from 1 January 2019.may potentially be exercised in respect of any unsecured debt securities issued by a bank under resolution or an entity in Santander UK, regardless of when they were issued. Accordingly, thebail-in power under the Banking Act could be exercised in respect of Santander UK group has implementedUK’s debt securities. Public financial support would only be used as a last resort, if at all, after having assessed and utilised, to the separation – or ring-fencing – of its core retail and small business deposit taking activities from its wholesale markets and investment banking activities.
Santander UK plc, beingmaximum extent practicable, the main banking entity withinresolution tools including the ring-fenced part of the UK group, will serve our retail, commercial and corporate customers. The majority of our customer loans and assets as well as customer deposits and liabilities will remain within Santander UK plc or Cater Allen Limited, which is also a ring-fenced bank. Wholesale markets and investment banking activities which, from 1 January 2019, are prohibited from being transacted within the ring-fenced bank principally included our derivatives business with financial institutions and certain corporates, elements of our short term markets business, Santander UK plc’s branches in Jerseybail-in tool and the Isleoccurrence of Man, and the United States (US) branch of Abbey National Treasury Services plc (ANTS).
Implementation of ring-fencing has involved material structural and operational changescircumstances in whichbail-in powers would need to Santander UK plc’s business and the corporate group structurebe exercised in the UK during 2018. Following consent from the PRA to the application to the High Court of England and Wales (the Court) for approval of our ring-fencing transfer scheme (the Scheme), our Scheme was approved by the Court on 12 June 2018.
In accordance with the Scheme: (i) ANTS has transferred the majority of its business; with products, transactions, arrangements and customers and other stakeholders which are permitted in the ring fence transferred to Santander UK plc and products, transactions, arrangements and customers and other stakeholders which are prohibited within the ring-fence transferred to the London branch of Banco Santander SA; and (ii) Santander UK plc has transferred its prohibited business and certain specified business that is permitted within the ring-fence to the London branch of Banco Santander SA. These transfers of business were implemented during July 2018.
On 11 December 2018, the Royal Court of Jersey approved the transfer of the business of the Jersey branchrespect of Santander UK plcor any entity in Santander UK would have a material adverse effect on Santander UK’s operations, financial condition and prospects.
The PRA also has the power to make rules requiring a new Jersey branchparent undertaking of ANTS, which isa bank to make arrangements to facilitate the exercise of resolution powers, including a power to require a member of the Santander UK Group Holdings plca banking group outside the ring-fence, by wayto issue debt instruments. The exercise of a court-sanctioned transfer scheme under Jersey law (the Jersey Scheme). On 13 December 2018, the Isle of Man High Court of Justice approved the transfer of the business of the Isle of Man branch of Santander UK plc to a new Isle of Man branch of ANTS, by way of a court-sanctioned transfer scheme under Isle of Man law (the Isle of Man Scheme). The effective date of the Jersey Scheme and the Isle of Man Scheme was 17 December 2018.
ANTS has ceased the activities of its US branch, and surrendered its US licence with effect from 14 December 2018.
We completed our ring-fencing plans in advance of the legislative deadline of 1 January 2019. However, given the complexity of the ring-fencing regulatory regime and the materialsuch powers could have an impact on the way the group now conducts its business operations in the UK, there is a risk thatliquidity of Santander UK plc and/or Cater Allen Limited may be found to be in breachUK’s debt instruments and could materially increase Santander UK’s cost of one or more ring-fencing requirements. This might occur, for example, if prohibited business activities are found to be taking place within the ring-fence or core, mandated retail banking activities are found being carried on in a UK entity outside the ring-fenced part of the group.funding.
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From 1 January 2019, ifIn addition, the BRRD provides for resolution authorities to have the power to require institutions and groups to make structural changes to ensure legal and operational separation of ‘critical functions’ from other functions where necessary, or to require institutions to limit or cease existing or proposed activities in certain circumstances. As a result of changes to the PRA Rulebook made to implement the BRRD, Santander UK group were foundis now required to beidentify such ‘critical functions’ as part of its resolution and recovery planning. If used in breachrespect of any of the ring-fencing requirements placed upon it under the ring-fencing regime, it could be subject to enforcement action by the PRA, the consequences of which might include substantial financial penalties, imposition of a suspension or restriction on the group’s UK activities or, in the most serious of cases, forced restructuring of the UK group, entitling the PRA (subject to the consent of the UK Government) to require the sale of a Santander ring-fenced bank or other parts of the UK group. Any of those sanctions could, if imposed, have a material adverse effect on our operations, financial condition and prospects.
The restructuring activities and migrations of businesses, assets and customer relationships mentioned above have had a material impact on how the Santander UK, group conducts its business. While it has sought to implement each of the required changes with minimal impact on customers, the Santander UK group is unable to predict with certainty the attitudes and reaction of its customers. The structural changes which have been requiredthese ex ante powers could have a material adverse effect on ourSantander UK’s operations, financial condition and prospects.
EU fiscalSantander UK must comply with anti-money laundering, anti-terrorism, anti-bribery and banking union
The European banking union is expected to be achieved through new harmonised banking rules (in a single rulebook)corruption, sanctions andanti-tax evasion laws and regulations and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed atfailure to prevent or detect any illegal or improper activities fully or on a European level. Its two main pillars are the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).
The SSM (comprising both the ECB and the national competent authorities) is designed to assist in making the banking sector more transparent, unified and safer. On 4 November 2014, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular direct supervision of 119 significant banks (at 5 December 2017) in the eurozone, including Banco Santander SA.
Regulation (EU) No. 806/2014 of the European Parliament and the Council of the EU (the SRM Regulation) became effective from 1 January 2015 and establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and Single Resolution Fund (SRF). The new Single Resolution Board (SRB), which is the central decision-making body of the SRM fully assumed its resolution powers on 1 January 2016. The SRB is responsible for managing the SRF.
Further, regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as Banco Santander SA’s main supervisory authority may have a material impact on our operations, financial condition and prospects and may be impacted by the terms of the UK’s exit from the EU (for more information, see the risk factor entitled ‘Exposure to UK political developments, including the ongoing negotiations between the UK and EU,timely basis could have a material adverse effect on us’).
Other regulatory reforms adoptedSantander UK’s operations, financial condition or proposed in the wake of the financial crisisprospects
The revised andre-enacted Markets in Financial Instruments legislation (MiFID) replaces the existing MiFID framework and comprises the Directive 2014/65 of the European Parliament and of the Council, of 15 May 2014 and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID2) and the Regulation 600/2014 of the European Parliament and of the Council of 15 May 2014 and amending Regulation (EU) No 648/2012 (MiFIR). The substantive provisions of MiFID came into force on 3 January 2018 and introduced an obligationSantander UK is required to trade certain classes ofOver-the-Counter (OTC) derivative contracts on trading venues. Certain details remain to be clarified in further binding technical standards to be adopted by the European Commission (the Commission). MiFID2 and MiFIR may lead to changes which negatively impact our profit margins, require us to adjust our business practices or increase our costs (including compliance costs). It is possible that the measures and procedures we have introduced might, in future, be deemed to be misaligned with MiFID obligations, or that individuals within the business may not fully comply with the new procedures. If there are breaches of our MiFID obligations or ofapplicable anti-money laundering (AML), counter-terrorism financing (CTF), anti-bribery and corruption, sanctions,anti-tax evasion and other existing laws and regulations relatingin the jurisdictions in which Santander UK operates. These laws and regulations require Santander UK, among other things, to conduct customer due diligence (including in respect of sanctions and politically-exposed person screening), ensure account and transaction information is kept up to date and implement effective financial crime we could face significant administrative,policies and procedures detailing what is required from those responsible in order to counter financial crime risks. Santander UK is also required to conduct financial crime training for its staff and to report suspicious transactions and activity to appropriate law enforcement.
The policies and procedures require the implementation and embedding of effective controls and monitoring within the businesses of Santander UK, which requires ongoing changes to systems, technology and operational activities. Comprehensive and risk based financial crime training at a group-wide wide and business unit level is a key element of this, with the FCA providing guidance on expectations within its Financial Crime Guide. Financial crime is continually evolving. This requires proactive and adaptable responses from Santander UK so that it is able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where Santander UK may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, Santander UK relies heavily on its staff to assist Santander UK by identifying such activities and reporting them, and Santander UK’s staff have varying degrees of experience in recognising criminal tactics and understanding the level of sophistication of criminal organisations. Where Santander UK outsources any of its customer due diligence, customer screening or anti financial crime operations, it remains responsible and accountable for full compliance and any breaches. If Santander UK is unable to apply the necessary scrutiny and oversight, or if such oversight proves insufficient to detect illegal or improper activities, there remains a risk of regulatory breach and criminal sanctions and restrictions on the conduct of our business and operations, as well as reputational damage. Therefore, any such breachesthis could have a material adverse effect on ourits operations, financial condition and prospects.
Over the last decade, financial crime risk has become the subject of enhanced regulatory scrutiny and supervision by regulators globally, and such scrutiny continues to intensify. Consequently, AML, CTF, anti-bribery and corruption and sanctions laws and regulations have become, and may continue to become, increasingly complex and detailed and have become, and may continue to become, the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel. The complexity in the area of financial crime policy is a significant challenge, involving overlapping requirements between different legislation, and, in some instances, conflicts of laws. The divergence of policy approaches between the EU/UK and US in the area of financial sanctions is exacerbated by the lack of clear guidance from the UK Office of Financial Sanctions Implementation.
The implementation of new UK legislation related to financial crime has required substantial amendments to its AML / CTF procedures and policies, with additional training and guidance required for employees. Further such amendments will likely be required going forward to reflect changes to UK laws and Government policy post-Brexit. Any changes could adversely impact Santander UK’s business by increasing its operational and compliance costs and reducing the value of its assets and operations, which would in turn have a material adverse effect on Santander UK’s operations, financial condition and prospects.
If Santander UK is unable to fully comply with applicable laws, regulations and expectations, its regulators and relevant law enforcement agencies have the ability and authority to pursue civil and criminal proceedings against it, to impose significant fines and other penalties on it, including requiring a complete review of Santander UK’s business systems,day-to-day supervision by external consultants, imposing restrictions on the conduct of Santander UK’s business and operations and ultimately the revocation of Santander UK’s banking licence. The reputational damage to its business and brand could be severe if Santander UK were found to have materially breached AML, CTF, anti-bribery and corruption or sanctions requirements. Santander UK’s reputation could also suffer if it were unable to protect Santander UK’s customers or its business from being used by criminals for illegal or improper purposes. Any of these outcomes could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
US regulationAt an operational level,geo-political, economic and social changes can provide opportunities to financial criminals and alter the risks posed to banks. Effective intelligence and monitoring systems within strengthened public/private partnerships to share knowledge on emerging risks are required to help mitigate these risks. However, there can be no guarantee that any intelligence shared by public authorities or other financial institutions will be accurate or effective in helping Santander UK to combat financial crime, and if, despite such efforts, Santander UK fails to combat financial crime effectively then this could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, while Santander UK reviews its relevant counterparties’ internal policies and procedures (for example, under its correspondent banking relationships) with respect to such matters, Santander UK, to a large degree, relies upon its relevant counterparties to maintain and properly apply their own appropriate anti-financial-crime procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using its (and its relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without its (or its relevant counterparties’) knowledge. There are also risks that other third parties, such as suppliers, could be involved in financial crime. If Santander UK is associated with, or even accused of being associated with, financial crime (or a business involved in financial crime), then its reputation could suffer and it could become subject to civil or criminal proceedings that could result in penalties, sanctions and legal enforcement (including being added to “black lists” that would prohibit certain parties from engaging in transactions with it), any one of which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK is subject totax-related risks
Santander UK is subject to the substance and interpretation of UK tax laws and is subject to routine review and audit by tax authorities in relation thereto. Santander UK’s interpretation or application of these tax laws may differ from those of the relevant tax authorities. While Santander UK provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities, the amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters. In general, changes to tax laws and tax rates, including as a result of policy changes by governments and/or regulators, and penalties for failing to comply with such changes, could have a material adverse effect on Santander UK’s operations, financial condition and prospects. Some of these changes may be specific to the banking/financial services sectors and therefore result in us incurring an additional tax burden when compared to other industry sectors.
Santander UK is exposed to risk of loss and damage from civil litigation and/or criminal legal and regulatory proceedings
Santander UK faces various legal and regulatory issues that may give rise to civil or criminal litigation, arbitration, and/or criminal, tax, administrative and/or regulatory investigations, inquiries or proceedings. Failure to adequately manage the risks arising in connection with legal and regulatory issues, including Santander UK’s obligations under existing applicable laws and regulations or its contractual obligations, including arrangements with its customers and suppliers, or failing to properly
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implement applicable laws and regulations could result in significant loss or damage including reputational damage, all of which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Additionally, the current regulatory environment, with the continuing heightened supervisory focus and associated enforcement activity, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs. Relevant risks include:
| – | Regulators, agencies and authorities with jurisdiction over Santander UK, including the Bank of England (BoE), the PRA and the FCA, HM Treasury, HM Revenue & Customs (HMRC), the CMA, the Commission, the Information Commissioner’s Office, the Financial Ombudsman Service (FOS), the PSR, the Serious Fraud Office (SFO), the National Crime Agency (NCA) or the Courts, may determine that certain aspects of Santander UK’s business have not been or are not being conducted in compliance with applicable laws or regulations (or that policies and procedures are inadequate to ensure compliance), or, in the case of the FOS, with what is fair and reasonable in the FOS’s opinion. Changes in policy, laws and regulations including in relation to SME dispute resolution and liability for authorised push payment fraud and unauthorised payment fraud, may have significant consequences and lead to material implementation, operational and compliance costs. |
| – | An adverse finding by a regulator, agency or authority could result in the need for extensive changes in systems and controls, business policies, and practices coupled with suspension of sales, restrictions on conduct of business and operations, withdrawal of services, customer redress, fines and reputational damage. |
| – | The increased focus on competition law in financial services and concurrent competition enforcement powers for the FCA and PSR may increase the likelihood of competition law related inquiries or investigations initiated by either the CMA or these authorities. In addition, the CMA’s widening focus on market outcomes may result in increased reviews by the CMA of the markets in which Santander UK operates. |
| – | The alleged historical or current misselling of financial products, such as mortgages, arising from causes such as the alleged overcharging of interest and the inappropriate sale of interest-only mortgages and Payment Protection Insurance (PPI), including as a result of having sales practices and/or rewards structures that are deemed to have been inappropriate, presents a risk of civil litigation (including claims management company driven legal campaigns) and/or enforcement action requiring Santander UK to amend sales processes, withdraw products or provide restitution to affected customers, any of which may require additional provisions to be recorded in Santander UK’s financial statements and could adversely impact future revenues from affected products. In the case of PPI claims specifically, there is an increased risk of litigation as a consequence of the FCA time bar which came into force on 30 August 2019. |
| – | Santander UK may hold bank accounts for entities that might be or are subject to scrutiny from various regulators and authorities, including the SFO, the NCA and regulators in the US and elsewhere, which could lead to Santander UK’s conduct being reviewed as part of any such scrutiny. |
| – | Santander UK may be liable for damages to third parties harmed by Santander UK’s conduct of business. For competition law, there are efforts by governments across Europe to promote private enforcement as a means of obtaining redress for harm suffered as a result of competition law breaches. Under the Consumer Rights Act 2015, there is scope for class actions to be used to allow the claims of a whole class of claimants to be heard in a single action in bothfollow-on and standalone competition cases. |
Santander UK is (and will continue from time to time to be) subject to certain legal or regulatory investigations, inquiries and proceedings, both civil and criminal including in connection with Santander UK’s lending and payment activities, treatment of customers, relationships with Santander UK’s employees, financial crime, and other commercial or tax matters. These may be brought against Santander UK under UK legal or regulatory processes, or under legal or regulatory processes in other jurisdictions, such as the EU and the US, in circumstances where overseas regulators and authorities may have jurisdiction by virtue of its activities or operations.
In view of the Dodd-Frank Wall Street Reforminherent difficulty of predicting the outcome of legal or regulatory proceedings, particularly where opportunistic claimants seek very large or indeterminate damages, cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, or where the approaches of regulators or authorities to legal or regulatory issues and sanctions applied are subject to change, Santander UK cannot state with confidence what the eventual outcome of any pending matters will be and any such pending matters are not disclosed by name because they are under assessment. Santander UK’s provisions in respect of any pending legal or regulatory proceedings are made in accordance with relevant accounting requirements. These provisions are reviewed periodically. However, in light of the uncertainties involved in such legal or regulatory proceedings, there can be no assurance that the ultimate resolution of these matters will not exceed the provisions currently accrued by Santander UK. As a result, the outcome of a particular matter (whether currently provided or otherwise) could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
The developing legal and regulatory regime in which Santander UK operates requires it to be compliant across all aspects of its business, including the training, authorisation and supervision of personnel and the development of systems, processes and documentation. If Santander UK fails to be compliant with relevant law or regulation, there is a risk of an adverse impact on its business from more proactive regulatory intervention (including by any overseas regulator which establishes jurisdiction), investigation and enforcement activity leading to sanctions, fines, civil or criminal penalties, or other action imposed by or agreed with the regulatory authorities, as well as increased costs associated with responding to regulatory inquiries and defending regulatory actions. Customers of financial services institutions, including Santander UK’s customers, may seek redress if they consider that they have suffered loss for example as a result of the misselling of a particular product, or through incorrect application or enforcement of the terms and conditions of a particular product or in connection with a competition law infringement and Santander UK’s rights under a contract with its customers may in certain circumstances be unenforceable or otherwise impaired.
The Financial Services and Markets Act 2000 (Designated Consumer Protection ActBodies) Order 2013 (the Dodd-Frank Act) enactedDesignated Consumer Bodies Order) was made on 16 December 2013 and came into force on 1 January 2014. The Designated Consumer Bodies Order designates the National Association of Citizens Advice Bureaux, the Consumers’ Association, the General Consumer Council for Northern Ireland and the National Federation of Self Employed and Small Businesses as consumer bodies that may submit a ‘super-complaint’ to the FCA. A ‘super-complaint’ is a complaint made by any of these designated consumer bodies to the FCA on behalf of consumers of financial services where it considers that a feature, or a combination of features, of the market for financial services in 2010,the UK is seriously damaging the interests of these customers. Complaints about damage to the interests of individual consumers will continue to be dealt with by the FOS. If a ‘super-complaint’ were to be made against a Santander UK entity by a designated consumer body under the Designated Consumer Bodies Order, any response published or action taken by the FCA could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Given the: (i) requirement for compliance with an increasing volume of relevant laws and regulations; (ii) more proactive regulatory intervention and enforcement and more punitive sanctions and penalties for infringement; (iii) inherent unpredictability of litigation; (iv) evolution of the jurisdiction of FOS and CMA and related impacts; (v) the development of a voluntary dispute resolution service to oversee the resolution of historic complaints from SMEs that meet the relevant eligibility criteria and new complaints from SMEs that would be outside the FOS’ proposed revised jurisdiction; (vi) the introduction of a voluntary code to enhance protection for customers who are victims of authorised push payment fraud; and (vii) the high volume of new regulations or policy changes from multiple regulators and authorities which Santander UK is mandated to implement within compressed timescales; it is possible that related costs or liabilities could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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Operational risks
Failure to successfully apply or to improve Santander UK’s credit risk management systems could have a material adverse effect on Santander UK’s operations, financial condition and prospects
As a commercial banking group, one of the main types of risks inherent in Santander UK’s business is credit risk. For example, an important feature of Santander UK’s credit risk management system is to employ Santander UK’s own credit rating system to assess the particular risk profile of a customer. This system is primarily generated internally, but, in the case of counterparties with a global presence, also builds off the credit assessment assigned by other Banco Santander group members. As this process involves detailed analysis of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgement on current or future credit risk behaviour of Santander UK’s customers, Santander UK’s employees may not always be able to assign a correct credit rating, which may result in a larger exposure to higher credit risks than indicated by Santander UK’s risk rating system. Santander UK may not be able to detect all possible risks before they occur, or its employees may not be able to effectively apply its credit policies and guidelines due to limited tools available to Santander UK, which may increase its credit risk.
Any failure to effectively apply, consistently monitor and refine Santander UK’s credit risk management systems may result in an increase in the level ofnon-performing loans and higher losses than expected, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK‘s data management policies and processes may not be sufficiently robust
Critical business processes across Santander UK rely on large volumes of data from a number of different systems and sources. If data governance (including data retention and deletion, data quality and data architecture policies and procedures) is not sufficiently robust, manual intervention, adjustments and reconciliations may be required to reduce the risk of error in Santander UK ‘s external reports or in reporting to senior management or regulators. Inadequate policies and processes may also affect Santander UK’s ability to use data to service customers more effectively or to improve Santander UK’s product offering. Santander UK must also comply with requirements under law or regulation which require classification of customers, counterparties, financial transactions or instruments. Financial institutions that fail to comply within-country (local) and global regulatory and compliance requirements may face supervisory measures, which could in turn have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s business is subject to risks related to cyber-crime
Santander UK’s systems, software and networks may be vulnerable to unauthorised access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm, and therefore have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Furthermore, Santander UK may be required to expend significant additional resources to modify Santander UK’s protective measures or to investigate and remediate vulnerabilities or other exposures. Santander UK expects its programmes of change to have an effect on its risk profile, both technological and regulatory. Whether it is the opportunities from adoption of cloud technology, systems to support important regulatory initiatives, or the desire to identify, prioritise and remove obsolete systems from operations, the operational risk associated with systems change is likely to increase and this will therefore remain an area of key focus in Santander UK’s risk management. There can be no assurance that Santander UK will not suffer material losses from such operational risks in the future, including those relating to any security breaches, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In particular, in recent years the computer systems of companies and organisations have been targeted by cyber criminals, activists and nation-state-sponsored groups. Like other financial institutions, Santander UK manages and holds confidential personal information of customers in the conduct of its banking operations, as well as a large number of assets. Consequently, Santander UK has been, implemented in part and continues to be, implemented by various US federal regulatory agencies. The Dodd-Frank Act, among other things, imposessubject to a regulatory framework on swap transactions, including swapsrange of cyber-attacks, such as malware, phishing and denial of service.
Cyber-attacks could give rise to the sort that we enter into, requires regulators to adopt new rules governing the retentionloss of credit risk by securitisers or originatorssignificant amounts of securitisations and significantly expands the coverage and scope of regulations that limit affiliate transactions within a banking organisation. The US Commodity Futures Trading Commission (the CFTC)customer data and other US regulators have adopted a host of new regulations for swaps markets, including swap dealer registration, business conduct, mandatory clearing, exchange trading and margin regulations. Most of these regulations are already effective, although regulations applicable to ‘security-based swaps’ (i.e., swaps based on securities or narrow-based security indices) required to be implemented by the US Securities and Exchange Commission (SEC)) are generally not yet effective, but many of those requirements are expected to come into effect in 2019. Abbey National Treasury Services plc, which became provisionally registered as a swap dealer with the CFTC on 4 November 2013, is currently subject to swaps regulations for its US facing swaps activities. These rules have already increased the costs associated with our swaps business, and continued compliance with those rules,sensitive information, as well as pending SEC security-based swaps rules,significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of Santander UK’s electronic systems used to service its customers. Any material disruption or slowdown of Santander UK’s systems could cause information, including data related to customer requests, to be lost or to be delivered to Santander UK’s clients with delays or errors, which could reduce demand for Santander UK’s services and products. As attempted attacks continue to evolve in scope and sophistication, Santander UK may incur significant costs in order to modify or enhance its protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to its customers. If Santander UK fails to effectively manage its cyber security risk, the impact could be significant and may include harm to Santander UK reputation and make Santander UK liable for the payment of customer compensation, regulatory penalties and fines. Factors such as failing to apply critical security patches from its technology providers, to manage out obsolete technology or to update Santander UK’s processes in response to new threats could give rise to these consequences, which, if they occur, could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, Santander UK may also be affected by cyber-attacks against national critical infrastructures in the UK or elsewhere, for example, the telecommunications network or cloud computing providers used by Santander UK. In common with other financial institutions Santander UK is dependent on such networks and any cyber-attack against these networks could negatively affect its ability to service its customers. As Santander UK does not operate these networks it has limited ability to protect Santander UK’s business from the adverse effects of cyber-attack against them. Further, the domestic and global financial services industry, including key financial market infrastructure, may be the target of cyber disruption and attack by cyber criminals, activists or governments looking to cause economic instability. Santander UK has limited ability to protect its business from the adverse effects of cyber disruption or attack against its counterparties and key national and financial market infrastructure. If such a disruption or attack were to occur it could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK is exposed to risk from potentialnon-compliance with policies, employee misconduct, human error, negligence and fraud
Santander UK is exposed to risk from potentialnon-compliance with policies, employee misconduct, human error, negligence and fraud. It is not always possible to deter or prevent suchnon-compliance, employee misconduct, human error, negligence or fraud and the precautions Santander UK takes to detect and prevent this activity may not always be effective. Any such matters could result in regulatory sanctions and cause reputational or financial harm, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Any failure to effectively manage changes in Santander UK’s information technology infrastructure and management information systems in a timely manner could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Santander UK’s businesses and its ability to remain competitive depends to a significant extent upon the functionality of its information technology systems and on its ability to upgrade and expand the capacity of its information technology infrastructure on a timely and cost-effective basis. The proper functioning of Santander UK’s financial control, risk management, credit analysis and reporting, accounting, customer service, financial crime, conduct and compliance and other information technology systems, as well as the communication networks between branches and main data processing centres, are critical to its businesses and its ability to
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compete. Investments and improvements in Santander UK’s information technology infrastructure are regularly required in order to remain competitive. It cannot be certain that in the future Santander UK will be able to maintain the level of capital expenditure necessary to support the improvement, expansion or upgrading of its information technology infrastructure as effectively as its competitors; this may result in a loss of any competitive advantages that Santander UK’s information technology systems provide. Any failure to effectively improve, expand or upgrade its information technology infrastructure and management information systems in a timely manner could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
From time to time Santander UK is required to migrate information relating its customers to new information technology systems. Any failure to manage such migration effectively could have a negative impact on Santander UK’s ability to provide services to its customers and could cause reputational damage to Santander UK which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK may be exposed to unidentified or unanticipated risks despite its risk management policies, procedures and methods and may be exposed to risk related to errors in Santander UK’s risk modelling
The management of risk is an integral part of Santander UK’s activities. Santander UK seek to monitor and manage its risk exposure through a variety of risk reporting systems. For a further increasedescription of our risk management framework see the ‘Risk review’ on pages 71 to 159. While Santander UK employs a broad and diversified set of risk monitoring and risk mitigation techniques and strategies, they may not be fully effective in mitigating Santander UK’s risk exposure in all economic market environments or against all types of risk, including risks that Santander UK fails to identify or anticipate.
Some of Santander UK’s tools and metrics for managing risk are based upon its use of observed historical market behaviour. Santander UK applies statistical and other tools to these observations to arrive at quantifications of its risk exposures. These tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors Santander UK did not anticipate or correctly evaluate in its statistical models. This would limit its ability to manage its risks. Santander UK losses thus could be significantly greater than the historical measures indicate. In addition, Santander UK’s quantified modelling does not take all risks into account. Santander UK’s more qualitative approach to managing those risks could prove insufficient, exposing it to material, unanticipated losses. Santander UK could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that include errors or are otherwise inadequately developed, implemented or used, or as a result of the modelled outcome being misunderstood. If existing or potential customers or counterparties believe its risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with Santander UK. These occurrences could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK relies on third parties and affiliates for important infrastructure support, products and services
Third party providers and certain affiliates provide key components of Santander UK’s business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections and network access. Relying on these third party providers and affiliates is a source of operational and regulatory risk, including with respect to security breaches affecting such parties and other parties that interact with these parties. As the depth of Santander UK’s relationship with these third parties and affiliates increases, including through the use of cloud based services, Santander UK increasingly face the risk of operational failure with respect to their systems. Santander UK may be required to take steps to protect the integrity of its operational systems, thereby increasing its operational costs. In addition, certain cross-border regulatory conflictsany problems caused by these third parties or affiliates, including as a result of them not providing Santander UK their services for any reason, or performing their services poorly, could adversely affect Santander UK’s ability to deliver products and services to customers and otherwise conduct its business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third party vendors or affiliates could also entail significant delays and expense. Further, the profitabilityoperational and regulatory risk Santander UK faces as a result of our swapsthese arrangements may be increased to the extent that it restructures such arrangements. Any restructuring could involve significant expense to Santander UK and entail significant delivery and execution risk which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK relies on recruiting, retaining and developing appropriate senior management and skilled personnel
Santander UK’s continued success depends in part on the continued service of key members of its senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of Santander UK’s strategy. The successful implementation of Santander UK’s strategy depends on the availability of skilled and appropriate management, both at Santander UK’s head office and in each of its business units. There is also an increasing demand for Santander UK to hire individuals with digital skills such as data scientist, engineering and designer skill sets. Such individuals are very sought after by reducingall organisations, not just the banking industry, and thus Santander UK’s ability to attract and hire this talent will determine how quickly the bank is able to respond to technological change. If Santander UK fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, it could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, the financial services industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on Santander UK’s ability to hire or retain the most qualified employees. If Santander UK fails or is unable to attract and appropriately train, motivate and retain qualified professionals, it could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Financial reporting risk
Santander UK’s financial statements are based in part on judgements and accounting estimates which, if inaccurate, could cause material misstatement of Santander UK’s future financial results and financial condition.
The preparation of the financial statements requires management to make judgements and accounting estimates that affect the reported amounts of assets and liabilities at the date of the financial statements 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 amounts may differ from these accounting estimates under different assumptions or conditions. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
As explained in Note 1 to the Consolidated Financial Statements, limited significant judgements have been made in the process of applying Santander UK’s accounting policies. Those accounting estimates, as well as the judgements inherent within them, are considered important to the portrayal of the financial results and financial condition because: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates; and (ii) any significant difference between the estimated amounts and actual amounts could have a material impact on Santander UK’s operations, financial condition and prospects.
Changes in accounting standards could affect reported earnings
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of Santander UK’s consolidated financial statements. These changes can materially affect how Santander UK records and reports its financial condition and operating results. In some cases, Santander UK could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Any change in reported earnings as a result of the foregoing could have a material adverse effect on Santander UK’s operations, financial condition and prospects
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Regulation of the Santander UK group
As a financial services group, Santander UK is subject to extensive financial services laws, regulations, administrative actions and policies in the UK, the EU and in each other location in which Santander UK operates. This intensive approach to supervision is maintained in the United Kingdom by the PRA and the FCA. As well as being subject to UK regulation, as part of the Banco Santander group, Santander UK is also affected by other regulators, such as the Banco de España and the ECB, as well as various legal and regulatory regimes (including the US) that have extra-territorial effect. Extensive legislation and implementing regulations affecting the financial services industry have recently been adopted in regions that directly or indirectly affect Santander UK’s business, including Spain, the US, the EU and other jurisdictions.
Approach of the Financial Conduct Authority (FCA)
As per the FSMA (amended by the Financial Services Act 2012), the FCA has a strategic objective to ensure that the relevant markets function well. In support of this, the FCA has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers.
The FCA Handbook sets out rules and guidance across a range of counterpartiesconduct issues with which we can trade effectively.financial institutions are required to comply including high level principles of business and detailed conduct of business standards and reporting standards.
In October 2014, US regulators adopted a joint final rule requiring sponsors of asset-backed securitisation transactions, which includes the Company Santander UK plc in relation to its residential mortgage-backed securities programmes, to retain 5%Regulatory Approach of the credit riskPRA
As per the Financial Services Act 2012, the PRA has two statutory objectives: to promote the safety and soundness of the assets subjectfirms which it supervises and, with respect to insurers, to contribute to the securitisation.securing of an appropriate degree of protection for policyholders. The rule permits sponsors to satisfy the risk retention requirement through the acquisition and retention of either 5% (measured by fair value) of the most subordinated interest in the securitisation, or 5% (measured by nominal value) of each tranche of interests issued by the securitisation, or some combination of the two. The rule also permits certain exceptions and methods of compliancePRA has a secondary objective in respect of specific typescompetition. The PRA’s regulatory and supervisory approach incorporates three key characteristics: to take a judgement-based approach, a forward-looking approach, and a focused-approach.
The PRA has largely inherited the prudential aspects of asset-backed securities transactions.the former FSA Handbook (now within the PRA Rulebook), including regulations and guidance relating to capital adequacy and liquidity among several other things.
US regulation
Within the Dodd-Frank Act, theso-called Volcker Rule prohibits ‘banking entities’, including the Santander UK group, from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain exemptions, including exemptions permitting foreign banking entities to engage in trading and fund activities that take place solely outside of the US. The final rules contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in US government and agency obligations as well as certain foreign government obligations, trading solely outside the US, and also permit ownership interests in certain types of funds to be retained. The Santander UK group was generally required to come into compliance with the Volcker Rule by July 2015, although the Federal Reserve extended the conformance deadline forpre-2014 ‘legacy’ investments in and relationships with private equity funds and hedge funds until 21 July 2017 and additional extensions for illiquid funds may be requested. On 30 May 2018,2015. In August 2019, the Federal Reserve and other federal regulators requested comment on proposedapproved certain modifications to the Volcker Rule includingwhich included modifications to the scope of restrictions on proprietary trading and investments in covered funds. It cannot be predicted at this time what, if any, modificationsfunds which generally operated to simplify and reduce compliance requirements. The effective date of these amendments was 1 January 2020 with compliance required by 1 January 2021. These regulators proposed further amendments to the Volcker RuleRule’s covered funds provisions on 30 January 2020, which would, if adopted, provide important new exclusions from the definition of covered fund and flexibility for banking entities to engage in funds activities. The proposal is currently open for comment, and the timeline for finalisation remains uncertain.
The Banking Act 2009
The special resolution regime set out in the Banking Act 2009 provides HM Treasury, the BoE, the PRA and the FCA with a variety of powers for dealing with UK deposit taking institutions (and, in certain circumstances, their holding companies) that are failing or likely to fail, including: (i) to take a bank or bank holding company into temporary public ownership; (ii) to transfer all or part of the business of a bank to a private sector purchaser; or (iii) to transfer all or part of the business of a bank to a ‘bridge bank’. The special resolution regime also comprises a separate insolvency procedure and administration procedure each of which is of specific application to banks. These insolvency and administration measures may be adopted or whatinvoked prior to the impactpoint at which an application for insolvency proceedings with respect to a relevant institution could be made.
The Financial Services (Banking Reform) Act 2013 further amended the Banking Act to introduce a UK‘bail-in power’ to implement the EU Bank Recovery and Resolution Directive (BRRD), which contains abail-in power similar to that contained in the Banking Act and requires EU Member States to provide resolution authorities with the power to write down the claims of unsecured creditors of a failing institution and to convert unsecured claims to equity (subject to certain parameters). The UKbail-in power is an additional power available to the UK resolution authorities under the special resolution regime provided for in the Banking Act. This enables them to recapitalise a failed institution by allocating losses to such institution’s shareholders and unsecured creditors, subject to the rights of such changes wouldshareholders and unsecured creditors to be for us.compensated under abail-in compensation order.
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Each of these aspects of the Dodd-Frank Act, as well as the changes in US banking regulations, and increased uncertainty surrounding future changes, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the Dodd-Frank Act (including the Volcker Rule and any modifications to it) poses to us is not yet known, however, such risks could be significant and we could be materially and adversely affected by them.
Competition
In the UK and elsewhere, there is continuing political, competitive and regulatory scrutiny of the banking industry. Political involvement in the regulatory process, in the behaviour and governance of the UK banking sector and in the major financial institutions in which the UK Government has a direct financial interest is likely to continue. The Competition and Markets Authority (CMA)CMA is the UK’s main competition authority responsible for ensuring that competition and markets work well for consumers. In addition, under the Banking Reform Act, as of 1 April 2015, the FCA has the power to enforce against breaches of the Competition Act 1998 and to refer markets to the CMA forin-depth investigation in the areas of financial services in the UK. As of 1 April 2015, the PSR also has an objective and powers equivalent to those of the FCA to promote competition in the payments industry.
In August 2016, the CMA published the final report in its market investigation into competition in the personal current account and SME retail banking markets, which identified a number of features of the markets for the supply of personal current accounts, business current accounts and SME lending that, in combination, were having an adverse effect on competition. The CMA is currently implementing a comprehensive package of remedies including, among other things, Open Banking and the introduction of requirements to prompt customers to review the services that they receive from their bank at certain trigger points and to promote customer awareness of account switching.
Further work on overdraft charges – which remain under political scrutiny – is ongoing by the FCA. In December 2018, the FCA published a consultation and policy paper regarding overdraft charges, which included final rules and guidance to address low awareness and engagement in this market and a consultation on proposals to reform the ways banks and building societies charge for overdrafts. The FCA is also undertaking more general work on fair pricing in financial services, including in relation to savings, mortgages and insurance. This is also an area of priority for the CMA, which made recommendations for further work by the FCA in its December 2018 response to a super-complaint by Citizens Advice.
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The FCA is conducting a Strategic Review of Retail Banking Business Models, looking at the potential effect of technological change, increased digitalisation andfree-if-in-creditPayments banking on firms’ business models. It is also looking to secure an appropriate degree of consumer protection for consumers in vulnerable circumstances. This review will inform the FCA’s ongoing policy work in retail banking and related areas. There can be no assurance that we will not be
Santander UK has been required to make systems changes and update processes to our business model as a result of this review or related work, and that such changes would not materially and adversely affect us.
In addition, the FCA and PSR continue to undertakecomply with a number of competition related studies and reviews acrossnew payments regulations at a number of our businesses. InterventionEuropean as a result of these studies and reviews, in addition to regulatory reforms, investigations and court cases affectingwell as domestic UK Level. Within the UK, financial services industry, could have an adverse effect onthe Payment Systems Regulator has mandated Santander UK build systems and processes for both Confirmation of Payee as well as the Contingent Reimbursement Model Code which both aim to reduce the level of customer fraud (particularly through our operations, financial condition and prospects, or on our relations with our customers and potential customers.customer’s manipulation into making payments known as “Authorised Push Payment” fraud).
Payments
TheAt a European level, the Second Payment Services Directive (PSD2) is a fundamental piece of payments-related legislation in Europe, the first part of which came into force in January 2018. The regulation aims to harmonise payment processing across Europe, and is being implemented in the UK by the FCA.
In the UK, PSD2 introduced Open Banking, which opened up access to customers’ online account and payments data to third party providers (TPPs). Customers are able to give secure access to certain TPPs authorised by the FCA or other European regulators to access account information and to make payments from current accounts. Following the CMA’s retail banking market investigation, the nine largest current account providers in the UK (theCMA-9) were required to accelerate certain of the PSD2 requirements and implement Open Banking by 13 January 2018.
The access method for customer accounts by TPPs is via an established Application Programme Interface (API) and, as one of theCMA-9, we have been required to undertake significant technical build to create these APIs and extend them to all categories of customers, account types and currencies.
Open Banking and PSD2 both have the potential to exacerbate a number of existing risks including data loss/data protection, cyber security, fraud and wider financial crime risk, which in turn could give rise to increased costs, litigation risk and risk of regulatory investigation and enforcement activity. Examples of the heightened risk include the risk of fraud relating to activities of a TPP pursuant to which funds are redirected to a third party not chosen by the customer; and the risk of data misuse by a TPP/other third party where the TPP has requested the data from Santander and this is provided to the TPP.
If the arrangements that we have made to comply with our Open Banking obligation prove to be inadequate or incompatible with legal and regulatory requirements or expectations, we could be required to make extensive and costly changes to our systems and controls, policies, and practices. We might also be fined by regulators, sued by customers, and might suffer reputational damage. Any requirement to make such changes, any liability to customers, any regulatory fines, or any reputational damage suffered, could have a material adverse effect on our operations, financial condition and prospects.
Financial Crime
A number of EU and UK regulatory measures targeted at preventing and countering financial crime (including anti-money laundering (AML) and countering the financing of terrorism (CTF) provisions) came into effect in 2017 and 2018.
As part of the EU’s revision of its AML/CTF rules, Directive (EU) No 2015/849 (the Fourth EU Money Laundering Directive) and Regulation (EU) No 847/2015 (the EU Wire Transfer Regulation) came into effect on 26 June 2017. The Fourth EU Money Laundering Directive replaced Directive (EC) No 60/2005 and significantly expanded the existing AML/CTF regime applicable to financial institutions by, among other things:
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Annual Report 2018 | Other information for US investors
On 22 June 2017, the final text of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 was published in the UK, which came into force on 26 June 2017 and implemented the requirements of the Fourth EU Money Laundering Directive and the EU Wire Transfer Regulation into UK law.
On 30 May 2018, the Council of EU and the European Parliament reached a political agreement on the EU Commission’s proposal to amendamended the Fourth Anti-Money Laundering Directive (the Directive). The amended directive, publishing the amending Directive (EU) No 2018 / 843 (5th AMLD) seeks to prevent large scale concealment of funds and to introduce.
The 5th AMLD brought in increased corporate transparency rules, whereby corporate and other legal entities will be required by law to publicly disclose information on beneficial ownership. The amended directive also introducesintroduced the application of AML rules to firms providing services associated with virtual currencies and further extendsextended enhanced due diligence requirements to all transactions with natural persons or legal entities established in third countries identified as high riskhigh-risk countries (HRTCs) pursuant to Article 9(2) of the Directive. The
Shortly after, the UK Government has confirmed their intention to implement the 5th AMLD into UK law asby the EUEU’s transposition deadline of 1010th January 2020, fordespite transposition fallsfalling within the then expected Brexit transition period of Brexit.period. The intention to transpose the Directive was carried out successfully on 20th December 2019, and the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (‘The Regulations’) came into effect on 10th January 2020. The Regulations:
The
| – | Introduce a requirement to report beneficial ownership discrepancies to Companies House |
| – | Extend EDD measures in respect of customers resident in a High-Risk Third Country |
| – | Treat new types of transactions, such as those related to cultural artefacts or items of archaeological, historical, cultural or religious significance, as potentially high risk. |
To ensure regulatory continuity post-Brexit, the UK Sanctions and AML Act received Royal Assent on 23 May 2018. The Act enables the UK to continue to implement United Nations sanctions regimes.regimes following Brexit. The Act also gives the UK the ability to impose its own sanctions regime plan which is likely to follow the approach of the EU but could deviate in some areas. Separately, the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2019 will ensure that the UK’s current AML Regime continues to operate effectively once the UK ceases to be a member of the EU.
The Act also introduces certain new measuresUK will continue to address money laundering, including in relationfollow EU legislation during the implementation period, which is due to company ownership information. The Act also provides powers to take actions against ‘human rights abusers’.end on 31 December 2020, and no immediate divergence is expected either on sanctions or the AML/CTF regime after this date.
TheAs regards sanctions, the current US administration has increased the use of sanctionscontinues to apply these regularly against individuals, entities and countries, which in many instances have been different to the policy approach of the EU and UK. In particular thecountries. There-introduction of primary and secondary sanctions against Iran which occurred in November 2018, following the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA),Action. Sanctions against Iran have since then increased further and are now targeting construction, manufacturing, textiles and mining. In light of Iran’s recent announcement that it would no longer abide by the nuclear deal with the EU, the EU too could consider reintroducing sanctions against Iran, although this has been most significant. These sanctions are substantially similarnot crystallised.
The banking sector continues to those that were in force in 2013, priorbe subject to the initial Iran nuclear agreement, thoughSuspicious Activity Reporting (‘SAR’) regime laid out in the secondary sanctions are broader in scope in some areas. In response the EU amended the EU Blocking Regulation, reflecting its support for the continuationProceeds of Crime Act 2002. The regime is one of the JCPOA, making it a potential criminal offence inkey tools to inform law enforcement agencies and the National Crime Agencies of suspicious (potentially money laundering) activity. In 2018, the UK to comply with there-introduced US sanctions on Iran. The UK Government has indicated that it will reflect the Blocking Regulation into UK law post-Brexit, though the precise details of this are yet to be seen.
The UK Policing and Crime Act 2017 strengthened the measures for the enforcement of financial sanctions, including in relation to the criminal enforcement and civil powers. Under the Act the Office of Financial Sanctions Implementation (OFSI) has powers to fine institutions a maximum of £1 million or 50% of the estimated value of the funds or resources, whichever is greater. Separately, the Criminal Finances Act 2017 updated the primary UK legislation in respect of investigation and enforcement against money laundering and terrorist financing. The Act provided law enforcement with new powers in regard to asset recovery and introduced ‘Unexplained Wealth Orders’. The Act also created a new corporate offence relating to failure to prevent the criminal facilitation of tax evasion. The UK Government also asked the Law Commission to conduct a review of the legislation relating tounderpinning the ‘Suspicious Activity Reporting’ regime (SAR), whichregime. The review is expected to bewas completed in late 2019.July 2019 and concluded that the breadth of the legal framework, including the pressure to submit SARs that is driven by individual criminal liability for failing to submit one when ‘suspicious’, means that SARs regime suffers from very large SARs volumes.
The UK’s SARs Reform Programme, which operates within the confines of the Government’s Economic Crime Plan 2019-2022, is exploring how banks could, together with government, target their joint efforts to produce and act quickly on higher value intelligence, thereby acting on some of the Law Commission’s findings.
Separately, the UK ParliamentParliament’s Treasury Select Committee is concluding an Inquiryconcluded its inquiry, launched in 2018, into Economic Crime, with the report expectedpublished in two parts, the first part in March and the second part in November 2019. The first part commented primarily on the fragmented approach to AML supervision in the first half of 2019. The Foreign Affairs Committee has also initiated an Inquiry into UK, Sanctions post-Brexit. The Select Committees maywhile the second part focused on the changes required to make recommendationsbanking safer for further legislative change or Government policy change in these areas.
The implementation of new UK legislation related to financial crime has required substantial amendments to our AML/CTF procedures and policies, with additional training and guidance required for employees. Further such amendmentsconsumers from a fraud perspective. Both issues will likely be required in 2019 to reflect changes to UK laws and Government policy post-Brexit. The changes could adversely impact our business by increasing our operational and compliance costs and reducingconsidered through the value of our assets and operations.
The complexity inpublic-private work on the area of financial crime policyGovernment’s Economic Crime Plan 2019-2022 which is a significant challenge, involving overlapping requirements between different legislation, and, in some instances, conflicts of laws. The divergence of policy approaches betweenlooking holistically at the EU/UK and US in the area of financial sanctions is exacerbated by the lack of clear guidance from the OFSI.
The growing complexity increases the risk that the required measures will not be implemented correctly or on time or that individuals within the business will not be fully compliant with the new procedures. If there are breaches of these measures or existing law and regulation relating to financialinternational anti-economic crime we could face significant administrative, regulatory and criminal sanctions and restrictions on the conduct of our business and operations, as well as reputational damage. The civil and criminal penalties for failures have increased and any such breaches could have a material adverse effect on our operations, financial condition and prospects.efforts
EU General Data Protection Regulation
The EU General Data Protection Regulation (the GDPR) came into direct effect in all EU Member States on 25 May 2018, replacing previous EU data privacy laws. Although a number of basic existing principles have remained the same, the GDPR has introduced new obligations on data controllers and rights for data subjects.
The GDPR has also introduced new fines and penalties for a breach of requirements, including fines for systematic breaches of up to the higher of 4% of annual worldwide turnover or€20m and fines of up to the higher of 2% of annual worldwide turnover or€10m (whichever is highest) for other specified infringements. The GDPR identifies a list of points to consider when imposing fines (including the nature, gravity and duration of the infringement).
The implementation of the GDPR has required substantial and ongoing amendments to our procedures and policies. The changes have impacted, and could further adversely impact, our business by increasing our operational and compliance costs. If there are breaches of the GDPR obligations, we could face significant administrative and monetary sanctions as well as reputational damage which could have a material adverse effect on our operations, financial condition and prospects.
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Further reforms to the mortgage lending market could require significant implementation costs or changes to our business strategy
Mortgage Lending
The final rules in relation to the FCA Mortgage Market Review (MMR) came into force on 26 April 2014. These rules required a number of material changes to the mortgages sales process, both in terms of advice provision in nearly all scenarios and significantly enhanced affordability assessment and evidencing. The rules permit interest-only loans. However, there is a clear requirement for a clearly understood and credible strategy for repaying the capital (evidence of which the lender must obtain before making the loan).
The Santander UK group has implemented certain changes to implement the MMR requirements. The FCA continues to assess firms’ implementation of the rules introduced as a result of the MMR and commenced a review of responsible lending practices in April 2015, publishing its report in May 2016. This is in addition to regulatory reforms being made as a result of the implementation of the Mortgage Credit Directive from 21 March 2016. In December 2016, the FCA published terms of reference for a market study into competition in the mortgages sector, which will focus on consumers’ ability to make effective decisions and whether commercial arrangements between lenders, brokers and other players leads to conflicts of interest or misaligned incentives to the detriment of consumers. Following a deferral, the FCA published its interim report setting out its preliminary conclusions in May 2018. The FCA has stated that it will publish its final report in Q1 2019.
It is possible that further changes may be made to the FCA’s Mortgage Conduct of Business (MCOB) rules as a result of these reviews and other related future regulatory reforms. To the extent that any new rules do apply to any of the loans, failure to comply with these rules may entitle a borrower to claim damages for loss suffered orset-off the amount of the claim against the amount owing under the loan. Any further changes to the FCA’s MCOB rules or to MCOB or the FSMA or changes in the regulatory structure or the Financial Services Act 2012, may adversely affect the Santander UK group’s operating results, financial condition and prospects. There can be no assurance that the Santander UK group will not make any future changes to its mortgage lending business, whether as a result of the MMR or other mortgage lending reforms, and that such changes would not adversely affect the Santander UK group.
Consumer credit
On 1 April 2014, consumer credit regulation was transferred from the OFT to the FCA in accordance with the Financial Services Act 2012. Firms that held an OFT licence and had registered with the FCA by 31 March 2014, including Santander UK, were granted an interim permission under the new regime and had to apply to the FCA for full authorisation during an application period notified by the FCA. Under the new regime: (i) carrying on certain credit-related activities (including in relation to servicing credit agreements) otherwise than in accordance with permission from the FCA will render the credit agreement unenforceable without FCA approval; and (ii) the FCA has the power to make rules providing that contracts made in contravention of its rules on cost and duration of credit agreements, or in contravention of its product intervention rules, are unenforceable. Santander UK is fully authorised to carry out consumer credit-related regulated activities, however, if the FCA were to impose conditions on that authorisation and/or make changes to the FCA rules applicable to authorised firms with consumer credit permissions, this could have an adverse effect on the Santander UK group’s operations, financial condition and prospects.
We are exposed to risk of loss and damage from civil litigation and/or criminal legal and regulatory proceedings
We face various legal and regulatory issues that may give rise to civil or criminal litigation, arbitration, and/or criminal, tax, administrative and/or regulatory investigations, inquiries or proceedings. Failure to adequately manage the risks arising in connection with legal and regulatory issues, including our obligations under existing applicable law and regulation or our contractual obligations including arrangements with suppliers, or failing to properly implement new applicable law and regulation could result in significant loss or damage including reputational damage, all of which could have a material adverse effect on our operations, financial condition and prospects. Additionally, the current regulatory environment, with the continuing heightened supervisory focus and associated enforcement activity, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs. Relevant risks include:
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We are from time to time subject to certain legal or regulatory investigations, inquiries or proceedings in the normal course of our business, including in connection with our lending and payment activities, treatment of customers, relationships with our employees, financial crime, and other commercial or tax matters. These may be brought against us under UK legal or regulatory processes, or under legal or regulatory processes in other jurisdictions, such as the EU and the US, where overseas regulators and authorities may have jurisdiction by virtue of our activities or operations. In view of the inherent difficulty of predicting the outcome of legal or regulatory proceedings, particularly where opportunistic claimants seek very large or indeterminate damages, cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, or where the approaches of regulators or authorities to legal or regulatory issues and sanctions applied are subject to change, we cannot state with confidence what the eventual outcome of any pending matters will be and any such pending matters are not disclosed by name because they are under assessment. Our provisions in respect of any pending legal or regulatory proceedings are made in accordance with relevant accounting requirements. These provisions are reviewed periodically. However, in light of the uncertainties involved in such legal or regulatory proceedings, there can be no assurance that the ultimate resolution of these matters will not exceed the provisions currently accrued by us.
As a result, the outcome of a particular matter (whether currently provided or otherwise) may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
Potential intervention by the FCA, the PRA, the CMA or an overseas regulator may occur, particularly in response to customer complaints
The PRA and the FCA continue to have an outcome-focused regulatory approach. This involves proactive intervention, investigation and enforcement, and punitive penalties for infringement. As a result, we and otherPRA-authorised orFCA-authorised firms continue to face increased supervisory intrusion and scrutiny (resulting in higher costs, including supervision fees), and in the event of a breach of relevant law or regulation, we are likely to face more stringent penalties and regulatory actions.
The developing legal and regulatory regime in which we operate requires us to be compliant across all aspects of our business, including the training, authorisation and supervision of personnel, systems, processes and documentation. If we fail to be compliant with relevant law or regulation, there is a risk of an adverse impact on our business from more proactive regulatory intervention (including by any overseas regulator which establishes jurisdiction), investigation and enforcement activity leading to sanctions, fines, civil or criminal penalties, or other action imposed by or agreed with the regulatory authorities, as well as increased costs associated with responding to regulatory inquiries and defending regulatory actions. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss for example as a result of the misselling of a particular product, or through incorrect application or enforcement of the terms and conditions of a particular product or in connection with a competition law infringement.
In particular, the FCA has operational objectives to protect consumers and to promote competition, and it is taking a more interventionist approach in its increasing scrutiny of product terms and conditions and monitoring compliance with competition law. FSMA (as amended by the Financial Services Act 2012) gives the FCA the power to make temporary product intervention rules either to improve a firm’s systems and controls in relation to product design, product management and implementation, or to address problems identified with products which may potentially cause significant detriment to consumers because of certain product features or firms’ flawed governance and distribution strategies. Such rules may prevent firms from entering into product agreements with consumers until such problems have been rectified. Since April 2015 the FCA (and the PSR) also has concurrent competition law enforcement powers. This is in addition to the CMA, the UK’s main competition authority, and the Commission which continue to have jurisdiction, respectively, to enforce competition law infringements in the UK or which have an effect on trade between EU Member States. Following a report by the National Audit Office, the CMA has stated it will seek to shift its focus toward enforcement of competition law breaches. As a result, the UK financial services sector now operates in an environment of heightened competition law scrutiny. Under the Financial Services Act 2010, the FCA also has the power to impose its own customer redress scheme on authorised firms, including us, if it considers that consumers have suffered loss or damage as a consequence of a regulatory failing, including misselling.
In recent years there has been FCA focus on the misselling of PPI. In November 2015, the FCA issued a consultation paper (CP15/39) outlining its proposed approach to PPI in light of the 2014 decision of the Supreme Court in Plevin v Paragon Personal Finance Ltd (Plevin) and its proposal to set a two year deadline for PPI claims. In Plevin, the Supreme Court ruled that a failure to disclose a large commission payment on a single premium PPI policy sold in connection with a secured personal loan made the relationship between the lender and the borrower unfair under section 140A of the Consumer Credit Act 1974 (CCA).
On 2 March 2017, the FCA published its policy statement (PS17/3) and final rules and guidance, confirming that there would be a two year deadline for PPI complaints, and that this would take effect from 29 August 2017, and include the commencement of a consumer communications campaign. The FCA’s approach to Plevin/unfair relationships under s140A CCA remains largely as set out in CP16/20, so profit share is included in the FCA’s approach to the assessment of fairness and redress. In addition, firms were required to write to customers whose misselling complaints were previously rejected, and who are within scope of s140A CCA, to inform them of their right to complain again in light of Plevin. The PPI provision was increased by a further £32m in March 2017 to take account of PS17/3 and the FCA’s final rules and guidance. In June 2017, we made a further net charge of £37m, following a review of claims handling procedures in relation to a specific PPI portfolio including the impact of a past business review. In Q4 2017, we made a further PPI provision of £40m, relating to an increase in estimated future claims activity following the commencement of the FCA advertising campaign for PPI. The ultimate financial impact on us of the claims arising from PPI complaints is still uncertain and will depend on a number of factors, including the rate at which new complaints arise, the length of any complaints, the content and quality of the complaints (including the availability of supporting evidence) and the average uphold rates and redress costs. We can make no assurance that expenses associated with PPI complaints will not exceed the provisions made relating to these claims. More generally, we can make no assurance that estimates for potential liabilities, based on the key assumptions used, are correct, and the reserves taken as a result may prove inadequate. If additional expenses that exceed provisions for PPI liabilities or other provisions were to be incurred, these expenses could have a material adverse effect on our operations, financial condition and prospects. If additional expenses that exceed provisions for PPI liabilities or other provisions were to be incurred, these expenses could have a material adverse effect on our operations, financial condition and prospects.
For further information about the provisions for PPI complaint liabilities and other conduct remediation, see Note 30 to the Consolidated Financial Statements. The potential financial impact may be relevant to any future industry-wide misselling or other infringement that could affect our businesses. Any such issues may lead from time to time to: (i) significant costs or liabilities; and (ii) changes in the practices of such businesses which benefit customers at a cost to shareholders. Decisions taken by the FOS (or any equivalent overseas regulator that has jurisdiction) could, if applied to a wider class or grouping of customers, have a material adverse effect on our operations, financial condition and prospects.
The Financial Services and Markets Act 2000 (Designated Consumer Bodies) Order 2013 (the Designated Consumer Bodies Order) was made on 16 December 2013 and came into force on 1 January 2014. The Designated Consumer Bodies Order designates the National Association of Citizens Advice Bureaux, the Consumers’ Association, the General Consumer Council for Northern Ireland and the National Federation of Self Employed and Small Businesses as consumer bodies that may submit a ‘super-complaint’ to the FCA. A ‘super-complaint’ is a complaint made by any of these designated consumer bodies to the FCA on behalf of consumers of financial services where it considers that a feature, or a combination of features, of the market for financial services in the UK is seriously damaging the interests of these customers. Complaints about damage to the interests of individual consumers will continue to be dealt with by the FOS. If a ‘super-complaint’ were to be made against a Santander UK group entity by a designated consumer body under the Designated Consumer Bodies Order, any response published or action taken by the FCA could have a material adverse effect on our operations, financial condition and prospects.
Given the: (i) requirement for compliance with an increasing volume of relevant laws and regulation; (ii) more proactive regulatory intervention and enforcement and more punitive sanctions and penalties for infringement; (iii) inherent unpredictability of litigation; and (iv) evolution of the jurisdiction of FOS and related impacts (including the changes identified by the FCA in the policy statements (PS 18/21) on 16 October 2018 and (PS18/22) on 14 December 2018, setting out changes to the eligibility criteria to access FOS), it is possible that related costs or liabilities could have a material adverse effect on our operations, financial condition and prospects.
The Banking Act may adversely affect our business
The Banking Act came into force on 21 February 2009. The special resolution regime set out in the Banking Act provides HM Treasury, the BoE, the PRA and the FCA (and their successor bodies) with a variety of powers for dealing with UK deposit taking institutions (and, in certain circumstances, their holding companies) that are failing or likely to fail, including: (i) to take a bank or bank holding company into temporary public ownership; (ii) to transfer all or part of the business of a bank to a private sector purchaser; or (iii) to transfer all or part of the business of a bank to a ‘bridge bank’. The special resolution regime also comprises a separate insolvency procedure and administration procedure each of which is of specific application to banks. These insolvency and administration measures may be invoked prior to the point at which an application for insolvency proceedings with respect to a relevant institution could be made.
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In addition, pursuant to amendments made to the Banking Act, which came into force on 1 August 2014, provision has been made for various tools to be used in respect of a wider range of UK entities, including investment firms and certain banking group companies, provided that certain conditions are met. Secondary legislation specifies that the Banking Act powers can be applied to investment firms that are required to hold initial capital of€730,000 or more and to certain UK incorporatednon-bank companies in the Santander UK group.
If an instrument or order were made under the Banking Act in respect of the Company or another Santander UK group entity, such instrument or order (as the case may be) may, among other things: (i) result in a compulsory transfer of shares or other securities or property of the Company or such other entity; (ii) impact on the rights of the holders of shares or other securities in the Company or such other entity or result in the nullification or modification of the terms and conditions of such shares or securities; or (iii) result in thede-listing of the shares and/or other securities of the Company or such other entity in the Santander UK group. In addition, such an order may affect matters in respect of the Company or such other entity and/or other aspects of the shares or other securities of the Company or such other entity in the Santander UK group, which may negatively affect the ability of the Company or such other entity to meet its obligations in respect of such shares or securities.
Further, amendments to the Insolvency Act 1986 and secondary legislation have introduced changes to the treatment and ranking of certain debts with the result that certain eligible deposits will rank in priority to the claims of ordinary (i.e.non-preferred) unsecured creditors in the event of an insolvency. This may negatively affect the ability of the Company or another Santander UK group entity to meet its obligations in respect of its unsecured creditors in an insolvency scenario.
Bail-in and write down powers under the Banking Act and the BRRD may adversely affect our business and the value of securities we may issue
The Banking Reform Act as of 31 December 2014 amended the Banking Act to introduce a UK‘bail-in power’. On 6 May 2014, the Council adopted the EU Bank Recovery and Resolution Directive (BRRD), which contains a similarbail-in power and requires EU Member States to provide resolution authorities with the power to write down the claims of unsecured creditors of a failing institution and to convert unsecured claims to equity (subject to certain parameters). The UK Government decided to implement the BRRDbail-in power from 1 January 2015, with the final phase of rules implemented on 1 January 2016.
The UKbail-in power is an additional power available to the UK resolution authorities under the special resolution regime provided for in the Banking Act. This enables them to recapitalise a failed institution by allocating losses to such institution’s shareholders and unsecured creditors, subject to the rights of such shareholders and unsecured creditors to be compensated under abail-in compensation order. Such an order would be based on the principle that such creditors should receive no less favourable treatment than they would have received had the bank entered into insolvency immediately before the coming into effect of thebail-in power. Thebail-in power includes the power to cancel or write down (in whole or in part) certain liabilities or to modify the terms of certain contracts for the purposes of reducing or deferring the liabilities of a relevant institution under resolution and the power to convert certain liabilities into shares (or other instruments of ownership) of the relevant institution. The conditions for use of the UKbail-in power are generally that (i) the regulator determines the relevant institution is failing or likely to fail; (ii) it is not reasonably likely that any other action can be taken to avoid such relevant institution’s failure; and (iii) the relevant UK resolution authority determines that it is in the public interest to exercise thebail-in power. Certain liabilities are excluded from the scope of thebail-in powers, including liabilities to the extent that they are secured.
According to the Banking Act, as well as similar principles in the BRRD, the relevant UK resolution authority should have regard to the insolvency treatment principles when exercising the UKbail-in power. The insolvency treatment principles are that: (i) the exercise of the UKbail-in power should be consistent with treating all liabilities of the relevant bank in accordance with the priority that they would enjoy on a liquidation; and (ii) any creditors who would have equal priority on a liquidation should bear losses on an equal footing with each other. HM Treasury may, by order, specify further matters or principles to which the relevant UK resolution authority must have regard when exercising the UKbail-in power. These principles may be specified in addition to, or instead of, the insolvency treatment principles. If the relevant UK resolution authority departs from the insolvency treatment principles when exercising the UKbail-in power, it must report to the Chancellor of the Exchequer stating the reasons for its departure.
Thebail-in power under the Banking Act and the BRRD may potentially be exercised in respect of any unsecured debt securities issued by a financial institution under resolution or by a relevant member of the Santander UK group, regardless of when they were issued. Accordingly, thebail-in power under the Banking Act and the BRRD could be exercised in respect of our debt securities. Public financial support would only be used as a last resort, if at all, after having assessed and exploited, to the maximum extent practicable, the resolution tools including thebail-in tool, and the occurrence of circumstances in whichbail-in powers would need to be exercised in respect of us would have a material adverse effect on our operations, financial condition and prospects.
The BRRD also contains a mandatory write down power which requires EU Member States to grant powers to resolution authorities to recapitalise institutions and/or their EEA parent holding companies that are in severe financial difficulty or at the point ofnon-viability by permanently writing down Tier 1 and Tier 2 capital instruments issued by such institutions and/or their EEA parent holding companies, or converting those capital instruments into shares (or other instruments of ownership). The mandatory write down provision has been implemented in the UK through the Banking Act. Before taking any form of resolution action or applying any resolution power set out in the BRRD, the UK resolution authorities have the power (and are obliged when specified conditions are determined to have been met) to write down, or convert Tier 1 and Tier 2 capital instruments issued by the relevant institution into CET1 capital instruments before, or simultaneously with, the entry into resolution of the relevant entity. These measures could be applied to certain of our debt securities. The occurrence of circumstances in which write down powers would need to be exercised in respect of us would be likely to have a negative impact on our business.
In contrast to the creditor protections afforded in the event of thebail-in powers being exercised, holders of capital instruments will not be entitled to the ‘no creditorworse-off’ protections under the Banking Act in the event that their capital instruments are written down or converted to equity under the mandatory write-down tool (unless the mandatory write-down tool were to be used alongside abail-in). Furthermore, in circumstances where capital instruments are converted into equity securities by application of the mandatory write-down tool, those equity securities may be subjected to thebail-in powers in resolution, resulting in their cancellation, significant dilution or transfer away from the investors therein.
In addition, the BRRD provides for resolution authorities to have the power to require institutions and groups to make structural changes to ensure legal and operational separation of ‘critical functions’ from other functions where necessary, or to require institutions to limit or cease existing or proposed activities in certain circumstances. As a result of changes to the PRA Rulebook made to implement the BRRD, the Company is now required to identify such ‘critical functions’ as part of its resolution and recovery planning. If used in respect of us, these ex ante powers would have a material adverse effect on our operations, financial condition and prospects.
Annual Report 2018 | Other information for US investors
We are subject to regulatory capital and leverage requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operations, financial condition and prospects
We are subject to capital adequacy requirements applicable to banks and banking groups under directly applicable EU legislation and as adopted by the PRA. We are required to maintain a minimum ratio of Common Equity Tier 1 (CET1) capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and Tier 1 capital to total adjusted assets for leverage monitoring purposes. Any failure by us to maintain such ratios above prescribed regulatory minimum levels may result in administrative actions or sanctions. These could potentially include requirements on us to cease all or certain lines of new business, to raise new capital resources or, in certain circumstances, a requirement for our existing capital instruments (potentially including our debt securities) to be subjected tobail-in or write down (for more information, see the risk factor entitled‘Bail-in and write down powers under the Banking Act and the BRRD may adversely affect our business and the value of securities we may issue’).
The Capital Requirements Directive IV (CRD IV Directive) and the Capital Requirements Regulation (the CRR and together with the CRD IV Directive, CRD IV) implemented changes proposed by the Basel Committee on Banking Supervision (the Basel Committee) to the capital adequacy framework, known as ‘Basel III’ in the EU. The CRR is directly applicable in each EU Member State and does not therefore require national implementing measures, whilst the CRD IV Directive has been implemented by EU Member States through national legislative processes. CRD IV was published in the Official Journal on 27 June 2013 and came into effect on 1 January 2014, with particular requirements expected to be fully effective by the end of 2019. CRD IV substantially reflects the Basel III capital and liquidity standards and facilitates the applicable implementation timeframes. On 19 December 2013, the PRA published the initial version of its rules and supervisory statements associated with the implementation of CRD IV, which cover prudential rules for banks, building societies and investment firms. Binding technical standards adopted by the European Commission have also impacted, and may further impact, the capital requirements which apply under CRD IV.
Under the ‘Pillar 2’ framework, the PRA requires the capital resources of UK banks to be maintained at levels which exceed the base capital requirements prescribed by CRD IV and to cover relevant risks in their business. In addition, a series of capital buffers have been established under CRD IV and PRA rules to ensure a bank can withstand a period of stress. These buffers, which must be met by CET1 capital, include the counter-cyclical capital buffer, sectoral capital requirements, a PRA buffer and the capital conservation buffer. The total size of the capital buffers will be informed by the results of the annual concurrent UK stress testing exercises. The BoE’s approach to stress testing the UK banking system was outlined in October 2015. The BoE is aiming to develop an approach that is explicitly counter-cyclical, with the severity of the stress test and the associated regulatory capital buffers varying systematically with the state of the financial cycle. Furthermore, the framework is aiming to support a continued improvement in UK banks’ risk management and capital planning capabilities, and the BoE expects participating UK banks to demonstrate sustained improvements in their capabilities over time. The PRA can take action if a bank fails to meet the required capital ratio hurdle rates in the stress testing exercise, and the banks which fail to do so will be required to take action to strengthen their capital position over an appropriate timeframe. If a bank does not meet expectations in its risk management and capital planning capabilities in the stress testing exercise, this may inform the setting of its capital buffers. In March 2018, the BoE published its guidance on its 2018 stress tests, which contained the annual cyclical scenario. The BoE published results of the stress test in November 2018.
Though the results of the PRA’s 2018 stress test did not impact on the level of capital that we are required to hold, the PRA could, in the future, as a result of stress testing exercises (both in the UK and EU wide) and as part of the exercise of UK macro-prudential capital regulation tools, or through supervisory actions (beyond the changes described below), require UK banks and banking groups, including us, to increase our/their capital resources further.
The Financial Services Act 2012 (the FS Act) empowers the Financial Policy Committee of the BoE (FPC), which is asub-committee of the Court of Directors of the BoE, to give directions to the PRA and the FCA so as to ensure implementation of macroprudential measures intended to manage systemic risk. For the UK, the FPC sets the countercyclical capital buffer rate on a quarterly basis. Following its meeting in June 2017, the FPC announced that the UK countercyclical capital buffer rate would be increased from 0% to 0.5%, with binding effect from June 2018. On 28 November 2017, it further increased the level to 1% with binding effect from November 2018. Following its meetings on 20 and 27 November 2018, the FPC maintained the UK countercyclical buffer rate at 1% and indicated it stood ready to move the rate in either direction as the risk environment evolved.
The FS Act also provides the FPC with certain other macro-prudential tools for the management of systemic risk. Since 6 April 2015, these tools have included powers of direction relating to leverage ratios. In July 2015, the FPC made certain directions to the PRA in relation to the leverage ratio. In December 2015, the PRA issued a policy statement setting out how it would implement the FPC’s direction and recommendations on the leverage ratio. All major UK banks and banking groups (including us) are required to hold enough Tier 1 capital (75% of which must be CET1 capital) to satisfy a minimum leverage requirement of 3.25% (following the PRA’s decision to increase the leverage ratio requirement from 3% to 3.25%, announced in October 2017) and enough CET1 capital to satisfy a countercyclical leverage ratio buffer of 35% of each bank’s institution-specific countercyclical capital buffer rate. The FPC has also previously directed the PRA to require UK globally systemically important banks(G-SIBs) and domestically systemically important banks, building societies andPRA-regulated investment firms (including us) to hold enough CET1 capital to meet a supplementary leverage ratio buffer of 35% of the institution-specificG-SIB buffer rate or Systemic Risk Buffer (SRBF) for domestically systemically important banks. The supplementary leverage ratio buffer was implemented on 1 January 2016, in line with theG-SIB buffer rate imposed by the Financial Stability Board (FSB), with the SRBF to be applicable from 1 January 2019. The FPC finalised and published its SRBF framework on 25 May 2016. Systemic importance is measured using the total assets of ring-fenced banksub-groups in scope of the SRBF, with higher SRBF rates applicable as total assets increase. In December 2016, the PRA published its statement of policy on the SRBF relevant to ring-fenced bodies and in November 2018 published its statement of policy for reflecting the SRBF for the UK Leverage Ratio. The FPC can also direct the PRA to adjust capital requirements in relation to particular sectors through the imposition of sectoral capital requirements. Action taken in the future by the FPC in exercise of any of its powers could result in the regulatory capital requirements applied to us being further increased.
Regulators in the UK and worldwide have also proposed that additional loss absorbency requirements should be applied to systemically important institutions to ensure that there is sufficient loss absorbing and recapitalisation capacity available in resolution. The BRRD requires that EU Member States ensure that EU banks meet a Minimum Requirement for Eligible Liabilities (MREL). The BRRD was transposed into UK law in January 2015, with the provisions on MREL taking effect from 1 January 2016.
The BoE’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL) Policy Statement was published in November 2016 and was subsequently updated in June 2018.
This sets out how the BoE expects to use its power to direct a ‘relevant person’ to maintain a minimum requirement for own funds and eligible liabilities (MREL). The Bank is required to set MREL for all institutions and will set the loss absorption amount to cover the losses that would need to be absorbed up to and in resolution. MREL eligible liabilities should be issued externally from the resolution entity.
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There are two types of MREL: ‘external MREL’, issued by a resolution entity, and internal MREL, issued by legal entities in a group that are not themselves resolution entities. Should a firm fail, external MREL helps to ensure that the firm’s own financial resources can be used to absorb losses and recapitalise the business, so that it can continue to provide critical functions without relying on public funds. Internal MREL provides for the recapitalisation of subsidiaries and has the effect of passing up losses within the group, so that they can be absorbed by the shareholders and creditors of the resolution entity through the use of resolution tools.
The BoE expects banks to comply withend-state MREL requirements by 1 January 2022, with the following interim transition (noting scalars may apply to internal MREL amounts):
From 1 January 2019 UK resolution entities that areG-SIBs will be required to meet the minimum requirements set out in the FSB TLAC standard, being the higher of 16% of RWAs or 6% of leverage exposures. The Santander UK group is part of aG-SIB Banking Group and as such will need to meet these minimum requirements.
From 1 January 2020 UK resolution entities that areG-SIBs orD-SIBs will be required to maintain MREL equal to the higher of: two times their Pillar 1 capital requirements and one times their Pillar 2Aadd-ons or if subject to a leverage ratio requirement, two times the applicable requirement.
From 1 January 2022:G-SIBs will be required to meet an external MREL equivalent to the higher of: two times the sum of Pillar 1 and Pillar 2A, or the higher of two times the applicable leverage ratio requirement or 6.75% of leverage exposures.
The BoE intends to take forward for internal MREL eligible liabilities the requirement that they be issued with a contractual trigger that provides the resolution authority of the material subsidiary with the opportunity to direct a write-down and/or conversion in the circumstances specified in the Policy Statement.
On 23 November 2016, the European Commission also published legislative proposals for amendments to CRD IV, the BRRD and the SRM and proposed an additional amending directive to facilitate the creation of a new asset class of ‘nonpreferred’ senior debt. The package of reforms is aimed at further strengthening the resilience of EU credit institutions and is expected to be finalised in 2019 with entry into force (with certain exceptions) no earlier than 2020. Among other things, the proposed package of reforms includes proposals to introduce a binding 3% leverage ratio and a requirement for institutions that trade in securities and derivatives to have more risk-sensitive own funds. In line with the BoE’s Policy Statement and the PRA consultation, the proposed reforms also include measures to align the MREL requirements with the FSB TLAC standards. The proposed reforms are to be considered by the European Parliament and the Council of the EU and remain subject to change, although Directive 2017/2399 amending Directive 2014/59/EU, implementing the‘non-preferred’ senior debt class came into force in December 2017. The final package of reforms may not include all elements of the proposals and new or amended elements may be introduced. Until the proposals are in final form, it is uncertain how they will affect us.
Further, since 31 December 2014, the PRA has had the power under the FSMA to make rules requiring a parent undertaking of a bank to make arrangements to facilitate the exercise of resolution powers, including a power to require a group to issue debt instruments. Such powers could have an impact on the liquidity of our debt instruments and could materially increase our cost of funding. Since 1 January 2014, we have also been subject to certain recovery and resolution planning requirements (popularly known as ‘living wills’) for banks and other financial institutions as set out in the PRA Rulebook. These requirements were updated in January 2015 to implement the recovery and resolution framework under the BRRD. The updated requirements impose more regular and detailed reporting obligations, including the requirement to submit recovery plans and resolution packs to the PRA and to keep them up to date.
In addition to the above, regulators in the UK and worldwide have produced a range of proposals for future legislative and regulatory changes which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operations, financial condition and prospects. These changes, which could affect the Santander UK group as a whole, include the EU implementation of the Basel Committee’s new market risk framework, which reflects rules made as a result of the Basel Committee’s fundamental review of the trading book. In addition, in December 2017 the Basel Committee published their finalisation of the Basel III framework, with proposed implementation from 1 January 2022. This includes the following elements:
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The foregoing measures could have a material adverse effect on our operating results, and consequently, on our financial condition and prospects. There is a risk that changes to the UK’s capital adequacy regime (including any increase to minimum leverage ratios) may result in increased minimum capital requirements, which could reduce available capital for business purposes and thereby adversely affect our cost of funding, profitability and ability to pay dividends, continue organic growth (including increased lending), or pursue acquisitions or other strategic opportunities (alternatively we could restructure our balance sheet to reduce the capital charges incurred pursuant to the PRA’s rules in relation to the assets held, or raise additional capital but at increased cost and subject to prevailing market conditions). In addition, changes to the eligibility criteria for Tier 1 and Tier 2 capital may affect our ability to raise Tier 1 and Tier 2 capital and impact the recognition of existing Tier 1 and Tier 2 capital resources in the calculation of our capital position. Furthermore increased capital requirements may negatively affect our return on equity and other financial performance indicators.
Our business could be affected if our capital is not managed effectively or if these measures limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms. Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. For more on our capital position and capital management, see ‘Risk review – Capital risk’ on pages 122 to 126.
Liquidity and funding risks are inherent in our business and could have a material adverse effect on us
Liquidity risk is the risk that we, although otherwise solvent, either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. During the period 2008 to 2013, continued constraints in the supply of liquidity, including inter-bank lending, materially and adversely affected the cost of
Annual Report 2018 | Other information for US investors
funding our business. There can be no assurance that such constraints will not reoccur. Extreme liquidity constraints may affect our operations and our ability to fulfil regulatory liquidity requirements, as well as limit growth possibilities. Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us.
Our cost of funding is directly related to prevailing interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
If wholesale markets financing ceases to be available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding (whether directly or indirectly) and therefore on our operations, financial condition and prospects.
In response to the financial crisis, central banks around the world, including the BoE, US Federal Reserve Bank (the Fed) and the ECB, made coordinated efforts to increase liquidity in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and ensuring that currency swaps markets remain liquid. Over the course of 2018 central banks have either started or continued to unwinding such stimulus, however towards the end of 2018 was that the near-term outlook for global growth had started to show signs of softening, this could lead to a slowdown in the expected tightening of global monetary policy. The BoE increased their Base Rate in August 2018 to 0.75%, this was the only UK rate rise in 2018. Additionally the BoE voted to maintain the stock of the quantitative easing programme of £445bn of assets, comprising £10bn of corporate bonds and £435bn of gilts. In December 2018, the ECB confirmed that it would end its asset purchase programme. In the US, the Fed increased its short-term interest rate by 25 basis points in each of March 2018, June 2018, September 2018 and December 2018 to 2.50%, and has forecast gradual additional interest rate increases in 2019. A rapid removal or significant reduction, in outstanding quantitative easing asset purchase programmes could have an adverse effect on our ability to access liquidity and on our funding costs.
In October 2013, the BoE updated its Sterling Monetary Framework to provide more transparent liquidity insurance support in exceptional circumstances. The Indexed Long-Term Repo Facility will now be available to support regular bank requirements for liquidity while the Discount Window Facility has been reinforced as support for banks experiencing idiosyncratic stress. The Collateralised Term Repo Facility will be made available to support markets in the event of a market wide liquidity stress. On 28 February 2018, the drawdown period closed for the BoE’s Term Funding Scheme(1) (TFS), which allowed participants to borrow central bank reserves in exchange for eligible collateral. At 31 December 2018, we had drawn £10.8bn under the TFS. In addition to the TFS, we participated in the Funding for Lending Scheme (FLS). At 31 December 2018, we had drawn £1.0bn of UK treasury bills under the FLS.
To the extent that we have made use of these BoE facilities described above, any significant reduction or withdrawal of those facilities could increase our funding costs.
Each of the factors described above (the persistence or worsening of adverse market conditions, and the lack of availability, or withdrawal, of such central bank quantitative easing and/or lending schemes or an increase in base interest rates) could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us and, more generally, on our operations, financial condition and prospects.
Further, we aim for a funding structure that is consistent with our assets, avoids excessive reliance on short-term wholesale funding, attracts enduring commercial deposits and provides diversification in products and tenor. We therefore rely, and will continue to rely, on commercial deposits to fund a significant proportion of lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy in the financial services industry in general, confidence in the company specifically, the Company’s credit rating and the availability and extent of deposit guarantees, as well as competition between banks for deposits or competition with other products, such as mutual funds. A change in any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future, and therefore have a material adverse effect on our operations, financial condition and prospects.
In our liquidity planning we assume that our customers will continue to make a volume of deposits with us (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are withdrawn at short notice or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, there may be a material adverse effect on our operations, financial condition and prospects. For additional information about our liquidity position and other liquidity matters, including the policies and procedures we use to manage our liquidity risks, see ‘Risk review – Liquidity risk’ on pages 114 to 116.
A sudden or unexpected shortage of funds in the banking system could threaten the stability of the banking system, and lead to increased funding costs, a reduction in the term of funding instruments or require us to liquidate certain assets, thereby impacting our liquidity position and ability to pay our debts. If these circumstances were to arise, this could have a material adverse effect on our operations, financial condition and prospects.
We are subject to liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operations, financial condition and prospects
The PRA has responsibility for the micro-prudential regulation of banks and certain other financial institutions. In June 2015, the PRA issued its policy statement on the transfer of the liquidity regime to the CRD IV standard, confirming that the existing regime under BIPRU 12 would cease to apply with effect from 1 October 2015, although certain of the BIPRU requirements are reflected in the new regime.
Under CRD IV, banks are, or under transitional measures will be, required to meet two new liquidity standards, consisting of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) metrics, which are aimed to promote:
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LCR
The LCR is intended to ensure that a bank maintains an adequate level of unencumbered, high quality liquid assets which can be used to offset the net cash outflows the bank could encounter under a short-term significant liquidity stress scenario. The current minimum requirement for LCR is set at 100%. Our current liquidity position is in excess of the minimum requirements set by the PRA, however there can be no assurance that future changes to the applicable liquidity requirements would not have an adverse effect on our financial performance.
NSFR
In October 2014, the Basel Committee published its final NSFR standard. The NSFR has not yet been implemented within Europe (unlike the LCR). As such there is no formal NSFR requirement applicable to UK or other EU banks until such time as the European Commission adopts appropriate regulatory/technical standards. The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. Banks are expected to hold an NSFR of at least 100% on an ongoing basis and report its NSFR at least quarterly. Ahead of its planned implementation, the NSFR will remain subject to an observation period. Santander UK monitors its NSFR on an ongoing basis and stands ready to comply with the standards once agreed.
There is a risk that implementing and maintaining existing and new liquidity requirements, such as through enhanced liquidity risk management systems, may incur significant costs, and more stringent requirements to hold liquid assets may materially affect our lending business as more funds may be required to acquire or maintain a liquidity buffer, thereby reducing future profitability. This could in turn adversely impact our operations, financial condition and prospects.
Exposure to UK Government debt could have a material adverse effect on us
Like many other UK banks, we invest in debt securities of the UK Government, largely for liquidity purposes. At 31 December 2018, approximately 2% of our total assets and 36% of our securities portfolio were comprised of debt securities issued by the UK Government. Any failure by the UK Government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on our operations, financial condition and prospects.
We may suffer adverse effects as a result of the political, economic and sovereign debt tensions in the eurozone
Conditions in the capital markets and the economy generally in the eurozone, though improving recently, continue to show signs of fragility and volatility. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies. This could have a material adverse effect on our operations, financial condition and prospects.
The UK EU Referendum caused significant volatility in the global stock and foreign exchange markets (for more information, see the risk factor entitled ‘We are vulnerable to disruptions and volatility in the global financial markets’ and ‘Exposure to UK political developments, including the ongoing negotiations between the UK and EU, could have a material adverse effect on us’). This volatility couldre-occur depending on the outcome of the continuing exit negotiations.
In the past, the ECB and European Council have taken actions with the aim of reducing the risk of contagion in the eurozone and beyond and improving economic and financial stability. Notwithstanding these measures, a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by the eurozone (and other) nations, which may be under financial stress. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be adversely affected, with wider possible adverse consequences for global financial market conditions.
Although we conduct the majority of our business in the UK, we have direct and indirect exposure to financial and economic conditions throughout the eurozone economies, including as a result of Banco Santander SA, and other affiliates being situated in the eurozone. Concerns relating to sovereign defaults or a partial or completebreak-up of the European Monetary Union, including potential accompanying redenomination risks and uncertainties, may recur in light of the political and economic factors mentioned above. For a further description of our country risk exposures, including eurozone and peripheral eurozone exposures and redenomination risk, see ‘Risk review – Country risk exposure’ on page 84. In addition, general financial and economic conditions in the UK, which directly affect our operations, financial condition and prospects, may deteriorate as a result of conditions in the eurozone.
We are exposed to risks faced by other financial institutions
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumours or questions about the solvency of certain financial institutions and the financial services industry generally, have led to incidents of market-wide liquidity problems over the last 10 years and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on our operations, financial condition and prospects.
An adverse movement in our external credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our operations, financial condition and prospects
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Credit rating agencies regularly evaluate us, and their credit ratings of our institution and our debt in issue are based on a number of factors, including our financial strength, the strength of the UK economy and conditions affecting the financial services industry generally.
Any downgrade in the external credit ratings assigned to us or any of our debt securities could have an adverse impact on us. In particular, such downgrade in our credit ratings could increase our borrowing costs and could require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our operations, financial condition and prospects. For example, a credit rating downgrade could have a material adverse effect on our ability to sell or market certain of our products, engage in certain longer-term transactions and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest.
In addition, under the terms of certain of our derivative contracts and other financial commitments, we may be required to maintain a minimum credit rating or otherwise our counterparties may be able to terminate such contracts or require the posting of collateral. Any of these results of a credit rating downgrade could, in turn, result in outflows and reduce our liquidity and have an adverse effect on us, including our operations, financial condition and prospects. For example, we estimate that at 31 December 2018, if Fitch, Moody’s and Standard & Poor’s were concurrently to downgrade the long-term credit ratings of Santander UK plc by one notch, and thereby trigger a short-term credit rating downgrade, this could result in an outflow of £3.6bn of cash and collateral (2017: £3.9bn). A hypothetical two notch downgrade would result in a further outflow of £0.2bn of cash and collateral at 31 December 2018 (2017: £0.2bn). These potential outflows are captured under the LCR regime. However, while certain potential impacts are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they
Annual Report 2018 | Other information for US investors
depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, whether any downgrade precipitates changes to the way that the financial institutions sector is rated, and assumptions about the ratings of other financial institutions and the potential behaviours of various customers, investors and counterparties. Actual outflows will also depend upon certain other factors including any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from a loss of unsecured funding (such as from money market funds) or loss of secured funding capacity.
Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on us. In addition, if certain counterparties terminated derivative contracts with us and we were unable to replace such contracts, our market risk profile could be altered.
The Company’s long-term debt is currently rated investment grade by the major rating agencies: Baa1 with positive outlook by Moody’s Investors Service, BBB with stable outlook by S&P Global Ratings and A with stable outlook by Fitch Ratings. Santander UK plc’s long-term debt is currently rated investment grade by the major rating agencies: Aa3 with positive outlook by Moody’s Investors Service, A with stable outlook by S&P Global Ratings and A+ with stable outlook by Fitch Ratings. If a downgrade of any Santander UK group member’s long-term credit ratings were to occur, it could also impact the short-term credit ratings of other members of the Santander UK group.
There can be no assurance that the credit rating agencies will maintain our current credit ratings or outlooks. A failure to maintain favourable credit ratings and outlooks could increase our cost of funding, adversely affect our interest margins, and reduce our ability to secure both long term and short term funding, any of which could have a material adverse effect on our operations, financial condition and prospects.
Negative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could have a material adverse effect on our operating results, financial condition, prospects and the marketability and trading value of our securities. This might also impact on our own credit rating, borrowing costs and our ability to secure funding. Negative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could also have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and companies, further depressing economic activity, increasing unemployment and/or reducing asset prices.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially adversely affect us and our profitability
Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices.
Changes in interest rates would affect the following areas, among others, of our business:
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Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors. Variations in interest rates could affect the interest earned on our assets and the interest paid on our borrowings, thereby affecting our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. In addition, costs we incur as we implement strategies to reduce interest rate exposure could increase in the future (which, in turn, will impact our results).
Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans, reduce the value of our financial assets and reduce gains or require us to record losses on sales of our loans or securities.
Due to the historically low interest rate environment in the UK in recent years, the rates on many of our interest-bearing deposit products have been priced at or near zero, which may limit our ability to further reduce customer rates in the event of further cuts in BoE Base Rate and thus negatively impacting our margins. Notwithstanding the August 2018 increase in BoE Base Rate to 0.75%, if a generally low interest rate environment in the UK persists in the long term, it may be difficult to increase our net interest income, which will impact our results.
LIBOR and other benchmarks are subject to national, international and other regulatory guidance and proposals for reform and transition to alternative rates. On 29 November 2017, the FCA announced that its Working Group on Sterling Risk-Free Rates will be mandated with implementing a broad-based transition to the Sterling Overnight Index Average (“SONIA”) over the next four years across sterling bond, loan and derivative markets, so that SONIA is established as the primary sterling interest rate benchmark. As set out in Andrew Bailey’s speech on 12 July 2018, the introduction of SONIA as the primary sterling interest rate benchmark is planned to take place before the end of 2021.
Any such changes to, or replacement of benchmarks may cause them to perform differently than in the past, or may have other consequential effects on any of our rights and obligations which depend on such benchmarks. In particular, the potential transition from LIBOR to SONIA or the elimination of the LIBOR benchmark, or changes in the manner of administration of such benchmark, could require an adjustment to the terms of financial instruments to which the Santander UK group is a party and to such contractual obligations of the Santander UK group which relate to LIBOR. This could have a material adverse effect on our operations, financial condition and prospects.
It is not yet clear whether LIBOR will cease to exist entirely before the end of 2021, whether the use of LIBOR will be made unlawful or impermissible in future, and whether there will be any transitional arrangements set out by law, regulation or market practice. In particular, it is not yet clear what the effect will be on legacy contracts and agreements. If LIBOR were to be discontinued or replaced without the regulators making clear provision for automatically transitioning legacy contracts and agreements, this could have a material adverse effect on our business.
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If LIBOR is replaced, ceases to exist or if the methodology for calculating LIBOR changes for any reason, interest rates on our floating rate obligations, loans, deposits, derivatives, and other financial instruments linked to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. In addition, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments linked to LIBOR rates. Any such issues relating to LIBOR or other benchmarks (including SONIA) could have a material adverse effect on our operations, financial condition and prospects.
We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities. Our capital resource is stated in pounds sterling and we do not fully hedge our capital position against changes in currency exchange rates. Although we seek to hedge most of our currency risk, through hedging and the purchase of cross-currency swaps, these hedges do not eliminate currency risk and we can make no assurance that we will not suffer adverse financial consequences as a result of currency fluctuations. The volatility in the value of the pound sterling following the result of the UK EU Referendum may persist as negotiations for exit continue and continued significant exchange rate volatility and the depreciation of the pound sterling in particular could have an adverse impact on our operating results and our ability to meet our US dollar and euro-denominated obligations, and which could have a material adverse effect on our operations, financial condition and prospects.
We are also exposed to price risk in our investments in equity and debt securities. The performance of financial markets may cause changes in the value of our investment portfolios. The volatility of world equity markets, due to the continued economic uncertainty and sovereign debt tensions, has had a particularly strong impact on the financial sector.
Continued volatility may affect the value of our investments in equity and debt securities and, depending on their fair value and future recovery expectations, could become a permanent impairment, which would be subject to write-offs against our results. To the extent any of these risks materialise, our net interest income or the market value of our assets and liabilities could be adversely affected.
Market conditions have resulted in, and could continue to result in, material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operations, financial condition and prospects
In the past 10 years, financial markets have been subject to periods of significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities, loans, derivatives and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting the prevailing market conditions, may result in negative changes in the fair values of our financial assets. In addition, the value ultimately realised by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which could have a material adverse effect on our operations, financial condition and prospects. In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgements and estimates in order to establish fair value.
Reliable assumptions are difficult to make and are inherently uncertain. Moreover, valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operations, financial condition and prospects.
Failure to successfully implement and continue to improve our credit risk management systems could materially and adversely affect our business
As a commercial banking group, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ our own credit rating system to assess the particular risk profile of a customer. This system is primarily generated internally, but, in the case of counterparties with a global presence, also builds off the credit assessment assigned by other Banco Santander group members. As this process involves detailed analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgement on current or future credit risk behaviour of our customers, our employees may not always be able to assign a correct credit rating, which may result in a larger exposure to higher credit risks than indicated by our risk rating system.
In addition, we continuously refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to detect all possible risks before they occur, or our employees may not be able to effectively implement our credit policies and guidelines due to limited tools available to us, which may increase our credit risk.
Any failure to effectively implement, consistently monitor and refine our credit risk management systems may result in an increase in the level ofnon-performing loans and higher losses than expected, which could have a material adverse effect on our operations, financial condition and prospects.
We are subject to various risks associated with our derivative transactions that could have a material adverse effect on our operations, financial condition and prospects
We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to various risks associated with these transactions, including market risk, operational risk, basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or counterparty risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).
Market practices and documentation for derivative transactions in the UK may differ from those in other countries. In addition, the execution and performance of these transactions depend on our ability to develop adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyse and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on our operations, financial condition and prospects.
Annual Report 2018 | Other information for US investors
Operational risks, including risks relating to data and information collection, processing, storage and security, are inherent in our business
Like other financial institutions with a large customer base, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as the personal information of other individuals, such as staff, and a large number of assets. Accordingly, our business depends on the ability to process a large number of transactions efficiently and accurately, and on our people, digital technologies, computer and email services, software and networks. We also rely on the secure processing, storage and transmission of confidential, sensitive personal data and other information using our computer systems and networks, and through the adoption of cloud computing services. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, human error, inadequate or failed internal control processes and systems or from external events that interrupt normal business operations. We also face the risk that our controls and procedures prove to be designed inadequately or are circumvented such that our data and/or client records are incomplete, not recoverable or not securely stored. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure data and information processing, storage and transmission capabilities to prevent against information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted hacking. Adoption of cloud based computing services in order to improve technological resilience and cost-effectiveness could bring with it risks to the information we process if we do not take care to implement appropriate controls such as strong authentication and encryption. If we cannot maintain an effective and secure electronic data and information, management and processing system or if we fail to maintain complete physical and electronic records, this could result in regulatory sanctions, including under the General Data Protection Regulation, which came into force on 25 May 2018. Any such failures or sanctions could result in serious reputational or financial harm to us, as well as to those whose data we hold, and could have a material adverse effect on our operations, financial condition and prospects.
Infrastructure and technology resilience
We take protective measures and continuously monitor and develop our systems to safeguard our technology infrastructure, data and information from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorised access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm, and therefore have a material adverse effect on our operations, financial condition and prospects. Furthermore, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures. We expect our programmes of change to have an effect on our risk profile, both technological and regulatory. Whether it is the opportunities from adoption of cloud technology, systems to support important regulatory initiatives, or the desire to identify, prioritise and remove obsolete systems from operations, the operational risk associated with systems change is likely to increase and this will therefore remain an area of key focus in our risk management. There can be no assurance that we will not suffer material losses from such operational risks in the future, including those relating to any security breaches, which could have a material adverse effect on our operations, financial condition and prospects.
Cyber security
In particular, we have seen in recent years the computer systems of companies and organisations targeted, not only by cyber criminals, but also by activists and rogue nation states. In common with other financial institutions, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Accordingly we have been and continue to be subject to a range of cyber-attacks, such as malware, phishing and denial of service.
Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our electronic systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in order to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to effectively manage our cyber security risk, the impact could be significant and may include harm to our reputation and have an adverse effect on our operations, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. Factors such as failing to apply critical security patches from our technology providers, to manage out obsolete technology or to update our processes in response to new threats could give rise to these impacts.
In addition, we may also be impacted by cyber-attacks against national critical infrastructures in the UK, for example, the telecommunications network. In common with other financial institutions we are dependent on such networks and any cyber-attack against these networks could negatively affect our ability to service our customers. As we do not operate these networks, we have limited ability to protect our business from the adverse effects of cyber-attack against them.
Further, the domestic and global financial services industry, including key financial market infrastructure, may be the target of cyber disruption and attack by cyber criminals, activists and rogue states looking to cause economic instability. We have limited ability to protect our business from the adverse effects of cyber disruption or attack against our counterparties and key financial market infrastructure. If such a disruption or attack were to occur it could cause serious operational and financial harm to us.
Procedure and policy compliance
We also manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorised disclosures could subject us to legal actions and administrative sanctions as well as damages and reputational harm that could materially and adversely affect our operations, financial condition and prospects. Further, our business is exposed to risk from potentialnon-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and cause serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. We may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorised access and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could have a material adverse effect on our operations, financial condition and prospects.
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We may fail to detect or prevent money laundering and other financial crime activities due to not correctly identifying our financial crime risks, failing to implement effective systems and controls to mitigate those risks or failing to recruit and retain resource with the necessary skills and experience. This could expose us to significant fines, additional regulatory scrutiny, restrictions on the conduct of our business and operations, increased liability, civil claims, criminal actions and reputational risk
We are obligated to comply with applicable anti-money laundering (AML), anti-terrorism, anti-bribery and corruption, sanctions,anti-tax evasion and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to conduct customer due diligence (including in respect of sanctions and politically-exposed person screening), ensure account and transaction information is kept up to date and implement effective financial crime policies and procedures detailing what is required from those responsible in order to counter financial crime risks. We are also required to conduct financial crime training for our staff and to report suspicious transactions and activity to appropriate law enforcement.
Over the last decade, financial crime risk has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML/CTF, anti-bribery and corruption and sanctions laws and regulations are increasingly complex and detailed and have become the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel. Political and policy maker focus on the topic in the UK, EU and within international bodies has intensified over the past year. For more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operations, financial condition and prospects’.
We have developed policies and procedures designed to detect and prevent the use of our banking network for money laundering and financial crime related activities, which are reviewed to ensure that all current requirements are fully reflected. The approach is also informed by intelligence assessment and risk assessment, including the recent UK Government National Risk Assessment of Money Laundering and Terrorist Financing.
The policies and procedures require the implementation and embedding within the business of effective controls and monitoring, which requires ongoing changes to systems, technology and operational activities. Comprehensive and risk based financial crime training at a bank wide and business unit level is a key element of this, with the FCA providing guidance on expectations within its Financial Crime Guide. Financial crime is continually evolving, and the expectation of regulators is increasing (for more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operations, financial condition and prospects’). This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our staff to assist us by identifying such activities and reporting them, and our staff have varying degrees of experience in recognising criminal tactics and understanding the level of sophistication of criminal organisations. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight there remains a risk of regulatory breach and this could have a material adverse effect on our operations, financial condition and prospects.
If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to pursue civil and criminal proceedings against us, to impose significant fines and other penalties on us, including requiring a complete review of our business systems,day-to-day supervision by external consultants, imposing restrictions on the conduct of our business and operations and ultimately the revocation of our banking licence, which could have a material adverse effect on our operations, financial condition and prospects. The reputational damage to our business and brand could be severe if we were found to have materially breached AML, anti-bribery and corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers or our business from being used by criminals for illegal or improper purposes.
In addition, while we review our relevant counterparties’ internal policies and procedures (for example, under our correspondent banking relationships) with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-financial-crime procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without our (or our relevant counterparties’) knowledge. There are also risks that other third parties, such as suppliers, could be involved in financial crime. If we are associated with, or even accused of being associated with, financial crime (or a business involved in financial crime), then our reputation could suffer and/or we could become subject to civil or criminal proceedings that could result in penalties, sanctions and/or legal enforcement (including being added to ‘black lists’ that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operations, financial condition and prospects.
As described in the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operations, financial condition and prospects’, there were a number of changes and updates to UK law in 2018 for financial crime. The divergence between the UK/EU and the US in regard to sanctions policy adds to the complexity in this area and poses potential risks. Constant monitoring of external laws and regulations is therefore a key area of focus to ensure internal policies, procedures and training are up to date with emerging requirements.
At an operational level,geo-political, economic and social changes can provide opportunities to financial criminals and alter the risks posed to banks. Effective intelligence and monitoring systems within strengthened public/private partnerships to share knowledge on emerging risks are required to help mitigate these risks. However, there can be no guarantee that any intelligence shared by public authorities or other financial institutions will be accurate or effective in helping us to combat financial crime, and if, as a result, we fail to combat financial crime effectively then this could have a material adverse effect on our operations, financial condition and prospects.
Annual Report 2018 | Other information for US investors
Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on our operations, financial condition and prospects
Our businesses and our ability to remain competitive depends to a significant extent upon the functionality of our information technology systems (including Partenon, the global banking information technology platform utilised by the Santander UK group and Banco Santander SA), and on our ability to upgrade and expand the capacity of our information technology on a timely and cost-effective basis. The proper functioning of our financial control, risk management, credit analysis and reporting, accounting, customer service, financial crime, conduct and compliance and other information technology systems, as well as the communication networks between branches and main data processing centres, are critical to our businesses and our ability to compete. Investments and improvements in our information technology infrastructure are regularly required in order to remain competitive. We cannot be certain that in the future we will be able to maintain the level of capital expenditure necessary to support the improvement, expansion or upgrading of our information technology infrastructure as effectively as our competitors; this may result in a loss of any competitive advantages that our information technology systems provide. Any failure to effectively improve, expand or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on our operations, financial condition and prospects.
We may be exposed to unidentified or unanticipated risks despite our risk management policies, procedures and methods and to risk related to errors in our modelling
The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of risk reporting systems. For a further description of our risk management framework see the ‘Risk review’ on pages 63 to 139. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.
Some of our tools and metrics for managing risk are based upon our use of observed historical market behaviour. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modelling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material, unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that include errors or are otherwise poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood. If existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. This could have a material adverse effect on our operations, financial condition and prospects.
Competition with other financial institutions could adversely affect us
The markets for UK financial services are very competitive and we have seen strong competition from incumbent banks and large building societies. In addition, we face competition from a number of new entrants,non-banks and other providers. Management expects such competition to continue or intensify as a result of customer behaviour and trends, technological changes, competitor behaviour, new entrants (includingnon-traditional financial services providers such as large retail or technology companies or financial technology companies), new lending models and changes in regulation (including the recent introduction of Open Banking and changes arising from PSD2).
We consider our competitive position in our management actions as appropriate, such as pricing and product decisions. Increasing competition could mean that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on our profitability, operations, financial condition and prospects. It may also negatively affect our operations, financial condition and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our customers and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on our operations, financial condition and prospects
The success of our operations and our profitability depends, in part, on the success of new products and services we offer our customers. However, we cannot guarantee that our new products and services will be responsive to customer demands or that they will be successful once they are offered to our customers. In addition, our customers’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our customers’ changing needs.
Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence customer choices.
If we cannot respond in a timely fashion to the changing needs of our customers, we may lose customers, which could in turn materially and adversely impact our operations, financial condition and prospects.
Further, our customers may raise complaints and seek redress if they consider that they have suffered loss from our products and services; for example, as a result of any alleged misselling or incorrect application of the terms and conditions of a particular product. This could in turn subject us to risks of potential legal action by our customers, or to intervention by our regulators.
As we expand the range of our products and services, some of which may be at an early stage of development in the UK market, we will be exposed to known, new and potentially increasingly complex risks, including conduct risk, and development expenses. Our employees and risk management systems, as well as our experience and that of our partners, may not be sufficient or adequate to enable us to properly handle or manage such risks. In addition, the cost of developing products that are not launched is likely to affect our operating results.
Any or all of the above factors, individually or collectively, could have a material adverse effect on our operations, financial condition and prospects.
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If the level ofnon-performing loans increases or the credit quality of our loans deteriorates in the future, or if our loan loss reserves are insufficient to cover loan losses, this could have a material adverse effect on our operations, financial condition and prospects
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses.Non-performing or low credit quality loans have in the past, and could continue to, negatively impact our operations, financial condition and prospects.
In particular, the amount of our reportednon-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (the credit quality of which may turn out to be worse than we had anticipated), or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties, a general deterioration in the UK or global economic conditions, the impact of political events, events affecting certain industries or events affecting financial markets and global economies.
We cannot be sure that we will be able to effectively control the level of impaired loans in, or the credit quality of, our total loan portfolio, which could have a material adverse effect on our operations, financial condition and prospects. Interest rates payable on a significant portion of our outstanding mortgage loan products fluctuate over time due to, among other factors, changes in the BoE Base Rate. As a result, borrowers with variable interest rate mortgage loans are exposed to increased monthly payments when the related mortgage interest rate adjusts upward. Similarly, borrowers of mortgage loans with fixed or introductory rates adjusting to variable rates after an initial period are exposed to the risk of increased monthly payments at the end of this period. This risk may be slightly greater following the BoE Base Rate increases in 2017 and 2018. Over the last few years both variable and fixed interest rates have been at historically low levels, which has benefited borrowers of new loans and those repaying existing variable rate loans regardless of special or introductory rates. Future increases in borrowers’ required monthly payments may result in higher delinquency rates and losses related tonon-performing loans in the future. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. These events, alone or in combination, may contribute to higher delinquency rates and losses for the Santander UK group, which could have a material adverse effect on our operations, financial condition and prospects.
Our current loan loss reserves may not be adequate to cover an increase in the amount ofnon-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our loan loss reserves are based on our current assessment of various factors affecting the quality of our loan portfolio, including our borrowers’ financial condition, repayment abilities, the realisable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we cannot provide any assurance that our current or future loan loss reserves will be sufficient to cover actual losses.
If our assessment of and expectations concerning the above mentioned factors differ from actual developments we may need to increase our loan loss reserves, which may adversely affect our operations, financial condition and prospects. Additionally, in calculating our loan loss reserves, we employ qualitative tools and statistical models which may not be reliable in all circumstances and which are dependent upon data that may not be complete. If we are unable to control or reduce the level of ournon-performing or poor credit quality loans, this could have a material adverse effect on our operations, financial condition and prospects.
Our loan portfolio is subject to risk of prepayment, which could have a material adverse effect on our operations, financial condition and prospects
Our loan portfolio is subject to prepayment risk resulting from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on our operations, financial condition and prospects. As a result we could be required to amortise net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income and there is a risk that we are not able to accurately forecast amortisation schedules for these purposes which may affect our profitability. Prepayment risk also has a significant adverse impact on credit card and collateralised mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. The risk of prepayment and our ability to accurately forecast amortisation schedules is inherent to our commercial activity and an increase in prepayments or a failure to accurately forecast amortisation schedules could have a material adverse effect on our operations, financial condition and prospects.
The value of the collateral, including real estate, securing our loans may not be sufficient, and we may be unable to realise the full value of the collateral securing our loan portfolio
The value of the collateral securing our loan portfolio may significantly fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the UK’s economy. Our residential mortgage loan portfolio is one of our principal assets, comprising 79% of our loan portfolio at 31 December 2018. As a result, we are highly exposed to developments in the residential property market in the UK.
House price growth has slowed since the UK EU Referendum, most noticeably in London, although UK house prices have generally continued to be supported by certain economic fundamentals including low mortgage rates (notwithstanding the recent BoE Base Rate increase to 0.75%) and low unemployment rates. Nevertheless, any increase in house prices may be limited given low levels of consumer confidence and low levels of real earnings growth. The depth of the previous house price declines as well as the continuing uncertainty as to the extent and sustainability of the UK economic recovery will mean that losses could be incurred on loans should they go into possession.
The value of the collateral securing our loan portfolio may also be adversely affected by force majeure events such as natural disasters like floods or landslides. Any force majeure event may cause widespread damage and could have an adverse impact on the economy of the affected region and may therefore impair the asset quality of our loan portfolio in that area.
We may also not have sufficientlyup-to-date information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral.
If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our operations, financial condition and prospects.
Annual Report 2018 | Other information for US investors
If we are unable to manage the growth of our operations, this could have a material adverse impact on our profitability
We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses when necessary. From time to time, we evaluate acquisition, disposal, and partnership opportunities that we believe could offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and we may not be able to acquire promising targets or form partnerships on favourable terms, or at all. Furthermore, preparations for acquisitions that we do not complete can be disruptive. We base our assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to value, operations, profitability and other matters that may prove to be incorrect. Our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Such integration entails significant risks such as challenges in retaining the customers and employees of the acquired businesses, unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims and regulatory investigations. We can give no assurances that our expectations with regards to integration and synergies will materialise.
We cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth decisions including our ability to:
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Any failure to manage growth effectively, including any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operations, financial condition and prospects. In addition, any acquisition, disposal or partnership could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies. Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any or all of these factors, individually or collectively, could have a material adverse effect on our operations, financial condition and prospects.
Goodwill impairments may be required in relation to businesses acquired from third parties
We have made business acquisitions from third parties in past years and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written-down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, and more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not however affect our regulatory capital. Whilst no impairment of goodwill was recognised in the current period and prior periods presented, there can be no assurances that we will not have to write down the value attributed to goodwill in the future, which could adversely affect our results and net assets.
We are responsible for contributing to compensation schemes in the UK in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers
The UK’s Financial Services Compensation Scheme (FSCS) is the UK’s compensation fund of last resort for customers of authorised financial services firms. It may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default. The FSCS is funded by levies on firms authorised by the PRA or the FCA (i.e. participant firms), including members of the Santander UK group.
Following the default of a number of authorised financial services firms since 2008, the FSCS borrowed funds totalling approximately £18bn from HM Treasury to meet the compensation costs for customers of those firms. The substantial majority of the principal should be repaid from funds the FSCS levies from asset sales, surplus cash flow or other recoveries in relation to assets of the firms that defaulted. However, the FSCS estimates that the assets of these failed institutions are insufficient, and, to the extent that there remains a shortfall, the FSCS is recovering this shortfall by levying firms authorised by the PRA or the FCA in instalments. The first instalment was in scheme year 2013/14, and we made a capital contribution in each of 2013, 2014, 2015 and 2016. In the year ending 31 December 2017, our contribution was £23m. For the year ended 31 December 2018, we made a contribution of £5m to the interest cost of the levy, and, on our income statement, released £4m of provisions to reflect the reduced amount now expected to be charged for the remaining interest.
However, in the event that the FSCS raises further funds from participant firms or increases the levies to be paid by such firms or the frequency at which the levies are to be paid, the associated cost to us could have a material adverse effect on our operations, financial condition and prospects. Since 2008, measures taken to protect the depositors of deposit-taking institutions involving the FSCS, such as the borrowing from HM Treasury mentioned above, have resulted in a significant increase in the levies made by the FSCS on the industry and such levies may continue to go up if similar measures are required to protect depositors of other institutions. In addition, following amendments to the preferred credit status of depositors that came into force on 31 December 2014, the FSCS stands in the place of depositors of a failing institution but has preferred status over an institution’s other creditors.
FSCS levies are collected by the FCA as part of a single payment by firms covering the FCA, the PRA, the FOS and the FSCS fees. It is possible that future policy of the FSCS and future levies on the firms authorised by the FCA or PRA may differ from those at present and that this could lead to a period of some uncertainty for members of the Santander UK group. The levies may also increase. In addition, it is possible that other jurisdictions where we operate could introduce or amend their similar compensation, contributory or reimbursement schemes. As a result of any such developments, we may incur additional costs and liabilities which may adversely affect our operations, financial condition and prospects.
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Changes in taxes and other assessments may adversely affect us
The tax and other assessment regimes to which our customers and we are subject are regularly reformed, or subject to proposed reforms. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which may be earmarked for designated governmental purposes. Some of these changes may be specific to the banking/financial services sectors and therefore result in us incurring an additional tax burden when compared to other industry sectors. The effects of these changes and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified and there can be no assurance that these reforms will not, once implemented, have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in ournon-performing credit portfolio.
The following paragraphs discuss five major reforms (the Bank Levy, Restriction of Tax Deductions for Compensation Payments, Corporation Tax Surcharge and two possible future changes in the taxation of banking groups in the EU) which could have a material adverse effect on our operations, financial condition and prospects, and the competitive position of UK banking groups, including us.
Bank Levy
HM Treasury introduced an annual UK bank levy (the Bank Levy) via legislation in the Finance Act 2011. The Bank Levy is imposed on (among other entities) UK banking groups and subsidiaries, and therefore applies to us. The amount of the Bank Levy is based on a bank’s total liabilities, excluding (among other things) Tier 1 capital, insured retail deposits and repos secured on sovereign debt. With effect from 1 April 2015, the Finance Act 2015 increased the rate (for short-term liabilities) to 0.21% (a reduced rate is applied to long-term equity and liabilities). Subsequently the Finance (No.2) Act 2015 (Finance No.2 Act), which was enacted on 18 November 2015, reduced the Bank Levy rate from 0.21% to 0.18% from 1 January 2016 with subsequent annual reductions to 0.1% from 1 January 2021.
Restriction of Tax Deductions for Compensation Payments
The Finance (No.2) Act implemented measures so that certain compensation expenditure incurred by banking companies (including ANTS and Santander UK plc) on or after 7 July 2015 is: (i) no longer deductible for corporation tax purposes; and (ii) subject to a deemed taxable receipt equivalent to 10% of such compensation expenditure.
Corporation Tax Surcharge
With effect from 1 January 2016, banks (as defined in the Corporation Tax Act 2010 and including Santander UK plc, ANTS and Cater Allen Limited) are subject to a surcharge at a rate of 8% on their taxable profits for corporation tax purposes (with certain reliefs added back and subject to annual allowance).
European Taxation
On 14 February 2013, the Commission published a proposal (the Commission Proposal) for a directive for a common system of financial transactions tax (FTT) in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the Participating Member States). However, Estonia has since stated that it will not participate.
The FTT may give rise to tax liabilities for Santander UK plc or Santander UK Group Holdings plc with respect to certain transactions (including concluding swap transactions and/or purchases or sales of securities (such as authorised investments)) if it is adopted based on the Commission’s Proposal.
Under the Commission’s proposal, the FTT could apply in certain circumstances to persons both within and outside of the Participating Member States. Whilst the UK is not a Participating Member State, the Commission’s proposal is broad and as such may impact transactions completed by financial institutions operating innon-Participating Member States.
Media reports have increasingly focused on how revenues raised by the EU FTT could constitute an independent revenue stream for the Participating Member States, potentially offsetting their contributions to the EU and/or providing a new income stream for the EU. This is seen as important in the context of the UK’s financial contributions ceasing in connection with its exit from the EU. Recent reports suggest the European Commission is intending to publish a revised legislative proposal with only share transactions being subject to the EU FTT. As such, the EU FTT appears likely to remain on the ECOFIN agenda for the foreseeable future.
Separately, the European Commission wrote to the Netherlands on 22 June 2018 to inform them that it is their view that the Netherlands domestic tax legislation, which gives tax deductions for coupons paid on conditionally convertible bonds issued by financial institutions, may benon-compliant with the EU’s State Aid regime as the Netherlands legislation only applies to financial institutions and thus gives preference to one sector over others.
Santander UK benefits from tax deductions on certain of its capital instruments under UK domestic law. The relevant UK law also restricts tax deductibility to instruments issued specifically by the regulated sector and thus could be subject to a similar EU challenge. This potential EU State Aid vulnerability has now been largely addressed by the Budget day announcement on the 29 October 2018 and accompanying draft legislation that will repeal the sector specific legislation and replace with new tax rules for hybrid capital instrument that can be issued by any sector. This new legislation should ensure that, subject to these instruments meeting certain specified conditions, any interest payable will be deductible. This should reduce this risk although there can be no guarantee that the EU will not successfully challenge the relevant UK law. Any removal of this tax deductibility might have a material adverse effect on our operations, financial condition and prospects.
Changes in our pension liabilities and obligations could have a materially adverse effect on our operations, financial condition and prospects
The majority of current employees are provided with pension benefits through defined contribution arrangements. Under these arrangements our legal obligation is limited to the cash contributions paid. We provide retirement benefits for many of our former and current employees in the UK through a number of defined benefit pension schemes established under trust. Santander UK plc is the principal employer under the majority of these schemes, but it has only limited control over the rate at which it pays into such schemes. Under the UK statutory funding requirements employers are usually required to contribute to the schemes at the rate they agree with the scheme trustees although, if they cannot agree, the rate can be set by the Pensions Regulator. The scheme trustees may, in the course of discussions about future valuations, seek higher employer contributions. The scheme trustees’ power in relation to the payment of pension contributions depends on the terms of the trust deed and rules governing the pension schemes, but, in some cases, the scheme trustees may have the unilateral right to set our relevant contribution.
The Pensions Regulator has the power to issue a financial support direction to companies within a group in respect of the liability of employers participating in the UK defined benefit pension schemes where that employer is a service company, or is otherwise ‘insufficiently resourced’ (as defined for the purposes of the relevant legislation). As some of the employers within the Santander UK group are service companies, if the Pensions Regulator determines that they have become insufficiently resourced and no suitable mitigating action is undertaken, other companies within the Santander UK group which are connected with or an associate of those employers are at risk of a financial support direction in respect of those employers’ liabilities to the defined benefit pension schemes in circumstances where the Pensions Regulator properly considers it reasonable to issue one. Such a financial support direction could require the companies to guarantee or provide security for the pension liabilities of those employers, or could require additional amounts to be paid into the relevant pension schemes in respect of them.
Annual Report 2018 | Other information for US investors
The Pensions Regulator can also issue contribution notices if it is of the opinion that an employer has taken actions, or failed to take actions, deliberately designed to avoid meeting its pension promises or which are materially detrimental to the scheme’s ability to meet its pension promises. A contribution notice can be issued to any company or individual that is connected with or an associate of such employer in circumstances where the Pensions Regulator considers it reasonable to issue and multiple notices could be issued to connected companies or individuals for the full amount of the debt. The risk of a contribution notice being imposed may inhibit our freedom to restructure or to undertake certain corporate activities.
Should the value of assets to liabilities in respect of the defined benefit schemes operated by us record a deficit or an increased deficit (as appropriate), due to either a reduction in the value of the pension fund assets (depending on the performance of financial markets) and/or an increase in the scheme liabilities due to changes in legislation, mortality assumptions, discount rate assumptions, inflation, market variables such as exchange rates or equity prices, the expected rate of return on scheme assets, or other factors, or there is a change in the actual or perceived strength of the employer’s covenant, this could result in us having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we have no or limited control. Although the trustees of the defined benefit pension schemes are obliged to consult with us before changing the pension schemes’ investment strategy, the trustees have the final say and ultimate responsibility for investment strategy rests with them.
Our principal defined pension scheme is the Santander (UK) Group Pension Scheme and its corporate trustee is Santander (UK) Group Pension Scheme Trustees Limited (the Pension Scheme Trustee), a wholly-owned subsidiary of the Company. Investment decisions are delegated by the Pension Scheme Trustee to Santander (CF Trustee) Limited, a private limited company owned by the Santander (CF Trustee) Limited directors. The Santander (CF Trustee) Limited directors’ principal duty, within the investment powers delegated to them, is to act in the best interest of the members of the Santander (UK) Group Pension Scheme and not that of the Company. Any increase in our pension liabilities and obligations could have a material adverse effect on our operations, financial condition and prospects.
The ongoing changes in the UK supervision and regulatory regime and particularly the implementation of the ICB’s recommendations may require us to make changes to our structure and business which could have an impact on our pension schemes or liabilities. (For a discussion of the ICB’s recommendations see ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operations, financial condition and prospects’.)
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel
Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our growth strategy and of a culture of Simple, Personal and Fair depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. There is also an increasing demand for Santander to hire individuals with digital skills such as data scientist, engineering and designer skill sets in the future. Such individuals are very sought after by all organisations, not just the banking industry, and thus our ability to attract and hire this talent will determine how quickly we transform to a digital bank. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our operations, financial condition and prospects, including control and operational risks, may be adversely affected.
In addition, the financial services industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our operations, financial condition and prospects could be adversely affected.
Damage to our reputation could cause harm to our business prospects
Maintaining a positive reputation is critical to attracting and retaining customers, investors and employees and conducting business transactions with counterparties. Damage to the reputation of the Santander UK group or Banco Santander SA (as the majority shareholder in the Company), the reputation of affiliates operating under the ‘Santander’ brand or any of our other brands could therefore cause significant harm to our business and prospects. Harm to our reputation can arise directly or indirectly from numerous sources, including, among others, employee misconduct (including the possibility of employee fraud), litigation, regulatory interventions and enforcement action, failure to deliver minimum standards of service and quality, disruption to service due to a cyber-attack, wider IT failures, compliance failures, third party fraud, financial crime, breach of legal or regulatory requirements, unethical behaviour (including adopting inappropriate sales and trading practices), and the activities of customers, suppliers and counterparties. Further, negative publicity regarding us, whether true or not, may result in harm to our operations, financial condition and prospects.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis has caused public perception of us and others in the financial services industry to decline.
We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of customers to deal with us, or give rise to litigation or regulatory enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to our operations, financial condition and prospects.
Our financial statements are based in part on judgements and accounting estimates which, if inaccurate, could cause material misstatement of our future financial results and financial condition
The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amounts of assets and liabilities at the date of the financial statements 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 amounts may differ from these accounting estimates under different assumptions or conditions. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
As explained in Note 1 to the Consolidated Financial Statements, no significant judgements have been made in the process of applying our accounting policies, other than those involving estimations about credit impairment losses, conduct remediation and pensions. Those accounting estimates, as well as the judgements inherent within them, are considered important to the portrayal of the financial results and financial condition because: (i) they are highly susceptible to change from period to period as assumptions are made to calculate the estimates; and (ii) any significant difference between the estimated amounts and actual amounts could have a material impact on the future financial results and financial condition.
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Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud
Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by us within our financial statements or under other accounting, regulatory, supervisory or listing authority requirements, including in reports filed or submitted under the US Securities Exchange Act of 1934, as amended (the Exchange Act), is accumulated and communicated to management, and recorded, processed, summarised and reported within the time periods specified in the US Securities and Exchange Commission’s rules and forms and other applicable accounting, regulatory, supervisory or listing authority requirements. Our control framework is based on the Committee of Sponsoring Organisations of the Treadway Commission 2013 internal control – integrated framework which is designed to recognise the many changes in business and operating environments since the issuance of the original framework and is intended to broaden and enhance the application of controls over financial reporting.
However, there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Consequently, our business is exposed to risk from potentialnon-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions, regulatory and law enforcement investigations, civil claims and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter or detect employee misconduct in a timely manner and the precautions we take to prevent and detect this activity may not always be effective. As a result of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.
Changes in accounting standards could impact reported earnings
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and operating results. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. For further information about future accounting developments, see Note 1 to the Consolidated Financial Statements.
We rely on third parties and affiliates for important infrastructure support, products and services
TPPs and certain affiliates provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections and network access. Relying on these TPPs and affiliates is a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting our TPPs and affiliates, and other parties that interact with these parties. As our interconnectivity with these third parties and affiliates increases, including through the use of cloud based services, we increasingly face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties or affiliates, including as a result of them not providing us their services for any reason, or performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise conduct our business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third party vendors or affiliates could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Any restructuring could involve significant expense to us and entail significant delivery and execution risk which could have a material adverse effect on our operations, financial condition and prospects.
We are part of a group and we may engage in transactions with our subsidiaries or affiliates
We and our subsidiaries and affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal and other services. Also, we rely upon certain outsourced services (including information technology support, maintenance, and consultancy services) provided by certain other members of the Banco Santander group (for more information, see the risk factor entitled ‘We rely on third parties and affiliates for important infrastructure support, products and services’). In addition, we are utilising a ring-fencing transfer scheme and other agreements with our subsidiaries and affiliates to implement the ring-fencing requirements of the Banking Reform Act (for more information, see the risk factor entitled ‘We are subject to substantial regulation and governmental oversight which could adversely affect our operations, financial condition and prospects’). The foregoing arrangements may be considered by some not to be on an arms-length basis.
English law applicable to public companies and financial groups and institutions, as well as our articles of association, provide for several procedures designed to ensure that the transactions entered into, with or among our financial subsidiaries, do not deviate from prevailing market conditions for those types of transactions. We are likely to continue to engage in transactions with our subsidiaries or affiliates. Future conflicts of interests between us and any of our subsidiaries or affiliates, or between our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favour.
Different disclosure and accounting principles between the UK and the US may provide different or less information about us than you expected
There may be less publicly available information about us than is regularly published about companies in the US. Issuers of securities in the UK are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in countries with a relatively more developed capital market, including the US. While we are subject to the periodic reporting requirements of the Exchange Act, we are not subject to the same disclosure requirements in the US as a domestic US registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic US registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available will not be the same as the information available to holders of securities of a US company and may be reported in a manner that is not familiar.
Risks concerning enforcement of judgements made in the US
The Company is a public limited company registered in England and Wales. Most of the Company’s directors and officers named herein are residents of the UK, and there is no assurance that any director of the Company will live in the US at any given time in the future. As a result, it may not be possible to serve process on such persons in the US or to enforce judgements obtained in US courts against them or us based on the civil liability provisions of the US federal securities laws or other laws of the US or any state thereof.
Annual Report 2018 | Other information for US investors
The following is a summary of the Articles of Association (the Articles) of the Company.
Santander UK Group Holdings plc is a public limited company incorporated and registered in England and Wales under the Companies Act 2006, with registered number 8700698. The Articles do not specifically state or limit the objects of the Company which are therefore unrestricted.
A Director shall not vote on, or be counted in the quorum in relation to, any resolution of the Directors in respect of any contract in which he or she has an interest, except if no conflict of interest could reasonably be expected to arise from that interest, or any resolution of the Directors concerning his or her own appointment, or the settlement or variation of the terms or the termination of his or her appointment. Directors are entitled to such remuneration as the directors determine for their services to the Company as directors and for any other service which they undertake for the Company. Directors may delegate to a person or committee the determination of any fee, remuneration or other benefit which may be paid or provided to any Director. No Director is required to retire by reason of his or her age, nor do any special formalities apply to the appointment orre-election of any Director who is over any age limit. No shareholding qualification for Directors is required.
The Company may issue shares with such rights or restrictions as may be determined by ordinary resolution or, if no such resolution has been passed or so far as the resolution does not make specific provision, as the Directors may decide. The Company may by ordinary resolution declare dividends, and the Directors may decide to declare or pay interim dividends. No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. If dividends are unclaimed for twelve years, the right to the dividend ceases. All dividends or other sums which are payable in respect of shares, and unclaimed after having been declared or become payable, may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.
Ordinary shares are transferable. Holders of ordinary shares are entitled to receive notice of and to attend any general meeting of the Company. Subject to any special terms as to voting upon which any shares may be issued or may for the time being be held, or any suspension or any abrogation of special rights, as set out in the Articles of Association, on a show of hands every member who is present in person at a general meeting of the Company shall have one vote and every proxy present who has been duly appointed by a member shall have one vote. On a poll every member who is present in person or by proxy shall have one vote for every share of which he or she is the holder.
The Company pays dividends on its ordinary shares only out of its distributable profits and not out of share capital. Dividends are determined by the Board.
The Company’s Articles of Association authorise it to issue redeemable shares, but the Company’s ordinary shares are not redeemable. There are no sinking fund provisions. Where the shares are partly paid, the Board may make further calls upon the holders in respect of any sum whether in respect of nominal value or premium that is unpaid on their shares. There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares of any class. If the Company’s share capital is split into different classes of shares, subject to the provisions of the UK Companies Act 2006, all or any of the rights attached to any class of shares (whether or not the Company is being wound up) may be varied with the consent in writing of the holders of not less than three-quarters in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. Additional quorum and voting requirements apply to such meeting.
General meetings shall be called by at least 14 clear days’ notice (that is, excluding the day of the general meeting and the day on which the notice is given). A general meeting may be called by shorter notice if it is so agreed, in the case of an annual general meeting, by all the shareholders having a right to attend and vote, or in other cases, by a majority in number of the shareholders having a right to attend and vote, being a majority together holding not less than 95% in nominal value of the shares giving the right. The notice shall specify the date, time and place of the meeting and the general nature of the business to be transacted.
There are no restrictions on the rights to own securities for either resident ornon-resident shareholders, other than those to which they may be subject as a result of laws and regulations in their home jurisdiction.
| Santander UK Group Holdings plc |
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| Strategic Report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Disclosure pursuant to Section 219 of the Iran Threat
Reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to the CompanyGroup and its affiliates within the Banco Santander group:Group.
(a) Santander UK holds accounts for two savings accountscustomers, with the first customer holding one GBP Savings Account and one current account for two customers.GBP Current Account, and the second customer holding one GBP Savings Account. Both of the customers, who are resident in the UK, are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program.programme. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 20182019 were negligible relative to the overall profits of Santander UK.
(b) During the period covered by this annual report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53 for another customer resident in the UK who is currently designated by the US under the SDGT sanctions program. The customer relationshippre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts, and the accounts were subsequently closed on 14 January 2019.2019, as they were outside of the risk appetite. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 20182019 were negligible relative to the overall profits of Santander UK.
(c) Santander UK holds two frozen current accounts for two UK nationals who are designated by the US under the SDGT sanctions programme. The accounts held by each customer have been frozen since their designation and have remained frozen through 2018.throughout 2019. These accounts are frozen in order to comply with Articles 2, 3 and 7 of Council Regulation (EC) No 881/2002, imposing certain specific restrictive measures directed against certain persons and entities associated with theAl-Qaeda network, by virtue of Commission Implementing Regulation (EU) 2015/1815. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the year ended 31 December 2018.2019.
(d) The Banco Santander group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat(stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to 27 April 27, 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended 31 December 2018 that were negligible relative to the overall revenues and profits of the Banco Santander group. The Banco Santander group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Banco Santander group is not contractually permitted to cancel these arrangements without either: (i) paying the guaranteed amount (in the case of the performance guarantees);, or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Banco Santander group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits which were negligible relative to the overall revenues and profits of Santander UK and the Banco Santander group in the year ended 31 December 2019.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
New York Stock Exchange (NYSE) Corporate Governance – differences in UK and NYSE corporate governance practice
The Company issues notes in the US from time to time pursuant to a shelf registration statement filed with the SEC. As these notes are listed on the NYSE, the Company is required to comply with NYSE corporate governance standards. Under the NYSE corporate governance standards, the Company must disclose any significant ways in which its corporate governance practices differ from those followed by US companies under the NYSE corporate governance standards. We believe the following to be the significant differences between our current corporate governance practices and those applicable to US companies under the NYSE corporate governance standards.
Under the NYSE corporate governance standards, independent directors must comprise a majority of the Board. As at 31 December 2018,2019, our Board was comprised of a Chair (who is also aNon-Executive Director), three Executive Directors and ten otherNon-Executive Directors. The Chair, Shriti Vadera, and six of the otherNon-Executive Non- Executive Directors Julie Chakraverty,(Garrett Curran, Annemarie Durbin, Ed Giera, Chris Jones, Genevieve Shore and Scott Wheway,Wheway) were independent as defined in the NYSE corporate governance standards. The other fourNon-Executive Directors were not independent according to NYSE corporate governance standards as they are representatives of the ultimate parent company, Banco Santander SA. Directors as at 31 December 20182019 include Juan Inciarte,Susan Allen, Gerry Byrne, Garrett Curran, Annemarie Durbin, Dirk Marzluf and Genevieve Shore, who resigned on 31 December 2018,2019, see the ‘Board and Committee membership, tenure, attendance and remuneration’ section. Following his resignation,their resignations, there will be, nine otherNon-Executive Directors in addition to the Chair, three other Non-Executive Directors who are independent according to NYSE corporate governance standards and threetwo Non-Executive Directors who are not independent according to NYSE corporate governance standards.
The NYSE corporate governance standards require that listed US companies have a nominating or corporate governance committee composed entirely of independent directors and with a written charter addressing certain corporate governance matters. Applicable UK rules do not require companies without equity shares listed on the London Stock Exchange, such as the Company, to have a nominating committee. However, the Company has a Board Nomination Committee, which leads the process for Board appointments. This Committee has written Terms of Reference setting out its role to identify and nominate candidates for Board and Board Committee appointments. As at 31 December 2018,2019, the following Directors made up the Board Nomination Committee: Shriti Vadera (Chair), Ana BotínBotin and Scott Wheway. Of these Directors, Shriti Vadera and Scott Wheway were independent according to NYSE corporate governance standards as at 31 December 2018.2019.
In addition, the Board is responsible for monitoring the effectiveness of the Company’s governance practices and making changes as needed to ensure the alignment of the Company’s governance system with current best practices. The Board monitors and manages potential conflicts of interest of management, Board members, shareholders, external advisors and other service providers, including misuse of corporate assets and abuse in related party transactions.
The NYSE corporate governance standards require that listed US companies have a compensation committee composed entirely of independent directors and with a written charter addressing certain corporate governance matters. Under its written Terms of Reference, the Company’s Board Remuneration Committee is primarily responsible for overseeing and supervising Santander UK’s policies and frameworks covering remuneration and reward. As at 31 December 2018,2019, the Board Remuneration Committee was made up of four independentNon-Executive Directors according to NYSE corporate governance standards (Annemarie Durbin (Chair), Chris Jones, Genevieve Shore and Scott Wheway). Annemarie Durbin and Genevieve Shore resigned from the Board on 31 December 2019. Following their resignations, the compensation committee consists of two independent Non-Executive Directors and Scott Wheway will replace Annemarie Durbin as the Chair of the compensation committee.
The NYSE corporate governance standards require that listed US companies have an audit committee that satisfies the requirements of Rule10A-3 under the US Securities Exchange Act of 1934, as amended (Rule10A-3), with a written charter addressing certain corporate governance matters, and whose members are all independent as defined in Rule10A-3. As a wholly-owned subsidiary of a parent that satisfies the requirements of Rule10A-3(c)(2), the Company is exempt from the requirements of Rule10A-3. However, the Company does have a Board Audit Committee. As at 31 December 2018,2019, the Board Audit Committee was made up of fourNon-Executive Directors: Chris Jones (Chair), Julie Chakraverty,Garrett Curran, Ed Giera, and Genevieve Shore. All four members were independent in 20182019 as defined in Rule10A-3. Garrett Curran and Genevieve Shore resigned from the Board on 31 December 2019. Following their resignations, the audit committee consists of two independent Non-Executive Directors.
The scope of the Board Audit Committee’s Terms of Reference as well as the duties and responsibilities of such committee are more limited than that required of audit committees under the NYSE corporate governance standards. For example, the Board Audit Committee does not provide an audit committee report as required by the NYSE corporate governance standards to be included in the Company’s annual proxy statement.
The NYSE corporate governance standards require that listed US companies adopt and disclose corporate governance guidelines, including with respect to the qualification, training and evaluation of their Directors. The NYSE corporate governance standards also require that the Board conducts a self-evaluation at least annually to determine whether it and its committees are functioning effectively. The Board has undertaken regular reviews of Board effectiveness primarily through an internal process led by the Chair. The Board undertook an external review of Board effectiveness in 2016 and agreedan internal review of Board effectiveness in 2018, agreeing on a plan for continuous improvement. In 2019, the Board considered feedback gained from the 2018 we reviewedevaluations, which concluded that the progress madeperformance of the Board, its Committees, the Chair and each of the Directors continued to be effective. The areas identified for greater focus in 2019 included business performance, efficiency, in-depth strategic consideration of disruptions/ digital on implementing the recommendations from 2016’s extensive external evaluation of Board effectivenessbusiness strategy, customers, people and carried out an internal assessment of effectiveness.wider management with senior management.
A CEO of a US company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate government standards. In accordance with NYSE corporate governance standards applicable to foreign private issuers, our CEO is not required to provide the NYSE with such an annual compliance certification.
In addition, as a wholly-owned subsidiary of an NYSE-listed company, the Company is exempt from two NYSE listing standards otherwise applicable to foreign companies listed on the NYSE as well as US companies listed on the NYSE. The first requires the CEO of any NYSE-listed foreign company to notify promptly the NYSE in writing after any executive of the issuer becomes aware of any materialnon-compliance with any applicable NYSE corporate governance standards. The second requires NYSE-listed foreign companies to submit executed written affirmations annually to the NYSE.
| Santander UK Group Holdings plc |
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Designated agent
The designated agent for service of process on Santander UK in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York.
Trustee/paying agent
The names and addresses of the Trustee/Paying Agentpaying agent for each class of security registered with the US Securities and Exchange Commission are set out below:
– Senior: Wells Fargo Bank, National Association, 150 East 42nd Street, 40th Floor, New York, New York 10017, United States
| – | Senior: Wells Fargo Bank, National Association, 150 East 42nd Street, 40th Floor, New York, New York 10017, United States |
| – | Subordinated: Wells Fargo Bank, National Association, 150 East 42nd Street, 40th Floor, New York, New York 10017, United States |
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Documents on display
The Company is subject to the information requirements of the US Securities Exchange Act of 1934. In accordance with these requirements, the Company files its Annual Report and other related documents with the US Securities and Exchange Commission. These documents may be inspected by US investors at the US Securities and Exchange Commission’s public reference rooms, which are located at 100 F Street NE, Washington, DC 20549. Information on the operation of the public reference rooms can be obtained by calling the US Securities and Exchange Commission on+1-202-551-8090 or by looking at the US Securities and Exchange Commission’s website. The US Securities and Exchange Commission maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with it. This is accessible at www.sec.gov.
None of the websites referred to in this Annual Report on Form20-F for the year ended 31 December 20182019 (the Form20-F), including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form20-F.
Legal proceedings
We are party to various legal proceedings in the ordinary course of business. See Notes 3027 and 3229 to the Consolidated Financial Statements.
Material contracts
We are party to various contracts in the ordinary course of business. For the two years ended 31 December 2018, there have beenThere are no material contracts entered into outside the ordinary course of business.business which are to be performed (or partly-performed) on or after the date of this report.
Audit fees
See Note 7 to the Consolidated Financial Statements.
Accounting developments under IFRS
See Note 1 to the Consolidated Financial Statements.
Share capital
Details of the Company’s share capital are set out in Note 3330 to the Consolidated Financial Statements.
Major shareholders
On 23 September 2013, the Company was incorporated with the issuance of two ordinary shares of £1 each which formed the initial share capital of the Company and were held by Banco Santander SA from 11 December 2013. On 10 January 2014, pursuant to a Board resolution dated 10 January 2014, the Company issued 11,267,503,000 ordinary shares of £1 each to Banco Santander SA and Santusa Holding SL in exchange for acquiring all of the ordinary shares of Santander UK plc. The Company has been a subsidiary of Banco Santander SA and Santusa Holding SL throughout 2018. On 24 March 2015, the Company cancelled and extinguished 4,207,503,002 ordinary shares. On 25 March 2015, the Company became a public limited company and changed its name from Santander UK Group Holdings Limited to Santander UK Group Holdings plc.
Exchange controls
There are no UK laws, decrees or regulations that restrict our export or import of capital, including the availability of cash and cash equivalents for use by us, or that affect the remittance of dividends or other shareholder payments tonon-UK holders of Company shares, except as outlined in the section on Taxation for US Investors below.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
Additional balance sheet analysis
RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET
InExcept where noted, in this section we summarise our assets and liabilities by their nature, rather than by how we classify them in the Consolidated Balance Sheet. These two presentations can be reconciled as follows, including cross references to the Notes to the Consolidated Financial Statements:
| Loans and advances | Loans and advances to | Balance | ||||||||||||||||||||||||||
| Securities | to banks | customers | Derivatives | Other | sheet total | |||||||||||||||||||||||
| 2018 | Note | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | – | 24,180 | 24,180 | ||||||||||||||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||||||||||||||||||
– Trading assets | 11 | – | – | – | – | – | – | |||||||||||||||||||||
– Derivative financial instruments | 12 | – | – | – | 5,321 | – | 5,321 | |||||||||||||||||||||
– Other financial assets at fair value through profit or loss | 13 | 3,356 | 1,458 | 1,323 | – | – | 6,137 | |||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||
– Loans and advances to customers(1) | 14 | – | – | 201,619 | – | – | 201,619 | |||||||||||||||||||||
– Loans and advances to banks(1) | – | 3,515 | – | – | – | 3,515 | ||||||||||||||||||||||
– Reverse repurchase agreements – non trading(1) | 17 | – | 3,254 | 17,873 | – | – | 21,127 | |||||||||||||||||||||
– Other financial assets at amortised cost(2) | 18 | 7,228 | – | – | – | – | 7,228 | |||||||||||||||||||||
Financial assets at fair value through other comprehensive income(2) | 19 | 13,229 | – | 73 | – | – | 13,302 | |||||||||||||||||||||
Financial investments(2) | 20 | |||||||||||||||||||||||||||
Interests in other entities | 21 | – | – | – | – | 88 | 88 | |||||||||||||||||||||
Property, plant and equipment | – | – | – | – | 1,835 | 1,835 | ||||||||||||||||||||||
Retirement benefit assets | 31 | – | – | – | – | 842 | 842 | |||||||||||||||||||||
Tax, intangibles and other assets | – | – | – | – | 4,187 | 4,187 | ||||||||||||||||||||||
| 23,813 | 8,227 | 220,888 | 5,321 | 31,132 | 289,381 | |||||||||||||||||||||||
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Deposits by £m | Deposits by £m | Derivatives £m | Other £m | Balance sheet total £m | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||||||||||||||||||
– Trading liabilities | 23 | – | – | – | – | – | ||||||||||||||||||||||
– Derivative financial instruments | 12 | – | – | 1,594 | – | 1,594 | ||||||||||||||||||||||
– Other financial liabilities at fair value through profit or loss | 24 | – | 5,296 | – | 990 | 6,286 | ||||||||||||||||||||||
Financial liabilities at amortised cost: | ||||||||||||||||||||||||||||
– Deposits by customers(1) | 25 | – | 173,692 | – | – | 173,692 | ||||||||||||||||||||||
– Deposits by banks(1) | 26 | 17,824 | – | – | – | 17,824 | ||||||||||||||||||||||
– Repurchase agreements – non trading(1) | 27 | 1,535 | 9,375 | – | – | 10,910 | ||||||||||||||||||||||
– Debt securities in issue | 28 | – | – | – | 55,906 | 55,906 | ||||||||||||||||||||||
– Subordinated liabilities | 29 | – | – | – | 3,601 | 3,601 | ||||||||||||||||||||||
Retirement benefit obligations | 31 | – | – | – | 115 | 115 | ||||||||||||||||||||||
Tax, other liabilities and provisions | – | – | – | 3,233 | 3,233 | |||||||||||||||||||||||
| 19,359 | 188,363 | 1,594 | 63,845 | 273,161 | ||||||||||||||||||||||||
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| Loans and advances to | Loans and advances to | Balance sheet | ||||||||||||||||||||||
| Securities | banks | customers | Other | total | ||||||||||||||||||||
| 2019 | Note | £m | £m | £m | £m | £m | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | 26,395 | 26,395 | |||||||||||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||||||||||||||
– Derivative financial instruments | 11 | – | – | – | 3,363 | 3,363 | ||||||||||||||||||
– Other financial assets at fair value through profit or loss | 12 | 433 | – | 540 | – | 973 | ||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||
– Loans and advances to customers | 13 | – | – | 207,498 | – | 207,498 | ||||||||||||||||||
– Loans and advances to banks | – | 2,583 | – | – | 2,583 | |||||||||||||||||||
– Reverse repurchase agreements – non trading | 16 | – | 2,161 | 21,475 | – | 23,636 | ||||||||||||||||||
– Other financial assets at amortised cost | 17 | 7,056 | – | – | – | 7,056 | ||||||||||||||||||
Financial assets at fair value through other comprehensive income: | 18 | 9,691 | – | 56 | – | 9,747 | ||||||||||||||||||
Interests in other entities | 19 | – | – | – | 117 | 117 | ||||||||||||||||||
Property, plant and equipment | – | – | – | 1,971 | 1,971 | |||||||||||||||||||
Retirement benefit assets | 28 | – | – | – | 670 | 670 | ||||||||||||||||||
Tax, intangibles and other assets | – | – | – | 4,479 | 4,479 | |||||||||||||||||||
| 17,180 | 4,744 | 229,569 | 36,995 | 288,488 | ||||||||||||||||||||
Deposits by £m | Deposits by £m | Other £m | Balance sheet £m | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||||||||||||||
– Derivative financial instruments | 11 | – | – | 1,709 | 1,709 | |||||||||||||||||||
– Other financial liabilities at fair value through profit or loss | 21 | – | 609 | 1,104 | 1,713 | |||||||||||||||||||
Financial liabilities at amortised cost: | ||||||||||||||||||||||||
– Deposits by customers | 22 | – | 179,006 | – | 179,006 | |||||||||||||||||||
– Deposits by banks | 23 | 14,359 | – | – | 14,359 | |||||||||||||||||||
– Repurchase agreements – non trading | 24 | 880 | 17,406 | – | 18,286 | |||||||||||||||||||
– Debt securities in issue | 25 | – | – | 50,171 | 50,171 | |||||||||||||||||||
– Subordinated liabilities | 26 | – | – | 3,528 | 3,528 | |||||||||||||||||||
Retirement benefit obligations | 28 | – | – | 280 | 280 | |||||||||||||||||||
Tax, other liabilities and provisions | – | – | 3,095 | 3,095 | ||||||||||||||||||||
| 15,239 | 197,021 | 59,887 | 272,147 | |||||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
sheet analysis | ||||||||||||||||||||
| Securities | Loans and to banks | Loans and advances to customers | Derivatives | Other | Balance sheet total | |||||||||||||||||||||||
| 2017 | Note | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | – | 32,771 | 32,771 | ||||||||||||||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||||||||||||||||||
– Trading assets | 11 | 14,818 | 6,897 | 8,840 | – | – | 30,555 | |||||||||||||||||||||
– Derivative financial instruments | 12 | – | – | – | 19,942 | – | 19,942 | |||||||||||||||||||||
– Other financial assets at fair value through profit or loss | 13 | 547 | – | 1,549 | – | – | 2,096 | |||||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||||||
– Loans and advances to customers(1) | 14 | – | – | 199,332 | – | – | 199,332 | |||||||||||||||||||||
– Loans and advances to banks(1) | – | 3,466 | – | – | – | 3,466 | ||||||||||||||||||||||
– Reverse repurchase agreements – non trading(1) | 17 | – | 2,464 | 150 | – | – | 2,614 | |||||||||||||||||||||
– Other financial assets at amortised cost(2) | 18 | |||||||||||||||||||||||||||
Financial assets at fair value through other comprehensive income(2) | 19 | |||||||||||||||||||||||||||
Financial investments(2) | 20 | 15,431 | – | 2,180 | – | – | 17,611 | |||||||||||||||||||||
Interests in other entities | 21 | – | – | – | – | 73 | 73 | |||||||||||||||||||||
Property, plant and equipment | – | – | – | – | 1,598 | 1,598 | ||||||||||||||||||||||
Retirement benefit assets | 31 | – | – | – | – | 449 | 449 | |||||||||||||||||||||
Tax, intangibles and other assets | – | – | – | – | 4,253 | 4,253 | ||||||||||||||||||||||
| 30,796 | 12,827 | 212,051 | 19,942 | 39,144 | 314,760 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Deposits by £m | Deposits by £m | Derivatives £m | Other £m | Balance £m | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||||||||||||||||||
– Trading liabilities | 23 | 1,885 | 25,530 | – | 3,694 | 31,109 | ||||||||||||||||||||||
– Derivative financial instruments | 12 | – | – | 17,613 | – | 17,613 | ||||||||||||||||||||||
– Other financial liabilities at fair value through profit or loss | 24 | – | 680 | – | 1,635 | 2,315 | ||||||||||||||||||||||
Financial liabilities at amortised cost: | ||||||||||||||||||||||||||||
– Deposits by customers | 25 | – | 177,421 | – | – | 177,421 | ||||||||||||||||||||||
– Deposits by banks(1) | 26 | 12,708 | – | – | – | 12,708 | ||||||||||||||||||||||
– Repurchase agreements – non trading(1) | 27 | 1,076 | – | – | – | 1,076 | ||||||||||||||||||||||
– Debt securities in issue | 28 | – | – | – | 48,860 | 48,860 | ||||||||||||||||||||||
– Subordinated liabilities | 29 | – | – | – | 3,793 | 3,793 | ||||||||||||||||||||||
Retirement benefit obligations | 31 | – | – | – | 286 | 286 | ||||||||||||||||||||||
Tax, other liabilities and provisions | – | – | – | 3,377 | 3,377 | |||||||||||||||||||||||
| 15,669 | 203,631 | 17,613 | 61,645 | 298,558 | ||||||||||||||||||||||||
|
|
| Securities | Loans and advances to banks | Loans and advances to customers | Other | Balance sheet total | ||||||||||||||||||||
| 2018 | Note | £m | £m | £m | £m | £m | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and balances at central banks | – | – | – | 24,180 | 24,180 | |||||||||||||||||||
Financial assets at fair value through profit or loss: | ||||||||||||||||||||||||
– Derivative financial instruments | 11 | – | – | – | 5,321 | 5,321 | ||||||||||||||||||
– Other financial assets at fair value through profit or loss | 12 | 3,356 | 1,458 | 1,323 | – | 6,137 | ||||||||||||||||||
Financial assets at amortised cost: | ||||||||||||||||||||||||
– Loans and advances to customers | 13 | – | – | 201,619 | – | 201,619 | ||||||||||||||||||
– Loans and advances to banks | – | 3,515 | – | – | 3,515 | |||||||||||||||||||
– Reverse repurchase agreements – non trading | 16 | – | 3,254 | 17,873 | – | 21,127 | ||||||||||||||||||
– Other financial assets at amortised cost | 17 | 7,228 | – | – | – | 7,228 | ||||||||||||||||||
Financial assets at fair value through other comprehensive income | 18 | 13,229 | – | 73 | – | 13,302 | ||||||||||||||||||
Interests in other entities | 19 | – | – | – | 88 | 88 | ||||||||||||||||||
Property, plant and equipment | – | – | – | 1,835 | 1,835 | |||||||||||||||||||
Retirement benefit assets | 28 | – | – | – | 842 | 842 | ||||||||||||||||||
Tax, intangibles and other assets | – | – | – | 4,187 | 4,187 | |||||||||||||||||||
| 23,813 | 8,227 | 220,888 | 36,453 | 289,381 | ||||||||||||||||||||
| ||||||||||||||||||||||||
Deposits by £m | Deposits by £m | Other £m | Balance £m | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Financial liabilities at fair value through profit or loss: | ||||||||||||||||||||||||
– Derivative financial instruments | 11 | – | – | 1,594 | 1,594 | |||||||||||||||||||
– Other financial liabilities at fair value through profit or loss | 21 | – | 5,296 | 990 | 6,286 | |||||||||||||||||||
Financial liabilities at amortised cost: | ||||||||||||||||||||||||
– Deposits by customers | 22 | – | 173,692 | – | 173,692 | |||||||||||||||||||
– Deposits by banks | 23 | 17,824 | – | – | 17,824 | |||||||||||||||||||
– Repurchase agreements – non trading | 24 | 1,535 | 9,375 | – | 10,910 | |||||||||||||||||||
– Debt securities in issue | 25 | – | – | 55,906 | 55,906 | |||||||||||||||||||
– Subordinated liabilities | 26 | – | – | 3,601 | 3,601 | |||||||||||||||||||
Retirement benefit obligations | 28 | – | – | 115 | 115 | |||||||||||||||||||
Tax, other liabilities and provisions | – | – | 3,233 | 3,233 | ||||||||||||||||||||
| 19,359 | 188,363 | 65,439 | 273,161 | |||||||||||||||||||||
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
SECURITIES
Securities are a small proportion of our total assets, held mainly within other financial assets at fair value through profit or loss, other financial assets at amortised cost or financial assets at fair value through other comprehensive income.
Analysis by type of issuer
The following table sets out our securities at 31 December 2019, 2018 2017 and 2016.2017. We hold these securities for liquidity purposes. Prior to the implementation of our ring-fence structure, as described in Note 43 to the Consolidated Financial Statements, we also held these securities for trading purposes.
For more information, see ‘Country risk exposures’ in the ‘Credit risk’ section of the Risk review.
| 2018 | 2017 | 2016 | ||||||||||
| £m | £m | £m | ||||||||||
UK Government | 7,479 | 9,449 | 10,014 | |||||||||
US Treasury and other US Government agencies and corporations | 921 | 1,155 | 1,268 | |||||||||
Other OECD governments | 4,162 | 4,091 | 4,504 | |||||||||
Bank and Building Society: | ||||||||||||
– Bonds | 5,278 | 4,395 | 5,051 | |||||||||
Other issuers: | ||||||||||||
– Fixed and floating rate notes – Government guaranteed | – | 426 | 898 | |||||||||
– Mortgage-backed securities | 3,748 | 107 | 133 | |||||||||
– Other asset-backed securities | 69 | 38 | 36 | |||||||||
– Other securities | 2,063 | 1,392 | 1,850 | |||||||||
Ordinary shares and similar securities | 93 | 9,743 | 6,098 | |||||||||
| 23,813 | 30,796 | 29,852 | ||||||||||
Ordinary shares and similar securities mainly comprise of equity securities listed in the UK and other countries. Prior to the implementation of our ring-fence structure these were principally held for trading purposes.
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| 2019 | 2018 | 2017 | ||||||||||
| £m | £m | £m | ||||||||||
UK Government | 7,474 | 7,479 | 9,449 | |||||||||
US Treasury and other US Government agencies and corporations | 853 | 921 | 1,155 | |||||||||
Other OECD governments | 3,097 | 4,162 | 4,091 | |||||||||
Other issuers: | ||||||||||||
– Bank and Building Society Bonds | 3,852 | 5,278 | 4,395 | |||||||||
– Fixed and floating rate notes – Government guaranteed | – | – | 426 | |||||||||
– Mortgage-backed securities | 602 | 3,748 | 107 | |||||||||
– Other asset-backed securities | – | 69 | 38 | |||||||||
– Other securities | 1,167 | 2,063 | 1,392 | |||||||||
– Ordinary shares and similar securities | 135 | 93 | 9,743 | |||||||||
| 17,180 | 23,813 | 30,796 | ||||||||||
Contractual maturities
Debt securities can be analysed by contractual maturity and the related weighted average yield for the year as follows:
| Later than | Later than | |||||||||||||||||||||||||||||||||||||||
| one year | five years | |||||||||||||||||||||||||||||||||||||||
| Not later | and not later | and not later | Later than | |||||||||||||||||||||||||||||||||||||
| than 1 year | than five years | than ten years | ten years | Total | ||||||||||||||||||||||||||||||||||||
One year or less £m | After one year through £m | After five years through £m | After ten years | Total £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
Issued by public bodies: | ||||||||||||||||||||||||||||||||||||||||
– UK Government | – | 190 | 7,120 | 169 | 7,479 | 181 | 1,333 | 5,789 | 170 | 7,473 | ||||||||||||||||||||||||||||||
– Other governments | 2,929 | 2,047 | 108 | – | 5,084 | |||||||||||||||||||||||||||||||||||
Banks, Building Societies and Other issuers | 780 | 3,933 | 3,805 | 2,639 | 11,157 | |||||||||||||||||||||||||||||||||||
– US Treasury and other US Government agencies and corporations | 1,516 | 2,175 | 260 | – | 3,951 | |||||||||||||||||||||||||||||||||||
– Other OECD governments | 514 | 3,156 | 770 | 1,181 | 5,621 | |||||||||||||||||||||||||||||||||||
Other issuers | – | – | – | – | – | |||||||||||||||||||||||||||||||||||
| 3,709 | 6,170 | 11,033 | 2,808 | 23,720 | 2,211 | 6,664 | 6,819 | 1,351 | 17,045 | |||||||||||||||||||||||||||||||
Weighted average yield | 0.39% | 1.85% | 1.51% | 1.60% | 1.43% | 0.73% | 1.97% | 1.73% | 1.81% | 1.70% | ||||||||||||||||||||||||||||||
Significant exposures
The following table shows the book value (which equals market value) of securities of individual counterparties where the total amount of those securities exceeded 10% of our shareholders’ funds at 31 December 20182019 as set out in the Consolidated Balance Sheet. The table also shows where we classify the securities in the Consolidated Balance Sheet.
| Financial assets at FVOCI £m | Other financial assets at £m | Total £m | Financial assets at £m | Other financial assets at £m | Total £m | |||||||||||||||||||
UK Government and UK Government guaranteed | 970 | 6,509 | 7,479 | 970 | 6,504 | 7,474 | ||||||||||||||||||
Japanese Government | 3,687 | – | 3,687 | 2,227 | – | 2,227 | ||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
sheet analysis | ||||||||||||||||||||
LOANS AND ADVANCES TO BANKS
Loans and advances to banks include loans to banks and building societies and balances with central banks (excluding central bank balances which can be withdrawn on demand). The balances include loans and advances to banks classified in the balance sheet as reverse repurchase agreements – non trading. Prior to the implementation of our ring-fence structure it also included loans and advances to banks classified as trading assets.
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Loans and advances to banks | 8,227 | 12,827 | 11,832 | 8,985 | 8,002 | |||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Loans and advances to banks | 4,744 | 8,227 | 12,827 | 11,832 | 8,985 | |||||||||||||||
Maturity analysis
The following table shows loans and advances to banks by maturity at 31 December 2018.2019.
| Later than | ||||||||||||||||||||||||||||||||||||||||||||
| one year | ||||||||||||||||||||||||||||||||||||||||||||
| Not later | and not later | Later than | ||||||||||||||||||||||||||||||||||||||||||
| On demand | Not later than three months | Later than three months and not later than one year | Later than one year and not later than five years | Later than five years and not later than ten years | Later than ten years | Total | than one year | than five years | five years | Total | ||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||||||
Fixed interest rate | 228 | 2,637 | 103 | 1 | – | 52 | 3,021 | 803 | – | – | 803 | |||||||||||||||||||||||||||||||||
Variable interest rate | 1,993 | 251 | 516 | 2,101 | 25 | 320 | 5,206 | 2,203 | 1,415 | 323 | 3,941 | |||||||||||||||||||||||||||||||||
| 2,221 | 2,888 | 619 | 2,102 | 25 | 372 | 8,227 | 3,006 | 1,415 | 323 | 4,744 | ||||||||||||||||||||||||||||||||||
LOANS AND ADVANCES TO CUSTOMERS
We provide lending facilities primarily to personal customers in the form of mortgages secured on residential properties and lending facilities to corporate customers. Purchase and resale agreements represent business with professionalnon-bank customers as part of the liquidity risk management function. The balances are stated before deducting impairment loss allowances and RV and voluntary termination provisions, and include loans and advances to customers classified in the balance sheet other financial assets at fair value through profit or loss, reverse repurchase agreements – non trading and financial assets at fair value through other comprehensive income. Prior to the implementation of our ring-fence structure they also included loans and advances to customers classified as trading assets.
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Loans secured on residential properties | 158,248 | 155,355 | 154,727 | 153,261 | 150,440 | |||||||||||||||
Corporate loans | 28,348 | 32,555 | 33,709 | 33,801 | 32,262 | |||||||||||||||
Finance leases | 6,821 | 6,710 | 6,730 | 6,306 | 2,639 | |||||||||||||||
Secured advances | – | – | 10 | 13 | 15 | |||||||||||||||
Other unsecured loans | 7,554 | 7,334 | 8,533 | 7,951 | 7,043 | |||||||||||||||
Purchase and resale agreements | 18,740 | 7,736 | 7,955 | 4,352 | 2,200 | |||||||||||||||
Loans and receivables securities | – | 2,180 | 255 | 51 | 109 | |||||||||||||||
Amounts due from immediate parent | – | – | – | – | – | |||||||||||||||
Amounts due from fellow subsidiaries and joint ventures | 1,997 | 1,199 | 1,112 | 1,367 | 797 | |||||||||||||||
Loans and advances to customers | 221,708 | 213,069 | 213,031 | 207,102 | 195,505 | |||||||||||||||
Impairment loss allowances | (751 | ) | (940 | ) | (921 | ) | (1,108 | ) | (1,415 | ) | ||||||||||
RV and voluntary termination provisions on finance leases | (69 | ) | (78 | ) | (68 | ) | (49 | ) | (24 | ) | ||||||||||
Net loans and advances to customers | 220,888 | 212,051 | 212,042 | 205,945 | 194,066 | |||||||||||||||
No single concentration of loans and advances above, except for loans secured on residential properties and corporate loans, is more than 10% of total loans and advances, and no individual country, except the UK, is more than 5% of total loans and advances.
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Loans secured on residential properties | 165,645 | 158,248 | 155,355 | 154,727 | 153,261 | |||||||||||||||
Corporate loans | 27,639 | 28,348 | 32,555 | 33,709 | 33,801 | |||||||||||||||
Finance leases | 6,264 | 6,821 | 6,710 | 6,730 | 6,306 | |||||||||||||||
Secured advances | – | – | – | 10 | 13 | |||||||||||||||
Other unsecured advances | 7,188 | 7,554 | 7,334 | 8,533 | 7,951 | |||||||||||||||
Purchase and resale agreements | 21,475 | 18,740 | 7,736 | 7,955 | 4,352 | |||||||||||||||
Loans and receivables securities | – | – | 2,180 | 255 | 51 | |||||||||||||||
Amounts due from immediate parent | – | – | – | – | – | |||||||||||||||
Amounts due from fellow Banco Santander subsidiaries and joint ventures | 2,204 | 1,997 | 1,199 | 1,112 | 1,367 | |||||||||||||||
Loans and advances to customers | 230,415 | 221,708 | 213,069 | 213,031 | 207,102 | |||||||||||||||
Impairment loss allowances | (785 | ) | (751 | ) | (940 | ) | (921 | ) | (1,108 | ) | ||||||||||
RV and voluntary termination provisions on finance leases | (61 | ) | (69 | ) | (78 | ) | (68 | ) | (49 | ) | ||||||||||
Net loans and advances to customers | 229,569 | 220,888 | 212,051 | 212,042 | 205,945 | |||||||||||||||
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
Maturity analysis
The following table shows loans and advances to customers by maturity at 31 December 2018.2019. Overdrafts are included as‘on-demand’. Loans and advances are included at their contractual maturity; no account is taken of a customer’s ability to repay early where it exists.
| On demand | Not later than three months | Later than three months and not later than one year | Later than and not later | Later than five years and not later than ten years | Later than ten years | Total | ||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
Loans secured on residential properties | 2 | 656 | 585 | 6,914 | 19,568 | 130,523 | 158,248 | |||||||||||||||||||||
Corporate loans | 861 | 1,309 | 2,927 | 12,420 | 4,865 | 5,966 | 28,348 | |||||||||||||||||||||
Finance leases | – | 894 | 2,157 | 3,600 | 74 | 96 | 6,821 | |||||||||||||||||||||
Other unsecured loans | 656 | 2,597 | 873 | 3,195 | 141 | 92 | 7,554 | |||||||||||||||||||||
Purchase and resale agreements | – | 13,674 | 5,066 | – | – | – | 18,740 | |||||||||||||||||||||
Amounts due from immediate parent | – | – | – | – | – | – | – | |||||||||||||||||||||
Amounts due from fellow subsidiaries and joint ventures | 2 | 415 | 753 | 827 | – | – | 1,997 | |||||||||||||||||||||
Loans and advances to customers | 1,521 | 19,545 | 12,361 | 26,956 | 24,648 | 136,677 | 221,708 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Fixed interest rate | – | 14,485 | 8,625 | 4,100 | 11,573 | 101,379 | 140,162 | |||||||||||||||||||||
– Variable interest rate | 1,521 | 5,060 | 3,736 | 22,856 | 13,075 | 35,298 | 81,546 | |||||||||||||||||||||
Total | 1,521 | 19,545 | 12,361 | 26,956 | 24,648 | 136,677 | 221,708 | |||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||
– Interest-only loans secured on residential properties | – | 321 | 253 | 4,211 | 9,715 | 33,348 | 47,848 | |||||||||||||||||||||
Our policy is to hedge fixed-rate loans and advances to customers using derivatives, or by matching with otheron-balance sheet interest rate exposures.
| Not later than one year £m | Later than one year | Later than £m | Total £m | |||||||||||||
Loans secured on residential properties | 1,122 | 7,340 | 157,183 | 165,645 | ||||||||||||
Corporate loans | 3,860 | 10,729 | 13,050 | 27,639 | ||||||||||||
Finance leases | 2,731 | 3,426 | 107 | 6,264 | ||||||||||||
Other unsecured loans | 3,476 | 3,372 | 340 | 7,188 | ||||||||||||
Purchase and resale agreements | 21,355 | 102 | 18 | 21,475 | ||||||||||||
Amounts due from immediate parent | – | – | – | – | ||||||||||||
Amounts due from fellow subsidiaries and joint ventures | 1,196 | 1,008 | – | 2,204 | ||||||||||||
Loans and advances to customers | 33,740 | 25,977 | 170,698 | 230,415 | ||||||||||||
Of which: | ||||||||||||||||
– Fixed interest rate | 23,724 | 9,073 | 119,416 | 152,213 | ||||||||||||
– Variable interest rate | 10,016 | 16,904 | 51,282 | 78,202 | ||||||||||||
Total | 33,740 | 25,977 | 170,698 | 230,415 | ||||||||||||
We manage our balance sheet on a behavioural basis, rather than on the basis of contractual maturity. Many loans are repaid before their legal maturity, particularly advances secured on residential property.
RISK ELEMENTS IN THE LOAN PORTFOLIO
The disclosure of credit risk elements in this section reflects US accounting practice and classifications. The purpose of the disclosure is to present within the US disclosure framework the elements of our loan portfolios with a greater risk of loss. The main classifications of credit risk elements presented are:
| – |
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| – | Potential problem loans |
| – |
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| – | Loan concentrations. |
ImpairedNonaccrual, past due and restructured loans
Following adoption of IFRS 9(i) Loans accounted for on 1 January 2018, wea nonaccrual basis (credit impaired loans)
We define a loan as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt they can keep up with their payments i.e. they are unlikely to pay. We classify credit impaired loans as Stage 3. For details of loans classified as Stage 3, see the ‘Credit risk’ section of the Risk review. PriorInterest income on financial assets that have become credit-impaired (or Stage 3) is calculated by applying the effective interest rate to the adoption of IFRS 9, we used a different definition of default to identify loans as credit impaired (although the two definitions are not significantly different), and we classified credit impaired loans as NPLs. Although we adopted IFRS 9 from 1 January 2018, we continued to monitor NPLs as a key metric in 2018. For more, see ‘Key metrics’ and ‘Definition of default (Credit impaired)’ in ‘Credit risk – Santander UK group level’ in the ‘Credit risk’ sectiontheir amortised cost (i.e. net of the Risk review.ECL provision).
In accordance with IFRS, we recognise interest income on assets after they have been written down as a resultAn analysis of an impairment loss. Interest continues to be accrued on all loans and the element of interest that is not anticipated to be recovered is provided for. Interest income recognised on impaired loans is set out in the Consolidated Financial Statements. The income adjustment in respect of interest that is not anticipated to be recovered was £8m (2017: £9m, 2016: £11m).included below:
2019 £m | 2018 £m | 2017 £m | 2016 £m | 2015 £m | ||||||||||||||||
Stage 3on-balance sheet (2015 to 2017: NPLs) | 2,289 | 2,491 | 2,848 | 2,994 | 3,056 | |||||||||||||||
(ii) Unimpaired loans contractually past due 90 days or more as to interest or principal
We classify all such loans as credit impaired.
(iii) Troubled debt restructurings
Under US accounting practice and classifications, troubled debt restructurings are loans whose terms have been modified by the lender because of the borrower’s financial difficulties, as a concession that the lender would not otherwise consider. We classify such loans as in forbearance. For details of loans in forbearance, see ‘Forbearance’ in ‘Credit risk – Santander UK group level’, ‘Credit risk – Retail Banking’ and ‘Credit risk – Other business segments’ in the ‘Credit risk’ section of the Risk review.
The table below summarises forborne exposures that were not credit-impaired:
| 2019 £m | ||||
Non-credit impaired forborne loans and advances to customers | 1,220 | |||
(iv) Interest foregone on impaired loans
The table below summarises the interest foregone on impaired lending:
| 2019 £m | ||||
Interest income that would have been recognised under original contract terms | 66 | |||
Interest income included in profit | (53 | ) | ||
Interest foregone | 13 | |||
| 280 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Additional balance sheet analysis |
Potential problem loans and advances
These are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. Under IFRS 9, we are required to assess whether any loans have suffered a significant increase in credit risk (SICR) since origination. When a loan experiences a SICR since initial recognition, but no credit impairment has materialised, we allocate it into Stage 2, and we consider it within potential problem loans and advances. For more, see the ‘Significant Increase in Credit Risk (SICR)’ section in the ‘Credit risk’ section of the Risk review.
In order to assess credit quality, we map exposures into a nine point scale, from 9 (lowest risk) to 1 (default). We classify such loans as impaired.show this credit rating distribution in the ‘Santander UK group level – credit risk review’ section of the Risk review.
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Loans and advances to customers(1)of which: | 199,869 | 200,325 | 200,156 | 198,634 | 190,651 | |||||||||||||||
– Stage 3 | 2,491 | |||||||||||||||||||
– NPLs | 2,408 | 2,848 | 2,994 | 3,056 | 3,424 | |||||||||||||||
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Cross-borderForeign outstandings
The disclosure of cross border outstandings in this section reflects US accounting practice and classifications. Cross border outstandings, as defined by bank regulatory rules, are amounts payable to us by residents of foreign countries, regardless of the currency in which the claim is denominated, and local country claims in excess of local country obligations. Cross border outstandings consist mainly of loans and advances to customers and banks, finance lease debtors, interest-bearing investments and other monetary assets.
In addition to credit risk, cross border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual payment obligations of principal and or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. These cross border outstandings are controlled through a well-developed system of country limits, which are reviewed to avoid concentrations of transfer, economic or political risks.
For more on our country risk exposures, see ‘Country risk exposures’ in the ‘Credit risk’ section of the Risk review.
(i) Cross border outstandings exceeding 1% of total assets
At 31 December 2019, 2018 2017 and 20162017 cross border outstandings exceeding 1% of total assets were as follows:
| 2019 | Governments £bn | Banks and other £bn | Other £bn | Total £bn | ||||||||||||||||||||||||||||
Japan | 2.3 | 1.6 | – | 3.9 | ||||||||||||||||||||||||||||
Ireland | – | 7.5 | 0.1 | 7.6 | ||||||||||||||||||||||||||||
Luxembourg | – | 2.8 | 0.1 | 2.9 | ||||||||||||||||||||||||||||
| 2018 | Governments and official institutions £bn | Banks and other £bn | Other £bn | Total £bn | ||||||||||||||||||||||||||||
US | 1.1 | 3.0 | 0.3 | 4.4 | 1.1 | 3.0 | 0.3 | 4.4 | ||||||||||||||||||||||||
Japan | 3.8 | 2.6 | – | 6.4 | 3.8 | 2.6 | – | 6.4 | ||||||||||||||||||||||||
Ireland | – | 12.3 | 0.4 | 12.7 | – | 12.3 | 0.4 | 12.7 | ||||||||||||||||||||||||
Spain | – | 2.7 | 0.2 | 2.9 | – | 2.7 | 0.2 | 2.9 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||||
US | 6.4 | 10.5 | 0.1 | 17.0 | 6.4 | 10.5 | 0.1 | 17.0 | ||||||||||||||||||||||||
Japan | 3.0 | 2.8 | 0.8 | 6.6 | 3.0 | 2.8 | 0.8 | 6.6 | ||||||||||||||||||||||||
Spain | – | 4.8 | 0.1 | 4.9 | – | 4.8 | 0.1 | 4.9 | ||||||||||||||||||||||||
France | 0.3 | 2.2 | 2.2 | 4.7 | 0.3 | 2.2 | 2.2 | 4.7 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
| 2016 | ||||||||||||||||||||||||||||||||
US | 5.0 | 13.1 | 0.1 | 18.2 | ||||||||||||||||||||||||||||
Japan | 2.8 | 3.3 | 1.4 | 7.5 | ||||||||||||||||||||||||||||
(ii) Cross border outstandings between 0.75% and 1% of total assets
There were noAt 31 December 2019, Santander UK had cross border outstandings between 0.75% and 1% of total assets at 31 December 2018. relating to the US. The aggregate amount of these cross border outstandings was £2.3bn.
At 31 December 2017 and 2016,2018, Santander UK did not have cross border outstandings between 0.75% and 1% of total assets were as follows:
| Governments | Banks and | |||||||||||||||
| and official | other financial | |||||||||||||||
| institutions | institutions | Other | Total | |||||||||||||
| 2017 | £bn | £bn | £bn | £bn | ||||||||||||
Germany | – | 2.8 | 0.1 | 2.9 | ||||||||||||
| ||||||||||||||||
| 2016 | ||||||||||||||||
Spain | – | 2.5 | 0.2 | 2.7 | ||||||||||||
Luxembourg | – | 2.3 | 0.3 | 2.6 | ||||||||||||
Germany | – | 2.5 | – | 2.5 | ||||||||||||
France | 0.4 | 2.0 | 0.1 | 2.5 | ||||||||||||
(iii) Cross border outstandings between 0.5% and 0.75% of total assetsfor any country.
At 31 December 2018, 2017, and 2016,Santander UK had cross border outstandings between 0.5%0.75% and 0.75%1% of total assets were as follows:
| Governments | Banks and | |||||||||||||||
| and official | other financial | |||||||||||||||
| institutions | institutions | Other | Total | |||||||||||||
| 2018 | £bn | £bn | £bn | £bn | ||||||||||||
Germany | – | 1.6 | – | 1.6 | ||||||||||||
| ||||||||||||||||
| 2017 | ||||||||||||||||
Ireland | – | 1.3 | 0.8 | 2.1 | ||||||||||||
Netherlands | – | 0.6 | 1.2 | 1.8 | ||||||||||||
Luxembourg | – | 1.3 | 0.4 | 1.7 | ||||||||||||
There were norelating to Germany. The aggregate amount of these cross border outstandings between 0.5%was £2.9bn.
Loan concentrations
No single concentration of loans and 0.75%advances above, except for loans secured on residential properties and corporate loans, is more than 10% of total assets at 31 December 2016.loans and advances, and no individual country, except the UK, is more than 5% of total loans and advances.
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
SUMMARY OF LOAN LOSS EXPERIENCE
Credit impairment loss allowances on loans and advances to customers
An analysis of impairment loss allowances on loans and advances to customers is presented below.
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Total credit impairment loss allowances: | ||||||||||||||||||||
– Loans secured on residential properties | 234 | 225 | 279 | 424 | 579 | |||||||||||||||
– Corporate loans | 226 | 490 | 382 | 395 | 558 | |||||||||||||||
– Finance leases | 85 | 46 | 45 | 20 | 30 | |||||||||||||||
– Other unsecured advances | 206 | 179 | 215 | 269 | 248 | |||||||||||||||
Total credit impairment loss allowances | 751 | 940 | 921 | 1,108 | 1,415 | |||||||||||||||
Movements in credit impairment loss allowances on loans and advances to customers
An analysis of movements in impairment loss allowances on loans and advances to customers is presented below.
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
Credit impairment loss allowances at 31 December | 940 | 921 | 1,108 | 1,415 | 1,538 | |||||||||||||||
Adoption of IFRS 9 (see Note 1 to the Consolidated Financial Statements) | 211 | |||||||||||||||||||
Reallocation of ECL on off balance sheet exposures(1) | (50 | ) | ||||||||||||||||||
Credit impairment loss allowances at 1 January | 1,101 | 921 | 1,108 | 1,415 | 1,538 | |||||||||||||||
Amounts written off: | ||||||||||||||||||||
– Loans secured on residential properties | (17 | ) | (17 | ) | (29 | ) | (32 | ) | (56 | ) | ||||||||||
– Corporate loans | (355 | ) | (64 | ) | (72 | ) | (157 | ) | (150 | ) | ||||||||||
– Finance leases | (23 | ) | (19 | ) | (22 | ) | (30 | ) | (14 | ) | ||||||||||
– Other unsecured advances | (144 | ) | (138 | ) | (196 | ) | (244 | ) | (272 | ) | ||||||||||
Total amounts written off | (539 | ) | (238 | ) | (319 | ) | (463 | ) | (492 | ) | ||||||||||
Credit impairment losses (released)/charged against profit: | ||||||||||||||||||||
– Loans secured on residential properties | (18 | ) | (37 | ) | (116 | ) | (123 | ) | 42 | |||||||||||
– Corporate loans | 17 | 172 | 59 | (6 | ) | 75 | ||||||||||||||
– Finance leases | 51 | 20 | 47 | 20 | 17 | |||||||||||||||
– Other unsecured advances | 139 | 102 | 142 | 265 | 235 | |||||||||||||||
Total credit impairment losses charged against profit | 189 | 257 | 132 | 156 | 369 | |||||||||||||||
Credit impairment loss allowances at 31 December | 751 | 940 | 921 | 1,108 | 1,415 | |||||||||||||||
|
| % | % | % | % | % | ||||||||||||||||
Ratio of amounts written off to average loans during the year | 0.27 | 0.12 | 0.15 | 0.22 | 0.26 | |||||||||||||||
Recoveries, net of collection costs
An analysis of recoveries, net of collection costs is presented below.
| 2018 | 2017 | 2016 | 2015 | 2014 | 2019 £m | 2018(1) £m | 2017 £m | 2016 £m | 2015 £m | |||||||||||||||||||||||||||||||
Total credit impairment loss allowances: | ||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential properties | 215 | 234 | 225 | 279 | 424 | |||||||||||||||||||||||||||||||||||
– Corporate loans | 262 | 226 | 490 | 382 | 395 | |||||||||||||||||||||||||||||||||||
– Finance leases | 88 | 85 | 46 | 45 | 20 | |||||||||||||||||||||||||||||||||||
– Other unsecured advances | 220 | 206 | 179 | 215 | 269 | |||||||||||||||||||||||||||||||||||
Total credit impairment loss allowances | 785 | 751 | 940 | 921 | 1,108 | |||||||||||||||||||||||||||||||||||
(1) On 1 January 2018, the Santander UK group adopted IFRS 9 (2015-2017: IAS 39).
Movements in credit impairment loss allowances on loans and advances to customers An analysis of movements in impairment loss allowances on loans and advances to customers is presented below.
|
(1) On 1 January 2018, the Santander UK group adopted IFRS 9 (2015-2017: IAS 39).
Movements in credit impairment loss allowances on loans and advances to customers An analysis of movements in impairment loss allowances on loans and advances to customers is presented below.
|
| ||||||||||||||||||||||||||||||||||||||
2019 £m | 2018(1) £m | 2017 £m | 2016 £m | 2015 £m | ||||||||||||||||||||||||||||||||||||
Credit impairment loss allowances at 31 December | 751 | 940 | 921 | 1,108 | 1,415 | |||||||||||||||||||||||||||||||||||
Adoption of IFRS 9 | 211 | |||||||||||||||||||||||||||||||||||||||
Reallocation of ECL on off balance sheet exposures(2) | (50 | ) | ||||||||||||||||||||||||||||||||||||||
Credit impairment loss allowances at 1 January | 751 | 1,101 | 921 | 1,108 | 1,415 | |||||||||||||||||||||||||||||||||||
Amounts written off: | ||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential properties | (14 | ) | (17 | ) | (17 | ) | (29 | ) | (32 | ) | ||||||||||||||||||||||||||||||
– Corporate loans | (54 | ) | (355 | ) | (64 | ) | (72 | ) | (157 | ) | ||||||||||||||||||||||||||||||
– Finance leases | (34 | ) | (23 | ) | (19 | ) | (22 | ) | (30 | ) | ||||||||||||||||||||||||||||||
– Other unsecured advances | (102 | ) | (144 | ) | (138 | ) | (196 | ) | (244 | ) | ||||||||||||||||||||||||||||||
Total amounts written off | (204 | ) | (539 | ) | (238 | ) | (319 | ) | (463 | ) | ||||||||||||||||||||||||||||||
Credit impairment losses (released)/charged against profit: | ||||||||||||||||||||||||||||||||||||||||
– Loans secured on residential properties | (5 | ) | (18 | ) | (37 | ) | (116 | ) | (123 | ) | ||||||||||||||||||||||||||||||
– Corporate loans | 90 | 17 | 172 | 59 | (6 | ) | ||||||||||||||||||||||||||||||||||
– Finance leases | 37 | 51 | 20 | 47 | 20 | |||||||||||||||||||||||||||||||||||
– Other unsecured advances | 116 | 139 | 102 | 142 | 265 | |||||||||||||||||||||||||||||||||||
Total credit impairment losses charged against profit | 238 | 189 | 257 | 132 | 156 | |||||||||||||||||||||||||||||||||||
Credit impairment loss allowances at 31 December | 785 | 751 | 940 | 921 | 1,108 | |||||||||||||||||||||||||||||||||||
(1) On 1 January 2018, the Santander UK group adopted IFRS 9 (2015-2017: IAS 39). (2) This relates to ECL onoff-balance sheet exposures following the adoption of a methodology to enable their separate identification from ECL on drawn exposures.
|
(1) On 1 January 2018, the Santander UK group adopted IFRS 9 (2015-2017: IAS 39). (2) This relates to ECL onoff-balance sheet exposures following the adoption of a methodology to enable their separate identification from ECL on drawn exposures.
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| ||||||||||||||||||||||||||||||||||||||
| % | % | % | % | % | ||||||||||||||||||||||||||||||||||||
Ratio of amounts written off to average loans during the year | 0.10 | 0.27 | 0.12 | 0.15 | 0.22 | |||||||||||||||||||||||||||||||||||
Recoveries, net of collection costs An analysis of recoveries, net of collection costs is presented below.
|
Recoveries, net of collection costs An analysis of recoveries, net of collection costs is presented below.
|
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| £m | £m | £m | £m | £m | 2019 £m | 2018 £m | 2017 £m | 2016 £m | 2015 £m | |||||||||||||||||||||||||||||||
Loans secured on residential properties | 2 | 3 | 4 | 2 | 3 | 2 | 2 | 3 | 4 | 2 | ||||||||||||||||||||||||||||||
Corporate loans | 1 | 1 | 3 | 3 | 4 | 2 | 1 | 1 | 3 | 3 | ||||||||||||||||||||||||||||||
Finance leases | 6 | 6 | 2 | 2 | 2 | 7 | 6 | 6 | 2 | 2 | ||||||||||||||||||||||||||||||
Other unsecured advances | 33 | 44 | 56 | 83 | 102 | 29 | 33 | 44 | 56 | 83 | ||||||||||||||||||||||||||||||
Total amount recovered | 42 | 54 | 65 | 90 | 111 | 40 | 42 | 54 | 65 | 90 | ||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Additional balance sheet analysis |
DEPOSITS BY CUSTOMERS
The balances below include deposits by customers classified in the balance sheet as other financial liabilities at fair value through profit or loss and repurchase agreements – non trading. Prior to the implementation of our ring-fence structure they also included deposits by customers classified as trading liabilities. The following tables show the average balances by customer type.product.
| 2018 | 2017 | 2016 | ||||||||||
| £m | £m | £m | ||||||||||
Demand deposits | 153,880 | 150,389 | 131,521 | |||||||||
Time deposits | 18,832 | 23,224 | 29,760 | |||||||||
Other deposits | 21,855 | 22,687 | 19,475 | |||||||||
Average balance(1) | 194,567 | 196,300 | 180,756 | |||||||||
Average interest rate(1) | 0.69% | 0.66% | 1.00% | |||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Average £m | Average % | Average £m | Average % | Average £m | Average % | |||||||||||||||||||||||||||
Demand deposits (including savings and current accounts) | 155,669 | 0.70 | 153,880 | 0.67 | 150,389 | 0.64 | ||||||||||||||||||||||||||
Time deposits | 17,877 | 1.24 | 18,832 | 0.87 | 23,224 | 0.85 | ||||||||||||||||||||||||||
Other deposits | 18,931 | 0.82 | 21,855 | 0.67 | 22,687 | 0.62 | ||||||||||||||||||||||||||
Total average balance(1) | 192,477 | 0.76 | 194,567 | 0.69 | 196,300 | 0.66 | ||||||||||||||||||||||||||
| (1) | Calculated using monthly data. |
We obtain retail demand and time deposits either through our branch network, cahoot or remotely. We also obtain retail demand and time deposits outside the UK, mainly through the Jersey and Isle of Man branches of ANTS (previously Santander UK plc). They are all interest-bearing and interest rates are varied from time to time in response to competitive conditions.
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DEPOSITS BY BANKS
The balances below include deposits by banks classified in the balance sheet as repurchase agreements – non trading. Prior to the implementation of our ring-fence structure they also included deposits by banks classified as trading liabilities.
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| £m | £m | £m | 2019 £m | 2018 £m | 2017 £m | |||||||||||||||||||
Average balance(1) | 19,536 | 15,708 | 12,634 | 17,251 | 19,536 | 15,708 | ||||||||||||||||||
Average interest rate(1) | 0.74% | 0.46% | 0.62% | 0.85% | 0.74% | 0.46% | ||||||||||||||||||
| (1) | Calculated using monthly data. |
At 31 December 2018,2019, deposits by foreign banks were £3,289m (2018: £4,631m, (2017: £2,159m, 2016: £1,995m)2017: £2,159m).
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
SHORT-TERM BORROWINGS
We include short-term borrowings in other financial liabilities at fair value through profit or loss, deposits by banks, repurchase agreements – non trading and debt securities in issue. Prior to the implementation of our ring-fence structure short-term borrowings were also included in trading liabilities. We do not show short-term borrowings separately on our balance sheet. Short-term borrowings are amounts payable for short-term obligations that are US Federal funds purchased and securities sold under repurchase agreements, commercial paper, borrowings from banks, borrowing from factors or other financial institutions and any other short-term borrowings reflected on the balance sheet. The table below shows short-term borrowings for each of the years ended 31 December 2019, 2018 2017 and 2016.2017.
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| £m | £m | £m | 2019 £m | 2018 £m | 2017 £m | |||||||||||||||||||
Securities sold under repurchase agreements | ||||||||||||||||||||||||
–Year-end balance | 12,175 | 26,334 | 10,104 | 17,441 | 12,175 | 26,334 | ||||||||||||||||||
–Year-end interest rate | 0.77% | 0.52% | 0.11% | 0.73% | 0.77% | 0.52% | ||||||||||||||||||
– Average balance(1) | 21,684 | 23,281 | 16,109 | 15,874 | 21,684 | 23,281 | ||||||||||||||||||
– Average interest rate(1) | 0.76% | 0.42% | 0.44% | 0.77% | 0.76% | 0.42% | ||||||||||||||||||
– Maximum balance(1) | 32,550 | 28,793 | 23,385 | 18,253 | 32,550 | 28,793 | ||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||
–Year-end balance | 3,131 | 3,293 | 3,132 | 3,014 | 3,131 | 3,293 | ||||||||||||||||||
–Year-end interest rate | 2.43% | 0.80% | 0.88% | 2.00% | 2.43% | 0.80% | ||||||||||||||||||
– Average balance(1) | 4,314 | 3,592 | 3,220 | 3,438 | 4,314 | 3,592 | ||||||||||||||||||
– Average interest rate(1) | 1.71% | 0.76% | 0.74% | 2.08% | 1.71% | 0.76% | ||||||||||||||||||
– Maximum balance(1) | 5,898 | 4,180 | 3,858 | 4,099 | 5,898 | 4,180 | ||||||||||||||||||
Borrowings from banks (Deposits by banks)(2) | ||||||||||||||||||||||||
–Year-end balance | 6,832 | 3,968 | 2,619 | 7,884 | 6,832 | 3,968 | ||||||||||||||||||
–Year-end interest rate | 0.66% | 0.34% | 0.09% | 0.55% | 0.66% | 0.34% | ||||||||||||||||||
– Average balance(1) | 5,268 | 3,278 | 3,350 | 5,455 | 5,268 | 3,278 | ||||||||||||||||||
– Average interest rate(1) | 0.54% | 0.23% | 0.10% | 0.53% | 0.54% | 0.23% | ||||||||||||||||||
– Maximum balance(1) | 6,902 | 4,222 | 4,861 | 7,884 | 6,902 | 4,222 | ||||||||||||||||||
Negotiable certificates of deposit | ||||||||||||||||||||||||
–Year-end balance | 3,221 | 4,706 | 5,217 | 2,806 | 3,221 | 4,706 | ||||||||||||||||||
–Year-end interest rate | 0.56% | 0.69% | 0.31% | 0.93% | 0.56% | 0.69% | ||||||||||||||||||
– Average balance(1) | 3,914 | 4,710 | 3,970 | 3,225 | 3,914 | 4,710 | ||||||||||||||||||
– Average interest rate(1) | 0.54% | 0.66% | 0.36% | 0.92% | 0.54% | 0.66% | ||||||||||||||||||
– Maximum balance(1) | 6,108 | 5,335 | 5,614 | 3,600 | 6,108 | 5,335 | ||||||||||||||||||
Other debt securities in issue | ||||||||||||||||||||||||
–Year-end balance | 7,397 | 7,556 | 7,904 | 10,890 | 7,397 | 7,556 | ||||||||||||||||||
–Year-end interest rate | 1.58% | 1.42% | 1.57% | 1.44% | 1.58% | 1.42% | ||||||||||||||||||
– Average balance(1) | 5,610 | 9,126 | 7,806 | 7,942 | 5,610 | 9,126 | ||||||||||||||||||
– Average interest rate(1) | 1.76% | 1.65% | 1.76% | 1.29% | 1.76% | 1.65% | ||||||||||||||||||
– Maximum balance(1) | 7,397 | 10,761 | 8,267 | 10,890 | 7,397 | 10,761 | ||||||||||||||||||
| (1) | Calculated using monthly weighted average data. |
| (2) | Theyear-end deposits by banks balance includesnon-interest bearing items in the course of transmission of £337m (2018: £262m, |
During 2018 and as part of our ring-fencing plans ANTS and its US Branch ceased issuing commercial paper. All commercial paper is now issued by Santander UK plc. Santander UK plc issues euro commercial paper with a minimum issuance amount of€100,000 with a maximum maturity of 364 days, and US$ commercial paper with a minimum denomination of US$250,000, with a maximum maturity of 270 days.
Certificates of deposit and certain time deposits
The following table shows the maturities of our certificates of deposit and other large wholesale time deposits fromnon-banks over £50,000 (or thenon-sterling equivalent of £50,000)US$100,000 at 31 December 2018.2019. A proportion of our retail time deposits also exceeds £50,000US$100,000 at any given date; however, the ease of access and other terms of these accounts means that they may not have been in excess of £50,000US$100,000 throughout 2018.2019. Also, the customers may withdraw their funds on demand by paying an interest penalty. For these reasons, no maturity analysis is presented for such deposits.
| Over 3 | Over 6 | |||||||||||||||||||||||||||||||||||||||
| 3 months | through | through | Over | |||||||||||||||||||||||||||||||||||||
| or less | 6 months | 12 months | 12 months | Total | ||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | 3 months £m | Over 3 through 6 months £m | Over 6 through 12 months £m | Over 12 months £m | Total £m | |||||||||||||||||||||||||||||||
Certificates of deposit | 2,587 | 394 | 240 | – | 3,221 | 1,831 | 764 | 119 | – | 2,714 | ||||||||||||||||||||||||||||||
Wholesale time deposits | 1,428 | 219 | 113 | – | 1,760 | |||||||||||||||||||||||||||||||||||
Time deposits | 711 | 104 | 166 | 502 | 1,483 | |||||||||||||||||||||||||||||||||||
| 4,015 | 613 | 353 | – | 4,981 | 2,542 | 868 | 285 | 502 | 4,197 | |||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Additional balance sheet analysis | ||||||||||||||||||||
CONTRACTUAL OBLIGATIONS
For the amounts and maturities of contractual obligations in respect of guarantees, see Notes 3229 and 4138 to the Consolidated Financial Statements. Other contractual obligations, including payments of principal and interest where applicable, are shown in the table below. Interest payments are included in the maturity column of the interest payments themselves, and are calculated using current interest rates.
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||
Less than £m | 1–3 years £m | 3–5 years £m | More than £m | Total £m | Less than 1 year £m | 1–3 years £m | 3–5 years £m | More than £m | Total £m | |||||||||||||||||||||||||||||||
Derivative financial instruments | 503 | 74 | 11 | 1,006 | 1,594 | 549 | 150 | 264 | 746 | 1,709 | ||||||||||||||||||||||||||||||
Deposits by customers(1) | 173,020 | 4,614 | 1,154 | 3,922 | 182,710 | 183,462 | 2,339 | 651 | 1,221 | 187,673 | ||||||||||||||||||||||||||||||
Deposits by banks(1) | 13,163 | 9,361 | 2,269 | 219 | 25,012 | 17,266 | 7,107 | – | 213 | 24,586 | ||||||||||||||||||||||||||||||
Debt securities in issue(2) | 14,219 | 21,829 | 5,920 | 14,928 | 56,896 | 16,515 | 13,516 | 10,282 | 10,963 | 51,276 | ||||||||||||||||||||||||||||||
Subordinated liabilities | – | – | 1,173 | 2,428 | 3,601 | – | – | 1,136 | 2,392 | 3,528 | ||||||||||||||||||||||||||||||
Retirement benefit obligations | 266 | 556 | 634 | 9,349 | 10,805 | 332 | 638 | 707 | 10,488 | 12,165 | ||||||||||||||||||||||||||||||
Operating lease obligations | 73 | 85 | 29 | 60 | 247 | 43 | 34 | 20 | 41 | 138 | ||||||||||||||||||||||||||||||
Purchase obligations | 276 | – | – | – | 276 | 414 | – | – | – | 414 | ||||||||||||||||||||||||||||||
| 201,520 | 36,519 | 11,190 | 31,912 | 281,141 | 218,581 | 23,784 | 13,060 | 26,064 | 281,489 | |||||||||||||||||||||||||||||||
| (1) | Includes deposits by banks and deposits by customers classified in the balance sheet as trading liabilities, other financial liabilities at fair value through profit or loss and financial liabilities at amortised cost (including repurchase agreements – non trading). |
| (2) | Includes debt securities in issue classified in the balance sheet as trading liabilities and other financial liabilities at fair value through profit or loss. |
The table is based on contractual maturities, so it takes no account of call features in our subordinated liabilities. The repayment terms of the debt securities may be accelerated in line with the covenants in the loan agreements.
For details of deposits by customers, deposits by banks, and repurchase agreements -– non trading, see Notes 25, 2622, 23 and 2724 to the Consolidated Financial Statements. We have entered into outsourcing contracts where, in some cases, there is no minimum specified spending requirement. In these cases, anticipated spending volumes have been included in purchase obligations.
Under current conditions, our working capital is expected to be sufficient for our present needs and to pursue our planned business strategies.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we issue guarantees on behalf of customers. The main guarantees we issue are standby letters of credit and performance bonds under which we take on credit on behalf of customers when actual funding is not required. This is normally because a third party will not accept the credit risk of the customer. We include these guarantees in our impairment loss allowance assessment with other forms of credit exposure. In addition, we give representations, indemnities and warranties on the sale of our subsidiaries, businesses and other assets, as is normal in such activity. The maximum potential amount of any claims made against these is usually much higher than actual settlements. We make provisions for our best estimate of the likely outcome, either at the time of sale, or later if we receive more information. See Note 3229 to the Consolidated Financial Statements for more information on our guarantees, commitments and contingencies. See Note 2119 to the Consolidated Financial Statements for more information on ouroff-balance sheet arrangements.
In the ordinary course of business, we also enter into securitisation transactions as set out in Note 1514 to the Consolidated Financial Statements. We consolidate thethese securitisation companies and we continue to administer the assets. The securitisation companies provide us with an important source of long-term funding and/or the ability to manage capital efficiently.
ADDITIONAL STATISTICAL INFORMATION
2019 % | 2018(1,2) % | 2017 % | 2016 % | 2015 % | ||||||||||||||||
Equity to assets ratio(3) | 4.73 | 4.52 | `4.35 | 4.40 | 4.47 | |||||||||||||||
Return on assets(4) | 0.24 | 0.38 | 0.41 | 0.44 | 0.34 | |||||||||||||||
Return on ordinary shareholders’ equity(5) | 4.9 | 8.2 | 9.2 | 9.6 | 7.2 | |||||||||||||||
Dividend payout ratio(6) | 39 | 100 | 44 | 47 | 50 | |||||||||||||||
| (1) | On 1 January 2018, the Santander UK group adopted IFRS 9. |
| (2) | In 2018, the Santander UK group completed the implementation of its ring-fencing plans. |
| (3) | Average ordinary shareholders’ equity divided by average total assets. Average balances are based on monthly data. |
| (4) | Profit after tax divided by average total assets. Average balances are based on monthly data. |
| (5) | Profit after tax due to equity holders of the parent divided by average ordinary shareholders’ equity. |
| (6) | Ordinary equity dividends approved divided by profit after tax attributable to equity holders of the parent. |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between interest rates and net interest income caused by the periodic repricing of assets and liabilities. Our largest administered rate items are residential mortgages and retail deposits, most of which bear interest at variable rates.
We mitigate the impact of interest rate movements on net interest income by repricing our variable rate mortgages and variable rate retail deposits separately, subject to competitive pressures. We also offer fixed-rate mortgages and savings products on which the interest rate is fixed for an agreed period at the start of the contract. We manage the margin on fixed-rate products by using derivatives matching the fixed-rate profiles. We reduce the risk of prepayment by imposing early termination charges if the customers end their contracts early.
We manage the risks from movements in interest rates as part of our overallnon-trading position. We do this within limits as set out in the Risk review.
Changes in net interest income – volume and rate analysis
The following table shows changes in interest income, interest expense and net interest income.income, and is presented using asset and liability classifications in the Consolidated Balance Sheet. It allocates the effects between changes in volume and changes in rate. Volume and rate changes have been calculated on the movement in the average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities. The changes caused by movements in both volume and rate have been allocated to rate changes.
| 2018/2017 | 2017/2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes due to | Changes due to | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | increase/(decrease) in | Total | increase/(decrease) in | 2019/2018 | 2018/2017 | |||||||||||||||||||||||||||||||||||||||||||||||||
| change | Volume | Rate | change | Volume | Rate | Total | Changes due to increase/(decrease) in | Total | Changes due to increase/(decrease) in | |||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | change £m | Volume £m | Rate £m | change £m | Volume £m | Rate £m | |||||||||||||||||||||||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers | (35 | ) | 62 | (97 | ) | (704 | ) | (8 | ) | (696 | ) | (222 | ) | 58 | (280 | ) | (35 | ) | 62 | (97 | ) | |||||||||||||||||||||||||||||||||
Loans and advances to banks | 43 | (25 | ) | 68 | 52 | 34 | 18 | (25 | ) | (24 | ) | (1 | ) | 43 | (25 | ) | 68 | |||||||||||||||||||||||||||||||||||||
Reverse repurchase agreements – non trading | 104 | 118 | (14 | ) | 5 | (2 | ) | 7 | 120 | 105 | 15 | 104 | 118 | (14 | ) | |||||||||||||||||||||||||||||||||||||||
Other interest-earning financial assets | 55 | 30 | 25 | 85 | 50 | 35 | 27 | 14 | 13 | 55 | 30 | 25 | ||||||||||||||||||||||||||||||||||||||||||
Total interest income | 167 | 185 | (18 | ) | (562 | ) | 74 | (636 | ) | (100 | ) | 153 | (253 | ) | 167 | 185 | (18 | ) | ||||||||||||||||||||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers – demand | 75 | 22 | 53 | (420 | ) | 198 | (618 | ) | 49 | 12 | 37 | 75 | 22 | 53 | ||||||||||||||||||||||||||||||||||||||||
Deposits by customers – time | (30 | ) | (37 | ) | 7 | (192 | ) | (85 | ) | (107 | ) | 58 | (8 | ) | 66 | (30 | ) | (37 | ) | 7 | ||||||||||||||||||||||||||||||||||
Deposits by customers – other | (4 | ) | 3 | (7 | ) | (14 | ) | (32 | ) | 18 | – | 12 | (12 | ) | (4 | ) | 3 | (7 | ) | |||||||||||||||||||||||||||||||||||
Deposits by banks | 85 | 20 | 65 | 17 | 31 | (14 | ) | 15 | (1 | ) | 16 | 85 | 20 | 65 | ||||||||||||||||||||||||||||||||||||||||
Repurchase agreements – non trading | 32 | 11 | 21 | (33 | ) | (15 | ) | (18 | ) | 89 | 33 | 56 | 32 | 11 | 21 | |||||||||||||||||||||||||||||||||||||||
Subordinated debt | 7 | (14 | ) | 21 | (9 | ) | (15 | ) | 6 | (4 | ) | (2 | ) | (2 | ) | 7 | (14 | ) | 21 | |||||||||||||||||||||||||||||||||||
Debt securities in issue | 199 | 55 | 144 | (116 | ) | (69 | ) | (47 | ) | 2 | (10 | ) | 12 | 199 | 55 | 144 | ||||||||||||||||||||||||||||||||||||||
Other interest-bearing financial liabilities | – | (3 | ) | 3 | (16 | ) | (6 | ) | (10 | ) | 2 | 16 | (14 | ) | – | (3 | ) | 3 | ||||||||||||||||||||||||||||||||||||
Total interest expense | 364 | 57 | 307 | (783 | ) | 7 | (790 | ) | 211 | 52 | 159 | 364 | 57 | 307 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | (197 | ) | 128 | (325 | ) | 221 | 67 | 154 | (311 | ) | 101 | (412 | ) | (197 | ) | 128 | (325 | ) | ||||||||||||||||||||||||||||||||||||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
sheet analysis | ||||||||||||||||||||
AVERAGE BALANCE SHEET
Year-end balances may not reflect activity throughout the year, so we present average balance sheets below.below, using asset and liability classifications from the Consolidated Balance Sheet. They show averages for our significant categories of assets and liabilities, and the related interest income and expense.
| 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| balance(1) | Interest(2,3) | rate | balance(1) | Interest(2,3) | rate | balance(1) | Interest(2,3) | rate | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| £m | £m | % | £m | £m | % | £m | £m | % | Average balance(1) £m | Interest(2,3) £m | Average % | Average balance(1) £m | Interest(2,3) £m | Average % | Average balance(1) £m | Interest(2,3) £m | Average % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to customers(4) | 202,326 | 5,459 | 2.70 | 200,075 | 5,494 | 2.75 | 200,339 | 6,198 | 3.09 | 204,457 | 5,237 | 2.56 | 202,326 | 5,459 | 2.70 | 200,075 | 5,494 | 2.75 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to banks | 30,015 | 207 | 0.69 | 35,527 | 164 | 0.46 | 27,164 | 112 | 0.41 | 26,519 | 182 | 0.69 | 30,015 | 207 | 0.69 | 35,527 | 164 | 0.46 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse repurchase agreements – non trading | 12,759 | 124 | 0.97 | 1,851 | 20 | 1.08 | 2,113 | 15 | 0.71 | 23,558 | 244 | 1.04 | 12,759 | 124 | 0.97 | 1,851 | 20 | 1.08 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | 19,589 | 282 | 1.44 | 17,281 | 227 | 1.31 | 12,792 | 142 | 1.11 | 20,582 | 309 | 1.50 | 19,589 | 282 | 1.44 | 17,281 | 227 | 1.31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total average interest-earning assets, interest income(5) | 264,689 | 6,072 | 2.29 | 254,734 | 5,905 | 2.32 | 242,408 | 6,467 | 2.67 | 275,116 | 5,972 | �� | 2.17 | 264,689 | 6,072 | 2.29 | 254,734 | 5,905 | 2.32 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit impairment loss allowances and RV & VT provisions | (862 | ) | – | – | (903 | ) | – | – | (1,095 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit loss allowances and RV & VT provisions | (770 | ) | – | – | (862 | ) | – | – | (903 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading assets | 12,241 | – | – | 25,149 | – | – | 21,798 | – | – | – | – | – | 12,241 | – | – | 25,149 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives and othernon-interest-earning assets | 24,204 | – | – | 32,519 | – | – | 36,697 | – | – | 14,332 | – | – | 24,204 | – | – | 32,519 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial assets at fair value through profit or loss | 4,223 | – | – | 2,158 | – | – | 2,439 | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial assets at FVTPL | 1,783 | – | – | 4,223 | – | – | 2,158 | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total average assets | 304,495 | – | – | 313,657 | – | – | 302,247 | – | – | 290,461 | – | – | 304,495 | – | – | 313,657 | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers – demand | (153,880 | ) | (1,036 | ) | 0.67 | (150,389 | ) | (961 | ) | 0.64 | (131,521 | ) | (1,381 | ) | 1.05 | (155,669 | ) | (1,085 | ) | 0.70 | (153,880 | ) | (1,036 | ) | 0.67 | (150,389 | ) | (961 | ) | 0.64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers – time | (18,832 | ) | (164 | ) | 0.87 | (23,224 | ) | (194 | ) | 0.84 | (29,760 | ) | (386 | ) | 1.30 | (17,877 | ) | (222 | ) | 1.24 | (18,832 | ) | (164 | ) | 0.87 | (23,224 | ) | (194 | ) | 0.84 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by customers – other | (1,679 | ) | (24 | ) | 1.43 | (1,537 | ) | (28 | ) | 1.82 | (6,679 | ) | (42 | ) | 0.63 | (2,510 | ) | (24 | ) | 0.96 | (1,679 | ) | (24 | ) | 1.43 | (1,537 | ) | (28 | ) | 1.82 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits by banks | (15,836 | ) | (120 | ) | 0.76 | (10,137 | ) | (35 | ) | 0.35 | (3,728 | ) | (18 | ) | 0.48 | (15,671 | ) | (135 | ) | 0.86 | (15,836 | ) | (120 | ) | 0.76 | (10,137 | ) | (35 | ) | 0.35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements – non trading | (8,840 | ) | (37 | ) | 0.42 | (2,707 | ) | (5 | ) | 0.18 | (4,435 | ) | (38 | ) | 0.86 | (16,692 | ) | (126 | ) | 0.75 | (8,840 | ) | (37 | ) | 0.42 | (2,707 | ) | (5 | ) | 0.18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt securities | (53,359 | ) | (936 | ) | 1.75 | (49,663 | ) | (737 | ) | 1.48 | (54,015 | ) | (853 | ) | 1.58 | (52,781 | ) | (938 | ) | 1.78 | (53,359 | ) | (936 | ) | 1.75 | (49,663 | ) | (737 | ) | 1.48 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated liabilities | (3,343 | ) | (141 | ) | 4.22 | (3,729 | ) | (134 | ) | 3.59 | (4,163 | ) | (143 | ) | 3.44 | (3,284 | ) | (137 | ) | 4.17 | (3,343 | ) | (141 | ) | 4.22 | (3,729 | ) | (134 | ) | 3.59 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other interest-bearing liabilities | (152 | ) | (8 | ) | 5.26 | (250 | ) | (8 | ) | 3.20 | (340 | ) | (24 | ) | 7.06 | (453 | ) | (10 | ) | 2.21 | (152 | ) | (8 | ) | 5.26 | (250 | ) | (8 | ) | 3.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total average interest-bearing liabilities, interest expense(5) | (255,921 | ) | (2,466 | ) | 0.96 | (241,636 | ) | (2,102 | ) | 0.87 | (234,641 | ) | (2,885 | ) | 1.23 | (264,937 | ) | (2,677 | ) | 1.01 | (255,921 | ) | (2,466 | ) | 0.96 | (241,636 | ) | (2,102 | ) | 0.87 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading liabilities | (12,032 | ) | – | – | (26,843 | ) | – | – | (18,491 | ) | – | – | – | – | – | (12,032 | ) | – | – | (26,843 | ) | – | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives and othernon-interest-bearing liabilities | (14,544 | ) | – | – | (25,448 | ) | – | – | (31,067 | ) | – | – | (6,741 | ) | – | – | (14,544 | ) | – | – | (25,448 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities at fair value through profit or loss | (5,344 | ) | – | – | (2,592 | ) | – | – | (2,467 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities at FVTPL | (2,076 | ) | – | – | (5,344 | ) | – | – | (2,592 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity | (16,654 | ) | – | – | (17,138 | ) | – | – | (15,581 | ) | – | – | (16,707 | ) | – | – | (16,654 | ) | – | – | (17,138 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total average liabilities and equity | (304,495 | ) | – | – | (313,657 | ) | – | – | (302,247 | ) | – | – | (290,461 | ) | – | – | (304,495 | ) | – | – | (313,657 | ) | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Average balances are based on monthly data. |
| (2) | The NIM for the year ended 31 December |
| (3) | The interest spread for the year ended 31 December |
| (4) | Loans and advances to customers include |
| (5) | The ratio of average interest-earning assets to interest-bearing liabilities at 31 December |
| Santander UK Group Holdings plc |
Annual Report 2018 2019| Other Shareholder information for US investors
The following is a summary, under current law, of the main UK tax considerations relating to the beneficial ownership by a US taxpayer of the shares of the Company. This summary is provided for general guidance and does not address investors that are subject to special rules or that do not hold the shares as capital assets. US residents should consult their local tax advisers, particularly in connection with any potential liability to pay US taxes on disposal, lifetime gift or bequest of their shares.
UK taxation on dividends
Under UK law, income tax is not withheld from dividends paid by UK companies. Shareholders, whether resident in the UK or not, receive the full amount of the dividend actually declared.
UK taxation on capital gains
Under UK law, when you sell shares you may be liable to pay either capital gains tax or corporation tax on chargeable gains. However if you are either:
| – | An individual who is not resident in the UK or |
| – | A company which is not resident in the UK, |
you will not be liable to UK tax on any capital gains made on disposal of your shares. The exception is if the shares are held in connection with a trade or business that is conducted in the UK through a branch or agency (for capital gains tax purposes) or a permanent establishment (for corporation tax purposes).
UK inheritance tax
Under the current estate and gift tax convention between the US and the UK, shares held by an individual shareholder who is:
| – | Domiciled for the purposes of the convention in the US and |
| – | Is not for the purposes of the convention a national of the UK |
will not be subject to UK inheritance tax on: |
| – | The individual’s death or |
| – | On a gift of the shares during the individual’s lifetime. |
The exception is if the shares are part of the business property of a permanent establishment of the individual in the UK or, in the case of a shareholder who performs independent personal services, pertain to a fixed base situated in the UK.
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
services industry terms | ||||||||||||||||||||
Glossary of financial services industry terms
| Term | Definition | ||
| 1I2I3 Business World | 1I2I3 Business World is the marketing name to describe customers who hold a 1I2I3 Business Account. This will give our 1I2I3 businesses access to preferential rates and special offers, for example on our loans and savings products. | ||
| 1I2I3 World | 1I2I3 World is the marketing name to describe customers that hold a 1I2I3 Current Account, 1I2I3 Lite Current Account, Select Current Account, Private Current Account, 1I2I3 Student / Graduate / Post-Graduate Current Account, 1I2I3 Mini Current Account or 1I2I3 Credit Card. Customers in 1I2I3 World have access to a range of products with preferential rates and / or special deals such as cashback. | ||
| Active customers | |||
| Adjusted cost to income ratio | |||
| Adjusted RoTE | The adjusted profit after tax attributable to equity holders of the parent divided by average shareholders’ equity lessnon-controlling interests, other equity instruments and average goodwill and intangible assets. | ||
| Alternative performance measures (APMs) | A financial measure of historical or future financial performance, financial position or | ||
| Any excess in month | Accounts that were overdrawn for more than their overdraft for everyday in the previous month. | ||
| Arrears | Customers are said to be in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Such a customer is also said to be in a state of delinquency. When a customer is in arrears, his entire outstanding balance is said to be delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue. | ||
| Asset Backed Securities (ABS) | Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages but could also include leases, credit card receivables, motor vehicles or student loans. | ||
| UK Bank Levy | The government levy that applies to certain UK banks, UK building societies and the UK operations of foreign banks from 1 January 2011. The levy is payable based on a percentage of the chargeable equity and liabilities of the bank at the balance sheet date. | ||
| Banking NIM | Banking net interest margin. Net interest income divided by average gross customer assets. | ||
| Basel III | In December 2010, the Basel Committee on Banking Supervision issued the Basel III rules text, which presents the details of strengthened global regulatory standards on bank capital adequacy and liquidity. The standards were implemented in the EU in January 2014. | ||
| Basis point (bp) | One hundredth of a per cent (i.e. 0.01%), so 100 basis points is 1%. Used in quoting movements in interest rates or yields on securities. | ||
| Brexit | The withdrawal of the United Kingdom from the European Union. | ||
| Business Banking | Division, managed under Retail Banking, serving enterprises with a turnover of up to £6.5m per annum. | ||
| Colleague engagement | Colleague engagement is measured on annual basis in the Group Engagement Survey (GES), conducted by Mercer for Banco Santander. Results are benchmarked against other firms in the UK financial sector and other high performing firms. | ||
| Collectively assessed loan impairment provisions | Impairment losses assessment on a collective basis for loans that are part of homogeneous pools of similar loans and that are not individually significant, using appropriate statistical techniques. See ‘Impairment of financial assets’ in Note 1 to the Consolidated Financial Statements. | ||
| Commercial Paper | An unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date. Commercial paper can be issued as an unsecured obligation of Santander UK and is usually issued for periods ranging from one week up to nine months. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively achieve longer term funding. CP can be issued in a range of denominations and can be discounted or interest-bearing. | ||
| Commercial Real Estate (CRE) | Lending to UK customers, primarily on tenanted property assets, with a focus on the office, retail, industrial and residential sectors. | ||
| Common Equity Tier 1 (CET1) capital | Thecalled-up share capital and eligible reserves less deductions calculated in accordance with the CRD IV implementation rules as per the PRA Policy Statement PS7/13. CET1 capital ratio is CET1 capital as a percentage of risk-weighted assets. | ||
| CET1 capital ratio | CET1 capital as a percentage of risk weighted assets. | ||
| Contractual maturity | The final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is due to be paid. | ||
| Corporates | The sum of enterprises served by our Business Banking, Corporate & Commercial Banking and Corporate & Investment Banking. | ||
| Countercyclical capital buffer | A capital buffer required under Basel III to ensure that capital requirements take account of the macro-financial environment in which banks operate. | ||
| Counterparty credit risk | |||
| Covered bonds | Debt securities backed by a portfolio of mortgages that is segregated from the issuer’s other assets solely for the benefit of the holders of the covered bonds. The Santander UK group issues covered bonds as part of its funding activities. | ||
| Credit Default Swap (CDS) | A credit derivative contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer in the event of a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency. | ||
| Credit spread | The yield spread between securities with the same coupon rate and maturity structure but with different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to accept a lower credit quality. | ||
| Credit Valuation Adjustment (CVA) | Adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. | ||
| Santander UK Group Holdings plc | 289 |
Annual Report 2019| Shareholder information
| Term | Definition | ||
| Capital Requirements Directive IV (CRD IV) | An EU legislative package covering prudential rules for banks, building societies and investment firms. | ||
| Cash collection | Agents have been instructed to collect cash from the customer. | ||
| Currency swap | An arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments on the principal amounts. Often, one party will pay a fixed interest rate, while the other will pay a floating exchange rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usuallyre-exchanged. | ||
| Current Account Switch Service (CASS) guarantee | On 16 September 2013, Bacs (previously Payments Council) launched CASS. The service isfree-to-use for consumers, small charities, small businesses and small trusts, and is designed to make switching current accounts from one bank or building society to another, simpler, reliable and hassle-free, thus removing customers’ perceived barriers to switching. The new service is backed by a customer guarantee and aims to increase competition in the high street, support the entry of new banks in the current account marketplace and give customers greater choice if they want to switch. | ||
| Customer loans / customer deposits | Money lent to or deposited by all individuals and companies that are not credit institutions. Such funds are predominantly recorded as assets and liabilities in the balance sheet under Loans and advances to customers and Deposits by customers, respectively. | ||
| Customer funding gap | Customer loans less customer deposits. | ||
| Days past due | One or more days that interest and/or principal payments are overdue based on the contractual terms. | ||
| Debt restructuring | This occurs when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as reducing the debt or interest charged on the loan. | ||
| Debt securities | Transferable instruments creating or acknowledging indebtedness. They include debentures, bonds, certificates of deposit, notes and commercial paper. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities can be secured or unsecured. | ||
| Debt securities in issue | Transferable certificates of indebtedness of the Santander UK group to the bearer of the certificates. These are liabilities of the Santander UK group and include commercial paper, certificates of deposit, bonds and medium-term notes. | ||
| Default | Financial assets in default represent those that are at least 90 days past due in respect of principal or interest and/or where the assets are otherwise considered to be unlikely to pay, including those that are credit impaired. | ||
| Default at proxy origination | IFRS 9 requires us to compare lifetime probability of default at origination with our view of lifetime probability of default now. If we do not have data at origination then a proxy origination is defined. | ||
Annual Report 2018 | Other information for US investors
| Defined benefit obligation | The present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service. | ||
| Defined benefit plan | A pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. The employer’s obligation can be more or less than its contributions to the fund. | ||
| Defined contribution plan | A pension plan under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions, i.e. the employer’s obligation is limited to its contributions to the fund. | ||
| Delinquency | See ‘Arrears’. | ||
| Deposits by banks | Money deposited by banks and other credit institutions. They include money-market deposits, securities sold under repurchase agreements, and other short-term deposits. Such funds are recorded as liabilities in the Santander UK group’s balance sheet under Deposits by Banks, Trading Liabilities or Financial Liabilities designated at Fair Value. | ||
| Derivative | A contract or agreement whose value changes with changes in an underlying index such as interest rates, foreign exchange rates, share prices or indices and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options. | ||
| Digital customers | Digital customers reflect the number of customers who have logged onto Retail or Business online banking or mobile | ||
| Distributable items | Equivalent to distributable profits under the Companies Act 2006. | ||
| Economic capital | An internal measure of the minimum equity and preference capital required for the Santander UK group to maintain its credit rating based upon its risk profile. | ||
| Effective tax rate | The tax on profit/(losses) on ordinary activities as a percentage of profit/(loss) on ordinary activities before taxation. | ||
| Expected credit loss (ECL) | Represents what the credit risk is likely to cost us either over the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a significant increase in credit risk since origination. | ||
| Expected loss | The product of the probability of default, exposure at default and loss given default. We calculate each factor in accordance with CRD IV, and include direct and indirect costs. We base them on our risk models and our assessment of each customer’s credit quality. | ||
| Exposure | The maximum loss that a financial institution might suffer if a borrower, counterparty or group fails to meet their obligations or assets andoff-balance sheet positions have to be realised. | ||
| 290 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
| Glossary of financial services industry terms | ||||||||||||||||||||
| Term | Definition | |
| Exposure at default (EAD) | The estimation of the extent to which the Santander UK group may be exposed to a customer or counterparty in the event of, and at the time of, that counterparty’s default. At default, the customer may not have drawn the loan fully or may already have repaid some of the principal, so that exposure is typically less than the approved loan limit. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product type. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an undrawn element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product type and base them on analysis of recent default data. | |
| Fair value adjustment | An adjustment to the fair value of a financial instrument which is determined using a valuation technique (level 2 and level 3) to include additional factors that would be considered by a market participant that are not incorporated within the valuation model. | |
| Financial Conduct Authority (FCA) | A UK quasi-governmental agency formed as one of the successors to the Financial Services Authority (FSA). The FCA regulates financial firms providing services to UK consumers and maintains the integrity of the UK’s financial markets. It focuses on the regulation of conduct by both retail and wholesale financial services firms. | |
| Financial Services Compensation Scheme (FSCS) | The UK’s statutory fund of last resort for customers of authorised financial services firms, established under the Financial Services and Markets Act (FSMA) 2000. The FSCS can pay compensation to customers if a UK PRA authorised firm is unable, or likely to be unable, to pay claims against it (for instance, an authorised bank is unable to pay claims by depositors). The FSCS is funded by levies on firms authorised by the PRA, including Santander UK plc and other members of the Santander UK group. | |
| Financially empowered people | The number of people we are supporting who are unbanked, underbanked or in a situation of vulnerability to get access to the financial system, receive tailored finance and increase their knowledge and resilience through financial education. In 2019 we decided to contribute to our Group target to financially empower 10m people by 2025. | |
| First / Second Charge | First charge (also known as first lien): debt that places its holder first in line to collect compensation from the sale of the underlying collateral in the event of a default on the loan. Second charge (also known as second lien): debt that is issued against the same collateral as a higher charge debt but that is subordinate to it. In the case of default, compensation for this debt will only be received after the first charge has been repaid and thus represents a riskier investment than the first charge. | |
| Follow-on Rate (FoR) | A mortgage product that tracks and is directly linked to the Bank of England base rate. | |
| Forbearance | Forbearance takes place when a concession is made on the contractual terms of a loan in response to an obligor’s financial difficulties. | |
| Full time equivalent | Full time equivalent employee units are theon-job hours paid for employee services divided by the number of ordinary-time hours normally paid for a full-time staff member when on the job (or contract employee where applicable). | |
| Funded / unfunded | Exposures where the notional amount of the transaction is either funded or unfunded. Represents exposures where a commitment to provide future funding has been made and the funds have been released / not released. | |
| Funding for Lending Scheme (FLS) | A scheme designed by the Bank of England and HM Treasury to incentivise banks and building societies to boost their lending to UK households andnon-financial companies. It aims to do this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their performance in lending to the UKnon-financial sector. | |
| Home loan (Residential mortgage) | A loan to purchase a residential property which is then used as collateral to guarantee repayment of the loan. The borrower gives the lender a lien against the property and the lender can foreclose on the property if the borrower does not repay the loan per the agreed terms. Also known as a residential mortgage. | |
| Impaired loans | Loans where the Santander UK group does not expect to collect all the contractual cash flows or to collect them when they are contractually due. | |
| Impairment loss allowance (Loan loss allowance) | An impairment loss allowance held on the balance sheet as a result of the raising of a charge against profit for an expected credit loss in the lending book. An impairment loss allowance may be either individual or collective. | |
| Impairment losses | For 2017 and prior periods, the IAS 39 definition of impairment losses applies. This is superseded by the IFRS 9 definition of credit impairment losses. The raising of a charge against profit for the incurred loss inherent in the lending book following an impairment review. For financial assets carried at amortised cost, impairment losses are recognised in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for impairment losses. Foravailable-for-sale financial assets, the cumulative loss including impairment losses is removed from equity and recognised in the income statement. | |
| Individually assessed loan impairment provisions | Impairment is measured individually for assets that are individually significant. For these assets, the Santander UK group measures the amount of the impairment loss as the difference between the carrying amount of the asset or group of assets and the present value of the estimated future cash flows from the asset or group of assets discounted at the original effective interest rate of the asset. | |
| Internal Capital Adequacy Assessment Process (ICAAP) | The Santander UK group’s own assessment of its regulatory capital requirements, as part of CRD IV. It takes into account the regulatory and commercial environment in which the Santander UK group operates, the Santander UK group’s Risk Appetite, the management strategy for each of the Santander UK group’s material risks and the impact of appropriate adverse scenarios and stresses on the Santander UK group’s capital requirements. | |
| Internal Liquidity Adequacy Assessment Process (ILAAP) | The Santander UK group’s own assessment of the prudent level of liquidity that is consistent with the Santander UK group’s LRA. It documents and demonstrates the Santander UK group’s overall liquidity adequacy – an appropriate level of liquid resources, a prudent funding profile and comprehensive management and control of liquidity and funding risks. | |
| Internal ratings-based approach (IRB) | The Santander UK group’s method, under the CRD IV framework, for calculating credit risk capital requirements using the Santander UK group’s internal Probability of Default models but with supervisory estimates of Loss Given Default and conversion factors for the calculation of Exposure at Default. | |
| International Financial Reporting Standards (IFRS) | A set of international accounting standards developed and issued by the International Accounting Standards Board, consisting of principles-based guidance. | |
| Investment grade | A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of AAA to BBB. | |
| ISDA Master agreement | Standardised contract developed by ISDA (International Swaps and Derivatives Association) used as an umbrella under which bilateral derivatives contracts are entered into. | |
| Lending to corporates | The sum of our Business banking, Corporate & Commercial Banking and Corporate & Investment Banking loan balances. | |
| Santander UK Group Holdings plc | 291 |
Annual Report 2019| Shareholder information
| Term | Definition | |
| Level 1 | The fair value of these financial instruments is based on unadjusted quoted prices for identical assets or liabilities in an active market that the Santander UK group has the ability to access at the measurement date. | |
| Level 2 | The fair value of these financial instruments is based on quoted prices in markets that are not active or quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. | |
| Level 3 | The fair value of these financial instruments is based on inputs to the pricing or valuation techniques that are significant to the overall fair value measurement of the asset or liability are unobservable. | |
| Liquid assets coverage of wholesale funding of less than one year | LCR eligible liquidity pool divided by wholesale funding with a residual maturity of less than one year. | |
| Liquidity Coverage Ratio (LCR) | The LCR is intended to ensure that a bank maintains an adequate level of unencumbered, high quality liquid assets which can be used to offset the net cash outflows the bank could encounter under a short-term significant liquidity stress scenario. | |
|
| LCR eligible liquidity pool | Assets eligible for inclusion in the LCR as high quality liquid assets. The LCR eligible liquidity pool also covers both Pillar 1 and Pillar 2 risks. | ||
| |||
| Loan to value ratio (LTV) | The amount of a first mortgage charge as a percentage of the total appraised value of real property. The LTV ratio is used in determining the appropriate level of risk for the loan and therefore the price of the loan to the borrower. LTV ratios may be expressed in a number of ways, including origination LTV and indexed LTV. | ||
| Loss Given Default (LGD) | The fraction of Exposure at Default that will not be recovered following default. LGD comprises the actual loss (the part that is not recovered), together with the economic costs associated with the recovery process. It is calculated as the expected loss divided by EAD for each month of the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type. | ||
| Loyal | |||
| Master netting agreement | An industry standard agreement which facilitates netting of transactions (such as financial assets and liabilities including derivatives) in jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis. | ||
| Medium-Term Funding (MTF) | Shown at a sterling equivalent value. Consists of senior debt issuance, asset-backed issuance (including securitisation and covered bond issuance) and structured issuance (including firm financing repurchase agreements). MTF excludes any collateral received from the Bank of England’s Funding for Lending Scheme (FLS) or Term Funding Scheme (TFS). | ||
| Medium-Term Notes (MTNs) | Corporate notes (or debt securities) continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years. They can be issued on a fixed or floating coupon basis or with an exotic coupon; with a fixed maturity date(non-callable) or with embedded call or put options or early repayment triggers. MTNs are most generally issued as senior, unsecured debt. | ||
| Minimum requirement for own funds and eligible liabilities (MREL) | A requirement under the Bank Recovery and Resolution Directive for EU resolution authorities to set a minimum requirement for own funds and eligible liabilities for banks, implementing the Financial Stability Board’s Total Loss Absorbing Capacity (TLAC) standard. The purpose of MREL is to help ensure that when banks, building societies and investment firms fail, that failure can be managed in an orderly way while minimising risks to financial stability, disruption to critical economic functions, and risks to public funds. | ||
| Mortgages | Refers to residential and buy to let retail mortgages only and excludes social housing and commercial mortgage properties. | ||
| Mortgage-Backed Securities (MBS) | Securities that represent interests in groups of mortgages, which may be on residential or commercial properties. Investors in these securities have the right to cash received from future mortgage payments (interest and / or principal). When the MBS references mortgages with different risk profiles, the MBS is classified according to the highest risk class. | ||
| n.m. | Not meaningful when the change is above 100%. | ||
| Net fee and commission income | Fee and commission income minus other fees paid that are not an integral part of the effective interest rate. For retail and corporate products, fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK group’s branch and ATM networks, annual fees payable by credit card holders and fees fornon-banking financial products. | ||
| Net interest income | The difference between interest received on assets and interest paid on liabilities. | ||
| Net Interest Margin (NIM) | Net interest income as a percentage of average interest-earning assets. | ||
Net Promoter Score – Business and corporate | Measured by the MarketVue Business Banking from Savanta. This is an ongoing telephone based survey designed to monitor usage and attitude of UK businesses towards banks. Structured telephone interviews are conducted each year among businesses of all sizes from newstart-ups to large corporates and are weighted by region and turnover to be representative of businesses in Great Britain. NPS – recommendation score is based on an 11 point scale (%Top 2 – %Bottom 7). | ||
Net Promoter Score – Retail | The | ||
| 292 | Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
Glossary of financial services industry terms | ||||||||||||||||||||
| Term | Definition | ||
| Net Stable Funding Ratio (NSFR) | The ratio of available stable funding resources to stable funding requirements over a one year time horizon, assuming a stressed scenario. The Basel III rules require this ratio to be over 100%. | ||
| Other retail products | Other Retail products include Cater Allen, cahoot and crown dependencies (Jersey branch and Isle of Man). | ||
| Over the counter (OTC) derivatives | Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They offer flexibility because, unlike standardised exchange-traded products, they can be tailored to fit specific needs. | ||
| Own credit | The effect of the Santander UK group’s own credit standing on the fair value of financial liabilities. | ||
| Past due | A financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually due. | ||
| People Supported | People supported through our charity partnerships and sponsored programmes. Employee volunteer activities are organised through our flagship Discovery Project programme, the Santander Foundation and Santander Universities. | ||
| Pillar 1 | The first pillar of the Basel III approach which provides the approach to the calculation of the minimum capital requirements. This is 8% of the bank’s risk-weighted assets. | ||
| Pillar 2 | The part of the CRD IV Accord which sets out the process by which a bank should review its overall capital adequacy and the processes under which the supervisors evaluate how well financial institutions are assessing their risks and take appropriate actions in response to the assessments. | ||
| Pillar 3 | The part of the CRD IV Accord which sets out the disclosure requirements for firms to publish details of their risks, capital and risk management. The aims are greater transparency and strengthening market discipline. | ||
| Potential problem loans | Loans other thannon-accrual loans, accruing loans which are contractually overdue 90 days or more as to principal or interest and troubled debt restructurings where known information about possible credit problems of the borrower causes management to have serious doubts about the borrower’s ability to meet the loan’s repayment terms. | ||
| Primary banking customers | Adult Banking Customers who have a three month average credit turnover of at least £500 and set up a minimum of two Direct Debits (one paid out in the last three months) or at least one Standing Order (paid out in the last three months). Student Banking Customers who have a twelve month average credit turnover of at least £500 and as a minimum three active Debit Card transactions in the last month. | ||
| Prime / prime mortgage loans | A US description for mortgages granted to the most creditworthy category of borrowers. | ||
| Private customers | Customers who have investments or savings of over £500,000 or a gross annual income in excess of £250,000. | ||
| Private equity investments | Equity holdings in operating companies not quoted on a public exchange. | ||
| Probability of default (PD) | The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis. | ||
| Prudential Regulation Authority (PRA) | The UK financial services regulator formed as one of the successors to the FSA. The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It sets standards and supervises financial institutions at the level of the individual firm. | ||
| Regulatory capital | The amount of capital that the Santander UK group holds, determined in accordance with rules established by the UK PRA for the consolidated Santander UK group and by local regulators for individual Santander UK group companies. | ||
| Remuneration Code | FCA Remuneration Code for dual regulated firms SYSC19D.3.44 and PRA Rulebook-Remuneration Part 15.7 | ||
| Repurchase agreement (Repo) | In a sale and repurchase agreement one party, the seller, sells a financial asset to another party, the buyer, under commitments to reacquire the asset at a later date. The buyer at the same time agrees to resell the asset at the same later date. From the seller’s perspective such agreements are securities sold under repurchase agreements (repos) and from the buyer’s securities purchased under commitments to resell (reverse repos). | ||
| Residential | Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and / or principal). | ||
| Retail deposit spread | Retail Banking customer deposit spreads against the relevant swap rate or LIBOR. Retail Banking customer deposits include savings and bank accounts for personal and business banking customers. | ||
Annual Report 2018 | Other information for US investors
| Retail loans | Loans to individuals rather than institutions, including residential mortgage lending and banking and consumer credit. | ||
| Risk Appetite | The level of risk (types and quantum) that the Santander UK group is willing to accept (or not accept) to safeguard the interests of shareholders whilst achieving business objectives. | ||
| Risk-weighted assets (RWA) | A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as implemented by the PRA. | ||
| Santander UK | Refers to Santander UK Group Holdings plc and its subsidiaries. | ||
| Securitisation | A process by which a group of assets, usually loans, are aggregated into a pool, which is used to back the issuance of new securities. A company sells assets to a structured entity which then issues securities backed by the assets, based on their value. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors. Assets used in securitisations include mortgages to create mortgage-backed securities. Santander UK has established securitisation structures as part of its funding and capital management activities. | ||
| Select customers | Customers who have a Select Current Account and pay their main income of at least £5,000 per month into their Select Current Account or keep £75,000 in any Santander investment(s), savings or current account. | ||
| Santander UK Group Holdings plc | 293 |
Annual Report 2019| Shareholder information
| Term | Definition | ||
| Significant increase in credit risk (SICR) | Assessed by comparing the risk of default of an exposure at the reporting date to the risk of default at origination (after considering the passage of time). | ||
| Sovereign exposures | Exposures to local and central governments, and government guaranteed counterparties. | ||
| Stage 1 | Assets have not experienced a significant increase in credit risk since origination. A loss allowance equal to a 12 month ECL is applied. | ||
| Stage 2 | Assets have experienced a significant increase in credit risk since origination but no credit impairment has materialised. A loss allowance equal to the lifetime ECL is applied. | ||
| Stage 3 | Assets that are in default and considered credit impaired. A loss allowance equal to the lifetime ECL is applied. Objective evidence of credit impairment is required. | ||
| Standardised approach | In relation to credit risk, a method for calculating credit risk capital requirements under CRD IV, using External Credit Assessment Institutions ratings and supervisory risk weights. The Standardised approach is less risk-sensitive than IRB (see ‘IRB’ above). In relation to operational risk, a method of calculating the operational capital requirement under CRD IV, by the application of a supervisory defined percentage charge to the gross income of eight specified business lines. | ||
| Stress testing | Stress testing is a management tool that facilitates a forward looking perspective on risk management, strategic planning, capital, and liquidity and funding planning. | ||
| Structured entity | An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. | ||
| Structured finance/notes | A structured note is an instrument which pays a return linked to the value or level of a specified asset or index and sometimes offers capital protection if the value declines. Structured notes can be linked to a range of underlying assets, including equities, interest rates, funds, commodities and foreign currency. | ||
| Subordinated liabilities | Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. | ||
| Sub-prime | Loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as court judgements and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, highdebt-to-income ratios, or other criteria indicating heightened risk of default. | ||
| Supranational | An international organisation where member states transcend national boundaries or interests to share in decision-making and vote on issues relating to the organisation’s geographical focus. | ||
| SVR | Standard Variable Rate, | ||
| Tier 1 capital | A measure of a bank’s financial strength defined by the PRA. It captures Core Tier 1 capital plus other Tier 1 securities in issue, but is subject to a deduction in respect of material holdings in financial companies. | ||
| Tier 2 capital | Defined by the PRA. Broadly, it includes qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available for sale equity gains and revaluation reserves. It is subject to deductions relating to the excess of expected loss over regulatory impairment allowance, securitisation positions and material holdings in financial companies. | ||
| Top 10 company to work for | In line with Banco Santander’s aspiration, we will aim to achieve the accreditation of a Top 10 company to work for, as measured by an industry-wide benchmarking survey, over the medium-term. | ||
| Total loss absorbing capacity (TLAC) | An international standard for TLAC issued by the Financial Stability Board, which requires global systemically important banks(G-SIBs) to have sufficient loss-absorbing and recapitalisation capacity available in resolution, to minimise impacts on financial stability, maintain the continuity of critical functions and avoid requiring taxpayer support. | ||
| Total wholesale funding | Comprises the sum of all outstanding debt securities, structured issuance (including firm financing repurchase agreements), subordinated debt and capital issuance, TFS and noncustomer deposits. Total wholesale funding excludes any collateral received as part of the FLS. | ||
| Trading book | Positions in financial instruments held either with trading intent or in order to hedge other elements of the trading book, which must be free of restrictive covenants on their tradability or ability to be hedged. | ||
| Unencumbered assets | |||
| UK leverage ratio | CRD IVend-point Tier 1 capital divided by exposures as defined by the European Commission Delegated Regulation 2015/62 of October 2014. In July 2016, the definition was amended to exclude from the calculation for total exposure those assets held against central banks that are matched by deposits in the same currency and of equal or longer maturity. | ||
| Value at Risk (VaR) | An estimate of the potential loss which might arise from market movements under normal market conditions, if the current positions were to be held unchanged for one business day, measured to a confidence level. | ||
| Wholesale funding with a residual maturity of less than one year | Wholesale funding which has a residual maturity of less than one year at the balance sheet date. | ||
| Write-down | After an advance has been identified as impaired and is subject to an impairment allowance, the stage may be reached whereby it is concluded that there is no realistic prospect of further recovery. Write-downs will occur when, and to the extent that, the whole or part of a debt is considered irrecoverable. | ||
| Wrong-way risk | An aggravated form of concentration risk and arises when there is an adverse correlation between the counterparty’s probability of default and themark-to-market value of the underlying transaction. | ||
| Santander UK Group Holdings plc |
| Strategic report | Governance | Risk review | Financial review | Financial statements | Shareholder information | |||||||||||||||
services industry terms | ||||||||||||||||||||
Form20-F Item Number and Caption
| Page
| |||||
| PART I | ||||||
| 1 | Identity of Directors, Senior Management and Advisers | * | ||||
| 2 | Offer Statistics and Expected Timetable | * | ||||
| 3 | Key Information | Selected financial data | 234 | |||
| Capitalisation and indebtedness | * | |||||
| Reasons for the offer and use of proceeds | * | |||||
| Risk factors | 245 | |||||
| 4 | Information on the Company | History and development of the company | 59, 165, 195, 271 | |||
| Business overview | 141, 144, 145, 146, 147, 148 | |||||
| Organisational structure | 25, 59, 240 | |||||
| Property, plant and equipment | Not applicable | |||||
| 4A | Unresolved Staff Comments | Not applicable | ||||
| 5 | Operating and Financial Review and Prospects | Operating results | 141, 160, 185 (Note 12), 198 (Note 28) | |||
| Liquidity and capital resources | 114, 122, 280 | |||||
| Research and development, patents and licenses, etc. | Not applicable | |||||
| Trend information | 6, 12, 13, 20 | |||||
| Off-balance sheet arrangements | 195 (Note 21), 206 (Note 32), 281 | |||||
| Tabular disclosure of contractual obligations | 281 | |||||
| Safe harbor | Not applicable | |||||
| 6 | Directors, Senior Management and Employees | Directors and senior management | 30 | |||
| Compensation | 52 | |||||
| Board practices | 33 | |||||
| Employees | 26, 181 (Note 6) | |||||
| Share ownership | 59, 211 (Note 38) | |||||
| 7 | Major Shareholders and Related Party Transactions | Major shareholders | 271 | |||
| Related party transactions | 211 (Note 43), 213 (Note 30), 232 (Note 16) | |||||
| Interests of experts and counsel | * | |||||
| 8 | Financial Information | Consolidated Statements and Other Financial Information | 160, 161, 162, 163, 164 | |||
| Significant Changes | 227 (Note 45) | |||||
| 9 | The Offer and Listing | Offer and listing details | * | |||
| Plan of distribution | * | |||||
| Markets | Not applicable | |||||
| Selling shareholders | * | |||||
| Dilution | * | |||||
| Expenses of the issue | * | |||||
| 10 | Additional Information | Share capital | * | |||
| Memorandum and articles of association | 268 | |||||
| Material contracts | 271 | |||||
| Exchange controls | 271 | |||||
| Taxation | 284 | |||||
| Dividends and paying agents | * | |||||
| Statements by experts | * | |||||
| Documents on display | 271 | |||||
| Subsidiary Information | Not applicable | |||||
| 11 | Quantitative and Qualitative Disclosures about Market Risk | 107 | ||||
| 12 | Description of Securities Other Than Equity Securities | Debt Securities | * | |||
| Warrants and Rights | * | |||||
| Other Securities | * | |||||
| American Depositary Shares | * | |||||
| PART II | ||||||
| 13 | Defaults, Dividend Arrearages and Delinquencies | Not applicable | ||||
| 14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | 271 | ||||
| 15 | Controls and Procedures | 61 | ||||
| 16A | Audit Committee financial expert | 44 | ||||
| 16B | Code of Ethics | 60 | ||||
| 16C | Principal Accountant Fees and Services | 182 (Note 7) | ||||
| 16D | Exemptions from the Listing Standards for Audit Committees | Not applicable | ||||
| 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | Not applicable | ||||
| 16F | Change in Registrant’s Certifying Accountant | Not applicable | ||||
| 16G | Corporate Governance | 270 | ||||
| 16H | Mine Safety Disclosure | Not applicable | ||||
| PART III | ||||||
| 17 | Financial Statements | Not applicable | ||||
| 18 | Financial Statements | 160 | ||||
| 19 | Exhibits | Filed with SEC | ||||
|
| Form20-F Item Number and Caption | Page | |||||
| PART I | ||||||
| 1 | Identity of Directors, Senior Management and Advisers | * | ||||
| 2 | Offer Statistics and Expected Timetable | * | ||||
| 3 | Key Information | Selected financial data | 168 | |||
| Capitalisation and indebtedness | * | |||||
| Reasons for the offer and use of proceeds | * | |||||
| Risk factors | 257 | |||||
| 4 | Information on the Company | History and development of the company | 65, 185 (Note 1), 215 (Note 19), 275 | |||
| Business overview | 161-167, 199 (Note 2) | |||||
| Organisational structure | 5, 65, 253 | |||||
| Property, plant and equipment | Not applicable | |||||
| 4A | Unresolved Staff Comments | Not applicable | ||||
| 5 | Operating and Financial Review and Prospects | Operating results | 161, 162 | |||
| Liquidity and capital resources | 132, 140, 167, 284 | |||||
| Research and development, patents and licenses, etc. | Not applicable | |||||
| Trend information | 6, 10, 16, 17 | |||||
| Off-balance sheet arrangements | 285 | |||||
| Tabular disclosure of contractual obligations | 285 | |||||
| Safe harbor | Not applicable | |||||
| 6 | Directors, Senior Management and Employees | Directors and senior management | 34 | |||
| Compensation | 60 | |||||
| Board practices | 36 | |||||
| Employees | 29, 199 | |||||
| Share ownership | 232 (Note 35) | |||||
| 7 | Major Shareholders and Related Party Transactions | Major shareholders | 275 | |||
| Related party transactions | 97, 234 (Note 36), 235 (Note 37) | |||||
| Interests of experts and counsel | * | |||||
| 8 | Financial Information | Consolidated Statements and Other Financial Information | 173, 180 | |||
| Significant Changes | 246 (Note 40) | |||||
| 9 | The Offer and Listing | Offer and listing details | * | |||
| Plan of distribution | * | |||||
| Markets | Not applicable | |||||
| Selling shareholders | * | |||||
| Dilution | * | |||||
| Expenses of the issue | * | |||||
| 10 | Additional Information | Share capital | * | |||
| Memorandum and articles of association | 272 | |||||
| Material contracts | 275 | |||||
| Exchange controls | 275 | |||||
| Taxation | 288 | |||||
| Dividends and paying agents | * | |||||
| Statements by experts | * | |||||
| Documents on display | 275 | |||||
| Subsidiary Information | 253 | |||||
| 11 | Quantitative and Qualitative Disclosures about Market Risk | 124 | ||||
| 12 | Description of Securities Other Than Equity Securities | Debt Securities | * | |||
| Warrants and Rights | * | |||||
| Other Securities | * | |||||
| American Depositary Shares | * | |||||
| PART II | ||||||
| 13 | Defaults, Dividend Arrearages and Delinquencies | Not applicable | ||||
| 14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | Not applicable | ||||
| 15 | Controls and Procedures | 64 | ||||
| 16A | Audit Committee financial expert | 53 | ||||
| 16B | Code of Ethics | 66 | ||||
| 16C | Principal Accountant Fees and Services | 203 (Note 7) | ||||
| 16D | Exemptions from the Listing Standards for Audit Committees | Not applicable | ||||
| 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | Not applicable | ||||
| 16F | Change in Registrant’s Certifying Accountant | Not applicable | ||||
| 16G | Corporate Governance | 274 | ||||
| 16H | Mine Safety Disclosure | Not applicable | ||||
| PART III | ||||||
| 17 | Financial Statements | Not applicable | ||||
| 18 | Financial Statements | 180 | ||||
| 19 | Exhibits | Filed with SEC | ||||
* Not required for an Annual Report. | ||||||
| Santander UK Group Holdings plc |
Annual Report 2019
Further Information
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Contact us
Customer services
For more information on our products and services, please visit our website:
 |
| Community involvement | ||||||
 | For more information on our products and services, please visit our website: | To find out more about applying for donations and the Santander UK Foundation, please visit our website: | ||||||
 | santander.co.uk customerservices@santander.co.uk | | santanderfoundation.org.uk | |||||
| Media centre | ||||||||
 | +44 (0)800 389 7000 | Contacts for the media relations team are available at our website via the media section: | ||||||
Shareholders
Information for UK shareholders of Banco Santander can be found at our website:
|
| |||||||
By post, please write to:
Santander Nominee Service
Aspect House
Spencer Road
Lancing BN99 6DA
| Information for UK shareholders of Banco Santander can be found at our website: | | aboutsantander.co.uk mediarelations@santander.co.uk | ||||||
| | santandershareview.com santandershareholders@equiniti.com | Investor relations For financial results and presentations, stock exchange announcements, credit ratings and information for debt investors, please visit the investor relations section of our website: | |||||
| By post, please write to: | ||||||||
Santander Nominee Service Aspect House Spencer Road | | santander.co.uk/about-santander/ investor-relations ir@santander.co.uk | ||||||
| Lancing BN99 6DA | ||||||||
| +44 (0)371 384 2000 +44 (0)121 415 7188 (From outside the UK) | |||||||
Key dates
Registered address Santander UK | ||||
Community involvement
To find out more about applying for donations and the Santander UK Foundation, please visit our website:
|
Media centre
Contacts for the media relations team are available at our website via the media section:
|
| |||
Investor relations
For financial results and presentations, stock exchange announcements, credit ratings and information for debt investors, please visit the investor relations section of our website:
London NW1 3AN
|
|
Registered address
Santander UK
2 Triton Square
Regent’s Place
London NW1 3AN
Glossary
Retail customer satisfaction
The Financial Research Survey (FRS) is a monthly personal finance survey of around 5,000 consumers prepared by the independent market research agency, Ipsos MORI.
The ‘retail customer satisfaction’ score refers to the proportion of extremely and very satisfied customers across mortgages, savings, main current accounts, home insurance, UPLs and credit cards, based on a weighting of those products calculated to reflect the average product distribution across Santander UK and competitor brands.
The competitor set used to calculate the product weights is Barclays, Halifax, HSBC, Lloyds Bank, Nationwide and NatWest. The competitor set included for the ranking and highest performing peers is Barclays, Halifax, HSBC, Lloyds Bank and NatWest.
2016-2018 KPIs and targets
KPIs are presented at 31 December in the periods indicated. Reported KPIs are based on spot balances at these dates except for:
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Our 2018 KPI targets were set at the 2015 Banco Santander Investor Day, based on the forecast and outlook then in place. Three targets were revised in 2016. At the 2017 Group Strategy Update we revised our RoTE 2018 target to9%-10% from8%-10%(2).
(1)Non-IFRS measure. See page 236.
(2)Non-IFRS measure.
| ||||||||
| Key dates | ||||||||
| 28 April 2020 | Q1 2020 results | |||||||
| 29 July 2020 | Q2 2020 results | |||||||
| 28 October 2020 | Q3 2020 results | |||||||
Designed and produced by
296 Santander UK Group Holdings plc
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| santander.co.uk
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| Santander UK | ||||
2 Triton Square Regent’s Place London NW13AN | ||||
EXHIBIT INDEX
| Exhibits1 | ||
| 1.1 | Articles of Association of Santander UK Group Holdings plc (incorporated by reference to Exhibit 1.1 to Santander UK Group Holdings plc’s Form20-FR filed with the Securities and Exchange Commission on 10 August 2015) | |
| 2.1 | Description of the Registrant’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 | |
| 8.1 | List of Subsidiaries of Santander UK Group Holdings plc - the list of subsidiaries | |
| 12.1 | CEO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 12.2 | CFO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 13.1 | Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 15.1 | Consent of PricewaterhouseCoopers LLP | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 1 | Documents concerning Santander UK Group Holdings plc referred to within the Annual Report on Form20-F |
|
| * | In accordance with Rule 402 of RegulationS-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
SIGNATURE
The registrant hereby certifies that it meets all the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SANTANDER UK GROUP HOLDINGS plc | ||||
| By: | /s/ Nathan Bostock | |||
| Nathan Bostock | ||||
| Chief Executive Officer | ||||
Dated: 810 March, 20192020
