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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
OR
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☐ | 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
For the transition period from to
Commission file number 001-37595
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 4272800 085 1491
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.
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
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/24824B | | New York Stock Exchange |
1.089% Fixed Rate/Floating Rate Notes due 2025 | | SAN/25C | | New York Stock Exchange |
1.532% Fixed Rate Resetting Notes due 2026 | | SAN/26 | | New York Stock Exchange |
1.673%Fixed Rate/Floating Rate Notes due 2027 | | SAN/27A | | New York Stock Exchange |
3.823% Fixed Rate/Floating Rate Notes due 2028 | | SAN/28 | | New York Stock Exchange |
2.896%Fixed Rate/Floating Rate Notes due 2032 | | SAN/32 | | New York Stock Exchange |
2.469% Fixed Rate/Floating Rate Notes due 2028 | | SAN/28A | | New York Stock Exchange |
6.833% Fixed Rate/Floating Rate Notes due 2026 | | SAN/28B | | 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.report
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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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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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. ☐
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† | 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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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 Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Annual Report 2020 Becoming a digital bank with a human touch | | | | | |
Helping our customers when it matters most |
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Santander UK Group Holdings plc – Annual Report 2022 |
Santander UK We help our customers at the moments that matter most. We champion British businesses and help them to grow sustainably. Our customer focus helps us to develop more loyal and lasting relationships. 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 and non-financial metrics which help to explain our 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. William Vereker Chair, 2 March 2021 Important information for readers None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2020 (the Form 20-F), including where a link is provided, nor any of the information contained on such websites, is incorporated by reference in the Form 20-F. 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 277. 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. 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 2020 | Strategic Report
Strategic report 1 Santander UK at a glance 2 Chair’s statement 4 Responding to the Covid-19 crisis 6 Market overview 8 CEO review 10 Our business model 14 Risk management overview 20 TCFD 26 Financial overview 28 Sustainability review 31 Stakeholder voice in the boardroom 38 Governance 42 Risk review 80 Financial review 182 Financial statements 195 Shareholder information 273 Contents Our reporting suite Access the full reporting suite at santander.co.uk C-19 Throughout the report look out for this symbol for Covid-19 stories Santander UK Group Holdings plc Environmental, Social and Governance Supplement 2020 Our Gender Pay Gap Report 2018 Annual Report 2020 Becoming a digital bank with a human touch ESG Supplement Sustainability microsite Gender Pay Gap Report Financial reports and presentations To read more visit santandersustainability.co.uk To read more, visit santandersustainability.co.uk To read more, visit santanderjobs.co.uk To read more, visit santander.co.uk/about-santander/ investor-relations Quarterly Management Statement, 30 September 2020 1 Santander UK Group Holdings plc The information contained in this Quarterly Management Statement (QMS) and in the Appendices is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 or interim financial statements in accordance with International Accounting Standard 34 ‘Interim Financial Reporting’. This QMS provides a summary of the unaudited business and financial trends for the nine months ended 30 September 2020 for Santander UK Group Holdings plc and its subsidiaries (Santander UK), including its principal subsidiary Santander UK plc. The unaudited business and financial trends in this statement only pertain to Santander UK on a statutory basis (the statutory perimeter). Unless otherwise stated, references to results in previous periods and other general statements regarding past performance refer to the business results for the same period in 2019. This QMS contains non-IFRS financial measures that are reviewed by management in order to measure our overall performance. These are financial measures which management believe provide useful information to investors regarding our results and are outlined as Alternative Performance Measures (APMs) in Appendix 1. These measures are not a substitute for IFRS measures. Appendix 2 contains supplementary consolidated information for Santander UK plc, our ring-fenced bank (RFB). A glossary of terms is available at https://www.santander.co.uk/about-santander/investor-relations/glossary Santander UK Group Holdings plc Quarterly Management Statement for the nine months ended 30 September 2020 Contacts Bojana Flint Director of Investor Relations & Strategic Initiatives 07720 733 819 Paul Sharratt Head of Debt Investor Relations 07715 087 829 Stewart Todd Head of External Affairs 07711 776 286 Adam Williams Head of Media Relations 07711 783 118 For more information: santander.co.uk/about-santander ir@santander.co.uk 1Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Our strategic framework pg 14 Our stakeholders Customers People Shareholders Communities We offer innovative products and services to help people and businesses prosper Santander UK is a large customer-focused bank and possesses 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. We play an important role in the UK economy and in the communities in which we operate. We help people purchase their home and save for the future, and support business growth. We employ 21,900 people and we paid £161m of corporation tax and £74m through the UK Bank Levy in 2020. Our innovative international proposition facilitates access to a range of markets and offers invaluable expertise and insight. We provide high quality, seamless service across our branch, digital and telephony channels We operate through three customer business segments, supported by central functions 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. It includes business banking customers, small businesses with an annual turnover up to £2m, and Santander Consumer Finance, predominantly a vehicle finance business. Corporate & Commercial Banking Offers a wide range of financial services and solutions to more complex businesses across multiple sectors, typically with annual turnovers of between £2m and £500m. Our service is provided by relationship managers and product specialists who cover clients’ UK and overseas needs. Corporate & Investment Banking(3) Offers specially tailored solutions and value- added services to corporate clients with an annual turnover of over £500m. We provide products to manage currency fluctuations and protect against interest rate risk and also arrange capital markets finance and specialist trade finance solutions. 14 million active UK customers c22,000 Full time equivalent employees 564 branches 3rd largest retail mortgage provider(1) Top 5 largest current account provider(2) 5th largest commercial lender(1) (1) Santander UK industry analysis of latest available bank and building society reports. Mortgage provider: UK mortgage stock, Retail Banking divisions. Commercial lender: UK commercial lending stock, Corporate and/or Commercial Banking divisions (excludes investment banking). (2) CACI’s CSDB, Current Account Stock, Volume, November 2020. (3) Subject to court approval, we are proposing to transfer substantially all of the CIB business to the London Branch of Banco Santander, S.A. in H221 by way of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000. Corporate Centre Mainly includes Treasury, which is responsible for capital, funding, liquidity, pensions and balance sheet management. It also includes our Jersey and Isle of Man businesses as well as our non-core corporate and legacy portfolios. Santander UK at a glance We are uniquely placed as a leading scale challenger bank. Our business model focuses on customer loyalty in our core business franchise. Annual Report 2020 | Strategic Report Santander UK Group Holdings plc2
We are an autonomous subsidiary which benefits from being an integral part of a global banking group Ring-fenced bank Non ring-fenced bank Banco Santander SA Santander UK Group Holdings plc – Retail Banking – Corporate & Commercial Banking – Corporate & Investment Banking – Jersey and Isle of Man businesses – UK mortgages (2020: £3.1bn) – Small number of legacy positions Santander UK plc Santander Financial Services plc C-19 Operational response We implemented a number of operational changes to ensure the safety of our customers and our people and to continue to provide essential services to the UK. Branch staff supported call centre colleagues by taking 246,000 core retail customer calls. Branches largely open during lockdown to provide essential banking services. Back office systems and processes rapidly updated to enable payment holidays and government lending schemes 90% head office staff enabled to work safely and flexibly from home We live our values of Simple, Personal and Fair through great behaviours and our people leaders: Bring PassionKeep Promises Embrace Change Show Respect Being open and inclusive Leading by example Inspiring and executing transformation Encouraging the team to prosper Actively Collaborate Speak UpGive Support Talk Straight Truly Listen Great Behaviours: Our People Leaders: 3Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
William Vereker I am proud of the commitment our people have shown in 2020 and am excited by the opportunities for us to continue to support our customers and communities in the future. Introduction The UK economy, banking sector and Santander UK have faced unprecedented challenges in 2020. Our business and our people have risen to those challenges and have been able to adapt and deliver for our customers throughout the year. I am proud to have joined Santander UK and am looking forward to the opportunities ahead. The technological changes accelerated over the last year will enable more rapid transformation of our business allowing us to serve our customers better. Our business has performed well throughout the year and as a core part of one of the largest financial services groups we have the opportunity to work more closely together across the group and work more efficiently as a business. Our Covid-19 response Since the onset of the Covid-19 pandemic, Nathan Bostock, our CEO and his leadership team, supported by the extraordinary hard work and commitment of all our colleagues, have done an amazing job in adapting to the fast and unprecedented changes in our operating environment and in all our lives while continuing to support our customers. Within a week of the first national lockdown, over 16,000 of our colleagues were enabled to work from home safely and productively, an increase of more than ten times pre pandemic levels and while managing through substantial operational and personal challenges for everyone involved. Our main focus has been on providing vital support to our customers, colleagues and communities during these incredibly challenging times. We have supported thousands of people and businesses with a range of measures, including over 373,000 payment holidays, and granted £4.6bn through Government loan schemes, which were rolled out to customers very quickly, a huge effort of which I am very proud. I would like to pay tribute to all our colleagues for their dedication and hard work in 2020. Delivering on our strategy We continued to deliver on our strategy, with a focus on our customers, simplification, improved efficiency and sustainable growth. In 2020, we grew our mortgage lendingby £4.4bn, despite the market being effectively closed in the second quarter of 2020. We also supported over 150,000 of our business and corporate customers via various Government backed support schemes, more than a 20 fold increase in customer volumes, all accomplished in a matter of a few short weeks. We did all this with our usual prudent approach to risk and while maintaining exceptionally strong capital and liquidity, both significantly above regulatory requirements. Covid-19 materially impacted our 2020 results, with profit before tax down 44% to £552m. The main driver of the decline was the increase in credit impairment losses to £645m, up from £220m in 2019, driven by Covid-19 related provision for expected credit losses, as a result of the impact on many small and medium businesses all over the UK. The decisive actions we have taken have helped to deliver a very resilient performance, with notable income recovery through the second half of the year. Our net interest margin improved significantly during the year as a result of actions that were taken on current account pricing. Our strategic priorities remain aligned to Banco Santander’s One Europe strategy, and this year we also welcomed António Simões as the Regional Head of Europe. I, and the rest of my UK based colleagues, look forward to working more closely with him, and his One Europe team, taking advantage of the further opportunities and synergies from being one of Europe’s largest financial services groups. Transforming for Success We maintained focus on our multi-year transformation programme, to make us simpler and more efficient as we reshape the bank to support our customers better. Two years into the programme, we have invested £332m and realised £244m of savings. The speed of change during the Covid-19 crisis has been extraordinary and transformed the way we operate. During 2020, customer engagement through contact centres and digital channels increased sharply, with digital financial transactions up 18% over the year. Branch counter transactions reduced by 18% and branch ATM transactions reduced by 55%. However, the role of the Branch evolved, with Voice in Branch (introduced in May 2020) receiving over 100,000 calls during December 2020. To facilitate this, branch staff were trained to respond to core Retail Banking calls and as at 31 December 2020, 14% of incoming customer calls were taken by branch staff to support their colleagues in call centres. Chair’s statement Annual Report 2020 | Strategic Report Santander UK Group Holdings plc4
and I want to personally thank them for their enormous dedication and effort during this time. The start of 2021 is looking challenging, but I am confident in the resilience of our business and the commitment of our colleagues to continue to achieve our transformation, whilst supporting our customers and ensuring the right outcomes for all. I am also very excited about the future, the opportunity for Santander UK and how we can continue to play a key role in the UK economy in supporting our customers. William Vereker Chair, 2 March 2021 Supporting our customers through a crisis The commitment of our people during the Covid-19 pandemic meant that we were able to continue to serve our customers when they most needed our support 373,000 Payment holidays provided £4.6bn Government backed business loans granted 82,000 Vulnerable customers contacted to offer support £20m Overdraft fees and interest waived C-19 Another area of significant focus for us has been financial or economic crime. We continued to make significant investment in enhancements to our control framework, as well as key controls such as anti-bribery and corruption measures, customer risk assessment, screen and transaction monitoring. The pace of change in banking has accelerated in 2020, and I am confident that we have the right strategy and the team to continue to adapt our business to meet the rapidly changing needs of our customers. Board changes As I begin my tenure as Chair I would like to pay tribute to Shriti Vadera for her sure-footed stewardship of the Company and leadership of the Board since her appointment in 2015. Santander UK has benefited from her guidance and I have greatly appreciated her sound advice and support in the handover of the Chair’s duties. I would also like to thank Scott Wheway who stepped down from the Board at the end of September 2020 after being on the Board since October 2013. Scott had been the Senior Independent Director since May 2015 and the Board has benefited greatly from his advice. In August 2020 Gerry Byrne, a Banco Santander nominated Non-Executive Director of Santander UK plc stepped down from the Santander UK plc Board after serving since December 2017. The Board appreciated his contribution during his tenure. We were delighted to welcome Tony Prestedge to the Board of Santander UK plc as a Deputy CEO and an Executive Director in December 2020. Tony has an outstanding track record of delivering complex transformation programmes to meet the changing needs of customers and he will be a real asset to the business. We also welcomed Mark Lewis to the Board of Santander UK plc in December 2020 as an Independent Non-Executive Director. Mark is the former CEO of Moneysupermarket.com Group plc and his experience in consumer digital businesses and leading recent digital change will enable him to make a crucial contribution to the Board. Board focus for 2021 Although much of the Board time in 2020 has been focused on our response to the Covid-19 pandemic and preparation for the end of the Brexit transition period, we also continued with our transformation programme to better serve our customers. This will continue to be our focus in 2021, alongside refining our strategic priorities to embed New Ways of Working as part of our evolved customer and employee proposition. The Board recognises that we have an important role to play not just in our economybut in promoting sustainability and diversity. Our culture of Simple, Personal and Fair places fair treatment at the heart of everything we do, underpinned by our well established nine behaviours. We will continue to ensure that our culture supports the delivery of the transformation objectives and our purpose to help people and business prosper. Finally, being part of the Banco Santander group, will provide opportunities for us to find even more ways to benefit our customers and grow the business sustainably and responsibly. Thank you and looking forward I am incredibly impressed and humbled by the lengths our colleagues have gone to in support of our customers and communities, 5Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
The Covid-19 crisis has been a huge challenge for all of us and our top priority throughout has been the welfare of our people, our customers and the communities in which we operate. The crisis has also had a material impact on our business operations and our financial results. Despite these challenges we have continued to play an active role in supporting our stakeholders and the wider UK economy. For more see page 29 For more see page 31 For more see page 36 Communities Older people and those affected by dementia have been disproportionately impacted by Covid-19 and so we donated £1.5m to each of our charity partners, Age UK and Alzheimer’s Society, to enable them to increase capacity in their contact centres and online services. In addition, more than 2,500 of our colleagues volunteered in the Santander ‘QuaranTea’ telephone call campaign to support the most vulnerable and isolated people during the pandemic, working alongside Alzheimer’s Society and Age UK. We also contributed over £5m to university initiatives, which included a £300k donation to Oxford UCL and Imperial College to support Covid-19 research and vaccine development. People Covid-19 has had a significant impact on our people as well as how and where they work. They put in a huge effort to quickly adapt to substantial operational changes to provide essential banking services for our customers. Around 90% of non-branch staff worked from home during 2020. From our engagement surveys we know that the majority of our people appreciate the flexibility of working from home but miss social interaction at the office. We intend to take this into account when we begin a phased safe return to offices. We are acutely aware of the personal and professional stress our people have been under. To help them deal with these, we implemented a range of support measures and wellbeing events. Customers We understand how hard it has been for our customers and we have supported half a million people and businesses with a range of measures. These included payment holidays, waived fees, reduced interest payments and lending through Government guaranteed loan schemes which were rolled out to customers very quickly. During lockdown, we necessarily restricted opening times and transactions in branches but did our utmost to continue to provide important banking services face to face, especially for our more vulnerable customers. Customer engagement through contact centres and digital channels increased sharply which we supported through reassignment of branch staff. Responding to the Covid-19 crisis Annual Report 2020 | Strategic Report Santander UK Group Holdings plc6
For more see page 33 Shareholders Like all banks, we have taken significant provisions against future credit losses as we anticipate the likely impact the Covid-19 crisis will have on our customers’ ability to repay their loans to us. Despite this we remained in profit for each quarter of 2020 while continuing to build resilience in the form of higher capital and liquidity. Following PRA guidance in early 2020, we temporarily suspended ordinary dividend payments. Following further guidance, an interim dividend of £103m for 2020 was paid in December 2020. In response to continuing pressure on our earnings, we have taken actions to mitigate some of the impact, including deposit repricing and an ongoing focus on our transformation programme. C-19 Read more The Covid-19 crisis has impacted all areas of our business and so is discussed in multiple locations throughout this report. We have also highlighted discrete Covid-19 related information in the following sections which can be identified by the C-19 indicator above. Our operational response 3 Supporting our customers 5 Unprecedented government response 8 Learnings from the crisis 17 Changes to our economic forecasts 21 IFRS 9 model overlays 29 Reaching Out to our customers 32 Employees provide lockdown lift 36 Branch staff at the vanguard 39 7Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
What we have seen The change in customer behaviour accelerated in 2020 as the move away from traditional in-branch banking towards online services stepped up as a result of the Covid-19 pandemic. As essential services, bank branches remained largely open throughout the lockdowns but, despite this, more customers used remote channels such as digital and telephone banking services. Digital banks have gained some traction in 2020 attracting more than their market share of current account switchers in the UK. Younger customers in particular put a greater emphasis on better digital tools, convenience, and a simpler purchasing process, characteristics often associated with digital-only banks. Our response and looking ahead During 2020, customer engagement through contact centres and digital channels increased sharply, with digital financial transactions up 18% over the year. Branch counter transactions reduced by 18% and branch ATM transactions reduced by 55%. In response, we adapted our operating model to meet the changing needs of our customers and to increase remote banking capacity. During the lockdown period we trained branch staff to be redeployed to online chat and telephone services. We also moved many services online, such as the ability for our customers to request a payment holiday on a mortgage. What we have seen While the UK banking sector remains very competitive, customer rates have fallen in both lending and deposits in 2020. Mortgage rates increased in the second half of 2020 as demand recovered strongly following the Covid-19 lockdown and the temporary reduced rates of stamp duty for house purchases. However, although new business margins have improved they still tend to be below back book levels, and competition could increase as demand eases in 2021. In recent years, some retail banks have exited mortgages or ceased new mortgage lending. In particular, several non-banks who diversified into financial services in recent years announced plans to divest and have put their books up for sale. Our response and looking ahead In line with the market, we increased mortgage lending rates as we managed our risk appetite and new lending flow. We also repriced our 1I2I3 Current Account and change in benefits in light of the lower rate environment and competitor actions. We expect our net mortgage lending to be in line with market growth, as we focus on quality customer service, retention and our comprehensive proposition for first- time buyers. 3.7 million users Exclusively using mobile app (2019: 3.1 million) New digital banks In January 2021, two new entrants announced plans for UK launch Five major forces continue to shape the UK banking market 1 2 3 4 5 Changing customer behaviour Strong market competition Rapid technological change Demanding regulatory agenda Uncertain economic environment C-19 UK government and regulatory authorities response The response by the UK government and regulatory authorities was unprecedented, with a wide range of fiscal, monetary and regulatory measures implemented. These measures included: For consumers – Loan payment holidays – Interest and fee waivers on banking products – Stamp duty waived for house purchases For businesses – Coronavirus Job Retention Scheme (CJRS) to pay wages for employees who cannot work due to Covid-19 – Lending schemes for business with government guarantees for lenders, most notably the Bounce Back Loan Scheme (BBLS) – Business rates relief For the economy – Bank rate reduced 65bps to 0.10% from 0.75% – Cheap funding for banks to support lending through the Term Funding SME scheme For banking market resilience – Reduced bank capital buffers – Ordinary dividends and executive bonuses suspended Market overview Annual Report 2020 | Strategic Report Santander UK Group Holdings plc8
What we have seen The UK economy, along with other global economies, experienced a significant downturn in 2020. As the Covid-19 pandemic unfolded, a number of regional and national lockdowns were announced to control the virus and reduce pressure on the NHS. During lockdown, non-essential businesses, schools and workplaces were closed and economic activity and consumer spending fell dramatically as a consequence. Alongside the uncertainty caused by the Covid-19 crisis there was also increased focus on preparation for the end of the Brexit transition period. In response, the UK government implemented a range of support programmes to protect jobs and help businesses survive and eventually support economic recovery. The Bank of England reduced the bank rate twice in March 2020, from 0.75% to 0.25% and then down to 0.10%, the lowest interest rate the UK has ever seen. Our response and looking ahead At Santander UK, we implemented a number of support measures, including offering payment holidays for business and retail customers, along with participating in various government lending schemes for businesses. Securing a Brexit deal has provided some welcome certainty and the chance to consider the opportunities inside the EU under the new arrangements, and new markets which we can support through our overseas links to the Banco Santander group. What we have seen Technology continues to evolve rapidly across all areas of the financial services sector as people demand to be able to do more digitally. Over recent years the banking sector has evolved to offer more and more services that were once only possible to do in a branch, online or through apps. Over recent years, new challenger banks entered the UK banking sector, disrupting the market with innovative propositions and competitive pricing to grow their business. This has helped to further influence customers’ expectations of digital banking interactions in particular. While the Covid-19 crisis highlighted the need for banks to offer essential services remotely, it has also reinforced that a high street presence has a part to play. Our response and looking ahead We have continued to invest heavily in improving our digital platforms to ensure our customers have a reliable, innovative and full banking service. By focusing on the customer experience, we have been able to reduce duplication from back office processes and streamline customer outcomes. During lockdown, having branches available for small teams to work from has been a real benefit. They have provided flexibility and technology has enabled them to support both their contact centre colleagues as well as our customers. What we have seen Despite the initial pause at the onset of Covid-19 pandemic, the regulatory policy and change agenda became intense heading into year-end. This was driven by the regulators continued guidance on Covid-19 financial support measures, preparation for Brexit, innovation and technological developments, and beginning the design process for the post-Brexit regulatory landscape. Covid-19 guidance implementation at short notice put a considerable strain on technology and operations as well as programme management resources. Alongside this, there was a significant increase in the volume and frequency of supervisory information and data requests. Significant business line, Risk, Finance, Compliance, and Regulatory Affairs resources were dedicated through the year to deliver these. Our response and looking ahead The Government is undertaking a series of reviews of the Financial Services sector, looking at the future regulatory framework in the UK, the regulatory regime for overseas firms coming into the UK, the UK Funds regime, Ringfencing, and the UK Listings rules among others. We are proactively engaging with the regulators, government, and industry trade associations on these and other significant policy initiatives, including a 2021 focus on Operational Resilience and Climate Risk Stress Testing, on-shored CRR II, and possibly the Basel 3.1 package of capital framework reforms. +18% Increase in financial transactions carried out on Santander UK digital platforms(1) 64 Regulatory initiatives introduced by regulators in 2020 -3% to 6% Range of HM Treasury consensus for 2021 growth in annual GDP(2) 1 2 3 4 5 Changing customer behaviour Strong market competition Rapid technological change Demanding regulatory agenda Uncertain economic environment (1) 2020 compared to 2019 (2) HM Treasury Forecasts for the UK economy: a comparison of independent forecasts January 2021. 9Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
To say 2020 has been a challenge for our customers, our colleagues and the economy would be an understatement. In the space of several weeks, the Covid-19 pandemic completely changed how we live our lives and how we work. In previous years, I would use this space to review the last twelve months and reflect upon our successes, opportunities and challenges, but looking back on 2020, that would not do justice to the impact the Covid-19 pandemic has had on all of us: from our customers and our colleagues to the wider economy. We have all had to adapt It has resulted in a fundamental change to how we live and work. It seems remarkable to think that just twelve months ago, we were still operating in what would be considered a normal environment. But since the first UK lockdown in March 2020, we have all had to adapt in ways that would seem unimaginable and I have been incredibly proud of how Santander UK has responded to that challenge. It has been a reminder of the role we play in the lives of our customers and how our purpose, to help people and business prosper, was never more important than in 2020. We have come together, to put in place the support and assistance needed for these unprecedented times. We also had to be there for our people – focusing on their safety and well being, helping them with new ways of working. And all of this at an unbelievable pace, with situations changing on a daily basis. Whilst it has underlined how important a service we are to our customers, especially in times of crisis and difficulties, it has highlighted the commitment of our colleagues, whether in branch, contact centres or the wider business, to provide that extra help and to go the extra mile to be there when we are needed. Our commitment to sustainability became even more relevant during the Covid-19 pandemic, not only in how we supported our stakeholders, but in our longer-term response. The pandemic reinforces the need to build more sustainable and resilient systems, to ‘build back better’, and we want to be part of that. The pandemic has presented the financial sector with an opportunity to rebuild trust with our customers, and to show that we understand the difficulties they’re facing, but importantly, that we can also provide the right help and support. We had to act and to act swiftly For our business customers, those difficulties have been stark and immediate. Almost overnight, viable, thriving businesses and their local economies were having to face up to a very different and uncertain future. Our customers were understandably looking to us and we had to act, and act swiftly. Working alongside government and regulators a series of support programmes were put in place in a matter of days, providing businesses with essential capital to help them navigate months of uncertainty. The impact has been real, with businesses telling us they have faced cash flow issues, reduced sales, decreased revenues, declining orders and for those reliant on physical customer engagement, such as retail, hospitality and leisure, the results are more acute still. SMEs faced particular challenges, and we went beyond traditional banking support with our ‘Survive and Revive’ initiative, offering resources and trading support to small businesses through the crisis. Given the sheer scale of the issues facing our customers and the economy, it was understandable that the government wanted to provide real financial help, and the best means of doing so was through the banking sector. We had the means of delivering that liquidity direct to the businesses that needed it and I am extremely proud of not only our response, but that of the banking sector as a whole, where we worked with HM Treasury to put this ambitious support package into action. The numbers are incredible. In a matter of months, we granted £4.6bn of Government-backed loans to over 150,000 customers: £4.0bn through the Bounce Back Loan Scheme, £0.4bn via the Coronavirus Business Interruption Loan Scheme and £0.2bn through the Coronavirus Large Business Interruption Loan Scheme. This enabled businesses to survive and to become Covid-secure or to evolve their business to meet their customers’ different needs and expectations. It is clear that, despite the approved vaccines and their roll out, a form of normality is still some distance away, so we must remain ready to help in whatever way we can. Straightening our relationship with our customers Our response to the pandemic has helped strengthen and deepen our relationship with many of our business customers, and I believe the same can be said for our retail customers. Their issues are different, but no less important. Many find themselves in positions of real insecurity for the first time in their lives. So we acted quickly to offer practical support via a payments holiday Nathan Bostock CEO review Annual Report 2020 | Strategic Report Santander UK Group Holdings plc10
I am immensely proud of the way in which my colleagues have responded to the pandemic Day in, day out our colleagues’ passion, resolve and support for each other has meant that we have been able to continue providing the best customer experience possible. I have been humbled by the humanity and kindness within our organisation, and the perseverance and resilience of our people continues to be a great source of pride and inspiration. Our key focus throughout the crisis has been to prioritise our colleagues’ wellbeing. Many of our colleagues are now entirely working from home for the first time, whereas others continue to come into their workplace under very different and challenging circumstances. We have responded to this with various measures to help our colleagues feel reassured and safe, continuously listening and responding to their needs. The support we have provided each other has meant that we have been able to adapt to new ways of working and manage busy workloads to respond to the rapidly changing needs of our customers. We have embraced this change, collaborating across teams to break down silos and leverage technology to help us deliver crucial support to vulnerable people and a service that is second-to-none. For more on how we are supporting our people see page 29 package across mortgages, unsecured personal loans and credit cards. Of the 373,000 payment holidays we provided, 251,000 of our mortgage customers benefited from a 3-6 month mortgage payment deferral. This helped reassure customers who found themselves furloughed or suddenly out of work. But it was vital that we continued to provide access to our essential day-to-day services. At the height of the pandemic, our branch network and contact centres remained operational, prioritising access for our most vulnerable customers and those with urgent needs. Over 1,100 of our branch colleagues were trained to provide support for the contact centres or live chat when they were not serving customers in the branches. Today, our branch colleagues continue to provide these services during the third national lockdown. Inevitably, the pandemic has accelerated changes in how our customers choose to bank with us. The pace of digital adoption across the economy has been a notable trend and we have seen the number of financial transactions carried out on our digital platforms reflect this with a 18% year-on-year increase. This included a 32% increase in current account digital openings as well as 64% of online mortgage retention. In April 2020, we launched ‘Reaching Out’, an initiative focused on calling some of our potentially vulnerable older customers, who typically would have visited a branch and may not have access to online or mobile banking. We provided these calls from frontline colleagues through to November 2020, reaching over 82,000 customers to check on their wellbeing and provide support where needed. A decade of change The priority for myself and for my leadership team was to provide colleagues with the support they would need so they could provide the services our customers needed. For those in branches and in our offices, we put in place measures to make their workplace Covid-secure. It was vital people could come to work with confidence and I was extremely proud of how quickly we moved to adapt our premises, and the understanding and fortitude of colleagues who continued to keep our face-to-face services running. On the other side, we have seen a remarkable change in how the rest of the business operates. It is astonishing to think that in the space of a handful of months, we enabled 90% of our head office colleagues to work remotely. A combination of utilising our digital infrastructure to give them the confidence to work effectively, and everyone’s adaptability and resilience has meant we have been able to provide customers with the support they need. In the last ten months, we have seen ten years’ worth of change in how we work. Supporting our communities We must, as a sector, take forward lessons learned from this crisis, so we can offer the best possible working environment with the right resource to enable real flexibility and responsiveness to the needs of individual colleagues. Supporting our people remains our top priority Throughout the pandemic, we remained committed to supporting our communities up and down the country with our sustainability strategy. Charities and their community organisations have been severely affected so I wanted to note the work of the Santander Foundation who donated £3m to our charity partners Age UK and Alzheimer’s Society. This donation enabled their contact centres and online services to increase capacity, and better serve those in need. Older people and those with dementia were disproportionately impacted by Covid-19, so the work of these charities is more important than ever. 11Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
I was proud that colleagues were keen to play their part and that is why we doubled the amount of time they could undertake volunteering activities at work to 70 hours, in order to support our charity partners, local community groups and the NHS volunteering appeal. Over 2,600 Santander UK employees volunteered with Age UK and Alzheimer’s Society to make phone calls to people who may be lonely or vulnerable, deliver shopping and become a ‘Dementia Friend’. Through Santander Universities, we’ve provided £4.5m of funding to our 85 university partners to support the array of initiatives launched to contribute to the national effort to combat the outbreak of Covid-19. With the pandemic presenting many new challenges for students, universities and the local community, we announced we were both repurposing and providing additional funding to ensure immediate support to alleviate health and educational challenges caused by the crisis. We provided £300k to Oxford, UCL and Imperial College to support Covid-19 research and vaccine development. This supported a variety of initiatives including assisting universities who were providing additional protective equipment for NHS staff as well as supporting university emergency hardship funds which provide grants to students who require financial support for living costs or resources for the transition towards a digital learning environment. This included IT equipment and support, such as laptops and broadband connectivity, which would normally be accessed on campus, to ensure students were able to continue their studies. The funding also went towards offering vital support for student mental health and wellbeing during this challenging time. Covid-19 and Brexit understandably dominated the agenda throughout 2020, but this cannot be at the expense of our ongoing commitment to support the transition to a low-carbon economy and tackle climate change. We remain utterly committed to the objectives of the Paris Agreement and Banco Santander has participated in renewable energy finance deals totalling €32bn during 2010-19, making it one of largest financiers of renewables both globally and in the UK. Looking ahead, Banco Santander has committed to raise and facilitate €120bn by 2025, and €220bn by 2030, in green finance globally. During 2020 the Board and Executive Committee (ExCo) undertook a deep dive on climate change, with external expert support, and agreed to further increase our ambition to address the urgent need for climate action. There is always more to do and we are working hard to manage climate-related financial risks in our portfolio, support customers to transition by developing green products and services, and reduce the emissions within our operations and supply chain. However, we recognise this is only part of the solution. Supporting renewables must be complemented by a reduction in the carbon emissions across our wider lending portfolio which is why we have tightened our policies on lending to carbon-intensive sectors. As a result, we will not provide financial products or services to new coal- fired power plants worldwide, or oil and gas drilling projects north of the Arctic Circle. Reflecting our customers and their experiences The last twelve months serve to remind us that regardless of the challenges we face, we must continue to promote inclusion and diversity. There is no doubt that for us to serve our customers effectively, our workplace we must reflect our customers and their experiences. Throughout the summer we held a number of events in response to the Black Lives Matter movement, listening to colleagues’ experiences and looking at the ways in which we, as a leadership team, can support colleagues and accelerate the pace of change within the bank. In response to what colleagues have been telling us we have developed our Black Inclusion Plan which will seek to double our black more senior population by 2023 and launched a black talent and sponsorship programme to improve career progression and social mobility. Our gender pay gap has continued to narrow as we implement our comprehensive action plan to improve gender representation across the organisation. Our mean average gender pay gap in 2020 was 29.3% a reduction of 0.5 percentage points year on year, while the median pay gap was 27.4%, a reduction of 0.8 percentage points year on year. We are focused on our Board and leadership gender diversity but know there is still more work to do. Although Covid-19 materially impacted our results, with statutory profit before tax of £552m, down 44% year-on-year; the decisive actions we have taken have helped to deliver a very resilient performance despite the difficult environment. We have achieved strong lending growth, particularly in mortgages, grown customer deposits, delivered further efficiency savings and a notable improvement in income in the second half of the year. In 2020, 1I2I3 Current Account repricing actions linked to bank rate reductions, led to a fall in the number of our loyal customers and retail NPS rank. Customer loyalty and NPS remain integral to our strategy and will be a key area of focus for management in 2021. Supporting ‘OneEurope’ Thanks to the extraordinary hard work and commitment of my colleagues, we have been able to continue providing essential banking services throughout the pandemic, alongside tailored help to customers who are facing challenges. Of course the ongoing pandemic is not the only challenge we face in 2021, as we embark upon a new relationship with the European Union that will have a considerable impact on how our business customers operate. Securing a deal has provided some welcome certainty and the chance to consider the opportunities inside the European Union under the new arrangements, and new markets. Regardless of the deal, how customers trade with the European Union is changing and it will involve more friction, but our Corporate and Commercial Banking team has been advising our business customers about how they can prepare for these new rules and requirements and will continue to support them in these formative weeks. In this context, Banco Santander’s ‘OneEurope’ initiative could not be better CET1 capital ratio 2020 2019 2018 13.2% 14.3% 15.2% UK leverage ratio 2020 2019 2018 4.5% 4.7% 5.1% CEO Review continued Annual Report 2020 | Strategic Report Santander UK Group Holdings plc12
£332m Investment since end 2018 Banco Santander’s goal for OneEurope is to create a better bank where our customers and our people feel a deep connection with Santander while delivering sustainable value for shareholders. We are building an even better bank that puts our customers at the heart of everything we do. This starts with understanding them better, so we build customer loyalty by giving them more reasons to join, stay with and recommend Santander. £244m Savings since end 2018 Santander UK is an integral part of this strategy and fully aligned purpose of wanting to help people and businesses prosper and to do it in a Simple, Personal and Fair way. As part of the OneEurope family, we will continue to innovate and transform our businesses. To do this, we will work even harder and better with our European colleagues, as there is much more that unites us and our customers than what sets us apart. I also want to thank Vicky Wallis and Patricia Halliday for their contributions to Santander UK and the Executive Committee as they leave for new challenges and welcome Christine Palmer and Tony Prestedge as our Chief Risk Officer and new Deputy Chief Executive Officer of Santander UK plc, respectively. Tony brings with him wide experience from his time at Nationwide and Barclays and will help drive forward the continued transformation of the business as we continue to put digital at the heart of how we operate and push forward our change programme. We plan to use our experience from the last twelve months to make Santander UK the best place to work for colleagues and a beacon for new talent and innovators. 2020 has been a year unlike any I can remember, but I am proud of how we have responded, providing our customers with the help and support they have needed. I hope that 2021 will present our customers and businesses with the sort of change they can relish with new opportunities to prosper, knowing we will be with them every step of the way. Nathan Bostock Chief Executive Officer, 2 March 2021 timed. By working more closely with our colleagues in Spain, Portugal and Poland, we will be able to align ourselves more closely with our European colleagues and leverage their skills, knowledge and resources to the benefit of our customers. Taken alongside Banco Santander’s global footprint, we are able to offer our customers access to expertise that will help them grow their business opportunities in Europe and beyond. In turbulent times, we have benefited from having a senior leadership team with the experience to help us navigate our way. So I would like to take this opportunity to thank our outgoing Chair of six years, Shriti Vadera. She has supported us through significant transformation and cultural change whilst her experience and insight has been invaluable. Our new Chair, William Vereker, brings a wealth of expertise both in the financial and political sectors and I look forward to working closely with him. Transforming for Success programme - integral part of OneEurope strategy 13Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Our purpose is to help people and businesses prosper Our resources People Bringing the skills, expertise and drive to deliver enhanced customer loyalty and experience Infrastructure Branch and online presence, operating centres and innovative technology Banco Santander family Technology, shared management experience and brand benefits as part of well-diversified global bank Financial Strong capital, liquidity and a prudent approach to risk Our competitive advantage Leading scale challenger bank in the UK Scale in our core banking businesses combined with an innovative mindset Resilient balance sheet Demonstrated by the lowest CET1 drawdown in the 2019 BoE stress tests International expertise for UK companies 20 trade corridors to help UK companies expand into overseas markets What we do We provide financial products and services Mortgages, consumer auto finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products for individuals and growth-focused support and services for companies How we do it Build strong customer relationships Offer a differentiated proposition Take a prudent approach to risk Do things The Santander Way Our culture is built on doing things The Santander Way Simple Our products are easy to understand and we offer a service which is convenient, no matter when or how our customers want to engage with us Personal We treat our customers as valued individuals, with a professional service they can trust. We support our colleagues to 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 Our aim is to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities Our business model Annual Report 2020 | Strategic Report Santander UK Group Holdings plc14
Creating value for our stakeholders During 2020 we all changed habits, we interacted differently, we shopped differently and we travelled less. Some of these changes are temporary but some will be more structural. The Covid-19 crisis also brought forward a digital change in our society and it will inevitably change how we operate, interact with customers, and how our employees will work going forward. It is incredible to think that in the space of a handful of months, we enabled nearly 85% of our colleagues to work remotely. This was not just about providing the correct IT (although it was part of it) and a digital infrastructure that could support this move, but it was also about individuals willing to change and adapt to this new environment and new demands. It was not just about working from home either. We were better able to utilise more of the talent within the organisation, with branch staff now able to assist our contact centres or chat facility from the branches outside of their opening hours. The post Covid-19 strategic operating model will leverage on the swift adoption of digital channels. Digital will encompass all levels of the organisation, including customer interactions, operations and support functions. For many customers who were previously wary of online banking, they have now discovered it is as easy as the online shop. We cannot pretend they will go back to their previous habits. The pandemic has accelerated the trend of customers using branches less, and digital transactions are ever more important. We will further our digital transformation, making digital the primary channel for sales and servicing. We will also enhance our digital capabilities to improve customer service and adapt to what customers are now expecting. Employees are also looking for more flexible ways of working, and the new environment will allow us to do so. There is a new challenge for many businesses, how do we give people the flexibility they want, whilst ensuring we retain a clear corporate sense of purpose? The pandemic has forced us to communicate more frequently with our colleagues to understand what their experiences from this new way of working and what they want in the future. Our internal surveys showed that 91% of colleagues felt more, or as productive working from home and 76% said they wanted to be in the office on average 4 days a month. We will be able to provide more flexible hours, while improving our customer service and employee value proposition. Additional flexibility will also create opportunities in how we access talent. We are confident these changes will enhance both productivity and our long-term growth potential. As we embrace this new operating model, consistently review and adapt our risk controls and governance frameworks to ensure that these are aligned with the latest regulatory requirements. Our continued culture of transparency and collaboration will be a key pillar for the successful implementation of our New Ways of Working strategy and that our re-defined operating model will allow for a more agile, responsive and resilient franchise, resulting in long-term value creation. C-19 Applying Covid-19 learnings - New Ways of Working People Delivering customer loyalty and outstanding customer experience Read more on page 31 Providing a thriving workplace for engaged, motivated and diverse individuals and teams Read more on page 34 Aiming to improve efficiency and returns through simplification and digitalisation Read more on page 33 Supporting communities in which we operated with our sustainability strategy Read more on page 36 Shareholders Communities Customers 15Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
1 Deliver growth through customer loyalty and outstanding customer experience – Deliver outstanding propositions to meet more of our customers needs – Connect physical and digital channels for seamless customer experience – Profitable growth in retail banking and sustainable returns in corporate banking – New and evolving revenue sources including global group projects 2 Simplify and digitise the business for improved efficiency and returns – Simplify, digitise and automate our processes – Improve our technology and operations through innovation and optimisation – Remove complexity and siloes to increase productivity – Capital discipline and RWA management – Maintain a prudent approach to risk 3 Engage, motivate and develop a talented and diverse team – Enable our people to meet their full potential – Implement new and flexible ways of working – Provide training and development to deliver a workforce for the future – Ensure all aspects of diversity remain front of mind Be a responsible and sustainable business Focus on five pillars for a thriving workplace, while meeting all our regulatory requirements and expectations: – Sustainable economic growth and financial inclusion – Climate change – Inclusive digitalisation – Ethics – Fighting financial crime Our refined strategic priorities are aligned to Banco Santander’s One Europe strategy, with a focus on customer loyalty and experience, simplification, improved efficiency and sustainable growth, while aiming to be the best bank for all our stakeholders. Our strategic priorities Annual Report 2020 | Strategic Report Santander UK Group Holdings plc16
Our Commitment to the UN Sustainable Development Goals (SDGs) Our business activities deliver on targets set out in the UN SDGs, which we have mapped against our Sustainability strategy. Specific SDG targets that we delivered on in 2020 are those in Goal 4, Goal 8, Goal 10, and Goal 13. To read more about our contribution and see the full mapping, please see our ESG Supplement 2020. Santander UK Group Holdings plc Environmental, Social and Governance Supplement 2020 We are transforming the business for success in order to meet the changing needs of our customers and deliver improved returns over the medium-term. Since commencing the multi-year transformation programme in 2019, we maintained a strong focus on digitalisation, automation and restructuring initiatives across the business. We have done so at an even faster pace in 2020, and with real urgency in order to continue to meet the changing needs of all our stakeholders, and despite significant uncertainties and operational challenges caused by the onset of the Covid-19 pandemic. 2020 was also all about breaking down silos and working across teams to deliver real change, while leveraging technology to help all our colleagues in the service of our customers. Our systems were also key enablers of this change, and through the launch of a new digitally integrated credit end-to-end platform, we have been able to reduce cycle times by 20-30%, delivering a faster and improved customer experience. The need for change is not a new concept for our organisation. Our plans to adapt and transform started well before the pandemic, and the transformation of our organisation will continue at a pace. Being new to the bank, I am impressed by Santander’s ambition, the scale of the bank globally, and the talent that is available to drive through the transformation. But more than that, I am captured by the engrained belief that the customer comes first. Tony Prestedge Santander UK plc Deputy Chief Executive Officer Transformation programme highlights Spend 1762020 2019 156 Savings 1522020 2019 92 Planned investment spend split: Customers Serving our customers better with more efficient network use and digital service model development Digital Digitising the back office with end- to-end IT processes and automation, leveraging technology such as the cloud and big data Footprint Repositioning our corporate footprint while supporting agile working and collaboration and optimising how and where we work. Footprint Digital Other Customers Transforming for Success 17Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
We have taken further decisive steps in 2020 to mitigate the material impact Covid-19 has had on our business operations and performance. We are confident in our ability to transform the business through a relentless focus on improved customer outcomes, strengthened business efficiency and proven resilience of the business, while continuing to deliver on our strategic priorities. (1) See Glossary on page 312 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 191 for details and reconciliation to the nearest IFRS measure for return on ordinary shareholders’ equity (RoE) and cost-to-income ratio. 2020 RoE was 2.9% (2019: 4.9%) and cost- to-income ratio was 63% (2019: 61%). KPI 2020 result Why it matters and how we performed Result 1 Loyal customers 4.4 million Loyal customers measures the number 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 us in-depth insight which allows us to tailor our services to their needs. This metric decreased in 2020, following 1I2I3 Current Account repricing actions linked to bank rate reductions, and now represent 32% of our active customer base. Customer loyalty remains at the heart of our strategy and will be a key area of focus in 2021. Customers Digital customers 6.3 million Digital customers are increasingly important given the benefits that mobile and digital can bring to the customer experience alongside more efficient operational delivery of 24/7 service. Customers in the UK are increasingly moving towards mobile and digital banking, a trend that exponentially increased in 2020 due to the Covid-19 lockdowns. 2020 2019 2018 6.3m 5.8m 5.5m Retail NPS(2) 8th Retail net promoter score is a widely-used measure of customer experience and customer advocacy. As expected, during 2020 we slipped from the Top 4 position we achieved in 2019 following 1I2I3 Current Account repricing actions linked to bank rate reductions. However, balances have increased over the year and overall account numbers have remained broadly stable. Improvement in customer satisfaction will be a key area of focus in 2021. 8th out of 9 competitors Business and corporate NPS(2) 1st Business and corporate net promoter score is a widely-used measure of customer experience and advocacy. In 2020 we maintained our first place ranking, a testament to the comprehensive proposition and our strong support for our small and medium-sized business customers during the Covid-19 pandemic. 1st out of 6 competitors 2 Adjusted RoTE (3) Return on ordinary shareholders’ equity (ROE) was 2.9% in 2020 (2019: 4.9%). Adjusted RoTE(1) was 4.3% in 2020 (2019: 7.8%). Adjusted RoTE is a measure of income generation on shareholder investment. The ROE of 2.9% and the adjusted RoTE of 4.3%(1) in 2020 were materially impacted by the Covid-19 pandemic credit impairment charges for future losses, partially offset by improvements in income driven by decisive management actions on liability repricing and continued focus on making the business more efficient. We are focused on improving returns through our ‘Transforming for Success’ multi-year transformation programme. Statutory RoTE was 2.9% (2019: 4.9%). Shareholders Adjusted cost-to- income ratio(3) Cost-to-income ratio was 63% in 2020 (2019: 61%). Adjusted cost-to-income ratio(1) was 59% in 2020 (2019: 59%). Cost-to-income ratio and adjusted cost-to-income ratio are efficiency measures to capture the amount spent to generate income. Cost-to-income ratio increased to 63% and adjusted cost-to-income remained stable at 59%(1) in 2020 with income pressure in the lower interest rate environment and the significantly lower banking and transaction fees driven by implementation of regulatory changes to overdrafts, offset by realised efficiency savings. We are focused on cost transformation through digitalisation, automation and restructuring activities. Cost-to-income ratio was also impacted by increased transformation costs. Cost of risk 31bps Cost of risk is a measure of credit impairment charge for the 12 month period as a percentage of average customer loans. In 2020 our cost of risk increased to 31bps, driven by £448m Covid-19 related provision for expected credit losses. This drove an increase of c.22bps, with portfolio performance remaining resilient with low write-offs and deterioration seen only on a few single name corporate cases. 2020 2019 2018 31bps 11bps 8bps Leverage ratio 5.1% All major UK banks and banking groups, us included, are required to hold enough Tier1 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. Leverage ratio of 5.1% in 2020 was up 40bps, primarily through improvement in CET1 capital and active management of leverage exposures. It remains 1.5p.p. above the regulatory requirement. 2020 2019 2018 5.1% 4.7% 4.5% 3 Top 10 company to work for Medium-term aim Top 10 company to work for is an important measure of employee satisfaction and our participation forms part of a wider Banco Santander goal. We participated in an industry-wide ranking survey in 2020 and gained accreditation as a Great Place to Work alongside Excellence in Wellbeing. The ranking will be announced in April 2021 to check our progress towards our over-arching global medium-term target. Alongside this, Santander UK was again accredited in the Top Employers Survey for 2020 for both the UK and Europe. People 4 Financially empowered people 500,000 Financially empowered people are those unbanked, underbanked or vulnerable people who we support by promoting access to finance, tailored products and financial education initiatives. In 2020 we adapted our support to help people through the Covid-19 pandemic, with financial aid, access initiatives and advice services. This contributes to Banco Santander’s target to financially empower 10 million people by 2025. 2020 2019 500,000 248,100 Communities Our performance and KPIs Annual Report 2020 | Strategic Report Santander UK Group Holdings plc18
KPI 2020 result Why it matters and how we performed Result 1 Loyal customers 4.4 million Loyal customers measures the number 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 us in-depth insight which allows us to tailor our services to their needs. This metric decreased in 2020, following 1I2I3 Current Account repricing actions linked to bank rate reductions, and now represent 32% of our active customer base. Customer loyalty remains at the heart of our strategy and will be a key area of focus in 2021. 2020 2019 2018 4.4m 4.6m 4.4m Customers Digital customers 6.3 million Digital customers are increasingly important given the benefits that mobile and digital can bring to the customer experience alongside more efficient operational delivery of 24/7 service. Customers in the UK are increasingly moving towards mobile and digital banking, a trend that exponentially increased in 2020 due to the Covid-19 lockdowns. 2020 2019 2018 6.3m 5.8m 5.5m Retail NPS(2) 8th Retail net promoter score is a widely-used measure of customer experience and customer advocacy. As expected, during 2020 we slipped from the Top 4 position we achieved in 2019 following 1I2I3 Current Account repricing actions linked to bank rate reductions. However, balances have increased over the year and overall account numbers have remained broadly stable. Improvement in customer satisfaction will be a key area of focus in 2021. 8th out of 9 competitors Business and corporate NPS(2) 1st Business and corporate net promoter score is a widely-used measure of customer experience and advocacy. In 2020 we maintained our first place ranking, a testament to the comprehensive proposition and our strong support for our small and medium-sized business customers during the Covid-19 pandemic. 1st out of 6 competitors 2 Adjusted RoTE (3) Return on ordinary shareholders’ equity (ROE) was 2.9% in 2020 (2019: 4.9%). Adjusted RoTE(1) was 4.3% in 2020 (2019: 7.8%). Adjusted RoTE is a measure of income generation on shareholder investment. The ROE of 2.9% and the adjusted RoTE of 4.3%(1) in 2020 were materially impacted by the Covid-19 pandemic credit impairment charges for future losses, partially offset by improvements in income driven by decisive management actions on liability repricing and continued focus on making the business more efficient. We are focused on improving returns through our ‘Transforming for Success’ multi-year transformation programme. Statutory RoTE was 2.9% (2019: 4.9%). Shareholders Adjusted cost-to- income ratio(3) Cost-to-income ratio was 63% in 2020 (2019: 61%). Adjusted cost-to-income ratio(1) was 59% in 2020 (2019: 59%). Cost-to-income ratio and adjusted cost-to-income ratio are efficiency measures to capture the amount spent to generate income. Cost-to-income ratio increased to 63% and adjusted cost-to-income remained stable at 59%(1) in 2020 with income pressure in the lower interest rate environment and the significantly lower banking and transaction fees driven by implementation of regulatory changes to overdrafts, offset by realised efficiency savings. We are focused on cost transformation through digitalisation, automation and restructuring activities. Cost-to-income ratio was also impacted by increased transformation costs. Cost of risk 31bps Cost of risk is a measure of credit impairment charge for the 12 month period as a percentage of average customer loans. In 2020 our cost of risk increased to 31bps, driven by £448m Covid-19 related provision for expected credit losses. This drove an increase of c.22bps, with portfolio performance remaining resilient with low write-offs and deterioration seen only on a few single name corporate cases. 2020 2019 2018 31bps 11bps 8bps Leverage ratio 5.1% All major UK banks and banking groups, us included, are required to hold enough Tier1 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. Leverage ratio of 5.1% in 2020 was up 40bps, primarily through improvement in CET1 capital and active management of leverage exposures. It remains 1.5p.p. above the regulatory requirement. 2020 2019 2018 5.1% 4.7% 4.5% 3 Top 10 company to work for Medium-term aim Top 10 company to work for is an important measure of employee satisfaction and our participation forms part of a wider Banco Santander goal. We participated in an industry-wide ranking survey in 2020 and gained accreditation as a Great Place to Work alongside Excellence in Wellbeing. The ranking will be announced in April 2021 to check our progress towards our over-arching global medium-term target. Alongside this, Santander UK was again accredited in the Top Employers Survey for 2020 for both the UK and Europe. People 4 Financially empowered people 500,000 Financially empowered people are those unbanked, underbanked or vulnerable people who we support by promoting access to finance, tailored products and financial education initiatives. In 2020 we adapted our support to help people through the Covid-19 pandemic, with financial aid, access initiatives and advice services. This contributes to Banco Santander’s target to financially empower 10 million people by 2025. 2020 2019 500,000 248,100 Communities 19Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Meeting operational challenges The Covid-19 pandemic has resulted in a number of significant challenges, which were met during the course of 2020. We transitioned effectively to a sustained working from home environment, underpinned by robust remote access technology, and continuous communications and support measures for all of our colleagues. At the same time, the risk team’s resources were mobilised to implement new processes and procedures to facilitate the delivery of Covid-19 government support measures for our retail, business and corporate customers, whilst maintaining operational resilience. Interactions and communications with our customers were also increased in order to better understand their individual needs. Credit and operational risk impacts During the year, we managed the evolution of both our credit and operational risk profiles across all of our businesses and loan portfolios. We initiated targeted retail customer out-reach to assess requirements for ongoing support and re-rated substantial segments of our corporate credit portfolios, also supplemented by proactive client Santander UK is a great business with considerable opportunity, backed by a strong global brand. I want to thank all my colleagues who are actively managing risk across the organisation, keeping focused and supporting each other, while delivering for all our stakeholders. Christine Palmer, Chief Risk Officer engagement. Financial Support activities have been re-engineered to ensure our customers obtain the best individual outcomes. We continue to focus on increased fraud and cyber risks seen across the financial services sector to ensure we maintain a robust operational environment. We have prioritised monitoring and oversight of these and other key operational risks with enhanced reporting and input to IT strategy, data management and business transformation. Strategic risk management actions Our teams supported the analysis of net credit loss modelling through ongoing reviews of inputs to our IFRS9 models, which determine the level and timing of the provision of credit losses in our financial accounts. Regular risk assessments of our business plans were undertaken throughout the year, under a range of economic stress scenarios. This enabled us to view our medium to longer term financial forecasts and the setting of our risk appetite to support the business plan. We also identified management actions that will assist us in mitigating cost and revenue pressures, including the phased delivery of our cost transformation programme. The Covid-19 pandemic had a material impact on our business and financial performance, as well as our risk profile. Net credit losses increased materially during the 2020 financial year to £645m. However, these charges were mainly driven by management judgement overlays with regards to expected future losses and reserve build, rather than loan performance deterioration. Various government support measures, especially the furlough schemes, have delayed the full impact on our customers and in turn on us. The outlook for the credit impairment charge remains uncertain, with future outcomes dependent upon the performance of the UK economy, especially unemployment. Operational risks have increased, along with the technology required to support a significantly larger staff cohort working from home, and employee communications and policies to mitigate the potential risk of staff health impacts materialising into capacity constraints. We have prioritised and focused risk resources in these areas to facilitate the implementation of enhanced controls, processes and technological solutions. Reputational and conduct risks also increased in the year, as we focused on ensuring that all customers were treated promptly and fairly under the various government backed schemes, whilst managing within risk appetite. We engaged, and continue to engage, closely with the government and regulators in the implementation and operation of the various schemes. C-19 Main impact on risk management Risk management overview Annual Report 2020 | Strategic Report Santander UK Group Holdings plc20
Brexit Whilst our contingency plans were based on a worst-case ‘no deal’ scenario, the risks associated with Brexit remain substantially the same, as the Trade and Cooperation Agreement deal does not cover financial services in any significant detail, as expected. Our plans are described more fully in the separate case study later in this section. Conduct and Regulatory We are operating in an environment where conduct and regulatory risks are elevated, reflecting the challenges posed by Covid-19 and the continuing need for customer support following the extension of support and forbearance measures in relation to mortgage repayments and government lending schemes for SMEs. Regulatory engagement continues to be high as a result of these issues, as well as with respect to other key developments such as Brexit, Negative Rates and Libor Transition. Robust processes have been put in place to provide assurance that risks are being managed and actions monitored across the various government sponsored schemes, and also other conduct related issues, in order to ensure fair customer outcomes. Managing a complex change agenda We continue to face a challenging change agenda into 2021 with respect to our operating model and also supporting a range of initiatives required to deliver our business strategy. These include increased agile transformation across the organisation; significant IT infrastructure projects; bedding down of new centres of excellence; and implementation of regulatory projects. This places more importance on our management of change, which is underpinned by our established risk project prioritisation processes and change oversight governance. Building and maintaining capital strength Regulatory uncertainty on the implementation and interpretation of capital rules continues and impacts on both our capital management and capital position. We continuously review our capital position on a forward-looking basis, which remains subject to the Bank of England’s stress testing regime. The 2020 CET1 capital ratio of 15.2% (2019: 14.3%) Our top risks outlined below are monitored monthly at the Executive Risk Control Committee (ERCC) and Board Risk Committee (BRC). Covid-19 first and second order risks During 2020 our top risks have been re- focused to incorporate two new top risks; the credit and operational (first order risks) and cost and revenue (second order risks) impacts of Covid-19. These are covered in more detail in separate case studies in this section and throughout the document, being clearly labelled with the C-19 indicator. Financial crime Financial crime activities can have significant impact on our customers. Criminals are increasingly using the financial system to launder the profits of illegal activity such as human trafficking and terrorism. We continued to make significant investment in ongoing enhancement to our financial crime control framework, and to key controls including anti-bribery and corruption measures, customer risk assessment, screening and transaction monitoring. Our Money Laundering Reporting Officer continues to reinforce the importance to Senior Management of focusing on; continuous enhancements to data quality, Key Risk Indicators and treatment strategies to sustainably control risk; ensuring proportionate capacity and investment across due diligence processes for higher risk customer segments; and promoting the embedding of an anti-financial crime culture framework. Covid-19 has also provided an opportunity for fraudsters to take advantage of vulnerable customers through a range of fraud attacks and scams. We have increased our fraud messaging and scam education to assist our customers. We have also continued to build on existing controls and develop new control environments to address fraud attacks. Top risks and UK leverage ratio of 5.1% (2019: 4.7%) were both significantly above regulatory requirements, despite higher Covid-19 related credit impairment losses. This includes the impact of a 2020 ordinary share dividend. Pension There was substantial volatility in the funding position and IAS 19 accounting position during 2020, particularly in the first half year. AA UK corporate credit spread volatility has been a major driver of the accounting position which impacts capital, along with equity and interest rate markets, with the Bank of England cutting the bank rate to 10bps and increasing quantitative easing. The de-risking actions we have taken during the past two years, including executing various hedging strategies and strategic asset reallocation have reduced exposure to pro-cyclical assets and improved the fund’s resilience. Cyber attacks In 2020, threats from the external cyber environment continued to increase, placing even more importance on our internal controls. We monitor a range of cyber risks and have taken mitigating actions including; deployment of a cyber threat intelligence platform; increased intelligence through industry co-operation; and actions to increase staff awareness. Implementation of our Cyber Security Plans is proving effective, with no significant disruption experienced to date. Third party risk management The complexity and criticality of services provided by third-parties is a key operational risk that has been recognised by us, our peers, and the regulators. We have established a robust Third Party Supplier Risk Framework, which ensures that those with whom we intend to conduct business, meet our risk and control standards throughout the life of our relationship with them. Ring-fencing implementation Ring-fencing has 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. Strategic Report Governance Risk review Financial review Financial statements Shareholder information 21Santander UK Group Holdings plc
Risk is any uncertainty which could affect our ability to achieve our objectives or impact our results and financial resources. See Risk Review for more information. Key risk types Description Mitigants Key metric Credit 1 2 4 The risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to whom we have provided credit, or for where we have assumed a financial obligation. We manage our exposures carefully, thorough credit checking and approval processes, to ensure we stay within our risk appetite and agreed concentration limits. We closely monitor the economy and where we see signs of stress we take action to reduce our exposure or adapt our pricing to adequately reflect risk. Stage 3 ratio (%) 1.42 2019 2018 2020 1.29 1.15 Market 1 4 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 other market risk factors, where such changes would affect our net worth through a change to revenues, assets, liabilities and off-balance sheet exposures in the banking book. Trading market risk – the risk of changes in market factors that affect the value of positions in the trading book. We use a variety of approaches to protect the bank. These include using financial instruments, by matching fixed rate deposits with fixed rate loans of a similar term. Stress testing helps us to measure and evaluate the potential impact of extreme events or market moves. NIM sensitivity +50bps (£m) 225 99 2072018 2019 2020 Liquidity 2 4 The risk that we do not have sufficient liquid financial resources to meet our obligations when they fall due, or we can only secure such resources at excessive cost. We aim to ensure our balance sheet remains resilient at all times. We hold sufficient liquidity to ensure we will survive three plausible but severe stress scenarios, by maintaining a prudent balance sheet structure and approved liquid resources. LCR (%) 150 2019 2020 142 Capital 2 4 The risk that we do not have an adequate amount or quality of capital to meet our internal business needs, regulatory requirements and market expectations. We utilise a capital risk framework that informs and monitors our capital risk appetite. We also undertake a wide-range of stress testing analysis to confirm our capital adequacy under various adverse scenarios. CET 1 capital ratio(%) 15.2 14.3 2018 2019 2020 13.2 Key risk types Annual Report 2020 | Strategic Report Santander UK Group Holdings plc22
Strategic priority key: 1 Grow customer loyalty by providing an outstanding customer experience 2 Simplify and digitise the business for improved efficiency and returns 3 Invest in our people and ensure they have the skills and knowledge to thrive 4 Further embed sustainability across our business Key risk types Description Mitigants Key metric Pension 2 4 The risk caused by our statutory, contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to a moral obligation or for some other reason. We monitor both the accounting and funding position against the overall risk appetite, and use a range of investment and hedging strategies to mitigate the inflation and rates impact. Funded DB pension scheme accounting surplus (£m) 135 431 7662018 2019 2020 Conduct and regulatory 1 2 3 4 Conduct risk – the risk that our decisions and behaviours lead to a detriment or poor outcomes 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 of conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. Our culture places the fair treatment of customers at the heart of everything we do. We continuously improve processes and training in order to integrate this fair treatment into our product and service design reviews. Remaining conduct provision (£m) 84 2018 2019 2020 214 276 Operational 1 2 3 4 The risk of loss due to inadequate or failed internal processes, people and systems, or external events. We maintain a particular focus on Cyber & IT; Change and transformation and People risks, which we mitigate through our management of operational risk. Operational risk is inherent in our business. Our approach is to mitigate this risk as far as possible, rather than to eliminate it entirely. We have a programme to enhance existing operational resilience practices and to deliver against recent joint regulatory consultation papers and new requirements expected in early 2021. Operational risk losses trend (excluding PPI and losses below £10,000) (%) 2019 2018 2020 3% -63% 51% Other key risks: Financial crime - the risk that we are used to enable financial crime. Legal risk - the risk of loss from legal causes or actions or omissions with legal consequences. Strategic and business - the risk of significant loss or under-performance against planned strategic objectives. Reputational - the risk of damage to the way our reputation and brand are perceived by our stakeholders. Model - the risk that predictions made by our models might be inaccurate. Of these risks, financial crime is a top and high priority risk for us. We are committed to conducting business in accordance with regulatory and legal requirements and the highest ethical standards. We believe that having a comprehensive and effective financial crime framework through policies, procedures and systems and controls to prevent and detect financial crime is a business imperative. £83m Incremental investment in the financial crime transformation programme to enhance systems and controls in 2020 Strategic Report Governance Risk review Financial review Financial statements Shareholder information 23Santander UK Group Holdings plc
Managing post-Brexit outcomes With a “no deal” outcome being avoided a significant source of disruption has been removed from the first quarter outlook. Impacts on our customers in both the retail and corporate sectors will become more apparent later during 2021. We undertake activities to support our corporate clients and maintain regular dialogue to aid our understanding of Brexit impacts on their business. With respect to assessment of the sensitivity of our forward business projections to Brexit, we currently see the potential for more material impacts in 2022, once key effects such as Foreign Direct Investment become clearer. We anticipated some initial Brexit related disruptions such as import and export delays in our current forecasts, consistent with the current limited trade arrangements. For Financial Services, impacts of regulatory alignment/divergence, and how these are resolved for equivalence assessments and mutual market access, may emerge later in 2021. Our existing relationships with EEA customers are managed by each business area, with restrictions on new business underpinned by controls re-enforced through a compliance monitoring framework. We are however able to leverage the benefits of being part of the wider Group in ensuring that we continue to serve these customers to ensure they receive the best financial outcomes. Six new emerging risks have been introduced to our risk radar during 2020. These are reviewed and discussed regularly at both ERCC and BRC. Negative rates Central Banks wish to retain as wide a range of policy tool options in order to mitigate economic and financial market risks. In early 2021 we were involved in roundtable discussions with the PRA, along with our industry peers, to provide feedback on the issues facing the banking sector in the event of a negative rate environment. Although we do not have material structural balance sheet exposure to negative rates, we have revisited our plans for readiness including systems capabilities (both tactical and strategic), legal and documentation issues, and how negative rates may impact our customers as well as implications for margin management. We will continue to develop and enhance our strategy during 2021, through a coordinated bank-wide approach led by our CFO. Extended government involvement in the banking industry There is the potential for adverse impacts on financial performance and investor perceptions of the banking industry, that could arise inadvertently as a result of the governments ongoing responses to Covid-19 (e.g. implementation risks related to government backed loan schemes, and IFRS9 loan loss guidance). However, to a certain extent, these risks have been balanced by other government actions such as the furlough scheme and the Term Funding Scheme for SMEs (TFSME), which have delayed peak unemployment and reduced funding costs respectively. These issues are considered as part of our forward financial business planning and by our Capital Committee and Assets and Liability Committee (ALCO) regularly. We are further evaluating the potential impacts of this risk, as government lending schemes unwind and the credit impacts of the crisis crystalise further. Extended period of economic contraction Negative multiplier effects from the economic shock caused by Covid-19 could materialise such as delayed spending and investment, and a larger surge in business failures and unemployment than anticipated. Coupled with deflation and lower or negative rates, this would prove even more challenging for banks’ profitability. We regularly undertake stress tests on our future business plans, under a range of economic scenarios. High inflation The injection of significant government and central bank stimulus, could over the medium to longer-term result in the emergence of higher inflation that detrimentally impacts the UK economy. Similar to other economic risks our regular analysis of stress scenarios that we run across our business plans ensures that we fully understand the potential impacts and any mitigating actions that we might need to take. Disruption of macro-economic factors Changes to GDP, unemployment, and house prices from longer term structural shifts in income and wealth could have a material impact on the inputs to our economic scenario analysis. As part of this analysis we review changes in key underlying drivers which aids our forward business planning and risk appetite setting. Other environmental and social issues Extreme weather, natural disasters, biodiversity loss, human made environmental disasters, health impacted by pollution, water crisis, other infectious diseases, and social unrest, are other risks we are taking into consideration. Whilst, we have an ongoing focus on maintaining and enhancing our operational resilience, these risks have the potential to have unpredictable impacts on global businesses and economies, including us, and our suppliers, similar to the wide ranging impacts of Covid-19. These risks were highlighted and discussed at the World Economic Forum in January 2020. Emerging risks Annual Report 2020 | Strategic Report Santander UK Group Holdings plc24
Previously identified and monitored emerging risks and our management actions Changing customer behaviour We consider that the strong trends towards customer digital adoption have been further accelerated during the Covid-19 crisis. Our multi-year transformation programme is regaining momentum, with a renewed focus on investment in digitalisation and automation, and implementing solutions which meet our customers demands Rapid technological change The increasing availability of a wide range of online product solutions for customers requires incumbent banks to enhance their offerings in order to retain and attract customers. We have continued to increase the number of our digital customers, develop new digital channels, improve existing digital services, and automate existing physical channels. At the same time, we also place a high priority on IT risk management, especially cyber security, in order to protect our customers and our reputation Intense market competition We expect competitive pressure to continue and intensify post the Covid-19 crisis, as market participants look to further reduce costs, improve productivity and services. Whilst we have been responding to these pressures as part of our business strategy, we remain focused on delivering sustainable, predictable growth, and achieving consistent profitability through balance sheet strength. Demanding regulatory agenda We continue to face a complex regulatory change agenda and engage in regular dialogue and interactions with regulatory bodies, particularly in the area of customer support. Covid-19 has further added to this complexity as the banking industry has responded to customer and client needs in a more challenging economic environment. We continue to manage regulatory risks, coordinated and prioritised through specific project groups with both risk and regulatory oversight. Impact on our economic forecasts During 2020 we changed our forecast economic scenarios to reflect the current uncertain environment caused by Covid-19. These capture a range of recovery paths for the UK economy and take account of possible further lockdown restrictions and the impact of the UK government responses. The changes to scenarios and associated revisions to the weights applied to those scenarios represent a significant shift to the downside. As an example, the current base case for unemployment is more severe than the worst case scenario in 2019. In addition, we moved to one upside and three downside scenarios in 2020, a change from two upside and two downside scenarios in 2019. The scenarios include forecasts for a number of economic variables including house price growth, GDP, unemployment and bank rate. Given the makeup of our balance sheet, the most significant driver of our expected credit losses (ECL) is unemployment, which held up through 2020 given government support measures such as the furlough scheme. We saw some noticeable impacts in ECL from changes in house prices in late 2020 as pent-up demand and the stamp duty waiver supported the housing market. The significant deterioration in GDP seen due to lockdown measures is a driver of ECL in our corporate portfolios. While lower bank rate helps borrowers with affordability of repayments it has a significant impact on our ability to generate returns and impacts rates paid to depositors. £164m Impact on credit impairment losses from changes to economic scenarios and weights C-19 Uncertain economic and geopolitical environment Elevated economic and geopolitical tensions can lead to periods of elevated market volatility and stresses in funding and lending markets. Our interest rate and foreign exchange hedging programmes are designed to limit income statement volatility arising from short-term market movements, providing resilience to our business model. Libor transition In January 2020, the Working Group on Sterling Risk-Free Reference Rates set targets to cease sterling LIBOR publication by the end of 2021. We continue to make good progress towards our transition to alternative rates ahead of the end of 2021, supported by our well established Project Governance structure. Climate change In April 2019, Supervisory Statement SS3/19 was issued by the PRA setting out its expectations of how banks and insurers should approach managing the financial risks from climate change. We are addressing climate change related risk issues through ongoing engagement across our business and support functions, coordinated and led by the Risk Division. Our continued focus is on the implementation of our plans to fully embed climate change risk assessment in risk management processes. We have set out further details of our activities in the separate call out box in this section of the report. Strategic Report Governance Risk review Financial review Financial statements Shareholder information 25Santander UK Group Holdings plc
Climate risks and our mortgage portfolio We are rapidly expanding our understanding of climate-related risks to our balance sheet. With more than 1.2 million loans, mortgages are our most material portfolio. In 2020, we completed a review of the physical and transition risks of climate change to our mortgages using scenarios from the UK Climate Programme. Working with property-level data, we assessed the most visible physical risk – flooding – for every Santander UK mortgage. Almost 95% of our mortgage lending is on properties with negligible or very low risk of flooding. Flood risk is expressed as a ratio, where a 1 in 30 year (1:30) flood event refers to the likelihood of flooding occurring in a given year. Flood Risk Number of properties High: >1:30 2,906 (>1%) Medium: between 1:30 and 1:100 10,021 (1%) Low: >1:1000 49,678 (4%) Very Low: >1:10,000 69,523 (6%) Negligible: <1:10,000 1,102,435 (89%) Total properties 1,234,563 We are implementing the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and taking action to meet the expectations set by the PRA, BoE and FCA. This requires wide-ranging collaboration both within the bank and externally to develop the tools and methodologies needed. 1 Governance The Chief Risk Officer (CRO) is responsible for climate-related financial risks with oversight from the Board Risk Committee (BRC) and the Responsible Banking Committee (RBC). A climate change working group is managing our TCFD implementation and reports climate risks to the CRO and progress updates to the Executive Risk Control Committee and BRC. A separate working group has been set up to lead our preparation for the Bank of England 2021 Biennial Exploratory Scenario climate stress test and a steering committee provides management oversight. We actively contribute to Banco Santander’s newly-established sustainable finance working groups, which draw on global expertise to identify new business opportunities in renewable energy, green buildings, clean mobility and sustainable agriculture . To support the Board, management, and business we delivered a range of training across the bank: – Board-level climate change workshop covering climate science and regulations, and TCFD recommendations – Online climate change training, available to all staff – Sector-specific climate change training for Corporate and Commercial Banking. In addition, we are preparing a Climate Dashboard to highlight portfolio-relevant risks and opportunities using internal portfolio level data, and external market and policy data. 2 Strategy We are committed to the objectives of the Paris Agreement and our ambition is to help the UK transition to a low-carbon economy and tackle climate change. We are a leader in financing renewable energy projects and in 2020 we were the number one lender to the renewable energy sector by deal number, and number two by value.1 We also aim to deliver carbon reductions across our wider lending portfolio. We have tightened our policies on lending to carbon intensive sectors and do not fund new coal- fired power plants worldwide, or oil and gas drilling projects north of the Arctic Circle. Banco Santander is a member of the UN Collective Commitment on Climate Action, which requires banks to set sector-specific targets for the most material sectors in their portfolios. In the UK, we have assessed our most material portfolio, mortgages, against the physical and transition risks of different climate scenarios. Following a review by the Board and ExCo, we have also repositioned climate change to be a standalone pillar within our broader sustainability agenda and increased our level of ambition. More information is available in our ESG Supplement. In preparation for the Bank of England BES climate stress test, we are reviewing our financial exposure to climate-related risks. We have developed and are stress testing a Target Operating Model, including scenario modelling, process map and data flows. We will include stress testing results in our ICAAP in Q1 2021 ahead of the BES in Q2 2021. (1) Source: Inframation League Tables 2020 Task Force on Climate-related Disclosures Annual Report 2020 | Strategic Report Santander UK Group Holdings plc26
3 Risk management Climate change is integrated into Santander UK’s risk framework. We have introduced minimum standards requiring each business area and risk type to consider the risks posed by climate change. The risk framework outlines the CRO’s responsibility to “embed the approach to managing the financial and strategic risks associated with climate change.” The Board has also approved a qualitative statement within the bank’s risk appetite statement relating to climate change. We will develop a quantitative expression for climate change risk in 2021. The key inputs for setting this limit(s) will be our climate change strategy and the outputs of the 2021 BES. We contributed to the Banco Santander risk taxonomy in 2020 using the outputs of our 2019 Climate Portfolio Screen. A UK- relevant taxonomy that is aligned with the Banco Santander taxonomy will be completed in Q1 2021. Banco Santander provides guidance and tools to analyse potential credit risk impacts relating to climate change, including identifying, assessing, managing and reporting climate-related risks. This guide is for Corporate and Investment Banking and Corporate and Commercial Banking, and is supported by the following documents: – Banco Santander climate briefing paper and climate finance risk and opportunity briefings for oil & gas, power, mining and metals, and steel – Santander Corporate and Investment Banking environment, social and climate change assessment procedure sector questionnaires and Q&A documents In 2020, we updated policies in line with our PRA plan commitments. The Environmental Operations Policy Statement now includes reference to the bank’s risk framework, which requires that climate change risks are considered. We also adopted the general sustainability policy from Banco Santander, which now incorporates the previously separate climate change policy. All UK processes and policies have been updated to reflect this, for example, integrating our commitment to a low-carbon transition into our Supplier Code of Conduct. 4 Targets and metrics Banco Santander has increased the number of climate-related performance metrics it discloses. These include market position for number of deals, total financing of most relevant climate financial services, and emissions avoided by financing renewables. Details can be found in the Banco Santander Climate Finance Report. Below we provide metrics for Santander UK Group Holding plc portfolio exposure by sector, and green finance. The table outlines the largest exposures to both physical and transition climate risks for sectors on our balance sheet. The percentage represents the sector contribution to total assets. Details of our operational carbon emissions can be found on page 37 or page 10 of our ESG Supplement 2020. Sector Amount £bn Exposure percentage Total assets 299.1 Mortgages 169.8 57% Real Estate 10.7 4% Consumer Finance 8.0 3% Electricity & Gas 0.6 0.2% In 2020, Banco Santander was the top lender in the UK renewable energy sector by number of transactions (2nd by deal amount), exclusive of energy from waste assets.1 As part of this, Santander UK originated £1,268m of debt financing to renewable energy projects in 2020. This includes financing originated in Santander UK by our Corporate & Commercial Banking and Corporate & Investment Banking teams. £1,268m total investment in 2020 in renewable energy projects (1) Source: Inframation League Tables 2020 27Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
2020 was defined by the Covid-19 pandemic. While the health crisis has sadly affected large numbers of people across the globe it also highlighted there is much to recognise and applaud about how we responded. I was particularly heartened by the resilience and commitment of our people who quickly transitioned to new working arrangements and I’m extremely proud of all their efforts. Duke Dayal, Chief Financial Officer A year of change The Finance team has played an important role supporting our colleagues to help our customers with payment holidays and lending to businesses guaranteed by government schemes. These measures alongside the reduction in bank rate, introduction of the TFSME and easing of prudential capital requirements have helped us to continue supporting the UK economy, without any deterioration in the resilience of our balance sheet. Returns are lower, but we have been able to absorb the necessary Covid-19 ECL provision build and report a net profit for each quarter of 2020. This has been possible thanks to our resilient balance sheet and decisive management actions. Our resilience is underpinned by several factors. Firstly, we have a prudent approach to risk and growth as well as a focus on prime residential mortgage lending with low LTV. Over recent years, we also chose to limit growth in our unsecured lending portfolios and actively managed down our exposure to commercial real estate. Secondly, we entered the crisis with strong capital and liquidity alongside a good track record in the Bank of England stress tests. We were well-positioned in an environment which was highly uncertain, even before the Covid-19 pandemic. Finally, we were quick to take mitigating and decisive actions which are beginning to come through our results and have partially offset higher impairment provisions. These actions include deposit repricing which stabilised our Banking NIM and ongoing transformation programme activities which have contributed to quarterly costs trending downward this year. An uncertain operating environment The UK banking market is very competitive and intensely regulated. We continue to face additional challenges from the Covid-19 pandemic and the impact of the new trading arrangements with the EU, both of which we expect to continue into the medium term. Like all banks, we have taken significant credit impairment charges this year – largely as we build provisions for expected credit losses rather than because of realised losses. We expect losses will start to be realised as unemployment rises. However, to date jobs have largely been protected by significant government measures to support businesses and individuals. Actively supporting the UK economy We granted 373,000 payment holidays to customers with a value of more than £40bn. Of these less than £3bn were still on payment holiday as at 31 December 2020 and we have seen less arrears among this cohort of customers than we expected. Summarised consolidated income statement For the years ended 31 December 2020 £m 2019 £m Net interest income 3,437 3,295 Non-interest income(1) 521 875 Total operating income 3,958 4,170 Operating expenses before impairment losses, provisions and charges (2,487) (2,526) Credit impairment losses (645) (220) Provisions for other liablilities and charges (274) (443) Profit before tax 552 981 Adjusted profit before tax(2) 710 1,300 (1) Comprises of ‘Net fee and commission income’ and ‘Other operating income’. (2) Non-IFRS measure, see page 191. The financial results were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £158m in 2020 and £319m in 2019. See ‘Alternative Performance Measures’ for details and reconciliation to the nearest IFRS measure. Financial Highlights 1.65% Banking NIM (2019:1.64%) 63% Cost-to-income ratio (2019:61%) £169.8bn UK mortgage loans (2019:£165.4bn) £75.6bn Retail Banking current account balances (2019:£68.7bn) £7.5bn MREL eligible senior unsecured debt (2019:£7.9bn) £72.9bn Risk-weighted assets (RWAs) (2019:£73.2bn) Financial overview Annual Report 2020 | Strategic Report Santander UK Group Holdings plc28
We have also lent £4.6bn to our business and corporate customers, through government schemes. The vast majority has been through the Bounce Back Loan Scheme which is 100% government guaranteed. We have also seen our business and corporate customers holding more deposits as they position themselves for the uncertain operating environment. Our financial results Our 2020 results have been materially impacted by the Covid-19 pandemic. Profit before tax of £552m was 44% lower than in 2019. Adjusted profit before tax(2) of £710m was 45% lower, see the Financial review for an explanation of the adjustments and the impact on adjusted profit. Net interest income was 4% higher than 2019 largely due to deposit repricing. Banking NIM of 1.65% was up 1bp from last year and improved sequentially in the second, third and fourth quarters of 2020. As in previous years, higher margin mortgage back book lending has continued to reprice onto lower margin new business products, although the rate of attrition on our Standard Variable Rate book has slowed and the balance in our Follow on Rate book has increased. In addition, new mortgage lending rates started to increase during the second half of 2020, alongside good mortgage applications following the easing of Covid-19 restrictions. Banking NIM improved during the second half of the year, largely due to deposit repricing. This was seen most significantly with our 1I2I3 Current Account where we reduced the customer rate by 90 basis points during the year, linked to bank rate reductions. Despite two rate changes, balances on this account have increased to £57bn. In addition, other deposit repricing actions across all our businesses and stronger margins on new mortgage originations have also helped improve net interest income. Non interest income was down 40% year- on-year following regulatory changes to overdraft fees and a slow-down in transactions during Covid-19 restrictions. Operating expenses were down 2% year-on- year as efficiency improvements continued. These offset underlying inflationary pressure and increased depreciation related to investment projects. Summarised segmental balance sheet(1) 31 December 2020 £bn 2019 £bn Customer loans Retail Banking 186.5 178.8 Corporate & Commercial Banking 17.6 18.4 Corporate & Investment Banking 2.8 4.0 Corporate Centre 3.5 4.1 Total customer loans 210.4 205.3 Other assets 88.7 83.2 Total assets 299.1 288.5 Customer deposits Retail Banking 152.2 142.7 Corporate & Commercial Banking 25.0 20.5 Corporate & Investment Banking 6.5 6.1 Corporate Centre 8.0 6.1 Total customer deposits 191.7 177.8 Total wholesale funding 63.2 65.3 Other liabilities 28.0 29.1 Total liabilities 282.9 272.2 Shareholders’ equity 15.8 15.9 Non-controlling interest(1) 0.4 0.4 Total liabilities and equity 299.1 288.5 (1) The segmental basis of presentation in this Annual Report has been changed. See Note 2 for more information. (2) Non-IFRS measure. See page 191 C-19 Covid-19 related IFRS 9 model overlays We made significant adjustments to our economic assumptions and scenario weightings in 2020 to reflect the impact of the Covid-19 pandemic. Our five economic scenarios were updated and weighted to the downside, to reflect the longer path to recovery for the UK. See the call out box on page 25 for more. We also reclassified the staging of a number of corporate loans based on a review of the sector exposures and lending most at risk due to Covid-19, while also considering those customers who have been granted some form of concession. In addition, we provided for unexpected defaults from large single name exposures arising as a result of the Covid-19 pandemic from non- retail portfolios. We made management judgment overlays with regards to payment holidays offered on a range of products. The granting of a payment holiday on its own was not considered to be a Significant Increase in Credit Risk (SICR) event, nor was it considered a default under regulatory definitions. We also made other Covid-19 management judgement overlays , predominantly relating to mortgage and unsecured personal loan model risk refinement, including delay in repossessions. 29Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Credit impairment losses were up £425m to £645m, of this £448m related to Covid-19 provisions for expected credit losses. See the call out box on the previous page for more. Portfolio performance remains resilient with low write-offs and material deterioration seen only on a few single name corporate cases during the year. Despite significant credit impairment losses, the loan book is relatively low risk and prudently positioned. Our loan portfolios are well collateralised and focused on prime UK mortgage lending which accounts for 80% of the customer loan balance and has an average loan-to-value of 42%. Our consumer (auto) finance book makes up a small part of our loan book with only 4% of total customer loans – more than 80% of the book is secured. Other unsecured retail lending including credit cards makes up only 2% of the book. We have materially deleveraged our commercial real estate portfolio over recent years and this now totals £4.7bn, down from £5.1bn in 2019. Provisions for other liabilities and charges were 38% lower year-on-year, primarily due to additional PPI charges in 2019 which were not repeated. Balance sheet resilience from strong capital and liquidity CET1 capital increased to £11.1bn, with capital accretion through retained profits, a change in treatment of software assets and a lower deduction from the excess of regulatory expected loss amounts over credit provisions. These increases were partially offset by adverse market driven movements in the defined benefit pension schemes. The CET1 capital ratio increased 90bps to 15.2%, with a 5.4p.p. buffer to Maximum Distributable Amount (MDA) restrictions. The UK leverage ratio increased 40bps to 5.1%, it remains 1.5p.p. above the regulatory requirement. The change in treatment of software assets led to a benefit of c30bps for the CET1 capital ratio and c10bps for the UK leverage ratio. Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17bps to the CET1 capital ratio, through the implementation of the RWA reduction factors for certain SME and infrastructure exposures. LCR was strong at 150%, up 8 percentage points on 2019, reflecting higher customer deposits and a transfer of £3.2bn of mortgage assets to Santander Financial Services plc, as we continue to optimise the funding structure of the group. Looking ahead Our operating environment remains very challenging for our customers, people and communities. Our base case assumes that there are continued local and regional lockdowns. Growth in GDP is also expected to be disrupted by the change in trading arrangements with the EU. The mortgage market has been particularly active due to pent up demand from the lockdown period and the temporarily reduced rates of stamp duty. This has led to improved new mortgage pricing and increased mortgage applications which will likely continue into the first quarter of 2021. We expect our net mortgage lending to be in line with market growth in 2021. We expect Banking NIM to remain broadly in line with the Q420 exit rate, predicated on stable mortgage margins, 1I2I3 Current Account repricing announced in Jan21 and no change to the Bank of England bank rate. Operating expenses should continue their downward trend, through transformation programme cost savings. We expect credit impairment charges to be lower in 2021 driven by UK economic recovery in the second half of the year. The actions we have taken have enabled us to continue working effectively throughout the crisis and will act to stabilise returns going into 2021. Our prudent approach to risk and capital and liquidity strength make us resilient in the face of ongoing uncertainty. Factors affecting our Banking NIM outlook Spreads improved in 2020 Our product spreads at the end of 2020 were noticeably higher than at the start of the year and marked a change in trend after some years of decline. The improvement was largely due to significant deposit repricing throughout 2020 which was fully embedded in the margin by the fourth quarter. The mortgage market is strong and customer rates have increased Following the easing of lockdown restrictions and the announcement of the temporary reduction in Stamp Duty, the mortgage market recovered strongly. This led to significant mortgage applications in the second half of the year and an increase in customer rates which is likely to continue into 2021 when the stamp duty reduction is expected to end. Deposit rates have fallen with the lower rate environment Savings and corporate deposits rates have fallen in the market and with bank rate close to zero there is little scope for further declines. We reduced the 1I2I3 Current Account rate twice in 2020 and in Jan21 announced a further reduction to pay 0.30% AER. Wholesale funding rates are low TFSME provides banks with significant funding capacity at close to bank rate. To date we have drawn £11.7bn through TFSME, well below the total allowable given the support we have provided to SME customers. We expect to replace almost all bank level funding maturities with TFSME during 2021. Financial overview continued Annual Report 2020 | Strategic Report Santander UK Group Holdings plc30
We strive to create value for all our stakeholders, engaging others to help us deliver our commitment to be a more responsible bank. We provided the opportunity for customers to self-serve where possible, and prioritised services for those unable to do so. We launched a Financial Support phone line and online hub to help customers dealing with financial difficulties. We introduced Chat, a new digital channel providing 24/7 service via a chatbot and access to colleagues via Live Chat. Since April 2020, we have seen over 3.7 million conversations through Chat, with volumes growing from 1,000 per day to over 25,000. To ensure capacity, we trained 4,000 colleagues to speak through live chat and introduced a continuous optimisation model for chatbot. We tested more decisions with customers than ever before, checking close to 500 customer journeys across digital channels, communications and online experiences. To help customers access information most relevant to them, we launched a dedicated home page and support sections for all Covid-19 tools and assistance. This was across Personal and Business, Mortgages, Current Accounts, Loans, Credit Cards & Investments. Between March and October 2020, over 1.3 million customers visited one of these support pages. Protecting customers from fraud Santander UK anticipated significant impacts on the fraud landscape due to the Covid-19 pandemic, through changes in social behaviour and criminal activity. In preparation, we adapted our controls and 2020 awareness campaigns, which covered remote access fraud, investment scams, safe account scams, financial fraud, and Covid-19-linked scams. We adapted our in-branch Scam Awareness sessions to virtual events for customers, colleagues and communities, open for all to attend. Following a June 2020 trial with 543 attendees, we implemented their feedback to develop ‘phase two’ – totalling 73 events with 1,783 attendees and an 89% satisfaction score. Cyber security As a result of Covid-19 and the UK lockdown we have seen an increase in customers adapting to a more digital banking experience, and in parallel, we have ensured they can place full trust in our online and mobile services. Our global, multi-layered and agile resilience framework has allowed us to respond quickly and securely to ensure the protection of our customers and their data at a time where the industry has faced extraordinary change. Awareness is at the core of our cyber defence; we see the protection of our customers and their data as the responsibility of every employee. We focus on educating our colleagues by hosting training sessions to enhance their cyber capabilities and ultimately bolster the bank’s security. We also continue to invest in emerging cyber security talent; the first cohort of our Digital Apprentices graduated in 2020 with key skills to secure the bank’s next generation of cyber experts. ‘Survive and Revive’ for SMEs In 2020, Santander Breakthrough re-aligned its support to SMEs with a focus on digital delivery. Designed to provide beyond- banking support to businesses from start-up to growth, we launched Survive and Revive, a bank-wide proposition delivering a suite of resources to help SMEs manage the crisis. Survive and Revive evolved during the year to respond to the changing economic environment and will continue into 2021. The first phase included our new resource hub, providing access to webinars, overseas opportunities, a part-funded e-commerce package, thought leadership and insights. This included a Sustainability module developed together with B Lab UK, the charity behind the B Corporation movement. Through a five-part webinar, it introduces SMEs to emerging trends in Sustainability and provide guidance for business leaders to make their companies more sustainable. Our Sustainability strategy became even more relevant during Covid-19, as the pandemic reinforced the need to build more sustainable and resilient systems. This section is designed to be read together with our Environmental, Social and Governance Supplement. Customers We want to help people and businesses prosper and aim to do so by being Simple, Personal and Fair in everything we do. Support measures During the Covid-19 pandemic, we offered unprecedented support to our customers, while ensuring the safety of our colleagues. We provided a full package of support measures for business and retail customers, including over 373,000 payment holidays, and £4.6bn of lending to our business and corporate customers through government schemes including Bounce Back Loans (BBLs), and Coronavirus Business Interruption Loan Scheme (CBILS). We paid particular attention to supporting our more vulnerable customers, providing flexibility with support options, and the rapid adaptation of our systems and processes to respond to the crisis. Inclusive digitalisation During the pandemic, we continued to offer a full banking service to our customers in branch, over the phone and online. Sustainability 31Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Over 50 webinars and 140 pages of content were delivered, reaching over 16,000 site visitors. The second phase of Survive and Revive focused on helping businesses trade as restrictions across the country changed. We secured digital advertising space online and in our branches for 50 SMEs and helped those wanting better digital engagement through social media and PR toolkits. Our freelancers campaign provided £250k to fund 250 SMEs projects delivered by freelancers across the country. We are signatories of the Investing in Women Code, and in 2020 continued a remote Women Business Leaders’ Mentoring Programme for 180 participants. We improved access to support and funding to under-represented entrepreneurs, focused on women of colour as part of Santander UK’s Black Inclusion Plan. In 2020 we supported over 880 businesses through international and sector trade activity, adapting our model to deliver 69 digital activities since March 2020 to a total 867 attendees. In 2020, we added 143 members to the Trade Club Alliance and supported 36 companies who faced Covid-19 challenges with supplier matchmaking, as well as referring 59 companies to the government for a PPE matchmaking scheme. Supporting our vulnerable customers With the backdrop of the Covid-19 pandemic, we responded to the needs of our most vulnerable customers, from ‘access to cash’ solutions to providing mechanisms for help from a trusted third party. One key initiative is our Supported Banking proposition, providing a flexible level of support from the customer’s chosen third party. In addition to a Power of Attorney, we now provide a Third Party Access facility and Carer’s Card option, for customers who need support but not a full Power of Attorney. Compared to other ‘workarounds’ where people were giving their own debit card to their carer to do their shopping, the Carer’s Card and Third Party mandate are safe and legal alternatives. For people who needed cash, but who couldn’t leave their homes, we enabled secure access via the Post Office network, meaning a customer could place an order for a limited amount of cash and allow a trusted third party to collect it. With our focus also on building capability across our colleagues, we introduced a dedicated online Vulnerability Hub. Colleagues visited the hub over 6,000 times in 2020, raising awareness and understanding about challenges faced by some customers and how this can impact their banking. The vulnerability hub is complimented with specific training sessions for all colleagues (including specialist teams), to continually broaden knowledge and develop our ability to recognise and support our vulnerable customers. During 2020 our bereavement service saw a number of improvements. We now offer an online chat facility to support customers and their representatives who may have questions about the bereavement process. We have also simplified the information required from customer representatives and we continue to be part of the Death Notification Service allowing a customer’s representatives to notify different organisations of a death through a centralised service. To support our colleagues, and to raise awareness and improve levels of confidence in this area, we have developed a series of tailored training videos on the bereavement process and how to support customers impacted by a bereavement. Supporting mental health Working with the mental health charity Mind, we provided colleagues with targeted, practical tools and guidance so that they can more confidently manage difficult conversations with customers, and manage any impact these conversations can have on their own wellbeing. Through in-depth workshops reaching over 100 colleagues, this training helps to ensure our customers – who may be dealing with financial or non-financial related stress, anxiety and other mental health issues – are aware and have access to avenues of mental health support. These initiatives are being complemented by the provision of additional tools, e-learning guidance and support for all colleagues on mental health through our internal wellbeing hub. C-19 Reaching out calls to customers In April 2020, we launched ‘Reaching Out’, an initiative focused on calling some of our potentially vulnerable older customers, who typically would have visited a branch and may not have a cash card or access to online or mobile banking. Above all, the calls are about customer wellbeing, with informal conversations supporting the customer to cope during the Covid-19 pandemic. This might cover financial wellbeing, such as explaining how to still access cash when needed, or other elements of the customer’s wellbeing where we are able to make a difference, such as liaising with our charity partners to provide additional support to those in need. We provided these calls from frontline colleagues from April-November 2020, reaching 81,859 customers. “One customer was 80 years old and had tried to get out to the local shop but it was closed. I asked him if he had enough food and he said he had enough for today only. I spoke to Age UK and rang him back to confirm he was happy for them to call him. They are now going to arrange to do his shopping so he does not have to go out.” - Sharon Field, Community Hub Director, Stratford Sustainability continued Annual Report 2020 | Strategic Report Santander UK Group Holdings plc32
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. Investor 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 a two-way link between investors and senior management, focusing on both external messaging and communication whilst providing feedback from investors to the Board. Shareholders We aim to deliver a long-term, sustainable return for our shareholders while helping people and businesses prosper. Part of a global bank We are a subsidiary of Banco Santander SA and part of the Banco Santander group, a leading retail and commercial bank headquartered in Spain. Our ordinary shares are all held by Banco Santander group companies and are not listed, although our preference shares are listed on the London Stock Exchange. We also have other equity instruments in the form of AT1 securities issued in 2014, 2015, 2017 and 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 Our consistent profitability has enabled us to pay a dividend every year between 2008 and 2019. In early 2020, as the Covid-19 crisis began to unfold, the PRA announced that regulated firms should not pay dividends and instead should conserve capital. In response to this, Santander UK temporarily suspended dividend payments. This guidance was later eased and dividends payments allowed within certain guidelines, following this we paid a dividend of £103m in December 2020. ESG investor engagement In 2019, the Investor Relations and Sustainability teams started to directly engage a targeted selection of our investors in discussions on ESG issues, with support from Banco Santander colleagues. This year we continued our structured engagement, holding individual ESG-focused meetings with our investors. Through these discussions, we aim to respond directly to heightened investor interest in ESG that comes as sustainability topics such as climate change are increasingly recognised as financially material to business success and resilience. In a two-way dialogue, we also gain important insight of investor needs and expectations, which we use to improve our ESG strategy and disclosure. Our ESG Supplement, for example, is a succinct data-driven report aligned to our annual report timeline and governance, developed with consideration of investors as a main audience and published on our Investor Relations webpage. These discussions can also help us navigate the many ESG guidelines and standards to ensure our reporting is useful and relevant. In 2021 we will continue to build on our engagement, including further development of our quarterly investor updates with decision-useful ESG information. 33Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Our top priority is to support the wellbeing and safety of our colleagues. We made a commitment that whatever a colleague’s personal situation, we will continue to pay contracted hours as normal, including throughout any periods of self-isolation. This applies to colleagues who are both permanent and on fixed term contracts. Our commitment continues to provide colleagues who have primary caring responsibilities with paid leave. We did not furlough any colleagues. We introduced a new always-on pulse survey called ‘Your Say’ to enable colleagues to provide regular feedback, share ideas and seek support. The survey focused on wellbeing, communication and our response to Covid-19. To help maintain social connections, we launched a ‘Stay in Touch, Keep Calm & Connect’ website to enable colleagues to remain connected through activities including stories and quizzes. We introduced a new module to our mandatory training suite to help people work from home effectively. Topics include preparing yourself, setting up your environment and managing your time, as well as how best to stay connected. Our survey on working from home continues to show positive feedback in terms of how we have managed this process. 91% of colleagues stated they are as or more productive working from home, an increase of 7 points from when the survey was first run earlier in the year. Inclusion and belonging Our commitment is to be a truly inclusive organisation reflective of our customer and communities. In 2020, we set out our next three year inclusion and belonging strategy “everyday inclusion” that prioritises the themes of respect, balance, leadership, advocacy, allyship, transparency and accountability. A member of our Executive Committee sponsors each diversity strand of gender, LGBT+, ethnicity, disability, families and carers, social mobility, and mental wellbeing. We hold a quarterly Everyday Inclusion Forum to provide guidance and direction to our strategy attended by our Executive Committee Sponsors, our Chief HR Officer and our Employee Led Network Leads. Our eight employee-led diversity networks collectively have over 11,000 members. They consider intersectionality, providing a safe space for colleagues to share their lived experiences, and receive targeted communications within a digital community space that is a vital source of support during the pandemic. We made enhancements to our people polices, including increasing our maternity, adoption and shared parental leave, offering a new paid sabbatical and developing ground breaking work to support menopause. Over the summer, we held a number of colleague listening events in response to the Black Lives Matter movement, looking at the ways to support colleagues to accelerate the pace of change. In September, we put in place a Black Inclusion plan, alongside an analysis of our own data. Three areas of focus were identified: Leadership, Allyship and Networks with supporting measures and targets to shape our activity to build Black Inclusion and amplify Black Voices. Additional actions include no longer using the term BAME, publishing our ethnicity workforce data and voluntarily publishing our ethnicity pay gap and action plan in December. We again featured in The Times Top 50 for Women List, commended for being in the top ten per cent of organisations that featured regularly during the ten years the list has been published. In the Social Mobility Employer Index, we were the highest placed Retail Bank (26th). The Social Mobility Employers’ Index, created by the Social Mobility Foundation (SMF), ranks UK employers on the actions they are taking to ensure they are open to accessing, developing and progressing talent from all backgrounds. Our Global Pulse survey results show that 87% of colleagues believe that Santander UK has created an environment where people of diverse backgrounds can succeed, 9 points above the external benchmark.(1) People Supporting our colleagues to deliver for our customers is our priority. Culture We are on a journey to embed our culture. Making all that we do Simple, Personal and Fair, underpinned by our nine behaviours, is critical to our effort to build a more responsible bank. We want to create a thriving workplace that promotes inclusion and diversity, prioritises wellbeing and develops the skills of our people. Our goal to be a high-performing and responsible business is reflected in the 2020 Global Pulse Survey with 88% of colleagues feeling “We act responsibly and make a positive contribution to society” up 3pts vs 2019. Our announcement that we will form part of the One Europe business model, alongside our ongoing transformation programme, will further develop our culture driving collaboration between our teams to better serve our customers in a Simple, Personal, Fair way. It presents an exciting opportunity and the Global Pulse Survey showed that our people have positive attitudes to change - 86% feel managers lead effectively through change and 85% believe their teams support our transformation. In 2020, we were again recognised as a Top Employer in UK and Europe by the Top Employers Institute alongside being accredited as a Great Place to Work. In 2021, our cultural priorities will continue to focus on being an inclusive and responsible organisation alongside continuously improving our culture to become more Simple, Personal, Fair in order to enable our colleagues to deliver great customer outcomes. Ways of working during the pandemic With the backdrop of the pandemic, we responded to the rapidly changing needs of our customers at pace and with efficiency, leveraging technology to enable over 15,000 colleagues to work remotely. Our response to Covid-19 has been well received with 88% of colleagues in agreement that “Santander is taking the appropriate steps to ensure employees stay safe and healthy at this stage of the pandemic” in the Global Pulse survey. Key people statistics 77% Engagement Index Score, 7 points above external benchmark. (2019: 70%) 82% Pride in being part of Santander, 5 points above external benchmark. (2019: 75%) (1) Financial sector benchmarks 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. Sustainability continued Annual Report 2020 | Strategic Report Santander UK Group Holdings plc34
Skills development Investing in our people allows us to be fit for the future with skilled and engaged colleagues who can truly thrive. In 2020, our people undertook 61,398 training days and we invested £7.9m, equipping them with the skills they need for now and in the future, including digital skills. Our Digital Learning Platform, MIO, saw 328,950 hits throughout 2020. The platform is focused on both development and providing support through internal communities and networks. MIO provides a variety of training styles, from 2-3 minute bursts to themed box set content. In 2021, we will launch a number of colleague upskill academies through the new global academy offer via Dojo (Banco Santander skills platform). This will include academies on Cloud and Agile, Digital Fluency, Global Engineering, Leadership and Global Financial Crime Academy. Employee engagement We foster an open dialogue between employees and our senior leaders. Colleagues joined virtual “In Conversation” events this year with the Santander UK plc Employee Designated Director on topics of simplification, wellbeing and inclusion. Our CEO and members of the Executive Committee participated in quarterly virtual events, with all colleagues invited to participate in the conversation and submit their questions in the live forum. The topics included sharing Santander UK’s financial results, recognition and celebrating success and providing insight into the future strategy. The Global Pulse Survey results improved in 24 of the 26 questions where we had a historical trend from the Global Engagement Survey (GES) 2019. Our Engagement Index score increased from 2019 by 7 points to 77%, and is 7 points above the external benchmark. Pride in being part of Santander increased by 7 points to 82% and is 5 points above the external benchmark. Drivers of increased engagement with the most positive trends compared with 2019 were questions around wellbeing, communication, innovative working practices and collaboration. Areas of improvement included continuing our simplification to improve colleague enablement and addressing ineffective ways of working. Working in partnership During 2020, we continued to work in partnership with our recognised trade unions Advance and Communication Workers Union (CWU) on our approach to support colleagues through the pandemic. We have also continued consultation with representatives on changes associated with transformation. Fair pay Our Reward Framework is reviewed annually against the external marketplace. We are proud to have been an accredited Real Living Wage employer since 2015. 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 Diversity Pay Report which includes voluntarily publishing our ethnicity pay gap, and the voluntary disclosure of our CEO pay ratio in our Remuneration Implementation Report. Prioritising wellbeing The launch of our Wellbeing Strategy and Wellbeing Hub in January 2020 provided a solid foundation for the significant focus and speed at which support is in place to help colleagues through the pandemic. In recognition of our strategy we achieved “Excellence in Wellbeing” accreditation from Great Places to Work. Our focus on wellbeing covers physical, mental, financial and social wellbeing. Our Wellbeing Hub reflects the new working environment including information on looking after your mental wellbeing when working at home, wellbeing webinars and a direct link to our Employee Assistance Programme. Since its launch, the Wellbeing Hub has been used by colleagues over 95,000 times. Thrive, our Mental Wellbeing app, is available to all colleagues and has multiple features to help maintain mental wellbeing, including meditation, breathing exercises and a mood meter. Importantly, the app allows all colleagues to access a live text chat with qualified psychologists at the touch of a button Monday to Friday, 8am to 8pm, with responses typically received within 30 seconds. We also enhanced our Employee Assistance programme to offer virtual counselling for more complex mental wellbeing support. 79% of our colleagues feel we care about wellbeing, 20 points above the external benchmark, and 13 points increase since 2019. 35Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
Financial inclusion Confidence with numbers is a key skill that underpins financial inclusion and in 2019 we established a three-year partnership with National Numeracy aimed at helping children and parents build confidence with numbers, using the magic of football and our sponsorship of the Champions League. To support the partnership during school closures, we enlisted Twinkl (the world’s largest online education hub), the F2 Freestylers (the world’s biggest football influencers), and Rio Ferdinand, former England and Manchester United Captain to create a series of free online football- themed maths challenges. The content received over 119,000 unique downloads. Confidence in money matters is another key skill which our partnership with Young Enterprise (YE) addresses through in-school activity. Due to school closures, YE adapted their programmes, and took My Money Week (MMW) and the Fiver challenge online. For MMW, a free resource hub was created for teachers, parents and carers to share with children, and the Fiver ‘at Home’ challenge encouraged students to develop a product or service over four weeks using £5 start- up money. Even with schools closed, over 110,000 young people took part in activities. Digital inclusion Wanting to improve digital skills for older people, we partnered with Age UK to launch GoDigital in 2020. Through digital awareness events 21,716 people were reached and a further 462 people received one-to- one support. In addition to supporting older people, we worked with We Are Digital to create content aimed at keeping 11-17 year-olds safe online. Through this programme, 1,513 young people were trained on topics such as captology, fraud and scams and sextortion. Santander Universities In response to Covid-19, Santander UK contributed £5.1m to university initiatives, which included a £300k donation to Oxford, UCL and Imperial College to support Covid-19 research and vaccine development. The contribution also went towards the production of PPE for the NHS and IT equipment for students. We also supported more than 10,200 students and graduates in 2020. 490 start- ups and SMEs benefited from the Santander Universities Internship Scheme, totalling 558 internships and founderships, with 45% of the internships going on to employment with the SME. Communities We support and invest in communities across the UK to foster sustainable economic growth. Becoming the UK’s best dementia- friendly bank In 2020, we entered the second year of our partnership with Alzheimer’ Society by focusing on how to better support customers with dementia. This included developing an online Dementia Guide, and launching a bespoke e-learning module, ‘Dementia Friends,’ encouraging our colleagues to improve their awareness of, and commit to a social action to support people affected by the disease. At the end of 2020, 54% of our workforce were Dementia Friends and 129 contact centre and branch staff completed a Dementia Ambassador training course, aimed at empowering colleagues to share information and promote internal dementia- friendly initiatives in their areas. We also launched the Dementia Steering Group, made up of carers and people living with dementia to ensure our products and services, (such as the ATM journey), are dementia friendly. Despite the challenges of Covid-19, we raised over £655,000 for Alzheimer’s Society in 2020, equating to over £1.4m since the partnership began in 2019. Santander Foundation Older people and those affected by dementia were disproportionately impacted by Covid-19. In response, the Santander Foundation postponed the launch of its new grants programme until 2021 to concentrate on supporting Alzheimer’s Society and Age UK. Each charity received a £1.5m donation enabling their contact centres and online services to increase capacity and continue providing support for those in need. The Foundation did however, further continue its support of charities though the Matched Donations programme, approving 577 employee requests totalling £509,319. C-19 Employee volunteers provide lockdown lift The Santander ‘QuaranTea’ campaign, aimed to support the most vulnerable and isolated people during the pandemic. Supporting Alzheimer’s Society and Age UK, Santander colleagues volunteered to; make weekly companion phone calls to isolated individuals, provide direct support to local Age UK centres, become Digital Champions and Dementia Friends, and distribute support guides to older people in their local communities. To encourage colleagues to join the campaign, the Santander Foundation donated £1,000 for each volunteer that took part, split equally between Alzheimer’s Society and Age UK (up to £1m), and also doubled the time colleagues could dedicate to volunteering, offering 70 hours of time, compared to 35. The response to the campaign far exceeded the original ambition to recruit 1,000 volunteers and 2,591 colleagues signed up to support 5,472 vulnerable people. Sustainability continued Annual Report 2020 | Strategic Report Santander UK Group Holdings plc36
We also lent to an offshore wind project in a new Asian market for that technology. In Corporate and Commercial Banking, we continue to support traditional mid-market renewable generation technologies, with tailored project finance solutions and flexible portfolio level facilities. In addition, we delivered funding solutions for a diverse range of projects and technologies, including batteries, energy efficiency and subsidy- free renewables. In 2020 we launched an innovative “Environmental and Social Growth Funding” solution, aiming to unlock high quality projects which deliver clear sustainability benefits. 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 2020 we improved our Third-Party Risk Management framework, processes and policies. The Third Party Supplier Control Questionnaire was reviewed and updated in Q2 2020 with support from EY, aligning to market best practice and including a review of the supplier’s approach to ensure compliance with human rights standards and support of the Real Living Wage. Covid-19 disrupted our planned on-site assessments, and we adapted to deliver remote assessments to suppliers. We launched our Third Party Code of Conduct in 2019, which we ask all suppliers to accept on our platform. We updated this in 2020 to include reference to climate change, inviting suppliers to join our commitment to a low carbon economy. We also improved our Procurement controls in review with a consultancy. 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 2020 we continued to promote our AFC Culture and Strategy, including through senior leadership briefings and colleague events or communications. We continue to develop external partnerships including through participation on the Economic Crime Action Plan. We’re a proactive member of the Joint Money Laundering Intelligence Taskforce and supported work to reform the Suspicious Activity Reporting regime. In addition, our partnership with the NGO “Stop the Traffik” strengthens how we tackle human trafficking and modern slavery. Ethics & 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. We have in place a number of prohibitions 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. Environmental and Social Risk Champions and the 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 and non- financial reputational risks to the Board. Renewable financing In 2020, Santander was the top UK lender in the renewable energy sector by number of transactions (2nd by deal amount), exclusive of energy from waste assets(1) . As part of this, Santander UK originated £1.27bn of debt financing to renewable energy projects. We provide advisory and financing solutions for renewable and alternative energy clients across a range of technologies and renewable energy support schemes, including onshore and offshore wind and solar projects. In 2020 we funded renewable energy in new markets and continued to expand our service offering by developing innovative new funding structures for the sector. We advised on two onshore wind portfolio financings across the UK and Ireland, which will allow clients to secure long-term financing and assure their future growth in this sector. In 2020, AFC Strategy held a virtual three- day conference with over 400 colleagues in attendance and external speakers from the National Economic Crime Committee and Stop the Traffik. Carbon neutrality in our operations At Santander UK, we are committed to reducing our operational impact on the environment. Banco Santander set an ambition to be carbon neutral across its operations by 2020, and the UK has achieved this. In 2020, we created the working group ‘Forum for Environmental Change’ to drive and coordinate our efforts. Our energy strategy enables annual reductions in carbon emissions across the UK estate. In 2020, Covid-19 amplified these reductions, with emissions of 6,452 tCO2e and total energy use of 123,152,495 kWh. With significant disruptions to typical working across the UK, our teams responded by monitoring the energy- related impacts of these disruptions. We have an employee network of over1,800 Green Champions. Our engagement programme ‘Go Green’ is evolving to consider the environmental aspects of home working. Annual water use across our estate decreased by 27% and rainwater collection units have also been in place at our Carlton Park data centres since 2019. We have taken steps to meet our net zero ambitions with the offsetting of 6,452 verified carbon units in 2020 and 100% procurement of electricity via green sources, bringing our net carbon emissions to zero. Our offices and data centres successfully retained our ISO 14001 (environmental) and ISO 50001 (energy) management system certifications. In 2020 we started construction of our new head office building, Unity Place. Aligning with rigorous efficiency and environmental criteria, Unity Place is set to rank in the top 10% of buildings with regards to BREEAM sustainability, demonstrating best practice. (1) Inframation League tables, 2020 37Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
We devoted significant time to the long- term profitability of the business, which included considering product pricing of our 1I2I3 account. The Directors balanced the future viability of our business against the impact on customers and sought to remain competitive in the market, ensure fair outcomes for customers on pricing as well as protect customers adversely impacted, by moving some customers to other products if appropriate. We also put in place additional support for customers identified as vulnerable. The interests of our employees As the Company has no direct employees there is currently no employee NED representation at the Board level. However, the Company oversees certain aspects of employee relations in subsidiaries, one of which, Santander UK plc, a designated Non-Executive Director to represent the views of the workforce and if the number of employees in other entities increases, employee representation at subsidiary or at Board level will be reviewed. For the time being, these other entities make their own arrangements for ensuring engagement with their employees. The Global Pulse Survey included these employees in its scope. Covid-19 had a significant impact on our employees with the majority moving to remote working for their safety and wellbeing. The Board considered reports on steps taken to protect colleagues working in branches from Covid-19 infection as well as from physical or verbal abuse from a minority of customers. We supported proposals for keeping branches open wherever possible, given their importance to the communities they serve, especially for our most vulnerable customers without access to digital services. Considering the needs of our employees, we reduced opening hours but balanced this with a significant increase in contact centre and digital support - both online and via mobile banking. We were mindful of the operational risks this presented and the mitigating actions that were being implemented and would evolve over time in response to our experience operating remotely. The Chief HR Officer regularly reported to the Board on the results of frequent employee wellbeing surveys and initiatives to support employees through these challenging times. There was positive feedback on our rapid response to the pandemic that enabled most colleagues to work remotely within a few weeks of lockdown and colleagues felt there was a genuine interest in their wellbeing. The pandemic provided a reminder that employee wellbeing is an important element of organisational resilience and efficiency and the Board and the Board Responsible Banking Committee paid close attention to employee metrics that seek to quantify well-being. We considered significant proposals impacting large numbers of colleagues at both national and local levels. We received assurance that our two recognised unions, Advance and CWU, had been actively consulted and engaged to ensure that employees’ views were represented in those proposals. In addition to responding to these challenges, the Board Remuneration Committee worked with management to align executive pension contributions, in line with best practice, with the wider workforce, and we provided strong challenge to ensure that the Company- wide remuneration policy remains Simple, Personal and Fair. We continued to support initiatives and investment in our people to ensure they have the skills and knowledge to thrive – a key strategic priority – this is covered in more detail in the People section of the Sustainability Report and we have been in active dialogue during the year about revising our Employee Value Proposition to reflect the experience of Covid-19, the aspirations of our colleagues and the needs of the business. During the year, the directors considered the views of all stakeholders insofar as is possible and practical when making decisions for the Company, mindful of our primary purpose to help people and businesses prosper. Inevitably there are times where a decision has required a trade-off to be made between stakeholder groups and, where this is the case, we sought to do this in a clear and transparent manner in line with our strategic priorities. More information on our stakeholders is set out in the Sustainability section of the Strategic Report, which also identifies why we consider these stakeholders to be key to our business model and strategy. The likely consequences of any decision in the long term Covid-19 had an immediate and significant impact on the financial position of the Company as well as its stakeholders. However, it also reaffirmed the importance of our ongoing transformation programme, with its focus on Technology, Procurement, Digital Capability and Omni-channel service provision. The Board remained focused on providing oversight of the programme’s delivery and balanced this with the interests of stakeholders including our customers in light of the current trading environment. In the face of unprecedented challenges posed by Covid-19 we maintained our strategic priority to simplify and digitise the business for improved efficiency and returns. Our engagement with stakeholders is described below. To ensure continuity of service for our customers, we accelerated technological change with employees reskilling to strengthen the support provided to customers during lockdown and restricted branch opening hours. We supported the swift development and roll out of various initiatives intended to provide additional support to customers who were unable to access services in branch (further details in the Our response to Covid-19). The Board received regular updates on the initiatives as well as feedback from customers. Stakeholder voice in the boardroom Annual Report 2020 | Strategic Report Santander UK Group Holdings plc38
Extensive customer testing helps shape new customer journeys such as the Business Bounce Back Loan digital journey, and we have developed an holistic Net Promoter Score tracking programme to understand what are the key factors that drive ‘promoters’ and ‘detractors’ of our brand. We have used this data to inform our discussions about prioritisation such as the mobile development backlog, and to understand the customer impact of key strategic decisions such as the 1I2I3 current account pricing changes. We worked closely with the Government and industry to make funds available to businesses to limit the impact of Covid-19. We provided challenge to the initial design of the schemes and also their implementation, impact on capital, liquidity, colleagues and customers. We accepted that fraud risk and operational risk might increase as a result of our participation in these government schemes but concluded that the interests of our customers would outweigh these negatives and we sought assurance on the controls and workarounds that would be put in place to mitigate these risks. We regularly received management information on loan applications and release of funds and associated risk issues. As part of the Board Risk Committee’s consideration of third party suppliers, we noted plans to work closely with our suppliers, ensuring their business continuity plans were in place and capable of providing continuity of service to the Company whilst adjusting to the new operating conditions under Covid-19. We have continued to uphold the standards expected of them including reviewing how we assess and mitigate the risk of human trafficking or slavery in our supply chains, and ensuring our UK Supplier Code of Conduct explicitly references the supplier contribution we expect towards a low-carbon economy. Our procurement proposition is under review as part of the transformation programme, which is considered regularly at Board level. The impact of our operations on the community and the environment As a result of Covid-19, many people in the communities in which we operate have been left feeling isolated or vulnerable. We have taken a particular interest in the many instances where employees have made a difference in their local communities and welcomed and acknowledged two colleagues receiving British Empire Medals for services to the community. The need to foster the company’s business relationships with suppliers, customers and others Covid-19 has impacted all of our customers, both individuals and businesses. It has challenged the delivery of our strategic purpose of providing our customers with an exceptional customer experience, and details of our efforts are provided in the Covid section and the Sustainability section. As a Board we paid close attention to our business relationships across our Retail, Corporate & Commercial Banking and Corporate Investment Banking businesses. At the outset of the lockdown we held several ad hoc Board meetings to understand how continuity of service and additional support would be provided to individual customers and businesses both large and small. We noted several improvements including upskilling of colleagues to empower them to resolve customer concerns at the First Point of Contact and the introduction of a ‘Digital Accelerator’ to improve the digital experience of customers. C-19 Branch Staff at the Vanguard Alert employees working in our branch network have been instrumental in caring for our customers in these challenging times: whether spotting exceptional withdrawals of cash to pay rogue builders, signs of human trafficking or unapproved withdrawals of cash by carers of vulnerable customers, their service on the front line has had a tremendous impact. We recognised their achievements on our intranet and this was also reported to the Board. Really Knowing Your Customer means more than account opening forms! Responding to Black Lives Matter We held a number of events in response to the Black Lives Matter movement, listening to colleagues about their experiences, analysing our own data then looking at ways to support colleagues and accelerate the pace of change within the bank. Disparities between the experiences of employees from different ethnic groups raised in these discussions were considered by members of our Executive and the Santander UK plc Employee Designated NED, who reported her feedback to the Santander UK plc Board. We responded by developing a Black Inclusion plan. Three areas of focus were identified: Leadership, Allyship and Networks, with supporting measures and targets to shape our activity to Build Black Inclusion and amplify Black Voices. We will also now use Asian, Black, other Minority Ethnic and White ethnic group identities rather than BAME in our analysis and reporting, publishing our ethnicity workforce data and our Ethnicity Pay Gap. 39Santander UK Group Holdings plc Strategic Report Governance Risk review Financial review Financial statements Shareholder information
trusted high street brand, we are deeply aware of what Santander means to our customers and the risks that could damage its reputation. We therefore maintain oversight through our Board Risk Committee and Board Responsible Banking Committee of improvements in our technology, data capture and structure as well as ensuring that we are treating customers fairly, putting in extra support for those considered vulnerable. We expect all employees to take individual accountability for our reputation and protecting our licence to operate. Although Covid-19 has changed some of the challenges faced, both in implementing government financial support schemes and changing fraudster tactics, Financial Crime has been a focus of our attention. Clear oversight and close supervision is managed by the Board Responsible Banking Committee with relevant issues escalated to the full Board. This approach is supported by comprehensive Anti-Financial Crime training for all Board members. Further to this, a centralised Anti Financial Crime Academy was launched in 2020, which builds on enhanced, role specific training for colleagues managing controls and processes as part of the financial crime compliance framework. We continue to uphold high ethical standards in our fight against financial crime and have taken forward a number of projects with external stakeholders. These include work with ‘Stop the Traffik’, the global leading Human Trafficking prevention charity. We have created a bespoke awareness training package, supported by the Modern Slavery Statement. We are also prominent members of the Joint Money Laundering Intelligence Taskforce (JMLIT), an industry and law enforcement framework for successful intelligence sharing. Overall, we are increasing our Private Public Partnerships to manage and respond to significant financial crime threats. The need to act fairly as between members of the company We have a single shareholder that is Banco Santander SA. The Board ensures that the shareholder’s interests are balanced against those of other stakeholders, including by the analysis of capital contributions and group- wide employee incentives, and ensuring individual remuneration scorecards include non-financial KPIs to measure positive actions in stakeholders’ interests. Sustainability is one of our four strategic priorities and we are determined to further embed sustainability into the way we do business. Climate change is considered as a key financial risk as well as a reputational risk, and the Board is actively considering the long-term effect of our operations on the environment including its lending decisions. In accordance with our PRA implementation plan, the implemented governance is that reputational risk aspects are considered at the Board Responsible Banking Committee while other risk (financial) is considered at Board Risk Committee. In addition to both of these Committees considering climate change in 2020, the Board also received a training workshop on climate change in September 2020. As a Board, we adopted locally the Banco Santander Responsible Banking policies on Sustainability, Human Rights and Culture, as part of a Banco Santander-wide exercise to ensure consistent standards and simplification. Maintaining a reputation for high standards of business conduct High standards of business conduct are a regulatory and communal imperative. Without trust in our services and our brand, we cannot serve our customers or the wider community. As a Board of a recognised and Board dives deep into Sustainability In November 2020 the Board Responsible Banking Committee had a two-hour workshop on Sustainability, in order to gain a detailed understanding of current sustainability macro trends and material issues for the bank, such as diversity, financial inclusion and climate change, and their implications for our business. The Board Responsible Banking Committee agreed the evolution of the Sustainability strategy, our key sustainability priorities for Santander UK moving forward and the level of ambition for each of these priorities. This will support the development of medium to long-term metrics and targets, to be approved by the Board. Stakeholder voice in the boardroom continued Annual Report 2020 | Strategic Report Santander UK Group Holdings plc40
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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The Strategic Report outlines the key elements of the Annual Report and provides context for the related financial statements. The report highlights key financial and non-financial metrics which help to explain our 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 aim 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 more information is also available in our ESG Supplement. By Order of the Board. William Vereker Chair 1 March 2023 |
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Important information for readers None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2022 (the Form 20-F), including where a link is provided, nor any of the information contained on such websites, is incorporated by reference in the Form 20-F. 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 271. 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. 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. |
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| Financial reports and presentations TO READ MORE, VISIT SANTANDER.CO.UK/ABOUT-SANTANDER/ INVESTOR-RELATIONSg |
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| ESG Supplement TO READ MORE VISIT SANTANDERSUSTAINABILITY.CO.UKg |
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| Sustainability microsite TO READ MORE VISIT SANTANDERSUSTAINABILITY.CO.UKg |
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| Gender Pay Gap Report TO READ MORE, VISIT SANTANDERJOBS.CO.UKg |
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Annual Report 20202022 | | | | Santander UK Group Holdings plc |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Together we’re working for a better tomorrow, today |
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Governance | | | |
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Our governance | | Contents | |
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. | | | |
| GovernanceSantander UK at a glance | |
| Board of Directors | 43 |
| Corporate Governance report | 45 |
| Chair's report on corporate governance | 45 |
| Board Nomination Committee Chair's report | 49 |
| Board Risk Committee Chair's report | 51 |
| Board Audit Committee Chair's report | 57 |
| Board Responsible Banking Committee Chair's report | 63 |
How our governance supports the delivery of our strategy | | Directors' Remuneration report | 65 |
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. | | Board Remuneration Committee Chair's report | 65 |
| Remuneration policy report | 66 |
| Remuneration implementation report | 69 |
| Board and committee membership and attendance | 73 |
| Directors' report | 74 |
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| Who we are | 3 | |
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| Market overview | 10 | |
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| Our performance and KPIs | 15 | |
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Creating value for our stakeholders | | | | |
| Customers | | | Shareholders | | | People |
We want to be Simple, Personal and Fair in how we deal with our customers | | We aim to improve efficiency and returns through simplification and digitalisation | | We provide a thriving workplace for engaged, motivated and diverse individuals and teams |
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| TO READ MORE, SEE PAGE 25 g | | | TO READ MORE, SEE PAGE 26 g | | | TO READ MORE, SEE PAGE 27 g |
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| Communities | | | Climate & ethics | | | |
We help to support and build better communities where people can prosper | | We apply high environmental and ethical standards to our business and operations | | |
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| TO READ MORE, SEE PAGE 28 g | | | TO READ MORE, SEE PAGE 29 g | | | |
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42Santander UK Group Holdings plc | | | | | | | | | | | | | | |
Annual Report 2022 | | | Santander UK Group Holdings plc 1 |
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Our business model is focused on building customer loyalty
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| Our Purpose is to help people and businesses prosper We help our customers at moments that matter most We champion British businesses and help them to grow sustainably Our customer focus helps us to develop more loyal and lasting relationships | | | | We liveour values of Simple, Personal and Fair through great behaviours and our people leaders:
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| OUR COMPETITIVE ADVANTAGES: | | | | |
| Leading scale challenger bank | | Strong balance sheet | | International expertise for UK companies | | | | |
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| We providehigh quality, seamless service across our branch, digital and telephony channels. | | | | OUR PEOPLE LEADERS: | |
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| 14 million active UK customers | 449 branches | | | | |
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| £187.1bn prime retail mortgages | 5th largest commercial lender1 | | | | |
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| c19,000 Full time equivalent employees | | | | | | | | |
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| | | | | | | | Mike Regnier at a management event for top 250 leaders in February 2023 | |
| | | | | | | | 1.Santander UK industry analysis of latest available bank and building society reports as at Q3 22. UK commercial lending stock, Corporate and/or Commercial Banking divisions (excludes investment banking). | |
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Annual Report 2022 | Santander UK Group Holdings plc 2 |
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Strategic reportReport | Sustainability and Responsible Banking | Governance | | Risk review | | Financial review | Financial statements | Financial statementsShareholder information |
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| Sustainability & Responsible Banking Strategy | |
| | Thriving Workplace | | Shareholder informationOur Foundation | |
| Creating a culture of inclusivity and belonging | | Being responsible in everything we do | |
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| Helping customers and communities prosper | | | |
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| Fighting climate change and supporting the green economy | | |
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| Our strategic priorities | |
| 1 | Deliver growth through customer loyalty and outstanding customer experience | | 3 | Engage, motivate and develop a talented and diverse team | |
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| 2 | Simplify and digitise the business for improved efficiency and returns | | 4 | Be a responsible and sustainable business | |
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| We offer innovative products and services to help people and businesses prosper | | | | Our corporate structure | |
| In 2022 we launched My Home Manager bringing services together to help customers get more from their home. Customers can see their estimated home value and equity, view their Energy Performance Certificates, access cost estimates and quotes from local tradespeople for maintenance and repair. We also launched Santander Navigator to support businesses by providing expertise and practical support from our global network. | | | | Banco Santander SA | |
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| | | | Retail Banking | | | Corporate & Commercial Banking (CCB) | |
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1 William Vereker
Chair
Appointed 1 November 2020 (Chair) Previously Independent Non-Executive Director from 1 October 2020
Skills and experience
William is an experienced and well-respected Banker, previously having served as Global Head of Investment Banking for UBS (2013 – 2018), and prior to that holding a number of leadership roles at Nomura, Lehman Brothers and Morgan Stanley. From 2018 to 2019 he served as the Prime Minister’s Business Envoy. He was a Vice Chairman at JP Morgan until October 2020.
Other principal appointments
Chair of Santander UKplc*.
Board Committee memberships
Board Nomination Committee
2 Ed Giera
Independent Non-Executive Director
Appointed 19 August 2015
Skills and experience
Ed is currently Principal of EJ Giera LLC, providing corporate finance advisory and fiduciary services, and the Manager of Boscobel Place Capital LLC, a private investment partnership focused on the global financial services sector. Formerly, his executive career was with JP Morgan Securities, the investment banking affiliate of JP Morgan Chase & Co.
Ed also previously served as a Non-Executive Director at Pension Corporation Group Limited, ICBC Standard Bank plc, the Renshaw Bay Structured Finance Opportunity Fund, NovaTech LLC and the Life and Longevity Markets Association.
Other principal appointments
Independent Non-Executive Director of Santander UK plc*. Non-Executive Director of the Renshaw Bay Real Estate Finance Fund.
Board Committee memberships
Board Audit Committee
Board Nomination Committee
Board Responsible Banking Committee
Board Risk Committee
Board Remuneration Committee
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Annual Report 2022 | Santander UK Group Holdings plc 3 |
3Chris Jones
Independent Non-Executive Director
Whistleblower’s Champion
Appointed 30 March 2015
Skills and experience
Chris was a partner at PwC from 1989 to 2014 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. He is a past president of the Association of Corporate Treasurers and a former Chairman of the Advisory Board of the Association of Corporate Treasurers.
Other principal appointments
Independent Non-Executive Director of Santander UK plc*. Independent Non-Executive Director of Legal & General Investment Management (Holdings) Limited. Audit and Risk Committee member of the Wellcome Trust. Non-Executive Director of Redburn (Europe) Limited. Board member of the Audit Committee Chairs’ Independent Forum.
Board Committee memberships
Board Audit Committee
Board Remuneration Committee
Board Responsible Banking Committee
Board Risk Committee
Whistleblower Champion
4 Ana Botín
Banco Santander Nominated
Non-Executive Director
Appointed 10 January 2014, Non-Executive Director 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. Ana has been a member of Banco Santander SA’s Board and Executive Committee since 1989 and previously served as CEO of Santander UK plc between 2010 and 2014. Ana directed Banco Santander’s Latin American expansion in the 1990s.
Other principal appointments
Non-Executive Director of Santander UK plc*. Executive Chair of Banco Santander SA* and Director. Non-Executive Director of The Coca-Cola Company. Vice-Chair of the Empresa y Crecimiento Foundation. Vice-Chair of the World Business Council for Sustainable Development. Member of the MIT’s CEO Advisory Board. Appointed to the IMF external advisory Board in March 2020.
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Santander UK Group Holdings plc43
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| | Financial services have a critical role to play in the UK’s economic recovery by attracting investment, encouraging innovation and supporting tomorrow’s entrepreneurs. Annual Report 2020 | Governance
William Vereker |
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Strong performance in challenging times
2022 was once again a challenging year as our customers faced into significant cost of living challenges against the backdrop of the conflict in Ukraine and macroeconomic uncertainty. I am very proud of the way that our people have responded to those challenges, especially coming so soon after the Covid-19 pandemic, helping the business to deliver a strong set of results. We have been especially focused on supporting our customers and delivering our mission to help businesses and people prosper.
Our profit from continuing operations before tax was up 2% from £1,858m to £1,894m driven by increased income, including significantly improved mortgage lending on the previous year and an increase in customer deposits thanks to the savings rates we were able to offer our customers, reflecting the increase to the Bank of England base rate.
Our CET1 capital ratio was again well above regulatory requirements at 15.2%. £1bn interim and special dividends were paid. The difficult economic headwinds experienced throughout the year underlined the prudence of our approach to risk and a resilient balance sheet.
Our strong mortgage performance of £9.8bn net lending and the success of our transformation programme in delivering efficiency improvements through simplification and further digitisation of our key processes ensured we were significant contributors to the success of Banco Santander throughout the year.
As part of Banco Santander's One Europe, we have utilised the expertise and insight across the business to ensure we have provided our customers with the best support possible in these difficult times, of which our new current account, Edge, is an example. We were also able to move our Commercial and Corporate Banking mainframe to the cloud ensuring we have the best infrastructure in place to support our customers.
This year, amongst the projects we are working on, I look forward to the launch of our OneApp, our pan-European customer interface. This exemplifies the power of being able to work across markets and benefit from the broader expertise of the Banco Santander group. Leveraging the strengths of the Banco Santander group will be even more important as we face into the challenges of the coming months.
Quick and proactive engagement
We cannot underestimate how challenging the last twelve months have been for our customers, just at the point where they were beginning to look ahead to a year free from Covid-19 related restrictions. The conflation of the conflict in Ukraine, cost of living and unprecedented political upheaval brought real pressure to bear on the households and businesses across the country.
The increase in inflation, exacerbated by the conflict in Ukraine, had a clear impact on household budgets with almost a quarter of our customers now spending over 10% more of their income on energy payments compared to the start of 2022. Our business customers found themselves in a position of having to raise prices or reconsider their hiring and investment strategies for the year ahead. The environment throughout 2022 for our SMEs was demanding with strong demand often undermined by issues with supply chains and recruitment.
By engaging with those customers proactively and quickly, we were able to provide support and assistance on key financial challenges from managing mortgage payments to advising businesses on how to handle changes in customer demand, thereby helping to put in place strategies now that could avoid financial distress later in
the year.
The political turmoil experienced in the UK
during the second half of 2022 was a reminder, should it be needed, that the decisions taken in Westminster have a very real impact upon the lives of people across the country.
Following the fiscal event in September, many of our mortgage customers coming off a fixed rate deal at the end 2022 or in 2023 will now be facing significantly increased payments. Whilst the steps taken subsequently reassured the markets and restored much needed calm, the ripple effect will continue to be felt in the months ahead, most obviously in the housing market as confidence takes time to recover.
The UK’s financial sector must help drive recovery
What has been evident throughout the year
has been the UK government’s welcome desire
to support the country’s financial sector and maintain the City of London’s position as one of
the two pre-eminent locations for financial services globally.
Financial services has a critical role to play in the UK’s economic recovery by attracting investment, encouraging innovation and supporting tomorrow’s entrepreneurs.
The government’s Edinburgh Reforms are a welcome step to improving the competitiveness of the sector and along with the Financial Services and Markets (FSM) Bill, will, I believe, help foster an environment focused on supporting investment and economic growth.
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Annual Report 2022 | Santander UK Group Holdings plc 4 |
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Chair’s statement continued |
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It will be important that our regulators play their part in this as they adapt to the environment outside the European Union and have regard for their secondary competitiveness objective.
Industry and politicians from all sides must maintain this constructive dialogue on how we can retain confidence in the UK and allow our financial sector to flourish for the benefit of the communities we serve up and down the country.
To this end, we look forward to working with the government in the months ahead to help them as they develop their plans for reform and implement the FSM Bill once it has royal assent.
Developing the skills our workforce and businesses need
In order that the UK economy is able to continue competing in the global market place, it is vital that we give its workforce the skills that our businesses need. We have a key role to play in delivering this.
Banco Santander is the largest global corporate supporter of higher education, and I am immensely proud of the fact that since 2007 Santander UK has donated over £100m to our university partners across the country, supporting 125,000 students into and through higher education. We offered a range of scholarships across a variety of areas including languages, leadership, sustainability and technology to give people the chance to learn the skills businesses want and need in their future employees.
In November 2022, I launched Santander UK’s ambitious new education and skills programme
at London’s Science Museum. Our aim is clear:
To help people across all age ranges fulfil their potential, whether they’re a budding entrepreneur with a great business idea, someone in mid-career who is looking to reskill or a young person from an under-represented community who dreams of going to university.
At the heart of the initiative is a £1m scholarship scheme that will help 100 students from under-represented groups with annual grants of £10,000 over three years across our 75 university partners.
I am particularly excited by our unique partnership with MK:U - Britain’s new model, digital and technical university, who will work with us in our new headquarters in Milton Keynes to develop the skills of the future for our staff and the local community.
Board changes and focus for 2023
Mike Regnier, our new Chief Executive Officer, has provided superb leadership across the business in his first year and been an excellent addition to the Boards of directorsthe Company and our Ring-Fenced Bank.
In the face of significant economic challenges, he has ensured that Santander UK has retained, at all times, a clear focus on serving our customers and meeting their needs.
The year ahead promises to be an exciting one as we prepare to move our corporate headquarters to our new, purpose built, campus in Milton Keynes, Unity Place. I look forward to welcoming our people to a building that has been designed to meet the needs of today’s workforce.
I welcome the gradual return to the workplace we have seen over the last twelve months, and expect that to continue in the coming months, so teams can come together to exchange ideas on how we best deliver on our purpose and strategy.
It is with that sense of collaboration I know we will come together, to provide our customers and businesses with the support, expertise and guidance that will help them to navigate whatever challenges and opportunities 2023 presents.
William Vereker
Chair, 1 March 2023
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| Education and skills program | |
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| Over £100m Donated since 2007 through our Universities Programme in the UK as we supported 125,000 students into and through higher education
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| £1m education and skills programme launched 100 students from under-represented groups helped with annual grants of £10,000 over three years and 1,000 students a year supported through paid internships with small and medium-sized businesses | |
| | | | William Vereker at the launch of our new education and skills programme |
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Annual Report 2022 | Santander UK Group Holdings plc 5 |
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| | The global environment and rising cost of living have presented challenges for many of our customers and clients. Our focus has been to provide targeted and practical support, including advice on household budgeting and a toolkit for SMEs to help with ongoing inflationary pressures. Mike Regnier |
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Commitment to help our customers
My first twelve months as Chief Executive Officer have underlined the vital role we play in the lives of our customers when they are facing into the difficult conditions the UK economy is currently experiencing.
When I took over from my predecessor Nathan Bostock in March 2022, it was clear that our business and retail customers would require support to navigate their way through the increase in the cost of living, exacerbated by the effect the conflict in Ukraine had on energy and commodity prices.
Just talking about support, no matter how well intentioned, means nothing if it is not matched by the commitment and actions of our people. Since I joined Santander UK, that desire to help and do the right thing has shone through in every conversation I have had in our branches and contact centres across the UK. They understand instinctively that, when times are difficult, people want practical help that will enable them to budget, to save or take that step onto the housing ladder.
Ensuring that we can enable our people to serve our customers and deliver on our purpose to help people and businesses prosper is especially important in the current climate. Throughout 2022, we implemented a series of changes and improvements to simplify our processes, modernise our IT platforms and tackle financial crime that I believe gives our people the best chance to provide the help that is needed.
Launching Edge
That same spirit of transformation and innovation was behind the launch of our new current account, Edge. It has been designed specifically with the expectations and behaviours of our customers in mind, helping them to make the most of their money today and reward them for essential spending, which is especially important in the current environment.
Alongside an improved focus on cashback, we have introduced an exclusive preferential savings rate, because saving remains important even when household budgets are under pressure.
Edge will continue to evolve as customers feedback to us what they want from the account alongside new in-app benefits throughout 2023.
It is an exciting statement about what the future offers for Santander UK.
Our NPS ranking was 7th for our retail business but I am optimistic that with our new current account product and improved customer service, we will be able to improve on that in the coming year.
Delivering strong results
Against challenging headwinds, it is to the enormous credit of our people that we delivered a strong set of results in 2022, building on the success of 2021. Profit from continuing operations before tax was up 2% to £1,894m, driven by £9.8bn net mortgage lending, an increase of £2.3bn. The increase in interest rates at the end of the third quarter of 2022 did result in a slowdown at the end of the year and we expect house prices will return to early 2021 levels in the coming months.
Mortgage customers across the country will be facing higher prices than they have been used to, particularly those whose fixed rate mortgage term ends during 2023. But this is exactly where our proactive support has been essential, giving customers the opportunity to fix a new rate or extend their term, for example, so they can budget with certainty.
Our customer deposits grew by £4.3bn to £196.5bn thanks to the fact we offered some of the most competitive savings rates in the market and customer loans to £219.7bn from £210.6bn. continuedOur Corporate and Commercial Banking division lent over £8bn to clients. The increase in the Bank of England base rate contributed to Banking NIM rising by 14bps on the year to 2.06% and our CET1 capital ratio stood at 15.2%.
We served 14 million customers throughout the year and for the first time, the number of digital customers accounted for half our customer base, increasing to 7 million. The number of digital transactions went up by 12%.
Following the Bank of England's assessment of UK banks' preparation for resolution under the Resolvability Assessment Framework, they concluded that we had no material issues in our approach.
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2022 highlights |
For full bios visit£1,894m
www.santander.co.uk/uk/about-santander-uk/about-us/non-executive-directorsProfit from continuing operations before tax
(2021: £1,858m) |
£655m Savings realised to date, with £936m of investment. |
£9.8bn Net mortgage lending (2021: £7.5bn) |
£4.3bn Customer deposits increase (2021: £0.5bn) |
£1.0bn Interim and special dividends paid (2021: £1.3bn) |
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Annual Report 2022 | Santander UK Group Holdings plc 6 |
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Supporting our customers with the cost of living
Our customers, rightly, expect us to provide them with the support and help that is essential to allow them to navigate a way through the impact of higher inflation and a slowing economy.
For many, including relatively new homeowners, this has been the first significant economic downturn they will have experienced. But in this digital age of banking, how we engage with them had to be different and it was important that our customers were able to contact us or take decisions in a way that was consistent with how they would normally bank.
Those experiencing financial difficulties were more likely to want to connect with us digitally and be confident they could take those important first decisions, big or small on spending, saving and housing costs, in the way they wanted to do so.
We contacted four million personal customers as part of our outreach programme, and over two million customers as part of our proactive strategy. We used our customer insight, looking at spending patterns and trigger points to identify and speak to customers who we believed may require additional support.
We grew our Financial Support team to around 600 colleagues who were trained to help our customers on the phone.
In addition to to this programme, we have run free online events to suggest how budgets could be managed, and signposted, where appropriate, customers to the debt advice agency PayPlan where we believe this may be of real benefit. The work of agencies like PayPlan and Stepchange is invaluable for many people around the country and that was why we provided £1m to them in funding to support their vital work.
I strongly believe that enabling customers to take that first step is crucial in enabling them to address any bigger financial concerns they may have. Giving them the opportunity to do so by whatever channel works for them is the least they should expect from us. I am proud, but not surprised, that our people have stepped up to provide that support at the time it is needed the most.
Supporting our people with the cost of living
In the same way, it was important that as an employer we were able to provide our people with additional support with the rising cost of living. We took a holistic approach by implementing a range of measures, both financial and non-financial, including awarding an additional, exceptional 4% pay increase in the autumn to more than 11,000 of our people earning less than £35,000 per annum and the introduction of a financial support helpline open to all. This pay award was in addition to the 2021 annual pay review.
Helping our business customers to grow
Life has not been any easier for our business customers, so soon after the challenges of the pandemic. As with our retail customers, it was crucial they could access support whether it be online or through our local relationship teams as and when they needed it.
Our clients were clear that it was not about surviving; they still want to take advantage of the opportunities to grow and expand their markets. To do this, we have to provide them with innovative solutions.
We launched our SME Toolkit in October 2022 to support businesses to adapt and manage growing costs, staffing issues, energy cost pressures and uncertainty. We partnered with our Breakthrough Team to select trusted partners to provide the content, as well as signposting other financial support content we have on our retail pages.
In June 2022, we launched Santander Navigator, our subscription-based platform to help UK businesses realise their international growth plans via our extensive global network as they explore new markets and grow internationally. 350 businesses have been supported into a new international market as a result, a 40% increase on 2021. Growing this number further will be vital for those businesses that will drive the UK’s economic recovery.
We complemented this with meet the buyer events, trade missions and webinars focused on helping businesses grow their international trade.
This contributed to retaining our 1st place NPS ranking for Business & Corporate banking.
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Providing support and helping customers make the most of their money |
Over 2 million customers |
We identified those customers who were most at risk of financial stress and reached out to them to offer our support –Website pages dedicated to where customers can find support –Launched an online SME support toolkit to provide guidance for businesses under pressure –Issued bespoke ‘cost of living’ communications to c200k students and around 220,000 business banking customers. –Sent communications to four million of our customers signposting advice available. |
c600 colleagues |
In our Financial Support team to help our customers on the phone
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Stopping fraud at source
Tackling fraud remains an absolute priority for us. The numbers are stark, with over £609m stolen by criminals through authorised and unauthorised fraud and scams across the UK.
The numbers involved are so large they can almost appear meaningless, but behind them are thousands of individual tragedies. A lifetime of savings; a pension for retirement; the deposit for that first house; or an inheritance to pass on to the family has gone. And in some cases, cannot be replaced.
Along with our peers in the banking sector, we have been working incredibly hard to put in place the checks that can help our customers take the necessary steps to protect themselves.
We have also focused our efforts on giving customers the right information about what they should look out for so they can spot scams at source. As fraudsters become more sophisticated in their methods, so the groups of customers who become victims grow.
The idea that this is a problem for older customers is patently untrue, with 19-34 year olds as likely to be a victim of authorised push payment (APP) scams due to our increasingly diverse online shopping habits.
We published a discussion paper, ‘Tackling authorised push payment fraud’, in October 2022 that looked at what we can do as an industry to address these problems.
We believe there is a need to create a 'Chip and Pin moment', as we did in the early 2000s which made it harder for criminals to defraud customers’ bank cards. By shifting the focus to how we can remove fraud risk in the first place, we can tip the balance back in favour of the customer against the criminal.
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Annual Report 2022 | Santander UK Group Holdings plc 7 |
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Enabling customers to transition to a low
carbon economy
Being a responsible business is a key part of our strategy for the long-term and our day-to-day decisions. Central to that is how we help our customers make the transition to a low carbon economy. As with the our approach to the cost of living, we must enable our customers to take practical decisions. We launched our Greener Homes Hub that provides help on how to make the home more eco-friendly and we continued to offer the free EnergyFact Report that gives guidance on how home owners can improve the energy efficiency of their homes.
Corporate and Commercial Banking expanded our sustainability lending proposition to make it easier for businesses across all sectors to access sustainable finance so customers can start their transition towards a net-zero economy.
We have also used our position in the market to foster debate on the retrofitting landscape in the UK and what policy developments are needed to facilitate change.
Our report, 'Buying into the Green Homes Revolution' examined the changing attitudes towards net zero among homeowners and buyers and revealed that we still have some serious barriers regarding cost and lack of understanding and guidance on retrofitting options to overcome to make it a natural step for homeowners to take.
To address these challenges, we made a series of recommendations that must focus on the right financial incentives, better information to offer guidance on upgrading properties and, establishing the skills, infrastructure and capacity to carry out retrofitting at scale to meet future needs. If we are to make progress, the financial sector and government must be willing to be bold in thinking and in action.
Responding to the conflict in Ukraine
I have been incredibly proud of how our people and customers have responded to the conflict in Ukraine and their desire to support the humanitarian relief effort that is taking place. Customers, our people and the Santander Foundation contributed over £455,000 to the Banco Santander Nominatedinitiative to support the Red Cross and United Nations High Commissioner for Refugees (UNHCR).
Non-Executive DirectorWe made it easier for Ukrainian refugees arriving in the UK to open a bank account with us, with over 2,000 new accounts opened. We also provided customers with the ability to make international payments to Ukraine.
Appointed 16 September 2019
Skills
Macmillan Partnership
There are currently three million people living with cancer in the UK and experienceone in two of us will receive a cancer diagnosis in our lifetimes. In June 2022, we launched a new strategic charitable partnership with Macmillan Cancer Support.
BruceThe partnership aims to improve financial inclusion and support to help people to cope with financial challenges they face after receiving a cancer diagnosis.
Since the launch, we have been working with Macmillan to review our processes, services and customer feedback to identify areas for improvement.
We are also developing a referral programme to connect our customers with Macmillan’s support services. In addition to these strategic workstreams, we have raised over £455,000 including the matched donations from the Santander Foundation.
Creating a diverse and inclusive workplace
Given the challenges we are facing, we must have a diverse and inclusive workplace that understands what our customers and communities are experiencing and need so they can prosper.
A critical part of that is a Vice Chairmanthe culture that we create across the business. The Santander Way is our cultural framework and Lead Independent Directorwe refreshed our behaviours to help us keep with the pace of Banco Santander SA*change we have seen in the wider sector in recent years and Chairmanensure the customer is at the heart of Lloyd’swhat we do and why we do it.
But it is clear that we still have work to do. The recruitment, retention and advancement of London.women is still an area of focus for us, particularly if we are to meet our ambition of having 50% (+/- 10%) senior female employees by 2025. The percentage of women in senior roles stands at 33.2%, but we must strive to do more, such as through our Women in STEM campaign, which aims to increase representation of women in these roles at all levels.
Bruce has served as Non-Executive Chairman of Moneysupermarket.com Group plc
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Unity Place |
| Unity Place, our new hub, will enable us to access the talent and skills that are being developed in Milton Keynes and across the Oxford-Cambridge arc. This fits perfectly with our ongoing partnership with MK:U, the new university of Milton Keynes, which will focus on the needs of business in the digital economy, addressing the technological skills gap. MK:U will occupy part of the office space, highlighting the close relationship Santander Universities maintains with academia. |
We have made further progress towards our ambition to increase Asian, Black and a Non-Executive Director of JLT Group plc. Heother minority ethnic representation in senior roles to 14% (+/- 2%) by 2025. This is now at 11.1% increasing by 1% from 2021, which means we are on track to meet our target, but I want us to look at how we can exceed that number.
I was also Non-Executive Chairman of Aon UK Ltd,delighted that our first Black Talent Programme cohort graduated earlier this year, and was Senior Independent Director at Close Brothers Group plc and Catlin Group Ltd. As an executive, he was co-founder and managing partnerover 60% of the listed private equity divisionparticipants have now been promoted or moved roles since joining the programme and we will host a further Black Talent Programme this year.
Our Gender Pay Gap shows a mixed picture. The mean pay gap reduced over the last 12 months to 29.2% primarily through success in hiring and promoting women into senior roles. However, the median pay gap has grown by 1.3% to 31.3% driven by structural changes to meet changing customer demand.
We have also seen increases to our Ethnicity Pay Gap with the mean average increasing by 1.5% to 9.1% due to a greater increase in representation in our most junior roles. I firmly believe that as we work on creating the career pathways, that will support more of 3i Group plc, Presidentour minority ethnic colleagues moving into senior roles.
I was pleased that we were recognised as a Top Employer by the Top Employers Institute and CEOare accredited by Great Place to Work as a Best Super Large Organisation, Best Workplace for Women and Best Workplace for Wellbeing. Once again we featured in The Times Top 50 Employers for Women and have done so in each of Marsh Europethe 11 years since its inception.
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Annual Report 2022 | Santander UK Group Holdings plc 8 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Looking ahead
2023 promises to be an exciting year for Santander UK. We will be moving our corporate headquarters to our new state-of-the-art campus in Milton Keynes and I am looking forward immensely to the opportunity of bringing our people together in a managing director of JP Morgan.space that is focused on collaboration.
HeIn 2022, we saw changes in our Executive Committee as John Collins OBE, Louise Shield and Iain Plunkett left the business for new challenges. I was previously a Non-Executive Director ofextremely grateful to all three who provided me with invaluable advice and counsel in my first year at Santander UK plc* between 2012as well as making significant contributions to our successes over a number of years. We wish them well for the future.
As we prepare to embrace this exciting new future, we welcomed several new faces to our Executive Committee, with Juan Ignacio Echeverria, Elisabet Pinilla, Charlie Shepherd and 2017,Stephen White joining in 2022.
Throughout the year, we instinctively put the customer first in our thinking and our actions. We must continue to do that as we know that the year ahead will continue to present challenges, but it will also offer opportunities.
I look forward to being able to support our customers and continuing to be a Non-Executive Director of Santander UK Group Holdings plc* between 2014voice on the issues that are important to us as a bank and 2017.our customers as we live up to our purpose in helping people and businesses prosper.
Other principal appointments
Non-Executive Director of Santander UK plc* since September 2019. Vice Chairman and Lead Independent Director of Banco Santander SA*. Chairman of Lloyd’s of London and Chair of Cuvva Limited.Mike Regnier
Board Committee memberships
Board Nomination Committee
6 Nathan Bostock
Executive Director
Chief Executive Officer
Appointed 19 August 2014
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*. Member of the Financial Services Trade Investment Board.
7 Madhukar (Duke) Dayal
Executive Director
Chief Financial Officer
Appointed 16 September 2019
Skills and experience
Duke has extensive financial services experience in a wide range of areas. Before joining Santander UK*, he worked for Santander US* in Boston as CFO of Santander Holdings* (April 2016 – July 2019) and President and CEO of Santander Bank NA* (September 2017 – July 2019).
Prior to joining Santander, Duke was with BNP Paribas for six years, where he served as Chief Financial Officer for BNP Paribas USA Holdings, BancWest and Bank of the West. Before that he helped lead a private equity start-up for JP Morgan Chase & Co, Brysam Global Partners. Prior to 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 and is on the Board of Governors for Nottingham Trent University.
Other principal appointments
Chief Financial Officer of Santander UK plc*.1 March 2023
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5FCA settlement on historical Business Banking AML controls |
In December 2022, the FCA concluded an investigation in relation to anti-money laundering controls in our Business Banking division in the period 31 December 2012 to 18 October 2017 following the payment of a £108m financial penalty.The FCA’s investigation focused on the identification, assessment and management of higher risk customers in the Business Banking division, including Money Services Businesses. It has now concluded, and no further action is anticipated by the FCA or any other authority in respect of this matter. “Santander UK takes its responsibilities regarding financial crime extremely seriously. We are very sorry for the historical Anti-Money Laundering (AML) related controls issues in our Business Banking division between 2012-17 highlighted in the FCA’s findings. “While we took action to address our AML issues once they were identified, we accept that our AML framework at the time should have been stronger. We have since made significant changes to address this by overhauling our financial crime technology, systems and processes.” |
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6Annual Report 2022 | Santander UK Group Holdings plc 9 |
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Five major forces continue to shape the UK banking market
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| What we have seen The market in which we operate is highly competitive. We expect such competition to intensify in response to increasing entry of FinTech and BigTech firms in the banking sector as well as the growth of digital currencies and cryptocurrencies. Traditional UK banks have largely refocused on core business areas and improving their digital offerings. Our response and looking ahead We remain cognisant of the evolving competitive environment and continue to develop offerings to rival competitors and seek partnerships to develop new propositions. Banco Santander's PagoNxt offering incorporates simple and accessible digital payment solutions. This is a key area for growth alongside OpenBank, their 100% digital bank. We expect these to be rolled out in the UK in the future. | Neo-banks continue to gain market share, competing with traditional UK banks. Nevertheless, financial sustainability remains unproven for most. Those that have started to highlight emerging signs of profitability have tended to mirror more traditional banking models. Nevertheless, digital-only providers continue to disaggregate the traditional vertically integrated banking business model by targeting the most profitable elements with innovative new propositions and attracting significant valuations (for example buy-now-pay-later). Large international peers have also entered the UK market through new digital-only brands with limited product offerings; however may provide a competitive offering over the longer term.
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Increased market disruption and strong competition | |
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| What we have seen Climate change is one of the biggest challenges facing society and our industry has a critical role to help tackle this. Clear disclosure is essential to help markets and other stakeholders assess our climate performance. Our response and looking ahead Climate change is one of three pillars of our Sustainability and Responsible Banking Strategy; with the goal of supporting the transition to a low carbon economy as both a lender and an employer.
In 2022, we expanded our Task Force on Climate-Related Financial Disclosures (TCFD) as well as reporting on how we are financing the green transition and our collaboration with stakeholders. We are implementing TCFD recommendations and working to meet the expectations set by the Bank of England, PRA and FCA. We also completed regulatory stress test exercises1 and the internal climate stress | test exercise (CISA) and started further development of the process to assess potential capital requirements for climate risk. Since 2020, we have provided over £10bn of green finance, helping our customers reduce their carbon footprint with a £20bn target by 2025. We launched a home energy report, EnergyFact, in partnership with Countrywide, with a goal to start meaningful engagement with mortgage customers and to begin to raise awareness on home improvements targeting energy efficiency and reduced carbon emissions. Looking ahead, we aim to develop more targets that reflect our strategic priority to be a responsible and sustainable business. TO READ MORE ABOUT OUR CLIMATE AGENDA, SEE OUR SUSTAINABILITY REVIEW g |
Climate change | |
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1.BoE CBES and ECB's climate stress tests.
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Annual Report 2022 | Santander UK Group Holdings plc 10 |
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Market overview continued |
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| What we have seen Customer interactions continued to shift to digital and remote services. Our enhanced digital capability attracted a further 370,000 digital customers in 2022, with 92% of current account and 99% of credit card openings made through digital channels. In mortgages, intermediary share of distribution continues to increase, whilst other products are now distributed largely through digital channels. 76% of our refinanced mortgages were retained online in 2022. Our response and looking ahead We invest in ensuring access to financial services for our customers, including those less confident in using technology for managing their finances.
| While customer footfall has fallen in recent years, we continue to appreciate the value of the human touch delivered through our branch network. We are mindful of the needs of our most vulnerable customers, responding with 'access to cash' solutions and providing mechanisms for help from a trusted third party. We continue to develop offerings to deliver growth through customer loyalty and customer experience. We are committed to creating products and services catered to our customers needs. In October 2022 we launched my Home Manager, designed to assist mortgage customers aspects of managing their home. |
Changing customer behaviour and distribution | |
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| What we have seen In 2022 the regulatory policy and change agenda remained intense. The UK Government announced the outcome of the Future Regulatory Framework review and has introduced legislation to Parliament to implement this, combined with a number of regulatory consultations aligned with the proposals. Our response and looking ahead This year we implemented the PRA’s operational resilience and outsourcing expectations, and this remains a key focus area for the bank moving forward, up to the 2025 deadline. The PRA has also published its consultation on the implementation of Basel 3.1 which will impact capital requirements. | The FCA announced the introduction of the Consumer Duty with tight implementation timelines, requiring significant focus across business units to ensure that we are compliant with the Duty, which has a first implementation date of 31 July 2023.
We continue to engage with regulators on other key issues, such as APP fraud and the challenges around the rising cost of living and impact of interest rates rises.
We await the Government’s forthcoming consultation on ring fencing. We anticipate further intensive regulatory activity in 2023 and will continue to work with industry, trade bodies, regulators, and Government to support the appropriate regulation of the UK’s financial services industry. |
Demanding regulatory agenda | |
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Santander UK Group Holdings plc
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| What we have seen In 2022, inflationary conditions moved from a perceived transitory condition to a likely more longer-term and persistent high inflation environment, following the conflict in Ukraine. This has caused further increases in the cost of living for our retail customers, particularly those on lower incomes. Market expectations for Bank Rate also changed significantly with the Monetary Policy Committee (MPC) raising the rate from 25bps at the end of 2021 to 350bps by the end of 2022. The volatility in Q3 2022 caused mortgage rates to rise sharply. Our response and looking ahead Our business is correlated to the performance of the economy. Our purpose is to help people and businesses prosper, so we are committed to support our customers with the rising cost of living. | Our focus has been to provide targeted and practical support, including advice on household budgeting and a toolkit for SMEs to help them through the ongoing inflationary pressures. The outlook remains uncertain as inflation has eroded real disposable income with the prospects of a recession ahead. We expect Bank Rate to continue to rise, peaking in H1 2023. Higher interest rates are likely to dampen demand for housing, causing a fall in house prices back to 2021 levels. We reached out to over 2 million customers most likely to be impacted by the cost of living crisis and remain committed to helping our customers at moments that matter most.
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Uncertain economic environment | |
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Annual Report 2022 | Santander UK Group Holdings plc 11 |
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Our aim is to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities |
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Our resources | | | | |
People Bringing the skills, expertise and drive to deliver enhanced customer loyalty and experience | Infrastructure Branch and online presence, operating centres and innovative technology | Banco Santander family Technology, shared management experience and brand benefits as part of well-diversified global bank | Financial Strong capital, liquidity and a prudent approach to risk |
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Our competitive advantage | Leading scale challenger bank in the UK Scale in our core banking businesses combined with an innovative mindset | Strong balance sheet Focused on prime secured lending with consistent strength under stress | International expertise for UK companies 20 trade corridors to help UK companies expand into overseas markets |
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What we do | We provide financial products and services Mortgages, consumer finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products for individuals and services for companies |
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How we do it | Build strong customer relationships | Offer a differentiated proposition | Take a prudent approach to risk | Do things The Santander Way |
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Our culture is built on doing things The Santander Way | | | |
Simple Our products are easy to understand and we offer a service which is convenient, no matter when or how our customers want to engage with us | Personal We treat our customers as valued individuals, with a professional service they can trust. We support our colleagues to 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 |
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Our purpose is to help people and businesses prosper |
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Annual Report 2022 | Santander UK Group Holdings plc 12 |
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Our strategic priorities focus on corporate governancecustomer loyalty and experience, simplification, improved efficiency and sustainable growth, while aiming to be the best bank for all our stakeholders.
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Customers | | Shareholders | | People | | Communities |
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–Deliver outstanding propositions to meet more of our customers' needs –Connect physical and digital channels for seamless customer experience –Profitable growth in retail banking and sustainable returns in corporate banking –New and evolving revenue sources including global Banco Santander group projects | | –Simplify, digitise and automate our processes –Improve our technology and operations through innovation and optimisation –Remove complexity and siloes to increase productivity –Capital discipline and RWA management –Maintain a prudent approach to risk | | –Enable our people to meet their full potential –Implement new and flexible ways of working –Provide training and development to deliver a workforce for the future –Ensure all aspects of diversity remain front of mind | | –Creating a thriving workplace –Driving sustainable economic growth and financial inclusion –Driving inclusive digitalisation –Upholding the highest ethical standards and fighting financial crime –Helping fight climate change and supporting the low carbon economy |
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Annual Report 2022 | Santander UK Group Holdings plc 13 |
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Our performance and KPIs1 |
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We are confident in our ability to transform the business through our customer focus, business efficiency and proven resilience.
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4.6 million Loyal customers We grew loyalty by deepening existing relationships and acquiring valuable new customers. This was enabled by strong propositions which included leading Savings offers and the launch of our new Edge current account. Delivering growth though customer loyalty remains at the heart of our strategy. |
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7.0 million Digital customers Customers in the UK are increasingly moving towards digital banking. Our enhanced digital capability attracted a further 370,000 digital customers in 2022, with 92% of current account and 99% of credit card openings made through digital channels. Half of our 14 million total active customers are now digital. |
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Ranked 7th in Retail Net Promoter Score At the start of 2022 we changed survey methodology for Retail (2021: NPS ranked 4th). Customer service is integral to our strategy and remains a key area of focus. |
7th out of 9 competitors |
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Ranked 1st in Business and Corporate Net Promoter We maintained our first place ranking, a testament to the comprehensive proposition and our strong support for our small and medium-sized business customers. |
1st out of 6 competitors |
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Return on Equity 10.6% (2021: 9.9%) and Adjusted RoTE2 14.1% (2021: 13.2%)
Improvement reflected increased income and lower costs, partly offset by higher credit charges. |
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Cost-to-income ratio improved to 47% (2021: 56%) and Adjusted cost-to-income ratio2 43% (2021: 50%)
Improved as a result of higher adjusted net interest income largely due to the impact of Bank Rate increases and lower adjusted operating expense. |
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15bps Cost of risk Increased with the deterioration in the economic environment and followed write-backs in 2021 related to ECL Covid releases. |
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5.2% UK Leverage ratio Remained stable as retained profit was partially offset by the change in treatment of software assets on 1 January 2022. UK leverage exposure remained broadly stable at £248.6bn (2021: £246.3bn) |
1.See Glossary on page 305 for KPI definitions. Our shareholders primarily monitor the APMs shown here. Equal prominence between IFRS measures and APMs are included within the CEO and CFO reviews. 2.Non-IFRS measure. See ‘Alternative Performance Measures’ on page 181 for details and reconciliation to the nearest IFRS measure for return on ordinary shareholders’ equity (RoE) and cost-to-income ratio. | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 14 |
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My report describes the roles, responsibilitiesOur performance and activities of the Board and its Committees.KPIs continued |
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The Board has been focused on supporting management duringMedium term aim to be a challenging yearTop 10 company to achieve Simple, Personalwork for We aspire to be a Top 10 company to work for as this is an important measure of employee satisfaction and Fair outcomes for customers. |
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William Vereker
Chair
2 March 2021
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Board activities
Read more onour participation forms part of a wider Banco Santander goal. (2021: 16thp47)
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Committee membership
and attendance
Read more onCurrent position: 30p73th
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We are also accredited as a Top Employer (unranked) by the Top Employers Institute |
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>2.1m financially empowered people cumulative since 2019 We have given further support to those unbanked, underbanked or vulnerable people by promoting access to finance, tailored products and financial education initiatives. This has been even more important during the Covid-19 crisis. |
Our governance
Maintaining 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) (the standard against which we measure ourselves), our governance practices and rules are set out in a number of our key documents, principally:
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The UK Group Framework, which defines clearly our responsibilities and relationship with Banco Santander SA, our shareholder, taking account of our fiduciary and regulatory responsibilities. This gives us the autonomy to discharge our responsibilities in the UK in line with best practice as an independent board while giving Banco Santander SA the oversight it needs. Clarity of roles and responsibilities is key to ensuring proper accountability for decisions and outcomes; and
–The Corporate Governance Framework, which is designed to assist the Board of Directors in discharging their responsibilities and ensuring an appropriate scheme of delegation throughout the Santander UK group.
The Board’s schedule and activities are planned to make sure 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 embedding
Following the changes implemented at the end of 2019, Santander UK plc, as the ring-fenced bank, has continued to operate within the ring-fencing governance rules. As the substantive business of the Santander UK Group Holdings plc group is currently conducted by Santander UK plc, our ring-fenced bank, under our current business model, the PRA has granted certain ring-fencing governance rule modifications, subject to various safeguards.
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| Organisation of our segments |
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| We manage our business through three operating segments plus the corporate centre as outlined here. Our segmental structure is consistent with how Banco Santander organises its operations across its Europe division. To ensure consistency and to leverage shared investment, best practice and expertise, we work closely with our colleagues across Europe. A number of our senior business leaders also head up business units across Europe. This includes our Head of Homes and Head of Everyday Banking who hold these roles for Europe as well as Santander UK.
| | | Retail Banking Retail Banking consists of two business units, Homes and Everyday Banking. Homes provides prime UK mortgage lending to owner occupiers and buy-to-let landlords with small portfolios. Everyday Banking provides banking services and unsecured lending to individuals and small businesses. | | | Corporate & Commercial Banking (CCB) CCB provides banking products and services to SMEs, mid-sized and larger corporates, typically with annual turnovers of between £2m and £500m, as well as to Local Authorities and Housing Associations. |
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| | | Consumer Finance Consumer Finance provides prime auto consumer financing for individuals, businesses, and automotive distribution networks. | | | Corporate Centre Corporate Centre provides treasury services for asset and liability management of our balance sheet. |
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This allows for certain overlaps of the Board and senior management of Santander UK Group Holdings plc and Santander UK plc, recognising our ownership structure and chosen ring-fencing business model.
The key ring-fencing safeguards include:
–the requirement to have at least three ring-fenced bank Independent Non-Executive Directors (INED), of whom none are employees or directors of any other member of the ring-fenced body's group other than a ring-fenced affiliate (referred to as Double INEDs (DINEDs)); and one of whom is designated senior ringfencing director (SRD) responsible for making sure that processes to identify and manage any conflicts of interest between the ring-fenced bank group and other members of the Santander UK Group Holdings plc group are operating effectively.
–the DINEDs and SRD have certain veto rights designed to protect the interests of the ring-fenced bank.
–the requirement for an approved person who is part of the RFB risk management function and who is not a director of, employed by or has any responsibilities for any other member of the ring-fenced bank's group other than a ring-fenced affiliate (RFB Risk Officer). The RFB Risk Officer has certain specific responsibilities in relation to identifying conflict matters.
–the Board and Committees of the two companies continue to be run substantially simultaneously to ensure efficiency and effectiveness whilst guaranteeing the independence and autonomy of our ring-fenced bank are appropriately protected. However, under PRA rule modifications, the ring-fenced bank Board and Board Committees must hold separate meetings twice a year to consider matters specific to the ring-fenced bank. The separate Board and Board Committee meetings of the ring-fenced bank took place in July and December 2020.
At 31 December 2020, the four DINEDs of the ring-fenced bank were Garrett Curran, Annemarie Durbin, Mark Lewis and Genevieve Shore. In addition, Annemarie Durbin acts as the SRD of Santander UK plc. Copies of the role profiles of board members, including the SRD, are available at www.aboutsantander.co.uk.
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Annual Report 2022 | Santander UK Group Holdings plc 15 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Santander UK Group Holdings plc45The pressures from rising interest rates alongside increased costs of living and doing business in 2022, meant it was increasingly important for us to focus on the impacts for our customers, as well as the bank. These challenges are ongoing and we remain committed to supporting our customers in the current environment, whilst prudently managing risk
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Annual Report 2020 | Governance
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Christine Palmer
Chief Risk Officer
Chair’s report
Sustained support for the business
We continued to support the business throughout 2022 via both remote access and increasingly office-based working, as the government removed all Covid restrictions by early Q2 2022. Our Risk teams have been active across a range of business and support functions including:
–Bringing Risk, Compliance and Economic Crime Risk functions together, into an aligned Risk & Compliance function under the Chief Risk Officer.
–Compliance support for initiation of a Consumer Duty organisation-wide programme; and effective Financial Crime oversight, including the enablement of an effective and timely response to Russia sanctions.
–Supporting new model developments and a continued focus on corporate governance regulatory capital approaches.
–Continued support for asset growth through credit decisioning, risk oversight and challenge.
–Support for delivery of Santander UK-wide stress testing including the Bank of England's Annual Cyclical Scenario and sensitivity analysis of our future business plans.
–Working with the business to ensure that risk is fully considered and effectively managed through the change lifecycle, from inception and prioritisation through to delivery.
–Impactful oversight and engagement across key Bank initiatives including IT transformation programmes, payments, material outsourcing, and organizational change.
Capital and Liquidity risks
We remain in a strong position with respect to our Capital, Liquidity and Pension fund metrics.
Our customer funding gap increased in 2022, with strong mortgage demand and competition for the UK retail deposits market.
We are pro-actively addressing this through mitigating actions across the business. Financial market volatility in September 2022 increased gilt yields materially, increasing pressure on pension funds' collateral requirements across the industry. Our pension fund had sufficient collateral to support hedging, but we have since taken further actions to increase resiliency.
Operational risks
We closely monitor operational risks, providing input and oversight to ensure operational resilience. Key areas of focus include Financial crime, Fraud, IT infrastructure, People, Data, Third Party Risk Management, and Cyber-attacks, where external risks to the industry remain elevated.
The net value of our operational risk losses (events over £10k) increased by 160%, largely relating to the £108m penalty arising from the FCA enforcement investigation into our Financial Crime systems and controls, together with new transformation programmes and continued External Fraud related losses which increased by 138% in value and are in line with industry trends.
Looking forward
With the Covid-19 pandemic now behind us, we aim to maintain our forward transition by focusing on:
–Managing a return to the office, and preparing for our move to a new headquarters due to open in 2023, while pro-actively engaging with our colleagues throughout the process.
–Continuing to attract and retain Risk management and Compliance talent, in a competitive recruitment market and transforming it to a fit-for-the future Risk & Compliance function.
–Supporting our customers, in an inflationary environment and tighter monetary conditions.
–Regular risk assessments of our business plans, to inform financial forecasts and risk appetite.
–Delivering impactful oversight, challenge, guidance and support to the business.
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| Cost of living pressures, higher mortgage rates | | |
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| In 2022, inflationary conditions moved from a perceived transitory condition to a likely more longer-term and persistent high inflation environment, following the outbreak of conflict in Ukraine. This caused further increases in the cost of living for our retail customers, particularly those on lower incomes. Market expectations for the BoE Bank Rate also changed significantly with the MPC raising the rate from 10bps at the end of 2021 to 400bps by February 2023. Current market consensus is | | that the BoE Bank Rate will rise a little further and peak in H1 2023, as inflation subsides in response to tighter financial conditions. We have recognised Inflationary and supply chain pressures as a Top risk, to ensure we remain focused on the potential impacts on our customers, and across our retail and corporate credit portfolios. Overall credit quality remains good across our portfolios, however cost of living pressures are starting to impact the book performance, with an increase in early warning | | indicators, albeit from a low base position. We continue to monitor the situation closely. Political turmoil within the UK Government, and a lack of clarity over public finances caused longer term rates to surge in September 2022. This placed further upwards pressure on mortgage rates, and since then affordability policy updates have been made to protect against the potential of unaffordable loans. We also reviewed and enhanced customer support capacity and solutions for customers in financial difficulty. | | |
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Annual Report 2022 | Santander UK Group Holdings plc Board16 |
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KeyStrategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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William Vereker
(Chair and Chair of NomCo)
| Ed Giera
(Chair of BRC and BRBC)
| Chris Jones
(Chair of BAC and RemCo)
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Ana Botín
(Group Executive
Chair)
| Bruce
Carnegie-Brown
(Group NED)
| Nathan Bostock
(CEO)
| Duke Dayal
(CFO)
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We monitor our Top risks monthly at the Executive Risk Control Committee and Board Risk Committee.
Highlighted below are our Top risks in 2022 and associated management actions. Many of these risks are likely to remain in focus in 2023.
Inflationary & supply chain pressures - New
We introduced this as a Top risk following the onset of the conflict in Ukraine, which exacerbated already elevated inflation levels. This covers potential impacts on our customers from cost of living increases and rising interest rates; on our corporate customers from business cost increases and supply chain pressures. It also covers remaining Covid-19 and Brexit related risk issues, post pandemic and formal exit from the EU, which are now no longer separate Top risks. We have taken actions to adjust affordability criteria in our retail lending decisions, increase customer support capacity, and ensure close and continuous monitoring of our credit portfolios for any indications of stress in our customer base.
Climate change
We continue to enhance our data strategy and reporting reflecting the strategic importance of climate change risk. We continue to progress our climate change implementation plan, including integrating associated risks into our Risk Framework, formulating a risk appetite, and progressing associated initiatives.
Financial Crime
In December 2022, we accepted an FCA penalty of £108m relating to historical AML control shortcomings as described under Conduct & Regulatory below. Developments related to the implementation of Russian sanctions have added further complexity to mitigating compliance risks and maintaining operational resilience in our Financial Crime Centre of Excellence. We continue to enhance our financial crime risk management capabilities, through implementation of our Financial Crime Transformation and Remediation programme, enhancing controls, and providing additional analytics capacity and subject matter expertise.
Fraud - New
We recognised this as a Top risk, reflecting significant industry wide increases in Fraud levels and losses, which are impacting our customers. Fraud losses now consistently form a significant proportion of our operational losses. We have designed new fraud prevention tools to complement our existing prevention and detection systems and controls. We continue to deploy dynamic 'scam warning' in our online banking payment process, to enhance fraud prevention controls for high-risk digital payments.
IT
The importance of IT risk management and control continued to be re-iterated by some outages to customer services during the year, although there has been a continued trend downwards in such incidents from H2 2021. To address these issues, we have finalised a multi-year IT Transformation plan, with Board approval, with the aim of securing risk reduction benefits which will accrue during the plan period. We consider that our IT associated risks are decreasing as a result of the ongoing implementation of our transformation plan.
Cyber risk management
In 2022, we experienced no notable data or cyber security incidents, although we responded to a number of third-party incidents, mainly ransomware attacks. Externally, the cyber risk landscape stabilised, however the threat remains at unprecedented levels due to the ongoing conflict in Ukraine. We continue to review and enhance our controls based on the latest intelligence, and invest in the right skills and resources. We also actively work with our peers in the Cyber Defence Alliance to share threat intelligence expertise, and experiences, to help identify common cyber-attack features and effective mitigation strategies.
People
In 2022, we continued to focus our overall wellbeing and inclusion strategy on supporting colleagues through transformation and change. In line with our peers, we are experiencing a competitive recruitment market and responding with enabler plans to reduce time-to-hire and open vacancies, as well as maintaining capacity and capability to deliver our business plans. Cost of living is also a key focus area where we have intervened with pay rises to support our colleagues across the business. We have managed a gradual return of colleagues to office environments, along with hybrid working as well as the people risks associated with a phased relocation of our Head Office to Unity Place in Milton Keynes.
Conduct & Regulatory
We continue to face a challenging regulatory agenda with significant ongoing FCA and PRA interaction on a range of industry issues, as well as the ECB and Payments Services regulators. These issues include the FCA's Consumer Duty, which requires considerable management and focus of resources. Final rules were published in July 2022, with the first implementation date set at 31 July 2023 and the final date of July 2024. In December 2022 the FCA announced that Santander UK accepted a penalty of £108m for historical AML control shortcomings between December 2012 and October 2017.
Managing Complex Change
We have a challenging change agenda including continued aspirations for transformation and growth. We have well-established change control processes, as well as a strong oversight framework and related risk-based prioritisation. This enables us to address operational and capacity challenges and facilitate timely delivery. In 2022, change included a reduction of our property footprint, and a specific focus on migration to cloud, further digitalisation, and management of obsolescence. Ensuring change does not result in adverse impacts on our risk profile underpins our strategic decisions and is robustly managed.
Data management
Data management, including data privacy, is a Top risk reflecting its role in supporting our business plans and strategy, as well as the rising cyber threat landscape and the importance of controls over personal data. In 2022, we continued to monitor data management risk through the enhanced governance structures and processes put in place by our Chief Data Officer. We are implementing a central data programme, with clear deliverables that will improve our data management capabilities in line with our approved data strategy.
Third Party Risk Management (TPRM)
We are progressing with a programme of work to enhance controls and governance arrangements. During 2022, we continued to evolve our processes, including implementation of a new TPRM process and amending contracts with suppliers. Our Procurement transformation also continues to operationalise our updated TPRM policies and processes.
Ring-Fencing
We have retained Ring-fencing as a Top risk to maintain our focus on ongoing governance and compliance, as we continue to assess and refine the quality and maturity of controls. Further review may be needed, depending on the outcomes of HM Treasury's proposed consultations on the ring-fencing regime, due to take place in 2023.
Building and maintaining capital strength and Pension risk
We saw sustained resilience and improvement in our Regulatory capital and Pension fund metrics throughout 2022 with detailed analysis set out in the Risk review. Pension risk has now been removed as a Top risk as a result of those improvements in metrics and actions taken to reduce residual risk and enhance resiliency, given increased market volatility in 2022.
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Annual Report 2022 | Santander UK Group Holdings plc 17 |
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We monitor these risks using our Emerging risks radar and regularly provide updates to the ERCC and BRC.
Highlighted below are our emerging risks in 2022 and our associated management actions. All of these risks will likely be in focus in 2023, given that they continue to evolve and intersect with our Top risks.
Uncertain macroeconomic and geopolitical environment
In the past few years, a number of broader, more complex and uncertain risks have evolved which may present future headwinds. These include geopolitical tensions between regions across the world, in particular the current conflict in the Ukraine. This has impacted global energy prices and supply chains which added to inflationary pressures, as well as stretching household finances. These risks accelerate trends towards deglobalisation, and a reduction of variety of goods and services, causing prices to increase over the medium to long-term.
These factors are also playing into increased localised political risk across the globe, including in the UK with a second new Prime Minister in 2022. In February 2023, the First Minister of Scotland resigned, with future implications for the Union with the UK remaining uncertain. We are closely following these political developments and the potential for any material impacts which we may need to reflect in our business plans.
Rapid technological change and customer behaviour
Our multi-year transformation programme with a focus on investment in digitalisation and automation, is aimed at designing compelling propositions for targeted customer segments, reshaping customer interactions and simplifying and digitising the business at scale for improved efficiency and returns.
Our overall approach reflects the continued acceleration of strong trends towards customer digital adoption via mobile and online banking, whilst also ensuring that we remain competitive in a market which is experiencing an increase in digital-led market entrants. We are cognisant of cyber, cloud technology and operational resilience issues which we take into account in our development strategy.
Intense market competition
Enhancing our digital proposition remains key in supporting our customers' needs, retaining and growing our customer loyalty base, and addressing the commercial challenges of a highly competitive mortgage market, where surplus deposits in ring-fenced banks remain a key driver of market pricing. As well as the elevated competition between incumbent banks, new entrants backed by other large multi-national banks are also launching in the UK offering competitive incentives to compete in the growing digital market, as well as savings, lending and investment markets.
Demanding regulatory agenda
We remain vigilant in taking a customer-focused approach in developing strategy, products, services and policies that support fair customer outcomes and market integrity. Like all UK banks, we will continue to face a demanding and complex regulatory agenda in 2023 and beyond focused on consumer outcomes, customer vulnerability, competition, climate change and Consumer Duty.
The PRA's operational resilience and outsourcing expectations remains a key focus for the bank moving forward, as well as implementation of Basel 3.1 which will impact capital requirements. We also continue with regulatory engagement on other key issues such as APP fraud and the impacts of the rising cost of living and interest rate rises.
Looking ahead we await the government's forthcoming consultation on ring-fencing, as well as working with industry, trade bodies, regulators and the government to support the appropriate regulation of UK financial services.
Extended Government involvement in banking & markets
Following Government policy interventions during the Covid-19 pandemic, including UK Government guaranteed loans and dividend restrictions, there are some indications that this trend will continue moving forwards. The increase in environmental, social and governance factors is likely to direct banks’ lending decisions further, with the risks of higher capital requirements as an incentive to channel lending to certain sectors, and potentially restrict or avoid others. Banks may also be called upon to contribute more to the exchequer, due to stretched public finances, via increased taxation rates, or windfall taxes, as evidenced by recent actions in Spain. Product pricing and actions will also remain under intense scrutiny by regulators and the Government, during the current period of higher inflation and mortgage rates. These issues have the potential to significantly impact our business plans, costs and revenues.
Central Bank Digital Currencies & Crypto assets
Depending upon how these are implemented, there is a risk of a significant transfer of commercial bank deposits into these Central Bank Digital Currencies over time, increasing wholesale funding requirements and costs, and reducing the 'stickiness' of deposits in a stress. There are also broader potential impacts on regulatory frameworks, and monetary and fiscal policy. We continue to monitor these developments as they evolve. We are also addressing the risk of crypto asset exposure through our client onboarding policies and procedures, which are part of our Financial Crime framework.
Disruption of UK macroeconomic factors
In the last quarter of 2022 and early 2023, UK house price growth slowed, following shocks to the macroeconomic environment arising from the conflict in Ukraine, which exacerbated inflationary pressures, and triggered significant rises in the cost of living and interest rates globally. After a steady increase of financial pressures on customers, the financial markets and economic environment saw substantial dislocation in H2 2022, which fundamentally changed macro-economic expectations for 2023 and beyond. We have been actively monitoring customer behaviour and to date our customers are showing resilience in adapting to the changing environment.
In 2022, we significantly developed our regulatory models, focusing on capital adequacy, to comply with new regulatory technical standards for banks. We expect this trend to continue over the next two years in line with supervisory expectations.
We recognise that Model risks have increased in the current environment of both higher inflation and interest rates, which is inconsistent with the period upon which the models were developed. We have fed back our response to the PRA on how we meet policy and procedure requirements under the Model Risk consultation paper (CP6/22), including the independent review of judgemental adjustments.
There are also significant macroeconomic risks attached to the transition process of decarbonising industrial sectors, although we have very limited direct exposure to those in our Corporate and Commercial Banking clients' businesses. There are also costs and risks associated with reducing UK housing emissions and 'greening' commercial property which could impact our retail customers and corporate clients.
Eurozone/Sovereign Bank Contagion
We previously considered this risk as part of the uncertain macroeconomic and geopolitical environment, but have now identified it separately, given developments in 2022. Energy and commodity price shocks have increased risks to post-pandemic growth and financial conditions in the Euro area and globally. Euro area sovereigns, corporates and households face higher interest rates and cost pressures that could test debt sustainability for more highly indebted entities. The most relevant risks for Santander UK could be reflected in wider credit spreads which could increase wholesale funding costs. Credible funding plans and liability strategies to support our aspired business growth will be key, which are the subject of regular review, challenge and discussion at our ALCO.
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Annual Report 2022 | Santander UK Group Holdings plc 18 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Key risk types map to, and are significant drivers of, our Top and Emerging risks. See the Risk review for more information.
Introduction
Key risk types are components of our overarching Risk Framework and are set out in detail in the Risk review. Each has its own defined framework, and we report on and review its risk profile formally at the ERCC, BRC and Board. However, the risk profile level is agreed at the underlying specialist risk control forums.
Top and emerging risk issues, which have been described in the commentary above, are contained within our Key risk types, and are mapped in the table below.
We have also commented below on a selection of these Key risk types, which were in focus in 2022 and remain so in 2023:
Credit risk – our credit portfolios have remained resilient, with unemployment tracking at historically low levels (one of the most important factors in defaults on mortgages). The UK housing market has also continued to show resilience, although house price growth slowed in Q4 2022 ; however we have a cautious outlook for 2023, with an increased cost of living impacting
households and increased mortgage rates likely to be a further factor going forwards. Our corporate credit customer portfolios have also remained resilient, but we also have a similar cautious outlook for 2023, with increased business costs and supply chain pressures, and potentially reduced consumer spending, likely to impact our customers further.
Strategic and Business risks – are challenging to manage in the current volatile and uncertain macro-environment, following the Covid-19 pandemic and the ongoing conflict in Ukraine. This risk type has strong links with a number of our Top and Emerging risks including people risks and management of change and transformation, which are critical to achieving our medium and longer-term business plans.
Operational risks – were prominent in 2022 where we were focused on managing risks arising from a heightened external cyber risk environment, exacerbated by the conflict in Ukraine; enhancing our fraud detection and prevention controls to mitigate increasing fraud
attacks and fraud losses, which are impacting across the banking industry; oversight of IT risk management where a multi-year transformation programme is being implemented; managing our people risk in a hybrid-working environment and tight recruitment market; managing complex change risk delivery with capacity and capability challenges intersecting with people risks; and enhancing our operational resilience along with associated regulatory requirements.
Model risks – in 2022 we devoted significant development and implementation time to regulatory models focused on capital adequacy. We expect this trend to continue over the next two years in line with supervisory expectations. We also developed new models for ECL reporting, with a focus on residential mortgages and commercial lending. The new models are designed to improve the overall control environment and enable us to eliminate some long-standing Judgemental Adjustments required due to limitations in prior models.
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Key risk type | Top risks | Emerging risks |
Credit & Capital | Inflationary & supply chain pressures Climate change Building & maintaining capital strength | Uncertain macroeconomic and geopolitical environment Extended Government involvement in banking & markets Disruption of UK macroeconomic factors |
Pension | Building & maintaining capital strength | Uncertain macroeconomic & geopolitical environment |
Operational | Third party risk management Managing complex change Data management IT Risk People risk IT Fraud Risk Cyber Risk Management | Central Bank Digital Currencies & Crypto Assets Rapid technological change & customer behaviour
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Conduct & Regulatory | Conduct & Regulatory Ring-Fencing Climate change Data management Inflationary & supply chain pressures Fraud Risk | Extended Government involvement in banking & markets Demanding regulatory agenda |
Financial crime | Financial crime Fraud Risk | Central Bank Digital Currencies & Crypto Assets |
Legal | Climate change Ring-fencing | Central Bank Digital Currencies & Crypto Assets |
Strategic & Business | Inflationary & supply chain pressures Managing complex change People Risk IT Risk Data management Financial Crime | Intense market competition Rapid Technological Change & Customer Behaviour Central Bank Digital Currencies & Crypto Assets |
Reputational | Climate change Conduct & Regulatory | Demanding regulatory agenda |
Model | Inflationary & supply chain pressures Climate change | Uncertain macroeconomic & geopolitical environment |
Market, Structural & Liquidity | Inflationary & supply chain pressures Building & maintaining capital strength | Uncertain macroeconomic & geopolitical environment Eurozone/Sovereign Bank Contagion |
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Annual Report 2022 | Santander UK Group Holdings plc 19 |
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| | Our strong set of results reflect the hard work of our people while demonstrating the continued importance of taking a prudent approach to risk and maintaining a resilient balance sheet.
Duke Dayal |
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A strong set of results in a challenging environment
The UK economy has faced a range of challenges over recent years, and it now faces a cost of living crisis with higher inflation and increased Bank Rate, together with the impacts from the conflict in Ukraine.
Against a challenging macroeconomic backdrop, we are extremely proud to have delivered a strong set of results across our segments underpinned by our prudent approach to risk and maintaining a resilient balance sheet.
Our financial results
Profit from continuing operations before tax of £1,894m was 2% higher than 2021.
Net interest income increased 12% and Banking NIM was up 14bps largely due to the impact of Bank Rate increases and higher mortgage lending.
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Summarised consolidated income statement |
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For the years ended 31 December | 2022 £m | 2021 £m |
Net interest income | 4,472 | 3,997 |
Non-interest income(1) | 534 | 547 |
Total operating income | 5,006 | 4,544 |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (2,370) | (2,540) |
Credit impairment (charges)/write-backs | (321) | 233 |
Provisions for other liabilities and charges | (421) | (379) |
Profit from continuing operations before tax | 1,894 | 1,858 |
Adjusted profit from continuing operations before tax(2) | 2,202 | 2,193 |
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1.Comprises ‘Net fee and commission income’ and ‘Other operating income’. 2.The financial results were affected by several items which are excluded from the ‘Adjusted profit from continuing operations before tax' above. These items had an aggregate impact of £308m on 2022 profit from continuing operations before tax (2021: £335m). Non-IFRS measure. See ‘Alternative Performance Measures’ on page 181 for details and reconciliation to the nearest IFRS measure.
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Operating expenses before credit impairment charges/write-backs and provisions decreased 7% due to lower transformation spend following significant restructuring in 2021.
This programme has embedded lower operational costs and improved our efficiency which should help to mitigate the impact of inflation.
Credit impairment charges of £321m, were driven by the deterioration in the economic outlook in 2022. Mortgage interest rates have risen with the expectation of further increases to Bank Rate and are likely to remain substantially higher than a year ago. These challenges for households and businesses are expected to continue well into 2023 and could impact credit quality. New to arrears flows and Stage 3 defaults remain low.
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| Financial highlights |
| £1,894m Profit before tax (2021: £1,858m) |
| 2.06% Banking NIM (2021: 1.92%) |
| 47% Cost-to-income ratio (2021: 56%) |
| 1.24% Stage 3 ratio (2021: 1.43%) |
| 15.2% CET1 Capital ratio (2021: 15.9%) |
| 5.2% UK leverage ratio (2021: 5.2%) |
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Annual Report 2022 | Santander UK Group Holdings plc 20 |
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Financial overview continued |
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Provisions for other liabilities and charges increased 11%, largely related to the £108m penalty for historical shortcomings in our AML controls between 31 December 2012 and 18 October 2017. We also continued to see a rise in scams with increased fraud charges of £153m in 2022 (2021: £74m). These were partially offset by lower transformation programme charges following significant restructuring in 2021.
Tax on profit from continuing operations decreased to £471m (2021: £485m), largely due to the impact of the revaluation of the deferred tax liability position following the 2022 decrease in the rate of Bank Surcharge. The effective tax rate decreased to 24.9% (2021: 26.1.%) in the period.
Our transformation programme has embedded lower operational costs and improved efficiency of the business. Despite a high inflationary environment we delivered £655m of transformation programme savings from investment of £936m, since 2019.
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Summarised segmental balance sheet(3) |
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31 December | 2022 £bn | 2021 £bn |
Customer loans by segment | | |
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Retail Banking | 194.6 | 185.6 |
Consumer Finance | 5.4 | 5.0 |
CCB 1 | 18.5 | 19.3 |
Corporate Centre | 1.2 | 0.7 |
Total | 219.7 | 210.6 |
Other assets2 | 72.5 | 83.1 |
Total assets | 292.2 | 293.7 |
Customer deposits by segment | | |
Retail Banking | 161.8 | 157.0 |
CCB | 24.8 | 26.5 |
Corporate Centre | 9.9 | 8.7 |
Total | 196.5 | 192.2 |
Total wholesale funding | 63.0 | 65.4 |
Other liabilities | 18.0 | 19.8 |
Total liabilities | 277.5 | 277.4 |
Shareholders' equity | 14.7 | 16.1 |
Non-controlling interest | 0.0 | 0.2 |
Total liabilities and equity | 292.2 | 293.7 |
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1. CCB customer loans includes £4.5bn of CRE loans (2021: £4.4bn). 2.31 December 2022, includes £49m of property assets classified as held for sale. 3.The segmental basis of presentation in this Annual Report has been changed. See Note 2 to the Consolidated Financial Statements for more information. |
Our loan book is well collateralised and primarily focused on prime UK mortgage lending which accounts for 85% of the customer loans with an average stock loan-to-value of 50%. Consumer Finance makes up 2% of the loan book and is largely secured on the vehicle. Unsecured retail lending which includes credit cards, overdrafts and UPLs also makes up 2% of the book.
Our corporate loan book is focused on SMEs and mid-sized and larger corporates and accounts for 8% of customer loans. We have a prudent approach to CRE with less than 1% of new business written above 60% LTV and no new loans for development purposes.
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Mortgage activity | |
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During the early part of 2022, the mortgage market was very active with high mortgage volumes and rising house prices. Liquidity among lenders led to high competition for mortgage lending. Despite this strong start to the year, the mortgage market began to slow as cost of living worries among consumers started to take effect. In the third quarter of 2022, borrowing costs rose sharply following Bank Rate increases after the fiscal event in September 2022. Despite these challenges, in 2022 we wrote £35.5bn of gross lending. Given 85% of our customer loans are retail mortgages, with an average loan-to-value of 50%, we are confident in the resilience of our balance sheet and believe our mortgage book is well protected from a downturn in the market. We introduced new Judgemental Adjustments (JAs) in June 2022 to account for the potential repayment affordability risk among those customers with low disposable income. After stressing for inflation, £5bn of mortgages moved from Stage 1 to Stage 2. Looking ahead, we expect a softer mortgage market in 2023 as the increased cost of living and higher borrowing costs dampen demand. |
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Annual Report 2022 | Santander UK Group Holdings plc 21 |
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Financial overview continued |
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Segmental performance
Retail Banking achieved strong customer growth throughout 2022 attributed to various switcher campaigns and new products.
We launched our new Santander Edge current account, which builds on the success of our 1I2I3 current account, offering cashback on essential spend, preferential savings rates as well as other benefits aimed to help our customers, particularly given current economic conditions.
We have also been focused on furthering customers financial education and ability to recognise scams, empowering over 2.1 million customers in 2022.
Consumer Finance has a prime portfolio with 84% of lending secured on the vehicle and low levels of default. In 2022, our Original Equipment Manufacturer (OEM) partners were responsible for 19% of all new car registrations and 14% of new business was for green assets (i.e. electric vehicles and hybrids).
Corporate & Commercial Banking (CCB) delivered strong financial performance in 2022 with good growth in clients, activity and income, almost £9bn in new facilities extended and a marked increase in segment profitability and returns.
The Santander Navigator platform, launched in June 2022, designed to help our clients diversify and expand overseas, has further enhanced our international proposition.
Our SME Support toolkit providing practical support and advice to businesses facing challenges has also been well received.
Our Growth Capital fund celebrated its 10th anniversary having supported over 200 businesses with £1.5bn in facilities.
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| Successful return to wholesale funding market | |
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| £3.9bn Senior issuance by Santander UK Group Holdings plc (2021: £2.8bn) | | | £25.0bn TFSME (2021: £31.9bn)
–£6.9bn TFSME repaid in 2022 and similar annual repayments expected over the next 3 years –£21.1bn TFSME repayment due by 2025
–£3.9bn remaining TFSME repayment due between 2027 and 2031 as schedule is aligned to BBLS lending term |
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| £4.7bn Issuance by Santander UK plc (2021: £0.1bn) | | |
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Balance sheet resilience from strong capital
and liquidity
The CET1 capital ratio decreased 70bps to 15.2%. This was largely due to regulatory changes that took effect on 1 January 2022, including the reintroduction of the full CET1 software asset deduction, and implementation of a new definition of default. RWAs increased to £71.2bn with growth in lending.
The UK leverage ratio remained stable at 5.2%, as retained profit was partially offset by the change in treatment of software assets on 1 January 2022.
We paid interim dividends of £1.0bn, £300m of which was a special dividend. These were paid after review and approval by the Board in line with our dividend policy.
Our liquidity coverage ratio was strong at 163%, significantly above regulatory requirements.
Looking ahead
As we look ahead to 2023, while the macro environment will remain uncertain, tail winds from higher Bank Rates should help improve Banking NIM. The outlook remains uncertain, as inflation has eroded real disposable income with prospects of a recession ahead. After strong house price growth in recent years, we expect house prices to fall back to 2021 levels as higher Bank Rates dampen demand.
We are preparing for the FCA's Consumer Duty which requires considerable management and focus of resources. The first implementation date for Consumer Duty is set at 31 July 2023, with a final date of July 2024.
Despite the challenging environment, we continue to remain focused on supporting our customers, people and communities.
Duke Dayal
Chief Financial Officer
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Annual Report 2022 | Santander UK Group Holdings plc 22 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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We recognise that financial institutions have an important role to play in addressing sector-specific challenges such as financial inclusion and financial crime, as well as broader systemic issues such as climate change.
Our Sustainability and Responsible Banking (SRB) strategy sets our ambition to become a sustainable and responsible bank; one which addresses these challenges and supports our purpose of helping people and businesses prosper. It responds to our most important sustainability issues and consists of three pillars and a solid foundation.
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| Our strategic ambition: to become a sustainable and responsible bank | |
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| Pillar 1: Creating a thriving workplace | | | Pillar 2: Better communities | |
| Our aim is to be a place where all of our people feel they belong and are supported to succeed. We want to provide a workplace with a responsible culture where anyone and everyone can grow while being themselves. This commitment is backed up by our Everyday Inclusion strategy which prioritises the themes ofintersectionality, respect, balanced representation, leadership, advocacy, allyship, transparency and accountability. The strategy focuses on attracting, recruiting, developing and retaining the most talented and diverse people. | | | Financial Inclusion is an increasingly important topic. It is therefore a key part of our approach to building better communities. Our Financial Inclusion strategy is designed to help people improve their financial skills, gain access to financial services and develop financial resilience. We also focus on generating positive impact in our communities, for example, working with our charity partner Macmillan Cancer Support, supporting vulnerable customers and empowering students with our Santander Universities programme, whilst focussing on providing good outcomes for our customers. |
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| Pillar 3: Healthy environment | |
| Climate change is one of the major challenges facing society today. At Santander UK plc Boardwe recognise this. Our goal is to support the UK in tackling climate change by supporting our customers, colleagues and communities transition to a low-carbon, climate-resilient economy. We are fully committed to the Banco Santander’s ambition to achieve net zero carbon emissions by 2050, in line with the Paris Climate Agreement. | |
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| Foundation: Being responsible in everything we do | |
| We must get the basics right before we can excel in the first three pillars. High standards of ethics and integrity are the foundation to prosperous businesses and society. They are also a clear priority in how customers choose their bank. We are committed to being a fair, transparent and responsible bank. At the heart of this isfair treatment of our customers. We deal with any form of fraud against our customers or other economic crime as a priority. | |
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William Vereker
(Chair and Chair of NomCo)
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| Ed GieraFor more information see the following sections in this report:
(Chair of BRC)
| Chris Jones–Sustainability review
(Chair of BAC)
| Garrett Curran
(Chair of BRBC)
| Annemarie Durbin
(SRD and Chair of RemCo)–Sustainability & Responsible Banking section, including TCFD
More information on performance data is also available in our separate Environmental, Social and Governance (ESG) Supplement, which does not form part of this Annual Report. | Mark Lewis |
| Genevieve Shore | | | | | | | | | | | | | |
Ana Botín
(Group Executive
Chair) Annual Report 2022 | Bruce
Carnegie-Brown
(Santander UK Group NED)
| Dirk Marzluf
(Group Head of Technology & Operations)
| Nathan Bostock
(CEO)
| Tony Prestedge
(Deputy CEO)
| Susan Allen
(CEO, Retail & Business Banking)
| Duke Dayal
(CFO)Holdings plc 23
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In addition, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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We strive to create value for all our stakeholders, by delivering on our commitment to be a more responsible bank.
This section is designed to be read together with the Board CommitteesSustainability and Responsible Banking section later in this report and our separate ESG Supplement.
Customers
We aim to be Simple, Personal and Fair in all our dealings with customers.
Cost of the ring-fenced bank must comprise at least one DINED member (or two DINED members for the Board Audit Committee and the Board Risk Committee). The Company continues to benefit from the knowledge, skills and experience of the DINEDs, where appropriate,living
2022 saw a sharp increase in the simultaneous Boardcost of living. We recognise that our customers may be feeling financial pressure brought on by these rising costs and Committee meetings of both companies.higher mortgage interest rates.
Board membershipIn response, we updated the financial support pages on our website to offer financial health checks, budget planning tools and tips on cutting spending and navigating rising energy costs. We also communicated with more than two million customers most likely to be impacted to highlight the support available. Where appropriate, we give links to PayPlan, a free and independent debt advice provider.
As at 31 December 2020,Financial inclusion
Financial inclusion is an important issue; starkly illustrated by the Board of Santander UK Group Holdings plc consisted of 3 Independent Non-Executive Directors (INEDs) including the Chair, 2 Group appointed Non-Executive Directors (GNEDs) and 2 Executive Directors (EDs). The Santander UK plc Board, as at 31 December 2020, consisted of 7 INEDs, including the Chair, 4 EDs and 3 GNEDs. The Board composition of Santander UK Group Holdings plc and Santander UK plc is detailed above. Under1.5 million people in the UK Group Framework, in light of the fact that Santander UK Group Holdings plcwithout a bank account and 13.1 million people with low financial capability. Our Financial Inclusion strategy 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.
Through the Board Nomination Committee, we make sure we have the right composition of individuals on the Board, giving an appropriate balance of knowledge,designed to help people improve their financial skills, experience and perspectives. 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 the development of a diverse pipeline for succession
Changesgain access to Board membership are set out in the Directors' report. These appointments maintain valuable skills and experience of financial services digital,and develop financial resilience. The strategy developmenthas three pillars: financial education and executionknowledge; an inclusive portfolio of products; and, transformation. On behalf ofservices and customer care.
Meeting our customers' changing needs
Responding to trends in customer behaviour, we changed our branch opening hours in 2022 and increased telephone support available.
Alongside serving customers face-to-face, the Board, I would likenew opening hours give our branch colleagues extra capacity to thank Shriti Vadera and Scott Wheway who stepped downhelp customers with telephone banking. In 2022, branch colleagues helped more customers than ever over the phone, taking more than 4.9 million calls during 2020 for their invaluable service to the Board and the Company.year.
All aspects of diversity form partMore of our Board succession planning process,customers are also benefiting from our Voice ID service, which is explained in the Board Nomination Committee Chair’s report. In 2016 weallows them to use their voice as their security password when they call us. Over three million customers are now set an aspirational target of having 33% women on the Board by 2020. Dueup to changes to the membership of the Board that took effect from 1 January 2020, we have not achieved this target. However, despite this reduction, we remain committed to our aspirational target. The Board of Santander UK plc is significantly larger than the board of Santander UK Group Holdings plc, reflective of the size of the business of the company.
Consequently, a small change in the size of the composition of the board of Santander UK Group Holdings plc, has a greater impact on the diversity of that Board. The Boards of the two companies are run largely simultaneously.use Voice ID.
Director inductionsMeanwhile digital transactions continue to grow, increasing by 12% in 2022. More than seven million customers now use our digital platforms every month, representing more than half of our customer base. Peak daily log-ons to our mobile app exceed six million. The increased digitisation trends that started with Covid-19 have persisted.
With the growth in online and mobile banking we continue to enhance our digital offering. 2.4 million customers are registered for My Money Manager, a feature in our mobile app that provides personalised insights and helps customers make better financial decisions. To date there have been over 125 million sessions in My Money Manager and we have shared over 60 million personalised insights with our customers since its launch.
We also use digital channels to help raise customer awareness on the latest fraud and scam threats. This year we shared tips and advice
9.9 million times through the mobile app and in total, 46.3 million fraud and scam messages were shared through the mobile app, online and by email.
Digital customer service is also growing. Online chats through Sandi, our virtual assistant, reached 5.7 million in 2022, a 24% increase over 2021.
We also enhanced our online tool for customers experiencing financial difficulty, which includes financial education, budget planning and managing debt. For more on this, see the financial inclusion section in our ESG supplement (which does not form part of this Annual Report).
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| Customer sustainability highlights | |
| 7+ million customers now use our digital platforms monthly | | | Additional information on how we support our customers can be found in our ESG supplement, including: –Cost of living –Supporting our customers through financial difficulty –Financial inclusion and our strategy
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| 5.7 million online chats through Sandi, our virtual assistant, a 24% increase from 2021 | | |
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| 10 years Since 2012, the Growth Capital team has helped over 200 businesses with more than £1.5bn of lending. In 2022, over £240m of new lending was deployed | | | 2.4 million customers are registered for our financial decision-making tool, My Money Manager. The service has provided more than 60 million personalised insights since 2020 |
| TO READ MORE, SEE OUR ESG SUPPLEMENTg |
Ongoing non-financial support for SMEs
Santander Breakthrough continues to develop new tools, resources and programmes to help small and medium-sized enterprises (SMEs) with non-financial support that meets their needs when they need it most. The economic environment was challenging for SMEs and throughout 2022 we increased on-demand resources and skills development programmes available via santanderbreakthrough.co.uk. We ensure there is a balance of information for every business, whether they are looking to expand domestically or internationally, develop new ways of working or manage the rising costs of doing business.
In 2022, Corporate and Commercial Banking celebrated 10 years since the creation of the Growth Capital team. The team was created to offer debt funding to high growth UK SMEs that would not dilute business founders’ equity or control. Since 2012, the Growth Capital team has helped over 200 businesses with more than £1.5bn of lending. In 2022, £240m of new lending was deployed.
In June 2022, we launched Santander Navigator, an end-to-end digital platform designed to help simplify international growth for SMEs. The platform brings together Santander’s global ecosystem of solution providers who can help businesses explore, prepare for, and connect to global opportunities. It also provides events and market insights. Through Santander Navigator, SMEs can draw on the knowledge and global reach of our provider network, gaining the information they need to overcome obstacles to international expansion. They can also access opportunities to expand into new markets and achieve their international ambitions while saving time and money as they grow.
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Annual Report 2022 | Santander UK Group Holdings plc 24 |
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Sustainability review continued |
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Shareholders
We aim to deliver a long-term, sustainable return for our shareholders while helping people and businesses prosper.
Part of a global bank
We are a subsidiary of Banco Santander SA and our ordinary shares are all held by Banco Santander group companies and are not listed. Santander UK plc's preference shares are listed on the London Stock Exchange and we also have other equity instruments in the form of AT1 securities.
Under the Banco Santander subsidiary model, Santander UK and other subsidiaries are responsible for their own capital, liquidity and funding. This not only mitigates the risk of difficulties in one subsidiary affecting another, it allows local market knowledge and expertise to be used and provides considerable operational flexibility.
We benefit from the strong Santander brand along with the experience and expertise of a global banking group. Sharing resources and capacity for systems development and using common, Banco Santander-wide technology platforms and innovations create a significant competitive advantage.
We are an important part of Banco Santander’s European division, and share a common ambition to grow our business through collaboration and by working more closely together. We aim to do this by better serving our customers, redefining how we interact with them and creating a simpler, more efficient operating model.
We began our multi-year transformation programme in 2019 to reshape the bank to better support our customers by focusing on simplification, digitalisation and customer experience. This has also helped reduce our cost base and we expect to see further improved returns in the medium term.
Consistent shareholder returns
Our operations are consistently profitable and we have paid a dividend every year since 2008. Dividends are paid in line with our dividend policy following review and approval by the Board. This ensures that our capital strength and resilience is maintained.
In 2022, we paid interim dividends of £1.0bn, £300m of which was a special dividend.
Investor engagement
Our Investor Relations team actively engages with institutional investors globally, working alongside our funding and capital teams for new issuances and building and maintaining relationships with fixed income investors and analysts.
We engaged with investors through in-person and virtual meetings, roadshows conferences, events and via regulatory announcements.
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Shareholders sustainability highlights | |
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| | 100% owned Our ordinary shares are owned by our parent group, Banco Santander. Santander UK plc's preference shares are listed on the London Stock Exchange |
| £1bn Interim ordinary share dividends related to 2022 profit and special dividend |
| TO READ MORE, SEE THE FINANCIAL OVERVIEW g |
During 2022, our discussions with investors included these key topics:
–Impact of the changing macroeconomic environment, notably higher inflation and rising interest rates, the mortgage market
–Competition for deposits
–Asset quality
–Strength of our regulatory capital and liquidity
–Funding plans
–Net Interest Margin outlook
Sustainability is also an increasing area of focus for investors. In response, we have significantly increased our focus and disclosure in recent years.
Our Investor Relations team provides a link between investors and senior management, focusing on external messaging and communication. The Board receives updates from the Investor Relations team on the continuing engagement with investors.
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Annual Report 2022 | Santander UK Group Holdings plc 25 |
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Sustainability review continued |
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People
Our motivated workforce is committed to our purpose.
Culture
We are part of a global company, united by a common culture, The Santander Way. This encompasses our purpose to help people and businesses prosper, our aim, to be the best open financial services platform, acting responsibly and earning the trust of our people, customers, shareholders and communities, our Simple, Personal and Fair values, our risk culture, which stresses that risk management is everyone’s job, and our behaviours.
In 2022, we refreshed the behaviours which were first launched in 2015. Our new TEAMS framework – Think Customer, Embrace Change, Act Now, Move Together and Speak Up will help us speed up our transformation towards becoming a more Simple, Personal and Fair bank.
We use our monthly pulse survey, Your Say, to listen to our employees. Launched in December 2021, Your Say provides real-time insight into our employees' engagement and experience; highlighting areas of success and opportunities for improvement. At the end of 2022 our overall employee engagement score was 7.8, which is above external benchmarks1.
Inclusion and belonging
We aim to be a place where all of our people feel they belong and are supported to succeed. We’re committed to being a truly inclusive organisation, one that reflects the customers and communities we serve. This commitment is backed up by our Everyday Inclusion strategy which prioritises the themes of intersectionality, respect, balanced representation, leadership, advocacy, allyship, transparency and accountability.
Our eight People Networks play an important role in bringing lived experiences into our decision making and promoting allyship. The networks (which all have a Board and ExCo sponsor) cover gender, ethnicity, LGBTQ+, disability, families and carers, social mobility, mental wellbeing, and veterans and reservists. Our Embrace LGBTQ+ Network was awarded the Outstanding Network of the Year at the European Diversity Awards.
In 2022 we continued focusing on building diversity and inclusion in Santander UK through programmes which include reverse mentoring for our Executive Committee and our Women in Science, Technology, Engineering and Mathematics (STEM) programme. More details are available in our ESG supplement. We continued to work towards our Black Inclusion Plan commitment to tackle under-representation of Black talent in our senior roles.
Our first 40 participants graduated from our Black Talent Programme and the next cohort of 60 employees will join in early 2023. We voluntarily disclose our ethnicity pay gap, and a breakdown by identity, as we believe in the positive benefits of transparency. We are actively lobbying for mandatory ethnicity pay gap reporting.
We are a signatory to the Menopause Workplace Pledge. Our team of passionate Menopause Advocates, trained by experts, Henpicked, run awareness sessions and point our people and managers to support resources. We are proud to be the first major employer in the UK to partner with digital health app, Peppy, which has provided access to expert menopause support to over 700 of our people to date. This includes one-to-one text chats with a team of nurse practitioners, a webinar series, group chats and a suite of additional resources.
We led the way across financial and professional services companies to raise awareness of the importance of socio-economic diversity through our work with the Government's Socio-Economic Diversity Taskforce. This led to us becoming a founding partner of Progress Together in 2022, a financial services membership body aimed at levelling the playing field for social mobility. We also received the Lord Mayor’s Award for Advancing Socio-Economic Diversity in Business and a silver award for Progression Programme of the Year at the Social Mobility Awards.
Wellbeing
Wellbeing is essential to helping our employees thrive. Our comprehensive approach involves supporting mental, physical, social and financial wellbeing. Our internal Wellbeing Hub provides information on wellbeing topics and brings together all the support options we offer. The Hub has been accessed 160,000 times in two years.
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| People sustainability highlights | |
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| Inclusive environment within the top 10% benchmark(1) for our score to the question ‘A diverse workforce is a clear priority for Santander’ | | | More information on how we support our people can be found in our ESG supplement, including:
–Inclusion, belonging and wellbeing –Skills development –Women in STEM –Reverse mentoring circles –Working with our two recognised trade unions –Recognition and reward –Post-pandemic ways of working –Our priorities going forward |
| Engaged people Engagement score of 7.8 is above external benchmarks(1) | | |
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| 10% of Santander UK Variable Pay is based on Sustainability and Responsible Banking metrics. In 2022, these metrics covered colleague engagement (5%) and people financially empowered (5%) | | Award recognition We’re proud of the recognition we receive for our work to create a sense of belonging for our people. This includes being a Times Top 50 Employer for Women, a top 75 Social Mobility Index employer, voted best for Mental Health and Wellbeing by Working Families |
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| TO READ MORE, SEE OUR ESG SUPPLEMENT g | |
| (1) Your Say's benchmark is the average score of all organisations using Your Say pulse surveys |
This year we relaunched our Positive About Mental Wellbeing training. The training will equip all of our 3,800 people managers with the tools to prioritise positive mental wellbeing every day, recognise when more support may be needed and help colleagues access support.
We also have a specific focus on financial wellbeing in response to the cost of living crisis. We have improved our financial support options and are raising colleague awareness on the support available including a dedicated helpline for all our people.
Fair pay and transparency
In 2022, we took action to relieve cost of living pressures on our people. This included an exceptional salary increase of 4% for 60% of our workforce. This covered 11,000 colleagues in lower pay bands and was in addition to our usual annual pay review. This was part of the annual review of our reward framework, which checks that all salary reviews and changes to reward policies do not have an adverse impact on particular employee groups.
We are transparent about pay and benefits and are proud to have been an accredited Real Living Wage employer since 2015. All salary ranges and pay progression arrangements are visible to all colleagues. We voluntarily publish our Ethnicity Pay Gap within our annual Everyday Inclusion and Pay Gap Report. We also voluntarily disclose our CEO pay ratio in the Remuneration Implementation Report within this Annual Report.
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Annual Report 2022 | Santander UK Group Holdings plc 26 |
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Communities
We provide support to build better communities where customers and people can prosper.
Financial education
Financial education is one of the pillars of our Financial Inclusion strategy. We believe it is crucial to provide a solid financial education to all children and young people, ultimately ensuring financial education for all. This is why we have a goal to become a leader in financial education by 2025. More information on our approach to financial inclusion is provided in the better communities section of our ESG Supplement.
The importance of financial education in the UK has been highlighted by the 2021 Strategy for Financial Wellbeing developed by the Money and Pensions Service, an arms-length Government body. The strategy’s goal is to ensure an additional 2 million children and young people get a meaningful financial education by 2030, growing from 4.8 million to 6.8 million.
We have worked with experts who told us the best way to deliver financial education is to teach financial concepts to people when they are young. This helps them to make better decisions about their money and protect their finances later in life. As a result, we support financial education being compulsory in UK primary schools and for resources to be easily accessible for all teachers, parents and students across the UK. In 2022, we provided financial education to 1,292,724 young people.
Santander Foundation
In 2022 the Santander Foundation awarded £1.85m to 13 charities as part of its Financial and Digital Empowerment Fund. These new partners will receive grants ranging from £125,000 to £150,000 over the next three years to deliver services that will empower people with skills, support and confidence needed to improve digital and financial capabilities.
The Santander Foundation is currently providing funding and support to 34 charitable organisations across the UK. In 2022, the Financial and Digital Empowerment funded partners have supported 2,109 people to develop their digital and financial capabilities.
In partnership with Santander UK, the Foundation continues to support a range of charities through the matched donations programme. In 2022, 1,105 employees were able to increase their fundraising contributions by a further £625,579.
Santander Universities
In 2022 we launched a new scholarship, skills and entrepreneurship programme designed to fuel the success of new generations of university students from underrepresented groups. Through the programme we aim to remove barriers to entry into higher education for these groups, level the currently uneven playing field and build essential skills for the future to ensure employment outcomes match peers from outside these groups. To achieve these aims, we will continue working with our established university partners to increase opportunities for underrepresented students, whether through our scholarships, living wage internships that help students focus on their future, or specialist entrepreneur centres to help turn students’ passion projects into businesses. In 2022 we provided more than 8,000 scholarships and awards. At the heart of the initiative is a £1m scholarship scheme that will help 100 students from under-represented groups with annual grants of £10,000 over three years at our 75 university partners.
We also know that higher education isn’t for everyone. So we are investing in ideas that provide a pathway for all, no matter where they are in the UK. One example is our global entrepreneurship platform, which brings together people with ideas, skilled individuals and eager interns alike. We are also working on opportunities to share more free and accessible learning programmes with people from all backgrounds, giving everyone the opportunity to learn and thrive.
When our new headquarters, Unity Place in Milton Keynes, opens its doors in 2023, we will welcome MK:U, a new-model, digital and technical higher education provider, to partner with us. We look forward to working together to create courses and qualifications that will help develop the skills of the future.
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| Communities sustainability highlights | |
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| 2,141,163 people have been financially empowered since 2019. We have been able to reach this many people by working with partners such as Twinkl and Young Enterprise | | More information on our approach to building better communities can be found in our ESG supplement, including: –Financial inclusion and our strategy –Santander Foundation: Case study |
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| £1.85m Santander Foundation's Financial and Digital Empowerment Fund awarded £1.85m to 13 charities supporting digital and financial inclusion to disadvantaged communities | | | 20,000+ people reached through our people helped initiatives. This includes a variety of activities, from colleague community volunteering initiatives to supporting charities through matched donations |
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| £455,000+ has been raised for Macmillan Cancer Support, from colleagues and matched donations from the Santander Foundation | | | £8m In 2022, we worked with 75 university partners making donations of £8m and benefiting 8,130 students and graduates |
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| TO READ MORE, SEE OUR ESG SUPPLEMENT g |
Macmillan Cancer Support 2022-2024
There are currently three million people living with cancer in the UK and one in two of us will receive a cancer diagnosis in our lifetimes. In June 2022, we launched a new strategic charitable partnership with Macmillan Cancer Support. The partnership aims to improve financial inclusion and support to help people to cope with financial challenges they face after receiving a cancer diagnosis. Since the launch, we have been working with Macmillan to review our processes, services and customer feedback to identify areas for improvement. We are developing a referral programme to connect our customers with Macmillan’s support services. In addition to these strategic workstreams, we have raised over £455,000 including matched donations from the Santander Foundation.
Ukraine support
Since the conflict in Ukraine in February 2022, we have been working to support the humanitarian relief effort. Santander UK (including customers, colleagues and the Santander UK Foundation) supported a Banco Santander initiative to aid Ukraine with Santander UK contributing over £455,000 to the Red Cross and UNHCR. In addition, our colleagues can still benefit from 70 hours of matched volunteering time, which was originally doubled from 35 hours during Covid-19, but has been kept open due to the new crisis.
Ukrainian refugees arriving in the UK can open a bank account with us so they can access the banking services they need. So far over 2,000 new accounts from Ukrainian refugees have been opened. We also provide customers with the ability to make international payments to Ukraine.
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Annual Report 2022 | Santander UK Group Holdings plc 27 |
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Climate and ethics
We apply high environmental and ethical standards to our investments and operations.
Responsible lending
As part of the Banco Santander group, we comply with the Equator Principles to factor social, ethical, and environmental impacts into our risk analysis and decision making for qualifying financial transactions.
Our Reputational Risk policy and Environmental, Social and Climate Change (ESCC) policy covers oil and gas, power generation and transmission, mining and metals, and soft commodities. It also covers projects or activities within certain sectors located in areas classified as Ramsar Sites, World Heritage Sites or Category I, II, III or IV sites defined by the International Union for Conservation of Nature.
Our ESCC policy also prohibits project-related financing for new coal-fired power plant (CFPP) worldwide and we will only work with new clients with CFPPs to provide specific financing for renewable energy projects. In these exceptions, we expect the client to have a credible plan with verifiable targets that show the client will reduce its revenues from coal-powered generation to 10% or below by 2030. Currently, we have no exposure to CFPPs.
At 31 December 2022, Santander UK's exposure to fossil fuel sectors was only 0.4% of our total non-financial corporate lending. In line with Banco Santander's 2050 net zero commitment, by 2030 we will eliminate all exposure to thermal coal mining and not provide financial services to power generation clients with more than 10% of revenue from thermal coal. For more on Banco Santander's commitment and approach to carbon-intensive sectors, please see Banco Santander's Climate Finance Report 2021-2022.
We review all relationships and transactions with identified ESCC or reputational risks, including human rights, to ensure they are within our risk appetite. Key decisions can be escalated to the Reputational Risk Forum and, if needed, the Board.
Green finance
Banco Santander's Sustainable Finance Classification System (SFCS) defines what investments can be considered green or social financing. We have applied the SFCS to our lending and identified the following as green financing: renewable energy and other green energy financing; mortgages on properties with A- or B-rated energy performance certificates (EPC); and, financing for electric vehicles, hybrid and PHEV with emissions below 50g CO2/km.
The SFCS uses harmonised definitions that provide consistency in tracking, reporting and managing sustainable finance across Banco Santander group. For more on our green finance ambition and performance, see TCFD in the Sustainability and Responsible Banking section.
Economic crime
Our Anti-Financial Crime strategy seeks to deter, detect and disrupt financial crime. All colleagues receive mandatory economic crime training that highlights issues and risks across all types of financial crime. We continue to enhance our award-winning Anti-Financial Crime Academy (AFCA) to deliver targeted, role-specific training. This includes specialist Academies for operational capabilities and business lines performing key anti-financial crime controls, as well as formal training and competence measurement to ensure employees show the required anti-financial crime skills. We have completed our annual Learning Needs Analysis which provides a key input for determining our 2023 anti-financial crime training plan and strategy. By the end of 2022, 60,474
AFCA modules covering all AFC disciplines have been completed by 16,078 individuals across Santander UK.
To enhance recognition for those taking AFCA training, we are working with a leading industry body, the International Compliance Association (ICA), to obtain accreditation for AFCA curriculum modules. This will provide an AFCA-ICA certification to employees passing AFCA modules.
We maintain strong processes for anti-bribery and corruption and facilitation of tax evasion, in particular risk management measures for relationships with third parties. In 2022, we reaffirmed our senior executive commitment against facilitation of tax evasion by issuing our pledge to all colleagues. We continue to work with external partners to understand and develop best practice integrity standards and we remain a Transparency International UK Business Integrity Forum Gold Member.
Economic crime also includes protecting our customers from fraud. Further information can be found in our ESG Supplement.
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| Climate and ethics sustainability highlights | |
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| More information on our approach to the environment and upholding high ethical standards can be found in our ESG supplement, including: –Tackling climate change –Climate Change strategy and governance –Financing the green transition –Investment in ESG assets –Sustainable Procurement –Enhancing climate change awareness –External collaborations and engagement –Focus on financial crime –Response to Anti-Money Laundering FCA finding –Protecting our customers from fraud –Ethical supply chain –Humanitarian focus –Cyber risk management –Data privacy and cyber security
| | | 5,761 tCO2e in 2022, we emitted 5,761 tCO2e of greenhouse gas emissions, a 9% decrease on 2021. This equates to 0.31 tCO2e per employee |
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| | | £6.5bn In 2022, we raised and facilitated £6.5bn of green finance of projects and activities classified as green according to SFCS. In 2021, we provided £3.9bn of green finance. |
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| | | TO READ MORE, SEE OUR TCFD SECTION AND ESG SUPPLEMENTg |
Streamlined Energy and Carbon Reporting In 2022, we used 103,156,234 kWh of energy, a 14% reduction against 2021 (119,562,413 kWh). Greenhouse gas emissions (market-based) were 5,761 tCO2e, 9% down from 2021 (6,321 tCO2e). Emissions per employee equate to 0.31 tCO2e, a decrease from 0.35 tCO2e in 2022. A rise in Scope 2 market-based emissions is mostly attributed to Santander Financial Services plc (SFS), which we included for this year's reporting. The basis of reporting of SECR information can be found in the TCFD section under Environmental Performance.
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| 2022 | 2021 | 2020 |
Scope 1 tCO2e | 4,512 | | 6,074 | | 5,937 | |
Scope 2 tCO2e - Location-based | 15,624 | | 18,860 | | 22,014 | |
Scope 2 tCO2e - Market-based | 53 | | | — | |
Scope 3 tCO2e - business travel only | 1,196 | | 247 | | 515 | |
tCO2e/FTE | 0.31 | | 0.35 | | 0.31 | |
Note: 2021 and 2020 exclude Santander Financial Services (SFS). For 2022, SFS accounts to less than 2% of total emissions.
With the easing of Covid-19 travel restrictions, business travel increased in 2022. This resulted in higher Scope 3 emissions compared to 2021. The total distance travelled and related emissions remain significantly below pre-pandemic levels. Our total emissions fell in 2022 due to significant reductions in our gas and electricity consumption. This was largely due to the rationalisation of our office network.
We continue to actively manage energy performance across all sites, identifying opportunities to enhance efficiency and optimise energy use. Ongoing energy saving refurbishments include new LED lighting, HVAC upgrades and replacement of fan coil units. Go Green, our environmental engagement initiative for employees gives them practical energy saving tips which help to reduce our energy consumption.
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Annual Report 2022 | Santander UK Group Holdings plc 28 |
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The Boards of the Company Secretary supportsand Santander UK plc (the RFB and the ChairBoards) have identified the below as our key stakeholder groups on the basis of their importance in designing individual inductions for NEDs, which include site visits and cover topics like strategy, key risks and current issues includingensuring the legal and regulatorycontinuing success of Santander UK.
Balancing the interests of these five landscape. The deliverystakeholder groups alongside the interests of the Santander UK group is key to ensuring that we operate as a sustainable and responsible business, in line with our strategy. This will help to ensure the long-term success of both companies.
To ensure that the interests of our tailored NED induction programe forstakeholders can be fully assessed and considered in our new appointments continued through 2020, appropriately adapted in light ofdecision making, the pandemic to includeBoard and the RFB Board delegate a number of virtual site visitsmatters to their Committees.
The main governance flows for these stakeholders’ interests are set out below, together with details of the key issues relating to each stakeholder that we took into consideration in 2022.
To support the Boards and interactions.their Committees in their considerations, in 2022 the Corporate Governance team provided training on how to write good board papers to circa 300 senior members of management. This training included a specific focus on the directors' duties and how management's preparation of their papers plays a key role in ensuring that the Directors can discharge their responsibilities in a fully informed manner.
In addition, the proforma paper, which management is required to use for their Board papers, now includes a section on stakeholder considerations.
For more on how the Directors discharged their responsibilities in 2022, including specific examples of stakeholder considerations and engagement, see the Governance section, including the Board Committee Chair reports, particularly the Board Responsible Banking Committee (RBC) Chair's Report.
William Vereker benefited from tailored induction programmes phased
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| Stakeholders | |
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| Customers | Shareholders | People | Communities | Regulators | |
| –Customer outcomes –Fraud protection –Vulnerable customers –Cost of living crisis support –Supporting customers’ sustainability ambitions –New Consumer Duty | –Financial performance –Return on equity –Alignment of strategy with our parent company –Meeting sustainability expectations | –Culture, conduct and behaviours –Cost of living crisis –Return to the office –Remuneration –Employee value proposition –Move to Milton Keynes | –Financial inclusion and empowerment –Community engagement and support –Universities programme | –Meeting regulatory rules and expectations –Proactively and constructively engaging with the regulators –Responding to regulatory requests | |
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| – | The RBC's purpose is to assist the Board achieving its aspiration to be a responsible bank, with particular reference to its key stakeholders.
During 2022, RBC spent the majority of its time considering the needs of its stakeholders, how they are being met and how to mitigate risks to their interests. Examples of these considerations can be found in the RBC Chairs’ report in the Governance section of this Annual Report. | | | | – | |
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| | Promote the success of the Companies in the long term for the benefit of their shareholders, taking into account the likely impact of their decisions in the long-term, as well as the interests of our stakeholders. | | | | | |
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Annual Report 2022 | Santander UK Group Holdings plc 29 |
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Annual Report 2022 | Santander UK Group Holdings plc 30 |
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Sustainability and Responsible Banking |
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| | Contents | |
| | Introduction | 32 |
| | Sustainability and Responsible Banking strategy | 33 |
| | Materiality | 34 |
| | Governance | 35 |
| | Medium-term scorecard and performance highlights | 36 |
| | Taskforce on Climate-related Financial Disclosures (TCFD) | 38 |
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Annual Report 2022 | Santander UK Group Holdings plc 31 |
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Introduction
Sustainability and Responsible Banking (SRB)
SRB is a strategic priority for Santander UK and our parent company, Banco Santander. Our goal is to be responsible and ethical across all our activities. By delivering on our purpose to help people and businesses prosper, we will grow as a business while helping to address society's key challenges. Our Simple, Personal and Fair values need to be reflected in everything we do. From the everyday decisions we take to our long-term plans and goals.
In recent years, the attention on Environmental Social and Governance (ESG) matters has increased. In the finance sector, this focus is reflected in the growth of signatories to the UN Principles for Responsible Banking (UNPRB). Banco Santander is a founding signatory to the UNPRB which are designed to integrate ESG considerations into banking. The UNPRB now has more than 300 signatories with US$ 89.5 trillion of assets under management, a growth of 127% since 2019.
This trend is also reflected in the growing number of existing and proposed regulatory requirements on ESG topics. These include the Taskforce on Climate-related Financial Disclosures (TCFD); International Sustainability Standards Board (ISSB); EU Corporate Sustainability Reporting Directive (CSRD); and, US SEC Climate Rules. We are also seeing growing engagement with stakeholders on ESG and sustainability. Throughout 2022, we engaged with debt investors and rating agencies solely on ESG topics.
About our SRB Reporting
This year we have created a new SRB section in our Annual Report. This responds to increasing demands by stakeholders for more information on our ESG strategy and performance alongside. In this section, we give an overview of our approach to SRB. This includes our strategy, material issues, sustainability governance, progress against our medium-term targets and a selection of highlights.
This new section also includes mandatory disclosures such as TCFD. We will continue to update our ESG disclosures in line with future regulatory guidance and market practice. There is information in our 2022 ESG Supplement available on our website (which does not form part of this Annual Report). Our ESG Supplement also includes limited assurance on a sample of our ESG metrics.
Our Sustainability Microsite also gives more information on all our ESG-related reports and disclosures. Banco Santander lists all its ESG reports and disclosures on its website.
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Annual Report 2022 | Santander UK Group Holdings plc 32 |
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Sustainability and Responsible Banking Strategy
Our approach
With a growing focus on sustainability over a periodrecent years, the need for businesses to be part of 12 months, whichthe solution to pressing social and environmental issues has become increasingly clear. We recognise that financial institutions have an important role to play. This includes meeting with senior management and site visits (where appropriate and in a Covid-19 safe way).
Throughout 2020, we continued to deliver workshops for all NEDs to further develop their knowledge and understanding of key business issues including major change projects and operational resilience, climate change, sustainabilityaddressing sector-specific challenges such as financial inclusion and financial crime. It also includes broader systemic issues such as climate change.
Our SRB strategy sets our ambition to become a sustainable and responsible bank. One which addresses these challenges and supports our vision of helping people and businesses prosper. It responds to our most important, or material, sustainability issues. Our SRB strategy consists of three pillars and a solid foundation.
Pillar 1: Thriving workplace
Our aim is to be a place where all of our people feel they belong and are supported to succeed. We want to provide a workplace with a responsible culture where anyone and everyone can grow while being themselves. Employee wellbeing is central to our approach.
This commitment is backed up by our Everyday Inclusion strategy which prioritises the themes of intersectionality, respect, balanced representation, leadership, advocacy, allyship, transparency and accountability.
Pillar 2: Better communities
Financial Inclusion is an increasingly important topic. It is therefore a key part of our approach to building better communities. Our Financial Inclusion strategy is designed to help people improve their financial skills, gain access to financial services and develop financial resilience. Our financial inclusion working group coordinates our approach and enhances business-wide collaboration.
We also focus on generating positive impact in our communities. For example, working with our charity partner Macmillan Cancer Support; supporting vulnerable customers; empowering students with our Santander education programme; and working with the Santander Foundation, whilst focusing on providing good outcomes for our customers.
As well as workshops,
Pillar 3: Healthy environment
Climate change is one of the NEDs received briefings on the governance requirements of ring-fenced banks.
46major challenges facing society today. At Santander UK Group Holdings plcwe recognise this. Our goal is to support the UK in tackling climate change by supporting our customers, colleagues and communities transition to a low-carbon, climate-resilient economy. We are fully committed to the Banco Santander’s ambition to achieve net zero carbon emissions by 2050, in line with the Paris Climate Agreement.
Foundation: Being responsible in everything we do
We must get the basics right before we can excel in the first three pillars. High standards of ethics and integrity are the foundation to prosperous businesses and society. They are also a clear priority in how customers choose their bank.
We are committed to being a fair, transparent and responsible bank. At the heart of this is fair treatment of our customers. We deal with any form of fraud against our customers or other economic crime as a priority.
A key focus is raising customer awareness on financial crime as a priority. We are committed to upholding the highest ethical standards, ensuring a responsible corporate culture and promoting human rights.
For more information on our SRB strategy see the Strategic Report and our ESG Supplement.
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Our strategic ambition: to become a sustainable and responsible bank |
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| | Thriving workplace Creating a culture of inclusivity and belonging | | | Better communities Helping customers and communities prosper | | | Healthy environment Fighting climate change and supporting the green economy | |
Key issues |
| –Diversity, inclusion and belonging –Employee wellbeing and talent –Organisational culture and governance
Additional priorities: –Social mobility |
| –Financial inclusion and empowerment –Community engagement and support –Sustainable finance –Inclusive innovation and digitalisation –Privacy, data protection and cyber security
Additional priorities: –Santander education –Santander Foundation |
| –Climate risk management –Portfolio alignment to net zero –Own operational footprint
Additional priorities: –Ensuring a just transition |
Our solid foundation |
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| | Being responsible, in everything we do We will aim to be responsible in everything we do with ethics and integrity being a solid foundation of our strategy, enabling businesses and society to prosper. | |
| Key issues | Additional priorities | |
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| –Ethics and compliance –Human and labour rights | –Responsible supply chain and procurement | –Responsible banking practices | –Financial crime | | |
Delivering on our strategic priorities and creating value for all of our stakeholders |
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Annual Report 2022 | Santander UK Group Holdings plc 33 |
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Materiality
Identifying our most material issues
Our SRB strategy focuses on our material issues. These are the most relevant ESG issues for Santander UK. We conducted a detailed materiality assessment in 2020. It identified the sustainability topics, or material issues, that are most important to our business and our stakeholders. In 2022 we refreshed our materiality matrix in line with technical guidance issued by Banco Santander. This defines a coordinated global approach, methodology and timelines for future materiality assessments and updates. Our next full materiality assessment is planned for 2024 and we will complete another refresh in 2023. Our material topics remain broadly the same this year. They continue to form the basis of our SRB strategy and our reporting.
Process
Our materiality process uses an evidence-based analysis. In our last full assessment we used a big data approach, powered by Datamaran. This analysed millions of data points covering regulatory frameworks, social media, news, and financial and sustainability reports of industry peers. The findings were overlaid with consumer insights and inputs from colleague surveys including our Executive Committee.
Our assessment also included a review of sustainability megatrends to identify emerging issues. We considered the principle of double materiality by analysing both sustainability and financial reports of peers. In total 100 peers were benchmarked, including non-traditional financial services companies and financial sector disruptors. Specialist consultancy Environmental Resources Management Ltd conducted the assessment in line with best practice.
For the 2022 refresh, we considered many different inputs including:
–Banco Santander material issues
–Our business strategy and SRB strategy documentation
–Key external documents including ratings, standards, regulations and mega trends relevant to our business and financial services
–reviewing key competitors' material issues.
We used the results of the materiality assessment to help develop our strategy. The materiality assessment and resulting matrix of material topics have been approved by the Board Responsible Banking Committee (RBC).
Evolving our strategy further
In a fast changing world, we review our SRB strategy regularly to make sure it is fit for purpose. We reviewed our strategic priorities in 2022 to ensure they remain relevant to the changing context we face. Our analysis confirmed that our SRB strategy is still relevant.
Maximising our positive impact
We strive for excellence in all areas of our SRB strategy. In particular, we want to amplify our impact in areas where we can make the biggest difference. In late 2021, we identified how we can maximise our positive impact as a business. After engagement with our Executive Committee and RBC, we identified three focus areas where we have concentrated our efforts in 2022 to build positive impact and differentiate our business. These are:
–Education, including financial education and knowledge
–Helping to green UK homes and businesses, and
–Social mobility.
We have also developed medium-term targets which are set out in the medium-term scorecard and performance highlights section below.
Changes since 2021 Environmental material topics Social material topics Governance material topics | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 34 |
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Governance
Improving our ESG governance
We continue to improve how we govern sustainability. In 2022, we enhanced how our Executive team maintains oversight of our SRB objectives. Our Senior Management Committee now reviews ESG monthly. There is also more focus on sustainability updates at Board Responsible Banking Committee meetings.
SRB is owned and executed by each business division with the support of the SRB team. The SRB team acts as a centre of expertise providing strategic direction and guidance for Sustainability Business Partners (SBPs). The SBPs help deliver our sustainability agenda across different business divisions, as shown below.
We also integrate sustainability into our day-to-day business. It is included as an assessment element in our product and initiatives approval processes for both retail and corporate businesses. This ensures we consider how new products or processes might have an impact on the environment, our customers or our communities.
To enhance sustainability knowledge and skills, we provide specialist training for our SBPs and colleagues in key functions. This includes courses from the Chartered Banker Institute, and the Cambridge Institute for Sustainability Leadership.
In 2022, we gave over 2,000 colleagues access to Sustainability Unlocked. This enabled them to deep dive into different subjects within the Sustainability agenda.
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Our Governance for Sustainability and Responsible Banking |
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| | | | Assists the Board in setting vision, level of ambition, priorities and pace | | | | |
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| | | | Provides management level oversight, steer and approval on performance | | | | |
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| Partners | | Sustainability and Responsibility Banking Team | | Third parties | |
| –Share subject matter expertise –Support on execution and operations –Provide platforms for external communications and brand positioning | | –Overall responsibility for the strategy, defining activities and programmes, and delivering on centrally driven activities –Advises the business as subject-matter experts | | –Provide specialist expertise and resource | |
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| | | | Act as centre of expertise and contact for individual business areas and deliver the sustainability agenda across the business | | | | |
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Annual Report 2022 | Santander UK Group Holdings plc 35 |
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Medium-term scorecard and performance highlights
In late 2021, we established a medium-term scorecard. This consists of targets for 2022-2025, and in some cases 2030. These will measure our performance and progress in key areas of our SRB strategy. We set the targets with two main considerations in mind: targets that will strengthen our contribution to existing Banco Santander group public commitments, and targets that will help us to meet our sustainability priorities. We will conduct a review of metrics and targets in 2023 to ensure they continue to be fit for purpose in meeting our sustainability priorities.
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Diversity, inclusion and belonging
50% (+/-10%) senior female employees by 2025 We maintained an upward trajectory in our senior female population in 2022. This is a long-term strategic commitment for us. We will continue to work hard to increase diversity and representation at senior employee levels over the medium term. |
33.2% (2021: 31.9%) |
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Diversity, inclusion and belonging
14% (+/-2%) senior Asian, Black, and other Minority Ethnic employees by 2025 Senior Asian, Black and other Minority Ethnic employee representation increased in 2022. We continue to work with our culture team to improve diversity and inclusion. This includes encouraging further employee disclosure across our diversity metrics to ensure that our data is accurate and up to date. |
11.1% (2021: 9.8%) |
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Diversity, inclusion and belonging
40-60% of women on the Board by 2030 Our female representation on the Board did not change in 2022. We are not anticipating any large changes in representation on our Board in the near future. |
33% (2021: 33%) |
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Organisational culture and governance
Top 10 company to work for by 2025 We continue to participate in the Great Place to Work rankings. We aim to achieve a top ten ranking over the medium term. Although our 2022 placing dropped from 2021, our continuous listening tool Your Say has improved visibility of our key focus areas, which we continue to work on to meet our target.1 |
30th (2021: 16th) |
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Social mobility
35% of senior employees from a lower socio-economic background by 2030 We continue to encourage our senior leaders to disclose their socio-economic background. We continue to integrate social mobility into our SRB agenda and have assigned a new senior sponsor to help drive our agenda forward.2 |
29% (2021: 29%) |
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ESG Supplement TO READ MORE VISIT SANTANDERSUSTAINABILITY.CO.UKg |
1 We are also recognised as a Top Employer by the Top Employers Institute. We are accredited by Great Place to Work as a Best Super Large Organisation (Rank 30), Best Workplace for Women and Best Workplace for Wellbeing
2 We are also developing new ways to create momentum within our internal Social Mobility network, a network of motivated colleagues who are working to deliver change for young adults within the community and our own workforce The 2022 result is the same as 2021 as the survey is due to be completed again 2023.
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Annual Report 2022 | Santander UK Group Holdings plc 36 |
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Sustainability and Responsible Banking continued |
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Financial inclusion
3 million people financially empowered by 2025 (cumulative since 2019) We have outperformed our expectations this year in our work to improve financial education and financial resilience. We have empowered 2,141,163 people since 2019. We continue to support and build financial resilience across the UK with our partners and our internal financial support centre of excellence. |
2.1 million1 (2021: 750,0001) |
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Financial inclusion
2.2 million children and young people given a meaningful financial education by 2025 Our work with our partner Twinkl was a huge success in 2022. Together we reached more than one million young people with financial education resources. These are distributed virtually and can be accessed by parents and school teachers. Our work with Young Enterprise was also successful reaching over 105,000 school children. |
1.7 million1 (2021: 500,0001) |
For more on:
–Diversity, inclusion and belonging, organisational culture and governance & social mobility, see the People section of the Strategic Report.
–Financial inclusion, see the Customers section of the Strategic Report.
–Supporting customers' transition to a low carbon economy, see the TCFD Metrics and Targets section.
1 Cumulative since 2019
2 Banco Santander's Sustainable Finance Classification System (SFCS) defines what investments can be considered green or social financing. We have applied the SFCS to our lending and identified the following as green financing: renewable energy and other green energy financing; mortgages on properties with A- or B rated EPC; and financing for electric vehicles, hybrid and PHEV with emissions below 50g CO2/km.
3 To measure communication, we measure unique visits to the Greener Homes Hub and emails that have been opened by customers with EPC ratings of D or below that includes advice on making energy efficiency improvements.
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Supporting customers to transition to a low carbon economy
£20bn of green finance raised and facilitated by 2025 In 2022, we performed strongly in our distribution of green finance. We adopted Banco Santander's Sustainable Finance Classification System2. This provides a uniform and robust way to identify green investments and loans in our business. Our mortgage lending performed strongly in 2022. 2023 may be a more challenging economic environment for mortgages. |
£6.5bn (2021: £3.9bn) |
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Supporting customers to transition to a low carbon economy
1.3 million customers with properties with an EPC rating of D or below communicated with to improve their homes' efficiency by 2025 In 2022, we launched our Green Homes Hub. It helps consumers learn more on their homes' EPC ratings and ways to improve their energy efficiency. We also continue to offer customers a free EnergyFact Report, provided by our partner Countrywide. This gives an outlook on potential energy efficiency retrofitting improvements.3 |
0.8 million (2021: 4,000) |
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Supporting customers to transition to a low carbon economy
180,000 customers supported to become greener with products and services by 2025 We performed strongly in offering mortgages for energy efficient properties, as well as lending for businesses. We continue to provide consumer finance funding with loans for electric and hybrid vehicles and will look to support more customers as they navigate the challenging economic climate. |
32,000 (2021: N/A - Data collection began in 2022) |
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Annual Report 2022 | Santander UK Group Holdings plc 37 |
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Taskforce on climate-related financial disclosures (TCFD) |
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Introduction
Climate change and the banking sector’s response is a constantly evolving topic. This influences how we respond to climate-related risk in our business and we continually seek to improve the way we manage and report on climate change.
This is the third year we have published our response to the TCFD recommendations. We have expanded our disclosure to match growing expectations from our stakeholders for transparent reporting on climate-related risks and opportunities.
We recognise that climate change is one of the biggest challenges facing society. We are committed to the objectives of the Paris Agreement on climate change. This includes the transition to a climate-resilient, net-zero economy.
In 2021, Banco Santander committed to achieve net zero carbon emissions by 2050. This target includes emissions from its own operations and all client emissions that result from our lending, advisory or investment services. In the UK, we have adopted this ambition as part of our SRB strategy.
This report shows how we manage climate risks, opportunities and considerations within our processes and policies.
We follow the four pillars of the TCFD recommendations:
–Governance
–Strategy
–Risk Management, and
–Metrics and Targets.
To demonstrate how we are achieving this, we also report on how we are financing the green transition and our collaboration with stakeholders.
More information can be found in our ESG Supplement, which does not form part of this Annual Report.
Summary of our response to the TCFD recommendations
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TCFD pillar and disclosure requirements | Examples of our approach | page |
Governance | | |
a) Describe the Board’s oversight of climate-related risks and opportunities | Santander UK climate change governance framework Board Responsible Banking Committee (RBC) and other Board-level committees (Board Audit Committee, Board Risk Committee) 2022 Board-level climate-related activities | 40-41 |
b) Describe management’s role in assessing and managing climate-related risks and opportunities | Santander UK climate change governance framework Senior Management Committee (SMC) and Executive Risk Control Committee (ERCC) 2022 senior management climate-related activities |
Strategy | | |
a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term | Three pillar approach of Santander UK’s Climate Change strategy Evolving risk appetite and business strategy informed by scenario analysis and stress tests Santander UK medium-term scorecard commitments | 42-46, 47-48, 53 |
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b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning | Net Zero Banking Alliance (NZBA) commitment to decarbonise the UK’s material sectors Climate Internal Scenario Analysis informing strategy and planning | 44-46, 52 |
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c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-relate scenarios, including a 2°C or lower scenario | NZBA commitments to decarbonise the UK’s material sectors Climate Internal Scenario Analysis (CISA) | 52, 54 |
Risk Management | | |
a) Describe the organisation’s processes for identifying and assessing climate-related risks | UK Climate Change Risk taxonomy Climate risk operating model | 49 |
b) Describe the organisation’s processes for managing climate-related risks | UK Climate Change Risk taxonomy Climate risk operating model Climate-related risk appetite Roles and responsibilities for climate change | 49, 50 |
c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management | Climate risk integration in key risks Climate Internal Scenario Analysis | 50, 52 |
Metrics and Targets | | |
a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process | Santander UK medium-term scorecard climate change targets Exposure to climate-related risk across sectors | 53-55 |
b) Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and related risks | Scope 1-3 GHG emission disclosures | 56 |
c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets | Santander UK medium-term scorecard climate change targets | 39, 47, 53 |
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Annual Report 2022 | Santander UK Group Holdings plc 38 |
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Our overarching climate ambition is to achieve net zero by 2050
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| Our climate change targets for 2025 | Our progress to date (2021-2022) |
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| Green finance raised and facilitated | £20bn | £10.5bn
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| Customers with properties that have an EPC rating of D or below communicated with to improve their homes' efficiency | 1.3 million | 0.8 million |
| Customers supported to become greener with products and services | 180,000 | >32,000 |
Status of our response to the TCFD recommendations
The FCA's Listing Rules require UK equity-listed companies to provide a statement of consistency with the TCFD framework. This requirement does not apply to Santander UK. However, we are voluntarily providing a statement to enhance transparency in our progress against the TCFD recommendations.
From 1 January 2023 the requirements of the new Companies Act (s414CA and CB) will require us to make similar disclosures.
We do not believe we are fully compliant with the TCFD framework yet. We have identified areas where we still need to make progress with respect to each of the four TCFD pillars, as follows:
Governance
We continue to develop our governance approach as our response to climate change evolves and matures. This includes new processes to support growing reporting requirements and commercial opportunities. The fast-changing regulatory environment requires us to continuously review our governance framework to ensure it is fit for purpose. We are streamlining our processes to create an agile approach to climate change supported by robust governance.
Strategy
For Strategy recommendations b) and c) we will continue to embed the results of our Climate Internal Scenario Analysis (CISA) to demonstrate our resilience to climate-related risks. We look to integrate this forward-looking analysis into our financial planning and business strategy. We are also developing commercial strategies to capture opportunities linked to the climate agenda.
Risk Management
Progress has been made relating to recommendations a) and b). We continue to enhance our capabilities for recommendation c). We have performed CISA and started to enhance our scenario analysis capability.
Metrics and Targets
Work is underway to gather credit exposure data by geography and average tenure. We have developed a client outreach programme to assess areas of vulnerability in our balance sheet to risks related to the transition to net zero and to identify ways to support customers on their transitions.
To develop interim Scope 1 and 2 reduction targets, we are assessing the impact of staff returning to offices and the move to our new headquarters in Milton Keynes in 2023.
Our disclosure for Scope 3 covers business travel only. We have made significant progress in measuring our main lending activities. As part the Banco Santander commitment1 to the Net Zero Banking Alliance (NZBA) we are working on setting decarbonisation plans for both short and long term timeframes and disclosure will be made in accordance with the NZBA requirements. We will also continue to work on disclosing more Scope 3 emissions in the future.
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| Climate change workshop with COP26 President |
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| The Board Responsible Banking Committee (RBC) hosted a climate change workshop in May 2022 with the Rt Hon Alok Sharma MP, President of the 26th United Nations Climate Change Conference (COP26). During the workshop we exchanged thoughts on our climate change strategy and ambitions, and the challenges we face as an industry. | | The dialogue concluded positively and we shared a summary of policy positions that would support the finance industry to decarbonise and help customers transition to a net zero economy. |
1 more information can be found in Banco Santander Climate Finance Report 2021-2022 : https://www.santander.com/content/dam/santander-com/en/documentos/informe-anual-de-sostenibilidad/2021/ias-2021-climate-finance-2021-en.pdf
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Annual Report 2022 | Santander UK Group Holdings plc 39 |
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Governance
Our climate change governance provides Board and Committee meetings held concurrently with Santander UK plc
Viewssenior management oversight of climate-related risks and opportunities. This supports our Climate Change strategy and the workforce at the Board
As the overwhelming majority of colleagues within the Santander UK group are employed inBoard's ambition to support the UK by Santander UK plc, thetransition to a low-carbon economy.
Governance of climate change is in place across all levels of our business. From Board have not appointed a Non-Executive Directorand Executive level, through our Risk and SRB functions, to represent the views of the workforce. However, the Board receives regular updates on the culture of theour business divisions, including Retail Banking, Consumer Finance and views of employees from engagement surveys feedback. The Board considers these arrangementsCorporate & Commercial Banking (CCB).
Climate change governance activities in 2022
We made significant progress in developing our approach to be invaluableclimate-related risk in understanding the views of the workforce and providing meaningful dialogue at the Board on workforce matters.2022.
Board Committees
Key Board Committee activities undertaken relating to climate change in 2022 included a review of the response to BoE’s CBES 2 and the PRA feedback on CBES. In addition, the Board Responsible Banking Committee (RBC) reviewed progress against our SRB performance metrics and the portfolio alignment exercise.
Executive Level Committees
At Executive management level, the Executive Risk Control Committee reviewed the planning and outputs of CISA. The Senior Management Committee (SMC) received updates on our climate change progress, including the portfolio alignment. The SMC made further recommendations to the Board-level committees.
Climate Leadership Group (CLG)
To reflect the rapid evolution of the climate change agenda in the banking sector we updated the Terms of Reference for our CLG. It is now chaired by the Head of SRB and meets monthly. It also reports more frequently to the Board and senior management committees on current and emerging climate risks and opportunities.
Throughout 2022, the CLG delivered regular updates to the SMC and Board RBC with a focus on our progress of the portfolio alignment exercise.
Climate Finance Working Groups
Our divisional Climate Finance Working Groups oversee the climate change and sustainability topics that are relevant to that division. In 2022, the working groups explored new products and services that will help our customers’ transition to a greener and more inclusive net zero economy. Initiatives included strengthening our process and practices on green finance and enhancing customer awareness on property energy efficiency and financing for retrofitting activities.
Our climate change governance framework
Our Climate Leadership Group (CLG) is responsible for recommending the overall Climate Change strategy and reports to the Board and senior management. Beneath the CLG, various working groups are responsible for the three pillars of our Climate Change strategy.
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| Board Risk Committee | | | Board Responsible Banking Committee | |
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| Executive Risk Control Committee | | | Senior Management Committee | |
| Responsible for: climate change financial risks and regulatory requirements (BoE, PRA, FCA) | | | Responsible for: assisting the Board in its aspiration to be a responsible bank, including its approach to ESG matters | |
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| | | | | | Responsible for: overseeing the development and implementation of the UK Climate Change strategy, encompassing the three strategic focus areas and eight enablers, including regulations and public policy | | | | | |
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| Climate Change Risk Working Group | | Climate Finance Working Groups | | Forum for Environmental Change | |
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| Responsible for: overseeing the management of climate risk in credit, market, liquidity and operations | | Responsible for: supporting customers' transition to a low-carbon economy with products and services | | Responsible for: reducing emissions in our operations in branches, offices and data centres | |
| Subgroups (x2): Scenario Analysis Working Group and Steering Committee | | Working Groups (x3): Homes, Consumer Finance, and Corporate and Commercial Banking | | Representation: Governance, procurement, data, Go Green, wellbeing and workplace, Sustainability and Responsible Banking | |
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Annual Report 2022 | Santander UK Group Holdings plc 40 |
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Our climate change governance structure
Our climate change governance structure strengthens our ability to identify, assess, manage and report climate risks, as follows:
–Committees: A number of Board and Executive committees, as well as dedicated working groups are responsible for climate-related risk
– Key senior management roles: A number of senior roles have specific responsibilities for climate risk management
– Risk organisational structure: We have the ‘three lines of defence’ model built into the way we run our business, including how we manage climate risk.
Our Climate change governance framework supports Santander UK's wider Governance structure. For more on the Board Risk Committee, Board Responsible Banking Committee and other relevant Board-level and senior executive committees, see the Governance section of this Annual Report.
Committees
The Board delegates certainand Board Level Committee responsibilities for climate risk are
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Board-level Committee | Main climate-related responsibilities |
Board Risk Committee (BRC) | –Approves risk appetite and maintains oversight of climate-related financial risks and regulatory requirements, including the BoE’s Climate Biennial Exploratory Scenario (CBES). |
Board Responsible Banking Committee (RBC) | –Recommends the SRB strategy (including climate change ambition level, policies, targets) to the Board and maintains oversight of execution. –Reviews climate disclosures, business performance against climate agenda priorities. |
The Executive Level Committee responsibilities for climate risk are: | | | | | | |
Executive level Committee | Main climate-related responsibilities | |
Executive Risk Control Committee (ERCC) | –Recommends risk appetite to BRC and reviews climate-related financial risks and compliance with regulatory requirements –Reviews planning and outputs of CISA. | |
Senior Management Committee (SMC) | –Sets the SRB strategy including climate change ambition level, policies, targets, and reviews progress –Reviews progress against climate agenda. Makes recommendations to Board committees. | |
The dedicated working group responsibilities for climate risk are: | | | | | | |
Working Group | | Main climate-related responsibilities |
Climate Leadership Group (CLG) | | –Oversees development and implementation of our Climate Change strategy –Coordinates and discusses strategic priorities and receives status updates from working groups. |
Climate Change Risk Working Group (CCRWG) | | –Coordinates and monitors delivery of climate change plan to manage climate change financial risks aligned with PRA expectations and TCFD –Reports progress to the CRO, the CLG and directly to the BRC and ERCC. |
Climate Finance Working Groups For Homes, Consumer Finance and CCB | | –Harness business opportunities from the transition to net zero, develop green products and services for customers and provide updates to the CLG |
Forum For Environmental Change (FFEC) | | –Oversees environmental matters on Santander UK Plc property, covering ISO14001 environmental management system, performance and communication to staff. |
Key senior management roles
Senior roles with specific responsibilities for managing climate risk are:
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Role | Main climate-related responsibilities |
Chief Risk Officer | The appointed Senior Management Function (SMF) with responsibility for climate-related financial risks. |
Head of Sustainability and Responsible Banking | Oversees our SRB strategy, including implementing our climate change strategy. Supports the business to manage climate risk, align our portfolios to net zero, and develop products and services that support customers and reduce our emissions. |
Head of Climate Change Risk | Coordinates and monitors delivery of our climate change implementation plan, managing the financial risks from climate change in line with PRA expectations and TCFD. Reports climate risks and progress to the CRO, the CLG and directly to the BRC and ERCC. |
Head of ESG and Climate Change in CCB | Acts as a central point of contact for ESG and climate-related matters in CCB. Responsible for raising awareness and training for CCB colleagues to enable them to support clients on climate change and sustainability. Reviews and responds to regulations that relate to our Sustainable Finance Classification System (SFCS) and including the UK Green Taxonomy. Supports all CCB regulatory climate stress testing. Develops new products and co-ordinates all ESG and climate matters that impact CCB. |
Risk organisational structure
As described in the Risk review section of this Annual Report, we use the 'three lines of defence' model to manage risk, including climate risk. Our Business Units, Business Support Units and Risk Control Units consider the impact of environmental and climate-related risks on our existing business risks in the medium and long term. Business Units are responsible for any climate-related risk identified in their business area. Business Support Units give Business Units specialist support on risk management. For climate-related risks, the Business Support Units include SRB, Technology & Operations, and Finance. The Risk Control Units report to the CRO and are responsible for the control and oversight of their respective risk type. For climate-related risks, the relevant Risk Control Units are credit, liquidity, pension, capital, operational, reputational, conduct & regulatory and legal risks. Internal Audit plays a key role in the governance of our ESG and climate change journey by providing assurance across a wide range of related topics. Internal Audit is developing an ESG audit strategy to provide line three assurance.
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Annual Report 2022 | Santander UK Group Holdings plc 41 |
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Strategy
Our ambition: Net Zero by 2050
Banco Santander has set an ambition to achieve net zero carbon emissions by 2050. In the UK we are aligned to this commitment and aim to reduce our emissions from our operations, and from our lending, advisory and investment services to meet this ambition.
Climate change is part of the Healthy Environment pillar of our SRB strategy. Our Climate Change strategy is made up of three pillars that cover the material climate-related risks and opportunities we face. Since 2020 we have achieved milestones within our Climate Change strategy and have also set internal targets for climate change. These include a target of £20bn of green finance by 2025.
As the climate change agenda grows, we aim to develop more targets to reflect our ambitions and track our progress.
This section consists of the following sub-sections:
–Our UK Climate Change strategy
–Progress within our Climate Change strategy
–Climate-related risks over short-, medium- and long-term
–Climate-related commercial and operational opportunities
–Financing the green transition.
UK Climate Change strategy framework
Climate change is one of Santander UK's most material sustainability and ESG issues. Our Climate Change strategy responds to this and focuses on three main areas that will deliver our net zero ambition:
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Our Climate Change strategy |
Ambition |
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Achieve net zero carbon emissions by 2050 |
Three strategic focus areas |
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| 1.Managing climate risks | | | 2.Supporting customers | | | 3.Reducing emissions in our operations |
| –Integrate climate considerations into risk management frameworks –Screen and stress test our portfolio to identify sector-specific transition and physical climate-related financial risks –Measure portfolio alignment and set risk appetites to help steer our portfolios in line with the Paris Agreement. | | | –Support customers to grow and succeed –Develop customer/client, sector and segment strategies to support and accelerate the transition to a zero-carbon economy –Create green products and services –Develop customer engagement plans –Ensure strategies are inclusive and avoid unintended social consequences. | | | –Review internal policies to consider climate –Continuous improvement of ISO certified environmental and energy management systems –Offset residual CO2 emissions –Create an internal green culture through employee engagement –Procure 100% green energy. |
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Eight enablers |
Governance and policies | Targets and KPIs | | Stakeholder management | Competencies and skills |
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Public policy, communication and brand | External partnerships | Reporting and disclosures | Pricing and/or rewards |
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Annual Report 2022 | Santander UK Group Holdings plc 42 |
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Progress within our Climate Change strategy in 2022
We recognise that meeting our net zero target needs ongoing and ambitious action. We have hit some positive milestones in the last few years and are working to set additional milestones that support our ambition.
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First steps on our journey to net zero by 2050 |
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2020 Achieved carbon neutrality in our operations | 2021 Removed unnecessary single-use plastics | 2022 Sourced 100% of electricity from renewable sources1 1.2 million customers moved to paper-free | 2025 Raise or facilitate £20bn of green finance | 2030 Reduce Scope 3 GHG emissions towards the 2050 group commitment | 2050 Net Zero |
1 100% renewable electricity sourced for Santander UK plc. Santander Financial Services plc, which is included in this report, is sourcing non-renewable electricity and represents 0.03% of Santander UK's total electricity consumption in 2022.
In 2022, we made significant progress across each of our UK Climate Change strategy pillars:
Managing climate risks
–Completed regulatory stress test exercises (BoE CBES and ECB’s climate stress tests) and the internal climate stress testing exercise (CISA). Started further development of the process to assess potential capital requirements for climate risk
–Implemented a climate change risk screening tool for suppliers
–Continued to measure financed emissions for Santander UK's two main lending activities (residential mortgages and auto finance)
–Launched an ESG data project to improve ESG data governance and strategy
–Implemented Climate Risk Assessment Model (CRAM), an assessment tool to monitor customers transition to net zero and show how we can help.
Supporting customers
–Launched the New Greener Homes Hub and home improvement loan for mortgage customers to support retrofitting properties
–Expanded free EnergyFact Reports offer to all Santander UK customers to inform and raise awareness of home energy efficiency.
Reducing emissions in our own operations
–Started a new Green Renewables contract
–Continued to work towards a BREEAM certification for our new head office, Unity Place, in Milton Keynes (due 2023)
–Contracted an independent sustainability ratings provider to assess sustainability ratings of our suppliers.
Enablers
–Updated the Climate change governance to strengthen the framework
–Ran a climate change Board Committeeslevel workshop with Rt Hon Alok Sharma MP
–Participated Bankers for Net Zero (B4NZ) roundtables, the Country chapter of Net Zero Banking Alliance (NZBA)
–Launched the sustainability and climate change training platform, Sustainability Unlocked, for CCB and Risk colleagues
–Entered a new collaboration with a pioneering climate tech business to market and expand the reach of their decarbonisation technology.
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| Developing a Just Transition | |
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| It is essential to recognise the needs of workers, communities and suppliers as the economy shifts towards low carbon. Ensuring that our activities continue to serve our stakeholders and communities is important to us. A fair transition ensures that vulnerable groups are not excluded. Everyone needs to have the chance to transition and prosper in a low-carbon economy. We joined the Financing Just Transition Alliance (FJTA) in 2022 to consider a just transition as part of our wider Climate Change strategy. The FJTA is coordinated by the Grantham Research Institute and the London School of Economics. It brings together finance industry peers to make sure their transition plans consider social implications alongside environmental. Our Homes division participated in FJTA workshops on identifying the social dimensions of decarbonising the UK Housing market. With the cost-of-living crisis and fuel poverty, the work with the Alliance and its members to build a whole-system approach is critical to meeting one of the greatest decarbonisation challenges. |
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Annual Report 2022 | Santander UK Group Holdings plc 43 |
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Climate-related risks and opportunities
The impacts of climate change present a range of risks to our business. The response to climate change, however, also offers real opportunities for us, our clients and how we operate.
Climate-related risks
Identifying, assessing and managing our climate risks is a key part of our Climate Change strategy. The complexity of climate change translates into a diverse range of risks. The first pillar of our Climate Change strategy addresses these risks. We assess our exposure to climate-related risk and establish processes to manage and respond to them. Our systems provide data inputs to our strategic and financial decision making. We also build our capabilities to test the resilience of our strategy and business against climate risks and their impacts.
Physical risks
Theseresult from the direct impacts of climate change such as increasing severity and frequency of extreme weather events. They can be acute (event-driven) or chronic. Chronic risks tend to materialise in the medium-to-longer term due to progressive climate shifts:
–Acute physical risks include more severe natural disasters. These include coastal floods, droughts, heatwaves, heavy precipitation, floods, landslides, hurricanes/cyclones, storm surges, water scarcity and stress, and wildfires
–Chronic physical risks include weather pattern shifts, extreme precipitation, higher average temperatures, chronic heatwaves and higher sea levels.
Physical risks can have economic impacts:
–Lower revenues owing to transport problems, supply chain disruption and other impacts that strain production
–Lower revenues and higher costs linked to workers’ health, safety, absenteeism and other workforce-related problems
–Write-offs and early retirement of assets due to property damage and high-risk locations
–Higher operating costs for example, from inadequate water supply for hydroelectric plants or to cool nuclear and fossil fuel plants
–Wind pattern shifts that reduce energy production from wind farms
–Higher capital costs, for example from damage to facilities
–Lower revenues from declining sales.
Transition risks
These relate to the process of adjustment towards a low-carbon economy. They arise from policymaking, technology, market sentiment and reputation changes in response to climate change:
–Government policymaking and action can give rise to higher operating costs for carbon intensive customers. Policies can introduce enhanced reporting obligations, especially on emissions and green taxonomy disclosures
–Potential prudential treatment for high carbon-related exposures, which could also raise financing costs for customers. These impacts appear in the short-to-medium term
–Technological advances, such as in renewable energy, energy storage and energy efficiency could render companies’ systems obsolete. This could make them less competitive in the medium-to-long term
–Market sentiment can have an impact on supply and demand in the medium-to-long term. This could come from changes in customer preferences, companies’ sales mix, energy pricing and asset revaluation
–Reputation impacts can lead to a sudden drop in demand for goods and services from discredited sectors or companies.
Climate change impact on financial planning and financial performance
It is important to understand the risks and opportunities to our balance sheet from climate change. A current example is how the energy crisis and war in Ukraine could affect the energy transition. We undertake climate scenario modelling to better understand these potential impacts on our business portfolios. This helps with devising actions that can mitigate these risks. Examples of potential climate-related impacts include:
–Impact of changing economics on house prices and mortgage repayments
–Possible consequences of policies that promote rapid transition and will require retrofits and upgrades to improve energy efficiency. We also consider if grants may be available to support our customers with upgrade costs
–The impact on affordability and associated household costs from increasing energy costs. We consider customers whose properties and have potentially lower EPC scores and associated energy costs
–Sectoral analysis of the impact of transition for our CCB customers. This includes EPC improvements of commercial properties, moving to renewable energy sources, reducing Scope 1-3 emissions or progressing sustainability plans.
The resilience of our Climate Change strategy
Our strategic approach not only reviews climate-related risks and opportunities. It also assesses our resilience to climate-related risk.
We took part in the BoE's CBES in 2021 and the ECB climate stress test in 2022. We are developing our regular in-house scenario analysis process – CISA. This will help us to enhance our processes and explore opportunities and impacts on the business. Our approach and full details are available in the Risk Management section below.
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Climate risk factors |
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Physical risks Leading to more severe natural disasters such as higher sea levels, higher temperatures and extreme flooding storms or heatwaves | | | Transition risks Shifts in consumer behaviours and preferences, policy changes affecting EPC ratings and technological advances |
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Potential economic impacts |
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Falling house prices | Falling Equity and Bond prices | | | Market and credit losses | Supply chain disruption |
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Financial implications |
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Credit losses and capital requirements | Write-downs of carbon-intensive assets | | | Falling Equity and Bond prices | Market and liquidity risk |
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Annual Report 2022 | Santander UK Group Holdings plc 44 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Climate-related risks over the short, medium and long term
The below table outlines the potential physical risk and transitional risk impacts arising from climate change. It includes an initial assessment of how these risks affect our key business segments over time.
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Climate risk type and drivers | Impact | Business Impact (low, medium, high) | Time horizon |
Physical risk |
Acute | –More frequent and severe climate events such as flooding, and drought that could affect our business and customers –Extreme events that could cause damage to our sites. | –Damage may occur to properties in our retail and commercial mortgage books, reducing collateral values (low) –Santander UK-owned property, or third-party supplier impacts could impact customer servicing (low). | ST, MT, LT |
Chronic | –Changes in weather patterns and stability of local ecosystems affecting food production and living environments impacting customers whose operations are exposed to vulnerable ecosystems –Rising temperatures affecting working conditions, living conditions and local infrastructure. –Rising sea levels affecting local ecosystems, increasing subsidence and food risks in our financial assets. | LT |
Transition risk |
Market and customers | –Change in consumer behaviours including deliberate move to more sustainable products –Potential loss of competitive advantage with our green product proposition or pricing risks. | –Strategic risk of not keeping pace if consumer preferences rapidly move towards more sustainable products (low). | ST, MT |
Policy making | –More demanding policy environment and standards affecting our customers' business operations and customer behaviour –Increased greenhouse gas emissions pricing to foster movement to renewable energy. | –Strategic risk of a rapid disorderly transition (low) –Potential risk of stranded customer assets if minimum EPC standards are enforced without government transition assistance (medium) –Dependency on policy making to achieve decarbonisation of material lending portfolios. Risk of falling behind if appropriate policies are not implemented or in a timely manner (medium). | ST, MT, LT |
Technology and data | –The need to invest in technology to reduce emissions or improve energy efficiency ratings –Lack of procedures and systems to obtain and store reliable data for risk assessments, classification and disclosure. | –For Consumer Finance, there is a risk that rapid technological obsolescence could result in lower vehicle residual values (low) –All business areas are subject to the risk of investments being made in green technologies that are rapidly superseded (low) –There are operational costs and greenwashing risks associated with misclassification of green assets and transition reporting (low). | MT |
Regulatory pressure | –Increasingly demanding banking regulation (for example, disclosure, stress testing, taxonomies) and increasing complexity and/or inconsistency with a scope required where data is not available or reliable –Inefficiencies as consequence of different climate regulations from various jurisdictions. | –Santander UK, as a subsidiary of Banco Santander, is exposed to a risk of arbitrage given differences in climate- related definitions (low) –Higher operating costs may be incurred as a result of multiple and conflicting regulatory reporting requirements (low). | ST, MT |
Reputational | –Risk of slow or lack of sufficient reaction impacting reputation –Increased scrutiny from different stakeholders (for example, supervisors, regulators, media, NGOs, investors) –Perceived not to be meeting, sufficiently progressing, or providing transparency on climate-related commitments –Liability implications as an intermediary in several value chains (for example, data, products, financial services) –Reputational impact from potential misalignment of emissions reduction commitments with performance in specific portfolios. | –Increased customer and regulatory scrutiny due to changing public opinion and increased regulation, which we are perceived as not to be meeting, sufficiently progressing, or providing transparency on climate-related commitments (low). | ST, MT, LT |
ST - short term: 0-3 years, MT - medium term: 3-5 years, LT - long term: 5-30 years
Business impact (low, medium, high): the scale of potential loss in terms of profitability/revenues, diminishing value of collateral/assets or occurrence of increased potential costs that Santander UK could face for climate- related events.
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Annual Report 2022 | Santander UK Group Holdings plc 45 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Climate-related opportunities
Climate change also presents commercial and operational opportunities for Santander UK.
To ensure we capitalise on these it is crucial we track the development of emerging and transition technology. We also need to understand the challenges customers face in adapting to the low-carbon transition. We aim to identify and develop innovative ideas, collaborations and products that are commercial opportunities.
The opportunities presented by climate change and the transition to a low-carbon economy are reflected in the second and third pillars of our Climate Change strategy. These are: 'Supporting customers' transition' and 'Reducing emissions in our own operations'.
In 2022, we reviewed the climate-related opportunities in areas where climate change has a material impact on our mortgage, consumer and corporate businesses.
It validated our strategic goal to support the transition by providing green and sustainable finance. We have set our target of £20bn of green financing by 2025. We also identified key enablers that will help to not only achieve but exceed our ambition.
The opportunities from climate change we have identified are outlined in the table below.We will also conduct a review of metrics and targets associated with these opportunities in 2023 to ensure they continue to be fit for purpose in meeting our sustainability priorities.
Climate-related opportunities over the short, medium and long term
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Commercial opportunities | Potential Impact on Santander UK | Market enablers | Time horizon |
Retail Banking - Homes | |
Green mortgages | –Increase balance sheet and funding requirement –Reduce relative exposure to energy inefficient properties.
| –Growth of energy efficient properties (EPC rating A and B) by maintaining levels of lending on new build properties, subject to new build supply and development, and encouraging the retrofitting of existing property stock –Public policy and regulations that can encourage homeowners and property sector to retrofit. | MT, LT |
Financing of retrofitting activities | –Grow the number of properties rated as energy efficient. | –Skills infrastructure growth to deliver retrofitting solutions in the market at scale –Increased awareness and knowledge of property owners on retrofitting –Clear and consistent Government policy on retrofitting. | MT, LT |
Consumer Finance | |
Financing to enable shift to EVs | –Reduce financed emission intensity –Establish new partnerships, such as with charging providers. | –Car manufacturers corporate strategy to transition to electric or hybrid vehicles –Consumer uptake and acceptance of electric or hybrid vehicles. | ST, MT |
Financing of additional technologies that enable low-carbon mobility solutions | –Establish new partnerships, e.g., with solar panel providers –Collaboration between Consumer Finance and Homes to offer complimentary products. | | MT, LT |
Corporate & Commercial Banking | |
Financing of –wind, solar and renewable energy –EV charging infrastructure –battery storage systems | –Increase in volume of green lending and sustainable-linked financing. | –Supportive public policy for renewables energy and balanced cost-benefit for energy providers and consumers –Consumer uptake of electric and hybrid vehicles –Growth of battery demand and supply. | ST, MT |
Continuing to eliminate carbon-intensive lending activities to support the green transition | | |
Supporting clients in the just transition | | |
Operational Opportunities | Potential Impact on Santander UK | Approach | Time horizon |
Reduce emissions in our properties, operations and company cars | –Potential cost savings from sourcing renewable energy and independence from gas/ electricity supply.
| –Work further to reduce our carbon emissions in our properties –Transfer a majority of our activities to our new headquarters Milton Keynes which will be completed and BREEAM certified in 2023 –Aim to retain ISO14001 and ISO50001 Management Systems. | ST, MT |
Supply chain management | –Increased transparency on suppliers' sustainability performance –Enhanced reporting on Scope 3 upstream emissions. | –Assess our suppliers using an independent sustainability rating provider and work with our suppliers to promote progress through specific KPIs and metrics. | ST, MT, LT |
ST - short term: 0-3 years, MT - medium term: 3-5 years, LT - long term: 5-30 years
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Annual Report 2022 | Santander UK Group Holdings plc 46 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Financing the Green Transition
Supporting our retail banking and corporate clients in the climate change transition is important to us and is reflected in our second pillar of our Climate Change strategy.
How we are supporting the climate change transition
We are engaging with our retail, business and corporate customers to identify the challenges and opportunities they face from the low-carbon transitioning and adapting to climate change.
In our Retail Banking and Consumer Finance divisions, there is a need for financial products and services that help improve energy inefficient properties and accelerate the uptake of electric vehicles.
These include:
–The purchase construction and refurbishment of energy-efficient buildings
–Installation and refurbishment of renewable power systems that use less energy
–Retrofitting activities, including insulation, double glazing of windows, installation of heat pumps are required
–Leasing of electric and hybrid vehicles
–Installation of EV charging points
We support our CCB clients with dedicated financing for renewable energy products and storage, such as solar panels, wind farms and battery production.
Our green finance performance
12%
Green Asset Ratio 2022
The EU's Non-Financial Reporting Directive (NFRD) sets out a framework for banks on how to report on sustainable finance activities. In response to Banco Santander's reporting requirement, in 2022 we started to assess our volume of green assets according to the EU Green Taxonomy.
The Green Asset Ratio (GAR) measures the share of taxonomy-eligible and taxonomy-aligned assets over the Bank's total assets. As of 2022, our GAR was 12%. Although it is not mandatory for us to report on GAR, we use this metric to enhance transparency of our own sustainable performance. We aim to use GAR to inform internal decision-making processes related to our green finance strategy. This is the first year of measuring this metric. We are looking to improve our GAR in the next coming years by increasing our green proposition to customers and providing more green finance.
We adopted Banco Santander’s SFCS, which outlines criteria to consider if an asset is green, social or sustainable across the Banco Santander group. By applying the SFCS we have identified multiple assets as green financing. The following can be considered most representative: renewable energy and other green energy financing, mortgages on properties with A- or B- rated EPCs and financing for vehicles with emissions of 50g CO2/ km or less.
In 2022 alone, we raised and facilitated £6.5bn of green finance according to the SFCS guidance. Since 2021, we have supported our customers with more than £10bn of green finance.
Consumer Finance provided £714m of financing to low-emission vehicles in 2022, representing a year-on-year growth of 64%. Similarly, CCB accelerated their green finance activities, growing their green financing from £199m in 2021 to £557m in 2022.
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| Reducing our exposure to carbon intensive sectors | |
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| Our ESCC Risk Management policy reflects our fundamental values and guides how we operate as a responsible lender. We assess any lending as a fossil fuel exposure if the counterparty is engaged in any of the activities laid out in the policy. This includes for example, the production and treatment, including refining, transportation, storage and wholesale distribution, of oil and gas; any coal mining or extraction activities; power plants; and the construction and maintenance of electricity transmission lines. The policy draws upon international standards and sector-specific regulations and guidelines to ensure we incorporate best practices. At 31 December 2022, Santander UK's exposure to fossil fuel sectors was only 0.4% of our total non-financial corporate lending. In line with Banco Santander's 2050 net zero commitment, by 2030 we will eliminate all exposure to thermal coal mining and not provide financial services to power generation clients with more than 10% of revenue from thermal coal. For more on Banco Santander's commitment and approach to carbon-intensive sectors, please see Banco Santander's Climate Finance Report 2021-2022. Our Risk Review section in the Annual Report contains further information on how we identify, assess, manage and report risks within our lending exposures. |
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Annual Report 2022 | Santander UK Group Holdings plc 47 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Retail Banking
Homes
Nineteen million homes in the UK have an EPC rating of D or below. This is both a challenge and an opportunity for the UK to improve the energy efficiency of these properties. In 2022, Homes launched a new home improvement loan to support customers planning green retrofits. We also launched the Greener Homes Hub, giving customers online information on energy efficiency. We continue to provide access to a free, digital EnergyFact Report tailored to each customer’s home. These tools will help raise customer awareness on energy efficiency. We have provided 11,500 EnergyFact Reports since 2021 including 6,000 in the second half of 2022 alone.
Everyday Banking
Everyday Banking supports customers and colleagues in the transition to a low carbon economy with the following products and services:
–We are working closely with Santander Asset Management1 to better understand customers’ needs on Sustainable Investment products. We are conducting customer research and designing offerings that will allow customers to invest their money in products that support people and planet.
–Through Santander UK’s National Parks Partnership we are exploring innovative investment solutions to deliver much-needed private capital to fund nature-based solutions.
We conducted research to discover how we can improve our customers’ awareness and understanding of how to reduce their contribution to climate change to help dischargethem transition to a low-carbon economy. The research shows that customers want help in this area. To provide support, we will be launching a carbon footprint tool in 2023 through My Money Manager, our personal finance management tool on the Santander mobile app. The tool will provide customers with their estimated carbon footprint and ideas on how to reduce their impact.
Consumer Finance
We have implemented a number of initiatives to help finance the green transition. In 2021, we set up the green finance dashboard and we track performance every month at the Climate Action and Sustainability Forum (CASF), the divisional working group for sustainability and climate change. CASF follows key trends and influences on green finance and identifies commercial opportunities to finance hybrid and electric vehicles. CASF’s scope included a review of Consumer Finance's risk appetite in 2022 which allowed increased financing on used EVs. Key updates CASF and the green finance dashboard are reported quarterly to the Consumer Finance Board. Non-auto financing increased in 2022 through an expanded cycle dealer network. We are also exploring other opportunities to offer finance to customers to support the shift to more sustainable lifestyles.
For 2023, we will review the trends and motivations for customers to shift to green vehicles. This will include reviewing opportunities to support them with financing. Aligned to this, we have engaged with the Green Finance Institute to look at ways to overcome barriers to EV uptake and financing.
Corporate & Commercial Banking
In 2022, we expanded our sustainability lending proposition in CCB. We are providing more opportunities for customers to start or accelerate their transition towards a net zero economy. Our Sustainability-linked lending has enabled corporate clients to strengthen their sustainability ambitions by aligning their commitments and targets to their finances. In 2022, we participated in £590m of sustainability-linked financing in a variety of sectors in the UK. We also delivered £557m of green financing to CCB customers. Examples of corporate clients’ targets that have been linked to our financing include, reducing Scope 1, 2 and 3 carbon emissions, enhancing diversity and inclusion, and improving community impact or improving operational waste and efficiency. This is a small sample of sustainability-aligned performance indicators that have helped CCB clients to accelerate their sustainability journey. We are one of the market-leading lenders in battery storage project financing providing more than £360m in funding since 2019. In 2022, we also provided £1.9bn of Social Housing loans.
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| Buying into the Green Homes Revolution | | | Supporting the switch to electric vehicles | | | | Financing battery storage | |
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| In October 2022, we launched the ‘Buying into the Green Homes Revolution’ report. The report highlights the main challenges to accelerating energy efficiency retrofitting in UK homes. These include a lack of skills infrastructure and the knowledge gap of consumers on how to make their property more energy efficient. The report’s findings are based on interviews with over 2,300 UK homebuyers and owners, estate agents and mortgage brokers. This research will help us develop suitable products and services and raise customer awareness. It will also support our public policy engagement in the best way to accelerate retrofitting in the UK. | | | 2022 saw CCB develop its first financing facility to support the switch to electric vehicles. With financing totalling £25.5m, CCB strengthened its relationship with Zenobē, the UK’s market leader in providing end-to-end solutions for fleet operators moving to zero-carbon fleets. The new financing marks CCB's entry into a high-growth sector that actively supports the UK Government’s ambition to decarbonise the transport sector. CCB has previously provided finance to Zenobē’s Battery Energy Storage Systems division which provides grid scale battery storage solutions.
Consumer Finance provided financing for 16,400 electric and hybrid vehicles in 2021. In 2022, the portfolio grew to more than 24,000 green vehicles, supporting more customers to switch to electric transport. | | | | High-quality battery storage is recognised as a key enabler of the UK’s transition to net zero. CCB continues to build its strong position in this sector and has provided over £360m of financing since 2019 to support the sector. Our success comes from the strong relationships we have established with market-leading project developers, including TagEnergy. We have delivered financing to support the build and operation of four TagEnergy battery projects in the last 18 months. One is operational, a 20MW/40MWh standalone storage system, with the other three due to come online later in 2023 and 2024. | |
1 Santander Asset Management sits outside of Santander UK Group Holdings plc and is also a subsidiary of the wider Banco Santander group
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Annual Report 2022 | Santander UK Group Holdings plc 48 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Risk Management
The risks associated with climate and environmental change are key issues for us and our stakeholders. We focused on managing them effectively.
We regularly review the Top risks that could affect our business, customers and shareholders. They are monitored at meetings of the Board Risk Committee and Executive Risk Control Committee.
Climate risk is considered as one of the principal risks to our business. Our Top risks in 2022 are summarised in the Risk management overview section of this report and covered in detail in the Risk review.
Impact of climate risk on our key risk types
Although climate risk can impact all risk types, the main risk types impacted by climate risk are:
Operational risk and resilience
Climate change has a clear impact on operational risk. Extreme weather may force closures or damage to our offices, data centres and branches. It could damage services provided by our suppliers which may affect our ability to operate.
Credit risk
Certain sectors will be affected more than others by climate risk. Some sectors may be affected by transition risks such as transport, whilst others will be more impacted from physical risk.
Physical climate risks may give rise to credit losses if weather-related events affect customers' ability to repay their debts. Collateral values could also be impacted as a result of damage to physical assets.
Transition risks include changes in Government policy related to residential homes and property value. For example, closing the Flood Re Scheme impacts homeowners, who have been flooded or are in high flood risk areas, and their ability to get flood insurance.
Reputational risk
Climate risks may arise from our own business activities and also from failing to meet sustainability targets. We are also mindful of the counterparties that we lend to and ensure that green lending does not undermine the positive efforts of the climate change agenda. Reputational risk may arise from classifying and reporting assets incorrectly as green or sustainable.
Pension risk
Climate change may present long-term risks to the value and security of pension scheme investments. There is a risk that investment of funds could be made without considering climate-related risks as our schemes are managed by trustees.
Liquidity risk
Climate risk may result in increased withdrawals of deposits. This could be acute physical hazard or changing customer sentiment due to a reputational event.
Our UK Climate Change Risk taxonomy
This is a qualitative classification of our portfolios’ potential exposure to climate risks. It gives us a common language and method for portfolio holders and decision makers to support their climate-related decisions. The taxonomy assigns corporate sectors a risk rating on a five-point scale for physical and transition climate change risks. Using guidance from Banco Santander, in 2022 we held workshops with our credit experts to validate these sector risk ratings.
Our climate risk operating model
Our SRB and Enterprise risk teams act as centres of excellence. They are responsible for integrating climate change considerations into teams across the first and second lines of defence.
The SRB team leads the Climate Leadership Group, which is responsible for implementing our Climate Change strategy. The SRB team works with our businesses on calculating financed emissions, setting decarbonisation targets and developing a transition plan.
The Climate Risk team reviews the impact of our net-zero-aligned commercial strategies and transition plans on our overall risk position and credit risk. The SRB team works with the business to develop products and services to achieve this. For more, see 'Financing the green transition'.
Our Enterprise Risk team leads the Climate Change Risk Working Group which manages climate risk across risk types. Enterprise Risk has also developed our Climate Change Risk Policy and coordinated our response to the PRA Supervisory Statement 3/19.
Managing climate-related risks
To manage the risks associated with climate change, we have a range of policies such as the ESCC Risk Management policy. In addition, theClimate Change Risk Policyoutlines the steps that our risk teams will take to identify, assess, manage and report on climate-related risks in our business and our primary supply chain.
The policy represents the minimum requirements for how we will manage and control climate-related financial risk. It covers the material physical and transition risks that exist in all risk types .
We remain committed to following best practices, international standards, treaties and references including:
–The Equator Principles
–The standards for social and environmental performance and the explanatory notes of the International Finance Corporation (IFC)
–The United Nations Global Compact
–The Universal Declaration of Human Rights
–The International Labour Organisation Declaration
–The Convention on the Rights of the Child
–The Rio Declaration on Environment
–The United Nations Convention against corruption.
We also follow standards specific to the activities in the oil and gas, power generation and mining and metals sectors, and those associated with businesses engaged in soft commodities.
Our UK risk management framework
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Annual Report 2022 | Santander UK Group Holdings plc 49 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Climate-related risk appetite
The Santander UK plc Board develops our qualitative climate risk appetite statement. We used data from internal and external analyses in 2022 to develop further and approve the climate risk appetite statements. Our climate change risk management follows six pillars which are aligned to the four PRA Pillars
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PRA Pillar | Santander Pillar | Description |
Governance | Internal stakeholder engagement and capacity building | Understanding the climate issues that we face, up to Board-level. Ensuring we have adequate resources to implement the actions defined in the other pillars of our implementation plan |
Governance | Defining how we ensure there is Board and senior management oversight and management of financial climate risks and climate change issues |
Scenario analysis | Strategy and scenario analysis | Understanding the financial and strategic implications of climate risks, including via scenario analysis |
Risk management | Risk management | Embedding climate change into business-as-usual risk management across all portfolios |
Disclosure | Metrics and targets | Defining metrics and targets to assess and manage climate-related risks and opportunities |
Disclosure | Ensuring we make required disclosures of financial climate risks and monitor how they are managed |
Roles and responsibilities
We have allocated roles and responsibilities across risk types. | | | | | |
Team | Sample of Accountabilities |
Sustainability and Responsible Banking | –Design and development of Climate Change strategy, including alignment with SRB strategy –TCFD reporting and target-setting including performing analysis in line with Paris pathway. |
First Line of Defence teams | –The identification, assessment, management and monitoring climate change risks –Enhance decision-making to include climate change –Understand the impact of scenario analysis outputs, leading client engagement on climate change risk. |
Second Line of Defence teams |
Enterprise Risk | –Runs climate change implementation plan and ensuring compliance to SMF accountabilities –Develop centralised climate change risk report and associated Management information –Develop business-configurable climate scenarios which will feed into stress testing and other processes. |
Risk owners | –Update relevant policies and procedures in response to climate risk and maintain accountability for risk control –Monitor key indicators for climate-related risk and opportunities. |
Credit Stress Testing | –Execution of climate stress tests for Retail and Corporate portfolios, and reporting of scenario outputs –Supporting Enterprise Risk to shape the climate stress testing scenarios supported by economics. |
Third Line of Defence Teams | –Assess the efficiency and effectiveness of processes and systems; compliance with regulation and supervisory requirements; and the reliability and integrity of financial and operational ESG reporting |
Developments in 2022
Credit risk
In 2022, we embedded a green dashboard in Consumer Finance to monitor the mix of vehicles we finance based on engine type. We also launched our Climate Risk Assessment Model (CRAM) to assess climate-related risk across corporate and commercial portfolios.
Climate risk considerations are now part of the product approval processes. We also established CISA and development programmes that will enhance the inputs into our credit decision processes.
Within the Home division, we have created a dashboard of key metrics to monitor potential climate change impacts and climate transitional risks across the mortgage book.
Operational risk & resilience
We included climate change scenarios within the Operational Risk Scenario Programme. We implemented the Environmental Operations Policy Statement, which outlines how we will manage the environmental impacts of our business. We also introduced a climate screening process when we use third parties.
Liquidity risk
A liquidity impacted scenario was tested based on the Disorderly Accelerated Transition scenario in the CISA. We also participated in the 2022 European Banking Authority (EBA) Climate Stress Exercise for Liquidity where an energy transition and nuclear disaster scenarios were tested.
Reputational risk
We reviewed sustainable finance products and green finance initiatives to ensure any green labelling is fit for purpose.
In addition, we explored the impact on liquidity and reputational risk was explored from potential negative media attention resulting from both Santander UK and Banco Santander group activities.
Pension risk
The Pension Scheme established a Sustainability Committee and published their TCFD. Specific responsibilities for climate-related risks and opportunities were agreed to ensure adequate management and oversight.
The Scheme explored and agreed a range of climate-specific investment objectives and policies to inform its duties, as detailedongoing investment approach.
Third-party risk
Climate considerations have been incorporated into our onboarding process for third parties. We have partnered with a sustainability ratings provider to measure the quality of a potential supplier's sustainability management system through its policies, actions and results.
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| Climate risks in our pension scheme | |
| The Santander (UK) Group Pension scheme Trustees are responsible for managing climate risk. A dedicated sustainability committee supports them. It oversees the Scheme’s sustainability strategy, climate policies and regulatory obligations. It has the responsibility for ensuring that the Scheme meets its net zero by 2050 carbon target. In 2022, the Scheme’s Responsible Investment Policy was updated to provide an additional focus on climate risks. Scenario analysis was completed to identify how these risks might affect the Scheme’s funding and investment strategies. For more on the Scheme’s approach relating to climate risk, see its TCFD report. | |
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Annual Report 2022 | Santander UK Group Holdings plc 50 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Climate stress testing and scenario analysis
Bank of England’s Climate Biennial Exploratory Scenario
We participated in the BoE's Biennial Exploratory Scenario for Climate Change (CBES). The CBES is an exploratory exercise to help the BoE size the finance sector’s exposure to climate risks. It reviews risks across three climate scenarios over a 30-year horizon. The exercise helps companies understand challenges to their business models and likely responses to climate-related risk. The CBES does not test capital adequacy or establish capital requirements.
Partnering with third-party climate modelling experts, we used internal and market datasets to feed into the CBES models used to complete this exercise. We also reached out to around 230 of our largest corporate clients. The responses we received helped us model the impact of climate risks across each of the three scenarios.
This analysis covered most of our balance sheet assets across Retail Banking and CCB.
After analysing the outputs, we defined more than 60 strategic management actions that we could take in relation to each scenario to mitigate the impact of climate change on our portfolios.
In January 2022, the BoE requested participants to perform a qualitative follow-up exercise.
The questions requested a qualitative, high-level sizing of potential loan book changes that might arise by 2050 from management actions and opportunities.
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CBES scenario | Scenario characteristics |
Early Action (Orderly) | – Assumes early and decisive action immediately in 2021 and is sufficient to limit global average temperature increases to below 2°C, in line with Paris Agreement – Carbon prices increase steadily from 2021 to 2050 and global CO2 emissions reach net zero around 2050 – This scenario has the least transition and physical risk. |
Late Action (Disorderly) | –Like the early action, this scenario assumes policy action will suffice to successfully limit warming to under 2°C by 2100 – Action to address climate change is delayed by ten years to 2030. Carbon prices undergo a steeper increase – Physical risks rise quicker than in the early action scenario and transition risks are also higher. |
No Additional Action | –This scenario explores what may happen if there are no further climate policies introduced beyond those already in place in 2021 – This results in limited technological transition and the climate target is not met – Global average temperature increases substantially by 2080 – This scenario tests resilience to both chronic changes in weather and more frequent and extreme weather events – There are limited transition risks, but more severe physical risks. |
European Central Bank stress testing
This was a constrained bottom-up stress test. It required participants to provide data and projections for different climate risk scenarios following a common methodology. The five climate risk scenarios tested were largely based on the outputs of the Phase II Network for Greening the Financial System (NGFS) models (released in June 2021). The exercise did not test capital adequacy similar to traditional stress tests.
There were a number of differences between the ECB stress test and the conventional UK PRA regulatory stress test and the CBES. The ECB test provided an additional scenario to help our analysis and magnify portfolio vulnerabilities, which can then be assessed.
Under the ECB stress test, we only needed to consider the transition risks of climate change on our mortgage and corporate books. Climate-related physical risks were out of scope.
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ECB scenario | Scenario characteristics |
Short term disorderly | –Three-year disorderly transition triggered by a sharp increase in the price of carbon emissions –Identifying potential vulnerabilities connected to a severe but plausible disorderly transition due to unexpected measures taken to reduce carbon emissions in the short term –Inspired by the increase in carbon price needed in the NGFS disorderly transition scenario to achieve the Paris Agreement targets to limits global temperature rise to 2°C. |
Long term orderly | –30-year scenario which explored early and decisive action to reduce global emissions in a gradual way –Clearly signposted government policies implemented relatively smoothly –Actions are sufficient to limit global average temperature increases to below 2°C by 2050. |
Long term disorderly | –30-year scenario where action to address climate change is delayed to 2030 –Due to the rapid transition needed, a deeper adjustment is required –Steeper increase in global carbon prices in a late attempt to meet the climate target of net zero by 2050. |
Long term hot house | –Governments fail to introduce policies to address climate change other than those already announced –Companies and consumers do not change their behaviour to reduce emissions. The transition to a low-carbon economy does not take place, so transition risks are very low or not existent –Emissions gradually decline in this scenario, although they continue to grow until 2080, leading to around 3°C of warming. |
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Annual Report 2022 | Santander UK Group Holdings plc 51 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Climate Internal Scenario Analysis (CISA)
In 2022 we developed a CISA to help understand better the potential impact of climate change on our business portfolios and balance sheet.
We generated three qualitative scenarios for climate-related risks. We also quantified potential losses from an early disorderly transition, for example linked to the current energy crisis and conflict in Ukraine.
The CISA outputs will form the basis of our 2022 ICAAP for climate risk. This will help to show if we need to hold more capital for climate-related risk and help us prioritise our actions for the next five years.
We developed the CISA in three phases:
–Phase 1 defined climate change scenarios and explored their potential impact. At the end of Phase 1, we selected the scenario to quantify in Phase 2
–Phase 2 assessed the chosen scenario for its economic impact on the balance sheet and modelled potential losses
–Phase 3 reviewed and finalised the results, including applying expert judgement. It added a sensitivity analysis and extended the time frame from 5 to 30 years.
The impacts assessed through the CISA include:
–Impact on house prices from climate change and interest rates on mortgages
–Possible consequences of policies that promote rapid transition and require retrofits and upgrades to improve energy efficiency. This takes into account any grants towards upgrade grants
–Impact on household finances from higher energy costs and taking account of customers whose homes have lower EPC scores
–Sectoral analysis of the financial impact of transition risks. This includes EPC improvements, moving to renewable energy sources, reducing Scope 1 to 3 emissions, and progressing sustainability plans.
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CISA scenario | Scenario characteristics |
Accelerated transition | –Immediate and disorderly transition where geopolitical tension creates uncertainty over global energy market supply chains –This creates an emphasis on domestic energy security where the government funds an accelerated transition to renewable energy supplies. For example, grants to assist with a mass rollout of electric heat pumps, electric vehicles and renewable energy sources, such as offshore wind, which reduces the reliance on Russian energy. |
Cost-sensitive transition | –A steady state scenario where real income growth continues its weak trend and energy transition continues in a cost sensitive way –Stable energy markets, and cheaper wholesale prices, keep gas in the energy mix –Private investment is expected to provide the bulk of the funding, with the government reluctant to directly pass-on infrastructure investment costs to the public. |
De-prioritised transition | –Energy transition becomes more expensive due to geopolitical fragmentation and superpower competition –Climate action is de-prioritised until 2030, permanently slowing transition in Europe. |
Outcomes of Scenario analysis
The CBES assessment was performed against long-term scenarios and a static balance sheet. This provided valuable understanding of modelling capabilities and development. However, it provided only limited insight into potential credit risk exposures that could be reflected in our provisioning assessments or credit decisions.
Through CBES and CBES 2, a set of management actions were defined to further explore portfolio risks and opportunities. This included identifying the need to perform a shorter-term scenario analysis on our balance sheet (CISA) and set out modelling capability enhancements (CISA Development Programme). These stress tests help us to understand our exposure and sensitivity to climate-related transition and physical risks in our loan book.
We used our CISA 2022 results to inform provisioning assessments against the modelled accelerated disorderly transition scenario. The range of losses over the 5-year horizon peaks at c.£1.2bn driven mainly by the economic scenario rather than climate factors. This loss estimate falls in the range of our IFRS 9 Expected Credit Loss scenarios, as described in the Risk Review, so no further provision is deemed necessary.
Evolving our approach to climate risk assessment
We have reflected on the learnings from our scenario analysis exercises. We are working on an end-to-end assessment of the capabilities we need for our climate scenario analysis, such as:
–Scenario generation – making sure we look at plausible, coherent and timely scenarios
–Establishing economic parameters – considering how economics may evolve due to policy changes or physical risk impacts
–Credit decisioning results – ensuring that decisions we make are simple, personal and fair
–Disclosures – the different regulatory data we need to report for transparency
–Governance – how we ensure decisions are taken at the correct management levels.
We are also upgrading our systems to capture more data that will improve our climate scenario modelling capabilities.
Client engagement
The CBES gave us an opportunity to reach out to customers to discover their adaptation plans for climate-related risk. This helped us identify how we can support them to accelerate their transition to net zero.
Data strategy
Both regulatory exercises required us to gather data from external sources for our models. This learning allowed us to plan how to collate data for future exercises by engaging with clients, using proxy methodologies and external sources.
Modelling development
We expect scenario analysis to increase and the models needed to identify climate risk will need to evolve. This allowed us to explore developments to our scenario analysis operating model and to reflect longer-term horizons.
Business strategy
The stress tests allowed us to consider and prioritise the actions we would take and build this into our strategy planning processes.
Increasing understanding on climate risk
We are assessing our capacity to comply with new and evolving regulations that can affect credit risk policies and procedures. This led to initiatives to increase our awareness of regulatory risks and horizon planning. We plan to focus on the physical risks that can affect our balance sheet, especially our large mortgage portfolio.
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Annual Report 2022 | Santander UK Group Holdings plc 52 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Metrics and targets
Our Climate Change strategy sets out medium-term metrics and targets across the business. These measure our performance and underpin our progress against the climate change agenda. They form part of our SRB medium-term scorecard.
Our targets are ambitious and the initiatives we put in place are in their early stages. We expect them to accelerate in the next few years. We are working on additional targets in the other pillars of our Climate Change strategy that will help us achieve our overall climate change goal of net zero by 2050.
We will conduct a review of metrics and targets in 2023 to ensure they continue to be fit for purpose in meeting our sustainability priorities. We also set out details of our operational GHG emissions (Scope 1, 2 and 3) in this section.
Santander UK medium-term climate change targets and 2022 performance | | | | | | | | | | | | | | | | | | | | |
| Metric | Performance | 2025 Target | Climate-related risk or opportunity | Looking ahead |
in 2022 | to date |
| Climate Change strategy pillar: Managing climate risk |
1 | Decarbonisation targets (sector-specific emission intensity) | In 2022, we continued to measure and assess our financed emissions for our material sectors | | | Addressing transition risks (for example, government policies such as phasing out sales of new internal combustion engine vehicles from 2030) | Status: ☐ We continue to work on assessing financed emissions. We will take into consideration our own initiatives and what Government policies can enable decarbonisation when setting our targets. We aim to meet Banco Santander's disclosure commitment made under the NZBA for 2024. |
| Climate Change strategy pillar: Supporting our customers |
1 | Volume of green finance raised and facilitated1 | £6.5bn Commentary: This target includes our commitment to support the renewable energy sector and we are on track on meeting the target set | £10.5bn | £20bn | Opportunity to provide sector leading sustainable and green finance products to support customers develop climate-resilient business models | Status: ☐ In Homes, we are looking to develop our green finance proposition to support existing and new customers in making their homes more energy efficient. We are exploring partnerships with firms involved in either the supply or installation of energy efficiency retrofitting. |
2 | Number of mortgage customers with properties that have an EPC rating of D or below communicated with to improve the efficiency of their homes2 | 807,383 customers Commentary: Our Greener Homes Hub has recorded more than 40,000 unique visits since launch, and we reached out to 2 million customers via e-mail | 811,034 | 1.3m | Addressing transition risks for homeowners in properties with low energy efficiency ratings | Status: ☐ Our Greener Homes Hub helped customers access our free EnergyFact Report, which provides insight on home energy efficiency. We are working on the customer journey for energy efficiency retrofitting over the next 12 months. Our focus is on supporting customers and aiming to de-risk retrofitting to enable more customers to reduce carbon emissions from their homes. |
3 | Number of customers supported with products and services in their transition to net zero3 | 32,968 customers Commentary: Our auto loans have provided over 25,000 customers with access to electric and hybrid vehicles. Over 11,000 mortgage customers have benefited from our free EnergyFact Report since its launch in 2021. The report has since been made available to all customers to provide the benefit of free insights on their home energy efficiency. | 32,968 | 180,000 | Supporting customers in building resilience to manage transition and physical risks through dedicated financing | Status: ☐ In Homes, we will continue to focus on our retrofitting strategy and developing our product offerings tailored to customer needs. EnergyFact reports have proved to be a continued success and we will continue to offer these to existing customers. During Q4 2022, CCB set out to upskill its colleagues by launching the educational platform Sustainability Unlocked. This will help enhance the quality of conversations with clients to support their transition to net zero. We continue to improve our services and products to enable clients to meet the climate change challenges. |
| Climate Change strategy pillar: reducing emissions in our own operations |
1 | Reduction of waste (e.g., single-use plastics) | Introduced a new sustainable cleaning system to a number of our properties | | | Implementing the latest operational sustainability standards to reduce costs | Status: ☐ In 2023, we will continue to rollout the new cleaning systems to the whole of the Santander UK estate and monitor its impact on waste generation.
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☐Initiative is on track☐Initiative is to be accelerated
1 using Banco Santander’s SFCS, green finance includes lending to renewable energy and other green energy financing, mortgages on properties with A- or B- rated EPCs and financing for vehicles with emissions of 50g CO2/ km or less
2 We measure the number of emails received and opened by customers and customer journeys made on the Greener Homes Hub
3 Some customers who received the EnergyFact report may be subset of the customers reported under metric 2
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Annual Report 2022 | Santander UK Group Holdings plc 53 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Aligning our lending portfolios to net zero
We are committed to aligning our operational emissions and financed emissions caused through our lending activities to net zero by 2050. We recognise the importance of setting interim targets that measure and track our performance against this ambition.
The Partnership for Carbon Accounting Financials (PCAF) is a global partnership of financial institutions that develops and implements a harmonized approach to assessing and disclosing GHG emissions associated with loan and investment portfolios. In November 2020, PCAF released a Global GHG Standard for the financial industry. We joined PCAF in 2021 to contribute to the ongoing development and application of its standards.
The PCAF GHG Standard covers seven asset classes, including our three most significant sector exposures – mortgages, consumer finance and commercial real estate. We use the Standard to calculate our baseline financed emissions for these three material sectors. Emissions are attributed based on our exposure, such as the outstanding loan amount divided by the value of the property or vehicle.
In 2021, our Climate Leadership Group approved the approach to calculating attributed baseline financed emissions (on an absolute and intensity basis). In 2022, we continued to follow the roadmaps we developed in 2021 for establishing the baseline of financed emissions for residential mortgages and auto lending. Together these represent around 88% of our lending activities.
The quality of data available for these calculations is reflected in PCAF data quality scores, with the aim to improve data quality and collection process over time. Using the baseline, we will work to determine suitable 2030 targets and plans by assessing suitable transition pathways. Part of target setting involves assessing the likelihood of market levers to decarbonise the sector. This includes public policies, and internal levers such as our own commercial opportunities.
In 2023, we will continue to work on assessing our financed emissions and establishing interim targets. We will consider key enablers, including Government Policy as well as our own actions to accelerate the decarbonisation. We will integrate the results of this process into our overall commercial strategies and climate change risk management process. We aim to publish results of our portfolio alignment exercise and decarbonisation plans in line with Banco Santander's commitment to NZBA in 2024. We also recognise the challenges in obtaining accurate and qualitative data for our lending books in this process.
Exposure to climate-related risk across sectors
Retail Banking - Homes
We are rapidly expanding our understanding of climate-related risks to our balance sheet, of which residential mortgages lending is our most significant portfolio. We have completed a review of both the physical and transition risks of climate change to our residential mortgage portfolio.
Energy efficiency profile of our residential mortgage book (transition climate risk)
As part of the 'Supporting our customers' pillar of our Climate Change strategy, we have set targets for providing green finance to support residential mortgage customers to make their homes more energy efficient.
The UK Government is currently consulting on proposals to require mortgage lenders to disclose the energy performance of their property portfolio. This includes an introduction of voluntary targets to improve portfolio energy performance to an average of EPC band C by 2035. To improve this we have been developing initiatives to help our customers understand their homes' energy efficiency and offer finance to make improvements.
In 2022 the percentage of A-C rated energy efficient properties on our mortgage book increased to 40%. This was due to strong new lending to A-C rated homes in the year as well as an improvement in the availability of EPC data.
EPC ratings (A-G) for residential mortgages as a percentage of the total number of mortgages where an EPC is recorded for 2022 and 20211:Note: Sourced from Landmark. Distribution of registered EPCs. 2022 distribution including modelled EPCs: A:<1%,B:11%, C:22%, D: 50%, E: 15%, F: 2% and G:<1%
1 For EPC data, we are using data provided by the UK Government and other third parties. Reasonable efforts have been made to ensure such data is complete and accurate. There are some known data quality issues across the process and reasonable efforts have been made to ensure disclosures are materially correct.
Regional distribution of EPC ratings (A - B) 2022: Note: Sourced from Landmark. Distribution of registered EPCs.
2022 distribution including modelled EPCs: LDN: 16%, ML :21%, NO:18%, SE:29%, NIRE:2%, SCOT:4%, SW&W:11%
Notes on EPC and flood risk data and assumptions
EPC data for our residential mortgage portfolio is provided by Landmark who source the data from the central EPC registers for the three UK jurisdictions, England and Wales, Scotland and Northern Ireland. Where a property does not have an actual EPC rating Landmark infers energy efficiency using its own proprietary model or by reference to EPC ratings in the same postcode area.
EPC data for England and Wales is currently the highest quality in terms of its recency and availability. In 2022, English and Welsh properties represented 91% of our mortgage portfolio. Around 71% of the portfolio across all jurisdictions currently has a registered EPC. Landmark provides an estimate of current flood risk and 50-year forecasts using four climate change scenarios. The presented figures show the current annual flood risk for all mortgage accounts open at 31 December 2022. Flood risk estimates are based on the likelihood of winter precipitation exceeding 6mm per day and consider coastal, river and pluvial flooding.
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Annual Report 2022 | Santander UK Group Holdings plc 54 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Flood risk (physical climate risk)
Flooding is the most visible physical risk to our mortgage portfolio. Working with postcode-level data we have assessed the flood risk for every Santander UK mortgage. Almost 95% of our mortgage lending is on properties with negligible or very low risk of flooding (see table).
Flood risk probability is expressed as a ratio, where a 1 in 30-year flood event (1:30) refers to the likelihood of flooding occurring in a given year. The table shows the current annual flood risk for all mortgage accounts open at 31 December 2022.
As part of our risk management process, we regularly review the value of our portfolio against the physical impacts of climate change. We provide more details on this in our Credit Risk section in the Risk Review of this Annual Report. There was no material change in flood risk across the portfolio in 2022 compared to 2021.
Consumer Finance
In Consumer Finance, the main transitional risk is the phase-out of internal combustion engine vehicles. The transition to electric vehicles may impact the demand for auto loans and the residual value of automotive vehicles. The division continues to monitor these risks.
Corporate & Commercial Banking
Carbon-intensive sectors
We are committed to providing financial products and/or services to business activities that are environmentally and socially responsible. Our strategy to grow our green finance activities supports this ambition.
The ESCC Risk Management policy sets out Santander’s criteria for the identification, assessment, monitoring and management of environmental and social risks and other climate change related activities. The policy is fully integrated within our risk management and lending decision-making processes. It prohibits direct new investment in, and/or providing financial services to specific projects or activities across key sectors that are considered harmful for the environment. It is aligned to and must be applied in conjunction with Banco Santander’s Sustainability and Human Rights policies. This policy covers activities within the oil and gas, power generation and mining and metals sectors and those arising from businesses engaged in soft commodities. We define fossil fuel exposure as counterparty activities that are engaged in those sectors.
In 2022, our corporate lending exposure to sectors1 that are considered to contribute most to climate change remained relatively low. Lending to mining represented 0.4% of our total non-financial corporate exposure.
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Flood risk for residential mortgages | 2022 | 2021 |
Annual Probability Band | Number of properties | % of properties | Number of properties | % of properties |
High: >1:30 | 2,975 | | 0.2 | % | 2,963 | | 0.2 | % |
Medium: between 1:30 and 1:100 | 9,814 | | 1 | % | 10,039 | | 1 | % |
Low: between 1:100 and 1:1,000 | 51,778 | | 4 | % | 50,009 | | 4 | % |
Very Low: between 1:1,000 and 1:10,000 | 69,234 | | 6 | % | 73,893 | | 6 | % |
Negligible: <1:10,000 | 1,084,755 | | 89 | % | 1,077,821 | | 89 | % |
Total | 1,218,556 | | 100 | % | 1,214,725 | | 100 | % |
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Regional risk exposure in % of total number of properties (high and med flood risk, properties with EPCs E-F) |
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Overview of exposures to carbon-intensive sectors |
| Credit exposure |
| 2022 balance (£m) | %(*) |
Real estate activities | 8,469 | 47.4 | % |
Accommodation and food service activities | 1,345 | 7.5 | % |
Wholesale and retail trade(1) | 1,341 | 7.5 | % |
Construction(2) | 1,073 | 6.0 | % |
Manufacturing(3) | 752 | 4.2 | % |
Information and communication | 379 | 2.1 | % |
Electricity, gas and steam supply | 268 | 1.5 | % |
Transport and storage(4) | 241 | 1.3 | % |
Agriculture | 125 | 0.7 | % |
Water supply | 95 | 0.5 | % |
Mining and quarrying(5) | 64 | 0.4 | % |
1 We set our classification of carbon-intensive or climate-relevant sectors in line with EBA's technical standards on prudential disclosures on ESG risks in accordance to Article 449a CRR (Pillar 3), which follows the Statistical Classification of Economic Activities in the European Community (commonly referred to "NACE" for "Nomenclature statistique des activités économiques dans la Communauté européenne").
(*) Percentage of Santander UK's total credit exposure to non-financial corporates of £17.9bn in 2022
(1) includes wholesale and trade of motor vehicles and motorcycles, parts and accessories. (2) includes construction of buildings and civil engineering activities. (3) includes manufacturing and processing of food products. (4) includes transport by road, rail and air and passenger transport. (5) includes mining and extraction activities of crude petroleum, coal, natural gas, metals.
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Annual Report 2022 | Santander UK Group Holdings plc 55 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Environmental performance
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2022 performance |
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| (19)% | (13)% | (18)% |
| Water consumed | Energy consumed | Waste collected |
| 2022: 107,719m3 (2021: 133,663 m3 ) | 2022: 103 million kWh (2021: 119 million kWh) | 2022: 1,910 tonnes (2021: 2,315 tonnes) |
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| (62)% | 99.7% | 99.8% |
| Paper consumed | Renewable electricity | Waste diverted from landfill |
| 2022: 331 tonnes (2021: 879 tonnes) | | 2021: 99.8% |
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Consumption of water and paper, waste collected and diverted not including Santander Financial Services plc
The figures above are in addition to our reporting of GHG emissions, paper, electricity consumption and waste in our ESG supplement. More details on our methodology for measuring performance data can be found in the same report.
As per our Streamlined Energy and Carbon Reporting (SECR) in 2022 (see the Ethics and Climate section in this report), we used 103,156,234 kWh of energy, compared to the 119,562,413 kWh used in 2021, and emitted 5,761 tCO2e market-based greenhouse gas emissions, compared to 6,321 tCO2e in 2021. The market-based approach reflects the emissions from the electricity purchased and this electricity is generated via green energy sources. A rise of 53 tCO2e of Scope 2 market-based emissions mainly reflects the inclusion of Santander Financial Services plc (SFS) for 2022. Santander UK plc reported less than 0.5 tCO2e of market-based emissions caused by EV charging performed by colleagues. Emissions per employee fell in 2022 to 0.31 tCO2e/FTE compared to 0.35 tCO2e/FTE in 2021.
Our total Scope 1, 2 and 3 emissions for 2022 were as follows:
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| 2022 | 2021 | 2020 |
Scope 1 tCO2e | 4,512 | | 6,074 | | 5,937 | |
Scope 2 tCO2e (Location-based) | 15,624 | | 18,860 | | 22,014 | |
Scope 2 tCO2e (Market-based) | 53 | | — | | — | |
Scope 3 tCO2e (Business travel) | 1,196 | | 247 | | 515 | |
Total | 5,761 | | 6,321 | | 6,452 | |
YoY % | (9) | % | (2) | % | |
Note: 2021 and 2020 figures exclude Santander Financial Services plc emissions, which for 2022 were less than 2% of total emissions and considered not material to be included in 2021 and 2020.
Additional notes on Scope 1 -3 GHG emissions
Boundary
The Scope 1-3 GHG emissions include the activities and facilities owned and/or under operational control of Santander UK Group Holdings plc.
Calculation
Scope 1: GHG emissions from oil, gas, direct transport and fugitive gas emissions. They exclude emissions related to colleagues working from home. Energy consumption and transport data is extracted from relevant internal systems and records, including bill validation systems, meter readings and internal travel systems.
Emissions for gas, oil, direct travel and fugitive gases are calculated using the GHG Protocol Corporate Standard using the relevant UK BEIS conversion factors. There were no Scope 1 emissions reported for SFS.
Scope 2:GHG emissions from purchased electricity (and electric fleet/company cars). We used for Santander UK plc the ‘market-based’ approach to quantify our emissions, meaning we use emissions factors provided by our electricity suppliers. 100% of Santander UK plc’s electricity is purchased from renewable sources (including solar and wind) via green tariffs and results in zero carbon emissions when using the market-based approach. The data for electricity consumption and electric fleet/cars are extracted from relevant source systems, such as billing invoices, mileage claims and maintenance records. Indirect emissions are calculated using the relevant UK BEIS conversion factors and guidance. We use conversion factors to convert distance travelled to CO2e emissions. Electricity purchased by SFS was from conventional energy sources.
We record Scope 2 emissions from SFS both as location-based and market-based emissions. We sourced data for SFS electricity usage from billing invoices. Where data was delayed for the year- end reporting, the average monthly electricity consumption was used to project the consumption for the remainder of the year.
Scope 3:GHG emissions are indirect emissions created through our value chain that are not included in Scope 1 and 2. For Santander UK plc 2022 data reporting includes emissions from Scope 3 category six: business travel, which includes travel by air, road and train and is not included elsewhere. Business travel records are extracted from relevant internal systems or provided by our third-party travel administrator. The distance travelled (kilometres) is converted into carbon emissions using relevant factors from the UK BEIS. For Santander UK plc business travel, conversion factors for cars are based on engine size. For flights they are based on average cabin seat class. For rail they are based on average cabin seat class and rail figures are based on national rail conversion factor from UK BEIS. We source data from mileage claims and third-party travel reports. For SFS, assumptions were made for the average distance travelled by air and rail. Further assumptions were made for the share of business and economy flights and average number of flights made per flight route. Respective UK BEIS conversion factors for short-haul flights and national rail were used to convert the total distance travelled into carbon emissions, and different factors were used for economy and business classes. Business travel data for SFS were sourced from financial records and based on expensed travel in the reporting period. Business travel for Santander UK plc and SFS excludes taxi journeys.
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Annual Report 2022 | Santander UK Group Holdings plc 56 |
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Governance | | | |
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Our governance | | Contents | |
The UK Corporate Governance Code 2018 (the Code) sets out the framework for premium listed companies in the UK. Although the Company does not have premium listed shares on the London Stock Exchange, compliance with the Code is appropriate for a Company of our size and systemic importance to the UK economy. This Governance section details 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 complied with are detailed in the Directors' Report. | | | |
| Governance | |
| Corporate Governance report | |
| Chair's report on corporate governance | |
| Board Nomination Committee Chair's report | |
| Board Risk Committee Chair's report | |
| Board Audit Committee Chair's report | |
| Board Responsible Banking Committee Chair's report | |
| | Directors' Remuneration report | |
| | Board Remuneration Committee Chair's report | |
| Remuneration policy report | |
| Remuneration implementation report | |
| Directors' report | |
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Annual Report 2022 | Santander UK Group Holdings plc 57 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Chair’s report on corporate governance |
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Our Board and governance structure
Maintaining high standards of corporate governance is an essential element to ensure the long-term sustainable success of the Company. In addition to the UK Corporate Governance Code 2018 (the Code) (the standard against which we measure ourselves), we also have internal governance practices and rules, principally:
–The UK Group Framework, which defines clearly our responsibilities and relationship with Banco Santander SA, our shareholder, taking account of our fiduciary and regulatory responsibilities. This gives us the autonomy to discharge our responsibilities in the UK in line with best practice as an independent board while giving Banco Santander SA the oversight it needs. Clarity of roles and responsibilities is key to ensuring proper accountability for decisions and outcomes.
–The Corporate Governance Framework, which is designed to assist the Board of Directors in discharging their responsibilities and ensuring an appropriate scheme of delegation throughout the Santander UK group.
The Corporate Governance Framework is reviewed regularly by the Board to confirm that governance arrangements remain effective. The corporate governance structure is supported by the internal control and risk management systems. An important principle, applied throughout the Corporate Governance Framework, is that delegation of executive authority is to individual Committee Chair's reports. office holders, who may delegate aspects of their authority to others, as appropriate. Executive Committees have been established to support individuals in discharging their responsibilities.
The role and responsibilities of the Board
The Board is collectively responsible for promoting the success of Santander UK for the benefit of its stakeholders, taking into account the likely impact of their decisions in the long-term, as well as the interests of our other stakeholders and to its contribution to the wider society.
The Board’s schedule and activities are planned to make sure that Directors have regard to the matters necessary to promote the success of the Company, including the broader implications of their decisions for the Company’s stakeholders including its shareholder.
The key decisions and matters reserved for the Board's approval, such as the long-term strategy and priorities, are set out in the Corporate Governance Framework. The Board is supported by its Committees which make decisions and recommendations on matters delegated to them under the Corporate Governance Framework. This enables the Board to spend a greater proportion of its time on strategic, forward-looking matters.
Board Committees
The Committees play an essential role in supporting the Board, giving focused oversight of key areas and aspects of the business. The rolebusiness and responsibilities of the Boardtheir roles and Board Committeesresponsibilities are set out in formaltheir Terms of Reference. TheseReference which are reviewedavailable at least annually asaboutsantander.co.uk and which do not form part of the reviewthis Annual Report. The Terms of the Corporate Governance Framework.Reference are
regularly reviewed by each Committee to make sure they remain appropriate.
Each Committee comprises Non-Executive Directors (NEDs) and a Chair. Except for the Board Nomination Committeeand Board Risk Committees which hashave one GNED,Banco Santander Group appointed Non-Executive Director (GNED), all Board Committees are composed of INEDs Independent Non-Executive Directors (INEDs)only.
The reduction in Board membership arising from implementation of ring-fencing requirements and the departure of Scott Wheway as SID has resulted in the Board Audit Committee, Board Remuneration Committee Board Responsible Banking Committee and Board Risk Committee comprisingcomprised two INEDs each.
only in 2022. Having assessed this in the light of the Code recommendations and as the substantive business of the Santander UK group is conducted by Santander UK plc, we are satisfied that the Committees will continue to be able to discharge their duties professionally, effectively and efficiently particularly as the Chairs of the Santander UK Group Holdings plc Board Audit Committee, Board Nomination Committee and Board Risk Committee are also chairs of the Santander UK plc Committees.efficiently. As the Santander UK Group Holdings plc and Santander UK plc Committees runmeet substantively simultaneously, they also continue to have the opportunity to benefit from the broader INED group’sgroup's skills and experience.
Further detailsThe Board Committees have each prepared a report which includes a description of their role and composition. These are presented in the sections that follow.
Board meetings in 2022
There were 11 Board meetings in 2022. Meetings of the rolesCompany were held concurrently with Santander UK plc. This model is supported by a number of ring-fencing safeguards to enable the Santander UK plc Board to operate in this way including the appointment of three ring-fenced bank Double Independent NEDs (DINEDs) (one of whom is the senior ring-fencing Director) and responsibilitiesa Ring-Fenced Bank Risk Officer.
Regular updates are provided to the Board by the Committee Chairs, CEO, CFO, CRO and myself as Chair. I, as Chair, also held a number of meetings with the NEDs without the Executive Directors (EDs) present. There is a comprehensive and continuous agenda setting and escalation process in place to ensure that the Board has the right information at the right time and in the right format to enable the Directors to make the right decisions. As Chair, I lead the process, assisted by the CEO and Company Secretary, and this ensures that sufficient time is set aside for strategic discussions and business critical items. Together with the Committee Chairs, we ensure Board and Committee meetings are structured to facilitate open discussion, debate and challenge.
The NEDs also receive regular updates from management to give context to current issues.
How governance contributes to the delivery of our strategy
Our governance arrangements contribute to the development and delivery of our strategy in various ways, including by taking accountability and responsibility, and ensuring information flows and independent insight from the NEDs.
All Directors are collectively responsible for the success of the Company. The NEDs exercise objective judgement in respect of Board Committees are detaileddecisions, and scrutinise and challenge management constructively. They also have responsibilities concerning the integrity of financial information, internal controls and risk management.
The Board is responsible for overseeing and developing our strategy and policies, overseeing risk and corporate governance and monitoring progress towards meeting our objectives and annual plans and monitoring its implementation by the CEO, supported by his wider executive management team. In 2022, the Board regularly reviewed progress against its delivery of the three year business plan. The Board is accountable to our shareholder for the proper conduct of the business and seeks to represent the interests of all stakeholders.
The Board has identified the following key stakeholders: Customers, Employees, Regulators, Communities and Investors. More information on how the Board balance the interests of these stakeholders can be found in the Board Responsible Banking Committee Chair's reports of eachreport.
Views of the workforce at the Board
Our colleagues are a key stakeholder, central to the delivery of our strategy, and the Board Committees.is committed to ensuring continuous engagement with them.
As the overwhelming majority of colleagues in the Santander UK group are employed by Santander UK plc, the Board receives regular updates on the culture of the business and views of employees of Santander UK plc from engagement surveys feedback. These give the Board an understanding of the overall Santander UK group workforce and provide meaningful dialogue at Board meetings on workforce matters.
With effect from 1 March 2023, Lisa Fretwell replaced Annemarie Durbin as the designated NED representing the views of the workforce on the Company and Santander UK plc.
Board activities
The Chair,I, together with the CEO and Company Secretary, and supported by the Directors and senior management, make sure that the Board has an appropriate schedule whichfor the year. This is focused on the opportunities to drive growth and risksprofitability of the business, transformation to support the future success of the business, business performance and risk mitigation,management and make surecustomer experience and outcomes. It includes the Company's digital strategy, ensuring the Company is run in a responsible and sustainable way in the interests of its stakeholders, 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.
During 2020, unlike previous years, the Board did not hold a separate Board Strategy day as the Board sought to adapt its processes due to the pandemic. | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 58 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Chair’s report on corporate governance continued |
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From March 2020, Board meetings were held virtually and the Board received deep dives on a number of particular areas of focus as well as undertaking a review of the overall strategy, including developing thoughts about what the new organisational operating model would look like in a post Covid-19 world.
During the course of the year, separate sessions were also held with the INEDs.
The Board has remained focused on the execution of strategy and responding to the challenges the business faced due to Covid-19, working closely with the government on the implementation of their support programmes.
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 Chair holds informal discussions with Board members. Complemented with external speaker workshops the Board 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 latest 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,NEDs; and topical or technical workshops. Senior leaders are also available to the NEDs throughoutfor advice and support.
The Board regularly monitors progress against the year.strategic priorities and performance targets of the business, and in 2022, once again held a separate Board Strategy Day. In advance of the Board Strategy Day, a workshop was held focused on disruption by Fintechs and Neobanks, which was designed to set the scene for the discussions on how and where we want to grow and invest, in the context of an evolving competitive landscape. Presentations at the Board Strategy Day considered the current macro environment, discussing potential changes to the Employee Value Proposition (including the future 'Ways of Working'), before the Board considered and explored opportunities to further grow the business. The day concluded with a presentation by the CEO on potential investments and the financial impact, recognising the trade off between returns and market share/revenue growth.
FurtherIn 2022, the Board and its Committees received deep dives on a number of areas (e.g. Consumer Duty, Climate Change and ILAAP) and externally facilitated workshops to consider important topics in depth and to engage with key stakeholders. To ensure the most effective use of the time at Board meetings, in addition to the delegation of certain responsibilities to the Board Committees, held informal discussions with Board members. The INEDs also met on several occasions without management and once without me present to assess my performance.
More details of the Board activities in 20202022 are set out at the end of this report.
Culture
The Board recognises the importance of culture, as a mechanism to support the long-term sustainable success of the Company. The Board are responsible for setting and overseeing our culture and values as well as monitoring progress on its development. The Board are committed to creating a culture of inclusivity and belonging, as well as creating a healthy culture environment. Throughout the year the Board has received feedback on our culture via a number of mechanisms including engagement with the workforce directly and through the NED chosen to represent the views of the workforce, as well as receiving reports from colleague surveys considering matters including future ways of working and wellbeing. The Board also seeks to ensure that workforce policies and practices are consistent with the Company's values and supports its long-term sustainable success.
Board responsibilities
As Chair, I have overall responsibility for the leadership of the Board and for ensuring its effectiveness in all aspects of its operation. These responsibilities are formalised in the Corporate Governance Framework.
The composition of the Board helps to ensure that no one individual or small group of individuals dominates the Board's decision-making. The diversity of skills, experience and background on the following page.Board enables the Board to provide constructive challenge and strategic guidance and to offer specialist advice. There is a clear division of responsibilities between the leadership of the Board and the executive leadership of the business. The responsibilities of the Chair, CEO, SID and NEDs and all Board Committees are agreed by the Board and set out in writing (as part of the Corporate Governance Framework) and are publicly available on our website at www.aboutsantander.co.uk, which does not form part of this Annual Report.
Sa
ntander
Board membership
At 31 December 2022, the Board of Santander UK Group Holdings plc47 consisted of the Chair (independent on appointment), three INEDs, two EDs and two GNEDs. The Santander UK plc Board, at 31 December 2022, consisted of the Chair (independent on appointment), six INEDs, two EDs and three GNEDs.
The Board's composition does not comply with the Code because our shareholder requires at least half the Board, including the Chair, to be independent unlike the Code which requires at least half the Board, excluding the Chair, to be independent.
Biographies of the Directors are set out in the Shareholders information section of this Annual Report. A record of Directors who served in the year is shown in the Directors' Report. The letters of appointment for INEDs and GNEDs are available at the Company’s registered office and at the Annual General Meeting.
Through the Board Nomination Committee, we make sure there is the right mix of individuals on the Board, giving an appropriate balance of knowledge, skills, experience and perspectives. 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 the development of a diverse pipeline for succession.
Changes to Board membership are set out in the Directors' report. In 2022, we appointed Mike Regnier as CEO (following Nathan Bostock's departure on 1 April 2022) and Lisa Fretwell as an INED, effective from 1 January 2022. These appointees have valuable skills and experience of financial services, digital, strategy and transformation.
All aspects of diversity form part of our Board succession planning process. For more, see the Board Nomination Committee Chair's report.
Board attendance
The Directors’ attendance at the Board meetings held in the year is set out below. Meetings of the Board are generally held concurrently with the Santander UK plc Board, with business specific to each company identified and recorded as appropriate, reflecting the decisions taken by the Board of the relevant entity.
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| | Scheduled meetings attended | Ad hoc meetings attended |
Chair | William Vereker | 8/8 | 3/3 |
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Independent Non-Executive Directors | Lisa Fretwell 1 | 8/8 | 3/3 |
Ed Giera | 8/8 | 3/3 |
Chris Jones | 8/8 | 3/3 |
Banco Santander Group nominated Non-Executive Directors | Antonio Simoes | 8/8 | 2/3 |
Pamela Walkden | 8/8 | 3/3 |
Executive Directors | Nathan Bostock 2 | 2/2 | 2/2 |
Duke Dayal | 8/8 | 3/3 |
Mike Regnier 3 | 6/6 | 1/1 |
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1 | Lisa Fretwell was appointed on 1 January 2022 |
2 | Nathan Bostock resigned on 1 April 2022 |
3 | Mike Regnier was appointed on 1 April 2022 |
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Annual Report 2022 | Santander UK Group Holdings plc 59 |
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Chair’s report on corporate governance continued |
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Monitoring independence
The Board Nomination Committee monitors whether there are relationships or circumstances which may affect a Director's independence, and have concluded that all NEDs are independent in character and judgement. I, as Chair, was independent on appointment when assessed against the circumstances set out in Provision 10 of the Code. No INEDs have a material relationship with the Company nor receive additional remuneration to Directors' fees. In addition, no INEDs serve as Directors of any external companies or affiliates in which any other Director is also a Director.
Monitoring Director time commitment, interests and fees
The Board Nomination Committee is responsible for oversight of Conflicts of Interest.
Each Director has a duty under the Companies Act 2006 to avoid a situation in which they have or may have, a direct or indirect interest that conflicts, or may conflict, with the interests of the Company. This duty is in addition to the existing duty Directors owe to the Company to disclose to the Board any interest in a transaction or arrangement under consideration by the Company.
In 2022, the Board Nomination Committee continued to review the time commitment and Directors' potential conflicts of interest to ensure that any such conflicts are managed appropriately and in compliance with CRD IV and ring-fencing requirements. In accordance with Provision 15 of the Code, Directors are required to seek prior approval from the Board before taking up external appointments.
External appointments are disclosed to the Board, before appointment, with an indication of time involved. All directors continue to devote sufficient time to their roles at the Company. No significant external appointments were undertaken by any Directors. The Articles of Association contain provisions that allow the Board to consider and, if it sees fit, authorise situational conflicts.
These powers have operated effectively and the formal system for Directors to declare their interests and for the non-conflicted Directors to authorise situational conflicts continues to be in place. Any authorisations given are recorded by the Company Secretary and Directors are asked to certify, on an annual basis, that the information in the register is correct.
The level of fees paid to INEDs for Board and Board Committee chair and membership were unchanged in 2022, although, following a review, it was decided to pay fees for some of the director responsibilities which had previously not been remunerated.For more, see the Remuneration Implementation Report.
The right information and support
The Chair, supported by the Company Secretary, ensures that all Board members receive appropriate and timely information. All Directors have access to the advice of the Company Secretary and the Company provides access, at its expense, to the services of independent professional advisers in order to help the Directors discharge their role. This also applies to Board Committees.
Board composition
Ensuring the right balance of skills, experience, independence and knowledge on the Board is the responsibility of the Board Nomination Committee. For more, see the Board Nomination Committee Chair's report.
Succession Planning
The Board Nomination Committee is responsible for ensuring plans are in place for orderly succession to both Board and senior management positions, and oversees the development of a diverse pipeline for succession. For more, see the Board Nomination Committee Chair's report.
Board and Committees' evaluation
The annual evaluation, which is typically facilitated externally at least once every three years, highlights areas of further development to enable the Board to continuously improve its performance.
I, as Chair of the Board, with the support of the Board Nomination Committee, lead the Board in considering and responding to the annual review of the Board and Committees' effectiveness, including the performance of individual Directors. In 2022, I asked the Company Secretary to undertake an internally facilitated review of the effectiveness of the Board and Board Committees.
In addition, in 2022, the Board continued to monitor progress against actions for the 2021 externally facilitated review of Board effectiveness.
For more, see the Board Nomination Committee Chair's report.
Director induction and training
The Company Secretary supports the Chair in designing individual inductions for NEDs, which include site visits and cover topics like strategy, balance sheet and capital, key risks and current issues including the legal and regulatorylandscape.
Directors who take on new roles or change roles in the year (such as becoming a member of a new Board Committee) attend induction or handover meetings as appropriate. Committee Chairs, with the Committee secretaries, agree Committee specific training, as appropriate. Directors are also given the opportunity to undertake further training so that they are fully comfortable with their role on the Board and to enable them to contribute to the long-term success of the Company. For more, see the Board Nomination Committee Chair's report.
Group structure and ring-fencing governance arrangements
The substantive business of the Santander UK group continues to be conducted by Santander UK plc, our principal ring-fenced bank (RFB). Ring-fenced banks operate within governance rules defined and overseen by the PRA who have granted Santander UK plc certain ring-fencing governance rule modifications, subject to various safeguards. This allows for certain overlaps of the Board and senior management of Santander UK Group Holdings plc and Santander UK plc, recognising our ownership structure and chosen ring-fencing business model.
At 31 December 2022, the three DINEDs of Santander UK plc were Annemarie Durbin, Mark Lewis and Nicky Morgan. In addition, Annemarie Durbin acts as the SRD of Santander UK plc.
Appointment and retirement of Directors
The Company's Articles of Association require each Director to retire every year at the Annual General Meeting and any Director may offer themselves for re-election by members. For more, see the Directors’ report.
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Annual Report 20202022 | Santander UK Group Holdings plc | 60 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Chair’s report on corporate governance
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Chair’s report on corporate governance continued |
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Summary of Board activities in 20202022 The Board endeavouredaims 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 activitiesActivities in 2020 included the following themes:2022 included: |
Theme | Action taken by the Board and outcomes | |
Strategy including One Europe and transformationBanco Santander | –In respect of transformation, received regular updatesFollowing on from the progress in drivingBoard Strategy Day, considered and challenged management’s proposals to enhance our proposition across the transformation agenda.Everyday Banking and Homes businesses. –Received regular updatesReviewed our customer proposition and experience, including a deep dive on our Net Promoter Score (NPS) and initiatives to improve the competitive landscape, the UK economyNPS trend, and banking sectorcustomer interactions strategy, including changes resulting from regulatory change requirements or in response to Covid-19.the branch operating model. –As part of consideration of the overallReviewed and challenged our marketing and brand strategy considered the UK economic outlook, including financial impacts of Covid-19, and possible future operating models, togetherpositioning, with an in depth review of Financial Crime. –Regularly considered Financial Crime, including approval of risk appetite and oversight of programmesa view to accelerate controls enhancement and regulatory engagement.developing a coherent brand narrative aligned with our ambition to be a ‘digital bank with a human touch’.
–Considered specific M&A market opportunities and reviewed organic and inorganic growth opportunities.to accelerate growth. –Regularly reviewed progress in deliveringReviewed initiatives and opportunities to collaborate and leverage resources and capability across the strategic priorities ofEurope region and the Banco Santander UKgroup, including the future Retail business modela common payments platform and, technological journey and associated investments required.banking application (OneApp). –Received regular updates from Banco Santander onConsidered disruption in the OneEurope initiative,financial services market including the benefits to Santander UK as a consequenceimpact of synergies with our ultimate parent, Banco Santander SA.neobanks and fintechs and digital currency and blockchain technology.
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Business, Customer and customer Transformation | –Reviewed, challenged, and approved the 3-year business plan (2023-2025) and the annual budget, including assumptions underpinning the plan given the rapidly evolving macroeconomic environment and investment to support a resilient and sustainable operating environment and associated risk assessments. –Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities, developments with customer experience and the Company's transformation programme. –ReviewedConsidered financial crime, including approval of risk appetite and approved the responseoversight of programmes to implementing the High Cost of Credit Reviewaccelerate controls enhancement and changes to current accounts.regulatory engagement, as well as back book remediation. –Reviewed, challengedConsidered and approvedendorsed the 3-yearIT transformation programme including clear milestones and investment to align IT infrastructure and systems with business plan (2021-2023)requirements and the annual Budget, including cost efficiencies and associatedbring IT risk assessments. –Conducted strategic reviews of our current account and mortgage propositions to ensure they remained competitive.within Board Risk Appetite.
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Covid-19 | –Received regular reports on Covid-19 throughout the pandemic.
–Provided support to Management in its deliberations and challenged preparedness for business dislocation.
–Received regular reports on the well being of staff during the pandemic across a range of metrics.
–Reviewed, challenged and remained apprised of the support being given to customers under the various Government initiatives as well as changes to overdrafts and the assistance being provided to vulnerable customers.
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Regulation, Balance Sheet and Capital | –Reviewed, challenged and approved the ICAAP; ILAAP;ICAAP, ILAAP, adequacy and effectiveness of stress-testing and capital management;management, AT1 Paymentspayments and ordinary and preference share dividend payments in accordanceline with guidance from the PRA.PRA guidance. –ReviewedSubmitted to the Bank of England results of the BoE Financial Policy Committee Financial Stability Report, considering future changes to the UK bank capital framework.annual cyclical and solvency stress test submissions. –Received regular updates on capital planning.Submitted a self-assessment of resolvability to the PRA in line with the Bank of England Resolvability Assessment Framework. –Considered assetthe future regulatory landscape and liability management activitiesimplications, including approval of the Consumer Duty implementation plan. – A number of Board members also participated in workshops delivered to the Board Audit Committee on the evolution of the IFRS 9 approach and was apprised of regulatory developments.supporting models.
–Agreed key assumptions and capabilities.
–Approved the Annual Report and other year-end related matters.
–Received and discussed regular reports on ring-fencing implementation compliance including the consideration of conflict matters and the appointment of a ring-fenced bank officer.
–Approved the Surplus Capital Allocation Framework and Dividend Policy.
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Risk and control | –Received regular enterprise wideenterprise-wide risk updates from the CRO, together with updates on specific risks, such as pensions, cyber security,third-party outsourcing, IT, data management, financial crime, fraud, climate change and Brexit.inflation. The Board closely monitored overall operational risk given the ongoing execution of the extensive transformation agenda. –Approved/adopted changes to the Risk Framework as part of the annual review, including the introduction of a new minimum standard to ensure each business area and risk type considers risks posed by climate change. |
–Received annual reports on whistleblowing and cyber security, considering the effectiveness of such arrangements. –Reviewed and approved relevant submissions related to the Operational Resilience Programme. –Approved the submission to the BoE of results from the Climate Biennial Exploratory Scenario Stress tests for climate risks. |
People and Culture | –Received updates on issues including talent management and& succession planning, gender pay gap and diversity and& inclusion. –Received updates Utilised regular reports on culture, considering our long-term strategic direction andincluding employee feedback to identify cultural priorities following employee feedback and assessment findings fromalignment with the Banking Standards Board.Company's long term strategic direction. –Considered Succession Planningcolleagues' ways of working and opportunities to optimise the real estate portfolio. – Considered succession planning across all key control, support functions and supportbusiness functions. |
Governance and Responsible Banking | –Received regular updates on the Chair's succession, subsequently approving the appointment of the new Chair. –Approved the appointment of a new NED, Senior Independent Director, ED and the Company Secretary.
–Reviewed, challenged and approved Santander UK’sthe Annual Report.
–Received regular verbal updates of Board Committee activity from their respectiverespective Committee Chairs. –Approved a revised version of the GroupBanco Santander Subsidiary Governance Model for subsidiaries, as well as changes toand certain Group Corporate Frameworks. –Approved a number ofthe education and social mobility strategies. – Approved the recommendations and resulting action plan for the 2021 externally facilitated Board evaluation, and the incremental recommendations arising from the internally facilitated Board evaluation in late 2022. – Approved policies including a new Board level Conflicts of Interest Policy, and a GroupBoard Diversity & Inclusion Policy, Policy for the Suitability, Selection and Succession of Board members and Policy on Regulatory Documents on the recommendation of the Board Nomination Committee. –Approved certain policies A number of Board members also participated in respect of ring-fencing compliance including a Permitted Exceptions Policy and an Arms Length Policy, on the recommendation ofworkshops delivered to the Board Risk Committee. –Approved any changesResponsible Banking Committee to directors' conflictsdiscuss the Company's climate strategy and supporting business initiatives; and consider the impact of interest, on the recommendation of the Board Nomination Committee.initiatives implemented so far and next steps in fraud prevention.
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William Vereker
48Santander UK Group Holdings plcChair
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 61 |
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Strategic reportReport | Sustainability and Responsible Banking | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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Board Nomination Committee Chair’s report
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| TheBoard Nomination Committee has focused on overseeing board changes and continuing to strengthen the senior management succession pipelineChair’s report |
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During the course of 2020, we strengthened the senior management team and will continue to do so throughout 2021, striving to achieve greater diversity. |
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William Vereker
Chair
2 March 2021
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Committee membership and attendance |
Read more onp73
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Introduction
On behalf of the Committee, I am pleased to present my firstthe Board Nomination Committee report.report, providing details of the key topics we considered in the year. I would like to thank Shriti Vadera and the Committee members and management for their support as partcontinued support.
The Committee conducts its business concurrently with the RFB Board Nomination Committee (the RFB Committee) to ensure alignment of my transition topractices, policies and procedures.
I am also the ChairmanshipChair of the CompanyRFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee. During 2020, the Committee has undergone a number of changes in its membership as set out later in this report.
Role and responsibility
The primary responsibilities of the Committee include to:Committees are responsible for, amongst other things:
–ReviewIdentifying, nominating and recommending candidates for appointment to the Board’sBoard.
–Regularly reviewing the 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 they arise;
–Assess its performance and oversee the performance evaluation process forof the Board and its Committees;Committees.
–ConsiderOverseeing the annual reappointmentevaluation of NEDs having regard to their performanceBoard and ability to contribute to the Board;Board Committee performance.
–OverseeReviewing corporate and internal governance matters.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
William Vereker (Chair) | 7/7 | 2/2 |
Ed Giera | 7/7 | 2/2 |
Pamela Walkden | 7/7 | 1/2 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
William Vereker (Chair) | 7/7 | 2/2 |
Annemarie Durbin | 7/7 | 2/2 |
Ed Giera | 7/7 | 2/2 |
Pamela Walkden | 7/7 | 1/2 |
Other attendees at Committee meetings in 2022 included the induction of new directorsCEO, Chief People Officer, Director, Performance & Reward, and ongoing training needs for the Board and individual directors; andDirector, Culture & Capability.
–Oversee the adequacy of the governance arrangements in place.
Overview of
Key activities in the year
During 2020,2022, the focus of the Committee’sCommittees' work was to:
–Oversee Board changes and continue to strengthenin the senior management succession pipeline;
–Lead the process for new director appointments to the Board;
–Review the collective skills, knowledge and experience of the Board, taking into account independence and diversity to inform succession plans;
–Review Board Committee membership and overseeing changes;
–Consider arrangements relating to Directors including Directors' interests, time commitment, terms of employment and that they remain appropriate; and
–Oversee governance arrangements on ring-fencing rule safeguards.
In addition, the Committee considered a number of governance policies and corporate frameworks that support our internal governance systems.
Summary of 2020 outcomesfollowing areas:
Succession planning
The Committee leads theCommittees lead a formal, rigorous and transparent process for the identification, nomination and recommendation of candidates for appointmentsappointment to the Board and senior management. It also makes suremanagement positions.
Part of this process is ensuring that there are succession plans are in place for orderly succession to both Board and key management positions encompassing internal and external candidates, and that there is a skills, experiences and diversity matrix which maps each Director's attributes against those which are most relevant for the Board, taking into account the future strategic direction of the Company and senior management positions. In doing so, it follows a rigorous and transparent process designedits needs. As well as tracking the Board's strengths, this matrix is used to make sure theidentify gaps in its desired collective skills profile.
While appointments are based on the merit of the individual candidates and objective criteria, and theywe also aim to promote diversity, in its broadest sense, to complement and strengthen the overall Board and its Committees’Committees' skills, knowledge and experience. Any appointment also takes account of all legal and regulatory requirements.
As partIn 2022, a significant proportion of the Committees' time was devoted to succession planning, and in particular identifying successors for Chris Jones, Chair of both the Board Audit and Remuneration Committees and Chair of the RFB Audit Committee, and Ed Giera, Senior Independent Director, Chair of both the Board Risk and Responsible Banking Committees and Chair of the RFB Risk Committee. Both will step down by 2024 after serving as Directors for nine years. To ensure a thorough handover, the Committees were keen to start the selection process early.
Hedley May, an external search consultant with whom the Company and individual Directors have no other relationship, were engaged to assist with the search and selection process. A preferred candidate to succeed Chris Jones as the Board Audit Committees Chair has been identified (subject to regulatory approval) but as the appointment process remains ongoing we will report on it more fully in next year’s Annual report, together with details of the induction programme arranged for the new director.
The Committees also reviewed the additional roles that the NEDs take on, such as the Whistleblowers’ Champion and Workforce Engagement representative to reallocate some of these when the current incumbents retire. Nicky Morgan was appointed to the new role of Consumer Duty Champion for Santander UK plc.
In addition to Board level appointments, the Committees oversaw and approved several changes to the Executive Committee membership and other management key position holders in 2022. On the Executive Committee, John Collins, Chief Legal and Regulatory Officer and Iain Plunkett, Chief Operating Officer both left, with Charles Shepherd, General Counsel and Stephen White,
Chief Operating Officer appointed. Louise Shield, Director of Corporate Communications and Responsible Banking left at the end of the year, with Andrew Wilson appointed to this position from 1 March 2023. In addition, the internal appointments of Elisabet Pinilla as Head of Technology & Operations from Banco Santander SA and Juan Ignacio Echeverria as Chief People Officer from Banco Santander Mexico showcase the strength of the Banco Santander group talent pool. On behalf of the Board, appointments process,I would like to welcome all those who joined us in the Committee takes accountyear and thank those who left us for their contributions.
Board effectiveness
The Committees reviewed the progress made and further actions needed on the areas of legalimprovement identified in the 2021 external evaluation of the Board, facilitated by Boardroom Review Limited (BRL) who have no other connection to Santander UK or any individual Directors.
Progress against these actions is set out below:
–Ensuring a successful induction for Mike Regnier, as incoming CEO, was critical. The Committees also considered upcoming Board retirements and regulatory requirements. the future composition in line with the Company's long-term strategy.
–The Board retains responsibility for and approves final decisions on these matters.
In 2020, the Committee spent significant time overseeing new Board appointments. Under the lead of the SID, the Committee undertook a search supported by Spencer Stuart for Shriti Vadera's replacement, resulting in its recommendation toStrategy Day this year allowed the Board to appoint me asspend time further developing a long-term vision for growth and risk.
–To ensure that the Board receive the right information, presented in a helpful way to support effective decision making, a new paper template was implemented and training on writing papers and presenting at meetings given to regular contributors.
Following the detailed and comprehensive external evaluation by BRL, in 2022 an independent Chair to the Board.
During the year, the Committee also reviewed changes to executive management talent, including a thorough assessmentinternal review of the skill sets needed in lightBoard and its Committees was conducted by the Company Secretary, assisted by the Head of Internal Governance. Interviews were held with Board members and the strategic direction ofExecutive Committee members were asked to complete a survey on the business, togetherBoard’s performance.
The review concluded that the Board and its Committees continue to operate effectively, with development planning for identified talent, to ensure a diverse leadership pipeline and strong leadership team. As part of this process, Tony Prestedge joined Santander UK plc as Deputynotable improvements now that recently appointed Directors, including the CEO and Christine Palmer joined as Chief Risk Officer. Both are membersI, have settled into our roles and established strong relationships with the Banco Santander group. Additional strengths identified were the fostering of an open and transparent atmosphere and the Executive Committee.blend of skills and experience on the Board. The review also identified some opportunities for improvement including:
–Oversight of ESG and Responsible Banking - given the increasing importance of these matters, the Board should ensure enough time is allocated to discuss them across the year.
–Agenda planning, Board time and Board materials - there is still room for improvement in these areas and the Chair and Company Secretary will work to enhance the scheduling and operation of Board vs Board Committee meetings.
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To support orderly succession planning for –Board Committee composition – undertake a review of the Board Committee composition to ensure knowledge is spread among Directors while meeting regulatory requirements.
–Emerging market themes and senior management positions,competitor benchmarking – ensuring the Committee assessesBoard remain appraised of market activity.
–Strengthening our alignment with the challengesBanco Santander group – fostered through the attendance of Banco Santander group directors and opportunities facingexecutives at UK meetings as appropriate, including the Board Strategy Day, and regular Board visits to Madrid.
The Board fully considered the recommendations from the internal evaluation and agreed an action plan which will be regularly reviewed by the Committees in 2023.
In 2022, I also conducted individual Directors’ assessments and the SID undertook an assessment of my performance.
Governance
Review of the Corporate Governance Framework and Banco Santander group Frameworks
A key element of our internal governance system is the adoption of corporate frameworks, which are designed to establish common principles across key subsidiaries on matters considered relevant due to their impact on the Banco Santander group’s risk profile. When the frameworks are periodically reviewed, the Committees oversee whether the Company and evaluatesremains in compliance with 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 in 2020 were consistent with this approach, tailored as appropriateprinciples in each, case.and determines whether any UK specific amendments are required. In 2022, the Committees reviewed six of these frameworks.
CentralWe also reviewed a proposal to amend the Santander UK Corporate Governance Framework (CGF). The proposed changes simplified the CGF structure and updated components to ensure they are fit for purpose and reflect Santander UK’s business and operating framework. The changes to the succession planning process isCGF were approved by the Board skills and diversity matrix which is used to trackfollowing recommendation from the Board's strengths and identify any gaps in its desired collective skills profile.Committee.
The skills and diversity matrix was updated during 2020Committees also approved the implementation of a Santander UK Subsidiary Governance Framework, which formalises the minimum standards for subsidiaries across the Santander UK group to take into consideration the future strategic direction of the Company and to make sure that consideration is given to diversity in its broadest sense.support good governance.
Other areas of 2020 focus
Diversity, inclusion and engagement with stakeholders
In 2016,We believe that our success is integrally linked to the diverse composition of our people and the promotion of an inclusive culture. The basis of this premise applies to our Boards as much as it does to any other area of our business. We recognise that a diverse and inclusive Board should result in a broad strategic perspective and we setstrive to maintain a Board in which a diverse range of skills, knowledge and experience are combined in an aspirational targetenvironment which values the input of every Director. Due regard is given to this when identifying and selecting candidates for Board appointments. We want a Board that reflects diversity in its broadest sense, embracing different perspectives and dynamics such as gender, race, age, disability, sexual orientation and socio-economic background.
During the year, the Committees considered updates to our Board Diversity and Inclusion Policy. The Board aims to maintain at least two female members and aims to have 40% female representation by 2025, previously having a minimum of 33% women, and overall aim of 50% female representation on the Board by 2020. Due to changes in membership of the Board in 2020, we had not achieved this aspirational target at 31 December 2020. However, we remain2030. We are also committed to maintaining at least one member from an ethnic minority background. Currently, one of our target. TheDirectors is from an ethnic minority, and 33% of the Board of Santander UK plc is significantly larger than theare female.
The Board of Santander UK Group Holdings plc reflectingis significantly smaller than the size of the business of the company. As a result, a small change in the composition of the boardBoard of Santander UK Group Holdings plc, reflecting its role as a holding company and that Board has a greater impact on the diversityonly eight Directors, two of that Board. The Boards of the two companieswhom are run largely simultaneously for efficiency.
female. We will also continue to make sure that gender and all aspects of diversity remain front of mind in our succession planning. We have signedplans for both Boards.
Our commitment to the BusinessHM Treasury Women in The Community ‘Race at Work’Finance Charter continues, with the aim to create gender balance by setting a target of 50% (+/-10%) women in senior roles (excluding Board members) by the end of 2025. At 31 December 2022, 28% of Executive Committee members were female, 34% of Executive Committee members' direct reports were female and made good progress, achieving four of our five actions with good progress on the final one. In February 2019, the Board confirmed our ambition to increase senior manager female population (mid to senior manager roles) was 33%.
Our representation of Asian, Black and other Minority Ethnic and White ethnic group employeescolleagues in senior roles (excluding Board members) increased in 2022, broadly in line with our internal growth target to achieve our ambition of 14% (+/-2%) across mid to senior manager roles by 2025.
We voluntarily published our ethnicity pay gap for the second year and continue to publish separate pay gaps for Asian, Black and other Minority Ethnic identities as part of our commitment to equality, transparency and accountability.
We continue to work towards race equality at work through our action plans in place and commitments including being a signatory to the Race at Work Charter and the 'If Not Now, When' campaign where we commit to taking key long term, sustainable actions on Black inclusion.
We also pledged to report on the progress of our Black Inclusion Plan within an annual report which can be found in our 2022 Diversity Pay Gap Report, now known as the 'Everyday Inclusion and Pay Gap Report'. This does not form part of this report. The BoardResponsible Banking Committees will be reviewing an updated Santander UK Diversity and Inclusion Policy is availablestrategy, with planned supporting actions aimed at www.aboutsantander.co.uk.
closing the gender and ethnicity pay gaps, in 2023.Director induction and training
Lisa Fretwell joined us as an INED on 1 January 2022, and Mike Regnier was appointed as CEO on 1 April 2022.
As the induction of the new CEO and other recent NED appointments was one of the priorities identified in the 2021 external evaluation, the oversight of their induction plans has been a key area of focus for the Committees. Each new Director received a comprehensive, tailored induction to ensure that they were fully informed about strategic and commercial issues affecting Santander UK and the markets in which they operate, as well as their duties and responsibilities as a Director. In addition, meetings were arranged with key stakeholders in the UK and across the Banco Santander group, and visits to different sites around the business were undertaken by each of them in line with their roles and needs.
Annual review of directorDirector interests, fees and conflicts of interest
In 2020,As set out in the Committee continued to review time commitment and Directors’ interests and to ensure any conflicts are managed appropriately and in compliance with CRD IV and ring-fencing requirements. The Company’s Articles of Association contain provisions that allowChair's report on corporate governance, the Board to consider and, if it sees fit, to authorise situational conflicts. The Board confirms that such powersCommittees' have operated effectively and that a formal system for Directors to declare their interests andresponsibility for the non-conflicted Directors to authorise situationaloversight of conflicts continues to be in place. Any authorisations given are recorded by the Company Secretary.of interest, reviewing Directors' proposed external appointments and their time commitment.
The CEO and I reviewed the level of fees paid to INEDs for Board and Board Committee chairmanshipchair and membership as well as certain roles including the SID, SRD and designated NED to represent the views of the workforce. In doing so, we considered whether NED fees were at an appropriate level, having regard to factors including the associated time commitments for INEDs and benchmarking against peers. In light of this, increases to the SID fee, and the introduction of a fee for the role of SRD and designated NED to represent the views of the workforce were approved. Further details are set out in the Remuneration Implementation Report.
Priorities for 2021
Over the next year we will continue to work on talent and succession planning, in particular on executive and senior management succession, ensuring we have a strong pipeline for senior management positions, as well as focusing on NEDs’ continuing development. We will place particular focus on the integration and orderly transition of new Board and senior management members, ensuring that Board and senior management dynamics remain appropriate.
We will also undertake an external evaluation of the Board and Board Committees’ effectiveness.
Governance
Committee membership
On 28 April 2020, Bruce Carnegie-Brown replaced Ana Botin as the GNED on the Committee. Subsequently, on 30 September 2020, Scott Wheway ceased to be a member of the Committee, following his decision to step down from the Board.I joined the Committee on 1 October 2020 and became Chair of the Committee on 1 November 2020, following Shriti Vadera's departure, and Ed Giera became a member on 16 October 2020. I would like to thank Ana Botin, Shriti Vadera and Scott
Wheway for their service on behalf of the Committee and welcome Bruce Carnegie-Brown,and Ed Giera to the Committee..
I believe that the Committee retains an appropriate balance of skills and expertise to carry out its role effectively.
Details of other Board Committee chairmanship and membership changes are detailed in each of the respective Committee reports.
Effectiveness of the Committee
The Committee’s performance was assessedAs noted above, as part of the Board’sinternally facilitated Board evaluation process incarried out during the year. Results were shared withyear, the Committee ChairCommittees' performance was assessed and then considered by the Committee. The review highlighted that the Committee continues to perform effectively, and the areas identified for enhancement have already been completed.
Board Effectiveness
In April 2020, an internal review of Board Effectivenessit was facilitated by Lintstock, focused on the Board's performance in 2019 as well as capturing matters pertaining to 2020. Individual Directors’ assessments were also conducted. The review concluded that the Board and its Committees continue to perform effectively. The Committee reviewed withresults of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for greater focusimprovement identified by the effectiveness review and recommended actions (including 2020 related actions) which are now underway. Those areas included: executive and board succession planning, transformation, dynamics between Board and executive, financial crime and customer focus. With my arrival in November 2020, the SID will undertake his twice-yearly assessment of my performance in 2021.is set out above.
Following a number of Board membership changes in the year as described earlier, the Committee determined that an external evaluation of the operation of the Board and Board Committees will be conducted at the end of 2021. Whilst this is later than the normal cycle, it is designed to allow new Board members to transition and for new Board processes to be established, giving more meaningful observations for the ongoing operational effectiveness of the Board.William Vereker
Terms of ReferenceChair
The Terms of Reference are regularly reviewed by the Committee to make sure they continue to be appropriate. The Committee's Terms of Reference are available at www.aboutsantander.co.uk.1 March 2023
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We counselled management on the need for a dynamic assessment of credit risk following industry or market responses to emerging risks, including Covid-19 and climate change. |
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Ed Giera
Board Risk Committee Chair
2 March 2021
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Committee membership and attendance |
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Introduction
On behalf of the Committee, I am pleased to present the Board Risk Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Risk Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committee is authorised by the Board to:
Role and Responsibilities
–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.
–Consider and review all risks and issues escalated by the Chief Risk Officer, and their associated action plans.
–Oversee and challenge the day-to-day risk management actions and oversight arrangements and adherence to risk frameworks and policies.
Overview–Oversee the adequacy of the governance arrangements we have in place.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 10/10 | 1/1* |
Chris Jones | 10/10 | 1/1* |
Pamela Walkden | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 10/10 | 1/1* |
Chris Jones | 10/10 | 1/1* |
Annemarie Durbin | 10/10 | 0/0 |
Mark Lewis | 10/10 | 0/0 |
Nicky Morgan | 10/10 | 1/1* |
Lisa Fretwell | 10/10 | 0/0 |
Pamela Walkden | 10/10 | 0/0 |
*BRC subcommittee to consider a specific topic on behalf of the Board.
Other attendees at Committee meetings in 2022 included the Board Chair, CEO, CFO, Chief Internal Auditor, CRO and External Auditors.
Key activities in the year
2020During 2022, the focus of the Committees' work was an unprecedented yearin the following areas:
Financial Crime risk
Financial crime risk remained a Top risk for Santander UK, with the Committee mainly duefocusing on it at each meeting. The Committee continues to monitor progress and challenge management on evidencing a return to Board risk appetite.
Fraud risk
Fraud risk was identified as a Top risk for Santander UK and was discussed regularly by the Committee, with fraud risk losses accounting for a significant portion of our overall operational risk losses. The Committee is monitoring the progress of management's tactical and strategic actions to return this risk to the Board's risk appetite.
Credit risk
The risks facingassociated with our credit portfolios, including corporate customer portfolios, were considered by the Committee, particularly in light of macroeconomic factors such as the risks associated with unemployment, the UK housing market, rising cost of living pressures on households, and rising mortgage rates, as well as increased business from Covid-19.costs and supply chain pressures.
Strategic and Business risk
We evaluated Santander UK's competitive position, long-term viability, and potential future threats, including its operations in the current volatile and uncertain macro-environment.
Operational risk & resilience
Managing resilience risk has remained a top priority, along with demonstrating to our regulators that Santander UK is resilient to any disruptions in its operations. The Committee consideredassessed the operational risks associated with a wide range of currentheightened external Cyber risk environment, IT risks, third-party risk management, People risk in a hybrid-working environment and emerging risks to our customersa difficult recruitment market, and our business including:
–Covid-19 impact on our people and operating model
–Operational risks, resilience of systems to fraud, and third party risks
–Capital and liquidity
–Conduct and Prudential risks
–Credit, both retail and commercial
–Santander Services including data integrity and security, cyber risks and risk infrastructure
–Initial development of climatemanaging complex change risk appetitewith capacity and capability challenges.
–Brexit.
Model riskWe reviewed and discussed regular Model risk updates, including progress on the heightened regulatory model transformation and new model developments, as well as the refresh of the model risk target operating model.
We reviewed the top risks at each meeting and also received regular updates on key emerging risks, principally driven by the Covid-19 pandemic, such as stress testing in response to the economic recovery, rapid technology change, changing customer behaviour, climate change risk, LIBOR transition, market risk, pension risk and business risk reviews.
The Board Risk Committee maintains amaintain an holistic view of Enterprise-Wideenterprise 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.
Whilst
Effectiveness of risk management system and internal controls
We considered, as part of the Operational Risk Profile & Analysis update, the results of the 2021 year end Risk and Control Self Assessment (RCSA). This highlighted the risk and exposure issues reported through the RCSA processes.
Through mitigating actions completed in 2021, several critical risks were reduced to high or lower risks. The critical risks remaining at 31 December 2021, were all being addressed, with no risk acceptance requested. An additional level of control assurance was introduced through the Operational Risk & Resilience Control’s (ORRC) review of Special Monitoring Controls as part of the annual Control Certification Campaign (those controls identified as most important in the mitigation of their critical inherent risks) by the respective risk owners.
Overall, we were satisfied that critical and high risks were well managed via risk mitigation and reassessment processes. The remaining high risk work streams, mainly relating to Financial Crime, IT and Third-Party exposures, were being addressed through the Financial Crime Transformation Programme, IT transformation programme and Procurement Transformation, respectively.
In 2022, the RCSA process continued to be enhanced, to ensure all material risks are considered and reported consistently across Santander UK.
The Committee received reports on management’s strategic plan for investment prioritisation. The Committee continues to review management’s reports on the execution of the overall bank-wide Risk Infrastructure Management Programme which, due to the progress made over the last few years to improve the bank’s infrastructure, has now transitioned into the business.
Effectiveness of the Committee
As part of the internally facilitated Board evaluation carried out during the year, the Committee's performance was assessed and it was concluded that the Committee continues to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board Responsible Banking Committee has oversight of financial crime risk,as a whole. More information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified can be found in the Board RiskNomination Committee retains ultimate oversight of risk appetite with respect to conduct, regulatory, reputational and financial crime risks.
Chair's report.
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Summary of 2020 outcomes
The Committee addressed our key responsibilities relating to Risk Appetite and the Risk Framework, our oversight of capital and liquidity stress testing, and raised challenges relating to areas of focus and risk categories. Many of the risk categories had been significantly impacted by Covid-19. For more on our responsibilities relating to risk management and internal controls see the section 'Other areas of focus' that follows.
Significant areas of focus
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Risk AppetiteAnnual Report 2022 | –Considered a number of changes proposed to the Board’s Risk Appetite Statement as part of the Annual Risk Appetite Review.
–Challenged management on the risk appetite for Crown Dependencies, specifically concentrations for buy-to-let and interest only, were appropriate and proportionate for the size of the geography.
–Reviewed management progress on the development of climate change risk appetite.
–Discussed the economic downturn and the impact on risk limits.
–Challenged management on the controls in place to identify and mitigate concentration risk in deposit gathering units by geography and business line.
–Monitored management progress on addressing financial crime risk exposure relative to risk appetite.
–Requested the development of a set of measures to improve the Committee's oversight and monitoring of and the concentration of deliverables to support prioritisation and input to change risk.
| –Following challenge, recommended management’s proposed changes to Risk Appetite to the Board for approval.
–Noted and were satisfied with the proposal to reduce the risk appetite limit for annual operational risk losses.
–Continued to assess management’s progress relative to Risk Appetite in the context of the Financial Crime Transformation Programme and Controls Acceleration Programme to enhance the Financial Crime control framework.
For more, see ‘Risk Appetite’ in the ‘Risk
governance’ section of the Risk review.
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Risk Framework | –Reviewed and adopted management changes to the Risk Framework to include the broadening of the scope of climate change risk and the inclusion of the Ring-Fenced Bank Risk Officer role.
–Received an update on 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.
–Received management’s proposal to amalgamate the Banking Market and Market Risk Frameworks into a single framework, the Structural and Market Risk Type Framework.64
| –Noted the enhanced responsibilities to be included in the Chief Financial Officer. role profile, and discussed the measures intended to increase capital efficiency and recycling.
–Received the Risk function’s confirmation that the Risk Framework had embedded the ring-fencing changes.
–Noted there was transparency and ownership of areas for improved compliance.
–Recommended the proposed changes to the Board for approval.
For more, see ‘Risk Framework’ in the
‘Risk governance’ section of the Risk review.
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Stress testing | –Monitored the 2020 Bank of England Concurrent Stress Test exercise and received updates throughout the process.
–Noted the development plans in place to improve existing and to develop new models.
–Noted that risks associated with Santander UK’s suite of stress testing models had generally improved across the last year.
| –Recommended the governance, process, controls and stress test results to the Board for approval and onward submission to the PRA.
–Committee members were provided with greater insight to adaptations to model plans, particularly for Internal Ratings Based and IFRS 9 and response to Covid-19.
–Supported management in determining the approach to climate change risk stress testing.
For more, see ‘Stress testing’ in the ‘Risk governance’ section of the Risk review.
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Significant areas of focus
In 2022, we discharged our responsibilities and continued to raise challenges relating to our areas of focus, identifying, and managing new risks and risk types.
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Santander Services (Technology & Operations)Risk Appetite | –Considered changes proposed to the Board’s Risk Appetite Statement (RAS) as part of the Annual Risk Appetite Review. The RAS approach, methodology and structure were thoroughly reviewed as part of the annual analysis to determine whether they remained in line with peers and also fit for purpose for our business. –Oversaw the implementation of a quantitative expression for Climate Change Risk Appetite and the simplification of the Board's Financial Crime Risk Appetite measures, as well as incremental changes to several existing metrics to provide a more meaningful measurement against the RAS. –Challenged management on the Climate Change Risk Appetite, noting that the focus had shifted from qualitative to decide on how besta quantitative expression of appetite, with targets established and expected to report on enhancements neededcontinue to improve connectivity between Santander Servicesevolve. Climate Change risk will be monitored and business units, specifically in relationassessed relative to skills and resourcing needs.the Responsible Banking Committee targets. –RequestedExamined the proposed changes to the Cost of Credit limit to better measure deviations from the budget, and updated to the Operational Risk qualitative statements and supporting metrics to ensure alignment to the current risk exposures, the statements and supporting metrics.
| –Agreed with the results of the RAS analysis which confirmed that reporting enables the Committee to have appropriate oversight on cultural change.business has the right approach and structure, as well as a market-appropriate appetite. –Received update on actions being taken by managementRecommended the proposed Risk Appetite to enhance the approachBoard for approval. For more, see ‘Risk Appetite’ in the ‘Risk governance’ section of the Risk review. |
Risk Framework | –Reviewed proposed changes to the Risk Framework. Management highlighted the reduction in the number of the Risk Types and capabilityframeworks due to the transfer of Third Partyassets from Santander UK plc to Banco Santander London Branch in 2021, which resulted in a simpler and more streamlined business model. –Considered management's descriptors of Risk Management includingProfile and Board Risk Appetite (BRA) to promote clearer demarcation of the establishment of a centre of excellencetwo measures in reporting. –Discussed the annual certification process and exploring opportunitiesassessed the extent to consolidatewhich the Risk Framework had been effectively implemented and streamline the certification of external suppliers, particularly those that provide servicesembedded across the business. –Continued discussionsNoted that the Risk certification results indicated that the majority of Santander UK remained compliant with management on Data Management risk and the progress being madeRisk Framework. Noted that full compliance increased to identify and manage key risks such as data quality and data lineage.92%, with improvements against most sections of the Risk Framework. – Received updates on cyber risk and the strategy and risk management relating to cloud usage.
–Continued discussions with management about the execution risks, and benefits, associated with a migration away from existing technology and risk infrastructure. Emphasised the need for Board-level involvement as well as alignment with Banco Santander group in the associated debate and decisions impacting data management and key systems architecture.
–Received substantive updates on Bank-wide Risk Infrastructure Management and the ongoing monitoring of IT obsolescence and data.
–Assessed the impact of Covid-19 on key Bank-wide Risk Infrastructure Management projects.
–Received updates on third party supplier risks 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 Operating Officer.
| –NotedFollowing the progress made bycompletion of the bank-wide Risk Infrastructure Management Programme, agreed with management on the implementation of a risk infrastructure framework in H1 2022 to improveaid in the transition of risk management capability within Santander Services and the improved clarity of management’s reporting to the Committee more generally. –Noted the three-year Cyber Transformation Programme and associated investment had contributed to enhancing Cyber security, including augmenting fraud detection capability acrossinfrastructure assessment into the business.
–SupportedAgreed that the implementation of a data governance model.Risk Framework continues to meet Industry and regulatory standards and that it has been effectively implemented. –Took comfort fromRecommended the process by managementproposed changes to distribute ownership and accountabilitythe Board for data integrity and observed that data structure and legacy systems architecture were key areas of focus to improve data quality. –Noted the progress on the Cyber investment plan and the Bank-wide Risk Infrastructure Management programme and the overall execution risk status.approval.
For more, see ‘Risk Framework’ in the ‘Risk governance’ section of the Risk review. |
BrexitStress testing | –Received regular updatesStress testing remains a key tool to highlight and manage the impact on management’s contingency plans. –Continuedcapital and profit and loss in stress scenarios. The Committee continues to closely monitor the risksmethodology, governance arrangements, and potential impact to Santander UK of alternative scenarios following the transition period.
–Noted management actions to enhance infrastructure, improve data and respond dynamically to reflect local regulations in overseas jurisdictions.outputs.
–Reviewed and supportedchallenged the decision on retaining passive servicingproposed scenarios and approach for completing the Bank of EEA customer accounts.England Annual Cyclical Scenario (ACS) stress testing exercise in 2022. The Committee was involved throughout the process, reviewing key drivers and challenging assumptions and outputs, particularly in light of the economic climate. –RequestedExamined the impact of the second round of the Bank of England’s Climate Biennial Exploratory Scenario stress test scenarios on Santander UK. A third-party peer review was also commissioned to compare our climate-related risk management to consider how businessthat of peer banks and to provide guidance on our overall ESG Risk operating model. –Reviewed management responses to address the regulator's feedback on the 2022 Bank of England Climate Biennial Exploratory Scenario stress tests.
| –Approved Santander UK’s response to the CBES 2 and the results and assumptions from the ACS stress testing exercise.
For more, see ‘Stress testing’ in the ‘Risk governance’ section of the Risk review. |
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Technology & Operations | –Some IT incidents experienced by our customers would be supported within 2022 demonstrated the changes to supplier payments.importance of robust IT risk management, controls, and third-party oversight and accountability. –Considered progress that had been made in IT transformation to reduce IT risk. The stabilisation of the risk of greater regulatory misalignment between the UKproduction environment had reduced incidents, and the EU both in the near-term and in the longer-term.safe execution of change requests had increased. –EmphasisedReviewed management progress in removing blockers to IT transformation had been resolved through the needestablishment of technical solutions to move applications to new infrastructures, an IT risk dashboard to measure progress against Risk Appetite and accountability and within the Chief Resilience and Control Office for coordination with Bancothe mapping and prioritisation of Important Business Services. –Discussed the challenges around recruitment, particularly for certain IT roles, and queried management on the actions being taken. –Received multiple updates on cyber security risk, the external threat landscape and the actions being taken by management in response to further strengthen our control measures. Although Santander onUK had not experienced any actions taken impacting customers and our employees working in the UK as EU nationals, in particular.critical cyber security incidents, we continue to respond to third-party ransomware attacks.
| –We continue to monitor political developments,Agreed that the governance and to review and challenge management’s contingency plans and post transition control framework for Brexit.the cloud infrastructure needed to be improved, highlighting the impact of any delay in cloud capability. –Endorsed the high-level plan to meet the BRA for IT, supported by underlying work streams with accountable owners. The Committee noted that the plan would be adjusted during 2023 to account for potential unknowns and management was encouraged to promptly escalate budgetary requirements to ensure alignment with available funding. –Management assured the Committee that there was sufficient investment for cyber security and patching, and addressing any system obsolescence continued to be a priority within the IT transformation programme.
For more, see the ‘Operational risk’ section of the Risk review. |
Ring-fencingFinancial Crime | –Received frequent updatesGiven the critical importance of financial crime management, the Committee meets on a regular basis to discuss and challenge management on the ring-fencing programme bothpath back to Risk Appetite. –Reviewed the findings of the Skilled Person’s (SP’s) report and management’s consideration in re-planning the Financial Crime Transformation Plan for a return to Risk Appetite. –Considered management's approaches to responding to the SP's recommendation and findings from the independent review of the Financial Crime Transformation Plan implementation. –Critically examined and challenged management throughout the year on the progress made on the Financial Crime Remediation Plan to return to Risk Appetite. As part of this review, we considered the Money Laundering Reporting Officer’s report, and the Second Line of Defence view as part of the Enterprise Wide Risk Management Reports and separately. These updates focused onenterprise-wide risk management reports to the programme’s top risks and mitigating actions, including operational, legal, execution and regulatory risks related to completion of the programme.Committee. –ReceivedChallenged management on the annual Ring-Fenced Body Permitted Exceptionsreturn to Risk Appetite delay, resource adequacy, third-party reliance, potential convergence with the One Europe Financial Crime Programme, and Arm’s Length policiesthe pace of Financial Crime Transformation implementation 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.remediation to drive financial crime improvements.
| –In the course of monitoring progress on the execution of the ring-fencing programme, we agreedRecommended that management should ensure appropriate capacity for teams to the appointment ofmanage work streams and encouraged management to also demonstrate a Ring-Fenced Bank Risk Officer role, subject to regulatory approval.sustainable cadence in bringing down remediation volumes. –RecommendedNoted management's assurance that financial crime would return within Risk Appetite by the Ring-Fenced Body Permitted Exceptions Policydeadline, as the risk profile continued to reduce across the business. To support this, the Committee requested regular updates on the current position, the associated risks to achieving BRA, plans for mitigation, and the Arm’s Length Policymeasures to assure the Board for approval.Committee that the programme could be delivered in accordance with the remediation lifecycle timelines. For more, see the ‘Financial crime risk’ section of the Risk review.
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Fraud | –Reviewed, discussed, and challenged management's actions to implement fraud prevention tools, systems, and controls to mitigate a variety of fraud risk types that are prevalent both within Santander UK and across the UK banking industry, particularly Authorised Payment Push (APP) fraud, which is our most prevalent fraud type. –Challenged management on the importance of continuing to educate and raise awareness among our customers and people about the growing risk of fraud and scams through media campaigns and digital channels. –Monitored and challenged management on progress with returning Fraud risk to Risk Appetite. | –Noted updates from management on progress with the range of actions being taken to prevent and mitigate fraud risk types, particularly under the Fraud Transformation Programme, which includes several projects designed to reduce the risk to our customers and the bank. |
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Oversight and advice to the Board on Santander UK’s current risk exposure and future risk strategy In 2020,2022, we reviewed Santander UK’sour exposure to the risks outlined below and analysed emerging themes, including regulatory, macroeconomic and global risks, which could affect Santander UK’s ability to achieve its strategic goals. |
Risk | Action taken by the Board Risk Committee | Outcome |
Credit risk | –Received regularReviewed the credit risk updates acrossprofile of the Retail Banking (Homes and Everyday Banking), Corporate & Commercial Banking and Corporate Investment BankingCater Allen businesses. –ExaminedDiscussed the impactcurrent macroeconomic environment which continues to be challenging, with increased inflation, cost of Covid-19living pressures, supply chain pressures, increased business costs, having the potential to put greater strain on our ability to serve our customers, as well as the risk of increased impairments and considered the impacts on our credit and collateral quality of affected customers, including sector deep dives of our businesses.portfolios. –Received updatesChallenged management on operational readiness/capacity to support customers, particularly those who would be due for mortgage maturity in 2023, and we were assured by the retail mortgage book, including interest-only and buy-to-let mortgages. –Monitored concentration risks, reviewed growth strategies and challengedactions being taken by management in relation to the Consumer Finance business.
–Discussed how the Covid-19 crisis was expected to accelerate structural shifts in certain industry sectors and the potential impact from a credit risk perspective, in particular the Retail and Real Estate sectors.be operationally ready.
–Reviewed the impact of Payment Holidays on credit riskConsumer Finance business and the suppressionimpacts of collection activities on non-performing loan stock. –Considered the process and support for customers on Payment Holidays.
–In relation to the constructionrising inflation and associated support sectors, we noted the progress made by managementcost of living increase which could result in an income shock for our customers and their ability to implement risk management, including control enhancements, adjustments to limits and exposures, corporate credit monitoring and approval processes, and operational procedures for delivering supply chain financing and receivables purchase products.repay their loans.
| –Counselled management on the needConcluded that credit portfolios remained resilient but have a cautious outlook for a dynamic assessment of credit risks following Covid-19 and industry or market responses to emerging risks, including climate change.2023. For more, see the ‘Credit risk’ section of the Risk review. |
Strategic & Business risk | –Considered the strategic & business risk, particularly in relation to the delivery of critical programmes such as partthe IT transformation and Financial Crime Transformation Plan, and the potential impact this could have on the delivery of risk reports on M&A opportunities, Data, Change and Operational Risk.our strategic priorities. –Discussed the value tocomplex regulatory agenda and considered management's plans for addressing the Company of being part of Santander Group.key regulatory priorities for the year. –Discussed the Company’sactions management had taken to mitigate strategic & business risk, including strengthening our business continuity and resilience plans, improving our business model, delivering cost efficiencies, building on our transformation programme and evolving our way of working to enhance flexibility, agility, and access to be able to adapt quickly to changes in the market, including the acceleration of digital technologies.talent while ensuring our people’s well-being.
| –Encouraged ManagementRecommended that management should consider as part of the strategic & business risk review, including perspectives on culture, people risk (capacity and future ways of working), and related strategic and business risk vulnerabilities. –Recommended that management should consider the requirement for forward-looking modelling analysis to continuously re-evaluate the strategyaid in order to be responsive to thedecision-making about profit sustainability, changing customer mix, evolving macroeconomic environment, and competitive environment.landscape.
For more, see the ‘Strategic risk’ section of the Risk review. |
Pension risk | –Received regular updates onDiscussed the key pension risk.risk factors, such as interest rate risk, inflation risk, investment risk and longevity risk, that the Santander UK Group Pension Scheme (the Scheme) is exposed to. –Monitored the interest rate, inflation rate and longevity hedging levels, and the significant progress made in de-risking the Scheme's asset portfolio. –Considered the actions taken by management to manage risk in relation to the conflict in Ukraine, and the related shocks to global markets. –Discussed the volatility in both the funding positionPension Schemes Act 2021 amendments and the IAS 19 accounting position.changes implemented to ensure any impact on the Scheme is properly considered in decision-making. –Noted that market uncertainty had increased volatility of credit spreads, however,Reviewed the asset de-riskingrelevant metrics and management actions recommended and agreed with the trustees in connection with notional leverage, liquidity, and collateral management associated with the Scheme's derivative hedging programme completed by management had mitigated the impacts on pension risk metrics.portfolios. | –SupportedAgreed with management's proposal to remove pension risk as a Top risk, noting the enhancements ofsignificant improvements in the governance arrangements with the trustees.overall risk profile and risk metrics. –EncouragedAgreed with management that the Scheme had sufficient collateral to continue working with the Trustees onsupport hedging, but recognised management actions to increase resiliency as a framework that would enable timely and efficient executionresult of asset allocation and risk management decisions.increased gilt yields. For more, see the ‘Pension risk’ section of the Risk review. |
Liquidity risk | –Reviewed the Internal Liquidity Adequacy Assessment Process (ILAAP)ILAAP and noted material enhancements tothat management have addressed all feedback from the regulator on the previous process made by management.Liquidity Supervisory Review and Evaluation Process and subsequent ILAAP reviews. –Questioned management about challenges faced during the ILAAP process, material liquidity stress test assumptions, and the flexibility and timeliness of our liquidity reporting. –ReceivedAttended a workshop in October 2022 with members of the Board on ILAAP to consider key assumptions in the ILAAP. –Considered the half yearly updates on asset and liability management activitiesactivities. We discussed the current macroeconomic environment and the Bank of England base rate increases impacts on products, particularly, mortgages and pricing. We discussed the effective actions management had taken to address our customer funding gap and the possible impacts on our assets and liabilities. –Noted that the analysis in support of the ACS submission to the regulator confirmed the liquid asset buffer portfolio remained within risk appetite,that Santander UK remains in a robust capital and appropriately hedged against duration risks and LIBOR decommissioning risks, respectively.liquidity ratio position.
| –Acknowledged that the Company holds sufficient liquid resources and has adequate governance and controls in place to manage the liquidity risks arising from its business and strategy. –Agreed to recommend the 20202022 ILAAP to the Board for approval, following review and challenge. For more, see the ‘Liquidity risk’ section of the Risk review. |
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Risk | Action taken by the Board Risk Committee | Outcome |
Capital risk | –Considered, from a capital risk perspective, dividends payable on the ordinary and preference share dividends proposed to be paid by Santander UK Group Holdings plc and Santander UK plc for the year-end.year. –Questioned management about continuous engagement with Banco Santander regarding possible dividend scenarios. –Discussed the capital risk position and the status of initiatives to deliver on Banco Santander’s capital contribution target for 2022. –Reviewed and approved the changes changes proposed to the Surplus Capital Allocation Framework which allowed for the identification of surplus capital.capital. –Reviewed the Internal Capital Adequacy Assessment Process (ICAAP)ICAAP and noted material enhancementschallenged management to examine whether the previous process made by management.scenario weights were still appropriate in light of the UK’s economic and political changes. –Received updates on a newDiscussed the performance of the internal ratingratings based (IRB) regulatory capital modelmodels for the mortgage book. Despite the inherent uncertainty caused by Covid-19, we noted that performance across the IRB model rating systems remained robust. | –Recommended the payment of dividends to the Board for approval, subject to final determinations on capital distributions by the regulator. –Comments and challenges received from Committee members were considered by management and incorporated into the final draft ICAAP. –Agreed to recommend the ICAAP to the Board for approval following review and challenge. For more, see the ‘Capital risk’ section of the Risk review. |
Operational risk & resilience | –NotedReceived regular updates on the emergingoperational risk associatedprofile and risk appetite, with Covid-19a particular focus on operational resilience, data management, outsourcing and considered the actions being taken bythird-party risk management, with respect to business continuity, credit sanction policy, supply chain as well as sectorpeople risk and single name exposures.change and transformation risk. –DiscussedConsidered progress to meet compliance with the operational risk & resilience challenge toOperational Resilience parts of the business, particularly those relating to our working from home model.PRA Rulebook and the FCA Handbook. –ReceivedReviewed management progress in identifying the important business services, setting impact tolerances, asset mapping and scenario testing completed to a level required to identify vulnerabilities and risks. –Examined the independent review of our approach to operational resilience including the design, methodology and outcomes. We were assured that our Operational Risk updates within Enterprise-wide Risk Management as well as Operational Resiliency, Data Centre Resilience Programme’s design and Change Risk.execution had no significant flaws, and recommendations from the independent reviewer were incorporated into our self-assessment programme. –Received regular updates on management’s strategies for mitigating cyber riskdata management & privacy risk. We challenged management on the data programme prioritisation, RAS and third partymetrics, capacity, system plans, funding and on residual data privacy risk. –Reviewed steps being takenAttended a workshop in July 2022 with members of the Board on our Data Strategy with a particular focus on the risk implications of our data & analytics capabilities. –With more outsourcing underway or planned as part of our transformation agenda, challenged management to managecontinue to make positive progress in improving the additional operational risks caused byapplication of the Covid-19Third-Party Risk Management Framework. –Questioned the root cause and remedial actions relating to the incidents in the year, partly due to third parties, most of which are related to IT vendors. –Remained focused on people risk and received updates on the people risk profile, the risk associated with Santander UK's relocation to Milton Keynes, the risk affecting key subject matter experts, and the ongoing effects of the pandemic. –DiscussedQuestioned management about their steps to address capacity challenges in key areas, and to improve colleague wellbeing, the current residual risks for the extended Working From Home operating model adopted as a result of Covid-19 pandemic. –Reviewed the increase in operational risk incidentsrecruitment process, and the impacts on our own customers, as well as any lessons that could be learned.
–Noted the enhancements to programme management disciplines around changeattrition and considered third party risk and dependence on key suppliers.
–Highlighted the elevated risk presented by the confluence of regulatory change requirements, change risk more generally and organisational capacity and capability programme.absence rates.
–Considered the overall change portfolio risk position and noted good progressits implications for our transformation plan. We reviewed the root cause analysis into under-performance in change and the resulting action plan to address the under-performance. –Discussed management’s capacity and capabilities in completing the projects in the necessary timeframes and encouraged management to carry out a portfolio review focused on rationalising the LIBOR transition.change agenda to enable delivery within capacity.
| –MonitoredRecommended to the impacts on operational risk and key controls associated with management’s executionBoard the approval of the high volume of significant transformation and remediation programmes.Operational Resilience Self-assessment. –Acknowledged the progress made to improve the risk profile of our data strategy and encouraged management had enhanced operational resilience and implemented effective crisis management protocols.to consider the risk implications of our current data challenges. –Assessed and challengedRecommended that management take remedial action to re-assess the progress being made by management incontrol protocols relating to the managementspecific incident, as well as the overall mainframe of operational risk incidents.a service outsourcing arrangement. –Considered an updateContinued to support management on their strategic plan for future ways of working and returning to the regular monitoringoffice, colleagues' well-being, and support provided to colleagues during the cost of capital adequacy models.living crisis. –Received an update onAdvised management to prioritise, plan and budget holistically to support the regulatory review of key mortgage and corporate IRB models. –Considered the implications of differing regulatory perspectives on through-the-cycle capital requirementsexecution of the Bank of EnglandData strategy, IT transformation programme, and Financial Crime Transformation Programme. Given the ECB, respectively.Data Strategy's critical dependence on key programmes and business initiatives.
For more, see the ‘Managing LIBOR transition’ case study in the ‘Market‘Operational risk’ section of the Risk review. |
Model risk | –Considered an update on the regular monitoring of capital adequacy models. –Received an update on the regulatory review of key mortgage and corporate IRB models. –Considered the implications of differing regulatory perspectives on through-the-cycle capital requirements of the Bank of England and the ECB, respectively. –Reviewed management's short, medium,respectively, including the potential implications for capital planning, product pricing, and long term approaches to model data time series and model recalibration in the wake of Covid-19 impacts.business strategy.
| –The Committee will continueContinued to monitor progress in respect of regulatory initiatives for IRB models, and request evidence of appropriate model types, assumptions, data integrity, and calibration. For more, see the ‘Model risk’ section of the Risk review. |
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Other areas of focus
Effectiveness of risk management system and internal controls
The Committee considered, as part of the Operational Risk Profile & Analysis update, the results of the 2019 year end Risk and Control Self Assessment (RCSA). This highlighted the risk and exposure issues reported through the RCSA processes.
Based on our assessments of the risk and exposure issues reported, we considered the continued increase in critical and high risks, however, we were satisfied that overall critical and high risks were well managed via risk mitigation and reassessment processes, respectively. The remaining high risks related mainly to third party provider IT disruption and making sure third party providers are contracted to meet 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. Management had undertaken significant work through the Financial Crime Transformation Programme (the FCTP) and the establishment of a Controls Acceleration Programme (CAP) to enhance the financial crime control network. To mitigate risk, steps were being taken to assess the impact of integrating CAP changes into business as usual activity.
The volume of change expected to be implemented in such a concentrated period of time presented a meaningful challenge for the Financial Crime function, however, and this necessitated a review of the resources needed. We continue to monitor the exposure, including with respect to overall risk appetite.
The Committee received reports on management’s strategic plan for investment prioritisation. The Committee continues to review management’s reports on the execution of the overall bank-wide risk infrastructure investment programme and 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 in 2020. The impact of Covid-19 had necessitated some reprioritisation of change initiatives, in agreement with regulators, to ensure continuity of service support to customers.
Reports from the Chief Operating Officer’s and Operational Risk identified similar themes with respect to root cause issues underpinning the execution of change programmes.
The Committee sought assurance around the aggregate risk of, as well as the capacity for delivering, the change programme.
The Committee had expressed concern at management’s capacity to effectively resource and execute the number of strategic transformation programmes in progress concurrently with the execution of regulatory change requirements including Covid-19 Government initiatives.
The Committee noted the plans to improve management information to execute the implementation of complex and often time critical and interdependent deliverables.
Priorities for 2021
In 2021, we will monitor the ongoing impact of Covid-19 on the credit risk profile, capital and liquidity adequacy and conduct risk, with respect to the Government sponsored recovery loan programs.
Data, cyber, third party, operational resilience and other IT-related operational risks will continue to be a priority, including the adoption of cloud services.
We expect to review continuing developments related to Brexit and the changes to the UK’s political, economic, and regulatory relationships with the EU.
We will also review and consider Santander UK’s risk framework and risk appetite for financial crime and climate-related financial and strategy risks.
Governance
Committee membership
There were no changes to the membership of the Committee in the year. The Committee welcomed the appointment of a new Chief Risk Officer.
The Terms of Reference require the majority of the members to be Independent Non-Executive Directors. This criterion was met throughout the year.
Effectiveness of the Committee
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 December 2020, we reviewed the Committee’s responsibilities as set out in the Terms of Reference and confirmed that including the impacts from Covid-19, the Committee had discharged its responsibilities in full in 2020.
The Committee's performance was assessed as part of the Board's evaluation process during the year. The results were considered by the Committee, with some actions agreed as a mechanism for continuous improvement and to keep areas for development in focus.
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
Terms of Reference
The Terms of Reference are regularly reviewed by the Committee to ensure they continue to be appropriate. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk.
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| 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 arrangementsBoard Audit Committee Chair’s report |
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In 2020, the principal challenge for the Committee comprised the assessment of the appropriateness of significant management judgements, disclosures and financial reporting arising from Covid-19, within an environment that has seen an unprecedented shift to remote working and the associated incremental risks this entails. |
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Chris Jones
Board Audit Committee Chair
2 March 2021
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Committee membership and attendance |
Read more on p73
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Introduction
RoleOn behalf of the Committee, I am pleased to present the Board Audit Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and responsibilitymanagement for their continued support.
The Committee providesconducts its business concurrently with the RFB Board Audit Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committee is authorised by the Board to provide oversight of the:of:
–integrityIntegrity of the financial statements of the Company and any formal announcements relating to its financial performance, including underlying significant financial reporting judgements.judgements and estimates.
–effectiveness of internalInternal financial controls.control effectiveness.
–The relationship with theour external auditors including their independence and objectivity, audit scope and effectiveness of the audit process in respect of thetheir statutory audit of the annual financial statements.
–effectiveness of the internal audit function.Internal Audit function effectiveness.
–whistleblowing arrangements.
In exercising this responsibility, the Committee recognises that certain matters with respect to Santander UK plcRecovery and its subsidiaries are reserved exclusively to the decision-making authority of the Santander UK plc Board of Directors and its committees.
Overview of the year
In 2020, the main activities of the Committee included:
Financial reporting:
–Assessing the appropriateness of key management judgements and estimates and related reporting each quarter.Resolution planning.
–Monitoring our Expected Credit Loss provisioning under IFRS 9, particularly as a result of the impact of Covid-19 and Brexit on the macroeconomic scenarios and their weightings; reviewing the staging of impaired loans; assessing the impact of payment holidays, including related PRA guidance; considering any post model adjustments, particularly those designed to adjust model results in response to the unusual economic environment due to Covid-19; focusing on disclosure enhancements and reviewing plans for further tactical and strategic IFRS 9 model development.Whistleblowing arrangements.
–Monitoring the provisions for and disclosure of PPI-related matters considering a number of factors, including the run-off of claims post the
PPI deadline expiry and the potential for future Plevin/RND legal claims.
–Considering our conduct risk exposures, including any associated provisioning and contingent liability disclosures, and challenging management's estimates.
–Reviewing the actuarial assumptions of the pension scheme accounting valuation, with particular focus on discount rates impacted by stressed markets and the risk of impairment to private equity, real estate and infrastructure assets.
–Considering the assessment of goodwill due to reduced profitability in the Covid-19 impacted economic environment.
Other key areas:
–Providing oversight on the adequacy and effectiveness of internal controls over financial reporting including: overseeing the enhancement of the SOx independent testing framework; reviewing the adequacy of data lineage; and assessing potential risks arising from the Covid-19 related remote working of staff.
–Overseeing the performance of the Internal Audit function, including their consideration of the potentially enhanced risks arising from remote working as well as overseeing the succession of the incumbent Chief Internal Auditor.
–Continuing oversight of interaction with our External Auditors including rotation of the partner team, selection of a new lead engagement partner for 2021, their increasing use of IT and monitoring their ability to audit remotely.
–Overseeing Santander UK's whistleblowing arrangements including the effectiveness of a largely new team.
–Reviewing management's progress in implementing the incoming Resolvability Assessment Framework.
–Reviewing the UK taxation strategy.
We also addressed other responsibilities delegated to the Committee by the Board.composition
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Summary of 2020 outcomes
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 2020, we focused on the following significant reporting matters in relation to financial accounting and disclosures:
| Scheduled meetings | Ad hoc meetings |
Financial reporting issue or judgementChris Jones (Chair) | Action taken by the Board Audit Committee10/10 | Outcome0/0 |
CreditEd Giera
| 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
Annemarie Durbin | 10/10 | 0/0 |
Nicky Morgan | 10/10 | 0/0 |
Mark Lewis | 04/04 | 0/0 |
Other attendees at Committee meetings in 2022 included the Board Chair, CEO, CFO, Chief Internal Auditor, CRO, Financial Controller, Director of Financial Reporting and the external auditor.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Financial reporting
–Considering the disclosures of and provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA and subsequent settlement of £108m.
–Challenging the macroeconomic scenarios weightings and other inputs to our credit risk models for purposes of estimating expected credit loss (ECL) provisions, to ensure appropriateness.
–Considering management's proposals on Judgemental Adjustments (JAs, formerly known as Post Model Adjustments), including new JAs to reflect potential repayment affordability risk among retail and corporate customers, and the release of Covid-19 related JAs previously applied to our credit risk model outputs for purposes of estimating ECL provisions.
–Reviewing management’s approach and key methodology changes for new mortgage and corporate ECL models, and supporting simplifications to reduce run time and allow for increased macroeconomic sensitivity analysis. We will continue to monitor the implementation of the new ECL models, which is expected to be completed in H1 2023.
–Reviewing management's approach to the defined benefit pension schemes assumptions and agreeing new models for estimating discount and inflation rates.
–Considering management's efforts to further streamline external financial reporting to ensure it remains relevant to investors, regulators and other stakeholders.
Oversight of external auditors
–Approving the external auditor's proposed audit scope and related fee proposal.
–Considering the FRC's Audit Quality Inspection Report published in July 2022 and other audit quality indicators including PwC Transparency Report as part of our annual assessment of PwC's performance.
–Monitoring the transition of the outgoing, and approved the selection of the incoming, lead external audit partner.
–Reviewing PwC's reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management's progress in resolving them.
–Discussing developments in financial reporting including changes to statute, accounting standards and best practice.
–Monitoring the ongoing independence of PwC.
Internal controls and regulatory reporting
–Overseeing the introduction of 100% independent testing of SOx controls, identified control deficiencies and related remediation plans.
–Continuing focus on oversight of the procurement process including consultant spend.
Internal Audit
–Monitoring progress against the 2022 Audit Plan.
–Monitoring past due Internal Audit recommendations and management's remediation plan to close them.
–Receiving regular updates on the operational effectiveness of Internal Audit to ensure the quality and experience is appropriate for the business and that it is appropriately resourced.
–Considering the results of Internal Audit reviews in conjunction with relevant Line 1 management as appropriate.
–Considering the 2023 Audit Plan and annual report for recommendation to the Board.
Recovery and Resolution planning
–The Committee oversaw management's progress on resolvability, including reviewing the preparations for and submission of the first resolvability public disclosure and arrangements supporting the ongoing maintenance and, where possible, enhancement of the Company's resolution capabilities.
–Overseeing the updating of the recovery plan.
Whistleblowing
–Monitoring management's continued embedding of its whistleblowing framework and arrangements. We continued to refine our policies and operating procedures to stay abreast of best practice.
–Considering key themes and whistleblows.
–Considering the whistleblowing annual report to the Board.
Determining the appropriateness of credit provisions is highly judgemental requiring management to make a number of assumptions. This has been impacted further during the year as a result of the Covid-19 pandemic.
| Covid-19 impact
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–Annual Report 2022Noted that applying management judgements on IFRS 9 ECL provisioning was highly difficult given the unusual and unique circumstances as a consequence of Covid-19.–Noted the importance of being as alert to over provisioning as to under provisioning.
–Reviewed the fully updated macroeconomic scenarios and weights on a quarterly basis which captured a wide range of potential outcomes for the UK economy since the outbreak of Covid-19.
–Noted that there was model risk around the underlying economic modelling in respect of the IFRS 9 ECL provisioning models in the context of the very significant required judgements.
–Considered management's compliance with both regulatory guidance in relation to the treatment of payment holidays and accounting guidance published during 2020.
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–Satisfied ourselves that the robustness of the process used to arrive at the management judgements as well as with the management judgements themselves.
–Endorsed the quarterly updates to the macroeconomic scenarios and weights.
–Agreed to continue monitoring the IFRS 9 ECL models for the reasonableness of the outputs in future periods.
–Agreed management’s approach on applying additional Post Model Adjustments (PMAs) to supplement the IFRS 9 ECL models due to Covid-19.
See the ‘Credit risk’ section in the Risk review.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
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| Retail credit provisions
–Reviewed detailed reports from management throughout the year analysing the proposed provisions by key product.
–Considered management’s proposals to apply a PMA to the mortgage model to transfer a proportion of Stage 1 loans into Stage 2 where our discussions with retail customers on a Covid-19 payment holiday established they may be in longer-term financial difficulties.
–Considered management’s proposals to apply a PMA to mitigate the risk of the mortgage model underestimating ECL.
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–Agreed with management’s judgement on the level of retail credit provisions, concluding that provisions remain robust and assumptions were appropriate.
–Agreed with management’s proposals to apply PMAs to the mortgage model.
–We will continue to monitor retail credit provisions.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
See Note 13 to the Consolidated Financial Statements.
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| Corporate credit provisions
–Reviewed detailed reports from management throughout the year to satisfy ourselves that any Significant Increase in Credit Risk triggers had been correctly identified.
–Considered management’s proposals to apply a PMA to transfer loans for some corporate and SME sectors and clients who have been severely impacted because of Covid-19 from Stage 1 into Stage 2 or from Stage 2 into Stage 3.
–Considered management’s proposals to apply a PMA to mitigate against the risk of a single name exposure with an ECL requirement of greater than £10m defaulting, which has not been covered by the existing model estimate or the corporate and SME PMA above.
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–Agreed with management’s judgement on the level of corporate credit provisions, concluding that provisions remain robust and assumptions were appropriate.
–Agreed with management’s proposals to apply PMAs to the corporate model.
–Acknowledged management’s approach of performing a significant amount of internal sector and counterparty assessments on the corporate portfolio.
–We will continue to monitor corporate credit provisions.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements.
See Note 13 to the Consolidated Financial Statements.
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58Santander UK Group Holdings plc
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Financial reporting Significant financial reporting issues including judgements and estimates The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. This is considered by the Committee on at least a quarterly basis. In 2022, we focused on the following significant reporting matters in relation to financial accounting and disclosures: |
Financial reporting issue or judgement | Action taken by the Board Audit Committee | Outcome |
ConductCredit impairment charges
Determining the appropriateness of credit impairment charges is highly judgemental requiring management to make a number of assumptions. | Overall approach –Noted that applying management judgements on IFRS 9 ECL provisioning was difficult given the circumstances due to the cost of living crisis, and regulatorythe reduction of Covid-related risks. –Reviewed the fully updated macroeconomic scenarios and weights on a quarterly basis, which captured a wide range of potential outcomes for the UK economy, particularly in light of the current high inflation environment. –Oversaw improvements in the framework to identify when a new JA is needed or an existing JA is no longer needed. –Reviewed management’s approach and key methodology changes for new mortgage and corporate ECL models. We supported simplifications to reduce run time and allow for increased macroeconomic sensitivity analysis, and noted an improved corporate LGD methodology. We welcomed embedding of some long standing JAs into core models, and supported the proposed upgrade to a bespoke tool to calculate ECL which strengthens the control environment. –Challenged management to ensure time is given to complete model governance to allow a high quality, well controlled implementation. We also discussed the use of Covid-19 loss experience in model development given the significant customer support which suppressed arrears emergence. The models are due to go live in H1 2023 after an independent model validation review, and are not expected to result in a material change in ECL. | –Agreed additional disclosures to provide clarity on management judgements and estimates. –Satisfied ourselves with the robustness of the process used to arrive at the management judgements and estimates as well as with the management judgements and estimates themselves. –Endorsed the quarterly updates to the macroeconomic scenarios and weights. –Endorsed the improvements in the JA framework. –Endorsed management’s approach and key methodology changes for new mortgage and corporate ECL models. –We will continue to monitor the implementation of the new ECL models. See the 'Credit risk' section in the Risk review. See 'Critical judgements and accounting estimates' in Note 1 to the Consolidated Financial Statements. |
| Retail and corporate credit impairment charges –Reviewed detailed reports from management throughout the year to satisfy ourselves that Significant Increase in Credit Risk (SICR) triggers had been correctly identified. –Considered management's proposal to apply new JAs to reflect repayment affordability risk for mortgage and unsecured lending customers with low disposable income. –Considered management's proposal to uplift the modelled mortgage probability of default as back testing and monitoring showed a risk of model underestimation. –Considered management's proposal to apply new JAs to reflect the corporate lending risks to those sectors susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. –Considered management's proposal to release all Covid-19 corporate sector staging JAs as lockdown risk has reduced. |
–Concurred with management's judgement on the level of retail and corporate credit impairment charges, concluding that provisions remain robust and assumptions were appropriate. –Agreed with management's updates on and proposals for JAs. –Agreed with management's proposals to apply new JAs and to reduce or eliminate those which were no longer required. –We will continue to monitor retail and corporate credit provisions. See 'Critical judgements and accounting estimates' in Note 1 to the Consolidated Financial Statements. See Note 13 to the Consolidated Financial Statements. See ‘Credit risk’ in the Risk Review. |
Provisions and Contingent liabilities The provisionprovisions for conductcustomer remediation, litigation and other regulatory remediation activities continued to be highly judgemental and requireshave required significant assumptions including Plevin in scope rates.assumptions. | –Considered the disclosures of and provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA and subsequent settlement. –Continued to scrutinise the level and adequacy of conductcustomer remediation, litigation and other regulatory provisions and challenged the reasonableness of management’s assumptions throughout the year.assumptions. In respect of non-PPI matters, the Committee:
–Reviewed management’s judgements and estimates in respect of the level of provision.
–Considered disclosures on the Cologne CPO and German FTO ongoing investigation into our historical involvement in German dividend arbitrage trades.
–Considered potential risks arising from anti-money laundering and financial crime systems and controls and our regulator's focus on this area and concurred with management's proposed disclosures.
In respect of PPI, mainly Plevin, the Committee:
–Monitored the discussion and progress madeon litigation with a third party over an alleged PPI liability and reviewed judgements and estimates on the liability under an indemnity.level of provision for potential future legal claims. –Reviewed management’s judgements and estimates in respect of the level of provision for potential future Plevin/RND legal claims.
in relation to on-going regulatory and law enforcement investigations.
| –Agreed with management's proposed disclosures and provision for the financial penalty following the FCA's civil regulatory investigation. –Agreed with management’s judgement on the level of conductcustomer remediation, litigation and other regulatory provisions and disclosures, including PPI, mainly Plevin, and other products. –Endorsed management's recommendation that no additional charges should be made for PPI BAU matters in 2020.disclosures.
–Endorsed the proposed year-end disclosures relating to German dividend arbitrage trades and anti-money laundering and financial crime systems and controls matters.
disclosures.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 29 and 31 to the Consolidated Financial Statements. |
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Financial reporting issue | Action taken by the Board Audit Committee | Outcome |
Pension obligationsDefined benefit pension schemes
Significant judgement is required on the key assumptions underlying defined benefit pension obligationasset and liability calculations. Outcomes remain inherently uncertain. | –Reviewed detailed reports throughoutmanagement’s approach regarding the year on keyprincipal assumptions underlying the defined benefit pension obligationasset and liability calculations. We recognised that, although some assumptions are based on observable data, others continue to require significant judgement. –Noted actuaries continue to review our best estimate of pension liabilities under IAS 19.
–Reviewed themanagement's approach and outcome ofto illiquid assets valuation.valuation where there is inherent uncertainty as their values are based on unobservable market inputs. Reviewed the proposal to continue to use the unaudited flash valuations provided by our private equity advisors, following review of the testing carried out against final audited valuations, and the conclusion that this is management’s best estimate of the value. –Reviewed management's proposals to adopt new models for estimating the proposed update to the long-term improvement mortality assumption to reflect the Continuous Mortality Investigation (CMI) 2019 projections model.discount and inflation rates. –Reviewed the change proposedAssessed management's proposal to apply a 10 basis point overlay to the Consumer Price Index (CPI) inflation assumption. –Revieweddiscount rate at 31 December 2022 as the regulatory capital impactdifference between it and the average of the change.modelled discount rates exceeded management's policy threshold to make an adjustment.
–Monitored the continued appropriateness of the methodology for defined benefit pension calculations and reviewed the inflation, discount and mortality rates applied at the year-end.
| –Agreed with management’s conclusion on illiquid assets revaluation.approach regarding the principal assumptions. –Agreed with management’smanagement's approach to illiquid assets valuation, including the assumptions applied, including changes made on long-term improvement mortality assumptionproposal to continue to use the unaudited flash valuations provided by our private equity advisors. –Agreed with management's proposals to adopt new models for estimating the discount and CPI inflation assumption in 2020.rates. –Supported management's proposal to apply an overlay to the discount rate at 31 December 2022. –Endorsed the proposed quantitative and qualitative year-end disclosures in respect of pension obligations.
See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See ‘Pension risk management’ in the Risk Review. See Note 30 to the Consolidated Financial Statements.
See ‘Pension risk’ in the Risk Review. |
Other areas | –Reviewed the outcome of the management’s going concern assessment in light of Covid-19.and viability assessments. –Reviewed the outcome of management’s assessment of any potentialannual impairment ofassessments for goodwill and the cost of the Company's investment in subsidiaries,Santander UK plc and and noted the decreaseincrease in 'headroom' arising from reduced expected future profitabilityheadroom in the current Covid-19 impacted economic environment.year. –
Received regular reports on any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities and monitored the appropriateness and transparency of disclosures.
| –Agreed with management that the going concern basis of accounting remained appropriate at 31 December 2020.2022. –Agreed with management that no impairmentimpairments to either goodwill or the carrying valuecost of the Company's investment in subsidiariesSantander UK plc should be recognised in 2020 and also considered the required increased sophistication of the assessment process and disclosures as a result of the lower headroom. –Endorsed management’s recommended accounting and disclosure in relation to litigation.
2022.
See Notes 29'Going concern' in this report and 31in the Directors' report. See Note 20 to the Consolidated Financial Statements. |
Santander UK Group Holdings plc59
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The Committee’s focus continues to be on areas of significant judgement and estimate which pose the greatest risk of a material financial statement misstatement. In doing so we consider carefully the reports of PwC, our external auditors, who constructively challenge the Company's financial reporting.
In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. For 2020,2022, these includedcontinued to include the identification and assessment of risks of material misstatement due to management fraud or error and the controls over calculation of risk-weighted assets. The Committee commissioned an external review of regulatory reporting, including consideration of the main controls over the completeness and accuracy of the main COREP returns and the appropriateness of key interpretations and judgements, with a focus on capital and risk-weighted assets. The Committee also reviewed the processes and governance in respect of the preparation of additional capital and risk management disclosures. The Committee monitored the increased risk arising from widespread and sustained remote working of staff due to Covid-19.error. We also received regular reports on any material litigation cases and their progress, as part of our consideration of provisions and contingent liabilities.
External Auditor
We continued to develop and oversee the interaction with PwC following their appointment in 2016. The independence of PwC was considered and monitored throughout the year. The Committee satisfied itself that PwC had met the independence requirements.
Jon Holloway will complete his fifth year as lead audit engagement partner and will rotate off the PwC audit engagement team in March 2021. Accordingly, during 2020, the Committee oversaw the process to select his replacement, Laura Needham. As part of our broader oversight of the PwC partner team, the Committee also considered the rotation of Hamish Anderson, a Key Audit Partner, during 2020 after four years and his replacement by Heather Varley.
Oversight of the relationship with our External Auditors
As part of our review of our relationship with PwC, our activities included:
–Consideration of their work and opinion relating to management judgements.
–Discussion of the impact of Covid-19 and remote working on their audit work and interaction with management.
–Consideration of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material,
either individually or in the aggregate at each quarter.
–Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate.
–Discussion of developments in financial reporting including changes to statute, accounting standards and best practice.
–Review of PwC’s reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management’s progress in resolving them.
–Received a briefing on PwC's increasing use of technology in their audit work.
–Interactions, including meetings in private session during each Committee meeting, and at other times throughout the year.
–Noted the latest results of the FRC’s quality inspection, and enquired into the results of any internal and external audit quality reviews of Santander UK.
–Considered Santander UK specific independence issues, as well as the PwC firmwide transparency report.
–Considered the FRC’s Audit Quality Inspection Report published in July 2020 and audit quality indicators as part of our annualmanagement's assessment of PwC’s performance.
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 on non-audit services provided by our External Auditors, which was updated in 2020 in the context of the Revised Ethical Standard issued by the FRC in December 2019.
Non-audit services were under continuous review throughout 2020 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees.
All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the full Committee. This process is in addition to the requirement for all non-audit fees to be approved by the Banco Santander Audit Committee.
The fees for non-audit work performed by PwC in the year, which are disclosed in Note 7 to the Consolidated Financial Statements, mainly comprised audit-related assurance services relating to the
support of various debt issuance programmes. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. During 2020, Santander UK paid a fee of £1.4m to PwC in relation to incremental work undertaken in support of their audit of Banco Santander SA.
In 2020, PwC’s non-audit related fees were 34% of their total audit fees, well within the internal cap of 70% approved by the Committee.
Fees for non-audit work performed by PwC in the year, other than those in relation to audit-related assurance services, were 4.3% of the average of the fees approved for Deloitte, EY and KPMG.
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 regardingmodel risk management for financial reporting controls.related models.
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 2020, the framework was further enhanced.
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. Management also provided presentations to the Committee concerning their actions in response to External and Internal Audit recommendations. This included access management, end user computing, controls over IFRS 9 and the Client Assets control environment.
Disclosure in the Annual Report
We received reports from the Disclosure Committeeverbal updates, in respect of each quarterly financial report, 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’sthe Company’s external reporting. Some of the Committee's disclosure considerations included:
–Provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA, and its settlement.
–Climate change and the transition to a low carbon economy, and its potential impact on the financial statements.
This, together with other reports received in the year, and a review of best practice and the approach of our peers,peer approaches, enabled us to conclude that we were satisfied with the disclosures in this Annual Report.
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Management also engaged with the Board and the Committee early on concerningin 2022 in respect of the approach to the reportAnnual Report which enabled us to provide input into the overall tone and messaging in a timely manner.
Fair, balanced and understandable
The Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable and whether it provides the information necessary for readers to assess Santander UK’sUK's position and performance, business model and strategy.
In this context, the Disclosure Committee considered and advised us whether:
–Key messages remainedare consistent throughout the document, relating both to financial performance and progress against strategic priorities.
–All keyKey judgements and estimates, significant risks and issues are reported and explained clearly and adequately.
–There isThe Annual Report has a clear framework to the document with good signposting and a complete picture of performance and events.
In addition to the above review process, the Committee’s
The Committee's assessment of fair, balanced and understandable is also underpinned by the understanding it gains through the reporting made to it throughout the year ofrelating to management judgements and estimates, internal control matters, Internal Audit activities and the reports of the External Auditors.
The Committee’sexternal auditors. Our 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 CommitteeCommittee's concerns and were consistent with those reported by management.
Following our assessment, we concluded that the 20202022 Annual Report iswas fair, balanced and understandable.
Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2020/212021/22
In November 2020,October 2022, the FRC issued a report which sets out its perspectiveviews on key developments for 2020/21 annual reports.reports, codifying its Thematic Reviews. The report highlighted areas of high-quality reporting, but also drew attention to improvements that would be needed in areas such as disclosures on workforce and wider stakeholder engagement, diversity and oversight of the effectiveness of the risk management and internal control systems. As part of our oversight of this area, we received and reviewed a report from management reported to us on its work in respect of the areas of interest to the FRC. We are satisfied that management appropriately addressed the areas identified by the FRC in the preparation of this Annual Report.
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We also reviewed management’s response to the extent appropriate to our ownership structure,a PRA thematic ‘Dear CFO’ letter which focused on high quality ECL implementation practices, progress and areas of development for climate-related risks, including the impact of Covid-19disclosures, and Brexit on the operation of the Company.IBOR reform, and we are comfortable with progress made in these areas.
Alternative Performance Measures (APMs)
This Annual Report includes a number of financial measures which are not accounting measures within the scope of IFRS. Such non-IFRS measures are APMs and include financial measures of historical or future financial performance or financial position or cash flows that exclude or include amounts that would not be adjusted in the most comparable IFRS measures.
Management reviews these APMs in order to measure Santander UK’sUK'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.
Definitioninvestors. For definitions of these APMs and, where such APMsthey are adjusted, reconciliations to the nearestmost comparable IFRS measures, are presented in ‘Selected financial data’ insee the ‘Financial review’'Financial review' section.
We reviewed the APMs and are satisfied that they continue to 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 nearestmost comparable IFRS measures. In addition, we challenged the number of adjustments made, and noted that management reduced them.
Going Concernconcern
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 financeFinance 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’sUK's resilience in the face of potential stress and prominent events including Covid-19.events. In making our assessment, we considered 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.
Oversight of external auditors
External Auditors
PwC were appointed in 2016 and their independence was considered and monitored throughout the year. We were satisfied that PwC continued to meet the independence requirements. Ian Godsmark became lead audit engagement artner from June 2022 following the resignation of Laura Needham from PwC.
Oversight of the relationship
Our review of the relationship with PwC included the following activities:
–Consideration of their audit plan and updates.
–Consideration of their work relating to management judgements and estimates.
–Consideration of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material, either individually or in the aggregate at each quarter.
–Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate.
–Discussion of developments in financial reporting including changes to statute, accounting standards and best practice.
–Review of PwC's reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management's progress in resolving them.
–Interactions, including meetings in private session during Committee meetings, and at other times throughout the year.
–Consideration of Santander UK specific independence issues, as well as those of PwC.
–Consideration of the FRC's Audit Quality Inspection Report published in July 2022 and other audit quality indicators including the PwC Transparency Report as part of our annual assessment of PwC's performance.
Based on the above inputs, 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 on non-audit services provided by our external auditors. Non-audit services were under continuous review throughout 2022 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees.
All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the Committee. This process is in addition to the requirement for all non-audit fees to be approved by the Banco Santander Audit Committee.
The fees for non-audit work performed by PwC in the year, are disclosed in Note 7 to the Consolidated Financial Statements. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. During 2022, the Company paid a fee of £1.4m to PwC in relation to incremental work undertaken in support of their audit of Banco Santander SA.
In 2022, PwC's non-audit related fees were 34% for the Company and 35% for the RFB of their total audit fees, well within the external cap of 70%.
Fees for non-audit work performed by PwC in the year, other than those in relation to audit-related assurance services, were 6% of the average of the fees approved for Deloitte, EY and KPMG.
Internal Controls and regulatory reporting
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. The Committee considered Management's enhancement of the SOx testing framework; 100% independent testing of controls; reviewing the adequacy of data lineage; and assessing potential risks from operating in a hybrid working environment.
Recognising the importance within statutory and regulatory reporting of capital and risk weighted asset metrics, many of which are not subject to external audit, the Committee retained its focus on the level of comfort we obtain. The PRA also emphasised the importance of the reliability of regulatory reporting in its thematic review published in September 2022. This area has always been covered by Internal Audit. We also reviewed the processes and governance in respect of preparing additional capital and risk management disclosures. We had a specific focus on liquidity risk reporting which is subject to a control enhancement programme.
The Committee monitored the control framework in place in respect of consultancy engagement as well as associated spend and performance of consultants. The appointment of a new Director of Procurement, with a focus on embedding the new procurement operation model, was welcomed by the Committee.
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Internal Audit
The Internal Audit plan, based on a comprehensive risk assessment, including budget and resources, was presented in draft and then final form for challenge and approvalrecommendation by the Committee.Committee to the Board for its approval. The plan has beenwas updated at regular intervals throughout the yearin 2022 in response to changes in the business and the regulatory environment and at the request of the Committee.
All unsatisfactorilyunsatisfactory and inadequate rated audit reports issued were subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee. SomeWe also reviewed a sample of audit reports rated needs improvement or satisfactory were also considered by the Committee on a sample basis.
We chose to invite'needs improvement' and requested management to present on progress with the implementation ofaddressing Internal Audit’sAudit'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 Audit), quarterly and annual Internal Audit reports and monitored findings as part of our oversight. We considered the total number of recommendations, the rationale for any of them becoming overdue, and broader root cause analyses. The CommitteeWe also requested that the Chief Internal Auditor highlight recommendations becoming due and any that were past due.
We noteddue, as a result of past due recommendations increasing beyond reasonable expectation; this was remediated by the year-end. The strong engagement between Internal Audit and the business continued in 2020. The Committee was also pleased to note that in January 2020, Internal Audit was the winner of the Chartered Institute of Internal Auditors Audit & Risk Awards 2019 in the category of 'Outstanding Team - Financial Services Sector'.
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The Committee monitored the impact of Covid-19 and the widespread remote working of staff including Internal Audit staff on execution of the Internal Audit plan.2022.
We also oversaw the objective setting, and performance evaluation and remuneration of the Chief Internal Auditor. The Chief Internal Auditor, having completed his term of assignment, is dueensuring objectives were aligned to return to Banco Santander in early 2021. key priorities for the Company.
The Committee oversawhas approved the selection process for a new Chief Internal Auditor and satisfied itself as to his qualifications, experience and suitability for the role.
Internal Audit External Quality Assessment
In early 2020,Charter and receives regular updates on the Committee reviewed the implementation of the remaining improvement opportunities identified in the External Quality Assessmentoperational effectiveness of the Internal Audit function to confirm that was conducted in 2018.it maintains its independence and to ensure its quality, experience and resourcing is appropriate. This is supplemented by regular interactions between the Chief Internal Auditor and the Committee Chair. We also receive feedback on interactions between Internal Audit, management and our external auditors.
A review is conducted every five years and evaluatesto evaluate the Internal Audit function in respect of its conformance with the standards of the Chartered Institute of Internal Auditors (CIIA), as well as its performance and effectiveness in comparisoncompared to industry peers and good practice. The outcomenext review is due in 2023 and a thorough process to select an external provider to carry out the review has been undertaken.
Recovery and Resolution Planning
The Committee oversaw management's progress on resolvability, including reviewing the preparations for the first resolvability public disclosure and arrangements supporting the ongoing maintenance and, where possible, enhancement of the Company's resolution capabilities. The Bank of England's (BoE) Resolvability Assessment Framework (RAF) sets out how it assesses UK financial firms' resolvability and introduces a public disclosure regime.
On 10 June 2022, the BoE published its first assessment of resolvability preparations of the eight major UK banks following its review had been favourable withof firms' self-assessment reports submitted to the function being compliant withPRA in October 2021 (as updated in February 2022). Santander UK was the CIIA’s Guidance on Effective Internal Auditonly large systemic bank for which the BoE did not identify any 'material issues' across three resolution outcomes.
The Committee also oversaw the updating of the recovery plan which was submitted to the PRA in Financial Services – Second Edition and also benchmarked well against peers.June 2022.
Whistleblowing
The Committee oversees Santander UK's whistleblowing arrangements including continuous refinement of our processes to align with evolving best practice. Santander UK recognises the importance of a culturecreating an environment where colleagues feel safe and able to speak up. Speak Up. Speaking Up is a core behaviour at Santander UK and there are a number of ways colleagues can do this, including raising a concern via Santander UK's Whistleblowing Team.
In 2020,2022, management continued to embed within Santander UKmanage the whistleblowing framework and arrangements under our oversight. This included recruiting a number of staff resulting in a largely new whistleblowing team.
We further consolidatedcontinued to refine our policies and operating procedures to stay abreast of best practice.
In November 2021, Santander UK delivered Ethics Training with a focus on the Company’s Ethical Code of Conduct, to our top 120 leaders and delivered targetedmiddle management. Our communications strategy has ensured the visibility and awareness of whistleblowing has remained high and dedicated and bespoke training to managers within the Retail Division notwithstanding that further training was impacted by Covid-19. Nevertheless, therespecific teams has been significant senior management engagementdelivered. The Board received Whistleblowing training as well as staff whistleblowing communications.part of its annual training programme.
The Committee is responsible for reviewing and monitoring the effectiveness of Santander UK’s whistleblowing procedures. It received and considered bi-annual reports on Santander UK’sUK's whistleblowing arrangements. The reportingThis included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, proposed 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 forahead of its submission to the Board to consider.Board.
In 2020, Internal Audit performed an audit of the key controls in the Whistleblowing function and rated them as satisfactory.
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’Whistleblowers' Champion to oversee the integrity, independence, and effectiveness of the whistleblowing arrangements.arrangements and I remainedremain focused on procedures and governance to prevent victimisation of those employees raisingwho raise a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of suggested enhancementscontinuous improvements to continuously improve the arrangements.
Other areas of 20202022 focus
In 2019, the Bank of England published its Resolvability Assessment Framework (RAF). This sets out how the Bank of England assesses UK financial firms' resolvability and introduces a public disclosure regime. The Bank of England expects UK firms to be resolvable by 1 January 2022 and firms must submit a self-assessment of their resolvability to the Prudential Regulation Authority on a two-yearly cycle from October 2021.
During 2020, the Committee oversaw management's progress in strengthening resolution capabilities, including with respect to valuations in resolution, and in meeting the requirements of the RAF. As in previous years the Committee also oversaw the development and updating of the recovery plan.
Priorities for 2021
Areas of focus for the Committee for 2021 will include:
–Monitoring the ongoing impact of Covid-19 on the macroeconomic scenarios and their weights which flow through to the management judgements and estimates supporting the IFRS 9 ECL provisioning.
–Reviewing our enhanced disclosures in response to recommendations of the PRA's Taskforce on Disclosure about ECL.
–Overseeing Management's proposed development of the IFRS 9 model.
–Monitoring the financial impact and disclosure consequences of historical conduct and litigation related issues including Plevin/RND.
–Monitoring the adequacy and effectiveness of internal controls over financial reporting including those in
relation to IFRS 9, effective interest rate and goodwill/impairment carrying values.
–Monitoring the potential impact of remote working by staff on financial reporting risk, the execution of the 2021 Internal Audit plan and external audit activities.
–Monitoring Management's progress implementing the Resolvability Assessment Framework.
–Monitoring the rotation of the PwC lead audit engagement partner.
–Monitoring the rotation of the Chief Internal Auditor.
Governance
Committee membership
At 31 December 2020, all members of the Committee were Independent Non-Executive Directors. The Committee also metreviewed management's response to the necessary requirements of independence throughoutDepartment for Business, Energy and Industrial Strategy (BEIS) consultations.
The Committee also considered the year, in accordance with the requirements of Rule 10A-3 under the US Securities Exchange Act 1934.Chief Financial Officer's objectives and annual performance evaluation.
Effectiveness of the Committee
In respectAs noted in the Board Nomination Committee Chair's Report above, as part of the Revised Statutory Audit Directive,internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by 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 inwhole. Information on the banking sector, in which we are operating.
The Board has determined that I have the necessary qualificationsprogress against actions from last year's review, this year’s evaluation process and skills to qualify as a Board Audit Committee financial expert as defined in Item 16A of Form 20-F and by reference to the NYSE listing standards.areas for improvement identified is set out above.
In my capacity as Committee Chair, I meet with key members of the management team and the External Auditorsexternal auditors in advance of each Committee meeting. I ensure that the Committee meets with management the Internal Auditors and the External Auditorsexternal auditors in private sessions. I also attend meetings with the PRA the FCA and the FRC.
TermsWith regards to my operation as Committee Chair, the Board has determined that I have the necessary qualifications and skills to qualify as the Board Audit Committee financial expert as defined in item 16F of ReferenceForm 20-F and by reference to the NYSE listing standards.
As I approach the end of my third term of appointment, it is my intention to resign during the second half of 2023 as a Director of both the Company and Santander UK plc, and therefore as Committee Chair. The Terms of Reference are regularly reviewed byBoard Nomination Committee will propose a replacement in due course ensuring that the Committee to make sure they continue to be appropriate. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk..nominee has the necessary qualifications and skills.
Chris Jones
1 March 2023
62Santander UK Group Holdings plc
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| TheBoard Responsible Banking Committee supports the Board with oversight of financial crime, reputation, conduct, sustainability, culture, diversity and inclusion, customer outcomes and employee wellbeingChair’s report |
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We continued to challenge management on delivering appropriate financial crime controls, managing regulatory change, and supporting employees and customers during the pandemic. |
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Responsible Banking Committee Chair
2 March 2021
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Committee membership and attendance
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Introduction
Role and responsibility
The purposeOn behalf of the Committee, isI am pleased to strengthen focus on financial crime, culture, conduct, sustainabilitypresent the Board Responsible Banking Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and customer outcomes. It monitors, challengesmanagement for their continued support.
The Committee conducts its business concurrently with the RFB Board Responsible Banking Committee (the RFB Committee) to ensure alignment of practices, policies and supports actions taken by managementprocedures. Nicky Morgan, the RFB Committee Chair, and I have written this report jointly and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
Nicky and I collaborate to ensure that matters within the business is run in a responsible way, inCommittees' remit are considered by the interests of all of our stakeholders including customers, our peopleappropriate forum, 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, employee wellbeing, sustainability, climate change, reputation, brand and financial crime.
The oversight of financial crime includes anti-money laundering, sanctions, terrorist financing, anti-bribery and corruption and two key transformation programmes that are critical to controls and systems.
The Committee Chairs collaborate to prevent any gaps in coveragecoverage. This is facilitated through a degree of common membership between the Committee and to ensurethe RFB Committee which enhances visibility of matters that any areas of overlap are addressed in the appropriate forum. Committee Chairs are members of other Boardextend across Committees to ensure breadth of visibility and fosters open channels of communication.
The Chair thanks and recognisesIn summary, the material contribution of Garrett Curran as RFB Committee Chair and ofis authorised by the RFB Committee's work during the year as it considers the majority of matters.
Overview of the year
In 2020, the impact of the pandemic was prevalent in Committee discussions, which ranged from changesBoard to the way that colleagues worked in head office sites, branches and contact centres including provision of additional training and support; wellbeing considerations and support; homeworking support; consideration of feedback from employee surveys; and support for customers and businesses, including as a result of
Government support schemes and by use of digital enhancements.
Summary of 2020 outcomes
Customers and Customer Outcomes
A strong focus at Board level for much of 2020 was support for customers and colleagues during the pandemic. The Committee also focused on:
–Vulnerable customers:
–Fair customer treatmentOversee the operation of the business and outcomessubsidiaries to ensure they act in a responsible way, promoting their long-term success having due regard to the interests of the Company's stakeholders.
–Fraud preventionSupport management in shaping and detection
–Open Banking implementationdriving the responsible banking agenda of the business across a broad spectrum of areas including customers, culture, diversity and
–Resourcing.
Reputational risk
The Committee ensured that adequate and effective control processes were in place to identify and manage reputational risks.
It received reports on existing and possible reputational, brand and franchise risks, including media and public policy issues inclusion, conduct, communities and climate change. The reports also included key decisions or key risk events that give rise to reputational risk issues.
Financial crime
The Committee:
–Received regular updates on Financial Crime from business accountable executiveschange and the Money Laundering Reporting Officer, including his annual report, and approvedenvironment (the Board Risk Committee is responsible for overseeing the proposed strategic recommendationsrisks associated with climate change).
–Discussed the importance of culture in the context of Financial CrimeCommittee composition
–Monitored and challenged management on the progress of Santander UK in improving its systems and controls to combat financial crime and meet regulatory expectations, including regular updates on controls acceleration and financial crime transformation; and
–Reviewed potential financial crime risks and any actions required in response, including in respect of international sanctions compliance.
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 4/4 | 0/0 |
Lisa Fretwell | 4/4 | 0/0 |
Chris Jones | 4/4 | 0/0 |
RFB Committee composition
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Nicky Morgan (Chair) | 4/4 | 0/0 |
Annemarie Durbin | 4/4 | 0/0 |
Lisa Fretwell | 4/4 | 0/0 |
Ed Giera | 4/4 | 0/0 |
Chris Jones | 4/4 | 0/0 |
Mark Lewis | 4/4 | 0/0 |
Other attendees at Committee meetings in 2022 included the CEO, Director of Corporate Communications and Responsible Banking, Chief People Officer, CRO, Director of Compliance, Chief Customer Officer, Everyday Banking, and Chief Customer Officer, Homes.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Responsible Banking at Santander
Responsible banking is a broad term covering an extensive array of environmental, social and governance-related (ESG) matters that are key to delivering Santander UK's strategy.
Following our decision in 2021 to focus our energies on three strategically-aligned pillars in relation to which we believe we can promote the success of the Company and the RFB, in the long term, while also having a real impact for the companies' stakeholders, in February 2022 we considered and approved the key metrics and targets that would allow us to track progress against these pillars relative to our ambitions.
The three pillars, which you can read more about in the Responsible Banking and Sustainability section of this Annual Report, are:
–A Thriving Workplace: Creating a culture of inclusivity and belonging.
–Better Communities: Helping customers and communities prosper.
–A Healthy Environment: Responding to climate change and supporting the green economy.
The foundation underlying these pillars is to be responsible in everything we do. You can read more about this in the Strategic Report.
Our customers
The Committees' focus on supporting our customers continued to increase in 2022 given challenges posed by the cost of living crisis and ever more sophisticated fraudsters. To support us in providing holistic oversight of how we are performing in respect of our customers, we tasked management with designing a new report and dashboard which now allows us to track progress and focus our discussions on areas that require further attention.
For each of our scheduled meetings in 2022, we received reports on our support for vulnerable customers and how we are ensuring that we are ready to help customers who find themselves in financial hardship as a result of the cost of living crisis. We have been pleased to learn that management has been dedicated to putting robust measures in place to:
–Understand the financial health of our customers.
–Contact customers proactively with support and advice if we think they might find themselves in financial distress.
–Provide additional channels through which customers can request help from us.
–Give extra training to our financial support specialists.
–Increase the capacity in our contact centres.
We believe management has taken the right steps to help our customers during this difficult time and encourage them to continue to identify more ways to provide support.
In February 2022, the Committee held a fraud workshop in order to better understand the significant challenges that Santander UK, its customers and the industry as a whole face in this area. The outcome of the workshop was a series of practical recommendations aimed at increasing the protection for our customers. We were pleased to hear at our December 2022 meeting that good progress has been made and that there are further initiatives in the pipeline which will be launched in early 2023. A number of members of the Committees also visited the Fraud and Economic crime teams on-site to understand the challenges in more depth. We expect that fraud prevention and detection will continue to be a priority in 2023.
While we spend much of our time considering how we can address specific issues facing our customers, such as fraud and inflation, we also need to understand how our customers feel about Santander UK more generally in order to ensure that we continue to provide good service and good outcomes to customers. One way we do this is by scrutinising our Net Promoter Scores and encouraging management to resolve the underlying factors that negatively affect them. This ensures that management is continuously working to improve our service and support.
In order to get a more personalised view of customers' experiences, Directors also visited contact centres and branches during the course of 2022 where they observed customers' calls and interactions. This has allowed the Board to understand more about how we interact with our customers and the issues that are raised. Visits during 2022 included those to our Mays Meadow contact centre in Belfast and Liverpool Lord Street branch.
In addition to our traditional banking services, a key priority for Santander UK is helping our customers meet their 'green' ambitions. We provide more information on this below.
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Board Responsible Banking Committee Chair’s reportcontinued
Conduct and Compliance
The Committee:
–Ensured that adequate and effective control processes and policies were in place to manage and measure Conduct and Compliance risk
–Considered key emerging Conduct and Compliance risk issues, lessons learned and anticipated risks via horizon scanning and investigations
–Received first and second line reporting against Conduct and Compliance risk metrics and reports on conduct-related regulatory interaction matters
–Considered the FCA Firm-Wide Evaluation and response plans
–Considered the Compliance Programme, including resourcing in the Compliance Monitoring Plan
–Considered any actions in response to regulatory developments, including individual and market developments, on conduct and compliance risk matters and
–Themes arising from customer complaints, whistleblowing, satisfaction metrics and FOS referrals.
People and Culture
During the pandemic, the Committee focused on the wellbeing of employees, due to the impact of necessary and ongoing home working. It also considered colleagues who were based in branches and the challenges inherent in each of the new circumstances that had been a response to the pandemic. In addition the Committee:
–Received updates on culture, considered thematic culture and conduct trends, including management-identified cultural drivers, changes in policy and working practices
–Monitored the culture strategy and management efforts to embed and maintain the desired culture throughout the business in line with the Company’s purpose, the simple, personal and fair values and the Santander behaviours
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Our people and culture
A Thriving Workplace is the first pillar of our Responsible Banking strategy and we spend a significant proportion of our meeting time assessing culture and colleagues' views of the organisation. We recognise that all teams differ, so we introduced a standing section to our quarterly meeting agendas called 'Employee Voice', where we hear directly from colleagues in specific teams. In 2022, we hosted colleagues from the Financial Support Centre of Excellence, the Customer Interactions team, the Technology and Operations team and the CFO division. We find it hugely valuable to deep dive into the experiences of each team. We encourage colleagues to be as open about the challenges they face as they are about their successes. This allows us to provide management with advice and support to resolve these challenges, and to identify any thematic issues that may need a more structured or strategic approach.
–Received updates on the approach to employee wellbeing, diversity and inclusion, including actions to increase black representation and progress against gender and minority ethnic inclusion targets.
–Reviewed key themes arising from employee surveys, employee focus groups led by management andAnnemarie Durbin, the Santander UK plc Employee Designated Director reports on her interactions with colleagues at each quarterly meeting. In addition, each NED has completed an employee engagement plan arranged for them by the Corporate Governance Office. In 2022, these included visits to contact centres, offices and people metrics to evaluate the impact on conductbranches. A number of us also attended events and culture,meetings with Santander UK colleague networks including the external Banking Standards Board AssessmentEmbrace network, an inclusive community for LGBTQ+ colleagues and allies to share information, personal experiences and hold discussions, and the internal Global Pulse Engagement SurveyEthnicity@Work network which celebrates and embraces cultural differences from race, belief, traditions, heritage and customs. We look forward to more interactions in 2023.
We recognise that many of our colleagues will be as affected by the cost of living crisis as our customers, and the Board focused on ensuring we provide a range of support to help. You can read more about this in the Board Remuneration Committee Chair's report.
Diversity and inclusion
The Committees considered Santander UK's approach to increasing diversity and inclusion at the majority of its scheduled meetings in 2022. We were pleased to note that we have been successful in improving the gender and ethnicity representation at senior levels. However, we acknowledge that there is still much to do and we were disappointed that with the results of our pay gap reporting, details of which you can find in the Board Remuneration Committee Chair's Report and Sustainability and Responsible Banking section. One way to enable us to be more proactive in improving diversity and inclusion is to enhance the data we have about it. In 2022 we welcomed an exercise conducted by management to improve our data disclosure options to ensure all our people feel they can select options that best reflect their individual identity. This has seen us improve our data disclosure rates for ethnicity and sexual orientation by 4% to 77% and 59%,
–Received
respectively. Management has undertaken to continue to help key decision makers across the business to use this data to take more targeted actions to improve representation and experience across Santander UK.
An updated Diversity and Inclusion strategy, with planned supporting actions aimed at closing the gender and ethnicity pay gaps, will be considered by the Committees in H1 2023.
Social mobility
In September 2022, management presented the first draft of an exciting new strategy aimed at facilitating greater social mobility for the benefit of our people, customers and communities. We welcomed the initiative and collaborated with management to give them the benefit of our experience and knowledge to refine the strategy to make it as impactful as possible, encouraging them to focus on a limited number of initiatives that could make the most difference. We were pleased to consider the final draft strategy at our December 2022 meeting where we recommended it to the Board for approval. You can find more information on Santander UK's social mobility strategy and activities in our Everyday Inclusion and Pay Gap Report 2022.
Our communities
Better Communities is the second pillar of our Responsible Banking strategy. Our communities are the foundations of our society and we believe that acting responsibly in relation to them, and providing investment in them, will make a great difference. The Committees also agreed that it is important that Santander UK focuses our efforts on activities through which we can make the biggest impact, and these tend to be linked to our business model and strategy. We have therefore encouraged management to continue our financial education and inclusion initiatives and agreed the priorities and structure of our Universities Programme and particularly our strategic partnership with Milton Keynes University (MK:U). For more on this, see the Sustainability review.
Regulators and compliance
Our regulators are a key stakeholder as they authorise Santander UK to provide our services to our customers. Complying with regulatory requirements and best practice is a priority, so we proactively engage with our regulators. While management undertakes the majority of engagement, Directors with specific SMF responsibilities meet regularly with the PRA and FCA.
At each quarterly meeting, the RFB Committee receives comprehensive updates on the operationRing-Fenced sub-group's conduct and compliance risk status, as well as actions to resolve any issues. The report also includes 'horizon scanning' to show the Committee what regulatory or compliance matters are expected in the future and how management plans to address them.
A key part of our regulatory agenda in 2022 was preparing, planning for, and implementing the new Consumer Duty. The Committee held a Consumer Duty workshop in Q2 2022 to get early sight of what was expected of the engagement withfinal rules and understand how management was preparing. Once the workforce mechanisms undertakenrules were published at the end of July 2022, the Board and the Committee held a series of meetings to ensure that a sound and robust implementation plan was available for approval by the October 2022 deadline. The RFB Committee Chair, Nicky Morgan, has been appointed as Consumer Duty Champion and the RFB Committee will oversee implementation in the RFB sub-group leading up to the deadline of 31 July 2023.
Responding to climate change
A Healthy Environment is the third pillar of our Responsible Banking strategy. Santander UK plc Designated Director. The themes raised during engagement sessionsis committed to reducing both its financed carbon emissions and employee focus groups fed into Peopleits own emissions to support the ambition to limit climate change to 1.5 degrees. In April 2022, the Committee met the then COP President, Alok Sharma, to discuss the climate change opportunities and Culture Updates. For more, see the Stakeholder Voicechallenges in the Boardroom.
Brand and Sustainability
The Committee:
–Considered brand and marketing and provided challenge on the brand proposition, the weight of factors within NPS and sought greater insight into the impact from changes made to the 1I2I3 proposition and also on brand affinity
–Considered reputation and how reputational risk impacted its brand and market positioning
–Received two separate Workshops on Sustainability and Climate Change
–Monitored embedding of Sustainability into our business strategy, helping the bank deliver value to all stakeholders, protect its reputation and brand.
It also oversees alignment to international frameworks, such as the Sustainable Development Goalsbanking sector, and the UN Principles for Responsible Banking.key issues that could be influenced by Government. For more on this workshop, see the Sustainability review.
Santander UK is also aware and supportive of the fact that many of our Sustainability strategy, Governancecustomers want to reduce their impact on the environment. The Committee encouraged management to support customers in meeting their ambitions and metrics, pleasewe were pleased to see our Environmental, Socialdecisive action taken by management, including the launch of the 'My Homes Manager' app for mortgage customers. Using the app, customers can view the Energy Performance Certificate of their home and Governance (ESG) Supplement.find tips for saving energy and reducing their bills.
Priorities for 2021
In 2021, theThe Committee also considered Santander UK's financed emissions reduction trajectory taking into account other key considerations such as customer and social impacts and Board Risk Appetite. This will continue to takebe a holistic approach to gain greater understanding and oversight of all of the key areas that contribute to the experiences of our customers, our people and wider stakeholders.
Key priorities will be:
–Oversight of progress on Financial Crime objectives, the successful embedding of the Controls Acceleration Programme and meeting regulatory expectations
–Oversight of programmes of regulatory change, to understand customer impact
so that the highest standards of conduct and fair outcomes are delivered
–Oversight of Sustainability strategy, including initiatives to achieve our priorities and development of the UK Climate Change Programme strategy
–Oversight of conduct
–Oversight of culture
–Oversight of diversity and inclusion, with focus on actions to close the pay gaps, including increasing senior representation
–Oversight of employee wellbeing
–Monitoring reputational risk, the continued enhancement of Fraud prevention; complaints and treatment of vulnerable customers; and
–Progress and plans to drive improvements to NPS and brand affinity.
Governance
Committee membership
All Committee members, including the Chair, are Independent Non-Executive Directors. The members of the Committee in 2020 were Scott Wheway (Chair until 17 March 2020 and a member until 30 September 2020), Ed Giera (Chair from 17 March 2020), and Chris Jones (who joined the Committee on 1 November 2020). Details of members, including their skills and experience, are shown in the Board of Directors section. The Committee is satisfied that its composition and operation comply with ring-fencing rules.
In addition to the Committee members, in 2020, regular attendees at Committee meetings included the Board Chair, CEO, Chief Legal and Regulatory Officer, Chief Risk Officer, CEO, Retail and Business Banking, Chief HR Officer, Director of Corporate Communications and the Director of Conduct and Compliance. In 2020, the Committee met eight times in response to changes due to Covid-19.2023.
Effectiveness of the Committee
The Committee's performance was assessedAs noted in the Board Nomination Committee Chair's Report, as part of the Board'sinternally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process during the year. The results were considered by the Committee, with some actions agreed as a mechanism for continuous improvement and to keep areas for developmentimprovement identified is set out above. An action plan for the Committees will be agreed at a forthcoming meeting. We will report on the actions identified and progress against them in focus. The Committee continues to operate effectively, discharging its responsibilities against its Terms of Reference and the Board takes assurance from the Committee on particular decision matters.next year's Annual Report.
Terms of ReferenceEd Giera
The Terms of Reference are regularly reviewed by the Committee to make sure they continue to be appropriate. The Committee’s Terms of Reference are available at www.aboutsantander.co.uk.1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 75 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Remuneration Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Remuneration Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Remuneration Committee (the RFB Committee) (together the "Committees") to ensure alignment of practices, policies and procedures. Annemarie Durbin, the RFB Committee Chair, and I have written this report jointly and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
Annemarie and I collaborate to ensure that matters within the Committees' remit are considered by the appropriate forum, and to prevent any gaps in coverage. This is facilitated through a degree of common membership between the Committee and the RFB Committee which enhances visibility of matters that extend across Committees and fosters open channels of communication.
The Committee is authorised by the Board to:
–Set the overarching principles and parameters of remuneration policy across Santander UK. We do so in consultation with the RFB Committee to ensure that the RFB is able to comply with its legal and regulatory obligations, including its ring-fencing obligations.
–Oversee implementation of remuneration policies, including considering and approving the remuneration arrangements (including bonuses) for EDs and senior executives. We approve individual remuneration awards and also changes to senior executive incentive plans.
–Approve the framework by which colleagues are designated as Material Risk Takers (MRT) and oversee MRT remuneration arrangements, including bonuses.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 6/6 | 0/0 |
Ed Giera | 6/6 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Annemarie Durbin (Chair) | 6/6 | 2/2 |
Ed Giera | 6/6 | 2/2 |
Chris Jones | 6/6 | 1/2 |
Mark Lewis | 6/6 | 2/2 |
Other attendees at the Committee meetings in 2022 included the CEO, Chief People Officer, Performance and Reward Director, Head of Performance and Reward and the Committees' Independent Adviser. The CRO and Director of Compliance (DoC) join the meetings regularly to give updates and recommendations on risk performance and potential remuneration risk adjustments.
No individual participates in discussions regarding their own remuneration.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Aligning remuneration with strategy
As always, a key consideration when agreeing our variable pay framework for the year is ensuring it incentivises our people to deliver Santander UK's strategy and business model for the long-term benefit of the Company and its stakeholders. It must also be designed to incentivise our people to exhibit the right behaviours.
For 2022, we ensured that our bonus scorecard continued to be aligned with our strategy, including our strategic commitments to our shareholder, our people, our customers and our wider communities. We approved a balanced scorecard of financial and non-financial metrics and targets, including metrics related to customer satisfaction and loyalty, and employee engagement scores. In order to support our Responsible Banking ambitions, which you can read more about in the Board Responsible Banking Chair's Report and Strategic Report, we included targets relating to financial empowerment and we also included a mechanism by which the bonus pool would be increased if management delivered targeted increases in diversity representation. We also tracked a sustainability metric aimed at supporting our customers to reduce their carbon emissions, in anticipation of being able to include it in a future bonus scorecard, should it be considered appropriately robust and strategically aligned. We will update you on that in our 2023 Report.
For more on the 2022 variable pay framework, including the metrics used in the scorecard for Santander UK plc, see the Remuneration Implementation Report.
Business performance in 2022 and impact on remuneration
The Committees made the year-end variable pay decisions in the context of the strong performance of the business, the wider economic environment and the fact that our customers and communities are facing significant inflationary pressures. In addition, while seeking to fairly reward hard work and strong financial and non-financial performance against our business strategy, we were mindful of the potential for improved business results that could be considered as a windfall resulting from the macroeconomic conditions in the year.
As usual, we also took into account an assessment of current and future risks when approving the overall bonus pools for Santander UK, Santander Consumer UK and Santander Financial Services, as well as bonus awards for Executive Directors.
The Committees are satisfied that 2022 variable pay outcomes for all colleagues appropriately reflect Santander UK’s business performance and are fair, consistent, and aligned to our stakeholders’ interests. For more on these outcomes, see the Remuneration Implementation Report.
All employee matters - cost of living
The Committee's roles and remit extend beyond the Executive Directors to include other senior roles (including MRTs) and, importantly, to the oversight of the implementation of remuneration policies for all colleagues across Santander UK.
We continued to ensure that executive remuneration decisions are informed by, and consistent with, the approach taken for employees more broadly. Ensuring our colleagues across the businesses are fairly remunerated is also a key focus for the Committees. As such, the Committees undertake an annual review of the remuneration policies and practices for the wider workforce and receive updates throughout the year on other key matters. Given the impact of the cost of living crisis on our colleagues, we considered these matters at the majority of our scheduled meetings during 2022.
During the year, the Committees endorsed and championed management's drive to support our people in managing the challenges arising from the cost of living crisis, particularly the lowest paid. We received regular updates on the assistance that Santander UK was putting in place to support colleagues. In December 2022, we conducted a review of all initiatives that had been delivered to satisfy ourselves that our approach had been fair, reasonable, targeted and, most of all, impactful. These initiatives included:
–An exceptional 4% salary increase awarded to all employees earning less than £35,000 per annum (full time equivalent) from 1 August 2022.
–An increase in entry level salaries from 1 August.
–A new financial support helpline, run by a dedicated team of Financial Care Specialists in the Financial Support Team, launched in October 2022. The helpline gives guidance on account options, repayment plans and budgeting tips for all employees.
Santander UK is an accredited Real Living Wage employer, a status over which the Committees maintain oversight.
We have once again voluntarily disclosed our CEO pay ratio. For more, see the Remuneration Implementation Report.
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Annual Report 2022 | Santander UK Group Holdings plc 76 |
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Strategic reportReport | Sustainability and Responsible Banking | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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Board Remuneration Committee Chair’s report
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| Our performance management, reward and benefits approach supports our business strategy, rewards strong performance and reinforces our culture and values within the approved risk management frameworkBoard Remuneration Committee Chair’s report continued |
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We aim to deliver remuneration aligned to sustainable performance outcomes for the long term benefit of our organisation. |
Chris Jones |
Board Remuneration Committee Chair 2 March 2021 |
Committee membership and attendance |
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All employee matters - benefits
In 2022, we continued our oversight of all employee benefits, supporting management's efforts to ensure that our benefits proposition is competitive and meaningful to our colleagues. Providing a breadth of benefits choices across financial, lifestyle, health and protection satisfies our colleagues' core benefits expectations as well as providing a good range of additional benefits choices that are highly valued. The Committees' view this as particularly important in light of the cost of living crisis.
We continued our oversight of the work management was undertaking with regards to our defined contribution pensions offering, and were pleased to support the introduction of a minimum employer contribution of 8% with no colleague contribution necessary. Other enhancements that will significantly strengthen our offering include the removal of service-related increments, which increases fairness. The changes, which will positively impact thousands of our people, and which will be particularly meaningful for our most junior colleagues, come into effect in April 2023. This has been well-received by colleagues.
Employee wellbeing is a key guiding principle for our benefits strategy and we were pleased that one of the improvements made to our offering in 2022 was to make available to all colleagues a free app-based service offering sessions with a private GP, physiotherapist, mental health professional, and a medical second opinion service.
Executive Director reward
In Q1 2022 we welcomed Mike Regnier as our new CEO, whose remuneration arrangements we reported on in last year's Annual Report. As a result of Nathan Bostock, our former CEO, transferring to a role at Banco Santander SA, he has retained his right to his deferred reward and is eligible for a pro-rated 2022 bonus. More information on this is available in the Remuneration Implementation Report.
Reward for senior colleagues
The talent market in the UK continued to be very competitive in 2022, particularly in key operational roles such as IT and cyber-security. Given the need to continue to attract and retain top talent with the relevant skills and experience to drive our strategic agenda forward, we had to carefully consider the remuneration for a number of key roles. To support us in doing so, the Committees continued to monitor our remuneration framework and approach to external market benchmarking, with the support of our external adviser, Deloitte LLP.
Where the business recruited or promoted senior members of management, we scrutinised the proposed remuneration and challenged where appropriate.
We also agreed the removal of long-term Banco Santander SA performance metrics to more closely align Executive Committee members' incentives with Santander UK's strategic priorities. These metrics only apply to the CEO from 2022 onwards.
On behalfRisk Adjustments
Our risk adjustment procedures, which are applicable to all colleagues, are robust and well embedded within our remuneration policy framework. We continue to use a range of risk adjustment mechanisms, including reducing the Committee, I am pleasedbonus pool and / or individual bonus awards in the current and previous years, and / or reducing the amount of any unvested deferred variable remuneration. Our approach to present my first Directors' Remuneration Report for 2020. I would likerisk adjustment is under continuous review to thank Scott Wheway for his stewardship ofadapt to the Committeechanges in Santander UK’s operating environment, ensuring that they remain comprehensive, relevant and support during my transitioncompliant with regulatory requirements.
The CRO and DoC report to Committee Chair in 2020,us regularly, providing commentary on the risk profile and Annemarie Durbin as Santander UK plc Committee Chair for her and that Committee's material contributions as this is where the majority of matters arise.
Role and responsibilities
The Committee is responsible for overarching remuneration policies and frameworks across the Santander UK group. It is responsible for remuneration arrangements of employing entities outside the Santander UK plc (the Ring-Fenced Bank or RFB) perimeter.
The Committee works in consultation with the RFB to ensure alignment of remuneration practices, policies, and procedures. The RFB's remuneration activities are governed by its Board Remuneration Committee.
Overview of the year
Through its monitoring and challenge of remuneration matters, the Committee completed its annual review of the regulated remuneration governance framework across the Santander UK group. In determining remuneration outcomes, we are mindful of the overall performance of the bank. We intensified prioritisation of the safety and wellbeing of our colleagues.
Taking account of financial and non financial performancebusiness in the year, and future risks,recommending any collective or individual adjustments that we approvedmay wish to implement as a result.
Ahead of the 2022 variable remuneration pay review, we spent time considering the fairest and most proportionate way of taking current risk issues into account. In particular, we spent significant time considering the most fair and proportionate way to deal with the FCA's penalty relating to historical anti-money laundering controls between 2012 and 2017. The failings and penalty were taken into account as part of the 2022 bonus pool fordetermination calculation.
Diversity Pay Reporting
We remain committed to increasing diversity and inclusion at Santander Financial Services plc.
Summary of 2020 outcomes
Variable pay
The Committee is satisfied that 2020 variable pay outcomes for all colleagues are appropriately aligned to Santander UK’s business performance, which is fair, consistent, and alignedUK, recognising its benefits to our stakeholder interests.business, colleagues and our wider communities.
While the Committees are responsible for overseeing Santander UK's approach to pay gap reporting, the Board ChangesResponsible Banking Committee (RBC) is responsible for overseeing management’s approach to, and progress in, improving diversity and inclusion across Santander UK. For more on this, see the RBC Chair's report.
TheOur 2022 Pay Gap Report, now known as the Everyday Inclusion and Pay Gap report, which was analysed and approved by the RFB Committee, consideredwas published in December 2022. Given our commitment to inclusion more broadly, this year we have provided a more holistic overview of our actions and progress towards achieving everyday inclusion, including additional metrics on diversity representation and employee experience. For more information on our approach to everyday inclusion, see the remuneration for William Vereker who was appointed as Board ChairRBC Chair's report and the Sustainability and Responsible Banking section of the Strategic Report.
In terms of the results, the mean gender pay and bonus gaps reduced in 2022, while the median gender pay and bonus gaps increased. Mean and median binary ethnicity pay and bonus gaps also increased. Clearly these results are disappointing and management has worked hard to identify the reasons behind the increases and create an action plan to address the factors within Santander UK's control. More details can be found in Everyday Inclusion and Pay Gap Report on 1our website, which does not form part of this Annual Report.
November 2020. Further details are set out laterThe Committee and the RBC will continue to provide oversight and encouragement to management to improve our diversity, inclusion and fair pay in this report.2023.
Priorities for 2021Committee adviser tender
In November 2021, we will (for entities outsidethe Committee reviewed the independence and effectiveness of the current Remuneration Committee Advisor, Deloitte LLP. While the review confirmed that Deloitte remained independent and effective, it was agreed that a formal tender would be conducted in 2022 as a matter of best practice.
Four independent firms participated in the tender, each of whom provided a written submission and met with management. They were assessed on an objective basis on factors including proven experience and credentials, understanding of Level One banking remuneration regulations and cultural fit with Santander UK. Two firms were shortlisted and were interviewed by the Chair of the RFB perimeter) continue to:Committee and one of its members.
–monitor our incentive structures and measures, to maintain alignment to our strategic aims, culture and behaviours, balancingBased on the needs of our people, customers, communities and shareholders and supporting our business transformation.
–monitor external developments in executive remuneration best practices inabove criteria, the industry and broader market taking into account the regulatory landscape and corporate governance.
Committee Membership
The membersre-appointment of the current Independent Adviser, Deloitte, was approved at the September 2022 meeting. We look forward to continuing to work closely with them.
Regulatory changes and engagement
Regulatory requirements and expectations are at the forefront of the Committees' considerations when making decisions and we are kept abreast of changes in regulatory requirements via a variety of means, including by management and our Independent Adviser. The Chairs of the Committees meet with our regulators on a periodic basis to update them on recent developments and upcoming matters. We also encourage management to engage proactively and regularly with our regulators on matters of interest to them. Ensuring that the new Consumer Duty is appropriately reflected in our variable pay framework going forward will be a key focus for the Committee during 2020 were Chris Jones (Chair), Scott Wheway (until 30 September 2020), and Ed Giera (from 1 November 2020).The Committee met 9 (including ad hoc meetings) times in 2020, reflecting its responsiveness to the changing environment brought by Covid-19.2023.
Effectiveness of the Committee
The Committee’s performance was assessedAs noted in the Board Nomination Committee Chair's Report, as part of the Board’sinternally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Boards. Information on the progress against actions from last year's review, this year’s evaluation process during the year. We considered the results and agreed key areas of development for 2020. The plan focuses on allocating more time to remuneration strategy, longer term trends and challenges.The Committee continues to operate effectivelyimprovement identified, is set out in discharging its responsibilities, and the Board takes assurance from the quality of the Committee’s work. TheNomination Committee considered the performance of its remuneration consultants, Deloitte LLP, and is satisfied that their advice and conduct remain independent, and objective.Chair's Report.
Terms of ReferenceChris Jones
The Committee’s Terms of Reference are regularly reviewed to make sure they remain appropriate. The Terms of Reference are available at www.aboutsantander.co.uk.1 March 2023
Santander UK Group Holdings plc65
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Annual Report 2022 | Santander UK Group Holdings plc 77 |
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AnnualStrategic Report 2020
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Remuneration policy report |
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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. Furthermore, we followapplied the UK Corporate Governance Code 2018 (the Code) wherever applicableand complied with the Provisions other than where stated in order to practice best standards of corporate governance, andthe Directors' Report. In addition, we comply with other listed disclosure requirements to the extent considered appropriate.appropriate taking into account our ownership structure.
Accordingly, several voluntary disclosures relating to remuneration are presented in this report.
Forward-looking remunerationRemuneration policy for Executive Directors (EDs)
Our forward-looking remuneration policy, which applies to Main Board Executive Directors (Executive Directors),EDs, is outlined below. Remuneration is structured in two main elements: fixed and variable pay. Fixed pay is set at market competitive levels appropriate for the role, so that inappropriate risk taking is not encouraged.role. Variable pay rewards the delivery of internal financial targets, key strategic priorities and individual performance.performance, subject to risk adjustment.
Remuneration policy applicable to Executive Directors' remuneration structure
Directors in the year | | | | | | | | |
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Fixed pay | Principle and description | Policy |
Base salary | –To attract and retain Executive DirectorsEDs of sufficient calibre and with the skills to deliver our strategy, taking into account the demands and complexity of the role. | –Base salaries are normally reviewed annually. In reviewing base salaries the Committee considers a number of factors, including: –Thethe skills required and responsibilities of the role alongside the market value of those attributes; –Thethe requirement for base salaries to be set at a level to avoid inappropriate risk taking; –Basebase salary increases across the colleague population; and –Prevailingprevailing market and economic conditions. |
Pension arrangements | –To provide a discrete element of the package to contribute towards retirement. | –All Executive DirectorsEDs receive a cash allowance in lieu of pension. –Pension for new Board appointments will bepension in line with the wider workforce average, level of pension provision available to the broader workforce, currently 9% of salary.
–Our approach to current Executive Director pension allowances is set out in the Policy Report.
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Other benefits | –To offer a competitive package and to support employee wellbeing. | –Including but not limited to: private medical insurance for Executive DirectorsEDs and their dependants, life assurance, health screening, relocation allowances and expatriaterelocation allowances where relevant. –Access to Santander UK’s all-employee share schemes on the same terms as all UK employees. |
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Variable pay | Principle and description | Policy |
Variable pay plans | –The Variable Pay Plan aims to motivate Executive DirectorsEDs to achieve and exceed annual internal targets within Santander UK’s Risk Appetite and in alignmentaligned with our business strategy and values. –Multi-year deferral further performance testing and delivery in Banco Santander SA shares aligns Executive Directors’EDs’ interests to the long-term interests of Santander UK. Further performance testing also applies for the CEO. –Part of the award is deferred according to the requirements of the PRA Remuneration Code.Rulebook (Remuneration Part). –The long-term Transformation Incentive planPlan recognises the collective achievement of key financial and non-financial internal targets associated with the bank's ongoing transformation. | –Bonus awards under the Variable Pay Plan are discretionary and determined by reference to performance against a scorecard of financial and non-financial goals, as well as individual performance. –40% of any bonus awarded is paid upfront after the performance year ends, (year one), and delivered at least half in shares. –60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered at least half in shares. –For Executive Directors,the CEO, the first three of five deferred award tranches are subject to further performance testing, which may reduce or increase the level of payout, but not increase it.payout. –The Transformation Incentive is based on performance assessed over a three year period with further deferral into cash and share based awards in line with regulatory requirements. –Share based awards are subject to a minimum twelve-month retention period following vesting. –Malus and clawback provisions apply to variable pay for up to ten years following the grant of an award. –The structure of variable pay awards means Executive DirectorsEDs acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. In addition, the CEO is subject to a Shareholding Policy, which ensures alignment with the long-term interests of Banco Santander shareholders. The requirement under the policy is set at two times the incumbent’s net salary upon appointment. A formal post-employment shareholding requirement is therefore not in place. |
66Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 78 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration policy report continued |
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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 by its shareholders. For control function staff,roles, a lower ratio of 1:1 is applied, apart from in exceptional circumstancesnormally applied.
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,easily understood, tailored to individual roles, competitive 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 strategic priorities across Customers, Shareholders, People and Sustainability.Communities. This ensures that our day-to-day activities align with Santander UK’s over-arching strategystrategic priorities which focus on customer loyalty and our aim of beingexperience, simplification, improved efficiency and sustainable growth while aiming to be the best bank.bank for all our stakeholders.
Simplicity
–To ensure our approach to remuneration is transparent and easily understood.
–To operate simple and clear structures for all Santander UK colleagues.to support each colleague to link their contribution to the success of the organisation.
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 Santander UK-wide framework. Risk adjustment occurs at an individual and bonus pool level.
–To provide a package that is balanced between fixed and variable pay, and short-term and long-term horizons, which aligns to our strategy 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 Directors'EDs' performance against objectives set at the start of the year covering a range of financial, non-financial, quantitative and qualitative criteria.
–To set robust and stretching internal targets and 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.growth and transformation.
–To consider wider employee pay and conditions 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, whilst reflective of our subsidiary structure.
Predictability
–The Committee annually reviews the variable pay opportunity for individuals and the basis of the bonus pool calculation. Due to commercial sensitivity, these are not disclosed as per the requirementsprovisions 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.above.
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 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 has been phased with the Chief Executive Officer's allowance reducing from 35% to 22% of salary effective 1 January 2020, and to 9% of salary from 1 January 2021. Subsequently, with effect from January 2021 the Chief Executive Officer's pension provision is aligned with the current workforce average.
On recruitment
When appointing a new Executive Director,ED, base salary is set at a market competitive level appropriate for the role, taking into consideration a range of factors including role scope and responsibilities, internal and external peer groups, the individual’s previous remuneration, relevant experience, and affordability.
Unless determined otherwise, any new Executive DirectorED will receive a pension allowance in line with the wider workforce average, currently 9% of salary. Benefits available will typically be aligned to the wider employee population.
Other elements of remunerationRemuneration will be established in line with the Remuneration Policy, as set out in the Executive Directors’EDs’ remuneration structure table in this report.
Relocation support and international mobility benefits may also be given. Where provided, relocation assistance will normally be a capped amount for a limited time. For an overseas appointment,In cases of international mobility, the Committee will have discretion to offer benefits and pension provisions which reflect their home country market practice and align to relevant legislation.
Buy-out awards
Compensation may be provided to Executive DirectorsEDs recruited externally for the forfeiture of any awardawards on leaving their previous employer. The Committee retains discretion to make such compensation as deemed appropriate to secure the relevant Executive Director’sindividual’s employment and will ensure any such payments align with both the long-term interests of Santander UK and the prevailing regulatory framework.
Such payments will be in line with the awards foregone as a result of leaving the previous employer taking into account value, form of awards, vesting dates and the extent to which performance conditions applied to the original awards.
Service agreements
TermsThe key terms and conditions of employment are set out in individual service agreements. These agreements which include a notice period of six months from both the Executive DirectorED and the Company.
The agreements may be terminatedagreement reserves a right for the Company to terminate employment immediately with a payment ofin lieu equal to the ED's fixed pay in lieu of notice.for the notice period. In the event of termination for gross misconduct, neither notice nor payment in lieu of notice is required, and any deferred awards are forfeited.
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Remuneration policy report continued
Termination payments
The remuneration impact on remuneration of an Executive DirectorED leaving the Company, under various scenarios reflectsincluding treatment of variable pay and/or any termination payment will reflect the terms of the service agreements, the relevant scheme rules, regulatory requirements and the Committee’s policy in this area.relevant to the reason for leaving.
Outstanding variable pay awards will generally lapse on termination, other than where an individual is considered a ‘good leaver’, in which case the. Where an ED is a good leaver, eligibility to variable pay awards will normally subsist until normalthe relevant scheduled payment dates. dates and will remain subject to performance where relevant.
The Committee determines whether an Executive DirectorED is a good leaver. Usual good leaver under certain circumstances includinginclude but are not limited to: injury, ill-health, disability, redundancy, retirement death, orand death. The Committee may, at its discretion, determine an ED a good leaver in any other reason at the Committee’s discretion.circumstances.
ThereA framework 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.EDs.
In the event of a change in control, any outstanding variable pay awards will be treated in line with the relevant scheme rules, taking into account the applicable regulatory requirements.
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Remuneration policy report continued |
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Risk and Performance adjustment
We continue to ensure thatmeet the regulatory requirements in respect of the Remuneration Code on risk and performance adjustment are met for our colleagues.adjustment. 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.
The Standard provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment overlay that can reduce the bonus pool or individual awards to nil at the Committee’s discretion. Given commercial sensitivity, the Committee does not provide annual detail on the application of discretion as required by the Code.
Our Individual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for decisions in relation to individual performance adjustments following an incident, including the application of malus and clawback.
Performance adjustments may include, but are not limited to:
–Reducing a bonusreducing an award for the current year;
–Reducingreducing the amount of any unvested deferred variable remuneration;
–Requiring a bonusrequiring an award which has been awarded (but not yet paid)been paid to be forfeited; and
–Requiringrequiring repayment on demand (on a net basis) of any cash and share awards received at any time for a period of up to ten years following the date of award.
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 a number of circumstances, including:
–Colleaguecolleague misbehaviour, misconduct or material error;
–Materialmaterial downturn in the performance of Santander UK or a relevant business unit’s performance;unit; and
–Santander UK or a relevant business unit suffering a material failure of risk management;
–Significant changes in Santander UK’s economic or regulatory capital base and the qualitative assessment of risk; and
–Material restatement of the Santander UK’s financial statements (except when required due to modification of the accounting rules).management.
When determining variable pay awards for individuals performing roles across Santander UK plc and Santander UK Group Holdings plc, the Santander UK Group Holdings plc Board Remuneration Committee will apply any necessary discretion based on factors related to UK Groupgroup entities outside of Santander UK plc. This discretion is subject to validation by the Santander UK plc Board Remuneration Committee.
The Committee seeks input from the Chair of the Board, Chair of the Board Risk Committee, Chief Risk Officer, Chief Legal and Regulatory Officer, Chair of the Board Audit Committee, Chief HRRisk Officer, ChairDirector of the BoardCompliance, Chief People Officer and Chief Internal Auditor when determining whether any performance or risk adjustments are required.
Policy for all employees
Our performance reward and benefitsreward approach across the Company supports and drives our business strategy, rewards strong performance and reinforces our values within the approved risk management framework. The general principles of the Remuneration Policy broadly apply across all colleagues where appropriate, and are designed to facilitate recruitment, motivation and retention whilst driving performance.
The composition of remuneration packages for the Executive DirectorsEDs is aligned with the broader colleague population, comprising salary, pensions and benefits, workforce aligned pension provisions and eligibility for discretionary variable pay dependent on role and responsibility. From 1 January 2021, the level of pension allowance for all current Executive Directors is aligned with the current average employer contribution for the wider workforce.
The Committee annually approves the operation of all of our variable reward schemes for all our customer-facing colleagues to ensure that all plansthey reward appropriate behaviour and do not incentivise unnecessaryactivities which are outside risk taking.appetite.
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Remuneration implementation report |
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Introduction
This section of the report outlines how our Remuneration Policy was implemented for 2020.2022.
Variable Pay Plan
To incentivise and reward Executive DirectorsEDs for achieving superior and sustained performance, our Directors participate in an annual variable incentive plan. A balance of financial and non-financial performance metrics 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 ensuresensure that Executive Directors’EDs’ interests are aligned to the long-term interests of the business. Further long-term performance testing also applies for the CEO.
Both upfront and deferred awards are made at least half in shares.shares or share-linked instruments. The deferred element is delivered over seven years, withyears. Effective 2022 and for the CEO only, the first three deferred tranches of awards are subject to further performance testing against long-term metrics which can reduce but not increase the overall level of awards.metrics. Awards delivered in shares or share-linked instruments are subject to an additional one-year retention period from the point of delivery.
The structure of the plan is illustrated below. The 20202022 Variable Pay Plan pool was determined based on a range of metrics using a balanced scorecard approach as follows:
Quantitative assessment
A quantitative assessment is undertaken against a balanced scorecard of financial and non-financial metrics that are key to Santander UK’s 20202022 strategy. Performance metrics are reviewed annually to ensure continued alignment with strategy and, for 2020 were:2022 a simplified scorecard comprised:
–Customers (Net Promoter Score, Loyal Customers and number of loyal customers)Total Customers)
–Shareholders
–Risk (Cost of credit & Stage 3 ratios)ROTE
–RORWA (where an accelerator could apply subject to ROTE and Capital (Contribution to Banco Santander group capital)
–Profitability (Net profit & RoTE)generation)
–Sustainability (Financial empowerment, Dementia Friendly Bank and emissions reduction)Empowerment)
–People (Employee Engagement)Engagement and a Diversity and Inclusion multiplier).
A profit underpin was introduced for 2020 applicable to Executive Directorsapplies which requires Profit after Tax to remain positive in order to pay any award.award, with a reduced pool should profit reduce substantially from the prior year.
Qualitative assessment
A qualitative assessment adds context to the quantitative assessment and ensures a balanced view of performance is taken. Performance is assessed across metrics including but not limited to: customers (conduct risk), profitability (results and costs) and responsible banking.
Banco Santander Group MultiplierAppointment and retirement of Directors
The Committee has the discretionCompany's Articles of Association require each Director to adjust the pool upwards or downwards to reflect overall Banco Santander performance if appropriate.
Exceptional Adjustment
Intended to cover unexpected factors or additional internal targets not covered by the quantitative or qualitative assessments. This may also include adjustments not covered in the qualitative assessments, including major risk events. No exceptional metrics were applied to the 2020 variable awards for Executive Directors
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 other risk appetite limit breaches e.g. reputational risk and Financial Crime risk). This can result in a downward risk adjustment of up to 100% of the bonus pool or individual awardsretire every year at the discretion ofAnnual General Meeting and any Director may offer themselves for re-election by members. For more, see the Committee.Directors’ report.
The Committee reviews and approves remuneration governance and frameworks on an annual basis to ensure continued compliance with the relevant regulatory rules, including for ring-fencing.
Individual assessment
The allocation of the pool is based on an individual's performance, taking into account a range of factors including behaviours, conduct and risk.
Deferred long-term awards
The payment of the first three deferred tranches of the 2020 awards (36% of the total award), payable in 2024, 2025 and 2026, is conditional on the achievement of long-term objectives measured over the three-year period 2021 to 2023. The performance measures for 2020 awards are EPS, relative TSR and compliance with the fully-loaded CET1 capital ratio. Following performance assessment, the level of awards will be adjusted accordingly. The measures can reduce but not increase the overall value of the deferred awards. The payment of the final two deferred tranches (24% of the total award), payable in 2027 and 2028 is subject to continued employment only and ex-post risk adjustment.
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Annual Report 2020 | Governance
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Remuneration implementation report continued
2020 Business Performance and Impact
on Remuneration
In spite of the impact on the broader economy from the Covid-19 pandemic, we have been able to report a net profit for each quarter of 2020. Our balance sheet remains strong and resilient, and progress has been made to reduce expenses through the transformation programme. Our people have responded rapidly and positively to the challenges posed by the pandemic, to support our customers and meet their changing needs. It is in this context that the Committee made remuneration decisions in respect of the 2020 performance period. Bonus awards were significantly reduced from previous years, and included an exercise of discretion by the Committee to reduce the formulaic bonus pool outcome in recognition of the external environment.
The Committee made the decision not to award the CEO a bonus for the year, and instead the value of bonus he might otherwise have received has been used to fund a corporate donation to the Santander Foundation. The CEO fully supported this decision. In keeping with our responsible approach in the current environment, the other Executive Directors received a reduced bonus reflecting the challenging conditions this year and our financial results. This was paid wholly in shares to align to the long-term interests of our shareholders.
As noted in the Chair's statement, a comprehensive package of measures was introduced to support colleagues at the start of the pandemic. These included a series of wellbeing interventions and a commitment to pay all colleagues their contracted hours, alongside confirmation that the Government's Coronavirus Job Retention Scheme would not be used. In recognition of the contribution made by customer facing colleagues who continued to directly engage with customers throughout the pandemic, a one-off £500 award was made. In considering year-end outcomes, the Committee agreed that the allocation of the bonus pool should be weighted towards less senior colleagues.
The Committee confirms that the remuneration policy operated as intended, demonstrating pay for performance alignment.
Context for decision making
The Committee ensures that broader remuneration policies and practices for employees across the Santander UK group are taken into account when setting policy for Executive Director remuneration. The Committee reviews remuneration trends across the Santander UK group including the relationship between Executive remuneration and that of other Santander UK group employees, as well as remuneration in the wider UK market when making decisions on Executive pay.
The Committee oversees broader workforce remuneration policies and practices, the implementation of remuneration and related employment policies across Santander UK 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 pay and benefits matters for all colleagues;
–Annual pay reviews for the general employee population;
–Santander UK group-wide pension and other benefit provisions;
–The design of and overall spend on variable incentive arrangements; and
–An assessment of conduct across the business.
The Committee is focused on ensuring that colleagues 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.
The Committee always considers the broader stakeholder environment when setting policy or reaching decisions on executive pay.
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Executive Directors’ remuneration (audited) Total remuneration of each Executive Director for the years ended 31 December 2020 and 2019. |
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| | Nathan Bostock (2,4,5) | | Duke Dayal (1,2) | | |
| | 2020 | | 2019 | | 2020 | 2019 | | | |
| | £000 | | £000 | | £000 | £000 | | | |
Salary and fees | | 1,680 | | 1,680 | | 950 | 277 | | | |
Taxable benefits | | 44 | | 56 | | 502 | 504 | | | |
Pension | | 370 | | 588 | | 86 | 25 | | | |
Total fixed pay | | 2,094 | | 2,324 | | 1,538 | 806 | | | |
Bonus (paid and deferred) (3) | | — | | 1,990 | | 748 | 354 | | | |
Total variable pay | | — | | 1,990 | | 748 | 354 | | | |
Total remuneration | | 2,094 | | 4,314 | | 2,286 | 1,160 | | | |
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(1) | Duke Dayal was appointed as an Executive Director on 16 September 2019 and his remuneration is shown from this date, with 2019 full year Santander UK Group Holdings plc equivalent total remuneration of £2.957m. |
(2) | Taxable benefits for the Executive Directors comprise a range of benefits including private health care, life and critical illness cover, health insurance and car allowance. Included in the 2020 benefits figure for Duke Dayal is a relocation allowance of £500,000. |
(3) | The bonus value shown is the total Variable Pay Plan award made in respect of 2020, which will be delivered wholly in shares. As set out in this report, a portion of the award (36% of the value shown) is subject to further performance testing which may reduce, but not increase, the value delivered. |
(4) | As set out in the Remuneration Policy report, the pension contribution received by Nathan Bostock was reduced from 35% to 22% of salary from 1 January 2020, and to 9% of salary from 1 January 2021. |
(5) | The CEO bonus outcome takes into account the external environment and the Committee's commitment to a reduction in the CEO's overall remuneration for the year. |
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Relative importance of spend on pay |
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| 2020 | 2019 | Change |
| £m | £m | % |
Profit before tax | 552 | | 981 | | (44) | |
Total employee costs | 1,189 | | 1,288 | | (8) | |
70Santander UK Group Holdings plc
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Stakeholder views
During 2020, Santander UK continued to engage with key stakeholders on remuneration related matters including its main regulators the PRA and FCA.
Employee opinion surveys are undertaken annually on employee engagement, and discussion takes place with union representatives during the annual pay review cycle and on relevant employee reward matters on a more frequent basis. The Committee receives updates on these discussions during the year. More frequent colleague pulse surveys were conducted in 2020, alongside other virtual listening forums, for a more frequent gauge of employee sentiment throughout the pandemic.
CEO pay ratio
Santander UK is committed to delivering fair pay which attracts, retains and motivates colleagues of the highest calibre across all grades. In line with this commitment, the Committee has oversight of compensation across the organisation, including pay ratios, and considers this when determining reward outcomes. For the second year we are voluntarily disclosing the ratio of the CEO’s total remuneration to that of UK colleagues.
The CEO's pay mix is weighted more highly towards variable pay to incentivise the achievement of stretching internal targets and long-term value creation which can lead to greater variability in total remuneration each year. In contrast, the typical pay mix of our colleagues places more emphasis on fixed pay, to ensure a minimum level of earnings which offers greater security and reflects our commitment to colleague wellbeing.
This difference in pay mix plays a key role in the movement of the ratio which is in part driven by the variable nature of our CEO's remuneration. However, in reviewing the ratio the Committee is keen to ensure that changes in the ratio are influenced by the differences in remuneration structure rather than an increase in pay disparity. In assessing the pay ratio, the Committee is confident that the Company's policy on remuneration is fair. A summary of our approach to Fair Pay is included in the People section of our Sustainability report.
The ratio this year has reduced from 129:1 to 64:1. This is largely due to the fact the CEO has not received a bonus. The first phase of the reduction in CEO pension contribution to employee average (from 35% in 2019 to 22% in 2020) has also contributed to the reduction in the ratio.
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 2020 were £143,600 (2019: £157,500). Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK.
The Committee is satisfied 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, following review in 2020.
In 2020, Deloitte also provided unrelated tax, financial and advisory, risk, assurance and consulting services to Santander UK.
By Committee invitation, the Chair, Chief Executive Officer and designated representatives from business functions attend meetings to advise on HR, Risk, Legal and Regulatory matters as appropriate, to support the Committee's work. Attendees included the Chief HR Officer, Performance & Reward Director, Chief Legal and Regulatory Officer, Chief Risk Officer and Company Secretary. No individual participates in discussions regarding their own remuneration.
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CEO pay ratioAnnual Report 2022 |
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| MethodologySantander UK Group Holdings plc (1)
| 25th percentile | Median | 75th percentile |
2020 CEO pay ratio | Option A | 88:1 | 64:1 | 37:1 |
2019 CEO pay ratio (4)
| Option A | 178:1 | 129:1 | 76:1 |
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| CEO remuneration (3)
| 25th percentile (2)
| Median (2)
| 75th percentile (2)60
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2020 CEO pay ratio | £ | £ | £ | £ |
Total salary £ | £1,680,000 | £20,009 | £26,347 | £43,228 |
Total remuneration £ | £2,094,000 | £23,903 | £32,785 | £56,190 |
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(1) | Employee pay is calculated based on the 'Option A' methodology. We have chosen Option A as it gives the most reliable and accurate result by calculating a comparable single figure for each employee. |
(2) | Employee pay data is based on full time equivalent pay for Santander UK plc employees. 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 remuneration is calculated based on fixed pay accrued during the financial year, and variable pay is either based on actual bonuses in respect of the 2020 year (where these are available) or modelled target bonuses where actuals are not yet available. |
(3) | The CEO's total remuneration is aligned to that disclosed in the Executive Directors' remuneration table on the previous page. |
(4) | The 2019 ratios are re-stated above. These were originally calculated based on fixed pay accrued within the 2019 year, in addition to bonuses paid in 2019 in respect of the 2018 year. The 2019 ratios have now been recalculated using 2019 fixed pay and bonuses paid in 2020 in respect of 2019 for all employees, to ensure closer alignment with the reporting requirements. This results in a reduction in the 2019 median pay ratio from 132:1 to 129:1. |
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Annual Report 2020 | Governance
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Remuneration implementation report continued
Chair and Non-Executive Director
remuneration
The Chair’s fee is reviewed and approved by the Committee. The fees paid to Non-Executive Directors are reviewed and approved by the Chief Executive Officer and the Chair. Fees are reviewed annually taking into account the market rate and time commitment for the role. The Chair is paid an all-inclusive base fee. Non-Executive Directors are paid a base fee, with a supplement for serving on or chairing a Board Committee. Group Non-Executive Directors do not receive fees in respect of their Santander UK duties.
William Vereker was appointed Chair on 1 November 2020, previously Non-Executive Director from 1 October 2020. For the period served from 1 October 2020 to 31 October 2020, he received the base board member fee of £95,000 pro-rated for time served. From appointment as Chair, in line with his predecessor, he will be paid an annual fee of £675,000. In addition, William is eligible to receive private medical insurance.
All Non-Executive Directors and the Chair serve under letters of appointment and either party can terminate on three months’ written notice, except in the case of the Chair where twelve months’ written notice is required..
Neither the Chair nor the Non-Executive Directors have the right to compensation on the early termination of their appointment beyond payments in lieu of notice at the option of Santander UK. In addition, neither the Chair nor the Non-Executive Directors are eligible for pension scheme membership or other incentive arrangements.
In 2020, some of the Non-Executive Directors voluntarily elected to donate a portion of their fees to the Santander UK Foundation Covid relief fund. The fees shown below do not reflect those contributions.
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Chair and Board Committee member fees |
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| 1 January 2020 | 1 January 2019 |
| £000 | £000 |
Chair (inclusive of membership fee) | 675 | 650 |
Board member | 95 | 90 |
Additional responsibilities | | |
Senior Independent Director | 35 | 30 |
Chair of Board Risk Committee | 65 | 60 |
Chair of Board Audit Committee | 60 | 60 |
Chair of Board Responsible Banking Committee | 60 | 60 |
Chair of Board Remuneration Committee | 60 | 60 |
Membership of Board Risk Committee | 30 | 25 |
Membership of Board Audit Committee | 25 | 25 |
Membership of Board Responsible Banking Committee | 25 | 25 |
Membership of Board Remuneration Committee | 25 | 25 |
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| 2020 Fees | 2019 Fees | 2020 Expenses | 2019 Expenses | 2020 Benefits | 2019 Benefits | 2020 Total | 2019 Total |
Non-Executive Directors | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 |
Chair | | | | | | | | |
William Vereker (1,2) | 120 | — | — | — | 1 | — | 121 | — |
Shriti Vadera (1,2) | 563 | 667 | — | — | 47 | 22 | 610 | 689 |
Independent Non-Executive Directors | | | | | | | | |
Ed Giera | 214 | 207 | — | 30 | — | — | 214 | 237 |
Chris Jones | 214 | 207 | — | — | — | — | 214 | 207 |
Scott Wheway (3) | 165 | 240 | 2 | 8 | — | — | 167 | 248 |
Banco Santander nominated Non-Executive Directors (5) | | | | | | | | |
Ana Botin | — | — | — | — | — | — | — | — |
Bruce Carnegie-Brown (4) | — | — | — | — | — | — | — | — |
(1)Shriti Vadera stepped down on 31 October 2020. William Vereker joined on 1 October 2020 and was appointed Board Chair on 1 November 2020.
(2)2019 full year fees for the Board Chair reflect the increase on 1 May 2019 from £650,000 to £675,000. Shriti Vadera was entitled to taxable benefits as follows: private medical cover of £548 (2019: £626) and transportation of £15,582 (2019: £20,752). In addition, she received a payment of £31,154 in respect of holiday pay. William Vereker received private medical cover of £411.
(3)Scott Wheway stepped down on 30 September 2020. Fees received are in respect of services to this date.
(4)Bruce Carnegie-Brown was appointed on 16 September 2019.
(5)None of the Banco Santander nominated Non-Executive Directors received any fees or expenses.
72Santander UK Group Holdings plc
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Board and Committee membership and attendance
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| | BoardStrategic Report | Nomination CommitteeSustainability and Responsible Banking | Governance | Risk Committee review | Audit CommitteeFinancial review | Responsible Banking CommitteeFinancial statements | Remuneration CommitteeShareholder information |
| | 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 | William Vereker (1)
| 1/1 | 2/2 | 2/2 | 3/3 | - | - | - | - | - | | - | | - | | - | |
Shriti Vadera (2)
| 8/8 | 4/4 | 7/7 | 3/3 | - | - | - | - | - | | - | | - | | - | |
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Independent Non-Executive DirectorsChair’s report on corporate governance continued | Ed Giera | 9/9 | 6/6 | 2/2 | 2/2 | 9/9 | 1/1 | 10/10 | 1/1 | 5/5 | | 2/2 | | 1/1 | | 0/0 | |
Chris Jones | 9/9 | 6/6 | - | - | 9/9 | 1/1 | 10/10 | 1/1 | 1/1 | | 0/0 | | 6/6 | | 3/3 | |
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Summary of Board activities in 2022 The Board aims to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole. Activities in 2022 included: |
Theme | Action taken by the Board and outcomes | |
Strategy including One Europe and Banco Santander | –Following on from the Board Strategy Day, considered and challenged management’s proposals to enhance our proposition across the Everyday Banking and Homes businesses. –Reviewed our customer proposition and experience, including a deep dive on our Net Promoter Score (NPS) and initiatives to improve the NPS trend, and customer interactions strategy, including changes to the branch operating model. –Reviewed and challenged our marketing and brand strategy and positioning, with a view to developing a coherent brand narrative aligned with our ambition to be a ‘digital bank with a human touch’. –Considered specific M&A market opportunities to accelerate growth. –Reviewed initiatives and opportunities to collaborate and leverage resources and capability across the Europe region and the Banco Santander group, including a common payments platform and, banking application (OneApp). –Considered disruption in the financial services market including the impact of neobanks and fintechs and digital currency and blockchain technology.
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Business, Customer and Transformation | –Reviewed, challenged, and approved the 3-year business plan (2023-2025) and the annual budget, including assumptions underpinning the plan given the rapidly evolving macroeconomic environment and investment to support a resilient and sustainable operating environment and associated risk assessments. –Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities, developments with customer experience and the Company's transformation programme. –Considered financial crime, including approval of risk appetite and oversight of programmes to accelerate controls enhancement and regulatory engagement, as well as back book remediation. –Considered and endorsed the IT transformation programme including clear milestones and investment to align IT infrastructure and systems with business requirements and bring IT risk within Board Risk Appetite.
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Regulation, Balance Sheet and Capital | –Reviewed, challenged and approved the ICAAP, ILAAP, adequacy and effectiveness of stress-testing and capital management, AT1 payments and ordinary and preference share dividend payments in line with PRA guidance. –Submitted to the Bank of England results of the annual cyclical and solvency stress test submissions. –Submitted a self-assessment of resolvability to the PRA in line with the Bank of England Resolvability Assessment Framework. –Considered the future regulatory landscape and implications, including approval of the Consumer Duty implementation plan. – A number of Board members also participated in workshops delivered to the Board Audit Committee on the evolution of the IFRS 9 approach and supporting models.
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Risk and control | –Received regular enterprise-wide risk updates from the CRO, together with updates on specific risks, such as third-party outsourcing, IT, data management, financial crime, fraud, climate change and inflation. The Board closely monitored overall operational risk given the ongoing execution of the extensive transformation agenda. –Approved/adopted changes to the Risk Framework as part of the annual review, including the introduction of a new minimum standard to ensure each business area and risk type considers risks posed by climate change. –Received annual reports on whistleblowing and cyber security, considering the effectiveness of such arrangements. –Reviewed and approved relevant submissions related to the Operational Resilience Programme. –Approved the submission to the BoE of results from the Climate Biennial Exploratory Scenario Stress tests for climate risks. |
People and Culture | –Received updates on issues including talent management & succession planning, gender pay gap and diversity & inclusion. – Utilised regular reports on culture, including employee feedback to identify cultural priorities and alignment with the Company's long term strategic direction. – Considered colleagues' ways of working and opportunities to optimise the real estate portfolio. – Considered succession planning across all key control, support functions and business functions. |
Governance and Responsible Banking | – Reviewed, challenged and approved the Annual Report. – Received regular verbal updates of Board Committee activity from their respective Committee Chairs. – Approved a revised Banco Santander Subsidiary Governance Model for subsidiaries, and certain Corporate Frameworks. – Approved the education and social mobility strategies. – Approved the recommendations and resulting action plan for the 2021 externally facilitated Board evaluation, and the incremental recommendations arising from the internally facilitated Board evaluation in late 2022. – Approved policies including a new Board level Conflicts of Interest Policy, Board Diversity & Inclusion Policy, Policy for the Suitability, Selection and Succession of Board members and Policy on Regulatory Documents on the recommendation of the Board Nomination Committee. – A number of Board members also participated in workshops delivered to the Board Responsible Banking Committee to discuss the Company's climate strategy and supporting business initiatives; and consider the impact of initiatives implemented so far and next steps in fraud prevention. |
William Vereker
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Scott Wheway Board Nomination Committee Chair’s report(3)
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Introduction
On behalf of the Committee, I am pleased to present the Board Nomination Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Nomination Committee (the RFB Committee) to ensure alignment of practices, policies and procedures.
I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committees are responsible for, amongst other things:
–Identifying, nominating and recommending candidates for appointment to the Board.
–Regularly reviewing the structure, size and composition of the Board and its Committees.
–Overseeing the evaluation of Board and Board Committee performance.
–Reviewing corporate and internal governance matters.
Committee composition
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| 6/7Scheduled meetings | 4/4Ad hoc meetings |
6/6 | 2/2William Vereker (Chair) | 7/7 | 0/02/2 |
Ed Giera | -7/7 | - | 5/5 | | 2/2 | | 5/5 | | 3/3 | |
Banco Santander nominated Non-Executive Directors | Ana BotinPamela Walkden | 7/97 | 2/6 | 0/1/2 |
RFB Committee composition
0/1 | - | - | - | - | - | | - | | - | | - | |
Bruce Carnegie-Brown | 7/9 | 4/6 | 5/6 | 3/4 | - | - | - | - | - | | - | | - | | - | |
| Scheduled meetings | Ad hoc meetings |
William Vereker (Chair) | 7/7 | 2/2 |
Annemarie Durbin | 7/7 | 2/2 |
Ed Giera | 7/7 | 2/2 |
Pamela Walkden | 7/7 | 1/2 |
Other attendees at Committee meetings in 2022 included the CEO, Chief People Officer, Director, Performance & Reward, and Director, Culture & Capability.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Succession planning
The Committees lead a formal, rigorous and transparent process for the identification, nomination and recommendation of candidates for appointment to the Board and senior management positions.
Part of this process is ensuring that there are succession plans in place for both Board and key management positions encompassing internal and external candidates, and that there is a skills, experiences and diversity matrix which maps each Director's attributes against those which are most relevant for the Board, taking into account the future strategic direction of the Company and its needs. As well as tracking the Board's strengths, this matrix is used to identify gaps in its desired collective skills profile.
While appointments are based on the merit of the individual candidates and objective criteria, we also aim to promote diversity, in its broadest sense, to complement and strengthen the overall Board and its Committees' skills, knowledge and experience. Any appointment also takes account of all legal and regulatory requirements.
In 2022, a significant proportion of the Committees' time was devoted to succession planning, and in particular identifying successors for Chris Jones, Chair of both the Board Audit and Remuneration Committees and Chair of the RFB Audit Committee, and Ed Giera, Senior Independent Director, Chair of both the Board Risk and Responsible Banking Committees and Chair of the RFB Risk Committee. Both will step down by 2024 after serving as Directors for nine years. To ensure a thorough handover, the Committees were keen to start the selection process early.
Hedley May, an external search consultant with whom the Company and individual Directors have no other relationship, were engaged to assist with the search and selection process. A preferred candidate to succeed Chris Jones as the Board Audit Committees Chair has been identified (subject to regulatory approval) but as the appointment process remains ongoing we will report on it more fully in next year’s Annual report, together with details of the induction programme arranged for the new director.
The Committees also reviewed the additional roles that the NEDs take on, such as the Whistleblowers’ Champion and Workforce Engagement representative to reallocate some of these when the current incumbents retire. Nicky Morgan was appointed to the new role of Consumer Duty Champion for Santander UK plc.
In addition to Board level appointments, the Committees oversaw and approved several changes to the Executive Committee membership and other management key position holders in 2022. On the Executive Committee, John Collins, Chief Legal and Regulatory Officer and Iain Plunkett, Chief Operating Officer both left, with Charles Shepherd, General Counsel and Stephen White,
Chief Operating Officer appointed. Louise Shield, Director of Corporate Communications and Responsible Banking left at the end of the year, with Andrew Wilson appointed to this position from 1 March 2023. In addition, the internal appointments of Elisabet Pinilla as Head of Technology & Operations from Banco Santander SA and Juan Ignacio Echeverria as Chief People Officer from Banco Santander Mexico showcase the strength of the Banco Santander group talent pool. On behalf of the Board, I would like to welcome all those who joined us in the year and thank those who left us for their contributions.
Board effectiveness
The Committees reviewed the progress made and further actions needed on the areas of improvement identified in the 2021 external evaluation of the Board, facilitated by Boardroom Review Limited (BRL) who have no other connection to Santander UK or any individual Directors.
Progress against these actions is set out below:
–Ensuring a successful induction for Mike Regnier, as incoming CEO, was critical. The Committees also considered upcoming Board retirements and the future composition in line with the Company's long-term strategy.
–The Board Strategy Day this year allowed the Board to spend time further developing a long-term vision for growth and risk.
–To ensure that the Board receive the right information, presented in a helpful way to support effective decision making, a new paper template was implemented and training on writing papers and presenting at meetings given to regular contributors.
Following the detailed and comprehensive external evaluation by BRL, in 2022 an internal review of the Board and its Committees was conducted by the Company Secretary, assisted by the Head of Internal Governance. Interviews were held with Board members and the Executive Committee members were asked to complete a survey on the Board’s performance.
The review concluded that the Board and its Committees continue to operate effectively, with notable improvements now that recently appointed Directors, including the CEO and I, have settled into our roles and established strong relationships with the Banco Santander group. Additional strengths identified were the fostering of an open and transparent atmosphere and the blend of skills and experience on the Board. The review also identified some opportunities for improvement including:
–Oversight of ESG and Responsible Banking - given the increasing importance of these matters, the Board should ensure enough time is allocated to discuss them across the year.
–Agenda planning, Board time and Board materials - there is still room for improvement in these areas and the Chair and Company Secretary will work to enhance the scheduling and operation of Board vs Board Committee meetings.
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Annual Report 2022 | Santander UK Group Holdings plc 62 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Executive DirectorsBoard Nomination Committee Chair’s report continued |
Nathan Bostock | 9/9 | 6/6 | - | - | - | - | - | - | - | | - | | - | | - | |
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–Board Committee composition – undertake a review of the Board Committee composition to ensure knowledge is spread among Directors while meeting regulatory requirements.
–Emerging market themes and competitor benchmarking – ensuring the Board remain appraised of market activity.
–Strengthening our alignment with the Banco Santander group – fostered through the attendance of Banco Santander group directors and executives at UK meetings as appropriate, including the Board Strategy Day, and regular Board visits to Madrid.
The Board fully considered the recommendations from the internal evaluation and agreed an action plan which will be regularly reviewed by the Committees in 2023.
In 2022, I also conducted individual Directors’ assessments and the SID undertook an assessment of my performance.
Governance
Review of the Corporate Governance Framework and Banco Santander group Frameworks
A key element of our internal governance system is the adoption of corporate frameworks, which are designed to establish common principles across key subsidiaries on matters considered relevant due to their impact on the Banco Santander group’s risk profile. When the frameworks are periodically reviewed, the Committees oversee whether the Company remains in compliance with the key principles in each, and determines whether any UK specific amendments are required. In 2022, the Committees reviewed six of these frameworks.
We also reviewed a proposal to amend the Santander UK Corporate Governance Framework (CGF). The proposed changes simplified the CGF structure and updated components to ensure they are fit for purpose and reflect Santander UK’s business and operating framework. The changes to the CGF were approved by the Board following recommendation from the Committee.
The Committees also approved the implementation of a Santander UK Subsidiary Governance Framework, which formalises the minimum standards for subsidiaries across the Santander UK group to support good governance.
Diversity, inclusion and engagement with stakeholders
We believe that our success is integrally linked to the diverse composition of our people and the promotion of an inclusive culture. The basis of this premise applies to our Boards as much as it does to any other area of our business. We recognise that a diverse and inclusive Board should result in a broad strategic perspective and we strive to maintain a Board in which a diverse range of skills, knowledge and experience are combined in an environment which values the input of every Director. Due regard is given to this when identifying and selecting candidates for Board appointments. We want a Board that reflects diversity in its broadest sense, embracing different perspectives and dynamics such as gender, race, age, disability, sexual orientation and socio-economic background.
During the year, the Committees considered updates to our Board Diversity and Inclusion Policy. The Board aims to maintain at least two female members and aims to have 40% female representation by 2025, previously having a minimum of 33%, and overall aim of 50% female representation on the Board by 2030. We are also committed to maintaining at least one member from an ethnic minority background. Currently, one of our Directors is from an ethnic minority, and 33% of the Board of Santander UK plc are female.
The Board of Santander UK Group Holdings plc is significantly smaller than the Board of Santander UK plc, reflecting its role as a holding company and that Board has only eight Directors, two of whom are female. We continue to make sure gender and all aspects of diversity remain front of mind in our succession plans for both Boards.
Our commitment to the HM Treasury Women in Finance Charter continues, with the aim to create gender balance by setting a target of 50% (+/-10%) women in senior roles (excluding Board members) by the end of 2025. At 31 December 2022, 28% of Executive Committee members were female, 34% of Executive Committee members' direct reports were female and our senior manager female population (mid to senior manager roles) was 33%.
Our representation of Asian, Black and other Minority Ethnic colleagues in senior roles (excluding Board members) increased in 2022, broadly in line with our internal growth target to achieve our ambition of 14% (+/-2%) by 2025.
We voluntarily published our ethnicity pay gap for the second year and continue to publish separate pay gaps for Asian, Black and other Minority Ethnic identities as part of our commitment to equality, transparency and accountability.
We continue to work towards race equality at work through our action plans in place and commitments including being a signatory to the Race at Work Charter and the 'If Not Now, When' campaign where we commit to taking key long term, sustainable actions on Black inclusion.
We also pledged to report on the progress of our Black Inclusion Plan within an annual report which can be found in our 2022 Diversity Pay Gap Report, now known as the 'Everyday Inclusion and Pay Gap Report'. This does not form part of this report. The Responsible Banking Committees will be reviewing an updated Santander UK Diversity and Inclusion strategy, with planned supporting actions aimed at closing the gender and ethnicity pay gaps, in 2023.
Director induction and training
Lisa Fretwell joined us as an INED on 1 January 2022, and Mike Regnier was appointed as CEO on 1 April 2022.
As the induction of the new CEO and other recent NED appointments was one of the priorities identified in the 2021 external evaluation, the oversight of their induction plans has been a key area of focus for the Committees. Each new Director received a comprehensive, tailored induction to ensure that they were fully informed about strategic and commercial issues affecting Santander UK and the markets in which they operate, as well as their duties and responsibilities as a Director. In addition, meetings were arranged with key stakeholders in the UK and across the Banco Santander group, and visits to different sites around the business were undertaken by each of them in line with their roles and needs.
Annual review of Director interests, fees and conflicts of interest
As set out in the Chair's report on corporate governance, the Committees' have responsibility for the oversight of conflicts of interest, reviewing Directors' proposed external appointments and their time commitment.
The level of fees paid to INEDs for Board and Board Committee chair and membership are set out in the Remuneration Implementation Report.
Effectiveness of the Committee
As noted above, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified is set out above.
William Vereker
Chair
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 63 |
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Duke DayalStrategic Report | 9/9Sustainability and Responsible Banking | 6/6Governance | -Risk review | -Financial review | -Financial statements | -Shareholder information | - | - | - | | - | | - | | - | |
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1 | William Vereker joined 1 October 2020; appointed Board Chair on 1 November 2020Risk Committee Chair’s report |
2 | Shriti Vadera resigned on 31 October 2020 |
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3 | Scott Wheway resigned on 30 September 2020 |
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Introduction
On behalf of the Committee, I am pleased to present the Board Risk Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Risk Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
SaThe Committee is authorised by the Board tontander:
–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 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.
–Consider and review all risks and issues escalated by the Chief Risk Officer, and their associated action plans.
–Oversee and challenge the day-to-day risk management actions and oversight arrangements and adherence to risk frameworks and policies.
–Oversee the adequacy of the governance arrangements we have in place.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 10/10 | 1/1* |
Chris Jones | 10/10 | 1/1* |
Pamela Walkden | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 10/10 | 1/1* |
Chris Jones | 10/10 | 1/1* |
Annemarie Durbin | 10/10 | 0/0 |
Mark Lewis | 10/10 | 0/0 |
Nicky Morgan | 10/10 | 1/1* |
Lisa Fretwell | 10/10 | 0/0 |
Pamela Walkden | 10/10 | 0/0 |
*BRC subcommittee to consider a specific topic on behalf of the Board.
Other attendees at Committee meetings in 2022 included the Board Chair, CEO, CFO, Chief Internal Auditor, CRO and External Auditors.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Financial Crime risk
Financial crime risk remained a Top risk for Santander UK, with the Committee focusing on it at each meeting. The Committee continues to monitor progress and challenge management on evidencing a return to Board risk appetite.
Fraud risk
Fraud risk was identified as a Top risk for Santander UK and was discussed regularly by the Committee, with fraud risk losses accounting for a significant portion of our overall operational risk losses. The Committee is monitoring the progress of management's tactical and strategic actions to return this risk to the Board's risk appetite.
Credit risk
The risks associated with our credit portfolios, including corporate customer portfolios, were considered by the Committee, particularly in light of macroeconomic factors such as the risks associated with unemployment, the UK housing market, rising cost of living pressures on households, and rising mortgage rates, as well as increased business costs and supply chain pressures.
Strategic and Business risk
We evaluated Santander UK's competitive position, long-term viability, and potential future threats, including its operations in the current volatile and uncertain macro-environment.
Operational risk & resilience
Managing resilience risk has remained a top priority, along with demonstrating to our regulators that Santander UK is resilient to any disruptions in its operations. The Committee assessed the operational risks associated with a heightened external Cyber risk environment, IT risks, third-party risk management, People risk in a hybrid-working environment and a difficult recruitment market, and managing complex change risk with capacity and capability challenges.
Model risk
We reviewed and discussed regular Model risk updates, including progress on the heightened regulatory model transformation and new model developments, as well as the refresh of the model risk target operating model.
We maintain an holistic view of enterprise wide risks and, to help achieve this, there is appropriate cross-membership between this Committee, the Board Responsible Banking Committee and the Board Audit Committee.
Effectiveness of risk management system and internal controls
We considered, as part of the Operational Risk Profile & Analysis update, the results of the 2021 year end Risk and Control Self Assessment (RCSA). This highlighted the risk and exposure issues reported through the RCSA processes.
Through mitigating actions completed in 2021, several critical risks were reduced to high or lower risks. The critical risks remaining at 31 December 2021, were all being addressed, with no risk acceptance requested. An additional level of control assurance was introduced through the Operational Risk & Resilience Control’s (ORRC) review of Special Monitoring Controls as part of the annual Control Certification Campaign (those controls identified as most important in the mitigation of their critical inherent risks) by the respective risk owners.
Overall, we were satisfied that critical and high risks were well managed via risk mitigation and reassessment processes. The remaining high risk work streams, mainly relating to Financial Crime, IT and Third-Party exposures, were being addressed through the Financial Crime Transformation Programme, IT transformation programme and Procurement Transformation, respectively.
In 2022, the RCSA process continued to be enhanced, to ensure all material risks are considered and reported consistently across Santander UK.
The Committee received reports on management’s strategic plan for investment prioritisation. The Committee continues to review management’s reports on the execution of the overall bank-wide Risk Infrastructure Management Programme which, due to the progress made over the last few years to improve the bank’s infrastructure, has now transitioned into the business.
Effectiveness of the Committee
As part of the internally facilitated Board evaluation carried out during the year, the Committee's performance was assessed and it was concluded that the Committee continues to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. More information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified can be found in the Board Nomination Committee Chair's report.
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Annual Report 2022 | Santander UK Group Holdings plc 64 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Significant areas of focus
In 2022, we discharged our responsibilities and continued to raise challenges relating to our areas of focus, identifying, and managing new risks and risk types.
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Risk Appetite | –Considered changes proposed to the Board’s Risk Appetite Statement (RAS) as part of the Annual Risk Appetite Review. The RAS approach, methodology and structure were thoroughly reviewed as part of the annual analysis to determine whether they remained in line with peers and also fit for purpose for our business. –Oversaw the implementation of a quantitative expression for Climate Change Risk Appetite and the simplification of the Board's Financial Crime Risk Appetite measures, as well as incremental changes to several existing metrics to provide a more meaningful measurement against the RAS. –Challenged management on the Climate Change Risk Appetite, noting that the focus had shifted from qualitative to a quantitative expression of appetite, with targets established and expected to continue to evolve. Climate Change risk will be monitored and assessed relative to the Responsible Banking Committee targets. –Examined the proposed changes to the Cost of Credit limit to better measure deviations from the budget, and updated to the Operational Risk qualitative statements and supporting metrics to ensure alignment to the current risk exposures, the statements and supporting metrics.
| –Agreed with the results of the RAS analysis which confirmed that the business has the right approach and structure, as well as a market-appropriate appetite. –Recommended the proposed Risk Appetite to the Board for approval. For more, see ‘Risk Appetite’ in the ‘Risk governance’ section of the Risk review. |
Risk Framework | –Reviewed proposed changes to the Risk Framework. Management highlighted the reduction in the number of the Risk Types and frameworks due to the transfer of assets from Santander UK plc to Banco Santander London Branch in 2021, which resulted in a simpler and more streamlined business model. –Considered management's descriptors of Risk Profile and Board Risk Appetite (BRA) to promote clearer demarcation of the two measures in reporting. –Discussed the annual certification process and assessed the extent to which the Risk Framework had been effectively implemented and embedded across the business. –Noted that the Risk certification results indicated that the majority of Santander UK remained compliant with the Risk Framework. Noted that full compliance increased to 92%, with improvements against most sections of the Risk Framework.
| –Following the completion of the bank-wide Risk Infrastructure Management Programme, agreed with management on the implementation of a risk infrastructure framework in H1 2022 to aid in the transition of risk infrastructure assessment into the business. –Agreed that the Risk Framework continues to meet Industry and regulatory standards and that it has been effectively implemented. –Recommended the proposed changes to the Board for approval.
For more, see ‘Risk Framework’ in the ‘Risk governance’ section of the Risk review. |
Stress testing | –Stress testing remains a key tool to highlight and manage the impact on capital and profit and loss in stress scenarios. The Committee continues to closely monitor methodology, governance arrangements, and outputs. –Reviewed and challenged the proposed scenarios and approach for completing the Bank of England Annual Cyclical Scenario (ACS) stress testing exercise in 2022. The Committee was involved throughout the process, reviewing key drivers and challenging assumptions and outputs, particularly in light of the economic climate. –Examined the impact of the second round of the Bank of England’s Climate Biennial Exploratory Scenario stress test scenarios on Santander UK. A third-party peer review was also commissioned to compare our climate-related risk management to that of peer banks and to provide guidance on our overall ESG Risk operating model. –Reviewed management responses to address the regulator's feedback on the 2022 Bank of England Climate Biennial Exploratory Scenario stress tests.
| –Approved Santander UK’s response to the CBES 2 and the results and assumptions from the ACS stress testing exercise.
For more, see ‘Stress testing’ in the ‘Risk governance’ section of the Risk review. |
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Annual Report 2022 | Santander UK Group Holdings plc 65 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Technology & Operations | –Some IT incidents experienced by our customers in 2022 demonstrated the importance of robust IT risk management, controls, and third-party oversight and accountability. –Considered progress that had been made in IT transformation to reduce IT risk. The stabilisation of the production environment had reduced incidents, and the safe execution of change requests had increased. –Reviewed management progress in removing blockers to IT transformation had been resolved through the establishment of technical solutions to move applications to new infrastructures, an IT risk dashboard to measure progress against Risk Appetite and accountability and within the Chief Resilience and Control Office for the mapping and prioritisation of Important Business Services. –Discussed the challenges around recruitment, particularly for certain IT roles, and queried management on the actions being taken. –Received multiple updates on cyber security risk, the external threat landscape and the actions being taken by management in response to further strengthen our control measures. Although Santander UK had not experienced any critical cyber security incidents, we continue to respond to third-party ransomware attacks.
| –Agreed that the governance and control framework for the cloud infrastructure needed to be improved, highlighting the impact of any delay in cloud capability. –Endorsed the high-level plan to meet the BRA for IT, supported by underlying work streams with accountable owners. The Committee noted that the plan would be adjusted during 2023 to account for potential unknowns and management was encouraged to promptly escalate budgetary requirements to ensure alignment with available funding. –Management assured the Committee that there was sufficient investment for cyber security and patching, and addressing any system obsolescence continued to be a priority within the IT transformation programme.
For more, see the ‘Operational risk’ section of the Risk review. |
Financial Crime | –Given the critical importance of financial crime management, the Committee meets on a regular basis to discuss and challenge management on the path back to Risk Appetite. –Reviewed the findings of the Skilled Person’s (SP’s) report and management’s consideration in re-planning the Financial Crime Transformation Plan for a return to Risk Appetite. –Considered management's approaches to responding to the SP's recommendation and findings from the independent review of the Financial Crime Transformation Plan implementation. –Critically examined and challenged management throughout the year on the progress made on the Financial Crime Remediation Plan to return to Risk Appetite. As part of this review, we considered the Money Laundering Reporting Officer’s report, and the Second Line of Defence view as part of the enterprise-wide risk management reports to the Committee. –Challenged management on the return to Risk Appetite delay, resource adequacy, third-party reliance, potential convergence with the One Europe Financial Crime Programme, and the pace of Financial Crime Transformation implementation and remediation to drive financial crime improvements.
| –Recommended that management should ensure appropriate capacity for teams to manage work streams and encouraged management to also demonstrate a sustainable cadence in bringing down remediation volumes. –Noted management's assurance that financial crime would return within Risk Appetite by the deadline, as the risk profile continued to reduce across the business. To support this, the Committee requested regular updates on the current position, the associated risks to achieving BRA, plans for mitigation, and the measures to assure the Committee that the programme could be delivered in accordance with the remediation lifecycle timelines. For more, see the ‘Financial crime risk’ section of the Risk review.
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Fraud | –Reviewed, discussed, and challenged management's actions to implement fraud prevention tools, systems, and controls to mitigate a variety of fraud risk types that are prevalent both within Santander UK and across the UK banking industry, particularly Authorised Payment Push (APP) fraud, which is our most prevalent fraud type. –Challenged management on the importance of continuing to educate and raise awareness among our customers and people about the growing risk of fraud and scams through media campaigns and digital channels. –Monitored and challenged management on progress with returning Fraud risk to Risk Appetite. | –Noted updates from management on progress with the range of actions being taken to prevent and mitigate fraud risk types, particularly under the Fraud Transformation Programme, which includes several projects designed to reduce the risk to our customers and the bank. |
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Annual Report 2022 | Santander UK Group Holdings plc 66 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Oversight and advice to the Board on Santander UK’s current risk exposure and future risk strategy In 2022, we reviewed our exposure to the risks outlined below and analysed emerging themes, including regulatory, macroeconomic and global risks, which could affect Santander UK’s ability to achieve its strategic goals. |
Risk | Action taken by the Board Risk Committee | Outcome |
Credit risk | –Reviewed the credit risk profile of the Retail Banking (Homes and Everyday Banking), Corporate & Commercial Banking and Cater Allen businesses. –Discussed the current macroeconomic environment which continues to be challenging, with increased inflation, cost of living pressures, supply chain pressures, increased business costs, having the potential to put greater strain on our ability to serve our customers, as well as the risk of increased impairments and considered the impacts on our credit portfolios. –Challenged management on operational readiness/capacity to support customers, particularly those who would be due for mortgage maturity in 2023, and we were assured by the actions being taken by management to be operationally ready. –Reviewed the Consumer Finance business and the impacts of the rising inflation and associated cost of living increase which could result in an income shock for our customers and their ability to repay their loans. | –Concluded that credit portfolios remained resilient but have a cautious outlook for 2023. For more, see the ‘Credit risk’ section of the Risk review. |
Strategic & Business risk | –Considered the strategic & business risk, particularly in relation to the delivery of critical programmes such as the IT transformation and Financial Crime Transformation Plan, and the potential impact this could have on the delivery of our strategic priorities. –Discussed the complex regulatory agenda and considered management's plans for addressing the key regulatory priorities for the year. –Discussed actions management had taken to mitigate strategic & business risk, including strengthening our business continuity and resilience plans, improving our business model, delivering cost efficiencies, building on our transformation programme and evolving our way of working to enhance flexibility, agility, and access to talent while ensuring our people’s well-being.
| –Recommended that management should consider as part of the strategic & business risk review, including perspectives on culture, people risk (capacity and future ways of working), and related strategic and business risk vulnerabilities. –Recommended that management should consider the requirement for forward-looking modelling analysis to aid in decision-making about profit sustainability, changing customer mix, evolving macroeconomic environment, and competitive landscape.
For more, see the ‘Strategic risk’ section of the Risk review. |
Pension risk | –Discussed the key pension risk factors, such as interest rate risk, inflation risk, investment risk and longevity risk, that the Santander UK Group Pension Scheme (the Scheme) is exposed to. –Monitored the interest rate, inflation rate and longevity hedging levels, and the significant progress made in de-risking the Scheme's asset portfolio. –Considered the actions taken by management to manage risk in relation to the conflict in Ukraine, and the related shocks to global markets. –Discussed the Pension Schemes Act 2021 amendments and the changes implemented to ensure any impact on the Scheme is properly considered in decision-making. –Reviewed the relevant metrics and management actions recommended and agreed with the trustees in connection with notional leverage, liquidity, and collateral management associated with the Scheme's derivative hedging portfolios. | –Agreed with management's proposal to remove pension risk as a Top risk, noting the significant improvements in the overall risk profile and risk metrics. –Agreed with management that the Scheme had sufficient collateral to support hedging, but recognised management actions to increase resiliency as a result of increased gilt yields. For more, see the ‘Pension risk’ section of the Risk review. |
Liquidity risk | –Reviewed the ILAAP and noted that management have addressed all feedback from the regulator on the previous Liquidity Supervisory Review and Evaluation Process and subsequent ILAAP reviews. –Questioned management about challenges faced during the ILAAP process, material liquidity stress test assumptions, and the flexibility and timeliness of our liquidity reporting. –Attended a workshop in October 2022 with members of the Board on ILAAP to consider key assumptions in the ILAAP. –Considered the half yearly updates on asset and liability management activities. We discussed the current macroeconomic environment and the Bank of England base rate increases impacts on products, particularly, mortgages and pricing. We discussed the effective actions management had taken to address our customer funding gap and the possible impacts on our assets and liabilities. –Noted that the analysis in support of the ACS submission to the regulator confirmed that Santander UK remains in a robust capital and liquidity ratio position.
| –Acknowledged that the Company holds sufficient liquid resources and has adequate governance and controls in place to manage the liquidity risks arising from its business and strategy. –Agreed to recommend the 2022 ILAAP to the Board for approval, following review and challenge. For more, see the ‘Liquidity risk’ section of the Risk review. |
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Annual Report 2022 | Santander UK Group Holdings plc 67 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Risk | Action taken by the Board Risk Committee | Outcome |
Capital risk | –Considered, from a capital risk perspective, the ordinary and preference share dividends proposed to be paid for the year. –Questioned management about continuous engagement with Banco Santander regarding possible dividend scenarios. –Discussed the capital risk position and the status of initiatives to deliver on Banco Santander’s capital contribution target for 2022. –Reviewed and approved the changes proposed to the Surplus Capital Allocation Framework which allowed for the identification of surplus capital. –Reviewed the ICAAP and challenged management to examine whether the scenario weights were still appropriate in light of the UK’s economic and political changes. –Discussed the performance of the internal ratings based (IRB) regulatory capital models for the mortgage book. Despite the inherent uncertainty caused by Covid-19, we noted that performance across the IRB model rating systems remained robust. | –Recommended the payment of dividends to the Board for approval, subject to final determinations on capital distributions by the regulator. –Comments and challenges received from Committee members were considered by management and incorporated into the final ICAAP. –Agreed to recommend the ICAAP to the Board for approval following review and challenge. For more, see the ‘Capital risk’ section of the Risk review. |
Operational risk & resilience | –Received regular updates on the operational risk profile and risk appetite, with a particular focus on operational resilience, data management, outsourcing and third-party risk management, people risk and change and transformation risk. –Considered progress to meet compliance with the Operational Resilience parts of the PRA Rulebook and the FCA Handbook. –Reviewed management progress in identifying the important business services, setting impact tolerances, asset mapping and scenario testing completed to a level required to identify vulnerabilities and risks. –Examined the independent review of our approach to operational resilience including the design, methodology and outcomes. We were assured that our Operational Resilience Programme’s design and execution had no significant flaws, and recommendations from the independent reviewer were incorporated into our self-assessment programme. –Received regular updates on data management & privacy risk. We challenged management on the data programme prioritisation, RAS and metrics, capacity, system plans, funding and on residual data privacy risk. –Attended a workshop in July 2022 with members of the Board on our Data Strategy with a particular focus on the risk implications of our data & analytics capabilities. –With more outsourcing underway or planned as part of our transformation agenda, challenged management to continue to make positive progress in improving the application of the Third-Party Risk Management Framework. –Questioned the root cause and remedial actions relating to the incidents in the year, partly due to third parties, most of which are related to IT vendors. –Remained focused on people risk and received updates on the people risk profile, the risk associated with Santander UK's relocation to Milton Keynes, the risk affecting key subject matter experts, and the ongoing effects of the pandemic. –Questioned management about their steps to address capacity challenges in key areas, and to improve colleague wellbeing, the recruitment process, and attrition and absence rates. –Considered the overall change portfolio risk position and its implications for our transformation plan. We reviewed the root cause analysis into under-performance in change and the resulting action plan to address the under-performance. –Discussed management’s capacity and capabilities in completing the projects in the necessary timeframes and encouraged management to carry out a portfolio review focused on rationalising the change agenda to enable delivery within capacity.
| –Recommended to the Board the approval of the Operational Resilience Self-assessment. –Acknowledged the progress made to improve the risk profile of our data strategy and encouraged management to consider the risk implications of our current data challenges. –Recommended that management take remedial action to re-assess the control protocols relating to the specific incident, as well as the overall mainframe of a service outsourcing arrangement. –Continued to support management on their strategic plan for future ways of working and returning to the office, colleagues' well-being, and support provided to colleagues during the cost of living crisis. –Advised management to prioritise, plan and budget holistically to support the execution of the Data strategy, IT transformation programme, and Financial Crime Transformation Programme. Given the Data Strategy's critical dependence on key programmes and business initiatives.
For more, see the ‘Operational risk’ section of the Risk review. |
Model risk | –Considered an update on the regular monitoring of capital adequacy models. –Received an update on the regulatory review of key mortgage and corporate IRB models. –Considered the implications of differing regulatory perspectives on through-the-cycle capital requirements of the Bank of England and the ECB, respectively, including the potential implications for capital planning, product pricing, and business strategy. | –Continued to monitor progress in respect of regulatory initiatives for IRB models, and request evidence of appropriate model types, assumptions, data integrity, and calibration. For more, see the ‘Model risk’ section of the Risk review. |
Ed Giera
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Annual Report 2022 | Santander UK Group Holdings plc 68 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Audit Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Audit Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committee is authorised by the Board to plcprovide oversight of:
–Integrity of the financial statements of the Company and any formal announcements relating to its financial performance, including underlying significant financial reporting judgements and estimates.
–73Internal financial control effectiveness.
–The relationship with our external auditors including their independence and objectivity, audit scope and effectiveness of the audit process in respect of their statutory audit of the annual financial statements.
–Internal Audit function effectiveness.
–Recovery and Resolution planning.
–Whistleblowing arrangements.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 10/10 | 0/0 |
Ed Giera | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
RFB Committee composition
| | | | | | | | |
| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 10/10 | 0/0 |
Ed Giera | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
Annemarie Durbin | 10/10 | 0/0 |
Nicky Morgan | 10/10 | 0/0 |
Mark Lewis | 04/04 | 0/0 |
Other attendees at Committee meetings in 2022 included the Board Chair, CEO, CFO, Chief Internal Auditor, CRO, Financial Controller, Director of Financial Reporting and the external auditor.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Financial reporting
–Considering the disclosures of and provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA and subsequent settlement of £108m.
–Challenging the macroeconomic scenarios weightings and other inputs to our credit risk models for purposes of estimating expected credit loss (ECL) provisions, to ensure appropriateness.
–Considering management's proposals on Judgemental Adjustments (JAs, formerly known as Post Model Adjustments), including new JAs to reflect potential repayment affordability risk among retail and corporate customers, and the release of Covid-19 related JAs previously applied to our credit risk model outputs for purposes of estimating ECL provisions.
–Reviewing management’s approach and key methodology changes for new mortgage and corporate ECL models, and supporting simplifications to reduce run time and allow for increased macroeconomic sensitivity analysis. We will continue to monitor the implementation of the new ECL models, which is expected to be completed in H1 2023.
–Reviewing management's approach to the defined benefit pension schemes assumptions and agreeing new models for estimating discount and inflation rates.
–Considering management's efforts to further streamline external financial reporting to ensure it remains relevant to investors, regulators and other stakeholders.
Oversight of external auditors
–Approving the external auditor's proposed audit scope and related fee proposal.
–Considering the FRC's Audit Quality Inspection Report published in July 2022 and other audit quality indicators including PwC Transparency Report as part of our annual assessment of PwC's performance.
–Monitoring the transition of the outgoing, and approved the selection of the incoming, lead external audit partner.
–Reviewing PwC's reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management's progress in resolving them.
–Discussing developments in financial reporting including changes to statute, accounting standards and best practice.
–Monitoring the ongoing independence of PwC.
Internal controls and regulatory reporting
–Overseeing the introduction of 100% independent testing of SOx controls, identified control deficiencies and related remediation plans.
–Continuing focus on oversight of the procurement process including consultant spend.
Internal Audit
–Monitoring progress against the 2022 Audit Plan.
–Monitoring past due Internal Audit recommendations and management's remediation plan to close them.
–Receiving regular updates on the operational effectiveness of Internal Audit to ensure the quality and experience is appropriate for the business and that it is appropriately resourced.
–Considering the results of Internal Audit reviews in conjunction with relevant Line 1 management as appropriate.
–Considering the 2023 Audit Plan and annual report for recommendation to the Board.
Recovery and Resolution planning
–The Committee oversaw management's progress on resolvability, including reviewing the preparations for and submission of the first resolvability public disclosure and arrangements supporting the ongoing maintenance and, where possible, enhancement of the Company's resolution capabilities.
–Overseeing the updating of the recovery plan.
Whistleblowing
–Monitoring management's continued embedding of its whistleblowing framework and arrangements. We continued to refine our policies and operating procedures to stay abreast of best practice.
–Considering key themes and whistleblows.
–Considering the whistleblowing annual report to the Board.
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Annual Report 2022 | Santander UK Group Holdings plc 69 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report continued |
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Financial reporting Significant financial reporting issues including judgements and estimates The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. This is considered by the Committee on at least a quarterly basis. In 2022, we focused on the following significant reporting matters in relation to financial accounting and disclosures: |
Financial reporting issue | Action taken by the Board Audit Committee | Outcome |
Credit impairment charges Determining the appropriateness of credit impairment charges is highly judgemental requiring management to make a number of assumptions. | Overall approach –Noted that applying management judgements on IFRS 9 ECL provisioning was difficult given the circumstances due to the cost of living crisis, and the reduction of Covid-related risks. –Reviewed the fully updated macroeconomic scenarios and weights on a quarterly basis, which captured a wide range of potential outcomes for the UK economy, particularly in light of the current high inflation environment. –Oversaw improvements in the framework to identify when a new JA is needed or an existing JA is no longer needed. –Reviewed management’s approach and key methodology changes for new mortgage and corporate ECL models. We supported simplifications to reduce run time and allow for increased macroeconomic sensitivity analysis, and noted an improved corporate LGD methodology. We welcomed embedding of some long standing JAs into core models, and supported the proposed upgrade to a bespoke tool to calculate ECL which strengthens the control environment. –Challenged management to ensure time is given to complete model governance to allow a high quality, well controlled implementation. We also discussed the use of Covid-19 loss experience in model development given the significant customer support which suppressed arrears emergence. The models are due to go live in H1 2023 after an independent model validation review, and are not expected to result in a material change in ECL. | –Agreed additional disclosures to provide clarity on management judgements and estimates. –Satisfied ourselves with the robustness of the process used to arrive at the management judgements and estimates as well as with the management judgements and estimates themselves. –Endorsed the quarterly updates to the macroeconomic scenarios and weights. –Endorsed the improvements in the JA framework. –Endorsed management’s approach and key methodology changes for new mortgage and corporate ECL models. –We will continue to monitor the implementation of the new ECL models. See the 'Credit risk' section in the Risk review. See 'Critical judgements and accounting estimates' in Note 1 to the Consolidated Financial Statements. |
| Retail and corporate credit impairment charges –Reviewed detailed reports from management throughout the year to satisfy ourselves that Significant Increase in Credit Risk (SICR) triggers had been correctly identified. –Considered management's proposal to apply new JAs to reflect repayment affordability risk for mortgage and unsecured lending customers with low disposable income. –Considered management's proposal to uplift the modelled mortgage probability of default as back testing and monitoring showed a risk of model underestimation. –Considered management's proposal to apply new JAs to reflect the corporate lending risks to those sectors susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. –Considered management's proposal to release all Covid-19 corporate sector staging JAs as lockdown risk has reduced. |
–Concurred with management's judgement on the level of retail and corporate credit impairment charges, concluding that provisions remain robust and assumptions were appropriate. –Agreed with management's updates on and proposals for JAs. –Agreed with management's proposals to apply new JAs and to reduce or eliminate those which were no longer required. –We will continue to monitor retail and corporate credit provisions. See 'Critical judgements and accounting estimates' in Note 1 to the Consolidated Financial Statements. See Note 13 to the Consolidated Financial Statements. See ‘Credit risk’ in the Risk Review. |
Provisions and Contingent liabilities The provisions for customer remediation, litigation and other regulatory activities continued to be highly judgemental and have required significant assumptions. | –Considered the disclosures of and provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA and subsequent settlement. –Continued to scrutinise the level and adequacy of customer remediation, litigation and other regulatory provisions and challenged management’s assumptions. –Monitored progress on litigation with a third party over an alleged PPI liability and reviewed judgements and estimates on the level of provision for potential future legal claims. –Reviewed management’s judgements and estimates in respect of the level of provision in relation to on-going regulatory and law enforcement investigations. | –Agreed with management's proposed disclosures and provision for the financial penalty following the FCA's civil regulatory investigation. –Agreed with management’s judgement on the level of customer remediation, litigation and other regulatory provisions and disclosures. –Endorsed the proposed year-end disclosures. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 29 and 31 to the Consolidated Financial Statements. |
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Annual Report 2022 | Santander UK Group Holdings plc 70 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report continued |
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Financial reporting issue | Action taken by the Board Audit Committee | Outcome |
Defined benefit pension schemes Significant judgement is required on the key assumptions underlying defined benefit pension asset and liability calculations. Outcomes remain inherently uncertain. | –Reviewed management’s approach regarding the principal assumptions underlying the defined benefit pension asset and liability calculations. –Reviewed management's approach to illiquid assets valuation where there is inherent uncertainty as their values are based on unobservable market inputs. Reviewed the proposal to continue to use the unaudited flash valuations provided by our private equity advisors, following review of the testing carried out against final audited valuations, and the conclusion that this is management’s best estimate of the value. –Reviewed management's proposals to adopt new models for estimating the discount and inflation rates. –Assessed management's proposal to apply a 10 basis point overlay to the discount rate at 31 December 2022 as the difference between it and the average of modelled discount rates exceeded management's policy threshold to make an adjustment. –Monitored the continued appropriateness of the methodology for defined benefit pension calculations and reviewed the inflation, discount and mortality rates applied at the year-end.
| –Agreed with management’s approach regarding the principal assumptions. –Agreed with management's approach to illiquid assets valuation, including the proposal to continue to use the unaudited flash valuations provided by our private equity advisors. –Agreed with management's proposals to adopt new models for estimating the discount and inflation rates. –Supported management's proposal to apply an overlay to the discount rate at 31 December 2022. –Endorsed the proposed quantitative and qualitative year-end disclosures in respect of pension obligations. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 30 to the Consolidated Financial Statements. See ‘Pension risk’ in the Risk Review. |
Other areas | –Reviewed the outcome of management’s going concern and viability assessments. –Reviewed the outcome of management’s annual impairment assessments for goodwill and the cost of the Company's investment in Santander UK plc and and noted the increase in headroom in the year.
| –Agreed with management that the going concern basis of accounting remained appropriate at 31 December 2022. –Agreed with management that no impairments to goodwill or the cost of the Company's investment in Santander UK plc should be recognised in 2022. See 'Going concern' in this report and in the Directors' report. See Note 20 to the Consolidated Financial Statements. |
The Committee’s focus continues to be on areas of significant judgement and estimate which pose the greatest risk of a material financial statement misstatement. In doing so we consider carefully the reports of PwC, our external auditors, who constructively challenge the Company's financial reporting.
In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. For 2022, these continued to include the identification and assessment of risks of material misstatement due to management fraud or error. We also considered management's assessment of the effectiveness of model risk management for financial reporting related models.
Disclosure in the Annual Report
We received verbal updates, in respect of each quarterly financial report, 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 the Company’s external reporting. Some of the Committee's disclosure considerations included:
–Provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA, and its settlement.
–Climate change and the transition to a low carbon economy, and its potential impact on the financial statements.
This, together with other reports received in the year, and a review of best practice and peer approaches, enabled us to conclude that we were satisfied with the disclosures in this Annual Report.
Management also engaged with the Board and the Committee early on in 2022 in respect of the approach to the Annual Report which enabled us to input into the overall tone and messaging in a timely manner.
Fair, balanced and understandable
The Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable and whether it provides the information necessary for readers to assess Santander UK's position and performance, business model and strategy.
In this context, the Disclosure Committee considered whether:
–Key messages are consistent throughout the document, relating to financial performance and progress against strategic priorities.
–Key judgements and estimates, significant risks and issues are reported clearly and adequately.
–The Annual Report has a clear framework with good signposting and a complete picture of performance and events.
The Committee's assessment of fair, balanced and understandable is also underpinned by the understanding it gains through the reporting made to it throughout the year relating to management judgements and estimates, internal control matters, Internal Audit activities and the reports of the external auditors. Our assessment also considers the robustness and outcomes of the assurance, review and verification processes conducted by management and whether the key risks reflected the Committee's concerns and were consistent with those reported by management.
Following our assessment, we concluded that the 2022 Annual Report was fair, balanced and understandable.
Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2021/22
In October 2022, the FRC issued a report which sets out its views on key developments for annual reports, codifying its Thematic Reviews. The report highlighted areas of high-quality reporting, but also drew attention to improvements that would be needed in areas such as disclosures on workforce and wider stakeholder engagement, diversity and oversight of the effectiveness of the risk management and internal control systems. As part of our oversight of this area, management reported to us on its work in the areas of interest to the FRC. We are satisfied that management appropriately addressed the areas identified by the FRC in the preparation of this Annual Report.
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Annual Report 2022 | Santander UK Group Holdings plc 71 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report continued |
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We also reviewed management’s response to a PRA thematic ‘Dear CFO’ letter which focused on high quality ECL implementation practices, progress and areas of development for climate-related risks, including disclosures, and IBOR reform, and we are comfortable with progress made in these areas.
Alternative Performance Measures (APMs)
This Annual Report includes a number of financial measures which are not accounting measures within the scope of IFRS. Such non-IFRS measures are APMs and include financial measures of historical or future performance or financial position that exclude or include amounts that would not be adjusted in the most comparable IFRS measures.
Management reviews these APMs to measure Santander UK's overall performance, position and profitability, and believes that their presentation provides useful information to investors. For definitions of these APMs and, where they are adjusted, reconciliations to the most comparable IFRS measures, see the 'Financial review' section.
We reviewed the APMs and are satisfied that they provide useful information to investors, and that management has clearly identified the APMs in this Annual Report and, where such APMs are adjusted, reconciled them to the most 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 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 considered 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.
Oversight of external auditors
External Auditors
PwC were appointed in 2016 and their independence was considered and monitored throughout the year. We were satisfied that PwC continued to meet the independence requirements. Ian Godsmark became lead audit engagement artner from June 2022 following the resignation of Laura Needham from PwC.
Oversight of the relationship
Our review of the relationship with PwC included the following activities:
–Consideration of their audit plan and updates.
–Consideration of their work relating to management judgements and estimates.
–Consideration of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material, either individually or in the aggregate at each quarter.
–Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate.
–Discussion of developments in financial reporting including changes to statute, accounting standards and best practice.
–Review of PwC's reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management's progress in resolving them.
–Interactions, including meetings in private session during Committee meetings, and at other times throughout the year.
–Consideration of Santander UK specific independence issues, as well as those of PwC.
–Consideration of the FRC's Audit Quality Inspection Report published in July 2022 and other audit quality indicators including the PwC Transparency Report as part of our annual assessment of PwC's performance.
Based on the above inputs, 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 on non-audit services provided by our external auditors. Non-audit services were under continuous review throughout 2022 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees.
All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the Committee. This process is in addition to the requirement for all non-audit fees to be approved by the Banco Santander Audit Committee.
The fees for non-audit work performed by PwC in the year, are disclosed in Note 7 to the Consolidated Financial Statements. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. During 2022, the Company paid a fee of £1.4m to PwC in relation to incremental work undertaken in support of their audit of Banco Santander SA.
In 2022, PwC's non-audit related fees were 34% for the Company and 35% for the RFB of their total audit fees, well within the external cap of 70%.
Fees for non-audit work performed by PwC in the year, other than those in relation to audit-related assurance services, were 6% of the average of the fees approved for Deloitte, EY and KPMG.
Internal Controls and regulatory reporting
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. The Committee considered Management's enhancement of the SOx testing framework; 100% independent testing of controls; reviewing the adequacy of data lineage; and assessing potential risks from operating in a hybrid working environment.
Recognising the importance within statutory and regulatory reporting of capital and risk weighted asset metrics, many of which are not subject to external audit, the Committee retained its focus on the level of comfort we obtain. The PRA also emphasised the importance of the reliability of regulatory reporting in its thematic review published in September 2022. This area has always been covered by Internal Audit. We also reviewed the processes and governance in respect of preparing additional capital and risk management disclosures. We had a specific focus on liquidity risk reporting which is subject to a control enhancement programme.
The Committee monitored the control framework in place in respect of consultancy engagement as well as associated spend and performance of consultants. The appointment of a new Director of Procurement, with a focus on embedding the new procurement operation model, was welcomed by the Committee.
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Annual Report 2022 | Santander UK Group Holdings plc 72 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report continued |
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Internal Audit
The Internal Audit plan, based on a comprehensive risk assessment, including budget and resources, was presented in draft and then final form for challenge and recommendation by the Committee to the Board for its approval. The plan was updated at regular intervals in 2022 in response to changes in the business and the regulatory environment and at the request of the Committee.
All unsatisfactory and inadequate rated audit reports issued were subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee. We also reviewed a sample of audit reports rated 'needs improvement' and requested management to present on progress with addressing Internal Audit's recommendations, issues encountered, milestones and dependencies.
We received regular reports on audit recommendations from our Chief Internal Auditor, quarterly and annual Internal Audit reports and monitored findings as part of our oversight. We considered the total number of recommendations, the rationale for any becoming overdue, and broader root cause analyses. We also requested that the Chief Internal Auditor highlight recommendations becoming due and any that were past due, as a result of past due recommendations increasing beyond reasonable expectation; this was remediated by the year-end. The strong engagement between Internal Audit and the business continued in 2022.
We also oversaw the objective setting, performance evaluation and remuneration of the Chief Internal Auditor, ensuring objectives were aligned to key priorities for the Company.
The Committee has approved the Internal Audit Charter and receives regular updates on the operational effectiveness of the Internal Audit function to confirm that it maintains its independence and to ensure its quality, experience and resourcing is appropriate. This is supplemented by regular interactions between the Chief Internal Auditor and the Committee Chair. We also receive feedback on interactions between Internal Audit, management and our external auditors.
A review is conducted every five years to evaluate the Internal Audit function in respect of its conformance with the standards of the Chartered Institute of Internal Auditors (CIIA), as well as its performance and effectiveness compared to industry peers and good practice. The next review is due in 2023 and a thorough process to select an external provider to carry out the review has been undertaken.
Recovery and Resolution Planning
The Committee oversaw management's progress on resolvability, including reviewing the preparations for the first resolvability public disclosure and arrangements supporting the ongoing maintenance and, where possible, enhancement of the Company's resolution capabilities. The Bank of England's (BoE) Resolvability Assessment Framework (RAF) sets out how it assesses UK financial firms' resolvability and introduces a public disclosure regime.
On 10 June 2022, the BoE published its first assessment of resolvability preparations of the eight major UK banks following its review of firms' self-assessment reports submitted to the PRA in October 2021 (as updated in February 2022). Santander UK was the only large systemic bank for which the BoE did not identify any 'material issues' across three resolution outcomes.
The Committee also oversaw the updating of the recovery plan which was submitted to the PRA in June 2022.
Whistleblowing
The Committee oversees Santander UK's whistleblowing arrangements including continuous refinement of our processes to align with evolving best practice. Santander UK recognises the importance of creating an environment where colleagues feel safe and able to Speak Up. Speaking Up is a core behaviour at Santander UK and there are a number of ways colleagues can do this, including raising a concern via Santander UK's Whistleblowing Team.
In 2022, management continued to manage the whistleblowing framework and arrangements under our oversight. We continued to refine our policies and operating procedures to stay abreast of best practice.
In November 2021, Santander UK delivered Ethics Training with a focus on the Company’s Ethical Code of Conduct, to our top 120 leaders and middle management. Our communications strategy has ensured the visibility and awareness of whistleblowing has remained high and dedicated and bespoke training to specific teams has been delivered. The Board received Whistleblowing training as part of its annual training programme.
The Committee considered bi-annual reports on Santander UK's whistleblowing arrangements. This included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, proposed changes to legislation and activities to promote and enhance the arrangements to support the culture of speaking up. The Committee also reviewed the annual Whistleblowing Report ahead of its submission to the Board.
The Committee is satisfied that Santander UK 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 and I remain focused on procedures and governance to prevent victimisation of employees who raise a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of continuous improvements to the arrangements.
Other areas of 2022 focus
The Committee also reviewed management's response to the Department for Business, Energy and Industrial Strategy (BEIS) consultations.
The Committee also considered the Chief Financial Officer's objectives and annual performance evaluation.
Effectiveness of the Committee
As noted in the Board Nomination Committee Chair's Report above, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified is set out above.
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 and the external auditors in private sessions. I also attend meetings with the PRA and the FRC.
With regards to my operation as Committee Chair, the Board has determined that I have the necessary qualifications and skills to qualify as the Board Audit Committee financial expert as defined in item 16F of Form 20-F and by reference to the NYSE listing standards.
As I approach the end of my third term of appointment, it is my intention to resign during the second half of 2023 as a Director of both the Company and Santander UK plc, and therefore as Committee Chair. The Board Nomination Committee will propose a replacement in due course ensuring that the nominee has the necessary qualifications and skills.
Chris Jones
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 73 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Responsible Banking Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Responsible Banking Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Responsible Banking Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. Nicky Morgan, the RFB Committee Chair, and I have written this report jointly and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
Nicky and I collaborate to ensure that matters within the Committees' remit are considered by the appropriate forum, and to prevent any gaps in coverage. This is facilitated through a degree of common membership between the Committee and the RFB Committee which enhances visibility of matters that extend across Committees and fosters open channels of communication.
In summary, the Committee is authorised by the Board to:
–Oversee the operation of the business and subsidiaries to ensure they act in a responsible way, promoting their long-term success having due regard to the interests of the Company's stakeholders.
–Support management in shaping and driving the responsible banking agenda of the business across a broad spectrum of areas including customers, culture, diversity and inclusion, conduct, communities and climate change and the environment (the Board Risk Committee is responsible for overseeing the risks associated with climate change).
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 4/4 | 0/0 |
Lisa Fretwell | 4/4 | 0/0 |
Chris Jones | 4/4 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Nicky Morgan (Chair) | 4/4 | 0/0 |
Annemarie Durbin | 4/4 | 0/0 |
Lisa Fretwell | 4/4 | 0/0 |
Ed Giera | 4/4 | 0/0 |
Chris Jones | 4/4 | 0/0 |
Mark Lewis | 4/4 | 0/0 |
Other attendees at Committee meetings in 2022 included the CEO, Director of Corporate Communications and Responsible Banking, Chief People Officer, CRO, Director of Compliance, Chief Customer Officer, Everyday Banking, and Chief Customer Officer, Homes.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Responsible Banking at Santander
Responsible banking is a broad term covering an extensive array of environmental, social and governance-related (ESG) matters that are key to delivering Santander UK's strategy.
Following our decision in 2021 to focus our energies on three strategically-aligned pillars in relation to which we believe we can promote the success of the Company and the RFB, in the long term, while also having a real impact for the companies' stakeholders, in February 2022 we considered and approved the key metrics and targets that would allow us to track progress against these pillars relative to our ambitions.
The three pillars, which you can read more about in the Responsible Banking and Sustainability section of this Annual Report, are:
–A Thriving Workplace: Creating a culture of inclusivity and belonging.
–Better Communities: Helping customers and communities prosper.
–A Healthy Environment: Responding to climate change and supporting the green economy.
The foundation underlying these pillars is to be responsible in everything we do. You can read more about this in the Strategic Report.
Our customers
The Committees' focus on supporting our customers continued to increase in 2022 given challenges posed by the cost of living crisis and ever more sophisticated fraudsters. To support us in providing holistic oversight of how we are performing in respect of our customers, we tasked management with designing a new report and dashboard which now allows us to track progress and focus our discussions on areas that require further attention.
For each of our scheduled meetings in 2022, we received reports on our support for vulnerable customers and how we are ensuring that we are ready to help customers who find themselves in financial hardship as a result of the cost of living crisis. We have been pleased to learn that management has been dedicated to putting robust measures in place to:
–Understand the financial health of our customers.
–Contact customers proactively with support and advice if we think they might find themselves in financial distress.
–Provide additional channels through which customers can request help from us.
–Give extra training to our financial support specialists.
–Increase the capacity in our contact centres.
We believe management has taken the right steps to help our customers during this difficult time and encourage them to continue to identify more ways to provide support.
In February 2022, the Committee held a fraud workshop in order to better understand the significant challenges that Santander UK, its customers and the industry as a whole face in this area. The outcome of the workshop was a series of practical recommendations aimed at increasing the protection for our customers. We were pleased to hear at our December 2022 meeting that good progress has been made and that there are further initiatives in the pipeline which will be launched in early 2023. A number of members of the Committees also visited the Fraud and Economic crime teams on-site to understand the challenges in more depth. We expect that fraud prevention and detection will continue to be a priority in 2023.
While we spend much of our time considering how we can address specific issues facing our customers, such as fraud and inflation, we also need to understand how our customers feel about Santander UK more generally in order to ensure that we continue to provide good service and good outcomes to customers. One way we do this is by scrutinising our Net Promoter Scores and encouraging management to resolve the underlying factors that negatively affect them. This ensures that management is continuously working to improve our service and support.
In order to get a more personalised view of customers' experiences, Directors also visited contact centres and branches during the course of 2022 where they observed customers' calls and interactions. This has allowed the Board to understand more about how we interact with our customers and the issues that are raised. Visits during 2022 included those to our Mays Meadow contact centre in Belfast and Liverpool Lord Street branch.
In addition to our traditional banking services, a key priority for Santander UK is helping our customers meet their 'green' ambitions. We provide more information on this below.
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Annual Report 2022 | Santander UK Group Holdings plc 74 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Responsible Banking Committee Chair’s report continued |
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Our people and culture
A Thriving Workplace is the first pillar of our Responsible Banking strategy and we spend a significant proportion of our meeting time assessing culture and colleagues' views of the organisation. We recognise that all teams differ, so we introduced a standing section to our quarterly meeting agendas called 'Employee Voice', where we hear directly from colleagues in specific teams. In 2022, we hosted colleagues from the Financial Support Centre of Excellence, the Customer Interactions team, the Technology and Operations team and the CFO division. We find it hugely valuable to deep dive into the experiences of each team. We encourage colleagues to be as open about the challenges they face as they are about their successes. This allows us to provide management with advice and support to resolve these challenges, and to identify any thematic issues that may need a more structured or strategic approach.
Annemarie Durbin, the Santander UK plc Employee Designated Director reports on her interactions with colleagues at each quarterly meeting. In addition, each NED has completed an employee engagement plan arranged for them by the Corporate Governance Office. In 2022, these included visits to contact centres, offices and branches. A number of us also attended events and meetings with Santander UK colleague networks including the Embrace network, an inclusive community for LGBTQ+ colleagues and allies to share information, personal experiences and hold discussions, and the Ethnicity@Work network which celebrates and embraces cultural differences from race, belief, traditions, heritage and customs. We look forward to more interactions in 2023.
We recognise that many of our colleagues will be as affected by the cost of living crisis as our customers, and the Board focused on ensuring we provide a range of support to help. You can read more about this in the Board Remuneration Committee Chair's report.
Diversity and inclusion
The Committees considered Santander UK's approach to increasing diversity and inclusion at the majority of its scheduled meetings in 2022. We were pleased to note that we have been successful in improving the gender and ethnicity representation at senior levels. However, we acknowledge that there is still much to do and we were disappointed that with the results of our pay gap reporting, details of which you can find in the Board Remuneration Committee Chair's Report and Sustainability and Responsible Banking section. One way to enable us to be more proactive in improving diversity and inclusion is to enhance the data we have about it. In 2022 we welcomed an exercise conducted by management to improve our data disclosure options to ensure all our people feel they can select options that best reflect their individual identity. This has seen us improve our data disclosure rates for ethnicity and sexual orientation by 4% to 77% and 59%,
respectively. Management has undertaken to continue to help key decision makers across the business to use this data to take more targeted actions to improve representation and experience across Santander UK.
An updated Diversity and Inclusion strategy, with planned supporting actions aimed at closing the gender and ethnicity pay gaps, will be considered by the Committees in H1 2023.
Social mobility
In September 2022, management presented the first draft of an exciting new strategy aimed at facilitating greater social mobility for the benefit of our people, customers and communities. We welcomed the initiative and collaborated with management to give them the benefit of our experience and knowledge to refine the strategy to make it as impactful as possible, encouraging them to focus on a limited number of initiatives that could make the most difference. We were pleased to consider the final draft strategy at our December 2022 meeting where we recommended it to the Board for approval. You can find more information on Santander UK's social mobility strategy and activities in our Everyday Inclusion and Pay Gap Report 2022.
Our communities
Better Communities is the second pillar of our Responsible Banking strategy. Our communities are the foundations of our society and we believe that acting responsibly in relation to them, and providing investment in them, will make a great difference. The Committees also agreed that it is important that Santander UK focuses our efforts on activities through which we can make the biggest impact, and these tend to be linked to our business model and strategy. We have therefore encouraged management to continue our financial education and inclusion initiatives and agreed the priorities and structure of our Universities Programme and particularly our strategic partnership with Milton Keynes University (MK:U). For more on this, see the Sustainability review.
Regulators and compliance
Our regulators are a key stakeholder as they authorise Santander UK to provide our services to our customers. Complying with regulatory requirements and best practice is a priority, so we proactively engage with our regulators. While management undertakes the majority of engagement, Directors with specific SMF responsibilities meet regularly with the PRA and FCA.
At each quarterly meeting, the RFB Committee receives comprehensive updates on the Ring-Fenced sub-group's conduct and compliance risk status, as well as actions to resolve any issues. The report also includes 'horizon scanning' to show the Committee what regulatory or compliance matters are expected in the future and how management plans to address them.
A key part of our regulatory agenda in 2022 was preparing, planning for, and implementing the new Consumer Duty. The Committee held a Consumer Duty workshop in Q2 2022 to get early sight of what was expected of the final rules and understand how management was preparing. Once the rules were published at the end of July 2022, the Board and the Committee held a series of meetings to ensure that a sound and robust implementation plan was available for approval by the October 2022 deadline. The RFB Committee Chair, Nicky Morgan, has been appointed as Consumer Duty Champion and the RFB Committee will oversee implementation in the RFB sub-group leading up to the deadline of 31 July 2023.
Responding to climate change
A Healthy Environment is the third pillar of our Responsible Banking strategy. Santander UK is committed to reducing both its financed carbon emissions and its own emissions to support the ambition to limit climate change to 1.5 degrees. In April 2022, the Committee met the then COP President, Alok Sharma, to discuss the climate change opportunities and challenges in the banking sector, and the key issues that could be influenced by Government. For more on this workshop, see the Sustainability review.
Santander UK is also aware and supportive of the fact that many of our customers want to reduce their impact on the environment. The Committee encouraged management to support customers in meeting their ambitions and we were pleased to see decisive action taken by management, including the launch of the 'My Homes Manager' app for mortgage customers. Using the app, customers can view the Energy Performance Certificate of their home and find tips for saving energy and reducing their bills.
The Committee also considered Santander UK's financed emissions reduction trajectory taking into account other key considerations such as customer and social impacts and Board Risk Appetite. This will continue to be a key focus in 2023.
Effectiveness of the Committee
As noted in the Board Nomination Committee Chair's Report, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified is set out above. An action plan for the Committees will be agreed at a forthcoming meeting. We will report on the actions identified and progress against them in next year's Annual Report.
Ed Giera
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 75 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Remuneration Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Remuneration Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Remuneration Committee (the RFB Committee) (together the "Committees") to ensure alignment of practices, policies and procedures. Annemarie Durbin, the RFB Committee Chair, and I have written this report jointly and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
Annemarie and I collaborate to ensure that matters within the Committees' remit are considered by the appropriate forum, and to prevent any gaps in coverage. This is facilitated through a degree of common membership between the Committee and the RFB Committee which enhances visibility of matters that extend across Committees and fosters open channels of communication.
The Committee is authorised by the Board to:
–Set the overarching principles and parameters of remuneration policy across Santander UK. We do so in consultation with the RFB Committee to ensure that the RFB is able to comply with its legal and regulatory obligations, including its ring-fencing obligations.
–Oversee implementation of remuneration policies, including considering and approving the remuneration arrangements (including bonuses) for EDs and senior executives. We approve individual remuneration awards and also changes to senior executive incentive plans.
–Approve the framework by which colleagues are designated as Material Risk Takers (MRT) and oversee MRT remuneration arrangements, including bonuses.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 6/6 | 0/0 |
Ed Giera | 6/6 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Annemarie Durbin (Chair) | 6/6 | 2/2 |
Ed Giera | 6/6 | 2/2 |
Chris Jones | 6/6 | 1/2 |
Mark Lewis | 6/6 | 2/2 |
Other attendees at the Committee meetings in 2022 included the CEO, Chief People Officer, Performance and Reward Director, Head of Performance and Reward and the Committees' Independent Adviser. The CRO and Director of Compliance (DoC) join the meetings regularly to give updates and recommendations on risk performance and potential remuneration risk adjustments.
No individual participates in discussions regarding their own remuneration.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Aligning remuneration with strategy
As always, a key consideration when agreeing our variable pay framework for the year is ensuring it incentivises our people to deliver Santander UK's strategy and business model for the long-term benefit of the Company and its stakeholders. It must also be designed to incentivise our people to exhibit the right behaviours.
For 2022, we ensured that our bonus scorecard continued to be aligned with our strategy, including our strategic commitments to our shareholder, our people, our customers and our wider communities. We approved a balanced scorecard of financial and non-financial metrics and targets, including metrics related to customer satisfaction and loyalty, and employee engagement scores. In order to support our Responsible Banking ambitions, which you can read more about in the Board Responsible Banking Chair's Report and Strategic Report, we included targets relating to financial empowerment and we also included a mechanism by which the bonus pool would be increased if management delivered targeted increases in diversity representation. We also tracked a sustainability metric aimed at supporting our customers to reduce their carbon emissions, in anticipation of being able to include it in a future bonus scorecard, should it be considered appropriately robust and strategically aligned. We will update you on that in our 2023 Report.
For more on the 2022 variable pay framework, including the metrics used in the scorecard for Santander UK plc, see the Remuneration Implementation Report.
Business performance in 2022 and impact on remuneration
The Committees made the year-end variable pay decisions in the context of the strong performance of the business, the wider economic environment and the fact that our customers and communities are facing significant inflationary pressures. In addition, while seeking to fairly reward hard work and strong financial and non-financial performance against our business strategy, we were mindful of the potential for improved business results that could be considered as a windfall resulting from the macroeconomic conditions in the year.
As usual, we also took into account an assessment of current and future risks when approving the overall bonus pools for Santander UK, Santander Consumer UK and Santander Financial Services, as well as bonus awards for Executive Directors.
The Committees are satisfied that 2022 variable pay outcomes for all colleagues appropriately reflect Santander UK’s business performance and are fair, consistent, and aligned to our stakeholders’ interests. For more on these outcomes, see the Remuneration Implementation Report.
All employee matters - cost of living
The Committee's roles and remit extend beyond the Executive Directors to include other senior roles (including MRTs) and, importantly, to the oversight of the implementation of remuneration policies for all colleagues across Santander UK.
We continued to ensure that executive remuneration decisions are informed by, and consistent with, the approach taken for employees more broadly. Ensuring our colleagues across the businesses are fairly remunerated is also a key focus for the Committees. As such, the Committees undertake an annual review of the remuneration policies and practices for the wider workforce and receive updates throughout the year on other key matters. Given the impact of the cost of living crisis on our colleagues, we considered these matters at the majority of our scheduled meetings during 2022.
During the year, the Committees endorsed and championed management's drive to support our people in managing the challenges arising from the cost of living crisis, particularly the lowest paid. We received regular updates on the assistance that Santander UK was putting in place to support colleagues. In December 2022, we conducted a review of all initiatives that had been delivered to satisfy ourselves that our approach had been fair, reasonable, targeted and, most of all, impactful. These initiatives included:
–An exceptional 4% salary increase awarded to all employees earning less than £35,000 per annum (full time equivalent) from 1 August 2022.
–An increase in entry level salaries from 1 August.
–A new financial support helpline, run by a dedicated team of Financial Care Specialists in the Financial Support Team, launched in October 2022. The helpline gives guidance on account options, repayment plans and budgeting tips for all employees.
Santander UK is an accredited Real Living Wage employer, a status over which the Committees maintain oversight.
We have once again voluntarily disclosed our CEO pay ratio. For more, see the Remuneration Implementation Report.
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Annual Report 2022 | Santander UK Group Holdings plc 76 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Remuneration Committee Chair’s report continued |
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All employee matters - benefits
In 2022, we continued our oversight of all employee benefits, supporting management's efforts to ensure that our benefits proposition is competitive and meaningful to our colleagues. Providing a breadth of benefits choices across financial, lifestyle, health and protection satisfies our colleagues' core benefits expectations as well as providing a good range of additional benefits choices that are highly valued. The Committees' view this as particularly important in light of the cost of living crisis.
We continued our oversight of the work management was undertaking with regards to our defined contribution pensions offering, and were pleased to support the introduction of a minimum employer contribution of 8% with no colleague contribution necessary. Other enhancements that will significantly strengthen our offering include the removal of service-related increments, which increases fairness. The changes, which will positively impact thousands of our people, and which will be particularly meaningful for our most junior colleagues, come into effect in April 2023. This has been well-received by colleagues.
Employee wellbeing is a key guiding principle for our benefits strategy and we were pleased that one of the improvements made to our offering in 2022 was to make available to all colleagues a free app-based service offering sessions with a private GP, physiotherapist, mental health professional, and a medical second opinion service.
Executive Director reward
In Q1 2022 we welcomed Mike Regnier as our new CEO, whose remuneration arrangements we reported on in last year's Annual Report. As a result of Nathan Bostock, our former CEO, transferring to a role at Banco Santander SA, he has retained his right to his deferred reward and is eligible for a pro-rated 2022 bonus. More information on this is available in the Remuneration Implementation Report.
Reward for senior colleagues
The talent market in the UK continued to be very competitive in 2022, particularly in key operational roles such as IT and cyber-security. Given the need to continue to attract and retain top talent with the relevant skills and experience to drive our strategic agenda forward, we had to carefully consider the remuneration for a number of key roles. To support us in doing so, the Committees continued to monitor our remuneration framework and approach to external market benchmarking, with the support of our external adviser, Deloitte LLP.
Where the business recruited or promoted senior members of management, we scrutinised the proposed remuneration and challenged where appropriate.
We also agreed the removal of long-term Banco Santander SA performance metrics to more closely align Executive Committee members' incentives with Santander UK's strategic priorities. These metrics only apply to the CEO from 2022 onwards.
Risk Adjustments
Our risk adjustment procedures, which are applicable to all colleagues, are robust and well embedded within our remuneration policy framework. We continue to use a range of risk adjustment mechanisms, including reducing the bonus pool and / or individual bonus awards in the current and previous years, and / or reducing the amount of any unvested deferred variable remuneration. Our approach to risk adjustment is under continuous review to adapt to the changes in Santander UK’s operating environment, ensuring that they remain comprehensive, relevant and compliant with regulatory requirements.
The CRO and DoC report to us regularly, providing commentary on the risk profile and performance of the business in the year, and recommending any collective or individual adjustments that we may wish to implement as a result.
Ahead of the 2022 variable remuneration pay review, we spent time considering the fairest and most proportionate way of taking current risk issues into account. In particular, we spent significant time considering the most fair and proportionate way to deal with the FCA's penalty relating to historical anti-money laundering controls between 2012 and 2017. The failings and penalty were taken into account as part of the 2022 bonus pool determination calculation.
Diversity Pay Reporting
We remain committed to increasing diversity and inclusion at Santander UK, recognising its benefits to our business, colleagues and our wider communities.
While the Committees are responsible for overseeing Santander UK's approach to pay gap reporting, the Board Responsible Banking Committee (RBC) is responsible for overseeing management’s approach to, and progress in, improving diversity and inclusion across Santander UK. For more on this, see the RBC Chair's report.
Our 2022 Pay Gap Report, now known as the Everyday Inclusion and Pay Gap report, which was analysed and approved by the RFB Committee, was published in December 2022. Given our commitment to inclusion more broadly, this year we have provided a more holistic overview of our actions and progress towards achieving everyday inclusion, including additional metrics on diversity representation and employee experience. For more information on our approach to everyday inclusion, see the RBC Chair's report and the Sustainability and Responsible Banking section of the Strategic Report.
In terms of the results, the mean gender pay and bonus gaps reduced in 2022, while the median gender pay and bonus gaps increased. Mean and median binary ethnicity pay and bonus gaps also increased. Clearly these results are disappointing and management has worked hard to identify the reasons behind the increases and create an action plan to address the factors within Santander UK's control. More details can be found in Everyday Inclusion and Pay Gap Report on our website, which does not form part of this Annual Report.
The Committee and the RBC will continue to provide oversight and encouragement to management to improve our diversity, inclusion and fair pay in 2023.
Committee adviser tender
In November 2021, the Committee reviewed the independence and effectiveness of the current Remuneration Committee Advisor, Deloitte LLP. While the review confirmed that Deloitte remained independent and effective, it was agreed that a formal tender would be conducted in 2022 as a matter of best practice.
Four independent firms participated in the tender, each of whom provided a written submission and met with management. They were assessed on an objective basis on factors including proven experience and credentials, understanding of Level One banking remuneration regulations and cultural fit with Santander UK. Two firms were shortlisted and were interviewed by the Chair of the RFB Committee and one of its members.
Based on the above criteria, the re-appointment of the current Independent Adviser, Deloitte, was approved at the September 2022 meeting. We look forward to continuing to work closely with them.
Regulatory changes and engagement
Regulatory requirements and expectations are at the forefront of the Committees' considerations when making decisions and we are kept abreast of changes in regulatory requirements via a variety of means, including by management and our Independent Adviser. The Chairs of the Committees meet with our regulators on a periodic basis to update them on recent developments and upcoming matters. We also encourage management to engage proactively and regularly with our regulators on matters of interest to them. Ensuring that the new Consumer Duty is appropriately reflected in our variable pay framework going forward will be a key focus for the Committee in 2023.
Effectiveness of the Committee
As noted in the Board Nomination Committee Chair's Report, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Boards. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified, is set out in the Board Nomination Committee Chair's Report.
Chris Jones
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 77 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration policy report |
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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. Furthermore, we applied the UK Corporate Governance Code 2018 (the Code) and complied with the Provisions other than where stated in the Directors' Report. In addition, we comply with other listed disclosure requirements to the extent considered appropriate taking into account our ownership structure.
Accordingly, several voluntary disclosures relating to remuneration are presented in this report.
Remuneration policy for Executive Directors (EDs)
Our remuneration policy, which applies to EDs, is outlined below. Remuneration is structured in two elements: fixed and variable pay. Fixed pay is set at market competitive levels appropriate for the role. Variable pay rewards the delivery of internal financial targets, key strategic priorities and individual performance, subject to risk adjustment.
Remuneration policy applicable to Executive Directors in the year
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Fixed pay | Principle and description | Policy |
Base salary | Annual Report 2020– | To attract and retain EDs of sufficient calibre and with the skills to deliver our strategy, taking into account the demands and complexity of the role.
| –GovernanceBase salaries are normally reviewed annually. In reviewing base salaries the Committee considers a number of factors, including: –the skills required and responsibilities of the role alongside the market value of those attributes; –the requirement for base salaries to be set at a level to avoid inappropriate risk taking; –base salary increases across the colleague population; and –prevailing market and economic conditions. |
Pension arrangements | –To provide a discrete element of the package to contribute towards retirement. | –All EDs receive a cash allowance in lieu of pension in line with the wider workforce average, currently 9% of salary.
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Other benefits | –To offer a competitive package and to support employee wellbeing. | –Including but not limited to: private medical insurance for EDs and their dependants, life assurance, health screening, and relocation allowances where relevant. –Access to Santander UK’s all-employee share schemes on the same terms as all UK employees. |
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Variable pay | Principle and description | Policy |
Variable pay plans | –The Variable Pay Plan aims to motivate EDs to achieve and exceed annual internal targets within Santander UK’s Risk Appetite and aligned with our business strategy and values. –Multi-year deferral and delivery in Banco Santander SA shares aligns EDs’ interests to the long-term interests of Santander UK. Further performance testing also applies for the CEO. –Part of the award is deferred according to the requirements of the PRA Rulebook (Remuneration Part). –The long-term Transformation Incentive Plan recognises the collective achievement of key financial and non-financial targets associated with the bank's ongoing transformation. | –Bonus awards under the Variable Pay Plan are discretionary and determined by reference to performance against a scorecard of financial and non-financial goals, as well as individual performance. –40% of any bonus awarded is paid upfront after the performance year ends, and delivered at least half in shares. –60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered at least half in shares. –For the CEO, the first three of five deferred award tranches are subject to further performance testing, which may reduce or increase the payout. –The Transformation Incentive is based on performance assessed over a three year period with further deferral into cash and share based awards in line with regulatory requirements. –Share based awards are subject to a minimum twelve-month retention period following vesting. –Malus and clawback provisions apply to variable pay for up to ten years following the grant of an award. –The structure of variable pay awards means EDs acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. In addition, the CEO is subject to a Shareholding Policy, which ensures alignment with the long-term interests of Banco Santander shareholders. The requirement under the policy is set at two times the incumbent’s net salary upon appointment. A formal post-employment shareholding requirement is therefore not in place. |
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Annual Report 2022 | Santander UK Group Holdings plc 78 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Directors' | | | | | |
Remuneration policy report continued |
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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 by its shareholders. For control function roles, a lower ratio of 1:1 is normally applied.
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 easily understood, tailored to individual roles, competitive and 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 strategic priorities across Customers, Shareholders, People and Communities. This ensures that our day-to-day activities align with Santander UK’s strategic priorities which focus on customer loyalty and experience, simplification, improved efficiency and sustainable growth while aiming to be the best bank for all our stakeholders.
Simplicity
–To ensure our approach to remuneration is transparent and easily understood.
–To operate clear structures to support each colleague to link their contribution to the success of the organisation.
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 Santander UK-wide framework. Risk adjustment occurs at an individual and bonus pool level.
–To provide a package that is balanced between fixed and variable pay, and short-term and long-term horizons, which aligns to our strategy whilst promoting prudent risk management.
–To ensure remuneration is compliant with applicable regulations and legislation.
Fairness
–To take into account an assessment of the EDs' performance against objectives set at the start of the year covering a range of financial, non-financial, quantitative and qualitative criteria.
–To set robust and stretching internal targets and 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 and transformation.
–To consider wider employee pay and conditions 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, whilst reflective of our structure.
Predictability
–The Committee annually reviews the variable pay opportunity for individuals and the basis of the bonus pool calculation. Due to commercial sensitivity, these are not disclosed as per the provisions of the Code. Directors’ remuneration is within the variable pay cap as approved by Banco Santander SA shareholders and set out above.
On recruitment
When appointing a new ED, base salary is set at a market competitive level appropriate for the role, taking into consideration a range of factors including role scope and responsibilities, internal and external peer groups, relevant experience, and affordability.
Unless determined otherwise, any new ED will receive a pension allowance in line with the wider workforce average, currently 9% of salary. Benefits available will typically be aligned to the wider employee population.
Remuneration will be established in line with the Remuneration Policy, as set out in the EDs’ remuneration structure table in this report.
Relocation support and international mobility benefits may also be given. Where provided, relocation assistance will normally be a capped amount for a limited time. In cases of international mobility, the Committee will have discretion to offer benefits and pension provisions which reflect home country market practice and align to relevant legislation.
Buy-out awards
Compensation may be provided to EDs recruited externally for the forfeiture of any awards on leaving their previous employer. The Committee retains discretion to make such compensation as deemed appropriate to secure the relevant individual’s employment and will ensure any such payments align with both the long-term interests of Santander UK and the prevailing regulatory framework.
Such payments will be in line with the awards foregone as a result of leaving the previous employer taking into account value, form of awards, vesting dates and the extent to which performance conditions applied to the original awards.
Service agreements
The key terms and conditions of employment are set out in individual service agreements. These agreements include a notice period of six months from both the ED and the Company.
The agreement reserves a right for the Company to terminate employment immediately with a payment in lieu equal to the ED's fixed pay for the notice period. In the event of termination for gross misconduct, neither notice nor payment in lieu of notice is required.
Termination payments
The remuneration impact of an ED leaving the Company, including treatment of variable pay and/or any termination payment will reflect the terms of the service agreements, relevant scheme rules, regulatory requirements and the Committee’s policy relevant to the reason for leaving.
Outstanding variable pay awards will generally lapse on termination, other than where an individual is considered a ‘good leaver’. Where an ED is a good leaver, eligibility to variable pay awards will normally subsist until the relevant scheduled payment dates and will remain subject to performance where relevant.
The Committee determines whether an ED is a good leaver. Usual good leaver circumstances include but are not limited to: injury, ill-health, disability, redundancy, retirement and death. The Committee may, at its discretion, determine an ED a good leaver in any other circumstances.
A framework is in place 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 EDs.
In the event of a change in control, any outstanding variable pay awards will be treated in line with the relevant scheme rules, taking into account applicable regulatory requirements.
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Annual Report 2022 | Santander UK Group Holdings plc 79 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration policy report continued |
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Risk and Performance adjustment
We continue to meet the regulatory requirements in respect of risk and performance adjustment. 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.
The Standard provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment that can reduce the bonus pool or individual awards to nil at the Committee’s discretion.
Our Individual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for decisions in relation to individual performance adjustments following an incident, including the application of malus and clawback.
Performance adjustments may include, but are not limited to:
–reducing an award for the current year;
–reducing the amount of any unvested deferred variable remuneration;
–requiring an award which has not yet been paid to be forfeited; and
–requiring repayment on demand (on a net basis) of any cash and share awards received at any time for a period of up to ten years following the date of award.
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 a number of circumstances, including:
–colleague misbehaviour, misconduct or material error;
–material downturn in the performance of Santander UK or a relevant business unit; and
–Santander UK or a relevant business unit suffering a material failure of risk management.
When determining variable pay awards for individuals performing roles across Santander UK plc and Santander UK Group Holdings plc, the Santander UK Group Holdings plc Board 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 Board Remuneration Committee.
The Committee seeks input from the Chair of the Board, Chair of the Board Risk Committee, Chair of the Board Audit Committee, Chief Risk Officer, Director of Compliance, Chief People Officer and Chief Internal Auditor when determining whether any performance or risk adjustments are required.
Policy for all employees
Our performance and reward approach across the Company supports our business strategy, rewards strong performance and reinforces our values within the approved risk management framework. The general principles of the Remuneration Policy broadly apply across all colleagues where appropriate, and are designed to facilitate recruitment, motivation and retention whilst driving performance.
The composition of remuneration packages for EDs is aligned with the broader colleague population, comprising salary, benefits, workforce aligned pension provisions and eligibility for discretionary variable pay dependent on role and responsibility.
The Committee annually approves the operation of variable reward schemes for all our colleagues to ensure they reward appropriate behaviour and do not incentivise activities which are outside risk appetite.
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Annual Report 2022 | Santander UK Group Holdings plc 80 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration implementation report |
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Introduction
TheThis section of the report outlines how our Remuneration Policy was implemented for 2022.
Variable Pay Plan
To incentivise and reward EDs for achieving superior and sustained performance, our Directors submit their report togetherparticipate in an annual variable incentive plan. A balance of financial and non-financial performance metrics are selected annually by the Committee and are aligned with our strategy as measured over the financial statements for the year ended 31 December 2020. The informationyear. Multi-year deferral and delivery in the Directors’ Report is unaudited, except where marked.
History and corporate structure
Santander UKGroup Holdings plc is a subsidiary of Banco Santander SA shares ensure that EDs’ interests are aligned to the long-term interests of the business. Further long-term performance testing also applies for the CEO.
Both upfront and deferred awards are made at least half in shares or share-linked instruments. The deferred element is delivered over seven years. Effective 2022 and for the CEO only, the first three deferred tranches of awards are subject to further performance testing against long-term metrics. Awards delivered in shares or share-linked instruments are subject to an additional one-year retention period from the point of delivery.
The 2022 Variable Pay Plan pool was determined based on a Spanish retailrange of metrics using a balanced scorecard approach as follows:
Quantitative assessment
A quantitative assessment is undertaken against a balanced scorecard of financial and commercial banknon-financial metrics that are key to Santander UK’s 2022 strategy. Performance metrics are reviewed annually to ensure continued alignment with strategy and, for 2022 a simplified scorecard comprised:
–Customers (Net Promoter Score, Loyal Customers and Total Customers)
–Shareholders
–ROTE
–RORWA (where an accelerator could apply subject to ROTE and Capital generation)
–Sustainability (Financial Empowerment)
–People (Employee Engagement and a Diversity and Inclusion multiplier).
A profit underpin applies which requires Profit after Tax to remain positive in order to pay any award, with a meaningful market share in ten core countries in Europe and the Americas.
Santander UK was formedreduced pool should profit reduce substantially from the acquisition of two former building societies, Abbey National and Alliance & Leicester together 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.prior year.
In 2018, certain subsidiaries and portfolios were transferred 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 comprise of only entities whose business is permitted under the Act as a ring-fenced bank.Other entities including Santander Financial Services plc are now directly or indirectly owned by the Company.
Result and dividends
The audited consolidated profit after tax for the year was £438m(2019:£709m). The Directors do not recommend the payment of a final dividend for 2020 (2019: £nil). One interim dividend was declared on the Company’s ordinary shares in issue in the year.This dividend of £103m was declared on 10 December 2020 and was paid in 2020.
Details of Santander UK’s activities and business performance in 2020, 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 42.
Qualitative assessment
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. ChangesA qualitative assessment adds context to the compositionquantitative assessment and ensures a balanced view of the Board can be found in the Board of Directors section with more details in the Chair’s report on Corporate Governance,performance is taken. Performance is assessed across metrics including but not limited to: customers (conduct risk), profitability (results and the relevant Committee Chairs’ reports..costs) and responsible banking.
Appointment and retirement of Directors
The Company's Articles of Association require each Director to retire every year at the Annual General Meeting and any Director may offer themselves for re-election by members. For more, see the Directors’ report.
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Annual Report 2022 | Santander UK Group Holdings plc 60 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Chair’s report on corporate governance continued |
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Summary of Board activities in 2022 The Board aims to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole. Activities in 2022 included: |
Theme | Action taken by the Board and outcomes | |
Strategy including One Europe and Banco Santander | –Following on from the Board Strategy Day, considered and challenged management’s proposals to enhance our proposition across the Everyday Banking and Homes businesses. –Reviewed our customer proposition and experience, including a deep dive on our Net Promoter Score (NPS) and initiatives to improve the NPS trend, and customer interactions strategy, including changes to the branch operating model. –Reviewed and challenged our marketing and brand strategy and positioning, with a view to developing a coherent brand narrative aligned with our ambition to be a ‘digital bank with a human touch’. –Considered specific M&A market opportunities to accelerate growth. –Reviewed initiatives and opportunities to collaborate and leverage resources and capability across the Europe region and the Banco Santander group, including a common payments platform and, banking application (OneApp). –Considered disruption in the financial services market including the impact of neobanks and fintechs and digital currency and blockchain technology.
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Business, Customer and Transformation | –Reviewed, challenged, and approved the 3-year business plan (2023-2025) and the annual budget, including assumptions underpinning the plan given the rapidly evolving macroeconomic environment and investment to support a resilient and sustainable operating environment and associated risk assessments. –Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities, developments with customer experience and the Company's transformation programme. –Considered financial crime, including approval of risk appetite and oversight of programmes to accelerate controls enhancement and regulatory engagement, as well as back book remediation. –Considered and endorsed the IT transformation programme including clear milestones and investment to align IT infrastructure and systems with business requirements and bring IT risk within Board Risk Appetite.
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Regulation, Balance Sheet and Capital | –Reviewed, challenged and approved the ICAAP, ILAAP, adequacy and effectiveness of stress-testing and capital management, AT1 payments and ordinary and preference share dividend payments in line with PRA guidance. –Submitted to the Bank of England results of the annual cyclical and solvency stress test submissions. –Submitted a self-assessment of resolvability to the PRA in line with the Bank of England Resolvability Assessment Framework. –Considered the future regulatory landscape and implications, including approval of the Consumer Duty implementation plan. – A number of Board members also participated in workshops delivered to the Board Audit Committee on the evolution of the IFRS 9 approach and supporting models.
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Risk and control | –Received regular enterprise-wide risk updates from the CRO, together with updates on specific risks, such as third-party outsourcing, IT, data management, financial crime, fraud, climate change and inflation. The Board closely monitored overall operational risk given the ongoing execution of the extensive transformation agenda. –Approved/adopted changes to the Risk Framework as part of the annual review, including the introduction of a new minimum standard to ensure each business area and risk type considers risks posed by climate change. –Received annual reports on whistleblowing and cyber security, considering the effectiveness of such arrangements. –Reviewed and approved relevant submissions related to the Operational Resilience Programme. –Approved the submission to the BoE of results from the Climate Biennial Exploratory Scenario Stress tests for climate risks. |
People and Culture | –Received updates on issues including talent management & succession planning, gender pay gap and diversity & inclusion. – Utilised regular reports on culture, including employee feedback to identify cultural priorities and alignment with the Company's long term strategic direction. – Considered colleagues' ways of working and opportunities to optimise the real estate portfolio. – Considered succession planning across all key control, support functions and business functions. |
Governance and Responsible Banking | – Reviewed, challenged and approved the Annual Report. – Received regular verbal updates of Board Committee activity from their respective Committee Chairs. – Approved a revised Banco Santander Subsidiary Governance Model for subsidiaries, and certain Corporate Frameworks. – Approved the education and social mobility strategies. – Approved the recommendations and resulting action plan for the 2021 externally facilitated Board evaluation, and the incremental recommendations arising from the internally facilitated Board evaluation in late 2022. – Approved policies including a new Board level Conflicts of Interest Policy, Board Diversity & Inclusion Policy, Policy for the Suitability, Selection and Succession of Board members and Policy on Regulatory Documents on the recommendation of the Board Nomination Committee. – A number of Board members also participated in workshops delivered to the Board Responsible Banking Committee to discuss the Company's climate strategy and supporting business initiatives; and consider the impact of initiatives implemented so far and next steps in fraud prevention. |
William Vereker
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Annual Report 2022 | Santander UK Group Holdings plc 61 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Nomination Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Nomination Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Nomination Committee (the RFB Committee) to ensure alignment of practices, policies and procedures.
I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committees are responsible for, amongst other things:
–Identifying, nominating and recommending candidates for appointment to the Board.
–Regularly reviewing the structure, size and composition of the Board and its Committees.
–Overseeing the evaluation of Board and Board Committee performance.
–Reviewing corporate and internal governance matters.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
William Vereker (Chair) | 7/7 | 2/2 |
Ed Giera | 7/7 | 2/2 |
Pamela Walkden | 7/7 | 1/2 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
William Vereker (Chair) | 7/7 | 2/2 |
Annemarie Durbin | 7/7 | 2/2 |
Ed Giera | 7/7 | 2/2 |
Pamela Walkden | 7/7 | 1/2 |
Other attendees at Committee meetings in 2022 included the CEO, Chief People Officer, Director, Performance & Reward, and Director, Culture & Capability.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Succession planning
The Committees lead a formal, rigorous and transparent process for the identification, nomination and recommendation of candidates for appointment to the Board and senior management positions.
Part of this process is ensuring that there are succession plans in place for both Board and key management positions encompassing internal and external candidates, and that there is a skills, experiences and diversity matrix which maps each Director's attributes against those which are most relevant for the Board, taking into account the future strategic direction of the Company and its needs. As well as tracking the Board's strengths, this matrix is used to identify gaps in its desired collective skills profile.
While appointments are based on the merit of the individual candidates and objective criteria, we also aim to promote diversity, in its broadest sense, to complement and strengthen the overall Board and its Committees' skills, knowledge and experience. Any appointment also takes account of all legal and regulatory requirements.
In 2022, a significant proportion of the Committees' time was devoted to succession planning, and in particular identifying successors for Chris Jones, Chair of both the Board Audit and Remuneration Committees and Chair of the RFB Audit Committee, and Ed Giera, Senior Independent Director, Chair of both the Board Risk and Responsible Banking Committees and Chair of the RFB Risk Committee. Both will step down by 2024 after serving as Directors for nine years. To ensure a thorough handover, the Committees were keen to start the selection process early.
Hedley May, an external search consultant with whom the Company and individual Directors have no other relationship, were engaged to assist with the search and selection process. A preferred candidate to succeed Chris Jones as the Board Audit Committees Chair has been identified (subject to regulatory approval) but as the appointment process remains ongoing we will report on it more fully in next year’s Annual report, together with details of the induction programme arranged for the new director.
The Committees also reviewed the additional roles that the NEDs take on, such as the Whistleblowers’ Champion and Workforce Engagement representative to reallocate some of these when the current incumbents retire. Nicky Morgan was appointed to the new role of Consumer Duty Champion for Santander UK plc.
In addition to Board level appointments, the Committees oversaw and approved several changes to the Executive Committee membership and other management key position holders in 2022. On the Executive Committee, John Collins, Chief Legal and Regulatory Officer and Iain Plunkett, Chief Operating Officer both left, with Charles Shepherd, General Counsel and Stephen White,
Chief Operating Officer appointed. Louise Shield, Director of Corporate Communications and Responsible Banking left at the end of the year, with Andrew Wilson appointed to this position from 1 March 2023. In addition, the internal appointments of Elisabet Pinilla as Head of Technology & Operations from Banco Santander SA and Juan Ignacio Echeverria as Chief People Officer from Banco Santander Mexico showcase the strength of the Banco Santander group talent pool. On behalf of the Board, I would like to welcome all those who joined us in the year and thank those who left us for their contributions.
Board effectiveness
The Committees reviewed the progress made and further actions needed on the areas of improvement identified in the 2021 external evaluation of the Board, facilitated by Boardroom Review Limited (BRL) who have no other connection to Santander UK or any individual Directors.
Progress against these actions is set out below:
–Ensuring a successful induction for Mike Regnier, as incoming CEO, was critical. The Committees also considered upcoming Board retirements and the future composition in line with the Company's long-term strategy.
–The Board Strategy Day this year allowed the Board to spend time further developing a long-term vision for growth and risk.
–To ensure that the Board receive the right information, presented in a helpful way to support effective decision making, a new paper template was implemented and training on writing papers and presenting at meetings given to regular contributors.
Following the detailed and comprehensive external evaluation by BRL, in 2022 an internal review of the Board and its Committees was conducted by the Company Secretary, assisted by the Head of Internal Governance. Interviews were held with Board members and the Executive Committee members were asked to complete a survey on the Board’s performance.
The review concluded that the Board and its Committees continue to operate effectively, with notable improvements now that recently appointed Directors, including the CEO and I, have settled into our roles and established strong relationships with the Banco Santander group. Additional strengths identified were the fostering of an open and transparent atmosphere and the blend of skills and experience on the Board. The review also identified some opportunities for improvement including:
–Oversight of ESG and Responsible Banking - given the increasing importance of these matters, the Board should ensure enough time is allocated to discuss them across the year.
–Agenda planning, Board time and Board materials - there is still room for improvement in these areas and the Chair and Company Secretary will work to enhance the scheduling and operation of Board vs Board Committee meetings.
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Annual Report 2022 | Santander UK Group Holdings plc 62 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Nomination Committee Chair’s report continued |
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–Board Committee composition – undertake a review of the Board Committee composition to ensure knowledge is spread among Directors while meeting regulatory requirements.
–Emerging market themes and competitor benchmarking – ensuring the Board remain appraised of market activity.
–Strengthening our alignment with the Banco Santander group – fostered through the attendance of Banco Santander group directors and executives at UK meetings as appropriate, including the Board Strategy Day, and regular Board visits to Madrid.
The Board fully considered the recommendations from the internal evaluation and agreed an action plan which will be regularly reviewed by the Committees in 2023.
In 2022, I also conducted individual Directors’ assessments and the SID undertook an assessment of my performance.
Governance
Review of the Corporate Governance Framework and Banco Santander group Frameworks
A key element of our internal governance system is the adoption of corporate frameworks, which are designed to establish common principles across key subsidiaries on matters considered relevant due to their impact on the Banco Santander group’s risk profile. When the frameworks are periodically reviewed, the Committees oversee whether the Company remains in compliance with the key principles in each, and determines whether any UK specific amendments are required. In 2022, the Committees reviewed six of these frameworks.
We also reviewed a proposal to amend the Santander UK Corporate Governance Framework (CGF). The proposed changes simplified the CGF structure and updated components to ensure they are fit for purpose and reflect Santander UK’s business and operating framework. The changes to the CGF were approved by the Board following recommendation from the Committee.
The Committees also approved the implementation of a Santander UK Subsidiary Governance Framework, which formalises the minimum standards for subsidiaries across the Santander UK group to support good governance.
Diversity, inclusion and engagement with stakeholders
We believe that our success is integrally linked to the diverse composition of our people and the promotion of an inclusive culture. The basis of this premise applies to our Boards as much as it does to any other area of our business. We recognise that a diverse and inclusive Board should result in a broad strategic perspective and we strive to maintain a Board in which a diverse range of skills, knowledge and experience are combined in an environment which values the input of every Director. Due regard is given to this when identifying and selecting candidates for Board appointments. We want a Board that reflects diversity in its broadest sense, embracing different perspectives and dynamics such as gender, race, age, disability, sexual orientation and socio-economic background.
During the year, the Committees considered updates to our Board Diversity and Inclusion Policy. The Board aims to maintain at least two female members and aims to have 40% female representation by 2025, previously having a minimum of 33%, and overall aim of 50% female representation on the Board by 2030. We are also committed to maintaining at least one member from an ethnic minority background. Currently, one of our Directors is from an ethnic minority, and 33% of the Board of Santander UK plc are female.
The Board of Santander UK Group Holdings plc is significantly smaller than the Board of Santander UK plc, reflecting its role as a holding company and that Board has only eight Directors, two of whom are female. We continue to make sure gender and all aspects of diversity remain front of mind in our succession plans for both Boards.
Our commitment to the HM Treasury Women in Finance Charter continues, with the aim to create gender balance by setting a target of 50% (+/-10%) women in senior roles (excluding Board members) by the end of 2025. At 31 December 2022, 28% of Executive Committee members were female, 34% of Executive Committee members' direct reports were female and our senior manager female population (mid to senior manager roles) was 33%.
Our representation of Asian, Black and other Minority Ethnic colleagues in senior roles (excluding Board members) increased in 2022, broadly in line with our internal growth target to achieve our ambition of 14% (+/-2%) by 2025.
We voluntarily published our ethnicity pay gap for the second year and continue to publish separate pay gaps for Asian, Black and other Minority Ethnic identities as part of our commitment to equality, transparency and accountability.
We continue to work towards race equality at work through our action plans in place and commitments including being a signatory to the Race at Work Charter and the 'If Not Now, When' campaign where we commit to taking key long term, sustainable actions on Black inclusion.
We also pledged to report on the progress of our Black Inclusion Plan within an annual report which can be found in our 2022 Diversity Pay Gap Report, now known as the 'Everyday Inclusion and Pay Gap Report'. This does not form part of this report. The Responsible Banking Committees will be reviewing an updated Santander UK Diversity and Inclusion strategy, with planned supporting actions aimed at closing the gender and ethnicity pay gaps, in 2023.
Director induction and training
Lisa Fretwell joined us as an INED on 1 January 2022, and Mike Regnier was appointed as CEO on 1 April 2022.
As the induction of the new CEO and other recent NED appointments was one of the priorities identified in the 2021 external evaluation, the oversight of their induction plans has been a key area of focus for the Committees. Each new Director received a comprehensive, tailored induction to ensure that they were fully informed about strategic and commercial issues affecting Santander UK and the markets in which they operate, as well as their duties and responsibilities as a Director. In addition, meetings were arranged with key stakeholders in the UK and across the Banco Santander group, and visits to different sites around the business were undertaken by each of them in line with their roles and needs.
Annual review of Director interests, fees and conflicts of interest
As set out in the Chair's report on corporate governance, the Committees' have responsibility for the oversight of conflicts of interest, reviewing Directors' proposed external appointments and their time commitment.
The level of fees paid to INEDs for Board and Board Committee chair and membership are set out in the Remuneration Implementation Report.
Effectiveness of the Committee
As noted above, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified is set out above.
William Vereker
Chair
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 63 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Risk Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Risk Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committee is authorised by the Board to:
–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 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.
–Consider and review all risks and issues escalated by the Chief Risk Officer, and their associated action plans.
–Oversee and challenge the day-to-day risk management actions and oversight arrangements and adherence to risk frameworks and policies.
–Oversee the adequacy of the governance arrangements we have in place.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 10/10 | 1/1* |
Chris Jones | 10/10 | 1/1* |
Pamela Walkden | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 10/10 | 1/1* |
Chris Jones | 10/10 | 1/1* |
Annemarie Durbin | 10/10 | 0/0 |
Mark Lewis | 10/10 | 0/0 |
Nicky Morgan | 10/10 | 1/1* |
Lisa Fretwell | 10/10 | 0/0 |
Pamela Walkden | 10/10 | 0/0 |
*BRC subcommittee to consider a specific topic on behalf of the Board.
Other attendees at Committee meetings in 2022 included the Board Chair, CEO, CFO, Chief Internal Auditor, CRO and External Auditors.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Financial Crime risk
Financial crime risk remained a Top risk for Santander UK, with the Committee focusing on it at each meeting. The Committee continues to monitor progress and challenge management on evidencing a return to Board risk appetite.
Fraud risk
Fraud risk was identified as a Top risk for Santander UK and was discussed regularly by the Committee, with fraud risk losses accounting for a significant portion of our overall operational risk losses. The Committee is monitoring the progress of management's tactical and strategic actions to return this risk to the Board's risk appetite.
Credit risk
The risks associated with our credit portfolios, including corporate customer portfolios, were considered by the Committee, particularly in light of macroeconomic factors such as the risks associated with unemployment, the UK housing market, rising cost of living pressures on households, and rising mortgage rates, as well as increased business costs and supply chain pressures.
Strategic and Business risk
We evaluated Santander UK's competitive position, long-term viability, and potential future threats, including its operations in the current volatile and uncertain macro-environment.
Operational risk & resilience
Managing resilience risk has remained a top priority, along with demonstrating to our regulators that Santander UK is resilient to any disruptions in its operations. The Committee assessed the operational risks associated with a heightened external Cyber risk environment, IT risks, third-party risk management, People risk in a hybrid-working environment and a difficult recruitment market, and managing complex change risk with capacity and capability challenges.
Model risk
We reviewed and discussed regular Model risk updates, including progress on the heightened regulatory model transformation and new model developments, as well as the refresh of the model risk target operating model.
We maintain an holistic view of enterprise wide risks and, to help achieve this, there is appropriate cross-membership between this Committee, the Board Responsible Banking Committee and the Board Audit Committee.
Effectiveness of risk management system and internal controls
We considered, as part of the Operational Risk Profile & Analysis update, the results of the 2021 year end Risk and Control Self Assessment (RCSA). This highlighted the risk and exposure issues reported through the RCSA processes.
Through mitigating actions completed in 2021, several critical risks were reduced to high or lower risks. The critical risks remaining at 31 December 2021, were all being addressed, with no risk acceptance requested. An additional level of control assurance was introduced through the Operational Risk & Resilience Control’s (ORRC) review of Special Monitoring Controls as part of the annual Control Certification Campaign (those controls identified as most important in the mitigation of their critical inherent risks) by the respective risk owners.
Overall, we were satisfied that critical and high risks were well managed via risk mitigation and reassessment processes. The remaining high risk work streams, mainly relating to Financial Crime, IT and Third-Party exposures, were being addressed through the Financial Crime Transformation Programme, IT transformation programme and Procurement Transformation, respectively.
In 2022, the RCSA process continued to be enhanced, to ensure all material risks are considered and reported consistently across Santander UK.
The Committee received reports on management’s strategic plan for investment prioritisation. The Committee continues to review management’s reports on the execution of the overall bank-wide Risk Infrastructure Management Programme which, due to the progress made over the last few years to improve the bank’s infrastructure, has now transitioned into the business.
Effectiveness of the Committee
As part of the internally facilitated Board evaluation carried out during the year, the Committee's performance was assessed and it was concluded that the Committee continues to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. More information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified can be found in the Board Nomination Committee Chair's report.
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Annual Report 2022 | Santander UK Group Holdings plc 64 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Significant areas of focus
In 2022, we discharged our responsibilities and continued to raise challenges relating to our areas of focus, identifying, and managing new risks and risk types.
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Risk Appetite | –Considered changes proposed to the Board’s Risk Appetite Statement (RAS) as part of the Annual Risk Appetite Review. The RAS approach, methodology and structure were thoroughly reviewed as part of the annual analysis to determine whether they remained in line with peers and also fit for purpose for our business. –Oversaw the implementation of a quantitative expression for Climate Change Risk Appetite and the simplification of the Board's Financial Crime Risk Appetite measures, as well as incremental changes to several existing metrics to provide a more meaningful measurement against the RAS. –Challenged management on the Climate Change Risk Appetite, noting that the focus had shifted from qualitative to a quantitative expression of appetite, with targets established and expected to continue to evolve. Climate Change risk will be monitored and assessed relative to the Responsible Banking Committee targets. –Examined the proposed changes to the Cost of Credit limit to better measure deviations from the budget, and updated to the Operational Risk qualitative statements and supporting metrics to ensure alignment to the current risk exposures, the statements and supporting metrics.
| –Agreed with the results of the RAS analysis which confirmed that the business has the right approach and structure, as well as a market-appropriate appetite. –Recommended the proposed Risk Appetite to the Board for approval. For more, see ‘Risk Appetite’ in the ‘Risk governance’ section of the Risk review. |
Risk Framework | –Reviewed proposed changes to the Risk Framework. Management highlighted the reduction in the number of the Risk Types and frameworks due to the transfer of assets from Santander UK plc to Banco Santander London Branch in 2021, which resulted in a simpler and more streamlined business model. –Considered management's descriptors of Risk Profile and Board Risk Appetite (BRA) to promote clearer demarcation of the two measures in reporting. –Discussed the annual certification process and assessed the extent to which the Risk Framework had been effectively implemented and embedded across the business. –Noted that the Risk certification results indicated that the majority of Santander UK remained compliant with the Risk Framework. Noted that full compliance increased to 92%, with improvements against most sections of the Risk Framework.
| –Following the completion of the bank-wide Risk Infrastructure Management Programme, agreed with management on the implementation of a risk infrastructure framework in H1 2022 to aid in the transition of risk infrastructure assessment into the business. –Agreed that the Risk Framework continues to meet Industry and regulatory standards and that it has been effectively implemented. –Recommended the proposed changes to the Board for approval.
For more, see ‘Risk Framework’ in the ‘Risk governance’ section of the Risk review. |
Stress testing | –Stress testing remains a key tool to highlight and manage the impact on capital and profit and loss in stress scenarios. The Committee continues to closely monitor methodology, governance arrangements, and outputs. –Reviewed and challenged the proposed scenarios and approach for completing the Bank of England Annual Cyclical Scenario (ACS) stress testing exercise in 2022. The Committee was involved throughout the process, reviewing key drivers and challenging assumptions and outputs, particularly in light of the economic climate. –Examined the impact of the second round of the Bank of England’s Climate Biennial Exploratory Scenario stress test scenarios on Santander UK. A third-party peer review was also commissioned to compare our climate-related risk management to that of peer banks and to provide guidance on our overall ESG Risk operating model. –Reviewed management responses to address the regulator's feedback on the 2022 Bank of England Climate Biennial Exploratory Scenario stress tests.
| –Approved Santander UK’s response to the CBES 2 and the results and assumptions from the ACS stress testing exercise.
For more, see ‘Stress testing’ in the ‘Risk governance’ section of the Risk review. |
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Annual Report 2022 | Santander UK Group Holdings plc 65 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Area of focus | Action taken by the Board Risk Committee | Outcome |
Technology & Operations | –Some IT incidents experienced by our customers in 2022 demonstrated the importance of robust IT risk management, controls, and third-party oversight and accountability. –Considered progress that had been made in IT transformation to reduce IT risk. The stabilisation of the production environment had reduced incidents, and the safe execution of change requests had increased. –Reviewed management progress in removing blockers to IT transformation had been resolved through the establishment of technical solutions to move applications to new infrastructures, an IT risk dashboard to measure progress against Risk Appetite and accountability and within the Chief Resilience and Control Office for the mapping and prioritisation of Important Business Services. –Discussed the challenges around recruitment, particularly for certain IT roles, and queried management on the actions being taken. –Received multiple updates on cyber security risk, the external threat landscape and the actions being taken by management in response to further strengthen our control measures. Although Santander UK had not experienced any critical cyber security incidents, we continue to respond to third-party ransomware attacks.
| –Agreed that the governance and control framework for the cloud infrastructure needed to be improved, highlighting the impact of any delay in cloud capability. –Endorsed the high-level plan to meet the BRA for IT, supported by underlying work streams with accountable owners. The Committee noted that the plan would be adjusted during 2023 to account for potential unknowns and management was encouraged to promptly escalate budgetary requirements to ensure alignment with available funding. –Management assured the Committee that there was sufficient investment for cyber security and patching, and addressing any system obsolescence continued to be a priority within the IT transformation programme.
For more, see the ‘Operational risk’ section of the Risk review. |
Financial Crime | –Given the critical importance of financial crime management, the Committee meets on a regular basis to discuss and challenge management on the path back to Risk Appetite. –Reviewed the findings of the Skilled Person’s (SP’s) report and management’s consideration in re-planning the Financial Crime Transformation Plan for a return to Risk Appetite. –Considered management's approaches to responding to the SP's recommendation and findings from the independent review of the Financial Crime Transformation Plan implementation. –Critically examined and challenged management throughout the year on the progress made on the Financial Crime Remediation Plan to return to Risk Appetite. As part of this review, we considered the Money Laundering Reporting Officer’s report, and the Second Line of Defence view as part of the enterprise-wide risk management reports to the Committee. –Challenged management on the return to Risk Appetite delay, resource adequacy, third-party reliance, potential convergence with the One Europe Financial Crime Programme, and the pace of Financial Crime Transformation implementation and remediation to drive financial crime improvements.
| –Recommended that management should ensure appropriate capacity for teams to manage work streams and encouraged management to also demonstrate a sustainable cadence in bringing down remediation volumes. –Noted management's assurance that financial crime would return within Risk Appetite by the deadline, as the risk profile continued to reduce across the business. To support this, the Committee requested regular updates on the current position, the associated risks to achieving BRA, plans for mitigation, and the measures to assure the Committee that the programme could be delivered in accordance with the remediation lifecycle timelines. For more, see the ‘Financial crime risk’ section of the Risk review.
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Fraud | –Reviewed, discussed, and challenged management's actions to implement fraud prevention tools, systems, and controls to mitigate a variety of fraud risk types that are prevalent both within Santander UK and across the UK banking industry, particularly Authorised Payment Push (APP) fraud, which is our most prevalent fraud type. –Challenged management on the importance of continuing to educate and raise awareness among our customers and people about the growing risk of fraud and scams through media campaigns and digital channels. –Monitored and challenged management on progress with returning Fraud risk to Risk Appetite. | –Noted updates from management on progress with the range of actions being taken to prevent and mitigate fraud risk types, particularly under the Fraud Transformation Programme, which includes several projects designed to reduce the risk to our customers and the bank. |
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Annual Report 2022 | Santander UK Group Holdings plc 66 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Oversight and advice to the Board on Santander UK’s current risk exposure and future risk strategy In 2022, we reviewed our exposure to the risks outlined below and analysed emerging themes, including regulatory, macroeconomic and global risks, which could affect Santander UK’s ability to achieve its strategic goals. |
Risk | Action taken by the Board Risk Committee | Outcome |
Credit risk | –Reviewed the credit risk profile of the Retail Banking (Homes and Everyday Banking), Corporate & Commercial Banking and Cater Allen businesses. –Discussed the current macroeconomic environment which continues to be challenging, with increased inflation, cost of living pressures, supply chain pressures, increased business costs, having the potential to put greater strain on our ability to serve our customers, as well as the risk of increased impairments and considered the impacts on our credit portfolios. –Challenged management on operational readiness/capacity to support customers, particularly those who would be due for mortgage maturity in 2023, and we were assured by the actions being taken by management to be operationally ready. –Reviewed the Consumer Finance business and the impacts of the rising inflation and associated cost of living increase which could result in an income shock for our customers and their ability to repay their loans. | –Concluded that credit portfolios remained resilient but have a cautious outlook for 2023. For more, see the ‘Credit risk’ section of the Risk review. |
Strategic & Business risk | –Considered the strategic & business risk, particularly in relation to the delivery of critical programmes such as the IT transformation and Financial Crime Transformation Plan, and the potential impact this could have on the delivery of our strategic priorities. –Discussed the complex regulatory agenda and considered management's plans for addressing the key regulatory priorities for the year. –Discussed actions management had taken to mitigate strategic & business risk, including strengthening our business continuity and resilience plans, improving our business model, delivering cost efficiencies, building on our transformation programme and evolving our way of working to enhance flexibility, agility, and access to talent while ensuring our people’s well-being.
| –Recommended that management should consider as part of the strategic & business risk review, including perspectives on culture, people risk (capacity and future ways of working), and related strategic and business risk vulnerabilities. –Recommended that management should consider the requirement for forward-looking modelling analysis to aid in decision-making about profit sustainability, changing customer mix, evolving macroeconomic environment, and competitive landscape.
For more, see the ‘Strategic risk’ section of the Risk review. |
Pension risk | –Discussed the key pension risk factors, such as interest rate risk, inflation risk, investment risk and longevity risk, that the Santander UK Group Pension Scheme (the Scheme) is exposed to. –Monitored the interest rate, inflation rate and longevity hedging levels, and the significant progress made in de-risking the Scheme's asset portfolio. –Considered the actions taken by management to manage risk in relation to the conflict in Ukraine, and the related shocks to global markets. –Discussed the Pension Schemes Act 2021 amendments and the changes implemented to ensure any impact on the Scheme is properly considered in decision-making. –Reviewed the relevant metrics and management actions recommended and agreed with the trustees in connection with notional leverage, liquidity, and collateral management associated with the Scheme's derivative hedging portfolios. | –Agreed with management's proposal to remove pension risk as a Top risk, noting the significant improvements in the overall risk profile and risk metrics. –Agreed with management that the Scheme had sufficient collateral to support hedging, but recognised management actions to increase resiliency as a result of increased gilt yields. For more, see the ‘Pension risk’ section of the Risk review. |
Liquidity risk | –Reviewed the ILAAP and noted that management have addressed all feedback from the regulator on the previous Liquidity Supervisory Review and Evaluation Process and subsequent ILAAP reviews. –Questioned management about challenges faced during the ILAAP process, material liquidity stress test assumptions, and the flexibility and timeliness of our liquidity reporting. –Attended a workshop in October 2022 with members of the Board on ILAAP to consider key assumptions in the ILAAP. –Considered the half yearly updates on asset and liability management activities. We discussed the current macroeconomic environment and the Bank of England base rate increases impacts on products, particularly, mortgages and pricing. We discussed the effective actions management had taken to address our customer funding gap and the possible impacts on our assets and liabilities. –Noted that the analysis in support of the ACS submission to the regulator confirmed that Santander UK remains in a robust capital and liquidity ratio position.
| –Acknowledged that the Company holds sufficient liquid resources and has adequate governance and controls in place to manage the liquidity risks arising from its business and strategy. –Agreed to recommend the 2022 ILAAP to the Board for approval, following review and challenge. For more, see the ‘Liquidity risk’ section of the Risk review. |
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Annual Report 2022 | Santander UK Group Holdings plc 67 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Risk Committee Chair’s report continued |
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Risk | Action taken by the Board Risk Committee | Outcome |
Capital risk | –Considered, from a capital risk perspective, the ordinary and preference share dividends proposed to be paid for the year. –Questioned management about continuous engagement with Banco Santander regarding possible dividend scenarios. –Discussed the capital risk position and the status of initiatives to deliver on Banco Santander’s capital contribution target for 2022. –Reviewed and approved the changes proposed to the Surplus Capital Allocation Framework which allowed for the identification of surplus capital. –Reviewed the ICAAP and challenged management to examine whether the scenario weights were still appropriate in light of the UK’s economic and political changes. –Discussed the performance of the internal ratings based (IRB) regulatory capital models for the mortgage book. Despite the inherent uncertainty caused by Covid-19, we noted that performance across the IRB model rating systems remained robust. | –Recommended the payment of dividends to the Board for approval, subject to final determinations on capital distributions by the regulator. –Comments and challenges received from Committee members were considered by management and incorporated into the final ICAAP. –Agreed to recommend the ICAAP to the Board for approval following review and challenge. For more, see the ‘Capital risk’ section of the Risk review. |
Operational risk & resilience | –Received regular updates on the operational risk profile and risk appetite, with a particular focus on operational resilience, data management, outsourcing and third-party risk management, people risk and change and transformation risk. –Considered progress to meet compliance with the Operational Resilience parts of the PRA Rulebook and the FCA Handbook. –Reviewed management progress in identifying the important business services, setting impact tolerances, asset mapping and scenario testing completed to a level required to identify vulnerabilities and risks. –Examined the independent review of our approach to operational resilience including the design, methodology and outcomes. We were assured that our Operational Resilience Programme’s design and execution had no significant flaws, and recommendations from the independent reviewer were incorporated into our self-assessment programme. –Received regular updates on data management & privacy risk. We challenged management on the data programme prioritisation, RAS and metrics, capacity, system plans, funding and on residual data privacy risk. –Attended a workshop in July 2022 with members of the Board on our Data Strategy with a particular focus on the risk implications of our data & analytics capabilities. –With more outsourcing underway or planned as part of our transformation agenda, challenged management to continue to make positive progress in improving the application of the Third-Party Risk Management Framework. –Questioned the root cause and remedial actions relating to the incidents in the year, partly due to third parties, most of which are related to IT vendors. –Remained focused on people risk and received updates on the people risk profile, the risk associated with Santander UK's relocation to Milton Keynes, the risk affecting key subject matter experts, and the ongoing effects of the pandemic. –Questioned management about their steps to address capacity challenges in key areas, and to improve colleague wellbeing, the recruitment process, and attrition and absence rates. –Considered the overall change portfolio risk position and its implications for our transformation plan. We reviewed the root cause analysis into under-performance in change and the resulting action plan to address the under-performance. –Discussed management’s capacity and capabilities in completing the projects in the necessary timeframes and encouraged management to carry out a portfolio review focused on rationalising the change agenda to enable delivery within capacity.
| –Recommended to the Board the approval of the Operational Resilience Self-assessment. –Acknowledged the progress made to improve the risk profile of our data strategy and encouraged management to consider the risk implications of our current data challenges. –Recommended that management take remedial action to re-assess the control protocols relating to the specific incident, as well as the overall mainframe of a service outsourcing arrangement. –Continued to support management on their strategic plan for future ways of working and returning to the office, colleagues' well-being, and support provided to colleagues during the cost of living crisis. –Advised management to prioritise, plan and budget holistically to support the execution of the Data strategy, IT transformation programme, and Financial Crime Transformation Programme. Given the Data Strategy's critical dependence on key programmes and business initiatives.
For more, see the ‘Operational risk’ section of the Risk review. |
Model risk | –Considered an update on the regular monitoring of capital adequacy models. –Received an update on the regulatory review of key mortgage and corporate IRB models. –Considered the implications of differing regulatory perspectives on through-the-cycle capital requirements of the Bank of England and the ECB, respectively, including the potential implications for capital planning, product pricing, and business strategy. | –Continued to monitor progress in respect of regulatory initiatives for IRB models, and request evidence of appropriate model types, assumptions, data integrity, and calibration. For more, see the ‘Model risk’ section of the Risk review. |
Ed Giera
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Annual Report 2022 | Santander UK Group Holdings plc 68 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Audit Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Audit Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. I am also the Chair of the RFB Committee and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
The Committee is authorised by the Board to provide oversight of:
–Integrity of the financial statements of the Company and any formal announcements relating to its financial performance, including underlying significant financial reporting judgements and estimates.
–Internal financial control effectiveness.
–The relationship with our external auditors including their independence and objectivity, audit scope and effectiveness of the audit process in respect of their statutory audit of the annual financial statements.
–Internal Audit function effectiveness.
–Recovery and Resolution planning.
–Whistleblowing arrangements.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 10/10 | 0/0 |
Ed Giera | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 10/10 | 0/0 |
Ed Giera | 10/10 | 0/0 |
Lisa Fretwell | 10/10 | 0/0 |
Annemarie Durbin | 10/10 | 0/0 |
Nicky Morgan | 10/10 | 0/0 |
Mark Lewis | 04/04 | 0/0 |
Other attendees at Committee meetings in 2022 included the Board Chair, CEO, CFO, Chief Internal Auditor, CRO, Financial Controller, Director of Financial Reporting and the external auditor.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Financial reporting
–Considering the disclosures of and provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA and subsequent settlement of £108m.
–Challenging the macroeconomic scenarios weightings and other inputs to our credit risk models for purposes of estimating expected credit loss (ECL) provisions, to ensure appropriateness.
–Considering management's proposals on Judgemental Adjustments (JAs, formerly known as Post Model Adjustments), including new JAs to reflect potential repayment affordability risk among retail and corporate customers, and the release of Covid-19 related JAs previously applied to our credit risk model outputs for purposes of estimating ECL provisions.
–Reviewing management’s approach and key methodology changes for new mortgage and corporate ECL models, and supporting simplifications to reduce run time and allow for increased macroeconomic sensitivity analysis. We will continue to monitor the implementation of the new ECL models, which is expected to be completed in H1 2023.
–Reviewing management's approach to the defined benefit pension schemes assumptions and agreeing new models for estimating discount and inflation rates.
–Considering management's efforts to further streamline external financial reporting to ensure it remains relevant to investors, regulators and other stakeholders.
Oversight of external auditors
–Approving the external auditor's proposed audit scope and related fee proposal.
–Considering the FRC's Audit Quality Inspection Report published in July 2022 and other audit quality indicators including PwC Transparency Report as part of our annual assessment of PwC's performance.
–Monitoring the transition of the outgoing, and approved the selection of the incoming, lead external audit partner.
–Reviewing PwC's reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management's progress in resolving them.
–Discussing developments in financial reporting including changes to statute, accounting standards and best practice.
–Monitoring the ongoing independence of PwC.
Internal controls and regulatory reporting
–Overseeing the introduction of 100% independent testing of SOx controls, identified control deficiencies and related remediation plans.
–Continuing focus on oversight of the procurement process including consultant spend.
Internal Audit
–Monitoring progress against the 2022 Audit Plan.
–Monitoring past due Internal Audit recommendations and management's remediation plan to close them.
–Receiving regular updates on the operational effectiveness of Internal Audit to ensure the quality and experience is appropriate for the business and that it is appropriately resourced.
–Considering the results of Internal Audit reviews in conjunction with relevant Line 1 management as appropriate.
–Considering the 2023 Audit Plan and annual report for recommendation to the Board.
Recovery and Resolution planning
–The Committee oversaw management's progress on resolvability, including reviewing the preparations for and submission of the first resolvability public disclosure and arrangements supporting the ongoing maintenance and, where possible, enhancement of the Company's resolution capabilities.
–Overseeing the updating of the recovery plan.
Whistleblowing
–Monitoring management's continued embedding of its whistleblowing framework and arrangements. We continued to refine our policies and operating procedures to stay abreast of best practice.
–Considering key themes and whistleblows.
–Considering the whistleblowing annual report to the Board.
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Annual Report 2022 | Santander UK Group Holdings plc 69 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report continued |
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Financial reporting Significant financial reporting issues including judgements and estimates The use of assumptions or estimates and the application of management judgement is an essential part of financial reporting. This is considered by the Committee on at least a quarterly basis. In 2022, we focused on the following significant reporting matters in relation to financial accounting and disclosures: |
Financial reporting issue | Action taken by the Board Audit Committee | Outcome |
Credit impairment charges Determining the appropriateness of credit impairment charges is highly judgemental requiring management to make a number of assumptions. | Overall approach –Noted that applying management judgements on IFRS 9 ECL provisioning was difficult given the circumstances due to the cost of living crisis, and the reduction of Covid-related risks. –Reviewed the fully updated macroeconomic scenarios and weights on a quarterly basis, which captured a wide range of potential outcomes for the UK economy, particularly in light of the current high inflation environment. –Oversaw improvements in the framework to identify when a new JA is needed or an existing JA is no longer needed. –Reviewed management’s approach and key methodology changes for new mortgage and corporate ECL models. We supported simplifications to reduce run time and allow for increased macroeconomic sensitivity analysis, and noted an improved corporate LGD methodology. We welcomed embedding of some long standing JAs into core models, and supported the proposed upgrade to a bespoke tool to calculate ECL which strengthens the control environment. –Challenged management to ensure time is given to complete model governance to allow a high quality, well controlled implementation. We also discussed the use of Covid-19 loss experience in model development given the significant customer support which suppressed arrears emergence. The models are due to go live in H1 2023 after an independent model validation review, and are not expected to result in a material change in ECL. | –Agreed additional disclosures to provide clarity on management judgements and estimates. –Satisfied ourselves with the robustness of the process used to arrive at the management judgements and estimates as well as with the management judgements and estimates themselves. –Endorsed the quarterly updates to the macroeconomic scenarios and weights. –Endorsed the improvements in the JA framework. –Endorsed management’s approach and key methodology changes for new mortgage and corporate ECL models. –We will continue to monitor the implementation of the new ECL models. See the 'Credit risk' section in the Risk review. See 'Critical judgements and accounting estimates' in Note 1 to the Consolidated Financial Statements. |
| Retail and corporate credit impairment charges –Reviewed detailed reports from management throughout the year to satisfy ourselves that Significant Increase in Credit Risk (SICR) triggers had been correctly identified. –Considered management's proposal to apply new JAs to reflect repayment affordability risk for mortgage and unsecured lending customers with low disposable income. –Considered management's proposal to uplift the modelled mortgage probability of default as back testing and monitoring showed a risk of model underestimation. –Considered management's proposal to apply new JAs to reflect the corporate lending risks to those sectors susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. –Considered management's proposal to release all Covid-19 corporate sector staging JAs as lockdown risk has reduced. |
–Concurred with management's judgement on the level of retail and corporate credit impairment charges, concluding that provisions remain robust and assumptions were appropriate. –Agreed with management's updates on and proposals for JAs. –Agreed with management's proposals to apply new JAs and to reduce or eliminate those which were no longer required. –We will continue to monitor retail and corporate credit provisions. See 'Critical judgements and accounting estimates' in Note 1 to the Consolidated Financial Statements. See Note 13 to the Consolidated Financial Statements. See ‘Credit risk’ in the Risk Review. |
Provisions and Contingent liabilities The provisions for customer remediation, litigation and other regulatory activities continued to be highly judgemental and have required significant assumptions. | –Considered the disclosures of and provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA and subsequent settlement. –Continued to scrutinise the level and adequacy of customer remediation, litigation and other regulatory provisions and challenged management’s assumptions. –Monitored progress on litigation with a third party over an alleged PPI liability and reviewed judgements and estimates on the level of provision for potential future legal claims. –Reviewed management’s judgements and estimates in respect of the level of provision in relation to on-going regulatory and law enforcement investigations. | –Agreed with management's proposed disclosures and provision for the financial penalty following the FCA's civil regulatory investigation. –Agreed with management’s judgement on the level of customer remediation, litigation and other regulatory provisions and disclosures. –Endorsed the proposed year-end disclosures. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 29 and 31 to the Consolidated Financial Statements. |
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Annual Report 2022 | Santander UK Group Holdings plc 70 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Financial reporting issue | Action taken by the Board Audit Committee | Outcome |
Defined benefit pension schemes Significant judgement is required on the key assumptions underlying defined benefit pension asset and liability calculations. Outcomes remain inherently uncertain. | –Reviewed management’s approach regarding the principal assumptions underlying the defined benefit pension asset and liability calculations. –Reviewed management's approach to illiquid assets valuation where there is inherent uncertainty as their values are based on unobservable market inputs. Reviewed the proposal to continue to use the unaudited flash valuations provided by our private equity advisors, following review of the testing carried out against final audited valuations, and the conclusion that this is management’s best estimate of the value. –Reviewed management's proposals to adopt new models for estimating the discount and inflation rates. –Assessed management's proposal to apply a 10 basis point overlay to the discount rate at 31 December 2022 as the difference between it and the average of modelled discount rates exceeded management's policy threshold to make an adjustment. –Monitored the continued appropriateness of the methodology for defined benefit pension calculations and reviewed the inflation, discount and mortality rates applied at the year-end.
| –Agreed with management’s approach regarding the principal assumptions. –Agreed with management's approach to illiquid assets valuation, including the proposal to continue to use the unaudited flash valuations provided by our private equity advisors. –Agreed with management's proposals to adopt new models for estimating the discount and inflation rates. –Supported management's proposal to apply an overlay to the discount rate at 31 December 2022. –Endorsed the proposed quantitative and qualitative year-end disclosures in respect of pension obligations. See ‘Critical judgements and accounting estimates’ in Note 1 to the Consolidated Financial Statements. See Note 30 to the Consolidated Financial Statements. See ‘Pension risk’ in the Risk Review. |
Other areas | –Reviewed the outcome of management’s going concern and viability assessments. –Reviewed the outcome of management’s annual impairment assessments for goodwill and the cost of the Company's investment in Santander UK plc and and noted the increase in headroom in the year.
| –Agreed with management that the going concern basis of accounting remained appropriate at 31 December 2022. –Agreed with management that no impairments to goodwill or the cost of the Company's investment in Santander UK plc should be recognised in 2022. See 'Going concern' in this report and in the Directors' report. See Note 20 to the Consolidated Financial Statements. |
The Committee’s focus continues to be on areas of significant judgement and estimate which pose the greatest risk of a material financial statement misstatement. In doing so we consider carefully the reports of PwC, our external auditors, who constructively challenge the Company's financial reporting.
In addition to the areas set out in the preceding table, the Committee also considers other higher risk items. For 2022, these continued to include the identification and assessment of risks of material misstatement due to management fraud or error. We also considered management's assessment of the effectiveness of model risk management for financial reporting related models.
Disclosure in the Annual Report
We received verbal updates, in respect of each quarterly financial report, 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 the Company’s external reporting. Some of the Committee's disclosure considerations included:
–Provision for a financial penalty as a result of a civil regulatory investigation into Santander UK's historical Anti Money Laundering control framework by the FCA, and its settlement.
–Climate change and the transition to a low carbon economy, and its potential impact on the financial statements.
This, together with other reports received in the year, and a review of best practice and peer approaches, enabled us to conclude that we were satisfied with the disclosures in this Annual Report.
Management also engaged with the Board and the Committee early on in 2022 in respect of the approach to the Annual Report which enabled us to input into the overall tone and messaging in a timely manner.
Fair, balanced and understandable
The Disclosure Committee also reports on whether the Annual Report is fair, balanced, and understandable and whether it provides the information necessary for readers to assess Santander UK's position and performance, business model and strategy.
In this context, the Disclosure Committee considered whether:
–Key messages are consistent throughout the document, relating to financial performance and progress against strategic priorities.
–Key judgements and estimates, significant risks and issues are reported clearly and adequately.
–The Annual Report has a clear framework with good signposting and a complete picture of performance and events.
The Committee's assessment of fair, balanced and understandable is also underpinned by the understanding it gains through the reporting made to it throughout the year relating to management judgements and estimates, internal control matters, Internal Audit activities and the reports of the external auditors. Our assessment also considers the robustness and outcomes of the assurance, review and verification processes conducted by management and whether the key risks reflected the Committee's concerns and were consistent with those reported by management.
Following our assessment, we concluded that the 2022 Annual Report was fair, balanced and understandable.
Financial Reporting Council (FRC) Annual Review of Corporate Reporting 2021/22
In October 2022, the FRC issued a report which sets out its views on key developments for annual reports, codifying its Thematic Reviews. The report highlighted areas of high-quality reporting, but also drew attention to improvements that would be needed in areas such as disclosures on workforce and wider stakeholder engagement, diversity and oversight of the effectiveness of the risk management and internal control systems. As part of our oversight of this area, management reported to us on its work in the areas of interest to the FRC. We are satisfied that management appropriately addressed the areas identified by the FRC in the preparation of this Annual Report.
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Annual Report 2022 | Santander UK Group Holdings plc 71 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Audit Committee Chair’s report continued |
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We also reviewed management’s response to a PRA thematic ‘Dear CFO’ letter which focused on high quality ECL implementation practices, progress and areas of development for climate-related risks, including disclosures, and IBOR reform, and we are comfortable with progress made in these areas.
Alternative Performance Measures (APMs)
This Annual Report includes a number of financial measures which are not accounting measures within the scope of IFRS. Such non-IFRS measures are APMs and include financial measures of historical or future performance or financial position that exclude or include amounts that would not be adjusted in the most comparable IFRS measures.
Management reviews these APMs to measure Santander UK's overall performance, position and profitability, and believes that their presentation provides useful information to investors. For definitions of these APMs and, where they are adjusted, reconciliations to the most comparable IFRS measures, see the 'Financial review' section.
We reviewed the APMs and are satisfied that they provide useful information to investors, and that management has clearly identified the APMs in this Annual Report and, where such APMs are adjusted, reconciled them to the most 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 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 considered 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.
Oversight of external auditors
External Auditors
PwC were appointed in 2016 and their independence was considered and monitored throughout the year. We were satisfied that PwC continued to meet the independence requirements. Ian Godsmark became lead audit engagement artner from June 2022 following the resignation of Laura Needham from PwC.
Oversight of the relationship
Our review of the relationship with PwC included the following activities:
–Consideration of their audit plan and updates.
–Consideration of their work relating to management judgements and estimates.
–Consideration of the summary of misstatements not corrected by management. The Committee was satisfied that they were not quantitatively or qualitatively material, either individually or in the aggregate at each quarter.
–Discussion on the level of disclosure in the Annual Report and Half Yearly Financial Report to satisfy ourselves that it is appropriate.
–Discussion of developments in financial reporting including changes to statute, accounting standards and best practice.
–Review of PwC's reports on findings and recommendations on internal control and financial reporting matters identified during their audit and their view of management's progress in resolving them.
–Interactions, including meetings in private session during Committee meetings, and at other times throughout the year.
–Consideration of Santander UK specific independence issues, as well as those of PwC.
–Consideration of the FRC's Audit Quality Inspection Report published in July 2022 and other audit quality indicators including the PwC Transparency Report as part of our annual assessment of PwC's performance.
Based on the above inputs, 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 on non-audit services provided by our external auditors. Non-audit services were under continuous review throughout 2022 to determine that they were permitted by reference to their nature, assessing potential threats and safeguards to auditor independence as well as the overall ratio of audit to non-audit fees.
All assignments require advance approval, either by the Chair (or in his absence his alternate), under delegated authority for amounts under £250,000 plus VAT or, if larger, by the Committee. This process is in addition to the requirement for all non-audit fees to be approved by the Banco Santander Audit Committee.
The fees for non-audit work performed by PwC in the year, are disclosed in Note 7 to the Consolidated Financial Statements. We ensured that these met the external and internal tests for maintaining their independence, including evidence of their professional scepticism. During 2022, the Company paid a fee of £1.4m to PwC in relation to incremental work undertaken in support of their audit of Banco Santander SA.
In 2022, PwC's non-audit related fees were 34% for the Company and 35% for the RFB of their total audit fees, well within the external cap of 70%.
Fees for non-audit work performed by PwC in the year, other than those in relation to audit-related assurance services, were 6% of the average of the fees approved for Deloitte, EY and KPMG.
Internal Controls and regulatory reporting
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. The Committee considered Management's enhancement of the SOx testing framework; 100% independent testing of controls; reviewing the adequacy of data lineage; and assessing potential risks from operating in a hybrid working environment.
Recognising the importance within statutory and regulatory reporting of capital and risk weighted asset metrics, many of which are not subject to external audit, the Committee retained its focus on the level of comfort we obtain. The PRA also emphasised the importance of the reliability of regulatory reporting in its thematic review published in September 2022. This area has always been covered by Internal Audit. We also reviewed the processes and governance in respect of preparing additional capital and risk management disclosures. We had a specific focus on liquidity risk reporting which is subject to a control enhancement programme.
The Committee monitored the control framework in place in respect of consultancy engagement as well as associated spend and performance of consultants. The appointment of a new Director of Procurement, with a focus on embedding the new procurement operation model, was welcomed by the Committee.
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Annual Report 2022 | Santander UK Group Holdings plc 72 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Internal Audit
The Internal Audit plan, based on a comprehensive risk assessment, including budget and resources, was presented in draft and then final form for challenge and recommendation by the Committee to the Board for its approval. The plan was updated at regular intervals in 2022 in response to changes in the business and the regulatory environment and at the request of the Committee.
All unsatisfactory and inadequate rated audit reports issued were subject to additional scrutiny by the Committee with the relevant business areas being required to present their action plans to the Committee. We also reviewed a sample of audit reports rated 'needs improvement' and requested management to present on progress with addressing Internal Audit's recommendations, issues encountered, milestones and dependencies.
We received regular reports on audit recommendations from our Chief Internal Auditor, quarterly and annual Internal Audit reports and monitored findings as part of our oversight. We considered the total number of recommendations, the rationale for any becoming overdue, and broader root cause analyses. We also requested that the Chief Internal Auditor highlight recommendations becoming due and any that were past due, as a result of past due recommendations increasing beyond reasonable expectation; this was remediated by the year-end. The strong engagement between Internal Audit and the business continued in 2022.
We also oversaw the objective setting, performance evaluation and remuneration of the Chief Internal Auditor, ensuring objectives were aligned to key priorities for the Company.
The Committee has approved the Internal Audit Charter and receives regular updates on the operational effectiveness of the Internal Audit function to confirm that it maintains its independence and to ensure its quality, experience and resourcing is appropriate. This is supplemented by regular interactions between the Chief Internal Auditor and the Committee Chair. We also receive feedback on interactions between Internal Audit, management and our external auditors.
A review is conducted every five years to evaluate the Internal Audit function in respect of its conformance with the standards of the Chartered Institute of Internal Auditors (CIIA), as well as its performance and effectiveness compared to industry peers and good practice. The next review is due in 2023 and a thorough process to select an external provider to carry out the review has been undertaken.
Recovery and Resolution Planning
The Committee oversaw management's progress on resolvability, including reviewing the preparations for the first resolvability public disclosure and arrangements supporting the ongoing maintenance and, where possible, enhancement of the Company's resolution capabilities. The Bank of England's (BoE) Resolvability Assessment Framework (RAF) sets out how it assesses UK financial firms' resolvability and introduces a public disclosure regime.
On 10 June 2022, the BoE published its first assessment of resolvability preparations of the eight major UK banks following its review of firms' self-assessment reports submitted to the PRA in October 2021 (as updated in February 2022). Santander UK was the only large systemic bank for which the BoE did not identify any 'material issues' across three resolution outcomes.
The Committee also oversaw the updating of the recovery plan which was submitted to the PRA in June 2022.
Whistleblowing
The Committee oversees Santander UK's whistleblowing arrangements including continuous refinement of our processes to align with evolving best practice. Santander UK recognises the importance of creating an environment where colleagues feel safe and able to Speak Up. Speaking Up is a core behaviour at Santander UK and there are a number of ways colleagues can do this, including raising a concern via Santander UK's Whistleblowing Team.
In 2022, management continued to manage the whistleblowing framework and arrangements under our oversight. We continued to refine our policies and operating procedures to stay abreast of best practice.
In November 2021, Santander UK delivered Ethics Training with a focus on the Company’s Ethical Code of Conduct, to our top 120 leaders and middle management. Our communications strategy has ensured the visibility and awareness of whistleblowing has remained high and dedicated and bespoke training to specific teams has been delivered. The Board received Whistleblowing training as part of its annual training programme.
The Committee considered bi-annual reports on Santander UK's whistleblowing arrangements. This included oversight and progress of concerns, outcomes, identifiable trends, observable risks, the regulatory environment, proposed changes to legislation and activities to promote and enhance the arrangements to support the culture of speaking up. The Committee also reviewed the annual Whistleblowing Report ahead of its submission to the Board.
The Committee is satisfied that Santander UK 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 and I remain focused on procedures and governance to prevent victimisation of employees who raise a whistleblowing concern. I meet regularly with management and I have been involved in overseeing the implementation of continuous improvements to the arrangements.
Other areas of 2022 focus
The Committee also reviewed management's response to the Department for Business, Energy and Industrial Strategy (BEIS) consultations.
The Committee also considered the Chief Financial Officer's objectives and annual performance evaluation.
Effectiveness of the Committee
As noted in the Board Nomination Committee Chair's Report above, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified is set out above.
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 and the external auditors in private sessions. I also attend meetings with the PRA and the FRC.
With regards to my operation as Committee Chair, the Board has determined that I have the necessary qualifications and skills to qualify as the Board Audit Committee financial expert as defined in item 16F of Form 20-F and by reference to the NYSE listing standards.
As I approach the end of my third term of appointment, it is my intention to resign during the second half of 2023 as a Director of both the Company and Santander UK plc, and therefore as Committee Chair. The Board Nomination Committee will propose a replacement in due course ensuring that the nominee has the necessary qualifications and skills.
Chris Jones
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 73 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Responsible Banking Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Responsible Banking Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Responsible Banking Committee (the RFB Committee) to ensure alignment of practices, policies and procedures. Nicky Morgan, the RFB Committee Chair, and I have written this report jointly and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
Nicky and I collaborate to ensure that matters within the Committees' remit are considered by the appropriate forum, and to prevent any gaps in coverage. This is facilitated through a degree of common membership between the Committee and the RFB Committee which enhances visibility of matters that extend across Committees and fosters open channels of communication.
In summary, the Committee is authorised by the Board to:
–Oversee the operation of the business and subsidiaries to ensure they act in a responsible way, promoting their long-term success having due regard to the interests of the Company's stakeholders.
–Support management in shaping and driving the responsible banking agenda of the business across a broad spectrum of areas including customers, culture, diversity and inclusion, conduct, communities and climate change and the environment (the Board Risk Committee is responsible for overseeing the risks associated with climate change).
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Ed Giera (Chair) | 4/4 | 0/0 |
Lisa Fretwell | 4/4 | 0/0 |
Chris Jones | 4/4 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Nicky Morgan (Chair) | 4/4 | 0/0 |
Annemarie Durbin | 4/4 | 0/0 |
Lisa Fretwell | 4/4 | 0/0 |
Ed Giera | 4/4 | 0/0 |
Chris Jones | 4/4 | 0/0 |
Mark Lewis | 4/4 | 0/0 |
Other attendees at Committee meetings in 2022 included the CEO, Director of Corporate Communications and Responsible Banking, Chief People Officer, CRO, Director of Compliance, Chief Customer Officer, Everyday Banking, and Chief Customer Officer, Homes.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Responsible Banking at Santander
Responsible banking is a broad term covering an extensive array of environmental, social and governance-related (ESG) matters that are key to delivering Santander UK's strategy.
Following our decision in 2021 to focus our energies on three strategically-aligned pillars in relation to which we believe we can promote the success of the Company and the RFB, in the long term, while also having a real impact for the companies' stakeholders, in February 2022 we considered and approved the key metrics and targets that would allow us to track progress against these pillars relative to our ambitions.
The three pillars, which you can read more about in the Responsible Banking and Sustainability section of this Annual Report, are:
–A Thriving Workplace: Creating a culture of inclusivity and belonging.
–Better Communities: Helping customers and communities prosper.
–A Healthy Environment: Responding to climate change and supporting the green economy.
The foundation underlying these pillars is to be responsible in everything we do. You can read more about this in the Strategic Report.
Our customers
The Committees' focus on supporting our customers continued to increase in 2022 given challenges posed by the cost of living crisis and ever more sophisticated fraudsters. To support us in providing holistic oversight of how we are performing in respect of our customers, we tasked management with designing a new report and dashboard which now allows us to track progress and focus our discussions on areas that require further attention.
For each of our scheduled meetings in 2022, we received reports on our support for vulnerable customers and how we are ensuring that we are ready to help customers who find themselves in financial hardship as a result of the cost of living crisis. We have been pleased to learn that management has been dedicated to putting robust measures in place to:
–Understand the financial health of our customers.
–Contact customers proactively with support and advice if we think they might find themselves in financial distress.
–Provide additional channels through which customers can request help from us.
–Give extra training to our financial support specialists.
–Increase the capacity in our contact centres.
We believe management has taken the right steps to help our customers during this difficult time and encourage them to continue to identify more ways to provide support.
In February 2022, the Committee held a fraud workshop in order to better understand the significant challenges that Santander UK, its customers and the industry as a whole face in this area. The outcome of the workshop was a series of practical recommendations aimed at increasing the protection for our customers. We were pleased to hear at our December 2022 meeting that good progress has been made and that there are further initiatives in the pipeline which will be launched in early 2023. A number of members of the Committees also visited the Fraud and Economic crime teams on-site to understand the challenges in more depth. We expect that fraud prevention and detection will continue to be a priority in 2023.
While we spend much of our time considering how we can address specific issues facing our customers, such as fraud and inflation, we also need to understand how our customers feel about Santander UK more generally in order to ensure that we continue to provide good service and good outcomes to customers. One way we do this is by scrutinising our Net Promoter Scores and encouraging management to resolve the underlying factors that negatively affect them. This ensures that management is continuously working to improve our service and support.
In order to get a more personalised view of customers' experiences, Directors also visited contact centres and branches during the course of 2022 where they observed customers' calls and interactions. This has allowed the Board to understand more about how we interact with our customers and the issues that are raised. Visits during 2022 included those to our Mays Meadow contact centre in Belfast and Liverpool Lord Street branch.
In addition to our traditional banking services, a key priority for Santander UK is helping our customers meet their 'green' ambitions. We provide more information on this below.
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Annual Report 2022 | Santander UK Group Holdings plc 74 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Responsible Banking Committee Chair’s report continued |
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Our people and culture
A Thriving Workplace is the first pillar of our Responsible Banking strategy and we spend a significant proportion of our meeting time assessing culture and colleagues' views of the organisation. We recognise that all teams differ, so we introduced a standing section to our quarterly meeting agendas called 'Employee Voice', where we hear directly from colleagues in specific teams. In 2022, we hosted colleagues from the Financial Support Centre of Excellence, the Customer Interactions team, the Technology and Operations team and the CFO division. We find it hugely valuable to deep dive into the experiences of each team. We encourage colleagues to be as open about the challenges they face as they are about their successes. This allows us to provide management with advice and support to resolve these challenges, and to identify any thematic issues that may need a more structured or strategic approach.
Annemarie Durbin, the Santander UK plc Employee Designated Director reports on her interactions with colleagues at each quarterly meeting. In addition, each NED has completed an employee engagement plan arranged for them by the Corporate Governance Office. In 2022, these included visits to contact centres, offices and branches. A number of us also attended events and meetings with Santander UK colleague networks including the Embrace network, an inclusive community for LGBTQ+ colleagues and allies to share information, personal experiences and hold discussions, and the Ethnicity@Work network which celebrates and embraces cultural differences from race, belief, traditions, heritage and customs. We look forward to more interactions in 2023.
We recognise that many of our colleagues will be as affected by the cost of living crisis as our customers, and the Board focused on ensuring we provide a range of support to help. You can read more about this in the Board Remuneration Committee Chair's report.
Diversity and inclusion
The Committees considered Santander UK's approach to increasing diversity and inclusion at the majority of its scheduled meetings in 2022. We were pleased to note that we have been successful in improving the gender and ethnicity representation at senior levels. However, we acknowledge that there is still much to do and we were disappointed that with the results of our pay gap reporting, details of which you can find in the Board Remuneration Committee Chair's Report and Sustainability and Responsible Banking section. One way to enable us to be more proactive in improving diversity and inclusion is to enhance the data we have about it. In 2022 we welcomed an exercise conducted by management to improve our data disclosure options to ensure all our people feel they can select options that best reflect their individual identity. This has seen us improve our data disclosure rates for ethnicity and sexual orientation by 4% to 77% and 59%,
respectively. Management has undertaken to continue to help key decision makers across the business to use this data to take more targeted actions to improve representation and experience across Santander UK.
An updated Diversity and Inclusion strategy, with planned supporting actions aimed at closing the gender and ethnicity pay gaps, will be considered by the Committees in H1 2023.
Social mobility
In September 2022, management presented the first draft of an exciting new strategy aimed at facilitating greater social mobility for the benefit of our people, customers and communities. We welcomed the initiative and collaborated with management to give them the benefit of our experience and knowledge to refine the strategy to make it as impactful as possible, encouraging them to focus on a limited number of initiatives that could make the most difference. We were pleased to consider the final draft strategy at our December 2022 meeting where we recommended it to the Board for approval. You can find more information on Santander UK's social mobility strategy and activities in our Everyday Inclusion and Pay Gap Report 2022.
Our communities
Better Communities is the second pillar of our Responsible Banking strategy. Our communities are the foundations of our society and we believe that acting responsibly in relation to them, and providing investment in them, will make a great difference. The Committees also agreed that it is important that Santander UK focuses our efforts on activities through which we can make the biggest impact, and these tend to be linked to our business model and strategy. We have therefore encouraged management to continue our financial education and inclusion initiatives and agreed the priorities and structure of our Universities Programme and particularly our strategic partnership with Milton Keynes University (MK:U). For more on this, see the Sustainability review.
Regulators and compliance
Our regulators are a key stakeholder as they authorise Santander UK to provide our services to our customers. Complying with regulatory requirements and best practice is a priority, so we proactively engage with our regulators. While management undertakes the majority of engagement, Directors with specific SMF responsibilities meet regularly with the PRA and FCA.
At each quarterly meeting, the RFB Committee receives comprehensive updates on the Ring-Fenced sub-group's conduct and compliance risk status, as well as actions to resolve any issues. The report also includes 'horizon scanning' to show the Committee what regulatory or compliance matters are expected in the future and how management plans to address them.
A key part of our regulatory agenda in 2022 was preparing, planning for, and implementing the new Consumer Duty. The Committee held a Consumer Duty workshop in Q2 2022 to get early sight of what was expected of the final rules and understand how management was preparing. Once the rules were published at the end of July 2022, the Board and the Committee held a series of meetings to ensure that a sound and robust implementation plan was available for approval by the October 2022 deadline. The RFB Committee Chair, Nicky Morgan, has been appointed as Consumer Duty Champion and the RFB Committee will oversee implementation in the RFB sub-group leading up to the deadline of 31 July 2023.
Responding to climate change
A Healthy Environment is the third pillar of our Responsible Banking strategy. Santander UK is committed to reducing both its financed carbon emissions and its own emissions to support the ambition to limit climate change to 1.5 degrees. In April 2022, the Committee met the then COP President, Alok Sharma, to discuss the climate change opportunities and challenges in the banking sector, and the key issues that could be influenced by Government. For more on this workshop, see the Sustainability review.
Santander UK is also aware and supportive of the fact that many of our customers want to reduce their impact on the environment. The Committee encouraged management to support customers in meeting their ambitions and we were pleased to see decisive action taken by management, including the launch of the 'My Homes Manager' app for mortgage customers. Using the app, customers can view the Energy Performance Certificate of their home and find tips for saving energy and reducing their bills.
The Committee also considered Santander UK's financed emissions reduction trajectory taking into account other key considerations such as customer and social impacts and Board Risk Appetite. This will continue to be a key focus in 2023.
Effectiveness of the Committee
As noted in the Board Nomination Committee Chair's Report, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Board as a whole. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified is set out above. An action plan for the Committees will be agreed at a forthcoming meeting. We will report on the actions identified and progress against them in next year's Annual Report.
Ed Giera
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 75 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Remuneration Committee Chair’s report |
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Introduction
On behalf of the Committee, I am pleased to present the Board Remuneration Committee report, providing details of the key topics we considered in the year. I would like to thank the Committee members and management for their continued support.
The Committee conducts its business concurrently with the RFB Board Remuneration Committee (the RFB Committee) (together the "Committees") to ensure alignment of practices, policies and procedures. Annemarie Durbin, the RFB Committee Chair, and I have written this report jointly and, given that the RFB has within its perimeter the vast majority of Santander UK's business, this report details the governance arrangements, practices and activities of both the Committee and the RFB Committee.
Annemarie and I collaborate to ensure that matters within the Committees' remit are considered by the appropriate forum, and to prevent any gaps in coverage. This is facilitated through a degree of common membership between the Committee and the RFB Committee which enhances visibility of matters that extend across Committees and fosters open channels of communication.
The Committee is authorised by the Board to:
–Set the overarching principles and parameters of remuneration policy across Santander UK. We do so in consultation with the RFB Committee to ensure that the RFB is able to comply with its legal and regulatory obligations, including its ring-fencing obligations.
–Oversee implementation of remuneration policies, including considering and approving the remuneration arrangements (including bonuses) for EDs and senior executives. We approve individual remuneration awards and also changes to senior executive incentive plans.
–Approve the framework by which colleagues are designated as Material Risk Takers (MRT) and oversee MRT remuneration arrangements, including bonuses.
Committee composition
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| Scheduled meetings | Ad hoc meetings |
Chris Jones (Chair) | 6/6 | 0/0 |
Ed Giera | 6/6 | 0/0 |
RFB Committee composition
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| Scheduled meetings | Ad hoc meetings |
Annemarie Durbin (Chair) | 6/6 | 2/2 |
Ed Giera | 6/6 | 2/2 |
Chris Jones | 6/6 | 1/2 |
Mark Lewis | 6/6 | 2/2 |
Other attendees at the Committee meetings in 2022 included the CEO, Chief People Officer, Performance and Reward Director, Head of Performance and Reward and the Committees' Independent Adviser. The CRO and Director of Compliance (DoC) join the meetings regularly to give updates and recommendations on risk performance and potential remuneration risk adjustments.
No individual participates in discussions regarding their own remuneration.
Key activities in the year
During 2022, the focus of the Committees' work was in the following areas:
Aligning remuneration with strategy
As always, a key consideration when agreeing our variable pay framework for the year is ensuring it incentivises our people to deliver Santander UK's strategy and business model for the long-term benefit of the Company and its stakeholders. It must also be designed to incentivise our people to exhibit the right behaviours.
For 2022, we ensured that our bonus scorecard continued to be aligned with our strategy, including our strategic commitments to our shareholder, our people, our customers and our wider communities. We approved a balanced scorecard of financial and non-financial metrics and targets, including metrics related to customer satisfaction and loyalty, and employee engagement scores. In order to support our Responsible Banking ambitions, which you can read more about in the Board Responsible Banking Chair's Report and Strategic Report, we included targets relating to financial empowerment and we also included a mechanism by which the bonus pool would be increased if management delivered targeted increases in diversity representation. We also tracked a sustainability metric aimed at supporting our customers to reduce their carbon emissions, in anticipation of being able to include it in a future bonus scorecard, should it be considered appropriately robust and strategically aligned. We will update you on that in our 2023 Report.
For more on the 2022 variable pay framework, including the metrics used in the scorecard for Santander UK plc, see the Remuneration Implementation Report.
Business performance in 2022 and impact on remuneration
The Committees made the year-end variable pay decisions in the context of the strong performance of the business, the wider economic environment and the fact that our customers and communities are facing significant inflationary pressures. In addition, while seeking to fairly reward hard work and strong financial and non-financial performance against our business strategy, we were mindful of the potential for improved business results that could be considered as a windfall resulting from the macroeconomic conditions in the year.
As usual, we also took into account an assessment of current and future risks when approving the overall bonus pools for Santander UK, Santander Consumer UK and Santander Financial Services, as well as bonus awards for Executive Directors.
The Committees are satisfied that 2022 variable pay outcomes for all colleagues appropriately reflect Santander UK’s business performance and are fair, consistent, and aligned to our stakeholders’ interests. For more on these outcomes, see the Remuneration Implementation Report.
All employee matters - cost of living
The Committee's roles and remit extend beyond the Executive Directors to include other senior roles (including MRTs) and, importantly, to the oversight of the implementation of remuneration policies for all colleagues across Santander UK.
We continued to ensure that executive remuneration decisions are informed by, and consistent with, the approach taken for employees more broadly. Ensuring our colleagues across the businesses are fairly remunerated is also a key focus for the Committees. As such, the Committees undertake an annual review of the remuneration policies and practices for the wider workforce and receive updates throughout the year on other key matters. Given the impact of the cost of living crisis on our colleagues, we considered these matters at the majority of our scheduled meetings during 2022.
During the year, the Committees endorsed and championed management's drive to support our people in managing the challenges arising from the cost of living crisis, particularly the lowest paid. We received regular updates on the assistance that Santander UK was putting in place to support colleagues. In December 2022, we conducted a review of all initiatives that had been delivered to satisfy ourselves that our approach had been fair, reasonable, targeted and, most of all, impactful. These initiatives included:
–An exceptional 4% salary increase awarded to all employees earning less than £35,000 per annum (full time equivalent) from 1 August 2022.
–An increase in entry level salaries from 1 August.
–A new financial support helpline, run by a dedicated team of Financial Care Specialists in the Financial Support Team, launched in October 2022. The helpline gives guidance on account options, repayment plans and budgeting tips for all employees.
Santander UK is an accredited Real Living Wage employer, a status over which the Committees maintain oversight.
We have once again voluntarily disclosed our CEO pay ratio. For more, see the Remuneration Implementation Report.
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Annual Report 2022 | Santander UK Group Holdings plc 76 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Board Remuneration Committee Chair’s report continued |
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All employee matters - benefits
In 2022, we continued our oversight of all employee benefits, supporting management's efforts to ensure that our benefits proposition is competitive and meaningful to our colleagues. Providing a breadth of benefits choices across financial, lifestyle, health and protection satisfies our colleagues' core benefits expectations as well as providing a good range of additional benefits choices that are highly valued. The Committees' view this as particularly important in light of the cost of living crisis.
We continued our oversight of the work management was undertaking with regards to our defined contribution pensions offering, and were pleased to support the introduction of a minimum employer contribution of 8% with no colleague contribution necessary. Other enhancements that will significantly strengthen our offering include the removal of service-related increments, which increases fairness. The changes, which will positively impact thousands of our people, and which will be particularly meaningful for our most junior colleagues, come into effect in April 2023. This has been well-received by colleagues.
Employee wellbeing is a key guiding principle for our benefits strategy and we were pleased that one of the improvements made to our offering in 2022 was to make available to all colleagues a free app-based service offering sessions with a private GP, physiotherapist, mental health professional, and a medical second opinion service.
Executive Director reward
In Q1 2022 we welcomed Mike Regnier as our new CEO, whose remuneration arrangements we reported on in last year's Annual Report. As a result of Nathan Bostock, our former CEO, transferring to a role at Banco Santander SA, he has retained his right to his deferred reward and is eligible for a pro-rated 2022 bonus. More information on this is available in the Remuneration Implementation Report.
Reward for senior colleagues
The talent market in the UK continued to be very competitive in 2022, particularly in key operational roles such as IT and cyber-security. Given the need to continue to attract and retain top talent with the relevant skills and experience to drive our strategic agenda forward, we had to carefully consider the remuneration for a number of key roles. To support us in doing so, the Committees continued to monitor our remuneration framework and approach to external market benchmarking, with the support of our external adviser, Deloitte LLP.
Where the business recruited or promoted senior members of management, we scrutinised the proposed remuneration and challenged where appropriate.
We also agreed the removal of long-term Banco Santander SA performance metrics to more closely align Executive Committee members' incentives with Santander UK's strategic priorities. These metrics only apply to the CEO from 2022 onwards.
Risk Adjustments
Our risk adjustment procedures, which are applicable to all colleagues, are robust and well embedded within our remuneration policy framework. We continue to use a range of risk adjustment mechanisms, including reducing the bonus pool and / or individual bonus awards in the current and previous years, and / or reducing the amount of any unvested deferred variable remuneration. Our approach to risk adjustment is under continuous review to adapt to the changes in Santander UK’s operating environment, ensuring that they remain comprehensive, relevant and compliant with regulatory requirements.
The CRO and DoC report to us regularly, providing commentary on the risk profile and performance of the business in the year, and recommending any collective or individual adjustments that we may wish to implement as a result.
Ahead of the 2022 variable remuneration pay review, we spent time considering the fairest and most proportionate way of taking current risk issues into account. In particular, we spent significant time considering the most fair and proportionate way to deal with the FCA's penalty relating to historical anti-money laundering controls between 2012 and 2017. The failings and penalty were taken into account as part of the 2022 bonus pool determination calculation.
Diversity Pay Reporting
We remain committed to increasing diversity and inclusion at Santander UK, recognising its benefits to our business, colleagues and our wider communities.
While the Committees are responsible for overseeing Santander UK's approach to pay gap reporting, the Board Responsible Banking Committee (RBC) is responsible for overseeing management’s approach to, and progress in, improving diversity and inclusion across Santander UK. For more on this, see the RBC Chair's report.
Our 2022 Pay Gap Report, now known as the Everyday Inclusion and Pay Gap report, which was analysed and approved by the RFB Committee, was published in December 2022. Given our commitment to inclusion more broadly, this year we have provided a more holistic overview of our actions and progress towards achieving everyday inclusion, including additional metrics on diversity representation and employee experience. For more information on our approach to everyday inclusion, see the RBC Chair's report and the Sustainability and Responsible Banking section of the Strategic Report.
In terms of the results, the mean gender pay and bonus gaps reduced in 2022, while the median gender pay and bonus gaps increased. Mean and median binary ethnicity pay and bonus gaps also increased. Clearly these results are disappointing and management has worked hard to identify the reasons behind the increases and create an action plan to address the factors within Santander UK's control. More details can be found in Everyday Inclusion and Pay Gap Report on our website, which does not form part of this Annual Report.
The Committee and the RBC will continue to provide oversight and encouragement to management to improve our diversity, inclusion and fair pay in 2023.
Committee adviser tender
In November 2021, the Committee reviewed the independence and effectiveness of the current Remuneration Committee Advisor, Deloitte LLP. While the review confirmed that Deloitte remained independent and effective, it was agreed that a formal tender would be conducted in 2022 as a matter of best practice.
Four independent firms participated in the tender, each of whom provided a written submission and met with management. They were assessed on an objective basis on factors including proven experience and credentials, understanding of Level One banking remuneration regulations and cultural fit with Santander UK. Two firms were shortlisted and were interviewed by the Chair of the RFB Committee and one of its members.
Based on the above criteria, the re-appointment of the current Independent Adviser, Deloitte, was approved at the September 2022 meeting. We look forward to continuing to work closely with them.
Regulatory changes and engagement
Regulatory requirements and expectations are at the forefront of the Committees' considerations when making decisions and we are kept abreast of changes in regulatory requirements via a variety of means, including by management and our Independent Adviser. The Chairs of the Committees meet with our regulators on a periodic basis to update them on recent developments and upcoming matters. We also encourage management to engage proactively and regularly with our regulators on matters of interest to them. Ensuring that the new Consumer Duty is appropriately reflected in our variable pay framework going forward will be a key focus for the Committee in 2023.
Effectiveness of the Committee
As noted in the Board Nomination Committee Chair's Report, as part of the internally facilitated Board evaluation carried out during the year, the Committees' performance was assessed and it was concluded that the Committees continue to perform effectively. The results of the evaluation and the subsequent action plan were considered and agreed by the Boards. Information on the progress against actions from last year's review, this year’s evaluation process and areas for improvement identified, is set out in the Board Nomination Committee Chair's Report.
Chris Jones
1 March 2023
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Annual Report 2022 | Santander UK Group Holdings plc 77 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration policy report |
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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. Furthermore, we applied the UK Corporate Governance Code 2018 (the Code) and complied with the Provisions other than where stated in the Directors' Report. In addition, we comply with other listed disclosure requirements to the extent considered appropriate taking into account our ownership structure.
Accordingly, several voluntary disclosures relating to remuneration are presented in this report.
Remuneration policy for Executive Directors (EDs)
Our remuneration policy, which applies to EDs, is outlined below. Remuneration is structured in two elements: fixed and variable pay. Fixed pay is set at market competitive levels appropriate for the role. Variable pay rewards the delivery of internal financial targets, key strategic priorities and individual performance, subject to risk adjustment.
Remuneration policy applicable to Executive Directors in the year
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Fixed pay | Principle and description | Policy |
Base salary | –To attract and retain EDs of sufficient calibre and with the skills to deliver our strategy, taking into account the demands and complexity of the role. | –Base salaries are normally reviewed annually. In reviewing base salaries the Committee considers a number of factors, including: –the skills required and responsibilities of the role alongside the market value of those attributes; –the requirement for base salaries to be set at a level to avoid inappropriate risk taking; –base salary increases across the colleague population; and –prevailing market and economic conditions. |
Pension arrangements | –To provide a discrete element of the package to contribute towards retirement. | –All EDs receive a cash allowance in lieu of pension in line with the wider workforce average, currently 9% of salary.
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Other benefits | –To offer a competitive package and to support employee wellbeing. | –Including but not limited to: private medical insurance for EDs and their dependants, life assurance, health screening, and relocation allowances where relevant. –Access to Santander UK’s all-employee share schemes on the same terms as all UK employees. |
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Variable pay | Principle and description | Policy |
Variable pay plans | –The Variable Pay Plan aims to motivate EDs to achieve and exceed annual internal targets within Santander UK’s Risk Appetite and aligned with our business strategy and values. –Multi-year deferral and delivery in Banco Santander SA shares aligns EDs’ interests to the long-term interests of Santander UK. Further performance testing also applies for the CEO. –Part of the award is deferred according to the requirements of the PRA Rulebook (Remuneration Part). –The long-term Transformation Incentive Plan recognises the collective achievement of key financial and non-financial targets associated with the bank's ongoing transformation. | –Bonus awards under the Variable Pay Plan are discretionary and determined by reference to performance against a scorecard of financial and non-financial goals, as well as individual performance. –40% of any bonus awarded is paid upfront after the performance year ends, and delivered at least half in shares. –60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered at least half in shares. –For the CEO, the first three of five deferred award tranches are subject to further performance testing, which may reduce or increase the payout. –The Transformation Incentive is based on performance assessed over a three year period with further deferral into cash and share based awards in line with regulatory requirements. –Share based awards are subject to a minimum twelve-month retention period following vesting. –Malus and clawback provisions apply to variable pay for up to ten years following the grant of an award. –The structure of variable pay awards means EDs acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. In addition, the CEO is subject to a Shareholding Policy, which ensures alignment with the long-term interests of Banco Santander shareholders. The requirement under the policy is set at two times the incumbent’s net salary upon appointment. A formal post-employment shareholding requirement is therefore not in place. |
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Annual Report 2022 | Santander UK Group Holdings plc 78 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration policy report continued |
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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 by its shareholders. For control function roles, a lower ratio of 1:1 is normally applied.
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 easily understood, tailored to individual roles, competitive and 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 strategic priorities across Customers, Shareholders, People and Communities. This ensures that our day-to-day activities align with Santander UK’s strategic priorities which focus on customer loyalty and experience, simplification, improved efficiency and sustainable growth while aiming to be the best bank for all our stakeholders.
Simplicity
–To ensure our approach to remuneration is transparent and easily understood.
–To operate clear structures to support each colleague to link their contribution to the success of the organisation.
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 Santander UK-wide framework. Risk adjustment occurs at an individual and bonus pool level.
–To provide a package that is balanced between fixed and variable pay, and short-term and long-term horizons, which aligns to our strategy whilst promoting prudent risk management.
–To ensure remuneration is compliant with applicable regulations and legislation.
Fairness
–To take into account an assessment of the EDs' performance against objectives set at the start of the year covering a range of financial, non-financial, quantitative and qualitative criteria.
–To set robust and stretching internal targets and 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 and transformation.
–To consider wider employee pay and conditions 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, whilst reflective of our structure.
Predictability
–The Committee annually reviews the variable pay opportunity for individuals and the basis of the bonus pool calculation. Due to commercial sensitivity, these are not disclosed as per the provisions of the Code. Directors’ remuneration is within the variable pay cap as approved by Banco Santander SA shareholders and set out above.
On recruitment
When appointing a new ED, base salary is set at a market competitive level appropriate for the role, taking into consideration a range of factors including role scope and responsibilities, internal and external peer groups, relevant experience, and affordability.
Unless determined otherwise, any new ED will receive a pension allowance in line with the wider workforce average, currently 9% of salary. Benefits available will typically be aligned to the wider employee population.
Remuneration will be established in line with the Remuneration Policy, as set out in the EDs’ remuneration structure table in this report.
Relocation support and international mobility benefits may also be given. Where provided, relocation assistance will normally be a capped amount for a limited time. In cases of international mobility, the Committee will have discretion to offer benefits and pension provisions which reflect home country market practice and align to relevant legislation.
Buy-out awards
Compensation may be provided to EDs recruited externally for the forfeiture of any awards on leaving their previous employer. The Committee retains discretion to make such compensation as deemed appropriate to secure the relevant individual’s employment and will ensure any such payments align with both the long-term interests of Santander UK and the prevailing regulatory framework.
Such payments will be in line with the awards foregone as a result of leaving the previous employer taking into account value, form of awards, vesting dates and the extent to which performance conditions applied to the original awards.
Service agreements
The key terms and conditions of employment are set out in individual service agreements. These agreements include a notice period of six months from both the ED and the Company.
The agreement reserves a right for the Company to terminate employment immediately with a payment in lieu equal to the ED's fixed pay for the notice period. In the event of termination for gross misconduct, neither notice nor payment in lieu of notice is required.
Termination payments
The remuneration impact of an ED leaving the Company, including treatment of variable pay and/or any termination payment will reflect the terms of the service agreements, relevant scheme rules, regulatory requirements and the Committee’s policy relevant to the reason for leaving.
Outstanding variable pay awards will generally lapse on termination, other than where an individual is considered a ‘good leaver’. Where an ED is a good leaver, eligibility to variable pay awards will normally subsist until the relevant scheduled payment dates and will remain subject to performance where relevant.
The Committee determines whether an ED is a good leaver. Usual good leaver circumstances include but are not limited to: injury, ill-health, disability, redundancy, retirement and death. The Committee may, at its discretion, determine an ED a good leaver in any other circumstances.
A framework is in place 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 EDs.
In the event of a change in control, any outstanding variable pay awards will be treated in line with the relevant scheme rules, taking into account applicable regulatory requirements.
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Annual Report 2022 | Santander UK Group Holdings plc 79 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration policy report continued |
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Risk and Performance adjustment
We continue to meet the regulatory requirements in respect of risk and performance adjustment. 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.
The Standard provides both a formula-based assessment against Santander UK’s Risk Appetite and an additional qualitative risk event assessment that can reduce the bonus pool or individual awards to nil at the Committee’s discretion.
Our Individual Remuneration Adjustment Standard provides a framework for the process, governance and standards relevant for decisions in relation to individual performance adjustments following an incident, including the application of malus and clawback.
Performance adjustments may include, but are not limited to:
–reducing an award for the current year;
–reducing the amount of any unvested deferred variable remuneration;
–requiring an award which has not yet been paid to be forfeited; and
–requiring repayment on demand (on a net basis) of any cash and share awards received at any time for a period of up to ten years following the date of award.
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 a number of circumstances, including:
–colleague misbehaviour, misconduct or material error;
–material downturn in the performance of Santander UK or a relevant business unit; and
–Santander UK or a relevant business unit suffering a material failure of risk management.
When determining variable pay awards for individuals performing roles across Santander UK plc and Santander UK Group Holdings plc, the Santander UK Group Holdings plc Board 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 Board Remuneration Committee.
The Committee seeks input from the Chair of the Board, Chair of the Board Risk Committee, Chair of the Board Audit Committee, Chief Risk Officer, Director of Compliance, Chief People Officer and Chief Internal Auditor when determining whether any performance or risk adjustments are required.
Policy for all employees
Our performance and reward approach across the Company supports our business strategy, rewards strong performance and reinforces our values within the approved risk management framework. The general principles of the Remuneration Policy broadly apply across all colleagues where appropriate, and are designed to facilitate recruitment, motivation and retention whilst driving performance.
The composition of remuneration packages for EDs is aligned with the broader colleague population, comprising salary, benefits, workforce aligned pension provisions and eligibility for discretionary variable pay dependent on role and responsibility.
The Committee annually approves the operation of variable reward schemes for all our colleagues to ensure they reward appropriate behaviour and do not incentivise activities which are outside risk appetite.
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Annual Report 2022 | Santander UK Group Holdings plc 80 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Remuneration implementation report |
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Introduction
This section of the report outlines how our Remuneration Policy was implemented for 2022.
Variable Pay Plan
To incentivise and reward EDs for achieving superior and sustained performance, our Directors participate in an annual variable incentive plan. A balance of financial and non-financial performance metrics are selected annually by the Committee and are aligned with our strategy as measured over the financial year. Multi-year deferral and delivery in Banco Santander SA shares ensure that EDs’ interests are aligned to the long-term interests of the business. Further long-term performance testing also applies for the CEO.
Both upfront and deferred awards are made at least half in shares or share-linked instruments. The deferred element is delivered over seven years. Effective 2022 and for the CEO only, the first three deferred tranches of awards are subject to further performance testing against long-term metrics. Awards delivered in shares or share-linked instruments are subject to an additional one-year retention period from the point of delivery.
The 2022 Variable Pay Plan pool was determined based on a range of metrics using a balanced scorecard approach as follows:
Quantitative assessment
A quantitative assessment is undertaken against a balanced scorecard of financial and non-financial metrics that are key to Santander UK’s 2022 strategy. Performance metrics are reviewed annually to ensure continued alignment with strategy and, for 2022 a simplified scorecard comprised:
–Customers (Net Promoter Score, Loyal Customers and Total Customers)
–Shareholders
–ROTE
–RORWA (where an accelerator could apply subject to ROTE and Capital generation)
–Sustainability (Financial Empowerment)
–People (Employee Engagement and a Diversity and Inclusion multiplier).
A profit underpin applies which requires Profit after Tax to remain positive in order to pay any award, with a reduced pool should profit reduce substantially from the prior year.
Qualitative assessment
A qualitative assessment adds context to the quantitative assessment and ensures a balanced view of performance is taken. Performance is assessed across metrics including but not limited to: customers (conduct risk), profitability (results and costs) and responsible banking.
Banco Santander Group Multiplier
The Committee has the discretion to adjust the pool upwards or downwards to reflect overall Banco Santander performance if appropriate.
Regional Adjustment
A Regional Adjustment was introduced in 2021, to reflect the UK's contribution to performance of the Banco Santander group's European Region (comprising Spain, Portugal, Poland and the UK).
Exceptional Adjustment
Exceptional adjustments allow for unexpected factors or additional internal targets not covered by the quantitative or qualitative assessments to be reflected in variable pay outcomes.
UK-focused risk adjustment
The UK-focused risk adjustment is linked to Santander UK’s Risk Appetite and provides both a formula-based assessment against Risk Appetite and an additional qualitative risk event assessment overlay. Consideration is given to risk appetite limit breaches including but not limited to: customers, conduct, operational, reputational and financial crime risk. This 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 Committee reviews and approves remuneration governance and frameworks on an annual basis to ensure continued compliance with the relevant regulatory rules, including for ring-fencing.
Individual assessment
The allocation of the pool is based on an individual's performance, taking into account a range of factors. Specifically an individual's performance is assessed 50% against the delivery of priorities (the 'What'), 40% against the behaviours exhibited to deliver these priorities (the 'How') and 10% on Risk.
Deferred long-term awards
Effective 2022, performance testing applies to a portion of the deferred awards for the CEO. Prior to 2022, this applied to all EDs. Any outstanding deferred awards granted to EDs prior to 2022 will remain subject to performance testing.
Performance testing applies to the first three deferred tranches of the 2022 awards (36% of the total award) which are payable in 2026, 2027 and 2028. Performance is measured over a three-year period 2023 to 2025.
The performance measures for 2022 awards are relative TSR, ROTE and ESG metrics. Following the performance assessment, the level of awards will be adjusted accordingly.
To drive performance, these measures can now both reduce and increase the overall value of the deferred awards.
Transformation Incentive Plan
This is a one-off long-term incentive plan which is designed to recognise the achievement of financial targets and an enhanced customer experience, whilst maintaining appropriate conduct controls and risk management, over the course of our transformation period.
Awards under the plan will be assessed over the period 1 January 2021 to 31 December 2023. Awards are granted half in cash and half in share-based units (linked to the Banco Santander SA share price), and will vest in accordance with regulatory requirements.
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Annual Report 2022 | Santander UK Group Holdings plc 81 |
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2022 Business Performance and Impact
on Remuneration
In the context of continued economic uncertainty and high inflation, our priority remains supporting our customers and people. Despite this challenging operating environment, the hard work of our colleagues has helped us to deliver a strong set of results. Strong profit performance was driven by net mortgage lending. Both our customer deposits and customer loans grew as part of our prudent balance sheet management. We retained our 14 million customers throughout the year and for the first time the number of digital customers accounts for half our customer base.
Our ongoing transformation programme has realised considerable savings which has helped mitigate the impact of rising inflation whilst allowing us to continue to improve our customer experience and deliver against our strategic priorities of being a responsible and sustainable business.
Whilst the Committee acknowledged this strong performance, it also recognised the seriousness of the penalty imposed by the FCA in December 2022 relating to historical anti-money laundering controls between 2012 and 2017 and the importance of reflecting this, alongside other factors, in determining variable pay awards. The failings and penalty were therefore taken into account as part of the quantitative and qualitative steps in the 2022 bonus pool determination, with a further discretionary adjustment applied.
Context for decision making
The Committee ensures that broader remuneration policies and practices for employees across the Santander UK group are taken into account when setting policy for executive remuneration. The Committee reviews remuneration trends across the Santander UK group including the outcome of any pay negotiations with our recognised trade unions and considers the relationship between executive remuneration and that of other Santander UK group employees, as well as remuneration in the wider UK market when making decisions on executive pay.
A particular focus of the Committee during the year has been the impact of the cost of living crisis on our colleagues. Several management initiatives designed to support our people, particularly the lowest paid, were endorsed by the Committee during the year. In addition, a review of all cost of living initiatives was undertaken at year end to ensure that the approach taken was both fair and effective. The cost of living crisis was considered carefully by the Committee when determining EDs' 2022 variable pay awards and remuneration for 2023.
The Committee oversees broader workforce remuneration policies and practices, the implementation of remuneration and related employment policies across Santander UK and the salary and variable pay awards for all Material Risk Takers. 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 pay and benefits matters for all colleagues;
–Annual pay reviews for the general employee population;
–Santander UK group-wide pension and other benefit provisions;
–The design of and overall spend on variable incentive arrangements; and
–An assessment of conduct across the business.
The Committee is focused on ensuring that colleagues are not subject to undue pressures or inappropriately incentivised. This is monitored using existing employee engagement indicators including engagement surveys.
The Committee always considers the broader stakeholder environment when setting policy or reaching decisions on executive pay.
Summary of remuneration arrangements for the Chief Executive Officers
Nathan Bostock stepped down as CEO effective 1 April 2022 to take up a position within Banco Santander. As such, he retains the right to deferred variable pay awards and was eligible for a pro-rated bonus to reflect time served in 2022. During the year, Santander UK welcomed Mike Regnier who was appointed CEO on 1 April 2022. Details of Mike’s remuneration are disclosed in the Executive Directors’ remuneration table below.
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Executive Directors’ remuneration Total remuneration of each ED for the years ended 31 December 2022 and 2021. |
|
| Mike Regnier (3) | | Nathan Bostock (4) | | Duke Dayal (5) |
| 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
| £000 | £000 | | £000 | £000 | | £000 | £000 |
Salary and fees | 1,123 | - | | 420 | 1,680 | | 1,000 | 958 |
Taxable benefits (1) | 2 | - | | 154 | 45 | | 522 | 523 |
Pension | 101 | - | | 38 | 151 | | 88 | 86 |
Total fixed pay | 1,226 | - | | 612 | 1,876 | | 1,610 | 1,567 |
Bonus (paid and deferred) (2) | 1,139 | - | | 398 | 1,864 | | 1,901 | 1,567 |
Total variable pay | 1,139 | - | | 398 | 1,864 | | 1,901 | 1,567 |
Total remuneration (6) | 2,365 | - | | 1,010 | 3,740 | | 3,511 | 3,134 |
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(1) | Taxable benefits for the Executive Directors comprise a range of benefits including, but not limited to, private health care, life cover and car benefit. Included in the 2021 and 2022 figures for Duke Dayal is a relocation allowance of £500,000 p.a.. |
(2) | The 2021 Variable Pay Plan awards made to Nathan Bostock and Duke Dayal have been restated to account for 36% of the awards being subject to long-term metrics. Performance against these metrics can decrease the award to 0% and may not increase the award value. Previously the value of the Variable Pay Plan awards have been disclosed in full which has resulted in an overstatement post the application of performance conditions. The value of the 2021 Variable Pay Plan subject to long-term performance conditions (currently Nathan Bostock: £1,048,680 and Duke Dayal: £715,748) will be disclosed at the close of the performance period. Effective 2022, 36% of the CEO's 2022 Variable Pay Plan award will be subject to long-term performance metrics assessed over three years. No other executive, aside from the CEO, will be subject to long-term performance metrics. Performance against these metrics can increase the value of this element by up to 25% of original value, or decrease the award to 0%. The value of both the current and former CEOs' 2022 Variable Pay Plan awards not subject to performance conditions, i.e. 64%, are disclosed above. The value subject to further performance conditions (currently Mike Regnier: £640,588 and Nathan Bostock: £223,864) will be disclosed at the close of the performance period upon vesting. |
(3) | Mike Regnier was appointed as CEO on 1 April 2022. Upon appointment, Mike Regnier was awarded guaranteed variable remuneration of £660,648 to compensate for remuneration forgone from his previous employer. This has not been included in the Total Remuneration value above. |
(4) | Nathan Bostock stepped down as CEO on 1 April 2022. The figures above reflect remuneration received whilst serving as a Board Director. No further payments are due. |
(5) | An additional one-off award was delivered to Duke Dayal in recognition of his contribution to regulatory projects during his service with Santander Holdings USA prior to joining the Company, and subject to Santander UK plc corporate and individual performance conditions during 2021. The value of the award is £294,532, and is included in the bonus value for 2021. |
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Annual Report 2022 | Santander UK Group Holdings plc 82 |
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Stakeholder views
During 2022, Santander UK continued to engage with key stakeholders on remuneration related matters including its main regulators, the PRA and FCA.
Regular engagement takes place with our shareholder to ensure there is alignment with remuneration constructs across the wider Banco Santander group while meeting all regulatory requirements and expectations. The outcome of these discussions drives our bonus pool construct.
Frequent colleague pulse surveys were conducted throughout 2022. This 'Your Say' function has enabled colleagues to share thoughts and ideas more frequently and anonymously all year round. Alongside other virtual listening forums, this gives a more frequent gauge of employee sentiment.
Additionally, discussions are conducted with union representatives during the annual pay review cycle and on relevant employee reward matters on a more frequent basis.
CEO pay ratio
Santander UK is committed to delivering fair pay which attracts, retains and motivates colleagues of the highest calibre across all grades. In line with this commitment, the Committee has oversight of compensation across the organisation, including pay ratios, and considers this when determining reward outcomes. We continue to voluntarily disclose the ratio of the CEO’s total remuneration to that of colleagues.
The CEO's pay mix is weighted more heavily towards variable pay to incentivise the achievement of stretching internal targets and long-term value creation. This can lead to greater variability in total remuneration. In contrast, the typical pay mix of our less senior colleagues places more emphasis on fixed pay, to ensure earnings offer security and certainty, and to meet our commitment to colleague financial wellbeing.
Changes in the ratio are therefore influenced by the differences in remuneration structure, rather than an increase in pay disparity. The ratio has decreased from 96:1 (re-stated and explained in footnote 4 below) in 2021 to 84:1 in 2022. The reduction in pay ratio is attributable to a number of different factors. These include an increase in average total remuneration amongst the employee population, and a reduction in the CEO remuneration package year-to-year. In assessing the pay ratio, the Committee is confident that the Company's policy on remuneration is fair and consistent with our all-employee pay policies.
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 in 2022 were £176,600 (2021: £199,050). Deloitte was first appointed as Adviser to the Committee following a formal tender process conducted in 2015. Following a further tender process in 2022, Deloitte was reappointed as the Committees' advisor. Deloitte's independence and effectiveness will continue to be reviewed annually. Deloitte is a founding member of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK.
The Committee is satisfied 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, following review in 2022.
In 2022, Deloitte also provided unrelated tax, advisory, risk, assurance and consulting services to Santander UK.
By Committee invitation, the Chair, CEO and designated representatives from business functions attend meetings as appropriate to advise on HR, Risk, Legal and Regulatory matters in support of the Committee's work. Attendees included the Chief People Officer, Performance & Reward Director, CRO and Company Secretary.
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CEO pay ratio |
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| Methodology (1) | 25th percentile | Median | 75th percentile |
2022 CEO pay ratio (5) | Option A | 119:1 | 84:1 | 49:1 |
2021 CEO pay ratio (4) | Option A | 140:1 | 96:1 | 54:1 |
2020 CEO pay ratio | Option A | 88:1 | 64:1 | 37:1 |
| CEO remuneration (3) | 25th percentile (2) | Median (2) | 75th percentile (2) |
2022 CEO pay ratio | £ | £ | £ | £ |
Total salary | £1,543,366 | £23,644 | £32,833 | £51,199 |
Total remuneration | £3,374,795 | £28,361 | £40,294 | £69,416 |
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(1) | Employee pay is calculated based on the 'Option A' methodology. We have chosen Option A as it gives the most reliable and accurate result by calculating a comparable single figure for each employee. |
(2) | Employee pay data is based on full time equivalent pay for Santander UK plc employees. 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 remuneration is calculated based on fixed pay accrued in the 2022 financial year, and variable pay is either based on actual bonuses in respect of the 2022 year (where these are available) or modelled target bonuses where actuals are not yet available. |
(3) | The CEO's total remuneration is aligned to that disclosed in the Executive Directors' remuneration table on the previous page. |
(4) | The 2021 ratios are re-stated above. These were originally calculated based on fixed pay accrued within the 2021 year, in addition to target bonuses for eligible colleagues. The 2021 ratios have now been recalculated using 2021 fixed pay and bonuses paid in 2022 in respect of 2021 for all employees. The CEO's 2021 total remuneration has been restated to account for a component of that award being subject to long-term metrics, in line with the approach to the Executive Directors’ remuneration table. |
(5) | The values used for the current and former CEOs' 2022 Variable Pay Plan awards are the same as those stated in the Executive Directors’ remuneration table i.e. the component which is not subject to performance conditions is used for the CEO pay ratio calculation above. The calculation also excludes the award of guaranteed variable remuneration of £660,648 made to Mike Regnier upon joining, to compensate for remuneration foregone from his previous employer. |
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Relative importance of spend on pay |
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| 2022 | 2021 | Change |
| £m | £m | % |
Profit from continuing operations before tax | 1,894 | | 1,858 | | 2 | | |
Total employee costs | 1,179 | | 1,202 | | (2) | | |
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Annual Report 2022 | Santander UK Group Holdings plc 83 |
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Chair and Non-Executive Director remuneration
The Chair’s fee is reviewed and approved by the Committee. The fees paid to NEDs are reviewed and approved by the CEO and the Chair. Fees are reviewed annually taking into account the market rate and time commitment for the role. The Chair is paid an all-inclusive base fee. NEDs are paid a base fee, with a supplement for serving on or chairing a Board Committee.
All NEDs 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 12 months’ written notice is required.
Neither the Chair nor the NEDs 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 the NEDs are eligible for pension scheme membership or incentive arrangements.
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Chair and Board Committee member fees |
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| 1 January 2022 | 1 January 2021 |
| £000 | £000 |
Chair (inclusive of membership fee) | 675 | 675 |
Board member | 95 | 95 |
Additional responsibilities | | |
Senior Independent Director | 45 | 45 |
Chair of Board Risk Committee | 65 | 65 |
Chair of Board Audit Committee | 60 | 60 |
Chair of Board Responsible Banking Committee | 60 | 60 |
Chair of Board Remuneration Committee | 60 | 60 |
Membership of Board Risk Committee | 30 | 30 |
Membership of Board Audit Committee | 25 | 25 |
Membership of Board Responsible Banking Committee | 25 | 25 |
Membership of Board Remuneration Committee | 25 | 25 |
Chair of Litigation and Contentious Regulatory Board Sub-Committee | 8 | — |
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| 2022 Fees | 2021 Fees | 2022 Expenses | 2021 Expenses | 2022 Benefits | 2021 Benefits | 2022 Total | 2021 Total |
Non-Executive Directors | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 |
Chair | | | | | | | | |
William Vereker (1) | 675 | 675 | — | — | 2 | 2 | 677 | 677 |
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Independent Non-Executive Directors | | | | | | | | |
Lisa Fretwell (2) | 175 | — | 10 | — | — | — | 185 | — |
Ed Giera (3) | 280 | 280 | — | — | — | — | 280 | 280 |
Chris Jones | 239 | 235 | 2 | 4 | — | — | 241 | 239 |
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Banco Santander Group nominated Non-Executive Directors (6) | | | | | | | | |
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Antonio Simoes (4) | — | — | — | — | — | — | — | — |
Pamela Walkden (5) | 125 | 31 | 2 | — | — | — | 127 | 31 |
(1)William Vereker's taxable benefit relates to private health care.
(2)Lisa Fretwell was appointed on 1 January 2022. Fees received are in respect of services from that date.
(3)Ed Giera’s 2021 fee has been restated to reflect fees earned in respect of 2021 (reduced by £7,000 to remove payments made in 2021 for services rendered as Senior Independent Director in 2020).
(4)Antonio Simoes was appointed on 30 April 2021.
(5)Pamela Walkden was appointed on 1 October 2021. Fees received are in respect of services from that date.
(6)With the exception of Pamela Walkden, none of the Banco Santander Group nominated Non-Executive Directors received any fees or expenses.
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Annual Report 2022 | Santander UK Group Holdings plc 84 |
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Introduction
The Directors submit their report together with the financial statements for the year ended 31 December 2022. The information in the Directors’ Report is unaudited, except where indicated.
Corporate structure, Subsidiaries and Branches
Santander UK Group Holdings plc is a subsidiary of Banco Santander SA, a Spanish retail and commercial bank with a market share in ten core countries in Europe and the Americas.
Santander UK was formed from two former building societies, Abbey National and Alliance & Leicester, together with the branch network and savings business of Bradford & Bingley, and has operated under a single brand since 2010.
Santander UK Group Holdings plc is a wholly-owned subsidiary of Banco Santander SA and all of its ordinary shares are unlisted and held directly and indirectly by Banco Santander SA.
Santander UK plc'spreference shares are listed on the London Stock Exchange and both the Company and Santander UK plc have other equity instruments in the form of AT1 securities listed on various securities exchange markets, including the London Stock Exchange and Euronext Dublin.
In addition, the Company and Santander UK plc are subject to US Securities Exchange Act reporting requirements as they have debt securities registered in the United States.
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.
As a result of ring-fencing implementation in 2018, and requirements set out in the Financial Services (Banking Reform) Act 2013, Santander UK plc and its subsidiaries comprise of only entities whose business is permitted under the Act as a ring-fenced bank. Other entities including Santander Financial Services (SFS) plc, which is incorporated in England and Wales, are directly or indirectly owned by the Company and SFS has branch offices in the Isle of Man and in Jersey. For more information, see Note 19.
Results and dividends
For details of the results for the year, see the Income Statement in the Consolidated Financial Statements. For more on dividends, see Note 10.
Details of Santander UK’s activities and business performance in 2022, together with an indication of the 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 43.
Directors
Biographies of the Directors are included in the Shareholder information section. Details of their emoluments and interests in shares are outlined in the Directors’ Remuneration Implementation report. For more on changes to the composition of the Board, see the Chair’s report on Corporate Governance and the Board Nomination Committee Chair's report.
Appointment and retirement of Directors
All Directors are appointed and retiredretire in accordance with the Company’s Articles of Association, the UK Companies Act 2006 and the UK Group Framework. The following appointments took place in 2020: William Vereker was appointed as a Director on 1 October 2020 and appointed as Chair on 1 November 2020. The following resignations took place in 2020: Shriti Vadera (Chair & Director), Scott Wheway (SID & INED). Further detailsDirectors are set out in the governance section.
A resolution was passed at the 2019 Annual General Meeting which requires Directorsrequired to retire every year with those wishing to serve again submittingat the Annual General meeting and may offer themselves for election or re-election.
Lisa Fretwell was appointed to the Board on 1 January 2022 as an INED and Mike Regnier joined the Board on 1 April 2022, as an Executive Director and CEO. Nathan Bostock resigned as an Executive Director and CEO on 1 April 2022.
Directors’ indemnities
Directors’ and Officers’ liability insurance cover was in place throughout 2020,the year, in addition to deedsa deed of indemnity which 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.
Theyindemnity which 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 the year-end. Qualifying pension scheme indemnities were also granted to the Trustees of the Santander UK group’s pension schemes.
Employees
We continue to ensure that 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 aims to involve and inform employees on matters that affect them. The intranet is a focal point for communications and the ‘AskHR’ website connects employees to all the information they need about working for Santander UK. We also use face-to-face communication, such as team meetings and roadshows for updates.
Santander UK regularly considers employees’ opinions and asks for their views on a range of issues through regular Santander UK-wideengagement and surveys. For more information, on colleague engagement and initiatives, see the Strategic Report and Board Responsible Banking Committee Chair's Report.
Consultation with Employees
Santander UK has a successful history of working in partnership with its recognised trade unions, Advance and the Communication Workers Union (CWU), who collectively negotiate on behalf of approximately 99.5% of our UK workforce (approximately 99.5% of colleagues).workforce. Both trade unions are affiliated to the Trades Union Congress. We consult Advance and the CWU on significant proposals including those relating to change across the business at both national and local levels.
Employee share ownership
Santander UK continues to operate two all-employee, HMRC-approvedHMRC approved share schemes: a Save-As-You-Earn (Sharesave) Scheme and a Share Incentive Plan (SIP), the latter. Those employees who are designated as Material Risk Takers receive part of which allows employees to purchasetheir annual bonus awards in Banco Santander SA shares from gross salary. Eligible senior management participated in a Banco Santander long-term incentive plan. A further descriptionshares/share linked instruments. Details of the plans and the related costs and obligations can be found in the Notes.
74Santander UK Group Holdings plc
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Share-based payments and compensation sections in Notes 1 and 36.
Disability
Santander UK is committed to equality of employment, access and quality of service for disabled people and complies with 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 a Disability Confident Employer achieving the Leader'Leader' level. 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 in the workplace.
Engagement with stakeholders and employees
Santander UK recognises the importance of fostering relationships with its principal stakeholders and that this is key to the long-term success of our business. We understand the importance of acting fairly and responsibly between members of the Company.
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Annual Report 2022 | Santander UK Group Holdings plc 85 |
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Directors’ report continued |
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Streamlined Energy and& Carbon Reporting (SECR)
In 2020 we usedF123,152,495 kWh of energy, with associated GHG emissions of6,452 tCO2e (market-based emissions). This equates to 0.31 tCO2e per employee, and compares to 139,467,401 kWh and8,693 tCO2e from 2019.
While Covid-19 had a significant impactor details on our figures for 2020, we have a programme of initiatives to improve energy use, carbon emissions and efficiency measures implemented in 2022 including Scope 1, 2 and reduce our impact on3 data, see the environment. These are outlinedSECR section in our Strategic Report. We calculate our emissions using the UK government Department for Environment, Food and Rural Affairs (DEFRA) conversion factors. For full data and methodology, please see our ESG Supplement.Sustainability Review.
Political contributions
In 20202022 and 2019,2021, no contributions were made by the Company for political purposes and no political expenditure was incurred.incurred by the Company.
Share capital
Details about the structure of the Company’s capital can be found in Note 32.
For details of employee share schemes and how rights are exercisable, see Note 37.36.
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. Santander Financial Services plc, a subsidiary of the Company, has branch offices in the Isle of Man and in Jersey. For more information, see Note 19.Association. These are available for inspection on request.
Financial instruments
The financial risk management objectives and policies of Santander UK and the policy for hedging, along with details of Santander UK's exposure to credit risk, market risk and liquidity risk are outlinedset out in the Risk review.
Research and development
Santander UK has a comprehensive product approval process and policy. New products, campaigns and business initiatives are reviewed by Santander UK’s Proposition Approval Forum.
Supervision and regulation
Some of Santander UK’s subsidiaries and associatesjoint venture companies are authorised by the FCA and the PRA (dual regulated) or the PRA or the FCA and regulated by the FCA or both the FCA and the PRA(solo regulated).
While Santander UK operates primarily in the UK, it is also subject to the laws and regulations of the other jurisdictions in which it operates or has listed debt securities such as the rules of the SEC for its activities in the US.
Internal controls
Risk management and internal controls
The Board and its Committees are responsible for reviewing and ensuring the effectiveness of management’s system of risk management and internal controls.
We have carried out a robust assessment of the principal and emerging risks facing Santander UK 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
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 UK-adopted international accounting standards (IAS) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and endorsed by the EU.. Santander UK’s internal control over financial reporting includes:
–Policies and procedures that relatepertain to the maintenance of records that in reasonable detail accurately and fairly and accurately reflect the transactions and dispositions of assetsassets.
–Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with UK-adopted IAS and IFRS, and that receipts and expenditures are being made only as authorised by managementin accordance with authorisations of 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 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 20202022 based on the criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in May 2013.
As a registrant under the US Securities Exchange Act of 1934, Santander UK Group Holdings plc’sUK'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 Holdingsplc’sUK's Financial Statements and the Form 20-F submitted to the US Securities and Exchange Commission.SEC.
In line with COSO and SEC requirements, those controls recognised as Sarbanes-Oxley applicable are subject to annual testing and certification by management including an attestation by the Chief Executive Officer (CEO)CEO and the Chief Financial Officer (CFO)CFO that the controlsthey are operating effectively and that the internal control over financial reporting can be relied on.
AnyAll Sarbanes-Oxley control weaknesses identified are captured, assessed and included withinin the year endyear-end assessment of the reliability of the Internal Control environment. These weaknessesThey are
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reported on an ongoing basis to the Board Audit Committee to ensure continuous improvements to the control environment are achieved.is continuously improved.
Based on this assessment, management concluded, at 31 December 2020,2022, that Santander UK’s internal control over financial reporting was effective.
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 2020.2022. 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 2020,2022 , 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. | | | | | | | | | | | | | | |
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Statements of Compliance
The UK Corporate Governance Code 2018 (the Code)
Santander UK voluntarily complies with the Code wherever applicable in order to achieve the best standards of corporate governance.
Thegovernance.The Code applied to the financial year ended 31 December 2020. The2022 and the Board confirms that it applied the principles and complied with those provisions of the Code throughout the year, except as detailed as follows:
–Provision 5: The Company has not appointed a Non-Executive DirectorNED to represent the views of the workforce, as this entity does not have a workforce. For further details, see 'Views of the workforce at the Board' in the Chair's Report in the Corporate Governance Section;Section. The Board does however, receive regular updates on the culture of the business and the views of employees from engagement surveys feedback. These provide the Board with an understanding of the wider workforce and provide meaningful dialogue at Board meetings on workforce matters.
–Provision 11 and 17:11: The Company does not comply with the requirement for at least half the Board, excluding the Chair, to be Non-Executive DirectorsNEDs whom the Board considers to be independent. This is because our shareholder requires at least half the Board, including the Chair, to be independent (for details, see Board membership in the Chair’s Report on Corporate Governance). This also affects compliance with Nomination Committee membership (majority INEDs) as the Chair is not treated as independent following appointment. We have assessed the implications and believe that the approach we follow is appropriate for our size and ownership structure. Furthermore, no one person or group of individuals dominates the Board’s decision-making.For details, see the Chair’s report on Corporate Governance.
–Provision 24:17: The Board Audit CommitteeCompany does not meetcomply with the requirement for the Board Nomination Committee (BNC) membership requirementsto comprise a majority of INEDs, following the Code. For details, seeappointment of Pamela Walkden, as a GNED in October 2021. Whilst Pamela Walkden is not an INED, her credentials and experience were felt to be invaluable to the 'Board Committees' inBNC. We have assessed the Chair’s Report onCorporate Governance section;implications and believe that the approach we follow is appropriate for our size and ownership structure.
–Provision 32:25: The RemunerationBoard Risk Committee does(BRC), since the appointment of Pamela Walkden as a GNED in October 2021, has not meetbeen composed of only INEDs. We have assessed the membership requirements ofimplications and believe that the Code. For details, see 'Board Committees' inapproach we follow is appropriate for our size and ownership structure, recognising the Chair’s Report on Corporate Governance section;experience and expertise that the GNED brings to BRC.
–Provision 36: The Board Remuneration Committee has not developed a policy for post-employmentpost-employment shareholding requirements. TheHowever, the structure of variable pay for executive directorsEDs and other senior executives ensures that individualsthey acquire a meaningful shareholding in Banco Santander SA which is held over a period forof up to eight years and which may extendextends for a significant period post employment. The Remuneration Committee does not intend to introduce a formal post employment shareholding policy for executive directors at this time, but will continue to keep this under review. For further details, see the Remuneration Policy Report;Report.
–Provision 38: With effect from January 2021, alongside the other Executive Directors, the Chief Executive Officer's pension provision is aligned with the current workforce average. For further details, see the Remuneration Implementation Report;
–Provisions 40 and 41: When determiningDue to commercial sensitivity, we have opted not to provide all of the disclosures required by Provision 41. The details not provided relate to (1) the extent to which discretion has been applied to remuneration policy,outcomes and the reasons why and (2) a description, with examples, of how the Board Remuneration Committee considershas addressed the factors in Provision 40 (specifically predictability as we do not provide the range of clarity, simplicity, risk, predictability, proportionality, and alignment to culture, and in particular how our remuneration policy and practices align to Santander UK’s corepossible values of Simple, Personal and Fair. Regularrewards to individual directors). Specific engagement takesdoes not take place with our shareholderthe workforce to ensure alignmentexplain how executive remuneration aligns with remuneration constructs acrosswider company pay policy. However, an explanation is available for employees in the wider Banco Santander group whilst ensuring that all regulatory requirements and expectations are met and the outcome of these discussions drives our bonus pool construct.Directors’ Remuneration Report. Details of the structure of our remuneration arrangements and key considerations of the Committee in the year are included in the Board Remuneration Committee Chair's Report. Due to commercial sensitivity, whilst we have chosen to provide details of our pay arrangements beyond the requirements for an entity with our ownership structure, we have chosen not to provide all of the disclosures required by this part of the Code. The details not provided relate to individual award opportunities and certain descriptions of the Committee’s work. For further details, see theReport, Remuneration Policy Report.and Implementation Reports.
The Code is publicly available on the Financial Reporting Council website at www.frc.org.uk.
UK Finance Disclosure Code for Financial Reporting Disclosure
Santander UK’s financial statements for the year ended 31 December 20202022 have been prepared in compliance with the principles of the UK Finance Disclosure Code for Financial Reporting Disclosure.Reporting.
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. They understand the importance to act fairly and responsibly between members of the company.
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Going concern
The going concern of Santander UK is reliant on preserving a sufficient level of capital and adequately funding the balance sheet. In making their going concern assessment in connection with preparing the financial statements, the Directors considered a wide range of information similar to that considered as part of the their assessment of longer-term viability including Santander UK’s long-term business and strategic plans, forecasts and projections, estimatedthose associated with climate change, capital fundingposition and liquidity requirements,and funding profile, stress scenarios, and contingent liabilities, and the reasonably possible changes in trading performance arising from potential economic, market and product developments.
During 2020, Government and Central Bank responses to Covid-19, including lending and financial stability measures and significant restrictions on people's movement, resulted in significant operational and financial impacts for Santander UK and its customers. The Directors' assessment therefore specifically considered the impacts of Covid-19, including for the following areas:
–Economic scenarios and weights: These underpin our ECL impairment allowances and are discussed in detail in the Credit risk sectionincluded consideration of the Risk review. The Directors reviewed the economic scenarios, revised as a result of Covid-19, to ensure that they captured the wide range of potential outcomes for the UK economy. These include a re-emergence of the virus and further lockdown measures being imposed, a slower economic recovery, and lag effects caused byimpacts arising from higher and longer unemployment rates.
–Liquidity: Although the key aim of the UK Government’s financial support measures introduced during 2020 (including the TFS and TFSME) was to limit damage to the wider economy from Covid-19, they had the side-effect of reducing any potential liquidity risks arising due to Covid-19. Although Covid-19 did not trigger a liquidity stress, its immediate negative impacts on liquidity, such as the drawing of committed credit and liquidity facilities, were largely offset by deposits from those same drawings as corporates reduced their spending. Similarly, the impact of the initial effective shutdown of the mortgage market and payment holidays granted to customers was offset by better than expected retail deposit balances as customers reduced their spending.
–Capital: Santander UK remains strongly capitalised and Covid-19 did not trigger a capital stress. As part of the Bank of England Interim Financial Stability Report (May 2020), the PRA developed a desktop stress scenario, which had less of an impact over the first two years of the scenario on the core banking system than their 2019 Stress Test, where our CET1 drawdown was the lowest across UK banks and we exceeded CET1 capital ratio and Tier 1 Leverage ratio hurdle rates across the projection horizon. We paid an ordinary share dividend in December in accordance with the PRA’s approach to shareholder distributions for 2020.
–Customers: Santander UK has supported many thousands of individuals and businesses affected by Covid-19 with a range of measures, including payment holidays on mortgages, personal loans and credit cards as well as taking an active part in UK Government’s loan schemes to help businesses. We are working with those customers who are experiencing difficulties to understand their individual situations and help them resume payments.
–Operations: All our operations continue to operate effectively with a significant majority of employees working from home and the majority of branches remaining open and returning to more normal hours. The current operating model could be sustained indefinitely with additional resilience being continuously implemented and is not affecting our ability to operate all our services, or raising concerns about our Business Continuity Planning, and
–Key suppliers: Suppliers are being closely monitored in line with our Third Party Risk Management Framework. No significant service issues were reported across our cohort of critical suppliers, and no material issues were reported across our broader (non-critical) supply chain. Isolated supplier impacts are being separately managed.living costs.
Having assessed this information and the principal risks and uncertainties, the Directors are satisfied that the Santander UK group has adequate resources to continue operations for a period of at least twelve12 months from thatthe date of this report and therefore consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.
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Ethical Code of Conduct
Santander UK is committed to maintainingensuring we hold ourselves to high ethical standards –standards. This means adhering to laws, regulations, policies including our Ethical Code of Conduct and regulations, conductingalso carrying out business in a responsible way,way. High standards of professional and treating all stakeholders with honestypersonal conduct helps Santander identify, manage and integrity. These principles are further reflected inrespond to risks, creates a positive, collaborative working environment and it ensures positive customer interactions and outcomes.
The Santander Way determines how we deliver on our purpose, to help people and businesses prosper. How we deliver that purpose is as important as the end result. Our conduct and our culture matters. Our aim is to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our colleagues, customers and communities.
How we do business is intrinsically linked to our behaviours and values and supports our aim. Santander UK’s Ethical Code of Conduct which sets out the standardstandards expected of all employees. Under theircolleagues and forms part of the terms and conditions of employment, employees are requiredemployment.
It makes clear our corporate values, our expectations regarding corporate behaviours and general principles and standards we expect with regard 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 orcustomers, colleagues, conflicts of interest.interest, data, media and our approach to sustainability.
EmployeesThere are also requirednumerous policies, processes, support and guidance that help colleagues meet these expectations and do the right thing to comply with all Company policies, which require employees to:
–Abide by all relevant laws and regulations
–Act with integrity in all their business actions on behalf ofensure Santander UK remains a Simple, Personal and Fair bank for its colleagues, customers, shareholders and the communities it serves.
–Not use their authority or office for personal gain
–The Ethical Code of Conduct business relationships in a transparent manner
–Rejectapplies to all improper practices or dealings to which they may be exposed.
colleagues including permanent and temporary colleagues as well as EDs and NEDs. The SEC requires companies to disclose whether they have a code of ethics that applies to the Chief Executive OfficerCEO 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 and supporting policies, including but not limited to 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.
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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 towill continue in the office of auditor and aauditor. A resolution to reappoint them will be proposed at the Company’s forthcoming Annual General Meeting.
By Order of the Board
John Mills
Company Secretary
1 March 2023
2 Triton Square, Regent’s Place,
London NW1 3AN
Simon Mitchley
Company Secretary
2 March 2021
2 Triton Square,
Regent’s Place,
London NW1 3AN
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Risk review | | | |
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The Risk review consists of unaudited financial information unless otherwise stated. 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. | | Contents | |
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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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| Risk Framework
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| Risk Appetite | 85 |
| Stress Testing | 86 |
| How risk is distributed across our business | |
| Credit risk | 87 |
| Santander UK group level | 87 |
| Retail Banking | 115 |
| Other business segments | 130 |
| Market risk | 144 |
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| | Conduct and regulatory risk | |
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| | Legal risk | 179 |
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Risk governance
INTRODUCTION
INTRODUCTION
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 with some overlap in membership, albeit the principal business activities of the Santander UK group are carried out 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 consistent application.
As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance, withstand stresses, such as the impacts of the Covid-19 pandemic, and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.
In 2020, the Covid-19 pandemic had a material impact on our business and financial performance, and our risk profile. The main impacts were felt in credit risk and operational risk, although other risks such as conduct and reputational risk were also affected. In response, we managed the evolution of our credit and operational risk profiles across the business. Challenges remain, such as the significant increase in cyber and fraud risk seen across the industry. We have prioritised monitoring and oversight of these and other key operational risks with enhanced reporting and input to IT strategy, data management and business transformation. Detailed discussions of the impact of Covid-19 on specific risk types are set out in the relevant sections of this Risk review and summarised in the 'Risk management overview' in the Strategic report.
RISK FRAMEWORK
How we define risk
Risk is any uncertainty about us being able to achieve our business objectives. It covers both financial and non-financial risks (NFRs). NFR is a broad term usually defined by exclusion, i.e. any risks other than the traditional financial risks of Credit, Market, Liquidity, Capital and Pension, and Strategic and business risk. Risk 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
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Key riskRisk types | Description |
Credit | The risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for whichwhom we have assumed a financial obligation. |
Market | BankingNon-traded market risk – the risk of loss of income, economic or economicmarket value due to changes to interest rates in the bankingnon-trading book or to changes in other market risk factors (e.g. credit spread and inflation risk), where such changes would affect our net worth through a change to revenues, assets, liabilities and off-balance sheet exposures in the bankingnon-trading book.
TradingTraded market risk– the risk of changes in market factors that affect the value of positions in the trading book.
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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 and market expectations. |
Pension | The risk caused by our statutory, contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to a moral obligationan agreed Recovery Plan or for some other reason. |
Operational risk & resilience | The risk of loss or adverse impact due to inadequate or failed internal processes, people and systems, or external events. We give a particular focus to Cyber, Fraud, IT, People and Third Party risks, which we mitigate through our management of operational risk. |
Conduct and regulatory | Conduct risk– the risk that our decisions and behaviours lead to a detriment or poor outcomeoutcomes 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 riskFinancial crime | The risk of loss due to inadequate or failed internal processes, people and systems, or external events. We give a particular focus to the following risks which we mitigate through our management of operational risk: Cyber – 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.
Change and transformation – 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.
People – People risk include all risks related to employees and third parties working for us, covering resource management, health & safety and employee relations.
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Other key risk types | Financial crime risk – the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, facilitation of tax evasion, 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 affecting our customers and the communities we serve.
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Other risk types | Model risk – the risk that the predictions of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately. Legal risk – the risk of an impact arising from legal deficiencies in contracts; failure 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. Strategic and business risk – the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their poor implementation 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. |
In January 2023, the Legal risk framework, in agreement with the General Counsel, was retired following a structural change when the Chief Legal and Regulatory Officer (CLRO) left the organisation and the Legal function moved to the CFO Division (Line 1). As the Risk Types are owned by Risk control units (Line 2 in our three lines of defence model, as set out in 'Risk organisational structure' section that follows), and the CFO Division is a Risk management unit (Line 1), it was decided to retire the Legal risk type and framework. Where appropriate, elements of the existing Legal risk framework will be subsumed into the other relevant risk frameworks. Within the Risk Framework, the roles and responsibilities of CFO have been expanded to include the oversight of the General Counsel and Legal function, overseeing the provision of legal support to Santander UK, and management of relationships with third party law firms.
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Annual Report 2022 | Model riskSantander UK Group Holdings plc – the risk that the predictions of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately.91
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Top and emerging risks
Several of our key risk types also have topTop risks associated with them. We regularly review the topTop risks that could impact our business, customers and shareholders, and they are monitored monthly at each meeting of the ERCC and BRC. The topTop risks we actively monitored over 2020in 2022 are set out in the relevant section of this Risk review and summarised in the ‘Top risks’Top risks section of the 'RiskRisk management overview'overview in the Strategic report. Our topTop risks included the first and second order risks arising from Covid-19, Brexit, capital strength, financialInflationary and supply chain pressures, Climate change, Financial crime, conductFraud, IT, Cyber, People and operational risks.Conduct and regulatory.
We also regularly review emerging risks that could impact our business, customers and shareholders, including regular review and discussion at the ERCC and BRC. The identification of emerging risks is co-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, environment (including climate change),broader geo-political, environmental and social risks, technology change, customer behaviour, market competition, regulation, government, digital assets and economic changes.disruption of UK macroeconomic factors. Emerging risks actively monitored over 2020in 2022 are set out in the relevant section of this Risk review and summarised in the ‘Emerging risks’ section of the 'Risk management overview'overview in the Strategic report.
We introduced six newIn 2022, we added Eurozone/Sovereign Bank Contagion to the emerging risks we monitor and transitioned Inflationary and supply chain pressures to our risk radar in 2020, several of which reflectedTop risks. For more, see the impact of the Covid-19 pandemic. They consisted of negative rates, extended government involvementRisk management overview in the banking industry, an extended period of economic contraction, high inflation, disruption of macro-economic factors, and other environmental and social issues. We also continued to monitor previously identified emerging risks including changing customer behaviour, rapid technological change, LIBOR transition and climate change.Strategic report.
Key elements
Our Risk Framework sets out how we manage and control risk. In 2020,2021, we updated it with a new standardenhanced some of the standards to considerprovide more details and clarity on the impact for risks related to climate changerelationship between, and also added additional controls to deal with potential conflictsroles of, interest which might affect Santander UK.
As a group, Banco Santander supports the recommendations of the TCFD, which were published with the aim of improving disclosure of climate financial risksSA and opportunities. We also welcome theSantander 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 torisk drivers whether physical or transition-led, and the Statementdevelopment 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.risk methodologies and quantitative models.
How we approach risk – our culture and principles
The complexity and importance of the financial services industry demands a strong risk culture. We have extensive systems, controls and safeguards in place to manage and control the risks we face, but it is also crucial that everyone takes personal responsibility for managing risk. Our risk culture plays a key role in our aim to be the best bank for our customers, shareholders, people and communities by acting responsibly. It is vital that everyone inall our business understandspeople understand 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:
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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. Senior executives are responsible for promoting our risk culture from the top. They drive cultural change and increased accountability across the business. We reinforce our Risk Culture Statement and embed our risk culture in all our business units through our Risk Framework, Risk Certifications and other initiatives. This includes highlighting that:
–It is everyone’s personal responsibility to play their part in managing risk
–We must Identify, Assess, Manage and Report risk quickly and accurately
–We make risk part of how we assess our people’s performance and how we recruit, develop and reward them
–Our internal control system is essential to ensure we manage and control risk in line with our principles, standards, Risk Appetite and policies.
We use Risk Certifications to confirm how we manage and control risks in line with our Risk Framework and within our Risk Appetite. As an example, every year, each member of our Executive Committee confirms that they have managed risk effectively 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 culture programme – I AM Risk
The Covid-19 pandemic has created additional risks in our business. At the same time, we continue with significant transformation programme activities, while dealing with a highly competitive financial services sector and a challenging political and regulatory environment. At times of change, it is important that we make the decisions that help us achieve our goals while supporting and protecting our colleagues and customers. 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:
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–Identify risks and opportunities –Assess their probability and impact –Manage the risks and suggest alternatives –Report, challenge, review, learn and ‘speak up’. | |
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. To support general awareness, our learning websites includes e-learninginclude 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.processes. The Executive Committee leads our culture initiatives under the CEO’s sponsorship. In our most recent employment engagement survey, 94% of employees recognised their personal responsibility for the risks they face in their day-to-day work. This demonstrates howsponsorship and we have embedded risk management inuse monthly staff surveys to give insight into our culture.
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I AM Risk in Action - Our Covid-19 Response
Our I AM Risk ethos was demonstrated through our response to the Covid-19 pandemic when we were faced with the rapid deployment of colleagues to remote working. This required a comprehensive review of the increased risks of remote working by all areas of the business. In addition, we devised additional mandatory training material at pace, in order to support our colleagues in their new working environments and to help them protect our customers. As the pandemic progressed and our colleagues were returning or continuing to work in our branches and offices, we created training to support them and to help them comply with the relevant government guidelines.
I AM Risk Week 2020
In November 2020, we once again joined colleagues from across the Banco Santander group to celebrate our risk culture, with an emphasis on our Speak Up behaviour. During this time, we encouraged our colleagues to use our I AM Risk resources to:
–Use our new and dynamic Speaking Up Channels Guide on the intranet to help find the right channels to raise any concerns
–Recognise a colleague for good risk behaviour
–Share a story of how an individual or team have taken personal accountability for risk.
Our risk governance structure
We are committed to the highest standards of corporate governance in every part of our business, including 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 have specific responsibilities for risk management
–Risk organisational structure: We have the ‘three lines of defence’ model built into the way we run our business.
Committees
The Board and Board Level Committee responsibilities for risk are:
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Board Level Committee | Main risk responsibilities |
The Board (including the Santander UK plc Board) | –Has overall responsibility for business execution and for managing risk |
–Reviews and approves the Risk Framework and Risk Appetite.Appetite |
Board Risk Committee (BRC) | –Assesses the Risk Framework and recommends it to the Board for approval |
–Advises the Board on our overall Risk Appetite, tolerance and strategy |
–Oversees our exposure to risk and our strategy and advises the Board on both |
–Reviews the effectiveness of our risk management systems and internal controls.controls |
–Receives regular updates on financial crime compliance and risks including money laundering, bribery and corruption and sanctions compliance and monitors KPIs in line with approved Board risk appetite |
Board Responsible Banking Committee | –Responsible for culture and operational risk from conduct, compliance, competition financial crime & legal matters |
–Reviews reports from the CLRODirector of Compliance (DoC) on the adequacy and effectiveness of the compliance function |
–Ensures that adequate and effective control processes are in place to identify and manage reputational risks |
–Oversees our Corporate Social ResponsibilitySustainability and Responsible Banking programme and how it impacts on employees, communities, the environment including sustainability and climate change, reputation, brand and market positioning.positioning |
Board Audit Committee | –Monitors and reviews the financial statements integrity, and any formal announcements on financial performance |
–Reviews the adequacy and effectiveness of the internal financial controls and whistleblowing arrangements |
–Monitors and reviews the effectiveness of the internal audit function.function |
–Oversees the independence and performance of our auditors.the external auditors |
Board Remuneration Committee | –Oversees implementation of remuneration policies, ensuring they promote sound and effective risk management.management |
The Executive Level Committee responsibilities for risk are:
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Executive Level Committee | Main risk responsibilities |
Executive Committee (ExCo) | –Reviews business plans in line with our Risk Framework and Risk Appetite before they are sent to the Board to approve.approve |
–Receives updates on key risk issues managed by CEO-level committees and monitors the actions taken.taken |
Senior Management Committee | –Focuses on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged |
–Reviews updates on key risk issues, customer, reputational and conduct matters.matters |
Executive Risk Control Committee (ERCC) | –Reviews Risk Appetite proposals before they are sent to the Board Risk CommitteeBRC and the Board to approve |
–Ensures that we comply with our Risk Framework, Risk Appetite and risk policies |
–Reviews and monitors our risk exposures and approves any corrective steps we need to take.take |
Asset and Liability Committee (ALCO) | –Reviews liquidity risk appetite (LRA) proposals |
–Ensures we measure and control structural balance sheet risks, including capital, funding and liquidity, in line with the policies, strategies and plans set by the Board |
–Reviews and monitors key asset and liability management activities to ensure we keep our exposures within our Risk Appetite.Appetite |
Pensions Committee | –Reviews pension risk appetite proposals |
–Approves actuarial valuations and reviews the impact they may have on our contributions, capital and funding |
–Consults with the pension scheme trustees on the scheme’s investment strategy.strategy |
Capital Committee | –Puts in place reporting systems and risk control processes to make sure capital risks are managed within our Risk Framework |
–Reviews capital adequacy and capital plans, including the ICAAP, before they are sent to the Board to approve.approve |
Incident Accountability Committee | –Considers, calibrates, challenges and agrees any appropriate individual remuneration adjustments |
–Presents recommendations to the Board Remuneration Committee.Committee |
Credit Approval Committee | –Approves corporate and wholesale credit transactions which exceed levels delegated to lower level forums or individuals.individuals |
Investment Approval Committee | –Approves equity type investment transactions which exceed levels delegated to lower level approval forums or individuals.individuals |
FinancialEconomic Crime Committee | –Ensures due reporting, consideration, oversight and informed decision making regarding compliance by the Company and its subsidiaries with financial crime laws and regulations, fraud, and best industry practice aligned to the Company’s stated risk appetite.our Risk Appetite |
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Key senior management roles
Senior roles with specific responsibilities for risk management are:
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Role | Main risk responsibilities |
Chief Executive Officer | The Board delegates responsibility for our business activities and managing risk on a day-to-day basis to the CEO. The 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 Risk Division leader, overseesOversees and challenges risk activities, and ensures lending decisions areis made within our Risk Appetite. Accountable for control and oversight of credit, market, liquidity, capital, pension, strategic & business, operational, model, climate and model risk.enterprise 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 the CRO with a holistic enterprise wide view of all risks. |
Chief Financial Officer | Responsible for developing strategy, leadership and management of the CFO Division. In supporting our corporate goals within our risk appetite, theThe CFO is responsible for managing interest rate, liquidity, pension and capital risks. The CFO also aims to maximise the return on Regulatory and Economic Capital, ensuring transactions create value with the right risk-based profile.Capital. |
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 CLROCRO 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. |
Director of Compliance (DoC) | Responsible to the CRO for control and oversight of conduct and regulatory risk and Compliance but has regulatory responsibility to report on this risk type to Executive and Board Committees and the FCA. |
Risk organisational structure
We use the ‘three lines of defence’ model to manage risk. This model is widely used in the banking industry and has a clear set of principles to 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:risk are as follows:
Line 1: Business Units and Business Support Units identify, assess and manage the risks which originate and exist in their area, within our | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Line 1: Risk Appetite.Line 2: Risk Control Units are independent monitoring and control functions. They are under the executive responsibility of the CEO, but responsible to the CRO for overseeing the first line of defence. They make sure Business Units and Business Support Units manage risks effectively and within our Risk Appetite. The Risk Control Units are: Financial Crime; Conduct & Compliance, responsible for controlling reputational and conduct & regulatory risks; Legal; and Risk, responsible for controlling credit, market, liquidity, capital, pension, strategic and business, operational and model risks.
Line 3: Internal Audit is an independent corporate function. It gives assurance on the design and effectiveness of our risk management and control processes.
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| Business Units and Business Support Units identify, assess and manage the risks which originate and exist in their area, within our Risk Appetite. It is under the executive responsibility of the CEO. | | Business & Business Support Units | | | | | | | | | | | | | | | | | | | | |
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| Line 2: Risk control | | Financial Crime Unit | | | | | | | | | | | | | Board Responsible Banking Committee | | | | |
| Risk Control Units are independent monitoring and control functions. They make sure Business Units and Business Support Units manage risks effectively and within our Risk Appetite. The Risk Control units are: Financial Crime, Risk - responsible for controlling credit, liquidity, capital, market, pension, strategic and business, operational, model and enterprise risks; and Compliance, responsible for controlling reputational and conduct and regulatory risks. It is under the executive responsibility of the CEO, but responsible to the CRO for overseeing the first line of defence. | | | | | MLRO | | | | | | | | | | | | |
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| | Compliance Unit
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| Line 3: Risk assurance | | | | | | | | | | | | | | | Board Audit Committee | | | | |
| Internal Audit is an independent corporate function. It gives assurance on the design and effectiveness of our risk management and control processes. It is responsible to the CIA. | | Internal Audit | | | | | | | | | | | | | | | |
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Internal control system
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, standards, roles and responsibilities, and governance for internal control. Our Risk Framework covers the categories below:
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Category | Description |
Risk Frameworks | Set out how we should manage and control risk across the business, (overall framework), our key risk types (risk type frameworks) and our key risk activities (risk activity frameworks).activities. |
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 each year how they have managed and/or managed/controlled risks in line with our risk frameworks and within our Risk Appetite. They are completed at least once a yearAppetite, and explain any action to be taken. This helps ensure people can be held personally accountable.drive personal accountability. |
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RISK APPETITE
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 adverse but plausible stressed economic and business conditions, as well as to survive a very severe stress that would deplete our capital reserves
–We should be able to predict how our income and losses might vary – that is, how volatile they are. That applies to all our risks and lines of business
–Our earnings and dividend payments should be stable, and in line with the return we aim to achieve
–We are an autonomous business, so we always aim to have strong capital and liquidity resources
–The way we fund our business should be based on diverse funding sources and duration. 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 differentacross all types of risk, using metrics and qualitative statements.
Metrics
We use metrics to set limits across most risk types including a set of metrics focused 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 a range of plausible stress scenarios for our business
–Concentration limits, to determine the maximum concentration level that we are willing to accept.
These limits apply in normal business conditions, but also when we might be experiencing a far more difficult economic environment. A good example of this might be when the UK economy is performing much worse than we expected, such as in 2020 due to the Covid-19 pandemic. We refer to conditions like this as being under stress. SeeFor more on EC and stress scenarios, onsee the next page.
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 operational risk, we use them to describe our risk-averse appetite for 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 changes in the markets and economic environment in which we operate, such as due to the Covid-19 pandemic.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.portfolios. 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.
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STRESS TESTING
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.
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, inflation, and the size of the UK economy. OneWe also explore sensitivities around several macro variables where there may be concerns or levels of uncertainty.
In 2021 and 2022, we completed the Bank of England’s (BoE) Climate Biennial Exploratory Scenario (CBES). The purpose of this exercise was to investigate a range of risks that may not be directly linked to prevailing economic and financial conditions and helps us to prepare for possible future shocks. The CBES tested the resilience of the scenarios used in 2020 considered a further level of stressUK financial system to the UK economy drivenphysical and transition risks associated with three different climate pathways. The key climate factors included physical risks due to higher global temperatures, and transition risks due to the structural changes needed to transition to a low-carbon economy.
In 2022, we also developed a Climate Internal Scenario Analysis (CISA) to help understand better the potential impact of climate change on our business portfolios and balance sheet. We generated three qualitative scenarios for climate-related risks and we also quantified potential losses from an early disorderly transition, for example linked to the current energy crisis and conflict in Ukraine. The CISA outputs will form the basis of our 2022 ICAAP for climate risk by a resurgence ofhelping show if we need to hold more capital for climate-related risk and help us prioritise our actions for the coronavirus cases in Q4 2020. This scenario is characterised by a double dip in GDP growth and unemployment reaching near 12%. We use a comprehensive suite of stress scenarios to explore sensitivities to market risk, including those based on historical market events.next five years.
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
–Our long term impacts of climate change, through the CBES and our CISA
–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.mortgage or other loans.
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 business plans that aim to mitigate damaging effects.potential impacts of possible stress scenarios.
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, ILAAP and ILAAP.CISA. The Board Risk CommitteeBRC approves the stress testing framework. The Board reviews stress test outputs as part of the approval processes for the ICAAP, ILAAP, Bank Recovery and Resolution Directive (BRRD), our Risk Appetite and regulatory stress tests.tests, including CBES.
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.PRA and the BoE. We also contribute to stress tests of Banco Santander SA 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
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 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 2020, the largest category continued to be2022, over half of our total risk-weighted assets accounted for credit risk in Retail Banking, which accounted for more than half of our risk-weighted assets.Banking. This reflects our business strategy and balance sheet.
For more on this, see ‘Risk-weighted assets’ in the ‘Capital risk’ section.
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Credit risk
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| Overview Credit risk is the risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for whichwhom we have assumed a financial obligation. Santander UK group level
We start by discussing credit risk at a Santander UK group level. We set out how our exposures arise our types of customer and how we manage them, and our approach to credit risk across the credit risk lifecycle. We discuss our ECL approach and the key inputs to our ECL model. We also summarise various Covid-19 support measures provided to our customers and their impact on ECL. We then analyse our key metrics, credit performance and forbearance, and highlight how Covid-19 affected them where relevant.
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.forbearance.
| | | Key metrics Stage 3 ratio increasedimproved to1.42% (2019: 1.15% 1.24% (2021: 1.43%).
Loss allowances increased to £1,377m (2019: £863m)£1,007m (2021: £866m). AverageBalance weighted average LTV of64% (2019: 65% 69% (2021: 66%) on new mortgage lending.
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Credit risk – Santander UK group level
SANTANDER UK GROUP LEVEL – CREDIT RISK MANAGEMENT
Exposures (audited)
Exposures to credit risk arise in our business segments from:
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Retail Banking | | Consumer Finance | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre |
In Homes: –Residential mortgages business banking, consumer (auto) finance and other unsecured lending (credit cards, personal loans and overdrafts)for customers with good credit quality (prime lending). –We provide these mostly for owner-occupiers, with buy-to-let mortgages for non-professional landlords. In Everyday Banking: –Unsecured lending to individuals, such as loans, credit cards and small businesses.overdrafts. –Banking services to businesses with turnover up to £6.5m per annum and simpler borrowing needs. We offer loans, credit cards and overdrafts. | | –Financing for cars, vans, motorbikes and leisure vehicles through Santander Consumer (UK) plc (SCUK). –Through our joint ventures, Hyundai Capital UK Ltd and Volvo Car Financial Services UK Limited, we provide retail point of sale customer finance and wholesale finance facilities (stock finance). | –Loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance. –We provide these to SMEs and midmid-sized corporates with turnover up to £500m per annum, Commercial Real Estate and Social Housing associations. | –Loans, bank accounts, treasury services, treasury markets activities, trade finance, receivables discounting and cash transmission.
–We provide these to large corporates and financial institutions.
| –Asset and liability management of our balance sheet, as well as our non-core and Legacy Portfolios being run down.legacy portfolios in run-off. –Exposures include financial institutions (derivatives and other treasury products), structured products, and sovereign and other international organisationsupranational assets that we holdchosen for diversification and liquidity. –Crown Dependencies - mainly residential mortgages to individuals in Jersey and the Isle of Man. |
The segmental basis of presentation in this Annual Report has changed following the transfer of Social Housing loans and non-core liabilities to our CCB segment from Corporate Centre. Comparatives have been changed, and the prior periods restated to report some customer assets in Corporate & Commercial Banking rather than in Business Banking (in Retail Banking), some non-core corporate mortgages in Corporate & Commercial Banking rather than in Corporate Centre, and a number of smaller business lines in Corporate Centre rather than in Corporate & Investment Banking.accordingly. 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 to the type of customer. We classify our customers as standardised or non-standardised:
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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.
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–We manage risk using automated decision-making tools. These are backed by teams of expert analysts.
| –We manage risk through expert analysis with support from internal risk assessment models.
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| For many of our business customers, the impact of the Covid-19 pandemic has been extreme with, in some cases, revenue streams disappearing overnight and cash flows becoming very challenged. Many businesses that had been performing well were suddenly faced with considerable unforeseen challenges. Given the scale of these issues and their impact on the wider economy, it is understandable that the UK Government wanted to provide financial help and recognised that one of the most efficient ways to do so quickly was through the banking sector.
The result was the rapid development, introduction and implementation of the government-backed loan schemes, BBLS, CBILS and CLBILS. We mobilised quickly to implement these schemes in a way that allowed our customers to get much needed support quickly. In a matter of months, we granted such loans to circa 150,000 customers totalling £4.6bn, consisting of £4.0bn BBLS, £0.4bn CBILS and £0.2bn CLBILS. These loans ensured that our customers had liquidity to allow them to survive, and adapt their business models to the new environment. Almost all of our government-backed loans have been to existing customers, with an incredible 111,000 BBLS loans made to existing customers who had never borrowed from us before. Almost all of the remainder of the BBLS loans have been made to existing borrowers.
The rapid support provided to so many of our business customers has strengthened and deepened many of our customer relationships. |
Covid-19 loan schemes |
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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 makingplanning, through assessment and origination, monitoring, arrears management and debt recovery. We make 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 Bankingproduct and the Credit risk – Other business segments sections.regularly review our approach and refine it when we need to.
1. Risk strategy and planning (audited)
All relevant areas of the business work together to create our business plans. We aim to balance our strategy, goals, and financial and technical resources with our Risk Appetite. To do this, we focus on economic and market conditions and forecasts, regulations, conduct 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 (audited)
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.back and can afford to, even if their circumstances change. We performundertake a thorough risk assessment to make sure customersa customer can meet their obligations before we approve a loan. We take proportionate steps to assess whether a customer will be able to repay the money borrowed. We do this by a series of initial affordability and credit application. Theserisk assessments. We access each customer’s credit profile and signs of how reliable they are at repaying credit. When a customer applies, we assess the data they provide, plus data from credit reference agencies (for Retail Banking and Consumer Finance) and performance on their other Santander accounts (if they have any) against our Credit Policy.
Retail Banking
In Homes, for secured loans, we assess affordability by reviewing the customer’s income and spending, their other credit commitments, and what would happen if interest rates went up. Many of our decisions are made with authority from the Board and consider:
–The credit quality of the customer
–The underlying risk and how we can mitigate it, such as through netting or collateral, or participation in Government-sponsored programs, such as the coronavirus support loan schemes introduced in 2020
–Our risk policy, limits and appetite
–Whether we can balance the amount of risk we face with the returns we expect, and
–Assessment of customer affordability.
We lend responsibly by having a number of prohibitions and restrictions on a range of activities. For details, see the 'Other business segments - credit risk management' section.
3. Monitoring (audited)
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 performautomated as we expect, we investigateuse data available to understand the reasons. Then we take action to mitigate it as far as possibleus. We tailor our process and bring performance back on track. We monitor and review our risk profile through formal governance forums and committees across our 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 want to offer in that country. For more geographical information, see ‘Country risk exposures’.
Industry concentrations
We also set exposure limits by industry sector. We set these limitsapplication assessment based on the industry outlook,product. More complex transactions often need greater manual assessment using our strategic aimscredit underwriters’ skill and desired levelexperience.
In Everyday Banking, similar to Homes, many of concentration,our decisions are automated and relevant limits set by Banco Santander. We analyse committed exposures inwe tailor the ‘Credit risk review’.
4. Arrears management (audited)
Sometimes our customers face financial difficulty and 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 cope. This helps us put in place the right strategy to manage their debt
–Work with them to get their account back on track as soon as possible in a way that works for them and us
–Monitor agreements we make to manage their debt, so we know they are working.
For more, see the Forbearance sectionprocess based on the next page.product. We assess affordability on a proportionate basis by reviewing the customer’s income, spending stressed for future inflation, their total credit commitments and accommodation stressed for expected interest rates.
5. Debt recovery
(audited)
Sometimes, even when we have taken all reasonable and responsible steps we can to manage arrears, they are not effective. If this happens, we have to end our agreement with the customer and try to recover the whole debt, or as much of it as we can.
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Loan modifications (audited)
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 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 as forborne. For retail accounts, if an account is in Stage 1 (a 12-month ECL) when we agree forbearance, we transfer it to Stage 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 an account that is deemed unlikely to pay (defined through a number of events listed in our Classification Policy), the forgiveness of fees and interest or debt, or is being granted multiple forbearances which would put the case into Stage 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 to a 12-month ECL once the criteria to exit forbearance have been met, as set out below.
Exit from forbearance or cure
For an account in Stage 3 to exit forbearance, all the following conditions must be met:
–The account has been classed as Stage 3 for at least one year since the end of the latest forbearance strategy
–The account is not deemed unlikely to pay
–The account is no longer in arrears, and the customer has no other material debts with us which are more than 90 days in arrears.
If all the conditions are met, the account is re-classed as Stage 2 forbearance until the Stage 2 forbearance exit conditions set out below are also met.
For an account in Stage 2 to exit forbearance, all the following conditions must be met:
–The account has been classed as Stage 2 for at least two years since the end of the latest forbearance strategy
–The account has been performing, i.e. the customer is no longer in financial difficulty
–Meaningful capital and interest repayments have been made for at least 50% of the two year period
–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 assist them to manage their financial liabilities. In addition, since March 2020, we have provided mortgage customers with payment holiday terms in line with UK Government and FCA guidance. Similar payment holidays have also been granted in respect of consumer (auto) finance, personal loans, credit cards, businesses and corporates. For more on this, see 'Covid-19 Support measures'.
Loans for customers who were provided with payment holidays were considered to have the contract terms modified. The granting of a payment holiday on its own was not considered to be a Significant Increase in Credit Risk (SICR) event, nor was it considered a default under regulatory definitions. Neither were they considered to have been granted forbearance. For customers who have needed further financial support after the payment holiday period, we help them by offering assistance in line with our policies.
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 track credit limits. We use internal data and data from third parties like credit bureaux.
–Models: we use models widely to measure credit risk and capital needs. They range from statistical and expert models to benchmarks.
–Review: we use formal and informal forums to approve, validate, review and challenge our risk management. We do this to help predict if our credit risk will worsen.
Key metrics (audited)
We use a number of key metrics to measure and control credit risk, as follows:
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Metric | Description |
Expected Credit Loss (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. The Stage 3 ratio is the main indicator of credit quality performance. |
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. 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. |
We also assess risks from other perspectives, such as geography, business area, product and process 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.
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Key differences between regulatory EL and IFRS 9 ECL models
There are differences between the regulatory EL and the IFRS 9 ECL approaches. Although our IFRS 9 models use the existing Basel advanced IRB risk components, we need to make several adjustments to ensure the outcome is in line with the IFRS 9 requirements, i.e. the financial reporting standard we use, as follows.
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| Basel advanced IRB EL | IFRS 9 ECL |
Rating philosophy | Mix of point-in-time, through-the-cycle or hybrid | Point-in-time, forward-looking. Considers a range of economic scenarios |
Parameters calibration | Contains regulatory floors and downturn calibration | Unbiased estimate, based on conditions known at the balance sheet date |
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) | PD in the next 12 months | Includes forward-looking economic data and removes conservatism. PD in next 12 months for Stage 1, lifetime for Stages 2 and 3 |
Loss Given Default (LGD) | Lifetime LGD for defaults in the next 12 months | Modelled without regulatory floors and exclusion of indirect costs |
Exposure at Default (EAD) | Exposure at the point of default if the customer defaults in the next 12 months | Floored at amount owed, except on some revolving facilities. Recognises ability for exposure to reduce from the balance sheet date to default date |
SICR | Does not include SICR concept | Includes SICR concept |
Discounting applied | At the weighted average cost of capital to the default date | At the effective interest rate (EIR) to the balance sheet date |
Recognising ECL (audited)
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 since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the risk of a loss being incurred even when it is considered unlikely.
Multiple economic scenarios and probability weights (audited)
For all our portfolios, except CIB, we use five forward-looking economic scenarios. For 2020, they consist of a central base case, one upside scenario and three downside scenarios. We use five scenarios to reflect a wide range of possible outcomes for the UK economy.
(i) For all our portfolios, except CIB
Our forecasting approach
We derive our scenarios in part by using a set of parameters in GDP fan charts published by the Office for Budget Responsibility (OBR). To avoid major changes to the scenarios due to changes in the OBR fan charts, we place more weight on the long-run outlook of the fan charts rather than relying solely on each individual 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 scenario. For 2020 this applied to the Upside 1, Downside 1 and Downside 2 scenarios. 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 fan chart path for our Upside 1 scenario and the 0.3 path for Downside 1. For Downside 2 we use a blend of the Downside 1 scenario and the base case rather than the 2008/09 recession, which is used under BAU. This is because the fall in GDP in the base case is markedly higher than the one seen in 2008/09, due to the lockdown restrictions imposed due to Covid-19. This means that in the longer run the GDP levels in our Downside 1 and 2 scenarios converge. To ensure that Downside 2 is kept consistent with any changes to the OBR fan charts, we calculate the Downside 2 GDP by taking the percentage difference between Downside 2 and Downside 1 GDP in the original forecast and applying this difference to the new Downside 1.
Once we have established the GDP paths 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. These variables are the product of the GDP growth paths we have forecast and the output of the OGEM for these growth paths. We then impose a Bank Rate profile for each scenario using expert judgement. We determine the Bank of England Bank Rate (Bank Rate) by using the base case Bank Rate profile and adjusting this for each of the four other scenarios. To do this, we firstly consider what each of the scenarios is trying to achieve.
For the upside scenario, which has a higher growth path and rising productivity growth, we allow for a managed tightening of the monetary stance, so we assume small increases in Bank Rate. In contrast, for Downside 2 the scenario shows 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 to bring inflation 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. For the Downside 1 scenario, this is aligned to the base case forecast as inflation is similar to that of the base case, and for Downside 3, this shows a negative interest rate profile which the Bank of England follows to try and boost growth with inflation remaining low. In this way, our scenarios reflect a range of possible outcomes that the Bank of England may follow for different growth paths.
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 for the UK economy include further waves of Covid-19 leading to restrictions on economic activity, a further and sharper downturn in global growth, a 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 smooth implementation of a new free trade agreement with the EU with limited trade frictions caused by customs checks and a recovery in global growth, coupled with a move to more open trade.
We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three-year planning processes, or sooner if there is a material change in current or expected economic conditions (as was the case in Q4 2020 when a second national lockdown was imposed). We refresh all our economic scenarios each quarter to reflect the latest data and OBR fan charts if these have changed, which are then reviewed and approved by the Credit Risk Provisions Forum (CRPF). The CRPF also assesses the probability weights at least once a quarter.
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. At the end of 2020, there were no significant differences between our base case forecasts and the consensus views.
In 2020, we were also able to do further peer benchmarking analysis of the economic scenarios using the data the PRA provided, which for Q4 2020 included the mean weighted analysis for a selection of economic variables, including GDP, unemployment rate and HPI. This meant that we could compare our weighted scenarios against the average of our peers to understand what differences there may be. The conclusion of this analysis demonstrated that our economic scenarios were in line with our peers.
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Key changes to our forecasting approach in 2020
In 2020, although the number of alternative scenarios remained the same, we removed the best upside scenario and replaced it with a further downside scenario that reflects the key risks associated with Covid-19. This scenario was developed internally by the Economic Analysis team with the Enterprise Risk team, rather than using a different path from the OBR fan charts, in order to reflect the specific circumstances of Covid-19 and further lockdowns which are unprecedented in the economic history of the UK. In addition there was a slight change to the Downside 1 Bank Rate profile, which in 2019 had Bank Rate rising. In the 2020 scenarios it was decided that in an environment which has seen Bank Rate remain at record lows, there should a be a downside scenario which reflects this status quo i.e. Bank Rate held flat at 10 bps.
Base case
Two key assumptions underpin the base case. Firstly it assumed a trade agreement was negotiated with the EU and that further discussions would take place post 2020 on aspects not covered. However despite the agreement, disruption would still occur in Q1 2021 as firms factor in the additional requirements they need to meet in order to trade. It further assumed that the second national lockdown was followed by the UK entering tier restrictions again and that this system would continue through Q1 2021 and into Q2 2021. However, it did not assume that there would be a third lockdown in Q1 2021. It is normal practice to review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances and we will continue to follow that approach particularly as the advice the UK Government issues is subject to change in this fluid environment. In order to factor in this further lockdown the Q4 2020 weights were updated with 5% removed from both Upside 1 and the base case and put onto Downside 2 and Downside 3. The reason for moving weight to both Downside 2 and Downside 3 is that Downside 3 incorporates a double dip recession, which is now considered more likely given the second lockdown in November 2020 and now a third in January 2021, although it is noted that this is still a very severe scenario and not a replacement for a base case. In terms of Downside 2, the longer restrictions remain in place, the greater the risk of longer-term effects which are reflected in this scenario.
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Base case key macroeconomic assumptions |
–House price growth:As we move into 2021, with the end of the stamp duty holiday in March 2021, the rise in unemployment, and negative real wage growth, there is likely to be a reduced demand and so lower house prices. As such we expect to see some negative growth towards the end of 2021 but, with the supply side still weak, this will be limited. We are projecting a fall of 2% by the end of 2021.
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–GDP: The outlook assumes that the recovery is curtailed by the return of the virus and the second national lockdown which leaves Q4 2020 growth in negative territory with GDP expected to contract by 11.5% in 2020. For 2021, it assumes the gradual easing of restrictions towards the end of Q2 2021 will support a modest rebound in growth.
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–Unemployment rate: Unemployment is expected to peak in Q2 2021 at just under 8% as the UK Government’s job support schemes come to an end. With support ending for firms and limited savings left to keep trading, rising insolvency rates trigger a further increase in unemployment. As consumers and businesses become more confident about efforts to contain the coronavirus in the second half of 2021, unemployment falls back gradually. However, given the need for the economy to restructure, unemployment remains at elevated levels compared to recent figures over the remaining forecast period.
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–Bank Rate: For the Bank Rate forecast, the base case assumes a flat profile of 10bps with a rise to 25bps at the beginning of 2024. This was based on the view that we have a limited trade agreement by the end of 2020, with inflation expected to remain near target over the five year forecast period. The Monetary Policy Committee will wait to understand how the economy responds to the new economic environment before changing the Bank Rate.
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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 1.6% pa, the OBR’s latest estimate of the UK’s long run average growth rate. CPI inflation is forecast to be below the 2% target rate in the initial forecast period but returning to target by the end. Nominal earnings growth will fall in 2020 before starting to recover in 2021. This will then support household spending power as we move into 2022. However, the effect of limited business investment on growth will continue as firms look to repay debt that they have taken on due to the lockdown.
In summary, the base case assumes that activity starts to recover as the restrictions are lifted, but that progress will be tempered by the uncertainty around the UK’s new trading relationship with the EU.
Key changes to our base case in 2020
The key changes to our base case assumptions in 2020 were: (i) lower GDP projections in 2020 and 2021 to reflect the impact of the ongoing restrictions on economic activity due to Covid-19; (ii) the unemployment rate, whilst lower than expected given the government furlough scheme, peaks in Q2 2021 and only slowly recovers as firms adapt to the new economic environment; (iii) there is negative house price growth for 2021 as the stamp duty holiday ends and unemployment rises; and (iv) the Bank Rate profile is held flat at 0.10% until Q1 2024, when there is a rise to 0.25% and remains flat over the rest of the forecast period.
Other scenarios
Based on this revised base case, we have reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These include (i) a significant rise in Covid-19 cases and further lockdown measures being imposed; (ii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iii) higher inflation; (iv) the long-term effects caused by higher and longer unemployment rates or higher and longer unemployment rate persisting, increasing the natural rate of unemployment; (v) a vaccine or treatments being developed at a quicker pace; and (vi) the global economy bouncing back more swiftly than expected.
In order to reflect these potential outcomes, we decided to continue to use the base case and four additional scenarios, which management considers to provide a range wide enough to reflect all of the above potential outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we concluded that only one upside scenario would be needed to reflect the upside risks to the base case. As with the base case, the scenarios are forecast over a five-year period and then mean revert over the next three years to the OBR's latest estimate of the UK's long run average growth rate.
The four scenarios are as follows:
One upside scenario
All our Q4 2020 scenarios reflect a sharp recession in 2020, although a modest upside scenario remains appropriate based on vaccines being distributed quickly and effectively to the population, with 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. HPI for Upside 1 is less positive than for the base case and is based on the HPI equations built into the OGEM and the particular GDP profile used, whereas our base case reflects our planning view which allows for flexibility to align what is currently seen in the market to the outlook of the economic variable forecast.
Three downside scenarios
Downside 1 assumes further local/regional lockdowns as we move through 2021 than in the base case as a means of controlling increases in infection rates, which in turn impact economic growth as the vaccine(s) is not as effective in reducing the virus outbreak as hoped. The scenario also reflects a fall in demand for housing leading to significant downward price corrections over the next five years with a peak to trough of negative 10%. It assumes trade agreements with other countries being negotiated over the forecast period, but fewer than in the base case.
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Downside 2 reflects a severe downturn with a longer recovery needed (U shape) capturing even more conservatism and lack of confidence in terms of spending by consumers with the higher levels of unemployment. For businesses it reflects a slower return to profitability and more insolvencies as the rollout of the vaccine progresses at a slower pace than needed to keep infection rates under control. It retains a rising bank rate profile to ensure there is a scenario which encapsulates rising inflation. However, the rise in interest rates results in a large increase in debt-service costs to households and a rapid undermining of demand in the housing market. House values fall sharply and the combination of rising interest rates and unemployment with falling house prices results in a rising profile of credit impairment losses.
Downside 3 features a double dip in economic activity (W shape) lasting three quarters, with higher unemployment and a sharper fall in house prices compared to the four other scenarios. The fall in GDP of c.11.5% between H2 2020 and H1 2021 is roughly half the fall of c22% in H1 2020, as this assumes that businesses have contingency plans to be able to stay open whilst practising social distancing. The peak in the unemployment rate is similar to that seen in the early 1980s recession peaking at 11.9% in 2021 and remaining in double digits until early 2022, before falling back very gradually. The long term effects of high unemployment result in a permanent hit to potential output, as persistent and elevated uncertainty leads to more job losses and corporate bankruptcies. Sharp falls in house prices (c30%) combined with persistently higher unemployment has particularly adverse consequences for credit impairment charges.
Key changes to our alternative scenarios in 2020
In terms of key changes to our alternative scenarios in 2020, these relate to changes to the base case, historic data for each variable, OBR fan charts and the OGEM. We also updated the way the GDP path is defined in Downside 2 as discussed above. Otherwise 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 to pin-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.
The table sets out the house price growth and unemployment rate for 2020 and 2021, and GDP and Bank Rate for 2020-2022 for each of the five scenarios.
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| | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 |
| | % | % | % | % | % |
House price growth(1) | 2020 | 3.70 | | 3.50 | | 3.70 | | 3.70 | | 3.50 | |
| 2021 | (4.60) | | (2.00) | | (5.40) | | (11.30) | | (19.70) | |
GDP(2) | 2020 | (10.50) | | (11.50) | | (10.50) | | (11.10) | | (11.50) | |
| 2021 | 4.80 | | 4.50 | | 4.00 | | (0.80) | | (8.00) | |
| 2022 | 4.90 | | 6.10 | | 3.60 | | 3.20 | | 3.10 | |
Unemployment rate | 2020 | 6.30 | | 6.80 | | 6.30 | | 6.30 | | 6.80 | |
| 2021 | 6.10 | | 7.50 | | 6.50 | | 8.50 | | 11.40 | |
Bank of England bank rate | 2020 | 0.10 | | 0.10 | | 0.10 | | 0.10 | | 0.10 | |
| 2021 | 0.25 | | 0.10 | | 0.10 | | 0.75 | | (0.50) | |
| 2022 | 0.75 | | 0.10 | | 0.10 | | 1.75 | | 0.00 | |
(1)Q4 annual growth rate.
(2)GDP is shown as an annual average and all other data points are at 31 December in the year indicated.
Our macroeconomic assumptions and their evolution throughout the forecast period
Our macroeconomic assumptions and their evolution throughout the forecast period for 2020 and 2019 were:
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| | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 |
2020 | | % | % | % | % | % |
House price growth | 5-year average increase/decrease | 0.49 | | 1.38 | | (2.01) | | (4.54) | | (4.44) | |
Peak/(trough) at (1) | 2.45 | | 7.11 | | (9.65) | | (20.72) | | (20.32) | |
GDP | 5-year average increase/decrease | 0.75 | | 0.39 | | (0.38) | | (0.98) | | (2.82) | |
Cumulative growth/(fall) to peak/(trough) (2) | 3.82 | | 1.96 | | (1.88) | | (4.80) | | (13.33) | |
Unemployment rate | 5-year end period | 4.14 | | 5.50 | | 5.84 | | 6.52 | | 7.40 | |
Peak/(trough) at (1) | 6.28 | | 7.90 | | 6.51 | | 8.78 | | 11.90 | |
Bank of England bank rate | 5-year end period | 1.75 | | 0.25 | | 0.25 | | 2.75 | | 0.00 | |
Peak/(trough) at (1) | 1.75 | | 0.25 | | 0.25 | | 3.00 | | (0.50) | |
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| | Upside 2 | Upside 1 | Base Case | Downside 1 | Downside 2 |
2019 | | % | % | % | % | % |
House price growth | 5-year average increase/decrease | 4.90 | | 3.70 | | 1.60 | | (1.20) | | (9.30) | |
Peak/(trough) at (1) | 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) | 1.88 | | 2.73 | | 4.10 | | 5.64 | | 7.84 | |
Bank of England bank rate | 5-year end period | 2.00 | | 2.00 | | 0.75 | | 2.00 | | 2.25 | |
Peak/(trough) at (1) | 2.00 | | 2.00 | | 0.75 | | 2.00 | | 3.00 | |
(1)For GDP and house price growth it is the peak to trough change over the 5 year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.
(2)This is the cumulative growth for the 5 year period.
92Santander UK Group Holdings plc
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The historical and forecast growth rates for the GDP assumptions we use for scenario modelling
The evolutions of the historical and forecast growth rates for the GDP assumptions we used for scenario modelling at 31 December 2020 and 31 December 2019 were:
GDP assumptions applied at 31 December 2020
GDP assumptions applied at 31 December 2019
Our forecasting period for GDP is five years and then we revert to the average trend growth over three years based on the OBR’s long-run GDP forecast.
For GDP assumptions applied at 31 December 2020, in the Downside 2 and Downside 3 scenarios the economy reaches a cyclical low in Q1 2021 and Q2 2021 respectively, after which GDP increases. In all scenarios, we assume that GDP will have reverted to the OBR’s long-run forecast rate after Q4 2028. The reversion to mean for all macroeconomic variables is expected to take three years after the initial five-year forecast period.
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Scenario weights
Given the change in scenarios for Q4 2020, we undertook a full review of the probability weights applied to the scenarios. The setting of probability weights needs to consider both the probability of the forecast economic scenarios occurring whilst ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support the initial assessment of how likely a scenario is to occur, we would typically undertake a Monte Carlo analysis which would ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring and therefore assign a probability weight to that scenario. However, a key challenge with this approach in a stressed environment is that the extreme GDP forecasts for the downside scenarios all fall in the last percentile which results in all of the new downside scenarios attracting very low probability weights.
Given this issue, we performed a similar analysis on a more limited time period relating to the global financial crisis in 2007-2012, as this reflected better the current UK outlook. In this case, the base case 5 year compound annual growth rate (CAGR) sat in the middle of the distribution, which is what is expected to occur. It also showed a ranking in terms of the weights to apply to the additional downside scenarios, and was able to show that the Downside 2 scenario should have a higher weight than Downside 3.
However, we also need to consider the UK economic and political environment when applying weights. The scenarios were developed in Q4 2020 and within this period there was considerable change, particularly relating to where UK regions sat within the tiers. For example, London moved through 4 different stages within a two week period. With the circumstances changing again in January 2021, although the Monte Carlo analysis would suggest keeping the weights from Q3 2020 and provides a useful starting point, it was clear that the move to a third lockdown in Q1 2021 would result in greater downside risks than would have been reflected by using the Q3 2020 weights. Therefore the weights were updated to reflect these further changes to the balance of risks moving forward. For the Q4 2020 weights, 5% was removed from both Upside 1 and the base case and put onto Downside 2 and Downside 3. The reason for moving weight to both Downside 2 and Downside 3 is that Downside 3 incorporates a double dip recession, which is now considered more likely given the second lockdown in November 2020 and now a third in January 2021, although it is noted that this is still a very severe scenario and not a replacement for a base case. In terms of Downside 2, the longer restrictions remain in place, the greater the risk of longer-term effects which are reflected in this scenario.
The scenario weights we applied for 2020 and 2019 were:
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| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 |
Scenario weights | % | % | % | % | % |
2020 | 5 | | 45 | | 15 | | 25 | | 10 | |
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| Upside 2 | Upside 1 | Base Case | Downside 1 | Downside 2 |
Scenario weights | % | % | % | % | % |
2019 | 5 | | 10 | | 40 | | 30 | | 15 | |
ii) For our CIB portfolios
Our forecasting approach
The scenario we applied for CIB is an overlay calculation which is used for the overlay in provisions estimation, due to Covid-19. This is the same methodology as adopted since Q2 2020. The Long Run scenario is based on a long run view (rather than point in time) and is prepared in the context of a long-term stable outlook where the structural deterioration is materialized to quantify the overlay to account for the macroeconomic worsening. This is to avoid excessive volatility and considered appropriate due to the size of the portfolio. No weights are applied.
Key changes to our forecasting approach in 2020
The approach taken in 2020 is different to that of 2019. In 2019 the approach was to forecast global growth rates for three different scenarios (Base case, Upside and Downside) and apply weights to those. These were then used across Banco Santander to ensure consistent treatment of these large and/or international counterparties across the Banco Santander group.
Scenario weights
The scenario weights we applied to the scenarios for our CIB portfolio for 2020 and 2019 were:
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| Upside | Base case | Downside |
Scenario weights | % | % | % |
2020 | N/A | N/A | N/A |
2019 | 30 | | 40 | | 30 | |
As noted above, no scenario weights were applied to our CIB portfolio for 2020 as it is a single scenario based on a long-run view, rather than a point in time.
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 2020 and 2019 were:
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GDP assumption | | | | % |
2020 | Long Run global growth scenario (1) | | | 1.3 | |
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| | Upside | Base case | Downside |
GDP assumption | | % | % | % |
2019 | 5 year average increase/decrease | 3.7 | | 3.5 | | 3.0 | |
| Cumulative growth/(fall) to peak/(trough)(2) | 0.3 | | 0.5 | | (1.2) | |
(1)The Long Run scenario is the average annual global growth rate over the 5 year period 2020 to 2024.
(2)The 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).
94Santander UK Group Holdings plc
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Sensitivity of ECL allowance
At 31 December 2020, the probability-weighted ECL allowance totalled £1,377m (2019: £863m), of which £1,344m (2019: £813m) related to exposures in Retail Banking, Corporate & Commercial Banking and Corporate Centre, and £33m (2019: £50m) 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.
Scenario 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 above, our CIB segment uses a single forward-looking economic scenario for 2020 (2019: three scenarios). However, the three scenarios are still used within the model, with a PMA held to increase provisions up to the level required in the single scenario. In order to present a consolidated view in a single table and show variation from the forward-looking component, the three scenarios are presented in the table with the overlay value added to each scenario. As all other segments use five scenarios (2019: five scenarios), interpolation is also required. Data from the CIB Upside scenario is presented in the Upside 1 Column, the Downside scenario is in the Downside 3 column, the Base Case is in the Base Case column and values in Downside 1 and Downside 2 are interpolated from the Base Case and Downside scenarios. At 31 December 2019, 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.
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| Weighted | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 |
2020 | £m | £m | £m | £m | £m | £m |
Exposure | 328,792 | | 328,792 | | 328,792 | | 328,792 | | 328,792 | | 328,792 | |
Retail Banking | 213,323 | | 213,323 | | 213,323 | | 213,323 | | 213,323 | | 213,323 | |
–of which mortgages | 183,077 | | 183,077 | | 183,077 | | 183,077 | | 183,077 | | 183,077 | |
CCB | 24,503 | | 24,503 | | 24,503 | | 24,503 | | 24,503 | | 24,503 | |
CIB | 11,646 | | 11,646 | | 11,646 | | 11,646 | | 11,646 | | 11,646 | |
Corporate Centre | 79,320 | | 79,320 | | 79,320 | | 79,320 | | 79,320 | | 79,320 | |
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ECL | 1,377 | | 1,129 | | 1,222 | | 1,301 | | 1,613 | | 1,802 | |
Retail Banking | 706 | | 610 | | 587 | | 661 | | 850 | | 863 | |
–of which mortgages | 280 | | 213 | | 207 | | 253 | | 390 | | 415 | |
CCB | 603 | | 485 | | 575 | | 567 | | 671 | | 824 | |
CIB | 33 | | 5 | | 26 | | 40 | | 53 | | 66 | |
Corporate Centre | 35 | | 29 | | 34 | | 33 | | 39 | | 49 | |
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| % | % | % | % | % | % |
Proportion of assets in Stage 2 | 5.2 | | 4.5 | | 4.6 | | 4.6 | | 6.5 | | 6.7 | |
Retail Banking | 5.3 | | 4.6 | | 4.6 | | 4.6 | | 7.1 | | 6.9 | |
–of which mortgages | 5.7 | | 4.8 | | 4.8 | | 4.8 | | 7.6 | | 7.4 | |
CCB | 22.4 | | 20.1 | | 20.8 | | 20.2 | | 24.5 | | 28.6 | |
CIB | 1.7 | | 1.7 | | 1.7 | | 1.7 | | 1.7 | | 1.7 | |
Corporate Centre | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
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| Weighted | Upside 2 | Upside 1 | Base Case | Downside 1 | Downside 2 |
2019 | £m | £m | £m | £m | £m | £m |
Exposure | 316,322 | | 316,322 | | 316,322 | | 316,322 | | 316,322 | | 316,322 | |
Retail Banking | 204,780 | | 204,780 | | 204,780 | | 204,780 | | 204,780 | | 204,780 | |
–of which mortgages | 178,788 | | 178,788 | | 178,788 | | 178,788 | | 178,788 | | 178,788 | |
CCB | 24,118 | | 24,118 | | 24,118 | | 24,118 | | 24,118 | | 24,118 | |
CIB | 13,384 | | 13,384 | | 13,384 | | 13,384 | | 13,384 | | 13,384 | |
Corporate Centre | 74,040 | | 74,040 | | 74,040 | | 74,040 | | 74,040 | | 74,040 | |
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ECL | 863 | | 640 | | 680 | | 726 | | 855 | | 1,542 | |
Retail Banking | 549 | | 425 | | 433 | | 448 | | 525 | | 1,084 | |
–of which mortgages | 218 | | 122 | | 127 | | 137 | | 196 | | 660 | |
CCB | 262 | | 195 | | 212 | | 229 | | 275 | | 398 | |
CIB | 50 | | 19 | | 34 | | 48 | | 53 | | 58 | |
Corporate Centre | 2 | | 1 | | 1 | | 1 | | 2 | | 2 | |
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| % | % | % | % | % | % |
Proportion of assets in Stage 2 | 3.7 | | 2.7 | | 2.8 | | 2.8 | | 3.1 | | 6.7 | |
Retail Banking | 4.5 | | 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 | 8.7 | | 7.4 | | 7.4 | | 7.4 | | 8.5 | | 16.3 | |
CIB | 1.5 | | 1.5 | | 1.5 | | 1.5 | | 1.5 | | 1.5 | |
Corporate Centre | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.2 | |
Changes to Stage 3 instruments are part of the sensitivity analysis but excluded from the disclosure because their values do not move due to changes in macroeconomic assumptions, i.e. they are either in or not in default at the reporting date.
We have incorporated our post model adjustments into the sensitivity analysis.
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 £280m at 31 December 2020 (2019: £218m) 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 unweighted base case economic scenario, and assumes no changes to the staging allocation of exposures. In 2019, we applied 40% weighting to the base case economic scenario, therefore a change in the basis of preparation in 2020. 2019 numbers have been restated.
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| Increase/decrease in house prices |
| +20% | +10% | -10% | -20% |
Increase/(decrease) in profit before tax | £m | £m | £m | £m |
2020 | 63 | | 38 | | (66) | | (183) | |
2019 | 41 | | 25 | | (39) | | (105) | |
2020 compared to 2019
In response to the Covid-19 pandemic the economic forecasts were downgraded, with the Base Case becoming significantly worse, and the Upside 2 scenario being replaced with a specific Covid-19 'W' shaped severe downside, increasing ECLs and Stage 2 balances across the scenarios. Further increases have come from management actions taken outside the scenarios, which moved the most impacted cases to Stage 2, further increasing losses. ECLs in the Covid- 19 'W' scenario are tempered by low Base Rate, keeping repayments low and allowing mortgage customers to more easily refinance.
In 2020, Stage 2 exposures increased as although arrears balances have reduced, management took actions in response to the Covid-19 pandemic, namely downgrading the economic scenarios and weights which increased PDs across the business causing more accounts to breach the SICR triggers to enter Stage 2, moving riskier balances of £0.8bn to which payment holidays were offered to from Stage 1 to Stage 2 and moving £3.1bn corporate loans most impacted by Covid-19 from Stage 1 to Stage 2. The increase in ECL balances reflected these actions.
Significant Increase in Credit Risk (SICR) (audited)
Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual term of the loan, or the behavioural term for a revolving facility. Loans which have not experienced a SICR are subject to 12 month ECL. We assess the 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. For more, see the section ‘Definition of default (Credit impaired)’ that follows.
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 challenges the appropriateness of them each year, or more often if we change them.
96Santander UK Group Holdings plc
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Quantitative criteria
We use quantitative criteria to identify where an exposure has increased in credit risk. The 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 we used for 2020 were:
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Retail Banking (1)
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| Consumer (auto) finance(2)
| Other unsecured | Corporate & Commercial Banking | Corporate & Investment Banking |
Mortgages | Personal loans | Credit cards | Overdrafts |
30bps | 300bps | 30bps | 340bps | 260bps | 30bps | Internal rating method |
(1)In Business banking, for larger customers we apply the same criteria that we use for Corporate & Commercial Banking.
(2)Consumer (auto) finance use the comparison of lifetime PDs to determine Stage allocation, unlike other products which first turn the lifetime PD into an average yearly PD (annualised) and then do the comparison.
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 2020, there were no changes to the way that we measure SICR. The granting of a payment holiday on its own was not considered to be a SICR event.
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 2020 and 2019 were:
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Retail Banking(1)
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Mortgages | Consumer (auto) finance | Other unsecured | Corporate & Commercial Banking | Corporate & Investment Banking |
Personal loans | Credit cards | Overdrafts |
- In forbearance - Default in last 24m
- >30 Days past due (DPD) in last 12m
- Bankrupt
- £100+ arrears | - In forbearance - Deceased or Insolvent - Court ‘Return of goods’ order or Police watchlist - Agreement terminated - Payment holiday - Cash Collection | - In Collections - Default in last 12m
- £50+ arrears | - In forbearance - Default in last 12m
- In Collections
- £100+ arrears | - Fees suspended - Default in last 12m
- Debit dormant >35 days
- Any excess in month | - In forbearance - Default in last 12m
- Watchlist: proactive management
- Default at proxy origination |
- Watchlist: proactive management |
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(1)In Business Banking, for larger customers we apply the same criteria that we use for Corporate & Commercial Banking.
In addition, due to Covid-19 we introduced temporary Post Model Adjustments (PMAs) to Stage allocation based on collective assessments of portfolios in Retail Banking and client level in corporate lending (Corporate & Commercial Banking and Corporate & Investment Banking segments) based on sector and client credit quality. See the section 'Post Model Adjustments (PMAs)' below for more on this.
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 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 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 original PD-based transfer criteria are no longer met. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before the instruments can be reclassified to Stage 1. For a loan in forbearance to cure, it must meet the exit conditions set out in the earlier section ‘Forbearance’.
Definition of default (Credit impaired) (audited)
We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data to make us doubt the customer can keep up with their payments i.e. they are unlikely to pay. The data we have on customers varies across our business segments. It typically includes where:
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Retail Banking |
–They have been reported bankrupt or insolvent. This excludes accounts which are up to date and are not defaulted.
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–Their loan term has ended, but they still owe us money more than three months later
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–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
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–We have suspended their fees and interest because they are in financial difficulties
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–We have repossessed the property.
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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
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–Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract
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–They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default
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–Their loan is unlikely to be refinanced or repaid in full on maturity
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–Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increase in market value.
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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. The CRPF reviews and approves the definition of default at least annually. The Board Audit Committee reviews and challenges the appropriateness of the definition each year, or more often if we change it.
During 2020, we offered customers the option to take a payment holiday for up to 6 months where the customer had self certified they had been financially impacted by Covid-19. The granting of a payment holiday on its own was not considered to a Significant Increase in Credit Risk, nor was it considered to be a default under regulatory definitions. Customers requiring further longer term financial support after the 6 month period, such as term extension or interest-only conversion, would be treated in accordance with our normal SICR and default definitions.
Measuring ECL (audited)
For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month over the forecast period. The lifetime ECL is the sum of the monthly ECLs over the forecast period, while the 12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted value for the relevant forecast month of the product of the following factors:
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Factor | Description |
Survival rate (SR) | The probability that the exposure has not closed or defaulted since the reporting date. |
PD | The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis. |
EAD | The amount we expect to be owed if a default event was to occur. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product type. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an off-balance sheet element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product type and base them on analysis of recent default data. |
LGD | Our expected loss if a default event were to occur. We express it as a percentage and calculate it based on factors that we have observed to affect the likelihood and/or value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type. |
We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD to reflect the default status of the account, considering the current DPD and loan to value. PD and SR are not required for accounts in default.
Forecast period
We base the forecast period for amortising facilities on the remaining contract 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 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, unemployment rate and Bank of England bank 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, where we have used internal capital or similar models as the basis for our ECL models, this typically results in a large number of relatively small homogenous groups. We typically group instruments where they share risk characteristics using one or more statistical 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 in run-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.
As described above, for our CIB portfolios (whether we assess them for impairment individually or collectively) we used one forward-looking economic scenario for forecasting in 2020 (2019: three scenarios). For all our other portfolios (whether we assess them for impairment individually or collectively) we use five forward-looking economic scenarios.
98Santander UK Group Holdings plc
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Management judgement applied in calculating ECL (audited)
IFRS 9 recognises that expert management judgement is an essential part of calculating ECL. Specifically, where the historical data 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, one upside scenario and three downside scenarios except for our CIB portfolio, where we used one scenario in 2020 (2019: three scenarios). This symmetry meets the ‘unbiased’ requirement and we consider these scenarios sufficient to account for any non-linear relationships.
–Probability weights:In determining the initial scenario probability weights, we assign the highest probability to the base case, whilst the outer scenarios typically attract lower probabilities than the more moderate ones.
–SICR thresholds:We use a combination of quantitative (both absolute and relative), qualitative and backstop criteria to identify exposures that we consider have shown a SICR since initial recognition.
–Post Model Adjustments: These relate to adjustments which we need to account for identified model limitations – such as those that have arisen due to challenges in obtaining historical data. We expect these to gradually be incorporated into the underlying models as we build up more comparative data over future reporting periods.
–Internal credit risk rating for corporate borrowers: We assign each corporate borrower an internal credit rating based on our internal rating scale. To do this, we look at the customer’s financial history and trends in the economy including reflecting the impacts of the Covid-19 pandemic – backed up by the expert judgement of a risk analyst. We review our internal ratings on a dynamic basis and at least once a year. The internal risk rating is used to determine the Probability of Default for a client.
–Individually assessed corporate Stage 3 exposures: We assess the ECL requirement for large single name corporate exposures on an individual basis when they meet our definition of default and are transferred into Stage 3. This assessment takes into consideration the latest specific information about the counterparty to determine a probability weighted ECL based on a best, worst and mid case outcome.
Probability weights
We made significant adjustments to our economic assumptions and scenario weightings during 2020 to reflect the emerging impact of the Covid-19 pandemic. Our five economic scenarios have been updated for Q4 2020 and weighted further to the downside, to reflect the expected longer path to recovery for the UK. The 2020 impact was an ECL charge of £164m. Had management applied Q3 2020 weights to the scenarios (Upside 1: 10%; Base case: 50%; Downside 1: 15%; Downside 2 :20%; Downside 3: 5%), the ECL would decrease by £34m to £130m.
Individually assessed corporate Stage 3 exposures
Management judgements are applied in assessing ECL provisions on individually assessed corporate loans. For those loans that were in default (i.e. Stage 3), the ECL was £157m at 31 December 2020. Had management assumed the best or worst outcome in terms of loss estimates, the ECL could have been within a range of £78m to £220m.
Post Model Adjustments (PMAs)
We use a range of methods to identify whether we need a PMA. These include regular review of model monitoring tools, period-to-period movement and trend analysis, comparison against forecasts, and input from expert teams who monitor and manage key portfolio risks. We only recognise a PMA if the ECL is over £1m. We keep PMAs in place until we no longer need them. This will typically be when they are built into our core credit model or the conditions that impacted the historical data no longer exist.
The Risk Provisions & Forecasting team calculates PMAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a consistent and controlled manner. We apply standard end-user computing controls to material and long-standing PMAs i.e. those expected to be in place for more than six months. Our Independent Validations Team may also review significant PMAs at their discretion. The CRPF approves all new PMAs. It delegates authority to approve temporary PMAs not expected to last beyond a quarter-end to the CFO. The Consolidated Reporting team reviews all new PMAs to ensure they comply with IFRS 9. We record all PMAs on a central log maintained by the Consolidated 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.
The most significant PMAs that we applied at 31 December 2020 and 31 December 2019 were:
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| 2020 | 2019 |
PMAs | £m | £m |
Interest-only maturity default risk(1) | 49 | | 51 | |
Buy-to-Let | 24 | | 21 | |
Long-term indeterminate arrears(1) | 29 | | 19 | |
12+ months in arrears(1) | 30 | | 23 | |
Corporate Covid-19 affected segments | 193 | | 0 | |
Payment Holidays | 27 | | 0 | |
Corporate single large exposure | 35 | | 0 | |
(1)In model adjustment
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–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 to write-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 increased our ECL by £49m. Had management applied different judgements to the expected proportion of customers who will not be able to repay at maturity, the PMA could have been within a range of £24m to £56m.
–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 increased our ECL by £24m.
–Long-term indeterminate arrears:To mitigate the risk of model underestimation, we fully provide for accounts in arrears which have neither repaid (cured) or been written-off after a period of 2 years 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 2020 and 31 December 2019 , we only needed to make an adjustment for mortgages. As a result of regulatory suspension of repossession in response to the Covid-19 pandemic, management has assumed up to a 2 year delay in repossessions when calculating the ECL uplift for this PMA. This is to make sure LTVs are appropriately stressed by the economic scenarios. 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 increased our ECL by £29m. Had management assumed no delay in repossessions or a 3 year delay, the PMA could have been within a range of £18m to £31m.
–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. As a result of regulatory suspension of repossession in response to the Covid-19 pandemic, management has assumed up to a 2 year delay in repossessions when calculating the ECL uplift for this PMA. This is to make sure LTVs are appropriately stressed by the economic scenarios. 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 increased our ECL by £30m. Had management assumed no delay in repossessions or a 3 year delay, the PMA could have been within a range of £19m to £35m.
–Corporate Covid-19 affected segments: In 2020, following internal sector and counterparty assessments, we transferred loans for some corporate and SME sectors and clients who have been severely impacted because of Covid-19 from Stage 1 into Stage 2. This includes exposures in a sector where trading has been highly impacted by Covid-19 including Hotels, Hospitality, Retail, Leisure and Care Homes sectors, and where the client has been assessed as most likely to require financial support based on their current financial circumstances. In addition, we have transferred some Stage 2 corporate and SME loans to Stage 3 based on a similar analysis of sector and client credit quality taking into consideration any concessions given to clients since the start of the pandemic as an indicator of those loans most likely to meet our default definition. We use our models to calculate the incremental ECL required from transferring loans between stages and apply stress factors to the client PD ratings based on our historical experience. Over the medium term, as our actual data on the performance of these customers grows, we expect the need for this PMA will diminish. This PMA increased our ECL by £193m, of which £70m relates to £3.1bn of exposures transferred from Stage 1 to Stage 2 and £123m relates to £0.4bn of Stage 2 exposures transferred to Stage 3. Had management assumed the lowest observed PD stress factors to all Stage 1 to Stage 2 transferred loans or transferred none of the Stage 2 exposures in highly impacted sectors to Stage 3, the PMA would reduce to £35m. Had management assumed the highest observed PD stress factor to all Stage 1 to Stage 2 transferred loans and transferred all £0.7bn high risk Stage 2 exposures in highly impacted sectors to Stage 3, the PMA would increase to £311m.
–Payment holidays: In 2020, we transferred a proportion of Stage 1 loans into Stage 2 where our discussions with retail customers on a Covid-19 payment holiday established they are in longer-term financial difficulties. This was done on a collective basis through a customer contact exercise and customer data profiling. Based on this assessment, we calculate the incremental ECL required by using the average Stage 2 coverage ratio of similar Stage 2 loans. Over the medium term, as our actual data on the performance of these customers grows, we expect the need for this PMA will diminish. This PMA increased our ECL by £27m. Had management assumed a higher or lower new to arrears flow rates, the PMA could have been within a range of £11m to £65m.
–Corporate single large exposure: In 2020, to mitigate against the risk of a single large corporate exposure with an ECL requirement of greater than £10m defaulting, which has not been covered by the existing model estimate or the corporate and SME PMA above, we applied a PMA for the risk of a company which unexpectedly defaults. This PMA has been calculated based on incurring three average historically observed single name large losses across our Corporate & Commercial and Corporate & Investment Banking business segments. We will continue to assess this risk over the medium term based on actual experience and we will refine the estimate based on changes in our portfolio credit quality and loan size mix. This PMA increased our ECL by £35m assuming three average losses are incurred or would reduce to £23m assuming only two average losses were incurred.
Governance around ECL impairment allowances (audited)
Our Risk Methodology team developed our ECL impairment models (except for the external models we use, such as OGEM which we described earlier in ‘Our forecasting approach’), and our Independent Validations 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 base case used in the economic scenarios we use to calculate forward-looking scenarios.
–CRPF reviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. It also 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.
100Santander UK Group Holdings plc
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Covid-19 Support measures
The Covid-19 crisis had a major impact on the UK and global economies in 2020. The UK Government’s fiscal interventions helped our customers to mitigate some of the adverse financial effects. However, levels of uncertainty and volatility increased significantly in 2020 and this led to a £514m increase in our ECL provisions.
Since March 2020, we have provided mortgage customers with payment holiday terms in line with UK Government's and FCA's guidance. Similar payment holidays have also been granted in respect of consumer (auto) finance, personal loans, credit cards, businesses and corporates.
We participated in the UK Government's Coronavirus Loan Schemes:
–The Coronavirus Business Interruption Loan Scheme (CBILS),
–The Bounce Back Loan Scheme (BBLS), and
–The Coronavirus Large Business Interruption Loan Scheme (CLBILS).
We implemented new processes and procedures to facilitate delivery of these Covid-19 government support measures. We also increased our interactions and communications with our customers to better understand their individual needs. For instance, we initiated targeted retail customer out-reach to assess their need for ongoing support. We re-engineered our financial support activities to ensure our customers obtain the best individual outcomes.
The UK Government guarantees losses for amounts lent under these schemes, although losses are limited to 80% in the case of the CBILS and the CLBILS. As a result, ECL is not applied to the BBLS but a 20% weighting is applied to the ECL for the CBILS and the CLBILS. The UK Government also pays interest on behalf of customers for the first twelve months under the CBILS and the BBLS, plus any lender-levied charges under the CBILS.
Loans for customers who were provided with payment holidays were considered to have the contract terms modified. The granting of a payment holiday on its own was not considered to be a SICR event, nor was it considered a default under regulatory definitions. Neither were they considered to have been granted forbearance. See the section 'Significant Increase in Credit Risk (SICR)' above for more on this.
Interest income continues to be recognised during any payment holiday period. In the absence of any other credit risk indicators, the granting of a payment holiday does not evidence a SICR. This means that the majority of customers affected have not been moved to Stage 2 for a lifetime ECL assessment unless they had triggered other SICR criteria. Such payment holidays also did not cause accounts to become past due and therefore did not automatically trigger a Stage 2 or Stage 3 lifetime ECL assessment.
In early 2020, we increased our Recovery team to manage expected defaults arising from the Covid-19 pandemic. We continue to identify those customers for whom additional borrowing would require remedial action to return them to be within our risk appetite over the medium-term, as well as customers who were showing signs of financial stress before the Covid-19 crisis. Customers in either of these situations are considered to have been granted forbearance with exposures categorised as either Stage 2 or Stage 3 and subject to a lifetime ECL assessment.
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Annual Report 2020 | Risk review
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SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW
Our maximum and net exposure to credit risk (audited)
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 are applied.
For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances. Off-balance sheet exposures are mortgage offers, guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum amount that we would have to pay if the guarantees were called on. For formal standby facilities, credit lines and other commitments that are irrevocable over the life of the facility, the maximum exposure is the total amount of the commitment.
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| Maximum exposure | | | | | |
| Balance sheet asset | | Off-balance sheet | | Collateral(1) | | |
| Gross amounts | Loss allowance | Net amounts | | Gross amounts | Loss allowance | Net amounts | | Cash | Non-cash | Netting(2) | Net exposure |
2020 | £bn | £bn | £bn | | £bn | £bn | £bn | | £bn | £bn | £bn | £bn |
Cash and balances at central banks | 43.5 | | 0 | | 43.5 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 43.5 | |
Financial assets at amortised cost: | | | | | | | | | | | | |
–Loans and advances to customers:(3) | | | | | | | | | | | | |
–Loans secured on residential properties(4) | 170.0 | | (0.3) | | 169.7 | | | 13.3 | | 0 | | 13.3 | | | 0 | | (173.3) | | 0 | | 9.7 | |
–Corporate loans | 24.5 | | (0.6) | | 23.9 | | | 15.4 | | (0.1) | | 15.3 | | | (0.1) | | (20.4) | | 0 | | 18.7 | |
–Finance leases | 6.6 | | (0.1) | | 6.5 | | | 0.2 | | 0 | | 0.2 | | | (0.1) | | (5.8) | | 0 | | 0.8 | |
–Other unsecured loans | 10.2 | | (0.3) | | 9.9 | | | 13.3 | | 0 | | 13.3 | | | 0 | | 0 | | 0 | | 23.2 | |
–Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 2.2 | | 0 | | 2.2 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 2.2 | |
Total loans and advances to customers | 213.5 | | (1.3) | | 212.2 | | | 42.2 | | (0.1) | | 42.1 | | | (0.2) | | (199.5) | | 0 | | 54.6 | |
–Loans and advances to banks | 2.0 | | 0 | | 2.0 | | | 1.0 | | 0 | | 1.0 | | | 0 | | 0 | | 0 | | 3.0 | |
–Reverse repurchase agreements – non trading | 19.6 | | 0 | | 19.6 | | | 0 | | 0 | | 0 | | | 0 | | (19.5) | | (0.1) | | 0 | |
–Other financial assets at amortised cost | 1.2 | | 0 | | 1.2 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 1.2 | |
Total financial assets at amortised cost | 236.3 | | (1.3) | | 235.0 | | | 43.2 | | (0.1) | | 43.1 | | | (0.2) | | (219.0) | | (0.1) | | 58.8 | |
Financial assets at fair value at FVOCI: | | | | | | | | | | | | |
–Loans and advances to customers | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | |
–Debt securities | 9.0 | | 0 | | 9.0 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 9.0 | |
Total financial assets at FVOCI | 9.0 | | 0 | | 9.0 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 9.0 | |
Total | 288.8 | | (1.3) | | 287.5 | | | 43.2 | | (0.1) | | 43.1 | | | (0.2) | | (219.0) | | (0.1) | | 111.3 | |
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2019 | | | | | | | | | | | | |
Cash and balances at central banks | 26.4 | | 0 | | 26.4 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 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 | | 0 | | 13.4 | | | 0 | | (168.9) | | 0 | | 9.9 | |
–Corporate loans | 27.0 | | (0.2) | | 26.8 | | | 14.3 | | (0.1) | | 14.2 | | | (0.1) | | (19.4) | | 0 | | 21.5 | |
–Finance leases | 6.3 | | (0.2) | | 6.1 | | | 0.3 | | 0 | | 0.3 | | | (0.1) | | (6.3) | | 0 | | 0 | |
–Other unsecured loans | 7.2 | | (0.2) | | 7.0 | | | 12.4 | | 0 | | 12.4 | | | 0 | | 0 | | 0 | | 19.4 | |
–Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 2.2 | | 0 | | 2.2 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 2.2 | |
Total loans and advances to customers | 208.3 | | (0.8) | | 207.5 | | | 40.4 | | (0.1) | | 40.3 | | | (0.2) | | (194.6) | | 0 | | 53.0 | |
–Loans and advances to banks | 2.5 | | 0 | | 2.5 | | | 1.2 | | 0 | | 1.2 | | | 0 | | 0 | | 0 | | 3.7 | |
–Reverse repurchase agreements – non trading | 23.6 | | 0 | | 23.6 | | | 0 | | 0 | | 0 | | | 0 | | (23.1) | | (0.5) | | 0 | |
–Other financial assets at amortised cost | 7.1 | | 0 | | 7.1 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 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 FVOCI: | | | | | | | | | | | | |
–Loans and advances to customers | 0.1 | | 0 | | 0.1 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0.1 | |
–Debt securities | 9.6 | | 0 | | 9.6 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 9.6 | |
Total financial assets at FVOCI | 9.7 | | 0 | | 9.7 | | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 9.7 | |
Total | 277.6 | | (0.8) | | 276.8 | | | 41.6 | | (0.1) | | 41.5 | | | (0.2) | | (217.7) | | (0.5) | | 99.9 | |
(1)The forms of collateral we take to reduce credit risk include: residential and commercial property; other physical assets, including motor vehicles; liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. Charges on residential property are most of the collateral we take.
(2)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.
(3)Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet.
(4)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.
102Santander UK Group Holdings plc
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Strategic Report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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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.
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| Balance sheet asset gross amount | | Collateral(1) | Netting(2) | Net exposure |
| | Cash | Non-cash |
2020 | £bn | | £bn | £bn | £bn | £bn |
Financial assets at FVTPL: | | | | | | |
–Derivative financial instruments | 3.5 | | | 0 | | (1.8) | | (0.8) | | 0.9 | |
–Other financial assets at FVTPL | 0.8 | | | 0 | | 0 | | 0 | | 0.8 | |
Total | 4.3 | | | 0 | | (1.8) | | (0.8) | | 1.7 | |
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2019 | | | | | | |
Financial assets at FVTPL: | | | | | | |
–Derivative financial instruments | 3.4 | | | 0 | | (1.9) | | (0.8) | | 0.7 | |
–Other financial assets at FVTPL | 1.0 | | | 0 | | 0 | | 0 | | 1.0 | |
Total | 4.4 | | | 0 | | (1.9) | | (0.8) | | 1.7 | |
(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
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).
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| PD range | |
| Mid | Lower | Upper | S&P equivalent |
Santander UK risk grade | % | % | % |
9 | 0.010 | | 0.000 | | 0.021 | | AAA to AA+ |
8 | 0.032 | | 0.021 | | 0.066 | | AA to AA- |
7 | 0.100 | | 0.066 | | 0.208 | | A+ to BBB |
6 | 0.316 | | 0.208 | | 0.658 | | BBB- to BB |
5 | 1.000 | | 0.658 | | 2.081 | | BB- |
4 | 3.162 | | 2.081 | | 6.581 | | B+ to B |
3 | 10.000 | | 6.581 | | 20.811 | | B- |
2 | 31.623 | | 20.811 | | 99.999 | | CCC to C |
1 (Default) | 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 plc103
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Annual Report 2020 | Risk review
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Rating distribution (audited)
The tables below show the credit rating of financial assets to which the impairment requirements in IFRS 9 apply. Post-PMA balances are used in risk grade allocation. For more on the credit rating profiles of key portfolios, see the ‘Credit risk – Retail Banking’ and ‘Credit risk – Other business segments’ sections.
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| Santander UK risk grade | | Loss allowance | Total |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) |
2020 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Exposures | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 43.5 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 43.5 | |
–Stage 1 | 43.5 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 43.5 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers(2) | 8.0 | | 28.2 | | 75.8 | | 44.8 | | 13.6 | | 27.4 | | 8.2 | | 7.5 | | (1.3) | | 212.2 | |
–Stage 1 | 8.0 | | 28.1 | | 75.4 | | 43.3 | | 10.9 | | 19.4 | | 1.1 | | 7.3 | | (0.2) | | 193.3 | |
–Stage 2 | 0 | | 0.1 | | 0.4 | | 1.5 | | 2.7 | | 8.0 | | 4.2 | | 0.2 | | (0.5) | | 16.6 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 2.9 | | 0 | | (0.6) | | 2.3 | |
Of which mortgages: | 7.9 | | 24.8 | | 69.3 | | 37.6 | | 5.7 | | 19.9 | | 4.5 | | 0.3 | | (0.3) | | 169.7 | |
–Stage 1 | 7.9 | | 24.8 | | 69.0 | | 36.2 | | 4.0 | | 15.0 | | 0.6 | | 0.3 | | 0 | | 157.8 | |
–Stage 2 | 0 | | 0 | | 0.3 | | 1.4 | | 1.7 | | 4.9 | | 2.1 | | 0 | | (0.2) | | 10.2 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1.8 | | 0 | | (0.1) | | 1.7 | |
Loans and advances to banks | 0.1 | | 0.1 | | 0.7 | | 0 | | 0 | | 0 | | 0 | | 1.1 | | 0 | | 2.0 | |
–Stage 1 | 0.1 | | 0.1 | | 0.7 | | 0 | | 0 | | 0 | | 0 | | 1.1 | | 0 | | 2.0 | |
–Reverse repo agreements – non trading | 12.2 | | 3.3 | | 1.5 | | 2.4 | | 0 | | 0 | | 0 | | 0.2 | | 0 | | 19.6 | |
–Stage 1 | 12.2 | | 3.3 | | 1.5 | | 2.4 | | 0 | | 0 | | 0 | | 0.2 | | 0 | | 19.6 | |
–Other financial assets at amortised cost | 1.2 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1.2 | |
–Stage 1 | 1.2 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1.2 | |
Total financial assets at amortised cost | 21.5 | | 31.6 | | 78.0 | | 47.2 | | 13.6 | | 27.4 | | 8.2 | | 8.8 | | (1.3) | | 235.0 | |
Financial assets at FVOCI: | 5.3 | | 3.4 | | 0.2 | | 0.1 | | 0 | | 0 | | 0 | | 0 | | 0 | | 9.0 | |
–Stage 1 | 5.3 | | 3.4 | | 0.2 | | 0.1 | | 0 | | 0 | | 0 | | 0 | | 0 | | 9.0 | |
Total on balance sheet | 70.3 | | 35.0 | | 78.2 | | 47.3 | | 13.6 | | 27.4 | | 8.2 | | 8.8 | | (1.3) | | 287.5 | |
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Total off–balance sheet | 0.4 | | 8.8 | | 9.5 | | 8.8 | | 5.1 | | 1.6 | | 0.5 | | 8.5 | | (0.1) | | 43.1 | |
–Stage 1 | 0.4 | | 8.8 | | 9.5 | | 8.6 | | 4.7 | | 1.1 | | 0.2 | | 8.5 | | 0 | | 41.8 | |
–Stage 2 | 0 | | 0 | | 0 | | 0.2 | | 0.4 | | 0.5 | | 0.2 | | 0 | | (0.1) | | 1.2 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | 0 | | 0.1 | |
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Total exposures | 70.7 | | 43.8 | | 87.7 | | 56.1 | | 18.7 | | 29.0 | | 8.7 | | 17.3 | | (1.4) | | 330.6 | |
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ECL | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0.2 | | 0.9 | | 0 | | | 1.3 | |
–Stage 1 | 0 | | 0 | | 0 | | 0.1 | | 0 | | 0 | | 0.1 | | 0 | | | 0.2 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.2 | | 0.2 | | 0 | | | 0.5 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.6 | | 0 | | | 0.6 | |
Of which mortgages: | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.2 | | 0 | | | 0.3 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0 | | | 0.2 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | | 0.1 | |
–Loans and advances to banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Reverse repo agreements – non trading | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Other financial assets at amortised cost | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total financial assets at amortised cost | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0.2 | | 0.9 | | 0 | | | 1.3 | |
Financial assets at FVOCI: | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total on balance sheet | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0.2 | | 0.9 | | 0 | | | 1.3 | |
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Total off–balance sheet | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | | 0.1 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | | 0.1 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
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Total ECL | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0.2 | | 1.0 | | 0 | | | 1.4 | |
104Santander UK Group Holdings plc
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Strategic Report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
| | | | Credit risk | | | | | | |
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| Santander UK risk grade | | | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | | Total |
2020 | % | % | % | % | % | % | % | % | | % |
Coverage ratio | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | 0 | | 0 | | 0 | | 0.2 | | 0.7 | | 0.7 | | 11.0 | | 0 | | | 0.6 | |
–Stage 1 | 0 | | 0 | | 0 | | 0.2 | | 0 | | 0 | | 9.1 | | 0 | | | 0.1 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 3.7 | | 2.5 | | 4.8 | | 0 | | | 3.0 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 20.7 | | 0 | | | 26.1 | |
Of which mortgages: | 0 | | 0 | | 0 | | 0 | | 0 | | 0.5 | | 4.4 | | 0 | | | 0.2 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 2.0 | | 4.8 | | 0 | | | 2.0 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 5.6 | | 0 | | | 5.9 | |
–Loans and advances to banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Reverse repo agreements – non trading | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Other financial assets at amortised cost | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total financial assets at amortised cost | 0 | | 0 | | 0 | | 0.2 | | 0.7 | | 0.7 | | 11.0 | | 0 | | | 0.6 | |
Financial assets at FVOCI: | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total on balance sheet | 0 | | 0 | | 0 | | 0.2 | | 0.7 | | 0.7 | | 11.0 | | 0 | | | 0.5 | |
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Total off–balance sheet | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 20.0 | | 0 | | | 0.2 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 50.0 | | 0 | | | 8.3 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
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Total coverage ratio | 0 | | 0 | | 0 | | 0.2 | | 0.5 | | 0.7 | | 11.5 | | 0 | | | 0.4 | |
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| Santander UK risk grade | | Loss allowance | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(3) | Total |
2019 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Exposures | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 26.4 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 26.4 | |
–Stage 1 | 26.4 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 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 | | 0 | | 0.4 | | 1.2 | | 2.7 | | 4.7 | | 2.7 | | 0 | | (0.3) | | 11.4 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | 2.3 | | 0 | | (0.4) | | 1.9 | |
Of which mortgages: | 9.8 | | 25.0 | | 71.9 | | 42.9 | | 7.7 | | 4.2 | | 3.9 | | 0 | | (0.2) | | 165.2 | |
–Stage 1 | 9.8 | | 25.0 | | 71.7 | | 42.0 | | 5.7 | | 1.1 | | 0.2 | | 0 | | 0 | | 155.5 | |
–Stage 2 | 0 | | 0 | | 0.2 | | 0.9 | | 2.0 | | 3.1 | | 2.0 | | 0 | | (0.1) | | 8.1 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1.7 | | 0 | | (0.1) | | 1.6 | |
–Loans and advances to banks | 0.1 | | 0.2 | | 1.0 | | 0 | | 0 | | 0 | | 0 | | 1.2 | | 0 | | 2.5 | |
–Stage 1 | 0.1 | | 0.2 | | 1.0 | | 0 | | 0 | | 0 | | 0 | | 1.2 | | 0 | | 2.5 | |
–Reverse repo agreements – non trading | 15.3 | | 2.4 | | 4.2 | | 1.5 | | 0 | | 0 | | 0 | | 0.2 | | 0 | | 23.6 | |
–Stage 1 | 15.3 | | 2.4 | | 4.2 | | 1.5 | | 0 | | 0 | | 0 | | 0.2 | | 0 | | 23.6 | |
–Other financial assets at amortised cost | 7.1 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 7.1 | |
–Stage 1 | 7.1 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 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 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 9.7 | |
–Stage 1 | 6.1 | | 3.2 | | 0.4 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 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 | |
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Total off–balance sheet | 0.9 | | 8.5 | | 8.3 | | 8.1 | | 5.0 | | 1.1 | | 0.6 | | 9.1 | | (0.1) | | 41.5 | |
–Stage 1 | 0.9 | | 8.5 | | 8.3 | | 8.0 | | 4.7 | | 1.0 | | 0.3 | | 9.1 | | 0 | | 40.8 | |
–Stage 2 | 0 | | 0 | | 0 | | 0.1 | | 0.3 | | 0.1 | | 0.2 | | 0 | | (0.1) | | 0.6 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | 0 | | 0.1 | |
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Total exposures | 67.3 | | 44.9 | | 89.3 | | 61.7 | | 23.8 | | 12.0 | | 6.8 | | 13.4 | | (0.9) | | 318.3 | |
Santander UK Group Holdings plc105
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Annual Report 2020 | Risk review
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| Santander UK risk grade | | | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(3) | Total |
2019 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | | £bn |
ECL | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.2 | | 0.5 | | 0 | | | 0.8 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | 0 | | | 0.1 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0.1 | | 0 | | | 0.3 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.4 | | 0 | | | 0.4 | |
Of which mortgages: | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | 0 | | | 0.2 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | 0 | | | 0.1 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | | 0.1 | |
–Loans and advances to banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Reverse repo agreements – non trading | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Other financial assets at amortised cost | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total financial assets at amortised cost | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.2 | | 0.5 | | 0 | | | 0.8 | |
Financial assets at FVOCI: | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total on balance sheet | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.2 | | 0.5 | | 0 | | | 0.8 | |
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Total off–balance sheet | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | | 0.1 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0 | | | 0.1 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
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Total ECL | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.2 | | 0.6 | | 0 | | | 0.9 | |
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2019 | % | % | % | % | % | % | % | % | | % |
Coverage ratio | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | 0 | | 0 | | 0 | | 0 | | 0.5 | | 1.8 | | 8.1 | | 0 | | | 0.4 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 1.6 | | 0 | | 0 | | | 0.1 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 3.7 | | 2.1 | | 3.7 | | 0 | | | 2.6 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 17.4 | | 0 | | | 21.1 | |
Of which mortgages: | 0 | | 0 | | 0 | | 0 | | 0 | | 2.4 | | 2.6 | | 0 | | | 0.1 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 3.2 | | 0 | | 0 | | | 1.2 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 5.9 | | 0 | | | 6.3 | |
–Loans and advances to banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Reverse repo agreements – non trading | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Other financial assets at amortised cost | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total financial assets at amortised cost | 0 | | 0 | | 0 | | 0 | | 0.5 | | 1.8 | | 8.1 | | 0 | | | 0.3 | |
Financial assets at FVOCI: | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
Total on balance sheet | 0 | | 0 | | 0 | | 0 | | 0.5 | | 1.8 | | 8.1 | | 0 | | | 0.3 | |
| | | | | | | | | | |
Total off–balance sheet | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 16.7 | | 0 | | | 0.2 | |
–Stage 1 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
–Stage 2 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 50.0 | | 0 | | | 16.7 | |
–Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
| | | | | | | | | | |
Total coverage ratio | 0 | | 0 | | 0 | | 0 | | 0.4 | | 1.7 | | 8.8 | | 0 | | | 0.3 | |
(1)Includes cash at hand and smaller cases mainly in the consumer (auto) finance and commercial mortgages portfolios, as well as loans written as part of the Government Covid-19 support schemes for micro-SMEs. We use scorecards for these items, rather than rating models.
(2)Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet.
(3)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.
106Santander UK Group Holdings plc
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Credit performance (audited)
Our 2020 results include £448m of impairment charges arising from changes to economic scenarios and weights and the staging reclassification of certain loans following an in-depth sectoral and payment holiday review, explained in more detail below.
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| Customer Loans | Gross write- offs | Loan Loss Allowances |
| Total | Stage 1 | Stage 2 | Stage 3 |
2020 | £bn | £bn | £bn | £bn | £m | £m |
Retail Banking: | 186.5 | | 173.2 | | 11.4 | | 1.9 | | 180 | | 706 | |
–of which mortgages | 169.8 | | 157.6 | | 10.4 | | 1.8 | | 14 | | 280 | |
–of which business banking | 3.9 | | 3.9 | | 0 | | 0 | | 12 | | 9 | |
–of which consumer (auto) finance | 8.0 | | 7.6 | | 0.4 | | 0 | | 25 | | 118 | |
–of which other unsecured lending | 4.8 | | 4.1 | | 0.6 | | 0.1 | | 129 | | 299 | |
Corporate & Commercial Banking | 17.6 | | 11.1 | | 5.5 | | 1.0 | | 51 | | 603 | |
Corporate & Investment Banking | 2.8 | | 2.6 | | 0.2 | | 0 | | 22 | | 33 | |
Corporate Centre | 3.5 | | 3.5 | | 0 | | 0 | | 0 | | 35 | |
| 210.4 | | 190.4 | | 17.1 | | 2.9 | | 253 | | 1,377 | |
Undrawn Balances | | 41.8 | | 1.3 | | 0.1 | | | |
Stage 1, Stage 2 and Stage 31 ratios % | | 90.49 | | 8.12 | | 1.42 | | | |
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2019 | £bn | £bn | £bn | £bn | £m | £m |
Retail Banking: | 178.8 | | 167.6 | | 9.3 | | 1.9 | | 196 | | 549 | |
–of which mortgages | 165.4 | | 155.5 | | 8.2 | | 1.7 | | 14 | | 218 | |
–of which business banking | 0.2 | | 0.2 | | 0 | | 0 | | 14 | | 9 | |
–of which consumer (auto) finance | 7.7 | | 7.0 | | 0.6 | | 0.1 | | 34 | | 88 | |
–of which other unsecured lending | 5.5 | | 4.9 | | 0.5 | | 0.1 | | 134 | | 234 | |
Corporate & Commercial Banking | 18.4 | | 15.9 | | 2.1 | | 0.4 | | 53 | | 262 | |
Corporate & Investment Banking | 4.0 | | 3.8 | | 0.2 | | 0 | | 0 | | 50 | |
Corporate Centre | 4.1 | | 4.0 | | 0.1 | | 0 | | 0 | | 2 | |
| 205.3 | | 191.3 | | 11.7 | | 2.3 | | 249 | | 863 | |
Undrawn Balances | | 40.9 | | 0.7 | | 0.1 | | | |
Stage 1, Stage 2 and Stage 31 ratios % | | 93.20 | | 5.69 | | 1.15 | | | |
(1)Stage3 ratio = (Stage3 drawn + Stage3 undrawn assets)/(total drawn assets + Stage3 undrawn assets)
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.
We made significant adjustments to our economic assumptions and scenario weightings during 2020 to reflect the emerging impact of the Covid-19 pandemic. Our five economic scenarios have been updated for Q4 2020 and weighted further to the downside, to reflect the expected longer path to recovery for the UK. The 2020 impact was an ECL charge of £164m (9M20: £150m), with an increase in Q4 2020 due to the weighting downgrade as a consequence of the January 2021 national lockdown, which was partially offset by higher house prices and a delayed peak in unemployment.
We have reclassified the staging of a number of corporate loans based on a review of the sectors and lending most at risk due to Covid-19, while also considering those customers who have been granted some form of concession. Furthermore, we have provided for unexpected large single name exposures defaulting due to a risk which could emerge as a result of the Covid-19 pandemic. The 2020 impact was an impairment charge of £215m, up from £172m in 9M20.
To support our customers, we have offered payment holidays on a range of products, most of which were taken by customers who were up to date with their repayments. The granting of a payment holiday on its own was not considered to be a Significant Increase in Credit Risk (SICR) event, nor was it considered a default under regulatory definitions, but we provided for potentially higher arrears as a result. In Q4 2020 we reviewed the ECL provision and loans that had taken payment holidays and decreased ECL by £11m to £27m (9M20: £38m).
We made other Covid-19 management judgement overlays, predominantly relating to mortgage and unsecured personal loan model risk refinement, including delay in repossessions, which increased ECL by £18m in Q4 2020 to £45m (9M20: £29m).
Santander UK Group Holdings plc107
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Annual Report 2020 | Risk review
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Credit quality (audited)
Total on-balance sheet exposures at 31 December 2020 comprised £210.4bn of customer loans, loans and advances to banks of £2.0bn, £20.8bn of sovereign assets measured at amortised cost, £9.0bn of assets measured at FVOCI, and £43.5bn of cash and balances at central banks.
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| Stage 1 | Stage 2 | Stage 3 | Total |
2020 | £m | £m | £m | £m |
Exposures | | | | |
On-balance sheet | | | | |
Retail Banking | 173,157 | | 11,384 | | 1,935 | | 186,476 | |
–of which mortgages | 157,614 | | 10,388 | | 1,799 | | 169,801 | |
Corporate & Commercial Banking | 11,167 | | 5,498 | | 961 | | 17,626 | |
Corporate & Investment Banking | 2,587 | | 198 | | 0 | | 2,785 | |
Corporate Centre | 78,708 | | 27 | | 0 | | 78,735 | |
Total on-balance sheet | 265,619 | | 17,107 | | 2,896 | | 285,622 | |
Off-balance sheet | | | | |
Retail Banking(1) | 26,550 | | 256 | | 41 | | 26,847 | |
–of which mortgages(1) | 13,180 | | 82 | | 14 | | 13,276 | |
Corporate & Commercial Banking | 6,050 | | 768 | | 59 | | 6,877 | |
Corporate & Investment Banking | 8,630 | | 231 | | 0 | | 8,861 | |
Corporate Centre | 567 | | 18 | | 0 | | 585 | |
Total off-balance sheet(2) | 41,797 | | 1,273 | | 100 | | 43,170 | |
Total exposures | 307,416 | | 18,380 | | 2,996 | | 328,792 | |
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ECL | | | | |
On-balance sheet | | | | |
Retail Banking | 100 | | 350 | | 218 | | 668 | |
–of which mortgages | 15 | | 130 | | 132 | | 277 | |
Corporate & Commercial Banking | 46 | | 189 | | 342 | | 577 | |
Corporate & Investment Banking | 5 | | 17 | | 0 | | 22 | |
Corporate Centre | 35 | | 0 | | 0 | | 35 | |
Total on-balance sheet | 186 | | 556 | | 560 | | 1,302 | |
Off-balance sheet | | | | |
Retail Banking | 18 | | 19 | | 1 | | 38 | |
–of which mortgages | 2 | | 1 | | 0 | | 3 | |
Corporate & Commercial Banking | 8 | | 10 | | 8 | | 26 | |
Corporate & Investment Banking | 4 | | 7 | | 0 | | 11 | |
Total off-balance sheet | 30 | | 36 | | 9 | | 75 | |
Total ECL | 216 | | 592 | | 569 | | 1,377 | |
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| % | % | % | % |
Coverage ratio(3) | | | | |
On-balance sheet | | | | |
Retail Banking | 0.1 | | 3.1 | | 11.3 | | 0.4 | |
–of which mortgages | 0 | | 1.3 | | 7.3 | | 0.2 | |
Corporate & Commercial Banking | 0.4 | | 3.4 | | 35.6 | | 3.3 | |
Corporate & Investment Banking | 0.2 | | 8.6 | | 0 | | 0.8 | |
Corporate Centre | 0 | | 0 | | 0 | | 0 | |
Total on-balance sheet | 0.1 | | 3.3 | | 19.3 | | 0.5 | |
Off-balance sheet | | | | |
Retail Banking | 0.1 | | 7.4 | | 2.4 | | 0.1 | |
–of which mortgages | 0 | | 1.2 | | 0 | | 0 | |
Corporate & Commercial Banking | 0.1 | | 1.3 | | 13.6 | | 0.4 | |
Corporate & Investment Banking | 0 | | 3.0 | | 0 | | 0.1 | |
Total off-balance sheet | 0.1 | | 2.8 | | 9.0 | | 0.2 | |
Total coverage | 0.1 | | 3.2 | | 19.0 | | 0.4 | |
(1)Off-balance sheet exposures include £7.7bn of retail mortgage offers in the pipeline.
(2)Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 31 to the Consolidated Financial Statements.
(3)ECL as a percentage of the related exposure.
108Santander UK Group Holdings plc
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Total on-balance sheet exposures at 31 December 2019 comprised £205.3bn of customer loans, loans and advances 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.
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| Stage 1 | Stage 2 | Stage 3 | Total |
2019 | £m | £m | £m | £m |
Exposures | | | | |
On-balance sheet | | | | |
Retail Banking | 167,608 | | 9,289 | | 1,865 | | 178,762 | |
–of which mortgages | 155,477 | | 8,157 | | 1,722 | | 165,356 | |
Corporate & Commercial Banking | 15,871 | | 2,096 | | 424 | | 18,391 | |
Corporate & Investment Banking | 3,843 | | 198 | | 0 | | 4,041 | |
Corporate Centre | 73,424 | | 97 | | 0 | | 73,521 | |
Total on-balance sheet | 260,746 | | 11,680 | | 2,289 | | 274,715 | |
Off-balance sheet | | | | |
Retail Banking(1) | 25,795 | | 186 | | 37 | | 26,018 | |
–of which mortgages(1) | 13,353 | | 67 | | 12 | | 13,432 | |
Corporate & Commercial Banking | 5,410 | | 289 | | 28 | | 5,727 | |
Corporate & Investment Banking | 9,129 | | 199 | | 15 | | 9,343 | |
Corporate Centre | 519 | | 0 | | 0 | | 519 | |
Total off-balance sheet(2) | 40,853 | | 674 | | 80 | | 41,607 | |
Total exposures | 301,599 | | 12,354 | | 2,369 | | 316,322 | |
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ECL | | | | |
On-balance sheet | | | | |
Retail Banking | 76 | | 246 | | 200 | | 522 | |
–of which mortgages | 11 | | 100 | | 103 | | 214 | |
Corporate & Commercial Banking | 46 | | 45 | | 156 | | 247 | |
Corporate & Investment Banking | 1 | | 13 | | 0 | | 14 | |
Corporate Centre | 1 | | 1 | | 0 | | 2 | |
Total on-balance sheet | 124 | | 305 | | 356 | | 785 | |
Off-balance sheet | | | | |
Retail Banking | 13 | | 13 | | 1 | | 27 | |
–of which mortgages | 3 | | 1 | | 0 | | 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 | |
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| % | % | % | % |
Coverage ratio(3) | | | | |
On-balance sheet | | | | |
Retail Banking | 0 | | 2.6 | | 10.7 | | 0.3 | |
–of which mortgages | 0 | | 1.2 | | 6.0 | | 0.1 | |
Corporate & Commercial Banking | 0.3 | | 2.1 | | 36.8 | | 1.3 | |
Corporate & Investment Banking | 0 | | 6.6 | | 0 | | 0.3 | |
Corporate Centre | 0 | | 1.0 | | 0 | | 0 | |
Total on-balance sheet | 0 | | 2.6 | | 15.6 | | 0.3 | |
Off-balance sheet | | | | |
Retail Banking | 0.1 | | 7.0 | | 2.7 | | 0.1 | |
–of which mortgages | 0 | | 1.5 | | 0 | | 0 | |
Corporate & Commercial Banking | 0.1 | | 2.1 | | 7.1 | | 0.3 | |
Corporate & Investment Banking | 0 | | 12.1 | | 60.0 | | 0.4 | |
Total off-balance sheet | 0.1 | | 6.4 | | 15.0 | | 0.2 | |
Total coverage | 0 | | 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 31 to the Consolidated Financial Statements.
(3)ECL as a percentage of the related exposure.
Santander UK Group Holdings plc109
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Annual Report 2020 | Risk review
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2020 compared to 2019
Key movements in exposures and ECL in the year by Stage were:
–The increase in Stage 1 exposures was due to the take up of BBLS by Business Banking customers, and other Covid-19 related UK Government's schemes by corporate customers as well as strong mortgage lending in H2 2020. Stage 1 ECL increased due to a £35m Corporate "Tall Tree" PMA to cover potential future large case losses, as well as increases from Retail unsecured portfolios as a result of the updated 2020 economic scenarios.
–Stage 2 exposures increased as although arrears balances have reduced, management took actions in response to the Covid-19 pandemic, namely downgrading the economic scenarios and weights which increased PDs across the business causing more accounts to breach the SICR triggers to enter Stage 2, moving riskier balances of £0.8bn to which payment holidays were offered to from Stage 1 to Stage 2 and moving £3.1bn corporate loans most impacted by Covid-19 from Stage 1 to Stage 2. The increase in ECL balances reflected these actions.
–Stage 3 exposures have increased due to the extension of the Covid-19 High Risk Corporate PMA to Stage 2 customers, which moved £0.4bn of Stage 2 exposures most at risk of being negatively impacted by Covid-19 to Stage 3. Stage 3 mortgage exposures also increased as accounts rolled off of payment holidays and into arrears.This was offset by strong performance across the Retail unsecured portfolios. The increase in ECL balances reflected these actions.
Stage 2 analysis (audited)
The following table analyses our Stage 2 exposures and ECL by the reason the exposure is classified as Stage 2.
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| Retail Banking | Other business segments | Total |
| Exposure | ECL | Coverage | Exposure | ECL | Coverage | Exposure | ECL | Coverage |
2020 | £m | £m | % | £m | £m | % | £m | £m | % |
PD deterioration | 7,840 | | 259 | | 3.3 | | 2,160 | | 40 | | 1.9 | | 10,000 | | 299 | | 3.0 | |
Forbearance | 612 | | 3 | | 0.5 | | 155 | | 5 | | 3.2 | | 767 | | 8 | | 1.0 | |
Other | 1,447 | | 22 | | 1.5 | | 1,046 | | 90 | | 8.6 | | 2,493 | | 112 | | 4.5 | |
30 DPD | 897 | | 58 | | 6.5 | | 253 | | 5 | | 2.0 | | 1,150 | | 63 | | 5.5 | |
Payment Holiday | 844 | | 27 | | 3.2 | | 0 | | 0 | | 0 | | 844 | | 27 | | 3.2 | |
High Risk Corporate | 0 | | 0 | | 0 | | 3,126 | | 83 | | 2.7 | | 3,126 | | 83 | | 2.7 | |
| 11,640 | | 369 | | 3.2 | | 6,740 | | 223 | | 3.3 | | 18,380 | | 592 | | 3.2 | |
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2019 | | | | | | | | | |
PD deterioration | 6,749 | | 190 | | 2.8 | | 2,093 | | 29 | | 1.4 | | 8,842 | | 219 | | 2.5 | |
Forbearance | 504 | | 3 | | 0.6 | | 57 | | 2 | | 3.5 | | 561 | | 5 | | 0.9 | |
Other | 1,174 | | 20 | | 1.7 | | 563 | | 56 | | 9.9 | | 1,737 | | 76 | | 4.4 | |
30 DPD | 1,048 | | 46 | | 4.4 | | 166 | | 2 | | 1.2 | | 1,214 | | 48 | | 4.0 | |
| 9,475 | | 259 | | 2.7 | | 2,879 | | 89 | | 3.1 | | 12,354 | | 348 | | 2.8 | |
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.
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| 2020 | | 2019 |
| Exposure | ECL | Coverage | | Exposure | ECL | Coverage |
| £m | £m | % | | £m | £m | % |
Stage 2 not in cure period | 17,036 | | 554 | | 3.3 | | | 12,020 | | 342 | | 2.8 | |
Stage 2 in cure period (for transfer to Stage 1) | 1,344 | | 38 | | 2.8 | | | 334 | | 6 | | 1.8 | |
| 18,380 | | 592 | | 3.2 | | | 12,354 | | 348 | | 2.8 | |
2020 compared to 2019
Stage 2 exposures increased as although arrears balances have reduced, management took actions in response to the Covid-19 pandemic, namely downgrading the economic scenarios and weights which increased PDs across the business causing more accounts to breach the SICR triggers to enter Stage 2, moving riskier balances of £0.8bn to which payment holidays were offered to from Stage 1 to Stage 2 and moving £3.1bn corporate loans most impacted by Covid-19 from Stage 1 to Stage 2. The increase in ECL balances reflected these actions, with coverage increases coming from the downgraded economic forecasts.
The accounts in cure period at 31 December 2020 increased compared to 2019, as more mortgage accounts cured out of late arrears and are being held in Stage 2 in 2020.
We do not have any cure period criteria for exiting Stage 3 to Stage 2.
110Santander UK Group Holdings plc
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Strategic Report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
| | | | Credit risk | | | | | | |
Reconciliation of exposures, loss allowance and net carrying amounts (audited)
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.
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| On-balance sheet | | Off-balance sheet |
| Exposures | Loss allowance | Net carrying amount | | Exposures | Loss allowance |
2020 | £m | £m | £m | | £m | £m |
Retail Banking(2) | 186,476 | | 668 | | 185,808 | | | 26,847 | | 38 | |
–of which mortgages(3) | 169,801 | | 277 | | 169,524 | | | 13,276 | | 3 | |
Corporate & Commercial Banking | 17,626 | | 577 | | 17,049 | | | 6,877 | | 26 | |
Corporate & Investment Banking | 2,785 | | 22 | | 2,763 | | | 8,861 | | 11 | |
Corporate Centre | 78,735 | | 35 | | 78,700 | | | 585 | | 0 | |
Total exposures presented in Credit Quality tables | 285,622 | | 1,302 | | 284,320 | | | 43,170 | | 75 | |
Other items(1) | | | 3,111 | | | | |
Adjusted net carrying amount | | | 287,431 | | | | |
Assets classified at FVTPL | | | 4,285 | | | | |
Non-financial assets | | | 7,348 | | | | |
Total assets per the Consolidated Balance Sheet | | | 299,064 | | | | |
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2019 | | | | | | |
Retail Banking(2) | 178,762 | | 522 | | 178,240 | | | 26,018 | | 27 | |
–of which mortgages(3) | 165,356 | | 214 | | 165,142 | | | 13,432 | | 4 | |
Corporate & Commercial Banking | 18,391 | | 247 | | 18,144 | | | 5,727 | | 15 | |
Corporate & Investment Banking | 4,041 | | 14 | | 4,027 | | | 9,343 | | 36 | |
Corporate Centre | 73,521 | | 2 | | 73,519 | | | 519 | | 0 | |
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 | | | | |
(1)These assets mainly relate to loans as part of a joint venture agreement and the accrued interest on them. They carry low credit risk and therefore have an immaterial ECL.
(2)Off-balance sheet exposures include credit cards in addition to mortgages.
(3)Off-balance sheet exposures include offers in the pipeline and undrawn balances from flexible mortgage products.
Santander UK Group Holdings plc111
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Annual Report 2020 | Risk review
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Movement in total exposures and the corresponding ECL (audited)
The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in 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.
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 301,599 | | 147 | | 12,354 | | 348 | | 2,369 | | 368 | | 316,322 | | 863 | |
Transfers from Stage 1 to Stage 2(3) | (9,814) | | (47) | | 9,814 | | 47 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 3,178 | | 110 | | (3,178) | | (110) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (385) | | (8) | | (1,126) | | (61) | | 1,511 | | 69 | | 0 | | 0 | |
Transfers from Stage 3(3) | 12 | | 2 | | 326 | | 21 | | (338) | | (23) | | 0 | | 0 | |
Transfers of financial instruments | (7,009) | | 57 | | 5,836 | | (103) | | 1,173 | | 46 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | (101) | | 0 | | 239 | | 0 | | 241 | | 0 | | 379 | |
Change in economic scenarios(2) | 0 | | 15 | | 0 | | 139 | | 0 | | 10 | | 0 | | 164 | |
Changes to model | 0 | | 0 | | 0 | | 0 | | 0 | | 25 | | 0 | | 25 | |
New lending and assets purchased(5) | 55,546 | | 40 | | 1,372 | | 64 | | 104 | | 51 | | 57,022 | | 155 | |
Redemptions, repayments and assets sold (7) | (47,671) | | (30) | | (2,250) | | (42) | | (441) | | (18) | | (50,362) | | (90) | |
Other(6) | 4,953 | | 88 | | 1,068 | | (53) | | 184 | | 99 | | 6,205 | | 134 | |
Assets written off (7) | (2) | | 0 | | 0 | | 0 | | (393) | | (253) | | (395) | | (253) | |
At 31 December 2020 | 307,416 | | 216 | | 18,380 | | 592 | | 2,996 | | 569 | | 328,792 | | 1,377 | |
Net movement in the period | 5,817 | | 69 | | 6,026 | | 244 | | 627 | | 201 | | 12,470 | | 514 | |
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ECL charge/(release) to the Income Statement | | 69 | | | 244 | | | 454 | | | 767 | |
Less: Discount unwind | | 0 | | | 0 | | | (14) | | | (14) | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | (108) | | | (108) | |
Total ECL charge/(release) to the Income Statement | 69 | | | 244 | | | 332 | | | 645 | |
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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 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 3,458 | | 74 | | (3,458) | | (74) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (361) | | (2) | | (595) | | (24) | | 956 | | 26 | | 0 | | 0 | |
Transfers from Stage 3(3) | 10 | | 1 | | 516 | | 23 | | (526) | | (24) | | 0 | | 0 | |
Transfers of financial instruments | (994) | | 62 | | 564 | | (64) | | 430 | | 2 | | 0 | | 0 | |
Net remeasurement of ECL on stage transfer(4) | 0 | | (66) | | 0 | | 130 | | 0 | | 96 | | 0 | | 160 | |
Change in economic scenarios(2) | 0 | | 5 | | 0 | | (15) | | 0 | | (9) | | 0 | | (19) | |
Changes to model | — | | 0 | | — | | 0 | | — | | 13 | | — | | 13 | |
New lending and assets purchased(5) | 42,415 | | 29 | | 827 | | 32 | | 15 | | 9 | | 43,257 | | 70 | |
Redemptions, repayments and assets sold (7) | (40,379) | | (32) | | (1,344) | | (28) | | (458) | | (42) | | (42,181) | | (102) | |
Other(6) | 4,195 | | 6 | | 295 | | (14) | | 171 | | 191 | | 4,661 | | 183 | |
Assets written off (7) | (1) | | 0 | | (1) | | 0 | | (361) | | (249) | | (363) | | (249) | |
At 31 December 2019 | 301,599 | | 147 | | 12,354 | | 348 | | 2,369 | | 368 | | 316,322 | | 863 | |
Net movement in the period | 5,236 | | 4 | | 341 | | 41 | | (203) | | 11 | | 5,374 | | 56 | |
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ECL charge/(release) to the Income Statement | | 4 | | | 41 | | | 260 | | | 305 | |
Less: Discount unwind | | 0 | | | 0 | | | (14) | | | (14) | |
Less: Recoveries net of collection costs | | (10) | | | (15) | | | (46) | | | (71) | |
Total ECL charge/(release) to the Income Statement | (6) | | | 26 | | | 200 | | | 220 | |
(1)Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2)Changes to assumptions in the year. Isolates the impact on ECL from changes to the economic variables for each scenario, changes to the scenarios themselves as well as changes in the probability weights from all other movements. This also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown within Transfers of financial instruments.
(3)Total impact of facilities that moved Stage(s) in the year. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the year. Transfers between Stages are based on opening balances and ECL at the start of the year.
(4)Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.
(5)Exposures and ECL of facilities that did not exist at the start of the year but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6)Residual movements on existing facilities that did not change Stage in the year, and which were not acquired in the year. Includes the net increase or decrease in the period of cash at central banks, the impact of changes in risk parameters in the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the year.
(7)Exposures and ECL for facilities that existed at the start of the year but not at the end.
112Santander UK Group Holdings plc
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COUNTRY RISK EXPOSURES (AUDITED)
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 SA 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 group members. We show them separately in the ‘Balances with other Banco Santander group members’ section.
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| 2020 | | 2019 |
| | | Financial Institutions | | | | | | | Financial Institutions | | | |
| Governments | Government guaranteed | Banks(1) | Other | Retail | Corporate | Total(2) | | Governments | Government guaranteed | Banks(1) | Other | Retail | Corporate | Total(2) |
| £bn | £bn | £bn | £bn | £bn | £bn | £bn | | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Eurozone | | | | | | | | | | | | | | | |
Ireland | 0 | | 0 | | 0 | | 6.0 | | 0 | | 0.1 | | 6.1 | | | 0 | | 0 | | 0 | | 7.5 | | 0 | | 0.1 | | 7.6 | |
Italy | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0.1 | | 0 | | 0 | | 0.1 | |
Spain | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.1 | | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
France | 0.1 | | 0 | | 0.5 | | 0.2 | | 0 | | 0 | | 0.8 | | | 0.1 | | 0 | | 0.6 | | 0.5 | | 0 | | 0 | | 1.2 | |
Germany | 0 | | 0 | | 0.7 | | 0.1 | | 0 | | 0.1 | | 0.9 | | | 0 | | 0 | | 1.2 | | 0.1 | | 0 | | 0.1 | | 1.4 | |
Luxembourg | 0 | | 0 | | 0.1 | | 1.3 | | 0 | | 0.1 | | 1.5 | | | 0 | | 0 | | 0.1 | | 2.7 | | 0 | | 0.1 | | 2.9 | |
Other(3) | 0.4 | | 0 | | 1.1 | | 0 | | 0 | | 0.4 | | 1.9 | | | 0.3 | | 0 | | 1.1 | | 0 | | 0 | | 0 | | 1.4 | |
| 0.5 | | 0 | | 2.4 | | 7.6 | | 0 | | 0.8 | | 11.3 | | | 0.4 | | 0 | | 3.0 | | 10.9 | | 0 | | 0.3 | | 14.6 | |
Other countries | | | | | | | | | | | | | | | |
UK | 44.4 | | 0 | | 2.8 | | 15.5 | | 209.3 | | 40.4 | | 312.4 | | | 33.5 | | 0 | | 3.6 | | 15.6 | | 204.6 | | 38.2 | | 295.5 | |
US | 0.8 | | 0 | | 0.9 | | 0.1 | | 0 | | 0.3 | | 2.1 | | | 1.0 | | 0 | | 1.1 | | 0.1 | | 0 | | 0.1 | | 2.3 | |
Japan | 2.4 | | 0 | | 1.0 | | 0 | | 0 | | 0 | | 3.4 | | | 2.3 | | 0 | | 1.6 | | 0 | | 0 | | 0 | | 3.9 | |
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Denmark | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.5 | | 0.5 | |
Other | 0.3 | | 0 | | 0.5 | | 0.1 | | 0.3 | | 0.7 | | 1.9 | | | 0.1 | | 0 | | 0.5 | | 0.1 | | 0.3 | | 0.8 | | 1.8 | |
| 47.9 | | 0 | | 5.2 | | 15.7 | | 209.6 | | 41.4 | | 319.8 | | | 36.9 | | 0 | | 6.8 | | 15.8 | | 204.9 | | 39.6 | | 304.0 | |
Total | 48.4 | | 0 | | 7.6 | | 23.3 | | 209.6 | | 42.2 | | 331.1 | | | 37.3 | | 0 | | 9.8 | | 26.7 | | 204.9 | | 39.9 | | 318.6 | |
(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 £0.6bn (2019: £0.2bn), Belgium of £0.9bn (2019: £0.6bn).
Balances with other Banco Santander group members (audited)
We deal with other Banco Santander group members 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. 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 group members. We also dealt with Banco Santander SA as part of implementing our ring–fencing 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 2020 and 31 December 2019, we had gross balances with other Banco Santander group members as follows:
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| 2020 | | 2019 |
| Financial institutions | | | | Financial institutions | | |
| Banks | Other | Corporate | Total | | Banks | Other | Corporate | Total |
| £bn | £bn | £bn | £bn | | £bn | £bn | £bn | £bn |
Assets | | | | | | | | | |
Spain | 1.8 | | 0 | | 0 | | 1.8 | | | 1.8 | | 0 | | 0 | | 1.8 | |
UK | 0 | | 2.3 | | 0 | | 2.3 | | | 0 | | 2.2 | | 0 | | 2.2 | |
| 1.8 | | 2.3 | | 0 | | 4.1 | | | 1.8 | | 2.2 | | 0 | | 4.0 | |
Liabilities | | | | | | | | | |
Spain | 2.5 | | 0.1 | | 0 | | 2.6 | | | 2.4 | | 0.1 | | 0 | | 2.5 | |
UK | 0 | | 1.3 | | 0 | | 1.3 | | | 0 | | 1.2 | | 0 | | 1.2 | |
Uruguay | 0.1 | | 0 | | 0 | | 0.1 | | | 0.2 | | 0 | | 0 | | 0.2 | |
| 2.6 | | 1.4 | | 0 | | 4.0 | | | 2.6 | | 1.3 | | 0 | | 3.9 | |
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Annual Report 2020 | Risk review
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Covid-19 Support measures in place at 31 December 2020
A summary of the Covid-19 financial support measures that were in place at 31 December 2020 is set out below:
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| Customers supported | Total loans for which PH granted | Breakdown of total PH granted | Outstanding PH |
| Up to date after PH | Ongoing PH | New to arrears after PH ends | In arrears before PH |
| | £bn | % | % | % | % | £bn |
Payment holidays (PH)(1) | | | | | | | |
Mortgages | 251,000 | 37.1 | | 88 | | 8 | | 2 | | 2 | | 2.5 | |
Consumer (auto) finance(2) | 54,000 | 0.5 | | 77 | | 11 | | 8 | | 4 | | 0.1 | |
Unsecured Personal Loans (UPLs) | 34,000 | 0.2 | | 77 | | 13 | | 4 | | 6 | | <0.1 |
Credit Cards | 32,000 | 0.1 | 76 | | 12 | | 8 | | 4 | | <0.1 |
Business and corporates | 2,500 | 2.4 | | 98 | | 2 | | 0 | | 0 | | 0.1 | |
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| Number of customers | Loan balance | % of relevant laon book |
| | £bn | % |
Government lending schemes(3) | | | |
Bounce Back Loan Scheme (BBLS)(4) | 148,000 | | 4.0 | | 19 | |
Coronavirus Business Interruption Loan Scheme (CBILS) | 2,000 | | 0.4 | | 2 | |
Coronavirus Large Business Interruption Loan Scheme (CLBILS) | 30 | | 0.2 | | 3 | |
(1)Also known as payment deferrals.Retail balances are stock positions for customers supported and loans at 31 December 2020 that have had, or currently have, payment holidays granted.
(2)Includes customers supported by PSA Finance UK Limited.
(3)Applications drawn to 31 December 2020.
(4)100% government guaranteed.
Corporate customer sector split(1)
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| 2020 | | 2019 |
| Total | | Total |
| £bn | | £bn |
Social housing | 5.8 | | | 6.4 | |
Other real estate | 4.9 | | | 5.5 | |
Wholesale & retail trade | 3.7 | | | 3.8 | |
Accommodation & food | 2.1 | | | 1.8 | |
Construction | 1.6 | | | 1.2 | |
Human health & social work | 1.5 | | | 1.4 | |
Professional, scientific and technical | 1.3 | | | 1.0 | |
Administrative & support services | 1.3 | | | 1.3 | |
Manufacturing | 1.0 | | | 1.2 | |
Information & communication | 0.8 | | | 0.5 | |
Transport & storage | 0.5 | | | 0.5 | |
Electricity & gas | 0.6 | | | 0.5 | |
Arts, entertainment & recreation | 0.4 | | | 0.3 | |
Other segments | 2.0 | | | 1.0 | |
Total corporate loans | 27.5 | | | 26.4 | |
Of which government lending schemes | 4.6 | | | 0 | |
(1)Total corporate loans includes £24.3bn of Corporate lending (CCB, CIB and Business Banking) and £3.2bn of non-core loans in Corporate Centre (which is mostly Social Housing).
The corporate loan book is well-diversified with limited sectoral concentration.
Social housing is lending and treasury services for UK housing association groups (mainly charitable entities) secured by tenanted UK residential property. We have not had a default, loss or repossession in this portfolio.
114Santander UK Group Holdings plc
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Credit risk – Retail Banking
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| 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, including the impact of Covid-19. 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 buy-to-let mortgages where we focus on non-professional landlords with small portfolios.
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 simple borrowing needs and an annual turnover of up to £6.5m. We offer unsecured lending products, including overdrafts, credit cards and business loans.
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The segmental basis of presentation in this Annual Report has been changed, and the prior periods restated, to report some customer assets in Corporate & Commercial Baking rather than in Business Banking (in Retail Banking).See Note 2 for more information.
RETAIL BANKING – CREDIT RISK MANAGEMENT
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| For more on our approach to credit risk at a Santander UK group level
See pages 88 to 101
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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 (audited)
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 (audited)
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 assess whether the customer will be able to make all the repayments on the loan over its full term. As part of this, we assess the risk that they will not pay us back. We do this by a series of initial affordability and credit risk assessments. If the loan is secured, we assess affordability by reviewing the customer’s income and spending, their other credit commitments, and what would happen if interest rates went up. For unsecured personal loans and credit cards, we stress accommodation costs on a proportionate 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 reasons people fail to pay off debt. We use them to build models of what is likely to happen in the future. These models give a credit score to the customer for the loan they want, to show how likely it is to be repaid. We regularly review them
–Credit reference agencies: data from credit reference agencies about how the borrower has handled credit in the past
–Other Santander accounts:we look at how the customer is using their other accounts with us.
Santander UK Group Holdings plc115
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Annual Report 2020 | Risk review
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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:are:
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Portfolio | Description |
Residential mortgages | Collateral is in the form of a first legal charge over the property. Before we grant a mortgage, the property is valued. We have our own guidelines forvalued either by a surveyor valuations, which build on guidance from the Royal Institution of Chartered Surveyors (RICS). But we also make use ofor using automated valuation methodologies where our confidence in the accuracy of this method is high. |
Unsecured lending | Unsecured lending means thereThere is no collateral or security tied to the loan that can be used to mitigate any potential loss if the customer does not pay us back. |
Business banking services | Business banking lending is unsecured. When lending to incorporated businesses, we typically obtain personal guarantees from each director but we do not treat these as collateral. We consider the UK Government guarantee supporting losses on amounts lent under its Coronavirus Loan Schemes as collateral with 100% for Bounce Back Loan Scheme (BBLS) and 80% for Coronavirus Business Interruption Loan Scheme (CBILS). |
Consumer Finance
In Consumer Finance, similar to Retail Banking, many decisions are automated and we tailor the process to the product. Residual value risk is one of our top risks.
Credit risk mitigation
The type of credit risk mitigation, including collateral, is:
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Portfolio | Description |
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 to ensure that the value of the vehicle being lent against is in line with market expectations, and thus any potential claims on said collateral would be sufficient to be able to mitigate against any potential losses. In addition, from time to time at a portfolio level we execute significant risk transfer transactions, which typically reduce RWAs. |
Business banking | Business banking lending is unsecured so there is no collateral or security tied to the loan that can be used to mitigate any potential loss if the customer does not pay us back. When lending to incorporated businesses, we typically obtain personal guarantees from each director but we do not treat these as collateral. |
3. Monitoring (audited)
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: each month, we also look at how the customer uses their other accounts with us, so we can identify problems early.
For secured lending, our monitoring also takes account of changes in property prices. We estimate the property’s current value every three months. In most cases, statistical models based on recent sales prices and valuations in that local area are used. Use of this model is subject to Model Risk Governance. Where a lack of data means the model’s valuation is not available, the original surveyor valuation with a House Price Index (HPI) adjustment as appropriate is used.
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.
Our day-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 our day-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 it necessary.
Covid-19 has and will continue to affect the macro-economic environment and we will respond to this using the Retail Risk Playbook tolerance framework and management judgements to ensure that portfolio quality remains within Risk Appetite.
4. Arrears management (audited)
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 account up to date as soon as possible. The most common way to bring an account 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.
5. Debt recovery (audited)
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 retail mortgage loans we can delay legal action. That can happen if the customer shows that they will be able to pay off the loan or the arrears. We aim to repossess only as a last resort or, if necessary, to protect the property from damage or third-party claims. We make sure our estimated losses from repossessed properties are realistic by getting two independent valuations on each property, as well as the estimated cost of selling it. These form the basis of our loss allowances calculations. Where we do enforce the possession of properties held as collateral, we use external agents to realise the value and settle the debt. During this process we do not own the property, but we do administer the sale process. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with insolvency regulations.
116Santander UK Group Holdings plc
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Loan modifications (audited)
Forbearance
If a customer lets us know they are having financial difficulty, we aim to come to an arrangement with them before they actually default. Their problems can be the result of losing their job, falling ill, a relationship breaking down, or the death of someone close to them.
Forbearance is mainly for mortgages and unsecured loans. We offer forbearance in line with our risk policies, and on a case-by-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:
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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.
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Term extension | We can extend the term of the loan, making each monthly payment smaller. For mortgages, the customer must also meet our policies for maximum loan term and age when they finish repaying (usually no more than 75). 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.appropriate. |
Other modifications
Apart from forbearance, we have sometimes changed the contract terms to keep a good relationship with a customer. In addition, since March 2020, we have provided mortgage customers with payment holiday terms in line with the UK Government's Covid-19 guidance. Similar payment holidays have also been granted in respect of consumer (auto) finance, personal loans, credit cards and business banking. Where these customers showed no signs of financial difficulties at the time, we do not classify the contract changes as forbearance, and most of the loans are being repaid without any problems. For customers who have needed further financial support after the payment holiday period, we help them by offering assistance in line with our policies. 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.
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RETAIL BANKING – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL (audited)
The following table shows changes in total on and off-balance sheet exposures subject to ECL assessment, and the corresponding ECL in the year. The footnotes to the Santander UK group level table on page 112 also apply to this table.
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL |
2020 | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 193,403 | | 89 | | 9,475 | | 259 | | 1,902 | | 201 | | 204,780 | | 549 | |
Transfers from Stage 1 to Stage 2 (3) | (5,242) | | (9) | | 5,242 | | 9 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1 (3) | 2,544 | | 86 | | (2,544) | | (86) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3 (3) | (305) | | (7) | | (540) | | (27) | | 845 | | 34 | | 0 | | 0 | |
Transfers from Stage 3 (3) | 8 | | 1 | | 324 | | 20 | | (332) | | (21) | | 0 | | 0 | |
Transfers of financial instruments | (2,995) | | 71 | | 2,482 | | (84) | | 513 | | 13 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer (4) | 0 | | (79) | | 0 | | 144 | | 0 | | 42 | | 0 | | 107 | |
Change in economic scenarios (2) | 0 | | 8 | | 0 | | 81 | | 0 | | 10 | | 0 | | 99 | |
Changes to model | 0 | | 0 | | 0 | | 0 | | 0 | | 25 | | 0 | | 25 | |
New lending and assets purchased (5) | 34,986 | | 29 | | 479 | | 36 | | 9 | | 6 | | 35,474 | | 71 | |
Redemptions, repayments and assets sold (7) | (25,835) | | (16) | | (1,139) | | (22) | | (319) | | 8 | | (27,293) | | (30) | |
Other (6) | 150 | | 17 | | 342 | | (46) | | 99 | | 94 | | 591 | | 65 | |
Assets written off (7) | (2) | | (1) | | 1 | | 1 | | (228) | | (180) | | (229) | | (180) | |
At 31 December 2020 | 199,707 | | 118 | | 11,640 | | 369 | | 1,976 | | 219 | | 213,323 | | 706 | |
Net movement in the year | 6,304 | | 29 | | 2,165 | | 110 | | 74 | | 18 | | 8,543 | | 157 | |
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Charge/(release) to the Income Statement | | 30 | | | 109 | | | 198 | | | 337 | |
Less: Discount unwind | | 0 | | | 0 | | | (9) | | | (9) | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | (20) | | | (20) | |
Income statement charge/(release) for the year | | 30 | | | 109 | | | 169 | | | 308 | |
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2019 | | | | | | | | |
At 1 January 2019 | 181,600 | | 88 | | 10,356 | | 259 | | 2,170 | | 203 | | 194,126 | | 550 | |
Transfers from Stage 1 to Stage 2 (3) | (3,078) | | (8) | | 3,078 | | 8 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1 (3) | 3,254 | | 67 | | (3,254) | | (67) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3 (3) | (315) | | (2) | | (482) | | (19) | | 797 | | 21 | | 0 | | 0 | |
Transfers from Stage 3 (3) | 9 | | 1 | | 500 | | 22 | | (509) | | (23) | | 0 | | 0 | |
Transfers of financial instruments: | (130) | | 58 | | (158) | | (56) | | 288 | | (2) | | 0 | | 0 | |
Net ECL remeasurement on stage transfer (4) | 0 | | (60) | | 0 | | 75 | | 0 | | 56 | | 0 | | 71 | |
Change in economic scenarios (2) | 0 | | (5) | | 0 | | (26) | | 0 | | (9) | | 0 | | (40) | |
Changes to model | 0 | | 0 | | 0 | | 0 | | 0 | | 13 | | 0 | | 13 | |
New lending and assets purchased (5) | 36,779 | | 23 | | 447 | | 25 | | 13 | | 9 | | 37,239 | | 57 | |
Redemptions, repayments and assets sold (7) | (25,810) | | (20) | | (1,206) | | (17) | | (436) | | (33) | | (27,452) | | (70) | |
Other (6) | 965 | | 5 | | 37 | | (1) | | 117 | | 160 | | 1,119 | | 164 | |
Assets written off (7) | (1) | | 0 | | (1) | | 0 | | (250) | | (196) | | (252) | | (196) | |
At 31 December 2019 | 193,403 | | 89 | | 9,475 | | 259 | | 1,902 | | 201 | | 204,780 | | 549 | |
Net movement in the year | 11,803 | | 1 | | (881) | | 0 | | (268) | | (2) | | 10,654 | | (1) | |
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Charge/(release) to the Income Statement | | 1 | | | 0 | | | 194 | | | 195 | |
Less: Discount unwind | | 0 | | | 0 | | | (8) | | | (8) | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | (31) | | | (31) | |
Income statement charge/(release) for the year | | 1 | | | 0 | | | 155 | | | 156 | |
(1)Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2)Changes to assumptions in the year. Isolates the impact on ECL from changes to the economic variables for each scenario, changes to the scenarios themselves and changes in the probability weights from all other movements. This also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in Transfers of financial instruments.
(3)Total impact of facilities that moved stage(s) in the 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 on facilities that did not exist at the start of the period but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6)Residual movements on facilities that did not change Stage in the period, and which were not acquired in the year. Included the impact of changes in risk parameters in the year, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the year.
(7)Exposures and ECL for facilities that existed at the start of the year, but not at the end.
118Santander UK Group Holdings plc
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Stage 2 analysis
The following table analyses our Stage 2 exposures and ECL by the reason the exposure is classified as Stage 2.
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| Mortgages | Business banking | Consumer (auto) finance | Other unsecured lending | Total |
| Exposure | ECL | Coverage | Exposure | ECL | Coverage | Exposure | ECL | Coverage | Exposure | ECL | Coverage | Exposure | ECL | Coverage |
2020 | £m | £m | % | £m | £m | % | £m | £m | % | £m | £m | % | £m | £m | % |
PD deterioration | 7,102 | | 92 | | 1.3 | | 0 | | 0 | | 0 | | 88 | | 13 | | 14.8 | | 650 | | 154 | | 23.7 | | 7,840 | | 259 | | 3.3 | |
Forbearance | 602 | | 3 | | 0.5 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 10 | | 0 | | 0 | | 612 | | 3 | | 0.5 | |
Other | 1,165 | | 7 | | 0.6 | | 0 | | 0 | | 0 | | 248 | | 11 | | 4.4 | | 34 | | 4 | | 11.8 | | 1,447 | | 22 | | 1.5 | |
30 DPD | 805 | | 14 | | 1.7 | | 10 | | 2 | | 20.0 | | 27 | | 12 | | 44.4 | | 55 | | 30 | | 54.5 | | 897 | | 58 | | 6.5 | |
Payment Holiday | 795 | | 15 | | 1.9 | | 0 | | 0 | | 0 | | 16 | | 1 | | 6.3 | | 33 | | 11 | | 33.3 | | 844 | | 27 | | 3.2 | |
| 10,469 | | 131 | | 1.3 | | 10 | | 2 | | 20.0 | | 379 | | 37 | | 9.8 | | 782 | | 199 | | 25.4 | | 11,640 | | 369 | | 3.2 | |
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2019 | | | | | | | | | | | | | | | |
PD deterioration | 6,216 | | 77 | | 1.2 | | 0 | | 0 | | 0 | | 91 | | 13 | | 14.3 | | 442 | | 100 | | 22.6 | | 6,749 | | 190 | | 2.8 | |
Forbearance | 504 | | 3 | | 0.6 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 504 | | 3 | | 0.6 | |
Other | 520 | | 6 | | 1.2 | | 0 | | 0 | | 0 | | 478 | | 4 | | 0.8 | | 176 | | 10 | | 5.7 | | 1,174 | | 20 | | 1.7 | |
30 DPD | 983 | | 15 | | 1.5 | | 6 | | 2 | | 33.3 | | 35 | | 11 | | 31.4 | | 24 | | 18 | | 75.0 | | 1,048 | | 46 | | 4.4 | |
| 8,223 | | 101 | | 1.2 | | 6 | | 2 | | 33.3 | | 604 | | 28 | | 4.6 | | 642 | | 128 | | 19.9 | | 9,475 | | 259 | | 2.7 | |
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Annual Report 2020 | Risk review
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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.
2020 compared to 2019
A historically benign credit environment has supported our customers in the past and helped to reduce credit risk. However, 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 housing market continues to show resilience, we are cautious on the outlook in light of recent economic uncertainty due to the Covid-19 pandemic. Strong net mortgage growth of £4.4bn (2019: £7.4bn), with a rebound in application volumes following the Q2 2020 housing market closure.
Borrower profile (audited)
In this table, ‘Home movers’ include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house. ‘Remortgagers’ are new customers who are taking a new mortgage with us.
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| Stock | | New business |
| 2020 | | 2019 | | 2020 | | 2019 |
| £m | % | | £m | % | | £m | % | | £m | % |
Home movers | 72,439 | | 42 | | | 70,860 | | 43 | | | 10,116 | | 41 | | | 11,192 | | 38 | |
Remortgagers | 51,796 | | 31 | | | 52,480 | | 32 | | | 6,861 | | 27 | | | 9,197 | | 31 | |
First-time buyers | 33,958 | | 20 | | | 32,112 | | 19 | | | 5,354 | | 21 | | | 6,952 | | 23 | |
Buy-to-let | 11,608 | | 7 | | | 9,904 | | 6 | | | 2,622 | | 11 | | | 2,473 | | 8 | |
| 169,801 | | 100 | | | 165,356 | | 100 | | | 24,953 | | 100 | | | 29,814 | | 100 | |
As well as the new business in the table above, there were £31.7bn (2019: £31.6bn) of remortgages where we moved existing customers with maturing products onto new mortgages. We also provided £1.2bn (2019: £1.3bn) of further advances and flexible mortgage drawdowns.
2020 compared to 2019
The borrower profile of stock remained broadly unchanged. The new business borrower profile whilst similar to 2019 showed an increase in Home Movers and Buy-to-let mortgages with a decrease in First Time Buyers and Remortgages, which reflected market conditions. In 2020, we helped first-time buyers purchase their new home with £5.4bn of gross lending (2019: £7.0bn).
Interest rate profile (audited)
The interest rate profile of our mortgage asset stock was:
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| 2020 | | 2019 | | | | | |
| £m | % | | £m | % | | | | | |
Fixed rate | 136,045 | | 80 | | | 128,798 | | 78 | | | | | | |
Variable rate | 21,152 | | 13 | | | 22,116 | | 13 | | | | | | |
Standard Variable Rate (SVR) | 10,682 | | 6 | | | 14,124 | | 9 | | | | | | |
Follow on Rate (FoR) | 1,922 | | 1 | | | 318 | | 0 | | | | | | |
| 169,801 | | 100 | | | 165,356 | | 100 | | | | | | |
2020 compared to 2019
In 2020, we continued to see customers refinance from SVR to fixed rate products influenced by low mortgage rates and the competitive mortgage market.
Geographical distribution (audited)
The geographical distribution of our mortgage asset stock was:
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| Stock | | New business |
| 2020 | 2019 | | 2020 | 2019 |
Region | £bn | £bn | | £bn | £bn |
London | 42.6 | | 41.4 | | | 6.1 | | 7.5 | |
Midlands and East Anglia | 22.9 | | 22.1 | | | 3.7 | | 4.3 | |
North | 23.1 | | 22.7 | | | 3.3 | | 3.8 | |
Northern Ireland | 3.1 | | 3.3 | | | 0.2 | | 0.3 | |
Scotland | 6.7 | | 6.8 | | | 0.8 | | 1.2 | |
South East excluding London | 53.6 | | 51.7 | | | 8.3 | | 9.7 | |
South West, Wales and other | 17.8 | | 17.4 | | | 2.6 | | 3.0 | |
| 169.8 | | 165.4 | | | 25.0 | | 29.8 | |
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Average loan size for new business | £'000 | £'000 |
South East including London | 284 | | 277 | |
Rest of the UK | 166 | | 154 | |
UK as a whole | 218 | | 207 | |
2020 compared to 2019
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. The loan-to-income multiple of mortgage lending in the year, based on average earnings of new business at inception, was 3.29 (2019: 3.27).
120Santander UK Group Holdings plc
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Larger loans (audited)
The mortgage asset stock of larger loans was:
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| South East including London | | UK |
| 2020 | 2019 | | 2020 | 2019 |
Individual mortgage loan size | £m | £m | | £m | £m |
<£0.25m | 45,553 | | 45,828 | | | 105,493 | | 105,855 | |
£0.25m to £0.50m | 36,241 | | 34,027 | | | 47,903 | | 44,549 | |
£0.50m to £1.0m | 12,214 | | 11,471 | | | 14,076 | | 13,114 | |
£1.0m to £2.0m | 1,934 | | 1,538 | | | 2,085 | | 1,644 | |
>£2.0m | 236 | | 186 | | | 244 | | 194 | |
| 96,178 | | 93,050 | | | 169,801 | | 165,356 | |
At 31 December 2020, there were 98 (2019: 76) individual mortgages over £2.0m. In 2020, there were 38 (2019: 32) new mortgages over £2.0m.
Loan-to-value analysis (audited)
This table shows the LTV distribution for the gross carrying amount and the related ECL of our total mortgage portfolio and Stage 3 mortgages, as well as the LTV distribution for new business. We also show the collateral value and simple average LTV for our mortgage stock, Stage 3 stock and new business. We use our estimate of the property value at the balance sheet date. We include fees that have been added to the loan in the LTV calculation. For flexible products, we only include the drawn amount, not undrawn limits.
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| 2020 | | 2019 |
| Stock | Stage 3 | New | | Stock | Stage 3 | New |
| Total | ECL | Total | ECL | Business | | Total | ECL | Total | ECL | Business |
LTV | £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
Up to 50% | 74,620 | | 28 | | 858 | | 11 | | 4,180 | | | 70,714 | | 24 | | 743 | | 11 | | 5,113 | |
>50-75% | 69,771 | | 90 | | 633 | | 36 | | 10,088 | | | 67,311 | | 65 | | 626 | | 24 | | 11,876 | |
>75-85% | 18,508 | | 41 | | 125 | | 19 | | 5,858 | | | 17,436 | | 31 | | 136 | | 13 | | 6,130 | |
>85-100% | 6,165 | | 44 | | 93 | | 22 | | 4,781 | | | 9,011 | | 34 | | 110 | | 17 | | 6,650 | |
>100% | 737 | | 77 | | 90 | | 44 | | 46 | | | 884 | | 64 | | 107 | | 38 | | 45 | |
| 169,801 | | 280 | | 1,799 | | 132 | | 24,953 | | | 165,356 | | 218 | | 1,722 | | 103 | | 29,814 | |
Collateral value of residential properties (1) | 169,694 | | | 1,783 | | | 24,953 | | | 165,229 | | | 1,702 | | | 29,813 | |
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| % | | % | | % | | % | | % | | % |
Simple Average(2) LTV (indexed) | 42 | | | 41 | | | 64 | | | 43 | | | 42 | | | 65 | |
(1)Collateral value shown is limited to the balance of each related loan. Excludes the impact of over-collateralisation, where the collateral is higher than the loan. Includes collateral against loans in negative equity of £629m (2019: £757m).
(2)Total of all LTV% divided by the total of all accounts.
At 31 December 2020, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances was £107m (2019: £127m).
In 2020, the simple average LTV of mortgage total new lending in London was 60% (2019: 61%).
2020 compared to 2019
There were no significant changes in the quality of our collateral in 2020. Overall simple average LTV remained broadly flat over the year with some slight improvements seen towards the end of the year. We continue to monitor the LTV profile of new lending and take action as needed to ensure the LTV mix of completions is appropriate.
Credit performance (audited)
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| 2020 | 2019 |
| £m | £m |
Mortgage loans and advances to customers of which: | 169,801 | | 165,356 | |
–Stage 1 | 157,614 | | 155,477 | |
–Stage 2 | 10,388 | | 8,157 | |
–Stage 3 | 1,799 | | 1,722 | |
Loss allowances(3) | 280 | | 218 | |
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| % | % |
Stage 1 ratio(1) | 92.82 | | 94.03 | |
Stage 2 ratio(1) | 6.12 | | 4.93 | |
Stage 3 ratio(2) | 1.07 | | 1.05 | |
(1)Stage 1/Stage 2 exposures as a percentage of customer loans.
(2)Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
(3)The ECL allowance is for both on and off–balance sheet exposures.
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Movement in total exposures and the corresponding ECL (audited)
The following table shows changes in total on and off-balance sheet exposures subject to ECL assessment, and the corresponding ECL, for residential mortgages in the year. The footnotes to the Santander UK group level analysis on page 112 are also applicable to this table.
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
2020 | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 168,830 | | 14 | | 8,224 | | 101 | | 1,734 | | 103 | | 178,788 | | 218 | |
Transfers from Stage 1 to Stage 2 (3) | (4,686) | | (2) | | 4,686 | | 2 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1 (3) | 1,911 | | 17 | | (1,911) | | (17) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (229) | | (3) | | (491) | | (11) | | 720 | | 14 | | 0 | | 0 | |
Transfers from Stage 3(3) | 4 | | 0 | | 311 | | 14 | | (315) | | (14) | | 0 | | 0 | |
Transfers of financial instruments | (3,000) | | 12 | | 2,595 | | (12) | | 405 | | 0 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer (4) | 0 | | (15) | | 0 | | 50 | | 0 | | 16 | | 0 | | 51 | |
Change in economic scenarios(2) | 0 | | 7 | | 0 | | 13 | | 0 | | 10 | | 0 | | 30 | |
Changes to model | 0 | | 0 | | 0 | | 0 | | 0 | | 25 | | 0 | | 25 | |
New lending and assets purchased (5) | 26,102 | | 4 | | 237 | | 5 | | 1 | | 0 | | 26,340 | | 9 | |
Redemptions, repayments and assets sold (7) | (20,679) | | (4) | | (856) | | (7) | | (297) | | (15) | | (21,832) | | (26) | |
Other(6) | (459) | | (1) | | 270 | | (19) | | 24 | | 7 | | (165) | | (13) | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (54) | | (14) | | (54) | | (14) | |
At 31 December 2020 | 170,794 | | 17 | | 10,470 | | 131 | | 1,813 | | 132 | | 183,077 | | 280 | |
Net movement in the year | 1,964 | | 3 | | 2,246 | | 30 | | 79 | | 29 | | 4,289 | | 62 | |
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Charge/(release) to the Income Statement | | 3 | | | 30 | | | 43 | | | 76 | |
Less: Discount unwind | | 0 | | | 0 | | | (2) | | | (2) | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | (1) | | | (1) | |
Income statement charge/(release) for the year | | 3 | | | 30 | | | 40 | | | 73 | |
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2019 | | | | | | | | |
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 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1 (3) | 2,921 | | 24 | | (2,921) | | (24) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (231) | | 0 | | (429) | | (8) | | 660 | | 8 | | 0 | | 0 | |
Transfers from Stage 3(3) | 5 | | (1) | | 485 | | 16 | | (490) | | (15) | | 0 | | 0 | |
Transfers of financial instruments | 350 | | 22 | | (520) | | (15) | | 170 | | (7) | | 0 | | 0 | |
Net ECL remeasurement on stage transfer (4) | 0 | | (23) | | 0 | | 16 | | 0 | | 12 | | 0 | | 5 | |
Change in economic scenarios(2) | 0 | | (5) | | 0 | | (22) | | 0 | | (9) | | 0 | | (36) | |
Changes to model | 0 | | 0 | | 0 | | 0 | | 0 | | 13 | | 0 | | 13 | |
New lending and assets purchased (5) | 31,090 | | 5 | | 198 | | 3 | | 2 | | 0 | | 31,290 | | 8 | |
Redemptions, repayments and assets sold (7) | (22,439) | | (1) | | (1,039) | | (6) | | (396) | | (12) | | (23,874) | | (19) | |
Other (6) | 2,090 | | 4 | | 153 | | 6 | | 31 | | 14 | | 2,274 | | 24 | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (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) | |
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Charge/(release) to the Income Statement | | 2 | | | (17) | | | 11 | | | (4) | |
Less: Discount unwind | | 0 | | | 0 | | | (4) | | | (4) | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | 0 | | | 0 | |
Income statement charge/(release) for the year | | 2 | | | (17) | | | 7 | | | (8) | |
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Loan modifications
Forbearance(1)
The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.
| | | | | | | | |
| 2020 | 2019 |
| £m | £m |
Financial assets modified in the year: | | |
–Amortised cost before modification | 305 | | 384 | |
–Net modification loss | 7 | | 7 | |
Financial assets modified since initial recognition: | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12 months ECL in the year | 114 | | 89 | |
The balances (audited) at 31 December 2020 and 31 December 2019, analysed by their staging at the year-end and the forbearance we applied, were:
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| Capitalisation | Term extension | Interest-only | Concessionary interest rate | Total | Loss allowances |
2020 | £m | £m | £m | £m | £m | £m |
Stage 2 | 409 | 393 | 310 | 0 | 1,112 | 13 |
Stage 3 | 219 | 83 | 86 | 28 | 416 | 29 |
| 628 | 476 | 396 | 28 | 1,528 | 42 |
Proportion of portfolio | 0.4 | % | 0.3 | % | 0.2 | % | 0 | % | 0.9 | % | |
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2019 | | | | | | |
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 | % | 0.9 | % | |
(1)We base forbearance type on the first forbearance on the accounts.
2020 compared to 2019
In 2020, the number of new accounts granted forbearance reduced. Forbearance activity was higher in 2019 due to the launch of a new term extension forbearance solution for interest-only past maturity customers in August 2018, with volumes of this solution decreasing after its initial launch. The proportion of the mortgage portfolio in forbearance remained flat at 0.9% (2019: 0.9%).
–At 31 December 2020, the proportion of accounts in forbearance for more than six months that had made their last six months’ contractual payments remained flat at 81% (2019: 81%).
–The weighted average LTV of all accounts in forbearance was 34% (2019: 35%) compared to the weighted average portfolio LTV of 38% (2019: 39%).
–At 31 December 2020, the carrying value of mortgages classified as multiple forbearance increased slightly to £143m (2019: £137m).
Other loan modifications
Since March 2020, we have provided mortgage customers with payment holiday terms in line with UK Government and FCA guidance. For more on this, see 'Covid-19 Support measures in place at 31 December 2020' in 'Santander UK group level - Credit risk review'.
At 31 December 2020, there were £2.6bn (2019: £4.5bn) of other mortgages on the balance sheet that we had modified since January 2008. At 31 December 2020:
The average LTV was 30% (2019: 32%), and 96% (2019: 96%) of accounts had made their last six months’ contractual payments.
The proportion of accounts that were 90 days or more in arrears was 1.50% (2019: 2.14%).
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Annual Report 2020 | Risk review
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RESIDENTIAL MORTGAGES – PORTFOLIOS OF PARTICULAR INTEREST
Introduction
We are mainly a residential prime lender and we do not originate sub-prime or second charge mortgages. Despite that, some types of mortgages have higher risks and others stand out for different reasons. These are:
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Product | Description |
Interest-only loans and part interest-only, part repayment loans | With an interest-only mortgage, the customer pays interest every month but the principal until the end of the mortgage. Some mortgages have a part that is interest-only, with the rest being a normal repayment mortgage. Customers with part interest-only, part repayment mortgages still have to pay back a lump sum at the end of their mortgage for the interest-only part. This means there is a higher credit risk on these loans as we depend on the customers to pay back a lump sum. We design new account LTV maximums to mitigate this credit risk. We also make sure the customer has a plausible repayment plan before we lend to them and remains on track for the life of the loan.
Since 2009, we have reduced the risk from new interest-only mortgages by lowering the maximum LTV. It has been 50% since 2012. When a customer plans to repay their mortgage by selling the property, we now only allow that if they own more than a set proportion of the equity.
Customers with interest-only mortgages have to make arrangements to repay the principal at the end of the mortgage. We have a strategy to make sure that we tell these customers that they have to do this. We send them messages with their annual mortgage statements, and we run contact campaigns to encourage them to tell us how they plan to repay. We undertake these contact campaigns periodically throughout the customers' interest-only mortgage term and increase the frequency of contact as customers approach term maturity.
If customers know they will not be able to repay their mortgage in full when it ends, or if their mortgage has already passed the date when it should have ended, we talk to them. If we think it is in the customer’s interests and they can afford it, we look at other ways of managing it. That can mean turning the mortgage into a standard repayment one and extending it. Or, if the customer is waiting for their means of repaying it, such as an investment plan or bonds, to mature, it can just mean extending it. |
Flexible loans | Flexible mortgages allow customers to pay more or less than their usual amount each month, or even to take ‘payment holidays’ when they pay nothing at all. Customers do not have to take or draw down the whole loan all at once – so if they took out a mortgage big enough to allow them to build a home extension after three years, they do not have to start paying interest on that extra money until they are ready to spend it. There are conditions on when and how much customers can draw down:
–There are often limits on how much can be drawn down in any month
–The customer cannot be in payment arrears
–The customer cannot have insolvency problems, such as a county court judgement, bankruptcy, an individual voluntary arrangement, an administration order or a debt relief order.
A customer can ask us to increase their credit limit, 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.
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Loans with an LTV >100% | Where the mortgage balance is more than the property is now worth, we cannot recover the full value of the loan by repossessing and selling the property. This means there is a higher credit risk on these loans. In some cases, property prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs greater than 100%.
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 focus on non-professional landlords. We have prudent lending criteria, and specific policies for BTL. We only lend to a maximum 75% LTV. The first applicant must earn a minimum income of £25,000 per year, and we require evidence of income in all cases. We also use a BTL affordability rate as part of our assessment about whether to lend. This means that the rental income must cover the monthly mortgage interest payments by a prescribed amount when calculated using a stressed interest rate. We regularly review the prescribed amount and adjust it as needed. |
In addition, in 2020 we provided customers with payment holiday terms in line with the UK Government's Covid-19 guidance. For more on this, see ‘Covid-19 Support measures in place at 31 December 2020’ in 'Santander UK group level - Credit risk review'.
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Credit performance (audited)
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| | Portfolio of particular interest(1) | |
| Total | Interest-only | Part interest-only, part repayment (2) (3) | Flexible(3) | LTV >100% | Buy-to-let | Other portfolio |
2020 | £m | £m | £m | £m | £m | £m | £m |
Mortgage portfolio | 169,801 | 38,722 | 13,498 | 9,953 | 737 | 11,608 | 113,378 |
–Stage 1 | 157,614 | 33,609 | 12,118 | 8,731 | 426 | 11,180 | 108,003 |
–Stage 2 | 10,388 | 4,230 | 1,132 | 989 | 221 | 393 | 4,763 |
–Stage 3 | 1,799 | 883 | 248 | 233 | 90 | 35 | 612 |
Stage 3 ratio(4) | 1.07 | % | 2.30 | % | 1.84 | % | 2.48 | % | 12.25 | % | 0.30 | % | 0.54 | % |
PIPs | 10 | 5 | 2 | 1 | 4 | 0 | 2 |
Simple average LTV (indexed) | 42 | % | 44 | % | 44 | % | 26 | % | 117 | % | 59 | % | 43 | % |
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2019 | | | | | | | |
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 | % |
(1)Where a loan falls into more than one category, we include it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the total mortgage portfolio.
(2)Mortgage balance includes both the interest-only part of £10,037m (2019: £9,823m) and the non-interest-only part of the loan.
(3)Includes legacy Alliance & Leicester flexible loans that work in a more limited way than our current Flexi loan product.
(4)Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
2020 compared to 2019
–In 2020, the proportion of interest-only loans together with part interest-only, part repayment and flexible loans reduced, reflecting our strategy to manage down the proportional exposure to these lending profiles.
–BTL mortgage balances increased £1.7bn to £11.6bn (2019:£9.9bn) driven by continued focus in growing this portfolio. In 2020, the simple average LTV of mortgage total new BTL lending was 65% (2019:64%).
Interest-only sub analysis
Full interest-only new business in the year
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| 2020 | 2019 |
| £m | £m |
Full interest-only loans | 4,267 | | 4,000 | |
Full interest-only maturity profile
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| Term expired | Within 2 years | Between 2-5 years | Between 5-15 years | Greater than 15 years | Total |
2020 | £m | £m | £m | £m | £m | £m |
Full interest-only portfolio | 374 | | 1,736 | | 3,722 | | 20,490 | | 12,400 | | 38,722 | |
–of which value weighted average LTV (indexed) is >75% | 13 | | 131 | | 154 | | 1,405 | | 1,018 | | 2,721 | |
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2019 | | | | | | |
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 | |
2020 compared to 2019
For full interest-only mortgages, of the total £374m that was term expired at 31 December 2020, 84% continued to pay the interest due under the expired contract terms. Interest-only mortgages that matured in 2020 totalled £613m, of which: £272m was subsequently repaid, £6m was refinanced under normal credit terms, £105m was refinanced under forbearance arrangements and £230m remained unpaid and was classified as term expired at 31 December 2020.
At 31 December 2020, there were 69,713 (2019: 76,767) flexible mortgage customers, with undrawn facilities of £5,621m (2019: £5,841m). The portfolio’s value weighted LTV (indexed) was 26% (2019: 27%).
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Forbearance(1) (audited)
The balances at 31 December 2020 and 31 December 2019 were:
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| Interest-only(2) | Flexible | LTV >100% | Buy-to-Let |
2020 | £m | £m | £m | £m |
Total | 285 | | 48 | | 10 | | 9 | |
–Stage 2 | 184 | | 34 | | 3 | | 6 | |
–Stage 3 | 101 | | 14 | | 7 | | 3 | |
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2019 | | | | |
Total | 392 | | 73 | | 17 | | 10 | |
–Stage 2 | 285 | | 56 | | 8 | | 8 | |
–Stage 3 | 107 | | 17 | | 9 | | 2 | |
(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.
2020 compared to 2019
In 2020, the number of new accounts granted forbearance reduced. Forbearance activity was higher in 2019 due to the launch of a new term extension forbearance solution for interest-only past maturity customers in August 2018, with volumes of this solution decreasing after its initial launch.
126Santander UK Group Holdings plc
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CONSUMER (AUTO) FINANCE AND OTHER UNSECURED LENDING
Consumer (auto) finance
Retail Banking provides auto finance through Santander Consumer (UK) plc (SCUK). We offer a range of wholesale finance products (stock financing) and retail products for the purchase or lease of new and used cars, vans, motorcycles, bicycles and caravans. Our products are offered through dealers and brokers at the point of sale. At 31 December 2020, we operate with 15 manufacturers and have two joint venture agreements.
Through our joint ventures, Hyundai Capital UK Ltd (HCUK) and PSA Finance UK Ltd (PSAF), we provide retail point of sale customer finance as well as wholesale finance facilities (stock finance) for Hyundai and Kia, managed by HCUK, and Peugeot, Citroën and DS, managed by PSAF. We hold a 50.01% share in each of these joint ventures. However, due to the varying structures of the joint ventures, we apply the equity method of accounting for HCUK and consolidate PSAF.
Residual Value risk is one of our top risks. We check the portfolio each month, using triggers set to identify any material change in trends. We use leading independent vehicle valuation companies to assess the future value of the asset both before the start of the agreement and at points during the agreement. It is through this approach to RV setting and provisioning, where we react to market and car model level changes in future valuations, to help us make better decisions, strategies, and retain financial stability.
One of our main aims is sustainable profit which plays a key part in the strategy decisions made in relation to business growth. Our focus is on the broadening of our range of partners and maintaining a conservative risk appetite. We support climate change mitigation by funding alternative fuel technologies and give customers the option to offset the carbon emissions from their vehicles.
During the Covid-19 pandemic, we have made sure that our dealer partners, retail customers and staff have had the right products, services, and support in place. Close to 40,000 of our retail portfolio customers have had some form of support through payment deferrals or changes to their agreements.
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 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 always look at ways to strengthen our approach.
Credit performance (audited)
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| Consumer (auto) finance | Other unsecured | |
| Personal loans | Credit cards | Overdrafts | Total other unsecured | Total |
2020 | £m | £m | £m | £m | £m | £m |
Loans and advances to customers of which: | 8,024 | 2,038 | 2,349 | 408 | 4,795 | 12,819 |
–Stage 1 | 7,587 | 1,881 | 1,975 | 253 | 4,109 | 11,696 |
–Stage 2 | 379 | 139 | 335 | 138 | 612 | 991 |
–Stage 3 | 58 | 18 | 39 | 17 | 74 | 132 |
Loss allowances(2) | 118 | 80 | 158 | 61 | 299 | 417 |
Stage 3 undrawn exposures | 0 | | | | 27 | 27 |
Stage 3 ratio(1) | 0.72 | % | | | | 2.09 | % | 1.24 | % |
Gross write offs | 25 | | | | 129 | 154 |
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2019 | | | |
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 | 0 | | | | 25 | 25 |
Stage 3 ratio(1) | 0.55 | % | | | | 2.15 | % | 1.21 | % |
Gross write-offs | 34 | | | | 134 | 168 |
(1)Total Stage 3 exposure as a percentage of loans and advances to customers plus undrawn Stage 3 exposures.
(2)The ECL allowance is for both on and off–balance sheet exposures.
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Annual Report 2020 | Risk review
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Loan modifications
Forbearance
The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.
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| Credit cards | Overdrafts | Total other unsecured |
2020 | £m | £m | £m |
Financial assets modified in the year: | | | |
–Amortised cost before modification | 18 | | 8 | | 26 | |
–Net modification gain | 8 | | 4 | | 12 | |
Financial assets modified since initial recognition: | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the year | 2 | | 2 | | 4 | |
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2019 | | | |
Financial assets modified in the year: | | | |
–Amortised cost before modification | 23 | | 15 | | 38 | |
–Net modification gain | 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 | |
The balances (audited) at 31 December 2020 and 31 December 2019 were:
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| | Other unsecured | |
| Consumer (auto) Finance | Personal loans | Credit cards | Overdrafts | Total other unsecured | Total |
2020 | £m | £m | £m | £m | £m | £m |
Total | 9 | | 0 | | 43 | | 16 | | 59 | | 68 | |
–Stage 2 | 4 | | 0 | | 10 | | 5 | | 15 | | 19 | |
–Stage 3 | 5 | | 0 | | 33 | | 11 | | 44 | | 49 | |
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2019 | | | | | | |
Total | 7 | | 0 | | 51 | | 25 | | 76 | | 83 | |
–Stage 2 | 5 | | 0 | | 10 | | 7 | | 17 | | 22 | |
–Stage 3 | 2 | | 0 | | 41 | | 18 | | 59 | | 61 | |
2020 compared to 2019
We maintained our prudent Consumer (auto) finance underwriting criteria throughout the year. In 2020, the product mix was broadly unchanged, with a slight increase in wholesale finance facilities (stock finance). The retail car finance market saw challenges in 2020 mainly due to dealerships closures as a result of Covid-19.
At 31 December 2020, Consumer (auto) finance balances increased by £340m (4%), and represented 4% (2019: 4%) of total Retail Banking loans and 4% (2019: 4%) of total customer loans. Gross lending (new business) was £3,074m (2019: £3,308m). Wholesale loans (Stock finance) to car dealerships were approximately 17% of the Consumer loan book, an increase of £65m since 31 December 2019. The average Consumer (auto) finance loan size was £15,918 (2019: £13,900).
The risk profile for Consumer (auto) finance and other unsecured lending remained stable in terms of our credit scoring acceptance policies, however there was a deterioration in the credit quality as a result of Covid-19. It is too early to assess whether this will be a permanent decline in the risk profile.
Other loan modifications
Since March 2020, we have provided Consumer (auto) finance, personal loans, and credit cards customers with payment holiday terms. For more on this, see 'Covid-19 Support measures in place at 31 December 2020' in 'Santander UK group level - Credit risk review'.
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BUSINESS BANKING
We provide business banking services to small businesses with a turnover of up to £6.5m per annum and relatively simple borrowing needs. We only offer unsecured lending products, including overdrafts, credit cards and business loans.
Our risk management strategies operate on an automated basis (where possible) to ensure an efficient customer journey and a cost-effective credit decisioning process. We use a combination of internal, credit reference agency and application data in our credit assessments. Credit scoring combined with policy rules give us confidence that businesses are creditworthy and can afford their repayments. Post approval, we review revolving credit facilities each year to ensure the facilities remain appropriate for the customer's financial circumstances.
The Covid-19 pandemic has created an extremely challenging environment for many businesses, and we have supported customers by participating in government support schemes designed for small businesses. The Bounce Back Loans Scheme attracted unprecedented demand due to the efficient application process, which requires no credit risk assessment. At 31 December 2020, we had accepted over 148,000 applications for Bounce Back Loans with loan amounts totalling £4.0bn. Applications for lending outside of government schemes that would ordinarily be approved automatically are being manually underwritten, as a temporary measure due to Covid-19, to ensure we consider the uncertain and changing environment.
Lending exposure outside of government support schemes reduced as customers have used the support available to reduce their commitments. We continue to closely monitor the performance of the portfolio and have developed bespoke methods to understand customers’ performance through the pandemic.
We substantially upgraded our decision system in 2020 to provide a greater breadth of data and flexibility to optimise risk strategies and meet the challenge of lending in a rapidly changing environment.
Credit performance (audited)
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| 2020 | 2019 |
| £m | £m |
Loans and advances to customers of which: | 3,855 | 209 |
–Stage 1 | 3,845 | 197 |
–Stage 2 | 6 | 6 |
–Stage 3 | 4 | 6 |
Loss allowances(2) | 9 | 9 |
Stage 3 undrawn exposures | 0 | 0 |
Stage 3 ratio(1) | 0.10 | % | 2.87 | % |
Gross write offs | 12 | 14 |
(1)Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
(2)The ECL allowance is for both on and off–balance sheet exposures.
2020 compared to 2019
Business banking balances increased significantly in 2020 due to Bounce Back Loans advanced under the UK Government's Coronavirus Loan Schemes set up as a result of Covid-19. These loans are 100% guaranteed by the UK Government, and so ECL is not applied to them.
Loan modifications
Forbearance
There was no new forbearance granted in 2020 and 2019.
The balances (audited) at 31 December 2020 and 31 December 2019 were:
| | | | | | | | |
| 2020 | 2019 |
| £m | £m |
Total | 4 | | 4 | |
| | |
–Stage 3 | 4 | | 4 | |
Other loan modifications
Since March 2020, we have provided Business Banking customers with payment holiday terms. For more on this, see 'Covid-19 Support measures in place at 31 December 2020' in 'Santander UK group level - Credit risk review'.
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Annual Report 2020 | Risk review
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Credit risk – other business segments
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| 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 our non-core and Legacy Portfolios in run-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, including the impact of Covid-19. We also focus on forbearance and portfolios of particular interest.
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Our main portfolios are:
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Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre |
–SME and mid corporate – banking, trade finance, receivables finance, 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 residential sub-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.
| –Large Corporate – loans and treasury products for large corporates to support their working capital and liquidity needs.
–Financial Institutions – mainly derivatives for hedging purposes and trade finance instruments, under approved ring-fenced bank exceptions policy.
| –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 High Quality Liquid Assets (HQLA) portfolio is high quality assets, chosen for diversification and liquidity. The Legacy Treasury asset portfolio is mainly asset-backed securities.
–Social Housing – legacy social housing loans that do not fit with our strategy.
–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 in run-off – assets from acquisitions that do not fit with our strategy. These include some commercial mortgages.
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| | –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 some customer assets in Corporate & Commercial Banking rather than in Business Banking (in Retail Banking), some non-core corporate mortgages in Corporate & Commercial Banking rather than in Corporate Centre, and a number of smaller business lines in Corporate Centre rather than in Corporate & Investment Banking. See Note 2 for more information.
OTHER BUSINESS SEGMENTS – CREDIT RISK MANAGEMENT
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| For more on our approach to credit risk at a Santander UK group level
See pages 88 to 101
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In Corporate & Commercial Banking, we classify most of our customers as non-standardised. We also have some SME customers classified as standardised as it is a high-volume portfolio with smaller exposures. In CIB and Corporate Centre, we classify all our customers as non-standardised, except for the commercial mortgages in our Legacy Portfolios in 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 our non-standardised customers.
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.
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2. Assessment and origination (audited)
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 assigningassign each customer a credit rating according to the internal rating threshold, 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, including reflecting the impacts of the Covid-19 pandemic – backed up by the expert judgement of a risk analyst. We review our internal ratings on a dynamic basis and at least once a year.year for those clients that are rated. We also assess the underlying risk of the transaction, taking into account of any mitigating factors (see the tables below) and how it fits with our risk policies, limits and Risk Appetite, as set by the Board and lower level committees and fora. We consider transactions in line with credit limits approved by the relevant credit authority. 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 also use stress testing, for example to estimate how a customer might be able to cope if interest rates rise or to manage the impacts of the Covid-19 pandemic including local and regional lockdowns.Appetite.
Responsible lending,
We lend including climate change and the transition to a wide range of sectors and industries, including those that are intrinsic or of strategic importance to thelow carbon economy of the UK or another country or territory.
As part of lending responsibly,the Banco Santander group, we comply with the Equator Principles factoringto factor social, ethical and environmental impacts into our risk analysis and decision-making processdecision making for qualifying financial transactions. These principles addressWe are committed to supporting clients and economies in their transition to a low carbon economy, providing financial products and/or services to business activities that are environmentally and socially responsible. Our ESCC policy sets out how we identify, assess, monitor and manage environmental and social risks and other climate change prevention of pollutionrelated activities in the Oil and toxic waste emissions, biodiversity, indigenous peoplesGas, Power Generation and human rights.Mining and Metals sectors and those arising from businesses engaged in soft commodities. Our policies on Aerospace and Defence, Energy, Mining & Metals and Soft Commodities and our Sensitive SectorsESCC policy continue to define our approach towards creating long-term value while managing reputational, social and environmental risks. These policies contain prohibitions and restrictions on a range of activities. Prohibited activities include the provision of products or servicesprohibits project-related financing for new Coal Fired Power Plantcoal-fired power plants (CFPP) projectsworldwide and taking onwe will only work with new clients with existing CFPPs.CFPPs to provide specific financing for renewable energy projects. In 2020,line with Banco Santander's commitment, by 2030 we included a further prohibitionwill eliminate all exposure to thermal coal mining and stop providing financial services to power generation clients with more than 10% of revenue from thermal coal. More information on our approach to Responsible Lending can be found in the development, construction or expansion of oilSustainability and gas drilling projects north of the Arctic Circle. Restricted activities include transactions specific to CFPPs for existing clients which do not significantly improve environmental impacts, such as a significant reduction of CO2. In 2020, we added a further restriction on the development, construction or expansion of Liquid Natural Gas facilities. Environmental and Social Risk Champions and the Reputational Risk Forum review and approve all restricted activities to ensure that they fall within our risk appetite. This forum reviews, monitors and escalates key decisions around financial and non-financial reputational risks to the Board.Responsible Banking section.
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:
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Portfolio | Description |
SME and mid corporate | Includes secured and unsecured lending. We can use covenants (financial or non-financial) to support a customer’s credit rating. For example, we can set limits on how much they can spend or borrow, or how they operate as a business. We can take mortgage debentures as collateral. These are charges overor a company’s assets, almost always first charges. We can also take a first legal charge on commercial property as collateral. Before agreeing the loan, we get an independent professional valuation which assessesof the property. Loan agreements typically allow us to obtain revaluations during the term of the loan. We can also take guarantees, but we do not treat them as collateral and we do not put a cash value on them unless they are supported by a tangible asset which is charged to us. The UK Government guarantee supporting the losses for amounts lent under the UK Government's Coronavirus Loan Schemes are considered as collateral (80% for CBILS and CLBILS and 100% for BBLS). If a customer defaults, we work with them to consider debt restructuring options. We generally do not enforce our security over their assets except when restructuring options have been exhausted or to protect our position in relation to third party claims. In this case, we might appoint an administrator.
We also lend against assets (like vehicles and equipment) and invoices for some customers. ForWe value assets we value them before we lend. For invoices, we review the customer’scustomers' ledgers regularly and lend against debtors thatwho 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 includingsuch as the property condition, age and location, tenant quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before agreeingadvancing the loan we visitand where appropriate, a bank representative visits the property, andadditionally we get an independent professional valuation which assesses the property, the tenant and future demand (such as comparing market rent to current rent).typically includes a site visit. Loan agreements typically allow us to viewobtain revaluations during the property each year and get revaluations every two to three years, or more often if it is likely covenants may be breached.term of the loan. |
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. We manage older Social Housing loans that do not fit our current business strategy in Corporate Centre. |
Corporate & Investment Banking:Centre
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.
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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 Financial Institutions within Corporate Centre. |
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Corporate Centre:
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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 assetsHigh Quality Liquid Assets (HQLA) in our Eligible Liquidity Pool. They are primarilymainly ABS and covered bonds, which benefit fromhold 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.flows. |
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 via netting and collateralisation on derivatives, repos and reverse repos, and stock borrowing/lending. We also hold collateral and tradereduce risk by clearing trades 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. possible.
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Legacy Portfolios in 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 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.
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Crown Dependencies | We manage the risk on this portfolio in the same way as for mortgages in Retail Banking. |
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3. Monitoring (audited)
We measure and monitor changes in our credit risk profile on a regular and systematic basis against our budgets, limits and benchmarks.
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 and monitor concentration limits in line with our Risk Appetite and review them on a regular basis.
–Geographical concentrations: We set exposure limits to countries and geographies, with reference to the country limits set by Banco Santander and our own Risk Appetite. For more geographical information, see ‘Country risk exposures’.
–Industry concentrations: We also set exposure limits by industry sector. We set these limits 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’ section that follows.
Retail Banking
In Homes, we use IT systems and data available to us to monitor accounts. The main parts are:
–Behavioural scoring: we use statistical models that help predict whether a customer will have problems repaying, based on 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
–Other Santander accounts: each month, we also look at how the customer uses their other accounts with us, so we can identify problems early.
Our day-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 economy also impact our Homes portfolio. As part of our day-to-day risk monitoring, we use a Retail Risk Playbook tolerance framework that sets out the most relevant macroeconomic variables to retail portfolio performance. We monitor these variables against our forecasts. If the economy deviates materially from our forecasts, such as due to the effects of the cost of living crisis, high inflation, we formally review our retail risk management policy and strategy. Our monitoring can also mean we change our minds about whether a product is still right for a customer. 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.
For secured lending, our monitoring also takes account of changes in property prices. We estimate the property’s value every three months. In most cases, we use statistical models based on recent sales prices and valuations in that local area. Use of this model is subject to Model Risk Governance. Where a lack of data means the model’s valuation is not available, we use the original surveyor valuation with a House Price Index (HPI) adjustment as needed.
In Everyday Banking, similar to Homes, we use IT systems and data available to us to monitor accounts, and we use the Retail Risk Playbook tolerance framework (except for business banking services) and management judgements to ensure that portfolio quality remains within Risk Appetite. For unsecured personal lending like credit cards and overdrafts, monitoring might lead us to raise or lower credit limits. For business banking services, we review revolving credit facilities each year to ensure the facilities remain appropriate for the customer's financial circumstances.
Consumer Finance
In Consumer Finance, similar to Retail Banking, we use IT systems and data available to us to monitor accounts, and we use the Retail Risk Playbook tolerance framework and management judgements to ensure that portfolio quality remains within Risk Appetite. We also check the Residual Value of our portfolio each month, using triggers set to identify any material change in trends.
Corporate & Commercial Banking and Corporate Centre
We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We give our ERCC amonitor detailed analysisanalyses of our credit exposures and risk trends everyeach month. We also report our larger exposures and risks to the Board Risk Committee everyeach month.
Our Watchlist
We also use a Watchlist for exposures subject to annual reviews 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 thattheir probability of default has increased, the probability of default. There are several reasons we might put customers on this list. For example, ifsuch as they suffer a downturn in trade, breachhave breached a covenant loseor lost 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.contract.
We classify Watchlist cases as:
–Enhanced monitoring: for less urgent cases. If they are significant, weWe monitor themthese cases more often and where appropriate may consider more collateral.
–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 Watchlist cases on the Watchlist for impairment as explainedset out in the ‘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 meansSICR, so we transfer it to Stage 2 and subject it toapply a lifetime ECL assessment to calculate the newfor our loss allowance.allowance calculations. We take into account any forbearance we offer. This includes whether any extra security, guarantees or guarantees areequity available the likelihood of more equity and the potential to enhance value throughby asset management.
In Corporate & Commercial Banking, as part of our client review process,annual reviews, for loans approachingnearing maturity, we look at the prospectsprospect of refinancing the loan on current market terms and applicable credit policy. WhereIf this seemsis unlikely, we put the case on our Watchlist. We manage exposures not subject to annual reviews, mainly high volume and low value cases, using early warning indicators including credit reference agency data, supported by teams of expert analysts.
In CIB and Corporate Centre, we typically 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,addition, we manage the credit quality of our Crown Dependencies mortgages in the same way as for mortgages in Retail Banking.
4. Arrears management (audited)
Retail Banking and Consumer Finance
We have several strategies to manage arrears that we can use 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 account up to date as soon as possible. The strategy we use depends on the risk and the customer’s circumstances.
Corporate & Commercial Banking and Corporate Centre
We identify problem debt by close monitoring, supported by our Watchlist process for exposures subject to annual review. We aim to identify warning signs early by monitoring customers’ financial and trading data, checking to see they do not breach covenants, and having regular dialogue with them. We tailor our strategy to the type of customer, their circumstances and the level of risk. We 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 engage our Restructuring & Recoveries team as needed on Watchlist cases and we may hand over more serious cases to them. For exposures not subject to annual review, we have strategies to manage arrears that can be used as early as the day of the missed payment. 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.
For more, see the Forbearance section.
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4. Arrears management
5. Debt recovery (audited)
We identify problem debt by close monitoring, supported by our Watchlist process. When there is a problem, our relationship managers are the firstSometimes, even when we have taken all reasonable and responsible steps 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 suremanage arrears, they are not breaching any covenants,effective. If this happens, we have to end our agreement with the customer and by having regular dialogue with them. We hold regular Watchlist meetingstry to agree a strategy for each portfolio.recover the whole debt, or as much of it as we can.
Our Restructuring & Recoveries team are engaged as appropriate on Watchlist cases andRetail Banking
In Homes, we may hand over more serious casesuse a debt collection agency, sell the debt, or take the customer to them.
5. Debt recovery
Consensual arrangements
court. For retail mortgages, we may repossess the property as a last resort or to protect it from damage or third-party claims. We make sure our estimated losses from repossessed properties are realistic by getting two independent valuations and the estimated selling costs, and using them in our loss allowances calculations. Where we cannot findrepossess a solution like any ofproperty, we do not take ownership. We use agents to realise the onesvalue and settle the debt. Any surplus funds are returned to the borrower or dealt with in line with insolvency rules.
In Everyday Banking, we describe above,may use a debt collection agency, sell the debt, or take the customer to court, similar to our approach in Homes.
Consumer Finance
In Consumer Finance, similar to Retail Banking, we may use a debt collection agency, sell the debt, or take the customer to court. We may consider taking steps to re-possess the vehicles we have financed.
Corporate & Commercial Banking and Corporate Centre
Where we look for an exit. If we can,exit, we aim to do this, if we can, 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,an agreement, we consider recovery options. This can be through:
–Thethrough an insolvency process
–Enforcingproceeding, enforcing over any collateral
–Selling or selling debt on the secondary market
–Consideringmarket. We may also consider other legal action available to recover what we are owed from debtors and guarantors.
owed. If there is a shortfall, we write it off against our loss allowances we hold.allowances. In certain very rare instances,cases, we may act as mortgagee in possession of assets held as collateral against non-performing commercial lending. In such cases, we carry the assets are carried on our balance sheet and are classified according toclassify them in line with our accounting policies.
Loan modifications (audited)
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 underWe sometimes change the terms of theira loan when a customer gets into financial difficulty (this is known as forbearance), or as part of our ongoing conversations with them.for other commercial reasons.
Forbearance (audited)
We maycan change the terms of a customer's loan, temporarily or permanently, to help them through temporary periods of difficulty so they can get back on to sustainable terms. We assess what we offer the following types of forbearance. We only do this if our assessments indicateto make sure the customer can meet the revised payments:afford it. Forbearance improves our customer relationships and we review our approach regularly to make sure it is still effective. We try to offer forbearance before a customer defaults and we only foreclose or repossess as a last resort.
The main types of forbearance we offer are:
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Term extension | We can extend the loan 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.making each monthly payment smaller. We may offer this option if the customer is up to date with their payments but showingshows signs of financial difficulties. We may also offer this option whereif the loan is about to mature and near-term refinancing is not possible on market terms. |
Interest-only | We can agreePrior to let2016, we offered retail customers temporary concessions to interest-only repayments due to financial difficulty. This concession is no longer available but any such loans that remain on interest-only repayment concession are classed as forborne. For corporate customers, we still consider interest-only concessions on a customer pay only the interest on the loan for a short time – usually less than a year.case by case basis. 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)including capitalisation
| If a customer is having cash flow issues,For retail customers, we may agreeadd the arrears to the mortgage balance (this is known as capitalisation) if they cannot afford to increase their monthly payment to pay off their arrears in a reasonable time but have been making their monthly payments, usually for at least six months. We can also capitalise property charges due to a landlord. We pay them for the customer to avoid the lease being forfeited. We may combine this help with term extensions and, in the past, interest-only concessions. In certain cases we may also offer interest rate concessions.
For corporate customers, we may lower or stop their payments until they have had time to recover. We may: –Reschedulemay reschedule payments to better match the customer’s cash flow – for example if the business is seasonal
–Provide - or provide a temporary increase in facilities to cover peak demand ahead of the customer’stheir trading improving.
We might do this by adding their arrears to their loan balance (we call this arrears capitalisation)capitalisation or drawing from an overdraft. We may also offer other types of forbearance, including providingto provide new facilities, interest rate concessions seasonal profiling and interest roll-up. In rare cases, we agree to forgive or reduce part of the debt. |
When we agree forbearance, we consider the account has suffered a SICR, as we explain later on, and we classify it as Stage 2 or 3. If an account is already in Stage 2, we keep it in Stage 2 unless the account is deemed unlikely to pay, involves forgiving fees and interest or debt, or is being granted multiple forbearances. In these cases, we move it into Stage 3. If an account is already in Stage 3, we keep it in Stage 3. A loan moves out of forbearance once the exit criteria below are met. We monitor the performance of all forborne loans.
Exit from forbearance or cure
For an account in Stage 3 to exit forbearance, all the following conditions must be met:
–The account has been classed as Stage 3 for at least one year since the end of the latest forbearance strategy
–The account is not deemed unlikely to pay
–The account is no longer in arrears, and the customer has no other material debts with us which are more than 90 days in arrears.
If all the conditions are met, the account is re-classed as Stage 2 forbearance until the Stage 2 forbearance exit conditions set out below are also met.
For an account in Stage 2 to exit forbearance, all the following conditions must be met:
–The account has been classed as Stage 2 for at least two years since the end of the latest forbearance strategy
–The account has been performing, i.e. the customer is no longer in financial difficulty
–Meaningful capital and interest repayments have been made for at least 50% of the two year period
–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.
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Other forms of debt management and modifications
When a customer is not showing signs of financial difficulties, we can also change their loan terms. We do this to help them manage their financial liabilities.
Retail Banking
In Homes, apart from forbearance, we have sometimes changed the contract terms to keep a good relationship with a customer. In Homes and Everyday Banking, we do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines.
Consumer Finance
We do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines.
Corporate & Commercial Banking and Corporate Centre
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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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 extramore 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 tocan 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. |
In addition, since March 2020, we have provided customers with payment holiday terms in line with the UK Government's Covid-19 guidance. Where these customers showed no signs of financial difficulties at the time, we do not classify the contract changes as forbearance. For customers who have needed further financial support after the payment holiday period, we help them by offering assistance in line with our policies.
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.
Retail Banking and Consumer Finance
These businesses involve managing large numbers of accounts, so they produce 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 factors such as the cash flow available to service debt. We also use an agency to value any collateral – mainly mortgages.
Corporate & Commercial Banking and Corporate Centre
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 lookby looking at a number of factors includingsuch as the cash flow available to service debt and the value of collateral based on third-party professionalprofessional valuations.
Key metrics (audited)
We use a number of key metrics to measure and control credit risk, as follows:
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Metric | Description |
Expected Credit Loss (ECL) | ECL tells us what credit risk is likely to cost us either over the next 12 months or 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 the sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets. The Stage 3 ratio is the main indicator of credit quality performance. |
Expected Loss (EL) | EL is based on the CRD IV regulatory capital rules and gives us another view of credit risk. It is the product of the probability of default, exposure at default and loss given default, and we include direct and indirect costs. We base it on our risk models and our assessment of each customer’s credit quality. 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 impairment accounting policy, see Note 1 to the Consolidated Financial Statements. |
We also assess risks from other perspectives, such as geography, business area, product and process to identify areas 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 customers, as we explain later on.
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Annual Report 20202022 | Santander UK Group Holdings plc | Risk review101 | | |
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OTHER BUSINESS SEGMENTS – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL (audited)
The following tables show changes in total on and off-balance sheet exposures and ECL in the year. The footnotes to the Santander UK group level table on page 102 also apply to these tables.
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Corporate & Commercial Banking | Stage 1 | Stage 2 | Stage 3 | Total |
Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
£m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 21,281 | | 53 | | 2,385 | | 51 | | 452 | | 158 | | 24,118 | | 262 | |
Transfers from Stage 1 to Stage 2(3) | (4,443) | | (37) | | 4,443 | | 37 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 528 | | 20 | | (528) | | (20) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (78) | | (1) | | (543) | | (21) | | 621 | | 22 | | 0 | | 0 | |
Transfers from Stage 3(3) | 4 | | 1 | | 1 | | 0 | | (5) | | (1) | | 0 | | 0 | |
Transfers of financial instruments | (3,989) | | (17) | | 3,373 | | (4) | | 616 | | 21 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | (18) | | 0 | | 92 | | 0 | | 198 | | 0 | | 272 | |
Change in economic scenarios(2) | 0 | | 7 | | 0 | | 44 | | 0 | | 0 | | 0 | | 51 | |
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New lending and assets purchased(5) | 7,984 | | 10 | | 805 | | 28 | | 94 | | 44 | | 8,883 | | 82 | |
Redemptions, repayments and assets sold (7) | (6,487) | | (13) | | (818) | | (18) | | (118) | | (25) | | (7,423) | | (56) | |
Other(6) | (1,572) | | 32 | | 521 | | 6 | | 97 | | 5 | | (954) | | 43 | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (121) | | (51) | | (121) | | (51) | |
At 31 December 2020 | 17,217 | | 54 | | 6,266 | | 199 | | 1,020 | | 350 | | 24,503 | | 603 | |
Net movement in the year | (4,064) | | 1 | | 3,881 | | 148 | | 568 | | 192 | | 385 | | 341 | |
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ECL charge/(release) to the Income Statement | | 1 | | | 148 | | | 243 | | | 392 | |
Less: Discount unwind | | 0 | | | 0 | | | (5) | | | (5) | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | (93) | | | (93) | |
Income statement charge/(release) for the year | | 1 | | | 148 | | | 145 | | | 294 | |
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Corporate & Investment Banking | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 12,972 | | 4 | | 397 | | 37 | | 15 | | 9 | | 13,384 | | 50 | |
Transfers from Stage 1 to Stage 2(3) | (43) | | 0 | | 43 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | 0 | | 0 | | (40) | | (13) | | 40 | | 13 | | 0 | | 0 | |
Transfers from Stage 3(3) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers of financial instruments | (43) | | 0 | | 3 | | (13) | | 40 | | 13 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Change in economic scenarios(2) | 0 | | 0 | | 0 | | 8 | | 0 | | 0 | | 0 | | 8 | |
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New lending and assets purchased (5) | 1,119 | | 1 | | 43 | | 0 | | 0 | | 0 | | 1,162 | | 1 | |
Redemptions, repayments and assets sold (7) | (5,005) | | (1) | | (287) | | (1) | | (1) | | 0 | | (5,293) | | (2) | |
Other(6) | 2,174 | | 5 | | 273 | | (7) | | (12) | | 0 | | 2,435 | | (2) | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (42) | | (22) | | (42) | | (22) | |
At 31 December 2020 | 11,217 | | 9 | | 429 | | 24 | | 0 | | 0 | | 11,646 | | 33 | |
Net movement in the year | (1,755) | | 5 | | 32 | | (13) | | (15) | | (9) | | (1,738) | | (17) | |
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ECL charge/(release) to the Income Statement | | 5 | | | (13) | | | 13 | | | 5 | |
Less: Discount unwind | | 0 | | | 0 | | | 0 | | | 0 | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | 2 | | | 2 | |
Income statement charge/(release) for the year | | 5 | | | (13) | | | 15 | | | 7 | |
134Santander UK Group Holdings plc
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
Corporate Centre | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 73,943 | | 1 | | 97 | | 1 | | 0 | | 0 | | 74,040 | | 2 | |
Transfers from Stage 1 to Stage 2(3) | (87) | | (2) | | 87 | | 2 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 106 | | 4 | | (106) | | (4) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (2) | | 0 | | (3) | | (1) | | 5 | | 1 | | 0 | | 0 | |
Transfers from Stage 3(3) | 1 | | 1 | | 1 | | 0 | | (2) | | (1) | | 0 | | 0 | |
Transfers of financial instruments | 18 | | 3 | | (21) | | (3) | | 3 | | 0 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | (4) | | 0 | | 3 | | 0 | | 1 | | 0 | | 0 | |
Change in economic scenarios(2) | 0 | | 0 | | 0 | | 6 | | 0 | | 0 | | 0 | | 6 | |
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New lending and assets purchased(5) | 11,457 | | 1 | | 45 | | 0 | | 1 | | 0 | | 11,503 | | 1 | |
Redemptions, repayments and assets sold (7) | (10,344) | | (1) | | (7) | | (1) | | (3) | | (1) | | (10,354) | | (3) | |
Other(6) | 4,201 | | 35 | | (69) | | (6) | | 1 | | 0 | | 4,133 | | 29 | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (2) | | 0 | | (2) | | 0 | |
At 31 December 2020 | 79,275 | | 35 | | 45 | | 0 | | 0 | | 0 | | 79,320 | | 35 | |
Net movement in the year | 5,332 | | 34 | | (52) | | (1) | | 0 | | 0 | | 5,280 | | 33 | |
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ECL charge/(release) to the Income Statement | | 34 | | | (1) | | | 0 | | | 33 | |
Less: Discount unwind | | 0 | | | 0 | | | 0 | | | 0 | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | 3 | | | 3 | |
Income statement charge/(release) for the year | | 34 | | | (1) | | | 3 | | | 36 | |
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
Corporate & Commercial Banking | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2019 | 23,259 | | 47 | | 1,422 | | 45 | | 375 | | 143 | | 25,056 | | 235 | |
Transfers from Stage 1 to Stage 2(3) | (801) | | (3) | | 801 | | 3 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 156 | | 7 | | (156) | | (7) | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (42) | | 0 | | (109) | | (5) | | 151 | | 5 | | 0 | | 0 | |
Transfers from Stage 3(3) | 0 | | 0 | | 16 | | 1 | | (16) | | (1) | | 0 | | 0 | |
Transfers of financial instruments | (687) | | 4 | | 552 | | (8) | | 135 | | 4 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | (7) | | 0 | | 18 | | 0 | | 38 | | 0 | | 49 | |
Change in economic scenarios(2) | 0 | | 8 | | 0 | | 11 | | 0 | | 0 | | 0 | | 19 | |
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New lending and assets purchased(5) | 3,733 | | 6 | | 379 | | 7 | | 2 | | 1 | | 4,114 | | 14 | |
Redemptions, repayments and assets sold (7) | (4,062) | | (10) | | (32) | | (11) | | (7) | | (9) | | (4,101) | | (30) | |
Other(6) | (962) | | 5 | | 64 | | (11) | | 55 | | 35 | | (843) | | 29 | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (108) | | (54) | | (108) | | (54) | |
At 31 December 2019 | 21,281 | | 53 | | 2,385 | | 51 | | 452 | | 158 | | 24,118 | | 262 | |
Net movement in the year | (1,978) | | 6 | | 963 | | 6 | | 77 | | 15 | | (938) | | 27 | |
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ECL charge/(release) to the Income Statement | | 6 | | | 6 | | | 69 | | | 81 | |
Less: Discount unwind | | 0 | | | 0 | | | (6) | | | (6) | |
Less: Recoveries net of collection costs | | (10) | | | (8) | | | (12) | | | (30) | |
Income statement charge/(release) for the year | | (4) | | | (2) | | | 51 | | | 45 | |
Santander UK Group Holdings plc135
Key differences between regulatory EL and IFRS 9 ECL models
There are differences between the regulatory EL and IFRS 9 ECL approaches. Although our IFRS 9 models use the existing Basel advanced IRB risk components, we need to make adjustments to ensure the outcome is in line with IFRS 9, i.e. the financial reporting standard we use, as follows. | | | | | | | | |
| Basel advanced IRB EL | IFRS 9 ECL |
Annual Report 2020 Rating philosophy
| | Mix of point-in-time, through-the-cycle or hybrid | Risk reviewPoint-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) | PD in the next 12 months | Includes forward-looking economic data and removes conservatism. PD in next 12 months for Stage 1, lifetime for Stages 2 and 3 |
Loss Given Default (LGD) | Lifetime LGD for defaults in the next 12 months | Modelled without regulatory floors and exclusion of indirect costs |
Exposure at Default (EAD) | Exposure at the point of default if the customer defaults in the next 12 months | Recognises ability for exposure to reduce from balance sheet date to default date |
SICR | Does not include SICR concept | Includes SICR concept |
Discounting applied | At weighted average cost of capital to the default date | At the effective interest rate (EIR) to the balance sheet date |
Recognising ECL (audited)
The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a Significant Increase in Credit Risk (SICR) since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted to reflect the risk of a loss being incurred even when it is unlikely.
Critical judgements and accounting estimates applied in calculating ECL (audited)
The preparation of Santander UK's consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based on amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There has been no change in the inherent sensitivity of the areas of judgement in the period. Management have considered the impact of developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting estimates.
The significant judgements, apart from those involving estimation, made by management in applying Santander UK's accounting policies in these financial statements (key judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year (key estimates), which together are considered critical to Santander UK's results and financial position, are as follows:
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 judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the future financial results and financial condition. The impact of the cost of living crisis has increased the uncertainty around ECL impairment calculations and has required management to make additional judgements and accounting estimates that affect the amount of assets and liabilities at the reporting date and the amount of income and expenses in the reporting period. The key additional judgements due to the impact of the cost of living crisis mainly reflect the increased uncertainty around forward-looking economic data and the need for additional Judgemental Adjustments. We consider the critical accounting estimates in calculating ECL to be:
–Forward-looking multiple economic scenario assumptions; and
–Probability weights assigned to multiple economic scenarios.
We consider the critical management judgements in calculating ECL to be:
–Determining an appropriate definition of default;
–Establishing the criteria for a significant increase in credit risk (SICR) and for corporate borrowers internal credit risk rating;
–Determining the need for any Judgemental Adjustments (JAs);
–Determining the need to assess corporate Stage 3 exposures individually.
See the sections below for more on each of these key judgements and estimates.
Multiple economic scenarios and probability weights (audited)
For all our portfolios we use five forward-looking economic scenarios. For 2022 , they consist of a central base case, one upside scenario and three downside scenarios. We use five scenarios to reflect a wide range of possible outcomes for the UK economy.
Our forecasting approach
We derive our scenarios in part by using a set of parameters in GDP fan charts published by the Office for Budget Responsibility (OBR). 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 fan chart path for our Upside 1 scenario and the 0.3 path for Downside 1. For Downside 2 we impose a recession via an adjustment factor that converges to Downside 1 in the long-run, rather than imposing a floor on the peak to trough fall which had occurred prior to the pandemic. To ensure that Downside 2 is kept consistent with any changes to the OBR fan charts, we calculate the Downside 2 GDP by taking the percentage difference between Downside 2 and Downside 1 GDP in the original forecast and applying this difference to the new Downside 1.
Once we have established the GDP paths 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. These variables are the product of the GDP growth paths we have forecast and the output of the OGEM for these growth paths. These are then reviewed to ensure consistency with the narrative of each scenario and therefore changes to these variables may be required in some cases. We then impose a Bank Rate profile for each scenario using expert judgement. We determine the Bank of England Bank Rate by using the base case Bank Rate profile and adjusting this for each of the four other scenarios. To do this, we firstly consider what each of the scenarios is trying to achieve.
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Annual Report 2022 | | Santander UK Group Holdings plc 102 |
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
Corporate & Investment Banking | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2019 | 17,389 | | 5 | | 134 | | 3 | | 26 | | 10 | | 17,549 | | 18 | |
Transfers from Stage 1 to Stage 2(3) | (208) | | 0 | | 208 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 41 | | 0 | | (41) | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 3(3) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers of financial instruments | (167) | | 0 | | 167 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | 0 | | 0 | | 36 | | 0 | | 0 | | 0 | | 36 | |
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New lending and assets purchased (5) | 54 | | 0 | | 0 | | 0 | | 0 | | 0 | | 54 | | 0 | |
Redemptions, repayments and assets sold (7) | (5,179) | | (1) | | 50 | | (1) | | (28) | | 0 | | (5,157) | | (2) | |
Other(6) | 875 | | 0 | | 46 | | (1) | | 17 | | (1) | | 938 | | (2) | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
At 31 December 2019 | 12,972 | | 4 | | 397 | | 37 | | 15 | | 9 | | 13,384 | | 50 | |
Net movement in the year | (4,417) | | (1) | | 263 | | 34 | | (11) | | (1) | | (4,165) | | 32 | |
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ECL charge/(release) to the Income Statement | | (1) | | | 34 | | | (1) | | | 32 | |
Less: Discount unwind | | 0 | | | 0 | | | 0 | | | 0 | |
Less: Recoveries net of collection costs | | 0 | | | (8) | | | (2) | | | (10) | |
Income statement charge/(release) for the year | | (1) | | | 26 | | | (3) | | | 22 | |
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Corporate Centre | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2019 | 74,116 | | 4 | | 100 | | 1 | | 1 | | 0 | | 74,217 | | 5 | |
Transfers from Stage 1 to Stage 2(3) | (15) | | 0 | | 15 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers from Stage 2 to Stage 1(3) | 7 | | 0 | | (7) | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers to Stage 3(3) | (4) | | 0 | | (4) | | 0 | | 8 | | 0 | | 0 | | 0 | |
Transfers from Stage 3(3) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Transfers of financial instruments | (12) | | 0 | | 4 | | 0 | | 8 | | 0 | | 0 | | 0 | |
Net ECL remeasurement on stage transfer(4) | 0 | | 0 | | 0 | | 0 | | 0 | | 2 | | 0 | | 2 | |
Change in economic scenarios(2) | 0 | | 1 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1 | |
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New lending and assets purchased(5) | 1,849 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,849 | | 0 | |
Redemptions, repayments and assets sold (7) | (5,326) | | 0 | | (156) | | 0 | | 13 | | 0 | | (5,469) | | 0 | |
Other(6) | 3,316 | | (4) | | 149 | | 0 | | (19) | | (2) | | 3,446 | | (6) | |
Assets written off (7) | 0 | | 0 | | 0 | | 0 | | (3) | | 0 | | (3) | | 0 | |
At 31 December 2019 | 73,943 | | 1 | | 97 | | 1 | | 0 | | 0 | | 74,040 | | 2 | |
Net movement in the year | (173) | | (3) | | (3) | | 0 | | (1) | | 0 | | (177) | | (3) | |
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ECL charge/(release) to the Income Statement | | (3) | | | 0 | | | 0 | | | (3) | |
Less: Discount unwind | | 0 | | | 0 | | | 1 | | | 1 | |
Less: Recoveries net of collection costs | | 0 | | | 0 | | | (1) | | | (1) | |
Income statement charge/(release) for the year | | (3) | | | 0 | | | 0 | | | (3) | |
136Santander UK Group Holdings plc
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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For the upside scenario, which has a slightly higher growth path, we assume a smaller increase in Bank Rate in 2023 with cuts beginning in 2024 in similar increments as the base case. For Downside 2 the scenario shows monetary policy being tightened to contain inflation at a time of weakening output growth, so here we assume the Bank of England raises rates to the same peak as in the base case to bring inflation back to its target rate, but that cuts start earlier as economic growth falls much more markedly and the Bank of England look to aid the economy. The rising Bank Rate profiles are based on forward guidance from the Bank of England, where increases are assumed to be gradual and incremental. For the Downside 1 scenario, this has a lower Bank Rate profile than in the base as the Bank of England look to bolster the economy earlier despite above target inflation rates, and for Stubborn Inflation, this reflects a larger increase in Bank Rate as inflation remains persistently above target. In this way, our scenarios reflect a range of possible outcomes that the Bank of England may follow for different growth paths, but also assumes that the Bank of England does not slash rates due to recessionary concerns.
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 for the UK economy include a further and sharper downturn in global growth, a substantial increase in inflation which raises the cost of living, a continuation of the very low productivity growth seen in the UK, and a move to a more protectionist agenda for trade. The upside risks were more muted at the end of 2022 and include a stronger recovery in global growth, a faster fall in inflation, coupled with a move to more open trade and further trade agreements with other countries.
We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three-year planning processes, or sooner if there is a material change in current or expected economic conditions. For instance, in 2022 the base case has been updated every quarter. We refresh all our economic scenarios each quarter to reflect the latest data and OBR fan charts if these have changed, which are then reviewed and approved by the Credit Risk Provisions Forum (CRPF). The CRPF also assesses the probability weights at least once a quarter.
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. At the end of 2022, there were no significant differences between our base case forecasts and the consensus views.
In 2022, we were also able to do further peer benchmarking analysis of the economic scenarios using the data the PRA provided, which for Q4 2022 included the mean weighted analysis for a selection of economic variables, including GDP, unemployment rate and HPI. This meant that we could compare our weighted scenarios against the average of our peers to understand what differences there may be. The conclusion of this analysis demonstrated that our economic scenarios were in line with our peers although, on a weighted basis, our house price inflation assumption reflected a more conservative view.
In 2022, we also considered any likely impact from climate change risk on our forecasting approach and concluded that no adjustment to the multiple economic scenarios for climate change risk was required. This is because climate change effects are generally regarded to be relevant over a longer timeframe than our forecast period of five years.
Our forecasting period for GDP is five years and then we revert to the average trend growth over three years based on the OBR’s long-run GDP forecast assumption. 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 forecasting approach in 2022
In 2022, there were no specific changes to our forecasting approach. The OBR returned to publishing its fan charts and the latest version, published in March 2022, have been incorporated.
Base case
For our base case, the forecasts include a 6 quarter recession with a peak to trough fall in GDP of c.2%, caused by falling real disposable incomes due to the cost of living crisis and higher interest rates which push up housing costs. The forecasts also incorporate the policies set out in the Autumn Statement, including the changes to the Energy Price Guarantee scheme. It is normal practice to review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances, and we will continue to follow that approach particularly as the advice the UK Government issues is subject to change in this fluid environment.
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Base case key macroeconomic assumptions |
–House price growth: Thehousing market was surprisingly resilient in the first half of 2022. However, the sharp rise in mortgage rates has triggered a slowdown in house price growth in recent months. With survey indicators pointing to a sharp reduction in demand as buyer confidence is hit by a squeeze on affordability from higher inflation, taxes and mortgage rates, house prices are expected to continue declining in the near-term. We are forecasting a 10% year-on-year decline in house prices by the end of 2023, with zero growth anticipated by the end of 2024. Once the Bank Rate moves towards its neutral level, house price growth starts to pick up and by the end of the forecast period is in line with long term average earnings growth. |
–GDP: The GDP forecasts for Q3 showed negative growth of -0.3% q/q and there is a high likelihood of a further contraction in Q4 which would push the UK economy into recession. The Q3 data showed that households and businesses are reducing spending to deal with rising costs, particularly of essential goods such as food and energy. All of this is likely, along with additional costs, to weigh on businesses with some firms falling into insolvency and there are examples of this being reported in Q4. The economy is expected to officially be in recession by the end of 2022 and for all of 2023, with growth remaining weak in 2024. While support from the Autumn Statement was reduced in some areas, for example with energy costs, there was some positive news for those on benefits and receiving the state pension, with both increasing in line with September’s inflation rate of 11.1% and with the minimum wage also set to increase in April 2023. This should help support household spending and prevent a deeper economic downturn than the c.2% decline we expect. |
–Unemployment rate:Unemployment rose to 3.7% in the 3 months to October as labour demand started to soften and inactivity among early retirees fell. However, the large increase in inactivity due to ill health or workers opting for early retirement is keeping unemployment rates low. Vacancies remain at high levels although they are continuing to fall back as demand of goods and services declines. With the effect of rising energy costs and interest rates, it is likely that labour demand will fall back further as some firms become insolvent and others find that demand for goods and services reduce as households restrict spending as real earnings fall. Whilst the forecast does not assume a large rise in unemployment, the rate peaks at 5.1% by end of 2024 as labour demand and supply conditions change, including previously inactive workers returning to the labour force. |
–Bank Rate: For the Bank Rate forecast, the last actual data point for 2022 was December when the MPC increased rates by 50bps to 3.50% in line with expectations. This was followed by another 50bps rise to 4.00% in February, with two members voting in favour of no change. Our base case assumes that in Q1 2023 there will be no additional rises. Rate cuts start in Q2 2024 as inflation starts to fall back and the MPC looks to boost flagging growth. Bank Rate ends 2024 at 3.25%, with further cuts in 2025 leaving the terminal rate at 2.50% over the medium-term. |
In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. For instance, it is likely that the reduction in the UK workforce continues and that this will have a knock-on impact for the economy, particularly if there are shortages of skilled workers in particular sectors. This is reflected in an average annual growth expectation of 1.6%, the OBR’s latest estimate of the UK’s long run average growth rate. CPI inflation is forecast to be significantly above the 2% target rate in the initial forecast period but then falls to target by the end.
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Annual Report 2022 | Santander UK Group Holdings plc 103 |
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Key changes to our base case in 2022
The key changes to our base case assumptions in 2022 were: (i) weaker GDP growth in 2023 and 2024 which largely reflects the bigger hit to consumer spending from the squeeze on real incomes; (ii) higher and longer above target inflation in response to rising food, fuel and utility bills; (iii) a steeper Bank Rate profile with rates now reaching 4% in 2023, with cuts starting in 2024. This had the effect of increasing the weighted average Bank Rate profile across the five scenarios to 4.29%; and (iv) house prices are 10% lower by the end of 2023.
Other scenarios
Based on this revised base case, we have reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These include (i) reflecting persistent above target inflation over the forecast period; (ii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iii) labour market frictions due to skills mismatches and a shrinking workforce as some discouraged workers leave altogether (for example EU workers returning to their native countries and older UK-born workers retiring early); and (iv) the global economy recovering more swiftly from higher inflation.
To reflect these potential outcomes, we decided to continue to use the base case and four additional scenarios, which management considers provides a range wide enough to reflect all the above potential outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we concluded that only one upside scenario would be needed to reflect the upside risks to the base case. As with the base case, the scenarios are forecast over a five-year period and then mean revert over the next three years to the OBR's latest estimate of the UK's long run average growth rate.
The four other scenarios are:
One upside scenario
This scenario has a quicker recovery than the Baseline although remains benign. It assumes that inflation falls back more swiftly than in the base case, with a quicker end to the Ukraine conflict which helps to reduce gas and food prices. This allows the Bank of England to cut rates bringing them back to what is more likely to be the neutral rate, with households using some of the additional levels of saving accrued over the pandemic. This results in higher consumer and business confidence enabling higher levels of spending with savings rates falling back as real earnings growth returns. House prices fall marginally more than the base case, mainly due to the implied relationship between GDP and HPI used by the Oxford Economics model compared to that used by Management to construct the base case.
Three downside scenarios
Downside 1 - This scenario is a bear case to the baseline. It assumes that peak to trough economic growth is lower and that the path out of recession is weaker. In this scenario excess savings are not used to support growth as consumer confidence remains extremely low, with households worried over the prospect of losing their job. House prices fall further than in the base case as more households look to downsize to lower mortgage repayments. Although inflation remains significantly above target, due to the very poor economic conditions, the Bank of England decides to cut Bank Rate earlier than in the base case to try and bolster growth.
Downside 2- This scenario is similar in severity to a typical stress test scenario. It shows a marked fall in GDP, with unemployment rising to levels consistent with the Global Financial Crisis (GFC) and house prices falling by almost a third as real incomes are squeezed by higher mortgage rates, inflation and taxes, which in turn hits buyer affordability. The scenario also reflects ongoing strike action by various unions pushing for larger pay growth, along with dealing with potential blackouts and the possibility of curtailed working weeks to deal with the energy supply shortage over the winter months. It further assumes that the incidence of major risk events, for example those caused by climate change, continue to occur exposing risks to countries’ fiscal position and the means to respond to such events. For this scenario an overlay to the unemployment rate was also made to the model output from the OGEM. This was to account for the possibility of a recession of similar magnitude to that of 2008/09 where the unemployment rate peaked at 8.5%.
Stubborn inflation- which has replaced the Downside 3 scenario that was related to Covid-19. The scenario considers the effect on the UK economy of a persistent inflationary environment, where inflation remains above target for much of the forecast period. This persistent inflation is created by a combination of factors, including higher energy costs exacerbated by the conflict in Ukraine; continuous wage rises resulting in a spiral effect pushed by increasing numbers of strikes; falling productivity; and continuing supply constraints pushing up input prices. This causes a peak to trough fall in GDP of -4% and a much higher Bank Rate profile with a peak of 6% to combat persistently higher inflation. House prices fall c.20% which is similar to the GFC.
Key changes to our alternative scenarios in 2022
The key changes in 2022 were to Stubborn Inflation, which was changed from a pandemic scenario to one considering the effects of persistently above target inflation; to the Bank Rate profile of the scenarios to reflect current levels; and changes to the base case, historical data for each variable, and the OGEM. We did not make any other methodological changes to the scenarios. The combination of these different inputs will mean differences across the variables for each of the alternative scenarios when we update them each quarter. We continue to compare the variables between each quarter and review any large changes to ensure they are not erroneous.
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Annual Report 2022 | Santander UK Group Holdings plc 104 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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The table below sets out our macroeconomic assumptions for each of the five scenarios at 31 December 2022:
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| | Upside 1 | Base case | Downside 1 | Downside 2 | Stubborn Inflation | Weighted |
| | % | % | % | % | % | % |
GDP(1) | 2021 (actual) | 7.5 | | 7.5 | | 7.5 | | 7.5 | | 7.5 | | 7.5 | |
| 2022 | 4.4 | | 4.4 | | 4.3 | | 3.7 | | 4.2 | | 4.3 | |
| 2023 | (1.0) | | (1.3) | | (1.9) | | (6.4) | | (2.7) | | (2.2) | |
| 2024 | 0.8 | | 0.5 | | (0.3) | | (0.7) | | (0.9) | | 0.0 | |
| 2025 | 2.0 | | 1.6 | | 0.5 | | 1.7 | | 0.2 | | 1.2 | |
| 2026 | 2.0 | | 1.5 | | 0.4 | | 1.5 | | 0.6 | | 1.2 | |
Bank Rate(1) | 2021 (actual) | 0.25 | | 0.25 | | 0.25 | | 0.25 | | 0.25 | | 0.25 | |
| 2022 | 3.50 | | 3.50 | | 3.50 | | 3.50 | | 3.50 | | 3.50 | |
| 2023 | 3.75 | | 4.00 | | 3.50 | | 3.75 | | 6.00 | | 4.29 | |
| 2024 | 3.00 | | 3.25 | | 2.75 | | 3.00 | | 5.50 | | 3.59 | |
| 2025 | 2.50 | | 2.75 | | 2.50 | | 2.75 | | 3.50 | | 2.85 | |
| 2026 | 2.25 | | 2.50 | | 2.25 | | 2.50 | | 3.00 | | 2.55 | |
HPI(1) | 2021 (actual) | 8.7 | | 8.7 | | 8.7 | | 8.7 | | 8.7 | | 8.7 | |
| 2022 | 7.6 | | 7.0 | | 7.6 | | 7.6 | | 7.6 | | 7.3 | |
| 2023 | (8.8) | | (10.0) | | (10.0) | | (15.8) | | (10.9) | | (10.7) | |
| 2024 | (4.3) | | 0.0 | | (6.7) | | (14.3) | | (8.8) | | (4.4) | |
| 2025 | 0.6 | | 2.0 | | (3.1) | | (4.1) | | (4.9) | | (0.8) | |
| 2026 | 4.1 | | 3.0 | | (0.2) | | 4.7 | | (0.6) | | 2.0 | |
Unemployment(1) | 2021 (actual) | 4.0 | | 4.0 | | 4.0 | | 4.0 | | 4.0 | | 4.0 | |
| 2022 | 3.7 | | 3.8 | | 3.7 | | 4.4 | | 3.7 | | 3.8 | |
| 2023 | 4.7 | | 4.7 | | 5.1 | | 8.5 | | 5.5 | | 5.3 | |
| 2024 | 4.5 | | 5.1 | | 5.4 | | 8.0 | | 5.9 | | 5.6 | |
| 2025 | 4.5 | | 4.5 | | 5.8 | | 7.4 | | 6.4 | | 5.4 | |
| 2026 | 4.4 | | 4.3 | | 6.1 | | 6.8 | | 6.6 | | 5.3 | |
The table below sets out our macroeconomic assumptions for each of the five scenarios at 31 December 2021:
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| | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | Weighted |
| | % | % | % | % | % | % |
GDP(1) | 2020 | (9.7) | | (9.7) | | (9.7) | | (9.7) | | (9.7) | | (9.7) | |
| 2021 | 7.0 | | 6.9 | | 6.8 | | 6.2 | | 5.6 | | 6.7 | |
| 2022 | 4.8 | | 4.6 | | 4.1 | | (0.7) | | (7.5) | | 2.8 | |
| 2023 | 2.2 | | 1.7 | | 0.9 | | 0.5 | | 3.1 | | 1.4 | |
| 2024 | 1.9 | | 1.5 | | 0.5 | | 1.6 | | 1.5 | | 1.3 | |
| 2025 | 2.1 | | 1.6 | | 0.5 | | 1.7 | | 1.5 | | 1.4 | |
Bank Rate(1) | 2020 | 0.10 | | 0.10 | | 0.10 | | 0.10 | | 0.10 | | 0.10 | |
| 2021 | 0.25 | | 0.25 | | 0.25 | | 0.25 | | 0.25 | | 0.10 | |
| 2022 | 0.75 | | 0.75 | | 0.75 | | 1.00 | | (0.50) | | 0.55 | |
| 2023 | 0.75 | | 0.75 | | 0.75 | | 2.00 | | 0.00 | | 0.96 | |
| 2024 | 1.25 | | 0.75 | | 1.00 | | 3.00 | | 0.00 | | 1.24 | |
| 2025 | 1.75 | | 0.75 | | 1.00 | | 2.75 | | 0.00 | | 1.21 | |
HPI(1) | 2020 | 6.9 | | 6.9 | | 6.9 | | 6.9 | | 6.9 | | 6.9 | |
| 2021 | 5.4 | | 5.0 | | 5.4 | | 5.4 | | (2.5) | | 4.8 | |
| 2022 | (0.8) | | 2.0 | | (1.8) | | (8.3) | | (19.6) | | (2.0) | |
| 2023 | (2.0) | | 2.0 | | (4.6) | | (13.1) | | (9.3) | | (3.1) | |
| 2024 | 1.0 | | 2.0 | | (3.1) | | (4.8) | | 2.4 | | (0.4) | |
| 2025 | 3.8 | | 2.0 | | (0.7) | | 4.3 | | 3.3 | | 2.1 | |
Unemployment(1) | 2020 | 5.2 | | 5.2 | | 5.2 | | 5.2 | | 5.2 | | 5.2 | |
| 2021 | 4.4 | | 4.7 | | 4.4 | | 4.4 | | 6.8 | | 4.7 | |
| 2022 | 4.4 | | 4.5 | | 4.8 | | 6.9 | | 11.4 | | 5.4 | |
| 2023 | 4.2 | | 4.4 | | 5.0 | | 6.9 | | 8.7 | | 5.2 | |
| 2024 | 3.9 | | 4.3 | | 5.1 | | 6.4 | | 8.0 | | 5.0 | |
| 2025 | 3.7 | | 4.3 | | 5.4 | | 6.1 | | 7.4 | | 5.0 | |
(1)GDP is the calendar year annual growth rate, HPI is Q4 annual growth rate and all other data points are at 31 December in the year indicated.
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Annual Report 2022 | Santander UK Group Holdings plc 105 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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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 31 December 2022 and 31 December 2021 were:
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| | Upside 1 | Base case | Downside 1 | Downside 2 | Stubborn Inflation |
2022 | | % | % | % | % | % |
House price growth | 5-year average increase/decrease | (0.73) | | (0.62) | | (3.79) | | (4.82) | | (4.69) | |
Peak/(trough) at (1) | (12.79) | | (11.19) | | (19.00) | | (30.69) | | (23.12) | |
GDP | 5-year average increase/decrease | 1.17 | | 0.75 | | (0.17) | | (0.63) | | (0.45) | |
Cumulative growth/(fall) to peak/(trough) (2) | 5.98 | | 3.80 | | (0.84) | | (3.12) | | (2.23) | |
Unemployment rate | 5-year end period | 4.17 | | 4.28 | | 6.09 | | 6.23 | | 6.40 | |
Peak/(trough) at (1) | 4.72 | | 5.10 | | 6.12 | | 8.50 | | 6.64 | |
Bank of England bank rate | 5-year end period | 2.25 | | 2.50 | | 2.25 | | 2.50 | | 3.00 | |
Peak/(trough) at (1) | 3.75 | | 4.00 | | 3.50 | | 4.00 | | 6.00 | |
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| | Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 |
2021 | | % | % | % | % | % |
House price growth | 5-year average increase/decrease | 1.30 | | 2.00 | | (1.78) | | (3.27) | | (6.00) | |
Peak/(trough) at (1) | (3.07) | | 0.00 | | (9.87) | | (24.03) | | (32.12) | |
GDP | 5-year average increase/decrease | 2.33 | | 1.89 | | 0.93 | | 0.49 | | (0.58) | |
Cumulative growth/(fall) to peak/(trough) (2) | 12.19 | | 9.83 | | 4.75 | | 2.48 | | (2.85) | |
Unemployment rate | 5-year end period | 3.60 | | 4.30 | | 5.65 | | 5.95 | | 6.80 | |
Peak/(trough) at (1) | 4.45 | | 4.70 | | 5.65 | | 7.27 | | 11.90 | |
Bank of England bank rate | 5-year end period | 2.00 | | 0.75 | | 1.00 | | 2.25 | | 0.25 | |
Peak/(trough) at (1) | 2.00 | | 0.75 | | 1.00 | | 3.00 | | (0.50) | |
(1)For GDP and house price growth it is the peak to trough change within the 5-year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.
(2)This is the cumulative growth for the 5-year period.
The historical and forecast growth rates for the GDP assumptions we use for scenario modelling
The historical and forecast growth rates for the GDP assumptions we used for scenario modelling at 31 December 2022 and 31 December 2021 were:
31 December 2022
31 December 2021
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Annual Report 2022 | Santander UK Group Holdings plc 106 |
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Scenario weights
Each quarter, we undertake a full review of the probability weights we apply to the scenarios. We consider the probability of the economic scenarios occurring, while ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support our initial assessment of how likely a scenario is to occur, we typically undertake a Monte Carlo analysis which would ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring and therefore assign a probability weight to that scenario. However, a key challenge with this approach in a stressed environment like the one seen in 2020 is that extreme GDP forecasts can occur.
We continue to use the entire historical GDP data set available for the Monte Carlo analysis to smooth out the large GDP data swings that the pandemic gave. For 2022, the base case sits around the 20th percentile as growth is lower now that a further recession is predicted. Under the longer period, the Downside 2 scenario, which has the lowest CAGR, now sits below the 10th percentile suggesting that a lower weight than the base case remains appropriate.
We also need to consider the UK economic and political environment when applying weights. Given the current cost of living crisis, we remain of the view that the risks to UK growth are still biased to the downside and include: a substantial increase in inflation staying above target for longer, which raises the cost of living reducing consumer demand; continuing weak investment reflecting the turbulent political global environment; further development of Covid strains that are immune to vaccines leading to further restrictions; a larger negative impact from the EU trade deal given ongoing issues such as in NI; a continuing and significant mismatch between vacancies and skills along with a smaller labour force; and the increasing possibility of a second Scottish referendum which may bring disruption to any recovery in the latter years of the forecast. As such, it remains appropriate to reflect this with a 45% cumulative weighting for the downside scenarios. In contrast to last year, Downside 3 (i.e. the stubborn inflation scenario) has a heavier weight compared to downside 1 and 2 as this scenario is more representative of the current climate of potential stagflation.
The scenario weights we applied for 2022 and 2021 were:
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| Upside 1 | Base case | Downside 1 | Downside 2 | Stubborn Inflation | Weighted |
Scenario weights | % | % | % | % | % | % |
2022 | 5 | | 50 | | 15 | | 10 | | 20 | | 100 | |
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| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | Weighted |
Scenario weights | % | % | % | % | % | % |
2021 | 5 | | 45 | | 25 | | 20 | | 5 | | 100 | |
Definition of default (Credit impaired) (audited)
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 that suggests the customer is unlikely to pay. The data we have on customers varies across our business segments. It typically includes where:
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Retail Banking and Consumer Finance |
–They have been reported bankrupt or insolvent and are in arrears |
–Their loan term has ended, but they still owe us money more than three months later |
–They have had forbearance while in default and have failed to perform under the new arrangement terms, or have had multiple forbearance. Performing forborne accounts while not in default are reported in Stage 2 |
–We have suspended their fees and interest because they are in financial difficulties |
–We have repossessed the property. |
Corporate & Commercial Banking and Corporate Centre |
–They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as another lender calls in a loan |
–Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract |
–They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default |
–Their loan is unlikely to be refinanced or repaid in full on maturity |
–Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increase in market value |
–Loans restructured under financial difficulties, classified as forborne transactions, in last 12 months. |
Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, there are differences with the default definitions for ECL purposes. The main differences are as follows:
–Performing forborne accounts while not in default are in Stage 2 until they cure their forbearance status (measured as 12 consecutive months of successful payments).
–Performing non-forborne accounts, which under our internal rating-based basis are subject to a 3-month cure period, for accounting purposes we classify them in Stage 2 until they cure all SICR triggers.
The CRPF reviews and approves the definition of default each year, or more often if we change it.
Following the implementation of a new regulatory definition of default in early 2022, we updated and aligned our definitions. This increased the Stage 3 ratio by 7bps (£0.2bn). This was due to including non-performing forbearance accounts which were previously reported in Stage 2 and are now reported in Stage 3 in line with unlikeliness to pay definitions, subject to a 12-month probation period in line with our regulatory default definition. The change in definition was a change in estimate and therefore prior periods have not been amended.
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Annual Report 2022 | Santander UK Group Holdings plc 107 |
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Significant Increase in Credit risk (SICR) (audited)
Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual term of the loan, or the behavioural term for a revolving facility. Loans which have not experienced a SICR are subject to 12-month ECL. We assess the 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 the exposure is not considered credit impaired. We apply a loss allowance equal to the lifetime ECL i.e. the 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. For more, see the section ‘Definition of default (Credit impaired)’ above.
We use quantitative, qualitative and backstop criteria to identify exposures that suffer a SICR. The Credit Risk Provisions Forum (CRPF) reviews and approves our SICR thresholds periodically. The Board Audit Committee reviews and challenges their appropriateness 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. We base our criteria on whether any increase in the lifetime PD since origination exceeds a threshold in relative and absolute terms. We base the value anticipated at origination on similar assumptions and data to the ones we use 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 origination. Our criteria are absolute (rather than relative) increases in lifetime PD since origination. We also apply a relative threshold of 100% (doubling the PD) across all portfolios. The criteria for 2022 were:
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For 2022 and 2021 |
Retail Banking | Consumer Finance(2) | Corporate & Commercial Banking | Corporate Centre |
Homes | Everyday Banking (1) |
Personal loans | Credit cards | Overdrafts |
30bps | 30bps | 340bps | 260bps | 300bps | 30bps | Internal rating method |
(1)For larger business banking customers we apply the same criteria that we use for Corporate & Commercial Banking.
(2)Consumer Finance use the comparison of lifetime PDs to determine Stage allocation, unlike other products which first turn the lifetime PD into an average yearly PD (annualised) and then do the comparison.
Qualitative criteria
We also use qualitative criteria to identify where an exposure has increased in credit risk, independent of changes in PD. The criteria for 2022 and 2021 were:
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Retail Banking | Consumer Finance | Corporate & Commercial Banking | Corporate Centre |
Homes | Everyday Banking(1) |
Personal loans | Credit cards | Overdrafts |
– In forbearance – Default in last 24m
– 30 Days past due (DPD) in last 12m
– Bankrupt
– £100+ arrears | – In Collections – Default in last 12m
– £50+ arrears | – In forbearance – Default in last 12m
– In Collections
– £100+ arrears
– Behaviour score indicators | – Fees suspended – Default in last 12m
– Debit dormant >35 days
– Any excess in month | – In forbearance – Deceased or Insolvent – Court ‘Return of goods’ order or Police watchlist – Agreement terminated – Payment holiday – Cash Collection | – In forbearance – Default in last 12m
– Watchlist: proactive management
– Default at proxy origination |
– Watchlist: proactive management |
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(1)For larger business banking customers we apply the same criteria that we use for Corporate & Commercial Banking.
An additional qualitative assessment was introduced as part of new Judgemental Adjustment introduced during 2022 in response to the cost of living crisis. Exposures that were deemed more significantly impacted by cost-of-living pressures based on indebtedness and disposable income thresholds were migrated to Stage 2. See 'Judgemental Adjustments (JAs) below for more on this.
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 DPD) relating to either a SICR or default.
Improvement in credit risk or cure
We transfer Stage 3 exposures to Stage 2 or Stage 1 when we no longer consider them to be credit impaired. We transfer Stage 2 exposures to Stage 1 when we no longer consider them to have suffered a SICR. Where we identified a SICR using quantitative criteria, we transfer the exposures to Stage 1 when they no longer meet the original PD-based transfer criteria. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before we transfer the exposure to Stage 1. For a loan to exit forbearance, it must meet the conditions set out in the section ‘Forbearance’.
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Annual Report 2022 | Santander UK Group Holdings plc 108 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Judgemental Adjustments (JAs) formerly known as Post Model Adjustments (PMAs) (audited)
We use a range of methods to identify whether we need a JA. These include regular review of model monitoring tools, changes in the period, trend analysis, comparison against forecasts, and input from expert teams who manage key portfolio risks. We only recognise a JA if its expected impact is over £1m and keep it in place until we no longer need it. This is usually when we build it into our core credit model or the conditions that impacted the historical data no longer exist.
Our Risk Provisions & Forecasting team calculates JAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a consistent and controlled manner. We apply standard end-user computing controls to JAs expected to be in place for more than six months. Our Independent Validations Team may also review significant JAs. The CRPF approves all new JAs and, each quarter, reviews and approves existing JAs.
–Long-term indeterminate arrears: To mitigate the risk of model underestimation, we fully provide for accounts in arrears which have neither repaid (cured) or been written-off after a period of 2 years 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 2022 and 31 December 2021, we only needed to make an adjustment for mortgages. When calculating the ECL uplift for this JA, management assumes a 2 year delay in the time to repossessions which reflects experience and ensure the LTVs are impacted by our Multiple scenario forecasts for HPI. Over the medium term, as we continue to address long term arrears in the portfolio, we expect the need for this JA will diminish. This JA increased our ECL by £13m. Had management assumed no delay in repossessions or a 3 year delay, the JA could have been within a range of £12m to £14m.
–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. When calculating the ECL uplift for this JA, management assumes a 2 year delay in the time to repossessions which reflects experience and ensure the LTVs are impacted by our Multiple scenario forecasts for HPI. Over the medium term, as we continue to address long term arrears in the portfolio, we expect the need for this JA will diminish. This JA increased our ECL by £22m. Had management assumed no delay in repossessions or a 3 year delay, the JA could have been within a range of £7m to £28m.
–Cladding risk: Following the Government's intervention to support the owners of flats where cladding rectification may be required, we released this JA.
–Mortgages affordability: This JA addresses the risk that the current PD model for mortgages is likely to underestimate a 'cost of living crisis' whereby real disposable income is stretched with increasing living costs and debt burden as interest rates begin to rise. The JA identifies a population of customers most likely to be under inflationary pressures, increases their PDs and moves them to Stage 2. At 31 December 2022, these accounts made up a significant amount of the total mortgage Stage 2 population as £5.0bn mortgages were moved from Stage 1 into Stage 2 as a result. The JA increased our ECL by £9m in 2022 with a closing ECL of £27m .
–Affordability of unsecured lending repayments: We introduced new JAs to account for the potential repayment affordability risk among those customers with low disposable income. These JAs increased our ECL by £35m. Had management applied different sensitivities to the PD uplifts across Mortgages and Retail unsecured affordability, the ECL impact could have been between £49m and £82m.
–UPL loss floor: This JA addresses the perceived macroeconomic insensitivity within the UPL IFRS 9 models, where historical analysis of losses shows a much larger correlation to the International Labour Organisation (ILO) unemployment forecast than the model gives. The JA then uplifts the lifetime losses expected in each of the five macroeconomic scenarios within the IFRS 9 model to meet the expected losses the historical analysis predicts. The JA increased our ECL by £15m . If management had only increased PDs, the JA could have been £12m.
–Model underestimation: This JA addresses potential underestimation risk of projected modelled ECL identified by our model monitoring and back-testing from lower PDs given the low level of macroeconomic stress and timing effects of government support schemes on emergence of defaults. At 31 December 2022, this JA increased our ECL by £57m. Had management applied the same PD uplift on the upside 1 scenario the JA could have been £49m. Had management applied the same PD uplift on the Downside 3 scenario as the Base case, Upside 1 and Downside 1 scenarios, the JA could have been £60m.
–Corporate lending to segments affected by supply chain:We introduced new JAs to reflect the corporate lending risks to those sectors which are susceptible to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. This JA calculates ECL depending on the customer’s risk profile in stage 1 and moves risk between stage 1 and 2 (resulting in increase in lifetime vs 12m ECL). In case of those clients already in stage 2 the JA is calculated by stressing PD levels according to the risk profile of the customer. In total this JA increased our ECL by £61m. The range for this JA can be between £26m to £187m depending on PD assumptions of high and severe sectors.
–Corporate lending to segments affected by Covid-19: In 2022, following a successful 18 month probation period, with no material observed defaults, we released all corporate sector staging JAs related to Covid-19 as the risks from lockdowns have reduced.
–Corporate single large exposure: In 2020, to mitigate against the risk of a single large corporate exposure with an ECL requirement of greater than £10m defaulting, which has not been covered by the existing model estimate or the corporate and SME JA above, we applied a JA for the risk of a company which unexpectedly defaults. This JA has been calculated based on incurring two average historically observed single name large losses in our Corporate & Commercial business segment. We will continue to assess this risk over the medium term based on actual experience and we will refine the estimate based on changes in our portfolio credit quality and loan size mix. At 31 December 2021, this JA increased our ECL by £23m . Had management assumed only one average loss was incurred the JA would decrease to £12m. The JA would increase to £35m assuming three average losses were incurred. It has been assessed and decision made to keep this JA as it is felt there is still a need for this given we are the start of a conventional recessionary environment. It is believed that the unprecedented support provided by the government over the last 2 to 3 years have differed stresses and accounted for the lack of any actual examples where we would have looked to utilise this JA.
–SME debt burden: We introduced a SME debt burden JA in 2021 to take account of the potential debt burden risk of unsecured lending to our SME customers who also took a BBL. This does not incorporate the credit risk on BBLs, as these are government guaranteed but instead considers the possible impact on repayment of other lending with us. At 31 December 2022, this JA increased our ECL by £7m . Had management used the modelled lifetime losses for all dragged accounts, the JA could have been £3m. Had management used a 50% coverage on all accounts, the JA could have been £15m.
–Other: This includes adjustments for other exposures in smaller portfolios that are not within models such as Buy To Let Mortgages. The year on year movement is driven by the absence of a £32m underlay JA which corrected an overstatement of the core modelled ECL as a result of customers who took a payment holiday artificially inflating stage 2. This was released in 2022 as the data distortion no longer impacted the modelled ECL.
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Annual Report 2022 | Santander UK Group Holdings plc 109 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Climate change
In addition 2022 and 2021,we assessed the risks to asset valuations in the customer loan book from both transitional and physical risks associated with climate change. At 31 December 2022 and 2021, we did not consider it appropriate to recognise a climate change risk related JA for the following reasons:
–The behavioural life of the loan book is less than five years. Any material transitional risks are generally regarded to be relevant over a longer timeframe than five years and as such, the risk predominantly relates to assets yet to be written;
–There have been no observed default events or SICRs due to climate change for any part of the loan book;
–The absolute exposure to fossil fuel industries is not deemed to be material. On an individually assessed basis, clients in these industries are highly rated and their markets remain highly liquid;
–The residual value of automotive vehicles might be impacted by diesel obsolescence and the transition to electric vehicles.The residual value risk is already set at the more cautious end of the acceptable range to capture the inherent risk of diesel obsolescence and measurement uncertainty of electric vehicles;
–ECL calculations are based on multiple forward-looking economic scenarios developed by management covering a period of 5 years, during which timeframe climate change risks may crystallise;
–The proportion of mortgage loans subject to flood and subsidence risk is not deemed to be material. The terms of our mortgage lending also require homeowners to buy suitable insurance which transfers the majority of the risk to asset valuations to third party insurers.
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| Homes | Everyday Banking | Consumer Finance | CCB | Corporate Centre | Total |
| Mortgages | Credit Cards | Other |
2022 | £m | £m | £m | £m | £m | £m | £m |
Modelled ECL | 134 | | 112 | | 93 | | 65 | | 194 | | — | | 598 | |
Individually assessed | — | | — | | — | | — | | 112 | | — | | 112 | |
ECL before JAs | 134 | | 112 | | 93 | | 65 | | 306 | | — | | 710 | |
JAs | | | | | | | |
Long-term indeterminate arrears | 13 | | — | | — | | — | | — | | — | | 13 | |
12+ months in arrears | 22 | | — | | — | | — | | — | | — | | 22 | |
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UPL loss floor | — | | — | | 15 | | — | | — | | — | | 15 | |
Model underestimation | 36 | | 2 | | 19 | | — | | — | | — | | 57 | |
Corporate single large exposure | — | | — | | — | | — | | 23 | | — | | 23 | |
Other | 21 | | 1 | | 10 | | 2 | | 3 | | — | | 37 | |
Total JAs | 92 | | 3 | | 44 | | 2 | | 26 | | — | | 167 | |
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Affordability and Cost of Living JAs | | | | | | | |
Corporate lending to segments affected by supply chain | — | | — | | — | | — | | 61 | | — | | 61 | |
Mortgages affordability | 27 | | — | | — | | — | | — | | — | | 27 | |
Retail Unsecured Affordability | — | | 15 | | 20 | | — | | — | | — | | 35 | |
SME debt burden | — | | — | | 7 | | — | | — | | — | | 7 | |
Total Affordability and Cost of Living JAs | 27 | | 15 | | 27 | | — | | 61 | | — | | 130 | |
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Total ECL | 253 | | 130 | | 164 | | 67 | | 393 | | — | | 1,007 | |
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Annual Report 2022 | Santander UK Group Holdings plc 110 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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| Homes | Everyday Banking | Consumer Finance | CCB | Corporate Centre | Total |
| Mortgages | Credit Cards | Other |
2021 | £m | £m | £m | £m | £m | £m | £m |
Modelled ECL | 121 | | 88 | | 56 | | 52 | | 108 | | — | | 425 | |
Individually assessed | — | | — | | — | | — | | 100 | | — | | 100 | |
ECL before JAs | 121 | | 88 | | 56 | | 52 | | 208 | | — | | 525 | |
JAs | | | | | | | |
Long-term indeterminate arrears | 14 | | — | | — | | — | | — | | — | | 14 | |
12+ months in arrears | 29 | | — | | — | | — | | — | | — | | 29 | |
Cladding risk | 15 | | — | | — | | — | | — | | — | | 15 | |
UPL loss floor | — | | — | | 21 | | — | | — | | — | | 21 | |
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Other JA | (20) | | 1 | | 9 | | — | | 18 | | — | | 8 | |
Total non Covid-19 JAs | 38 | | 1 | | 30 | | — | | 18 | | — | | 87 | |
Covid-19 JAs | | | | | | | |
Corporate lending to segments affected by Covid-19 | — | | — | | — | | — | | 176 | | — | | 176 | |
Corporate single large exposure | — | | — | | — | | — | | 23 | | — | | 23 | |
Model underestimation | 14 | | — | | 14 | | — | | — | | — | | 28 | |
SME debt burden | — | | — | | 9 | | — | | — | | — | | 9 | |
Total Covid-19 JAs | 14 | | — | | 23 | | — | | 199 | | — | | 236 | |
Affordability and Cost of Living JAs | | | | | | | |
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Mortgages affordability | 18 | | — | | — | | — | | — | | — | | 18 | |
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Total Affordability and Cost of Living JAs | 18 | | — | | — | | — | | — | | — | | 18 | |
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Total ECL | 191 | | 89 | | 109 | | 52 | | 425 | | — | | 866 | |
2022 compared to 2021
JAs reduced from £341m to £297m and the proportion of JAs to total ECL decreased from 39% to 29%. The change in proportion was mainly due to an increase in total ECL driven by the deterioration in the economic environment compared to 2021.
Internal credit risk rating for corporate borrowers (audited)
We assign each corporate borrower an internal credit rating based on our internal rating scale. 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 on a dynamic basis and at least once a year. The internal risk rating is used to determine the Probability of Default for a client.
Individually assessed corporate Stage 3 exposures (audited)
We assess the ECL requirement for large single name corporate exposures on an individual basis when they meet our definition of default and are transferred into Stage 3. This assessment takes into consideration the latest specific information about the counterparty to determine a probability weighted ECL based on a best, worst and mid case outcome. For those loans that were in default (i.e. Stage 3), the ECL was £129m at 31 December 2022 (2021: £100m). Had management assumed the best or worst outcome in terms of loss estimates, the ECL could have been within a range of £68m to £203m.
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Annual Report 2022 | Santander UK Group Holdings plc 111 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Sensitivity of ECL allowance(audited)
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. In addition, the ECL for residential mortgages 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 ECL allowance and profit before tax. We have incorporated judgemental adjustments (JA's) into the sensitivity analysis, and these assumptions are set out below.
Scenario sensitivity
The tables below show the ECL allowances that would have arisen had management applied a 100% weight to each economic scenario. The allowances were calculated using a stage allocation appropriate to each scenario 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.
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| Upside 1 | Base case | Downside 1 | Downside 2 | Stubborn Inflation | Weighted |
2022 | £m | £m | £m | £m | £m | £m |
Exposure | 312,830 | | 312,830 | | 312,830 | | 312,830 | | 312,830 | | 312,830 | |
Retail Banking | 216,383 | | 216,383 | | 216,383 | | 216,383 | | 216,383 | | 216,383 | |
– Homes - Mortgages | 195,170 | | 195,170 | | 195,170 | | 195,170 | | 195,170 | | 195,170 | |
– EDB - Credit Cards | 12,845 | | 12,845 | | 12,845 | | 12,845 | | 12,845 | | 12,845 | |
– EDB - Other | 8,368 | | 8,368 | | 8,368 | | 8,368 | | 8,368 | | 8,368 | |
Consumer Finance | 5,739 | | 5,739 | | 5,739 | | 5,739 | | 5,739 | | 5,739 | |
CCB | 28,299 | | 28,299 | | 28,299 | | 28,299 | | 28,299 | | 28,299 | |
Corporate Centre | 62,409 | | 62,409 | | 62,409 | | 62,409 | | 62,409 | | 62,409 | |
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ECL | 931 | | 933 | | 994 | | 1,384 | | 1,150 | | 1,007 | |
Retail Banking | 490 | | 498 | | 530 | | 831 | | 648 | | 546 | |
– Homes - Mortgages | 215 | | 219 | | 245 | | 502 | | 325 | | 253 | |
– EDB - Credit Cards | 122 | | 123 | | 127 | | 142 | | 140 | | 130 | |
– EDB - Other | 153 | | 156 | | 158 | | 187 | | 183 | | 163 | |
Consumer Finance | 65 | | 66 | | 65 | | 69 | | 68 | | 67 | |
CCB | 376 | | 369 | | 399 | | 484 | | 434 | | 394 | |
Corporate Centre | — | | — | | — | | — | | — | | — | |
| % | % | % | % | % | % |
Proportion of assets in Stage 2 | 4.0 | | 4.0 | | 5.0 | | 11.0 | | 7.0 | | 7.0 | |
Retail Banking | 4.0 | | 4.0 | | 4.0 | | 10.0 | | 6.0 | | 7.0 | |
– Homes - Mortgages | 4.0 | | 4.0 | | 4.0 | | 11.0 | | 6.0 | | 7.0 | |
– EDB - Credit Cards | 2.0 | | 2.0 | | 2.0 | | 3.0 | | 3.0 | | 3.0 | |
– EDB - Other | 7.0 | | 7.0 | | 7.0 | | 9.0 | | 8.0 | | 8.0 | |
Consumer Finance | 6.0 | | 6.0 | | 6.0 | | 6.0 | | 6.0 | | 6.0 | |
CCB | 8.0 | | 9.0 | | 9.0 | | 18.0 | | 14.0 | | 12.0 | |
Corporate Centre | — | | — | | — | | — | | — | | — | |
| % | % | % | % | % | % |
Proportion of assets in Stage 3 | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
Retail Banking | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
– Homes - Mortgages | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
– EDB - Credit Cards | — | | — | | — | | — | | — | | — | |
– EDB - Other | 2.0 | | 2.0 | | 2.0 | | 2.0 | | 2.0 | | 2.0 | |
Consumer Finance | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
CCB | 2.0 | | 2.0 | | 2.0 | | 2.0 | | 2.0 | | 2.0 | |
Corporate Centre | — | | — | | — | | — | | — | | — | |
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Annual Report 2022 | Santander UK Group Holdings plc 112 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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| Upside 1 | Base case | Downside 1 | Downside 2 | Downside 3 | Weighted |
2021 | £m | £m | £m | £m | £m | £m |
Exposure | 319,319 | | 319,319 | | 319,319 | | 319,319 | | 319,319 | | 319,319 | |
Retail Banking | 214,979 | | 214,979 | | 214,979 | | 214,979 | | 214,979 | | 214,979 | |
– Homes - Mortgages | 193,247 | | 193,247 | | 193,247 | | 193,247 | | 193,247 | | 193,247 | |
– EDB - Credit Cards | 12,301 | | 12,301 | | 12,301 | | 12,301 | | 12,301 | | 12,301 | |
– EDB - Other | 9,431 | | 9,431 | | 9,431 | | 9,431 | | 9,431 | | 9,431 | |
Consumer Finance | 5,298 | | 5,298 | | 5,298 | | 5,298 | | 5,298 | | 5,298 | |
CCB | 27,345 | | 27,345 | | 27,345 | | 27,345 | | 27,345 | | 27,345 | |
Corporate Centre | 71,697 | | 71,697 | | 71,697 | | 71,697 | | 71,697 | | 71,697 | |
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ECL | 740 | | 738 | | 849 | | 1,123 | | 1,288 | | 866 | |
Retail Banking | 307 | | 286 | | 375 | | 510 | | 662 | | 389 | |
– Homes - Mortgages | 134 | | 125 | | 177 | | 283 | | 437 | | 191 | |
– EDB - Credit Cards | 78 | | 72 | | 89 | | 102 | | 101 | | 89 | |
– EDB - Other | 95 | | 89 | | 109 | | 125 | | 124 | | 109 | |
Consumer Finance | 50 | | 51 | | 51 | | 53 | | 54 | | 52 | |
CCB | 383 | | 401 | | 423 | | 560 | | 572 | | 425 | |
Corporate Centre | — | | — | | — | | — | | — | | — | |
| % | % | % | % | % | % |
Proportion of assets in Stage 2 | 5.0 | | 5.0 | | 5.0 | | 6.0 | | 7.0 | | 5.0 | |
Retail Banking | 5.0 | | 5.0 | | 5.0 | | 7.0 | | 8.0 | | 5.0 | |
– Homes - Mortgages | 6.0 | | 6.0 | | 6.0 | | 7.0 | | 8.0 | | 6.0 | |
– EDB - Credit Cards | 2.0 | | 1.0 | | 2.0 | | 2.0 | | 2.0 | | 2.0 | |
– EDB - Other | 3.0 | | 3.0 | | 4.0 | | 5.0 | | 4.0 | | 4.0 | |
Consumer Finance | 4.0 | | 4.0 | | 4.0 | | 4.0 | | 4.0 | | 4.0 | |
CCB | 17.0 | | 16.0 | | 17.0 | | 21.0 | | 21.0 | | 18.0 | |
Corporate Centre | — | | — | | — | | — | | — | | — | |
| % | % | % | % | % | % |
Proportion of assets in Stage 3 | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
Retail Banking | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
– Homes - Mortgages | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | | 1.0 | |
– EDB - Credit Cards | — | | — | | — | | — | | — | | — | |
– EDB - Other | 3.0 | | 3.0 | | 3.0 | | 3.0 | | 3.0 | | 3.0 | |
Consumer Finance | — | | — | | — | | — | | — | | — | |
CCB | 4.0 | | 4.0 | | 4.0 | | 4.0 | | 4.0 | | 4.0 | |
Corporate Centre | — | | — | | — | | — | | — | | — | |
2022 compared to 2021
In 2022 ECL increased as a result of PD deterioration and an introduction of affordability JAs mainly due to changes in the current economic environment. As a risk from further lockdowns relating to Covid19 reduced, we released all Corporate Covid19 related JAs. This release resulted in the movement of £0.4bn corporate Stage 3 loans to Stage 2 and £1.7bn of corporate loans transferred from Stage 2 to Stage 1. However, this was offset by an introduction of a new corporate lending JA relating to segments that are susceptible to high inflation and energy price, higher input costs, potential for lower consumer and business demand. This resulted in movement of £1.4bn from Stages 1 to 2. Mortgage affordability continued to be impacted by the increased base rate and inflationary pressures, resulting in an increase in Stage 2 mortgage asset by £0.8bn.
We have incorporated our JA's into the sensitivity analysis.
HPI sensitivity
Given the relative size of our residential mortgage portfolio, management considers that changes in HPI assumptions used to calculate the ECL allowance for residential mortgages would have the most significant impact on the ECL allowance. The table below shows the ECL impact on the profit before tax of applying an immediate and permanent hour price increase/decrease to our unweighted base case scenario, and assumes no changes to the stage allocation of exposures.
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| Increase/decrease in house prices |
| +20% | +10% | -10% | -20% |
Increase/(decrease) in profit before tax | £m | £m | £m | £m |
2022 | 48 | | 32 | | (61) | | (176) | |
2021 | 64 | | 40 | | (69) | | (197) | |
2022 compared to 2021
The HPI ECL sensitivity remains similar to 2021. The expected impact from a drop in the HPI index by 10% and 20% is £61m and £176m respectively. There has been moderate growth for 2022 coupled with a negative economic outlook that has resulted in potential losses increasing towards the end of the year.
Both the modelled ECL and the PMAs were stressed in the sensitivity analysis to assess the potential impact on ECL from housing market volatility. The impact is driven by marginal growth in the housing market with subdued demand for purchases driven by the increases interest rates.
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Annual Report 2022 | Santander UK Group Holdings plc 113 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Measuring ECL (audited)
For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month over the forecast period. The lifetime ECL is the sum of the monthly ECLs over the forecast period, while the 12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted value for the relevant forecast month of the product of the following factors:
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Factor | Description |
Survival rate (SR) | The probability that the exposure has not closed or defaulted since the reporting date. |
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. |
Exposure at default (EAD) | The amount we expect to be owed if a default event occurs. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an off-balance sheet element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product and base them on analysis of recent default data. |
Loss given default (LGD) | Our expected loss if a default event were to occur. We express it as a percentage and calculate it based on factors that we have observed to affect the likelihood and/or value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type. |
We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD to reflect the default status of the account, considering the current DPD and loan to value. PD and SR are not required for accounts in default.
Forecast period
We base the forecast period for amortising facilities on the remaining contract term. For revolving facilities, we base it 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 Judgemental Adjustment to reflect our view of the full lifetime ECL.
Forward-looking information
Our assessments of a SICR and the calculation of ECL incorporate forward-looking data. We perform historical analysis and identify the key economic variables that impact credit risk and ECL for each portfolio. These can include house price growth, GDP, unemployment rate and BoE Bank Rate. Where applicable, we incorporate these economic variables and their associated impacts into our models.
Economic forecasts have the most impact on ECL measurement for residential mortgages and, to a lesser extent, corporate loans. This is due to the long behavioural lives and large size of these portfolios. Economic forecasts have less impact on ECL for other portfolios due to their shorter lives and smaller size.
Grouping of instruments for losses measured on a collective basis
We measure ECL at the individual financial instrument level. However, where we have used internal capital or similar models as the basis for our ECL models, this typically results in a large number of relatively small homogenous groups. We typically group instruments where they share risk characteristics using statistical models and assess them for impairment collectively.
We use this approach for
–all our Retail Banking and Consumer Finance portfolios,
–SME customers in Corporate & Commercial Banking, and
–Legacy Portfolios in run-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.
For all our portfolios (whether we assess them for impairment individually or collectively) we use five forward-looking economic scenarios.
Governance around ECL impairment allowances (audited)
Our Risk Methodology team developed our ECL models (except for the external models we use, such as OGEM which we described earlier in ‘Our forecasting approach’), and our Independent Validations team reviews all material models. As model owners, our Risk Provisioning & Forecasting team run the models to calculate our ECL each month. The models are sensitive to changes in credit conditions and reflect management judgements that give rise to measurement uncertainty in our ECL as set out above. The following committees and forums review the provision drivers and ensure that the ECL remains appropriate:
–Model Risk Control Forum (MRCF) reviews and approves new models and model changes. It also reviews the use of OGEM as a reliable model on which to base our other forecast macroeconomic variables. We use it across all stress testing and planning so it is subject to model risk criteria.
–ALCO reviews and approves the base case used in the economic scenarios we use to calculate forward-looking scenarios.
–CRPF reviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. It also 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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Annual Report 2022 | Santander UK Group Holdings plc 114 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW
Our maximum and net exposure to credit risk (audited)
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 are applied.
For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances. Off-balance sheet exposures are mortgage offers, guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum amount that we would have to pay if the guarantees were called on. For formal standby facilities, credit lines and other commitments that are irrevocable over the life of the facility, the maximum exposure is the total amount of the commitment.
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| Maximum exposure | | | | | |
| Balance sheet asset | | Off-balance sheet | | Collateral(1) | | |
| Gross amounts | Loss allowance | Net amounts | | Gross amounts | Loss allowance | Net amounts | | Cash | Non-cash | Netting(2) | Net exposure |
2022 | £bn | £bn | £bn | | £bn | £bn | £bn | | £bn | £bn | £bn | £bn |
Cash and balances at central banks | 46.6 | | — | | 46.6 | | | — | | — | | — | | | — | | — | | — | | 46.6 | |
Financial assets at amortised cost: | | | | | | | | | | | | |
–Loans and advances to customers:(3) | | | | | | | | | | | | |
–Retail Mortgages(4) | 188.3 | | (0.3) | | 188.0 | | | 8.0 | | — | | 8.0 | | | — | | (191.4) | | — | | 4.6 | |
–Corporate loans | 19.1 | | (0.3) | | 18.8 | | | 9.3 | | — | | 9.3 | | | (0.1) | | (16.5) | | — | | 11.5 | |
–Finance leases | 4.6 | | (0.1) | | 4.5 | | | 0.4 | | — | | 0.4 | | | — | | (4.8) | | — | | 0.1 | |
–Accrued interest and other adjustments | 0.9 | | — | | 0.9 | | | — | | — | | — | | | — | | — | | — | | 0.9 | |
–Other unsecured loans | 7.7 | | (0.2) | | 7.5 | | | 13.7 | | (0.1) | | 13.6 | | | — | | — | | — | | 21.1 | |
–Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 4.2 | | — | | 4.2 | | | — | | — | | — | | | — | | — | | — | | 4.2 | |
Total loans and advances to customers | 224.8 | | (0.9) | | 223.9 | | | 31.4 | | (0.1) | | 31.3 | | | (0.1) | | (212.7) | | — | | 42.4 | |
–Loans and advances to banks | 1.1 | | — | | 1.1 | | | 0.4 | | — | | 0.4 | | | — | | — | | — | | 1.5 | |
–Reverse repurchase agreements – non trading | 7.3 | | — | | 7.3 | | | — | | — | | — | | | — | | (7.3) | | — | | — | |
–Other financial assets at amortised cost | 0.2 | | — | | 0.2 | | | — | | — | | — | | | — | | — | | — | | 0.2 | |
Total financial assets at amortised cost | 233.4 | | (0.9) | | 232.5 | | | 31.8 | | (0.1) | | 31.7 | | | (0.1) | | (220.0) | | — | | 44.1 | |
Financial assets at fair value at FVOCI: | | | | | | | | | | | | |
–Loans and advances to customers | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | — | |
–Debt securities | 6.0 | | — | | 6.0 | | | — | | — | | — | | | — | | — | | — | | 6.0 | |
Total financial assets at FVOCI | 6.0 | | — | | 6.0 | | | — | | — | | — | | | — | | — | | — | | 6.0 | |
Total | 286.0 | | (0.9) | | 285.1 | | | 31.8 | | (0.1) | | 31.7 | | | (0.1) | | (220.0) | | — | | 96.7 | |
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2021 | | | | | | | | | | | | |
Cash and balances at central banks | 50.5 | | — | | 50.5 | | | — | | — | | — | | | — | | — | | — | | 50.5 | |
Financial assets at amortised cost: | | | | | | | | | | | | |
–Loans and advances to customers:(3) | | | | | | | | | | | | |
–Retail Mortgages(4) | 178.0 | | (0.2) | | 177.8 | | | 16.0 | | — | | 16.0 | | | — | | (181.2) | | — | | 12.6 | |
–Corporate loans | 19.3 | | (0.4) | | 18.9 | | | 7.7 | | — | | 7.7 | | | (0.1) | | (16.8) | | — | | 9.7 | |
–Finance leases | 3.9 | | (0.1) | | 3.8 | | | 0.3 | | — | | 0.3 | | | — | | (4.7) | | — | | (0.6) | |
–Accrued interest and other adjustments | 0.7 | | — | | 0.7 | | | — | | — | | — | | | — | | — | | — | | 0.7 | |
–Other unsecured loans | 9.4 | | (0.2) | | 9.2 | | | 13.3 | | — | | 13.3 | | | — | | — | | — | | 22.5 | |
–Amounts due from fellow Banco Santander group subsidiaries and joint ventures | 3.1 | | — | | 3.1 | | | — | | — | | — | | | — | | — | | — | | 3.1 | |
Total loans and advances to customers | 214.4 | | (0.9) | | 213.5 | | | 37.3 | | — | | 37.3 | | | (0.1) | | (202.7) | | — | | 48.0 | |
–Loans and advances to banks | 1.4 | | — | | 1.4 | | | 0.4 | | — | | 0.4 | | | — | | — | | — | | 1.8 | |
–Reverse repurchase agreements – non trading | 12.7 | | — | | 12.7 | | | — | | — | | — | | | — | | (12.2) | | (0.4) | | 0.1 | |
–Other financial assets at amortised cost | 0.5 | | — | | 0.5 | | | — | | — | | — | | | — | | — | | — | | 0.5 | |
Total financial assets at amortised cost | 229.0 | | (0.9) | | 228.1 | | | 37.7 | | — | | 37.7 | | | (0.1) | | (214.9) | | (0.4) | | 50.4 | |
Financial assets at FVOCI: | | | | | | | | | | | | |
–Loans and advances to customers | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | — | |
–Debt securities | 5.9 | | — | | 5.9 | | | — | | — | | — | | | — | | — | | — | | 5.9 | |
Total financial assets at FVOCI | 5.9 | | — | | 5.9 | | | — | | — | | — | | | — | | — | | — | | 5.9 | |
Total | 285.4 | | (0.9) | | 284.5 | | | 37.7 | | — | | 37.7 | | | (0.1) | | (214.9) | | (0.4) | | 106.8 | |
(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 and securities finance transactions, we use standard master netting agreements. For more on this, see ‘Credit risk mitigation’ in the ‘Credit risk - Credit risk management’ section.
(3)Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet.
(4)The collateral value 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.
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Annual Report 2022 | Santander UK Group Holdings plc 115 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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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.
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| Balance sheet asset gross amount | | Collateral(1) | Netting(2) | Net exposure |
| | Cash | Non-cash |
2022 | £bn | | £bn | £bn | £bn | £bn |
Financial assets at FVTPL: | | | | | | |
–Derivative financial instruments | 2.4 | | | — | | (1.7) | | (0.5) | | 0.2 | |
–Other financial assets at FVTPL | 0.4 | | | — | | — | | — | | 0.4 | |
Total | 2.8 | | | — | | (1.7) | | (0.5) | | 0.6 | |
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2021 | | | | | | |
Financial assets at FVTPL: | | | | | | |
–Derivative financial instruments | 1.7 | | | — | | (0.7) | | (0.6) | | 0.4 | |
–Other financial assets at FVTPL | 0.7 | | | — | | — | | — | | 0.7 | |
Total | 2.4 | | | — | | (0.7) | | (0.6) | | 1.1 | |
(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 and securities finance transactions, we use standard master netting agreements. They allow us to set off our credit risk exposure to a counterparty against our obligations to the counterparty in relation to transactions under the master netting agreement 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 ‘Credit risk – Credit risk management’ section.
Single credit rating scale
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).
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| PD range | |
| Mid | Lower | Upper | S&P equivalent |
Santander UK risk grade | % | % | % |
9 | 0.010 | | 0.000 | | 0.021 | | AAA to AA+ |
8 | 0.032 | | 0.021 | | 0.066 | | AA to AA- |
7 | 0.100 | | 0.066 | | 0.208 | | A+ to BBB |
6 | 0.316 | | 0.208 | | 0.658 | | BBB- to BB |
5 | 1.000 | | 0.658 | | 2.081 | | BB- |
4 | 3.162 | | 2.081 | | 6.581 | | B+ to B |
3 | 10.000 | | 6.581 | | 20.811 | | B- |
2 | 31.623 | | 20.811 | | 99.999 | | CCC to C |
1 (Default) | 100.000 | | 100.000 | | 100.000 | | D |
The PDs in the table above are based on Economic Capital (EC) PD mappings, calculated based on the average PD 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 aligned to the regulatory capital models however any regulatory floors are removed and PDs are defined at every possible rating rather than grouped into rating buckets.
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Annual Report 2022 | Santander UK Group Holdings plc 116 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Rating distribution (audited)
The tables below show the credit rating of our financial assets to which the impairment requirements in IFRS 9 apply. JAs are incorporated in the balances. For more on the credit rating profiles of key portfolios, see the credit risk review section for each business segment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Santander UK risk grade | | Loss allowance | Total |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) |
2022 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Exposures | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 46.6 | | — | | — | | — | | — | | — | | — | | — | | — | | 46.6 | |
–Stage 1 | 46.6 | | — | | — | | — | | — | | — | | — | | — | | — | | 46.6 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers(2) | 9.5 | | 36.5 | | 87.1 | | 52.7 | | 15.2 | | 9.3 | | 5.4 | | 9.0 | | (0.9) | | 223.8 | |
–Stage 1 | 9.5 | | 36.2 | | 85.4 | | 48.4 | | 11.1 | | 4.0 | | 0.5 | | 8.6 | | (0.1) | | 203.6 | |
–Stage 2 | — | | 0.3 | | 1.7 | | 4.3 | | 4.1 | | 5.2 | | 2.6 | | 0.2 | | (0.5) | | 17.9 | |
–Stage 3 | — | | — | | — | | — | | — | | 0.1 | | 2.3 | | 0.2 | | (0.3) | | 2.3 | |
Of which mortgages: | 9.5 | | 34.1 | | 83.8 | | 45.6 | | 7.3 | | 3.8 | | 3.1 | | 1.1 | | (0.3) | | 188.0 | |
–Stage 1 | 9.5 | | 33.8 | | 82.1 | | 41.6 | | 4.2 | | 0.5 | | 0.1 | | 1.1 | | — | | 172.9 | |
–Stage 2 | — | | 0.3 | | 1.7 | | 4.0 | | 3.1 | | 3.2 | | 1.3 | | — | | (0.2) | | 13.4 | |
–Stage 3 | — | | — | | — | | — | | — | | 0.1 | | 1.7 | | — | | (0.1) | | 1.7 | |
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–Loans and advances to banks | 0.1 | | (0.1) | | — | | — | | — | | — | | — | | 1.1 | | — | | 1.1 | |
–Stage 1 | 0.1 | | (0.1) | | — | | — | | — | | — | | — | | 1.1 | | — | | 1.1 | |
–Reverse repo agreements – non trading | 5.4 | | 0.6 | | 0.1 | | 1.1 | | — | | — | | — | | 0.1 | | — | | 7.3 | |
–Stage 1 | 5.4 | | 0.6 | | 0.1 | | 1.1 | | — | | — | | — | | 0.1 | | — | | 7.3 | |
–Other financial assets at amortised cost | 0.2 | | — | | — | | — | | — | | — | | — | | — | | — | | 0.2 | |
–Stage 1 | 0.2 | | — | | — | | — | | — | | — | | — | | — | | — | | 0.2 | |
Total financial assets at amortised cost | 15.2 | | 37.0 | | 87.2 | | 53.8 | | 15.2 | | 9.3 | | 5.4 | | 10.2 | | (0.9) | | 232.4 | |
Financial assets at FVOCI: | 3.5 | | 2.2 | | 0.3 | | — | | — | | — | | —�� | | — | | — | | 6.0 | |
–Stage 1 | 3.5 | | 2.2 | | 0.3 | | — | | — | | — | | — | | — | | — | | 6.0 | |
Total on balance sheet | 65.3 | | 39.2 | | 87.5 | | 53.8 | | 15.2 | | 9.3 | | 5.4 | | 10.2 | | (0.9) | | 285.0 | |
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Total off–balance sheet | 0.1 | | 7.2 | | 6.9 | | 6.5 | | 4.9 | | 2.1 | | 0.4 | | 3.7 | | (0.1) | | 31.7 | |
–Stage 1 | 0.1 | | 7.2 | | 6.8 | | 6.4 | | 4.7 | | 1.7 | | 0.2 | | 3.7 | | — | | 30.8 | |
–Stage 2 | — | | — | | 0.1 | | 0.1 | | 0.2 | | 0.4 | | 0.1 | | — | | (0.1) | | 0.8 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 0.1 | | — | | — | | 0.1 | |
Total exposures | 65.4 | | 46.4 | | 94.4 | | 60.3 | | 20.1 | | 11.4 | | 5.8 | | 13.9 | | (1.0) | | 316.7 | |
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ECL | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers(2) | — | | — | | — | | — | | 0.2 | | 0.2 | | 0.5 | | 0.0 | | | 0.9 | |
–Stage 1 | — | | — | | — | | — | | 0.1 | | 0.0 | | 0.0 | | 0.0 | | | 0.1 | |
–Stage 2 | — | | — | | — | | — | | 0.1 | | 0.2 | | 0.2 | | 0.0 | | | 0.5 | |
–Stage 3 | — | | — | | — | | — | | 0.0 | | 0.0 | | 0.3 | | 0.0 | | | 0.3 | |
Of which mortgages: | — | | — | | — | | — | | 0.1 | | 0.1 | | 0.1 | | 0.0 | | | 0.3 | |
–Stage 1 | — | | — | | — | | — | | | | | 0.0 | | | — | |
–Stage 2 | — | | — | | — | | — | | 0.1 | | 0.1 | | | 0.0 | | | 0.2 | |
–Stage 3 | — | | — | | — | | — | | | | 0.1 | | 0.0 | | | 0.1 | |
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–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 | — | | — | | — | | — | | 0.2 | | 0.2 | | 0.5 | | — | | | 0.9 | |
Financial assets at FVOCI: | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total on balance sheet | — | | — | | — | | — | | 0.2 | | 0.2 | | 0.5 | | — | | | 0.9 | |
| | | | | | | | | | |
Total off–balance sheet | — | | — | | — | | — | | — | | — | | 0.1 | | — | | | 0.1 | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | — | | — | | 0.1 | | — | | | 0.1 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total ECL | — | | — | | — | | — | | 0.2 | | 0.2 | | 0.6 | | — | | | 1.0 | |
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Annual Report 2022 | Santander UK Group Holdings plc 117 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Santander UK risk grade | | | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total |
2022 | % | % | % | % | % | % | % | % | | % |
Coverage ratio | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Financial assets at amortised cost: | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Loans and advances to customers(2) | — | | — | | — | | — | | 1.3 | | 2.2 | | 9.3 | | — | | | 0.4 | |
–Stage 1 | — | | — | | — | | — | | 0.9 | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | 2.4 | | 3.8 | | 7.7 | | — | | | 2.8 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 13.0 | | — | | | 13.0 | |
Of which mortgages: | — | | — | | — | | — | | 1.4 | | 2.6 | | 3.2 | | — | | | 0.2 | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | 3.2 | | 3.1 | | — | | — | | | 1.5 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 5.9 | | — | | | 5.9 | |
–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 | — | | — | | — | | — | | 1.3 | | 2.2 | | 9.3 | | — | | | 0.4 | |
Financial assets at FVOCI: | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total on balance sheet | — | | — | | — | | — | | 1.3 | | 2.2 | | 9.3 | | — | | | 0.3 | |
| | | | | | | | | | |
Total off–balance sheet | — | | — | | — | | — | | — | | — | | 25.0 | | — | | | 0.3 | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | — | | — | | 100.0 | | — | | | 12.5 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total coverage ratio | — | | — | | — | | — | | 1.0 | | 1.8 | | 10.3 | | — | | | 0.3 | |
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Annual Report 2022 | Santander UK Group Holdings plc 118 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Santander UK risk grade | | Loss allowance | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total |
2021 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Exposures | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | 50.5 | | — | | — | | — | | — | | — | | — | | — | | — | | 50.5 | |
–Stage 1 | 50.5 | | — | | — | | — | | — | | — | | — | | — | | — | | 50.5 | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | 9.0 | | 33.0 | | 85.8 | | 48.6 | | 12.9 | | 10.2 | | 6.0 | | 8.9 | | (0.9) | | 213.5 | |
–Stage 1 | 9.0 | | 32.2 | | 84.3 | | 45.5 | | 10.1 | | 5.0 | | 0.6 | | 8.3 | | (0.1) | | 194.9 | |
–Stage 2 | — | | 0.8 | | 1.5 | | 3.1 | | 2.8 | | 5.2 | | 2.8 | | 0.3 | | (0.4) | | 16.1 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 2.6 | | 0.3 | | (0.4) | | 2.5 | |
Of which mortgages: | 9.0 | | 30.2 | | 80.5 | | 43.1 | | 6.5 | | 4.7 | | 3.2 | | 0.8 | | (0.2) | | 177.8 | |
–Stage 1 | 9.0 | | 30.0 | | 79.2 | | 40.2 | | 4.2 | | 1.6 | | 0.1 | | 0.8 | | — | | 165.1 | |
–Stage 2 | — | | 0.2 | | 1.3 | | 2.9 | | 2.3 | | 3.1 | | 1.3 | | — | | (0.1) | | 11.0 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 1.8 | | — | | (0.1) | | 1.7 | |
–Loans and advances to banks | 0.2 | | 0.2 | | 1.0 | | — | | — | | — | | — | | — | | — | | 1.4 | |
–Stage 1 | 0.2 | | 0.2 | | 1.0 | | — | | — | | — | | — | | — | | — | | 1.4 | |
–Reverse repo agreements – non trading | 9.7 | | 0.1 | | 1.1 | | 0.6 | | — | | — | | — | | 1.2 | | — | | 12.7 | |
–Stage 1 | 9.7 | | 0.1 | | 1.1 | | 0.6 | | — | | — | | — | | 1.2 | | — | | 12.7 | |
–Other financial assets at amortised cost | 0.5 | | — | | — | | — | | — | | — | | — | | — | | — | | 0.5 | |
–Stage 1 | 0.5 | | — | | — | | — | | — | | — | | — | | — | | — | | 0.5 | |
Total financial assets at amortised cost | 19.4 | | 33.3 | | 87.9 | | 49.2 | | 12.9 | | 10.2 | | 6.0 | | 10.1 | | (0.9) | | 228.1 | |
Financial assets at FVOCI: | 3.6 | | 2.1 | | 0.2 | | — | | — | | — | | — | | — | | — | | 5.9 | |
–Stage 1 | 3.6 | | 2.1 | | 0.2 | | — | | — | | — | | — | | — | | — | | 5.9 | |
Total on balance sheet | 73.5 | | 35.4 | | 88.1 | | 49.2 | | 12.9 | | 10.2 | | 6.0 | | 10.1 | | (0.9) | | 284.5 | |
| | | | | | | | | | |
Total off–balance sheet | 0.1 | | 7.3 | | 7.0 | | 6.8 | | 4.5 | | 1.3 | | 0.5 | | 10.2 | | — | | 37.7 | |
–Stage 1 | 0.1 | | 7.0 | | 6.7 | | 6.6 | | 4.3 | | 1.0 | | 0.2 | | 10.2 | | — | | 36.1 | |
–Stage 2 | — | | 0.3 | | 0.3 | | 0.2 | | 0.2 | | 0.3 | | 0.2 | | — | | — | | 1.5 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 0.1 | | — | | — | | 0.1 | |
Total exposures | 73.6 | | 42.7 | | 95.1 | | 56.0 | | 17.4 | | 11.5 | | 6.5 | | 20.3 | | (0.9) | | 322.2 | |
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ECL | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | — | | — | | — | | — | | 0.3 | | 0.1 | | 0.5 | | — | | | 0.9 | |
–Stage 1 | — | | — | | — | | — | | 0.1 | | — | | — | | — | | | 0.1 | |
–Stage 2 | — | | — | | — | | — | | 0.2 | | 0.1 | | 0.1 | | — | | | 0.4 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 0.4 | | — | | | 0.4 | |
Of which mortgages: | — | | — | | — | | — | | — | | 0.1 | | 0.1 | | — | | | 0.2 | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | — | | 0.1 | | — | | — | | | 0.1 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 0.1 | | — | | | 0.1 | |
–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 | — | | — | | — | | — | | 0.3 | | 0.1 | | 0.5 | | — | | | 0.9 | |
Financial assets at FVOCI: | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total on balance sheet | — | | — | | — | | — | | 0.3 | | 0.1 | | 0.5 | | — | | | 0.9 | |
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Total off–balance sheet | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | �� | | | — | |
–Stage 2 | — | | — | | — | | — | | — | | — | | — | — | | | — | |
–Stage 3 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total ECL | — | | — | | — | | — | | 0.3 | | 0.1 | | 0.5 | | — | | | 0.9 | |
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Annual Report 2022 | Santander UK Group Holdings plc 119 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Santander UK risk grade | | | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total |
2021 | % | % | % | % | % | % | % | % | | % |
Coverage ratio | | | | | | | | | | |
On balance sheet | | | | | | | | | | |
Cash and balances at central banks | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Financial assets at amortised cost: | | | | | | | | | | |
–Loans and advances to customers⁽²⁾ | — | | — | | — | | — | | 2.3 | | 1.0 | | 8.3 | | — | | | 0.4 | |
–Stage 1 | — | | — | | — | | — | | 1.0 | | — | | — | | — | | | 0.1 | |
–Stage 2 | — | | — | | — | | — | | 7.1 | | 1.9 | | 3.6 | | — | | | 2.5 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 15.4 | | — | | | 16.0 | |
Of which mortgages: | — | | — | | — | | — | | — | | 2.1 | | 3.1 | | — | | | 0.1 | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | — | | 3.2 | | — | | — | | | 0.9 | |
–Stage 3 | — | | — | | — | | — | | — | | — | | 5.6 | | — | | | 5.9 | |
–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 | — | | — | | — | | — | | 2.3 | | 1.0 | | 8.3 | | — | | | 0.4 | |
Financial assets at FVOCI: | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total on balance sheet | — | | — | | — | | — | | 2.3 | | 1.0 | | 8.3 | | — | | | 0.3 | |
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Total off–balance sheet | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 1 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 2 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
–Stage 3 | — | | — | | — | | — | | — | | — | | — | | — | | | — | |
Total coverage ratio | — | | — | | — | | — | | 1.7 | | 0.9 | | 7.7 | | — | | | 0.3 | |
(1)Includes cash at hand and smaller cases mainly in the Consumer (auto) finance and commercial mortgages portfolios, as well as loans written as part of the Covid-19 support schemes. We use scorecards for these items, rather than rating models.
(2)Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet.
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Annual Report 2022 | Santander UK Group Holdings plc 120 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Credit performance (audited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer Loans | Gross write-offs | Loan Loss Allowances |
| Total | Stage 1 | Stage 2 | Stage 3 |
2022 | £bn | £bn | % | £bn | % | £bn | % | £m | £m |
| | | | | | | | | |
Retail Banking | 194.6 | | 178.0 | | 91.5 | | 14.6 | | 7.4 | | 2.0 | | 1.08 | | 113 | | 504 | |
– Homes - Mortgages | 187.1 | | 171.7 | | 91.8 | | 13.6 | | 7.3 | | 1.8 | | 0.99 | | 3 | | 250 | |
– EDB - Credit Cards | 2.5 | | 2.1 | | 85.7 | | 0.3 | | 12.9 | | 0.1 | | 2.53 | | 40 | | 120 | |
– EDB - Other(1) | 5.0 | | 4.2 | | 82.8 | | 0.7 | | 13.0 | | 0.1 | | 4.30 | | 70 | | 134 | |
Consumer Finance(2) | 5.4 | | 5.0 | | 93.0 | | 0.4 | | 6.5 | | — | | 0.54 | | 19 | | 67 | |
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CCB | 18.5 | | 14.5 | | 78.3 | | 3.5 | | 18.8 | | 0.5 | | 3.08 | | 24 | | 362 | |
Corporate Centre | 1.2 | | 1.2 | | 99.6 | | — | | 0.3 | | — | | 0.10 | | — | | — | |
Total Drawn | 219.7 | | 198.7 | | 90.4 | | 18.5 | | 8.4 | | 2.5 | | 1.24 | | 156 | | 933 | |
Retail Banking | 21.8 | | 21.2 | | — | | 0.5 | | — | | 0.1 | | — | | — | | 42 | |
– Homes - Mortgages | 8.0 | | 7.9 | | — | | 0.1 | | — | | — | | — | | — | | 3 | |
– EDB - Credit Cards | 10.3 | | 10.2 | | — | | 0.1 | | — | | — | | — | | — | | 10 | |
– EDB - Other(1) | 3.5 | | 3.1 | | — | | 0.3 | | — | | 0.1 | | — | | — | | 29 | |
Consumer Finance(2) | 0.4 | | 0.4 | | — | | — | | — | | — | | — | | — | | — | |
CCB | 9.7 | | 9.3 | | — | | 0.4 | | — | | — | | — | | — | | 32 | |
Corporate Centre | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total Undrawn | 31.9 | | 30.9 | | — | | 0.9 | | — | | 0.1 | | — | | — | | 74 | |
Total | 251.6 | | 229.6 | | — | | 19.4 | | — | | 2.6 | | — | | 156 | | 1,007 | |
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2021 | £bn | £bn | % | £bn | % | £bn | % | £m | £m |
Retail Banking | 185.6 | | 171.8 | | 92.6 | | 11.7 | | 6.2 | | 2.1 | | 1.15 | | 107 | | 368 | |
– Homes - Mortgages | 177.3 | | 164.4 | | 92.7 | | 11.1 | | 6.3 | | 1.8 | | 1.02 | | 5 | | 186 | |
– EDB - Credit Cards | 2.4 | | 2.2 | | 90.8 | | 0.2 | | 7.7 | | — | | 2.54 | | 39 | | 82 | |
–EDB - Other | 5.9 | | 5.2 | | 88.5 | | 0.4 | | 6.6 | | 0.3 | | 4.90 | | 63 | | 100 | |
Consumer Finance | 5.0 | | 4.8 | | 95.5 | | 0.2 | | 4.0 | | — | | 0.48 | | 25 | | 52 | |
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CCB | 19.3 | | 13.9 | | 72.0 | | 4.6 | | 23.9 | | 0.8 | | 4.28 | | 58 | | 408 | |
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Corporate Centre | 0.7 | | 0.7 | | 99.5 | | — | | 0.3 | | — | | 0.21 | | — | | — | |
Total Drawn | 210.6 | | 191.2 | | 90.8 | | 16.5 | | 8 | | 2.9 | | 1.43 | | 190 | | 828 | |
Retail Banking | 29.4 | | 29.2 | | — | | 0.2 | | — | | — | | — | | — | | 21 | |
– Homes - Mortgages | 16.0 | | 15.9 | | — | | 0.1 | | — | | — | | — | | — | | 5 | |
– EDB - Credit Cards | 9.9 | | 9.9 | | — | | — | | — | | — | | — | | — | | 7 | |
–EDB - Other | 3.5 | | 3.4 | | — | | 0.1 | | — | | — | | — | | — | | 9 | |
Consumer Finance | 0.3 | | 0.3 | | — | | — | | — | | — | | — | | — | | — | |
CCB | 8.1 | | 6.7 | | — | | 1.3 | | — | | 0.1 | | — | | — | | 17 | |
Corporate Centre | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total Undrawn | 37.8 | | 36.2 | | — | | 1.5 | | — | | 0.1 | | — | | — | | 38 | |
Total | 248.4 | | 227.4 | | — | | 18.0 | | — | | 3.0 | | — | | 190 | | 866 | |
(1)EDB - Other includes £2.5bnof BBLS lending (£2.4bn is BBLS with 100% Government Guarantee), £2.0bn unsecured personal loans and£0.5bn overdrafts.
(2)Consumer Finance - 84% of lending is collateralised on the vehicle.
For more on the credit performance of our key portfolios by business segment, see the credit risk review section for each business segment.
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Annual Report 2022 | Santander UK Group Holdings plc 121 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Credit quality (audited)
Total on-balance sheet exposures at 31 December 2022 comprised £219.7bn of customer loans, loans and advances to banks of £1.1 bn, £7.5bn of sovereign assets measured at amortised cost £6.0bn of assets measured at FVOCI, and £46.6bn of cash and balances at central banks.
| | | | | | | | | | | | | | |
| Stage 1 | Stage 2 | Stage 3 | Total |
2022 | £m | £m | £m | £m |
Exposures | | | | |
On-balance sheet | | | | |
Retail Banking | 178,033 | | 14,551 | | 2,077 | | 194,661 | |
– Homes - Mortgages | 171,733 | | 13,576 | | 1,832 | | 187,141 | |
– EDB - Credit Cards | 2,192 | | 329 | | 37 | | 2,558 | |
– EDB - Other | 4,108 | | 646 | | 208 | | 4,962 | |
Consumer Finance | 5,005 | | 350 | | 29 | | 5,384 | |
CCB | 14,507 | | 3,476 | | 535 | | 18,518 | |
Corporate Centre | 62,405 | | 3 | | 1 | | 62,409 | |
Total on-balance sheet | 259,950 | | 18,380 | | 2,642 | | 280,972 | |
Off-balance sheet | | | | |
Retail Banking(1) | 21,176 | | 490 | | 56 | | 21,722 | |
– Homes - Mortgages(1) | 7,899 | | 109 | | 21 | | 8,029 | |
– EDB - Credit Cards | 10,137 | | 122 | | 29 | | 10,288 | |
– EDB - Other | 3,140 | | 259 | | 6 | | 3,405 | |
Consumer Finance | 356 | | — | | — | | 356 | |
CCB | 9,331 | | 412 | | 37 | | 9,780 | |
Corporate Centre | — | | — | | — | | — | |
Total off-balance sheet(2) | 30,863 | | 902 | | 93 | | 31,858 | |
Total exposures | 290,813 | | 19,282 | | 2,735 | | 312,830 | |
| | | | |
ECL | | | | |
On-balance sheet | | | | |
Retail Banking | 57 | | 295 | | 152 | | 504 | |
– Homes - Mortgages | 24 | | 131 | | 95 | | 250 | |
– EDB - Credit Cards | 14 | | 85 | | 21 | | 120 | |
– EDB - Other | 19 | | 79 | | 36 | | 134 | |
Consumer Finance | 19 | | 27 | | 21 | | 67 | |
CCB | 69 | | 155 | | 138 | | 362 | |
Corporate Centre | — | | — | | — | | — | |
Total on-balance sheet | 145 | | 477 | | 311 | | 933 | |
Off-balance sheet | | | | |
Retail Banking | 12 | | 28 | | 2 | | 42 | |
– Homes - Mortgages | 2 | | 1 | | — | | 3 | |
– EDB - Credit Cards | 3 | | 6 | | 1 | | 10 | |
– EDB - Other | 7 | | 21 | | 1 | | 29 | |
Consumer Finance | — | | — | | — | | — | |
CCB | 14 | | 11 | | 7 | | 32 | |
Corporate Centre | — | | — | | — | | — | |
Total off-balance sheet | 26 | | 39 | | 9 | | 74 | |
Total ECL | 171 | | 516 | | 320 | | 1,007 | |
| | | | |
Coverage ratio(3) | % | % | % | % |
On-balance sheet | | | | |
Retail Banking | — | | 2.0 | | 7.3 | | 0.3 | |
– Homes - Mortgages | — | | 1.0 | | 5.2 | | 0.1 | |
– EDB - Credit Cards | 0.6 | | 25.8 | | 56.8 | | 4.7 | |
– EDB - Other | 0.5 | | 12.2 | | 17.3 | | 2.7 | |
Consumer Finance | 0.4 | | 7.7 | | 72.4 | | 1.2 | |
CCB | 0.5 | | 4.5 | | 25.8 | | 2.0 | |
Corporate Centre | — | | — | | — | | — | |
Total on-balance sheet | 0.1 | | 2.6 | | 11.8 | | 0.3 | |
Off-balance sheet | | | | |
Retail Banking | 0.1 | | 5.7 | | 3.6 | | 0.2 | |
– Homes - Mortgages | — | | 0.9 | | — | | — | |
– EDB - Credit Cards | — | | 4.9 | | 3.4 | | 0.1 | |
– EDB - Other | 0.2 | | 8.1 | | 16.7 | | 0.9 | |
Consumer Finance | — | | — | | — | | — | |
CCB | 0.2 | | 2.7 | | 18.9 | | 0.3 | |
Corporate Centre | — | | — | | — | | — | |
Total off-balance sheet | 0.1 | | 4.3 | | 9.7 | | 0.2 | |
Total coverage | 0.1 | | 2.7 | | 11.7 | | 0.3 | |
(1)Off-balance sheet exposures include £2.8bn of residential mortgage offers in the pipeline.
(2)Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 31.
(3)ECL as a percentage of the related exposure.
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Annual Report 2022 | Santander UK Group Holdings plc 122 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Total on-balance sheet exposures at 31 December 2021 comprised £210.6bn of customer loans, loans and advances to banks of £1.4bn, £13.2bn of sovereign assets measured at amortised cost, £5.9bn of assets measured at FVOCI, and £50.5bn of cash and balances at central banks.
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| Stage 1 | Stage 2 | Stage 3 | Total |
2021 | £m | £m | £m | £m |
Exposures | | | | |
On-balance sheet | | | | |
Retail Banking | 171,791 | | 11,693 | | 2,124 | | 185,608 | |
– Homes - Mortgages | 164,381 | | 11,118 | | 1,798 | | 177,297 | |
– EDB - Credit Cards | 2,125 | | 181 | | 35 | | 2,341 | |
– EDB - Other | 5,285 | | 394 | | 291 | | 5,970 | |
Consumer Finance | 4,760 | | 200 | | 24 | | 4,984 | |
CCB | 13,890 | | 4,602 | | 790 | | 19,282 | |
Corporate Centre | 71,693 | | 2 | | 2 | | 71,697 | |
Total on-balance sheet | 262,134 | | 16,497 | | 2,940 | | 281,571 | |
Off-balance sheet | | | | |
Retail Banking(1) | 29,123 | | 204 | | 44 | | 29,371 | |
– Homes - Mortgages(1) | 15,851 | | 81 | | 18 | | 15,950 | |
– EDB - Credit Cards | 9,887 | | 49 | | 24 | | 9,960 | |
– EDB - Other | 3,385 | | 74 | | 2 | | 3,461 | |
Consumer Finance | 314 | | — | | — | | 314 | |
CCB | 6,714 | | 1,312 | | 37 | | 8,063 | |
Corporate Centre | — | | — | | — | | — | |
Total off-balance sheet(2) | 36,151 | | 1,516 | | 81 | | 37,748 | |
Total exposures | 298,285 | | 18,013 | | 3,021 | | 319,319 | |
| | | | |
ECL | | | | |
On-balance sheet | | | | |
Retail Banking | 53 | | 178 | | 137 | | 368 | |
– Homes - Mortgages | 9 | | 88 | | 89 | | 186 | |
– EDB - Credit Cards | 15 | | 47 | | 20 | | 82 | |
– EDB - Other | 29 | | 43 | | 28 | | 100 | |
Consumer Finance | 18 | | 17 | | 17 | | 52 | |
CCB | 45 | | 119 | | 244 | | 408 | |
Corporate Centre | — | | — | | — | | — | |
Total on-balance sheet | 116 | | 314 | | 398 | | 828 | |
Off-balance sheet | | | | |
Retail Banking | 12 | | 8 | | 1 | | 21 | |
– Homes - Mortgages | 5 | | 0 | | — | | 5 | |
– EDB - Credit Cards | 3 | | 3 | | 1 | | 7 | |
– EDB - Other | 4 | | 5 | | — | | 9 | |
Consumer Finance | — | | — | | — | | — | |
CCB | 5 | | 8 | | 4 | | 17 | |
Corporate Centre | — | | 0 | | 0 | | — | |
Total off-balance sheet | 17 | | 16 | | 5 | | 38 | |
Total ECL | 133 | | 330 | | 403 | | 866 | |
| | | | |
Coverage ratio(3) | % | % | % | % |
On-balance sheet | | | | |
Retail Banking | — | | 1.5 | | 6.5 | | 0.2 | |
– Homes - Mortgages | — | | 0.8 | | 4.9 | | 0.1 | |
– EDB - Credit Cards | 0.7 | | 26.0 | | 57.1 | | 3.5 | |
– EDB - Other | 0.5 | | 10.9 | | 9.6 | | 1.7 | |
Consumer Finance | 0.4 | | 8.5 | | 70.8 | | 1.0 | |
CCB | 0.3 | | 2.6 | | 30.9 | | 2.1 | |
Corporate Centre | — | | — | | — | | — | |
Total on-balance sheet | — | | 1.9 | | 13.5 | | 0.3 | |
Off-balance sheet | | | | |
Retail Banking | — | | 3.9 | | 2.3 | | 0.1 | |
– Homes - Mortgages | — | | — | | — | | — | |
– EDB - Credit Cards | — | | 6.1 | | 4.2 | | 0.1 | |
– EDB - Other | 0.1 | | 6.8 | | — | | 0.3 | |
Consumer Finance | — | | — | | — | | — | |
CCB | 0.1 | | 0.6 | | 10.8 | | 0.2 | |
Corporate Centre | — | | — | | — | | — | |
Total off-balance sheet | — | | 1.1 | | 6.2 | | 0.1 | |
Total coverage | — | | 1.8 | | 13.3 | | 0.3 | |
(1)Off-balance sheet exposures include £10.6bn of residential mortgage offers in the pipeline.
(2)Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 31.
(3)ECL as a percentage of the related exposure
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Annual Report 2022 | Santander UK Group Holdings plc 123 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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2022 compared to 2021
The ECL provision at 31 December 2022 increased by £141m to £1.0bn (2021: £0.9bn). Notable changes to ECL in 2022 which impacted credit impairment were:
–Corporate Covid-19 related JAs:: net release of £175m. All corporate sector staging JAs related to Covid-19 released, resulting in £0.4bn movement of corporate Stage 3 loans to Stage 2.
–Economic scenarios and weights: charge of £163m. Updated economic scenarios with expectations for higher base rate and lower house prices in 2023.
–Corporate sector staging risks: charge of £61m. JAs to reflect the corporate lending risks for sectors and counterparties which are most susceptible to increased inflation, energy prices and input costs alongside potentially lower demand. As a result, £1.4bn of higher risk Stage 1 loans were moved to Stage 2, and probability of defaults increased on some Stage 2 loans following an assessment of the client and sector risks.
–Affordability of retail lending repayments: charge of £44m. JAs to account for the potential repayment affordability risk among those customers with low disposable income. After stressing for inflation, £0.2bn of unsecured loans, overdrafts and credit cards moved from Stage 1 to Stage 2. In addition, £5.0bn of mortgages moved from Stage 1 to Stage 2 following an assessment of customer indebtedness.
–Write-offs against provision: Gross write-off utilisation of £157m (2021: £191m).
Key movements in exposures and ECL in the period by Stage were:
–The reduction in Stage 1 exposures arose mainly from changes in Corporate Centre. This reduction was partially offset by the growth in the mortgage portfolio and Corporate & Commercial Banking. The Stage 1 ECL increased mainly due to the increase in Corporate & Commercial Banking as a result of unwinding the Corporate lending to segments affected by Covid-19 JA that placed more vulnerable accounts into Stage 2.
–Total Stage 2 exposures increased due to the implementation of cost of living JAs to cover the affordability risk associated with the increase in interest rates and energy pries. This included a portion of the mortgage and unsecured lending portfolios from Stage 1 to Stage 2. This was partially offset by the unwinding of the Corporate lending to segments affected by Covid-19 JAs. In Retail Banking, Stage 2 exposures increased due to the implementation of cost of living JAs to cover the affordability risk associated with the increase in interest rates and energy prices. Stage 2 ECL increased due to a worsening in the economic outlook with the inclusion of an inflationary pressure scenario. Retail Banking Stage 2 ECL also increased due to affordability risk JAs.
–Stage 3 exposures and ECL reduced due to releasing the Stage 2-3 Corporate lending to segments affected by Covid-19 JAs. Stage 3 exposures and ECL remained fairly stable across the Retail Banking portfolio.
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Annual Report 2022 | Santander UK Group Holdings plc 124 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Stage 2 analysis (audited)
The following table analyses our Stage 2 exposures and ECL by the reason the exposure is classified as Stage 2.
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| | | | | | | PD deterioration | Forbearance | Other | 30 DPD | Mortgage affordability | Retail Unsecured affordability | High risk corporate | Total |
Retail Banking Homes - Mortgages | Exposure £m | | | | | | | 7,310 | | 449 | | 393 | | 463 | | 4,961 | | — | | — | | 13,576 | |
ECL £m | | | | | | | 85 | | 2 | | 7 | | 10 | | 27 | | — | | — | | 131 | |
Coverage % | | | | | | | 1.2 | | 0.4 | | 1.8 | | 2.2 | | 0.5 | | — | | — | | 1.0 | |
Retail Banking EDB - Credit Cards | Exposure £m | | | | | | | 240 | | — | | 22 | | 8 | | — | | 59 | | — | | 329 | |
ECL £m | | | | | | | 63 | | — | | 4 | | 4 | | — | | 14 | | — | | 85 | |
Coverage % | | | | | | | 26.3 | | — | | 18.2 | | 50.0 | | — | | 23.7 | | — | | 25.8 | |
Retail Banking EDB - Other | Exposure £m | | | | | | | 303 | | — | | 26 | | 178 | | — | | 139 | | — | | 646 | |
ECL £m | | | | | | | 42 | | — | | 6 | | 14 | | — | | 17 | | — | | 79 | |
Coverage % | | | | | | | 13.9 | | — | | 23.1 | | 7.9 | | — | | 12.2 | | — | | 12.2 | |
Consumer Finance | Exposure £m | | | | | | | 159 | | — | | 164 | | 27 | | — | | — | | — | | 350 | |
ECL £m | | | | | | | 12 | | — | | 5 | | 10 | | — | | — | | — | | 27 | |
Coverage % | | | | | | | 7.5 | | — | | 3.0 | | 37.0 | | — | | — | | — | | 7.7 | |
CCB | Exposure £m | | | | | | | 1,548 | | 64 | | 684 | | 214 | | — | | — | | 966 | | 3,476 | |
ECL £m | | | | | | | 81 | | 4 | | 1 | | 10 | | — | | — | | 59 | | 155 | |
Coverage % | | | | | | | 5.2 | | 6.3 | | 0.1 | | 4.7 | | — | | — | | 6.1 | | 4.5 | |
Corporate Centre | Exposure £m | | | | | | | — | | — | | — | | 3 | | — | | — | | — | | 3 | |
ECL £m | | | | | | | — | | — | | — | | — | | — | | — | | — | | — | |
Coverage % | | | | | | | — | | — | | — | | — | | — | | — | | — | | — | |
Total Drawn | Exposure £m | | | | | | | 9,560 | | 513 | | 1,289 | | 893 | | 4,961 | | 198 | | 966 | | 18,380 | |
ECL £m | | | | | | | 283 | | 6 | | 23 | | 48 | | 27 | | 31 | | 59 | | 477 | |
Coverage % | | | | | | | 3.0 | | 1.2 | | 1.8 | | 5.4 | | 0.5 | | 15.7 | | 6.1 | | 2.6 | |
Undrawn | ECL £m | | | | | | | 19 | | — | | 8 | | 6 | | — | | 4 | | 2 | | 39 | |
Total Reported | Exposure £m | | | | | | | 10,323 | | 625 | | 1,271 | | 937 | | 4,961 | | 199 | | 966 | | 19,282 | |
ECL £m | | | | | | | 302 | | 6 | | 31 | | 54 | | 27 | | 35 | | 61 | | 516 | |
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2021 | | | | | | | | | | | | | | |
Retail Banking Homes - Mortgages | Exposure £m | | | | | | | 5,138 | | 650 | | 600 | | 489 | | 4,241 | | — | | — | | 11,118 | |
ECL £m | | | | | | | 57 | | 4 | | 2 | | 7 | | 18 | | — | | — | | 88 | |
Coverage % | | | | | | | 1.1 | | 0.6 | | 0.3 | | 1.4 | | 0.4 | | — | | — | | 0.8 | |
Retail Banking EDB - Credit Cards | Exposure £m | | | | | | | 160 | | — | | 13 | | 7 | | — | | — | | — | | 180 | |
ECL £m | | | | | | | 41 | | — | | 2 | | 4 | | — | | — | | — | | 47 | |
Coverage % | | | | | | | 25.6 | | — | | 15.4 | | 57.1 | | — | | — | | — | | 26.1 | |
Retail Banking EDB - Other | Exposure £m | | | | | | | 150 | | — | | 6 | | 239 | | — | | — | | — | | 395 | |
ECL £m | | | | | | | 22 | | — | | 1 | | 20 | | — | | — | | — | | 43 | |
Coverage % | | | | | | | 14.7 | | — | | 16.7 | | 8.4 | | — | | — | | — | | 10.9 | |
Consumer Finance | Exposure £m | | | | | | | 42 | | 11 | | 130 | | 17 | | — | | — | | — | | 200 | |
ECL £m | | | | | | | 6 | | 2 | | 4 | | 5 | | — | | — | | — | | 17 | |
Coverage % | | | | | | | 14.3 | | 18.2 | | 3.1 | | 29.4 | | — | | — | | — | | 8.5 | |
CCB | Exposure £m | | | | | | | 463 | | 272 | | 445 | | 313 | | — | | — | | 3,109 | | 4,602 | |
ECL £m | | | | | | | 19 | | 8 | | 17 | | 1 | | — | | — | | 74 | | 119 | |
Coverage % | | | | | | | 4.1 | | 2.9 | | 3.8 | | 0.3 | | — | | — | | 2.4 | | 2.6 | |
Corporate Centre | Exposure £m | | | | | | | — | | — | | 2 | | — | | — | | — | | — | | 2 | |
ECL £m | | | | | | | — | | — | | — | | — | | — | | — | | — | | — | |
Coverage % | | | | | | | — | | — | | — | | — | | — | | — | | — | | — | |
Total Drawn | Exposure £m | | | | | | | 5,953 | | 933 | | 1,196 | | 1,065 | | 4,241 | | — | | 3,109 | | 16,497 | |
ECL £m | | | | | | | 145 | | 14 | | 26 | | 37 | | 18 | | — | | 74 | | 314 | |
Coverage % | | | | | | | 2.4 | | 1.5 | | 2.2 | | 3.5 | | 0.4 | | — | | 2.4 | | 1.9 | |
Undrawn | ECL £m | | | | | | | 8 | | 1 | | 1 | | 2 | | — | | — | | 4 | | 16 | |
Total Reported | Exposure £m | | | | | | | 6,192 | | 1,016 | | 1,332 | | 1,205 | | 4,272 | | — | | 3,996 | | 18,013 | |
ECL £m | | | | | | | 153 | | 15 | | 27 | | 39 | | 18 | | — | | 78 | | 330 | |
Where balances satisfy more than one of the criteria above for determining a SICR, we have assigned the corresponding gross carrying amount and ECL in order of the categories presented.
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Annual Report 2022 | Santander UK Group Holdings plc 125 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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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:
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| 2022 | | 2021 |
| Exposure | ECL | Coverage | | Exposure | ECL | Coverage |
| £m | £m | % | | £m | £m | % |
Stage 2 not in cure period | 13,156 | | 439 | | 3.3 | | | 13,351 | | 286 | | 2.1 | |
Stage 2 in cure period (for transfer to Stage 1) | 6,126 | | 77 | | 1.3 | | | 4,662 | | 44 | | 0.9 | |
| 19,282 | | 516 | | 2.7 | | | 18,013 | | 330 | | 1.8 | |
2022 compared to 2021
The accounts in a cure period increased in 2022 due to the introduction of the Unsecured Affordability JA and an increase in the number of accounts falling in scope for the Mortgage affordability JA. Accounts which have been moved into Stage 2 due to a JA are assumed to not be in a cure period.
Stage 3 analysis (audited)
The following table analyses our Stage 3 exposures and the related ECL by whether or not they are in a cure period at the balance sheet date.
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| 2022 | | 2021 |
| Exposure | ECL | Coverage | | Exposure | ECL | Coverage |
| £m | £m | % | | £m | £m | % |
Stage 3 not in cure period | 2,421 | | 286 | | 11.8 | | | N/A | N/A | N/A |
Stage 3 in cure period (for transfer to Stage 2) | 314 | | 34 | | 10.8 | | | N/A | N/A | N/A |
| 2,735 | | 320 | | 11.7 | | | 3,021 | | 403 | | 13.3 | |
2022 compared to 2021
Following the implementation of a new regulatory definition of default in early 2022, we introduced a cure period criteria for Stage 3 assets. We did not have any cure period criteria for Stage 3 at 31 December 2021 and as the change in definition was a change in estimate the prior periods were not amended.
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Annual Report 2022 | Santander UK Group Holdings plc 126 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Reconciliation of exposures, loss allowance and net carrying amounts (audited)
The table below shows the relationships between disclosures in this Credit risk review section which refer to drawn exposures and the associated ECL, and the total assets as presented in the Consolidated Balance Sheet. The Credit risk review disclosures exclude Joint ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the customer's account, and cash collateral.
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| On-balance sheet | | Off-balance sheet |
| Exposures | Loss allowance | Net carrying amount | | Exposures | Loss allowance |
2022 | £m | £m | £m | | £m | £m |
Retail Banking | 194,661 | | 504 | | 194,157 | | | 21,722 | | 42 | |
–Homes - Mortgages(1) | 187,141 | | 250 | | 186,891 | | | 8,029 | | 3 | |
–EDB - Credit Cards(2) | 2,558 | | 120 | | 2,438 | | | 10,288 | | 10 | |
–EDB - Other (3) | 4,962 | | 134 | | 4,828 | | | 3,405 | | 29 | |
Consumer Finance | 5,384 | | 67 | | 5,317 | | | 356 | | — | |
Corporate & Commercial Banking | 18,518 | | 362 | | 18,156 | | | 9,780 | | 32 | |
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Corporate Centre | 62,409 | | — | | 62,409 | | | — | | — | |
Total exposures presented in Credit Quality tables | 280,972 | | 933 | | 280,039 | | | 31,858 | | 74 | |
Joint ventures | | | 4,165 | | | | |
Other items | | | 904 | | | | |
Adjusted net carrying amount | | | 285,108 | | | | |
Assets classified at FVTPL | | | 2,873 | | | | |
Non-financial assets(3) | | | 4,262 | | | | |
Total assets per the Consolidated Balance Sheet | | | 292,243 | | | | |
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2021 | | | | | | |
Retail Banking | 185,608 | | 368 | | 185,240 | | | 29,371 | | 21 | |
–Homes(1) | 177,297 | | 186 | | 177,111 | | | 15,950 | | 5 | |
–EDB - Credit Cards(2) | 2,341 | | 82 | | 2,259 | | | 9,960 | | 7 | |
–EDB - Other(3) | 5,970 | | 100 | | 5,870 | | | 3,461 | | 9 | |
Consumer Finance | 4,984 | | 52 | | 4,932 | | | 314 | | — | |
Corporate & Commercial Banking | 19,282 | | 408 | | 18,874 | | | 8,063 | | 17 | |
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Corporate Centre | 71,697 | | — | | 71,697 | | | — | | — | |
Total exposures presented in Credit Quality tables | 281,571 | | 828 | | 280,743 | | | 37,748 | | 38 | |
Joint ventures | | | 3,080 | | | | |
Other items | | | 656 | | | | |
Adjusted net carrying amount | | | 284,479 | | | | |
Assets classified at FVTPL | | | 2,396 | | | | |
Non-financial assets(3) | | | 6,801 | | | | |
Total assets per the Consolidated Balance Sheet | | | 293,676 | | | | |
(1)Off-balance sheet exposures include offers in the pipeline and undrawn flexible mortgages products.
(2)Off-balance sheet exposures include credit cards.
(3)Non-financial assets include £(2,654)m (2021: £85m) of Macro hedge of interest rate risk.
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Annual Report 2022 | Santander UK Group Holdings plc 127 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Movement in total exposures and the corresponding ECL (audited)
The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the period. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 298,285 | | 133 | | 18,013 | | 330 | | 3,021 | | 403 | | 319,319 | | 866 | |
Transfers from Stage 1 to Stage 2(3) | (9,100) | | (25) | | 9,100 | | 25 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 7,207 | | 133 | | (7,207) | | (133) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (621) | | (4) | | (624) | | (32) | | 1,245 | | 36 | | — | | — | |
Transfers from Stage 3(3) | 10 | | 1 | | 758 | | 150 | | (768) | | (151) | | — | | — | |
Transfers of financial instruments | (2,504) | | 105 | | 2,027 | | 10 | | 477 | | (115) | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (110) | | — | | 98 | | — | | 110 | | — | | 98 | |
Change in economic scenarios(2) | — | | 37 | | — | | 123 | | — | | 3 | | — | | 163 | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 48,194 | | 42 | | 1,119 | | 76 | | 64 | | 24 | | 49,377 | | 142 | |
Redemptions, repayments and assets sold(7) | (55,332) | | (35) | | (2,065) | | (60) | | (950) | | (35) | | (58,347) | | (130) | |
Changes in risk parameters and other movements(6) | 2,170 | | (1) | | 188 | | (61) | | 377 | | 87 | | 2,735 | | 25 | |
Assets written off(7) | — | | — | | — | | — | | (254) | | (157) | | (254) | | (157) | |
At 31 December 2022 | 290,813 | | 171 | | 19,282 | | 516 | | 2,735 | | 320 | | 312,830 | | 1,007 | |
Net movement in the period | (7,472) | | 38 | | 1,269 | | 186 | | (286) | | (83) | | (6,489) | | 141 | |
| | | | | | | | |
ECL charge/(release) to the Income Statement | | 38 | | | 186 | | | 74 | | | 298 | |
Less: Discount unwind | | — | | | — | | | (13) | | | (13) | |
Less: Recoveries net of collection costs | | — | | | — | | | 36 | | | 36 | |
Total ECL charge/(release) to the Income Statement | | 38 | | | 186 | | | 97 | | | 321 | |
Discontinued operations ECL adjustment | | — | | | — | | | — | | | — | |
ECL charge/(release) to the Income Statement from continued operations | | 38 | | | 186 | | | 97 | | | 321 | |
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At 1 January 2021 | 307,416 | | 216 | | 18,380 | | 592 | | 2,996 | | 569 | | 328,792 | | 1,377 | |
Transfers from Stage 1 to Stage 2(3) | (6,805) | | (9) | | 6,805 | | 9 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 5,883 | | 167 | | (5,883) | | (167) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (572) | | (3) | | (532) | | (20) | | 1,104 | | 23 | | — | | — | |
Transfers from Stage 3(3) | 14 | | 2 | | 455 | | 62 | | (469) | | (64) | | — | | — | |
Transfers of financial instruments | (1,480) | | 157 | | 845 | | (116) | | 635 | | (41) | | — | | — | |
Net remeasurement of ECL on stage transfer(4) | — | | (133) | | — | | 26 | | — | | 64 | | — | | (43) | |
Change in economic scenarios(2) | — | | (7) | | — | | (151) | | — | | (12) | | — | | (170) | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 50,863 | | 31 | | 936 | | 26 | | 24 | | 19 | | 51,823 | | 76 | |
Redemptions, repayments and assets sold(7) | (63,659) | | (70) | | (3,441) | | (67) | | (519) | | (68) | | (67,619) | | (205) | |
Changes in risk parameters and other movements(6) | 5,145 | | (61) | | 1,293 | | 20 | | 182 | | 63 | | 6,620 | | 22 | |
Assets written off (7) | — | | — | | — | | — | | (297) | | (191) | | (297) | | (191) | |
At 31 December 2021 | 298,285 | | 133 | | 18,013 | | 330 | | 3,021 | | 403 | | 319,319 | | 866 | |
Net movement in the period | (9,131) | | (83) | | (367) | | (262) | | 25 | | (166) | | (9,473) | | (511) | |
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ECL charge/(release) to the Income Statement | | (83) | | | (262) | | | 25 | | | (320) | |
Less: Discount unwind | | — | | | — | | | (11) | | | (11) | |
Less: Recoveries net of collection costs | | — | | | — | | | 87 | | | 87 | |
Total ECL charge/(release) to the Income Statement | | (83) | | | (262) | | | 101 | | | (244) | |
Discontinued operations ECL adjustment | | 11 | | | — | | | — | | | 11 | |
ECL charge/(release) to the Income Statement from continued operations | | (72) | | | (262) | | | 101 | | | (233) | |
(1)Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2)Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, the scenarios themselves, and the probability weights from all other movements. Also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in Transfers of financial instruments.
(3)Total impact of facilities that moved Stage(s) in the period. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the period. Transfers between Stages are based on opening balances and ECL at the start of the period.
(4)Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.
(5)Exposures and ECL of facilities that did not exist at the start of the period but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6)Residual movements on existing facilities that did not change Stage in the period, and which were not acquired in the period. Includes the net increase or decrease in the period of cash at central banks, the impact of changes in risk parameters in the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the period.
(7)Exposures and ECL for facilities that existed at the start of the period but not at the end.
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Annual Report 2022 | Santander UK Group Holdings plc 128 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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COUNTRY RISK EXPOSURES (AUDITED)
We manage our country risk exposure under our global limits 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 need to.
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 line 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. If so, we use the guarantor’s country of domicile. If a client has operations in many countries, we use their country of incorporation. The table below excludes balances with other Banco Santander group members. We show them separately in the section that immediately follows.
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| 2022 | | 2021 |
| | | Financial institutions | | | | | | | Financial institutions | | | |
| Governments | | Banks(1) | Other | Retail | Corporate | Total(2) | | Governments | | Banks(1) | Other | Retail | Corporate | Total(2) |
| £bn | | £bn | £bn | £bn | £bn | £bn | | £bn | | £bn | £bn | £bn | £bn | £bn |
Eurozone | | | | | | | | | | | | | | | |
Ireland | — | | | — | | 2.3 | | — | | 0.1 | | 2.4 | | | — | | | — | | 5.3 | | — | | — | | 5.3 | |
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Spain | — | | | — | | — | | — | | — | | — | | | — | | | — | | — | | — | | 0.1 | | 0.1 | |
France | 0.1 | | | 0.8 | | 0.5 | | — | | — | | 1.4 | | | 0.1 | | | 0.3 | | 0.2 | | — | | — | | 0.6 | |
Germany | — | | | 0.3 | | — | | — | | 0.1 | | 0.4 | | | — | | | 0.5 | | — | | — | | — | | 0.5 | |
Luxembourg | — | | | — | | — | | — | | — | | — | | | — | | | — | | 0.1 | | — | | — | | 0.1 | |
Other(3) | 0.3 | | | 0.5 | | — | | — | | — | | 0.8 | | | 0.3 | | | 0.8 | | — | | — | | — | | 1.1 | |
| 0.4 | | | 1.6 | | 2.8 | | — | | 0.2 | | 5.0 | | | 0.4 | | | 1.6 | | 5.6 | | — | | 0.1 | | 7.7 | |
Other countries | | | | | | | | | | | | | | | |
UK | 46.6 | | | 1.8 | | 6.2 | | 220.2 | | 26.8 | | 301.6 | | | 50.2 | | | 2.1 | | 9.9 | | 217.8 | | 28.7 | | 308.7 | |
US | 0.1 | | | 1.0 | | — | | — | | | 1.1 | | | 0.5 | | | 0.8 | | — | | — | | — | | 1.3 | |
Japan | 1.1 | | | 0.3 | | — | | — | | — | | 1.4 | | | 1.0 | | | 0.2 | | — | | — | | — | | 1.2 | |
Switzerland | 1.2 | | | — | | — | | — | | — | | 1.2 | | | — | | | — | | — | | — | | — | | — | |
Other | 0.1 | | | 0.8 | | 0.2 | | 1.3 | | 0.5 | | 2.9 | | | 0.3 | | | 0.2 | | 0.1 | | 0.7 | | 0.1 | | 1.4 | |
| 49.1 | | | 3.9 | | 6.4 | | 221.5 | | 27.3 | | 308.2 | | | 52.0 | | | 3.3 | | 10.0 | | 218.5 | | 28.8 | | 312.6 | |
Total | 49.5 | | | 5.5 | | 9.2 | | 221.5 | | 27.5 | | 313.2 | | | 52.4 | | | 4.9 | | 15.6 | | 218.5 | | 28.9 | | 320.3 | |
(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.
(3)Includes The Netherlands £0.1bn (2021: £0.2bn), Belgium £0.6bn (2021: £0.7bn), and Finland £0.1bn (2021: £nil).
Balances with other Banco Santander group members (audited)
We deal with other Banco Santander group members 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. 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 group members. 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 Board and the PRA.
At 31 December 2022 and 31 December 2021, we had gross balances with other Banco Santander group members as follows:
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| 2022 | | 2021 |
| Financial institutions | | | | Financial institutions | | |
| Banks | Other | Corporate | Total | | Banks | Other | Corporate | Total |
| £bn | £bn | £bn | £bn | | £bn | £bn | £bn | £bn |
Assets | | | | | | | | | |
Spain | 1.4 | | — | | — | | 1.4 | | | 1.0 | | — | | — | | 1.0 | |
UK | — | | 4.2 | | — | | 4.2 | | | — | | 3.1 | | — | | 3.1 | |
| 1.4 | | 4.2 | | — | | 5.6 | | | 1.0 | | 3.1 | | — | | 4.1 | |
Liabilities | | | | | | | | | |
Spain | 1.7 | | 0.1 | | — | | 1.8 | | | 1.4 | | 0.1 | | — | | 1.5 | |
UK | — | | 1.2 | | — | | 1.2 | | | — | | 1.2 | | — | | 1.2 | |
Uruguay | — | | — | | — | | — | | | 0.1 | | — | | — | | 0.1 | |
| 1.7 | | 1.3 | | — | | 3.0 | | | 1.5 | | 1.3 | | — | | 2.8 | |
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Annual Report 2022 | Santander UK Group Holdings plc 129 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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RETAIL BANKING – CREDIT RISK REVIEW
We provide detailed credit risk analysis for Retail Banking in separate sections below for Homes, our largest portfolio, and our Everyday Banking portfolio.
RETAIL BANKING: HOMES – CREDIT RISK REVIEW
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.
Borrower profile (audited)
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| Stock | | New business |
| 2022 | | 2021 | | 2022 | | 2021 |
| £m | % | | £m | % | | £m | % | | £m | % |
Home movers(1) | 77,708 | | 41 | | | 75,879 | | 43 | | | 12,221 | | 36 | | | 13,537 | | 43 | |
Remortgagers(2) | 53,936 | | 29 | | | 51,336 | | 29 | | | 10,644 | | 31 | | | 8,031 | | 25 | |
First-time buyers | 38,698 | | 21 | | | 35,189 | | 20 | | | 8,129 | | 24 | | | 6,206 | | 19 | |
Buy-to-let | 16,799 | | 9 | | | 14,893 | | 8 | | | 3,133 | | 9 | | | 4,239 | | 13 | |
| 187,141 | | 100 | | | 177,297 | | 100 | | | 34,127 | | 100 | | | 32,013 | | 100 | |
(1)'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.
(2)'Remortgagers’ are new customers who are taking a new mortgage with us
As well as the new business above, there were £25.3bn (2021: £30.5bn) of remortgages where we moved customers with maturing products onto new mortgages. We also provided £1.2bn (2021: £1.4bn) of further advances and flexible mortgage drawdowns.81% (2021: 83%) of customers with a maturing mortgage were retained, which applied to mortgages four months post maturity and calculated as a 12-month average of retention rates to September.
2022 compared to 2021
In 2022, mortgage asset stock increased across all sectors, with the stock borrower profile unchanged. Our new business increased, mainly in remortgages, reflecting market conditions and strong demand from first time buyers, driven by customers securing fixed rate products in a rising interest rate environment. In 2022, we helped first-time buyers buy their new home with £8.1bn of gross lending (2021: £6.2bn).
Interest rate profile (audited)
The interest rate profile of our maturing mortgage asset stock was:
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| 2022 | | 2021 |
| £m | % | | £m | % |
Fixed rate | 166,281 | | 89 | | | 149,517 | | 84 | |
Of which maturing: | | | | | |
–< 12 months | 39,123 | | 21 | | | 30,067 | | 17 | |
–Later than 1 year but no later than 3 years | 39,056 | | 21 | | | 41,753 | | 24 | |
–Later than 3 years but no later than 4 years | 24,584 | | 13 | | | 24,799 | | 14 | |
–Later than 4 years but no later than 5 years | 25,290 | | 14 | | | 21,276 | | 12 | |
–Later than 5 years | 38,228 | | 20 | | | 31,622 | | 18 | |
Variable rate | 12,511 | | 7 | | | 17,124 | | 10 | |
Standard Variable Rate (SVR) | 5,682 | | 3 | | | 7,876 | | 4 | |
Follow on Rate (FoR) | 2,667 | | 1 | | | 2,780 | | 2 | |
| 187,141 | | 100 | | | 177,297 | | 100 | |
2022 compared to 2021
In 2022, we continued to see customers refinance from variable rate and SVR to fixed rate products influenced by the rapid increases in interest rates and the competitive mortgage market. Within fixed rate products, we continued to see an increase in the proportion of 5 year fixed rate mortgages in 2022.
Geographical distribution (audited)
The geographical distribution of our mortgage asset stock and new business was:
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| Stock | | New business |
| 2022 | 2021 | | 2022 | 2021 |
Region | £bn | £bn | | £bn | £bn |
London | 47.8 | | 45.3 | | | 8.3 | | 8.3 | |
Midlands and East Anglia | 26.0 | | 24.1 | | | 5.3 | | 4.7 | |
North | 24.8 | | 23.5 | | | 4.7 | | 3.8 | |
Northern Ireland | 2.9 | | 3.0 | | | 0.3 | | 0.3 | |
Scotland | 6.8 | | 6.6 | | | 1.2 | | 1.0 | |
South East excluding London | 59.3 | | 56.4 | | | 10.6 | | 10.5 | |
South West, Wales and other | 19.5 | | 18.4 | | | 3.7 | | 3.4 | |
| 187.1 | | 177.3 | | | 34.1 | | 32.0 | |
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2022 compared to 2021
The portfolio's geographical distribution continued to represent a broad footprint across the UK, with a concentration around London and the South East. The loan-to-income multiple of mortgage lending in the year, based on average earnings of new business at inception, was 3.35 (2021: 3.35).
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Annual Report 2022 | Santander UK Group Holdings plc 130 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Mortgage loan size (audited)
The split of our mortgage asset by size was:
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Mortgage loan size | 2022 | 2021 |
>£1.0m | 2 | % | 2 | % |
£0.5m to £1.0m | 10 | % | 9 | % |
£0.25m to £0.5m | 31 | % | 30 | % |
<£0.25m | 57 | % | 59 | % |
Average loan size (stock) | £184k | £174k |
Average loan size (new business) | £237k | £234k |
Loan-to-value analysis (audited)
This table shows the LTV distribution for the gross carrying amount and the related ECL of our total mortgage portfolio and Stage 3 mortgages, and new business. We also show the collateral value and average LTV. We use our estimate of the property value at the balance sheet date and include fees that have been added to the loan. For flexible products, we only include the drawn amount, not undrawn limits.
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| 2022 | | 2021 |
| Stock | Stage 3 | New | | Stock | Stage 3 | New |
| Total | ECL | Total | ECL | Business | | Total | ECL | Total | ECL | Business |
LTV | £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
Up to 50% | 88,841 | | 37 | | 1,116 | | 14 | | 4,890 | | | 80,058 | | 25 | | 944 | | 9 | | 4,997 | |
>50-60% | 36,356 | | 29 | | 284 | | 11 | | 4,014 | | | 30,854 | | 22 | | 301 | | 10 | | 4,379 | |
>60-70% | 34,350 | | 50 | | 197 | | 16 | | 6,104 | | | 33,344 | | 25 | | 226 | | 11 | | 6,517 | |
>70-80% | 17,977 | | 46 | | 110 | | 15 | | 10,094 | | | 24,511 | | 31 | | 155 | | 14 | | 10,242 | |
>80-90% | 7,369 | | 29 | | 42 | | 9 | | 6,002 | | | 6,632 | | 21 | | 68 | | 10 | | 4,558 | |
>90-100% | 1,876 | | 17 | | 32 | | 9 | | 2,999 | | | 1,367 | | 16 | | 39 | | 9 | | 1,270 | |
>100% | 372 | | 45 | | 52 | | 21 | | 24 | | | 531 | | 51 | | 65 | | 26 | | 50 | |
| 187,141 | | 253 | | 1,833 | | 95 | | 34,127 | | | 177,297 | | 191 | | 1,798 | | 89 | | 32,013 | |
Collateral value (1) | 187,093 | | | 1,824 | | | 34,126 | | | 177,222 | | | 1,786 | | | 32,012 | |
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| % | | % | | % | | % | | % | | % |
| | | | | | | | | | | |
Average LTV - Balance weighted(2)(3) | 50 | | | 47 | | | 69 | | | 52 | | | 51 | | | 66 | |
(1)Collateral value is limited to the balance of each loan and excludes the impact of any over-collateralisation. Includes collateral against loans in negative equity of £323m (2021: £455m).
(2)Balance weighted LTV = (Loan 1 balance x (Loan 1 Balance/Loan 1 latest property valuation) + (Loan 2 balance x (loan 2 balance/Loan 2 latest property valuation)+ ...) /(Loan 1 balance + Loan 2 balance+...).
(3) Simple average stock LTV 39% (2021: 41%).
At 31 December 2022, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances was £48m (2021: £75m). The balance weighted average LTV of new business in the period in London was 66% (2021: 64%).
2022 compared to 2021
There were no significant changes in collateral quality in 2022. Despite economic pressures, balance weighted average LTVs were broadly flat over the period. We monitor the LTV profile of new lending and take action as needed to ensure the LTV mix of completions is appropriate.
Credit performance (audited)
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Mortgage loans and advances to customers of which: | 187,141 | | 177,297 | |
–Stage 1 | 171,733 | | 164,381 | |
–Stage 2 | 13,576 | | 11,118 | |
–Stage 3 | 1,832 | | 1,798 | |
Loss allowances(1) | 253 | | 191 | |
| | | | | | | | |
| % | % |
Stage 1 ratio(2) | 91.76 | | 92.72 | |
Stage 2 ratio(2) | 7.25 | | 6.27 | |
Stage 3 ratio | 0.99 | | 1.02 | |
(1)The ECL allowance is for both on and off–balance sheet exposures.
(2)Stage 1/Stage 2 exposures as a percentage of customer loans.
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Annual Report 2022 | Santander UK Group Holdings plc 131 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Movement in total exposures and the corresponding ECL (audited)
The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page 128 also apply to these tables. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 180,232 | | 14 | | 11,199 | | 88 | | 1,816 | | 89 | | 193,247 | | 191 | |
Transfers from Stage 1 to Stage 2(3) | (5,833) | | (1) | | 5,833 | | 1 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 2,961 | | 16 | | (2,961) | | (16) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (278) | | (2) | | (448) | | (11) | | 726 | | 13 | | — | | — | |
Transfers from Stage 3(3) | 3 | | — | | 280 | | 9 | | (283) | | (9) | | — | | — | |
Transfers of financial instruments | (3,147) | | 13 | | 2,704 | | (17) | | 443 | | 4 | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (15) | | — | | 40 | | — | | 8 | | — | | 33 | |
Change in economic scenarios(2) | — | | 1 | | — | | 21 | | — | | 2 | | — | | 24 | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 35,028 | | 7 | | 529 | | 11 | | 1 | | — | | 35,558 | | 18 | |
Redemptions, repayments and assets sold(7) | (32,565) | | (3) | | (1,229) | | (11) | | (415) | | (12) | | (34,209) | | (26) | |
Changes in risk parameters and other movements(6) | 84 | | 9 | | 482 | | — | | 18 | | 7 | | 584 | | 16 | |
Assets written off (7) | — | | — | | — | | — | | (10) | | (3) | | (10) | | (3) | |
At 31 December 2022 | 179,632 | | 26 | | 13,685 | | 132 | | 1,853 | | 95 | | 195,170 | | 253 | |
Net movement in the period | (600) | | 12 | | 2,486 | | 44 | | 37 | | 6 | | 1,923 | | 62 | |
| | | | | | | | |
ECL charge/(release) to the Income Statement | | 12 | | | 44 | | | 9 | | | 65 | |
Less: Discount unwind | | — | | | — | | | (2) | | | (2) | |
Less: Recoveries net of collection costs | | — | | | — | | | (1) | | | (1) | |
Total ECL charge/(release) to the Income Statement | | 12 | | | 44 | | | 6 | | | 62 | |
| | | | | | | | |
| | | | | | | | |
At 1 January 2021 | 170,794 | | 17 | | 10,470 | | 131 | | 1,813 | | 132 | | 183,077 | | 280 | |
Transfers from Stage 1 to Stage 2(3) | (5,439) | | (2) | | 5,439 | | 2 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 3,782 | | 21 | | (3,782) | | (21) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (242) | | (2) | | (451) | | (4) | | 693 | | 6 | | — | | — | |
Transfers from Stage 3(3) | 3 | | — | | 353 | | 15 | | (356) | | (15) | | — | | — | |
Transfers of financial instruments | (1,896) | | 17 | | 1,559 | | (8) | | 337 | | (9) | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (18) | | — | | 10 | | — | | 9 | | — | | 1 | |
Change in economic scenarios(2) | — | | (1) | | — | | (67) | | — | | (12) | | — | | (80) | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 33,292 | | 6 | | 332 | | 2 | | 1 | | — | | 33,625 | | 8 | |
Redemptions, repayments and assets sold(7) | (25,073) | | (3) | | (1,435) | | (6) | | (332) | | (16) | | (26,840) | | (25) | |
Changes in risk parameters and other movements(6) | 3,115 | | (4) | | 273 | | 26 | | 13 | | (10) | | 3,401 | | 12 | |
Assets written off (7) | — | | — | | — | | — | | (16) | | (5) | | (16) | | (5) | |
At 31 December 2021 | 180,232 | | 14 | | 11,199 | | 88 | | 1,816 | | 89 | | 193,247 | | 191 | |
Net movement in the period | 9,438 | | (3) | | 729 | | (43) | | 3 | | (43) | | 10,170 | | (89) | |
| | | | | | | | |
ECL charge/(release) to the Income Statement | | (3) | | | (43) | | | (38) | | | (84) | |
Less: Discount unwind | | — | | | — | | | (2) | | | (2) | |
Less: Recoveries net of collection costs | | — | | | — | | | (1) | | | (1) | |
Total ECL charge/(release) to the Income Statement | | (3) | | | (43) | | | (41) | | | (87) | |
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Annual Report 2022 | Santander UK Group Holdings plc 132 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Loan modifications
Forbearance(1)
The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Financial assets modified in the period: | | |
–Amortised cost before modification | 317 | | 424 | |
–Net modification loss | 7 | | 9 | |
Financial assets modified since initial recognition: | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12 months ECL in the period | 91 | | 152 | |
The balances at 31 December 2022 and 31 December 2021, analysed by their staging at the period-end and the forbearance we applied, were:
| | | | | | | | | | | | | | | | | | | | |
| Capitalisation | Term extension | Interest-only | Concessionary interest rate | Total (audited) | Loss allowances |
2022 | £m | £m | £m | £m | £m | £m |
Stage 2 | 311 | 320 | 240 | 6 | 877 | 11 |
Stage 3 | 299 | 140 | 65 | 190 | 694 | 31 |
| 610 | 460 | 305 | 196 | 1,571 | 42 |
Proportion of portfolio | 0.3 | % | 0.3 | % | 0.2 | % | 0.1 | % | 0.9 | % | |
| | | | | | |
2021 | | | | | | |
Stage 2 | 388 | 444 | 273 | 4 | 1,109 | 12 |
Stage 3 | 217 | 75 | 73 | 111 | 476 | 26 |
| 605 | 519 | 346 | 115 | 1,585 | 38 |
Proportion of portfolio | 0.3 | % | 0.3 | % | 0.2 | % | 0.1 | % | 0.9 | % | |
(1)We base forbearance type on the first forbearance on the accounts.
2022 compared to 2021
In 2022, forbearance activity was stable. The proportion of the mortgage portfolio in forbearance remained flat at 0.9% (2021: 0.9%).
–At 31 December 2022, the proportion of accounts in forbearance for more than six months that had made their last six months’ contractual payments was 85% (2021: 85%).
–The weighted average LTV of all accounts in forbearance was 43% (2021: 32%) compared to the weighted average portfolio LTV of 50% (2021: 35%)
–At 31 December 2022, the carrying value of mortgages classified as multiple forbearance increased slightly to £152m (2021: £148m).
Other loan modifications
From March 2020 to March 2021, we provided mortgage customers with payment holiday terms in line with UK Government and FCA guidance. The scheme has now ceased. The following table provides information on such loan modifications.
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Financial assets modified in the period: | | |
–Amortised cost before modification | — | | 658 | |
| | |
Financial assets modified since initial recognition: | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12 months ECL in the period | — | | 8 | |
At 31 December 2022, there were £1.9bn (2021: £2.3bn) of other mortgages on the balance sheet that we had modified since January 2008. At 31 December 2022:
The average LTV was 24% (2021: 27%), and 94% (2021: 95%) of accounts had made their last six months’ contractual payments.
The proportion of accounts that were 90 days or more in arrears was 1.53% (2021: 2.62%).
There were no other loan modifications made in the year.
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Annual Report 2022 | Santander UK Group Holdings plc 133 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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RETAIL BANKING: HOMES – PORTFOLIOS OF PARTICULAR INTEREST
Introduction
We are mainly a residential prime lender and we do not originate sub-prime or second charge mortgages. Despite that, some types of mortgages have higher risks and others stand out for different reasons. These are:
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Product | Description |
Interest-only loans and part interest-only, part repayment loans | With an interest-only mortgage, the customer pays interest every month but the principal is only repaid at the end of the mortgage term. Some mortgages have a part that is interest-only, with the rest being a normal repayment mortgage. Customers with part interest-only, part repayment mortgages still have to pay back a lump sum at the end of their mortgage for the interest-only part. This means these loans have a higher credit risk as we depend on the customers to pay back a lump sum. We design new account LTV maximums to mitigate this risk. We also make sure the customer has a plausible repayment plan before we lend to them and stays on track for the loan term.
We mitigate the risk from new interest-only mortgages by having lower maximum LTVs. For most applicants, the maximum LTV is 50%. For high net worth customers, it can be up to 75%. When a customer plans to repay their mortgage by selling the property, we require a minimum equity buffer of £250k. We also remind customers that they have to arrange to repay the principal at the end of the mortgage. We send them messages with their annual mortgage statements, and we contact them throughout the mortgage term to encourage them to tell us how they plan to repay. We increase the frequency of contact as the loan approaches maturity. If customers know they will not be able to repay their mortgage 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 their interests and they can afford it, we look at other ways to manage it, such as turning the mortgage into a repayment one and extending it. If the customer is waiting for their way to repay it, such as an investment plan, to mature, we may permit an extension. |
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. There are conditions on when and how much customers can draw down, and they do not have to take or draw down the whole loan all at once. A customer can ask us to raise their credit limit, but that means we will go through our full credit approval process. We can also lower a 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 loans for new mortgages. This is an area of interest if any customers might be using these facilities to self-forbear, such as regularly drawing down small amounts. We reflect signs that the credit risk has significantly increased in our ECL calculations. |
Loans with an LTV >100% | In some cases, property prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs greater than 100%. Where the mortgage balance is more than the property is now worth, we cannot recover the full value of the loan by repossessing and selling the property. This means there is a higher credit risk on these loans so we monitor them as part of our assessment of ongoing portfolio performance. We design new account LTV maximums to mitigate an increase in accounts with an LTV >100%. |
Buy-to-Let (BTL) loans | We have specific policies for BTL and focus on non-professional landlords. We have prudent lending criteria and the maximum LTV is 75%. The first applicant must earn a minimum of £25,000 per year, and we require proof of income in all cases. We also use a BTL affordability rate as part of our lending assessment. This means that the rental income must cover the monthly mortgage interest payments by a prescribed amount when calculated using a stressed interest rate. We regularly review the prescribed amount and adjust it as needed. |
Climate change
The value of property collateral for mortgages might be affected by physical impacts related to the frequency and scale of extreme weather events, such as flood and subsidence risk or changing environmental performance standards for property. In 2022 we reviewed the proportion of mortgage loans subject to flood and subsidence risk and concluded that the risk was not material. The terms of our mortgage lending require homeowners to buy suitable insurance which transfers the majority of the risk to asset valuations to third party insurers.
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Annual Report 2022 | Santander UK Group Holdings plc 134 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Credit performance (audited)
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| | Portfolio of particular interest(1) | |
| Total | Interest-only | Part interest-only, part repayment (2) | Flexible | LTV >100% | Buy-to-let | Other portfolio |
2022 | £m | £m | £m | £m | £m | £m | £m |
Mortgage portfolio | 187,141 | 41,098 | 13,759 | 6,765 | 372 | 16,799 | 129,299 |
–Stage 1 | 171,733 | 35,957 | 12,380 | 5,713 | 218 | 15,884 | 120,683 |
–Stage 2 | 13,576 | 4,265 | 1,161 | 839 | 102 | 876 | 7,916 |
–Stage 3 | 1,832 | 876 | 218 | 213 | 52 | 39 | 700 |
Stage 3 ratio | 0.99 | % | 2.15 | % | 1.60 | % | 3.45 | % | 13.91 | % | 0.23 | % | 0.54 | % |
Properties in possession | 47 | 18 | 8 | 3 | 7 | 1 | 16 |
| | | | | | | |
Balance weighted LTV (indexed) | 50 | % | 47 | % | 49 | % | 36 | % | 117 | % | 58 | % | 52 | % |
| | | | | | | |
2021 | | | | | | | |
Mortgage portfolio | 177,297 | 40,906 | 13,865 | 8,549 | 531 | 14,893 | 118,874 |
–Stage 1 | 164,381 | 36,459 | 12,614 | 7,509 | 357 | 14,363 | 111,947 |
–Stage 2 | 11,118 | 3,630 | 1,024 | 796 | 109 | 489 | 6,225 |
–Stage 3 | 1,798 | 817 | 227 | 244 | 65 | 41 | 702 |
Stage 3 ratio | 1.02 | % | 2.02 | % | 1.64 | % | 3.06 | % | 12.29 | % | 0.27 | % | 0.59 | % |
Properties in possession | 2 | 1 | 1 | 0 | 1 | — | 0 |
Balance weighted LTV (indexed) | 52 | % | 48 | % | 52 | % | 39 | % | 118 | % | 61 | % | 53 | % |
(1)Where a loan falls into more than one category, we include it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the total mortgage portfolio.
(2)Mortgage balance includes both the interest-only part of £10,192m (2021: £10,270m) and the non-interest-only part of the loan.
2022 compared to 2021
–In 2022, the combined total proportion of interest-only loans, part interest-only, part repayment loans and flexible loans remained stable.
–BTL mortgage balances increased £1.9bn to £16.8bn (2021: £14.9bn) driven by continued focus in growing this portfolio. In 2022, the balance weighted average LTV of mortgage total new BTL lending was 67% (2021: 68%)
Forbearance(1) (audited)
The balances at 31 December 2022 and 31 December 2021 were:
| | | | | | | | | | | | | | |
| Interest-only(2) | Flexible | LTV >100% | Buy-to-Let |
2022 | £m | £m | £m | £m |
Total | 292 | | 36 | | 10 | | 15 | |
–Stage 2 | 112 | | 19 | | 1 | | 11 | |
–Stage 3 | 180 | | 17 | | 9 | | 4 | |
| | | | |
2021 | | | | |
Total | 419 | | 35 | | 13 | | 11 | |
–Stage 2 | 280 | | 24 | | 3 | | 8 | |
–Stage 3 | 139 | | 11 | | 10 | | 3 | |
(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.
2022 compared to 2021
Levels of forbearance on interest-only accounts decreased in 2022. The higher levels of forbearance on interest-only accounts in 2021 were driven by the availability of a one year deferral of repaying capital for maturing or past maturity interest-only customers impacted or potentially impacted by Covid-19. This was offered in line with FCA guidance. The scheme closed in 2021.
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Annual Report 2022 | Santander UK Group Holdings plc 135 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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RETAIL BANKING: EVERYDAY BANKING – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL (audited)
The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page 128 also apply to these tables. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 20,682 | | 51 | | 698 | | 98 | | 352 | | 49 | | 21,732 | | 198 | |
Transfers from Stage 1 to Stage 2(3) | (841) | | (7) | | 840 | | 8 | | — | | — | | (1) | | 1 | |
Transfers from Stage 2 to Stage 1(3) | 155 | | 22 | | (155) | | (22) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (158) | | (1) | | (56) | | (7) | | 214 | | 7 | | — | | (1) | |
Transfers from Stage 3(3) | 7 | | — | | 14 | | 4 | | (21) | | (5) | | — | | (1) | |
Transfers of financial instruments | (837) | | 14 | | 643 | | (17) | | 193 | | 2 | | (1) | | (1) | |
Net ECL remeasurement on stage transfer(4) | — | | (22) | | — | | 91 | | — | | 30 | | — | | 99 | |
Change in economic scenarios(2) | — | | (2) | | — | | 26 | | — | | — | | — | | 24 | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 2,312 | | 12 | | 253 | | 38 | | 16 | | 10 | | 2,581 | | 60 | |
Redemptions, repayments and assets sold (7) | (2,829) | | (11) | | (176) | | (10) | | (483) | | (5) | | (3,488) | | (26) | |
Changes in risk parameters and other movements(6) | 249 | | 1 | | (62) | | (35) | | 324 | | 83 | | 511 | | 49 | |
Assets written off(7) | — | | — | | — | | — | | (122) | | (110) | | (122) | | (110) | |
At 31 December 2022 | 19,577 | | 43 | | 1,356 | | 191 | | 280 | | 59 | | 21,213 | | 293 | |
Net movement in the period | (1,105) | | (8) | | 658 | | 93 | | (72) | | 10 | | (519) | | 95 | |
| | | | | | | | |
Charge/(release) to the Income Statement | | (8) | | | 93 | | | 120 | | | 205 | |
Less: Discount unwind | | — | | | — | | | (4) | | | (4) | |
Less: Recoveries net of collection costs | | — | | | — | | | 1 | | | 1 | |
Total ECL charge/(release) to the Income Statement | | (8) | | | 93 | | | 117 | | | 202 | |
| | | | | | | | |
| | | | | | | | |
At 1 January 2021 | 21,089 | | 57 | | 791 | | 201 | | 105 | | 50 | | 21,985 | | 308 | |
Transfers from Stage 1 to Stage 2(3) | (214) | | (2) | | 214 | | 2 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 418 | | 81 | | (418) | | (81) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (284) | | (1) | | (36) | | (10) | | 320 | | 11 | | — | | — | |
Transfers from Stage 3(3) | 5 | | 1 | | 11 | | 5 | | (16) | | (6) | | — | | — | |
Transfers of financial instruments: | (75) | | 79 | | (229) | | (84) | | 304 | | 5 | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (78) | | — | | 39 | | — | | 23 | | — | | (16) | |
Change in economic scenarios(2) | — | | (4) | | — | | (19) | | — | | — | | — | | (23) | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 2,150 | | 13 | | 84 | | 12 | | 9 | | 4 | | 2,243 | | 29 | |
Redemptions, repayments and assets sold(7) | (3,023) | | (11) | | (101) | | (16) | | (29) | | (5) | | (3,153) | | (32) | |
Changes in risk parameters and other movements(6) | 541 | | (6) | | 153 | | (34) | | 77 | | 74 | | 771 | | 34 | |
Assets written off(7) | — | | 1 | | — | | (1) | | (114) | | (102) | | (114) | | (102) | |
At 31 December 2021 | 20,682 | | 51 | | 698 | | 98 | | 352 | | 49 | | 21,732 | | 198 | |
Net movement in the period | (407) | | (6) | | (93) | | (103) | | 247 | | (1) | | (253) | | (110) | |
| | | | | | | | |
Charge/(release) to the Income Statement | | (7) | | | (102) | | | 101 | | | (8) | |
Less: Discount unwind | | — | | | — | | | (4) | | | (4) | |
Less: Recoveries net of collection costs | | — | | | — | | | (51) | | | (51) | |
Total ECL charge/(release) to the Income Statement | | (7) | | | (102) | | | 46 | | | (63) | |
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Annual Report 2022 | Santander UK Group Holdings plc 136 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Credit performance (audited)
| | | | | | | | | | | | | | | | | | | | |
| Business banking | Other unsecured | |
| Personal loans | Credit cards | Overdrafts | Total other unsecured | Total |
2022 | £m | £m | £m | £m | £m | £m |
Loans and advances to customers of which: | 2,519 | 1,982 | 2,558 | 461 | 5,001 | 7,520 |
–Stage 1 | 2,223 | 1,730 | 2,192 | 155 | 4,077 | 6,300 |
–Stage 2 | 133 | 231 | 329 | 282 | 842 | 975 |
–Stage 3 | 163 | 21 | 37 | 24 | 82 | 245 |
Loss allowances(1) | 19 | 62 | 130 | 82 | 274 | 293 |
Stage 3 undrawn exposures | 3 | | | | 32 | 35 |
Stage 3 ratio | 6.58 | % | | | | 2.27 | % | 3.71 | % |
Gross write-offs | 11 | | | | 99 | 110 |
| | | | | | |
2021 | | | |
Loans and advances to customers of which: | 3,532 | 2,000 | 2,341 | 438 | 4,779 | 8,311 |
–Stage 1 | 3,076 | 1,910 | 2,125 | 299 | 4,334 | 7,410 |
–Stage 2 | 201 | 73 | 181 | 120 | 374 | 575 |
–Stage 3 | 255 | 17 | 35 | 19 | 71 | 326 |
Loss allowances(1) | 22 | 47 | 89 | 40 | 176 | 198 |
Stage 3 undrawn exposures | — | | | | 26 | 26 |
Stage 3 ratio | 7.20 | % | | | | 2.03 | % | 4.23 | % |
Gross write-offs | 6 | | | | 97 | 103 |
(1)The ECL allowance is for both on and off–balance sheet exposures
2022 compared to 2021
Business Banking balances were lower, mainly due to reductions in the Bounce back loans (BBL) portfolio. Stage 3 assets reduced, although this had a minimal impact on write offs as the reduction in assets was mainly due to the BBLs, where the 100% government guarantee was claimed. Other unsecured balances increased slightly in 2022. However, Stage 2 unsecured assets increased by125%, reflecting the current economic environment. This is yet to impact Stage 3 or write offs, which did not increase.
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Annual Report 2022 | Santander UK Group Holdings plc 137 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Loan modifications
Forbearance
The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.
| | | | | | | | | | | | | | |
| Business banking | Credit cards | Overdrafts | Total |
2022 | £m | £m | £m | £m |
Financial assets modified in the period: | | | | |
–Amortised cost before modification | — | | 7 | | 7 | | 14 | |
–Net modification gain | — | | 7 | | 6 | | 13 | |
Financial assets modified since initial recognition: | | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period | — | | 3 | | 1 | | 4 | |
| | | | |
2021 | | | | |
Financial assets modified in the period: | | | | |
–Amortised cost before modification | — | | 13 | | 9 | | 22 | |
–Net modification gain | — | | 5 | | 4 | | 9 | |
Financial assets modified since initial recognition: | | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period | — | | 4 | | 2 | | 6 | |
The balances (audited) at 31 December 2022 and 31 December 2021 were:
| | | | | | | | | | | | | | | | | | | | |
| | Other unsecured | |
| Business banking | Personal loans | Credit cards | Overdrafts | Total other unsecured | Total |
2022 | £m | £m | £m | £m | £m | £m |
Total | 3 | | 1 | | 34 | | 16 | | 51 | | 54 | |
–Stage 2 | — | | 1 | | 6 | | 2 | | 9 | | 9 | |
–Stage 3 | 3 | | — | | 28 | | 14 | | 42 | | 45 | |
| | | | | | |
2021 | | | | | | |
Total | 2 | | 1 | | 38 | | 15 | | 54 | | 56 | |
–Stage 2 | — | | — | | 7 | | 3 | | 10 | | 10 | |
–Stage 3 | 2 | | 1 | | 31 | | 12 | | 44 | | 46 | |
Other loan modifications
From March 2020 to March 2021, we provided business banking and other unsecured lending customers with payment holiday terms. The following table provides information on such loan modifications.
| | | | | | | | | | | |
| Business banking | Other unsecured | Total |
2022 | £m | £m | £m |
Financial assets modified in the period: | | | |
–Amortised cost before modification | — | | — | | — | |
–Net modification gain | — | | — | | — | |
Financial assets modified since initial recognition: | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period | — | | — | | — | |
| | | |
2021 | | | |
Financial assets modified in the period: | | | |
–Amortised cost before modification | — | | 9 | | 9 | |
–Net modification gain | — | | — | | — | |
Financial assets modified since initial recognition: | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period | — | | 1 | | 1 | |
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Annual Report 2022 | Santander UK Group Holdings plc 138 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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CONSUMER FINANCE – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL (audited)
The following table shows changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level analysis on page 128 also apply to this table. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL | Exposures ⁽¹⁾ | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 5,074 | | 18 | | 200 | | 17 | | 24 | | 17 | | 5,298 | | 52 | |
Transfers from Stage 1 to Stage 2(3) | (232) | | (2) | | 232 | | 2 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 68 | | 2 | | (68) | | (2) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (13) | | — | | (10) | | (2) | | 22 | | 2 | | (1) | | — | |
Transfers from Stage 3(3) | — | | — | | 1 | | 1 | | (1) | | (1) | | — | | — | |
Transfers of financial instruments | (177) | | — | | 155 | | (1) | | 21 | | 1 | | (1) | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (2) | | — | | 9 | | — | | 10 | | — | | 17 | |
Change in economic scenarios(2) | — | | — | | — | | — | | — | | — | | — | | — | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 2,225 | | 7 | | 110 | | 8 | | 3 | | 2 | | 2,338 | | 17 | |
Redemptions, repayments and assets sold(7) | (1,232) | | (5) | | (77) | | (7) | | — | | — | | (1,309) | | (12) | |
Changes in risk parameters and other movements(6) | (529) | | 1 | | (38) | | 1 | | 18 | | 10 | | (549) | | 12 | |
Assets written off(7) | — | | — | | — | | — | | (37) | | (19) | | (37) | | (19) | |
At 31 December 2022 | 5,361 | | 19 | | 350 | | 27 | | 29 | | 21 | | 5,740 | | 67 | |
Net movement in the period | 287 | | 1 | | 150 | | 10 | | 5 | | 4 | | 442 | | 15 | |
| | | | | | | | |
Charge/(release) to the Income Statement | | 1 | | | 10 | | | 23 | | | 34 | |
Less: Discount unwind | | — | | | — | | | (2) | | | (2) | |
Less: Recoveries net of collection costs | | — | | | — | | | (5) | | | (5) | |
Total ECL charge/(release) to the Income Statement | | 1 | | | 10 | | | 16 | | | 27 | |
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| | | | | | | | |
At 1 January 2021 | 7,824 | | 44 | | 379 | | 37 | | 58 | | 37 | | 8,261 | | 118 | |
Transfers from Stage 1 to Stage 2(3) | (98) | | (1) | | 98 | | 1 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 105 | | 6 | | (105) | | (6) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (8) | | — | | (8) | | (2) | | 16 | | 2 | | — | | — | |
Transfers from Stage 3(3) | 5 | | — | | 3 | | 2 | | (8) | | (2) | | — | | — | |
Transfers of financial instruments: | 4 | | 5 | | (12) | | (5) | | 8 | | — | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | — | | — | | — | | — | | — | | — | | — | |
Change in economic scenarios(2) | — | | — | | — | | (2) | | — | | — | | — | | (2) | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 2,212 | | 6 | | 70 | | 4 | | 3 | | 2 | | 2,285 | | 12 | |
Redemptions, repayments and assets sold(7) | (4,063) | | (19) | | (142) | | (6) | | (19) | | (3) | | (4,224) | | (28) | |
Changes in risk parameters and other movements(6) | (903) | | (18) | | (95) | | (12) | | 11 | | 6 | | (987) | | (24) | |
Assets written off(7) | — | | — | | — | | 1 | | (37) | | (25) | | (37) | | (24) | |
At 31 December 2021 | 5,074 | | 18 | | 200 | | 17 | | 24 | | 17 | | 5,298 | | 52 | |
Net movement in the period | (2,750) | | (26) | | (179) | | (20) | | (34) | | (20) | | (2,963) | | (66) | |
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Charge/(release) to the Income Statement | | (26) | | | (21) | | | 5 | | | (42) | |
Less: Discount unwind | | — | | | — | | | — | | | — | |
Less: Recoveries net of collection costs | | — | | | — | | | 9 | | | 9 | |
Total ECL charge/(release) to the Income Statement | | (26) | | | (21) | | | 14 | | | (33) | |
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Annual Report 2022 | Santander UK Group Holdings plc 139 |
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Credit performance (audited)
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Loans and advances to customers of which: | 5,384 | 4,984 |
–Stage 1 | 5,005 | 4,760 |
–Stage 2 | 350 | 200 |
–Stage 3 | 29 | 24 |
Loss allowances(1) | 67 | 52 |
Stage 3 undrawn exposures | — | — |
Stage 3 ratio | 0.54 | % | 0.49 | % |
Gross write offs | 19 | 25 |
(1)The ECL allowance is for both on and off–balance sheet exposures.
2022 compared to 2021
In 2022, we maintained our prudent Consumer (auto) finance underwriting criteria. The product mix was broadly unchanged, with wholesale balances increasing slightly.
At 31 December 2022, Consumer (auto) finance gross lending (new business) was £2,519m( 2021: £2,383m). Wholesale loans (Stock finance) to car dealerships at 31 December 2022 were approximately 10.1% (2021: 7.3%) of the Consumer loan book. At 31 December 2022, the average Consumer (auto) finance loan size was £17,256 (2021: £16,182).
The risk profile was stable in terms of our credit scoring acceptance policies. The overall risk performance was good with the vast majority of customers paying.
Loan modifications
Forbearance
There were no accounts in forbearance at 31 December 2022 and 31 December 2021.
Other loan modifications
From March 2020 to March 2021, we provided Consumer Finance customers with payment holiday terms. The following table provides information on such loan modifications.
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| 2022 | 2021 |
| £m | £m |
Financial assets modified in the period: | | |
–Amortised cost before modification | — | | 54 | |
–Net modification loss | — | | — | |
Financial assets modified since initial recognition: | | |
–Gross carrying amount of financial assets for which the ECL allowance changed to 12-month measurement in the period | 95 | | 226 | |
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Annual Report 2022 | Santander UK Group Holdings plc 140 |
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CORPORATE & COMMERCIAL BANKING – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL (audited)
The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page 128 also apply to these tables. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stage 1 | Stage 2 | Stage 3 | Total |
Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
£m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 20,604 | | 50 | | 5,914 | | 127 | | 827 | | 248 | | 27,345 | | 425 | |
Transfers from Stage 1 to Stage 2(3) | (2,195) | | (14) | | 2,195 | | 14 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 4,023 | | 92 | | (4,023) | | (92) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (172) | | (1) | | (111) | | (13) | | 283 | | 14 | | — | | — | |
Transfers from Stage 3(3) | — | | — | | 463 | | 135 | | (463) | | (135) | | — | | — | |
Transfers of financial instruments | 1,656 | | 77 | | (1,476) | | 44 | | (180) | | (121) | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (72) | | — | | (41) | | — | | 61 | | — | | (52) | |
Change in economic scenarios(2) | — | | 38 | | — | | 76 | | — | | — | | — | | 114 | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 8,629 | | 16 | | 228 | | 19 | | 43 | | 12 | | 8,900 | | 47 | |
Redemptions, repayments and assets sold(7) | (9,019) | | (15) | | (584) | | (32) | | (53) | | (17) | | (9,656) | | (64) | |
Changes in risk parameters and other movements(6) | 1,968 | | (11) | | (194) | | (27) | | 21 | | (14) | | 1,795 | | (52) | |
Assets written off (7) | — | | — | | — | | — | | (86) | | (24) | | (86) | | (24) | |
At 31 December 2022 | 23,838 | | 83 | | 3,888 | | 166 | | 572 | | 145 | | 28,298 | | 394 | |
Net movement in the period | 3,234 | | 33 | | (2,026) | | 39 | | (255) | | (103) | | 953 | | (31) | |
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ECL charge/(release) to the Income Statement | | 33 | | | 39 | | | (79) | | | (7) | |
Less: Discount unwind | | — | | | — | | | (3) | | | (3) | |
Less: Recoveries net of collection costs | | — | | | — | | | 42 | | | 42 | |
Total ECL charge/(release) to the Income Statement | | 33 | | | 39 | | | (40) | | | 32 | |
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| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2021 | 20,952 | | 77 | | 6,311 | | 199 | | 1,020 | | 350 | | 28,283 | | 626 | |
Transfers from Stage 1 to Stage 2(3) | (1,055) | | (4) | | 1,055 | | 4 | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | 1,579 | | 60 | | (1,579) | | (60) | | — | | — | | — | | — | |
Transfers to Stage 3(3) | (38) | | — | | (37) | | (3) | | 75 | | 3 | | — | | — | |
Transfers from Stage 3(3) | 1 | | — | | 88 | | 40 | | (89) | | (40) | | — | | — | |
Transfers of financial instruments | 487 | | 56 | | (473) | | (19) | | (14) | | (37) | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | (39) | | — | | (22) | | — | | 31 | | — | | (30) | |
Change in economic scenarios(2) | — | | (2) | | — | | (62) | | — | | (1) | | — | | (65) | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | 13,208 | | 6 | | 450 | | 8 | | 12 | | 13 | | 13,670 | | 27 | |
Redemptions, repayments and assets sold(7) | (16,644) | | (15) | | (1,357) | | (17) | | (139) | | (42) | | (18,140) | | (74) | |
Changes in risk parameters and other movements(6) | 2,601 | | (33) | | 983 | | 40 | | 54 | | (7) | | 3,638 | | — | |
Assets written off (7) | — | | — | | — | | — | | (106) | | (59) | | (106) | | (59) | |
At 31 December 2021 | 20,604 | | 50 | | 5,914 | | 127 | | 827 | | 248 | | 27,345 | | 425 | |
Net movement in the period | (348) | | (27) | | (397) | | (72) | | (193) | | (102) | | (938) | | (201) | |
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ECL charge/(release) to the Income Statement | | (27) | | | (72) | | | (43) | | | (142) | |
Less: Discount unwind | | — | | | — | | | (4) | | | (4) | |
Less: Recoveries net of collection costs | | — | | | — | | | 56 | | | 56 | |
Total ECL charge/(release) to the Income Statement | | (27) | | | (72) | | | 9 | | | (90) | |
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Annual Report 2022 | Santander UK Group Holdings plc 141 |
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Committed exposures
Credit risk arises on both on- and off–balance sheet transactions, e.g. guarantees. Therefore, committed exposures are typically higher than asset balances. However, committed exposures can be smaller than the asset balances due to netting. We show Sovereigns and Supranationals net of short positions and Large Corporate reverse repurchase agreement exposures net of repurchase agreement liabilities and include OTC derivatives. The derivative and other treasury product exposures (classified as ‘Financial Institutions’) are also typically lower than the asset balances, 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(audited)
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.
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| Santander UK risk grade | | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total | |
2020 | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
Corporate & Commercial Banking | | | | | | | | | | |
SME and mid corporate | 0 | | 468 | | 1,288 | | 2,640 | | 2,820 | | 3,518 | | 2,790 | | 922 | | 14,446 | | |
Commercial Real Estate | 0 | | 0 | | 65 | | 214 | | 696 | | 3,684 | | 484 | | 9 | | 5,152 | | |
Social Housing | 112 | | 2,631 | | 2,334 | | 0 | | 0 | | 2 | | 0 | | 6 | | 5,085 | | |
| 112 | | 3,099 | | 3,687 | | 2,854 | | 3,516 | | 7,204 | | 3,274 | | 937 | | 24,683 | | |
Corporate & Investment Banking | | | | | | | | | | |
Large Corporate | 174 | | 1,826 | | 3,267 | | 3,882 | | 1,523 | | 157 | | 81 | | 0 | | 10,910 | | |
Financial Institutions | 367 | | 444 | | 639 | | 23 | | 6 | | 0 | | 0 | | 0 | | 1,479 | | |
| 541 | | 2,270 | | 3,906 | | 3,905 | | 1,529 | | 157 | | 81 | | 0 | | 12,389 | | |
Corporate Centre | | | | | | | | | | |
Sovereign and Supranational | 50,867 | | 2,383 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 53,250 | | |
Structured Products | 1,168 | | 1,044 | | 229 | | 41 | | 0 | | 0 | | 0 | | 0 | | 2,482 | | |
Social Housing | 2 | | 2,001 | | 1,814 | | 0 | | 0 | | 0 | | 0 | | 0 | | 3,817 | | |
Financial Institutions | 497 | | 200 | | 9 | | 6 | | 0 | | 0 | | 0 | | 0 | | 712 | | |
Legacy Portfolios in run-off(2) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 156 | | 156 | | |
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Crown Dependencies | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 275 | | 275 | | |
Corporate Centre | 52,534 | | 5,628 | | 2,052 | | 47 | | 0 | | 0 | | 0 | | 431 | | 60,692 | | |
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Total | 53,187 | | 10,997 | | 9,645 | | 6,806 | | 5,045 | | 7,361 | | 3,355 | | 1,368 | | 97,764 | | |
Of which: | | | | | | | | | | |
Stage 1 | 53,187 | | 10,914 | | 9,584 | | 6,541 | | 4,136 | | 4,029 | | 431 | | 1,183 | | 90,005 | | |
Stage 2 | 0 | | 83 | | 61 | | 265 | | 909 | | 3,332 | | 1,904 | | 185 | | 6,739 | | |
Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,020 | | 0 | | 1,020 | | |
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2019 | | | | | | | | | | |
Corporate & Commercial Banking | | | | | | | | | | |
SME and mid corporate | 0 | | 25 | | 798 | | 1,953 | | 4,833 | | 3,896 | | 1,450 | | 299 | | 13,254 | | |
Commercial Real Estate | 0 | | 0 | | 0 | | 426 | | 3,787 | | 1,574 | | 121 | | 149 | | 6,057 | | |
Social Housing | 1,231 | | 3,655 | | 26 | | 0 | | 0 | | 2 | | 4 | | 0 | | 4,918 | | |
| 1,231 | | 3,680 | | 824 | | 2,379 | | 8,620 | | 5,472 | | 1,575 | | 448 | | 24,229 | | |
Corporate & Investment Banking | | | | | | | | | | |
Large Corporate | 281 | | 2,356 | | 4,419 | | 4,558 | | 842 | | 75 | | 115 | | 0 | | 12,646 | | |
Financial Institutions | 383 | | 822 | | 718 | | 11 | | 0 | | 0 | | 0 | | 0 | | 1,934 | | |
| 664 | | 3,178 | | 5,137 | | 4,569 | | 842 | | 75 | | 115 | | 0 | | 14,580 | | |
Corporate Centre | | | | | — | | | | | | |
Sovereign and Supranational | 37,359 | | 2,255 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 39,614 | | |
Structured Products | 1,166 | | 981 | | 396 | | 29 | | 0 | | 0 | | 0 | | 0 | | 2,572 | | |
Social Housing | 934 | | 3,036 | | 90 | | 0 | | 0 | | 0 | | 0 | | 0 | | 4,060 | | |
Financial Institutions | 542 | | 246 | | 43 | | 25 | | 1 | | 0 | | 0 | | 0 | | 857 | | |
Legacy Portfolios in run-off(2) | 0 | | 0 | | 0 | | 130 | | 0 | | 0 | | 110 | | 0 | | 240 | | |
| | | | | | | | | | |
Crown Dependencies | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 1 | | 288 | | 289 | | |
| 40,001 | | 6,518 | | 529 | | 184 | | 1 | | 0 | | 111 | | 288 | | 47,632 | | |
| | | | | | | | | | |
Total | 41,896 | | 13,376 | | 6,490 | | 7,132 | | 9,463 | | 5,547 | | 1,801 | | 736 | | 86,441 | | |
Of which: | | | | | | | | | | |
Stage 1 | 41,896 | | 13,376 | | 6,464 | | 6,940 | | 8,714 | | 4,175 | | 814 | | 719 | | 83,098 | | |
Stage 2 | 0 | | 0 | | 26 | | 192 | | 749 | | 1,372 | | 523 | | 17 | | 2,879 | | |
Stage 3 | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 464 | | 0 | | 464 | | |
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| Santander UK risk grade | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total |
2022 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
| | | | | | | | | |
SME and mid corporate | — | | 336 | | 923 | | 2,341 | | 3,299 | | 5,327 | | 1,791 | | 106 | | 14,123 | |
Commercial Real Estate | — | | 2 | | 111 | | 2,044 | | 2,128 | | 936 | | 185 | | 1 | | 5,407 | |
Social Housing | 44 | | 4,028 | | 3,956 | | 6 | | — | | — | | — | | 1 | | 8,035 | |
| 44 | | 4,366 | | 4,990 | | 4,391 | | 5,427 | | 6,263 | | 1,976 | | 108 | | 27,565 | |
Of which: | | | | | | | | | |
Stage 1 | 39 | | 4,364 | | 4,944 | | 4,202 | | 4,773 | | 4,289 | | 386 | | 108 | | 23,105 | |
Stage 2 | 5 | | 2 | | 46 | | 189 | | 654 | | 1,974 | | 1,018 | | — | | 3,888 | |
Stage 3 | — | | — | | — | | — | | — | | — | | 572 | | — | | 572 | |
| | | | | | | | | |
2021 | | | | | | | | | |
| | | | | | | | | |
SME and mid corporate | — | | 659 | | 714 | | 2,397 | | 3,067 | | 5,545 | | 2,207 | | 66 | | 14,655 | |
Commercial Real Estate | — | | 126 | | 137 | | 1,471 | | 2,228 | | 638 | | 249 | | — | | 4,849 | |
Social Housing | 52 | | 3,961 | | 3,759 | | 9 | | — | | 53 | | — | | 106 | | 7,940 | |
| 52 | | 4,746 | | 4,610 | | 3,877 | | 5,295 | | 6,236 | | 2,456 | | 172 | | 27,444 | |
Of which: | | | | | | | | | |
Stage 1 | 52 | | 3,809 | | 4,359 | | 3,604 | | 4,192 | | 4,138 | | 380 | | 169 | | 20,703 | |
Stage 2 | — | | 937 | | 251 | | 239 | | 1,086 | | 2,005 | | 1,509 | | (114) | | 5,913 | |
Stage 3 | — | | — | | — | | 34 | | 17 | | 93 | | 567 | | 117 | | 828 | |
(1)Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.
(2)Residual structured and asset finance loans (shipping, aviation and structured finance).
Santander UK Group Holdings plc137
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Annual Report 2020 | Risk review
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20202022 compared to 20192021
In Corporate & Commercial Banking, we saw a 2%2022, committed exposure was substantially unchanged, with an increase in committed exposures, with Covid-19 related lendingthe CRE portfolio of 12%., largely offset by reductions in SME and mid Corporate offset by the continued deleveraging of the CRE portfolio. Our CRE portfolio decreased by 15% as we continue to manage our exposure in line with proactive risk management policies.corporate. The rating distribution deterioratedimproved in Corporate & Commercial Bankingthe CRE portfolios following Covid-19 related downgrades.
Following a management reviewrecovery in the credit quality of our structure, customer assets of £2.0bn have transferred from Business Banking (within Retail Banking) to Corporate & Commercial Banking and non-core commercial mortgages of £0.4bn have been transferred from Corporate Centre. We use scorecards for these commercial mortgages, instead of a rating model.
In CIB, committed exposures decreased by 15% mainly due to reductions in our Large Corporate portfolio, largely driven by exposures being refinanced into Banco Santander London Branch as part of the agreed strategy. There has been limited demand for Covid-19 related funding as the majority of CIB customers have had access to equity markets and the Covid Corporate Financing Facility. The rating distribution flattened slightly in CIB following a number of Covid-19 related downgrades.
In Corporate Centre, committed exposures increased by 27% mainly driven by UK Sovereign and Supranational exposures which increased by 34% as part of the management of the liquid asset buffer driven by a change in customer funding, where deposit growth exceeded asset growth, as well as higher receipts of cash margin calls following the volatilitycustomers initially downgraded as a result of Covid-19. The portfolio profileIt has remained short-term, reflecting the purpose of the holdings. Legacy Portfoliosbroadly stable in run–off reduced by 35%. Social Housing exposures reduced by 6%.SME and mid corporate.
Geographical distribution(audited)
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.
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| 2020 | | 2019 |
| UK | Europe | US | Rest of World | Total | | UK | Europe | US | Rest of World | Total |
| £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
Corporate & Commercial Banking | | | | | | | | | | | |
SME and mid Corporate | 14,399 | | 47 | | 0 | | 0 | | 14,446 | | | 13,169 | | 84 | | 0 | | 1 | | 13,254 | |
Commercial Real Estate | 5,151 | | 0 | | 0 | | 1 | | 5,152 | | | 6,057 | | 0 | | 0 | | 0 | | 6,057 | |
Social Housing | 5,085 | | 0 | | 0 | | 0 | | 5,085 | | | 4,918 | | 0 | | 0 | | 0 | | 4,918 | |
| 24,635 | | 47 | | 0 | | 1 | | 24,683 | | | 24,144 | | 84 | | 0 | | 1 | | 24,229 | |
Corporate & Investment Banking | | | | | | | | | | | |
Large Corporate | 9,838 | | 1,052 | | 0 | | 20 | | 10,910 | | | 10,665 | | 1,922 | | 2 | | 57 | | 12,646 | |
Financial Institutions | 655 | | 439 | | 131 | | 254 | | 1,479 | | | 611 | | 849 | | 169 | | 305 | | 1,934 | |
| 10,493 | | 1,491 | | 131 | | 274 | | 12,389 | | | 11,276 | | 2,771 | | 171 | | 362 | | 14,580 | |
Corporate Centre | | | | | | | | | | | |
Sovereign and Supranational | 46,912 | | 1,516 | | 849 | | 3,973 | | 53,250 | | | 33,202 | | 1,549 | | 855 | | 4,008 | | 39,614 | |
Structured Products | 1,683 | | 799 | | 0 | | 0 | | 2,482 | | | 1,710 | | 811 | | 0 | | 51 | | 2,572 | |
Social Housing | 3,817 | | 0 | | 0 | | 0 | | 3,817 | | | 4,060 | | 0 | | 0 | | 0 | | 4,060 | |
Financial Institutions | 301 | | 365 | | 6 | | 40 | | 712 | | | 329 | | 335 | | 157 | | 36 | | 857 | |
Legacy Portfolios in run-off | 60 | | 0 | | 0 | | 96 | | 156 | | | 130 | | 0 | | 0 | | 110 | | 240 | |
| | | | | | | | | | | |
Crown Dependencies | 0 | | 0 | | 0 | | 275 | | 275 | | | 0 | | 0 | | 0 | | 289 | | 289 | |
| 52,773 | | 2,680 | | 855 | | 4,384 | | 60,692 | | | 39,431 | | 2,695 | | 1,012 | | 4,494 | | 47,632 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| UK | Europe | US | Rest of World | Total | | UK | Europe | US | Rest of World | Total |
| £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
| | | | | | | | | | | |
SME and mid corporate | 14,091 | | 32 | | — | | — | | 14,123 | | | 14,612 | | 43 | | — | | — | | 14,655 | |
Commercial Real Estate | 5,407 | | — | | — | | — | | 5,407 | | | 4,849 | | — | | — | | — | | 4,849 | |
Social Housing | 8,035 | | — | | — | | — | | 8,035 | | | 7,940 | | — | | — | | — | | 7,940 | |
| 27,533 | | 32 | | — | | — | | 27,565 | | | 27,401 | | 43 | | — | | 0 | | 27,444 | |
Credit risk mitigation (audited)
| | | | | | | | | | | |
| Gross exposure | Collateral | Net exposure |
| Stage 3 | Stage 3 | Stage 3 |
2022 | £m | £m | £m |
| | | |
SME and mid corporate | 513 | | 169 | | 344 | |
Commercial Real Estate | 59 | | 30 | | 29 | |
| 572 | | 199 | | 373 | |
| | | | | | | | | | | |
2021 | | | |
| | | |
SME and mid corporate | 747 | | 307 | | 440 | |
Commercial Real Estate | 81 | | 37 | | 44 | |
| 828 | | 344 | | 484 | |
138Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 142 |
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Credit risk mitigation (audited)
| | | | | | | | | | | |
| Gross exposure | Collateral | Net exposure |
| Stage 3 | Stage 3 | Stage 3 |
2020 | £m | £m | £m |
Corporate & Commercial Banking | | | |
SME and mid corporate | 853 | | 286 | | 567 | |
Commercial Real Estate | 167 | | 105 | | 62 | |
| 1,020 | | 391 | | 629 | |
Corporate & Investment Banking | | | |
Large Corporate | 0 | | 0 | | 0 | |
| 0 | | 0 | | 0 | |
Corporate Centre | | | |
| | | |
Crown Dependencies | 0 | | 0 | | 0 | |
| 0 | | 0 | | 0 | |
| | | | | | | | | | | |
2019 | | | |
Corporate & Commercial Banking | | | |
SME and mid corporate | 363 | | 52 | | 311 | |
Commercial Real Estate | 89 | | 58 | | 31 | |
| 452 | | 110 | | 342 | |
Corporate & Investment Banking | | | |
Large Corporate | 15 | | 0 | | 15 | |
| 15 | | 0 | | 15 | |
Corporate Centre | | | |
| | | |
Crown Dependencies | 1 | | 0 | | 1 | |
| 1 | | 0 | | 1 | |
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Annual Report 2020 | Risk review
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Credit performance(audited)
We monitor exposures that show potentially higher risk characteristics using our Watchlist process (described in ‘Monitoring’ in the ‘Credit risk management’ section).process. The table below shows the exposures we monitor, and those we classify as Stage 3 by portfolio at 31 December 20202022 and 31 December 2019.2021.
| | | | | | | | | | | | | | | | | | | | |
2020 | Committed exposure | |
| Watchlist | | | |
Fully performing | Enhanced monitoring | Proactive management | Stage 3 | Total (1) | Loss allowances |
£m | £m | £m | £m | £m | £m |
Corporate & Commercial Banking | | | | | | |
SME and mid Corporate | 10,844 | | 340 | | 2,409 | | 853 | | 14,446 | | 478 | |
Commercial Real Estate | 4,191 | | 233 | | 561 | | 167 | | 5,152 | | 125 | |
Social Housing | 5,012 | | 0 | | 73 | | 0 | | 5,085 | | 0 | |
| 20,047 | | 573 | | 3,043 | | 1,020 | | 24,683 | | 603 | |
Corporate & Investment Banking | | | | | | |
Large Corporate | 9,398 | | 252 | | 1,260 | | 0 | | 10,910 | | 33 | |
Financial Institutions | 1,479 | | 0 | | 0 | | 0 | | 1,479 | | 0 | |
| 10,877 | | 252 | | 1,260 | | 0 | | 12,389 | | 33 | |
Corporate Centre | | | | | | |
Sovereign and Supranational | 53,250 | | 0 | | 0 | | 0 | | 53,250 | | 0 | |
Structured Products | 2,482 | | 0 | | 0 | | 0 | | 2,482 | | 35 | |
Social Housing | 3,748 | | 69 | | 0 | | 0 | | 3,817 | | 0 | |
Financial Institutions | 712 | | 0 | | 0 | | 0 | | 712 | | 0 | |
Legacy Portfolios in run-off | 156 | | 0 | | 0 | | 0 | | 156 | | 0 | |
| | | | | | |
Crown Dependencies | 275 | | 0 | | 0 | | 0 | | 275 | | 0 | |
| 60,623 | | 69 | | 0 | | 0 | | 60,692 | | 35 | |
Total loss allowances | | | | | | 671 | |
| | | | | | | | | | | | | | | | | | | | |
2022 | Committed exposure | |
| Watchlist | | | |
Fully performing | Enhanced monitoring | Proactive management | Stage 3 | Total (1) | Loss allowances |
£m | £m | £m | £m | £m | £m |
| | | | | | |
SME and mid corporate | 11,796 | | 431 | | 1,383 | | 513 | | 14,123 | | 355 | |
Commercial Real Estate | 4,765 | | 103 | | 480 | | 59 | | 5,407 | | 38 | |
Social Housing | 7,979 | | 46 | | 10 | | — | | 8,035 | | 1 | |
| 24,540 | | 580 | | 1,873 | | 572 | | 27,565 | | 394 | |
| | | | | | | | | | | | | | | | | | | | |
2019 | | |
Corporate & Commercial Banking | | | | | | |
SME and mid Corporate | 11,397 | | 1,162 | | 332 | | 363 | | 13,254 | | 213 | |
Commercial Real Estate | 5,778 | | 107 | | 83 | | 89 | | 6,057 | | 49 | |
Social Housing | 4,828 | | 90 | | 0 | | 0 | | 4,918 | | 0 | |
| 22,003 | | 1,359 | | 415 | | 452 | | 24,229 | | 262 | |
Corporate & Investment Banking | | | | | | |
Large Corporate | 11,834 | | 252 | | 545 | | 15 | | 12,646 | | 50 | |
Financial Institutions | 1,924 | | 0 | | 10 | | 0 | | 1,934 | | 0 | |
| 13,758 | | 252 | | 555 | | 15 | | 14,580 | | 50 | |
Corporate Centre | | | | | | |
Sovereign and Supranational | 39,614 | | 0 | | 0 | | 0 | | 39,614 | | 0 | |
Structured Products | 2,572 | | 0 | | 0 | | 0 | | 2,572 | | 0 | |
Social Housing | 4,047 | | 13 | | 0 | | 0 | | 4,060 | | 0 | |
Financial Institutions | 854 | | 0 | | 3 | | 0 | | 857 | | 0 | |
Legacy Portfolios in run-off | 240 | | 0 | | 0 | | 0 | | 240 | | 2 | |
| | | | | | |
Crown Dependencies | 288 | | 0 | | 0 | | 1 | | 289 | | 0 | |
| 47,615 | | 13 | | 3 | | 1 | | 47,632 | | 2 | |
Total loss allowances | | | | | | 314 | |
| | | | | | | | | | | | | | | | | | | | |
2021(2) | | |
| | | | | | |
SME and mid corporate | 11,227 | | 520 | | 2,161 | | 747 | | 14,655 | | 376 | |
Commercial Real Estate | 4,344 | | 204 | | 220 | | 81 | | 4,849 | | 46 | |
Social Housing | 7,800 | | — | | 140 | | — | | 7,940 | | 3 | |
| 23,371 | | 724 | | 2,521 | | 828 | | 27,444 | | 425 | |
(1)Includes committed facilities and derivatives. We define ‘Enhanced Monitoring’
(2)New customer management systems have introduced improved portfolio segmentation information. This has led to a realignment of portfolio segmentation and ‘Proactive Management’ inimproved the ‘Monitoring‘ section.identification of portfolios of particular interest. Due to this a restatement of the 2021 figures has taken place.
20202022 compared to 20192021
InAcross Corporate & Commercial Banking, exposures subject towatchlist exposure decreased, enhanced monitoring decreased by 58%.Exposures subject to20% and proactive monitoring by 26% This followed the upgrading of cases as they stabilised after emerging from Covid-19 lockdowns especially in SME and Mid Corporates whilst CRE saw an increase in Proactive Management.
Stage 3 assets also decreased, down 31% with loss allowances decreasing by £31m (7%). The remaining Covid-19 related judgemental adjustments (JAs) were released. New JAs have been introduced to reflect the heightened risks of sectors and counterparties deemed most susceptible to current headwinds.
Loan modifications
Forbearance
The following table (audited) sets out the financial assets that were forborne while they had a seven fold increase.loss allowance measured at lifetime ECL.
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
| £m | | £m |
Financial assets modified in the period: | | | |
–Amortised cost before modification | 240 | | | 243 | |
–Net modification gain/ (loss) | 8 | | | (5) | |
Financial assets modified since initial recognition: | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12-month ECL in the period | 15 | | | 29 | |
We only make forbearance arrangements for lending to customers. The balances (audited) at 31 December 2022 and 31 December 2021, analysed by their staging at the period–end and the forbearance we applied, were:
| | | | | | | | |
| 2022 | 2021 |
| | |
| £m | £m |
Stock(1) | | |
–Term extension | 98 | 150 |
–Interest-only | 238 | 239 |
–Other payment rescheduling | 219 | 204 |
| 555 | 593 |
Of which: | | |
–Stage 1 | 17 | 20 |
–Stage 2 | 173 | 303 |
–Stage 3 | 365 | 270 |
| 555 | 593 |
Proportion of portfolio | 2.0 | % | 2.4 | % |
(1)We base forbearance type on the first forbearance we applied. Tables only show accounts open at the period-end. Amounts are drawn balances and include off balance sheet balances.
2022 compared to 2021
In 2022, forbearance stock decreased overall due to a single case that was first reported as forbearance in 2021, and was repaid in 2022. This was mainlypartially offset by a small increase in the SME and mid Corporate sector where restrictions imposed in response to the Covid-19 pandemic reduced economic activity. Accommodation and food service activities, and wholesale and non-food retail were adversely affected despite the measures taken by the UK Government to support industries through the Covid-19 pandemic. In Commercial Real Estate, falling capital and rental yields along with Covid-19 related rent collection challenges exacerbated structural issues in sub-sectors such as Retail. LTVs in this portfolio are relatively low with almost three quarters of the total CRE portfolio having an LTV below 50%, following planned deleveraging of the portfolio in recent years.other cases.
In CIB, Large Corporate exposures subject to enhanced monitoring remained stable, whilst exposures subject to proactive management more than doubled. The majority of downgrades were in sectors most impacted by Covid-19. There are no Stage 3 exposures following the repayment in full of a single borrower. Within Financial Institutions, there are no exposures subject to enhanced or proactive monitoring.
In Corporate Centre, exposures subject to proactive management reduced. Exposures subject to enhanced monitoring increased slightly within the Social Housing portfolio due to regulatory rather than risk concerns.
Across the Other business segments portfolios, loan loss allowances increased by £357m (114%), largely due to Covid-19. This reflected significant adjustments to economic assumptions and scenario weights, the reclassification of the Staging of corporate loans in the sectors and lending most at risk due to Covid-19, and provision for an unexpected default of a large single name exposure as a result of the Covid-19 pandemic.
140Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 143 |
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Strategic Report | Sustainability and Responsible Banking | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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Loan modifications
Forbearance
The following table (audited)sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre |
| £m | £m | £m | | £m | £m | £m |
Financial assets modified in the year: | | | | | | | |
–Amortised cost before modification | 201 | | 23 | | 0 | | | 160 | | 0 | | 0 | |
–Net modification gain/ (loss) | (5) | | 1 | | 0 | | | 1 | | 0 | | 0 | |
Financial assets modified since initial recognition: | | | | | | | |
–Gross carrying amount of financial assets for which the loss allowance changed to 12-month ECL in the year | 40 | | 0 | | 0 | | | 38 | | 0 | | 0 | |
We only make forbearance arrangements for lending to customers. The balances (audited) at 31 December 2020 and 31 December 2019, analysed by their staging at the year–end and the forbearance we applied, were:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre |
| £m | £m | £m | | £m | £m | £m |
Stock(1) | | | | | | | |
–Term extension | 141 | 23 | 0 | | 66 | 42 | 0 |
–Interest-only | 175 | 0 | 0 | | 153 | 0 | 0 |
–Other payment rescheduling | 180 | 0 | 0 | | 229 | 15 | 0 |
| 496 | 23 | 0 | | 448 | 57 | 0 |
Of which: | | | | | | | |
–Stage 1 | 13 | 0 | 0 | | 61 | 42 | 0 |
–Stage 2 | 179 | 23 | 0 | | 111 | 0 | 0 |
–Stage 3 | 304 | 0 | 0 | | 276 | 15 | 0 |
| 496 | 23 | 0 | | 448 | 57 | 0 |
Proportion of portfolio | 2.0 | % | 0.2 | % | 0 | % | | 1.8 | % | 0.4 | % | 0 | % |
(1)We base forbearance type on the first forbearance we applied. Tables only show accounts open at the year-end. Amounts are drawn balances and include off balance sheet balances.
2020 compared to 2019
In line with guidance from the EBA and PRA in March 2020, concessions required as a result of Covid-19 where the borrower is exhibiting no other signs of financial difficulty are not reported as forbearance.
In Corporate & Commercial Banking, the cumulative forbearance stock increased slightly. Forbearance stock reduced in CIB, following the exit of the previous two forborne cases, and one new forbearance. At 31 December 2020, there was only one forborne case (2019: two cases) in CIB.
Other loan modifications
Since March 2020, we have provided corporates customers with payment holiday terms. For more on this, see 'Covid-19 Support measures in place at 31 December 2020' in 'Santander UK group level - Credit risk review'.
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Annual Report 2020 | Risk review
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PORTFOLIOS OF PARTICULAR INTEREST
Introduction
Some types of lending have higher risk and others stand out for other reasons. We give more detail below on twothe following areas of particular interest.
| | | | | |
Portfolio | Description |
Commercial Real Estate (CRE) | Lending to experienced, professional landlords mainly secured by tenanted UK property. The CRE market experienced a challenging environment in the immediate years after the last financial crisis and has previously seen regular cyclical downturns. For those reasons, thisdownturns, and so is a portfolio of particular interest. We manage and report our Commercial Real EstateCRE portfolio in Corporate & Commercial Banking. |
Social Housing | The Social Housing sector in the UK is critical in ensuring the supply of affordable housing across the country. Housing associations play a prominent role in addressing the UK’s shortage of housing across all tenures. The sector benefits from a zero–loss default history aided by its regulated nature. This is a portfolio of particular interest as we hold a significant position in the market.
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 loans that do not fit our current business strategy, which we manage and report in Corporate Centre. We provide detailed disclosures of our Social Housing portfolios in in the sections above. We provide a summary of our total Social Housing portfolio below, to give a Santander UK–wide view. |
In addition,prior periods, we also gave a summary of our total Social Housing portfolio as we managed part of it in 2020Corporate & Commercial Banking and part of it in Corporate Centre. With effect from 2022, we provided customers with payment holiday termsmanage all our Social Housing portfolio in line withCorporate & Commercial Banking, as explained in Note 2 to the UK Government's Covid-19 guidance. ForConsolidated Financial Statements. As a result, information on our total Social Housing portfolio is now presented in the main Corporate & Commercial Banking section.
Climate change
The global economy is still heavily dependent on fossil fuel energy sources such as coal, natural gas and oil, which significantly contribute to climate change. Energy transmission requires building and maintaining appropriate wholesale networks that can affect the natural environment. We remain committed to reallocating financial flows from fossil fuel consumption, including for electricity generation, to cleaner alternatives as set out in our Environmental, Social and Climate Change Policy.
In order to track and measure how our current lending activities contribute towards the reliance of fossil fuels, in 2022 we analysed our portfolio to identify fossil fuel exposures. We classified lending as a fossil fuel exposure if the counterparty engaged in any of the following activities:
–Oil & Gas: production and treatment including refining, transportation, storage and wholesale distribution
–Mining & Extraction: any coal mining or extraction activities
–Power Generation: clients for who coal-fired generation represents more than 10% of revenues on this, see ‘Covid-19 Support measures in place ata consolidated basis.
At 31 December 2020’2022, we had limited exposure to such counterparties, with these activities making up 0.4% of our Corporate and Commercial Banking lending to non-financial corporates. On an individually assessed basis, clients in 'Santander UK group level - Credit risk review'.
these industries were highly rated and their markets remained highly liquid. We will continue to monitor, disclose and reduce lending which contributes to ongoing fossil fuel use.
Commercial Real Estate
Credit performance
The table below shows the main CRE credit performance metrics at 31 December 20202022 and 31 December 2019.2021.
| | | | | | | | | | | | | | | | | |
| Customer loans(1) | Stage 3(2) | Stage 3 Ratio(3) | Gross write–offs | Total loss allowance |
| £m | £m | % | £m | £m |
2020 | 4,689 | | 165 | | 3.60 | | 13 | | 125 | |
2019 | 5,573 | | 89 | | 1.60 | | 8 | | 49 | |
| | | | | | | | | | | | | | | | | |
| Customer loans | Stage 3 | Stage 3 Ratio | Gross write–offs | Total loss allowance |
| £m | £m | % | £m | £m |
2022 | 4,822 | | 58 | | 1.20 | | — | | 38 | |
2021 | 4,345 | | 79 | | 1.82 | | 25 | | 46 | |
(1)CRE drawn loans in the CRE portfolio of our Corporate & Commercial Banking segment of £4,689m (2019: £5,573m).
(2)We define Stage 3 in the ‘Credit risk management’ section.
(3)Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.
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 20202022 and 31 December 2019.2021.
| | | 2020 | | 2019 | | 2022 | | 2021 |
| | Stock | | Stage 3 | | Stock | | Stage 3 | | Stock | | Stage 3 | | Stock | | Stage 3 |
| | Total | ECL | | Total | ECL | | Total | ECL | | Total | ECL | | Total | ECL | | Total | ECL | | Total | ECL | | Total | ECL |
LTV | LTV | £m | | £m | | £m | | £m | LTV | £m | | £m | | £m | | £m |
Up to 50% | Up to 50% | 3,043 | | 53 | | | 43 | | 13 | | | 3,157 | | 14 | | | 13 | | 7 | | Up to 50% | 2,818 | | 15 | | | 14 | | 1 | | | 2,485 | | 15 | | | 21 | | 5 | |
>50-70% | >50-70% | 1,342 | | 59 | | | 109 | | 42 | | | 1,564 | | 22 | | | 63 | | 16 | | >50-70% | 1,416 | | 7 | | | 2 | | — | | | 1,194 | | 20 | | | 41 | | 14 | |
>70-100% | >70-100% | 49 | | 6 | | | 7 | | 3 | | | 29 | | 1 | | | — | | 1 | | >70-100% | 137 | | 4 | | | 15 | | 3 | | | 35 | | 2 | | | 3 | | — | |
> 100% | > 100% | 8 | | 4 | | | 6 | | 4 | | | 9 | | 4 | | | 6 | | 4 | | > 100% | 67 | | — | | | 1 | | — | | | 37 | | 1 | | | 5 | | 1 | |
Other portfolio (1) | Other portfolio (1) | 230 | | 3 | | | — | | — | | | 809 | | 7 | | | 7 | | 3 | | Other portfolio (1) | 359 | | 12 | | | 26 | | 7 | | | 594 | | 8 | | | 9 | | 3 | |
Total with collateral | Total with collateral | 4,672 | | 125 | | | 165 | | 62 | | | 5,568 | | 48 | | | 89 | | 31 | | Total with collateral | 4,797 | | 38 | | | 58 | | 11 | | | 4,345 | | 46 | | | 79 | | 23 | |
Development loans | Development loans | 17 | | — | | | — | | — | | | 5 | | — | | | — | | — | | Development loans | 25 | | — | | | — | | — | | | — | | — | | | — | | — | |
| | 4,689 | | 125 | | | 165 | | 62 | | | 5,573 | | 48 | | | 89 | | 31 | | | 4,822 | | 38 | | | 58 | | 11 | | | 4,345 | | 46 | | | 79 | | 23 | |
(1)Smaller value transactions, mainly commercial mortgages.
Due to the ongoing Covid-19 pandemic and legal restrictions on travel and inspection, we issued a Temporary Valuation Policy which was in place between April and July 2020. This effectively suspended valuations for the period. For valuations falling due in this period, our approach was to defer this for a maximum of six months.
142Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 144 |
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Strategic Report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
| | | | Credit risk | | | | | | | | |
Refinancing risk
At 31 December 2022, CRE loans of £964m (2021: £1,084m) were due to mature within 12 months. Of these, £17m or 1.8% (2021: £7m or 0.7%) had an LTV ratio higher than is acceptable under our current credit policy, £7m of which were reported as Stage 3 (2021: £4m).
Sector analysis
| Sector | Sector | 2020 | | 2019 | Sector | 2022 | | 2021 |
£m | % | | £m | % | £m | % | | £m | % |
Office | Office | 1,491 | | 32 | | | 1,288 | | 23 | | Office | 1,267 | | 26 | | | 1,127 | | 26 | |
Retail | Retail | 853 | | 18 | | | 850 | | 15 | | Retail | 635 | | 13 | | | 653 | | 15 | |
Industrial | Industrial | 680 | | 15 | | | 699 | | 12 | | Industrial | 749 | | 16 | | | 457 | | 10 | |
Residential | Residential | 766 | | 16 | | | 762 | | 14 | | Residential | 853 | | 18 | | | 720 | | 17 | |
Mixed use | Mixed use | 358 | | 8 | | | 759 | | 14 | | Mixed use | 641 | | 13 | | | 526 | | 12 | |
Student accommodation | Student accommodation | 62 | | 1 | | | 85 | | 1 | | Student accommodation | 81 | | 2 | | | 58 | | 1 | |
Hotels and leisure | Hotels and leisure | 181 | | 4 | | | 268 | | 5 | | Hotels and leisure | 212 | | 4 | | | 210 | | 5 | |
Other | Other | 51 | | 1 | | | 53 | | 1 | | Other | 25 | | 1 | | | — | | — | |
Standardised portfolio(1) | 247 | | 5 | | | 809 | | 15 | | |
Small value transactions portfolio(1) | | Small value transactions portfolio(1) | 359 | | 7 | | | 594 | | 14 | |
| | 4,689 | | 100 | | | 5,573 | | 100 | | | 4,822 | | 100 | | | 4,345 | | 100 | |
(1)Smaller value transactions, mainlyMainly commercial mortgages.
2022 compared to 2021
The CRE portfolio is well diversified across sectors with no significant regional or single name concentration. FallingIn 2022, the market faced falling capital and rental yields along with Covid-19 related rent collection challenges have exacerbated structural issueschanges in certain sub-sectors such as Retail.Retail and Office. However at 31 December 2020,2022, the LTV profile of the portfolio remained conservative with £4,385m£4,234m and 99% (2019: £4,721m95% (2021: £3,679m and 99%98%) of the non–standardised portfolio at or below 70% LTV following planned deleveragingLTV. Almost two thirds of the portfolio. Almost three quarters of the Non-Standardised CRE portfolio havehas an LTV below 50%.
Refinancing risk
At 31 December 2020, CRE loans of £1,337m (2019: £1,172m) were due to mature within 12 months. Of these, £9m or 0.7% (2019: £6m or 0.5%) had an LTV ratio higher than is acceptable under our current credit policy, all of which was reported as Stage 3 (2019: £6m).
2020 compared to 2019
In our CRE portfolio, drawn customer loans decreasedincreased by £884m, as we focus on risk-weighted returns to manage our exposure in line with proactive risk management policies.£477m. In 2020,2022 , we maintained a prudent lending approach, with all>99% of new business (2019:(2021: 100%) written at or below 60% LTV. The weighted average LTV on the CRE portfolio was 45% (2019: 45%)46%.
Drawn facilities subject to enhanced monitoring increaseddecreased by 48% to £225m (2019: £106m)£102m (2021: £198m). Drawn facilities subject to proactive management increased by 537%115% to £522m (2019: £82m)£473m (2021: £220m). The majority of downgrades were in sub sectors most impacted by Covid-19. Stage 3 exposures increaseddecreased to £165m (2019: £89m) as a result of further deterioration in the retail sub-sector.£58m (2021: £79m).
Social Housing
We manage and report our Social Housing portfolio in Corporate & Commercial Banking, except for older Social Housing loans that do not fit our current business strategy, which we manage and report in Corporate Centre. We provide detailed disclosures of our Social Housing portfolios in the sections above. At 31 December 2020 and 31 December 2019, our total Social Housing exposure was:
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| 2020 | 2019 |
| On-balance sheet | Total exposure | Total loss allowances | On-balance sheet | Total exposure | Total loss allowances |
| £m | £m | £m | £m | £m | £m |
Corporate & Commercial Banking | 2,770 | | 5,085 | | — | | 2,794 | | 4,918 | | — | |
Corporate Centre | 3,043 | | 3,817 | | — | | 3,585 | | 4,060 | | — | |
| 5,813 | | 8,902 | | — | | 6,379 | | 8,978 | | — | |
Santander UK Group Holdings plc143
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Annual Report 2022 | Santander UK Group Holdings plc 145 |
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CORPORATE CENTRE – CREDIT RISK REVIEW
Movement in total exposures and the corresponding ECL (audited)
The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page 128 also apply to these tables. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stage 1 | Stage 2 | Stage 3 | Total |
| Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL | Exposures(1) | ECL |
| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 71,693 | | — | | 2 | | — | | 2 | | — | | 71,697 | | — | |
Transfers from Stage 1 to Stage 2(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers to Stage 3(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers from Stage 3(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers of financial instruments | — | | — | | — | | — | | — | | — | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | — | | — | | — | | — | | — | | — | | — | |
Change in economic scenarios(2) | — | | — | | — | | — | | — | | — | | — | | — | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | — | | — | | — | | — | | — | | — | | — | | — | |
Redemptions, repayments and assets sold (7) | (9,687) | | — | | — | | — | | — | | — | | (9,687) | | — | |
Changes in risk parameters and other movements(6) | 399 | | — | | 1 | | — | | (1) | | — | | 399 | | — | |
Assets written off (7) | — | | — | | — | | — | | — | | — | | — | | — | |
At 31 December 2022 | 62,405 | | — | | 3 | | — | | 1 | | — | | 62,409 | | — | |
Net movement in the period | (9,288) | | — | | 1 | | — | | (1) | | — | | (9,288) | | — | |
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ECL charge/(release) to the Income Statement | | — | | | — | | | — | | | — | |
Less: Discount unwind | | — | | | — | | | — | | | — | |
Less: Recoveries net of collection costs | | — | | | — | | | — | | | — | |
Total ECL charge/(release) to the Income Statement | | — | | | — | | | — | | | — | |
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| £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2021 | 75,540 | | 12 | | — | | — | | — | | — | | 75,540 | | 12 | |
Transfers from Stage 1 to Stage 2(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers from Stage 2 to Stage 1(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers to Stage 3(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers from Stage 3(3) | — | | — | | — | | — | | — | | — | | — | | — | |
Transfers of financial instruments | — | | — | | — | | — | | — | | — | | — | | — | |
Net ECL remeasurement on stage transfer(4) | — | | — | | — | | — | | — | | — | | — | | — | |
Change in economic scenarios(2) | — | | — | | — | | — | | — | | — | | — | | — | |
Changes to model | — | | — | | — | | — | | — | | — | | — | | — | |
New lending and assets purchased(5) | — | | — | | — | | — | | — | | — | | — | | — | |
Redemptions, repayments and assets sold(7) | (3,749) | | (12) | | — | | — | | — | | — | | (3,749) | | (12) | |
Changes in risk parameters and other movements(6) | (98) | | — | | 2 | | — | | 2 | | — | | (94) | | — | |
Assets written off (7) | — | | — | | — | | — | | — | | — | | — | | — | |
At 31 December 2021 | 71,693 | | — | | 2 | | — | | 2 | | — | | 71,697 | | — | |
Net movement in the period | (3,847) | | (12) | | 2 | | — | | 2 | | — | | (3,843) | | (12) | |
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ECL charge/(release) to the Income Statement | | (12) | | | — | | | — | | | (12) | |
Less: Discount unwind | | — | | | — | | | — | | | — | |
Less: Recoveries net of collection costs | | — | | | — | | | — | | | — | |
Total ECL charge/(release) to the Income Statement | | (12) | | | — | | | — | | | (12) | |
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Annual Report 20202022 | Santander UK Group Holdings plc | 146 |
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Committed exposures
Credit risk arises on both on- and off–balance sheet transactions, e.g. derivatives.
Rating distribution (audited)
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.
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| Santander UK risk grade | |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 to 1 | Other(1) | Total |
2022 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Corporate Centre | | | | | | | | | |
Sovereign and Supranational | 53,910 | | 1,077 | | — | | — | | — | | — | | — | | — | | 54,987 | |
Structured Products | 136 | | 1,162 | | 875 | | — | | — | | — | | — | | — | | 2,173 | |
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Financial Institutions | 1,191 | | 676 | | 635 | | 26 | | — | | — | | — | | — | | 2,528 | |
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Crown Dependencies | — | | — | | — | | — | | — | | — | | — | | 1,141 | | 1,141 | |
| 55,237 | | 2,915 | | 1,510 | | 26 | | — | | — | | — | | 1,141 | | 60,829 | |
Of which: | | | | | | | | | |
Stage 1 | 55,237 | | 2,915 | | 1,510 | | 26 | | — | | — | | — | | 1,137 | | 60,825 | |
Stage 2 | — | | — | | — | | — | | — | | — | | — | | 3 | | 3 | |
Stage 3 | — | | — | | — | | — | | — | | — | | — | | 1 | | 1 | |
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2021 | | | | | | | | | |
Corporate Centre | | | | | | | | | |
Sovereign and Supranational | 57,415 | | 1,051 | | — | | — | | — | | — | | — | | — | | 58,466 | |
Structured Products | 573 | | 1,064 | | 197 | | 41 | | | | | — | | 1,875 | |
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Financial Institutions | 501 | | 534 | | 361 | | 7 | | — | | — | | — | | — | | 1,403 | |
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Crown Dependencies | — | | — | | — | | — | | — | | — | | — | | 742 | | 742 | |
| 58,489 | | 2,649 | | 558 | | 48 | | — | | — | | — | | 742 | | 62,486 | |
Of which: | | | | | | | | | |
Stage 1 | 58,489 | | 2,649 | | 558 | | 48 | | — | | — | | — | | 740 | | 62,484 | |
Stage 2 | — | | — | | — | | — | | — | | — | | — | | 2 | | 2 | |
Stage 3 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
(1)Smaller exposures mainly in the commercial mortgage portfolio, and Crown Dependencies residential mortgages 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).
2022 compared to 2021
Committed exposures decreased by 2.7% mainly driven by UK Sovereign and Supranational exposures, as part of normal liquid asset portfolio management, which reduced by 6.0%. The portfolio profile remained short-term, reflecting the purpose of the holdings.
Geographical distribution (audited)
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.
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| 2022 | | 2021 |
| UK | Europe | US | Rest of World | Total | | UK | Europe | US | Rest of World | Total |
| £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
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Sovereign and Supranational | 50,806 | | 1,886 | | 83 | | 2,212 | | 54,987 | | | 54,651 | | 950 | | 469 | | 2,396 | | 58,466 | |
Structured Products | 1,379 | | 422 | | 4 | | 368 | | 2,173 | | | 1,219 | | 656 | | — | | 0 | | 1,875 | |
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Financial Institutions | 1,075 | | 1,036 | | 230 | | 187 | | 2,528 | | | 536 | | 572 | | 81 | | 214 | | 1,403 | |
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Crown Dependencies | — | | — | | — | | 1,141 | | 1,141 | | | — | | — | | — | | 742 | | 742 | |
| 53,260 | | 3,344 | | 317 | | 3,908 | | 60,829 | | | 56,406 | | 2,178 | | 550 | | 3,352 | | 62,486 | |
Credit performance (audited)
We monitor exposures that show potentially higher risk characteristics using our Watchlist process. In Corporate Centre committed exposures were all fully performing at 31 December 2022 and 31 December 2021.
Loan modifications (audited)
There were no loan modifications made in 2022 and 2021.
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Annual Report 2022 | Santander UK Group Holdings plc 147 |
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Market risk
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| Overview Market risk comprises bankingnon-traded market risk and tradingtraded market risk. BankingNon-traded market risk is the risk of loss of income, economic or economicmarket value due to changes to interest rates in the bankingnon-trading book or to changes in other market risk factors (e.g. credit spread and inflation risk), where such changes would affect our net worth through an adjustment to revenues, assets, liabilities and off-balance sheet exposures in the bankingnon-trading book.
TradingTraded market risk is the risk of changes in market factors that affect the value of the positions in the trading book. We have no significant traded market risk exposure.
In this section, we set out which of our assets and liabilities are exposed to bankingnon-traded and tradingtraded market risk. Then we explain how we manage these risks and discuss our key market risk metrics. We also provide an update on the process of replacing LIBOR and other Interbank Offered Rates. | | | Key metrics Santander UK plc group Net Interest Margin (NIM)Income (NII) sensitivity to +50bps+100bps was £225m£238m and to ‑50bps‑100bps was £(15)£(194)m (2019: £99m(2021: £334m and £56m)£(459)m).
SFS NIM sensitivity to +50bps was £6m and to ‑50bps was £(1)m (2019: £19m and £(14)m)
Santander UK plc group Economic Value of Equity (EVE) sensitivity to +50bps+100bps was £367m and to ‑50bps was £(585)m (2019: £10m and £(88)m)
SFS EVE sensitivity to +50bps was £(4)£(501)m and to ‑50bps‑100bps was £(7)£651m (2021: £(399)m (2019: £23m and £(22)m)£147m).
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BALANCE SHEET ALLOCATION BY MARKET RISK CLASSIFICATION (AUDITED)
We manage our assets and liabilities exposed to market risk as either banking or trading market risk. We classify all our assets and liabilities exposed to market risk as bankingnon-traded market risk, except for certain derivativesportfolios that we manage on amust classify as trading intent basis.books for regulatory purposes (such as selling derivatives or derivative-based products to clients), of which we must fair value for accounting reasons (such as assets in the eligible liquidity pool). For accounting purposes, we classify all derivatives as held for trading unless they are designated as being in a hedging relationship. The derivatives that we manage on a trading intent basis are a small proportion of the derivatives that we classify as held for trading for accounting purposes. For more, see Note 11 to the Consolidated Financial Statements.
BANKINGNON-TRADED MARKET RISK
OUR KEY BANKINGNON-TRADED MARKET RISKS (AUDITED)(audited)
BankingNon-traded market risk mainly comes from providing banking products and services to our customers, as well as our structural balance sheet exposures. It arises in all our business segments.
In Retail Banking, Consumer Finance and Corporate & Commercial Banking, it is a by-product of us writing customer business and we transfer most of these risks to Corporate Centre to manage. The only types of bankingnon-traded market risk that we keep in Retail Banking, Consumer Finance and Corporate & Commercial Banking are short-term mismatches due to forecasting variances in prepayment and launch risk. This is where customers repay their loans earlier than their expected maturity date or do not take the expected volume of new products.
In Corporate & Investment Banking, it arises from lending to corporates, which we also transfer to Corporate Centre to manage. Corporate Centre also manages our structural balance sheet exposures, such as foreign exchange and Income Statement volatility risk.
Our key bankingnon-traded market risks are:
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Key risks | Description |
Interest rate risk | Yield curve risk: comes from timing mismatches in repricing fixed and variable rate assets, liabilities and off-balance sheet instruments. It also comes from investing non-rate sensitive liabilities in interest-earning assets. We mainly measure yield curve risk with NIM and EVE sensitivities, which are measures that are commonly used in the financial services industry. We also use other risk measures, such as Value at Risk (VaR) which is a statistical measure based on a historical simulation of events, and stress testing. Our NIM and EVE sensitivities cover all the material yield curve risk in our banking book balance sheet. Basis risk: comes from pricing assets using a different rate index to the liabilities that fund them. We are exposed to basis risks associated with Bank of England bank rate, reserve rate linked assets we deposit with central banks, and the Sterling Overnight Index Average (SONIA) rate, and LIBOR rates of different terms. As LIBOR and other Interbank Offered Rates are being replaced, we continue to engage with stakeholders across the business to ensure we capture and understand new risks as they emerge.rate. |
Spread risksrisk | Spread risk arises when the value of assets or liabilities which are accounted for at fair value (either through Other Comprehensive Income or through Profit and Loss) are affected by changes in the credit spread. We measure these spreads as the difference between the discount rate we use to value the asset or liability, and an underlying interest rate curve. Spread risks can be split into Swap Spread (where the instrument has been issued by a Sovereign counterparty) and Credit Spread (where the instrument has been issued by for example a corporate or bank counterparty). It mainly arises in the bond portfolios we hold for liquidity purposes. We measure spread risk with sensitivities, stress tests and VaR measures. |
Foreign exchange risk | Our banking businesses operate mainly in sterling markets, so we do not create significant foreign exchange exposures. The only exception to this is money we raise in foreign currencies. For more on this, see ‘Wholesale funding’ in the ‘Liquidity risk’ section. |
Income statement volatility risk | We measure most of the assets and liabilities in our banking book balance sheet at amortised cost. We sometimes manage their risk profile by using derivatives. As all derivatives are accounted for at fair value, the mismatch in their accounting treatment can lead to volatility in our Income Statement. This happens even if the derivative is an economic hedge of the asset or liability. |
NON-TRADED MARKET RISK MANAGEMENT
Risk appetite
Our Structural and Market Risk framework sets out our high-level arrangements and standards to manage, control and oversee non-traded market risk, and is part of our overall Risk Framework. Our Risk Appetite sets the controls, risk limits and key risk metrics for non-traded market risk. We show risk appetite by the income and value sensitivity limits we set in our Risk Appetite, at both Santander UK and Banco Santander group levels.
144Risk measurement Santander UK Group Holdings plc
We mainly measure our exposures with NII and EVE sensitivity analysis. We support this with VaR risk measures and stress testing. We also monitor our interest rate repricing gap. We regularly review our risk models and metrics including underlying model assumptions to ensure they continue to reflect the risks inherent in the current rate environment and regulatory expectations.
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Annual Report 2022 | Santander UK Group Holdings plc 148 |
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BANKING MARKET RISK MANAGEMENT
Risk appetite
Our framework for dealing with market risk is part of our overall Risk Framework. The Structural and Banking Market Risk framework sets out our high-level arrangements and standards to manage, control and oversee banking market risk. Our Risk Appetite sets the controls, risk limits and key risk metrics for banking market risk. We articulate risk appetite by the income and value sensitivity limits we set in our Risk Appetite, at both Santander UK and Banco Santander group levels.
Risk measurement
For banking market risk, we mainly measure our exposures with NIMNII and EVE sensitivity analysis. We support this with VaR risk measures and stress testing. We also monitor our interest rate repricing gap.
sensitivities NIM and EVE sensitivities(audited)
The calculations for NIMNII and EVE sensitivities involve many assumptions, including expected customer behaviour (such as early repayment of loans) and how interest rates may move. These assumptions are a key part of our overall control framework, so we update and review them regularly.
Our NIMNII and EVE sensitivities include the interest rate risk from all our banking book positions. Our banking book positions generate almost all our reported net interest income.
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NIM sensitivity | |
–NII sensitivityNIM
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NII sensitivity is an income-based measure we use to forecast the changes to interest income and interest expense in different scenarios. It gives us a combined impact on net interest income over a given period – usually 12 or 36 months. | | |
–We calculate NIMNII sensitivity by simulating the NIMNII using two2 yield curves. The difference between the two NIM2 NII totals is the NIMNII sensitivity.
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–Our main model assumptions are that:
–The balance sheet is dynamic. This means that it includes the run-off of current assets and liabilities as well as retained and new business
–We use a behavioural balance sheet rather than contractual one. This means that we adjust balances for behavioural or assumed profile. We do this with most retail products whose behavioural maturity is different to the contractual maturity. This is usually because customers are exercising the option to withdraw or prepay early, or there is no contractual maturity,
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EVE sensitivity |
–We calculate EVE sensitivity as the change in the net present value of all the interest rate sensitive items in the banking book balance sheet for a defined set of instantaneous parallel and non-parallel shifts in the yield curve. |
–We use a static balance sheet. This means that all balance sheet items run-off according to their contractual, behavioural or assumed run-off behaviour (whichever is appropriate), and there is no retained or new business.
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The limitations of sensitivities
We use sensitivities to measure the impact of standard, instantaneous, parallel shifts in relevant yield curves. The advantage of using standard parallel shifts is they generally give us a constant measure of the size of our market risk exposure, with a simple and consistent stress. This compares to specific scenarios like ‘flat rates’. The magnitude of flat rates depends on the shape of the current curve and the shift required to reach the flat rate scenario.
There is one exception to the relative simplicity of parallel shifts. In order to limit negative interest rates, the yield curve may be ‘floored’. Using material parallel shocks does not always seem realistic, or it might not necessarily test the scenarios that have the most impact on us. So weWe also run non-parallel stress tests, too, to calculate the impact of some plausible non-parallel scenarios, and over various time periods for income stresses, usually one or three years.
VaRValue at Risk (VaR) (audited)
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VaR |
–VaR indicates the losses that we might suffer because of unfavourable changes in the markets under normal (non-stressed) market conditions. |
–We run a historical simulation using the past two years ofhistorical daily price moves at a 99% confidence level, to find how much we might lose, – the VaR. normally at a 99% confidence level. |
–For any given day’s position, we expect to suffer losses greater than the VaR estimate 1% of the time – once every 100 trading days, or two to three times a year.
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–This gives us a consistent way of assessing risk for all relevant market risk factors in our portfolios.
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The limitations of VaR
VaR is a useful and important market standard measure of risk, but it does have some limitations. These include:
–VaR assumes what happened in the past is a reliable way to predict what will happen in the future. This may not always be the case
–VaR is based on positions at the end of the business day so it doesn’t include intra-day positions
–VaR does not predict how big the loss could be on the 1% of trading days that it is greater than the VaR
–Using a time horizon of one day means VaR does not tell us everything about exposures that we cannot liquidate or hedge within a day, or products with infrequent pricing.
Back-testing – comparing VaR estimates with reality
To check that the way we estimate VaR is reasonable, we back-test our VaR by comparing it against both actual and hypothetical profits and losses, using a one-day time horizon. Back-testing allows us to identify exceptions – times when the predictions were out of line with what happened. We can then look for trends in these exceptions, which can help us decide whether we need to recalibrate our VaR model.
Other ways of measuring risk
As well as using sensitivities and stress tests, we can measure banking market risk using net notional positions. This can give us a simple view of our exposure, although we generally need to combine it with other risk measures to cover all aspects of a risk profile, such as projected changes over time.
Other metrics we can use include Earnings at Risk (EaR). Although VaR can be useful as it captures changes in economic values, as we describe above, VaR will not reflect the actual Income Statement impact of most of our banking book positions. This is because we account for them at amortised cost rather than fair value. EaR is like VaR but captures changes in income rather than value. We use this approach mainly to generate a one-year EaR measure to assess Basis risk.
Santander UK Group Holdings plc145
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Annual Report 2020 | Risk review
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Stress testing
Stress testing is an essential part of our risk management. It helps us to measure and evaluate the potential impact on portfolio values of more extreme, although plausible, events or market moves. We express limits as on how much we could lose in a stress event, and this restricts how much risk we take.
Stress testing scenarios
Simple stress tests (like parallel shifts in relevant curves) give us clear measures of risk control and a consistent starting point for setting limits. More complex, multi-factor and multi-time period stress tests can give us information about specific potential events. They can also test outcomes that we might not capture through parallel stresses or VaR-type measures because of data or model limitations.measures. We can also use stress tests to estimate losses in extreme market events beyond the confidence level used in VaR models.
We can adapt our stress tests to reflect current concerns such as Brexit,climate change risk, the Covid-19 pandemic and other macroeconomic events or changing market conditions quicker than we can with other risk measures, like VaR.conditions. We can include bothrun individual business area stresses and Santander UK-wide scenarios. We can produce
Other ways of measuring risk
As well as using sensitivities and stress tests, we can measure non-traded market risk using eithernet notional positions. This can give us a simple view of our exposure, although we generally need to combine it with other risk measures to cover all aspects of a risk profile, such as projected changes over time. Other metrics we can use include Earnings at Risk (EaR). EaR is like VaR but captures changes in income or value measures. They cover one or more categories of exposures on an accruals basis or at fairrather than value. We use expert judgementthis approach for example to define appropriate hypothetical stress tests and any adjusting assumptions based on the balance sheet, management actions and customer behaviour.
How we use stress testing
We discuss stress testing results at senior management committees. They affect Corporate Centre’s decisions by highlighting possible risks in the banking book and the effectiveness of remedial actions we could take. We compare stress test results with stress limits and triggers set by our internal committees, or against metrics set by the PRA. If the results are over our limits or triggers, we take remedial actions and follow an escalation process.generate a one-year EaR measure to assess Basis risk.
Risk mitigation (audited)
We typically hedge the interest rate risk of the securities we hold for liquidity and investment purposes with interest rate swaps. We retain spread exposures, and these are the key drivers of the VaR and stress tests we use to assess the risk of the portfolio. We mitigate Income Statement volatility mainly through hedge accounting. We monitor any hedge accounting ineffectiveness that might lead to Income Statement volatility with a VaR measure and trigger, reported monthly. For our accounting policies for derivatives and hedge accounting, see Note 1 to the Consolidated Financial Statements.
We typically hedge the interest rate risk of the securities we hold for liquidity and investment purposes with interest rate swaps, retaining spread exposures. These retained exposures are the key drivers of the VaR and stress tests we use to assess the risk of the portfolio.
We hedge our foreign currency funding positions back to sterling, so our foreign exchange positions tend to be residual exposures that remain after hedging. These positionsexposures could be, for example, to ‘spot’ foreign exchange rates onor to cross currency basis. We monitor foreign exchange risk against absolute net exposures and VaR-based limits and triggers.
For more on this, see ‘Funding strategy‘ and ‘Term issuance’ in the ‘Liquidity risk’ section.
Risk monitoring and reporting (audited)
We monitor the bankingour non-traded market risks of the securities we hold for liquidity and investment purposes using sensitivities, VaR and stress tests. We report them against limits and triggers to senior management daily and to ALCO and ERCC each month. The VaR we report captures all key sources of volatility (including interest rate and spread risks) to fully reflect the potential volatility.
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| Following the decision by global regulators to phase out IBORs and replace them with alternative reference rates, we set up a project to oversee the design of alternative reference rate products and the transition for any of our contracts that could be affected. The CFO sponsors the project and it is driven by senior staff from across the business, including our client-facing business areas, Legal, Compliance, Risk, Operations and Technology, and Finance. It has a formal governance structure, including a Senior Management Forum that meets monthly, and thematic and product working groups. ALCO and the Board Risk Committee receive regular reports.
In 2020, we deployed new products to support the transition off IBORs and completed the transition of some existing IBOR agreements. We continued to actively participate in a wide range of industry forums. Following our progress in 2020, we are confident that we will be able to process transitions to risk-free rates (RFRs) that will be needed in 2021 for interest rate benchmarks that cease to be available. We have in place detailed plans, processes and procedures to support the transition throughout 2021 (including for amending the contractual terms of affected financial instruments to incorporate new benchmark rates) and will keep them under review to ensure they remain consistent with industry standards as they evolve.
IBOR reform exposes banks to various risks, which we are monitoring closely. These risks include:
–Conduct risk arising from discussions with clients and market counterparties due to the changes to existing contracts needed to effect IBOR transition
–Risk of financial losses to our clients and us that markets are disrupted due to IBOR transition
–Pricing risk from potential lack of market data if liquidity in IBORs reduces and some RFRs are not yet liquid
–Operational risk arising from changes to our IT systems and processes, and the risk of payments being disrupted if an IBOR ceases to be available
–Accounting risk if our hedging relationships fail, and from unrepresentative income statement volatility as financial instruments transition to RFRs.
While these risks may be increased by diverging approaches to IBOR transition in different geographies, our main exposures are to GBP LIBOR corporate loans and derivatives, and we are closely monitoring IBOR reform developments in different countries. The current expectation is that GBP, EUR, JPY and CHF LIBOR, and one week and two month USD LIBOR, will generally cease to be available for use after 31 December 2021. The other USD LIBOR tenors are currently expected to cease after 30 June 2023. Our main new alternative reference rates are:
–Sterling Overnight Index Average (SONIA) which replaces GBP LIBOR, and
–the Secured Overnight Financial Rate (SOFR), which replaces USD LIBOR.
We also recognise that IBOR transition presents potential challenges for our customers. We have communicated with customers and have launched a website to provide more information and to help outline the possible options available. We are also actively planning further customer communications on transitioning existing agreements off impacted IBORs.
For quantitative information, see Note 43 to the Consolidated Financial Statements.
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146Santander UK Group Holdings plc
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BANKING
NON-TRADED MARKET RISK REVIEW
Interest rate risk
Yield curve risk
The table below shows how our base casenet interest income and valuation would be affected by a 50 basis point parallel shift (both up and down) applied instantaneously to the yield curve at 31 December 20202022 and 31 December 2019 for the Santander UK plc group and SFS.2021. Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable. 50In 2022, we moved to focus on 100 basis points is(bps) from previously disclosed sensitivities of 50bps and 25bps. The shift reflects a more realistic stress in the stress we typically focuscurrent rate environment. We have replaced the previously disclosed sensitivities of 50bps and 25bps for 2021 with 100 bps sensitivities for consistency with 2022.
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| | | 2022 | | | 2021 |
| | | +100bps | -100bps | | | +100bps | -100bps |
| | | £m | £m | | | £m | £m |
NII sensitivity (audited)(1) | | | 238 | | (194) | | | | 334 | | (459) | |
EVE sensitivity | | | (501) | | 651 | | | | (399) | | 147 | |
(1) Based on for banking market risk controls, although we also monitor sensitivities to other parallel and non-parallel shifts as well as scenarios.
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| 2020 | | 2019 |
| +50bps | -50bps | | +50bps | -50bps |
| £m | £m | | £m | £m |
NIM sensitivity (audited) | 225 | | (15) | | | 99 | | 56 | |
EVE sensitivity | 367 | | (585) | | | 10 | (88) | |
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| | | | | SFS |
NIM sensitivity (audited) | 6 | | (1) | | | 19 | (14) |
EVE sensitivity | (4) | | (7) | | | 23 | (22) |
modelling assumptions of repricing behaviour..
Basis risk
We report basis risk using the EaR approach.
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| 2020 | 2019 |
| £m | £m |
Basis risk EaR | 8 | | 18 | |
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| 2022 | 2021 |
| £m | £m |
Basis risk EaR | 2 | | 2 | |
Interest rate repricing gap
The table below shows the interest rate repricing gap of our balance sheet by repricing buckets. | | | | | | | | | | | | | | | | | | | | | | | |
| 3 months | 1 year | 3 years | 5 years | >5years | Not sensitive | Total |
2022 | £m | £m | £m | £m | £m | £m | £m |
Assets | 106,980 | | 44,748 | | 79,006 | | 52,489 | | 5,249 | | 14,123 | | 302,595 | |
Liabilities | 135,801 | | 30,262 | | 58,526 | | 51,161 | | 3,833 | | 25,023 | | 304,606 | |
Off-balance sheet | 31,378 | | (16,133) | | (16,972) | | 723 | | 3,015 | | — | | 2,011 | |
Net gap | 2,557 | | (1,647) | | 3,508 | | 2,051 | | 4,431 | | (10,900) | | — | |
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| 3 months | 1 year | 3 years | 5 years | >5years | Not sensitive | Total |
2020 | £m | £m | £m | £m | £m | £m | £m |
Assets | 121,812 | | 47,975 | | 71,729 | | 37,114 | | 7,944 | | 16,513 | | 303,087 | |
Liabilities | 191,178 | | 22,836 | | 21,013 | | 16,322 | | 27,385 | | 25,551 | | 304,285 | |
Off-balance sheet | 25,788 | | (11,081) | | (17,322) | | (1,794) | | 5,607 | | — | | 1,198 | |
Net gap | (43,578) | | 14,058 | | 33,394 | | 18,998 | | (13,834) | | (9,038) | | — | |
| 2019 | | |
2021 | | 2021 | |
Assets | Assets | 107,155 | | 50,284 | | 67,439 | | 32,918 | | 12,561 | | 16,539 | | 286,896 | | Assets | 111,211 | | 45,979 | | 77,726 | | 44,418 | | 7,191 | | 16,930 | | 303,455 | |
Liabilities | Liabilities | 188,773 | | 17,513 | | 22,774 | | 12,892 | | 21,900 | | 24,064 | | 287,916 | | Liabilities | 190,649 | | 17,328 | | 25,735 | | 16,108 | | 28,733 | | 25,551 | | 304,104 | |
Off-balance sheet | Off-balance sheet | 14,945 | | (18,495) | | 4,481 | | (1,516) | | 1,605 | | — | | 1,020 | | Off-balance sheet | 27,369 | | (18,508) | | (19,842) | | 3,447 | | 8,183 | | — | | 649 | |
Net gap | Net gap | (66,673) | | 14,276 | | 49,146 | | 18,510 | | (7,734) | | (7,525) | | — | | Net gap | (52,069) | | 10,143 | | 32,149 | | 31,757 | | (13,359) | | (8,621) | | — | |
Spread risksrisk
The table below shows the risk metrics covering the portfolios of securities we hold for liquidity and investment purposes. | | | | | | | | |
| 2022 | 2021 |
| £m | £m |
VaR | 3 | | 4 | |
Worst three month stressed loss | 46 | | 56 | |
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| 2020 | 2019 |
| £m | £m |
VaR | 7 | | 3 | |
Worst three month stressed loss | 93 | | 102 | |
20202022 compared to 20192021
The movement in Santander UK plc group NIM and EVE sensitivities in 2020 was largely driven by further margin compression risk as a result of lower levels of the yield curve following the base rate cut in March 2020 and continuing growth in administered rate liability volumes. The movement in Santander UK plc group sensitivities also reflect the transfer of mortgages from Santander UK plc to Santander Financial Services plc during 2020.
During the year, we periodicallyWe regularly review our risk models and metrics including underlying modelling assumptions to ensure they bettercontinue to reflect the risks inherent in the current rate environment and incorporate regulatory expectations. These
NII Sensitivity to a -100bps stress reduced to £(194)m 2021: £(459)m) as the risk of margin compression as a result of customer deposit rates becoming floored reduced in the higher rate environment. The NII sensitivity to a +100bps parallel stress reduced to £238m (2021: £334m), as the mix of customer liabilities changed in the higher rate environment.
EVE Sensitivity to a +100bps stress increased to £(501)m (2021: £(399)m) in the higher rate environment. This was driven by changes in our underlying assumptions for risk measurement purposes also contributed to the movementsmix of customer liabilities, offset by a reduction in the year.
The basis risk EaR in 2020 decreased due to the natural evolutionprofile of the balance sheet leadingstructural position and customer behaviour in response to a reduced underlying net basis position.
Santander UK Group Holdings plc147
higher rates.
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TRADINGTRADED MARKET RISK
OUR KEY TRADING MARKET RISKS (AUDITED)
We have no significant traded market risk exposure. Our main tradingonly exposure to traded market risks are in Corporate & Investment Banking. They comerisk comes from providing permitted financial services to permitted customers, in our customers.main Ring-Fenced Bank, Santander UK plc. Our exposures are affected by market movements in interest rates, credit spreads, and foreign exchange. We do not have trading market risk in Retail Banking or Corporate & Commercial Banking. Tradingexchange rates. Traded market risk can reduce our net income.
We only have a very small amount of trading market risk in the Santander UK ring fenced bank. This is from permitted products and permitted customers. We hedge risks from client trades, and our books are as close to back-to-back as possible. Marketpossible, with market risk is hedged with Banco Santander SA or CCPs. This is required by Banking Reform legislation.
Our ring-fenced bank Santander UK plc has two trading desks. The Link Desk sells ring-fenced bank permissible products to clients.transacts derivatives with our corporate clients that are permitted under the ring-fencing regime. The Retail Structured Products desk (RSP) sells investments (Santander UK plc issued notes) to retail investors, through our UK branches and other channels. The Link Desk is exposed to the credit quality of our clients. We adjust valuations for this - Credit Valuation Adjustment (CVA), which feeds our valuations and hence income and expenses. The low market risk in our trading business means that CVA is the main driver of income movements, along with similar factors – Debt Valuation Adjustment (DVA) driven by our own credit, and Liquidity Valuation Adjustment (LVA) driven by the market price of liquidity. These valuation adjustments are collectively referred to as XVAs.
We calculate market risk capital using standard rules.
TRADING MARKET RISK MANAGEMENT
Risk appetite
Market risk is managed within our overall Risk Framework. The market risk framework sets our high level arrangements and standards for managing, controlling, and overseeing trading market risk. Our Risk Appetite for trading market risk is low. We only need to report a qualitative measure to the Board. We monitor trading market risk using stress measures.
Risk measurement
We have a range of ways of measuring trading market risk, including stress testing (explained in the Banking market risk management section above) and detailed sensitivity measures.
Stress testing
This is an essential part of our risk management. It helps us measure and evaluate the possible results of extreme, although plausible, events or market moves. We set limits on what we could lose in a stress event. This restricts how much risk we take.
Stress testing scenarios
We calculate the impact of 100 scenarios on our trading books every month. The scenarios we create may be inspired by past events, like the global financial crisis. They may include ways that unusual market conditions could happen. They include interest rates, equity prices and exchange rates. Most are reported against limits, and so could lead to our front office being asked to reduce risk. Our scenarios are not all calibrated to the same severity; some may be for a much longer holding period or a completely artificial and unrealistic scenario. We therefore do not limit all of them in the same way.
How we use stress testing
We use limits to manage how much we can lose in a crisis. This limits the risk we take. We make sure that plausible losses are below the Risk Appetite set by the Board. We report to senior management regularly at the Market & Structural Risk Control Forum.
Risk mitigation (audited)
We manage and control trading market risk within clear limits. There are specific levels that need escalation or action. This means we limit the impact of negative market movements. We keep the areas that create trading market risk separate from areas which control and oversee risk.
Risk monitoring and reporting (audited)
We maintain a complete set of written policies, procedures, and processes. These make sure we identify, assess, manage, and report trading market risk.
TRADING MARKET RISK REVIEW
2020 compared to 2019
In 2020, there were no significant changes to our trading market risk exposures in the Santander UK plc group. We are only exposed to a small amount of trading market risk. This is from permitted products sold to permitted customers, offset by permitted market risk hedges.
The Internal VaR for exposure to tradingtraded market risk in 2020 and 2019at 31 December 2022 was less than £1m.£1m (2021: less than £1m).
148Santander UK Group Holdings plc
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Liquidity risk
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| Overview Liquidity risk is the risk that we do not have thesufficient liquid financial resources available to meet our obligations when they fall due, or we can only secure such resources at excessive cost. In this section, we describe our sources and uses of liquidity and how we manage liquidity risk. We also analyse our key liquidity metrics, including our LCRs and our eligible liquidity pools. We then explain our funding strategy and structure and we analyse our wholesale funding. Finally, we analyse how we have encumbered some of our assets to support our funding activities.
| | | Key metrics LCR of 163% (2021: n/a) RFB LCR of 157% (2021: 168%) RFB DoLSub LCR of 150% (2019: 142%152% (2021: 166%) SFS LCR of 165% (2019: 471%218% (2021: 206%) Wholesale funding and AT1 with maturity <1 year £21.1bn (2019: £22.5bn)£11.0bn (2021: £10.2bn) LCR eligible liquidity pool of £49.0bn (2021: n/a) RFB DoLSub LCR eligible liquidity pool of £51.5bn (2019: £42.0bn)£46.3bn (2021: £51.4bn) SFS LCR eligible liquidity pool of £2.8bn (2019: £5.7bn)£2.7bn (2021: £2.8bn) | |
OUR KEY LIQUIDITY RISKS (AUDITED)(audited)
Through our LRA framework, we manage our funding or structural contingent and market liquidity risks wherever they arise. This can be in retail and corporate deposit outflows, wholesale secured and unsecured liquidity outflows and off-balance sheet activities. Other risks our framework covers include funding concentrations, intra-day cash flows, intra-group commitments and support, franchise retention and franchise retention.cross currency risk.
Our main sources of liquidity
Customer deposits finance most of our customer lending. Although these funds are mostly callable, in practice they give us a stable and predictable core of funding. This is due to the nature of retail accounts and the breadth of our retail customer relationships.
We have a strong wholesale funding investor base, diversified across product types and geographies. Through the wholesale markets, we have active relationships in many sectors including banks, other financial institutions, corporates and investment funds. We access the wholesale funding markets through the issuance of capital, senior unsecured debt, covered bonds, structured notes and short-term funding. We also access these markets through securitisations of certain assets of Santander UK plc and our operating subsidiaries. For more on our programmes, see Notes 14, 2226 and 2627 in the Consolidated Financial Statements.
We generate funding on the strength of our own balance sheet, our own profitability and our own network of investors. In addition, we have access to UK Government funding schemes. We comply with rules set by the PRA, other regulators, and Banco Santander standards. While we manage, consolidate and monitor liquidity risk centrally, we also manage and monitor it in the business area it comes from. For more on our structural relationship with Banco Santander and how that impacts our liquidity management, see the Directors’ report.
Our main uses of liquidity
Our main uses of liquidity are to fund our lending in Retail Banking, Corporate & Commercial BankingConsumer Finance and Corporate & InvestmentCommercial Banking, to pay interest and dividends, and to repay debt. Our ability to pay dividends depends on various factors. These include our regulatory capital needs, the level of our distributable reserves, and our financial performance. We also use liquidity to pay for business combinations.
LIQUIDITY RISK MANAGEMENT
Introduction
We manage liquidity risk on a consolidated basis in our CFO division, which is our centralised function for managing funding, liquidity and capital. We created our governance, oversight and control frameworks, and our LRA, on the same consolidated basis.
We monitor and manage liquidity risk for the Santander UK plc group and SFS separately. Under this model, and the PRA’s liquidity rules, Santander UK plc and its subsidiary Cater Allen Limited form the RFB Domestic Liquidity Sub-group (the RFB DoLSub), which allows the entitiesthem to collectively meet regulatory requirements for the purpose of managingto manage liquidity risk. Each member of the RFB DoLSub will support the other by transferring surplus liquidity in times of stress.
We continue to transfer liquidity risks from the productssecurities Santander UK Group Holdings plc issues, or the contracts it executes, into our subsidiaries largely through back-to-back transactions. We fund any mismatches, if needed, by ordinary share dividends from subsidiaries.
Risk appetite
Separate LRAs are in place for Santander UK plc group and SFS. These are appropriate to their individual business models and consistent with the strategy of Santander UK Group Holdings plc.
Our LRA statement is based on the principles of liquidity management we use to manage our balance sheet. It also supports our need to meet or exceed the rules of our regulators.regulatory rules. In line with our liquidity management principles, we avoid an over-reliance on funding from a single product, customer or counterparty. We also maintain enough unencumbered customer assets to support current and future funding and collateral requirements and maintain enough capacity to monetise liquid assets and other counterbalancing capacity within an appropriate timeframe.on a timely basis.
Our LRA is proposed to the Risk division and the Board, which is then approved under advice from the Board Risk Committee. Our LRA, in the context of our overall Risk Appetite, is reviewed and approved by the Board each year, or more often if needed.
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Risk measurement
We use a number of metrics to manage liquidity risk. These include metrics that show the difference between cash and collateral inflows and outflows in different periods. They also include structural metrics, such as our level of encumbered assets.
Ongoing business management
Within our framework of prudent funding and liquidity management, we manage our activities to minimise our liquidity risk.risk appetite. We have clear responsibilities for short-term funding, medium-term funding, encumbrance, collateral and liquid asset management. This ensures we manage liquidity risks as part of our daily operations, strategy and planning.
Our liquidity management framework is split between short-term and strategic activities. Our short-term activities focus on intra-day collateral; management and maintaining liquid assets to cover unexpected demands on cash in a stress, scenario (suchsuch as large and unexpected deposit withdrawals by customers and loss of wholesale funding).funding. Our strategic activities focus on ensuring we are not over reliant on any one source for funding and that we avoid excessive concentrations in the maturity of our funding.
We regularly test the liquidity of our eligible liquidity pool, in line with PRA and Basel rules. We do this by realising some of the assets throughby repurchase or outright sale to the market. We make sure that over any 12-month period we realise a significant part of our eligible liquidity pool. As well as our eligible liquidity pool, we always hold a portfolio of unencumbered liquid assets. Our LRA and PRA requirements determine the size and composition of this portfolio. These assets give us a source of contingent liquidity, as we can realise some of them in a time of stress to create liquidity throughby repurchase or outright sale to the market.
Stress testing
We have aOur liquidity stress testtesting framework in place which is central to our LRA measurement and monitoring. It includes three severe but plausible stress test scenarios. To fit with our risk appetite, the liquidity outflows that come from these stress tests must be fully covered with high-quality liquid assets, other liquid assets and appropriate management actions sanctioned at the right level of governance. A funding plan disruption stress scenario also forms part of our LRA monitoring.actions.
Our Risk division runs a range of stress tests. Our LRA stress test is a combination of three tests that cover idiosyncratic, market-wide and combined scenarios.
Our other tests consider scenarios such as a global economic slowdown that results in reduced confidence in the banking industry,banks, a slowdown in one of thea major economieseconomy or a deteriorationdecline in the availability ofaccess to liquidity. These are considered on both an acute and protracted basis. We also run severe combined stress tests which look at both a deep and prolonged UK recession that results in a reduction in wholesale funding availability and a simultaneousan idiosyncratic shock that would lead to retail and commercial outflows. In 2020, we addedWe run a new Covid-19 pandemicclimate change stress, which excludes any UK government support.that assumes severe physical risks results in a reduction in retail deposits, increased use of corporate lending facilities and an increase in mortgage defaults.
We also conduct sensitivity analysis and reverse stress testing for instant liquidity shocks by each key liquidity risk. We do this to understand the impacts they would have on our LRA and our regulatory liquidity metrics.
We monitor our LCR to ensure we continue to meet the requirements. We also monitor the Net Stable Funding Ratio (NSFR), which is due to bewas implemented on 1 January 2022, and we expect to exceed any future requirements.2022.
Risk mitigation (audited)
The Board aims to make our balance sheet resilient at all times and for it to be perceived as such by stakeholders. This preserves our short and long-term viability. The Board recognises that as we are involved in maturity transformation, we cannot hold enough liquidity to cover all possible stress scenarios. The Board requires us to hold enough liquidity to make sure we will survive three plausible but severe stress scenarios (our LRA stress)stress test, described above). We do this by maintaining a prudent balance sheet structure and approved liquid resources.
Recovery and Resolution framework
OurThe CFO is the accountable SMF for recovery and resolution and the related work is managed by the CFO division. They are overseen by the Board Audit Committee and the Board.
We review and refresh our recovery plan each year. It sets out the risks, we face, the indicators we use to monitor these risks, and the actions availablewe can take to mitigate a stress tocapital, liquidity or capital.combined stress event. We can thereforeare confident that we have sufficient credible and executable options to respond to a wide variety of stresses, from mild to severe,be they market-wide or idiosyncratic, in a coordinated,timely and effective and timely manner. We are mindful of our recovery capacity and monitor the headroom to recovery triggers. Recovery indicators are both qualitative and quantitative and are embedded into our management processes.risk frameworks. We monitor recovery capacity, headroom to recovery triggers and recovery indicators regularly. If needed,necessary, we would invoke recovery would be invoked early in order to mitigate the effects of a stress and restore our financial position and balance sheet strength.
We submitted our first self-assessment of our resolvability to the PRA in October 2021 and made targeted updates to it in February 2022. On 10 June 2022 we published our first resolvability public disclosure. This concludes that we have put in place capabilities that enable us to meet the Bank of England’s resolution outcomes and that these are sufficiently flexible, so that they can be adapted to the specifics of failure as it unfolds, in order to credibly support the resolution in practice. Our recovery plancapabilities are underpinned by comprehensive governance, testing and assurance arrangements, which seek to ensure that our resolution readiness is approved bymaintained and, where appropriate, enhanced on an ongoing basis. On the Board under advice fromsame day, the Board Audit Committee and is subjectBank of England published its own assessment of UK major banks’ resolvability arrangements. The Santander UK specific section of the Bank of England’s disclosure confirms that the Bank of England has not identified any material issues in relation to ongoing review and enhancement. It is owned byour approach to achieving the CFO and managed bythree resolution outcomes set out in the CFO division.Resolvability Assessment Framework.
Risk monitoring and reporting (audited)
We monitor liquidity risk daily, weekly and monthly. We do this through different committees and levels of management, including ALCO and the Board Risk Committee.BRC.
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LIQUIDITY RISK REVIEW
Liquidity Coverage Ratio
This table shows our LCRLiquidity metrics are reported for Santander UK from 1 January 2022 following adoption of the CRR2 regulation. We have continued to present separate data for RFB and LRA at 31 December 2020SFS for 2022 and 31 December 2019. We also show the SFS LCR and LRA separately,2021 as we monitor and manage liquidity risk for SFS separately. The LRA data reflect the stress testing methodology in place at that time.a transition.
| | | LCR RFB DoLSub(1) | LRA RFB(2) | | LCR | RFB DoLSub LCR(1) | SFS LCR |
| | 2020 | 2019 | 2020 | 2019 | | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| | £bn | £bn | £bn | £bn | | £bn | £bn | £bn | £bn | £bn | £bn |
Eligible liquidity pool (liquidity value)(3)(2) | Eligible liquidity pool (liquidity value)(3)(2) | 51.2 | 41.6 | 47.2 | 40.6 | Eligible liquidity pool (liquidity value)(3)(2) | 48.9 | n/a | 46.2 | 51.3 | 2.7 | 2.8 |
Net stress outflows | Net stress outflows | (34.1) | (29.3) | (34.4) | (31.7) | Net stress outflows | (30.0) | n/a | (30.4) | (30.9) | (1.3) | (1.4) |
Surplus | Surplus | 17.1 | 12.3 | 12.8 | 8.9 | Surplus | 18.9 | n/a | 15.8 | 20.4 | 1.4 | 1.4 |
Eligible liquidity pool as a percentage of anticipated net cash flows | Eligible liquidity pool as a percentage of anticipated net cash flows | 150 | % | 142 | % | 137 | % | 128 | % | Eligible liquidity pool as a percentage of anticipated net cash flows | 163 | % | n/a | 152 | % | 166 | % | 218 | % | 206 | % |
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| LCR SFS | LRA SFS |
Eligible liquidity pool (liquidity value) | 2.8 | 5.7 | 2.8 | 5.7 |
Net stress outflows | (1.7) | (1.2) | (1.7) | (1.1) |
Surplus | 1.1 | 4.5 | 1.1 | 4.6 |
Eligible liquidity pool as a percentage of anticipated net cash flows | 165 | % | 471 | % | 168 | % | 518 | % |
(1)The RFB LCR was 152% (2019:146%157%(2021:168%).
(2)The LRA is calculated for the Santander UK plc group (the RFB Group) and is a three-month Santander UK specific requirement.
(3)The liquidity value is calculated as applying an applicable haircut to the carrying value.
LCR eligible liquidity pool
This table shows the carrying value of our eligible liquidity pool assets at 31 December 20202022 and 31 December 2019.2021. It also shows the weighted average carrying value in the year.We also show SFS at 31 December 2020 and 31 December 2019, as we monitor and manage liquidity risk for SFS separately.
| | | RFB DoLSub | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying value | Weighted average carrying value in the year | | Carrying value | Weighted average carrying value in the year |
| | 2020 | 2019 | 2020 | 2019 | | 2022 | 2021 | 2022 | 2021 |
| | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total |
| | £bn | | £bn |
Cash and balances at central banks | Cash and balances at central banks | 39.4 | | — | | 39.4 | | 19.3 | | — | | 19.3 | | 26.8 | | 19.1 | | Cash and balances at central banks | 44.5 | | — | | 44.5 | | n/a | 45.5 | | n/a |
Government bonds | Government bonds | 8.9 | | 0.1 | | 9.0 | | 16.7 | | 1.2 | | 17.9 | | 15.5 | | 20.8 | | Government bonds | 3.2 | | — | | 3.2 | | n/a | 4.1 | | n/a |
Supranational bonds and multilateral development banks | Supranational bonds and multilateral development banks | 1.5 | | — | | 1.5 | | 2.9 | | — | | 2.9 | | 2.9 | | 2.9 | | Supranational bonds and multilateral development banks | 0.3 | | — | | 0.3 | | n/a | 0.1 | | n/a |
Covered bonds | Covered bonds | 1.0 | | — | | 1.0 | | 1.4 | | 0.1 | | 1.5 | | 1.2 | | 2.4 | | Covered bonds | 0.1 | | 0.9 | | 1.0 | | n/a | 0.9 | | n/a |
Asset-backed securities | Asset-backed securities | — | | 0.6 | | 0.6 | | — | | 0.4 | | 0.4 | | 0.6 | | 1.4 | | Asset-backed securities | — | | — | | — | | n/a | 0.1 | | n/a |
| | | 50.8 | | 0.7 | | 51.5 | | 40.3 | | 1.7 | | 42.0 | | 47.0 | | 46.6 | | | 48.1 | | 0.9 | | 49.0 | | n/a | 50.7 | | n/a |
| RFB DoLSub | | RFB DoLSub | | |
| | | | SFS | | |
Cash and balances at central banks | Cash and balances at central banks | 2.3 | | — | | 2.3 | | 5.2 | | — | | 5.2 | | 4.7 | | 4.4 | | | Cash and balances at central banks | 42.1 | | — | | 42.1 | | 45.9 | | — | | 45.9 | | 43.5 | | 40.6 | |
Government bonds | Government bonds | 0.5 | | — | | 0.5 | | 0.5 | | — | | 0.5 | | 0.5 | | 0.5 | | | Government bonds | 2.9 | | — | | 2.9 | | 4.2 | | — | | 4.2 | | 3.8 | | 7.0 | |
Supranational bonds and multilateral development banks | | Supranational bonds and multilateral development banks | 0.3 | | — | | 0.3 | | 0.2 | | — | | 0.2 | | 0.1 | | 0.3 | |
Covered bonds | | Covered bonds | 0.1 | | 0.9 | | 1.0 | | 0.8 | | — | | 0.8 | | 0.9 | | 1.1 | |
Asset-backed securities | | Asset-backed securities | — | | — | | — | | — | | 0.3 | | 0.3 | | 0.1 | | 0.4 | |
| | 2.8 | | — | | 2.8 | | 5.7 | | — | | 5.7 | | 5.2 | | 4.9 | | | |
| | | 45.4 | | 0.9 | | 46.3 | | 51.1 | | 0.3 | | 51.4 | | 48.4 | | 49.4 | |
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SFS | | | | | | | | |
Cash and balances at central banks | 2.4 | | — | | 2.4 | | 2.3 | | — | | 2.3 | | 2.0 | | 2.0 | |
Government bonds | 0.3 | | — | | 0.3 | | 0.5 | | — | | 0.5 | | 0.4 | | 0.5 | |
| 2.7 | | — | | 2.7 | | 2.8 | | — | | 2.8 | | 2.4 | | 2.5 | |
Currency analysis
This table shows the carrying value of our eligible liquidity pool by major currencies at 31 December 20202022 and 31 December 2019.2021. The composition of the pool is consistent with the currency profile of our net liquidity outflows.We also show | | | | | | | | | | | | | | | | | |
| US Dollar | Euro | Sterling | Other | Total |
| £bn | £bn | £bn | £bn | £bn |
2022 | 0.8 | | 1.3 | | 46.9 | | — | | 49.0 | |
| | | | | |
RFB DoLSub | | | | | |
| | | | | |
2022 | 0.8 | | 1.3 | | 44.2 | | — | | 46.3 | |
2021 | 0.8 | | 0.4 | | 50.2 | | — | | 51.4 | |
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All the assets in the SFS at 31 December 2020 and 31 December 2019, as we monitor and manageeligible liquidity risk for SFS separately.
| | | | | | | | | | | | | | | | | |
| | | | | RFB DoLSub |
| US Dollar | Euro | Sterling | Other | Total |
| £bn | £bn | £bn | £bn | £bn |
2020 | 2.0 | | 1.2 | | 48.1 | | 0.2 | | 51.5 | |
2019 | 3.6 | | 1.2 | | 36.1 | | 1.1 | | 42.0 | |
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| | | | | SFS |
2020 | — | | — | | 2.8 | | — | | 2.8 | |
2019 | — | | — | | 5.7 | | — | | 5.7 | |
pool of £2.7bn (2021: £2.8bn) are denominated in Sterling.
2020Net Stable Funding Ratio (NSFR)
The NSFR was implemented on 1 January 2022.
2022 compared to 20192021
RFB DoLSub LCR at 150% reflects our prudent approachWe remain in an uncertain operating environmenta strong liquidity position. We hold sufficient liquid resources and is significantly above regulatory requirements. SFS LCR Eligible Liquidity Pool reducedhave adequate governance and controls in place to £2.8bn as a result of £3.2bn of mortgage assets transferred from Santander UK plc to SFS, which utilisedmanage the deposits in SFS.
Although the key aim of the UK Government financial support measures introduced in 2020 (including the TFS and TFSME) was to limit damage to the wider economy from Covid-19, they had the side-effect of reducing any potential liquidity risks arising due to Covid-19. Although Covid-19 did not trigger a liquidity stress, its immediate negative impacts on liquidity, such asfrom our business and strategy. At 31 December 2022, the drawing of committed creditLCR and liquidity facilities, were largely offset by deposits from those same drawings as corporates reduced their spending. Similarly, the impact of the initial effective shutdown of the mortgage market and payment holidays granted to customers was offset by better than expected retail deposit balances as customers reduced their spending.NSFR significantly exceeded regulatory requirements.
Santander UK Group Holdings plc151
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Annual Report 2022 | Santander UK Group Holdings plc 153 |
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Annual Report 2020 | Risk review
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FUNDING RISK MANAGEMENT
Funding strategy
Our funding strategy continues to be based on maintaining a conservatively structured balance sheet and diverse sources of funding to meet the needs of our business strategy and plans. The CFO Division maintains a funding plan and ensures it is compliantthat complies with the LRA and regulatory liquidity and capital requirements.
Most of our funding comes from customer deposits. We source the rest from a mix of secured and unsecured funding in the wholesale markets. Overall, this means that we do not rely too heavily on wholesale funds. We manage funding requirements by targeting a specific Liquidity Coverage Ratio, we ensure maturities are prefunded and capital/TLACMinimum Requirements for Eligible Liabilities (MREl) requirements are prioritised. We also have checks and controls to limit our asset encumbrance from our secured funding operations.
As part of maintaining a diverse funding base, we raise funding in a number of currencies, including euroEUR and USD, and convert it into sterling through currency swaps to fund our commercial assets which are largely sterling denominated.
Our base of stable retail and corporate deposits is a key funding source for us. We leverage our large and diverse customer base to offer products that give us a long-term sustainable source of funding. We do this by focusing on building long-term relationships. Over 85% of our total core retail customer liabilities are covered by the Financial Services Compensation Scheme (the FSCS).
Behavioural maturities
The contractual maturity of our balance sheet assets and liabilities highlights the maturity transformation that underpins the role of banks to lend long term, but to fund themselves mainly with shorter-term liabilities, like customer deposits. We do this by diversifying our funding operations across a wide customer base, both in numbers and by type of depositor. In practice, the behavioural profiles of many liabilities show more stability and longer maturity than their contractual maturity. This is especially true of many types of retail and corporate deposits that, while they may be repayable on demand or at short notice, have shown good stability even in times of stress. We model behaviour profiles using our experience of customer behaviour. We use this data to determine the funds transfer pricing interest rates at which we reward and charge our business units for sources and uses of funds. We apply this rate until a customer changes to a different product or service offered by us or by one of our competitors.
We continue to maintain the quality of our retail, commercial and wholesale deposits. We aim to deepen our customer relationships across all customer segments. We do this to lengthen the contractual and behavioural profile of our liability base.
Deposit funding
We mainly fund our Retail Banking, Corporate & Commercial BankingConsumer Finance and Corporate & InvestmentCommercial Banking activities by customer deposits. We fund the rest through wholesale markets.
Wholesale funding
Wholesale
Composition of wholesale funding
We are active in the wholesale markets and we have direct access to both money market and long-term investors through our funding programmes. This makes our wholesale funding well diversified by product, maturity, geography and currency. This includes currencies available across a range of channels from money markets, repo markets, senior unsecured, secured, medium-term and capital.
Santander UK plc is our main operating company issuer of senior unsecured debt, structured notes, short-term funding and issuancecovered bonds.
Santander UK Group Holdings plc is the issuer of capital and MREL/Total Loss Absorbing Capacity (TLAC) eligible senior unsecured debt. Under CRR II, G-SIBs have been subject to the MREL standard. As part of this, UK resolution entities that are G-SIBs or are part of a G-SIB, including Santander UK Group Holdings plc, are required to meet the MREL minimum requirements, implemented through the Bank of England Statement of Policy on MREL in the UK. From 1 January 2020, the MREL requirement is the higher of (i) two times the Pillar 1 capital requirements and one times their Pillar 2A add-ons; (ii) 6% of CRR leverage exposures or (iii) two times the minimum leverage ratio requirement. The MREL requirements have been fully implemented from 1 January 2022.
Our main operating company Santander UK plc is subject to internal MREL as it meets the requirements of a material subsidiary of our ultimate parent Banco Santander SA.
We also access the wholesale markets through securitisations of certain assets of our operating subsidiaries. We also have access to UK Government funding schemes. Eligible collateral for these schemes includes all collateral that is eligible in the Bank of England’s Discount Window Facility. We ensure that enough collateral is placed and available at the Discount Window.
Issuance model and resolution
Banco Santander is a multiple point of entry resolution group. This means that should it fail, it would be split up into parts. Healthy parts might be sold or be kept as a residual group without their distressed sister companies. The resolution or recapitalisation of the distressed parts might be effected via ‘bail in’ of bonds that had been issued to the market by a regional intermediate holding company.
Santander UK is a single point of entry resolution group. This means that resolution would work downwards from the group’s holding company i.e. Santander UK Group Holdings plc. Losses in subsidiaries would first be transferred up to Santander UK Group Holdings plc. If the holding company is bankrupt as a result, the group is deemed to be failing or likely to fail, it will be put into resolution. The ‘bail in’ tool is applied to the holding company, with the equity being written off and bonds written off or converted into equity as needed to recapitalise the group. Those bondholders would become the new owners, and the group would stay together.
Santander UK Group Holdings plc is the immediate holding company of Santander UK plc but does not guarantee its debts or other obligations. This structure is a Bank of England recommended configuration which aims to ensure the activities of the operating company are not disrupted as the Santander UK group goes through resolution, thereby maintaining continuity of services for customers.
Composition of wholesale funding
We are active in the wholesale markets and we have direct access to both money market and long-term investors through our funding programmes. This makes our wholesale funding well diversified by product, maturity, geography and currency. This includes currencies available across a range of channels from money markets, repo markets, senior unsecured, secured, medium-term and capital. For details of our main programmes, see the Funding Information section of our website www.santander.co.uk/uk/about-santander-uk/investor-relations/funding-information.
Santander UK plc is our main operating company issuer of senior unsecured debt, structured notes, short-term funding and covered bonds.
Santander UK Group Holdings plc is the issuer of capital and MREL/Total Loss Absorbing Capacity (TLAC) eligible senior unsecured debt. Since the implementation of CRR II in June 2019, G-SIBs have been subject to the MREL standard. Since 1 January 2019, UK resolution entities that are G-SIBs or are part of a G-SIB, including Santander UK Group Holdings plc, have been required to meet the MREL minimum requirements, implemented through the Bank of England Statement of Policy on MREL in the UK. From 1 January 2020 the MREL requirement is the higher of (i) two times the Pillar 1 capital requirements and one times their Pillar 2A add-ons; (ii) 6% of CRR leverage exposures or (iii) two times the minimum leverage ratio requirement. The MREL requirements will be fully implemented from 1 January 2022 and G-SIBs will be required to meet to the higher of (i) two times the sum of Pillar 1 capital requirements and their Pillar 2A add-ons; (ii) 6.75% of CRR leverage exposures or (iii) two times the minimum leverage ratio requirement.
Our main operating company Santander UK plcis subject to internal MREL as it meets the requirements of a material subsidiary of our ultimate parent Banco Santander SA.
We also access the wholesale markets through securitisations of certain assets of our operating subsidiaries. In addition, we have access to UK Government funding schemes. Eligible collateral for these schemes includes all collateral that is eligible in the Bank of England’s Discount Window Facility. We ensure that enough collateral is placed and available at the Discount Window.
152Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 154 |
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FUNDING RISK REVIEW
Our funding strategy continues to be based on maintaining a conservatively structured balance sheet and diverse sources of funding to meet the needs of our business strategy and plans. The CFO Division maintains a funding plan and ensures it is compliant with the LRA and regulatory liquidity and capital requirements.
2020 compared to 2019
–Our overall funding strategy remains to develop and sustain a diversified funding base. We also need to fulfil regulatory requirements as well as support our credit ratings.
–2020 presented unforeseen challenges in the debt capital markets with the Covid-19 pandemic causing significant volatility in March and April. However, despite the ongoing effect of Covid-19 on global economies and the growing concerns around a Brexit deal, the credit markets remained open, although at wider credit spreads. Following a rapid response from central banks to provide liquidity, notably the BoE’s Term Funding Scheme with additional incentives for SMEs (TFSME) in the UK, credit spreads retraced towards the end of the year.
–In January 2020 it was estimated that the 2020 funding requirement was £10bn to £12bn. At the end of Q1 2020, and before the impact of Covid-19 on global markets, we had issued £4.6bn of medium-term funding. We issued a further £0.8bn in August 2020 as we continued on our plan to achieve the required end state MREL requirement in January 2022. The introduction of the TFSME scheme in March 2020 meant there was no further need to access markets for funding, as any residual requirement would be met by drawing down on our initial borrowing allowance from the BoE scheme.
–We issued £5.4bn of wholesale funding, including £1.4bn MREL eligible senior unsecured issued from the Company and £4.0bn of core funding, consisting of covered bonds and senior unsecured, issued from Santander UK plc, our ring-fenced bank (RFB).
–In 2020 the total term funding was £5.4bn (2019: £4.5bn), of which £3.0bn was covered bonds and £2.4bn of senior unsecured notes.
–We have £6.3bn outstanding under the TFS and £11.7bn outstanding under the TFSME.
–Maturities in 2020 were £16.5bn (2019: £8.1bn). At 31 December 2020, 68% (2019: 67%) of wholesale funding had a maturity of greater than one year, with an overall residual duration of 38 months (2019: 33 months).
–In October 2020, Santander UK plc transferred £3.2bn of mortgage assets to Santander Financial Services plc (SFS). The transaction allows us to optimise our overall funding structure within Santander UK plc, utilising the deposits in SFS and reducing our funding requirement in Santander UK plc.
–In 2020, c£4.3bn of medium-term funding was left in US Dollars and a further £0.7bn in Euro. These balances were used to fund customer assets and our HQLA portfolio.
–Our level of encumbrance from external and internal issuance of securitisations and covered bonds was broadly static in 2020, as planned.
Santander UK Group Holdings plc153
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Annual Report 2020 | Risk review
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FUNDING RISK REVIEW
Reconciliation of wholesale funding to the balance sheet (audited)
This table reconciles our wholesale funding to our balance sheet at 31 December 20202022 and 31 December 2019.2021.
| | | Balance sheet line item | | Balance sheet line item |
| | Funding analysis | Deposits by banks(3) | Deposits by customers(1) | Repurchase agreements - non trading | Financial liabilities designated at fair value | Debt securities in issue | Subordinated liabilities | Other equity instruments and non- controlling interests(2) | | Funding analysis | Deposits by banks(3) | Deposits by customers(1) | Repurchase agreements - non trading | Financial liabilities designated at fair value | Debt securities in issue | Subordinated liabilities | Other equity instruments and non- controlling interests(2) |
2020 | £bn | |
2022 | | 2022 | £bn |
Deposits by banks | Deposits by banks | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Deposits by banks | 0.5 | | 0.5 | | — | | — | | — | | — | | — | | — | |
Certificates of deposit and commercial paper | Certificates of deposit and commercial paper | 5.7 | | 0 | | 0 | | 0 | | 0 | | 5.7 | | 0 | | 0 | | Certificates of deposit and commercial paper | 4.7 | | — | | — | | — | | — | | 4.7 | | — | | — | |
Senior unsecured – public benchmark | Senior unsecured – public benchmark | 15.5 | | 0 | | 0 | | 0 | | 0 | | 15.5 | | 0 | | 0 | | Senior unsecured – public benchmark | 14.4 | | — | | — | | — | | — | | 14.4 | | — | | — | |
–privately placed | –privately placed | 1.1 | | 0 | | 0 | | 0 | | 0.9 | | 0.2 | | 0 | | 0 | | –privately placed | 0.6 | | — | | — | | — | | 0.4 | | 0.2 | | — | | — | |
Covered bonds | Covered bonds | 17.9 | | 0 | | 0 | | 0 | | 0 | | 17.9 | | 0 | | 0 | | Covered bonds | 14.9 | | — | | — | | — | | — | | 14.9 | | — | | — | |
Securitisation and structured issuance | Securitisation and structured issuance | 2.8 | | 0 | | 0 | | 0 | | 0.5 | | 2.3 | | 0 | | 0 | | Securitisation and structured issuance | 1.0 | | — | | — | | — | | — | | 1.0 | | — | | — | |
Term Funding Scheme | 6.3 | | 6.3 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| TFSME | TFSME | 11.7 | | 11.7 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | TFSME | 25.0 | | 25.0 | | — | | — | | — | | — | | — | | — | |
Subordinated liabilities and equity | Subordinated liabilities and equity | 4.7 | | 0 | | 0 | | 0 | | 0 | | 0 | | 2.2 | | 2.5 | | Subordinated liabilities and equity | 4.1 | | — | | — | | — | | — | | — | | 1.9 | | 2.2 | |
Total wholesale funding | Total wholesale funding | 65.7 | | 18.0 | | 0 | | 0 | | 1.4 | | 41.6 | | 2.2 | | 2.5 | | Total wholesale funding | 65.2 | | 25.5 | | — | | — | | 0.4 | | 35.2 | | 1.9 | | 2.2 | |
Repos | Repos | 15.8 | | 0 | | 0 | | 15.8 | | 0 | | 0 | | 0 | | 0 | | Repos | 8.0 | | — | | — | | 8.0 | | — | | — | | — | | — | |
Foreign exchange and hedge accounting | Foreign exchange and hedge accounting | 2.5 | | 0 | | 0 | | 0 | | 0 | | 2.1 | | 0.4 | | 0 | | Foreign exchange and hedge accounting | 1.6 | | — | | — | | — | | — | | 1.2 | | 0.4 | | — | |
Other | Other | 3.0 | | 3.0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Other | 3.4 | | 3.0 | | — | | — | | 0.4 | | — | | — | | — | |
Balance sheet total | Balance sheet total | 87.0 | | 21.0 | | 0 | | 15.8 | | 1.4 | | 43.7 | | 2.6 | | 2.5 | | Balance sheet total | 78.2 | | 28.5 | | — | | 8.0 | | 0.8 | | 36.4 | | 2.3 | | 2.2 | |
| 2019 | | |
2021 | | 2021 | |
Deposits by banks | Deposits by banks | 0.3 | | 0.3 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | Deposits by banks | 0.2 | | 0.2 | | — | | — | | — | | — | | — | | — | |
Certificates of deposit and commercial paper | Certificates of deposit and commercial paper | 5.8 | | 0 | | 0 | | 0 | | 0 | | 5.8 | | 0 | | 0 | | Certificates of deposit and commercial paper | 5.1 | | — | | — | | — | | — | | 5.1 | | — | | — | |
Senior unsecured – public benchmark | Senior unsecured – public benchmark | 18.9 | | 0 | | 0 | | 0 | | 0 | | 18.9 | | 0 | | 0 | | Senior unsecured – public benchmark | 12.4 | | — | | — | | — | | — | | 12.4 | | — | | — | |
–privately placed | –privately placed | 2.7 | | 0 | | 0 | | 0 | | 1.0 | | 1.7 | | 0 | | 0 | | –privately placed | 0.6 | | — | | — | | — | | 0.5 | | 0.1 | | — | | — | |
Covered bonds | Covered bonds | 18.2 | | 0 | | 0 | | 0 | | 0 | | 18.2 | | 0 | | 0 | | Covered bonds | 12.5 | | — | | — | | — | | — | | 12.5 | | — | | — | |
Securitisation and structured issuance | Securitisation and structured issuance | 5.6 | | 0 | | 0 | | 1.4 | | 0.5 | | 3.7 | | 0 | | 0 | | Securitisation and structured issuance | 0.7 | | — | | — | | — | | — | | 0.7 | | — | | — | |
Term Funding Scheme | 10.8 | | 10.8 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| TFSME | | TFSME | 31.9 | | 31.9 | | — | | — | | — | | — | | — | | — | |
Subordinated liabilities and equity | Subordinated liabilities and equity | 5.5 | | 0 | | 0 | | 0 | | 0 | | 0 | | 2.9 | | 2.6 | | Subordinated liabilities and equity | 4.4 | | — | | — | | — | | — | | — | | 2.0 | | 2.4 | |
Total wholesale funding | Total wholesale funding | 67.8 | | 11.1 | | 0 | | 1.4 | | 1.5 | | 48.3 | | 2.9 | | 2.6 | | Total wholesale funding | 67.8 | | 32.1 | | — | | — | | 0.5 | | 30.8 | | 2.0 | | 2.4 | |
Repos | Repos | 16.9 | | 0 | | 0 | | 16.9 | | 0 | | 0 | | 0 | | 0 | | Repos | 11.7 | | — | | — | | 11.7 | | — | | — | | — | | — | |
Foreign exchange and hedge accounting | Foreign exchange and hedge accounting | 2.5 | | 0 | | 0 | | 0 | | 0 | | 1.9 | | 0.6 | | 0 | | Foreign exchange and hedge accounting | 1.0 | | — | | — | | — | | — | | 0.8 | | 0.2 | | — | |
Other | Other | 3.5 | | 3.3 | | 0 | | 0 | | 0.2 | | 0 | | 0 | | 0 | | Other | 2.1 | | 1.8 | | — | | — | | 0.3 | | — | | — | | — | |
Balance sheet total | Balance sheet total | 90.7 | | 14.4 | | 0 | | 18.3 | | 1.7 | | 50.2 | | 3.5 | | 2.6 | | Balance sheet total | 82.6 | | 33.9 | | — | | 11.7 | | 0.8 | | 31.6 | | 2.2 | | 2.4 | |
(1)This is included in our balance sheet total of £193,088m (2019: £179,006m)£197,313m (2021: £192,914m).
(2)Consists of £NaN (2019: £NaN)£nil (2021: £nil) fixed/floating rate non-cumulative callable preference shares, £235m (2019:£0m (2021: £235m) Step-up Callable Perpetual Reserve Capital Instruments and £2,241m (2019: £2,241m)£2,196m (2021: £2,191m) Perpetual Capital Securities (net of issuance costs). See Notes 3345 and 3433 to the Consolidated Financial Statements.
(3)Other consists of items in the course of transmission and other deposits, excluding the TFS.deposits. See Note 24 to the Consolidated Financial Statements.
154Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 155 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
| | | | Liquidity risk | | | | | | | | |
Maturity profile of wholesale funding(audited)
This table shows our main sources of wholesale funding. It does not include securities finance agreements. The table is based on exchange rates at issue and scheduled repayments and call dates. It does not reflect the final contractual maturity of the funding.
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| ≤ 1 month | >1 and ≤ 3 months | >3 and ≤ 6 months | >6 and ≤ 9 months | >9 and ≤ 12 months | Sub-total ≤ 1 year | >1 and ≤ 2 years | >2 and ≤ 5 years | >5 years | Total |
2020 | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
Santander UK Group Holdings plc(1) | | | | | | | | | | |
Senior unsecured – public benchmark | 0.7 | | 0 | | 0 | | 1.1 | | 0 | | 1.8 | | 1.2 | | 4.9 | | 1.3 | | 9.2 | |
–privately placed | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.1 | | 0.1 | |
Subordinated liabilities and equity (incl. AT1) | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.8 | | 1.5 | | 0.7 | | 3.0 | |
| 0.7 | | 0 | | 0 | | 1.1 | | 0 | | 1.8 | | 2.0 | | 6.4 | | 2.1 | | 12.3 | |
Santander UK plc | | | | | | | | | | |
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Certificates of deposit and commercial paper | 0.7 | | 3.7 | | 1.2 | | 0 | | 0.1 | | 5.7 | | 0 | | 0 | | 0 | | 5.7 | |
Senior unsecured – public benchmark | 0.4 | | 0 | | 1.6 | | 0 | | 0.8 | | 2.8 | | 0.6 | | 2.6 | | 0.3 | | 6.3 | |
–privately placed | 0 | | 0.3 | | 0 | | 0 | | 0.1 | | 0.4 | | 0 | | 0.2 | | 0.4 | | 1.0 | |
Covered bonds | 0 | | 0 | | 3.7 | | 1.7 | | 0 | | 5.4 | | 1.7 | | 6.4 | | 4.4 | | 17.9 | |
Securitisation and structured issuance(2) | 0.2 | | 0 | | 0 | | 0.2 | | 0 | | 0.4 | | 0.9 | | 0.3 | | 0 | | 1.6 | |
Term Funding Scheme | 0 | | 1.5 | | 1.5 | | 1.0 | | 0 | | 4.0 | | 2.3 | | 0 | | 0 | | 6.3 | |
TFSME | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 11.7 | | 0 | | 11.7 | |
Subordinated liabilities | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0.5 | | 1.2 | | 1.7 | |
| 1.3 | | 5.5 | | 8.0 | | 2.9 | | 1.0 | | 18.7 | | 5.5 | | 21.7 | | 6.3 | | 52.2 | |
Other group entities | | | | | | | | | | |
Securitisation & structured issuance(3) | 0.2 | | 0.1 | | 0 | | 0.1 | | 0.2 | | 0.6 | | 0.4 | | 0.2 | | 0 | | 1.2 | |
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Total at 31 December 2020 | 2.2 | | 5.6 | | 8.0 | | 4.1 | | 1.2 | | 21.1 | | 7.9 | | 28.3 | | 8.4 | | 65.7 | |
Of which: –Secured | 0.4 | | 1.6 | | 5.2 | | 3.0 | | 0.2 | | 10.4 | | 5.3 | | 18.6 | | 4.4 | | 38.7 | |
–Unsecured | 1.8 | | 4.0 | | 2.8 | | 1.1 | | 1.0 | | 10.7 | | 2.6 | | 9.7 | | 4.0 | | 27.0 | |
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For details of the maturities of financial liabilities and off-balance sheet commitments, see Note 39 to the Consolidated Financial Statements. | 2019 | | |
Total at 31 December 2019 | 1.7 | | 5.5 | | 4.7 | | 2.1 | | 8.5 | | 22.5 | | 16.6 | | 18.8 | | 9.9 | | 67.8 | | |
| | | ≤ 1 month | >1 and ≤ 3 months | >3 and ≤ 6 months | >6 and ≤ 9 months | >9 and ≤ 12 months | Sub-total ≤ 1 year | >1 and ≤ 2 years | >2 and ≤ 5 years | >5 years | Total |
2022 | | 2022 | £bn |
Santander UK Group Holdings plc(1) | | Santander UK Group Holdings plc(1) | |
Senior unsecured – public benchmark | | Senior unsecured – public benchmark | 0.8 | | 0.7 | | — | | 0.6 | | 0.8 | | 2.9 | | 1.6 | | 6.5 | | 1.6 | | 12.6 | |
–privately placed | | –privately placed | — | | — | | — | | — | | — | | — | | — | | 0.1 | | — | | 0.1 | |
Subordinated liabilities and equity (incl. AT1) | | Subordinated liabilities and equity (incl. AT1) | — | | — | | — | | — | | — | | — | | 0.5 | | 1.4 | | 1.0 | | 2.9 | |
| | | 0.8 | | 0.7 | | — | | 0.6 | | 0.8 | | 2.9 | | 2.1 | | 8.0 | | 2.6 | | 15.6 | |
Santander UK plc | | Santander UK plc | |
Deposits by banks | | Deposits by banks | 0.2 | | 0.3 | | — | | — | | — | | 0.5 | | — | | — | | — | | 0.5 | |
Certificates of deposit and commercial paper | | Certificates of deposit and commercial paper | 1.2 | | 3.2 | | 0.3 | | — | | — | | 4.7 | | — | | — | | — | | 4.7 | |
Senior unsecured – public benchmark | | Senior unsecured – public benchmark | 0.3 | | — | | — | | — | | — | | 0.3 | | 0.9 | | 0.3 | | 0.3 | | 1.8�� | |
–privately placed | | –privately placed | — | | — | | — | | — | | — | | — | | 0.1 | | 0.2 | | 0.2 | | 0.5 | |
Covered bonds | | Covered bonds | — | | 1.0 | | 0.1 | | 0.9 | | — | | 2.0 | | 3.4 | | 8.4 | | 1.1 | | 14.9 | |
Securitisation & structured issuance(2) | | Securitisation & structured issuance(2) | 0.1 | | — | | 0.1 | | — | | — | | 0.2 | | 0.1 | | 0.6 | | 0.1 | | 1.0 | |
| TFSME | | TFSME | — | | — | | — | | — | | — | | — | | — | | 25.0 | | — | | 25.0 | |
Subordinated liabilities | | Subordinated liabilities | — | | — | | — | | — | | 0.4 | | 0.4 | | — | | — | | 0.8 | | 1.2 | |
| | | 1.8 | | 4.5 | | 0.5 | | 0.9 | | 0.4 | | 8.1 | | 4.5 | | 34.5 | | 2.5 | | 49.6 | |
Other group entities | | Other group entities | |
Securitisation & structured issuance(3) | | Securitisation & structured issuance(3) | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total at 2022 | | Total at 2022 | 2.6 | | 5.2 | | 0.5 | | 1.5 | | 1.2 | | 11.0 | | 6.6 | | 42.5 | | 5.1 | | 65.2 | |
Of which: | Of which: | | Of which: | |
–Secured | –Secured | 0.2 | | 0.1 | | 2.7 | | 0.3 | | 5.8 | | 9.1 | | 11.5 | | 10.4 | | 3.6 | | 34.6 | | –Secured | 0.1 | | 1.0 | | 0.2 | | 0.9 | | — | | 2.2 | | 3.5 | | 34.0 | | 1.2 | | 40.9 | |
–Unsecured | –Unsecured | 1.5 | | 5.4 | | 2.0 | | 1.8 | | 2.7 | | 13.4 | | 5.1 | | 8.4 | | 6.3 | | 33.2 | | –Unsecured | 2.5 | | 4.2 | | 0.3 | | 0.6 | | 1.2 | | 8.8 | | 3.1 | | 8.5 | | 3.9 | | 24.3 | |
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2021 | | | | | | | | | | |
Total at 2021 | 3.1 | | 3.2 | | 2.8 | | 0.2 | | 0.9 | | 10.2 | | 5.9 | | 41.1 | | 10.6 | | 67.8 | |
Of which: | | | | | | | | | | |
–Secured | 0.2 | | — | | 0.9 | | 0.1 | | 0.9 | | 2.1 | | 2.1 | | 33.7 | | 7.2 | | 45.1 | |
–Unsecured | 2.9 | | 3.2 | | 1.9 | | 0.1 | | — | | 8.1 | | 3.8 | | 7.4 | | 3.4 | | 22.7 | |
(1)95% of Senior Unsecuredsenior unsecured debt issued from Santander UK Group Holdings plc has been downstreamed to Santander UK plc as ‘secondary non-preferential debt’ in line with the guidelines from the Bank of England for Internal MREL.
(2)Includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator.
(3)Includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator.
2022 compared to 2021
–Our overall funding strategy remains to develop and sustain a diversified funding base. We also need to fulfil regulatory requirements as well as support our credit ratings.
–Our funding costs improved with maturities refinanced at lower cost. Total wholesale funding decreased in 2022.
–We repaid £6.9bn of TFSME, with £25.0bn outstanding at year-end. In 2022, we utilised TFSME drawings to support mortgage lending in H122, but a successful retail funding campaign towards the end of the year and above-planned secured funding meant we were able to repay drawings. We expect similar annual repayments over the next 3 years.
–We issued a total of £8.6bn, including MREL issuance of £3.9bn equivalent, and £4.7bn of non-MREL issuance from Santander UK Group Holdings plcplc. We expect to issue between £2bn and £3bn of MREL in 2023, of which we have already issued £1.0bn equivalent in January 2023. Maturities in 2022 were £5.3bn.
–At 31 December 2022, 83% (2021:85%) of wholesale funding had a maturity of greater than one year, with an overall residual duration of 37 months (2021: 47 months).
–155Our structural hedge position increased, with an average of £110bn over the last 12 months, and an average duration of c2.5 years.
–Our level of encumbrance from external and internal issuance of securitisations and covered bonds decreased again in 2022.
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Annual Report 20202022 | Santander UK Group Holdings plc | Risk review156 | | |
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Currency composition of wholesale funds (audited)
This table shows our wholesale funding by major currency at 31 December 2020 and 31 December 2019.
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| 2020 | | 2019 |
| Sterling | US Dollar | Euro | Other | | Sterling | US Dollar | Euro | Other |
| % | % | % | % | | % | % | % | % |
Santander UK Group Holdings plc | | | | | | | | | |
Senior unsecured – public benchmark | 11 | | 61 | | 28 | | 0 | | | 12 | | 64 | | 22 | | 2 | |
–privately placed | 0 | | 0 | | 0 | | 100 | | | 0 | | 0 | | 0 | | 100 | |
Subordinated liabilities and equity (incl. AT1) | 75 | | 25 | | 0 | | 0 | | | 70 | | 30 | | 0 | | 0 | |
| 27 | | 51 | | 21 | | 1 | | | 27 | | 54 | | 16 | | 3 | |
Santander UK plc | | | | | | | | | |
Deposits by banks | 0 | | 0 | | 0 | | 0 | | | 3 | | 97 | | 0 | | 0 | |
Certificates of deposit and commercial paper | 51 | | 44 | | 4 | | 1 | | | 45 | | 54 | | 1 | | 0 | |
Senior unsecured – public benchmark | 10 | | 73 | | 17 | | 0 | | | 14 | | 54 | | 32 | | 0 | |
–privately placed | 41 | | 37 | | 10 | | 12 | | | 21 | | 15 | | 59 | | 5 | |
Covered bonds | 48 | | 5 | | 46 | | 1 | | | 54 | | 0 | | 45 | | 1 | |
Securitisation & structured issuance | 77 | | 23 | | 0 | | 0 | | | 72 | | 28 | | 0 | | 0 | |
Term Funding Scheme | 100 | | 0 | | 0 | | 0 | | | 100 | | 0 | | 0 | | 0 | |
TFSME | 100 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | |
Subordinated liabilities | 63 | | 37 | | 0 | | 0 | | | 49 | | 51 | | 0 | | 0 | |
| 63 | | 18 | | 19 | | 0 | | | 54 | | 22 | | 24 | | 0 | |
Other group entities | | | | | | | | | |
Securitisation & structured issuance | 100 | | 0 | | 0 | | 0 | | | 95 | | 5 | | 0 | | 0 | |
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Total | 57 | | 24 | | 19 | | 0 | | | 50 | | 27 | | 22 | | 1 | |
Term issuance (audited)
In 2020, our external term issuance (sterling equivalent) was:
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| Sterling | US Dollar | Euro | | Total 2020 | Total 2019 |
| £bn | £bn | £bn | | £bn | £bn |
Santander UK Group Holdings plc | | | | | | |
Senior unsecured – public benchmark | 0 | | 0.8 | | 0.6 | | | 1.4 | | 0 | |
Subordinated debt and equity (inc. AT1) | 0 | | 0 | | 0 | | | 0 | | 0.5 | |
| 0 | | 0.8 | | 0.6 | | | 1.4 | | 0.5 | |
Santander UK plc | | | | | | |
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Covered bonds | 1.0 | | 0.9 | | 1.1 | | | 3.0 | | 2.9 | |
Senior unsecured – public benchmark | 0 | | 1.0 | | 0 | | | 1.0 | | 0.9 | |
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TFSME | 11.7 | | 0 | | 0 | | | 11.7 | | 0 | |
| 12.7 | | 1.9 | | 1.1 | | | 15.7 | | 3.8 | |
Other group entities | | | | | | |
Securitisations | 0 | | 0 | | 0 | | | 0 | | 0.2 | |
Total gross issuances | 12.7 | | 2.7 | | 1.7 | | | 17.1 | | 4.5 | |
Santander UK Group Holdings plc repurchased several securities to improve its future interest expense while maintaining a prudent approach to the management of Santander UK plc’s funding and liquidity base.
156Santander UK Group Holdings plc
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| | | | Liquidity risk | | | | | | | | |
Currency composition of wholesale funds (audited)
This table shows our wholesale funding by major currency at 31 December 2022 and 31 December 2021.
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| 2022 | | 2021 |
| Sterling | US Dollar | Euro | Other | | Sterling | US Dollar | Euro | Other |
| % | % | % | % | | % | % | % | % |
Santander UK Group Holdings plc | | | | | | | | | |
Senior unsecured – public benchmark | 18 | | 58 | | 24 | | — | | | 10 | | 59 | | 31 | | — | |
–privately placed | — | | — | | — | | 100 | | | — | | — | | — | | 100 | |
Subordinated liabilities and equity (incl. AT1) | 75 | | 25 | | — | | — | | | 75 | | 25 | | — | | — | |
| 28 | | 51 | | 20 | | 1 | | | 24 | | 51 | | 24 | | 1 | |
Santander UK plc | | | | | | | | | |
Deposits by banks | 29 | | 71 | | — | | — | | | 32 | | 68 | | — | | — | |
Certificates of deposit and commercial paper | 56 | | 42 | | 2 | | — | | | 45 | | 53 | | 2 | | — | |
Senior unsecured – public benchmark | 18 | | 62 | | 20 | | — | | | 14 | | 46 | | 40 | | — | |
–privately placed | 95 | | — | | 5 | | — | | | 92 | | — | | 6 | | 2 | |
Covered bonds | 43 | | 12 | | 45 | | — | | | 44 | | 8 | | 48 | | — | |
Securitisation & structured issuance | 100 | | — | | — | | — | | | 74 | | 26 | | — | | — | |
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TFSME | 100 | | — | | — | | — | | | 100 | | — | | — | | — | |
Subordinated liabilities | 48 | | 52 | | — | | — | | | 57 | | 43 | | — | | — | |
| 74 | | 12 | | 14 | | — | | | 77 | | 10 | | 13 | | — | |
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Total | 63 | | 21 | | 16 | | — | | | 67 | | 18 | | 15 | | — | |
Term issuance (audited)
In 2022, our external term issuance (sterling equivalent) was:
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| Sterling | US Dollar | Euro | Other | 2022 | 2021 |
| £bn | £bn | £bn | £bn | £bn | £bn |
Santander UK Group Holdings plc | | | | | | |
Senior unsecured – public benchmark | 1.2 | | 2.1 | | 0.6 | | — | | 3.9 | | 2.8 | |
Subordinated debt and equity (inc. AT1) | 0.8 | | — | | — | | — | | 0.8 | | 0.5 | |
| 2.0 | | 2.1 | | 0.6 | | — | | 4.7 | | 3.3 | |
Santander UK plc | | | | | | |
Securitisations and other secured funding | 0.6 | | — | | — | | — | | 0.6 | | — | |
Covered bonds | 1.8 | | 0.8 | | 1.4 | | — | | 4.0 | | — | |
Senior unsecured – public benchmark | — | | — | | — | | — | | — | | — | |
–privately placed | 0.1 | | — | | — | | — | | 0.1 | | 0.1 | |
TFSME | — | | — | | — | | — | | — | | 20.2 | |
| 2.5 | | 0.8 | | 1.4 | | — | | 4.7 | | 20.3 | |
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Total gross issuances | 4.5 | | 2.9 | | 2.0 | | — | | 9.4 | | 23.6 | |
Loan to deposit ratio
This table shows our customer loans, customer deposits and loan to deposit ratio (LDR) at 31 December 2022 and 31 December 2021, and the adjustments to reconcile the data to the balance sheet.
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| 2022 | 2021 |
| Customer loans | Customer deposits | LDR(2) | Customer loans | Customer deposits | LDR(2) |
| £bn | £bn | % | £bn | £bn | % |
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Total customer loans and deposits(1) | 219.7 | | 196.5 | | 112 | % | 210.6 | | 192.2 | | 110 | % |
Adjust for fair value loans, impairment loss allowances, accrued interest and other | 4.1 | | 0.8 | | | 2.9 | | 0.7 | | |
Statutory loans and advances to customers and deposits by customers | 223.8 | | 197.3 | | 113 | % | 213.5 | | 192.9 | | 111 | % |
(1) The customer loans and customer deposits numbers agree to the customer balances in the Balance sheet review section of the Financial review.
(2) Customer loans (Loans and advances to customers) divided by Customer deposits (Deposits by customers).
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Annual Report 2022 | Santander UK Group Holdings plc 157 |
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Encumbrance
We have encumberedencumber an asset if we have pledgedpledge or transferredtransfer it as collateral against an existinga liability. This means it is no longer available to secure funding, meet our collateral needs or be sold to reduce future funding needs. Being able to pledge or transfer assets as collateral is an integrala key part of a financial institution’sbank’s operations. We do various thingsThe main ways we encumber assets are that lead to asset encumbrance. These include where we:
–Enter enter into securitisation, covered bonds, and repurchase agreements (including central bank programmes) to access medium and long-term funding
–Enterfunding; enter into short-term funding transactions. These includetransactions (including repurchase agreements and stock borrowing transactionsborrowing) as part of our operational liquidity management
–Pledgemanagement; pledge collateral as part of participating in payment and settlement systems
–Postsystems; and post collateral as part of derivatives activity.
We monitor our mix of secured and unsecured funding sources in our funding plan. We aim to use our available collateral efficiently to raise secured funding and to meet our other collateralised obligations.
Our biggest source of encumbrance is where we use our mortgage portfolio to raise funds through securitisation, covered bonds or other structured borrowing. We control our levels of encumbrance from these by setting a minimum level of unencumbered assets that must be available after we factor in our future funding plans, whether we can use our assets for our future collateral needs, the impact of a possible stress and our current level of encumbrance.encumbrance level.
Assets classified as readily available for encumbrance include cash and securities we hold in our eligible liquidity pool. They also include other unencumbered assets that give us a source of contingent liquidity. We do not rely on these extra unencumbered assets in our LRA, but we might use some of them in a time of stress. We can create liquidity by using them as collateral for secured funding or through outright sale.
Loans and advances to customers are only classified as readily available for encumbrance if they are already in a form we can use to raise funding without any other actions on our part. This includes excess collateral that is already in a secured funding structure. It also includesstructure and collateral that is pre-positioned at central banks andthat is available for use in secured funding.
All other loans and advances are classified as not readily available for encumbrance, however, they may still be suitable for use in secured funding structures.
Encumbrance of customer loans and advances
We have issued prime retail mortgage-backed and other asset-backed securitised products to a diverse investor base through our prime mortgage-backed and other asset-backed funding programmes.
We have raised funding with mortgage-backed notes, both issued to third parties and retained – the latter being central bank eligible collateral for funding purposes in other Bank of England facilities. We also have a covered bond programme, under which we issue securities to investors secured by a pool of residential mortgages.
For more on how we have issued notes from our securedthese programmes, externally and also retained them, and what we have used them for, see Notes 14 and 26 to the Consolidated Financial Statements in the 2020 Annual Report.
Statements.
On-balance sheet encumbered and unencumbered assets (audited)
| | | Encumbered with counterparties other than central banks | | Unencumbered assets not pre-positioned with central banks | | | Encumbered with counterparties other than central banks | Assets positioned at central banks(3) | | Unencumbered assets not pre-positioned with central banks | |
| | Covered bonds | Securitis- ations | Other | Total | Assets positioned at central banks(3) | Readily available | Other available assets | Cannot be encumbered | Total | Total assets | | Covered bonds | Securitis- ations | Other | Total | Readily available | Other available assets | Cannot be encumbered | Total | Total assets |
2020 | £m | |
2022 | | 2022 | £m |
Cash and balances at central banks(1)(2) | Cash and balances at central banks(1)(2) | — | | — | | 985 | | 985 | | 871 | | 41,681 | | — | | — | | 42,552 | | 43,537 | | Cash and balances at central banks(1)(2) | — | | — | | 1,330 | | 1,330 | | 911 | | 44,394 | | — | | — | | 45,305 | | 46,635 | |
Financial assets at FVTPL: | Financial assets at FVTPL: | | Financial assets at FVTPL: | |
–Derivative financial instruments | –Derivative financial instruments | — | | — | | — | | — | | — | | — | | — | | 3,451 | | 3,451 | | 3,451 | | –Derivative financial instruments | — | | — | | — | | — | | — | | — | | — | | 2,439 | | 2,439 | | 2,439 | |
–Other financial assets at FVTPL | –Other financial assets at FVTPL | — | | — | | — | | — | | — | | — | | — | | 834 | | 834 | | 834 | | –Other financial assets at FVTPL | — | | — | | — | | — | | — | | — | | — | | 434 | | 434 | | 434 | |
Financial assets at amortised cost: | Financial assets at amortised cost: | | Financial assets at amortised cost: | |
–Loans and advances to customers | –Loans and advances to customers | 23,669 | | 7,469 | | 149 | | 31,287 | | 61,292 | | 77,833 | | 19,801 | | 21,965 | | 180,891 | | 212,178 | | –Loans and advances to customers | 21,304 | | 2,851 | | 46 | | 24,201 | | 68,535 | | 91,761 | | 18,284 | | 21,059 | | 199,639 | | 223,840 | |
–Loans and advances to banks | –Loans and advances to banks | — | | — | | 804 | | 804 | | — | | — | | — | | 1,200 | | 1,200 | | 2,004 | | –Loans and advances to banks | — | | — | | 163 | | 163 | | — | | — | | — | | 942 | | 942 | | 1,105 | |
–Repurchase agreements – non trading | –Repurchase agreements – non trading | — | | — | | — | | — | | — | | — | | — | | 19,599 | | 19,599 | | 19,599 | | –Repurchase agreements – non trading | — | | — | | — | | — | | — | | — | | — | | 7,348 | | 7,348 | | 7,348 | |
–Other financial assets at amortised cost | –Other financial assets at amortised cost | — | | — | | 648 | | 648 | | — | | 515 | | — | | — | | 515 | | 1,163 | | –Other financial assets at amortised cost | — | | — | | 35 | | 35 | | — | | 121 | | — | | — | | 121 | | 156 | |
Financial assets at FVOCI | Financial assets at FVOCI | — | | — | | 5,677 | | 5,677 | | — | | 3,273 | | — | | — | | 3,273 | | 8,950 | | Financial assets at FVOCI | — | | — | | 4,441 | | 4,441 | | — | | 1,583 | | — | | — | | 1,583 | | 6,024 | |
Interests in other entities | Interests in other entities | — | | — | | — | | — | | — | | — | | — | | 172 | | 172 | | 172 | | Interests in other entities | — | | — | | — | | — | | — | | — | | — | | 252 | | 252 | | 252 | |
Intangible assets | Intangible assets | — | | — | | — | | — | | — | | — | | — | | 1,649 | | 1,649 | | 1,649 | | Intangible assets | — | | — | | — | | — | | — | | — | | — | | 1,550 | | 1,550 | | 1,550 | |
Property, plant and equipment | Property, plant and equipment | — | | — | | — | | — | | — | | — | | 1,740 | | — | | 1,740 | | 1,740 | | Property, plant and equipment | — | | — | | — | | — | | — | | — | | 1,526 | | — | | 1,526 | | 1,526 | |
Current tax assets | Current tax assets | — | | — | | — | | — | | — | | — | | — | | 271 | | 271 | | 271 | | Current tax assets | — | | — | | — | | — | | — | | — | | — | | 484 | | 484 | | 484 | |
Retirement benefit assets | Retirement benefit assets | — | | — | | — | | — | | — | | — | | — | | 496 | | 496 | | 496 | | Retirement benefit assets | — | | — | | — | | — | | — | | — | | — | | 1,051 | | 1,051 | | 1,051 | |
Other assets | Other assets | — | | — | | — | | — | | — | | — | | — | | 3,020 | | 3,020 | | 3,020 | | Other assets | — | | — | | — | | — | | — | | — | | — | | (601) | | (601) | | (601) | |
Total assets | Total assets | 23,669 | | 7,469 | | 8,263 | | 39,401 | | 62,163 | | 123,302 | | 21,541 | | 52,657 | | 259,663 | | 299,064 | | Total assets | 21,304 | | 2,851 | | 6,015 | | 30,170 | | 69,446 | | 137,859 | | 19,810 | | 34,958 | | 262,073 | | 292,243 | |
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| | | Encumbered with counterparties other than central banks | | Unencumbered assets not pre-positioned with central banks | | |
| | Covered bonds | Securitis- ations | Other | Total | Assets positioned at central banks(3) | Readily available | Other available assets | Cannot be encumbered | Total | Total assets | |
2019 | £m | |
2021 | | 2021 | |
Cash and balances at central banks(1)(2) | Cash and balances at central banks(1)(2) | — | | — | | 1,080 | | 1,080 | | 707 | | 24,608 | | — | | — | | 25,315 | | 26,395 | | Cash and balances at central banks(1)(2) | — | | — | | 1,580 | | 1,580 | | 935 | | 47,979 | | — | | — | | 48,914 | | 50,494 | |
Financial assets at FVTPL: | Financial assets at FVTPL: | | Financial assets at FVTPL: | |
–Derivative financial instruments | –Derivative financial instruments | — | | — | | — | | — | | — | | — | | — | | 3,363 | | 3,363 | | 3,363 | | –Derivative financial instruments | — | | — | | — | | — | | — | | — | | — | | 1,720 | | 1,720 | | 1,720 | |
–Other financial assets at FVTPL | –Other financial assets at FVTPL | — | | — | | — | | — | | — | | — | | — | | 973 | | 973 | | 973 | | –Other financial assets at FVTPL | — | | — | | — | | — | | — | | — | | — | | 676 | | 676 | | 676 | |
Financial assets at amortised cost: | Financial assets at amortised cost: | | Financial assets at amortised cost: | |
–Loans and advances to customers | –Loans and advances to customers | 23,310 | | 12,915 | | 366 | | 36,591 | | 55,272 | | 76,568 | | 22,875 | | 16,192 | | 170,907 | | 207,498 | | –Loans and advances to customers | 15,713 | | 3,720 | | 84 | | 19,517 | | 80,623 | | 74,890 | | 18,893 | | 19,602 | | 194,008 | | 213,525 | |
–Loans and advances to banks | –Loans and advances to banks | — | | — | | 615 | | 615 | | — | | — | | — | | 1,968 | | 1,968 | | 2,583 | | –Loans and advances to banks | — | | — | | 478 | | 478 | | — | | — | | — | | 942 | | 942 | | 1,420 | |
–Repurchase agreements – non trading | –Repurchase agreements – non trading | — | | — | | — | | — | | — | | — | | — | | 23,636 | | 23,636 | | 23,636 | | –Repurchase agreements – non trading | — | | — | | — | | — | | — | | — | | — | | 12,683 | | 12,683 | | 12,683 | |
–Other financial assets at amortised cost | –Other financial assets at amortised cost | — | | — | | 3,026 | | 3,026 | | — | | 4,030 | | — | | — | | 4,030 | | 7,056 | | –Other financial assets at amortised cost | — | | — | | 0 | | 0 | | — | | 506 | | — | | — | | 506 | | 506 | |
Financial assets at FVOCI | Financial assets at FVOCI | — | | — | | 6,020 | | 6,020 | | — | | 3,727 | | — | | — | | 3,727 | | 9,747 | | Financial assets at FVOCI | — | | — | | 4,434 | | 4,434 | | — | | 1,417 | | — | | — | | 1,417 | | 5,851 | |
Interests in other entities | Interests in other entities | — | | — | | — | | — | | — | | — | | — | | 117 | | 117 | | 117 | | Interests in other entities | — | | — | | — | | — | | — | | — | | — | | 201 | | 201 | | 201 | |
Intangible assets | Intangible assets | — | | — | | — | | — | | — | | — | | — | | 1,776 | | 1,776 | | 1,776 | | Intangible assets | — | | — | | — | | — | | — | | — | | — | | 1,545 | | 1,545 | | 1,545 | |
Property, plant and equipment | Property, plant and equipment | — | | — | | — | | — | | — | | — | | 1,971 | | — | | 1,971 | | 1,971 | | Property, plant and equipment | — | | — | | — | | — | | — | | — | | 1,555 | | — | | 1,555 | | 1,555 | |
Current tax assets | Current tax assets | — | | — | | — | | — | | — | | — | | — | | 186 | | 186 | | 186 | | Current tax assets | — | | — | | — | | — | | — | | — | | — | | 351 | | 351 | | 351 | |
Retirement benefit assets | Retirement benefit assets | — | | — | | — | | — | | — | | — | | — | | 670 | | 670 | | 670 | | Retirement benefit assets | — | | — | | — | | — | | — | | — | | — | | 1,573 | | 1,573 | | 1,573 | |
Other assets | Other assets | — | | — | | — | | — | | — | | — | | — | | 2,517 | | 2,517 | | 2,517 | | Other assets | — | | — | | — | | — | | — | | — | | — | | 1,576 | | 1,576 | | 1,576 | |
Total assets | Total assets | 23,310 | | 12,915 | | 11,107 | | 47,332 | | 55,979 | | 108,933 | | 24,846 | | 51,398 | | 241,156 | | 288,488 | | Total assets | 15,713 | | 3,720 | | 6,576 | | 26,009 | | 81,558 | | 124,792 | | 20,448 | | 40,869 | | 267,667 | | 293,676 | |
(1)Encumbered cash and balances at central banks include minimum cash balances we have to hold at central banks for regulatory purposes.
(2)Readily realisable cash and balances at central banks are amounts held at central banks as part of our liquidity management activities.
(3)Comprises pre-positioned assets and encumbered assets.
158Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 158 |
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Capital risk
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| Overview Capital risk is the risk that we do not have an adequate amount or quality of capital to meet our internal business needs,objectives, regulatory requirements and market expectations. In this section, we set out how we are regulated. We also give details of the results of the Bank of England’s 2019 stress testing exercise. We explain how we manage capital on a standalone basis as a subsidiary in the Banco Santander group. We then analyse our capital resources and key capital ratios including our leverage and RWAs. | | | Key metrics CET1 capital ratio of 15.2% (2019: 14.3%(2021: 15.9%) Total qualifying regulatory capital of £15.4bn (2019: £15.8bn)£14.5bn (2021: £14.7bn)
UK leverage ratio of 5.1% (2019: 4.7%5.2% (2021: 5.2%) | |
THE SCOPE OF OUR CAPITAL ADEQUACY
Regulatory supervision
For capital purposes, we are subject to prudential supervision by the PRA, as a UK banking group, and by the European Central Bank (ECB) as part of the Banco Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM). Although we are part of the Banco Santander group, we do not have a guarantee from our immediate and ultimate parent Banco Santander SA and we operate as a standalone subsidiary. As we are part of the UK sub-group that is regulated by the PRA, we have to meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the support of our parent. Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior management appointments.
Santander UK Group Holdings plc is the holding company of Santander UK plc and is the head of the Santander UK group for regulatory capital and leverage purposes. Santander UK plc is the head of the ring-fenced bank sub-group and is subject to regulatory capital and leverage rules in relation to that sub-group.
Our basis of consolidation for our capital disclosures is substantially the same as for our Consolidated Financial Statements.
CAPITAL RISK MANAGEMENT
The Board is responsible for capital management strategy and policy and ensuring that we monitor and control our capital resources within regulatory and internal limits. We manage our funding and maintain capital adequacy on a standalone basis. We operate within the capital risk framework and appetite approved by our Board. This reflects the business environment we operate in, our strategy for each material risk and the potential impact of any adverse scenarios or stresses on our capital position.capital.
Management of capital requirements (audited)
Our capital risk appetite aims to maintain capital levels appropriate to the level of stress applied, and the expected regulatory response. In:
–An adverse economic stress, which we might expect to occur once in 20 years, the firm should remain profitable and exceed all regulatory capital minimums at all times.
–A very severe economic stress, which we might expect to occur once in 100 years, and which has been designed to test any specific weaknesses of a firm’s business model, the firm should meet all regulatory capital minimums at all times. This is subject to the use ofusing regulatory buffers designed to absorb losses in such a stress.
Management of capital resources (audited)
We use a mix of regulatory and EC ratios and limits, internal buffers and restrictions to manage our capital resources. We also take account of the costs of differing capital instruments and capital management techniques. We also use these to shape the best structure for our capital needs. We decide how to allocate our capital resources as part of our strategic planning process. We base this in part on the relative returns on capital using both EC and regulatory capital measures. We plan for severe stresses and we set out what action we would take if an extremely severe stress threatened our viability and solvency. This could include not paying dividends, selling assets, reducing our business and issuing more capital.
Risk measurement
We apply Banco Santander’s approach to capital measurement and risk management for CRD IV. Santander UK Group Holdings plc is classified as a significant subsidiary of Banco Santander SA. For more on the CRD IV risk measurement of our exposures, see Banco Santander’s Pillar 3 report.
Key metrics
The main metrics we use to measure capital risk are CET1 capital ratio,and total capital ratio and UK leverage ratio. Weratio.We continue to be in excess of overall capital requirements, minimum leverage requirements and minimum requirements for own funds and eligible liabilities (MREL).
Stress testing
Each year we create a capital plan, as part of our ICAAP. We share our ICAAP with the PRA. The PRA then tells us how much capital (Pillar 2A), and of what quality, it thinks we should hold on top of our Pillar 1 requirements and buffer levels. We also develop a series of economic scenarios to stress test our capital needs and confirm that we have enough regulatory capital to meet our projected and stressed capital needs and to meet our obligations as they fall due.
In 2022, we developed a Climate Internal Scenario Analysis (CISA) to help understand better the potential impact of climate change on our business portfolios and balance sheet. The CISA outputs will form the basis of our 2022 ICAAP for climate risk by helping show if we need to hold more capital for climate risks and help us prioritise our actions for the next five years.
We augment our regulatory minimum capital with internal buffers. We hold buffers to ensure we have enough time to take action against unexpected movements.
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changes.Risk mitigation
We have designed our capital risk framework, policies and procedures to ensure that we operate within our Risk Appetite. We manage capital transferability between our subsidiaries in line with our business strategy, our risk and capital management policies, and UK laws and regulations. There are no legal restrictions on us moving capital resources promptly, or repaying liabilities, between the Company and its subsidiaries except for distributions between Santander UK entities in the ring-fenced bank sub-group and Santander UK entities that are not members of the ring-fenced bank sub-group, where the PRA is required to assess the impact of proposed distribution prior to payment. For details on our Recovery framework in the event of a capital stress, see the risk mitigation section'risk mitigation' in the ‘Liquidity risk’ section.
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Annual Report 2022 | Santander UK Group Holdings plc 159 |
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At 31 December 2022, Santander UK plc (RFB), Cater Allen Limited, Santander ISA Managers Limited and certain other non-regulated subsidiaries within the ring-fenced bank entered into a capital support deed dated 13 November 2018 (the RFB Sub-Group Capital Support Deed). The partieswere party to the RFB Sub-Group Capital Support Deed aredated 17 December 2021. These parties were permitted by the PRA to form a core UK group, as defined in the PRA Rulebook, a permission which will expire on 31 December 2021.2024. Exposures of each of the regulated entities to other members of the core UK group arewere exempt from large exposure limits that would otherwise apply. These intra-group exposures were risk-weighted at 0% and excluded from leverage exposure on a solo as well as consolidated basis. The purpose of the RFB Sub-Group Capital Support Deed iswas to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated parties to any of the regulated parties in the RFB Sub-Group in the event that one of the regulated parties breachesbreached or iswas at risk of breaching its capital resources requirements or risk concentrations requirements.
At 31 December 2022, Santander UK Group Holdings plc SFSand Santander Financial Services plc, the regulated entities, and Santander Equity Investments Limited entered into a capital support deed dated 13 November 2018 (the NRFBwere party to the Non-RFB Sub-Group Capital Support Deed)Deed dated 17 December 2021. These parties were permitted by the PRA to form a core UK group, as defined in the PRA Rulebook, a permission which expireswill expire on 31 December 2021.2024. Exposures of each of the regulated entities to other members of the core UK group were exempt from large exposure limits that would otherwise apply. These intra-group exposures were risk-weighted at 0% and excluded from leverage exposure on a solo as well as consolidated basis. The purpose of the NRFB Capital Support Deed iswas to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated parties to any of the regulated parties in the Non-RFB Sub-Group in the event that one of the regulated parties breached or was at risk of breaching its capital resources requirements or risk concentrations requirements. For more details, see Note 31.
Risk monitoring and reporting
We monitor and report regularly against our capital plan. We do this to identify any change in our business performance that might affect our capital. Each month, we also review the economic assumptions we use to create and stress test our capital plan. We do this to identify any potential reduction in our capital.
CAPITAL RISK REVIEW
Meeting evolving capital requirements
We target a CET1 management buffer of sufficient size to absorb volatility in CET1 deductions, capital supply and capital demand whilst remaining above the current and expected future regulatory CET1 requirement. Distribution restrictions would be expected to be applied if we were unable to meet both our minimum requirement, which consists of the Pillar 1 minimum plus Pillar 2A, the CRD IV buffers consisting of the Capital Conservation Buffer (CCB), the Countercyclical Capital Buffer (CCyB), and the Other Systemically Important Institutions Buffer (O-SII) at the level of the RFB Group. Expected future regulatory CET1 requirements are impacted by the projected increase in the UK CCyB to 2% in July 2023.
Impact of IFRS 9 on regulatory capital
We expect ECL-based provisions continue to be more volatile than our IAS 39 incurred loss-based provisions used prior to 2018 as ourOur ECL methodology takes account of forward-looking data and covers a range of possible economic outcomes. This is likely to impact our CET1 capital levels,outcomes, and so provision movements may result in increased pro-cyclicality of risk-based capital and leverage ratios. However, the impact is currently mitigated by our surplus of ECLIRB model regulatory expected losses over provisions for exposures using the IRB approach. For such exposures (which include residential mortgages) the adverse impact on CET1 capital of provision increases from reserve movements is offset by the related reduction of the negative CET1 capital adjustment for regulatory expected loss amounts. Furthermore, the EU transition arrangementsUK CRR transitional rules for the capital impact of IFRS 9 mean that adverse CET1 effects from increases in ECL-based provisions from the level of such provisions at 1 January 2018 are partly reduced until the end of 2024.
We reflect projections of ECL provisions in our capital position forecasting under base case and stress scenarios for ICAAP and capital management purposes. We also consider the dynamics of ECL in how we assess monitor and manage capital risk. The greater volatility from IFRS 9 ECL could result in material favourable and unfavourable swings to our Income Statement. Whilst the initial impacts of IFRS 9 were based on estimates prepared in a supportive economic environment, aA period of economic instability, (suchsuch as wasthat seen in early 2020 due to the impacts of the Covid-19 pandemic)pandemic, could significantly impact our results and our financial assets. It could also impact the amount of capital we have to hold. We take into account the volatility of ECL in our capital planning strategy.
Bank of England stress testing
Due toThe results of the Covid-19 pandemic,latest round of Bank of England stress tests were released in December 2021. As a result of the exercise, the Bank of England cancelleddid not require Santander UK to undertake any actions. Before management actions and on a non-transitional IFRS 9 basis, with a low-point CET1 capital ratio of 11.2% we were well above the 2020 Annual Stress Testreference rate of 8.2%. Additionally, with a low-point UK leverage ratio of 4.1%, we were above the reference rate of 3.5%. The Bank of England’s reference rates comprise the sum of minimum capital requirements (4.5% of RWA plus Pillar 2A for the CET1 ratio, and 3.25% of Leverage Exposure for the UK Leverage Ratio), applicable systemic buffers, and an adjustment to help lenders focus on meetingoffset the needspro-cyclical impacts of UK households and businesses via the continuing provision of credit.
In the August 2020 Financial Stability Report, the Financial Policy Committee published a ‘reverse stress test’ exercise performed without direct input from banks which judged UK banks to be resilient to a very wide range of possible outcomes.IFRS 9.
Meeting evolvingHeadroom of our CET1 capital requirementsratio to our current MDA trigger level at 31 December 2022
We target aAt 31 December 2022, the headroom of our CET1 management buffercapital ratio of sufficient size15.2% to absorb volatility inour 7% AT1 permanent write down (PWD) securities trigger was 8.2% of total RWAs or £5.8bn (2021: 8.9% of total RWAs or £6.1bn).
The headroom of our CET1 deductions, capital supply and capital demand whilst remaining above the regulatory CET1 requirement. Distribution restrictions would be expectedratio to be applied if we were unable to meet both our minimumcurrent maximum distributable amount (MDA) trigger level at 31 December 2022 was:
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| | | Minimum |
| | | % |
Pillar 1 | | | 4.5 | |
Pillar 2A(1) | | | 3.2 | |
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Capital conservation buffer | | | 2.5 | |
Countercyclical capital buffer | | | 1.0 | |
Current MDA trigger | | | 11.2 | |
Headroom | | | 4.0 | |
CET1 capital ratio | | | 15.2 | |
(1) Santander UK's Pillar 2 requirement which consists of the Pillar 1 minimum pluswas 5.7% at 31 December 2022, Pillar 2A the CRD IV buffers consisting of the Capital Conservation Buffer (CCB), the Countercyclical Capital Buffer (CCyB) ,and from 28 December 2020 the Other Systemically Important Institutions Buffer (O-SII) (previously the Systemic Risk Buffer (SRB)) at the level of the RFB Group.
The Bank of England's Financial Policy Committee (FPC) reduced UK CCyB to 0% in March 2020 in response to the Covid-19 pandemic, and the FPC stated that it expected to maintain the UK CCyB at this rate for at least 12 months. As thereguidance is a one yearpoint in time lag for any announced CCyB increasesassessment.
Significant headroom to apply, any subsequent increase would not take effect until March 2022 at the earliest.minimum capital requirements and MDA
We review the resilience of ourOur current capital position via internal stress tests conducted as partprovides significant headroom of 400bps above our ICAAP exercise, and we participate in the annualMDA trigger. The UK Banking Stress Test. In the last exercise in 2019, our projected CET1leverage ratio and UK Leverage ratio exceeded the hurdle rates after ‘strategic’ management actions and the Prudential Regulation Committee judged that the stress test did not reveal capital inadequacies in our balance sheet.of 5.2% is well above regulatory requirements.
160Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 160 |
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Headroom of our CET1 capital ratio to our current MDA trigger level at 31 December 2020
At 31 December 2020, the headroom of our CET1 capital ratio of 15.2% to our 7% AT1 permanent write down (PWD) securities trigger was 8.2% of total RWAs or £6.0bn (2019: 7.3% of total RWAs or £5.3bn).
The headroom of our CET1 capital ratio to our current maximum distributable amount (MDA) trigger level at 31 December 2020 was:
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| Current MDA |
| % |
Pillar 1 | 4.5 | |
Pillar 2A(1)
| 2.8 | |
CCB | 2.5 | |
CCyB(2)
| — | |
Current MDA trigger | 9.8 | |
Headroom to current MDA | 5.4 | |
Total CET1 capital ratio | 15.2 | |
(1) Santander UK’s Pillar 2 CET1 requirement was 4.94% at 31 December 2020, Pillar 2A guidance is a point in time assessment.
(2) The current applicable UK CCyB rate is 0% (2019: 1%).
MREL recapitalisation
We have made major progress to meet MREL requirements. To date, we have issued £7.5bn of MREL compliant senior unsecured bonds.
Our forward-looking MREL recapitalisation plan assumes the Pillar 2A requirement remains at 4.9% and is calculated using RWA, leverage exposures and exchange rates at 31 December 2020. Based on this set of assumptions, our MREL requirements are driven by leverage. Santander UK’s indicative MREL requirements excluding buffers is currently circa. £21bn from 1 January 2022. Assuming the current plan by 2022, we expect to issue up to a further £2.5bn of senior unsecured bonds by year-end 2021 to cover the maturities and meet our total 2022 MREL requirement
In addition to meeting our minimum requirement, we intend to have an MREL recapitalisation management buffer in excess of the value of Santander UK Group Holdings plc senior unsecured securities that are due to become MREL ineligible over the following six months.
Key capital ratios
| | | Santander UK Group Holdings plc | | Santander UK plc | | Santander UK Group Holdings plc | | Santander UK plc |
| | 2020 | 2019 | | 2020 | 2019 | | 2022 | 2021 | | 2022 | 2021 |
| | % | % | | % | % | | % | % | | % | % |
CET1 capital ratio | CET1 capital ratio | 15.2 | | 14.3 | | | 15.4 | | 14.3 | | CET1 capital ratio | 15.2 | | 15.9 | | | 15.4 | | 16.1 | |
AT1 | AT1 | 3.1 | | 3.1 | | | 2.7 | | 2.7 | | AT1 | 3.1 | | 3.2 | | | 2.8 | | 2.9 | |
Grandfathered Tier 1 | Grandfathered Tier 1 | 0.3 | | 0.5 | | | 0.4 | | 0.7 | | Grandfathered Tier 1 | — | | 0.2 | | | — | | 0.2 | |
Tier 2 | Tier 2 | 2.5 | | 3.7 | | | 2.7 | | 4.0 | | Tier 2 | 2.1 | | 2.3 | | | 2.2 | | 2.7 | |
Total capital ratio | Total capital ratio | 21.1 | | 21.6 | | | 21.2 | | 21.7 | | Total capital ratio | 20.4 | | 21.6 | | | 20.4 | | 21.9 | |
The total capital difference between Santander UK Group Holdings plc and Santander UK plc was due to the recognition of minority interests. The total subordination available to Santander UK plc senior unsecured bondholders was 21.2% (2019:21.7%20.4% (2021: 21.9%) of RWAs.
Return on ordinary shareholders' equityassets - profit after tax dividedby average total assets was 2.9% (2019: 4.9%0.48% (2021: 0.48%).
OurSummarised change in CET1 capital ratio was up 90bps to 15.2%, with a 5.4p.p. buffer to MDA restrictions. The CET1 capital ratio includes a benefit of c.30bps and UK leverage ratio c.10bps from the change in treatment of software assets. Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17bps to the CET1 capital ratio, through the implementation of the RWA reduction factors for certain SME and infrastructure exposures.
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| Change | CET1 Capital ratio |
| pp | % |
31 December 2021 | | 15.9 | |
Annual Report 2020 Regulatory changes on 1 January 2022
| |-0.4 | |
Pro forma at 1 January 2022 | | 15.5 Risk review | |
Post dividend retained earnings | +0.8 | |
Special dividend | -0.4 | |
Fixed pension deficit contributions | -0.2 | |
Expected loss less provisions | +0.2 | |
RWA growth and other | -0.7 | |
31 December 2022 | | 15.2 | |
2022 compared to 2021
The CET1 capital ratio decreased 70 bps to 15.2%. This was largely due to regulatory changes that took effect on 1 January 2022, and a special dividend paid in December 2022. The regulatory changes included the reintroduction of the full CET1 software asset deduction, and implementation of new definition of default regulatory guidance. The impact of increased RWAs £71.2bn (£68.1bn) and the special dividend were partially offset by post dividend retained earnings. We remain strongly capitalised with significant headroom to minimum requirements and MDA.
Total capital ratio decreased by 120bps to 20.4%, due to the lower CET1 capital ratio as outlined above and the reduction in AT1 and Tier 2 capital securities recognised following the end of the CRR Grandfathering period on 1 January 2022.
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Annual Report 2022 | | Santander UK Group Holdings plc 161 |
Regulatory capital resources (audited)
This table shows our qualifying regulatory capital.
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| 2020 | 2019 |
| £m | £m |
CET1 capital instruments and reserves: | | |
–Capital instruments | 7,060 | | 7,060 | |
–Retained earnings | 6,030 | | 6,251 | |
–Accumulated other reserves and non-controlling interests | 679 | | 554 | |
CET1 capital before regulatory adjustments | 13,769 | | 13,865 | |
CET1 regulatory adjustments: | | |
–Additional value adjustments | (21) | | (35) | |
–Goodwill (net of tax) | (1,150) | | (1,155) | |
–Other intangibles | (199) | | (573) | |
–Fair value reserves related to gains or losses on cash flow hedges | (486) | | (368) | |
–Negative amounts resulting from the calculation of regulatory expected loss amounts | (368) | | (619) | |
–Gains or losses on liabilities valued at fair value resulting from changes in own credit standing | (6) | | (5) | |
–Deferred tax assets that rely on future profitability excluding timing differences | (9) | | (8) | |
–Defined benefit pension fund assets | (364) | | (502) | |
–Dividend accrual | (18) | | (18) | |
–IFRS 9 Transitional Adjustment | 73 | | 16 | |
–Deductions for non-controlling interests | (162) | | (160) | |
CET1 capital | 11,059 | | 10,438 | |
AT1 capital instruments: | | |
–Capital instruments | 2,241 | | 2,241 | |
–Amount of qualifying items subject to phase out from AT1 | 324 | | 487 | |
–Regulatory deductions for instruments issued by subsidiary undertakings | (93) | | (83) | |
AT1 capital | 2,472 | | 2,645 | |
Tier 1 capital | 13,531 | | 13,083 | |
Tier 2 capital instruments: | | |
–Capital instruments | 2,076 | | 2,901 | |
–Amount of qualifying items subject to phase out from Tier 2 | 352 | | 377 | |
–Regulatory deductions for instruments issued by subsidiary undertakings or subject to CRDIV amortisation and repurchases | (571) | | (583) | |
Tier 2 capital | 1,857 | | 2,695 | |
Total regulatory capital(1) | 15,388 | | 15,778 | |
(1) Capital resources include a transitional IFRS 9 benefit at 31 December 2020 of £73m (2019: £16m).
2020 compared to 2019
CET1 capital increased to £11.1bn, with capital accretion through retained profits, the impact of the change in treatment of software assets in UK Capital Requirements Regulation (which increased CET1 capital by £0.25bn) and a lower deduction from the excess of regulatory expected loss amounts over credit provisions. These increases were partially offset by adverse market driven movements in the defined benefit pension schemes.
AT1 capital decreased in 2020, primarily reflecting the annual increase in the transitional limit applied to grandfathered AT1 capital instruments.
Tier 2 capital decreased in 2020, largely reflecting the amortisation of dated instruments.
We remain strongly capitalised and Covid-19 did not trigger a capital stress. As part of the Bank of England Interim Financial Stability Report (May 2020), the PRA developed a desktop stress scenario, which had less of an impact over the first two years of the scenario on the core banking system than their 2019 Stress Test, where our CET1 drawdown was the lowest across UK banks and we exceeded CET1 capital ratio and Tier 1 Leverage ratio hurdle rates across the projection horizon.
We paid an ordinary share dividend in December in accordance with the PRA's approach to shareholder distributions for 2020.
162Santander UK Group Holdings plc
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Regulatory capital resources (audited)
This table shows our qualifying regulatory capital:
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
CET1 capital instruments and reserves: | | |
– Capital instruments | 7,060 | | 7,060 | |
– Retained earnings | 6,563 | | 6,754 | |
– Accumulated other reserves and non-controlling interests | (1,108) | | 138 | |
CET1 capital before regulatory adjustments | 12,515 | | 13,952 | |
CET1 regulatory adjustments: | | |
– Additional value adjustments | (18) | | (25) | |
– Goodwill (net of tax) | (1,133) | | (1,130) | |
– Other intangibles | (351) | | (195) | |
– Fair value reserves related to gains or losses on cash flow hedges | 1,116 | | (110) | |
– Negative amounts resulting from the calculation of regulatory expected loss amounts | (517) | | (585) | |
– Gains or losses on liabilities valued at fair value resulting from changes in own credit standing | (27) | | 0 | |
– Deferred tax assets that rely on future profitability excluding timing differences | 0 | | (2) | |
– Defined benefit pension fund assets | (755) | | (1,061) | |
– NPE Backstop | (4) | | 0 | |
– CET1 Capital Charge | 0 | | 0 | |
– Dividend accrual | (3) | | (17) | |
– IFRS 9 Transitional Adjustment | 20 | | 21 | |
| | |
CET1 capital | 10,843 | | 10,848 | |
AT1 capital instruments: | | |
– Capital instruments | 2,196 | | 2,191 | |
– Amount of qualifying items subject to phase out from AT1 | — | | 163 | |
– Regulatory deductions for instruments issued by subsidiary undertakings | — | | (48) | |
AT1 capital | 2,196 | | 2,306 | |
Tier 1 capital | 13,039 | | 13,154 | |
Tier 2 capital instruments: | | |
– Capital instruments | 2,111 | | 2,263 | |
– Amount of qualifying items subject to phase out from Tier 2 | 207 | | 35 | |
– Regulatory deductions for instruments issued by subsidiary undertakings or subject to CRDIV amortisation and repurchases | (857) | | (725) | |
Tier 2 capital | 1,461 | | 1,573 | |
Total regulatory capital | 14,500 | | 14,727 | |
2022 compared to 2021
We paid £1.0bn interim dividends (2021: £1.3bn), £0.3bn of which was a special dividend. These were paid following review and approval by the Board in line with our dividend policy.
Movements in regulatory capital :
| | | CET1 capital | AT1 capital | Tier 2 capital | Total | | CET1 capital | AT1 capital | Tier 2 capital | Total |
| | £m | | £m |
At 1 January 2020 | 10,438 | | 2,645 | | 2,695 | | 15,778 | | |
At 1 January 2022 | | At 1 January 2022 | 10,848 | 2,306 | 1,573 | 14,727 |
–Retained earnings | –Retained earnings | (221) | | — | | — | | (221) | | –Retained earnings | (191) | | — | | — | | (191) | |
–Other reserves and non-controlling interests | –Other reserves and non-controlling interests | 125 | | — | | — | | 125 | | –Other reserves and non-controlling interests | (1,246) | | — | | — | | (1,246) | |
–Additional value adjustments | –Additional value adjustments | 14 | | — | | — | | 14 | | –Additional value adjustments | 7 | | — | | — | | 7 | |
–Goodwill (net of tax) | –Goodwill (net of tax) | 5 | | — | | — | | 5 | | –Goodwill (net of tax) | (3) | | — | | — | | (3) | |
–Other intangibles | –Other intangibles | 374 | | — | | — | | 374 | | –Other intangibles | (156) | | — | | — | | (156) | |
–Fair value reserves related to gains and losses on cash flow hedges | –Fair value reserves related to gains and losses on cash flow hedges | (118) | | — | | — | | (118) | | –Fair value reserves related to gains and losses on cash flow hedges | 1,226 | | — | | — | | 1,226 | |
–Negative amounts resulting from the calculation of regulatory expected loss amounts | –Negative amounts resulting from the calculation of regulatory expected loss amounts | 251 | | — | | — | | 251 | | –Negative amounts resulting from the calculation of regulatory expected loss amounts | 68 | | — | | — | | 68 | |
–Gains or losses on liabilities valued at fair value resulting from changes in own credit standing | –Gains or losses on liabilities valued at fair value resulting from changes in own credit standing | (1) | | — | | — | | (1) | | –Gains or losses on liabilities valued at fair value resulting from changes in own credit standing | (27) | | — | | — | | (27) | |
–Deferred tax assets that rely on future profitability excluding timing differences | –Deferred tax assets that rely on future profitability excluding timing differences | (1) | | — | | — | | (1) | | –Deferred tax assets that rely on future profitability excluding timing differences | 2 | | — | | — | | 2 | |
–Defined benefit pension fund assets | –Defined benefit pension fund assets | 138 | | — | | — | | 138 | | –Defined benefit pension fund assets | 306 | | — | | — | | 306 | |
–NPE Backstop | | –NPE Backstop | (4) | | — | | — | | (4) | |
–CET1 Capital Charge | | –CET1 Capital Charge | — | | — | | — | | — | |
–Dividend accrual | | –Dividend accrual | 14 | | — | | — | | 14 | |
| –Deductions for non-controlling interests | (2) | | — | | — | | (2) | | |
–Capital instruments | –Capital instruments | — | | — | | (825) | | (825) | | –Capital instruments | — | | 5 | | (152) | | (147) | |
–IFRS 9 Transitional Adjustment | –IFRS 9 Transitional Adjustment | 57 | | — | | — | | 57 | | –IFRS 9 Transitional Adjustment | (1) | | — | | — | | (1) | |
–Amount of qualifying items subject to phase out from AT1 | –Amount of qualifying items subject to phase out from AT1 | — | | (163) | | — | | (163) | | –Amount of qualifying items subject to phase out from AT1 | — | | (163) | | — | | (163) | |
–Amount of qualifying items subject to phase out from Tier 2 | –Amount of qualifying items subject to phase out from Tier 2 | — | | — | | (25) | | (25) | | –Amount of qualifying items subject to phase out from Tier 2 | — | | — | | 172 | | 172 | |
- Deductions for instruments issued by subsidiary undertakings or subject to CRD IV amortisation | - Deductions for instruments issued by subsidiary undertakings or subject to CRD IV amortisation | — | | (10) | | 12 | | 2 | | - Deductions for instruments issued by subsidiary undertakings or subject to CRD IV amortisation | — | | 48 | | (132) | | (84) | |
At 31 December 2020 | 11,059 | | 2,472 | | 1,857 | | 15,388 | | |
At 31 December 2022 | | At 31 December 2022 | 10,843 | | 2,196 | | 1,461 | | 14,500 | |
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In line with the position of the Basel Committee views following the outbreak of the Covid-19 pandemic, the UK has now adopted revised IFRS 9 transitional adjustment rules which apply a higher level of transitional relief to capital following rises in IFRS 9 provisions.
The original transitional adjustments consisted of a Static component, which was impacted on 1 January 2018 and a Dynamic component with changes in provisions for non-impaired assets made after 1 January 2018. A transitional factor was applied to the Dynamic component to determine the level of offset that was available over time (95% in 2018, 85% in 2019, 70% in 2020, 50% in 2021 and 25% in 2022).
The revisions to the transitional adjustment are part of the ‘Quick fix' CRR amendments which have been in force from 27 June 2020. They have involved dividing the original Dynamic component into two parts – creating an ‘old’ component for provision changes from 1 January 2018 to 1 January 2020, and then a new Dynamic component for provision changes from 1 January 2020 and applying a revised higher transitional factor to this latter component, with an extended transitional period.
CET1, AT1 and Tier 2 regulatory adjustments
These are adjustments required by CRD IV.
AT1 capital
These are preference shares and innovative/hybrid Tier 1 securities. None of the instruments we issued before 1 January 2014 fully meet the CRD IV AT1 capital rules, which apply from that date. The instruments contribution to Tier 1 capital will bewas phased out by CRD IV rules until the start of 2022.in 2021. The £750m Fixed Rate Reset Perpetual AT1 Capital Securities (net of issuance costs), the £800m Perpetual Capital Securities and the £500m Perpetual Capital Securities we issued since then fully meet the CRD IV AT1 capital rules.
In August 2019, as part of a capital management exercise, the Company purchased and redeemed the £300m Fixed Rate Reset Perpetual AT1 Capital Securities, and issued a further £500m Fixed Rate Reset Perpetual AT1 Capital Securities to Banco Santander SA.
Tier 2 capital
These are fully CRD IV eligible Tier 2 instruments and grandfathered Tier 2 instruments whose recognition as capital is beingwas phased out under CRD IV untilin 2021.
MREL recapitalisation
As at the startend of 2022, we have outstanding £12.2bn of MREL compliant senior unsecured bonds.
Our forward-looking MREL recapitalisation plan assumes the Pillar 2A requirement remains at 5.7% and is calculated using RWA, leverage exposures and exchange rates at 31 December 2022. Based on this set of assumptions, our MREL requirements are driven by our RWAs. Santander UK’s indicative MREL requirements including combined buffer requirements is currently circa £23bn from 31 December 2022.
In addition to meeting our minimum requirement, we intend to have an MREL recapitalisation management buffer in excess of the value of Santander UK Group Holdings plc senior unsecured securities that are due to become MREL ineligible over the following six months, plus a buffer for foreign exchange movements.
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Annual Report 2020 | Risk review
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Risk-weighted assets
The tables below are consistent with our regulatory filings for 31 December 20202022 and 31 December 2019.2021.
| | | 2020 | 2019 | | 2022 | 2021 |
RWAs by risk | RWAs by risk | £bn | £bn | RWAs by risk | £bn | £bn |
Credit risk | Credit risk | 64.8 | | 64.1 | | Credit risk | 63.0 | | 60.2 | |
Counterparty risk | Counterparty risk | 1.1 | | 1.5 | | Counterparty risk | 0.7 | | 1.0 | |
Market risk | Market risk | 0.2 | | 0.3 | | Market risk | 0.3 | | 0.2 | |
Operational risk | Operational risk | 6.8 | | 7.3 | | Operational risk | 7.2 | | 6.7 | |
| | 72.9 | | 73.2 | | | 71.2 | | 68.1 | |
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| 2020 | 2019 |
RWAs by segment | £bn | £bn |
Retail Banking | 49.5 | | 47.8 | |
Corporate & Commercial Banking | 13.3 | | 14.0 | |
Corporate & Investment Banking | 3.8 | | 4.8 | |
Corporate Centre | 6.3 | | 6.6 | |
| 72.9 | | 73.2 | |
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| 2022 | 2021 |
RWAs by segment | £bn | £bn |
Retail Banking | 44.6 | | 42.9 | |
– Homes | 35.0 | | 34.2 | |
– Everyday Banking | 9.6 | | 8.7 | |
Consumer Finance | 7.3 | | 6.4 | |
Corporate & Commercial Banking | 14.0 | | 13.6 | |
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Corporate Centre | 5.3 | | 5.2 | |
| 71.2 | | 68.1 | |
Movements in RWAs by risk:
| | | Credit/ counterparty risk | Market risk | Operational risk | Total | | Credit/counterparty risk | Market risk | Operational risk | Total |
| | £bn | | £bn |
At 1 January 2020 | 65.6 | | 0.3 | | 7.3 | | 73.2 | | |
At 1 January 2022 | | At 1 January 2022 | 61.2 | | 0.2 | | 6.7 | | 68.1 | |
Asset size | Asset size | (1.2) | | (0.1) | | — | | (1.3) | | Asset size | 0.9 | | 0.1 | | 0.5 | | 1.5 | |
Asset quality | Asset quality | 1.9 | | — | | — | | 1.9 | | Asset quality | 0.4 | | — | | — | | 0.4 | |
| Model updates | | Model updates | 0.5 | | — | | — | | 0.5 | |
Methodology and policy | Methodology and policy | (0.4) | | — | | — | | (0.4) | | Methodology and policy | 0.7 | | — | | — | | 0.7 | |
| Other | — | | — | | (0.5) | | (0.5) | | |
At 31 December 2020 | 65.9 | | 0.2 | | 6.8 | | 72.9 | | |
| At 31 December 2022 | | At 31 December 2022 | 63.7 | | 0.3 | | 7.2 | | 71.2 | |
2020 compared to 2019
The Pillar 2A capital requirement was 4.94%, the majority of which remained with an RWA percentage based element.
We use significant risk transfer (SRT) securitisation transactions to manage and diversify credit and other risks, with associated reductions to the level of RWAs. Currently, we have SRT securitisation transactions which cover portfolios of corporate facilities and Consumer Finance loans.
164Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 163 |
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Regulatory leverage
| | | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Regulatory exposure | Regulatory exposure | 259,044 | | 269,162 | | Regulatory exposure | 248,602 | 246,304 |
End-point Tier 1 capital(1) | End-point Tier 1 capital(1) | 13,164 | | 12,625 | | End-point Tier 1 capital(1) | 12,863 | 12,849 |
UK leverage ratio | UK leverage ratio | 5.1 | % | 4.7 | % | UK leverage ratio | 5.2 | % | 5.2 | % |
BBLS lending excluded from leverage exposure | BBLS lending excluded from leverage exposure | (3,986) | | — | | BBLS lending excluded from leverage exposure | (2,564) | (3,622) |
(1) Includes deductions and AT1 adjustment permitted under the recommendation from the Financial Policy Committee on 25 July 2016.
Under the PRA rules, we adjust our total assets per the Consolidated Balance Sheet to calculate our regulatory exposure for leverage purposes. We do this as follows:
| | | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Total assets per the Consolidated Balance Sheet | Total assets per the Consolidated Balance Sheet | 299,064 | | 288,488 | | Total assets per the Consolidated Balance Sheet | 292,243 | | 293,676 | |
Derivatives netting and potential future exposure | Derivatives netting and potential future exposure | (1,521) | | (1,671) | | Derivatives netting and potential future exposure | (1,305) | | (646) | |
Securities financing current exposure add-on | Securities financing current exposure add-on | 767 | | 1,006 | | Securities financing current exposure add-on | 371 | | 518 | |
Removal of IFRS netting | Removal of IFRS netting | 1,144 | | 1,191 | | Removal of IFRS netting | 923 | | 1,052 | |
Removal of qualifying central bank claims | Removal of qualifying central bank claims | (47,537) | | (26,400) | | Removal of qualifying central bank claims | (49,199) | | (54,116) | |
Commitments calculated in accordance with Basel Committee Leverage Framework | Commitments calculated in accordance with Basel Committee Leverage Framework | 8,114 | | 8,393 | | Commitments calculated in accordance with Basel Committee Leverage Framework | 6,971 | | 7,619 | |
CET1 regulatory adjustments | CET1 regulatory adjustments | (987) | | (1,845) | | CET1 regulatory adjustments | (1,402) | | (1,799) | |
| | 259,044 | | 269,162 | | | 248,602 | | 246,304 | |
The adjustments are:
–Derivatives netting and potential future exposure: where a qualifying netting agreement is in place netting is allowed for leverage purposes. This is partially offset by including the PEEPotential Future Exposure (PFE) we use to calculate EADs
–Securities financing current exposure add-on: we include an add-on for securities financing transactions to show current exposure for leverage purposes
–Removal of IFRS netting: where netting of assets and liabilities is allowed under IFRS, but not under the Basel rules, we remove it for leverage purposes
–Removal of qualifying central banks claims: permitted under the recommendation of the FPCFinancial Policy Committee (FPC) on 25 July 2016, but under CRD IV rules the exposure measure does not allow the removal of qualifying central bank deposits or claims
–Commitments calculated in accordance with Basel Committee Leverage Framework: we add the gross value of off-balance sheet commitments for leverage purposes after we apply regulatory credit conversion factors
–CET1 regulatory adjustments: where we have deducted assets from CET1, they can be deducted for leverage purposes.
2020
2022 compared to 20192021
The UK leverage ratio remained stable at 5.2%, as retained profit was partially offset by the change in treatment of 5.1% was up 40bps, primarily through improvement in CET1 capital and active management ofsoftware assets on 1 January 2022. UK leverage exposures. It remains 1.5p.p. above the regulatory requirement.exposure remained broadly stable at £248.6bn (2021: £246.3bn).
Distributable items
Distributable items are equivalent to distributable profits under the UK Companies Act 2006. The distributable items of Santander UK Group Holdings plc under CRD IV at 31 December 20202022 and 31 December 2019,2021, and movements in the year,period, were as follows:
| | | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
At 1 January | At 1 January | 4,262 | | 4,221 | | At 1 January | 4,262 | | 4,252 | |
Dividends approved: | Dividends approved: | | | Dividends approved: | | |
–AT1 Capital Securities | –AT1 Capital Securities | (147) | | (142) | | –AT1 Capital Securities | (143) | | (143) | |
–Tax on above item | –Tax on above item | 28 | | 38 | | –Tax on above item | 27 | | 27 | |
–Ordinary shares | –Ordinary shares | (103) | | (262) | | –Ordinary shares | (1,013) | | (1,346) | |
Dividends receivable: | Dividends receivable: | | | Dividends receivable: | | |
–Investment in AT1 Capital Securities | –Investment in AT1 Capital Securities | 131 | | 125 | | –Investment in AT1 Capital Securities | 133 | | 131 | |
–Tax on above item | –Tax on above item | (25) | | (34) | | –Tax on above item | (25) | | (25) | |
–Investment in ordinary shares of subsidiary | –Investment in ordinary shares of subsidiary | 129 | | 323 | | –Investment in ordinary shares of subsidiary | 1,079 | | 1,366 | |
Other income statement items (Company) | Other income statement items (Company) | (23) | | (7) | | Other income statement items (Company) | (13) | | — | |
At 31 December | 4,252 | | 4,262 | | |
At period end | | At period end | 4,307 | | 4,262 | |
Santander UK Group Holdings plc165
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Annual Report 2020 | Risk review
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Pension risk
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Annual Report 2022 | Santander UK Group Holdings plc 164 |
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Pension risk
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| Overview Pension risk is the risk caused by our statutory contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to some other reason. In this section, we explain how we manage and mitigate pension risk, including our investment and hedging strategies. We also discuss our key metrics and developments in the year. | | | Key metrics Funding Deficit at Risk was £1,280m (2019: £1,520m)£860m (2021: £1,190m)
Funded defined benefit pension scheme accounting surplus was £135m (2019: £431m)£1,051m (2021: £1,573m) | |
OUR KEY PENSION RISKS
Sources of risk
Pension risk is one of our key financial risks. Santander UK plc is the sponsor of the Santander (UK) Group Pension Scheme (the Scheme), a defined benefit scheme. Our risk is that over the long-term the Scheme’s assets are not enough to meet its liabilities as they fall due. WhenIf this happens, we could have to (or choose to) make extra contributions. We might also need to hold more capital to reflect this risk.
The Scheme, risk metrics and regulatory capital can be sensitive to changes in the assumptions of the key pension risk factors the Scheme is exposed to are:shown below.
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Key risks | Description |
Interest rate risk | The risk that a decrease in (long-term) interest rates causes an increase in the value of the Scheme’s liabilities that are not matched by an increase in the value of its assets. |
Inflation risk | Annual pension increases are directly linked to RPI or CPI. The risk is that an increase in inflation causes an increase in the value of the Scheme’s liabilities that are not matched by an increase in the value of its assets. |
Longevity risk | The Scheme’s liabilities are in respect of current and past employees and are expected to stretch beyond 2080 due to the long-term nature of the obligation. Therefore, the value of the Scheme’s liabilities isare also impacted by changes to the life expectancy of Scheme members over time. |
Investment risk | The risk that the return on the Scheme’s assets is insufficient to meet the liabilities. |
The accounting and regulatory capital can be sensitive to changes in the assumptions of these key risk factors.
For more on our defined benefit schemes, including sensitivity analysis of our key actuarial assumptions, see Note 30 to the Consolidated Financial Statements. This includes a sensitivity analysis of our key actuarial assumptions.
Defined contribution schemes
We also have defined contribution schemes for some of our employees. The benefits received at retirement will mainly depend on the contributions made (by both the employees and us) and the performance of the investments which are typically chosen by employees. These schemes carry far less market risk for us, although we are still exposed to operational and reputational risks. To manage these risks, we monitor the administration performance of the provider and the performance of the investment funds and the costs met by members. We ensure our employees are given enough information about their investment choices.
For more on our defined contribution schemes, see Note 30 to the Consolidated Financial Statements.
The impact of our defined benefit schemes on capital
We take account of the impact of pension risk on our capital as part of our planning and stress testing process, considering measures such as the impact on CET1 and Pillar 2A, and also where relevant the impact on the related measures such as the leverage ratio. This includes our ICAAPs, PRA stress tests and our quarterly assessment of capital requirements. We also consider the impact of any changes proposed to the Scheme or its investment strategy.
Our defined benefit pension schemes affect capital in two ways:
–We treat an IAS 19 deficit as a liability on our balance sheet. We recognise deficit movements in a deficit through Other Comprehensive Income, and so this reduces our shareholders’ equity and CET1 capital. Deficit movements on the balance sheet are mainly due to re-measurements, including actuarial losses. We treat an IAS 19 surplus as an asset on our balance sheet.asset. This increases shareholders’ equity. However,equity, but it is deducted for the purposes ofin determining CET1 capital. An IAS 19 surplus or surplus/deficit on our balance sheet is partially offset by a deferred tax liability or asset, respectively.liability/asset. These may be recognised for calculating CET1 capital depending on our overall deferred tax position at that time.position.
–The PRA takes pension risk into account in the Pillar 2A capital assessment throughin the annual ICAAP exercise. The Pillar 2A requirement formsis part of our overall regulatory minimum requirement for CET1 capital, Tier 1 capital and total capital. We perform a quarterly assessment internally. For more on our minimum regulatory requirements, see the ‘Capital risk’ section.
166Santander UK Group Holdings plc
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PENSION RISK MANAGEMENT
Scheme governance
The Scheme operates under a trust deed. Santander (UK) Group Pension Scheme Trustees Limited (the Trustee), is a wholly owned subsidiaryFor details of the Santander UK group. The Trustee ensures thathow the Scheme is run properly,governed and that members' benefits are secure. It delegates investment decisions within ranges determined in the Statement of Investment Principlesoperates, see Note 30 to the board of Santander (CF Trustee) Limited (the CF Trustee). The CF Trustee is responsible for reviewing, agreeing and implementing investment strategies, with our input as and when needed. Every month, we discuss pension-related matters at our Pensions Committee and Pension Risk Forum. For example, our Pensions Committee reviews the Scheme’s investment strategies and approves actuarial valuations. The Pension Risk Forum is a Risk division management forum that monitors our pension risk within approved risk appetite and policies. We work with the Trustee to ensure that the Scheme is adequately funded but our responsibilities are clearly segregated from the Trustee’s.Consolidated Financial Statements.
Risk appetite
Our risk appetite is a key consideration in all decisions and risk management activities related to the Scheme. Our pension risk appetite is reviewed by our Pensions Committee at least once a year. It is then sent to the Board for approval. We measure pension risk on both a technical provisions (funding) basis and an accounting (IAS 19) basis. We manage pension risk on both the accounting and the funding basis. Both bases are inputs into our capital calculations.
Risk measurement
Our key risk metrics include:
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Key risk metrics | Description |
Funding Deficit at Risk | We use a VaR and a forward-looking stress testing framework to model the Scheme’s assets and liabilities to show the potential deterioration in the current funding position. This ensures we adequately capture the risks, diversification benefits and liability matching characteristics of the obligations and investments of the Scheme. We use a time period of 1 year and a 95% confidence interval in our VaR model. |
Required Return | This estimates the return required from the Scheme’s assets each year to reach a pre-defined funding target by a fixed date in the future. |
Pensions Volatility | We use a VaR and a forward-looking stress testing framework to model the volatility in the pension-related capital deduction. We use a time period of 1 year and a 95% confidence interval in our VaR model. |
The Scheme invests in certain assets whose values are not based on market observable data, such as investments in private equity funds and property. See Note 30 to the Consolidated Financial Statements for more details. The risks of these assets are included in the metrics described above.
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Annual Report 2022 | Santander UK Group Holdings plc 165 |
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We perform stress tests for regulators, including for ICAAPs and PRA stress tests. The stress testing framework allows us to also consider how macroeconomic events could impact the Scheme’s assets and liabilities. For more on our stress testing, see the 'Risk governance' section.
Climate change scenario testing was developed in 2021 and refined in 2022 giving us the capacity to simulate risk exposures over an extended time horizon. The Trustee adopted a target of net zero by 2050. This target is now factored into Trustee decision making.
Risk mitigation
The key tools we use to maintain the above key risk metrics within appetite are:
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Key tools | Description |
Investment strategies | The Trustee developed the following investment objectives to reflect their principalmain duty to act in the best interests of the Scheme beneficiaries: –To maintain a diversified portfolio of assets of appropriate suitability, quality, security, liquidity and profitability which willto generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future benefits whichthat the Scheme provides as set out in the rules of the Scheme –To limit the risk that the assets fail to meet the liabilities –To invest in a manner appropriate to the nature and duration of the expected future retirement benefit payments under the Scheme –To minimise the Scheme's long-term costs of the Scheme by maximising asset returns net of fees and expenses whilst reflecting the objectives above. The investment strategy is regularly reviewed. Thereviewed, and its impact of the investment strategy on Funding Deficit at Risk is considered. This assessment includes the changing impact of different forward-looking stress tests as the asset allocation evolves over time, as the profile of the Scheme evolves on the journey to lower dependence on Santander UK. Fund managers are also reviewed annually to ensure the investments remain appropriate for the Scheme. |
Hedging strategies | The Trustee employs asset-liability matching arrangements including the use of liability driven investment strategies, and has a hedging strategy to reduce key market risks, mainly interest rate and inflation risk. This includes investing in suitable fixed income and inflation-linked assets and entering into interest rate and inflation hedges. The CF Trusteerisk, but also hedges some of its equity and currency risk. This is achieved by using equity put options, equity collarsWe monitor available collateral and other derivatives that provide downside protection. Currency hedging is usedliquidity with the objective of ensuring we have sufficient collateral and/or liquidity available to reduce risks from investing in assets denominated in currencies other than sterling. The hedging of interest rate and inflation risk in particular reduce the Funding Deficit at Risk.
As the Scheme matures, the Trustee also actively monitors and manages longevity risk through transactions such as buy-ins and longevity swaps. meet any margin calls. |
Environmental, social and governance (ESG) | The Trustee has established a long-term investment horizon. It believes that an appropriate assessment of factors such as sustainable growth, environmentalSustainability Committee which is responsible for overseeing the Scheme’s policies, regulatory obligations and climate change impacts, as well as other social and governance considerations, will help to better achieve the objectives set and improve outcomes for members and beneficiaries through enhanced long-term returns and management of arising riskspriorities in respect of the Scheme's assets.
The Trustee also believes that investors who are responsible owners,climate change and who engage, support better outcomes for the companies they invest in and ultimately enhance their investments by using their rights as shareholders influencing more sustainable corporate strategies, performance, risk management, capital structure, tax transparency and corporate governance, including culture, diversity and remuneration, potential conflicts of interest and social and environmental impact. Engagement is purposeful dialogue with companies on these matters as well as on issues that are the immediate subject of votes at general meetings. The Trustee will also monitor its supply chain for modern slavery risk.wider ESG related matters. |
We look at the impact on our risk metrics when determining the appropriateness of the investment and hedging strategies. We also use the impact on our risk metrics to propose changes to optimise these strategies.
Santander UK Group Holdings plc167
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Annual Report 2020 | Risk review
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Risk monitoring and reporting
We monitor pension risk each month and report on it at Pension Risk Forum, ERCC, Pensions Committee and, where thresholds are exceeded (or likely to be), to the Board Risk Committee and the Board in line with our pension risk appetite. We discuss any remedial action with the Trustee. For all key risk metrics, we determine tolerance levels for deterioration based on our risk appetite. We use different triggers to indicate our position relative to those risks and report all key risk metrics against these triggers to Pensions Committee and Pension Risk Forum each month. We consider actions to reduce risk to an acceptable level where the position looks likely to exceed the red trigger level.
In addition, we monitor the performance of third parties who support the valuation of the Scheme’s assets and liabilities. The models they use are reviewed and validated by our internal model validation team and approved by the model risk committee. Every year, we carry out a full analysis of the assumptions we use which is considered by the Board Audit Committee and Pensions Committee. We ensure that we carry out consistency checks for all liability calculations supplied by third parties. We obtain audited figures of the asset values from the appointed investment manager. Independent audits are then carried out on behalf of the custodian. We also apply our own checks to make sure that the asset values provided are consistent with expectations.
PENSION RISK REVIEW
20202022 compared to 20192021
Interest and inflation hedging increasedAsset de-risking continued in 2020. There was a reduction2022 as part of the long-term goal to reduce the risk of the Scheme, in risk in the asset portfolioparticular with £1.7bn of growth assetslisted equities being sold and investment grade corporate bonds being purchased. In 2022, the proceeds investedScheme purchased a second annuity policy and entered into a second longevity swap. These covered most pensioners in the matching asset portfolio. The Scheme who retired since the first annuity purchase and longevity swap. There was also purchased an annuity policy covering £300m of pension obligations.a significant focus on ensuring sufficient liquidity and collateral levels in the Scheme and securing a positive outcome for the 2022 triennial actuarial valuation with the Trustee.
Risk monitoring and measurement
Our main focus is to ensure the Scheme achieves the right balance between risk and reward whilst minimising the impact on our capital and financial position. In 2020, overall asset returns were positive with strong performance from liability-matching assets, mainly bonds. TheAt 31 December 2022, the Funding Deficit at Risk decreased to £1,280m (2019: £1,520m)£860m (2021: £1,190m), mainly due to the sale of growth assets, increasedactions such as interest rate and inflation hedging, and risk metrics now reflecting the 2019 triennial valuation. Our long-term objective is to reduce the risksale of the Scheme and eliminate the deficit on the funding basis. On the funding basis, the interest rate hedging ratio was 81% (2019: 64%) and the inflation hedging ratio was 79% (2019: 63%) at 31 December 2020. The Scheme was invested in certaingrowth assets, at 31 December 2020 whose values are not based on market observable data, such as investments in private equityincluding listed equities, hedge funds and commercial property. Due diligence has been conducted to ensure the values obtained in respect of these assets are appropriate and represent fair value.
We also monitor the potentialThe impact from variations in the IAS 19 position on CET1 capital. The negative impact on CET1 capital increasedwas not significant in 2020.2022. For more on the impact of our defined benefit schemes on capital, see the ‘Capital risk’ section.
Accounting position
The accounting position deteriorated over 2022. The Scheme sections in surplus had an aggregate surplus of £1,051m at 31 December 2022 (2021: £1,573m) while there were no sections in deficit (2021: none). The overall funded position was volatilea £1,051m surplus (2021: £1,573m surplus). There were also unfunded liabilities of £25m at 31 December 2022 (2021: £37m). The overall deterioration was mainly driven by negative asset returns over the period, partially offset by an increase in 2020 reflecting volatility in bond yields, a decline inthe discount rate due to rising gilt yields, and movement in asset values, particularly equities. deficit contributions paid into the Scheme.
There remains considerable market uncertainty and while the actions highlighted above mitigate some of the impact of market movements inon yields, our position could change materially over a short period.
In 2020, the accounting surplus of the Scheme and other funded schemes decreased. Some sections in the Scheme had a surplus of £496m at 31 December 2020 (2019: £670m) whilst other sections had a deficit of £361m (2019: £239m). The overall position was a £135m surplus (2019: £431m surplus). There were also unfunded scheme liabilities of £42m at 31 December 2020 (2019: £41m). The deterioration in the overall position was mainly driven by a decrease in the discount rate in the period. This was due to falling corporate bond yields which increased the value of liabilities. However, this was partially offset by a rise in overall asset values.
For more on our pension schemes, including the current asset allocation and our accounting assumptions, see Note 30 to the Consolidated Financial Statements.
Maturity profile of undiscounted benefit payments
The Scheme’s obligation to make benefit payments extends over the long-term. This is expected to stretch beyond 2080. The graph below shows the maturity profile of the undiscounted benefit payments expected to be paid from the Scheme over its life at 31 December 2020:2022:
168Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 166 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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regulatory risk
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Operational risk & resilience
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| Overview Operational risk is the risk of loss or adverse impact due to inadequate or failed internal processes, people and systems, or external events. Operational resilience is the ability to prevent disruption occurring to the extent practicable; adapt systems and processes to continue to provide services and functions in the event of an incident; return to normal running promptly when a disruption is over; and learn and evolve from both incidents and near misses. The combined ‘Operational Risk & Resilience Framework’ reflects the importance of operational resilience and the intrinsically close links between the management of operational risk and the operational resilience of the organisation - Operational Resilience is the outcome of executing sound Operational Risk practices. In this section, we explain how we manage operational risk, with a focus on our top operational risks. These top operational risks may change each year depending on the relative movement in importance among all operational risks. We also describe our operational risk event losses and developments in the year. | | | Key metrics Operational risk losses (over £10,000, and excluding PPI) increased by 160% compared to 2021.
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OUR KEY OPERATIONAL RISKS
Operational risk is inherent in our business. As a result, we aim to manage it down to as low a level as possible, rather than eliminate it entirely. Operational risk events can have a financial impact and can also affect our business objectives, customer service and regulatory obligations. These events can include product mis-selling, fraud, process failures, system downtime and damage to assets or external events.
Our top operational risks are:
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Key risks | Description |
Cyber | We rely extensively on the use of technology to support our customers and to run our business. While technology allows us to develop and improve the way we serve our customers, it is critically important that we protect our customers’ data and provide them with a secure environment in which to deal with us. Failure to protect the data of Santander UK and its customers against theft, damage or destruction from cyber-attacks could cause operational disruption, unauthorised access, loss or misuse of data, breach of regulations, negative customer outcomes, financial loss or reputational damage. The value of the data itself, especially personal details of customers and employees is a focus of cyber criminals along with systems that enable cyber attacks to be monetised. It is therefore critical that we are resilient to cyber-attacks and can quickly recover from them. |
Data Management | We use data in all of our services and products. Data Management risk is where this data does not support the business outcomes, either through incorrect decisions or offerings, due to issues with its data quality. Data quality issues may be caused by technology incidents or processing errors. |
Fraud | Fraud can be committed by first parties (our customers), second parties (people known to our customers or us), third parties (people unknown to our customers or us), and internally by our staff. We are committed to protecting ourselves and our customers from fraud and to mitigating our fraud risk in an ever-evolving external fraud environment. |
IT | As noted in Cyber, technology is vital to our processes and operations, and in providing service to our customers. IT risk arises from any event related to the use of technology supporting business processes, where the event may result in the unavailability or failure of systems or in processing errors that impact our customers or operations. This includes hardware or software failures, or issues caused by change. |
People | People risks include all risks related to employees and third parties working for us, covering resource management, health, safety and wellbeing and employee relations. People risk is a transverse risk as resource capacity, capability, and engagement challenges impact all risk types. As we develop our working practices and adapt to changing circumstances, people impacts and risks continue to be key considerations. |
Third party | We rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of services and goods. These include outsourced services, such as IT infrastructure including increasing use of the Cloud, software development and banking operations. Regulations require us to classify other legal entities in the Banco Santander group as external suppliers, so we manage them as third parties. Many suppliers are also shared across the sector and this could increase risk due to complexity and capacity issues at the third parties. The failure of a supplier may cause operational disruption, breach of data security or regulations, negative customer impact, financial loss or reputational damage. |
Transformation and Change | Change risk arises in any activity that transforms our business strategy, operating environment, or products and services we provide to our customers. Management of change risks is an integral part of our governance and our focus, given the potential for impacts across all areas of non-financial risk. Failure to ensure change is appropriately considered, funded, executed and managed could result in operational disruption, poor customer outcomes, financial loss, reputational damage and may impede our ability to meet regulatory requirements. |
We are also exposed to tax risk which, even though it is a lower risk for us, is still a high-profile risk and may include legacy items. We adopted the Code of Practice on Taxation for Banks in 2010.
OPERATIONAL RISK MANAGEMENT
Risk appetite
We set our operational risk appetite at a Santander UK group level and we express it through measures approved by the Board. These include risk statements and metrics set against our main non-financial risk event types. We also set lower level triggers, qualitative parameters and quantitative thresholds across our business. We monitor our risk profile and performance against the risk appetite under several key risk areas, and we have processes to identify, assess, manage and report risks and events. We incorporate Banco Santander group principles and standards, regulatory requirements and best practice, where applicable. Coverage across the seven CRD IV loss event types is comprehensive and aligns to the key risk areas approved by ERCC.
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Annual Report 2022 | Santander UK Group Holdings plc 167 |
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Risk measurement
The key components of the operational risk toolset we use to measure and mitigate risk are:
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Operational risk toolset | Description |
Operational risk and control assessments | Our business units identify and assess their operational risks to ensure they manage and control them within our operational risk appetite, and prioritise actions needed. Every area must identify and record their material risks, assess their controls for adequacy and then accept the risk or plan to address any deficiencies. We also use operational risk assessments and risk rating tools as key parts of change risk management. |
Risk scenario analysis | We perform this across business units. It involves a top down assessment of our key operational risks. We update our scenarios each year. The analysis gives us insight into rare but high impact events and allows us to understand potential impacts and address issues. |
Key indicators | Key indicators and their tolerance levels give us an objective view of risk exposure or the strength of a control at any point in time. They also show trends and give us early warning of potential increasing risk exposures. Of primary importance are our business-wide risk appetite indicators which show adherence to our risk appetite statements. |
Operational risk event and loss management | Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory impacts and/or damage to our reputation. We use data from these processes to identify and correct any control weaknesses. We also use root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments, scenario analysis and risk reporting. Our operational risk loss appetite sets the level of total operational risk loss (expected and unexpected) in any given year (on a 12-month rolling basis) that we consider to be acceptable. We track actual losses against our appetite, and we escalate as needed. |
Risk based insurance | Where appropriate, we use insurance to complement other risk mitigation measures. |
Risk mitigation
We mitigate our key operational risks in the following ways:
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Key risks | Risk mitigation |
Cyber | Protecting our customers, systems and data remains a top priority for us. We operate a layered defence approach which we regularly assess to ensure that it addresses the prevailing threats. We validate our controls using tests designed to replicate real-world cyber-attacks. Our cyber security experts assess our overall cyber security posture and report to management each month, and to ExCo, ERCC, BRC and Board at least twice a year. We assess cyber controls and risks each quarter using Banco Santander's Holistic Cyber Risk Framework. Keeping our systems secure is a bank-wide responsibility and we continue to enhance our staff training to support this. We also have targeted training for Board members, senior management and other employees. We continue to work with other banks through the Cyber Defence Alliance, where we share intelligence on cyber threats and effective strategies to counter them. We campaign to raise awareness and give customers the knowledge they need to avoid becoming victims of cyber attacks. As part of this, we run customer education campaigns, and we offer advice through our online security centre. We also have a cyber insurance policy to give us comprehensive cover to respond and recover losses and damages from security or system failures and any impact of a data breach. |
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Data | We continue to monitor and mitigate data risk through enhanced governance structures and processes supported by effective deployment of our risk and control library. We assess Data risk each year as part of the Risk and Control Self-Assessment (RCSA) process and update our risk profile as needed. Our data management programme is a key enabler to ensuring our data is fit for purpose and making improvements to our underlying processes and data governance. We are also embedding Data Marketplace as a holistic system for data management across the bank, ensuring a more robust and comprehensive approach for managing data. |
Fraud | We operate layered security controls combining prevention and detection controls, to mitigate risks. The current fraud environment is incredibly challenging, and as such our current Fraud Transformation programme contains several projects that are designed to reduce the risks to us and our customers. We are committed to taking a more preventative approach to mitigate these risks. To help support customers, over the past five years we have created a series of fraud education and media campaigns, many of which focus on drawing public attention to common frauds, such as purchase scams, investment fraud, and money mules, and how to avoid them. |
IT | We proactively monitor technology platforms and applications through automated alerts to detect events that may impact their performance or availability. We investigate material events to identify the root cause and remedial actions needed. We escalate these events as needed through the Santander Early Escalation Notification (SEEN) Process, and we review them each quarter to identify trends we need to remediate. We assess IT risk each year as part of the RCSA process and update our risk profile as needed. |
People | We monitor people risks through the use of a broad range of operational risk indicators covering capacity, capability, engagement and diversity and inclusion. These are reviewed and refreshed annually to track and monitor all people related measures. We mitigate people risk through adopting various attraction and retention strategies throughout the employee lifecycle, and by delivering a competitive employee value proposition including hybrid working. All significant people-related change initiatives must have Operational Risk Assessments conducted. We also have processes to capture and assess people-related events. |
Third party | We identify and assess the risk profile of each of our third party arrangements before onboarding and throughout the relationship. We also identify and measure key third party risks within our operational risk and control assessments. We capture and assess related events, and use operational risk indicators to measure the third party risk profile of the business. We aim to ensure that our suppliers meet our risk and control standards beginning with on-boarding, throughout our relationship with them, and during off-boarding. |
Transformation and change | Risk management of Transformation and Change is integrated within our project governance framework, known as One Governance, which brings together project planning and prioritisation, cost discipline and risk management of all project portfolios under one unified system environment. Projects are initially subject to rigorous review to ensure that demand funded is prioritised based on what the bank should, needs and wants to do for the benefit of our customers clients, colleagues and franchise, a process which incorporates risk and regulatory considerations. At an individual initiative level, the key risk management requirements are supported by an initial Project Risk Rating (PRR) which considers the risk an initiative poses to us and allows application of risk-based governance. An Executive Risk Summary (ERS) and an Operational Risk Assessment (ORA) are completed for all but very low risk rated projects. Our Change Risk Oversight Group assesses and manages risks at portfolio level. We continue to take a measured approach to executing risk and delivering cost savings, with a focus on prioritisation and capacity management. |
Risk monitoring and reporting
Reporting is a key part of how we manage risk. We can identify exposures through our operational risk and control assessments, risk scenario analysis, key indicators, operational risk assessments and incidents and events. We report exposures for each business unit through regular risk and control forums. These include details of risk exposures and how we plan to mitigate them. We prioritise and highlight events that have a material impact on our customers, reputation or finance by reporting them to key executives and committees. We use The Standardised Approach (TSA) to calculate our Pillar 1 operational risk capital. We use an internal model aligned to the CRD IV advanced measurement approach to validate our Pillar 2 capital needs.
Our crisis management framework covers all levels of the business. It sets out possible triggers and how we will manage a crisis, and we test it at least annually. If an event occurs, our business continuity plans help us recover as quickly as possible and we undertake post incident reviews to identify learnings.
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Annual Report 2022 | Santander UK Group Holdings plc 168 |
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OPERATIONAL RISK REVIEW
2022 compared to 2021
Operational risk event losses
The table below shows our operational losses in 2022 and 2021 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.
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| Value % | Volume % | | Value % | Volume % |
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External fraud | 27 | | 95 | | | 30 | | 89 | |
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Clients, products and business practices(1) | 77 | | 1 | | | 41 | | 2 | |
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Business disruption and systems failures | (3) | | — | | | 14 | | 1 | |
Execution, delivery, and process management | (1) | | 4 | | | 15 | | 8 | |
| 100 | | 100 | | | 100 | | 100 | |
(1) 2% volume in 2021 was previously categorised as Employment practices and workplace safety
The value of our operational risk losses (events over £10,000) increased by 160% in 2022 largely due to the AML penalty and the continued increase in Fraud losses. In line with general industry trends, the value and volumes of losses due to cases of External Fraud increased by 138% and 119% respectively. We continue to enhance our anti-fraud measures to help protect our customers. Additionally, we have observed a rise in the number of events and losses prompted by the increasing level of change, resulting from delivery of regulation, industry developments and the need to further digitalise the business.
Cyber risk
Information and cyber security remain a top risk and a priority. We experienced no notable data and cyber security incidents in 2022. We continue to see increasing ransomware attacks across all sectors driven by compromises in supply chain tools and we expect this trend to continue. We continue to invest in the right skills and resources to manage data and cyber risk. We also continue to monitor the cyber threat from the conflict in Ukraine.
Data risk
in 2022, we continued to monitor data management risk through the enhanced governance structures and processes put in place by our Chief Data Officer. Our Data Programme is progressing with clearly defined deliverables that will improve our ability to manage data and enhance our data management capabilities, in line with our approved Data Strategy.
Fraud risk
Fraud against our customers and the bank remains a top risk and a priority. Fraud levels across UK banks continued to rise in 2022. Social engineering techniques used by fraudsters are a significant threat to customers and outside of the bank’s controls. As such, in line with peers, Authorised Push Payment (APP) fraud is our largest fraud type. We are focused on preventative measures and in response to increasing fraud attacks, we designed new fraud prevention tools to complement our existing prevention and detection systems and controls. We continue to deploy dynamic ‘scam warnings’ in our online banking payment process, enhancing fraud prevention controls for high-risk digital payments, presenting customers with tailored questions and warnings specific to their payment journey. We play an actively collaborate on fraud management with industry partners, through UK Finance and Stop Scams UK. In 2022, we continued our customer awareness campaigns on the most common frauds and scams.
IT risk
The importance of IT continued to be reiterated by some outages to customer services in 2022 and we continue progressing a wide programme to address the root causes and further reduce key risks within our IT estate. The programme is expected to deliver risk reduction over a three year horizon and progress is closely monitored though our risk governance.
People risk
This risk continues to be compounded by changes in operating models and the execution of our strategies. We continue to adapt and respond to these risks; in particular, the people risks associated with the phased relocation of our Head Office to Unity Place in Milton Keynes, which are under close monitoring and management. 2022 saw lower wellbeing-related absence but, in line with our peers, we continue to see raised attrition levels reflecting a more buoyant job market. Potential impacts on productivity are supported with our wellbeing and inclusion strategy, centred on helping colleagues through change. As appropriate, we advocate hybrid working to encourage colleagues to return to offices, and are providing support as external economic factors impact some colleagues.
Third party risk
We continue to rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of goods and services. In 2022, we continued to evolve our processes. This included implementing a new Third Party Risk Management process and amending contracts with suppliers.
Transformation and change
The way in which we operate, the technology we rely on, and how we interact with our customers and stakeholders is constantly evolving, and consequently, our ability as an organization to meet this change is a key priority. In 2022, we continued our transformation to simplify the bank, digitise processes and customer journeys, reduce cost, extend internal capabilities and ensure a resilient operating model. This included reducing our property footprint and significant delivery against a diverse transformation agenda with specific focus on a migration to the cloud, further digitalisation and managing obsolescence. Ensuring change does not result in unacceptable impacts on our risk profile underpins our strategic decisions and is robustly managed.
Operational Resilience
We have committed that, by 2025, we will address the vulnerabilities identified in the first operational resilience self-assessment approved by the Board and submitted to our regulators in March 2022. Achieving this will enhance our resilience, i.e. the ability of Santander UK to recover its Important Business Services (IBS) within Impact Tolerance levels to avoid intolerable harm to customers, the firm, or the market, with focus on vulnerable customers. In 2022, we focused on enhancing and testing our firm-wide recovery strategies and readiness to respond to a range of potential external events. Our operational resilience programme was subject to independent external review in January 2022 and received a satisfactory rating from Internal Audit in July 2022. A programme is in progress to remediate identified asset vulnerabilities which could directly affect our ability to recover our IBS within Impact Tolerances in the event of an outage. We have introduced resilience assessments across technology, data, people, third parties, and premises, which enhance our ability to monitor, oversee and action issues. Input to these assessments include scenario test outputs, post incident reviews, metrics, RCSAs, and event data. The Board continues to be actively engaged in the operational resilience journey and in March 2023 are to approve our annual operational resilience self-assessment.
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Annual Report 2022 | Santander UK Group Holdings plc 169 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Conduct and regulatory risk
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| Overview We manage the conduct and non-financial regulatory risk types in one framework. We do thisframework to reflect their similarities. Conduct risk is the risk that our decisions and behaviours lead to a detriment or poor outcomeoutcomes for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk is the risk of financial or reputational loss, or imposition of or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. We are committed to ensuring conduct strategy is embedded in our business and that the fair treatment of our customers is at the heart of what we do.
In this section, we explain how we manage conduct and regulatory risk and highlight new processes we implemented in response to Covid-19.risk. We also describe our main conduct provisions, with a focus on PPI, and give some insight into our work to protect vulnerable consumers via our Reaching Out initiative during the Covid-19 pandemic.regulatory provisions.
| | | Key metrics PPICustomer remediation provision was £76m (2019: £189m)£90m (2021: £44m)
Litigation and other regulatory provision was £136m (2021: £166m)
Other conduct provision was £8m (2019: £25m)
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OUR KEY CONDUCT AND REGULATORY RISKS
Our purpose is to help customers and businesses prosper by meeting their needs and expectations.prosper. To achieve this, we are committed to making sureensuring conduct strategy is embedded in our business, good outcomes for our customers is at the heart of what we do and that our strategy, proposition and initiative approval process, and systems, operationsoperation and controls are well designed and delivered.
operating effectively. We see our key exposure to conduct and regulatory risk through:
–through the risk of errors in our product design, sales practices, post-sale servicing, operational processes, complaint handling, and
– the failure to supervise, monitor andor control the activities of our employees.
All of these may result in the risk that we do not meet our customers’ needs, align to the expectations of our regulators, or deliver the expected outcomes or observe required standards of market behaviour.
Our Conduct and Regulatory Framework is built on the following underlying types of risk:risks:
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Key risks | Description |
Regulatory | The risk that we fail to adhere to relevant laws, regulations and codes which could have serious financial, reputational and customer impacts. This includesimpacts, including the risk that we may be adversely impacted by changes and related uncertainty around UK and international regulations. We categorise regulatory risk into financial and non-financial risk. This isrisk aligned to our main regulators who are- the PRA and FCA but also includes- and other UK regulators and authorities such as the CMA, Payment Systems Regulator, Lending Standards Board, Financial Ombudsman Service and Information Commissioner’s Office. authorities. As well as being subject to UK regulation, as part of the Banco Santander group, we are also impacted indirectly through regulation by the Banco de España (the Bank of Spain) and at a corporate level, by the ECB through the SSM. We also fall within the scope of US regulation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. This restricts our activities both in the UK and the US. We must also adhere to the rules and guidance of other regulators and voluntary codes in the UK. regulation. |
Product | The risk that we offer products and services that do not result in the rightgood outcomes for our customers. |
Sales | The risk that we sell products and services to our customers without giving themcustomers enough information to make an informed decision, orthat we do not provide correct advice.appropriate advice, or that we fail to take account of customer vulnerability. |
After-sale and servicing | The risk that failures of our operations, processes, servicing activity, IT or controls result in poor outcomes for our customers.customer outcomes. This includes the risks that: –Wethat we do not give appropriate after-sale communications to customers, makingmake it difficult for themcustomers to contact us, or that we fail to take account of a customer’s vulnerability
–We do not have robustcustomer vulnerability. It also includes the risk that our systems and controls todo not prevent or detect and prevent fraud or errors in the customer experience.fraud.
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Culture | The risk that we do not maintain a culture that encourages the right behaviourappropriate behaviours and puts the customer at the heart of what we do. |
Competition | The risk of financial harm, criminal liability, customer harm or reputational damage that we may incur because we fail to comply with relevant competition law or being involved in any competition law investigation or proceedings. |
Controls | The risk that we do not supervise and monitor our employees effectively or do not have robustthat our systems and controls in place todo not prevent andor detect misconduct. |
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Annual Report 2020 | Risk review
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CONDUCT AND REGULATORY RISK MANAGEMENT
Risk appetite
We aim to comply with all regulatory requirements, and we have no appetite to make decisions or operate in a way that leads to unfairpoor customer outcomes for our customers or which negatively impacts the market. Our Board approves our risk appetite on an annual basis,each year, or more often if needed, and we cascade it to our business units through our risk framework and policies. We also haveagree lower level risk tolerance thresholds that are agreed at least annually. Our material conduct and regulatory risk exposures are subject to, and reported against, our conduct and regulatory risk appetite statements, as well as lower level triggers and thresholds for action.
Risk measurement
Due to the close links between our conduct, regulatory and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply where such exposures and risks have a conduct and/or regulatory risk impact. Since the outbreak of Covid-19 we have continuously reviewed our communications with customers, our policies and have provided additional tools, such as digital budget planners and online triage guides to support customers in understanding their financial position. Despite the introduction of these digital enhancements our intention remains to speak to each customer in financial difficulty to ensure the most appropriate solutions are offered. We have been increasing our resource in this area to ensure that we can meet customer demand.
We support our conduct and regulatory risk framework and policies with tools that aim to identify and assess new and emerging conduct risks. These include:
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Key tools | Description |
Strategy and business planning | Our Strategy and Corporate Development team helpWe align our overall corporate strategy, financial plans, risk appetite and operational capabilities through our annual process to set our strategy. We derive our business unit plans from our overall corporate strategy and they contain a view of conduct and regulatory risk with our other key risk types.risk. |
Sales qualityQuality assurance | We subject retail sales and processes to internal quality assurance and, as needed, external monitoring to ensure their quality.monitoring. |
Operational risk and control assessments | Our business and business support units assess our operational risks, systems and controls to give us a consolidated risk view across all our business areas. We complete the assessments through a central tool to evaluate and manage our residual risk exposures. |
Scenario testing and horizon scanning | We consider conduct and regulatory risk in our scenario testing. This reviewstesting and review possible root causes and assumptions to determine the likelihood and size of the impact, andwith actions to enhance our controls where required. |
Conduct risk reporting | We use dashboards to give us an end-to-enda view of our conduct risks across our business. This allows us to apply a lens tobusiness and manage conduct risk and understand if it is in line with our risk appetite. |
Compliance monitoring | We carry out an annual conduct and regulatory risk assurance programme approved by the Board and tracked throughthroughout the year. |
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Risk mitigation
Our conduct and regulatory risk framework and policies set out the principles, standards, roles and responsibilities and governance for conduct and regulatory risk, such as:
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Policies | Description |
Product approval | Our product approval process aims to minimise our conduct, legal, regulatory or reputational risks in the design, marketing, sales and serviceservicing of new products and services. We assess all our products and services within a formal framework to make sureensure they meet the needs and expectations of our customers, are within our risk appetite and agreed metrics, and to ensure that processes and controls are in place. |
Suitable advice and information for customers | We give guidance to advisers and staff on the key principles, requirements and ethical behaviours they must follow. This ensures our customers are sufficiently informed when they consider or make a buying decision. In our Retail Banking division, the main products we cover are mortgages, investments, savings and protection. |
Training and competence | In line with the expectations of our regulators, weWe train our staff and require them to maintain an appropriatea suitable level of competence (in line with their role and responsibilities) to ensure customers can achieve fairappropriate outcomes. We invest in all our people to ensure that we achieve our mandatory risk objectives and that everyone acknowledges their personal responsibility for risk management through our I AM Risk approach.
to manage risk. We place a specific focus on: –Vulnerability: Ensuring thaton ensuring our colleagues are trained to helprecognise and support customers who may be vulnerable, (see below).
–Financial abuse:or who may be experiencing financial stress, financial difficulty or financial abuse. We work closely with other members of UK Finance, as part of the Financial Abuse Working Party, with a shared vision to help victims regain control of their finances. Through this collaboration we have adopted a Financial Abuse Code of Practice as part of our overall vulnerable customer strategy. We have specific training material for colleagues to raise awareness and improve understanding around the devastating impacts of financial abuse and how we can help. Due to the very complex nature of situations involving financial abuse, we also have a dedicated Specialist Support Team that offers guidance to colleagues dealing withhelping customers who are victims andmay need more tailored solutions to help them regain control of their finances.solutions.
–Covid-19: We designed and delivered tailored training across key areas of the business to support customers affected by Covid-19.
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TreatingFair treatment of vulnerable customers fairly | Some customers may be impacted financially or personally as a result of their circumstances. Our Vulnerable Customer Policy gives business areasunits a clear and consistent understandingview of what vulnerability can mean and the types of situations when customers may need more support. Our guidelines focus on identifying vulnerable customers,characteristics of vulnerability, understanding customer needs and the support and flexibility we can give to help them avoid financial difficulty.help. In addition to mandatory training, we train our customer-facing staff using real customer scenarios to enable our colleagues to deal with a wide range of sensitive issues. Our online Vulnerable Customer Support Tool gives our people more guidance and support, and our Specialist Support Team provides guidance for the most complex situations. We also consider vulnerability in every initiative, and adapt our technology to the needs of customers with vulnerability characteristics in our design and testing stages. We work with key charities, authorities, trade associations and other specialists to develop our understanding of vulnerability. In addition to mandatory training, we train our customer-facing colleagues using real customer scenarios to highlight different vulnerable situations. This enables our colleagues to deal with a wide range of sensitive issues. We also have an online Vulnerable Customer Support Tool for our colleagues to give them more guidance and support. Our colleagues have access to our Specialist Support Team who can give specific help and guidance for the most complex vulnerable customer situations.
We consider vulnerability in every initiative. Adapting our technology to the needs of customers with physical disabilities is a key part of our design and testing stages and we work closely with the Digital Accessibility Centre. We have also developed our training approach through a series of real-life customer stories available to colleagues to access anytime to develop their skills.
Our objective throughout the Covid-19 pandemic has been, and continues to be providing a range of support and solutions for customers who find themselves facing financial difficulty, based on individual customer circumstances, with the aim of rehabilitating customers back into a healthy financial position. Our Financial Support model has evolved to ensure that we help customers who are facing temporary but severe financial difficulty. We are enhancing our model further, for circumstances that may remain for a longer term.
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170Santander UK Group Holdings plc
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Strategic report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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regulatory risk
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Risk monitoring and reporting
We consider conduct and regulatory risk as part of the governance aroundin all our business decisions. Our material conduct and regulatory risk exposures are subject to, and reported against, our conduct and regulatory risk appetite statement, as well as lower level triggers and thresholds for action. We monitor the position to ensure we provide appropriate outcomes and meet regulatory expectations. We have specific fora and committees such as theour Conduct and Compliance Forum, and business specific risk management fora to make decisions on conduct and regulatory risk mattersrisks and we ultimately report to the ERCC and Board Responsible Banking Committee. The data we report to senior management and Committees gives them a clear understanding of current and potential emerging conduct and regulatory risks and issues.BRBC. Our risk and control fora support management to control risks in their business units. Reporting includes conduct risk dashboards, which set out a range ofwith metrics across common areas. These include policy breaches logged, mystery shopping, quality assurance and complaints, as well asand commentary on trends and root causes. This approach enablescauses to enable us to take effective action. As well as the reports issued by the business, our Legal and Regulatory Division reports directly to the Board to give a view on legal, conduct and regulatory, reputational and financial crime risks, and to escalate issues or any breach of our risk appetite.
In 2020, to ensure we continue to drive fair and consistent outcomes, whilst managing the increased inflow of customers resulting from the Covid-19 pandemic, we have invested in people and technology. Tailored customer support is already in place and continues to evolve to ensure there is a robust, forward-looking governance model in place to allow us to recognise and address risks related to our personal and business customers. Conduct risk dashboards have been developed and escalated through governance as outlined above.
CONDUCT AND REGULATORYOPERATIONAL RISK REVIEWMANAGEMENT
2020 compared to 2019Risk appetite
In 2020, to ensureWe set our operational risk appetite at a Santander UK group level and we fully considered customerexpress it through measures approved by the Board. These include risk statements and conduct impactsmetrics set against our main non-financial risk event types. We also set lower level triggers, qualitative parameters and quantitative thresholds across our business,business. We monitor our risk profile and performance against the risk appetite under several key risk areas, and we continued to maintain a strong focus on robust oversight and control of the full customer journey. We maintain Compliance teams across all our key business divisions and in key cross functional areas such as fraud, payment services, data protection and Financial Support Centre of Excellence. Conduct and regulatory risk frameworks are in place across all business divisions that operate alongside our wider Risk Frameworkhave processes to identify, assess, manage and report conductrisks and events. We incorporate Banco Santander group principles and standards, regulatory risk.
In 2020, we continued to build on our progress in 2019requirements and remained vigilant in taking a customer-focused approach in developing strategy, productsbest practice, where applicable. Coverage across the seven CRD IV loss event types is comprehensive and policies that support fair customer outcomes and market integrity, in particular within the context of regulator and government driven Covid-19 initiatives. These have all been deployed at a fast pace, with systems and controls in place to enable and increase our working from home capability, whilst continuing to provide critical services to our customers. As part of this, we:
–Assessed the views and new policy areas in the FCA’s 2020/21 Business Plan. Most of the measures and initiatives aim to ensure financial services firms give customers the support they need during and post the Covid-19 pandemic. This is a re-focus by the FCA on its key priorities against other work, driven by Covid-19. We have considered and addressed them in our controls, product processes and frameworks
–Maintained focus on Covid-19 and forbearance measures following further FCA's Guidance on Support for Consumer Credit and Overdraft Customers along with mortgage customers guidance extending the period customers can access further payment holiday
–Implemented processes to support customers including creating the Financial Support Centre of Excellence and SME support to ensure we continue to drive fair and consistent outcomes, whilst managing the increased inflow of customers impacted by Covid-19, with further investment in people and technology
–Took steps to maintain appropriate monitoring and surveillance capability for our market and customer facing staff working from home due to Covid-19
–Continued to manage technological change and increased digitalisation in line with regulatory initiatives
–Delivered change to meet the evolving regulatory landscape, including changes brought about by Payment Systems Regulator (PSR), EU Cross Border Regulation, Open Banking and PSD2, and the FCA Consumer Protection Agenda, and
–Continued to prepare for the transition from LIBOR to risk-free rates at the end of 2021, including planning for customer communications and recognition of potential conduct risks.
Following the launch of the Contingent Reimbursement Model, a voluntary code of practice to deal with authorised push payment fraud, we agreed along with seven other banks to a funding loan for no-blame cases. We continue to engage with the industry and authorities, giving input and support to embed the code.
Like all UK banks, we continue to see a demanding regulatory agenda focused on addressing customer detriment, price regulation and vulnerability. Conduct risks will rise in the near- and medium-term as banks deal with a large number of personal and business borrowers impacted by the Covid-19 pandemic. When implementing regulatory change, we focus on ensuring that our strategy, leadership, governance arrangements, and approach to managing and rewarding staff does not lead to a detrimental impact on our customers, competition, or to market integrity. We expect all our staff to take responsibility for managing risk through our I AM Risk programme.
Accounting position
For more on our provisions, see Note 29aligns to the Consolidated Financial Statements. For more on our contingent liabilities, see Note 31 to the Consolidated Financial Statements.
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| In 2020, we recognised that many of our customers who would normally use a branch for their day-to-day banking might be shielding at home during the Covid-19 pandemic, and we wanted to reach out to them and check on their wellbeing – both personal and financial. We launched our Reaching Out initiative, focused around calling those customers who regularly visit our branches. The calls were about customer wellbeing, with informal conversations focused on checking the customer was coping okay and reassuring them that we were available to help if they needed some support.
For our customers who felt isolated, it was an opportunity to simply have a chat with a familiar voice, while for others it was an opportunity to ask about the different ways they could still access cash and do their banking. As part of the calls, colleagues also took the opportunity to remind customers of the importance of not sharing personal information over the phone.
This initiative involved the collaboration of our charity partners at Age UK and Alzheimer’s Society, who welcomed this type of proactive contact. The reaction from both colleagues and customers was overwhelmingly positive with many stories of how customers reacted to our calls and from colleagues who felt enormously proud taking part in this activity.
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Protecting vulnerable customers |
key risk areas approved by ERCC.Santander UK Group Holdings plc171
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Annual Report 2020 | Risk review
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Operational risk
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Annual Report 2022 | Overview
Operational risk is the risk of loss due to inadequate or failed internal processes, people and systems, or external events.
In this section, we explain how we manage operational risk, with a focus on our top three key operational risks. In 2020, these consisted of Cyber, Change and transformation, and People. The classifications were enhanced in the year, driven primarily by the impacts of the Covid-19 pandemic.
We also describe our operational risk event losses and developments in the year, and give some insight into how we have demonstrated operational resilience as an organisation in response to Covid-19.
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Operational risk losses (over £10,000, and excluding PPI) increased by 51%
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OUR KEY OPERATIONAL RISKS
Operational risk is inherent in our business. As a result, we aim to manage it down to as low a level as possible, rather than eliminate it entirely. Operational risk events can have a financial impact and can also affect our business objectives, customer service and regulatory obligations. These events can include product mis-selling, fraud, process failures, system downtime and damage to assets or external events.
Our top three operational risks are:
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Key risks | Description |
Cyber | We rely extensively on the use of technology to support our customers and to run our business. This includes internal platforms, such as our core banking systems, mortgage platforms, telecommunications, remote working and finance systems, and customer-facing platforms such as our mobile app and online banking websites. The use of technology and the internet have changed the way we live and work, and the Covid-19 pandemic has further evidenced the reliance on technology. While technology allows us to develop and improve the way we serve our customers, it is critically important that we protect our customers’ information and provide them with 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 cause operational disruption, breach of data security or regulations, negative customer outcomes, financial loss or reputational damage. Even small periods of disruption that deny access to our services can erode our customers’ trust in us. This applies not only to our own systems but also to those of our third-party providers and counterparties in the market. The value of the data itself, especially the personal details of customers and employees, has increased considerably and is a core focus of cyber criminals along with systems, such as payments and ATM networks, that enable the monetisation of cyber system breaches. It is therefore critical that we are resilient to cyber-attacks and can withstand and quickly recover from those events should they occur.
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Change and transformation | We have to constantly change to keep up with an increasing pace of change in technological innovation, evolving business models and the competitive landscape. A key part of our business strategy is to develop and deliver new banking products and services, while making our processes and systems more efficient and resilient. Third party involvement is increasing as part of this strategy.
We are also implementing a large number of changes to keep up with the latest regulatory and legal requirements, impacting all areas of our business. There is more on this in the ‘Conduct and Regulatory Risk’ section.
The scale and pace of our plans, and the potential compounding effect of various changes happening at the same time, increases our operational risk. These changes could have financial, customer, reputational and regulatory impacts if we do not manage them properly.
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People | People risks include all risks related to employees and third parties working for us, covering resource management, health, safety and wellbeing and employee relations. These have collectively increased in significance to become a top risk for the bank driven primarily by the Covid-19 pandemic. The majority of non-branch employees have been working from home since pandemic restrictions were first introduced by the UK Government, and most will continue to do so for some time. This has raised potential impacts on mental wellbeing and ergonomic risks. In addition, as the bank transforms itself, the significant level of organisational change may cause disruption for employees. As we develop our working practices and adapt to changing circumstances, people impacts and risks continue to be key considerations. |
We remained operationally stable throughout the periods of UK Government and regionally-imposed Covid-19 restrictions in 2020 by redeploying the majority of our non-branch workforce from working in an office to working from home (WFH). We achieved this by quickly increasing our capacity for staff to work remotely fivefold and by improving the resilience of our connectivity solution. We have invested significantly in controls and other mitigants to support WFH arrangements including: enhanced monitoring of employees’ transactional activity, the distribution of circa 6,000 items of office equipment to support home working, the implementation of an intranet-based Coronavirus Support Hub for all employees, and remote working mandatory training. We also conduct ongoing health trackers and feedback surveys. Spare employee capacity has been reassigned to assist operational hotspots such as enabling branch employees to support customer contact centres via the ‘Voice in Branch’ initiative, and the establishment of a Financial Support Centre to help customers coming to the end of a payment holiday or furlough arrangement. We successfully implemented changes to products and processes generated by the UK Government’s Covid-19 support schemes and have delivered to desired deadlines. Where roles could not operate from home, or on-site training/coaching was required, we have transformed our Head Office sites into Covid-19 safe environments with temperature checks, health questionnaires, screens, signage, and one-way systems. Working locations and arrangements for employees not based in branches will remain the same until the start of May 2021, when we will again review the situation.
Following the UK’s exit from the transition period on 31 December 2020, we continue to focus on assessing the potential impacts of the new Trade and Cooperation deal on our customers and our business. Our Brexit Planning was developed on the basis of a ‘no deal’ scenario and remains relevant, as the initial agreement with the EU mainly relates to goods and does not cover financial services in any significant detail, as expected. Therefore we continue to manage with reference to those plans, as the new relationship with the EU evolves, which address a number of areas requiring cross-divisional communication including: financial markets infrastructure, cross-border data flows, international payments, third-party service, cyber risk, operational resilience, and internal and external stakeholder communications.
172Santander UK Group Holdings plc
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Risk measurement
The key components of the operational risk toolset we use to measure and mitigate risk are:
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Operational risk toolset | Description |
Operational risk and control assessments | Our business units identify and assess their operational risks to ensure they manage and control them within our operational risk appetite, and prioritise actions needed. Every area must identify and record their material risks, assess their controls for adequacy and then accept the risk or plan to address any deficiencies. We also use operational risk assessments and risk rating tools as key parts of change risk management. |
Risk scenario analysis | We perform this across business units. It involves a top down assessment of our key operational risks. We update our scenarios each year. The analysis gives us insight into rare but high impact events and allows us to understand potential impacts and address issues. |
Key indicators | Key indicators and their tolerance levels give us an objective view of risk exposure or the strength of a control at any point in time. They also show trends and give us early warning of potential increasing risk exposures. Of primary importance are our business-wide risk appetite indicators which show adherence to our risk appetite statements. |
Operational risk event and loss management | Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory impacts and/or damage to our reputation. We use data from these processes to identify and correct any control weaknesses. We also use root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments, scenario analysis and risk reporting. Our operational risk loss appetite sets the level of total operational risk loss (expected and unexpected) in any given year (on a 12-month rolling basis) that we consider to be acceptable. We track actual losses against our appetite, and we escalate as needed. |
Risk based insurance | Where appropriate, we use insurance to complement other risk mitigation measures. |
Risk mitigation
We mitigate our key operational risks in the following ways:
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Key risks | Risk mitigation |
Cyber | Protecting our customers, systems and data remains a top priority for us. We operate a layered defence approach which we regularly assess to ensure that it addresses the prevailing threats. We validate our controls using tests designed to replicate real-world cyber-attacks. Our cyber security experts assess our overall cyber security posture and report to management each month, and to ExCo, ERCC, BRC and Board at least twice a year. We assess cyber controls and risks each quarter using Banco Santander's Holistic Cyber Risk Framework. Keeping our systems secure is a bank-wide responsibility and we continue to enhance our staff training to support this. We also have targeted training for Board members, senior management and other employees. We continue to work with other banks through the Cyber Defence Alliance, where we share intelligence on cyber threats and effective strategies to counter them. We campaign to raise awareness and give customers the knowledge they need to avoid becoming victims of cyber attacks. As part of this, we run customer education campaigns, and we offer advice through our online security centre. We also have a cyber insurance policy to give us comprehensive cover to respond and recover losses and damages from security or system failures and any impact of a data breach. |
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Data | We continue to monitor and mitigate data risk through enhanced governance structures and processes supported by effective deployment of our risk and control library. We assess Data risk each year as part of the Risk and Control Self-Assessment (RCSA) process and update our risk profile as needed. Our data management programme is a key enabler to ensuring our data is fit for purpose and making improvements to our underlying processes and data governance. We are also embedding Data Marketplace as a holistic system for data management across the bank, ensuring a more robust and comprehensive approach for managing data. |
Fraud | We operate layered security controls combining prevention and detection controls, to mitigate risks. The current fraud environment is incredibly challenging, and as such our current Fraud Transformation programme contains several projects that are designed to reduce the risks to us and our customers. We are committed to taking a more preventative approach to mitigate these risks. To help support customers, over the past five years we have created a series of fraud education and media campaigns, many of which focus on drawing public attention to common frauds, such as purchase scams, investment fraud, and money mules, and how to avoid them. |
IT | We proactively monitor technology platforms and applications through automated alerts to detect events that may impact their performance or availability. We investigate material events to identify the root cause and remedial actions needed. We escalate these events as needed through the Santander Early Escalation Notification (SEEN) Process, and we review them each quarter to identify trends we need to remediate. We assess IT risk each year as part of the RCSA process and update our risk profile as needed. |
People | We monitor people risks through the use of a broad range of operational risk indicators covering capacity, capability, engagement and diversity and inclusion. These are reviewed and refreshed annually to track and monitor all people related measures. We mitigate people risk through adopting various attraction and retention strategies throughout the employee lifecycle, and by delivering a competitive employee value proposition including hybrid working. All significant people-related change initiatives must have Operational Risk Assessments conducted. We also have processes to capture and assess people-related events. |
Third party | We identify and assess the risk profile of each of our third party arrangements before onboarding and throughout the relationship. We also identify and measure key third party risks within our operational risk and control assessments. We capture and assess related events, and use operational risk indicators to measure the third party risk profile of the business. We aim to ensure that our suppliers meet our risk and control standards beginning with on-boarding, throughout our relationship with them, and during off-boarding. |
Transformation and change | Risk management of Transformation and Change is integrated within our project governance framework, known as One Governance, which brings together project planning and prioritisation, cost discipline and risk management of all project portfolios under one unified system environment. Projects are initially subject to rigorous review to ensure that demand funded is prioritised based on what the bank should, needs and wants to do for the benefit of our customers clients, colleagues and franchise, a process which incorporates risk and regulatory considerations. At an individual initiative level, the key risk management requirements are supported by an initial Project Risk Rating (PRR) which considers the risk an initiative poses to us and allows application of risk-based governance. An Executive Risk Summary (ERS) and an Operational Risk Assessment (ORA) are completed for all but very low risk rated projects. Our Change Risk Oversight Group assesses and manages risks at portfolio level. We continue to take a measured approach to executing risk and delivering cost savings, with a focus on prioritisation and capacity management. |
Risk monitoring and reporting
Reporting is a key part of how we manage risk. We can identify exposures through our operational risk and control assessments, risk scenario analysis, key indicators, operational risk assessments and incidents and events. We report exposures for each business unit through regular risk and control forums. These include details of risk exposures and how we plan to mitigate them. We prioritise and highlight events that have a material impact on our customers, reputation or finance by reporting them to key executives and committees. We use The Standardised Approach (TSA) to calculate our Pillar 1 operational risk capital. We use an internal model aligned to the CRD IV advanced measurement approach to validate our Pillar 2 capital needs.
Our Brexit planningcrisis management framework covers all levels of the business. It sets out possible triggers and how we will manage a crisis, and we test it at least annually. If an event occurs, our business continuity plans help us recover as quickly as possible and we undertake post incident reviews to identify learnings.
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OPERATIONAL RISK REVIEW
2022 compared to 2021
Operational risk event losses
The table below shows our operational losses in 2022 and 2021 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.
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| 2022 | | 2021 |
| Value % | Volume % | | Value % | Volume % |
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External fraud | 27 | | 95 | | | 30 | | 89 | |
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Clients, products and business practices(1) | 77 | | 1 | | | 41 | | 2 | |
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Business disruption and systems failures | (3) | | — | | | 14 | | 1 | |
Execution, delivery, and process management | (1) | | 4 | | | 15 | | 8 | |
| 100 | | 100 | | | 100 | | 100 | |
(1) 2% volume in 2021 was previously categorised as Employment practices and workplace safety
The value of our operational risk losses (events over £10,000) increased by 160% in 2022 largely due to the AML penalty and the continued increase in Fraud losses. In line with general industry trends, the value and volumes of losses due to cases of External Fraud increased by 138% and 119% respectively. We continue to enhance our anti-fraud measures to help protect our customers. Additionally, we have observed a rise in the number of events and losses prompted by the increasing level of change, resulting from delivery of regulation, industry developments and the need to further digitalise the business.
Cyber risk
Information and cyber security remain a top risk and a priority. We experienced no notable data and cyber security incidents in 2022. We continue to see increasing ransomware attacks across all sectors driven by compromises in supply chain tools and we expect this trend to continue. We continue to invest in the right skills and resources to manage data and cyber risk. We also continue to monitor the cyber threat from the conflict in Ukraine.
Data risk
in 2022, we continued to monitor data management risk through the enhanced governance structures and processes put in place by our Chief Data Officer. Our Data Programme is progressing with clearly defined deliverables that will improve our ability to manage data and enhance our data management capabilities, in line with our approved Data Strategy.
Fraud risk
Fraud against our customers and the bank remains a top risk and a priority. Fraud levels across UK banks continued to rise in 2022. Social engineering techniques used by fraudsters are a significant threat to customers and outside of the bank’s controls. As such, in line with peers, Authorised Push Payment (APP) fraud is our largest fraud type. We are focused on preventative measures and in response to increasing fraud attacks, we designed new fraud prevention tools to complement our existing prevention and detection systems and controls. We continue to deploy dynamic ‘scam warnings’ in our online banking payment process, enhancing fraud prevention controls for high-risk digital payments, presenting customers with tailored questions and warnings specific to their payment journey. We play an actively collaborate on fraud management with industry partners, through UK Finance and Stop Scams UK. In 2022, we continued our customer awareness campaigns on the most common frauds and scams.
IT risk
The importance of IT continued to be reiterated by some outages to customer services in 2022 and we continue progressing a wide programme to address the root causes and further reduce key risks within our IT estate. The programme is expected to deliver risk reduction over a three year horizon and progress is closely monitored though our risk governance.
People risk
This risk continues to be overseencompounded by changes in operating models and the execution of our strategies. We continue to adapt and respond to these risks; in particular, the people risks associated with the phased relocation of our Head Office to Unity Place in Milton Keynes, which are under close monitoring and management. 2022 saw lower wellbeing-related absence but, in line with our peers, we continue to see raised attrition levels reflecting a more buoyant job market. Potential impacts on productivity are supported with our wellbeing and inclusion strategy, centred on helping colleagues through change. As appropriate, we advocate hybrid working to encourage colleagues to return to offices, and are providing support as external economic factors impact some colleagues.
Third party risk
We continue to rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of goods and services. In 2022, we continued to evolve our processes. This included implementing a new Third Party Risk Management process and amending contracts with suppliers.
Transformation and change
The way in which we operate, the technology we rely on, and how we interact with our customers and stakeholders is constantly evolving, and consequently, our ability as an organization to meet this change is a key priority. In 2022, we continued our transformation to simplify the bank, digitise processes and customer journeys, reduce cost, extend internal capabilities and ensure a resilient operating model. This included reducing our property footprint and significant delivery against a diverse transformation agenda with specific focus on a migration to the cloud, further digitalisation and managing obsolescence. Ensuring change does not result in unacceptable impacts on our risk profile underpins our strategic decisions and is robustly managed.
Operational Resilience
We have committed that, by 2025, we will address the vulnerabilities identified in the first operational resilience self-assessment approved by the Board and submitted to our regulators in March 2022. Achieving this will enhance our resilience, i.e. the Senior Management Committee (SMC).ability of Santander UK to recover its Important Business Services (IBS) within Impact Tolerance levels to avoid intolerable harm to customers, the firm, or the market, with focus on vulnerable customers. In 2022, we focused on enhancing and testing our firm-wide recovery strategies and readiness to respond to a range of potential external events. Our Brexit Working Group consistsoperational resilience programme was subject to independent external review in January 2022 and received a satisfactory rating from Internal Audit in July 2022. A programme is in progress to remediate identified asset vulnerabilities which could directly affect our ability to recover our IBS within Impact Tolerances in the event of senior representatives froman outage. We have introduced resilience assessments across technology, data, people, third parties, and premises, which enhance our ability to monitor, oversee and action issues. Input to these assessments include scenario test outputs, post incident reviews, metrics, RCSAs, and event data. The Board continues to be actively engaged in the operational resilience journey and in March 2023 are to approve our annual operational resilience self-assessment.
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Annual Report 2022 | Santander UK Group Holdings plc 169 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Conduct and regulatory risk
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| Overview We manage conduct and non-financial regulatory risk types in one framework to reflect their similarities. Conduct risk is the risk that our decisions and behaviours lead to detriment or poor outcomes for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk is the risk of financial or reputational loss, or imposition of or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. In this section, we explain how we manage conduct and regulatory risk. We also describe our main conduct and regulatory provisions.
| | | Key metrics Customer remediation provision was £90m (2021: £44m) Litigation and other regulatory provision was £136m (2021: £166m)
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OUR KEY CONDUCT AND REGULATORY RISKS
Our purpose is to help customers and businesses prosper. To achieve this, we are committed to ensuring conduct strategy is embedded in our business, good outcomes for our customers is at the heart of what we do and support functions, who meet regularlythat our proposition and escalate areas that require further focusinitiative approval process, and attentionsystems, operation and controls are well designed and operating effectively. We see our key exposure to conduct and regulatory risk through the Boardrisk of errors in our product design, sales practices, post-sale servicing, operational processes, complaint handling, and the SMC.
We are also exposedfailure to tax risk which, even though it is a lower risk for us, is still a high-profile risk andsupervise, monitor or control the activities of our employees. All of these may include legacy items. We define tax risk asresult in the risk that we do not meet our customers’ needs, align to the expectations of our regulators, deliver the expected outcomes or observe required standards of market behaviour.
Our Conduct and Regulatory Framework is built on the following risks:
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Key risks | Description |
Regulatory | The risk that we fail to adhere to laws, regulations and codes which could have serious financial, reputational and customer impacts, including the risk that we may be adversely impacted by changes and uncertainty around UK and international regulations. We categorise regulatory risk into financial and non-financial risk aligned to our main regulators - the PRA and FCA - and other UK regulators and authorities. As part of the Banco Santander group, we are also impacted indirectly through regulation by the Banco de España (the Bank of Spain) and by the ECB through the SSM. We also fall within the scope of US regulation. |
Product | The risk that we offer products and services that do not result in good outcomes for our customers. |
Sales | The risk that we sell products and services without giving customers enough information to make an informed decision, that we do not provide appropriate advice, or that we fail to take account of customer vulnerability. |
After-sale and servicing | The risk that failures of our operations, processes, IT or controls result in poor customer outcomes. This includes the risks that we do not give appropriate after-sale communications to customers, make it difficult for customers to contact us, or that we fail to take account of customer vulnerability. It also includes the risk that our systems and controls do not prevent or detect fraud. |
Culture | The risk that we do not maintain a culture that encourages appropriate behaviours and puts the customer at the heart of what we do. |
Competition | The risk of financial harm, criminal liability, customer harm or reputational damage that we may incur because we fail to comply with relevant competition law or being involved in any competition law investigation or proceedings. |
Controls | The risk that we do not supervise our employees effectively or that our systems and controls do not prevent or detect misconduct. |
CONDUCT AND REGULATORY RISK MANAGEMENT
Risk appetite
We aim to comply with domesticall regulatory requirements, and international tax regulations because we misinterpret legislation, regulationshave no appetite to make decisions or guidance,operate in a way that leads to poor customer outcomes or which negatively impacts the market. Our Board approves our risk appetite each year, or more often if needed, and we cascade it to our business units through our risk framework and policies. We also agree lower level risk tolerance thresholds at least annually.
Risk measurement
Due to the links between our conduct, regulatory and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply where exposures have a conduct or regulatory risk impact.
We support our conduct and regulatory risk framework and policies with tools that aim to identify and assess new and emerging conduct risks. These include:
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Key tools | Description |
Strategy and business planning | We align our overall corporate strategy, financial plans, risk appetite and operational capabilities through our annual process to set our strategy. We derive our business unit plans from our corporate strategy and they contain a view of conduct and regulatory risk. |
Quality assurance | We subject sales and processes to internal quality assurance and, as needed, external monitoring. |
Operational risk and control assessments | Our business and business support units assess our operational risks, systems and controls to give us a consolidated risk view across all our business areas. We complete the assessments through a central tool to evaluate and manage our residual risk exposures. |
Scenario testing and horizon scanning | We consider conduct and regulatory risk in our scenario testing and review possible root causes and assumptions to determine the likelihood and impact, with actions to enhance our controls where required. |
Conduct risk reporting | We use dashboards to give us a view of conduct risks across our business and manage conduct risk in line with our risk appetite. |
Compliance monitoring | We carry out an annual conduct and regulatory risk assurance programme approved by the Board and tracked throughout the year. |
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Annual Report 2022 | Santander UK Group Holdings plc 170 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Risk mitigation
Our conduct and regulatory risk framework and policies set out the principles, standards, roles and responsibilities and governance for conduct and regulatory risk, such as:
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Policies | Description |
Product approval | Our product approval process aims to minimise our conduct, regulatory or reputational risks in the design, marketing, sales and servicing of products and services. We assess our products and services within a formal framework to ensure they meet the needs and expectations of our customers, are within our risk appetite and agreed metrics, and to ensure processes and controls are in place. |
Suitable advice and information for customers | We give guidance to advisers and staff on the key principles, requirements and ethical behaviours they must follow. This ensures our customers are sufficiently informed when they consider or make a buying decision. |
Training and competence | We train our staff and require them to maintain a suitable level of competence to ensure customers can achieve appropriate outcomes. We invest in all our people to ensure that we achieve our mandatory risk objectives and that everyone acknowledges their personal responsibility to manage risk. We place focus on ensuring our colleagues are trained to recognise and support customers who may be vulnerable, or who may be experiencing financial stress, financial difficulty or financial abuse. We also have a dedicated Specialist Support Team that offers guidance to colleagues helping customers who may need more tailored solutions. |
Fair treatment of vulnerable customers | Some customers may be impacted financially or personally as a result of their circumstances. Our Vulnerable Customer Policy gives business units a clear and consistent view of what vulnerability can mean and situations when customers may need more support. Our guidelines focus on identifying characteristics of vulnerability, understanding customer needs and the support and flexibility we can give to help. In addition to mandatory training, we train our customer-facing staff using real customer scenarios to enable our colleagues to deal with a wide range of sensitive issues. Our online Vulnerable Customer Support Tool gives our people more guidance and support, and our Specialist Support Team provides guidance for the most complex situations. We also consider vulnerability in every initiative, and adapt our technology to the needs of customers with vulnerability characteristics in our design and testing stages. We work with charities, authorities, trade associations and other specialists to develop our understanding of vulnerability. |
Risk monitoring and reporting
We consider conduct and regulatory risk in all our business decisions. Our material conduct and regulatory risk exposures are subject to, and reported against, our conduct and regulatory risk appetite statement, as well as lower level triggers and thresholds for action. We monitor the position to ensure we provide appropriate outcomes and meet regulatory expectations. We have specific fora and committees such as our Conduct and Compliance Forum, and business specific risk management fora to make decisions on conduct and regulatory risks and we report to the tax authorities inaccurately or late. This could lead to financial penalties, additional tax charges or reputational damage. Santander UK adopted the Code of Practice on Taxation for Banks in 2010.
In 2020, we responded to the UK regulators’ Consultation Papers (CPs) on building operational resilience in the financial services sector issued in December 2019. We have since been actively engaged in industry collaboration groupsERCC and with UK Finance to support the development of operational resilience best practice. We also conducted a pilot to assess our operationalBRBC. Our risk and resilience-related practices against the CPs' requirements. We are developing an enhanced set of activitiescontrol fora support management to support a new target operating model to further strengthen our capability to deliver operations through disruption. We have started a programme of work to deliver these enhancements through 2021 and 2022 as well as to address the regulatory requirements which are due to be issued in Q1 2021.
Banco Santander aims to cut total carbon emissions by 46% between 2019 and 2025. In order to support the transition to a low carbon economy and minimise the environmental impact of our energy use, we are committed to continual improvement in the energy performance of our property operations. We maintain ISO 50001 energy management systems in all head office buildings, and we set annual energy reduction targets to drive improvement in energy performance. Our Operational Risk Framework requires that all business units consider the impact ofcontrol risks related to climate change in their business units. Reporting includes conduct risk management processes.dashboards, with metrics across common areas. These include policy breaches logged, quality assurance and complaints, and commentary on trends and root causes to enable us to take effective action.
OPERATIONAL RISK MANAGEMENT
Risk appetite
We set our operational risk appetite at a Santander UK group level and we express it through measures approved by the Board. These include risk statements and metrics set against our principalmain non-financial risk loss event types. We cascade our appetite across our business areas by setting out clearalso set lower level triggers, qualitative parameters and quantitative thresholds.thresholds across our business. We monitor our risk profile and performance against the risk appetite under several Principal Risk Areas,key risk areas, and we also have processes to enable us to identify, assess, manage and escalatereport risks and events,events. We incorporate Banco Santander group principles and our governance requires us to mitigate or accept all identified risks.
standards, regulatory requirements and best practice, where applicable. Coverage across the seven CRD IV loss event types is comprehensive and aligns to principalthe key risk areas approved by ERCC. As a result, we have specific embedded monitoring and measurement of our operational risks, including our top three operational risk types which are as follows:
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Annual Report 2022 | Santander UK Group Holdings plc 167 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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–Cyber:We have a comprehensive set of Risk Appetite statements and metrics which have been agreed by the Board, and which allow us to measure our cyber risk. We have defined statements and metrics with key subject matter experts in our Cyber and IT teams, and we incorporate Banco Santander group principles and standards, regulatory requirements and industry best practice, where applicable.
–Change and transformation: Change is one of our risk appetite areas of focus, ensuring we can specifically monitor risk appetite in relation to Change via a clearly defined suite of statements and metrics. Consideration of Change risk appetite is embedded within our project risk governance methodology, as part of the approval of every project’s Business Case. We specifically monitor Change risk related to Regulatory change initiatives via statements and metrics. We also consider Change risk within our IT & Cyber Risk appetite to address obsolescence considerations as part of our change agenda, and as part of our third party risk appetite, in line with their increasing involvement in Change and Transformation related activities.
–People:We have People-related Risk Appetite statements and metrics which have been agreed by the Board. We use these to measure our People risk, including the well-being of our employees, and to inform employee relations and engagement. We employ subject matter experts in our HR function to help us to monitor and manage our people risk. Formal actions are required to address and mitigate any measures which are reported out of tolerance. We communicate, action, and escalate, as needed, any material issues to the Board.
Risk measurement and mitigation
The key components of the operational risk toolset we use to measure and mitigate risk are:
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Operational risk toolset | Description |
Operational risk and control assessments | Our business units identify and assess their operational risks to ensure they manage and control them within our operational risk appetite. They also ensure that weappetite, and prioritise any actions needed. Every area has tomust identify and record their material risks, assess their controls for adequacy and then accept the risk or formulate a plan to address any deficiencies. We also use operational risk assessments and project risk rating tools as essential elementskey parts of our change risk management. |
Risk scenario analysis | We perform this across business units. It involves a top down assessment of our most significantkey operational risks. We have a set ofupdate our scenarios that we review and update each year. The analysis gives us insight into rare but high impact events. It alsoevents and allows us to better understand the potential impacts and to address any issues. |
Key indicators | Key indicators and their tolerance levels give us an objective view of the degree of risk exposure or the strength of a control at any point in time. They also show trends over time and give us early warning of potential increasing risk exposures. Of primary importance are our business-wide risk appetite indicators which measure ourshow adherence to our defined risk appetite statements. |
Operational risk lossesevent and loss management | Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory impacts and/or damage to our reputation. We use data from these processes to identify and correct any control weaknesses. We also use root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments, scenario analysis and risk reporting. Our operational risk loss appetite sets the level of total operational risk loss (expected and unexpected) in any given year (on a 12-month rolling basis) that we consider to be acceptable. We track actual losses against our appetite, and we escalate as needed. |
Operational risk event management | Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory impacts and/or damage to our reputation. We have processes to capture and analyse loss events. We use data from these processes to identify and correct any control weaknesses. We also use root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments, scenario analysis and risk reporting. |
Risk based insurance | Where appropriate, we use insurance to complement other risk mitigation measures. |
Santander UK Group Holdings plc173
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Annual Report 2020 | Risk review
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Risk mitigationWe mitigate our key operational risks in the following ways:
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Key risks | Risk mitigation |
Cyber | Protecting our customers, systems and data remains a top priority for us. Online security and data breach stories, along with many reports of scams and online fraud, continue to feature in the press. All organisations, including banks, are in an ongoing race to keep ahead of criminals who are becoming ever more sophisticated and destructive in their approach. Criminals persist in attempts to deny our customers access to our digital channels, target online services and data, or steal online credentials and appropriate funds by various methods, including social engineering.
We continue to enhance our resilience to cyber disruption as our Security and Information Technology teams continually identify and assess technological risks. They are guided by standardised, industry-leading control frameworks to ensure that we remain within our operational risk appetite. We measure the maturity of our controls in terms of their design and effectiveness and when combined with our cyber threat intelligence, we use it to define and prioritise our programmes of mitigation. We have processes to capture and analyse events from our security systems that drive escalation processes as needed. We operate a layered defence approach to cyber risk which we test andregularly assess continually to ensure that it addresses the prevailing threats. Our comprehensive approach to validatingWe validate our controls includesusing tests designed to replicate real-world cyber-attacks with test findings driving our ongoing improvement plans. As part of this, we participate in industry widecyber-attacks. Our cyber security stress tests, such as CBEST, throughexperts assess our overall cyber security posture and report to weeklymanagement each month, and to ExCo, ERCC, BRC and Board at least twice a year. We assess cyber testing of our internet facing digital services that enables us to compare against our peers.
But keepingcontrols and risks each quarter using Banco Santander's Holistic Cyber Risk Framework. Keeping our systems secure is a bank widebank-wide responsibility and we continue to enhance our staff training programmes for employees to support this. We have Board-level expertise and supervision in cyber security matters to ensure robust monitoring and challenge. We also have targeted training for Board members, and senior management and other employees who may be singled out by criminals, such as those facilitating payments. New cyber security training ensures that everyone understands the threats we face, and that we all have the expertise to spot emails from criminals and attacks on our systems.employees. We continue to work with other banks as members ofthrough the Cyber Defence Alliance, where we share intelligence on cyber threats and effective strategies to counter them.
We campaign to raise awareness and give customers the knowledge they need to avoid becoming victims of fraud. We use robust technology to protect our customers, in particular to look for anomalous behaviour or malicious software on customer devices, and we continually invest in the fight to counter scams.cyber attacks. As part of this, we run customer education campaigns, and we offer advice through our online security centre.
There have been no material security breaches to date, and we are highly vigilant at all times. We also have a cyber insurance policy to providegive us with immediate responsecomprehensive cover to assessrespond and control therecover losses and damages from security or system failures and any impact of a data breach.
Analysis |
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Data | We continue to monitor and mitigate data risk through enhanced governance structures and processes supported by effective deployment of our security posture drives an ongoing discussion about cyber risks across the business. This includes individual business areas who must include cyber risk when they make business continuity decisions.and control library. We also use maturity assessments and both internal and external threat analyses. Our cyber security experts assess our overall security posture and make recommendations to both management and Risk fora on a monthly basis, with onward reporting to the Executive Committee, ERCC, BRC and Board at least twice a year.
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Change and transformation | We are constantly changing to maximize technological innovation, evolve business models and give our customers the best possible service. This includes the introduction of new third-party suppliers, the adoption of new technologies and business models, organisational changes, and dealing with legacy systems and processes. Our operationalData risk exposure increases when we make changes, and the risks can compound when several changes happen at the same time. The scale of change that we are currently planning and managing is unprecedented for us.
In order to support the constant need for change whilst minimising the operational risk, we review:
–The risk management of individual projects
–The risk managementeach year as part of the aggregate change from our portfolio of projects
–Our capacity and capability to deliver the overall change agenda.
For individual projects, our Change risk management process starts with an early assessment of the change impact using the Project Risk Rating (PRR) tool, which determines the level of subsequent risk management required. Projects with higher change impacts are required to track risks and mitigating actions using the Operational Risk Assessment (ORA). Operational risks for all material changes in each new project, product and supplier are assessed before they are allowed to go ahead. At the portfolio level, we monitor our portfolio for concentrations of change which can compound a risk or place high demands for our teams to deliver several changes at once. In terms of our overall capacity and capability, we constantly recruit, train and upskill more dedicated project managers to support the delivery of our overall change agenda. We track and monitor the number of regulatory projects with a red risk status (under our Transformation Office's Execution Risk Management Framework). We give priority to our regulatory change projects for funding and delivery.
Our Risk and Control Self-Assessment (RCSA) capturesprocess and update our risk profile as needed. Our data management programme is a key enabler to ensuring our data is fit for purpose and making improvements to our underlying processes and data governance. We are also embedding Data Marketplace as a holistic system for data management across the bank, ensuring a more robust and comprehensive approach for managing data.
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Fraud | We operate layered security controls combining prevention and detection controls, to mitigate risks. The current fraud environment is incredibly challenging, and as such our current Fraud Transformation programme contains several projects that are designed to reduce the risks related to Changeus and Transformation thatour customers. We are identified bycommitted to taking a more preventative approach to mitigate these risks. To help support customers, over the business, alongside an assessmentpast five years we have created a series of the effectivenessfraud education and media campaigns, many of the controls,which focus on drawing public attention to common frauds, such as purchase scams, investment fraud, and the residual risk exposure. money mules, and how to avoid them. |
IT | We log any operational riskproactively monitor technology platforms and applications through automated alerts to detect events that occurmay impact their performance or availability. We investigate material events to identify the root cause and remedial actions needed. We escalate themthese events as needed through our operational riskthe Santander Early Escalation Notification (SEEN) process.
Process, and we review them each quarter to identify trends we need to remediate. We assess IT risk each year as part of the RCSA process and update our risk profile as needed.
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People | We mitigate the People risks associated with wellbeing impacts of Covid-19 and the remote working environment using virtual meeting tools and keeping-in-touch schemes. We also provide regular communications and other support. We are also aware that extended remote working arrangements may increase ergonomic risks; we are mitigating suchmonitor people risks through Occupational Health Service supportthe use of a broad range of operational risk indicators covering capacity, capability, engagement and assessments for individuals where thesediversity and inclusion. These are appropriate. We launched a ‘Coronavirus Hub’ in April 2020,reviewed and refreshed annually to support employees and people managers during this challenging time. We track and monitor all people related indicators, withmeasures. We mitigate people risk through adopting various attraction and retention strategies throughout the employee lifecycle, and by delivering a focus on those with red risk status.competitive employee value proposition including hybrid working. All significant people-related change initiatives must have Operational Risk Assessments conducted. We also have processes to capture and assess people-related events. |
Third party | We identify and assess the risk profile of each of our third party arrangements before onboarding and throughout the relationship. We also identify and measure key third party risks within our operational risk and control assessments. We capture and assess related events, as well asand use operational risk indicators in place to measure the ongoing Peoplethird party risk profile of the business. We aim to ensure that our business.suppliers meet our risk and control standards beginning with on-boarding, throughout our relationship with them, and during off-boarding. |
Transformation and change | Risk management of Transformation and Change is integrated within our project governance framework, known as One Governance, which brings together project planning and prioritisation, cost discipline and risk management of all project portfolios under one unified system environment. Projects are initially subject to rigorous review to ensure that demand funded is prioritised based on what the bank should, needs and wants to do for the benefit of our customers clients, colleagues and franchise, a process which incorporates risk and regulatory considerations. At an individual initiative level, the key risk management requirements are supported by an initial Project Risk Rating (PRR) which considers the risk an initiative poses to us and allows application of risk-based governance. An Executive Risk Summary (ERS) and an Operational Risk Assessment (ORA) are completed for all but very low risk rated projects. Our Change Risk Oversight Group assesses and manages risks at portfolio level. We continue to take a measured approach to executing risk and delivering cost savings, with a focus on prioritisation and capacity management. |
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, operational risk assessments and incidents and events. We report exposures for each business unit through regular risk and control reports.forums. These include details of risk exposures and how we plan to mitigate them. We prioritise and highlight events that have a material impact on our customers, reputation or finance by reporting them to key executives and committees.
We use The Standardised Approach (TSA) forto calculate our Pillar 1 operational risk capital needs.capital. We use an internal model aligned to the CRD IV advanced measurement approach to assessvalidate our Pillar 2 capital needs.
We have aOur 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 andIt sets out possible triggers and how we will manage a crisis, or major incident and we test it at least annually. If an event occurs, we haveour business continuity plans in place tohelp us recover as quickly as possible and we undertake post incident reviews to ensure any learnings are taken forward. These are aligned with our key customer journeys and delivery of critical IT services.
identify learnings.
174Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 168 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic report | | Governance | | Risk review | | Financial review | | Financial statements | | Shareholder information |
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Cyber
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 in the worldwide Santander Security Operations Centre in Madrid. We use a wide range of key risk indicators, 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 metric-driven approach to reporting through our risk management frameworks has led to proactive mitigation of risk.
Change and transformation
We monitor and report Change and Transformation risks by reviewing the project PRR and ORA, both for individual projects and at a more aggregated level. In addition, we monitor and report Change and Transformation risks in the relevant governance stream for the type of change. For example, products, services and technological changes have specific governance with their own operational risk reporting requirements. We report an aggregated view of change risk by every business division, at least each quarter, using our Non-Financial Risk Dashboard. We capture risks related to change and transformation identified by the business in our RCSAs, and we report operational risk events related to change using the SEEN process. We oversee Change and Transformation, including the related risks, through our Transformation Dashboard, which is regularly reviewed by the Board.
People
We formally track our People risk profile against our risk appetite through our monthly HR Risk and Control Forum and other Risk Governance Fora. 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 and the Board where appropriate. We report a monthly aggregated view of People risk in terms of sickness absence, wellbeing and attrition. We use the results of regular wellbeing surveys to help drive our areas of People focus.
OPERATIONAL RISK REVIEW
2022 compared to 2021
Operational risk event losses
The table below shows our operational losses in 20202022 and 20192021 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.
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| 2022 | | 2021 |
| Value % | Volume % | | Value % | Volume % |
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External fraud | 27 | | 95 | | | 30 | | 89 | |
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Clients, products and business practices(1) | 77 | | 1 | | | 41 | | 2 | |
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Business disruption and systems failures | (3) | | — | | | 14 | | 1 | |
Execution, delivery, and process management | (1) | | 4 | | | 15 | | 8 | |
| 100 | | 100 | | | 100 | | 100 | |
(1) 2% volume in 2021 was previously categorised as Employment practices and workplace safety
The value of our operational risk losses (events over £10,000) increased by 160% in 2022 largely due to the AML penalty and the continued increase in Fraud losses. In line with general industry trends, the value and volumes of losses due to cases of External Fraud increased by 138% and 119% respectively. We manage somecontinue to enhance our anti-fraud measures to help protect our customers. Additionally, we have observed a rise in the number of these risks using frameworks for other risk types, including regulatoryevents and financial crime risk even though we report them here.
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| 2020 | | 2019 |
| Value % | Volume % | | Value % | Volume % |
Internal fraud | 1 | | — | | | — | | — | |
External fraud | 58 | | 89 | | | 30 | | 80 | |
Employment practices and workplace safety | 1 | | 1 | | | — | | — | |
Clients, products, and business practices | 34 | | 3 | | | 39 | | 6 | |
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Business disruption and systems failures | 1 | | — | | | 2 | | 1 | |
Execution, delivery, and process management | 5 | | 7 | | | 29 | | 13 | |
| 100 | | 100 | | | 100 | | 100 | |
losses prompted by the increasing level of change, resulting from delivery of regulation, industry developments and the need to further digitalise the business.
2020 compared to 2019Cyber risk
In 2020 we did not experience any material operational risk losses. Aligned to the rest of the industry, we experienced an increase in Push Payment fraud volumes and losses with external fraud now accounting for 59% of all losses over £10,000. In addition, provisions were raised to cover customer remediation programmes and associated costs. Overall, whilst we experienced an increased level of loss against 2019, the level remained comfortably within our forecast and 2020 risk appetite.
Cyber
We rely extensively on the use of technology to support our customers and to run our business. This includes internal platforms, such as our core banking systems, mortgage platforms, telecommunications, remote working and finance systems, and customer-facing platforms such as our mobile app and online banking websites. The use of technology and the internet have changed the way we live and work, and the Covid-19 pandemic has further evidenced the reliance on technology. Technology and the internet allow us to develop and improve the way we serve our customers. It is critically important that we protect our customers’ information and provide them with a secure environment in which to deal with us, especially when the threat from cyber criminals is so prevalent and more sophisticated than ever.
As such, informationInformation and cyber security remainsremain a top risk and a priority. We experienced no notable informationdata and cyber security incidents in 2020. Cyber threats2022. We continue to increase and evolve in sophistication as criminals seek new ways to monetise their efforts. Externally in 2020, we saw a large increase insee increasing ransomware attacks across all sectors driven by compromises in supply chain tools and we expect this trend to continue. As a result, weWe continue to review and enhance our ransomware controls based on the latest intelligence. We actively work with peersinvest in the Cyber Defence Alliance to share threat intelligence, expertise and experience to help identify common features of cyber-attacks and effective mitigation strategies.
Covid-19 related cyber activity has so far had limited impact on the finance sector. There has been a notable increase in Covid-19 phishing lures reaching our staff, however our technical controls and awareness training have provided strong mitigation. We also monitor a range of other common cyber threats including attacks on payment systems, ATM networks and third-party suppliers, where insider threat and network intrusion are the most common methods of attack. We have taken mitigating action against these threats including deploying a cyber threat intelligence platform, increased intelligence through chairing the Geopolitical Financial Services working group and enhancing online service access construction to further strengthen our resilience against Distributed Denial of Service attacks. Our cyber transformation programme continues to enhance our control environment and ensures we deliver secure products and solutions for our customers and the communities we serve. We also continue investing to maintain the right skills and resources to manage informationdata and cyber securityrisk. We also continue to monitor the cyber threat from the conflict in Ukraine.
Data risk effectively
in 2022, we continued to monitor data management risk through the enhanced governance structures and processes put in place by our Chief Data Officer. Our Data Programme is progressing with clearly defined deliverables that will improve our ability to manage data and enhance our data management capabilities, in line with our approved Data Strategy.
Fraud risk
Fraud against our customers and the bank remains a top risk and a priority. Fraud levels across allUK banks continued to rise in 2022. Social engineering techniques used by fraudsters are a significant threat to customers and outside of the bank’s controls. As such, in line with peers, Authorised Push Payment (APP) fraud is our lineslargest fraud type. We are focused on preventative measures and in response to increasing fraud attacks, we designed new fraud prevention tools to complement our existing prevention and detection systems and controls. We continue to deploy dynamic ‘scam warnings’ in our online banking payment process, enhancing fraud prevention controls for high-risk digital payments, presenting customers with tailored questions and warnings specific to their payment journey. We play an actively collaborate on fraud management with industry partners, through UK Finance and Stop Scams UK. In 2022, we continued our customer awareness campaigns on the most common frauds and scams.
IT risk
The importance of defence.IT continued to be reiterated by some outages to customer services in 2022 and we continue progressing a wide programme to address the root causes and further reduce key risks within our IT estate. The programme is expected to deliver risk reduction over a three year horizon and progress is closely monitored though our risk governance.
People risk
This risk continues to be compounded by changes in operating models and the execution of our strategies. We continue to adapt and respond to these risks; in particular, the people risks associated with the phased relocation of our Head Office to Unity Place in Milton Keynes, which are under close monitoring and management. 2022 saw lower wellbeing-related absence but, in line with our peers, we continue to see raised attrition levels reflecting a more buoyant job market. Potential impacts on productivity are supported with our wellbeing and inclusion strategy, centred on helping colleagues through change. As appropriate, we advocate hybrid working to encourage colleagues to return to offices, and are providing support as external economic factors impact some colleagues.
Third party risk
We continue to rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of goods and services. In 2022, we continued to evolve our processes. This included implementing a new Third Party Risk Management process and amending contracts with suppliers.
Transformation and change
The way in which we operate, the technology we rely on, and how we interact with our customers and stakeholders is constantly evolving, and consequently, our ability as an organization to meet this change is a key priority. In 2022, we continued our transformation to simplify the bank, digitise processes and customer journeys, reduce cost, extend internal capabilities and ensure a resilient operating model. This included reducing our property footprint and significant delivery against a diverse transformation agenda with specific focus on a migration to the cloud, further digitalisation and managing obsolescence. Ensuring change does not result in unacceptable impacts on our risk profile underpins our strategic decisions and is robustly managed.
Operational Resilience
We have committed that, by 2025, we will address the vulnerabilities identified in the first operational resilience self-assessment approved by the Board and submitted to our regulators in March 2022. Achieving this will enhance our resilience, i.e. the ability of Santander UK to recover its Important Business Services (IBS) within Impact Tolerance levels to avoid intolerable harm to customers, the firm, or the market, with focus on vulnerable customers. In 2022, we focused on enhancing and testing our firm-wide recovery strategies and readiness to respond to a range of potential external events. Our operational resilience programme was subject to independent external review in January 2022 and received a satisfactory rating from Internal Audit in July 2022. A programme is in progress to remediate identified asset vulnerabilities which could directly affect our ability to recover our IBS within Impact Tolerances in the event of an outage. We have introduced resilience assessments across technology, data, people, third parties, and premises, which enhance our ability to monitor, oversee and action issues. Input to these assessments include scenario test outputs, post incident reviews, metrics, RCSAs, and event data. The Board continues to be actively engaged in the operational resilience journey and in March 2023 are to approve our annual operational resilience self-assessment.
Santander UK Group Holdings plc175
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Annual Report 2020 | Risk review
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Change and transformation
Following a substantial review of our portfolio of change in 2019, we set up a transformation programme (Transforming for Success) to transform us into a digital bank that serves our customers and colleagues with improved customer journeys and colleague experiences. This was accompanied by the launch of an updated project governance framework, known as One Governance, and the implementation of a new project governance tool (Wave) by the COO division in Q4 2020, to further strengthen project planning and prioritisation, cost discipline and risk management. One Governance and Wave bring all Santander UK plc group project portfolios under one unified system environment, and embed risk requirements within the project governance system workflow for the first time. The key risk requirements are the Project Risk Rating (PRR), the Executive Risk Summary (ERS) and the Operational Risk Assessment (ORA). The PRR enables us to identify the risk profile of initiatives at the earliest opportunity, prioritising subsequent risk management for higher-risk initiatives. The ERS provides a ‘live’ summary of key risks related to an initiative’s business case for senior management, supporting the funding decision and then throughout the project lifecycle. The ORA captures a more detailed assessment of an initiative’s risks, relevant controls and mitigating actions, tracking them through execution to closure. We continue to refine our operational risk management methodology, particularly to support the shift away from traditional ‘waterfall’ funding models to more iterative funding approaches and agile development.
People
As noted above, people risk increased significantly in 2020, mainly driven by Covid-19. As the Covid-19 pandemic developed, we increased our focus on people-related issues to support and maintain colleague wellbeing through ongoing communications and bank-wide support. The results of regular Employee Surveys conducted throughout 2020 continued to reflect positive satisfaction levels. Notwithstanding this, the Covid-19 environment remains challenging, with a third lockdown in January 2021 accompanied by seasonal factors, likely to impact on mental health, fatigue and increased absence. We continue to adapt our strategy to allow for these factors, along with the potential impact on productivity. People risk is also compounded further by other factors including outsourcing activities, changes in operating models, and execution of future strategies, which we recognise need to be managed carefully.
LIBOR transition
Whilst the Bank of England and the FCA have recognised the challenges presented by Covid-19 to the industry-wide IBOR transition by adjusting some interim milestones, we have continued to make progress on this transition and remain on target to meet industry and regulatory deadlines. We are transforming key systems and processes to deal with the new risk-free rates. We expect some increase in operational risk in the transition as we embed new systems and processes, particularly as differing responses across jurisdictions may need multi-stage transitions for products with cross-currency dimensions. For quantitative information, see Note 43 to the Consolidated Financial Statements.
Data management
Data Management continues to increase in importance. We have invested and are making good progress with our ability to identify and manage key risks such as data quality. We have implemented a data governance model including a Senior Data Forum which reports to the SMC, Board Audit Committee and Board Risk Committee. We are also enhancing our data management architecture to better support our Digital Transformation strategy.
Operational resilience
The Bank of England, PRA and FCA published a consultation paper in December 2019 to help financial firms evolve their approach to operational resilience. The regulators recognised the Covid-19 impacts across the industry in early 2020 and extended the time to respond to the paper by six months to the end of October 2020 to allow lessons learnt from the Covid-19 pandemic to be considered in the final regulations due to be published in H1 2021. 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 working from home capability as well as the operational risk and resilience framework and implementing a Board-approved strategy. This will focus on defining our key business services, providing enriched data, and mapping our end-to-end process dependencies. 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 2021 designed to embed operational resilience in our Digital Transformation programme as well as day-to-day activities.
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Annual Report 2022 | The key challenge in delivering the Covid-19 lockdown contingency solution was the rapid ramping up of our Remote Access Service (RAS) solution and deployment of IT equipment to allow the majority of our head office workforce to work from home.
We mobilised our Covid-19 response before theSantander UK Government announced its lockdown restrictions in March 2020. Whilst the RAS technology was well understood and has been in use for many years, the pace with which the infrastructure needed to be upgraded to support the extra staff numbers meant we had to include multiple tactical technical solutions during the implementation. We prioritised staff performing critical activities for the deployment of IT equipment and we reallocated remote access licences to priority staff. In parallel, our Procurement team sourced additional laptops to replace office-based desktops. Over 7,500 additional laptops were purchased, configured and distributed to staff.
We reconfigured meetings and communications to operate over Microsoft Teams and the Outlook Web App to reduce our dependency on RAS for basic day-to-day operations. Our extended use of remote access to allow staff to operate outside of the office has been key to our Covid-19 response. Within a period of only a few weeks, we had 90% of our head office staff operating from home whilst the business remained operationally stable and able to maintain service to our customers.
Group Holdings plc
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Resilience in Covid-19 |
176Santander UK Group Holdings plc
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Other key risks
Conduct and regulatory risk
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| Overview | | | | |
| Overview We manage conduct and non-financial regulatory risk types in one framework to reflect their similarities. Conduct risk is the risk that our decisions and behaviours lead to detriment or poor outcomes for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk is the risk of financial or reputational loss, or imposition of or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. In this section, we describeexplain how we manage conduct and regulatory risk. We also describe our main conduct and regulatory provisions.
| | | Key metrics Customer remediation provision was £90m (2021: £44m) Litigation and other regulatory provision was £136m (2021: £166m)
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OUR KEY CONDUCT AND REGULATORY RISKS
Our purpose is to help customers and businesses prosper. To achieve this, we are committed to ensuring conduct strategy is embedded in our business, good outcomes for our customers is at the heart of what we do and that our proposition and initiative approval process, and systems, operation and controls are well designed and operating effectively. We see our key exposure to conduct and regulatory risk through the risk of errors in our product design, sales practices, post-sale servicing, operational processes, complaint handling, and the failure to supervise, monitor or control the activities of our employees. All of these may result in the risk that we do not meet our customers’ needs, align to the expectations of our regulators, deliver the expected outcomes or observe required standards of market behaviour.
Our Conduct and Regulatory Framework is built on the following risks:
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Key risks | Description |
Regulatory | The risk that we fail to adhere to laws, regulations and discuss developmentscodes which could have serious financial, reputational and customer impacts, including the risk that we may be adversely impacted by changes and uncertainty around UK and international regulations. We categorise regulatory risk into financial and non-financial risk aligned to our main regulators - the PRA and FCA - and other UK regulators and authorities. As part of the Banco Santander group, we are also impacted indirectly through regulation by the Banco de España (the Bank of Spain) and by the ECB through the SSM. We also fall within the scope of US regulation. |
Product | The risk that we offer products and services that do not result in good outcomes for our customers. |
Sales | The risk that we sell products and services without giving customers enough information to make an informed decision, that we do not provide appropriate advice, or that we fail to take account of customer vulnerability. |
After-sale and servicing | The risk that failures of our operations, processes, IT or controls result in poor customer outcomes. This includes the risks that we do not give appropriate after-sale communications to customers, make it difficult for customers to contact us, or that we fail to take account of customer vulnerability. It also includes the risk that our systems and controls do not prevent or detect fraud. |
Culture | The risk that we do not maintain a culture that encourages appropriate behaviours and puts the customer at the heart of what we do. |
Competition | The risk of financial harm, criminal liability, customer harm or reputational damage that we may incur because we fail to comply with relevant competition law or being involved in any competition law investigation or proceedings. |
Controls | The risk that we do not supervise our employees effectively or that our systems and controls do not prevent or detect misconduct. |
CONDUCT AND REGULATORY RISK MANAGEMENT
Risk appetite
We aim to comply with all regulatory requirements, and we have no appetite to make decisions or operate in a way that leads to poor customer outcomes or which negatively impacts the market. Our Board approves our risk appetite each year, or more often if needed, and we cascade it to our business units through our risk framework and policies. We also agree lower level risk tolerance thresholds at least annually.
Risk measurement
Due to the links between our conduct, regulatory and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply where exposures have a conduct or regulatory risk impact.
We support our conduct and regulatory risk framework and policies with tools that aim to identify and assess new and emerging conduct risks. These include:
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Key tools | Description |
Strategy and business planning | We align our overall corporate strategy, financial plans, risk appetite and operational capabilities through our annual process to set our strategy. We derive our business unit plans from our corporate strategy and they contain a view of conduct and regulatory risk. |
Quality assurance | We subject sales and processes to internal quality assurance and, as needed, external monitoring. |
Operational risk and control assessments | Our business and business support units assess our operational risks, systems and controls to give us a consolidated risk view across all our business areas. We complete the assessments through a central tool to evaluate and manage our residual risk exposures. |
Scenario testing and horizon scanning | We consider conduct and regulatory risk in our scenario testing and review possible root causes and assumptions to determine the likelihood and impact, with actions to enhance our controls where required. |
Conduct risk reporting | We use dashboards to give us a view of conduct risks across our business and manage conduct risk in line with our risk appetite. |
Compliance monitoring | We carry out an annual conduct and regulatory risk assurance programme approved by the Board and tracked throughout the year. |
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Annual Report 2022 | Santander UK Group Holdings plc 170 |
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Risk mitigation
Our conduct and regulatory risk framework and policies set out the principles, standards, roles and responsibilities and governance for conduct and regulatory risk, such as:
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Policies | Description |
Product approval | Our product approval process aims to minimise our conduct, regulatory or reputational risks in the year.design, marketing, sales and servicing of products and services. We assess our products and services within a formal framework to ensure they meet the needs and expectations of our customers, are within our risk appetite and agreed metrics, and to ensure processes and controls are in place. |
Suitable advice and information for customers | We give guidance to advisers and staff on the key principles, requirements and ethical behaviours they must follow. This ensures our customers are sufficiently informed when they consider or make a buying decision. |
Training and competence | We train our staff and require them to maintain a suitable level of competence to ensure customers can achieve appropriate outcomes. We invest in all our people to ensure that we achieve our mandatory risk objectives and that everyone acknowledges their personal responsibility to manage risk. We place focus on ensuring our colleagues are trained to recognise and support customers who may be vulnerable, or who may be experiencing financial stress, financial difficulty or financial abuse. We also have a dedicated Specialist Support Team that offers guidance to colleagues helping customers who may need more tailored solutions. |
Fair treatment of vulnerable customers | Some customers may be impacted financially or personally as a result of their circumstances. Our Vulnerable Customer Policy gives business units a clear and consistent view of what vulnerability can mean and situations when customers may need more support. Our guidelines focus on identifying characteristics of vulnerability, understanding customer needs and the support and flexibility we can give to help. In addition to mandatory training, we train our customer-facing staff using real customer scenarios to enable our colleagues to deal with a wide range of sensitive issues. Our online Vulnerable Customer Support Tool gives our people more guidance and support, and our Specialist Support Team provides guidance for the most complex situations. We also consider vulnerability in every initiative, and adapt our technology to the needs of customers with vulnerability characteristics in our design and testing stages. We work with charities, authorities, trade associations and other key risks are:specialists to develop our understanding of vulnerability. |
Risk monitoring and reporting
We consider conduct and regulatory risk in all our business decisions. Our material conduct and regulatory risk exposures are subject to, and reported against, our conduct and regulatory risk appetite statement, as well as lower level triggers and thresholds for action. We monitor the position to ensure we provide appropriate outcomes and meet regulatory expectations. We have specific fora and committees such as our Conduct and Compliance Forum, and business specific risk management fora to make decisions on conduct and regulatory risks and we report to the ERCC and BRBC. Our risk and control fora support management to control risks in their business units. Reporting includes conduct risk dashboards, with metrics across common areas. These include policy breaches logged, quality assurance and complaints, and commentary on trends and root causes to enable us to take effective action.
CONDUCT AND REGULATORY RISK REVIEW
2022 compared to 2021
To fully consider customer and conduct impacts across our business, we maintain a strong focus on robust oversight and control of the customer journey across all our products and services. In 2022, we continued to build on our progress and remain vigilant in taking a customer-focused approach in developing strategy, products, services and policies that support fair customer outcomes and market integrity, in particular in the context of regulator and government driven initiatives. As part of this, we:
–Assessed the views and new policy areas in the FCA’s 2022/23 Business Plan. The key focus is on three main areas: reducing and preventing serious consumer harm; setting and testing higher standards; and promoting competition and positive change. We continue to consider and address these in our controls, product and service processes and frameworks, and we continue to adapt in line with the evolution of a digital economy.
–Delivered change to meet the evolving regulatory landscape, including changes brought about by the PSR: Confirmation of Payee Phase 2, Open Banking and PSD2, and the FCA consumer protection agenda.
–Following the implementation of the Contingent Reimbursement Model, a voluntary code to deal with authorised push payment (APP) fraud, we continue to engage with the industry and authorities, giving input and support to further develop the code's framework. We also considered the latest PSR proposals to give greater protection for consumers against APP scams.
–Further evolved our Financial Support team and SME support, with more investment in people and IT to ensure we continue to drive fair outcomes and can provide tailored support, whilst managing the anticipated increased inflow of customers affected by the rising cost of living. This included reviewing related FCA and LSB publications.
–Proactively contacted over 2 million customers who may be experiencing early signs of financial stress, to support them and try to help avoid longer term financial difficulty. We refer customers to internal and external sources of support and have ongoing customer engagement and support plans.
–Continued focus on financial support for our business customers as Pay As You Grow options have been exhausted for many BBLS customers and 3 year CBILS overdrafts are reaching maturity.
–Successfully transitioned to alternate reference rates for the vast majority of LIBOR agreements. Our focus remains on transitioning a small group of customers whose agreements still reference either synthetic Sterling LIBOR or USD LIBOR. We continue to contribute to FCA consultation papers on both.
–Continued to actively participate in schemes to ensure the long term future of access to cash, including supporting the set up of shared banking hubs and wider engagement with LINK and industry partners.
–Continued our Consumer Duty implementation programme remaining focused on ensuring that our product and services, communications, and control frameworks are enhanced to continue to support good customer outcomes.
Like all UK banks, we continue to see a demanding regulatory agenda focused on consumer outcomes and customer vulnerability, including Consumer Duty, and continue to evaluate the evolving regulatory environment, particularly in light of the FSM Bill, and the government's Edinburgh Reforms. Conduct risks will likely continue to rise in the near and medium-term, as banks deal with increasing numbers of personal and business borrowers who are impacted by the rising cost of living. When implementing change, we focus on ensuring that our strategy, leadership, governance arrangements, and approach to managing and rewarding staff does not lead to a detrimental impact on our customers, competition, or to market integrity. We also remain committed to protecting the personal data we collect and use, and respecting the data protection rights of our customers, our people and others associated with us.
For an update on key movements in our financial crime risk profile, see the 'Financial crime risk review' section.
Accounting position
For more on our provisions, see Note 29 to the Consolidated Financial Statements. For more on our contingent liabilities, see Note 31 to the Consolidated Financial Statements.
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Annual Report 2022 | Santander UK Group Holdings plc 171 |
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Financial crime risk
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| Overview Financial crime risk:risk is the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, facilitation of tax evasion, bribery and corruption. –Legal risk: the risk of loss arising from legal deficiencies in contracts; failure 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.
| | –Strategic and business risk: the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their poor implementation that impact the long-term interests ofIn this section, we describe our key stakeholders, or from an inability to adapt to external developments.
–Reputational risk: the risk of damage tofinancial crime risks and explain how we manage and mitigate financial crime risk. We also describe developments in 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 prediction of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately.year.
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FINANCIAL CRIME RISK
OUR KEY FINANCIAL CRIME RISKS
We are committed to conducting business in accordance with regulatory and legal requirements and the highest ethical standards. We believe that having a comprehensive and effective financial crime framework through policies, procedures, systems and controls to prevent and detect financial crime is a business imperative and a positive investment that protects us from legal, regulatory and reputational risks. Financial crime is a high priority risk for us. We recognise that financial crime activities can have a significant impact on our customers.and associated illegal activity damages the customers and communities we serve. Criminals use the financial system to launder the profits of illegal activity such as human trafficking and to fund terrorism. Financial crime is therefore a high priority risk for us and we remain committed in our efforts to counter it by maintaining the highest ethical standards and conducting business in accordance with regulatory and legal requirements. We have adopted a bank wide anti-financial crime strategy (AFC) that sets out the principles of ‘Deter, Detect and Disrupt’ and invested in training our colleagues in how to identify and prevent financial crime.
We believe that having a comprehensive and effective financial crime risk management framework is a business imperative and a positive investment that protects us from legal, regulatory and reputational risks. This includes implementing policies, procedures, and maintaining effective systems and controls to prevent and detect financial crime. 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. The bank wide anti-financial crime strategy (AFC) sets out the principles of ‘Deter, Detect and Disrupt’. We adopt a risk-based approach in line with UK and international laws and standards, and we work with government, law enforcement and the private sector to help meet our commitments and to inform our AFC strategy.
Our key financial crime risks are::
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Key risks | Description |
Money laundering | We are used by criminals to transform the proceeds of crime into seemingly legitimate money or other assets. |
Terrorist financing | We are used by terrorists to deposit, distribute or collect funds that are used to fund their activity. |
Sanctions | We do not identify payments, customers or entities that are subject to economic or financial sanctions. |
Bribery and corruption | We fail to put in place effective controls to prevent or detect bribery and corruption. |
Facilitation of tax evasion | We fail to put in place effective systems and controls to prevent the facilitation of tax evasion. |
FINANCIAL CRIME RISK MANAGEMENT
Risk appetite
We are committed to complying with all applicable financial crime regulations and legislation that prevent Santander UK from being used to facilitate financial crime. Financial crime risk appetite is the level of financial crime risk we are prepared to accept in carrying out our activities. This is approved at Board level and disseminatedshared across the business, 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 UKrisk that we are being used to facilitate financial crime. We seek to comply with applicable UK and international sanctions laws and other regulations and make sure our risk appetite adapts to external events. We have minimal tolerance for residual financial crime risk, bribery and corruption risk, facilitation of tax evasion risk and zero tolerance for sanctions.non-compliance with sanctions laws and regulations. We require employees and third parties acting on our behalf to act with integrity, due diligence and care, to those who breachcare. We have no appetite for non-compliance with financial crime laws or regulations by employees or persons acting for or on our policy and regulatory requirements.behalf.
Risk measurement
We measure our exposure to financial crime risk regularly. Our AFC strategy along withand frameworks setsset 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 complete ad-hoc reviews based on key trigger events. Our Financial Intelligence Unit assesses specific types of threat, drawing on data from law enforcement and public authorities.
Risk mitigation
We take a proactive approach to mitigating financial crime risk. Our financial crime risk frameworks are supported by policies and standards which explain the requirements for mitigating money laundering, terrorist financing, sanctions compliance risks, bribery and corruption, and facilitation of tax evasion risks. We update these regularly to ensure they reflect new 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 training to build knowledge of emerging risks.
Key elements of our financial crime risk mitigation approach are that we:
–Undertake customer due diligence measures for new and existing customers, which include understanding their activities and banking needs
–Conduct risk assessments of customers, products, businesses, sectors and geographic risks to tailor our mitigation efforts
–Ensure all our staff complete mandatory financial crime training and, where required, role-based specialist training
–Deploy new systems to better capture, analyse and act on data to mitigate financial crime risks
–Partner with public authorities, the Home Office and the wider financial services industry to pool expertise and data. We are also involved in partnerships such as the Joint Money Laundering Intelligence Taskforce (JMLIT) which supports public-private collaboration to tackle financial crime.
Santander UK Group Holdings plc177
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Annual Report 2022 | Santander UK Group Holdings plc 172 |
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Annual Report 2020 | Risk review
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Risk monitoring and reporting
We use key risk indicators to monitor our exposure to financial crime risks, and we report all issues in a timely manner. We work closely with 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 continue to develop and enhance our financial crime operating and governance model to ensure that our control environment evolves at pace, keeping up with new or amended laws, regulations or industry guidance.
We adhere to a strong governance and reporting schedule to our ERCC and Financial Crime Committee, including analysis of the risks on the horizon, key risk indicators and a directional indication of the risk profile. Throughout the year,2022, management continued to update the risk committees on management and mitigation of financial crime risks including our activities to understand and address emerging challenges. We have introduced an enhanced set ofour financial crime risk indicators for effective risk reporting to senior management. We also regularly report to the Board Responsible BankingRisk Committee on financial crime risk, the impact on the business and the actions we are taking to mitigate the risk.
FINANCIAL CRIME RISK REVIEW
20202022 compared to 20192021
In 2020,Protecting the communities we continued to progress towards a more sustainableserve from the social and effective strategiceconomic impacts of financial crime compliance approach. Engagement on the topic from senior management and the Board has remained high, proportionate to one of ourremains a top risks. We continued embedding our AFC strategy, policies, and improving training across the business in 2020, endorsed by senior management.
Our Board continued to support investment to improve improvements to systems and controls to increased efficiency through automation. We assigned investment to design and establish a Centre of Excellence to manage end-to-end financial crime operations, designed to develop a talented workforce with the right skill sets and cultural approaches. In 2020, we also set up the Control Acceleration Programme (CAP) to provide near-term risk mitigation and demonstrable evidence of enhancements to key controls. In 2020, we promoted the embedding of the AFC culture across the business by establishing a defined framework.
priority for Santander. The financial crime landscape continuedcontinues to be complex, through 2020, with evolving regulatory and legal requirements, geo-political factors and changing criminal methods influencing the risks we face. In 2020, we updated
Changes to UK and global sanctions regimes in 2022, most notably those arising from the global response to the conflict in Ukraine, added significant complexity and operational demand upon our AML, Sanctions and Anti Bribery and Corruption (AB&C) policies and standardsfinancial crime controls in a compressed period. This complexity is anticipated to ensure that all current external obligations are reflected appropriately,continue in 2023 and we continuedcontinue to proactively monitor external developments and with particular regardrespond to post-Brexit requirements. We take a proactive approachtheir impacts on our financial crime controls, and have increased our resources to engagement withdo so.
FCA settlement on historical Business Banking AML controls
In December 2022, the FCA and HM Government, including throughconcluded an investigation in relation to anti-money laundering controls in our participationBusiness Banking division in the Economic Crime Reform Program. This external engagement helps inform our internal policies and strategies.
We also continuedperiod 31 December 2012 to proactively participate in external partnerships18 October 2017 following the payment of a £108m financial penalty.
The FCA’s investigation focused on the identification, assessment and management of higher risk customers in our Business Banking division, including Money Services Businesses. It has now concluded, and no further action is anticipated by the FCA or any other authority in respect of this matter.
Santander UK takes its responsibilities regarding financial crime extremely seriously. For more, operational nature,see Note 31. The Banco Santander group, including Santander UK, is fully committed to the Joint Money Laundering Intelligence Task Force. We built partnerships with Regional Organisedfight against financial crime and will continue to meet all applicable financial crime regulations and legislation internationally and ensure effectiveness in our control environment.
Financial Crime UnitsTransformation Programme
Senior management and with NGOs. These partnerships enabled us to learn more about emerging risks and turn these into alerts and intelligence briefings that are communicated to colleagues across the bank to support proactive prevention and detectionBoard engagement in the management of financial crime risk remains high, proportionate with one of our top risks. We continue to enhance our financial crime risk management capabilities across data, systems and subject matter expertise through our multiyear financial crime transformation and remediation programme. Continued areas of focus during 2022 includes;
–Ongoing training of colleagues in identifying, assessing, managing and reporting financial crime. Uplifting specialist role competencies through our Economic Crime Academy (ECA), enhancing the skill sets, knowledge and qualifications of key staff.
–Remediated data gaps in our customer records through back door remediation o help us manage financial crime risks.
–Maturing our Financial Crime Centre of Excellence to increase integration of financial crime risk management operations across our organisation.
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| In 2020, we continued our focus on raising consumer awareness of fraud, with creative and eye-catching media campaigns designed to address current scam trends and grab people’s attention by delivering important messages in ways they wouldn’t expect.
In June 2020, we tackled ‘safe account scams’ by recreating the famous bubble bath scene from the film 'The Big Short' where Margot Robbie unlocks the jargon around financial terms. We used our own Robbie (former footballer Robbie Savage) to explain safe account scams - from a bathtub, of course! The video was shared by Robbie on his social media accounts and his posts were shared by a number of high profile footballers – which along with widespread media coverage, helped spread the word far and wide.
Later in 2020, we turned our attention to the issue of ‘investment scams’, a type of fraud that has seen a significant rise over the last year, with victims losing an average of £10,000. We created a campaign that aimed to ‘use rhymes to prevent financial crimes’ and commissioned poets Pam Ayres and Suli Breaks to pen the Santander Scam Sonnets. Each poet used real case studies of scams as the background to their poems which warned people what to look out for to avoid becoming the victim of an investment scam. Through wide-ranging media interviews and posts across social media, our poets helped share the message and keep people safe across the UK.
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Raising fraud awarenessAnnual Report 2022 | Santander UK Group Holdings plc 173 |
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Other key risks
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| In this section, we describe how we manage our other key risks and discuss developments in the year. Our other key risks are: –Model risk: the risk that the prediction of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately. –Legal risk: the risk of loss arising from legal deficiencies in contracts; failure 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. –Strategic and business risk: the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their poor implementation 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.
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MODEL RISK
Generally, we consider a model to be a repeatable method that relies on assumptions to produce estimates of uncertain outcomes. Our key model risks arise from weaknesses and limitations in our models, or the incorrect use of a model. They include risks stemming from model data, systems, development, performance and governance. The most material models we use help us calculate our regulatory capital and credit losses, and perform stress tests.
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Model risk management | Description |
Risk appetite | We express our model risk appetite through risk assessments of our material models. The Board is asked to agree this at least annually. |
Risk measurement | We consider the percentage of models that have been independently assessed and the outcome of those reviews in measuring model risk. All models have assumptions and in general the more limitations those assumptions have, the higher the uncertainty and model risk. |
Risk mitigation | We mitigate model risk through controls over how we use models throughout their life. We maintain a central model inventory that includes data on owners, uses and model limitations. We assess how important each model is to our business, and we track and resolve actions from independent reviews. We also maintain a clear approval path for new models and changes to existing models. |
Risk monitoring and reporting | We report model risks and issues using management and control forums. We escalate issues when needed, or if our risk appetite is breached or showing adverse trends that could lead to future issues. |
2022 compared to 2021
We maintain a risk-based approach to management and control, focusing on model monitoring and independent model reviews on our more material models, such as those for credit losses or those with specifically defined regulatory standards.We remain focused on all our models given the recent changes in economic factors, with a particular focus on inflation and Bank Rate.
In 2022, we significantly developed our regulatory models, focusing on capital adequacy, to comply with new regulatory technical standards for banks. We expect this trend to continue over the next two years in line with supervisory expectations. We also developed new models for ECL reporting, with a focus on residential mortgages and commercial lending. The new models are designed to improve the overall control environment and accuracy of our risk measurement. They will also enable us to eliminate some long-standing Judgemental Adjustments required due to limitations in prior models.
Changes to models due to the cessation of LIBOR were completed. All model updates were governed in line with the complexity of change and the materiality of underlying models.We also focused on the models we used to support the BoE climate change stress test. These were new types of models with much longer forecast horizons. We expect work to continue in this area in the coming years.We updated our toolsets to help manage and control model risk, implementing a tool that supports the end-to-end model risk lifecycle. The tool provides a register for all models and their uses, automated reporting and governance workflow. The tool also has full traceability.
LEGAL RISK
Legal risk includes the legal consequences of operational risk, such as breach of contract, and operational risk with legal origins, 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
–Discharge duties or responsibilities created by law or regulation.
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Legal riskRisk management | Description |
Risk appetite | We should aim to make decisions and operate in a way that does not lead to legal risk. We apply robust controls to manage these risks and 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 teams provide 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, templates, policies and procedures and specific support on a product, service, transaction or arrangement basis and decide whether legal advice should be sourced internally or externally. |
Risk monitoring and reporting | AnOur internal legal risk reporting framework is in place to providegives visibility of the Santander UK-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 & RegulatoryCorporate Governance Division. This is in addition to reports issued by the business. |
20202022 compared to 20192021
Our legal risk profile remained heightened but broadly stable in 2020,2022, reflecting the high number and value of legal risks that we continue to be managed.
manage. We prepared forcontinued to evaluate the evolving legal and regulatory environment, particularly in light of the Financial Services and Markets Bill and other changes set out in the Government’s Edinburgh Reforms and the implications of lawthe FCA’s new Consumer Duty. We continued to align our outsourcing and regulation arising from Brexit, includingmaterial contracts to ensure EBA Outsourcing compliance, frameworksPRA/FCA requirements on operational resiliency and continuity, and Schrems II. We focused on the mitigation of legal and reputational risk relating to the FCA enforcement investigation into historical anti-money laundering systems and controls in our Business Banking division which concluded in December 2022. While litigated PPI claim volumes stabilised, there remains on-going large scale complex PPI related litigation brought by AXA, and a German criminal and tax investigation relating to historical dividend tax arbitrage transactions. We continue to manage our legal risk in relation to newthematic Court actions and existing transactions or arrangements. We took into account the EU-UK Trade and Cooperation Agreement in relation to financial services and the lack of uniformity in legal and regulatory regimes in EEA member states in relation to products and services we provide, undertake or offer to EEA based customers. The measures we have taken remain under review as the post-Brexit regulatory landscape evolves.
Progress continues to be made through the LIBOR transition programme to manage the legal risksFOS complaints related to IBOR transition, with our accessionfraud, mortgages and commissions. In January 2023, the Legal risk framework was retired following a structural change when the Legal function moved to the ISDA fallback supplement protocol, successful consent solicitationsCFO Division, as described in relation to outstanding debt securities and'How we define risk' in 'Risk Framework' in the development of plans to outreach to our CCB and CIB clients to effect amendments to affected contracts. Some of the legal risks related to LIBOR transition may be mitigated by powers proposed to be granted to the FCA under the Financial Services Bill to enable a ‘tough legacy regime’ using a synthetic LIBOR.'Risk governance' section.
We have developed a third party supplier contracting standard, reflecting the EBA guidelines on outsourcing, to help us manage legal risks as part of our third party risk management framework. We have taken steps to address certain CCA and PSR related points and to complete the remediation of issues associated with failure to implement overdraft alerts as part of the Competition & Markets Authority Market Investigation Order.Nevertheless, legal risks continued to emerge and develop throughout 2020. The Covid-19 pandemic and the measures taken by the UK Government and regulators to address it generated a range of legal risks, including in relation to the shift of our employees to mainly work from home, payment holidays and other forms of forbearance granted to our customers and the scope and requirements of the UK Government's Coronavirus Loan Schemes. Litigated PPI claim volumes continued to increase and there is evidence of claim management companies testing mortgage-related claims. Changes to the UK insolvency regime through the Corporate Insolvency and Governance Act 2020 and the introduction from May 2021 of moratoriums under the Breathing Space Regulations require assimilation by affected business units. We continue to identify, assess and manage the legal risks associated with implementing our transformation programme, including making sure that we reflect contractual terms and legal requirements in our systems and operating processes. We will continue to manage these risks in 2021.
In 2020, we put in place further oversight of external spend, and we continued to simplify and cascade our processes to drive even greater consistency and discipline. We expect further improvements in 2021 with the development and implementation of an automated legal spend tool. This will enable greater oversight and challenge of all legal spend across the Santander UK group. | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 174 |
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STRATEGIC AND BUSINESS RISK
Strategic and business risk could impact our long-term success if it caused our business model to become out of date, ineffective, or inconsistent with our goals. This could arise if we:
–Have an incomplete picture of our environment, such aswe fail to identify threats arising from the economy, regulation, competitor activity andcompetitors and/or changes in technology and customer expectations
–Misjudgeexpectations. It could also arise if we misjudge our capabilities, or ability to implement our strategy,
–Pursue or pursue initiatives like acquisitions that do not fit with our business model or miss opportunities that we could benefit from.
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Strategic and business riskRisk 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 within our operations and plans to ensure we stay within our risk appetite. |
Risk mitigation | We manage strategic and business risk by having a clear and consistent strategy that takes account of external factors and our own capabilities. We have an effective planning process which ensures we refine, strengthen, and adapt our strategy to reflect changes in the environment and other key risks and opportunities. |
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 indicators. These include our KPIs as set out in the ‘Strategic report’. |
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Annual Report 2020 | Risk review
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20202022 compared to 20192021
Our business environment is always changing, and this affects how we do business. The post Covid-19 pandemiceconomic recovery was unexpectedly halted by the conflict in Ukraine bringing in geo-political uncertainties and UK nationalexacerbating the cost of living crisis. We prudently managed our balance sheet in an increasing interest rate environment and regional lockdowns have beenare simplifying our operating model to offset pressures of the deteriorating macro environment. Mortgage volumes dropped post mini-budget and mortgage prices increased given increasing interest rates. We proactively reached out to our mortgage customers and gave them financial support where needed. We helped our customers manage their finances in a significant challenge impacting the economic backdroprising inflation environment by providing them with budget planning and management tools, as well as tips to cut spending. We will continue to work with all our customers through these difficult times and provide them targeted and practical support that they need.
We continue to face a demanding regulatory agenda and in July 2022, the FCA published the new Consumer Duty rules, which we are on track to deliver.
Climate change is a key part of our business operations and financial results. Our top priority throughout has beendecisions. In 2022, we complied with all climate change related regulation including engaging in the welfareBoE's CBES. As part of our people, our customers and the communities in whichBanco Santander group, we operate. We have adapted by supporting our customers with a range of measures such as payment holidays and UK Government's Coronavirus Loan Schemes, as well as enhancing online services and doing our utmost to continue to offer important services face-to-face, especially for our more vulnerable customers. The learnings we take from the crisis will help us to become even more agile, efficient, and responsive to the needs of our customers, and enable us to emerge as a stronger and more resilient bank.also set ourselves Green Finance targets until 2025.
Competitive pressures remained highcontinued in 2020,2022, mainly from established players, butplayers. We remained competitive by launching new technology-led entrants could disruptproducts such as a market leading e-Saver account, fixed rate ISA products and the marketEdge current account for our retail customers, and helping our business customers grow through the Santander Navigator and SME Toolkit. We also improved our digital capabilities through enhanced mobile app features like My Money Manager and Santander Boosts. We will continue to invest in the longer term. We expect these trendsour technology to continue in 2021, but we believe our customer-focused business model and strategy, and our adaptable and innovative approach, will support our continued success.provide a high-quality customer experience.
Overall, we remain focused on supporting customer loyalty, simplification, improvedneeds, improving efficiency, and building a responsible and sustainable growth as we continuebusiness, while continuing to transform the business for success.progress with our agenda to tackle climate change. This will enable us to meet the changing needs of our customers and deliver improved returns over the medium-term. For more on this, see the ‘Strategic report’.long-term.
REPUTATIONAL RISK
Our key reputationalReputational risks can arise from both internal and external factors. Failures in corporate governance or management, failingWe seek to treat our customers fairly, the actual or perceived way we do business, and the sectors and countries we deal with can impact on our reputation. We also consider how our clients and those who act for us conduct themselves, and how business is conducted in our industry.
External factors which can include the macro environment and the performance of the sector must be considered. In 2020, both these elements were significantly impacted by the Covid-19 pandemic and the response of the UK government to support the economy. Sustained damage tomanage our reputation could haveproactively, underpinned by our aim to be a material impact onresponsible bank, and through our ability to operate fully. In turn, this could affect our financial performance and prospects. Reputationalreputational risk framework.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.
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Reputational riskRisk management | Description |
Risk appetite | We have a low appetite for reputational risk, which is agreed by the Board at least each year. We express it in terms of the risk measures set out below. |
Risk measurement | We assess our exposure to reputational risk daily. We base this on expert judgement and analysis of social, print, and broadcast media, and the views of political and market commentators. We also commission independent third parties to analyse our activities and those of our UK peers to identify significant reputational events, or a prolonged decline in our reputation, and any sector level or thematic issues that may impact our wider business. We also measure the perception of Santander UK amongstby key stakeholder groupsstakeholders through regular interactions and perform annual reviews ofreview staff sentiment. We review our reputation daily through media and political interactions and updates, and through weekly reputation reports from an external supplier.sentiment each year. |
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.reviews. Our Corporate Communications and Responsible Banking, Legal and Regulatory Affairs and Marketing team helps our business units to mitigate the risk and agree action plans as needed. They do thisneeded, as part of their role to monitor, build and protect our reputationbrand and brand.reputation. |
Risk monitoring and reporting | We monitor and report reputational risks and issues on a timely basis. Our Reputational Risk Forum reviews monitors and escalates key issues to Board level key decisionsERCC, RBC and the Board. We also report regularly to ExCo on reputational risks. It also has regularSustainability and ad-hoc meetings to discuss the risks we face. We escalate them to the ERCC and Board Responsible Banking, Committee, as needed. Our Corporate Communications, Legal and Marketing teams also reports regularly to our Executive Committee on Corporate Social Responsibility, Sustainability and Public Affairs policies. They do this from an environment, community and sector point of view. |
Our Reputational and ESCC risk policies define how we create long-term value while managing those risks. Our ESCC policy covers Oil & Gas, Power Generation & Transmission, Mining & Metals and Soft Commodities. For example, financing is prohibited for project-related financing for new CFPP projects worldwide and we will only work with new clients with CFPPs to provide specific financing for renewable energy projects.
20202022 compared to 20192021
In 2020,2022, our key reputational risks lay in our response toarose from the Covid-19 pandemic.economic slowdown and the cost of living crisis. To manage this, we regularly and proactively shared information with key external stakeholders on the numerous actions we took to support customers, colleagues and communities over the course of the year.communities. Particular areas of external focus included our provision of payment holidayssupport for customers our participation in the UK Government's Coronavirus Loan Schemes for businessesfacing financial difficulties and our ability to provide daily services from the branch network, contact centres and our online platforms.increasing mortgage payments.
We also worked to manageexplain how our processes and controls have changed and improved since the impact of the UK’s departure from the EU and the end of the transition period. We developed communications for our customers to advise them on any potential impact from Brexitperiod related to the products and services they enjoy, at the same time as giving reassurance onFCA penalty for historical shortcomings in our ongoing commitment to serving the UK.
Our Reputational Risk Forum continued to meet regularly to discuss our emerging and material risks, bringing together senior representatives from across the business, alongside the use of our formal Reputational Risk Register. This ensured that reputational risk is a leading consideration with the ERCC and the Board Responsible Banking Committee. This maintains the visibility and discussion of reputational risk issues at Board level.
AML controls, settled in December 2022.
180Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 175 |
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MODEL RISK
Models typically analyse data to look for relationships, formulating a methodology with a set of assumptions and parameters. Generally, we consider a model to be any method that relies on assumptions to produce estimates of uncertain outcomes. Our key model risks arise from weaknesses and limitations in our models, or the incorrect use of a model. They include risks stemming from model data, systems, development, performance and governance. The most material models we use help us calculate our regulatory capital and credit losses, and perform stress tests. Increased regulatory standards influence how we manage and control model risk. During 2020, we significantly enhanced our Capital Adequacy models to ensure they comply with these new regulatory standards. The Covid-19 pandemic impacted our models so we put in place additional levels of monitoring to ensure they remain fit for purpose. In order to calibrate models based on the new macroeconomic variables as a result of Covid-19, where applicable we use post model adjustments until the variables are built into our models.
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Model risk management | Description |
Risk appetite | We express our model risk appetite through risk assessments of our key risk models. The Board is asked to agree this at least each year. |
Risk measurement | We consider both the percentage of models that have been independently assessed, and the outcome of those reviews, in how we measure model risk. All models have several assumptions and in general the more limitations we have for those assumptions, the higher the levels of uncertainty and therefore model risk. |
Risk mitigation | We mitigate model risk through controls over how we use models throughout their life. We maintain a central model inventory that includes data on owners, uses and model limitations. We assess how important each model is to our business, and we track and resolve actions from independent reviews. We also maintain a clear approval path for new models and changes to existing models. |
Risk monitoring and reporting | We report model risks and issues using management and control forums. We escalate issues to the ERCC when needed, or if our risk appetite is breached or showing adverse trends that could lead to future issues. |
2020 compared to 2019
We maintain a risk-based approach to management and control. For example, we focus independent model reviews on our more material models, such as those for credit losses or those with specific regulatory standards defined.
We continue to assess both the short-term and medium-term impacts to our models due to the Covid-19 pandemic. We have created a taskforce focusing on models and data to ensure that data is captured robustly and that any required model changes are approved by the appropriate authority. Government-led schemes and initiatives such as mortgage payment holidays and bounce back loans will affect the data that feeds into our scoring and rating models, moreover, the significant changes observed within the macroeconomic environment could affect those models we use for stress testing and provisioning. Whilst all models need active monitoring, the Covid-19 pandemic has resulted in some models requiring closer and more frequent oversight to ensure their performance remains acceptable. The current unprecedented environment means that models are often working outside of normal parameters, and so are likely to require more overlays and post-model adjustments.
The redevelopment of the suite of regulatory capital models to account for new regulations is a key model project. This focuses on several regulations across the PRA and the ECB including the Hybrid Philosophy for Secured Residential Real Estate and the new Definition of Default requirements. Whilst several models were rebuilt in 2020 and submitted to the regulators for review, the regulatory change agenda for 2021 is significant.
Furthermore, we continue to enhance our suite of models used for IFRS 9 and stress testing purposes, ensuring alignment with the PRA regulatory policy and supervisory statement on stress test models.
Our plans for migration away from models using LIBOR are progressing well with more than 50% of models already updated. Further work is expected to take place in 2021 to support the transition, including new model developments and amendments to existing models.
Due to our minimal traded activities, we are not impacted materially by the Fundamental Review of the Trading Book.
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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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Annual Report 2022 | Santander UK Group Holdings plc 176 |
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Income statement review
SUMMARISED CONSOLIDATED INCOME STATEMENT
| | | | | 2020 | 2019 | | | 2022 | 2021 |
| | £m | £m | | | £m | £m |
Net interest income | Net interest income | 3,437 | | 3,295 | | | Net interest income | 4,472 | | 3,997 | |
Non-interest income(1) | Non-interest income(1) | 521 | | 875 | | | Non-interest income(1) | 534 | | 547 | |
Total operating income | Total operating income | 3,958 | | 4,170 | | | Total operating income | 5,006 | | 4,544 | |
Operating expenses before credit impairment losses, provisions and charges | (2,487) | | (2,526) | | | |
Credit impairment losses | (645) | | (220) | | | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | | Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (2,370) | | (2,540) | |
Credit impairment (charges)/write-backs | | Credit impairment (charges)/write-backs | (321) | | 233 | |
Provisions for other liabilities and charges | Provisions for other liabilities and charges | (274) | | (443) | | | Provisions for other liabilities and charges | (421) | | (379) | |
Total operating credit impairment losses, provisions and charges | (919) | | (663) | | | |
Profit before tax | 552 | | 981 | | | |
Tax on profit | (114) | | (272) | | | |
Total operating credit impairment (charges)/write-backs, provisions and charges | | Total operating credit impairment (charges)/write-backs, provisions and charges | (742) | | (146) | |
Profit from continuing operations before tax | | Profit from continuing operations before tax | 1,894 | | 1,858 | |
Tax on profit from continuing operations | | Tax on profit from continuing operations | (471) | | (485) | |
Profit from continuing operations after tax | | Profit from continuing operations after tax | 1,423 | | 1,373 | |
Profit/(loss) from discontinued operations after tax | | Profit/(loss) from discontinued operations after tax | — | | 32 | |
Profit after tax | Profit after tax | 438 | | 709 | | | Profit after tax | 1,423 | | 1,405 | |
| Attributable to: | Attributable to: | | | | Attributable to: | | |
Equity holders of the parent | Equity holders of the parent | 402 | | 672 | | | Equity holders of the parent | 1,406 | | 1,369 | |
Non-controlling interests | Non-controlling interests | 36 | | 37 | | | Non-controlling interests | 17 | | 36 | |
Profit after tax | Profit after tax | 438 | | 709 | | | Profit after tax | 1,423 | | 1,405 | |
(1)Comprises 'Net fee and commission income' and 'Other operating income'.
(2)Non-IFRS measure. The financial results were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £158m in 2020 and £319m in 2019. See ‘Alternative Performance Measures’ for details and reconciliation to the nearest IFRS measure.
A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.
20202022 compared to 20192021
Profit from continuing operations after tax up 4%. Adjusted profit from continuing operations before tax was down 44%flat: adjustments for transformation, operating lease depreciation, property and penalty for historical shortcomings in our AML controls to (1)
£552m and adjusted profit before tax(2) was down 45% to £710m due to the factors outlined below. By income statement line item, the movements were:
–Net interest income was up 12%4% and Banking NIM , with repricing actions onup 14bps largely due to the 1I2I3 Current Account and other deposits offsettingimpact of base rate cuts and back book mortgage margin pressure, including £1.8bn net attrition on SVR and Follow on Rate products (2019: £3.9bn). When adjusted for the £44m one-off impact of the accounting adjustment (for details, see 'Revenue recognition - Interest income and expense' in the Accounting policies in Note 1 to the Consolidated Financial Statements), net interest income(2) was up 3%.increases.
–Non-interest income was down 2%, due to the £71m gain on sale of our UK head office in 2021. Adjusted non-interest income40%(1) up 19%, with significantly lower banking and transaction fees in our retail business largely due to the implementationcontinued strength of regulatory changes to overdrafts. When adjusted for £92m of operating lease depreciation,non-interest income(2) was down 43%.the second-hand car market which drove higher Consumer Finance income.
–Operating expenses before credit impairment losses,(charges) / write-backs, provisions and charges were down 7% largely due to lower transformation programme spend following significant restructuring in 2021. This programme has embedded lower operational costs and improved the efficiency of the business which should help to mitigate the impact of inflation. Adjusted operating expenses before credit impairment (charges) / write-backs, provisions and charges2%(1), with down 3% as efficiency savings and lower variable pay accrual. When adjusted for £92m operating lease depreciation, £113m offrom our transformation programme costswere partially offset by increased financial crime spend and £24m of expenses in H120 as a result of Covid-19, operating expenses(2) were down 5%.inflationary pressures.
–Credit impairment losses were up £425mcharges of £321m driven by the deterioration in the economic environment, including higher interest rates, lower GDP, and lower house prices, as well as the risk that higher inflation could impact lending repayments. These charges followed write-backs of £233m in 2021 and increased the cost of risk to £645m. This includes £448m arising from changes to economic scenarios15bps, as we increased the ECL build in retail portfolios (2021: (11)bps). Loans entering arrears remained low. Arrears stock on mortgages remains low with 0.62% greater than 90 days past due (2021: 0.79%)(2). In Corporate and weights, the staging reclassificationCommercial Banking, we have seen a small number of certain loans, payment holidays and other Covid-19 management judgement overlays. Portfolio performance remains resilient with low write-offs and deterioration seen only on a few single name corporate cases.defaults emerge in Q4-22.
–Provisions for other liabilities and charges up 11%, largely related to the £108m penalty for shortcomings in our AML controls between 31 December 2012 and 18 October 2017. We also continued to see a rise in scams with increased fraud charges of £153m in 2022 (2021: £74m). These were down 38% to £274m, largelypartially offset by lower transformation programme charges following significant restructuring in 2021. Adjusted provisions for other liabilities and charges(1) up 17%, an increase of £42m. This was primarily due to the absence of an additional PPI charge, lower transformation restructuringhigher fraud charges and a release of other conduct provisions relatednoted above.
Discontinued operations relate to the sale of interest rate derivatives (IRD). ThisCIB segment which was partially offset bymoved to SLB under a previously reported regulatory and other provision in our Retail Banking business. Part VII banking business transfer scheme, completed on 11 October 2021.
When adjusted for transformation restructuring charges (2020: £65m, 2019: £105m), PPI charges (2020: nil, 2019: £169m) and regulatory and other provisions (2020: nil, 2019: £10m), provisions(2) were up £50m with higher non-conduct remediation charges, as well as the non-repeat of 2019 property provision releases..
–Tax on profit decreased £158m to £114m The 2020 Effective Tax rate (ETR) of 20.7% is lower (2019:20.7%) primarily as a result of 2019 non-allowable conduct charges which were not repeated in 2020, partially offset by adverse movements in deferred tax.
Please refer to the Financial review section of our Annual Report on Form 20-F for the year ended 31 December 2019, filed with the US Securities and Exchange Commission on 8 March 20202021 for a comparative discussion of 20192021 financial results compared to 2018.2020.
(1) Non-IFRS measure. See 'Alternative Performance Measures' in the Financial Review for details and a reconciliation of adjusted metrics to the nearest IFRS measure.
(2) Arrears over 90 days past due: credit cards 0.49% (2021: 0.45%), UPLs 0.61% (2021: 0.51%), overdrafts 2.24% (2021: 2.10%), Consumer Finance 0.44% (2021: 0.36%).
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PROFIT BEFORE TAX BY SEGMENT
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Consolidated Financial Statements.
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| Retail Banking(2) | Corporate & Commercial Banking(2) | Corporate & Investment Banking(2) | Corporate Centre(2) | Total | | | | | |
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| | | | | |
2020 | £m | £m | £m | £m | £m | | | | | |
Net interest income/(expense) | 3,105 | | 364 | | 55 | | (87) | | 3,437 | | | | | | |
Non-interest income(1) | 375 | | 93 | | 68 | | (15) | | 521 | | | | | | |
Total operating income/(expense) | 3,480 | | 457 | | 123 | | (102) | | 3,958 | | | | | | |
Operating expenses before credit impairment losses, provisions and charges | (1,913) | | (316) | | (114) | | (144) | | (2,487) | | | | | | |
Credit impairment losses | (308) | | (294) | | (7) | | (36) | | (645) | | | | | | |
Provisions for other liabilities and (charges)/releases | (175) | | (12) | | (10) | | (77) | | (274) | | | | | | |
Total operating credit impairment losses, provisions and charges | (483) | | (306) | | (17) | | (113) | | (919) | | | | | | |
Profit/(loss) before tax | 1,084 | | (165) | | (8) | | (359) | | 552 | | | | | | |
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| | | | | | | | | | |
2019 | | | | | | | | | | |
Net interest income/(expense) | 2,827 | | 422 | | 62 | | (16) | | 3,295 | | | | | | |
Non-interest income(1) | 691 | | 109 | | 70 | | 5 | | 875 | | | | | | |
Total operating income/(expense) | 3,518 | | 531 | | 132 | | (11) | | 4,170 | | | | | | |
Operating expenses before credit impairment losses, provisions and charges | (1,980) | | (324) | | (130) | | (92) | | (2,526) | | | | | | |
Credit impairment (losses)/releases | (156) | | (45) | | (22) | | 3 | | (220) | | | | | | |
Provisions for other liabilities and charges | (290) | | (22) | | (16) | | (115) | | (443) | | | | | | |
Total operating credit impairment losses, provisions and charges | (446) | | (67) | | (38) | | (112) | | (663) | | | | | | |
Profit/(loss) before tax | 1,092 | | 140 | | (36) | | (215) | | 981 | | | | | | |
(1)Comprises 'Net fee and commission income' and 'Other operating income'.
(2)The segmental basis of presentation has changed following a management review of our structure and segmental income statements and customer balances for 2019 have been restated accordingly. See Note 2 to the Consolidated Financial Statements.
2020 compared to 2019
–For Retail Banking, profit before tax decreased 1%, with an increase in credit impairment charges largely due to Covid-19, partially offset by an increase in net interest income largely due to 1I2I3 Current Account and other deposit repricing. Non-interest income was impacted by reduced banking and transaction fees as a result of regulatory changes to overdrafts.
–For Corporate & Commercial Banking, loss before tax of £165m, with an increase in credit impairment charges largely due to Covid-19, as well as a small number of single name exposures. Income was impacted by the base rate reductions and lower fees due to lower business activity levels which have been adversely affected by Covid-19.
–For Corporate & Investment Banking, loss before tax of £8m, with lower credit impairment charges and lower operating expenses, driven by transformation programme efficiencies. As part of our drive for continuous improvement in customer experience and following a review of the way we operate the CIB business in the UK, we intend to conduct substantially all of this business from SLB beginning later this year. To undertake this change, and subject to court approval, we are proposing to transfer substantially all of the CIB business to SLB in H221 by way of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000.
–For Corporate Centre, loss before tax increased to £359m with net interest income impacted by the effect of the reduction in the base rate on our liquidity asset buffer. Furthermore, operating expenses increased with centrally held transformation programme costs and credit impairment losses. Credit impairment losses were higher driven by a provision for unexpected large single name exposures at risk of defaulting as a result of the Covid-19 crisis. Our structural hedge position has remained stable at c£97bn, with an average duration of c2.5 years. Our structural hedge contribution is reallocated to our other business segments in line with our transfer pricing policy.
184Santander UK Group Holdings plc
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Balance sheet review
SUMMARISED CONSOLIDATED BALANCE SHEET
| | | | | | | | |
| 2020 | 2019 |
| £m | £m |
Assets | | |
Cash and balances at central banks | 43,537 | | 26,395 | |
Financial assets at fair value through profit or loss | 4,285 | | 4,336 | |
Financial assets at amortised cost | 234,944 | | 240,773 | |
Financial assets at fair value through other comprehensive income | 8,950 | | 9,747 | |
Interest in other entities | 172 | | 117 | |
Property, plant and equipment | 1,740 | | 1,971 | |
Retirement benefit assets | 496 | | 670 | |
Tax, intangibles and other assets | 4,940 | | 4,479 | |
Total assets | 299,064 | | 288,488 | |
Liabilities | | |
Financial liabilities at fair value through profit or loss | 3,354 | | 3,422 | |
Financial liabilities at amortised cost | 276,144 | | 265,350 | |
Retirement benefit obligations | 403 | | 280 | |
Tax, other liabilities and provisions | 2,918 | | 3,095 | |
Total liabilities | 282,819 | | 272,147 | |
Equity | | |
Total shareholders’ equity | 15,848 | | 15,946 | |
Non-controlling interests | 397 | | 395 | |
Total equity | 16,245 | | 16,341 | |
Total liabilities and equity | 299,064 | | 288,488 | |
A more detailed Consolidated Balance Sheet is containedPROFIT BEFORE TAX BY SEGMENT
Continuing operations
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Consolidated Financial Statements.
2020 compared to 2019 | | | | | | | | | | | | | | | | | |
| Retail Banking | Consumer Finance | Corporate & Commercial Banking | Corporate Centre | Total |
2022 | £m | £m | £m | £m | £m |
Net interest income | 3,689 | | 180 | | 580 | | 23 | | 4,472 | |
Non-interest income/(expense)(1) | 197 | | 195 | | 146 | | (4) | | 534 | |
Total operating income | 3,886 | | 375 | | 726 | | 19 | | 5,006 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (1,683) | | (144) | | (342) | | (201) | | (2,370) | |
Credit impairment (charges)/write-backs | (263) | | (27) | | (31) | | — | | (321) | |
Provisions for other liabilities and charges | (395) | | (6) | | (8) | | (12) | | (421) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | (658) | | (33) | | (39) | | (12) | | (742) | |
Profit from continuing operations before tax | 1,545 | | 198 | | 345 | | (194) | | 1,894 | |
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2021 | | | | | |
Net interest income/(expense) | 3,374 | | 233 | | 397 | | (7) | | 3,997 | |
Non-interest income(1) | 201 | | 178 | | 112 | | 56 | | 547 | |
Total operating income/(expense) | 3,575 | | 411 | | 509 | | 49 | | 4,544 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (1,703) | | (163) | | (365) | | (309) | | (2,540) | |
Credit impairment (charges)/write-backs | 98 | | 33 | | 90 | | 12 | | 233 | |
Provisions for other liabilities and charges | (187) | | 4 | | (34) | | (162) | | (379) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | (89) | | 37 | | 56 | | (150) | | (146) | |
Profit from continuing operations before tax | 1,783 | | 285 | | 200 | | (410) | | 1,858 | |
(1)
Assets
CashComprises 'Net fee and balances at central banks
Cashcommission income' and balances at central banks increased by 65% to £43,537m at 31 December 2020 (2019: £26,395m)'Other operating income'. This was mainly driven by cash inflows from higher customer deposits, lower non-bounce back lending, the drawdown of TFSME funding and normal liquidity management, partially offset by increased mortgage and bounce back lending.
Financial assets at fair value through profit or loss:Financial assets at fair value through profit or loss decreased by 1% to £4,285m at 31 December 2020 (2019: £4,336m), mainly due to:
–A £0.4bn increase in derivatives held for hedging with an increase in interest rate contracts and a decrease in exchange rate contracts.
–A decrease in derivatives held for trading of £0.3bn, linked to transactions with corporate customers that are not held in hedging relationships.
Financial assets at amortised cost:
Financial assets at amortised cost decreased by 2% to £234,944m at 31 December 2020 (2019: £240,773m), largely driven by the disposal of £5.5bn of UK Government gilts, a £4.0bn decrease in reverse repurchase agreements and, a decrease in time deposits and third party cash collateral of £0.6bn, as part of normal liquidity management. This was partially offset by an increase in customer loans of £5.1bn, with £4.4bn increase in mortgages due to pent up demand from the lockdown period and the temporary reduced rates of stamp duty. In addition, consumer (auto) finance increased by £0.3bn, and unsecured retail lending decreased by £0.7bn due to lower consumer spending during lockdown. Corporate loans increased £1.1bn, driven by our participation in the government lending schemes (£4.6bn), partially offset by lower investment appetite resulting borrowing requirements.
Financial assets at fair value through other comprehensive income
Financial assets at fair value through other comprehensive income decreased by 8% to £8,950m at 31 December 2020 (2019: £9,747m) mainly due to the disposal of UK Government bonds and the maturity of bank issued securities, partially offset by an increase in non-UK government securities due to normal liquidity management.
Property, plant and equipment
Property, plant and equipment decreased by 12% to £1,740m at 31 December 2020 (2019: £1,971m) reflecting freehold and leasehold property sales and lower contract hire sales.
Retirement benefit assets
Retirement benefit assets decreased by 26% to £496m at 31 December 2020 (2019: £670m), due to a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme) resulting from a decrease in the discount rate in the period. This was partially offset by a rise in overall asset values.
Tax, intangibles and other assets
Tax, intangibles and other assets increased by 10% to £4,940m at 31 December 2020 (2019: £4,479m), mainly due to changes in interest rates impacting the macro hedge of interest rate risk included in other assets.
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Liabilities
Financial liabilities at amortised cost
Financial liabilities at amortised cost increased by 4% to £276,144m at 31 December 2020 (2019: £265,350m). This was mainly due to an increase of £13.9bn in customer deposits, of which £7.6bn was corporate and business banking customers building up their cash reserves and £6.7bn related to retail customers increasing current account balances through reduced spending. Deposits from banks increased £6.6bn reflecting funding received through TFSME and additional amounts deposited as collateral. This was partially offset by a £2.4bn decrease in non-trading repurchase agreements as part of normal liquidity management and a £6.5bn decrease in subordinated liabilities following the repurchase of certain subordinated liabilities as part of ongoing liability management.
Retirement benefit obligations
Retirement benefit obligations increased by 44% to £403m at 31 December 2020 (2019: £280m), due to a decrease in the overall accounting surplus of the Scheme. This was principally due to a decrease in the discount rate in the period due to falling corporate bond yields which increased the value of liabilities in the Scheme. This was partially offset by a rise in overall asset values.
Equity
Total shareholders’ equity
Total shareholders’ equity decreased by 1% to £15,848m at 31 December 2020 (2019: £15,946m). This was principally due to an increase in the cash flow hedging reserve and profit after tax for the period, partially offset by dividends paid and a decrease in the defined benefit pension asset.
186Santander UK Group Holdings plc
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Balance sheet review
CUSTOMER BALANCES
This section analyses customer loans and customer deposits at a consolidated level and by business segment. The customer balances below exclude Joint ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the customer's account, and cash collateral. A reconciliation between the customer balances below and the total assets as presented in the Consolidated
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| 2020 | 2019 |
| £bn | £bn |
Customer loans | 210.4 | | 205.3 | |
Other assets | 88.7 | | 83.2 | |
Total assets | 299.1 | | 288.5 | |
Customer deposits | 191.7 | | 177.8 | |
Total wholesale funding | 63.2 | | 65.3 | |
Other liabilities | 28.0 | | 29.1 | |
Total liabilities | 282.9 | | 272.2 | |
Shareholders' equity | 15.8 | | 15.9 | |
Non-controlling interest | 0.4 | | 0.4 | |
Total liabilities and equity | 299.1 | | 288.5 | |
Balance Sheet is set out in the Risk review.
Consolidated | | | | | | | | |
| 2022 | 2021 |
| £bn | £bn |
Customer loans | 219.7 | | 210.6 | |
Other assets(1) | 72.5 | | 83.1 | |
Total assets | 292.2 | | 293.7 | |
Customer deposits | 196.5 | | 192.2 | |
Total wholesale funding | 63.0 | | 65.4 | |
Other liabilities | 18.0 | | 19.8 | |
Total liabilities | 277.5 | | 277.4 | |
Shareholders' equity | 14.7 | | 16.1 | |
Non-controlling interest | — | | 0.2 | |
Total liabilities and equity | 292.2 | | 293.7 | |
(1) At 31 December 2022, includes £49m of property assets classified as held for sale.
Further analysesanalysis of credit risk on customer loans and on our funding strategy, are includedis set out in the Credit risk and Liquidity risk sectionssection of the Risk review.
20202022 compared to 20192021
–Customer loans increased £5.1bn,£9.1bn, with a £4.4bn increase in mortgages due to pent-up demand from the lockdown period and the temporary reduced rates£9.8bn of stamp duty. In addition, consumer (auto) finance increased by £0.3bn and unsecured retail lending decreased by £0.7bn due to lower consumer spending during lockdown. Corporate loans increased £1.1bn, driven by our participation in the government lending schemes (£4.6bn), partially offset by lower investment appetite reducing borrowing requirements.net mortgage lending.
–Customer deposits increased £13.9bn,£4.3bn, following successful eSaver and ISA campaigns in H2-22.
–Other assets and other liabilities decreased, primarily reflecting our approach to liquidity management in 2022.
–Total wholesale funding decreased, with total term funding of which £7.6bn was corporate£57.8bn (2021: £60.1bn).
–Shareholders' equity decreased, largely due to cash flow hedging of our debt issuance and business banking customers building up their cash reserves and £6.7bn related to retail customers increasing current account balances through reduced spending.pension remeasurement.
Retail Banking
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| 2020 | 2019 |
| £bn | £bn |
Mortgages | 169.8 | | 165.4 | |
Business banking | 3.9 | | 0.2 | |
Consumer (auto) finance | 8.0 | | 7.7 | |
Other unsecured lending | 4.8 | | 5.5 | |
Customer loans | 186.5 | | 178.8 | |
Current accounts | 75.6 | | 68.7 | |
Savings | 57.4 | | 57.2 | |
Business banking accounts | 13.4 | | 10.5 | |
Other retail products | 5.8 | | 6.3 | |
Customer deposits | 152.2 | | 142.7 | |
Customer loans by segment
| | | | | | | | |
| 2022 | 2021 |
| £bn | £bn |
Retail Banking | 194.6 | | 185.6 | |
Consumer Finance | 5.4 | | 5.0 | |
CCB 1 | 18.5 | | 19.3 | |
Corporate Centre 2 | 1.2 | | 0.7 | |
Total | 219.7 | | 210.6 | |
(1) CCB customer loans includes £4.5bn of CRE loans (2021: £4.4bn). In Q4-22 we transferred £1.5bn (2021: £2.3bn) of Social Housing loans to our CCB segment from Corporate & Commercial Banking
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| 2020 | 2019 |
| £bn | £bn |
Non-Commercial Real Estate trading businesses | 12.9 | | 13.3 | |
Commercial Real Estate | 4.7 | | 5.1 | |
Customer loans | 17.6 | | 18.4 | |
Customer deposits | 25.0 | | 20.5 | |
Centre to reflect the way these are managed, and restated comparatives accordingly.
Customer deposits by segment
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| 2022 | 2021 |
| £bn | £bn |
Retail Banking | 161.8 | | 157.0 | |
CCB 1 | 24.8 | | 26.5 | |
Corporate Centre 1 | 9.9 | | 8.7 | |
Total | 196.5 | | 192.2 | |
(1) In Q4-22 we transferred £0.4bn of non-core liabilities (2021: £0.9bn) to our CCB segment from Corporate & Investment Banking
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| 2020 | 2019 |
| £bn | £bn |
Customer loans | 2.8 | | 4.0 | |
Customer deposits | 6.5 | | 6.1 | |
Centre to reflect the way these are managed, and restated comparatives accordingly.
Corporate CentreRetail Banking customer deposits by portfolio
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| 2020 | 2019 |
| £bn | £bn |
Social Housing | 3.0 | | 3.6 | |
Crown Dependencies (Isle of Man and Jersey) | 0.3 | | 0.3 | |
Non-core | 0.2 | | 0.2 | |
Customer loans | 3.5 | | 4.1 | |
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Customer deposits | 8.0 | | 8.5 | |
–of which Crown Dependencies | 6.0 | | 6.1 | |
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| 2022 | 2021 |
| £bn | £bn |
Current accounts | 76.6 | | 80.7 | |
Savings accounts | 67.0 | | 57.8 | |
Business banking accounts | 12.2 | | 13.1 | |
Other retail products | 6.0 | | 5.4 | |
Retail Banking customer deposits | 161.8 | | 157.0 | |
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Cash flows
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
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| 2020 | 2019 |
| £m | £m |
Net cash flows from operating activities | 16,181 | | 3,523 | |
Net cash flows from investing activities | 6,631 | | 2,885 | |
Net cash flows from financing activities | (7,983) | | (4,091) | |
Change in cash and cash equivalents | 14,829 | | 2,317 | |
A more detailed Consolidated Cash Flow Statement is contained in the Consolidated Financial Statements.
The major activities and transactions that affected cash flows in 2020 and 2019 were as follows:
In 2020, the net cash inflows from operating activities of £16,181m resulted from net cash inflows generated from profits in the year and higher customer deposits, offset by additional retail and corporate lending. The net cash inflows from investing activities of £6,631m 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 £14,829m in the year.
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.
188Santander UK Group Holdings plc
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Capital and funding
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| 2020 | 2019 |
| £bn | £bn |
Capital | | |
CET1 capital | 11.1 | | 10.4 | |
Total qualifying regulatory capital | 15.4 | | 15.8 | |
CET1 capital ratio | 15.2 | % | 14.3 | % |
Total capital ratio | 21.1 | % | 21.6 | % |
UK leverage ratio | 5.1 | % | 4.7 | % |
Risk-weighted assets | 72.9 | | 73.2 | |
–of which Retail Banking | 49.5 | | 47.8 | |
–of which Corporate & Commercial Banking | 13.3 | | 14.0 | |
–of which Corporate & Investment Banking | 3.8 | | 4.8 | |
–of which Corporate Centre | 6.3 | | 6.6 | |
Funding | | |
Total wholesale funding and AT1 | 65.7 | | 67.8 | |
- of which with a residual maturity of less than one year | 21.1 | | 22.5 | |
TreasuryKEY CAPITAL METRICS
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| 2022 | 2021 |
| £bn | % | £bn | % |
Capital | | | | |
CET1 capital | 10.8 | | 15.2 | | 10.8 | | 15.9 | |
Total qualifying regulatory capital | 14.5 | | 20.4 | | 14.7 | | 21.6 | |
UK leverage | 13.0 | | 5.2 | | 12.8 | | 5.2 | |
Summarised change in CET1 capital ratio
Liquidity
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| 2020 | 2019 |
| £bn | £bn |
Santander UK Domestic Liquidity Sub Group (RFB DoLSub) | | |
Liquidity Coverage Ratio (LCR) | 150 | % | 142 | % |
LCR eligible liquidity pool | 51.5 | 42.0 |
Santander Financial Services (SFS) | | |
LCR | 165 | % | 471 | % |
LCR eligible liquidity pool | 2.8 | | 5.7 |
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| CET1 capital ratio |
| % |
31 December 2021 | 15.9 | |
Regulatory changes on 1 January 2022 | (0.4) | |
Pro forma at 1 January 2022 | 15.5 | |
Post dividend retained earnings | 0.8 | |
Special dividend | (0.4) | |
Fixed pension deficit contributions | (0.2) | |
Expected loss less provisions | 0.2 | |
RWA growth and other | (0.7) | |
31 December 2022 | 15.2 | |
Further analysis of2022 compared to 2021
Capital ratios well above regulatory requirements
–The CET1 capital fundingratio decreased 70bps to 15.2%. This was largely due to regulatory changes that took effect on 1 January 2022 and liquidity isa special dividend paid in December 2022. The regulatory changes included in the Capital risk and Liquidity risk sectionsreintroduction of the Risk review.
2020 comparedfull CET1 software asset deduction, and implementation of new definition of default regulatory guidance. The impact of increased RWAs and the special dividend were partially offset by post dividend retained earnings. We remain strongly capitalised with significant headroom to 2019
minimum requirements and MDA.
–CET1 capital increased to£11.1bn with capital accretion throughThe UK leverage ratio remained stable at 5.2% as retained profits, the impact ofprofit was partially offset by the change in treatment of software assets outlined in the EBA technical standard on the prudential treatment of software assets and a lower deduction from the excess of regulatory expected loss amounts over credit provisions. These increases were partially offset by adverse market driven movements in the defined benefit pension schemes.
–CET1 capital ratio increased 90 basis points to 15.2% with a 5.4p.p. buffer to Maximum Distributable Amount (MDA) restrictions.1 January 2022. UK leverage ratio up 40 bps to 5.1%,1.5p.p. above the regulatory requirement. The increase was primarily through improvement in CET1 capital and active management of leverage exposures. The CET1 capital ratio includes a benefit of c30bps and UK leverage ratio c10bps from the change in treatment of software assets exposure remained broadly stable at £248.6bn (2021: £246.3bn).
–AmendmentsTotal capital ratio decreased by 120bps to Capital Requirements Regulation (CRR)20.4%, which were publisheddue to lower CET1 capital ratio as outlined above as well as the reduction in Additional Tier 1 and Tier 2 capital securities recognised following the Official Journal on 26 June 2020, contributed 17 basis points to the CET1 ratio, through the implementationend of the RWA reduction factors for certain Small and Medium-sized Enterprise (SME) and infrastructure exposures.
–The Pillar 2A capital requirement was 4.94%, the majority of which remained with an RWA percentage-based element.
– Following the PRA's announcement regarding the resumption of dividend payments, an interim dividend of £103m for 2020 was paid in Dec 20.CRR Grandfathering period on 1 January 2022.
–We issued £5.4bnpaid £1.0bn interim dividends, £300m of which was a special dividend (2021: £1.3bn). These were paid following review and approval by the Board in line with our dividend policy.
CET1 capital ratio at 31 December 2022
| | | | | |
| Minimum |
| % |
Pillar 1 | 4.5 | |
Pillar 2A | 3.2 | |
Capital conservation buffer | 2.5 | |
Countercyclical capital buffer | 1.0 | |
Current MDA trigger | 11.2 | |
Headroom | 4.0 | |
CET1 capital ratio | 15.2 | |
KEY FUNDING AND LIQUIDITY METRICS
| | | | | | | | |
| 2022 | 2021 |
| £bn | £bn |
Loan to deposit ratio | 113 | % | 111 | % |
Total wholesale funding and AT1 | 65.2 | 67.8 |
of which TFSME | 25.0 | 31.9 |
of which with a residual maturity of less than one year | 11.0 | 10.2 |
LCR | 163 | % | n.a. |
LCR eligible liquidity pool | 49.0 | n.a. |
Liquidity metrics reported for Santander UK from 1 January 2022 following the adoption of the CRR2 regulation.
2022 compared to 2021
Strong funding across a range of diverse products
–Total wholesale funding decreased, with £6.9bn TFSME repayment. Funding costs improved with maturities refinanced at lower cost.
–Issuances of £8.6bn, including £1.4bn MREL eligible senior unsecured issuedissuance of £3.9bn equivalent and £4.7bn of non-MREL issuance from Santander UK Group Holdings plc, and £4bn of core funding, consisting of covered bonds and senior unsecured, issued from Santander UK plc.our RFB.
–We expect to issue between £2.0bn and £3.0bn of MREL in 2023 , of which we have £6.3bn outstanding under the TFS and £11.7bn outstanding under the TFSME.
– In October 2020, Santander UK plc transferred £3.2bn of mortgage assets to SFS. The transaction allows us to optimise our overall funding structure within Santander UK, utilising the depositsalready issued £1.0bn equivalent in SFS and reducing our funding requirement in Santander UK plc.January 2023.
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Annual Report 20202022 | Santander UK Group Holdings plc | Financial review180 | | |
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Selected financial data
The financial information set forth below for the years ended 31 December 2020, 2019 and 2018 and at 31 December 2020 and 2019 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
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| 2020 | (1,2) | 2019 | (3,4,5) | 2018 | 2017 | 2016 |
£m | £m | £m | £m | £m |
Assets | | | | | |
Cash and balances at central banks | 43,537 | | 26,395 | | 24,180 | | 32,771 | | 17,107 | |
Financial assets at fair value through profit or loss | 4,285 | | 4,336 | | 11,458 | | 52,593 | | 57,646 | |
Financial assets at amortised cost | 234,944 | | 240,773 | | 233,489 | | 205,412 | | 204,085 | |
Financial assets at fair value through other comprehensive income | 8,950 | | 9,747 | | 13,302 | | | |
Financial investments | | | | | | 17,611 | | 17,466 | |
Interests in other entities | 172 | | 117 | | 88 | | 73 | | 61 | |
Intangible assets | 1,649 | | 1,776 | | 1,814 | | 1,742 | | 1,685 | |
Property, plant and equipment | 1,740 | | 1,971 | | 1,835 | | 1,598 | | 1,491 | |
Current tax assets | 271 | | 186 | | 106 | | — | | — | |
Retirement benefit assets | 496 | | 670 | | 842 | | 449 | | 398 | |
Other assets | 3,020 | | 2,517 | | 2,267 | | 2,511 | | 2,571 | |
Total assets | 299,064 | | 288,488 | | 289,381 | | 314,760 | | 302,510 | |
Liabilities | | | | | |
Financial liabilities at fair value through profit or loss | 3,354 | | 3,422 | | 7,880 | | 51,037 | | 41,103 | |
Financial liabilities at amortised cost | 276,144 | | 265,350 | | 261,933 | | 243,858 | | 241,590 | |
Other liabilities | 2,343 | | 2,373 | | 2,507 | | 2,728 | | 3,221 | |
Provisions | 468 | | 577 | | 515 | | 558 | | 700 | |
Current tax liabilities | — | | — | | — | | 3 | | 53 | |
Deferred tax liabilities | 107 | | 145 | | 211 | | 88 | | 128 | |
Retirement benefit obligations | 403 | | 280 | | 115 | | 286 | | 262 | |
Total liabilities | 282,819 | | 272,147 | | 273,161 | | 298,558 | | 287,057 | |
Equity | | | | | |
Total shareholders’ equity | 15,848 | | 15,946 | | 15,820 | | 15,801 | | 15,054 | |
Non-controlling interests | 397 | | 395 | | 400 | | 401 | | 399 | |
Total equity | 16,245 | | 16,341 | | 16,220 | | 16,202 | | 15,453 | |
Total liabilities and equity | 299,064 | | 288,488 | | 289,381 | | 314,760 | | 302,510 | |
(1)In 2020, the Santander UK group adopted 'Interest Rate Benchmark Reform – Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16’.
(2)In October 2020, Santander UK plc sold £3.2bn of mortgages to Santander Financial Services plc.
(3)On 1 January 2019, the Santander UK group adopted IFRS 16 (2016-2018: IAS 17).
(4)On 1 January 2018, the Santander UK group adopted IFRS 9 (2016 and 2017: IAS 39).
(5)In 2018, the Santander UK group completed the implementation of its ring-fencing plans.
INCOME STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | (1,2) | 2019 | (3,4,5) | 2018 | (4,5) | 2017 | 2016 |
£m | £m | £m | £m | £m |
Net interest income | 3,437 | | 3,295 | | 3,606 | | 3,803 | | 3,582 | |
Net fee and commission income | 383 | | 689 | | 749 | | 807 | | 770 | |
Other operating income | 138 | | 186 | | 188 | | 302 | | 443 | |
Total operating income | 3,958 | | 4,170 | | 4,543 | | 4,912 | | 4,795 | |
Operating expenses before credit impairment losses, provisions and charges | (2,487) | | (2,526) | | (2,563) | | (2,502) | | (2,417) | |
Credit impairment losses | (645) | | (220) | | (153) | | (203) | | (67) | |
Provisions for other liabilities and charges | (274) | | (443) | | (260) | | (393) | | (397) | |
Total operating credit impairment losses, provisions and charges | (919) | | (663) | | (413) | | (596) | | (464) | |
Profit before tax | 552 | | 981 | | 1,567 | | 1,814 | | 1,914 | |
Tax on profit | (114) | | (272) | | (403) | | (514) | | (597) | |
Profit after tax | 438 | | 709 | | 1,164 | | 1,300 | | 1,317 | |
(1)In 2020, the Santander UK group adopted 'Interest Rate Benchmark Reform – Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16’.
(2)In October 2020, Santander UK plc sold £3.2bn of mortgages to Santander Financial Services plc.
(3)On 1 January 2019, the Santander UK group adopted IFRS 16 (2016-2018: IAS 17).
(4)On 1 January 2018, the Santander UK group adopted IFRS 9 (2016 and 2017: IAS 39).
(5)In 2018, the Santander UK group completed the implementation of its ring-fencing plans.
ALTERNATIVE PERFORMANCE MEASURES (APMs)
190Santander 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 non-IFRS financial measures that constitute APMs, as defined in European Securities and Markets Authority (ESMA) guidelines and non-GAAP financial measures, as defined in (and presented in accordance with) U.S. Securities and Exchange Commission (SEC) rules and guidance. 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.
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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. |
Adjusted non-interest income | Non-interest income adjusted for items management believe to be significant, to facilitate underlying operating performance and cost-to-income comparisons from period to period. |
Adjusted operating expenses before credit impairment losses,charges, provisions and charges | Operating expenses before credit impairment losses,charges, provisions and charges adjusted for items management believe to be significant, to facilitate underlying operating performance and cost-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. |
Adjusted cost-to-income ratio | Adjusted total operating expenses before credit impairment losses(charges)/ write-backs and provisions for other liabilities and charges as a percentage of the total of adjusted net interest income and adjusted non-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 less non-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. |
Adjusted Banking NIM | In 2020 we introduced this as a new APM to remove the 2020 positive impact of the accounting change, which is not expected to be repeated and did not occur in earlier periods. It is calculated as adjusted net interest income as a percentage of average customer assets over the period. We consider this metric useful for management and investors as it removes the 2020 positive impact of the accounting change on net interest income. |
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Annual Report 2020 | Financial review
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Reconciliation of adjusted APMs to nearest IFRS measure
a) Adjusted profit metrics and average customer assets
Net interest income, non-interest income, operating expenses before credit impairment losses, provisions and charges, provisions for other liabilities and charges, andAs shown in the table below, profit from continuing operations before tax are allis adjusted for items management believe to be significant,significant. We adjust for these to facilitate underlying operating performance comparisons from period to period.
| | | | | | | | | | | |
| Ref | 2020 | 2019 |
| | £m | £m |
Net interest income | | | |
Reported | (i) | 3,437 | | 3,295 | |
Adjust for accounting treatment | | (44) | | — | |
| | | |
Adjusted | (ii) | 3,393 | | 3,295 | |
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Non-interest income | | | |
Reported | (iii) | 521 | | 875 | |
| | | |
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Adjust for operating lease depreciation | | (92) | | (103) | |
Adjust for Vocalink Holdings Limited shareholding | | — | | (15) | |
Adjusted | (iv) | 429 | | 757 | |
| | | |
Operating expenses before credit impairment losses, provisions and charges | | | |
Reported | (v) | (2,487) | | (2,526) | |
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| | | |
Adjust for transformation | | 113 | | 50 | |
| | | |
Adjust for operating lease depreciation | | 92 | | 103 | |
Adjust for higher IT costs, staff expenses and increased site cleaning as a result of Covid-19 | | 24 | | — | |
Adjusted | (vi) | (2,258) | | (2,373) | |
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Provisions for other liabilities and charges | | | |
Reported | | (274) | | (443) | |
Adjust for transformation | | 65 | | 105 | |
Adjust for PPI | | — | | 169 | |
Adjust for regulatory and other | | — | | 10 | |
| | | |
| | | |
Adjusted | | (209) | | (159) | |
| | | |
Profit before tax | | | |
Reported | | 552 | | 981 | |
Specific income, expenses and charges | | 158 | | 319 | |
Adjusted profit before tax | | 710 | | 1,300 | |
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Average customer assets | (vii) | 208,525 | | 201,334 | |
The financial results for 2020reflect continuing operations and 2019 were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £158m in 2020 and £319m in 2019. The specific income, expenses and charges are outlined below:therefore do not include discontinued operations.
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| Ref. | 2022 | 2021 |
| | £m | £m |
Non-interest income | | | |
Reported | (i) | 534 | | 547 | |
Adjust for operating lease depreciation | | (74) | | (81) | |
Adjust for net loss / (gain) on sale of property | | 7 | | (73) | |
Adjusted | (ii) | 467 | | 393 | |
| | | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | | | |
Reported | (iii) | (2,370) | | (2,540) | |
Adjust for transformation | | 171 | | 278 | |
Adjust for operating lease depreciation | | 74 | | 81 | |
Adjusted | (iv) | (2,125) | | (2,181) | |
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Provisions for other liabilities and charges | | | |
Reported | | (421) | | (379) | |
Adjust for transformation | | 22 | | 130 | |
Adjust for penalty related to historical shortcomings in AML controls | | 108 | | — | |
Adjusted | | (291) | | (249) | |
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Profit from continuing operations before tax | | | |
Reported | | 1,894 | | 1,858 | |
Specific income, expenses and charges | | 308 | | 335 | |
Adjusted profit from continuing operations before tax | | 2,202 | | 2,193 | |
–Accounting adjustment
During Q4 2020, we revised the accounting treatment for certain items of mortgage income with an impact on net interest income of £44m for 2020. For details, see 'Revenue recognition - Interest income and expense' in the Accounting policies in Note 1 to the Consolidated Financial Statements.
–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 and non-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.
–Adjustment for higher IT costs, staff expenses and increased site cleaning as a result of Covid-19
In Q220 we introduced an adjustment for Covid-19 expenses as we believe the underlying performance of the business is clearer if we exclude these charges due to the unprecedented nature of the crisis. These costs include higher IT costs, remote network, staff expenses, mail outs and increased site cleaning. These expenses were identified as being incurred as a direct result of Covid-19 actions as the crisis emerged and are not expected to recur.
192Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 181 |
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The financial results for 2022 and 2021 were impacted by a number of specific income, expenses and charges with an aggregate impact on profit from continuing operations before tax of £308m in 2022 and £335m in 2021. The specific income, expenses and charges are outlined below:
–Operating lease depreciation
We adjust operating expenses and non-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 business volumes.
–Net loss / (gain) on sale of property
Previously named ‘net gain on sale of London head office and branch properties’, now also includes subsequent sale of property under our transformation programme.
–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.
–PPIPenalty related to historical shortcomings in AML controls
We have been closely involvedIn December 2022, we paid a financial penalty to settle the FCA’s enforcement investigation into the AML systems and controls in our Business Banking division in the additional industry activitiesperiod between 31 December 2012 and 18 October 2017. The settlement concluded the FCA’s investigation and we are adjusting for this because it relates to support the regulatory time-bar for claims and orderly closurea historical incident which impacts comparison of the FCA remediation campaign. We made an additional provisionunderlying trend. Details 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 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 priorSantander UK’s response to the complaint deadline. Our best estimate of the additional provision requiredsettlement can be viewed at Q4 2019 was £99m.www.santander.co.uk/about-santander/media-centre/press-releases/santander-uk-reaches-fca-settlement-on-historical.
–Regulatory and other
In Q4 2019 we made a £10m provision in relation to our consumer credit business operations.
–Removal of certain adjusting itemsb) Adjusted cost-to-income ratio
During Q420, APMs were reassessedCalculated as adjusted total operating expenses before credit impairment (charges) / write-backs, provisions and management concluded that charges relating to regulatory and other conduct matters incurred during the year were no longer sufficiently material to warrant separate adjustments in the contextas a percentage of the resultstotal of net interest income and adjusted non-interest income. We consider this metric useful for management and investors as an efficiency measure to capture the full year 2020.amount spent to generate income, as we invest in our multi-year transformation programme.
b) Adjusted Banking NIM
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| Calculation, refers to table a) above | 2020 | 2019 |
| | £m | £m |
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Banking NIM | (i) divided by (vii) | 1.65 | % | 1.64 | % |
Adjusted Banking NIM | (ii) divided by (vii) | 1.63 | % | 1.64 | % |
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| Ref. | 2022 | 2021 |
| | % | % |
| | | |
| | | |
| | | |
| | | |
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Cost-to-income ratio | (iii) divided by the sum of (i) and net interest income | 47 | % | 56 | % |
Adjusted cost-to-income ratio | (iv) divided by the sum of (ii) and net interest income | 43 | % | 50 | % |
c) Adjusted cost-to-income ratioRoTE
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| Calculation, refers to table a) above | 2020 | 2019 |
| | £m | £m |
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| | | |
| | | |
| | | |
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Cost-to-income ratio | (v) divided by the sum of (i) and (iii) | 63 | % | 61 | % |
Adjusted cost-to-income ratio | (vi) divided by the sum of (ii) and (iv) (vi) divided by the sum of (ii) and (iv) | 59 | % | 59 | % |
Calculated as adjusted profit after tax attributable to equity holders of the parent, divided by average shareholders’ equity less non-controlling interests, other equity instruments, and average goodwill and other intangible assets. 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. | | | | | | | | | | | |
| | Specific income, expenses and charges | As adjusted |
| |
2022 | £m | £m | £m |
Profit after tax | 1,423 | | 254 | | 1,677 | |
Less non-controlling interests of annual profit | (17) | | | (17) | |
Profit due to equity holders of the parent (A) | 1,406 | | | 1,660 | |
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| | Equity adjustments | As adjusted |
| |
2022 | £m | £m | £m |
Average shareholders' equity | 15,545 | | | |
Less average AT1 securities | (2,194) | | | |
Less average non-controlling interests | (118) | | | |
Average ordinary shareholders' equity (B) | 13,233 | | | |
Average goodwill and intangible assets | (1,548) | | | |
Average tangible equity (C) | 11,685 | | 63 | | 11,748 | |
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Return on ordinary shareholders’ equity (A/B) | 10.6 | % | | — | |
Adjusted RoTE (A/C) | — | | | 14.1 | % |
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| | Specific income, expenses and charges | As adjusted |
| |
2020 | £m | £m | £m |
Profit after tax | 438 | | 115 | | 553 | |
Annualised profit after tax | — | | | — | |
Phasing adjustments | — | | | — | |
Less non-controlling interests of annual profit | (36) | | | (36) | |
Profit due to equity holders of the parent (A) | 402 | | | 517 | |
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| | Equity adjustments | As adjusted |
| |
2020 | £m | £m | £m |
Average shareholders' equity | 16,293 | | | |
Less average AT1 securities | (2,243) | | | |
Less average non-controlling interests | (398) | | | |
Average ordinary shareholders' equity (B) | 13,652 | | | |
Average goodwill and intangible assets | (1,713) | | | |
Average tangible equity (C) | 11,939 | | 29 | | 11,968 | |
| | | |
Return on ordinary shareholders’ equity (A/B) | 2.9 | % | | — | |
Adjusted RoTE (A/C) | — | | | 4.3 | % |
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Annual Report 2022 | Santander UK Group Holdings plc182193 |
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| | Specific income, expenses and charges | As adjusted |
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2019 | £m | £m | £m |
Profit after tax | 709 | | 270 | | 979 | |
| | | |
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Less non-controlling interests of annual profit | (37) | | | (37) | |
Profit due to equity holders of the parent (A) | 672 | | | 942 | |
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| | Equity adjustments | As adjusted |
| |
2019 | £m | £m | £m |
Average shareholders' equity | 16,281 | | | |
Less average AT1 securities | (2,141) | | | |
Less average non-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 | |
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Return on ordinary shareholders’ equity (A/B) | 4.9 | % | | — | |
RoTE (A/C) | — | | | 7.8 | % |
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| | Specific income, expenses and charges | As adjusted |
| |
2021 | £m | £m | £m |
Profit after tax | 1,405 | | 244 | | 1,649 | |
Less non-controlling interests of annual profit | (36) | | | (36) | |
Profit due to equity holders of the parent (A) | 1,369 | | | 1,613 | |
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| | Equity adjustments | As adjusted |
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2021 | £m | £m | £m |
Average shareholders' equity | 16,312 | | | |
Less average AT1 securities | (2,216) | | | |
Less average non-controlling interests | (316) | | | |
Average ordinary shareholders' equity (B) | 13,780 | | | |
Average goodwill and intangible assets | (1,597) | | | |
Average tangible equity (C) | 12,183 | | 61 | | 12,244 | |
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Return on ordinary shareholders’ equity (A/B) | 9.9 | % | | — | |
RoTE (A/C) | — | | | 13.2 | % |
–Specific income, expenses, charges
Details of these items are outlined in a)'a) Adjusted profit metrics and average customer assetsassets' above, with a total impact on profit from continuing operations before tax of £158m.£308m. The tax onimpact of these items is c£43mon the taxation charge was £54m and on profit after tax on thesewas £254m. Tax is calculated at the standard rate of corporation tax including the bank surcharge, except for items is £115m.such as conduct provisions which are not tax deductible.
–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-looking non-IFRS Adjusted RoTE targets for the medium term to an equivalent IFRS measure for ROE is not available without unreasonable efforts.
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| | Contents | |
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| | Report of Independent Registered Public Accounting Firm (PCAOB ID 876) | |
| | Primary financial statements | |
| | Consolidated Income Statement | |
| | Consolidated Statement of Comprehensive Income | |
| | Consolidated Balance Sheet | |
| | Consolidated Cash Flow Statement | |
| | Consolidated Statement of Changes in Equity | |
| | Notes to the financial statements | 210 |
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| | Company Balance Sheet | |
| | Company Cash Flow Statement | |
| | Company Statement of Changes in Equity | |
| | Notes to the company financial statements | |
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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 sheets of Santander UK Group Holdings plc and its subsidiaries (the “Company”) as of December 31, 20202022 and 2019,2021, 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 December 31, 2020,2022, 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 December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 i)2022 in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006, ii) as prepared in accordance with the accounting provisions required by International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, and iii) as prepared in accordance withi) International Financial Reporting Standards as issued by the International Accounting Standards Board.
Changes inBoard, and ii) UK-adopted International Accounting PrinciplesStandards.
As discussed in Note 1 to the consolidated financial statements, in 2019 the company 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 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Board Audit Committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Credit Impairment Loss Allowance for expected credit losses foron loans and advances to customers
As described in Notes 1 and 13 to the consolidated financial statements, the allowance for expected credit losses (“ECL”) was £1,303 million as of 31 December 2020.are recognised for financial assets measured at amortised cost. The measurement of ECL reflects an unbiased andreflects: a probability weighted amount that is determined by evaluating a range of possible outcomes,outcomes; the time value of moneymoney; 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. The application of the ECL impairment methodology for calculating the allowance for ECLcredit impairment loss allowances is highly susceptible to change from period to period and requires management to make judgemental assumptions in determining the estimates.estimate. The key judgements made by management in applying the ECL impairment methodology areare: (i) the definition of default, forward looking multiple economic scenarios,scenarios; (ii) the probability weights significant increase in credit risk thresholds, post-model adjustments, internal credit risk ratings for corporate borrowers and individually assessedassigned to multiple economic scenarios; (iii) assessing individual corporate stage 3 exposures.exposures; and (iv) determining judgemental adjustments. The Company’s ECL was £933 million as of December 31, 2022.
The principal considerations for our determination that performing procedures relating to the credit impairment loss allowance for expected credit losses foron loans and advances to customers is a critical audit matter are (i) there wasdue to the significant judgementjudgements being applied by management in determining (i) the allowance, whichforward looking economic scenarios, (ii) the probability weights applied to those scenarios, (iii) individual corporate stage 3 provisions and (iv) judgemental adjustments. This in turn led to a high degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence related to the models, judgementsmethodology and judgement in assumptions used to determine the allowanceallowance; and (ii) the audit effort involved the use of professionals with specialised skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation process, including model performance monitoring controls, management’s review and approval of key judgements and assumptions used in determining the allowance for ECL and the determination of internal credit risk ratings.impairment loss allowance. These procedures also included, among others, testing management’s process for estimating expected credit losses; evaluating the criteria set by management for determining whether there had been a significant increaseappropriateness of model methodologies; testing the underlying data used in credit riskthe model and testingevaluating the reasonableness of keymanagement’s assumptions in determiningrelated to (i) multiple forward looking economic scenarios and their relative probability weights. Evaluating these assumptions involved assessing their reasonableness against external dataweights; (ii) judgemental adjustments; and economic events that have occurred. We assessed the reasonableness of internal credit risk ratings for corporate borrowers and the(iii) expected future cash flows related toand collateral valuations of individually assessed corporate stage 3 exposures. We also evaluated the reasonableness of the method and assumptions used to determine post model adjustments. Professionals with specialised skill and knowledge were used to assist in completing these procedures.
Valuation of defined benefit scheme pension obligations
As described in Notes 1 and 30 toevaluating the consolidated financial statements, the carrying valuereasonableness of the defined benefit obligations was £13.9 billion asforward looking economic scenarios, probability weight assumptions, the sufficiency and appropriateness of 31 December 2020. Accounting for defined benefit pension schemes requires management to make assumptions principally about the discount rate adopted, but also about price inflationjudgemental adjustments, and life expectancy. Management’s assumptions are based on past experience and current economic trends, which are not necessarily an indication of future experience.
The principal considerations for our determination that performing procedures relating to the valuation of defined benefit scheme pension obligations is a critical audit matter are (i) there was significant judgement by management in determining the discount rate, price inflation and life expectancy, which in turncorporate real estate collateral valuations.
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Valuation of defined benefit pension surplus
As described in Notes 1 and 30 to the consolidated financial statements, the Company operates a number of defined benefit pension schemes. The main scheme is the Santander (UK) Group Pension Scheme (the scheme). The scheme is in a net surplus of £1,051 million as of December 31, 2022. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). Management estimates the present value of the defined benefit obligation 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. In determining the value of scheme liabilities, demographic and financial assumptions are made by management about life expectancy, inflation and discount rates. The scheme invests in certain assets whose values are not based on market observable data which totalled £3,100 million as of December 31, 2022. These illiquid assets included investments in unquoted equities and unquoted corporate bonds, as well as investments in property, infrastructure and hedge funds. These illiquid assets are valued by reference to the latest manager statements provided by the managers, adjusted for any cash movements since the latest valuation, with the exception of directly held property where the underlying asset valuations are prepared by an independent expert, adjusted for any cash movements where necessary since the latest valuation.
The principal considerations for our determination that performing procedures relating to the valuation of the defined benefit pension surplus is a critical audit matter are due to the significant judgements made by management in determining: (i) the life expectancy, inflation and discount rate assumptions; and (ii) the fair value of the scheme’s illiquid assets, including adjustments for any capital changes and potential fair value movements since the last valuation date. This, in turn, led to significant auditor judgement, subjectivity and audit effort in performing procedures and evaluating audit evidence and (ii) theevidence. The audit effort involved the use of professionals with specialised skill or knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls over key assumptions includingrelating to the discount rate, price inflation and life expectancy used to calculatevaluation of the defined benefit obligation.pension obligation and the valuation of illiquid assets. These procedures also included, among others, assessingevaluating the reasonablenessdefined benefit pension obligation by 1) testing the completeness and accuracy of discount rate, price inflationthe underlying data, and life expectancy assumptions by comparing to our independently determined benchmarks. It also included2) the involvement of professionals with specialised skill and knowledge to assist in evaluatinga) developing an independent range of the inflation rate, the discount rate and life expectancy assumptions, b) comparing the independent range of assumptions to management's assumptions to evaluate the reasonableness of management’s assumptions and c) assessing the appropriateness of the methodologies used by management to determine these assumptions. Procedures over directly held property included, among others: (i) the involvement of professionals with specialised skill and knowledge to assist in assessing the appropriateness of the methodology applied, and evaluatingreasonableness of the key assumptions used by management’s third party valuer for property and reviewing the reasonableness of the discount rate, price inflationvaluation for a sample of properties, (ii) for the other illiquid assets, obtaining third-party confirmations of the valuation directly from investment managers and comparing these against management’s reported value, recalculating management’s valuations and comparing them to the third-party confirmations and, if applicable, testing material capital changes in the period between the valuation and the life expectancy assumptions.
Legal and Regulatory matters
As described in Notes 1, 29 and 31entity’s balance sheet date where there was a time lag, (iii) assessing evidence regarding the valuations, such as agreeing NAV statements from investment managers to the consolidatedaudited fund financial statements the provision for regulatory and other matters was £226m and includes an amount within it in respectwhere they were available, performing back testing of management’s best estimate of liability relatingfair values to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints. Note 31 provides disclosure relating to ongoing factual issues and reviews that could impact the timing and amount of any outflows. In addition, Note 31 includes disclosure of an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions as well as an Financial Conduct Authority ("FCA") civil regulatory investigation which commenced in July 2017 into compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. 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 principal considerations for our determination that performing procedures relating to legal and regulatory matters is a critical audit matter are (i) there was significant judgement exercised by management in determining the level of provisions, if any, which in turn led to a high degree of auditor judgement and subjectivity in performing procedures and evaluating evidence in relation to the specific PPI portfolio, the German dividend tax arbitragerecent transactions and reviewing controls reports for the FCA investigation; and (ii) the significant judgement by management when disclosing facts and circumstances related to the matters, which in turn led to a high degree of auditor judgement and subjectivity in performing procedures related to the disclosures, including evaluating the audit evidence obtained.investment managers where available.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedGoodwill impairment assessment - personal financial statements. These procedures included testing the effectiveness of controls relating to management’s determination of the likelihood of any potential outflows and whether the amount of loss can be reasonably estimated. These procedures also included, among others, obtaining and evaluating letters of audit inquiry and legal opinions from external legal counsel and holding discussions with them, reviewing reports provided to governance committees and discussing the matters with those charged with governance, evaluating the reasonableness of management’s assessment regarding whether it is probable that a liability exists and a reliable estimate can be made of the likely outcome, and evaluating the sufficiency of the group’s disclosures made in relation to each of the matters.
Impairment of Goodwill relating to the Personal Financial Servicesservices cash generating unit
As described in Notes 1 and 20 to the consolidated financial statements, the carrying valueamount of goodwill relating to the Personal Financial Services ("PFS"personal financial services (‘PFS’) cash generating unit ("CGU"(“CGU”) was £1.17 billion as of December 31, December 2020. The carrying amount of the goodwill is based on the application of judgements including the basis of goodwill impairment calculation assumptions.2022. Management undertakes an annual assessment to evaluate whether the carrying value of goodwill is impaired, carrying out this assessment more frequently if reviews identify indicators of impairment or when events or changes in circumstances dictate. The impairment review comprises a comparison ofImpairment is required where the carrying value of goodwill exceeds its recoverable amount. The recoverable amount of the CGU with its recoverable amount: the higher of the cash-generating unit’s fair value less costs to sell and its value in use. The recoverable amounts of goodwill have beenwas determined based on the value in use calculations. Value in use(“VIU”) methodology at each testing date. The VIU is calculated by discounting management’s expected futurethe cash flows obtainable as a result offlow projections for the asset’s continued use (after making allowance for increases in regulatory capital requirements) at a market-based discount rate. Estimates include the determination of theCGU. The carrying value of the PFS CGUgoodwill is based on an allocationthe application of judgement in determining the basis of goodwill impairment testing methodology, including the need for planning assumptions and internal capital allocations. Estimates include forecast cash flows for CGUs, including estimated allocations of regulatory capital, forecasts usedthe growth rate for determiningthe period beyond the initial cash flows for CGUsflow projections and discount rates which factor in risk-free rates and applicable risk premiums, which are variables subject to fluctuations in external market rates and economic conditions beyond management’s control. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and is subject to potential change over time.premiums.
The principal considerations for our determination that performing procedures relating to the goodwill impairment of goodwill at the PFS CGUassessment - personal financial services cash generating unit is a critical audit matter are (i) there wasdue to the significant judgementjudgements by management to determinein determining (i) the discount rate assumptionamount of regulatory capital and the method used for determining the carrying value of the PFS CGU, (ii) the forecast cash generating unit, whichflows, (iii) the discount rate and (iv) the growth rate for the period beyond the initial cash flow projections assumptions. This, in turn, led to significant auditor judgement, subjectivity and audit effort to performin performing procedures and evaluate theevaluating audit evidence obtainedrelated to management’s judgements and (ii)assumptions. In addition, the audit effort involved the use of professionals with specialised skill or knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures also included, among others, (i) testing management’s process for determining the carrying value of individual CGU including internal capital allocations, (ii) evaluating the appropriateness of the valuemethodology used to estimate the VIU, (iii) testing the completeness and accuracy of underlying data used in usethe model applied, assessing(iv) comparing an independent range of assumptions for the discount rate and the growth rate beyond the initial cash flow projections to management's assumptions to evaluate the reasonableness of the discount rate assumption,management’s assumptions, and testing the appropriateness of the method used to determine the carrying value of the CGU. Evaluating the discount rate involved independently determining an appropriate market rate and comparing it to management's discount rate. The procedures also included(v) evaluating the reasonableness of the disclosuresforecasted cash flows including comparing performance in respectrecent years to the budgets and 3 year plans for the equivalent periods to assess the accuracy of these judgements.the budgeting and forecasting process and (vi) assessing the appropriateness of the related disclosures. Professionals with specialised skill and knowledge assisted in completing these procedures.the evaluation of the reasonableness of the discount rate, the growth beyond the initial cash flow projections and assessing the determination of the carrying value of the PFS CGU.
Litigation and other regulatory matters
/s/ PricewaterhouseCoopers LLP
London,As described in Notes 1, 29 and 31 to the consolidated financial statements, as of December 31, 2022, the provision for litigation and other regulatory matters of £136 million includes, among other items, a provision relating to a legal dispute regarding allocation of responsibility for a specific Payment Protection Insurance (“PPI”) portfolio of complaints. There is also an ongoing investigation in relation to the historical involvement of Santander UK
4 March 2021
We have served as the Company's auditor since 2016.
plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc197plc) in German dividend tax arbitrage transactions for which management has determined that there are uncertainties that mean it is not currently possible to make a reliable assessment of the size of any potential liability. Significant judgement may be required when accounting for provisions, including in determining whether a present obligation exists, in assessing the likely outcome of future legal decisions and in estimating the probability, timing, nature and amount of any outflows that may arise from past events. These judgements are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters.
The principal considerations for our determination that performing procedures relating to litigation and other regulatory matters is a critical audit matter are due to the significant judgements made by management when estimating the probability, timing, nature and amount of any outflows for the legal dispute for a specific PPI portfolio of complaints, and the German dividend tax arbitrage investigation. This in turn led to a high degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of the cases against the requirements of IAS
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37, Provisions, Contingent Liabilities and Contingent Assets. These procedures also included, among others, (i) inquiries of internal legal counsel on the developments in respect to the significant cases (ii) obtaining and evaluating letters of audit inquiry from external legal counsel, (iii) evaluating the reasonableness of management’s assessment regarding the probability of an outflow and the estimated amount of the obligation, where a reliable estimate can be formed and (iv) evaluating the sufficiency of the group’s disclosures made in relation to each of the matters.
/s/ PricewaterhouseCoopers LLP
London, UK
7 March 2023
We have served as the Company's auditor since 2016.
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Consolidated Income Statement
For the years ended 31 December
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| | 2020 | 2019 | 2018 |
| Notes | £m | £m | £m |
Interest and similar income | 3 | 5,146 | | 5,972 | | 6,072 | |
Interest expense and similar charges | 3 | (1,709) | | (2,677) | | (2,466) | |
Net interest income | | 3,437 | | 3,295 | | 3,606 | |
Fee and commission income | 4 | 756 | | 1,117 | | 1,170 | |
Fee and commission expense | 4 | (373) | | (428) | | (421) | |
Net fee and commission income | | 383 | | 689 | | 749 | |
Other operating income | 5 | 138 | | 186 | | 188 | |
Total operating income | | 3,958 | | 4,170 | | 4,543 | |
Operating expenses before credit impairment losses, provisions and charges | 6 | (2,487) | | (2,526) | | (2,563) | |
Credit impairment losses | 8 | (645) | | (220) | | (153) | |
Provisions for other liabilities and charges | 8 | (274) | | (443) | | (260) | |
Total operating credit impairment losses, provisions and charges | | (919) | | (663) | | (413) | |
Profit before tax | | 552 | | 981 | | 1,567 | |
Tax on profit | 9 | (114) | | (272) | | (403) | |
Profit after tax | | 438 | | 709 | | 1,164 | |
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Attributable to: | | | | |
Equity holders of the parent | | 402 | | 672 | | 1,125 | |
Non-controlling interests | 34 | 36 | | 37 | | 39 | |
Profit after tax | | 438 | | 709 | | 1,164 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
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Consolidated Statement of Comprehensive Income
For the years ended 31 December
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| 2020 | 2019 | 2018 |
| £m | £m | £m |
Profit after tax | 438 | | 709 | | 1,164 | |
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Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently: | | | |
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Movement in fair value reserve (debt instruments): | | | |
–Change in fair value | 114 | | 147 | | (74) | |
–Income statement transfers | (107) | | (147) | | 21 | |
–Taxation | (2) | | 0 | | 14 | |
| 5 | | 0 | | (39) | |
Cash flow hedges: | | | |
–Effective portion of changes in fair value | 974 | | (864) | | 788 | |
–Income statement transfers | (803) | | 1,021 | | (751) | |
–Taxation | (53) | | (40) | | (14) | |
| 118 | | 117 | | 23 | |
Currency translation on foreign operations | 0 | | (3) | | 0 | |
Net other comprehensive income that may be reclassified to profit or loss subsequently | 123 | | 114 | | (16) | |
Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently: | | | |
Pension remeasurement: | | | |
–Change in fair value | (505) | | (523) | | 469 | |
–Taxation | 133 | | 131 | | (117) | |
| (372) | | (392) | | 352 | |
Own credit adjustment: | | | |
–Change in fair value | (3) | | (77) | | 84 | |
–Taxation | 0 | | 19 | | (21) | |
| (3) | | (58) | | 63 | |
Net other comprehensive expense that will not be reclassified to profit or loss subsequently | (375) | | (450) | | 415 | |
Total other comprehensive income/(expense) net of tax | (252) | | (336) | | 399 | |
Total comprehensive income | 186 | | 373 | | 1,563 | |
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Attributable to: | | | |
Equity holders of the parent | 152 | | 334 | | 1,524 | |
Non-controlling interests | 34 | | 39 | | 39 | |
Total comprehensive income | 186 | | 373 | | 1,563 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
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At 31 December
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| Notes | £m | £m |
Assets | | | |
Cash and balances at central banks | | 43,537 | | 26,395 | |
Financial assets at fair value through profit or loss: | | | |
–Derivative financial instruments | 11 | 3,451 | | 3,363 | |
–Other financial assets at fair value through profit or loss | 12 | 834 | | 973 | |
Financial assets at amortised cost: | | | |
–Loans and advances to customers | 13 | 212,178 | | 207,498 | |
–Loans and advances to banks | | 2,004 | | 2,583 | |
–Reverse repurchase agreements – non trading | 16 | 19,599 | | 23,636 | |
–Other financial assets at amortised cost | 17 | 1,163 | | 7,056 | |
Financial assets at fair value through other comprehensive income | 18 | 8,950 | | 9,747 | |
Interests in other entities | 19 | 172 | | 117 | |
Intangible assets | 20 | 1,649 | | 1,776 | |
Property, plant and equipment | 21 | 1,740 | | 1,971 | |
Current tax assets | | 271 | | 186 | |
Retirement benefit assets | 30 | 496 | | 670 | |
Other assets | | 3,020 | | 2,517 | |
Total assets | | 299,064 | | 288,488 | |
Liabilities | | | |
Financial liabilities at fair value through profit or loss: | | | |
–Derivative financial instruments | 11 | 1,920 | | 1,709 | |
–Other financial liabilities at fair value through profit or loss | 22 | 1,434 | | 1,713 | |
Financial liabilities at amortised cost: | | | |
– Deposits by customers | 23 | 193,088 | | 179,006 | |
–Deposits by banks | 24 | 20,973 | | 14,359 | |
–Repurchase agreements – non trading | 25 | 15,848 | | 18,286 | |
–Debt securities in issue | 26 | 43,679 | | 50,171 | |
–Subordinated liabilities | 27 | 2,556 | | 3,528 | |
Other liabilities | 28 | 2,343 | | 2,373 | |
Provisions | 29 | 468 | | 577 | |
Deferred tax liabilities | | 107 | | 145 | |
Retirement benefit obligations | 30 | 403 | | 280 | |
Total liabilities | | 282,819 | | 272,147 | |
Equity | | | |
Share capital | 32 | 7,060 | | 7,060 | |
Other equity instruments | 33 | 2,241 | | 2,241 | |
Retained earnings | | 6,030 | | 6,251 | |
Other reserves | | 517 | | 394 | |
Total shareholders’ equity | | 15,848 | | 15,946 | |
Non-controlling interests | 34 | 397 | | 395 | |
Total equity | | 16,245 | | 16,341 | |
Total liabilities and equity | | 299,064 | | 288,488 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | | |
Nathan Bostock | Madhukar Dayal |
Chief Executive Officer | Chief Financial Officer |
Company Registered Number: 08700698 | |
Santander UK Group Holdings plc207
| | | | | | | | |
| | |
Annual Report 2020 | Financial statements
| | |
| | | | | | | |
Consolidated Cash Flow Statement
For the years ended 31 December
| | | | | | | | | | | | | | | | | |
| | | | |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Cash flows from operating activities | | | |
Profit after tax | 438 | | 709 | | 1,164 | |
| | | |
Adjustments for: | | | |
| | | | |
| | | | |
| | | | |
Non-cash items included in profit: | | | |
– Depreciation and amortisation | 570 | | 545 | | 378 | |
– Provisions for other liabilities and charges | 274 | | 443 | | 260 | |
– Impairment losses | 672 | | 238 | | 189 | |
– Corporation tax charge | 114 | | 272 | | 403 | |
– Other non-cash items | 93 | | (345) | | (68) | |
– Pension charge/(credit) for defined benefit pension schemes | 38 | | 35 | | 81 | |
| 1,761 | | 1,188 | | 1,243 | |
Net change in operating assets and liabilities: | | | |
– Cash and balances at central banks | (152) | | (84) | | (161) | |
– Trading assets | 0 | | 0 | | 24,528 | |
– Derivative assets | (88) | | 1,959 | | 14,621 | |
– Other financial assets at fair value through profit or loss | 1,561 | | 1,637 | | (3,467) | |
– Loans and advances to banks and customers | (5,421) | | (605) | | (8,221) | |
– Other assets | (343) | | 240 | | 203 | |
– Deposits by banks and customers | 20,812 | | 2,225 | | 1,845 | |
– Derivative liabilities | 211 | | 115 | | (16,018) | |
– Trading liabilities | 0 | | 0 | | (31,101) | |
– Other financial liabilities at fair value through profit or loss | (1,618) | | (959) | | 4,480 | |
– Debt securities in issue | (202) | | (548) | | (2,760) | |
– Other liabilities(1) | (983) | | (600) | | (824) | |
| 13,777 | | 3,380 | | (16,875) | |
Corporation taxes paid | (161) | | (309) | | (445) | |
Effects of exchange rate differences | 366 | | (1,445) | | 1,731 | |
Net cash flows from operating activities | 16,181 | | 3,523 | | (13,182) | |
Cash flows from investing activities | | | |
Investments in other entities | 0 | | 0 | | (66) | |
Purchase of property, plant and equipment and intangible assets | (378) | | (510) | | (699) | |
Proceeds from sale of property, plant and equipment and intangible assets | 166 | | 108 | | 26 | |
Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income | (3,015) | | (5,013) | | (7,002) | |
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income | 9,858 | | 8,300 | | 3,816 | |
Net cash flows from investing activities | 6,631 | | 2,885 | | (3,925) | |
Cash flows from financing activities | | | |
Issue of other equity instruments | 0 | | 500 | | 0 | |
| | | |
Issue of debt securities and subordinated notes | 5,599 | | 4,145 | | 13,329 | |
Issuance costs of debt securities and subordinated notes | (13) | | (15) | | (31) | |
Repayment of debt securities and subordinated notes | (13,287) | | (7,969) | | (6,303) | |
Repurchase of non-controlling interests and other equity instruments | 0 | | (318) | | 0 | |
Dividends paid on ordinary shares | (103) | | (262) | | (1,123) | |
Dividends paid on other equity instruments | (147) | | (142) | | (145) | |
Dividends paid on non-controlling interests | (32) | | (30) | | (40) | |
Net cash flows from financing activities | (7,983) | | (4,091) | | 5,687 | |
Change in cash and cash equivalents | 14,829 | | 2,317 | | (11,420) | |
Cash and cash equivalents at beginning of the year | 33,233 | | 30,969 | | 42,228 | |
Effects of exchange rate changes on cash and cash equivalents | 45 | | (53) | | 161 | |
Cash and cash equivalents at the end of the year | 48,107 | | 33,233 | | 30,969 | |
| | | |
Cash and cash equivalents consist of: | | | |
Cash and balances at central banks | 43,537 | | 26,395 | | 24,180 | |
Less: regulatory minimum cash balances | (871) | | (720) | | (636) | |
| 42,666 | | 25,675 | | 23,544 | |
| | | |
Other cash equivalents | 5,441 | | 7,558 | | 7,425 | |
Cash and cash equivalents at the end of the year | 48,107 | | 33,233 | | 30,969 | |
(1) Total cash outflow for leases was £49m (2019: £59m), including payment of principal amount of £46m (2019: £55m).
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
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208Santander UK Group Holdings plc
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 193 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | | | | | | | | | | |
Consolidated Income Statement
For the years ended 31 December
| | | | | | | | | | | | | | |
| | 2022 | 2021 | 2020 |
| Notes | £m | £m | £m |
Interest and similar income | 3 | 6,822 | | 4,830 | | 5,071 | |
Interest expense and similar charges | 3 | (2,350) | | (833) | | (1,690) | |
Net interest income | | 4,472 | | 3,997 | | 3,381 | |
Fee and commission income | 4 | 836 | | 694 | | 681 | |
Fee and commission expense | 4 | (512) | | (414) | | (363) | |
Net fee and commission income | | 324 | | 280 | | 318 | |
Other operating income | 5 | 210 | | 267 | | 136 | |
Total operating income | | 5,006 | | 4,544 | | 3,835 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | 6 | (2,370) | | (2,540) | | (2,425) | |
Credit impairment (charges)/write-backs | 8 | (321) | | 233 | | (639) | |
Provisions for other liabilities and charges | 8 | (421) | | (379) | | (263) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | | (742) | | (146) | | (902) | |
Profit from continuing operations before tax | | 1,894 | | 1,858 | | 508 | |
Tax on profit from continuing operations | 9 | (471) | | (485) | | (101) | |
Profit from continuing operations after tax | | 1,423 | | 1,373 | | 407 | |
Profit from discontinued operations after tax | 42 | — | | 32 | | 31 | |
Profit after tax | | 1,423 | | 1,405 | | 438 | |
| | | | |
Attributable to: | | | | |
Equity holders of the parent | | 1,406 | | 1,369 | | 402 | |
Non-controlling interests | | 17 | | 36 | | 36 | |
Profit after tax | | 1,423 | | 1,405 | | 438 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 194 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk Reviewreview | | Financial review | | Financial statements | | Shareholder information |
| | | | | | | | Primary financial statements | | | | | |
| | | | | | | | | | | | | |
Consolidated Statement of Comprehensive Income
For the years ended 31 December
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Profit after tax | 1,423 | | 1,405 | | 438 | |
Other comprehensive (expense)/income that may be reclassified to profit or loss subsequently: | | | |
Movement in fair value reserve (debt instruments): | | | |
- Change in fair value | (278) | | (111) | | 114 | |
- Income statement transfers | 247 | | 110 | | (107) | |
- Taxation | 11 | | (2) | | (2) | |
| (20) | | (3) | | 5 | |
Cash flow hedges: | | | |
- Effective portion of changes in fair value | 436 | | (875) | | 974 | |
- Income statement transfers | (2,130) | | 357 | | (803) | |
- Taxation | 468 | | 142 | | (53) | |
| (1,226) | | (376) | | 118 | |
Currency translation on foreign operations | — | | — | | — | |
Net other comprehensive (expense)/income that may be reclassified to profit or loss subsequently | (1,246) | | (379) | | 123 | |
Other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently: | | | |
Pension remeasurement: | | | |
- Change in fair value | (723) | | 1,263 | | (505) | |
- Taxation | 267 | | (419) | | 133 | |
| (456) | | 844 | | (372) | |
Own credit adjustment: | | | |
- Change in fair value | 29 | | — | | (3) | |
- Taxation | (9) | | — | | 0 | |
| 20 | | — | | (3) | |
Net other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently | (436) | | 844 | | (375) | |
Total other comprehensive (expense)/income net of tax | (1,682) | | 465 | | (252) | |
Total comprehensive (expense)/income | (259) | | 1,870 | | 186 | |
| | | |
Attributable to: | | | |
Equity holders of the parent | (276) | | 1,834 | | 152 | |
Non-controlling interests | 17 | | 36 | | 34 | |
Total comprehensive (expense)/income | (259) | | 1,870 | | 186 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 195 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Consolidated Balance Sheet(1)
At 31 December
| | | | | | | | | | | |
| | 2022 | 2021 |
| Notes | £m | £m |
Assets | | | |
Cash and balances at central banks | | 46,635 | | 50,494 | |
Derivative financial instruments | 11 | 2,439 | | 1,720 | |
Other financial assets at fair value through profit or loss | 12 | 434 | | 676 | |
Loans and advances to customers | 13 | 223,840 | | 213,525 | |
Loans and advances to banks | | 1,105 | | 1,420 | |
Reverse repurchase agreements - non trading | 16 | 7,348 | | 12,683 | |
Other financial assets at amortised cost | 17 | 156 | | 506 | |
Macro hedge of interest rate risk | | (2,654) | | 85 | |
Financial assets at fair value through other comprehensive income | 18 | 6,024 | | 5,851 | |
Interests in other entities | 19 | 252 | | 201 | |
Intangible assets | 20 | 1,550 | | 1,545 | |
Property, plant and equipment | 21 | 1,526 | | 1,555 | |
Current tax assets | | 484 | | 351 | |
Retirement benefit assets | 30 | 1,051 | | 1,573 | |
Other assets | | 2,004 | | 1,491 | |
Assets held for sale | 42 | 49 | | — | |
Total assets | | 292,243 | | 293,676 | |
Liabilities | | | |
Derivative financial instruments | 11 | 1,008 | | 1,019 | |
Other financial liabilities at fair value through profit or loss | 22 | 803 | | 803 | |
Deposits by customers | 23 | 197,313 | | 192,914 | |
Deposits by banks | 24 | 28,543 | | 33,862 | |
Repurchase agreements - non trading | 25 | 7,982 | | 11,718 | |
Debt securities in issue | 26 | 36,420 | | 31,580 | |
Subordinated liabilities | 27 | 2,332 | | 2,228 | |
Macro hedge of interest rate risk | | 95 | | 122 | |
Other liabilities | 28 | 2,601 | | 2,076 | |
Provisions | 29 | 380 | | 366 | |
Deferred tax liabilities | | 30 | | 573 | |
Retirement benefit obligations | 30 | 25 | | 37 | |
| | | |
Total liabilities | | 277,532 | | 277,298 | |
Equity | | | |
Share capital | 32 | 7,060 | | 7,060 | |
Other equity instruments | 33 | 2,196 | | 2,191 | |
Retained earnings | | 6,563 | | 6,754 | |
Other reserves | | (1,108) | | 138 | |
Total shareholders’ equity | | 14,711 | | 16,143 | |
Non-controlling interests | 45 | — | | 235 | |
Total equity | | 14,711 | | 16,378 | |
Total liabilities and equity | | 292,243 | | 293,676 | |
(1) For more information on balance sheet amounts restated see Note 44.
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 1 March 2023 and signed on its behalf by:
| | | | | |
Mike Regnier | Madhukar Dayal |
Chief Executive Officer | Chief Financial Officer |
Company Registered Number: 08700698 | |
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 196 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Consolidated Cash Flow Statement(1)
For the years ended 31 December
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Cash flows from operating activities | | | |
Profit before tax | 1,894 | | 1,902 | | 552 | |
| | | |
Adjustments for: | | | |
Non-cash items included in profit: | | | |
– Depreciation and amortisation | 297 | | 506 | | 570 | |
– Provisions for other liabilities and charges | 421 | | 383 | | 274 | |
– Impairment losses | 285 | | (228) | | 672 | |
| | | |
– Other non-cash items | 1,363 | | (244) | | 93 | |
– Pension charge/(credit) for defined benefit pension schemes | 28 | | 38 | | 38 | |
| 2,394 | | 455 | | 1,647 | |
Net change in operating assets and liabilities: | | | |
– Cash and balances at central banks | 274 | | (659) | | (57) | |
– Derivative assets | (719) | | 1,731 | | (88) | |
– Other financial assets at fair value through profit or loss | 1,064 | | 1,143 | | 1,561 | |
– Loans and advances to banks and customers | (10,683) | | (960) | | (5,421) | |
– Reverse repurchase agreements - non trading | 6,818 | | 7,024 | | 3,924 | |
– Other assets | (571) | | 327 | | (343) | |
– Deposits by banks and customers | (1,373) | | 12,747 | | 20,812 | |
– Repurchase agreements - non trading | (4,145) | | (7,550) | | (2,959) | |
– Derivative liabilities | (11) | | (902) | | 211 | |
– Other financial liabilities at fair value through profit or loss | (973) | | (1,109) | | (1,618) | |
– Debt securities in issue | (1,352) | | (330) | | (202) | |
– Other liabilities | (41) | | (608) | | (937) | |
| (11,712) | | 10,854 | | 14,883 | |
Corporation taxes paid | (397) | | (418) | | (161) | |
Effects of exchange rate differences | 2,354 | | (640) | | 366 | |
Net cash flows from operating activities | (5,467) | | 12,153 | | 17,287 | |
Cash flows from investing activities | | | |
| | | |
| | | |
Purchase of property, plant and equipment and intangible assets | (504) | | (615) | | (378) | |
Proceeds from sale of property, plant and equipment and intangible assets | 159 | | 437 | | 166 | |
Purchase of financial assets at amortised cost and financial assets at FVOCI | (2,884) | | (1,256) | | (3,015) | |
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at FVOCI | 3,023 | | 4,509 | | 9,858 | |
Net cash flows from investing activities | (206) | | 3,075 | | 6,631 | |
Cash flows from financing activities | | | |
Issue of other equity instruments | 750 | | 450 | | — | |
| | | |
Issue of debt securities and subordinated notes | 8,683 | | 2,853 | | 5,599 | |
Issuance costs of debt securities and subordinated notes | (16) | | (6) | | (13) | |
Repayment of debt securities and subordinated notes | (4,522) | | (13,728) | | (13,287) | |
Disposal of non-controlling interests | (235) | | (181) | | — | |
Repurchase of other equity instruments | (750) | | (500) | | — | |
Dividends paid on ordinary shares | (1,013) | | (1,346) | | (103) | |
Dividends paid on other equity instruments | (143) | | (143) | | (147) | |
Dividends paid on non-controlling interests | (17) | | (17) | | (32) | |
Principal elements of lease payments | (26) | | (25) | | (46) | |
Net cash flows from financing activities | 2,711 | | (12,643) | | (8,029) | |
Change in cash and cash equivalents | (2,962) | | 2,585 | | 15,889 | |
Cash and cash equivalents at beginning of the year | 51,787 | | 49,221 | | 33,287 | |
Effects of exchange rate changes on cash and cash equivalents | 120 | | (19) | | 45 | |
Cash and cash equivalents at the end of the year | 48,945 | | 51,787 | | 49,221 | |
| | | |
Cash and cash equivalents consist of: | | | |
Cash and balances at central banks | 46,635 | | 50,494 | | 43,537 | |
Less: restricted balances | (2,241) | | (2,515) | | (1,856) | |
| 44,394 | | 47,979 | | 41,681 | |
| | | |
Other cash equivalents: Loans and advances to banks - Non trading | 938 | 1,270 | 1,690 |
Other cash equivalents: Reverse repurchase agreements | 3,613 | 2,538 | 5,850 |
Cash and cash equivalents at the end of the year | 48,945 | 51,787 | 49,221 |
(1) For more information on cash flows and amounts restated see Note 34.
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 197 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Consolidated Statement of Changes in Equity
For the years ended 31 December
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Other reserves | | | Non-controlling interests | |
| Share capital | Other equity instruments | Available for sale(2) | Fair value(2) | Cash flow hedging | Currency translation | Retained earnings | | |
| Total | Total |
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 7,060 | | 2,241 | | 0 | 24 | | 368 | | 2 | | 6,251 | | 15,946 | | 395 | | 16,341 | |
Profit after tax | — | | — | | | — | | — | | — | | 402 | | 402 | | 36 | | 438 | |
Other comprehensive income, net of tax: | | | | | | | | | | |
– Fair value reserve (debt instruments) | — | | — | | | 5 | | — | | — | | — | | 5 | | — | | 5 | |
– Fair value reserve (equity instruments) | — | | — | | | — | | — | | — | | — | | — | | — | | — | |
– Cash flow hedges | — | | — | | | — | | 118 | | — | | — | | 118 | | — | | 118 | |
– Pension remeasurement | — | | — | | | — | | — | | — | | (370) | | (370) | | (2) | | (372) | |
– Own credit adjustment | — | | — | | | — | | — | | — | | (3) | | (3) | | — | | (3) | |
– Currency translation on foreign operations | — | | — | | | — | | — | | 0 | | — | | 0 | | — | | 0 | |
Total comprehensive income | — | | — | | | 5 | | 118 | | 0 | | 29 | | 152 | | 34 | | 186 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Dividends on ordinary shares | — | | — | | | — | | — | | — | | (103) | | (103) | | — | | (103) | |
Dividends on other equity instruments | — | | — | | | — | | — | | — | | (147) | | (147) | | — | | (147) | |
Dividends on non-controlling interests | — | | — | | | — | | — | | — | | — | | — | | (32) | | (32) | |
| | | | | | | | | | |
At 31 December 2020 | 7,060 | | 2,241 | | 0 | 29 | | 486 | | 2 | | 6,030 | | 15,848 | | 397 | | 16,245 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
At 1 January 2019 | 7,060 | | 2,041 | | 0 | 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 of non-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 on non-controlling interests | — | | — | | | — | | — | | — | | — | | — | | (30) | | (30) | |
At 31 December 2019 | 7,060 | | 2,241 | | 0 | 24 | | 368 | | 2 | | 6,251 | | 15,946 | | 395 | | 16,341 | |
| | | | | | | | | | |
At 31 December 2017 | 7,060 | | 2,041 | | 68 | | 0 | 228 | | 5 | | 6,399 | | 15,801 | | 401 | | 16,202 | |
Adoption of IFRS 9(1) | — | | — | | (68) | | 63 | | — | | — | | (187) | | (192) | | — | | (192) | |
At 1 January 2018 | 7,060 | | 2,041 | | 0 | | 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 on non-controlling interests | — | | — | | | — | | — | | — | | — | | — | | (40) | | (40) | |
At 31 December 2018 | 7,060 | | 2,041 | | 0 | 24 | | 251 | | 5 | | 6,439 | | 15,820 | | 400 | | 16,220 | |
(1) 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, partially offset by the recognition of a deferred tax asset of £68m.
(2) Following the adoption of IFRS 9, a fair value reserve was introduced to replace the available-for-sale reserve.
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| | | Other reserves | | | Non-controlling interests | |
| Share capital | Other equity instruments | Fair value | Cash flow hedging | Currency translation | Retained earnings | | |
| Total | Total |
| £m | £m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 7,060 | | 2,191 | | 26 | | 110 | | 2 | | 6,754 | | 16,143 | | 235 | | 16,378 | |
Profit after tax | — | | — | | — | | — | | — | | 1,406 | | 1,406 | | 17 | | 1,423 | |
Other comprehensive (expense)/income, net of tax: | | | | | | | | | |
- Fair value reserve (debt instruments) | — | | — | | (20) | | — | | — | | — | | (20) | | — | | (20) | |
- Cash flow hedges | — | | — | | — | | (1,226) | | — | | — | | (1,226) | | — | | (1,226) | |
- Pension remeasurement | — | | — | | — | | — | | — | | (456) | | (456) | | — | | (456) | |
- Own credit adjustment | — | | — | | — | | — | | — | | 20 | | 20 | | — | | 20 | |
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Total comprehensive income | — | | — | | (20) | | (1,226) | | — | | 970 | | (276) | | 17 | | (259) | |
Issue of other equity instruments | — | | 750 | | — | | — | | — | | — | | 750 | | — | | 750 | |
Disposal of non-controlling interests | — | | — | | — | | — | | — | | — | | — | | (235) | | (235) | |
Repurchase of other equity instruments | — | | (745) | | — | | — | | — | | (5) | | (750) | | — | | (750) | |
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Dividends on ordinary shares | — | | — | | — | | — | | — | | (1,013) | | (1,013) | | — | | (1,013) | |
Dividends on other equity instruments | — | | — | | — | | — | | — | | (143) | | (143) | | — | | (143) | |
Dividends on non-controlling interests | — | | — | | — | | — | | — | | — | | — | | (17) | | (17) | |
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At 31 December 2022 | 7,060 | | 2,196 | | 6 | | (1,116) | | 2 | | 6,563 | | 14,711 | | — | | 14,711 | |
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At 1 January 2021 | 7,060 | | 2,241 | | 29 | | 486 | | 2 | | 6,030 | | 15,848 | | 397 | | 16,245 | |
Profit after tax | — | | — | | — | | — | | — | | 1,369 | | 1,369 | | 36 | | 1,405 | |
Other comprehensive (expense)/income, net of tax: | | | | | | | | | |
- Fair value reserve (debt instruments) | — | | — | | (3) | | — | | — | | — | | (3) | | — | | (3) | |
- Cash flow hedges | — | | — | | — | | (376) | | — | | — | | (376) | | — | | (376) | |
- Pension remeasurement | — | | — | | — | | — | | — | | 844 | | 844 | | — | | 844 | |
Total comprehensive income | — | | — | | (3) | | (376) | | — | | 2,213 | | 1,834 | | 36 | | 1,870 | |
Issue of other equity instruments | — | | 450 | | — | | — | | — | | — | | 450 | | — | | 450 | |
Disposal of non-controlling interests | — | | — | | — | | — | | — | | — | | — | | (181) | | (181) | |
Repurchase of other equity instruments | — | | (500) | | — | | — | | — | | — | | (500) | | — | | (500) | |
Dividends on ordinary shares | — | | — | | — | | — | | — | | (1,346) | | (1,346) | | — | | (1,346) | |
Dividends on other equity instruments | — | | — | | — | | — | | — | | (143) | | (143) | | — | | (143) | |
Dividends on non-controlling interests | — | | — | | — | | — | | — | | — | | — | | (17) | | (17) | |
At 31 December 2021 | 7,060 | | 2,191 | | 26 | | 110 | | 2 | | 6,754 | | 16,143 | | 235 | | 16,378 | |
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At 1 January 2020 | 7,060 | | 2,241 | | 24 | | 368 | | 2 | | 6,251 | | 15,946 | | 395 | | 16,341 | |
Profit after tax | — | | — | | — | | — | | — | | 402 | | 402 | | 36 | | 438 | |
Other comprehensive (expense). income, net of tax: | | | | | | | | | |
- Fair value reserve (debt instruments) | — | | — | | 5 | | — | | — | | — | | 5 | | — | | 5 | |
- Cash flow hedges | — | | — | | — | | 118 | | — | | — | | 118 | | — | | 118 | |
- Pension remeasurement | — | | — | | — | | — | | — | | (370) | | (370) | | (2) | | (372) | |
- Own credit adjustment | — | | — | | — | | — | | — | | (3) | | (3) | | — | | (3) | |
Total comprehensive income | — | | — | | 5 | | 118 | | — | | 29 | | 152 | | 34 | | 186 | |
Dividends on ordinary shares | — | | — | | — | | — | | — | | (103) | | (103) | | — | | (103) | |
Dividends on other equity instruments | — | | — | | — | | — | | — | | (147) | | (147) | | — | | (147) | |
Dividends on non-controlling interests | — | | — | | — | | — | | — | | — | | — | | (32) | | (32) | |
At 31 December 2020 | 7,060 | | 2,241 | | 29 | | 486 | | 2 | | 6,030 | | 15,848 | | 397 | | 16,245 | |
The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.
Santander UK Group Holdings plc209
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Annual Report 2022 | Santander UK Group Holdings plc 198 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Annual Report 2020 | Financial statements
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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 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 number 0870-607-6000.3AN. 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 Companyit controls (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.report.
Compliance with International Financial Reporting Standards (IFRS)
The consolidated financial statements of the Santander UK group and the separate financial statements of the Company comply with international accounting standards in conformity with the requirements of the Companies Act 2006 and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.UK-adopted International Accounting Standards (IAS). The financial statements are also prepared in accordance with International Financial Reporting Standards (IFRSs)IFRS as issued by the International Accounting Standards Board (IASB), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSsIFRS as issued by the IASB for the periods presented.
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 foundhave been included in the Risk review. Those disclosures formreview section of this Annual Report. This information forms an integral part of these financial statements by this cross reference, is marked as audited, and is covered by the Independent auditor's report.
Climate change
Santander UK continues to develop its assessment of the potential impacts that climate change and the transition to a low carbon economy may have on the assets and liabilities recognised and presented in its financial statements.
Santander UK is mindful of its responsibilities as a responsible lender and is focused on ways to meet the objectives of the Paris Agreement on climate change and to support the UK’s transition to a climate-resilient, net zero economy.
Santander UK's current climate change strategy focuses on three main areas to achieve Banco Santander's ambition to reach net zero emissions by 2050:
1. Managing climate risks by integrating climate considerations into risk management frameworks, screening and stress testing our portfolio for climate related financial risks, and setting risk appetites to help steer our portfolio in line with the Paris Agreement,
2. Supporting our customers’ transition by developing products and services that promote a reduction in CO2 emissions, and
3. Reducing emissions in our operations and supply chain by focusing on continuous improvement in our operations, and environmental and energy management systems in accordance with ISO14001 and 15001, promoting responsible procurement practices and employee engagement.
Santander UK's current climate change strategy and its view of the risks associated with climate change and the transition to a low carbon economy are reflected in its critical judgements and accounting estimates, although climate change risk did not have a significant impact at 31 December 2022 and 2021, consistent with management's assessment that climate change and the transition to a low carbon economy are not currently expected to have a meaningful impact on the viability of the Santander UK group in the medium term.
At 31 December 2022 and 2021, management specifically considered the potential impact of climate change and the transition to a low carbon economy on:
–Loans and advances to customers (see Note 13 and the credit risk section of the Risk review). Some climate change risks arise due to the requirements of IFRS 9 and others relate to specific portfolios and sectors: 5 years,For Mortgages in Retail Banking and Commercial Real Estate lending in Corporate & Commercial Banking, the value of property collateral might be affected by physical impacts related to the frequency and scale of extreme weather events, such as flood and subsidence risk, or changing environmental performance standards for property.
–For automotive loans in Consumer Finance, the residual value of automotive vehicles might be impacted by diesel obsolescence and the transition to electric vehicles.
–For corporate lending in Corporate & Commercial Banking, certain sectors give rise to fossil fuel exposures, such as Oil & Gas, Mining & Extraction and Power Generation.
–Goodwill impairment assessment (see Note 20). Estimates underpinning the determination of whether or not goodwill balances are impaired are partly based on forecast business performance beyond the time horizon for management's detailed plans.
Future changes to Santander UK's climate change strategy may impact Santander UK's critical judgements and accounting estimates and result in material changes to financial results and the carrying values of certain assets and liabilities in future reporting periods.
Recent accounting developments
Interest Rate Benchmark ReformDisclosure of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2
In September 2019,February 2021, the IASB issued ‘Interest Rate Benchmark Reform: Amendmentsamended IAS 1 Presentation of Financial Statements to require entities to disclose their material rather than their significant accounting policies. To support this amendment, the IASB also amended IFRS 9, IAS 39 and IFRS 7’.Practice Statement 2 Making Materiality Judgements to provide guidance on how to apply the concept of materiality. The Santander UK group applies IAS 39 hedge accounting so the amendments to IFRS 9 do not apply. The IAS 39 amendments apply to all hedging relationships directly affected by uncertainties related to interbank offered rate (IBOR) reform and must be appliedare effective for annual periods beginning on or after 1 January 2020. Following their endorsement for use2023 with earlier application permitted. The amendments have been applied in the European Union, the Santander UK group adopted the IAS 39 and IFRS 7 amendments in the preparation of thepreparing these financial statements for the year ended 31 December 2019. The exceptions given by the IAS 39 amendments mean that IBOR reform had no impact on hedge relationships for affected hedges.
In August 2020, the IASB issued ‘Interest Rate Benchmark Reform – Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and, IFRS 16’. These amendments applyconsequently, only to changes required by IBOR reform to financial instruments and hedging relationships. The amendments are effective from 1 January 2021 and must be applied retrospectively without restating comparative information. Following their endorsement for use in the European Union and the UK, the Santander UK group has elected to apply the amendments in the preparation of these financial statements. The amendments address thematerial accounting issues for financial instruments when IBOR reformpolicy information is implemented including providing a practical expedient for changes to contractual cash flows, giving relief from specific hedge accounting requirements, and specifying a number of additional disclosures to enable users of financial statements to understand the effect of IBOR reform on an entity’s financial instruments and risk management strategy.
Further details of the impact of these amendments on the financial statements for the year ended 31 December 2020 and the additional disclosures required are provided in Note 43.
Other changes
The Santander UK group adopted IFRS 16 and amendments to IAS 12 in 2019 and adopted IFRS 9 in 2018, with the impact included in the statement of changes in equity for that year end.
disclosed.
Future accounting developments
At 31 December 2020,2022, for the Santander UK group, there were no other 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 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.notes.
210Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 199 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | Risk Review | | Financial review | | Financial statements | | Shareholder information |
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Material accounting policy information
The following material accounting policies have been applied in preparing these financial statements. For material accounting policies which involve the application of judgements or accounting estimates that are determined to be critical to the preparation of these financial statements see 'Critical judgements and accounting estimates'.
Consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by it and its subsidiaries.
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 any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment retained in 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.
Credit protection entities established as part of significant risk transfer (SRT) transactions are not consolidated by the Santander UK group in cases where third party investors have the exposure, or rights, to all of the variability of returns from the performance of the entities.
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 on non-monetary items measured at fair value are recognised in the consolidated income statement except for differences arising on equity securities measured at fair value through other comprehensive income (FVOCI), which are recognised in other comprehensive income.
Revenue recognition
a) Interest income and expense
Interest and similar income comprisescomprise interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI 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 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 3’)(i.e. 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 Review.review.
During Q4 2020, we revised the accounting treatment for certain items of mortgage income. Mortgage account fees, which are normally paid at the end of the mortgage and were previously recognised as received in fee income, are now recognised in interest income as part of the effective interest rate method throughout the life of the mortgage to better reflect the requirements of IFRS. In addition, we no longer accrue interest income relating to the period after mortgages revert to the standard variable rate (or equivalent) beyond the incentive period. This better aligns our policy to current practice. These changes resulted in an increase in net interest income of £44m for 2020. The net impact of these changes is not material and comparatives have not been restated.
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
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Annual Report 2020 | Financial statements
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received from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK group’s branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial products.
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 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 the ex-dividend date for equity securities.
d) Other operating income
Other operating 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 other operating income. Other operating 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 pension schemes (see 'Critical judgements and accounting estimates')
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.
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 each year-end. The expected benefit costs are accrued over the period of employment using an accounting methodology similar to that for the defined benefit pension scheme.
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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 subsidiary (including awards granted under the Long-Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options or awards as they vest.
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Options granted under the Employee Sharesave scheme and awards granted under the Transformation Incentive Plan 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.
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 freerisk-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 freerisk-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 the non-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 (for goodwill see 'Critical judgements and accounting estimates')
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 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 Santander UK and sold, transferred, licensed, rented or exchanged. The value of such intangible assets, where they are available for use, is amortised on a straight-line basis over their useful economic life of three to seven years. Other intangible years and the assets are reviewed annually for impairment indicators and tested for impairment where indicators are present. Other intangible assets that are not yet available for use are tested for impairment annually or more frequently when events or changes in circumstances dictate.
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 and right-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 other operating income. Repairs and renewals are charged to the income statement when the expenditure is incurred.lessee. 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:
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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 |
Operating lease assets - vehicles | 2 to 4 years |
Depreciation is not charged on freehold land and assets under construction. Depreciation onof operating lease assets where the Santander UK group is the lessor is described in 'Leases' below.
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Financial instruments (for impairment of debt instrument financial assets see' Critical judgements and accounting estimates: Credit impairment losses')
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 FVTPL 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 placemarketplace concerned. Regular way purchases of financial assets classified as loans and receivables,advances, and issues of equity or financial liabilities measured at amortised cost are recognised on settlement date;date, being the date when the Santander UK group becomes a party to the contractual terms of the instrument; all other regular way purchases and issues are recognised on trade date.
b) Financial assets and liabilities
i) Classification and subsequent measurement
The Santander UK group classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL.
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 tradingtrading.
–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.
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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 13.12. Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method. When estimates of future cash flows are revised, the carrying amount of the respective financial assets or financial liabilities is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in the income statement.
–FVOCI – Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent SPPI, and that are not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are recognised in OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Other operating 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 ‘Other operating 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.
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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 ‘Other operating income’ line in the income statement.
c) Financial liabilities
Financial liabilities are classified as subsequently measured at amortised cost, except for:
–Financial liabilities at fair value through profit or loss:FVTPL: this classification is applied to derivatives and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or lossFVTPL are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability) and partially in profit or loss (the remaining amount of change in the fair value of the liability)
–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.
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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 outcomesoutcomes.
–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 – creditthe Credit risk management insection of the Risk review) using one or more statistical models. Where we have used internal capital or similar models as the basis for our ECL 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, a write-off is only made when all collection procedures have been exhausted and the security has been sold and/or a claim made on any mortgage indemnity guarantee or other insurance. In the corporate loan portfolio, there may be occasions where a write-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, a write-off is only made when all internal avenues of collecting the debt have been exhausted. 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.
All write-offs are assessed / made on a case-by-case basis, taking account of the exposure at the date of write-off, after accounting for the value from any collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once investigations have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances.
b) –Recoveries
Recoveries of credit impairment lossescharges are not included in the impairment loss allowance but are taken to income and offset against credit impairment losses.charges. Recoveries of credit impairment lossescharges are classified in the income statement as ‘Credit impairment losses’charges’.
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 the Santander UK group 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: an assessment is performed to determine whether the terms of the new agreement are substantially different from the terms of the existing agreement, after considering changes in the cash flows arising from the modified terms and the overall instrument risk profile. Where terms are substantially different, such modifications are treated as a new transaction resulting in derecognition of the original financial asset, and the recognition of a ‘new’ financial asset with 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. Where terms are not substantially different, the carrying value of the financial asset is adjusted to reflect the present value of modified cash flows discounted at the original EIR with any gain or loss arising from modification recognised immediately in the income statement.
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 a case-by-case basis to establish whether or not the financial asset should be derecognised. For IBOR reform see Note 41.
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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 (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 lossescharges 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.
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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 of over-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.contracts. 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).
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 withinin Other operating income.
Offsetting financial assets and liabilities
Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Santander UK group is party to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.
Hedge accounting
The Santander UK group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of its risk management strategies. Derivatives are used to hedge exposures to interest rates, exchange rates and certain indices such as retail price indices.equity price.
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.
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Annual Report 2022 | Santander UK Group Holdings plc 204 |
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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 other operating 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 linestraight-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, foreign currency risk on its fixed rate debt issuances denominated in foreign 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 these risks.
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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. The Santander UK group has also entered into synthetic securitisation arrangements, as part of significant risk transfer (SRT) transactions to reduce its risk-weighted assets, where undertakings have issued credit-linked notes and deposited the funds raised as collateral for credit protection in respect of 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, or in the case of SRT transactions, collateral deposited.
Impairment of non-financial assets (for goodwill see 'Critical judgements and accounting estimates')
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 amountvalue of the asset or cash generating unit with its recoverable amount: the higher of the asset’s or cash-generating unit’s fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at which non-financial assets, including goodwill, are 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 (after making allowance for increases in regulatory capital requirements), including those resulting from its ultimate disposal, at a market-based discount rate on a pre-tax basis. The recoverable amounts of goodwill have been based on value in use calculations.
The carrying values of property, plant and equipment, goodwill and other intangible assets are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss relating to property, plant and equipment may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the property, plant and equipment’s recoverable amount. The carrying amount of the property, plant and equipment will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.
Leases
a) The Santander UK group as lessor (as lessor)
Operating lease assets are recorded at cost and the difference between cost and residual value (RV) is depreciated over the life of the asset after taking into account anticipated residual value (RV).asset. 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 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 assesses whether a contract is or contains a lease at the inception of the contract and recognises a right-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 leases with a term of 12 months or less 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 in 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 in 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 impairment as for owned assets. The obligation to restore the asset is included in Provisions on the balance sheet.
218Santander UK Group Holdings plc
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Income taxes, including deferred taxes
The tax expense represents the sum of the income tax currently payable and deferred income tax.
Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Current taxes associated with the repurchase of equity instruments are reported directly in equity.
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-measurements 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
Following a decision by the IFRS Interpretations Committee in April 2022, Santander UK updated its accounting policy to exclude from cash and cash equivalents Reserves Collateralisation Accounts (RCAs) balances held at the Bank of England relating to Santander UK’s participation in certain payments schemes. Instead, RCAs balances are classified as restricted balances and included within 'change in operating assets' in the cash flow statement. Prior periods have been restated see Note 34.
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks, reverse repurchase agreements and short-term investments in securities. Balances with central banks represent amounts held at the Bank of England as part of the Santander UK group’s liquidity management activities. In addition, itIt includes certain minimum cash balancesratio deposits held for regulatory purposes and reserves collateralised accounts in respect of Santander UK’s participation in certain payments schemes which are required to be maintained with the Bank of England.England and are restricted balances.
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Annual Report 2022 | Santander UK Group Holdings plc 205 |
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Provisions and contingent liabilities (see 'Critical judgements and accounting estimates')
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.
ConductCustomer remediation provisions are made for the estimated cost of making redress payments with respect to the past sales of products, using conclusions such as the number of claims the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main features.
When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.
Loan commitments are measured as the amount of the loss allowance, determined in line with IFRS 9 as set out in the Credit risk section of the 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.
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.
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CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATESCritical judgements and accounting estimates
The preparation of the Consolidated Financial StatementsSantander UK's consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting estimatespolicies that affect the reported amountamounts of assets, and liabilities, at the date of the Consolidated Financial Statements and the reported amount of income and expenses duringexpenses. Due to the reporting period. Management evaluates itsinherent uncertainty in making estimates, actual results reported in future periods may be based on amounts which differ from those estimates. Estimates, judgements and accounting estimates, whichassumptions are continually evaluated and are based on historical experience and on various other factors, including expectations of future events that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions. In preparing the Consolidated Financial Statements,circumstances. There has been no significant judgements have been madechange in the processinherent sensitivity of applying the areas of judgement in the period. Management have considered the impact of developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting policies, other than those involving estimations about credit impairment losses, provisions and contingent liabilities, pensions and goodwill.estimates.
The followingsignificant judgements, apart from those involving estimation, made by management in applying Santander UK's accounting estimates, as well aspolicies in these financial statements (key judgements) and the judgements inherentkey sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within them,the next financial year (key estimates), which together are considered importantcritical to the portrayal of the Santander UK group’s financialUK's results and financial condition because: (i) theyposition, 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.
follows:
a) Credit impairment allowancecharges
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 judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the future financial results and financial condition. The impact of Covid-19the cost of living crisis has increased the uncertainty around ECL impairment calculations and has required management to make additional judgements and accounting estimates that affect the amount of assets and liabilities at the reporting date and the amount of income and expenses in the reporting period. The key additional judgements due to the impact of Covid-19the cost of living crisis mainly reflect the increased uncertainty around forward-looking economic data and the need for additional post modeljudgemental adjustments.
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Key judgements | –Determining an appropriate definition of default |
| –Establishing the criteria for a significant increase in credit risk (SICR) and, for corporate borrowers, internal credit risk rating |
| –Determining the need for any judgemental adjustments |
| –Determining the need to assess corporate Stage 3 exposures individually |
Key areas of judgement in accounting estimates | –Forward-looking multiple economic scenario assumptions |
| –Probability weights assigned to multiple economic scenarios |
The key judgements made by management in applying the ECL impairment methodology are the definition of default, forward-looking economic scenarios, probability weights, SICR thresholds, post model adjustments, internal credit risk rating for corporate borrowers and individually assessed corporate Stage 3 exposures. For more on each of these key judgements including the impact of Covid-19 on them,and estimates, see 'Management judgement'Critical judgements and accounting estimates applied in calculating ECL' in the ‘Credit risk – Santander UK group level – credit risk management’ section of the Risk review.
Sensitivity of ECL allowance
For detailed disclosures, see 'Sensitivity of ECL allowance' in the ‘Credit risk – Santander UK group level – credit risk management’ section of the Risk review.
b) Provisions and contingent liabilities
Significant judgment may be required when accounting | | | | | |
Key judgements | –Determining whether a present obligation exists |
| –Determining the likely outcome of future legal decisions |
Key estimates | –Probability, timing, nature and amount of any outflows that may arise from past events |
Included in Litigation and other regulatory provisions in Note 29 are amounts in respect of management’s best estimates of liability relating to a legal dispute regarding allocation of responsibility for provisions, including in determining whether a present obligation existsspecific PPI portfolio of complaints, and in estimatingPlevin related litigation. Note 31 provides disclosure relating to ongoing factual issues and reviews that could impact the probabilitytiming and amount of any outflows.
Note 31 includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions.
These judgmentsjudgements 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 relatingoutflows, or to provisions and contingent liabilities are set out below.calculate any resulting sensitivities. For more details,on these key judgements and estimates, see Notes 29 and 31.
Included in Regulatory and other provisions in Note 29 is 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. Note 31 provides disclosure relating to ongoing factual issues and reviews that could impact the timing and amount of any outflows.In addition, Note 31 includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions, as well as an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. It also includes disclosure relating to certain leases in which current and former Santander UK group members were the lessor that are currently under review by HMRC in connection with claims for tax allowances. | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 206 |
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c) PensionsDefined benefit pension schemes
The Santander UK group operates a number of defined benefit pension schemes as described in Note 30 and estimates their position as described in the accounting policy ‘Pensions and other post retirement benefits’benefits’.
Key areas | | | | | |
Key judgements | –Setting the criteria for constructing the corporate bond yield curve used to determine the discount rate |
| –Determining the methodology for setting the inflation assumption |
Key estimates | –Discount rate applied to future cash flows |
| –Rate of price inflation |
| –Expected lifetime of the schemes' members |
| –Valuation of pension fund assets whose values are not based on market observable data |
For more on each of judgement in accountingthese key judgements and estimates,
Accounting for defined benefit pension schemes requires management to make assumptions principally about the discount rate adopted, but also about price inflation and life expectancy. 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 see Note 30. 30.
Sensitivity of defined benefit pension scheme estimates
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. DetailedFor detailed disclosures, on the actuarial assumption sensitivities of the schemes can be found in thesee ‘Actuarial assumption sensitivities’ sectionin Note 30. The Scheme is invested in certain assets whose values are not based on market observable data, such as investments in private equity funds and property. Due diligence has been conducted to ensure the values obtained in respect of Note 30.these assets are appropriate and represent fair value. Given the nature of these investments, we are unable to prepare sensitivities on how their values could vary as market conditions or other variables change.
d) Goodwill
The carrying amount of goodwill is based on the application of judgements including the basis of goodwill impairment calculation assumptions. Santander UK undertakes an annual assessment to evaluate whether the carrying valueamount of goodwill is impaired, carrying out this assessment more frequently if reviews identify indicators of impairment or when events or changes in circumstances dictate.
Estimates include the determination of the carrying value of the Personal Financial Services Cash Generating Unit based on an allocation of regulatory capital, forecasts used for determining cash flows for Cash Generating Units and discount rates which factor in risk-free rates and applicable risk premiums, which are variables subject to fluctuations in external market rates and economic conditions beyond management’s control. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and is subject to potential change over time. | | | | | |
Key judgements: | –Determining the basis of goodwill impairment testing methodology, including the need for planning assumptions and internal capital allocations |
Key estimates: | –Forecast cash flows for cash generating units, including estimated allocations of regulatory capital |
| –Growth rate beyond initial cash flow projections |
| –Discount rates which factor in risk-free rates and applicable risk premiums |
| All of these variables are subject to fluctuations in external market rates and economic conditions beyond management’s control |
For more on each of these assumptions, including changes in the assumptions that would trigger an impairment,key judgements and estimates, see Note 20.
Sensitivity of goodwill
For detailed disclosures, see ‘Sensitivities of key assumptions in calculating VIU’ in Note 20.
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Annual Report 2022 | Santander UK Group Holdings plc 207 |
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2. SEGMENTS
Santander UK’s principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of four segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies.
–Retail Banking offers a wide rangeconsists of productstwo business units, Homes and financialEveryday Banking. Homes provides prime UK mortgage lending to owner occupiers and buy-to-let landlords with small portfolios. Everyday Banking provides banking services and unsecured lending to individuals and small businesses as well alongside wealth management for high-net-worth clients.
–Consumer Finance provides prime auto consumer financing for individuals, businesses, and automotive distribution networks.
–Corporate & Commercial Banking provides banking products and services to SMEs, mid-sized and larger corporates, typically with annual turnovers of between £2m and £500m as well as to Local Authorities and Housing Associations.
–Corporate Centre provides treasury services for asset and liability management of our balance sheet, as well as management of non-core and legacy portfolios.
Retail Banking delivers products through our omni-channel presence comprising branches, ATMs, telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with simple banking needs and Santander Consumer Finance predominantlybusiness is primarily introduced by car dealerships acting as our intermediary along with a vehicle finance business.
–small amount of new business introduced via digital channels. Corporate &and Commercial Banking offers a wide range of financial services and solutions to more complex businesses across multiple sectors, typically with annual turnovers of between £2m and £500m. Service andBanking expertise areis provided by relationship managers, product specialists and through digital and telephony channels, and cover clients’clients' needs both in the UK and overseas.
– In addition, Corporate &and Investment Banking (CIB) provided services to corporate clients with an annual turnover of £500m and above. Santander UK transferred a significant part of the 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 supportbusiness to the restLondon branch of Banco Santander UK’sSA under a part VII banking business transfer scheme which completed on 11 October 2021. The residual parts of the business were wound down or transferred to other segments.
–Corporate Centre mainly includes the treasury,In December 2022, we transferred £1.5bn (2021: £2.3bn; 2020: £3.2bn) of social housing loans, and £0.4bn of non-core corporate and legacy portfolios, as well as the 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 allocatedLiabilities (2021: £0.9bn; 2020: £nil) to the three business segments. The non-core corporate and legacy portfolios are being run-down and/or managed for value.
The segmental basis of presentation in this Annual Report has changed following a management review of our structure. As a result, customer assets of £2.0bn and customer deposits of £3.1bn have been transferred from Business Banking (in Retail Banking) to CCB non-core corporate mortgages of £0.4bn have been transferredsegment from Corporate Centre to CCB,reflect the way these assets are managed, and a number of smaller business lines have been transferred from CIB to Corporate Centre.restated comparatives accordingly. This resulted in an increase in profit before tax in Retail BankingCCB of £18m (2019:£2.9m (2021: decrease of £36m), a decrease in CCB of £9m (2019: increase of £24m), a decrease in CIB of £10m (2019:£2.7m; 2020: decrease of £1m),£6.3m) and an increase of £1mequal but opposite impact in Corporate Centre (2019: increase of £13m). The net impact for Santander UK was nil.Centre.
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.
Results by segment
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| Retail Banking | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | Total |
2020 | £m | £m | £m | £m | £m |
Net interest income/(expense) | 3,105 | | 364 | | 55 | | (87) | | 3,437 | |
Non-interest income | 375 | | 93 | | 68 | | (15) | | 521 | |
Total operating income/(expense) | 3,480 | | 457 | | 123 | | (102) | | 3,958 | |
Operating expenses before credit impairment losses, provisions and charges | (1,913) | | (316) | | (114) | | (144) | | (2,487) | |
Credit impairment losses | (308) | | (294) | | (7) | | (36) | | (645) | |
Provisions for other liabilities and (charges)/release | (175) | | (12) | | (10) | | (77) | | (274) | |
Total operating credit impairment losses, provisions and charges | (483) | | (306) | | (17) | | (113) | | (919) | |
Profit/(loss) before tax | 1,084 | | (165) | | (8) | | (359) | | 552 | |
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Revenue from external customers | 4,175 | | 549 | | 123 | | (889) | | 3,958 | |
Inter-segment revenue | (695) | | (92) | | 0 | | 787 | | 0 | |
Total operating income/(expense) | 3,480 | | 457 | | 123 | | (102) | | 3,958 | |
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Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) | | | | | |
–Current account and debit card fees | 441 | | 41 | | 10 | | 0 | | 492 | |
–Insurance, protection and investments | 65 | | 0 | | 0 | | 0 | | 65 | |
–Credit cards | 67 | | 0 | | 0 | | 0 | | 67 | |
–Non-banking and other fees(2) | 15 | | 47 | | 66 | | 4 | | 132 | |
Total fee and commission income | 588 | | 88 | | 76 | | 4 | | 756 | |
Fee and commission expense | (335) | | (19) | | (10) | | (9) | | (373) | |
Net fee and commission income/(expense) | 253 | | 69 | | 66 | | (5) | | 383 | |
| | | | | |
| | | | | |
Customer loans | 186,476 | | 17,626 | | 2,784 | | 3,483 | | 210,369 | |
Total assets(3) | 195,142 | | 17,626 | | 2,784 | | 83,512 | | 299,064 | |
Customer deposits | 152,167 | | 24,985 | | 6,506 | | 8,074 | | 191,732 | |
Total liabilities | 152,715 | | 25,011 | | 6,517 | | 98,576 | | 282,819 | |
| | | | | |
Average number of full-time equivalent staff | 19,151 | | 2,092 | | 716 | | 180 | | 22,139 | |
For the years ended 31 December
| | | | | | | | | | | | | | | | | | |
| Retail Banking | Consumer Finance | Corporate & Commercial Banking | | Corporate Centre | Total |
2022 | £m | £m | £m | | £m | £m |
Net interest income | 3,689 | | 180 | | 580 | | | 23 | | 4,472 | |
Non-interest income / (expense) | 197 | | 195 | | 146 | | | (4) | | 534 | |
Total operating income | 3,886 | | 375 | | 726 | | | 19 | | 5,006 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (1,683) | | (144) | | (342) | | | (201) | | (2,370) | |
Credit impairment (charges)/write-backs | (263) | | (27) | | (31) | | | — | | (321) | |
Provisions for other liabilities and charges | (395) | | (6) | | (8) | | | (12) | | (421) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | (658) | | (33) | | (39) | | | (12) | | (742) | |
Profit/(loss) from continuing operations before tax | 1,545 | | 198 | | 345 | | | (194) | | 1,894 | |
| | | | | | |
Revenue from external customers | 4,153 | | 513 | | 732 | | | (392) | | 5,006 | |
Inter-segment revenue | (267) | | (138) | | (6) | | | 411 | | — | |
Total operating income | 3,886 | | 375 | | 726 | | | 19 | | 5,006 | |
| | | | | | |
Revenue from external customers includes the following fee and commission income:(1) | | | | | | |
–Current account and debit card fees | 502 | | — | | 60 | | | — | | 562 | |
–Insurance, protection and investments | 78 | | — | | — | | | — | | 78 | |
–Credit cards | 95 | | — | | — | | | — | | 95 | |
–Non-banking and other fees(2) | 2 | | 20 | | 77 | | | 2 | | 101 | |
Total fee and commission income | 677 | | 20 | | 137 | | | 2 | | 836 | |
Fee and commission expense | (483) | | (5) | | (18) | | | (6) | | (512) | |
Net fee and commission income/(expense) | 194 | | 15 | | 119 | | | (4) | | 324 | |
| | | | | | |
Customer loans | 194,661 | | 5,384 | | 18,518 | | | 1,141 | | 219,704 | |
Total assets(3) | 203,697 | | 10,371 | | 18,518 | | | 59,657 | | 292,243 | |
Of which assets held for sale | — | | — | | — | | | 49 | | 49 | |
Customer deposits | 161,748 | | — | | 24,798 | | | 9,930 | | 196,476 | |
Total liabilities | 161,821 | | 1,223 | | 24,473 | | | 90,015 | | 277,532 | |
| | | | | | |
Average number of full-time equivalent staff | 15,212 | 531 | 2,336 | | 194 | 18,273 |
(1)The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2)Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)Includes customer loans, net of credit impairment losscharge allowances.
Santander UK Group Holdings plc221
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Annual Report 2022 | Santander UK Group Holdings plc 208 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
| | | | | | | | | | | | | |
| | |
Annual Report 2020 | Financial statements
| | |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| Retail Banking | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | Total |
2019 | £m | £m | £m | £m | £m |
Net interest income/(expense) | 2,827 | | 422 | | 62 | | (16) | | 3,295 | |
Non-interest income | 691 | | 109 | | 70 | | 5 | | 875 | |
Total operating income/(expense) | 3,518 | | 531 | | 132 | | (11) | | 4,170 | |
Operating expenses before credit impairment losses, provisions and charges | (1,980) | | (324) | | (130) | | (92) | | (2,526) | |
Credit impairment (losses)/releases | (156) | | (45) | | (22) | | 3 | | (220) | |
Provisions for other liabilities and charges | (290) | | (22) | | (16) | | (115) | | (443) | |
Total operating credit impairment losses, provisions and charges | (446) | | (67) | | (38) | | (112) | | (663) | |
Profit/(loss) before tax | 1,092 | | 140 | | (36) | | (215) | | 981 | |
| | | | | |
Revenue from external customers | 4,255 | | 633 | | 138 | | (856) | | 4,170 | |
Inter-segment revenue | (737) | | (102) | | (6) | | 845 | | 0 | |
Total operating income/(expense) | 3,518 | | 531 | | 132 | | (11) | | 4,170 | |
| | | | | |
Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) | | | | | |
–Current account and debit card fees | 696 | | 49 | | 13 | | 0 | | 758 | |
–Insurance, protection and investments | 76 | | 0 | | 0 | | 1 | | 77 | |
–Credit cards | 86 | | 0 | | 0 | | 0 | | 86 | |
–Non-banking and other fees(2) | 61 | | 58 | | 67 | | 10 | | 196 | |
Total fee and commission income | 919 | | 107 | | 80 | | 11 | | 1,117 | |
Fee and commission expense | (373) | | (23) | | (17) | | (15) | | (428) | |
Net fee and commission income/(expense) | 546 | | 84 | | 63 | | (4) | | 689 | |
| | | | | |
| | | | | |
Customer loans | 178,762 | | 18,391 | | 4,041 | | 4,104 | | 205,298 | |
Total assets(3) | 185,920 | | 18,391 | | 4,046 | | 80,131 | | 288,488 | |
Customer deposits | 142,735 | | 20,546 | | 6,102 | | 8,438 | | 177,821 | |
Total liabilities | 143,602 | | 20,572 | | 6,233 | | 101,740 | | 272,147 | |
| | | | | |
Average number of full-time equivalent staff | 20,594 | | 2,151 | | 804 | | 157 | | 23,706 | |
| | | | | |
2018 | | | | | |
Net interest income | 3,076 | | 470 | | 69 | | (9) | | 3,606 | |
Non-interest income | 632 | | 115 | | 132 | | 58 | | 937 | |
Total operating income | 3,708 | | 585 | | 201 | | 49 | | 4,543 | |
Operating expenses before credit impairment losses, provisions and charges | (1,914) | | (318) | | (203) | | (128) | | (2,563) | |
Credit impairment (losses)/releases | (135) | | (8) | | (14) | | 4 | | (153) | |
Provisions for other liabilities and charges | (228) | | (16) | | (8) | | (8) | | (260) | |
Total operating credit impairment losses, provisions and (charges)/releases | (363) | | (24) | | (22) | | (4) | | (413) | |
Profit/(loss) before tax | 1,431 | | 243 | | (24) | | (83) | | 1,567 | |
| | | | | |
Revenue from external customers | 4,361 | | 750 | | 245 | | (813) | | 4,543 | |
Inter-segment revenue | (653) | | (165) | | (44) | | 862 | | 0 | |
Total operating income | 3,708 | | 585 | | 201 | | 49 | | 4,543 | |
| | | | | |
Revenue from external customers includes the following fee and commission income disaggregated by income type:(1) | | | | | |
–Current account and debit card fees | 690 | | 49 | | 14 | | 0 | | 753 | |
–Insurance, protection and investments | 105 | | 0 | | 0 | | 0 | | 105 | |
–Credit card fees | 85 | | 0 | | 0 | | 0 | | 85 | |
–Non-banking and other fees(2) | 76 | | 65 | | 81 | | 5 | | 227 | |
Total fee and commission income | 956 | | 114 | | 95 | | 5 | | 1,170 | |
Fee and commission expense | (382) | | (25) | | (14) | | 0 | | (421) | |
Net fee and commission income | 574 | | 89 | | 81 | | 5 | | 749 | |
| | | | | |
Customer loans | 171,134 | | 19,858 | | 4,543 | | 4,334 | | 199,869 | |
Total assets(3) | 177,959 | | 19,858 | | 3,244 | | 88,320 | | 289,381 | |
Customer deposits | 139,976 | | 19,695 | | 4,853 | | 7,607 | | 172,131 | |
Total liabilities | 140,750 | | 19,723 | | 4,400 | | 108,288 | | 273,161 | |
| | | | | |
Average number of full-time equivalent staff | 20,964 | | 2,102 | | 985 | | 159 | | 24,210 | |
| | | | | | | | | | | | | | | | | | | | |
| Retail Banking | Consumer Finance | Corporate & Commercial Banking | Corporate & Investment Banking | Corporate Centre | Total |
2021 | £m | £m | £m | £m | £m | £m |
Net interest income/(expense) | 3,374 | | 233 | | 397 | | — | | (7) | | 3,997 | |
Non-interest income | 201 | | 178 | | 112 | | — | | 56 | | 547 | |
Total operating income | 3,575 | | 411 | | 509 | | — | | 49 | | 4,544 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (1,703) | | (163) | | (365) | | — | | (309) | | (2,540) | |
Credit impairment (charges)/write-backs | 98 | | 33 | | 90 | | — | | 12 | | 233 | |
Provisions for other liabilities and charges | (187) | | 4 | | (34) | | — | | (162) | | (379) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | (89) | | 37 | | 56 | | — | | (150) | | (146) | |
Profit/(loss) from continuing operations before tax | 1,783 | | 285 | | 200 | | — | | (410) | | 1,858 | |
| | | | | | |
Revenue from external customers | 4,061 | | 489 | | 619 | | — | | (625) | | 4,544 | |
Inter-segment revenue | (486) | | (78) | | (110) | | — | | 674 | | — | |
Total operating income/(expense) | 3,575 | | 411 | | 509 | | — | | 49 | | 4,544 | |
| | | | | | |
Revenue from external customers includes the following fee and commission income:(1) | | | | | | |
–Current account and debit card fees | 428 | | — | | 50 | | — | | — | | 478 | |
–Insurance, protection and investments | 67 | | — | | — | | — | | — | | 67 | |
–Credit cards | 73 | | — | | — | | — | | — | | 73 | |
–Non-banking and other fees(2) | 2 | | 10 | | 62 | | — | | 2 | | 76 | |
Total fee and commission income | 570 | | 10 | | 112 | | — | | 2 | | 694 | |
Fee and commission expense | (384) | | — | | (22) | | — | | (8) | | (414) | |
Net fee and commission income | 186 | | 10 | | 90 | | — | | (6) | | 280 | |
| | | | | | |
Customer loans | 185,608 | | 4,984 | | 19,282 | | — | | 742 | | 210,616 | |
Total assets(3) | 193,214 | | 8,873 | | 19,281 | | — | | 72,308 | | 293,676 | |
Customer deposits | 156,991 | | — | | 26,466 | | — | | 8,719 | | 192,176 | |
Total liabilities | 157,622 | | 1,173 | | 26,513 | | — | | 91,990 | | 277,298 | |
| | | | | | |
Average number of full-time equivalent staff | 16,149 | | 670 | | 2,281 | | 528 | | 216 | | 19,844 | |
| | | | | | |
2020 | | | | | | |
Net interest income | 2,758 | | 264 | | 355 | | — | | 4 | | 3,381 | |
Non-interest income | 245 | | 127 | | 96 | | — | | (14) | | 454 | |
Total operating income | 3,003 | | 391 | | 451 | | — | | (10) | | 3,835 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | (1,792) | | (166) | | (324) | | — | | (143) | | (2,425) | |
Credit impairment (charges)/write-backs | (264) | | (44) | | (294) | | — | | (37) | | (639) | |
Provisions for other liabilities and charges | (160) | | (8) | | (6) | | — | | (89) | | (263) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | (424) | | (52) | | (300) | | — | | (126) | | (902) | |
Profit/(loss) from continuing operations before tax | 787 | | 173 | | (173) | | — | | (279) | | 508 | |
| | | | | | |
Revenue from external customers | 3,685 | | 501 | | 608 | | — | | (959) | | 3,835 | |
Inter-segment revenue | (682) | | (110) | | (157) | | — | | 949 | | — | |
Total operating income | 3,003 | | 391 | | 451 | | — | | (10) | | 3,835 | |
| | | | | | |
Revenue from external customers includes the following fee and commission income:(1) | | | | | | |
–Current account and debit card fees | 442 | | — | | 42 | | — | | — | | 484 | |
–Insurance, protection and investments | 65 | | — | | — | | — | | — | | 65 | |
–Credit card fees | 66 | | — | | — | | — | | — | | 66 | |
–Non-banking and other fees(2) | 3 | | 10 | | 50 | | — | | 3 | | 66 | |
Total fee and commission income | 576 | | 10 | | 92 | | — | | 3 | | 681 | |
Fee and commission expense | (337) | | — | | (22) | | — | | (4) | | (363) | |
Net fee and commission income | 239 | | 10 | | 70 | | — | | (1) | | 318 | |
| | | | | | |
Customer loans | 178,451 | | 8,025 | | 20,821 | | 2,784 | | 288 | | 210,369 | |
Total assets(3) | 186,226 | | 11,143 | | 20,820 | | 2,784 | | 78,091 | | 299,064 | |
Customer deposits | 152,167 | | — | | 24,985 | | 6,506 | | 8,074 | | 191,732 | |
Total liabilities | 152,687 | | 2,397 | | 25,011 | | 6,517 | | 96,207 | | 282,819 | |
| | | | | | |
Average number of full-time equivalent staff | 18,198 | | 640 | | 2,405 | | 716 | | 180 | | 22,139 | |
(1)The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2)Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)Includes customer loans, net of credit impairment losscharge allowances.
(4)CIB results presented as discontinued operations. See Note42.
The main differences between Customer loans and Loans and advances to customers (Note 13) are balances in Corporate Centre held for liquidity purposes. The main differences between Customer deposits and Deposits by customers (Note 23) are equity-linked deposits and intercompany deposits.
Geographical information is not provided, as substantially all of Santander UK’s activities are in the UK.
222Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 209 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | Risk Review | | Financial review | | Financial statements | | Shareholder information |
| | | | | | | | Notes to the financial statements | | | | |
3. NET INTEREST INCOME
| | | Group | | Group |
| | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 |
| | £m | £m | | £m | £m |
Interest and similar income: | Interest and similar income: | | | Interest and similar income: | | |
Loans and advances to customers(3) | Loans and advances to customers(3) | 4,847 | | 5,237 | | 5,459 | | Loans and advances to customers(3) | 5,854 | | 4,685 | | 4,772 | |
Loans and advances to banks | Loans and advances to banks | 62 | | 182 | | 207 | | Loans and advances to banks | 651 | | 54 | | 62 | |
Reverse repurchase agreements – non trading | Reverse repurchase agreements – non trading | 118 | | 244 | | 124 | | Reverse repurchase agreements – non trading | 149 | | 35 | | 118 | |
Other | Other | 119 | | 309 | | 282 | | Other | 168 | | 56 | | 119 | |
Total interest and similar income(1) | Total interest and similar income(1) | 5,146 | | 5,972 | | 6,072 | | Total interest and similar income(1) | 6,822 | | 4,830 | | 5,071 | |
Interest expense and similar charges: | Interest expense and similar charges: | | | Interest expense and similar charges: | | |
Deposits by customers | Deposits by customers | (884) | | (1,331) | | (1,224) | | Deposits by customers | (827) | | (331) | | (884) | |
Deposits by banks | Deposits by banks | (47) | | (135) | | (120) | | Deposits by banks | (496) | | (23) | | (28) | |
Repurchase agreements – non trading | Repurchase agreements – non trading | (43) | | (126) | | (37) | | Repurchase agreements – non trading | (120) | | (3) | | (43) | |
Debt securities in issue | Debt securities in issue | (614) | | (938) | | (936) | | Debt securities in issue | (795) | | (372) | | (614) | |
Subordinated liabilities | Subordinated liabilities | (111) | | (137) | | (141) | | Subordinated liabilities | (108) | | (92) | | (111) | |
Other | Other | (10) | | (10) | | (8) | | Other | (4) | | (12) | | (10) | |
Total interest expense and similar charges(2) | Total interest expense and similar charges(2) | (1,709) | | (2,677) | | (2,466) | | Total interest expense and similar charges(2) | (2,350) | | (833) | | (1,690) | |
Net interest income | Net interest income | 3,437 | | 3,295 | | 3,606 | | Net interest income | 4,472 | | 3,997 | | 3,381 | |
(1)This includes £38m (2019: £155m)Includes £87m (2021: £22m, 2020: £38m) of interest income on financial assets at fair value through other comprehensive income.FVOCI.
(2)This includes £451m (2019 : £310m)Includes £6m (2021: £317m, 2020: £451m) of interest expense on derivatives hedging debt issuances and £3m (2019:(2021: £4m3m, )2020, £3m) of interest expense on lease liabilities.
(3) During 2020, we revised the accounting treatment for certain items of mortgage income to better align our policy to current practice. The net impact of these changes is not material and comparatives have not been restated. Further details are provided in Note 1 Accounting Policies.
4. NET FEE AND COMMISSION INCOME
| | | Group | | Group |
| | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 |
| | £m | £m | | £m | £m |
Fee and commission income: | Fee and commission income: | | | Fee and commission income: | | |
Current account and debit card fees | Current account and debit card fees | 492 | | 758 | | 753 | | Current account and debit card fees | 562 | | 478 | | 484 | |
Insurance, protection and investments | Insurance, protection and investments | 65 | | 77 | | 105 | | Insurance, protection and investments | 78 | | 67 | | 65 | |
Credit cards | Credit cards | 67 | | 86 | | 85 | | Credit cards | 95 | | 73 | | 66 | |
Non-banking and other fees(1) | Non-banking and other fees(1) | 132 | | 196 | | 227 | | Non-banking and other fees(1) | 101 | | 76 | | 66 | |
Total fee and commission income | Total fee and commission income | 756 | | 1,117 | | 1,170 | | Total fee and commission income | 836 | | 694 | | 681 | |
Total fee and commission expense | Total fee and commission expense | (373) | | (428) | | (421) | | Total fee and commission expense | (512) | | (414) | | (363) | |
Net fee and commission income | Net fee and commission income | 383 | | 689 | | 749 | | Net fee and commission income | 324 | | 280 | | 318 | |
(1) Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
5. OTHER OPERATING INCOME
| | | Group | | Group |
| | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 |
| | £m | £m | | £m | £m |
Net losses on financial instruments designated at fair value through profit or loss | (24) | | (94) | | (85) | | |
Net gains on financial instruments mandatorily at fair value through profit or loss | 64 | | 113 | | 23 | | |
Net gains/(losses) on financial instruments designated at fair value through profit or loss | | Net gains/(losses) on financial instruments designated at fair value through profit or loss | (74) | | (68) | | (26) | |
Net (losses)/gains on financial instruments mandatorily at fair value through profit or loss | | Net (losses)/gains on financial instruments mandatorily at fair value through profit or loss | 84 | | 50 | | 64 | |
Hedge ineffectiveness | Hedge ineffectiveness | 19 | | 8 | | 34 | | Hedge ineffectiveness | 28 | | 8 | | 19 | |
| Net profit on sale of financial assets at fair value through other comprehensive income | Net profit on sale of financial assets at fair value through other comprehensive income | 17 | | 15 | | 19 | | Net profit on sale of financial assets at fair value through other comprehensive income | — | | 6 | | 17 | |
Income from operating lease assets | Income from operating lease assets | 126 | | 124 | | 86 | | Income from operating lease assets | 129 | | 136 | | 126 | |
Other | Other | (64) | | 20 | | 111 | | Other | 43 | | 135 | | (64) | |
| | 138 | | 186 | | 188 | | | 210 | | 267 | | 136 | |
Following the implementation of our ring-fencing plans in 2018, assetsAssets and liabilities held at fair value through profit or loss,FVTPL, including derivatives, are predominantlymainly 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 gains on financial instruments mandatorily at fair value through profit or loss'FVTPL' includes fair value gains of £89m (2019:£14m (2021: losses of £42m, 2018:£15m, 2020: gains of £22m)£89m) 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 losses of £88m (2019:£14m (2021: gains of £43m, 2018:£15m, 2020: losses of £21m)£88m). 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 (2019: £1m, 2018:of £nil (2021: £nil , 2020: £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.
Santander UK Group Holdings plc223
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| | |
Annual Report 2020 | Financial statements
| | |
| | |
Exchange rate differences recognised in the Consolidated Income Statement on items not at fair value through profit or lossFVTPL were £719m£2,147m expense (2019: £1,102m(2021: £215m income, 2018: £689m2020: £719m expense) and are presented in the line ‘Other'. These are principally offset by related releases from the cash flow hedge reserve of £803m£2,130m income (2019: £1,021m(2021: £357m expense, 2018: £751m2020: £803m income) as set out in the Consolidated Statement of Comprehensive Income, which are also presented in 'Other’. Exchange rate differences on items measured at fair value through profit or lossFVTPL are included in the line items relating to changes in fair value.
In 2020,2022, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of its ongoing liability management exercises, resulting in a loss of £24m.
6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES
| | | | | | | | | | | |
| | | Group |
| | | |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Staff costs: | | | |
Wages and salaries | 845 | | 866 | | 905 | |
Performance-related payments | 99 | | 160 | | 160 | |
Social security costs | 102 | | 112 | | 111 | |
Pensions costs: – defined contribution plans | 67 | | 67 | | 66 | |
–defined benefit plans | 38 | | 35 | | 81 | |
Other share-based payments | 4 | | 7 | | 3 | |
Other personnel costs | 34 | | 41 | | 50 | |
| 1,189 | | 1,288 | | 1,376 | |
Other administration expenses | 728 | | 693 | | 809 | |
Depreciation, amortisation and impairment | 570 | | 545 | | 378 | |
| 2,487 | | 2,526 | | 2,563 | |
£5m
Staff costs
’Performance-related payments’ include bonuses paid in cash and share awards granted under the Long-Term Incentive Plan and the Deferred shares bonus plan, as described in Note 37. Included in this are equity-settled share-based payments, none (2021 loss 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 2020 | | Costs expected to be recognised in 2021 or later |
| Arising from awards in current year | Arising from awards in prior year | Total | | Arising from awards in current year | Arising from awards in prior year | Total |
| £m | £m | £m | | £m | £m | £m |
Cash | 2 | | 7 | | 9 | | | 2 | | 9 | | 11 | |
Shares | 2 | | 6 | | 8 | | | 2 | | 9 | | 11 | |
| 4 | | 13 | | 17 | | | 4 | | 18 | | 22 | |
£1m,
The following table shows the amount2020: loss of bonus awarded to employees for the performance year 2020. 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 |
| 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 |
| £m | £m | | £m | £m | | £m | £m |
Cash award – not deferred | 79 | | 131 | | | 0 | | 0 | | | 79 | | 131 | |
–deferred | 9 | | 10 | | | 11 | | 17 | | | 20 | | 27 | |
Shares award – not deferred | 3 | | 10 | | | 0 | | 0 | | | 3 | | 10 | |
–deferred | 8 | | 9 | | | 11 | | 17 | | | 19 | | 26 | |
Total discretionary bonus | 99 | | 160 | | | 22 | | 34 | | | 121 | | 194 | |
£24m
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 was based on a number of assumptions and the actual impact may be different. This was reflected in the income statement and in the closing net accounting surplus of the Scheme in 2018. The allowance included in the Scheme liabilities at 31 December 2020 increased by £5m (2019: £5m) to £50m (2019: £45m) to reflect the latest assumptions. This change was recognised in other comprehensive income. We work is being undertaken to consider and agree how to implement GMP equalisation.
‘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 37.
The average number of full-time equivalent staff was 22,139 (2019: 23,706, 2018: 24,210).The increase in staff numbers in 2018 reflected Santander UK plc’s acquisition 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)).
224Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 210 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | Risk Review | | Financial review | | Financial statements | | Shareholder information |
| | | | | | | | Notes to the financial statements | | | | |
In 2022, other includes £7m of losses on the sale of property under our transformation programme. In 2021, other includes £73m of property gains from the sale of our London head office and branch properties.
6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT CHARGES, PROVISIONS AND CHARGES
For the years ended 31 December
| | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Staff costs: | | | |
Wages and salaries | 761 | | 759 | | 802 | |
Performance-related payments | 173 | | 184 | | 99 | |
Social security costs | 112 | | 113 | | 102 | |
Pensions costs: – defined contribution plans | 60 | | 65 | | 67 | |
–defined benefit plans | 28 | | 38 | | 38 | |
Other share-based payments | 1 | | 1 | | 4 | |
Other personnel costs | 44 | | 42 | | 34 | |
| 1,179 | | 1,202 | | 1,146 | |
Other administration expenses | 894 | | 831 | | 710 | |
Depreciation, amortisation and impairment | 297 | | 507 | | 569 | |
| 2,370 | | 2,540 | | 2,425 | |
| | | |
Staff costs
’Performance-related payments’ include bonuses paid in cash and share awards granted under the arrangements described in Note 36. Included in this are equity-settled share-based payments, none of which related to option-based schemes. These are disclosed in the table below as ‘Shares awards’. Performance-related payments above include amounts related to deferred performance awards as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Costs recognised in 2022 | | Costs expected to be recognised in 2023 or later |
| Arising from awards in current year | Arising from awards in prior year | Total | | Arising from awards in current year | Arising from awards in prior year | Total |
| £m | £m | £m | | £m | £m | £m |
Cash | 3 | | 5 | | 8 | | | 6 | | 8 | | 14 | |
Shares | 3 | | 5 | | 8 | | | 6 | | 8 | | 14 | |
| 6 | | 10 | | 16 | | | 12 | | 16 | | 28 | |
The following table shows the amount of bonus awarded to employees for the performance year 2022. In the case of deferred cash and shares awards, the final amount paid to an employee is influenced by forfeiture provisions and any performance conditions to which the awards are subject. The deferred shares award amount is based on the fair value of the awards at the date of grant.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses charged in the year | | Expenses deferred to future periods | | Total |
| 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
| £m | £m | | £m | £m | | £m | £m |
Cash award – not deferred | 148 | | 156 | | | — | | — | | | 148 | | 156 | |
–deferred | 8 | | 8 | | | 14 | | 15 | | | 22 | | 23 | |
Shares award – not deferred | 9 | | 12 | | | — | | — | | | 9 | | 12 | |
–deferred | 8 | | 8 | | | 14 | | 14 | | | 22 | | 22 | |
Total discretionary bonus | 173 | | 184 | | | 28 | | 29 | | | 201 | | 213 | |
'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 36.
The average number of full-time equivalent staff was 18,273 (2021: 19,844, 2020: 22,139).
Depreciation, amortisation and impairment
In 2020,2022, depreciation, amortisation and impairment was impacted by operating leaseincluded depreciation of £73m (2021: £81m, 2020: £92m (2019: £103m)) on operating lease assets (where the Santander UK group is the lessor) with a net book valuecarrying amount of £542m£577m at 31 December 2022 (2021: £595m, 2020 (2019: £574m): £542m). It was also impacted byincluded depreciation of £59m (2019: £61m)£19m (2021: £20m, 2020: £59m) on right-of-use assets with a net book valuecarrying amount of £103m£115m at 31 December 2020 (2019: £153m), following the adoption of IFRS 16 on 1 January 2019.2022 (2021: £119m, 2020: £103m).
Other administration expenses
'Other administration expenses' includes £10m21m (2019:(2021: £13m)23m expenses, 2020: £10m) related to short-term leases.
In 2022, 'Depreciation, amortisation and impairment' included an impairment charge of £10m (2021: £88m, 2020: £nil) associated with branch and head office site closures as part of the transformation programme. For more, see Note 21.
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Annual Report 2022 | Santander UK Group Holdings plc 211 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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7. AUDIT AND OTHER SERVICES
| | | Group | | Group |
| | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 |
| | £m | £m | | £m | £m |
Audit fees: | Audit fees: | | | Audit fees: | | |
Fees payable to the Company's auditor and its associates for the audit of the Santander UK group's annual accounts | 10.5 | | 8.5 | | 7.7 | | |
Fees payable to the Company’s auditor and its associates for the audit of the Santander UK group’s annual accounts | | Fees payable to the Company’s auditor and its associates for the audit of the Santander UK group’s annual accounts | 12.8 | | 12.1 | | 10.5 | |
Fees payable to the Company’s auditor and its associates for other services to the Santander UK group: | Fees payable to the Company’s auditor and its associates for other services to the Santander UK group: | | | 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 | –Audit of the Santander UK group’s subsidiaries | 1.8 | | 1.9 | | 1.6 | | –Audit of the Santander UK group’s subsidiaries | 0.8 | | 1.2 | | 1.8 | |
Total audit fees(1) | Total audit fees(1) | 12.3 | | 10.4 | | 9.3 | | Total audit fees(1) | 13.6 | | 13.3 | | 12.3 | |
Non-audit fees: | Non-audit fees: | | | Non-audit fees: | | |
Audit-related assurance services(2) | Audit-related assurance services(2) | 1.7 | | 1.7 | | 2.2 | | Audit-related assurance services(2) | 1.9 | | 1.7 | | 1.7 | |
Other assurance services | Other assurance services | 0.5 | | 0.4 | | 0.1 | | Other assurance services | 0.8 | | 0.5 | | 0.5 | |
Other non-audit services | Other non-audit services | 0 | | 0.2 | | 1.0 | | Other non-audit services | 0.2 | | 0.2 | | — | |
Total non-audit fees | Total non-audit fees | 2.2 | | 2.3 | | 3.3 | | Total non-audit fees | 2.9 | | 2.4 | | 2.2 | |
(1)2020 2022 audit fees included £0.8m (2019: £0.3m) which related to the prior year.
(2) 2020 audit-related assurance services included £ NaN (2019: £NaN)£0.6m (2021: £1.2m, 2020: £0.8m) which related to the prior year.
Audit fees payable for the statutory audit of Santander UK Group Holdings plc were £0.5m (2019: £0.5m, 2018: £0.5m)£0.6m (2021: £0.5m, 2020: £0.5m).
Audit-related assurance services mainly comprisescomprised services performed in connection with review of the interim financial information of the Company and reporting to the Company's UK regulators.
Other assurance services mainly comprised services performed in support of various debt issuance programmes.
Of the total non-audit fees, £1.5m (2021: £1.2m, (2019: £1.6m, 2018: £1.1m)2020: £1.2m) accords with the definition of "Audit Fees"'Audit Fees' per US Securities and Exchange Commission (SEC) guidance, £1.0m (2019: £0.5m, 2018: £1.1m)£1.4m (2021: £1.2m, 2020: £1.0m) accords with the definition of "Audit'Audit related fees"fees' per that guidance and £NaN (2019: £0.2m, 2018: £1.1m)£0.0m (2021: £0.0m, 2020: £0.0m) accords with the definition of "All'All other fees"fees' per that guidance.
In 2020,2022, the Company’s auditors earned no fees (2021: £27,000, 2020: £24,000 fees (2019: 0 fees, 2018: £150,000)fees) payable by entities outside the Santander UK group for the review of the financial position of corporate and other borrowers.
In 2022, the Company's auditors earned £1.6m (2021: £1.4m, 2020: £1.5m), in relation to incremental work undertaken in support of the audit of Banco Santander SA.
8. CREDIT IMPAIRMENT LOSSESCHARGES AND PROVISIONS
| | | | | | | | | | | |
| | | Group |
| | | |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Credit impairment losses: | | | |
Loans and advances to customers | 672 | | 238 | | 189 | |
Recoveries of loans and advances, net of collection costs | (24) | | (40) | | (42) | |
Off-balance sheet exposures (See Note 29) | (3) | | 22 | | 6 | |
| 645 | | 220 | | 153 | |
Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 29) | 268 | | 437 | | 260 | |
Provisions for residual value and voluntary termination | 6 | | 6 | | 0 | |
| 274 | | 443 | | 260 | |
| 919 | | 663 | | 413 | |
For the years ended 31 December | | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Credit impairment charges/(write-backs): | | | |
Loans and advances to customers | 249 | | (186) | | 666 | |
Recoveries of loans and advances, net of collection costs | 36 | | (17) | | (24) | |
Off-balance sheet credit exposures (See Note 29) | 36 | | (30) | | (3) | |
| 321 | | (233) | | 639 | |
Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 29) | 424 | | 388 | | 257 | |
(Releases)/Provisions for residual value and voluntary termination | (3) | | (9) | | 6 | |
| 421 | | 379 | | 263 | |
| 742 | | 146 | | 902 | |
In 20202022, 2021 and 20192020 there were 0no material credit impairment lossescharges 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.FVOCI.
Santander UK Group Holdings plc225
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Annual Report 2022 | Santander UK Group Holdings plc 212 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Annual Report 2020 | Financial statements
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9. TAXATION
| | | | | | | | | | | | | | | | | |
| | | Group |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Current tax: | | | |
UK corporation tax on profit for the year | 105 | | 255 | | 413 | |
Adjustments in respect of prior years | (27) | | (30) | | (22) | |
Total current tax | 78 | | 225 | | 391 | |
Deferred tax: | | | |
Charge for the year | 35 | | 51 | | 11 | |
Adjustments in respect of prior years | 1 | | (4) | | 1 | |
Total deferred tax | 36 | | 47 | | 12 | |
Tax on profit | 114 | | 272 | | 403 | |
| | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Current tax: | | | |
UK corporation tax on profit for the year | 524 | | 400 | | 92 | |
Adjustments in respect of prior years | (88) | | (30) | | (27) | |
Total current tax | 436 | | 370 | | 65 | |
Deferred tax: | | | |
(Credit)/Charge for the year | (30) | | 101 | | 35 | |
Adjustments in respect of prior years | 65 | | 14 | | 1 | |
Total deferred tax | 35 | | 115 | | 36 | |
Tax on profit from continuing operations | 471 | | 485 | | 101 | |
The standard rate of UK corporation tax was 27% for banking entities and 19% for non-banking entities (2019:(2021: 27% for banking entities and 19% for non-banking entities; 2018:2020: 27% for banking entities and 19% for non-banking entities) following the introduction of an 8% surcharge to be applied to banking companies from 1 January 2016. Taxation. Tax for other jurisdictions is calculated at the rates prevailing in the relevantthose jurisdictions. Finance Act 2016 introduced a reduction in the standard rate of corporation tax rate to 17% from 2020 but this was reversed in the UK Budget in March 2020. As a result, the standard rate of corporation tax remains at 19% and the effect of the increase of 2% over that expected at 31 December 2019 has been reflected in the opening deferred tax balance at 1 January 2020.
The Santander UK group’s effective tax rate for 20202022 was 20.7% (2019: 27.7%24.9% (2021: 26.1%, 2018: 25.7%2020: 19.9%). The tax on profit from continuing operations before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows:
| | | | | | | | | | | | | | | | | |
| | | Group |
| | | |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Profit before tax | 552 | | 981 | | 1,567 | |
Tax calculated at a tax rate of 19% (2019: 19%, 2018: 19%) | 105 | | 186 | | 298 | |
Bank surcharge on profits | 28 | | 64 | | 111 | |
Non-deductible preference dividends paid | 8 | | 8 | | 8 | |
Non-deductible UK Bank Levy | 20 | | 24 | | 20 | |
Non-deductible conduct remediation, fines and penalties | (4) | | 44 | | 6 | |
Other non-deductible costs and non-taxable income | 23 | | 29 | | 26 | |
Effect of change in tax rate on deferred tax provision | 6 | | (10) | | (2) | |
Tax relief on dividends in respect of other equity instruments | (40) | | (39) | | (43) | |
Adjustment to prior year provisions | (32) | | (34) | | (21) | |
| | | | |
Tax charge | 114 | | 272 | | 403 | |
For the years ended 31 December | | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Profit from continuing operations before tax | 1,894 | | 1,858 | | 508 | |
Tax calculated at a tax rate of 19% (2021: 19%, 2020: 19%) | 360 | | 353 | | 97 | |
Bank surcharge on profits | 123 | | 106 | | 23 | |
Non-deductible preference dividends paid | 9 | | 9 | | 8 | |
Non-deductible UK Bank Levy | 13 | | 14 | | 20 | |
Non-deductible conduct remediation, fines and penalties | 48 | | 6 | | (4) | |
Other non-deductible costs and non-taxable income | 20 | | 33 | | 23 | |
Effect of change in tax rate on deferred tax provision | (28) | | 8 | | 6 | |
Tax relief on dividends in respect of other equity instruments | (40) | | (40) | | (40) | |
Adjustment to prior year provisions | (34) | | (4) | | (32) | |
Tax on profit from continuing operations | 471 | | 485 | | 101 | |
The UK government announced in its budget on 3 March 2021 that it would increase the main rate of corporation tax by 6% to 25% with effect from 1 April 2023. This change was substantively enacted on 24 May 2021 and, as a result, the effect has been reflected in the closing deferred tax position included in these financial statements. The comparative 2020 results reflected an increase in tax rates by 2% following an announcement in the 2020 budget to reverse a previously planned rate reduction from April 2020.
A reduction in the Bank Surcharge rate from 8% to 3% was announced in October 2021 to be effective from 1 April 2023. This change in rate was substantively enacted on 2 February 2022 and as a result, the effects of this change have been reflected in the closing balance sheet position for deferred tax.
Current tax assets and liabilities
Movements in current tax assets and liabilities during the year were as follows:
| | | | | | | | | | | |
| | Group |
| 2020 | 2019 |
| £m | £m |
Assets | 186 | | 106 | |
Liabilities | 0 | | 0 | |
At 1 January | 186 | | 106 | |
Income statement charge | (78) | | (225) | |
Other comprehensive income (charge)/credit | 1 | | (3) | |
Corporate income tax paid | 161 | | 309 | |
Other movements | 1 | | (1) | |
| 271 | | 186 | |
Assets | 271 | | 186 | |
Liabilities | 0 | | 0 | |
At 31 December | 271 | | 186 | |
| | | | | | | | |
| | Group |
| 2022 | 2021 |
| £m | £m |
Assets | 351 | | 271 | |
Liabilities | — | | — | |
At 1 January | 351 | | 271 | |
Income statement charge (including discontinued operations) | (436) | | (382) | |
Other comprehensive income credit | 159 | | 33 | |
Corporate income tax paid | 397 | | 418 | |
Other movements | 13 | | 11 | |
| 484 | | 351 | |
Assets | 484 | | 351 | |
Liabilities | — | | — | |
At 31 December | 484 | | 351 | |
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. For more on this, see our Tax Strategy at www.santander.co.uk/about-santander/sustainability/taxation-strategy.
226Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 213 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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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 has the legal right to offset and intends to settle on a net basis.
| | | | | Group | | Group |
| | Fair value of financial instruments | Pension remeasurement | Cash flow hedges | | Fair value reserve | Tax losses carried forward | Accelerated tax depreciation | Other temporary differences | Total | | Fair value of financial instruments | Pension remeasurement | Cash flow hedges | Fair value reserve | Tax losses carried forward | Accelerated tax depreciation | Other temporary differences | Total |
| | £m | | £m | | £m |
At 1 January 2020 | (52) | | (98) | | (58) | | | (8) | | 13 | | 18 | | 40 | | (145) | | |
Income statement (charge)/ credit | (13) | | (62) | | 0 | | | 0 | | 2 | | 21 | | 16 | | (36) | | |
Transfers/reclassifications | 0 | | 0 | | 12 | | | 0 | | 0 | | 0 | | (15) | | (3) | | |
Credited/(charged) to other comprehensive income | 0 | | 133 | | (54) | | | (2) | | 0 | | 0 | | 0 | | 77 | | |
At 31 December 2020 | (65) | | (27) | | (100) | | | (10) | | 15 | | 39 | | 41 | | (107) | | |
| At 1 January 2019 | (51) | | (182) | | (43) | | | (12) | | 20 | | (4) | | 61 | | (211) | | |
At 1 January 2022 | | At 1 January 2022 | (123) | | (508) | | (7) | | (12) | | 8 | | 68 | | 1 | | (573) | |
Income statement (charge)/credit | Income statement (charge)/credit | (1) | | (47) | | 0 | | | 0 | | (7) | | 22 | | (14) | | (47) | | Income statement (charge)/credit | 150 | | (49) | | — | | — | | (7) | | (33) | | (96) | | (35) | |
Transfers/reclassifications | Transfers/reclassifications | 0 | | 0 | | 22 | | | 4 | | 0 | | 0 | | (26) | | 0 | | Transfers/reclassifications | — | | — | | 3 | | (1) | | (1) | | — | | (1) | | — | |
Credited/(charged) to other comprehensive income | Credited/(charged) to other comprehensive income | 0 | | 131 | | (37) | | | 0 | | 0 | | 0 | | 19 | | 113 | | Credited/(charged) to other comprehensive income | — | | 267 | | 309 | | 11 | | — | | — | | (9) | | 578 | |
At 31 December 2019 | (52) | | (98) | | (58) | | | (8) | | 13 | | 18 | | 40 | | (145) | | |
At 31 December 2022 | | At 31 December 2022 | 27 | | (290) | | 305 | | (2) | | — | | 35 | | (105) | | (30) | |
| At 1 January 2021 | | At 1 January 2021 | (65) | | (27) | | (100) | | (10) | | 15 | | 39 | | 41 | | (107) | |
Income statement (charge)/credit | | Income statement (charge)/credit | (58) | | (67) | | — | | (1) | | (7) | | 39 | | (21) | | (115) | |
Transfers/reclassifications | | Transfers/reclassifications | — | | 5 | | (16) | | 1 | | — | | (10) | | (19) | | (39) | |
Credited/(charged) to other comprehensive income | | Credited/(charged) to other comprehensive income | — | | (419) | | 109 | | (2) | | — | | — | | — | | (312) | |
At 31 December 2021 | | At 31 December 2021 | (123) | | (508) | | (7) | | (12) | | 8 | | 68 | | 1 | | (573) | |
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 three-year plan (described in Note 20) would not cause a reduction in the deferred tax assets recognised. At 31 December 2020,2022, the Santander UK group had a recognised deferred tax asset in respect of UK capital losses carried forward of £12m (2019: £11m)£nil (2021:£5m ) included within tax losses carried forward. There are 0£nil unrecognised deferred tax assets on capital losses carried forward (2019: £NaN)(2021: £nil).
10. DIVIDENDS ON ORDINARY SHARES
Dividends on ordinary shares declared and paid in the year were as follows:
| | | Group | | Group | | Group | | Group |
| | 2020 | 2019 | 2018 | | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
| | Pence per share | Pence per share | | £m | £m | | Pence per share | Pence per share | | £m | £m |
In respect of current year – first interim | In respect of current year – first interim | 1.46 | 1.95 | | 3.54 | | | 103 | | 138 | | 250 | | In respect of current year – first interim | 5.62 | 4.05 | | 1.46 | | | 397 | | 286 | | 103 | |
– second interim | – second interim | 0 | 1.76 | | 9.46 | | | 0 | | 124 | | 668 | | – second interim | 8.73 | 15.01 | | — | | | 616 | | 1,060 | | — | |
– third interim | 0 | 0 | | 2.90 | | | 0 | | 0 | | 205 | | |
| | 1.46 | 3.71 | | 15.90 | | | 103 | | 262 | | 1,123 | | |
| | | 14.35 | 19.06 | | 1.46 | | | 1,013 | | 1,346 | | 103 | |
Following the PRA's announcement regarding the resumption of dividend payments,In 2022 an interim dividend of £1,013m (2021: £103m 1,346mfor 2020, 2020: £103m) was paid on the Company's ordinary shares in December 2020.
In 2018,issue, £300m of which was a special dividend. These were paid following review and approval by the Board in addition to the interim dividends of £250m and £205m, we also paid aline with our dividend of £668m that related to the ring-fencing transfers to Banco Santander, London Branch.policy.
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Annual Report 2022 | Santander UK Group Holdings plc 214 |
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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’sits own risks.
The Santander UK group’s These 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 and Note 43 Interest Rate Benchmark Reform.
Santander UK Group Holdings plc227
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Annual Report 2020 | Financial statements
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41.b) Analysis of derivatives
The table below includes the notional amounts of transactions outstanding at the balance sheet date; they do not represent actual exposures.
| | | | | | Group | | | | | Group |
| | 2020 | | 2019 | | 2022 | | 2021 |
| | | Fair value | | | Fair value | | | Fair value | | | Fair value |
| | Notional amount | Assets | Liabilities | | Notional amount | Assets | Liabilities | | Notional amount | Assets | Liabilities | | Notional amount | Assets | Liabilities |
| | £m | | £m | | £m | | £m |
Derivatives held for trading: | Derivatives held for trading: | | | Derivatives held for trading: | | |
Exchange rate contracts | Exchange rate contracts | 15,465 | | 395 | | 431 | | | 14,249 | | 136 | | 199 | | Exchange rate contracts | 14,769 | | 320 | | 299 | | | 11,750 | | 159 | | 183 | |
Interest rate contracts | Interest rate contracts | 40,630 | | 926 | | 837 | | | 47,045 | | 754 | | 566 | | Interest rate contracts | 31,599 | | 473 | | 792 | | | 25,617 | | 489 | | 708 | |
Equity and credit contracts | Equity and credit contracts | 1,319 | | 124 | | 83 | | | 2,583 | | 292 | | 167 | | Equity and credit contracts | 954 | | 142 | | 25 | | | 1,138 | | 166 | | 57 | |
Total derivatives held for trading | Total derivatives held for trading | 57,414 | | 1,445 | | 1,351 | | | 63,877 | | 1,182 | | 932 | | Total derivatives held for trading | 47,322 | | 935 | | 1,116 | | | 38,505 | | 814 | | 948 | |
Derivatives held for hedging | Derivatives held for hedging | | | Derivatives held for hedging | | |
Designated as fair value hedges: | Designated as fair value hedges: | | | Designated as fair value hedges: | | |
Exchange rate contracts | Exchange rate contracts | 789 | | 84 | | 6 | | | 1,482 | | 166 | | 2 | | Exchange rate contracts | 538 | | 12 | | 4 | | | 590 | | 39 | | — | |
Interest rate contracts | Interest rate contracts | 93,748 | | 1,225 | | 1,885 | | | 94,550 | | 1,022 | | 1,488 | | Interest rate contracts | 77,885 | | 1,776 | | 411 | | | 80,651 | | 908 | | 737 | |
Equity derivative contracts | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | |
| | | 94,537 | | 1,309 | | 1,891 | | | 96,032 | | 1,188 | | 1,490 | | | 78,423 | | 1,788 | | 415 | | | 81,241 | | 947 | | 737 | |
Designated as cash flow hedges: | Designated as cash flow hedges: | | | Designated as cash flow hedges: | | |
Exchange rate contracts | Exchange rate contracts | 27,020 | | 1,978 | | 409 | | | 28,502 | | 2,023 | | 462 | | Exchange rate contracts | 26,035 | | 1,717 | | 186 | | | 22,239 | | 996 | | 338 | |
Interest rate contracts | Interest rate contracts | 19,407 | | 467 | | 23 | | | 17,451 | | 184 | | 35 | | Interest rate contracts | 25,971 | | 164 | | 1,463 | | | 21,329 | | 177 | | 216 | |
Equity derivative contracts | Equity derivative contracts | 13 | | 6 | | 0 | | | 49 | | 0 | | 4 | | Equity derivative contracts | 51 | | 8 | | 1 | | | 47 | | 7 | | 1 | |
| | 46,440 | | 2,451 | | 432 | | | 46,002 | | 2,207 | | 501 | | | 52,057 | | 1,889 | | 1,650 | | | 43,615 | | 1,180 | | 555 | |
Total derivatives held for hedging | Total derivatives held for hedging | 140,977 | | 3,760 | | 2,323 | | | 142,034 | | 3,395 | | 1,991 | | Total derivatives held for hedging | 130,480 | | 3,677 | | 2,065 | | | 124,856 | | 2,127 | | 1,292 | |
Derivative netting(1) | Derivative netting(1) | | (1,754) | | (1,754) | | | (1,214) | | (1,214) | | Derivative netting(1) | — | | (2,173) | | (2,173) | | | — | | (1,221) | | (1,221) | |
Total derivatives | Total derivatives | 198,391 | | 3,451 | | 1,920 | | | 205,911 | | 3,363 | | 1,709 | | Total derivatives | 177,802 | | 2,439 | | 1,008 | | | 163,361 | | 1,720 | | 1,019 | |
(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 £330m (2019: £222m)£1,368m (2021: £189m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £651m (2019: £629m)£70m (2021: £202m).
For information about the impact of netting arrangements on derivative assets and liabilities in the table above, see Note 41.
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.40.
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 over the counter | | | | Asset | | | Liability |
| | Traded on recognised exchanges | Settled by central counterparties | Not settled by central counterparties | Total | | Traded on recognised exchanges | Traded over the counter | | Traded on recognised exchanges | Traded over the counter | | | Settled by central counterparties | Not settled by central counterparties | Total | | | Traded over the counter | | | Traded over the counter |
2020 | £m | | £m | | £m | |
2022 | | 2022 | | £m | | | £m | | | £m |
Exchange rate contracts | Exchange rate contracts | 0 | | 0 | | 43,274 | | 43,274 | | | 0 | | 2,457 | | | 0 | | 846 | | Exchange rate contracts | | — | | 41,342 | | 41,342 | | | | 2,049 | | | | 489 | |
Interest rate contracts | Interest rate contracts | 0 | | 144,343 | | 9,442 | | 153,785 | | | 0 | | 864 | | | 0 | | 991 | | Interest rate contracts | | 124,638 | | 10,817 | | 135,455 | | | | 240 | | | | 493 | |
Equity and credit contracts | Equity and credit contracts | 0 | | 0 | | 1,332 | | 1,332 | | | 0 | | 130 | | | 0 | | 83 | | Equity and credit contracts | | — | | 1,005 | | 1,005 | | | | 150 | | | | 26 | |
| | 0 | | 144,343 | | 54,048 | | 198,391 | | | 0 | | 3,451 | | | 0 | | 1,920 | | | | 124,638 | | 53,164 | | 177,802 | | | | 2,439 | | | | 1,008 | |
| 2019 | | |
2021 | | 2021 | | | | | | |
Exchange rate contracts | Exchange rate contracts | 0 | | 0 | | 44,233 | | 44,233 | | | 0 | | 2,325 | | | 0 | | 663 | | Exchange rate contracts | | — | | 34,579 | | 34,579 | | | | 1,193 | | | | 522 | |
Interest rate contracts | Interest rate contracts | 0 | | 131,538 | | 27,508 | | 159,046 | | | 0 | | 747 | | | 0 | | 876 | | Interest rate contracts | | 117,560 | | 10,037 | | 127,597 | | | | 353 | | | | 441 | |
Equity and credit contracts | Equity and credit contracts | 0 | | 0 | | 2,632 | | 2,632 | | | 0 | | 291 | | | 0 | | 170 | | Equity and credit contracts | | — | | 1,185 | | 1,185 | | | | 174 | | | | 56 | |
| | 0 | | 131,538 | | 74,373 | | 205,911 | | | 0 | | 3,363 | | | 0 | | 1,709 | | | | 117,560 | | 45,801 | | 163,361 | | | | 1,720 | | | | 1,019 | |
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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.
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.
228Santander UK Group Holdings plc
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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 or risk free 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.BoE base rate. 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 foreign exchange contracts (spot, forward and swaps) or 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.
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, or other incentive 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.
.TheThe 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.
During 2020, due to changes in the Banco Santander share price the outgoing cashflows relating to schemes prior to the 2020 sharesave schemes are no longer expected to occur.
LIBORIBOR Reform
DetailsNote 41 includes details of the notional value of hedging instruments by benchmark interest rate impacted by IBOR reform are disclosed in Note 43.and the notional amounts of assets, liabilities and off-balance sheet commitments affected by IBOR reform that have yet to transition to an alternative benchmark interest rate.
Hedge effectiveness measurement
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 both fair value and cash flow hedges, hedge ineffectiveness can arise from hedging derivatives with a non-zero fair value at the date of initial designation. In addition, for:
Fair value hedges
Hedge ineffectiveness can also arise due to differences in discounting between the hedged item and the hedging instrument as cash collateralised swaps discount using Overnight Indexed Swaps discount curves not applied to the hedged item; and where counterparty credit risk impacts the fair value of the derivative but not the hedged item. For portfolio hedges of interest rate risk, it can also arise due to differences in the expected and actual volume of prepayments.
Cash flow hedges
Hedge ineffectiveness can also arise due to differences in the timing of cash flows between the hedged item and the hedging instrument. For micro hedges of interest rate risk, it can also arise due to differences in the basis of cash flows between the hedged item and the hedging instrument. For hedges of equity risk on cash settled share-based transactions, it can also arise due to changes in the expected number of Sharesave options to be exercised.
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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:
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| | | | | | | Group |
2020 | Hedging Instruments | ≤1 month | >1 and ≤3 months | >3 and ≤12 months | >1 and ≤5 years | >5 years | Total |
Fair value hedges: | | | | | | | |
Interest rate risk | Interest rate contracts- Nominal Amount (£m) | 2,429 | | 7,617 | | 27,791 | | 47,749 | | 7,889 | | 93,475 | |
| Average fixed interest rate - GBP | 0.69 | % | 0.65 | % | 0.82 | % | 0.73 | % | 3.61 | % | — | |
| Average fixed interest rate - EUR | 1.18 | % | 0.23 | % | 3.02 | % | 0.98 | % | 2.34 | % | — | |
| Average fixed interest rate - USD | 1.87 | % | 1.72 | % | 2.89 | % | 2.49 | % | 4.16 | % | — | |
Interest rate/FX risk | Exchange rate contracts - Nominal Amount (£m) | 0 | | 0 | | 132 | | 461 | | 196 | | 789 | |
| Interest rate contracts - Nominal Amount (£m) | 0 | | 0 | | 0 | | 236 | | 37 | | 273 | |
| Average GBP - EUR exchange rate | 0 | | 0 | | 1.1405 | | 1.1700 | | 1.1669 | | — |
| Average GBP - USD exchange rate | 0 | | 0 | | 0 | | 0 | | 0 | | — | |
| Average fixed interest rate - EUR | 0 | | 0 | | 4.64 | % | 1.78 | % | 3.56 | % | — | |
| Average fixed interest rate - USD | 0 | | 0 | | 0 | | 0 | | 0 | | — | |
Cash flow hedges: | | | | | | | |
Interest rate risk | Interest rate contracts - Nominal Amount (£m) | 0 | | 897 | | 2,528 | | 7,964 | | 1,061 | | 12,450 | |
| Average fixed interest rate - GBP (%) | 0 | | 0.46 | % | 0.57 | % | 1.45 | % | 1.33 | % | — | |
FX risk | Exchange rate contracts- Nominal Amount (£m) | 1,439 | | 2,015 | | 3,877 | | 7,113 | | 1,119 | | 15,563 | |
| Interest rate contracts- Nominal Amount (£m) | 0 | | 0 | | 0 | | 366 | | 0 | | 366 | |
| Average GBP - JPY exchange rate | 0 | | 137.9769 | | 135.6073 | | 132.2714 | | 0 | | — | |
| Average GBP - EUR exchange rate | 0 | | 0 | | 0 | | 1.1629 | | 1.1787 | | — | |
| Average GBP - USD exchange rate | 1.2931 | | 1.3164 | | 1.3231 | | 1.3039 | | 0 | | — | |
Equity risk | Equity derivative contracts - Nominal Amount (£m) | 0 | | 0 | | 0 | | 12 | | 1 | | 13 | |
Interest rate/FX risk | Exchange rate contracts - Nominal Amount (£m) | 732 | | 0 | | 2,583 | | 6,550 | | 1,592 | | 11,457 | |
| Interest rate contracts - Nominal Amount (£m) | 732 | | 0 | | 882 | | 4,062 | | 915 | | 6,591 | |
| Average GBP - EUR exchange rate | 0 | | 0 | | 1.3543 | | 1.2525 | | 1.1965 | | — | |
| Average GBP - USD exchange rate | 1.4649 | | 0 | | 0 | | 1.6085 | | 1.3811 | | — | |
| Average fixed interest rate - GBP (%) | 2.01 | % | 0 | | 3.18 | % | 2.48 | % | 3.39 | % | — | |
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2019 | | | | | | | |
Fair value hedges: | | | | | | | |
Interest rate risk | Interest rate contracts- Nominal 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 | 0 | | 1.54 | % | 1.99 | % | 2.69 | % | 4.56 | % | — |
Interest rate/FX risk | Exchange rate contracts - Nominal Amount (£m) | 0 | | 755 | | 0 | | 317 | | 410 | | 1,482 | |
| Interest rate contracts - Nominal Amount (£m) | 0 | | 0 | | 0 | | 18 | | 218 | | 236 | |
| Average GBP - EUR exchange rate | 0 | | 0 | | 0 | | 1.1781 | | 1.1603 | | — |
| Average GBP - USD exchange rate | 0 | | 1.5110 | | 0 | | 0 | | 0 | | — |
| Average fixed interest rate - EUR | 0 | | 0 | | 0 | | 3.52 | % | 2.12 | % | — |
| Average fixed interest rate - USD | 0 | | 2.38 | % | 0 | | 0 | | 0 | | — |
Cash flow hedges: | | | | | | | |
Interest rate risk | Interest rate contracts - Nominal Amount (£m) | 0 | | 339 | | 1,066 | | 4,671 | | 500 | | 6,576 | |
| Average fixed interest rate - GBP (%) | 0 | | 0.76 | % | 0.82 | % | 1.46 | % | 0.40 | % | — | |
FX risk | Exchange rate contracts- Nominal Amount (£m) | 1,187 | | 2,119 | | 3,758 | | 5,217 | | 0 | | 12,281 | |
| Interest rate contracts- Nominal Amount (£m) | 0 | | 0 | | 0 | | 755 | | 0 | | 755 | |
| Average GBP - JPY exchange rate | 0 | | 145.9275 | 143.0857 | 140.8152 | 0 | | — |
| Average GBP - EUR exchange rate | 0 | | 1.1444 | | 1.1167 | | 1.1526 | | 0 | | — |
| Average GBP - USD exchange rate | 1.2856 | | 1.2624 | | 1.2925 | | 1.2991 | | 0 | | — |
Equity risk | Equity derivative contracts - Nominal Amount (£m) | 0 | | 0 | | 7 | | 41 | | 1 | | 49 | |
Interest rate/FX risk | Exchange rate contracts - Nominal Amount (£m) | 812 | | 0 | | 3,367 | | 8,009 | | 4,033 | | 16,221 | |
| Interest rate contracts - Nominal Amount (£m) | 0 | | 0 | | 3,121 | | 4,829 | | 2,170 | | 10,120 | |
| Average GBP - EUR exchange rate | 1.2742 | | 0 | | 1.1689 | 1.3114 | 1.2090 | — |
| Average GBP - USD exchange rate | 0 | | 0 | | 1.5357 | 1.5811 | 1.4499 | — |
| Average fixed interest rate - GBP (%) | 2.49 | % | 0 | | 2.16 | % | 2.87 | % | 2.96 | % | — | |
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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:
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2022 | Hedging Instruments | ≤1 month | >1 and ≤3 months | >3 and ≤12 months | >1 and ≤5 years | >5 years | Total |
Fair value hedges: | | | | | | | |
Interest rate risk | Interest rate contracts - Nominal amount (£m) | 2,210 | | 4,468 | | 21,678 | | 45,451 | | 3,808 | | 77,615 | |
| Average fixed interest rate - GBP | 2.58 | % | 0.88 | % | 0.56 | % | 2.07 | % | 3.78 | % | |
| Average fixed interest rate - EUR | 1.77 | % | 1.60 | % | 0.77 | % | 0.28 | % | 3.09 | % | |
| Average fixed interest rate - USD | 1.35 | % | 3.47 | % | 3.51 | % | 2.00 | % | 4.92 | % | |
Interest rate/FX risk | Exchange rate contracts - Nominal amount (£m) | — | | — | | 66 | | 465 | | 7 | | 538 | |
| Interest rate contracts - Nominal amount (£m) | — | | — | | — | | 263 | | 7 | | 270 | |
| Average GBP - EUR exchange rate | — | | — | | 1.20 | | 1.16 | | 1.10 | | |
| Average GBP - USD exchange rate | — | | — | | — | | 1.19 | | — | | |
| Average fixed interest rate - EUR | — | % | — | % | 3.42 | % | 2.06 | % | — | % | |
| Average fixed interest rate - USD | — | % | — | % | — | % | 4.63 | % | — | % | |
Cash flow hedges: | | | | | | | |
Interest rate risk | Interest rate contracts - Nominal amount (£m) | 1,042 | | 2,191 | | 1,940 | | 13,060 | | 1,076 | | 19,309 | |
| Average fixed interest rate - GBP | 1.77 | % | 2.29 | % | 1.98 | % | 2.35 | % | 1.84 | % | |
FX risk | Exchange rate contracts - Nominal amount (£m) | 2,301 | | 3,135 | | 2,381 | | 10,606 | | 1,163 | | 19,586 | |
| Interest rate contracts - Nominal amount (£m) | 415 | | — | | — | | 2,325 | | 997 | | 3,737 | |
| Average GBP - JPY exchange rate | — | 157.45 | 160.04 | — | — | |
| Average GBP - CHF exchange rate | — | 1.13 | — | — | — | |
| Average GBP - EUR exchange rate | — | — | 1.12 | 1.18 | 1.17 | |
| Average GBP - USD exchange rate | 1.22 | 1.25 | 1.17 | 1.31 | 1.39 | |
Equity risk | Equity derivative contracts - Nominal amount (£m) | — | | — | | 6 | | 43 | | 2 | | 51 | |
Interest rate/FX risk | Exchange rate contracts - Nominal amount (£m) | — | | — | | 1,173 | | 4,626 | | 650 | | 6,449 | |
| Interest rate contracts - Nominal amount (£m) | — | | — | | 585 | | 2,132 | | 208 | | 2,925 | |
| Average GBP - EUR exchange rate | — | — | 1.19 | 1.21 | 1.20 | |
| Average GBP - USD exchange rate | — | — | 1.60 | 1.50 | 1.54 | |
| Average fixed interest rate - GBP | — | | — | | 3.27 | % | 2.58 | % | 4.59 | % | |
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2021 | | | | | | | |
Fair value hedges: | | | | | | | |
Interest rate risk | Interest rate contracts - Nominal amount (£m) | 3,121 | | 6,223 | | 21,442 | | 44,644 | | 4,991 | | 80,421 | |
| Average fixed interest rate - GBP | 0.59 | % | 0.42 | % | 0.09 | % | 0.88 | % | 3.13 | % | |
| Average fixed interest rate - EUR | 0.51 | % | 1.74 | % | 1.08 | % | 0.81 | % | 2.61 | % | |
| Average fixed interest rate - USD | 1.91 | % | 0.96 | % | 1.44 | % | 2.76 | % | 4.05 | % | |
Interest rate/FX risk | Exchange rate contracts - Nominal amount (£m) | — | | — | | 107 | | 381 | | 102 | | 590 | |
| Interest rate contracts - Nominal amount (£m) | — | | — | | — | | 193 | | 37 | | 230 | |
| Average GBP - EUR exchange rate | — | — | 1.21 | 1.16 | 1.17 | |
| Average fixed interest rate - EUR | — | | — | | 3.29 | % | 2.03 | % | 2.62 | % | |
Cash flow hedges: | | | | | | | |
Interest rate risk | Interest rate contracts - Nominal amount (£m) | 1,010 | | 481 | | 871 | | 7,532 | | 5,137 | | 15,031 | |
| Average fixed interest rate - GBP | 1.97 | % | 0.44 | % | 0.08 | % | 1.39 | % | 0.97 | % | |
FX risk | Exchange rate contracts - Nominal amount (£m) | 2,703 | | 936 | | 2,057 | | 6,715 | | 2,124 | | 14,535 | |
| Interest rate contracts - Nominal amount (£m) | — | | — | | — | | 2,438 | | 887 | | 3,325 | |
| Average GBP - JPY exchange rate | — | 142.91 | 148.86 | — | — | |
| Average GBP - EUR exchange rate | 1.17 | — | 1.18 | 1.16 | 1.17 | |
| Average GBP - USD exchange rate | 1.34 | 1.34 | 1.33 | 1.34 | 1.39 | |
Equity risk | Equity derivative contracts - Nominal amount (£m) | — | | — | | 2 | | 41 | | 4 | | 47 | |
Interest rate/FX risk | Exchange rate contracts - Nominal amount (£m) | 620 | | — | | 840 | | 4,765 | | 1,479 | | 7,704 | |
| Interest rate contracts - Nominal amount (£m) | — | | — | | — | | 2,049 | | 924 | | 2,973 | |
| Average GBP - EUR exchange rate | 1.28 | — | 1.39 | 1.20 | 1.20 | |
| Average GBP - USD exchange rate | — | — | — | 1.61 | 1.38 | |
| Average fixed interest rate - GBP | 2.26 | % | — | | 1.17 | % | 2.72 | % | 3.41 | % | |
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 217 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Report | Sustainability and Responsible Banking | Governance | Risk Reviewreview | | 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 other operating income
| | | | | | | | | | | |
| | | Group |
| 2020 | 2019 | 2018 |
£m | £m | £m |
Fair value hedging: | | | |
(Losses)/gains on hedging instruments | (299) | | (360) | | 4 | |
Gains/(losses) on hedged items attributable to hedged risks | 364 | | 414 | | 75 | |
Fair value hedging ineffectiveness | 65 | | 54 | | 79 | |
Cash flow hedging ineffectiveness | (46) | | (46) | | (45) | |
| 19 | | 8 | | 34 | |
| | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
£m | £m | £m |
Fair value hedging: | | | |
Gains/(losses) on hedging instruments | 2,371 | | 846 | | (299) | |
(Losses)/gains on hedged items attributable to hedged risks | (2,307) | | (804) | | 364 | |
Fair value hedging ineffectiveness | 64 | | 42 | | 65 | |
Cash flow hedging ineffectiveness | (36) | | (34) | | (46) | |
| 28 | | 8 | | 19 | |
Hedge ineffectiveness can be analysed by risk category as follows:
| | | Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | Group |
| | Change in FV of hedging instruments | Change in FV of hedged items | Recognised in income statement | | Change in FV of hedging instruments | Change in FV of hedged items | Recognised in income statement | | | 2022 | | | 2021 | | | 2020 |
| | £m | | £m | | Change in FV of hedging instruments | Change in FV of hedged items | Recognised in income statement | | Change in FV of hedging instruments | Change in FV of hedged items | Recognised in income statement | | Change in FV of hedging instruments | Change in FV of hedged items | Recognised in income statement |
Fair value hedges: | Fair value hedges: | | | Fair value hedges: | £m | | £m | | £m |
| Interest rate risk | Interest rate risk | (358) | | 384 | | 26 | | | (264) | | 284 | | 20 | | Interest rate risk | 2,382 | | (2,324) | | 58 | | | 868 | | (838) | | 30 | | | (358) | | 384 | | 26 | |
Interest rate/FX risk | Interest rate/FX risk | 59 | | (20) | | 39 | | | (96) | | 130 | | 34 | | Interest rate/FX risk | (11) | | 17 | | 6 | | | (22) | | 34 | | 12 | | | 59 | | (20) | | 39 | |
| | (299) | | 364 | | 65 | | | (360) | | 414 | | 54 | | | 2,371 | | (2,307) | | 64 | | | 846 | | (804) | | 42 | | | (299) | | 364 | | 65 | |
| | Group | |
| | | | | 2020 | | | | 2019 | | | | | | | | | | | | | | | | | |
| | Hedging Instruments | | | Hedging Instruments | | | | | Group |
| | Income statement line item affected by reclassification | Change in FV | Recognised in OCI | Recognised in income statement | Reclassified from reserves to income | | Change in FV | Recognised in OCI | Recognised in income statement | Reclassified from reserves to income | | Hedging Instruments | Recognised in income statement | Reclassified from reserves to income |
| | £m | | £m | | Income statement line item affected by reclassification | Change in FV | Recognised in OCI |
Cash flow hedges: | Cash flow hedges: | | | | Cash flow hedges: | £m |
| 2022 | | 2022 | | |
Interest rate risk | Interest rate risk | Net interest income | 185 | | (179) | | 6 | | 33 | | | 34 | | (33) | | 1 | | 13 | | Interest rate risk | Net interest income | (1,150) | | 1,150 | | — | | (96) | |
FX risk | FX risk | Net interest income/other operating income | (42) | | 38 | | (4) | | 2 | | | (333) | | 329 | | (4) | | (316) | | FX risk | Net interest income/other operating income | 1,602 | | (1,602) | | — | | 1,691 | |
Equity risk | Equity risk | Operating expenses | 2 | | (2) | | 0 | | (5) | | | (7) | | 7 | | 0 | | (9) | | Equity risk | Operating expenses | 2 | | (2) | | — | | 2 | |
Interest rate/FX risk | Interest rate/FX risk | Net interest income/other operating income | 782 | | (830) | | (48) | | 773 | | | (604) | | 561 | | (43) | | (709) | | Interest rate/FX risk | Net interest income/other operating income | (54) | | 18 | | (36) | | 533 | |
| | 927 | | (973) | | (46) | | 803 | | | (910) | | 864 | | (46) | | (1,021) | | | 400 | | (436) | | (36) | | 2,130 | |
2021 | | 2021 | | |
Interest rate risk | | Interest rate risk | Net interest income | (312) | | 306 | | (6) | | 70 | |
FX risk | | FX risk | Net interest income/other operating income | (54) | | 54 | | — | | (158) | |
Equity risk | | Equity risk | Operating expenses | (1) | | 1 | | — | | 2 | |
Interest rate/FX risk | | Interest rate/FX risk | Net interest income/other operating income | (542) | | 514 | | (28) | | (273) | |
| | | (909) | | 875 | | (34) | | (359) | |
2020 | | 2020 | | |
Interest rate risk | | Interest rate risk | Net interest income | 185 | | (179) | | 6 | | 33 | |
FX risk | | FX risk | Net interest income/other operating income | (42) | | 38 | | (4) | | 2 | |
Equity risk | | Equity risk | Operating expenses | 2 | | (2) | | — | | (5) | |
Interest rate/FX risk | | Interest rate/FX risk | Net interest income/other operating income | 782 | | (830) | | (48) | | 773 | |
| | | | 927 | | (973) | | (46) | | 803 | |
In 2020,2022, cash flow hedge accounting of £57m (2019: £4m)£10m (2021: £14m) had to cease due to the hedged cash flows 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 |
| 2020 | 2019 |
| £m | £m |
Balance at 1 January | 479 | | 322 | |
Effective portion of changes in fair value: | | |
– Interest rate risk | 179 | | 33 | |
– Foreign currency risk | (38) | | (329) | |
– Equity risk | 2 | | (7) | |
– Interest rate/foreign currency risk | 830 | | (561) | |
| 973 | | (864) | |
Income statement transfers: | | |
– Interest rate risk | (33) | | (13) | |
– Foreign currency risk | (2) | | 316 | |
– Equity risk | 5 | | 9 | |
– Interest rate/foreign currency risk | (773) | | 709 | |
| (803) | | 1,021 | |
Balances at 31 December | 649 | | 479 | |
| | | | | | | | |
| | Group |
| 2022 | 2021 |
| £m | £m |
Balance at 1 January | 133 | | 649 | |
Effective portion of changes in fair value: | | |
– Interest rate risk | (1,150) | | (306) | |
– Foreign currency risk | 1,602 | | (54) | |
– Equity risk | 2 | | (1) | |
– Interest rate/foreign currency risk | (18) | | (514) | |
| 436 | | (875) | |
Income statement transfers: | | |
– Interest rate risk | 96 | | (70) | |
– Foreign currency risk | (1,691) | | 158 | |
– Equity risk | (2) | | (2) | |
– Interest rate/foreign currency risk | (533) | | 273 | |
| (2,130) | | 359 | |
Balance at 31 December | (1,561) | | 133 | |
Santander UK Group Holdings plc231
| | | | | | | | |
| | | | | |
Annual Report 20202022 | Santander UK Group Holdings plc | Financial statements218 | | |
| | |
Hedged exposures
Santander UK hedges its exposures to various risks, including interest rate risk and foreign currency risk, as set out in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Group |
| | | | | 2020 | | | | | | 2019 |
| | Accumulated amount of FV hedge adjustments | Change in value to calculate hedge ineffectiveness | | | Accumulated amount of FV hedge adjustments | Change in value to calculate hedge ineffectiveness |
| Carrying value | Hedged item | Portfolio hedge of interest rate risks | Of which Discontinued hedges | | Carrying value | Hedged item | Portfolio hedge of interest rate risks | Of which Discontinued hedges |
| £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
Fair value hedges | | | | | | | | | | | |
Interest rate risk: | | | | | | | | | | | |
Loans and advances to customers | 54,118 | | 0 | | 1,202 | | 904 | | 332 | | | 43,098 | | 0 | | 870 | | 630 | | 258 | |
Other financial assets at amortised cost | 772 | | 0 | | 36 | | 13 | | 121 | | | 6,627 | | 0 | | 142 | | 121 | | 83 | |
Reverse repos – non trading | 12,149 | | 0 | | 1 | | 0 | | 3 | | | 17,121 | | 0 | | (2) | | 0 | | (2) | |
Other financial assets at FVOCI | 5,129 | | 155 | | 0 | | 74 | | 88 | | | 5,944 | | 102 | | 0 | | 82 | | 125 | |
Deposits by customers | (4,305) | | (15) | | (10) | | (10) | | (13) | | | (6,261) | | 0 | | 4 | | 0 | | 3 | |
Deposits by banks | 0 | | 0 | | 0 | | 0 | | 0 | | | (517) | | (16) | | 0 | | (17) | | (1) | |
Debt securities in issue | (8,889) | | (518) | | (137) | | (305) | | (120) | | | (11,782) | | (388) | | (166) | | (311) | | (163) | |
Subordinated liabilities | (636) | | (185) | | (41) | | (166) | | (27) | | | (707) | | (181) | | (48) | | (204) | | (19) | |
Interest rate/FX risk: | | | | | | | | | | | |
Other financial assets at FVOCI | 299 | | 5 | | 0 | | 0 | | 15 | | | 241 | | 3 | | 0 | | 0 | | (4) | |
Debt securities in issue | (621) | | (94) | | 0 | | (76) | | (34) | | | (1,396) | | (135) | | 0 | | (122) | | 136 | |
Subordinated liabilities | 3 | | 3 | | 0 | | 3 | | (1) | | | 7 | | 7 | | 0 | | 7 | | (2) | |
| 58,019 | | (649) | | 1,051 | | 437 | | 364 | | | 52,375 | | (608) | | 800 | | 186 | | 414 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Group |
| | | | 2020 | | | | 2019 |
| | Change in value to calculate hedge ineffectiveness | Cash flow hedge reserve | Balances on cash flow hedge reserve for discontinued hedges | | Change in value to calculate hedge ineffectiveness | Cash flow hedge reserve | Balances on cash flow hedge reserve for discontinued hedges |
| Hedged item balance sheet line item | £m | £m | £m | | £m | £m | £m |
Cash flow hedges: | | | | | | | | |
Interest rate risk: | Loans and advances to customers | (183) | | 165 | | 1 | | | (34) | | 21 | | (11) | |
| Loans and advances to banks | (2) | | 1 | | 0 | | | (2) | | 0 | | 0 | |
| Reverse repurchase agreements – non trading | (2) | | 1 | | 0 | | | 0 | | 0 | | 0 | |
| Deposits by banks | 7 | | (2) | | 0 | | | 3 | | (2) | | 0 | |
| | | | | | | | |
| Repurchase agreements – non trading | 1 | | (1) | | 0 | | | 0 | | 0 | | 0 | |
FX risk: | Other financial assets at FVOCI | 40 | | 6 | | 0 | | | (122) | | 3 | | 0 | |
| Not applicable – highly probable forecast transactions | 33 | | 3 | | 0 | | | 267 | | 2 | | 0 | |
| Deposits by customers | (7) | | 0 | | 0 | | | 3 | | 0 | | 0 | |
| Deposits by banks | 0 | | 0 | | 0 | | | 4 | | 0 | | 0 | |
| Debt securities in issue | (13) | | (46) | | 0 | | | 177 | | (3) | | 0 | |
| Repurchase agreements – non trading | (15) | | 0 | | 0 | | | 0 | | 0 | | 0 | |
Equity risk: | Other liabilities | (2) | | 6 | | 0 | | | 7 | | (2) | | (1) | |
Interest rate/FX risk: | Debt securities in issue/loans and advances to customers | (701) | | 322 | | (2) | | | 630 | | 280 | | 20 | |
| Subordinated liabilities/loans and advances to customers | (130) | | 194 | | 0 | | | (69) | | 180 | | 0 | |
| | (974) | | 649 | | (1) | | | 864 | | 479 | | 8 | |
232Santander UK Group Holdings plc
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
| | | | | | | | | | | | | |
Strategic Report | | Governance | | | | | | | | | | | |
Hedged exposures
Santander UK hedges its exposures to various risks, including interest rate risk and foreign currency risk, as set out in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Group |
| | | | | 2022 | | | | | | 2021 |
| | Accumulated amount of FV hedge adjustments | Change in value to calculate hedge ineffectiveness | | | Accumulated amount of FV hedge adjustments | Change in value to calculate hedge ineffectiveness |
| Carrying value | Hedged item | Portfolio hedge of interest rate risks | Of which Discontinued hedges | | Carrying value | Hedged item | Portfolio hedge of interest rate risks | Of which Discontinued hedges |
| £m | £m | £m | £m | £m | | £m | £m | £m | £m | £m |
Fair value hedges | | | | | | | | | | | |
Interest rate risk: | | | | | | | | | | | |
Loans and advances to customers | 60,783 | | — | | (2,637) | | (651) | | (2,708) | | | 58,455 | | — | | 88 | | 500 | | (1,096) | |
Other financial assets at amortised cost | 156 | | — | | (12) | | 2 | | (14) | | | 160 | | — | | 2 | | 3 | | (12) | |
Reverse repurchase agreements – non trading | 4,045 | | — | | (5) | | (1) | | — | | | 9,570 | | — | | (5) | | — | | (6) | |
Other financial assets at FVOCI | 2,325 | | (200) | | — | | 35 | | (227) | | | 3,728 | | 23 | | — | | 47 | | (112) | |
Deposits by customers | (1,394) | | — | | 5 | | — | | 5 | | | — | | — | | — | | — | | 14 | |
| | | | | | | | | | | |
Debt securities in issue | (5,210) | | 355 | | (95) | | (172) | | 566 | | | (4,373) | | (188) | | (115) | | (230) | | 325 | |
Subordinated liabilities | (250) | | (27) | | (6) | | (62) | | 54 | | | (293) | | (75) | | (8) | | (70) | | 49 | |
Interest rate/FX risk: | | | | | | | | | | | |
Other financial assets at FVOCI | 237 | | (21) | | — | | 1 | | (9) | | | 227 | | — | | — | | 1 | | (20) | |
Debt securities in issue | (290) | | (18) | | — | | (37) | | 27 | | | (423) | | (55) | | — | | (47) | | 55 | |
Subordinated liabilities | 1 | | 1 | | — | | 1 | | (1) | | | 2 | | 2 | | — | | 2 | | (1) | |
| 60,403 | | 90 | | (2,750) | | (884) | | (2,307) | | | 67,053 | | (293) | | (38) | | 206 | | (804) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Group |
| | | | 2022 | | | | 2021 |
| | Change in value to calculate hedge ineffectiveness | Cash flow hedge reserve | Balances on cash flow hedge reserve for discontinued hedges | | Change in value to calculate hedge ineffectiveness | Cash flow hedge reserve | Balances on cash flow hedge reserve for discontinued hedges |
| Hedged item balance sheet line item | £m | £m | £m | | £m | £m | £m |
Cash flow hedges: | | | | | | | | |
Interest rate risk: | Loans and advances to customers | 925 | | (999) | | (1) | | | 236 | | (135) | | (2) | |
| Cash and balances at central banks | 233 | | (274) | | (106) | | | 71 | | (80) | | — | |
| | | | | | | | |
| Deposits by banks | (8) | | 7 | | — | | | (1) | | 1 | | — | |
| | | | | | | | |
| | | | | | | | |
FX risk: | Other financial assets at FVOCI | — | | (6) | | — | | | (194) | | (1) | | — | |
| Not applicable – highly probable forecast transactions | (349) | | 2 | | — | | | 148 | | 1 | | — | |
| Deposits by customers | (74) | | — | | — | | | 4 | | — | | — | |
| | | | | | | | |
| Debt securities in issue | (1,142) | | (19) | | (2) | | | 90 | | 67 | | 6 | |
| Repurchase agreements - non trading | (37) | | — | | — | | | 6 | | — | | — | |
Equity risk: | Other liabilities | (2) | | 3 | | — | | | 1 | | 3 | | — | |
Interest rate/FX risk: | Debt securities in issue/loans and advances to customers | 55 | | (244) | | (3) | | | 503 | | 144 | | (4) | |
| Subordinated liabilities/loans and advances to customers | (37) | | (31) | | 77 | | | 11 | | 133 | | 80 | |
| | (436) | | (1,561) | | (35) | | | 875 | | 133 | | 80 | |
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 219 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Strategic Report | Sustainability and Responsible Banking | Governance | Risk Reviewreview | | Financial review | | Financial statements | | Shareholder information |
| | | | | | | | Notes to the financial statements | | | | | |
| | | | | | | | | | | | | |
12. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Loans and advances to customers: | Loans and advances to customers: | | | Loans and advances to customers: | | |
Loans to housing associations | Loans to housing associations | 13 | | 12 | | Loans to housing associations | 4 | | 12 | |
Other loans | Other loans | 579 | | 528 | | Other loans | 335 | | 502 | |
| | 592 | | 540 | | | 339 | | 514 | |
Debt securities | Debt securities | 112 | | 298 | | Debt securities | 85 | | 112 | |
Equity securities | Equity securities | 130 | | 135 | | Equity securities | 10 | | 50 | |
Reverse repurchase agreements - non trading | 0 | | 0 | | |
| | 834 | | 973 | | | 434 | | 676 | |
For the Santander UK group, other financial assets at FVTPL comprised £508m (2019: £465m)£312m (2021: £454m) of financial assets designated at FVTPL and £325m (2019:£122m (2021:£509m)222m) of financial assets mandatorily held at FVTPL.
Loans and advances to customers principally represented other loans, being a portfolio of roll-up mortgagesand deferred consideration following the partial sale of the portfolio. These are managed, and have 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.FVTPL.
In 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, were presented on a net basis. This followed a deed of amendment, including a legal right of set-off between the principal amounts of the senior tranches of credit linked notes and the related cash deposits included as collateral in Note 36. At 31 December 2020, the amount of this netting was £825m (2019: £1.5bn).
The net (loss)/gainloss in the year attributable to changes in credit risk for loans and advances at fair value through profit or lossFVTPL was £NaN (2019: £NaN, 2018: £(1)m)£1m (2021: £nil, 2020: £nil). The cumulative net loss attributable to changes in credit risk for loans and advances at fair value through profit or lossFVTPL at 31 December 20202022 was £2m (2019:£3m (2021: £2m).
13. LOANS AND ADVANCES TO CUSTOMERS
| | | | | | | | |
| | Group |
| 2020 | 2019 |
£m | £m |
Loans secured on residential properties | 170,089 | | 165,645 | |
Corporate loans | 24,474 | | 27,043 | |
Finance leases | 6,554 | | 6,264 | |
Secured advances | 0 | | 0 | |
Other unsecured loans | 10,169 | | 7,188 | |
Amounts due from fellow Banco Santander subsidiaries and joint ventures | 2,249 | | 2,204 | |
Loans and advances to customers | 213,535 | | 208,344 | |
Credit impairment loss allowances on loans and advances to customers | (1,303) | | (785) | |
RV and voluntary termination provisions on finance leases | (54) | | (61) | |
Net loans and advances to customers | 212,178 | | 207,498 | |
| | | | | | | | |
| | Group |
| 2022 | 2021 |
£m | £m |
Loans secured on residential properties | 188,282 | | 178,039 | |
Corporate loans | 19,057 | | 19,282 | |
Finance leases | 4,645 | | 3,916 | |
| | |
Other unsecured loans | 7,742 | | 9,405 | |
Accrued interest and other adjustments | 904 | | 656 | |
Amounts due from fellow Banco Santander subsidiaries and joint ventures | 4,165 | | 3,080 | |
Loans and advances to customers | 224,795 | | 214,378 | |
Credit impairment loss allowances on loans and advances to customers | (933) | | (828) | |
Residual value and voluntary termination provisions on finance leases | (22) | | (25) | |
Net loans and advances to customers | 223,840 | | 213,525 | |
For movements in expected credit losses, see the 'Movement in total exposures and the corresponding ECL' table in the Santander UK group level - Credit risk review section of the Risk review.
Finance lease and hire purchase contract receivables may be analysed as follows:
| | | Group | | Group |
| | 2020 | | 2019 | | 2022 | | 2021 |
| | Gross investment | Unearned finance income | Net investment | | Gross investment | Unearned finance income | Net investment | | Gross investment | Unearned finance income | Net investment | | Gross investment | Unearned finance income | Net investment |
| | £m | | £m | | £m | | £m |
No later than one year | No later than one year | 3,468 | | (297) | | 3,171 | | | 3,060 | | (303) | | 2,757 | | No later than one year | 1,493 | | (182) | | 1,311 | | | 1,906 | | (5) | | 1,901 | |
Later than one year and not later than two years | Later than one year and not later than two years | 1,829 | | (173) | | 1,656 | | | 2,046 | | (207) | | 1,839 | | Later than one year and not later than two years | 1,367 | | (168) | | 1,199 | | | 1,324 | | (201) | | 1,123 | |
Later than two years and not later than three years | Later than two years and not later than three years | 1,099 | | (106) | | 993 | | | 1,157 | | (119) | | 1,038 | | Later than two years and not later than three years | 1,190 | | (147) | | 1,043 | | | 772 | | (141) | | 631 | |
Later than three years and not later than four years | Later than three years and not later than four years | 575 | | (55) | | 520 | | | 541 | | (54) | | 487 | | Later than three years and not later than four years | 1,044 | | (129) | | 915 | | | 343 | | (82) | | 261 | |
Later than four years and not later than five years | Later than four years and not later than five years | 231 | | (25) | | 206 | | | 41 | | (4) | | 37 | | Later than four years and not later than five years | 143 | | (18) | | 125 | | | 38 | | (38) | | — | |
Later than five years | Later than five years | 8 | | 0 | | 8 | | | 147 | | (41) | | 106 | | Later than five years | 59 | | (7) | | 52 | | | — | | — | | — | |
| | 7,210 | | (656) | | 6,554 | | | 6,992 | | (728) | | 6,264 | | | 5,296 | | (651) | | 4,645 | | | 4,383 | | (467) | | 3,916 | |
The prior year analysis by maturity in the table above has been restated to conform with the current year presentation.
Santander UK Group Holdings plc233
| | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 220 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Annual Report 2020 | Financial statements
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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 £3,552m (2019: £3,512m)£1,761m (2021: £1,510m) of unguaranteed RV at the end of the current lease terms, which is expected to be recovered through re-payment, re-financing or sale. Contingent rent income of £NaN (2019: £NaN, 2018: £NaN)£nil (2021: £nil, 2020: £nil) was earned duringin the year, which was classified in ‘Interest and similar income’. Finance income on the net investment in finance leases was £308m (2019: £299m, 2018: £346m)£230m (2021: £243m, 2020: £308m).
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 14.
At 31 December 2022 and 2021, the Santander UK group had contracted with lessees for the following future undiscounted minimum lease payments receivable under operating leases.
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| Group |
| 2022 | 2021 |
| | £m |
No later than one year | 31 | | 31 | |
Later than one year and not later than two years | 28 | | 27 | |
Later than two years and not later than three years | 23 | | 22 | |
Later than three years and not later than four years | 13 | | 15 | |
Later than four years and not later than five years | 11 | | 11 | |
Later than five years | 22 | | 28 | |
| 128 | | 134 | |
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.transactions.
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 costlow-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 to non-recourse finance arrangements. These loans and receivables have been purchased by, or assigned to, structured entities or Abbey Covered Bonds LLP, and have been funded primarily through the issue of mortgage-backed securities, 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.subsidiary undertakings. 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) 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 regulatory requirements.
In April 2020, Santander UK plc followed FCA guidance on how they expect mortgage lenders and administrators to treat customers fairly during the Covid-19 pandemic and restructured all its securitisations to accommodate its obligations as servicer under the principles set out in the FCA Handbook and Mortgage Conduct of Business rules.
The granting of payment holidays to any securitised loans results in a corresponding decrease in revenue receipts available to the trust company to distribute to the funding entity on each distribution date. To mitigate the potential impact to the securitisations, the qualifying structured entities were amended to direct a cash payment to the funding entity in an amount equal to the funding entity's share of the aggregate amount of the interest that would have been due on any loans which are the subject of a payment holiday. To effect such cash payment, Santander UK plc’s share of revenue receipts is reduced by such amount and the funding entity's share of revenue receipts increased accordingly, making the impact neutral to the securitisation.
ii) Other securitisation structures
The Santander UK group issues notes through pass-through stand-alone vehicles foralso makes use of auto loan securitisations, whereby a pool of auto loans originated by a member of the securitisation of receivables derived from credit agreements with retail customers forSantander UK group is sold to a special purpose vehicle by the asset originator. The special purpose vehicle funds the purchase of financed vehicles. Santander UK plc and its subsidiaries are under no obligationthe auto loans by issuing asset-backed securities to support any losses that may be incurred by the master trust or other structures, securitisation companies or holdersthird-party investors. A proportion of the securities are also retained by members of the Santander UK group. Members of the Santander UK group also receive payments from the special purpose vehicle in respect of fees for administering the auto loans, and dopayment of deferred consideration for the sale of the auto loans. The seller has no right or obligation to repurchase any securitised loan, except if certain representations and warranties given by the seller at the time of transfer are breached and, in certain cases, if there has been a subsequent variation in the terms of the underlying auto loan not intend to provide such further support.permitted under the sale agreement.
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Annual Report 2022 | Santander UK Group Holdings plc 221 |
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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.
234Santander UK Group Holdings plc
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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 20202022 and 20192021 are listed below.
| | | Gross assets | | External notes in issue | | Notes issued to Santander UK plc/subsidiaries as collateral | | Gross assets | | External notes in issue | | Notes issued to Santander UK plc/subsidiaries as collateral |
| | 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
£m | £m | | £m | £m | | £m | £m | £m | £m | | £m | £m | | £m | £m |
Mortgage-backed master trust structures: | Mortgage-backed master trust structures: | | | | | | | Mortgage-backed master trust structures: | | | | | | |
–Holmes | 3,073 | | 4,262 | | | 829 | | 1,931 | | | 334 | | 463 | | |
–Fosse | 2,258 | | 3,708 | | | 290 | | 295 | | | 1,402 | | 1,404 | | |
–Langton | 2,782 | | 3,076 | | | 0 | | 0 | | | 2,355 | | 2,354 | | |
- Holmes | | - Holmes | 1,646 | | 2,294 | | | 790 | | 430 | | | 176 | | 183 | |
- Fosse | | - Fosse | 2,028 | | 2,154 | | | 100 | | 288 | | | 1,365 | | 1,402 | |
| | 8,113 | | 11,046 | | | 1,119 | | 2,226 | | | 4,091 | | 4,221 | | | 3,674 | | 4,448 | | | 890 | | 718 | | | 1,541 | | 1,585 | |
Other asset-backed securitisation structures: | Other asset-backed securitisation structures: | | | | | | | Other asset-backed securitisation structures: | | | | | | | |
–Motor | 189 | | 490 | | | 104 | | 324 | | | 97 | | 197 | | |
–Auto ABS UK Loans | 1,460 | | 1,532 | | | 1,107 | | 1,229 | | | 361 | | 368 | | |
| 1,649 | | 2,022 | | | 1,211 | | 1,553 | | | 458 | | 565 | | |
- Motor | | - Motor | 6 | | 38 | | | 7 | | 41 | | | — | | — | |
Total securitisation programmes | Total securitisation programmes | 9,762 | | 13,068 | | | 2,330 | | 3,779 | | | 4,549 | | 4,786 | | Total securitisation programmes | 3,680 | | 4,486 | | | 897 | | 759 | | | 1,541 | | 1,585 | |
Covered bond programmes | Covered bond programmes | | | | | | | Covered bond programmes | | | | | | |
–Euro 35bn Global Covered Bond Programme | –Euro 35bn Global Covered Bond Programme | 23,670 | | 23,323 | | | 19,285 | | 19,004 | | | 0 | | 0 | | –Euro 35bn Global Covered Bond Programme | 21,304 | | 15,713 | | | 15,205 | | 12,760 | | | — | | — | |
Total securitisation and covered bond programmes | Total securitisation and covered bond programmes | 33,432 | | 36,391 | | | 21,615 | | 22,783 | | | 4,549 | | 4,786 | | Total securitisation and covered bond programmes | 24,984 | | 20,199 | | | 16,102 | | 13,519 | | | 1,541 | | 1,585 | |
Less: held by Santander UK group: | | | | |
–Euro 35bn Global Covered Bond Programme | | 0 | | 0 | | | |
Total securitisation and covered bond programmes (See Note 26) | | 21,615 | | 22,783 | | | |
The following table sets out the internal and external issuances and redemptions in 20202022 and 20192021 for each securitisation and covered bond programme.
| | | Internal issuances | | External issuances | | Internal redemptions | | External redemptions | | Internal issuances | | External issuances | | Internal redemptions | | External redemptions |
| | 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
| | £bn | £bn | | £bn | £bn | | £bn | £bn | | £bn | £bn | | £bn | £bn | | £bn | £bn | | £bn | £bn | | £bn | £bn |
Mortgage-backed master trust structures: | Mortgage-backed master trust structures: | | | | | | | | | Mortgage-backed master trust structures: | | | | | | | | |
–Holmes | –Holmes | 0 | | 0 | | | 0 | | 0 | | | 0.3 | | 0 | | | 0.9 | | 1.1 | | –Holmes | — | | — | | | 0.6 | | — | | | 0.1 | | 0.2 | | | 0.2 | | 0.4 | |
–Fosse | –Fosse | 0 | | 1.4 | | | 0 | | 0.1 | | | 0 | | 0 | | | 0 | | 0 | | –Fosse | — | | — | | | — | | — | | | — | | — | | | 0.2 | | — | |
–Langton | –Langton | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | –Langton | — | | — | | | — | | — | | | — | | 2.4 | | | — | | — | |
Other asset-backed securitisation structures: | Other asset-backed securitisation structures: | | | | | | | | | Other asset-backed securitisation structures: | | | | | | | | |
–Motor | –Motor | 0 | | 0 | | | 0 | | 0 | | | 0.1 | | 0.2 | | | 0.2 | | 0.4 | | –Motor | — | | — | | | — | | — | | | — | | 0.1 | | | — | | 0.1 | |
–Auto ABS UK Loans | –Auto ABS UK Loans | 0 | | 0.1 | | | 0.3 | | 0.2 | | | 0 | | 0.1 | | | 0.1 | | 0.2 | | –Auto ABS UK Loans | — | | — | | | — | | — | | | — | | 0.1 | | | — | | 0.1 | |
Covered bond programme | Covered bond programme | 0 | | 0 | | | 3.0 | | 2.9 | | | 0 | | 0.5 | | | 2.7 | | 1.5 | | Covered bond programme | — | | — | | | 4.2 | | — | | | 0.1 | | — | | | 1.7 | | 6.5 | |
| | 0 | | 1.5 | | | 3.3 | | 3.2 | | | 0.4 | | 0.8 | | | 3.9 | | 3.2 | | | — | | — | | | 4.8 | | — | | | 0.2 | | 2.8 | | | 2.1 | | 7.1 | |
In 2021 all the remaining Langton bonds were redeemed and all the remaining associated mortgages were repurchased by Santander UK plc. There was no gain or loss on redemption.
Redemptions for Auto ABS UK Loans, which were held in PSA Finance UK Limited (PSA), are included up to 30 July 2021, the date on which the Santander UK group sold its entire shareholding in PSA.
Holmes Funding Ltd has a beneficial interest of £1.0bn (2019: £2.1bn)£0.8bn (2021: £0.5bn) in the residential mortgage loans held by Holmes Trustees Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Holmes Trustees Ltd belongs to Santander UK plc.
Fosse Funding (No.1) Ltd has a beneficial interest of £1.7bn (2019: £1.7bn)£1.5bn (2021: £1.6bn) in the residential mortgage loans held by Fosse Trustee (UK) Ltd. The remaining share of the beneficial interest in residential mortgage loans held by Fosse Trustee (UK) Ltd belongs to Santander UK plc.
Langton Funding (No.1) Ltd has a beneficial interest of £2.4bn (2019: £2.4bn) 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 £186m (2019: £283m)£112m (2021: £60m), 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.
The Fosse Master Issuer plc hassecuritisation companies have cash deposits of £NaN (2019: £NaN)£108m (2021: £185m), which have been accumulated to finance the redemption of a number of securities issued by Fosse Master Issuer plc.securitisation companies. The share of Fosse Funding (No.1) Ltd’s beneficial interest in the assets held by Fosse Trustee (UK) Ltd is therefore reduced by this amount.
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Annual Report 2022 | Santander UK Group Holdings plc 222 |
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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 substancea result of thethese 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 (the servicing fee in respect of which is dependent on the amount or timing of the cash flows collected from, or the non-performance of, 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.
Santander UK Group Holdings plc235
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Annual Report 2020 | Financial statements
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The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:
| | | | | Group | | | | Group |
| | 2020 | | 2019 | | 2022 | | 2021 |
| | Assets | Liabilities | | Assets | Liabilities | | Assets | Liabilities | | Assets | Liabilities |
Nature of transaction | Nature of transaction | £m | £m | Nature of transaction | £m | £m |
Sale and repurchase agreements | Sale and repurchase agreements | 1,597 | | (1,340) | | | 7,592 | | (6,739) | | Sale and repurchase agreements | 120 | | (128) | | | 171 | | (172) | |
Securities lending agreements | Securities lending agreements | 918 | | (752) | | | 195 | | (143) | | Securities lending agreements | 2,871 | | (2,509) | | | 1,892 | | (1,742) | |
Securitisations (See Notes 14 and 26) | Securitisations (See Notes 14 and 26) | 6,980 | | (2,330) | | | 9,992 | | (3,779) | | Securitisations (See Notes 14 and 26) | 3,680 | | (897) | | | 4,486 | | (759) | |
| | 9,495 | | (4,422) | | | 17,779 | | (10,661) | | | 6,671 | | (3,534) | | | 6,549 | | (2,673) | |
16. REVERSE REPURCHASE AGREEMENTS – NON TRADING
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
£m | £m | £m | £m |
Agreements with banks | Agreements with banks | 1,258 | | 2,161 | | Agreements with banks | 885 | | 447 | |
Agreements with customers | Agreements with customers | 18,341 | | 21,475 | | Agreements with customers | 6,463 | | 12,236 | |
| | 19,599 | | 23,636 | | | 7,348 | | 12,683 | |
17. OTHER FINANCIAL ASSETS AT AMORTISED COST
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
£m | £m | £m | £m |
Asset backed securities | Asset backed securities | 491 | | 532 | | Asset backed securities | 94 | | 443 | |
Debt securities | Debt securities | 672 | | 6,524 | | Debt securities | 62 | | 63 | |
| | 1,163 | | 7,056 | | | 156 | | 506 | |
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.
18. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
£m | £m | £m | £m |
Debt securities | Debt securities | 8,929 | | 9,691 | | Debt securities | 6,024 | | 5,833 | |
Loans and advances to customers | Loans and advances to customers | 21 | | 56 | | Loans and advances to customers | — | | 18 | |
| | 8,950 | | 9,747 | | | 6,024 | | 5,851 | |
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. INTERESTS IN OTHER ENTITIES
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| | Group |
| 2020 | 2019 |
£m | £m |
Joint Ventures | 172 | | 117 | |
| 172 | | 117 | |
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.
236Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 223 |
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19. INTERESTS IN OTHER ENTITIES
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| 2022 | 2021 |
£m | £m |
Joint Ventures | 252 | | 201 | |
| 252 | | 201 | |
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 it.
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.SFSregistration. SFS has branch offices in Jersey and the Isle of Man.
Subsidiaries with significant non-controlling interests
The only subsidiary with significant non-controlling interests is PSA Finance UK Limited, which operates in the UK. In 2020 and 2019, the proportion of ownership interests and voting rights held by non-controlling interests was 50%.
| | | | | | | | |
| 2020 | 2019 |
| £m | £m |
Profit attributable to non-controlling interests | 19 | | 19 | |
Accumulated non-controlling interests of the subsidiary | 162 | | 160 | |
Dividends paid to non-controlling interests | 15 | | 12 | |
Summarised financial information: | | |
Total assets | 3,451 | | 3,228 | |
Total liabilities | 3,127 | | 2,905 | |
Profit for the year | 38 | | 40 | |
Total comprehensive income for the year | 33 | | 40 | |
Interests in consolidated structured entities
Structured entities are formed by Santander UK to accomplish specific and well-defined objectives. Santander UK consolidatesconsolidated 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 14 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 inion relevant Notes.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)
All protected cells in GIP, a Guernsey-incorporated, closed-ended, protected cell company, were redeemed in 2020 with the final redemption taking place on 31 December 2020. Santander Guarantee Company, a Santander UK group company, guaranteed the shareholders of cells a fixed return on their investment and/or the investment amount on redemption. As Santander UK has no remaining exposure to the variable risks and returns through Santander Guarantee Company’s guarantee, it no longer consolidates GIP.
ii) Motor Securities 2018-1 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 group loans. Concurrently, these entities sellentity sells credit protection to Santander UK in respect of the referenced loans and, in return for a fee, areis liable to make protection payments to Santander UK upon the occurrence of a credit event in relation to any of the referenced loans. Motor 2018 is consolidated as Santander UK 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 2020,2022, Santander UK’s share in the profit after tax of its joint ventures was £20m (2019: £30m)£36m (2021: £22m) before elimination of transactions between Santander UK and the joint ventures. At 31 December 2020,2022, the carrying amount of Santander UK’s interest was £172m (2019: £117m)£252m (2021: £201m). At 31 December 20202022 and 2019,2021, the joint ventures had 0no 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. Theinfluence.The structured entities sponsored but not consolidated by Santander UK are as follows.follows:
i) Santander (UK) Common Investment Fund (the 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 £13,553m (2019: £12,446m)£8,646m (2021: £14,100m) 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 30. 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.
ii) Credit protection entities
Santander UK has established 3 (2019: 4)four (2021: three) unconsolidated credit protection entities, which are Designated Activity Companies limited by 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 £2,160m (2019: £3,766m)£180m (2021: £1,184m), are issued to, and held by, Santander UK. Junior credit linked notes, which amounted to £678m (2019: £825m)£465m (2021: £619m), are all held by third party investors and suffer the first losses incurred in the referenced portfolios.portfolios after any tranche of risk that has been assumed by Santander UK. Funds raised by the sale of the credit linked notes are deposited with Santander UK as collateral for the credit protection.
The senior credit linked notes, along with the deposits and associated guarantees, are presented on a net basis, to reflect a legal right of set-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 in ‘Deposits by customers’ (see Note 23). The entities are not consolidated by Santander UK because the third partythird-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 entities. Since 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 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 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 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.
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Annual Report 2022 | Santander UK Group Holdings plc 224 |
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20. INTANGIBLE ASSETS
a) Goodwill
| | | | | | | | | | | |
| | | Group |
| Cost | Accumulated impairment | Net book value |
| £m | £m | £m |
At 31 December 2019, 1 January 2020 and 31 December 2020 | 1,285 | | (82) | | 1,203 | |
| | | | | | | | | | | |
| | | Group |
| Cost | Accumulated impairment | Carrying amount |
| £m | £m | £m |
At 31 December 2021 and 1 January 2022 | 1,285 | | (82) | | 1,203 | |
Movement in the period | — | | (4) | | (4) | |
At 31 December 2022 | 1,285 | | (86) | | 1,199 | |
Impairment of goodwill
In 20202022 and 2019, 02021, no significant impairment of goodwill was recognised. Goodwill is tested for impairment annually at 30 November,31 December, with a review for impairment indicators of impairment at 30 June and 31 December.June. Goodwill is tested for impairment if reviews identify an impairment indicator of impairment or when events or changes in circumstances dictate.
At 30 November 2020, theThe annual review identified that the continuing uncertainty createdrisks of Covid-19 have reduced significantly; however rising inflation, exacerbated by the Covid-19 pandemicconflict in Ukraine, places increasing uncertainty on the UK economic trajectory, and its potential impact on the carrying value of goodwill as impairment indicators of impairment for all cash-generating units (CGUs). As a result, management performed an updated the impairment test at 31 December 20202022 for all CGUs.
Basis of the recoverable amount
The recoverable amount of all CGUs was determined based on its value in use (VIU) methodology at each testing date for 2020 and 2019.date. For each CGU, the VIU is calculated by discounting management’s cash flow projections for the CGU. The cash flow projections also take account of increased internal capital allocations needed to achieve internal and regulatory capital targets including the leverage ratio. The key assumptions used in the VIU calculation for each CGU are set out below. The Retail Banking segment consists of the Private Banking CGU and the rest of Retail Banking, known as the Personal Financial Services CGU.
KeyCarrying amount of Goodwill by CGU and key assumptions in the VIU calculation.calculation
| | | Goodwill | | Discount rate | | Growth rate beyond initial cash flow projections | | Goodwill | | Discount rate | | Growth rate beyond initial cash flow projections |
| | 2020 | 2019 | | 2020 | 2019 | | 2020 | 2019 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
CGU | CGU | £m | £m | | % | % | | % | % | CGU | £m | £m | | % | % | | % | % |
Personal financial services | 1,169 | | 1,169 | | | 13.6 | | 9.8 | | | 1.6 | | 1.6 | | |
Private banking | 30 | | 30 | | | 8.9 | | 9.8 | | | 1.6 | | 1.6 | | |
Personal Financial Services | | Personal Financial Services | 1,169 | | 1,169 | | | 16.6 | | 13.6 | | | 1.6 | | 1.6 | |
Private Banking | | Private Banking | 30 | | 30 | | | 15.3 | | 16.3 | | | 1.6 | | 1.6 | |
Other | Other | 4 | | 4 | | | 13.6 | | 9.8 | | | 1.6 | | 1.6 | | Other | — | | 4 | | | 13.6 | | | 1.6 | |
| | 1,203 | | 1,203 | | | | | | | 1,199 | | 1,203 | | | | | |
The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives.
Management’s judgement in estimating the cash flows of a CGU
The cash flow projections for the purpose of impairment testing for each CGU are derived from the latest 3-year plan presented to the Board. The Board challenges and endorses management’s planning assumptions in light of internal capital allocations needed to support Santander UK’s strategy, current market conditions and the macro-economicmacroeconomic outlook. For the goodwill impairment tests conducted at 31 December 2020,2022, the determination of the carrying valueamount of the Personal Financial Services CGU was based on an allocation of regulatory capital and management’s cash flow projections until the end of 2023.2025. The assumptions included in the cash flow projections reflect an allocation to the cost of capital to support future growth, as well as the expected impact of Covid-19 onrecent events in the UK economic environment andon the financial outlook within which the CGUs operate. The cash flow projections are supported by Santander UK’s base case economic scenario. For more on the base case economic scenario, including our forecasting approach and the assumptions in place at 31 December 2020,2022, see the Credit risk – Santander UK group level section of the Risk review. The cash flow projections take into account the likely impact of recent changes to the BoE Bank Rate, inflation and also consider the impact of future climate change.
Cash flow projections for the purpose of impairment testing do not take account of any adverse outcomes arising from contingent liabilities (see Note 31), whose existence will be confirmed by uncertain future events or where any obligation is not probable or otherwise cannot be measured reliably, nor do they take account of the benefits arising from Santander UK’s transformation plans that had not yet been implemented or committed at 31 December 2020.2022.
Discount rate
The rate used to discount the cash flows is based on the cost of equity assigned to each CGU, which is derived using a capital asset pricing model (CAPM). and calculated on a post-tax basis. The CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. The inputs to the CAPM are observable on a post-tax basis. In determining the discount rate, management have identified the cost of equity associated with market participants that closely resemble our CGUs and adjusted them for tax to arrive at the pre-tax equivalent rate. The Private Banking CGU has a different discount rate compared to the Personal Financial Services CGU because different market participants closely resemble each CGU.
Growth rate beyond initial cash flow projections
The growth rate for periods beyond the initial cash flow projections is used to extrapolate the cash flows in perpetuity because of the long-term perspective of CGUs. In line with the accounting requirements, management uses the UK Government’s official estimate of UK long-term average GDP growth rate, as this is lower than management's estimate of the long-term average growth rate of the business. The estimated UK long-term average GDP growth rate has regard to the long-term impact of inherent uncertainties, such as Brexit, climate change and higher living costs, driven by high inflation and rising interest rates.
238Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 225 |
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Sensitivities
Goodwill arising on the acquisition of key assumptions in calculating VIUPersonal Financial Services and Private Banking
The VIU of each CGU remains higher than the carrying value of the related goodwill. However,The VIU review at 31 December 2020,2022 did not indicate the need for an impairment in the Company’s goodwill balances. Management considered the level of headroom and the uncertainty relating to the respective estimates of the VIU for those CGUs but determined that there was a sufficient basis to conclude that no impairment was required.
Sensitivities of key assumptions in calculating the value in use
At 31 December 2022 and 31 December 2021, the VIU of the Personal Financial Services CGU was sensitive to reasonably possible changes in the key assumptions supporting the recoverable amount, although no reasonably possible changes in any of the key assumptions would have resulted in an impairment.amount.
The table below presents a summary of the key assumptions underlying the most sensitive inputs to the model for the Personal Financial Services CGU, the key risks associated with each and details of a reasonably possible change in assumptions, such as a decrease in mortgage new business. The sensitivity analysis presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might impact one or more of the other assumptions and could result in an impairment.a larger or smaller overall impact.
The VIU calculation is not sensitive overall to the UK long-term average GDP growth rate assumption given the amount of headroom as the increased profit after tax generated by growth of the business is mostly offset by the need to retain more profit to meet increased regulatory capital requirements driven by the growth in assets. No reasonably possible change in the growth rate assumption would have resulted in an impairment.
Reasonably possible changes in key assumptions
| | | | | | | | | | | | | | | |
CGU | Input | Key assumptions | Associated risks | Reasonably possible change | |
Personal Financial Services | –Cash flow projections
| –BoE Bank Rate –UK house price growth –UK mortgage loan market growth –UK unemployment rate –Position in the market –Regulatory capital levels. | –Uncertain market outlook –Persistent lowHigher interest rate environment impact on customer affordability –Customer remediation and regulatory action outcomes –Uncertain regulatory capital requirements. | –Cash flow projections decrease by 5% (2021: 5%). | |
–Discount rate
| –Discount rate used is a reasonable estimate of a suitable market rate for the profile of the business. | –Market rates of interest rise. | –Discount rate increases by 100 basis points.points (2021: 100 basis points). | |
| | | | |
At 31 December 2022 and 31 December 2021, a reasonably possible change in the key assumptions in relation to the VIU calculation for the goodwill balance in the Personal Financial Services CGU would have resulted in a reduction in headroom as follows.
| | | | | | | | | | | |
| | Reduction in headroom |
| | 2022 | 2021 |
CGU | Reasonably possible change | £m | £m |
Personal Financial Services | Cash flow projections decrease by 5% (2021: 5%) | (538) | | (455) | |
| Discount rate increases by 100 basis points (2021: 100 basis points) | (887) | | (943) | |
Sensitivity of VIUValue in use changes to current assumptions to achieve nil headroom
Although there was no impairment of goodwill at 31 December 2020, the amount by whichrelating to the Personal Financial Services CGU’s recoverable amount exceedsCGU or the carrying value (the headroom) reduced andPrivate Banking CGU at 31 December 2022, the test is nowfor the Personal Financial Services CGU remains sensitive to some of the assumptions used. Theused, as described above. In addition, the changes in assumptions detailed below for the discount rate and cash flow projections would eliminate the current headroom. As a result, there is a risk of impairment in the future should business performance or economic factors diverge from forecasts.
In 2022, there was an increase in headroom arising from an increase in profitability and cash flows forecast as interest rates have risen, alongside a reduction in the required leverage capital requirement, which was partially offset by an increase in the discount rate.
The sensitivity analysis presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might impact one or more of the other assumptions and could result in a larger or smaller overall impact.
| | | Carrying value | Value in use | Headroom | Increase in post tax discount rate | | Decrease in cash flows | |
2022 | | 2022 | Carrying value | Value in use | Headroom | Increase in discount rate | Decrease in cash flows |
CGU | CGU | £m | bps | | % | CGU | £m | bps | % |
Personal Financial Services | Personal Financial Services | 6,758 | | 8,602 | | 1,844 | | 239 | | | 22 | | Personal Financial Services | 8,860 | | 10,752 | | 1,892 | | 239 | 18 | |
| | | | | | | | | | | | | | | | | | |
2021 | | | | | | |
Personal Financial Services | 8,433 | | 9,100 | | 667 | | 68 | | 7 | |
At 31 December 2019, there were no reasonably possible changes in any of the key assumptions that would have resulted in an impairment. | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 226 |
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b) Other intangibles
| | | Group | | Group |
| | Cost | Accumulated amortisation / impairment | Net book value | | Cost | Accumulated amortisation / impairment | Carrying amount |
| | £m | | £m |
At 1 January 2020 | 1,263 | | (690) | | 573 | | |
At 1 January 2022 | | At 1 January 2022 | 1,346 | | (1,004) | | 342 | |
Additions | Additions | 101 | | 0 | | 101 | | Additions | 112 | | — | | 112 | |
Disposals | Disposals | (47) | | 47 | | 0 | | Disposals | (186) | | 186 | | — | |
Charge | Charge | 0 | | (198) | | (198) | | Charge | — | | (100) | | (100) | |
Impairment | Impairment | 0 | | (30) | | (30) | | Impairment | — | | (3) | | (3) | |
At 31 December 2020 | 1,317 | | (871) | | 446 | | |
At 31 December 2022 | | At 31 December 2022 | 1,272 | | (921) | | 351 | |
| At 1 January 2019 | 1,099 | | (488) | | 611 | | |
At 1 January 2021 | | At 1 January 2021 | 1,317 | | (871) | | 446 | |
Additions | Additions | 178 | | 0 | | 178 | | Additions | 83 | | — | | 83 | |
Disposals | Disposals | (14) | | 0 | | (14) | | Disposals | (54) | | 53 | | (1) | |
Charge | Charge | 0 | | (192) | | (192) | | Charge | — | | (159) | | (159) | |
Impairment | Impairment | 0 | | (10) | | (10) | | Impairment | — | | (27) | | (27) | |
At 31 December 2019 | 1,263 | | (690) | | 573 | | |
At 31 December 2021 | | At 31 December 2021 | 1,346 | | (1,004) | | 342 | |
Other intangibles which consist of computer software, include computer software under development of £99m (2019: £197m)£149m (2021: £83m), of which £68m£33m is internally generated (2019: £123m)(2021: £31m).
The impairment charge of £3m (2021: £27m) relates to computer software no longer expected to yield future economic benefits as it has become obsolete.
21. PROPERTY, PLANT AND EQUIPMENT | | | | | | | | | | | | | | | | | | | | |
| | | | | | Group |
| Property | Office fixtures and equipment | Computer software | Operating lease assets | Right-of-use assets | Total(1) |
| £m | £m | £m | £m | £m | £m |
Cost: | | | | | | |
At 1 January 2022 | 981 | 1,056 | 437 | 755 | 258 | 3,487 |
Additions | 62 | 87 | 4 | 185 | 39 | 377 |
Reclassification to assets held for sale | (98) | (13) | — | — | — | (111) |
Disposals | (52) | (299) | (362) | (218) | (25) | (956) |
At 31 December 2022 | 893 | 831 | 79 | 722 | 272 | 2,797 |
Accumulated depreciation: | | | | | | |
At 1 January 2022 | 335 | 863 | 435 | 160 | 139 | 1,932 |
Charge for the year | 18 | 69 | 1 | 73 | 19 | 180 |
Impairment during the year | 8 | 2 | — | — | — | 10 |
Reclassification to assets held for sale | (49) | (13) | — | — | — | (62) |
Disposals | (41) | (296) | (363) | (88) | (1) | (789) |
At 31 December 2022 | 271 | 625 | 73 | 145 | 157 | 1,271 |
Carrying amount | 622 | 206 | 6 | 577 | 115 | 1,526 |
| | | | | | |
Cost: | | | | | | |
At 1 January 2021 | 1,275 | 1,362 | 436 | 720 | 222 | 4,015 |
Additions | 126 | 28 | 1 | 284 | 65 | 504 |
Disposals | (420) | (334) | — | (249) | (29) | (1,032) |
At 31 December 2021 | 981 | 1,056 | 437 | 755 | 258 | 3,487 |
Accumulated depreciation: | | | | | | |
At 1 January 2021 | 491 | 1,053 | 434 | 178 | 119 | 2,275 |
Charge for the year(2) | 32 | 87 | 1 | 81 | 20 | 221 |
Impairment during the year | 46 | 28 | — | — | 23 | 97 |
Disposals | (234) | (305) | — | (99) | (23) | (661) |
At 31 December 2021 | 335 | 863 | 435 | 160 | 139 | 1,932 |
Carrying amount | 646 | 193 | 2 | 595 | 119 | 1,555 |
(1) Includes assets under construction of £204m (2021: £106m) and investment properties of £17m (2021: £17m). (2) Following a review of the estimated useful lives of property the charge for the year includes accelerated property depreciation of £nil (2021: £9m).
Santander UK Group Holdings plc239
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Annual Report 2022 | Santander UK Group Holdings plc 227 |
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21. PROPERTY, PLANT AND EQUIPMENT
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Group |
| Property | Office fixtures and equipment | Computer software | Operating lease assets | Right-of-use assets | Total(3) |
| £m | £m | £m | £m | £m | £m |
Cost: | | | | | | |
At 1 January 2020 | 1,275 | 1,442 | 439 | 738 | 214 | 4,108 |
Additions | 61 | 24 | 2 | 185 | 10 | 282 |
Disposals | (61) | (104) | (5) | (203) | (2) | (375) |
At 31 December 2020 | 1,275 | 1,362 | 436 | 720 | 222 | 4,015 |
Accumulated depreciation: | | | | | | |
At 1 January 2020 | 457 | 1,022 | 434 | 164 | 60 | 2,137 |
Charge for the year(2) | 80 | 111 | 0 | 92 | 59 | 342 |
Disposals | (46) | (80) | 0 | (78) | 0 | (204) |
At 31 December 2020 | 491 | 1,053 | 434 | 178 | 119 | 2,275 |
Net book value | 784 | 309 | 2 | 542 | 103 | 1,740 |
| | | | | | |
Cost: | | | | | | |
At 1 January 2019(1) | 1,295 | 1,405 | 438 | 604 | 211 | 3,953 |
Additions | 5 | 66 | 1 | 251 | 4 | 327 |
Disposals | (25) | (29) | 0 | (117) | (1) | (172) |
At 31 December 2019 | 1,275 | 1,442 | 439 | 738 | 214 | 4,108 |
Accumulated depreciation: | | | | | | |
At 1 January 2019 | 432 | 908 | 434 | 134 | 0 | 1,908 |
Charge for the year | 39 | 162 | 0 | 81 | 60 | 342 |
Disposals | (14) | (48) | 0 | (51) | 0 | (113) |
At 31 December 2019 | 457 | 1,022 | 434 | 164 | 60 | 2,137 |
Net book value | 818 | 420 | 5 | 574 | 154 | 1,971 |
(1) Represents the valueIn 2021, we sold our current head office site in Triton Square, London to a wholly-owned subsidiary of theBanco Santander SA. Property, office fixtures and equipment and right-of-use assets principally premises, recognised on 1 January 2019 upon adoptionwere impaired in the period as a result of IFRS 16.our multi-year transformation project. The impairment relates to leasehold properties within the scope of our branch network restructuring programme and head office sites which are either closing or consolidating.
(2) Following a review of the estimated useful lives of property asAs part of Santander UK's transformation program,our plan to be the chargebest bank to work for in the year includes accelerated property depreciationUK, we are building a new head office in Milton Keynes to meet the flexible needs of £9m (2019: £2m).a modern workforce. It represents a planned investment of more than £200m, funded from existing resources. Site works began in Q1 2020 with practical completion expected in April 2023. Expenditure at 31 December 2022 was approximately £204m.
(3) Property, plant and equipment includes assets under construction of £55m (2019: £16m).
The Santander UK group leases properties, vehicles and other equipment which are classified as operating leases because they do not transfer substantially all of the risks and rewards incidental to ownership of the assets. Short-term leases are excluded. See the accounting policy in Note 1.
22. OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
£m | £m | £m | £m |
US$30bn Euro Medium Term Note Programme | US$30bn Euro Medium Term Note Programme | 102 | | 159 | | US$30bn Euro Medium Term Note Programme | 3 | | 5 | |
Structured Notes Programmes | Structured Notes Programmes | 805 | | 809 | | Structured Notes Programmes | 375 | | 413 | |
Eurobonds | Eurobonds | 150 | | 137 | | Eurobonds | 102 | | 142 | |
Structured deposits | Structured deposits | 375 | | 435 | | Structured deposits | 321 | | 223 | |
Collateral and associated financial guarantees | Collateral and associated financial guarantees | 2 | | 173 | | Collateral and associated financial guarantees | 2 | | 20 | |
Repurchase agreements - non trading | 0 | | 0 | | |
| | 1,434 | | 1,713 | | | 803 | | 803 | |
For the Santander UK group all (2019:(2021: all) of the other financial liabilities at fair value through profit or lossFVTPL were designated as such.
Collateral and associated financial guarantees in the table above represent collateral received, together with associated credit protection guarantees, in respect of the proceeds of the retained senior tranches of credit linked notes described in Note 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 of set-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 2020 the amount of this netting was £825m (2019: £1.5bn). For more, see ‘Credit protection entities’ in Note 19.39.
Gains and losses arising from changes in the credit spread of securities issued by the Santander UK group reverse over the contractual life of the debt, provided that the debt is not repaid at a premium or a discount. The net lossgain during the year attributable to changes in the Santander UK group’s own credit risk on the above securities was £25m (2021: £12m loss, 2020: £3m (2019: £77m loss, 2018: £84m gain)loss). The cumulative net lossgain attributable to changes in the Santander UK group’s own credit risk on the above securities at 31 December 20202022 was £15m (2021: £10m loss, 2020: £3m (2019: £NaN)loss).
At 31 December 2020,2022, the amount that would be required to be contractually paid at maturity of the securities above was £11m£138m higher ((20212019: £4m lower): £nil) higher than the carrying value.
23. DEPOSITS BY CUSTOMERS
| | | | | | | | |
| | Group |
| 2022 | 2021 |
£m | £m |
Demand and time deposits(1) | 196,160 | | 191,764 | |
Amounts due to fellow Banco Santander subsidiaries and joint ventures | 1,153 | | 1,150 | |
| 197,313 | | 192,914 | |
(1)Includes equity index-linked deposits of £408m (2021: £549m). The capital amount guaranteed/protected and the amount of return guaranteed in respect of the equity index-linked deposits were £408m and £2m (2021: £549m and £2m) respectively.
24. DEPOSITS BY BANKS
| | | | | | | | |
| | Group |
| 2022 | 2021 |
£m | £m |
Items in the course of transmission | 701 | | 414 | |
Deposits held as collateral | 1,758 | | 941 | |
Other deposits(1) | 26,084 | | 32,507 | |
| 28,543 | | 33,862 | |
(1)Includes drawdown from the TFSME of £25.0bn (2021: £31.9bn).
240Santander UK Group Holdings plc | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 228 |
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23. DEPOSITS BY CUSTOMERS
| | | | | | | | |
| | Group |
| 2020 | 2019 |
£m | £m |
Demand and time deposits(1) | 191,774 | | 177,772 | |
Amounts due to fellow Banco Santander subsidiaries and joint ventures | 1,314 | | 1,234 | |
| 193,088 | | 179,006 | |
(1)Includes equity index-linked deposits of £577m (2019: £1,139m). The capital amount guaranteed/protected and the amount of return guaranteed in respect of the equity index-linked deposits were £577m and £2m (2019: £1,139m and £18m) respectively.
24. DEPOSITS BY BANKS
| | | | | | | | |
| | Group |
| 2020 | 2019 |
£m | £m |
Items in the course of transmission | 375 | | 337 | |
Deposits held as collateral | 2,071 | | 2,175 | |
Other deposits(1) | 18,527 | | 11,847 | |
| 20,973 | | 14,359 | |
(1)Includes drawdown from the TFS of £6.3bn (2019: £10.8bn) and drawdown from the TFSME of £11.7bn (2019:£NaN).
25. REPURCHASE AGREEMENTS – NON TRADING
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
£m | £m | £m | £m |
Agreements with banks(1) | Agreements with banks(1) | 6,358 | | 10,227 | | Agreements with banks(1) | 50 | | 43 | |
Agreements with customers(1) | Agreements with customers(1) | 9,490 | | 8,059 | | Agreements with customers(1) | 7,932 | | 11,675 | |
| | 15,848 | | 18,286 | | | 7,982 | | 11,718 | |
(1) In 2022, an administrative error was identified where some repurchase agreements had been incorrectly classified as 'agreements with banks, rather than 'agreements with customers'. As a result, the balance for
2021 has been restated to reclassify £4,102m from 'agreements with banks' to 'agreements with customers'.
26. DEBT SECURITIES IN ISSUE
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
£m | £m | £m | £m |
Medium-term notes: | Medium-term notes: | | | Medium-term notes: | | |
– US$30bn Euro Medium Term Note Programme | – US$30bn Euro Medium Term Note Programme | 1,694 | | 4,679 | | – US$30bn Euro Medium Term Note Programme | 739 | | 1,405 | |
– Euro 30bn Euro Medium Term Note Programme | – Euro 30bn Euro Medium Term Note Programme | 3,619 | | 5,175 | | – Euro 30bn Euro Medium Term Note Programme | 6,435 | | 4,304 | |
– US SEC-registered Debt Programme – Santander UK Group Holdings plc | 4,882 | | 5,763 | | |
– US SEC-registered Debt Programme – Santander UK plc | 4,723 | | 5,891 | | |
– Euro 750m Senior Unsecured Notes | 673 | | 0 | | |
– US$1bn Senior Unsecured Notes | 734 | | 0 | | |
– US SEC-registered Debt Programme - Santander UK Group Holdings plc | | – US SEC-registered Debt Programme - Santander UK Group Holdings plc | 7,083 | | 5,978 | |
- US SEC-registered Debt Programme - Santander UK plc | | - US SEC-registered Debt Programme - Santander UK plc | 1,276 | | 1,224 | |
| | 16,325 | | 21,508 | | | 15,533 | | 12,911 | |
Euro 35bn Global Covered Bond Programme (See Note 14) | 19,285 | | 19,004 | | |
Euro 35bn Global Covered Bond Programme | | Euro 35bn Global Covered Bond Programme | 15,205 | | 12,760 | |
US$20bn Commercial Paper Programmes | US$20bn Commercial Paper Programmes | 2,824 | | 3,014 | | US$20bn Commercial Paper Programmes | 1,851 | | 2,704 | |
Certificates of deposit | Certificates of deposit | 2,858 | | 2,806 | | Certificates of deposit | 2,874 | | 2,387 | |
Credit linked notes | Credit linked notes | 57 | | 60 | | Credit linked notes | 60 | | 59 | |
Securitisation programmes (See Note 14) | 2,330 | | 3,779 | | |
Securitisation programmes | | Securitisation programmes | 897 | | 759 | |
| | 43,679 | | 50,171 | | | 36,420 | | 31,580 | |
The funding from the Euro 30bn Euro Medium Term Note Programme and the US SEC-registered Debt Programme in the name of Santander UK Group Holdings plc has predominantlymainly been downstreamed to our operating company Santander UK plc.
Santander UK Group Holdings plc241
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Annual Report 2020 | Financial statements
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27. SUBORDINATED LIABILITIES
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
£325m Sterling preference shares | £325m Sterling preference shares | 344 | | 344 | | £325m Sterling preference shares | 344 | | 344 | |
Undated subordinated liabilities | Undated subordinated liabilities | 557 | | 581 | | Undated subordinated liabilities | 219 | | 240 | |
Dated subordinated liabilities | Dated subordinated liabilities | 1,655 | | 2,603 | | Dated subordinated liabilities | 1,769 | | 1,644 | |
| | 2,556 | | 3,528 | | | 2,332 | | 2,228 | |
In 2020,2022, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £24m. In 2019, the Santander UK group did not repurchase any£5m (2021: a loss of its debt securities or subordinated liabilities.£1m).
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 the subordinated liabilities upon a winding up of the issuer is specified in their respective terms and conditions.
In 20202022 and 2019,2021, the Santander UK group had 0no 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.
Undated subordinated liabilities
| | | Group | | Group |
| | | 2020 | 2019 | | | 2022 | 2021 |
| | First call date | £m | £m | | First call date | £m | £m |
10.0625% Exchangeable capital securities | 10.0625% Exchangeable capital securities | n/a | 205 | | 205 | | 10.0625% Exchangeable capital securities | n/a | 205 | | 205 | |
7.375% 20 Year Step-up perpetual callable subordinated notes | 2020 | 0 | | 15 | | |
7.125% 30 Year Step-up perpetual callable subordinated notes | 7.125% 30 Year Step-up perpetual callable subordinated notes | 2030 | 352 | | 361 | | 7.125% 30 Year Step-up perpetual callable subordinated notes | 2030 | 14 | | 35 | |
| | 557 | | 581 | | | | 219 | | 240 | |
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 7.125% 30 Year Step-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 7.375% 20 Year Step-up perpetual callable subordinated notes were redeemed in full on 28 September 2020.
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The 10.0625% Exchangeable capital securities are exchangeable into fully paid 10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of Santander UK plc, on the business day immediately following any interest payment date.
Dated subordinated liabilities
| | | Group | | Group |
| | | 2020 | 2019 | | | 2022 | 2021 |
| | Maturity | £m | £m | | Maturity | £m | £m |
5% Subordinated notes (US$1,500m) | 5% Subordinated notes (US$1,500m) | 2023 | 542 | | 1,132 | | 5% Subordinated notes (US$1,500m) | 2023 | 591 | | 548 | |
4.75% Subordinated notes (US$1,000m) | 4.75% Subordinated notes (US$1,000m) | 2025 | 536 | | 763 | | 4.75% Subordinated notes (US$1,000m) | 2025 | 608 | | 541 | |
7.95% Subordinated notes (US$1,000m) | 7.95% Subordinated notes (US$1,000m) | 2029 | 242 | | 280 | | 7.95% Subordinated notes (US$1,000m) | 2029 | 207 | | 221 | |
6.50% Subordinated notes | 6.50% Subordinated notes | 2030 | 31 | | 40 | | 6.50% Subordinated notes | 2030 | 22 | | 28 | |
5.875% Subordinated notes | 5.875% Subordinated notes | 2031 | 10 | | 9 | | 5.875% Subordinated notes | 2031 | 7 | | 9 | |
5.625% Subordinated notes (US$500m) | 5.625% Subordinated notes (US$500m) | 2045 | 294 | | 379 | | 5.625% Subordinated notes (US$500m) | 2045 | 334 | | 297 | |
| | 1,655 | | 2,603 | | | 1,769 | | 1,644 | |
The dated subordinated liabilities are redeemable in whole at the option of Santander UK plc 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.
28. OTHER LIABILITIES
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Lease liabilities | Lease liabilities | 100 | 138 | Lease liabilities | 129 | 134 |
Other(1) | Other(1) | 2,243 | 2,235 | Other(1) | 2,472 | 1,942 |
| | 2,343 | 2,373 | | 2,601 | 2,076 |
(1) For more information on amounts restated see Note 44.
29. PROVISIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Group |
| Customer remediation | Litigation and other regulatory | Bank Levy | Property | ECL on undrawn facilities and guarantees | Restructuring | Other | Total |
|
£m | £m | £m | £m | £m | £m | £m | £m |
At 1 January 2022 | 44 | | 166 | | 1 | | 74 | | 38 | | 29 | | 14 | | 366 | |
Additional provisions (See Note 8) | 77 | | 137 | | 49 | | — | | 36 | | 23 | | 196 | | 518 | |
Provisions released (See Note 8) | (18) | | (18) | | (4) | | (7) | | — | | — | | (11) | | (58) | |
Utilisation and other | (13) | | (149) | | (60) | | (20) | | — | | (30) | | (192) | | (464) | |
Recharge(1) | — | | — | | 18 | | — | | — | | — | | — | | 18 | |
At 31 December 2022 | 90 | | 136 | | 4 | | 47 | | 74 | | 22 | | 7 | | 380 | |
(1) Recharge in respect of the UK Bank Levy paid on behalf of other UK entities in the Banco Santander group
Provisions expected to be settled within no more than 12 months after 31 December 2022 were £130m (2021: £182m).
a) Customer remediation
Provisions of £77m were recognised in 2022 for two customer remediation exercises relating to our historical mortgage book. Most of the provision relates to the proposed refund of early repayment charges paid by a specific group of customers who historically switched mortgage products The provision remains subject to change as additional data becomes available and remediation boundaries are finalised.
At 31 December 2022 there was no customer remediation provision (2021: £6m) for a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act (CCA). The remediation is now complete with all customers having been contacted.
242Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 230 |
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29. PROVISIONS
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Group |
| Conduct remediation | | | | | |
| PPI | Other products | Bank Levy | Property | Off balance sheet ECL | Regulatory and other | Total |
|
£m | £m | £m | £m | £m | £m | £m |
At 1 January 2020 | 189 | | 25 | | 48 | | 61 | | 78 | | 176 | | 577 | |
Additional provisions (See Note 8) | 0 | | 0 | | 74 | | 9 | | 0 | | 209 | | 292 | |
Provisions released (See Note 8) | 0 | | (15) | | 0 | | (8) | | (3) | | (1) | | (27) | |
Utilisation and other(1) | (113) | | (2) | | (94) | | (17) | | 0 | | (158) | | (384) | |
| | | | | | | |
Recharge(2) | 0 | | 0 | | 10 | | 0 | | 0 | | 0 | | 10 | |
At 31 December 2020 | 76 | | 8 | | 38 | | 45 | | 75 | | 226 | | 468 | |
To be settled: | | | | | | | |
–Within 12 months | 76 | | 2 | | 38 | | 24 | | 75 | | 125 | | 340 | |
–In more than 12 months | 0 | | 6 | | 0 | | 21 | | 0 | | 101 | | 128 | |
| 76 | | 8 | | 38 | | 45 | | 75 | | 226 | | 468 | |
(1) Utilisationb) Litigation and other included a transfer from ‘PPI’ to ‘Regulatoryregulatory
Litigation and other’other regulatory provisions principally comprised amounts in respect of an ongoing legal dispute. No further information haslitigation and other regulatory charges, operational loss and operational risk provisions, and related expenses. A number of uncertainties exist with respect to these provisions given the uncertainties inherent in litigation and other regulatory matters, that affect the amount and timing of any potential outflows with respect to which provisions have been provided on the basis it would be seriously prejudicial.
(2) This relates to a recharge in respectestablished. These provisions are reviewed at least quarterly. The majority of the UK Bank Levy paid on behalf2022 charge is the settlement of other UK entitiesa financial penalty of Banco Santander SA.
a) Conduct remediation
i) Payment Protection Insurance (PPI)
At 31 December 2020, the remaining provision for PPI redress and related costs was £76m (2019: £189m). There was no additional provision in 2020.
Cumulative complaints from the inception of the PPI complaints process to 31 December 2020, regardless of the likelihood of Santander UK incurring a liability, were 4.6m. At 31 December 2020, there were an estimated 3,500 complaints still requiring assessment and we had also entered into a commercial negotiation£108m with the Official Receiver.FCA for shortcomings in our anti-money laundering controls.
Although the deadline for bringing PPI complaints has passed, customers can still commence litigation concerning the historical salePlevin related litigation. Amounts include a provision of PPI. Provision has been made£24m for the best estimate of any obligation to pay compensation in respect of current stock and estimated future claims. However, thereThere are ongoing factual issues to be resolved regarding such litigation which may have legal consequences including the volume and quality of future litigation claims. As a result, the extent of the potential liability and amount of any compensation to be paid remains uncertain.
The provision for conduct remediation recognised represents management’s best estimate of Santander UK’s liability in respect of mis-selling of PPI policies.
(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 £8m (2019: £25m), which primarily related to the sale of mortgage endowments.
b) 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 0.14% applies for 2020 (2019: 0.15%). The UK Bank Levy cost for 2020 was £74m (2019: £87m, 2018: £69m). The Santander UK group paid £88m in 2020 (2019: £90m) and provided for a liability of £38m at 31 December 2020 (2019: £48m).
c) Property
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 expected sub-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 £1m of transformation charges in 2020. 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, and in particular the closure of university branches in 2020.
d) Off-balance sheet ECL
Provisions include expected credit losses relating to guarantees given to third parties and undrawn loan commitments.
e) Regulatory and other
Regulatory and other provisions principally comprised 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 at least quarterly.
At 31 December 2020 Regulatory and other provisions included an amount of £47m (2019: £68m) that arose from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act (CCA). This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2020 of potential costs in respect of the identified issue. As detailed in Note 31, there are aspects of the issue which remain under review.
The balance also included an amount in respect of our best estimate of the liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints, further described in Note 31. No further information on the best estimate is provided on the basis that it would be seriously prejudicial.
c) Bank Levy
A rate of 0.10% applied for 2022 (2021: 0.10%).
d) Property
Property provisions include leasehold vacant property provisions, dilapidation provisions for leased properties within the scope of IFRS 16 and decommissioning and disposal costs relating to vacant freehold properties. Leasehold vacant property provisions are made by reference to an estimate of any expected sub-let income, compared to the head rent, and the possibility of disposing of Santander UK Group Holdings plcUK’s interest in the lease, taking into account conditions in the property market.
243
e) ECL on undrawn facilities and guarantees
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Annual Report 2020 | Financial statements
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Provisions include expected credit losses relating to guarantees given to third parties and undrawn loan commitments.In 2020 there wasf) Restructuring
Restructuring provisions relate to severance costs associated with transformation and organisational changes. The provision includes a charge of £17m included in Regulatory and other provisions, relating to breaches of certain requirements to provide SMS warning alerts to customers regarding overdraft charges in our Retail Banking Business. It also included a charge of £65m£19m as part of our multi-year transformation programme to improve future returns, focused on simplifying, digitising and automating the bank, a chargebank.
g) Other
Other provisions do not fit into any of the other categories, such as some categories of operational losses, including fraud losses. In 2022, Other provisions included charges for operational risk provisions of £91m, and smaller charges for legal and redundancy provisions.£186m, including fraud losses of £153m.
30. RETIREMENT BENEFIT PLANS
The amounts recognised in the balance sheet were as follows:
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Assets/(liabilities) | Assets/(liabilities) | | | Assets/(liabilities) | | |
Funded defined benefit pension scheme - surplus | Funded defined benefit pension scheme - surplus | 496 | | 670 | | Funded defined benefit pension scheme - surplus | 1,051 | | 1,573 | |
Funded defined benefit pension scheme - deficit | (361) | | (239) | | |
Unfunded pension and post retirement medical benefits | (42) | | (41) | | |
| Unfunded pension and post-retirement medical benefits | | Unfunded pension and post-retirement medical benefits | (25) | | (37) | |
Total net assets | Total net assets | 93 | | 390 | | Total net assets | 1,026 | | 1,536 | |
Remeasurement losses/(gains) recognised in other comprehensive income duringin the year were as follows:
| | | | | | | | | | | |
| | | Group |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Pension remeasurement | 505 | | 523 | | (469) | |
| | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Pension remeasurement | 723 | | (1,263) | | 505 | |
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. The majority of employees are members of a defined contribution Master Trust, LifeSight. This is the plan into which eligible employees are enrolled automatically. The assets of LifeSight are held in separate trustee-administered funds. In October 2020, there was a transfer of assets and liabilities to LifeSight from the defined contribution section of the main Santander UK Group defined benefit pension scheme (see below). Funds arising from Additional Voluntary Contributions (AVCs) are largely remainedheld within the main defined benefit scheme operated by the Santander UK Group scheme.group.
An expense of £67m (2019: £67m, 2018: £66m)£60m (2021: £65m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 6).
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. The Scheme covers 11% (2019:10% (2021: 11%) 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-ownedwholly owned subsidiary of Santander UK Group Holdings plc. The principal duty of the Trustee is to act in the best interests of the members of the Scheme. The Trustee board comprises five (2019: 5)six (2021: five) Directors selected by Santander UK Group Holdings plc, plus five (2019: 5)four (2021: five) 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
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Annual Report 2022 | Santander UK Group Holdings plc 231 |
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fund, managed by Santander (CF Trustee) Limited, a private limited company owned by 5ten Trustee directors, 3 appointed by Santander UK plc and 2 bywho are the same as the directors of 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 materialany 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-qualifiedprofessionally qualified actuaries and valued for accounting purposes at each balance sheet date. The Scheme 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 20192022 was finalised in August 2019,November 2022, with aan overall scheme deficit to be funded of £1,136m.£183m. The next scheduled triennial funding valuation will be at 31 March 2022.2025. 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 main differences between the assumptions used for assessing the defined benefit liabilities for the funding valuation and those used for IAS19 isIAS 19 are that the financial and demographic assumptions used for the funding valuation are generally more prudent than those used for the IAS 19 valuation.
The total amount charged to the income statement was as follows:
| | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Net interest income | (31) | | (5) | | (10) | |
Current service cost | 30 | | 38 | | 36 | |
Past service and GMP costs | — | | — | | 1 | |
Past service curtailment costs | 0 | | 5 | | — | |
Administration costs | 9 | | 8 | | 8 | |
| 8 | | 46 | | 35 | |
The amounts recognised in other comprehensive income were as follows:
| | | | | | | | | | | |
| | | Group |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Return on plan assets (excluding amounts included in net interest expense) | 5,531 | | (452) | | (1,328) | |
Actuarial (gains)/losses arising from changes in demographic assumptions | (122) | | (17) | | 34 | |
Actuarial (gains)/losses arising from experience adjustments | 481 | | (19) | | (141) | |
Actuarial (gains)/losses arising from changes in financial assumptions | (5,167) | | (775) | | 1,940 | |
Pension remeasurement | 723 | | (1,263) | | 505 | |
Movements in the present value of defined benefit scheme obligations were as follows:
| | | | | | | | |
| Group |
| 2022 | 2021 |
| £m | £m |
At 1 January | (12,884) | | (13,894) | |
Current service cost paid by Santander UK plc | (29) | | (29) | |
Current service cost paid by other subsidiaries | (1) | | (9) | |
Current service cost paid by fellow Banco Santander subsidiaries | — | | — | |
Interest cost | (241) | | (188) | |
Employer salary sacrifice contributions | (3) | | (9) | |
Past service cost | — | | — | |
Past service curtailment costs | — | | (5) | |
GMP equalisation cost | — | | — | |
Remeasurement due to actuarial movements arising from: | | |
– Changes in demographic assumptions | 122 | | 17�� | |
– Experience adjustments | (481) | | 19 | |
– Changes in financial assumptions | 5,167 | | 775 | |
Benefits paid | 413 | | 398 | |
Derecognition of pension scheme liabilities arising from the sale of PSA | — | | 41 | |
At 31 December | (7,937) | | (12,884) | |
244Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 232 |
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The total amount charged to the income statement was as follows:
| | | | | | | | | | | |
| | | Group |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Net interest income | (10) | | (24) | | (7) | |
Current service cost | 36 | | 34 | | 41 | |
Past service and GMP costs | 1 | | 1 | | 41 | |
Administration costs | 8 | | 8 | | 8 | |
| 35 | | 19 | | 83 | |
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 was based on a number of assumptions and the actual impact may be different. This was reflected in the income statement and in the closing net accounting surplus of the Scheme in 2018. The allowance included in the Scheme liabilities at 31 December 2020 increased by £5m (2019: £5m) to £50m (2019: £45m) to reflect the latest assumptions. This change was recognised in other comprehensive income. Work is being undertaken to consider and agree how to implement GMP equalisation.
On 20 November 2020, a further court ruling on the Lloyds GMP equalisation case took place on the issue of whether or not there is an obligation to equalise transfers that occurred prior to October 2018. It was concluded that historic transfers should be equalised. The potential additional liability was estimated and was not material. As a result, no additional liability has been accounted for.
The amounts recognised in other comprehensive income were as follows:
| | | | | | | | | | | |
| | | Group |
| | | |
| 2020 | 2019 | 2018 |
| £m | £m | £m |
Return on plan assets (excluding amounts included in net interest expense) | (1,328) | | (873) | | 246 | |
Actuarial losses/(gains) arising from changes in demographic assumptions | 34 | | 42 | | (56) | |
Actuarial (gains)/losses arising from experience adjustments | (141) | | (40) | | 15 | |
Actuarial losses/(gains) arising from changes in financial assumptions | 1,940 | | 1,394 | | (674) | |
Pension remeasurement | 505 | | 523 | | (469) | |
Movements in the present value of defined benefit scheme obligations were as follows:
| | | | | | | | |
| Group |
| 2020 | 2019 |
| £m | £m |
At 1 January | (12,165) | | (10,805) | |
Current service cost paid by Santander UK plc | (24) | | (22) | |
Current service cost paid by other subsidiaries | (12) | | (12) | |
| | |
Interest cost | (253) | | (308) | |
Employer salary sacrifice contributions | (2) | | (8) | |
Past service cost | (1) | | (1) | |
| | |
Remeasurement due to actuarial movements arising from: | | |
– Changes in demographic assumptions | (34) | | (42) | |
– Experience adjustments | 141 | | 40 | |
– Changes in financial assumptions | (1,940) | | (1,394) | |
Benefits paid | 396 | | 387 | |
At 31 December | (13,894) | | (12,165) | |
Movements in the fair value of the schemes’ assets were as follows:
| | | | | | | | |
| Group |
| 2020 | 2019 |
| £m | £m |
At 1 January | 12,555 | | 11,532 | |
Interest income | 263 | | 332 | |
Contributions paid by employer and scheme members | 245 | | 213 | |
| | |
Administration costs paid | (8) | | (8) | |
Return on plan assets (excluding amounts included in net interest expense) | 1,328 | | 873 | |
Benefits paid | (396) | | (387) | |
At 31 December | 13,987 | | 12,555 | |
Santander UK Group Holdings plc245
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| Group |
| 2022 | 2021 |
| £m | £m |
At 1 January | 14,420 | | 13,987 | |
Interest income | 272 | | 193 | |
Contributions paid by employer and scheme members | 224 | | 247 | |
Contributions paid by fellow Banco Santander subsidiaries | — | | — | |
Administration costs paid | (9) | | (8) | |
Return on plan assets (excluding amounts included in net interest expense) | (5,531) | | 452 | |
Benefits paid | (413) | | (398) | |
Derecognition of pension scheme assets arising from the sale of PSA | — | | (53) | |
At 31 December | 8,963 | | 14,420 | |
The composition and fair value of the schemes’ assets by category was:
| | | | | | | Group | | | | | | | | | | Group |
| | Quoted prices in active markets | | Prices not quoted in active markets | | Total | | Quoted prices in active markets | | Prices not quoted in active markets | | Total | | Valuation |
2020 | £m | % | | £m | % | | £m | % | |
2022 | | 2022 | £m | % | | £m | % | | £m | % | | technique |
| Overseas equities | | Overseas equities | — | — | | | 1,172 | 13 | | | 1,172 | 13 | | | A,C |
Corporate bonds | | Corporate bonds | 1,991 | 22 | | | 244 | 3 | | | 2,235 | 25 | | | A,C |
Government fixed interest bonds | | Government fixed interest bonds | 1,138 | 13 | | | — | — | | | 1,138 | 13 | | | A |
Government index-linked bonds | | Government index-linked bonds | 5,525 | 62 | | | — | — | | | 5,525 | 62 | | | A |
Property | | Property | — | — | | | 1,202 | 13 | | | 1,202 | 13 | | | B |
Derivatives | | Derivatives | — | — | | | (78) | (1) | | | (78) | (1) | | | A |
Cash | | Cash | — | — | | | 1,340 | 15 | | | 1,340 | 15 | | | A |
Repurchase agreements(1) | | Repurchase agreements(1) | — | — | | | (4,312) | (48) | | | (4,312) | (48) | | | A |
Infrastructure | | Infrastructure | — | — | | | 426 | 5 | | | 426 | 5 | | | B,C |
Annuities | | Annuities | — | — | | | 298 | 3 | | | 298 | 3 | | | D |
Longevity swap | | Longevity swap | — | — | | | (12) | — | | | (12) | — | | | D |
Other | | Other | — | — | | | 29 | — | | | 29 | — | | | C |
| | | 8,654 | 97 | | | 309 | 3 | | | 8,963 | 100 | | | |
2021 | | 2021 | | | | | | | |
UK equities | UK equities | 40 | | 0 | | | 0 | | 0 | | | 40 | | 0 | | UK equities | 38 | — | | | — | — | | | 38 | — | | | A |
Overseas equities | Overseas equities | 1,271 | | 9 | | | 1,004 | | 7 | | | 2,275 | | 16 | | Overseas equities | 1,401 | 10 | | | 1,065 | 7 | | | 2,466 | 17 | | | A,C |
Corporate bonds | Corporate bonds | 1,121 | | 8 | | | 457 | | 3 | | | 1,578 | | 11 | | Corporate bonds | 1,607 | 11 | | | 312 | 2 | | | 1,919 | 13 | | | A,C |
Government fixed interest bonds | Government fixed interest bonds | 1,618 | | 12 | | | 0 | | 0 | | | 1,618 | | 12 | | Government fixed interest bonds | 2,788 | 19 | | | — | — | | | 2,788 | 19 | | | A |
Government index-linked bonds | Government index-linked bonds | 6,695 | | 48 | | | 0 | | 0 | | | 6,695 | | 48 | | Government index-linked bonds | 9,159 | 64 | | | — | — | | | 9,159 | 64 | | | A |
Property | Property | 0 | | 0 | | | 1,454 | | 10 | | | 1,454 | | 10 | | Property | — | — | | | 1,409 | 10 | | | 1,409 | 10 | | | B |
Derivatives | Derivatives | 0 | | 0 | | | 312 | | 2 | | | 312 | | 2 | | Derivatives | — | — | | | (83) | (1) | | | (83) | (1) | | | A |
Cash | Cash | 0 | | 0 | | | 1,161 | | 8 | | | 1,161 | | 8 | | Cash | — | — | | | 2,290 | 16 | | | 2,290 | 16 | | | A |
Repurchase agreements(1) | Repurchase agreements(1) | 0 | | 0 | | | (2,198) | | (15) | | | (2,198) | | (15) | | Repurchase agreements(1) | — | — | | | (6,582) | (45) | | | (6,582) | (45) | | | A |
Infrastructure | | Infrastructure | — | — | | | 390 | 3 | | | 390 | 3 | | | B,C |
Annuities | | Annuities | — | — | | | 298 | 2 | | | 298 | 2 | | | D |
Longevity swap | | Longevity swap | — | — | | | (8) | — | | | (8) | — | | | D |
Other | Other | 0 | | 0 | | | 1,052 | | 8 | | | 1,052 | | 8 | | Other | — | — | | | 336 | 2 | | | 336 | 2 | | | C |
| | 10,745 | | 77 | | | 3,242 | | 23 | | | 13,987 | | 100 | | | 14,993 | 104 | | | (573) | (4) | | | 14,420 | 100 | | | |
2019 | | |
UK equities | 128 | | 1 | | | 0 | | 0 | | | 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 | | | 0 | | 0 | | | 2,710 | | 22 | | |
Government index-linked bonds | 4,543 | | 35 | | | 0 | | 0 | | | 4,543 | | 35 | | |
Property | 0 | | 0 | | | 1,332 | | 11 | | | 1,332 | | 11 | | |
Derivatives | 0 | | 0 | | | 94 | | 1 | | | 94 | | 1 | | |
Cash | 0 | | 0 | | | 984 | | 8 | | | 984 | | 8 | | |
Repurchase agreements(1) | 0 | | 0 | | | (3,263) | | (26) | | | (3,263) | | (26) | | |
Other | 0 | | 0 | | | 1,575 | | 12 | | | 1,575 | | 12 | | |
| 10,456 | | 83 | | | 2,099 | | 17 | | | 12,555 | | 100 | | |
(1) Sale and repurchase agreements net of purchase and resale agreements.
Scheme assets are stated at | | | | | | | | | | | | | | |
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Valuation techniques
The main methods for measuring the fair value of the Scheme’s assets at 31 December 2022 and 2021 are set out below.
A.The asset valuation is provided by the asset manager. The valuation is based upon quoted prices in active markets except for property, property funds, derivatives, private equityon observable market data, and those classified under ‘Other’. where relevant is typically based on bid price values, or the single price if only one price is available.
B.The ‘Other’ category includes annuities, infrastructure funds and hedge funds. The property funds and the infrastructure funds were valued using marketunderlying asset valuations are prepared by an independent expert. Investments in hedge funds thatexpert, adjusted for any cash movements where necessary since the latest valuation.
C.Assets 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 the latest valuationmanager statements provided by the private equity managers. Themanagers, adjusted for any cash movements since the latest valuation.
D.Assets relating to insured annuities wereliabilities are valued by the actuaries based on the liabilities insured.our year-end accounting assumptions.
At 31 December 2020, the valueThe ‘Other’ category includes hedge fund investments.
A number of the insured annuitiesinsurance transactions have been entered into that have been included in the ‘Other’ category included the value ofasset valuation under annuities and Longevity swap. The transactions were as follows:.
–In May 2020 a pensioner buy-in that was entered into on 27 May 2020 by the Trustee with an insurance company.Trustee. This transaction insured 100% of the SMA section pensioner liabilities and 50% of the SPI section pensioner liabilities based on membership in the Scheme at 31 December 2018.
–In March 2021, the Trustee entered into a longevity swap. Approximately 85% of pensioner liabilities were covered by the longevity swap at inception, excluding pensioners in the SMA and SPI sections.
–In 2022, a pensioner buy-in was entered into by the Trustee covering pensioners in the SMA and SPI sections who were uninsured at 30 June 2021.
–In July 2022, the Trustee entered into a second longevity swap, extending the insurance over uninsured pensioners in the same membership groups covered by the first swap transacted in March 2021, based on membership in the Scheme at 31 December 2021.
At 31 December 2020,2022, as highlighted above, the Scheme was invested in certain assets whose values are not based on market observable data, such as the investments in private equity fundsunquoted equities and property.bonds, as well as property, infrastructure and hedge funds. The valuation of these assets relies on unobservable data as these assets do not have a readily available quoted price in an active market. A large proportion of the property is directly held and valued using a bespoke valuation method taking both the nature of the properties and the tenancy schedules as inputs to derive the fair value. Where there is a time lag between the net asset value and the balance sheet date, management adjusts the value of the assets for any cash movements. Due diligence has been conducted to ensure the values obtained in respect of these assets are appropriate and represent fair value. Given the nature of these investments, we are unable to prepare sensitivities on how their values could vary as market conditions or other variables change.
A strategy is in place to manage interest rate and inflation risk relating to the liabilities. In 2020, the level of interest rateThe Scheme prior to 31 December 2022 invested in equities and inflation rate hedging was increased.had an equity collar in place to manage equity risk. The Scheme also has in place an equity collar to manage equity risk and hedges a proportion of its foreign exchange exposure to manage currency risk. At 31 December 20202022 the equity collar had a notional value of £1,076m (2019: £1,560m)£3m (2021: £1,259m) and the currency forwards had a notional value of £2,378m (2019: £2,079m)£985m (2021: £2,296m). SomeSignificant asset de-risking took place in 2020,2022, with disinvestmentsthe Scheme divesting entirely from equity funds andlisted equities, as well as its multi-asset funds. Significant investments were made in quoted corporate bonds over the year, largely funded from these sales. The sale proceeds also went to de-leveraging the asset portfolio. The Trustee has established the Sustainability Committee which is responsible for overseeing the Scheme’s policies, regulatory obligations and priorities in respect of climate change and wider Environmental, Social and Governance (ESG) related matters. This includes the monitoring of climate change related risks and opportunities, scenario analysis and monitoring of investments from disinvestment were used in a liability driven investment portfolio. Anan ESG monitoring framework has also been implemented to ensure regulatory compliance and to support the consideration of ESG issues in the decision-making framework.perspective.
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 20202022 and 2019.2021. The Santander UK group’s pension scheme assets do not include any property or other assets that are occupied or used by the Santander UK group.
The Santander UK group's employee pension funds recognise the magnitude of the challenges that climate and energy transition pose to governments, companies and civil society. They are also aware of their impact on the ability to comply with their fiduciary duty providing long-term risk-adjusted returns to their members. They have committed to a target of net zero by 2050, showing their full support for the Santander UK group's vision, commitment to sustainability and climate change.
Funding
In August 2019,November 2022, 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 a schedule of contributions following the finalisation of the 31 March 20192022 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 £236m£218m in 2020 (2019: £203m)2022 (2021: £241m) to the Scheme, of which £187m (2019: £153m)£178m (2021: £194m) 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 £187m each year from 30 September 2019covers the period up to 31 March 2026. In addition, the Santander UK group has agreed to pay further2026 and comprises of contingent contributions shouldwhich become due if the funding position have fallenof any section falls behind plan.the agreed plan. The Santander UK group also meets Scheme administration expenses. The funding valuation is used to judge the amount of cash contributions the GroupSantander UK group needs to put into the pension scheme. It will always be different to the IAS 19 accounting deficit, which is an accounting rule concerning employee benefits and shown on the balance sheet of our financial statements.
Actuarial assumptions
The principal actuarial assumptions used for the Scheme were:
| | | | | | | | | | | |
| Group |
| 2022 | 2021 | 2020 |
| % | % | % |
To determine benefit obligations(1): | | | |
– Discount rate for scheme liabilities | 4.9 | | 1.9 | | 1.3 | |
– General price inflation | 3.1 | | 3.4 | | 3.0 | |
– General salary increase | 1.0 | | 1.0 | | 1.0 | |
– Expected rate of pension increase | 3.0 | | 3.2 | | 2.9 | |
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Actuarial assumptions
| | | | | | | | | | | |
| Years | Years | Years |
Longevity at 60 for current pensioners, on the valuation date: | | | |
– Males | 27.4 | 27.5 | 27.5 |
– Females | 30.1 | 30.1 | 30.0 |
Longevity at 60 for future pensioners currently aged 40, on the valuation date: | | | |
– Males | 28.9 | 29.0 | 29.0 |
– Females | 31.6 | 31.6 | 31.5 |
(1) The principal actuarial discount rate and inflation related assumptions set out in the table above reflect the assumptions calculated based on the Scheme’s duration and cash flow profile as a whole. The actual
assumptions used were determined for the defined benefit schemes were:
| | | | | | | | | | | |
| Group |
| 2020 | 2019 | 2018 |
| % | % | % |
To determine benefit obligations: | | | |
– Discount rate for scheme liabilities | 1.3 | | 2.1 | | 2.9 | |
– General price inflation | 3.0 | | 3.0 | | 3.2 | |
– General salary increase | 1.0 | | 1.0 | | 1.0 | |
– Expected rate of pension increase | 2.9 | | 2.9 | | 2.9 | |
| | | | | | | | | | | |
| Years | Years | Years |
Longevity at 60 for current pensioners, on the valuation date: | | | |
– Males | 27.5 | 27.3 | 27.3 |
– Females | 30.0 | 29.8 | 30.1 |
Longevity at 60 for future pensioners currently aged 40, on the valuation date: | | | |
– Males | 29.0 | 28.9 | 28.7 |
– Females | 31.5 | 31.3 | 31.6 |
each section independently based on each section’s duration and cash flow profile.
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-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. In 2022, management updated the model used to construct the curve following a review of the Scheme's IAS 19 assumptions. The model which we use for constructingto construct the curve uses corporate bond data but excludes most convertible bonds, asset-backed bonds and asset-backedgovernment related bonds. The curve is then constructed from this data by extrapolating the horizontal forward curvespot rates from 30 years withto 50 years by holding the level of this forward rate being the average of the fitted forwardspread above nominal gilt spot rates over the 15 to 30 year range.constant. From 50 years onwards, it is assumed that spot rates remain constant. When considering an appropriate assumption, we project forward the expected cash flows of each section of the Scheme and adopt a single equivalent cash flow weighted discount rate for each section, subject to management judgement.
General price inflation
Consistent with our discount rate methodology, we set the inflation assumption using the expected cash flows for each section 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. In 2020,2022, management amendedrefined the general price inflation assumption following a review of the Scheme’s IAS 19 assumptions, to reflect a different data set and different methodology used to construct the expectation that the Retail Price Index would be brought in line with the Consumer Price Index from 2030. At 31 December 2020, this change increased the liabilities of the Scheme by £64m.curve.
General salary increase
From 1 March 2015, a cap on pensionable pay increases of 1% each year was applied to staff in the Scheme.
Expected rate of pension increase
The 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 allows for the likelihood that high or low inflation in one-year feeds into inflation remaining high or low in the next year.
Mortality assumptions
The mortality assumptions are based on an independent analysis of the Scheme’s actual mortality experience, carried out as part of the triennial actuarial valuation, together with recent evidence from the Continuous Mortality Investigation. An allowance is then made for expected future improvements to life expectancy based on the Continuous Mortality Investigation Tables. Following this review the S3 Medium all pensioner mortality table was adopted with appropriate adjustments to reflect the actual mortality experience. For future improvements, at 31 December 20202022 the CMI 20192021 projection model was adopted, with model parameters selected having had regard to the Scheme’s membership profile with an initial addition to improvements of 0.15% 0.25%per annum, together with a long-term rate of future improvements to life expectancy of 1.25% for male and female members. No weight was placed on the 2020 data in the model, reflecting the uncertainty regarding whether, and how much, 2020 mortality data reflects likely future experience. A modest weight of 10% was placed on the 2021 data in the model, reflecting the likelihood of sustained indirect impacts of the pandemic. Both of thesethe mortality table and the projection model are published by the Continuous Mortality Investigation.
In 2019,2022, 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 20192022 triennial valuation and a separate review conducted on early retirement experience.valuation. These reviews resulted in changes in the assumptions for commutation, family statistics, and early retirement which were retained at 31 December 2020.and the withdrawal assumption.
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.
| | | (Decrease)/increase | | Change in pension obligation at year end from | (Decrease)/increase |
| | Change in pension obligation at period end from | 2020 | 2019 | | 2022 | 2021 | 2022 | 2021 |
Assumption | Assumption | £m | £m | Assumption | | £m | £m |
Discount rate | Discount rate | 25 bps increase | (662) | | (564) | | Discount rate | 50 bps increase | 25 bps increase | (501) | (571) |
General price inflation | General price inflation | 25 bps increase | 365 | | 407 | | General price inflation | 50 bps increase | 25 bps increase | 374 | 392 |
Mortality | Mortality | Each additional year of longevity assumed | 515 | | 419 | | Mortality | Each additional year of longevity assumed | 203 | 478 |
The 25 50bps sensitivity to the inflation assumption includes the corresponding impact of changes in future pension increase assumptions before and after retirement. 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.
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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 | Year ending 31 December | £m | Year ending 31 December | £m |
2021 | 359 | | |
2022 | 327 | | |
2023 | 2023 | 336 | | 2023 | 416 | |
2024 | 2024 | 359 | | 2024 | 360 | |
2025 | 2025 | 382 | | 2025 | 382 | |
Five years ending 2030 | 2,139 | | |
2026 | | 2026 | 404 | |
2027 | | 2027 | 425 | |
Five years ending 2032 | | Five years ending 2032 | 2,325 | |
The average duration of the defined benefit obligation at 31 December 20202022 was 19.414.2 years (2019: 18.8(2021: 18.3 years).
Covid-19Emerging risks
The Covid-19 pandemic ledActions taken in 2022 to significant volatilityreduce asset risk, in financial marketsline with the agreements already in 2020. This translated into a volatile pension surplus/deficit,place with large movements going through Other Comprehensive Income as a result. Significant progress was made in 2020the Trustee, served to improve the Scheme’s resilience to market volatility. In 2022, the risks considered in relation to Covid-19 related mainly to the suitability of our long-term mortality assumption for our IAS 19 and funding valuations.
The focus in 2022 shifted to the risks arising from the conflict in Ukraine, rising interest rates, the 2022 actuarial valuation, together with market volatility which includesdriven by the increase in the level of interest rate and inflation rate hedging, de-risking within the asset portfolio and investment in a buy-in.
UK political landscape. The Santander UK group has collaborated with the Trustee to ensure the delivery of key functions and services could be maintained throughout the Covid-19 pandemic, to include most vitally the payment of pensions to members. At the start of the Covid-19 pandemic, an enhanced risk monitoring framework was also established to identify and monitor such risks and ensure they were adequately managed.
31. CONTINGENT LIABILITIES AND COMMITMENTS
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Guarantees given to third parties | Guarantees given to third parties | 939 | | 1,198 | | Guarantees given to third parties | 448 | | 363 | |
Formal standby facilities, credit lines and other commitments | Formal standby facilities, credit lines and other commitments | 42,231 | | 40,410 | | Formal standby facilities, credit lines and other commitments | 31,410 | | 37,385 | |
| | | | 31,858 | | 37,748 | |
| | 43,170 | | 41,608 | | |
At 31 December 2020,2022, the Santander UK group had credit impairment loss provisions relating to guarantees given to third parties and undrawn loan commitments. See Note 29 for furthermore details. For segmental and credit risk staging analysis relating to off-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
At 31 December 2022 ,Santander UK plc, Cater Allen Limited, Santander ISA Managers Limited and certain other non-regulated subsidiaries within the ring-fenced bank entered intoof Santander UK plc were party to a capital support deed dated 13 November 2018entered into on 17 December 2021 and effective from 1 January 2022 (the RFB Sub-Group Capital Support Deed). TheThese parties to the RFB Sub-Group Capital Support Deed arewere permitted by the PRA to form a core UK group as defined in the PRA Rulebook, a permission which will expireexpires on 31 December 2021.2024. 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.apply and these exposures are risk-weighted at0%. Where applicable this permission also provides for intra-group exposures to be excluded from the leverage exposure measure. 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, the non-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.
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 NRFB Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated parties to any of the regulated parties in the event that one of the regulated parties breached or was at risk of breaching its capital resources requirements or risk concentrations requirements.
At 31 December 2022, Santander UK Group Holdings plc and Santander Financial Services plc, the regulated entities, and Santander Equity Investments Limited were party to a capital support deed entered into on 17 December 2021 and effective from 1 January 2022 (the Non-RFB Sub-Group Capital Support Deed). These parties were permitted by the PRA to form a core UK group as defined in the PRA Rulebook, a permission which expires on 31 December 2024. 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 and these exposures are risk-weighted at 0%. Where applicable this permission also provides for intra-group exposures to be excluded from the leverage exposure measure. The purpose of the Non-RFB Sub-Group Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated parties to any of the regulated parties in the event that one of the regulated parties breached or was at risk of breaching its capital resources or risk concentrations requirements.
Liquidity support arrangements
We monitor and manage liquidity risk for the Santander UK plc group and its former subsidiary SFSSantander Financial Services plc separately. Under this model, and the PRA’s liquidity rules, Santander UK plc and its subsidiary Cater Allen Limited form the RFB Domestic Liquidity Sub-group (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.
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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
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 certain claims against it. The FSCS is funded by levies on the industry (andand 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. The remaining debt due to the FSCS, that related to the failure of Bradford & Bingley plc, has now been repaid. This has enabled the FSCS to make a corresponding repayment of the balance of its loan to HM Treasury. The provision was £NaN in 2020 (2019: £NaN).appropriate.
Loan representations and warranties
In connection with the securitisations and covered bond transactions described in Note 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 programmes included in Note 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 securitisations and covered bond programmes are collateralised by prime residential mortgage loans. Santander UK plc is principally a retail prime lender and has no appetite or product offering for any type of sub-prime business. In addition, Santander UK plc’s credit policy explicitly prohibits such lending.
Similarly, under the auto loan securitisations in Note 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 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, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.
In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition, where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made.
FCA civil regulatory investigation into Santander UK plc financial crime systems, processes and controls, and compliance with the Money Laundering Regulations 2007
In December 2022, we paid a £108m financial penalty to settle the FCA's enforcement investigation into the anti-money laundering systems and controls in our Business Banking division in the period between 31 December 2012 and 18 October 2017. The settlement concluded the FCA's investigation.
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Annual Report 2022 | Santander UK Group Holdings plc 237 |
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Payment Protection Insurance
In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is in its early stages. The dispute relates to the liability for PPI mis-selling complaints relating to pre-2005 PPI policies underwritten by AXA France IARD and AXA France Vie (together, AXA France - previously Financial Insurance Company Ltd and Financial Assurance Company Ltd respectively) and involves Santander Cards UK Limited (a former GE Capital Corporation entity and distributor of pre-2005 PPI known as GE Capital Bank Limited which was acquired by Banco Santander S.A.SA in 2008 and subsequently transferred to Santander UK plc) and a Banco Santander S.A.SA subsidiary Santander Insurance Services UK Limited (together the Santander Entities). During the relevant period, AXA France were owned by Genworth Financial International Holdings, Inc.Inc (Genworth).
In September 2015, AXA S.A.SA acquired AXA France from Genworth. In July 2017, the Santander Entities notified AXA France that they did not accept liability for losses on PPI policies relating to thisthe relevant period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with AXA France pursuant to which it agreed to handle complaints on their behalf, and AXA France agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis. A standstill agreement was entered into between the Santander Entities and AXA France as a condition of the CHA.
In July 2020, Genworth announced that it had agreed to pay AXA SA circa £624m£624m in respect of PPI mis-selling losses in settlement of the related dispute concerning obligations under the sale and purchase agreement pursuant to which Genworth sold AXA France to AXA.AXA SA. The CHA between Santander UK plc and AXA France terminated on 26 December 2020. On 30 December 2020, AXA France provided written notice to the Santander Entities to terminate the standstill agreement and claimed thatagreement. During 2021, AXA France commenced litigation against the Santander Entities are liableseeking recovery of £636m and any further losses relating to reimbursepre-2005 PPI. Judgment in respect of the Santander Entities application for AXA France’s claim to be struck out/summarily dismissed, was handed down by the Commercial Court on 12 July 2022. In summary, the Commercial Court upheld a significant part of the Santander Entities’ strike-out application, striking out AXA France’s claim for contribution against Santander for alleged losses and requiring AXA France for pre-2005 PPI mis-sellingto re-plead a significant portion of its other pleadings. AXA France updated the amount of losses currently estimated at £631 million. Thisclaimed from £636m to £670m in their Amended Particulars of Claim dated 21 October 2022. Overall, the dispute isremains at an early stage and there are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is difficult to reliably predict the outcome or the timing of the resolution of the matter. The Regulatorylitigation and other
Santander UK Group Holdings plc249
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regulatory provision in Note 29 includesour best estimate of the Santander Entities’ liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial to the Santander Entities’ interests in connection with the dispute.
In addition, and in relation to PPI more generally the PPI provision includes an amount relating to legal claims challenging the FCA’s industry guidance on the treatment of Plevin / recurring non-disclosure assessments. This provision is based on current stock levels, future projected claims, and average redress. There remains a risk that volumes received in future may be higher than forecast. The provision in Note 29 includes our best estimate of Santander UK’s liability for the specific issue. The actual cost of customer compensation could differ from the amount provided. It is not currently practicable to provide an estimate of the risk and amount of any further financial impact.
German dividend tax arbitrage transactions
In June 2018 the Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a loophole of a specific German settlement mechanism through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.
During 20202022 we have continued to cooperate with the German authorities and, with the assistance of external experts, to progress an internal investigation into the matters in question. From Santander UK plc’s perspective, the investigation is focused principally on the period 2009-2011 and remains on-going. There remain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact.
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, 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 29, other provisions include an amount of £47m arising from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice. The Regulatory and other provision in Note 29 includes our best estimate of Santander UK’s liability for the specific issue. The actual cost of customer compensation could differ from the amount provided. It is not practicable to provide an estimate of the risk and amount of any further financial impact.
FCA civil regulatory investigation into Santander UK plc financial crime systems, processes and controls and compliance with the Money Laundering Regulations 2007
Santander UK plc is cooperating with an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. The FCA’s investigation focuses primarily on the period 2012 to 2017 and includes consideration of high risk customers including Money Service Businesses. It These uncertainties mean it is not currently possible to make a reliable assessment of the size of any liability resulting from the investigation including any financial penalty.related potential liability.
Taxation
The Santander UK group engages in discussion, and co-operates, with HM Revenue & Customs (HMRC) in their oversight of the Santander UK group’s tax matters. The Santander UK group adopted the UK’s Code of Practice on Taxation for Banks in 2010.
Certain leases in which the Santander UK group is or was the lessor are currentlyhave been under review by HMRC in connection with claims for tax allowances. Under the terms of the lease agreements, the Santander UK group is fully indemnified in all material respects by the respective lessees for any liability arising from the disallowance of tax allowances plus accrued interest, which could be upinterest. During 2021, an outline agreement in principle in respect of a number of these lease arrangements was reached directly between the lessee and HMRC. This agreement was executed in April 2022, resulting in a final payment by the lessee to £152m. Whilst legal opinions have been obtained to supportHMRC and the conclusion of HMRC’s review. There is no financial impact for the Santander UK group’s position, the matter remains uncertain pending formal resolution with HMRC and any subsequent litigation. In 2020, as required under the terms of the leases these matters have moved to formal litigation and it is currently anticipated that hearings will be held at the First Tier Tax Tribunal in 2021 or 2022.group.
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Annual Report 2022 | Santander UK Group Holdings plc 238 |
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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. Conversion of the preferred stock into Class A Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK & Ireland (UK&I) multilateral interchange fees (MIFs). Following ring-fencing, all Visa stock is now held by Santander Equity Investments Limited (SEIL), outside the ring fenced bank. ring-fenced bank.In valuing the preferred stock, SEIL makes adjustments for illiquidity and the potential for changes in the conversion rate.rate due to litigation costs. In June 2020, the Supreme Court issued a judgmentjudgement finding that MIFs restricted competition. In 2020competition, and this resulted in a change to the calculation of the fair value ofadjustments. There has been no change to the convertible preferred stock being reduced by £10m.fair value adjustment in 2022.
In September 2020, pursuant to the scheduled release assessment, Visa released half of the value of the convertible preferred stock. As a result of this release, SEIL was issued with 52115,211 units of Series A Convertible Participating Preferred Stock (Series A Preferred Stock). WhenThis Series A Preferred Stock was subsequently sold byfor £82m.
In July 2022, pursuant to the scheduled release assessment, Visa released just over half of the value of the remaining convertible preferred stock. As a result of this release, SEIL each sharewas issued with 2,516 units of Series A Preferred Stock. In 2022, SEIL sold all 2,516 units of Series A Preferred Stock will automatically convert into 100 sharesfor £41.6m. SEIL therefore had no units of ClassSeries A CommonPreferred Stock remaining at 31 December 2022. Following the scheduled release assessment, SEIL re-estimated the changes to the conversion rate of Visa Inc.the remaining convertible preferred stock in the scenario that losses relating to UK&I MIFs exceed €1bn.
In addition, Santander UK and certain other UK&I banks have agreed to indemnify Visa Inc. in the event that the preferred stock is insufficient to meet the costs of this litigation. Visa Inc. has recourse to this indemnity once more than €1bn€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 NaN.nil. Whilst Santander UK's liability under this indemnity is capped at €39.85m,€39.85m, Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism. At this stage, it is unclear whether the litigation will give rise to more than €1nb€1bn of losses relating to UK&I MIFs which means it is difficult to predict the resolution of the matter including the timing or the significance of the possible impact.
As part of the sale of subsidiaries, businesses and other entities, and as is normal in such circumstances, entities within the Santander UK hasgroup have 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 36.35.
250Santander UK Group Holdings plc
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Other off-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.
Lease commitments as lessee
The majority of leases are subject to a third party outsourcing contract which expired on 24 December 2020 and the remainder are held directly by the Santander UK group with third party landlords. The leasehold interests subject to the outsourcing contract are held directly by the Santander UK group from 25 December 2020. Where Santander UK group leases have expired, negotiations are in progress/will be progressed with the landlords of these properties, to agree renewal terms, where occupation is still required. 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 the freehold interest in a property is held by the outsourcing company (91 properties in total), new lease terms have been negotiated and all these leases are due to complete in January 2021, save for two, where the outsourcing company own a long leasehold interest and the leases will be completed upon receipt of landlords consent.
32. SHARE CAPITAL
| | | Group | | Group |
| | Ordinary shares of £1 each | | Ordinary shares of £1 each |
Issued and fully paid share capital | Issued and fully paid share capital | No. | £m | Issued and fully paid share capital | No. | £m |
At 31 December 2019, 1 January 2020 and 31 December 2020 | 7,060,000,000 | 7,060 | | |
At 31 December 2021, 1 January 2022 and 31 December 2022 | | At 31 December 2021, 1 January 2022 and 31 December 2022 | 7,060,000,000 | 7,060 | |
33. OTHER EQUITY INSTRUMENTS
| | | | | | | | | | | | | | |
| | | | Group |
| Interest rate
| | 2020 | 2019 |
| % | Next call date | £m | £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 | |
| | | | |
– £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 5.33 | | March 2021 | 500 | | 500 | |
– £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.30 | | March 2025 | 500 | | 500 | |
| | | 2,241 | | 2,241 | |
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| | | | Group |
| Interest rate
| | 2022 | 2021 |
| % | Next call date | £m | £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 | |
- £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.30 | | March 2025 | 500 | | 500 | |
- £450m Fixed Rate Reset Perpetual AT1 Capital Securities | 4.25 | | March 2026 | 450 | | 450 | |
- £750m Fixed Rate Reset Perpetual AT1 Capital Securities | 6.50 | | June 2027 | 750 | | — | |
| | | 2,196 | | 2,191 | |
AT1 securities
The AT1 securities are perpetual and pay a distribution on 24 March, June, September and December.quarterly distribution. At each distribution payment date, the Company can decide whether to pay the distribution, which is non-cumulative, in whole or in part. The distribution rate resets every five 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
All AT1 securities 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 5.33% and 6.30% Fixed Rate Reset Perpetual AT1 Capital Securities. No such redemption may be made withoutonly with the consent of the PRA.
The £500m 5.33%£450m 4.25% 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.
34. NON-CONTROLLING INTERESTS
| | | | | | | | | | | | | | |
| Initial interest rate | | 2020 | 2019 |
| % | First call date | £m | £m |
Santander UK plc issued: | | | | |
| | | | |
– £300m Step-up Callable Perpetual Reserve Capital Instruments | 7.037 | | February 2026 | 235 | | 235 | |
PSA Finance UK Limited | | | 162 | | 160 | |
| | | 397 | | 395 | |
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 significant non-controlling interests. See Note 19 for summarised financial information of PSA Finance UK Limited.
In June 2022, Santander UK Group Holdings plc251 purchased and redeemed the £750m 7.375% Fixed Rate Reset Perpetual AT1 Capital Securities and issued £750m 6.50% Fixed Rate Reset Perpetual AT1 Capital Securities, which were fully subscribed by the Company’s immediate parent company, Banco Santander SA. The original securities were redeemed at par and £5m of transaction costs that were recognised against the proceeds from the original securities were transferred to retained earnings.
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Annual Report 2022 | Santander UK Group Holdings plc 239 |
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35. CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
34. NOTES TO CASH FLOWS
Changes in liabilities arising from financing activities
The table below shows the changes in liabilities arising from financing activities. The changes in equity arising from financing activities are set out in the Consolidated Statement of Changes in Equity.
| | | Group | | Group |
| | | | | 2020 | | | | 2019 | | Balance sheet line item | |
| | Balance sheet line item | | | Balance sheet line item | | | Debt securities in issue | Subordinated liabilities | Other equity instruments | Lease liabilities | Dividends paid | Total |
2022 | | 2022 | £m |
At 1 January | | At 1 January | 31,580 | 2,228 | 2,191 | 134 | — | 36,133 |
Proceeds from issue of debt securities | | Proceeds from issue of debt securities | 8,667 | — | 8,667 |
Repayment of debt securities | | Repayment of debt securities | (4,482) | — | (4,482) |
| | Debt securities in issue | Subordinated liabilities | Other equity instruments | Dividends paid | Total | | Debt securities in issue | Subordinated liabilities | Other equity instruments | Dividends paid | Total | |
| £m | | £m | |
At 1 January | 50,171 | | 3,528 | | 2,241 | | 0 | | 55,940 | | | 55,906 | | 3,601 | | 2,041 | | 0 | | 61,548 | | |
Cash flows from financing activities | (6,762) | | (939) | | 0 | | (282) | | (7,983) | | | (3,839) | | 0 | | 196 | | (434) | | (4,077) | | |
Cash flows from operating activities | (202) | | 0 | | 0 | | 0 | | (202) | | | (548) | | 0 | | 0 | | 0 | | (548) | | |
Repayment of subordinated liabilities | | Repayment of subordinated liabilities | — | (40) | — | (40) |
Issue of other equity instruments | | Issue of other equity instruments | — | 750 | — | 750 |
Repurchase of other equity instruments | | Repurchase of other equity instruments | — | (750) | — | (750) |
Principal elements of lease payments | | Principal elements of lease payments | — | (26) | — | (26) |
Dividends paid | | Dividends paid | — | (1,173) |
Liability-related other changes | | Liability-related other changes | (1,282) | 2 | 5 | 21 | — | (1,254) |
Non-cash changes: | Non-cash changes: | | | Non-cash changes: | |
– Unrealised foreign exchange | – Unrealised foreign exchange | 359 | | (6) | | 0 | | 0 | | 353 | | | (1,647) | | (94) | | 0 | | 0 | | (1,741) | | – Unrealised foreign exchange | 1,893 | 190 | — | 2,083 |
– Other changes | – Other changes | 113 | | (27) | | 0 | | 282 | | 368 | | | 299 | | 21 | | 4 | | 434 | | 758 | | – Other changes | 44 | (47) | — | 1,173 | 1,169 |
At 31 December | At 31 December | 43,679 | | 2,556 | | 2,241 | | 0 | | 48,476 | | | 50,171 | | 3,528 | | 2,241 | | 0 | | 55,940 | | At 31 December | 36,420 | 2,332 | 2,196 | 129 | — | 41,077 |
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| | | | | | |
2021 | | | | | | |
At 1 January | 43,679 | 2,556 | 2,241 | 100 | — | 48,576 |
Proceeds from issue of debt securities | 2,847 | — | — | — | — | 2,847 |
Repayment of debt securities | (13,724) | — | — | — | — | (13,724) |
Repayment of subordinated liabilities | — | (4) | — | — | — | (4) |
Issue of other equity instruments | — | — | 450 | — | — | 450 |
Repurchase of other equity instruments | — | — | (500) | — | — | (500) |
Principal elements of lease payments | — | — | — | (25) | — | (25) |
Dividends paid | — | — | — | — | (1,506) | (1,506) |
Liability-related other changes | (473) | (4) | — | 59 | — | (418) |
Non-cash changes: | | | | | | |
– Unrealised foreign exchange | (930) | 14 | — | — | — | (916) |
– Other changes | 181 | (334) | — | — | 1,506 | 1,353 |
At 31 December | 31,580 | 2,228 | 2,191 | 134 | — | 36,133 |
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| | | | |
| | | | | | |
2020 | | | | | | |
At 1 January | 50,171 | 3,528 | 2,241 | 138 | — | 56,078 |
Proceeds from issue of debt securities | 5,586 | — | — | — | — | 5,586 |
Repayment of debt securities | (12,348) | — | — | — | — | (12,348) |
Repayment of subordinated liabilities | — | (939) | — | — | — | (939) |
Principal elements of lease payments | — | — | — | (46) | — | (46) |
Dividends paid | — | — | — | — | (282) | (282) |
Liability-related other changes | (243) | (10) | — | 8 | — | (245) |
Non-cash changes: | | | | | | |
– Unrealised foreign exchange | 359 | (6) | — | — | — | 353 |
– Other changes | 154 | (17) | — | — | 282 | 419 |
At 31 December | 43,679 | 2,556 | 2,241 | 100 | — | 48,576 |
Footnotes to the cash flow statement
Net cash flows from operating activities includes interest received of £6,618m (2021: £4,873m, 2020: £5,176m), interest paid of £2,107m (2021: £1,085m, 2020: £1,900m) and dividends received of £nil (2021: £nil, 2020: £nil).
Total cash outflow for leases was£28m (2021: £28m, 2020: £49m).
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Annual Report 2022 | Santander UK Group Holdings plc 240 |
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Restatements in the consolidated cash flow statement
The presentation of the consolidated cash flow statement has changed to present 'profit before tax' within cash flows from operating activities instead of 'profit after tax'. Prior periods have been restated. As a result, for the year ended 31 December 2021 and 31 December 2020, the adjustment for 'corporation tax charge' in 'non-cash items included in profit' within cash flows from operating activities has been decreased by £497m and £114mrespectively.
Following a decision by the IFRS Interpretations Committee in April 2022, Santander UK updated its accounting policy to exclude from cash and cash equivalents Reserves Collateralisation Accounts (RCAs) balances held at the BoE relating to Santander UK’s participation in certain payments schemes. Instead, RCAs balances are classified as restricted balances and included within 'change in operating assets' in the cash flow statement. Prior periods have been restated. As a result, opening cash and cash equivalents at 1 January 2022 and 1 January 2021 have been restated by£1,580m and £985m respectively. At 31 December 2021, cash and cash equivalents were reduced by £1,580m and restricted balances were increased by £1,580m. At 31 December 2020, cash and cash equivalents were reduced by £985m and restricted balances were increased by £985m. The net change in cash and balances at central banks was restated as a result of a decrease in cash inflows from operating activities of £595m in 2021(2020: increase of £95m).
Other matters
As set out in Note 45, during 2022, the non-controlling interests were redeemed. In addition, in 2021, there was a disposal of non-controlling interests of £181m.
36.35. 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 for on-balance sheet and off-balance sheet.
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
On-balance sheet: | On-balance sheet: | | | On-balance sheet: | | |
Cash and balances at central banks | Cash and balances at central banks | 985 | | 1,080 | | Cash and balances at central banks | 1,330 | | 1,580 | |
Loans and advances to banks | Loans and advances to banks | 804 | | 615 | | Loans and advances to banks | 163 | | 478 | |
Loans and advances to customers – securitisations and covered bonds (See Note 14) | 31,138 | | 36,225 | | |
Loans and advances to customers – other | 23,690 | | 16,315 | | |
Loans and advances to customers - securitisations and covered bonds (See Note 14) | | Loans and advances to customers - securitisations and covered bonds (See Note 14) | 24,155 | | 19,432 | |
Loans and advances to customers - other | | Loans and advances to customers - other | 32,011 | | 41,953 | |
Other financial assets at amortised cost | Other financial assets at amortised cost | 648 | | 3,026 | | Other financial assets at amortised cost | 35 | | — | |
Financial assets at fair value through other comprehensive income | Financial assets at fair value through other comprehensive income | 5,677 | | 6,020 | | Financial assets at fair value through other comprehensive income | 4,441 | | 4,435 | |
Total on-balance sheet | Total on-balance sheet | 62,942 | | 63,281 | | Total on-balance sheet | 62,135 | | 67,878 | |
Total off-balance sheet | Total off-balance sheet | 24,701 | | 15,111 | | Total off-balance sheet | 9,184 | | 14,449 | |
The Santander UK group provides assets as collateral in the following areas of the business.
Sale and repurchase agreements
The Santander UK group also enters into sale and repurchase agreements and similar transactions of debt securities, which are accounted for as secured borrowings.securities. 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 20202022 was £25,874m (2019: £20,634m)£11,553m (2021: £15,368m), of which £1,392m (2019: £2,067m)£900m (2021: £639m) was classified within ‘Loans and advances to customers – securitisations and covered bonds’ in the table above.
Securitisations and covered bonds
As described in Note 14, Santander UK plc and certain of its subsidiaries issue securitisations and covered bonds. At 31 December 2020,2022, there were £33,432m (2019: £36,391m)£24,984m (2021: £20,199m) of gross assets in these secured programmes and £2,294m (2019: £166m)£829m (2021: £767m) of these related to internally retained issuances that were available for use as collateral for liquidity purposes in the future.
At 31 December 2020,2022, a total of £4,530m (2019: £4,728m)£1,725m (2021: £1,855m) of notes issued under securitisation and covered bond programmes had been retained internally, a proportion of which had been used as collateral via third party bilateral secured funding transactions, which totalled £1,114m£500m at 31 December 2020 (2019: £1,581m)2022 (2021: £500m), 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 £30,135m£34,963m at 31 December 2020 (2019: £21,639m)2022 (2021: £46,007m) and are offset by contractual commitments to return stock borrowed or cash received.
Derivatives business
In addition to the arrangements described above, collateral is also provided in the normal course of derivative business to counterparties. At 31 December 2020 £1,888m (2019: £1,961m)2022 £1,548m (2021: £2,159m) of such collateral in the form of cash had been provided by the Santander UK group and is included in the table.
252Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 241 |
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b) Collateral accepted as security for assets
The collateral held as security for assets, analysed between those liabilities accounted for on balance sheet and off-balance sheet, was:
| | | Group | | Group |
| | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
On-balance sheet: | On-balance sheet: | | | On-balance sheet: | | |
Deposits by banks | Deposits by banks | 2,071 | | 2,175 | | Deposits by banks | 1,758 | | 941 | |
Total on-balance sheet | Total on-balance sheet | 2,071 | | 2,175 | | Total on-balance sheet | 1,758 | | 941 | |
Total off-balance sheet | Total off-balance sheet | 31,043 | | 25,461 | | Total off-balance sheet | 10,395 | | 18,240 | |
Purchase and resale agreements
The Santander UK group also enters into purchase and resale agreements and similar transactions of debt securities, which are accounted for as collateralised loans.securities. 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 2020,2022, the fair value of such collateral received was £25,972m (2019: £20,444m)£8,628m (2021: £14,562m). 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 £5,071m£1,767m at 31 December 2020 (2019: £5,017m)2022 (2021: £3,678m) 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 2020, £2,071m (2019: £2,175m)2022, £1,758m (2021: £941m) 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.
37.36. 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.scheme and the Transformation Incentive Plan. 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.
At 31 December 2022, the carrying amount of liabilities arising from share-based payment transactions, excluding any cash element was £6.6m (2021: £3.7m), of which £0.1m had vested at 31 December 2022 (2021: £0.4m).
a) Sharesave Schemes
The Santander UK group launched its thirteenthfifteenth HM Revenue & Customs approved Sharesave invitation under Banco Santander SA ownershipsponsorship in September 2020.2022. Sharesave invitations have been offered since 2008 under broadly similar terms. Under the Sharesave Scheme’s HMRC-approved savings limits, eligible employees may enter into contracts to save between £5£5 and £500£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. This year no discount was applied. The option price is calculated as the average middle market quoted price of Banco Santander SA shares over the first threedealing days prior to invitation.invitation and discounted by up to 20%. This year a 10% discount was applied. 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 vestvesting to exercise the option.
The table below summarises movements in the number of options, and changes in weighted average exercise price over the same period.
| | | 2020 | | 2019 | | 2022 | | 2021 |
| | Number of options | Weighted average exercise price | | Number of options | Weighted average exercise price | | Number of options | Weighted average exercise price | | Number of options | Weighted average exercise price |
| | ‘000 | £ | | ‘000 | £ | | ‘000 | £ | | ‘000 | £ |
Outstanding at 1 January | Outstanding at 1 January | 23,373 | | 3.03 | | | 26,838 | | 3.12 | | Outstanding at 1 January | 25,993 | | 2.25 | | | 21,162 | | 2.32 | |
Granted | Granted | 11,642 | | 1.65 | | | 9,594 | | 2.83 | | Granted | 13,068 | | 1.89 | | | 9,414 | | 2.43 | |
Exercised | Exercised | (860) | | 2.75 | | | (7,978) | | 2.83 | | Exercised | (242) | | 1.69 | | | (48) | | 1.86 | |
Forfeited/expired | Forfeited/expired | (12,993) | | 2.96 | | | (5,081) | | 3.42 | | Forfeited/expired | (8,831) | | 2.59 | | | (4,535) | | 2.95 | |
Outstanding at 31 December | Outstanding at 31 December | 21,162 | | 2.32 | | | 23,373 | | 3.03 | | Outstanding at 31 December | 29,988 | | 2.00 | | | 25,993 | | 2.25 | |
Exercisable at 31 December | Exercisable at 31 December | 1,805 | | 3.59 | | | 2,519 | | 3.62 | | Exercisable at 31 December | 3,439 | | 3.22 | | | 1,321 | | 2.75 | |
The weighted average share price at the date the options were exercised was £2.92 (2019: £3.18)£2.34 (2021: £2.65).
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Annual Report 2022 | Santander UK Group Holdings plc 242 |
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The following table summarises the range of exercise prices and weighted average remaining contractual life of the options at 31 December 20202022 and 2019.2021.
| | | | | | | | | | | | | | | | | |
| | 2020 | | | 2019 |
| Weighted average remaining contractual life | Weighted average exercise price | | Weighted average remaining contractual life | Weighted average exercise price |
| |
| |
Range of exercise prices | Years | £ | | Years | £ |
£1 to £2 | 4 | 1.65 | | | — | | — | |
£2 to £3 | 2 | 2.81 | | | 3 | 2.80 | |
£3 to £4 | 1 | 3.38 | | | 2 | 3.38 | |
£4 to £5 | 1 | 4.02 | | | 2 | 4.13 | |
Santander UK Group Holdings plc253
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Annual Report 2020 | Financial statements
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| | 2022 | | | 2021 |
| Weighted average remaining contractual life | Weighted average exercise price | | Weighted average remaining contractual life | Weighted average exercise price |
Range of exercise prices | Years | £ | | Years | £ |
£1 to £2 | 3 | 1.79 | | | 3 | 1.65 | |
£2 to £3 | 2 | 2.56 | | | 3 | 2.81 | |
£3 to £4 | 1 | 3.46 | | | 1 | 3.38 | |
£4 to £5 | 0 | 4.02 | | | 1 | 4.02 | |
The fair value of each option at the date of grant is estimated using a partial differentiation equation model.an analytical model that also reflects the correlation between EUR and GBP. This model uses assumptions on the share price, the EUR/GBP FX rate, the EUR/GBP risk-free interest rate, dividend yields, the expected volatilityvolatilities of both the underlying shares and EUR/GBP for the expected lives of options granted. The weighted average grant-date fair value of options granted during the year was £0.21 (2019: £0.49).
At 31 December 2020, the carrying amount of liabilities arising from share-based payment transactions in the Santander UK Group Holdings plc group was £0.5m (2019: £2.4m), of which £NaN had vested at 31 December 2020 (2019: £1.4m)£0.23 (2021: £0.20).
b) LTIP
In 2015, a conditional cash award was made to certain Executive Directors, Key Management Personnel (as defined in Note 38) 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 plan granted in 2015 involved a one-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 2016 respectively based on performance over the performance cycle. 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 were met and payment was made to the remaining eligible population in March 2019 at 65.78% of the original award.
The following table summarises the movement in the value of conditional awards in the LTIP in 2020 and 2019:
| | | | | | | | |
| | 2015 LTIP |
| 2020 | 2019 |
| £000 | £000 |
Outstanding at 1 January | 0 | | 6,374 | |
Payments made | 0 | | (4,578) | |
Forfeited/cancelled | 0 | | (1,796) | |
Outstanding at 31 December | 0 | | 0 | |
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 2019 and 2020, conditional share awards were made toThose employees (designatedwho are designated as Material Risk Takers). Such employeesTakers receive part of their annual bonus as a deferred award comprising 50% in shares, and 50%in cash. AnyEither 40% (for any variable pay award of less than £500,000) or 60% (for any variable pay award greater than £500,000) is deferred awards are dependent on continued employment or subject to Santander UK's discretion for leavers. For 2019 and 2020 bonus awards, deferral of the award is over a three, four, five or seven-yearseven year period from the anniversary of the initial award. Deferred bonus awards in shares are subject to an additional one-yearone-year retention period from the point of delivery.
Material Risk Takers Any deferred awards are requireddependent on continued employment and subject to defer either 40% or 60%Santander UK's discretion, and the vesting 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 isare subject to risk and performance adjustment in the event of deficient performance and prudent financial control provisions.adjustment.
d)c) 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£1,800 per tax year (or no more than 10% of an employee’s salary for the tax year) from pre-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. 3,254,9003,974,698 shares were outstanding at 31 December 2020 (2019: 2,396,9092022 (2021: 3,618,796 shares).
d) Transformation Incentive Plan
This is a one-off long-term incentive plan which is designed to recognise the achievement of financial targets and an enhanced customer experience, whilst maintaining appropriate conduct controls and risk management, over the course of our transformation period.
Awards under the plan will be assessed over the period 1 January 2021 to 31 December 2023. Awards are granted half in cash and half in share-based units (linked to the Banco Santander SA share price), and will vest in accordance with regulatory requirements. The total value of share-based awards granted in 2022 was £1m and the liability arising from share-based payment transactions, excluding any cash element was £1.8m.
38.37. 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 (KMP) of the Santander UK group is set out in aggregate below.
| | | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 |
Directors’ remuneration | Directors’ remuneration | £ | £ | Directors’ remuneration | £ | £ |
Salaries and fees(1) | Salaries and fees(1) | 3,906,401 | | 5,045,302 | | 5,028,434 | | Salaries and fees(1) | 4,037,116 | | 3,828,333 | | 3,913,865 | |
Performance-related payments(1)(2) | Performance-related payments(1)(2) | 748,495 | | 3,896,382 | | 5,194,317 | | Performance-related payments(1)(2) | 3,701,569 | | 3,431,294 | | 479,037 | |
Other fixed remuneration (pension and other allowances & non-cash benefits) | 1,047,986 | | 1,386,439 | | 1,467,011 | | |
Other fixed remuneration (allowances and non-cash benefits) | | Other fixed remuneration (allowances and non-cash benefits) | 906,201 | | 806,103 | | 1,047,986 | |
Expenses | Expenses | 2,579 | | 42,526 | | 25,198 | | Expenses | 13,004 | | 3,705 | | 2,579 | |
Total remuneration | Total remuneration | 5,705,461 | | 10,370,649 | | 11,714,960 | | Total remuneration | 8,657,890 | | 8,069,435 | | 5,443,467 | |
| | | 2020 | 2019 | 2018 | | 2022 | 2021 | 2020 |
Directors' and Other Key Management Personnel compensation | Directors' and Other Key Management Personnel compensation | £ | £ | Directors' and Other Key Management Personnel compensation | £ | £ |
Short-term employee benefits(2) | Short-term employee benefits(2) | 17,886,869 | | 23,238,187 | | 24,445,189 | | Short-term employee benefits(2) | 15,641,669 | | 18,831,380 | | 16,106,627 | |
Post-employment benefits(3) | Post-employment benefits(3) | 2,107,544 | | 3,674,772 | | 2,399,261 | | Post-employment benefits(3) | 740,333 | | 913,842 | | 1,832,544 | |
Total Compensation | 19,994,413 | | 26,912,959 | | 26,844,450 | | |
Compensation for loss of office(3) | | Compensation for loss of office(3) | 1,540,400 | | — | | 275,000 | |
Total compensation | | Total compensation | 17,922,402 | | 19,745,222 | | 18,214,171 | |
(1)In line with2021 and 2020 salaries and fees have been restated to reflect fees earned in respect of services rendered during the Code, a proportionyear. Fees of the performance-related payment was deferred. Further details can be found in Note 37.£7,463 have been reallocated from 2021 to 2020.
(2)2021 and 2020 Performance related payments have been restated to account for 36% of Directors and selected KMP awards being subject to long-term metrics. Performance against these metrics can decrease the award to 0% and may not increase the award value. Previously, the value of the Variable Pay Plan awards have been disclosed in full which has resulted in an overstatement post the application of performance conditions. The value of the 2021 and 2020 Variable Pay Plan awards subject to long-term performance conditions will be disclosed after the close of the performance period upon vesting. In addition to the remuneration in the table above, no grants of shares in Banco Santander SA were made to Directors and KMPs as part of buy-outs of deferred performance-related payments of shares in connection with previous employment for two individuals. Onein 2022 (2021: one to a directorKMP with a value of £107,225, of which £25,413 vested in the year, 2020: one to a Director of £1,293,678 of which £242,605 vested in the year and one to Key Management Personnela KMP of £924,133 of which £60,500 vested in the year (2019: £NaN)year). A payment of guaranteed variable remuneration of £660,648 was made to a Director in 2022 (2021: £nil, 2020: £nil) part of which was awarded in Banco Santander SA shares. The element of the guaranteed remuneration which vested in respect of 2022 has been disclosed above, 40%, and the remaining 60% will be disclosed upon vesting.
(3)NaN Termination payments were Compensation for loss of office was paid to three KMPs in 20202022 totalling £1,540,400 (2021: £nil, 2020: one KMP: £275,000).
In 2022, the remuneration, excluding pension contributions, of the highest paid Director, was £3,510,441 (2021: £3,740,810, 2020: £2,093,149) of which £1,900,506 (2021: £1,864,320, 2020: £nil) was performance related. In 2022, the accrued defined benefit pension relating to key management persons (2019: £1,076,435the highest paid director was £nil (2021: £22,119, 2020: £21,309 per annum for one individual; 2018: £847,388 for two individuals)a different individual).
254Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 243 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | Risk Review | | Financial review | | Financial statements | | Shareholder information |
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In 2020, the remuneration, excluding pension contributions, of the highest paid Director, was £2,200,138 (2019: £3,725,993) of which £748,495 (2019: £1,989,900) was performance related. In 2020, there was no pension benefit accrued for the highest paid Director.
b) Retirement benefits
Defined benefit pension schemes are provided to certain employees. See Note 30 for details of the schemes and the related costs and obligations. One director has a deferred pension benefit accruing under a defined benefit scheme. Ex gratia pensions paid to former Directors of Santander UK plc in 2020,2022, which have been provided for previously, amounted to £366,248 (2019: £335,202; 2018: £87,300)£379,945 (2021: £370,668; 2020: £366,248). In 1992,Since the Company became part of the Banco Santander group, the Board decidedhas not to awardawarded any new such ex gratiaex-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.
| | | | 2020 | | 2019 | | | 2022 | | 2021 |
No. | £000 | | No. | £000 | No. | £000 | | No. | £000 |
Secured loans, unsecured loans and overdrafts | Secured loans, unsecured loans and overdrafts | | | Secured loans, unsecured loans and overdrafts | | |
At 1 January | At 1 January | 18 | 4,920 | | | 16 | 3,035 | | At 1 January | 4 | 27 | | | 9 | 1,825 | |
Net movements | Net movements | (9) | (3,095) | | | 2 | 1,885 | | Net movements | 2 | 620 | | | (5) | (1,798) | |
At 31 December | At 31 December | 9 | 1,825 | | | 18 | 4,920 | | At 31 December | 6 | 647 | | | 4 | 27 | |
| Deposit, bank and instant access accounts and investments | Deposit, bank and instant access accounts and investments | | | Deposit, bank and instant access accounts and investments | | |
At 1 January | At 1 January | 32 | 11,975 | | | 30 | 10,963 | | At 1 January | 16 | 6,427 | | | 16 | 8,063 | |
Net movements | Net movements | (16) | (3,912) | | | 2 | 1,012 | | Net movements | — | (3,432) | | | — | (1,636) | |
At 31 December | At 31 December | 16 | 8,063 | | | 32 | 11,975 | | At 31 December | 16 | 2,995 | | | 16 | 6,427 | |
In 20202022 and 2019 2021, 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 20202022 and 2019, 2021, no Directors exercised share options over shares in Banco Santander SA, the ultimate parent company of the Company.
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 2020,2022, loans were made to 4four Directors (2019: 9(2021: two Directors), with a principal amount of £13,994£332,426 outstanding at 31 December 2020 (2019: £1,767,066)2022 (2021: £15,430). In 2020,2022, loans were made to 5two Other Key Management Personnel (2019: 9)(2021: two), with a principal amount of £1,811,171£314,667 outstanding at 31 December 2020 (2019: £3,153,343)2022 (2021: £11,678).
In 20202022 and 2019,2021, there were 0no 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 20202022 and 2019, 02021, no Director had a material interest in any contract of significance with Santander UK other than a service contract.contract or appointment letter, as appropriate.
39.38. 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 the year-end:
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| | | | | | | | | | | | | Group |
| Interest, fees and other income received | | Interest, fees and other expenses paid | | Amounts owed by related parties | | Amounts owed to related parties |
| | |
| 2020 | 2019 | 2018 | | 2020 | 2019 | 2018 | | 2020 | 2019 | | 2020 | 2019 |
£m | £m | £m | | £m | £m | £m | | £m | £m | | £m | £m |
Ultimate parent | (120) | | (150) | | (73) | | | 158 | | 334 | | 231 | | | 1,857 | | 1,817 | | | (2,463) | | (2,409) | |
Fellow subsidiaries | (54) | | (58) | | (81) | | | 148 | | 158 | | 169 | | | 37 | | 34 | | | (498) | | (500) | |
Associates & joint ventures | (29) | | (29) | | (28) | | | 0 | | 0 | | 0 | | | 2,234 | | 2,194 | | | (1,034) | | (930) | |
| (203) | | (237) | | (182) | | | 306 | | 492 | | 400 | | | 4,128 | | 4,045 | | | (3,995) | | (3,839) | |
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| | | | | | | | | | | | | Group |
| Interest, fees and other income received | | Interest, fees and other expenses paid | | Amounts owed by related parties | | Amounts owed to related parties |
| | |
| 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | | 2022 | 2021 |
£m | £m | £m | | £m | £m | £m | | £m | £m | | £m | £m |
Ultimate parent | (863) | | (210) | | (120) | | | 47 | | 34 | | 158 | | | 1,423 | | 1,049 | | | (1,732) | | (1,392) | |
Fellow subsidiaries | (60) | | (47) | | (54) | | | 171 | | 151 | | 148 | | | 31 | | 20 | | | (278) | | (467) | |
Associates & joint ventures | (77) | | (34) | | (29) | | | 17 | | 4 | | — | | | 4,151 | | 3,075 | | | (973) | | (918) | |
| (1,000) | | (291) | | (203) | | | 235 | | 189 | | 306 | | | 5,605 | | 4,144 | | | (2,983) | | (2,777) | |
For more on this, see ‘Balances with other Banco Santander companies’group members’ in the Risk review.review, Note 13. Loans and advances to customers, Note 23. Deposits by customers and Note 33. Other Equity Instruments. In addition, transactions with pension schemes operated by the Santander UK group are described in Note 30. In November 2022, Santander (UK) Group Pension Scheme Trustees Limited entered into an unsecured committed liquidity facility with Santander UK plc for £600m with a maturity date of 31 December 2024. This facility provides an alternate source of short-term liquidity for day-to-day operational needs. At the balance sheet date, no drawings had been made from this facility and the entire facility remained undrawn.
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 in 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.
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In addition,2020, Santander Consumer (UK) plc (SCUK) purchased a 50% share in July 2018 wea new joint venture, Volvo Car Financial Services UK Limited. In 2021, £390m of dealer lending was transferred £1.4bnfrom SCUK to the new entity.
In 2021, SCUK sold its entire 50% shareholding in PSA Finance UK Limited to PSA Financial Services Spain EFC SA, a joint venture between Santander Consumer Finance SA, a fellow subsidiary of customer loans, £21.5bnBanco Santander SA, and Banque PSA Finance SA.
In 2021, a significant part of other assets and £20.7bnthe CIB business of liabilities from Santander UK was transferred to the London branch of Banco Santander SA by way of a Part VII banking business transfer scheme. For more details, see Note 42.
In 2021, we sold our current head office site in Triton Square, London Branch. Of these transfers £19.7bnto Santander UK Investments, a wholly owned subsidiary of assetsour ultimate parent. Santander UK occupies space within the building and £18.8bnpaid fees of liabilities related to derivatives business. These transfers reduced RWAs by £5.5bn and we paid£6m (2021: £4m) under an associated dividend of £668m.occupational licence arrangement.
40.39. 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)a) 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 its non-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. Active markets are assessed by reference to average daily trading volumes in absolute terms and, where applicable, by reference to market capitalisation for the instrument.
Level 2 Quoted prices in inactive markets, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability.
Level 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.
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c)
b) Valuation techniques
The main valuation techniques employed in internal models to measure the fair value of the financial instruments at 31 December 20202022 and 20192021 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 2020, 20192022, 2021 and 2018.2020.
AIn the valuation of financial instruments requiring static hedging (for example interest rate, currency derivatives and property derivatives) and in the valuation of loans and advances and deposits, the ‘present value’ method is used. Expected future cash flows are discounted using the interest rate curves of the applicable currencies or forward house price index levels, as well as credit spreads. The interest rate curves are generally observable market data and reference yield curves derived from quoted interest rates in appropriate time bandings, which match the timings of the cash flows and maturities of the instruments. The forward commodity house price index levels are generally observable market data.
BIn 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 the bid-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.
CIn 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.
DIn 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 of non-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 as bid-offer spread, interest rates, credit risk, exchange rates, the quoted market price of 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.
d)c) 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 validationverification 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 current mark-to-model valuation and estimates of how different these valuations could be on an actual trade, taking into consideration how active the market is. For spot assets that cannot be sold due to illiquidity, forward estimates are discounted to 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.
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e)
d) 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 20202022 and 2019,2021, 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, 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 | | | | | Group |
| | | 2020 | | 2019 | | 2022 | | 2021 |
| | | Fair value | | Carrying | | | Fair value | | Carrying | | Fair value | | Carrying | | Fair value | | Carrying |
| | Level 1 | Level 2 | Level 3 | Total | value | | Level 1 | Level 2 | Level 3 | Total | value | | Level 1 | Level 2 | Level 3 | Total | value | | Level 1 | Level 2 | Level 3 | Total | value |
£m | | £m | £m | | £m |
Assets | Assets | | | Assets | | |
Loans and advances to customers | Loans and advances to customers | 0 | | 0 | | 214,730 | | 214,730 | | 212,178 | | | 0 | | 0 | | 212,007 | | 212,007 | | 207,498 | | Loans and advances to customers | — | | — | | 216,451 | | 216,451 | | 223,840 | | | — | | — | | 216,279 | | 216,279 | | 213,525 | |
Loans and advances to banks | Loans and advances to banks | 0 | | 2,004 | | 0 | | 2,004 | | 2,004 | | | 0 | | 2,039 | | 539 | | 2,578 | | 2,583 | | Loans and advances to banks | — | | 1,105 | | — | | 1,105 | | 1,105 | | | — | | 1,420 | | — | | 1,420 | | 1,420 | |
Reverse repurchase agreements - non trading | Reverse repurchase agreements - non trading | 0 | | 19,382 | | 226 | | 19,608 | | 19,599 | | | 0 | | 23,634 | | 0 | | 23,634 | | 23,636 | | Reverse repurchase agreements - non trading | — | | 7,341 | | — | | 7,341 | | 7,348 | | | — | | 12,453 | | 226 | | 12,679 | | 12,683 | |
Other financial assets at amortised cost | Other financial assets at amortised cost | 799 | | 393 | | 0 | | 1,192 | | 1,163 | | | 6,575 | | 535 | | 0 | | 7,110 | | 7,056 | | Other financial assets at amortised cost | 144 | | — | | — | | 144 | | 156 | | | 164 | | 348 | | — | | 512 | | 506 | |
| | 799 | | 21,779 | | 214,956 | | 237,534 | | 234,944 | | | 6,575 | | 26,208 | | 212,546 | | 245,329 | | 240,773 | | | 144 | | 8,446 | | 216,451 | | 225,041 | | 232,449 | | | 164 | | 14,221 | | 216,505 | | 230,890 | | 228,134 | |
Liabilities | Liabilities | | | Liabilities | | |
Deposits by customers | Deposits by customers | 0 | | 109 | | 193,102 | | 193,211 | | 193,088 | | | 0 | | 96 | | 179,040 | | 179,136 | | 179,006 | | Deposits by customers | — | | 52 | | 197,228 | | 197,280 | | 197,313 | | | — | | 52 | | 192,887 | | 192,939 | | 192,914 | |
Deposits by banks | Deposits by banks | 0 | | 20,966 | | 16 | | 20,982 | | 20,973 | | | 0 | | 13,962 | | 407 | | 14,369 | | 14,359 | | Deposits by banks | — | | 27,997 | | 54 | | 28,051 | | 28,543 | | | — | | 33,780 | | 82 | | 33,862 | | 33,862 | |
Repurchase agreements - non trading | Repurchase agreements - non trading | 0 | | 15,847 | | 0 | | 15,847 | | 15,848 | | | 0 | | 18,292 | | 0 | | 18,292 | | 18,286 | | Repurchase agreements - non trading | — | | 7,982 | | — | | 7,982 | | 7,982 | | | — | | 11,718 | | — | | 11,718 | | 11,718 | |
Debt securities in issue | Debt securities in issue | 0 | | 43,500 | | 1,430 | | 44,930 | | 43,679 | | | 0 | | 51,736 | | 0 | | 51,736 | | 50,171 | | Debt securities in issue | 4,988 | | 28,685 | | 1,582 | | 35,255 | | 36,420 | | | 4,070 | | 27,084 | | 1,218 | | 32,372 | | 31,580 | |
Subordinated liabilities | Subordinated liabilities | 0 | | 2,830 | | 239 | | 3,069 | | 2,556 | | | 0 | | 4,220 | | 0 | | 4,220 | | 3,528 | | Subordinated liabilities | 19 | | 2,268 | | 224 | | 2,511 | | 2,332 | | | 1,019 | | 1,512 | | 238 | | 2,769 | | 2,228 | |
| | 0 | | 83,252 | | 194,787 | | 278,039 | | 276,144 | | | 0 | | 88,306 | | 179,447 | | 267,753 | | 265,350 | | | 5,007 | | 66,984 | | 199,088 | | 271,079 | | 272,590 | | | 5,089 | | 74,146 | | 194,425 | | 273,660 | | 272,302 | |
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 assetsas a separate line item on the balance sheet.
Valuation methodology for financial instruments carried at amortised cost
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 or credit spreads relevant to the specific industry of 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 LTV Band, after taking account of expected customer prepayment rates. The spread is based on new business interest rates derived from publicly available competitor market information.
ii) Corporate loans
The determination of the fair values of performing loans takes accountis calculated by discounting the contractual cash flows and also deducting other costs relating to expected credit losses, cost of the differential between existing marginscapital, credit risk capital, operational risk capital, cost of funding and estimated new business rates for similar loans in terms of segment and 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.operating costs.
iii) Other loans
These consist of unsecured personal loans, credit cards, overdrafts and consumer (auto) finance. The weighted average lives of these portfolios are typically short and relate to relatively new business. As a result, contractual interest rates approximate new business interest rates, and therefore no mark-to-market surplus or deficit has been recorded with respect to the performing book, with the exception ofFor 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 the 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 a 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, using a spread appropriate to the underlying collateral.
Other financial assets at amortised cost
These consist of asset backed securities and debt securities. The asset backed securities can 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 quoted market prices.
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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, 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. Where reliable prices are not available, internal models have been used to determine fair values, which take into account, among other things, contract terms and observable market data, which include such factors as interest rates, credit risk and exchange rates. 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.
f)e) 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 20202022 and 31 December 2019,2021, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.
| | | | | | Group | | Group |
| | 2020 | | 2019 | | | 2022 | | 2021 | |
| | Level 1 | Level 2 | Level 3 | Total | | Level 1 | Level 2 | Level 3 | Total | Valuation | | Level 1 | Level 2 | Level 3 | Total | | Level 1 | Level 2 | Level 3 | Total | Valuation |
| | £m | | £m | technique | | £m | | £m | technique |
Assets | Assets | | | | Assets | | | |
Derivative financial instruments | Derivative financial instruments | Exchange rate contracts | 0 | | 2,455 | | 2 | | 2,457 | | | 0 | | 2,319 | | 6 | | 2,325 | | A | Derivative financial instruments | Exchange rate contracts | — | | 2,049 | | — | | 2,049 | | | — | | 1,193 | | 1 | | 1,194 | | A |
| | Interest rate contracts | 0 | | 2,604 | | 14 | | 2,618 | | | 0 | | 1,951 | | 9 | | 1,960 | | A & C | | Interest rate contracts | — | | 2,406 | | 7 | | 2,413 | | | — | | 1,574 | | — | | 1,574 | | A & C |
| | Equity and credit contracts | 0 | | 71 | | 59 | | 130 | | | 0 | | 223 | | 69 | | 292 | | B & D | | Equity and credit contracts | — | | 103 | | 47 | | 150 | | | — | | 118 | | 55 | | 173 | | B & D |
| | Netting | 0 | | (1,754) | | 0 | | (1,754) | | | 0 | | (1,214) | | 0 | | (1,214) | | | | Netting | — | | (2,173) | | — | | (2,173) | | | — | | (1,221) | | — | | (1,221) | | |
| | | 0 | | 3,376 | | 75 | | 3,451 | | | 0 | | 3,279 | | 84 | | 3,363 | | | | | — | | 2,385 | | 54 | | 2,439 | | | — | | 1,664 | | 56 | | 1,720 | | |
Other financial assets at FVTPL | Other financial assets at FVTPL | Loans and advances to customers | 0 | | 493 | | 99 | | 592 | | | 0 | | 448 | | 92 | | 540 | | A | Other financial assets at FVTPL | Loans and advances to customers | — | | 294 | | 45 | | 339 | | | — | | 440 | | 74 | | 514 | | A |
| Debt securities | 0 | | 3 | | 109 | | 112 | | | 2 | | 2 | | 294 | | 298 | | A, B & D | |
| | Equity securities | 83 | | 0 | | 47 | | 130 | | | 16 | | 0 | | 119 | | 135 | | B | | Debt securities | — | | 13 | | 72 | | 85 | | | — | | 1 | | 111 | | 112 | | A, B & D |
| | Reverse repurchase agreements – non trading | 0 | | 0 | A | | Equity securities | — | | — | | 10 | | 10 | | | — | | — | | 50 | | 50 | | B |
| | 83 | | 496 | | 255 | | 834 | | | 18 | | 450 | | 505 | | 973 | | | | — | | 307 | | 127 | | 434 | | | — | | 441 | | 235 | | 676 | | |
Financial assets at FVOCI | Financial assets at FVOCI | Debt securities | 8,501 | | 428 | | 0 | | 8,929 | | | 9,209 | | 482 | | 0 | | 9,691 | | D | Financial assets at FVOCI | Debt securities | 5,996 | | 28 | | — | | 6,024 | | | 5,833 | | — | | — | | 5,833 | | D |
| | Loans and advances to customers | 0 | | 0 | | 21 | | 21 | | | 0 | | 0 | | 56 | | 56 | | D | | Loans and advances to customers | — | | — | | — | | — | | | — | | — | | 18 | | 18 | | D |
| | 8,501 | | 428 | | 21 | | 8,950 | | | 9,209 | | 482 | | 56 | | 9,747 | | | | 5,996 | | 28 | | — | | 6,024 | | | 5,833 | | — | | 18 | | 5,851 | | |
Total assets at fair value | Total assets at fair value | | 8,584 | | 4,300 | | 351 | | 13,235 | | | 9,227 | | 4,211 | | 645 | | 14,083 | | | Total assets at fair value | | 5,996 | | 2,720 | | 181 | | 8,897 | | | 5,833 | | 2,105 | | 309 | | 8,247 | | |
| Liabilities | Liabilities | | | | Liabilities | | | |
Derivative financial instruments | Derivative financial instruments | Exchange rate contracts | 0 | | 846 | | 0 | | 846 | | | 0 | | 659 | | 4 | | 663 | | A | Derivative financial instruments | Exchange rate contracts | — | | 489 | | — | | 489 | | | — | | 521 | | — | | 521 | | A |
| | Interest rate contracts | 0 | | 2,742 | | 3 | | 2,745 | | | 0 | | 2,087 | | 2 | | 2,089 | | A & C | | Interest rate contracts | — | | 2,662 | | 4 | | 2,666 | | | — | | 1,659 | | 2 | | 1,661 | | A & C |
| | Equity and credit contracts | 0 | | 54 | | 29 | | 83 | | | 0 | | 142 | | 29 | | 171 | | B & D | | Equity and credit contracts | — | | 18 | | 8 | | 26 | | | — | | 28 | | 30 | | 58 | | B & D |
| | Netting | 0 | | (1,754) | | 0 | | (1,754) | | | 0 | | (1,214) | | 0 | | (1,214) | | | | Netting | — | | (2,173) | | — | | (2,173) | | | — | | (1,221) | | — | | (1,221) | | |
| | 0 | | 1,888 | | 32 | | 1,920 | | | 0 | | 1,674 | | 35 | | 1,709 | | | | — | | 996 | | 12 | | 1,008 | | | — | | 987 | | 32 | | 1,019 | | |
Other financial liabilities at FVTPL | Other financial liabilities at FVTPL | Debt securities in issue | 0 | | 1,051 | | 6 | | 1,057 | | | 0 | | 1,099 | | 6 | | 1,105 | | A | Other financial liabilities at FVTPL | Debt securities in issue | — | | 477 | | 3 | | 480 | | | — | | 555 | | 5 | | 560 | | A |
| | Structured deposits | 0 | | 375 | | 0 | | 375 | | | 0 | | 406 | | 29 | | 435 | | A | | Structured deposits | — | | 321 | | — | | 321 | | | — | | 223 | | — | | 223 | | A |
| | Repurchase agreements – non trading | 0 | | 0 | A | | Collateral and associated financial guarantees | — | | 2 | | — | | 2 | | | — | | 19 | | 1 | | 20 | | D |
| | Collateral and associated financial guarantees | 0 | | 0 | | 2 | | 2 | | | 0 | | 147 | | 26 | | 173 | | D | | — | | 800 | | 3 | | 803 | | | — | | 797 | | 6 | | 803 | | |
| 0 | | 1,426 | | 8 | | 1,434 | | | 0 | | 1,652 | | 61 | | 1,713 | | | |
Total liabilities at fair value | Total liabilities at fair value | | 0 | | 3,314 | | 40 | | 3,354 | | | 0 | | 3,326 | | 96 | | 3,422 | | | Total liabilities at fair value | | — | | 1,796 | | 15 | | 1,811 | | | — | | 1,784 | | 38 | | 1,822 | | |
Transfers between levels of the fair value hierarchy
In 20202022 there there was an £81m (2019: none) transferwere no significant (2021: no significant) transfers of Visa shares from Level 3 to Level 1 due tofinancial instruments between levels of the changes in litigation matters relating to these shares. A ruling was made whereby Type B Visa shares were converted into Type A Visa shares. Type B Visa shares are not liquid observable, but Type A Visa shares are.fair value hierarchy.
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g)
f) 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 adjustmentadjustments are listedset out in the following table:
| | | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Risk-related: | Risk-related: | | | Risk-related: | | |
- Bid-offer and trade specific adjustments | - Bid-offer and trade specific adjustments | (8) | | (12) | | - Bid-offer and trade specific adjustments | (12) | | (9) | |
- Uncertainty | - Uncertainty | 45 | | 37 | | - Uncertainty | 27 | | 40 | |
- Credit risk adjustment | - Credit risk adjustment | 11 | | 6 | | - Credit risk adjustment | (1) | | 6 | |
- Funding fair value adjustment | - Funding fair value adjustment | 3 | | 6 | | - Funding fair value adjustment | 1 | | 3 | |
| | 51 | | 37 | | | 15 | | 40 | |
Model-related | 0 | | 0 | | |
| Day One profit | Day One profit | 0 | 0 | Day One profit | (1) | — |
| | 51 | | 37 | | | 14 | | 40 | |
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 generate mid-market values. The bid-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, the bid-offer spread is based on a 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 a bid-offer spread is applied to each risk bucket based upon the market bid-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 the non-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.
The methodologies do not, in general, account for wrong-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 significant wrong-way risk, a trade-specific approach is applied to reflect the wrong-way risk within the valuation. Exposure to wrong-way risk is limited via internal governance processes and deal pricing. Santander UK considers that an appropriate adjustment to reflect wrong-way risk is £NaN (2019: £NaN)£nil (2021: £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.
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.
260Santander UK Group Holdings plc
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h)
g) 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 value | | Fair value movements recognised in profit/(loss) |
| | | 2020 | 2019 | | 2020 | 2019 | 2018 | | 2022 | 2021 | | 2022 | 2021 | 2020 |
Balance sheet line item | Balance sheet line item | Category | Financial instrument product type | £m | £m | | £m | £m | Balance sheet line item | Category | Financial instrument product type | £m | £m | | £m | £m |
1. Derivative assets | 1. Derivative assets | Equity and credit contracts | Reversionary property interests | 51 | | 52 | | | 3 | | 2 | | 30 | | 1. Derivative assets | Equity and credit contracts | Reversionary property interests | 30 | | 45 | | | (8) | | — | | 3 | |
2. FVTPL assets | 2. FVTPL assets | Loans and advances to customers | Roll-up mortgage portfolio | 56 | | 51 | | | 6 | | 0 | | 8 | | 2. FVTPL assets | Loans and advances to customers | Roll-up mortgage portfolio | 28 | | 48 | | | (18) | | (5) | | 6 | |
3. FVTPL assets | 3. FVTPL assets | Loans and advances to customers | Other loans | 43 | | 41 | | | 3 | | 1 | | 2 | | 3. FVTPL assets | Loans and advances to customers | Other loans | 17 | | 26 | | | (4) | | (2) | | 3 | |
4. FVTPL assets | 4. FVTPL assets | Debt securities | Reversionary property securities | 107 | | 120 | | | 6 | | (17) | | (28) | | 4. FVTPL assets | Debt securities | Reversionary property securities | 70 | | 91 | | | — | | 5 | | 6 | |
5. FVTPL assets | 5. FVTPL assets | Equity securities | Unlisted equity shares | 47 | | 119 | | | 12 | | 42 | | 19 | | 5. FVTPL assets | Equity securities | Unlisted equity shares | 10 | | 50 | | | (10) | | 1 | | 12 | |
6. FVTPL assets | 6. FVTPL assets | Debt securities | Credit linked notes | 2 | | 174 | | | (16) | | 7 | | 13 | | 6. FVTPL assets | Debt securities | Credit linked notes | 2 | | 20 | | | 4 | | (5) | | (16) | |
7. FVOCI assets | 7. FVOCI assets | Loans and advances to customers | Other loans | 21 | | 56 | | | (4) | | (2) | | (5) | | 7. FVOCI assets | Loans and advances to customers | Other loans | — | | 18 | | | — | | (3) | | (4) | |
8. Derivative liabilities | 8. Derivative liabilities | Equity contracts | Property options and forwards | (29) | | (26) | | | (3) | | 0 | | 0 | | 8. Derivative liabilities | Equity contracts | Property options and forwards | (8) | | (30) | | | 4 | | (1) | | (3) | |
9. FVTPL liabilities | 9. FVTPL liabilities | Financial guarantees | Credit protection guarantee | (2) | | (26) | | | 16 | | (7) | | (13) | | 9. FVTPL liabilities | Financial guarantees | Credit protection guarantee | — | | (1) | | | — | | 5 | | 16 | |
| | | | 296 | | 561 | | | 23 | | 26 | | 26 | | | | | 149 | | 267 | | | (32) | | (5) | | 23 | |
Other Level 3 assets | Other Level 3 assets | | 24 | | 32 | | | 7 | | 15 | | (2) | | Other Level 3 assets | | 24 | | 11 | | | 13 | | 2 | | 7 | |
Other Level 3 liabilities | Other Level 3 liabilities | | (9) | | (44) | | | (3) | | (7) | | 1 | | Other Level 3 liabilities | | (7) | | (7) | | | (2) | | 2 | | (3) | |
Total net assets | Total net assets | | 311 | | 549 | | | 0 | | 0 | | 0 | | Total net assets | | 166 | | 271 | | | | | | | | |
Total income/(expense) | Total income/(expense) | | | | | 27 | | 34 | | 25 | | Total income/(expense) | | | | | (21) | | (1) | | 27 | |
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 ownerhomeowner vacating the property and is calculated from mortality rates and acceleration rates which are a function of age and gender, obtained from the relevant mortality tables. Indexing is felt to be appropriate due to the size and geographical dispersion of the reversionary interest portfolio. These are determined using HPI Spot Rates adjusted to reflect estimated forward growth. 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 represent roll-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 maydoes not have to 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 and rolled-up interest) is repaid upon the owner’s vacation of the property and the value of the loan is only repaid from the value of the property. This is known as a ‘no negative 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 the roll-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’ isare 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 ownerhomeowner 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 1 above. An adjustment is also made to reflect the specific property risk. Discussion ofSpecific property risk is from the difference between the specific property risk adjustment isproperties in the sameportfolio, and the average price as Instrument 1 above.expressed in the regionally weighted house price index.
5. FVTPL assets – 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 to valuation models used in these models include equity prices bid-offer spread,and 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 31. This is estimated by reference to best estimates received from third party legal counsel.
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6 .FVTPL. 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 19.
7. FVOCI assets – Loans and advances to customers – other loans
These relate to shipping and 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.
8. Derivative liabilities – Equity contracts
There are three types of derivatives in this category:
European options – These are valued using a modified Black-Scholes model where the HPI is log-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. The principal pricing parameter is HPI forward growth rate.rate, which is unobservable.
9. FVTPL liabilities – 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 6 above and have been designated at fair value through profit or loss. These instruments are valued using the same unobservable parameters described in Instrument 6 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 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 20202022 and 2019:2021:
| | | Assets | | Liabilities | | Assets | | Liabilities |
| | Derivatives | Other financial assets at FVTPL | Financial assets at FVOCI | Total | | Derivatives | Other financial liabilities at FVTPL | Total | | Derivatives | Other financial assets at FVTPL | Financial assets at FVOCI | Total | | Derivatives | Other financial liabilities at FVTPL | Total |
| | £m | | £m | | £m | | £m |
At 1 January 2020 | 84 | | 505 | | 56 | | 645 | | | (35) | | (61) | | (96) | | |
At 1 January 2022 | | At 1 January 2022 | 56 | | 235 | | 18 | | 309 | | | (32) | | (6) | | (38) | |
Total (losses)/gains recognised: | Total (losses)/gains recognised: | | Total (losses)/gains recognised: | |
- Fair value movements | 10 | | 11 | | (4) | | 17 | | | (7) | | 17 | | 10 | | |
- Foreign exchange and other movements | 0 | | (9) | | 0 | | (9) | | | 0 | | 8 | | 8 | | |
Fair value movements(2) | | Fair value movements(2) | 5 | | (28) | | — | | (23) | | | 2 | | — | | 2 | |
Foreign exchange and other movements | | Foreign exchange and other movements | — | | (2) | | — | | (2) | | | — | | 1 | | 1 | |
Transfers in | Transfers in | 1 | | 1 | | 0 | | 2 | | | 0 | | 0 | | 0 | | Transfers in | — | | — | | — | | — | | | (2) | | — | | (2) | |
Transfers out | Transfers out | 0 | (81) | 0 | (81) | | 0 | | 28 | | 28 | | Transfers out | — | (28) | — | (28) | | — | | — | | — | |
Netting(1) | Netting(1) | 0 | | (42) | | 0 | | (42) | | | 0 | | 0 | | 0 | | Netting(1) | — | | (8) | | — | | (8) | | | — | | — | | — | |
Additions | 9 | | 0 | | 0 | | 9 | | | 0 | | (2) | | (2) | | |
| Sales | Sales | 0 | | (19) | | (19) | | (38) | | | 0 | | 0 | | 0 | | Sales | — | | (5) | | — | | (5) | | | — | | — | | — | |
Settlements | Settlements | (29) | | (111) | | (12) | | (152) | | | 10 | | 2 | | 12 | | Settlements | (7) | | (37) | | (18) | | (62) | | | 20 | | 2 | | 22 | |
At 31 December 2020 | 75 | | 255 | | 21 | | 351 | | | (32) | | (8) | | (40) | | |
At 31 December 2022 | | At 31 December 2022 | 54 | | 127 | | — | | 181 | | | (12) | | (3) | | (15) | |
| (Losses)/gains recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period | 10 | | 2 | | (4) | | 8 | | | (7) | | 25 | | 18 | | |
Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the year(2) | | Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the year(2) | 5 | | (30) | | — | | (25) | | | 2 | | 1 | | 3 | |
| At 1 January 2019 | 115 | | 1,055 | | 73 | | 1,243 | | | (70) | | (49) | | (119) | | |
At 1 January 2021 | | At 1 January 2021 | 75 | | 255 | | 21 | | 351 | | | (32) | | (8) | | (40) | |
Total gains/(losses) recognised: | Total gains/(losses) recognised: | | Total gains/(losses) recognised: | |
- Fair value movements | - Fair value movements | 17 | | 33 | | (2) | | 48 | | | (8) | | (6) | | (14) | | - Fair value movements | 2 | | (6) | | (3) | | (7) | | | — | | 6 | | 6 | |
- Foreign exchange and other movements | - Foreign exchange and other movements | 0 | | 4 | | 0 | | 4 | | | 0 | | (6) | | (6) | | - Foreign exchange and other movements | — | | 2 | | — | | 2 | | | — | | 1 | | 1 | |
Transfers in | 0 | | 11 | | 0 | | 11 | | | 0 | | 0 | | 0 | | |
Netting(1) | Netting(1) | 0 | | (430) | | 0 | | (430) | | | 0 | | 0 | | 0 | | Netting(1) | — | | 23 | | — | | 23 | | | — | | (5) | | (5) | |
Additions | 2 | | 188 | | 0 | | 190 | | | 0 | | (3) | | (3) | | |
Sales | Sales | 0 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | Sales | — | | (16) | | — | | (16) | | | — | | — | | — | |
Settlements | Settlements | (50) | | (356) | | (15) | | (421) | | | 43 | | 3 | | 46 | | Settlements | (21) | | (23) | | — | | (44) | | | — | | — | | — | |
At 31 December 2019 | 84 | | 505 | | 56 | | 645 | | | (35) | | (61) | | (96) | | |
At 31 December 2021 | | At 31 December 2021 | 56 | | 235 | | 18 | | 309 | | | (32) | | (6) | | (38) | |
| Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period | 17 | | 37 | | (2) | | 52 | | | (8) | | (12) | | (20) | | |
Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the year | | Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the year | 2 | | (4) | | (3) | | (5) | | | — | | 7 | | 7 | |
(1)This relates to the effect of netting on the fair value of the credit linked notes due to a legal right of set-off between the principal amounts of the senior notes and the associated cash deposits. For more, see ‘ii) Credit protection entities’ in Note 19.
(2)Fair value movements relating to derivatives and other financial assets at FVTPL are recognised in other operating income in the income statement. Fair value movements relating to financial assets at FVOCI are recognised in the movement in fair value reserve (debt instruments).
262Santander UK Group Holdings plc
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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
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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 changes | Unfavourable changes | | | Assumption value | | Favourable changes | Unfavourable changes |
| | Fair value | | Range(1) | Weighted average | Shift | | Fair value | | Range | Weighted average | Shift |
2020 | £m | Assumption description | £m | |
2022 | | 2022 | £m | Assumption description | Range | Weighted average | Shift | £m |
1. Derivative assets – Equity and credit contracts: | 1. Derivative assets – Equity and credit contracts: | 51 | | HPI Forward growth rate | 0% - 5% | 2.57 | % | 1 | % | 8 | | (8) | | 1. Derivative assets – Equity and credit contracts: | 30 | | HPI Forward growth rate | 4 | | (4) | |
– Reversionary property derivatives | – Reversionary property derivatives | | HPI Spot rate(2) | n/a | 445 | | 10 | % | 7 | | (7) | | – Reversionary property derivatives | | HPI Spot rate(2) | n/a | 513 | | 10 | % | 4 | | (4) | |
2. FVTPL – Loans and advances to customers: | 2. FVTPL – Loans and advances to customers: | 56 | | HPI Forward growth rate | 0% - 5% | 2.69 | % | 1 | % | 2 | | (2) | | 2. FVTPL – Loans and advances to customers: | 28 | | HPI Forward growth rate | -5% to 5% | 1.39 | % | 1 | % | 1 | | (1) | |
– Roll-up mortgage portfolio | – Roll-up mortgage portfolio | | | | – Roll-up mortgage portfolio | | | |
3. FVTPL – Loans and advances to customers: | 3. FVTPL – Loans and advances to customers: | 43 | | Credit spreads | 0.07% - 1.55% | 0.44 | % | 0.2 | % | 0 | | 0 | | 3. FVTPL – Loans and advances to customers: | 17 | | Credit spreads | 0.19% - 2.04% | 0.98 | % | 20 | % | — | | — | |
– Other loans | – Other loans | | | | – Other loans | | | |
4. FVTPL – Debt securities: | 4. FVTPL – Debt securities: | 107 | | HPI Forward growth rate | 0% - 5% | 2.57 | % | 1 | % | 1 | | (1) | | 4. FVTPL – Debt securities: | 70 | | HPI Forward growth rate | -5% to 5% | 0.53 | % | 1 | % | 1 | | (1) | |
– Reversionary property securities | – Reversionary property securities | | HPI Spot rate(2) | n/a | 445 | | 10 | % | 5 | | (5) | | – Reversionary property securities | | HPI Spot rate(2) | n/a | 513 | | 10 | % | 3 | | (3) | |
5. FVTPL - Equity securities: | 47 | | Contingent litigation risk | 0% - 100% | 49 | % | 20 | % | 8 | | (8) | | |
5. FVTPL – equity securities: | | 5. FVTPL – equity securities: | 10 | | Contingent litigation risk | 0% - 100% | 0.95 | % | 20 | % | 7 | | (7) | |
– Unlisted equity shares | – Unlisted equity shares | | | | – Unlisted equity shares | | | |
7. FVOCI - Loans and advances to customers: | 21 | | Credit spreads | 0.15% - 0.53% | 0.32 | % | 20 | % | 0 | | 0 | | |
6. FVOCI - Loans and advances to customers: | | 6. FVOCI - Loans and advances to customers: | — | | Credit spreads | 0.40% - 0.48% | 0.48 | % | 20 | % | — | | — | |
– Other loans | – Other loans | | | | – Other loans | | | |
8. Derivative liabilities – Equity contracts: | (29) | | HPI Forward growth rate | 0% - 5% | 2.42 | % | 1 | % | 2 | | (2) | | |
– Property-related options and forwards | | HPI Spot rate(2) | n/a | 433 | | 10 | % | 3 | | (3) | | |
7. Derivative liabilities – Equity contracts: | | 7. Derivative liabilities – Equity contracts: | (8) | | HPI Forward growth rate | -5% to 5% | -0.92 | % | 1 | % | 1 | | (1) | |
– Property options and forwards | | – Property options and forwards | | HPI Spot rate(2) | n/a | 491 | | 10 | % | 2 | | (3) | |
| 2019 | | |
2021 | | 2021 | |
1. Derivative assets – Equity and credit contracts: | 1. Derivative assets – Equity and credit contracts: | 52 | HPI Forward growth rate | 0% - 5% | 2.57 | % | 1 | % | 8 | | (8) | | 1. Derivative assets – Equity and credit contracts: | 45 | HPI Forward growth rate | 0% - 5% | 2.56 | % | 1 | % | 6 | | (6) | |
– Reversionary property derivatives | – Reversionary property derivatives | | HPI Spot rate(2) | n/a | 802 | | 10 | % | 7 | | (7) | | – Reversionary property derivatives | | HPI Spot rate(2) | n/a | 483 | | 10 | % | 6 | | (6) | |
2. FVTPL – Loans and advances to customers: | 2. FVTPL – Loans and advances to customers: | 51 | HPI Forward growth rate | 0% - 5% | 2.69 | % | 1 | % | 2 | | (2) | | 2. FVTPL – Loans and advances to customers: | 48 | HPI Forward growth rate | 0% - 5% | 2.68 | % | 1 | % | 2 | | (2) | |
– Roll-up mortgage portfolio | – Roll-up mortgage portfolio | | – Roll-up mortgage portfolio | |
3. FVTPL – Loans and advances to customers: | 3. FVTPL – Loans and advances to customers: | 41 | Credit spreads | 0% - 1% | 0.35 | % | 20 | % | 0 | | 0 | | 3. FVTPL – Loans and advances to customers: | 26 | Credit spreads | 0.07% - 1.44% | 0.50 | % | 20 | % | — | | — | |
– Other loans | – Other loans | | – Other loans | |
4. FVTPL – Debt securities: | 4. FVTPL – Debt securities: | 120 | HPI Forward growth rate | 0% - 5% | 2.57 | % | 1 | % | 0 | | 0 | | 4. FVTPL – Debt securities: | 91 | HPI Forward growth rate | 0% - 5% | 2.56 | % | 1 | % | 1 | | (1) | |
– Reversionary property securities | – Reversionary property securities | | HPI Spot rate(2) | n/a | 802 | | 10 | % | 6 | | (6) | | – Reversionary property securities | | HPI Spot rate(2) | n/a | 483 | | 10 | % | 4 | | (4) | |
5. FVTPL - Equity securities: | 119 | Contingent litigation risk | 0% - 100% | 20 | % | 20 | % | 6 | | (6) | | |
5. FVTPL – equity securities: | | 5. FVTPL – equity securities: | 50 | Contingent litigation risk | 0% - 100% | 45 | % | 20 | % | 7 | | (7) | |
– Unlisted equity shares | – Unlisted equity shares | | – Unlisted equity shares | |
7. FVOCI - Loans and advances to customers: | 7. FVOCI - Loans and advances to customers: | 56 | Credit spreads | 0% - 1% | 0.51 | % | 20 | % | 0 | | 0 | | 7. FVOCI - Loans and advances to customers: | 18 | Credit spreads | 0.15% - 0.19% | 0.04 | % | 20 | % | — | | — | |
– Other loans | – Other loans | | – Other loans | |
8. Derivative liabilities – Equity contracts: | 8. Derivative liabilities – Equity contracts: | (26) | HPI Forward growth rate | 0% - 5% | 2.44 | % | 1 | % | 2 | | (2) | | 8. Derivative liabilities – Equity contracts: | (30) | HPI Forward growth rate | 0% - 5% | 2.39 | % | 1 | % | 2 | | (2) | |
–Property-related options and forwards | | HPI Spot rate(2) | n/a | 758 | | 10 | % | 3 | | (3) | | |
– Property options and forwards | | – Property options and forwards | | HPI Spot rate(2) | n/a | 469 | | 10 | % | 3 | | (3) | |
(1)The range of actual assumption values used to calculate the weighted average disclosure.
(2)The HPI spot rate in the weighted average column represents the HPI spot rate index level at 31 December 20202022 and 2019.2021.
No sensitivities are presented for FVTPL assets – Debt securities, Credit Linked Notes (instrument 6) and FVTPL liabilities – financial guarantees (instrument 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 offset by an equal and opposite change in the valuation of the financial guarantees.
Santander UK Group Holdings plc263 | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 252 |
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i)h) Maturities of financial liabilities and off-balance sheet commitments
The table below analyses the maturities of the undiscounted cash flows relating to financial liabilities and off-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.
| | | Group | | Group |
| | On demand | Not later than 3 months | Later than 3 months and not later than 1 year | Later than 1 year and not later than 5 years | Later than 5 years | Total | | On demand | Not later than 3 months | Later than 3 months and not later than 1 year | Later than 1 year and not later than 5 years | Later than 5 years | Total |
| 2020 | £m | |
2022 | | 2022 | £m |
Financial liabilities | Financial liabilities | | Financial liabilities | |
Derivative financial instruments | Derivative financial instruments | 0 | | 320 | | 134 | | 584 | | 950 | | 1,988 | | Derivative financial instruments | — | | 224 | | 120 | | 501 | | 302 | | 1,147 | |
Other financial liabilities at fair value through profit or loss | Other financial liabilities at fair value through profit or loss | 0 | | 1 | | 107 | | 570 | | 759 | | 1,437 | | Other financial liabilities at fair value through profit or loss | — | | — | | 98 | | 443 | | 437 | | 978 | |
Deposits by customers | Deposits by customers | 179,499 | | 4,251 | | 5,994 | | 2,767 | | 682 | | 193,193 | | Deposits by customers | 181,744 | | 4,969 | | 7,927 | | 2,471 | | 332 | | 197,443 | |
Deposits by banks | Deposits by banks | 2,426 | | 1,894 | | 2,535 | | 14,044 | | 207 | | 21,106 | | Deposits by banks | 2,067 | | 948 | | 659 | | 26,140 | | — | | 29,814 | |
Repurchase agreements – non trading | Repurchase agreements – non trading | 0 | | 15,350 | | 500 | | 0 | | 0 | | 15,850 | | Repurchase agreements – non trading | — | | 7,984 | | 3 | | — | | — | | 7,987 | |
Debt securities in issue | Debt securities in issue | 0 | | 5,759 | | 11,042 | | 19,269 | | 8,921 | | 44,991 | | Debt securities in issue | — | | 6,678 | | 2,101 | | 23,076 | | 6,830 | | 38,685 | |
Subordinated liabilities | Subordinated liabilities | 0 | | 30 | | 92 | | 1,221 | | 2,718 | | 4,061 | | Subordinated liabilities | — | | 35 | | 691 | | 1,149 | | 1,400 | | 3,275 | |
Lease liabilities | Lease liabilities | 0 | | 0 | | 18 | | 57 | | 37 | | 112 | | Lease liabilities | — | | — | | 32 | | 82 | | 28 | | 142 | |
Total financial liabilities | Total financial liabilities | 181,925 | | 27,605 | | 20,422 | | 38,512 | | 14,274 | | 282,738 | | Total financial liabilities | 183,811 | | 20,838 | | 11,631 | | 53,862 | | 9,329 | | 279,471 | |
Off-balance sheet commitments given | Off-balance sheet commitments given | 21,055 | | 4,493 | | 4,983 | | 11,493 | | 1,146 | | 43,170 | | Off-balance sheet commitments given | 19,111 | | 787 | | 898 | | 7,508 | | 3,554 | | 31,858 | |
| 2019 | | |
2021 | | 2021 | |
Financial liabilities | Financial liabilities | | Financial liabilities | |
Derivative financial instruments | Derivative financial instruments | 9 | | 250 | | 294 | | 424 | | 796 | | 1,773 | | Derivative financial instruments | — | | 96 | | 61 | | 392 | | 517 | | 1,066 | |
Other financial liabilities at fair value through profit or loss | Other financial liabilities at fair value through profit or loss | 1 | | 6 | | 203 | | 617 | | 969 | | 1,796 | | Other financial liabilities at fair value through profit or loss | — | | 6 | | 8 | | 553 | | 236 | | 803 | |
Deposits by customers | Deposits by customers | 162,774 | | 3,851 | | 7,931 | | 3,563 | | 1,101 | | 179,220 | | Deposits by customers | 180,907 | | 3,706 | | 5,690 | | 1,920 | | 741 | | 192,964 | |
Deposits by banks | Deposits by banks | 2,717 | | 487 | | 4,765 | | 6,339 | | 220 | | 14,528 | | Deposits by banks | 1,386 | | 536 | | 57 | | 31,984 | | — | | 33,963 | |
Repurchase agreements – non trading | Repurchase agreements – non trading | 6 | | 15,878 | | 1,578 | | 846 | | 0 | | 18,308 | | Repurchase agreements – non trading | — | | 11,419 | | 299 | | — | | — | | 11,718 | |
Debt securities in issue | Debt securities in issue | 0 | | 7,211 | | 9,815 | | 24,676 | | 10,989 | | 52,691 | | Debt securities in issue | — | | 5,011 | | 2,752 | | 16,754 | | 8,057 | | 32,574 | |
Subordinated liabilities | Subordinated liabilities | 0 | | 239 | | 131 | | 1,539 | | 3,961 | | 5,870 | | Subordinated liabilities | — | | 32 | | 98 | | 1,547 | | 2,020 | | 3,697 | |
Lease liabilities | Lease liabilities | 0 | | 0 | | 46 | | 59 | | 52 | | 157 | | Lease liabilities | — | | — | | 32 | | 79 | | 32 | | 143 | |
Total financial liabilities | Total financial liabilities | 165,507 | | 27,922 | | 24,763 | | 38,063 | | 18,088 | | 274,343 | | Total financial liabilities | 182,293 | | 20,806 | | 8,997 | | 53,229 | | 11,603 | | 276,928 | |
Off-balance sheet commitments given(1) | Off-balance sheet commitments given(1) | 20,171 | | 2,927 | | 5,742 | | 11,490 | | 1,277 | | 41,608 | | Off-balance sheet commitments given(1) | 20,545 | | 5,359 | | 5,747 | | 5,523 | | 574 | | 37,748 | |
1.In 2020, an administrative error was identified regarding the incorrect classification of £4.9bn of 2019 loan commitments between 'Not later than 3 months' and 'later than 3 months and not later than 1 year'. As a result, the 2019 loan commitments have been amended to reduce loan commitments 'Not later than 3 months' and increase loan commitments 'later than 3 months and not later than 1 year'. In 2020, administrative errors were identified regarding the omission of £1.3bn of 2019 financial guarantees and the incorrect inclusion of £3.7bn of 2019 financial guarantees from the 'off- balance sheet commitments given'. As a result, the 2019 'off-balance sheet commitments given have been amended to correct these amounts.
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 relevant covenants. Further, no account is taken of the possible early repayment of Santander UK’s mortgage-backed non-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.
41. | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 253 |
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40. 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 and close-out netting applied across all outstanding transactions covered by the agreements if an event of default or other predetermined events occur. Financial collateral refers to cash and non-cash collateral obtained, typically daily or weekly, to cover the net exposure between counterparties by enabling the collateral to be realised in an event of default or if other predetermined events occur. For repurchase and reverse repurchase agreements and other similar secured lending and borrowing, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements, such as global master repurchase agreements and global master securities lending agreements, whereby all outstanding transactions with the same counterparty can be offset and close-out netting applied across all outstanding 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 if a counterparty 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.
264Santander UK Group Holdings plc
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| | | | | Group | | | | Group |
| | Amounts subject to enforceable netting arrangements | | | Amounts subject to enforceable netting arrangements | |
| | Effects of offsetting on balance sheet | | Related amounts not offset | Assets not subject to enforceable netting arrangements(2) | | | Effects of offsetting on balance sheet | | Related amounts not offset | Assets not subject to enforceable netting arrangements(2) | |
| | Gross amounts | Amounts offset | Net amounts on balance sheet | | Financial instruments | Financial collateral(1) | Net amount | Balance sheet total(3) | | Gross amounts | Amounts offset | Net amounts on balance sheet | | Financial instruments | Financial collateral(1) | Net amount | Balance sheet total(3) |
2020 | £m | | £m | |
2022 | | 2022 | £m | | £m |
Assets | Assets | | Assets | |
Derivative financial assets | Derivative financial assets | 5,116 | | (1,754) | | 3,362 | | | (820) | | (1,840) | | 702 | | 89 | | 3,451 | | Derivative financial assets | 4,557 | | (2,173) | | 2,384 | | | (526) | | (1,720) | | 138 | | 55 | | 2,439 | |
Reverse repurchase, securities borrowing & similar agreements: | Reverse repurchase, securities borrowing & similar agreements: | | Reverse repurchase, securities borrowing & similar agreements: | |
- Amortised cost | - Amortised cost | 26,084 | | (6,485) | | 19,599 | | | (129) | | (19,470) | | 0 | | 0 | | 19,599 | | - Amortised cost | 8,826 | | (1,478) | | 7,348 | | | (9) | | (7,339) | | — | | — | | 7,348 | |
- Fair value | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| Loans and advances to customers and banks(4) | Loans and advances to customers and banks(4) | 7,524 | | (1,073) | | 6,451 | | | 0 | | 0 | | 6,451 | | 207,731 | | 214,182 | | Loans and advances to customers and banks(4) | 5,144 | | (908) | | 4,236 | | | — | | — | | 4,236 | | 220,709 | | 224,945 | |
| | 38,724 | | (9,312) | | 29,412 | | | (949) | | (21,310) | | 7,153 | | 207,820 | | 237,232 | | | 18,527 | | (4,559) | | 13,968 | | | (535) | | (9,059) | | 4,374 | | 220,764 | | 234,732 | |
Liabilities | Liabilities | | Liabilities | |
Derivative financial liabilities | Derivative financial liabilities | 3,597 | | (1,754) | | 1,843 | | | (820) | | (839) | | 184 | | 77 | | 1,920 | | Derivative financial liabilities | 3,142 | | (2,173) | | 969 | | | (526) | | (158) | | 285 | | 39 | | 1,008 | |
Repurchase, securities lending & similar agreements: | Repurchase, securities lending & similar agreements: | | Repurchase, securities lending & similar agreements: | |
- Amortised cost | - Amortised cost | 22,333 | | (6,485) | | 15,848 | | | (129) | | (15,719) | | 0 | | 0 | | 15,848 | | - Amortised cost | 9,460 | | (1,478) | | 7,982 | | | (9) | | (7,973) | | — | | — | | 7,982 | |
- Fair value | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | | 0 | | |
| Deposits by customers and banks(4) | Deposits by customers and banks(4) | 3,222 | | (1,073) | | 2,149 | | | 0 | | (502) | | 1,647 | | 211,912 | | 214,061 | | Deposits by customers and banks(4) | 3,265 | | (908) | | 2,357 | | | — | | — | | 2,357 | | 223,499 | | 225,856 | |
| | 29,152 | | (9,312) | | 19,840 | | | (949) | | (17,060) | | 1,831 | | 211,989 | | 231,829 | | | 15,867 | | (4,559) | | 11,308 | | | (535) | | (8,131) | | 2,642 | | 223,538 | | 234,846 | |
| 2019 | | |
2021 | | 2021 | |
Assets | Assets | | Assets | |
Derivative financial assets | Derivative financial assets | 4,493 | | (1,214) | | 3,279 | | | (768) | | (1,915) | | 596 | | 84 | | 3,363 | | Derivative financial assets | 2,870 | | (1,221) | | 1,649 | | | (582) | | (693) | | 374 | | 72 | | 1,721 | |
Reverse repurchase, securities borrowing & similar agreements: | Reverse repurchase, securities borrowing & similar agreements: | | Reverse repurchase, securities borrowing & similar agreements: | |
- Amortised cost | - Amortised cost | 25,312 | | (1,676) | | 23,636 | | | (537) | | (23,099) | | 0 | | 0 | | 23,636 | | - Amortised cost | 14,882 | | (2,199) | | 12,683 | | | (435) | | (12,248) | | — | | — | | 12,683 | |
- Fair value | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | | 0 | | |
Loans and advances to customers and banks(4) | Loans and advances to customers and banks(4) | 6,036 | | (1,248) | | 4,788 | | | 0 | | 0 | | 4,788 | | 205,293 | | 210,081 | | Loans and advances to customers and banks(4) | 4,316 | | (923) | | 3,393 | | | — | | — | | 3,393 | | 211,552 | | 214,945 | |
| | 35,841 | | (4,138) | | 31,703 | | | (1,305) | | (25,014) | | 5,384 | | 205,377 | | 237,080 | | | 22,068 | | (4,343) | | 17,725 | | | (1,017) | | (12,941) | | 3,767 | | 211,624 | | 229,349 | |
Liabilities | Liabilities | | Liabilities | |
Derivative financial liabilities | Derivative financial liabilities | 2,877 | | (1,214) | | 1,663 | | | (768) | | (572) | | 323 | | 46 | | 1,709 | | Derivative financial liabilities | 2,197 | | (1,221) | | 976 | | | (582) | | (351) | | 43 | | 43 | | 1,019 | |
Repurchase, securities lending & similar agreements: | Repurchase, securities lending & similar agreements: | | Repurchase, securities lending & similar agreements: | |
- Amortised cost | - Amortised cost | 19,962 | | (1,676) | | 18,286 | | | (537) | | (17,749) | | 0 | | 0 | | 18,286 | | - Amortised cost | 13,917 | | (2,199) | | 11,718 | | | (435) | | (11,283) | | — | | — | | 11,718 | |
- Fair value | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 0 | | 0 | | |
Deposits by customers and banks(4) | Deposits by customers and banks(4) | 2,482 | | (1,248) | | 1,234 | | | 0 | | (502) | | 732 | | 192,131 | | 193,365 | | Deposits by customers and banks(4) | 2,683 | | (923) | | 1,760 | | | — | | — | | 1,760 | | 225,016 | | 226,776 | |
| | 25,321 | | (4,138) | | 21,183 | | | (1,305) | | (18,823) | | 1,055 | | 192,177 | | 213,360 | | | 18,797 | | (4,343) | | 14,454 | | | (1,017) | | (11,634) | | 1,803 | | 225,059 | | 239,513 | |
(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 of set-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.
42. EVENTS AFTER THE BALANCE SHEET DATE
There have been no significant events between 31 December 2020 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except as follows:
Proposed transfer of the Corporate & Investment Banking (CIB) business to the London Branch of Banco Santander SA (SLB)
As part of our drive for continuous improvement in customer experience and following a review of the way we operate the CIB business in the UK, we intend to conduct substantially all of this business from SLB beginning later in 2021. To undertake this change, and subject to court approval, we are proposing to transfer substantially all of the CIB business to SLB in H2 2021 by way of a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000.
Although this decision was made prior to 31 December 2020, the transfer, which is subject to court approval, is proposed to take effect in H2 2021. We will continue to engage with regulators in relation to the proposed transfer.
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Annual Report 2022 | Santander UK Group Holdings plc 254 Santander UK Group Holdings plc265
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43.
41. INTEREST RATE BENCHMARK REFORM
Regulatory announcements
In March 2021, the FCA and ICE Benchmark Administration (IBA, the administrator of LIBOR) announced that GBP, Euro, Swiss franc and Japanese yen LIBOR settings, as well as settings for 1-week and 2-month US dollar LIBOR, would cease at the end of 2021, with the remaining US dollar LIBOR settings ceasing at the end of June 2023.
To help mitigate the risk of widespread disruption to legacy LIBOR contracts which had not transitioned by the end of 2021, in September 2021 the FCA confirmed its decision to use powers granted under the UK Benchmarks Regulation, to require continued publication using a synthetic methodology for the 1-month, 3-month and 6-month GBP and Japanese yen LIBOR settings until at least the end of 2022.
In September 2019,2022, the FCA announced that for synthetic yen LIBOR setting, market participants should be prepared for publication to cease permanently at the end of 2022. The FCA also announced the continued publication of the 1-month and 6-month synthetic GBP LIBOR settings for a further 3 months after the end of 2022 until 31 March 2023 to support any remaining transition efforts. The FCA has no intention to use its powers to compel IBA to continue to publish the 1- and 6-month synthetic GBP LIBOR settings beyond this date and these settings will permanently cease immediately after their final publication on 31 March 2023.
In November 2022, the FCA proposed to require the IBA to continue to publish the 1-month, 3-month and 6-month US dollar LIBOR settings under an unrepresentative synthetic methodology until the end of September 2024, after which it is expected to cease permanently. For GBP LIBOR, the FCA announced that they intend to continue to require IBA to publish the 3-month synthetic GBP LIBOR setting until the end of March 2024, after which it will cease permanently.
The effect of these announcements and proposals is that the final LIBOR publication would be the end of September 2024:
–the 3 synthetic Japanese yen LIBOR settings ceased at end of December 2022
–the 1-month and 6-month synthetic GBP LIBOR settings will cease at the end of March 2023
–the overnight and 12-month USD LIBOR settings will cease at the end of June 2023
–the 3-month synthetic GBP LIBOR setting will cease at the end of March 2024, and
–the 1-month, 3-month and 6-month synthetic USD LIBOR settings would cease at the end of September 2024 (proposed).
Amendments to accounting standards
The IASB amended IFRS 9 'Financial Instruments'‘Financial Instruments’, IAS 39 'Financial‘Financial Instruments: Recognition and Measurement'Measurement’ and IFRS 7 'Financial‘Financial Instruments: Disclosures' to address issues affecting financial reportingDisclosures’ in the period before the reform of an interest rate benchmark, including the replacement of an interest rate benchmark with an alternative benchmark rate2019 (the Phase 1 amendments). These Phase 1 amendments provided to provide temporary exceptions to specific hedge accounting requirements because of the uncertainty arising from the reform. After issuingThe exceptions end at the earlier of when the uncertainty regarding the timing and the amount of interest rate benchmark-based cash flows is no longer present, and discontinuance of the hedge relationship (or reclassification of all amounts from the cash flow hedge reserve). The Phase 1 amendments in August 2020, thecontinue to apply to Santander UK's GBP LIBOR cash flow hedges, for remaining legacy contracts, and USD LIBOR cash flow hedges (but not any using 1-week or 2-month USD LIBOR settings).
The IASB issuedmade further amendments to various IFRSs (the Phase 2 amendments) in 2020 to address issues that might affect financial reporting during the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate (the Phase 2 amendments).rate. The Phase 2 amendments do not supersede the Phase 1 amendments.
Phase 1 amendments
The amendments provide temporary exceptions from applying specific hedge accounting requirements to hedging relationships that are directly affected by the IBOR reform. The exceptions have the effect that IBOR 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:
– when the uncertainty regarding the timing and the amount of interest rate benchmark-based cash flows is no longer present, and
– discontinuance of the hedge relationship (or reclassification of all amounts from the cash flow hedge reserve).
The amendments apply to all hedging relationships directly affected by uncertainties related to IBOR reform and had no impact on hedge relationships for affected hedges. The main assumptions or judgements made by Santander UK in applying the amendments are outlined below.
–For cash flow hedges affected by IBOR reform, Santander UK management has assumed that the interest rate benchmark on which hedged cash flows are based is not altered as a result of IBOR reform when assessing whether the future cash flows are highly probable. For discontinued hedging relationships, the same assumption has been applied for determining whether the hedged future cash flows are expected to occur.
–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 IBOR reform.
–Santander UK will not discontinue hedge accounting during the period of IBOR-related uncertainty solely because the retrospective effectiveness falls outside the required 80-125% range.
–For hedges of a non-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.
Phase 2 amendments
These amendments apply only to changes required by IBOR reform to financial instruments and hedging relationships. Changes are directly required by IBOR reform if, and only if, the change is necessary as a direct consequent of interest rate benchmark reform, and the new basis for determining the contractual cash flow is economically equivalent to the previous basis. The exceptions given by the amendments mean that IBOR reform did not result in the discontinuation of hedge accounting and any hedge ineffectiveness continued to be recognised in profit or loss for affected hedges at and for the year ended 31 December 2020. The amendments address the accounting issues for financial instruments when IBOR reform is implemented as described below.
Practical expedient for changes to contractual cash flowsFor instruments to which the amortised cost measurement applies, the amendments require entities, as a practical expedient, to account for a change in the basis for determining the contractual cash flows by updating the effective interest rate using the guidance in IFRS 9 resulting in no immediate gain or loss being recognised, provided that,as long as the change is directly required by IBOR reform and takes place on an economically equivalent basis. Whereas someThe practical expedient was applied to all instruments were convertedor contracts that transitioned to alternative benchmark interest rates during 2020, the majority of instruments referencing LIBOR or other IBORs will transition to alternative benchmark interest rates during 2021. Santander UK has no lease contracts which are indexed to LIBOR or other IBORs. Consequently, the application of the practical expedient2022 and had no material impact for the Santander UK group for 2020.
Relief from specific hedge accounting requirementsgroup. The table below sets out the hedge accountingPhase 2 amendments and their impact for Santander UK, whichalso provide additional temporary reliefs from applying specific IAS 39 hedge accounting requirements to hedging relationships directly affected by IBOR reform. For GBP LIBOR cash flow hedges of remaining legacy contracts using 1-month and 6-month synthetic settings, the transition to alternative benchmark interest rates will take place no later than March 2023 and, for those using the 3-month synthetic setting, no later than March 2024. For USD LIBOR cash flow hedges, transition will take place no later than June 2023 for those using overnight and 12-month USD LIBOR settings and no later than September 2024 for those using 1-month, 3-month and 6-month synthetic USD LIBOR settings.
Managing LIBOR transition
During 2021, Santander UK along with its customers and counterparties, agreed the transition to alternative reference rates for the majority of agreements referencing the LIBOR settings that ceased at the end of 2021. During 2022, the LIBOR transition project was closed, and local business areas have continued to work with customers and counterparties to further reduce the number of untransitioned agreements, including those referencing synthetic LIBOR and the continuing USD LIBOR settings.
| | | | | |
Hedge accounting amendment | Impact for the Santander UK group | | | | | | | |
Allow amendment of the designation of a hedging relationship to reflect changes that are required by the reform. The hedge designation must be amended by the end of the reporting period in which the changes are made.
Annual Report 2022 | This amendment means any change to hedge documentation will not result in discontinuation of hedge accounting nor the designation of a new hedge relationship. The Santander UK group did not use this relief in 2020. It expects the majority of its hedge relationships will transition to alternative benchmark rates in 2021.Group Holdings plc
|
When a hedged item in a cash flow hedge is amended to reflect the changes that are required by the reform, the amount accumulated in the cash flow hedge reserve will be deemed to be based on the alternative benchmark rate on which the hedged future cash flows are determined.
255 | This amendment would result in the release of the cash flow hedge reserve to profit or loss in the same period or periods in which the hedged cash flows that are now based on the alternative benchmark interest rate affect profit or loss. At 31 December 2020, the Santander UK group’s existing cash flow hedges have not yet transitioned to alternative benchmark interest rates which is expected to take place in 2021. |
An entity may, on an individual hedge basis, reset to zero the cumulative fair value changes of the hedged item and hedging instrument when ceasing to apply the retrospective effectiveness assessment relief provided by the Phase 1 amendments. | At 31 December 2020, the amendment had no impact on the Santander UK group. The Santander UK group will assess on a hedge-by-hedge basis as the hedging instrument transitions away from LIBORs or other IBORs in 2021 and expects resetting the cumulative fair value changes to zero will have no effect on the amounts recorded in profit or loss. All hedge ineffectiveness including any outside the 80-125% range arising from IBOR reform will be recognised in profit or loss. |
When amending the hedge relationships for groups of items, hedged items are allocated to sub-groups based on the alternative benchmark interest rate being hedged, and the benchmark rate for each sub-group is designated as the hedged risk. | At 31 December 2020, the amendment had no impact on the Santander UK group as the affected portfolio has not yet begun transitioning away from LIBOR. |
An alternative benchmark interest rate designated as a non-contractually specified risk component, that is not separately identifiable at the date when it is designated, is deemed to have met the requirements at that date if the entity reasonably expects that it will meet the requirements within a period of 24 months from the date of first designation. The 24-month period will apply to each alternative benchmark interest rate separately. The risk component will, however, be required to be reliably measurable. | The amendment eases transition to alternative benchmark interest rates by allowing hedging relationships to be designated and to continue even before the new benchmark interest rates are fully established as market benchmarks. At 31 December 2020, for the Santander UK group, the majority of hedge relationships, where an alternative benchmark interest rate is to be designated as a non-contractually specified risk component, are GBP fair value hedge relationships. Santander UK group expects alternative benchmark interest rates to be separately identifiable and reliably measurable when they transition in 2021. |
266Santander UK Group Holdings plc
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For other changes that are not as a direct consequence of IBOR reform, Santander UK separately assesses those changes to determine if they result in derecognition or discontinuation of hedge accounting by applying the relevant accounting policies as set out in Note 1.
The following table showstables show the notional amounts of assets, liabilities and off-balance sheet commitments at 31 December 20202022 and 31 December 2021 affected by IBOR reform that have yet to transition to an alternative benchmark interest rate as provided internally to key management personnel.rate. | | | | | | | | | | | | | | |
| | | | Group |
| | | | 2022 |
| GBP(2) LIBOR | USD(2) LIBOR | Other(2) | Total |
| £m | £m | £m | £m |
Assets | | | | |
Derivatives(1) | — | | 1,665 | | — | | 1,665 | |
| | | | |
Financial assets at amortised cost | 76 | | 245 | | — | | 321 | |
| | | | |
| 76 | | 1,910 | | — | | 1,986 | |
Liabilities | | | | |
Derivatives(1) | 66 | | 1,846 | | — | | 1,912 | |
| | | | |
Financial liabilities at amortised cost | — | | 2,491 | | — | | 2,491 | |
| 66 | | 4,337 | | — | | 4,403 | |
Off-balance sheet commitments given | 2 | | — | | — | | 2 | |
| | | | Group | | 2021 |
| | GBP(2) LIBOR | USD(2) LIBOR | Other(2) | Total | |
| | £m | |
Assets | Assets | | Assets | |
Derivatives(1) | Derivatives(1) | 33,857 | | 4,844 | | 2,149 | | 40,850 | | Derivatives(1) | — | | 1,648 | | — | | 1,648 | |
Other financial assets at fair value through profit and loss | Other financial assets at fair value through profit and loss | 968 | | 22 | | 0 | | 990 | | Other financial assets at fair value through profit and loss | 8 | | — | | — | | 8 | |
Financial assets at amortised cost | Financial assets at amortised cost | 15,062 | | 1,191 | | 90 | | 16,343 | | Financial assets at amortised cost | 1,373 | | 81 | | 1 | | 1,455 | |
Financial assets at fair value through comprehensive income | 428 | | 0 | | 0 | | 428 | | |
| | | 50,315 | | 6,057 | | 2,239 | | 58,611 | | | 1,381 | | 1,729 | | 1 | | 3,111 | |
Liabilities | Liabilities | | Liabilities | |
Derivatives(1) | Derivatives(1) | 35,312 | | 5,381 | | 88 | | 40,781 | | Derivatives(1) | 338 | | 1,975 | | — | | 2,313 | |
Other financial liabilities at fair value through profit and loss | Other financial liabilities at fair value through profit and loss | 1,128 | | 69 | | 0 | | 1,197 | | Other financial liabilities at fair value through profit and loss | — | | 5 | | — | | 5 | |
Financial liabilities at amortised cost | Financial liabilities at amortised cost | 2,354 | | 3,515 | | 0 | | 5,869 | | Financial liabilities at amortised cost | 34 | | 2,401 | | — | | 2,435 | |
| | 38,794 | | 8,965 | | 88 | | 47,847 | | | 372 | | 4,381 | | — | | 4,753 | |
Off-balance sheet commitments given | Off-balance sheet commitments given | 11,405 | | 2,126 | | 573 | | 14,104 | | Off-balance sheet commitments given | 338 | | 59 | | — | | 397 | |
(1)Many of the Santander UK group’sgroup's derivatives subject to IBOR reform are governed bystandard ISDA definitions. In October 2020contracts and are subject to supplementary ISDA issued an IBOR fallbacks supplement setting out how the amendments to new alternative benchmark rates will be accomplished, the effect of which is to create fallback provisions in derivatives that describe what floating rates will applywhich became effective on the permanent discontinuation of certain key IBORs or upon ISDA declaring a non-representative determination of an IBOR. The Santander UK group has adhered to the protocol to implement the fallbacks to derivative contracts that were entered into before the effective date of the supplement (2525 January 2021). If derivative counterparties also adhere to the protocol, new fallbacks will automatically be implemented in existing derivative contracts when the supplement becomes effective.2021.
(2) Cessation dates are :- Settings for GBP, JPY & NOK LIBOR 31/12/2021,& 1-week and 2-month USD LIBOR 30/06/23,ceased on 31 December 2021 and for EONIA 03/01/on 3 January 2022. For certain legacy contracts, while 1-month, 3-month and 6-month settings for JPY LIBOR ceased on 31 December 2022, 1-month and 6-month synthetic GBP LIBOR settings have been extended until the end of March 2023 and until the end of March 2024 for the 3-month synthetic GBP LIBOR setting. Overnight, and 12-month USD LIBOR settings will cease on 30 June 2023. For certain legacy contract, 1-month, 3-month and 6-month synthetic USD LIBOR settings would cease at the end of September 2024.
The following tables show the notional amount of derivatives in hedging relationships directly affected by uncertainties related to IBOR reform.
| | | Group | | | 2022 | | | 2021 |
| | | | USD LIBOR | | Total | | | USD LIBOR | | Total |
| | GBP LIBOR | USD LIBOR | Other | Total | | | £m | | £m | | | £m | | £m |
2020 | £m | |
Total notional value of hedging instruments: | | |
Total notional value of hedging instruments | | Total notional value of hedging instruments | | | | | | | | | |
–Cash flow hedges | –Cash flow hedges | 15,198 | | 5,119 | | 0 | | 20,317 | | –Cash flow hedges | | 2,906 | | | 2,906 | | | | 2,586 | | | 2,586 | |
–Fair value hedges | –Fair value hedges | 32,223 | | 1,077 | | 778 | | 34,078 | | –Fair value hedges | | 178 | | | 178 | | | | 160 | | | 160 | |
| | 47,421 | | 6,196 | | 778 | | 54,395 | | | | 3,084 | | | 3,084 | | | | 2,746 | | | 2,746 | |
Maturing after cessation date(1) | Maturing after cessation date(1) | | Maturing after cessation date(1) | | | | | | | | | |
–Cash flow hedges | –Cash flow hedges | 10,553 | | 2,562 | | 0 | | 13,115 | | –Cash flow hedges | | 2,906 | | | 2,906 | | | | 2,586 | | | 2,586 | |
–Fair value hedges | –Fair value hedges | 12,477 | | 162 | | 720 | | 13,359 | | –Fair value hedges | | 178 | | | 178 | | | | 160 | | | 160 | |
| | 23,030 | | 2,724 | | 720 | | 26,474 | | | | 3,084 | | | 3,084 | | | | 2,746 | | | 2,746 | |
(1) Cessation dates are :- GBP, JPY, NOK LIBOR 31/12/2021,The 2-month USD LIBOR 30/06/23, EONIA 03/01/2022setting ceased on 31 December 2021. Overnight and 12-month USD LIBOR settings will cease on 30 June 2023. For certain legacy contracts, 1-month, 3-month and 6-month synthetic USD LIBOR settings would cease at the end of September 2024.
The Santander UK group’s GBP LIBOR and USD LIBOR cash flow hedges extend beyond the anticipated cessation dates for both LIBORs.LIBOR. The Santander UK group expects that GBP LIBOR and USD LIBOR will be replaced by SONIA and SOFR respectively but there remains uncertainty over the timing and amount of the replacement rate cash flows.flows for USD LIBOR cash flow hedges. Hedging relationships impacted by uncertainty about IBOR reform may experience ineffectiveness due to market participants’ expectations of when the shift from the existing IBOR benchmark rate to an alternative benchmark interest rate will occur or because transition of the hedged item and the hedging instrument could occur at different times.
The Santander UK group will cease to apply the assumptions that the hedged benchmark interest rate, the cash flows of the hedged item and/or hedging instrument will not be altered because of IBOR reform when the uncertainty arising from IBOR reform is no longer present. This will require amendment to hedge documentation by the end of the reporting period in which the changes occur. Cumulative changes in the hedged cash flows and the hedging instrument based on new alternative benchmark rates will also be remeasured when IBOR reform uncertainty is removed.
Further details of the significant interest rate benchmarks to which hedging relationships are exposed, the extent of risk exposure that is affected by IBOR reform, the effect of IBOR reform on interest rate risk management 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.
Santander UK Group Holdings plc267
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Annual Report 2020 | Financial statements
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Company Balance Sheet
At 31 December
| | | | | | | | | | | |
| | 2020 | 2019 |
| Notes | £m | £m |
Assets | | | |
Financial assets at fair value through profit or loss: | | | |
– Other financial assets at fair value through profit or loss | 4 | 1,425 | | 0 | |
Financial assets at amortised cost: | | | |
– Loans and advances to banks | 5 | 7,934 | | 8,920 | |
– Other financial assets at amortised cost | 6 | 830 | | 1,142 | |
Interests in other entities | 7 | 13,585 | | 13,600 | |
Current tax assets | | 11 | | 6 | |
Other assets | | 1 | | 2 | |
Total assets | | 23,786 | | 23,670 | |
Liabilities | | | |
Financial liabilities at fair value through profit or loss: | | | |
– Other financial liabilities at fair value through profit or loss | 8 | 1,425 | | 0 | |
Financial liabilities at amortised cost: | | | |
– Deposits by banks | 9 | 7 | | 8 | |
– Debt securities in issue | 10 | 7,970 | | 8,957 | |
– Subordinated liabilities | 11 | 830 | | 1,142 | |
Other liabilities | | 1 | | 0 | |
Total liabilities | | 10,233 | | 10,107 | |
Equity | | | |
Share capital | 14 | 7,060 | | 7,060 | |
Other equity instruments | 15 | 2,241 | | 2,241 | |
Retained earnings | | 4,252 | | 4,262 | |
Total shareholders’ equity | | 13,553 | | 13,563 | |
Total liabilities and equity | | 23,786 | | 23,670 | |
The accompanying Notes form an integral part of these Financial Statements.
The profit after tax of the Company attributable to shareholders was £240m (2019: £449m). 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 2 March 2021 and signed on its behalf by:
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Nathan BostockAnnual Report 2022 | Madhukar DayalSantander UK Group Holdings plc
|
Chief Executive Officer256 | Chief Financial Officer |
Company Registered Number: 08700698 | |
268Santander UK Group Holdings plc
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42. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued operations
Transfer of the CIB Business
Santander UK plc transferred a significant part of its CIB business to the London branch of Banco Santander SA under a Part VII banking business transfer scheme, which completed on 11 October 2021. The residual parts of the CIB business were wound down or transferred to other segments. For the periods prior to its sale, the CIB business met the requirements for presentation as discontinued operations.
The financial performance and cash flow information relating to the discontinued operations were as follows:
For the years ended 31 December
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
| £m | £m | £m |
Net interest income | — | 33 | | 55 | |
Net fee and commission income | — | 34 | | 65 | |
Other operating income | — | 2 | | 2 | |
Total operating income | — | 69 | | 122 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | — | (32) | | (62) | |
Credit impairment (charges)/write-backs | — | 11 | | (6) | |
Provisions for other liabilities and charges | — | (4) | | (10) | |
Total operating credit impairment (charges)/write-backs, provisions and charges | — | 7 | | (16) | |
Profit from discontinued operations before tax | — | 44 | | 44 | |
Tax on profit from discontinued operations | — | (12) | | (13) | |
Profit from discontinued operations after tax | — | 32 | | 31 | |
There were no gains or losses recognised on the measurement to fair value less costs to sell or on the disposal of the asset groups constituting the discontinued operations. In 2022, the net cash flows attributable to the operating activities in respect of discontinued operations were £nil outflow (2021: £3,612m outflow, 2020: £1,815m outflow). There were no investing or financing activities in respect of discontinued operations.
Assets held for sale
Sale of property
Management considered the sale of Santander House and Shenley Wood freehold land and buildings, part of an agreement with the developer for the construction of Unity Place, to be highly probable at the balance sheet date. As such, the Santander UK group reclassified these properties, which are included in the Corporate Centre segment and carried at their sales prices, as held for sale. The sale is expected to complete in H2 2023 with no gain or loss.
At 31 December 2022, assets held for sale comprised:
| | | | | | | | |
| |
| 2022 | 2021 |
| £m | £m |
Assets | | |
| | |
| | |
| | |
| | |
| | |
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| | |
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Property, plant and equipment | 49 | | — | |
| | |
| | |
| | |
Total assets held for sale | 49 | | — | |
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43. EVENTS AFTER THE BALANCE SHEET DATE
There have been no significant events between 31 December 2022 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements.
44. NOTES TO THE BALANCE SHEET
Restatement in the consolidated Balance sheet
In 2022, the macro hedge of interest rate risk balances increased significantly and are now disclosed separately on the face of the balance sheet rather than being included in Other assets and Other liabilities. Prior periods have been restated accordingly. As a result, at 31 December 2021, £85m (2020: £1,239m) has been reclassified from Other assets into the Macro hedge of interest rate risk asset, and £122m (2020: £188m) has been reclassified from Other liabilities into the Macro hedge of interest rate risk liability.
45. NON-CONTROLLING INTERESTS
| | | | | | | | | | | | |
| Initial interest rate | | 2022 | 2021 |
| % | | £m | £m |
Santander UK plc issued: | | | | |
– £300m Step-up Callable Perpetual Reserve Capital Instruments | 7.037 | | | — | | 235 | |
| | | — | | 235 | |
On 14 February 2022, the £300m Step-up Callable Perpetual Reserve Capital Instruments were called for value and redeemed at their principal amount.
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Annual Report 2022 | Santander UK Group Holdings plc 257 |
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46. COMPANY FINANCIAL DATA
Company Cash Flow StatementBalance Sheet
At 31 December
| | | | | | | | |
| 2020 | 2019 |
| £m | £m |
Cash flows from operating activities | | |
Profit after tax | 240 | | 449 | |
Adjustments for: | | |
Non-cash items included in profit | 15 | | 3 | |
Net change in operating assets and liabilities | (449) | | 370 | |
| | |
Effects of exchange rate differences | (51) | | (371) | |
Net cash flows from operating activities | (245) | | 451 | |
Cash flows from investing activities | | |
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income | 336 | | — | |
Investments in other entities | 0 | | (200) | |
Net cash flows from investing activities | 336 | | (200) | |
Cash flows from financing activities | | |
Issue of other equity instruments | 0 | | 500 | |
| | |
Issue of debt securities and subordinated notes | 1,410 | | 0 | |
Repayment of debt securities | (1,250) | | 0 | |
Repurchase of other equity instruments | 0 | | (304) | |
Issuance costs of debt securities and subordinated notes | (1) | | 0 | |
Dividends paid on ordinary shares | (103) | | (262) | |
Dividends paid on other equity instruments | (147) | | (142) | |
Net cash flows from financing activities | (91) | | (208) | |
Change in cash and cash equivalents | 0 | | 43 | |
Cash and cash equivalents at beginning of the year | 51 | | 8 | |
Cash and cash equivalents at the end of the year | 51 | | 51 | |
| | | | | | | | | | | |
| | 2022 | 2021 |
| Notes | £m | £m |
Assets | | | |
Other financial assets at fair value through profit or loss | 4 | 7,888 | | 4,190 | |
Loans and advances to banks | 5 | 4,800 | | 5,926 | |
Other financial assets at amortised cost | 6 | 942 | | 838 | |
Interests in other entities | 7 | 13,640 | | 13,590 | |
Current tax assets | | 19 | | 15 | |
Other assets | | 2 | | 2 | |
Total assets | | 27,291 | | 24,561 | |
Liabilities | | | |
Other financial liabilities at fair value through profit or loss | 8 | 7,888 | | 4,190 | |
Deposits by banks | 9 | — | | 7 | |
Debt securities in issue | 10 | 4,898 | | 6,013 | |
Subordinated liabilities | 11 | 942 | | 838 | |
| | | |
Total liabilities | | 13,728 | | 11,048 | |
Equity | | | |
Share capital | 14 | 7,060 | | 7,060 | |
Other equity instruments | 15 | 2,196 | | 2,191 | |
Retained earnings | | 4,307 | | 4,262 | |
Total shareholders’ equity | | 13,563 | | 13,513 | |
Total liabilities and equity | | 27,291 | | 24,561 | |
The accompanying Notes form an integral part of these Financial Statements.
The profit after tax of the Company attributable to shareholders was £1,206m (2021: £1,499m). 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 1 March 2023 and signed on its behalf by:
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Mike Regnier | Madhukar Dayal |
Chief Executive Officer | Chief Financial Officer |
Company Registered Number: 08700698 | |
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Annual Report 2022 | Santander UK Group Holdings plc 258 |
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Company Cash Flow Statement(1)
At 31 December
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Cash flows from operating activities | | |
Profit before tax | 1,202 | | 1,495 | |
Adjustments for: | | |
Non-cash items included in profit | 9 | | 1 | |
Net change in operating assets and liabilities | 363 | | 1,937 | |
| | |
Effects of exchange rate differences | 980 | | (94) | |
Net cash flows from operating activities | 2,554 | | 3,339 | |
Cash flows from investing activities | | |
Purchase of financial assets at amortised cost and financial assets at fair value | (3,802) | | (2,774) | |
| | |
Investments in other entities | (50) | | — | |
Net cash flows from investing activities | (3,852) | | (2,774) | |
Cash flows from financing activities | | |
Issue of other equity instruments | 750 | | 450 | |
| | |
Issue of debt securities and subordinated notes | 3,898 | | 2,797 | |
Repayment of debt securities | (1,446) | | (8) | |
Repurchase of other equity instruments | (750) | | (1,814) | |
Issuance costs of debt securities and subordinated notes | (9) | | (500) | |
Dividends paid on ordinary shares | (1,013) | | (1,346) | |
Dividends paid on other equity instruments | (143) | | (143) | |
| | |
Net cash flows from financing activities | 1,287 | | (564) | |
Change in cash and cash equivalents | (11) | | 1 | |
Cash and cash equivalents at beginning of the year | 52 | | 51 | |
Cash and cash equivalents at the end of the year | 41 | | 52 | |
(1) For more information on cash flows and amounts restated see Note 12.
The accompanying Notes form an integral part of these Financial Statements.
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Annual Report 2022 | Santander UK Group Holdings plc 259 |
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Company Statement of Changes in Equity
For the years ended 31 December
| | | Share capital | Other equity instruments | Retained earnings | Total | | Share capital | Other equity instruments | Retained earnings | Total |
| | £m | | £m |
At 1 January 2020 | 7,060 | | 2,241 | | 4,262 | | 13,563 | | |
At 1 January 2022 | | At 1 January 2022 | 7,060 | | 2,191 | | 4,262 | | 13,513 | |
Total comprehensive income:(1) | Total comprehensive income:(1) | | Total comprehensive income:(1) | |
– Profit after tax | 0 | | 0 | | 240 | | 240 | | |
| Dividends on ordinary shares | 0 | | 0 | | (103) | | (103) | | |
Dividends on other equity instruments | 0 | | 0 | | (147) | | (147) | | |
At 31 December 2020 | 7,060 | | 2,241 | | 4,252 | | 13,553 | | |
| At 1 January 2019 | 7,060 | | 2,041 | | 4,221 | | 13,322 | | |
Total comprehensive income:(1) | | |
– Profit after tax | — | | — | | 449 | | 449 | | |
Profit after tax | | Profit after tax | — | | — | | 1,206 | | 1,206 | |
Issue of other equity instruments | Issue of other equity instruments | — | | 500 | | — | | 500 | | Issue of other equity instruments | — | | 750 | | — | | 750 | |
Repurchase of other equity instruments | Repurchase of other equity instruments | — | | (300) | | (4) | | (304) | | Repurchase of other equity instruments | — | | (745) | | (5) | | (750) | |
Dividends on ordinary shares | Dividends on ordinary shares | — | | — | | (262) | | (262) | | Dividends on ordinary shares | — | | — | | (1,013) | | (1,013) | |
Dividends on other equity instruments | Dividends on other equity instruments | — | | — | | (142) | | (142) | | Dividends on other equity instruments | — | | — | | (143) | | (143) | |
At 31 December 2019 | 7,060 | | 2,241 | | 4,262 | | 13,563 | | |
At 31 December 2022 | | At 31 December 2022 | 7,060 | | 2,196 | | 4,307 | | 13,563 | |
| At 1 January 2021 | | At 1 January 2021 | 7,060 | | 2,241 | | 4,252 | | 13,553 | |
Total comprehensive income:(1) | | Total comprehensive income:(1) | |
Profit after tax | | Profit after tax | — | | — | | 1,499 | | 1,499 | |
Issue of other equity instruments | | Issue of other equity instruments | — | | 450 | | — | | 450 | |
Repurchase of other equity instruments | | Repurchase of other equity instruments | — | | (500) | | — | | (500) | |
Dividends on ordinary shares | | Dividends on ordinary shares | — | | — | | (1,346) | | (1,346) | |
Dividends on other equity instruments | | Dividends on other equity instruments | — | | — | | (143) | | (143) | |
At 31 December 2021 | | At 31 December 2021 | 7,060 | | 2,191 | | 4,262 | | 13,513 | |
(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.
The accompanying Notes form an integral part of these Financial Statements.
Company Income Statement
For the years ended 31 December
| | | | | | | | | | | | | | |
| | 2022 | 2021 | 2020 |
| Notes | £m | £m | £m |
Interest and similar income | | 192 | | 221 | | 309 | |
Interest expense and similar charges | | (196) | | (225) | | (312) | |
Net interest income | | (4) | | (4) | | (3) | |
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Dividend income | | 1,212 | | 1,497 | | 260 | |
Other operating income | | — | | 8 | | (15) | |
Total operating income | | 1,208 | | 1,501 | | 242 | |
Operating expenses before credit impairment (charges)/write-backs, provisions and charges | 2 | (6) | | (6) | | (7) | |
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Profit before tax | | 1,202 | | 1,495 | | 235 | |
Tax on profit | | 4 | | 4 | | 5 | |
Profit after tax | | 1,206 | | 1,499 | | 240 | |
Santander UK Group Holdings plc269 | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 260 |
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1.46.1 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
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, except as set out below. 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 comply with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and have also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.standards. The financial statements are also prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRSs as issued by the IASB for the periods presented..presented.
Recent accounting developmentsClimate change
See Note 1Management specifically also considered the potential impact of climate change and the transition to a low carbon economy on its Investment in Santander UK plc. Estimates underpinning the Consolidated Financial Statements.determination of whether or not the cost of the investment is impaired are partly based on forecast business performance beyond the time horizon for management's detailed plans. .
CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATESCritical judgements and accounting estimates
The preparation of the financial statements requires management to make judgements and accounting estimates that affect the reported amount 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 results may differ from these accounting estimates under different assumptions or conditions. In preparing the financial statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about interests in other entities.
Interests in other entities - Investment in subsidiaries
The carrying amount of investments in subsidiaries is based on the application of judgements including the basis of the cost of investment impairment calculation assumptions. Estimates include forecasts used for determining cash flows for the subsidiary's business and discount rates which factor in risk-free rates and applicable risk premiums, which are variables subject to fluctuations in external market rates and economic conditions beyond management’s control. Santander UK undertakes an annual assessment to evaluate whether the carrying valueamount of investments in subsidiaries is impaired, carrying out this assessment more frequently if reviews identify indicators of impairment or when events or changes in circumstances dictate.
| | | | | |
Key judgements: | –Determining the basis of investment impairment testing methodology, including the need for planning assumptions and internal capital allocations |
Key estimates: | –Forecast cash flows for investments, including estimated allocations of regulatory capital |
| –Growth rate beyond initial cash flow projections |
| –Discount rates which factor in risk-free rates and applicable risk premiums |
| All of these variables are subject to fluctuations in external market rates and economic conditions beyond management’s control |
The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and is subject to potential change over time. For more on these assumptions, including changes in the assumptions that would trigger an impairment, see Note 7.46.7.
2.46.2 OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES,CHARGES, PROVISIONS AND CHARGES
These comprise wages and salaries of £7m (2019: £7m)£6m (2021: £6m) recharged by the operating company, Santander UK plc. In 20202022 and 2019,2021, the Company had 0no full-time staff as they are all employed by Santander UK plc.
3.
46.3 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.
46.4 OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
| | | | | | | | |
| 2020 | 2019 |
| £m | £m |
Debt securities | 1,425 | | 0 | |
| 1,425 | | 0 | |
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Debt securities | 7,888 | | 4,190 | |
| 7,888 | | 4,190 | |
Other financial assets at FVTPL comprised £1,425m (2019: nil)£7,888m (2021: £4,190m) of financial assets designatedmandatorily held at FVTPL. In 2020,2022, as part of MREL requirements, the Company issued £1,425m£3,991m (2021: £2,847m) debt securities, which were subsequently downstreamed to Santander UK plc.
5. LOANS AND ADVANCES TO BANKS
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 2020 and 2019, 0 material expected credit losses. All of our senior debt issued out of Santander UK Group Holdings plc is downstreamed to our principal operating company Santander UK plc.
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Annual Report 2022 | Santander UK Group Holdings plc 261Santander UK Group Holdings plc |
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6.
46.5 LOANS AND ADVANCES TO BANKS
Loans and advances to banks comprise mainly amounts due from Santander UK group undertakings. The fair values of loans and advances to banks are equal to their carrying amounts. In 2022 and 2021, there were no material expected credit losses. All of our senior debt issued out of Santander UK Group Holdings plc is downstreamed to our principal operating company Santander UK plc.
46.6 OTHER FINANCIAL ASSETS AT AMORTISED COST
These consist of investments in subordinated notes and have a maturity greater than 10 years.
7.
46.7 INTERESTS IN OTHER ENTITIES
| | | 2020 | 2019 | | 2022 | 2021 |
| | £m | £m | | £m | £m |
Interests in ordinary shares of subsidiaries | Interests in ordinary shares of subsidiaries | 11,630 | | 11,645 | | Interests in ordinary shares of subsidiaries | 11,635 | | 11,635 | |
£500m Fixed Rate Reset Perpetual AT1 Capital Securities | £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 495 | | 495 | | £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 495 | | 495 | |
£750m Fixed Rate Reset Perpetual AT1 Capital Securities | £750m Fixed Rate Reset Perpetual AT1 Capital Securities | 750 | | 750 | | £750m Fixed Rate Reset Perpetual AT1 Capital Securities | 750 | | 750 | |
£300m Fixed Rate Reset Perpetual AT1 Capital Securities | 0 | | 0 | | |
£500m Fixed Rate Reset Perpetual AT1 Capital Securities | £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 210 | | 210 | | £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 210 | | 210 | |
£500m Fixed Rate Reset Perpetual AT1 Capital Securities | £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 500 | | 500 | | £500m Fixed Rate Reset Perpetual AT1 Capital Securities | 500 | | 500 | |
| | 13,585 | | 13,600 | | |
£50m Fixed Rate Reset Perpetual Capital Securities | | £50m Fixed Rate Reset Perpetual Capital Securities | 50 | | — | |
| | | 13,640 | | 13,590 | |
Details of subsidiaries and joint ventures and associates are set out in the Shareholder information section. For information on AT1 Capital Securities, see Note 33 to the Consolidated Financial Statements. The Company has no interests in joint ventures or associates.
Interests in other entities mainly relate to investments in 100% of the ordinary share capital of Santander UK plc, Santander Financial Services plc and Santander Equity Investments Limited, as well as holdings of AT1 Capital Securities issued by Santander UK plc.
Interests in subsidiaries are held at cost subject to impairment. In 2020 and 2019, 0 significant impairment was recognised.
The movement in the Company’s interests in subsidiaries was as follows:
| | | | | | | | | | | |
| Cost | Impairment | Net book value |
| £m | £m | £m |
At 31 December 2020 | 11,645 | | (15) | | 11,630 | |
| | | |
At 1 January 2019 and 31 December 2019 | 11,645 | | 0 | | 11,645 | |
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| Cost | Impairment | Carrying amount |
| £m | £m | £m |
At 31 December 2022 | 11,645 | | (10) | | 11,635 | |
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At 31 December 2021 | 11,645 | | (10) | | 11,635 | |
Impairment testing
At the end of each reporting period, an impairment review is undertaken in respect of interestsInterests in other entities.entities are tested for impairment annually at 31 December. Interests in other entities are otherwise tested for impairment if reviews identify an indicator of impairment or when events or changes in circumstances dictate. Impairment is required where the carrying value of an investment exceeds its recoverable amount.
Basis of the recoverable amount
The recoverable amount is calculated usingof all interests in other entities was determined based on a value in use (VIU) methodology at each testing date. For each investment, the VIU is calculated by discounting management’s cash flow projections for the investment. The cash flow projections also take account of increased internal capital allocations needed to arrive atachieve internal and regulatory capital targets including the present valueleverage ratio. The key assumptions used in the VIU calculation for each investment are set out below.
Carrying amount of futureinvestments and key assumptions in the VIU calculation
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| Carrying amount of investment | | Discount rate | | Growth rate beyond initial cash flow projections |
| 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
Investment | £m | £m | | % | % | | % | % |
Santander UK plc | 11,268 | | 11,267 | | | 16.9 | | 13.6 | | | 1.6 | | 1.6 | |
Santander Financial Services plc | 337 | | 337 | | | 16.7 | | 15.6 | | | 1.6 | | 1.6 | |
Other | 30 | | 31 | | | | | | | |
| 11,635 | | 11,635 | | | | | | | |
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Annual Report 2022 | Santander UK Group Holdings plc 262 |
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Management’s judgement in estimating the cash flows expected to be derived from the investment.of an investment
The VIU calculation uses cash flow projections derived from the latest 3-year plan presented to the Board. For more details, see Note 20 to the Consolidated Financial Statements.
Cash flow projections for the purpose of impairment testing do not take account of any adverse outcomes arising from contingent liabilities (see Note 31 to the Consolidated Financial Statements), whose existence will be confirmed by uncertain future events or where any obligation is not probable or otherwise cannot be measured reliably, nor do they take account of the benefits arising from Santander UK’s transformation plans that had not yet been implemented or committed at 31 December 2020.2022.
Discount rate
The rate used to discount the cash flows is based on the cost of equity assigned to each investment, which is derived using a CAPM. The CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium to reflect the inherent risk of the businessinvestment being evaluated. These variables are based on the market’s assessment of the economic variables and management’s judgement. In determining the discount rate, management have identified the cost of equity associated with market participants that closely resemble our investments and adjusted them for tax to arrive at the pre-tax equivalent rate.
Growth rate beyond initial cash flow projections
The growth rate for periods beyond the initial cash flow projections is used to extrapolate the cash flows in perpetuity because of the long-term perspective of the business. In line with the accounting requirements, management uses the UK Government’s official estimate of the UK long-term average GDP growth rate, as this is lower than management's estimate of the long-term average growth rate of the business.
Investments in Santander UK plc and Santander Financial Services plc
The VIU of each investment remains higher than the carrying value of the investment. The VIU review at 31 December 20202022 did not indicate the need for an impairment in the Company’s investments in Santander UK plc and Santander Financial Services plc. Management considered the reduction in headroom and the uncertainty relating to the respective estimates of the VIU for those investments, but determined that there was a sufficient basis to conclude that no impairment was required.
Sensitivities of key assumptions in calculating the VIU forof the investment in Santander UK plc
TheAt 31 December 2022 and 2021, the VIU iswas sensitive to reasonably possible changes in the key assumptions similar to those applied in determining the recoverable amount of goodwill recognised in the Santander UK plc group (see Note 20 to the Consolidated Financial Statements). The discount rate assumption forIn addition, given the investment in Santander UK plc was 14.0%. In addition,lack of significant headroom, the VIU is also sensitive to the UK long-term average GDP growth rate used to extrapolate cash flows beyond the initial forecast period and management considers it reasonably possible for that rate to decrease by 10 basis points, although this impact is largely offset by higher capital requirements although this impact is largely offset by higher capital requirements.assumption.
At 31 December 2020,2022 and 2021, a reasonably possible change in the following key assumptions in relation to the VIU calculation for the Company’s investment in Santander UK plc would have resulted in ana reduction in headroom, as shown in the table below. The sensitivity analysis presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment as follows:review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might impact one or more of the other assumptions and could result in a larger or smaller overall impact.
| | | | | | | | | | | |
| | Reduction in headroom |
| | 2022 | 2021 |
Subsidiary | Reasonably possible change | £m | £m |
Santander UK plc | Cash flow projections decrease by 5% (2021: 5%) | (773) | | (607) | |
| Discount rate increases by 100 basis points (2021: 100 basis points) | (1,212) | | (1,261) | |
| GDP growth rate decreases by 10 basis points (2021: 10 basis points) | (42) | | (24) | |
–
If
The decrease in cash flow projections in the cash flows used had been 5% lower than management’s estimates, includingtable above includes the impact of holding back the required capital to support the growth of the business, the Company would have hadbusiness. Under current regulatory capital regulations as they apply to recognise an impairment against the carrying amount of its investment of £109m.
–If the discount rate used had been 100 basis points higher than management’s estimates, the Company would have had to recognise an impairment against the carrying amount of its investment of £637m.
–No impairment against the carrying amount of the investment in Santander UK plc, would have arisen if the UK long-term average GDP growth rate were to decrease by 10 basis points. The calculation is not sensitive overall to the UK long-term average GDP growth rate assumption as the increased profit after tax generated by growth of the business is mostly offset by the need to retain more profit to meet increased regulatory capital requirements driven by the growth in assets.
Santander UK Group Holdings plc271
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Sensitivity of VIU changes to current assumptions to achieve nil headroom
Although there was no impairment of the Company's investment in Santander UK plc at 31 December 2020, the amount by which the recoverable amount exceeds the carrying value (the headroom) reduced2022 and 2021, the test is nowremains sensitive to some of the assumptions used, as described above. In addition, the changes in assumptions detailed below for the discount rate and cash flow projections would eliminate the current headroom. As a result, there is a risk of impairment in the future should business performance or economic factors diverge from forecasts.
The sensitivity analysis presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might impact one or more of the other assumptions and could result in a larger or smaller overall impact.
| | | Carrying value | Value in use | Headroom | Increase in post tax discount rate | | Decrease in cash flows | |
2022 | | 2022 | Carrying value | Value in use | Headroom | Increase in post tax discount rate | Decrease in cash flows |
Subsidiary | Subsidiary | £m | bps | | % | Subsidiary | £m | bps | % |
Santander UK plc | Santander UK plc | 11,267 | | 11,745 | | 478 | | 40 | | | 4 | | Santander UK plc | 11,268 | | 15,461 | | 4,193 | | 450 | 27 | |
At 31 December 2019, there were no reasonably possible changes in any of the key assumptions that would have resulted in an impairment. | | | | | | | | | | | | | | | | | |
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2021 | | | | | |
Santander UK plc | 11,267 | | 12,147 | | 880 | | 67 | 7 | |
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Annual Report 2022 | Santander UK Group Holdings plc 263 |
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Sensitivities of key assumptions in calculating the VIU forof the investment in Santander Financial Services plc
TheAt 31 December 2022 and 2021, the VIU iswas sensitive to reasonably possible changes in the key assumptions for the discount rate and cash flows similar to those applied in determining the recoverable amount of goodwill recognised in the Santander UK plc group (see Note 20 to the Consolidated Financial Statements). The discountIn line with the position for Santander UK plc, the VIU is not sensitive to the UK long-term average GDP growth rate assumption foroverall as the investmentincreased profit after tax generated by growth of the business is mostly offset by the need to retain more profit to meet increased regulatory capital requirements driven by the growth in Santander Financial Services plc was 13.7%.assets.
At 31 December 2020,2022 and 2021, a reasonably possible change in the following key assumptions in relation to the VIU calculation for the Company’s investment in Santander Financial Services plc would have resulted in ana reduction in headroom, as shown in the table below. The sensitivity analysis presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment as follows:
–No impairment againstreview. However, due to the carrying amountinterrelationships between some of the investmentassumptions, a change in Santander Financial Services plc would have arisen ifone of the cashflows used had been 5% lower than management’s estimates, includingassumptions might impact one or more of the other assumptions and could result in a larger or smaller overall impact.
| | | | | | | | | | | |
| | Reduction in headroom |
| | 2022 | 2021 |
Subsidiary | Reasonably possible change | £m | £m |
Santander Financial Services plc | Cash flow projections decrease by 5% (2021: 5%) | (18) | | (19) | |
| Discount rate increases by 100 basis points (2021: 100 basis points) | (29) | | (28) | |
The decrease in cash flow projections in the table above includes the impact of holding back the required capital to support the growth of the business.
–If the discount rate used had been 100 basis points higher than management’s estimates, the Company would have hadSensitivity of VIU changes to recognise an impairment against the carrying amount of its investment of £5m.current assumptions to achieve nil headroom
Although there was no impairment of the Company's investment in Santander Financial Services plc at 31 December 2020 , the amount by which the recoverable amount exceeds the carrying value (the headroom) reduced2022 and 2021, the test is nowremains sensitive to some of the assumptions used, as described above. In addition, the changes in assumptions detailed below for the discount rate and cash flow projections would eliminate the current headroom. As a result, there is a risk of impairment in the future should business performance or economic factors diverge from forecasts.
The sensitivity analysis presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the impairment review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might impact one or more of the other assumptions and could result in a larger or smaller overall impact.
| | | Carrying value | Value in use | Headroom | Increase in post tax discount rate | | Decrease in cash flows | |
2022 | | 2022 | Carrying value | Value in use | Headroom | Increase in post tax discount rate | | Decrease in cash flows |
Subsidiary | Subsidiary | £m | bps | | % | Subsidiary | £m | bps | | % |
Santander Financial Services plc | Santander Financial Services plc | 337 | | 363 | | 26 | | 82 | | | 7 | | Santander Financial Services plc | 337 | | 359 | | 22 | | 75 | | 6 | |
At 31 December 2019, there were no reasonably possible changes in any of the key assumptions that would have resulted in an impairment. | | | | | | | | | | | | | | | | | | |
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2021 | | | | | | |
Santander Financial Services plc | 337 | | 376 | | 39 | | 145 | | 10 | |
8.46.8 OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
| | | | | | | | |
| 2020 | 2019 |
£m | £m |
Medium-term notes | 1,425 | | 0 | |
| 1,425 | | 0 | |
| | | | | | | | |
| 2022 | 2021 |
£m | £m |
Medium-term notes | 7,888 | | 4,190 | |
| 7,888 | | 4,190 | |
Other financial liabilities at FVTPL comprised £1,425m£7,888m (2021: £4,190m) of other financial liabilities designated at fair value through profit or loss.FVTPL.
In 2020,2022, as part of MREL requirements, the Company issued £1,425m£3,991m (2021: £2,847m) of debt securities, which were then downstreamed to Santander UK plc.
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 cumulative net gain or loss at 31 December 2020 ,2022, and net gain or loss for the year attributable to changes in the Santander UK group’s own credit risk on the above securities was £NaN£nil (2021: £nil) and has been included in profit and loss to offset credit risk on internal MREL assets held which are required to be recorded at fair value through profit and lossFVTPL in accordance with IFRS9.
IFRS 9.
At 31 December 2020,2022, the amount that would be required to be contractually paid at maturity of the securities abovabove was £755m higher e was £21m lower (2021:£26m higher)than the carrying value.
9. DEPOSITS BY BANKS
These consist of amounts due to subsidiaries and are repayable on demand.
10. DEBT SECURITIES IN ISSUE
The Company issues notes in the US from time to time pursuant to a shelf registration statement on Form F-3 filed with the SEC in 2018.
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Annual Report 2022 | Santander UK Group Holdings plc 264Santander UK Group Holdings plc |
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| | | | | | | | Notes to the Company financial statements | | | | |
11. SUBORDINATED LIABILITIES
| | | | | | | | | | | |
| | 2020 | 2019 |
Dated subordinated liabilities | Maturity | £m | £m |
4.75% Subordinated notes (US$1,000m) | 2025 | 536 | | 763 | |
5.625% Subordinated notes (US$500m) | 2045 | 294 | | 379 | |
| | 830 | | 1,142 | |
46.9 DEPOSITS BY BANKSThese consist of amounts due to subsidiaries under loan agreements and are repayable on demand.
12. CHANGES46.10 DEBT SECURITIES IN LIABILITIES ARISING FROM FINANCING ACTIVITIESISSUE
The Company issues notes in the US from time to time pursuant to a shelf registration statement on Form F-3 filed with the SEC in 2021.
| | | | | | | | |
| 2022 | 2021 |
£m | £m |
Medium-term notes: | | |
– Euro 30bn Euro Medium Term Note Programme | 2,387 | | 3,028 | |
– US SEC-registered Debt Programme – Santander UK Group Holdings plc | 2,511 | | 2,985 | |
| 4,898 | | 6,013 | |
The funding from the Euro 30bn Euro Medium Term Note Programme and the US SEC-registered Debt Programme in the name of Santander UK Group Holdings plc has predominantly been downstreamed to our operating company Santander UK plc.
Debt securities in issue include £2m due from Santander UK group undertakings.
46.11 SUBORDINATED LIABILITIES
| | | | | | | | | | | |
| | 2022 | 2021 |
Dated subordinated liabilities | Maturity | £m | £m |
4.75% Subordinated notes (US$1,000m) | 2025 | 608 | | 541 | |
5.625% Subordinated notes (US$500m) | 2045 | 334 | | 297 | |
| | 942 | | 838 | |
46.12 NOTES TO CASH FLOWS
Changes in liabilities arising from financing activities
In addition to the changes in equity arising from financing activities, as set out in the Company Statement of Changes in Equity, the table below shows the changes in liabilities arising from financing activities.
| | | 2020 | | 2019 | | 2022 | | 2021 |
| | Balance sheet line item | | | Balance sheet line item | | | Balance sheet line item | | | | Balance sheet line item | | |
| | Debt securities in issue | Subordinated liabilities | Other equity instruments | Dividends paid | Total | | Debt securities in issue | Subordinated liabilities | Other equity instruments | Dividends paid | Total | | Debt securities in issue | Other liabilities at FVTPL(1) | Subordinated liabilities | Other equity instruments | | Dividends paid | Total | | Debt securities in issue | Other liabilities at FVTPL(1) | Subordinated liabilities | Other equity instruments | | Dividends paid | Total |
| | £m | | £m | | £m | | £m | | £m | | £m |
At 1 January | At 1 January | 8,957 | | 1,142 | | 2,241 | | 0 | | 12,340 | | | 9,295 | | 1,185 | | 2,041 | | 0 | | 12,521 | | At 1 January | 6,013 | | 4,190 | | 838 | | 2,191 | | | — | | 13,232 | | | 7,970 | | 1,425 | | 830 | | 2,241 | | | — | | 12,466 | |
Cash flows from financing activities | 440 | | (281) | | 0 | | (250) | | (91) | | | 0 | | 0 | | 196 | | (404) | | (208) | | |
Proceeds from issue of debt securities | | Proceeds from issue of debt securities | — | | 3,889 | | — | | — | | | — | | 3,889 | | | — | | 2,788 | | — | | — | | | — | | 2,788 | |
Repayment of debt securities | | Repayment of debt securities | (1,446) | | — | | — | | — | | | — | | (1,446) | | | (1,814) | | — | | — | | — | | | — | | (1,814) | |
| | Issue of other equity instruments | | Issue of other equity instruments | — | | — | | — | | 750 | | | — | | 750 | | | — | | — | | — | | 450 | | | — | | 450 | |
Repurchase of other equity instruments | | Repurchase of other equity instruments | — | | — | | — | | (750) | | | — | | (750) | | | — | | — | | — | | (500) | | | — | | (500) | |
| Dividends paid | | Dividends paid | — | | — | | — | | — | | | (1,156) | | (1,156) | | | — | | — | | — | | — | | | (1,489) | | (1,489) | |
Liability-related other changes | | Liability-related other changes | (14) | | (191) | | 1 | | 5 | | | — | | (199) | | | (28) | | (23) | | — | | — | | | — | | (51) | |
Non-cash changes: | Non-cash changes: | | | Non-cash changes: | | | | | | |
– Unrealised foreign exchange | – Unrealised foreign exchange | (17) | | (28) | | 0 | | 0 | | (45) | | | (327) | | (44) | | 0 | | 0 | | (371) | | – Unrealised foreign exchange | 339 | | — | | 103 | | — | | | — | | 442 | | | (124) | | — | | 8 | | — | | | — | | (116) | |
– Other changes | – Other changes | (1) | | (3) | | 0 | | 250 | | 246 | | | (11) | | 1 | | 4 | | 404 | | 398 | | – Other changes | 6 | | — | | — | | — | | | 1,156 | | 1,162 | | | 9 | | — | | — | | — | | | 1,489 | | 1,498 | |
At 31 December | At 31 December | 9,379 | | 830 | | 2,241 | | 0 | | 12,450 | | | 8,957 | | 1,142 | | 2,241 | | 0 | | 12,340 | | At 31 December | 4,898 | | 7,888 | | 942 | | 2,196 | | | — | | 15,924 | | | 6,013 | | 4,190 | | 838 | | 2,191 | | | — | | 13,232 | |
(1) Liability-related other changes for Other liabilities at FVTPL are not part of the changes in liability arising from financing activities.
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Annual Report 2022 | Santander UK Group Holdings plc 265 |
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Footnotes to the cash flow statement
Net cash flows from operating activities includes interest received of £202m (2021: £245m), interest paid of £159m (2021: £240m) and dividends received of £1212m (2021: £1497m).
Restatements in the Company cash flow statement
The presentation of the company cash flow statement has changed to present 'profit before tax' within cash flows from operating activities instead of 'profit after tax'. Prior periods have been restated. As a result, for the year ended 31 December 2021, the adjustment for 'non-cash items included in profit' within cash flows from operating activities has been decreased by £4m.
13.46.13 CONTINGENT LIABILITIES AND COMMITMENTS
Details of the capital support arrangements entered into by the Company are set out in Note 31 to the Consolidated Financial Statements.
14.
46.14 SHARE CAPITAL
Details of the Company’s share capital are set out in Note 32 to the Consolidated Financial Statements.
15.
46.15 OTHER EQUITY INSTRUMENTS
Details of the Company’s other equity instruments are set out in Note 33 to the Consolidated Financial Statements.
16.
46.16 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 3837 to the Consolidated Financial Statements.
17.
46.17 RELATED PARTY TRANSACTIONS
The Company’s onlysignificant transactions with related parties arise in connection with the receiptwith:
–Dividend income from subsidiaries of dividends declared by its subsidiaries, payment of dividends£1,212m (2021: £1,497m, 2020: £260m),
–Dividends on its own ordinary shares declared and Perpetual Capital Securities, interest paymentspaid during the year are set out in Note 10 to its subsidiary on intercompany loansthe Consolidated Financial Statements.
–Loans and interest receivedadvances to banks include £4,759m due from its subsidiaries relating to downstreamed fundingSantander UK group undertakings,
–Other financial assets at amortised cost, see Note 46.6, all of senior debt, as well as any transactions entered into as partwhich are securities issued by Santander UK plc,
–Other financial liabilities at fair value through profit or loss, see Note 46.8, all of the implementation ofwhich are securities subscribed for by Santander UK’s ring-fencing plans.UK plc,
–Deposits by banks, see Note 46.9,
–Debt securities, see Note 46.10.
18.46.18 EVENTS AFTER THE BALANCE SHEET DATE
See Note 4243 to the Consolidated Financial Statements.
19.
46.19. INTEREST RATE BENCHMARK REFORM
At 31 December 2020,2022, the Company had £2,196m£2,491m (2021: £2,217m) of USD LIBOR-linked Financial liabilities at amortised cost that were affected by IBOR reform and have yet to transition to an alternative benchmark interest rate as provided internally to key management personnel.
Further details of the significant interest rate benchmarks to which hedging relationships are exposed, the extent of risk exposure that is affected by IBOR reform, the effect of IBOR reform on interest rate risk management and how Santander UK's transition to alternative benchmark interest rates is being managed, are disclosed in Note 4341 to the Consolidated Financial Statements and the Banking market risk section of the Risk review.Statements.
Santander UK Group Holdings plc273
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Annual Report 2020 |Shareholder information
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Shareholder information | | | |
| | Contents | |
| | Subsidiaries, joint ventures and associatesAnnual Report 2022 | 275
|
| | Forward-looking statements | 278 |
| | | |
| | Risk factors | 280 |
| | Regulation of the Santander UK groupGroup Holdings plc | 294266 |
| | Articles of Association | 296 |
| | Iran Threat Reduction and Syria Human Rights Act (ITRA) | 297 |
| | New York Stock Exchange (NYSE) Corporate Governance | 298 |
| | Other information | 299 |
| | Additional balance sheet analysis | 300 |
| | Taxation for US investors | 311 |
| | Glossary of financial services industry terms | 312 |
| | Cross-reference to Form 20-F | 318 |
274Santander UK Group Holdings plc
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Strategic Report | Sustainability and Responsible Banking | Governance | | Risk Review | review | Financial review | | Financial statements | | Shareholder information |
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Shareholder information | | | |
| | Contents | |
| | Subsidiaries and related undertakings | |
| | Forward-looking statements | |
| | | |
| | Risk factors | |
| | Regulation of the Santander UK group | |
| | Articles of Association | |
| | Iran Threat Reduction and Syria Human Rights Act (ITRA) | |
| | Board of Directors | |
| | New York Stock Exchange (NYSE) Corporate Governance | |
| | Other information | |
| | Additional balance sheet and cash flow analysis | |
| | Taxation for US investors | |
| | Glossary of financial services industry terms | |
| | Cross-reference to Form 20-F | |
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Annual Report 2022 | Santander UK Group Holdings plc 267 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Subsidiaries joint ventures and associatesrelated undertakings (audited)
In accordance with Section 409 of the Companies Act 2006, details of Santander UK Group Holdings plc’sthe Company’s subsidiaries joint ventures and associatesrelated undertakings at 31 December 20202022 are set out below.
Subsidiaries
All subsidiaries are owned 100% and consolidated by the Santander UK group.UK.
Incorporated and registered in England and Wales:
| | | | | | | | | | | | | | | | | | | |
| Registered office(1) | Direct/Indirect ownership | Share class through which ownership is held | Proportion of ownership interest | Ultimate proportion of ownership |
Name of subsidiary | % | % |
2 & 3 Triton Limited | A | Indirect | | Ordinary £1 | — | | 100 |
A & L CF June (2) Limited | A | Indirect | | Ordinary £1 | — | | 100 |
A & L CF June (3) Limited | A | Indirect | | Ordinary £1 | — | 100 |
A & LCFL CF March (5) Limited | A | Indirect | | Ordinary £1 | — | | 100 |
A & L CF September (4) Limited | A | Indirect | | Ordinary £1 | — | 100 |
Abbey National Beta Investments Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National Business Office Equipment Leasing Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National Nominees Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National PLP (UK) Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National Property Investments | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National Treasury Services Investments Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National Treasury Services Overseas Holdings | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey National UK Investments | A | Indirect | | Ordinary €0.20 | — | | 100 |
| | | | Ordinary £1 | | | |
Abbey Stockbrokers (Nominees) Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Abbey Stockbrokers Limited | A | Indirect | | Ordinary £1 | — | | 100 |
| | | | A Preference £1 | | | |
| | | | B Preference £1 | | | |
Alliance & Leicester Cash Solutions Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Alliance & Leicester Commercial Bank Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Alliance & Leicester Investments (Derivatives) Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Alliance & Leicester Investments (No.2) Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Alliance & Leicester Investments Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Alliance & Leicester Limited | G | Indirect | | Ordinary £0.50 | — | | 100 |
Alliance & Leicester Personal Finance Limited | G | Indirect | | Ordinary £1 | — | 100 |
AN (123) Limited | A | Indirect | | Ordinary £0.10 | — | | 100 |
ANITCO Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Athena Corporation Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Cater Allen Holdings Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Cater Allen International Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Cater Allen Limited | A | Indirect | | Ordinary £1 | — | 100 |
Cater Allen Lloyd's Holdings Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Cater AllensAllen Syndicate Management Limited | A | Indirect | | Ordinary £1 | — | | 100 |
First National Motor Business Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | | 100 |
First National Motor Contracts Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | | 100 |
First National Motor Facilities Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | | 100 |
First National Motor Finance Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | | 100 |
First National Motor Leasing Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | | 100 |
First National Motor plc | B | Indirect | | Ordinary £1 | — | | 100 |
First National Tricity Finance Limited | A | Indirect | | Ordinary £1 | — | 100 |
Insurance Funding Solutions Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Liquidity Limited | A | Indirect | | Ordinary A £0.10 | — | | 100 |
| | | | Ordinary B1 £0.10 | | | |
| | | | Ordinary B2 £0.10 | | | |
| | | | Preference £1 | | | |
Mortgage Engine Limited | A | Indirect | | Ordinary £1 | — | | 100 |
PSA Finance UK Limited | H | Indirect | | Ordinary £1 | — | 50 |
(1) Refer to the key at the end of this section for the registered office address.
Santander UK Group Holdings plc275
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Annual Report 2022 | Santander UK Group Holdings plc 268 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Annual Report 2020 | Shareholder information
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Subsidiaries, joint ventures and associatescontinued
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| Registered office(1) | Direct/Indirect ownership | Share class through which ownership is held | Proportion of ownership interest | Ultimate proportion of ownership |
Name of subsidiary | % | % |
Santander (CF Trustee Property Nominee) Limited | S | Trust relationship | Ordinary £1 | — | | — |
Santander (CF Trustee) Limited | S | Trust relationship | Ordinary £1 | — | | — |
Santander (UK) Group Pension Scheme Trustees Limited | S | Direct | | Ordinary £1 | 100 | | 100 |
Santander Assets 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 | — | | 100 |
| | | | Ordinary B £1 | — | | 100 |
Santander UK (Structured Solutions) Limited | A | Indirect | | Ordinary £0.01 | — | | 100 |
Santander UK plc | A | Direct | | Ordinary £0.10 | 100 | | 100 |
Santander UK Technology Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Sheppards Moneybrokers Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Solarlaser Limited | A | Indirect | | Ordinary £1 | — | | 100 |
SCF Eastside Locks GP Limited | S | Trust relationship | Ordinary £1 | — | | — |
The Alliance & Leicester Corporation Limited | A | Indirect | | Ordinary £1 | — | | 100 |
Time Retail Finance Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | 100 |
| | | | Ordinary £0.0001 | — | 100 |
Tuttle and Son Limited | A | Indirect | | Ordinary £1 | — | | 100 |
| | | | | | | | | | | | | | |
| Registered office(1) | Direct/Indirect ownership | Share class through which ownership is held | Proportion of ownership interest |
Name of subsidiary | % |
Santander (CF Trustee Property Nominee) Limited | P | Trust relationship | Ordinary £1 | — |
Santander (CF Trustee) Limited | P | Trust relationship | Ordinary £1 | — |
Santander (UK) Group Pension Scheme Trustees Limited | P | Direct | Ordinary £1 | 100 |
Santander Asset Finance (December) Limited | G | Indirect | Ordinary £1 | — |
Santander Asset Finance plc | A | Indirect | Ordinary £0.10 | — |
Santander Cards Limited | A | Indirect | Ordinary £1 | — |
Santander Cards UK Limited | A | Indirect | Ordinary £1 | — |
Santander Consumer (UK) plc | B | Indirect | Ordinary £1 | — |
Santander Consumer Credit Services Limited | A | Indirect | Ordinary £1 | — |
Santander Equity Investments Limited | A | Direct | Ordinary £1 | 100 |
Santander Estates Limited | G | Indirect | Ordinary £1 | — |
Santander Financial Services plc | A | Direct | Ordinary £1 | 100 |
Santander Global Consumer Finance Limited | A | Indirect | Ordinary £0.0001 | — |
Santander Guarantee Company | A | Indirect | Ordinary £1 | — |
Santander Lending Limited | A | Indirect | Ordinary £1 | — |
Santander Mortgage Holdings Limited | A | Indirect | Ordinary £1 | — |
Santander Private Banking UK Limited | A | Indirect | Ordinary £1 | — |
Santander Secretariat Services Limited | A | Direct | A Ordinary US$0.01 | 100 |
Santander UK Operations Limited | A | Indirect | Ordinary A £1 | — |
| | | Ordinary B £1 | |
Santander UK (Structured Solutions) Limited | A | Indirect | Ordinary £0.01 | — |
Santander UK plc | A | Direct | Ordinary £0.10 | 100 |
Santander UK Technology Limited | A | Indirect | Ordinary £1 | — |
Sheppards Moneybrokers Limited | A | Indirect | Ordinary £1 | — |
Solarlaser Limited | A | Indirect | Ordinary £1 | — |
SCF Eastside Locks GP Limited | P | Trust relationship | Ordinary £1 | — |
The Alliance & Leicester Corporation Limited | A | Indirect | Ordinary £1 | — |
Time Retail Finance Limited (In liquidation) | F | Indirect | Ordinary £1 | — |
| | | Ordinary £0.0001 | |
Tuttle and Son Limited | A | Indirect | Ordinary £1 | — |
(1) Refer to the key at the end of this section for the registered office address.
Incorporated and registered outside England and Wales:
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| Registered office(1) | Direct/Indirect ownership | Share class through which ownership is held | Proportion of ownership interest | Ultimate proportion of ownership |
Name of subsidiary | % | % |
A & LCFL CF (Guernsey) Limited | TO | Indirect | | Ordinary £1 | — | | 100 |
Abbey Business Services (India) Private Limited | QN | Indirect | | Ordinary INR 10 | — | | 100 |
Abbey National International Limited | UQ | Indirect | | Ordinary £1 | — | | 100 |
ALIL Services Limited (In liquidation) | R | Indirect | | Ordinary £1 | — | | 100 |
Carfax (Guernsey) Limited | T | Indirect | | Ordinary £1 | — | | 100 |
Santander Cards Ireland Limited | JI | Indirect | | Ordinary €1 | — | 100 |
| | | | Ordinary €1.27 | | |
Santander ISA Managers Limited | IH | Indirect | | Ordinary £1 | — | | 100 |
Sovereign Spirit Limited | PM | Indirect | | Ordinary BMD 1 | — | | 100 |
(1) Refer to the key at the end of this section for the registered office address, including the countrycountry.
276Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 269 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Strategic Report | | Governance | | Risk Review | | Financial review | | Financial statements | | Shareholder information |
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Other subsidiary undertakings
All entities are registered in England and Wales except for Guaranteed Investment Products 1 PCC Limited which is registered in Guernsey and Motor Securities 2018-1 Designated Activity Company and Motor Securities 2020-1 Designated Activity Company which areis 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.
| | | | | | | | | | | | | | |
| Registered | Name of entity | Registered |
Name of entity | office(1) | office(1) |
Abbey Covered Bonds (Holdings) Limited | E | Holmes Trustees LimitedMaster Issuer plc | A |
Abbey Covered Bonds (LM) Limited | E | Langton Funding (No.1)Holmes Trustees Limited | CA |
Abbey Covered Bonds LLP | A | Langton Mortgages Trustee (UK) Limited | A |
Auto ABS UK Loans 2017 Holdings Limited | C | Langton PECOH Limited | C |
Auto ABS UK Loans 2017 plc | C | Langton Securities (2008-1) plc (In Liquidation) | C |
Auto ABS UK Loans 2019 Holdings Limited | L | Langton Securities (2010-1) plc | C |
Auto ABS UK Loans 2019 plc | L | Langton Securities (2010-2) plc | C |
Auto ABS UK Loans Holdings Limited | C | Langton Securities Holdings Limited | C |
Auto ABS UK Loans plc | C | MAC No.1 Limited | AD |
Fosse (Master Issuer) Holdings Limited | C | Motor 2015-1 HoldingsMAC No.1 Limited | CA |
Fosse Funding (No.1) Limited | C | Motor 2016-1 Holdings Limited | C |
Fosse Master Issuer plc | C | Motor 2016-1 plc | C |
Fosse PECOHTrustee (UK) Limited | CA | Motor 2017-1 Holdings Limited | C |
Fosse Trustee (UK)Holmes Funding Limited | A | Motor 2017-1 plc (In Liquidation) | C |
Guaranteed Investment Products 1 PCC Limited | M | Motor Securities 2018-1 Designated Activity Company | N |
Holmes Funding Limited | A | Motor Securities 2020-1 Designated Activity Company | ND |
Holmes Holdings Limited | A | PECOH LimitedMotor Securities 2018-1 Designated Activity Company | AK |
Holmes Master Issues plc | A | | |
(1) Refer to the key at the end of this section for the registered office address.
Joint ventures and associatesRelated undertakings
All of these entities, which are registered in England and Wales, are associated undertakings accounted for by the equity method of accounting.accounting, with 50% ownership being held.
| | | | | | | | | | | | | | | | | | | | | | | |
| Registered office(1) | Direct/Indirect ownership | Share class through which ownership is held | Proportion of ownership interest | Ultimate proportion of ownership |
Name of subsidiaryentity | % | % |
Hyundai Capital UK Limited | KJ | Indirect | Ordinary £1 | — | 50 |
PSA UK Number 1 plc (In liquidation) | H | Indirect | B Ordinary £1 | — | 50 |
| | | C Ordinary £1 | | |
Syntheo Limited (In liquidation) | F | Indirect | | Ordinary £1 | — | 50 |
Volvo Car Financial Services UK Limited | OL | 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. Santander 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 | L | 10th Floor, 5 Churchill Place, London E14 5HU |
B | Santander House, 86 Station Road, Redhill RH1 1SR | M | Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey |
C | 1 Bartholomew Lane, London EC2V 2AX | | GY1 2HT |
D | 40a Station Road, Upminster, Essex RM14 2TR | N | 3rd Floor, Flemming Court, Flemming’s Place, Dublin 4 |
E | Wilmington Trust SP Services (London) Limited, 1 Kings Arms Yard, | O | Scandinavia House, Norreys Drive, Maidenhead, Berkshire SL6 4FL |
| London EC2R 7AF | P | Clarendon House, 2 Church Street, Hamilton HM11, Bermuda |
F | Griffins, Tavistock House South, Tavistock Square, London WC1H 9LG | Q | The Residency, 7th Floor, 133/1 Residency Road, Bangalore, KA |
G | Carlton Park, Narborough, Leicester LE19 0AL | | 560 025, India |
H | 61 London Road, Redhill RH1 1QA | R | 19/21 Prospect Hill, Douglas, Isle of Man IM99 1RY |
I | 287 St. Vincent Street, Glasgow, Scotland G2 5NB | S | 201 Grafton Gate East, Milton Keynes MK9 1AN |
JI | 25/28 North Wall Quay,3 Dublin Langdings, Dublin 1, Ireland | T | Fourth Floor, The Albany, South Esplanade, St. Peter Port, |
KJ | London Court, 39 London Road, Reigate RH2 9AQ | | |
K | 3rd Floor, Flemming Court, Flemming’s Place, Dublin 4, Ireland | | |
L | Scandinavia House, Norreys Drive, Maidenhead, Berkshire SL6 4FL | | |
M | Clarendon House, 2 Church Street, Hamilton HM11, Bermuda | | |
N | The Residency, 7th Floor, 133/1 Residency Road, Bangalore, KA 560 025, India | | |
O | Suite 1 North, 1st Floor, Albert House, St. Peter Port, Guernsey GY1 4NF1AJ | | |
P | 201 Grafton Gate East, Milton Keynes MK9 1AN | | |
Q | 13-15 Charing Cross, St. Helier, Jersey JE2 3RP | | |
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| | U | 19-21 Commercial Street, St. Helier, Jersey JE2 3RU |
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Forward-looking statements
The Company and its subsidiaries (together Santander UK) may from time to time make written or oral forward-looking statements. The Company makes written forward-looking statements in this Annual Report and may also make forward-looking statements in its periodic reports to the SEC on Forms 20-F and 6-K, in its offering circulars and prospectuses, in press releases and 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
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,operations, are considered in detail in the Risk review, and they include:
–the effects of the war in Ukraine
–the effects of UK economic conditions and disruptions in the global economy and global financial markets
–the effects of UK economic conditionsthe Covid-19 pandemic
–the effects of the UK’s withdrawal from the European Union
–the effects of climate change
–the effects of competition with other financial institutions, including new entrants into the financial services sector
–the risk that Santander UK’s ability to maintain its competitive position depending, in part, on the success of new or existing products and services may not become (or may not continue to be) successful
–the risk that Santander UK may be unableit offers its customers and its ability to continue offering products and services from third parties
–the extent to which Santander UK’s loan portfolio is subject to prepayment risk
–the risk of damage to Santander UK's reputation
–the risk that Santander UK may be unable to manage the growth of its operations
–the effects of any changes to the reputation of Santander UK or its affiliates
–the extent to which regulatory capital, liquidity and leverage requirements, and any changes to these requirements may limitaffect Santander UK’s operationsUK
–liquidity constraints and Santander UK’s ability to access liquidity and funding on acceptable financial terms
–the effects of an adverse movement in external credit ratingratings assigned to Santander UK any Santander UK member or any of their respectiveits 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 changes in positions recorded at fair value for its financial assets due to changes in market conditions
–risks arising from the integrity and continued existence of reference rates
Santander UK’s ability to control the level of non-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 the bail-in and write down powers thereunder
–the effects of any failure to comply with anti-money laundering, anti-terrorism, anti-corruption,anti-bribery and corruption, sanctions and anti-tax evasion or sanctions laws orand regulations, or the risk of any failure to prevent or detect any illegal or improper activities fully or timeouslyon a timely basis
–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 and damage from civil litigation and/or criminal legal orand regulatory proceedings
–the risk of failing to successfully apply or to improve Santander UK’s credit risk management systems
–the risk that Santander UK’s data management policies and processes may not be sufficiently robust
–the effect of cyber-crime on Santander UK’s business
–the risks arising from any non-compliance with Santander UK’s policies, from any employee misconduct or human error, negligence and deliberate acts of harm or from any negligence ordishonesty, including fraud
–the risk of failing to effectively manage changes in Santander UK’s information technology infrastructure and management information systems in a timely manner
–the risk that Santander UK, along with the government, may not have the ability to manage and mitigate the impacts of climate change effectively
–Santander UK’s exposure to unidentified or unanticipated risks despite its risk management policies, procedures and methods and Santander UK’s exposure to risks related to errors in its risk modelling
–the risks arising from Santander UK’s reliance on third parties and affiliates for keyimportant infrastructure support, products and services
–the ability of Santander UK to recruit, retain and develop appropriate senior management and skilled personnel
–the effects of any inaccuracy within the judgements and accounting estimates which underpin aspects of the financial statements, and the consequent risk of any material misstatement of Santander UK’s financial results
–the effect of any change in accounting standards
Please refer to our latest filings with the SEC (including, without limitation, ourthe Risk Factors section in this Annual Report on Form 20-F for the year ended 31 December 2020)2022) 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 foregoing non-exhaustive list of important factors. Forward-looking statements speak only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such knowledge, information and views may change at any time. 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..otherwise.
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Risk factors
An investment in Santander UK Group Holdings plc (the Company) and its subsidiaries (us, we or Santander UK) involves a number of risks, the material ones of which are set out below.
Geopolitical and macro-economic risks
The war in Ukraine could materially affect our operations and financial position
On 24 February 2022, Russia launched a large-scale military action against Ukraine. The Russian military action has caused an ongoing humanitarian crisis in Europe. It has also significantly impacted global commodity and financial markets, leading to supply chain disruptions and increases in the prices of energy, oil, gas and raw materials. This has led to heightened inflation, which has created further challenges for monetary authorities and our customers.
We do not have a presence in Russia and Ukraine and our direct exposure to Russian and Ukrainian markets and assets is negligible. However, the effect of Russia’s continued military action against Ukraine on global commodity and financial markets and general macroeconomic conditions remains uncertain, and there is a risk that the economic effects of Russia's continued military action against Ukraine could exacerbate the current slowdown in the global economy, which would adversely affect our businesses, results of operations and financial position.
Price pressures on the energy, oil and gas sectors resulting from the Russian military action against Ukraine underline the need to accelerate the decarbonisation transition and present opportunities to finance new energy solutions that can improve energy security in the medium to long term. However, historic reliance on stable and cheap energy has meant that price pressures on the energy, oil and gas sectors resulting from the Russian military action against Ukraine and the resulting increases in energy prices pose risks to economic growth and debt sustainability, contributing to the challenges our customers are facing in terms of cost of living.
The continuation or escalation of the conflict between Russia and Ukraine, including the extension of the conflict to other countries in the region, could lead to further increases in energy prices (particularly gas prices, if supplies to Europe remain interrupted) and heightened inflationary pressures. This could lead to further increases in interest rates, impact financial market stability in the Eurozone and worsen the current cost of living crisis our customers are facing. Such developments would negatively affect the payment capacity of some of our customers, whose likely need for increased support will place additional pressures on the staff in our financial support and call centres.
In response to the Russian military action against Ukraine, the United States of America (US), the European Union (EU), the United Kingdom (UK) and other UN member states and jurisdictions, have imposed, and may further impose, severe financial and economic sanctions and export controls against Russia, Belarus, the so-called Donetsk People’s Republic and the so-called Luhansk People’s Republic. Such sanctions have included freezing/blocking assets, targeting major Russian banks, the Russian Central Bank, and certain Russian companies and individuals, imposing export controls against Russia and Russian interests, as well as disconnecting certain Russian banks from the SWIFT system (Society for Worldwide Interbank Financial Telecommunication). In addition, the sanctions imposed also include a ban on trading in sovereign debt and other securities. Russia has implemented certain countermeasures in response. The scale of sanctions is unprecedented, complex and rapidly evolving, and poses continuously increasing operational and compliance risks to Santander UK. Our corporate framework and policies are designed to ensure compliance with applicable laws, regulations and economic sanctions, including US, UK, EU and UN economic sanctions, in the countries in which we operate. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, have resulted in an increasingly fragmented macroeconomic, trade and regulatory environment. Currently, we do not have any loans, credits or contingencies affected by the recent sanctions imposed on Russia. However, we cannot predict whether any of the countries in which we operate will enact additional economic sanctions or trade restrictions in response to the Russian military action against Ukraine or the impact such additional sanctions or restrictions may have on us which may include increased costs and regulatory burdens associated with the compliance of the evolving and complex sanctions landscape. The heightened regulatory, political and media focus on our response to this crisis may also increase our exposure to conduct and reputational risks.
Furthermore, the disruption and volatility in the global financial markets caused by the Russian invasion and the potential of further tightening of financial market conditions due to the conflict could have a material adverse effect on Santander UK’s ability to access funding, capital and liquidity on financial terms acceptable to it and result in an increase in Santander UK’s cost of funding due to widening of credit spreads. This could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, the risk of cyberattacks on companies and institutions could increase as a result of Russia’s military action against Ukraine and in response to the consequent sanctions imposed by the US, the EU, the UK and other jurisdictions. Such attacks could adversely affect our ability to maintain or enhance our cyber security and data protection measures. While we continue to see increasing ransomware attacks across sectors driven by supply chain tool compromises, and expect this trend to continue, we have not experienced any notable information or cyber security incidents as a result of Russia’s actions against Ukraine. We continue to actively monitor this situation.
Santander UK’s operations, financial condition and prospects are materially impacted by economic conditions in the UK and disruptions in the global economy and global financial markets
Santander UK’s business activities are concentrated in the UK, where it offers a range of banking and financial products and services to UK retail and corporate customers. As a consequence, Santander UK’s operations, financial condition and prospects are significantly affected by the general economic conditions in the UK.
Despite the economic recovery experienced during 2021 in the UK as measures to combat the COVID-19 pandemic were eased, pre-pandemic growth levels were not reached. There isremains a risk of an extended period of economic contraction that continues through 20212023 as the effects of higher bank rates, Brexit, and higher and more persistent inflation continue to affect supply chains and business and household confidence and finances. Interest rates have risen sharply over the course of 2022 and there is a risk that this trend will continue throughout 2023, putting further lockdowns are imposed restricting economic activitypressures on household finances due to a sharp rise of the costs for refinancing their mortgage for some of our customers and significantly higher costs of borrowing overall. Higher mortgage rates could dampen demand in the UK and acrosshousing market, leading to a drop in new business or a fall in house prices, reducing the globe depending on the efficacy, take-up and rolloutvalue of the vaccines for Covid-19.collateral we hold against mortgages. These risks could amplify the existingcreate further downward pressure on the economy; for example: a large surge in business failures with knock-on effects for the labour market resulting in high rates of unemployment that create debt management issues foraffect the ability of customers to pay their debts, which could also contribute to negative multiplier effects through delayed investment and spending; and a stronger push towards protectionism as governments look to protect home industries. This could also lead to a longer-term turn in the credit cycle with a broader contraction of credit as lenders attempt to protect themselves from increased losses.
In particular, Santander UK faces, among others, the following risks related toin this period of economic uncertainty (including the current economic downturn:effect of those risks on gross domestic product, inflation, unemployment and house prices):
–Reduced demand for Santander UK’s products and services.services - particularly the potential for reduced mortgage market volumes.
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–Inability of Santander UK’s borrowers to comply fullymake payments on their loans in full or in a timely manner with their existing obligations.
–The process Santander UK uses to estimate losses inherent in its credit exposure requires complex judgements and assumptions, including forecasts of economic conditions, if such economic conditions develop more adversely than Santander UK’s estimates it may impair the ability of Santander UK’s borrowers to repay their loans.on time.
–The degree of uncertainty concerning economic conditions may adversely affect the accuracy of Santander UK’s estimates, which may, in turn, impact the reliability of the IFRS 9 model and process andto determine the sufficiency of Santander UK’s loan loss allowances.
–DisruptionLower house or other asset prices, reducing the value of macro-economic factors (such as GDP, unemploymentcollateral Santander UK holds on mortgage and house prices), both locally and regionally.other lending.
–Lower or negative interest rates,Higher and more persistent inflation, reducing Santander UK’s interest margins.profitability and increasing the cost of living for Santander UK's borrowers.
–The value and liquidity of the portfolio of investment securities that Santander UK holds may be adversely affected.
Santander UK is also exposed to:
–The recoveryBroader geopolitical issues, which remain heightened with the potential for a further pushback against globalism. Further moves towards unilateralism may also cause increased tension and/or hostilities between nations, which could negatively impact the global economy and financial markets. In addition, Russia's invasion of Ukraine has impacted the international financial industry may be delayedUK economy, in particular by pushing up energy and impact Santander UK’s operations, financial conditionoil prices and prospects.increasing inflation further;
–Adverse macroeconomic developments have had and may continueClimate change risks which could result in material damage to our customers’ property or businesses or have a negativematerial impact on the household income of Santander UK’s retail customersour customers' business models under a transition to a low carbon economy; and the profitability of Santander UK’s business customers, which has adversely affected and may continue to adversely affect the recoverability of Santander UK’s loans and other extensions of credit and result in increased credit losses. In particular, the outbreak of Covid-19 and various efforts recommended or put in place for individuals and businesses to contain the spread of the disease in the UK and in other countries, as well as some of the UK government and central bank financial mitigation measures, has had a material adverse effect on Santander UK’s operations and income, as described below under 'The Covid-19 pandemic'.
–Accommodative monetary policies leading to an extended period of low or lower interest rates, particularly the reduction of interest rates to near zeroSocial unrest as a mitigating measure in response to the Covid-19 outbreak, weaker sterling, higher government debt levels, and potentially higher inflation in the longer term, which could have an adverse effect on Santander UK’s profitability.result of severe economic disruption.
Adverse changes in the credit quality of Santander UK’s borrowers andor counterparties or a general deterioration in UK economic conditions could reduce the recoverability and value of Santander UK’s assets and require an increase in its level of provisions for expected credit losses. There can be no assurance that Santander UK will not have to increase its provisions for loan losses in the future as a result of increases in non-performing loans or for other reasons beyond its control. For example, for 2020, Santander UK recognised net provisions of £448m relating to the Covid-19 pandemic as described further below under 'The Covid-19 pandemic'. Material increases in Santander UK’s provisionsprovision for loan losses and write-offswrite-off or charge-offs have had and could continue toagain have a material adverse effect on its operations, financial condition and prospects. Any significant related reduction in the demand for itsSantander UK products and services, a sustained downturn in the UK economy or changes in central bank interest rates could also have a material adverse effect on Santander UK’s operations, financial condition and prospects.
SantanderInflation continued to rise in 2022, mainly driven by increasing energy and food prices. Monetary policy in the UK is also exposed to:
–Broader geopolitical issues, which remain heightenedhas been tightened significantly since the end of 2021 and there are expectations of further rate increases with a peak rate in 2023. Our own budget forecasts anticipate a gradual fall back in the potential forinflation rate, following a further pushback against globalism, once concerns directly relatedpeak in 2022, to meet the pandemic subside. Further moves towards unilateralism may also cause increased tension between nations, which could negatively impact the global economy and financial markets;
–Climate change risks which could have a material impact on our client's business models under a transition to a low carbon economy; Other environmental risks such as extreme weather, natural disasters, biodiversity loss, human made environmental disasters, health impactedtarget rate by pollution, water crisis, and other infectious diseases; and
–Social unrest as a result of severe economic disruption caused by the pandemic.
2026. Economic instability and downturns beyond the UK may also impact the UK economy as a whole. DisruptionEurope’s manufacturing base is heavily dependent upon natural gas, and restriction in supply and significantly increased costs are expected to have a material adverse impact on the Eurozone economy, which could lead to disruption and volatility in the global financial markets, as a result of debt sustainability concerns. This could have a material adverse effectimpact on Santander 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.
A recessionary economic environment could also lead to rating downgrades affecting the UK, Santander UK or its customers, investments and/or instruments, causing capital impacts due to increased RWAs, an increase in the volatility of wholesale markets and the cost of funding. Fiscal concerns related to the UK have already increased volatility in UK financial markets which necessitated Bank of England intervention in late September 2022.
The Covid-19 pandemic
The Covid-19 pandemic has caused, and continuesthe Covid-19 pandemic (or new strains or variations thereof) or unforeseen new diseases or infections have the potential to cause, social disruption and a material economic downturn in the UK and globally,globally. Macroeconomic expectations are that the effects of which continue to unfoldthe Covid-19 pandemic will be long lasting with the level and may worsen. Thisspeed of economic recovery still uncertain, with impacts being felt largely in a tight labour market, supply chain pressures and increased inflation. The Covid-19 pandemic has had a material adverse effect on Santander UK’s operations and income and could continue to have a material adverse effect on its operations, income, financial condition and prospects depending on a number of factors which remain uncertain at this point (further waves of infection, further variantsprospects. To the extent that the residual impacts of the Covid-19 virus, the distribution and further development of vaccines, further lockdowns and the speed and stability of the economic recovery, amongst others). To the extent the Covid-19 pandemic continuescontinue to adversely affect the UK or global economy and/or Santander UK, it may also have the effect of increasing the likelihood and/or magnitude of other risks described herein or may pose other risks which are not presently known to Santander UK or not currently expected to be significant to Santander UK’s business, operations or financial performance. For further information on the impactperformance.1
In 2022, certain adverse consequences of the Covid-19 pandemic continued to impact the macroeconomic environment, including labour shortages and disruptions of global supply chains, which contributed to rising inflationary pressures. These adverse consequences may persist for some time. If new Covid-19 waves, or the emergence of another infection of similar proportions, force countries to re-adopt measures that restrict economic activity, the macroeconomic environment could deteriorate and adversely impact our business and results of operations, which could include, but is not limited to (i) a decreased demand for our products and services; (ii) material impairment of our loans and other assets including goodwill; (iii) a decline in the value of collateral; (iv) constraints on Santander UK’s operating environment, see 'Operating environmentour liquidity due to market conditions, exchange rates and stakeholder update'customer withdrawal of deposits and Note 1continued draws on lines of credit; and (v) downgrades to our credit ratings. Any downgrade in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative and other contracts and adversely affect our interest margins and results of operations.
Moreover, our operations could still be impacted by risks from remote working, which were largely deployed as a response to the Consolidated Financial Statements.Covid-19 pandemic. While in 2022 we continued to implement a partial return to our office locations, we still maintain flexibility to work remotely, and our staff have progressively adapted a hybrid approach to working. If we become unable to successfully operate our business from remote locations including, for example, due to failures of our technology infrastructure and controls, or increased cybersecurity risks, this could result in business disruptions that could have a material and adverse effect on our business.
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The Covid-19 pandemic has caused global disruption, which has impacted Santander UK’s customers, suppliers, staff and operations. In March 2020, the UK, as well as other jurisdictions, implemented severe restrictions on the movement of the population, with a resultant significant impact on economic activity. Despite a gradual phasing out of such restrictions during the summer months of 2020, restrictions have since been reinstated with diverging stringency and at different times in jurisdictions across the globe. Although a number of vaccines are now available and more are expected, it remains unclear how restrictions will evolve through 2021; this will depend on the pace of the vaccination programme and its extension, possible mutations to the Covid-19 virus and the effectiveness of the vaccine and length of the immunity it grants. Santander UK continues to monitor the situation closely.
In response to the Covid-19 pandemic, Santander UK deployed working from home capabilities and adapted some of its key processes and working areas, such as branches and call centres, to the working requirements under lockdown. However, Santander UK faces operational challenges arising from this deployment, including those presented by the unavailability of personnel and the changes in normal operating procedures, which put pressure on internal controls. Santander UK has been, and may continue to be, adversely affected by disruptions to its infrastructure, business processes and technology services, including as a result of the temporary freeze on system changes unrelated to the Covid-19 pandemic, which was implemented in the second quarter of 2020 to minimise the impact of the additional pressures on Santander UK’s systems. Santander UK may also face increased operational risks due to cyber security threats and fraud as the speed and extent of deployment of government schemes put additional pressure on internal controls. For further information, see “Operating environment and stakeholder update” and “Risk review - Operational risk.” Working practices are under ongoing review to allow improved controls, better remote working and flexibility, to comply with social distancing measures on-site, and to be able to provide testing, cater for self-isolating needs and to allow a swift response to new lock down measures, all of which may lead to increased costs or further business disruption.
Like other jurisdictions, the UK government and central bank have launched measures to provide financial support to parts of the economy most impacted by the Covid-19 pandemic (see “Risk review—Credit risk—Credit risk – Santander UK group level—Covid-19 Support measures”). The success of these measures (for example, lower interest rates, extensive central bank lending, extension of effective dates for regulatory changes, business lending schemes, payment holidays and furlough measures) to reactivate the economy and support households and businesses is still uncertain and may not be able to prevent a prolonged and deep crisis or even a recessionary environment. A significant number of our customers have made use of these business lending schemes and payment holidays. For further details, see “Operating environment and stakeholder update” and “Risk review - Credit risk - Credit risk – Santander UK group level - Santander UK Group level – Credit risk review - Covid-19 Support measures”.
Several of these measures have had, and are expected to continue to have, a negative impact on our financial condition and results of operations. For example, our net interest income was impacted by an immediate repricing of assets following cuts in the Bank of England’s (BoE) base rate from 0.75% to 0.1% in response to the Covid-19 pandemic which was mitigated by deposit repricing actions in the second half of 2020. In addition, our non-interest income for the year ended 31 December 2020 decreased by 40% compared to 2019. This resulted from significantly lower banking and transaction fees in our retail business, which, although largely due to expected reductions following the implementation of regulatory changes to overdraft income, were caused partly by the Covid-19 pandemic. For further details on the impact of the Covid-19 pandemic on our financial condition and results of operations, see "Chief Executive Officer's review", "Financial overview", “Risk review - Risk overview - Top risks”, and "Financial review".
The impact of the Covid-19 pandemic on our retail and corporate customers’ income, profitability and prospects could significantly affect their ability to service and repay their loans. Our credit impairment charges have consequently increased as our new credit scenarios, and the weights applied to those scenarios, under IFRS 9 reflect a range of potential economic outcomes due to the Covid-19 pandemic. These scenarios capture a range of recovery paths for the UK economy, reflecting the uncertain environment caused by the Covid-19 pandemic, including possible further local/regional lockdown restrictions in 2021 and the impact of the UK government responses. These scenarios have been weighted to the downside to reflect the longer path to recovery for the UK. For further details, see “Risk review - Credit risk - Credit risk – Santander UK group level - Multiple economic scenarios and probability weights.” Santander UK recognised net provisions of £448m relating to the Covid-19 pandemic during 2020, arising from the changes to economic scenarios and weights and the staging reclassification of certain loans following an in-depth sectoral and payment holiday review. During 2020 £0.8bn of mortgage assets (based on a sample mortgage customer contact exercise, as well as additional Stage 1 customer data profiling) were transferred from Stage 1 to Stage 2 lifetime ECL. Santander UK has also transferred £3.1bn corporate Stage 1 loans into Stage 2 lifetime ECL and £0.4bn of corporate Stage 2 to Stage 3 ECL following contact with customers regarding possible concessions, review of the existing judgment perimeter and categorisation of sectors as “Low, Medium or High Risk” based on the Standard Industrial Classification (SIC) codes for 31 December 2020 reporting. For further details, see “Risk review - Credit risk”.
The assumptions and economic forecasts used in these scenarios, and the weights applied to them, may need to be reviewed further if the Covid-19 pandemic worsens and depending on the effects of further impacts on the global economy, international markets and in relation to specific business sectors, which may suffer worse losses than others or have a much slower recovery. The impact of the outbreak on the long-term prospects of businesses in these sectors is expected to be material and may lead to significant ECL charges on specific exposures, which may not be fully captured by ECL modelling techniques. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and so they may be subject to errors affecting the accuracy of their outputs and/or misused. This may be exacerbated when dealing with unprecedented scenarios, due to the lack of historical reference points and data. In the case of Covid-19, there are no precedents to model and forecast the effects of the pandemic and the related containment measures and financial support schemes in the medium and long term.
A recessionary economic environment could also lead to rating downgrades affecting the UK, Santander UK or its customers, investments and/or instruments, causing capital impacts due to increased RWAs, an increase in the volatility of wholesale markets and the cost of funding.
The UK’s withdrawal from the European Union (Brexit) 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 establishedand a transition period until 31 December 2020, during which the UK continued to be treated as an EU member state and applicable EU legislation continued to be in force (the Transition Period). Alimited trade deal was agreed between the UK and the EU prior towith the end of the Transition Period and therelevant new regulations camecoming into force on 1 January 2021.
The trade deal, however, diddoes not include agreements on certain areas such as financial services and data adequacy, althoughadequacy. As a further transitional period has been agreed with respect to rules on the transfer of personal data between the EU and the UK until the end of June 2021. Without equivalence decisions or other agreements that provide market access on a stable and wide-spread basis,result, Santander UK has, and will continue to have, a limited ability to provide cross-border services to EU customers and to trade with EU counterparties. It is uncertain whether equivalence decisions will be granted or whether a trade agreement with respect to financial services between the EUThe wider and the UK will be reached. The impact of any such trade agreement, equivalence decisions or any other cooperation mechanisms on financial markets generally, the extent of legislative and regulatory convergence and regulatory cooperation that would be required between the UK and the EU member states, as well as the level of access that may be granted to financial services firms across EU and UK markets is uncertain. The widercontinuing impact of Brexit on financial markets through market fragmentation, reduced access to finance and funding, and a lack of access to certain financial market infrastructure, may affect Santander UK's operations, financial condition and prospects and those of its customers and clients.customers.
Uncertainty remainsResidual risks remain around the effect ofimpact on the current trade deal onUK’s economy. Brexit has contributed to global pandemic-related supply and labour market constraints and reduced economic growth in the UK given that it does not address financial servicesoutput and around the effect of the additional non-tariff trade barriers imposed on products. It is likely that growth will initially be disruptedexports as businesses attempt to adapt to the new cross-border procedures and rules applicable in the UK and in the EU to their activities, products, customers and suppliers.
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While the longer term effects of the UK’s withdrawal from the EU are difficult to predict,assess, this has also been hampered by overlay of and development of economic risks from the Covid-19 pandemic and the Russian invasion of Ukraine. Further, there is ongoing political and economic uncertainty, which is likely to continue in the medium term and which could negatively affect Santander UK's customers and clients and counterparties.
There are also other potential longer term impacts resulting from Brexit which could impact the UK economy and Santander UK's business such as increased calls forfriction with the EU and EU countries, and the possibility of a second referendum on Scottish independence from the UK, which could negatively affect Santander UK’s customers and instability in Northern Ireland, if the current arrangements regarding the borders between the Republic of Ireland, Northern Irelandcounterparties and Great Britain are called into further question.
If one or more of these risks were to materialise it could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK faces risks from the impact of climate change, which could materially affect Santander UK’s business operations, reputation, clients and customers, as well as the creditworthiness of its counterparties
Climate risk is a risk that manifests through other principal risks, primarily enterprise risk, credit risk and operational risk. Climate change could expose Santander UK to financial risk either through its physical (e.g., climate or weather-related events) or transitional (e.g., changes in climate policy or in the regulation of financial institutions and corporates with respect to climate change risks) effects. Transition risks could be further accelerated by the occurrence of changes in the physical climate.
Physical risks from climate change arise from climate and weather-related events, such as heatwaves, droughts, floods, landslides, storms, sea level rise, coastal erosion and subsidence. These risks could impact our customers in the form of lower revenues due to transport problems, supply chain disruption and other impacts that strain production and lower revenues and higher costs for our customers owing to workers’ health, safety, absenteeism and other workforce-related problems. These risks could also lead to damage to our customers’ property or operations, which could impair asset values and the creditworthiness of customers leading to increased default rates, delinquencies, write-offs and impairment charges in Santander UK’s portfolios. In addition, Santander UK’s premises and resilience may also suffer physical damage due to weather-related events leading to increased costs for Santander UK.
Transition risks arise from the process of adjustment towards a low-carbon economy. Santander UK may face significant and rapid developments in stakeholder expectations, policy, law and regulation which could impact the lending activities Santander UK undertakes, as well as the risks associated with its lending portfolios, and the value of Santander UK’s financial assets. Reputation risk could arise from a failure to meet changing societal, investor or regulatory demands.
Banco Santander S.A. is a founding member of the UN-convened Net Zero Banking Alliance committing Santander UK Group Holdings plc to set and disclose decarbonisation targets for most greenhouse gas intensive sectors and to becoming a net zero bank by 2050. As such, Santander UK Group Holdings plc is implementing and reporting at a group level (including Santander UK plc) against the TCFD recommendations and has disclosed targets to manage climate-related risks and opportunities, however, we do not believe our climate-related disclosure is fully aligned with the TCFD recommendations yet. In order to fulfil these ambitions and reach the relevant targets or any other climate related ambitions or targets Santander UK may commit to in future, Santander UK will need to incorporate climate considerations into its strategy, business model, the products and services it provides to customers and its financial and non-financial risk management processes (including processes to measure and manage the various financial and non-financial risks Santander UK faces as a result of climate change). Failure to adequately embed risks associated with climate change into its risk framework to appropriately measure, manage and disclose the various financial and operational risks it faces as a result of climate change, or failure to adapt Santander UK’s strategy and business model to the changing regulatory requirements and market expectations on a timely basis, may have a material and adverse impact on Santander UK’s level of business growth, competitiveness, profitability, capital requirements, cost of funding, and financial condition. Achieving Santander UK’s climate-related ambitions and targets will also depend on a number of factors outside its control, including (among other things) availability of data to measure and assess the climate impact on Santander UK’s customers, advancements of low-carbon transition technologies and public policies to support the energy transition in the markets where Santander UK operates. If these external factors and other changes do not occur, or do not occur on a timely basis, Santander UK may fail to achieve its climate-related ambitions and targets and this could have a material adverse effect on Santander UK’s business growth, competitiveness, profitability, financial condition and reputation. In 2023, we will continue to work on assessing our financed emissions and establishing interim targets. We will consider key enablers, including government policy as well as our own actions to accelerate the decarbonisation.
For further details on Santander UK’s approach to climate change see “Sustainability & Responsible Banking – Taskforce on Climate-related Financial Disclosures (TCFD)" in the Santander UK Group Holdings plc Annual Report on Form 20-F.
Business model risks
Santander UK is exposed to competition from other financial institutions, including new entrants into the financial services sector
The markets for UK financial services are very competitive and Santander UK has seen strong competition from incumbent banks, building societies and large building societies.other established financial service providers. In addition, Santander UK faces competition from a number of new entrants, non-banks and other providers. providers, including technology companies and large retail companies with strong brand recognition.
The UK government and regulators are actively supporting the emergence of new entrants into the UK financial services market. The internet and mobile technologies are also changing customer behaviour and the competitive environment. There has been a steep rise in customer use of mobile banking in recent years and we expectthe Covid-19 pandemic accelerated the strong trends towards customer digital adoption to have been further accelerated during the Covid-19 crisis.adoption. Santander UK is investing in a multi-year transformation programme, including digitalisation of channels and services and automation of physical channels, to both meet customer preferences and protect its competitive position. There can be no assurance that the transformation programme will deliver the benefits sought from it. Santander UK faces competition from established providers of financial services as well as from banking business developed by non-financial companies, including technology companies and large retail companies with strong brand recognition.
Management expects such competition to continue or intensify as a result of customer behaviour and trends, technological changes, competitor behaviour, the growth in digital banking, new lending models and changes in regulation (including the recent introduction of Open Banking and changes arising from PSD2)the Payment Services Directive (PSD2)). As a result of any restructuring or evolution in the market, there may emerge one or more new viable competitors in the UK banking market or a 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 competition-related factors or a combination thereof could result in a significant reduction in the profit 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
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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 its operations, financial condition and prospects.
The rising rate environment and cost of living crisis may result in competitors reacting quite differently in relation to, amongst other factors, loan pricing, availability, deposit pricing, investment decisions. This has already had, and will continue to have, an impact on the competitive environment and future decisions of Santander UK.
Santander 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 operations and its profitability depends, in part, on the success of new products and services it offers to customers and the way in which it offers and provides itits products and services. The increasing availability of a wide range of digital or online products and services for customers requires banks like Santander UK to enhance their offerings in order to retain and attract customers. However, Santander UK cannot guarantee that its new products and services or the way in which it offers or provides its 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, andunattractive. 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 ability of a borrower or issuer to payprepay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of Santander UK’s earning assets and could have a material adverse effect on Santander 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 inwith Santander UK’s funding obligations and reinvestment at lower yields. The risk of prepayment and its impact on Santander UK's 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.
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 SAS.A. (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 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, loss or compromise of customer data, 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 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.
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
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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.
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. | | | | | | | | | | | | | | |
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Capital and liquidity risk
Santander UK is subject to regulatory capital, liquidity and leverage requirements that could limit 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 retained EU law and as adopted by the PRA.Prudential Regulation Authority (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 (leverage) 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 UKUK's existing capital instruments (potentially including Santander UK’s debt securities) to be subjected to bail-in or write down (for more information, see the risk factor entitled ‘Santander UK may become subject to the provisions of the Banking Act 2009 (the Banking Act), including bail-in and write down powers’).
The EU 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 has been amended through a series of EU regulations, including the Capital Requirements Regulation 2 (CRR 2) and the CRD IV Directive amended by the Capital Requirements Directive V (CRD V Directive). The European Union (Withdrawal) Act 2018 converted the directly applicable elements of CRD IV into UK law on 31 December 2020 and preserved existing UK law implementing the CRD IV directive. Certain elements of the CRR which were ‘onshored’ in this way have now been transposed into the PRA rules.
In implementing CRD IV and the revised versions of 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 (the most recent exercise undertaken)undertaken to set UK bank capital buffers) 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 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 is also required to maintain available stable funding equal to at least 100% of its required stable funding (the net stable funding ratio (NSFR)). 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 requirerequires UK globally systemically important banks (G-SIBs) and Ring Fenced Bodies to hold enough CET1 capital to meet an additional leverage ratio buffer of 35% of the institution-specific G-SIB buffer rate or Other Systemically Important Institutions (O-SII) Bufferbuffer rate following the implementation of the CRD V Directive on 28 December 2020 (previously the Systemic Risk Buffer rate) and for consolidated groups which include a Ring Fenced Body (as defined in the Financial Services and Markets Act 2000 (FSMA) to hold enough CET1 capital to meet the Additional Leverage Ratio Buffer (ALRB). 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 BoE is required to set the Minimum Requirement for Eligible Liabilities (MREL) for all institutions. The BoE expectsrequired most banks, since 1 January 2022, to complybe in compliance with the end-state MREL requirements, by 1 January 2022.which Santander UK plc and Santander UK Group Holdings plc are.
The UK implementation of the elements of CRR2 that are not currently in force, which include revisions to the leverage ratio, counterparty risk capital requirements
Regulators and the net stable funding ratio (NSFR), is currently expected to be on 1 January 2022.
In addition to the above, regulatorslegislators in the UK and worldwide have produced a range of proposals for future legislative and regulatory changesreform which could force Santander UK to comply with certain operational restrictions or take steps to raise further capitalor could increase Santander UK’s expenses and could
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therefore 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 UK's implementation of the remaining Basel III standards. The Basel Committee on Banking Supervision has approved a series of significant changes to the Basel regulatory capital and liquidity framework subsequent to Basel III from 7 December 2017, colloquially known as Basel IV or Basel 3.1, including additional capital requirements, higher capital ratios, more stringent eligibility requirements for capital instruments, a new leverage ratio and liquidity requirements. On 30 November 2022, the PRA published a consultation paper (CP) 16/22 on the implementation of the Basel IV standards (which the PRA refers to as Basel 3.1) in the UK (closing on 31 March 2023). This would revise the CRD IV framework already implemented in the UK and would have consequential impacts on the UK implementation of the Basel Committee’s new market risk framework, which reflects rules madeleverage ratio, and elements of the liquidity and large exposures frameworks. The PRA has proposed a five-year transitional period for implementation that will become effective on 1 January 2025. CRD IV requirements adopted in the UK may change further, including as a result of policy developments associated with the Basel Committee’s fundamental reviewmigration of the trading book. In addition, in December 2017 the Basel Committee published their finalisation of the Basel IIICRD IV framework with proposed implementation from 1 January 2022. This includes the following elements:
–Revisionsinto domestic regulatory rules, as well as changes to the standardised approach for credit risk, credit valuation adjustment riskway in which the PRA continues to interpret and operational riskapply these requirements to address certain weaknesses identified by the Basel CommitteeUK banks (including as regards individual model approvals or otherwise).
–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 Basel Committee delayed the proposed implementation date of these revised rules to 1 January 2023. 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, or other discretionary payments on its capital instruments, 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, any 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.
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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 includingsuch as over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While Santander UK performs comprehensive internal stress testing in order to ensure that it maintains funding profiles and holds a liquid asset buffer and implements liquidity management processesin order to seek to mitigate and control these risks, in particular,manage this risk. However, 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. Extremereoccur or that they will occur in the same way, but past experience and comprehensive stress testing regimes help Santander UK to consider and manage the potential impacts on its liquidity position. Liquidity constraints may affect Santander UK’s operations and its ability to fulfilmeet regulatory liquidity requirements as well asor may 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 fundsit and in the banking system could threaten the stability of the banking system, and leadaddition to increased funding costs, may result in a reductionshortening 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.it raises.
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 arecan be market-driven or idiosyncratic in nature and may be influenced by market perceptions of its creditworthiness.creditworthiness rather than any underlying change in Santander UK’s financial position. Changes to interest rates and Santander UK’s credit spreads occur continuously and may be unpredictable and highly volatile. Market predictions of future central bank policy rate paths may impact Santander UK’s cost of funding, even if central bank actions do not ultimately follow market predictions.
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 persistenceprices or worsening of these adverse market conditions, significant increases in capital markets funding costs or deposit rates could have a material adverse effect onto reduce growth plans. Santander UK’s interest margins, its cost of funding access to liquiditymight also be impacted by increased competition for retail and its profitability and therefore on its operations, financial condition and prospects.corporate deposits.
In recent years Santander UK has also made use of central bank funding schemes such asresponse to the BoE's Term Funding Scheme andCovid-19 pandemic, the BoE introduced the Term Funding Scheme with additional incentives for Small and Medium-Sized Enterprises (TFSME). AsSantander UK has begun repaying drawings ahead of the 2025 contractual maturities and as at 31 December 2020,2022, Santander UK had drawn £6.3bn£25bn of cash underdrawings outstanding having repaid £7bn in the Term Funding Scheme and a further £11.7bnfourth quarter of cash under the TFSME.
More recently, in response to the Covid-19 pandemic, the BoE introduced the TFSME, with similar terms to its previous Term Funding scheme. Santander UK has utilised this scheme as appropriate to mitigate and pre-empt funding risks that may arise as a result of the global pandemic. 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.2022.
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. The on-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 and 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.funds or, if launched, central bank digital currency. 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
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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. This might increase Santander UK’s requirements for wholesale funding or require the execution of contingent options to raise additional liquidity, including the potential curtailing of growth plans.
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, a 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 resultseffects 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 2020,2022, 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£1.4bn of cash and collateral. A hypothetical two notch downgrade would result in a further outflow of £1.9bn£0.7bn of cash and collateral at 31 December 2020. These potential outflows are captured under2022. Under the LCR regime.we hold sufficient liquidity to cover these potential outflows. 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.
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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’sUK 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 schemesscheme established under trust. Santander UK plc is the principal employer under the majority of these schemes,this scheme, but it has only limited control over the rate at which it pays into such schemes.the scheme. 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,scheme, 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, amongst other things, 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.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. Inflation in particular poses a significant risk to the pension fund as liabilities would be adversely impacted by an increase in long-term inflation. 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 trusteestrustee of the defined benefit pension schemes areis obliged to consult with Santander UK before changing the pension schemes’ investment strategy, the trustees havetrustee has the final say and the ultimate responsibility for investment strategy rests with them.
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the trustee.Changes in UK legislation and regulation through the Pension Schemes Act 2021 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. ChangesThese 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.
The defined benefit schemes havescheme has material investments in illiquid assets consisting primarily of unlisted credit, private equity and property. The value of these investments can only be known when they are realised. The value in the accounts is an estimate of the fair value of these investments but the final realised value could be materially different and if less than the value used in the accounts could result in Santander UK having to make increased contributions to reduce or satisfy resulting deficits which as above would also divert resources from use in other areas of the 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, credit spreads, 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 UKUK's 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, inflation, monetary policies, domestic and international economic and political conditions and other factors.conditions. 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
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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, and following on from the BoE base rate cut to 0.1% in March 2020, the rates on many of Santander UK’s interest-bearing deposit products have been priced at or near zero. This may limit Santander UK’s ability to further reduce customer rates in the event of further cuts in BoE base rate putting pressure on Santander UK's margins and profitability. 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
The current expectation is that GBP, EUR, JPY and CHF LIBOR, as well as one-week and two-month USD LIBOR, will generally cease to be available for use after 31 December 2021, and that other USD LIBOR tenors will similarly cease after 30 June 2023. It is not yet clear whether a form of synthetic LIBOR (in respect of any of the aforementioned currencies) will be published for limited use in what may be defined as “tough legacy” transactions. The interaction of different legal initiatives in several jurisdictions may cause some interpretative ambiguities and conflicts of law, and the lack of a legal or regulatory framework in the UK for the automatic transition of legacy contracts makes such transition more complex and subject to a range of risks (including legal, litigation, conduct, system, model and reputational risks) that could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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.
Although it is expected that GBP LIBOR will be declared non-representative before the end of 2021, it is not yet clear when this will occur, or when other currency LIBOR rates and their different tenors will cease to exist, or whether a form of synthetic LIBOR will be published for limited use in what may be defined as “tough legacy” transactions. The interaction of different legal initiatives in several jurisdictions may cause some interpretative ambiguities and conflicts of law, and the lack of a legal or regulatory framework in the UK for the automatic transition of legacy contracts and agreements makes such transition more complex and subject to a range of risks (including legal, litigation, conduct, system, model and reputational risks) that could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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 2020, Santander estimates the notional value of its contracts referencing post-2021 LIBOR benchmarks to be £81.1bn. 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
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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 changes in positions recorded at fair value 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 market changes. A widening of market credit spreads, reflecting the prevailing market conditions would negatively impact asset valuations in future periods and may result in negative changes in the fair values of Santander UK's financial assets. A tightening of Santander UK’s own credit spreads would increase the magnitude of liabilities, thereby reducing net assets.
In addition, the value ultimately realised by Santander UK on disposal of assets and liabilities recorded at fair value may be lower than their current fair value; for example, 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.
Santander UK is also exposed to changes in the market value of credit and funding spreads for the valuation of certain derivative contracts, the estimated value of which is negatively exposed to increases in the Credit Valuation Adjustment (CVA) spread and the Funding Fair Valuation Adjustment (FFVA)(FVA) spread over the lifetime of the transaction.
Any of these factors could require Santander UK to record negative changes in fair value which could have a material adverse effect on its operations, financial condition and prospects.
Santander UK is also exposed to changes in UK residential house price index levels, future index growth assumptions and house price index volatility. These impact the valuations of the portfolios of home reversion plans, lifetime mortgages and associated hedges held by Santander UK. In addition, the home reversion assets and mortgages are exposed to any changes in underlying mortality assumptions as maturity dates on these are not fixed and are driven by the vacation of the underlying property on a permanent basis by the plan holder. Specific property risk exists for each individual asset versus the indexed growth assumption at the point of maturity. Lifetime mortgages additionally have prepayment risk which is managed via a FVA based on historic data.
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 Governmentgovernment largely for liquidity management purposes. At 31 December 2020,2022, approximately 10%4% of Santander UK’s total assets and 10%3% of Santander UK’s securities portfolio were comprised of debt securities issued by the UK Government.government. Any failure by the UK Governmentgovernment 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.
Santander UK is exposed to risks relating to the integrity and continued existence of reference rates
As previously announced by the Financial Conduct Authority (FCA), all sterling, euro, Swiss franc and Japanese yen LIBOR settings, and the 1-week and 2-month USD LIBOR settings, ceased to be published based on panel bank submissions after 31 December 2021, and the remaining USD LIBOR settings (i.e., overnight, 1-month, 3-month, 6-month and 12-month) will either cease to be published or cease to be representative immediately after 30 June 2023. In September 2021, the FCA announced that it would compel the continued publication of the 1-, 3- and 6-month sterling (and Japanese yen) LIBOR settings after end-2021, using a ‘synthetic’ methodology for a limited time. The FCA announced subsequently that the 1- and 6-month sterling LIBOR 'synthetic' settings “will permanently cease immediately after final publication on 31 March 2023”, and in November 2022, the FCA announced that the 3-month sterling LIBOR 'synthetic' setting would cease to be published after 31 March 2024.
During 2021, Santander UK – along with its customers and counterparties – agreed the transition to alternative reference rates for the majority of agreements referencing the LIBOR settings that ceased at the end of 2021. The number of un-transitioned agreements referencing ‘synthetic’ LIBOR settings has continued to reduce in 2022, with the transition of additional agreements being agreed during the year. Santander UK is also continuing to finalise the transition of agreements referencing continuing USD LIBOR settings.
The transition of LIBOR based agreements has been complex and involved a range of risks (including legal, conduct, system, model, accounting and reputational risks). Changes to, or the replacement of, benchmarks may cause contracts in which they are used to perform differently than in the past or may have other consequential effects. In particular, the transition of contracts from GBP LIBOR to an alternative reference rate (such as SONIA or the BoE base rate) has typically involved an adjustment to the terms of financial contracts to which Santander UK is a party. Whilst Santander UK, and its customers and counterparties, have agreed on the transition for most impacted agreements and Santander UK has taken steps to manage the risks outlined, there can be no assurance that these risks will not crystallise. This could have adverse effects on Santander UK’s operations, financial condition, and prospects.
Credit risks
If the level of non-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 reported non-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
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deterioration in the UK or global economic conditions (including without limitation, rising interest rates), the impact of political events, events affecting certain industries or events affecting financial markets and global economies. Broader inflationary pressures that impact a customer's ability to service debt payments could also lead to increased arrears in both unsecured and secured products.
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 borrowersborrowers' required monthly payments may result in higher delinquency rates and losses related to non-performing loans in the future.going forward. 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 of non-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 its non-performing or poor credit quality loans, this could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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 80.7%85% of Santander UK’s loan portfolio at 31 December 2020.2022. As a result, Santander UK is highly exposed to developments in the residential property market in the UK.
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House price growth strengthened overwas strong in the secondfirst half of 2020 as2022 with demand for housing also strong. However, in Q3 and Q4 prices started to fall and there remains a result of pent up demand during the first Covid-19 lockdown in the UK together with the stimulus provided by temporary changes in stamp duty; however, there is a high level of uncertainty in the outlook for house prices in 2021 as these effects subside and whether further stimulus measures may be introduced.for 2023. The depth of the previous house price declines as well as the continuing uncertainty as to the extent and sustainability of the UK economic downturn and 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 sufficiently up-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 and regulatory risks
Santander UK is subject to substantial and evolving regulation and governmental oversight
As a financial services group, Santander UK is subject to extensive financial services laws, regulations, administrative actions and policies in the UK, and in each other location in which Santander UK operates. For a discussion of the principal laws and regulations to which Santander UK is subject, see “Regulation'Regulation of the Santander UK group”group'. The sector is facingcontinues to face 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 otherwise assure the stability and operational resilience of institutions under their supervision), enhance consumer protection, address climate change risks, the risk of greenwashing and environmental, social and governance risks generally, 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 KingdomUK by the Prudential RegulationPRA, the FCA, the Competition and Markets Authority (PRA), the Lending Standards Board (LSB), Financial Conduct Authority (FCA)(CMA), the Payment Systems Regulator (PSR), the Information Commissioner’s Office (ICO) and the Competition and Markets Authority (CMA)Lending Standards Board (LSB).
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), are beyond Santander UK’s control and could materially affect Santander UK’s business.
Changes in UK legislation and regulation applicable to address the stability of the financial sector may also affect Santander UK’s competitive position, particularly if such changes are implemented before international consensus is reached on key issues affecting the industry.
To the extent these laws, regulations and policies apply to it, Santander UK may face higher compliance costs. Santander UK may lackcosts and the need to carefully manage 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 such laws, regulations and policies 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 andand/or result in enforcement action
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(including the imposition of financial and other penalties.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 otherwise have a material adverse effect on its 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 ReformReform: : 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 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. 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)government) to require the sale of a Santander ring-fenced bank or other parts of the UK group. Following HM Treasury’s publication of the final report of the Independent Panel on Ring-Fencing and Proprietary Trading on 15 March 2022, HM Treasury announced its intention to consult on certain limited reforms to the ring-fencing regime during 2023, alongside broader proposals to raise the threshold above which ring-fencing requirements apply from £25bn to £35bn of retail deposits, and to align the ring-fencing regime with the UK resolution regime. These consultations may result in future changes to the regime or lead to further review or amendment of Santander UK’s operational and compliance arrangements in relation to the regime.
–CompetitionCompetition:: Reviews and investigations by competition authorities (which in the United KingdomUK 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.
–PaymentsPayments: : Santander UK has been required to make systems changes and update processes to comply with a number of new payment 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’scustomers' manipulation into making payments known as “Authorised'Authorised Push Payment”Payment' fraud). Under these standards, Santander UK assumes 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. Santander UK also expects to see significant developments in the key UK payment systems architecture - with systems update of the high value CHAPSClearing House Automated Payment System (CHAPS) system through the Real Time Gross Settlement (RTGS) renewal as well as the “New'New Payments Architecture”Architecture' for faster payments, BACS and the other lower value retail payment schemes. The Covid-19 pandemic has also acceleratedTransitioning to the existing trend of declining use of cash. Combined‘New Payments Architecture’ will generate short-term challenges, including in successfully adopting the ISO20022 messaging standard while ensuring payment message completeness in alignment with existing overcapacity, this has led the industry to consider the creation of a single “Cash Utility” which would manage the operation of all cash processing infrastructure within the UK. The Second Payment Services Directive (PSD2)regulatory requirements. PSD2 has been implemented withinand transposed into UK legislation in the UKPayment Services Regulations 2017 and the UK continues to build upon the requirements within the EBA Regulatory Technical Standards via the Open Banking API industry standard and build. Open Banking and PSD2 both have shown that they 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. Santander UK has also adapted
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systems and pricing to comply with other European regulations - including the Second Cross Border Payments Regulation which has required Santander UK to reduce prices for the majority of EEA currency payments in line with the price of their domestic equivalents
–Data PrivacyPrivacy: : Failure to comply with emerging and recently implementedcurrent laws and regulations concerning data privacy and localisation in a number of jurisdictions across the globe may result in regulatory sanctions. In particular, the General Data Protection Regulation (EU) 2016/679 (GDPR), including the GDPR has introduced newas it forms part of UK domestic law by virtue of the EUWA (UK GDPR), and the Data Protection Act 2018 (DPA) imposes obligations on data controllers and rights for data subjects. The implementation of the UK GDPR and DPA 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 theUK 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. The Data Protection and Digital Information Bill was introduced on 18 July 2022 and is currently progressing through the various stages of the parliamentary process. Some proposed reforms, such as the requirement to implement a privacy management programme may result in a further increase in compliance and operational costs, if implemented. The proposed changes may also pose a risk to the EU Commission’s adequacy finding in respect of the UK, as the UK’s data protection laws may no longer be considered to be essentially equivalent to those of the EU, which would impact data flows from the EU to the UK.
–LIBORElectronic Marketing: :For the purposes of the Privacy and Electronic Communications Regulations 2003 (PECR), Santander UK relies on legitimate interests and not consent as a lawful basis for its marketing activity (an opt-out model, rather than an opt-in model). This model limits Santander UK to marketing its own similar products and services only to its own customers who have not opted out of marketing. This model therefore prevents the marketing by Santander UK of Santander group companies’ products and services by electronic means. This may put Santander UK at a competitive disadvantage. It is expected that GBP LIBOR will be declared non-representative before the end of 2021, although it is not yet clear when this will occur, and LIBOR for other currencies is likelyproposed to be published for some time but also likelymove from a legitimate interests to ceasea consent model in the near future. There is no legal or regulatory framework for the automatic transition of legacy contracts and agreements, the transition away from LIBOR requires a multiyear bank wide programme and the operational,will be legal and regulatory risks involved in such complexassociated with this transition, could have a material adverse effect on Santander UK's operations, financial condition and prospects.as well as systems updates costs to operationalise.
–InsolvencyConsumer Duty:: In response to a requirement introduced into the FSMA, the FCA has published final rules and guidance on a broad consumer duty that firms undertaking regulated activities with retail clients should observe (the Consumer Duty). The Consumer Duty has three elements: A consumer Principle that provides a high-level expectation of conduct, a set of overarching Cross-cutting Rules which develop and amplify the standards of conduct that the FCA expects under the consumer Principle and a suite of rules and guidance setting more detailed expectations for a firm's conduct according to the four specific outcomes that represent the key elements of the firm and its consumer relationships (products and services, price and value, consumer understanding and consumer support). The Consumer Duty also includes requirements for firms to end unfair charges and fees, make it as easy to switch or cancel products as it was to take them out in the first place, provide helpful and accessible customer support, act quickly to respond to customer queries, provide timely, clear and easily understandable information to customers regarding products and services, provide products and services that are appropriate for their customers, and focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction. Firms will also need to monitor, evidence and report against many of the requirements. Final rules and guidance were published on 27 July 2022 and firms will have until 31 July 2023 to implement its requirements. For closed products or services, the FCA rules come into force on 31 July 2024. The Consumer Duty requires a review of, and changes to, Santander UK’s products, services, policies, systems and procedures against the FCA requirements. The Consumer Duty will affect elements of Santander UK’s business model and strategy, the products and services it offers and the pricing or costs of those products and services, which may in turn affect the revenue and profits that Santander UK is able to generate. It may result in an increase in civil litigation or claims to the Financial Ombudsman Service by customers alleging a breach of the Consumer Duty or in regulatory action by the FCA.
–Insolvency: Changes to the UK corporate insolvency regime were introduced through the Corporate Insolvency and Governance Act 2020, including a pre-insolvency moratorium process for corporates in financial difficulty to give a period of time to seek a rescue or restructure and a new restructuring plan insolvency procedure to enable debt restructures. The Finance Act 2020 re-established certain tax debts owed by corporates as secondary preferential debts, ranking ahead of debts owed to floating charge holders. The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis MoratoriumMoratorium) (England and Wales) Regulations 2020 will introduce from(Breathing Space Regulations) (which came into force on 4 May 20212021) give eligible individuals in England and Wales the ability for individuals to apply for a breathing space or mental health crisis moratorium during which creditors may not demand payment of interest or fees that accrue or enforce a debt owed by the applicant. It is not yet clear whatThe impact these changes will have in relation to the collection and recovery of loans to retail and corporate customers who are in financial difficulty or default.default continues to evolve.
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–Outsourcing and Third Party Risk Management: In March 2021, the PRA published Supervisory Statement 2/21 on outsourcing and third party risk management (SS2/21). The PRA has stated that SS2/21 should be the primary source of reference for Santander UK when interpreting and complying with its requirements on outsourcing and third-party risk management. SS2/21 should be read alongside the EBA guidelines on outsourcing arrangements, and FCA rules and guidance on outsourcing which remain applicable and effective. A major development is that the scope of contracts which should meet the PRA requirements on outsourcing and third-party risk management has increased beyond that set out in the EBA guidelines on outsourcing. The PRA states that it expects material third-party agreements that are not outsourcing to be subject to controls that are as robust as the controls that would apply to outsourcing arrangements with an equivalent level of materiality. Also in March 2021, the PRA published Supervisory Statement 1/21 (SS1/21) which set out its expectations for the operational resilience of Santander UK’s ‘important business services’. These are services that a PRA regulated firm provides which, if disrupted, could pose a risk to that firm’s safety and soundness or, the financial stability of the UK. Santander UK is required to identify and set impact tolerances for all its important business services which must, in all cases, include a time-based metric to measure the tolerable level of disruption to that important business service. Santander UK must ensure it is able to deliver its important business services within impact tolerances in severe but plausible scenarios. If Santander UK is unable to meet the PRA’s requirements on outsourcing and third-party risk management then it may face supervisory measures, which could in turn have a material adverse effect on Santander UK’s operations, financial condition and prospects.
–Climate Change: The UK government has announced its intention to roll out new sustainability disclosure requirements, which will expand on the those required under the TCFD framework, including transition plans to align to net-zero, as well as a new UK green taxonomy. Santander UK Group Holdings plc is implementing the recommendations of TCFD on a group level: further reporting will require additional gathering of data and operationalisation of reporting and there will be legal, reputational and regulatory risks should Santander UK Group Holdings plc fail to adequately report, or to demonstrate appropriate capabilities to transition and support its customers to transition to a low carbon economy.
–Evolving conductConduct and regulatory policyRegulatory Policy:: The CMA is seeking enhanced consumer protection powers and is considering policy issues that may impact financial services, for example 'loyalty penalties' and the impact of digitalisation on consumer outcomesoutcomes. There is the potential that the CMA and FCA take different stances on certain policy issues in these spheresspheres.
–National Security and Investment Act: The National Security and Investment Act 2021 came into force on 4 January 2022 in the UK, introducing a new national security screening regime with mandatory suspensory notifications required for corporate and financial transactions in certain sectors which meet the prescribed thresholds. The Act also grants the UK Government wide-ranging powers to intervene in transactions on national security grounds, even where the transaction is outside of the scope of the mandatory notification regime. The UK Government can impose heavy criminal and civil penalties under the Act for non-compliance. In the event that the UK Government intervenes in any of Santander UK's transactions and/or imposes any related penalties on Santander UK, this could result in reputational damage and 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 Act, including bail-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 the de-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 (see further ‘Regulation of Santander UK - The Banking Act 2009’), such an order would be based on the principle that any creditors affected by the 'bail-in' order should receive no less favourable treatment than they would have received had the bank entered into insolvency immediately before the coming into effect of the bail-in power. The bail-in power includes the power to cancel or write down (in whole or in part) certain liabilities or to modify the terms of certain contracts for the purposes of reducing or deferring the liabilities of a bank under resolution and the power to convert certain liabilities into shares (or other instruments of ownership) of the bank. The bail-in power under the Banking Act 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, the bail-in power under the Banking Act could be exercised in respect of Santander UK’s debt securities. Public financial support would only be used as a last resort, if at all, after having assessed and utilised, to the maximum extent practicable, the resolution tools including the bail-in tool and the occurrence of circumstances in which bail-in powers would need to be exercised in respect of Santander UK or 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 parent undertaking of a bank to make arrangements to facilitate the exercise of resolution powers, including a power to require a member of a banking group to issue debt instruments. The exercise of such powers could have an impact on the liquidity of Santander UK’s debt instruments and could materially increase Santander UK’s cost of funding.
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, Santander UK is now required to identify such ‘critical functions’ as part of its resolution and recovery planning. If used in respect of Santander UK, these ex ante powers could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK must comply with anti-money laundering, anti-terrorism, anti-bribery and corruption, sanctions and anti-tax evasion laws and regulations and a failure to prevent or detect any illegal or improper activities fully or on a timely basis could have a material adverse effect on Santander UK’s operations, financial condition or prospects
Santander UK is required to comply with applicable anti-money laundering (AML), counter-terrorism financing (CTF), anti-bribery and corruption, sanctions, anti-taxpreventing the facilitation of tax evasion and other laws and regulations in 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 accountcustomer and transaction information is appropriately recorded, monitored and 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. The policies and procedures require the implementation and embedding of effective controls and monitoring within the businesses of Santander UK, which in turn requires ongoing changes to systems, technology and operational activities.
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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,effective controls, 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, detect and disrupt threats and criminality effectively. Even known threats
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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’s staff, whom Santander UK reliesrely heavily on its staffupon to assist Santander UK by identifyingidentify such activities and reportingreport them, and Santander UK’s staff have varying degrees of experience in recognising criminal tactics, making effective, bank-wide mandatory and understandingspecialist training provided by the level of sophistication of criminal organisations. Santander UK Anti-Financial Crime Academy more pertinent.
Where Santander UK outsources any of its customer due diligence, customer screening or anti financialanti-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 this could have a material adverse effect on itsSantander UK's operations, financial condition and prospects.
Over the last decade, AML, CTF, anti-bribery and corruption and sanctions laws and regulations have become, and may continue to become, increasingly complex and detailed. Consequently, 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 enhancedTo manage regulatory supervision, requiringscrutiny, Santander UK requires improved systems, sophisticated monitoring and skilled compliance personnel. TheNavigating the increasing complexity in the area of financial crime policyregulation 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/EU, UK and US in the area of economic sanctions and the evolving financial and trade sanctions is exacerbated byimposed on Russia and Belarus due to the lack of clear guidance from the UK Office of Financial Sanctions Implementation.war in Ukraine, require additional immediate and longer-term sanctions risk management and compliance efforts for Santander UK.
UK AML /and CTF legislation continues to change – most recently(for instance through regular updates to the UK’s list of third countries identified as high-risk countries), recent updates to beneficial ownership discrepancy reporting requirements detailed in September 2020 –the UK’s Money Laundering Regulations, or the recent launch of the Register of Overseas Entities and the associated compliance regime, which can lead to substantial amendments to Santander UK’s AML /and CTF procedures and policies, with additional training and guidance required for employees. Further such amendments will likely be required going forward to reflectWhile legislative changes to UK laws and Government policy post-Brexit. While there arecan offer opportunities to increase effectiveness and efficiency in the overall anti-financial crime system, there are also risks of legislative and regulatory divergence from EU requirements. Significant change 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 werewas found to have materially breached AML, CTF, anti-bribery and corruption, anti-tax evasion or sanctions requirements. Santander UK’s reputation could also suffer if it were unable to protect Santander UK’sits customers or its business from being used by criminals for illegal or improper purposes. Criminal penalties could be imposed upon individuals employed by Santander UK. Any of these outcomes could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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 supported by improved national capabilities to share knowledge on emerging risks and information pre-suspicion are required to help mitigatemanage 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, reliesdepends 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”'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 to tax-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 usSantander UK 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 have given rise and 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 failingfailure to properly 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, combined with the forthcoming regulatory change initiatives, will lead to material operational and compliance costs. Relevant risks include:include:
–Regulators, agencies and authorities with jurisdiction over Santander UK, including the BoE, the PRA and the FCA, HM Treasury, HM Revenue & Customs (HMRC), the CMA, the Information Commissioner’s Office, the Financial Ombudsman Service (FOS), the PSR, the Serious Fraud Office (SFO), the National Crime Agency (NCA), the Office of Financial Sanctions (OFSI) or the Courts,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 small and medium sized enterprise (SME)
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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.
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–The alleged historical or current misselling of, or misconduct in relation to, financial products, such as mortgages, arising from causes such as the alleged overcharging of interest, the alleged inappropriate sale of interest-only mortgages and the alleged unfair use of the standard variable rate and Payment Protection Insurance (PPI), including as a result of having sales practices and/or rewards structures that are deemed to have been inappropriate, has given rise to and may in the future give rise to a risk of civil litigation (including claims management company driven legal campaigns). Such matters may in the future give rise to the risk of regulatory 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.
–Santander UK may have held and may continue to 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 has led and could in the future 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 both follow-on and standalone competition cases.
–The alleged historical or current misselling of, or misconduct in relation to, financial products, including the alleged misselling of Payment Protection Insurance (PPI), the alleged overcharging of interest, the alleged inappropriate sale of interest-only mortgages, the alleged unfair use of the standard variable rate in connection with mortgages, the alleged non-disclosure of commission, including auto finance related commission giving rise to an alleged unfair relationship, or alleged misconduct as a result of having sales practices and/or rewards structures that are deemed to have been inappropriate, has given rise to and may in the future give rise to a risk of complaints to FOS and/or civil litigation (including claims management company driven legal or complaints campaigns)(see Note 31 to the Consolidated Financial Statements for legal actions and regulatory matters). Such matters may in the future give rise to the risk of regulatory 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.
–Santander UK may have held and may continue to hold bank accounts for entities or have relationships with entities such as third parties 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 has led and could in the future lead to Santander UK’s conduct being reviewed as part of any such scrutiny.
–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.matters (see Note 31 to the Consolidated Financial Statements for legal actions and regulatory 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 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, 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 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 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.
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 groupGroup 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. InWhere 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 of non-performing loans and higher losses than expected, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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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
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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. Santander UK must also comply with the requirements under law or regulation in respect of the use of and protection of customer data and must mitigate the risk of any misuse or loss of data owing to failure of a data management process or an employee breach. Financial institutions that fail to comply with in-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. The 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, and continues to be, subject to a range of cyber-attacks, such as malware, phishing and denial of service.
Cyber-attacks could result in 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 Santander UK’s electronic systems used to service its customers. Any material disruption or degradation 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 both 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. This might also include significant increases in the premiums paid on cyber insurance policies or changes to policy limits and cover.
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 to provide digital banking services to its customers, connect its systems to suppliers and counterparties, and allow its staff to work effectively from their homes. 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 potential non-compliance with policies, employee misconduct, human error, negligence and deliberate acts of harm or dishonesty, including fraud
Santander UK is exposed to risk from potential non-compliance with policies, employee misconduct, human error, negligence and deliberate acts of harm or dishonesty, including fraud. It is not always possible to deter or prevent such non-compliance, employee misconduct, human error, negligence or frauderrors, acts, omissions and failures and the precautions Santander UK takes to detect and prevent this activity may not always be effective. Any such mattersinstances could result in regulatory sanctions and cause reputational or financial harm, which couldand therefore 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 customers, businesses and its ability to compete. Investments and improvements in Santander UK’s information technology infrastructure are regularly required in orderreviewed with a view to remain competitive. It cannot be certainretain competitive advantage and to ensure 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 ofresilience remains within acceptable levels. Conversely 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.prospects, and could cause reputational damage to Santander UK.
From time to timetime-to-time Santander UK is required to migrate information relating to 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.
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 programmes of systems change is likely to increase and this will therefore remain an area of key focus in Santander UK’s risk management. While internal controls aim to reduce the risk to acceptable levels, there can be no assurance that Santander UK will not suffer material losses from such operational risks in the future, 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 description of our risk management framework see the ‘Risk review’. While Santander UK employs a broad and diversified set of
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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
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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 UKUK's 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 our third parties and other parties that interact with these providers. As the use and depth of Santander UK’s relationship with these third parties and affiliates increases, including the use of cloud based services, Santander UK increasingly faces the risk of operational failure with respect to its systems. Santander UK may be required to take steps to protect the integrity of its operational systems, thereby increasing its operational costs. In addition, any 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, litigation 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 Santander UK faces as a result of these 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, develop.develop, 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 all 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. In light of a shortage of skills currently being seen across the UK, it is increasingly challenging to recruit and retain talent for all roles, with subject matter expert and customer facing roles offering the biggest challenges.
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 develop, 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 Consolidated Financial StatementsSantander UK's consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting estimatespolicies that affect the reported amounts of assets, and liabilities, at the date of the financial statements and the reported amount of income and expenses duringexpenses. Due to the reporting period. Management evaluates itsinherent uncertainty in making estimates, actual results reported in future periods may be based on amounts which differ from those estimates. Estimates, judgements and accounting estimates, whichassumptions are continually evaluated and are based on historical experience and on various other factors, including expectations of future events that are believed to be reasonable under the circumstances, on an on-going basis. Actual amounts may differ from these accounting estimates under different assumptions or conditions. Revisions to accounting estimates are recognisedcircumstances. There has been no change in the periodinherent sensitivity of the areas of judgement in the period. Management has considered the impact of developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting estimates.
The significant judgements, apart from those involving estimation, made by management in applying Santander UK's accounting policies in these financial statements (key judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year (key estimates), which the estimate is revisedtogether are considered critical to Santander UK's results and in any future periods affected.
As explainedfinancial position, are set out in Note 1 to the Consolidated Financial Statements no significantin 'Critical judgements have been madeand accounting estimates'. Any material differences between estimates and actual results reported in the process of applying Santander UK’s accounting policies, other than those involving estimations about credit impairment losses, conduct remediation, pensions and goodwill impairment. Those accounting estimates, as well as the judgements inherent within them, are considered importantany given financial period, or any material adjustments to the portrayalcarrying amount of the financial resultsassets and financial condition because: (i) they are highly susceptibleliabilities, could result in reputational damage to change from period to period as assumptions are made to calculate the estimates;Santander UK and (ii) any significant difference between the estimated amounts and actual amounts could have a material impactadverse effect on Santander UK’sits future financial results and financial condition.
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 operatingfinancial 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 future financial results and financial condition.
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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 and in each other location in which Santander UK operates. This intensive approach to supervision is maintained in the UK by the PRA and the FCA. As well as being subject to UK regulation, as a result of forming 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. 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.
Approach of the Financial Conduct Authority (FCA)
As per the FSMA (as 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 forprotect consumers from bad conduct, 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 conduct issues with which financial institutions are required to comply including high level principles of business and detailed conduct of business standards and reporting standards.
Regulatory approach of the FCAPRA
As per the Financial Services Act 2012, the PRA has two primary objectives: to promote the safety and soundness of the firms which it regulates and, with respect to insurers, to contribute to the securing of an appropriate degree of protection for policyholders. The PRA has a secondary objective in respect of the promotion of effective competition in the markets for services provided by PRA authorised firms..firms. 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 Rulebook includes regulations and guidance relating to capital adequacy and liquidity, among several other things.
US regulation
Within the Dodd-Frank Act, the so-called Volcker Rule, prohibits ‘banking entities’, including the Santander UK group, from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain exemptions, including exemptions permitting foreign banking entities to engage in trading and fund activities that take place solely outside of the US. The final rules containVolcker Rule also contains 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 permitpermits ownership interests in certain types of funds to be retained. In August 2019, the Federal Reserve and other federal regulators approved certain modifications to the Volcker Rule which included modifications to the scope of restrictions on proprietary trading and investments in covered funds which generally operated to simplify and reduce compliance requirements. The effective date of these amendments is 1 January 2020, with compliance required by 1 January 2021. In June 2020, the same federal regulators approved a final rule that makes significant revisions to the covered fund provisions of the Volcker Rule. These revisions include (i)retained such as new exclusions for credit funds, venture capital funds, family wealth management vehicles and client facilitation vehicles, and an expanded scope for the public welfare fund exclusions; and (ii) revisions to address practical obstacles to reliance on the existing exclusions for loan securitisations, foreign public funds, and small business investment companies. These amendments to the Volcker Rule became effective 1 October 2020.vehicles. The Santander UK group has policies, procedures and controls in place designed to achieve compliance with the Volcker Rule.
The Banking Act 2009
The special resolution regime set out in the Banking Act 2009 provides HM Treasury, the BoE,Bank of England, 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.
The Financial Services (Banking Reform) Act 2013 further amended the Banking Act 2009 to introduce a UK ‘bail-in power’ to implement the EU Bank Recovery and Resolution Directive (BRRD),BRRD, which contains a bail-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 UK bail-in power is an additional power available to the UK resolution authorities under the special resolution regime provided for in the Banking Act 2009. 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 a bail-in compensation order.
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 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 for in-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.
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Payments
Within the UK, the Payment Systems Regulator has mandated that Santander UK builds systems and processes for both Confirmation of Payee as well as the Contingent Reimbursement Model Code (CRM) both of which aim to reduce the level of customer fraud (particularly through our customer's manipulation into making payments known as "Authorised'Authorised Push Payment"Payment' fraud). Under these standards, Santander UK assumes responsibility for certain categories of customer losses, and inherent failings in system design may lead to fines from regulators and/or compensation being paid to customers. Santander UK also expects to see significant developments in the key UK payment systems architecture - with systems update of the high value CHAPS system through Real Time Gross Settlement (RTGS) renewal as well as the "New'New Payments Architecture"Architecture' for faster payments, BACS and the other lower value retail payment schemes. The Covid-19 pandemic has also accelerated the existing trend of declining use of cash. Combined with existing overcapacity, this has led the industry to consider the creation of a single “Cash Utility” which would manage the operation of all cash processing infrastructure within the UK. The Second Payment Services Directive (PSD2) has been implemented within the UK and the UK continues to build upon the requirements within the EBA Regulatory Technical Standards via the Open Banking API industry standard and build. Santander UK has also adapted systems and pricing to comply with other European regulations - including the Second Cross Border Payments Regulation which has required Santander UK to baseline the majority of EEA currency payments against their domestic equivalents in price.
Finally, Santander UK has reviewed its use of European payments systems and processes in light of the end of the UK’s transition period with the EU and has concluded that it can remain within the SEPA Payment Scheme and continue to send SEPA Euro Payments via Madrid to EEA beneficiaries. However, as it is not domiciled in the EU, it has needed to exit the other (high value) Euro payment schemes, being EURO1 and Target 2. It has negotiated new arrangements to access those systems via Madrid and a correspondent banking relationship agreement has been agreed and is operational.
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Financial crime
On 30 May 2018, the Council of EU and the European Parliament amended the Fourth Anti-Money Laundering Directive (the Directive), publishing the amending Directive (EU) No 2018 / 843 (5th AMLD).
The 5th AMLD brought in increased corporate transparency rules, introduced the application of AML rules to firms providing services associated with virtual currencies and further extended enhanced due diligence (EDD) requirements to all transactions with natural persons or legal entities established in third countries identified as high-risk countries (HRTCs) pursuant to Article 9(2) of the Directive.
The UK Governmentgovernment transposed the Directive into UK law on 20 December 2019, amending the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) through the Money Laundering and Terrorist Financing (Amendment) Regulations 20192019. The latter came into effect on 10 January 2020. The Regulations:
–Introduced2020 and, among other changes, introduced a requirement to report beneficial ownership discrepancies to Companies HouseHouse. Further amendments to the MLRs were made by the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020.
–ExtendedOn 26 March 2021, HM Treasury published a new statutory instrument, The Money Laundering and Terrorist Financing (Amendment) (High Risk Countries) Regulations 2021 amending the MLRs by replacing references to the European Commission's list of HRTCs (in respect of which EDD and additional specific EDD measures must be taken under the MLRs) with a UK list identified in a new Schedule 3ZA to the MLRs. This was the first exercise of the powers in section 49 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). The UK list of HRTCs came into force on 26 March 2021 and has since been amended through The Money Laundering and Terrorist Financing (Amendment)(No.2)(High-Risk Countries) Regulations 2021 coming into force on 13 July 2021, The Money Laundering and Terrorist Financing (Amendment) (No. 3) (High-Risk Countries) Regulations 2021 coming into force on 2 November 2021, Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2022 coming into force on 29 March 2022, The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 coming into force on 12 July 2022, and The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022 coming into force on 15 November 2022. These amendments reflect changes to the Financial Action Task Force (FATF) list of jurisdictions under increased monitoring.
In July 2021, the UK government launched two consultations on the MLRs (as amended). The first targeted specific changes to align the UK’s AML/CTF regime with recent amendments to FATF standards and introduce certain technical changes. The second was a 'Call for Evidence' examining the effectiveness and future state of the UK’s AML/CTF regime. Both consultations closed in October 2021. On 24 June 2022, the UK government published a forward-looking review of the UK’s AML/CTF regime in response to the ‘Call for Evidence’ focusing on systemic effectiveness, regulatory effectiveness and supervisory effectiveness. Following the publication of The Money Laundering and Terrorist Financing (Amendment) Regulations 2022 which came into force on 9 March 2022 and served to make certain time-sensitive updates to ensure the UK continues to meet international standards, and , the UK government published The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 in response to their 2021 consultation, coming into force on 1 September with specific measures coming into force on 1 April 2023. These amendments include amongst others, specific obligations in respect of customers residentaddressing Proliferation Financing risk and amendments to beneficial ownership discrepancy reporting regime, including discrepancy reporting obligations in a High-Risk Third Country
–Treated new typesrespect of transactions, such as those relatedthe Register of Overseas Entities introduced by the Economic Crime (Transparency and Enforcement) Act 2022 which was quickly moved through Parliament in light of Russia’s invasion of Ukraine and came into force in 15 March 2022. Additional key changes introduced by the Economic Crime (Transparency and Enforcement) Act 2022 included strengthening aspects of the Unexplained Wealth Orders regime and increasing the speed at which sanctions designations can be made. On 22 September 2022, the UK government introduced the Economic Crime & Corporate Transparency Bill which aims to cultural artefacts or items of archaeological, historical, cultural or religious significance, as potentially high risk.deliver long-awaited reforms to tackle economic crime and improve transparency over corporate entities. It is expected that this Bill gains Royal Assent during 2023.
To ensure regulatory continuity post-Brexit, the government introduced SAMLA to provide a legal framework through which it can impose and update sanctions following the UK's departure from the EU. SAMLA grants the UK Sanctionsgovernment the authority to introduce statutory instruments to enable compliance with United Nations (UN) sanctions and AML Actother international obligations, and to meet defined discretionary purposes such as promoting national and international peace and security. SAMLA broadly mirrors the EU sanctions regime but enables the UK to continueact independently by imposing sanctions regulations swiftly without the need to implement United Nations sanctions regimes following Brexit. The Act also givesreach a consensus with other EU member states. For example, the UK government introduced the abilityGlobal Anti-Corruption Sanctions Regulations 2021 which allow the UK government to impose its own sanctions regime which is likely to followdesignate entities and individuals involved in serious corruption around the approach of the EU but could deviate in some areas.world. Separately, the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2019 were enacted to ensure that the UK’s current AML Regime should continuehas continued to operate effectively oncenow that the UK ceaseshas ceased to be a member of the EU.
The UK has followed EU legislation during the Brexit implementation period, until 31 December 2020, and no immediate divergence is expected either on sanctions or the AML/CTF regime after this date.
The possibility of near-term divergence has also beenfrom EU law was reduced by the FCA's Temporary Transitional Power. Under this, a standstill direction has beenwas issued which stipulatesstipulated that until 31 March 2022 and in terms of certain regulatory obligations, firms cancould continue to comply with the legal framework in place in the UK immediately before 31 December 2020. Financial crime legislation iswas covered by the standstill direction.
As regardsThe US government has continued to actively apply and enforce sanctions the current US administration continues to apply these regularly against individuals, entities and countries. US sanctions are subject to change without warning and may affect Santander UK’s ability to transact with certain individuals and entities and to operate in certain jurisdictions.
The re-introductionUK, EU and US are expected to continue to use sanctions to pursue their foreign policy interests and objectives, and the imposition of primarynew, additional, and/or enhanced sanctions is and secondarywill remain unpredictable. Any changes in UK, EU and/or US sanctions against Iran occurred in November 2018, following the US withdrawal from the Joint Comprehensive Plan of Action. US Sanctions against Iran have since then increased further in some areas. Although Iran announced its intention to no longer abide by the EU nuclear deal the reimposition of comprehensive EU sanctions against Iran has not occurred, but remains a possibility.
could affect Santander UK’s business.
The banking sector in the UK continues to be subject to the Suspicious Activity Reporting (SAR) regime laid out in the Proceeds of Crime Act 2002. The regime is one of the key tools to inform law enforcement agencies and the National Crime AgenciesAgency of suspicious (potentially money laundering)laundering or terrorist financing) activity. In 2018, the UK Governmentgovernment asked the Law Commission to conduct a review of the legislation underpinning the regime. The review was completed in 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 the SARs regime suffers from very large SARsreporting volumes.
The UK’s SARs Reform Programme, which operates within the confines of the Government’sgovernment’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, in 2019 Anti-corruption continues to be a key focus of the UK Parliament’s Treasury Select Committee concluded its inquiry, intoGovernments approach to economic crime. The Economic Crime (Transparency and Enforcement) Act 2022 which came into force on 15 March 2022 contains provisions which will seek to tackle corruption through increased transparency of overseas ownership of UK land and real estate and the strengthening of UWO’s. Anti-corruption remains a topic of global focus, as illustrated by President Biden's ‘Protecting Democracy’ summit in December 2021 during which the US released its first strategy on Countering Corruption and more recently US National Security Advisor Jake Sullivan's speech at the December 2022 International Anti-Corruption Conference (IACC). Sullivan reiterated President Biden and the US administration's commitment to working with the report published in two parts. The first part commented primarily on the fragmented approachother countries to AML supervision in the UK, while the second part focused on the changes required to make banking safer for consumers from a fraud perspective.
In October 2020, the Committee launched a new inquiry to review progress made against both these strands. The inquiry will also focus on recent developments such as the FinCEN paperschampion democracy and trends emerging from the coronavirus crisis.
.fight corruption.
Santander UK Group Holdings plc295
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Annual Report 2022 | Santander UK Group Holdings plc 289 |
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Articles of Association
The following is a summary of the Articles of Association (the Articles) of the Company.
Santander UK Group Holdings plc is a public limited company incorporated and registered in England and Wales under the Companies Act 2006, with registered number 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 has an interest, except if no conflict of interest could reasonably be expected to arise from that interest, or any resolution of the Directors concerning his own appointment, or the settlement or variation of the terms or the termination of his or her appointment. Directors are entitled to such remuneration as the directors determine for their services to the Company as directors and for any other service which they undertake for the Company. Directors may delegate to a person or committee the determination of any fee, remuneration or other benefit which may be paid or provided to any Director. No Director is required to retire by reason of his or her age, nor do any special formalities apply to the appointment or re-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 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 or non-resident shareholders, other than those to which they may be subject as a result of laws and regulations in their home jurisdiction.
296Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 290 |
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Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the Exchange Act), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to the GroupBanco Santander group and its affiliates withinaffiliates. During the Banco Santander group.period covered by this report:
(a) Santander UK holds fiveseven blocked accounts for threefive customers with the first customer holding one GBP Savings Account and one GBP Current Account, the second customer holding one GBP Savings Account, and the third customer holding two GBP Current Accounts. All three customers, who are resident in the UK,that are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions programme. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 20202022 were negligible relative to the overall profits of Banco Santander UK.SA.
(b) Santander UKConsumer Finance, SA holds two frozen currentthrough its Belgian branch seven blocked correspondent accounts for two UK nationals who arean Iranian bank that is currently designated by the US under the SDGT sanctions programme. The accounts held by one customer were fully inaccessible at the time of the US designation; havinghave been blocked at the time of the account going into a debit balance. The accounts held by the second customer were blocked immediately following the US designation and have remained frozen throughout 2020. 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 the Al-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.since 2008. No revenues or profits were generated by Santander UKthe Belgian branch on these accounts in the year ended 31 December 2020.2022.
(c) Santander Consumer Bank, S.A.Brasil holds three blocked USD correspondent accounts and four blocked EUR correspondent accounts for Bank Melli. The accounts have been blocked since 2008. Bank Melli is currentlythree customers with domicile in Brazil designated by the US under the Specially Designated Global Terrorist (SDGT)SDGT sanctions programme. No revenues orRevenues and profits were generated by Santander Consumer Bank, S.A.Brasil on these accounts in the year ended 31 December 2020.2022 were negligible relative to the overall profits of Banco Santander SA.
(d) Santander Consumer Finance, SA also held through its branch in Greece an auto finance loan for a client designated by the US under the SDGT sanctions programme. The relationship was terminated before the year end. Revenues or profits generated by the branch in Greece on this position in the year ended 31 December 2022 were negligible relative to the overall profits of Banco Santander SA.
(e) The Banco Santander group also has certain legacy performance guarantees for the benefit of Bank Mellatan Iranian bank that is currently designated by the US under the SDGT sanctions programme (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to 27 April 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended 31 December 2022 which were negligible relative to the overall revenues and profits of Santander UK and the Banco Santander group in the year ended 31 December 2020.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: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.
Santander UK Group Holdings plc297 | | | | | | | | | | | | | | |
Annual Report 2022 | Santander UK Group Holdings plc 291 |
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Board of Directors
1 William Vereker
Chair
Appointed 1 November 2020 (Chair), previously Independent Non-Executive Director from 1 October 2020.
Skills and experience
William is an experienced and well-respected Banker, previously having served as Global Head of Investment Banking for UBS (2013 – 2018), and prior to that holding a number of leadership roles at Nomura, Lehman Brothers and Morgan Stanley. From 2018 to 2019 he served as the Prime Minister’s Business Envoy. He was a Vice Chairman at JP Morgan until October 2020.
Other principal appointments
Chair of Santander UKplc*. Non-Executive Director to the London Stock Exchange Group Plc. Member of the UK Prime Minister's Investment Council. Member and Special Advisor of Delancey Credit and Income Fund GP – Investment Committee. He sits on the Advisory Board of Celonis GmbH and also chairs the Advisory Board of Gonville & Caius College, Cambridge.
Board Committee memberships
Board Nomination Committee (Chair)
2 Lisa Fretwell
Independent Non-Executive Director
Appointed 1 January 2022
Skills and experience
Lisa has 25 years’ experience within the financial services, technology, retail, and manufacturing industries in both business and consulting roles. She holds a first-class honours degree in Chemical engineering from the University of Birmingham and an MBA from Cranfield Business School. She was awarded Business Leader of the Year by Women in Credit in 2020. Lisa joined Santander from Experian, where she was Managing Director of Experian UK’s Data Business from 2019 - 2021. Prior to this, Lisa held various senior roles at Cisco for over 10 years, including Vice President of Software and Operations and Managing Director of Consulting Services and Internet Business Solutions. Lisa also held roles at Capgemini and Procter & Gamble before joining Cisco.
Other principal appointments
Independent Non-Executive Director of Santander UK plc*. Lisa is a Non-Executive Director at Restore plc since 20 April 2022.
Board Committee memberships
Board Audit Committee, Board Risk Committee, Board Responsible Banking Committee
3 Ed Giera
Independent Non-Executive Director, Senior Independent Director
Ed was appointed Independent Non-Executive Director on 19 August 2015 and Senior Independent Non-Executive Director on 15 October 2020.
Skills and experience
Ed’s executive career was with JP Morgan Securities, the investment banking affiliate of JP Morgan Chase & Co. where he held positions as Global Head of Pension Advisory, Head of Capital Markets for the EMEA region, and other senior roles. Ed is currently a Partner and Manager of Boscobel Place Capital LLC, a private investment partnership focused on the global financial services sector, and Principal of EJ Giera LLC, providing corporate finance advisory and fiduciary services. Ed was formerly a Non-Executive Director at Pension Corporation Group Limited, a holding company for the Pension Insurance Corporation Holdings Limited, where he chaired the Board Audit & Risk Committee. He has also served as a Non-Executive Director for ICBC Standard Bank plc; for the Renshaw Bay Real Estate Fund and Renshaw Bay Structured Finance Opportunity Fund, respectively; and for NovaTech LLC.
Other principal appointments
Independent Non-Executive Director of Santander UK plc*. Non-Executive Director and Chair of the Board Risk Committee of Rothesay Life Plc. Director of Rothesay Limited. Partner of Boscobel Place Capital LLC and RB St. James's Place LP. Founder and Principal of E.J. Giera LLC.
Board Committee memberships
Board Audit Committee, Board Nomination Committee, Board Responsible Banking Committee (Chair), Board Risk Committee (Chair), Board Remuneration Committee.
4 Chris Jones
Independent Non-Executive Director, Whistleblowers' Champion
Appointed 30 March 2015
Skills and experience
Chis is a financial expert with a deep understanding and knowledge of financial services and is an experienced INED. Chris was formerly a partner at PwC from 1989 to 2014, focused on the financial services industry from the mid-1980s 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. Chris is a past president of the Association of Corporate Treasurers and chaired their advisory board from 2010 to 2018. Chris is a fellow of both the Institute of Chartered Accountants in England and Wales and The Association of Corporate Treasurers.
Other principal appointments
Independent Non-Executive Director of Santander UK plc*. Independent Non-Executive Director of Legal & General Investment Management (Holdings) Limited and Legal and General Assurance (Pensions Management) Limited. Audit and Risk Committee member of the Wellcome Trust.
Board Committee memberships
Board Audit Committee (Chair), Board Remuneration Committee (Chair), Board Responsible Banking Committee, Board Risk Committee.
5 António Simões
Banco Santander Nominated Non-Executive Director
Appointed 30 April 2021
Skills and experience
António is currently Head of Europe for Banco Santander. He joined the Banco Santander group in September 2020 as regional head of Europe with managerial responsibility and oversight of the bank’s businesses in Europe with reporting lines from the country heads of Spain, UK, Portugal and Poland. Before joining
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Annual Report 2022 | Santander UK Group Holdings plc 292 |
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Santander, António spent 13 years at HSBC where he led a number of businesses, both in London and Hong Kong. Most recently he was CEO for Global Private Banking and before that António was CEO for the UK and continental Europe. Previously to joining HSBC, he was a partner at McKinsey & Company in their London office and also worked at Goldman Sachs.
Other principal appointments
Non-Executive Director of Santander UK plc*. Trustee for the Prince’s Trust International. Non-Executive Director of Universia España Red de Universidades, S.A. Director of PagoNxT SL (Spain)*.
6 Pamela Walkden
Banco Santander Nominated Non-Executive Director
Appointed 1 October 2021
Skills and experience
Pamela has served in a number of senior management positions predominantly at Standard Chartered Bank, including as Group Head of Human Resources, Chief Risk Officer, Group Treasurer, Group Head of Asset and Liability Management and Regional Markets, Group Head of Internal Audit, Group Head of Corporate Affairs and Group Manager of Investor Relations.
In addition, she served as an independent member of the UK Prudential Regulation Authority (PRA) Regulatory Reform Panel and as a member of the European Banking Authority Stakeholder Group.
Other principal appointments
Non-Executive Director of Santander UK plc* . Independent Non-Executive Director and Chair of the Audit Committee in Banco Santander SA. Member of the Advisory Board at JD Haspel Limited.
Board Committee memberships
Board Risk Committee, Board Nomination Committee
7 Mike Regnier
Executive Director, Chief Executive Officer
Appointed Chief Executive Officer on 1 April 2022.
Skills and experience
Mike joined Santander UK from Yorkshire Building Society (YBS), where he was a Board member since 2014 and Chief Executive since 2017. He previously held the posts of Chief Commercial Officer and Chief Customer Officer. Mike began his career in strategic management consulting with a focus on Retail and Retail Financial Services. After management positions at Asda, he joined the banking sector and held a number of senior positions at Lloyds Banking Group, including Personal Current Accounts and Credit Cards Director, and Products and Marketing Director for TSB.
Mike has served as a Board Director of Visa UK, and Chairman of the merchant acquirer LTSB Cardnet. He was also Chair of the Building Societies Association from 2019 – 2021. Mike holds an MEng in Engineering, Economics & Management from Oxford, together with an MBA from INSEAD.
Other principal appointments
Chief Executive Officer of Santander UK plc*.
8 Madhukar (Duke) Dayal
Executive Director, Chief Financial Officer
Appointed 16 September 2019
Skills and experience
Duke has extensive financial services experience in a wide range of areas. Before joining Santander UK, he worked for Santander US* in Boston as CFO of Santander Holdings* (April 2016 – July 2019) and President and CEO of Santander Bank NA* (September 2017 – July 2019).
Prior to joining Santander, Duke was with BNP Paribas for six years, where he served as Chief Financial Officer for BNP Paribas USA Holdings, BancWest and Bank of the West in San Francisco. Before that he helped lead a private equity start-up for JP Morgan Chase & Co, Brysam Global Partners. Prior to that, he spent eight years with Citi in a variety of business and finance roles in New York, California, South Korea and Brussels.
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 and is on the Board of Governors for Nottingham Trent University.
Other principal appointments
Chief Financial Officer of Santander UK plc*.
* Part of the Banco Santander group.
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Annual Report 2022 | Santander UK Group Holdings plc 293 |
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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 directorsDirectors must comprise a majority of the Board. As at 31 December 2020, 2022, our Board was comprised of a Chair, (who is also a Non-Executive Director), two Executive Directors and fourfive Non-Executive Directors. The Chair, William Vereker, and twothree of the other Non-Executive Directors, (Ed(Lisa Fretwell, Ed Giera and Chris Jones), were independent as defined in the NYSE corporate governance standards. The other two Non-Executive Directors (Ana Botin(Antonio Simoes and Bruce Carnegie-Brown)Pamela Walkden) were not independent according to NYSE corporate governance standards as they are representatives of the ultimate parent company, Banco Santander SA. Lisa Fretwell was appointed as an independent Non-Executive Director, on 1 January 2022.
The NYSE corporate governance standards require that listed US companies have a nominating or corporate governance committee composed entirely of independent directorsDirectors 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 2020,2022, the following Directors made up the Board Nomination Committee: William Vereker (Chair), Bruce Carnegie-BrownEd Giera and Ed Giera. Of thesePamela Walkden. Two of the Directors William Vereker and Ed Giera were independent according to NYSE corporate governance standards. The other Director (Pamela Walkden) was not independent according to NYSE corporate governance standards as she is a representative of the ultimate parent company, Banco Santander SA.
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 advisorsadvisers 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 2020,2022, the following Directors were on the Board Remuneration Committee was made up of twoCommittee: Chris Jones (Chair) and Ed Giera. Both Directors were independent Non-Executive Directors according to NYSE corporate governance standards (Chris Jones and Ed Giera).standards.
The NYSE corporate governance standards require that listed US companies have an audit committee that satisfies the requirements of Rule 10A-3 under the US Securities Exchange Act of 1934, as amended (Rule 10A-3), with a written charter addressing certain corporate governance matters, and having a minimum of three members who are all independent as defined in Rule 10A-3. As a wholly-owned subsidiary of a parent that satisfies the requirements of Rule 10A-3(c)(2), the Company is exempt from the requirements of Rule 10A-3. However, the Company does have a Board Audit Committee. As at 31 December 2020,2022, the Board Audit Committee was made up of twothree Non-Executive Directors: Chris Jones (Chair), Lisa Fretwell and Ed Giera. BothAll members were independent in 20202022 as defined in Rule 10A-3. Whilst the Board Audit Committee is comprised of two members, the NYSE corporate governance standards require a minimum of three members.
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. During the year the Board considered feedback gained from the 20192022 performance evaluations, which concluded that the performance of the Board and its Committees continues to be effective.
A CEO of a US company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate government standards. In accordance with NYSE corporate governance standards applicable to foreign private issuers, our CEO is not required to provide the NYSE with such an annual compliance certification. In addition, as a wholly-owned subsidiary of an NYSE-listed company, the Company is exempt from two NYSE listing standards otherwise applicable to foreign companies listed on the NYSE as well as US companies listed on the NYSE. The first requires the CEO of any NYSE-listed foreign company to notify promptly the NYSE in writing after any executive of the issuer becomes aware of any material non-compliance with any applicable NYSE corporate governance standards. The second requires NYSE-listed foreign companies to submit executed written affirmations annually to the NYSE.
298Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 294 |
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Other information
Designated agent
The designated agent for service of process on Santander UK in the United States is CTC T Corporation System, 111 Eighth Avenue, New York, New York.
Trustee/paying agent
The names and addresses of the Trustee/paying agent for each class of security registered with the US Securities and Exchange Commission (the SEC) are set out below:
–Senior: Wells Fargo Bank, National Association, 150 East 42ndCitibank NA, 388 Greenwich Street, 40th Floor, New York, New York 10017,10013, United States
–Subordinated: Wells Fargo Bank, National Association, 150 East 42ndCitibank NA, 388 Greenwich Street, 40th Floor, New York, New York 10017,10013, United States
–Capital: Wells Fargo Bank National Association, 150 East 42ndof New York Mellon, 240 Greenwich Street, 40th Floor 7E, New York, New York 10017, United States10286
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 SEC, and which may be accessed at the SEC's website. Information on the operation of the public reference rooms can be obtained by calling the SEC on +1-202-551-8090 or by looking at the SEC’s website. The SEC 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 Form 20-F for the year ended 31 December 20202022 (the Form 20-F), including where a link is provided, nor any of the information contained on such websites is incorporated by reference in the Form 20-F.
Legal proceedings
We are party to various legal proceedings in the ordinary course of business. See Notes 29 and 31 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 2020,2022, there have been no material contracts entered into outside the ordinary course of business.
Audit fees
See Note 7 to the Consolidated Financial Statements.
Accounting developments under IFRS
See Note 1 to the Consolidated Financial Statements.
Share capital
Details of the Company’s share capital are set out in the Notes to the Consolidated Financial Statements.
Major shareholders
At 31 December 2022, the Company was a subsidiary of Banco Santander SA and Santusa Holding SL. 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 to non-UK holders of Company shares, except as outlined in the section on Taxation for US Investors below.
Santander UK Group Holdings plc299
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Additional balance sheet analysis
RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET
Except 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:
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| | Securities | Loans and advances to banks | Loans and advances to customers | Other | Balance sheet total |
2020 | Note | £m | £m | £m | £m | £m |
Assets | | | | | | |
Cash and balances at central banks | | — | | — | | — | | 43,537 | | 43,537 | |
Financial assets at fair value through profit or loss: | | | | | | |
– Derivative financial instruments | 11 | — | | — | | — | | 3,451 | | 3,451 | |
– Other financial assets at fair value through profit or loss | 12 | 242 | | — | | 592 | | — | | 834 | |
Financial assets at amortised cost: | | | | | | |
– Loans and advances to customers | 13 | — | | — | | 212,178 | | — | | 212,178 | |
– Loans and advances to banks | | — | | 2,004 | | — | | — | | 2,004 | |
– Reverse repurchase agreements – non trading | 16 | — | | 1,258 | | 18,341 | | — | | 19,599 | |
– Other financial assets at amortised cost | 17 | 1,163 | | — | | — | | — | | 1,163 | |
Financial assets at fair value through other comprehensive income | 18 | 8,929 | | — | | 21 | | — | | 8,950 | |
Interests in other entities | 19 | — | | — | | — | | 172 | | 172 | |
Property, plant and equipment | 21 | — | | — | | — | | 1,740 | | 1,740 | |
Retirement benefit assets | 30 | — | | — | | — | | 496 | | 496 | |
Tax, intangibles and other assets | | — | | — | | — | | 4,940 | | 4,940 | |
| | 10,334 | | 3,262 | | 231,132 | | 54,336 | | 299,064 | |
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| | | Deposits by banks | Deposits by customers | Other | Balance sheet total |
| | | £m | £m | £m | £m |
Liabilities | | | | | | |
Financial liabilities at fair value through profit or loss: | | | | | | |
– Derivative financial instruments | 11 | | — | | — | | 1,920 | | 1,920 | |
– Other financial liabilities at fair value through profit or loss | 22 | | — | | 377 | | 1,057 | | 1,434 | |
Financial liabilities at amortised cost: | | | | | | |
– Deposits by customers | 23 | | — | | 193,088 | | — | | 193,088 | |
– Deposits by banks | 24 | | 20,973 | | — | | — | | 20,973 | |
– Repurchase agreements – non trading | 25 | | 6,358 | | 9,490 | | — | | 15,848 | |
– Debt securities in issue | 26 | | — | | — | | 43,679 | | 43,679 | |
– Subordinated liabilities | 27 | | — | | — | | 2,556 | | 2,556 | |
Retirement benefit obligations | 30 | | — | | — | | 403 | | 403 | |
Tax, other liabilities and provisions | | | — | | — | | 2,918 | | 2,918 | |
| | | 27,331 | | 202,955 | | 52,533 | | 282,819 | |
300Santander UK Group Holdings plc
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| | Securities | Loans and advances to banks | Loans and advances to customers | Other | Balance sheet 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 | 21 | — | | — | | — | | 1,971 | | 1,971 | |
Retirement benefit assets | 30 | — | | — | | — | | 670 | | 670 | |
Tax, intangibles and other assets | | — | | — | | — | | 4,479 | | 4,479 | |
| | 17,180 | | 4,744 | | 229,569 | | 36,995 | | 288,488 | |
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| | | Deposits by banks | Deposits by customers | Other | Balance sheet total |
| | | £m | £m | £m | £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 | 22 | | — | | 609 | | 1,104 | | 1,713 | |
Financial liabilities at amortised cost: | | | | | | |
– Deposits by customers | 23 | | — | | 179,006 | | — | | 179,006 | |
– Deposits by banks | 24 | | 14,359 | | — | | — | | 14,359 | |
– Repurchase agreements – non trading | 25 | | 10,227 | | 8,059 | | — | | 18,286 | |
– Debt securities in issue | 26 | | — | | — | | 50,171 | | 50,171 | |
– Subordinated liabilities | 27 | | — | | — | | 3,528 | | 3,528 | |
Retirement benefit obligations | 30 | | — | | — | | 280 | | 280 | |
Tax, other liabilities and provisions | | | — | | — | | 3,095 | | 3,095 | |
| | | 24,586 | | 187,674 | | 59,887 | | 272,147 | |
Additional balance sheet and cash flow analysis
SECURITIES
Securities are a small proportion of our total assets, held mainly withinclassified in the consolidated balance sheet as other financial assets at fair value through profit or loss, other financial assets at amortised cost orand financial assets at fair value through other comprehensive income.
Analysis by type of issuer
The following table sets out our securities at 31 December 2020, 2019 and 2018. We hold these securities for liquidity purposes. Prior to the implementation of our ring-fence structure, we also held these securities for trading purposes.
For more information, see ‘Country risk exposures’ in the ‘Credit risk’ section of the Risk review.
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| 2020 | 2019 | 2018 |
£m | £m | £m |
UK Government | 1,059 | | 7,474 | | 7,479 | |
US Treasury and other US Government agencies and corporations | 848 | | 853 | | 921 | |
Other OECD governments | 3,323 | | 3,097 | | 4,162 | |
Other issuers: | | | |
- Bank and Building Society Bonds | 3,482 | | 3,852 | | 5,278 | |
- Fixed and floating rate notes - Government guaranteed | — | | — | | — | |
- Mortgage-backed securities | 393 | | 602 | | 3,748 | |
- Other asset-backed securities | — | | — | | 69 | |
- Other securities | 1,099 | | 1,167 | | 2,063 | |
Ordinary shares and similar securities | 130 | | 135 | | 93 | |
| 10,334 | | 17,180 | | 23,813 | |
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Contractual maturities
Debt securities can be analysed by contractual maturity and the related weighted average yield for the year as follows:
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| Not later than 1 year | Later than one year and not later than five years | Later than five years and not later than ten years | Later than ten years | Total |
| £m | £m | £m | £m | £m |
Issued by public bodies: | | | | | |
- UK Government | 11 | | 925 | | — | | 123 | | 1,059 | |
- US Treasury and other US Government agencies and corporations | 19 | | 829 | | — | | — | | 848 | |
- Other OECD Governments | 2,194 | | 951 | | 178 | | — | | 3,323 | |
Other issuers | 458 | | 3,120 | | 491 | | 905 | | 4,974 | |
| 2,682 | | 5,825 | | 669 | | 1,028 | | 10,204 | |
Weighted average yield | 0.62 | % | 1.84 | % | 2.07 | % | 0.93 | % | 1.44 | % |
at amortised cost - Yields
Significant exposures
The following table shows the bookweighted average yields for debt securities not held at fair 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 2020 as set out in the Consolidated Balance Sheet. The table also shows where we classify the securities in the Consolidated Balance Sheet.2022.
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| Financial assets at FVOCI | Other financial assets at amortised cost | Total |
| £m | £m | £m |
UK Government and UK Government guaranteed | 387 | | 672 | | 1,059 | |
Japanese Government | 2,379 | | — | | 2,379 | |
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| 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 |
| % | % | % | % | % |
Weighted average yield | | | | | |
– Debt securities at amortised cost | — | | 4.58 | | 3.46 | | — | | 4.12 | |
Weighted average yield is calculated using Total clean price x yield for each maturity bucket / Total clean price for each maturity bucket.
LOANS AND ADVANCES TO BANKS
Loans and advances to banks include loans to banksare classified in the consolidated balance sheet as financial assets at amortised cost 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
Reconciliation to classifications in the implementation of our ring-fence structure it also included loans and advances to banks classified as trading assets.consolidated balance sheet
| | | 2020 | 2019 | 2018 | 2017 | 2016 | | 2022 | 2021 |
£m | £m | | Note | £m | £m |
Financial assets at amortised cost: | | Financial assets at amortised cost: | | — | | — | |
Loans and advances to banks | Loans and advances to banks | 3,262 | | 4,744 | | 8,227 | | 12,827 | | 11,832 | | Loans and advances to banks | | 1,105 | | 1,420 | |
Reverse repurchase agreements - non trading | | Reverse repurchase agreements - non trading | 16 | 885 | | 447 | |
| | | 1,990 | | 1,867 | |
Maturity analysis
The following table shows loans and advances to banks by maturity at 31 December 2020.2022.
| | | Not later than one year | Later than one year and not later than five years | Later than five years | Total | | Not later than one year | Later than one year and not later than five years | Later than five years and not later than fifteen years | Later than fifteen years | Total |
| | £m | | £m |
Fixed interest rate | Fixed interest rate | 861 | | — | | — | | 861 | | Fixed interest rate | 1,624 | | — | | — | | — | | 1,624 | |
Variable interest rate | Variable interest rate | 2,162 | | 231 | | 8 | | 2,401 | | Variable interest rate | 358 | | — | | 8 | | — | | 366 | |
| | 3,023 | | 231 | | 8 | | 3,262 | | | 1,982 | | — | | 8 | | — | | 1,990 | |
LOANS AND ADVANCES TO CUSTOMERS
We provide lending facilities primarily to personal customers in the form of mortgages secured on residential properties and lending facilities to corporate customers. Purchase and resale agreements represent business with professional non-bank customers 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.
302Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 296 |
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| 2020 | 2019 | 2018 | 2017 | 2016 |
| £m | £m | £m | £m | £m |
Loans secured on residential properties | 170,089 | | 165,645 | | 158,248 | | 155,355 | | 154,727 | |
Corporate loans | 25,087 | | 27,639 | | 28,348 | | 32,555 | | 33,709 | |
Finance leases | 6,554 | | 6,264 | | 6,821 | | 6,710 | | 6,730 | |
Secured advances | — | | — | | — | | — | | 10 | |
Other unsecured advances | 10,169 | | 7,188 | | 7,554 | | 7,334 | | 8,533 | |
Purchase and resale agreements | 18,341 | | 21,475 | | 18,740 | | 7,736 | | 7,955 | |
Loans and receivables securities | — | | — | | — | | 2,180 | | 255 | |
Amounts due from immediate parent | — | | — | | — | | — | | — | |
Amounts due from fellow subsidiaries, associates and joint ventures | 2,249 | | 2,204 | | 1,997 | | 1,199 | | 1,112 | |
Loans and advances to customers | 232,489 | | 230,415 | | 221,708 | | 213,069 | | 213,031 | |
Impairment loss allowances | (1,303) | | (785) | | (751) | | (940) | | (921) | |
RV and voluntary termination provisions on finance leases | (54) | | (61) | | (69) | | (78) | | (68) | |
Net loans and advances to customers | 231,132 | | 229,569 | | 220,888 | | 212,051 | | 212,042 | |
LOANS AND ADVANCES TO CUSTOMERS
Loans and advances to customers are classified in the consolidated balance sheet as financial assets at fair value through profit or loss, financial assets at amortised cost (including loans and advances to customers classified as reverse repurchase agreements – non trading) and financial assets at fair value through other comprehensive income. Reverse repurchase agreements represent business with professional non-bank customers as part of the liquidity risk management function. The balances below are stated before deducting impairment loss allowances and RV and voluntary termination provisions.
Maturity analysis
The following table shows loansfinancial assets at amortised cost: Loans and advances to customers by maturity at 31 December 2020.2022. 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.
| | | Not later than one year | Later than one year and not later than five years | Later than five years | Total | | Not later than one year | Later than one year and not later than five years | Later than five years and not later than fifteen years | Later than fifteen years | Total |
| | £m | | £m |
Loans secured on residential properties | Loans secured on residential properties | 1,049 | | 6,535 | | 162,505 | | 170,089 | | Loans secured on residential properties | 1,461 | 7,930 | 47,413 | 131,478 | 188,282 |
Corporate loans | Corporate loans | 19,278 | | 1,299 | | 4,510 | | 25,087 | | Corporate loans | 3,100 | 11,211 | 4,137 | 609 | 19,057 |
Finance leases | Finance leases | 3,171 | | 3,375 | | 8 | | 6,554 | | Finance leases | 1,311 | 3,282 | 52 | — | 4,645 |
Other unsecured advances | Other unsecured advances | 2,483 | | 3,720 | | 3,966 | | 10,169 | | Other unsecured advances | 3,497 | 3,340 | 863 | 42 | 7,742 |
Purchase and resale agreements | 18,341 | | — | | — | | 18,341 | | |
Accrued interest and other adjustments | | Accrued interest and other adjustments | 18 | 77 | 225 | 584 | 904 |
Amounts due from immediate parent | Amounts due from immediate parent | — | | — | | — | | — | | Amounts due from immediate parent | — |
Amounts due from fellow subsidiaries, associates and joint ventures | 1,286 | | 963 | | — | | 2,249 | | |
Amounts due from fellow subsidiaries and joint ventures | | Amounts due from fellow subsidiaries and joint ventures | 1,970 | — | 2,195 | 4,165 |
Loans and advances to customers | Loans and advances to customers | 45,608 | | 15,892 | | 170,989 | | 232,489 | | Loans and advances to customers | 11,357 | 25,840 | 52,690 | 134,908 | 224,795 |
Of which: | | |
- Fixed interest rate | 39,804 | | 5,521 | | 137,968 | | 183,293 | | |
- Variable interest rate | 5,804 | | 10,371 | | 33,021 | | 49,196 | | |
Total | 45,608 | | 15,892 | | 170,989 | | 232,489 | | |
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.
The factors which influenced management’s judgement in determining the amount of the additions to the allowance are set out in the ‘Recognising ECL’ section in the ‘Credit risk – Santander UK group level – credit risk management’ section of the Risk review.
RISK ELEMENTS IN THE LOAN PORTFOLIOInterest rate sensitivity
The disclosurefollowing table shows the interest rate sensitivity of credit risk elements in this section reflects US accounting practiceFinancial assets at amortised cost: Loans and classifications. The purpose of the disclosure isadvances 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:customers due after one year at 31 December 2022.
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| Fixed rate | Variable rate | Total |
| £m | £m | £m |
Loans secured on residential properties | 164,473 | | 23,809 | | 188,282 | |
Corporate loans | 2,753 | | 16,304 | | 19,057 | |
Finance leases | 4,643 | | 2 | | 4,645 | |
Other unsecured advances | 5,392 | | 2,350 | | 7,742 | |
Accrued interest and other adjustments | 729 | | 175 | | 904 | |
Amounts due from immediate parent | — | | — | | — | |
Amounts due from fellow subsidiaries and joint ventures | 4,150 | | 15 | | 4,165 | |
Loans and advances to customers | 182,140 | | 42,655 | | 224,795 | |
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Nonaccrual, past due and restructured loans
SUMMARY OF LOAN LOSS EXPERIENCE
–Potential problem loans
–Foreign outstandings
–Loan concentrations.
Nonaccrual, past due and restructured loans
(i) Loans accounted for on a nonaccrualnon-accrual basis (creditare credit impaired loans)
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. Interest income on financial assets that have become credit-impaired (or Stage 3) is calculated by applying the effective interest rate to their amortised cost (i.e. net of the ECL provision).
An analysisIn 2022 and 2021 there were no material credit impairment charges on loans and advances to banks, non-trading reverse repurchase agreements, other financial assets at amortised cost and financial assets at FVOCI. As a result, the following tables present Loans and Advances to customers only.
The following tables show additional ratios and the components used in their calculation for the years ended 31 December 2022, 2021, and 2020.
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| 2022 | 2021 |
| £m | £m |
Allowance for credit losses to total loans | 0.43 | % | 0.43 | % |
Allowance for credit losses | 955 | | 900 | |
Total loans outstanding | 219,700 | | 210,600 | |
Non-accrual loans to total loans | 1.14 | % | 1.38 | % |
Non-accrual loans outstanding | 2,500 | | 2,900 | |
Total loans outstanding | 219,700 | | 210,600 | |
Allowance for credit losses to non-accrual loans | 38.20 | % | 31.03 | % |
Allowance for credit losses | 955 | | 900 | |
Non-accrual loans outstanding | 2,500 | | 2,900 | |
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| 2022 | 2021 | 2020 |
| £m | £m | £m |
Loans secured on residential properties | — | % | — | % | 0.01 | % |
Net charge-off during the period | 3 | | 5 | | 14 | |
Average amount outstanding | 185,303 | | 173,779 | | 168,700 | |
Corporate loans | 0.13 | % | — | % | — | % |
Net charge-off during the period | 24 | | 58 | | 73 | |
Average amount outstanding | 19,170 | | 21,876 | | 25,757 | |
Finance leases | 0.44 | % | — | % | — | % |
Net charge-off during the period | 19 | | 25 | | 25 | |
Average amount outstanding | 4,281 | | 5,235 | | 6,409 | |
Other unsecured advances | 1.28 | % | 1.00 | % | 2.00 | % |
Net charge-off during the period | 110 | | 103 | | 141 | |
Average amount outstanding | 8,574 | | 9,787 | | 8,679 | |
Amounts due from immediate parent | — | % | — | % | — | % |
Net charge-off during the period | — | | — | | — | |
Average amount outstanding | 780,000,000 | | — | | — | |
Amounts due from fellow subsidiaries and joint ventures | — | % | — | % | — | % |
Net charge-off during the period | — | | — | | — | |
Average amount outstanding | 3,623 | | 2,665 | | 2,227 | |
Loans and advances to customers | 0.07 | % | 0.09 | % | 0.12 | % |
Net charge-off during the period | 156 | | 191 | | 253 | |
Average amount outstanding | 221,731 | | 213,342 | | 211,772 | |
Discussion of impaired loans is included below:the factors driving material changes in the ratios above or their components
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| 2020 | 2019 | 2018 | 2017 | 2016 |
| £m | £m | £m | £m | £m |
Stage 3 on-balance sheet (2016 to 2017: NPLs) | 2,896 | | 2,289 | | 2,491 | | 2,848 | | 2,994 | |
The factors driving significant changes are discussed as follows:–Allowance for credit losses, exposures, expected credit losses, Stage 3 exposures and related ratios at a consolidated Santander UK group level can be found in the commentary sections in 'Credit performance', 'Credit quality' 'Stage 2 analysis' in 'Santander UK group level - credit risk review' in the Risk review
–More detailed discussion by business segment can be found in the 'Retail Banking: Homes - credit risk review', 'Retail Banking: Everyday Banking - credit risk review', 'Corporate & Commercial Banking - credit risk review' and 'Corporate Centre - credit risk review' sections of the Risk review.
Santander UK Group Holdings plc303
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(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:
| | | | | |
| 2020 |
| £m |
Non-credit impaired forborne loans and advances to customersAnnual Report 2022 | 1,333Santander UK Group Holdings plc 298
| |
(iv) Interest foregone on impaired loans
The table below summarises the interest foregone on impaired lending:
| | | | | |
| 2020 |
| £m |
Interest income that would have been recognised under original contract terms | 67 | |
Interest income included in profit | 53 | |
Interest foregone | 14 | |
Potential problem loans
These are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. 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 show this credit rating distribution in the ‘Santander UK group level – credit risk review’ section of the Risk review.
Foreign 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 2020, 2019 and 2018 cross border outstandings exceeding 1% of total assets were as follows:
| | | | | | | | | | | | | | |
| Governments and official institutions | Banks and other financial institutions | Other | Total |
2020 | £bn | £bn | £bn | £bn |
| | | | |
Japan | 2.4 | | 1.0 | | — | | 3.4 | |
Ireland | — | | 6.0 | | 0.1 | | 6.1 | |
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2019 | | | | |
| | | | |
Japan | 2.3 | | 1.6 | | — | | 3.9 | |
Ireland | — | | 7.5 | | 0.1 | | 7.6 | |
| | | | |
Luxembourg | — | | 2.8 | | 0.1 | | 2.9 | |
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2018 | | | | |
US | 1.1 | | 3.0 | | 0.3 | | 4.4 | |
Japan | 3.8 | | 2.6 | | — | | 6.4 | |
Ireland | — | | 12.3 | | 0.4 | | 12.7 | |
Spain | — | | 2.7 | | 0.2 | | 2.9 | |
(ii) Cross border outstandings between 0.75% and 1% of total assets
At 31 December 2020, Santander UK had no cross border outstandings between 0.75% and 1% of total assets.
At 31 December 2019, Santander UK had cross border outstandings between 0.75% and 1% of total assets relating to the US. The aggregate amount of these cross border outstandings was £2.3bn.
At 31 December 2018, Santander UK had no cross border outstandings between 0.75% and 1% of total assets.
304Santander UK Group Holdings plc
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Loan concentrations
No single concentration of loansDEPOSITS BY CUSTOMERS
The following table shows the average balances and advances above, exceptinterest rates for loans secured on residential propertiesdeposits by customers by product for the years ended 31 December 2022, 2021, 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.2020.
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.
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| 2020 | 2019 | 2018⁽¹⁾ | 2017 | 2016 |
£m | £m | £m | £m | £m |
Total credit impairment loss allowances: | | | | | |
– Loans secured on residential properties | 277 | | 215 | | 234 | | 225 | | 279 | |
– Corporate loans | 635 | | 262 | | 226 | | 490 | | 382 | |
– Finance leases | 118 | | 88 | | 85 | | 46 | | 45 | |
– Other unsecured advances | 273 | | 220 | | 206 | | 179 | | 215 | |
Total credit impairment loss allowances | 1,303 | | 785 | | 751 | | 940 | | 921 | |
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| 2022 | | | 2021 | | | 2020 | |
| Average Balance | Average Interest Rate(1) | | Average Balance | Average Interest Rate(1) | | Average Balance | Average Interest Rate(1) |
£m | % | £m | % | | £m | % |
Demand deposits (including savings and current accounts) | 175,918 | 0.37 | % | | 177,508 | 0.12 | % | | 165,425 | 0.40 | % |
Time deposits | 12,816 | 1.37 | % | | 12,199 | 0.92 | % | | 17,685 | 1.18 | % |
Other deposits | 12,543 | 1.01 | % | | 16,683 | 0.03 | % | | 17,571 | 0.27 | % |
Total average balance(1) | 201,277 | 0.47 | % | | 206,390 | 0.16 | % | | 200,681 | 0.47 | % |
(1)On 1 January 2018, the Santander UK group adopted IFRS 9 (2016 and 2017: IAS 39).Calculated using monthly data.
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.
| | | | | | | | | | | | | | | | | |
| 2020 | 2019 | 2018⁽¹⁾ | 2017 | 2016 |
£m | £m | £m | £m | £m |
Credit impairment loss allowances at 31 December | 785 | | 751 | | 940 | | 921 | | 1,108 | |
Adoption of IFRS 9 | | | 211 | | | |
Reallocation of ECL on off balance sheet exposures(2) | | | (50) | | | |
Credit impairment loss allowances at 1 January | 785 | | 751 | | 1,101 | | 921 | | 1,108 | |
Amounts written off: | | | | | |
– Loans secured on residential properties | (12) | | (14) | | (17) | | (17) | | (29) | |
– Corporate loans | 13 | | (54) | | (355) | | (64) | | (72) | |
– Finance leases | (25) | | (34) | | (23) | | (19) | | (22) | |
– Other unsecured advances | (130) | | (102) | | (144) | | (138) | | (196) | |
Total amounts written off | (154) | | (204) | | (539) | | (238) | | (319) | |
Credit impairment losses (released)/charged against profit: | | | | | |
– Loans secured on residential properties | 74 | | (5) | | (18) | | (37) | | (116) | |
– Corporate loans | 359 | | 90 | | 17 | | 172 | | 59 | |
– Finance leases | 55 | | 37 | | 51 | | 20 | | 47 | |
– Other unsecured advances | 184 | | 116 | | 139 | | 102 | | 142 | |
Total credit impairment losses charged against profit | 672 | | 238 | | 189 | | 257 | | 132 | |
Credit impairment loss allowances at 31 December | 1,303 | | 785 | | 751 | | 940 | | 921 | |
(1)On 1 January 2018, the Santander UK group adopted IFRS 9 (2016 and 2017: IAS 39).
(2)This relates to ECL on off-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 | 0.08 | | 0.10 | | 0.27 | | 0.12 | | 0.15 | |
Recoveries, net of collection costs
An analysis of recoveries, net of collection costs is presented below.
| | | | | | | | | | | | | | | | | |
| 2020 | 2019 | 2018 | 2017 | 2016 |
| £m | £m | £m | £m | £m |
Loans secured on residential properties | 1 | | 2 | | 2 | | 3 | | 4 | |
Corporate loans | 1 | | 2 | | 1 | | 1 | | 3 | |
Finance leases | 9 | | 7 | | 6 | | 6 | | 2 | |
Other unsecured advances | 12 | | 29 | | 33 | | 44 | | 56 | |
Total amount recovered | 23 | | 40 | | 42 | | 54 | | 65 | |
The factors which influenced management’s judgement in determiningUK's statutory fund of last resort for customers of authorised financial services firms is the Financial Services Compensation Scheme (FSCS). The FSCS can pay compensation to customers if a PRA authorised firm is unable, or likely to be unable to pay claims against it for example by depositors.
The following table shows the amounts of insured and uninsured total deposits and time deposits excluding intercompany deposits at 31 December 2022. The table also shows the amount of time deposits that are uninsured, either because they exceed FSCS compensation limits or because they are otherwise uninsured.
| | | | | | | | |
| 2022 | 2021 |
| £m | £m |
Insured deposits | 131,820 | 128,472 |
Uninsured deposits | 64,340 | 63,292 |
Total deposits | 196,160 | 191,764 |
of which: | | |
Insured time deposits | 9,242 | 5,683 |
Uninsured time deposits | 8,272 | 5,258 |
– Excess over guaranteed limit | 5,202 | 1,988 |
– Otherwise uninsured | 3,070 | 3,270 |
Total time deposits | 17,514 | 10,941 |
The following table shows the additions to the allowance are set out in the ‘Recognising ECL’ section in the ‘Credit risk – Santander UK group level – credit risk management’ sectionmaturity of the Risk review.
OTHER ASSETS
As part of our plan to be the best bank to work for in the UK, we are building a new head office in Milton Keynes to meet the flexible needs of a modern workforce. It represents a planned investment of more than £150m, funded from existing resources. Site works began in Q1 2020 and are due to complete in Spring 2022. Expenditureuninsured time deposits at 31 December 2020 was approximately £48m.2022.
| | | | | | | | | | | | | | | | | |
| Under 3 months | 3 to 6 months | 6 to 12 months | Over 12 months | Total |
| £m | £m | £m | £m | £m |
Deposits by customers | 3,207 | 1,614 | 2,286 | 1,165 | 8,272 |
The following table provides details of the deposit insurance scheme that applies to these deposits.
| | | | | |
Guarantee fund | Definition |
Financial Services Compensation Scheme (FSCS) | The FSCS is the UK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). |
Isle of Man and Jersey Bank Depositor Compensation Schemes (DCSs) | The Isle of Man branch of the Company is a participant in the Isle of Man Depositors’ Compensation Scheme and the Jersey branch of the Company is a participant in the Jersey Bank Depositors Compensation Scheme. These DCSs are independent statutory compensation funds for customers of Isle of Man and Jersey banks and pay compensation if a bank is unable to pay claims against it. The DCSs are funded, if and when required, by contributions from covered banks in the Isle of Man or Jersey that are participants in the DCSs. |
Santander UK Group Holdings plc305
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Annual Report 20202022 | Santander UK Group Holdings plc | Shareholder information299 | | |
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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 product.
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| 2020 | | 2019 | | 2018 |
| Average Balance | Average Interest Rate(1) | | Average Balance | Average Interest Rate(1) | | Average Balance | Average Interest Rate(1) |
£m | % | | £m | % | | £m | % |
Demand deposits (including savings and current accounts) | 165,425 | | 0.40 | | | 155,669 | | 0.70 | | | 153,880 | | 0.67 | |
Time deposits | 17,685 | | 1.18 | | | 17,877 | | 1.24 | | | 18,832 | | 0.87 | |
Other deposits | 9,985 | | 0.39 | | | 18,931 | | 0.82 | | | 21,855 | | 0.67 | |
Total average balance(1) | 193,095 | | 0.47 | | | 192,477 | | 0.76 | | | 194,567 | | 0.69 | |
(1)Calculated using monthly data.
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.
| | | | | | | | | | | |
| 2020 | 2019 | 2018 |
£m | £m | £m |
Average balance(1) | 27,631 | | 17,251 | | 19,536 | |
Average interest rate(1) | 0.27 | % | 0.85 | % | 0.74 | % |
(1)Calculated using monthly data.
At 31 December 2020 deposits by foreign banks were £1,763m (2019: £3,289m, 2018: £4,631m).
306Santander UK Group Holdings plc
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SHORT-TERM BORROWINGS
We include short-term borrowingsDEPOSITS BY BANKS
Deposits by banks are classified in otherthe consolidated balance sheet as financial liabilities at fair value through profit or loss,amortised cost and include deposits by banks classified as repurchase agreements – non trading and debt securities in issue. Priortrading.
Reconciliation 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 2020, 2019 and 2018.
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| 2020 | 2019 | 2018 |
| £m | £m | £m |
Securities sold under repurchase agreements | | | |
– Year-end balance | 15,848 | | 17,441 | | 12,175 | |
- Year-end interest rate | (0.24) | % | 0.73 | % | 0.77 | % |
– Average balance(1) | 16,145 | | 15,874 | | 21,684 | |
– Average interest rate(1) | 0.15 | % | 0.77 | % | 0.76 | % |
– Maximum balance(1) | 19,938 | | 18,253 | | 32,550 | |
Commercial paper | | | |
– Year-end balance | 2,824 | | 3,014 | | 3,131 | |
- Year-end interest rate | 0.15 | % | 2.00 | % | 2.43 | % |
– Average balance(1) | 3,145 | | 3,438 | | 4,314 | |
– Average interest rate(1) | 0.89 | % | 2.08 | % | 1.71 | % |
– Maximum balance(1) | 3,839 | | 4,099 | | 5,898 | |
Borrowings from banks (Deposits by banks) | | | |
– Year-end balance | 6,817 | | 7,884 | | 6,832 | |
- Year-end interest rate | (0.03) | % | 0.55 | % | 0.66 | % |
– Average balance(1) | 10,607 | | 5,455 | | 5,268 | |
– Average interest rate(1) | 0.23 | % | 0.53 | % | 0.54 | % |
– Maximum balance(1) | 12,545 | | 7,884 | | 6,902 | |
Negotiable certificates of deposit | | | |
– Year-end balance | 2,858 | | 2,806 | | 3,221 | |
- Year-end interest rate | 0.09 | % | 0.93 | % | 0.56 | % |
– Average balance(1) | 2,574 | | 3,225 | | 3,914 | |
– Average interest rate(1) | 0.43 | % | 0.92 | % | 0.54 | % |
– Maximum balance(1) | 2,946 | | 3,600 | | 6,108 | |
Other debt securities in issue | | | |
– Year-end balance | 11,694 | | 10,890 | | 7,397 | |
- Year-end interest rate | 2.33 | % | 1.44 | % | 1.58 | % |
– Average balance(1) | 11,561 | | 7,942 | | 5,610 | |
– Average interest rate(1) | 2.32 | % | 1.29 | % | 1.76 | % |
– Maximum balance(1) | 14,771 | | 10,890 | | 7,397 | |
(1) Calculated using monthly weighted average data.
(2) The year-end deposits by banks balance includes non-interest bearing itemsclassifications in the course of transmission of £375m (2019: £337m, 2018: £262m).consolidated balance sheet
All commercial paper is 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. | | | | | | | | | | | |
| | 2022 | 2021 |
| Note | £m | £m |
Financial liabilities at amortised cost: | | — | — |
- Deposits by banks | 24 | 28,543 | 33,862 |
- Repurchase agreements - non trading | 25 | 50 | 43 |
| | 28,593 | 33,905 |
Certificates of deposit and certain time deposits
The following table shows the maturitiesaverage balances of our certificatesand interest rates for deposits by banks for the years ended 31 December 2022, 2021, and 2020.
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| 2022 | | | 2021 | | | | 2020 |
| Average Balance | Average Interest Rate(1) | | Average Balance | Average Interest Rate(1) | | Average Balance | Average Interest Rate(1) |
| £m | % | £m | % | £m | % |
Deposits by banks | 35,098 | 1.44 | | | 24,051 | 0.10 | | | 20,045 | 0.28 | |
(1)Calculated using monthly data.
At 31 December 2022 deposits by foreign banks were £2,211m (2021: £1,179m, 2020: £1,763m).
All bank deposits are uninsured, as the FSCS does not cover financial institutions.
The following table shows the maturity of deposit and other large wholesale timeuninsured deposits from non-banks over US$100,000by banks at 31 December 2020. A proportion of our retail time deposits also exceeds US$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 US$100,000 throughout 2020. 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.2022.
| | | | | | | | | | | | | | | | | |
| 3 months or less | Over 3 through 6 months | Over 6 through 12 months | Over 12 months | Total |
| £m | £m | £m | £m | £m |
Certificates of deposit | 1,725 | | 1,045 | | 88 | | — | | 2,858 | |
Time deposits | 783 | | 26 | | 124 | | 502 | | 1,435 | |
| 2,508 | | 1,071 | | 212 | | 502 | | 4,293 | |
| | | | | | | | | | | | | | | | | |
| Under 3 months | 3 to 6 months | 6 to 12 months | Over 12 months | Total |
| £m | £m | £m | £m | £m |
Deposits by banks | 3,365 | 36 | 5 | 25,187 | 28,593 |
Santander UK Group Holdings plc307
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CONTRACTUAL OBLIGATIONS
For the amounts and maturities of contractual obligations in respect of guarantees, see Notes 31 and 40 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.
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| Payments due by period |
Less than 1 year | 1–3 years | 3–5 years | More than 5 years | Total |
£m | £m | £m | £m | £m |
Derivative financial instruments | 453 | | 351 | | 226 | | 890 | | 1,920 | |
Deposits by customers(1) | 199,187 | | 2,569 | | 534 | | 665 | | 202,955 | |
Deposits by banks(1) | 13,174 | | 2,251 | | 11,701 | | 205 | | 27,331 | |
Debt securities in issue(2) | 16,700 | | 8,396 | | 10,412 | | 9,228 | | 44,736 | |
Subordinated liabilities | — | | 542 | | 536 | | 1,478 | | 2,556 | |
Retirement benefit obligations | 359 | | 663 | | 741 | | 12,131 | | 13,894 | |
Lease obligations | 17 | | 32 | | 21 | | 30 | | 100 | |
Purchase obligations | 389 | | — | | — | | — | | 389 | |
| 230,279 | | 14,804 | | 24,171 | | 24,627 | | 293,881 | |
(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 23, 24 and 25 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 31 to the Consolidated Financial Statements for more information on our guarantees, commitments and contingencies. See Note 19 to the Consolidated Financial Statements for more information on our off-balance sheet arrangements.
In the ordinary course of business, we also enter into securitisation transactions as set out in Note 14 to the Consolidated Financial Statements. We consolidate these 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
| | | | | | | | | | | | | | | | | |
| 2020 | 2019 | 2018(1,2) | 2017 | 2016 |
| % | % | % | % | % |
Equity to assets ratio(3) | 4.60 | | 4.73 | | 4.52 | | 4.35 | | 4.40 | |
Return on assets(4) | 0.15 | | 0.24 | | 0.38 | | 0.41 | | 0.44 | |
Return on ordinary shareholders' equity(5) | 2.9 | | 4.9 | | 8.2 | | 9.2 | | 9.6 | |
Dividend payout ratio(6) | 26 | | 39 | | 100 | | 44 | | 47 | |
(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.
308Santander UK Group Holdings plc
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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 overall non-trading position. We do this within limits as set out in the Risk review.
Changes in net interest income – volume and rate analysis
The following table shows changes in interest income, interest expense and net interest income, 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.
| | | 2020/2019 | | 2019/2018 | | 2022 / 2021 | | | 2021 / 2020 |
| Changes due to increase/(decrease) in | | | Changes due to increase/(decrease) in | | Changes due to increase/(decrease) in | | | Changes due to increase/(decrease) in |
Total change | Volume | Rate | | Total change | Volume | Rate | | Total change | Volume | Rate | | Total change | Volume | Rate |
£m | | £m | £m | | £m |
Interest income | Interest income | | | Interest income | | |
Loans and advances to customers | Loans and advances to customers | (390) | | 187 | | (577) | | | (222) | | 58 | | (280) | | Loans and advances to customers | 1,283 | 53 | 1,230 | | (149) | (87) | (62) |
of which reverse repurchase agreements | | of which reverse repurchase agreements | 114 | (11) | 125 | | (62) | (26) | (36) |
Loans and advances to banks | Loans and advances to banks | (120) | | 55 | | (175) | | | (25) | | (24) | | (1) | | Loans and advances to banks | 597 | 2 | 595 | | (29) | 21 | (50) |
Reverse repurchase agreements – non trading | (126) | | (4) | | (122) | | | 120 | | 105 | | 15 | | |
Other interest earning financial assets | (190) | | (94) | | (96) | | | 27 | | 14 | | 13 | | |
of which reverse repurchase agreements | | of which reverse repurchase agreements | — | (2) | 2 | | (21) | (18) | (3) |
Debt securities and other interest earning assets | | Debt securities and other interest earning assets | 112 | (6) | 118 | | (63) | (51) | (12) |
Assets designated at FVOCI | | Assets designated at FVOCI | — | | — |
Total interest income | Total interest income | (826) | | 144 | | (970) | | | (100) | | 153 | | (253) | | Total interest income | 1,992 | 49 | 1,943 | | (241) | (117) | (124) |
Interest expense | Interest expense | | | Interest expense | | | |
Deposits by customers - demand | Deposits by customers - demand | (425) | | 68 | | (493) | | | 49 | | 12 | | 37 | | Deposits by customers - demand | 433 | (2) | 435 | | (442) | 48 | (490) |
Deposits by customers - time | Deposits by customers - time | (13) | | (2) | | (11) | | | 58 | | (8) | | 66 | | Deposits by customers - time | 63 | 6 | 57 | | (97) | (65) | (32) |
Deposits by customers - other | Deposits by customers - other | (9) | | 5 | | (14) | | | 0 | | 12 | | (12) | | Deposits by customers - other | 117 | (1) | 118 | | (37) | (2) | (35) |
of which repurchase agreements | | of which repurchase agreements | 117 | (1) | 118 | | (23) | (3) | (20) |
Deposits by banks | Deposits by banks | (88) | | 11 | | (99) | | | 15 | | (1) | | 16 | | Deposits by banks | 473 | 11 | 462 | | (22) | 9 | (31) |
Repurchase agreements – non trading | (83) | | 1 | | (84) | | | 89 | | 33 | | 56 | | |
Subordinated debt | (26) | | (18) | | (8) | | | (4) | | (2) | | (2) | | |
Debt securities in issue | (324) | | (64) | | (260) | | | 2 | | (10) | | 12 | | |
of which repurchase agreements | | of which repurchase agreements | — | | (17) | — |
Debt securities | | Debt securities | 349 | (19) | 368 | | (207) | (167) | (40) |
Commercial paper | | Commercial paper | 74 | (1) | 75 | | (35) | 2 | (37) |
Subordinated liabilities | | Subordinated liabilities | 16 | (4) | 20 | | (19) | (30) | 11 |
Other interest-bearing financial liabilities | Other interest-bearing financial liabilities | — | | — | | — | | | 2 | | 16 | | (14) | | Other interest-bearing financial liabilities | (8) | (6) | (2) | | 2 | (3) | 5 |
Total interest expense | Total interest expense | (968) | | 1 | | (969) | | | 211 | | 52 | | 159 | | Total interest expense | 1,517 | (16) | 1,533 | | (857) | (208) | (649) |
Net interest income | Net interest income | 142 | | 143 | | (1) | | | (311) | | 101 | | (412) | | Net interest income | 475 | 65 | 410 | | 616 | 91 | 525 |
Santander UK Group Holdings plc309
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Annual Report 2022 | Santander UK Group Holdings plc 301 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Annual Report 2020 | Shareholder information
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AVERAGE BALANCE SHEET
Year-end balances may not reflect activity throughout the year, so we present average balance sheets 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | | 2021 | | | 2020 |
| | 2020 | | 2019 | | 2018 | |
| | Average balance(1) | Interest(2,3) | Average rate | | Average balance(1) | Interest(2,3) | Average rate | | Average balance(1) | Interest(2,3) | Average rate | | Average balance(1) | Interest | Average rate | | Average balance(1) | Interest | Average rate | | Average balance(1) | Interest | Average rate |
| | £m | % | | £m | % | | £m | % | | £m | % | | £m | % | | £m | % |
Assets | Assets | | | Assets | | |
Loans and advances to customers(4) | 211,772 | | 4,847 | | 2.29 | | | 204,457 | | 5,237 | | 2.56 | | | 202,326 | | 5,459 | | 2.70 | | |
Loans and advances to customers(2) | | Loans and advances to customers(2) | 230,289 | 5,996 | 2.60 | | | 227,720 | 4,713 | 2.07 | | | 231,885 | 4,862 | 2.10 | |
of which reverse repurchase agreements | | of which reverse repurchase agreements | 8,558 | 142 | 1.66 | | | 14,378 | 28 | 0.19 | | | 20,113 | 90 | 0.45 | |
Loans and advances to banks | Loans and advances to banks | 34,450 | | 62 | | 0.18 | | | 26,519 | | 182 | | 0.69 | | | 30,015 | | 207 | | 0.69 | | Loans and advances to banks | 48,321 | 658 | 1.36 | | | 46,416 | 61 | 0.13 | | | 37,506 | 90 | 0.24 | |
Reverse repurchase agreements – non trading | 23,169 | | 118 | | 0.51 | | | 23,558 | | 244 | | 1.04 | | | 12,759 | | 124 | | 0.97 | | |
Debt securities | 14,330 | | 119 | | 0.83 | | | 20,582 | | 309 | | 1.50 | | | 19,589 | | 282 | | 1.44 | | |
Total average interest-earning assets, interest income(5) | 283,721 | | 5,146 | | 1.81 | | | 275,116 | | 5,972 | | 2.17 | | | 264,689 | | 6,072 | | 2.29 | | |
Credit loss allowances and RV & VT provisions | (1,071) | | — | | — | | | (770) | | — | | — | | | (862) | | — | | — | | |
of which reverse repurchase agreements | | of which reverse repurchase agreements | 816 | 7 | 0.86 | | | 1,138 | 7 | 0.62 | | | 3,056 | 28 | 0.92 | |
Debt securities and other interest earning assets | | Debt securities and other interest earning assets | 7,314 | 168 | 2.30 | | | 8,174 | 56 | 0.69 | | | 14,330 | 119 | 0.83 | |
Assets designated at FVOCI | | Assets designated at FVOCI | — | — | | | — | — | | | — | — | |
Total average interest-earning assets, interest income | | Total average interest-earning assets, interest income | 285,924 | 6,822 | 2.39 | | | 282,310 | 4,830 | 1.71 | | | 283,721 | 5,071 | 1.79 | |
Credit impairment loss allowances and RV &VT | | Credit impairment loss allowances and RV &VT | (1,057) | — | — | | | (1,325) | — | — | | | (1,071) | — | — | |
Trading assets | Trading assets | — | | — | | — | | | — | | — | | — | | | 12,241 | | — | | — | | Trading assets | — | — | | | — | — | | | — | — | |
Derivatives and other non-interest-earning assets | Derivatives and other non-interest-earning assets | 13,849 | | — | | — | | | 14,332 | | — | | — | | | 24,204 | | — | | — | | Derivatives and other non-interest-earning assets | 8,509 | — | — | | | 10,738 | — | — | | | 13,849 | — | — | |
Other financial assets at FVTPL | Other financial assets at FVTPL | 896 | | — | | — | | | 1,783 | | — | | — | | | 4,223 | | — | | — | | Other financial assets at FVTPL | 549 | — | — | | | 765 | — | — | | | 896 | — | — | |
Total average assets | Total average assets | 297,395 | | — | | — | | | 290,461 | | — | | — | | | 304,495 | | — | | — | | Total average assets | 293,925 | — | — | | | 292,488 | — | — | | | 297,395 | — | — | |
Liabilities | Liabilities | | | Liabilities | | | | | |
Deposits by customers - demand | Deposits by customers - demand | (165,425) | | (660) | | 0.40 | | | (155,669) | | (1,085) | | 0.70 | | | (153,880) | | (1,036) | | 0.67 | | Deposits by customers - demand | (175,918) | (651) | 0.37 | | | (177,508) | (218) | 0.12 | | | (165,425) | (660) | 0.40 | |
Deposits by customers - time | Deposits by customers - time | (17,685) | | (209) | | 1.18 | | | (17,877) | | (222) | | 1.24 | | | (18,832) | | (164) | | 0.87 | | Deposits by customers - time | (12,816) | (175) | 1.37 | | | (12,199) | (112) | 0.92 | | | (17,685) | (209) | 1.18 | |
Deposits by customers - other | Deposits by customers - other | (3,026) | | (15) | | 0.50 | | | (2,510) | | (24) | | 0.96 | | | (1,679) | | (24) | | 1.43 | | Deposits by customers - other | (12,192) | (121) | 0.99 | | | (16,387) | (4) | 0.02 | | | (17,111) | (41) | 0.24 | |
of which repurchase agreements | | of which repurchase agreements | (8,568) | (120) | 1.40 | | | (12,372) | (3) | 0.02 | | | (14,085) | (26) | 0.18 | |
Deposits by banks | Deposits by banks | (16,960) | | (47) | | 0.28 | | | (15,671) | | (135) | | 0.86 | | | (15,836) | | (120) | | 0.76 | | Deposits by banks | (34,561) | (496) | 1.44 | | | (23,580) | (23) | 0.10 | | | (19,727) | (45) | 0.23 | |
Repurchase agreements – non trading | (16,852) | | (43) | | 0.26 | | | (16,692) | | (126) | | 0.75 | | | (8,840) | | (37) | | 0.42 | | |
of which repurchase agreements | | of which repurchase agreements | (5) | — | — | | | (6) | — | — | | | (2,767) | (17) | 0.61 | |
Debt securities | Debt securities | (49,204) | | (614) | | 1.25 | | | (52,781) | | (938) | | 1.78 | | | (53,359) | | (936) | | 1.75 | | Debt securities | (29,201) | (713) | 2.44 | | | (30,774) | (364) | 1.18 | | | (43,487) | (571) | 1.31 | |
Commercial paper | | Commercial paper | (5,121) | (82) | 1.60 | | | (6,013) | (8) | 0.13 | | | (5,717) | (43) | 0.75 | |
Subordinated liabilities | Subordinated liabilities | (2,846) | | (111) | | 3.90 | | | (3,284) | | (137) | | 4.17 | | | (3,343) | | (141) | | 4.22 | | Subordinated liabilities | (1,991) | (108) | 5.42 | | | (2,076) | (92) | 4.43 | | | (2,846) | (111) | 3.90 | |
Other interest-bearing liabilities | Other interest-bearing liabilities | (462) | | (10) | | 2.16 | | | (453) | | (10) | | 2.21 | | | (152) | | (8) | | 5.26 | | Other interest-bearing liabilities | (143) | (4) | 2.80 | | | (308) | (12) | 3.90 | | | (462) | (10) | 2.16 | |
Total average interest-bearing liabilities, interest expense(5) | (272,460) | | (1,709) | | 0.63 | | | (264,937) | | (2,677) | | 1.01 | | | (255,921) | | (2,466) | | 0.96 | | |
Total average interest-bearing liabilities, interest expense | | Total average interest-bearing liabilities, interest expense | (271,943) | (2,350) | 0.86 | | | (268,845) | (833) | 0.31 | | | (272,460) | (1,690) | 0.62 | |
Trading liabilities | Trading liabilities | — | | — | | — | | | — | | — | | — | | | (12,032) | | — | | — | | Trading liabilities | — | — | | | — | — | | | — | — | |
Derivatives and other non-interest bearing liabilities | (6,381) | | — | | — | | | (6,741) | | — | | — | | | (14,544) | | — | | — | | |
Derivatives and other non interest-bearing liabilities | | Derivatives and other non interest-bearing liabilities | (4,701) | — | — | | | (5,579) | — | — | | | (6,381) | — | — | |
Other financial liabilities at FVTPL | Other financial liabilities at FVTPL | (1,589) | | — | | — | | | (2,076) | | — | | — | | | (5,344) | | — | | — | | Other financial liabilities at FVTPL | (833) | — | — | | | (1,050) | — | — | | | (1,589) | — | — | |
Equity | Equity | (16,965) | | — | | — | | | (16,707) | | — | | — | | | (16,654) | | — | | — | | Equity | (16,448) | — | — | | | (17,014) | — | — | | | (16,965) | — | — | |
Total average liabilities and equity | Total average liabilities and equity | (297,395) | | — | | — | | | (290,461) | | — | | — | | | (304,495) | | — | | — | | Total average liabilities and equity | (293,925) | — | — | | | (292,488) | — | — | | | (297,395) | — | — | |
(1) Average balances are based on monthly data.
(2) The NIM forLoans and advances to customers include Stage 3 assets. See the year ended 31 December 2020 was 1.21% (2019: 1.20%, 2018: 1.36%). NIM is calculated as net interest income divided by‘Credit risk’ section of the Risk review.
Margin and average interest earning assetsspread
(3) The interest spread for the year ended 31 December 2020 was 1.18% (2019: 1.16%, 2018: 1.33%). | | | | | | | | | | | |
| 2022 | 2021 | 2020 |
| % | % | % |
Interest spread(1) | 1.53 | | 1.40 | | 1.17 | |
Net interest margin(2) | 1.56 | | 1.42 | | 1.19 | |
Average spread(3) | 105 | | 105 | | 104 | |
(1) Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.
(4) Loans and advances to customers include Stage 3 assets. See(2) NIM is calculated as net interest income divided by average interest earning assets
(3) Average spread is the ‘Credit risk’ section of the Risk review.
(5) The ratio of average interest-earning assets to interest-bearing liabilities at 31 December 2020 was 104% (2019: 104%, 2018: 103%).
310Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 302 |
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Strategic Report | Sustainability and Responsible Banking | Governance | | Risk Reviewreview | | Financial review | | Financial statements | | Shareholder information |
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SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
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| 2022 | 2021 |
| £m | £m |
Net cash flows from operating activities | (5,467) | | 12,153 | |
Net cash flows from investing activities | (206) | | 3,075 | |
Net cash flows from financing activities | 2,711 | | (12,643) | |
Change in cash and cash equivalents | (2,962) | | 2,585 | |
A more detailed Consolidated Cash Flow Statement is contained in the Consolidated Financial Statements.
The major activities and transactions that affected cash flows in 2022 and 2021 were as follows:
In 2022, the net cash outflows from operating activities of £5,467m resulted from outflows generated from an increase in loans and advances to banks and customers, and a decrease in repurchase agreements, partially offset by net cash inflows from an decrease in reverse repurchase agreements and the effects of exchange rate differences. The net cash outflows from investing activities of £206m mainly reflected the net disposal of certain asset backed securities as part of normal liquid asset portfolio management. The net cash inflows from financing activities mainly reflected net cash inflows relating to debt securities in issue. These resulted in cash and cash equivalents decreasing by £2,962m in the year.
In 2021, the net cash inflows from operating activities of £12,153m resulted from net cash inflows generated from profits in the year and higher customer deposits, offset by additional retail and corporate lending. The net cash inflows from investing activities of £3,075m 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 £2,585m in the year.
Cash flow requirements
For details of our cash flow requirements over the next 12 months and in the longer term and how we plan to meet them, see the Liquidity risk section of the Risk review.
Material cash requirements
Our material commitments under commercial contracts at 31 December 2022were as follows:
–For cash flows and maturities relating to Derivatives, Deposits by customers, Deposits by banks, Debt securities in issue, Subordinated liabilities and Lease obligations, see Note 40 to the Consolidated Financial Statements. The maturities of financial liabilities and off-balance sheet commitments table analyses the maturities of the cash flows based on the remaining period to the contractual maturity date at the balance sheet date. In practice, the behavioural profiles of many liabilities show more stability and longer maturity than their contractual maturity. This is especially true of many types of retail and corporate deposits that, while they may be repayable on demand or at short notice, have shown good stability even in times of stress. For further details, see the Liquidity risk section of the Risk review.
–For details of cash flows and maturities relating to Retirement benefit obligations including employer contributions and funding see Note 30 to the Consolidated Financial Statements.
–Purchase obligations: 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. Total purchase obligations, all of which are due within 1 year, totalled £469m.
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Annual Report 2022 | Santander UK Group Holdings plc 303 |
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Strategic Report | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Taxation for US investors
The following is a summary, under current law, of the main UK tax considerations relating to the beneficial ownership by a US taxpayer of the shares of the Company. This summary is provided for general guidance and does not address investors that are subject to special rules or that do not hold the shares as capital assets. US residents should consult their local tax advisers, particularly in connection with any potential liability to pay US taxes on disposal, lifetime gift or bequest of their shares.
UK taxation on dividends
Under UK law, income tax is not withheld from dividends paid by UK companies. Shareholders, whether resident in the UK or not, receive the full amount of the dividend actually declared.
UK taxation on capital gains
Under UK law, when you sell shares you may be liable to pay either capital gains tax or corporation tax on chargeable gains. However, if you are either:
–An individual who is 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 plc311
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Annual Report 2022 | Santander UK Group Holdings plc 304 |
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AnnualStrategic Report 2020
| | Sustainability and Responsible Banking | Governance | Risk review | Financial review | Financial statements | Shareholder information |
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Glossary of financial services industry terms
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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 | Active customers are defined as those having an open account, with more than a set minimum balance along with certain specified transactions in the prior month. |
Adjusted Banking NIM | Adjusted net interest income divided by average gross customer assets. |
Adjusted cost to income ratio | Adjusted total operating expenses before credit impairment lossescharges and provisions for other liabilities and charges as a percentage of adjusted total operating income. |
Adjusted RoTE | The adjusted profit after tax attributable to equity holders of the parent divided by average shareholders’ equity less non-controlling interests, other equity instruments and average goodwill and intangible assets. |
Alternative performance measures (APMs) | A financial measure of historical or future financial performance, financial position or cashflows, other than a financial measure defined or specified under International Financial Reporting Standards. |
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. |
Balance weighted Loan to Value (LTV) ratio | Balance weighted LTV = (Loan 1 balance x (Loan 1 Balance/Loan 1 latest property valuation) + (Loan 2 balance x (loan 2 balance/Loan 2 latest property valuation)+ ...) /(Loan 1 balance + Loan 2 balance +...) |
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 debt instrument 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 | The called-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. |
Consumer Finance | Provides prime auto consumer financing for individuals, businesses, and automotive distribution networks. |
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. |
CorporatesCorporate Centre | The sumProvides treasury services for asset and liability management of enterprises served by our Business Banking, balance sheet, as well as management of non-core and legacy portfolios. |
Corporate & Commercial Banking Corporate & Investment Banking(CCB) | Provides banking products and services to SMEs, mid-sized and larger corporates, typically with annual turnovers of between £2m and £500m, as well as social housingto Local Authorities and non-core lending in the Corporate Centre.Housing Associations. |
Cost of risk | Cost of risk is credit impairment charge for the 12 month12-month period as a percentage of average gross customer loans. This is a useful measure of the relationship between the size of the credit impairment charge and the book size which investors use as a proxy to compare relative credit risk. |
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 | The risk that the counterparty to a transaction may default before completing the satisfactory settlement of the transaction. |
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. |
312Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 305 |
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Term | Definition |
Credit Valuation Adjustment (CVA) | Adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. |
Capital Requirements Directive IV (CRD IV) | An EU legislative package covering prudential rules for banks, building societies and investment firms. |
Cash collection | Agents have been instructed to collect cash from the customer. |
Currency swap | An arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments on the principal amounts. Often, one party will pay a fixed interest rate, while the other will pay a floating exchange rate (though there are also fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usually re-exchanged. |
Current Account Switch Service (CASS) guarantee | On 16 September 2013, Bacs (previously Payments Council) launched CASS. The service is free-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. |
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 app(s) (Retail Mobile includes SanWallet & OnePayFX) at least once in the month. |
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. |
Energy performance certificate (EPC) | A scheme to summarise the energy efficiency of buildings and apply a rating between A – G. |
Everyday Banking | Provides banking services and unsecured lending to individuals and small businesses as well alongside wealth management for high-net-worth clients. |
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 at default (EAD) | The maximum loss that a financial institution might suffer if a borrower, counterparty or group fails to meetdefaults on their obligations or assets and off-balance sheet positions have to be realised. |
Santander UK Group Holdings plc313
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Annual Report 2022 | Santander UK Group Holdings plc 306 |
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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 ofThe Financial Conduct Authority is a financial regulatory body in 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.United Kingdom. |
Financial Services Compensation Scheme (FSCS) | The UK’sFinancial Services Compensation Scheme is the UK's statutory fund of last resortdeposit insurance and investors compensation scheme 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.firms. |
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 the on-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 and non-financial companies. It aims to do this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their performance in lending to the UK non-financial sector. |
Government lending schemes | Lending provided by banks with some element of government guarantee, including Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS). |
Home loan (Residential mortgage)Homes | A loanHomes provides prime UK mortgage lending 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 propertyowner occupiers 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.buy-to-let landlords with small portfolios. |
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. For available-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 corporatesJA | The sumJudgemental Adjustments: Adjustments made to the ECL estimate outside of our Business banking, Corporate & Commercial Banking and Corporate & Investment Banking loan balances and social housing and non-core lending in Corporate Centrethe ECL models to reflect management judgements. |
314Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 307 |
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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 qualityhigh-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 customers | Loyal customers are defined as primary banking current account customers who hold an additional product. |
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 for non-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 basedtelephone-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 new start-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 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 NPS isMORI based on a 11-point scale (%Top2 – %Bottom 7) 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.cards. |
Santander UK Group Holdings plc315
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Annual Report 2022 | Santander UK Group Holdings plc 308 |
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Term | Definition |
Net Stable Funding Ratio (NSFR) | The ratio of available stable funding resources to stable funding requirements over a one yearone-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. |
Payment holiday | A period in which a customer has relief from making repayments on a loan. Also known as a payment deferral. |
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 than non-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 Mortgage-Backed Securities (RMBS) | Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and / 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. |
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. |
316Santander UK Group Holdings plc
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Annual Report 2022 | Santander UK Group Holdings plc 309 |
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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). |
SME 1 | SME 1 supports any business with turnover of up to £6.5m who have up to 2 Directors/Shareholders/Partners or who have simple banking needs such as current account, savings or unsecured lending of up to £25,000,£25,000. |
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 month12-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 lookingforward-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, high debt-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 a(SVR) | A mortgage product managed by Santander and not directly linked to the Bank of England base rate. |
Term Funding Scheme with additional incentives for SMEs (TFSME) | The TFSME allows eligible banks and building societies to access four-year funding at rates very close to Bank 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, TFSTFSME and noncustomernon-customer 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 | Assets on our balance sheet not used to secure liabilities or otherwise pledged. |
UK leverage ratio | CRD IV end-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. This is a key prudential regulatory measure which provides useful information to investors. |
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 the mark-to-market value of the underlying transaction. |
Santander UK Group Holdings plc317
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Annual Report 20202022 | Santander UK Group Holdings plc | Shareholder information310 | | |
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Cross-reference to Form 20-F
| | | | | | | | | | | |
Form 20-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 | 190, 227 (Note 10) |
| | Capitalisation and indebtedness | * |
| | Reasons for the offer and use of proceeds | * |
| | Risk factors | 280 |
4 | Information on the Company | History and development of the company | 74, 208, 210 (Note 1), 236 (Note 19), 240 (Note 21), 269, 299 |
| | Business overview | 21, 64, 75, 113, 120, 138, 169, 184, 221 (Note 2), 251 (Note 33), 294, 302 |
| | Organisational structure | 74, 152, 236 (Note 19), 275 |
| | Property, plant and equipment | 185, 210 (Note 1), 240 (Note 21), 305 |
4A | Unresolved Staff Comments | | Not applicable |
5 | Operating and Financial Review and Prospects | Operating results | 144, 146, 167, 183, 186, 280 |
| | Liquidity and capital resources | 145, 149, 151, 152, 153, 159, 186, 188, 208, 269, 305, 307, 308 |
| | Research and development, patents and licenses, etc. | 75 |
| | Trend information | 4, 10, 28, 183, 280 |
| | Off-balance sheet arrangements | 236 (Note 19), 248 (Note 31), 308 |
| | Tabular disclosure of contractual obligations | 308 |
| | Safe harbor | 278 |
6 | Directors, Senior Management and Employees | Directors and senior management | 43, 73 |
| | Compensation | 65, 210 (Note 1), 244 (Note 30), 308 |
| | Board practices | 45, 57, 65, 66, 68, 73, 254 (Note 38) |
| | Employees | 2, 38, 74, 224 (Note 6) |
| | Share ownership | 74, 253 (Note 37), 255 (Note 39) |
7 | Major Shareholders and Related Party Transactions | Major shareholders | 299 |
| | Related party transactions | 254 (Note 38), 255 (Note 39) |
| | Interests of experts and counsel | * |
8 | Financial Information | Consolidated Statements and Other Financial Information | 196, 204, 243 (Note 29), 248 (Note 31), 296 |
| | Significant Changes | 74, 265 (Note 42) |
9 | The Offer and Listing | Offer and listing details | * |
| | Plan of distribution | * |
| | Markets | * |
| | Selling shareholders | * |
| | Dilution | * |
| | Expenses of the issue | * |
10 | Additional Information | Share capital | * |
| | Memorandum and articles of association | 296 |
| | Material contracts | 299 |
| | Exchange controls | 299 |
| | Taxation | 311 |
| | Dividends and paying agents | * |
| | Statements by experts | * |
| | Documents on display | 299 |
| | Subsidiary Information | * |
11 | Quantitative and Qualitative Disclosures about Market | | 144 |
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 | | 75, 76 |
16A | Audit Committee financial expert | | 50, 298 |
16B | Code of Ethics | | 78 |
16C | Principal Accountant Fees and Services | | 57, 60, 225 (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 | | 298 |
318Santander UK Group Holdings plc
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Strategic Report | Sustainability and Responsible Banking | Governance | | Risk Reviewreview | | Financial review | | Financial statements | | Shareholder information |
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| | | | | | | | | | | | | |
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16H | Mine Safety Disclosure | | Not applicable |
PART III | | |
17 | Financial Statements | | Not applicable |
18 | Financial Statements | | 204 |
19 | Exhibits | | Filed with SEC |
* Not required for an Annual Report. |
Cross-reference to Form 20-F
| | | | | | | | | | | |
Form 20-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 | Capitalisation and indebtedness | * |
| | Reasons for the offer and use of proceeds | * |
| | Risk factors | 277-291 |
4 | Information on the Company | History and development of the company | 85, 102, 197, 199, 224, 227-228, 257, 295 |
| | Business overview | 10-11, 75, 86, 129-130, 142, 147, 170-171, 178, 208-209, 239, 281, 288-289 |
| | Organisational structure | 85, 224, 295 |
| | Property, plant and equipment | 44, 196, 201, 227-228 |
4A | Unresolved Staff Comments | | Not applicable |
5 | Operating and Financial Review and Prospects | Operating results | 18, 148-150, 154, 166, 171, 177-178, 277-291 |
| | Liquidity and capital resources | 72, 87, 148, 151-156, 159-164, 216-219, 303 |
| | Research and development, patents and licenses, etc. | 86 |
| | Trend information | 10-11, 16-19, 177, 179 |
| | Critical Accounting Estimates | 206-207 |
| | | |
| | | |
6 | Directors, Senior Management and Employees | Directors and senior management | 58-61, 292-293 |
| | Compensation | 76-80, 81-84, 196, 200-201, 231-236, 241-243 |
| | Board practices | 58-61, 69-73, 76-80, 243, 292-293 |
| | Employees | 15, 85, 211 |
| | Share ownership | 85, 242-245 |
| | Disclosure of a registrant's action to recover erroneously awarded compensation | Not applicable |
7 | Major Shareholders and Related Party Transactions | Major shareholders | 295 |
| | Related party transactions | 129, 243-245 |
| | Interests of experts and counsel | * |
8 | Financial Information | Consolidated Statements and Other Financial Information | 185-197, 194-266, 230-231, 236-239, 290 |
| | Significant Changes | 257 |
9 | The Offer and Listing |
| * |
| | | |
| | | |
| | | |
| | | |
| | | |
10 | Additional Information | Share capital | * |
| | Memorandum and articles of association | 290 |
| | Material contracts | 295 |
| | Exchange controls | 295 |
| | Taxation | 304 |
| | Dividends and paying agents | * |
| | Statements by experts | * |
| | Documents on display | 295 |
| | Subsidiary Information | * |
11 | Quantitative and Qualitative Disclosures about Market Risk | | 91-175 |
12 | Description of Securities Other Than Equity Securities |
| Exhibit 2.1 |
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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 | | 86 |
16A | Audit Committee financial expert | | |
16B | Code of Ethics | | 87 |
16C | Principal Accountant Fees and Services | | 69, 72, 212 |
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 | | 294 |
16H | Mine Safety Disclosure | | Not applicable |
16I | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | Not applicable |
PART III | | |
17 | Financial Statements | | Not applicable |
18 | Financial Statements | | 194-198 |
19 | Exhibits | | Filed with SEC |
* Not required for an Annual Report. |
Santander UK Group Holdings plc319
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Annual Report 2022 | Santander UK Group Holdings plc 311 |
EXHIBIT INDEX
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Exhibits1 | |
1.1 | |
2.1 | |
8.1 | |
12.1 | |
12.2 | |
13.1 | |
15.1 | |
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 2022 Annual Report on Form 20-F 2019 may be inspected at 2 Triton Square, Regent’s Place, London NW1 3AN, its principal executive offices and registered address.
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SANTANDER UK GROUP HOLDINGS plc
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By: | | /s/ Nathan BostockMike Regnier |
| | Nathan BostockMike Regnier |
| | Chief Executive Officer |
Dated: 47 March, 20212023