FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

Securities Exchange Act of 1934

For the month of August 2019

SANTANDER UK PLC

(Translation of registrant’s name into English)

2 Triton Square, Regent’s

Place, London NW1 3AN, England

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F . . . .X. . . . Form 40-F . . . . . . . .

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____

THE REGISTRANT HEREBY INCORPORATES ALL PARTS OF THIS REPORT ON FORM 6-K BY REFERENCE INTO REGISTRATION STATEMENT NO. 333-232887 FILED BY THE REGISTRANT WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM F-3ASR UNDER THE SECURITIES ACT OF 1933.

This Report on Form 6-K contains references to websites of the registrant and its affiliates. The registrant is not incorporating by reference any information posted on such websites.

Half Yearly Financial Report 2019

 

Santander UK plc

PART OF THE BANCO SANTANDER GROUP

 

 

 

 

 

 

Important information for readers

Santander UK plc and its subsidiaries (collectively called Santander UK or the Santander UK group) operate primarily in the UK, and are part of Banco Santander (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA.

This Half Yearly Financial Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See ‘Forward-looking statements’ in the Financial review section.

None of the websites referred to in this Half Yearly Financial Report on Form 6-K for the six months ended 30 June 2019 (the Form 6-K), including where a link is provided, nor any of the information contained on such websites, is incorporated by reference into the Form 6-K.

    

    

 

Santander UK plc

Half Yearly Financial Report 2019

 

Introduction			2
Financial review			4
Risk review			12
Financial statements			33
Other information for US investors			55

 

Santander UK plc		1

2019 Half Yearly Financial Report  |  Introduction

    

 

Introduction

The Company sets out in this report a fair review of its business and a description of its principal risks and uncertainties, including a balanced and comprehensive analysis of the development and performance of the business in the first half of the year and of its position at the end of the period.

Principal activities and business review

Santander UK plc (the Company) and its subsidiaries (collectively, Santander UK or the Santander UK group) is the ring-fenced bank of Santander UK Group Holdings plc group, serving all of its personal customers in the UK and the vast majority of its business customers. It offers a wide range of personal financial products and services.

Delivering on our purpose

Our purpose is to help people and businesses prosper. We aim to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities, with a culture that is Simple, Personal and Fair. Customer loyalty remains at the core of our strategy, while we transform the bank for improved returns.

Building customer loyalty

We are focused on building stronger customer relationships and a seamless customer experience. On a net promoter score basis (NPS)⁽¹⁾, we are ranked first in our peer group for business and corporate and top three amongst our peers for retail. During the first half of 2019, we helped 15,000 first time buyers purchase a home and 169,000 customers finance their cars.

We are strengthening our mortgage franchise through innovative launches, such as an online mortgage overpayments tool, as well as the introduction of 40-year mortgages to help more people buy their first home. We launched a new advertising campaign, which resulted in the highest monthly uplift in Ad Awareness according to YouGov research in June 2019. This is helping to drive improved brand awareness as well as an increased mortgage application pipeline.

This year we are proud to have been awarded Best Business Current Account Provider again, for the 17th year running, and Business Bank of the Year again, for the 5th year running, by Moneyfacts⁽²⁾. We have opened 31,000 1I2I3 Business Current Accounts since launch in October 2018, with strong switcher levels. The 1I2I3 Business World proposition has also been strengthened through the launch of a 1I2I3 Fixed Term Bond in June 2019.

Digital acquisition and adoption is driving change in the organisation. Since the start of the year, we retained 60% of refinanced mortgage loans online. We also opened 46% of current accounts and 66% of credit cards through digital channels. We are continuing to develop our international proposition, supported by the 13 trade corridors we have established to date. We continue to utilise our access to global best practice and market leading solutions through Banco Santander.

Transforming our bank for improved returns

Earlier in the year, we outlined a significant restructure to make our branch network smaller and optimised for the future. We also announced plans to reshape our Corporate & Commercial Banking (CCB) business, with a continued focus on SME and mid-sized businesses, particularly those with international trade ambitions. Our multi-year transformation programme aims to simplify, digitise and automate the bank by focusing on our operating model, structures and productivity. We have already taken a number of decisive actions and plan to invest £400m by the end of 2021 with a 2-3 year payback. Over the medium-term, and subject to further strategic transformation opportunities, we expect to invest an additional £100m with a similar payback period.

We are prioritising growth in portfolios with attractive returns, such as mortgages and consumer (auto) finance as we aim to become a more focused and efficient bank. We will continue to leverage our relationship with our parent and to collaborate with the wider Banco Santander group on a number of initiatives including One Pay FX, Openbank and Asto. We have some exciting innovations in the pipeline, including improvements to customer service utilising Google Virtual Assistant, enhancing efficiency and customer experience.

Outlook

Given market perception that there is an increased likelihood of a ‘no deal’ outcome in October 2019, we continue to prepare for all potential outcomes. We expect income pressure to continue to impact our results, with the significant cost savings from our transformation programme largely offsetting this over the medium-term.

Our principal risks and uncertainties

Information on our principal risks and uncertainties is set out in the Risk review by type of risk. Except where noted, there has been no significant change to the description of these risks or key mitigating actions as set out in the 2018 Annual Report on Form 20-F (the 2018 Annual Report).

 

 

(1)	Net promoter score is defined in the ‘Glossary’ section of the Financial review.

(2)

Business Moneyfacts Awards are run by Moneyfacts Group, the independently owned and impartial provider of UK personal finance data. Business Moneyfacts Awards are highly coveted awards which are totally independent. The awards are presented annually for product excellence and outstanding service and cover products from across the range of financial services.

 

2		Santander UK plc

> Introduction

    

 

Key performance indicators

The directors of the Company’s parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which includes the Santander UK plc group) on a business division basis. The Company’s Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the Company. As a result, key performance indicators are not set, monitored or managed at the Santander UK plc group level. The development and performance of the business of the Santander UK plc group is set out in the ‘Income statement review’ section of the Financial review.

 

Santander UK plc		3

    

 

Financial review

 

 

 

 

 

				Contents
				Income statement review			5
				Summarised Consolidated Income Statement			5
				Profit before tax by segment			6
				Balance sheet review			7
				Summarised Consolidated Balance Sheet			7
				Customer balances			9
				Capital			10
				Liquidity			10
				Forward-looking statements			11
				Glossary			11

 

4		Santander UK plc

> Income statement review

    

 

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT

 

		Half year to 30 June 2019 £m				Half year to 30 June 2018(2) £m
Net interest income			1,668				1,811
Non-interest income(1)			453				501
Total operating income			2,121				2,312
Operating expenses before credit impairment losses, provisions and charges			(1,257	)			(1,283	)
Credit impairment losses			(69	)			(91	)
Provisions for other liabilities and charges			(206	)			(33	)
Total operating credit impairment losses, provisions and charges			(275	)			(124	)
Profit before tax			589				905
Tax on profit			(170	)			(233	)
Profit after tax for the period			419				672
Attributable to:
Equity holders of the parent			410				660
Non-controlling interests			9				12
Profit after tax for the period			419				672

 

(1)	Comprised of Net fee and commission income and Net trading and other income.

(2)	Adjusted to reflect the amendment to IAS 12, as described in Note 1 to the Condensed Consolidated Interim Financial Statements.

A more detailed Consolidated Income Statement is contained in the Condensed Consolidated Interim Financial Statements.

H119 compared to H118

By income statement line item, the movements were:

 

–

Net interest income was down 8%, largely impacted by pressure from the mortgage back book and £2.1bn of SVR attrition (Q219: £0.5bn).

 

–

Non-interest income was down 10%, largely due to £63m of ring-fencing perimeter changes in CIB, partially offset by £15m additional consideration received in connection with the 2017 Vocalink sale. Following a change in accounting treatment of operating leases consumer (auto) finance income also increased.

 

–

Operating expenses before credit impairment losses, provisions and charges were down 2%, largely due to £41m of ring-fencing perimeter changes and £28m of Banking Reform costs from H118, as well as £13m of transformation costs this year.

 

We also incurred higher depreciation costs related to prior year investment projects and the change in accounting treatment of operating leases in consumer (auto) finance. These increases were partially offset by lower employee costs.

 

–

Credit impairment losses decreased 24%, with a release from a significant risk transfer (SRT) securitisation in June 2019 and single name charges in CIB which were not repeated this year. All portfolios continue to perform very well.

 

–

Provisions for other liabilities and charges were up £173m to £206m, with £100m of transformation programme charges (predominantly restructuring costs) in Corporate Centre and £70m PPI provision charge in Retail Banking.

 

–

Profit before tax was down 35% to £589m, for the reasons outlined above.

 

–

Tax on profit decreased £63m to £170m, as a result of lower taxable profits in H119, with PPI charges not tax deductible.

PPI provision charge

 

–

At 30 June 2019, the remaining provision for redress and related costs was £248m (2018: £246m). This includes a provision for PPI redress as well as our best estimate of liability for a specific portfolio which was disclosed in our 2018 Annual Report.

 

–

We made an additional provision of £70m in Q219 reflecting an increase in PPI claims volumes, additional industry activities and having considered guidance provided by the FCA, in advance of the PPI claims deadline on 29 August 2019.

 

–

We will continue to monitor our provision levels, and take account of the impact of any further change in claims received and FCA guidance.

 

Santander UK plc		5

2019 Half Yearly Financial Report  |  Financial review

    

 

PROFIT BEFORE TAX BY SEGMENT

The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date. For more, see Note 2 to the Condensed Consolidated Interim Financial Statements.

 

–

Retail Banking offers a wide range of products and financial services to individuals and small businesses through a network of branches and ATMs, as well as through telephony, digital and intermediary channels. Retail Banking includes business banking customers, small businesses with an annual turnover up to £6.5m, and Santander Consumer Finance, predominantly a vehicle finance business.

–

Corporate & Commercial Banking covers businesses with an annual turnover of £6.5m to £500m. Corporate & Commercial Banking offers a wide range of products and financial services provided by relationship teams that are based in a network of regional CBCs and through telephony and digital channels.

–

Corporate & Investment Banking services corporate clients with an annual turnover of £500m and above. CIB clients require specially tailored solutions and value-added services due to their size, complexity and sophistication. We provide these clients with products to manage currency fluctuations, protect against interest rate risk, and arrange capital markets finance and specialist trade finance solutions, as well as providing support to the rest of Santander UK’s business segments.

–

Corporate Centre mainly includes the treasury, non-core corporate and legacy portfolios, including Crown Dependencies. Corporate Centre is also responsible for managing capital and funding, balance sheet composition, structure, pension and strategic liquidity risk. To enable a more targeted and strategically aligned apportionment of capital and other resources, revenues and costs incurred in Corporate Centre are allocated to the three business segments. The non-core corporate and legacy portfolios are being run-down and/or managed for value.

 

Half year to 30 June 2019		Retail     Banking £m				Corporate &     Commercial Banking £m				Corporate & Investment Banking £m				Corporate Centre £m				Total £m
Net interest income/(expense)			1,465				189				32				(18	)			1,668
Non-interest income(1)			353				38				47				15				453
Total operating income/(expense)			1,818				227				79				(3	)			2,121
Operating expenses before credit impairment losses, provisions and charges			(1,011	)			(138	)			(83	)			(25	)			(1,257	)
Credit impairment (losses)/releases			(63	)			(9	)			4				(1	)			(69	)
Provisions for other liabilities and charges			(95	)			(1	)			(11	)			(99	)			(206	)
Total operating credit impairment losses, provisions and (charges)/releases			(158	)			(10	)			(7	)			(100	)			(275	)
Profit/(loss) before tax			649				79				(11	)			(128	)			589
Half year to 30 June 2018(2)
Net interest income			1,565				202				33				11				1,811
Non-interest income(1)			304				40				115				42				501
Total operating income			1,869				242				148				53				2,312
Operating expenses before credit impairment losses, provisions and charges			(957	)			(134	)			(145	)			(47	)			(1,283	)
Credit impairment (losses)/releases			(52	)			(22	)			(18	)			1				(91	)
Provisions for other liabilities and (charges)/releases			(34	)			8				(2	)			(5	)			(33	)
Total operating credit impairment losses, provisions and charges			(86	)			(14	)			(20	)			(4	)			(124	)
Profit/(loss) before tax			826				94				(17	)			2				905

 

(1)	Comprised of Net fee and commission income and Net trading and other income.

(2)	Restated to reflect the resegmentation of our short term markets business to Corporate Centre as described in Note 2 to the Condensed Consolidated Interim Financial Statements.

H119 compared to H118

For Retail Banking, profit before tax was lower, largely impacted by pressure from the mortgage back book and £2.1bn of SVR attrition. Following a change in accounting treatment of operating leases, higher non-interest income was partially offset by higher operating expenses.

For Corporate & Commercial Banking, profit before tax was lower, largely due to the interest expense related to the 2018 SRT securitisations. Credit impairment losses decreased £13m, as a result of a release from the completion of the June 2019 SRT securitisation.

For Corporate & Investment Banking, profit before tax was lower largely reflecting the changes in the statutory perimeter, following the transfers of activities to Banco Santander London Branch as part of ring-fence implementation.

For Corporate Centre, loss before tax was largely due to transformation programme investment of £113m, as well as the impact of holding higher liquidity and lower yields on non-core assets. Following ring-fence implementation, some short-term markets activity is now accounted for in net interest income, rather than non-interest income.

 

6		Santander UK plc

> Balance sheet review

    

 

Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET

 

		30 June 2019 £bn				31 December 2018 £bn
Assets
Cash and balances at central banks			21,936				19,747
Financial assets at fair value through profit or loss			6,190				10,876
Financial assets at amortised cost			234,127				232,444
Financial assets at fair value through other comprehensive income			13,438				13,302
Interest in other entities			96				88
Property, plant and equipment			2,069				1,832
Retirement benefit assets			779				842
Tax, intangibles and other assets			5,892				4,241
Total assets			284,527				283,372
Liabilities
Financial liabilities at fair value through profit or loss			3,408				7,655
Financial liabilities at amortised cost			260,096				256,514
Retirement benefit obligations			252				114
Tax, other liabilities and provisions			4,707				3,180
Total liabilities			268,463				267,463
Equity
Total shareholders’ equity			15,905				15,758
Non-controlling interests			159				151
Total equity			16,064				15,909
Total liabilities and equity			284,527				283,372

A more detailed Consolidated Balance Sheet is contained in the Condensed Consolidated Interim Financial Statements.

30 June 2019 compared to 31 December 2018

Assets

Cash and balances at central banks

Cash and balances at central banks increased by 11% to £21,936m at 30 June 2019 (2018: £19,747m) due to higher balances with the Bank of England, partially offset by lower cash balances in the retail branches.

Financial assets at fair value through profit or loss:

Financial assets at fair value through profit or loss decreased by 43% to £6,190m at 30 June 2019 (2018: £10,876m), mainly due to:

 

–

£2.1bn of senior tranches of credit linked notes, which were previously classified as other financial assets at fair value through profit or loss, are now presented on a net basis. For more information see Note 9 to the Condensed Consolidated Interim Financial Statements.

–

The maturity of non-trading reverse repurchase agreements held at FVTPL, which totalled £2.3bn at 31 December 2018.

Financial assets at amortised cost:

Financial assets at amortised cost increased by 1% to £234,127m at 30 June 2019 (2018: £232,444m), mainly due to:

 

–

Customer loans increased £0.7bn, with higher mortgage and consumer (auto) finance lending partially offset by a reduction in Corporate & Investment Banking and CRE exposures.

–

Reverse repurchase agreements – non trading increasing by £1.3bn, reflecting the classification of all non-trading reverse repurchase agreements at amortised cost in line with our ring-fenced model and as part of normal liquidity risk management.

These increases were partially offset by a decrease of £0.7bn in loans and advances to banks.

Property, plant and equipment

Property, plant and equipment increased by 13% to £2,069m at 30 June 2019 (2018: £1,832m) mainly due to the application of IFRS 16 with effect from 1 January 2019.

Retirement benefit assets

Retirement benefit assets decreased by 7% to £779m at 30 June 2019 (2018: £842m). This was mainly due to actuarial losses in the period driven by a fall in gilt yields and a narrowing of credit spreads, partially offset by asset growth mainly driven by the increase in gilt values.

Tax, intangibles and other assets

Tax, intangibles and other assets increased by 39% to £5,892m at 30 June 2019 (2018: £4,241m), mainly due to the settlement timings of financial transactions with payment agents in the normal course of business.

 

Santander UK plc		7

2019 Half Yearly Financial Report  |  Financial review

    

 

Liabilities

Financial liabilities at fair value through profit or loss:

Financial liabilities at fair value through profit or loss decreased by 55% to £3,408m at 30 June 2019 (2018: £7,655m), mainly due to:

 

–

£2.1bn of senior cash deposits, which were previously classified as other financial liabilities at fair value through profit or loss, are now presented on a net basis. For more information see Note 16 to the Condensed Consolidated Interim Financial Statements.

–

The maturity of non-trading repurchase agreements held at FVTPL, which totalled £2.1bn at 31 December 2018.

These decreases were partially offset by a small increase in the carrying value of derivative liabilities.

Financial liabilities at amortised cost

Financial liabilities at amortised cost increased by 1% to £260,096m at 30 June 2019 (2018: £256,514m). This was mainly due to the following:

 

–

Repurchase agreements – non trading increased by £3.9bn reflecting the classification of all non-trading repurchase agreements at amortised cost in line with our ring-fenced model and as part of normal liquidity risk management.

–

Customer deposits increased £2.4bn, driven by higher corporate deposits as well as increased savings and business banking deposits in Retail Banking.

–

Deposits by banks decreased by £0.7bn due to a reduction in the deposits placed with Banco Santander and lower balances held as cash collateral.

–

Debt securities in issue decreased by £2.1bn, reflecting maturities in the period, partially offset by covered bond issuances of £1bn in February 2019 and €1bn in May 2019, as well as a senior unsecured issuance of $1bn in June 2019.

Retirement benefit obligations

Retirement benefit obligations increased by £138m to £252m at 30 June 2019 (2018: £114m). This was mainly due to actuarial losses in the period driven by a fall in gilt yields and a narrowing of credit spreads, partially offset by asset growth mainly driven by the increase in gilt values.

Tax, other liabilities and provisions

Tax, other liabilities and provisions increased by 48% to £4,707m at 30 June 2019 (2018: £3,180m) mainly due to the settlement timings of financial transactions with payment agents in the normal course of business.

Equity

Total shareholders’ equity

Total shareholders’ equity increased slightly by 1% to £15,905m at 30 June 2019 (2018: £15,758m). This net increase was principally due to retained profits for the period and increases in the fair value of effective cash flow hedges, partially offset by reductions in the defined benefit surplus and own credit adjustments.

 

8		Santander UK plc

> Balance sheet review

    

 

CUSTOMER BALANCES

Consolidated

 

		30 June 2019 £bn				31 December 2018 £bn
Customer loans			200.3				199.6
Other assets			84.2				83.8
Total assets			284.5				283.4
Customer deposits			169.7				167.3
Medium Term Funding (MTF)			46.9				48.9
Other liabilities			51.8				51.2
Total liabilities			268.4				267.4
Shareholders’ equity			15.9				15.8
Non-controlling interest			0.2				0.2
Total liabilities and equity			284.5				283.4

Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.

30 June 2019 compared to 31 December 2018

 

–

Customer loans increased £0.7bn, with higher mortgage and consumer (auto) finance lending partially offset by a reduction in CIB and CRE exposures.

–

Customer deposits increased by £2.4bn, driven by higher corporate deposits, as well as increased savings and business banking deposits in Retail Banking.

–

The MTF balance decreased, reflecting maturities in the period, partially offset by covered bond issuances of £1bn in February 2019 and €1bn in May 2019, as well as a senior unsecured issuance of $1bn in June 2019.

 

Retail Banking
		30 June 2019 £bn				31 December 2018 £bn
Mortgages			159.4				158.0
Business banking			1.8				1.8
Consumer (auto) finance			7.8				7.3
Other unsecured lending			5.6				5.7
Customer loans			174.6				172.8
Current accounts			67.8				68.4
Savings			57.0				56.0
Business banking accounts			12.1				11.9
Other retail products			5.9				5.8
Customer deposits			142.8				142.1
Corporate & Commercial Banking
		30 June 2019 £bn				31 December 2018 £bn
Trading businesses			11.6				11.5
Commercial Real Estate			5.8				6.2
Customer loans			17.4				17.7
Customer deposits			18.0				17.6
Corporate & Investment Banking
		30 June 2019 £bn				31 December 2018 £bn
Customer loans			4.1				4.6
Customer deposits			6.1				4.8
Corporate Centre
		30 June 2019 £bn				31 December 2018 £bn
Customer loans			4.2				4.5
– of which Social Housing			3.6				3.8
– of which non-core			0.6				0.7
Customer deposits			2.8				2.8

 

Santander UK plc		9

2019 Half Yearly Financial Report  |  Financial review

    

 

Capital
		30 June 2019     £bn				31 December 2018   £bn
Capital and leverage
Total qualifying regulatory capital			15.8				15.9
Total capital ratio			21.1%				20.3%
RWAs			74.7				78.5

 

(1)	Segmental RWAs for 2018 have been restated to reflect the transfer of our short term markets activity from CIB to Corporate Centre and the reallocation of an equity stake in a joint venture from Corporate Centre to Retail Banking.

Analysis of capital is included in the Capital risk section of the Risk review.

30 June 2019 compared to 31 December 2018

–

RWAs reduced largely as a result of the June 2019 SRT securitisation and lower lending in our corporate business as we continue to focus on risk-weighted returns. This was partially offset by increased RWAs in Retail Banking with lending growth in mortgages and consumer (auto) finance.

–

We take a prudent approach to risk and our calculation of RWAs uses through-the-cycle modelling of unexpected losses. As a result we have a higher mortgage RWA translation ratio than other large UK banks. Following implementation of planned PRA changes by 1 January 2021, RWA calculation models will have to use a hybrid of through-the-cycle and point-in-time assumptions and as a result we expect a significant decrease in our RWAs.

Liquidity

 

		30 June 2019     £bn				31 December 2018   £bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)			155%				164%
LCR eligible liquidity pool			49.0				54.1

Analysis of liquidity is included in the Liquidity risk section of the Risk review.

30 June 2019 compared to 31 December 2018

–

We continue to maintain high levels of liquidity to ensure we are well prepared for potential Brexit uncertainty later in the year.

–

The RFB DoLSub LCR and LCR eligible liquidity pool both decreased following the transfer of our Isle of Man and Jersey businesses (Crown Dependencies) into ANTS as part of ring-fencing implementation.

Proposed changes to our operating companies’ structure

–

As part of ring-fencing implementation, Santander UK Group Holdings plc adopted a wide ring-fenced bank model with most of our operations within Santander UK plc, the ring-fenced bank. ANTS is outside the RFB and also holds wealth management businesses in the Crown Dependencies, which are not permitted within the ring-fence as they are located outside the UK.

–

To optimise our overall funding structure, Santander UK Group Holdings plc is considering the transfer of some RFB assets to ANTS to enable more efficient use of Crown Dependencies deposits.

 

10		Santander UK plc

> Balance sheet review

    

 

Forward-looking statements

The Company and its subsidiaries (together Santander UK) may from time to time make written or oral forward-looking statements. The Company makes written forward-looking statements in this Half Yearly Financial Report and may also make forward-looking statements in its periodic reports to the SEC on Forms 20-F and 6-K, in its offering circulars and prospectuses, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on its behalf. For more, see ‘Forward-looking statements’ in the Shareholder information section of the 2018 Annual Report. Please also refer to our latest filings with the SEC (including, without limitation, our Annual Report on Form 20-F for the year ended 31 December 2018) for a discussion of certain risk factors and forward-looking statements. Undue reliance should not be placed on forward-looking statements when making decisions with respect to any Santander UK member and/or its securities. Investors and others should take into account the inherent risks and uncertainties of forward-looking statements and should carefully consider the non-exhaustive list of important factors in the 2018 Annual Report. 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.

Glossary

Our glossary of industry and other main terms is included in the section ‘Other information for US investors’ in our 2018 Annual Report on Form 20-F.

The definition of Net Promoter Score is as follows:

 

Term		Definition
Net Promoter Score (NPS)		NPS measures customer experience and predicts business growth. This proven metric provides the core measurement for customer experience management programs and the loyalty of customers to a company.
		Business and corporate NPS is measured by the MarketVue Business Banking from Savanta. This is an ongoing telephone based survey designed to monitor usage and attitude of UK businesses towards banks. 15,000 structured telephone interviews are conducted each year among businesses of all sizes from new start-ups to large corporates. The data is based upon 9,925 interviews made in twelve months ended 30 June 2019 with businesses turning over from £0 - £500m per annum 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). The competitor set included in this analysis is Barclays, RBS, HSBC, Lloyds Bank, TSB and NatWest.
		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 is 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. Data shown is for the twelve months ended 30 June 2019, based on 13,803 interviews and compared against twelve months ended data for the period as indicated. The competitor set used to calculate the product weights is Barclays, Halifax, HSBC, Lloyds Bank, Nationwide, NatWest, TSB and RBS. The competitor set included in this analysis for the ranking and highest performing peers is Barclays, Halifax, HSBC, Lloyds Bank, Nationwide, NatWest, TSB and RBS.

 

Santander UK plc		11

    

 

Risk review

 

				Contents
				Risk overview			13
				Risk governance			13
				Credit risk			14
				Santander UK group level			14
				Retail Banking			20
				Other business segments			24
				Market risk			26
				Banking market risk			26
				Trading market risk			26
				Liquidity risk			27
				Capital risk			30
				Other key risks			31

 

12		Santander UK plc

> Risk governance

    

 

Risk overview

All our activities involve identifying, assessing, managing and reporting risks. Sound risk management is at the centre of our day-to-day activities. It benefits our business and our customers by helping to ensure balanced and responsible growth.

RISK TYPES

Our key risk types help us define the risks to which we are exposed. For key risk type definitions, see ‘How we define risk’ on page 53 of the 2018 Annual Report.

30 June 2019 compared to 31 December 2018

In H119, our top risks remained largely the same. The more notable movements in the top risks across the period related to the following:

 

-

Given the mitigating action we have undertaken, the risk associated with ‘Mitigating the impact of a low rate environment’ has been removed from our list of top risks. However, we continue to keep the situation under close review, especially given the heightened level of volatility experienced in market interest rates during the first half of the year.

-

We consider that a range of different Brexit scenarios remain possible, but that the risk of a ‘no deal’ Brexit is significant as evidenced by recent movements in market interest rates and sterling. Following the results of the EU elections in May 2019 and the subsequent resignation of the Prime Minister, the political uncertainty has increased further, with the focus now moving to the new Prime Minister’s Brexit strategy. Our Brexit planning approach remains unchanged, with a focus on remaining operationally ready, in the event that the UK leaves the EU without a deal. We have a Brexit Response Group which is our key forum for co-ordinating and escalating operational impacts, and which is designed for the business and support functions to take proactive steps where necessary. Oversight of key Brexit related matters is also provided by Senior Management Committee and the Board.

-

The Interest rate and Foreign Exchange hedging programs we have in place are designed to limit Income Statement volatility arising from short-term market movements, and give resilience to our business model. Our view of the longer-term outlook remains unchanged, although the economic uncertainty and the impact of rates remaining low, if prolonged over time, could impact our Net Interest Margin.

-	We successfully implemented our Ring-fencing programme in 2018. We have retained it as a top risk while we maintain focus on embedding ring-fencing culture throughout our governance and operations.

-	We have continued to build and strengthen our capital position through a combination of management actions and retained profits.

In H119, our emerging risks remained largely unchanged, with the exceptions of climate change, which we already recognise is a significant global issue and have been tracking through various emerging regulatory developments; and also developments in both the UK economy and the global geopolitical environment:

 

-

Climate change risk – reflecting the significant potential risks posed by climate change to the economy and to the financial system, in April 2019, the PRA became the first regulator in the world to publish supervisory expectations setting out how banks and insurance companies need to develop an enhanced approach to managing the financial risks from climate change. For 2019, our programme of work is focused on enhancing our understanding of the most material climate change related risk drivers of our business model, and producing an implementation plan to fully deliver the PRA’s expectations under Supervisory Statement 3/19. We are addressing climate change related risk issues through ongoing engagement across our business and support functions, co-ordinated and led by the Risk Division, and now intend to formally recognise it as an emerging risk.

-

Uncertain economic and geopolitical environment - In H119, the UK economy continued to grow in Q1, but indications from purchasing managers indices are that activity could have stayed flat or even contracted in Q2. It remains to be seen whether this is a temporary situation. Unemployment remains low and real wage growth remains firmly positive, which should continue to support both consumption and the economy. However, consumer and business surveys remain weak due to concerns over Brexit and the economy generally. Arrears remain at historically low levels, with good credit quality being maintained across our lending portfolios, supported by our prudent approach to lending. Some normalisation from these cyclically low levels could arise over the medium term, should the credit cycle reach a turning point. Outside of the UK, there are concerns that global economic growth could continue to slow, with trade tensions remaining elevated between the US and China. Geo-political risks are also high across a number of geographies, which could also have adverse implications for global growth.

Risk governance

As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.

30 June 2019 compared to 31 December 2018

There were no significant changes in our risk governance, including how we define risk and our key risk types, as described in the 2018 Annual Report. In H119, we also renamed ‘Strategic risk’ as ‘Strategic and Business risk’ to reflect that its scope includes the risk of underperformance against planned objectives.

 

Santander UK plc		13

2019 Half Yearly Financial Report  |  Risk review

    

 

Credit risk

 

Overview
Credit risk is the risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for which we assumed a financial obligation.   In this section we begin by reviewing the latest forward-looking information used in our Expected Credit Loss (ECL) assessments. We then analyse our credit risk profile and performance at a Santander UK group level followed by Retail Banking, which is covered separately from our other business segments: Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre.				Key metrics   Stage 3 ratio was broadly stable at 1.28% (2018: 1.29%).   Loss allowances increased to £817m (2018: £807m).   Average LTV of 64% (2018: 63%) on new mortgage lending.

Credit risk – Santander UK group level

Introduction

We manage credit risk across all our business segments in line with the credit risk lifecycle. We tailor the way we manage risk across the lifecycle to the type of customer. There have been no significant changes in the way we manage credit risk as described in the 2018 Annual Report.

The segmental basis of presentation in this Half Yearly Financial Report has been changed, and the prior period restated, to report our short term markets business in Corporate Centre rather than in Corporate & Investment Banking. This reflects the run down or transfer to Banco Santander London Branch of the prohibited part of the business in 2018, as part of the transition to our ring-fenced model, with the remaining permitted business forming part of our liquidity risk management function. See Note 2 to the Condensed Consolidated Interim Financial Statements for more information.

We provide an update on the key changes to the inputs to our ECL model below.

Risk measurement and control

Key metrics

Following the introduction of IFRS 9 in 2018, the Stage 3 ratio became the main indicator of credit quality performance and replaces the NPL ratio which is no longer reported. The Stage 3 ratio is total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.

Recognising ECL

The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a significant increase in credit risk (SICR) since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the likelihood of a loss being incurred even when it is considered unlikely.

Multiple economic scenarios and probability weights

For all our portfolios, except CIB, we use five forward-looking economic scenarios. They consist of a central base case, two upside scenarios and two downside scenarios. We use five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy. For example, the Downside 2 scenario reflects the possibility of a recession occurring. We believe that our five scenarios, in particular Downside 1 and Downside 2, reflect the range of outcomes that Brexit may take, including a deal with a transition period or a no-deal Brexit. Our scenarios are also in line with a number of scenarios that have been produced by, for example, the Bank of England and its disruptive scenario, and other economic forecasters’ no deal scenarios. As such our scenarios and weights reflect the range of possible outcomes that the UK may face in H219 and beyond.

 

Base case for H119

–  Our base case assumes that the UK will negotiate an orderly exit with the EU that avoids a so-called‘cliff-edge’ event when the UK leaves the EU and that there will be a relatively smooth transition period.

–  The GDP forecast for 2019 was lowered in March 2019 to reflect the weak start to the year and continuing Brexit uncertainty, however, growth starts to slowly pick up after 2019 as Brexit uncertainty starts to wane and reverts back to the long run growth rate of 1.6% pa.

–  Unemployment continues its current trend over the forecast period, tightening labour markets further and pushing up average earnings growth. This growth along with inflation trending at the Bank of England target rate of 2%, result in positive real earnings growth.

–  Whilst the low value of sterling continues in 2019, it is expected to rally against the dollar once the withdrawal agreement on Brexit has been ratified, making exports less competitive. Even though the Brexit negotiations are likely to result in some increased trade costs between the EU and UK, these are not projected to significantly impact the downwards trend in the share of UK exports going to the EU.

–  For Bank Rate forecast, the base case currently assumes a flat profile for the 5-year planning horizon.

–  In the medium-term, the forecast projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential, which is reflected in an average growth expectation of less than 2% pa.

–  In summary, the base case assumes that activity will continue to run at a sluggish pace as we move through 2019. CPI inflation is forecast to remain around the target rate and a positive increase in wage growth is predicted. Both of these will provide a boost to household spending power. However, the effect of limited business investment on growth will continue until the Brexit uncertainty starts to wane. Furthermore, with household savings ratios at or near historic lows and consumer credit growth slowing, consumer demand will be driven increasingly by the fundamentals of household income growth.

The key changes to the base case from 2018 to H119 are that GDP for 2019 is now 1.2% compared to 1.5%; unemployment is lower across all years of the forecast (on average 4.0% compared to 4.3%); house prices growth is lower for 2019 at 1% compared to 2%; and there are no interest rate increases planned over the period compared to increases of 0.25% in 2019, 2020 and 2022.

For details on our methodology to derive the scenarios we use in our ECL model and the weights we apply to them, see the ‘Multiple economic scenarios and probability weights’ section in the 2018 Annual Report.

 

14		Santander UK plc

> Credit Risk

    

 

The annual growth rates over the five year forecast for each of our scenarios at 30 June 2019 and 31 December 2018 were:

 

		Upside 2				Upside 1				Base case				Downside 1				Downside 2
30 June 2019		%				%				%				%				%
House price index(1)			4.80				3.40				1.70				(2.20)				(8.70)
GDP(1)			2.60				2.20				1.80				0.70				1.00
Unemployment rate			1.90				3.00				4.00				6.50				7.80
Interest rate			0.75				0.75				0.75				2.00				2.25
31 December 2018
House price index(1)			3.40				2.30				2.00				(2.00)				(9.50)
GDP(1)			2.50				2.10				1.60				0.70				0.30
Unemployment rate			2.80				3.80				4.30				6.90				8.60
Interest rate			1.00				1.25				1.50				2.50				2.25
(1) Compound annual growth rate
The probability weights we applied to the scenarios at 30 June 2019 and 31 December 2018 were:
		Upside 2				Upside 1				Base case				Downside 1				Downside 2
Probability weights		%				%				%				%				%
30 June 2019			5				15				40				30				10
31 December 2018			5				15				40				30				10
CIB portfolio
The average global annual growth rates over the four year forecast for each of the scenarios for our CIB portfolio at 30 June 2019 and 31 December 2018 were:
										Upside				Base case				Downside
GDP assumption										%				%				%
30 June 2019											3.8				3.5				3.0
31 December 2018											4.2				3.6				2.7
The probability weights we applied to the scenarios for our CIB portfolio at 30 June 2019 and 31 December 2018 were:
										Upside				Base case				Downside
Probability weights										%				%				%
30 June 2019											30				40				30
31 December 2018											20				60				20

Significant Increase in Credit Risk

There have been no changes to the way that we measure SICR as described in the 2018 Annual Report, except that we changed the absolute thresholds for unsecured personal loans and Corporate & Commercial Banking exposures to be calculated on an annualised basis to bring them into line with our other portfolios.

Management judgement applied in calculating ECL

IFRS 9 recognises that expert management judgement is an essential part of calculating ECL. Specifically, where the historical information that we use in our models does not reflect current or future expected conditions or the data we have does not cover a sufficient period or is not robust enough. We discussed what we consider to be the significant management judgements in calculating ECL in the 2018 Annual Report, which are:

 

–	Definition of default

–	Forward-looking multiple economic scenarios

–	Probability weights

–	SICR thresholds

–	Post Model Adjustments

Post Model Adjustments (PMAs)

The most significant PMAs that we applied at 30 June 2019 and 31 December 2018 were:

 

		30 June				31 December
		2019				2018
PMAs		£m				£m
Interest-only maturity default risk			51				69
Buy-to-Let (BTL)			18				20
Long-term indeterminate arrears			20				23
Temporary economics			22				-

In addition to updating the PMAs we applied in 2018, in H119 we applied a temporary economics PMA of £22m. In June 2019, management updated the economic scenarios for Q2 2019, which resulted in a release of ECL, mainly arising from changes to Base Rate/Libor, unemployment and HPI. While the risks facing the UK macro economy are materially unchanged and our scenarios capture a plausible range of possible loss distributions under alternative economic conditions, uncertainty around the outcome of Brexit and its effect on the UK macro environment continues. Management therefore applied a temporary PMA of £22m to defer the impacts in full for the Q2 2019 changes in assumptions on Base Rate/Libor and unemployment, and partially for HPI.

 

Santander UK plc		15

2019 Half Yearly Financial Report  |  Risk review

    

 

SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW

Credit performance

The customer loans in the tables below and in the rest of the ‘Credit risk’ section are presented differently from the balances in the Consolidated Balance Sheet. The main difference is that customer loans exclude interest we have accrued but not charged to customers’ accounts yet.

 

						Stage 3				Stage 3
		Customer				drawn				undrawn				Stage 3				Gross write–				Loss
		loans				exposure(1)(2)				exposure				ratio(3)				offs				allowances
30 June 2019		£bn				£m				£m				%				£m				£m
Retail Banking:			174.6				2,156				42				1.26				96				584
– of which mortgages			159.4				1,922				15				1.22				6				214
Corporate & Commercial Banking			17.4				300				26				1.87				4				205
Corporate & Investment Banking			4.1				–				26				0.63				–				16
Corporate Centre			4.2				14				–				0.33				1				12
			200.3				2,470				94				1.28				101				817
31 December 2018
Retail Banking:			172.8				2,211				43				1.30				182				594
– of which mortgages			158.0				1,982				17				1.27				18				237
Corporate & Commercial Banking			17.7				264				12				1.56				97				182
Corporate & Investment Banking			4.6				–				26				0.56				252				18
Corporate Centre			4.5				16				–				0.36				3				13
			199.6				2,491				81				1.29				534				807
Of which: Corporate lending
30 June 2019			23.3				394				53				1.92				13				274
31 December 2018			24.1				353				38				1.62				364				253

 

(1)	We define Stage 3 in the ‘Credit risk – Santander UK group level’ section.

(2)	Interest on Stage 3 exposures is derecognised in line with the requirements of IFRS 9.

(3)	Total Stage 3 exposure as a percentage of customer loans plus undrawn Stage 3 exposures.

Corporate lending comprises the business banking portfolio in our Retail Banking segment, and our Corporate & Commercial Banking and Corporate & Investment Banking segments.

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.

 

16		Santander UK plc

> Credit Risk

    

 

Credit quality

Total on-balance sheet exposures at 30 June 2019 comprised £200.3bn of customer loans, L&A to banks of £2.1bn, £29.6bn of sovereign assets measured at amortised cost, £13.4bn of assets measured at FVOCI and £22.0bn of cash and balances at central banks.

 

														Stage 2
		Average PD(1)								Stage 1				< 30 DPD				>30 DPD				Sub total				Stage 3				Total
30 June 2019		%								£m				£m				£m				£m				£m				£m
Exposures
On-balance sheet
Retail Banking			0.50								162,180				9,383				871				10,254				2,156				174,590
– of which mortgages			0.44								148,203				8,450				814				9,264				1,922				159,389
Corporate & Commercial Banking			1.06								15,622				1,333				110				1,443				300				17,365
Corporate & Investment Banking			0.29								3,868				192				–				192				–				4,060
Corporate Centre			0.13								71,263				117				14				131				14				71,408
Total on-balance sheet											252,933				11,025				995				12,020				2,470				267,423
Off–balance sheet
Retail Banking(2)											25,283				173				–				173				42				25,498
– of which mortgages(2)											13,054				65				–				65				15				13,134
Corporate & Commercial Banking											5,333				184				–				184				26				5,543
Corporate & Investment Banking											10,451				202				–				202				26				10,679
Corporate Centre											1,186				–				–				–				–				1,186
Total off–balance sheet(3)											42,253				559				–				559				94				42,906
Total exposures											295,186				11,584				995				12,579				2,564				310,329
ECL
On-balance sheet
Retail Banking											86				212				34				246				224				556
– of which mortgages											9				90				13				103				98				210
Corporate & Commercial Banking											32				26				4				30				130				192
Corporate & Investment Banking											2				–				–				–				–				2
Corporate Centre											4				3				1				4				4				12
Total on-balance sheet											124				241				39				280				358				762
Off–balance sheet
Retail Banking											14				13				–				13				1				28
– of which mortgages											3				1				–				1				–				4
Corporate & Commercial Banking											6				5				–				5				2				13
Corporate & Investment Banking											3				2				–				2				9				14
Total off–balance sheet											23				20				–				20				12				55
Total ECL											147				261				39				300				370				817
Coverage ratio(4)										%				%				%				%				%				%
On-balance sheet
Retail Banking											0.1				2.3				3.9				2.4				10.4				0.3
– of which mortgages											–				1.1				1.6				1.1				5.1				0.1
Corporate & Commercial Banking											0.2				2.0				3.6				2.1				43.3				1.1
Corporate & Investment Banking											0.1				–				–				–				–				–
Corporate Centre											–				2.6				7.1				3.1				28.6				–
Total on-balance sheet											–				2.2				3.9				2.3				14.5				0.3
Off–balance sheet
Retail Banking											0.1				7.5				–				7.5				2.4				0.1
– of which mortgages											–				1.5				–				1.5				–				–
Corporate & Commercial Banking											0.1				2.7				–				2.7				7.7				0.2
Corporate & Investment Banking											–				1.0				–				1.0				34.6				0.1
Total off-balance sheet											0.1				3.6				–				3.6				12.8				0.1
Total coverage											–				2.3				3.9				2.4				14.4				0.3

 

(1)	Average PDs are 12-month, scenario-weighted PDs. Financial assets in default are excluded from the calculation, as they are allocated a 100% PD.

(2)	Off-balance sheet exposures include £7.2bn of retail mortgage offers in the pipeline.

(3)	Off-balance sheet amounts consist of contingent liabilities and commitments.

(4)	ECL as a percentage of the related exposure.

Stage 2 analysis

		30 June				31 December
		2019				2018
		£m				£m
Currently in arrears			995				960
Currently up–to–date:
– PD deterioration			7,929				8,509
– Other(1)			3,655				2,542
Total Stage 2			12,579				12,011

 

(1)	Mainly due to forbearance.

 

Santander UK plc		17