TIDMSAN
RNS Number : 2023R
Santander UK Plc
27 February 2019
Santander UK plc
Announcement of Annual Report for the Year Ended 31 December
2018
Santander UK plc is pleased to announce the publication of its
Annual Report for the Year Ended 31 December 2018 (the 'Annual
Report'), in compliance with Disclosure Guidance & Transparency
Rule (DTR) 4.1.
Please click here to view the full 2018 Annual Report and
Accounts of Santander UK plc:
http://www.rns-pdf.londonstockexchange.com/rns/2023R_1-2019-2-26.pdf
Please click here to view Santander UK plc's Glossary of
Financial Services Industry Terms to be read in conjunction with
the Santander UK plc's 2018 Annual Report and Accounts:
http://www.rns-pdf.londonstockexchange.com/rns/2023R_2-2019-2-26.pdf
The Annual Report may also be accessed via the Investor
Relations section of Santander UK's website at
www.aboutsantander.co.uk. A copy of the Annual Report has also been
submitted to the National Storage Mechanism.
The following information is extracted from the Annual
Report.
This announcement constitutes the material required by DTR 6.3.5
to be communicated to the media in unedited full text through a
Regulatory Information Service. This material is not a substitute
for reading the Annual Report in full.
Form 20-F
It should be noted that the financial results for 2018 will be
included in the Annual Report on Form 20-F that will be filed with
the SEC and will be available online at www.sec.gov.
Forward- Looking Statements
Santander UK plc and its ultimate parent Banco Santander SA
caution that this announcement may contain forward-looking
statements. Such forward looking-statements are found in various
places throughout this announcement with respect to the financial
condition, results, operations and business including future
business development and economic performance.
These statements and forecasts involve risk and uncertainty
because they relate to events and depend upon circumstances that
will occur in the future. There are a number of factors that could
cause actual results or developments to differ materially from
those expressed or implied by these forward-looking statements and
forecasts.
No statement financial or otherwise should be construed as a
profit forecast.
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations. Company law requires the Directors to prepare
financial statements for each financial year. Under that law, the
Directors have prepared the Santander UK group and Company
financial statements in accordance with IFRS as adopted by the
EU.
In preparing the financial statements, the Directors have also
elected to comply with IFRS as issued by the IASB. Under company
law, the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state
of affairs of the Santander UK group and the Company and of the
profit or loss of the Santander UK group and the Company for that
period.
In preparing the financial statements, the Directors are
required to:
- Select suitable accounting policies and then apply them
consistently
- State whether applicable IFRS as adopted by the EU and IFRS
issued by the IASB have been followed for the Santander UK group
and Company financial statements, subject to any material
departures disclosed and explained in the financial statements
- Make judgements and accounting estimates that are reasonable
and prudent
- Prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Santander UK group
and company will continue in business.
The Directors are also responsible for safeguarding the assets
of the Santander UK group and the Company, and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Santander UK
group's and the Company's transactions and disclose with reasonable
accuracy at any time the financial position of the Santander UK
group and the Company, and enable them to ensure that the financial
statements comply with the UK Companies Act 2006 and, as regards
the Santander UK group financial statements, Article 4 of the IAS
Regulation.
The Directors are responsible for the integrity and maintenance
of Santander UK's website.
Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Having taken into account all the matters considered by the
Board and brought to its attention during the year, the Directors
are satisfied that the Annual Report taken as a whole is fair,
balanced and understandable, and provides the information necessary
to assess Santander UK's position and performance, business model
and strategy.
Each of the Directors at the date of approval of this report
confirms, to the best of their knowledge, that:
- The financial statements, prepared in accordance with IFRS, as
adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and the Santander UK group
- The management report, which is incorporated into the
Directors' report, includes a fair review of the development and
performance of the business and the position of the Company and the
Santander UK group, together with a description of the principal
risks and uncertainties they face.
Principal risks
Risk is any uncertainty about us being able to achieve our
business objectives. It can be split into a set of key risk types,
each of which could affect our results and our financial resources.
Enterprise wide risk is the aggregate view of all the key risk
types described below:
Key risk types Description
Credit The risk of loss due to the default or credit quality deterioration
of a customer or counterparty to which we have provided credit,
or for which we have assumed a financial obligation.
----------------------------------------------------------------------
Market Banking market risk - the risk of loss of income or economic
value due to changes to interest rates in the banking book
or to changes in exchange rates, where such changes would
affect our net worth through an adjustment to revenues, assets,
liabilities and off-balance sheet exposures in the banking
book.
Trading market risk - the risk incurred as a result of changes
in market factors that affect the value of positions in the
trading book.
----------------------------------------------------------------------
Liquidity The risk that we do not have sufficient liquid financial resources
available to meet our obligations as they fall due, or we
can only secure such resources at excessive cost.
----------------------------------------------------------------------
Capital The risk that we do not have an adequate amount or quality
of capital to meet our internal business objectives, regulatory
requirements, market expectations and dividend payments, including
AT1 coupons.
----------------------------------------------------------------------
Pension The risk caused by our contractual or other liabilities with
respect to a pension scheme (whether established for our employees
or those of a related company or otherwise). It also refers
to the risk that we will need to make payments or other contributions
with respect to a pension scheme due to a moral obligation
or for some other reason.
----------------------------------------------------------------------
Conduct and Conduct risk - the risk that our decisions and behaviours
regulatory lead to a detriment or poor outcome for our customers. It
also refers to the risk that we fail to maintain high standards
of market behaviour and integrity.
Regulatory risk - the risk of financial or reputational loss,
or imposition or conditions on regulatory permission, as a
result of failing to comply with applicable codes, regulator's
rules, guidance and regulatory expectations.
----------------------------------------------------------------------
Other key risk Operational risk - the risk of loss due to inadequate or failed
types internal processes, people and systems, or external events.
We give a particular focus to process and change management
risk, third party risk and cyber risk which we mitigate through
our management of operational risk.
Financial crime risk - the risk that we are used to further
financial crime, including money laundering, sanctions evasion,
terrorist financing, bribery and corruption. Failure to meet
our legal and regulatory obligations could result in criminal
or civil penalties against Santander UK or individuals, as
well as negatively affecting our customers and the communities
we serve.
Legal risk - the risk of an impact arising from legal deficiencies
in contracts; failure to take appropriate measures to protect
assets; failure to manage legal disputes appropriately; failure
to assess or implement the requirements of a change of law;
or failure to comply with law or regulation or to discharge
duties or responsibilities created by law or regulation.
Strategic risk - the risk of significant loss or damage arising
from strategic decisions that impact the long-term interests
of our key stakeholders or from an inability to adapt to external
developments.
Reputational risk - the risk of damage to the way our reputation
and brand are perceived by the public, clients, government,
colleagues, investors or any other interested party.
Model risk - the risk that the results of our models may be
inaccurate, causing us to make sub-optimal decisions, or that
a model may be
used inappropriately.
Financial review
SUMMARISED CONSOLIDATED INCOME STATEMENT
2018 2017
GBPm GBPm
Net interest income 3,603 3,803
Non-interest income(1) 931 1,109
===================================================== ======= =======
Total operating income 4,534 4,912
===================================================== ======= =======
Operating expenses before credit impairment losses,
provisions and charges (2,579) (2,499)
===================================================== ======= =======
Credit impairment losses(2) (153) (203)
Provisions for other liabilities and charges (257) (393)
===================================================== ======= =======
Total operating credit impairment losses, provisions
and charges (410) (596)
===================================================== ======= =======
Profit before tax 1,545 1,817
Tax on profit (441) (561)
===================================================== ======= =======
Profit after tax 1,104 1,256
===================================================== ======= =======
Attributable to:
Equity holders of the parent 1,082 1,235
Non-controlling interests 22 21
===================================================== ======= =======
Profit after tax 1,104 1,256
===================================================== ======= =======
(1) Comprised of Net fee and commission income and Net trading
and other income.
(2) Credit impairment losses for 2018 are calculated on an IFRS
9 basis and for 2017 on an IAS 39 basis. For more on this
change in methodology see the IFRS 9 accounting policy changes
in Note 1 and the IFRS 9 transition disclosures in Note 44
to the Consolidated Financial Statements.
A more detailed Consolidated Income Statement is contained in
the Consolidated Financial Statements.
2018 compared to 2017
As described in more detail below, and in Note 43 to the
Consolidated Financial Statements, the financial results reflect
the changes in our statutory perimeter that we made in the third
quarter of 2018, following the ring-fence transfers to Banco
Santander London Branch. Prior periods have not been restated.
Profit before tax was down 15% at GBP1,545m. By income statement
line, the movements were:
- Net interest income was down 5%, impacted by lower new mortgage
margins, SVR attrition and the GBP39m accrued interest release
in the second quarter of 2017,
which was not repeated this year. These were partially offset
by management pricing actions on customer deposits and strong
mortgage lending volumes.
- Non-interest income was down 16%, largely due to the GBP48m
gain on sale of Vocalink Holdings Limited shareholdings in
the second quarter of 2017, which was not repeated this year,
and reflecting regulatory changes in overdrafts. This was partially
offset by increased income in consumer (auto) finance and asset
finance.
- Operating expenses before credit impairment losses, provisions
and charges increased 3%. The impact of higher regulatory,
risk and control costs and GBP40m of costs relating to guaranteed
minimum pension (GMP) equalisation were partially offset by
cost management programmes and operational and digital efficiencies.
Banking Reform costs were lower at GBP38m in 2018 (2017: GBP81m).
- Credit impairment losses were down 25%, with Carillion plc
charges in 2017 partially offset by a number of charges and
lower releases across portfolios in 2018. All portfolios continue
to perform well, supported by our prudent approach to risk
and the resilience of the UK economy.
- Provisions for other liabilities and charges were down 35%,
largely due to GBP109m PPI and GBP35m other conduct provision
charges relating to the sale of interest rate derivatives in
2017, which were not repeated this year. These were partially
offset by provision charges in the fourth quarter of 2018 of
GBP58m in relation to our consumer credit business operations
and GBP33m relating to historical probate and bereavement processes.
Additionally, there was an GBP11m release in other conduct
provisions in the second quarter of 2018 relating to the sale
of interest rate derivatives.
The remaining provision for PPI redress and related costs was
GBP246m. We made no additional PPI charges in the year, based
on our recent claims experience, and having considered the
FCA's Consultation Paper 18/33 issued on 7 November 2018. We
will continue to monitor our provision levels, and take account
of the impact of any further change in claims received and
FCA guidance.
The remaining provision for other conduct issues was GBP30m,
which primarily relates to the sale of interest rate derivatives,
following an ongoing review of the regulatory classification
of customers potentially eligible for redress. Following further
analysis, management assessed the provision requirements resulting
in a release of GBP11m in the second quarter of 2018.
In the fourth quarter of 2018 we were fined GBP32.8m by the
FCA in relation to an investigation into our historical probate
and bereavement practices. We acknowledged the findings of
the FCA and apologised to the families and beneficiaries of
deceased customers affected by these failings. We have completed
a comprehensive tracing exercise and transferred the majority
of funds in deceased customers' accounts to their rightful
beneficiaries, with compensatory interest where appropriate.
In the fourth quarter of 2018 we made a GBP58m provision in
relation to our consumer credit business operations. This charge
is management's current best estimate as we continue to assess
the scope of this issue.
- Tax on profit decreased 21% to GBP441m, largely as a result
of lower taxable profits in 2018 and the impact of lower conduct
provisions that are disallowed for tax purposes. The effective
tax rate was 28.5% (2017: 30.9%).
Critical factors affecting results
The preparation of our Consolidated Financial Statements
requires management to make estimates and judgements that affect
the reported amount of assets and liabilities at the balance sheet
date and the reported amount of income and expenses during the
reporting period. Management evaluates its estimates and judgements
on an ongoing basis. Management bases its estimates and judgements
on historical experience and other factors believed to be
reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
Estimates and judgements that are considered important to the
portrayal of our financial condition including, where applicable,
quantification of the effects of reasonably possible ranges of such
estimates are set out in 'Critical Judgements and Accounting
Estimates' in Note 1 to the Consolidated Financial Statements.
The rest of this section contains a summary of the results, and
commentary thereon, by income statement line item for each
segment.
Basis of results presentation
The segmental information in this Annual Report reflects the
reporting structure in place at the reporting date in accordance
with which the segmental information in Note 2 to the Consolidated
Financial Statements has been presented.
The basis of presentation in this Annual Report has been
changed, and the prior periods restated, to report our Jersey and
Isle of Man branches in Corporate Centre rather than in Retail
Banking as in previous years, as a result of their transfer from
Santander UK plc to ANTS in December 2018 as part of the
implementation of ring-fencing.
PROFIT BEFORE TAX BY SEGMENT
Corporate
& Corporate
Retail Commercial & Investment Corporate
Banking Banking Banking Centre Total
2018 GBPm GBPm GBPm GBPm GBPm
Net interest income 3,126 403 69 5 3,603
Non-interest income(1) 638 82 272 (61) 931
=========================================== ======== =========== ============= ========= =======
Total operating income 3,764 485 341 (56) 4,534
=========================================== ======== =========== ============= ========= =======
Operating expenses before
credit impairment losses,
provisions and charges (1,929) (258) (262) (130) (2,579)
=========================================== ======== =========== ============= ========= =======
Credit impairment (losses)/releases(2) (124) (23) (14) 8 (153)
Provisions for other liabilities
and (charges)/releases (230) (14) (8) (5) (257)
=========================================== ======== =========== ============= ========= =======
Total operating credit impairment
losses, provisions and (charges)/releases (354) (37) (22) 3 (410)
=========================================== ======== =========== ============= ========= =======
Profit/(loss) before tax 1,481 190 57 (183) 1,545
=========================================== ======== =========== ============= ========= =======
2017
=========================================== ======== =========== ============= ========= =======
Net interest income 3,270 391 74 68 3,803
Non-interest income(1) 615 74 364 56 1,109
=========================================== ======== =========== ============= ========= =======
Total operating income 3,885 465 438 124 4,912
=========================================== ======== =========== ============= ========= =======
Operating expenses before
credit impairment losses,
provisions and charges (1,856) (223) (304) (116) (2,499)
=========================================== ======== =========== ============= ========= =======
Credit impairment (losses)/releases (36) (13) (174) 20 (203)
Provisions for other liabilities
and (charges)/releases (342) (55) (11) 15 (393)
=========================================== ======== =========== ============= ========= =======
Total credit impairment losses,
provisions and (charges)/releases (378) (68) (185) 35 (596)
=========================================== ======== =========== ============= ========= =======
Profit/(loss) before tax 1,651 174 (51) 43 1,817
=========================================== ======== =========== ============= ========= =======
(1) Comprised of Net fee and commission income and Net trading
and other income.
(2) Credit impairment losses for 2018 are calculated on an IFRS
9 basis and for 2017 on an IAS 39 basis. For more on this
change in methodology see the IFRS 9 accounting policy changes
in Note 1 and the IFRS 9 transition disclosures in Note 44
to the Consolidated Financial Statements.
RETAIL BANKING
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 GBP6.5m,
and Santander Consumer Finance, predominantly a vehicle finance
business.
Summarised income statement
2018 2017
GBPm GBPm
Net interest income 3,126 3,270
Non-interest income(1) 638 615
===================================================== ======= =======
Total operating income 3,764 3,885
===================================================== ======= =======
Operating expenses before credit impairment losses,
provisions and charges (1,929) (1,856)
===================================================== ======= =======
Credit impairment losses(2) (124) (36)
Provisions for other liabilities and charges (230) (342)
===================================================== ======= =======
Total operating credit impairment losses, provisions
and charges (354) (378)
===================================================== ======= =======
Profit before tax 1,481 1,651
===================================================== ======= =======
(1) Comprised of Net fee and commission income and Net trading and other
income.
(2) Credit impairment losses for 2018 are calculated on an IFRS 9 basis
and for 2017 on an IAS 39 basis. For more on this change in methodology
see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition
disclosures in Note 44 to the Consolidated Financial Statements.
2018 compared to 2017
Profit before tax decreased by GBP170m to GBP1,481m in 2018
(2017: GBP1,651m). By income statement line, the movements
were:
- Net interest income was down 4%, driven by pressure on new mortgage
lending margins and SVR attrition partially offset by management pricing
actions on customer deposits and strong mortgage lending volumes.
- Non-interest income was up 4%, due to stronger consumer finance income
partially offset by lower overdraft fees, reflecting regulatory changes.
- Operating expenses before credit impairment losses, provisions and charges
increased 4%, with higher regulatory, risk and control costs, strategic
investment in business transformation, digital enhancements and growth
initiatives.
- Credit impairment losses were up at GBP124m, due to lower releases in
mortgages and other unsecured lending portfolios.
- Provisions for other liabilities and charges were down at GBP230m, due
to GBP109m PPI conduct provision charges and GBP35m other conduct provision
charges relating to the sale of interest rate derivatives in 2017 which
were not repeated. We had provision charges in the fourth quarter of
2018 of GBP58m in relation to our consumer credit business operations
and GBP33m relating to historical probate and bereavement processes.
The remaining provision for PPI redress and related costs was GBP246m.
We made no additional PPI charges in the year, based on our recent claims
experience, and having considered the FCA's Consultation Paper 18/33
issued on 7 November 2018. We will continue to monitor our provision
levels, and take account of the impact of any further change in claims
received and FCA guidance.
The remaining provision for other conduct issues was GBP30m, which primarily
relates to the sale of interest rate derivatives, following an ongoing
review of the regulatory classification of customers potentially eligible
for redress. Following further analysis, management assessed the provision
requirements resulting in a release of GBP11m in the second quarter
of 2018.
In the fourth quarter of 2018 we were fined GBP32.8m by the FCA in relation
to an investigation into our historical probate and bereavement practices.
We acknowledged the findings of the FCA and apologised to the families
and beneficiaries of deceased customers affected by these failings.
We have completed a comprehensive tracing exercise and transferred the
majority of funds in deceased customers' accounts to their rightful
beneficiaries, with compensatory interest where appropriate.
In the fourth quarter of 2018 we made a GBP58m provision in relation
to our consumer credit business operations. This charge is management's
current best estimate as we continue to assess the scope of this issue.
Customer balances
2018 2017
GBPbn GBPbn
Mortgages 158.0 154.7
Business banking 1.8 1.9
Consumer (auto) finance 7.3 7.0
Other unsecured lending 5.7 5.1
============================== ====== ======
Customer loans 172.8 168.7
============================== ====== ======
Current accounts(3) 68.4 67.5
Savings(3) 56.0 59.3
Business banking accounts 11.9 11.2
Other retail products(3) 5.8 5.8
============================== ====== ======
Customer deposits 142.1 143.8
============================== ====== ======
Risk-weighted assets (RWAs) 46.2 44.1
============================== ====== ======
(3) Balances for 'Savings' and 'Other retail products' have been restated
to reflect the transfer of the Crown Dependencies balances to Corporate
Centre and cahoot current account and savings balances from 'Other retail
products' to 'Current accounts' and 'Savings'.
2018 compared to 2017
- Mortgage lending increased GBP3.3bn, through a combination of well positioned
service and product pricing, as well as our ongoing focus on customer
retention. In 2018, mortgage gross lending was GBP28.8bn (2017: GBP25.5bn)
and consumer (auto) finance gross lending was GBP3.8bn (2017: GBP3.1bn).
Credit cards balances also increased GBP0.5bn with competitive pricing
strategy in late 2018.
- Customer deposits decreased, primarily due to a decline of GBP3.3bn
in savings balances, partially offset by a GBP0.9bn increase in current
account balances and a GBP0.7bn increase in business banking deposits.
- RWAs increased in line with customer loan growth.
CORPORATE & COMMERCIAL BANKING
To better align reporting to the nature of the business segment
following ring-fence transfers, Commercial Banking has been
re-branded as Corporate & Commercial Banking. Corporate &
Commercial Banking covers businesses with an annual turnover of
GBP-6.5m to GBP500m. Corporate & Commercial Banking offers a
wide range of products and financial services provided by
relationship teams that are based in a network of regional CBCs and
through telephony and digital channels.
Summarised income statement
2018 2017
GBPm GBPm
===================================================== ===== =====
Net interest income 403 391
Non-interest income(1) 82 74
===================================================== ===== =====
Total operating income 485 465
===================================================== ===== =====
Operating expenses before credit impairment losses,
provisions and charges (258) (223)
===================================================== ===== =====
Credit impairment losses(2) (23) (13)
Provisions for other liabilities and charges (14) (55)
===================================================== ===== =====
Total operating credit impairment losses, provisions
and charges (37) (68)
===================================================== ===== =====
Profit before tax 190 174
===================================================== ===== =====
(1) Comprised of Net fee and commission income and Net trading and other
income.
(2) Credit impairment losses for 2018 are calculated on an IFRS 9 basis
and for 2017 on an IAS 39 basis. For more on this change in methodology
see the IFRS 9 accounting policy changes in Note 1 and the IFRS 9 transition
disclosures in Note 44 to the Consolidated Financial Statements.
2018 compared to 2017
Profit before tax increased by GBP16m to GBP190m in 2018 (2017:
GBP174m). By income statement line, the movements were:
- Net interest income was up 3%, driven by improved liability margins.
- Non-interest income was up 11%, with growth in asset restructuring fees
up 27%, digital and payment fees up 22%, cash management up 13% and
international up 4%, partially offset by a decline in rates management
income.
- Operating expenses before credit impairment losses, provisions and charges
were up 16%, driven by higher regulatory costs, business transformation,
digital enhancements and expansion of our asset finance business.
- Credit impairment losses were up at GBP23m primarily due to lower releases,
partially offset by risk management initiatives. All portfolios continue
to perform well.
- Provisions for other liabilities and charges improved largely due to
a partial release in the second quarter of 2018 of a charge in respect
of a charge made in the second quarter of 2017 relating to the sale
of interest rate derivatives.
Customer balances
2018 2017
GBPbn GBPbn
Non-Commercial Real Estate trading businesses 11.5 11.5
Commercial Real Estate(3) 6.2 7.9
============================================== ====== ======
Customer loans 17.7 19.4
============================================== ====== ======
Customer deposits 17.6 17.8
============================================== ====== ======
RWAs 17.0 19.4
============================================== ====== ======
(3) Excludes Commercial Real Estate loans totalling GBP0.2bn (2017: GBP0.2bn)
to small business customers that are managed by Business banking in
the Retail Banking business segment.
2018 compared to 2017
- Customer loans were down GBP1.7bn, largely due to ring-fence transfers
and a risk management initiative, as well as a GBP1.1bn managed reduction
in Commercial Real Estate lending, as well as customer repayments.
Alongside the ring-fence transfers and a risk management initiative,
we have continued our solid lending growth to non-Commercial Real Estate
trading businesses of GBP0.5bn, ahead of the market.
- Customer deposits were down GBP0.2bn, driven by management pricing actions
and working capital use by customers.
- RWAs decreased 12%, largely as a result of ring-fence implementation
and risk management initiatives, including significant risk transfer
(SRT) securitisations. These actions have positioned the bank prudently,
though they will have an economic impact in 2019.
Corporate & investment banking
As part of a rebrand across the Banco Santander group, Global
Corporate Banking (the UK segment of Santander Global Corporate
Banking) has been branded as Corporate & Investment Banking
(CIB). CIB services corporate clients with an annual turnover of
GBP500m and above. CIB clients require specially tailored solutions
and value-added services due to their size, complexity and
sophistication. We provide these clients with products to manage
currency fluctuations, protect against interest rate risk, and
arrange capital markets finance and specialist trade finance
solutions, as well as providing support to the rest of Santander
UK's business segments.
Summarised income statement
2018 2017
GBPm GBPm
Net interest income 69 74
Non-interest income(1) 272 364
===================================================== ===== =====
Total operating income 341 438
===================================================== ===== =====
Operating expenses before credit impairment losses,
provisions and charges (262) (304)
===================================================== ===== =====
Credit impairment losses(2) (14) (174)
Provisions for other liabilities and charges (8) (11)
===================================================== ===== =====
Total operating credit impairment losses, provisions
and charges (22) (185)
===================================================== ===== =====
Profit/(loss) before tax 57 (51)
===================================================== ===== =====
(1) Comprised of Net fee and commission income and Net trading
and other income.
(2) Credit impairment losses for 2018 are calculated on an IFRS
9 basis and for 2017 on an IAS 39 basis. For more on this
change in methodology see the IFRS 9 accounting policy changes
in Note 1 and the IFRS 9 transition disclosures in Note 44
to the Consolidated Financial Statements
2018 compared to 2017
As described in more detail below, and in Note 43 to the
Consolidated Financial Statements, the financial results reflect
the changes in our statutory perimeter that we made in the third
quarter of 2018, following the ring-fence transfers to Banco
Santander London Branch which principally impacted Corporate &
Investment Banking. Prior periods have not been restated. Profit
before tax increased by GBP108m to GBP57m in 2018 (2017: GBP51m
loss). By income statement line, the movements were:
- Operating income was down predominantly due to ring-fence transfers.
- We have continued our strategic investment in business transformation,
digital enhancements and growth initiatives in our core business areas.
- Credit impairment losses were down, due to charges for Carillion plc
in 2017.
Customer balances
(1)2018 (1) 2017
GBPbn GBPbn
Customer loans 4.6 6.0
Customer deposits 4.8 4.5
RWAs 7.2 16.5
================== ======= ==============
2018 compared to 2017
- Customer loans decreased to GBP4.6bn, largely as a result of ring-fence
transfers and a risk management initiative.
- Customer deposits increased to GBP4.8bn, largely as a result of higher
instant access deposit balances.
- RWAs decreased 56% to GBP7.2bn largely as a result of ring-fence transfers
and a risk management initiative. Other assets and liabilities of GBP21.5bn
and GBP20.7bn, primarily relating to derivative contracts, were transferred
to Banco Santander London Branch in July 2018. RWAs attributable to
customer loans were GBP5.2bn (2017: GBP7.2bn).
These actions will result in significantly lower future profits for
this segment.
CORPORATE CENTRE
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.
Summarised income statement
2018 2017
GBPm GBPm
Net interest income 5 68
Non-interest (expense)/income(1) (61) 56
===================================================== ===== =====
Total operating (expense)/income (56) 124
===================================================== ===== =====
Operating expenses before credit impairment losses,
provisions and charges (130) (116)
===================================================== ===== =====
Credit impairment releases(2) 8 20
Provisions for other liabilities and charges (5) 15
===================================================== ===== =====
Total operating credit impairment releases/(losses),
provisions and charges 3 35
===================================================== ===== =====
(Loss)/profit before tax (183) 43
===================================================== ===== =====
(1) Comprised of Net fee and commission income and Net trading
and other income
(2) Credit impairment losses for 2018 are calculated on an IFRS
9 basis and for 2017 on an IAS 39 basis. For more on this
change in methodology see the IFRS 9 accounting policy changes
in Note 1 and the IFRS 9 transition disclosures in Note 44
to the Consolidated Financial Statements.
2018 compared to 2017
Corporate Centre made a loss before tax of GBP183m in 2018
(2017: GBP43m profit). By income statement line, the movements
were:
- Net interest income was down largely due to the GBP39m accrued interest
release in the second quarter of 2017, which was not repeated this year,
and lower yields on non-core assets.
- Non-interest expense was up largely due to the GBP48m gain on sale of
Vocalink Holdings Limited shareholdings in the second quarter of 2017
and positive mark-to-market movements on asset portfolios in 2017, which
were not repeated this year.
- Operating expenses before credit impairment losses, provisions and charges
were up 12%, with lower regulatory and project costs relating to Banking
Reform of GBP38m (2017: GBP81m) offset by GBP40m of costs relating to
GMP equalisation.
- Credit impairment releases were down 60%, largely driven by our exit
strategy from non-core customer loans.
- Provisions for other liabilities and charges were up at GBP8m, largely
due to releases in 2017 which were not repeated this year.
Customer balances
2018 2017
GBPbn GBPbn
Customer loans(3) 4.5 6.2
- of which Social Housing 3.8 5.1
- of which Crown Dependencies - 0.3
- of which non-core 0.7 0.8
Customer deposits(3) 2.8 9.8
- of which Crown Dependencies - 6.4
RWAs 8.1 7.0
============================== ====== ======
(3) Balances for 'Customer loans' and 'Customer deposits' have been restated
to reflect the transfer of Crown Dependencies from Retail Banking.
2018 compared to 2017
- Customer loans decreased GBP1.7bn, as we continue to implement our exit
strategy from non-core customer loans, predominantly our legacy Social
Housing portfolio.
- Customer deposits decreased to GBP2.8bn, largely due to the sale of
the Crown Dependencies to ANTS in December 2018.
- RWAs were higher at GBP8.1bn, due to increases in counterparty risk
with more concentrated exposures to Banco Santander London Branch, following
derivative business transfers as part of ring-fence implementation.
RWAs attributable to non-core customer loans amounted to GBP1.7bn (2017:
GBP1.0bn) following an increase in Social Housing risk-weights.
- Our structural hedge position has remained stable at cGBP89bn (2017:
cGBP80bn), with an average duration of c2.2 years (2017: c2.5 years).
The majority of new mortgage flows were left un-hedged.
Balance sheet review
SUMMARISED CONSOLIDATED BALANCE SHEET
2018 2017
GBPm GBPm
Assets
Cash and balances at central banks 19,747 32,771
Financial assets at fair value through profit
or loss:
- Trading assets - 30,555
- Derivative financial instruments 5,259 19,942
Other financial assets at fair value through
- profit or loss 5,617 2,096
Financial assets at amortised cost:
- Loans and advances to customers(1) 201,289 199,340
- Loans and advances to banks(1) 2,799 3,463
- Reverse repurchase agreements - non trading(1) 21,127 2,614
- Other financial assets at amortised cost(2) 7,229
Financial assets at fair value through other comprehensive
income(2) 13,302
Financial investments(2) 17,611
Interest in other entities 88 73
Property, plant and equipment 1,832 1,598
Retirement benefit assets 842 449
Tax, intangibles and other assets 4,241 4,253
============================================================== ======= =======
Total assets 283,372 314,765
============================================================== ======= =======
Liabilities
Financial liabilities at fair value through profit
or loss:
- Trading liabilities - 31,109
- Derivative financial instruments 1,369 17,613
Other financial liabilities at fair value through
- profit or loss 6,286 2,315
Financial liabilities at amortised cost:
- Deposits by customers 178,090 183,648
- Deposits by banks(1) 17,221 12,708
- Repurchase agreements - non trading(1) 10,910 1,076
- Debt securities in issue 46,692 42,633
- Subordinated liabilities 3,601 3,793
Retirement benefit obligations 114 286
Tax, other liabilities and provisions 3,180 3,379
============================================================== ======= =======
Total liabilities 267,463 298,560
============================================================== ======= =======
Equity
Total shareholders' equity 15,758 16,053
Non-controlling interests 151 152
============================================================== ======= =======
Total equity 15,909 16,205
============================================================== ======= =======
Total liabilities and equity 283,372 314,765
============================================================== ======= =======
(1) From 1 January 2018, the non-trading repurchase agreements and non-trading
reverse repurchase agreements that are held at amortised cost are now
presented as separate lines in the balance sheet, as described in Note
1. Comparatives are re-presented accordingly.
(2) On adoption of IFRS 9, the Santander UK group split the 'financial investments'
balance sheet line item between 'other financial assets at amortised
cost' and 'financial assets at fair value through other comprehensive
income'. This approach aligns the balance sheet line items to the IFRS
9 accounting classifications and provides a clearer understanding of
our financial position.
A more detailed Consolidated Balance Sheet is contained in the
Consolidated Financial Statements.
2018 compared to 2017
As described in more detail below, and in Note 43 to the
Consolidated Financial Statements, the balances at 31 December 2018
excluded assets and liabilities transferred outside of the
Santander UK group as part of ring-fencing implementation.
Assets
Cash and balances at central banks
Cash and balances at central banks decreased by 40% to
GBP19,747m at 31 December 2018 (2017: GBP32,771m) due to no
balances being held with US Federal Reserve following the closure
of the ANTS branch office in the US, and lower balances with the
Bank of England, in accordance with our liquidity and funding
plans. In addition, cash and balances at central banks decreased
due to the sale of the business of the Jersey and Isle of Man
branches of Santander UK plc to ANTS.
Trading assets
Trading assets decreased to GBPnil at 31 December 2018 (2017:
GBP30,555m). This reflected the run-down or transfer of our trading
business, including the transfer of our gilt-edged market making
business to Banco Santander London Branch, as part of our
transition to our ring-fenced model.
Derivative financial instruments - assets
Derivative assets decreased by 74% to GBP5,259m at 31 December
2018 (2017: GBP19,942m). This mainly related to the transfer of the
prohibited part of our derivatives business with certain corporates
and financial institutions to Banco Santander London Branch as part
of the transition to our ring-fenced model.
Other financial assets at fair value through profit or loss
Other financial assets at fair value through profit or loss
increased to GBP5,617m at 31 December 2018 (2017: GBP2,096m), due
to the following:
- On adoption of IFRS 9, certain financial investments and loans and advances
to customers, previously measured at amortised cost or available-for-sale
under IAS 39, were reclassified at fair value through profit or loss
(FVTPL), as they did not have solely payment of principal and interest
(SPPI) characteristics. These reclassifications were partially offset
by the Santander UK group electing to re-measure Social Housing loans
from FVTPL to amortised cost to reflect the hold to collect business
model.
- As part of the establishment of a credit protection vehicle in the year,
Santander UK acquired GBP2.5bn of credit linked notes (classified as
debt securities), which were measured at FVTPL.
- In addition, Santander UK elected to classify certain non-trading reverse
repurchase agreements totalling GBP2.2bn at FVTPL to minimise accounting
mismatches during our ring-fencing transition.
Loans and advances to customers
Loans and advances to customers at amortised cost increased
slightly to GBP201,289m at 31 December 2018 (2017: GBP199,340m).
This was mainly due to:
- Increases related to GBP3.3bn of lending growth in mortgages and GBP0.5bn
lending growth to non-CRE trading businesses, GBP0.8bn in lending to
other group entities and GBP1.0bn due to the re-classification of Social
Housing loans from FVTPL to amortised cost on adoption of IFRS 9.
- Decreases largely due to managed reductions of GBP1.1bn in CRE and GBP1.4bn
in non-core loans, as well as GBP1.4bn of ring-fence transfers. In September
2018, we also transferred GBP1.3bn of customer loans to Banco Santander
London Branch as part of a risk management initiative.
Reverse repurchase agreements - non trading
Non trading reverse repurchase agreements increased to
GBP21,127m at 31 December 2018 (2017: GBP2,614m), which reflected
the revised classification of the majority of our permitted non
trading reverse repurchase agreements at amortised cost, in line
with our ring-fenced business model for managing these assets as
part of our overall funding and liquidity plans.
Other financial assets at amortised cost
On adoption of IFRS 9, the Santander UK group split the
'financial investments' balance sheet line item between 'other
financial assets at amortised cost' and 'financial assets at FVOCI.
This aligned the balance sheet line items to the IFRS 9 accounting
classifications and provides a clearer understanding of our
financial position. At 1 January 2018, this resulted in GBP7,776m
of other financial assets at amortised cost being re-classified
from financial investments measured at amortised cost. When
compared to 1 January 2018, the balance reduced slightly to
GBP7,229m at 31 December 2018.
Financial assets at fair value through other comprehensive
income
At 1 January 2018 and on adoption of IFRS 9, financial
investments of GBP8,743m that were previously measured at
available-for-sale under IAS 39 were re-classified at FVOCI. When
compared to 1 January 2018, the balance increased to GBP13,302m at
31 December 2018 due to higher volumes of short-dated bonds within
the eligible liquidity pool.
Retirement benefit assets
Retirement benefit assets increased by 88% to GBP842m at 31
December 2018 (2017: GBP449m). This was mainly due to actuarial
gains in the year driven by rising corporate bond yields, partially
offset by a higher assumed inflation rate, which when combined
reduced the value placed on Scheme liabilities.
Liabilities
Trading liabilities
Trading liabilities decreased to GBPnil at 31 December 2018
(2017: GBP31,109m). This reflected the run-down or transfer of the
majority of our trading business, including the transfer of our
gilt-edged market making business to Banco Santander London Branch,
as part of our transition to our ring-fenced model.
Derivative financial instruments - liabilities
Derivative liabilities decreased to GBP1,369m at 31 December
2018 (2017: GBP17,613m). This mainly related to the transfer of the
prohibited part of our derivatives business with certain corporates
and financial institutions to Banco Santander London Branch, as
part of the transition to our ring-fenced model.
Other financial liabilities at fair value through profit or
loss
Other financial liabilities at fair value through profit or loss
increased to GBP6,286m at 31 December 2018 (2017: GBP2,315m), due
to the classification of GBP1.7bn of non-trading repurchase
agreements at FVTPL to minimise accounting mismatches during our
ring-fencing transition, and also higher structured deposit
balances following the establishment of a new credit protection
vehicle in the year.
Deposits by customers
Deposits by customers at amortised cost decreased by 3% to
GBP178,090m at 31 December 2018 (2017: GBP183,648m), with lower
corporate deposits and management pricing actions driving a
reduction in retail savings products. In addition, GBP4.8bn of
customer deposits were transferred as part of the sale of the
business of the Jersey and Isle of Man branches of Santander UK plc
to ANTS. This was partially offset by a GBP0.9bn increase in
personal current account balances.
Deposits by banks
Deposits by banks increased by 36% to GBP17,221m at 31 December
2018 (2017: GBP12,708m), driven by further drawdowns of the Term
Funding Scheme with the Bank of England, and higher deposits held
as collateral.
Repurchase agreements - non trading
Non trading repurchase agreements increased to GBP10,910m at 31
December 2018 (2017: GBP1,076m), which reflected the revised
classification of the majority of our permitted non trading
repurchase agreements at amortised cost, in line with our
ring-fenced business model for managing these liabilities as part
of our overall funding and liquidity plans.
Debt securities in issue
Debt securities in issue increased by 10% to GBP46,692m at 31
December 2018 (2017: GBP42,633m) reflecting the pre-funding of our
2019 requirements.
Retirement benefit obligations
Retirement benefit obligations decreased by 60% to GBP114m at 31
December 2018 (2017: GBP286m). This was principally due to
actuarial gains in the year driven by widening credit spreads on
the discount rate used to value scheme liabilities.
Equity
Total shareholders' equity
Total shareholders' equity decreased by 2% to GBP15,758m at 31
December 2018 (2017: GBP16,053m). Total comprehensive income in the
period was offset by dividend payments, including GBP668m
associated with ring-fencing transfers to Banco Santander London
Branch. In addition, as part of a capital management exercise,
Santander UK plc purchased and redeemed GBP290m of 6.475% Perpetual
Capital securities.
Cash flows
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
2018 2017
GBPm GBPm
Net cash flows from operating activities (15,405) 23,976
Net cash flows from investing activities (3,682) 816
Net cash flows from financing activities 2,730 (7,637)
Change in cash and cash equivalents (16,357) 17,155
========================================= ======== =======
A more detailed Consolidated Cash Flow Statement is contained in
the Consolidated Financial Statements.
The major activities and transactions that affected cash flows
during 2018 and 2017 were as follows:
In 2018, the net cash outflows from operating activities of
GBP15,405m resulted from net cash outflows relating to trading and
derivative assets and liabilities. The net cash outflows from
investing activities of GBP3,682m mainly reflecting purchases of
financial investments in the year as part of normal liquidity
management. The net cash inflows from financing activities of
GBP2,730m reflected the net inflows from debt securities following
the pre-funding of our 2019 requirements. This was offset by
payments of dividends on ordinary shares, preference shares, other
equity instruments and non-controlling interests. Cash and cash
equivalents decreased by GBP16,357m principally from the decrease
in cash held at central banks.
In 2017, the net cash inflows from operating activities of
GBP23,976m resulted from the increase in trading balances,
increased customer lending and customer savings and deposits from
other banks. The net cash inflows from investing activities of
GBP816m mainly reflected sale and redemption of financial
investments offset by purchases of property, plant and equipment
and intangible assets. The net cash outflows from financing
activities of GBP7,637m principally reflected the repayment of debt
securities maturing in the year of GBP13,763 offset by new issues
of debt securities of GBP6,645m, the payment of interim dividends
on ordinary shares, preference shares, other equity instruments and
non-controlling interests of GBP1,000m. Cash and cash equivalents
increased by GBP17,155m principally from the increase in cash and
balances at central banks, which is held as part of the liquidity
pool. This increase was mainly due to a change in the mix of assets
held for liquidity purposes as part of normal portfolio management
activity.
2018 business development highlights
Retail Banking
- We announced plans to reshape our branch network and close 140 branches
in response to changes in how customers are choosing to carry out their
banking.
Our future branch network, with c615 branches, will be made up of a
combination of larger branches offering improved community facilities
to support local businesses and customers, and smaller branches using
the latest technology to offer customers more convenient access to banking
services. Furthermore, in order to deliver a branch network for the
future, 100 branches will be refurbished over the next two years through
an investment of GBP55m.
- Our Wealth Management strategy continues to focus on expanding our multi-channel
proposition to make investments accessible for our customers. In the
second half of 2018 we launched the Digital Investment Advisor, offering
customers low cost online investments advice. This complements our growing
online platform, the Investment Hub, which now serves over 254,000 accounts
(up 12% from 2017), as well as our face-to-face advice services for
customers.
- We aim to help our customers manage their money and improve our customer
experience by providing real-time support in their channel of choice.
In November 2018 we launched the Santander ChatBot for our online banking
customers. It has been designed to support their questions and queries
using machine learning, giving instant answers to basic types of queries
often raised.
- SMEs have traditionally been underserved by banks in the UK, and we
aim to change this. In October 2018 we launched the 1I2I3 Business Current
Account alongside the 1I2I3 Business World for small businesses and
expanded our support by providing access to our branch network for account
holders. The 1I2I3 Business Current Account has been rated 'Outstanding'
by Business Moneyfacts since launch.
- We have successfully applied to be part of the Incentivised Switching
Scheme (branded Business Banking Switch), which covers eligible RBS
business customers (formerly known as customers of Williams & Glyn),
with an annual credit turnover of up to GBP25m. These customers will
be incentivised to switch their primary business current accounts and
loans to participating challenger banks, including Santander UK, when
the scheme launches on 25 February. Under the scheme, participating
banks will receive a one-off payment for each switching customer that
they attract.
- In April 2018, we launched 'Santander One Pay FX', a new blockchain-based
international payments service which enables our customers to have the
majority of their euro transfers complete on the same day. This was
part of a Banco Santander initiative for retail customers across UK,
Spain, Brazil and Poland.
- Throughout 2018, we have been making improvements to our mobile banking
app which resulted in our iOS rating improving to 4.8 in December 2018,
based on 181,000 reviews.
- We have made improvements to our mortgage offering throughout 2018,
including exclusive rates for First Time Buyers holding a Help to Buy
ISA, and our gifted deposit scheme promotion. We also added the ability
to make a single mortgage overpayment online at any time, offering customers
more control over their mortgage.
Corporate & Commercial Banking
- Our Growth Capital team continues to provide high growth SMEs with innovative
funding solutions to support investment, with over GBP21m of growth
capital and GBP101m of senior debt provided to 36 companies as part
of our Breakthrough programme. In 2018, we supported 478 companies who
benefited from international events focused on helping create international
connections and achieving their global ambitions.
- We are also building primacy banking customer relationships with a growing
number of international trade initiatives, which complements existing
services like the Santander Trade Club, which is part of the Trade Club
Alliance. The Alliance currently has 12 members, formed of international
banking groups, with 10 already offering global access to our customers
looking to find new trading partners.
We are developing these initiatives in collaboration with the Banco
Santander group and key strategic partners to leverage global expertise
and contacts to help our customers grow their businesses.
- We have established 3 trade corridors in 2018 to connect our UK customers,
helping UK businesses to establish the necessary contacts and local
support services to open up new markets and successfully grow trade
overseas.
Corporate & Investment Banking
- We have made progress in completing the roll out of our client management
service to all our customers, to simplify the client on-boarding process
and improve customer experience.
Financial statements
Consolidated Income Statement
For the years ended 31 December
2018 2017
Notes GBPm GBPm
============================================= ===== ======= =======
Interest and similar income 3 6,066 5,905
Interest expense and similar charges 3 (2,463) (2,102)
============================================= ===== ======= =======
Net interest income 3,603 3,803
============================================= ===== ======= =======
Fee and commission income 4 1,170 1,222
Fee and commission expense 4 (421) (415)
============================================= ===== ======= =======
Net fee and commission income 749 807
============================================= ===== ======= =======
Net trading and other income 5 182 302
============================================= ===== ======= =======
Total operating income 4,534 4,912
============================================= ===== ======= =======
Operating expenses before credit impairment
losses, provisions and charges 6 (2,579) (2,499)
============================================= ===== ======= =======
Credit impairment losses 8 (153) (203)
Provisions for other liabilities and charges 8 (257) (393)
============================================= ===== ======= =======
Total operating credit impairment losses,
provisions and charges (410) (596)
============================================= ===== ======= =======
Profit before tax 1,545 1,817
Tax on profit 9 (441) (561)
============================================= ===== ======= =======
Profit after tax 1,104 1,256
============================================= ===== ======= =======
Attributable to:
Equity holders of the parent 1,082 1,235
Non-controlling interests 35 22 21
============================================= ===== ======= =======
Profit after tax 1,104 1,256
============================================= ===== ======= =======
Consolidated Statement of Comprehensive Income
For the years ended 31 December
2018 2017
GBPm GBPm
==================================================== ===== =====
Profit after tax 1,104 1,256
====================================================== ===== =====
Other comprehensive income:
Other comprehensive income that may be reclassified
to profit or loss subsequently:
Available-for-sale securities: (1)
* Change in fair value 80
* Income statement transfers (54)
* Taxation (6)
====================================================== ===== =====
20
==================================================== ===== =====
Movement in fair value reserve (debt
instruments): (1)
* Change in fair value (74)
* Income statement transfers 21
* Taxation 13
====================================================== ===== =====
(40)
==================================================== ===== =====
Cash flow hedges:
* Effective portion of changes in fair value 793 (238)
* Income statement transfers (752) (94)
* Taxation (13) 89
====================================================== ===== =====
28 (243)
==================================================== ===== =====
Currency translation on foreign operations - -
==================================================== ===== =====
Net other comprehensive income that may
be reclassified to profit or loss subsequently (12) (223)
===================================================== ===== =====
Other comprehensive income that will not
be reclassified to profit or loss subsequently:
Pension remeasurement:
* Change in fair value 470 (103)
* Taxation (118) 26
====================================================== ===== =====
352 (77)
==================================================== ===== =====
Own credit adjustment:
* Change in fair value 84 (29)
* Taxation (21) 7
====================================================== ===== =====
63 (22)
==================================================== ===== =====
Net other comprehensive income that will
not be reclassified to profit or loss subsequently 415 (99)
===================================================== ===== =====
Total other comprehensive income net
of tax 403 (322)
====================================================== ===== =====
Total comprehensive income 1,507 934
====================================================== ===== =====
Attributable to:
Equity holders of the parent 1,486 913
Non-controlling interests 21 21
====================================================== ===== =====
Total comprehensive income 1,507 934
====================================================== ===== =====
(1) Following the adoption of IFRS 9, a fair value reserve was introduced
to replace the available-for-sale reserve, as described in Note 1.
Consolidated Balance Sheet
At 31 December
2018 2017
Notes GBPm GBPm
============================================ ===== ======= =======
Assets
Cash and balances at central banks 19,747 32,771
Financial assets at fair value through
profit or loss:
- Trading assets 11 - 30,555
- Derivative financial instruments 12 5,259 19,942
Other financial assets at fair value
- through profit or loss 13 5,617 2,096
Financial assets at amortised cost:
- Loans and advances to customers(1) 14 201,289 199,340
- Loans and advances to banks(1) 2,799 3,463
Reverse repurchase agreements - non
- trading(1) 17 21,127 2,614
Other financial assets at amortised
- cost(2) 18 7,229
Financial assets at fair value through
other comprehensive income(2) 19 13,302
Financial investments(2) 20 17,611
Interests in other entities 21 88 73
Intangible assets 22 1,808 1,742
Property, plant and equipment 1,832 1,598
Current tax assets 9 153 -
Retirement benefit assets 31 842 449
Other assets 2,280 2,511
============================================ ===== ======= =======
Total assets 283,372 314,765
============================================ ===== ======= =======
Liabilities
Financial liabilities at fair value
through profit or loss:
- Trading liabilities 23 - 31,109
- Derivative financial instruments 12 1,369 17,613
Other financial liabilities at fair
- value through profit or loss 24 6,286 2,315
Financial liabilities at amortised cost:
- Deposits by customers 25 178,090 183,648
- Deposits by banks(1) 26 17,221 12,708
- Repurchase agreements - non trading(1) 27 10,910 1,076
- Debt securities in issue 28 46,692 42,633
- Subordinated liabilities 29 3,601 3,793
Other liabilities 2,448 2,730
Provisions 30 509 558
Current tax liabilities 9 - 3
Deferred tax liabilities 9 223 88
Retirement benefit obligations 31 114 286
============================================ ===== ======= =======
Total liabilities 267,463 298,560
============================================ ===== ======= =======
Equity
Share capital 33 3,119 3,119
Share premium 33 5,620 5,620
Other equity instruments 34 1,991 2,281
Retained earnings 4,744 4,732
Other reserves 284 301
============================================ ===== ======= =======
Total shareholders' equity 15,758 16,053
Non-controlling interests 35 151 152
============================================ ===== ======= =======
Total equity 15,909 16,205
============================================ ===== ======= =======
Total liabilities and equity 283,372 314,765
============================================ ===== ======= =======
(1) From 1 January 2018, the non-trading repurchase agreements and non-trading
reverse repurchase agreements that are held at amortised cost are now
presented as separate lines in the balance sheet, as described in Note
1. Comparatives are re-presented accordingly.
(2) On adoption of IFRS 9, the 'financial investments' balance sheet line
item was split between 'other financial assets at amortised cost' and
'financial assets at FVOCI'. This approach aligns the balance sheet
line items to the IFRS 9 accounting classifications and provides a clearer
understanding of our financial position.
The accompanying Notes to the Financial Statements form an
integral part of these Consolidated Financial Statements.
The Financial Statements were approved and authorised for issue
by the Board on 26 February 2019 and signed on its behalf by:
Nathan Bostock Antonio Roman
Chief Executive Officer Chief Financial Officer
Company Registered Number: 2294747
Consolidated Cash Flow Statement
For the years ended 31 December
2018 2017
Notes GBPm GBPm
=========================================================== ====== ========= =========
Cash flows from operating activities
Profit after tax 1,104 1,256
Adjustments for:
Non-cash items included in profit:
* Depreciation and amortisation 375 354
* Provisions for other liabilities and charges 257 393
* Impairment losses 189 257
* Corporation tax charge 441 561
* Other non-cash items 238 (208)
* Pension charge for defined benefit pension schemes 79 32
=========================================================== ====== ========= =========
1,579 1,389
Net change in operating assets and liabilities:
* Cash and balances at central banks (255) (25)
* Trading assets 24,528 (941)
* Derivative assets 14,683 5,529
* Other financial assets at fair value through profit
or loss (3,635) 25
* Loans and advances to banks and customers (9,129) (1,832)
* Other assets (246) (246)
* Deposits by banks and customers 926 10,900
* Derivative liabilities (16,244) (5,490)
* Trading liabilities (31,101) 15,017
* Other financial liabilities at fair value through
profit or loss 4,106 717
* Debt securities in issue (2,524) 132
* Other liabilities (556) (1,397)
=========================================================== ====== ========= =========
(19,447) 22,389
Corporation taxes paid (391) (484)
Effects of exchange rate differences 1,750 (574)
=========================================================== ====== ========= =========
Net cash flows from operating activities (15,405) 23,976
=========================================================== ====== ========= =========
Cash flows from investing activities
Investments in other entities 21 (66) -
Proceeds from disposal of subsidiaries(1) 348 -
Purchase of property, plant and equipment
and intangible assets (696) (542)
Proceeds from sale of property, plant and
equipment and intangible assets 26 52
Purchase of financial investments (7,002) (726)
Proceeds from sale and redemption of financial
investments 3,708 2,032
=========================================================== ====== ========= =========
Net cash flows from investing activities (3,682) 816
=========================================================== ====== ========= =========
Cash flows from financing activities
Issue of AT1 Capital Securities 34 - 500
Issuance costs of AT1 Capital Securities - (4)
Issue of debt securities and subordinated
notes 10,642 6,645
Issuance costs of debt securities and subordinated
notes (23) (15)
Repayment of debt securities and subordinated
notes (6,281) (13,763)
Repurchase of preference shares and other
equity instruments 34 (290) -
Dividends paid on ordinary shares 10 (1,139) (829)
Dividends paid on preference shares and other
equity instruments (157) (152)
Dividends paid on non-controlling interests (22) (19)
=========================================================== ====== ========= =========
Net cash flows from financing activities 2,730 (7,637)
=========================================================== ====== ========= =========
Change in cash and cash equivalents (16,357) 17,155
=========================================================== ====== ========= =========
Cash and cash equivalents at beginning of
the year 42,226 25,705
Effects of exchange rate changes on cash
and cash equivalents 160 (634)
=========================================================== ====== ========= =========
Cash and cash equivalents at the end of the
year 26,029 42,226
=========================================================== ====== ========= =========
Cash and cash equivalents consist of:
Cash and balances at central banks 19,747 32,771
Less: regulatory minimum cash balances (636) (395)
=========================================================== ====== ========= =========
19,111 32,376
=========================================================== ====== ========= =========
Net trading other cash equivalents - 5,953
Net non-trading other cash equivalents 6,918 3,897
=========================================================== ====== ========= =========
Cash and cash equivalents at the end of the
year 26,029 42,226
=========================================================== ====== ========= =========
(1) In 2018, the Santander UK group sold a number of subsidiaries
for a cash consideration of GBP348m (2017: GBPnil). The carrying
value of the net assets disposed of was GBP348m (2017: GBPnil).
Consolidated Statement of Changes in Equity
For the years ended 31 December
Other reserves Non-
-------------------------------------------
Share Share Other Available- Fair Cash Currency Retained Total controlling Total
capital premium equity for-sale(1) value(1) flow translation earnings GBPm interests GBPm
GBPm GBPm instruments GBPm GBPm hedging GBPm GBPm GBPm
GBPm GBPm
At 31 December
2017 3,119 5,620 2,281 68 228 5 4,732 16,053 152 16,205
Adoption of IFRS
9 (see Note 1) - - - (68) 63 - - (187) (192) - (192)
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
At 1 January
2018 3,119 5,620 2,281 - 63 228 5 4,545 15,861 152 16,013
Profit after
tax - - - - - - 1,082 1,082 22 1,104
Other comprehensive
income, net of
tax:
* Fair value reserve (debt instruments) - - - (40) - - - (40) - (40)
* Cash flow hedges - - - - 28 - - 28 - 28
* Pension remeasurement - - - - - - 353 353 (1) 352
* Own credit adjustment - - - - - - 63 63 - 63
Total comprehensive
income - - - (40) 28 - 1,498 1,486 21 1,507
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
Other - - - - - - (45) (45) - (45)
Repurchase of
other equity
instruments - - (290) - - - - (290) - (290)
Dividends on
ordinary shares - - - - - - (1,139) (1,139) - (1,139)
Dividends on
preference shares
and other equity
instruments - - - - - - (157) (157) - (157)
Dividends on
non-controlling
interests - - - - - - - - (22) (22)
Tax on other
equity instruments - - - - - - 42 42 - 42
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
At 31 December
2018 3,119 5,620 1,991 23 256 5 4,744 15,758 151 15,909
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
At 1 January
2017 3,119 5,620 1,785 48 471 5 4,255 15,303 150 15,453
Profit after
tax - - - - - - 1,235 1,235 21 1,256
Other comprehensive
income, net of
tax:
* Available-for-sale securities - - - 20 - - - 20 - 20
* Cash flow hedges - - - - (243) - - (243) - (243)
* Pension remeasurement - - - - - - (77) (77) - (77)
* Own credit adjustment - - - - - - (22) (22) - (22)
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
Total comprehensive
income - - - 20 (243) - 1,136 913 21 934
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
Issue of AT1
Capital Securities - - 496 - - - - 496 - 496
Dividends on
ordinary shares - - - - - - (553) (553) - (553)
Dividends on
preference shares
and other equity
instruments - - - - - - (152) (152) - (152)
Dividends on
non-controlling
interests - - - - - - - - (19) (19)
Tax on other
equity instruments - - - - - - 46 46 - 46
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
At 31 December
2017 3,119 5,620 2,281 68 228 5 4,732 16,053 152 16,205
============================================ ======= ======= =========== =========== ======== ======= =========== ======== ======== =========== ========
1. ACCOUNTING policies
These financial statements are prepared for Santander UK plc
(the Company) and the Santander UK plc group (the Santander UK
group) under the UK Companies Act 2006. The principal activity of
the Santander UK group is the provision of an extensive range of
personal financial services, and a wide range of banking and
financial services to personal, business and corporate customers.
Santander UK 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. It is an operating company undertaking banking and
financial services transactions.
Basis of preparation
These financial statements incorporate the financial statements
of the Company and entities controlled by the Company (its
subsidiaries) made up to 31 December each year. The Consolidated
Financial Statements have been prepared on the going concern basis
using the historical cost convention, except for financial assets
and liabilities that have been measured at fair value. An
assessment of the appropriateness of the adoption of the going
concern basis of accounting is disclosed in the statement of going
concern in the Directors' Report.
Compliance with International Financial Reporting Standards
The Santander UK group Consolidated Financial Statements have
been prepared in accordance with IFRSs as issued by the IASB,
including interpretations issued by the IFRS Interpretations
Committee (IFRS IC) of the IASB (together IFRS). The Santander UK
group has also complied with its legal obligation to comply with
IFRSs as adopted by the European Union as there are no applicable
differences between the two frameworks for the periods
presented.
The Company financial statements have been prepared in
accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provision of the UK Companies Act
2006. Disclosures required by IFRS 7 'Financial Instruments:
Disclosure' relating to the nature and extent of risks arising from
financial instruments, and IAS 1 'Presentation of Financial
Statements' relating to objectives, policies and processes for
managing capital, can be found in the Risk review. Those
disclosures form an integral part of these financial
statements.
Recent accounting developments
On 1 January 2018, the Santander UK group adopted IFRS 9
'Financial Instruments' (IFRS 9) and IFRS 15 'Revenue from
Contracts with Customers' (IFRS 15). The new or revised accounting
policies are set out below.
The impact of applying IFRS 9 is disclosed in Note 44. The
accounting policy changes for IFRS 9, set out below, have been
applied from 1 January 2018. Comparatives have not been restated.
As a result of the change from IAS 39 to IFRS 9, some disclosures
presented in respect of certain financial assets are not comparable
because their classification may have changed between the two
standards. This means that some IFRS 9 disclosures are not directly
comparable and some disclosures that relate to information
presented on an IAS 39 basis are no longer relevant in the current
period. As explained in Note 44, the classification and measurement
changes to financial assets that arose on adoption of IFRS 9 have
been aligned to the presentation in the balance sheet. The
Santander UK group decided to continue adopting IAS 39 hedge
accounting and consequently there have been no changes to the hedge
accounting policies and practices following the adoption of IFRS 9.
However, additional hedge accounting disclosure requirements of
IFRS 7 'Financial Instruments: Disclosures' (IFRS 7) have been
included in these financial statements.
In addition, non-trading repurchase agreements and non-trading
reverse repurchase agreements that are held at amortised cost are
now presented as separate lines in the balance sheet. Previously,
non-trading reverse repurchase agreements were included in 'Loans
and advances to banks' and 'Loans and advances to customers', and
non-trading repurchase agreements were included in 'Deposits by
banks'. The new presentation, which is considered to be more
relevant to an understanding of our financial position, was adopted
with effect from 1 January 2018, and comparatives are re-presented
accordingly. For the Santander UK group, the impact of this
re-presentation on the balance sheet at 1 January 2017 was to
decrease loans and advances to banks by GBP1,462m, increasing non
trading reverse repurchase agreements by the same amount, and to
decrease deposits by banks by GBP2,384m, increasing non trading
repurchase agreements by the same amount. For the Company, the
impact of this re-presentation on the balance sheet at 1 January
2017 was to decrease loans and advances to banks by GBP476m,
increasing non trading reverse repurchase agreements by the same
amount, and to decrease deposits by banks by GBP2,933m, and
increase non trading repurchase agreements by the same amount.
The application of IFRS 15 had no material impact on the
Santander UK group as there were no significant changes in the
recognition of in-scope income. The accounting policy changes for
IFRS 15 are set out in the Revenue recognition policy below.
Future accounting developments
At 31 December 2018, the Santander UK group has not yet adopted
the following significant new or revised standards and
interpretations, and amendments thereto, which have been issued but
which are not yet effective for the Santander UK group:
- IFRS 16 'Leases' (IFRS 16) - In January 2016, the IASB issued IFRS 16.
The standard is effective for annual periods beginning on or after 1
January 2019. IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both lessees and lessors.
For lessee accounting, IFRS 16 introduces a single lessee accounting
model and requires a lessee to recognise 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 with a term of more than 12 months, unless the underlying asset
is of low value. For lessor accounting, IFRS 16 substantially carries
forward the lessor accounting requirements from the existing leasing
standard (IAS 17) and a lessor continues to classify its leases as operating
leases or finance leases and to account for those two types of leases
differently.
The Santander UK group has elected to apply the modified retrospective
approach whereby the ROU asset at the date of initial application is
measured at an amount equal to the lease liability. The ROU asset is
adjusted for any prepaid lease payments and incentives relating to the
relevant leases that were recognised on the balance sheet at 31 December
2018. It includes the estimated costs of restoring the underlying assets
to the condition required by the lease terms and conditions.
For the Santander UK group, the application of IFRS 16 at 1 January
2019 is expected to increase property, plant and equipment by GBP210m
(being the net increase in ROU assets referred to above), reduce other
assets by GBP12m, increase other liabilities by GBP181m from recognising
lease liabilities, and increase provisions by GBP17m. There is expected
to be no impact on shareholders' equity. For the Company, the application
of IFRS 16 is expected to increase property, plant and equipment by
GBP223m, reduce other assets by GBP12m, increase other liabilities by
GBP194m from recognising lease liabilities, and increase provisions
by GBP17m, with no impact on shareholders' equity. In arriving at the
estimated impact, as well as excluding leases whose terms end within
12 months, the Santander UK group applies a single discount rate to
a portfolio of leases with similar remaining lease terms. In addition
to the choice of transition approach, the determination of the discount
rate is the most significant area of judgement. The Santander UK group
applies an incremental borrowing rate (based on 3-month GBP LIBOR plus
a credit spread to reflect the cost of raising unsecured funding in
the wholesale markets) appropriate to the relevant remaining lease term.
The lease liabilities shown above differ from the amount of operating
lease commitments disclosed in Note 32 due to the effects of discounting
the lease liabilities and excluding short-term leases that are outside
the scope of IFRS 16.
- Amendment to IAS 12 'Income Taxes' (part of 'Annual Improvements to
IFRS Standards 2015-2017 Cycle') - In December 2017, as part of its
annual improvements project, the IASB issued an amendment to IAS 12
to clarify that the income tax consequences of dividends on financial
instruments classified as equity should be recognised according to where
the past transactions or events that generated distributable profits
were recognised. This means that, to the extent that profits from which
dividends on equity instruments were recognised in the income statement,
the income tax consequences would be similarly recognised in the same
statement. The amendment, which is applied retrospectively and is effective
for annual reporting periods beginning on or after 1 January 2019, is
awaiting EU endorsement at the time of approving these Consolidated
Financial Statements. The effects of the amendment are expected to lead
to a reduction in the effective tax rate where the tax relief on coupons
in respect of AT1 capital securities would be recognised in the income
statement rather than in equity.
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 has (i) power over the investee; (ii) is
exposed, or has rights, to variable returns from its involvement
with the investee; and (iii) has the ability to use its power to
affect its returns. The Company reassesses whether or not it
controls an investee if facts and circumstances indicate that there
are changes to one or more of the three elements of control listed
above. When the Company has less than a majority of the voting
rights of an investee, it has power over the investee when the
voting rights are sufficient to give it the practical ability to
direct the relevant activities of the investee unilaterally. The
Company considers all relevant facts and circumstances in assessing
whether or not the Company's voting rights in an investee are
sufficient to give it power, including:
- The size of the Company's holding of voting rights relative to the size
and dispersion of holdings of the other vote holders
- Potential voting rights held by the Company, other vote holders or other
parties
- Rights arising from other contractual arrangements
- Any additional facts and circumstances that indicate that the Company
has, or does not have, the current ability to direct the relevant activities
at the time that decisions need to be made, including voting patterns
at previous shareholders' meetings.
Consolidation of a subsidiary begins when the Company obtains
control over the subsidiary and ceases when the Company loses
control of the subsidiary. Specifically, the results of a
subsidiary acquired or disposed of during the year are included in
the consolidated income statement and the consolidated statement of
comprehensive income from the date the Company gains control until
the date when the Company ceases to control the subsidiary.
Inter-company transactions, balances and unrealised gains on
transactions between Santander UK group companies are eliminated;
unrealised losses are also eliminated unless the cost cannot be
recovered.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries which meet the definition of a
business. The cost of an acquisition is measured at the fair value
of the assets given up, shares issued or liabilities undertaken at
the date of acquisition. Acquisition-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.
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 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 FVOCI (2017:
available-for-sale), which are recognised in other comprehensive
income.
Revenue recognition
a) Interest income and expense
Interest and similar income comprises interest income on
financial assets measured at amortised cost, investments in debt
instruments measured at FVOCI (2017: available-for-sale) and
interest income on hedging derivatives. Interest expense and
similar charges comprises interest expense on financial liabilities
measured at amortised cost, and interest expense on hedging
derivatives. Interest income on financial assets measured at
amortised cost, investments in debt instruments measured at FVOCI
(2017: available-for-sale) and interest expense on financial
liabilities other than those at fair value through profit or loss
(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'), 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.
b) Fee and commission income and expense
Fees and commissions that are not an integral part of the
effective interest rate are recognised when the service is
performed. Most fee and commission income is recognised at a point
in time. Certain commitment, upfront and management fees are
recognised over time but are not material. For retail and corporate
products, fee and commission income consists principally of
collection services fees, commission on foreign currencies,
commission and other fees received from retailers for processing
credit card transactions, fees received from other credit card
issuers for providing cash advances for their customers through the
Santander UK group's branch and ATM networks, annual fees payable
by credit card holders and fees 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) Net trading and other income
Net trading and other income includes all gains and losses from
changes in the fair value of financial assets and liabilities held
at fair value through profit or loss (comprising financial assets
and liabilities held for trading, trading derivatives and other
financial assets and liabilities at fair value through profit or
loss), together with related interest income, expense, dividends
and changes in fair value of any derivatives managed in conjunction
with these assets and liabilities. Changes in fair value of
derivatives in a fair value hedging relationship are also
recognised in net trading and other income. Net trading and other
income also includes income from operating lease assets, and
profits and losses arising on the sales of property, plant and
equipment and subsidiary undertakings.
Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, including computer
software, which are assets that necessarily take a substantial
period of time to develop for their intended use, are added to the
cost of those assets, until the assets are substantially ready for
their intended use. All other borrowing costs are recognised in
profit or loss in the period in which they occur.
Pensions and other post-retirement benefits
a) Defined benefit schemes
A defined benefit scheme is a pension scheme that guarantees an
amount of pension benefit to be provided, usually as a function of
one or more factors such as age, years of service or compensation.
Pension costs are charged to 'Administration expenses', within the
line item 'Operating expenses before impairment losses, provisions
and charges' with the net interest on the defined benefit asset or
liability included within 'Net interest income' in the income
statement. The asset or liability recognised in respect of defined
benefit pension schemes is the present value of the defined benefit
obligation at the balance sheet date, less the fair value of scheme
assets. The defined benefit obligation is calculated annually by
independent actuaries using the projected unit credit method. The
assets of the schemes are measured at their fair values at the
balance sheet date.
The present value of the defined benefit obligation is estimated
by projecting forward the growth in current accrued pension
benefits to reflect inflation and salary growth to the date of
pension payment, then discounted to present value using the yield
applicable to high-quality AA rated corporate bonds of the same
currency and which have terms to maturity closest to the terms of
the scheme liabilities, adjusted where necessary to match those
terms. In determining the value of scheme liabilities, demographic
and financial assumptions are made by management about life
expectancy, inflation, discount rates, pension increases and
earnings growth, based on past experience and future expectations.
Financial assumptions are based on market conditions at the balance
sheet date and can generally be derived objectively.
Demographic assumptions require a greater degree of estimation
and judgement to be applied to externally derived data. Any surplus
or deficit of scheme assets over liabilities is recognised in the
balance sheet as an asset (surplus) or liability (deficit). An
asset is only recognised to the extent that the surplus can be
recovered through reduced contributions in the future or through
refunds from the scheme. The income statement includes the net
interest income/expense on the net defined benefit liability/asset,
current service cost and any past service cost and gain or loss on
settlement. Remeasurement of defined benefit pension schemes,
including return on scheme assets (excludes amounts included in net
interest), actuarial gains and losses (arising from changes in
demographic assumptions, the impact of scheme experience and
changes in financial assumptions) and the effect of the changes to
the asset ceiling (if applicable), are recognised in other
comprehensive income. Remeasurement recognised in other
comprehensive income will not be reclassified to the income
statement. Past-service costs are recognised as an expense in the
income statement at the earlier of when the scheme amendment or
curtailment occurs and when the related restructuring costs or
termination benefits are recognised. Curtailments include the
impact of significant reductions in the number of employees covered
by a scheme, or amendments to the terms of the scheme so that a
significant element of future service will no longer qualify for
benefits or will qualify only for reduced benefits. Curtailment
gains and losses on businesses that meet the definition of
discontinued operations are included in profit or loss for the year
from discontinued operations. Gains and losses on settlements are
recognised when the settlement occurs.
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.
Share-based payments
The Santander UK group engages in cash-settled and
equity-settled share-based payment transactions in respect of
services received from certain of its employees. Shares of the
Santander UK group's parent, Banco Santander SA are purchased in
the open market by the Santander UK group (for the Employee
Sharesave scheme) or are purchased by Banco Santander SA or another
Banco Santander company (for awards granted under the Long-Term
Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share
options or awards as they vest.
Options granted under the Employee Sharesave scheme are
accounted for as cash-settled share-based payment transactions.
Awards granted under the Long-Term Incentive Plan and Deferred
Shares Bonus Plan are accounted for as equity-settled share-based
payment transactions.
The fair value of the services received is measured by reference
to the fair value of the shares or share options initially on the
date of the grant for both the cash and equity settled share-based
payments and then subsequently at each reporting date for the
cash-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 free interest rate, the expected volatility
of the Banco Santander SA share price over the life of the option
and the dividend growth rate. The fair value of the awards granted
for the Long-Term Incentive Plan was determined at the grant date
using an option pricing model, which takes into account the share
price at grant date, the risk free interest rate, the expected
volatility of the Banco Santander SA share price over the life of
the award and the dividend growth rate. Vesting conditions included
in the terms of the grant are not taken into account in estimating
fair value, except for those that include terms related to market
conditions. Non-market vesting conditions are taken into account by
adjusting the number of shares or share options included in the
measurement of the cost of employee service so that, ultimately,
the amount recognised in the income statement reflects the number
of vested shares or share options. Where vesting conditions are
related to market conditions, the charges for the services received
are recognised regardless of whether or not the market-related
vesting conditions are met, provided that 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
Goodwill represents the excess of the cost of an acquisition, as
well as the fair value of any interest previously held, over the
fair value of the share of the identifiable net assets of the
acquired subsidiary, associate, or business at the date of
acquisition. Goodwill on the acquisition of subsidiaries and
businesses is included in intangible assets. Goodwill on
acquisitions of associates is included as part of investment in
associates. Goodwill is tested for impairment at each balance sheet
date, or more frequently when events or changes in circumstances
dictate, and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity or business include
the carrying amount of goodwill relating to the entity or business
sold.
Other intangible assets are recognised if they arise from
contractual or other legal rights or if they are capable of being
separated or divided from the Santander UK group and sold,
transferred, licensed, rented or exchanged. The value of such
intangible assets is amortised on a straight-line basis over their
useful economic life of three to seven years. Other intangible
assets are reviewed annually for impairment indicators and tested
for impairment where indicators are present.
Software development costs are capitalised when they are direct
costs associated with identifiable and unique software products
that are expected to provide future economic benefits and the cost
of those products can be measured reliably. These costs include
payroll, materials, services and directly attributable overheads.
Internally developed software meeting these criteria and externally
purchased software are classified in intangible assets on the
balance sheet and amortised on a straight-line basis over their
useful life of three to seven years, unless the software is an
integral part of the related computer hardware, in which case it is
treated as property, plant and equipment as described below.
Capitalisation of costs ceases when the software is capable of
operating as intended. Costs of maintaining software are expensed
as incurred.
Property, plant and equipment
Property, plant and equipment include owner-occupied properties
(including leasehold properties), office fixtures and equipment and
computer software. Property, plant and equipment are carried at
cost less accumulated depreciation and accumulated impairment
losses. A review for indications of impairment is carried out at
each reporting date. Gains and losses on disposal are determined by
reference to the carrying amount and are reported in net trading
and other income. Repairs and renewals are charged to the income
statement when the expenditure is incurred. Internally developed
software meeting the criteria set out in 'Goodwill and other
intangible assets' above and externally purchased software are
classified in property, plant and equipment where the software is
an integral part of the related computer hardware (for example
operating system of a computer). Classes of property, plant and
equipment are depreciated on a straight-line basis over their
useful life, as follows:
Owner-occupied properties Not exceeding 50 years
Office fixtures and equipment 3 to 15 years
Computer software 3 to 7 years
============================= ======================
Depreciation is not charged on freehold land and assets under
construction.
Financial instruments
a) Initial recognition and measurement
Financial assets and liabilities are initially recognised when
the Santander UK group becomes a party to the contractual terms of
the instrument. The Santander UK group determines the
classification of its financial assets and liabilities at initial
recognition and measures a financial asset or financial liability
at its fair value plus or minus, in the case of a financial asset
or financial liability not at FVTPL, transaction costs that are
incremental and directly attributable to the acquisition or issue
of the financial asset or financial liability. Transaction costs of
financial assets and financial liabilities carried at fair value
through profit or loss are expensed in profit or loss. Immediately
after initial recognition, an expected credit loss (ECL) allowance
is recognised for financial assets measured at amortised cost and
investments in debt instruments measured at FVOCI.
A regular way purchase is a purchase of a financial asset under
a contract whose terms require delivery of the asset within the
timeframe established generally by regulation or convention in the
market place concerned. Regular way purchases of financial assets
classified as loans and receivables, issues of equity or financial
liabilities measured at amortised cost are recognised on settlement
date; all other regular way purchases and issues are recognised on
trade date.
b) Financial assets and liabilities
i) Classification and subsequent measurement
From 1 January 2018, the Santander UK group has applied IFRS 9
Financial Instruments and classifies its financial assets in the
measurement categories of amortised cost, FVOCI and FVTPL.
Financial assets and financial liabilities are classified as
FVTPL where there is a requirement to do so or where they are
otherwise designated at FVTPL on initial recognition. Financial
assets and financial liabilities which are required to be held at
FVTPL include:
- Financial assets and financial liabilities held for trading
- Debt instruments that do not have solely payments of principal and interest
(SPPI) characteristics. Otherwise, such instruments are measured at
amortised cost or FVOCI, and
- Equity instruments that have not been designated as held at FVOCI.
Financial assets and financial liabilities are classified as
held for trading if they are derivatives or if they are acquired or
incurred principally for the purpose of selling or repurchasing in
the near-term, or form part of a portfolio of financial instruments
that are managed together and for which there is evidence of
short-term profit taking.
In certain circumstances, other financial assets and financial
liabilities are designated at FVTPL where this results in more
relevant information. This may arise because it significantly
reduces a measurement inconsistency that would otherwise arise from
measuring assets or liabilities or recognising the gains or losses
on them on a different basis, where the assets and liabilities are
managed and their performance evaluated on a fair value basis or,
in the case of financial liabilities, where it contains one or more
embedded derivatives which are not closely related to the host
contract.
The classification and measurement requirements for financial
asset debt and equity instruments and financial liabilities are set
out below.
a) Financial assets: debt instruments
Debt instruments are those instruments that meet the definition
of a financial liability from the issuer's perspective, such as
loans and government and corporate bonds. Classification and
subsequent measurement of debt instruments depend on the Santander
UK group's business model for managing the asset, and the cash flow
characteristics of the asset.
Business model
The business model reflects how the Santander UK group manages
the assets in order to generate cash flows and, specifically,
whether the Santander UK group's objective is solely to collect the
contractual cash flows from the assets or is to collect both the
contractual cash flows and cash flows arising from the sale of the
assets. If neither of these is applicable, such as where the
financial assets are held for trading purposes, then the financial
assets are classified as part of an 'other' business model and
measured at FVTPL. Factors considered in determining the business
model for a group of assets include past experience on how the cash
flows for these assets were collected, how the assets' performance
is evaluated and reported to key management personnel, and how
risks are assessed and managed.
SPPI
Where the business model is to hold assets to collect
contractual cash flows or to collect contractual cash flows and
sell, the Santander UK group assesses whether the assets' cash
flows represent SPPI. In making this assessment, the Santander UK
group considers whether the contractual cash flows are consistent
with a basic lending arrangement (i.e. interest includes only
consideration for the time value of money, credit risk, other basic
lending risks and a profit margin that is consistent with a basic
lending arrangement). Where the contractual terms introduce
exposure to risk or volatility that is inconsistent with a basic
lending arrangement, the related asset is classified and measured
at FVTPL.
Financial assets with embedded derivatives are considered in
their entirety when determining whether their cash flows are
SPPI.
Based on these factors, the Santander UK group classifies its
debt instruments into one of the following measurement
categories:
- Amortised cost - Financial assets that are held for collection of contractual
cash flows where those cash flows represent SPPI, and that are not designated
at FVTPL, are measured at amortised cost. The carrying amount of these
assets is adjusted by any ECL recognised and measured as presented in
Note 14. Interest income from these financial assets is included in
'Interest and similar income' using the effective interest rate method.
When estimates of future cash flows are revised, the carrying amount
of the respective financial assets or financial liabilities is adjusted
to reflect the new estimate discounted using the original effective
interest rate. Any changes are recognised in the income statement.
- FVOCI - Financial assets that are held for collection of contractual
cash flows and for selling the assets, where the assets' cash flows
represent SPPI, and that are not designated at FVTPL, are measured at
FVOCI. Movements in the carrying amount are recognised in OCI, except
for the recognition of impairment gains or losses, interest revenue
and foreign exchange gains and losses on the instrument's amortised
cost which are recognised in profit or loss. When the financial asset
is derecognised, the cumulative gain or loss previously recognised in
OCI is reclassified from equity to profit or loss and recognised in
'Net trading and other income'. Interest income from these financial
assets is included in 'Interest and similar income' using the effective
interest rate method.
- FVTPL - Financial assets that do not meet the criteria for amortised
cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument
that is subsequently measured at FVTPL, including any debt instruments
designated at fair value, is recognised in profit or loss and presented
in the income statement in 'Net trading and other income' in the period
in which it arises.
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.
b) Financial assets: equity instruments
Equity instruments are instruments that meet the definition of
equity from the issuer's perspective, being instruments that do not
contain a contractual obligation to pay cash and that evidence a
residual interest in the issuer's net assets. All equity
investments are subsequently measured at FVTPL, except where
management has elected, at initial recognition, to irrevocably
designate an equity investment at FVOCI. When this election is
used, fair value gains and losses are recognised in OCI and are not
subsequently reclassified to profit or loss, including on disposal.
ECLs (and reversal of ECLs) are not reported separately from other
changes in fair value. Dividends, when representing a return on
such investments, continue to be recognised in profit or loss as
other income when the right to receive payments is established.
Gains and losses on equity investments at FVTPL are included in the
'Net trading and other income' line in the income statement.
c) Financial liabilities
Financial liabilities are classified as subsequently measured at
amortised cost, except for:
- Financial liabilities at fair value through profit or loss: this classification
is applied to derivatives, financial liabilities held for trading and
other financial liabilities designated as such at initial recognition.
Gains or losses on financial liabilities designated at fair value through
profit or loss are presented partially in other comprehensive income
(the amount of change in the fair value of the financial liability that
is attributable to changes in the credit risk of that liability) and
partially in profit or loss (the remaining amount of change in the fair
value of the liability).
- Financial liabilities arising from the transfer of financial assets
which did not qualify for derecognition, whereby a financial liability
is recognised for the consideration received for the transfer. In subsequent
periods, the Santander UK group recognises any expense incurred on the
financial liability, and
- Financial guarantee contracts and loan commitments.
Contracts involving the receipt of cash on which customers
receive an index-linked return are accounted for as equity
index-linked deposits. The principal products are Capital
Guaranteed/Protected Products which give the customers a limited
participation in the upside growth of an equity index. In the event
the index falls in price, a cash principal element is
guaranteed/protected. The equity index-linked deposits contain
embedded derivatives. These embedded derivatives, in combination
with the principal cash deposit element, are designed to replicate
the investment performance profile tailored to the return agreed in
the contracts with customers. The cash principal element is
accounted for as deposits by customers at amortised cost. The
embedded derivatives are separated from the host instrument and are
separately accounted for as derivatives.
d) Sale and repurchase agreements (including stock borrowing and
lending)
Securities sold subject to a commitment to repurchase them at a
predetermined price (repos) under which substantially all the risks
and rewards of ownership are retained by the Santander UK group
remain on the balance sheet and a liability is recorded in respect
of the consideration received. Securities purchased under
commitments to resell (reverse repos) are not recognised on the
balance sheet and the consideration paid is recorded as an asset.
The difference between the sale and repurchase price is treated as
trading income in the income statement, except where the repo is
not treated as part of the trading book, in which case the
difference is recorded in interest income or expense.
Securities lending and borrowing transactions are generally
secured, with collateral in the form of securities or cash advanced
or received. Securities lent or borrowed are not reflected on the
balance sheet. Collateral in the form of cash received or advanced
is recorded as a deposit or a loan. Collateral in the form of
securities is not recognised.
e) Day One profit adjustments
The fair value of a financial instrument on initial recognition
is generally its transaction price (that is, the fair value of the
consideration given or received). However, sometimes the fair value
will be based on other observable current market transactions in
the same instrument, without modification or repackaging, or on a
valuation technique whose variables include only data from
observable markets, such as interest rate yield curves, option
volatilities and currency rates. When such evidence exists, the
Santander UK group recognises a trading gain or loss at inception
(Day One gain or loss), being the difference between the
transaction price and the fair value. When significant unobservable
parameters are used, the entire Day One gain or loss is deferred
and is recognised in the income statement over the life of the
transaction until the transaction matures, is closed out, the
valuation inputs become observable or an offsetting transaction is
entered into.
ii) Impairment of debt instrument financial assets
The Santander UK group assesses on a forward-looking basis the
ECL associated with its debt instrument assets carried at amortised
cost and FVOCI and with the exposure arising from financial
guarantee contracts and loan commitments. The Santander UK group
recognises a loss allowance for such losses at each reporting date.
The measurement of ECL reflects:
An unbiased and probability-weighted amount that is determined by evaluating
- a range of possible outcomes
- The time value of money, and
Reasonable and supportable information that is available without undue
cost or effort at the reporting date about past events, current conditions
- and forecasts of future economic conditions.
Grouping of instruments for losses measured on a collective
basis
We typically group instruments and assess them for impairment
collectively where they share risk characteristics (as described in
Retail Banking - credit risk management in the Risk review) using
one or more statistical models. Where we have used internal capital
or similar models as the basis for our IFRS 9 models, this
typically results in a large number of relatively small homogenous
groups which are determined by the permutations of the underlying
characteristics in the statistical models. We calculate separate
collective provisions for instruments in Stages 1, 2 and 3 where
the instrument is not individually assessed, as described
below.
Individually assessed impairments (IAIs)
We assess significant Stage 3 cases individually. We do this for
CIB and Corporate & Commercial Banking cases, but not for
Business Banking cases in Retail Banking which we assess
collectively. To calculate the estimated loss, we estimate the
future cash flows under several scenarios each of which uses
case-specific factors and circumstances. We then probability-weight
the net present value of the cash flows under each scenario to
arrive at a weighted average provision requirement. We update our
assessment process every quarter and more frequently if there are
changes in circumstances that might affect the scenarios, cash
flows or probabilities we apply.
For more on how ECL is calculated, see the Credit risk section
of the Risk review.
a) Write-off
For secured loans, a write-off is only made when all collection
procedures have been exhausted and the security has been sold or
from claiming on any mortgage indemnity guarantee or other
insurance. In the corporate portfolio, there may be occasions where
a write-off occurs for other reasons, 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.
There is no threshold based on past due status beyond which all
secured loans are written off as there can be significant
variations in the time needed to enforce possession and sale of the
security, especially due to the different legal frameworks that
apply in different regions of the UK. For unsecured loans, a
write-off is only made when all internal avenues of collecting the
debt have been exhausted and the debt is passed over to external
collection agencies. A past due threshold is applied to unsecured
debt where accounts that are 180 days past due are written off
unless there is a dispute awaiting resolution. Contact is made with
customers with the aim to achieve a realistic and sustainable
repayment arrangement. Litigation and/or enforcement of security is
usually carried out only when the steps described above have been
undertaken without success.
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 losses are not included in the
impairment loss allowance, but are taken to income and offset
against credit impairment losses. Recoveries of credit impairment
losses are classified in the income statement as 'Credit impairment
losses'.
iii) Modifications of financial assets
The treatment of a renegotiation or modification of the
contractual cash flows of a financial asset normally depends upon
whether the renegotiation or modification is due to financial
difficulties of the borrower or for other commercial reasons.
- Contractual modifications due to financial difficulties of the borrower:
where Santander UK modifies the contractual conditions to enable the
borrower to fulfil their payment obligations, the asset is not derecognised.
The gross carrying amount of the financial asset is recalculated as
the present value of the renegotiated/modified contractual cash flows
that are discounted at the financial asset's original EIR and any gain
or loss arising from the modification is recognised in the income statement.
- Contractual modifications for other commercial reasons: such modifications
are treated as a new transaction resulting in derecognition of the original
financial asset, and the recognition of a 'new' financial asset. Any
difference between the carrying amount of the derecognised asset and
the fair value of the new asset is recognised in the income statement
as a gain or loss on derecognition.
Any other contractual modifications, such as where a regulatory
authority imposes a change in certain contractual terms or due to
legal reasons, are assessed on a case-by-case basis to establish
whether or not the financial asset should be derecognised.
iv) Derecognition other than on a modification
Financial assets are derecognised when the rights to receive
cash flows have expired or the Santander UK group has transferred
its contractual right to receive the cash flows from the assets and
either: (1) substantially all the risks and rewards of ownership
have been transferred; or (2) the Santander UK group has neither
retained nor transferred substantially all of the risks and
rewards, but has transferred control.
Financial liabilities are derecognised when extinguished,
cancelled or expired.
c) Financial guarantee contracts and loan commitments
Financial guarantee contracts are contracts that require the
issuer to make specified payments to reimburse the holder for a
loss it incurs because a specified debtor fails to make payments
when due, in accordance with the terms of a debt instrument. Such
financial guarantees are given to banks, financial institutions and
others on behalf of customers to secure loans, overdrafts and other
banking facilities.
Financial guarantee contracts are initially measured at fair
value and subsequently measured at the higher of the amount of the
loss allowance, and the premium received on initial recognition
less income recognised in accordance with the principles of IFRS
15. Loan commitments are measured as the amount of the loss
allowance. The Santander UK group has not provided any commitment
to provide loans at a below-market interest rate, or that can be
settled net in cash or by delivering or issuing another financial
instrument.
For financial guarantee contracts and loan commitments, the loss
allowance is recognised as a provision and charged to credit
impairment losses in the income statement. The loss allowance in
respect of revolving facilities is classified in loans and advances
to customers to the extent of any drawn balances. The loss
allowance in respect of undrawn amounts is classified in
provisions. When amounts are drawn, any related loss allowance is
transferred from provisions to loans and advances to customers.
Derivative financial instruments (derivatives)
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. 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 within net trading
and other income.
Offsetting financial assets and liabilities
Financial assets and liabilities including derivatives are
offset and the net amount reported in the balance sheet when there
is a legally enforceable right to set off the recognised amounts
and there is an intention to settle on a net basis, or realise the
asset and settle the liability simultaneously. The Santander UK
group is party to a number of arrangements, including master
netting arrangements under industry standard agreements which
facilitate netting of transactions in jurisdictions where netting
agreements are recognised and have legal force. The netting
arrangements do not generally result in an offset of balance sheet
assets and liabilities for accounting purposes, as transactions are
usually settled on a gross basis.
Hedge accounting
The Santander UK group applies hedge accounting to represent, to
the maximum possible extent permitted under accounting standards,
the economic effects of its risk management strategies. Derivatives
are used to hedge exposures to interest rates, exchange rates and
certain indices such as retail price indices.
At the time a financial instrument is designated as a hedge
(i.e. at the inception of the hedge), the Santander UK group
formally documents the relationship between the hedging
instrument(s) and hedged item(s), its risk management objective and
strategy for undertaking the hedge. The documentation includes the
identification of each hedging instrument and respective hedged
item, the nature of the risk being hedged (including the benchmark
interest rate being hedged in a hedge of interest rate risk) and
how the hedging instrument's effectiveness in offsetting the
exposure to changes in the hedged item's fair value attributable to
the hedged risk is to be assessed. Accordingly, the Santander UK
group formally assesses, both at the inception of the hedge and on
an ongoing basis, whether the hedging derivatives have been and
will be highly effective in offsetting changes in the fair value
attributable to the hedged risk during the period that the hedge is
designated. A hedge is normally regarded as highly effective if, at
inception and throughout its life, the Santander UK group can
expect, and actual results indicate, that changes in the fair value
or cash flow of the hedged items are effectively offset by changes
in the fair value or cash flow of the hedging instrument. If at any
point it is concluded that it is no longer highly effective in
achieving its documented objective, hedge accounting is
discontinued.
Where derivatives are held for risk management purposes, and
when transactions meet the required criteria for documentation and
hedge effectiveness, the derivatives may be designated as either:
(i) hedges of the change in fair value of recognised assets or
liabilities or firm commitments (fair value hedges); (ii) hedges of
the variability in highly probable future cash flows attributable
to a recognised asset or liability, or a forecast transaction (cash
flow hedges); or (iii) a hedge of a net investment in a foreign
operation (net investment hedges). The Santander UK group applies
fair value and cash flow hedge accounting, but not hedging of a net
investment in a foreign operation.
a) Fair value hedge accounting
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in the income statement,
together with the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk. Where the
hedged item is measured at amortised cost, the fair value changes
due to the hedged risk adjust the carrying amount of the hedged
asset or liability. Changes in the fair value of portfolio hedged
items are presented separately in the consolidated balance sheet in
macro hedge of interest rate risk and recognised in the income
statement within net trading and other income. If the hedge no
longer meets the criteria for hedge accounting, changes in the fair
value of the hedged item attributable to the hedged risk are no
longer recognised in the income statement. For fair value hedges of
interest rate risk, the cumulative adjustment that has been made to
the carrying amount of the hedged item is amortised to the income
statement using the effective interest method over the period to
maturity. For portfolio hedged items, the cumulative adjustment is
amortised to the income statement using the straight line method
over the period to maturity.
b) Cash flow hedge accounting
The effective portion of changes in the fair value of qualifying
cash flow hedges is recognised in other comprehensive income in the
cash flow hedging reserve. The gain or loss relating to the
ineffective portion is recognised immediately in the income
statement. Amounts accumulated in equity are reclassified to the
income statement in the periods in which the hedged item affects
profit or loss. When a hedging instrument expires or is sold, or
when a hedge no longer meets the criteria for hedge accounting, any
cumulative gain or loss existing in equity at that time remains in
equity and is recognised in the income statement when the forecast
transaction is ultimately recognised in the income statement. When
a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was reported in equity is immediately
transferred to the income statement. The Santander UK group is
exposed to cash flow interest rate risk on its floating rate assets
and foreign currency risk on its fixed rate debt issuances
denominated in foreign currency. Cash flow hedging is used to hedge
the variability in cash flows arising from both these risks.
Securitisation transactions
The Santander UK group has entered into arrangements where
undertakings have issued mortgage-backed and other asset-backed
securities or have entered into funding arrangements with lenders
in order to finance specific loans and advances to customers. As
the Santander UK group has retained substantially all the risks and
rewards of the underlying assets, such financial instruments
continue to be recognised on the balance sheet, and a liability
recognised for the proceeds of the funding transaction.
Impairment of non-financial assets
At each balance sheet date, or more frequently when events or
changes in circumstances dictate, property plant and equipment
(including operating lease assets) and intangible assets (including
goodwill) are assessed for indicators of impairment. If indications
are present, these assets are subject to an impairment review. The
impairment review comprises a comparison of the carrying amount of
the asset or cash generating unit with its recoverable amount: the
higher of the asset's or cash-generating unit's fair value less
costs to sell and its value in use. The cash-generating unit
represents the lowest level at which non-financial assets including
goodwill is monitored for internal management purposes and is not
larger than an operating segment.
The fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Value in use
is calculated by discounting management's expected future cash
flows obtainable as a result of the asset's continued use,
including those resulting from its ultimate disposal, at a market
based discount rate on 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
Operating lease assets are recorded at cost and depreciated over
the life of the asset after taking into account anticipated
residual value. Operating lease rental income and depreciation is
recognised on a straight-line basis over the life of the asset.
Amounts due from lessees under finance leases and hire purchase
contracts are recorded as receivables at the amount of the
Santander UK group's net investment in the leases. Finance lease
income is allocated to accounting periods so as to reflect a
constant periodic rate of return on the Santander UK group's net
investment outstanding in respect of the leases and hire purchase
contracts. A provision is recognised to reflect a reduction in any
anticipated unguaranteed RV. A provision is also recognised for
voluntary termination of the contract by the customer, where
appropriate.
b) The Santander UK group as lessee
The Santander UK group enters into operating leases for the
rental of equipment or real estate. Payments made under such leases
are charged to the income statement on a straight-line basis over
the period of the lease. When an operating lease is terminated
before the lease period has expired, any payment to be made to the
lessor by way of penalty is recognised as an expense in the period
in which termination takes place.
If the lease agreement transfers the risk and rewards of the
asset, the lease is recorded as a finance lease and the related
asset is capitalised. At inception, the asset is recorded at the
lower of the present value of the minimum lease payments or fair
value and depreciated over the lower of the estimated useful life
and the life of the lease. The corresponding rental obligations are
recorded as borrowings. The aggregate benefit of incentives, if
any, is recognised as a reduction of rental expense over the lease
term on a straight-line basis.
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
For the purposes of the cash flow statement, cash and cash
equivalents comprise balances with less than three months maturity
from the date of acquisition, including cash and non-restricted
balances with central banks, treasury bills and other eligible
bills, loans and advances to banks and short-term investments in
securities.
Balances with central banks represent amounts held at the Bank
of England and, at 31 December 2017, the US Federal Reserve as part
of the Santander UK group's liquidity management activities. In
addition, it includes certain minimum cash balances held for
regulatory purposes required to be maintained with the Bank of
England.
Provisions
Provisions are recognised for present obligations arising as
consequences of past events where it is more likely than not that a
transfer of economic benefits will be necessary to settle the
obligation, and it can be reliably estimated.
Conduct provisions are made for the estimated cost of making
redress payments with respect to the past sales of products, based
on conclusions regarding the number of claims that will be
received, including the number of those that will be upheld, the
estimated average settlement per case and other related costs.
Provision is made for the anticipated cost of restructuring,
including redundancy costs, when an obligation exists. An
obligation exists when the Santander UK group has a detailed formal
plan for restructuring a business, has raised valid expectations in
those affected by the restructuring, and has started to implement
the plan or announce its main features.
When a leasehold property ceases to be used in the business,
provision is made where the unavoidable costs of the future
obligations relating to the lease are expected to exceed
anticipated rental income. The net costs are discounted using
market rates of interest to reflect the long-term nature of the
cash flows.
Provisions include amounts in respect of irrevocable loan
commitments. The provision is the present value of the difference
between the contractual cash flows based on the expected drawdowns
and the cash flows that the Santander UK group expects to
receive.
Contingent liabilities are possible obligations whose existence
will be confirmed only by certain future events or present
obligations where the transfer of economic benefit is uncertain or
cannot be reliably measured. Contingent liabilities are not
recognised but are disclosed unless they are remote.
Share capital
a) Share issue costs
Incremental external costs directly attributable to the issue of
new shares are deducted from equity net of related income
taxes.
b) Dividends
Dividends on ordinary shares are recognised in equity in the
period in which the right to receive payment is established.
Accounting policies relating to comparatives - IAS 39
On 1 January 2018, Santander UK group adopted IFRS 9, which
replaced IAS 39. In accordance with the transition requirements of
IFRS 9, comparatives were not restated. The accounting policies
applied in accordance with IAS 39 for periods before the adoption
of IFRS 9 are set out below:
Financial assets and liabilities - IAS 39
Financial assets and liabilities are initially recognised when
the Santander UK group becomes a party to the contractual terms of
the instrument. The Santander UK group determines the
classification of its financial assets and liabilities at initial
recognition. Financial assets are classified as financial assets at
fair value through profit or loss, loans and receivables,
available-for-sale financial assets and held-to-maturity
investments. Financial assets that are classified at fair value
through profit or loss, which have not been designated as such or
are not accounted for as derivatives, or assets classified as
available-for-sale, may subsequently in rare circumstances, be
reclassified from the fair value through profit or loss category to
the loans and receivables, available-for-sale or held-to-maturity
categories. Financial liabilities are classified as fair value
through profit or loss if they are either held for trading or
otherwise designated at fair value through profit or loss on
initial recognition.
a) Financial assets and liabilities at fair value through profit
or loss
Financial assets and financial liabilities are classified as
FVTPL if they are either held for trading or otherwise designated
at FVTPL on initial recognition. Financial assets and financial
liabilities are classified as held for trading if they are
derivatives or if they are acquired or incurred principally for the
purpose of selling or repurchasing in the near-term, or form part
of a portfolio of financial instruments that are managed together
and for which there is evidence of short-term profit taking. In
certain circumstances, financial assets and financial liabilities
other than those that are held for trading are designated at FVTPL
where this results in more relevant information because it
significantly reduces a measurement inconsistency that would
otherwise arise from measuring assets or liabilities or recognising
the gains or losses on them on a different basis, where the assets
or liabilities are managed and their performance evaluated on a
fair value basis, or where a financial asset or financial liability
contains one or more embedded derivatives which are not closely
related to the host contract.
Financial assets and financial liabilities classified as FVTPL
are initially recognised at fair value and transaction costs are
taken directly to the income statement. Gains and losses arising
from changes in fair value are included directly in the income
statement except for gains and losses on financial liabilities
designated at FVTPL relating to own credit which are presented in
other comprehensive income.
Derivative financial instruments, trading assets and liabilities
and financial assets and liabilities designated at fair value are
classified as FVTPL.
b) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments, that are not quoted in an active
market and which are not classified as available-for-sale or FVTPL.
They arise when the Santander UK group provides money or services
directly to a customer with no intention of trading the loan. Loans
and receivables are initially recognised at fair value including
direct and incremental transaction costs. They are subsequently
valued at amortised cost, using the effective interest method.
Loans and receivables consist of loans and advances to banks, loans
and advances to customers, and loans and receivables
securities.
c) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial
assets that are designated as available-for-sale and are not
categorised into any of the other categories described. They are
initially recognised at fair value including direct and incremental
transaction costs, and subsequently held at fair value. Gains and
losses arising from changes in fair value are recognised in other
comprehensive income until sale or until determined to be impaired
when the cumulative gain or loss or impairment losses are
transferred to the income statement. Where the financial asset is
interest-bearing, interest is determined using the effective
interest method. Income on investments in equity shares, debt
instruments and other similar interests is recognised in the income
statement as and when dividends are declared and interest is
accrued. Impairment losses and foreign exchange translation
differences on monetary items are recognised in the income
statement.
d) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturities that the
Santander UK group's management has the positive intention and
ability to hold to maturity other than those that meet the
definition of loans and receivables or that the Santander UK group
designates upon initial recognition as at fair value through profit
or loss, or available-for-sale. They are initially recognised at
fair value including direct and incremental transaction costs and
measured subsequently at amortised cost, using the effective
interest method, less any provision for impairment. A sale or
reclassification of a more than insignificant amount of
held-to-maturity investments would result in the reclassification
of all held-to-maturity investments to available-for-sale financial
assets.
Impairment of financial assets - IAS 39
At each balance sheet date, the Santander UK group assesses
whether there is objective evidence that a financial asset or group
of financial assets is impaired. A financial asset or a group of
financial assets is impaired and impairment losses are incurred
only if there is objective evidence of impairment as a result of
one or more events that occurred after the initial recognition of
the asset (a loss event) and that loss event (or events) has an
impact on the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated. In the
case of equity investments classified as available-for-sale, a
significant or prolonged decline in the fair value of the security
below its cost is considered an indicator that the assets are
impaired.
a) Assets carried at amortised cost
For loans and advances, loans and receivables securities and
held-to-maturity investments, the amount of the loss is measured as
the difference between the asset's carrying amount and the present
value of estimated future cash flows (excluding future credit
losses that have not been incurred) discounted at the financial
asset's original effective interest rate. The carrying amount of
the asset is reduced and the amount of the loss is recognised in
profit or loss. If a loan or held-to-maturity investment has a
variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate determined
under the contract.
Subsequent to the recognition of an impairment loss on a
financial asset or a group of financial assets, interest income
continues to be recognised on an effective interest rate basis, on
the asset's carrying value net of impairment provisions. If, in a
subsequent period, the amount of the impairment loss decreases and
the decrease can be related objectively to an event occurring after
the impairment was recognised (such as an improvement in the
debtor's credit rating), the reversal of the previously recognised
impairment loss is recognised in profit or loss.
Impairment allowances are assessed individually for financial
assets that are individually significant. Impairment allowances for
portfolios of smaller balance homogenous loans such as most
residential mortgages, personal loans and credit card balances that
are below the individual assessment thresholds, and for loan losses
that have been incurred but not separately identified at the
balance sheet date, are determined on a collective basis.
Individual assessment
For individually assessed assets, the Santander UK group
measures the amount of the loss as the difference between the
carrying amount of the asset and the present value of the estimated
future cash flows from the asset discounted at the asset's original
effective interest rate.
The factors considered in determining whether a loan is
individually significant for the purpose of assessing impairment
include the size of the loan, the number of loans in the portfolio,
the importance of the individual loan relationship and how this is
managed. Potential indicators of loss events which may be evidence
of impairment for retail borrowers may include missed payments of
capital and interest and borrowers notifying the Santander UK group
of current or likely financial stress.
For corporate assets, when a specific observed impairment is
established, the asset is transferred to the Corporate &
Commercial Banking Restructuring & Recoveries team. As part of
their impairment reviews, an assessment is undertaken of the
expected future cash flows (including, where appropriate, cash
flows through enforcement of any applicable security held) in
relation to the relevant asset, discounted at the loan's original
effective interest rate. The result is compared to the current
carrying value of the asset. Any shortfall evidenced as a result of
such a review will be assessed and recorded as an observed specific
loss allowance.
Collective assessment
In making a collective assessment for impairment, financial
assets are grouped together according to their credit risk
characteristics. These can include grouping by product,
loan-to-value, brand, geography, type of customer and previous
insolvency events. For each such portfolio or sub-segment of the
portfolio, future cash flows are estimated through the use of
historical loss experience. The historical loss experience is
adjusted to include the effects of changes in current economic,
behavioural and other conditions that cannot be successfully
depicted solely from historical experience. The loss is discounted
at the effective interest rate, except where portfolios meet the
criteria for short-term receivables. The unwind of the discount
over time is reported through interest and other similar income
within the income statement, with an increase to the impairment
loss allowances on the balance sheet. Loans for which evidence of
potential loss have been specifically identified are grouped
together for the purpose of calculating an allowance for observed
losses. Loans for which no evidence of loss has been specifically
identified on an individual basis are grouped together according to
their credit risk characteristics for the purpose of calculating an
allowance for incurred but not observed (IBNO) losses. Such losses
will only be individually identified in the future.
Observed impairment loss allowance
An impairment loss allowance for observed losses is established
for all NPLs where it is increasingly probable that some of the
capital or interest will not be repaid or recovered through
enforcement of any applicable security. The allowance for observed
losses is determined on a collective (or portfolio) basis for
groups of loans with similar credit risk characteristics. For more
on the definition of NPLs, see 'Credit risk management - risk
measurement and control' in the Risk review.
For mortgages and other secured advances, the allowance for
observed losses is calculated as the product of the account
outstanding balance (exposure) at the reporting date, the estimated
proportion that will be repossessed (the loss propensity) and the
percentage of exposure which will result in a loss (the loss
ratio). The loss propensities for the observed segment (i.e. where
the loan is classified as non-performing) represent the percentage
that will ultimately be written off, or repossessed for secured
advances. Loss propensities are based on recent historical
experience, typically covering a period of no more than the most
recent 12 months in the year under review. The loss ratio is based
on actual cases which have been repossessed and sold using the most
recent 12 month average data, segmented by LTV, and is then
discounted using the effective interest rate.
IBNO impairment loss allowances
An allowance for IBNO losses is established for loans which are
either:
- Performing and no evidence of loss has been specifically identified
on an individual basis but because the loans that are not yet past due
are known from past experience to have deteriorated since the initial
decision to lend was made (for example, where a borrower has not yet
missed a payment but is experiencing financial difficulties at the reporting
date, for example due to a loss of employment, divorce or bereavement),
or
- In arrears and not classified as non-performing.
The impairment loss calculation resembles the one explained
above for the observed segment except that for the IBNO segment,
where the account is currently up to date, the loss propensity
represents the percentage of such cases that are expected to miss a
payment in the appropriate emergence period and which will
ultimately be written off. Where the account is delinquent, the
loss propensity represents the percentage of such cases that will
ultimately be written off.
b) Loans and receivables securities and held-to-maturity
investments
Loans and receivables securities and held-to-maturity
investments are assessed individually for impairment. An impairment
loss is incurred if there is objective evidence that a loss event
has occurred since initial recognition of the assets that has an
impact on the estimated future cash flows of the asset. Potential
indicators of loss events include significant financial distress of
the issuer and default or delinquency in interest and principal
payments (breach of contractual terms).
Loans and receivables securities and held-to-maturity
investments are monitored for potential impairment through a
detailed expected cash flow analysis, where appropriate, taking
into account the structure and underlying assets of each individual
security. Once specific events give rise to a reasonable
expectation that future anticipated cash flows may not be received,
the asset originating these doubtful cash flows will be deemed to
be impaired with the impairment loss being measured as the
difference between the expected future cash flows discounted at the
original effective interest rate and the carrying value of the
asset.
c) Assets classified as available-for-sale
The Santander UK group assesses at each balance sheet date
whether there is objective evidence that an available-for-sale
financial asset is impaired. The assessment involves reviewing the
financial circumstances (including creditworthiness) and future
prospects of the issuer, assessing the future cash flows expected
to be realised and, in the case of equity shares, considering
whether there has been a significant or prolonged decline in the
fair value of the security below its cost. The cumulative loss is
measured as the difference between the acquisition cost and the
current fair value, less any impairment loss previously reported in
the income statement and is removed from other comprehensive income
and recognised in the income statement. For impaired debt
instruments, further impairment losses are recognised where there
has been a further negative impact on expected future cash
flows.
If, in a subsequent period, the fair value of a debt instrument
classified as available-for-sale increases and the increase is due
to an event occurring after the impairment loss was recognised in
the income statement (with objective evidence to support this), the
impairment loss is reversed through the income statement. If, in a
subsequent period, the fair value of an equity instrument
classified as available-for-sale increases, all such increases in
the fair value are treated as a revaluation, and are recognised in
other comprehensive income. Impairment losses recognised on equity
instruments are not reversed through the income statement.
CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATES
The preparation of the Consolidated Financial Statements
requires management to make judgements and accounting estimates
that affect the reported amount of assets and liabilities at the
date of the Consolidated Financial Statements and the reported
amount of income and expenses during the reporting period.
Management evaluates its judgements and accounting estimates, which
are based on historical experience and on various other factors
that are believed to be reasonable under the circumstances, on an
ongoing basis. Actual results may differ from these accounting
estimates under different assumptions or conditions.
In the course of preparing the Consolidated Financial
Statements, no significant judgements have been made in the process
of applying the accounting policies, other than those involving
estimations about credit impairment losses, conduct remediation and
pensions as set out below.
The following accounting estimates, as well as the judgements
inherent within them, are considered important to the portrayal of
the Santander UK group's financial results and financial condition
because: (i) they are highly susceptible to change from period to
period as assumptions are made to calculate the estimates, and (ii)
any significant difference between the estimated amounts and actual
amounts could have a material impact on the Santander UK group's
future financial results and financial condition.
In calculating each accounting estimate, a range of outcomes was
calculated based principally on management's conclusions regarding
the input assumptions relative to historical experience. The actual
estimates were based on what management concluded to be the most
probable assumptions within the range of reasonably possible
assumptions.
a) Credit impairment allowance
The application of the ECL impairment methodology for
calculating credit impairment allowances is highly susceptible to
change from period to period. The methodology requires management
to make a number of judgmental assumptions in determining the
estimates. Any significant difference between the estimated amounts
and actual amounts could have a material impact on the Santander UK
group's future financial results and financial condition.
Key areas of judgement in accounting estimates
The key judgements made by management in applying the ECL
impairment methodology are set out below.
- Definition of default
- Forward-looking information
- Probability weights
- SICR
- Post model adjustments.
For more on each of these key judgements, see the 'Credit risk -
Santander UK group level - credit risk management' section of the
Risk review.
Sensitivity of ECL allowance
At 31 December 2018, the probability-weighted ECL allowance
totalled GBP807m, of which GBP789m related to exposures in Retail
Banking, Corporate & Commercial Banking and Corporate Centre,
and GBP18m 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.
Probability weights
The amounts shown in the tables below illustrate the ECL
allowances that would have arisen had management applied a 100%
weighting to each economic scenario. The allowances were calculated
using a stage allocation appropriate to each economic scenario
presented and differs from the probability-weighted stage
allocation used to determine the ECL allowance shown above. For
exposures subject to individual assessment, the distribution of ECL
which could reasonably be expected has also been considered,
assuming no change in the number of cases subject to individual
assessment, and within the context of a potential best to worst
case outcome.
Upside Upside Downside Downside
Retail Banking, Corporate & Commercial 2 1 Base case 1 2
Banking and Corporate Centre GBPm GBPm GBPm GBPm GBPm
ECL 554 596 648 843 1,930
======================================= ====== ====== ========= ======== ========
Upside Base case Downside
Corporate & Investment Banking(1) GBPm GBPm GBPm
ECL 8 17 27
================================== ====== ========= ========
(1) As described in more detail in the 'Santander UK Group Level - Credit
Risk Management' section, our Corporate & Investment Banking segment
uses three forward-looking economic scenarios, whereas our other segments
use five scenarios. The results of the 100% weighting ECL for the Corporate
& Investment Banking segment are therefore presented separately.
HPI
Given the relative size of our residential mortgage portfolio,
management considers that changes in HPI assumptions underpinning
the calculation of the ECL allowance for residential mortgages of
GBP237m at 31 December 2018 would have the most significant impact
on the ECL allowance. The table below shows the impact on profit
before tax of applying an immediate and permanent house price
increase / decrease to our base case economic scenario, and assumes
no changes to the staging allocation of exposures:
Increase/decrease in house
prices
--------------------------------
+10% -10% -20%
+20% GBPm GBPm GBPm
Increase/(decrease) in profit before tax 20 12 (20) (52)
========================================= ====== ======= ======= ======
b) Provisions
(i) PPI conduct remediation
The most critical factor in determining the level of PPI
provision is the volume of claims that fall in scope for Santander
UK. The uphold rate is informed by historical experience and the
average cost of redress can be predicted reasonably accurately
given that management is dealing with a high volume and reasonably
homogeneous population. In setting the provision, management
estimated the total claims that were likely to be received to the
end of the time-bar period in August 2019.
Key areas of judgement in accounting estimates
The provision mainly represents management's best estimate of
Santander UK's future liability in respect of misselling of PPI
policies and Plevin complaints. It requires significant judgement
by management in determining appropriate assumptions, which include
the level of complaints expected to be received, of those, the
number that will be upheld and redressed (reflecting legal and
regulatory responsibilities, including the determination of
liability and the effect of the time bar), as well as the redress
costs for each of the different populations of customers
identified. These are described in more detail in the 'PPI
assumptions' section in Note 30.
Sensitivity of PPI conduct remediation provision
We made no additional provision charges for PPI conduct
remediation relating to past activities and products sold
recognised in 2018 (2017: GBP109m). The balance sheet provision
amounted to GBP246m (2017: GBP356m). Detailed disclosures on the
provision for PPI conduct remediation can be found in Note 30.
Had management used different assumptions, a larger or smaller
provision charge would have resulted that could have had a material
impact on the Santander UK group's reported profit before tax.
Detailed disclosures on the assumptions used, including
sensitivities, can be found in Note 30.
(ii) Other
As set out in Note 30, an amount of GBP58m (2017: GBPnil) was
charged in 2018 and arose from a systems-related historical issue
identified by Santander UK, relating to compliance with certain
requirements of the Consumer Credit Act (CCA). This provision is
based on detailed reviews of relevant systems related to consumer
credit business operations, supported by external legal and
regulatory advice, and reflects our best estimate at 31 December
2018 of potential costs in respect of the identified issue.
However, as detailed in Note 32, these reviews and the related
analysis are not yet complete, such that the approach and timing to
any remediation has not yet been finalised, although it is expected
to commence in 2019.
c) Pensions
The Santander UK group operates a number of defined benefit
pension schemes as described in Note 31 and estimates their
position as described in the accounting policy 'Pensions and other
post retirement benefits'.
Key areas of judgement in accounting estimates
Accounting for defined benefit pension schemes requires
management to make assumptions principally about the discount rate
adopted, but also about price inflation, pension increases, life
expectancy and earnings growth. Management's assumptions are based
on past experience and current economic trends, which are not
necessarily an indication of future experience. These are described
in more detail in the 'Actuarial assumptions' section in Note
31.
Sensitivity of defined benefit pension scheme estimates
The defined benefit pension schemes which were in a net asset
position at 31 December 2018 had a surplus of GBP842m (2017:
GBP449m) and the defined benefit pension schemes which were in a
net liability position at 31 December 2018 had a deficit of GBP114m
(2017: GBP286m).
Had Management used different assumptions, a larger or smaller
pension remeasurement gain or loss would have resulted that could
have had a material impact on the Santander UK group's reported
financial position. Detailed disclosures on the actuarial
assumption sensitivities of the schemes can be found in the
'Actuarial assumption sensitivities' section in Note 31.
2. SEGMENTS
Santander UK's principal activity is financial services, mainly
in the UK. The business is managed and reported on the basis of the
following segments, which are strategic business units that offer
different products and services, have different customers and
require different technology and marketing strategies:
- Retail Banking: Offers a wide range of products and financial services
to individuals and small businesses through a network of branches and
ATMs, as well as through telephony, digital and intermediary channels.
Retail Banking includes business banking customers, small businesses
with an annual turnover up to GBP-6.5m, and Santander Consumer Finance,
predominantly a vehicle finance business.
- Corporate & Commercial Banking: To better align reporting to the nature
of the business segment following ring-fence transfers, Commercial Banking
has been re-branded as Corporate & Commercial Banking. Corporate & Commercial
Banking covers businesses with an annual turnover of GBP-6.5m to GBP500m.
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: As part of a rebrand across the Banco
Santander group, Global Corporate Banking (the UK segment of Santander
Global Corporate Banking) has been branded as Corporate & Investment
Banking. CIB services corporate clients with an annual turnover of GBP500m
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.
The segmental data below is presented in a manner consistent
with the internal reporting to the committee which is responsible
for allocating resources and assessing performance of the segments
and has been identified as the chief operating decision maker. The
segmental data is prepared on a statutory basis of accounting, in
line with the accounting policies set out in Note 1. Transactions
between segments are on normal commercial terms and conditions.
Internal charges and internal UK transfer pricing adjustments are
reflected in the results of each segment. Revenue sharing
agreements are used to allocate external customer revenues to a
segment on a reasonable basis. Funds are ordinarily reallocated
between segments, resulting in funding cost transfers disclosed in
operating income. Interest charged for these funds is based on
Santander UK's cost of wholesale funding. Interest income and
interest expense have not been reported separately. The majority of
segment revenues are interest income in nature and net interest
income is relied on primarily to assess segment performance and to
make decisions on the allocation of segment resources.
The segmental basis of presentation in this Annual Report has
been changed, and prior periods restated, to report our Jersey and
Isle of Man branches in Corporate Centre rather than in Retail
Banking as in previous years, as a result of their transfer from
Santander UK plc to ANTS in December 2018. Prior periods have not
been restated for the changes in our statutory perimeter in the
third quarter of 2018, following the ring-fence transfers to Banco
Santander London Branch, as described in Note 43.
Results by segment
Corporate Corporate
Retail & Commercial & Investment Corporate
Banking Banking Banking Centre Total
2018 GBPm GBPm GBPm GBPm GBPm
============================================== ======== ============= ============= ========= =======
Net interest income 3,126 403 69 5 3,603
Non-interest income/(expense) 638 82 272 (61) 931
============================================== ======== ============= ============= ========= =======
Total operating income/(expense) 3,764 485 341 (56) 4,534
============================================== ======== ============= ============= ========= =======
Operating expenses before
credit impairment losses,
provisions and charges (1,929) (258) (262) (130) (2,579)
============================================== ======== ============= ============= ========= =======
Credit impairment (losses)/releases (124) (23) (14) 8 (153)
Provisions for other liabilities
and charges (230) (14) (8) (5) (257)
============================================== ======== ============= ============= ========= =======
Total operating credit impairment
losses, provisions and (charges)/releases(1) (354) (37) (22) 3 (410)
============================================== ======== ============= ============= ========= =======
Profit/(loss) before tax 1,481 190 57 (183) 1,545
============================================== ======== ============= ============= ========= =======
Revenue from external customers 4,421 638 386 (911) 4,534
Inter-segment revenue (657) (153) (45) 855 -
============================================== ======== ============= ============= ========= =======
Total operating income/(expense) 3,764 485 341 (56) 4,534
============================================== ======== ============= ============= ========= =======
Revenue from external customers
includes the following fee
and commission income disaggregated
by income type: (2)
* Current account and debit card fees 697 27 29 - 753
* Insurance, protection and investments 105 - - - 105
* Credit cards 85 - - - 85
* Non-banking and other fees(3) 75 62 87 3 227
Total fee and commission income 962 89 116 3 1,170
Fee and commission expense (382) (25) (14) - (421)
============================================== ======== ============= ============= ========= =======
Net fee and commission income 580 64 102 3 749
============================================== ======== ============= ============= ========= =======
Customer loans 172,747 17,702 4,613 4,524 199,586
Total assets(4) 201,261 17,702 27,569 36,840 283,372
============================================== ======== ============= ============= ========= =======
Customer deposits 142,065 17,606 4,853 2,791 167,315
Total liabilities 142,839 17,634 8,480 98,510 267,463
============================================== ======== ============= ============= ========= =======
Average number of staff 20,694 1,732 1,108 111 23,645
============================================== ======== ============= ============= ========= =======
(1) Credit impairment losses for 2018 are calculated on an IFRS 9 basis
and for 2017 and earlier on an IAS 39 basis. For more on this methodology
change, see the IFRS 9 accounting policy changes in Note 1 and the IFRS
9 transition disclosures in Note 44.
(2) The disaggregation of fees and commission income as shown above is not
included in reports provided to the chief operating decision maker but
is provided to show the split by reportable segments.
(3) Non-banking and other fees include mortgages, consumer finance, commitment
commission, asset finance, invoice finance and trade finance.
(4) Includes customer loans, net of credit impairment loss allowances.
Corporate
& Corporate
Retail Commercial & Investment Corporate
Banking(5) Banking Banking Centre(5) Total
2017 GBPm GBPm GBPm GBPm GBPm
============================================= =========== =========== ============= ========== =======
Net interest income 3,270 391 74 68 3,803
Non-interest income 615 74 364 56 1,109
============================================= =========== =========== ============= ========== =======
Total operating income 3,885 465 438 124 4,912
============================================= =========== =========== ============= ========== =======
Operating expenses before credit impairment
losses, provisions and charges (1,856) (223) (304) (116) (2,499)
============================================= =========== =========== ============= ========== =======
Credit impairment (losses)/releases(1) (36) (13) (174) 20 (203)
Provisions for other liabilities and
charges (342) (55) (11) 15 (393)
============================================= =========== =========== ============= ========== =======
Total operating credit impairment losses,
provisions and (charges)/releases (378) (68) (185) 35 (596)
============================================= =========== =========== ============= ========== =======
Profit/(loss) before tax 1,651 174 (51) 43 1,817
============================================= =========== =========== ============= ========== =======
Revenue from external customers 4,534 639 506 (767) 4,912
Inter-segment revenue (649) (174) (68) 891 -
============================================= =========== =========== ============= ========== =======
Total operating income 3,885 465 438 124 4,912
============================================= =========== =========== ============= ========== =======
Revenue from external customers includes
the following fee and commission income
disaggregated by income type:(2)
* Current account and debit card fees 737 27 27 - 791
* Insurance, protection and investments 100 - - - 100
* Credit cards 92 - - - 92
* Non-banking and other fees(3) 45 63 123 8 239
Total fee and commission income 974 90 150 8 1,222
Fee and commission expense (367) (31) (17) - (415)
============================================= =========== =========== ============= ========== =======
Net fee and commission income 607 59 133 8 807
Customer loans 168,729 19,391 6,037 6,167 200,324
Total assets(4) 174,524 19,391 51,078 69,772 314,765
============================================= =========== =========== ============= ========== =======
Customer deposits 143,834 17,760 4,546 9,781 175,921
Total liabilities 150,847 18,697 45,603 83,413 298,560
============================================= =========== =========== ============= ========== =======
Average number of staff 17,194 1,240 1,006 119 19,559
============================================= =========== =========== ============= ========== =======
(1) Credit impairment losses for 2018 are calculated on an IFRS
9 basis and for 2017 and earlier on an IAS 39 basis. For more
on this methodology change, see the IFRS 9 accounting policy
changes in Note 1 and the IFRS 9 transition disclosures in
Note 44.
(2) The disaggregation of fees and commission income as shown above is not
included in reports provided to the chief operating decision maker but
is provided to show the split by reportable segments.
(3) Non-banking and other fees include mortgages, consumer finance, commitment
commission, asset finance, invoice finance and trade finance.
(4) Includes customer loans, net of credit impairment loss allowances.
(5) The re-segmentation to report our Jersey and Isle of Man branches in
Corporate Centre, rather than in Retail Banking, has resulted in profit
before tax of GBP21m being re-presented in Corporate Centre in 2017,
as well as customer loans of GBP262m and customer deposits of GBP6,418m.
5. NET TRADING AND OTHER INCOME
Group
----- -----
2018 2017
GBPm GBPm
========================================================== ===== =====
Net trading and funding of other items by
the trading book 245 205
Net (losses)/gains on other financial assets
at fair value through profit or loss (6) 80
Net (losses)/gains on other financial liabilities
at fair value through profit or loss (44) (97)
Net losses on derivatives managed with assets/liabilities
held at fair value through profit or loss (128) (17)
Hedge ineffectiveness 34 5
Net profit on sale of available-for-sale assets 54
Net profit on sale of financial assets at
fair value through other comprehensive income 19
Net income from operating lease assets 86 44
Other (24) 28
========================================================== ===== =====
182 302
========================================================== ===== =====
'Net trading and funding of other items by the trading book'
includes fair value gains of GBP22m (2017: losses of GBP27m) 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 GBP21m (2017: gains of GBP28m). As a result, the net fair value
movements recognised on the equity index-linked deposits and the
related economic hedges were net gains of GBP1m (2017: GBP1m).
In 2017, 'Net profit on sale of available-for-sale assets'
included a gain of GBP48m in respect of the sale of Vocalink
shares.
In November 2018, pursuant to a Partnership Special Redemption
Event, the Abbey National Capital Trust I 8.963% Non-cumulative
Trust Preferred Securities were fully redeemed. In September 2017,
as part of a capital management exercise, 91% of the 7.375% 20 Year
Step-up perpetual callable subordinated notes were purchased and
redeemed.
Exchange rate differences recognised in the Consolidated Income
Statement on items not at fair value through profit or loss were
GBP689m expense (2017: GBP109m expense) and are presented in the
line 'Net trading and funding of other items by the trading book.'
These are principally offset by related releases from the cash flow
hedge reserve of GBP752m income (2017: GBP94m income) as set out in
the Consolidated Statement of Comprehensive Income, which are also
presented in 'Net trading and funding of other items by the trading
book'. Exchange rate differences on items measured at fair value
through profit or loss are included in the line items relating to
changes in fair value.
6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES,
PROVISIONS AND CHARGES
Group
----- -----
2018 2017
GBPm GBPm
============================================== ===== =====
Staff costs:
Wages and salaries 898 743
Performance-related payments 159 157
Social security costs 111 93
Pensions costs - defined contribution plans 67 54
- defined benefit plans 79 32
Other share-based payments 3 10
Other personnel costs 52 45
============================================== ===== =====
1,369 1,134
Other administration expenses 835 1,011
Depreciation, amortisation and impairment 375 354
============================================== ===== =====
2,579 2,499
============================================== ===== =====
8. Credit IMPAIRMENT LOSSES AND PROVISIONS
Group
----- -----
2018 2017
GBPm GBPm
======================================================== ===== =====
Credit impairment losses:
Loans and advances to customers (See Note 14) 189 257
Recoveries of loans and advances, net of collection
costs (See Note 14) (42) (54)
Off-balance sheet exposures (See Note 30) 6
======================================================== ===== =====
153 203
======================================================== ===== =====
Provisions for other liabilities and charges (excluding
off-balance sheet credit exposures) (See Note
30) 257 385
Provisions for RV and voluntary termination (See
Note 14) - 8
257 393
410 596
======================================================== ===== =====
9. TAXATION
Group
----- -----
2018 2017
GBPm GBPm
========================================== ===== =====
Current tax:
UK corporation tax on profit for the year 450 556
Adjustments in respect of prior years (20) (27)
========================================== ===== =====
Total current tax 430 529
========================================== ===== =====
Deferred tax:
Charge/(credit) for the year 16 23
Adjustments in respect of prior years (5) 9
========================================== ===== =====
Total deferred tax 11 32
========================================== ===== =====
Tax on profit 441 561
========================================== ===== =====
The standard rate of UK corporation tax was 27% for banking
entities and 19% for non-banking entities (2017: 27.25% for banking
entities and 19.25% for non-banking entities) following the
introduction of an 8% surcharge to be applied to banking companies
from 1 January 2016. Taxation for other jurisdictions is calculated
at the rates prevailing in the relevant jurisdictions. The Finance
(No.2) Act 2015 introduced reductions in the corporation tax rate
from 20% to 19% in 2017 and 18% by 2020. The Finance Act 2016,
introduced a further reduction in the standard rate of corporation
tax rate to 17% from 2020. The effects of the changes in tax rates
are included in the deferred tax balances at both 31 December 2018
and 2017.
10. DIVIDS ON ORDINARY SHARES
Dividends on ordinary shares declared and paid during the year
were as follows:
Group Group
-------------- -----
2018 2017
Pence Pence
per per 2018 2017
share share GBPm GBPm
=================================== ======
In respect of current year - first
interim 0.81 1.04 250 323
- second interim 2.15 0.74 668 230
- third interim 0.71 - 221 -
3.67 1.78 1,139 553
In 2018, and in addition to the dividends of GBP250m and GBP221m
that were made as part of our policy to pay 50% of recurring
earnings, we also paid a dividend of GBP668m that related to the
ring-fencing transfers to Banco Santander London Branch. For more
on our ring-fencing implementation, see Note 43.
11. TRADING ASSETS
Group
2018 2017
GBPm GBPm
Securities purchased under resale agreements - 8,870
Debt securities - 5,156
Equity securities - 9,662
Cash collateral associated with trading balances - 6,156
Short-term loans - 711
- 30,555
In 2018, as part of our ring-fencing plans, the trading business
in the Santander UK group was run down as the prohibited elements
moved to the Banco Santander London Branch. For more on our
ring-fence implementation, see Note 43. In 2017, a significant
portion of the debt and equity securities were held in our eligible
liquidity pool. They consisted mainly of government bonds and
quoted stocks. Detailed disclosures can be found in the 'Liquidity
risk' section of the Risk review.
12. DERIVATIVE FINANCIAL INSTRUMENTS
b) Analysis of derivatives
The notional amounts in the tables below indicate the nominal
value of transactions outstanding at the balance sheet date; they
do not represent actual exposures.
Group
2018 2017
Fair value Fair value
Notional Notional
amount Assets Liabilities amount Assets Liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
Derivatives held for trading
Exchange rate contracts 13,830 454 351 144,160 2,559 4,130
Interest rate contracts 79,038 1,421 1,105 863,151 22,091 21,619
Equity and credit contracts 2,762 251 168 19,814 888 693
Total derivatives held
for trading 95,630 2,126 1,624 1,027,125 25,538 26,442
Derivatives held for hedging
Designated as fair value
hedges:
Exchange rate contracts 3,010 357 - 2,641 312 6
Interest rate contracts 86,422 1,065 1,315 59,610 1,272 1,470
Equity derivative contracts - - - 16 - 4
89,432 1,422 1,315 62,267 1,584 1,480
Designated as cash flow
hedges:
Exchange rate contracts 33,901 3,537 200 23,117 3,206 55
Interest rate contracts 18,808 46 102 12,884 84 115
Equity derivative contracts - - - 26 9 -
52,709 3,583 302 36,027 3,299 170
Total derivatives held
for hedging 142,141 5,005 1,617 98,294 4,883 1,650
Derivative netting(1) (1,872) (1,872) (10,479) (10,479)
Total derivatives 237,771 5,259 1,369 1,125,419 19,942 17,613
(1) Derivative netting excludes the effect of cash collateral,
which is offset against the gross derivative position. The
amount of cash collateral received that had been offset against
the gross derivative assets was GBP9m (2017: GBP333m) and
the amount of cash collateral paid that had been offset against
the gross derivative liabilities was GBP354m (2017: GBP706m).
13. other FINANCIAL ASSETS AT FAIR VALUE through profit or
loss
Group
2018 2017
GBPm GBPm
Loans and advances to customers:
Loans to housing associations 13 1,034
Other loans 81 515
94 1,549
Debt securities 3,251 547
Equity securities - -
Reverse repurchase agreements - non trading 2,272 -
5,617
(1) 2,096
(1) For the Santander UK group, this comprises GBP1,095m of financial
assets designated at FVTPL and GBP4,522m of financial assets
mandatorily at FVTPL.
14. LOANS AND ADVANCES TO CUSTOMERS
Group
2018 2017
GBPm GBPm
Net loans and advances to customers 201,289 199,340
Movement in credit impairment loss allowances:
Group
Loans
secured Other
on residential Corporate Finance unsecured
properties loans leases loans Total
GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 225 490 46 179 940
Adoption of IFRS 9 (see Note
1)(1) 47 99 11 54 211
Re-allocation of ECL on off-balance
sheet exposures(1) (3) (25) - (22) (50)
At 1 January 2018 269 564 57 211 1,101
(Release)/charge to the income
statement (see Note 8) (18) 17 51 139 189
Write-offs and other items(2)
(3) (17) (355) (23) (144) (539)
At 31 December 2018 234 226 85 206 751
Recoveries, net of collection
costs (see Note 8) 2 1 6 33 42
At 1 January 2017 279 382 45 215 921
(Release)/charge to the income
statement (see Note 8) (37) 172 20 102 257
Write-offs and other items(2) (17) (64) (19) (138) (238)
At 31 December 2017 225 490 46 179 940
Of which:
* Observed 105 433 12 59 609
* Incurred but not yet observed 120 57 34 120 331
225 490 46 179 940
Recoveries, net of collection
costs (see Note 8) 3 1 6 44 54
(1) The adjustment for the adoption of IFRS 9 related to the re-measurement
of loss allowances on loans and advances to customers at amortised
cost. The re-allocation of ECL on off-balance sheet exposures
was a transfer to provisions following the adoption of a methodology
to enable their separate identification from ECL on drawn
exposures. See Note 30.
(2) Mortgage write-offs exclude the effect of the unwind over time of the
discounting in estimating losses, as described in the accounting policy
'Financial instruments' in Note 1. Mortgage write-offs including this
effect were GBP18m (2017: GBP22m).
(3) The contractual amount outstanding on financial assets that were written
off in the year, and are still subject to enforcement activity was GBP76m.
15. SECURITISATIONS AND COVERED BONDS
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 and the carrying value of the notes in
issue at 31 December 2018 and 2017 are listed below.
Notes issued
to Santander
External notes UK plc/subsidiaries
Gross assets in issue as collateral
2018 2017 2018 2017 2018 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Mortgage-backed master trust
structures:
- Holmes 4,414 4,299 3,182 1,400 463 389
- Fosse 4,646 5,732 199 616 34 34
- Langton 3,034 3,893 - - 2,354 2,355
12,094 13,924 3,381 2,016 2,851 2,778
Other asset-backed securitisation
structures:
- Motor 1,055 1,318 738 852 374 514
- Auto ABS UK Loans 1,468 1,498 1,212 1,240 316 306
2,523 2,816 1,950 2,092 690 820
Total securitisation programmes 14,617 16,740 5,331 4,108 3,541 3,598
Covered bond programme:
- Euro 35bn Global Covered
Bond Programme 21,578 19,772 18,653 16,866 - -
Total securitisation and covered
bond programmes 36,195 36,512 23,984 20,974 3,541 3,598
Less: held by the Santander
UK group:
- Euro 35bn Global Covered
Bond Programme (539) (1,067)
Total securitisation and covered
bond programmes (see Note 28) 23,445 19,907
The following table sets out the internal and external issuances
and redemptions in 2018 and 2017 for each securitisation and
covered bond programme.
Internal External Internal External
issuances issuances redemptions redemptions
2018 2017 2018 2017 2018 2017 2018 2017
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
Mortgage-backed master trust structures:
- Holmes 0.1 - 1.8 0.5 - 0.2 0.1 1.8
- Fosse - - - - - 0.1 0.4 1.8
Other asset-backed securitisation structures:
- Motor - 0.1 - 0.5 0.1 0.1 0.1 0.3
- Auto ABS UK Loans - 0.2 0.4 0.7 - - 0.4 0.7
Covered bond programme - - 4.3 2.3 0.5 0.3 1.9 3.2
0.1 0.3 6.5 4.0 0.6 0.7 2.9 7.8
23. TRADING LIABILITIES
Group
2018 2017
GBPm GBPm
Securities sold under repurchase agreements - 25,504
Short positions in securities and unsettled trades - 3,694
Cash collateral - 1,911
- 31,109
In 2018, as part of our ring-fence plans, the trading business
in the Santander UK group was run down, and the gilt-edged market
making business was transferred to Banco Santander London Branch.
For more on our ring-fencing transition, see Note 43.
30. PROVISIONS
Group
Conduct remediation
FSCS Off-balance
and sheet
Other Bank Vacant ECL Regulatory
PPI products Levy property GBPm and other Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 356 47 57 39 59 558
Reallocation of ECL
on off-balance sheet
exposures(1) - - - - 50 - 50
At 1 January 2018 356 47 57 39 50 59 608
Additional provisions
(see Note 8) - - 69 12 6 209 296
Provisions released
(see Note 8) - (14) (4) - - (15) (33)
Utilisation (110) (3) (91) (14) - (158) (376)
Other - - 14(2) - - - 14
At 31 December 2018 246 30 45 37 56 95 509
To be settled:
- Within 12 months 246 22 45 22 56 95 486
- In more than 12 months - 8 - 15 - - 23
246 30 45 37 56 95 509
At 1 January 2017 457 36 96 47 64 700
Additional provisions 109 35 93 4 144 385
Utilisation (210) (34) (132) (12) (149) (537)
Transfers - 10 - - - 10
At 31 December 2017 356 47 57 39 59 558
To be settled:
- Within 12 months 167 38 57 23 59 344
- In more than 12 months 189 9 - 16 - 214
356 47 57 39 59 558
(1) ECL on off-balance sheet exposures following the adoption of a methodology
to enable their separate identification from ECL on drawn exposures.
See Note 14.
(2) Santander UK plc recharged GBP14m (2017: GBPnil) in respect of the UK
Bank Levy paid on behalf of other UK entities of Banco Santander SA.
a) Conduct remediation
2018 compared to 2017
The remaining provision for PPI redress and related costs was
GBP246m (2017: GBP356m). We made no additional PPI charges in the
year, based on our recent claims experience and having considered
the FCA Consultation paper CP18/33 issued on 7 November 2018. We
will continue to monitor our provision levels, and take account of
the impact of any further claims received and FCA guidance.
d) Off-balance sheet ECL
Following the adoption of IFRS 9 on 1 January 2018, provisions
include expected credit losses relating to guarantees given to
third parties and undrawn loan commitments.
e) Regulatory and other
Regulatory and other provisions principally comprise amounts in
respect of regulatory charges (including fines), operational loss
and operational risk provisions, restructuring charges and
litigation and related expenses. A number of uncertainties exist
with respect to these provisions given the uncertainties inherent
in operational, restructuring and litigation matters that affect
the amount and timing of any potential outflows with respect to
which provisions have been established. These provisions are
reviewed periodically.
Regulatory and other provisions charged in 2018 included the
following items:
In the fourth quarter of 2018, we were fined GBP33m by the FCA in relation
to an investigation into our historical probate and bereavement practices.
We acknowledged the findings of the FCA and apologised to the families
and beneficiaries of deceased customers affected by these failings.
- This amount was charged and paid in the year.
An amount of GBP58m (2017: GBPnil) that was charged in 2018 and arose
from a systems related historical issue identified by Santander UK,
relating to compliance with certain requirements of the Consumer Credit
Act (CCA). This provision is based on detailed reviews of relevant systems
related to consumer credit business operations, supported by external
legal and regulatory advice, and reflects our best estimate at 31 December
2018 of potential costs in respect of the identified issue. However,
as detailed in Note 32, these reviews and the related analysis are not
yet complete, such that the approach and timing to any remediation has
- not yet been finalised, although it is expected to commence in 2019.
31. RETIREMENT BENEFIT PLANS
The amounts recognised in the balance sheet were as follows:
Group
2018 2017
GBPm GBPm
Assets/(liabilities)
Funded defined benefit pension scheme
- surplus 842 449
Funded defined benefit pension scheme
- deficit (75) (245)
Unfunded defined benefit pension scheme (39) (41)
Total net assets 728 163
a) Defined contribution pension plans
The Santander UK group operates a number of defined contribution
pension plans. The assets of the defined contribution pension plans
are held and administered separately from those of the Santander UK
group. In December 2017, the Santander UK group ceased to
contribute to the Santander Retirement Plan, an occupational
defined contribution plan, and future contributions are paid into a
defined contribution Master Trust, LifeSight. This Master Trust is
the plan into which eligible employees are enrolled automatically.
During the year the Santander Retirement Plan was wound up and all
assets were transferred to LifeSight. The assets of the LifeSight
Master Trust are held in separate trustee-administered funds.
An expense of GBP67m (2017: GBP54m) was recognised for defined
contribution plans in the year, and is included in staff costs
classified within operating expenses (see Note 6). None of this
amount was recognised in respect of key management personnel for
the years ended 31 December 2018 and 2017.
b) Defined benefit pension schemes
The Santander UK group operates a number of defined benefit
pension schemes. The main scheme is the Santander (UK) Group
Pension Scheme (the Scheme). It comprises seven legally segregated
sections under the terms of a merger of former schemes operated by
Santander UK plc agreed in 2012. The Scheme covers 13% (2017: 17%)
of the Santander UK group's employees, and is a funded defined
benefit scheme which is closed to new members.
The total amount charged to the income statement was as
follows:
Group
2018 2017
GBPm GBPm
Net interest income (7) (5)
Current service cost 41 31
Past service and GMP costs 41 1
Administration costs 8 8
83 35
Movements in the present value of defined benefit scheme
obligations were as follows:
Group
2018 2017
GBPm GBPm
At 1 January (11,583) (11,082)
Current service cost paid by Santander UK plc (27) (30)
Current service cost paid by subsidiaries (14) (1)
Current service cost paid by fellow Banco Santander
subsidiaries - (12)
Interest cost (282) (305)
Employer salary sacrifice contributions (6) (6)
Past service cost (1) (1)
GMP equalisation cost (40) -
Remeasurement due to actuarial movements arising
from:
* Changes in demographic assumptions 56 151
* Experience adjustments (15) 11
* Changes in financial assumptions 675 (700)
Benefits paid 433 392
At 31 December (10,804) (11,583)
Movements in the fair value of the schemes' assets were as
follows:
Group
2018 2017
GBPm GBPm
At 1 January 11,746 11,218
Interest income 289 310
Contributions paid by employer and scheme members 184 171
Contributions paid by fellow Banco Santander
subsidiaries - 12
Administration costs paid (8) (8)
Return on plan assets (excluding amounts included
in net interest expense) (246) 435
Benefits paid (433) (392)
At 31 December 11,532 11,746
Actuarial assumptions
The principal actuarial assumptions used for the defined benefit
schemes were:
2018 2017
% %
To determine benefit obligations:
- Discount rate for scheme liabilities 2.9 2.5
- General price inflation 3.2 3.2
- General salary increase 1.0 1.0
- Expected rate of pension increase 2.9 2.9
Years Years
Longevity at 60 for current pensioners, on
the valuation date:
- Males 27.3 27.4
- Females 30.1 30.1
Longevity at 60 for future pensioners currently
aged 40, on the valuation date:
- Males 28.7 28.9
- Females 31.6 31.7
Discount rate for scheme liabilities
The rate used to discount the retirement benefit obligation is
based on the annual yield at the balance sheet date of high quality
corporate bonds on that date. There are only a limited number of
higher quality Sterling-denominated corporate bonds, particularly
those that are longer-dated. Therefore, in order to set a suitable
discount rate, we need to construct a corporate bond yield curve.
We consider a number of different data sources and methods of
projecting forward the corporate bond curve. When considering an
appropriate assumption, we project forward the expected cash flows
of the Scheme and adopt a single equivalent cash flow weighted
discount rate, subject to management judgement.
During 2018 we reduced the level of management adjustment to the
discount rate, noting the expanded range of different models used
by UK companies, and the relatively higher discount rates being
adopted. At 31 December 2018 this increased the discount rate
applied and had a positive impact of GBP104m on the accounting
surplus.
General price inflation
Consistent with our discount rate methodology, we set the
inflation assumption using the expected cash flows of the Scheme,
fitting them to an inflation curve to give a weighted average
inflation assumption. We then deduct an inflation risk premium to
reflect the compensation holders of fixed rate instruments expect
to receive for taking on the inflation risk. This premium is
subject to a cap, to better reflect management's view of inflation
expectations.
During the year, the assumptions for setting the inflation risk
premium were updated to reflect management's current views of long
term inflation. At 31 December 2018, this had a negative impact of
GBP65m on the accounting surplus.
Expected rate of pension increase
During the year, the methodology for setting the expected rate
of pension increases was changed to better represent the current
expectations for inflation volatility and the impact of caps and
collars on pension increases. The revised pension increase
assumption methodology uses a stochastic model, which is calibrated
to consider both the observed historical volatility term structure
and derivative pricing. The model provides an improvement in
estimate because it allows for the likelihood that high or low
inflation in one year feeds into inflation remaining high or low in
the next year. At 31 December 2018 this had a negative impact of
GBP85m on the accounting surplus.
Mortality assumptions
The mortality assumptions are based on an independent analysis
of the Santander (UK) Group Pension Scheme's actual mortality
experience, carried out as part of the triennial actuarial
valuations, together with recent evidence from the Continuous
Mortality Investigation Table 'S2 Light' mortality tables. An
allowance is then made for expected future improvements to life
expectancy based on the Continuous Mortality Investigation
Tables.
During 2018 we adopted the CMI 2017 projection model for future
improvements in life expectancy with a long-term rate of future
improvements to life expectancy of 1.25% for male and female
members. This model incorporates the latest available data on
trends in life expectancy. At 31 December 2018, this had a positive
impact of GBP57m on the accounting surplus.
32. CONTINGENT LIABILITIES AND COMMITMENTS
Group
2018(1) 2017
GBPm GBPm
Guarantees given to subsidiaries and fellow
subsidiaries of Santander UK Group Holdings
plc - -
Guarantees given to third parties 1,610 1,557
Formal standby facilities, credit lines and
other commitments with original term to maturity
of:
* One year or less 8,550 10,664
* Later than one year 31,561 31,278
41,721 43,499
(1) For segmental and credit risk staging analysis relating to off-balance
sheet exposures, see the IFRS 9 credit quality table in the 'Santander
UK group level - credit risk review' section.
Other legal actions and regulatory matters
Santander UK engages in discussion, and co-operates, with the
FCA, PRA 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.
Payment Protection Insurance
Note 30 details our provisions including those in relation to
PPI. In relation to a specific PPI portfolio of complaints, a legal
dispute regarding allocation of liability is in its early stages.
There are factual issues to be resolved which may have legal
consequences including in relation to liability. These issues
create uncertainties which mean that it is difficult to reliably
predict the resolution of the matter including timing or the
significance of the possible impact. The PPI provision includes our
best estimate of Santander UK's liability to the specific
portfolio. Further information has not been provided on the basis
that it would be seriously prejudicial.
German dividend tax arbitrage transactions
Santander UK plc, ANTS and Cater Allen International Limited
(all subsidiaries of Santander UK Group Holdings plc) are currently
under investigation by the Cologne Criminal Prosecution Office and
the German Federal Tax Office in relation to historical involvement
in German dividend tax arbitrage transactions (known as cum/ex
transactions). We are cooperating with the German authorities and
are conducting our own internal investigation into the matters in
question. There are factual issues to be resolved which may have
legal consequences including potentially material financial
penalties. These issues create uncertainties which mean that it is
difficult to predict with reasonable certainty the resolution of
the matter including timing or the significance of the possible
impact.
41. FINANCIAL INSTRUMENTS
a) Measurement basis of financial assets and liabilities
Financial assets and financial liabilities are measured on an
ongoing basis either at fair value or at amortised cost. Note 1
describes how the classes of financial instruments are measured,
and how income and expenses, including fair value gains and losses,
are recognised.
e) Fair values of financial instruments carried at amortised
cost
The following tables analyse the fair value of the financial
instruments carried at amortised cost at 31 December 2018 and 2017,
including their levels in the fair value hierarchy - Level 1, Level
2 and Level 3. It does not include fair value information for
financial assets and financial liabilities carried at amortised
cost if the carrying amount is a reasonable approximation of fair
value. Cash and balances at central banks, which consist of demand
deposits with the Bank of England and, in 2017, the US Federal
Reserve, together with cash in tills and ATMs, have been excluded
from the table as the carrying amount is deemed an appropriate
approximation of fair value. The fair value of the portfolio of UK
Government debt securities, included in other financial assets at
amortised cost, is the only financial instrument categorised in
Level 1 of the fair value hierarchy.
Group
2018 2017
Fair value Fair value
Level Level Level Carrying Level Level Level Carrying
1 2 3 Total value 1 2 3 Total value
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Loans and advances
to customers - - 204,061 204,061 201,289 - 6,331 195,335 201,666 199,340
Loans and advances
to banks - 2,739 60 2,799 2,799 - 2,894 556 3,450 3,463
Reverse repurchase
agreements - non trading - 21,130 - 21,130 21,127 - 2,614 - 2,614 2.614
Other financial assets
at amortised cost 6,390 721 - 7,111 7,229
Financial investments 6,435 2,211 - 8,646 8,758
6,390 24,590 204,121 235,101 232,444 6,435 14,050 195,891 216,376 214,175
Liabilities
Deposits by customers - 21 178,160 178,181 178,090 - - 183,790 183,790 183,648
Deposits by banks - 16,243 989 17,232 17,221 - 12,164 557 12,721 12,708
Repurchase agreements
- non trading - 10,923 - 10,923 10,910 - 1,085 - 1,085 1,076
Debt securities in
issue - 47,787 - 47,787 46,692 - 44,296 - 44,296 42,633
Subordinated liabilities - 3,877 - 3,877 3,601 - 4,256 - 4,256 3,793
- 78,851 179,149 258,000 256,514 - 61,801 184,347 246,148 243,858
f) Fair values of financial instruments measured at fair
value
The following tables summarise the fair values of the financial
assets and liabilities accounted for at fair value at 31 December
2018 and 2017, analysed by their levels in the fair value hierarchy
- Level 1, Level 2 and Level 3.
Group
2018 2017
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total Valuation
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm technique
Assets
Securities
purchased
under resale
Trading assets agreements - - - - - 8,870 - 8,870 A
Debt securities - - - - 5,156 - - 5,156 -
Equity securities - - - - 9,662 - - 9,662 -
Cash collateral - - - - - 6,156 - 6,156 A
Short-term loans - - - - 656 55 - 711 A
- - - - 15,474 15,081 - 30,555
Derivative
financial Exchange rate
instruments contracts - 4,323 25 4,348 - 6,061 16 6,077 A
Interest rate
contracts - 2,526 6 2,532 - 23,435 12 23,447 A & C
Equity and credit
contracts - 188 63 251 - 861 36 897 B & D
Netting - (1,872) - (1,872) - (10,479) - (10,479)
- 5,165 94 5,259 - 19,878 64 19,942
Other financial
assets at Loans and advances
FVTPL to customers - 12 82 94 - 1,485 64 1,549 A
A, B &
Debt securities 18 2,339 894 3,251 184 187 176 547 D
Equity securities - - - - B
Reverse repurchase
agreements -
non trading - 2,272 - 2,272 - - - - A
18 4,623 976 5,617 184 1,672 240 2,096
Financial
assets at
FVOCI Debt securities 12,487 742 - 13,229 D
Loans and advances
to customers - - 73 73 D
12,487 742 73 13,302
Financial Available-for-sale
investments - debt securities 8,770 2 - 8,772 C
Available-for-sale
- equity securities 19 9 53 81 B
8,789 11 53 8,853
Total assets at fair
value 12,505 10,530 1,143 24,178 24,447 36,642 357 61,446
Liabilities
Securities sold
Trading under repurchase
liabilities agreements - - - - - 25,504 - 25,504 A
Short positions
in securities
and unsettled
trades - - - - 3,694 - - 3,694 -
Cash collateral - - - - - 1,911 - 1,911 A
Short-term deposits - - - - - - - - -
- - - - 3,694 27,415 - 31,109
Derivative
financial Exchange rate
instruments contracts - 528 23 551 - 4,176 15 4,191 A
Interest rate
contracts - 2,515 7 2,522 - 23,199 5 23,204 A & C
Equity and credit
contracts - 132 36 168 1 653 43 697 B & D
Netting - (1,872) - (1,872) - (10,479) - (10,479)
- 1,303 66 1,369 1 17,549 63 17,613
Other financial
liabilities Debt securities
at FVTPL in issue - 983 7 990 - 1,629 6 1,635 A
Structured deposits - 104 29 133 - 680 - 680 A
Repurchase agreements
- non trading - 2,110 - 2,110 - - - - A
Collateral and
associated financial
guarantees - 3,040 13 3,053 D
- 6,237 49 6,286 - 2,309 6 2,315
Total liabilities
at fair value - 7,540 115 7,655 3,695 47,273 69 51,037
g) Fair value adjustments
The internal models incorporate assumptions that Santander UK
believes would be made by a market participant to establish fair
value. Fair value adjustments are adopted when Santander UK
considers that there are additional factors that would be
considered by a market participant that are not incorporated in the
valuation model.
Santander UK classifies fair value adjustments as either
'risk-related' or 'model-related'. The fair value adjustments form
part of the portfolio fair value and are included in the balance
sheet values of the product types to which they have been applied.
The magnitude and types of fair value adjustment are listed in the
following table:
2018 2017
GBPm GBPm
Risk-related:
* Bid-offer and trade specific adjustments 13 34
* Uncertainty 36 43
* Credit risk adjustment 9 36
* Funding fair value adjustment 4 6
62 119
Model-related 5 8
Day One profit - 1
67 128
h) Internal models based on information other than market data
(Level 3)
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 2018 and 2017:
Assets Liabilities
Other Financial
financial assets Other
assets at FVOCI financial
at GBPm Financial liabilities
Derivatives FVTPL investments Total Derivatives at FVTPL Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 64 240 53 357 (63) (6) (69)
Adoption of IFRS 9 - 598 199 (53) 744 - - -
At 1 January 2018 64 838 199 - 1,101 (63) (6) (69)
Total (losses)/gains
recognised in profit
or loss:
* Fair value movements 28 (5) (5) 18 1 (13) (12)
* Foreign exchange and other movements (5) - - (5) 5 (1) 4
Transfers in 35 18 - 53 (31) (29) (60)
Additions - 280 17 297 - - -
Sales - (95) - (95) - - -
Settlements (28) (60) (138) (226) 22 - 22
At 31 December 2018 94 976 73 1,143 (66) (49) (115)
(Losses)/gains recognised
in profit or loss
relating to assets
and liabilities held
at the
end of the year 23 (5) (5) 13 6 (14) (8)
===========
At 1 January 2017 103 264 32 399 (74) (6) (80)
Total (losses)/gains
recognised in profit
or loss:
* Fair value movements (32) (16) - (48) 14 - 14
* Foreign exchange and other movements 32 - - 32 (32) - (32)
Gains recognised in
other comprehensive
income - - 21 21 - - -
Additions 9 - - 9 (2) - (2)
Sales - (8) - (8) - - -
Settlements (48) - - (48) 31 - 31
At 31 December 2017 64 240 53 357 (63) (6) (69)
(Losses)/gains recognised
in profit or loss
relating to assets
and liabilities held
at the
end of the year - (16) - (16) (18) - (18)
===========
43. ring-fencing
Regulation
The Financial Services (Banking Reform) Act 2013 inserted
provisions into the Financial Services and Markets Act 2000 (FSMA)
and related legislation (the Banking Reform Legislation) requiring
the Santander UK group amongst a number of other UK banking groups,
to operationally and legally separate certain retail banking
activities from certain wholesale or investment banking activities
by 1 January 2019. This is known as 'ring-fencing'. The Banking
Reform Legislation specifies:
Certain banking services or activities (principally deposit taking from
- individuals and SMEs) which must be undertaken by a ring-fenced bank.
Certain banking services and activities, along with certain types of
credit risk exposure or off-balance sheet items, which a ring-fenced
- bank will be prohibited from carrying on or incurring (prohibited business).
As a result, under the ring-fencing regime, a ring-fenced bank
is only permitted to carry on banking services or activities that
are not prohibited (permitted business).
Santander UK group model
Our ring-fence structure was completed ahead of the 1 January
2019 regulatory deadline. Its implementation involved a
ring-fencing transfer scheme (RFTS) between Santander UK plc, ANTS
and Banco Santander SA, as well as asset sales and the rundown of
certain short-term positions. Under our chosen model:
- Santander UK plc is the primary ring-fenced bank within a ring-fenced
bank sub-group and serves all of our personal customers in the UK, and
the majority of our business banking customers. Santander UK plc also
broadly, to the extent allowed by the legislation, continues to hold
and serve Santander's corporate banking business in the UK. Any products
Santander UK can't offer, or customers it can't serve, from within the
ring-fenced bank (which includes some Corporate & Investment Banking
business and some Corporate & Commercial Banking customers) are, in
most cases, provided or served by the wider Banco Santander group, notably
through its Banco Santander London Branch. Santander UK plc continues
to be a subsidiary of Santander UK Group Holdings plc, and is the holding
company of the Santander UK ring-fenced bank sub-group. Cater Allen
Limited is also a ring-fenced bank and part of the Santander UK ring-fenced
bank sub-group. Neither Santander UK plc nor Cater Allen Limited conduct
prohibited business.
- ANTS was emptied of most assets and liabilities, except for a small
pool of residual assets and liabilities, and became a wholly-owned direct
subsidiary of Santander UK Group Holdings plc, outside the ring-fenced
bank. The prohibited business of ANTS, which principally included our
derivatives business with financial institutions, certain corporates
and our short term markets business, was either transferred to Banco
Santander London Branch or, in the case of the majority of our short
term markets business, was run down. The majority of the permitted business
of ANTS transferred to Santander UK plc, with a small amount of the
permitted business of ANTS transferring to Banco Santander London Branch.
- The business of the Crown Dependency branches (Jersey and Isle of Man)
of Santander UK plc was sold to ANTS pursuant to transfer schemes effected
under relevant Jersey and Isle of Man law, and therefore transferred
out of the ring-fenced bank.
Any associated business transfers to Banco Santander London
Branch were made for a cash consideration equivalent to the book
value of the associated assets and liabilities, which represents a
fair value for the Santander UK group. Costs to sell were
immaterial. Our ring-fence structure is now in place with all
required transfers completed. Compliance with ring-fencing
legislation has involved significant effort over a number of years,
with a total cost of cGBP240m.
44. TRANSITION TO IFRS 9
Statutory balance sheet reconciliation under IAS 39 and IFRS
9
The measurement categories and carrying amounts of financial
assets determined in accordance with IAS 39 and IFRS 9 are compared
below, illustrating a total net assets decrease of GBP192m as a
result of the application of IFRS 9:
Group
IAS 39 IFRS 9
Carrying Carrying IFRS
amount amount 9 Balance
(31 (1 Sheet
December January Re-presentation (1 January
Measurement 2017) Reclassifications(1) Remeasurement(2) Measurement 2018) (6) 2018)
Assets category GBPm GBPm GBPm category GBPm GBPm GBPm
Cash
and balances
with
central Loans & Amortised
banks receivables 32,771 - - cost 32,771 - 32,771
Trading FVTPL
assets FVTPL 30,536 - - (Mandatory) 30,536 - 30,536
FVTPL 19 - - FVOCI 19 (19)(a) -
30,555 - - 30,555 (19) 30,536
Derivative
financial FVTPL
instruments FVTPL (Trading) 19,942 - - (Mandatory) 19,942 - 19,942
Other
financial
assets Amortised
at FVTPL(3) FVTPL (Designated) 1,022 (45)(b) - cost 977 (977)(b) -
FVTPL
FVTPL (Designated) 836 - - (Designated) 836 - 836
FVTPL
FVTPL (Designated) 238 - - (Mandatory) 238(c) 1,181(d) 1,419
2,096 (45) - 2,051 204 2,255
Loans
and advances
to Loans & Amortised
customers(4) receivables 199,068 - (211) cost 198,857 977(b) 199,834
Loans &
receivables 181 (1)(a) - FVOCI 180 (180)(a) -
Loans & FVTPL
receivables 91 - - (Mandatory) 91 (91)(d) -
199,340 (1) (211) 199,128 706 199,834
Loans
and advances Loans & Amortised
to banks receivables 3,463 - - cost 3,463 - 3,463
Reverse
repurchase
agreements
- non Loans & Amortised
trading receivables 2,614 - - cost 2,614 - 2,614
Other
financial
assets
at amortised Amortised
cost cost - 7,776(e) 7,776
Financial
assets
at FVOCI FVOCI - 8,942(a)(f) 8,942
Financial Loans & Amortised
investments receivables 1,198 - - cost 1,198 (1,198)(e)
Loans & FVTPL
receivables 982 (2)(d) - (Mandatory) 980 (980)(d)
Available-for-sale 8,743 - - FVOCI 8,743 (8,743)(f)
FVTPL
Available-for-sale 29 - - (Mandatory) 29 (29)(d)
Amortised
Held-to-maturity 6,578 - - cost 6,578 (6,578)(e)
FVTPL
Available-for-sale 81 - - (Mandatory) 81 (81)(d)
17,611 (2) -- 17,609 (17,609)
Other
assets Other assets 6,373 (1) Other assets 6,372 - 6,372
Total
assets
(pre-deferred
tax asset
)(5) 314,765 (49) (211) 314,505 - 314,505
(1) Gross (pre-tax) impact on assets resulting from facilities
impacted by the IFRS 9 classification and measurement rules.
(2) Gross (pre-tax) impact of facilities that were subject to
an incurred loss assessment under IAS 39, and are now subject
to an ECL assessment under IFRS 9; and facilities that have
been reclassified from a non-amortised cost basis to an amortised
cost basis. There is no loss allowance movement attributable
to held-to-maturity investments or available-for-sale financial
assets reclassified to amortised cost.
(3) The balance sheet category for 'Financial assets designated
at fair value' has been changed to 'Other financial assets
at fair value through profit or loss' following the adoption
of IFRS 9.
(4) Of the GBP211m increase in loss allowance, GBP50m related
to off-balance sheet exposures which, for presentation purposes,
have been aggregated in the assets section. For more on this,
see Note 14.
(5) The impact of transition to IFRS 9 gave rise to a deferred
tax asset of GBP68m, of which GBP14m is attributable to 'Reclassifications',
and GBP54m to 'Remeasurement'. This deferred tax asset was
offset against our deferred tax liabilities.
(6) Gross (pre-tax) impact of re-presentations resulting from
the adoption of IFRS 9.
Reclassification and re-presentation
The columns for 'Reclassifications' and 'Re-presentations' in
the table above capture the following changes resulting from the
adoption of IFRS 9:
(a) Of the financial assets at FVOCI of GBP8,942m, GBP199m was previously
classified as trading assets of GBP19m (measured at FVTPL) and loans
and advances to customers of GBP180m (measured at amortised cost). As
these financial assets were held within hold to collect and sell business
models, they were re-measured at FVOCI on adoption of IFRS 9 (which
also resulted in a GBP1m downward remeasurement of loans and receivables).
(b) The Santander UK group elected to re-measure Social Housing loans from
FVTPL to amortised cost to reflect the hold to collect business model.
This resulted in a GBP45m downward remeasurement of the financial asset
and a reclassification of the remaining balance of GBP977m from other
financial assets at FVTPL to loans and advances to customers at amortised
cost.
(c) Other financial assets of GBP238m, previously designated at FVTPL under
IAS 39, are now mandatorily held at FVTPL, as there is no longer an
option to bifurcate embedded derivatives under IFRS 9 and they fail
the SPPI test.
(d) Other financial assets at FVTPL of GBP1,181m were previously classified
as financial investments of GBP980m (measured at amortised cost), financial
investments of GBP110m (measured at available-for-sale), and loans and
advances to customers of GBP91m (measured at amortised cost). As these
financial assets do not have SPPI characteristics, they were mandatorily
measured at FVTPL on adoption of IFRS 9 (which also resulted in a GBP2m
downward remeasurement of loans and receivables) and were reclassified
to other financial assets at FVTPL.
(e) Other financial assets at amortised cost of GBP7,776m were previously
classified as financial investments (measured at amortised cost). On
adoption of IFRS 9, the Santander UK group split the 'financial investments'
balance sheet line item between 'other financial assets at amortised
cost' and 'financial assets at FVOCI'. This aligned the balance sheet
line items to the IFRS 9 accounting classifications and provides a clearer
understanding of our financial position.
(f) Of the financial assets at FVOCI of GBP8,942m, GBP8,743m was previously
classified as financial investments (and measured at available-for-sale).
The reclassification was part of the alignment of the balance sheet
line items and IFRS 9 accounting classifications described above.
Reclassifications of debt instruments
For financial assets that were reclassified on transition to
IFRS 9, the following table shows their fair value at 31 December
2018 and the fair value gain or loss that would have been
recognised if these financial assets had not been reclassified:
Group
2018
GBPm
To amortised cost from FVTPL:
Fair value at 31 December 2018 1,347
Fair value gain that would have been recognised during the year
if the financial asset had not been reclassified 120
The effective interest rate of these debt instruments on the
date of initial application of IFRS 9 was 3.35%. In 2018, interest
income of GBP21m was recognised for these debt instruments.
45. EVENTS AFTER THE BALANCE SHEET DATE
There have been no significant events between 31 December 2018
and the date of approval of these financial statements which would
require a change to or additional disclosure in the financial
statements, except for the following:
In January 2019, we announced plans to reshape our branch
network and close 140 branches in response to changes in how
customers are choosing to carry out their banking. Our future
branch network, with approximately 615 branches, will be made up of
a combination of larger branches offering improved community
facilities to support local businesses and customers, and smaller
branches using the latest technology to offer customers more
convenient access to banking services. Furthermore, in order to
deliver a branch network for the future, 100 branches will be
refurbished over the next two years through an investment of
GBP55m. At 31 December 2018, no provision was recognised in respect
of these plans as the relevant criteria under IAS 37 'Provisions,
contingent liabilities and contingent assets' had not been met.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
ACSEANAKADANEFF
(END) Dow Jones Newswires
February 27, 2019 02:15 ET (07:15 GMT)
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