TIDMSAN

RNS Number : 7691E

Santander UK Plc

03 March 2020

Santander UK plc

Announcement of Annual Report for the Year Ended 31 December 2019.

Santander UK plc is pleased to announce the publication of its Annual Report for the Year Ended 31 December 2019 (the 'Annual Report'), in compliance with Disclosure Guidance & Transparency Rule (DTR) 4.1.

The Annual Report may 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 2019 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 S.A. both caution that this announcement may contain forward-looking statements. Such forward looking-statements are found in various places throughout this announcement with respect to our financial condition, results, operations and business, including future business development and economic performance.

Such forward-looking statements are based on management's current expectations, estimates and projections, and both Santander UK plc and Banco Santander S.A. caution that these statements are not guarantees of future performance. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by any forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Nothing in this announcement constitutes, or should be construed as constituting, 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.

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 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 set up for our employees 
                 or those of a related company or otherwise). It also refers 
                 to the risk that we will need to make payments or other contributions 
                 with respect to a pension scheme due to a moral obligation 
                 or for some other reason. 
                ---------------------------------------------------------------------- 
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. 
                ---------------------------------------------------------------------- 
Operational     The risk of loss due to inadequate or failed internal processes, 
 risk            people and systems, or external events. We give a particular 
                 focus to the following risks which we mitigate through our 
                 management of operational risk: 
                 Process and change management risk - A key part of our business 
                 strategy is to develop and deliver new banking channels and 
                 products. We are also implementing a large number of regulatory 
                 and legal changes, impacting all areas of our business. 
                 Third party risk - We rely extensively on third parties, 
                 both within the Banco Santander group and outside of it, for 
                 a range of services and goods. 
                 Cyber risk - We rely extensively on the use of technology 
                 across our business. It is critically important that we give 
                 our customers a secure environment in which to deal with us, 
                 especially when the threat from cyber criminals is so prevalent 
                 and more sophisticated than ever. Failure to protect the data 
                 assets of Santander UK and its customers against theft, damage 
                 or destruction from cyber-attacks could result in damage to 
                 our reputation and direct financial losses. 
                ---------------------------------------------------------------------- 
Other key risk  Financial crime risk - the risk that we are used to further 
 types           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 affecting our customers and the communities we serve. 
                 Legal risk - the risk of an impact arising from legal deficiencies 
                 in contracts; failure to protect assets; failure to manage 
                 legal disputes appropriately; failure to assess or implement 
                 the requirements of a change of law; or failure to comply 
                 with law or regulation or to discharge duties or responsibilities 
                 created by law or regulation. 
                 Strategic & business risk - the risk of significant loss 
                 or damage arising from strategic decisions that impact the 
                 long-term interests of our key stakeholders or from an inability 
                 to adapt to external developments. 
                 Reputational risk - the risk of damage to the way our reputation 
                 and brand are perceived by the public, clients, government, 
                 colleagues, investors or any other interested party. 
                 Model risk - the risk that the results of our models may 
                 be inaccurate, causing us to make sub-optimal decisions, or 
                 that a model may be used inappropriately. 
 

Santander uk group level - Credit risk review

Movement in total exposures and the corresponding ECL

The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the year. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.

 
                                     Stage 1               Stage 2               Stage 3                 Total 
----------------------------  --------------------  --------------------  ---------------------  --------------------- 
                               Exposures(1)    ECL   Exposures(1)    ECL   Exposures(1)     ECL   Exposures(1)     ECL 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
                                       GBPm   GBPm           GBPm   GBPm           GBPm    GBPm           GBPm    GBPm 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 At 1 January 2019                  290,882    143         12,011    307          2,571     357        305,464     807 
----------------------------  =============  -----  -------------  -----  -------------  ------  -------------  ====== 
 Transfers from Stage 1 to 
  Stage 2(3)                        (4,101)   (11)          4,101     11              -       -              -       - 
                              -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Transfers from Stage 2 to 
  Stage 1(3)                          3,458     74        (3,458)   (74)              -       -              -       - 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Transfers to Stage 3(3)              (361)    (2)          (595)   (24)            956      26              -       - 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Transfers from Stage 3(3)               10      1            516     23          (526)    (24)              -       - 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Transfers of financial 
  instruments                         (994)     62            564   (64)            430       2              -       - 
============================  =============  =====  =============  =====  =============  ======  =============  ====== 
 Net ECL remeasurement on 
  stage transfer(4)                       -   (66)              -    130              -      96              -     160 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Change in economic 
  scenarios(2)                            -      5              -   (15)              -     (9)              -    (19) 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Changes to model                         -      -              -      -              -      13              -      13 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 New lending and assets 
  purchased (5) (8)                  42,415     29            827     32             15       9         43,257      70 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Other(6)                             3,514      6            294   (14)            172     191          3,980     183 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Redemptions and repayments 
  (7)                              (40,380)   (32)        (1,344)   (28)          (459)    (42)       (42,183)   (102) 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ====== 
 Assets written off(7)                  (1)      -            (1)      -          (361)   (249)          (363)   (249) 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 At 31 December 2019                295,436    147         12,351    348          2,368     368        310,155     863 
============================  =============  =====  =============  =====  =============  ======  =============  ====== 
 Net movement in the year             4,554      4            340     41          (203)      11          4,691      56 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 
 ECL charge/(release) to the 
  Income Statement                               4                    41                    260                    305 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ====== 
 Less: ECL relating to 
  derecognised income                            -                     -                   (13)                   (13) 
----------------------------  -------------  -----  -------------  -----  -------------  ------  -------------  ------ 
 Less: Recoveries net of 
  collection costs                            (10)                  (15)                   (46)                   (71) 
============================  =============  =====  =============  =====  =============  ======  =============  ====== 
 Total ECL charge/(release) to the Income 
  Statement                                    (6)                    26                    201                    221 
===========================================  =====  =============  =====  =============  ======  =============  ====== 
 
 
 2018 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 At 1 January 2018                                 285,133    176    12,110    284   3,043     691    300,286   1,151 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ====== 
 Transfers from Stage 1 to Stage 2(3)              (4,190)   (11)     4,190     11       -       -          -       - 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Transfers from Stage 2 to Stage 1(3)                3,325     68   (3,325)   (68)       -       -          -       - 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Transfers to Stage 3(3)                             (445)    (8)     (603)   (23)   1,048      31          -       - 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Transfers from Stage 3(3)                              17      6       443     27   (460)    (33)          -       - 
===============================================  =========  =====  ========  =====  ======  ======  =========  ====== 
 Transfers of financial instruments                (1,293)     55       705   (53)     588     (2)          -       - 
===============================================  =========  =====  ========  =====  ======  ======  =========  ====== 
 Net remeasurement of ECL on stage transfer(4)           -   (63)         -     83       -      79          -      99 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Change in economic scenarios(2)                         -      4         -   (12)       -     (8)          -    (16) 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Changes to model                                        -    (1)         -      2       -     (8)          -     (7) 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 New lending and assets purchased(5) (8)            57,280     43     1,085     33      17      13     58,382      89 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Other(6)                                            5,540   (27)     (175)   (15)     266     207      5,631     165 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ------ 
 Redemptions and repayments (7)                   (55,778)   (44)   (1,714)   (15)   (687)    (81)   (58,179)   (140) 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ====== 
 Assets written off(7)                                   -      -         -      -   (656)   (534)      (656)   (534) 
===============================================  =========  =====  ========  =====  ======  ======  =========  ====== 
 At 31 December 2018                               290,882    143    12,011    307   2,571     357    305,464     807 
===============================================  =========  =====  ========  =====  ======  ======  =========  ====== 
 Net movement in the year                            5,749   (33)      (99)     23   (472)   (334)      5,178   (344) 
===============================================  =========  =====  ========  =====  ======  ======  =========  ====== 
 
 ECL charge/(release) to the Income Statement                (33)               23             200                190 
-----------------------------------------------  ---------  -----  --------  -----  ------  ------  ---------  ====== 
 Less: Recoveries net of collection costs                       -                -            (36)               (36) 
===============================================  =========  =====  ========  =====  ======  ======  =========  ====== 
 Total credit impairment charge/(release)                    (33)               23             164                154 
==========================================================  =====  ========  =====  ======  ======  =========  ====== 
 
 
 (1)   Exposures that have attracted an ECL, and as reported in the Credit Quality table above. 
 (2)   Changes to assumptions in the year. Isolates the impact on ECL from changes to the economic 
        variables for each scenario, changes to the scenarios themselves as well as changes in the 
        probability weights from all other movements. The impact of changes in economics on exposure 
        Stage allocations are shown within Transfers of financial instruments. 
 (3)   Total impact of facilities that moved Stage(s) in the year. This means, for example, that 
        where risk parameter changes (model inputs) or model changes (methodology) result in a facility 
        moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis 
        only applies to facilities that existed at both the start and end of the year. Transfers between 
        Stages are based on opening balances and ECL at the start of the period. 
 (4)   Relates to the revaluation of ECL following the transfer of an exposure from one Stage to 
        another. 
 (5)   Exposures and ECL of facilities that did not exist at the start of the year but did at the 
        end. Amounts in Stage 2 and 3 represent assets which deteriorated in the year after origination 
        in Stage 1. 
 (6)   Residual movements on facilities that did not change Stage in the year, and which were neither 
        acquired nor purchased in the year. Includes the impact of changes in risk parameters in the 
        year, unwind of discount rates and increases in ECL requirements of accounts which ultimately 
        were written off in the period. 
 (7)   Exposures and ECL for facilities that existed at the start of the year, but not at the end. 
 (8)   Basis of preparation for this line item is changed to report new lending for corporate loans 
        at the opening balance rather than the year-end closing balance and non-customer assets in 
        Corporate Centre on a net basis rather than a gross basis. 
 

Financial review

Critical factors affecting results

The preparation of the Consolidated Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions.

Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in 'Critical Judgements and Accounting Estimates' in Note 1 to the Consolidated Financial Statements.

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT

 
                                                                       2019   2018(2) 
                                                                       GBPm      GBPm 
Net interest income                                                   3,292     3,603 
Non-interest income(1)                                                  881       931 
=================================================================  ========  ======== 
Total operating income                                                4,173     4,534 
=================================================================  ========  ======== 
Operating expenses before credit impairment losses, provisions 
 and charges                                                        (2,499)   (2,579) 
=================================================================  ========  ======== 
Credit impairment losses                                              (221)     (153) 
Provisions for other liabilities and charges                          (441)     (257) 
=================================================================  ========  ======== 
Total operating credit impairment losses, provisions and charges     (662 )     (410) 
=================================================================  ========  ======== 
Profit before tax                                                     1,012     1,545 
 
Tax on profit                                                        (279 )     (399) 
=================================================================  ========  ======== 
Profit after tax                                                        733     1,146 
=================================================================  ========  ======== 
 
Attributable to: 
Equity holders of the parent                                            714     1,124 
Non-controlling interests                                                19        22 
=================================================================  ========  ======== 
Profit after tax                                                        733     1,146 
=================================================================  ========  ======== 
 
 
     Comprised of Net fee and commission income and Net trading 
(1)   and other income. 
     Adjusted to reflect the amendment to IAS 12, as described 
(2)   in Note 1. 
 

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

2019 compared to 2018

Profit before tax was down 34% to GBP1,012m due to the factors outlined below. By income statement line item, the movements were:

 
-  Net interest income was down 9%, largely impacted by mortgage back book pressure and GBP3.9bn 
    of SVR attrition (2018: GBP4.9bn). 
-  Non-interest income was down 5%, largely due to GBP58m of ring-fencing perimeter changes in 
    2018 and the closure of trading businesses following ring-fencing implementation, partially 
    offset by GBP15m additional Vocalink consideration received in Q2 2019. 
-  Operating expenses before credit impairment losses, provisions and charges were down 3%, with 
    the absence of GBP48m of ring-fencing perimeter changes, GBP40m of GMP equalisation costs 
    and GBP38m of Banking Reform costs all incurred in 2018. This was partially offset by GBP50m(3) 
    transformation costs in 2019 and GBP40m higher operating lease depreciation. Higher depreciation 
    costs and inflationary pressures were offset by lower staff costs and efficiency savings. 
-  Credit impairment losses were up 44% to GBP221m, largely due to lower mortgage releases as 
    well as a few single name corporate exposures. 
-  Provisions for other liabilities and charges were up GBP184m to GBP441m, largely due to additional 
    PPI provisions of GBP169m and GBP105m of transformation programme charges(3) (predominantly 
    restructuring costs) as well as an additional GBP10m other provision charge in 2019 pertaining 
    to our retail credit business operations. Other adjustments to provisions amounted to GBP80m 
    in 2018. The 2019 increase was also offset by GBP21m, which was the net effect of a number 
    of items, most notably the release of property provisions. 
 
    The GBP169m charged in respect of PPI comprised: 
   -  In Q219 we reported an additional provision of GBP70m reflecting an increase in PPI claim 
       volumes, additional industry activities and having considered guidance provided by the FCA 
       and our specific approach to PPI claims, in advance of the PPI claims deadline on 29 August 
       2019. 
   -  In Q319, and in line with industry experience, we received unprecedented volumes of information 
       requests in August 2019 and saw a significant spike in both these requests and complaints 
       in the final days prior to the complaint deadline. Our best estimate of the additional provision 
       required was GBP99m. 
-  Tax on profit decreased GBP120m to GBP279m, as a result of lower taxable profits in 2019, 
    partially offset by the tax effect of additional PPI remediation charges which are not tax 
    deductible. 
 
 
(3)  Transformation programme investment of GBP155m, of which GBP50m is operating expenses and 
      GBP105m is provisions for other liabilities and charges. 
 

PROFIT BEFORE TAX BY SEGMENT

The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented.

 
 
 
                                                            Corporate      Corporate 
                                                Retail   & Commercial   & Investment  Corporate 
                                               Banking        Banking        Banking     Centre     Total 
2019                                              GBPm           GBPm           GBPm       GBPm      GBPm 
============================================  ========  =============  =============  =========  ======== 
Net interest income/(expense)                    2,876            359             63        (6)     3,292 
Non-interest income/(expense)(1)                   698             78            112        (7)       881 
Total operating income/ (expense)                3,574            437            175       (13)     4,173 
============================================  ========  =============  =============  =========  ======== 
Operating expenses before credit impairment 
 losses, provisions and charges                (1,994)          (264)          (171)       (70)   (2,499) 
============================================  ========  =============  =============  =========  ======== 
Credit impairment losses                         (160)           (37)           (22)        (2)     (221) 
Provisions for other liabilities and 
 charges                                         (292)           (20)           (17)      (112)     (441) 
Total operating credit impairment 
 losses, provisions and charges                  (452)           (57)           (39)      (114)     (662) 
============================================  ========  =============  =============  =========  ======== 
Profit/(loss) before tax                         1,128            116           (35)      (197)     1,012 
============================================  ========  =============  ============= 
 
2018(2) 
============================================  ========  =============  =============  =========  ======== 
Net interest income                              3,126            403             69          5     3,603 
Non-interest income(1)                             638             82            183         28       931 
Total operating income                           3,764            485            252         33     4,534 
============================================  ========  =============  =============  =========  ======== 
Operating expenses before credit impairment 
 losses, provisions and charges                (1,929)          (258)          (250)      (142)   (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       (354)           (37)           (22)          3     (410) 
============================================  ========  =============  =============  =========  ======== 
Profit/(loss) before tax                         1,481            190           (20)      (106)     1,545 
============================================  ========  =============  =============  =========  ======== 
 
 
     Comprised of Net fee and commission income and Net trading 
(1)   and other income. 
(2)  Restated to reflect the resegmentation of our short term markets 
      business to Corporate Centre as described in Note 2 to the 
      Consolidated Financial Statements. 
 

2019 compared to 2018

 
-  For Retail Banking, profit before tax decreased, largely due to pressure 
    from the mortgage back book, including GBP3.9bn of SVR attrition as 
    well as additional PPI provision charges and lower credit impairment 
    releases. Higher operating lease volumes and a change in accounting 
    treatment(3) of residual value risk resulted in increased non-interest 
    income, partially offset by higher depreciation in operating expenses. 
-  For Corporate & Commercial Banking, profit before tax reduced 39%, largely 
    due to lower net interest income following the 2018 and 2019 significant 
    risk transfer (SRT) securitisations. Credit impairment losses increased 
    as a result of single name exposures and lower write-backs. 
-  For Corporate & Investment Banking, loss before tax increased to GBP35m 
    driven by the 2018 changes in the statutory perimeter, following the 
    transfers of activities to Banco Santander London Branch as part of 
    ring-fencing implementation as well as higher credit impairment losses 
    due to single name exposures. 
-  For Corporate Centre, loss before tax increased. This was largely due 
    to GBP155m transformation programme investment including GBP105m reported 
    as provisions for other liabilities and charges and GBP50m reported 
    as operating expenses. In addition, yields on non-core assets were lower 
    in 2019 and non-interest income was impacted by the closure of trading 
    businesses, while operating expenses related to Banking Reform and GMP 
    equalisation in 2018 were not repeated. 
 
 
(3)  In 2019, our accounting treatment for residual value (RV) 
      risk changed. This resulted in a GBP24m reversal of RV provisions 
      recognised in other income (of which GBP22m relates to charges 
      taken in prior periods) which was partially offset by GBP7.5m 
      accelerated depreciation of the underlying asset (prior periods: 
      GBP2.3m). 
 

Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET

 
                                                                2019      2018 
                                                                GBPm      GBPm 
Assets 
Cash and balances at central banks                            21,180    19,747 
Financial assets at fair value through profit or loss          3,702    10,876 
Financial assets at amortised cost                           239,834   232,444 
Financial assets at fair value through other comprehensive 
 income                                                        9,747    13,302 
Interest in other entities                                       117        88 
Property, plant and equipment                                  1,967     1,832 
Retirement benefit assets                                        669       842 
Tax, intangibles and other assets                              4,486     4,241 
Total assets                                                 281,702   283,372 
===========================================================  =======  ======== 
Liabilities 
Financial liabilities at fair value through profit or 
 loss                                                          3,161     7,655 
Financial liabilities at amortised cost                      259,179   256,514 
Retirement benefit obligations                                   280       114 
Tax, other liabilities and provisions                          3,065     3,180 
Total liabilities                                            265,685   267,463 
===========================================================  =======  ======== 
Equity 
Total shareholders' equity                                    15,857    15,758 
Non-controlling interests                                        160       151 
Total equity                                                  16,017    15,909 
===========================================================  =======  ======== 
Total liabilities and equity                                 281,702   283,372 
===========================================================  =======  ======== 
 

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

2019 compared to 2018

Assets

Cash and balances at central banks

Cash and balances at central banks increased by 7% to GBP21,180m at 31 December 2019 (2018: GBP19,747m). This was driven by cash inflows generated from profits in the year, higher customer deposits and the net disposal of certain asset backed securities, offset by additional retail lending and net cash outflows relating to debt securities in issue.

Financial assets at fair value through profit or loss:

Financial assets at fair value through profit or loss decreased by 66% to GBP3,702m at 31 December 2019 (2018: GBP10,876m), mainly due to:

 
-  GBP2.1bn of senior tranches of credit linked notes, which were previously 
    classified as other financial assets at fair value through profit or 
    loss, are now presented on a net basis as a result of changes to legal 
    agreements. For more information see Note 12 to the Consolidated Financial 
    Statements. 
-  The maturity of non-trading reverse repurchase agreements held at FVTPL, 
    which totalled GBP2.3bn at 31 December 2018. 
 

Financial assets at amortised cost:

Financial assets at amortised cost increased by 3% to GBP239,834m at 31 December 2019 (2018: GBP232,444m), mainly due to:

 
-  An increase in customer loans, with mortgage lending in Retail Banking 
    up GBP7.4bn. This was partially offset by a reduction in corporate lending 
    which included managed reductions in Commercial Real Estate of GBP1.1bn. 
-  Reverse repurchase agreements - non trading increasing by GBP2.5bn, 
    reflecting the classification of all new non-trading reverse repurchase 
    agreements at amortised cost in line with our ring-fenced model and 
    as part of normal liquidity risk management. 
 

Financial assets at fair value through other comprehensive income

Financial assets at fair value through other comprehensive income decreased by 27% to GBP9,747m at 31 December 2019 (2018: GBP13,302m) mainly due to the disposal of certain asset backed securities as part of normal liquid asset portfolio management.

Property, plant and equipment

Property, plant and equipment increased by 7% to GBP1,967m at 31 December 2019 (2018: GBP1,832m) mainly due to an increase in operating lease assets and the recognition of right-of-use assets following the adoption of IFRS 16 on 1 January 2019.

Retirement benefit assets

Retirement benefit assets decreased by 21% to GBP669m at 31 December 2019 (2018: GBP842m), reflecting a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme). This was mainly due to a decrease in corporate bond yields, resulting in a higher value being placed on the liabilities in the Scheme. This was partially offset by asset growth, mainly driven by the decrease in corporate bond yields.

Tax, intangibles and other assets

Tax, intangibles and other assets increased by 6% to GBP4,486m at 31 December 2019 (2018: GBP4,241m), mainly due to an increase in the carrying value of the macro hedge of interest rate risk.

Liabilities

Financial liabilities at fair value through profit or loss:

Financial liabilities at fair value through profit or loss decreased by 59% to GBP3,161m at 31 December 2019 (2018: GBP7,655m), mainly due to:

 
-  GBP2.1bn of cash deposits, which were previously classified as other 
    financial liabilities at fair value through profit or loss, are now 
    presented on a net basis as a result of changes to legal agreements. 
    For more information see Note 21 to the Consolidated Financial Statements. 
-  The maturity of non-trading repurchase agreements held at FVTPL, which 
    totalled GBP2.1bn at 31 December 2018. 
 

Financial liabilities at amortised cost

Financial liabilities at amortised cost increased by 1% to GBP259,179m at 31 December 2019 (2018: GBP256,514m). This was mainly due to:

 
-  Repurchase agreements - non trading increasing by GBP7.4bn reflecting 
    the classification of all new non-trading repurchase agreements at amortised 
    cost in line with our ring-fenced model and as part of normal liquidity 
    risk management. 
-  An increase in customer deposits, with GBP3.0bn growth in Retail Banking 
    supported by a successful ISA campaign and 1I2I3 Business Current Account 
    inflows. Corporate deposits also increased as we focused on building 
    strong customer relationships. 
-  Deposits by banks decreasing by GBP2.9bn due to a reduction in time 
    deposits with other banks, including deposits placed with Banco Santander, 
    and lower balances held as cash collateral. 
-  Debt securities in issue decreasing by GBP5.6bn, reflecting maturities 
    in the period, partially offset by covered bond issuances of GBP1bn 
    in February 2019, EUR1bn in May 2019 and GBP1bn in November 2019, along 
    with a senior unsecured issuance of $1bn in June 2019. 
 

Retirement benefit obligations

Retirement benefit obligations increased by 146% to GBP280m at 31 December 2019 (2018: GBP114m), reflecting a decrease in the overall accounting surplus of the Scheme. This was mainly due to a decrease in corporate bond yields, resulting in a higher value being placed on the liabilities in the Scheme. This was partially offset by asset growth, mainly driven by the decrease in corporate bond yields.

Tax, other liabilities and provisions

Tax, other liabilities and provisions decreased by 4% to GBP3,065m at 31 December 2019 (2018: GBP3,180m) mainly due to changes in unsettled financial transactions as well as tax balances.

Equity

Total shareholders' equity

Total shareholders' equity increased by 1% to GBP15,857m at 31 December 2019 (2018: GBP15,758m). This was principally due to the profit after tax for the year and a net increase in other equity instruments being offset by downward defined benefit pension remeasurements and dividend payments.

Customer balances

Consolidated

 
                                2019   2018 
                               GBPbn  GBPbn 
Customer loans                 205.0  199.6 
Other assets                    76.7   83.8 
Total assets                   281.7  283.4 
=============================  =====  ===== 
Customer deposits              171.7  167.3 
----------------------------- 
Total wholesale funding         65.2   70.8 
Other liabilities               28.7   29.3 
============================= 
Total liabilities              265.6  267.4 
Shareholders' equity            15.9   15.8 
Non-controlling interest         0.2    0.2 
============================= 
Total liabilities and equity   281.7  283.4 
=============================  =====  ===== 
 

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

2019 compared to 2018

 
-  Customer loans increased GBP5.4bn, with mortgage lending in Retail Banking 
    up GBP7.4bn. This was partially offset by a reduction in corporate lending 
    which included managed reductions in CRE of GBP1.1bn. 
-  Customer deposits increased GBP4.4bn, with GBP3.0bn growth in Retail 
    Banking supported by a successful ISA campaign and 1I2I3 Business Current 
    Account inflows. Corporate deposits also increased as we focused on 
    building strong customer relationships. 
 

Retail Banking

 
                             2019   2018 
                            GBPbn  GBPbn 
Mortgages                   165.4  158.0 
Business banking              1.8    1.8 
-------------------------- 
Consumer (auto) finance       7.7    7.3 
Other unsecured lending       5.5    5.7 
-------------------------- 
Customer loans              180.4  172.8 
==========================  =====  ===== 
Current accounts             68.7   68.4 
-------------------------- 
Savings                      57.2   56.0 
Business banking accounts    12.9   11.9 
-------------------------- 
Other retail products         6.3    5.8 
Customer deposits           145.1  142.1 
==========================  =====  ===== 
 

Corporate & Commercial Banking

 
                                                 2019   2018 
                                                GBPbn  GBPbn 
Non-Commercial Real Estate trading businesses    11.2   11.5 
Commercial Real Estate                            5.1    6.2 
Customer loans                                   16.3   17.7 
==============================================  =====  ===== 
Customer deposits                                18.2   17.6 
==============================================  =====  ===== 
 

Corporate & Investment Banking

 
                     2019   2018 
                    GBPbn  GBPbn 
Customer loans        4.1    4.6 
Customer deposits     6.1    4.8 
==================  =====  ===== 
 

Corporate Centre

 
                     2019   2018 
                    GBPbn  GBPbn 
Social Housing        3.6    3.8 
Non-core              0.6    0.7 
==================  =====  ===== 
Customer loans        4.2    4.5 
==================  =====  ===== 
 
Customer deposits     2.3    2.8 
==================  =====  ===== 
 

Capital and funding

 
                                                        2019   2018 
                                                       GBPbn  GBPbn 
Capital and leverage 
CET1 capital                                            10.4   10.4 
Total qualifying regulatory capital                     15.8   15.9 
CET1 capital ratio                                     14.3%  13.2% 
Total capital ratio                                    21.7%  20.3% 
RWAs                                                    72.6   78.5 
Funding 
Total wholesale funding                                 67.4   72.8 
- of which with a residual maturity of less than one 
 year                                                   22.5   16.5 
=====================================================  =====  ===== 
 

Further analysis of capital and funding is included in the Capital risk and Liquidity risk sections of the Risk review.

2019 compared to 2018

 
 -   CET1 capital was stable at GBP10.4bn, with ongoing capital accretion 
      through profits retained after dividend payment, offset by market-driven 
      pension movements. 
 -   RWAs reduced largely as a result of SRT securitisations and lower 
      corporate lending as we continue to focus on risk-weighted returns. 
      This was partially offset by increased RWAs in Retail Banking in 
      line with mortgage lending growth. 
 -   CET1 capital ratio increased 110bps to 14.3%, through active RWA 
      management. 
 -   Total wholesale funding decreased, reflecting maturities in the 
      period, partially offset by covered bond issuances of GBP1bn in 
      February 2019, EUR1bn in May 2019 and GBP1bn in November 2019, along 
      with senior unsecured issuance of $1bn in June 2019. In August 2019, 
      we increased our AT1 outstanding by GBP200m via the issuance of 
      a new GBP500m 6.3% AT1 and the repurchase of the GBP300m 7.6% AT1. 
 

Liquidity

 
                                                          2019   2018 
                                                         GBPbn  GBPbn 
Santander UK Domestic Liquidity Sub Group (RFB DoLSub) 
Liquidity Coverage Ratio (LCR)                            142%   164% 
LCR eligible liquidity pool                               42.0   54.1 
=======================================================  =====  ===== 
 

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

2019 compared to 2018

 
 -   While LCR remains high at 142%, it is lower than 2018 reflecting 
      reduced uncertainty. 
 -   The RFB DoLSub LCR and LCR eligible liquidity pool both decreased 
      following the transfer of our Isle of Man and Jersey businesses 
      (Crown Dependencies) into SFS in 2018 as part of ring-fencing implementation. 
 

Financial statements

Consolidated Income Statement

For the years ended 31 December

 
                                                        2019   2018(1) 
                                              Notes     GBPm      GBPm 
--------------------------------------------         -------  -------- 
Interest and similar income                       3    5,917     6,066 
Interest expense and similar charges              3  (2,625)   (2,463) 
Net interest income                                    3,292     3,603 
============================================  =====  =======  ======== 
Fee and commission income                         4    1,112     1,170 
Fee and commission expense                        4    (426)     (421) 
Net fee and commission income                            686       749 
============================================  =====  =======  ======== 
Net trading and other income                      5      195       182 
============================================  =====  =======  ======== 
Total operating income                                 4,173     4,534 
                                              ===== 
Operating expenses before credit impairment 
 losses, provisions and charges                   6  (2,499)   (2,579) 
============================================  =====  =======  ======== 
Credit impairment losses                          8    (221)     (153) 
Provisions for other liabilities and 
 charges                                          8    (441)     (257) 
Total operating credit impairment 
 losses, provisions and charges                        (662)     (410) 
============================================  =====  =======  ======== 
Profit before tax                                      1,012     1,545 
Tax on profit                                     9    (279)     (399) 
Profit after tax                                         733     1,146 
============================================  =====  =======  ======== 
 
Attributable to: 
Equity holders of the parent                             714     1,124 
Non-controlling interests                        32       19        22 
Profit after tax                                         733     1,146 
============================================  =====  =======  ======== 
 
 
     Adjusted to reflect the amendment to IAS 12, as described 
(1)   in Note 1. 
 

Consolidated Statement of Comprehensive Income

For the years ended 31 December

 
                                                         2019  2018(2) 
                                                         GBPm     GBPm 
Profit after tax                                          733    1,146 
======================================================  =====  ======= 
Other comprehensive income: 
Other comprehensive income/(expense) that may be 
 reclassified to profit or loss subsequently: 
Available-for-sale securities(1) 
- Change in fair value 
- Income statement transfers 
- Taxation 
 
Movement in fair value reserve (debt instruments):(1) 
- Change in fair value                                    147     (74) 
- Income statement transfers                            (147)       21 
- Taxation                                                  -       13 
                                                               ======= 
                                                            -     (40) 
======================================================  =====  ======= 
Cash flow hedges: 
- Effective portion of changes in fair value            (857)      793 
- Income statement transfers                            1,013    (752) 
- Taxation                                               (41)     (13) 
                                                               ======= 
                                                          115       28 
======================================================  =====  ======= 
Currency translation on foreign operations                (4)        - 
======================================================  =====  ======= 
Net other comprehensive income/(expense) that may 
 be reclassified to profit or loss subsequently           111     (12) 
======================================================  =====  ======= 
Other comprehensive income/(expense) that will not 
 be reclassified to profit or loss subsequently: 
======================================================  =====  ======= 
Pension remeasurement: 
- Change in fair value                                  (522)      470 
- Taxation                                                131    (118) 
                                                               ======= 
                                                        (391)      352 
======================================================  =====  ======= 
Own credit adjustment: 
- Change in fair value                                   (77)       84 
- Taxation                                                 19     (21) 
                                                               ======= 
                                                         (58)       63 
======================================================  =====  ======= 
Net other comprehensive (expense)/income that will 
 not be reclassified to profit or loss subsequently     (449)      415 
======================================================  =====  ======= 
Total other comprehensive (expense)/income net of 
 tax                                                    (338)      403 
======================================================  =====  ======= 
Total comprehensive income                                395    1,549 
======================================================  =====  ======= 
 
Attributable to: 
Equity holders of the parent                              374    1,528 
Non-controlling interests                                  21       21 
                                                               ======= 
Total comprehensive income                                395    1,549 
======================================================  =====  ======= 
 
 
(1)  Following the adoption of IFRS 9, a fair value reserve was introduced 
      to replace the available-for-sale reserve. 
(2)  Adjusted to reflect the amendment to IAS 12, as described in Note 1. 
 

Consolidated Balance Sheet

At 31 December

 
                                                                       2019     2018 
                                                             Notes     GBPm     GBPm 
Assets 
Cash and balances at central banks                                   21,180   19,747 
Financial assets at fair value through profit or loss: 
- Derivative financial instruments                              11    3,316    5,259 
- Other financial assets at fair value through profit 
 or loss                                                        12      386    5,617 
Financial assets at amortised cost: 
- Loans and advances to customers                               13  207,287  201,289 
- Loans and advances to banks                                         1,855    2,799 
- Reverse repurchase agreements - non trading                   16   23,636   21,127 
- Other financial assets at amortised cost                      17    7,056    7,229 
Financial assets at fair value through other comprehensive 
 income                                                         18    9,747   13,302 
Interests in other entities                                     19      117       88 
Intangible assets                                               20    1,766    1,808 
Property, plant and equipment                                         1,967    1,832 
Current tax assets                                               9      200      153 
Retirement benefit assets                                       28      669      842 
Other assets                                                          2,520    2,280 
Total assets                                                        281,702  283,372 
===========================================================  =====  =======  ======= 
Liabilities 
Financial liabilities at fair value through profit 
 or loss: 
- Derivative financial instruments                              11    1,448    1,369 
- Other financial liabilities at fair value through 
 profit or loss                                                 21    1,713    6,286 
Financial liabilities at amortised cost: 
- Deposits by customers                                         22  181,883  178,090 
- Deposits by banks                                             23   14,353   17,221 
- Repurchase agreements - non trading                           24   18,286   10,910 
- Debt securities in issue                                      25   41,129   46,692 
- Subordinated liabilities                                      26    3,528    3,601 
Other liabilities                                                     2,344    2,448 
Provisions                                                      27      572      509 
Deferred tax liabilities                                         9      149      223 
Retirement benefit obligations                                  28      280      114 
Total liabilities                                                   265,685  267,463 
===========================================================  =====  =======  ======= 
Equity 
Share capital                                                   30    3,105    3,119 
Share premium                                                   30    5,620    5,620 
Other equity instruments                                        31    2,191    1,991 
Retained earnings                                                     4,546    4,744 
Other reserves                                                          395      284 
===========================================================  =====  =======  ======= 
Total shareholders' equity                                           15,857   15,758 
Non-controlling interests                                       32      160      151 
Total equity                                                         16,017   15,909 
===========================================================  =====  =======  ======= 
Total liabilities and equity                                        281,702  283,372 
===========================================================  =====  =======  ======= 
 

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 2 March 2020 and signed on its behalf by:

 
Nathan Bostock           Madhukar Dayal 
Chief Executive Officer  Chief Financial Officer 
 

Company Registered Number: 2294747

Consolidated Cash Flow Statement

For the years ended 31 December

 
                                                        2019    2018(1) 
                                                        GBPm       GBPm 
Cash flows from operating activities 
Profit after tax                                         733      1,146 
 
Adjustments for: 
Non-cash items included in profit: 
- Depreciation and amortisation                          543        375 
- Provisions for other liabilities and charges           441        257 
- Impairment losses                                      239        189 
- Corporation tax charge                                 279        399 
- Other non-cash items                                 (439)        238 
- Pension charge for defined benefit pension 
 schemes                                                  35         79 
===================================================  =======  ========= 
                                                       1,098      1,537 
Net change in operating assets and liabilities: 
- Cash and balances at central banks                    (71)      (255) 
- Trading assets                                           -     24,528 
- Derivative assets                                    1,943     14,683 
- Other financial assets at fair value through 
 profit or loss                                        1,664    (3,635) 
- Loans and advances to banks and customers              170    (9,129) 
- Other assets                                           247      (246) 
- Deposits by banks and customers                        641        926 
- Derivative liabilities                                  79   (16,244) 
- Trading liabilities                                      -   (31,101) 
- Other financial liabilities at fair value 
 through profit or loss                                (959)      4,106 
- Debt securities in issue                             (529)    (2,524) 
- Other liabilities                                    (568)      (556) 
===================================================  =======  ========= 
                                                       2,617   (19,447) 
Corporation taxes paid                                 (292)      (391) 
Effects of exchange rate differences                 (1,079)      1,750 
Net cash flows from operating activities               3,077   (15,405) 
===================================================  =======  ========= 
Cash flows from investing activities 
Investments in other entities                              -       (66) 
Proceeds from disposal of subsidiaries(2)                  -        348 
Purchase of property, plant and equipment 
 and intangible assets                                 (505)      (696) 
Proceeds from sale of property, plant and 
 equipment and intangible assets                         108         26 
Purchase of financial assets at amortised 
 cost and financial assets at fair value through 
 other comprehensive income(3)                       (5,013)    (7,002) 
Proceeds from sale and redemption of financial 
 assets at amortised cost and financial assets 
 at fair value through other comprehensive 
 income(3)                                             8,300      3,708 
Net cash flows from investing activities               2,890    (3,682) 
===================================================  =======  ========= 
Cash flows from financing activities 
Issue of other equity instruments                        500          - 
Issuance costs of other equity instruments                 -          - 
Issue of debt securities and subordinated 
 notes                                                 4,145     10,642 
Issuance costs of debt securities and subordinated 
 notes                                                  (15)       (23) 
Repayment of debt securities and subordinated 
 notes                                               (7,969)    (6,281) 
Repurchase of preference shares and other 
 equity instruments                                    (318)      (290) 
Dividends paid on ordinary shares                      (315)    (1,139) 
Dividends paid on preference shares and other 
 equity instruments                                    (142)      (157) 
Dividends paid on non-controlling interests             (12)       (22) 
Net cash flows from financing activities             (4,126)      2,730 
===================================================  =======  ========= 
Change in cash and cash equivalents                    1,841   (16,357) 
===================================================  =======  ========= 
Cash and cash equivalents at beginning of 
 the year                                             26,029     42,226 
Effects of exchange rate changes on cash and 
 cash equivalents                                       (53)        160 
Cash and cash equivalents at the end of the 
 year                                                 27,817     26,029 
===================================================  =======  ========= 
 
Cash and cash equivalents consist of: 
Cash and balances at central banks                    21,180     19,747 
Less: regulatory minimum cash balances                 (707)      (636) 
                                                      20,473     19,111 
===================================================  =======  ========= 
Net trading other cash equivalents                         -          - 
Net non-trading other cash equivalents                 7,344      6,918 
Cash and cash equivalents at the end of the 
 year                                                 27,817     26,029 
===================================================  =======  ========= 
 
 
(1)  Adjusted to reflect the amendment to IAS 12, as described 
      in Note 1. 
(2)  In 2018, the Santander UK group sold a number of subsidiaries 
      for a cash consideration of GBP348m, which equalled the carrying 
      amount of the net assets disposed of. 
 

Consolidated Statement of Changes in Equity

For the years ended 31 December

 
                                                                  Other reserves 
                                                    ------------------------------------------- 
 
                                             Other                            Cash                                            Non- 
                       Share    Share       equity   Available-      Fair     flow     Currency     Retained           controlling 
                     capital  premium  instruments  for-sale(1)  value(1)  hedging  translation  earnings(2)    Total    interests    Total 
                        GBPm     GBPm         GBPm         GBPm      GBPm     GBPm         GBPm         GBPm     GBPm         GBPm     GBPm 
At January 2019        3,119    5,620        1,991                     23      256            5        4,744   15,758          151   15,909 
Profit after tax           -        -            -                      -        -            -          714      714           19      733 
Other comprehensive 
 income, net of 
 tax: 
- Cash flow hedges         -        -            -                      -      115            -            -      115            -      115 
- Pension 
 remeasurement             -        -            -                      -        -            -        (393)    (393)            2    (391) 
- Own credit 
 adjustment                -        -            -                      -        -            -         (58)     (58)            -     (58) 
- Currency 
 translation 
 on foreign 
 operations                -        -            -                      -        -          (4)            -      (4)            -      (4) 
Total comprehensive 
 income                    -        -            -                      -      115          (4)          263      374           21      395 
===================  =======  =======  ===========  ===========  ========  =======  ===========  ===========  =======  ===========  ======= 
Issue of other 
 equity instruments        -        -          500                      -        -            -            -      500            -      500 
Repurchase of 
 other equity 
 instruments            (14)        -        (300)                      -        -            -          (4)    (318)            -    (318) 
Dividends on 
 ordinary 
 shares                    -        -            -                      -        -            -        (315)    (315)            -    (315) 
Dividends on 
 preference 
 shares and other 
 equity instruments        -        -            -                      -        -            -        (142)    (142)            -    (142) 
Dividends on 
 non-controlling 
 interests                 -        -            -                      -        -            -            -        -         (12)     (12) 
At 31 December 
 2019                  3,105    5,620        2,191                     23      371            1        4,546   15,857          160   16,017 
===================  =======  =======  ===========  ===========  ========  =======  ===========  ===========  =======  ===========  ======= 
 
At 31 December 
 2017                  3,119    5,620        2,281           68                228            5        4,732   16,053          152   16,205 
Adoption of IFRS 
 9(3)                      -        -            -         (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           -        -            -                      -        -            -        1,124    1,124           22    1,146 
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            -        1,540    1,528           21    1,549 
===================  =======  =======  ===========  ===========  ========  =======  ===========  ===========  =======  ===========  ======= 
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) 
At 31 December 
 2018                  3,119    5,620        1,991                     23      256            5        4,744   15,758          151   15,909 
===================  =======  =======  ===========  ===========  ========  =======  ===========  ===========  =======  ===========  ======= 
 
 
(1)  Following the adoption of IFRS 9, a fair value reserve was introduced to replace 
      the available-for-sale reserve. 
(2)  Adjusted to reflect the amendment to IAS 12, as described in Note 1. 
(3)  The adoption of IFRS 9 decreased shareholders' equity at 1 January 2018 by GBP192m 
      (net of tax), comprised of a GBP49m decrease arising from the application of the 
      new classification and measurement requirements for financial assets, and a GBP211m 
      decrease arising from the application of the new ECL impairment methodology, these 
      amounts being partially offset by the recognition of a deferred tax asset of GBP68m. 
 

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 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

IFRS 16 'Leases' (IFRS 16)

On 1 January 2019 the Santander UK group adopted IFRS 16 and the revised accounting policies as lessee which have been applied from 1 January 2019 are set out below. Comparatives have not been restated. The impact of applying IFRS 16 is disclosed in section (ii).

As described below, IFRS 16 impacted property and equipment leases where the Santander UK group is the lessee. IFRS 16 had no impact for leases where the Santander UK group is the lessor.

i) Accounting policy change

The Santander UK group as lessee

The Santander UK group assesses whether a contract is or contains a lease at the inception of the contract and recognises a right-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases, except for short-term leases, being those with a term of 12 months or less, or leases for which the underlying asset is of low value which are expensed in the income statement on a straight-line basis over the lease terms. Lease payments exclude irrecoverable VAT which is expensed in the income statement as lease payments are made.

The lease liability, which is included within Other liabilities on the balance sheet, is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate appropriate to the lease term. The lease liability is subsequently measured at amortised cost using the effective interest rate method. Remeasurement of the lease liability occurs if there is a change in the lease payments (when a corresponding adjustment is made to the ROU asset), the lease term or in the assessment of an option to purchase the underlying asset.

At inception, the ROU asset, which is included within Property, plant and equipment on the balance sheet, comprises the lease liability, initial direct costs and the obligations to restore the asset, less any incentives granted by the lessor. The ROU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset and is reviewed for indications of impairment as for owned assets. The obligation to restore the asset is included within Provisions on the balance sheet.

ii) Impact of adoption

The Santander UK group elected to apply the modified retrospective approach whereby the ROU asset at the date of initial application was measured at an amount equal to the lease liability. The ROU asset was adjusted for any prepaid lease payments and incentives relating to the relevant leases that were recognised on the balance sheet at 31 December 2018 and included an estimate of the costs of restoring the underlying assets to the condition required by the terms of the lease. In addition, the following practical expedients permitted by the standard were applied:

 
 -   a single discount rate being the incremental borrowing rate was applied 
      to a portfolio of leases with reasonably similar characteristics; 
      and 
 -   operating leases with a remaining lease term of less than 12 months 
      as at 1 January 2019 were treated as short term leases. 
 

For the Santander UK group, the application of IFRS 16 at 1 January 2019 increased property, plant and equipment by GBP210m (being the net increase in ROU assets referred to above), reduced other assets by GBP12m and increased other liabilities by GBP181m from recognising lease liabilities. In addition, we also increased provisions by GBP17m (see Note 27). There was no impact on shareholders' equity. For the Company, the application of IFRS 16 at 1 January 2019 increased property, plant and equipment by GBP191m, reduced other assets by GBP12m and increased other liabilities by GBP162m from recognising lease liabilities. In addition, we also increased provisions by GBP17m. There was no impact on shareholders' equity. The amount of the lease liabilities above differed from the amount of operating lease commitments at 31 December 2018 and is reconciled as follows:

 
                                                     Group   Company 
                                                      GBPm      GBPm 
 Rental commitments under non-cancellable 
  operating leases under IAS 17 at 31 December 
  2018 (see Note 29)                                   246       229 
 Recognition exemption for short-term leases          (72)      (71) 
 Effect from discounting at the incremental 
  borrowing rate at 1 January 2019                       7         4 
 Additional liabilities recognised based on 
  the initial application of IFRS 16 at 1 January 
  2019                                                 181       162 
 

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.

IAS 12

The Santander UK group has also applied the amendment to IAS 12 'Income Taxes' (part of 'Annual Improvements to IFRS Standards 2015-2017 Cycle') in these Condensed Consolidated Interim Financial Statements. The amendment clarifies that the income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the past transactions or events that generated distributable profits were recognised. This means that, to the 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 has been applied retrospectively, reduces the effective tax rate where the tax relief on dividends in respect of other equity instruments is recognised in the income statement rather than as a separate line item within the statement of changes in equity. Overall, there was no impact on shareholders' equity for the Santander UK group or the Company from applying the amendment to IAS 12 at 1 January 2019. For the Santander UK group, the impact of the amendment to IAS 12 on the income statement for the year ended 31 December 2019 was to reduce tax on profit by GBP39m (2018: GBP42m, 2017: GBP46m), increasing profit after tax by the same amount. For the Company, the impact of the amendment to IAS 12 on the income statement for the year ended 31 December 2019 was to reduce tax on profit by GBP39m (2018: GBP42m, 2017: GBP46m), increasing profit after tax by the same amount.

London Inter-Bank Offered Rate (LIBOR) reform

In September 2019, the IASB issued Interest Rate Benchmark Reform: Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7 'Financial Instruments: Disclosure'. Santander UK applies IAS 39 hedge accounting so the amendments to IFRS 9 do not apply. The IAS 39 amendments provide temporary exceptions from applying specific hedge accounting requirements to hedging relationships that are directly affected by the reform to LIBOR and other Interbank Offered Rates, hereinafter referred to as LIBOR reform. The exceptions have the effect that LIBOR reform should not generally cause hedge accounting to terminate, however any hedge ineffectiveness continues to be recognised in the income statement. The exceptions end at the earlier of:

 
 -   when the uncertainty regarding the timing and the amount of interest 
      rate benchmark based cash flows is no longer present, and 
 -   discontinuance of the hedge relationship (or reclassification of all 
      amounts from the cash flow hedge reserve). 
 

The IAS 39 amendments apply to all hedging relationships directly affected by uncertainties related to LIBOR reform and must be applied for annual periods beginning on or after 1 January 2020. However, following their endorsement for use in the European Union, Santander UK has elected to apply the IAS 39 and IFRS 7 amendments in the preparation of the financial statements for the year ended 31 December 2019. The exceptions given by the IAS 39 amendments mean that LIBOR reform had no impact on hedge relationships for affected hedges at and for the year ended 31 December 2019. The main assumptions or judgements made by Santander UK in applying the IAS 39 amendments are outlined below.

 
 -   For cash flow hedges affected by LIBOR reform, Santander UK management 
      has assumed that the interest rate benchmark on which hedged cash 
      flows are based is not altered as a result of LIBOR reform when assessing 
      whether the future cash flows are highly probable. For discontinued 
      hedging relationships, the same assumption has been applied for determining 
      whether the hedged future cash flows are expected to occur. 
 -   In making its prospective hedge effectiveness assessments, Santander 
      UK has assessed whether the economic relationship between the hedged 
      item and the hedging instrument exists based on the assumption that 
      the interest rate benchmark on which the hedged item and the hedging 
      instrument are based is not altered as a result of LIBOR reform. 
 -   Santander UK will not discontinue hedge accounting during the period 
      of LIBOR-related uncertainty solely because the retrospective effectiveness 
      falls outside the required 80-125% range. 
 -   For hedges of a non-contractually specified benchmark portion of an 
      interest rate, Santander UK only considers at inception of such a 
      hedging relationship whether the separately identifiable requirement 
      is met. 
 

Details of the significant interest rate benchmarks to which hedging relationships are exposed, the extent of risk exposure that is affected by LIBOR reform, and how Santander UK's transition to alternative benchmark interest rates is being managed, are disclosed in the Banking market risk section of the Risk review. The nominal amount of the hedging instruments in hedging relationships directly affected by uncertainties related to LIBOR reform is disclosed in Note 11.

Future accounting developments

At 31 December 2019, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective or which have otherwise not been early adopted where permitted.

Comparative information

As required by US public company reporting requirements, these financial statements include two years of comparative information for the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related Notes.

Consolidation

a) Subsidiaries

The Consolidated Financial Statements incorporate the financial statements of the Company and entities (including structured entities) controlled by it and its subsidiaries. Control is achieved where the Company (i) has 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 fair value through other comprehensive income (FVOCI) (2017: available-for-sale asset measured at fair value), 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 measured at fair value) and interest income on hedging derivatives. Interest expense and similar charges comprises interest expense on financial liabilities measured at amortised cost, and interest expense on hedging derivatives. Interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI (2017: available-for-sale measured at fair value) and interest expense on financial liabilities other than those at fair value through profit or loss (FVTPL) is determined using the effective interest rate method.

The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the gross carrying amount of the financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding expected credit losses. The calculation includes all amounts paid or received by the Santander UK group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of the financial instrument and all other premiums or discounts.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have subsequently become credit-impaired (or 'Stage 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 subsidiary (including awards granted under the Long-Term Incentive Plan and the Deferred Shares Bonus Plan) to satisfy share options or awards as they vest.

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 annually, or more frequently when events or changes in circumstances dictate, and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business sold.

Other intangible assets are recognised if they arise from contractual or other legal rights or if they are capable of being separated or divided from the Santander UK group and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over their useful economic life of three to seven years. Other intangible assets are reviewed annually for impairment indicators and tested for impairment where indicators are present.

Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of those products can be measured reliably. These costs include payroll, materials, services and directly attributable overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of three to seven years, unless the software is an integral part of the related computer hardware, in which case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended. Costs of maintaining software are expensed as incurred.

Property, plant and equipment

Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software. Property, plant and equipment also includes operating leases where the Santander UK group is the lessor and right-of-use assets where the Santander UK group is the lessee, as described further in 'Leases' below. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. A review for indications of impairment is carried out at each reporting date. Gains and losses on disposal are determined by reference to the carrying amount and are reported in net trading and other income. Repairs and renewals are charged to the income statement when the expenditure is incurred. Internally developed software meeting the criteria set out in 'Goodwill and other intangible assets' above and externally purchased software are classified in property, plant and equipment where the software is an integral part of the related computer hardware (for example operating system of a computer). Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life, as follows:

 
Owner-occupied properties                  Not exceeding 50 years 
Office fixtures and equipment              3 to 15 years 
Computer software                          3 to 7 years 
Right-of-use assets (see 'Leases -         Shorter of the lease term or the useful 
 The Santander UK group as lessee' below)   life of the underlying asset 
=========================================  ======================================= 
 

Depreciation is not charged on freehold land and assets under construction. Depreciation on operating lease assets where the Santander UK group is the lessor is described in 'Leases' below.

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 FVTPL are expensed in profit or loss. Immediately after initial recognition, an expected credit loss (ECL) allowance is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI.

A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the market 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

The Santander UK group classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL.

Financial assets and financial liabilities are classified as FVTPL where there is a requirement to do so or where they are otherwise designated at FVTPL on initial recognition. Financial assets and financial liabilities which are required to be held at FVTPL include:

 
-  Financial assets and financial liabilities held for 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 13. 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 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 and/or a claim made 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. Where appropriate the debt is passed over to external collection agencies. A past due threshold is applied to unsecured debt where accounts that are 180 days past due are written off unless there is a dispute awaiting resolution. Contact is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried out only when the steps described above have been undertaken without success.

All write-offs are assessed / made on a case-by-case basis, taking account of the exposure at the date of write-off, after accounting for the value from any collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once investigations have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances.

b) Recoveries

Recoveries of credit impairment 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 (determined in accordance with IFRS 9 as described in Credit risk section of the Risk review). The Santander UK group has not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument.

For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision and charged to credit impairment losses in the income statement. The loss allowance in respect of revolving facilities is classified in loans and advances to customers to the extent of any drawn balances. The loss allowance in respect of undrawn amounts is classified in provisions. When amounts are drawn, any related loss allowance is transferred from provisions to loans and advances to customers.

Derivative financial instruments (derivatives)

Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures, and equity index options.

Derivatives are held for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge accounting relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described in 'Hedge accounting' below.

Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values 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, foreign currency risk on its fixed rate debt issuances denominated in foreign currency and equity price risk arises from the Santander UK group operating the Employee Sharesave scheme. Cash flow hedging is used to hedge the variability in cash flows arising from these risks.

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, are monitored for internal management purposes and is not larger than an operating segment.

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Value in use is calculated by discounting management's expected future cash flows obtainable as a result of the asset's continued use, 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 (RV). Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset. After initial recognition, residual values are reviewed regularly, and any changes are recognised prospectively through remaining depreciation charges.

Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Santander UK group's net investment in the leases. Finance lease income is allocated to accounting periods to reflect a constant periodic rate of return on the Santander UK group's net investment outstanding in respect of the leases and hire purchase contracts. A provision is recognised to reflect a reduction in any anticipated unguaranteed RV. A provision is also recognised for voluntary termination of the contract by the customer, where appropriate.

b) The Santander UK group as lessee

The Santander UK group assesses whether a contract is or contains a lease at the inception of the contract and recognises a right-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments for all leases, except for leases with a term of 12 months or less which are expensed in the income statement on a straight-line basis over the lease terms. Lease payments exclude irrecoverable VAT which is expensed in the income statement as lease payments are made.

The lease liability, which is included within Other liabilities on the balance sheet, is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the incremental borrowing rate appropriate to the lease term. The lease liability is subsequently measured at amortised cost using the effective interest rate method. Remeasurement of the lease liability occurs if there is a change in the lease payments (when a corresponding adjustment is made to the ROU asset), the lease term or in the assessment of an option to purchase the underlying asset.

At inception, the ROU asset, which is included within Property, plant and equipment on the balance sheet, comprises the lease liability, initial direct costs and the obligations to restore the asset, less any incentives granted by the lessor. The ROU asset is depreciated over the shorter of the lease term or the useful life of the underlying asset and is reviewed for indications of impairment as for owned assets. The obligation to restore the asset is included within Provisions on the balance sheet.

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 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, using conclusions such as the number of claims the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main features.

When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.

Loan commitments are measured as the amount of the loss allowance (determined in accordance with IFRS 9 as described in Credit risk section of the Risk review).

Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.

Share capital

a) Share issue costs

Incremental external costs directly attributable to the issue of new shares are deducted from equity net of related income taxes.

b) Dividends

Dividends on ordinary shares are recognised in equity in the period in which the right to receive payment is established.

Accounting policies relating to comparatives - IAS 39

On 1 January 2018, the Santander UK group adopted IFRS 9, which replaced IAS 39. In accordance with the transition requirements of IFRS 9, comparatives were not restated. The principal accounting policies applied in accordance with IAS 39 for periods before the adoption of IFRS 9 are set out below:

Classification and measurement of financial assets and liabilities - IAS 39

Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander UK group determines the classification of its financial assets and liabilities at initial recognition. Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition.

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.

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.

Available-for-sale financial assets 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. Impairment losses and foreign exchange translation differences on monetary items are recognised in the income statement.

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.

For assets carried at amortised cost, including loans and advances and loans and receivables securities, 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.

For available-for-sale financial assets, the Santander UK group assesses impairment at each balance sheet date, which 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.

IAS 17

On 1 January 2019, Santander UK group adopted IFRS 16, which replaced IAS 17. Having chosen to apply the modified retrospective approach, in accordance with the transition requirements of IFRS 16, comparatives were not restated. The accounting policies for the Santander UK group as lessee applied in accordance with IAS 17 for periods before the adoption of IFRS 16 are set out below:

The Santander UK group as lessee - IAS 17

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.

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 2019, the probability-weighted ECL allowance totalled GBP863m (2018: GBP807m), of which GBP 813 m (2018: GBP789m) related to exposures in Retail Banking, Corporate & Commercial Banking and Corporate Centre, and GBP 50 m (2018: 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.

As described in more detail in the 'Santander UK group level - Credit risk management' section in the Risk review, our CIB segment uses three forward-looking economic scenarios, whereas our other segments use five scenarios. In order to present a consolidated view in a single table, the data for CIB in the table below presents the CIB Upside scenario in the Upside 2 column, the CIB downside scenario in the Downside 2 column, and interpolated data for CIB in the Upside 1 and Downside 1 columns.

 
                                Weighted   Upside   Upside  Base case  Downside  Downside 
                                    GBPm        2        1       GBPm         1         2 
2019                                         GBPm     GBPm                 GBPm      GBPm 
Exposure 
Retail Banking                   206,479  206,479  206,479    206,479   206,479   206,479 
- of which: mortgages            178,788  178,788  178,788    178,788   178,788   178,788 
CCB                               21,855   21,855   21,855     21,855    21,855    21,855 
CIB                               13,456   13,456   13,456     13,456    13,456    13,456 
Corporate Centre                  74,532   74,532   74,532     74,532    74,532    74,532 
 
ECL 
Retail Banking                       591      456      467        485       570     1,148 
- of which: mortgages                218      122      127        137       196       660 
CCB                                  210      156      169        183       219       317 
CIB                                   50       19       34         48        53        58 
Corporate Centre                      129               10         10        13        18 
 
                                       %%                %%                   %% 
Proportion of assets in Stage 
 2 
Retail Banking                       4.7      3.2      3.3        3.3       3.7       8.3 
- of which: mortgages                4.6      3.1      3.1        3.1       3.6       8.7 
CCB                                 10.0      7.4      7.4        7.4       8.5      16.3 
CIB                                  2.9      1.5      1.5        1.5       1.5       1.5 
Corporate Centre                     0.2      0.1      0.1        0.1       0.2       0.3 
==============================  ========  =======  =======  =========  ========  ======== 
 
 
2018                               GBPm     GBPm     GBPm     GBPm     GBPm     GBPm 
Exposure 
Retail Banking                  195,805  195,805  195,805  195,805  195,805  195,805 
- of which: mortgages           169,170  169,170  169,170  169,170  169,170  169,170 
CCB                              22,835   22,835   22,835   22,835   22,835   22,835 
CIB                              17,618   17,618   17,618   17,618   17,618   17,618 
Corporate Centre                 74,690   74,690   74,690   74,690   74,690   74,690 
 
ECL 
Retail Banking                      594      431      452      480      637    1,607 
- of which: mortgages               237      121      131      137      273    1,105 
CCB                                 182      115      135      157      192      302 
CIB                                  188               12       17       22       27 
Corporate Centre                     138                9       11       13       21 
 
                                      %%                %%                %% 
Proportion of assets in Stage 
 2 
Retail Banking                      5.4      3.4      3.5      3.7      4.7     15.1 
- of which: mortgages               5.6      3.4      3.6      3.7      4.9     16.5 
CCB                                 5.5      3.0      3.0      3.1      4.3     10.7 
CIB                                 0.8      0.4      0.4      0.4      0.4      0.4 
Corporate Centre                    0.2      0.1      0.1      0.1      0.2      0.4 
==============================  =======  =======  =======  =======  =======  ======= 
 

Changes to Stage 3 instruments are excluded from the disclosure because they are not specifically sensitive to changes in macroeconomic assumptions.

We have incorporated our post model adjustments into the sensitivity analysis.

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 GBP218m at 31 December 2019 (2018: GBP237m) would have the most significant impact on the ECL allowance. The table below shows the impact on profit before tax of applying an immediate and permanent house price increase / decrease to our base case economic scenario, and assumes no changes to the staging allocation of exposures:

 
                                              Increase/decrease in house 
                                                        prices 
                                           -------------------------------- 
                                              +20%     +10%    -10%    -20% 
Increase/(decrease) in profit before tax      GBPm     GBPm    GBPm    GBPm 
31 December 2019                                16       10    (16)    (43) 
=========================================  =======  =======  ======  ====== 
31 December 2018                                20       12    (20)    (52) 
=========================================  =======  =======  ======  ====== 
 

b) Provisions and contingent liabilities

Significant judgment may be required when accounting for provisions, including in determining whether a present obligation exists and in estimating the probability and amount of any outflows. These judgments are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters. As a result it is often not possible to make reliable estimates of the likelihood and amount of any potential outflows.

The main areas of judgement relating to provisions and contingent liabilities are set out below. For more details, see Notes 27 and 29.

(i) PPI conduct remediation

The most critical factor in determining the level of PPI provision is the volume of claims that fall in scope for Santander UK. The uphold rate is informed by historical experience and the average cost of redress can be predicted reasonably accurately given that management is dealing with a high volume and reasonably homogeneous population.

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, although the level of judgement has reduced with the passing of the FCA deadline of 29 August 2019 for PPI complaints. The key assumption in calculating the provision was the estimated number of complaints that would be received in respect of customers with successful information requests that were still eligible to make a complaint.

Sensitivity of PPI conduct remediation provision

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.

More details can be found in the PPI section of Note 27.

(ii) Other

Included in Regulatory and other provisions in Note 27 is an amount in respect of management's best estimate of liability relating to compliance with certain requirements of the Consumer Credit Act. It also includes an amount in respect of management's best estimate of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints. For both items, Note 29 provides disclosure relating to ongoing factual issues and reviews that could impact the timing and amount of any outflows.

In addition, Note 29 includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited in German dividend tax arbitrage transactions. It also includes disclosure relating to certain leases in which current and former Santander UK group members were the lessor that are currently under review by HMRC in connection with claims for tax allowances.

c) Pensions

The Santander UK group operates a number of defined benefit pension schemes as described in Note 28 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 28.

Sensitivity of defined benefit pension scheme estimates

Had management used different assumptions, a larger or smaller pension remeasurement gain or loss would have resulted that could have had a material impact on the Santander UK group's reported financial position. Detailed disclosures on the actuarial assumption sensitivities of the schemes can be found in the 'Actuarial assumption sensitivities' section in Note 28.

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 GBP6.5m, and Santander Consumer Finance, 
    predominantly a vehicle finance business. 
-  Corporate & Commercial Banking covers multi-sector businesses with an 
    annual turnover typically between GBP6.5m and GBP500m. It offers a wide 
    range of financial services and solutions provided by relationship teams 
    and product specialists based across the UK and through digital and 
    telephony channels. 
-  Corporate & Investment Banking 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. 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 was changed, and the prior periods restated, to report our short term markets business in Corporate Centre rather than in Corporate & Investment Banking. This reflects the run down or transfer to Banco Santander London Branch of the prohibited part of the business in 2018, as part of the transition to our ring-fenced model, with the remaining permitted business forming part of our liquidity risk management function.

Results by segment

 
                                                             Corporate      Corporate 
                                                Retail    & Commercial   & Investment  Corporate 
                                               Banking         Banking        Banking     Centre     Total 
2019                                              GBPm            GBPm           GBPm       GBPm      GBPm 
Net interest income/(expense)                    2,876             359             63        (6)     3,292 
Non-interest income/(expense)                      698              78            112        (7)       881 
Total operating income/(expense)                 3,574             437            175       (13)     4,173 
============================================  ========  ==============  =============  =========  ======== 
Operating expenses before credit impairment 
 losses, provisions and charges                (1,994)           (264)          (171)       (70)   (2,499) 
============================================  ========  ==============  =============  =========  ======== 
Credit impairment losses                         (160)            (37)           (22)       (2 )     (221) 
Provisions for other liabilities and 
 charges                                         (292)            (20)           (17)      (112)     (441) 
Total operating credit impairment losses, 
 provisions and charges(1)                       (452)            (57)           (39)     (114 )     (662) 
============================================  ========  ==============  =============  =========  ======== 
Profit/(loss) before tax                         1,128             116           (35)      (197)     1,012 
============================================  ========  ==============  =============  =========  ======== 
 
Revenue from external customers                  4,311             530            181      (849)     4,173 
Inter-segment revenue                            (737)            (93)            (6)        836         - 
Total operating income/(expense)                 3,574             437            175       (13)     4,173 
============================================  ========  ==============  =============  =========  ======== 
 
Revenue from external customers includes 
 the following fee and commission income 
 disaggregated by income type:(2) 
 - Current account and debit card fees             702              27             29          -       758 
 - Insurance, protection and investments            76               -              -          1        77 
 - Credit cards                                     86               -              -          -        86 
 - Non-banking and other fees(3)                    61              56             71          3       191 
Total fee and commission income                    925              83            100          4     1,112 
Fee and commission expense                       (373)            (23)           (17)      (13 )    ( 426) 
============================================  ========  ==============  =============  =========  ======== 
Net fee and commission income/ (expense)           552              60             83        (9)       686 
============================================  ========  ==============  =============  =========  ======== 
 
Customer loans                                 180,398          16,297          4,114      4,199   205,008 
Total assets(4)                                187,556          16,297          4,727     73,122   281,702 
============================================  ========  ==============  =============  =========  ======== 
Customer deposits                              145,050          18,234          6,101      2,331   171,716 
Total liabilities                              145,917          18,260          6,500     95,008   265,685 
============================================  ========  ==============  =============  =========  ======== 
 
Average number of staff                         20,832           1,796            901         41    23,570 
============================================  ========  ==============  =============  =========  ======== 
 
 
(1)  Credit impairment losses for 2018 and later are calculated on an IFRS 
      9 basis and for 2017 on an IAS 39 basis. 
(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         Banking     Banking(5)   Centre(5)     Total 
2018                                                GBPm            GBPm           GBPm        GBPm      GBPm 
Net interest income                                3,126             403             69           5     3,603 
Non-interest income                                  638              82            183          28       931 
Total operating income                             3,764             485            252          33     4,534 
==============================================  ========  ==============  =============  ==========  ======== 
Operating expenses before credit 
 impairment losses, provisions 
 and charges                                     (1,929)           (258)          (250)       (142)   (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           (20)       (106)     1,545 
==============================================  ========  ==============  =============  ==========  ======== 
 
Revenue from external customers                    4,421             638            297       (822)     4,534 
Inter-segment revenue                              (657)           (153)           (45)         855         - 
Total operating income                             3,764             485            252          33     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)                                  179,572          17,702          8,607      77,491   283,372 
==============================================  ========  ==============  =============  ==========  ======== 
Customer deposits                                142,065          17,606          4,853       2,791   167,315 
Total liabilities                                142,839          17,634          8,885      98,105   267,463 
==============================================  ========  ==============  =============  ==========  ======== 
 
Average number of staff                           21,215           1,732          1,083         175    24,205 
==============================================  ========  ==============  =============  ==========  ======== 
 
Average number of staff                           17,194           1,240          1,006         119    19,559 
==============================================  ========  ==============  =============  ==========  ======== 
 
 
(1)  Credit impairment losses for 2018 and later are calculated on an IFRS 
      9 basis and for 2017 on an IAS 39 basis. 
(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 of our short term markets business has resulted 
      in profit before tax of GBP77m being re-presented in Corporate Centre 
      rather than Corporate & Investment Banking in 2018 (2017: GBP98m). 
 

5. NET TRADING AND OTHER INCOME

 
                                                                                 Group 
                                                                    ----  -----  ----- 
                                                                    2019   2018   2017 
                                                                    GBPm   GBPm   GBPm 
Net trading and funding of other items by the trading 
 book                                                                  6    245    205 
Net gains/(losses) on other financial assets at fair 
 value through profit or loss                                         19    (6)     80 
Net losses on other financial liabilities at fair 
 value through profit or loss                                       (83)   (44)   (97) 
Net gains/(losses) on derivatives managed with assets/liabilities 
 held at fair value through profit or loss                            69  (128)   (17) 
Hedge ineffectiveness                                                  8     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                                   15     19 
Income from operating lease assets                                   124     86     44 
Other                                                                 37   (24)     28 
                                                                     195    182    302 
==================================================================  ====  =====  ===== 
 

Following the implementation of our ring-fencing plans in 2018, assets and liabilities held at fair value through profit or loss, including derivatives, are predominantly used to provide customers with risk management solutions, and to manage and hedge the Santander UK group's own risks, and do not give rise to significant overall net gains/(losses) in the income statement.

'Net trading and funding of other items by the trading book' includes fair value losses of GBP42m (2018: 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 gains of GBP43m (2018: 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 (2018: GBP1m, 2017: GBP1m).

In 2019, 'net profit on sale of financial assets at fair value through other comprehensive income' included additional consideration of GBP15m in connection with the 2017 Vocalink Holdings Limited shareholding sale. In 2017, 'Net profit on sale of available-for-sale assets' included a gain of GBP48m in respect of the sale of the Vocalink Holdings Limited shareholding.

Exchange rate differences recognised in the Consolidated Income Statement on items not at fair value through profit or loss were GBP1,102m income (2018: 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 GBP1,013m expense (2018: 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.

In 2019, our accounting treatment for residual value risk changed. This resulted in a GBP24m reversal of RV provisions recognised in other income (of which GBP22m relates to charges taken in prior periods) which was partially offset by GBP7.5m accelerated depreciation of the underlying asset (prior periods: GBP2.3m). The net adjustment is not considered material and therefore the 2018 accounts were not restated.

6. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES

 
                                                   2019   2018 
                                                   GBPm   GBPm 
Staff costs: 
Wages and salaries                                  852    898 
Performance-related payments                        159    159 
Social security costs                               111    111 
Pensions costs - defined contribution plans          66     67 
                       - defined benefit plans       35     79 
Other share-based payments                            -      3 
Other personnel costs                                40     52 
================================================  =====  ===== 
                                                  1,263  1,369 
Other administration expenses                       693    835 
Depreciation, amortisation and impairment           543    375 
                                                  2,499  2,579 
 ===============================================  =====  ===== 
 

8. Credit IMPAIRMENT LOSSES AND PROVISIONS

 
                                                          2019  2018 
                                                          GBPm  GBPm 
Credit impairment losses:(1) 
Loans and advances to customers                            239   189 
Recoveries of loans and advances, net of collection 
 costs                                                    (40)  (42) 
Off-balance sheet exposures (See Note 27)                   22     6 
                                                           221   153 
========================================================  ====  ==== 
Provisions for other liabilities and charges (excluding 
 off-balance sheet credit exposures) (See Note 27)         435   257 
Provisions for RV and voluntary termination                  6     - 
                                                           441   257 
========================================================  ====  ==== 
                                                           662   410 
========================================================  ====  ==== 
 
 
(1)  Credit impairment losses for 2018 and later are calculated on an IFRS 
      9 basis and for 2017 and earlier on an IAS 39 basis. 
 

9. TAXATION

 
                                             2019  2018(1) 
                                             GBPm     GBPm 
Current tax: 
UK corporation tax on profit for the year     265      408 
Adjustments in respect of prior years        (25)     (20) 
Total current tax                             240      388 
===========================================  ====  ======= 
Deferred tax: 
Charge for the year                            46       16 
Adjustments in respect of prior years         (7)      (5) 
Total deferred tax                             39       11 
===========================================  ====  ======= 
Tax on profit                                 279      399 
===========================================  ====  ======= 
 
 
(1)  Adjusted to reflect the amendment to IAS 12, as described in Note 1. 
 

The standard rate of UK corporation tax was 27% for banking entities and 19% for non-banking entities (2018: 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. Finance Act 2016 introduced a 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 2019 and 2018.

10. DIVIDS ON ORDINARY SHARES

Dividends on ordinary shares declared and paid in the year were as follows:

 
                                                                      Group and                    Group 
                                                                        Company              and Company 
 
                                                           2019        2018 
                                                          Pence       Pence       2019              2018 
                                                      per share   per share       GBPm              GBPm 
In respect of current year 
 - first interim                                           0.53        0.81        164               250 
                        - second interim                   0.49        2.15        151               668 
                                   - third interim            -        0.71          -               221 
===================================================  ==========  ==========  =========  ================ 
                                                           1.02        3.67        315             1,139 
===================================================  ==========  ==========  =========  ================ 
 
 

In 2018, 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.

11. DERIVATIVE FINANCIAL INSTRUMENTS

b) Analysis of derivatives

The table below includes the notional amounts of transactions outstanding at the balance sheet date; they do not represent actual exposures.

 
                                                                                         Group 
                                --------  -------  -----------  --------  -------  ----------- 
                                                          2019                            2018 
                                --------  -------  -----------  --------  -------  ----------- 
                                                          Fair                            Fair 
                                                         value                           value 
                                          -------  -----------            -------  ----------- 
                                Notional                        Notional 
                                  amount   Assets  Liabilities    amount   Assets  Liabilities 
                                    GBPm     GBPm         GBPm      GBPm     GBPm         GBPm 
Derivatives held for trading: 
Exchange rate contracts           14,149      134          200    13,830      454          351 
Interest rate contracts           46,564      718          315    79,038    1,421        1,105 
Equity and credit contracts        2,474      283          160     2,762      251          168 
==============================  ========  =======  ===========  ========  =======  =========== 
Total derivatives held 
 for trading                      63,187    1,135          675    95,630    2,126        1,624 
==============================  ========  =======  ===========  ========  =======  =========== 
Derivatives held for hedging 
==============================  ========  =======  ===========  ========  =======  =========== 
Designated as fair value 
 hedges: 
Exchange rate contracts            1,482      166            2     3,010      357            - 
Interest rate contracts           94,550    1,022        1,488    86,422    1,065        1,315 
==============================  ========  =======  ===========  ========  =======  =========== 
                                  96,032    1,188        1,490    89,432    1,422        1,315 
==============================  ========  =======  ===========  ========  =======  =========== 
Designated as cash flow 
 hedges: 
Exchange rate contracts           28,502    2,023          462    33,901    3,537          200 
Interest rate contracts           17,451      184           35    18,808       46          102 
Equity derivative contracts            -        -            -         -        -            - 
==============================  ========  =======  ===========  ========  =======  =========== 
                                  45,953    2,207          497    52,709    3,583          302 
==============================  ========  =======  ===========  ========  =======  =========== 
Total derivatives held 
 for hedging                     141,985    3,395        1,987   142,141    5,005        1,617 
==============================  ========  =======  ===========  ========  =======  =========== 
Derivative netting(1)                     (1,214)      (1,214)            (1,872)      (1,872) 
==============================  ========  =======  ===========  ========  =======  =========== 
Total derivatives                205,172    3,316        1,448   237,771    5,259        1,369 
==============================  ========  =======  ===========  ========  =======  =========== 
 
 
(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 GBP222m (2018: GBP9m) and 
      the amount of cash collateral paid that had been offset against 
      the gross derivative liabilities was GBP629m (2018: GBP354m). 
 

12. other FINANCIAL ASSETS AT FAIR VALUE through profit or loss

 
                                                    Group 
                                              ----  ----- 
                                              2019   2018 
                                              GBPm   GBPm 
============================================  ====  ===== 
Loans and advances to customers: 
Loans to housing associations                   12     13 
Other loans                                     80     81 
============================================  ====  ===== 
                                                92     94 
Debt securities                                294  3,251 
Equity securities                                -      - 
Reverse repurchase agreements - non trading      -  2,272 
============================================  ====  ===== 
                                               386  5,617 
============================================  ====  ===== 
 

13. LOANS AND ADVANCES TO CUSTOMERS

 
                                                                   Group 
                                                       ----------------- 
                                                           2019     2018 
                                                           GBPm     GBPm 
Loans secured on residential properties                 165,356  157,957 
Corporate loans                                          27,043   27,763 
Finance leases                                            6,264    6,821 
Secured advances                                              -        - 
Other unsecured loans                                     7,096    7,554 
Amounts due from fellow Banco Santander subsidiaries 
 and joint ventures                                       2,366    1,997 
Amounts due from Santander UK Group Holdings 
 plc                                                          8       17 
Amounts due from subsidiaries                                 -        - 
=====================================================   =======  ======= 
Loans and advances to customers                         208,133  202,109 
Credit impairment loss allowances on loans and 
 advances to customers                                    (785)    (751) 
RV and voluntary termination provisions on finance 
 leases                                                    (61)     (69) 
                                                                 ======= 
Net loans and advances to customers                     207,287  201,289 
======================================================  =======  ======= 
 

For movements in expected credit losses, see the Credit risk section of the Risk review.

14. 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 (or for the covered bond programme assigned) and the carrying value of the notes in issue at 31 December 2019 and 2018 are listed below.

 
                                                                                Notes issued 
                                                                                to Santander 
                                                      External notes     UK plc/subsidiaries 
                                      Gross assets          in issue           as collateral 
                                    --------------  ----------------  ---------------------- 
                                      2019    2018     2019     2018        2019        2018 
                                      GBPm    GBPm     GBPm     GBPm        GBPm        GBPm 
Mortgage-backed master trust 
 structures: 
- Holmes                             4,262   4,414    1,931    3,182         463         463 
- Fosse                              3,708   4,646      295      199       1,404          34 
- Langton                            3,076   3,034        -        -       2,354       2,354 
                                    11,046  12,094    2,226    3,381       4,221       2,851 
==================================  ======  ======  =======  =======  ==========  ========== 
Other asset-backed securitisation 
 structures: 
- Motor                                490   1,055      324      738         197         374 
- Auto ABS UK Loans                  1,532   1,468    1,229    1,212         368         316 
                                     2,022   2,523    1,553    1,950         565         690 
==================================  ======  ======  =======  =======  ==========  ========== 
Total securitisation programmes     13,068  14,617    3,779    5,331       4,786       3,541 
==================================  ======  ======  =======  =======  ==========  ========== 
Covered bond programmes: 
 - Euro 35bn Global Covered 
  Bond Programme                    23,323  21,578   19,004   18,653           -           - 
Total securitisation and 
 covered bond programmes            36,391  36,195   22,783   23,984       4,786       3,541 
==================================  ======  ======  =======  =======  ==========  ========== 
Less: held by Santander UK 
 group: 
 - Euro 35bn Global Covered 
  Bond Programme                                          -    (539) 
Total securitisation and 
 covered bond programmes (See 
 Note 25)                                            22,783   23,445 
==================================  ======  ======  =======  =======  ==========  ========== 
 

The following table sets out the internal and external issuances and redemptions in 2019 and 2018 for each securitisation and covered bond programme.

 
                                        Internal      External        Internal        External 
                                       issuances     issuances     redemptions     redemptions 
                                    ------------  ------------  --------------  -------------- 
                                     2019   2018   2019   2018    2019    2018    2019    2018 
                                    GBPbn  GBPbn  GBPbn  GBPbn   GBPbn   GBPbn   GBPbn   GBPbn 
Mortgage-backed master trust 
 structures: 
 - Holmes                               -    0.1      -    1.8       -       -     1.1     0.1 
 - Fosse                              1.4      -    0.1      -       -       -       -     0.4 
Other asset-backed securitisation 
 structures: 
 - Motor                                -      -      -      -     0.2     0.1     0.4     0.1 
 - Auto ABS UK Loans                  0.1      -    0.2    0.4     0.1       -     0.2     0.4 
Covered bond programme                  -      -    2.9    4.3     0.5     0.5     1.5     1.9 
                                      1.5    0.1    3.2    6.5     0.8     0.6     3.2     2.9 
==================================  =====  =====  =====  =====  ======  ======  ======  ====== 
 

27. PROVISIONS

 
                                                                                                Group 
                            Conduct remediation 
                           --------------------- 
 
                                                  FSCS and            Off-balance 
                                           Other      Bank                  sheet  Regulatory 
                               PPI      products      Levy  Property          ECL   and other   Total 
                              GBPm          GBPm      GBPm      GBPm         GBPm        GBPm    GBPm 
At 31 December 2018            246            30        45        37           56          95     509 
Adoption of IFRS 16 (see 
 Note 1)                         -             -         -        17            -           -      17 
========================= 
At 1 January 2019              246            30        45        54           56          95     526 
Additional provisions 
 (see Note 8)                  169             -        86        44           22         166     487 
Provisions released (see 
 Note 8)                         -             -       (5)      (21)            -         (4)    (30) 
Utilisation and other(1)     (226)           (5)      (90)     ( 18)            -        (82)   (421) 
Recharge(2)                      -             -        10         -            -           -      10 
At 31 December 2019            189            25        46        59           78         175     572 
=========================  =======  ============  ========  ========  ===========  ==========  ====== 
To be settled: 
- Within 12 months             189            18        46        43           78         171     545 
- In more than 12 months         -             7         -        16            -           4      27 
                               189            25        46        59           78         175     572 
=========================  =======  ============  ========  ========  ===========  ==========  ====== 
 
 
(1)  Utilisation and other included a transfer from 'PPI' to 'Regulatory 
       and other' in respect of an ongoing legal dispute. No further information 
       has been provided on the basis it would be seriously prejudicial. 
 (2)  This relates to a recharge in respect of the UK Bank Levy paid on behalf 
       of other UK entities of Banco Santander SA. 
 

a) Conduct remediation

2019 compared to 2018

In 2019, we charged an additional GBP169m in respect of PPI:

 
-  In Q2 2019 we reported an additional provision of GBP70m reflecting 
    an increase in PPI claim volumes, additional industry activities and 
    having considered guidance provided by the FCA and our specific approach 
    to PPI claims, in advance of the PPI claims deadline on 29 August 2019. 
-  In Q3 2019, and in line with industry experience, we received unprecedented 
    volumes of information requests in August 2019 and saw a significant 
    spike in both these requests and complaints in the final days prior 
    to the complaint deadline. Our best estimate of the additional provision 
    required was GBP99m. 
 

d) Off-balance sheet ECL

Provisions include expected credit losses relating to guarantees given to third parties and undrawn loan commitments.

e) Regulatory and other

Regulatory and other provisions principally comprised amounts in respect of regulatory charges (including fines), operational loss and operational risk provisions, restructuring charges and litigation and related expenses. A number of uncertainties exist with respect to these provisions given the uncertainties inherent in operational, restructuring and litigation matters that affect the amount and timing of any potential outflows with respect to which provisions have been established. These provisions are reviewed at least quarterly.

At 31 December 2019 the balance included an amount of GBP68m (2018: GBP58m) that arose from a systems related historical issue identified by Santander UK, relating to compliance with certain requirements of the Consumer Credit Act. This provision is based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice, and reflects our best estimate at 31 December 2019 of potential costs in respect of the identified issue. As detailed in Note 29, there are aspects of the issue which remain under review.

The balance also included an amount in respect of our best estimate of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI portfolio of complaints, further described in Note 29. No further information regarding the best estimate is provided on the basis that it would be seriously prejudicial to Santander UK's interests in connection with the dispute.

Regulatory and other provisions charged in 2019 included GBP65m of transformation charges in 2019, relating to the multi-year project described above in 'c) Property'. In addition to charges largely related to the restructuring of our branch network, further charges were largely associated with the announced plans to reshape our Corporate & Commercial Banking business. Regulatory and other provisions charged in 2019 also included GBP68m of operational loss and operational risk provisions.

28. RETIREMENT BENEFIT PLANS

The amounts recognised in the balance sheet were as follows:

 
                                                         Group 
                                                   2019   2018 
                                                   GBPm   GBPm 
Assets/(liabilities) 
Funded defined benefit pension scheme - surplus     669    842 
Funded defined benefit pension scheme - deficit   (239)   (75) 
Unfunded pension and post retirement medical 
 benefits                                          (41)   (39) 
Total net assets                                    389    728 
================================================  =====  ===== 
 

a) Defined contribution pension plans

The Santander UK group operates a number of defined contribution pension plans. The assets of the defined contribution pension plans are held and administered separately from those of the Santander UK group. The majority of employees are members of a defined contribution Master Trust, LifeSight. This Master Trust is the plan into which eligible employees are enrolled automatically. The assets of the LifeSight Master Trust are held in separate trustee-administered funds.

An expense of GBP66m (2018: 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 2019, 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. The Scheme covers 11% (2018: 13%) of the Santander UK group's current 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 
                                    ----- 
                              2019   2018 
                              GBPm   GBPm 
Net interest income          ( 23)    (7) 
Current service cost            34     41 
Past service and GMP costs       1     41 
Administration costs             8      8 
                             =====  ===== 
                                20     83 
===========================  =====  ===== 
 

Movements in the present value of defined benefit scheme obligations were as follows:

 
                                                          Group 
                                                 2019      2018 
                                                 GBPm      GBPm 
At 1 January                                ( 10,804)  (11,583) 
Current service cost paid by Santander UK 
 plc                                             (22)      (27) 
Current service cost paid by subsidiaries        (12)      (14) 
Current service cost paid by fellow Banco           -         - 
 Santander subsidiaries 
Interest cost                                   (308)     (282) 
Employer salary sacrifice contributions          ( 9)       (6) 
Past service cost                                 (1)       (1) 
GMP equalisation cost                               -      (40) 
Remeasurement due to actuarial movements 
 arising from: 
- Changes in demographic assumptions            (42 )        56 
- Experience adjustments                           42      (15) 
                                               (1,377 
- Changes in financial assumptions                  )       675 
Benefits paid                                     375       433 
At 31 December                               (12,158)  (10,804) 
==========================================  =========  ======== 
 

Movements in the fair value of the schemes' assets were as follows:

 
                                                             Group 
                                                      2019    2018 
                                                      GBPm    GBPm 
At 1 January                                        11,532  11,746 
Interest income                                        331     289 
Contributions paid by employer and scheme 
 members                                               212     184 
Contributions paid by fellow Banco Santander             -       - 
 subsidiaries 
Administration costs paid                              (8)     (8) 
Return on plan assets (excluding amounts included 
 in net interest expense)                              855   (246) 
Benefits paid                                       ( 375)   (433) 
At 31 December                                      12,547  11,532 
==================================================  ======  ====== 
 

Actuarial assumptions

The principal actuarial assumptions used for the defined benefit schemes were:

 
                                           Group and Company 
                                         ------------------- 
                                              2019      2018 
                                                 %         % 
To determine benefit obligations: 
- Discount rate for scheme liabilities         2.1       2.9 
- General price inflation                      3.0       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   27.3 
- Females                                          29.8   30.1 
Longevity at 60 for future pensioners currently 
 aged 40, on the valuation date: 
- Males                                            28.9   28.7 
- Females                                          31.3   31.6 
================================================  =====  ===== 
 

Discount rate for scheme liabilities

The rate used to discount the retirement benefit obligation for accounting purposes is based on the annual yield at the balance sheet date of high-quality corporate bonds on that date. There are only a limited number of higher quality Sterling-denominated corporate bonds, particularly those that are longer-dated. Therefore, in order to set a suitable discount rate, we need to construct a corporate bond yield curve. The model which we use for constructing the curve uses corporate bond data but excludes most convertible and asset-backed bonds. The curve is then constructed from this data by extrapolating the horizontal forward curve from 30 years, with the level of this forward rate being the average of the fitted forward rates over the 15 to 30 year range. When considering an appropriate assumption, we project forward the expected cash flows of the Scheme and adopt a single equivalent cash flow weighted discount rate, subject to management judgement.

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.

General salary increase

From 1 March 2015, a cap on pensionable pay increases of 1% each year was applied to staff in the Scheme.

Expected rate of pension increase

The pension increase assumption methodology uses a stochastic model, which is calibrated to consider both the observed historical volatility term structure and derivative pricing. The model allows for the likelihood that high or low inflation in one-year feeds into inflation remaining high or low in the next year.

Mortality assumptions

The mortality assumptions are based on an independent analysis of the Scheme's actual mortality experience, carried out as part of the triennial actuarial valuation, together with recent evidence from the Continuous Mortality Investigation. An allowance is then made for expected future improvements to life expectancy based on the Continuous Mortality Investigation Tables.

In 2019, the methodology for setting the demographic assumptions was changed to better represent current expectations, following a review carried out by the Trustee as part of the 2019 triennial valuation and a separate review conducted on early retirement experience. These reviews resulted in changes in assumptions for mortality, commutation, family statistics and early retirement. At 31 December 2019, this had a negative impact of GBP44m on the accounting surplus.

29. CONTINGENT LIABILITIES AND COMMITMENTS

 
                                                             Group 
                                                    ------  ------ 
                                                      2019    2018 
                                                      GBPm    GBPm 
Guarantees given to subsidiaries and fellow              -       - 
 subsidiaries of Santander UK Group Holdings 
 plc 
Guarantees given to third parties                    1,198   1,610 
Formal standby facilities, credit lines and 
 other commitments with original term to maturity 
 of: 
- One year or less                                  18,248   8,550 
- Later than one year                               22,149  31,561 
                                                    41,595  41,721 
==================================================  ======  ====== 
 

For segmental and credit risk staging analysis relating to off-balance sheet exposures, see the credit quality table in the 'Santander UK group level - credit risk review' section.

Other legal actions and regulatory matters

Santander UK engages in discussion, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.

In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition, where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made.

Payment Protection Insurance

In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is ongoing and remains in its early stages. The dispute relates to the liability for PPI mis-selling complaints relating to pre-2005 PPI policies underwritten by Financial Insurance Company Ltd (FICL) and Financial Assurance Company Ltd (FACL) and involves two Santander UK plc subsidiaries, Santander Cards UK Limited and Santander Insurance Services Limited (the Santander Entities). During the relevant period, FICL and FACL were owned by Genworth Financial International Holdings, Inc. In July 2015 AXA S.A. (AXA) acquired FICL and FACL from Genworth. In July 2017, Santander UK plc notified AXA that the Santander Entities did not accept liability for losses on PPI policies relating to this period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with FICL and FACL pursuant to which it agreed to handle complaints on their behalf, and FICL and FACL agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis.

A related dispute between AXA and (1) Genworth Financial International Holdings, Inc. and (2) Genworth Financial, Inc. (Genworth) concerning, inter alia, the proper construction of an alleged obligation to make payment on demand of a sum equal to 90% of all applicable PPI mis-selling losses (the Construction Issue) in a sale and purchase agreement dated 17 September 2015 (SPA) was determined by the High Court (Court) in December 2019. The Santander Entities were joined as third parties in connection with an application for declaratory relief by Genworth. This application related to Genworth's assertion that upon any payment to AXA under the SPA, Genworth would have rights of subrogation against the Santander Entities (the Subrogation Issue). The Court found against Genworth and in favour of AXA on the Construction Issue, and against Genworth and in favour of the Santander Entities in relation to the Subrogation Issue. In documents before the Court, AXA's claim was stated to be GBP265 million as at the end of 2018, noting further significantly larger sums would be demanded. During the Court hearing in November 2019, AXA noted that it had sought further sums, bringing the outstanding sum of its claim against Genworth to around GBP350 million at that time, with such figure likely to increase significantly.

Genworth's application for permission to appeal was refused by the Court. Genworth made an application for permission to appeal to the Court of Appeal on 10 January 2020. The application for permission to appeal has not yet been determined. Most recently in its US SEC filing of 27 February 2020, Genworth noted that AXA had at that date submitted invoices claiming aggregate losses of approximately US$560 million.

More generally, there are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is not currently practicable to reliably predict the resolution of the matter including timing or the significance of the possible impact.

The Regulatory and other provision in Note 27 includes our best estimate of Santander UK's liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial to Santander UK's interests in connection with the dispute.

In addition, and in relation to PPI more generally, there are legal claims being made by Claims Management Companies challenging the FCA's industry guidance on the treatment of Plevin /recurring non-disclosure assessments. No provision has been made as it is not possible to make a reliable estimate of the possible outflow of economic resource relating to this risk.

German dividend tax arbitrage transactions

In June 2018 the Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a feature of a specific German settlement mechanism through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.

During 2019 we have continued to cooperate with the German authorities and, with the assistance of external experts, to progress an internal investigation into the matters in question. From Santander UK plc's perspective the investigation is focused principally on the period 2009-2011 and remains on-going. There remain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact. Any potential losses, claims or expenses suffered or incurred by Santander Financial Services plc in respect of these matters have been fully indemnified by Santander UK plc, as part of the ring-fencing transfer scheme between Santander UK plc, Santander Financial Services plc and Banco Santander SA.

38. FINANCIAL INSTRUMENTS

a) Measurement basis of financial assets and liabilities

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.

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 2019 and 2018, including their levels in the fair value hierarchy - Level 1, Level 2 and Level 3. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Cash and balances at central banks, which consist of demand deposits with the Bank of England, together with cash in tills and ATMs, have been excluded from the table as the carrying amount is deemed an appropriate approximation of fair value. The fair value of the portfolio of UK Government debt securities, included in other financial assets at amortised cost, is the only material financial instrument categorised in Level 1 of the fair value hierarchy.

 
                                                                                                            Group 
                           ------  ------  -------  -------  --------  ------  ------  -------  -------  -------- 
                                                                 2019                                        2018 
                                              Fair                                        Fair 
                                             value           Carrying                    value           Carrying 
                            Level   Level    Level                      Level   Level    Level 
                                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                   -       -  211,796  211,796   207,287       -       -  204,061  204,061   201,289 
Loans and advances 
 to banks                       -   1,739      116    1,855     1,855       -   2,739       60    2,799     2,799 
Reverse repurchase 
 agreements - non 
 trading                        -  23,634        -   23,634    23,636       -  21,130        -   21,130    21,127 
Other financial 
 assets at amortised 
 cost                       6,575     535        -    7,110     7,056   6,390     721        -    7,111     7,229 
                            6,575  25,908  211,912  244,395   239,834   6,390  24,590  204,121  235,101   232,444 
Liabilities 
Deposits by customers           -      95  181,918  182,013   181,883       -      21  178,160  178,181   178,090 
Deposits by banks               -  13,956      407   14,363    14,353       -  16,243      989   17,232    17,221 
Repurchase agreements 
 - non trading                  -  18,292        -   18,292    18,286       -  10,923        -   10,923    10,910 
Debt securities 
 in issue                       -  42,694        -   42,694    41,129       -  47,787        -   47,787    46,692 
Subordinated liabilities        -   4,220        -    4,220     3,528       -   3,877        -    3,877     3,601 
                                -  79,257  182,325  261,582   259,179       -  78,851  179,149  258,000   256,514 
 

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 2019 and 2018, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.

 
                                                                                                                 Group 
                                                                      2019                             2018 
                                            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 
Derivative 
 financial            Exchange rate 
 instruments           contracts                -    2,317      6    2,323       -    4,323     25    4,348          A 
 Interest rate                                                                                                     A & 
  contracts                                     -    1,915      9    1,924       -    2,526      6    2,532          C 
 Equity and credit                                                                                                 B & 
  contracts                                     -      223     60      283       -      188     63      251          D 
 Netting                                        -  (1,214)      -  (1,214)       -  (1,872)      -  (1,872) 
                                                -    3,241     75    3,316       -    5,165     94    5,259 
Other financial       Loans and advances 
 assets at FVTPL       to customers             -        -     92       92       -       12     82       94          A 
                                                                                                                    A, 
                                                                                                                   B & 
 Debt securities                                -        -    294      294      18    2,339    894    3,251          D 
                      Equity securities         -        -      -        -       -        -      -        -          B 
 Reverse repurchase 
  agreements - 
  non trading                                   -        -      -        -       -    2,272      -    2,272          A 
                                                -        -    386      386      18    4,623    976    5,617 
Financial assets 
 at FVOCI             Debt securities       9,209      482      -    9,691  12,487      742      -   13,229          D 
 Loans and advances 
  to customers                                  -        -     56       56       -        -     73       73          D 
                                            9,209      482     56    9,747  12,487      742     73   13,302 
Total assets 
 at fair value                              9,209    3,723    517   13,449  12,505   10,530  1,143   24,178 
 
Liabilities 
Derivative 
 financial            Exchange rate 
 instruments           contracts                -      660      4      664       -      528     23      551          A 
 Interest rate                                                                                                     A & 
  contracts                                     -    1,836      2    1,838       -    2,515      7    2,522          C 
 Equity and credit                                                                                                 B & 
  contracts                                     -      134     26      160       -      132     36      168          D 
 Netting                                        -  (1,214)      -  (1,214)       -  (1,872)      -  (1,872) 
                                                -    1,416     32    1,448       -    1,303     66    1,369 
Other financial 
 liabilities          Debt securities 
 at FVTPL              in issue                 -    1,099      6    1,105       -      983      7      990          A 
 Structured deposits                            -      406     29      435       -      104     29      133          A 
 Repurchase agreements 
  - non trading                                 -        -      -        -       -    2,110      -    2,110          A 
 Collateral and 
  associated financial 
  guarantees                                    -      147     26      173       -    3,040     13    3,053          D 
                                                -    1,652     61    1,713       -    6,237     49    6,286 
Total liabilities 
 at fair value                                  -    3,068     93    3,161       -    7,540    115    7,655 
 

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:

 
                                             2019  2018 
                                             GBPm  GBPm 
Risk-related: 
- Bid-offer and trade specific adjustments   (12)    13 
- Uncertainty                                  17    36 
- Credit risk adjustment                        6     9 
- Funding fair value adjustment                 6     4 
                                               17    62 
Model-related                                   -     5 
                                               17    67 
 

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 2019 and 2018:

 
                                                                      Assets                             Liabilities 
                                                    Other                                         Other 
                                                financial  Financial                          financial 
                                                   assets     assets                        liabilities 
                                  Derivatives    at FVTPL   at FVOCI   Total  Derivatives      at FVTPL        Total 
                                         GBPm        GBPm       GBPm    GBPm         GBPm          GBPm         GBPm 
At 1 January 2019                          94         976         73   1,143         (66)          (49)        (115) 
Total gains/(losses) recognised 
 in profit or loss: 
- Fair value movements                     18         (9)        (2)       7          (6)           (6)         (12) 
- Foreign exchange and 
 other movements                            -           6          -       6            -           (6)          (6) 
Transfers in                                -          11          -      11            -             -            - 
Netting (1)                                 -      ( 430)          -  ( 430)            -             -            - 
Additions                                   2         188          -     190            -           (3)         (3 ) 
Sales                                       -           -          -       -            -             -            - 
Settlements                              (39)       (356)       (15)   (410)           40             3           43 
At 31 December 2019                        75         386         56     517         (32)          (61)         (93) 
 
Gains/(losses) recognised 
 in profit or loss relating 
 to assets and liabilities 
 held at the end of the 
 year                                      18         (3)        (2)      13          (6)          (12)         (18) 
 
At 1 January 2018                          64         838        199   1,101         (63)           (6)         (69) 
Total gains/(losses) 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) 
 
Gains/(losses) recognised 
 in profit or loss relating 
 to assets and liabilities 
 held at the end of the 
 year                                      23         (5)        (5)      13            6          (14)          (8) 
 
 
(1)  This relates to the effect of netting on the fair value of the credit 
      linked notes due to a legal right of set-off between the principal amounts 
      of the senior notes and the associated cash deposits. For more, see 
      'ii) Credit protection entities' in Note 19. 
 

40. EVENTS AFTER THE BALANCE SHEET DATE

There have been no significant events between 31 December 2019 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements.

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

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