UNITED STATES
SECURITIES AND EXCHANGE COMMISION
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
December 31, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
OR
| o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Date of event requiring this shell company report to |
Commission file number 0-25670
Santander UK plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
(Jurisdiction of incorporation or organization)
2 Triton Square, Regent’s Place, London NW1 3AN, England
(Address of principal executive offices)
(Address of principal executive offices)
Julian Curtis
2 Triton Square, Regent’s Place, London NW1 3AN, England
Tel +44 (0) 870 607 6000
Fax +44 (0) 20 7756 5645
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
2 Triton Square, Regent’s Place, London NW1 3AN, England
Tel +44 (0) 870 607 6000
Fax +44 (0) 20 7756 5645
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12 (g) of the Act.
None
Securities registered or to be registered pursuant to Section 15 (d) of the Act.
7.95% Term Subordinated Securities due October 26, 2029
Subordinated Guarantee by Santander UK plc (as successor in interest to Abbey National plc) of the
8.963% Non-Cumulative Perpetual Preferred Limited Partnership Interests issued by Abbey National
Capital LP I
Subordinated Guarantee by Santander UK plc (as successor in interest to Abbey National plc) of the
8.963% Non-Cumulative Trust Preferred Securities issued by Abbey National Capital Trust I
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common
stock as of the close of the period covered by the annual report.
|
10 3/8% Non-cumulative Preference Shares of nominal value £1 each
|
200,000,000 | |||
|
8 5/8% Non-cumulative Preference Shares of nominal value £1 each
|
125,000,000 | |||
|
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
o
U.S. GAAP
þ
International Financial Reporting Standards as issued by the
International Accounting Standards Board
o
Other
If “Other” has been checked in response to the previous question indicate by check mark which
financial statement item the registrant has elected to follow.
Item 17
o
Item 18
o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
Business Review and Forward-looking Statements
Chief Executive’s Review
Overview
We have seen an excellent performance from all business areas in 2009 despite continued
turbulent market conditions. Our personal financial services revenue and profit growth improved
considerably and were significantly ahead of our UK peer group on these measures. We also continue to
transfer best practices and to create synergies with other Santander group units and to manage our costs well.
We have delivered an increase of 52% in statutory profit after tax, which was underpinned by
sustained but prudent lending and continued growth in retail and corporate deposits. At the same
time we have improved overall margins in a low interest rate environment, through pricing and
hedging strategies reflecting the increased cost of funding. Each of the businesses strengthened
and advanced, allowing us to achieve double digit trading income growth for the second year in
succession. As in 2008, this was balanced against controlled costs, despite on-going investment,
which meant that we achieved double digit operating jaws (operating income growth less operating
cost growth) for the fifth consecutive year. Our trading cost:income ratio has improved further to
42% (2008: 50% including Alliance & Leicester) and is now ‘best in class’ when compared to our UK
peers.
Business Performance
Our business continues to thrive and our market position has been strengthened by the additions
of Alliance & Leicester plc and the Bradford & Bingley savings business. We now have market shares
in our retail business of around 10% across our core markets of mortgages, savings and bank
accounts. The business combination with Alliance & Leicester also accelerated our growth into the
small and medium-sized enterprises (SMEs) market to an estimated market share of 3%, a key step
forward as we continue to develop the range of services we provide and move towards our ambition of
being a full service commercial bank.
Our core business strategy continues to serve us well and has not changed. We continue to
focus on our customers, driving efficiencies across the combined businesses and reinvesting these
cost savings in growth projects for the future and new innovative and value-for-money products and
service to our customers. This, together with excellent service, will drive cross-sales to our 25
million UK customers, and increase customer loyalty. In 2009, our ability to offer better
value-for-money products resulted in more ‘best-buy’ mentions in the UK press than any other UK
bank, and has supported a significant uplift in new business.
Highlights in 2009 (relative to 2008 on a trading basis including Alliance & Leicester)
include:
| • | opening 1.1 million new current accounts, which exceeded our target of 1 million new current accounts, and represented a 21% increase from 2008; | |
| • | increasing investment sales by 25% compared to a wider market decline estimated at 13%, driven by a combination of improved advisor coverage across the network and competitive offers; | |
| • | our commitment to remain a consistent mortgage lender in difficult times, with a gross lending market share of 18.4% (2008: 13.9%) and £7.6bn of net lending in 2009 (2008: £6.1bn), increasing our estimated market share of mortgage stock by 0.6% to 13.5%; | |
| • | increasing lending to SMEs by 16% compared to 2008. This has been possible through leveraging relationships via the 20 regional corporate centres acquired as part of Alliance & Leicester, and extending the product range and number of small business advisers; | |
| • | growth in net deposits of £14.9bn across Retail, Corporate and Private Banking customers, demonstrating that Santander UK is seen as a “safe haven” for UK savers; and | |
| • | strong revenue performance in Global Banking & Markets, taking advantage of favourable market conditions in interest rate and equity markets, as well as further building its client-focused franchise. |
Integration and Rebrand
In January 2010, we completed the rebranding of Abbey and Bradford & Bingley’s savings business
to Santander, and our customers are already seeing the benefit of the increased number of Santander
branches (now around 1,000). In addition, we have extended the range of our value-for-money
products and services available to customers of Bradford & Bingley’s savings business.
The integration of Alliance & Leicester is on track and we expect to complete the transfer of
its branches and customers onto Partenon, Santander’s IT system, by the end of the year, which will
coincide with the rebranding of Alliance & Leicester to Santander. By the end of the year, our
customers will have access to approximately 1,300 branches. We are on target to deliver by 2011
the £180m of cost savings that we identified when we acquired Alliance & Leicester.
Funding, Liquidity and Capital
We have continued to manage our balance sheet prudently, having reduced our reliance on
short-term funding over the course of 2009 by increasing our customer deposits and by further
reducing non-core assets, such as the Treasury asset portfolio acquired with Alliance & Leicester
plc. At the same time, Santander UK has been able to support the UK economy
with continued strong commercial net lending growth which has been more than matched by a larger
increase in net deposit flows. In doing so this has improved our loan to deposit ratio, including
equity, to 126% (136% in 2008).
2
Business Review and Forward-looking Statements
Chief Executive’s Review
continued
From the start of 2009, Santander UK has raised all of the wholesale funding needs of the
enlarged Santander UK Group via Abbey National Treasury Services plc, the Group’s face to the
wholesale markets.
Although the global financial system has experienced difficult credit and liquidity conditions
since August 2007, recent months have seen an improvement in market conditions with wholesale
funding spreads tightening, albeit not to levels pre-turmoil. Santander UK has taken advantage of
improving market conditions to raise additional wholesale funding, in particular, two well received
benchmark sized transactions to wholesale investors in the second half of 2009, and in March 2010
the first publicly-placed mortgage-backed securitisation transaction from a UK bank since 2007
(other recent transactions from UK banks had included an investor put). The transaction was
denominated in both pounds sterling and euro and raised approximately £1.4bn. Whilst the various UK
Government schemes to support the banking sector were welcomed by Santander UK we have chosen not
to participate in them.
In 2009, the UK Financial Services Authority, our main UK regulator announced its new
liquidity regime. Implementation of this regime has begun, and we will work closely with the
regulator to ensure that a balance between prudent liquid asset holdings and continued lending
growth is maintained. Over the course of 2009, Santander UK’s liquidity policy has seen its
holdings of liquid assets further increase compared to the end of 2008, which was itself greatly
increased compared to the holdings at the start of 2008.
During the course of 2009, we strengthened our capital ratios. Our Core Tier 1 capital ratio
increased to 6.8% (2008: 6.2%), and our Tier 1 capital ratio increased to 9.5% (2008: 8.5%). These
improvements have been delivered without the need to raise capital, and were achieved through
retained earnings after a dividend payout of £500m, de-risking of non-growth Alliance & Leicester
portfolios and our unsecured personal loan portfolio, and some improvement to capital models.
Key Financial Highlights
Santander UK has delivered statutory profit after tax of £1,245m, an increase of 52% over £819m
in 2008. We have achieved the financial targets for 2009, with trading income growth of 20% and a
further improvement in the trading cost:income ratio
from 50% (including Alliance &
Leicester) to 42% in the year.
Summary Highlights
Personal Financial Services trading profit before tax (management’s preferred profit measure,
described in the Business Review — Summary on page 16) increased by £447m, 31% to £1,912m compared
to £1,465m in 2008.
| • | Personal Financial Services trading income was up 20%, driven by a strong performance across all business divisions, with the commercial banking spread improving to 1.82% (2008: 1.44%). |
| • | Retail Banking income benefited from both asset and deposit growth driven by competitively-priced, low risk lending with deposit acquisition across a broad range of products (savings, banking and structured products). In addition, mortgage margins improved throughout 2009 as a result of lower interest rates and sustained new business margins in excess of stock margin, and increased standard variable rate asset. | ||
| • | Corporate Banking income was ahead of 2008 driven by SME customer lending for the combined businesses up 16%, with targeted lending through the 20 regional centres acquired as part of Alliance & Leicester. This lending was more than offset by deposit inflows as companies sought to diversify their banking relationships. | ||
| • | Private Banking income was also ahead of 2008 reflecting growth in all business areas, in particular Cater Allen and Abbey International due to increased customer deposits. | ||
| • | Global Banking & Markets had a good year, driven by sustained growth in customer activity. Results benefited from growth in equity products activity linked to the sales of investments through retail channels as customers sought improved returns in the low interest rate environment. In addition, there was an increase in Short Term Markets activity mainly during the first half of the year when spreads were volatile in the market. |
| • | Personal Financial Services trading expenses were in line with the prior year. Increases in the cost base as a result of the acquisition of Bradford & Bingley’s savings business in September 2008, and investments in growth businesses, have been offset by savings achieved on the removal of duplicated back office and support functions across the business. Excluding Bradford & Bingley’s savings business, costs were down by 3% and Alliance & Leicester costs decreased by 17%. | |
| • | The combination of tightly controlled costs and strong revenue growth resulted in a further improvement in the trading cost:income ratio to 42%. | |
| • | As expected in light of the recessionary conditions experienced in the UK for much of 2009, the trading provisions charge increased, up 64% reflecting the effects of falls in house prices and increased unemployment. However, the second half of the year saw a flattening of recent trends, most noticeably in relation to mortgages with a slower growth in arrears. This reflects, in part, the better than expected unemployment trends and the persistent low interest rate environment, but also collection efforts and the overall quality of the book. We have preserved conservative levels of coverage (provisions as a proportion of non-performing loans), and our arrears and repossession levels have remained significantly better than industry benchmarks from the Council of Mortgage Lenders. | |
| • | The Alliance & Leicester corporate and treasury asset portfolios are performing in line with expectations at the time of acquisition. Balances in the run down portfolios have been reduced by 19% and 36% respectively, through natural maturities and some disposals of assets, with a focus on those considered to be higher risk. |
3
Business Review and Forward-looking Statements
Chief Executive’s Review
continued
Strategic context
We have made tremendous progress transforming our UK business and our 2009 results are the
culmination of five years’ hard work. Since becoming part of the Santander Group in November 2004,
we have:
| • | introduced Santander’s IT system, Partenon, one of the most significant banking IT programmes seen in the UK; | |
| • | improved our profitability and revenue generation so that today we believe that we are the most profitable personal financial services provider in the UK; | |
| • | reduced the trading cost:income ratio from 73% to 42%, now well below the sector average of approximately 57% and best in class when compared to our UK peers; | |
| • | used our competitive cost advantage to rejuvenate our product range to deliver more competitive value-for-money products than our peer group in the UK; | |
| • | introduced and maintained a measured and prudent approach to lending; | |
| • | increased the scale of our UK operations with the combination of Santander UK, Alliance & Leicester and Bradford & Bingley’s savings business; and | |
| • | completed the rebranding of Abbey and Bradford & Bingley branches, with Alliance & Leicester to be rebranded by the end of 2010. |
While we have seen a significant increase in new business in 2009, our strategy going forward will
be to
reward our existing 25 million customers with even better value-for-money products,
giving them a compelling reason to do more business with us. In this context, we launched a zero
fee current account targeting existing and new mortgage and investment customers, and we have
further plans for 2010.
In 2009 and 2008, we won Euromoney’s ‘Best UK Bank’ award. Banco Santander, S.A. won
Euromoney’s ‘Best Bank in Western Europe’ award in 2009 and its ‘Best Global Bank’ award in 2008.
In addition, in 2009 we won The Banker Award for ‘Best Bank in the UK’ and Banco Santander, S.A.
won its ‘Best Bank in the World’ award. The focus on customers and service are core Santander
values against which good progress has been made — and efforts remain channeled to deliver further
improvements in 2010.
Looking ahead
Rebranding to Santander is a significant step towards achieving our vision of becoming the best
commercial bank in the UK, and we expect to be able to demonstrate further progress in 2010.
More recent data indicates that the UK economy is starting to emerge from recession and both
the Bank of England and the UK Government are expecting that the UK economy will grow in 2010. The
pace of that growth may well be slow and economic prospects, both in the UK and globally, remain
subject to considerable uncertainty.
Our business model will not change and we expect to reduce our cost to income ratio even
further. We will continue to focus on managing risk and prudent lending while growing our
business and transferring best practices to and from other units of the Santander group. We will continue to prioritise improving our service and putting our customers at the
heart of everything we do. Customer service remains a priority, to build on the improvements made
in 2009.
Over the next few years we want to increase the number of products each of our customers holds
through increasingly competitive and market-leading products. We’ll launch similar products and
initiatives to the Zero current account to reward our 25 million customers and we are confident
this approach will continue to set us apart from other UK banks.
Summary
2009 has been a very successful year for Santander UK, which would not have been possible
without the continued support, dedication and commitment of our staff, as well as from many people and units of the Santander group, of which I am very proud.
Together, we have built a great business and I would like to take this opportunity to thank them
for their outstanding contribution in 2009.
As the UK emerges from recession, we remain cautiously optimistic about our business
prospects. We believe that 2010 will mark a further significant step in our business as we
complete the integration and rebranding of Alliance & Leicester. Against this background, and with the ongoing
benefit from our Group strength, we believe that our UK business continues to be well-positioned
for the challenges and opportunities ahead.
António Horta-Osório
Chief Executive
Chief Executive
4
Business Review and Forward-looking Statements
Forward looking Statements
Santander UK plc (formerly Abbey National plc) (the ‘Company’) and its subsidiaries (together
‘Santander UK’ or the ‘Group’) may from time to time make written or oral forward-looking
statements. Examples of such forward-looking statements include, but are not limited to:
| • | projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios; | |
| • | statements of plans, objectives or goals of Santander UK or its management, including those related to products or services; | |
| • | statements of future economic performance; and | |
| • | statements of assumptions underlying such statements. |
Words such as ‘believes’, ‘anticipates’, ‘expects’, ‘intends’, ‘aims’, ‘plans’, ‘targets’ and
similar expressions are intended to identify forward-looking statements but are not the exclusive
means of identifying such statements.
By their very nature, forward-looking statements cannot be objectively verified, are
speculative and involve inherent risks and uncertainties, both general and specific, and risks
exist that the predictions, forecasts, projections and other forward-looking statements will not be
achieved. Santander UK cautions readers that a number of important factors could cause actual
results to differ materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements made by Santander UK or on Santander UK’s behalf. Some
of these factors are considered in detail in the Risk Management section on page 49 and the Risk
Factors section on page 192 and may include:
| • | inflation, interest rate, exchange rate, basis spread, market and monetary fluctuations; | |
| • | lack of liquidity in funding markets and sources of funding in periods of economic and political crisis; | |
| • | the effect of, and changes to, government supervision and regulation of financial services institutions in response to recent market conditions and turmoil in the broader financial services industry; | |
| • | extraordinary governmental actions, including nationalisation of financial services institutions in response to recent market conditions and turmoil in the broader financial services industry; | |
| • | the effects of market conditions and extent of economic activity in the UK and other geographical markets; | |
| • | the length and severity of current market turmoil and its impact on credit quality, consumer confidence, market volatility, loan delinquencies and defaults; | |
| • | the effects of counterparty defaults on the financial services industry; | |
| • | the effects of competition in the geographic and business areas in which Santander UK conducts operations; | |
| • | changes in consumer spending, saving and borrowing habits in the UK; | |
| • | illiquidity and volatility in UK real estate markets; | |
| • | the impact of lower than expected investment returns on the funding of private and public sector defined benefit pensions; | |
| • | the effects of changes in laws, regulations, taxation or accounting standards or practices, or the effects of the interpretation of laws by the courts; | |
| • | the ability to increase market share and control expenses; | |
| • | the timely development and acceptance of new Santander UK products and services and the perceived overall value of these products and services by customers; | |
| • | acquisitions and disposals; | |
| • | the ability to integrate recently acquired businesses and to realise anticipated saving and operational benefits from such integration; | |
| • | technological changes; | |
| • | the possibility of foreign exchange controls, expropriation, nationalisation or confiscation of assets in countries in which Santander UK conducts operations; | |
| • | consumer perception as to the continuing availability of credit and price competition; and | |
| • | Santander UK’s success at managing the risks of the foregoing. |
Santander UK cautions that the foregoing list of important factors is not exhaustive. When relying
on forward-looking statements to make decisions with respect to Santander UK, investors and others
should carefully consider the foregoing factors and other uncertainties and events. Such
forward-looking statements speak only as of the date on which they are made and are based on the
knowledge, information available and views taken on the date on which they are made; such
knowledge, information and views may change at any time. Santander UK does not undertake any
obligation to update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Written forward-looking statements may appear in documents filed with the US Securities and
Exchange Commission, including this Annual Report and Accounts, reports to shareholders and other
communications. The US Private Securities Litigation Reform Act of 1995 contains a safe harbour for
forward-looking statements on which Santander UK relies in making such disclosures.
5
Business and Financial Review
Business Overview
This Business and Financial Review contains forward-looking statements that involve inherent
risks and uncertainties. Actual results may differ materially from those contained in such
forward-looking statements. See “Forward-looking Statements” on page 5.
General
Santander UK plc (formerly Abbey National plc) (the ‘Company’) and its subsidiaries (together,
‘Santander UK’ or the ‘Group’) operate primarily in the UK, under UK law and regulation and are
part of Banco Santander, S.A. (together with its subsidiaries, ‘Santander’). Santander UK is a
significant financial services provider in the UK, being the second largest residential mortgage
lender and the third largest savings brand following the combinations with Alliance & Leicester plc
and Bradford and Bingley’s savings business, operating across the full range of personal financial
services.
The principal executive office and registered office of Santander UK plc and Abbey National
Treasury Services plc is 2 Triton Square, Regent’s Place, London NW1 3AN. Santander UK’s telephone
number is +44 (0) 870-607-6000. The designated agent for service of process on Santander UK in the
United States is CT, 111 Eighth Avenue, New York, NY 10011. See “Business and Financial Review —
Tangible fixed assets” for further information on Santander UK’s properties.
Summary history
The Abbey National Building Society (‘the Society’) was formed in 1944 with the merger of two
long-standing building societies. In 1988, Abbey National plc was incorporated as a bank and in
1989 the Society transferred business to Abbey National plc as part of the conversion and listing
on the London Stock Exchange. In 2003, the brand name was shortened to Abbey. A list of the
Company’s principal subsidiaries and their country of incorporation can be found on page 139.
On 12 November 2004, Banco Santander, S.A. completed the acquisition of the entire issued
ordinary share capital of the Company, implemented by means of a scheme of arrangement under
Section 425 of the Companies Act 1985, making the Company a wholly-owned subsidiary of Banco
Santander, S.A.. Banco Santander, S.A. is one of the largest banks in the world by market
capitalisation. Founded in 1857, Banco Santander, S.A. has more than 90 million customers and over
14,000 branches.
In September 2008, following the announcement by HM Treasury to take Bradford & Bingley plc
into public ownership, the retail deposits, branch network and its related employees transferred,
under the provisions of the Banking (Special Provisions) Act 2008, to the Company. All of Bradford
& Bingley plc’s customer loans and treasury assets, including all its mortgage assets, were taken
into public ownership. The transfer to the Company consisted of the £20bn retail deposit base with
2.7 million customers, as well as Bradford & Bingley plc’s direct channels including 197 retail
branches, 141 agencies (distribution outlets in third party premises) and related employees. The
acquisition price was £612m, including the transfer of £208m of capital relating to offshore
entities. The transfer of Bradford & Bingley plc’s customers and their retail deposits further
strengthened the Group’s retail customer deposit base and franchise.
In December 2008, following the acquisition by Banco Santander, S.A. of Alliance & Leicester
plc, the Company injected £950m of capital into Alliance & Leicester plc through a subscription
for: (i) 234,113,712 new Alliance & Leicester plc ordinary shares for cash at £2.99 per ordinary
share; (ii) US$220m undated subordinated notes issued by Alliance & Leicester plc; and (iii) euro
115m undated subordinated notes issued by Alliance & Leicester plc. Previously, in October 2008,
the Company subscribed for US$100m undated floating rate subordinated notes issued by Alliance &
Leicester plc. As a result of the subscription for ordinary shares, the Company held 35.6% of the
issued ordinary share capital of Alliance & Leicester plc at 31 December 2008.
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for newly issued ordinary shares of the Company.
Accordingly, the Company is now the immediate parent company of Alliance & Leicester plc. As
described in Note 47 to the Consolidated Financial Statements, the Company has accounted for the
transfer of Alliance & Leicester plc with effect from 10 October 2008, the date on which Alliance &
Leicester plc was acquired by Banco Santander, S.A..
These business combinations allow the Group to deliver increased critical mass in the UK
through greater market share.
In 2009 and 2008, the Company won Euromoney’s ‘Best UK Bank’ award. Banco Santander, S.A. won
Euromoney’s ‘Best Bank in Western Europe’ award in 2009 and its ‘Best Global Bank’ award in 2008.
In addition, in 2009 the Company won The Banker Award for ‘Best Bank in the UK’ and Banco
Santander, S.A. won its ‘Best Bank in the World’ award.
As of 11 January 2010, the Company, which includes the Bradford & Bingley savings business,
changed its name to Santander UK plc and now operates under the Santander brand name. Alliance &
Leicester will also be rebranded as Santander by the end of the year, as information technology
changes ensure any Santander customer in the UK can transact in all its UK branches. The move is
delivering a significant advantage for customers as they have been able to use 1,000 branches from
early 2010 and will be able to use up to 1,300 branches by the end of the year. The change also
reflects Santander group’s policy to operate under a single brand.
Corporate purpose and strategy
Santander UK’s purpose is to maximise value for its shareholder, Banco Santander, S.A., by
focusing on offering a full commercial banking service in the UK providing value-for-money products
to customers. With the continuing support of Banco Santander, S.A., Santander UK aims to be the
best commercial bank in the UK.
6
Business and Financial Review
Business Overview
continued
Executive responsibility
Santander UK’s management structure is headed by António Horta-Osório, Chief Executive, and
consists of a number of business and support divisions. The business divisions consist of:
| • | Retail Banking — offers residential mortgages, savings and banking and other personal financial products to customers throughout the UK. Alison Brittain heads Retail Distribution as well as business banking and e-commerce, while Antonio Lorenzo is responsible for the Intermediary channel. | |
| • | Corporate Banking — offers banking services principally to small and mid-sized (‘SME’) UK companies. It also contains operations in run down. This division is headed by Steve Pateman. | |
| • | Global Banking & Markets — provides financial markets sales, trading and risk management services, as well as manufacturing retail structured products. This division is headed by Luis de Sousa. | |
| • | Private Banking — offers private banking and other specialist banking services. On 10 March 2010, the self-invested personal pension plan and the WRAP portfolio management service businesses were sold. This division is headed by Antonio Lorenzo. |
The support divisions consist of:
| • | Retail Products and Marketing — responsible for integrating and gaining the maximum value from Santander UK’s products, marketing and brand communications to serve Santander UK’s customers better. This division is headed by Miguel-Ángel Rodríguez-Sola. | |
| • | Human Resources — responsible for delivering the human resources strategy and personnel support. This division is headed by Karen Fortunato. | |
| • | Manufacturing — responsible for all information technology, cost control and operations activity, including service centres. This division is headed by Juan Olaizola. | |
| • | Risk — responsible for ensuring that the board of directors (“Board”) and senior management team of Santander UK are provided with an appropriate risk policy and control framework, and to report any material risk issues to the Risk Committee and the Board. This division is headed by Juan Colombás. | |
| • | Internal Audit — responsible for supervising the compliance, effectiveness and efficiency of Santander UK’s internal control systems to manage its risks. This division is headed by Jorge de la Vega. |
In addition there are a number of corporate units:
| • | Group Infrastructure — This unit includes Asset & Liability Management, Group Capital and Funding and reports to Antonio Lorenzo. | |
| • | Strategy & Planning, Financial Accounting & Economics — This unit reports to Antonio Lorenzo. | |
| • | Corporate Services — This unit includes Legal, Secretariat, Compliance and Regulatory Risk Management and reports to Karen Fortunato. | |
| • | Service Quality — This unit reports to Miguel-Ángel Rodríguez-Sola. | |
| • | Communications — This unit is headed by Matthew Young. | |
| • | Santander Universities in the UK — This unit is headed by Miguel-Ángel Rodríguez-Sola, with oversight in line with the global Universities structure. |
Competitive environment, future trends and outlook
The economic environment in 2009 remained very difficult, with falling house prices, volatile
share prices, rising unemployment, and difficulties facing banks, homeowners and savers. The UK’s
retail banks underwent further significant changes, with the UK Government increasing its holdings
of shares in The Royal Bank of Scotland Group plc and Lloyds Banking Group plc. The UK Government
continues to support UK banks during the current market turmoil through the Special Liquidity
Scheme, the Asset Protection Scheme, the Credit Guarantee Scheme and the UK Banking Act 2009.
Santander UK’s main competitors are other UK retail banks, building societies and other
financial services providers such as insurance companies, supermarket chains and large retailers.
The market remains highly competitive, driven largely by market incumbents. Management expects such
competition to continue in response to competitor behaviour, consumer demand, technological
changes, the impact of consolidation, regulatory actions and other factors.
2010 is expected to be another difficult year for the UK economy. Although the UK economy has
begun to show signs of emerging from recession, unemployment is predicted to remain high, resulting
in continuing difficulties for banks, homeowners and savers. The outcome of the European Union’s
review of the UK Government’s support for The Royal Bank of Scotland Group plc and Lloyds Banking
Group plc may also trigger further restructuring of the retail banking sector in the UK. Santander
UK continues to benefit from the strength of its parent company, Banco Santander, S.A. and, as part
of Santander, management remains confident of Santander UK’s strength and potential to continue
growing despite continuing challenging conditions in some of its core personal financial services
markets. A detailed description of
management’s basis for concluding that Santander UK remains a going concern is set out in the
Directors’ Report — Going Concern on page 89.
7
Business and Financial Review
Business Overview
continued
Personal Financial Services (‘PFS’)
The overview below reflects the reporting structure in place during 2009 in accordance with
which the segmental information in the Business and Financial Review has been presented. In this
report, the Retail Banking, Corporate Banking, Global Banking & Markets, Private Banking, and Group
Infrastructure segments are referred to as the Personal Financial Services businesses.
Retail Banking
Retail Banking consists of residential mortgages, savings, banking and consumer credit, online
banking and financial services through cahoot, general insurance, Santander Business Banking
(formerly known as Abbey Business), asset management and credit cards.
Residential Mortgages
Following the transfer of Alliance & Leicester plc to the Company in January 2009, Santander UK is
now the second largest provider of residential mortgages in the UK measured by outstanding
balances, providing mortgage loans for house purchases as well as home improvement loans to new and
existing mortgage customers.
Mortgage loans are offered in two payment types. Repayment mortgages require both principal
and interest to be repaid in monthly instalments over the life of the mortgage. Interest-only
mortgages require monthly interest payments and the repayment of principal at the end of the
mortgage term. This can be arranged via a number of investment products including Individual
Savings Accounts and pension policies, or by the sale of the property.
Santander UK’s mortgage loans are usually secured by a first mortgage over property and are
typically available over a 25-year term, although there is no minimum term. Variable rate products
charge interest at variable rates, including trackers which track the Bank of England base rate and
those determined at the discretion of Santander UK by reference to the general level of market
interest rates and competitive forces in the UK mortgage market. Fixed rate products offer a
predetermined interest rate, generally fixed for between two and five years, after which they bear
interest at standard variable rates. The majority of new mortgage business is through fixed rate
business, normally with an incentive period for the first two to five years. In line with the rest
of the UK market, a significant proportion (although reduced compared with the previous year) of
mortgages are repaid at the end of the fixed or incentive period, with the customer moving to a new
incentive product. The remainder stay on Santander UK’s standard variable rate.
Savings
Following the acquisition of Bradford & Bingley’s savings business in September 2008 and the
transfer of Alliance & Leicester plc to the Company in January 2009, Santander UK is now the third
largest deposit taker in the UK and provides a wide range of retail savings accounts in the UK,
including on-demand, notice, and investment accounts, Individual Savings Accounts, and capital
guaranteed products. Interest rates on savings in the UK are primarily set with reference to the
general level of market interest rates and the level of competition for such funds.
Banking and Consumer Credit
Santander UK offers a range of personal banking services including current accounts, credit cards
and unsecured personal loans. Credit scoring is used for initial lending decisions. Behavioural
scoring is used for certain products for further lending decisions.
cahoot
cahoot is the Group’s separately branded, e-commerce retail banking and financial services
provider.
General Insurance
The range of non-life insurance products distributed by Santander UK includes property (buildings
and contents) and payment protection. Residential home insurance remains the primary type of policy
offered and is sold through the branch network, the internet and over the telephone, as well as
being sold by mortgage intermediaries, often at the time a mortgage is taken out.
Santander Business Banking
Santander Business Banking offers a range of banking services to small businesses in the UK.
Asset Management
Retail Banking earns a commission on products sold through its agreement with a sister company,
Santander Asset Management UK Limited.
Credit Cards
Santander UK credit cards are issued through a sister company outside the Group, Santander Cards
Limited. Retail Banking earns a commission from Santander Cards Limited on every credit card sold.
Corporate Banking
Corporate Banking provides a range of banking services through its network of Regional Business
Centres and specialist businesses. Following the transfer of Alliance and Leicester plc to
Santander UK plc by Banco Santander, S.A. a broad range of banking products is now offered
including loans, current accounts, deposits, treasury services, asset finance, cash transmission,
trade finance and invoice discounting. The Regional Business Centres have seen significant growth
in their customer base in 2009 and primarily service small and medium-sized UK companies. The
specialist businesses within Corporate Banking service customers in various business sectors
including Real Estate, Social Housing, and Infrastructure.
Corporate Banking is also responsible for managing the run down of certain portfolios,
including aviation and shipping. Prior to its disposal on 8 December 2008, it was also responsible
for Porterbrook, its rolling stock leasing
business. 100% of Porterbrook Leasing Company Limited and its subsidiaries were sold to a
consortium of investors including Antin Infrastructure Partners (the BNP Paribas sponsored
infrastructure fund), Deutsche Bank AG, London Branch and Lloyds Banking Group plc, for a cash
consideration of approximately £1.6bn with Santander UK providing £0.6bn medium-term, senior loan
funding to the acquisition vehicle.
8
Business and Financial Review
Business Overview
continued
Global Banking & Markets
Global Banking & Markets is principally structured into two business areas: Rates and Equity.
Rates cover sales and trading activity for fixed income derivatives. Equity comprises the Equity
Derivatives, Property Derivatives and Short Term Markets areas. Equity and residential property
derivatives activities include the manufacture of structured products sold to retail customers both
by Santander UK and by other financial institutions. Short Term Markets runs the securities
lending/borrowing and repurchase agreement (‘repo’) businesses and retains a US branch for funding
purposes.
In 2008, the US securities financing business was closed. Previously, Global Banking & Markets
also operated a credit derivatives business, but given the lack of activity in the credit markets
beginning in 2007, the business was closed and its activities consolidated in Spain with the
equivalent Banco Santander, S.A. unit with effect from 1 January 2008.
Private Banking
Private Banking consists of Abbey National International Limited, Alliance & Leicester
International Limited, Bradford & Bingley International Limited and Santander UK’s majority
interest in Santander Private Banking UK Limited. On 17 December 2007, Santander UK sold 49% of its
shareholding in Santander Private Banking UK Limited (consisting of James Hay, Cater Allen Limited
and Abbey Stockbrokers Limited) to Santander PB UK (Holdings) Limited, a direct subsidiary of Banco
Santander, S.A., for a total cash consideration of £203m. The companies affected were Cater Allen
Limited, Abbey Stockbrokers Limited, James Hay Holdings Limited, and their subsidiaries. On 10
March 2010, Santander Private Banking UK Limited completed the disposal of James Hay Holdings
Limited, together with its five subsidiary companies, by the sale of 100% of James Hay Holdings
Limited’s shares to IFG UK Holdings Limited, a subsidiary of IFG Group for a cash consideration of
approximately £39m. The IFG Group provides independent financial advisory, fund management and
pension administration services in Ireland and the UK.
Offshore Deposit-Taking Businesses: Abbey, Alliance & Leicester and Bradford & Bingley
International
Abbey National International Limited uses the Abbey International brand. Its office is in Jersey,
with a focus on attracting deposits by offering a range of savings accounts denominated in
sterling, US dollars and euro. Alliance & Leicester International Limited is based in the Isle of
Man, with a focus on attracting deposits from both retail and corporate customers via savings
accounts denominated in sterling, US dollars and euro. Bradford & Bingley International Limited is
also based in the Isle of Man with a focus on attracting deposits from both retail and corporate
customers via savings accounts predominantly denominated in sterling.
Cater Allen
Cater Allen Limited, trading as Cater Allen Private Bank, provides financial services products to
individuals and businesses. The business attracts clients by marketing to introducers, including
independent financial advisers.
Abbey Stockbrokers
Abbey Stockbrokers Limited, trading as Abbey Sharedealing, provides a direct share trading service
for customers. Customers buy and sell shares on their account with the help of the dealers at Abbey
Sharedealing. No advice is provided and all trades are on an execution-only basis.
James Hay
James Hay provided administration services for self-invested pension plans and the WRAP portfolio
management product (which combines all of a client’s investments into a single manageable account)
to end customers mainly via independent financial advisers and branded financial service providers.
As noted above, this business was sold on 10 March 2010.
Group Infrastructure
Group Infrastructure consists of Asset and Liability Management (‘ALM’), which is also
responsible for Group Capital and Funding, and the Treasury asset portfolio of the Alliance &
Leicester group. ALM is responsible for managing the Group’s structural balance sheet shape and,
in conjunction with the Risk Division, tactical liquidity risk management. This includes short-term
and medium-term funding, covered bond and securitisation programmes. ALM’s responsibilities also
include Retail Banking’s product and structural exposure to interest rates and, in that role, it is
a link between Retail Banking and Global Banking & Markets. ALM recommends and helps to implement
Board, Asset and Liability Management Committee and Risk Committee policies for all aspects of
balance sheet management — formulating guidance for, and monitoring, the overall balance sheet
shape, including maturity profile. Group Capital is responsible for the return on the Group’s
capital, reserves, preference shares and subordinated debt. Funding is responsible for the
provision of funding, both to other businesses within the Group and to fellow subsidiaries of Banco
Santander, S.A..
Santander UK plc and Abbey National Treasury Services plc had a shelf registration statement
with the US Securities and Exchange Commission, which expired in December 2008. The possibility of
filing a new registration statement is being kept under review. Additionally, as part of its
prudent contingent funding arrangements, ALM ensures that Santander UK has access to the central
bank facilities made available by the Bank of England, the Swiss National Bank, the US Federal
Reserve and indirectly the European Central Bank. Further information is set out in detail in the
Balance Sheet Business Review — Sources of Liquidity on page 45.
9
Business and Financial Review
Business Review — Summary
The results discussed below are not necessarily indicative of Santander UK’s results in future
periods. The following information contains certain forward-looking statements. See
“Forward-looking Statements” on page 5. The following discussion is based on and should be read in
conjunction with the Consolidated Financial Statements elsewhere in this Annual Report and
Accounts.
Executive Summary
Santander UK has prepared this Business and Financial Review in a manner consistent with the
way management views the business as a whole. As a result, Santander UK presents the following key
sections to the Business and Financial Review:
| • | Business Review Summary — this contains an explanation of the basis of Santander UK’s results and any potential changes to that basis in the future; a summary Income Statement with commentary; a summary of the nature of adjustments between Santander UK’s statutory basis of accounting (as described in the Accounting Policies section on pages 109 to 123 and Santander UK’s management basis of accounting (known as the “trading” basis); | |
| • | Key Performance Indicators — this contains a description of the key measures used by management in assessing the success of the business against its strategies and objectives; | |
| • | Personal Financial Services — this contains a supplementary summary of the results, and commentary thereon, by Income Statement line item on a trading basis, for each segment. Additional information is provided for the Retail Banking segment due to its significance to the Group’s results; | |
| • | Other Material Items — this contains information about the statutory to trading basis adjustments; and | |
| • | Balance Sheet Business Review — this contains an analysis of Santander UK’s balance sheet, including: |
| • | Off-Balance Sheet disclosures — a summary of Santander UK’s off-balance sheet arrangements, their business purpose, and importance to Santander UK; | ||
| • | Capital disclosures — an analysis of Santander UK’s capital needs and availability; and | ||
| • | Liquidity disclosures — an analysis of Santander UK’s sources and uses of liquidity and cash flows. |
Basis of results presentation
The Group’s business is managed and reported on the basis of the following segments:
| • | Retail Banking; | |
| • | Corporate Banking; | |
| • | Global Banking & Markets; | |
| • | Private Banking; and | |
| • | Group Infrastructure. |
In 2009, the Bradford & Bingley offshore deposit-taking business was managed and reported as part
of Private Banking rather than Retail Banking as in 2008. The segmental analysis of the Group’s
results for 2008 has been amended to reflect this change. In addition, in 2009, the Group’s
transfer pricing arrangements were updated to reflect the greater benefit of retail deposits in a
period of higher funding costs. Prior years’ segmental analyses have been adjusted for consistency.
In this report, the Retail Banking, Corporate Banking, Global Banking & Markets, Private Banking
and Group Infrastructure segments are referred to as the Personal Financial Services (“PFS”)
businesses.
Critical Factors Affecting Results
Critical accounting policies and areas of significant management judgement
The preparation of Santander UK’s Consolidated Financial Statements requires management to make
estimates and judgements 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 estimates and judgements on an ongoing basis. Management
bases its estimates and judgements on historical experience and on other factors that are believed
to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Estimates and judgements that are considered important to the
portrayal of Santander UK’s financial condition including, where applicable, quantifications of the
effects of reasonably possible ranges of such estimates and judgements are set out in the
Accounting Policies in the Consolidated Financial Statements.
Impact of the current credit environment
Further information about the impact of the current credit environment is contained in the Risk
Management Report on page 77, in addition to information relating to the valuation of financial
instruments included in the Group’s critical accounting policies disclosures referred to above.
Profit on disposal of Group undertakings
No profits or losses were made on the disposal of Group undertakings (2008: £40m, 2007: £7m) or
on the sale of non-controlling interests in subsidiary undertakings (2008: £nil, 2007: £105m)
during the year.
Significant acquisitions and disposals
The 2009 results included significant contributions from Alliance & Leicester, (which was
transferred to the Company on 9 January 2009) and the Bradford & Bingley savings business (acquired
in September 2008), as described in the Business Overview.
Current and future accounting developments under IFRS
Details can be found in the Accounting Policies on page 109 of the Consolidated Financial
Statements.
10
Business and Financial Review
Business Review — Summary
continued
Group Summary
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for Santander UK plc newly issued ordinary shares.
Accordingly, Santander UK plc is now the immediate parent company of Alliance & Leicester. As
described in Note 47 to the Consolidated Financial Statements, in the absence of authoritative
guidance under International Financial Reporting Standards (‘IFRS’) for accounting for transactions
between entities under common control, the transfer has been accounted for in a manner consistent
with group reconstruction relief under UK Generally Accepted Accounting Practice (‘UK GAAP’). As a
result, the transfer of Alliance & Leicester has been accounted for by the Company with effect from
10 October 2008, the date on which Banco Santander, S.A. acquired Alliance & Leicester. The Group’s
Consolidated Financial Statements for the year ended, and as at 31 December 2008 have been amended
to reflect this treatment, where significant, as described in Note 47.
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Net interest income
|
3,412 | 1,772 | 1,499 | |||||||||
|
Non-interest income
|
1,284 | 1,232 | 1,283 | |||||||||
|
Total operating income
|
4,696 | 3,004 | 2,782 | |||||||||
|
Administrative expenses
|
(1,848 | ) | (1,343 | ) | (1,369 | ) | ||||||
|
Depreciation and amortisation
|
(260 | ) | (202 | ) | (205 | ) | ||||||
|
Total operating expenses excluding provisions and charges
|
(2,108 | ) | (1,545 | ) | (1,574 | ) | ||||||
|
Impairment losses on loans and advances
|
(842 | ) | (348 | ) | (344 | ) | ||||||
|
Provisions for other liabilities and charges
|
(56 | ) | (17 | ) | — | |||||||
|
Total operating provisions and charges
|
(898 | ) | (365 | ) | (344 | ) | ||||||
|
Profit before tax
|
1,690 | 1,094 | 864 | |||||||||
|
Taxation charge
|
(445 | ) | (275 | ) | (179 | ) | ||||||
|
Profit for the year
|
1,245 | 819 | 685 | |||||||||
|
|
||||||||||||
|
Attributable to:
|
||||||||||||
|
Equity holders of the parent
|
1,190 | 811 | 685 | |||||||||
|
Non-controlling interest
|
55 | 8 | — | |||||||||
|
|
||||||||||||
|
Core Tier 1 capital ratio
(1)
(%)
|
6.8 | % | 6.2 | % | 5.4 | % | ||||||
|
Tier 1 capital ratio
(1)
(%)
|
9.5 | % | 8.5 | % | 7.3 | % | ||||||
|
Risk weighted assets
(2)
|
67,438 | 63,425 | 68,562 | |||||||||
| (1) | From 1 January 2008, the Group has managed its capital requirements on a Basel II basis, as described in Note 50 to the Consolidated Financial Statements. 2007 has been presented on a Basel I basis. | |
| (2) | In accordance with the requirements of the UK Financial Services Authority, this includes 35.6% of Alliance & Leicester plc’s risk weighted assets at 31 December 2008, reflecting Santander UK’s ownership of that percentage of Alliance & Leicester plc’s ordinary share capital on that date, as described in Business Overview — Summary History. |
Profit before tax of £1,690m increased from £1,094m in 2008 (2007: £864m). Material movements
by line include:
Net interest income
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
3,090 | 1,587 | 1,449 | |||||||||
|
Corporate Banking
|
208 | (28 | ) | (42 | ) | |||||||
|
Private Banking
|
139 | 105 | 89 | |||||||||
|
Group Infrastructure
|
(25 | ) | 108 | 3 | ||||||||
|
|
3,412 | 1,772 | 1,499 | |||||||||
2009 compared to 2008
Net interest income of £3,412m compared to £1,772m in 2008 increased by £1,640m. Of the total
increase, £840m represented the inclusion of the net interest income in 2009 of Alliance &
Leicester. By segment, the movements were:
| • | Retail Banking net interest income of £3,090m increased by £1,503m from £1,587m in 2008. Of the total increase, £760m represented the inclusion of the net interest income in 2009 of Alliance & Leicester. The remaining increase of £743m was largely driven by balanced growth in customer lending and deposits across a mix of products combined with effective margin management, as well as a 17% growth in bank account liability balances and hedging strategies which helped to offset the impact of lower interest rates. In terms of lending, unsecured lending balances continued to decline, but were more than offset by net mortgage lending of £7.6bn in 2009. The increase in mortgage lending resulted in the Group taking an 18% share of the gross mortgage lending market in the UK in 2009, with lending written at margins above stock margin and with an emphasis on targeting lower loan-to-value segments. In addition, income from existing mortgage balances increased as more customers reverted to standard variable rate, and margins improved in both the mortgage and unsecured loan portfolios. |
11
Business and Financial Review
Business Review — Summary
continued
| • | Corporate Banking net interest income of £208m increased by £236m from £(28)m in 2008. Of the total increase, £92m represented the inclusion of the net interest income in 2009 of Alliance & Leicester. The remaining increase of £144m reflected in part the sale of the Porterbrook businesses early in December 2008 (net interest income in 2008 included interest expense of £76m incurred by the Porterbrook businesses, whereas its associated leasing income was classified as non-interest income). The balance of the increase in net interest income in 2009 reflected continued benefit from higher asset margins as new business lending and pricing was altered to reflect the market environment in terms of funding cost and competitors’ de-leveraging. Net interest income also improved as a result of robust growth of both assets and liabilities. | |
| • | Private Banking net interest income of £139m increased by £34m from £105m in 2008. Of the total increase, £8m represented the inclusion of the net interest income in 2009 of Alliance & Leicester. The remaining increase of £26m was primarily due to the benefit of new transfer pricing arrangements on deposits acquired in the year combined with balance growth, more than offsetting an increased cost of acquisition. | |
| • | Group Infrastructure net interest income/(expense) of £(25)m decreased by £133m from £108m in 2008. Of the total decrease, £20m represented the inclusion of the net interest expense in 2009 of Alliance & Leicester. The remaining decrease of £113m reflected an increase in funding costs during the year, a lower return on liquid assets, and changes to transfer pricing arrangements to reflect current market conditions that benefited the operating business units. |
2008 compared to 2007
Net interest income of £1,772m compared to £1,499m in 2007 increased by £273m, driven by a
combination of asset growth and improved Commercial Banking spread up four basis points:
| • | Retail Banking net interest income of £1,587m increased by £138m from £1,449m in 2007, which benefited from strong asset growth of 10% in challenging market conditions, and our continued focus on effective margin management for both mortgages and customer deposits. Lending growth was focused on high quality prime residential lending at lower LTV and improved retention at attractive margins. | |
| • | Corporate Banking net interest income/(expense) of £(28)m increased by £14m from £(42)m in 2007, driven by continued prudent growth in lending whilst taking advantage of opportunities in the market to improve margins. Furthermore, there was significant growth in deposits from corporate clients, further strengthening the Group’s balance sheet. Overall, net interest income/(expense) for 2007 and 2008 was a net charge as it included interest expense incurred by the Porterbrook businesses that were sold early in December 2008, whereas its leasing income and depreciation were classified as non-interest income. | |
| • | Private Banking net interest income of £105m increased by £16m from £89m in 2007, reflecting growth in all business areas, in particular Cater Allen and Abbey International which were driven by increased customer deposits. | |
| • | Group Infrastructure net interest income of £108m increased by £105m from £3m in 2007 benefiting from higher earnings within Group Infrastructure on retained profits and the additional share capital injection of £1bn in October 2008, prior to its transfer into Alliance & Leicester plc in December 2008. |
Non-interest income
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
683 | 609 | 635 | |||||||||
|
Corporate Banking
|
237 | 290 | 266 | |||||||||
|
Global Banking & Markets
|
380 | 327 | 260 | |||||||||
|
Private Banking
|
34 | 35 | 34 | |||||||||
|
Group Infrastructure
|
(50 | ) | (29 | ) | 88 | |||||||
|
|
1,284 | 1,232 | 1,283 | |||||||||
2009 compared to 2008
Non-interest income of £1,284m increased by £52m compared to £1,232m in 2008. The inclusion of the
non-interest income in 2009 of Alliance & Leicester resulted in an increase of £413m. By segment,
the movements were:
| • | Retail Banking non-interest income of £683m increased by £74m from £609m in 2008. Of the total increase, £179m represented the inclusion of the non-interest income in 2009 of Alliance & Leicester. The remaining decrease of £105m was largely due to lower fees on unsecured lending products, as part of our stated strategy to reduce unsecured lending exposures, as well as lower fees from current accounts due to repricing. In addition, mortgage fees were adversely impacted by a reduction in the volume of mortgage redemptions given decreased activity in the market as a result of declining house prices and lower levels of supply. | |
| • | Corporate Banking non-interest income of £237m decreased by £53m from £290m in 2008. Non-interest income increased by £184m as a result of the inclusion of the non-interest income in 2009 of Alliance & Leicester. However, this was more than offset by a decrease of £265m reflecting the inclusion in non-interest income in 2008 of the leasing income relating to the Porterbrook businesses which were sold early in December 2008. In addition, new business lending has generated increases in both fees and cross-selling of Global Banking & Markets products. | |
| • | Global Banking & Markets non-interest income of £380m increased by £53m from £327m in 2008, reflecting strong performances in the equity business (linked to sales of retail products through the branch network) and short term markets business, which benefited from a favourable trading environment available from wider spreads in an illiquid market. |
12
Business and Financial Review
Business Review — Summary
continued
| • | Private Banking non-interest income of £34m decreased slightly from £35m in 2008. Alliance & Leicester contributed £1m in 2009. The remaining decrease was principally due to lower annual, transaction and new business fees. | |
| • | Group Infrastructure non-interest expense of £50m increased by £21m from £29m in 2008. Alliance & Leicester contributed £49m of non-interest income in 2009. The remaining decrease of £70m in the year reflected mark-to-market losses. Substantial mark-to-market gains arose in the second half of 2008 from movements in interest rates, which were more than offset by losses due to widening asset spreads. In 2009, the mark-to-market gains reversed, but the credit spreads did not change significantly, resulting in the recognition of losses. |
2008 compared to 2007
Non-interest income of £1,232m
compared to £1,283m in 2007 decreased by £51m. The decrease is largely due to the profit on sale received in 2007 from the part sale of PFS subsidiaries, not
repeated in 2008.
| • | Retail Banking non-interest income of £609m decreased slightly by £26m from £635m in 2007. Despite difficult market conditions, Retail Banking continued to broaden its cross-selling activity, with increased commission from credit cards and investments. Growth in these areas was offset by lower mortgage redemption volumes, lower unsecured lending and continued pressure on current account charges. | |
| • | Corporate Banking non-interest income of £290m increased by £24m from £266m in 2007 as new business lending generated increases in both fees and cross-selling of Global Banking & Markets products, which were partly offset by the cessation of operating lease rental income as a result of the sale of the Porterbrook businesses early in December 2008. | |
| • | Global Banking & Markets non-interest income of £327m increased by £67m from £260m in 2007 reflecting strong performances in both Rates and Equity business, due to increased transactional flow arising from close co-operation with other parts of Santander UK and the beneficial trading environment available from diverging spreads in an illiquid market. | |
| • | Private Banking non-interest income of £35m was broadly in line with £34m in 2007, reflecting increased fees in James Hay offsetting lower income in Abbey International due to the one-off property sales in 2007. | |
| • | Group Infrastructure non-interest income/(expense) of £(29)m decreased by £117m from £88m in 2007, principally due to a decrease in gains on the part sale of PFS subsidiaries of £70m. In addition, Group Infrastructure non-interest income decreased due to a decline in income caused by the termination of the protection business reported in this segment in 2007. |
Administrative expenses
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
1,332 | 996 | 1,063 | |||||||||
|
Corporate Banking
|
168 | 45 | 30 | |||||||||
|
Global Banking & Markets
|
101 | 104 | 111 | |||||||||
|
Private Banking
|
66 | 58 | 60 | |||||||||
|
Group Infrastructure
|
181 | 140 | 105 | |||||||||
|
|
1,848 | 1,343 | 1,369 | |||||||||
2009 compared to 2008
Administrative expenses of £1,848m (2008: £1,343m) increased by £505m. Of the total increase, £501m
represented the inclusion of the administrative expenses in 2009 of Alliance & Leicester. By
segment, the movements were:
| • | Retail Banking administrative expenses of £1,332m increased by £336m from £996m in 2008. Of the total increase, £301m represented the inclusion of the administrative expenses in 2009 of Alliance & Leicester. A further £60m of the increase was due to costs related to the Bradford & Bingley savings business since its acquisition in September 2008. The remaining administrative expenses decrease was largely due to the removal of duplications across back office and support functions due to the integration of Alliance & Leicester and the Bradford & Bingley savings business. | |
| • | Corporate Banking administrative expenses of £168m increased by £123m from £45m in 2008. Of the total increase, £128m represented the inclusion of the administrative expenses in 2009 of Alliance & Leicester. The remaining decrease was due to operational efficiencies arising from the integration of Alliance & Leicester and the sale of the Porterbrook business. | |
| • | Global Banking & Markets administrative expenses of £101m were slightly lower than £104m in 2008, reflecting strong cost management while increasing income. | |
| • | Private Banking administrative expenses of £66m increased by £8m from £58m in 2008. Of the total increase, £4m represented the inclusion of the administrative expenses in 2009 of Alliance & Leicester International Limited. The remaining increase of £4m was principally due to costs (including systems and other integration costs) related to Bradford & Bingley International since its acquisition in 2008. | |
| • | Group Infrastructure administrative expenses of £181m increased by £41m from £140m in 2008. Alliance & Leicester contributed £68m in 2009. The remaining decrease of £27m was largely due to savings resulting from integration benefits relating to the combination with Alliance & Leicester, partly offset by higher central costs, including pension contributions and early retirement costs. |
13
Business and Financial Review
Business Review — Summary
continued
2008 compared to 2007
Administrative expenses of £1,343m (2007: £1,369m) decreased by £26m due to continuing cost
reduction activity partially offset by costs relating to the Bradford & Bingley savings business.
| • | Retail Banking administrative expenses of £996m decreased by £67m from £1,063m in 2007, due to continuing cost reduction activity partially offset by costs relating to the Bradford & Bingley savings business. | |
| • | Corporate Banking administrative expenses of £45m increased by £15m from £30m in 2007, largely driven by investment in growing the business. | |
| • | Global Banking & Markets administrative expenses of £104m decreased by £7m from £111m in 2007, reflecting strong cost management while increasing income. | |
| • | Private Banking administrative expenses of £58m decreased by £2m from £60m in 2007 due to continuing cost reduction activity. | |
| • | Group Infrastructure administrative expenses of £140m increased by £35m from £105m in 2007, reflecting investment costs not allocated to the business units. |
Depreciation and amortisation
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
163 | 80 | 72 | |||||||||
|
Corporate Banking
|
88 | 117 | 129 | |||||||||
|
Global Banking & Markets
|
3 | 3 | 2 | |||||||||
|
Private Banking
|
2 | 1 | 2 | |||||||||
|
Group Infrastructure
|
4 | 1 | — | |||||||||
|
|
260 | 202 | 205 | |||||||||
2009 compared to 2008
Depreciation and amortisation of £260m (2008: £202m) increased by £58m. Of the total increase,
£122m represented the inclusion of the depreciation and amortisation in 2009 of Alliance &
Leicester. By segment, the movements were:
| • | Retail Banking depreciation and amortisation of £163m increased by £83m from £80m in 2008. Of the total increase, £30m represented the inclusion of the depreciation and amortisation in 2009 of Alliance & Leicester. The remaining increase of £53m was largely driven by a full year of depreciation of, and further investment in, our IT platform Partenon and increased depreciation costs as a result of growing our lending to small and medium sized enterprises (SMEs). | |
| • | Corporate Banking depreciation and amortisation of £88m decreased by £29m from £117m in 2008. Alliance & Leicester contributed £87m in 2009. The remaining decrease reflected the sale of the Porterbrook businesses which had contributed depreciation expense of £116m in 2008. |
2008 compared to 2007
Depreciation and amortisation of £202m (2007: £205m) was in line with the previous year,
principally because Porterbrook was only sold at the end of the year.
| • | Retail Banking depreciation and amortisation of £80m increased by £8m from £72m in 2007 due to the commencement of depreciation of our IT platform Partenon. | |
| • | Corporate Banking depreciation and amortisation of £117m decreased by £12m from £129m in 2007. This represents depreciation on the operating lease assets in the Porterbrook train leasing business, which was only sold at the end of 2008. |
Impairment losses on loans and advances
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
712 | 309 | 239 | |||||||||
|
Corporate Banking
|
32 | (5 | ) | (29 | ) | |||||||
|
Private Banking
|
2 | 2 | 2 | |||||||||
|
Group Infrastructure
|
96 | 42 | 132 | |||||||||
|
|
842 | 348 | 344 | |||||||||
2009 compared to 2008
Impairment losses on loans and advances of £842m (2008: £348m) increased by £494m. Of the total
increase, £195m represented the inclusion of the Impairment losses on loans and advances in 2009 of
Alliance & Leicester. By segment, the movements were:
| • | Retail Banking impairment losses on loans and advances of £712m increased by £403m from £309m in 2008. Of the total increase, £92m represented the inclusion of Alliance & Leicester’s impairment losses in 2009. The remaining increase of £311m was distributed across all products with the largest increase relating to mortgages, as the impact of falling house prices and the lagging effect of unemployment, as anticipated, started to emerge. Most of the impact came through in the first half of the year, with the second half performance stabilising and in some areas improving. |
14
Business and Financial Review
Business Review — Summary
continued
| With respect to mortgages, the second half of the year saw a slower rate of growth in arrears, with fewer losses than observed earlier in the year, in part as a result of collection activities and mitigating actions taken, but also due to the low interest rate environment and the slight upturn in house prices. The improvement in performance across all portfolios in the second half of the year exceeded set expectations. A very strong mortgage coverage ratio of close to 21% has been preserved. | ||
| • | Corporate Banking impairment losses on loans and advances of £32m increased by £37m from a £5m release in 2008. Of the total increase, £4m represented the inclusion of Alliance & Leicester’s impairment losses in 2009. The low level of impairment losses is a reflection of prudent lending criteria relating to the growth businesses and portfolios as well as provisions made on acquisition relating to the non-growth portfolios to reflect expected losses in those portfolios as required under acquisition accounting. The remaining increase of £33m reflected the non-recurrence in 2009 of Corporate Banking provision releases in 2008 relating to run down businesses and some deterioration arising from market conditions. | |
| • | Private Banking impairment losses on loans and advances of £2m were in line with £2m in 2008. | |
| • | Group Infrastructure impairment losses on loans and advances of £96m increased by £54m from £42m in 2008. Alliance & Leicester contributed £98m in 2009 in respect of the treasury asset portfolio. The remaining decrease of £45m principally relates to the non-recurrence in 2009 of other credit provision charges incurred in 2008. |
2008 compared to 2007
Impairment losses on loans and advances were broadly unchanged at £348m (2007: £344m), as credit
quality remained strong, with a continued reduction in the size of the unsecured personal lending
book, offset by a further general deterioration in economic conditions affecting the mortgage
portfolio provision.
| • | Retail Banking impairment losses on loans and advances of £309m increased by £70m from £239m in 2007, largely driven by signs of deterioration in the mortgage portfolio. The performance of the mortgage portfolio remained strong, and was better than Council of Mortgage Lenders (‘CML’) averages for 2008. In addition, the level of secured coverage appropriately reflected the current economic conditions and benchmarked well ahead of our UK peers for 2008. At the same time, there was a reduction in the unsecured lending charge, driven by the tightening in lending policies in 2007 and the reduction in the unsecured loan portfolio. | |
| • | Corporate Banking provision releases of £5m decreased by £24m from £29m in 2007 reflecting an increased level of impairment on the new corporate portfolios more than offset by final provision releases from the successful run down of the legacy portfolios. | |
| • | Private Banking impairment losses on loans and advances of £2m were in line with £2m in 2007. | |
| • | Group Infrastructure impairment losses on loans and advances of £42m decreased by £90m from £132m in 2007. The impairment charge is split for segmental reporting purposes on the basis set out in “Other Material Items” on page 27 between Retail Banking and Group Infrastructure. The reduction in the charge in Group Infrastructure in 2008 compared to 2007 reflects lower provisions held centrally. |
Provisions for other liabilities and charges
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
56 | 17 | — | |||||||||
|
|
56 | 17 | — | |||||||||
2009 compared to 2008
Provisions for other liabilities and charges in Retail Banking of £56m compared to £17m in 2008,
principally representing redundancy costs relating to the integration of Alliance & Leicester and
the Bradford & Bingley savings business.
2008 compared to 2007
Provisions for other liabilities and charges in Retail Banking of £17m compared to £nil in 2007,
relating to the integration of the acquired Bradford & Bingley savings business, partially offset
by a release of the misselling provision.
15
Business and Financial Review
Business Review — Summary
continued
Adjustments between the statutory basis and the trading basis
Santander UK’s Board reviews discrete financial information for each of its segments that
includes measures of operating results and assets. The segments are managed primarily on the basis
of their results, which are measured on a ‘trading’ basis. The trading basis differs from the
statutory basis as a result of the application of various adjustments, as described below.
Management considers that the trading basis provides the most appropriate way of reviewing the
performance of the business. The adjustments are:
| • | Alliance & Leicester pre-acquisition trading basis results — Following the transfer of Alliance & Leicester plc to the Company in January 2009, the statutory results for the year ended 31 December 2009 include the results of the Alliance & Leicester group, whereas the statutory results for the year ended 31 December 2008 do not. In order to enhance the comparability of the results for the two periods, management reviews the 2008 results including the pre-acquisition results of the Alliance & Leicester group for that period. | |
| • | Reorganisation and other costs — These comprise implementation costs in relation to the cost reduction projects, including integration-related expenses, as well as certain remediation administration expenses and credit provisions. Management needs to understand the underlying drivers of the cost base that will remain after these exercises are complete, and does not want this view to be clouded by these costs, which are managed independently. | |
| • | Depreciation of operating lease assets — The operating lease businesses are managed as financing businesses and, therefore, management needs to see the margin earned on the businesses. Residual value risk is separately managed. As a result, the depreciation is netted against the related income. | |
| • | Profit on part sale of PFS subsidiaries — These profits are excluded from the results to allow management to understand the underlying performance of the business. In 2009 there were no such profits. In 2008, the profit on the sale of the Porterbrook businesses was excluded. In 2007, the profit on the sale of 49% of James Hay, Cater Allen and Abbey Sharedealing, and small recoveries on certain other transactions were similarly excluded. | |
| • | Hedging and other variances — The Balance Sheet and Income Statement are subject to mark-to-market volatility including that arising from the accounting for elements of derivatives deemed under IFRS rules to be ineffective as hedges. Volatility also arises on certain assets previously managed on a fair value basis, and hence classified as fair value through profit or loss under IFRS, that are now managed on an accruals basis. Where appropriate, such volatility is separately identified to enable management to view the underlying performance of the business. In addition, other variances include the reversal of coupon payments on certain equity instruments which are treated as interest expense in the trading results but are reported below the profit after tax line for statutory purposes. | |
| • | Capital and other charges — These principally comprise internal nominal charges for capital invested in the Group’s businesses. Management implemented this charge to assess the effectiveness of capital investments. |
For a detailed explanation of these items, see “Other Material Items” in the Business and Financial
Review.
16
Business and Financial Review
Business Review — Key Performance Indicators
Key performance indicators relevant to the Group during the years ended, and as at, 31 December
2009, 2008 and 2007 are set out below. This information describes the key measures used by
management in assessing the success of the business against its strategies and objectives.
| Key performance indicator | Note | 2009 | 2008 | 2007 | ||||||||||||
|
PFS trading revenues
|
1 | £ | 4,658m | £ | 3,894m | £ | 2,615m | |||||||||
|
PFS trading cost:income ratio
|
2 | 42 | % | 50 | % | 50 | % | |||||||||
|
Profit for the year
|
3 | £ | 1,245m | £ | 819m | £ | 685m | |||||||||
|
Commercial Banking spread
|
4 | 1.82 | % | 1.44 | % | 1.40 | % | |||||||||
|
Total number of employees
|
5 | 19,483 | 22,669 | 15,236 | ||||||||||||
|
Market share of mortgage stock
|
6 | 13.5 | % | 12.9 | % | 9.3 | % | |||||||||
|
Loan-to-deposit ratio
|
7 | 126 | % | 136 | % | 146 | % | |||||||||
|
Loan-to-value ratio of mortgage stock (indexed)
|
8 | 52 | % | 51 | % | 46 | % | |||||||||
| 1. | PFS trading revenues | |
| PFS trading revenues comprise net interest income and non-interest income of the Personal Financial Services businesses. Discussion and analysis of this data is set out in the Business Review — Personal Financial Services on pages 19 and 20. |
Management reviews PFS trading revenues in order to assess the
Group’s effectiveness in obtaining new customers and business.
Management’s target for PFS trading revenues from 2007 to 2009
was growth of between 5% and 10% per annum, which was exceeded.
PFS trading revenue growth in 2009 compared with 2008 was 20%.
Management’s target for PFS trading revenues is growth of
between 5% and 10% per annum from 2010 to 2012.
| 2. | PFS trading cost:income ratio | |
| The PFS trading cost:income ratio is defined as trading expenses divided by trading income of the Personal Financial Services businesses. Discussion and analysis of trading income and expenses is set out in the Business Review — Personal Financial Services on pages 19 to 26. Further information about the calculation of the PFS trading cost:income ratio is contained in Selected Financial Data on page 190. |
Management reviews the PFS trading cost:income ratio in order
to measure the operating efficiency of the Group. Management’s
original target for the PFS trading cost:income ratio, set in
2005, was to reduce it to 45% by 2008. This was achieved in
2008 prior to impact of the transfer of Alliance & Leicester
plc. Management’s new target for the PFS trading cost:income
ratio is to achieve sustained further improvements from this
level. In 2009, this target was met and the PFS trading
cost:income ratio was reduced to 42%.
| 3. | Profit for the year | |
| Profit for the year is the statutory consolidated profit after tax for the year. Discussion and analysis of this data is set out in the Group Summary in this Business Review — Summary section on pages 11 to 15. |
Management reviews the profit for the year in order to monitor
the effectiveness of the Group’s strategy and decisions to
maximise the value of the business, and increase the strength
of its capital base and its capacity to pay dividends to its
shareholder Banco Santander, S.A.. Management’s target for the
profit for the year is to achieve sustained growth over the
previous year, and this was achieved in 2009.
In order to ensure that targets related to the above three key performance
indicators are met, management also focuses on other measures which are set out
below as critical drivers towards achieving the three key performance
indicators above on a sustainable basis.
| 4. | Commercial Banking spread | |
| Commercial Banking spread is defined as the trading net interest income over average customer loans (mortgages, unsecured personal loans, corporate loans and overdraft interest). Discussion and analysis of this data is set out in the Business Review — Personal Financial Services on pages 19 to 26. |
Management reviews the Commercial Banking spread in order to
assess the economic sustainability of its commercial banking
products and operations. Management’s target for the Commercial
Banking spread is to ensure that it is appropriate for the
current market conditions and profit targets. This target has
been met given the improvements in the spread and strong
reported profit growth.
| 5. | Total number of employees | |
| Total number of employees is measured at the year-end and calculated on a full-time equivalent basis. The 19,483 employees at 31 December 2009 included 5,228 employees of Alliance & Leicester plc as a result of the transfer of Alliance & Leicester plc to the Company in January 2009. The 22,669 employees at 31 December 2008 include 6,755 employees of Alliance & Leicester plc. 2007 data do not include such employees. 2009 and 2008 data includes 1,155 (2008: 1,556) employees who transferred to the Company in September 2008 as part of the acquisition of the Bradford & Bingley savings business. 2007 data do not include such employees. As part of the planning process, headcount targets are set for each division and reviewed on a monthly basis. Further information about employees on a segmental basis is contained in Note 1 to the Consolidated Financial Statements. |
17
Business and Financial Review
Business Review — Key Performance Indicators
continued
| Management reviews the total number of employees in order to support the continuing overall control of the Group’s cost base and the trading cost:income ratio. Management’s targets for the total number of employees are to ensure that staffing levels are optimal for the nature and size of the Group’s business. Headcount was reduced by 1,603 full-time equivalents in line with our stated intentions to remove duplicated back office and support functions following the acquisitions of Alliance & Leicester plc and the Bradford & Bingley savings business. Further, more modest, reductions in headcount are expected in 2010. | ||
| 6. | Market share of mortgage stock | |
| Market share of mortgage stock represents the book value of the Group’s mortgage asset as a percentage of the total book value of mortgages in the UK market, and is measured at the year-end. Market share of mortgage stock is calculated by reference to data on the size of the UK mortgage market produced by the Bank of England. Discussion and analysis of this data is set out in the Business Review — Personal Financial Services on pages 21 and 22. |
Management reviews market share of mortgage stock as one of the
measures to assess the Group’s effectiveness in obtaining new
customers. Management’s target for market share of mortgage stock in
2007 and 2008 was to maintain the Group’s historical market share of
mortgage stock of approximately 10%, subject to earning an appropriate
margin. Following the transfer of Alliance & Leicester plc to the
Group in 2009, the Group’s target for market share of mortgage stock
was updated to reflect the Group’s combined historical market share of
approximately 12.9%. In 2009, market share increased by 0.6% driven by
profitable new business and retention.
| 7. | Loan-to-deposit ratio | |
| During 2009, management placed a greater focus on the loan-to-deposit ratio as part of its focus on maintaining a sustainable funding model. |
The loan-to-deposit ratio represents the book value of the Group’s
commercial assets (i.e. retail, corporate and private banking assets)
divided by its commercial liabilities (i.e. retail, corporate and
private banking deposits, and shareholders’ funds), and is measured at
the year-end. Discussion and analysis of the loan-to-deposit ratio is
set out in the Chief Executive’s Review on page 2 and in the
Directors’ Report on page 90.
Management reviews the loan-to-deposit ratio in order to assess the
Group’s ability to fund its commercial operations with commercial
borrowings, reducing reliance on sourcing funding from the wholesale
markets whilst improving its customer product holdings. Management’s
target for the loan-to-deposit ratio is sustained improvements in
future years. During 2009, Santander UK has continued to achieve
strong commercial net lending growth which has been more than matched
by a larger increase in net deposit flows, in doing so improving our
loan deposit ratio to 126% (2008: 136% including Alliance &
Leicester).
| 8. | Loan-to-value (‘LTV’) ratio on mortgage stock | |
| During 2009, as a result of the difficult economic environment, management placed a greater focus on the LTV ratio on mortgage stock in order to ensure that the profit target be achieved. |
The LTV ratio is calculated as the book value of the Group’s
residential mortgages as a percentage of the estimated current market
value of the properties against which the mortgages are secured. The
current market value is estimated from house price indices by
adjusting the value of the property at the time of the origination of
the mortgage for changes in house prices from that date to the balance
sheet date. The LTV ratio is a measure of the estimated current level
of security that the Group possesses on its mortgage loans.
Management reviews the LTV ratio in order to assess the Group’s
potential resilience to future declines in property prices.
Management’s target for the LTV ratio is, subject to market
conditions, to sustain a LTV ratio of less than 60%. During 2009, the
Group has continued to focus on the quality of new lending based on
affordability and lower LTV segments. The average LTV on stock value
at 31 December 2009 was slightly higher than the previous year at 52%
(2008: 51%) as expected, due to the effects of falling house prices
more than offsetting lower LTVs on new business.
18
Business and Financial Review
Business Review — Personal Financial Services
This section contains a summary of the results, and commentary thereon, by Income Statement
line item on a trading basis for each segment within the Personal Financial Services businesses,
together with reconciliations from the trading basis to the statutory basis. Additional information
is provided on the adjustments between the trading basis and the statutory basis in the Business
Review — Other Material Items.
Personal Financial Services profit before tax by segment
31 December 2009
| Retail | Corporate | Global Banking | Private | Group | ||||||||||||||||||||
| Banking | Banking | & Markets | Banking | Infrastructure | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Net interest income/(expense)
|
3,257 | 294 | — | 130 | (340 | ) | 3,341 | |||||||||||||||||
|
Non-interest income
|
707 | 163 | 380 | 34 | 33 | 1,317 | ||||||||||||||||||
|
Total trading income
|
3,964 | 457 | 380 | 164 | (307 | ) | 4,658 | |||||||||||||||||
|
Total trading expenses
|
(1,442 | ) | (181 | ) | (104 | ) | (68 | ) | (149 | ) | (1,944 | ) | ||||||||||||
|
Impairment losses on loans and advances
|
(712 | ) | (31 | ) | — | (2 | ) | (57 | ) | (802 | ) | |||||||||||||
|
Trading profit/(loss) before tax
|
1,810 | 245 | 276 | 94 | (513 | ) | 1,912 | |||||||||||||||||
|
Adjust for:
|
||||||||||||||||||||||||
|
- Reorganisation and other costs
|
(79 | ) | — | — | — | (107 | ) | (186 | ) | |||||||||||||||
|
- Hedging and other variances
|
(11 | ) | — | — | — | (25 | ) | (36 | ) | |||||||||||||||
|
- Capital and other charges
|
(180 | ) | (86 | ) | — | 8 | 258 | — | ||||||||||||||||
|
Profit/(loss) before tax
|
1,540 | 159 | 276 | 102 | (387 | ) | 1,690 | |||||||||||||||||
31 December 2008
| Retail | Corporate | Global Banking & | Private | Group | ||||||||||||||||||||
| Banking | Banking | Markets | Banking | Infrastructure | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Net interest income/(expense)
|
2,282 | 134 | — | 99 | (126 | ) | 2,389 | |||||||||||||||||
|
Non-interest income
|
836 | 264 | 326 | 37 | 42 | 1,505 | ||||||||||||||||||
|
Total trading income
|
3,118 | 398 | 326 | 136 | (84 | ) | 3,894 | |||||||||||||||||
|
Total trading expenses
|
(1,358 | ) | (239 | ) | (107 | ) | (64 | ) | (172 | ) | (1,940 | ) | ||||||||||||
|
Impairment losses on loans and advances
|
(442 | ) | (44 | ) | — | (3 | ) | — | (489 | ) | ||||||||||||||
|
Trading profit/(loss) before tax
|
1,318 | 115 | 219 | 69 | (256 | ) | 1,465 | |||||||||||||||||
|
Adjust for:
|
||||||||||||||||||||||||
|
- A&L pre-acquisition trading basis results
|
(300 | ) | (34 | ) | — | (8 | ) | 178 | (164 | ) | ||||||||||||||
|
- Reorganisation and other costs
|
(121 | ) | — | — | — | (42 | ) | (163 | ) | |||||||||||||||
|
- Profit on part sale of PFS subsidiaries
|
— | 40 | — | — | — | 40 | ||||||||||||||||||
|
- Hedging and other variances
|
— | — | — | — | (84 | ) | (84 | ) | ||||||||||||||||
|
- Capital and other charges
|
(103 | ) | (14 | ) | — | 16 | 101 | — | ||||||||||||||||
|
Profit/(loss) before tax
|
794 | 107 | 219 | 77 | (103 | ) | 1,094 | |||||||||||||||||
31 December 2007
| Retail | Corporate | Global Banking & | Private | Group | ||||||||||||||||||||
| Banking | Banking | Markets | Banking | Infrastructure | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Net interest income/(expense)
|
1,538 | (31 | ) | — | 70 | (78 | ) | 1,499 | ||||||||||||||||
|
Non-interest income
|
635 | 132 | 260 | 34 | 55 | 1,116 | ||||||||||||||||||
|
Total trading income
|
2,173 | 101 | 260 | 104 | (23 | ) | 2,615 | |||||||||||||||||
|
Total trading expenses
|
(996 | ) | (30 | ) | (107 | ) | (61 | ) | (105 | ) | (1,299 | ) | ||||||||||||
|
Impairment losses on loans and advances
|
(239 | ) | 29 | — | (2 | ) | — | (212 | ) | |||||||||||||||
|
Trading profit/(loss) before tax
|
938 | 100 | 153 | 41 | (128 | ) | 1,104 | |||||||||||||||||
|
Adjust for:
|
||||||||||||||||||||||||
|
- Reorganisation and other costs
|
(139 | ) | — | (6 | ) | (1 | ) | (132 | ) | (278 | ) | |||||||||||||
|
- Profit on part sale of PFS subsidiaries
|
— | 5 | — | — | 105 | 110 | ||||||||||||||||||
|
- Hedging and other variances
|
— | — | — | — | (72 | ) | (72 | ) | ||||||||||||||||
|
- Capital and other charges
|
(89 | ) | (11 | ) | — | 19 | 81 | — | ||||||||||||||||
|
Profit/(loss) before tax
|
710 | 94 | 147 | 59 | (146 | ) | 864 | |||||||||||||||||
2009 compared to 2008
Personal Financial Services trading profit before tax of £1,912m increased by
£447m on the previous year (2008: £1,465m), driven by strong income growth
across all businesses which exceeded the increase in impairment losses, as well
as continued cost control. Trading income was 20% higher, well above the
targeted range. In absolute terms the increase in trading income was twice as
large as the increase in trading provisions. Trading expenses showed a small
increase, due to the inclusion of £98m of Bradford & Bingley savings business
related costs following its acquisition in September 2008, which was partially
offset by a reduction in other trading expenses resulting from integration
benefits from Alliance & Leicester. Santander UK remains on track to deliver
targeted cost savings of £180m by 2011.
19
Business and Financial Review
Business Review — Personal Financial Services
continued
| • | Retail Banking trading profit before tax increased by £492m to £1,810m (2008: £1,318m) driven by a strong increase in trading income, partly offset by higher trading expenses and impairment losses. Trading income benefited from a significant improvement in mortgage margins both in terms of new lending and retention of existing business, as well as increased retention levels on standard variable rate and other longer term products. In addition, the Retail Banking business delivered strong growth in customer deposits, together with effective management of deposit margins in a low interest rate environment. There was also a significant increase in bank account openings and investment product sales. These positive income trends were partly offset by lower fee income from current accounts, a reduction in the volume of mortgage redemptions and lower unsecured lending volumes. Trading expenses increased mainly due to the inclusion of a full year of Bradford & Bingley savings business related expenses. The increase in impairment losses was largely attributable to the residential mortgage and unsecured personal loans portfolios reflecting the impact of market conditions, albeit with mortgage arrears tracking better than expectations and significantly better than our UK peers. | |
| • | Corporate Banking trading profit before tax increased by £130m to £245m (2008: £115m). This movement was due to strong income performance, lower operating expenses benefiting from integration synergies and lower impairment losses. Trading income growth benefited from higher asset margins as well as robust growth on both assets and deposits — assets not in run down grew by 12% and deposits more than doubled. | |
| • | Global Banking & Markets trading profit before tax increased by £57m to £276m (2008: £219m) due predominantly to a strong income performance. During the first half of 2009, Global Banking & Markets was able to take advantage of wider spreads, particularly in the short term markets business. In addition, Global Banking & Markets benefited from integrated sales efforts across the Santander group, including equities linked to investment sales in the branch network. | |
| • | Private Banking trading profit before tax increased by £25m to £94m (2008: £69m) reflecting higher trading income as a result of higher deposits in Cater Allen and improved margins in both Cater Allen and Abbey International. | |
| • | Group Infrastructure trading loss before tax increased by £257m to £513m (2008: £256m) reflecting an increase in funding costs during the year, a lower return on liquid assets, and changes to transfer pricing arrangements to reflect current market conditions. |
2008 compared to 2007
Personal Financial Services trading profit before tax of £1,465m increased by
£361m on the previous year (2007: £1,104m). Of the total increase, £164m
represented the inclusion of Alliance & Leicester’s pre-acquisition trading
profit before tax in 2008. The remaining increase of £197m was driven by a
strong income performance across all four business divisions. This was balanced
against controlled costs, up 3.2%, as we continued to invest in our Corporate
Banking and Private Banking businesses, and additional costs relating to
Bradford & Bingley’s savings business acquired in September 2008. As a result,
our trading cost:income ratio was further reduced to 45%, and was better than
the average of our UK peers.
| • | Retail Banking trading profit before tax increased by £380m to £1,318m (2007: £938m). Of the total increase, £299m represented the inclusion of Alliance & Leicester’s pre-acquisition trading profit before tax in 2008. The remaining increase of £81m was driven by an increase in trading income and lower expenses partly offset by higher credit provisions. Trading income benefited from a 10% growth in both assets and deposits and better mortgage new business margins throughout 2008. At the same time, we maintained our focus on high quality prime residential lending at lower LTV and improved retention at attractive margins. Trading provisions increased, largely reflecting an increase in mortgage arrears, driven by the change in economic conditions. The level of secured coverage remained strong at 25% and was ahead of our UK peers for 2008. | |
| • | Corporate Banking trading profit before tax increased by £15m to £115m (2007: £100m). The inclusion of Alliance & Leicester’s pre-acquisition trading profit before tax in 2008 added £34m to the overall Corporate Banking trading profit before tax. This increase was more than offset by a £49m decrease reflecting lower provisions, in part due to releases from positions in run down, and increased expenses largely driven by investment in growing the business, partially offset by higher trading income. | |
| • | Global Banking & Markets trading profit before tax increased by £66m to £219m (2007: £153m) reflecting strong performances in both the Rates and Equity business, due to increased transactional flow arising from close co-operation with other parts of the Group and the beneficial trading environment available from diverging spreads in an illiquid market. | |
| • | Private Banking trading profit before tax increased by £28m to £69m (2007: £41m). Of the total increase, £8m represented the inclusion of Alliance & Leicester’s pre-acquisition trading profit before tax in 2008. The remaining increase of £20m reflected growth in all businesses, particularly Cater Allen and Abbey International driven by increased customer deposits attracted by competitive rates. | |
| • | Group Infrastructure trading loss before tax increased by £128m to £256m (2007: £128m). The inclusion of Alliance & Leicester’s pre-acquisition trading loss before tax in 2008 added £178m to the overall Group Infrastructure trading loss before tax. The remaining decrease of £50m reflected higher earnings on retained profits and earnings on the additional share capital injection of £1bn in October 2008, prior to its transfer into Alliance & Leicester plc in December 2008. |
20
Business and Financial Review
Business Review — Personal Financial Services
continued
Personal Financial Services business volumes
Business volumes relating to the Personal Financial Services businesses are set out below.
These volumes are used by management to assess the sales performance of the Group, both absolutely
and relative to its UK peers, and to inform management of product trends in the Personal Financial
Services market.
Balances in the 2008 column in the table below have been amended for the Transfer of Alliance
& Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements.
The business volumes for 2008 were unaffected by the Transfer and therefore have not been amended
in the 2008 column. However, in order to provide more meaningful and relevant comparatives between
2009 and 2008, Alliance & Leicester pre-acquisition business volumes for the year ended 31 December
2008 have been combined with Santander UK and presented together in the Combined Volumes 2008
column. These measures are non-GAAP financial measures. A body of generally accepted accounting
principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined
as one that measures historical or future financial performance, financial position or cash flows
but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP
measures. These non-GAAP financial measures are not a substitute for GAAP measures, for which
management has responsibility.
In addition, information related to market share and bank account openings for 2008 have also
been presented on a combined basis in the Combined Volumes 2008 column.
| Combined volumes (2) | ||||||||||||||||
| 2009 | 2008 (1) | 2008 | 2007 | |||||||||||||
|
Mortgages:
|
||||||||||||||||
|
Gross mortgage lending in the year
|
£26.4 | bn | £31.8 | bn | £35.2 | bn | £35.6 | bn | ||||||||
|
Capital repayments in the year
|
£18.8 | bn | £20.7 | bn | £29.1 | bn | £26.9 | bn | ||||||||
|
Net mortgage lending in the year
|
£7.6 | bn | £11.1 | bn | £6.1 | bn | £8.7 | bn | ||||||||
|
Mortgage stock balance
(1)
:
|
£166.7 | bn | £159.2 | bn | — | £110.5 | bn | |||||||||
|
- Retail
|
£160.4 | bn | £153.2 | bn | — | £105.0 | bn | |||||||||
|
- Housing Association
(3)
|
£6.3 | bn | £6.0 | bn | — | £5.5 | bn | |||||||||
|
Market share — gross mortgage lending
(4)
|
18.4 | % | 12.4 | % | 13.9 | % | 9.8 | % | ||||||||
|
Market share — capital repayments
(4)
|
14.3 | % | 9.5 | % | 13.7 | % | 10.5 | % | ||||||||
|
Market share — net mortgage lending
(4)
|
65.5 | % | 28.9 | % | 15.2 | % | 8.1 | % | ||||||||
|
Market share — mortgage stock
(1) (4)
|
13.5 | % | 12.9 | % | — | 9.3 | % | |||||||||
|
Customer deposits:
|
||||||||||||||||
|
Total net deposit flows
(5)
|
£14.9 | bn | £9.5 | bn | £12.6 | bn | £2.7 | bn | ||||||||
|
Deposit stock
(1) (6)
|
£143.9 | bn | £129 | bn | — | £67.3 | bn | |||||||||
|
Investment and pensions annual premium income
|
£3.5 | bn | £2.2 | bn | £2.8 | bn | £1.7 | bn | ||||||||
|
Banking:
|
||||||||||||||||
|
Bank account openings (000’s)
|
||||||||||||||||
|
- Retail
|
1,032 | 548 | 846 | 400 | ||||||||||||
|
- Other
|
61 | 24 | 58 | 30 | ||||||||||||
|
|
1,093 | 572 | 904 | 430 | ||||||||||||
|
Bank account liability balance:
|
||||||||||||||||
|
- Retail
|
£11.2 | bn | £9.7 | bn | — | £5.5 | bn | |||||||||
|
- Other
|
£4.7 | bn | £4.7 | bn | — | £4.8 | bn | |||||||||
|
|
£15.9 | bn | £14.4 | bn | — | £10.3 | bn | |||||||||
|
Gross unsecured personal lending in the year:
|
||||||||||||||||
|
- Retail
|
£1.4 | bn | £0.8 | bn | £2.3 | bn | £0.9 | bn | ||||||||
|
- Other, including cahoot
|
£0.1 | bn | £0.1 | bn | £0.1 | bn | £0.1 | bn | ||||||||
|
|
£1.5 | bn | £0.9 | bn | £2.4 | bn | £1.0 | bn | ||||||||
|
Unsecured lending asset balance
(1) (7)
:
|
||||||||||||||||
|
- Retail
|
£4.5 | bn | £5.8 | bn | — | £2.5 | bn | |||||||||
|
- Other, including cahoot
|
£0.3 | bn | £0.4 | bn | — | £0.8 | bn | |||||||||
|
|
£4.8 | bn | £6.2 | bn | — | £3.3 | bn | |||||||||
|
Credit card sales (000’s)
|
387 | 395 | 475 | 261 | ||||||||||||
| (1) | Balances at 31 December 2008 have been amended for the Transfer of Alliance & Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements. Business volumes have not been amended. | |
| (2) | Includes Alliance & Leicester pre-acquisition business volumes for the year ended 31 December 2008 in order to provide more meaningful comparatives. | |
| (3) | Housing Association mortgages are classified in the Corporate Banking segment and exclude contingent liabilities and commitments. See Note 37 to the Consolidated Financial Statements. | |
| (4) | Mortgage market shares are estimated internally by reference to data on the size of the UK mortgage market produced by the Bank of England. | |
| (5) | Includes Bradford & Bingley savings business net deposit flows from its acquisition in September 2008. | |
| (6) | Includes Bradford & Bingley deposits acquired in September 2008 and subsequent net inflows. 2007 has been amended to include retail structured product flows. | |
| (7) | Comprises unsecured personal loans, credit cards and overdrafts. |
2009 compared to 2008
Mortgages
Gross mortgage lending was £26.4bn, representing an estimated market share of 18.4%, an increase in
market share of 4.5% compared to 2008 (on a combined basis including Alliance & Leicester) and
ahead of our mortgage stock share.
21
Business and Financial Review
Business Review — Personal Financial Services
continued
Our mortgage performance remained strong against a backdrop of a much smaller re-mortgage market,
in part due to the decline in house prices, and continued to be driven by a competitive pricing
strategy, targeting high quality new lending based on affordability and lower loan-to-value (‘LTV’)
segments with good margins. In particular, there was no lending at LTV greater than 90% during the
year. The average LTV on new business completions in 2009 was slightly lower at 61% (2008: 65%).
Capital repayments were £18.8bn, considerably lower than the level of repayments in 2008, as
more customers reverted to standard variable rate loans, and successful retention activity. Our
estimated market share of capital repayments increased slightly to 14.3% compared to 2008 (on a
combined basis including Alliance & Leicester), reflecting the smaller size of the market in 2009.
Net mortgage lending of £7.6bn represented a market share of 65.5% of mortgage lending in the UK
during the year as the Group continued to be a consistent lender in difficult times. This
performance was achieved against a market backdrop of heightened competition in lower LTV segments,
demonstrating our effective pricing and retention strategies.
Deposits and Investments
Deposit flows of £14.9bn were underpinned by strong performances from the Retail, Corporate and
Private Banking businesses. Retail and Private Banking inflows benefitted from the alignment of
product marketing and pricing strategies across the brands, including the introduction of Abbey
products, such as fixed rate bonds and Individual Savings Accounts, and promotional activity in
Bradford & Bingley branches. Corporate Banking saw further growth in flows, driven by strong levels
of re-investment by customers with maturing capital-protected investments and savings bonds, as
investors sought to invest with banks with strong credit ratings.
Investment sales of £3.5bn were up 25% in the year (on a combined basis including Alliance &
Leicester) compared to a wider market decline estimated at 13% for the same period. This strong
performance primarily reflected the ongoing attractiveness of offering capital guaranteed
investment products as customers continue to seek lower risk alternatives, but has also been driven
by increased coverage of specialist bancassurance advisors across the branch network.
Banking
Current account openings in the year increased by 21%, to 1.1 million accounts, which exceeded our
target of 1 million new current accounts.
Unsecured Personal Lending
Total gross unsecured personal lending in the year decreased to £1.5bn, representing a 38% decrease
from 2008 (on a combined basis including Alliance & Leicester) following the same trend as the
previous year, reflecting our continued cautious stance, with the unsecured loan portfolio balance
down 23% on 2008. Our continued focus on existing customers and decreased unsecured lending in line
with our stated policy again contributed to higher margins on the overall portfolio resulting in an
increase in the average margin on the portfolio of 182 basis points over 2008.
Credit Card Sales
Credit card sales decreased in 2009, as 2008 benefited from the launch of the Abbey Zero card. In
addition, we saw a decline in sales via direct mail as we focused on selling to existing customers
through our direct channels to improve cross-selling initiatives.
2008 compared to 2007
Mortgages
Gross mortgage lending increased to £31.8bn, representing an estimated market share of 12.4%
compared to 9.8% in 2007. Our mortgage performance remained strong in a market that continued to
contract, impacted by falling customer confidence, particularly in the purchase market. This strong
performance was driven by a competitive pricing strategy, targeting high quality lower LTV lending
at good margins.
Net mortgage lending of £11.1bn increased 28%, and was largely achieved in the first half of
2008 when gross lending increased, reflecting the strength of our franchise during challenging
market conditions, and reduced capital repayments through excellent retention activity. This
restored our mortgage stock market share to its historical level of approximately 10%.
Deposits and Investments
Retail, Corporate and Private Banking net deposit flows increased by £6.8bn to £9.5bn. Retail and
Private Banking flows increased significantly driven by the Direct Individual Savings Accounts, the
Instant Access Saver account and the eSaver Direct, together with the launch of innovative new
products promoted through the branches and an excellent performance from Bradford & Bingley’s
branches since their acquisition in September 2008. We also saw a strong performance in bonds,
driven by a contribution from both the Abbey-branded and cahoot offerings. Corporate Banking flows
increased significantly, driven by a focus on relationship managers driving volumes from new
business and existing clients, and attracting substantial deposits from corporate clients, further
strengthening Santander UK’s balance sheet.
Investment sales increased 34%, despite the market decreasing by 8%, reflecting the
attractiveness of offering capital guaranteed investment products as customers seek lower risk
alternatives. The second half of the year also benefited from the continued expansion of the number
of sales advisors and high levels of re-investment by customers.
Banking
Bank account openings continued to increase, and were up 33%, achieving a record number of openings
in the second half of the year and a strong market share performance. This was underpinned by
innovative new products and propositions such as the market-leading 8% rate offered on credit
balances.
22
Business and Financial Review
Business Review — Personal Financial Services
continued
Unsecured Personal Lending
Total gross unsecured personal lending in 2008 decreased by 10% reflecting our continued cautious
stance. The unsecured loan portfolio balance increased from 2007 as a result of the Transfer of
Alliance & Leicester plc to the Company, which more than offset a 17% decrease in Abbey balances as
we focused the lending mix towards existing customers, which made up 94% of new lending, and
through the branch channel.
Credit Card Sales
Credit card sales increased by 51% in 2008 benefiting from the launch of the Abbey Zero card and
improved cross-selling initiatives during the year.
Personal Financial Services trading net interest income by segment
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
3,257 | 2,282 | 1,538 | |||||||||
|
Corporate Banking
|
294 | 134 | (31 | ) | ||||||||
|
Private Banking
|
130 | 99 | 70 | |||||||||
|
Group Infrastructure
|
(340 | ) | (126 | ) | (78 | ) | ||||||
|
PFS trading net interest income
|
3,341 | 2,389 | 1,499 | |||||||||
|
Adjust for:
|
||||||||||||
|
- A&L pre-acquisition trading basis results
|
— | (617 | ) | — | ||||||||
|
- Hedging and other variances
|
71 | — | — | |||||||||
|
PFS net interest income
|
3,412 | 1,772 | 1,499 | |||||||||
2009 compared to 2008
Retail Banking net interest income increased by £975m to £3,257m (2008: £2,282m) largely driven by
balanced growth in customer lending and deposits across a mix of products combined with effective
margin management, as well as a 17% growth in bank account liability balances and hedging
strategies which helped to offset the impact of lower interest rates. In addition, income from
existing mortgage balances increased as more customers reverted to standard variable rate mortgages
and margins improved in both the mortgage and unsecured loan portfolios in the low interest
environment.
Corporate Banking net interest income improved by £160m to £294m (2008: £134m). This reflected
in part the sale of the Porterbrook businesses early in December 2008 (net interest income in 2008
included interest expense of £76m incurred by the Porterbrook businesses, whereas its associated
leasing income and depreciation were classified as non-interest income). The balance of the
increase in net interest income in 2009 reflected continued benefit from higher asset margins as
new business lending and pricing was altered to reflect the market environment in terms of funding
cost and competitors’ de-leveraging. Net interest income also improved as a result of robust growth
of both assets and liabilities.
Private Banking net interest income increased by £31m to £130m (2008: £99m). The increase was
primarily due to the benefit of new transfer pricing arrangements on deposits acquired in the year
which increased overall balances, more than offsetting competitive market pressures on pricing.
Group Infrastructure net interest expense increased by £214m to £340m (2008: £126m),
reflecting an increase in funding costs during the year, a lower return on liquid assets, and
changes to transfer pricing arrangements to reflect current market conditions that benefited the
operating business units. This was partly offset by the unwind of the discount on acquisition of
the Alliance & Leicester Treasury asset portfolio.
2008 compared to 2007
Retail Banking net interest income increased by £744m to £2,282m (2007: £1,538m). Of the total
increase, £592m represented the inclusion of Alliance & Leicester’s pre-acquisition trading net
interest income in 2008. The remaining increase of £152m reflected a 10% growth in both assets and
deposits and better mortgage new business margins throughout 2008.
Corporate Banking net interest income charge improved by £165m to £134m (2007: £(31)m). Of the
total increase, £147m represented the inclusion of Alliance & Leicester’s pre-acquisition trading
net interest income in 2008. The remaining increase of £18m was driven by a continued prudent
growth in lending whilst taking advantage of opportunities in the market to improve margins. The
Group also saw significant growth in deposits from corporate clients, further strengthening the
Group’s balance sheet. Overall, net interest income for 2007 and 2008 was a net charge as it
included interest expense incurred by the Porterbrook businesses that were sold early in December
2008, whereas its leasing income and depreciation were classified as non-interest income.
Private Banking net interest income increased by £29m to £99m (2007: £70m). Of the total
increase, £10m represented the inclusion of Alliance & Leicester’s pre-acquisition trading net
interest income in 2008. The remaining increase of £19m reflected growth in all business areas,
particularly Cater Allen and Abbey International driven by increased customer deposits attracted by
competitive rates.
Group Infrastructure net interest expense increased by £48m to £126m (2007: £78m). The
inclusion of the pre-acquisition trading net interest expense in 2008 of Alliance & Leicester
increased the overall Group Infrastructure net interest expense by £132m. The remaining decrease of
£84m reflected higher earnings on shareholder’s funds in 2008.
23
Business and Financial Review
Business Review — Personal Financial Services
continued
Personal Financial Services trading non-interest income by segment
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
707 | 836 | 635 | |||||||||
|
Corporate Banking
|
163 | 264 | 132 | |||||||||
|
Global Banking & Markets
|
380 | 326 | 260 | |||||||||
|
Private Banking
|
34 | 37 | 34 | |||||||||
|
Group Infrastructure
|
33 | 42 | 55 | |||||||||
|
PFS trading non-interest income
|
1,317 | 1,505 | 1,116 | |||||||||
|
Adjust for:
|
||||||||||||
|
- A&L pre-acquisition trading basis results
|
— | (330 | ) | — | ||||||||
|
- Reorganisation and other costs
|
— | (16 | ) | — | ||||||||
|
- Depreciation of operating lease assets
|
74 | 117 | 129 | |||||||||
|
- Profit on part sale of PFS subsidiaries
|
— | 40 | 110 | |||||||||
|
- Hedging and other variances
|
(107 | ) | (84 | ) | (72 | ) | ||||||
|
PFS non-interest income
|
1,284 | 1,232 | 1,283 | |||||||||
2009 compared to 2008
Retail Banking trading non-interest income decreased by £129m to £707m (2008: £836m), largely due
to lower fees on unsecured lending products, as part of our stated strategy to reduce unsecured
lending exposures, and lower fees from current accounts due to repricing. In addition, mortgage
fees were adversely impacted by a reduction in the volume of mortgage redemptions given decreased
activity in the market as a result of declining house prices and lower levels of supply.
Corporate Banking non-interest income decreased by £101m to £163m (2008: £264m), reflecting
the inclusion in non-interest income in 2008 of the leasing income and depreciation relating to the
Porterbrook businesses which were sold early in December 2008. New business lending has generated
increases in both fees and cross-selling of Global Banking & Markets products.
Global Banking & Markets non-interest income increased by £54m to £380m (2008: £326m)
reflecting strong performances in the equity business (linked to sales of retail products through
the branch network) and short term markets business, which benefited from a favourable trading
environment available from wider spreads in an illiquid market.
Private Banking non-interest income decreased slightly by £3m to £34m (2008: £37m),
principally due to lower annual, transaction and new business fees.
Group Infrastructure non-interest income decreased slightly to £33m (2008: £42m), principally
due to the non-recurrence in 2009 of gains on the buy-back of debt securities in 2008.
2008 compared to 2007
Retail Banking trading non-interest income increased by £201m to £836m (2007: £635m). The inclusion
of the pre-acquisition trading non-interest income in 2008 of Alliance & Leicester added £211m to
the overall Retail Banking trading non-interest income. The remaining decrease of £10m reflected
lower mortgage redemption volumes, lower unsecured lending and continued pressure on current
account charges more than offsetting increased commission from credit cards and investments.
Corporate Banking non-interest income increased by £132m to £264m (2007: £132m). Of the total
increase, £131m represented the inclusion of Alliance & Leicester’s pre-acquisition trading
non-interest income in 2008. The remaining increase of £1m reflected new business lending
generating increases in both fees and cross-selling of Global Banking & Markets products, which
were offset by the cessation of operating lease rental income and depreciation as a result of the
sale of the Porterbrook businesses early in December 2008.
Global Banking & Markets non-interest income increased by £66m to £326m (2007: £260m)
reflecting strong performance in both Rates and Equity business, due to increased transactional
flow arising from close co-operation with other parts of Santander UK and the beneficial trading
environment available from diverging spreads in an illiquid market.
Private Banking non-interest income was broadly in line with 2007 at £37m (2007: £34m). Of the
total increase, £2m represented the inclusion of Alliance & Leicester’s pre-acquisition trading
non-interest income in 2008. The remaining fees were unchanged as increased fees in James Hay
offset lower income in Abbey International due to one-off property sales in 2007.
Group Infrastructure non-interest income decreased by £13m to £42m (2007: £55m). The inclusion
of the pre-acquisition trading non-interest expense in 2008 of Alliance & Leicester decreased the
overall Group Infrastructure non-interest income by £14m. The remaining increase of £1m was due to
an increase in income from short-term funding, partly offset by a decline in income caused by the
termination of the protection business reported in this segment in 2007.
24
Business and Financial Review
Business Review — Personal Financial Services
continued
Personal Financial Services total trading expenses by segment
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
1,442 | 1,358 | 996 | |||||||||
|
Corporate Banking
|
181 | 239 | 30 | |||||||||
|
Global Banking & Markets
|
104 | 107 | 107 | |||||||||
|
Private Banking
|
68 | 64 | 61 | |||||||||
|
Group Infrastructure
|
149 | 172 | 105 | |||||||||
|
PFS total trading expenses
|
1,944 | 1,940 | 1,299 | |||||||||
|
Adjust for:
|
||||||||||||
|
- A&L pre-acquisition trading basis results
|
— | (600 | ) | — | ||||||||
|
- Reorganisation and other costs
|
90 | 88 | 146 | |||||||||
|
- Depreciation of operating lease assets
|
74 | 117 | 129 | |||||||||
|
PFS expenses
|
2,108 | 1,545 | 1,574 | |||||||||
2009 compared to 2008
Trading expenses increased by £4m to £1,944m (2008: £1,940m). The increase reflected the full year
impact of the Bradford & Bingley savings business and investments in the business being largely
offset by savings from the integration of Alliance & Leicester.
Retail Banking trading expenses of £1,442m increased by £84m (2008: £1,358m). £94m of the
increase was due to costs related to Bradford & Bingley’s savings business since its acquisition in
September 2008. The remaining administrative expenses decrease was largely due to the removal of
duplications across back office and support functions due to the integration of Alliance &
Leicester and Bradford & Bingley’s savings business.
Corporate Banking trading expenses of £181m were £58m lower than the previous year (2008:
£239m). The decrease was due to operational efficiencies arising from the integration of Alliance
& Leicester, and the sale of the Porterbrook business.
Global Banking & Markets trading expenses of £104m were slightly lower than the previous year
(2008: £107m) reflecting strong cost management whilst increasing income.
Private Banking trading expenses of £68m increased by £4m (2008: £64m) due to business growth.
Group Infrastructure trading expenses of £149m were £23m lower than the previous year (2008:
£172m). The decrease was due to savings resulting from integration benefits from the combination
with Alliance & Leicester.
2008 compared to 2007
Trading expenses increased by £641m to £1,940m (2007: £1,299m). Of the total increase, £600m
represented the inclusion of Alliance & Leicester’s pre-acquisition trading expenses in 2008. The
remaining increase of £41m reflected the impact of the acquisition of the Bradford & Bingley
savings business in September 2008, as well as investment in customer facing operations and growth
businesses such as Corporate Banking and Private Banking which contributed to good income growth.
Retail Banking trading expenses of £1,358m increased by £362m (2007: £996m). The inclusion of
the pre-acquisition trading expenses in 2008 of Alliance & Leicester increased the overall Retail
Banking trading expenses by £370m. The remaining decrease of £8m was principally due to savings and
efficiencies as a result of the strategic change cost reduction projects, partly offset by the
costs related to Bradford & Bingley’s savings business since its acquisition in September 2008.
Corporate Banking trading expenses of £239m were £209m higher than the previous year (2007:
£30m). Of the total increase, £194m represented the inclusion of Alliance & Leicester’s
pre-acquisition trading expenses in 2008. The remaining increase of £15m was largely driven by
investment in growing the business.
Global Banking & Markets trading expenses of £107m were in line with the previous year (2007:
£107m) reflecting strong cost management whilst increasing income.
Private Banking trading expenses of £64m increased by £3m (2007: £61m). The inclusion of the
pre-acquisition trading expenses in 2008 of Alliance & Leicester increased the overall Private
Banking trading expenses by £4m. The remaining decrease of £1m was driven by reduced employment
costs in James Hay and Abbey Sharedealing due to operational efficiencies.
Group Infrastructure trading expenses of £172m increased by £67m (2007: £105m). Of the total
increase, £32m represented the inclusion of Alliance & Leicester’s pre-acquisition trading expenses
in 2008. The remaining increase of £35m in part reflected costs related to Bradford & Bingley’s
savings business since its acquisition in September 2008.
Personal Financial Services trading impairment losses on loans and advances by segment
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Retail Banking
|
712 | 442 | 239 | |||||||||
|
Corporate Banking
|
31 | 44 | (29 | ) | ||||||||
|
Private Banking
|
2 | 3 | 2 | |||||||||
|
Group Infrastructure
|
57 | — | — | |||||||||
|
PFS trading impairment losses on loans and advances
|
802 | 489 | 212 | |||||||||
|
Adjust for:
|
||||||||||||
|
- A&L pre-acquisition trading basis results
|
— | (183 | ) | — | ||||||||
|
- Reorganisation and other costs
|
40 | 42 | 132 | |||||||||
|
PFS impairment losses on loans and advances
|
842 | 348 | 344 | |||||||||
25
Business and Financial Review
Business Review — Personal Financial Services
continued
2009 compared to 2008
The PFS trading impairment losses on loans and advances increased by £313m to £802m (2008: £489m)
as general economic conditions continued to deteriorate.
Retail Banking trading impairment losses on loans and advances increased by £270m to £712m
(2008: £442m) and were distributed across all products, with the largest increase relating to
mortgages as the impact of falling house prices and the lagging effect of unemployment, as
expected, started to emerge. Most of the impact came in the first half of the year, with the second
half performance stabilising and in some areas improving. With respect to mortgages, the second
half of the year saw a slower rate of growth in arrears, with fewer losses than observed earlier in
the year, in part as a result of collection activities and mitigating actions taken, but also due
to the low interest rate environment and the slight upturn in house prices. The improvement in
performance across all portfolios in the second half of the year exceeded expectations. A strong
mortgage coverage ratio of close to 21% has been preserved.
Corporate Banking trading impairment losses on loans and advances decreased by £13m to £31m
(2008: £44m). The low level of impairment losses is a reflection of prudent lending criteria
relating to the growth businesses and provisions made on acquisition with respect to the non-growth
portfolios to reflect expected losses in those portfolios as required under acquisition accounting.
The decrease of £13m reflected the non-recurrence in 2009 of Corporate Banking provision releases
in 2008 relating to run down businesses more than offset by some deterioration arising from market
conditions.
Private Banking impairment losses on loans and advances of £2m were broadly in line with £3m
in 2008.
Group Infrastructure trading impairment losses on loans and advances increased by £57m to £57m
(2008: £nil) due to the inclusion of the Alliance & Leicester treasury asset portfolio. These
losses are offset by the income on the portfolio, which is classified in net interest income.
2008 compared to 2007
Trading impairment losses on loans and advances increased by £277m to £489m (2007: £212m). Of the
total increase, £183m represented the inclusion of Alliance & Leicester’s pre-acquisition trading
impairment losses on loans and advances in 2008. The remaining increase of £94m was largely driven
by deterioration in the mortgage portfolio. The performance of the mortgage portfolio remained
strong, and was better than Council of Mortgage Lenders (‘CML’) averages for 2008. In addition, the
level of secured coverage appropriately reflected the economic conditions and benchmarked well
ahead of UK peers for 2008. At the same time, there was a reduction in the unsecured lending
charge, driven by the tightening in lending policies in 2007 and the reduction in the unsecured
loan portfolio.
Corporate Banking impairment losses on loans and advances increased by £73m to £44m (2007:
release of £29m). Of the total increase, £50m represented the inclusion of Alliance & Leicester’s
pre-acquisition trading impairment losses on loans and advances in 2008. The remaining increase of
£23m reflected an increased level of impairment on the new corporate portfolios more than
offsetting provision releases from the successful run down of the legacy portfolios.
Private Banking impairment losses on loans and advances of £3m were broadly in line with £2m
in 2007.
Personal Financial Services non-performing loans
| 2009 | 2008 (1) | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Total non-performing loans (‘NPLs’)
|
3,613 | 2,378 | 892 | |||||||||
|
Total loans and advances to customers (excluding trading assets)
|
194,087 | 185,989 | 118,399 | |||||||||
|
Total provisions (on a statutory basis)
|
1,299 | 1,001 | 551 | |||||||||
|
NPLs as a % of loans and advances
|
1.86 | % | 1.28 | % | 0.75 | % | ||||||
|
Provisions as a % of NPLs
|
35.95 | % | 42.10 | % | 61.77 | % | ||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements. |
2009 compared to 2008
In 2009, the value of non-performing loans increased to £3,613m (2008: £2,378m) and non-performing
loans as a percentage of loans and advances increased to 1.86% (2008:
1.28%). The non-performing
loan ratio increased due to rising secured (residential and commercial properties) and corporate
arrears reflecting continued market deterioration. However, the retail unsecured arrears decreased
by £114m.
The overall coverage ratio decreased from 42.10% to 35.95%, impacted by the mix of the
non-performing assets, due to the increase in the secured mortgage component which has a lower
provisioning requirement because of inherent security.
2008 compared to 2007
In 2008, the value of non-performing loans increased to £2,378m (2007: £892m) and non-performing
loans as a percentage of loans and advances increased to 1.28% (2007: 0.75%). The inclusion of
Alliance & Leicester in 2008 represents non-performing loans of £873m. Most of the remaining
increase in the non-performing loan was due to a rise in secured arrears given market
deterioration.
The overall coverage ratio decreased from 61.77% to 42.10%, largely due to a change in the mix
of arrears, which shifted towards the secured portfolio, resulting in a reduction in coverage due
to the lower reserving requirements on this portfolio because of inherent security.
26
Business and Financial Review
Other Material Items
Adjustments between the statutory basis and the trading basis
Santander UK’s Board reviews discrete financial information for each of its segments that
includes measures of operating results and assets, which are measured on a ‘trading’ basis. The
trading basis differs from the statutory basis as a result of the application of various
adjustments, as presented below, and described in the Business Review — Summary. Management
considers that the trading basis provides the most appropriate way of reviewing the performance of
the business.
The trading adjustments consist of:
A&L pre-acquisition trading basis results
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
|
— | 164 | — | |||||||||
The pre-acquisition trading basis results of Alliance & Leicester for the year ended 31
December 2008 are included in the results discussed in the section ‘Personal Financial Services profit before tax by segment’.
The pre-acquisition non-trading adjustments of Alliance & Leicester for the year ended 31 December
2008 of £(1,288)m have not been included. This adjustment applies only to 2008 as the results of
Alliance & Leicester are fully consolidated in the 2009 statutory results.
Reorganisation and other costs
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Cost reduction programme
|
131 | 100 | 109 | |||||||||
|
Credit provisions
|
40 | 42 | 132 | |||||||||
|
Misselling remediation administration costs
|
15 | 21 | 37 | |||||||||
|
|
186 | 163 | 278 | |||||||||
These costs comprise implementation costs in relation to the strategic change and cost
reduction process, certain credit provisions taken centrally, as well as remediation administration
costs in respect of product misselling.
2009 compared to 2008
Total reorganisation and other costs of £186m increased by £23m compared to the previous period
(2008: £163m).
Cost reduction programme expenses of £131m increased by £31m compared to the previous period
(2008: £100m) reflecting the cost of restructuring and rebranding following the transfer of
Alliance & Leicester plc to the Company in 2009 and the acquisition of the Bradford & Bingley
savings business in September 2008.
Non-trading credit provisions of £40m in 2009 represent impairment losses recognised on the
consolidation of the assets of the Group’s Conduit vehicles, as described in ‘Exposure to
Off-Balance Sheet Entities sponsored by the Group’ in the Risk Management Report on page 84. The
2008 charge of £42m relates to retail credit provisions. In accordance with IFRS, the charge for
credit provisions adjusts the balance sheet provisions to the level that management deems adequate
to absorb actual and inherent losses in Santander UK’s loan portfolio from homogeneous portfolios
of assets and individually identified loans, as described more fully in the Risk Management Report
- Provisions on loans and advances to customers, and in the Accounting Policies in the Consolidated
Financial Statements. The required charge is generally determined using statistical techniques
developed on previous experience and on projections of current market conditions to the time the
loss is expected to crystallise. For management reporting purposes, the total charge is then split
between the charge that would be required based on conditions that persist at the balance sheet
date, and the adjustment to that charge in order to reflect the change in conditions when the loss
is expected to crystallise. The charge that would be required based on conditions that persist at
the balance sheet date is used in the day to day running of the business, and is therefore included
in provisions on the trading basis. The adjustment to the charge is excluded from the results on a
trading basis and is classified as non-trading. No adjustment to the charge was required in 2009 as
conditions that persisted at the balance sheet date reflected the conditions when the loss is
expected to crystallise.
Misselling remediation administration costs decreased to £15m (2008: £21m) reflecting a
reduction in complaints handling charges.
2008 compared to 2007
Total reorganisation and other costs of £163m decreased by £115m compared to the previous period
(2007: £278m).
Cost reduction programme expenses of £100m decreased by £9m compared to the previous period
(2007: £109m) reflecting the end of the cost reduction programme initiated in 2004 and reduced
project reorganisation costs.
Non-trading credit provisions of £42m decreased £90m compared to the previous period (2007:
£132m). The reduction in 2008 compared to 2007 reflects the fact that the conditions at the balance
sheet date were more closely aligned at 31 December 2008 than 31 December 2007 to the conditions
that were expected to persist when the losses crystallise.
Misselling remediation administration costs decreased to £21m (2007: £37m) reflecting a
reduction in complaints handling charges.
27
Business and Financial Review
Other Material Items
continued
Profit on part sale of PFS subsidiaries
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
|
— | 40 | 110 | |||||||||
These profits are excluded from the results to allow management to understand the underlying
performance of the business. In 2009, there were no such profits. In 2008, the profit on the sale
of the Porterbrook businesses was excluded.
In 2007, the profit on the sale of 49% of James Hay, Cater Allen and Abbey Sharedealing, and
small recoveries on certain other transactions were similarly excluded.
Hedging and other variances
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
|
36 | 84 | 72 | |||||||||
The Balance Sheet and Income Statement are subject to mark-to-market volatility including that
arising from the accounting for elements of derivatives deemed under IFRS rules to be ineffective
as hedges. Volatility also arises on certain assets previously managed on a fair value basis, and
hence classified as fair value through profit or loss under IFRS, that are now managed on an
accruals basis. In addition, other variances include the reversal of coupon payments on certain
equity instruments which are treated as an interest expense in the trading results but are reported
below the profit after tax line for statutory purposes.
2009 compared to 2008
In 2009, substantial mark-to-market gains which arose in the second half of 2008 from movements in
interest rates reversed. These were partly offset by the reversal of losses due to widening asset
spreads in 2008 as credit spreads narrowed. In addition, 2009 includes a credit of £57m relating to
non-controlling interests and Reserve Capital Instruments which are treated as interest expense on
a trading basis.
2008 compared to 2007
In 2008, there was substantial mark-to-market volatility which affected asset and liability
positions and related derivatives. The impact of this volatility was a loss of £84m (2007: £72m),
largely due to increasing asset credit spreads. Losses were incurred due to an increase in credit
spreads on the Group’s holdings of prime mortgage-backed securities (almost all of which are AAA
rated), which are accounted for as fair value through profit or loss and ineligible for
reclassification in accordance with IAS 39. However, this was partially offset by other
mark-to-market volatility, principally arising on swaps which do not meet the IAS 39 requirements
for hedge accounting.
Capital and other charges
Capital charges principally comprise internal nominal charges for capital invested in the
Group’s businesses. Management implemented this charge to assess if capital is invested
effectively. On a consolidated basis, the total of these internal reallocations is £nil.
Legal proceedings
Santander UK is party to various legal proceedings in the ordinary course of business, the
ultimate resolution of which is not expected to have a material adverse effect on the financial
position or the results of operations of Santander UK. See Note 37 to the Consolidated Financial
Statements.
Material contracts
Santander UK is party to various contracts in the ordinary course of business. For the three
years ended 31 December 2009 there have been no material contracts entered into outside the
ordinary course of business, except for the contracts described below.
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged group, Banco Santander, S.A. transferred all of its Alliance & Leicester
plc shares to the Company in exchange for newly issued ordinary shares of the Company.
On 19 March 2009, the Company gave a full and unconditional guarantee in respect of the
unsubordinated liabilities of Alliance & Leicester plc incurred prior to 31 July 2012 under a deed
poll guarantee entered into by the Company. Alliance & Leicester plc has given a reciprocal
guarantee in respect of the unsubordinated liabilities of the Company incurred prior to 31 July
2012.
Audit fees
See Note 7 to the Consolidated Financial Statements.
28
Business and Financial Review
Throughout this section, references to UK and non-UK refer to the location of the office where
the transaction is recorded. 2008 data has been updated to reflect the transfer of Alliance &
Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements.
Summary
This balance sheet business review describes the Group’s significant assets and liabilities and
its strategy and reasons for entering into such transactions. The principal assets and liabilities
are summarised by their nature, rather than by their classification in the balance sheet. The
balance sheet business review is divided into the following sections:
| • | Securities — The Group’s strategies and reasons for holding securities are described on pages 31 and 32, as well as: |
| • | Analysis by type of issuer. | ||
| • | Maturity analysis for available-for-sale debt securities. | ||
| • | Significant exposures exceeding 10% of the Group’s shareholders’ funds. |
| • | Loans and advances to banks — These assets are described on pages 32 and 33, consisting of: |
| • | Geographical analysis between UK and non-UK. | ||
| • | Maturity analysis further analysed between UK and non-UK. | ||
| • | Interest rate sensitivity analysed between fixed rate and floating rate. |
| • | Loans and advances to customers — These assets are described on pages 33 to 35, consisting of: |
| • | Geographical analysis between UK and non-UK, further analysed by product. | ||
| • | Maturity analysis further analysed geographically and by product. | ||
| • | Interest rate sensitivity analysed between fixed rate and floating rate. | ||
| • | Provisions on loans and advances to customers — The Group’s policies are described on pages 34 and 35, together with disclosures related to potential problem loans and advances, potential credit risk elements in loans and advances, exposures to countries experiencing liquidity problems and cross border outstandings. |
| • | Derivatives — The Group’s derivative positions are summarised on page 35. Cross references are provided to other disclosures about the Group’s strategies and reasons for entering into derivative transactions and further detailed analysis of derivative notional amounts and assets and liabilities by type of contract. | |
| • | Tangible fixed assets — A summary of the Group’s capital expenditure during the year by segment, together with details of the Group’s property interests and principal sites are described on page 36. | |
| • | Deposits by banks — These liabilities are summarised on page 36, including average balances and maximum balances during the year, with further analysis geographically. | |
| • | Deposits by customers — These liabilities are summarised on pages 37 and 38, including average balances and maximum balances during the year, with further analyses geographically and by customer type. | |
| • | Debt securities in issue — The Group’s debt securities in issue are summarised on pages 38 and 39, including commentary on the movements in the major debt issuance programmes during the year and cross references to detailed descriptions of the programmes. | |
| • | Retirement benefit obligations — Details of the movements in the Group’s pension deficit are set out on page 39. | |
| • | Contractual obligations — A contractual maturity analysis of the Group’s obligations is set out on page 40. | |
| • | Off balance sheet arrangements — The Group’s off-balance sheet arrangements, including guarantees, commitments, contingencies, and exposures to off-balance sheet entities sponsored by the Group are described on page 40. | |
| • | Capital management and resources — A summary of the Group’s approach to capital management and resources is set out on pages 41 to 43, as well as disclosures required by Pillar 3, details of the Group’s capital ratios and regulatory capital resources and requirements. | |
| • | Liquidity — The Group’s liquidity arrangements are described on pages 43 to 46, including a summary of the sources and uses of liquidity, together with commentary on the Group’s cash flows for the past three years. | |
| • | Other |
| • | Changes in net interest income — An analysis of changes in the Group’s interest income, interest expense and net interest income between changes in volume and changes in rate is presented on page 47. | ||
| • | Average balance sheets — As period-end statements may not be representative of the Group’s activity throughout the year, average balance sheets for the Group are presented on page 48. The average balance sheets summarise the significant categories of assets and liabilities, including all major categories of interest-earning assets and interest-bearing liabilities, together with average interest rates. |
29
Business and Financial Review
Balance Sheet Business Review
continued
Reconciliation to classifications in the consolidated balance sheet
The classifications of assets and liabilities in the Group’s consolidated balance sheet,
including the Note reference, and in the balance sheet business review may be reconciled as
follows:
31 December 2009
| Balance sheet business review section | ||||||||||||||||||||||||||||||||
| Loans and | Loans and | Tangible | ||||||||||||||||||||||||||||||
| advances | advances | fixed | Balance | |||||||||||||||||||||||||||||
| Securities | to banks | to customers | Derivatives | assets | Other | sheet total | ||||||||||||||||||||||||||
| Balance sheet line item and note | Note | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash and balances at central banks
|
11 | — | — | — | — | — | 4,163 | 4,163 | ||||||||||||||||||||||||
|
Trading assets
|
12 | 17,410 | 5,252 | 10,628 | — | — | — | 33,290 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
13 | — | — | — | 22,827 | — | — | 22,827 | ||||||||||||||||||||||||
|
Financial assets designated at fair value
|
14 | 5,979 | — | 6,379 | — | — | — | 12,358 | ||||||||||||||||||||||||
|
Loans and advances to banks
|
15 | — | 9,151 | — | — | — | — | 9,151 | ||||||||||||||||||||||||
|
Loans and advances to customers
|
16 | — | — | 186,804 | — | — | — | 186,804 | ||||||||||||||||||||||||
|
Available for sale securities
|
18 | 797 | — | — | — | — | — | 797 | ||||||||||||||||||||||||
|
Loans and receivables securities
|
19 | — | 7,208 | 2,690 | — | — | — | 9,898 | ||||||||||||||||||||||||
|
Macro hedge of interest rate risk
|
— | — | — | — | — | 1,127 | 1,127 | |||||||||||||||||||||||||
|
Property, plant and equipment
|
23 | — | — | — | — | 938 | — | 938 | ||||||||||||||||||||||||
|
Operating lease assets
|
24 | — | — | — | — | 312 | — | 312 | ||||||||||||||||||||||||
|
Tax, intangibles and other assets
|
— | — | — | — | — | 3,626 | 3,626 | |||||||||||||||||||||||||
|
Total assets
|
24,186 | 21,611 | 206,501 | 22,827 | 1,250 | 8,916 | 285,291 | |||||||||||||||||||||||||
| Debt | Retirement | Balance | ||||||||||||||||||||||||||||||
| Deposits | Deposits by | securities | benefit | sheet | ||||||||||||||||||||||||||||
| by banks | customers | in issue | Derivatives | obligations | Other | total | ||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by banks
|
27 | 5,811 | — | — | — | — | — | 5,811 | ||||||||||||||||||||||||
|
Deposits by customers
|
28 | — | 143,893 | — | — | — | — | 143,893 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
13 | — | — | — | 18,963 | — | — | 18,963 | ||||||||||||||||||||||||
|
Trading liabilities
|
29 | 40,824 | 4,115 | 1,213 | — | — | — | 46,152 | ||||||||||||||||||||||||
|
Financial liabilities designated at fair value
|
30 | 45 | 12 | 4,366 | — | — | — | 4,423 | ||||||||||||||||||||||||
|
Debt securities in issue
|
31 | — | — | 47,758 | — | — | — | 47,758 | ||||||||||||||||||||||||
|
Other borrowed funds
|
32 | — | — | 1,352 | — | — | — | 1,352 | ||||||||||||||||||||||||
|
Subordinated liabilities
|
33 | — | — | 5,597 | — | — | — | 5,597 | ||||||||||||||||||||||||
|
Retirement benefit obligations
|
36 | — | — | — | — | 1,070 | — | 1,070 | ||||||||||||||||||||||||
|
Tax, other liabilities and provisions
|
— | — | — | — | — | 3,050 | 3,050 | |||||||||||||||||||||||||
|
Total liabilities
|
46,680 | 148,020 | 60,286 | 18,963 | 1,070 | 3,050 | 278,069 | |||||||||||||||||||||||||
31 December 2008
| Balance sheet business review section | ||||||||||||||||||||||||||||||||
| Loans and | Loans and | Tangible | ||||||||||||||||||||||||||||||
| advances to | advances | fixed | Balance sheet | |||||||||||||||||||||||||||||
| Securities | banks | to customers | Derivatives | assets | Other | total | ||||||||||||||||||||||||||
| Balance sheet line item and note | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash and balances at central banks
|
11 | — | — | — | — | — | 4,017 | 4,017 | ||||||||||||||||||||||||
|
Trading assets
|
12 | 17,509 | 7,445 | 1,310 | — | — | — | 26,264 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
13 | — | — | — | 35,125 | — | — | 35,125 | ||||||||||||||||||||||||
|
Financial assets designated at fair value
|
14 | 4,690 | — | 6,687 | — | — | — | 11,377 | ||||||||||||||||||||||||
|
Loans and advances to banks
|
15 | — | 16,001 | — | — | — | — | 16,001 | ||||||||||||||||||||||||
|
Loans and advances to customers
|
16 | — | — | 180,176 | — | — | — | 180,176 | ||||||||||||||||||||||||
|
Available for sale securities
|
18 | 2,663 | — | — | — | — | — | 2,663 | ||||||||||||||||||||||||
|
Loans and receivables securities
|
19 | — | 8,444 | 5,663 | — | — | — | 14,107 | ||||||||||||||||||||||||
|
Macro hedge of interest rate risk
|
— | — | — | — | — | 2,188 | 2,188 | |||||||||||||||||||||||||
|
Property, plant and equipment
|
23 | — | — | — | — | 854 | — | 854 | ||||||||||||||||||||||||
|
Operating lease assets
|
24 | — | — | — | — | 348 | — | 348 | ||||||||||||||||||||||||
|
Tax, intangibles and other assets
|
— | — | — | — | — | 4,190 | 4,190 | |||||||||||||||||||||||||
|
Total assets
|
24,862 | 31,890 | 193,836 | 35,125 | 1,202 | 10,395 | 297,310 | |||||||||||||||||||||||||
| Debt | Retirement | |||||||||||||||||||||||||||||||
| Deposits | Deposits by | securities | benefit | Balance sheet | ||||||||||||||||||||||||||||
| by banks | customers | in issue | Derivatives | obligations | Other | total | ||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by banks
|
27 | 14,488 | — | — | — | — | — | 14,488 | ||||||||||||||||||||||||
|
Deposits by customers
|
28 | — | 130,245 | — | — | — | — | 130,245 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
13 | — | — | — | 27,810 | — | — | 27,810 | ||||||||||||||||||||||||
|
Trading liabilities
|
29 | 34,341 | 4,622 | 1,024 | — | — | 751 | 40,738 | ||||||||||||||||||||||||
|
Financial liabilities designated at fair
value
|
30 | 153 | 252 | 5,268 | — | — | — | 5,673 | ||||||||||||||||||||||||
|
Debt securities in issue
|
31 | — | — | 58,511 | — | — | — | 58,511 | ||||||||||||||||||||||||
|
Other borrowed funds
|
32 | — | — | 2,076 | — | — | — | 2,076 | ||||||||||||||||||||||||
|
Subordinated liabilities
|
33 | — | — | 6,787 | — | — | — | 6,787 | ||||||||||||||||||||||||
|
Retirement benefit obligations
|
36 | — | — | — | — | 813 | — | 813 | ||||||||||||||||||||||||
|
Tax, other liabilities and provisions
|
— | — | — | — | — | 3,472 | 3,472 | |||||||||||||||||||||||||
|
Total liabilities
|
48,982 | 135,119 | 73,666 | 27,810 | 813 | 4,223 | 290,613 | |||||||||||||||||||||||||
30
Business and Financial Review
Balance Sheet Business Review
continued
Securities
The Group holds securities for a variety of purposes:
| • | As part of its trading activities in the Short Term Markets business of Global Banking & Markets; | |
| • | For yield and liquidity purposes, including the Asset and Liability Management Committee investment portfolio of Group mortgage-backed securities and other asset-backed securities, in Group Infrastructure; and | |
| • | In the Alliance & Leicester Treasury asset portfolio in Group Infrastructure which is being run down. The securities in this portfolio are accounted for as loans and receivables as described in Note 19 to the Consolidated Financial Statements and are therefore disclosed in the Loans and advances to banks and Loans and advances to customers sections of this Balance Sheet Business Review. |
The following table sets out the book and market values of securities at 31 December 2009, 2008 and
2007. For further information, see the Notes to the Consolidated Financial Statements.
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Trading portfolio
|
||||||||||||
|
Debt securities:
|
||||||||||||
|
UK Government
|
968 | 191 | 1,168 | |||||||||
|
US treasury and other US Government agencies and corporations
|
628 | 574 | — | |||||||||
|
Other OECD governments
|
1,260 | 2,374 | 2,554 | |||||||||
|
Bank and building society:
|
||||||||||||
|
- Certificates of deposit — Government guaranteed
|
205 | 3,119 | 9,679 | |||||||||
|
- Certificates of deposit — Other
|
1,730 | 5,266 | — | |||||||||
|
Other issuers:
|
||||||||||||
|
- Floating rate notes
|
3,038 | 4,724 | — | |||||||||
|
- Floating rate notes — Government guaranteed
|
8,090 | 553 | 2,805 | |||||||||
|
- Mortgage-backed securities
|
— | — | 2 | |||||||||
|
- Other asset-backed securities
|
— | — | 2,368 | |||||||||
|
- Other
|
13 | — | 10,255 | |||||||||
|
Ordinary shares and similar securities
|
1,478 | 708 | 1,494 | |||||||||
|
|
17,410 | 17,509 | 30,325 | |||||||||
|
Available for sale securities
|
||||||||||||
|
Debt securities:
|
||||||||||||
|
UK Government
|
405 | 2,383 | — | |||||||||
|
Other issuers — other
|
342 | 235 | 8 | |||||||||
|
Ordinary shares and similar securities
|
50 | 45 | 32 | |||||||||
|
|
797 | 2,663 | 40 | |||||||||
|
Financial assets designated at fair value through profit and loss
|
||||||||||||
|
Debt securities:
|
||||||||||||
|
Bank and building society certificates of deposit
|
2,220 | — | 15 | |||||||||
|
Other issuers:
|
||||||||||||
|
- Mortgage-backed securities
|
3,355 | 4,362 | 4,093 | |||||||||
|
- Other asset-backed securities
|
50 | 63 | 1,460 | |||||||||
|
- Synthetic floating rate notes and structured debt securities
|
354 | 265 | 514 | |||||||||
|
|
5,979 | 4,690 | 6,082 | |||||||||
|
Total
|
24,186 | 24,862 | 36,447 | |||||||||
UK Government securities
The holdings of UK Government securities represent Treasury Bills and UK Government guaranteed
issues by other UK banks. These securities are held for trading and liquidity purposes, including
meeting the FSA’s stock liquidity ratio requirements. The Group’s holdings remain at levels
required by the liquidity ratio. The aggregate Group holding of UK Government securities has risen
with the acquisition of the Bradford & Bingley savings business and with the transfer of Alliance &
Leicester plc.
US treasury and other US Government agencies and corporations
The holdings of US treasury and other US Government agencies’ and corporations’ securities
represent US Treasury Bills, including cash management bills. These securities are held for trading
and liquidity purposes.
Other OECD governments
This category comprises issues by Organisation of Economic Co-operation and Development (‘OECD’)
governments other than the US and UK Governments. These securities are held for trading and
liquidity purposes.
Bank and building society certificates of deposit and bonds
Bank and building society certificates of deposit are fixed-rate securities with relatively short
maturities. These are managed within the overall position for the relevant book. These securities
are held for trading and liquidity purposes.
31
Business and Financial Review
Balance Sheet Business Review
continued
Floating rate notes
Floating rate notes have regular interest rate profiles and are either managed within the overall
position for the relevant book or are hedged into one of the main currencies. These securities are
held for trading and liquidity purposes.
Mortgage-backed securities
This category comprises highly rated, European residential mortgage-backed securities. The
securities are of high quality, contain no sub-prime element and consist almost entirely of
AAA-rated prime exposures. This category includes mortgage-backed securities issued by other
Santander group companies. These securities are held as part of the investment portfolio.
Other asset-backed securities
This category comprises a range of mostly floating-rate asset-backed securities including home
equity loans, commercial mortgages, car dealer, lease and credit card debtors and student loans, as
well as a small balance of collateralised synthetic obligations. Some credit card debtors
incorporate cap features. These securities are held as part of the investment portfolio.
Other securities
This category comprised mainly synthetic floating-rate notes (which are fixed-rate bonds packaged
into floating-rate by means of swaps tailored to provide a match to the characteristics of the
underlying bond), along with a number of structured transactions which were hedged, as appropriate,
either on an individual basis or as part of the overall management of the books. The synthetic
floating-rate notes comprised bonds issued by banks, financial institutions and corporations, the
latter being largely guaranteed by banks and financial institutions. These securities are held for
trading and liquidity purposes.
The following table sets forth available for sale debt securities by contractual maturity at 31
December 2009. Contractual maturities of investments held for trading or classified as fair value
through profit or loss are not presented.
| In more than 3 | In more than 1 year | |||||||||||||||||||||||
| In not more than 3 | months but not more | but not more than 5 | In more than | |||||||||||||||||||||
| On demand | months | than 1 year | years | 5 years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
UK Government
|
— | — | 405 | — | — | 405 | ||||||||||||||||||
|
Other
|
— | 75 | — | 267 | — | 342 | ||||||||||||||||||
|
Weighted average yield for year %
|
— | 1.30 | % | 4.13 | % | 2.45 | % | — | 3.24 | % | ||||||||||||||
Significant exposures
The following table sets forth the book and market values of securities of individual
counterparties where the aggregate amount of those securities exceeded 10% of the Group’s
shareholders’ funds at 31 December 2009 as set out in the Consolidated Balance Sheet on page 103.
| £m | ||||
|
Lloyds Banking Group plc
|
5,432 | |||
|
The Royal
Bank of Scotland Group plc
|
2,523 | |||
|
Grupo Monte dei Paschi di Siena
|
2,290 | |||
|
Barclays
Bank plc
|
2,015 | |||
|
UK Government
|
1,373 | |||
|
Hipototta No.3 plc
|
1,092 | |||
|
Hipototta No.2 plc
|
837 | |||
Trading portfolio 2009 compared to 2008
The size of the total trading portfolio has remained largely unchanged at 31 December 2009 compared
to 31 December 2008, although there has been a shift from bank certificates of deposit to
government-guaranteed bank paper due to the enhanced risk-adjusted yield.
Available for sale securities 2009 compared to 2008
Available for sale securities decreased at 31 December 2009 compared to 31 December 2008 as a
larger proportion of the overall securities portfolio was held on a trading basis reflecting more
active management of the liquidity portfolio.
Financial assets designated at fair value through profit and loss 2009 compared to 2008
The increase in the portfolio at 31 December 2009 compared to 31 December 2008 was due to certain
bank certificates of deposit being included here as they were held on a yield basis, rather than a
trading basis, partly offset by scheduled repayments of mortgage-backed securities.
Loans and advances to banks
Loans and advances to banks include loans to banks and building societies and balances with
central banks (excluding those central bank balances which can be withdrawn on demand). The
geographical analysis of loans and advances presented in the following table is based on the
location of the office from which the loans and advances are made, rather
than the domicile of the borrower. The balances below include loans and advances to banks that are
classified in the balance sheet as trading assets, financial assets designated at fair value, or
loans and receivables securities.
32
Business and Financial Review
Balance Sheet Business Review
continued
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
UK
|
21,524 | 28,859 | 12,066 | 11,943 | 8,060 | |||||||||||||||
|
Non-UK
|
87 | 3,031 | 222 | 93 | 1,036 | |||||||||||||||
|
|
21,611 | 31,890 | 12,288 | 12,036 | 9,096 | |||||||||||||||
The balances above include loans and advances to other Santander companies from UK offices of
£7,546m (2008: £9,353m, 2007: £1,640m).
The following table sets forth loans and advances to banks by maturity at 31 December 2009.
| On | In not more than | In more than three months | In more than one year but | In more than | ||||||||||||||||||||
| demand | three months | but not more than one year | not more than five years | five years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
UK
|
4,145 | 7,772 | 4,334 | 4,270 | 1,003 | 21,524 | ||||||||||||||||||
|
Non-UK
|
22 | 18 | 47 | — | — | 87 | ||||||||||||||||||
|
|
4,167 | 7,790 | 4,381 | 4,270 | 1,003 | 21,611 | ||||||||||||||||||
The following table sets forth loans and advances to banks by interest rate sensitivity at 31
December 2009.
| Fixed rate | Variable rate | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
Interest-bearing loans and advances to banks
(1)
:
|
||||||||||||
|
UK
|
16,747 | 3,847 | 20,594 | |||||||||
|
Non-UK
|
47 | 40 | 87 | |||||||||
|
|
16,794 | 3,887 | 20,681 | |||||||||
| (1) | Excludes non interest-bearing accounts |
Loans and advances to banks 2009 compared to 2008
Loans and advances to banks decreased at 31 December 2009 compared to 31 December 2008 due to the
2008 balance including the temporary investment of surplus liquidity which in 2009 was used to
reduce short-term borrowings.
Loans and advances to customers
The Group provides lending facilities primarily to personal customers in the form of mortgages
secured on residential properties and a limited number of lending facilities to corporate
customers. Purchase and resale agreements represent sale and repurchase activity with professional
non-bank customers by the Global Banking & Markets Short Term Markets business. The geographical
analysis of loans and advances presented in the following table is based on the location of the
office from which the loans and advances are made. The balances below are stated before the
deduction for loan loss allowances and include loans and advances to customers that are classified
in the balance sheet as trading assets, financial assets designated at fair value, or loans and
receivables securities.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
UK
|
||||||||||||||||||||
|
Advances secured on residential property
|
167,172 | 159,168 | 110,857 | 102,096 | 94,330 | |||||||||||||||
|
Corporate loans
|
12,171 | 13,181 | 1,247 | 666 | 334 | |||||||||||||||
|
Finance leases
|
1,602 | 1,792 | — | 1 | 3 | |||||||||||||||
|
Other secured advances
|
3,817 | 4,206 | 2,960 | 2,305 | 1,882 | |||||||||||||||
|
Other unsecured advances
|
5,249 | 6,745 | 3,263 | 4,104 | 3,845 | |||||||||||||||
|
Purchase and resale agreements
|
10,628 | 1,310 | 3,711 | 5,427 | 4,789 | |||||||||||||||
|
Loans and receivables securities
|
2,690 | 5,663 | — | — | — | |||||||||||||||
|
Amounts due from fellow group subsidiaries
|
4,457 | 2,652 | 55 | — | — | |||||||||||||||
|
Total UK
|
207,786 | 194,717 | 122,093 | 114,599 | 105,183 | |||||||||||||||
|
Non-UK
|
||||||||||||||||||||
|
Advances secured on residential property
|
9 | 12 | 13 | 19 | 26 | |||||||||||||||
|
Corporate loans
|
2 | 103 | — | — | — | |||||||||||||||
|
Other secured advances
|
2 | 3 | 2 | — | — | |||||||||||||||
|
Other unsecured advances
|
1 | 2 | 2 | 35 | 31 | |||||||||||||||
|
Purchase and resale agreements
|
— | — | 13,544 | 14,375 | 13,152 | |||||||||||||||
|
Total non-UK
|
14 | 120 | 13,561 | 14,429 | 13,209 | |||||||||||||||
|
Total
|
207,800 | 194,837 | 135,654 | 129,028 | 118,392 | |||||||||||||||
|
Less: credit provisions
|
(1,299 | ) | (1,001 | ) | (551 | ) | (536 | ) | (394 | ) | ||||||||||
|
Total, net of provisions
|
206,501 | 193,836 | 135,103 | 128,492 | 117,998 | |||||||||||||||
The balances above include loans and advances to other Santander group companies of £4,457m
(2008: £2,652m, 2007: £55m). Detailed analysis of the loans and receivables securities included in
the table above is set out in the Impact of the Current Credit Environment in the Risk Management
Report on page 77.
No single concentration of loans and advances, with the exception of advances secured on
residential properties, as disclosed above, accounts for more than 10% of total loans and advances
and no individual country, other than the UK and US, accounts for more than 5% of total loans and
advances.
33
Business and Financial Review
Balance Sheet Business Review
continued
The following tables set forth loans and advances to customers by maturity and interest rate
sensitivity at 31 December 2009. In the maturity analysis, overdrafts are included in the
“on-demand” category. Advances secured by residential properties are included in the maturity
analysis at their stated maturity; however, such advances may be repaid early.
| In not more | In more than three | In more than one | In more | |||||||||||||||||||||
| On | than three | months but not | year but not more | than five | ||||||||||||||||||||
| demand | months | more than one year | than five years | years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
UK
|
||||||||||||||||||||||||
|
Advances secured on residential property
|
70 | 995 | 2,907 | 17,164 | 146,036 | 167,172 | ||||||||||||||||||
|
Corporate loans
|
172 | 1,471 | 710 | 5,959 | 3,859 | 12,171 | ||||||||||||||||||
|
Finance leases
|
19 | 137 | 89 | 435 | 922 | 1,602 | ||||||||||||||||||
|
Other secured advances
|
— | 106 | 65 | 401 | 3,245 | 3,817 | ||||||||||||||||||
|
Other unsecured advances
|
667 | 559 | 1,145 | 2,447 | 431 | 5,249 | ||||||||||||||||||
|
Purchase and resale agreements
|
1,801 | 8,827 | — | — | — | 10,628 | ||||||||||||||||||
|
Loans and receivables securities
|
62 | 21 | — | 184 | 2,423 | 2,690 | ||||||||||||||||||
|
Amounts due from fellow group subsidiaries
|
54 | 3,327 | 5 | 1,071 | — | 4,457 | ||||||||||||||||||
|
Total UK
|
2,845 | 15,443 | 4,921 | 27,661 | 156,916 | 207,786 | ||||||||||||||||||
|
Non-UK
|
||||||||||||||||||||||||
|
Advances secured on residential property
|
— | — | — | 1 | 8 | 9 | ||||||||||||||||||
|
Corporate loans
|
— | 2 | — | — | — | 2 | ||||||||||||||||||
|
Other secured advances
|
— | — | — | — | 2 | 2 | ||||||||||||||||||
|
Other unsecured advances
|
— | 1 | — | — | — | 1 | ||||||||||||||||||
|
Total non-UK
|
— | 3 | — | 1 | 10 | 14 | ||||||||||||||||||
|
Total
|
2,845 | 15,446 | 4,921 | 27,662 | 156,926 | 207,800 | ||||||||||||||||||
The interest rate sensitivity table below analyses loans between fixed rate and variable rate
as at 31 December 2009.
| Fixed rate | Variable rate | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
UK
|
80,912 | 126,874 | 207,786 | |||||||||
|
Non-UK
|
1 | 13 | 14 | |||||||||
|
|
80,913 | 126,887 | 207,800 | |||||||||
The Group’s policy is to hedge all fixed-rate loans and advances to customers using derivative
instruments, or by matching with other on-balance sheet interest rate exposures.
Loans and advances to customers — 2009 compared to 2008
Loans and advances to customers increased at 31 December 2009 compared to 31 December 2008 due to
increased mortgage lending, as planned, and increased repurchase agreement (‘repo’) activity with
non-bank counterparties. New corporate lending was offset by repayments from the non-growth
corporate portfolios.
Provisions on loans and advances to customers
Details of the Group’s provisioning policy are set out on page 64 and in the Accounting Policies
section on pages 116 to 118. An analysis of end-of-year provisions on loans and advances to
customers, movements in provisions for bad and doubtful debts, and Group non-performing loans and
advances are set out in the Risk Management Report on page 56 and Note 16 to the Consolidated
Financial Statements.
In Retail Banking, due to the homogenous nature of the loans, the assessment of impairment
existing at the reporting date is undertaken on a collective basis through the use of statistical
techniques. The collective assessment takes due consideration of the time in arrears, with longer
periods in arrears indicating a higher probability of the loans going into possession. Individual
assessments are only undertaken when the collateral on a secured residential loan is repossessed or
on commercial loans, where the loan is overdue.
These techniques are equally used to establish the amount of provisions for bad and doubtful
debts. In addition, the Group’s policy of initiating prompt contact with customers in arrears,
together with the nature of the security held, which in the case of some advances secured on
residential property may have increased in value over the life of the loans, means that some
non-performing loans will not result in a loss.
Non-performing loans and advances are statistically more likely to result in losses the longer
they have been in arrears. Losses on cases for which the property securing the loan has been taken
into possession are evaluated individually with the amounts expected to be lost on realisation of
the security being established with a high degree of certainty.
Provisions on loans and advances to customers — 2009 compared to 2008
Provisions for impairment losses on loans and advances for Retail Banking increased from £698m to
£940m as at 31 December 2009. This primarily reflects the impact of increased observed provisions
driven by the unsecured personal advances portfolio acquired from Alliance & Leicester in 2008.
This was also partly affected by the increase in observed provisions over the residential mortgage
portfolio due to the continued challenging economic conditions in 2009.
Provisions for impairment on loans and advances for Corporate Banking increased by £56m to
£359m as at 31 December 2009. The observed provision charge was £177m due to losses in the property
sector. This was partly offset by a £117m release of the IBNO provision as losses were observed.
34
Business and Financial Review
Balance Sheet Business Review
continued
Provisions on loans and advances to customers — 2008 compared to 2007
As at 31 December 2008, total provisions for impairment losses on loans and advances increased from
£551m to £698m. This primarily reflects the impact of increased observed provisions over the
residential mortgage portfolio, where declining property prices resulted in losses from higher
mortgage repossession cases. The reduction in the provision charged against unsecured personal
advances is due to a reduction in risk appetite on this portfolio and a more stringent credit
approval process.
The increase in the provisions during the year is largely due to the inclusion of the incurred
but not yet observed (‘IBNO’) provision related to Alliance & Leicester’s Corporate Banking
portfolio.
The following table sets forth arrears on advances secured on residential properties included in
the Group non-performing loans and advances within the Risk Management Report on page 66 to the
Consolidated Financial Statements for each of the last five years.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
6 months to 12 months in arrears
|
717 | 429 | 163 | 155 | 172 | |||||||||||||||
|
12 months or more in arrears
|
281 | 72 | 30 | 27 | 26 | |||||||||||||||
|
Properties in possession
|
111 | 129 | 64 | 42 | 44 | |||||||||||||||
Potential credit risk elements in loans and advances
Interest continues to be accrued on all loans and the element of interest that is not anticipated
to be recovered is derecognised. Interest income recognised on impaired loans is set out in the
Consolidated Financial Statements. The income adjustment in respect of interest that is not
anticipated to be recovered was £46m (2008: £21m, 2007: £16m).
Country risk exposure
Despite another turbulent year for the global economy that has lead some countries to experience
severe difficulties, the Group is not exposed to sovereign debt of countries currently experiencing
liquidity problems. The Group has exposure to banks in those countries limited to a £13m (2008:
£13m) exposure through a Floating Rate Note issued by a bank in Dubai and a £36m exposure to a bank
in Greece (2008:£187m). Since the balance sheet date, exposure to banks in Greece has reduced to
£5m.
Cross border outstandings
The operations of the Group involve operations in non-local currencies. These cross border
outstandings are controlled through a well-developed system of country limits, which are reviewed
to avoid concentrations of transfer, economic or political risks. Cross border outstandings, which
exclude finance provided within the Group, are based on the country of domicile of the borrower or
guarantor of ultimate risk and comprise loans and advances to customers and banks, finance lease
debtors, interest-bearing investments and other monetary assets denominated in currencies other
than the borrower’s local currency.
Cross border outstandings exceeding 1% of total assets
At 31 December 2009 and 2008, the Group had no cross border outstandings exceeding 1% of total
assets.
| As % of total | Banks and other | Governments and | Commercial, industrial and other | |||||||||||||||||
| assets | Total | financial institutions | official institutions | private sector entities | ||||||||||||||||
| At 31 December 2007 | % | £m | £m | £m | £m | |||||||||||||||
|
United States
|
1.19 | 2,369 | 2,369 | — | — | |||||||||||||||
Cross border outstandings between 0.75% and 1% of total assets
At 31 December 2009, 2008 and 2007, the Group had no cross border outstandings between 0.75% and 1%
of total assets.
Derivative assets and liabilities
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Assets
|
||||||||||||
|
Derivative financial instruments:
|
||||||||||||
|
- held for trading
|
21,472 | 31,713 | 9,519 | |||||||||
|
- held for hedging
|
1,355 | 3,412 | 432 | |||||||||
|
|
22,827 | 35,125 | 9,951 | |||||||||
|
Liabilities
|
||||||||||||
|
Derivative financial instruments:
|
||||||||||||
|
- held for trading
|
16,775 | 25,420 | 9,728 | |||||||||
|
- held for hedging
|
2,188 | 2,390 | 203 | |||||||||
|
|
18,963 | 27,810 | 9,931 | |||||||||
Derivatives are held by the Group for trading or for risk management purposes. All derivatives
are classified as held at fair value through profit or loss. For accounting purposes, the Group
chooses to designate certain derivatives as in a hedging relationship if they meet specific
criteria. The main hedging derivatives are interest rate and cross-currency swaps, which are used
to hedge fixed-rate lending and structured savings products and medium-term note issuances, capital
issuances and other capital markets funding.
35
Business and Financial Review
Balance Sheet Business Review
continued
Global Banking & Markets is the only area of the Group actively trading derivative products and
is additionally responsible for implementing Group derivative hedging with the external market. In
Group Infrastructure, derivatives are used for economic hedging. Further details about Market Risk
in Global Banking & Markets and in Group Infrastructure are set out in the Risk Management Report.
This information includes a summary of the activities undertaken, the related risks associated with
such activities and the types of hedging derivatives used in managing such risks.
Further detailed analysis of the derivatives held by the Group, both for trading and hedging
purposes, including derivative notional amounts and assets and liabilities analysed by type of
contract is contained in Note 13 of the Consolidated Financial Statements.
Tangible fixed assets
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Property, plant and equipment
|
938 | 854 | 528 | |||||||||
|
Operating lease assets
|
312 | 348 | 2,164 | |||||||||
|
|
1,250 | 1,202 | 2,692 | |||||||||
|
Capital expenditure incurred during the year
|
343 | 197 | 407 | |||||||||
Capital expenditure during each of the years ended 31 December 2009, 2008 and 2007 was
principally incurred by Retail Banking (mostly consisting of computer infrastructure, computer
software and furniture and fittings for branches) and by Corporate Banking (consisting of operating
lease assets). Details of capital expenditure contracted but not provided for in respect of
tangible fixed assets are set out in Note 23 to the Consolidated Financial Statements.
The Group had 1,565 unique property interests at 31 December 2009, including the properties
acquired as a result of the transfer of Alliance & Leicester plc to the Company in January 2009 and
the properties acquired from Bradford & Bingley plc in September 2008. The total consisted of 209
freeholds and 1,356 operating lease interests, occupying a total floor space of 1,064,421 square
metres. The number of unique property interests owned by the Group is more than the number of
individual properties as the Group has more than one interest in some properties. The majority of
the Group’s property interests are retail branches. Included in the above total are 36 properties
that were not occupied by the Group as at 31 December 2009. Of the Group’s individual properties,
1,262 are located in the UK, 1 in Europe and 2 in the US. There are no material environmental
issues associated with the use of the above properties.
The Group has eight principal sites consisting of its headquarters and Treasury operations;
the banking back office and Human Resources functions; Corporate Banking; Private Banking and the
telephone distribution operations; Credit Cards, Debt Management, Finance, Compliance and
Marketing. These properties are held under operating leases, except for the Group’s headquarters
and one of the banking back offices. The registered office of the Company is located at 2 Triton
Square, Regent’s Place, London NW1 3AN.
Management believes its existing properties and those under construction, in conjunction with
those it leases, are adequate and suitable for its business as presently conducted and to meet
future business needs. All properties are adequately maintained.
Deposits by banks
(1)
The balances below include deposits by banks that are classified in the balance sheet as trading
liabilities and financial liabilities designated at fair value.
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Year-end balance
(2)
|
46,680 | 48,982 | 27,555 | |||||||||
|
Average balance
(3)
|
48,907 | 34,064 | 36,574 | |||||||||
|
Maximum balance
|
57,845 | 49,194 | 48,278 | |||||||||
| (1) | The Group’s policy is to mark-to-market the majority of its deposits by banks balances including interest. Mark-to-market movements are recorded in net trading and other income rather than net interest income. As a result, it has not been possible to calculate average or year-end interest rates. | |
| (2) | The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £652m (2008: £922m, 2007: £786m). | |
| (3) | Average balances are based upon monthly data. |
At 31 December 2009, deposits by foreign banks amounted to £15,282m (2008: £13,031m, 2007:
£7,922m).
The following tables set forth the average balances of deposits by banks by location.
| Average: year ended 31 December | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
UK
|
45,152 | 31,661 | 34,120 | |||||||||
|
Non-UK
|
3,755 | 2,403 | 2,454 | |||||||||
|
|
48,907 | 34,064 | 36,574 | |||||||||
36
Business and Financial Review
Balance Sheet Business Review
continued
Deposits by customers
The balances below include deposits by customers that are classified in the balance sheet as
trading liabilities and financial liabilities designated at fair value.
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Year-end balance
|
148,020 | 135,119 | 90,148 | |||||||||
|
Average balance
(1)
|
141,312 | 99,056 | 92,046 | |||||||||
|
Maximum balance
|
148,020 | 143,998 | 92,344 | |||||||||
| (1) | Average balances are based upon monthly data. |
The following tables set forth the average balances of deposits by geography.
| Average: year ended 31 December | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
UK
|
134,209 | 93,712 | 85,701 | |||||||||
|
Non-UK
|
7,103 | 5,344 | 6,345 | |||||||||
|
|
141,312 | 99,056 | 92,046 | |||||||||
The following tables set forth the average balances of deposits by geography and customer type.
| Average: year ended 31 December | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
UK
|
||||||||||||
|
Retail demand deposits
|
73,060 | 55,096 | 56,563 | |||||||||
|
Retail time deposits
|
42,873 | 23,590 | 6,033 | |||||||||
|
Wholesale deposits
|
18,276 | 15,026 | 23,105 | |||||||||
|
|
134,209 | 93,712 | 85,701 | |||||||||
|
Non-UK
|
||||||||||||
|
Retail demand deposits
|
3,170 | 1,742 | 1,811 | |||||||||
|
Retail time deposits
|
3,724 | 2,063 | 1,532 | |||||||||
|
Wholesale deposits
|
209 | 1,539 | 3,002 | |||||||||
|
|
7,103 | 5,344 | 6,345 | |||||||||
|
|
141,312 | 99,056 | 92,046 | |||||||||
Retail demand and time deposits are obtained either through the branch network, cahoot or
remotely (such as postal accounts). Retail demand and time deposits are also obtained outside the
UK, principally through Abbey International. They are all interest bearing and interest rates are
varied from time to time in response to competitive conditions.
Demand deposits
Demand deposits consist of savings and current accounts. Savings products comprise Individual
Savings Accounts, instant saver savings accounts, remote access accounts, such as those serviced by
post, and a number of other accounts which allow the customer a limited number of notice-free
withdrawals per year depending on the balance remaining in the account. These accounts are treated
as demand deposits because the entire account balance may be withdrawn on demand without penalty as
one of the notice-free withdrawals.
Time deposits
Time deposits consist of notice accounts, which require customers to give notice of an intention to
make a withdrawal, and bond accounts, which have a minimum deposit requirement. In each of these
accounts, early withdrawal incurs an interest penalty.
Wholesale deposits
Wholesale deposits are those which either are obtained through the money markets or for which
interest rates are quoted on request rather than being publicly advertised. These deposits are of
fixed maturity and bear interest rates that reflect the inter-bank money market rates.
37
Business and Financial Review
Balance Sheet Business Review
continued
Commercial paper
Issuances of commercial paper and certificates of deposit were used to fund commercial banking
operations in 2008 and 2009. As a result, such issuances have been classified as deposits by
customers. In 2007 and previous years, similar debt issuances were used to fund the Group’s trading
operations and therefore were classified as trading liabilities.
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Year-end balance
|
7,210 | 5,120 | 7,283 | |||||||||
|
Year-end interest rate
(1)
|
1.83 | % | 1.78 | % | — | |||||||
|
Average balance
(2)
|
5,669 | 4,550 | 6,610 | |||||||||
|
Average interest rate
(1)
(2)
|
1.64 | % | 3.35 | % | — | |||||||
|
Maximum balance
|
7,506 | 6,405 | 8,784 | |||||||||
| (1) | Prior to 2008, the majority of commercial paper balances including interest were marked-to-market rather than accounted for on an accruals basis. Mark-to-market movements were recorded in net trading and other income rather than net interest income. As a result, it was not possible to calculate average or year-end interest rates for 2007. | |
| (2) | Average balances are based upon monthly data. |
The Group issues commercial paper generally in denominations of not less than US$50,000, with
maturities of up to 365 days. Commercial paper is issued by Abbey National Treasury Services plc
and Abbey National North America LLC.
Negotiable certificates of deposit
Issuances of commercial paper and certificates of deposit were used to fund commercial banking
operations in 2008 and 2009. As a result, such issuances have been classified as deposits by
customers. In 2007 and previous years, similar debt issuances were used to fund the Group’s
trading operations and therefore were classified as trading liabilities.
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Year-end balance
|
9,188 | 9,638 | 11,326 | |||||||||
|
Year-end interest rate
(1)
|
1.73 | % | 4.17 | % | — | |||||||
|
Average balance
(2)
|
7,519 | 12,729 | 13,037 | |||||||||
|
Average interest rate
(1)
(2)
|
2.69 | % | 4.9 | % | — | |||||||
|
Maximum balance
|
9,188 | 15,807 | 14,821 | |||||||||
| (1) | Prior to 2008, the majority of negotiable certificates of deposit balances including interest were marked-to-market rather than accounted for on an accruals basis. Mark-to-market movements were recorded in net trading and other income rather than net interest income. As a result, it was not possible to calculate average or year-end interest rates for 2007. | |
| (2) | Average balances are based upon monthly data. |
Certificates of deposit and certain time deposits
The following table sets forth the maturities of the Group’s certificates of deposit and other
large wholesale time deposits from non-bank counterparties in excess of £50,000 (or the
non-sterling equivalent of £50,000) at 31 December 2009. A proportion of the Group’s retail time
deposits also exceeds £50,000 at any given date; however, the ease of access and other terms of
these accounts means that they may not have been in excess of £50,000 throughout 2009.
Furthermore, the customers may withdraw their funds on demand upon payment of an interest
penalty. For these reasons, no maturity analysis is presented for such deposits.
| In more than three | In more than six | |||||||||||||||||||
| Not more than | months but not more | months but not more | In more than | |||||||||||||||||
| three months | than six months | than one year | one year | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Certificates of deposit:
|
||||||||||||||||||||
|
UK
|
418 | 48 | 20 | 1 | 487 | |||||||||||||||
|
Non-UK
|
4,958 | 983 | 2,735 | 20 | 8,696 | |||||||||||||||
|
Wholesale time deposits:
|
||||||||||||||||||||
|
UK
|
1,918 | — | 43 | 299 | 2,260 | |||||||||||||||
|
|
7,294 | 1,031 | 2,798 | 320 | 11,443 | |||||||||||||||
At 31 December 2009, an additional £10m (2008: £71m) of wholesale deposits were repayable on
demand.
The Group has issued debt securities in a range of maturities, interest rate structures and
currencies, for purposes of meeting liquidity, funding and capital needs.
| 2009 | 2008 | 2007 | ||||||||||||||
| Note | £m | £m | £m | |||||||||||||
|
Trading liabilities
|
29 | 1,213 | 1,775 | 12,534 | ||||||||||||
|
Financial liabilities designated at fair value
|
30 | 4,366 | 5,268 | 7,538 | ||||||||||||
|
Debt securities in issue
|
31 | 47,758 | 58,511 | 35,712 | ||||||||||||
|
Other borrowed funds
|
32 | 1,352 | 2,076 | 1,419 | ||||||||||||
|
Subordinated liabilities
|
33 | 5,597 | 6,787 | 4,732 | ||||||||||||
|
|
60,286 | 74,417 | 61,935 | |||||||||||||
38
Business and Financial Review
Balance Sheet Business Review
continued
Most of the debt securities that the Group has issued are classified as “Debt securities in
issue” in the balance sheet. The remaining debt securities issued by the Group are classified
separately in the balance sheet, either because they qualify as Trading liabilities or were
designated upon initial recognition as Financial liabilities designated at fair value, or there are
key differences in the legal terms of the securities, such as liquidation preferences (“Other
borrowed funds”), or subordination of the rights of holders to the rights of holders of certain
other liabilities (“Subordinated liabilities”).
Trading liabilities
— The debt securities in issue classified as trading liabilities are set out
in Note 29 to the Consolidated Financial Statements and include short positions in securities.
In 2009, there was no significant change in trading liabilities. In 2008, the balance
decreased because in 2007, issuances of commercial paper and certificates of deposit were used to
fund the Group’s trading operations and were classified as trading liabilities. From 2008, such
issuances have been used to fund commercial banking operations and therefore have been classified
as debt securities in issue.
Financial liabilities designated at fair value
— Details of the securities classified as Financial
liabilities designated at fair value are set out in Note 30 to the Consolidated Financial
Statements.
In 2009, balances decreased due to repayments, with new issues not being designated at fair
value. In 2008, the balance decreased primarily due to redemptions during the year, partly offset
by the effect of the consolidation of debt securities issued by Alliance & Leicester plc reflecting
the transfer of Alliance & Leicester plc to the Group which has been accounted for with effect from
10 October 2008.
Debt securities in issue
— Details of the Group’s main debt securities issuance programmes are set
out in Note 31 to the Consolidated Financial Statements.
In 2009, debt securities in issue decreased as part of Santander UK’s strategy of reducing the
level of short-term wholesale funding. In 2008, Debt securities in issue increased primarily due to
the consolidation of approximately £17,477m of debt securities issued by Alliance & Leicester plc
reflecting the transfer of Alliance & Leicester plc to the Group which has been accounted for with
effect from 10 October 2008. The debt securities in issue balance also increased due to the
issuances of relatively short-term debt denominated principally in US dollars and euro.
Other borrowed funds
— Details of the individual securities classified as Other borrowed funds are
set out in Note 32 to the Consolidated Financial Statements.
In 2009, Other borrowed funds decreased due to the effect of changes in the sterling-US dollar
exchange rate on the Group’s US$1,000m Non-Cumulative Trust Preferred Securities. In addition,
during 2009, the £300m Step Up Callable Perpetual Reserve Capital Instruments were reclassified to
equity as described in Note 39 to the Consolidated Financial Statements.
In 2008, Other borrowed funds increased due to the effect of changes in the sterling-US dollar
exchange rate on the Group’s US$1,000m Non-Cumulative Trust Preferred Securities.
Subordinated liabilities
— Details of the individual securities classified as Subordinated
liabilities are set out in Note 33 to the Consolidated Financial Statements.
In 2009, Subordinated liabilities decreased due to the redemption of the 5.00% subordinated
bonds 2009 (euro 511m). The subordinated liabilities also decreased due to the effect of changes in
the sterling-US dollar, sterling-euro and sterling-Japanese yen exchange rates on the Group’s
securities denominated in those foreign currencies.
In 2008, Subordinated liabilities increased due to the consolidation of approximately £1,436m
of notes issued by Alliance & Leicester plc, reflecting the transfer of Alliance & Leicester plc to
the Group which has been accounted for with effect from 10 October 2008. The subordinated
liabilities also increased due to the effect of changes in the sterling-US dollar, sterling-euro
and sterling-Japanese yen exchange rates on the Group’s securities denominated in those foreign
currencies.
Retirement benefit obligations
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Total net liabilities
|
(1,070 | ) | (813 | ) | ||||
The Group operates a number of defined contribution and defined benefit pension schemes, and
post retirement medical benefit plans. Detailed disclosures of the Group’s retirement benefit
obligations are contained in Note 36 to the Consolidated Financial Statements.
The total net deficit on the Group’s defined benefit schemes, and other post retirement
medical benefit plans, increased from £813m at 31 December 2008 to £1,070m at 31 December 2009. The
key reason for the increase was a reduction of 100 basis points in the net discount rate (i.e. the
discount rate less the inflation rate) used to value the defined benefit scheme liabilities. The
increase in assumed inflation also impacted the expected rate of pension increase, in turn leading
to a further increase in scheme liabilities. These increases were partly offset by employer
contributions made and improvements in asset values.
39
Business and Financial Review
Balance Sheet Business Review
continued
Contractual obligations
The amounts and maturities of contractual obligations in respect of guarantees are described in
Note 37 to the Consolidated Financial Statements. Other contractual obligations are:
| Payments due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | Over 5 years | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Deposits by banks
(1)
|
46,680 | 46,241 | 206 | 189 | 44 | |||||||||||||||
|
Deposits by customers
(1)
|
148,020 | 132,312 | 11,284 | 3,612 | 812 | |||||||||||||||
|
Derivative financial instruments
|
18,963 | 4,004 | 268 | 6,563 | 8,128 | |||||||||||||||
|
Debt securities in issue
(2)
|
53,337 | 22,111 | 3,467 | 4,026 | 23,733 | |||||||||||||||
|
Other borrowed funds
|
1,352 | — | — | — | 1,352 | |||||||||||||||
|
Subordinated liabilities
|
5,597 | — | 478 | — | 5,119 | |||||||||||||||
|
Retirement benefit obligations
|
1,070 | 3 | 116 | 82 | 869 | |||||||||||||||
|
Operating lease obligations
|
968 | 115 | 303 | 81 | 469 | |||||||||||||||
|
Purchase obligations
|
867 | 317 | 301 | 168 | 81 | |||||||||||||||
|
Total
|
276,854 | 205,103 | 16,423 | 14,721 | 40,607 | |||||||||||||||
| (1) | Includes deposits by banks and deposits by customers that are classified in the balance sheet as trading liabilities. | |
| (2) | Includes debt securities in issue that are classified in the balance sheet as trading liabilities and financial liabilities designated at fair value. |
As the above table is based on contractual maturities, no account is taken of call features
related to subordinated liabilities. The repayment terms of the debt securities may be accelerated
in line with the covenants contained within the individual loan agreements. Details of deposits by
banks and deposits by customers can be found in Notes 27 and 28 to the Consolidated Financial
Statements.
The Group has entered into outsourcing contracts where, in some circumstances, there is no
minimum specified spending requirement. In these cases, anticipated spending volumes have been
included within purchase obligations.
Under current conditions, the Group’s working capital is expected to be sufficient for its
present requirements and to pursue its planned business strategies.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Group issues guarantees on behalf of customers. The
significant types of guarantees are:
| • | It has been normal in the UK to issue cheque guarantee cards to current account customers holding chequebooks, as historically retailers did not generally accept cheques without such form of guarantee. The guarantee was not automatic but depends on the retailer having sight of the cheque guarantee card at the time the purchase is made. The issuing bank is liable to honour these cheques even where the customer does not have sufficient funds in his or her account. The issuing bank’s guarantee liability is in theory the number of cheques written and deposited with retailers multiplied by the amount guaranteed per cheque, which can be between £50 and £100. In practice most customers will only write cheques when they have funds in their account to meet the cheque, and cheques are frequently presented without the benefit of the cheque guarantee. | |
| Following years of declining cheque usage, extensive research and reducing acceptance amongst retailers, the UK Payments Council has agreed to a UK industry-wide withdrawal of the UK Cheque Guarantee Scheme from 30 June 2011. In line with this announcement, from October 2009 we started phasing out cheque guarantee cards on replacement cards and card renewals. Customers can continue to use unguaranteed cheques, and cheque books will continue to be available in the usual way. |
As a result the Group’s guarantee liability is decreasing as new
cards are issued without the guarantee, meaning that the Group will
no longer be liable to honour cheques where the customer does not
have sufficient funds in his or her account. On this basis management
have assessed the risk with respect to this guarantee as highly
remote and decreasing. We consider the risk of loss as part of the
provisioning requirement on bank accounts.
| • | Standby letters of credit also represent the taking on of credit on behalf of customers when actual funding is not required, normally because a third party is not prepared to accept the credit risk of the Group’s customer. These are also included in the normal credit provisioning assessment alongside other forms of credit exposure. | |
| • | The Group, as is normal in such activity, gives representations, indemnities and warranties on the sale of subsidiaries and businesses. The maximum potential amount of any claims made against these is usually significantly higher than actual settlements. Appropriate provision is made with respect to management’s best estimate of the likely outcome, either at the time of sale, or subsequently if additional information becomes available. |
Further information regarding off-balance sheet arrangements can be found in the Risk Management
Report — Impact of the Current Credit Environment on page 77. See Note 37 to the Consolidated
Financial Statements for additional information regarding the Group’s guarantees, commitments and
contingencies. In the ordinary course of business, the Group also enters into securitisation
transactions as described in Note 17 to the Consolidated Financial Statements. The securitisation
companies are consolidated. The mortgage assets continue to be administered by the Group. The
securitisation companies provide the Group with an important source of long-term funding.
40
Business and Financial Review
Balance Sheet Business Review
continued
Capital management and resources
Capital management and capital allocation
The Group adopts a centralised capital management approach, based on an assessment of both
regulatory requirements and the economic capital impacts of our businesses. Details of the Group’s
objectives, policies and processes for managing capital, including the group capital table, can be
found in Note 50 to the Consolidated Financial Statements.
Capital and risk management disclosures required by Pillar 3
Santander is supervised by the Banco de España on a consolidated basis. The Group has applied
Santander’s approach to capital measurement and risk management in its implementation of Basel II.
As a result, the Group has been classified as a significant sub-group of Santander at 31 December
2009. The relevant Pillar 3 disclosure requirements for the Group are set out below. Further
information on the Basel II risk measurement of the Group’s exposures is included in Santander’s
Pillar 3 report.
Scope of the Group’s capital adequacy
Santander UK plc and its subsidiaries are a UK banking group regulated by the UK Financial Services
Authority. The basis of consolidation for prudential purposes is the same as the basis of
consolidation for financial statement purposes. Consequently, the results of significant
subsidiaries regulated by the UK Financial Services Authority are included in the Group’s capital
adequacy disclosures.
The Group and Santander recognise the additional security inherent in Tier 1 capital in the
current commercial and regulatory environment. As a result, on 12 October 2008, Banco Santander,
S.A. agreed to inject capital of £1bn into the combined businesses fulfilling its agreed commitment
to the UK Government’s banking support scheme announced on 8 October 2008. Consequently, on 12
October 2008, the Company issued ten billion ordinary shares of 10 pence each and these shares were
issued at par to Banco Santander, S.A. on the same date. These ordinary shares qualified as Tier 1
capital for the Group. This capital was, in turn, transferred to Alliance & Leicester plc in late
December 2008 as planned.
At 31 December 2008, the Company held 35.6% of the issued ordinary share capital of Alliance &
Leicester plc as described in Business Overview — Summary History. As a result, the Group’s
capital adequacy disclosures at 31 December 2008 include 35.6% of Alliance & Leicester plc’s
capital resources requirement on a proportional consolidation basis in accordance with the UK
Financial Services Authority’s rules. This amounted to £676m at 31 December 2008.
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for newly issued ordinary shares of the Company.
Accordingly, the Company is now the immediate parent company of Alliance & Leicester plc.
Capital transferability between the Group’s subsidiaries is managed in accordance with the
Group’s corporate purpose and strategy, its risk and capital management policies and with regard to
UK legal and regulatory requirements. There are no other current or foreseen material practical or
legal impediments to the prompt transfer of capital resources or repayment of liabilities when due
between the Company and its subsidiaries and associates.
Capital ratios
The calculations of Group capital are prepared on a basis consistent with the Group’s regulatory
filings, and therefore the comparatives have not been amended to reflect application of group
reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company, as
described in Note 47.
The table below summarises the Group’s capital ratios:
| 2009 | 2008 | |||||||
|
Core Tier 1 (after deductions)
|
6.8 | % | 6.2 | % | ||||
|
Tier 1
|
9.5 | % | 8.5 | % | ||||
|
Total capital
|
17.6 | % | 14.0 | % | ||||
Ratios are calculated by taking the relevant capital resources as a percentage of risk weighted
assets.
Regulatory capital resources
The table below analyses the composition of the Group’s regulatory capital resources. The
calculations reflect the amounts prepared on a basis consistent with the Group’s regulatory
filings, and therefore the comparatives have not been amended to reflect application of group
reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company, as
described in Note 47 to the Consolidated Financial Statements.
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Core Tier 1 capital:
|
||||||||
|
Called up share capital
|
2,412 | 1,148 | ||||||
|
Share premium
|
1,857 | 1,857 | ||||||
|
Retained earnings and other reserves
|
2,251 | 1,689 | ||||||
|
|
6,520 | 4,694 | ||||||
41
Business and Financial Review
Balance Sheet Business Review
continued
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Deductions from Core Tier 1 capital:
|
||||||||
|
Intangible Assets
|
(1,541 | ) | (508 | ) | ||||
|
Securitisation positions
|
(75 | ) | (21 | ) | ||||
|
Expected Losses
|
(325 | ) | (257 | ) | ||||
|
Material Holdings
|
— | (6 | ) | |||||
|
|
(1,941 | ) | (792 | ) | ||||
|
|
||||||||
|
Total Core Tier 1 capital after deductions
|
4,579 | 3,902 | ||||||
|
Non cumulative Preference Shares
|
833 | 603 | ||||||
|
Innovative Tier 1 instruments
|
1,332 | 1,095 | ||||||
|
Excess on limits for including innovative Tier 1 capital in total Tier 1 capital
|
(306 | ) | (213 | ) | ||||
|
Total Tier 1 Capital after deductions
|
6,438 | 5,387 | ||||||
|
|
||||||||
|
Tier 2 capital:
|
||||||||
|
Subordinated debt
|
5,516 | 4,543 | ||||||
|
Excess innovative tier 1 capital
|
306 | 213 | ||||||
|
Other
|
10 | 10 | ||||||
|
|
5,832 | 4,766 | ||||||
|
|
||||||||
|
Deductions from Tier 2 capital:
|
||||||||
|
Securitisation positions
|
(75 | ) | (21 | ) | ||||
|
Expected Losses
|
(325 | ) | (257 | ) | ||||
|
Material Holdings
|
— | (6 | ) | |||||
|
Total Tier 2 capital after deductions
|
5,432 | 4,482 | ||||||
|
Deductions from Tier 1 and 2
|
— | (988 | ) | |||||
|
Total Capital Resources
|
11,870 | 8,881 | ||||||
The Group’s core Tier 1 capital consists of ordinary share capital, share premium and audited
profits for the years ended 31 December 2009 and 2008 after adjustment to comply with the UK
Financial Services Authority’s rules. A reconciliation to the statutory reserves is set out below:
| 2009 | ||||
| £m | ||||
|
Total shareholders equity
(accounting basis)
|
7,222 | |||
|
Less: Reserve Capital Instruments (See Note 39)
|
(297 | ) | ||
|
Less: non-cumulative preference shares and Innovative Tier 1 Capital Securities (See Note 38)
|
(591 | ) | ||
|
Less: available for sale reserves
|
(12 | ) | ||
|
Pensions adjustment
|
217 | |||
|
Changes in liabilities designated as fair value through profit or loss from changes in Group’s own credit risk
|
(19 | ) | ||
|
Core Tier 1 capital
|
6,520 | |||
The IAS19 pension deficit is deducted from shareholders’ equity. In the Group’s regulatory
filings the next five years’ deficit contributions are treated as a deduction.
Valuation adjustments relating to liabilities designated at fair value through profit or loss
which are not attributable to changes in benchmark interest rates are excluded from regulatory
capital resources.
The increase in Core Tier 1 capital primarily relates to additional share capital subscribed
for and retained profits for the period. Non cumulative preference shares and Innovative Tier 1 are
shown separately in the above table. Details of the Innovative Tier 1 capital instruments are set
out in Note 32 to the Consolidated Financial Statements. For capital management purposes and in
accordance with the UK Financial Services Authority’s rules, Innovative Tier 1 is treated as Tier 1
capital. The UK Financial Services Authority’s capital gearing rules restrict the amount of
Innovative Tier 1 capital included in Tier 1 capital to 15% of core Tier 1 capital after
deductions. The excess is classified as Tier 2.
For details of the subordinated debt issues that meet the UK Financial Services Authority’s
definition of Tier 2 capital see Note 33 to the Consolidated Financial Statements. In accordance
with the UK Financial Services Authority’s rules, in the last five years to maturity, dated
subordinated debt issues are amortised on a straight line basis.
During 2009, accounting valuation adjustments to Tier 1 and Tier 2 instruments were also
included in capital as permitted in accordance with UK Financial Services Authority rules. The
Group has elected to deduct certain securitisation positions from capital rather than treat these
exposures as a risk weighted asset.
The expected losses deduction represents the difference between expected loss calculated in
accordance with the Group’s Retail Internal Rating-Based (‘IRB’) and Advanced Internal Rating-Based
(‘AIRB’) models, and the impairment provisions calculated in accordance with IFRS. Details of the
Group’s accounting policy for credit provisions are set out in the Accounting Policies in the
Consolidated Financial Statements on pages 116 to 118. Expected losses are calculated using risk
parameters based on either through-the-cycle, or economic downturn estimates, and which are subject
to conservatism due to the imposition of regulatory floors. They are therefore currently higher
than the impairment provision which accounts for losses incurred at the balance sheet date.
Intangible assets represent goodwill arising on the transfer of Alliance & Leicester plc, the
acquisition of the savings business of Bradford & Bingley plc, and certain capitalised computer
software costs.
42
Business and Financial Review
Balance Sheet Business Review
continued
Material holdings deductions and other Tier 1 and Tier 2 deductions principally represent
investments in and loans to other banks in the Santander group which were repaid during 2009.
Regulatory capital requirement
The table below analyses the composition of the Group’s regulatory capital requirements. The
calculations reflect the amounts prepared on a basis consistent with the Group’s regulatory
filings, and therefore the comparatives have not been amended to reflect application of group
reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company, as
described in Note 47 to the Consolidated Financial Statements.
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Credit Risk — Standardised approach:
|
||||||||
|
Institutions
|
16 | 34 | ||||||
|
Corporates
|
602 | 564 | ||||||
|
Retail
|
208 | 167 | ||||||
|
Secured on real estate property
|
210 | 187 | ||||||
|
Past due items
|
38 | 14 | ||||||
|
Securitisation positions
|
— | 65 | ||||||
|
Other items
|
254 | 193 | ||||||
|
|
1,328 | 1,224 | ||||||
|
Credit Risk — IRB approach:
|
||||||||
|
Retail exposures secured by real estate collateral
|
1,732 | 1,989 | ||||||
|
Qualifying revolving retail
|
149 | 169 | ||||||
|
Other retail
|
298 | 293 | ||||||
|
Institutions
|
188 | 124 | ||||||
|
Corporates
|
581 | 280 | ||||||
|
Other
|
62 | 21 | ||||||
|
|
3,010 | 2,876 | ||||||
|
|
||||||||
|
Counterparty risk capital component
|
213 | 215 | ||||||
|
|
||||||||
|
Operational risk — standardised approach:
|
529 | 398 | ||||||
|
|
||||||||
|
Market Risk:
|
315 | 361 | ||||||
|
Interest rate Position Risk Requirement (‘PRR’)
|
34 | 75 | ||||||
|
Equity PRR
|
37 | 39 | ||||||
|
Commodity PRR
|
45 | 56 | ||||||
|
FX PRR
|
33 | 30 | ||||||
|
Internal models
|
166 | 161 | ||||||
|
Total Pillar 1 capital requirement
|
5,395 | 5,074 | ||||||
|
Risk weighted assets
(based on an 8% capital charge)
|
67,438 | 63,425 | ||||||
From 1 January 2008, the Group applied Basel II to the calculation of its capital requirement.
In addition, the UK Financial Services Authority approved the Group’s application of the Retail IRB
and AIRB approaches to the Group’s credit portfolios with effect from 1 January 2008. Residential
lending capital resources requirement include securitised residential mortgages.
On 9 January 2009, Banco Santander, S.A. transferred all of its Alliance & Leicester plc
shares to the Company in exchange for newly issued ordinary shares of the Company. 100% of the
Pillar 1 capital requirement was included from this date, which amounted to £1,899m.
Although core business volumes have increased, these increases have been offset by
de-leveraging of certain non-core portfolios and enhancements to retail IRB models. During the
course of 2009, regulatory approval was received to apply a refined approach to the retail
exposures secured by real estate collateral which addressed the effects of pro-cyclicality evident
in the estimates for probability of default (PD).
Liquidity
Liquidity risk is the potential that, although remaining in operation, the Group does not have
sufficient liquid financial resources to enable it to meet its obligations as they fall due, or can
secure them only at excessive cost.
The Board is responsible for the Group’s liquidity management and control framework and has
approved key liquidity limits in setting the Group’s liquidity risk appetite. Along with its
internal Liquidity Risk Manual, which sets out the liquidity risk control framework and policy, the
Group abides by the “Sound Practices for Managing Liquidity in Banking Organisations” set out by
the Basel Committee as its standard for liquidity risk management and control. The Group also
complies with the UK Financial Services Authority’s liquidity requirements, and has appropriate
liquidity controls in place.
See “Business and Financial Review — Risk Management” for more information.
43
Business and Financial Review
Balance Sheet Business Review
continued
Cash flows
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Net cash inflow/(outflow) from operating activities
|
2,929 | (21,444 | ) | (9,332 | ) | |||||||
|
Net cash inflow/(outflow) from investing activities
|
1,433 | 19,402 | (196 | ) | ||||||||
|
Net cash (outflow)/inflow from financing activities
|
(4,621 | ) | (7,381 | ) | 4,776 | |||||||
|
Decrease in cash and cash equivalents
|
(259 | ) | (9,423 | ) | (4,752 | ) | ||||||
For the years ended 31 December 2009, 2008 and 2007, cash and cash equivalents decreased £259m,
£9,423m and £4,752m respectively. The following discussion highlights the major activities and
transactions that affected the Group’s cash flows during 2009, 2008 and 2007.
In 2009, the net inflow from investing activities of £1,433m reflected the cash arising from
the sale and redemption of debt securities. Due to ongoing market volatility only a portion of the
cash generated was used to acquire new debt securities during the year. In 2008, the net inflow
from investing activities of £19,402m primarily arose as a result of the acquisition of Bradford &
Bingley plc’s savings business in September 2008 to strengthen the Group’s retail customer deposit
base and franchise, which generated £18,001m of cash. This, plus additional inflows from customer
deposits, was invested in new lending.
In 2009, the net outflow from financing activities of £4,621m reflected the repayment of loan
capital that matured during the year, which was partially offset by new issues of loan capital. In
2008, the cash outflow from financing activities of £7,381m to repay loan capital reflected the
maturity of some existing issues, which was not offset by new issues of loan capital given market
conditions at the time.
In 2009, net cash and cash equivalents decreased by £259m, largely reflecting cash dividends
on ordinary shares paid during the year. In 2008, the decrease in cash and cash equivalents of
£9,423m was principally a result of reducing cash and cash equivalents in the Global Banking & Markets operations to fund our Retail Banking
lending.
Cash Flows from Operating Activities
For the years ended 31 December 2009, 2008 and 2007, net cash inflow/(outflow) from operating
activities was £2,929m, £(21,444)m and £(9,332)m, respectively. The Group’s operating assets and
liabilities support the Group’s lending activities, including the origination of mortgages and
unsecured personal loans. During 2008 and 2007, net cash was used to fund the Group’s core business
of origination of mortgages in Retail Banking. During 2009, customer deposits exceeded net lending
as a consequence of an increase in customer confidence.
In 2009, the net cash inflow related largely to an increase in deposits by banks and deposits
by customers. Our stability in the current environment which contributed to an increase in customer
confidence resulted in the increase in deposits by banks and customer accounts. The UK Government’s
efforts on quantitative easing and reduced activity in Global Banking & Markets also contributed to
this increase. This increase was partially offset by a substantial adverse foreign exchange
movement which is a consequence of sterling weakening against foreign currencies.
In 2008, in addition to the movement related to the acquisition of Bradford & Bingley plc’s
savings business, other strong customer deposit inflows were partially offset by a reduction in
deposits by banks. The remaining significant changes relate to the reduction of activity in Global
Banking & Markets.
The amount and timing of cash flows related to the Group’s operating activities may vary
significantly in the normal course of business as a result of market conditions and trading
strategies in Cater Allen International Limited.
Cash Flows from Investing Activities
The Group’s investing activities primarily involve the acquisition and disposal of businesses, and
the purchase of tangible and intangible assets.
In 2009, net cash of £1,433m was generated by investing
activities, primarily as a result of proceeds of £3,001m in respect of available-for-sale
securities that were sold or matured during the year. In line with the Group’s strategy to reduce
balance sheet assets in light of prevailing market conditions, only part of the above cash inflows
was used to purchase new securities in an amount of £1,134m.
Cash of £463m was used during the year to fund the acquisition of tangible and intangible
fixed assets. Of the £463m invested, £120m was invested in furniture and fittings for the Retail
Banking branch network as part of branch refurbishments; a further £120m was invested in the
continuing development of Partenon, the Santander Group’s IT platform; £115m was used to acquire
the head office building in London which had previously been leased; and £81m represented the
purchase of operating lease assets.
In 2008, net cash of £19,402m was generated by investing
activities, primarily as a result of the acquisition of Bradford & Bingley plc’s savings business
in September 2008 to strengthen the Group’s retail customer deposit base and franchise, which
generated £18,001m of cash, and the sale of the Porterbrook operating lease business which
generated £1,605m of cash. These sources of cash were partially offset by uses of cash of £278m to
fund purchases of tangible and intangible fixed assets, and £1,222m to invest in non-trading
securities. Of the £278m invested in tangible and intangible fixed assets, £120m was invested in
computer infrastructure and software, primarily reflecting investment in systems to support our
expansion in lending to small and medium-sized enterprises, and further investment in elements of
Partenon; £59m was invested in furniture and fittings for the Retail Banking branch network, mainly
as a result of continuing branch refurbishments; and £88m was invested by the Porterbrook operating
lease business in the construction of rail assets prior to its sale early in December 2008. The
£1,222m invested in non-trading securities represented the purchase of assets pledged related to
the Group’s obligations with respect to pensions funding.
44
Business and Financial Review
Balance Sheet Business Review
continued
In 2007, net cash of £196m was used in investing activities. £407m was
invested in tangible fixed assets, principally consisting of the investment of £215m by Porterbrook
in rolling stock; £103m in Partenon, reflecting the costs of migrating many of our core products
onto the new platform; and £66m in refurbishments in the Retail Banking branch network. These uses
of cash were partially offset by cash proceeds of £203m on the sale of 49% of the Group’s
shareholding in Santander Private Banking UK Limited (consisting of James Hay, Cater Allen and
Abbey Sharedealing) to Santander PB UK (Holdings) Limited, a direct subsidiary of Banco Santander,
S.A., as part of a reorganisation of Santander’s Private Banking businesses.
Cash Flows from Financing Activities
The Group’s financing activities reflect transactions involving the issuance and repayment of
long-term debt, and the issuance of, and payment of dividends on, the Company’s shares.
In 2009, net cash outflow from financing activities was £4,621m, principally due to repayment
of loan capital. There were new issues for £1,556m of long-term debt (specifically mortgage
covered bonds) in 2009. In addition, £225m of cash dividends on ordinary shares were paid.
In 2008, net cash outflow from financing activities was £7,381m, principally due to repayment
of loan capital. There were no external issuances of long-term debt in 2008, reflecting the
difficult conditions in the credit markets. The net cash used was partially offset by the issuance
of £1bn of ordinary share capital. In addition, cash dividends on ordinary shares of £595m were
paid.
In 2007, net cash provided by financing activities was £4,776m principally due to new issuances of
mortgage-backed securities under the Group’s securitisation programme classified as long-term debt.
The effect was partially offset by redemption of securities issued by the securitisation companies.
For further information on the Group’s securitisation programme, see Note 18 to the Consolidated
Financial Statements. No cash dividends were paid on ordinary shares.
Sources of liquidity
The Group is primarily funded by retail deposits. This, together with corporate deposits, forms its
Commercial Bank franchise, which attracts deposits through a variety of entities. More than three
quarters of Commercial Bank customer lending is financed by Commercial Bank customer deposits. The
retail sources primarily originate from the Retail Banking savings business. Although largely
callable, these funds provide a stable and predictable core of liquidity due to the nature of the
retail accounts and the breadth of personal customer relationships.
Additionally, the Group has a strong wholesale funding base, which is diversified across
funding types and geography. Through the wholesale markets, the Group has active relationships with
more than 500 counterparties across a range of sectors, including banks, central banks, other
financial institutions, corporates and investment funds. Other sources of funding include
collateralised borrowings, mortgage securitisations and long-term debt issuance. While there is no
certainty regarding money market lines of credit extended to the Group, they are actively managed
as part of the ongoing business. No guaranteed lines of credit have been purchased as such
arrangements are not common practice in the European banking industry.
Short-term funding is accessed through money market instruments, including time deposits,
certificates of deposit and commercial paper. Medium to long-term funding is accessed primarily
through the stand-alone bond markets. In addition, the Group utilises its euro medium-term note
programme. The major debt issuance programmes are managed by Abbey National Treasury Services plc
on its own behalf, except for the US commercial paper programme, which is managed for Abbey
National North America LLC, a guaranteed subsidiary of the Company, and are set out in Note 31
to the Consolidated Financial Statements.
The ability to sell assets quickly is also an important source of liquidity for the Group. The
Group holds marketable investment securities, such as central bank, eligible government and other
debt securities, which could be disposed of, either by entering into sale and repurchase
agreements, or by being sold to provide additional funding should the need arise. The Group also
makes use of asset securitisation arrangements to provide alternative funding sources.
Along with other major UK banks and building societies, the Company participated in the Bank
of England’s Special Liquidity Scheme whereby it swapped self-subscribed-for asset-backed security
issuances for highly liquid Treasury Bills. All major UK banks and building societies were required
to participate as part of the measures designed to improve the liquidity position of the UK banking
system in general. The Company did not participate in the other UK Government backed schemes;
namely the Credit Guarantee Scheme and the Asset Purchase Scheme.
Within the framework of prudent funding and liquidity management, the Group manages its
commercial banking activities to minimise liquidity risk. As at 31 December 2009, the Group’s loan
to deposit ratio was 126% (2008: 136%) and this improvement was mainly driven by organic growth in
net deposit inflows which exceeded net lending growth. The Group aims to further reduce this ratio
strategically over the course of 2010.
Securitisation of assets
The Group has provided prime retail mortgage-backed securitised products to a diverse investor base
through its mortgage backed funding programmes. Funding has historically been raised via
mortgage-backed notes, both issued to third parties and retained (the latter being central bank
eligible collateral, both via the Bank of England’s Special Liquidity Scheme facility and for
contingent funding purposes in other Bank of England, European Central Bank, Swiss National Bank, and US Federal Reserve
facilities). It is expected that issues to third parties and retained issuances will together
represent a similar proportion of the Group’s overall funding in 2010 and 2011. During 2008 and
2009, as a result of market conditions, the main means of raising wholesale medium-term funding was
through retained issuances. In March 2010 the Group issued through the Fosse Master Trust the first
publicly-placed mortgage-backed securitisation transaction from a UK bank since 2007; other recent
transactions from UK banks had included an investor put. The transaction was denominated in both
pounds sterling and euro and raised approximately £1.4bn.
45
Business and Financial Review
Balance Sheet Business Review
continued
UK Government 2008 Credit Guarantee Scheme
In October 2008, the UK Government announced measures intended to ensure the stability of the
financial system and to protect ordinary savers, depositors, businesses and borrowers, including
the details of its 2008 Credit Guarantee Scheme for UK incorporated banks and building societies
debt issuance (the ‘Scheme’).
The Scheme provided for HM Treasury to guarantee specific debt instruments issued by eligible
institutions during the extended period ending on 31 December 2009 and with a maturity not
exceeding 9 April 2014. The Company was the eligible institution for the Group. The Company did
not issue any debt guaranteed by the Scheme.
Uses of liquidity
The principal uses of liquidity for the Group are the funding of Retail and Corporate Banking
lending, payment of interest expense, dividends paid to shareholders, and the repayment of debt.
The Group’s ability to pay dividends depends on a number of factors, including the Group’s
regulatory capital requirements, distributable reserves and financial performance.
For further information on liquidity, including liquidity risk management and developments during
the year, see Risk Management — Liquidity Risk on page 58 and Risk Management — Impact of the
Current Credit Environment on page 77.
Current market conditions
After a difficult start to the year, funding and liquidity conditions improved during 2009. This
was the result of on-going liquidity support schemes through increased liquidity within the
financial system; strengthened deposit protection insurance; and bank support through increased
capital and guarantees. More recently, signs of macroeconomic recovery, although still fragile,
have seen further improvements in debt markets. From the Group’s perspective, short-term unsecured
money-market funding has been continuously available. However, investor demand for unsecured and
mortgage-backed issuance has been much reduced since 2007 and at significantly wider spreads. These
markets have traditionally been important sources of funding. Funding issues also came to the fore
in the banking sector more generally, resulting in the introduction of government-backed funding
initiatives, including the UK Government Credit Guarantee Scheme.
During this time, the Group kept its main stress scenarios under review upon which the Board’s
risk appetite is based, in light of market developments. At all times, the Group sought to maintain
a buffer of securities that are eligible for discount in open market operations with the central
banks to which the Group has access including highly rated central government debt. This buffer was
at least sufficient to survive either an acute Group-specific stress during stressed market
conditions, or a prolonged loss of unsecured wholesale funding during stressed market conditions.
The underlying analysis of customer deposit behaviour under stressed conditions is aligned with the
assumptions made in operational contingency planning.
The UK Government initiative announced in early October 2008, including the provision of
liquidity and funding support and facilities to enable banks to raise new capital to strengthen
their capital base, was welcomed by the Group. The Group did not use the UK Government
recapitalisation scheme, nor does it expect to in the future. The Group believes that the current
arrangements with the Bank of England, European Central Bank, Swiss National Bank and US Federal
Reserve, as well as the UK Credit Guarantee Scheme that are available to the UK banking industry
will help the banking sector to meet liquidity and funding needs.
Interest rate sensitivity
Interest rate sensitivity refers to the relationship between interest rates and net interest
income resulting from the periodic repricing of assets and liabilities. The largest administered
rate items in the Group’s balance sheet are residential mortgages and retail deposits, the majority
of which bear interest at variable rates. The Group is able to mitigate the impact of interest rate
movements on net interest income in Retail Banking by repricing separately the variable rate
mortgages and variable rate retail deposits, subject to competitive pressures.
The Group also offers fixed-rate mortgages and savings products on which the interest rate
paid by or to the customer is fixed for an agreed period of time at the start of the contract. The
Group manages the margin on fixed-rate products by the use of derivatives matching the fixed-rate
profiles. The risk of prepayment is reduced by imposing early termination charges if the customers
terminate their contracts early.
The Group seeks to manage the risks associated with movements in interest rates as part of its
management of the overall non-trading position. This is done within limits as described in the Risk
Management Report beginning on page 49.
46
Business and Financial Review
Balance Sheet Business Review
continued
Changes in net interest income — volume and rate analysis
The following table allocates changes in interest income, interest expense and net interest
income between changes in volume and changes in rate for the Group for the years ended 31 December
2009, 2008 and 2007. Volume and rate variances have been calculated on the movement in the average
balances and the change in the interest rates on average interest-earning assets and average
interest-bearing liabilities. The variance caused by changes in both volume and rate has been
allocated to rate changes.
| 2009/2008 | 2008/2007 | |||||||||||||||||||||||
| Changes due to | Changes due to | |||||||||||||||||||||||
| Total | increase/(decrease) in | Total | increase/(decrease) in | |||||||||||||||||||||
| change | Volume | Rate | change | Volume | Rate | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Interest income
|
||||||||||||||||||||||||
|
Loans and advances to banks
|
||||||||||||||||||||||||
|
UK
|
(284 | ) | 93 | (377 | ) | 198 | 538 | (340 | ) | |||||||||||||||
|
Non-UK
|
(9 | ) | 10 | (19 | ) | 24 | 17 | 7 | ||||||||||||||||
|
Loans and advances to customers
|
||||||||||||||||||||||||
|
UK
|
(625 | ) | 2,664 | (3,289 | ) | 650 | 881 | (231 | ) | |||||||||||||||
|
Non-UK
|
2 | — | 2 | — | — | — | ||||||||||||||||||
|
Debt securities
|
||||||||||||||||||||||||
|
UK
|
319 | 244 | 75 | — | — | — | ||||||||||||||||||
|
Total interest income
|
||||||||||||||||||||||||
|
UK
|
(590 | ) | 3,001 | (3,591 | ) | 848 | 1,419 | (571 | ) | |||||||||||||||
|
Non-UK
|
(7 | ) | 10 | (17 | ) | 24 | 17 | 7 | ||||||||||||||||
|
|
(597 | ) | 3,011 | (3,608 | ) | 872 | 1,436 | (564 | ) | |||||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
Deposits by banks
|
||||||||||||||||||||||||
|
UK
|
(25 | ) | (5 | ) | (20 | ) | 19 | (25 | ) | 44 | ||||||||||||||
|
Deposits by customers — retail demand deposits
|
||||||||||||||||||||||||
|
UK
|
(1,361 | ) | 770 | (2,131 | ) | 4 | (261 | ) | 265 | |||||||||||||||
|
Non-UK
|
12 | 40 | (28 | ) | (48 | ) | (18 | ) | (30 | ) | ||||||||||||||
|
Deposits by customers — retail time deposits
|
||||||||||||||||||||||||
|
UK
|
(318 | ) | 447 | (765 | ) | 208 | 959 | (751 | ) | |||||||||||||||
|
Non-UK
|
(17 | ) | 74 | (91 | ) | 30 | 15 | 15 | ||||||||||||||||
|
Deposits by customers — wholesale deposits
|
||||||||||||||||||||||||
|
UK
|
823 | 210 | 613 | 31 | 25 | 6 | ||||||||||||||||||
|
Non-UK
|
— | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||
|
Bonds and medium-term notes
|
||||||||||||||||||||||||
|
UK
|
(1,224 | ) | 148 | (1,372 | ) | 282 | 816 | (534 | ) | |||||||||||||||
|
Non-UK
|
(281 | ) | 77 | (358 | ) | 48 | 152 | (104 | ) | |||||||||||||||
|
Dated and undated loan capital and other
subordinated liabilities
|
||||||||||||||||||||||||
|
UK
|
147 | 90 | 57 | 12 | 15 | (3 | ) | |||||||||||||||||
|
Non-UK
|
(7 | ) | 10 | (17 | ) | 17 | 4 | 13 | ||||||||||||||||
|
Other interest-bearing liabilities UK
|
14 | 5 | 9 | (1 | ) | 3 | (4 | ) | ||||||||||||||||
|
Total interest expense
|
||||||||||||||||||||||||
|
UK
|
(1,944 | ) | 1,665 | (3,609 | ) | 555 | 1,532 | (977 | ) | |||||||||||||||
|
Non-UK
|
(293 | ) | 201 | (494 | ) | 44 | 153 | (109 | ) | |||||||||||||||
|
|
(2,237 | ) | 1,866 | (4,103 | ) | 599 | 1,685 | (1,086 | ) | |||||||||||||||
|
Net interest income
|
1,640 | 1,145 | 495 | 273 | (249 | ) | 522 | |||||||||||||||||
47
Business and Financial Review
Balance Sheet Business Review
continued
Average balance sheet
(1) (2)
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
| balance | Interest | rate | balance | Interest | rate | balance | Interest | rate | ||||||||||||||||||||||||||||
| £m | £m | % | £m | £m | % | £m | £m | % | ||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Loans and advances to banks
|
||||||||||||||||||||||||||||||||||||
|
UK
|
15,477 | 140 | 0.90 | 12,702 | 424 | 3.34 | 3,731 | 226 | 6.06 | |||||||||||||||||||||||||||
|
Non-UK
|
646 | 15 | 2.32 | 454 | 24 | 5.29 | 30 | 1 | 3.33 | |||||||||||||||||||||||||||
|
Loans and advances to customers
(3)
|
||||||||||||||||||||||||||||||||||||
|
UK
|
182,800 | 6,820 | 3.73 | 134,557 | 7,445 | 5.53 | 107,709 | 6,815 | 6.33 | |||||||||||||||||||||||||||
|
Non-UK
|
18 | 3 | 16.67 | 18 | 1 | 5.56 | 22 | 1 | 4.55 | |||||||||||||||||||||||||||
|
Debt securities
|
||||||||||||||||||||||||||||||||||||
|
UK
|
12,141 | 340 | 2.80 | 962 | 21 | 2.18 | 8 | — | — | |||||||||||||||||||||||||||
|
Total average interest-earning assets,
interest income
|
211,082 | 7,318 | 3.47 | 148,693 | 7,915 | 5.32 | 111,500 | 7,043 | 6.32 | |||||||||||||||||||||||||||
|
Provision for loan losses
|
(1,464 | ) | — | — | (562 | ) | — | — | (458 | ) | — | — | ||||||||||||||||||||||||
|
Trading business
|
27,586 | — | — | 35,394 | — | — | 68,612 | — | — | |||||||||||||||||||||||||||
|
Assets designated at fair value through profit
and loss
|
12,278 | — | — | 12,769 | — | — | 9,152 | — | — | |||||||||||||||||||||||||||
|
Non-interest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Other
|
36,774 | — | — | 22,885 | — | — | 15,162 | — | — | |||||||||||||||||||||||||||
|
Total average assets
|
286,237 | 219,179 | 203,968 | |||||||||||||||||||||||||||||||||
|
Non-UK assets as a % of total
|
0.23 | % | 0.22 | % | 0.03 | % | ||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits by banks
|
||||||||||||||||||||||||||||||||||||
|
UK
|
(6,911 | ) | (193 | ) | 2.79 | (7,079 | ) | (218 | ) | 3.08 | (5,169 | ) | (199 | ) | 3.85 | |||||||||||||||||||||
|
Deposits by customers: retail demand
(4)
|
||||||||||||||||||||||||||||||||||||
|
UK
|
(73,060 | ) | (1,002 | ) | 1.37 | (55,096 | ) | (2,363 | ) | 4.29 | (56,563 | ) | (2,359 | ) | 4.17 | |||||||||||||||||||||
|
Non-UK
|
(3,170 | ) | (61 | ) | 1.92 | (1,742 | ) | (49 | ) | 2.81 | (1,811 | ) | (97 | ) | 5.36 | |||||||||||||||||||||
|
Deposits by customers: retail time
(4)
|
||||||||||||||||||||||||||||||||||||
|
UK
|
(42,836 | ) | (932 | ) | 2.18 | (23,590 | ) | (547 | ) | 2.32 | (6,033 | ) | (339 | ) | 5.62 | |||||||||||||||||||||
|
Non-UK
|
(3,723 | ) | (75 | ) | 2.01 | (2,063 | ) | (92 | ) | 4.46 | (1,532 | ) | (62 | ) | 4.05 | |||||||||||||||||||||
|
Deposits by customers: wholesale
(4)
|
||||||||||||||||||||||||||||||||||||
|
UK
|
(12,796 | ) | (222 | ) | 1.73 | (4,180 | ) | (102 | ) | 2.44 | (2,080 | ) | (71 | ) | 3.41 | |||||||||||||||||||||
|
Non-UK
|
— | — | — | — | — | — | (58 | ) | (3 | ) | 5.17 | |||||||||||||||||||||||||
|
Bonds and medium-term notes
|
||||||||||||||||||||||||||||||||||||
|
UK
|
(41,659 | ) | (733 | ) | 1.76 | (38,721 | ) | (1,957 | ) | 5.05 | (27,776 | ) | (1,675 | ) | 6.03 | |||||||||||||||||||||
|
Non-UK
|
(10,077 | ) | (44 | ) | 0.44 | (8,154 | ) | (325 | ) | 3.99 | (5,293 | ) | (277 | ) | 5.23 | |||||||||||||||||||||
|
Dated and undated loan capital and other
subordinated liabilities
|
||||||||||||||||||||||||||||||||||||
|
UK
|
(7,622 | ) | (547 | ) | 7.18 | (6,221 | ) | (400 | ) | 6.43 | (5,778 | ) | (388 | ) | 6.72 | |||||||||||||||||||||
|
Non-UK
|
(651 | ) | (55 | ) | 8.45 | (560 | ) | (62 | ) | 11.07 | (511 | ) | (45 | ) | 8.81 | |||||||||||||||||||||
|
Other interest-bearing liabilities UK
|
(1,083 | ) | (42 | ) | 3.88 | (918 | ) | (28 | ) | 3.05 | (825 | ) | (29 | ) | 3.52 | |||||||||||||||||||||
|
Total average interest-bearing liabilities,
interest expense
|
(203,588 | ) | (3,906 | ) | 1.92 | (148,324 | ) | (6,143 | ) | 4.14 | (113,429 | ) | (5,544 | ) | 4.89 | |||||||||||||||||||||
|
Trading business
|
(48,236 | ) | — | — | (41,538 | ) | — | — | (64,342 | ) | — | — | ||||||||||||||||||||||||
|
Liabilities designated at fair value through
profit and loss
|
(63 | ) | — | — | (6,650 | ) | — | — | (7,847 | ) | — | — | ||||||||||||||||||||||||
|
Non-interest-bearing liabilities:
|
— | — | — | |||||||||||||||||||||||||||||||||
|
Other
|
(28,789 | ) | — | — | (18,663 | ) | — | — | (15,248 | ) | — | — | ||||||||||||||||||||||||
|
Shareholders’ funds
|
(5,580 | ) | — | — | (4,004 | ) | — | — | (3,102 | ) | — | — | ||||||||||||||||||||||||
|
Total average liabilities and shareholders’ funds
|
(286,256 | ) | (219,179 | ) | (203,968 | ) | ||||||||||||||||||||||||||||||
|
Non-UK liabilities as a % of total
|
6.16 | % | 5.71 | % | 4.51 | % | ||||||||||||||||||||||||||||||
|
Interest spread
|
— | — | 1.55 | — | — | 1.18 | — | — | 1.43 | |||||||||||||||||||||||||||
|
Net interest margin
|
— | — | 1.62 | — | — | 1.19 | — | — | 1.34 | |||||||||||||||||||||||||||
| (1) | Average balances are based upon monthly data. | |
| (2) | The ratio of average interest-earning assets to interest-bearing liabilities for the year ended 31 December 2009 was 103.68% (2008: 100.25%, 2007: 98.30%). | |
| (3) | Loans and advances to customers include non-performing loans. See “Analysis of provisions on loans and advances to customers” in the Risk Management Report on page 56. | |
| (4) | Demand deposits, time deposits and wholesale deposits are defined under “Deposits by customers” above. |
48
Business and Financial Review
Risk Management
The Risk Management report contains audited financial information except for the discussion of
Operational Risk on page 52 that, in accordance with the guidance in paragraph BC65 of IFRS 7, is
unaudited. 2008 data has been updated to reflect the transfer of Alliance & Leicester plc to the
Company as described in Note 47 to the Consolidated Financial Statements.
Summary
This Risk Management report describes the Risk Governance Framework of Santander UK plc
(formerly Abbey National plc) (the ‘Company’, and together with its subsidiaries, the ‘Group’), and
includes more detail on the Group’s key risks, on a segmental basis or aggregated where relevant.
It is divided into the following sections:
Introduction
— A description of the Group’s Risk Governance Framework, including the three tiers of
the Risk Governance structure.
Financial Risks and Risk Management —
Group-wide disclosures about specific risks which do not
originate in any single operating segment, such as operational risk and pension obligation risk, as
well as Group-wide disclosures about market risk and credit risk are described on pages 51 to 58.
Liquidity Risk
— A description of the liquidity risks the Group faces, along with their management
and activity in 2009 and 2008, can be found on pages 58 to 60.
Discussion of Key Risks by Operating Segment
— Detailed discussions about risk exposures,
measurement information and management policies presented by operating segment can be found on
pages 61 to 76:
| • | Risks in Retail Banking — The risks in this segment are described on pages 61 to 67, comprising: |
| • | Credit risk , including its management, an analysis of types and credit quality of retail lending and disclosures relating to provisioning, arrears and recoveries. | ||
| • | Market risk , including its management. |
| • | Risks in Corporate Banking — The risks in this segment are described on pages 67 to 70, comprising: |
| • | Credit risk , including its management, mitigation and the disclosure of exposure by rating of counterparty. | ||
| • | Market risk , including its management. |
| • | Risks in Global Banking & Markets — The risks in this segment are described on pages 70 to 73, comprising: |
| • | Credit risk , including its management, mitigation and the disclosure of exposure by rating of counterparty. | ||
| • | Market risk , including its management and disclosures on short-term market risk, structural market risk and trading market risk. |
| • | Risks in Private Banking — The risks in this segment are described on page 73 to 74, comprising a description of credit risk and market risk in the entities which this segment incorporates. | |
| • | Risks in Group Infrastructure — The risks in this segment are described on pages 74 to 76, comprising: |
| • | Credit risk , including its management and the disclosure of exposure by rating of counterparty. | ||
| • | Market risk , including its management and disclosure of Net Interest Margin Sensitivity and the Market Value of Equity sensitivity. | ||
| • | A description of the types of derivative contracts used to hedge risks in this segment. |
The Impact of the Current Credit Environment
— Detailed disclosures can be found on pages 77 to
85, including a description of the Group’s exposures to certain classes of financial assets and
off-balance sheet entities.
Introduction
The Group accepts that risk arises from its full range of activities, and actively manages and
controls it. The management of risk is an integral part of the Group’s activities. Risk is
defined as the uncertainty around the Group’s ability to achieve its business objectives and
execute its strategy effectively. Risk constitutes the Group’s exposure to uncertainty and the
consequent variability of return. Specifically, risk equates to the adverse impacts on
profitability arising from different sources of uncertainty. The key risks Santander UK is exposed
to are Credit (Retail, Corporate & Commercial, Wholesale), Market (Traded and Non-Traded),
Operational, Pension Obligation, Concentration, Residual Value, Liquidity, Asset Backed Funding
(including Encumbrance), Reputational and Business Strategic. Risk measurement is used to capture
the source of the uncertainty and the magnitude of its potential effect on the profitability and
solvency of the Group. Effective risk management and control is therefore of fundamental importance
to the Group’s long-term success.
Understanding and controlling risk is critical for the effective management of the business.
The Group’s Risk Framework aims to ensure that risk is managed and controlled on behalf of
shareholders, customers, depositors, employees and the Group’s regulators. Effective and efficient
risk governance and oversight provide management with
assurance that the Group’s business activities will not be adversely impacted by risks that
could have been reasonably foreseen. This in turn reduces the uncertainty of achieving the Group’s
strategic objectives.
49
Business and Financial Review
Risk Management
continued
Authority for Risk Management flows from the Santander UK plc Board of Directors (the ‘Board’) to
the Chief Executive and from him to specific individuals. Formal standing committees are maintained
for effective management or oversight. Their authority is derived from the person they are intended
to assist.
Risk Governance Framework
The diagram below shows the Risk Governance Framework in operation in respect of risk
management and oversight.
FEVE is a Spanish acronym for “Firmas En Vigilancia Especial”, which means business under special
watch.
The Risk Division at Banco Santander, S.A. reports to the President of the Comisión Delegada
de Riesgos (‘CDR’ or Delegated Risk Committee).
The main elements of risk governance within the Group are as follows:
First tier of risk governance
Risk management is provided by the Board. It approves the Group’s risk appetite in consultation
with Banco Santander, S.A. as appropriate, approves the strategy for managing risk and is
responsible for the Group’s system of internal control. The Board is supported by the Chief
Executive and Executive Management, who have primary responsibility for understanding, identifying,
and owning the risks generated by their lines of business and establishing a framework for managing
those risks within the Board-approved risk appetite of the Group. In addition, understanding,
identifying, and owning the risks generated by the Group’s operations are the responsibility of the
Divisional Heads and central functions. These functions provide technical support and advice to
assist in the management and control of risk. Within this tier, there is a process for transaction
review and approval within certain thresholds, discharged by the Credit Approval Committee.
Transactions reviewed which exceed the threshold limits set are subject to prior review by Banco
Santander, S.A.’s Risk Division before final approval by the Credit Approval Committee.
Risk Committee
The Risk Committee is a management committee, established under the authority of and chaired by the
Chief Executive. The Risk Committee reviews risk issues, gives advice and recommendations to the
Chief Executive, the Executive Committee, or other parties as appropriate and makes decisions on
risk issues within its sphere of responsibility.
50
Business and Financial Review
Risk Management
continued
Second tier of risk governance
Risk control is provided by the Board independently supported by the Risk Division. The roles
of the Chief Risk Officer, the Head of Wholesale Risk, and the Risk Division include development of
risk measurement methodologies, risk approval, risk monitoring, risk reporting and escalation of
risk issues in line with the relevant risk policy for all risks across all lines of Retail Banking,
Corporate Banking, Global Banking & Markets, Private Banking and Group Infrastructure business.
Dedicated Business ROFs advise and support the Chief Risk Officer in fulfilling his risk
control responsibilities and help to ensure that risks are suitably understood, managed and
controlled.
The Risk Division provides independent challenge to all business areas in respect of risk
management and compliance with policies and advises the business when they are approaching the
limits of the Group’s risk appetite.
The Board, as supported by the Risk Division, is responsible for ensuring compliance with
Group policies and limits imposed by Banco Santander, S.A. including:
| • | Group-wide risk policies; | |
| • | Group-wide risk limits/parameters; | |
| • | Approval processes relating to transactions that exceed local risk limits; | |
| • | The systematic review of large exposures to clients, sectors, geographical areas and different risk types; and | |
| • | Reporting to Banco Santander, S.A.. |
Third tier of risk governance
Risk assurance provides independent objective assurance on the effectiveness of the management
and control of risk across the Group. This is provided through the Non-Executive Directors, the
Audit and Risk Committee and the Internal Audit function.
Non-Executive Directors
The Non-Executive Directors are members of the Board who have a particular responsibility for
constructively challenging and contributing to the development of strategy, scrutinising the
performance of management in meeting agreed goals and objectives and monitoring reporting
performance, and assuring themselves that the financial controls and systems of risk management are
robust and defensible.
Audit and Risk Committee
The Audit and Risk Committee is made up of Non-Executive Directors, and is a committee of the
Board. The Committee has responsibility for:
| • | The oversight of the risk governance framework; | |
| • | Review of the effectiveness of the Group’s internal and external audit processes; | |
| • | Review of control policies and procedures including regulatory compliance and financial reporting; | |
| • | The identification, assessment and reporting of risks; and | |
| • | The risk governance structure and associated compliance with risk control policies and procedures. |
Internal Audit
The Internal Audit function supports the Audit and Risk Committee by providing independent and
objective opinions on the effectiveness and integrity of the Group’s risk governance arrangements.
It does this via a systematic programme of risk-based audits of the controls established and
operated by the “first tier” risk management functions and those exercised by the “second tier”
risk control functions.
The audit opinions and underlying rationale of findings and recommendations form the basis
upon which the Audit and Risk Committee can take reasonable (but not absolute) assurance that the
risk governance arrangements are fit for purpose and working properly. The Audit and Risk
Committee also receive reports from management, the risk control functions and the external
auditors to help them to discharge their risk governance oversight responsibilities.
Financial Risks and Risk Management
The financial risks affecting the Group are discussed below. Risks are generally managed
through tailored management policies within the business division or operating segment in which
they are originated.
Group-wide disclosures including those relating to specific risks which do not originate in
any single operating segment, are described separately at the beginning of this section, apart from
liquidity risk which is discussed at the end of the section, following the detailed disclosures
about the impact of the current credit environment.
The Group-wide disclosures are followed by detailed discussions about risk exposures,
measurement information and management policies presented by operating segment, being Retail
Banking, Corporate Banking, Global Banking & Markets, Private Banking, and Group Infrastructure
(which includes Asset and Liability Management (‘ALM’) and the Treasury asset portfolio).
The risk exposure and management information relating to the Company principally arise in
Retail Banking, Corporate Banking and Group Infrastructure. Following the outsourcing of key IT and
operations processes to group
companies, risk governance of these entities is crucial. The use of service level agreements
and key metrics support this governance.
51
Business and Financial Review
Risk Management
continued
Financial Instruments
The Group uses financial instruments to manage the structural balance sheet exposures that
arise from its banking activities, in accordance with Risk policies and the Asset and Liability
Management Committee’s direction. The Group also trades in financial instruments where it takes
positions in exchange-traded and over the counter instruments, including derivatives, to take
advantage of short-term market movements in the equity and bond markets and in currency and
interest rates.
Operational Risk — Group-wide (unaudited)
Operational risk is the risk of loss to the Group, resulting from inadequate or failed internal
processes, people and systems, or from external events. Such risks can materialise as frauds,
process failures, system downtime or damage to assets due to fire, floods etc. When such risks
materialise they have not only immediate financial consequences for the Group but also an effect on
its business objectives, customer service, regulatory responsibilities and reputation. Operational
risk exposures arise across the Group’s business divisions and operating segments, and are managed
on a consistent basis.
Managing operational risk (unaudited)
The Group undertakes extensive activity to minimise the impacts operational risks may have on
business areas. An independent central operational risk function (Enterprise and Operational Risk)
has responsibility for establishing the framework within which these risks are managed and is
aligned to operational risk professionals within business areas to ensure consistent approaches are
applied across the Group. The primary purpose of the framework, which is approved by the Risk
Committee and Board, is to define and articulate the Group-wide policy, processes, roles and
responsibilities. The framework incorporates industry practice and regulatory requirements,
particularly those emanating from the Basel Committee, European Union Directives, the UK Financial
Services Authority and the parent regulator (Banco d’Espana or The Bank of Spain).
The day-to-day management of operational risk is the responsibility of business managers who
identify, assess and monitor the risks, in line with the processes described in the framework. The
operational risk function ensures that all key risks are regularly reported to Risk Fora, the Risk
Committee and Board.
Key operational risk activity in 2009 (unaudited)
During 2009, the Group has continued to respond to the developing operational risk environment with
coordinated responses, and the Group continues to perform detailed control reviews in response to
major industry events.
Following many high profile customer data security lapses experienced by other organisations
in the UK, the Group has continued to take proactive steps to minimise similar risks. A corporate
information security programme was established which involved the strengthening of controls for the
management of sensitive data and included the implementation of encryption standards across the
Group.
The Group continues to strengthen its point of sale compliance and control procedures to
minimise risk and serve its customers. To this end, work continues to progress in implementing new
systems which are already successfully operating in Banco Santander, S.A.. In 2009, implementations
have concentrated on integrating Bradford & Bingley savings business and Alliance & Leicester group
systems, with further focus on Alliance & Leicester throughout 2010.
Internet frauds were greatly reduced throughout 2009 by developing and implementing
improvements to fraud detection rates and introducing a Santander Group transactional model which
increased the volume of cases that were intercepted. As part of integration activity, these
controls were replicated throughout all Santander UK companies.
In line with UK Financial Services Authority guidance and industry practice, the Group has
crisis management and disaster recovery arrangements to ensure that critical business processes are
maintained in the event of an unforeseen interruption. Insurance policies are also purchased to
provide cover for a range of potential operational risk losses. In response to the increased
threats of terrorism, flooding, and pandemic disasters, contingency strategies continue to be
refined and key progress has included the development of dispersed contingency sites and automated
system switch over facilities.
Corporate operational risk frameworks have been implemented throughout all Santander companies
during the year, integrating approaches across the Bradford & Bingley savings business, Alliance &
Leicester and Santander UK. To highlight awareness of Operational Risk issues, appropriate
training is available for management and staff involved in control functions throughout the Group.
Credit Risk — Group-wide
Credit risk is the risk that counterparties will not meet their financial obligations resulting
in the Group losing the monies lent, including any interest accrued, or having to close out
transactions prematurely, which may incur losses after realising collateral held.
Significant concentrations of credit risk
During 2009, the Group’s most significant exposures to credit risk derived from:
| • | the residential mortgage portfolio and unsecured personal lending businesses in Retail Banking; | |
| • | secured lending and derivatives exposures to companies, real estate entities and social housing associations in Corporate Banking; | |
| • | unsecured lending and derivatives exposure to banks and other financial institutions in Global Banking & Markets; and | |
| • | portfolios of assets in Group Infrastructure inconsistent with the Group’s future strategy such as shipping, aviation, and the Treasury asset portfolio acquired as a result of the transfer of Alliance & Leicester plc to the Company. |
52
Business and Financial Review
Risk Management
continued
The residential mortgage portfolio comprises loans to private individuals secured against
residential properties in the UK. This is a prime portfolio with total exposure of £161bn at
31
December 2009 (2008: £152bn). The Unsecured Personal Loan portfolio comprises
unsecured loans to private individuals issued in the UK. Total exposure stood at £4.9bn at 31
December 2009 (2008: £6.3bn). The commercial loan, real estate and social housing portfolios in
Corporate Banking comprise loans secured on UK property, corporate loans and associated
derivatives. The total committed facilities exposure to these portfolios was £24.9bn at 31 December
2009 (2008: £24.8bn).
Although Global Banking & Markets’, Corporate Banking’s and Group Infrastructure’s operations
are based mainly in the UK, they have built up exposures to various entities around the world and
are therefore exposed to concentrations of risk related to geographic area. At 31 December 2009, 2%
(2008: 9%) of Global Banking & Markets’ credit exposures were to counterparties from the United
States, and 77% (2008: 47%) were to counterparties from the UK. 2% (2008: 1%) of Global Banking &
Markets’ exposures were to countries that are not members of the Organisation for Economic
Co-operation and Development (‘OECD’). The remaining exposures were mainly to European
counterparties. At 31 December 2009, 87% (2008: 81%) of Corporate Banking’s credit exposures were
to counterparties from the UK, and 2% (2008: 3%) were to counterparties from the United States, and
11% (2008: 16%) of Corporate Banking’s exposures were to other countries. Group Infrastructure’s
exposures result from its asset portfolios, including the Treasury asset portfolio. At 31 December
2009, treasury investment securities stood at £9.9bn (2008: £14.1bn). Details of credit ratings and
geographic analysis can be found on pages 78 to 85.
Geographical exposures are governed by country limits set by Banco Santander, S.A.
(‘Santander’) centrally and determined according to the classification of the country (whether it
is a developed OECD country or not), the rating of the country and its gross domestic product. The
Group is further constrained in its country risk exposure, within the group limits, and by its
capital base.
Maximum exposure to credit risk
The following table presents the amount that best represents the Group’s estimated maximum exposure
to credit risk at the reporting date without taking account of any collateral held or other credit
enhancements:
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Trading assets
|
21,688 | 25,008 | ||||||
|
Purchase and resale agreements
|
14,685 | 1,256 | ||||||
|
Derivative financial instruments
|
22,827 | 35,125 | ||||||
|
Financial assets designated at fair value
|
12,358 | 11,377 | ||||||
|
Available-for-sale securities
|
797 | 2,663 | ||||||
|
Loan and receivable securities
|
9,898 | 14,107 | ||||||
|
Loans and advances to customers
|
186,804 | 180,176 | ||||||
|
Loans and advances to banks
|
6,069 | 16,001 | ||||||
|
Other
|
4,334 | 3,977 | ||||||
|
Third party exposures
(1) (2)
|
279,460 | 289,690 | ||||||
| (1) | In addition, the Group is exposed to credit risk in respect of guarantees granted, loan commitments and stock borrowing and lending agreements. The estimated maximum exposure to credit risk is described in Note 37 to the Consolidated Financial Statements on page 157. | |
| (2) | Excludes loan to other members of the Santander UK and Santander groups. |
In managing the gross exposures, the Group uses the policies and processes described in the
Credit Risk sections below. Collateral, when received, can be held in the form of security over the
mortgaged property, full debentures over a company’s assets and through market standard collateral
agreements in its treasury business.
Loans and advances
The following tables categorise the Group’s loans and advances into three categories as: neither
past due nor impaired, past due but not individually impaired, or individually impaired. For
certain homogeneous portfolios of loans and advances, impairment is assessed on a collective basis
and each loan is not individually assessed for impairment. Loans in this category are classified
as neither past due nor impaired, or past due but not individually impaired, depending upon their
arrears status. The impairment allowance includes allowances against financial assets that have
been individually assessed for impairment and those that are subject to collective assessment for
impairment.
53
Business and Financial Review
Risk Management
continued
2009
| Group | ||||||||||||||||||||||||
| Past due but not | Total | |||||||||||||||||||||||
| Neither past | individually | Individually | Impairment | Carrying | ||||||||||||||||||||
| due nor impaired | impaired | Impaired | Total | Allowance | Value | |||||||||||||||||||
| Statutory balance sheet line items | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Trading assets
|
||||||||||||||||||||||||
|
- Loans and advances to banks
|
5,252 | — | — | 5,252 | — | 5,252 | ||||||||||||||||||
|
- Loans and advances to customers
|
10,628 | — | — | 10,628 | — | 10,628 | ||||||||||||||||||
|
Financial assets designated at fair value
through profit and loss
|
||||||||||||||||||||||||
|
- Loans and advances to customers
|
6,379 | — | — | 6,379 | — | 6,379 | ||||||||||||||||||
|
Loans and advances to banks
|
||||||||||||||||||||||||
|
- Placements with other banks
|
1,606 | — | — | 1,606 | — | 1,606 | ||||||||||||||||||
|
- Amounts due from parent
|
5,995 | — | — | 5,995 | — | 5,995 | ||||||||||||||||||
|
- Amounts due from associates
|
1,551 | — | — | 1,551 | — | 1,551 | ||||||||||||||||||
|
Loans and advances to customers
|
||||||||||||||||||||||||
|
- Advances secured on residential property
|
155,619 | 4,107 | 1,076 | 160,802 | (484 | ) | 160,318 | |||||||||||||||||
|
- Corporate Loans
|
11,500 | 166 | 507 | 12,173 | (357 | ) | 11,816 | |||||||||||||||||
|
- Finance Leases
|
1,566 | 19 | 17 | 1,602 | (2 | ) | 1,600 | |||||||||||||||||
|
- Other secured advances
|
3,571 | 127 | 121 | 3,819 | (62 | ) | 3,757 | |||||||||||||||||
|
- Other unsecured advances
|
4,505 | 220 | 525 | 5,250 | (394 | ) | 4,856 | |||||||||||||||||
|
- Amounts due from fellow subsidiaries
|
4,457 | — | — | 4,457 | — | 4,457 | ||||||||||||||||||
|
Loans and receivables securities
|
9,870 | — | 34 | 9,904 | (6 | ) | 9,898 | |||||||||||||||||
|
Total loans and advances
|
222,499 | 4,639 | 2,280 | 229,418 | (1,305 | ) | 228,113 | |||||||||||||||||
2009
| Company | ||||||||||||||||||||||||
| Past due but not | Total | |||||||||||||||||||||||
| Neither past | individually | Individually | Impairment | Carrying | ||||||||||||||||||||
| due nor impaired | impaired | Impaired | Total | Allowance | Value | |||||||||||||||||||
| Statutory balance sheet line items | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Financial assets designated at fair
value through profit and loss
|
||||||||||||||||||||||||
|
- Loans and advances to banks
|
160 | — | — | 160 | — | 160 | ||||||||||||||||||
|
- Loans and advances to customers
|
45 | — | — | 45 | — | 45 | ||||||||||||||||||
|
Loans and advances to banks
|
||||||||||||||||||||||||
|
- Placements with other banks
|
995 | — | — | 995 | — | 995 | ||||||||||||||||||
|
- Amounts due from parent
|
1 | — | — | 1 | — | 1 | ||||||||||||||||||
|
- Amounts due from associates
|
1 | — | — | 1 | — | 1 | ||||||||||||||||||
|
- Amounts due from subsidiaries
|
108,659 | — | — | 108,659 | — | 108,659 | ||||||||||||||||||
|
Loans and advances to customers
|
||||||||||||||||||||||||
|
- Advances secured on residential property
|
118,240 | 3,626 | 880 | 122,746 | (395 | ) | 122,351 | |||||||||||||||||
|
- Other secured advances
|
3,530 | 117 | 112 | 3,759 | (55 | ) | 3,704 | |||||||||||||||||
|
- Other unsecured advances
|
4,362 | 188 | 486 | 5,036 | (351 | ) | 4,685 | |||||||||||||||||
|
- Amounts due from fellow subsidiaries
|
71 | — | — | 71 | — | 71 | ||||||||||||||||||
|
- Amounts due from subsidiaries
|
938 | — | 98 | 1,036 | (98 | ) | 938 | |||||||||||||||||
|
Total loans and advances
|
237,002 | 3,931 | 1,576 | 242,509 | (899 | ) | 241,610 | |||||||||||||||||
Credit quality of loans and advances that are neither past due nor individually impaired
The credit quality of loans and advances that are neither past due nor individually impaired is as
follows:
| Group | ||||||||||||||||
| Good | Satisfactory | Higher Risk | Total | |||||||||||||
| 2009 | 2009 | 2009 | 2009 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Trading assets
|
||||||||||||||||
|
- Loans and advances to banks
|
5,071 | 181 | — | 5,252 | ||||||||||||
|
- Loans and advances to customers
|
10,628 | — | — | 10,628 | ||||||||||||
|
Financial assets designated at fair value in P&L
|
||||||||||||||||
|
- Loans and advances to customers
|
6,379 | — | — | 6,379 | ||||||||||||
|
Loans and advances to banks
|
||||||||||||||||
|
- Placements with other banks
|
1,606 | — | — | 1,606 | ||||||||||||
|
- Amounts due from parent
|
5,995 | — | — | 5,995 | ||||||||||||
|
- Amounts due from associates
|
1,551 | — | — | 1,551 | ||||||||||||
|
Loans and advances to customers
|
||||||||||||||||
|
- Advances secured on residential property
|
142,116 | 13,050 | 453 | 155,619 | ||||||||||||
|
- Corporate Loans
|
6,940 | 4,444 | 116 | 11,500 | ||||||||||||
|
- Finance Leases
|
1,452 | 114 | — | 1,566 | ||||||||||||
|
- Other secured advances
|
1,412 | 2,065 | 94 | 3,571 | ||||||||||||
|
- Other unsecured advances
|
1,212 | 3,184 | 109 | 4,505 | ||||||||||||
|
- Amounts due from fellow subsidiaries
|
4,457 | — | — | 4,457 | ||||||||||||
|
Loans and receivables securities
|
4,217 | 5,645 | 8 | 9,870 | ||||||||||||
|
Total loans and advances
|
193,036 | 28,683 | 780 | 222,499 | ||||||||||||
54
Business and Financial Review
Risk Management
continued
| Company | ||||||||||||||||
| Good | Satisfactory | Higher Risk | Total | |||||||||||||
| 2009 | 2009 | 2009 | 2009 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Financial assets designated at fair value in P&L
|
||||||||||||||||
|
- Loans and advances to banks
|
160 | — | — | 160 | ||||||||||||
|
- Loans and advances to customers
|
45 | — | — | 45 | ||||||||||||
|
Loans and advances to banks
|
||||||||||||||||
|
- Placements with other banks
|
995 | — | — | 995 | ||||||||||||
|
- Amounts due from parent
|
1 | — | — | 1 | ||||||||||||
|
- Amounts due from associates
|
1 | — | — | 1 | ||||||||||||
|
- Amounts due from subsidiaries
|
108,659 | — | — | 108,659 | ||||||||||||
|
Loans and advances to customers
|
||||||||||||||||
|
- Advances secured on residential property
|
105,848 | 11,939 | 453 | 118,240 | ||||||||||||
|
- Other secured advances
|
1,531 | 1,912 | 87 | 3,530 | ||||||||||||
|
- Other unsecured advances
|
1,172 | 3,084 | 106 | 4,362 | ||||||||||||
|
- Amounts due from fellow subsidiaries
|
71 | — | — | 71 | ||||||||||||
|
- Amounts due from subsidiaries
|
938 | — | — | 938 | ||||||||||||
|
Total loans and advances
|
219,421 | 16,935 | 646 | 237,002 | ||||||||||||
Internal measures of credit quality have been used in the table analysing credit quality,
above. Different measures are applied to retail and wholesale lending, as follows:
| Retail Lending | ||||||||||||||||
| Probability of default | Probability of default | Expected loss | Wholesale Lending | |||||||||||||
| Financial statements description | Secured (1) | Commercial (2) | Unsecured (3) | Probability of default | ||||||||||||
|
Good
|
0.0 - 0.5 | % (4) | 0.0 - 0.5 | % | 0.0 - 0.5 | % | 0.0 - 0.5 | % | ||||||||
|
Satisfactory
|
0.5 - 12.5 | % | 0.5 - 35 | % | 0.5 - 12.5 | % | 0.5 - 12.5 | % | ||||||||
|
Higher Risk
|
12.5%+ | (5) | 35%+ | 12.5%+ | 12.5%+ | |||||||||||
| (1) | “Secured” consists of Advances secured on residential property. | |
| (2) | “Commercial” consists of Other secured advances and certain unsecured advances. | |
| (3) | “Unsecured” consists of Other unsecured advances excluding those included within the “Commercial” category. | |
| (4) | Or a loan-to-value ratio of less than 75%. | |
| (5) | Or a loan-to-value ratio exceeding 75%. |
Summarised descriptions of credit quality used in the financial statements relating to retail
and wholesale lending are as follows:
|
Good
|
There is a very high likelihood that the asset will not default and will be recovered in full. The exposure has a negligible or low probability of default. Such exposure also exhibits a strong capacity to meet financial commitments and only exceptionally shows any period of delinquency. | |
|
|
||
|
Satisfactory
|
There is a high likelihood that the asset will be recovered and is therefore of no cause for concern to the Group. The asset has low to moderate probability of default, strong recovery rates and may typically show only short periods of delinquency. Typically these are high loan to value mortgages or most unsecured lending. Moderate to high application scores, credit bureau scores or behavioural scores characterise this credit quality. | |
|
|
||
|
Higher Risk
|
All rated accounts that not viewed as “Good” or “Satisfactory” are rated as “Higher Risk”. The assets are characterised by some concern over the obligor’s ability to make payments when due. However, the assets have not yet converted to actual delinquency. There may also be doubts over the value of collateral or security provided. However, the borrower or counterparty is continuing to make payments when due and is expected to settle all outstanding amounts of principal and interest. |
Maturity analysis of loans and advances that are past due but not individually impaired
A maturity analysis of loans and advances that are past due but not individually impaired is set
out below.
In the retail loans book, a loan or advance is considered past due when any contractual
payments have been missed and for secured loans, when they are more than 30 days in arrears. The amounts disclosed in the table are the total financial asset of the
account, not just the past due payments. All retail accounts are classified as non-impaired as they
are provisioned collectively with the exception of properties in possession, which are provisioned
on a case by case basis and hence are not included in the table below.
In the corporate loans book a loan or advance is considered past due when 90 days past due,
and also when the Group has reason to believe that full repayment of the loan is in doubt.
2009
| Group | ||||||||||||||||||||||||
| Past due up to | Past due 3-6 | Past due 6 months | ||||||||||||||||||||||
| 1 month | Past due 1-2 months | Past due 2-3 months | months | and over | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Loans and advances to customers
|
||||||||||||||||||||||||
|
- Advances secured on residential property
|
— | 1,536 | 889 | 1,113 | 569 | 4,107 | ||||||||||||||||||
|
- Corporate Loans
|
— | — | — | 166 | — | 166 | ||||||||||||||||||
|
- Finance Leases
|
— | — | — | 19 | — | 19 | ||||||||||||||||||
|
- Other secured advances
|
— | 41 | 13 | 17 | 56 | 127 | ||||||||||||||||||
|
- Other unsecured advances
|
99 | 43 | 20 | 30 | 28 | 220 | ||||||||||||||||||
|
Total loans and advances
|
99 | 1,620 | 922 | 1,345 | 653 | 4,639 | ||||||||||||||||||
55
Business and Financial Review
Risk Management
continued
2009
| Company | ||||||||||||||||||||||||
| Past due up to | Past due 6 | |||||||||||||||||||||||
| 1 month | Past due 1-2 months | Past due 2-3 months | Past due 3-6 months | months and over | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Loans and advances to customers
|
||||||||||||||||||||||||
|
- Advances secured on residential property
|
— | 1,369 | 803 | 992 | 462 | 3,626 | ||||||||||||||||||
|
- Other secured advances
|
— | 38 | 12 | 16 | 51 | 117 | ||||||||||||||||||
|
- Other unsecured advances
|
94 | 39 | 19 | 24 | 12 | 188 | ||||||||||||||||||
|
Total loans and advances
|
94 | 1,446 | 834 | 1,032 | 525 | 3,931 | ||||||||||||||||||
Analysis of provisions on loans and advances to customers
An analysis of the Group’s provisions on loans and advances to customers is presented below.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Observed provisions
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
313 | 174 | 74 | 45 | 21 | |||||||||||||||
|
Corporate advances — UK
|
185 | 13 | — | — | — | |||||||||||||||
|
Finance leases — UK
|
1 | — | — | 1 | 3 | |||||||||||||||
|
Other secured advances — UK
|
50 | 37 | 32 | 73 | 123 | |||||||||||||||
|
Unsecured personal advances — UK
|
341 | 227 | 250 | 243 | 158 | |||||||||||||||
|
Total observed provisions
|
890 | 451 | 356 | 362 | 305 | |||||||||||||||
|
Incurred but not yet observed provisions
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
171 | 184 | 102 | 60 | 35 | |||||||||||||||
|
Corporate advances — UK
|
172 | 289 | — | — | — | |||||||||||||||
|
Finance leases — UK
|
1 | 1 | — | — | — | |||||||||||||||
|
Other secured advances — UK
|
12 | 11 | 8 | 3 | — | |||||||||||||||
|
Unsecured personal advances — UK
|
53 | 65 | 85 | 111 | 54 | |||||||||||||||
|
Total incurred but not yet observed provisions
|
409 | 550 | 195 | 174 | 89 | |||||||||||||||
|
Total provisions
|
1,299 | 1,001 | 551 | 536 | 394 | |||||||||||||||
Movements in provisions for impairment losses on loans and advances
An analysis of movements in the Group’s provisions for impairment losses on loans and advances is
presented below.
| 2009 | 2008 | 2007 | 2006 | 2005 (1) | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Provisions at 31 December
|
1,001 | 551 | 536 | 394 | 467 | |||||||||||||||
|
IFRS reclassifications
|
— | — | — | — | (40 | ) | ||||||||||||||
|
Provisions at 1 January
|
1,001 | 551 | 536 | 394 | 427 | |||||||||||||||
|
Amounts written off
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
(84 | ) | (32 | ) | (9 | ) | (11 | ) | (5 | ) | ||||||||||
|
Finance leases UK
|
(4 | ) | — | (1 | ) | — | — | |||||||||||||
|
Other secured advances — UK
|
(17 | ) | (9 | ) | (24 | ) | (27 | ) | (36 | ) | ||||||||||
|
Unsecured personal advances — UK
|
(425 | ) | (262 | ) | (339 | ) | (205 | ) | (247 | ) | ||||||||||
|
Total amounts written off
|
(530 | ) | (303 | ) | (373 | ) | (243 | ) | (288 | ) | ||||||||||
|
Observed provisions charged against profit
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
223 | 132 | 38 | 35 | 12 | |||||||||||||||
|
Corporate advances — UK
|
172 | 13 | — | — | — | |||||||||||||||
|
Finance leases UK
|
5 | — | — | — | — | |||||||||||||||
|
Other secured advances — UK
|
30 | 14 | (17 | ) | (25 | ) | 11 | |||||||||||||
|
Unsecured personal advances — UK
|
539 | 239 | 346 | 289 | 218 | |||||||||||||||
|
Total observed provisions charged against profit
|
969 | 398 | 367 | 299 | 241 | |||||||||||||||
|
Incurred but not yet observed provisions charged against profit
|
(141 | ) | (4 | ) | 21 | 86 | 14 | |||||||||||||
|
Total provisions charged against profit (including discontinued operations)
|
828 | 394 | 388 | 385 | 255 | |||||||||||||||
|
Acquisition of business
|
— | 359 | — | — | — | |||||||||||||||
|
Provisions at the end of the year
|
1,299 | 1,001 | 551 | 536 | 394 | |||||||||||||||
| (1) | IFRS reclassifications related primarily to provisions on certain corporate loans in businesses and portfolios that were inconsistent with the Group’s strategy, and were sold during 2005 or transferred to Corporate Banking. |
Group recoveries
An analysis of the Group’s recoveries is presented below.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Advances secured on residential properties — UK
|
1 | 1 | 2 | 2 | 3 | |||||||||||||||
|
Corporate advances — UK
|
23 | — | — | — | — | |||||||||||||||
|
Finance leases — UK
|
1 | — | — | — | — | |||||||||||||||
|
Other secured advances — UK
|
— | 12 | 6 | 7 | 7 | |||||||||||||||
|
Unsecured personal advances — UK
|
30 | 33 | 36 | 32 | 27 | |||||||||||||||
|
Total amount recovered
|
55 | 46 | 44 | 41 | 37 | |||||||||||||||
56
Business and Financial Review
Risk Management
continued
Group non-performing loans and advances
(1)
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Group non-performing loans and advances that are impaired
|
1,833 | 1,142 | 296 | 375 | 314 | |||||||||||||||
|
Group non-performing loans and advances that are not impaired
|
1,780 | 1,236 | 596 | 451 | 568 | |||||||||||||||
|
Total non-performing loans and advances
(2)
|
3,613 | 2,378 | 892 | 826 | 882 | |||||||||||||||
|
|
% | % | % | % | % | |||||||||||||||
|
Non-performing loans and advances as a % of loans and advances to customers
(3)
|
1.86 | 1.28 | 0.75 | 0.76 | 0.88 | |||||||||||||||
|
Provision as a percentage of total non-performing loans and advances
|
35.95 | 42.10 | 61.77 | 64.89 | 44.67 | |||||||||||||||
| (1) | Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or longer. | |
| (2) | All non-performing loans are UK and continue accruing interest. | |
| (3) | Loans and advances to customers include social housing loans and finance leases, and exclude trading assets. |
Group restructured loans
Loans have been restructured or renegotiated by capitalising the arrears where customers in arrears
have maintained an agreed monthly repayment for a specified period. For further information, refer
to the discussions of restructured loans in the Retail Banking and Corporate Banking sections.
Basel II (unaudited)
Throughout 2009, the Group applied the retail internal ratings-based (IRB) approach for credit risk
to its key retail portfolios. During the course of 2009, regulatory approval was received to apply
a refined approach to the residential mortgage portfolio which addressed the effects of
procyclicality evident in the estimates for probability of default (PD).
A combination of the advanced and foundation internal ratings-based approaches was employed
for the principal wholesale and corporate portfolios. For the remaining credit exposures, currently
on the Basel II standardised approach, a rolling programme of transition to the appropriate IRB
approach is underway. The standardised approach for Operational Risk continued to be applied during
2009.
The Group applied Basel II to its Internal Capital Adequacy Assessment Process (ICAAP) and to
the risk and capital disclosures made to the market. The Group has applied Banco Santander S.A.’s
approach to risk management in its application of Basel II. Further information on the Group’s
capital position under Basel II is included in Note 50 to the Consolidated Financial Statements.
Further information on the Basel II risk measurement of the Group’s exposures will be included in
Banco Santander S.A.’s Pillar 3 report. The Group’s Pillar 3 disclosures are set out in the Balance
Sheet Business Review on pages 41 to 43.
Market risk — Group-wide
Market risk is the potential for loss of income or decrease in the value of net assets caused
by movements in the levels and prices of financial instruments including interest rate and foreign
currency risks. The Group accepts that market risk arises from its full range of activities. The
Group aims to actively manage and control market risk by limiting the adverse impact of market
movements whilst seeking to enhance earnings within clearly defined parameters. The Market Risk
Manual, which is reviewed and approved by the Head of Wholesale Risk on an annual basis, sets the
framework under which market risks are managed and controlled. Business area policies, risk limits
and mandates are established within the context of the Market Risk Manual.
Executive directors are responsible for ensuring that they have sufficient expertise to manage
the risks originated and retained within their business divisions. The business areas are responsible
for ensuring that they have sufficient expertise to manage the risks associated with their
operations. The independent Risk function, under the direction of the Head of Wholesale Risk, aims
to ensure that risk-taking and risk control occur within the framework prescribed by the Market
Risk Manual. The Risk function also provides oversight of all risk-taking activities through a
process of reviews.
The Group aims to ensure that exposure to market risks is measured and reported on an accurate
and timely basis to senior management. In addition to the regular reporting for the purposes of
active risk management, the Board also receives reporting of all significant market risk exposures
on a monthly basis where actual exposure levels are measured against limits. Senior management
recognise that different risk measures are required to best reflect the risks faced in different
types of business activities. In measuring exposure to market risk, the Group uses a range of
complementary measures, covering both value and income as appropriate.
Pension obligation risk — Group-wide
The Group has statutory funding obligations as the sponsoring employer for a number of defined
benefit staff pension schemes. The schemes are managed by independent trustees in accordance with
legislation and trust deeds and rules, for the benefit of members. The Group accepts that it is
exposed to pension obligation risk that could give rise to an unexpected increase in the Group’s
obligations to fund the schemes, either because of a loss of net asset value or because of changes
in legislation or regulatory action. The principal risks to the net asset value of the schemes are
an increase in the value of the liabilities arising from adverse changes in the longevity
assumptions, increases in inflation or reductions in the discount rate used, and scheme assets
being adversely affected by market movements. Further information on pensions can be found in
“Critical Accounting Policies” within the Accounting Policies on page 122 and in Note 36 to the
Consolidated Financial Statements.
Risk management
The Chief Financial Officer is responsible for managing the Group’s exposure to pension obligation
risk, in conjunction with the trustees. Further details of the funding arrangements for the pension
schemes can be found on page 122.
57
Business and Financial Review
Risk Management
continued
Liquidity risk — Group wide
Liquidity risk is the potential that the Group has insufficient financial resources to meet its
payment and collateral obligations (to the extent that they will be settled by delivering cash or
another financial asset) as they fall due, or can do so only at excessive cost. Liquidity risks
arise throughout the Group. Its primary business activity is commercial banking and, as such, it
engages in maturity transformation, whereby callable and short-term commercial deposits are
invested in longer-term customer loans.
The majority of funding is raised from retail deposits with the balance raised in wholesale
markets. The traditional sources of wholesale funding were:
| • | Secured and unsecured money-market funding (including unsecured cash, repo, CD and CP issuance); | |
| • | Senior debt issuance (including discrete bond issues and MTNs); | |
| • | Mortgage-backed funding (including securitisation and covered bond issuance); and | |
| • | Subordinated debt and capital issuance (although the primary purpose is not funding). |
For accounting purposes, wholesale funding is classified as deposits by banks, deposits by
customers, debt securities in issue, other borrowed funds and subordinated liabilities.
As a result of market conditions, the mortgage-backed funding markets, which have
traditionally been important sources of funding and had been effectively closed to new external
issuances since the end of 2007, except for private placements with a small number of investors,
have started to reopen. Despite these difficult market conditions, in October 2009, the Group
issued a 7-year euro 1.75bn covered bond, followed in March 2010 with a 3-year euro 1bn
transaction. In March 2010 the Group issued a £1.4bn mortgage backed securitisation transaction
using Fosse Master Trust. This was the first publicly-placed mortgage-backed securitisation
transaction from a UK bank since 2007; other recent transactions from UK banks had included an
investor put. The Group benefited both from the conservative proportion of retail assets that are
funded in wholesale markets, as well as having entered the period of market stress in a strong
liquidity position. All internal and external liquidity ratios were maintained during this period.
The Group has access to the Bank of England’s, the Swiss National Bank’s and the US Federal
Reserve’s lending facilities. In addition, it can access indirectly the European Central Bank’s
repo facilities. The key on-going liquidity risks are:
| • | Loss of customer deposits; | |
| • | Loss of access to wholesale funding markets (including foreign exchange swaps) or counterparties; | |
| • | Intra-day payments systems dislocation; and | |
| • | Contingent liabilities arising from mortgage-backed or other funding, such as collateral calls or early amortisation. |
Liquidity risk management
The Board is responsible for the liquidity risk management and control framework and defines the
liquidity risk appetite. Funding and liquidity risk management are the responsibility of the Chief
Financial Officer who delegates day-to-day responsibility to the Treasurer, Head of ALM. The Group
has a centralised liquidity risk management approach whereby all liquidity/funding is managed
centrally by the Treasurer, Head of ALM, under the direction of the Asset & Liability Management
Committee and within the framework of the Liquidity Risk Manual. In addition to daily reporting of
business level and consolidated liquidity risk information to senior management, the Asset and
Liability Management Committee and the Risk Committee monitor the Group’s liquidity position on a
monthly basis. The Board also receives a monthly update on key liquidity issues and the Group’s
liquidity position is reported to the UK Financial Services Authority on a weekly basis.
The Group views the essential elements of funding and liquidity management as controlling
potential cash outflows, maintaining prudent levels of highly liquid assets and ensuring that
access to funding is available from a diversity of sources. A management and monitoring process,
and a series of liquidity limits within which liquidity is managed, underpin these elements. The
Board targets a funding strategy that avoids excessive reliance on wholesale funding and attracts
enduring commercial deposits by understanding the liquidity persistence of customer deposits under
different scenarios, appropriately reflecting product features and types of customers. The funding
strategy aims to provide effective diversification in the sources and tenor of funding as well as
establishing the capacity to raise additional unplanned funding from those sources quickly. An
excessive concentration in either liquid assets or contractual liabilities also contributes to
potential liquidity risk, and so limits have been defined under the Liquidity Risk Appetite.
Management also monitors the Group’s compliance with limits set by the UK Financial Services
Authority. In addition to such limits, liquidity ratios have trigger-review levels that require the
Treasurer, Head of ALM and Head of Wholesale Risk to initiate appropriate reviews of current
exposure when such levels are exceeded.
In line with the policy of Banco Santander, S.A., the Group manages its funding and maintains
adequate liquidity on a stand-alone basis. Nevertheless, the Group co-ordinates issuance plans with
Banco Santander, S.A., where appropriate. While the Group’s liquidity risk is consolidated and
centrally controlled, liquidity risk is also measured, monitored and controlled within the specific
business area or the subsidiary where it arises.
The Group holds, at all times, an unencumbered liquid asset buffer to mitigate liquidity risk.
The size and composition of this buffer is determined both by internal stress tests as well as the
appropriate UK Financial Services Authority liquidity regime; a surplus is maintained in both
cases. Since 31 December 2008, the Group has increased its holding of Individual Liquidity Adequacy
Standards (ILAS) eligible assets (as defined within the UK Financial Services Authority liquidity
regime), held exclusively for liquidity purposes, by 44% to £15.3bn. This excludes other
ILAS-eligible assets which are being held for trading purposes.
58
Business and Financial Review
Risk Management
continued
The Group benefitted both from the conservative proportion of retail assets that are funded in
wholesale markets, as well as having entered the period of market stress in a strong liquidity
position. All internal and external liquidity ratios were maintained during this period.
Within the framework of prudent funding and liquidity management, the Group manages its
activities to minimise liquidity risk. The key elements of the Group’s liquidity risk management
are:
Short-term, tactical liquidity management:
| • | Liquid assets — a buffer of liquid assets is held to cover unexpected demands on cash in extreme but plausible stress scenarios. In the Group’s case, the largest stress events include large and unexpected deposit withdrawals by retail customers and a loss of unsecured wholesale funding. | |
| • | Intra-day collateral management — to ensure that adequate collateral is available to support payments in each payment or settlement system in which the Group participates, as they fall due. |
Strategic liquidity management:
| • | Structural balance sheet shape — to manage the extent of maturity transformation (investment of shorter term funding in longer term assets), the funding of non-marketable assets with wholesale funding and the extent to which non-marketable assets can be used to generate liquidity. | |
| • | Wholesale funding strategy — to avoid over-reliance on any individual counterparty, currency, market or product, or group of counterparties, currencies, markets or products that may become highly correlated in a stress scenario; and to avoid excessive concentrations in the maturity of wholesale funding. | |
| • | Wholesale funding capacity — to maintain and promote counterparty relationships, monitor line availability and ensure funding capacity is maintained through ongoing use of lines and markets. |
Collateral calls on derivatives positions can pose a significant liquidity risk. Collateral calls
may arise at times of market stress and when asset liquidity may be tightening. The timing of the
cashflows on a derivative hedging an asset may be different to the timing of the cashflows of the
asset being held, even if they are similar in all other respects. Collateral calls may be triggered
by a credit downgrading. The Group manages these risks by including collateral calls in stress
tests on liquidity, and by maintaining a portfolio of assets held for managing liquidity risk.
The Contingency Funding Plan becomes operational when the demand for cash, whether from
demands for repayment, from wholesale funding or from retail deposits, exceeds the normal liquidity
management process capacity. The circumstances that cause this to happen will tend to be sudden,
unexpected events that trigger demands for cash that cannot be managed within the procedures,
limits and controls defined in the Liquidity Risk Manual.
To be effective, the management of liquidity in a crisis must be timely, proactive and
flexible enough to respond to a variety of different circumstances. The management structure for
the Contingency Funding Plan, which is structured around a small team of individuals with the
authority to agree, co-ordinate and implement actions that will control a volatile, dynamic
situation, has two key elements:
| • | the Treasurer, Head of ALM is responsible for the rapid assessment of the implications of a sudden, unexpected event on the day-to-day liquidity of the Group, and for the decision to activate the Contingency Funding Plan; and; | |
| • | the liquidity crisis management team, under the chairmanship of the Chief Financial Officer, is the decision-making authority in the event of a liquidity crisis, and is responsible for implementing the Liquidity Contingency Plan. |
Risk limits or triggers are set for the key tactical and strategic liquidity risk drivers. These
are monitored by the Treasurer, Head of ALM and Risk Division and reported monthly to the Asset &
Liability Management Committee, Risk Committee and the Board.
Maturities of financial liabilities
The table below analyses the maturities of the undiscounted cash flows relating to financial
liabilities of the Group based on the remaining period to the contractual maturity date at the
balance sheet date. Deposits by customers are largely made up of Retail Deposits. In particular the
‘Demand’ grouping includes current accounts and other variable rate savings products. The ‘Up to 3
months’ grouping largely constitutes wholesale funding of wholesale assets of a similar maturity.
There are no significant financial liabilities related to financial guarantee contracts. This
table is not intended to show the liquidity of the Group.
59
Business and Financial Review
Risk Management
continued
At 31 December 2009
| Group | ||||||||||||||||||||||||
| Up to 3 | 3-12 | 1-5 | Over 5 | |||||||||||||||||||||
| Demand | months | months | years | years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Deposits by banks
|
3,716 | 1,918 | 25 | 159 | — | 5,818 | ||||||||||||||||||
|
Deposits by customers
|
105,157 | 7,169 | 18,228 | 13,476 | 654 | 144,684 | ||||||||||||||||||
|
Trading liabilities
|
2,864 | 37,554 | 3,204 | 2,430 | 443 | 46,495 | ||||||||||||||||||
|
Financial liabilities designated at fair value
|
— | 1,012 | 619 | 2,318 | 487 | 4,436 | ||||||||||||||||||
|
Debt securities in issue
|
— | 12,327 | 7,313 | 5,856 | 23,859 | 49,355 | ||||||||||||||||||
|
Loan commitments
|
35,723 | 11,835 | 963 | 1,734 | 2,323 | 52,578 | ||||||||||||||||||
|
Other borrowed funds
|
— | 54 | 72 | 382 | 3,184 | 3,692 | ||||||||||||||||||
|
Subordinated liabilities
|
— | 206 | 258 | 1,368 | 7,222 | 9,054 | ||||||||||||||||||
|
|
147,460 | 72,075 | 30,682 | 27,723 | 38,172 | 316,112 | ||||||||||||||||||
|
Derivative financial instruments
|
— | 54 | 341 | 1,723 | 255 | 2,373 | ||||||||||||||||||
|
Total financial liabilities
|
147,460 | 72,129 | 31,023 | 29,446 | 38,427 | 318,485 | ||||||||||||||||||
At 31 December 2009
| Company | ||||||||||||||||||||||||
| Up to 3 | 1-5 | Over 5 | ||||||||||||||||||||||
| Demand | months | 3-12 months | years | years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Deposits by banks
|
3,333 | 24,000 | 10,564 | 73,944 | 7,567 | 119,408 | ||||||||||||||||||
|
Deposits by customers
|
77,240 | 15,933 | 12,468 | 15,302 | 44,581 | 165,524 | ||||||||||||||||||
|
Loan commitments
|
8,441 | — | 34 | — | — | 8,475 | ||||||||||||||||||
|
Other borrowed funds
|
— | 40 | 30 | 161 | 678 | 909 | ||||||||||||||||||
|
Subordinated liabilities
|
— | 158 | 260 | 1,379 | 7,316 | 9,113 | ||||||||||||||||||
|
|
89,014 | 40,131 | 23,356 | 90,786 | 60,142 | 303,429 | ||||||||||||||||||
|
Derivative financial instruments
|
— | — | — | — | 437 | 437 | ||||||||||||||||||
|
Total financial liabilities
|
89,014 | 40,131 | 23,356 | 90,786 | 60,579 | 303,866 | ||||||||||||||||||
At 31 December 2008
| Group | ||||||||||||||||||||||||
| Up to 3 | 3-12 | 1-5 | Over 5 | |||||||||||||||||||||
| Demand | months | months | years | years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Deposits by banks
|
2,375 | 8,537 | 691 | 3,123 | — | 14,726 | ||||||||||||||||||
|
Deposits by customers
|
102,170 | 9,430 | 15,294 | 3,519 | 834 | 131,247 | ||||||||||||||||||
|
Trading liabilities
|
5,071 | 31,253 | 1,817 | 1,667 | 1,554 | 41,362 | ||||||||||||||||||
|
Financial liabilities designated at fair value
|
— | 1,816 | 1,330 | 1,858 | 1,230 | 6,234 | ||||||||||||||||||
|
Loan commitments
|
40,082 | 689 | 337 | 836 | 792 | 42,736 | ||||||||||||||||||
|
Debt securities in issue
|
— | 13,350 | 9,650 | 14,254 | 55,282 | 92,536 | ||||||||||||||||||
|
Other borrowed funds
|
— | 60 | 93 | 493 | 4,110 | 4,756 | ||||||||||||||||||
|
Subordinated liabilities
|
— | 234 | 308 | 2,428 | 8,322 | 11,292 | ||||||||||||||||||
|
|
149,698 | 65,369 | 29,520 | 28,178 | 72,124 | 344,889 | ||||||||||||||||||
|
Derivative financial instruments
|
80 | 319 | 412 | 746 | 1,521 | 3,078 | ||||||||||||||||||
|
Total financial liabilities
|
149,778 | 65,688 | 29,932 | 28,924 | 73,645 | 347,967 | ||||||||||||||||||
At 31 December 2008
| Company | ||||||||||||||||||||||||
| Up to 3 | 3-12 | 1-5 | Over 5 | |||||||||||||||||||||
| Demand | months | months | years | years | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Deposits by banks
|
2,907 | 18,354 | 19,638 | 58,758 | 36,477 | 136,134 | ||||||||||||||||||
|
Deposits by customers
|
67,856 | 14,944 | 14,516 | 14,001 | 59,490 | 170,807 | ||||||||||||||||||
|
Trading liabilities
|
4 | 22 | 748 | — | — | 774 | ||||||||||||||||||
|
Loan commitments
|
9,732 | — | 35 | — | — | 9,767 | ||||||||||||||||||
|
Other borrowed funds
|
— | 45 | 46 | 245 | 1,247 | 1,583 | ||||||||||||||||||
|
Subordinated liabilities
|
— | 232 | 288 | 2,316 | 8,651 | 11,487 | ||||||||||||||||||
|
|
80,499 | 33,597 | 35,271 | 75,320 | 105,865 | 330,552 | ||||||||||||||||||
|
Derivative financial instruments
|
56 | — | — | 660 | 1,678 | 2,394 | ||||||||||||||||||
|
Total financial liabilities
|
80,555 | 33,597 | 35,271 | 75,980 | 107,543 | 332,946 | ||||||||||||||||||
As the above table is based on contractual maturities, no account is taken of call features
related to subordinated liabilities. The repayment terms of the debt securities may be accelerated
in line with the covenants contained within the individual loan agreements, as described in Note 33
to the Consolidated Financial Statements.
In addition, no account is taken of the possible early repayment of the Group’s
mortgage-backed non-recourse finance which is redeemed by the Group as funds become available from
redemptions of the residential mortgages. The Group has no control over the timing and amount of
redemptions of residential mortgages.
The maturity analyses above for derivative financial liabilities include the remaining
contractual maturities for those derivative financial liabilities for which contractual maturities
are essential for an understanding of the timing of the cash flows. These consist of interest rate
swaps and cross-currency swaps which are used to hedge the Group’s exposure to interest rates and
exchange rates, and all loan commitments.
60
Business and Financial Review
Risk Management
continued
Risk Management in Retail Banking
Credit risk in Retail Banking
Credit risk is the risk that counterparties will not meet their financial obligations, which
may result in Retail Banking losing the principal amount lent, the interest accrued and any
unrealised gains (less any security held). Credit risk occurs mainly in Retail Banking’s loan and
investment assets (including residential mortgages and secured lending, personal and business
banking). Retail Banking actively manages and controls credit risk.
Managing credit risk
The Board has approved a set of risk appetite limits to cover credit risk arising in Retail
Banking. The management of Retail Banking credit risk is aligned with the processes and procedures
used within Santander UK’s Retail Banking and is managed on a Group basis. Within these limits,
credit mandates and policies are approved with respect to products sold by the Santander UK group.
Residential mortgages and secured lending
Retail Banking lends on many types of property but only after a credit risk assessment of the
borrower, including affordability modelling and an assessment of the property is undertaken. The
systems used to manage and monitor the quality of the mortgage assets are reviewed in accordance
with policy to ensure they perform as expected. Residential lending is subject to lending policy
and lending authority levels, which are used to structure lending decisions to the same standard
across the retail network, a process further improved by mortgage credit scoring, underwriter
accreditation and regular compliance reviews. Details concerning the prospective borrower and the
mortgage are subject to a criteria-based decision-making process. Criteria for assessment include
credit references, loan-to-value ratio, borrower status and the mortgage credit score.
All mortgages provided by Retail Banking are secured on UK properties. All properties must be
permanent in construction; mobile homes are not generally acceptable. The Group can provide a loan
for the purchase of properties outside the UK where the property is a second home and the loan is
secured on the main property located in the UK.
Prior to granting any first mortgage loan on a property, the Group has the property valued by
an approved and qualified surveyor. The valuation is based on set Group guidelines, which build
upon the Royal Institution of Chartered Surveyors guidance on valuation methods. In the case of
re-mortgages, where the loan-to-value (‘LTV’) is 75% or lower, and the risk judged by the size of
the advance requested and the credit score of the applicant is considered medium or low, and an
accurate, reputable automated valuation is available, this may substitute for a surveyor’s
valuation.
For existing mortgages, the current values of the properties on which individual mortgages are
secured are estimated quarterly. For each individual property, details such as address, type of
property and number of bedrooms are supplied to an independent agency that estimates current
property valuations using information from recent property transactions and valuations.
Until 2008, for additional lending where a first-charge mortgage is already held with the
Group and the loan-to-value is less than 90%, the original property value used to be subject to
indexation and no further survey carried out. During 2008, this practice was phased-out, with all
additional loans requiring an automated valuation or surveyor’s valuation. The use of an automated
valuation depends upon the availability of a reliable automated valuation, and the level of credit
risk posed by the proposed loan.
Higher risk loans
The Group is principally a retail prime lender and does not originate second charge mortgages. A
£37m portfolio of second charge mortgages was acquired as a result of the transfer of Alliance &
Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements. This
portfolio is in run-down.
Certain mortgage products may be considered higher risk. Operating as a prime lender in the
UK mortgage market, the Group does not have any material sub-portfolio demonstrating very poor
performance. The portfolio’s arrears performance has remained relatively stable and favourable to
industry benchmarks. Arrears rates and loss rates remain very low. Nonetheless, there are some
mortgage types that present higher risks than others. These products consist of:
Interest-only loans
— Interest-only mortgages require monthly interest payments and the repayment
of principal at maturity. This can be arranged via investment products including Individual Savings
Accounts and pension policies, or by the sale of the property. It is the customer’s responsibility
to ensure that they have sufficient funds to repay the principal in full at maturity.
Interest-only mortgages are well-established and common in the UK market. Lending policies to
mitigate the risks inferred by this repayment structure are in place and mature. While the risks
are higher than capital repayment mortgages, they are only modestly so. The performance of this
significant sub-portfolio has been quite acceptable and stable.
Flexible loans
— Flexible mortgages allow the customers to vary their monthly payment, or take
payment holidays, within predetermined criteria and/or up to an agreed credit limit. Customers are
also permitted to draw down additional funds at any time up to the limit or redraw amounts that
have been previously overpaid.
Loans with original LTV > 100%
— Progressively stricter lending criteria are applied to
mortgages above a loan-to-value of 75%. Historically, in limited circumstances, customers were able
to borrow more than 100% of the value of the property against which the loan was secured, within
certain limits. However, in 2009 no loans were made with a loan-to-value of
more than 100% (2008 and 2007: less than 0.1%). In 2009, less than 0.1% of new secured loan
advances were made with a loan-to-value of more than 90% (2008: 2%, 2007: 3%).
61
Business and Financial Review
Risk Management
continued
Loans with higher loan-to-value ratios carry a higher risk due to the increased likelihood that
liquidation of the collateral will not yield sufficient funds to cover the loan advanced, arrears
and the costs of liquidation. These loans generally attract higher margins as a result.
Sub-prime lending
— The Group has no appetite or product offering for sub-prime business. The
Group’s credit policy explicitly prohibits such lending and is designed to ensure that any business
written is responsible, affordable (both initially and an on-going basis) and of a good credit
quality.
Mortgage credit quality and credit risk mitigation
(1
)
| 2009 | 2008 | 2007 | ||||||||||
|
Loan-to-value analysis:
|
||||||||||||
|
New business
|
||||||||||||
|
< 75%
|
83 | % | 62 | % | 52 | % | ||||||
|
75% - 90%
|
17 | % | 36 | % | 45 | % | ||||||
|
> 90%
|
— | 2 | % | 3 | % | |||||||
|
|
100 | % | 100 | % | 100 | % | ||||||
|
Average loan-to-value of new business (at inception)
|
61 | % | 65 | % | 64 | % | ||||||
|
Stock
|
||||||||||||
|
< 75%
|
61 | % | 67 | % | 76 | % | ||||||
|
75% - 90%
|
22 | % | 22 | % | 20 | % | ||||||
|
90% - 100%
|
10 | % | 7 | % | 4 | % | ||||||
|
> 100% i.e. negative equity
|
7 | % | 4 | % | — | |||||||
|
|
100 | % | 100 | % | 100 | % | ||||||
|
|
||||||||||||
|
Average loan-to-value of stock
|
52 | % | 51 | % | 46 | % | ||||||
|
|
||||||||||||
|
Borrower profile:
|
||||||||||||
|
New business
|
||||||||||||
|
First-time buyers
|
17 | % | 11 | % | 13 | % | ||||||
|
Home movers
|
37 | % | 25 | % | 37 | % | ||||||
|
Remortgagers
|
46 | % | 64 | % | 50 | % | ||||||
|
|
100 | % | 100 | % | 100 | % | ||||||
|
|
||||||||||||
|
Of which:
(2)
|
||||||||||||
|
- Interest-only loans
|
36 | % | 53 | % | 53 | % | ||||||
|
- Flexi loans
|
9 | % | 14 | % | 8 | % | ||||||
|
- Loans with original LTV > 100%
|
— | — | — | |||||||||
|
|
||||||||||||
|
Stock
|
||||||||||||
|
First-time buyers
|
17 | % | 16 | % | 15 | % | ||||||
|
Home movers
|
38 | % | 39 | % | 42 | % | ||||||
|
Remortgagers
|
45 | % | 45 | % | 43 | % | ||||||
|
|
100 | % | 100 | % | 100 | % | ||||||
|
|
||||||||||||
|
Of which:
(2)
|
||||||||||||
|
- Interest-only loans
|
43 | % | 43 | % | 41 | % | ||||||
|
- Flexi loans
|
18 | % | 18 | % | 14 | % | ||||||
|
- Loans with original LTV > 100%
|
— | — | 1 | % | ||||||||
|
|
||||||||||||
|
Average earnings multiple (at inception)
|
2.8 | 3.0 | 3.0 | |||||||||
| (1) | Excludes any fees added to the loan, and only includes the drawn loan amount, not drawdown limits. | |
| (2) | Where a loan exhibits more than one of the “higher risk” criteria, it is included in all the applicable categories. |
Loan-to-value analysis
The residential mortgage portfolio showed an increasing trend of payment arrears with the
deterioration in economic conditions, which has stabilised in the second half of the year. During
2009, LTV on new business completions declined during the first half of the year. However, this
slightly increased during the second half of the year, with the fourth quarter 2009 LTV at 64% (Q3
09: 62%, Q4 08: 60%). The indexed stock LTV increased to 52% from 2008 (Q3 09: 52%, Q4 08: 50%) due
to net lending mix, and mitigated by rising house prices evidenced by portfolio revaluation towards
the end of the year. Although credit criteria continued to be tightened for higher risk segments,
targeted policy relaxation and competitive pricing at higher LTV began to result in a slight uplift
in new business average LTV in 2009.
| • | Arrears more than 90 days past due have increased from 0.93% in December 2008 to 1.37% at the end of 2009. | |
| • | Monthly mortgage completions in excess of 75% LTV fell from 14% in December 2008 to 23% in December 2009. |
7% (2008: 4%) of the retail mortgage portfolio was over 100% LTV, based on the re-evaluation
performed in December 2009. The increase was due to the general decline in property prices during
the year. However, the impact was partly mitigated by the reduced LTV profile of new business and
increased control of the retention process.
62
Business and Financial Review
Risk Management
continued
Borrower profile
During 2009, the proportion of new business from remortgages decreased. This trend was seen across
the UK market as lower interest rates and stricter lending criteria reduced the incentives for
customers to remortgage to another lender.
Mortgage arrears and repossessions
The Collections & Recoveries Department is responsible for all debt management initiatives on the
secured portfolio for Retail Banking. Debt management strategies, which include negotiating
repayment arrangements and concessions and debt counselling, can start as early as the day after a
repayment is past due and will continue until legal action. Different collection strategies are
applied to different segments of the portfolio subject to the perceived levels of risk for example,
loan-to-value, collections score and account characteristics.
If the agreed repayment arrangement is not maintained, legal proceedings may be taken and may
result in the property being taken into possession. The Group sells the repossessed property at
market price and uses the sale proceeds, net of costs, to pay off the outstanding value of the
mortgage. The stock of repossessed properties held by the Group varies according to the number of
new possessions and the buoyancy of the housing market.
A programme of forbearance designed to enable borrowers experiencing short to medium term
repayment difficulties to remain in their home has been in place during 2009. On average, each
month less than 1% of accounts in arrears either have their term extended or convert to interest
only. Levels of adherence to revised payment terms are currently high at approximately 70%.
The following tables set forth information on UK residential mortgage arrears at 31 December
2009, 2008, and 2007 for Retail Banking compared to the industry average as provided by the Council
of Mortgage Lenders (‘CML’).
| CML (2) | ||||||||||||||||||||||||
| Group (1) | (unaudited) | |||||||||||||||||||||||
| Higher risk loans (3) | ||||||||||||||||||||||||
| Interest-only | Flexible | Loans with original | Remaining loan | |||||||||||||||||||||
| Mortgage arrears | loans | loans | LTV > 100% | portfolio | Total (3) | |||||||||||||||||||
| (Percentage of total mortgage loans by number) | ||||||||||||||||||||||||
|
31 to 60 days in arrears:
|
||||||||||||||||||||||||
|
31 December 2007
|
0.61 | 0.13 | — | 0.80 | 1.48 | — | ||||||||||||||||||
|
31 December 2008
|
0.57 | 0.11 | — | 0.56 | 1.19 | — | ||||||||||||||||||
|
31 December 2009
|
0.45 | 0.07 | 0.01 | 0.51 | 1.00 | — | ||||||||||||||||||
|
61 to 90 days in arrears:
|
||||||||||||||||||||||||
|
31 December 2007
|
0.25 | 0.06 | — | 0.31 | 0.59 | — | ||||||||||||||||||
|
31 December 2008
|
0.32 | 0.06 | — | 0.30 | 0.65 | — | ||||||||||||||||||
|
31 December 2009
|
0.27 | 0.04 | — | 0.29 | 0.58 | — | ||||||||||||||||||
|
3 to 5 months in arrears:
|
||||||||||||||||||||||||
|
31 December 2007
|
0.21 | 0.04 | — | 0.24 | 0.49 | 0.62 | ||||||||||||||||||
|
31 December 2008
|
0.31 | 0.06 | — | 0.28 | 0.62 | 1.01 | ||||||||||||||||||
|
31 December 2009
|
0.41 | 0.05 | 0.01 | 0.36 | 0.80 | 0.97 | ||||||||||||||||||
|
6 to 11 months in arrears:
|
||||||||||||||||||||||||
|
31 December 2007
|
0.08 | 0.02 | — | 0.08 | 0.17 | 0.35 | ||||||||||||||||||
|
31 December 2008
|
0.13 | 0.03 | — | 0.11 | 0.26 | 0.62 | ||||||||||||||||||
|
31 December 2009
|
0.22 | 0.04 | — | 0.16 | 0.40 | 0.81 | ||||||||||||||||||
|
12 months or more in arrears:
|
||||||||||||||||||||||||
|
31 December 2007
|
0.02 | — | — | 0.01 | 0.03 | 0.13 | ||||||||||||||||||
|
31 December 2008
|
0.02 | — | — | 0.02 | 0.05 | 0.25 | ||||||||||||||||||
|
31 December 2009
|
0.09 | 0.03 | — | 0.07 | 0.17 | 0.60 | ||||||||||||||||||
| (1) | Group data is not readily available for arrears less than 31 days. | |
| (2) | Council of Mortgage Lenders data is not available for arrears less than 3 months. | |
| (3) | Where a loan exhibits more than one of the “higher risk” criteria, it is included in all the applicable categories. As a result, the total of the mortgage arrears for “higher risk” loans and remaining loan portfolio will not agree to the total mortgage arrears percentages. |
The following tables set forth information on UK properties in possession, at 31 December 2009,
2008, and 2007 for Retail Banking compared to the industry average as provided by the Council of
Mortgage Lenders, as well as the carrying amount of assets obtained as collateral.
| Group | CML (unaudited) | |||||||
| Properties in possession | (Percentage of total mortgage loans by number) | |||||||
|
31 December 2007
|
0.05 | 0.10 | ||||||
|
31 December 2008
|
0.06 | 0.21 | ||||||
|
31 December 2009
|
0.05 | 0.14 | ||||||
| Group | ||||
| Carrying amount of assets obtained as collateral | £m | |||
|
31 December 2007
|
64 | |||
|
31 December 2008
|
130 | |||
|
31 December 2009
|
110 | |||
63
Business and Financial Review
Risk Management
continued
The table below analyses Residential mortgages that have been restructured or renegotiated by
capitalising the arrears where customers in arrears have maintained an agreed monthly repayment for
an agreed period.
| 2009 | 2009 | 2008 | 2008 | |||||||||||||
| £m | % | £m | % | |||||||||||||
|
Mortgages restructured during the year
(1)
|
325 | 100 | 348 | 100 | ||||||||||||
|
Of which
(3)
:
|
||||||||||||||||
|
- Interest only loans
|
157 | 48 | 156 | 45 | ||||||||||||
|
- Flexi loans
|
15 | 5 | 24 | 7 | ||||||||||||
|
- Loans with original LTV >100%
|
1 | — | 1 | — | ||||||||||||
| (1) | All mortgages originated by the Group are first charge. | |
| (2) | Mortgages are included within the year that they were restructured. | |
| (3) | Where a loan exhibits more than one of the “higher risk” criteria, it is included in all the applicable categories. |
Banking and Consumer Credit.
Retail Banking uses systems and processes to manage the risks
involved in providing unsecured personal loans and overdraft lending or in granting bank account
facilities. These include the use of application and behavioural scoring systems to assist in the
granting of credit facilities as well as regular monitoring of scorecard performance and the
quality of the unsecured lending portfolios. Behavioural scoring examines the lending
relationships that a customer has with Retail Banking and how the customer uses their bank account.
This information generates a score that is used to assist in deciding the level of risk (in terms
of overdraft facility amount, card facilities granted and preferred unsecured personal loan value)
for each customer that Retail Banking is willing to accept. Individual customer scores are normally
updated on a monthly basis. Retail Banking has successfully extended the use of behavioural
scoring into other areas of the business, including the refinement of debt management strategies
and bank account transaction processing.
Personal Financial Services banking and unsecured personal loan arrears
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Total banking and unsecured personal loan arrears
(1,2)
|
257 | 371 | 134 | |||||||||
|
Total banking and unsecured personal loan asset
|
4,830 | 6,225 | 3,119 | |||||||||
|
Banking and unsecured personal loan arrears as a % of asset
|
5.31 | % | 5.96 | % | 4.30 | % | ||||||
| (1) | From 2008, banking arrears is defined as customers that had been in arrears for greater than 90 days. In prior years, it was defined as customers whose borrowings exceed their overdraft by over £100. If the prior year definition were applied to 2008 data, the total arrears would increase by £53m. | |
| (2) | Unsecured personal loan and credit card arrears are defined as the balances of accounts that are three or more months in arrears (> 4 instalments). |
Provisions on loans and advances to customers
The charge for provisions on loans and advances to customers adjusts the balance sheet
provisions to the level that management deems adequate to absorb actual and inherent losses in
Retail Banking’s loan portfolio from homogeneous portfolios of assets and individually identified
loans. A proportion of Retail Banking’s provisions on loans and advances to customers relate to
loans and advances secured either by a first charge on residential property in the UK, or by other
appropriate security depending on the nature of the loan.
The Group’s provisioning policy is as follows. Further information is set out in the
Accounting Policies in the Consolidated Financial Statements:
| • | Observed provision — an observed provision is established for all past due loans after a specified period of repayment default where it is likely that some of the capital will not be repaid or recovered through enforcement of any applicable security. The length of the default period depends on the nature of the advance and is generally no more than three months. Once a loan misses a payment (breach of contractual terms) an assessment of the likelihood of collecting the principal and overdue payments is made. This assessment is generally made using statistical techniques developed on previous experience and on projections of current market conditions to the time the loss is expected to crystallise. These techniques estimate the propensity of loans to go to write-off and, as a separate exercise, the loss incurred on written off debt is monitored. For advances secured on residential property, the propensity of loans to reach repossession is determined with repossessed properties assessed on an individual basis through the use of an external valuation, anticipated disposal costs and the current exposure. | |
| • | Incurred but not yet observed provision — an incurred but not yet observed provision is made against loans, which have not missed a payment but are known from past experience to have deteriorated since the initial decision to lend was made. Based on historical evidence, the number of accounts likely to default in the future as a result of events present at the balance sheet date are identified through use of statistical techniques. Further detailed examination is performed on the losses that emerge over a defined period of time after the reporting date called the emergence period. This period is determined to ensure that only those accounts which have credit deterioration at the reporting date are captured and excludes accounts which will suffer credit deterioration after the reporting period. The emergence period is two to three months for unsecured lending and 12 months for secured lending. The provision methodology outlined for observed provisions is then applied to accounts identified as impaired in the performing portfolios. | |
| • | Amounts written off — unsecured loans are written off when all internal avenues of collecting the debt have failed and the debt is passed onto external collection agencies. On secured loans, the write-off takes place on ultimate realisation of collateral value, or from claiming on any mortgage indemnity guarantee or other insurance. All write-offs are 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 write-off policy is regularly reviewed. |
64
Business and Financial Review
Risk Management
continued
Security is realised in accordance with the Group’s internal debt management programme. 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. As a result of the write-off policy, the provisions
will be made significantly in advance of the related write-off on all products. The exception to
this rule is the discovery of fraud, where the exposure is written off once full investigations
have been completed and the probability of recovery is minimal. The time span between the discovery
and write-off will be short and may not result in a provision being raised.
Retail Banking analysis of provisions on loans and advances to customers
An analysis of the Retail Banking provisions on loans and advances to customers is presented
below.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Observed provisions
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
313 | 175 | 74 | 45 | 21 | |||||||||||||||
|
Finance leases — UK
|
— | — | — | 1 | 3 | |||||||||||||||
|
Other secured advances — UK
|
50 | 36 | 32 | 73 | 123 | |||||||||||||||
|
Unsecured personal advances — UK
|
341 | 227 | 250 | 243 | 158 | |||||||||||||||
|
Total observed provisions
|
704 | 438 | 356 | 362 | 305 | |||||||||||||||
|
Incurred but not yet observed provisions
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
171 | 184 | 102 | 60 | 35 | |||||||||||||||
|
Finance leases — UK
|
— | — | — | — | — | |||||||||||||||
|
Other secured advances — UK
|
12 | 11 | 8 | 3 | — | |||||||||||||||
|
Unsecured personal advances — UK
|
53 | 65 | 85 | 111 | 54 | |||||||||||||||
|
Total incurred but not yet observed provisions
|
236 | 260 | 195 | 174 | 89 | |||||||||||||||
|
Total provisions
|
940 | 698 | 551 | 536 | 394 | |||||||||||||||
Retail Banking movements in provisions for impairment losses on loans and advances
An analysis of movements in the Retail Banking provisions for impairment losses on loans and
advances is presented below.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Provisions at 31 December
|
698 | 551 | 536 | 394 | 467 | |||||||||||||||
|
IFRS reclassifications
|
— | — | — | — | (40 | ) | ||||||||||||||
|
Provisions at 1 January
|
698 | 551 | 536 | 394 | 427 | |||||||||||||||
|
Amounts written off
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
(84 | ) | (32 | ) | (9 | ) | (11 | ) | (5 | ) | ||||||||||
|
Other secured advances — UK
|
(17 | ) | (9 | ) | (25 | ) | (27 | ) | (36 | ) | ||||||||||
|
Unsecured personal advances — UK
|
(399 | ) | (262 | ) | (339 | ) | (205 | ) | (247 | ) | ||||||||||
|
Total amounts written off
|
(500 | ) | (303 | ) | (373 | ) | (243 | ) | (288 | ) | ||||||||||
|
Observed provisions charged against/(released into) profit
|
||||||||||||||||||||
|
Advances secured on residential properties — UK
|
223 | 132 | 38 | 35 | 12 | |||||||||||||||
|
Other secured advances — UK
|
30 | 14 | (17 | ) | (25 | ) | 11 | |||||||||||||
|
Unsecured personal advances — UK
|
513 | 239 | 346 | 289 | 221 | |||||||||||||||
|
|
766 | 385 | 367 | 299 | 244 | |||||||||||||||
|
Advances secured on residential properties — non-UK
|
— | — | — | — | (3 | ) | ||||||||||||||
|
Total observed provisions charged against profit
|
766 | 385 | 367 | 299 | 241 | |||||||||||||||
|
Incurred but not yet observed provisions (released into)/charged against profit
|
(24 | ) | (17 | ) | 21 | 86 | 14 | |||||||||||||
|
Total provisions charged against profit (including discontinued operations)
|
742 | 368 | 388 | 385 | 255 | |||||||||||||||
|
Acquired through business combinations
|
— | 82 | — | — | — | |||||||||||||||
|
Provisions at the end of the year
|
940 | 698 | 551 | 536 | 394 | |||||||||||||||
IFRS reclassifications related primarily to provisions on certain corporate loans in businesses
and portfolios that were inconsistent with the Group’s strategy, and were sold during 2005 or
transferred to Corporate Banking.
Retail Banking recoveries
An analysis of the Retail Banking recoveries is presented below.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Advances secured on residential properties — UK
|
1 | 1 | 2 | 2 | 3 | |||||||||||||||
|
Other secured advances — UK
|
— | 12 | 6 | 7 | 7 | |||||||||||||||
|
Unsecured personal advances — UK
|
30 | 33 | 36 | 32 | 27 | |||||||||||||||
|
Total amount recovered
|
31 | 46 | 44 | 41 | 37 | |||||||||||||||
65
Business and Financial Review
Risk Management
continued
Retail Banking non-performing loans and advances
(1)
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Retail Banking non-performing loans and advances that are impaired
(2)
|
1,343 | 745 | 296 | 375 | 314 | |||||||||||||||
|
Retail Banking non-performing loans and advances that are not impaired
|
1,561 | 1,236 | 596 | 451 | 568 | |||||||||||||||
|
Total non-performing loans and advances
(3)
|
2,904 | 1,981 | 892 | 826 | 882 | |||||||||||||||
|
|
% | % | % | % | % | |||||||||||||||
|
Non-performing loans and advances as a % of loans and advances to customers
|
1.67 | 1.19 | 0.80 | 0.80 | 0.92 | |||||||||||||||
|
Provision as a percentage of total non-performing loans and advances
|
32.37 | 35.24 | 61.77 | 64.89 | 44.67 | |||||||||||||||
| (1) | Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or longer | |
| (2) | Non-performing loans against which a provision for impairment losses has been established. | |
| (3) | All non-performing loans are UK and continue accruing interest |
Retail Banking non-performing loans and advances by higher risk loan type
(1) (2)
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Total non-performing loans and advances
|
2,904 | 1,981 | 892 | |||||||||
|
Of which:
|
||||||||||||
|
- Interest only loans
|
1,665 | 1,001 | 375 | |||||||||
|
- Flexi loans
|
251 | 218 | 76 | |||||||||
|
- Loans with original LTV > 100%
|
25 | 11 | 1 | |||||||||
| (1) | No reliable data is available prior to 2007. | |
| (2) | Where a loan exhibits more than one of the “higher risk” criteria, it is included in all the applicable categories. |
In 2009, non-performing loans and advances as a percentage of loans and advances to customers
increased from 1.19% to 1.67%. This primarily
reflects the impact of the continued market deterioration on the performance of the residential
mortgage portfolio. This has also further increased the proportion of non-performing loans secured
against residential property in the non-performing loan balance, which has in turn further reduced
the overall provision coverage as the distribution shifts towards mortgages that require a lower
level of coverage due to inherent securities held against the non-performing loans.
In 2008, non-performing loans and advances as a percentage of loans and advances to customers
increased from 0.80% to 1.19%. This primarily
reflects the impact of the deteriorating market environment on the performance of the residential
mortgage portfolio. This has also increased the proportion of non-performing loans secured against
residential property in the non-performing loan balance, which has in turn further reduced the
average provision coverage required in respect of the eventual credit losses that are expected to
emerge from these loans.
In 2007, non-performing loans and advances as a percentage of loans and advances to customers
remained unchanged at 0.80%. This is a reflection
of the continued strength in the credit quality of the Group’s loans. The overall provision
coverage ratio decreased from 64.89% to 61.77% due to the change in the proportions of mortgages
and unsecured loans in the non-performing loan balance, where a greater proportion represented
mortgages (which have a lower provision as a percentage of the asset).
In 2006, non-performing loans and advances as a percentage of loans and advances to customers
decreased from 0.92% to 0.80%. This reflected the
continuing strength of the credit quality of the Group’s loans, particularly on the secured
mortgages. Provisions as a percentage of total non-performing loans and advances increased from
44.67% to 64.89% in 2006, which reflected the change in macro-economic factors such as interest
rate rises.
Interest income recognised on impaired loans amounted to £101m (2008: £51m, 2007: £36m).
Retail Banking restructured loans
Loans have been restructured or renegotiated by capitalising the arrears where customers in
arrears have maintained an agreed monthly repayment for a specified period. The value of capitalised
arrears on these loans during 2009 was £6m (2008: £7m).
The table below shows the Group’s loans not included in non-performing loans that have been
restructured or renegotiated by capitalising the arrears.
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Restructured loans
|
377 | 371 | ||||||
66
Business and Financial Review
Risk Management
continued
Santander Business Banking (formerly known as Abbey Business)
Santander Business Banking provides a range of products to assist with the finance requirements
of small businesses, including overdrafts and loans. Risk management policies are specific to and
reflect the risks inherent in each product set. Approval processes for credit risk include the use
of judgement, assisted by the use of probability of default and loss given default data, and the
use of credit scoring. Business Banking operates within policies and authority levels approved by
the Chief Risk Officer. Business Banking has a dedicated risk team, reflecting the desire for risk
control to be close to the business needs and risks. Business Banking provides mortgages to
borrowers on a range of mainly non-residential property. Agreed credit assessment criteria include
serviceability ratios, loan-to-value ratios, and quality of tenants, with stress testing against
interest rate movements. Concentration limits per borrower and business sector are also employed to
ensure a balanced loan portfolio. The management of defaulting accounts and the repossession and
sale of properties is handled by a dedicated function within the risk operation.
The strategic plan to extend the customer proposition into the SME market is being supported
by a workstream which aims to manage all risks within this market and throughout the risk cycle.
The development of the risk framework is overseen by the Chief Risk Officer.
Market risk in Retail Banking
Market risks are originated in Retail Banking only as a by-product of writing customer business
and are transferred out of Retail Banking insofar as possible. Only prepayment and launch risk
exposures are retained within Retail Banking, as these behavioural risks are influenced by internal
marketing and pricing activity and are managed by Asset Business and Customer Funds Committees.
Other market risks are transferred to the Asset and Liability Management (‘ALM’) operation within
Group Infrastructure, where they can be managed in conjunction with exposures arising from the
funding, liquidity or capital management activities of ALM. Funds received with respect to deposits
taken are lent on to Group Infrastructure on matching terms as regards interest rate re-pricing and
maturity. Similarly, loans are funded through matching borrowings from Group Infrastructure. Market
risks arising from structured products, including exposure to changes in the levels of equity
markets, are hedged within Global Banking & Markets.
Risk Management in Corporate Banking
Credit risk in Corporate Banking
Credit risk is the risk that counterparties will not meet their financial obligations resulting
in Corporate Banking losing the monies lent, including any interest accrued, or having to close out
transactions prematurely, which may result in losses even after realising the value of any
collateral held. Credit risk arises by Corporate Banking making loans, investing in other financial
instruments or entering into financing transactions or derivative contracts. Corporate Banking
actively manages and controls credit risk.
Managing credit risk
The Board has approved a set of risk appetite limits to cover different types of risk, including
credit risk, arising in Corporate Banking. The Group’s credit risk appetite is measured and
controlled by a maximum Economic Capital value, which is defined as the maximum level of unexpected
loss that the Group is willing to sustain over a one-year period. Within these limits, credit
mandates and policies are approved to cover detailed industry, sector and product limits. All
transactions falling within these mandates and policies are accommodated under credit limits
approved by the appropriate credit authority. Specific approval is usually required by the Credit
Approval Committee (a specific committee established under the authority of the Chief Executive)
for any transaction that falls outside the mandates.
Analysis of credit exposures and credit risk trends are provided each month to the Corporate
and Commercial Banking Risk Oversight Forum, with key issues escalated to the Risk Committee as
required. Large Exposures (as defined by the UK Financial Services Authority) are reported
quarterly to the Risk Committee and the UK Financial Services Authority.
Credit risk on derivative instruments is calculated using the potential future mark-to-market
exposure of the instruments at a 97.5% statistical confidence level and adding this value to the
current value. The resulting “loan equivalent” or credit risk is then included against credit
limits, along with other non-derivative exposures. In addition, there is a policy framework to
enable the collateralisation of derivative instruments including swaps. If collateral is deemed
necessary to reduce credit risk, any unsecured risk threshold, and the nature of any collateral to
be accepted, is determined by management’s credit evaluation of the counterparty.
Corporate Banking has been targeted as an area where the Group aims to achieve controlled
growth, mainly through the expansion of a regional network supporting lending to the Real Estate,
Corporate (including SME), Education and Health sectors. Focus is being given to the control of
credit risks within this expansion with, amongst other things, the development and implementation
of robust Credit Policy Mandates and models covering both risk appetite and ratings.
67
Business and Financial Review
Risk Management
continued
Corporate Banking loans
| Loans & | Impaired | % Collateral | ||||||||||||||||||||||||||
| advances net of | loans as % of | Impairment | held against | |||||||||||||||||||||||||
| Gross loans | Impairment | impairment | Impaired | gross loans & | charge for | impaired | ||||||||||||||||||||||
| & advances | allowance | allowance | loans | advances | the period | loans | ||||||||||||||||||||||
| £m | £m | £m | £m | % | £m | % | ||||||||||||||||||||||
|
Group
(1)
:
|
||||||||||||||||||||||||||||
|
- 2009
|
20,122 | (359 | ) | 19,763 | 618 | 3.07 | 60 | 47 | ||||||||||||||||||||
|
- 2008
|
19,888 | (302 | ) | 19,586 | 882 | 4.43 | 26 | 43 | ||||||||||||||||||||
|
Company:
|
||||||||||||||||||||||||||||
|
- 2009
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
- 2008
|
24 | — | 24 | — | — | — | — | |||||||||||||||||||||
| (1) | Excludes social housing bonds and operating lease assets. |
Corporate Banking committed facilities exposure by credit rating of the issuer or
counterparty
(1)
2009
| Social | ||||||||||||||||||||
| Corporate | Real Estate | housing | Non-growth | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
AAA
|
— | 60 | — | — | 60 | |||||||||||||||
|
AA
|
206 | — | 997 | 310 | 1,513 | |||||||||||||||
|
A
|
799 | 463 | 5,484 | 639 | 7,385 | |||||||||||||||
|
BBB
|
2,688 | 1,585 | 1,791 | 3,027 | 9,091 | |||||||||||||||
|
BB
|
1,462 | 2,043 | 100 | 1,726 | 5,331 | |||||||||||||||
|
B
|
124 | 180 | — | 204 | 508 | |||||||||||||||
|
CCC
|
16 | 5 | — | 66 | 87 | |||||||||||||||
|
D
|
111 | 95 | — | 199 | 405 | |||||||||||||||
|
Other
(2)
|
921 | — | — | — | 921 | |||||||||||||||
|
Total
|
6,327 | 4,431 | 8,372 | 6,171 | 25,301 | |||||||||||||||
2008
| Corporate | Real Estate | Social housing | Non-growth | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
AAA
|
30 | 95 | — | — | 125 | |||||||||||||||
|
AA
|
182 | — | 1,008 | 939 | 2,129 | |||||||||||||||
|
A
|
247 | 270 | 5,222 | 711 | 6,450 | |||||||||||||||
|
BBB
|
2,372 | 1,792 | 1,821 | 3,488 | 9,473 | |||||||||||||||
|
BB
|
1,309 | 1,724 | 100 | 1,895 | 5,028 | |||||||||||||||
|
B
|
176 | — | 9 | 221 | 406 | |||||||||||||||
|
CCC
|
1 | — | — | 136 | 137 | |||||||||||||||
|
D
|
197 | 49 | — | 322 | 568 | |||||||||||||||
|
Other
(2)
|
1,088 | — | — | — | 1,088 | |||||||||||||||
|
Total
|
5,601 | 3,931 | 8,160 | 7,712 | 25,404 | |||||||||||||||
| (1) | All exposures are internally rated. External ratings are taken into consideration in the rating process, where available. | |
| (2) | Individual exposures of £1m or less. |
Corporate Banking committed facilities exposure by geographical area
2009
| Corporate | Real Estate | Social Housing | Non-growth | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
United Kingdom
|
6,019 | 4,202 | 8,372 | 3,353 | 21,946 | |||||||||||||||
|
US
|
— | 65 | — | 511 | 576 | |||||||||||||||
|
Rest of the world
|
308 | 164 | — | 2,307 | 2,779 | |||||||||||||||
|
Total
|
6,327 | 4,431 | 8,372 | 6,171 | 25,301 | |||||||||||||||
2008
| Corporate | Real Estate | Social Housing | Non-growth | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
United Kingdom
|
5,408 | 3,598 | 8,160 | 3,576 | 20,742 | |||||||||||||||
|
US
|
— | 72 | — | 617 | 689 | |||||||||||||||
|
Rest of the world
|
193 | 261 | — | 3,519 | 3,973 | |||||||||||||||
|
Total
|
5,601 | 3,931 | 8,160 | 7,712 | 25,404 | |||||||||||||||
The increase in Corporate and Real Estate exposures in 2009 arose from the continued
development of a UK corporate banking franchise and was offset by a reduction in the non growth
portfolios, both in the UK and overseas. There are no significant exposures to Dubai, Portugal,
Greece, Spain, Argentina and Iceland within the Corporate Banking book.
Corporate Banking — Watchlist
The entire corporate risk portfolio of new, emerging and serious circumstances relating to the
portfolio (i.e. those loans on a ‘Watchlist’) and those in Collections are managed at the FEVE
Corporate Risk forum. FEVE is a Spanish acronym for “Firmas En Vigilancia Especial”, which means
businesses under special watch.
68
Business and Financial Review
Risk Management
continued
A summary of the Watchlist cases at 31 December 2009 by portfolio and assessment of risk is as
follows:
2009
| Portfolio | Watch | Watch | Workout | Workout | NPL | NPL | ||||||||||||||||||||||
| £m | £m | % | £m | % | £m | % | ||||||||||||||||||||||
|
Corporate
|
5,895 | 377 | 6 | 204 | 3 | 135 | 2 | |||||||||||||||||||||
|
Real Estate
|
4,431 | 672 | 15 | 331 | 7 | 206 | 5 | |||||||||||||||||||||
|
Non-growth
|
6,172 | 1,232 | 20 | 502 | 8 | 368 | 6 | |||||||||||||||||||||
|
Total
|
16,498 | 2,281 | 14 | 1,037 | 6 | 709 | 4 | |||||||||||||||||||||
Exposures are classified as “workout” if they are being actively managed by the Risk Division.
Corporate Banking arrears
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Total Corporate lending arrears
|
533 | 143 | — | |||||||||
|
Total Corporate lending assets
|
20,707 | 20,516 | 7,003 | |||||||||
|
Corporate lending arrears as a % of assets
|
2.57 | % | 0.70 | % | — | |||||||
Corporate Banking analysis of provisions on loans and advances to customers
An analysis of the Corporate Banking provisions on loans and advances to customers is presented
below.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Observed provisions
|
||||||||||||||||||||
|
Corporate advances — UK
|
185 | 13 | — | — | — | |||||||||||||||
|
Finance leases — UK
|
1 | — | ||||||||||||||||||
|
Total observed provisions
|
186 | 13 | — | — | — | |||||||||||||||
|
Incurred but not yet observed provisions
|
||||||||||||||||||||
|
Corporate advances — UK
|
172 | 289 | — | — | — | |||||||||||||||
|
Finance leases — UK
|
1 | 1 | ||||||||||||||||||
|
Total incurred but not yet observed provisions
|
173 | 290 | — | — | — | |||||||||||||||
|
Total provisions
|
359 | 303 | — | — | — | |||||||||||||||
Corporate Banking movements in provisions for impairment losses on loans and advances:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Provisions at the start of the year
|
303 | — | — | — | — | |||||||||||||||
|
Amounts written off:
|
||||||||||||||||||||
|
- Corporate Loans
|
— | — | — | — | — | |||||||||||||||
|
- Finance Leases
|
(4 | ) | — | — | — | — | ||||||||||||||
|
Total amounts written off
|
(4 | ) | — | — | — | — | ||||||||||||||
|
Observed provisions charged against profit:
|
||||||||||||||||||||
|
- Corporate Loans
|
172 | 13 | — | — | — | |||||||||||||||
|
- Finance Leases
|
5 | — | — | — | — | |||||||||||||||
|
Total observed provisions charged against profit
|
177 | 13 | — | — | — | |||||||||||||||
|
Incurred but not yet observed provisions charged against profit
|
(117 | ) | 13 | — | — | — | ||||||||||||||
|
Total provisions charged against profit
|
60 | 26 | — | — | — | |||||||||||||||
|
Acquired through business combinations
|
— | 277 | ||||||||||||||||||
|
Provisions at the end of the year
|
359 | 303 | — | — | — | |||||||||||||||
Corporate Banking recoveries
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Secured
|
1 | — | — | |||||||||
|
Unsecured
|
23 | — | — | |||||||||
|
Total amount recovered
|
24 | — | — | |||||||||
Corporate Banking non-performing loans and advances
(1)
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Non-performing loans and advances that are impaired
|
490 | 397 | — | |||||||||
|
Non-performing loans and advances that are not impaired
|
219 | — | — | |||||||||
|
Total non-performing loans and advances
(2)
|
709 | 397 | — | |||||||||
|
|
||||||||||||
|
Non-performing loans and advances as a percentage of loans and advances to customers
(3)
|
3.52 | % | 2.00 | % | — | |||||||
|
Provision as a percentage of total non-performing loans and advances
|
51 | % | 76 | % | — | |||||||
| (1) | Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or longer | |
| (2) | All non-performing loans are UK and continue accruing interest. | |
| (3) | Loans and advances to customers include social housing loans and finance leases. |
69
Business and Financial Review
Risk Management
continued
In 2009, non-performing loans and advances as a percentage of loans and advances to customers
increased to 3.52% as market conditions continued to
deteriorate. This reflects the consolidation of the Alliance & Leicester Corporate Lending business
which included assets with generally higher risk characteristics as well as the more challenging
economic environment on customers especially in the Real Estate and shipping markets.
In 2008, non-performing loans and advances as a percentage of loans and advances to customers
increased to 2.00%. This reflects the impact of the
deteriorating market environment on the performance of the corporate and real estate portfolios,
and the transfer of Alliance & Leicester’s Corporate Banking portfolio.
Interest income recognised on impaired loans amounted to £4m (2008: £2m). In 2007, there were
no impaired loans.
Credit risk mitigation
Collateralisation
The corporate portfolio is largely unsecured but typically incorporates guarantee structures
underpinned by both financial and non-financial covenants. The Social Housing portfolio is secured
on residential real estate owned and let by UK Housing Associations. In the real estate portfolio,
collateral is in the form of commercial real estate assets. Within the non-growth portfolios of
assets inconsistent with the Group’s future strategy, collateral is regularly held through a charge
over the underlying asset and in some circumstances, cash. There are also a small number of PFI
transactions where collateral is held in the form of a charge over the underlying concession
contract.
Restructured loans
Loans may be restructured or renegotiated by capitalising the arrears where customers in arrears
have maintained an agreed monthly repayment for a specified period. Loans have been restructured
during 2009 by way of debt for equity swaps, through new equity being raised or in some cases an
exit has been achieved through the sale of debt.
Market risk in Corporate Banking
Market risks arising in the Corporate Banking division are transferred from the originating
business to ALM within Group Infrastructure, where they can be managed in conjunction with
exposures arising from the funding, liquidity or capital management activities of ALM. Funds
received with respect to deposits taken are lent on to Group Infrastructure on matching terms as
regards interest rate repricing and maturity. Similarly, loans are funded though matching
borrowings from Group Infrastructure. Any permitted retained market risk exposure is minimal, and
is monitored against limits approved by the Head of Wholesale Risk.
Risk Management in Global Banking & Markets
Credit risk in Global Banking & Markets
Credit risk is the risk that counterparties will not meet their financial obligations resulting
in Global Banking & Markets losing the monies lent, including any interest accrued, or having to
close out transactions prematurely, which may incur losses after realising collateral held. Credit
risk arises by Global Banking & Markets making loans, investing in debt securities or other
financial instruments or entering into financing transactions or derivative contracts. Global
Banking & Markets actively manages and controls credit risk.
Managing credit risk
The Board has approved a set of risk appetite limits to cover different types of risk, including
credit risk, arising in Global Banking & Markets. The Group’s credit risk appetite is measured and
controlled by a maximum Economic Capital value, which is defined as the maximum level of unexpected
loss that the Group is willing to sustain over a one-year period. Within these limits, credit
mandates and policies are approved to cover detailed industry, sector and product limits.
All transactions are accommodated under credit limits approved by the appropriate credit
authority. Specific approval is usually required from the Credit Approval Committee (a specific
committee established under the authority of the Chief Executive) for any transaction that falls
outside the mandates.
Analysis of credit exposures and credit risk trends are provided each month to the Wholesale
Risk Oversight and Control Forum with key issues escalated to the Risk Committee as required. Large
Exposures (as defined by the UK Financial Services Authority) are reported monthly to the Risk
Committee and the UK Financial Services Authority.
Credit risk on derivative instruments is calculated using the potential future mark-to-market
exposure of the instruments at a 97.5% statistical confidence level and adding this value to the
current value. The resulting “loan equivalent” or credit risk is then included against credit
limits, along with other non-derivative exposures.
In addition, there is a policy framework to enable the collateralisation of derivative
instruments including swaps. If collateral is deemed necessary to reduce credit risk, any unsecured
risk threshold, and the nature of any collateral to be accepted, is determined by management’s
credit evaluation of the counterparty.
70
Business and Financial Review
Risk Management
continued
Credit risk mitigation
(i) Netting arrangements
The Group restricts its credit risk by entering into transactions under industry standard
agreements which facilitate netting of transactions in the 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.
However, there is scope for the credit risk associated with favourable contracts to be reduced
by netting arrangements embodied in the agreements to the extent that if an event of default
occurs, all amounts with the counterparty under the specific agreement can be terminated and
settled on a net basis. Derivatives, repurchase and reverse repurchase transactions, stock
borrowing/lending transactions and securities financing transactions are governed by industry
standard agreements that facilitate netting.
(ii) Collateralisation
The Group also mitigates its credit risk to counterparties with which it primarily transacts
financial instruments through collateralisation, using industry standard collateral agreements.
Under these agreements, net exposures with counterparties are collateralised with cash, securities
or equities. Exposures and collateral are generally revalued daily and collateral is adjusted
accordingly to reflect deficits/surpluses. Collateral taken must comply with the Group’s collateral
parameters policy. This policy is designed to control the quality and concentration risk of
collateral taken such that collateral held can be liquidated when a counterparty defaults. Cash
collateral in respect of derivatives held at the year-end was £1.5bn (2008: £3.4bn), not all
derivative arrangements being subject to collateral agreements. Collateral obtained during the year
in respect of purchase and resale agreements (including securities financing) is equal to at least
100% of the amount of the exposure.
Global Banking & Markets net exposure by credit rating of the issuer or counterparty
(1)
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
AAA
|
12,068 | 5,904 | ||||||
|
AA
|
512 | 5,905 | ||||||
|
A
|
2,596 | 2,326 | ||||||
|
BBB
|
403 | 251 | ||||||
|
BB
|
172 | 91 | ||||||
|
B
|
— | 1 | ||||||
|
Total
|
15,751 | 14,478 | ||||||
| (1) | External ratings are applied to all exposures where available. |
In the securities financing businesses, credit risk arises on both assets and liabilities and
on both on and off-balance sheet transactions. Consequently, the above credit risk exposure arises
not only from the on balance sheet assets, but also from securities financing trades classified as
liabilities and off-balance sheet assets.
Market risk in Global Banking & Markets
Market risk-taking is performed within the framework established by the Market Risk Manual. A
major portion of the market risk arises from exposures to changes in the levels of interest rates,
equity markets and credit spreads. Interest rate exposure is generated from trading activities.
Exposure to equity markets is generated by the creation and risk management of structured products
by Global Banking & Markets for the Personal Financial Services market and trading activities.
Credit spread exposure arises from credit risk management and trading activities within Global
Banking & Markets.
Managing market risk
Risks are managed within limits approved by the Head of Wholesale Risk or Banco Santander, S.A.’s
Board Risk Committee and within the risk control framework defined by the Market Risk Manual. For
trading activities the primary risk exposures for Global Banking & Markets are interest rate,
equity, credit spread and residual exposure to property indices. Interest rate risks are managed
via interest rate swaps, futures and options (caps, floors and swaptions). Equity risks are managed
via equity stock, index futures, options and structured equity derivatives. Credit-spread risks are
managed via credit derivatives (credit default swaps, total return swaps). Property index risk is
managed via insurance contracts and property derivatives.
To facilitate understanding and communication of different risks, risk categories have been
defined. Exposure to all market risk factors is assigned to one of these categories. The Group
considers two categories:
| • | Short-term liquid market risk covers activities where exposures are subject to frequent change and could be closed out over a short-time horizon. Most of the exposure is generated by Global Banking & Markets. | |
| • | Structural market risk includes exposures arising as a result of the structure of portfolios of assets and liabilities, or where the liquidity of the market is such that the exposure could not be closed out over a short-time horizon. The risk exposure is generated by features inherent in either a product or portfolio and normally presented over the life of the portfolio or product. Such exposures are a result of the decision to undertake specific business activities, can take a number of different forms, and are generally managed over a longer-time horizon. |
71
Business and Financial Review
Risk Management
continued
Global Banking & Markets operates within a market risk framework designed to ensure that it has the
capability to manage risk in a well-controlled manner. A comprehensive set of policies, procedures
and processes have been developed and implemented to identify, measure, report, monitor and control
risk across Global Banking & Markets.
Trading market risk
For trading activities the standardised risk measure adopted is Value at Risk. From 1 January
2010, this has been calculated at a 99% confidence level over a one-day time horizon in accordance
with the standard used throughout Santander. Prior to this date, a 95% confidence level was used.
On a daily basis, market risk factor sensitivities, Value at Risk measures and stress tests are
produced, reported and monitored against limits for each major activity and at the aggregate Global
Banking & Markets level. These limits are used to align risk appetite with the business’
risk-taking activities and are reviewed on a regular basis.
Measurement of risks can involve the use of complex quantitative methods and mathematical
principles to model and predict the changes in instruments and portfolio valuation. These methods
are essential tools to understand the risk exposures. Trading market risk exposure arises only in
the Abbey National Treasury Services plc group. Exposures are managed on a continuous basis, and
are marked to market daily.
The following table shows the Value at Risk-based consolidated exposures for the major risk
classes as at 31 December 2009, together with the highest, lowest and average exposures for the
year. Exposures within each risk class reflect a range of exposures associated with movements in
that financial market. For example, interest rate risks include the impact of absolute rate
movements, movements between interest rate bases and movements in implied volatility on interest
rate options. The range of possible statistical modelling techniques and assumptions mean these
measures are not precise indicators of expected future losses, but are estimates of the potential
change in the value of the portfolio over a specified time horizon and within a given confidence
interval. Historical simulation models are used with appropriate add-ons to reflect unobservable
inputs.
From time to time, losses may exceed the amounts stated where the movements in market rates
fall outside the statistical confidence interval used in the calculation of the value at risk
analysis. The 95% confidence interval means that the theoretical loss at a risk factor level is
likely to be exceeded in one period in twenty. This risk is addressed by monitoring stress-testing
measures across the different business areas. For trading instruments the actual, average, highest
and lowest value at risk exposures shown below are all calculated to a 95% level of confidence
using a simulation of actual one day market movements over a one-year period. The effect of
historic correlations between risk factors is additionally shown below. The use of a one-day time
horizon for all risks associated with trading instruments reflects the horizon over which market
movements will affect the measured profit and loss of these activities.
The amounts below represent the potential change in market values of trading instruments.
Since trading instruments are recorded at market value, these amounts also represent the potential
effect on income.
| Actual Exposure at 31 December | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Group trading instruments | £m | £m | £m | |||||||||
|
Interest rate risks
|
2.4 | 5.3 | 3.0 | |||||||||
|
Equity risks
|
1.0 | 1.2 | 2.2 | |||||||||
|
Spread risks
|
1.1 | 1.9 | 1.9 | |||||||||
|
Property risks
|
6.0 | 6.8 | 3.4 | |||||||||
|
Other risks
(1)
|
0.4 | 0.9 | 0.3 | |||||||||
|
Correlation offsets
(2)
|
(2.3 | ) | (2.5 | ) | (2.3 | ) | ||||||
|
Total correlated one-day Value at Risk
|
8.6 | 13.6 | 8.5 | |||||||||
| Exposure for the year ended 31 December | ||||||||||||||||||||||||||||||||||||
| Average exposure | Highest exposure | Lowest exposure | ||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
| Group trading instruments | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Interest rate risks
|
3.9 | 3.6 | 1.7 | 6.2 | 5.6 | 3.7 | 1.6 | 2.5 | 0.9 | |||||||||||||||||||||||||||
|
Equity risks
|
1.4 | 2.0 | 2.4 | 2.7 | 3.5 | 3.7 | 0.8 | 1.0 | 1.6 | |||||||||||||||||||||||||||
|
Spread risks
|
2.5 | 1.3 | 0.9 | 3.4 | 2.8 | 2.0 | 1.1 | 0.5 | 0.4 | |||||||||||||||||||||||||||
|
Property risks
|
6.1 | 4.7 | 2.3 | 6.9 | 7.4 | 3.5 | 5.5 | 3.2 | 1.0 | |||||||||||||||||||||||||||
|
Other risks
(1)
|
0.7 | 0.6 | 0.3 | 1.0 | 1.0 | 1.2 | 0.3 | 0.2 | 0.1 | |||||||||||||||||||||||||||
|
Correlation offsets
(2)
|
(3.1 | ) | (2.2 | ) | (1.6 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total correlated one-day Value at Risk
|
11.5 | 10.0 | 6.0 | 14.0 | 14.5 | 8.8 | 8.3 | 8.0 | 4.1 | |||||||||||||||||||||||||||
| (1) | Other risks include foreign exchange risk. | |
| (2) | The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest total correlated one-day Value-at-Risk. A corresponding correlation offset effect cannot be calculated and is therefore omitted from the above table. |
Property risks have increased over the last two years. The largest factor in the Value at Risk
increase is from an equity release business funded by the Group, as total equity advances increased
over the three-year period. A secondary factor is the significant fall in interest rates in the
same period. The present value of all the cash flows has increased significantly as a result of
the lower discount rates, increasing sensitivity and hence Value at Risk.
72
Business and Financial Review
Risk Management
continued
Derivatives held for Trading Purposes
Global Banking & Markets is the only area of the Group actively trading derivative products and is
additionally responsible for implementing most Group derivative hedging with the external market.
For trading activities, Global Banking & Markets objectives are to gain value by marketing
derivatives to end users and hedging the resulting exposures efficiently; and the management of
trading exposure reflected on the Group’s balance sheet. Trading derivatives include 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.
Credit Derivatives
Previously, Global Banking & Markets also operated a credit derivatives business. The business
traded in single-name credit derivatives, credit derivative indices and a limited number of
portfolio credit derivative transactions. The credit derivatives trading function operated within
the same framework as other trading functions. Risk limits were established and monitored. Given
the lack of activity in the credit markets in 2007 and early 2008, the business was closed and its
activities consolidated in Spain with the equivalent Banco Santander, S.A. business area with
effect from 1 January 2008. Any residual positions have been hedged with Banco Santander, S.A..
Risk Management in Private Banking
Credit risk in Private Banking
Cater Allen
Cater Allen provides a limited range of products to assist with the finance requirements of
individuals and businesses. Risk management policies are specific to and reflect the risks inherent
in each product set. Approval processes for credit risk include the use of judgement, assisted by
the use of credit scoring and credit ratings. Cater Allen operates within policies and authority
levels approved by the Chief Risk Officer. Cater Allen has a dedicated risk team, reflecting the
desire for risk control to be close to the business needs and risks.
The following table presents Cater Allen’s estimated maximum exposure to credit risk at the
reporting date without taking account of any collateral held or other credit enhancements:
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Loans and advances to customers
|
3.1 | 3.8 | ||||||
|
Other
|
0.2 | 0.2 | ||||||
|
Third party exposures
|
3.3 | 4.0 | ||||||
Abbey International
Abbey International’s office is in Jersey, with a focus on attracting deposits by offering a range
of savings accounts denominated in sterling, US dollars and euros. There is no credit risk
associated in taking deposits.
Alliance & Leicester International
Alliance & Leicester International’s office is in the Isle of Man, with a focus on attracting
deposits by offering a range of savings accounts denominated in sterling, US dollars and euros.
There is no credit risk associated in taking deposits.
Bradford & Bingley International
Bradford & Bingley International Limited is based in the Isle of Man with a focus on attracting
deposits from both retail and corporate customers via savings accounts predominantly denominated in
sterling. There is no credit risk associated in taking deposits.
James Hay
James Hay provides administration services for self-invested pension plans and the WRAP portfolio
management product to end customers mainly via independent financial advisers and branded financial
service providers. With the exception of fees receivable, there is no credit risk associated with
this type of service. On 10 March 2010, Santander Private Banking UK Limited completed the
disposal of James Hay Holdings Limited, together with its five subsidiary companies, by the sale of
100% of James Hay Holdings Limited’s shares to IFG UK Holdings Limited, a subsidiary of IFG Group
for a cash consideration of approximately £39m. The IFG Group provides independent financial
advisory, fund management and pension administration services in Ireland and the UK.
Abbey Stockbrokers
Abbey Stockbrokers Limited, trading as Abbey Sharedealing, provides a direct share dealing service
to customers. Customers buy and sell shares on their account with the help of the dealers at Abbey
Stockdealing. No advice is provided and all trades are on an execution only basis, account
customers are required to provide funds before settlement. As such there is no credit risk
associated with this type of activity.
73
Business and Financial Review
Risk Management
continued
Market risk in Private Banking
Market risk arises from exposures to changes in the levels of interest rates, foreign exchange
rates and equity markets. Market risk arises through the provision of retail and other banking
products and services, as well as structural exposures arising in the balance sheet of the entities
in Private Banking.
Managing market risk
Market risks in Private Banking arising from exposure to changes in the levels of interest rates
and foreign exchanges rates are substantially transferred from the original business to ALM. Risks
not transferred are managed within a series of market risk mandates, which set triggers for
reporting on the extent of market risk that may be retained. These limits are defined in terms of
nominal amounts, sensitivity, earnings-at-risk or value-at-risk. The permitted retained market risk
exposure is minimal. Market risks arising from structured products, including exposure to changes
in the levels of equity markets, are hedged with Global Banking & Markets. It is the current
intention for market risk from some structured products to be retained within Private Banking,
after the implementation of further market risk controls and processes.
Risk Management in Group Infrastructure
Group Infrastructure consists of ALM, which is also responsible for Group Capital and Funding,
as well as the Treasury asset portfolio. ALM is responsible for managing the Group’s structural
balance sheet shape and, in conjunction with Risk Division, tactical liquidity risk management.
This includes short-term and medium-term funding, covered bond and securitisation programmes. ALM’s
responsibilities also include Retail Banking’s product and structural exposure to interest rates
and, in that role, is a link between the Retail Banking and Global Banking & Markets. ALM
recommends and helps to implement Board, Asset and Liability Management Committee and Risk
Committee policies for all aspects of balance sheet management — formulating guidance for, and
monitoring, the overall balance sheet shape, including maturity profile. Group Capital represents
the return on the Group’s capital, reserves, preference shares and subordinated debt. Funding
represents the provision of funding, both to other businesses within the Group and to fellow
subsidiaries of Banco Santander, S.A..
Credit risk in Group Infrastructure
Credit risk is the risk that counterparties will not meet their financial obligations resulting
in Group Infrastructure losing the monies lent, including any interest accrued, or having to close
out transactions prematurely, which may incur losses after realising collateral held. Credit risk
arises by Group Infrastructure making loans, investing in debt securities or other financial
instruments or entering into financing transactions or derivative contracts.
Managing credit risk
Credit risk arises in Group Infrastructure with respect to the division’s holdings of externally
rated asset-backed securities and residential mortgage-backed securities principally issued by
Santander Group entities, bank floating rate notes, other assets held for liquidity purposes, and
lending to fellow subsidiaries of the Santander Group.
All credit risk meets the criteria approved by the Board in respect to risk appetite
parameters and all exposure, including intra-group, is captured on the global risk management
systems and falls within limits approved by Santander Risk Division. The exposure is managed by the
Group’s Wholesale Risk Team.
Group Infrastructure net exposure by credit rating of the issuer or counterparty
(1)
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
AAA
|
10,130 | 17,994 | ||||||
|
AA
|
7,540 | 10,662 | ||||||
|
A
|
10,531 | 12,429 | ||||||
|
BBB+
|
2,507 | 1,174 | ||||||
|
BBB
|
375 | 789 | ||||||
|
Below BBB
|
430 | 440 | ||||||
|
D
|
— | 10 | ||||||
|
Total
|
31,513 | 43,498 | ||||||
| (1) | External ratings are applied to all exposures where available. |
Risks are managed in accordance with limits, asset quality plans and criteria set out in the
relevant policy statement. Decisions are based on independent credit risk analysis, supplemented by
the output of internal ratings tools and external rating agency analysis. An internal ratings model
is used to grade financial institution exposures and to generate probability of default and
expected loss. The Group uses external ratings supplemented by internal analysis to assess the
risks associated with structured credit and securitisation investments. Individual exposures are
reviewed at least annually. Asset quality monitoring is reported by regular executive and
management reporting, and exception reporting against a range of asset quality triggers, which
include expected loss analysis.
The Treasury asset portfolio is monitored for potential impairment as soon as an event
occurs to suggest a counterparty’s creditworthiness merits attention. Once specific events give
rise to a reasonable expectation that future anticipated cash flows may not be received, the asset
originating these doubtful cash flows will be deemed to be impaired.
74
Business and Financial Review
Risk Management
continued
For structured investment vehicles (‘SIVs’), Collateralised Debt Obligations (‘CDOs’) and
Collateralised Loan Obligations (‘CLOs’) impairment is deemed to have occurred when one or more of
the following events have occurred:
| • | the vehicle has realised losses arising from sale of assets that make it probable that the note-holders will not receive principal and base coupon in full; | |
| • | the vehicle has been restructured and the terms of the restructuring make it probable that the note-holders will not receive principal and base coupon in full; | |
| • | the Group expects to participate in a restructuring or refinancing of the vehicle which has been proposed by the vehicle’s manager or sponsor and the likely terms make it probable that the note-holders will not receive principal and base coupon in full; | |
| • | the vehicle has entered into enforcement; or | |
| • | the funding and market conditions are such that the vehicle is expected either to sell assets or restructure such that it is probable that the note-holders will not receive principal and base coupon in full. |
CDOs containing sub-prime US mortgage assets and other structured credit assets are deemed impaired
if estimated losses on the underlying assets exceed the level of credit support. Asset backed
securities are assessed on an individual basis.
Market risk in Group Infrastructure
Most market risks arising from the Retail Banking, Corporate Banking, and Private Banking
divisions are transferred from the originating business to the ALM function within Group
Infrastructure, where they can be managed in conjunction with exposures arising from the funding,
liquidity or capital management activities of ALM. As a consequence, non-trading risk exposures are
substantially transferred to Group Infrastructure. Market risks mainly arise through the provision
of banking products and services to personal and corporate/business customers, as well as
structural exposures arising in the Group’s balance sheet. These risks impact the Group’s current
earnings and economic value.
The most significant market risks in Group Infrastructure are interest rate and credit spread
risks. Yield curve risk arises from the timing mismatch in the repricing of fixed and variable rate
assets, liabilities and off-balance sheet instruments, as well as the investment of
non-interest-bearing liabilities in interest-bearing assets. Credit spread risk arises principally
on Group Infrastructure’s holdings of mortgage-backed securities.
Basis risk arises, to the extent that the volume of administered variable rate assets and
liabilities are not precisely matched, which exposes the balance sheet to changes in the
relationship between administered rates and market rates.
The Group is also exposed to risks arising from features in retail products that give
customers the right to alter the expected cash flows of a financial contract. This creates
prepayment risk, for example where customers may prepay loans before their contractual maturity.
In addition, the Group is exposed to product launch risk, for example where the customers may not
take up the expected volume of new fixed rate mortgages or other loans.
Managing market risk
The Asset and Liability Management Committee is responsible for managing the Group’s overall
balance sheet position. Natural offsets are used as far as possible to mitigate yield curve
exposures but the overall balance sheet position is generally managed using derivatives that are
transacted through Global Banking & Markets. The Treasurer, Head of ALM is responsible for managing
risks in accordance with the Asset and Liability Management Committee’s direction.
Risks are managed within limits approved either by the Head of Wholesale Risk or Banco
Santander, S.A.’s Board Risk Committee, and within the risk control framework defined by the Market
Risk Manual. The key risk limits relate to yield curve risk. They are:
| • | Net Interest Margin sensitivity: the sensitivity of annual net interest margin to an instantaneous and unexpected adverse 100 basis point parallel shock to the yield curve. | |
| • | Market Value of Equity sensitivity: the sensitivity of the net present value of interest rate sensitive positions to an instantaneous and unexpected adverse 100 basis point parallel shock to the yield curve. |
These two measures provide complementary views of potential losses from interest rate movements.
Market Value of Equity sensitivity provides a long-term view covering the present value of all
future cash flows, whereas Net Interest Margin sensitivity considers only the impact on net
interest margin over the next 12 months. Calculation of these two measures requires modelling of
expected customer and other behaviours. These models are regularly reviewed and updated.
The following table shows the results of these measures as at 31 December 2009 and 2008:
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Net interest margin sensitivity (100 basis points adverse parallel shock)
|
(38 | ) | (64 | ) | ||||
|
Market value of equity sensitivity (100 basis points adverse parallel shock)
|
2 | (153 | ) | |||||
Market risk on the Group’s Santander-issued mortgage-backed securities portfolio is managed
against credit spread triggers approved by the Head of Wholesale Risk and sensitivity analysis is
disclosed in Note 49 to the Consolidated Financial Statements.
75
Business and Financial Review
Risk Management
continued
Derivatives
Derivative financial instruments (‘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. They include
interest rate, cross-currency and equity related swaps, forward rate agreements, caps, floors,
options and swaptions (see below). In Group Infrastructure, derivatives are used for economic
hedging.
All derivatives are classified as held at fair value through profit or loss. For accounting
purposes under IFRS, the Group chooses to designate certain derivatives as in a hedging
relationship if they meet specific criteria set out in IAS 39 “Financial Instruments: Recognition
and measurement”.
The main hedging derivatives are interest rate and cross-currency swaps, which are used to
hedge fixed-rate lending and structured savings products and medium-term note issuances, capital
issuances and other capital markets funding.
Derivative products that are combinations of more basic derivatives (such as swaps with
embedded option features), or that have leverage features, may be used in circumstances where the
underlying position being hedged contains the same risk features. In such cases the derivative used
will be structured to match the risks of the underlying asset or liability. Exposure to market risk
on such contracts is therefore economically hedged.
The following table summarises the activities undertaken within Group Infrastructure, the
related risks associated with such activities and the types of hedging derivatives used in managing
such risks. These risks may also be managed using on-balance sheet instruments as part of an
integrated approach to risk management. Further information is contained in Note 13 to the
Consolidated Financial Statements.
| Activity | Risk | Type of hedge | ||
|
Management of the return on
variable rate assets financed by
shareholders’ funds and net
non-interest-bearing liabilities.
|
Reduced profitability due to falls in interest rates. | Receive fixed interest rate swaps. | ||
|
|
||||
|
Management of the basis between
administered rate assets and
liabilities and wholesale market rates.
|
Reduced profitability due to adverse changes in the basis spread. | Basis swaps. | ||
|
|
||||
|
Management of repricing profile of
wholesale funding.
|
Reduced profitability due to adverse movement in wholesale interest rates when large volumes of wholesale funding are repriced. | Forward rate agreements. | ||
|
|
||||
|
Fixed rate lending and investments.
|
Sensitivity to increases in interest rates. | Pay fixed interest rate swaps. | ||
|
|
||||
|
Fixed rate retail and wholesale funding.
|
Sensitivity to falls in interest rates. | Receive fixed interest rate swaps. | ||
|
|
||||
|
Equity-linked retail funding.
|
Sensitivity to increases in equity market indices. | Receive equity swaps. | ||
|
|
||||
|
Management of other net interest income
on retail activities.
|
Sensitivity of income to changes in interest rates. | Interest rate swaps. | ||
|
|
||||
|
Issuance of products with embedded
equity options.
|
Sensitivity to changes in underlying index and index volatility causing option exercise. | Interest rate swaps combined with equity options. | ||
|
|
||||
|
Lending and issuance of products with
embedded interest rate options.
|
Sensitivity to changes in underlying rate and rate volatility causing option exercise. | Interest rate swaps plus caps/floors. | ||
|
|
||||
|
Investment in, and issuance of, bonds
with put/call features.
|
Sensitivity to changes in rates causing option exercise. | Interest rate swaps combined with swaptions (1) and other matched options. | ||
| (1) | A swaption is an option on a swap that gives the holder the right but not the obligation to buy or sell a swap. |
76
Business and Financial Review
Risk Management
continued
Impact of the Current Credit Environment
The Group aims to actively manage its exposure to financial institutions and non-bank financial
institutions such as pension and investment funds, monoline insurers and general insurers. This
exposure arises from investment in floating rate notes, short-term money market placements,
derivative transactions and margin posting on securities borrowing transactions.
At 31 December 2009, the Group is not exposed to sovereign debt of countries currently
experiencing liquidity problems. The Group has exposure to banks in those countries limited to a
£13m (2008: £13m) exposure through a Floating Rate Note issued by a bank in Dubai and a £36m
exposure to a bank in Greece (2008: £187m). Since the balance sheet date, exposure to banks in
Greece has reduced to £5m.
Details of the Group’s investing and lending arrangements with respect to floating rate notes
(‘FRNs’), asset-backed securities (‘ABS’) including mortgage-backed securities (‘MBS’),
Collateralised Debt Obligations (‘CDOs’), Collateralised Loan Obligations (‘CLOs’), Structured
Investment Vehicles (‘SIVs’), monoline insurers, off-balance sheet entities, other holdings for
liquidity purposes, and lending activities are set out below.
Classification in the Consolidated Balance Sheet
The classification of these assets in the Group consolidated balance sheet is as follows:
2009
| Type of Financial Instrument analysed further | OECD Govt | Bank & building | ||||||||||||||||||||||||||||||||||||||
| FRNs | ABS | CDO | CLO | Other | Sub-total | debts | society CDs | Total | ||||||||||||||||||||||||||||||||
| Balance sheet line item | Note | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||
|
Trading assets — debt securities
|
12 | 11,128 | — | — | — | 13 | 11,141 | 2,856 | 1,935 | 15,932 | ||||||||||||||||||||||||||||||
|
Financial assets designated at fair
value — debt securities
|
14 | — | 3,446 | 50 | — | 263 | 3,759 | — | 2,220 | 5,979 | ||||||||||||||||||||||||||||||
|
Available for sale — debt securities
|
18 | — | — | — | — | — | — | 749 | — | 749 | ||||||||||||||||||||||||||||||
|
Loans and receivables securities
|
19 | 6,749 | 2,245 | 80 | 639 | 185 | 9,898 | — | — | 9,898 | ||||||||||||||||||||||||||||||
|
|
17,877 | 5,691 | 130 | 639 | 461 | 24,798 | 3,605 | 4,155 | 32,558 | |||||||||||||||||||||||||||||||
2008
| Type of Financial Instrument analysed further | OECD Govt | Bank and building | ||||||||||||||||||||||||||||||||||||||
| FRNs | ABS | CDO | CLO | Other | Sub-total | debts | society CDs | Total | ||||||||||||||||||||||||||||||||
| Balance sheet line item | Note | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||||
|
Trading assets — debt securities
|
12 | 5,277 | — | — | — | — | 5,277 | 3,139 | 8,385 | 16,801 | ||||||||||||||||||||||||||||||
|
Financial assets designated at fair
value — debt securities
|
14 | — | 4,690 | — | — | — | 4,690 | — | — | 4,690 | ||||||||||||||||||||||||||||||
|
Available for sale — debt securities
|
18 | — | — | — | — | — | — | 2,618 | — | 2,618 | ||||||||||||||||||||||||||||||
|
Loans and receivables securities
|
19 | 9,936 | 3,507 | 164 | 321 | 179 | 14,107 | — | — | 14,107 | ||||||||||||||||||||||||||||||
|
|
15,213 | 8,197 | 164 | 321 | 179 | 24,074 | 5,757 | 8,385 | 38,216 | |||||||||||||||||||||||||||||||
Additional analysis is presented below of the above financial instruments, except for the
category “OECD Govt debts” and “Bank & building society CDs”. Further detail on those assets is set
out in Note 12 to the Consolidated Financial Statements.
Summary
2009
| 2009 movement (1) | ||||||||||||||||||||||||
| Nominal | Book value | Fair value | Income statement | Reserves | Provisions (1) | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Floating rate notes
|
17,932 | 17,877 | 17,787 | 137 | (89 | ) | (4 | ) | ||||||||||||||||
|
Asset backed securities
|
5,893 | 5,691 | 5,424 | 103 | (118 | ) | (15 | ) | ||||||||||||||||
|
Collateralised debt obligations
|
215 | 130 | 130 | (11 | ) | (4 | ) | (3 | ) | |||||||||||||||
|
Collateralised loan obligations
|
703 | 639 | 606 | (1 | ) | (20 | ) | — | ||||||||||||||||
|
Other investments
|
466 | 461 | 462 | 16 | — | (4 | ) | |||||||||||||||||
|
|
25,209 | 24,798 | 24,409 | 244 | (231 | ) | (26 | ) | ||||||||||||||||
2008
| 2008 movement (1) | ||||||||||||||||||||||||
| Nominal | Book value | Fair value | Income statement | Reserves | Provisions (1) | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Floating rate notes
|
15,234 | 15,213 | 14,731 | (25 | ) | — | — | |||||||||||||||||
|
Asset backed securities
|
8,373 | 8,197 | 7,167 | (328 | ) | — | — | |||||||||||||||||
|
Collateralised debt obligations
|
366 | 164 | 130 | — | — | — | ||||||||||||||||||
|
Collateralised loan obligations
|
352 | 321 | 247 | — | — | — | ||||||||||||||||||
|
Other investments
|
197 | 179 | 187 | (2 | ) | — | — | |||||||||||||||||
|
|
24,522 | 24,074 | 22,462 | (355 | ) | — | — | |||||||||||||||||
| (1) | Amounts in respect of assets held at the balance sheet date i.e. not including amounts relating to assets sold during the year. |
77
Business and Financial Review
Risk Management
continued
Fair value of debt securities by credit rating of the issuer or counterparty
(1)
2009
| FRNs | Other | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
AAA
|
10,486 | 4,474 | 14,960 | |||||||||
|
AA+
|
83 | — | 83 | |||||||||
|
AA
|
2,271 | 749 | 3,020 | |||||||||
|
A
|
3,803 | 778 | 4,581 | |||||||||
|
BBB
|
550 | 168 | 718 | |||||||||
|
Below BBB
|
594 | 191 | 785 | |||||||||
|
Unrated
|
— | 262 | 262 | |||||||||
|
Total
|
17,787 | 6,622 | 24,409 | |||||||||
| (1) | External ratings are applied to all exposures, where available. |
2008
| FRNs | Other | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
AAA
|
— | 6,993 | 6,993 | |||||||||
|
AA+
|
— | 266 | 266 | |||||||||
|
AA
|
6,475 | 289 | 6,764 | |||||||||
|
A
|
7,307 | 94 | 7,401 | |||||||||
|
BBB
|
661 | 30 | 691 | |||||||||
|
Below BBB
|
288 | 59 | 347 | |||||||||
|
Total
|
14,731 | 7,731 | 22,462 | |||||||||
| (1) | External ratings are applied to all exposures, where available. |
Floating Rate Notes
(a) Fair value movements by geographical location of issuer or counterparty
2009
| 2009 movement | ||||||||||||||||||||||||||||||||
| Fair value as % of | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
UK
|
9,578 | 53 | 9,611 | 9,596 | 100 | 95 | (11 | ) | (4 | ) | ||||||||||||||||||||||
|
Italy
|
653 | 4 | 650 | 650 | 100 | 1 | (4 | ) | — | |||||||||||||||||||||||
|
Spain
|
1,546 | 9 | 1,527 | 1,510 | 98 | 4 | (20 | ) | — | |||||||||||||||||||||||
|
Rest of Europe
|
3,943 | 22 | 3,910 | 3,897 | 99 | 30 | (29 | ) | — | |||||||||||||||||||||||
|
US
|
699 | 4 | 651 | 633 | 91 | (4 | ) | (20 | ) | — | ||||||||||||||||||||||
|
Rest of the world
|
1,513 | 8 | 1,528 | 1,501 | 99 | 11 | (5 | ) | — | |||||||||||||||||||||||
|
Total
|
17,932 | 100 | 17,877 | 17,787 | 99 | 137 | (89 | ) | (4 | ) | ||||||||||||||||||||||
2008
| 2008 Movement | ||||||||||||||||||||||||||||||||
| Fair value as % | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | of nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
UK
|
3,093 | 20 | 3,107 | 3,069 | 99 | (4 | ) | — | — | |||||||||||||||||||||||
|
Italy
|
1,316 | 9 | 1,314 | 1,288 | 98 | (1 | ) | — | — | |||||||||||||||||||||||
|
Spain
|
2,860 | 19 | 2,831 | 2,744 | 96 | (2 | ) | — | — | |||||||||||||||||||||||
|
Rest of Europe
|
5,115 | 34 | 5,160 | 5,016 | 98 | (15 | ) | — | — | |||||||||||||||||||||||
|
US
|
1,102 | 7 | 1,057 | 934 | 85 | — | — | — | ||||||||||||||||||||||||
|
Rest of the world
|
1,748 | 11 | 1,744 | 1,680 | 96 | (3 | ) | — | — | |||||||||||||||||||||||
|
Total
|
15,234 | 100 | 15,213 | 14,731 | 97 | (25 | ) | — | — | |||||||||||||||||||||||
(b) Fair value movements by credit rating of issuer or counterparty
2009
| 2009 movement | ||||||||||||||||||||||||||||||||
| Fair value as % | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | of nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
AAA
|
10,422 | 58 | 10,486 | 10,486 | 101 | 136 | — | — | ||||||||||||||||||||||||
|
AA
+
|
83 | — | 83 | 83 | 100 | — | ||||||||||||||||||||||||||
|
AA
|
2,297 | 13 | 2,270 | 2,271 | 99 | 3 | (19 | ) | — | |||||||||||||||||||||||
|
A
|
3,925 | 22 | 3,865 | 3,802 | 97 | (1 | ) | (51 | ) | — | ||||||||||||||||||||||
|
BBB
|
589 | 3 | 570 | 551 | 94 | — | (16 | ) | — | |||||||||||||||||||||||
|
Below BBB
|
616 | 4 | 603 | 594 | 96 | (1 | ) | (3 | ) | (4 | ) | |||||||||||||||||||||
|
Total
|
17,932 | 100 | 17,877 | 17,787 | 99 | 137 | (89 | ) | (4 | ) | ||||||||||||||||||||||
78
Business and Financial Review
Risk Management
continued
2008
| 2008 Movement | ||||||||||||||||||||||||||||||||
| Fair value as % | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | of nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
AA and above
|
6,433 | 42 | 6,574 | 6,475 | 101 | (17 | ) | — | — | |||||||||||||||||||||||
|
A
|
7,722 | 51 | 7,635 | 7,307 | 95 | (8 | ) | — | — | |||||||||||||||||||||||
|
BBB
|
735 | 5 | 712 | 661 | 90 | — | — | — | ||||||||||||||||||||||||
|
Below BBB
|
344 | 2 | 292 | 288 | 84 | — | — | — | ||||||||||||||||||||||||
|
Total
|
15,234 | 100 | 15,213 | 14,731 | 97 | (25 | ) | — | — | |||||||||||||||||||||||
The FRNs held are principally issued by banks and other financial institutions. On average,
the FRNs have 18 months to maturity (2008: 23 months).
Structured Investment Vehicles
The Group has insignificant holdings in SIVs, with a nominal value of £14m (2008: £17m) against
which provisions of £11m (2008: £12m) are held, giving a book value of £3m (2008: £5m). The SIVs
are classified as floating rate notes in the balance sheet and included in the tables above.
Asset-Backed Securities
The Group has a portfolio of structured assets, which is diversified by issuer, underlying
asset type and geography. Further details on structured asset exposures are set out in the tables
below.
(a) Fair value movements by geographical location of issuer or counterparty
2009
| 2009 movement | ||||||||||||||||||||||||||||||||
| Fair value as % | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | of nominal | Statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
UK
|
||||||||||||||||||||||||||||||||
|
ABS
|
142 | 2 | 141 | 140 | 99 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
912 | 16 | 878 | 791 | 87 | 2 | (28 | ) | — | |||||||||||||||||||||||
|
|
1,054 | 18 | 1,019 | 931 | 88 | 2 | (28 | ) | — | |||||||||||||||||||||||
|
US
|
||||||||||||||||||||||||||||||||
|
ABS
|
553 | 9 | 506 | 483 | 87 | (8 | ) | (37 | ) | — | ||||||||||||||||||||||
|
MBS
|
292 | 5 | 218 | 125 | 43 | (8 | ) | (29 | ) | (9 | ) | |||||||||||||||||||||
|
|
845 | 14 | 724 | 608 | 72 | (16 | ) | (66 | ) | (9 | ) | |||||||||||||||||||||
|
Rest of Europe
|
||||||||||||||||||||||||||||||||
|
ABS
|
300 | 5 | 288 | 283 | 94 | 14 | (2 | ) | (6 | ) | ||||||||||||||||||||||
|
MBS
|
3,542 | 60 | 3,511 | 3,463 | 98 | 104 | (20 | ) | — | |||||||||||||||||||||||
|
|
3,842 | 65 | 3,799 | 3,746 | 98 | 118 | (22 | ) | (6 | ) | ||||||||||||||||||||||
|
Rest of the world
|
||||||||||||||||||||||||||||||||
|
MBS
|
152 | 3 | 149 | 139 | 91 | (1 | ) | (2 | ) | — | ||||||||||||||||||||||
|
Total
|
5,893 | 100 | 5,691 | 5,424 | 92 | 103 | (118 | ) | (15 | ) | ||||||||||||||||||||||
2008
| 2008 movement | ||||||||||||||||||||||||||||||||
| Fair value as | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | % of nominal | Statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
UK
|
||||||||||||||||||||||||||||||||
|
ABS
|
31 | — | 31 | 28 | 90 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
1,156 | 14 | 1,531 | 950 | 82 | — | — | — | ||||||||||||||||||||||||
|
|
1,187 | 14 | 1,562 | 978 | 82 | — | — | — | ||||||||||||||||||||||||
|
US
|
||||||||||||||||||||||||||||||||
|
ABS
|
962 | 11 | 881 | 732 | 76 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
393 | 5 | 277 | 191 | 49 | — | — | — | ||||||||||||||||||||||||
|
|
1,355 | 16 | 1,158 | 923 | 68 | — | — | — | ||||||||||||||||||||||||
|
Rest of Europe
|
||||||||||||||||||||||||||||||||
|
ABS
|
461 | 6 | 432 | 426 | 92 | (23 | ) | — | — | |||||||||||||||||||||||
|
MBS
|
5,084 | 61 | 4,764 | 4,568 | 90 | (305 | ) | — | — | |||||||||||||||||||||||
|
|
5,545 | 67 | 5,196 | 4,994 | 90 | (328 | ) | — | — | |||||||||||||||||||||||
|
Rest of the world
|
||||||||||||||||||||||||||||||||
|
ABS
|
36 | — | 36 | 34 | 94 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
250 | 3 | 245 | 238 | 95 | — | — | — | ||||||||||||||||||||||||
|
|
286 | 3 | 281 | 272 | 95 | — | — | — | ||||||||||||||||||||||||
|
Total
|
8,373 | 100 | 8,197 | 7,167 | 86 | (328 | ) | — | — | |||||||||||||||||||||||
79
Business and Financial Review
Risk Management
continued
(b) Vintage of asset-backed securities by geographical location of issuer or counterparty
2009
| Original credit | Original sub- | Original vintage | ||||||||||||||||||||||||||||||||||
| Nominal | enhancements | prime exposure | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||
| Country | £m | £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||
|
UK
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
142 | 3 | — | 27 | 4 | 54 | 15 | — | — | |||||||||||||||||||||||||||
|
MBS
|
912 | 68 | — | 35 | 10 | 26 | 29 | — | — | |||||||||||||||||||||||||||
|
|
1,054 | 71 | — | 34 | 9 | 30 | 27 | — | — | |||||||||||||||||||||||||||
|
US
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
553 | 31 | — | 27 | 66 | 6 | 1 | — | — | |||||||||||||||||||||||||||
|
MBS
|
292 | 35 | 11 | 23 | 37 | 26 | 14 | — | — | |||||||||||||||||||||||||||
|
|
845 | 66 | 11 | 26 | 56 | 13 | 5 | — | — | |||||||||||||||||||||||||||
|
Rest of Europe
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
300 | 5 | — | 25 | 3 | 42 | 30 | — | — | |||||||||||||||||||||||||||
|
MBS
|
3,542 | 46 | — | 80 | 1 | 9 | 10 | — | — | |||||||||||||||||||||||||||
|
|
3,842 | 51 | — | 76 | 1 | 11 | 12 | — | — | |||||||||||||||||||||||||||
|
Rest of the world
|
||||||||||||||||||||||||||||||||||||
|
MBS
|
152 | 6 | — | 34 | 3 | 3 | 60 | — | — | |||||||||||||||||||||||||||
|
Total
|
5,893 | 194 | 11 | 60 | 11 | 15 | 14 | — | — | |||||||||||||||||||||||||||
(c) Fair value movements by credit rating of issuer or counterparty
2009
| 2009 movement | ||||||||||||||||||||||||||||||||
| Fair Value as % | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | of nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
AAA
|
||||||||||||||||||||||||||||||||
|
ABS
|
803 | 14 | 761 | 734 | 91 | 8 | (32 | ) | — | |||||||||||||||||||||||
|
MBS
|
3,730 | 63 | 3,667 | 3,553 | 95 | 100 | (42 | ) | — | |||||||||||||||||||||||
|
|
4,533 | 77 | 4,428 | 4,287 | 95 | 108 | (74 | ) | — | |||||||||||||||||||||||
|
AA
|
||||||||||||||||||||||||||||||||
|
ABS
|
10 | — | 8 | 7 | 70 | — | (1 | ) | — | |||||||||||||||||||||||
|
MBS
|
364 | 6 | 348 | 313 | 86 | 2 | (10 | ) | — | |||||||||||||||||||||||
|
|
374 | 6 | 356 | 320 | 86 | 2 | (11 | ) | — | |||||||||||||||||||||||
|
A
|
||||||||||||||||||||||||||||||||
|
ABS
|
56 | 1 | 51 | 50 | 89 | (1 | ) | (3 | ) | — | ||||||||||||||||||||||
|
MBS
|
582 | 10 | 574 | 564 | 97 | 1 | (6 | ) | — | |||||||||||||||||||||||
|
|
638 | 11 | 625 | 614 | 96 | — | (9 | ) | — | |||||||||||||||||||||||
|
BBB
|
||||||||||||||||||||||||||||||||
|
ABS
|
67 | 1 | 66 | 65 | 98 | — | (1 | ) | — | |||||||||||||||||||||||
|
MBS
|
51 | 1 | 42 | 34 | 67 | (1 | ) | (6 | ) | — | ||||||||||||||||||||||
|
|
118 | 2 | 108 | 99 | 84 | (1 | ) | (7 | ) | — | ||||||||||||||||||||||
|
Below BBB
|
||||||||||||||||||||||||||||||||
|
ABS
|
59 | 1 | 49 | 49 | 83 | (1 | ) | (2 | ) | (6 | ) | |||||||||||||||||||||
|
MBS
|
171 | 3 | 125 | 55 | 32 | (5 | ) | (15 | ) | (9 | ) | |||||||||||||||||||||
|
|
230 | 4 | 174 | 104 | 45 | (6 | ) | (17 | ) | (15 | ) | |||||||||||||||||||||
|
Total
|
5,893 | 100 | 5,691 | 5,424 | 92 | 103 | (118 | ) | (15 | ) | ||||||||||||||||||||||
2008
| 2008 movement | ||||||||||||||||||||||||||||||||
| Fair value as % | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | of nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
AAA
|
||||||||||||||||||||||||||||||||
|
ABS
|
1,404 | 17 | 1,316 | 1,163 | 83 | (23 | ) | — | — | |||||||||||||||||||||||
|
MBS
|
6,336 | 75 | 6,084 | 5,544 | 88 | (266 | ) | — | — | |||||||||||||||||||||||
|
|
7,740 | 92 | 7,400 | 6,707 | 87 | (289 | ) | — | — | |||||||||||||||||||||||
|
AA+
|
||||||||||||||||||||||||||||||||
|
ABS
|
11 | — | 10 | 10 | 91 | (1 | ) | — | — | |||||||||||||||||||||||
|
MBS
|
300 | 4 | 256 | 256 | 85 | (38 | ) | — | — | |||||||||||||||||||||||
|
|
311 | 4 | 266 | 266 | 86 | (39 | ) | — | — | |||||||||||||||||||||||
|
AA
|
||||||||||||||||||||||||||||||||
|
ABS
|
18 | — | 15 | 12 | 67 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
91 | 1 | 107 | 50 | 55 | — | — | — | ||||||||||||||||||||||||
|
|
109 | 1 | 122 | 62 | 57 | — | — | — | ||||||||||||||||||||||||
|
A
|
||||||||||||||||||||||||||||||||
|
ABS
|
83 | 1 | 67 | 59 | 71 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
38 | — | 283 | 18 | 47 | — | — | — | ||||||||||||||||||||||||
|
|
121 | 1 | 350 | 77 | 64 | — | — | — | ||||||||||||||||||||||||
|
BBB
|
||||||||||||||||||||||||||||||||
|
ABS
|
17 | — | 12 | 12 | 71 | — | — | — | ||||||||||||||||||||||||
|
MBS
|
33 | 1 | 22 | 12 | 36 | — | — | — | ||||||||||||||||||||||||
|
|
50 | 1 | 34 | 24 | 48 | — | — | — | ||||||||||||||||||||||||
|
Below BBB
|
||||||||||||||||||||||||||||||||
|
MBS
|
42 | 1 | 25 | 31 | 74 | — | — | — | ||||||||||||||||||||||||
|
|
42 | 1 | 25 | 31 | 74 | — | — | — | ||||||||||||||||||||||||
|
Total
|
8,373 | 100 | 8,197 | 7,167 | 86 | (328 | ) | — | — | |||||||||||||||||||||||
80
Business and Financial Review
Risk Management
continued
The fair value movements above exclude the effects of changes in foreign exchange rates.
(d) Vintage of asset-backed securities by credit rating of issuer or counterparty
2009
| Original credit | Original sub-prime | Original vintage | ||||||||||||||||||||||||||||||||||
| Nominal | enhancements | exposure | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||
| Credit rating | £m | £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||
|
AAA
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
803 | 37 | — | 27 | 45 | 18 | 10 | — | — | |||||||||||||||||||||||||||
|
MBS
|
3,730 | 115 | — | 71 | 4 | 9 | 16 | — | — | |||||||||||||||||||||||||||
|
|
4,533 | 152 | — | 63 | 11 | 11 | 15 | — | — | |||||||||||||||||||||||||||
|
AA
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
10 | 1 | — | 29 | 41 | 30 | — | — | — | |||||||||||||||||||||||||||
|
MBS
|
364 | 15 | 6 | 5 | 6 | 65 | 24 | — | — | |||||||||||||||||||||||||||
|
|
374 | 16 | 6 | 6 | 7 | 63 | 24 | — | — | |||||||||||||||||||||||||||
|
A
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
56 | 1 | — | — | — | 100 | — | — | — | |||||||||||||||||||||||||||
|
MBS
|
582 | 3 | — | 95 | 3 | — | 2 | — | — | |||||||||||||||||||||||||||
|
|
638 | 4 | — | 86 | 3 | 9 | 2 | — | — | |||||||||||||||||||||||||||
|
BBB
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
67 | — | — | 55 | — | 11 | 34 | — | — | |||||||||||||||||||||||||||
|
MBS
|
51 | 4 | — | 49 | 40 | 11 | — | — | — | |||||||||||||||||||||||||||
|
|
118 | 4 | — | 53 | 17 | 11 | 19 | — | — | |||||||||||||||||||||||||||
|
Below BBB
|
||||||||||||||||||||||||||||||||||||
|
ABS
|
59 | — | — | — | 27 | 47 | 26 | — | — | |||||||||||||||||||||||||||
|
MBS
|
171 | 18 | 6 | 22 | 23 | 35 | 20 | — | — | |||||||||||||||||||||||||||
|
|
230 | 18 | 6 | 16 | 24 | 38 | 22 | — | — | |||||||||||||||||||||||||||
|
Total
|
5,893 | 194 | 12 | 60 | 11 | 15 | 14 | — | — | |||||||||||||||||||||||||||
Included in the tables above are holdings of ALT-A US asset-backed securities of £107m.
The following table shows the vintages of the collateral assets supporting the Group’s holdings of
asset-backed securities and mortgage-backed securities at 31 December 2009.
| Original vintage | ||||||||||||||||||||||||||||
| Asset Type | Nominal | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||
| £m | % | % | % | % | % | % | ||||||||||||||||||||||
|
Prime lending
|
5,663 | 61 | 10 | 15 | 14 | — | — | |||||||||||||||||||||
|
ALT-A
|
224 | 34 | 40 | 17 | 9 | — | — | |||||||||||||||||||||
|
Sub-prime
|
6 | — | — | — | 100 | — | — | |||||||||||||||||||||
|
Total
|
5,893 | 60 | 11 | 15 | 14 | — | — | |||||||||||||||||||||
Monoline Insurers
The Group has a £219m (2008: £255m) exposure to securitisations which are wrapped by monoline
insurers. The principal risk exposures are recorded against the securitisations, with the monoline
wraps being viewed as contingent exposures. The exposures to monoline insurers are classified as
asset-backed securities in the balance sheet and are included in the tables above.
Collateralised Debt Obligations
(a) Fair value movements by geographical location of issuer or counterparty
2009
| Fair value | 2009 movement | Original | Original | |||||||||||||||||||||||||||||||||||||
| as % of | Income | exposure | Credit | |||||||||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | statement | Reserves | Provision | to sub-prime | enhancement | ||||||||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | % | % | ||||||||||||||||||||||||||||||
|
UK
|
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Rest of Europe
|
2 | 1 | 2 | 2 | 100 | (1 | ) | — | — | — | — | |||||||||||||||||||||||||||||
|
US
|
212 | 99 | 127 | 127 | 60 | (10 | ) | (4 | ) | (3 | ) | 11 | 30 | |||||||||||||||||||||||||||
|
Rest of the world
|
1 | — | 1 | 1 | 100 | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Total
|
215 | 100 | 130 | 130 | 60 | (11 | ) | (4 | ) | (3 | ) | 11 | 30 | |||||||||||||||||||||||||||
2008
| Fair value | 2008 movement | Original | ||||||||||||||||||||||||||||||||||||||
| as % of | Income | Original exposure | Credit | |||||||||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | statement | Reserves | Provision | to sub-prime | enhancement | ||||||||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | % | % | ||||||||||||||||||||||||||||||
|
UK
|
24 | 7 | 17 | 13 | 54 | — | — | — | — | 27 | ||||||||||||||||||||||||||||||
|
Rest of Europe
|
3 | 1 | 3 | 4 | 133 | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
US
|
339 | 92 | 144 | 113 | 33 | — | — | — | 21 | 28 | ||||||||||||||||||||||||||||||
|
Rest of the world
|
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Total
|
366 | 100 | 164 | 130 | 36 | — | — | — | 19 | 27 | ||||||||||||||||||||||||||||||
81
Business and Financial Review
Risk Management
continued
(b) Vintage of collateralised debt obligations by geographical location of issuer or counterparty
2009
| Original credit | Original sub-prime | Original vintage | ||||||||||||||||||||||||||||||||||
| Nominal | enhancements | exposure | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||
| Country | £m | £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||
|
ABS CDO
|
||||||||||||||||||||||||||||||||||||
|
UK
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Rest of Europe
|
2 | — | — | 50 | 50 | — | — | — | — | |||||||||||||||||||||||||||
|
US
|
48 | 15 | 14 | 33 | 65 | 2 | — | — | — | |||||||||||||||||||||||||||
|
|
50 | 15 | 14 | 34 | 64 | 2 | ||||||||||||||||||||||||||||||
|
Synthetic CDO
|
||||||||||||||||||||||||||||||||||||
|
US
|
95 | 11 | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
|
95 | 11 | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Other CDO
|
||||||||||||||||||||||||||||||||||||
|
US
|
70 | 8 | 1 | 38 | 5 | 24 | 33 | — | — | |||||||||||||||||||||||||||
|
|
70 | 8 | 1 | 38 | 5 | 24 | 33 | — | — | |||||||||||||||||||||||||||
|
Total
|
215 | 34 | 15 | 64 | 17 | 8 | 11 | — | — | |||||||||||||||||||||||||||
(c) Fair value movements by credit rating of issuer or counterparty
2009
| Fair value | 2009 movement | Original | Original | |||||||||||||||||||||||||||||||||||||
| as % of | Income | exposure | credit | |||||||||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair Value | nominal | statement | Reserves | Provisions | to sub-prime | enhancement | ||||||||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | % | % | ||||||||||||||||||||||||||||||
|
AAA
|
16 | 7 | 8 | 8 | 50 | (1 | ) | — | — | — | 26 | |||||||||||||||||||||||||||||
|
AA
|
64 | 30 | 48 | 48 | 75 | (1 | ) | (4 | ) | — | 1 | 13 | ||||||||||||||||||||||||||||
|
A
|
17 | 8 | 7 | 7 | 41 | (1 | ) | — | — | 10 | — | |||||||||||||||||||||||||||||
|
BBB
|
23 | 11 | 15 | 15 | 65 | (1 | ) | — | — | 1 | 1 | |||||||||||||||||||||||||||||
|
Below BBB
|
95 | 44 | 52 | 52 | 55 | (7 | ) | — | (3 | ) | 6 | 2 | ||||||||||||||||||||||||||||
|
Total
|
215 | 100 | 130 | 130 | 60 | (11 | ) | (4 | ) | (3 | ) | 4 | 7 | |||||||||||||||||||||||||||
2008
| Fair value | 2008 movement | Original | Original | |||||||||||||||||||||||||||||||||||||
| as % of | Income | exposure | credit | |||||||||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair Value | nominal | statement | Reserves | Provisions | to sub-prime | enhancement | ||||||||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | % | % | ||||||||||||||||||||||||||||||
|
AAA
|
147 | 40 | 91 | 75 | 51 | — | — | — | 1 | 34 | ||||||||||||||||||||||||||||||
|
AA
|
38 | 10 | 18 | 17 | 45 | — | — | — | 10 | 35 | ||||||||||||||||||||||||||||||
|
A
|
11 | 3 | 4 | 4 | 36 | — | — | — | 13 | 23 | ||||||||||||||||||||||||||||||
|
BBB
|
18 | 5 | 7 | 6 | 33 | — | — | — | 14 | 8 | ||||||||||||||||||||||||||||||
|
Below BBB
|
152 | 42 | 44 | 28 | 18 | — | — | — | 41 | 21 | ||||||||||||||||||||||||||||||
|
Total
|
366 | 100 | 164 | 130 | 36 | — | — | — | 19 | 27 | ||||||||||||||||||||||||||||||
(d) Vintage of collateralised debt obligations by credit rating of issuer or counterparty
2009
| Original credit | Original sub-prime | Original vintage | ||||||||||||||||||||||||||||||||||
| Nominal | enhancements | exposure | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||
| Credit rating | £m | £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||
|
ABS CDO
|
||||||||||||||||||||||||||||||||||||
|
AAA
|
12 | 6 | — | — | 100 | — | — | — | — | |||||||||||||||||||||||||||
|
AA
|
12 | 3 | 2 | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
A
|
1 | — | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
BBB
|
5 | 1 | 2 | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Below BBB
|
20 | 5 | 10 | — | 95 | 5 | — | — | — | |||||||||||||||||||||||||||
|
|
50 | 15 | 14 | 35 | 63 | 2 | — | — | — | |||||||||||||||||||||||||||
|
Synthetic CDO
|
||||||||||||||||||||||||||||||||||||
|
AAA
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
AA
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
A
|
15 | 1 | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
BBB
|
16 | 3 | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Below BBB
|
64 | 7 | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
|
95 | 11 | — | 100 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Other CDO
|
||||||||||||||||||||||||||||||||||||
|
AAA
|
3 | 1 | — | 67 | — | 33 | — | — | — | |||||||||||||||||||||||||||
|
AA
|
51 | 7 | 1 | 39 | — | 11 | 50 | — | — | |||||||||||||||||||||||||||
|
A
|
1 | — | — | — | 100 | — | — | — | — | |||||||||||||||||||||||||||
|
BBB
|
2 | — | — | 50 | 50 | — | — | — | — | |||||||||||||||||||||||||||
|
Below BBB
|
13 | — | — | 31 | — | 69 | — | — | — | |||||||||||||||||||||||||||
|
|
70 | 8 | 1 | 39 | 3 | 22 | 36 | — | — | |||||||||||||||||||||||||||
|
Total
|
215 | 34 | 15 | 64 | 17 | 8 | 11 | — | — | |||||||||||||||||||||||||||
82
Business and Financial Review
Risk Management
continued
In addition, in the ordinary course of business, the Group entered into long-term interest rate
hedging contracts with five investment vehicles whose underlying assets comprise debt securities,
bank loans and energy and infrastructure financings. Although the vehicles themselves are not
externally rated, the counterparty exposure ranks super-senior to the most senior notes issued by
the vehicles and these notes are rated AAA or AA. The total mark-to-market exposure at 31 December
2009 was £100m (2008: £186m).
Collateralised Loan Obligations
(a) Fair value movements by geographical location of issuer or counterparty
2009
| Fair value | 2009 movement | |||||||||||||||||||||||||||||||
| as % of | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
UK
|
93 | 13 | 87 | 82 | 88 | (1 | ) | (4 | ) | — | ||||||||||||||||||||||
|
Rest of Europe
|
42 | 6 | 36 | 28 | 67 | — | (5 | ) | — | |||||||||||||||||||||||
|
US
|
568 | 81 | 516 | 496 | 87 | — | (11 | ) | — | |||||||||||||||||||||||
|
Total
|
703 | 100 | 639 | 606 | 86 | (1 | ) | (20 | ) | — | ||||||||||||||||||||||
2008
| Fair value | 2008 movement | |||||||||||||||||||||||||||||||
| as % of | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Country | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
UK
|
115 | 33 | 108 | 94 | 82 | — | — | — | ||||||||||||||||||||||||
|
Rest of Europe
|
47 | 13 | 41 | 30 | 64 | — | — | — | ||||||||||||||||||||||||
|
US
|
190 | 54 | 172 | 123 | 65 | — | — | — | ||||||||||||||||||||||||
|
Total
|
352 | 100 | 321 | 247 | 70 | — | — | — | ||||||||||||||||||||||||
(b) Vintage of collateralised loan obligations by geographical location of issuer or counterparty
2009
| Original credit | Original sub-prime | Original vintage | ||||||||||||||||||||||||||||||||||
| Nominal | enhancements | exposure | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||
| Country | £m | £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||
|
UK
|
93 | 13 | — | 14 | 59 | 14 | 13 | — | — | |||||||||||||||||||||||||||
|
Rest of Europe
|
42 | 8 | — | 22 | 5 | 42 | 31 | — | — | |||||||||||||||||||||||||||
|
US
|
568 | 122 | — | 82 | 4 | 10 | 4 | — | — | |||||||||||||||||||||||||||
|
Total
|
703 | 143 | — | 70 | 11 | 12 | 7 | — | — | |||||||||||||||||||||||||||
(c) Fair value movements by credit rating of issuer or counterparty
2009
| Fair Value | 2009 movement | |||||||||||||||||||||||||||||||
| as % of | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
AAA
|
202 | 29 | 185 | 176 | 87 | (1 | ) | (6 | ) | — | ||||||||||||||||||||||
|
AA
|
254 | 36 | 225 | 218 | 86 | — | (1 | ) | — | |||||||||||||||||||||||
|
A
|
181 | 26 | 161 | 157 | 87 | — | (4 | ) | — | |||||||||||||||||||||||
|
BBB
|
56 | 8 | 49 | 39 | 70 | — | (7 | ) | — | |||||||||||||||||||||||
|
Below BBB
|
10 | 1 | 19 | 16 | 160 | — | (2 | ) | — | |||||||||||||||||||||||
|
Total
|
703 | 100 | 639 | 606 | 86 | (1 | ) | (20 | ) | — | ||||||||||||||||||||||
2008
| Fair Value | 2008 movement | |||||||||||||||||||||||||||||||
| as % of | Income | |||||||||||||||||||||||||||||||
| Nominal value | Book value | Fair value | nominal | Statement | Reserves | Provisions | ||||||||||||||||||||||||||
| Credit rating | £m | % | £m | £m | % | £m | £m | £m | ||||||||||||||||||||||||
|
AAA
|
276 | 78 | 257 | 211 | 76 | — | — | — | ||||||||||||||||||||||||
|
AA
|
42 | 12 | 36 | 23 | 55 | — | — | — | ||||||||||||||||||||||||
|
A
|
30 | 9 | 26 | 13 | 43 | — | — | — | ||||||||||||||||||||||||
|
BBB
|
4 | 1 | 2 | — | — | — | — | — | ||||||||||||||||||||||||
|
Below BBB
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Total
|
352 | 100 | 321 | 247 | 70 | — | — | — | ||||||||||||||||||||||||
83
Business and Financial Review
Risk Management
continued
(d) Vintage of collateralised loan obligations by credit rating of issuer or counterparty
2009
| Original credit | Original sub-prime | Original vintage | ||||||||||||||||||||||||||||||||||
| Nominal | enhancements | exposure | Pre-2005 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||||||
| Credit rating | £m | £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||
|
AAA
|
202 | 40 | — | 43 | 28 | 24 | 5 | — | — | |||||||||||||||||||||||||||
|
AA
|
254 | 50 | — | 92 | 6 | 2 | — | — | — | |||||||||||||||||||||||||||
|
A
|
181 | 38 | — | 84 | — | 8 | 8 | — | — | |||||||||||||||||||||||||||
|
BBB
|
56 | 12 | — | 24 | — | 34 | 42 | — | — | |||||||||||||||||||||||||||
|
Below BBB
|
10 | 1 | — | 70 | 30 | — | — | — | — | |||||||||||||||||||||||||||
|
Total
|
703 | 141 | — | 70 | 11 | 12 | 7 | — | — | |||||||||||||||||||||||||||
Other investments
| Book value | Fair value | Book value | Fair value | |||||||||||||
| 2009 | 2009 | 2008 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Principal Protected Notes
|
24 | 26 | 34 | 31 | ||||||||||||
|
Other
|
437 | 436 | 145 | 156 | ||||||||||||
|
|
461 | 462 | 179 | 187 | ||||||||||||
The Principal Protected Notes are backed by highly rated bank counterparties and are due to
mature by the end of 2016. Other investments of £437m (2008: £145m) consisted primarily of
Corporate lending transactions that were completed by Corporate Banking.
Exposure to Off-Balance Sheet Entities sponsored by the Group
Secured Loan to Conduit
The Group’s Conduit facility is funded by the Group via secured loans. Prior to 2009, the Conduit
was not consolidated into the Group accounts on the basis that the Special Purpose Entities
(‘SPEs’) within the Conduit were not controlled by the Group. However, in the second half of 2009,
the Group took an active role in the management of the Conduit’s assets. Although there has been no
change in the terms and conditions of the Group’s loans to the Conduit, management has concluded
that the Group is now required to consolidate the assets of the Conduit vehicles, rather than
recognising the loans to the Conduit vehicles and treating the assets of the Conduit vehicles as
off-balance sheet.
Consolidation of the assets of the Conduit vehicles has not had a significant impact on the
Group’s income statement and balance sheet. The assets of the Conduit vehicles consist of ABS
(including Alt-A US residential mortgage-backed securities), CLOs and CDOs, and are consolidated in
the respective tables above as at 31 December 2009.
84
Business and Financial Review
Risk Management
continued
The underlying assets within the Conduit vehicles at 31 December 2008 analysed by asset type and
credit rating were as follows:
31 December 2008
| Cumulative | Original credit | Original sub-prime | Original vintage | |||||||||||||||||||||||||||||||||
| Asset Type | Credit rating | Nominal | Impairment | enhancement | exposure | Pre-2005 | 2005 | 2006 | 2007 | |||||||||||||||||||||||||||
| £m | £m | % | % | % | % | % | % | |||||||||||||||||||||||||||||
|
ABS
|
||||||||||||||||||||||||||||||||||||
|
US RMBS
|
AAA | 46 | — | 32 | — | 39 | 61 | — | — | |||||||||||||||||||||||||||
|
(ALT-A)
|
AA | 5 | — | 18 | — | 100 | — | — | — | |||||||||||||||||||||||||||
|
|
Below BBB | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Total ABS
|
51 | — | 30 | — | 45 | 55 | — | — | ||||||||||||||||||||||||||||
|
CLO
|
||||||||||||||||||||||||||||||||||||
|
|
AAA | 442 | — | 24 | — | 99 | — | — | 1 | |||||||||||||||||||||||||||
|
|
AA | 33 | — | 29 | — | 82 | 18 | — | — | |||||||||||||||||||||||||||
|
|
A | 30 | — | 26 | — | 100 | — | — | — | |||||||||||||||||||||||||||
|
Total CLO
|
505 | — | 24 | — | 98 | 1 | — | 1 | ||||||||||||||||||||||||||||
|
CDO
|
||||||||||||||||||||||||||||||||||||
|
ABS CDO
|
AAA | 19 | — | 24 | 36 | 100 | — | — | — | |||||||||||||||||||||||||||
|
|
AA | 26 | — | 28 | 44 | 100 | — | — | — | |||||||||||||||||||||||||||
|
|
BBB | 28 | 4 | 26 | 45 | 100 | — | — | — | |||||||||||||||||||||||||||
|
|
Below BBB | 45 | 17 | 30 | 65 | 100 | — | — | — | |||||||||||||||||||||||||||
|
|
118 | 21 | 28 | 51 | 100 | — | — | — | ||||||||||||||||||||||||||||
|
Synthetic CDO
|
||||||||||||||||||||||||||||||||||||
|
|
AAA | 27 | — | 19 | — | — | 100 | — | — | |||||||||||||||||||||||||||
|
|
A | 76 | 6 | 10 | — | 32 | 68 | — | — | |||||||||||||||||||||||||||
|
|
BBB | 17 | 14 | 10 | — | — | 100 | — | — | |||||||||||||||||||||||||||
|
|
Below BBB | 34 | 31 | 5 | — | — | 100 | — | — | |||||||||||||||||||||||||||
|
|
154 | 51 | 10 | — | 16 | 84 | — | — | ||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||||||
|
|
AAA | 73 | — | 45 | — | 45 | — | 55 | — | |||||||||||||||||||||||||||
|
|
AA | 17 | — | 61 | — | — | 41 | 59 | — | |||||||||||||||||||||||||||
|
|
A | 11 | — | 49 | — | — | 100 | — | — | |||||||||||||||||||||||||||
|
|
101 | — | 48 | — | 32 | 18 | 50 | — | ||||||||||||||||||||||||||||
|
Total CDO
|
373 | 72 | 26 | 16 | 47 | 40 | 13 | — | ||||||||||||||||||||||||||||
|
Total Conduit
assets
|
929 | 72 | 74 | 19 | 6 | 1 | ||||||||||||||||||||||||||||||
The only other SPEs sponsored but not consolidated by the Group are SPEs which issue shares
that back retail structured products. The Group’s arrangements with these entities comprise the
provision of equity derivatives and a secondary market-making service to those retail customers who
wish to exit early from these products. The total value of products issued by the SPEs is £5,798m
(2008: £3,213m), and the total value of repurchases held by the Group is £234m (2008: £254m).
Credit Derivatives
As noted above, previously, Global Banking & Markets operated a credit derivatives business. The
business traded in single-name credit derivatives, credit derivative indices and a limited number
of portfolio credit derivative transactions. The credit derivatives trading function operated
within the same framework as other trading functions. Risk limits were established and monitored.
There is a limited number of remaining credit derivative transactions with a nominal value of £772m
(2008: £1.1bn) where the Group faces external counterparties and the risk has been hedged with
Banco Santander, S.A. in Spain.
Lending Activities
The Group is principally a retail prime lender and has no appetite or product offering for
sub-prime business. The Group’s credit policy explicitly prohibits such lending and is specifically
designed to ensure that any business written is responsible, affordable (both initially and an
on-going basis) and of a good credit quality. The Group’s principal lending activities arise in the
Retail Banking division. For further information, see Risk Management in Retail Banking.
Liquidity
In addition to funding customer loans and advances, the Group also holds available liquid assets,
in the form of cash and short-term deposits, to manage the day-to-day requirements of the business.
The Group holds a higher level of liquid assets than in 2008, in recognition of the current market
conditions.
85
Report of the Directors
Directors
Board of Directors
As at 31 December 2009
As at 31 December 2009
Chairman
Lord Burns
Lord Burns (age 66) was appointed Joint Deputy Chairman on 1 December 2001 and Chairman on 1
February 2002. He is also Chairman of Alliance & Leicester plc, Channel 4 Television Corporation,
and Glas Cymru Cyfyngedig (Welsh Water) and a Non-Executive Director of Pearson plc and Banco
Santander, S.A.. His current professional roles include President of the Society of Business
Economists, Fellow of the London Business School, Companion of the Institute of Management,
President of the National Institute of Economic and Social Research and Vice President of the Royal
Economic Society. He was formerly Permanent Secretary to the Treasury and chaired the
Parliamentary Financial Services and Markets Bill Joint Committee. He was a Non-Executive Director
of British Land plc (2000-2005) and Legal & General Group plc (1991-2001). He was also Chairman of
the National Lottery Commission (2000-2001) and Marks and Spencer Group plc (2006-2008).
Executive Directors
António Horta-Osório
Chief Executive
António Horta-Osório (age 46) was appointed Chief Executive on 21 August 2006. He was a
Non-Executive Director from 1 December 2004 until his appointment as Chief Executive. He joined
from Banco Santander Totta in Portugal where he was Chief Executive Officer since 1999. He is also Chief
Executive of Alliance & Leicester plc, Executive Vice President of Banco Santander, S.A. and a
member of its management committee as well as Non-Executive Chairman of Banco Santander Totta and a
Non-Executive Director to the Court of The Bank of England. He was previously Chief Executive
Officer of Banco Santander Brasil (1996-1999). António started his career at Citibank Portugal, where he was
head of Capital Markets and at the same time was an assistant professor at the Universidade
Católica Portuguesa. He then worked for Goldman Sachs in New York and London, focusing on corporate
finance activities in Portugal and, in 1993, joined the Santander group as Chief Executive Officer
of Banco Santander de Negócios Portugal. He is a graduate in Management and Business Administration
at Universidade Católica Portuguesa, has an MBA from INSEAD, where he was awarded the Henry Ford II
Prize, and an AMP from Harvard Business School.
Antonio Lorenzo
Chief Financial Officer
Antonio Lorenzo (age 43) was appointed as an Executive Director and Chief Finance Officer on 1 June
2009, following his appointment as Financial Controller and Head of Private Banking in November
2004. He is also an Executive Director of Alliance & Leicester plc and his additional
responsibilities include heading up the Intermediary division. Antonio first joined the Banco
Santander, S.A. group as a Financial Controller of the Global Wholesale division (Spain) in 1998.
In 2003, Antonio moved to Chile to head Latam and Global Wholesale Banking MI division. Before he
joined the Santander group, Antonio worked at Arthur Andersen (Spain). He was part of the Financial
Services Audit Team and was an advisor in the Treasury and Capital Markets area. At that time he
taught Auditing at the European University of Madrid. He is a member of the official Registry of
Auditors of Spain and holds two Bachelors degrees, in Economics (Universidad Complutense de Madrid)
and Law (UNED).
Juan Colombás
Chief Risk Officer
Juan Colombás (age 47) was appointed as an Executive Director on 31 July 2009 and is responsible
for the Risk division. He is also an Executive Director of Alliance & Leicester plc. Juan joined in
2006 as Chief Risk Officer and has over 23 years of experience in a range of Risk, Control and
Business Management roles across the Corporate Banking, Investment Banking, Retail Distribution and
Risk Divisions of the Santander Group. Juan joined the Commercial Banking Division and Internal
Audit Division of Banco Hispano Americano as a trainee in 1986. He graduated top of his class in
BSc Industrial Chemical Engineering and has a Financial Management Degree and an MBA.
Alison Brittain
Executive Director, Retail Distribution
Alison Brittain (age 45) was appointed Executive Director, Retail Distribution on 2 January 2008.
She is responsible for Branch Distribution, Telephone Distribution, e-commerce, Business Banking
and Commercial Mortgages. She was previously Managing Director of the Barclays and Woolwich Retail
Network and the Small Business Banking division of Barclays Bank plc. She is also an Executive
Director of Alliance & Leicester plc.
86
Report of the Directors
Directors
continued
Non-Executive Directors
Juan Rodríguez Inciarte
Deputy Chairman
Juan Inciarte (age 57) was appointed Non-Executive Director on 1 December 2004. He joined Banco
Santander, S.A. in 1985. After holding various positions, he was appointed to the Board of
Directors in 1991, holding this office until 1999. He is currently a Board Member and Head of
Strategy of Banco Santander, S.A., a Director of Santander Consumer Finance, S.A., Non-Executive
Director of Alliance & Leicester plc, Director of ABN AMRO Holding N.V. and Director of RFS
Holdings B.V.. In addition, he is a director of Banco Banif S.A. and of Vista Capital de Expansion
S.A.. For several years he served on the Board of Directors of First Union Corporation (now
Wachovia Bank) in the US, the Board of Directors and Executive Committee of San Paolo — IMI in
Italy and the Boards of the Royal Bank of Scotland plc and National Westminster Bank plc (from 1998
— 2004). He also held the positions of Executive Director of NIBC Bank N.V. in the Netherlands
(from 2005 — 2007), Director and Member of the Executive Committee of Sovereign Bancorp in the US
(from 2006 — 2008) and Director of Compañía Española de Petróleos (from 1999 — 2009). He
is also Chairman of the US-Spain Council and a Fellow of The Chartered Institute of Bankers in
Scotland.
Jane Barker
Jane Barker (age 60) was appointed Non-Executive Director on 21 October 2008. She is Chief
Executive Officer of Equitas Limited, the company set up to re-insure and run-off the 1992 and
prior years’ non-life liabilities of Lloyd’s of London syndicates and a Non-Executive Director of
Alliance & Leicester plc. She is Deputy Chairman of the Royal College of Music and was previously a
member of the council and chair of the Audit Committee of the Open University. Her previous roles
have included being Finance Director of the London Stock Exchange.
Roy Brown
Roy Brown (age 63) was appointed Non-Executive Director on 21 October 2008. He is a Chartered
Engineer and is Chairman of GKN plc and a Non-Executive Director of Alliance & Leicester plc.
Formerly, he was a Senior Independent Director of HMV Group plc, Executive Director of Unilever plc
and NV, a Non-Executive Director of Brambles Industries plc, the British United Provident
Association Ltd (BUPA) and the Franchise Board of Lloyd’s of London.
José María Carballo
José María Carballo (age 66) was appointed Non-Executive Director on 1 December 2004. He is a
Non-Executive Director of Alliance & Leicester plc, Chairman of La Unión Resinera Española,
Chairman of Vista Desarrollo, Director of Vista Capital Expansion S.A. S.G.E.C.R., Director of
Teleférico Pico del Teide S.A. and Director of Santander Banif Inmobiliario F.I.I.. He is also Vice
President and Honorary Treasurer of the Iberoamerican Benevolent Society (UK). He was Executive
Vice President of Banco Santander, S.A. from 1989-2001 and Chief Executive Officer of Banco
Santander de Negocios from 1989 to 1993. Until 1989 he was Executive Vice President responsible for
Europe at Banco Bilbao Vizcaya. He was also Executive Vice President of Banco de Bilbao in New York
until 1983.
José María Fuster
José María Fuster (age 51) was appointed Non-Executive Director on 1 December 2004. He is Executive
Vice President of Operations and Technology, and Chief Information Officer of Banco Santander,
S.A., Non-Executive Director of Banesto and Non-Executive Director of Alliance & Leicester plc. He
joined Banesto in 1998 and was appointed as Chief Information Officer of Banco Santander, S.A. in
2003. He started his professional career with International Business Machines, S.A. and Arthur
Andersen as a consultant. He has also worked for Citibank España, S.A. and National Westminster
Bank plc.
Rosemary Thorne
Rosemary Thorne (age 58) was appointed Non-Executive Director on 1 July 2006. She is also a
Non-Executive Director on the Board of Smurfit Kappa Group plc and a Non-Executive Director of
Alliance & Leicester plc. She was Group Finance Director of Ladbrokes plc until April 2007,
Non-Executive Director of Cadbury Schweppes plc until September 2007 and Senior Independent
Director on the Board of Virgin Radio Holdings Limited until June 2008. Previously, she was Group
Financial Controller of Grand Metropolitan Public Limited Company (prior to its merger with
Guinness plc to become Diageo plc) and spent almost eight years as the Group Finance Director of J
Sainsbury plc. She joined the Board of Bradford & Bingley plc in 1999 as Group Finance Director,
initially working on its demutualisation and flotation, resulting in a place in the FTSE 100 in
December 2000. She remained in this role for a further five years. She was a member of the
Financial Reporting Council and Financial Reporting Review Panel for nine years and a member of The
Hundred Group of Finance Directors Main Committee for 15 years.
Keith Woodley
Keith Woodley (age 70) was appointed Non-Executive Director on 5 August 1996. He was made Senior
Independent Non-Executive Director in April 1999 and was Deputy Chairman from 6 April 1999 until
November 2004. He is a Non-Executive Director of Alliance & Leicester plc, former Non-Executive
Director of National and Provincial Building Society and a former partner of Deloitte Haskins &
Sells. A past President of the Institute of Chartered Accountants in England and Wales, he is a
Council Member and Pro-Chancellor of the University of Bath.
87
Report of the Directors
Directors’ Report
Corporate Structure
Santander UK plc (formerly Abbey National plc) (the ‘Company’) is a wholly-owned subsidiary of
Banco Santander, S.A.. The ordinary shares of the Company are not traded on the London Stock
Exchange. Banco Santander, S.A. is incorporated in Spain and has its registered office at Paseo de
Pereda 9-12, Santander, Spain. Note 20 to the Consolidated Financial Statements provides a list of
the principal subsidiaries of the Company, the nature of each subsidiary’s business and details of
branches.
Corporate Governance
The Company is subject to the Listing Rules and the Disclosure & Transparency Rules of the UK
Financial Services Authority, because it has preference shares listed on the London Stock Exchange.
As it does not have listed ordinary shares, the Company is exempt from the requirement to make
certain disclosures that are normally part of the continuing obligations of listed companies in the
UK. This exemption applies, among other things, to corporate governance and certain Directors’
remuneration disclosures.
Principal Activities and Business Review
The principal activity of Santander UK plc, company number 2294747, and its subsidiaries
(together ‘Santander UK’ or the ‘Group’) continues to be the provision of an extensive range of
personal financial services. In addition, Santander UK provides a wide range of banking and
financial services to business and public sector customers. The Company is authorised and regulated
by the UK Financial Services Authority.
The Company is required to set out in this report a fair review of the development and
performance of the business of the Group during the year ended 31 December 2009 and of the position
of the Group at the end of the year. The information that fulfils this requirement can be found in
the Chief Executive’s Review on pages 2 to 4. The Chief Executive’s Review also contains a
description of the likely future developments for the Group. When reading the Chief Executive’s
Review, reference should be made to the Forward-looking Statements section on page 5.
Further information on the development and performance of the business of the Group, both at a
consolidated level and analysed by division can be found in the following sections:
| • | An analysis of the Group’s development and performance during the year is contained in the Business Review — Summary on pages 10 to 16. | |
| • | A further detailed analysis of the Personal Financial Services businesses is contained in the Business Review — Personal Financial Services on pages 19 to 26. |
Further information on the position of the Group at the end of the year can be found in the
following sections:
| • | An analysis of the Personal Financial Services business volumes is contained in the Business Review — Personal Financial Services on pages 21 to 23. | |
| • | The Balance Sheet Business Review can be found on pages 29 to 48, including a review of capital management and resources on page 41, details of capital expenditure on page 36, off-balance sheet arrangements on page 40, liquidity on pages 43 to 46, and contractual obligations on page 40. | |
| • | The Group’s key performance indicators are described in the Business Review — Summary on page 17. |
The Company is also required to describe the principal risks and uncertainties facing the Group.
Financial risks are described in the Risk Management Report for each segment of the business by
type of risk on pages 49 to 85, and material risk factors are described in the Risk Factors section
on pages 192 to 197.
Results and Dividends
The results of the Group are discussed in the Principal Activities and Business Review above.
The Directors do not recommend the payment of a final dividend (2008: £nil). An interim dividend of
£500m was declared on 22 December 2009 on the Company’s ordinary shares in issue and this will be
paid during 2010. An Interim dividend of £225m was declared in 2008 and paid in 2009.
Events after the balance sheet date
On 25 February 2010 it was announced that Alliance & Leicester plc intends to transfer its
business into the Company later this year under a scheme allowed by Part VII of the Financial
Services and Markets Act 2000. This transfer is subject to UK Financial Services Authority support
and Court approval. The transfer will provide benefits for Alliance & Leicester plc customers and
for the Company. For Alliance & Leicester plc customers this includes access to Santander UK’s full
product range plus use of over 1,300 branches, four times as many branches currently available for
Alliance & Leicester plc customers. By rationalising systems and improving the sales and risk
management processes through having a single view of customers’ dealings, the Company will also
benefit from the significant synergies that were announced to the market at the time of the
acquisition of Alliance & Leicester plc by Banco Santander, S.A. in 2008.
On 26 February 2010 it was announced that as the Alliance & Leicester plc preference shares
will not transfer to the Company under the proposed Part VII Transfer, Alliance & Leicester plc and
Santander UK plc have agreed that the holders of the Alliance & Leicester plc preference shares
should be given the opportunity to exchange their Alliance & Leicester plc preference shares for
new preference shares to be issued by the Company. It is intended that the exchange will be carried
out by a scheme of arrangement under Part 26 of the Companies Act 2006, which, if approved by the
Court as well as holders of the Alliance & Leicester plc preference shares and the Company (as
holder of the ordinary shares of Alliance & Leicester plc), the Alliance & Leicester plc preference
shares would be substituted with a new issue of preference shares by Santander UK plc on
substantially similar terms.
88
Report of the Directors
Directors’ Report
continued
In March 2010 the Group issued through the Fosse Master Trust the first publicly-placed
mortgage-backed securitisation transaction from a UK bank since 2007; other recent transactions
from UK banks had included an investor put. The transaction was denominated in both pounds sterling
and euro and raised approximately £1.4bn.
There were no other significant events after the balance sheet date.
Going Concern
The Directors confirm that they are satisfied that the Group has adequate resources to continue
in business for the foreseeable future. For this reason, they continue to adopt a going concern
basis in preparing the financial statements.
As outlined above, the Group’s business activities, together with the factors likely to affect
its future development, performance and position are set out in the Chief Executive’s Review on
pages 2 to 4 and in the Business Review on pages 10 to 26. The financial position of the Group, its
cash flows, liquidity position and borrowing facilities are described in the Balance Sheet Business
Review on pages 29 to 48. In addition, Note 50 to the Consolidated Financial Statements includes
the Group’s objectives, policies and processes for managing its capital; its financial risk
management objectives; details of its financial instruments and hedging activities; and its
exposures to credit risk and liquidity risk. As also outlined above, in respect of the principal
risks and uncertainties facing the Group, financial risks are described in the Risk Management
Report on pages 49 to 85, and material risk factors are described in the Risk Factors section on
page 192 to 197.
In assessing going concern, the Directors take account of all information of which they are
aware about the future, which is at least, but is not limited to, twelve months from the date that
the balance sheet is signed. This information includes the Group’s results forecasts and
projections, estimated capital, funding and liquidity requirements as well as contingent
liabilities, and possible economic, market and product developments, taking account of reasonably
possible changes in trading performance.
| • | Budgets and forecasts | |
| Since the acquisition of the Company by Banco Santander, S.A., the Group has a history of profitable operations. Management prepares a 3-year plan (the ‘3-Year Plan’) that forecasts balance sheet, income and margin, by product, with a particular focus on the forthcoming year. |
| • | Review and reforecast | ||
| The 3-Year Plan, its assumptions, forecast results and key sensitivities are reviewed by senior management and presented to the Executive Committee, the Board of Directors and to senior executives of Banco Santander, S.A.. The budget is reforecast frequently and reviewed by the Executive Committee and the Board of Directors. As part of the budgets and planning process, a particular emphasis is placed on ensuring the sustainability of earnings, and achieving and maintaining a high level of operating efficiency in the Group (measured by the PFS trading cost:income ratio) to enable competitive products to be developed for customers. | |||
| • | Stress testing | ||
| To assess the Group’s ability to adapt to various market challenges, the budgets are “stress tested” as part of the Group’s internal capital adequacy assessment process (‘ICAAP’) under Basel II. Several scenarios are modelled, including a severe scenario, and senior management makes an assessment of how this would affect the Group’s profit and funding plans. |
| • | Borrowing requirements and liability management | |
| The Group’s financial plans are constructed to ensure that they allow the Group to meet its financial obligations as they fall due, both with respect to maturing existing liabilities and future borrowing requirements. | ||
| The Group’s funding requirements are met from a variety of sources, with a significant majority being sourced from retail and corporate deposits (i.e. the commercial bank’s customers). At 31 December 2009, commercial bank customer assets as a percentage of commercial bank customer liabilities stood at 126% (2008: 136%). The balance of the Group’s funding is sourced from the wholesale markets with reference to prevailing and expected market conditions and the desired balance sheet structure. The Board considers it appropriate to balance cost effective short-term financing with medium and long-term funds, which have less refinancing risk, all within the context of maintaining a diverse range of sources of wholesale funding. | ||
| Asset and Liability Management produce strategic and tactical funding plans as part of the Group’s planning process. These funding plans are approved by the Board and the Asset & Liability Management Committee and are controlled on a day-to-day basis by the Treasurer, Head of ALM and within the framework of the Liquidity Risk Manual. The plans are stressed to ensure adverse conditions can be accommodated via a range of management levers. Funding and liquidity management is the responsibility of the Chief Financial Officer who delegates day-to-day responsibility to the Treasurer, Head of ALM. Liquidity risk control and oversight are provided by the Chief Risk Officer, supported by the Risk Division. See the Risk Management Report for further details on Liquidity Risk Management. | ||
| • | Contingent liabilities | |
| The Directors, via the Audit and Risk Committee, also consider the Group’s exposure to contingent liabilities. This consideration addresses contingent liabilities experienced by the Group in the past, such as legal proceedings, guarantees, operating lease commitments, product misselling liabilities, and those arising in respect of the UK Financial Services Compensation Scheme, but also considers whether there are any new contingencies. |
89
Report of the Directors
Directors’ Report
continued
| Contingent liabilities are captured on a timely basis for purposes of disclosure in the Annual Report and Accounts, and the interim financial statements. Information about guarantees to third parties, tax contingencies and other contingencies are gathered and disclosed. Data about the Group’s operating lease commitments are also captured. | ||
| Non-trading guarantees require the approval of the Chief Executive or the Chief Financial Officer or, in their absence, any two Company Executive Directors or one Company Executive Director and the Company Secretary. This provision forms part of the Company’s Corporate Governance Framework (other Financial Delegated Authorities). | ||
| • | Products and markets | |
| The Directors review information about the major aspects of the economic environment within which the Group operates at monthly Board meetings. This information includes an economic update which contains data on key economic and market trends. In addition, the Group’s Economic Analysis team monitors and provides information to the Board on current and prospective economic and market developments. Retail financial markets, such as the housing market, are a major focus for analysing current trends and potential developments. | ||
| The Directors also receive regular briefings on market share for the Group’s major products and six-monthly competitor analyses. | ||
| Wholesale market conditions are reviewed daily by the Treasurer, Head of ALM and presented monthly to the Asset & Liability Management Committee by way of an update. The tactical and strategic funding plans are updated, if necessary, with reference to current and expected market conditions. | ||
| • | Financial risk management | |
| The Group’s risk management focuses on major areas of risk, namely credit risk, market risk, liquidity risk, and operational risk. The Risk Management Report sets out in detail how the Group manages these risks. | ||
| • | Financial adaptability | |
| The Directors also consider the ability of the Group to take effective action to alter the amounts and timing of cash flows so that it can respond to unexpected needs or opportunities. Such financial adaptability mitigates the areas of financial risk above in considering the appropriateness of the going concern presumption in relation to the Group. In determining the financial adaptability of the Group, the Directors have considered the ability of the Group to: |
| • | Obtain new sources of finance | ||
| The Group minimises refinancing risk by sourcing funds from a variety of markets as appropriate and subject to consideration of the appropriate leverage ratio and funding mix for the Group, and in particular customer deposit levels and medium-term financing. The Group actively manages its relationships with existing providers of funding and considers new sources of funds as and when they arise. | |||
| Day-to-day sources of finance consist primarily of retail deposits. To the extent that wholesale funding is required, a variety of sources are usually available from a range of markets, including: |
| • | money markets: both unsecured (including interbank and customer deposits, and issuances of certificates of deposit and commercial paper) and secured (including repos in open market operations); | ||
| • | debt capital markets (including discrete bond issues and medium term notes); | ||
| • | mortgage-backed funding (including securitisation and covered bond issuance); and | ||
| • | capital instruments (although primarily issued to maintain capital ratios). |
| In addition to day-to-day funding sources, the Group has access to contingent sources from Central Banks, including the Bank of England, the Swiss National Bank, the US Federal Reserve and indirectly the European Central Bank. The Group ensures that it has access to these contingent facilities as part of its prudent liquidity risk management. See the Risk Management Report for further details on Liquidity Risk Management. The Group minimises reliance on any one market by maintaining a diverse funding base, and avoiding concentrations by maturity, currency and institutional type. | |||
| It is expected that the next year may see some improvement in the wholesale markets compared to 2009, although this may well be slow and fragile. However, the Group is well positioned for the coming year given the improved loan to deposit ratio of 126% (136% in 2008) and the continuing de-leveraging of non-growth areas following the acquisition of Alliance & Leicester plc. | |||
| • | Obtain financial support from other group companies | ||
| For liquidity purposes, the Group operates on a stand-alone basis. However, in case of stress conditions, it would consult with its parent company, Banco Santander, S.A., about financial support. | |||
| • | Continue business by making limited reductions in the level of operations or by making use of alternative resources | ||
| The Group maintains and regularly updates a Contingency Funding Plan to cover potential extreme scenarios. In addition, the 3-Year Plan is stressed, as part of the ICAAP process, to ensure that the Group can accommodate extreme scenarios and the impact this would have on the 3-Year Plan and profits. In accommodating these extreme scenarios, various management levers would be utilised, including the encashment of certain liquid assets and a reduction in new business in Retail and Corporate Banking. |
After making enquiries, the Directors have a reasonable expectation that the Company and the Group
have adequate resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual
Report and Accounts.
90
Report of the Directors
Directors’ Report
continued
Directors
The members of the Company’s board (the ‘Board’) at 31 December 2009 are named on pages 86 to
87. For each Director, the date of appointment is shown. As at 31 December 2009, the Board
comprised a Chairman, four Executive Directors including the Chief Executive, and seven
Non-Executive Directors. At the date of publication of this report, the Board composition remains
the same. The roles of Chairman and Chief Executive are separated and clearly defined. The Chairman
is primarily responsible for the working of the Board and the Chief Executive for the running of
the business and implementation of Board strategy and policy. The following Executive Directors
resigned on 30 April 2009 and 31 May 2009 respectively; David Bennett and Nathan Bostock.
Non-Executive Directors have been appointed for an indefinite term (other than Jane Barker,
Roy Brown, Rosemary Thorne and Keith Woodley, who have been appointed for a three-year term, after
which their appointments may be extended upon mutual agreement).
When they were appointed, the appointments of António Horta-Osório, Antonio Lorenzo, Juan
Colombás, Juan Rodríguez Inciarte, José María Fuster and José María Carballo were all proposed by
Banco Santander, S.A.. The Company may pay an Executive Director instead of allowing them to work
during their notice period.
Committees of the Board
The Board maintains two standing committees, which operate within written terms of reference.
Audit and Risk Committee
Membership of the Audit and Risk Committee is restricted to Non-Executive Directors. The Audit
and Risk Committee’s primary tasks are to review the scope of external and internal audit, to
receive reports from the external auditors (currently Deloitte LLP) and the Chief Internal Auditor,
and to review the interim information, annual financial statements and any other significant
financial reports before they are presented to the Board, focusing in particular on accounting
policies, compliance and areas of management judgement and estimates. The Audit and Risk
Committee’s scope also includes risk management and oversight and the review of the procedures in
place for employees to raise concerns about possible wrongdoing in financial reporting and other
matters. For a further discussion of the risk-control responsibilities of the Audit and Risk
Committee, see the Risk Management section of the Annual Report and Accounts on page 51.
The Audit and Risk Committee more generally acts as a forum for discussion of internal control
issues and contributes to the Board’s review of the effectiveness of the Group’s internal control
and risk management systems and processes. The Audit and Risk Committee also conducts a review of
the remit and reports of the internal audit function (which is a Banco Santander S.A. group
function) in so far as it relates to the Group as well as the internal audit function’s
effectiveness, authority, resources and standing within the Group and management’s response to
their findings and recommendations.
The Group’s relationship with the external auditors and the experience and qualifications of
the external auditors are monitored by the Audit and Risk Committee and external auditor’s audit
plans and audit findings are reviewed by the Audit and Risk Committee. A framework for ensuring
auditor independence has been adopted, which defines unacceptable non-audit assignments,
pre-approval of acceptable non-audit assignments and procedures for approval of acceptable
non-audit assignments.
The Audit and Risk Committee may make any recommendations to the Board as it sees fit and the
Chairperson of the Audit and Risk Committee reports formally to the Board after each meeting. The
Chairperson, Rosemary Thorne, has over 15 years of experience as Finance Director of FTSE 100
companies and was a member of the Financial Reporting Council, The Financial Reporting Review Panel
and The Hundred Group of Finance Directors Main Committee. The Board has determined that Rosemary
Thorne has the necessary qualifications and experience to qualify as an audit committee financial
expert as defined in the rules promulgated under the US Securities Exchange Act of 1934, as
amended, and the Board considers that she is independent in accordance with Section 303A.02 of the
New York Stock Exchange Corporate Governance Rules.
The other members of the Audit and Risk Committee are José María Carballo, Keith Woodley, Roy
Brown and Jane Barker. Pursuant to SEC Rule 10A-3(c)(2), which provides a general exemption from
the requirement to have an audit committee for subsidiaries that are listed on a national
securities exchange or market where the parent satisfies the requirement of SEC Rule 10A-3, the
Company is exempt from the requirements of SEC Rule 10A-3. According to SEC Rule 10A-3(c)(2),
additional listings of an issuer’s securities are exempt from the audit committee requirements if
the issuer is already subject to them as a result of listing any class of securities on any market
subject to SEC Rule 10A-3. This exemption extends to listings of non-equity securities by a direct
or indirect subsidiary that is consolidated or at least 50% beneficially owned by a parent company,
if the parent is subject to the requirements as a result of the listing of a class of its equity
securities. Consequently, as applied to the current shareholding structure of the Company, (as the
wholly-owned subsidiary of Banco Santander, S.A.), the Company is exempt from the audit committee
requirements of SEC Rule 10A-3 since: (i) the Company is a wholly-owned subsidiary of Banco
Santander, S.A., (ii) Banco Santander, S.A. has equity securities listed on the New York Stock
Exchange and is therefore subject to SEC Rule 10A-3, and (iii) the Company does not have any equity
securities listed on the New York Stock Exchange or any other national securities exchange in the
United States of America.
Remuneration Oversight Committee
Establishment of the Remuneration Oversight Committee was approved by the Board on 22 December
2009, with effect from 1 January 2010. The Remuneration Oversight Committee is primarily
responsible for overseeing and supervising the Group’s policies and frameworks covering
remuneration and reward as applied in, or devolved to the UK. The members of the Remuneration
Oversight Committee are Roy Brown (Chairman), José María Carballo, Keith Woodley, Rosemary Thorne
and Jane Barker.
91
Report of the Directors
Directors’ Report
continued
Directors’ Remuneration (audited)
The aggregate remuneration received by the Directors of the Company in 2009 was:
| £ | ||||
|
Salaries and fees
|
3,714,844 | |||
|
Performance-related payments
|
3,476,749 | |||
|
Other taxable benefits
|
— | |||
|
Total remuneration excluding pension contributions
|
7,191,593 | |||
|
Pension contributions
|
108,031 | |||
|
Compensation for loss of office
|
1,162,500 | |||
|
|
8,462,124 | |||
These totals exclude emoluments received by Directors in respect of their primary duties as
Directors or Officers of Banco Santander, S.A. in respect of which no apportionment has been made.
Long-Term Incentive Plan (audited)
In 2009, four Executive Directors (2008: two) were granted conditional awards of shares in Banco
Santander, S.A. under the Santander Long-Term Incentive Plan for a total fair value of £944,404
(2008: £702,952) based on a share price on 1 July 2009 of euro 8.14 (2008: euro 11.96). Under the
Santander Long-Term Incentive Plans granted on 1 July 2009, 21 June 2008 and 31 December 2007,
certain Executive Directors, Key Management Personnel (as defined in Note 44 to the Consolidated
Financial Statements) and other nominated individuals were granted conditional awards of shares in
Banco Santander, S.A.. The number of shares participants will receive depends on the performance of
Banco Santander, S.A. during this period. All awards under the Santander Long-Term Incentive Plan
will depend on Santander’s Total Shareholder Return performance against a competitor benchmark
group. Awards made prior to 2009 also depend on Santander’s Earnings Per Share performance against
a competitor benchmark group. 90.79% of the 40% of the 2007 conditional award of shares vested in
July 2009. Subject to performance conditions being met, the remaining 60% of the 2007 conditional
award will vest in July 2010, 100% of the 2008 conditional award will vest in July 2011 and 100% of
the 2009 conditional award will vest in July 2012.
Remuneration of Highest Paid Director (audited)
In 2009, the remuneration, excluding pension contributions, of the highest paid Director was
£3,440,436 (2008: £3,563,784) of which £2,589,259 (2008: £2,742,908) was performance related. There
was no accrued pension benefit for the highest paid Director (2008: nil), other than that accrued
by, or treated to be accrued by a Spanish subsidiary of Banco Santander, S.A.. A conditional award
of shares was made to the highest paid Director under the Long-Term Incentive Plan during 2009 and
2008.
Bank Payroll Tax
In December 2009, the UK Government announced that the Finance Bill 2010 will introduce a bank
payroll tax of 50% applicable to discretionary bonuses over £25,000 awarded to UK bank employees
between 9 December 2009 and 5 April 2010. Draft legislation and guidance on its application has
been published. The estimated cost of the payroll tax is £16m, which was provided in full in 2009.
Retirement Benefits (audited)
Defined benefit pension plans are provided to certain of the Group’s employees. See Note 36 to the
Consolidated Financial Statements for a description of the plans and the related costs and
obligations. No retirement benefits are accruing for any directors under a defined benefit scheme
(2008: one) in respect of their qualifying services to the Group.
In July 2009, as part of the Group’s periodic review of its pension schemes, updated funding
arrangements were agreed with the pension scheme trustees of one scheme.
Non-Executive Directors (audited)
Fees were paid to Non-Executive Directors in 2009 totalling £500,360 (2008: £390,710); this amount
is included above in the table of Directors’ remuneration.
Directors’ Interests and Related Party Transactions (audited)
In 2009, loans were made to two Directors, with a principal amount of £3,000 outstanding at 31
December 2009. No directors had any loans in 2008. In 2009, loans were made to two members of the
Group’s Key Management Personnel, with a principal amount of £834,730 outstanding at 31 December
2009. See Notes 44 and 45 to the Consolidated Financial Statements included elsewhere in this
Annual Report and Accounts for disclosures of deposits and investments made and insurance policies
entered into by the Directors, Key Management Personnel and their connected persons with the Group
at 31 December 2009. Note 45 to the Consolidated Financial Statements also includes details of
other related party transactions.
In 2009, there were no other transactions, arrangements or agreements with the Group in which
Directors or Key Management Personnel or persons connected with them had a material interest. No
Director had a material interest in any contract of significance other than a service contract with
the Group at any time during the year.
No Director held any interest in the shares of any company within the Group at any time during
the year and no Director exercised or was granted any rights to subscribe for shares in any company
within the Group. During 2009, no Directors exercised share options over shares in Banco Santander,
S.A., the parent company of the Company (2008: one).
92
Report of the Directors
Directors’ Report
continued
Third Party Indemnities
Enhanced indemnities are provided to the Directors of the Company by Santander UK plc against
liabilities and associated costs which they could incur in the course of their duties to the
Company. All of the indemnities remain in force as at the date of this Annual Report and Accounts.
A copy of each of the indemnities is kept at the registered address shown on page 199.
Financial Risk Management Objectives
The financial risk management objectives and policies of the Group; the policy for hedging each
major type of forecasted transaction for which hedge accounting is used; and the exposure of the
Group to price risk, credit risk, liquidity risk and cash flow risk are outlined in the Risk
Management Report on pages 49 to 85.
Pension Funds
The assets of the pension schemes are held separately from those of the Group and are under the
control of trustees.
Three of the Group’s pension schemes have a common corporate trustee which, at 31 December
2009, had nine directors, comprising six Group-appointed directors (one of whom is an independent
trustee director) and three member-elected directors. The National & Provincial Building Society
Pension Fund has a different corporate trustee, the Board of which at 31 December 2009 comprised
three Group-appointed directors (one of whom is an independent trustee director), and three
member-elected directors. The above four pension schemes were, as at 31 December 2009, invested in
a Common Investment Fund which has a corporate trustee, comprising four Group-appointed directors
and two scheme trustee appointed directors.
As at 31 December 2009 the Scottish Mutual Assurance plc Staff Pension Scheme had six
trustees, of whom four are selected by the Group (two of whom are members and one of whom is an
independent trustee) and two are elected by eligible members. In the case of the Scottish
Provident Institution Staff Pension Fund, as at 31 December 2009 there were eight trustees, of whom
five (one of whom is a member and one of whom is an independent trustee) are selected by the Group
and the remaining three are elected by eligible members.
As at 31 December 2009 the Alliance & Leicester Pension Scheme had nine trustees, of whom five
are selected by the Group (one of whom is an independent trustee) and four are elected by eligible
members.
Asset management of the schemes is delegated to a number of fund managers and the trustees
receive independent professional advice on the performance of the managers. Legal advice to the
trustees of the various schemes is provided by external firms of solicitors. The audits of the
pension schemes are separate from that of the Group. The audits of the Amalgamated, Associated
Bodies, Group and The National & Provincial Building Society Pension schemes are undertaken by
Grant Thornton UK LLP. The audits of the Scottish Mutual Assurance plc Staff Pension Scheme, the
Scottish Provident Institution Staff Pension Fund and the Alliance & Leicester Pension Scheme are
undertaken by KPMG LLP.
In July 2009, as part of the Group’s periodic review of its pension schemes, updated funding
arrangements were agreed with the pension scheme trustees of one scheme. Further information is
provided in Note 36 to the Consolidated Financial Statements.
Market Value of Land and Buildings
On the basis of a periodic review process, the estimated aggregate market value of the Group’s
land and buildings was not significantly different from the fixed asset net book value of £420m
(2008: £316m), as disclosed in Note 23 to the Consolidated Financial Statements. It is considered
that, except where specific provisions have been made, the land and buildings have a value in use
to the Group that exceeds the estimated market value, and the net book value is not impaired.
Disability
The Group is committed to equality of access and quality of service for disabled people and
embraces the spirit of the UK Disability Discrimination Acts 1995 and 2005 throughout its business
operations. The Group has processes in place to help recruit, train, develop, retain and promote
employees with disabilities and is committed to giving full and fair consideration to applications
for employment made by disabled persons, for continuing the employment of, and arranging
appropriate training for, existing employees who have become disabled.
Employee Involvement
Employee share ownership
In January 2006, the Group introduced a Partnership Shares scheme, which also operates under the
SIP umbrella. Employees are able to invest up to a maximum of £1,500 of pre-tax salary in Banco
Santander, S.A. shares per tax year. These shares will be held in trust on the employees’ behalf.
In recognition of the Banco Santander, S.A. 150
th
anniversary, all Group and Banco
Santander, S.A. employees were given 100 free shares in Banco Santander, S.A. on 6 August 2007.
These shares were granted under an existing SIP for Group employees and a new SIP was set up for
UK-based Banco Santander, S.A. employees.
Following the acquisition of the Bradford & Bingley savings business in September 2008, the
related employees who transferred to the Group were given 100 free shares in Banco Santander, S.A.
on 8 April 2009. The free shares will be held in trust on the employees’ behalf for a minimum of
three years.
In recognition of the Banco Santander, S.A. acquisition of Alliance & Leicester plc, all
Alliance & Leicester employees were given 100 free shares in Banco Santander, S.A. on 1 December
2008. These shares were granted using an HM Revenue & Customs approved Share Incentive Plan. The
free shares will be held in trust on the employee’s behalf for a minimum of three years.
93
Report of the Directors
Directors’ Report
continued
In response to employee feedback, and in support of the Human Resources strategy, the Group
introduced its first Sharesave Scheme under Banco Santander, S.A. ownership. The HM Revenue &
Customs approved Sharesave Scheme was launched in September 2008. Employees were given the option
of saving between £5 and £250 per month for a three or five-year savings period. The option price
was set at a 20% discount on the average middle market quotation of Banco Santander, S.A. shares
over the first three dealing days of September 2008.
A subsequent invitation under the Sharesave Scheme was made in September 2009, as part of
which the scheme was extended to other UK companies within the Santander Group. The option price
for the 2009 invitation was set at a 20% discount to the average middle market quotation of Banco
Santander S.A. shares over the first three dealing days of September 2009.
Communication
The Group wants to involve and inform employees on matters that affect them. The Group publishes a
magazine every quarter for employees, and almost all employees have access to the Company intranet.
The Group also uses face-to-face communication, such as team meetings, regional roadshows and an
annual staff convention. All these channels are designed to keep employees fully informed of news
and developments which may have an impact on them, and also to keep them up to date on financial,
economic and other factors which affect the Group’s performance. The Group considers employees’
opinions and asks for their views on a range of issues through regular company-wide surveys.
Consultation
The Group has a long history of trade union recognition governed by a partnership agreement with
Advance, the independent trade union that it recognises to act as the voice of Santander UK
employees. Advance is affiliated to the Trade Union Congress and operates from its own offices in
Hertfordshire. Advance is involved in major Santander UK initiatives, and the Company consults it
on significant proposals within the business. Consultation takes place at both national and local
levels. Santander UK holds regular Joint Consultative and Negotiating Committee meetings to enable
collaborative working and ensure that communication is open and two-way.
In May 2009 UBAC, the union recognised for Bradford & Bingley savings business staff,
successfully completed a Transfer of Engagement to Advance following a ballot of members in which
83% of UBAC members voted in favour of the merger.
Within Alliance & Leicester we also work closely with the independent trade unions we
recognise: the Communication Workers Union (CWU) and the Public & Commercial Services Union (PCS).
Both unions are affiliated with the Trade Union Congress. Alliance & Leicester holds regular
National Union Consultation Meetings to enable collaborative working and ensure that communication
is open and two-way.
Donations
Santander UK Foundation Limited (formerly Abbey National Charitable Trust Limited) (the
‘Foundation’) supported disadvantaged people throughout the UK through the following three
charitable priorities: education, financial capability and community regeneration. In 2009,
Santander UK made total cash donations through the Foundation of £3,281,596 (2008: £2,316,701).
Through the Staff Matched Donation Scheme, 1,150 staff donations to charities were matched during
the year amounting to £1,025,634 (2008: £778,407).
Political Contributions
No contributions were made for political purposes and no political expenditure was incurred.
Suppliers
The Group has a Cost Management & Procurement Policy and process that is enforced across all
significant purchases from suppliers to provide a consistent approach. Corporate and social
responsibility is a key factor throughout the purchasing process. All new suppliers must adhere to
the Group’s Corporate & Social Responsibility Protocol, unless it is not relevant to the type of
work being undertaken. The protocol covers human rights, labour standards, environment and
anti-corruption, in line with the principles in the UN Global Compact.
Policy and Practice on Payment of Creditors
It is the Group’s policy to ensure payments are made in accordance with the terms and
conditions agreed, except where the supplier fails to comply with those terms and conditions. The
Group’s practice on payment of creditors has been quantified under the terms of Schedule 7 of The
Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. Based on the
ratio of the aggregate amounts owed to trade creditors at the end of the year to the aggregate
amounts invoiced by suppliers during the year at 31 December 2009, trade creditor days for the
Group were 17 days (2008: 27 days).
Code of Conduct
The Group is committed to maintaining high ethical standards — adhering to laws and
regulations, conducting business in a responsible way and treating all stakeholders with honesty
and integrity. The Group’s policies in this regard are set out in ‘How we do business’. This
document, which was established in 1999 and reviewed and updated by the Board in 2003, was the
subject of a review in 2008. This has resulted in the adoption of Banco Santander, S.A.’s General
Code of Conduct.
94
Report of the Directors
Directors’ Report
continued
Under the Code of Conduct, staff are required to act at all times with the highest standards of
business conduct in order to protect the Group’s reputation and ensure a company culture which is
free from any risk of corruption, compromise or conflicts of interest.
The Core Principles outlined in the Code of Conduct state that employees must:
| • | Abide by all relevant laws and regulations. | |
| • | Act with integrity in all their business actions on the Group’s behalf. | |
| • | Not use their authority or office for personal gain. | |
| • | Conduct business relationships in a transparent manner. | |
| • | Reject all improper practices or dealings they may be exposed to. | |
| • | Be individually responsible for keeping to the Code of Conduct. |
The Group’s ethical policies include ethical investment guidelines, which are an integral part of
the risk management processes for investment decision making. Procedures are also in place for
employees to follow if they feel that there has been a breach of our ethical policies.
The Group also complies with the applicable code of ethics regulations of the United States
Securities and Exchange Commission promulgated under the US Securities Exchange Act of 1934, as
amended. Among other things, these regulations aim to protect investors by improving the accuracy
and reliability of information that companies disclose. The rules require companies to disclose
whether they have a code of ethics that applies to the Chief Executive and senior financial
officers that promotes honest and ethical conduct; full, fair, accurate, timely and understandable
disclosures; compliance with applicable governmental laws, rules and regulations; prompt internal
reporting of violations; and accountability for adherence to such a code of ethics. The Group meets
these requirements through the Code of Conduct, the whistleblowing policy, the UK Financial
Services Authority’s Principles for Businesses, and the UK Financial Services Authority’s
Principles and Code of Practice for Approved Persons (together, the ‘Code of Ethics’), with which
the Chief Executive and senior financial officers must comply. These include requirements to manage
conflicts of interest appropriately and to disclose any information the UK Financial Services
Authority may want to know about. The Group provides a copy of its ethical policy to anyone, free
of charge, on application to the address on page 199.
Supervision and Regulation
As a firm authorised by the UK Financial Services Authority, the Company is subject to UK
financial services laws and regulations, which are discussed below. Recent significant regulatory
developments which will affect the Group are also highlighted below.
UK
In the UK, the Financial Services Authority is the single independent regulator for the regulation
of deposit taking, investment business, mortgages and insurance. The UK Financial Services
Authority was set up by the government and exercises statutory powers under the UK Financial
Services and Markets Act 2000 (‘FSMA’). The Company, together with several of its subsidiaries, is
authorised by the UK Financial Services Authority to carry on a range of regulated activities in
the UK, which include mortgages, banking, insurance and investment business. The UK Financial
Services Authority must adhere to four regulatory objectives, as prescribed in FSMA, which set out
the parameters of regulation: market confidence; public awareness; the protection of consumers; and
the reduction of financial crime. Based on these regulatory objectives, the UK Financial Services
Authority has formulated an extensive handbook of rules and guidance to which authorised firms are
subject.
Banks, insurance companies and other financial institutions in the UK are subject to the UK
Financial Services Compensation Scheme (the ‘FSCS’). The FSCS covers claims made against
authorised firms (or any participating EEA firms) where they are unable, or likely to be unable, to
pay claims against them. In relation to each of: deposits; investments; and mortgage advice and
arranging, the FSCS provides cover for 100% of the first £50,000 of a claim, with £50,000 being the
maximum amount payable per customer. The FSCS also extends (up to various amounts) to certain
long-term and general insurance contracts, including general insurance advice and arranging.
UK Government Asset Protection Scheme
On 19 January 2009, the UK Government announced the implementation of a new asset protection scheme
(the ‘APS’) pursuant to which, in return for a fee, the UK HM Treasury will provide to each
participating institution protection against credit losses incurred on one or more portfolios of
defined assets to the extent that credit losses exceed a“first loss“amount to be borne by the
institution. The APS aims to target those assets where there is the greatest amount of uncertainty
about their future performance including commercial and residential property loans and structured
credit assets.
It was further announced on 26 February 2009 that UK HM Treasury protection will cover 90% of
the credit losses which exceed the “first loss“amount, with each participating institution
retaining a further residual exposure of 10% of any credit losses exceeding this amount. The APS is
being offered, in the first instance, to those UK incorporated authorised deposit-takers (including
UK subsidiaries of foreign institutions) with more than £25 billion of eligible assets. Following a
detailed assessment of the potential benefits and costs of participation in the APS, Santander UK
has determined that it does not wish to participate in the APS at this time.
95
Report of the Directors
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continued
European Union
The Group is directly affected by laws emanating from the European Union, primarily through
directives that must be implemented by the UK as a Member State of the European Union.
Basel II
Basel II is a supervisory framework for the risk and capital management of banks and is structured
around three pillars. Pillar 1 specifies minimum capital requirements for banks and new
methodologies for calculating risk weighted assets. Pillar 2 describes the supervisory review
process and outlines the internal capital adequacy assessment process (‘ICAAP’) required by banks
applying Pillar 1 methodologies. Pillar 3 requires disclosure of risk and capital information. The
Group’s capital and risk management disclosures are set out in Note 50 to the Consolidated
Financial Statements on page 185.
In the European Union, Basel II was implemented by the Capital Requirements Directive (‘CRD’)
with effect from 1 January 2007. In the UK, the Financial Services Authority implemented the CRD by
including it in UK Financial Services Authority rules. These new UK Financial Services Authority
rules took effect from 1 January 2007. Throughout 2009 the Group has applied the Basel II framework
to its capital calculations, its ICAAP and to its risk and capital disclosures to the market.
Other Changes to Capital Adequacy and Liquidity Arrangements
In October 2008, the UK Government announced a UK banking support scheme that addressed both
capital and liquidity requirements of the UK banking industry. To fulfil its agreed commitment to
this scheme, Banco Santander, S.A. subscribed for £1bn of the Company’s Core Tier 1 capital issued
on 12 October 2008. This capital was, in turn, transferred to Alliance & Leicester plc in December
2008 as planned. As part of the UK Government’s banking support scheme, the Group has participated
in the UK Special Liquidity Scheme.
During 2009 Santander UK commenced a comprehensive programme of work to ensure compliance with
the requirements of the UK Financial Services Authority’s new liquidity regime as laid out in
PS09/16. The work is carried out with sponsorship from an Executive Director, by a dedicated
project team complemented by relevant external resources where appropriate. During 2010 Santander
UK is required to complete an Individual Liquidity Adequacy Assessment as part of the UK Financial
Services Authority’s Supervisory Liquidity Review Process. This includes an assessment of liquidity
requirements using the UK Financial Services Authority prescribed stresses. The sources of
liquidity risk that are currently analysed within the liquidity risk and control framework are
covered by the UK Financial Services Authority stresses, although precise calibration may differ in
the final liquidity guidance to be set by the UK Financial Services Authority.
A number of consultations are currently underway on proposals to change regulatory capital
requirements in both a UK and international context. These include proposals from the Basel
Committee on Banking Supervision in respect of capital and liquidity as well as the proposition for
recovery and resolution plans in the UK. Taken in aggregate, there is a potential for these reforms
to have a significant effect. The Group is currently engaged in the assessment of their possible
impact and any response that could be required.
Other Regulatory Developments
There are a number of other regulatory developments going through a consultation and implementation
process which may have some effect on the Group’s business. These include the Financial Services
Compensation Scheme arrangements, consumer credit regulations, financial stability, and conduct of
business arrangements such as those resulting from the Retail Distribution review, Mortgage Market
review and payment protection insurance.
Disclosure Controls and Procedures
The Group evaluated with the participation of its Chief Executive and Chief Financial Officer,
the effectiveness of the Group’s disclosure controls and procedures as of 31 December 2009. There
are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives.
Based upon the Group’s evaluation, the Chief Executive and the Chief Financial Officer
concluded that, as of 31 December 2009, the Group’s disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by the Group in
the reports that the Group files and submits under the US Securities Exchange Act of 1934 is
recorded, processed, summarised and reported within the time periods specified in the applicable
rules and forms, and that it is accumulated and communicated to the Group’s management, including
the Group’s Chief Executive and Chief Financial Officer, as appropriate, to allow timely decisions
regarding disclosure.
There has been no change in the Group’s internal control over financial reporting during the
Group’s 2009 fiscal year that has materially affected, or is reasonably likely to materially affect
the Group’s internal controls over financial reporting.
96
Report of the Directors
Directors’ Report
continued
Management’s Report on Internal Control over Financial Reporting
Internal control over financial reporting is a component of an overall system of internal
control. The Group’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting, the preparation and fair
presentation of financial statements for external purposes in accordance with International
Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board,
and as endorsed by the European Union.
The Group’s internal control over financial reporting includes:
| • | Policies and procedures that relate to the maintenance of records that fairly and accurately reflect the transactions and disposition of assets. | |
| • | Controls providing reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only as authorised by management. | |
| • | Controls providing reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions or
because the degree of compliance with policies or procedures may deteriorate.
Management is responsible for establishing and maintaining adequate internal control over the
financial reporting of the Group. Management assessed the effectiveness of the Group’s internal
control over financial reporting as of 31 December 2009 based on the criteria established in the
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, Management believes that, as of 31 December 2009,
the Group’s internal control over financial reporting is effective.
This Annual Report and Accounts does not include an attestation report of the Group’s
registered public accounting firm regarding internal control over financial reporting. The Group’s
internal controls over financial reporting were not subject to attestation by the Group’s
registered public accounting firm pursuant to temporary rules of the US Securities and Exchange
Commission that permit the Group to provide only management’s report in this Annual Report and
Accounts.
Relevant Audit Information
Each of the Directors as at the date of approval of this report confirms that:
| • | so far as the Director is aware, there is no relevant audit information of which the Group’s auditors are unaware; and | |
| • | the Director has taken all steps that he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. |
This confirmation is given and should be interpreted in accordance with the provisions of Section
418 of the UK Companies Act 2006.
British Bankers’ Association draft Code for Financial Reporting Disclosure
In October 2009, the British Bankers’ Association published a draft Code for Financial
Reporting Disclosure. The draft Code sets out five disclosure principles together with supporting
guidance. The principles are that UK banks will: provide high quality, meaningful and
decision-useful disclosures; review and enhance their financial instrument disclosures for key
areas of interest; assess the applicability and relevance of good practice recommendations to their
disclosures acknowledging the importance of such guidance; seek to enhance the comparability of
financial statement disclosures across the UK banking sector; and clearly differentiate in their
annual reports between information that is audited and information that is unaudited.
The Group and other major UK banks have voluntarily adopted the draft Code in their 2009
financial statements. The Group’s 2009 financial statements have therefore been prepared in
compliance with the draft Code’s principles.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and Accounts including the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year.
The Directors are required by the International Accounting Standards (‘IAS’) Regulation to prepare
the group financial statements under IFRS, as adopted by the European Union, and have also elected
to prepare the parent company financial statements in accordance with IFRS, as adopted by the
European Union. The financial statements are also required by law to be properly prepared in
accordance with the UK Companies Act 2006 and Article 4 of the IAS Regulation. In addition, in
order to meet certain US requirements, the Directors are required to prepare the Group financial
statements in accordance with IFRS, as issued by the International Accounting Standards Board.
The Directors acknowledge their responsibility to ensure the financial statements give a true
and fair view of the assets, liabilities, financial position and profit or loss presented and that
the management report, which is incorporated into
this report, includes a fair review of the development and performance of the business and a
description of the principal risks and uncertainties the business faces.
97
Report of the Directors
Directors’ Report
continued
International Accounting Standard 1 requires that financial statements present fairly for each
financial year the Company’s financial position, financial performance and cash flows. This
requires the faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation
and presentation of financial statements’.
In virtually all circumstances, a fair presentation will be achieved by compliance with all
applicable IFRS. However, the Directors are also required to:
| • | properly select and apply accounting policies; | |
| • | present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; | |
| • | provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and | |
| • | make an assessment of the Company’s ability to continue as a going concern. |
The Directors are responsible for keeping proper accounting records that disclose with reasonable
accuracy at any time the financial position of the Company and enable them to ensure that the
financial statements comply with the UK Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial
information included on the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other
jurisdictions.
Auditors
Deloitte LLP have expressed their willingness to continue in office as auditors and a
resolution to reappoint them will be proposed at the Company’s forthcoming Annual General Meeting.
By Order of the Board
Karen M. Fortunato
Company Secretary
27 April 2010
2 Triton Square, Regent’s Place, London NW1 3AN
98
Financial Statements
Contents to Financial Statements
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Financial Statements
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| 101 | ||||
| 102 | ||||
| 102 | ||||
| 103 | ||||
| 104 | ||||
| 105 | ||||
| 106 | ||||
| 107 | ||||
| 107 | ||||
| 108 | ||||
| 109 | ||||
| 124 |
99
Financial Statements
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100
Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Santander UK plc
We have audited the accompanying consolidated balance sheets of Santander UK plc, a wholly
owned subsidiary of Banco Santander, S.A., and its subsidiary undertakings (together, the
‘Santander UK Group’) at 31 December 2009 and 2008, and the related consolidated statements of
income, comprehensive income, changes in equity, and cash flows for each of the three years in the
period ended 31 December 2009, the Accounting Policies and the related notes, including the
information in pages 49 to 85 of the Form 20-F (together the ‘financial statements’). These
financial statements are the responsibility of the Santander UK Group management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Santander UK Group is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Santander UK Group’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Santander UK Group at 31 December 2009 and 2008, and the
results of its operations and its cash flows for each of the three years in the period ended 31
December 2009, in conformity with International Financial Reporting Standards (‘IFRS’) as
adopted for use in the European Union and IFRS as issued by the International Accounting Standards
Board (“IASB”).
As disclosed in Note 47 to the financial statements, the consolidated balance sheet and
consolidated cash flow statement for the year ended 31 December 2008 were restated to reflect the
transfer of Alliance & Leicester plc to Santander UK plc.
Deloitte LLP
Chartered Accountants and Registered Auditors
London, United Kingdom
27 April 2010
101
Financial Statements
Consolidated Income Statement
For the years ended 31 December 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
|
Interest and similar income
|
2 | 7,318 | 7,915 | 7,043 | ||||||||||||
|
Interest expense and similar charges
|
2 | (3,906 | ) | (6,143 | ) | (5,544 | ) | |||||||||
|
Net interest income
|
3,412 | 1,772 | 1,499 | |||||||||||||
|
Fee and commission income
|
3 | 986 | 768 | 785 | ||||||||||||
|
Fee and commission expense
|
3 | (162 | ) | (97 | ) | (90 | ) | |||||||||
|
Net fee and commission income
|
824 | 671 | 695 | |||||||||||||
|
Dividend income
|
— | — | 1 | |||||||||||||
|
Net trading and other income
|
4 | 460 | 561 | 587 | ||||||||||||
|
Total operating income
|
4,696 | 3,004 | 2,782 | |||||||||||||
|
Administration expenses
|
5 | (1,848 | ) | (1,343 | ) | (1,369 | ) | |||||||||
|
Depreciation and amortisation
|
6 | (260 | ) | (202 | ) | (205 | ) | |||||||||
|
Total operating expenses excluding provisions and charges
|
(2,108 | ) | (1,545 | ) | (1,574 | ) | ||||||||||
|
Impairment losses on loans and advances
|
8 | (842 | ) | (348 | ) | (344 | ) | |||||||||
|
Provisions for other liabilities and charges
|
(56 | ) | (17 | ) | — | |||||||||||
|
Total operating provisions and charges
|
(898 | ) | (365 | ) | (344 | ) | ||||||||||
|
Profit before tax
|
1,690 | 1,094 | 864 | |||||||||||||
|
Taxation charge
|
9 | (445 | ) | (275 | ) | (179 | ) | |||||||||
|
Profit for the year
|
1,245 | 819 | 685 | |||||||||||||
|
Attributable to:
|
||||||||||||||||
|
Equity holders of the parent
|
1,190 | 811 | 685 | |||||||||||||
|
Non-controlling interest
|
55 | 8 | — | |||||||||||||
The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.
All profits during the year were generated from continuing operations.
Consolidated Statement of Comprehensive Income
For the years ended 31 December 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
|
Profit for the year
|
1,245 | 819 | 685 | |||||||||||||
|
Other comprehensive income:
|
||||||||||||||||
|
Actuarial losses on retirement benefit obligations
|
36 | (606 | ) | (44 | ) | (113 | ) | |||||||||
|
(Losses)/gains on available-for-sale securities
|
18 | (6 | ) | 8 | 19 | |||||||||||
|
Exchange differences on translation of foreign operations
|
(4 | ) | 28 | (1 | ) | |||||||||||
|
Tax on items taken directly to equity
|
171 | 8 | 9 | |||||||||||||
|
Net loss recognised directly in equity
|
(445 | ) | — | (86 | ) | |||||||||||
|
Gains on available-for-sale securities transferred to profit or loss on sale
|
(2 | ) | — | (1 | ) | |||||||||||
|
Tax on items transferred to profit or loss
|
1 | — | — | |||||||||||||
|
Net transfers to profit
|
(1 | ) | — | (1 | ) | |||||||||||
|
Total other comprehensive expense for the year before tax
|
(618 | ) | (8 | ) | (96 | ) | ||||||||||
|
Tax relating to components of other comprehensive income
|
172 | 8 | 9 | |||||||||||||
|
Total comprehensive income for the year
|
799 | 819 | 598 | |||||||||||||
|
|
||||||||||||||||
|
Attributable to:
|
||||||||||||||||
|
Equity holders of the parent
|
744 | 811 | 598 | |||||||||||||
|
Non-controlling interest
|
55 | 8 | — | |||||||||||||
102
Financial Statements
Consolidated Balance Sheet
As at 31 December 2009 and 2008
| 2009 | 2008 (1) | |||||||||||
| Notes | £m | £m | ||||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
11 | 4,163 | 4,017 | |||||||||
|
Trading assets
|
12 | 33,290 | 26,264 | |||||||||
|
Derivative financial instruments
|
13 | 22,827 | 35,125 | |||||||||
|
Financial assets designated at fair value
|
14 | 12,358 | 11,377 | |||||||||
|
Loans and advances to banks
|
15 | 9,151 | 16,001 | |||||||||
|
Loans and advances to customers
|
16 | 186,804 | 180,176 | |||||||||
|
Available for sale securities
|
18 | 797 | 2,663 | |||||||||
|
Loans and receivables securities
|
19 | 9,898 | 14,107 | |||||||||
|
Macro hedge of interest rate risk
|
1,127 | 2,188 | ||||||||||
|
Investment in associated undertakings
|
21 | 75 | 35 | |||||||||
|
Intangible assets
|
22 | 1,446 | 1,347 | |||||||||
|
Property, plant and equipment
|
23 | 938 | 854 | |||||||||
|
Operating lease assets
|
24 | 312 | 348 | |||||||||
|
Current tax assets
|
85 | 212 | ||||||||||
|
Deferred tax assets
|
25 | 946 | 1,274 | |||||||||
|
Other assets
|
26 | 1,074 | 1,322 | |||||||||
|
Total assets
|
285,291 | 297,310 | ||||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
27 | 5,811 | 14,488 | |||||||||
|
Deposits by customers
|
28 | 143,893 | 130,245 | |||||||||
|
Derivative financial instruments
|
13 | 18,963 | 27,810 | |||||||||
|
Trading liabilities
|
29 | 46,152 | 40,738 | |||||||||
|
Financial liabilities designated at fair value
|
30 | 4,423 | 5,673 | |||||||||
|
Debt securities in issue
|
31 | 47,758 | 58,511 | |||||||||
|
Other borrowed funds
|
32 | 1,352 | 2,076 | |||||||||
|
Subordinated liabilities
|
33 | 5,597 | 6,787 | |||||||||
|
Other liabilities
|
34 | 2,323 | 2,342 | |||||||||
|
Provisions
|
35 | 91 | 207 | |||||||||
|
Current tax liabilities
|
300 | 518 | ||||||||||
|
Deferred tax liabilities
|
25 | 336 | 405 | |||||||||
|
Retirement benefit obligations
|
36 | 1,070 | 813 | |||||||||
|
Total liabilities
|
278,069 | 290,613 | ||||||||||
|
Equity
|
||||||||||||
|
Share capital
|
39 | 2,709 | 1,148 | |||||||||
|
Share premium account
|
39 | 1,857 | 3,121 | |||||||||
|
Retained earnings
|
1,911 | 1,678 | ||||||||||
|
Other reserves
|
29 | 39 | ||||||||||
|
|
6,506 | 5,986 | ||||||||||
|
Non-controlling interest
|
38 | 716 | 711 | |||||||||
|
Total shareholders’ equity
|
7,222 | 6,697 | ||||||||||
|
Total liabilities and equity
|
285,291 | 297,310 | ||||||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47. |
The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.
The Financial Statements on pages 102 to 188 were approved and authorised for issue by the Board on
27 April 2010 and signed on its behalf by:
Antonio Lorenzo
Chief Financial Officer
Chief Financial Officer
Company Registered Number: 2294747
103
Financial Statements
Consolidated Statement of Changes in Equity
For the years ended 31 December 2009, 2008 and 2007
| Other reserves | ||||||||||||||||||||||||||||||||||||
| Foreign | ||||||||||||||||||||||||||||||||||||
| Available | currency | Non- | ||||||||||||||||||||||||||||||||||
| Share | Share | for sale | translation | Retained | controlling | |||||||||||||||||||||||||||||||
| Capital | Premium | reserve | reserve | earnings | Total | Interest | Total | |||||||||||||||||||||||||||||
| Notes | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||||||
|
1 January 2007
|
148 | 1,857 | 1 | (6 | ) | 1,116 | 3,116 | — | 3,116 | |||||||||||||||||||||||||||
|
Total comprehensive income (gross)
|
— | — | 18 | (1 | ) | 572 | 589 | — | 589 | |||||||||||||||||||||||||||
|
Tax relating to components of other
comprehensive income
|
— | — | (6 | ) | — | 15 | 9 | — | 9 | |||||||||||||||||||||||||||
|
Dividends declared
|
40 | — | — | — | — | (370 | ) | (370 | ) | — | (370 | ) | ||||||||||||||||||||||||
|
Arising through business part-disposal
|
— | — | — | — | — | — | 98 | 98 | ||||||||||||||||||||||||||||
|
31 December 2007
|
148 | 1,857 | 13 | (7 | ) | 1,333 | 3,344 | 98 | 3,442 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
1 January 2008
|
148 | 1,857 | 13 | (7 | ) | 1,333 | 3,344 | 98 | 3,442 | |||||||||||||||||||||||||||
|
Total comprehensive income (gross)
|
— | — | 8 | 28 | 767 | 803 | 8 | 811 | ||||||||||||||||||||||||||||
|
Tax relating to components of other
comprehensive income
|
— | — | (3 | ) | — | 11 | 8 | — | 8 | |||||||||||||||||||||||||||
|
Dividends declared
|
40 | — | — | — | — | (450 | ) | (450 | ) | — | (450 | ) | ||||||||||||||||||||||||
|
Issued share capital
|
39 | 1,000 | — | — | — | — | 1,000 | — | 1,000 | |||||||||||||||||||||||||||
|
Capital contribution
|
39 | — | 1,264 | — | — | 17 | 1,281 | — | 1,281 | |||||||||||||||||||||||||||
|
Assumed through business combinations
|
38 | — | — | — | — | — | — | 605 | 605 | |||||||||||||||||||||||||||
|
31 December 2008
(1)
|
1,148 | 3,121 | 18 | 21 | 1,678 | 5,986 | 711 | 6,697 | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
1 January 2009
|
1,148 | 3,121 | 18 | 21 | 1,678 | 5,986 | 711 | 6,697 | ||||||||||||||||||||||||||||
|
Total comprehensive income (gross)
|
— | — | (8 | ) | (4 | ) | 584 | 572 | 55 | 627 | ||||||||||||||||||||||||||
|
Tax relating to components of other
comprehensive income
|
— | — | 2 | — | 170 | 172 | — | 172 | ||||||||||||||||||||||||||||
|
Dividends declared
|
40 | — | — | — | — | (521 | ) | (521 | ) | (50 | ) | (571 | ) | |||||||||||||||||||||||
|
Reclassification of RCIs
|
39 | 297 | — | — | — | — | 297 | — | 297 | |||||||||||||||||||||||||||
|
Transfer to share capital
|
39 | 1,264 | (1,264 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
31 December 2009
|
2,709 | 1,857 | 12 | 17 | 1,911 | 6,506 | 716 | 7,222 | ||||||||||||||||||||||||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47. |
104
Financial Statements
Consolidated Cash Flow Statement
For the years ended 31 December 2009, 2008 and 2007
| 2009 | 2008 (1) | 2007 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
|
Net cash flow from/(used in) operating activities
|
||||||||||||||||
|
Profit for the year
|
1,245 | 819 | 685 | |||||||||||||
|
Adjustments for:
|
||||||||||||||||
|
Non cash items included in net profit
|
(24 | ) | 1,297 | 1,307 | ||||||||||||
|
Change in operating assets
|
7,776 | (30,381 | ) | (12,411 | ) | |||||||||||
|
Change in operating liabilities
|
(2,351 | ) | 209 | 696 | ||||||||||||
|
Income taxes received/(paid)
|
2 | 43 | (5 | ) | ||||||||||||
|
Effects of exchange rate differences
|
(3,719 | ) | 6,569 | 396 | ||||||||||||
|
Net cash flow from/(used in) operating activities
|
41 | 2,929 | (21,444 | ) | (9,332 | ) | ||||||||||
|
Net cash flow from/(used in) investing activities
|
||||||||||||||||
|
Acquisition of businesses, net of cash acquired
|
41 | — | 18,667 | — | ||||||||||||
|
Dividends received from associates
|
— | 2 | — | |||||||||||||
|
Investment in associates
|
(35 | ) | (8 | ) | (8 | ) | ||||||||||
|
Disposal of subsidiaries, net of cash disposed
|
41 | — | 1,605 | 5 | ||||||||||||
|
Disposal of non-controlling interest in subsidiaries
|
— | — | 203 | |||||||||||||
|
Purchase of tangible and intangible fixed assets
|
(463 | ) | (278 | ) | (407 | ) | ||||||||||
|
Proceeds from sale of tangible and intangible fixed assets
|
60 | 15 | 8 | |||||||||||||
|
Purchase of non-trading securities
|
(1,133 | ) | (891 | ) | — | |||||||||||
|
Proceeds from sale of non-trading securities
|
3,004 | 290 | 3 | |||||||||||||
|
Net cash flow from/(used in) investing activities
|
1,433 | 19,402 | (196 | ) | ||||||||||||
|
Net cash flow (used in)/from financing activities
|
||||||||||||||||
|
Issue of ordinary share capital
|
— | 1,000 | — | |||||||||||||
|
Issue of loan capital
|
1,556 | — | 13,363 | |||||||||||||
|
Preference dividend paid
|
(19 | ) | — | — | ||||||||||||
|
Interest paid on Tier 1
|
(17 | ) | — | — | ||||||||||||
|
Repayment of loan capital
|
(5,895 | ) | (7,786 | ) | (8,587 | ) | ||||||||||
|
Dividends paid
|
(246 | ) | (595 | ) | — | |||||||||||
|
Net cash flow (used in)/from financing activities
|
(4,621 | ) | (7,381 | ) | 4,776 | |||||||||||
|
Net decrease in cash and cash equivalents
|
(259 | ) | (9,423 | ) | (4,752 | ) | ||||||||||
|
Cash and cash equivalents at beginning of the year
|
27,675 | 34,056 | 39,082 | |||||||||||||
|
Effects of exchange rate changes on cash and cash equivalents
|
(1,052 | ) | 3,042 | (274 | ) | |||||||||||
|
Cash and cash equivalents at the end of the year
|
41 | 26,364 | 27,675 | 34,056 | ||||||||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47. |
The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.
105
Financial Statements
Company Balance Sheet
As at 31 December 2009 and 2008
| 2009 | 2008 | |||||||||||
| Notes | £m | £m | ||||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
11 | 3,266 | 2,456 | |||||||||
|
Derivative financial instruments
|
13 | 2,539 | 2,735 | |||||||||
|
Financial assets designated at fair value
|
14 | 37,145 | 47,525 | |||||||||
|
Loans and advances to banks
|
15 | 109,658 | 116,486 | |||||||||
|
Loans and advances to customers
|
16 | 131,749 | 123,319 | |||||||||
|
Available for sale securities
|
18 | 30 | 25 | |||||||||
|
Loans and receivables securities
|
19 | 2 | — | |||||||||
|
Investment in subsidiary undertakings
|
20 | 7,038 | 5,147 | |||||||||
|
Investment in associated undertakings
|
21 | 76 | 741 | |||||||||
|
Intangible assets
|
22 | 552 | 484 | |||||||||
|
Property, plant and equipment
|
23 | 561 | 569 | |||||||||
|
Current tax
assets
|
— | 194 | ||||||||||
|
Deferred tax assets
|
25 | 428 | 458 | |||||||||
|
Other assets
|
26 | 651 | 987 | |||||||||
|
Total assets
|
293,695 | 301,126 | ||||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
27 | 116,414 | 124,846 | |||||||||
|
Deposits by customers
|
28 | 159,187 | 155,466 | |||||||||
|
Derivative financial instruments
|
13 | 3,353 | 5,393 | |||||||||
|
Trading liabilities
|
29 | — | 739 | |||||||||
|
Other borrowed funds
|
32 | 539 | 905 | |||||||||
|
Subordinated liabilities
|
33 | 5,580 | 7,030 | |||||||||
|
Other liabilities
|
34 | 1,611 | 1,283 | |||||||||
|
Provisions
|
35 | 74 | 99 | |||||||||
|
Current tax liabilities
|
92 | 128 | ||||||||||
|
Deferred tax liabilities
|
25 | — | 6 | |||||||||
|
Retirement benefit obligations
|
36 | 922 | 797 | |||||||||
|
Total liabilities
|
287,772 | 296,692 | ||||||||||
|
Equity
|
||||||||||||
|
Share capital
|
39 | 2,709 | 1,148 | |||||||||
|
Share premium account
|
39 | 1,857 | 1,857 | |||||||||
|
Retained earnings
|
1,350 | 1,422 | ||||||||||
|
Available for sale reserve
|
7 | 7 | ||||||||||
|
Total shareholders’ equity
|
5,923 | 4,434 | ||||||||||
|
Total liabilities and equity
|
293,695 | 301,126 | ||||||||||
The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.
The Financial Statements on pages 102 to 188 were approved and authorised for issue by the Board on
27 April 2010 and signed on its behalf by:
Antonio Lorenzo
Chief Financial Officer
Chief Financial Officer
Company Registered Number: 2294747
106
Financial Statements
Company Statement of Comprehensive Income
For the years ended 31 December 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
|
Profit for the year
|
747 | 1,328 | 351 | |||||||||||||
|
Other comprehensive income/(expenses):
|
||||||||||||||||
|
Actuarial losses on retirement benefit obligations
|
36 | (414 | ) | (43 | ) | (116 | ) | |||||||||
|
Losses/(gains) on available-for-sale securities
|
18 | — | (4 | ) | 18 | |||||||||||
|
Tax on items taken directly to equity
|
116 | 12 | 10 | |||||||||||||
|
Net loss recognised directly in equity
|
(298 | ) | (35 | ) | (88 | ) | ||||||||||
|
Gains on available-for-sale securities transferred to profit or loss on sale
|
— | — | (1 | ) | ||||||||||||
|
Tax on items transferred to profit
|
— | — | — | |||||||||||||
|
Net transfers to profit
|
— | — | (1 | ) | ||||||||||||
|
Total other comprehensive expense for the year before tax
|
(414 | ) | (47 | ) | (99 | ) | ||||||||||
|
Tax relating to components of other comprehensive income
|
116 | 12 | 10 | |||||||||||||
|
Total comprehensive income for the year
|
449 | 1,293 | 262 | |||||||||||||
|
|
||||||||||||||||
|
Attributable to:
|
||||||||||||||||
|
Equity holders of the parent
|
449 | 1,293 | 262 | |||||||||||||
Company Statement of Changes in Equity
For the years ended 31 December 2009, 2008 and 2007
| Share | Share | Available for | Retained | |||||||||||||||||||||
| Capital | Premium | sale reserve | earnings | Total | ||||||||||||||||||||
| Notes | £m | £m | £m | £m | £m | |||||||||||||||||||
|
1 January 2007
|
148 | 1,857 | — | 694 | 2,699 | |||||||||||||||||||
|
Total comprehensive income (gross)
|
— | — | 17 | 235 | 252 | |||||||||||||||||||
|
Tax relating to components of other comprehensive income
|
— | — | (6 | ) | 16 | 10 | ||||||||||||||||||
|
Dividends declared
|
40 | — | — | — | (370 | ) | (370 | ) | ||||||||||||||||
|
31 December 2007
|
148 | 1,857 | 11 | 575 | 2,591 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
1 January 2008
|
148 | 1,857 | 11 | 575 | 2,591 | |||||||||||||||||||
|
Total comprehensive income (gross)
|
— | — | (4 | ) | 1,285 | 1,281 | ||||||||||||||||||
|
Tax relating to components of other comprehensive income
|
— | — | — | 12 | 12 | |||||||||||||||||||
|
Issued share capital
|
39 | 1,000 | — | — | — | 1,000 | ||||||||||||||||||
|
Dividends declared
|
40 | — | — | — | (450 | ) | (450 | ) | ||||||||||||||||
|
31 December 2008
|
1,148 | 1,857 | 7 | 1,422 | 4,434 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
1 January 2009
|
1,148 | 1,857 | 7 | 1,422 | 4,434 | |||||||||||||||||||
|
Total comprehensive income (gross)
|
— | — | — | 333 | 333 | |||||||||||||||||||
|
Tax relating to components of other comprehensive income
|
— | — | — | 116 | 116 | |||||||||||||||||||
|
Capital contribution
|
39 | 1,264 | — | — | — | 1,264 | ||||||||||||||||||
|
Dividends declared
|
40 | — | — | — | (521 | ) | (521 | ) | ||||||||||||||||
|
Reclassification of Reserve Capital Instruments
|
39 | 297 | — | — | — | 297 | ||||||||||||||||||
|
31 December 2009
|
2,709 | 1,857 | 7 | 1,350 | 5,923 | |||||||||||||||||||
107
Financial Statements
Company Cash Flow Statement
For the years ended 31 December 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||||||
| Notes | £m | £m | £m | |||||||||||||
|
Net cash flow (used in)/from operating activities
|
||||||||||||||||
|
Profit for the year
|
747 | 1,328 | 351 | |||||||||||||
|
Adjustments for:
|
||||||||||||||||
|
Non cash items included in net profit
|
(207 | ) | 2,038 | 446 | ||||||||||||
|
Change in operating assets
|
1,103 | (80,636 | ) | (8,761 | ) | |||||||||||
|
Change in operating liabilities
|
(6,166 | ) | 128,109 | 13,865 | ||||||||||||
|
Income taxes received
|
21 | 80 | 48 | |||||||||||||
|
Effects of exchange rate differences
|
(268 | ) | 897 | — | ||||||||||||
|
Net cash flow (used in)/from operating activities
|
41 | (4,770 | ) | 51,816 | 5,949 | |||||||||||
|
Net cash flow (used in)/from investing activities
|
||||||||||||||||
|
Increase in investment in subsidiaries
|
— | (598 | ) | (418 | ) | |||||||||||
|
Investment in associates
|
(35 | ) | (708 | ) | (8 | ) | ||||||||||
|
Disposal of subsidiaries, net of cash disposed
|
— | 111 | 415 | |||||||||||||
|
Disposal of non-controlling interest in subsidiaries
|
— | — | 203 | |||||||||||||
|
Purchase of tangible and intangible fixed assets
|
(209 | ) | (174 | ) | (181 | ) | ||||||||||
|
Proceeds from sale of tangible and intangible fixed assets
|
18 | 11 | — | |||||||||||||
|
Purchase of non-trading securities
|
(9 | ) | (9 | ) | — | |||||||||||
|
Proceeds from sale and redemption of non-dealing securities
|
3 | 8 | 3 | |||||||||||||
|
Net cash flow (used in)/from investing activities
|
(232 | ) | (1,359 | ) | 14 | |||||||||||
|
Net cash flow (used in)/from financing activities
|
||||||||||||||||
|
Issue of ordinary share capital
|
— | 1,000 | — | |||||||||||||
|
Issue of loan capital
|
— | — | 65 | |||||||||||||
|
Repayment of loan capital
|
(557 | ) | (253 | ) | (641 | ) | ||||||||||
|
Dividends paid
|
(246 | ) | (595 | ) | — | |||||||||||
|
Net cash flow (used in)/from financing activities
|
(803 | ) | 152 | (576 | ) | |||||||||||
|
Net (decrease)/increase in cash and cash equivalents
|
(5,805 | ) | 50,609 | 5,387 | ||||||||||||
|
Cash and cash equivalents at beginning of the year
|
61,203 | 10,594 | 5,207 | |||||||||||||
|
Effects of exchange rate changes on cash and cash equivalents
|
— | — | — | |||||||||||||
|
Cash and cash equivalents at the end of the year
|
41 | 55,398 | 61,203 | 10,594 | ||||||||||||
The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.
108
Financial Statements
Accounting Policies
International Financial Reporting Standards
The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as approved by the International Accounting Standards
Board (‘IASB’), and interpretations issued by the International Financial Reporting Interpretations Committee (‘IFRIC’) of the IASB that, under European Regulations, are
effective and available for early adoption at the reporting date. Santander UK plc (formerly Abbey National plc) (the ‘Company’) and its subsidiaries (together the ‘Group’) have complied
with IFRS as issued by the IASB in addition to complying with its legal obligation to comply with IFRS as adopted for use in the European Union.
Disclosures required by IFRS 7 ‘Financial Instruments: Disclosure’ relating to the nature and
extent of risks arising from financial instruments can be found in the Risk Management section on
pages 49 to 85 which form part of these Consolidated Financial Statements.
Recent developments
In 2009, the Group adopted the following new or revised IFRS:
| a) | IAS 23 ‘Borrowing Costs’ — On 29 March 2007, the IASB issued an amendment to IAS 23 ‘Borrowing costs’ which removes the option to expense borrowing costs incurred during the acquisition, construction or production of a qualifying asset. The adoption of the amendment to IAS 23 did not have a material impact on the Group’s profit or loss or financial position. | |
| b) | IAS 1 ‘Presentation of Financial Statements’ — On 6 September 2007, the IASB issued an amendment to IAS 1 ‘Presentation of Financial Statements’ which changes the way in which non-owner changes in equity are required to be presented. As a result, a ‘Statement of Changes in Equity’ has been included as a separate primary financial statement showing changes in equity during the periods presented. In addition, the Statement of Recognised Income and Expense has been replaced with a ‘Statement of Comprehensive Income’. The adoption of the amendment to IAS 1 did not have any impact on the Group’s profit or loss or financial position. | |
| c) | IFRS 2 ‘Share based payments — vesting conditions and cancellations’ - On 17 January 2008, the IASB issued an amendment to IFRS 2 ‘Share based payments’ which requires share option awards lapsing due to a failure to meet the service condition to be treated as cancellations rather than forfeitures. The adoption of the amendment to IFRS 2 did not have a material impact on the Group’s profit or loss or financial position. | |
| d) | IFRS 7 ‘Financial Instruments: Disclosures — Improving Disclosures about Financial Instruments’ — On 5 March 2009, the IASB issued an amendment to IFRS 7 ‘Financial Instruments: Disclosures’ which requires enhanced disclosures about fair value measurements and liquidity risk. Among other things, the amendment (1) requires disclosure of any change in the method for determining fair value and the reasons for the change; (2) establishes a three-level hierarchy for making fair value measurement disclosures; (3) requires disclosure for each fair value measurement in the balance sheet of which level in the hierarchy was used, and any transfers between levels, with additional disclosures whenever level 3 of the hierarchy is used including a measure of sensitivity to a change in input data; (4) clarifies that the current maturity analysis for non-derivative financial liabilities should include issued financial guarantee contracts; and (5) amends the required disclosure of a maturity analysis for derivative financial liabilities. The disclosures required by the amendment to IFRS 7 may be found on pages 177 to 185 and pages 59 and 60. |
Future developments
The Group has not yet adopted the following new or revised IFRS or IFRIC interpretations, which
have been issued but which are not yet effective for the Group:
| a) | IFRS 3 ‘Business Combinations’ — On 10 January 2008, the IASB issued an amendment to IFRS 3 ‘Business Combinations’ which clarifies and changes certain elements of accounting for a business combination, including measurement of contingent consideration, step acquisition and intangible assets and also widens the scope of this standard. There are also associated amendments to IAS 27, IAS 28 and IAS 31. The amendment to IFRS 3 is effective for periods beginning on or after 1 July 2009. | |
| b) | IFRS 9 ‘Financial Instruments’ — On 12 November 2009, the IASB issued IFRS 9 ‘Financial Instruments’, which significantly overhauls the accounting requirements for financial instruments under IFRS. IFRS 9 is mandatory for annual periods beginning on or after 1 January 2013, with early application permitted. IFRS 9 requires that a financial asset be classified into one of three categories for measurement and income recognition: (1) Amortised cost, (2) Fair value through profit or loss (FVTPL) and (3) Fair value through other comprehensive income. The standard requires reclassification between amortised cost and FVTPL (or vice versa) if a financial asset no longer meets the criteria for its original classification. IFRS 9 replaces the existing classification and measurement requirements in IAS 39 for financial assets. It changes the manner in which entities classify and measure investments in debt and equity securities, loan assets, trade receivables and derivative financial assets by requiring entities to classify financial assets as being measured at either amortized cost or fair value depending on the entity’s business model and the contractual cash flow characteristics of the asset. The Group is currently evaluating the requirements of IFRS 9. |
109
Financial Statements
Accounting Policies
continued
Basis of preparation
The Financial Statements have been prepared under the historical cost convention, as modified
by the revaluation of available-for-sale financial assets, financial assets and financial
liabilities held at fair value through profit or loss and all derivative contracts, and on the
going concern basis as disclosed in the Directors’ statement of going concern set out in the
Directors’ Report on pages 89 and 90.
As described in Note 47, the Group has accounted for the transfer of Alliance & Leicester plc
retrospectively from 10 October 2008, the date on which Alliance & Leicester plc was acquired by
the Company’s parent Banco Santander, S.A..
As described in Note 48, the Group has finalised the purchase price allocation in respect of
the acquisition of Bradford & Bingley’s savings business. As permitted by IFRS 3 “Business
Combinations”, the final allocation has been accounted for retrospectively from September 2008, the
date on which Bradford & Bingley’s savings business was acquired.
IAS 1 ‘Presentation of Financial Statements’ requires the presentation of a balance sheet as
at the beginning of the earliest period when a company applies an accounting policy
retrospectively. In respect of both the above matters, for the Group, this balance sheet would be
as at 31 December 2006. However, the retrospective accounting for the transfer of Alliance &
Leicester plc and the finalisation of the purchase price allocation in respect of the acquisition
of Bradford & Bingley’s savings business had no impact on the balance sheet as at 31 December 2006,
and so that balance sheet has not been represented in these Consolidated Financial Statements.
Consolidation
a) Subsidiaries
Subsidiaries, which are those companies and other entities (including Special Purpose Entities)
over which the Group, directly or indirectly, has power to govern the financial and operating
policies, are consolidated. The existence and effect of potential voting rights that are presently
exercisable or presently convertible are considered when assessing whether the Group controls
another entity. The Company recognises investments in subsidiaries at cost less impairment.
Subsidiaries are consolidated from the date on which control is transferred to the Group and
are no longer consolidated from the date that control ceases. The purchase method of accounting is
used to account for the acquisition of subsidiaries. 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, plus directly attributable acquisition costs. The excess of the cost of acquisition
over the fair value of the tangible and intangible net assets of the subsidiary acquired is
recorded as goodwill. Inter-company transactions, balances and unrealised gains on transactions
between Group companies are eliminated; unrealised losses are also eliminated unless the cost
cannot be recovered. The accounting reference date of the Company and its subsidiary undertakings
is 31 December, with the exception of those leasing, investment, insurance and funding companies
which, because of commercial considerations, have various accounting reference dates. The Financial
Statements of these subsidiaries have been consolidated on the basis of interim Financial
Statements for the period to 31 December.
Transactions between entities under common control are outside the scope of IFRS 3 — Business
Combinations, and there is no other guidance for such situations under IFRS. Business combinations
between entities under common control transacted for non-cash consideration are accounted for by
the Group in a manner consistent with group reconstruction relief under UK GAAP.
b) Associates
Investments in associates are accounted for by the equity method of accounting and are initially
recognised at cost. Under this method, the Group’s share of the post-acquisition profits or losses
of associates is recognised in the income statement, and its share of post-acquisition movements in
reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against
the cost of the investment. The Company recognises investments in associates at cost less
impairment.
Associates are entities in which the Group has between 20% and 50% of the voting rights, or
over which the Group has significant influence, but which it does not control. The existence and
effect of potential voting rights that are presently exercisable or presently convertible are
considered when assessing whether the Group has significant influence over another entity.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent
of the Group’s interest in the associates; unrealised losses are also eliminated unless the
transaction provides evidence of an impairment of the asset transferred. The Group’s investment in
associates includes goodwill on acquisition. When the Group’s share of losses in an associate
equals or exceeds its interest in the associate the Group does not recognise further losses unless
the Group has incurred obligations or made payments on behalf of the associates.
Foreign currency translation
Items included in the Financial Statements of each entity of the 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 pounds sterling, which is the functional currency of the parent.
Income statements and cash flows of foreign entities are translated into the Group’s reporting
currency at average exchange rates for the year and their balance sheets are translated at the
exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities
are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are
recognised in the income statement as part of the gain or loss on sale.
110
Financial Statements
Accounting Policies
continued
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
deferred in equity under the cash flow hedge.
The amount of exchange rate differences recognised in profit or loss on items not at fair
value through profit and loss was £2,570m income (2008: £5,850m charge, 2007: £505m charge). This
was offset by income/charges on items held at fair value.
Revenue recognition
(a) Interest income and expense
Income on financial assets that are classified as loans and receivables or available-for-sale, and
interest expense on financial liabilities other than those at fair value through profit and loss
are determined using the effective interest 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 net carrying amount of the financial asset or
financial liability. When calculating the effective interest rate, the future cash flows are
estimated after considering all the contractual terms of the instrument excluding future credit
losses. The calculation includes all amounts paid or received by the 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 on
assets classified as loans and receivables or available-for-sale, interest expense on liabilities
classified at amortised cost and interest income and expense on hedging derivatives are recognised
in interest and similar income and interest expense and similar charges in the income statement.
(b) Fee and commissions income
Fees and commissions that are not an integral part of the effective interest rate are recognised
when the service has been provided. For retail products, fee and commission income consists
principally of collection services fees, commission on foreign currencies, and fees for non-banking
financial products. Revenue from these income streams is recognised as earned when the service is
provided.
For insurance products, fee and commission income consists principally of commissions earned
on the sale of building and contents insurance, life protection insurance and payment cover
insurance.
Asset management fee and commission income comprises portfolio and other management advisory
and service fees, investment fund management fees, and fees for private banking, financial planning
and custody services. Portfolio and other management advisory and service fees are recognised based
on the applicable service contracts. Asset management fees related to investment funds are
recognised rateably over the period the service is provided. The same principle is applied for
private banking, financial planning and custody services that are continuously provided over an
extended period of time.
(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 comprises all gains and losses from changes in the fair value of
financial assets and liabilities held at fair value through profit or loss (including financial
assets and financial liabilities held for trading and designated as fair value through profit or
loss), together with related interest income, expense and dividends. It also includes income from
operating lease assets, and profits/(losses) on the sales of fixed assets and subsidiary
undertakings.
Changes in the fair value of financial assets and liabilities held for trading, including
trading derivatives, are recognised in the income statement as net trading and other income
together with dividends and interest receivable and payable. Changes in the fair value of assets
and liabilities designated as fair value through profit or loss are recognised in net trading and
other income together with dividends, interest receivable and payable and changes in fair value of
derivatives managed in conjunction with these assets and liabilities. Changes in fair value of
derivatives in a designated hedging relationship are recognised in net trading and other income
along with the fair value of the hedged item.
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 such time as 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
Group companies have various pension schemes. The schemes are generally funded through payments
to insurance companies or trustee-administered funds as determined by periodic actuarial
calculations. A defined benefit plan is a pension plan that defines an amount of pension benefit to
be provided, usually as a function of one or more factors such as age, years of service or
compensation. A defined contribution plan is a pension plan under which the Group pays fixed
contributions as they fall due into a separate entity (a fund) and will have no legal or
constructive obligations to pay further contributions if the fund does not hold sufficient assets
to pay all employees benefits relating to employee service in the current and prior periods.
111
Financial Statements
Accounting Policies
continued
The liability recognised in respect of defined benefit pension plans is the present value of the
defined benefit obligation at the balance sheet date, less the fair value of plan assets. The
defined benefit obligation is calculated annually by independent actuaries using the projected unit
credit method. Full actuarial valuations of the Group’s principal defined benefit schemes are
carried out every year. The Group is responsible for the actuarial valuations and in doing so
considers or relies in part on a report of a third party expert. The present value of the defined
benefit obligation is determined by the estimated future cash outflows using interest rates of high
quality corporate bonds, which have terms to maturity closest to the terms of the related
liability, adjusted where necessary to match those terms.
The Group’s consolidated income statement includes the current service cost of providing
pension benefits, the expected return on schemes’ assets net of expected administration costs, and
the interest cost on the schemes’ liabilities. Actuarial gains and losses arising from experience
adjustments and changes in actuarial assumptions are taken directly to reserves and recognised in
the statement of comprehensive income. Past-service costs are charged immediately to the income
statement, unless the changes are conditional on the employees remaining in service for a specified
period of time, known as the vesting period. In this case, the past-service costs are amortised on
a straight-line basis over the average period until the benefits become vested.
For defined contribution plans, the Group pays contributions to publicly or privately
administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the
contributions have been paid, the Group has no further payment obligations. The regular
contributions constitute net periodic costs for the year in which they are due and as such are
included in staff costs. Curtailment gains and losses on sold businesses that meet the definition
of discontinued operations are included in operating expenses in profit or loss for the year from
discontinued operations.
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 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 Group’s parent, Banco
Santander, S.A. are purchased in the open market by the Group (for the Executive Share Option
Scheme, the Employee Sharesave scheme and awards granted under the Medium Term Incentive Plan) or
are purchased by Banco Santander, S.A. or another group company (for awards granted under the Long
Term Incentive Plan) to satisfy share options as they vest. The Executive Share Option scheme, the
Employee Sharesave scheme and awards granted under the Medium Term Incentive Plan are accounted for
as cash-settled share-based payment transactions. Awards granted under the Long Term Incentive
Scheme are accounted for as equity-settled share-based payment transactions. Prior to the
acquisition of the Company by Banco Santander, S.A., share options were satisfied by issue of new
shares of the Company. These options were accounted for as equity settled share-based payments. 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 and then subsequently at each reporting date. The
cost of the employee services received in respect of the shares or share options granted is
recognised in the income statement within administration expenses, over the period that the
services are received, which is the vesting period. A liability equal to the portion of the goods
or services received is recognised at the current 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, S.A. is recognised at the current fair value determined at the grant date for
equity-settled share based payments. The fair value of the options granted under the Executive
Share Option scheme, the Employee Sharesave scheme and awards granted under the Medium Term
Incentive Plan 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, S.A. share price over the life of the option, the dividend growth rate and
other relevant factors.
The fair value of the awards granted for the Long Term Incentive Plan were valued at the grant
date using an option pricing model, which takes into account the expected life of the options,
interest rates, volatility of the Banco Santander, S.A. share price over the life of the option,
exercise price, market price and dividends. Except for those that include terms related to market
conditions, vesting conditions included in the terms of the grant are not taken into account in
estimating fair value.
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.
Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s
share of the net identifiable assets of the acquired subsidiary, associate, or business at the date
of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in
Intangible assets. Goodwill on acquisitions of associates is included as part of Investment in
associates. Goodwill is tested for impairment at each balance sheet date, or more frequently when
events or changes in circumstances dictate, and carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity or business include the carrying amount of goodwill
relating to the entity or business sold.
Other intangible assets are recognised if they arise from contracted or other legal rights or
if they are capable of being separated or divided from the Group and sold, transferred, licensed,
rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over
the useful economic life of the assets in question, which ranges from 9 to 20 years. Other
intangible assets are reviewed annually for impairment indicators and tested for impairment where
indicators are present.
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Software development costs are capitalised when they are associated with identifiable and unique
software products that are expected to provide future economic benefits and the cost of these
products can be measured reliably. 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 3-7 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. Costs associated with maintaining software programmes are expensed as
incurred.
Property, plant and equipment
Property, plant and equipment include owner-occupied properties, office fixtures and equipment
and computer software. Property, plant and equipment are carried at cost less accumulated
depreciation and accumulated impairment losses. A review for indications of impairment is carried
out at each reporting date. Gains and losses on disposal are determined by reference to the
carrying amount and are reported in net trading and other income. Repairs and renewals are charged
to the income statement when the expenditure is incurred.
Software development costs are capitalised when they are associated with identifiable and
unique software products that are expected to provide future economic benefits and the cost of
these products can be measured reliably. Internally developed software meeting these criteria and
externally purchased software are classified in property, plant and equipment on the balance sheet
where the software is an integral part of the related computer hardware. Costs associated with
maintaining software programmes are expensed as incurred. Classes of property, plant and equipment
are depreciated on a straight-line basis over their useful life as follows:
|
Owner-occupied properties
|
Not exceeding 50 years | |
|
Office fixtures and equipment
|
3 to 15 years | |
|
Computer software
|
3 to 7 years |
Depreciation is not charged on freehold land and assets under construction.
Financial assets
The Group classifies its financial assets as: financial assets at fair value through profit or
loss, loans and receivables and available-for-sale financial assets. Management determines the
classification of its investments at initial recognition. Financial assets that are classified at
fair value through profit or loss, which have not been designated as such or are not accounted for
as derivatives, or assets classified as available-for-sale, may subsequently in rare circumstances,
be reclassified from the fair value through profit or loss category to the loans and receivables,
available-for-sale or held to maturity categories. In order to meet the criteria for
reclassification, the asset must no longer be held for the purpose of selling or repurchasing in
the near term and must also meet the definition of the category into which it is to be reclassified
had it not been required to classify it at fair value through profit or loss at initial
recognition. The reclassified value is the fair value of the asset at the date of
reclassification. The Group has not utilised this option and therefore has not reclassified any
assets from the fair value through profit or loss category that were classified as such at initial
recognition.
(a) Financial assets at fair value through profit or loss
Financial assets are classified as fair value through profit or loss if they are either held for
trading or otherwise designated at fair value through profit or loss on initial recognition. A
financial asset is classified as held for trading if it is a derivative or it is acquired
principally for the purpose of selling in the near term, or forms part of a portfolio of financial
instruments that are managed together and for which there is evidence of short-term profit taking.
In certain circumstances financial assets other than those that are held for trading are
designated at fair value through profit or loss where this results in more relevant information
because it significantly reduces a measurement inconsistency that would otherwise arise from
measuring assets or recognising the gains or losses on them on a different basis, where the assets
are managed and their performance evaluated on a fair value basis, or where a financial asset
contains one or more embedded derivatives which are not closely related to the host contract.
Trading assets, derivative financial instruments and financial assets designated at fair value
are classified as fair value through profit or loss, except where in a hedging relationship. They
are derecognised when the rights to receive cash flows from the asset have expired or when the
Group has transferred substantially all the risks and rewards of ownership.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments, that
are not quoted in an active market and which are not classified as available-for-sale or fair value
through profit or loss. They arise when the Group provides money or services directly to a customer
with no intention of trading the loan. Loans and receivables are initially recognised at fair value
including direct and incremental transaction costs. They are subsequently valued at amortised cost,
using the effective interest method. They are derecognised when the rights to receive cash flows
have expired or the Group has transferred substantially all of the risks and rewards of ownership.
Loans and receivables consist of Loans and advances to banks and Loans and advances to customers
and Loan and receivable securities.
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(c) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as
available-for-sale and are not categorised into any of the other categories described. They are
initially recognised at fair value including direct and incremental transaction costs. They are
subsequently held at fair value. Gains and losses arising from changes in fair value are included
as a separate component of equity until sale when the cumulative gain or loss is transferred to the
income statement. Interest is determined using the effective interest method.
Income on investments in equity shares and other similar interests is recognised in the income
statement as and when dividends are declared and interest is accrued. Impairment losses and foreign
exchange translation differences on monetary items are recognised in the income statement. The
investments are derecognised when the rights to receive cash flows have expired or the Group has
transferred substantially all the risks and rewards of ownership. Available-for-sale securities
are classified as available-for-sale.
(d) Held to maturity investments
Held to maturity investments are non-derivative financial assets with fixed or determinable
payments and fixed maturity that an entity has the positive intention and ability to hold to
maturity. Held to maturity investments are initially recognised at fair value including direct and
incremental transaction costs. They are subsequently valued at amortised cost, using the effective
interest method. They are derecognised when the rights to receive cash flows have expired or the
Group has transferred substantially all of the risks and rewards of ownership. Were the Group to
sell other than an insignificant amount of held to maturity assets, the entire category would be
tainted and reclassified as available-for-sale.
The Group does not hold any held to maturity financial assets.
Valuation of financial instruments
Financial instruments that are classified at fair value through profit or loss (‘FVTPL’),
including those held for trading purposes, or available-for-sale, and all derivatives, are stated
at fair value. The fair value of such financial instruments is the estimated amount at which the
instrument could be exchanged in a current transaction between willing, knowledgeable parties,
other than in a forced or liquidation sale.
Initial measurement
The best evidence of the fair value of a financial instrument at initial recognition is the
transaction price unless the instrument is evidenced by comparison with other observable current
market transactions in the same instrument or based on a valuation technique whose variables
include significant data from observable markets. Any difference between the transaction price and
the value based on a valuation technique where the inputs are not based on data from observable
current markets is not recognised in profit or loss on initial recognition. Subsequent gains or
losses are only recognised to the extent that they arise from a change in a factor that market
participants would consider in setting a price.
Subsequent measurement
The Group applies the following fair value hierarchy that prioritises the inputs to valuation
techniques used in measuring fair value. The hierarchy establishes three categories for valuing
Financial Instruments, giving the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs. The three
categories are: quoted prices in active markets (Level 1), internal models based on observable
market data (Level 2) and internal models based on other than observable market data (Level 3). If
the inputs used to measure an asset or a liability fall to different levels within the hierarchy,
the classification of the entire asset or liability will be based on the lowest level input that is
significant to the overall fair value measurement of the asset or liability.
The Group categorises assets and liabilities measured at fair value within the fair value
hierarchy based on the inputs to the valuation techniques as follows:
| Level 1: | Unadjusted quoted prices for identical assets or liabilities in an active market that the Group has the ability to access at the measurement date. Level 1 positions include debt securities, equity securities, exchange traded derivatives and short positions in securities. | |
| Level 2: | Quoted prices in markets that are not active, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. Level 2 positions include loans and advances to banks, loans and advances to customers, equity securities, exchange rate derivatives, interest rate derivatives, equity and credit derivatives, debt securities, deposits by banks, deposits by customers, and debt securities in issue. | |
| Level 3: | Inputs to the pricing or valuation techniques that are significant to the overall fair value measurement of the asset or liability are unobservable. Level 3 positions include equity securities, exchange rate derivative, equity and credit derivatives, loans and advances to customers, debt securities, and debt securities in issue. |
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Financial Statements
Accounting Policies
continued
The Group assesses active markets for equity instruments based on the average daily trading volume
both in absolute terms and relative to the market capitalisation for the instrument. The Group
assesses active markets for debt instruments based on both the average daily trading volume and the
number of days with trading activity. The Group assesses active markets for exchange traded
derivatives based on the average daily trading volume both in absolute terms and relative to the
market capitalisation for the instrument. Market activity and liquidity is discussed in the
relevant monthly Risk Forum as well as being part of the daily update given by each business at the
start of the trading day. This information, together with the observation of active trading and
the magnitude of the bid-offer spreads allow consideration of the liquidity of a financial
instrument.
All underlying assets and liabilities are reviewed to consider the appropriate adjustment to
mark the mid price reported in the trading systems to a realisable value. This process takes into
account the liquidity of the position in the size of the adjustment required. These liquidity
adjustments are presented and discussed at the monthly Risk Forum.
In determining the appropriate measurement levels, the Group performs regular analyses on the
assets and liabilities. All underlying assets and liabilities are regularly reviewed to determine
whether a position should be regarded as illiquid; the most important practical consideration being
the observability of trading. Where the bid-offer spread is observable, this is tested against
actual trades. Changes in the observability of significant valuation inputs during the reporting
period may result in a reclassification of certain assets and liabilities within the fair value
hierarchy.
Financial instruments valued using observable market prices
If a quoted market price in an active market is available for an instrument, the fair value is
calculated based on the market price.
Financial instruments valued using a valuation technique
In the absence of a quoted market price in an active market, management uses internal models to
make its best estimate of the price that the market would set for that financial instrument. In
order to make these estimations, various techniques are employed, including extrapolation from
observable market data and observation of similar financial instruments with similar
characteristics. Wherever possible, valuation parameters for each product are based on prices
directly observable in active markets or that can be derived from directly observable market
prices. Valuation parameters for each type of financial instrument are discussed in Note 49 of the
Consolidated Financial Statements.
Unrecognised gains as a result of the use of valuation models using unobservable inputs (‘Day One profits’)
The timing of recognition of deferred day one profit and loss is determined individually. It is
deferred until either the instrument’s fair value can be determined using market observable inputs
or is realised through settlement. The financial instrument is subsequently measured at fair value,
adjusted for the deferred day one profit and loss. Subsequent changes in fair value are recognised
immediately in the consolidated income statement without immediate reversal of deferred day one
profits and losses.
“Regular way” purchases of financial assets
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 are recognised
on settlement date; all other regular way purchases are recognised on trade date. The assets are
derecognised when the rights to receive cash flows have expired or the Group has transferred
substantially all the risks and rewards of ownership.
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.
Sale and repurchase agreements (including stock borrowing and lending)
Securities sold subject to a linked repurchase agreement (‘repos’) are retained in the
Financial Statements as trading assets and the counterparty liability is included in amounts
‘Deposits by banks’ or ‘Deposits by customers’ within trading liabilities as appropriate.
Securities purchased under agreements to resell (‘reverse repos’) are recorded as ‘Loans and
advances to banks’ or ‘Loans and advances to customers’ within trading assets as appropriate. The
difference between the sale and repurchase price is treated as trading income in the income
statement. Securities lent to counterparties that are collateralised by cash are also retained in
the balance sheet. Securities borrowing and lending transactions collateralised with other
securities are not recognised in the balance sheet.
Derivative financial instruments
Transactions are undertaken in derivative financial instruments (‘derivatives’), which include
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 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.
115
Financial Statements
Accounting Policies
continued
Derivatives are initially recognised at fair value on the date on which a derivative contract is
entered into and are subsequently remeasured at their fair value. Fair values are obtained from
quoted market prices in active markets, including recent market transactions, and valuation
techniques, including discounted cash flow models and option pricing models as appropriate. All
derivatives are carried as assets when fair value is positive and as liabilities when fair value is
negative, except where netting is permitted.
Certain derivatives embedded in other financial instruments, such as the conversion option in
a convertible bond, are treated as separate derivatives when their economic characteristics and
risks are not closely related to those of the host contract and the hybrid contract is not carried
at fair value through profit or loss. 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 there has been a change in the
terms of the contract which significantly modifies the cash flows, or where assets have been
reclassified where they are reassessed at the time of reclassification.
Hedge accounting
The Group designates certain derivatives as hedging instruments of the fair value of recognised
assets or liabilities or firm commitments (fair value hedge). Hedge accounting is used for
derivatives designated in this way provided certain criteria are met.
At the time a financial instrument is designated as a hedge, the Group formally documents the
relationship between the hedging instrument(s) and hedged item(s). Documentation includes risk
management objectives and the strategy in undertaking the hedge transaction, together with the
methods that will be used to assess the effectiveness of the hedging relationship. Accordingly, the
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
of the hedged items. A hedge is normally regarded as highly effective if, at inception and
throughout its life, the Group can expect, and actual results indicate, that changes in the fair
value of the hedged items are effectively offset by changes in the fair value of the hedging
instrument, and actual results are within a range of 80% to 125%.
The Group discontinues hedge accounting when it is determined that: a derivative is not, or
has ceased to be, highly effective as a hedge; when the derivative expires, or is sold, terminated
or exercised; or when the hedged item matures or is sold or repaid. On discontinuance of hedge
accounting amortisation of the adjustment to the hedged item is included in net trading and other
income.
The hedge adjustment for fair value hedges is classified in the balance sheet in the same
category as the hedged item, unless it relates to a macro hedging relationship where the hedge
adjustment is recognised as a macro hedge on the face of the balance sheet. For fair value hedges,
changes in the fair value of the hedging instrument and hedged item are recognised in net trading
and other income. Hedge ineffectiveness represents the amount by which the changes in the fair
value of the hedging derivative differ from changes in the fair value of the hedged item. Such
gains and losses are recorded in current period earnings within net trading and other income.
Gains and losses on components of a hedging derivative that are excluded from assessing hedge
effectiveness are also included in net trading and other income.
Securitisation transactions
The Group has entered into certain arrangements where undertakings have issued mortgage-backed
securities or have entered into funding arrangements with lenders in order to finance specific
loans and advances to customers. As the Group has retained substantially all the risks and rewards
of the underlying assets, all such financial instruments continue to be held on the Group balance
sheet, and a liability recognised for the proceeds of the funding transaction.
Impairment of financial assets
At each balance sheet date the Group assesses whether, as a result of one or more events
occurring after initial recognition, there is objective evidence that a financial asset or group of
financial assets classified as available-for-sale or loans and receivables have become impaired.
Evidence of impairment may include indications that the borrower or group of borrowers have
defaulted, are experiencing significant financial difficulty, or the debt has been restructured to
reduce the burden to the borrower.
(a) Financial assets carried at amortised cost
Retail assets
Impairment losses are assessed individually for the financial assets that are individually
significant and individually or collectively for assets that are not individually significant.
Balance sheet provisions are maintained at the level that management deems sufficient to absorb
probable incurred losses in the Group’s loan portfolio from homogeneous portfolios of assets and
individually identified loans.
A provision for observed losses is established for all past due loans after a specified period
of repayment default where it is probable that some of the capital will not be repaid or recovered
through enforcement of any applicable security. Once a loan misses a payment (breach of contractual
terms) an assessment of the likelihood of collecting the principal and overdue payments is made. This assessment is generally made using statistical techniques based
on historic experience. These determinations are supplemented by various formulaic calculations and
the application of management judgement.
116
Financial Statements
Accounting Policies
continued
For individually assessed assets, the Group measures the amount of the loss as the difference
between the carrying amount of the asset or group of assets and the present value of the estimated
future cash flows from the asset or group of assets discounted at the original effective interest
rate of the asset.
In making collective assessment for impairment, financial assets are assessed for each
portfolio segmented by similar risk characteristics. For each risk segment, future cash flows from
these portfolios are estimated through the use of historical loss experience. The historical loss
experience is adjusted for current observable data, including estimated current property prices, to
reflect the effects of current conditions not affecting the period of historical experience. The
loss is discounted at the effective interest rate, except where portfolios meet the criteria for
short-term receivables. The unwind of the discount over time is reported through interest
receivable within the income statement, with the provision on the balance sheet increasing.
Loans that are part of a homogeneous pool of similar loans are placed on default status based
on the number of months in arrears, which is determined through the number of missed payments or
the number of months in collection. Loans that are not part of a homogeneous pool of similar loans
are analysed based on the number of months in arrears on a case-by-case basis and are placed on
default status when the probability of default is likely.
Generally, the length of time before an asset is placed on default status for provisioning is when
one payment is missed. Repayment default periods vary depending on the nature of the collateral
that secures the advances. On advances secured by residential or commercial property, the default
period is three months. For advances secured by consumer goods such as cars or computers, the
default period is less than three months, the exact period being dependent on the particular type
of loan in this category.
On unsecured advances, such as personal term loans, the default period is generally four
missed payments (three months in arrears). Exceptions to the general rule exist with respect to
revolving facilities, such as bank overdrafts, which are placed on default upon a breach of the
contractual terms governing the applicable account, and on credit card accounts where the default
period is three months.
A provision for inherent losses is made for loan losses that have been incurred but have not
been separately identified at the balance sheet date because the loan is not yet past due. An
example of this situation is where a borrower has not yet missed a payment but is experiencing
financial difficulties at the reporting date, e.g. due to loss of employment or divorce. In these
circumstances, an inherent loss had been incurred at the reporting date. The provision for inherent
losses is determined on a portfolio basis based on management’s best estimate of the current
position based on past experience adjusted by current trends. These statistical techniques involve
the following (i) estimation of a period of time called the emergence period, which is discussed
below, (ii) assessment of the number of accounts that go into arrears over the emergence period,
and (iii) application of the provision methodology outlined for observed provisions to these
accounts identified as impaired as a result of this exercise. Accounts that suffered credit
deterioration after the reporting date are accordingly excluded from the statistical analysis.
The emergence period
This is the period which the Group’s statistical analysis shows to be the period in which losses
that had been incurred but have not been separately identified at the balance sheet date, become
evident as the loans turn into past due. Based on the Group’s statistical analysis at 31 December
2009, the emergence period was two to three months for unsecured lending and twelve months for
secured lending. The longer emergence period for secured lending reflects the fact that a customer
is more likely to default on unsecured debt before defaulting on secured lending. The factors
considered in determining the length of the emergence period for unsecured lending are recent
changes in customers’ debit/credit payment profiles and credit scores. The factors considered for
secured lending are the frequency and duration of exceptions from adherence to the contractual
payment schedule.
Once a financial asset or a group of financial assets has been written down as a result of an
impairment loss, the assets are not placed onto a non-accrual status. Subsequent interest income
continues to be recognised on an effective interest rate basis, though on the asset value after
provisions have been deducted.
Impairment losses are recognised in the income statement and the carrying amount of the
financial asset or group of financial assets is reduced by establishing an allowance for impairment
losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can
be ascribed to an event after the impairment was recognised, the previously recognised loss is
reversed by adjusting the allowance. For secured loans, a write-off is only made when all
collection procedures have been exhausted and the security has been sold. For unsecured loans, a
write-off is only made when all internal avenues of collecting the debt have been exhausted and the
debt is passed over to external collection agencies. Write-offs are charged against previously
established provisions for impairment.
Recoveries of loan losses are not included in the loan loss allowance, but are taken to income
and offset against charges for loan losses. Loan loss recoveries are classified in the income
statement as Impairment losses on loans and advances.
Corporate assets
Impairments for these assets are assessed on both an individual and a collective basis. For
individual assets impairment reviews are conducted monthly for those assets on the Group’s
‘Watchlist’ of new, emerging and serious circumstances relating to the portfolio, with a particular
focus on the following scenarios: (1) where an asset has a payment default which has been
outstanding for 90 days or more; (2) where non-payment defaults have occurred and/or where it has
become evident that some sort of workout or rescheduling exercise is to be undertaken; or (3)
where, for example with Real Estate Finance, it has become evident that the value of the Group’s
security is no longer considered adequate.
In such situations the file is transferred to the Corporate Banking Workouts team within
Credit Risk. As part of their assessment, a full review of the expected future cash flows in
relation to the relevant asset, appropriately discounted, will be undertaken and the result
compared to the current net book value of the asset. Any shortfall evidenced as a result of such a
review, particularly where the shortfall is likely to be permanent, will lead to a suitable
impairment recommendation.
117
Financial Statements
Accounting Policies
continued
Collective impairments are also looked at for portfolios where it is felt that market events,
either specific or general, are likely to determine that losses are already inherent in a portfolio
notwithstanding that these events may not have manifested themselves in specific defaults or other
triggers that would lead to an individual impairment assessment. The amount of any such collective
impairment will, for each portfolio concerned, represent management’s best estimate of likely loss
levels and will take into account inter alia estimates of future actual default rates and likely
recovery levels.
Once a financial asset or a group of financial assets has been written down as a result of an
impairment loss, the assets are not placed onto a non-accrual status. Subsequent interest income
continues to be recognised on an effective interest rate basis, though on the asset value after
provisions have been deducted.
For secured loans, a write-off is made when all collection procedures have been exhausted and
the security has been sold. For unsecured loans, a write-off is made when all avenues for
collecting the debt have been exhausted. There may be occasions where a write-off occurs for other
reasons, for example, following a consensual restructure of the debt or where the debt is sold for
strategic reasons into the secondary market at a value lower than the face value of the debt.
Write-offs are charged against previously established provisions for impairment.
Loans and receivables securities
Loans and receivables securities are assessed individually for impairment. An impairment loss is
incurred if there is objective evidence that an event has occurred since initial recognition of the
assets that has an impact in the estimated future cash flows of the loans and receivables
securities.
(b) Available-for-sale financial assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial
asset or a group of financial assets is impaired. In assessing whether assets are impaired, a
significant or prolonged decline in the fair value of the security below its cost is considered
evidence. 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 equity and recognised in the income statement.
If in a subsequent period, the fair value of a debt instrument classified as
available-for-sale increases and the increase is due to an event occurring after the impairment
loss was recognised in the income statement (with objective evidence to support this), the
impairment loss is reversed through the income statement.
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. Net selling price is
calculated by reference to the amount at which the asset could be disposed of in a binding sale
agreement in an arm’s length transaction evidenced by an active market or recent transactions for
similar assets, less costs to sell. Value in use is calculated by discounting the 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 carrying values of fixed assets and goodwill 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.
Impairment of a cash generating unit is allocated first to goodwill and then to other assets held
within the unit on a pro-rata basis. An impairment loss recognised in an interim period is not
reversed at the balance sheet date. A previously recognised impairment loss relating to a fixed
asset may be reversed in part or in full when a change in circumstances leads to a change in the
estimates used to determine the fixed asset’s recoverable amount. The carrying amount of the fixed
asset 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 impairment reviews,
cash generating units are the lowest level at which management monitors the return on investment on
assets.
Leases
The Group as lessor — Operating lease assets are recorded at deemed cost and depreciated over
the life of the asset after taking into account anticipated residual values. Operating lease rental
income and depreciation is recognised on a straight-line basis over the life of the asset. Amounts
due from lessees under finance leases and hire purchase contracts are recorded as receivables at
the amount of the Group’s net investment in the leases. Finance lease income is allocated to
accounting periods so as to reflect a constant periodic rate of return on the Group’s net
investment outstanding in respect of the leases and hire purchase contracts.
The Group as lessee — The 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.
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Financial Statements
Accounting Policies
continued
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. Deferred income tax is provided in full, using the
liability method, 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 Financial
Statements. 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 assets and
liabilities are not recognised if the temporary difference arises from goodwill and 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 charged or credited
directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax
liabilities are recognised for taxable temporary differences arising on investments in subsidiaries
except where the Group is able to control reversal of the temporary difference and it is probable
that it will not reverse in the foreseeable future.
The Company 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 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.
Financial liabilities
Financial liabilities are initially recognised when the Group becomes contractually bound to
the transfer of economic benefits in the future.
(a) Financial liabilities at fair value through profit or loss
Financial liabilities are classified as fair value through profit or loss if they are either held
for trading or otherwise designated at fair value through profit or loss on initial recognition. A
financial liability is classified as held for trading if it is a derivative or it is incurred
principally for the purpose of selling or being unwound in the near term, or forms part of a
portfolio of financial instruments that are managed together and for which there is evidence of
short-term profit taking.
In certain circumstances financial liabilities other than those that are held for trading are
designated at fair value through profit or loss where this results in more relevant information
because it significantly reduces a measurement inconsistency that would otherwise arise from
measuring assets and liabilities or recognising the gains or losses on them on a different basis,
or where a financial liability contains one or more embedded derivatives which are not closely
related to the host contract. These liabilities 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.
Derivative financial instruments, Trading liabilities and Financial liabilities designated at
fair value are classified as fair value through profit or loss.
(b) Other financial liabilities
All other financial liabilities are initially recognised at fair value net of transaction costs
incurred. They are subsequently stated at amortised cost and the redemption value recognised in the
income statement over the period of the liability using the effective interest method.
Deposits by banks, Deposits by customers, Debt securities in issue (unless designated at fair
value), Other borrowed funds and Subordinated liabilities are classified as amortised cost.
119
Financial Statements
Accounting Policies
continued
Equity index-linked deposits
Contracts involving the receipt of cash on which customers receive an index-linked return are
accounted for as equity index-linked deposits, and classified as deposits by customers within
trading liabilities. Equity index-linked deposits are managed within the equity derivatives trading
book as an integral part of the equity derivatives portfolio. There are two principal product
types.
(a) Capital at Risk
These products are designed to replicate the investment performance of an equity index, subject to
a floor. In the event the index falls under a certain predetermined level, customers forfeit a
predetermined percentage of principal up to a predetermined amount.
(b) Capital Guaranteed/Protected:
These products 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.
Equity index-linked deposits are remeasured at fair value at each reporting date with changes
in fair values recognised in the income statement. 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. Other than new capital guaranteed products, which are treated as
deposits by customers with any associated embedded derivatives bifurcated, embedded derivatives are
not separated from the host instrument and are not separately accounted for as a derivative
instrument, as the entire contract embodies both the embedded derivative and the host instrument
and is remeasured at fair value at each reporting date. As such, there is no requirement to
bifurcate the embedded derivatives in the equity index-linked deposits.
Borrowings
Borrowings, including subordinated liabilities, are recognised initially at fair value, being
the proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings
are subsequently stated at amortised cost or fair value dependent on designation at initial
recognition.
Preference shares which carry a contractual obligation to transfer economic benefits are
classified as other financial liabilities and are presented in other borrowed funds. The dividends
on these preference shares are recognised in the income statement as interest expense on an
amortised cost basis using the effective interest method.
Share capital
Incremental external costs directly attributable to the issue of new shares are deducted from
equity net of related income taxes.
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. 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.
Provision is made for the anticipated cost of restructuring, including redundancy costs, when
an obligation exists. An obligation exists when the Group has a detailed formal plan for
restructuring a business, and has raised valid expectations in those affected by the restructuring
and has started to implement the plan or announce its main features.
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.
Financial guarantee contracts
The Group accounts for guarantees that meet the definition of a financial guarantee contract at
fair value on initial recognition. In subsequent periods, these guarantees are measured at the
higher of the initial fair value less cumulative amortisation and the amount that would be
recognised as a provision as described in the Accounting Policies above.
Dividends
Dividends on ordinary shares are recognised in equity in the period in which the right to
receive payment is established.
120
Financial Statements
Accounting Policies
continued
Critical accounting policies and areas of significant management judgement
The preparation of the Group’s Consolidated Financial Statements requires management to make
estimates and judgements that affect the reported amount of assets and liabilities at the date of
the Financial Statements and the reported amount of income and expenses during the reporting
period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its
estimates and judgements on historical experience and on various other factors that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
The following estimates and judgements are considered important to the portrayal of the
Group’s financial condition.
(a) Provisions for loans and advances
The Group estimates provisions for loans and advances to customers, treasury asset portfolio
securities and loans and advances to banks with the objective of maintaining balance sheet
provisions at the level believed by management to be sufficient to absorb actual losses (‘observed
provisions’) and inherent losses (‘incurred but not yet observed provisions’) in the Group’s loan
portfolio from homogeneous portfolios of assets and individually identified loans in connection
with loans and advances to banks and loans and advances to customers. The calculation of provisions
on impaired loans and advances is based on the likelihood of the asset being written off (or
repossessed in the case of mortgage loans) and the estimated loss on such a write-off. These
assessments are made using statistical techniques based on historic experience. These
determinations are supplemented by various formulaic calculations and the application of management
judgement.
The Group considers accounting estimates related to provisions for loans and advances ‘critical accounting estimates’ because: (i) they are highly susceptible to change from period to
period as the assumptions about future default rates and valuation of potential losses relating to
impaired loans and advances are based on recent performance experience, and (ii) any significant
difference between the Group’s estimated losses (as reflected in the provisions) and actual losses
would require the Group to take provisions which, if significantly different, could have a material
impact on its future income statement and its balance sheet. The Group’s assumptions about
estimated losses are based on past performance, past customer behaviour, the credit quality of
recent underwritten business and general economic conditions, which are not necessarily an
indication of future losses.
Provisions for loans and advances, less amounts released and recoveries of amounts written off
in previous years are charged to the line item ‘Impairment losses on loans and advances’ in the
income statement. The provisions are deducted from the ‘Loans and advances to banks’ and the ‘Loans
and advances to customers’ line items on the balance sheet. If the Group believes that additions to
the provisions for such credit losses are required, then the Group records additional provisions
for credit losses, which would be treated as a charge in the line item ‘Impairment losses on loans
and advances’ in the income statement. The Consolidated Financial Statements for the year ended 31
December 2009 include a net provision charge (i.e. after recoveries) for loans and advances in
connection with retail lending for an amount equal to £711m, and corporate lending for an amount
equal to £36m. The provision charges for retail and corporate lending increased from 2008 largely
due to worsening market conditions.
In calculating the retail and corporate lending provisions, principally within the Retail
Banking and Corporate Banking segments, a range of outcomes was calculated based principally on
management’s conclusions regarding the current economic outlook relative to historic experience.
Had management used different assumptions regarding the current economic outlook, a larger or
smaller provision for loans and advances would have resulted that could have had a material impact
on the Group’s reported profit on continuing operations before tax in 2009. Specifically, if
management’s conclusions as to the current economic outlook were different, but within the range of
what management deemed to be reasonably possible economic outlooks, the provision charge for loans
and advances in the Retail Banking segment could have decreased in 2009 from an actual provision
charge of £711m (2008: £322m, 2007: £344m) by up to £127m (2008: £78m, 2007: £163m), with a
potential corresponding increase in the Group’s profit before tax in 2009 of up to 8% (2008: 7%,
2007: 19%), or increased by up to £115m (2008: £66m, 2007: £52m), with a potential corresponding
decrease in the Group’s profit before tax in 2009 of up to 7% (2008: 6%, 2007: 6%). The provision
charge for loans and advances in the Corporate Banking segment could have decreased in 2009 from an
actual provision charge of £36m by up to £15m, with a potential corresponding increase in the
Group’s profit before tax in 2009 of up to 1%, or increased by up to £10m, with a potential
corresponding decrease in the Group’s profit before tax in 2009 of up to 1%.
The
actual provision charge for retail lending of £711m (2008: £322m, 2007: £344m) and
corporate lending of £36m (2008: £26m, 2007: £nil) in 2009 was based on what management estimated
to be the most probable economic outlook within the range of reasonably possible assumptions.
The provision charge for the Treasury asset portfolio acquired on 10 October 2008 of £93m
(2008: £nil) was based on management’s assessment of impairment of each individual asset based on
data available at 31 December 2009. A detailed analysis of the Treasury asset portfolio by type of
instrument, credit structure, credit rating and geography can be found in the Risk Management
Report on pages 77 to 85.
(b) Valuation of financial instruments
The Group considers that the accounting estimate related to the valuation of financial assets
and financial liabilities including derivatives where quoted market prices are not available is a
‘critical accounting estimate’ because: (i) it is highly susceptible to change from period to
period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and
specific features of the transactions; and (ii) the impact that recognising a change in the
valuations would have on the assets reported on its balance sheet as well as its net profit/(loss)
could be material.
121
Financial Statements
Accounting Policies
continued
Changes in the valuation of financial assets and financial liabilities including derivatives where
quoted market prices are not available are accounted for in the line item ‘Net trading and other
income’ in the income statement and the ‘Trading assets’, ‘Financial assets designated at fair
value’, ‘Trading liabilities’, ‘Financial liabilities designated at fair value’ and ‘Derivative
financial instruments’ line items in the Group’s balance sheet.
The Group trades in a wide variety of financial instruments in the major financial markets and
therefore considers a range of interest rates, volatility, exchange rates, counterparty credit
ratings, valuation adjustments and other similar inputs, all of which vary across maturity bands.
These are chosen to best reflect the particular characteristics of each transaction. Had
management used different assumptions regarding the interest rates, volatility, exchange rates, the
credit rating of the counterparty, and valuation adjustments, a larger or smaller change in the
valuation of financial assets and financial liabilities including derivatives where quoted market
prices are not available would have resulted that could have had a material impact on the Group’s
reported profit before tax in 2009. Detailed disclosures on financial instruments, including
sensitivities, can be found in Note 49 on page 173. Further information about sensitivities
(including value-at-risk) to market risk arising from financial instrument trading activities can
be found in the Risk Management Report on page 72.
(c) Provisions for misselling
The Group estimates provisions for misselling with the objective of maintaining reserve levels
believed by management to be sufficient to absorb current estimated probable losses in connection
with compensation from customers who claim reimbursement of bank charges, and misselling of
endowment policies, payment protection insurance policies, and other products. The calculation of
provisions for misselling is based on the estimated number of claims that will be received, of
those, the number that will be upheld, and the estimated average settlement per case. These
assessments are based on management’s estimate for each of these three factors. In certain
instances, the extent to which the Group is required to uphold claims is driven by binding legal
decisions or precedents, as described in Note 37.
The Group considers accounting estimates related to misselling provisions ‘critical accounting
estimates’ because: (i) they are highly susceptible to change from period to period per the three
factors above, and (ii) any significant difference between the Group’s estimated losses as
reflected in the provisions and actual losses would require the Group to take provisions which, if
significantly different, could have a material impact on its future income statement and its
balance sheet. The Group’s assumptions about estimated losses are based on past claims uphold
rates, past customer behaviour, and past average settlements, which are not necessarily an
indication of future losses.
Provisions for misselling are charged to the line item ‘Provisions for other liabilities and
charges’ in the income statement. The provision is included in the ‘Provisions’ line item on the
balance sheet. If the Group believes that additions to the misselling provision are required, then
the Group records additional provisions, which would be treated as a charge in the line item
‘Provisions for other liabilities and charges’ in the income statement.
The Consolidated Financial Statements for the year ended 31 December 2009 include a provision
charge for misselling in the Retail Banking segment for an amount equal to £10m (2008: £40m
release, 2007: £nil). The balance sheet provision decreased from £141m in 2008 to £43m in 2009,
reflecting settlement of claims principally relating to Payment Protection Insurance.
In calculating the misselling provision within the Retail Banking segment, management’s best
estimate of the provision was calculated based on conclusions regarding the number of claims that
will be received, of those, the number that will be upheld, and the estimated average settlement
per case. Had management used different assumptions regarding these factors, a larger or smaller
provision for misselling would have resulted in the Retail Banking segment that could have had a
material impact on the Group’s reported profit on continuing operations before tax in 2009.
Specifically, if management’s conclusions as to the number of claims that will be received, of
those, the number that will be upheld, and the estimated average settlement per case were
different, but within the range of what management deemed to be reasonably possible, the provision
charge for misselling in the Retail Banking segment could have decreased in 2009 by up to £7m
(2008: £8m, 2007: £29m), with a potential corresponding increase in the Group’s profit before tax
in 2009 of up to 0.4% (2008: 1%, 2007: 3%), or increased by up to £8m (2008: £9m, 2007: £19m), with
a potential corresponding decrease in the Group’s profit before tax in 2009 of up to 0.5% (2008:
1%, 2007: 2%). The actual charge in 2009 was based on what management estimated to be the most
probable number of claims that will be received, of those, the number that will be upheld, and the
estimated average settlement per case within the range of reasonably possible outcomes.
(d) Pensions
The Group operates a number of defined benefit pension schemes as described in Note 36 to the
Consolidated Financial Statements. The assets of the schemes are measured at their fair values at
the balance sheet date. The liabilities of the schemes are estimated by projecting forward the
growth in current accrued pension benefits to reflect inflation and salary growth to the date of
pension payment, discounted to present value using the interest rate applicable to high-quality AA
rated corporate bonds of the same currency and term as the scheme liabilities. 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. In determining the
value of scheme liabilities, assumptions are made by management as to mortality, price inflation,
discount rates, pensions increases, and earnings growth. 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.
122
Financial Statements
Accounting Policies
continued
The Group considers accounting estimates related to pension provisions ‘critical accounting
estimates’ because: (i) they are highly susceptible to change from period to period, and (ii) any
significant difference between the Group’s estimates of the scheme liabilities and actual
liabilities could significantly alter the amount of the surplus or deficit recognised in the
balance sheet and the pension cost charged to the income statement. The Group’s assumptions
principally about mortality, but also about price inflation, discount rates, pensions increases,
and earnings growth are based on past experience and current economic trends, which are not
necessarily an indication of future experience. Pension costs are charged to the line item
‘Administration expenses’, with the interest cost on liabilities and the expected return on scheme
assets included within ‘Net trading and other income’ in the income statement. The provision is
included in the Retirement benefit obligations line item in the balance sheet. If the Group
believes that increases to the pensions cost are required, then the Group records additional costs
that would be treated as a charge in the line item Administration expenses in the income statement.
The Consolidated Financial Statements for the year ended 31 December 2009 include current year
defined benefit service cost of £44m and a pension scheme deficit of £1,060m. The current year
service cost of £44m (2008: £55m, 2007: £67m) decreased, reflecting reductions in active scheme
membership, salary reviews, changes in pension increases, changes in mortality assumptions, changes
in price inflation assumptions and changes in discount rate. The current year pension scheme
deficit of £1,060m (2008: £803m, 2007: £979m) increased as a result of a reduction of 100 basis
points in the net discount rate (i.e. the discount rate less the inflation rate) used to value the
defined benefit scheme liabilities. The increase in assumed inflation also impacted the expected
rate of pension increase, in turn leading to a further increase in scheme liabilities. These
increases were partly offset by employer contributions made and improvements in asset values.
In calculating the current year service cost and deficit, a range of outcomes was calculated
based principally on management’s estimates regarding mortality, price inflation, discount rates,
pensions increases, and earnings growth. Had management used different assumptions principally
regarding mortality, but also price inflation, discount rate, pensions increases, and earnings
growth, a larger or smaller charge for pension costs would have resulted that could have had a
material impact on the Group’s reported profit before tax in 2009. Specifically, if management’s
conclusions as to mortality, price inflation, discount rates, pensions increases, and earnings
growth were different, but within the range of what management deemed to be reasonably possible
conclusions, the charge for pension costs could have decreased in 2009 from an actual pension
charge of £44m (2008: £55m, 2007: £67m) by up to £9m (2008: £8m, 2007: £13m), with a potential
corresponding increase in the Group’s profit before tax in 2009 of up to 1% (2008: 1%, 2007: 2%),
or increased by up to £6m (2008: £8m, 2007: £7m), with a potential corresponding decrease in the
Group’s profit before tax in 2009 of up to 0.4% (2008: 1%, 2007: 1%). The actual current year
service pension charge of £44m (2008: £55m, 2007: £67m) in 2009 was based on what management
estimated to be the most probable mortality, price inflation, discount rates, pensions increases,
and earnings growth within the range of reasonably possible values. Detailed disclosures on the
pension deficit including sensitivities can be found in Note 36 on page 153.
(e) Deferred tax
The Group recognises deferred tax assets with respect to tax losses carried forward to the
extent that it is probable that future taxable profits will be available against which the unused
tax losses and unused tax credits can be utilised. At 31 December 2009 and 2008 the Group has
recognised such deferred tax assets in full. As at 31 December 2009 this amounted to £297m (2008:
£368m). The value of the deferred tax asset is based on management’s best estimate of the amount
that will be recoverable in the foreseeable future. This estimate is based on management’s
assessment of future taxable profits that are expected to arise over this period.
The Group considers accounting estimates in respect of £297m (2008: £368m) of the deferred tax
assets relating to the Alliance & Leicester group ‘critical accounting estimates’ because: (i) they
are highly susceptible to change from period to period as the assumptions about future taxable
profits represent forward-looking estimates which are inherently vulnerable to changes in economic
and market conditions, and (ii) any significant shortfall between the Group’s estimated taxable
profits and actual taxable profits could require the Group to take charges which, if significant,
could have a material impact on its future income statement and its balance sheet. The Group’s
assumptions about estimated future taxable profits are based on assumptions about future
performance within the Group of which Alliance & Leicester plc is a part, and general economic
conditions, which are not necessarily an indication of future performance.
Changes to the value of deferred tax assets are charged to the line item ‘Taxation charge’
in the income statement. Changes in deferred tax assets are deducted from the ‘Deferred tax assets’
line item on the balance sheet. The Consolidated Financial Statements for the year ended 31
December 2009 do not include a charge for changes in the value of deferred tax assets arising in
connection with the non recoverability of taxable losses. If management estimates of future tax
profits were not met, it is possible that the deferred tax asset would still be recovered, but over
a longer period, therefore it is not possible to quantify reliably a meaningful sensitivity or
range of possible outcomes. Under current UK tax legislation, the tax losses in respect of which
deferred tax assets have been recognised do not expire.
It is management’s view that the recoverable value of the deferred tax asset will be
unaffected by the scheme allowed by Part VII of the Financial Services and Markets Act 2000 under
which the Company intends to transfer Alliance & Leicester plc’s business into Santander UK plc
later this year, as described in Note 46.
123
Financial Statements
Notes to the Financial Statements
1. Segments
The principal activity of the Group is financial services. The Group’s business is managed and
reported on the basis of the following segments:
| • | Retail Banking; | |
| • | Corporate Banking; | |
| • | Global Banking & Markets; | |
| • | Private Banking; and | |
| • | Group Infrastructure. |
In 2009, the Bradford & Bingley off-shore deposit-taking business was managed and reported as part
of Private Banking rather than Retail Banking. The segmental analysis of the Group’s results for
2008 has been amended to reflect this change. In addition, in 2009, the Group’s transfer pricing
arrangements were updated to reflect the greater benefit of retail deposits in a period of higher
funding costs. Prior years’ segmental analyses have been adjusted for consistency. In this report,
the Retail Banking, Corporate Banking, Global Banking & Markets, Private Banking and Group
Infrastructure segments are referred to as the Personal Financial Services (‘PFS’) businesses.
The Group’s segments are strategic business units that offer different products and services.
They are managed separately because each business requires different technology and marketing
strategies. The Group has five segments. Retail Banking offers a range of personal banking, savings
and mortgage products and services, under the brands Santander and Alliance & Leicester. Corporate
Banking offers banking services principally to small and mid-sized UK companies under the brands
Santander and Alliance & Leicester. Global Banking & Markets provides financial markets sales,
trading and risk management services, as well as manufacturing retail structured products. It also
contains operations in run down. Private Banking offers specialist banking services and offered
self-invested pension plans and WRAP products. Group Infrastructure consists of Asset and Liability
Management activities, Group Capital, Funding and the Treasury asset portfolio of the Alliance &
Leicester group.
The segment information below is presented on the basis used by the Company’s board of
directors (the ‘Board’) to evaluate performance, in accordance with IFRS 8. The Board reviews
discrete financial information for each of its segments, including measures of operating results
and assets. The segments are managed primarily on the basis of their results, which are measured on
a ‘trading’ basis. The trading basis differs from the statutory basis (described in the Accounting
Policies section on pages 109 to 123) as a result of the application of various adjustments.
Management considers that the trading basis provides the most appropriate way of reviewing the
performance of the business. The adjustments are:
| • | Alliance & Leicester pre-acquisition trading basis results — Following the transfer of Alliance & Leicester plc to the Company in January 2009, the statutory results for the year ended 31 December 2009 include the consolidated results of the Alliance & Leicester group, whereas the statutory results for the year ended 31 December 2008 do not. In order to enhance the comparability of the results for the two periods, management reviews the 2008 results including the pre-acquisition results of the Alliance & Leicester group for that period. | |
| • | Reorganisation and other costs — These comprise implementation costs in relation to the cost reduction projects including integration-related expenses, as well as certain remediation administration expenses and credit provisions. Management needs to understand the underlying drivers of the cost base that will remain after these exercises are complete, and does not want this view to be clouded by these costs, which are managed independently. | |
| • | Depreciation of operating lease assets — The operating lease businesses are managed as financing businesses and, therefore, management needs to see the margin earned on the businesses. Residual value risk is separately managed. As a result, the depreciation is netted against the related income. | |
| • | Profit on part sale of PFS subsidiaries — These profits are excluded from the results to allow management to understand the underlying performance of the business. In 2009, there were no such profits. In 2008, the profit on the sale of the Porterbrook businesses was excluded. In 2007, the profit on the sale of 49% of James Hay, Cater Allen and Abbey Sharedealing, and small recoveries on certain other transactions were similarly excluded. | |
| • | Hedging and other variances — The Balance Sheet and Income Statement are subject to mark-to-market volatility including that arising from the accounting for elements of derivatives deemed under IFRS rules to be ineffective as hedges. Volatility also arises on certain assets previously managed on a fair value basis, and hence classified as fair value through profit or loss under IFRS, that are now managed on an accruals basis. Where appropriate, such volatility is separately identified to enable management to view the underlying performance of the business. In addition, other variances include the reversal of coupon payments on certain equity instruments which are treated as interest expense in the trading results but are reported below the profit after tax line for statutory purposes. | |
| • | Capital and other charges — These principally comprise internal nominal charges for capital invested in the Group’s businesses. Management implemented this charge to assess the effectiveness of capital investments. |
Transactions between the business segments are on normal commercial terms and conditions. The
accounting policies of the segments are the same as those described in the summary of significant
accounting policies. Internal charges and transfer pricing adjustments have been reflected in the
performance of each business. Revenue sharing agreements are used to allocate external customer
revenues to a business segment on a reasonable basis. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in total trading
income. Interest charged for these funds is based on the Group’s cost of capital.
124
Financial Statements
Notes to the Financial Statements
continued
Interest receivable and interest payable have not been reported separately. The majority of the
revenues from the segments presented below are from interest and the Board relies primarily on net
interest revenues to both assess the performance of the segment and to make decisions regarding
allocation of segmental resources.
Segment assets and liabilities comprise operating assets and liabilities, being the majority
of the balance sheet.
a) Segmental information
2009
| Global | Group | |||||||||||||||||||||||||||||||
| Retail | Corporate | Banking & | Private | Infra- | Adjust- | Group | ||||||||||||||||||||||||||
| Banking | Banking | Markets | Banking | structure | Total | ments | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Net interest income
|
3,257 | 294 | — | 130 | (340 | ) | 3,341 | 71 | 3,412 | |||||||||||||||||||||||
|
Non-interest income
|
707 | 163 | 380 | 34 | 33 | 1,317 | (33 | ) | 1,284 | |||||||||||||||||||||||
|
Total trading income
|
3,964 | 457 | 380 | 164 | (307 | ) | 4,658 | 38 | 4,696 | |||||||||||||||||||||||
|
Administration expenses
|
(1,312 | ) | (168 | ) | (101 | ) | (66 | ) | (145 | ) | (1,792 | ) | (56 | ) | (1,848 | ) | ||||||||||||||||
|
Depreciation & amortisation
|
(130 | ) | (13 | ) | (3 | ) | (2 | ) | (4 | ) | (152 | ) | (108 | ) | (260 | ) | ||||||||||||||||
|
Total trading expenses
|
(1,442 | ) | (181 | ) | (104 | ) | (68 | ) | (149 | ) | (1,944 | ) | (164 | ) | (2,108 | ) | ||||||||||||||||
|
Impairment losses on loans and advances
|
(712 | ) | (31 | ) | — | (2 | ) | (57 | ) | (802 | ) | (40 | ) | (842 | ) | |||||||||||||||||
|
Provisions for other liabilities and charges
|
— | — | — | — | — | — | (56 | ) | (56 | ) | ||||||||||||||||||||||
|
Trading profit/(loss) before tax
|
1,810 | 245 | 276 | 94 | (513 | ) | 1,912 | (222 | ) | 1,690 | ||||||||||||||||||||||
|
Adjust for:
|
||||||||||||||||||||||||||||||||
|
Reorganisation and other costs
|
(79 | ) | — | — | — | (107 | ) | (186 | ) | |||||||||||||||||||||||
|
Hedging and other variances
|
(11 | ) | — | — | — | (25 | ) | (36 | ) | |||||||||||||||||||||||
|
Capital and other charges
|
(180 | ) | (86 | ) | — | 8 | 258 | — | ||||||||||||||||||||||||
|
Profit/(loss) before tax
|
1,540 | 159 | 276 | 102 | (387 | ) | 1,690 | |||||||||||||||||||||||||
|
Average number of staff
|
18,985 | 522 | 115 | 819 | 289 | 20,730 | ||||||||||||||||||||||||||
|
Total assets
|
175,816 | 21,816 | 53,260 | 176 | 34,223 | 285,291 | ||||||||||||||||||||||||||
Adjustments comprise:
| Impairment | Provisions | |||||||||||||||||||||||||||
| Net | Non | Depreciation | on loans | for other | ||||||||||||||||||||||||
| interest | interest | Administration | and | and | liabilities | Profit | ||||||||||||||||||||||
| income | income | expenses | amortisation | advances | and charges | before tax | ||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
|
Reorganisation and other costs
|
— | — | (56 | ) | (34 | ) | (40 | ) | (56 | ) | (186 | ) | ||||||||||||||||
|
Depreciation on operating lease assets
|
— | 74 | — | (74 | ) | — | — | — | ||||||||||||||||||||
|
Hedging and other variances
|
71 | (107 | ) | — | — | — | — | (36 | ) | |||||||||||||||||||
|
|
71 | (33 | ) | (56 | ) | (108 | ) | (40 | ) | (56 | ) | (222 | ) | |||||||||||||||
Changes in interest and exchange rates mean that period on period comparisons of gross interest
and other trading income and expense are not meaningful and therefore management only consider
these items on a net basis. Similarly, management consider the trading income generated by each
segment on the basis of the margin earned on the customer relationship. There is therefore no
split that is meaningful of trading income between external customers and intra-Group. No analysis
of total trading income from external customers and intra-Group is therefore presented.
2008
| Global | Group | |||||||||||||||||||||||||||||||
| Retail | Corporate | Banking & | Private | Infra- | Adjust- | Group | ||||||||||||||||||||||||||
| Banking | Banking | Markets | Banking | structure | Total | ments | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Net interest income
|
2,282 | 134 | — | 99 | (126 | ) | 2,389 | (617 | ) | 1,772 | ||||||||||||||||||||||
|
Non-interest income
|
836 | 264 | 326 | 37 | 42 | 1,505 | (273 | ) | 1,232 | |||||||||||||||||||||||
|
Total trading income
|
3,118 | 398 | 326 | 136 | (84 | ) | 3,894 | (890 | ) | 3,004 | ||||||||||||||||||||||
|
Administration expenses
|
(1,274 | ) | (219 | ) | (104 | ) | (63 | ) | (169 | ) | (1,829 | ) | 486 | (1,343 | ) | |||||||||||||||||
|
Depreciation & amortisation
|
(84 | ) | (20 | ) | (3 | ) | (1 | ) | (3 | ) | (111 | ) | (91 | ) | (202 | ) | ||||||||||||||||
|
Total trading expenses
|
(1,358 | ) | (239 | ) | (107 | ) | (64 | ) | (172 | ) | (1,940 | ) | 395 | (1,545 | ) | |||||||||||||||||
|
Impairment losses on loans and advances
|
(442 | ) | (44 | ) | — | (3 | ) | — | (489 | ) | 141 | (348 | ) | |||||||||||||||||||
|
Provisions for other Liabilities and charges
|
— | — | — | — | — | — | (17 | ) | (17 | ) | ||||||||||||||||||||||
|
Trading profit/(loss) before tax
|
1,318 | 115 | 219 | 69 | (256 | ) | 1,465 | (371 | ) | 1,094 | ||||||||||||||||||||||
|
Adjust for:
|
||||||||||||||||||||||||||||||||
|
A&L pre-acquisition trading basis results
|
(300 | ) | (34 | ) | — | (8 | ) | 178 | (164 | ) | ||||||||||||||||||||||
|
Reorganisation and other costs
|
(121 | ) | — | — | — | (42 | ) | (163 | ) | |||||||||||||||||||||||
|
Profit on part sale of PFS subsidiaries
|
— | 40 | — | — | — | 40 | ||||||||||||||||||||||||||
|
Hedging and other variances
|
— | — | — | — | (84 | ) | (84 | ) | ||||||||||||||||||||||||
|
Capital and other charges
|
(103 | ) | (14 | ) | — | 16 | 101 | — | ||||||||||||||||||||||||
|
Profit/(loss) before tax
|
794 | 107 | 219 | 77 | (103 | ) | 1,094 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Average number of staff
|
13,475 | 226 | 300 | 638 | 190 | 14,829 | ||||||||||||||||||||||||||
|
Total assets
|
166,681 | 20,057 | 52,558 | 179 | 57,835 | 297,310 | ||||||||||||||||||||||||||
125
Financial Statements
Notes to the Financial Statements
continued
Adjustments comprise:
| Provisions for | ||||||||||||||||||||||||||||
| Net | Non | Depreciation | Impairment | other | Profit | |||||||||||||||||||||||
| interest | interest | Administration | and | on loans and | liabilities and | before | ||||||||||||||||||||||
| income | income | expenses | amortisation | advances | charges | tax | ||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
|
A&L pre-acquisition trading basis results
|
(617 | ) | (330 | ) | 552 | 48 | 183 | — | (164 | ) | ||||||||||||||||||
|
Reorganisation and other costs
|
— | (16 | ) | (66 | ) | (22 | ) | (42 | ) | (17 | ) | (163 | ) | |||||||||||||||
|
Depreciation on operating lease assets
|
— | 117 | — | (117 | ) | — | — | — | ||||||||||||||||||||
|
Profit on part sale of PFS subsidiaries
|
— | 40 | — | — | — | — | 40 | |||||||||||||||||||||
|
Hedging and other variances
|
— | (84 | ) | — | — | — | — | (84 | ) | |||||||||||||||||||
|
|
(617 | ) | (273 | ) | 486 | (91 | ) | 141 | (17 | ) | (371 | ) | ||||||||||||||||
The comparative trading basis segmental results analyses above for the year ended 31 December
2008 include the pre-acquisition trading basis results for the Alliance & Leicester group for the
reasons described in the section entitled ‘Alliance & Leicester pre-acquisition trading basis
results’ on the previous page.
The Alliance & Leicester group was not part of the Group at that time, and the inclusion of
these pre-acquisition trading basis results in the 2008 comparatives in the internal segmental
information reviewed by the Board is intended only to enhance the comparability of the results for
the two periods. These pre-acquisition trading basis results do not form part of the statutory
results of the Group for the year ended 31 December 2008. The inclusion of these results in the
internal segmental information reviewed by the Board is not intended to imply that the Alliance &
Leicester group was part of the Group at that time, and should not be interpreted as attempting to
do so.
Details of the pre-acquisition financial information included above, by segment, are as
follows:
Alliance & Leicester group full year trading basis results for the year ended 31 December 2008
| Retail | Corporate | Private | Group | |||||||||||||||||
| Banking | Banking | Banking | Infra-structure | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net interest income
|
592 | 147 | 10 | (132 | ) | 617 | ||||||||||||||
|
Non-interest income
|
211 | 131 | 2 | (14 | ) | 330 | ||||||||||||||
|
Total trading income
|
803 | 278 | 12 | (146 | ) | 947 | ||||||||||||||
|
Administration expenses
|
(344 | ) | (174 | ) | (4 | ) | (30 | ) | (552 | ) | ||||||||||
|
Depreciation & amortisation
|
(26 | ) | (20 | ) | — | (2 | ) | (48 | ) | |||||||||||
|
Total operating expenses excluding provisions and charges
|
(370 | ) | (194 | ) | (4 | ) | (32 | ) | (600 | ) | ||||||||||
|
Impairment losses on loans and advances
|
(133 | ) | (50 | ) | — | — | (183 | ) | ||||||||||||
|
Total operating provisions and charges
|
(133 | ) | (50 | ) | — | — | (183 | ) | ||||||||||||
|
Trading profit/(loss) before tax
|
300 | 34 | 8 | (178 | ) | 164 | ||||||||||||||
2007
| Global | Group | |||||||||||||||||||||||||||||||
| Retail | Corporate | Banking & | Private | Infra- | Adjust- | Group | ||||||||||||||||||||||||||
| Banking | Banking | Markets | Banking | structure | Total | ments | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Net interest income
|
1,538 | (31 | ) | — | 70 | (78 | ) | 1,499 | — | 1,499 | ||||||||||||||||||||||
|
Non-interest income
|
635 | 132 | 260 | 34 | 55 | 1,116 | 167 | 1,283 | ||||||||||||||||||||||||
|
Total trading income
|
2,173 | 101 | 260 | 104 | (23 | ) | 2,615 | 167 | 2,782 | |||||||||||||||||||||||
|
Administration expenses
|
(937 | ) | (30 | ) | (105 | ) | (59 | ) | (105 | ) | (1,236 | ) | (133 | ) | (1,369 | ) | ||||||||||||||||
|
Depreciation & amortisation
|
(59 | ) | — | (2 | ) | (2 | ) | — | (63 | ) | (142 | ) | (205 | ) | ||||||||||||||||||
|
Total trading expenses
|
(996 | ) | (30 | ) | (107 | ) | (61 | ) | (105 | ) | (1,299 | ) | (275 | ) | (1,574 | ) | ||||||||||||||||
|
Impairment losses on loans and advances
|
(239 | ) | 29 | — | (2 | ) | — | (212 | ) | (132 | ) | (344 | ) | |||||||||||||||||||
|
Trading profit/(loss) before tax
|
938 | 100 | 153 | 41 | (128 | ) | 1,104 | (240 | ) | 864 | ||||||||||||||||||||||
|
Adjust for:
|
||||||||||||||||||||||||||||||||
|
Reorganisation and other costs
|
(139 | ) | — | (6 | ) | (1 | ) | (132 | ) | (278 | ) | |||||||||||||||||||||
|
Profit on part sale of PFS subsidiaries
|
— | 5 | — | — | 105 | 110 | ||||||||||||||||||||||||||
|
Hedging and other variances
|
— | — | — | — | (72 | ) | (72 | ) | ||||||||||||||||||||||||
|
Capital and other charges
|
(89 | ) | (11 | ) | — | 19 | 81 | — | ||||||||||||||||||||||||
|
Profit/(loss) before tax
|
710 | 94 | 147 | 59 | (146 | ) | 864 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Average number of staff
|
13,269 | 166 | 389 | 858 | 221 | 14,903 | ||||||||||||||||||||||||||
|
Total assets
|
114,306 | 9,357 | 54,029 | 211 | 21,720 | 199,623 | ||||||||||||||||||||||||||
Adjustments comprise:
| Non | Depreciation | Impairment on | Provisions for | Profit | ||||||||||||||||||||
| interest | Administration | and | loans and | other liabilities | before | |||||||||||||||||||
| income | expenses | amortisation | advances | and charges | tax | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Reorganisation and other costs
|
— | (133 | ) | (13 | ) | (132 | ) | — | (278 | ) | ||||||||||||||
|
Depreciation on operating lease assets
|
129 | — | (129 | ) | — | — | — | |||||||||||||||||
|
Profit on part sale of PFS subsidiaries
|
110 | — | — | — | — | 110 | ||||||||||||||||||
|
Hedging and other variances
|
(72 | ) | — | — | — | — | (72 | ) | ||||||||||||||||
|
|
167 | (133 | ) | (142 | ) | (132 | ) | — | (240 | ) | ||||||||||||||
126
Financial Statements
Notes to the Financial Statements
continued
b) Geographical information
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Total operating income
|
||||||||||||
|
United Kingdom
|
4,625 | 2,974 | 2,678 | |||||||||
|
Other
|
71 | 30 | 104 | |||||||||
|
|
4,696 | 3,004 | 2,782 | |||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Total assets other than financial instruments, current tax assets and deferred tax assets
|
||||||||
|
United Kingdom
|
2,842 | 2,704 | ||||||
|
Other
|
4 | 2 | ||||||
|
|
2,846 | 2,706 | ||||||
2. Net interest income
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Interest and similar income:
|
||||||||||||
|
Loans and advances to banks
|
155 | 448 | 227 | |||||||||
|
Loans and advances to customers
|
6,823 | 7,394 | 6,747 | |||||||||
|
Other interest-earning financial assets
|
340 | 73 | 69 | |||||||||
|
Total interest and similar income
|
7,318 | 7,915 | 7,043 | |||||||||
|
Interest expense and similar charges:
|
||||||||||||
|
Deposits by banks
|
193 | 218 | 200 | |||||||||
|
Deposits by customers
|
2,256 | 3,155 | 2,905 | |||||||||
|
Debt securities in issue and other borrowed funds
|
865 | 2,218 | 1,955 | |||||||||
|
Other interest-bearing financial liabilities
|
592 | 552 | 484 | |||||||||
|
Total interest expense and similar charges
|
3,906 | 6,143 | 5,544 | |||||||||
|
Net interest income
|
3,412 | 1,772 | 1,499 | |||||||||
3. Net fee and commission income
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Fee and commission income:
|
||||||||||||
|
Retail products
|
674 | 461 | 450 | |||||||||
|
Insurance products
|
158 | 155 | 201 | |||||||||
|
Asset management
|
154 | 152 | 134 | |||||||||
|
Total fee and commission income
|
986 | 768 | 785 | |||||||||
|
Fee and commission expense:
|
||||||||||||
|
Other fees paid
|
162 | 97 | 90 | |||||||||
|
Total fee and commission expense
|
162 | 97 | 90 | |||||||||
|
Net fee and commission income
|
824 | 671 | 695 | |||||||||
4. Net trading and other income
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Net trading and funding of other items by the trading book
|
187 | 54 | 260 | |||||||||
|
Income from operating lease assets
|
95 | 223 | 245 | |||||||||
|
Income on assets designated at fair value through profit or loss
|
95 | 916 | 368 | |||||||||
|
Expense on liabilities designated at fair value through profit or loss
|
(117 | ) | (435 | ) | (382 | ) | ||||||
|
Gains/(losses) on derivatives managed with assets/liabilities held at fair value through profit or loss
|
230 | (396 | ) | (19 | ) | |||||||
|
Profit on sale of a non-controlling interest in subsidiary undertakings
|
— | — | 105 | |||||||||
|
Profit on sale of subsidiary undertakings
|
— | 40 | 7 | |||||||||
|
Profit/(loss) on sale of fixed assets
|
2 | (17 | ) | 5 | ||||||||
|
Hedge ineffectiveness and other
|
(32 | ) | 176 | (2 | ) | |||||||
|
|
460 | 561 | 587 | |||||||||
127
Financial Statements
Notes to the Financial Statements
continued
5. Administration expenses
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Staff costs:
|
||||||||||||
|
Wages and salaries
|
697 | 545 | 529 | |||||||||
|
Social security costs
|
71 | 45 | 42 | |||||||||
|
Pensions costs: — defined contribution plans
|
20 | 8 | 7 | |||||||||
|
— defined benefit plans
|
55 | 47 | 62 | |||||||||
|
Other personnel costs
|
62 | 50 | 77 | |||||||||
|
|
905 | 695 | 717 | |||||||||
|
Property, plant and equipment expenses
|
227 | 182 | 191 | |||||||||
|
Information technology expenses
|
311 | 201 | 195 | |||||||||
|
Other administration expenses
|
405 | 265 | 266 | |||||||||
|
|
1,848 | 1,343 | 1,369 | |||||||||
Included in wages and salaries is £5m (2008: £7m, 2007: £3m) which arose from equity-settled
share-based payments, of which £nil (2008: £nil, 2007: £3m) related to option-based schemes. Also
included in wages and salaries was £5m (2008: release of £28m, 2007: £8m) which arose from
cash-settled share-based payments.
6. Depreciation and amortisation
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Depreciation of property, plant and equipment excluding operating lease assets
|
163 | 78 | 76 | |||||||||
|
Depreciation of operating lease assets
|
75 | 117 | 129 | |||||||||
|
Amortisation of intangible fixed assets
|
22 | 7 | — | |||||||||
|
|
260 | 202 | 205 | |||||||||
7. Audit and other services
The fees for audit and other services payable to the Company’s auditors, Deloitte LLP, are
analysed as follows:
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Audit fees:
|
||||||||||||
|
- Fees payable to the Company’s auditor for the audit of the Group’s annual accounts
|
1.9 | 1.6 | 1.2 | |||||||||
|
- Fees payable to the Company’s auditor and its associates for the audit of the
Company’s subsidiaries pursuant to legislation
|
2.3 | 1.6 | 1.6 | |||||||||
|
Total audit fees
|
4.2 | 3.2 | 2.8 | |||||||||
|
Non-audit fees:
|
||||||||||||
|
Other assurance services
|
||||||||||||
|
- Other services pursuant to legislation
|
1.2 | 0.7 | 1.4 | |||||||||
|
- Tax compliance services
|
— | — | — | |||||||||
|
- Other assurance
|
0.4 | 0.8 | 0.6 | |||||||||
|
Total assurance services fees
|
1.6 | 1.5 | 2.0 | |||||||||
|
Other services
|
||||||||||||
|
- Tax services
|
0.7 | 0.4 | — | |||||||||
|
- Other services
|
— | — | 0.1 | |||||||||
|
Total other services
|
0.7 | 0.4 | 0.1 | |||||||||
|
Total non-audit fees
|
2.3 | 1.9 | 2.1 | |||||||||
Other services pursuant to legislation relate to services carried out by the auditors in
relation to statutory and regulatory filings of the Company and its associates. Of this category,
£1.1m (2008: £0.6m, 2007: £1.2m) accords with the definition of ‘Audit fees’ per US Securities and
Exchange Commission guidance. The remaining £0.1m (2008: £0.1m, 2007: £0.2m) accords with the
definition of ‘Other services’ per that guidance.
Other assurance relates to services performed in connection with securitisation and debt
issuances. Of this category, £nil (2008: £0.2m, 2007: £0.1m) accords with the definition of ‘Audit
fees’ per US Securities and Exchange Commission guidance. Of the remaining balance £0.3m (2008:
£0.3m, 2007: £0.2m) accords with the definition of ‘Audit related fees’ per that guidance and £0.1m
(2008: £0.3m, 2007: £0.3m) accords with the definition of ‘Other services’ per that definition.
No information technology, internal audit, valuation and actuarial, litigation, recruitment
and remuneration or corporate finance services were provided by the external auditors during these
years. A framework for ensuring auditors’ independence has been adopted which defines unacceptable
non-audit assignments, pre-approval of acceptable non-audit assignments and procedures for approval
of acceptable non-audit assignments by the Audit and Risk Committee. All services provided by the
Group’s external auditors are either pre-approved or approved by the Audit and Risk Committee.
128
Financial Statements
Notes to the Financial Statements
continued
8. Impairment losses/(recoveries) on loans and advances
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Impairment losses on loans and advances
|
897 | 394 | 388 | |||||||||
|
Recoveries of loans and advances
|
(55 | ) | (46 | ) | (44 | ) | ||||||
|
|
842 | 348 | 344 | |||||||||
9. Taxation charge
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Current tax:
|
||||||||||||
|
UK corporation tax on profit of the year
|
124 | 218 | 122 | |||||||||
|
Adjustments and reclassifications in respect of prior periods
|
(117 | ) | (65 | ) | (31 | ) | ||||||
|
Total current tax
|
7 | 153 | 91 | |||||||||
|
Deferred tax:
|
||||||||||||
|
Current year
|
388 | 95 | 68 | |||||||||
|
Adjustments and reclassifications in respect of prior periods
|
50 | 27 | 20 | |||||||||
|
Total deferred tax
|
438 | 122 | 88 | |||||||||
|
Tax on profit for the year
|
445 | 275 | 179 | |||||||||
UK corporation tax is calculated at 28% (2008: 28.5%, 2007: 30%) of the estimated assessable
profits for the year. The standard rate of UK corporation tax was reduced from 30% to 28% with
effect from 1 April 2008. Taxation for other jurisdictions is calculated at the rates prevailing in
the relevant jurisdictions.
The tax on the Group’s profit before tax differs from the theoretical amount that would arise
using the basic tax rate of the Company as follows:
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Profit before tax
|
1,690 | 1,094 | 864 | |||||||||
|
Tax calculated at a tax rate of 28% (2008: 28.5%, 2007: 30%)
|
473 | 310 | 259 | |||||||||
|
Non taxable gain on sale of subsidiary undertakings
|
(5 | ) | (11 | ) | (33 | ) | ||||||
|
Non deductible preference dividends paid
|
8 | 8 | 9 | |||||||||
|
Effect of non-allowable provisions and other non-equalised items
|
51 | 19 | (10 | ) | ||||||||
|
Non-taxable dividend income
|
(4 | ) | (5 | ) | (3 | ) | ||||||
|
Effect of non-UK profits and losses
|
(8 | ) | (8 | ) | (11 | ) | ||||||
|
Utilisation of capital losses for which credit not previously recognised
|
(3 | ) | — | (11 | ) | |||||||
|
Effect of change in tax rate on deferred tax provision
|
— | — | (10 | ) | ||||||||
|
Adjustment to prior year provisions
|
(67 | ) | (38 | ) | (11 | ) | ||||||
|
Income tax expense
|
445 | 275 | 179 | |||||||||
In addition to the income tax expense charged to profit or loss, a deferred tax asset of £172m
(2008: £8m, 2007: £9m) has been recognised in equity in the year. Further information about
deferred income tax is presented in Note 25.
10. Profit/(loss) on ordinary activities after tax
The profit after tax of the Company attributable to the shareholders was £747m (2008: £1,328m,
2007: £351m). As permitted by Section 408 of the UK Companies Act 2006, the Company’s profit and
loss account has not been presented in these Consolidated Financial Statements.
11. Cash and balances with central banks
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Cash in hand
|
710 | 804 | 308 | 347 | ||||||||||||
|
Balances with central banks
|
3,453 | 3,213 | 2,958 | 2,109 | ||||||||||||
|
|
4,163 | 4,017 | 3,266 | 2,456 | ||||||||||||
For regulatory purposes, certain minimum cash balances are required to be maintained with the
Bank of England. At 31 December 2009, these amounted to £184m (2008: £171m).
129
Financial Statements
Notes to the Financial Statements
continued
12. Trading assets
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Balances with central banks
|
— | 2,498 | ||||||
|
Loans and advances to banks
|
5,252 | 4,947 | ||||||
|
Loans and advances to customers
|
10,628 | 1,310 | ||||||
|
Debt securities
|
15,932 | 16,801 | ||||||
|
Equity securities
|
1,478 | 708 | ||||||
|
|
33,290 | 26,264 | ||||||
Debt securities can be analysed by type of issuer as follows:
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Issued by public bodies:
|
||||||||
|
- Government securities
|
2,856 | 3,139 | ||||||
|
Issued by other issuers:
|
||||||||
|
- Bank and building society certificates of deposit: Government guaranteed
|
205 | 3,119 | ||||||
|
- Bank and building society certificates of deposit: Other
|
1,730 | 5,266 | ||||||
|
- Floating rate notes
|
3,038 | 4,724 | ||||||
|
- Floating rate notes: Government guaranteed
|
8,090 | 553 | ||||||
|
- Other debt securities: Other
|
13 | — | ||||||
|
|
15,932 | 16,801 | ||||||
Debt securities and equity securities can be analysed by listing status as follows:
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Debt securities:
|
||||||||
|
- Listed in the UK
|
12,803 | 9,576 | ||||||
|
- Listed elsewhere
|
3,129 | 7,225 | ||||||
|
- Unlisted
|
— | — | ||||||
|
|
15,932 | 16,801 | ||||||
|
Equity securities:
|
||||||||
|
- Listed in the UK
|
1,183 | 317 | ||||||
|
- Listed elsewhere
|
295 | 391 | ||||||
|
|
1,478 | 708 | ||||||
The Company has no trading assets (2008: nil).
13. Derivative financial instruments
All derivatives are required to be held at fair value through profit or loss. Derivatives are
classified as held for trading unless they are designated as being in a hedge relationship.
Derivatives are held for trading or for risk management purposes. The Group chooses to designate
certain derivatives as in a hedging relationship if they meet specific criteria.
Derivatives held for trading purposes
Global Banking & Markets is the only area of the Group actively trading derivative products and is
additionally responsible for implementing Group derivative hedging with the external market. For
trading activities, its objectives are to gain value by:
| • | Marketing derivatives to end users and hedging the resulting exposures efficiently; and | |
| • | The management of trading exposure reflected on the Group’s balance sheet. |
Trading derivatives include interest rate, cross currency, equity, 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 held for risk management purposes
The main derivatives are interest rate and cross-currency swaps, which are used to hedge the
Group’s exposure to interest rates and exchange rates. These risks are inherent in non-trading
assets, liabilities and positions, including fixed-rate lending and structured savings products
within the relevant operations throughout the Group, including medium-term note issues, capital
issues and fixed-rate asset purchases.
130
Financial Statements
Notes to the Financial Statements
continued
The derivatives table in the Market Risk discussion within the Group Infrastructure section of the
Risk Management Report summarises activities undertaken by the Group, the related risks associated
with such activities and the types of derivative used in managing such risks. Such risks may also
be managed using natural offsets within other on-balance sheet instruments as part of an integrated
approach to risk management.
Derivative products which are combinations of more basic derivatives (such as swaps with
embedded option features), or which have leverage features, may be used in circumstances where the
underlying position being hedged contains the same risk features. In such cases, the derivative
used will be structured to match the risks of the underlying asset or liability. Exposure to market
risk on such contracts is therefore hedged. The fair values of derivative instruments held both
for trading and hedging purposes are set out in the following tables. The tables below show the
contract or underlying principal amounts, positive and negative fair values of derivatives analysed
by contract. Contract or notional amounts indicate the volume of business outstanding at the
balance sheet date and do not represent amounts of risk. The fair values represent the amount at
which a contract could be exchanged in an arm’s length transaction, calculated at market rates at
the balance sheet date.
Derivatives classified as held for trading or held for risk management purposes that have not
been designated as in a hedging relationship are classified as derivatives held for trading in the
table below. Derivatives that have been designated as in a hedging relationship are classified as
derivatives held for hedging below.
2009
| Group | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for trading | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
113,036 | 3,101 | 409 | |||||||||
|
- Foreign exchange swaps and forwards
|
22,496 | 164 | 112 | |||||||||
|
|
135,532 | 3,265 | 521 | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
554,709 | 14,905 | 13,226 | |||||||||
|
- Caps, floors and swaptions
|
80,075 | 1,767 | 737 | |||||||||
|
- Futures (exchange traded)
|
89,379 | 4 | — | |||||||||
|
- Forward rate agreements
|
77,170 | 56 | 61 | |||||||||
|
|
801,333 | 16,732 | 14,024 | |||||||||
|
Equity and credit contracts:
|
||||||||||||
|
- Equity index and similar products
|
4,736 | 881 | 1,311 | |||||||||
|
- Equity index options (exchange traded)
|
71,662 | 563 | 871 | |||||||||
|
- Credit default swaps and similar products
|
3,737 | 31 | 48 | |||||||||
|
|
80,135 | 1,475 | 2,230 | |||||||||
|
Total derivative assets and liabilities held for trading
|
1,017,000 | 21,472 | 16,775 | |||||||||
2009
| Group | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for fair value hedging | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
6,515 | 860 | — | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
45,093 | 495 | 2,185 | |||||||||
|
Equity and credit contracts:
|
||||||||||||
|
- Equity index and similar products
|
— | — | 3 | |||||||||
|
Total derivative assets and liabilities held for fair value hedging
|
51,608 | 1,355 | 2,188 | |||||||||
|
Total recognised derivative assets and liabilities
|
1,068,608 | 22,827 | 18,963 | |||||||||
2009
| Company | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for trading | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
19,983 | 123 | 2,810 | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
57,029 | 1,093 | 1 | |||||||||
|
- Caps, floors and swaptions
|
146 | 2 | — | |||||||||
|
|
57,175 | 1,095 | 1 | |||||||||
|
Equity and credit contracts:
|
||||||||||||
|
- Equity index and similar products
|
273 | 38 | 190 | |||||||||
|
Total derivative assets and liabilities held for trading
|
77,431 | 1,256 | 3,001 | |||||||||
131
Financial Statements
Notes to the Financial Statements
continued
2009
| Company | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for fair value hedging | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
1,846 | 796 | — | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
4,797 | 487 | 352 | |||||||||
|
Total derivative assets and liabilities held for fair value hedging
|
6,643 | 1,283 | 352 | |||||||||
|
Total recognised derivative assets and liabilities
|
84,074 | 2,539 | 3,353 | |||||||||
2008
| Group | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for trading | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
33,507 | 8,236 | 551 | |||||||||
|
- Foreign exchange swaps and forwards
|
19,563 | 1,421 | 1,129 | |||||||||
|
|
53,070 | 9,657 | 1,680 | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
471,976 | 16,887 | 16,658 | |||||||||
|
- Caps, floors and swaptions
|
44,529 | 1,782 | 1,842 | |||||||||
|
- Futures (exchange traded)
|
55,534 | 232 | — | |||||||||
|
- Forward rate agreements
|
250,324 | 604 | 599 | |||||||||
|
|
822,363 | 19,505 | 19,099 | |||||||||
|
Equity and credit contracts:
|
||||||||||||
|
- Equity index and similar products
|
16,245 | 1,597 | 3,659 | |||||||||
|
- Equity index options (exchange traded)
|
11,564 | 843 | 803 | |||||||||
|
- Credit default swaps and similar products
|
1,854 | 111 | 179 | |||||||||
|
|
29,663 | 2,551 | 4,641 | |||||||||
|
Total derivative assets and liabilities held for trading
|
905,096 | 31,713 | 25,420 | |||||||||
2008
| Group | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for fair value hedging | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
2,595 | 1,136 | — | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
85,183 | 2,276 | 2,390 | |||||||||
|
Total derivative assets and liabilities held for fair value hedging
|
87,778 | 3,412 | 2,390 | |||||||||
|
Total recognised derivative assets and liabilities
|
992,874 | 35,125 | 27,810 | |||||||||
2008
| Company | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for trading | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
22,004 | 1,611 | 3,334 | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
56,457 | 490 | 162 | |||||||||
|
- Caps, floors and swaptions
|
246 | 3 | — | |||||||||
|
|
56,703 | 493 | 162 | |||||||||
|
Equity and credit contracts:
|
||||||||||||
|
- Equity index and similar products
|
685 | 8 | 176 | |||||||||
|
Total derivative assets and liabilities held for trading
|
79,392 | 2,112 | 3,672 | |||||||||
2008
| Company | ||||||||||||
| Contract/ notional | Fair value | Fair value | ||||||||||
| amount | assets | liabilities | ||||||||||
| Derivatives held for fair value hedging | £m | £m | £m | |||||||||
|
Exchange rate contracts:
|
||||||||||||
|
- Cross-currency swaps
|
1,570 | — | 1,394 | |||||||||
|
Interest rate contracts:
|
||||||||||||
|
- Interest rate swaps
|
5,141 | 623 | 327 | |||||||||
|
Total derivative assets and liabilities held for fair value hedging
|
6,711 | 623 | 1,721 | |||||||||
|
Total recognised derivative assets and liabilities
|
86,103 | 2,735 | 5,393 | |||||||||
132
Financial Statements
Notes to the Financial Statements
continued
Net gains or losses arising from fair value hedges included in net trading and other income
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Net gains/(losses):
|
||||||||||||
|
- on hedging instruments
|
647 | 39 | (413 | ) | ||||||||
|
- on hedged items attributable to hedged risks
|
(579 | ) | 53 | 449 | ||||||||
|
|
68 | 92 | 36 | |||||||||
The Group hedges its exposures to various risks, including interest rate risk and foreign
currency risk, in connection with certain mortgage assets, covered bond issuances, and subordinated
and senior debt securities in issue. The gains/(losses) arising on these assets and liabilities
are presented in the table above on a combined basis.
14. Financial assets designated at fair value
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Loans and advances to banks
|
— | — | 160 | 162 | ||||||||||||
|
Loans and advances to customers
|
6,379 | 6,687 | 45 | 44 | ||||||||||||
|
Debt securities
|
5,979 | 4,690 | 36,940 | 47,319 | ||||||||||||
|
|
12,358 | 11,377 | 37,145 | 47,525 | ||||||||||||
Financial assets are designated at fair value through profit or loss where this results in more
relevant information because it significantly reduces a measurement inconsistency that would
otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on
a different basis, or where a contract contains one or more embedded derivatives.
The following assets have been designated at fair value through profit or loss:
| • | Loans and advances to customers, representing certain loans secured on residential property to housing associations. These would otherwise have been measured at amortised cost with the associated derivatives used to economically hedge the risk held for trading and measured at fair value through profit or loss. | |
| • | Debt securities representing holdings of asset-backed securities of £5,929m (2008: £4,690m) and collateralised synthetic obligations of £50m (2008: £nil): |
| • | At the date of their acquisition, the asset-backed securities were managed, and their performance was evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them was provided internally on that basis to the Group’s key management personnel. Almost all of these securities are now managed on an accruals basis, but are not eligible for reclassification under IAS 39. | ||
| • | The collateralised synthetic obligations contain embedded derivatives which would otherwise require bifurcation and separate recognition as derivatives. The collateralised synthetic obligations were initially recognised in 2009 upon the consolidation of the assets of the Group’s Conduit vehicles as described in ‘Exposure to Off-Balance Sheet Entities sponsored by the Group — Secured Loan to Conduit’ in the Risk Management Report. |
The maximum exposure to credit risk on loans and advances designated as held at fair value through
profit or loss at the balance sheet date was £6,261m (2008: £6,335m) for the Group and £204m (2008:
£206m) for the Company. The maximum exposure was mitigated by the Group having a charge over the
residential properties in respect of lending to housing associations. Of the movement in the fair
value of the loans and advances to banks, loans and advances to customers and debt securities an
amount of £247m (2008: £474m) was due to changes in credit spreads.
Debt securities can be analysed by listing status as follows:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Listed in the UK
|
— | — | 18,463 | 26,978 | ||||||||||||
|
Listed elsewhere
|
3,224 | 4,120 | 18,016 | 20,341 | ||||||||||||
|
Unlisted
|
2,755 | 570 | 461 | — | ||||||||||||
|
|
5,979 | 4,690 | 36,940 | 47,319 | ||||||||||||
15. Loans and advances to banks
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Placements with other banks
|
1,605 | 6,648 | 995 | 970 | ||||||||||||
|
Amounts due from parent
|
5,995 | 9,353 | 1 | 1,004 | ||||||||||||
|
Amounts due from associated undertakings
|
1,551 | — | 1 | 334 | ||||||||||||
|
Amounts due from subsidiaries
|
— | — | 108,661 | 114,178 | ||||||||||||
|
|
9,151 | 16,001 | 109,658 | 116,486 | ||||||||||||
133
Financial Statements
Notes to the Financial Statements
continued
During the year, no impairment losses were incurred (2008: £nil, 2007: £nil).
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Repayable: | £m | £m | £m | £m | ||||||||||||
|
On demand
|
1,457 | 3,555 | 5,551 | 7,826 | ||||||||||||
|
In not more than 3 months
|
5,055 | 1,985 | 46,580 | 50,759 | ||||||||||||
|
In more than 3 months but not more than 1 year
|
2,390 | 8,980 | 14,552 | 6,135 | ||||||||||||
|
In more than 1 year but not more than 5 years
|
95 | 61 | 21,951 | 18,263 | ||||||||||||
|
In more than 5 years
|
154 | 1,420 | 21,024 | 33,503 | ||||||||||||
|
|
9,151 | 16,001 | 109,658 | 116,486 | ||||||||||||
16. Loans and advances to customers
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Advances secured on residential properties
|
160,802 | 152,493 | 122,746 | 115,474 | ||||||||||||
|
Corporate loans
|
12,173 | 13,284 | — | 24 | ||||||||||||
|
Finance leases
|
1,602 | 1,792 | — | — | ||||||||||||
|
Other secured advances
|
3,819 | 4,209 | 3,759 | 4,133 | ||||||||||||
|
Other unsecured advances
|
5,250 | 6,747 | 5,036 | 3,082 | ||||||||||||
|
Amounts due from fellow group subsidiaries
|
4,457 | 2,652 | 71 | — | ||||||||||||
|
Amounts due from subsidiaries
|
— | — | 1,036 | 1,328 | ||||||||||||
|
Loans and advances to customers
|
188,103 | 181,177 | 132,648 | 124,041 | ||||||||||||
|
Less: loan loss allowances
|
(1,299 | ) | (1,001 | ) | (899 | ) | (722 | ) | ||||||||
|
Loans and advances to customers, net of loan loss allowances
|
186,804 | 180,176 | 131,749 | 123,319 | ||||||||||||
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Repayable : | £m | £m | £m | £m | ||||||||||||
|
On demand
|
997 | 636 | 534 | 523 | ||||||||||||
|
In no more than 3 months
|
6,591 | 6,712 | 1,575 | 1,418 | ||||||||||||
|
In more than 3 months but not more than 1 year
|
4,909 | 5,974 | 3,311 | 2,532 | ||||||||||||
|
In more than 1 year but not more than 5 years
|
26,411 | 25,585 | 14,653 | 13,248 | ||||||||||||
|
In more than 5 years
|
149,195 | 142,270 | 112,575 | 106,320 | ||||||||||||
|
Loans and advances to customers
|
188,103 | 181,177 | 132,648 | 124,041 | ||||||||||||
|
Less: loan loss allowances
|
(1,299 | ) | (1,001 | ) | (899 | ) | (722 | ) | ||||||||
|
Loans and advances to customers, net of loan loss allowances
|
186,804 | 180,176 | 131,749 | 123,319 | ||||||||||||
The Group’s leasing subsidiaries enter into finance lease and hire purchase arrangements with
customers, as follows.
Gross investment in finance leases and hire purchase contracts receivable
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Within 1 year
|
240 | 333 | ||||||
|
Between 1-5 years
|
543 | 699 | ||||||
|
In more than 5 years
|
1,570 | 1,556 | ||||||
|
|
2,353 | 2,588 | ||||||
|
Unearned future finance income on finance leases and hire purchase contracts
|
(751 | ) | (797 | ) | ||||
|
Net investment in finance leases and hire purchase contracts
|
1,602 | 1,791 | ||||||
The net investment in finance leases and hire purchase contracts is analysed as follows:
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Within 1 year
|
246 | 230 | ||||||
|
Between 1-5 years
|
435 | 484 | ||||||
|
In more than 5 years
|
921 | 1,077 | ||||||
|
Net investment in finance leases and hire purchase contracts
|
1,602 | 1,791 | ||||||
Included in the carrying value of Net investment in finance leases and hire purchase contracts
is £13m (2008: £48m) residual value at the end of the current lease terms, which will be recovered
through re-letting or sale.
Included within loans and advances to customers are £15,150m (2008: £24,101m) of mortgage
advances assigned to bankruptcy remote special purpose entities, Abbey Covered Bonds LLP and
Alliance & Leicester Covered Bonds LLP. These loans provide security to issues of covered bonds
made by the Company and Alliance & Leicester plc.
134
Financial Statements
Notes to the Financial Statements
continued
Loans and advances to customers have the following interest rate structures:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Fixed rate
|
77,427 | 90,214 | 62,222 | 66,682 | ||||||||||||
|
Variable rate
|
110,676 | 90,963 | 70,426 | 57,359 | ||||||||||||
|
Less: loan loss allowances
|
(1,299 | ) | (1,001 | ) | (899 | ) | (722 | ) | ||||||||
|
|
186,804 | 180,176 | 131,749 | 123,319 | ||||||||||||
Movement in loan loss allowances:
2009
| Group | ||||||||||||||||||||||||
| Loans secured | Other | Other | ||||||||||||||||||||||
| on residential | Corporate | Finance | secured | unsecured | ||||||||||||||||||||
| property | Loans | leases | advances | advances | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
As at 1 January 2009
|
||||||||||||||||||||||||
|
- Individually assessed
|
174 | 13 | — | 37 | 227 | 451 | ||||||||||||||||||
|
- Collectively assessed
|
184 | 289 | 1 | 11 | 65 | 550 | ||||||||||||||||||
|
|
358 | 302 | 1 | 48 | 292 | 1,001 | ||||||||||||||||||
|
Charge/(release) to the income statement:
|
||||||||||||||||||||||||
|
- Individually assessed
|
223 | 172 | 5 | 30 | 539 | 969 | ||||||||||||||||||
|
- Collectively assessed
|
(13 | ) | (117 | ) | — | 1 | (12 | ) | (141 | ) | ||||||||||||||
|
|
210 | 55 | 5 | 31 | 527 | 828 | ||||||||||||||||||
|
Write offs
|
(84 | ) | — | (4 | ) | (17 | ) | (425 | ) | (530 | ) | |||||||||||||
|
At 31 December 2009:
|
||||||||||||||||||||||||
|
- Individually assessed
|
313 | 185 | 1 | 50 | 341 | 890 | ||||||||||||||||||
|
- Collectively assessed
|
171 | 172 | 1 | 12 | 53 | 409 | ||||||||||||||||||
|
|
484 | 357 | 2 | 62 | 394 | 1,299 | ||||||||||||||||||
2008
| Group | ||||||||||||||||||||||||
| Loans secured | Other | Other | ||||||||||||||||||||||
| on residential | Corporate | Finance | secured | unsecured | ||||||||||||||||||||
| property | Loans | leases | advances | advances | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
As at 1 January 2008:
|
||||||||||||||||||||||||
|
- Individually assessed
|
74 | — | — | 32 | 250 | 356 | ||||||||||||||||||
|
- Collectively assessed
|
102 | — | — | 8 | 85 | 195 | ||||||||||||||||||
|
|
176 | — | — | 40 | 335 | 551 | ||||||||||||||||||
|
Charge/(release) to the income statement:
|
||||||||||||||||||||||||
|
- Individually assessed
|
132 | 13 | — | 14 | 239 | 398 | ||||||||||||||||||
|
- Collectively assessed
|
21 | 13 | — | 3 | (41 | ) | (4 | ) | ||||||||||||||||
|
|
153 | 26 | — | 17 | 198 | 394 | ||||||||||||||||||
|
Write offs
|
(32 | ) | — | — | (9 | ) | (262 | ) | (303 | ) | ||||||||||||||
|
Acquired through business combinations
|
61 | 276 | 1 | — | 21 | 359 | ||||||||||||||||||
|
At 31 December 2008:
|
||||||||||||||||||||||||
|
- Individually assessed
|
174 | 13 | — | 37 | 227 | 451 | ||||||||||||||||||
|
- Collectively assessed
|
184 | 289 | 1 | 11 | 65 | 550 | ||||||||||||||||||
|
|
358 | 302 | 1 | 48 | 292 | 1,001 | ||||||||||||||||||
2007
| Group | ||||||||||||||||||||||||
| Loans secured | Other | Other | ||||||||||||||||||||||
| on residential | Corporate | Finance | secured | unsecured | ||||||||||||||||||||
| property | Loans | leases | advances | advances | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
As at 1 January 2007:
|
||||||||||||||||||||||||
|
- Individually assessed
|
45 | — | 1 | 73 | 243 | 362 | ||||||||||||||||||
|
- Collectively assessed
|
60 | — | — | 3 | 111 | 174 | ||||||||||||||||||
|
|
105 | — | 1 | 76 | 354 | 536 | ||||||||||||||||||
|
Charge/(release) to the income statement:
|
||||||||||||||||||||||||
|
- Individually assessed
|
38 | — | — | (17 | ) | 346 | 367 | |||||||||||||||||
|
- Collectively assessed
|
42 | — | — | 5 | (26 | ) | 21 | |||||||||||||||||
|
|
80 | — | — | (12 | ) | 320 | 388 | |||||||||||||||||
|
Write offs
|
(9 | ) | — | (1 | ) | (24 | ) | (339 | ) | (373 | ) | |||||||||||||
|
At 31 December 2007:
|
||||||||||||||||||||||||
|
- Individually assessed
|
74 | — | — | 32 | 250 | 356 | ||||||||||||||||||
|
- Collectively assessed
|
102 | — | — | 8 | 85 | 195 | ||||||||||||||||||
|
|
176 | — | — | 40 | 335 | 551 | ||||||||||||||||||
135
Financial Statements
Notes to the Financial Statements
continued
| Company | ||||||||||||||||||||||||
| Loans secured | Amounts | Other | Other | |||||||||||||||||||||
| on residential | due from | Finance | secured | unsecured | ||||||||||||||||||||
| property | subsidiaries | leases | advances | advances | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
As at 1 January 2009
|
297 | 113 | — | 42 | 270 | 722 | ||||||||||||||||||
|
Charge/(release) to the income statement
|
182 | (15 | ) | — | 31 | 421 | 619 | |||||||||||||||||
|
Write offs
|
(84 | ) | — | — | (18 | ) | (340 | ) | (442 | ) | ||||||||||||||
|
At 31 December 2009
|
395 | 98 | — | 55 | 351 | 899 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
As at 1 January 2008
|
176 | 136 | — | 11 | 331 | 654 | ||||||||||||||||||
|
Charge/(release) to the income statement
|
153 | (23 | ) | — | 32 | 197 | 359 | |||||||||||||||||
|
Write offs
|
(32 | ) | — | — | (1 | ) | (258 | ) | (291 | ) | ||||||||||||||
|
At 31 December 2008
|
297 | 113 | — | 42 | 270 | 722 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
As at 1 January 2007
|
105 | 161 | 1 | 4 | 352 | 623 | ||||||||||||||||||
|
Charge/(release) to the income statement
|
80 | (25 | ) | — | 8 | 316 | 379 | |||||||||||||||||
|
Write offs
|
(9 | ) | — | (1 | ) | (1 | ) | (337 | ) | (348 | ) | |||||||||||||
|
At 31 December 2007
|
176 | 136 | — | 11 | 331 | 654 | ||||||||||||||||||
Recoveries:
| Group | ||||||||||||||||||||||||
| Loans secured | Other | Other | ||||||||||||||||||||||
| on residential | Corporate | Finance | secured | unsecured | ||||||||||||||||||||
| property | Loans | leases | advances | advances | Total | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
2009
|
1 | 23 | 1 | — | 30 | 55 | ||||||||||||||||||
|
2008
|
1 | — | — | 12 | 33 | 46 | ||||||||||||||||||
|
2007
|
2 | — | — | 6 | 36 | 44 | ||||||||||||||||||
17. Securitisation of assets
Loans and advances to customers include portfolios of residential mortgage loans, which are
subject to non-recourse finance arrangements. These loans have been purchased by, or assigned to,
special purpose securitisation companies, and have been funded primarily through the issue of
mortgage-backed securities. No gain or loss has been recognised as a result of these sales. These
securitisation companies are consolidated and included in the Group financial statements as
subsidiaries.
Master Trust Structures
The Group makes use of a type of securitisation known as a master trust structure. In this
structure, a pool of assets is assigned to a trust company by the asset originator, initially
funded by the originator. A funding entity acquires beneficial interests in a share of the
portfolios of assets with funds borrowed from qualifying special purpose entities, which at the
same time issue asset-backed securities to third-party investors or the Group. The purpose of the
special purpose entities is to obtain diverse, low cost funding through the issue of asset-backed
securities, or to use the asset-backed securities as collateral for raising funds. The share of the
pool of assets not purchased from the trust company by the funding entity is known as the
beneficial interest of the originator.
Using this structure, the Group has assigned portfolios of residential mortgages and their
related security to Holmes Trustees Limited, a trust company that holds the portfolios of mortgages
on trust for the Company and Holmes Funding Limited and Holmes Funding 2 Limited. In June 2009, two
new entities were incorporated (Holmes Master Issuer 2 plc and Holmes Funding 2 Limited) in order
to enable the separation of the intercompany issuances from the third party issuances. Holmes
Funding Limited and Holmes Funding 2 Limited acquire beneficial interests in the portfolios of
mortgages with funds borrowed from the securitisation companies Holmes Financing (No.s 1, 9, and
10) plc, Holmes Master Issuer plc and Holmes Master Issuer 2 plc.
In January 2009 the remaining mortgages backed securities in Holmes Financing (No. 8) plc were
redeemed. The remaining share of the beneficial interest in residential mortgage loans held by
Holmes Trustees Limited belongs to Santander UK plc, and amounts to £13.0bn at 31 December 2009.
Mortgage backed notes totalling £3.0bn equivalent were redeemed during the year. In April 2008 the
remaining mortgage backed securities in issue in Holmes Financing (No. 6) plc and Holmes Financing
(No. 7) plc were redeemed.
Alliance & Leicester plc established the Fosse Master Trust securitisation structure in 2006.
Notes were issued by Fosse Master Issuer plc to third party investors and the proceeds loaned to
Fosse Funding (No. 1) Limited, which in turn used the funds to purchase beneficial interests in
mortgages held by Fosse Trustee Limited. Mortgage backed notes totalling £0.6bn equivalent were
redeemed during the year.
Alliance & Leicester plc established the Langton Master Trust securitisation structure on 25
January 2008. Notes were issued by Langton Securities (2008-1) plc, Langton Securities (2008-2) plc
and Langton Securities (2008-3) plc to Alliance & Leicester plc, either for the purpose of creating collateral to be used for funding
or for subsequent transfer of Notes to investors outside the Group. Each entity loaned the proceeds
of the Notes issued to Langton Funding (No.1) Limited, which in turn used the funds to purchase a
beneficial interest in the mortgages held by Langton Mortgages Trustee Limited.
136
Financial Statements
Notes to the Financial Statements
continued
The Company and its subsidiaries are under no obligation to support any losses that may be incurred
by the Holmes, Fosse and Langton securitisation companies or holders of the securities and do not
intend to provide such further support. Holders of the securities are only entitled to obtain
payment of principal and interest to the extent that the resources of the Holmes, Fosse and Langton
securitisation companies are sufficient to support such payments, and the holders of the securities
have agreed in writing not to seek recourse in any other form.
The Company and its subsidiaries receive payments from the securitisation companies in respect
of fees for administering the loans, and payment of deferred consideration for the sale of the
loans. The Company and its subsidiaries have no right or obligation to repurchase the benefit of
any securitised loan, except if certain representations and warranties given by the Company or its
subsidiaries at the time of transfer are breached.
In April and December 2008, Holmes Funding Limited acquired, at book value, additional
beneficial interests in the trust property vested in Holmes Trustees Limited. These further
beneficial interests of £8.2bn and £13.4bn, respectively, were acquired through borrowing from
Holmes Master Issuer plc, which funded its advances to Holmes Funding Limited through the issue of
mortgage backed securities. All of the mortgage backed securities issued in 2008 were acquired by
the Company. It is intended that any future issues will continue to be made from Holmes Master
Issuer plc or Holmes Master Issuer 2 plc.
Bracken Securities plc
In October 2007 Alliance & Leicester plc securitised £10,367m of residential mortgage assets to
Bracken Securities plc. Notes of £10,367m were issued by Bracken Securities plc to Alliance &
Leicester plc, either for the purpose of creating collateral to be used for funding or for
subsequent transfer of Notes to investors outside the Alliance & Leicester group.
Outstanding balances of assets securitised and non-recourse finance under the Holmes structure at
31 December 2009 were:
| Gross assets | Non-recourse | Issued to Santander | ||||||||||||||
| Closing date of | securitised | finance | UK plc as collateral | |||||||||||||
| Securitisation company | securitisation | £m | £m | £m | ||||||||||||
|
Holmes Financing (No. 1) plc
|
26 July 2000 | 275 | 275 | — | ||||||||||||
|
Holmes Financing (No. 9) plc
|
8 December 2005 | 1,053 | 1,658 | — | ||||||||||||
|
Holmes Financing (No. 10) plc
|
8 August 2006 | 1,526 | 1,639 | — | ||||||||||||
|
Holmes Master Issuer plc — 2006/1
|
28 November 2006 | 1,767 | 2,015 | — | ||||||||||||
|
Holmes Master Issuer plc — 2007/1
|
28 March 2007 | 3,392 | 4,985 | — | ||||||||||||
|
Holmes Master Issuer plc — 2007/2
|
20 June 2007 | 4,319 | 5,263 | — | ||||||||||||
|
Holmes Master Issuer plc — 2007/3
|
21 December 2007 | 7,259 | — | 8,914 | ||||||||||||
|
Holmes Master Issuer plc — 2008/1
|
10 April 2008 | 8,240 | — | 9,103 | ||||||||||||
|
Holmes Master Issuer plc — 2008/2
|
19 December 2008 | 12,758 | — | 13,209 | ||||||||||||
|
Beneficial interest in mortgages held by Holmes Trustees Ltd
|
12,980 | — | — | |||||||||||||
|
|
53,569 | 15,835 | 31,226 | |||||||||||||
The gross assets securitised represent the interest in the trust property held by Holmes
Funding Limited related to the debt issued by the securitisation companies. The beneficial interest
in the mortgages held by Holmes Trustees Limited represents the proportion of the funds required to
be retained in the trust as part of the master trust structure.
The Holmes securitisation companies have placed cash deposits totalling £1.8bn, which have
been accumulated to finance the redemption of a number of securities issued by the Holmes
securitisation companies. The Holmes securitisation companies’ contractual interest in advances
secured on residential property is therefore reduced by this amount. The Company and its
subsidiaries do not own directly, or indirectly, any of the share capital of any of the
securitisation companies.
The Fosse, Bracken and Langton securitisation companies have cash deposits totalling £115m, which
have been accumulated to finance the redemption of a number of securities issued by the Fosse,
Bracken and Langton securitisation companies. The Fosse, Bracken and Langton securitisation
companies’ contractual interest in advances secured on residential property is therefore reduced by
this amount. The Company and its subsidiaries do not own directly, or indirectly, any of the share
capital of any of the above securitisation companies or their parents.
In March 2010 the Group issued through the Fosse Master Trust the first publicly-placed
mortgage-backed securitisation transaction from a UK bank since 2007; other recent transactions
from UK banks had included an investor put. The transaction was denominated in both pounds sterling
and euro and raised approximately £1.4bn.
Outstanding balances of assets securitised and non-recourse finance under the Fosse, Bracken
and Langton structures at 31 December 2009 were:
| Gross assets | Non-recourse | Issued to A&L plc as | ||||||||||||||
| Closing date | securitised | finance | collateral | |||||||||||||
| Securitisation company | of securitisation | £m | £m | £m | ||||||||||||
|
Fosse Master Issuer plc
|
28 November 2006 | 1,859 | 1,924 | — | ||||||||||||
|
Fosse Master Issuer plc
|
1 August 2007 | 2,050 | 2,080 | — | ||||||||||||
|
Fosse Master Issuer plc
|
21 August 2008 | 287 | 314 | — | ||||||||||||
|
Bracken Securities plc
|
11 October 2007 | 6,736 | — | 6,909 | ||||||||||||
|
Langton Securities (2008-1) plc
|
25 January 2008 | 1,227 | — | 1,228 | ||||||||||||
|
Langton Securities (2008-2) plc
|
5 March 2008 | 2,210 | — | 2,211 | ||||||||||||
|
Langton Securities (2008-3) plc
|
17 June 2008 | 3,521 | — | 3,522 | ||||||||||||
|
Beneficial interest in mortgages held by Fosse Master Trust Ltd
|
2,251 | — | — | |||||||||||||
|
Beneficial interest in mortgages held by Langton Master Trust Ltd
|
1,572 | — | — | |||||||||||||
|
|
21,713 | 4,318 | 13,870 | |||||||||||||
137
Financial Statements
Notes to the Financial Statements
continued
18. Available-for-sale securities
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Debt securities
|
747 | 2,618 | — | — | ||||||||||||
|
Equity securities
|
50 | 45 | 30 | 25 | ||||||||||||
|
|
797 | 2,663 | 30 | 25 | ||||||||||||
Maturities of debt securities:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Due in less than 3 months
|
91 | 1,644 | — | — | ||||||||||||
|
Due in more than 3 months but less than 1 year
|
405 | 970 | — | |||||||||||||
|
Due in more than 1 year but less than 5 years
|
251 | 4 | — | — | ||||||||||||
|
Due in more than one year but not more than 5 years
|
— | — | — | — | ||||||||||||
|
|
747 | 2,618 | — | — | ||||||||||||
Equity securities do not bear interest. Equity securities can be analysed by listing status as
follows:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Listed in the UK
|
11 | 10 | — | — | ||||||||||||
|
Unlisted
|
39 | 35 | 30 | 25 | ||||||||||||
|
|
50 | 45 | 30 | 25 | ||||||||||||
The movement in available-for-sale securities can be summarised as follows:
| Group | Company | |||||||
| £m | £m | |||||||
|
At 1 January 2009
|
2,663 | 25 | ||||||
|
Additions
|
1,133 | 8 | ||||||
|
Redemptions and maturities
|
(3,001 | ) | (3 | ) | ||||
|
Amortisation of discount
|
8 | — | ||||||
|
Movement in fair value
|
(6 | ) | — | |||||
|
At 31 December 2009
|
797 | 30 | ||||||
| Group | Company | |||||||
| £m | £m | |||||||
|
At 1 January 2008
|
40 | 28 | ||||||
|
Additions
|
1,222 | 9 | ||||||
|
Acquired through business combinations
|
1,658 | — | ||||||
|
Redemptions and maturities
|
(286 | ) | (8 | ) | ||||
|
Amortisation of discount
|
21 | — | ||||||
|
Movement in fair value
|
8 | (4 | ) | |||||
|
At 31 December 2008
|
2,663 | 25 | ||||||
| Group | Company | |||||||
| £m | £m | |||||||
|
At 1 January 2007
|
23 | 12 | ||||||
|
Redemptions and maturities
|
(2 | ) | (2 | ) | ||||
|
Movement in fair value
|
19 | 18 | ||||||
|
At 31 December 2007
|
40 | 28 | ||||||
19. Loan and receivable securities
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Loan and receivable securities
|
9,898 | 14,107 | 2 | — | ||||||||||||
These assets were acquired as part of the transfer of Alliance & Leicester plc to the Group.
Upon initial recognition by the Group, the securities were classified as ‘loans and receivables’ as
the Group identified that a rare circumstance of extreme market illiquidity existed at that time.
The Group has the intention to hold the assets for the foreseeable future or until maturity.
138
Financial Statements
Notes to the Financial Statements
continued
In 2009, the Group recognised additional securities as a result of the requirement to consolidate
the assets of the Group’s Conduit vehicles, rather than recognising the Group’s loans to the
Conduit vehicles and treating the assets of the Conduit vehicles as off-balance sheet, as described
in “Exposure to Off-Balance Sheet Entities sponsored by the Group — Secured Loan to Conduit” in the
Risk Management Report on page 84. Upon initial recognition by the Group, these securities were
classified as ‘loans and receivables’.
Detailed analysis of these securities is contained in the Risk Management Report.
20. Investment in subsidiary undertakings
Investments in subsidiaries are held at cost subject to impairment. The movement in investments
in subsidiary undertakings was as follows:
| Company | ||||||||||||
| Cost | Impairment | Net book value | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January 2009
|
5,252 | (105 | ) | 5,147 | ||||||||
|
Additions
|
2,136 | (211 | ) | 1,925 | ||||||||
|
Disposals within the Group/repayment of investment
|
(45 | ) | 11 | (34 | ) | |||||||
|
At 31 December 2009
|
7,343 | (305 | ) | 7,038 | ||||||||
| Cost | Impairment | Net book value | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January 2008
|
5,213 | (160 | ) | 5,053 | ||||||||
|
Additions
|
133 | — | 133 | |||||||||
|
Disposals within the Group
|
(94 | ) | — | (94 | ) | |||||||
|
Write-back of impairments/repayment of investment
|
— | 55 | 55 | |||||||||
|
At 31 December 2008
|
5,252 | (105 | ) | 5,147 | ||||||||
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc (wholly owned by Banco Santander, S.A. and the Company) shares to the Company in
exchange for 12,631,375,230 newly issued ordinary shares of the Company (the ‘Transfer’). The
result of this was to increase the Company’s holding of 35.6% of Alliance & Leicester plc’s equity
voting interests to 100%. Accordingly, the Company is now the immediate parent company of Alliance
& Leicester plc. As described more fully in Note 47, the transfer of Alliance & Leicester plc has
been accounted for by the Company with effect from 10 October 2008, the date on which Banco
Santander, S.A. acquired control of Alliance & Leicester plc.
The ordinary shares of the Company issued as consideration for Banco Santander, S.A.’s holding
of Alliance & Leicester plc shares have been recognised at their nominal value, which is the same
as the fair value of the shares issued by Banco Santander, S.A. in exchange for the shares of
Alliance & Leicester plc plus acquisition costs, and the net assets of Alliance & Leicester plc
have been accounted for by the Company at the fair values recognised by Banco Santander, S.A. at
the time of its acquisition of Alliance & Leicester plc on 10 October 2008. The acquisition price
was £1,281m.
In September 2008, following the announcement by HM Treasury to take Bradford & Bingley plc
into public ownership, the retail deposits, branch network and its related employees, and offshore
entities transferred, under the provisions of the UK Banking (Special Provisions) Act 2008, to the
Company. All of Bradford & Bingley plc’s customer loans and treasury assets, which include all its
mortgage assets, were taken into public ownership. The only entities acquired by the Company were
offshore entities, for which consideration of £208m was paid.
On 17 December 2007, the Company sold 100% of its shareholdings in James Hay, Cater Allen and
Abbey Sharedealing to Santander Private Banking UK Limited, at the time of the transaction a 100%
owned direct subsidiary of the Company, for a total cash consideration of £414m. The companies sold
were Cater Allen Limited, Abbey Stockbrokers Limited, Abbey Stockbrokers (Nominees) Limited, James
Hay Holdings Limited, James Hay Wrap Managers Limited, James Hay Insurance Company Limited, James
Hay Administration Company Limited, James Hay Pension Trustees Limited and Sarum Trustees Limited.
Subsequently, on 17 December 2007, the Company sold 49% of its shareholding in Santander Private
Banking UK Limited to Santander PB UK (Holdings) Limited, a direct subsidiary of Banco Santander,
S.A. for a total cash consideration of £203m.
The principal subsidiaries of the Company at 31 December 2009 are shown below. The Directors
consider that to give full particulars of all subsidiary undertakings would lead to a statement of
excessive length. In accordance with Section 410(2) of the UK Companies Act 2006, the following
information relates to those subsidiary undertakings whose results or financial position, in the
opinion of the Directors, principally affect the results of the Group. Full particulars of all
subsidiary undertakings will be annexed to the Company’s next annual return in accordance with
Section 410(3)(b) of the UK Companies Act 2006.
| Principal subsidiary | Nature of business | % Interest held | Country of incorporation or registration | |||||
|
Abbey National International Limited*
|
Personal finance | 100 | Jersey | |||||
|
Abbey National North America LLC*
|
Funding | 100 | United States | |||||
|
Abbey National Treasury Services plc
|
Treasury operations | 100 | England & Wales | |||||
|
Alliance & Leicester plc
|
Bank, deposit taker | 100 | England & Wales | |||||
|
Alliance & Leicester International Limited*
|
Offshore deposit taking | 100 | Isle of Man | |||||
|
Bradford & Bingley International Limited
|
Bank, deposit taker | 100 | Isle of Man | |||||
|
Cater Allen International Limited*
|
Securities financing | 100 | England & Wales | |||||
|
Cater Allen Limited*
|
Bank, deposit taker | 51 | England & Wales | |||||
| * | Held indirectly through subsidiary companies. |
139
Financial Statements
Notes to the Financial Statements
continued
All the above companies are included in the Consolidated Financial Statements. The Company holds
directly or indirectly 100% of the issued ordinary share capital of its principal subsidiaries,
except for Cater Allen Limited as described above. All companies operate principally in their
country of incorporation or registration. Abbey National Treasury Services plc also has a branch
office in the US and the Cayman Islands. The Company has a branch in the Isle of Man. Alliance &
Leicester plc has a branch in the Isle of Man. The ability of Alliance & Leicester International
Limited to pay dividends to the Company is restricted by regulatory capital requirements. Abbey
National International Limited had a branch in the Isle of Man, which was closed on 1 April 2010.
21. Investment in associated undertakings
The movement in interests in associated undertakings was as follows:
| Group | Company | |||||||
| £m | £m | |||||||
|
At 1 January 2009
|
35 | 741 | ||||||
|
Additional investment
|
35 | 35 | ||||||
|
Share of results
|
5 | — | ||||||
|
Transfer to investment in subsidiary
|
— | (700 | ) | |||||
|
At 31 December 2009
|
75 | 76 | ||||||
| Group | Company | |||||||
| £m | £m | |||||||
|
At 1 January 2008
|
29 | 33 | ||||||
|
Additional investments
|
8 | 708 | ||||||
|
Share of results
|
(2 | ) | — | |||||
|
At 31 December 2008
|
35 | 741 | ||||||
The principal associated undertakings at 31 December 2009 and 2008 were:
2009
| Country of | Assets | Liabilities | Income | Profit/(loss) | % interest | ||||||||||||||||||||
| Name and nature of business | registration | £m | £m | £m | £m | held | |||||||||||||||||||
|
PSA Finance plc, personal finance
|
England and Wales | 3 | — | — | — | 50.0 | |||||||||||||||||||
|
Santander Consumer (UK) plc, consumer finance
|
England and Wales | 2,361 | (2,215 | ) | (134 | ) | 123 | 49.9 | |||||||||||||||||
2008
| Country of | Assets | Liabilities | Income | Profit/(loss) | % interest | |||||||||||||||||||
| Name and nature of business | registration | £m | £m | £m | £m | held | ||||||||||||||||||
|
PSA Finance plc, personal finance
|
England and Wales | 4 | — | 1 | 1 | 50.0 | ||||||||||||||||||
|
Santander Consumer (UK) plc, consumer finance
|
England and Wales | 714 | (647 | ) | 73 | (2 | ) | 49.9 | ||||||||||||||||
All associated undertakings have a year-end of 31 December and are unlisted.
22. Intangible assets
a) Goodwill
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Cost
|
||||||||||||||||
|
At 1 January
|
1,281 | 112 | 419 | — | ||||||||||||
|
Acquisitions
|
4 | 1,169 | — | 419 | ||||||||||||
|
At 31 December
|
1,285 | 1,281 | 419 | 419 | ||||||||||||
|
Accumulated impairment
|
||||||||||||||||
|
At 1 January and 31 December
|
22 | 22 | — | — | ||||||||||||
|
Net book value
|
1,263 | 1,259 | 419 | 419 | ||||||||||||
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc (wholly owned by Banco Santander, S.A. and the Company) shares to the Company in
exchange for 12,631,375,230 newly issued ordinary shares in the Company (the
‘Transfer’). The result of this was to increase the Company’s holding of 35.6% of Alliance &
Leicester plc’s equity voting interests to 100%. Accordingly, the Company is now the immediate
parent company of Alliance & Leicester plc. As described more fully in Note 47, the transfer of
Alliance & Leicester plc has been accounted for by the Company with effect from 10 October 2008,
the date on which Banco Santander, S.A. acquired control of Alliance & Leicester plc.
140
Financial Statements
Notes to the Financial Statements
continued
The ordinary shares of the Company issued as consideration for Banco Santander, S.A.’s holding of
Alliance & Leicester plc shares have been recognised at their nominal value, which is the same as
the fair value of the shares issued by Banco Santander, S.A. in exchange for the shares of Alliance
& Leicester plc plus acquisition costs, and the net assets of Alliance & Leicester plc have been
accounted for by the Company at the fair values recognised by Banco Santander, S.A. at the time of
its acquisition of Alliance & Leicester plc on 10 October 2008. The acquisition price was £1,281m.
In connection with the acquisition, goodwill of £774m was recognised, which is attributable to the
anticipated increase in revenues arising from a strengthened market position and greater critical
mass, and the anticipated future operating cost synergies arising from the elimination of
duplicated back office and support functions. Adjustments to the value of goodwill arising from the
final allocation of the aggregate purchase price as at the acquisition date are set out in Note 48.
In September 2008, following the announcement by HM Treasury to take Bradford & Bingley plc
into public ownership, the retail deposits, branch network and its related employees transferred,
under the provisions of the Banking (Special Provisions) Act 2008, to the Company. All of Bradford
& Bingley plc’s customer loans and treasury assets, which include all its mortgage assets, were
taken under public ownership. The transfer to the Company consisted of the £20.0bn retail deposit
base with 2.7 million customers, as well as Bradford & Bingley plc’s direct channels including 197
retail branches, 141 agencies (distribution outlets in third party premises) and related employees.
The acquisition price was £612m, including the transfer of £208m of capital from Bradford & Bingley
plc relating to offshore entities. In connection with the acquisition, goodwill of £395m was
recognised at a Group level, which is attributable to the anticipated increase in revenues arising
from a strengthened market position and greater critical mass, and the anticipated future operating
cost synergies arising from the elimination of duplicated back office and support functions.
Adjustments to the value of goodwill arising from the finalisation of the allocation of the
aggregate purchase price as at the acquisition date are set out in Note 48.
Prior to their acquisition by the Company, the retail deposits, branch network and related
employees of Bradford & Bingley plc were not managed or reported on a stand-alone basis. As a
result, it is not practicable to prepare separate combined financial information for this business
and the Group for the year ended 31 December 2008 as though the acquisition date for the business
combination had been 1 January 2008.
Impairment of goodwill
During the year there was no impairment of goodwill (2008: £nil, 2007: £nil). Impairment testing in
respect of goodwill is performed annually, more frequently if there are impairment indicators
present, and comprises a comparison of the carrying amount of the cash-generating unit with its
recoverable amount: the higher of the cash-generating unit’s net selling price and its value in
use. Net selling price is calculated by reference to the amount at which the asset could be
disposed of in a binding sale agreement in an arm’s length transaction evidenced by an active
market or recent transactions for similar assets. Value in use is calculated by discounting the
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 following cash-generating units include in their carrying values goodwill that comprises
the goodwill reported by the Group. The cash-generating unit does not carry on its balance sheet
any other intangible assets with indefinite useful lives.
| Goodwill | ||||||||||||||||||||||||||||
| 2009 | 2008 | Key | Discount | Growth | ||||||||||||||||||||||||
| Business Division | Cash Generating Unit | £m | £m | Basis of valuation | assumptions | rate | rate | |||||||||||||||||||||
|
Retail Banking
|
Alliance & Leicester | 774 | 774 | Value in use: cash flow | 3 year plan | 10.1 | % | 10 | % | |||||||||||||||||||
|
Retail Banking
|
Cater Allen Private Bank | 90 | 90 | Value in use: cash flow | 3 year plan | 10.1 | % | 10 | % | |||||||||||||||||||
|
Retail Banking
|
Bradford & Bingley savings business | 395 | 395 | Value in use: cash flow | 3 year plan | 10.1 | % | 5 | % | |||||||||||||||||||
b) Other intangibles
| Group | Company | |||||||
| 2009 | 2009 | |||||||
| £m | £m | |||||||
|
Cost
|
||||||||
|
At 1 January 2009
|
95 | 72 | ||||||
|
Additions
|
120 | 82 | ||||||
|
Disposals
|
(3 | ) | (3 | ) | ||||
|
At 31 December 2009
|
212 | 151 | ||||||
|
Accumulated amortisation / impairment
|
||||||||
|
At 1 January 2009
|
7 | 7 | ||||||
|
Charge for the year
|
22 | 11 | ||||||
|
At 31 December 2009
|
29 | 18 | ||||||
|
Net book value
|
183 | 133 | ||||||
141
Financial Statements
Notes to the Financial Statements
continued
| Group | Company | |||||||
| 2008 | 2008 | |||||||
| £m | £m | |||||||
|
Cost
|
||||||||
|
At 1 January 2008
|
— | — | ||||||
|
Additions
|
81 | 68 | ||||||
|
Acquired through business combinations
|
21 | 4 | ||||||
|
Disposals
|
(7 | ) | — | |||||
|
At 31 December 2008
|
95 | 72 | ||||||
|
Accumulated amortisation / impairment
|
||||||||
|
At 1 January 2008
|
— | — | ||||||
|
Charge for the year
|
7 | 7 | ||||||
|
At 31 December 2008
|
7 | 7 | ||||||
|
Net book value
|
88 | 65 | ||||||
Other intangible assets of the Group and the Company consist of computer software.
23. Property, plant and equipment (excluding operating lease assets)
| Group | ||||||||||||||||
| Owner-occupied | Office fixtures | Computer | ||||||||||||||
| properties | and equipment | software | Total | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Cost:
|
||||||||||||||||
|
At 1 January 2009
|
340 | 570 | 385 | 1,295 | ||||||||||||
|
Additions
|
126 | 120 | 16 | 262 | ||||||||||||
|
Disposals
|
(1 | ) | (51 | ) | (14 | ) | (66 | ) | ||||||||
|
At 31 December 2009
|
465 | 639 | 387 | 1,491 | ||||||||||||
|
Accumulated depreciation:
|
||||||||||||||||
|
At 1 January 2009
|
24 | 312 | 105 | 441 | ||||||||||||
|
Charge for the year
|
21 | 81 | 61 | 163 | ||||||||||||
|
Disposals
|
— | (51 | ) | — | (51 | ) | ||||||||||
|
At 31 December 2009
|
45 | 342 | 166 | 553 | ||||||||||||
|
Net book value
|
420 | 297 | 221 | 938 | ||||||||||||
| Group | ||||||||||||||||
| Owner-occupied | Office fixtures | Computer | ||||||||||||||
| properties | and equipment | software | Total | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Cost:
|
||||||||||||||||
|
At 1 January 2008
|
74 | 479 | 359 | 912 | ||||||||||||
|
Acquired through business combinations
|
257 | 60 | — | 317 | ||||||||||||
|
Additions
|
11 | 59 | 39 | 109 | ||||||||||||
|
Disposals
|
(2 | ) | (28 | ) | (13 | ) | (43 | ) | ||||||||
|
At 31 December 2008
|
340 | 570 | 385 | 1,295 | ||||||||||||
|
Accumulated depreciation:
|
||||||||||||||||
|
At 1 January 2008
|
18 | 283 | 83 | 384 | ||||||||||||
|
Charge for the year
|
7 | 49 | 22 | 78 | ||||||||||||
|
Disposals
|
(1 | ) | (20 | ) | — | (21 | ) | |||||||||
|
At 31 December 2008
|
24 | 312 | 105 | 441 | ||||||||||||
|
Net book value
|
316 | 258 | 280 | 854 | ||||||||||||
| Company | ||||||||||||||||
| Owner-occupied | Office fixtures | Computer | ||||||||||||||
| properties | and equipment | software | Total | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Cost:
|
||||||||||||||||
|
At 1 January 2009
|
112 | 498 | 315 | 925 | ||||||||||||
|
Additions
|
11 | 101 | 15 | 127 | ||||||||||||
|
Disposals
|
— | (2 | ) | (15 | ) | (17 | ) | |||||||||
|
At 31 December 2009
|
123 | 597 | 315 | 1,035 | ||||||||||||
|
Accumulated depreciation:
|
||||||||||||||||
|
At 1 January 2009
|
22 | 299 | 35 | 356 | ||||||||||||
|
Charge for the year
|
8 | 52 | 60 | 120 | ||||||||||||
|
Disposals
|
— | (2 | ) | — | (2 | ) | ||||||||||
|
At 31 December 2009
|
30 | 349 | 95 | 474 | ||||||||||||
|
Net book value
|
93 | 248 | 220 | 561 | ||||||||||||
142
Financial Statements
Notes to the Financial Statements
continued
| Company | ||||||||||||||||
| Owner-occupied | Office fixtures | Computer | ||||||||||||||
| properties | and equipment | software | Total | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Cost:
|
||||||||||||||||
|
At 1 January 2008
|
68 | 453 | 279 | 800 | ||||||||||||
|
Acquired through business combinations
|
34 | 10 | — | 44 | ||||||||||||
|
Additions
|
11 | 56 | 39 | 106 | ||||||||||||
|
Disposals
|
(1 | ) | (21 | ) | (3 | ) | (25 | ) | ||||||||
|
At 31 December 2008
|
112 | 498 | 315 | 925 | ||||||||||||
|
Accumulated depreciation:
|
||||||||||||||||
|
At 1 January 2008
|
15 | 271 | 13 | 299 | ||||||||||||
|
Charge for the year
|
7 | 45 | 22 | 74 | ||||||||||||
|
Disposals
|
— | (17 | ) | — | (17 | ) | ||||||||||
|
At 31 December 2008
|
22 | 299 | 35 | 356 | ||||||||||||
|
Net book value
|
90 | 199 | 280 | 569 | ||||||||||||
At 31 December 2009, capital expenditure contracted, but not provided for was £1m (2008: £3m,
2007: £nil) in respect of property, plant and equipment. Of the carrying value at the balance sheet
date £99m (2008: £107m) related to assets under construction.
The cost of office fixtures and equipment held under finance leases was £26m (2008: £26m). At
the balance sheet date, the Group had contracted with lessees for the following future minimum
lease payments in leases relating to freehold properties:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Leases which expire | £m | £m | £m | £m | ||||||||||||
|
Within 1 year
|
1 | — | 1 | — | ||||||||||||
|
Between 1-5 years
|
2 | 3 | 1 | 2 | ||||||||||||
|
In more than 5 years
|
3 | 5 | 3 | 5 | ||||||||||||
|
|
6 | 8 | 5 | 7 | ||||||||||||
24. Operating lease assets
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Cost
|
||||||||
|
At 1 January
|
348 | 3,474 | ||||||
|
Additions
|
81 | 88 | ||||||
|
Acquired through business combinations
|
— | 348 | ||||||
|
Disposals
|
(101 | ) | — | |||||
|
Disposals of subsidiary undertaking
|
— | (3,562 | ) | |||||
|
At 31 December
|
328 | 348 | ||||||
|
Depreciation and impairment
|
||||||||
|
At 1 January
|
— | 1,310 | ||||||
|
Charge for the year
|
75 | 117 | ||||||
|
Disposals
|
(59 | ) | — | |||||
|
Disposals of subsidiary undertaking
|
— | (1,427 | ) | |||||
|
At 31 December
|
16 | — | ||||||
|
Net book value
|
312 | 348 | ||||||
The operating lease assets of the Group consist of commercial vehicles. The Group’s trains and
related assets were sold in 2008 as described in Note 41. The Company has no operating lease
assets.
Future minimum lease receipts under non-cancellable operating leases are due over the
following periods:
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
In no more than 1 year
|
72 | 81 | ||||||
|
In more than 1 year but no more than 5 years
|
99 | 133 | ||||||
|
In more than 5 years
|
26 | 17 | ||||||
|
|
197 | 231 | ||||||
143
Financial Statements
Notes to the Financial Statements
continued
25. Deferred tax
Deferred taxes are calculated on temporary differences under the liability method using the tax
rates expected to apply when the liability is settled or the asset is realised. The movement on the
deferred tax account was as follows:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
At 1 January
|
869 | 121 | 452 | 614 | ||||||||||||
|
Income statement credit/(charge)
|
(438 | ) | (122 | ) | (149 | ) | (174 | ) | ||||||||
|
Credited/(charged) to equity
|
172 | 8 | 116 | 12 | ||||||||||||
|
Acquired through business combinations
|
7 | 416 | 9 | — | ||||||||||||
|
Disposal of subsidiary undertaking
|
— | 446 | — | — | ||||||||||||
|
At 31 December
|
610 | 869 | 428 | 452 | ||||||||||||
Deferred tax assets and liabilities are attributable to the following items:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Deferred tax liabilities
|
||||||||||||||||
|
Accelerated tax depreciation
|
(236 | ) | (193 | ) | — | — | ||||||||||
|
Other temporary differences
|
(100 | ) | (212 | ) | — | (6 | ) | |||||||||
|
|
(336 | ) | (405 | ) | — | (6 | ) | |||||||||
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Deferred tax assets
|
||||||||||||||||
|
Pensions and other post retirement benefits
|
306 | 244 | 264 | 224 | ||||||||||||
|
Accelerated book depreciation
|
178 | 271 | 55 | 66 | ||||||||||||
|
IAS 32 & IAS 39 transitional adjustments
|
78 | 95 | 72 | 76 | ||||||||||||
|
Provision for loan impairment and other provisions
|
13 | 22 | — | — | ||||||||||||
|
Other temporary differences
|
74 | 228 | 37 | 46 | ||||||||||||
|
Tax losses carried forward
|
297 | 414 | — | 46 | ||||||||||||
|
|
946 | 1,274 | 428 | 458 | ||||||||||||
The aggregate current and deferred tax relating to items charged or credited to equity is:
| Group | Company | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Pensions and other post retirement benefits
|
119 | 291 | 300 | 173 | 289 | 301 | ||||||||||||||||||
The deferred tax assets scheduled above have been recognised in both the Company and the Group
on the basis that sufficient future taxable profits are forecast within the foreseeable future, in
excess of the profits arising from the reversal of existing taxable temporary differences, to allow
for the utilisation of the assets as they reverse. Under current UK tax legislation, the tax losses
in respect of which deferred tax assets have been recognised do not expire. The benefit of the tax
losses carried forward in the Company may only be realised by utilisation against the future
taxable profits of the Company.
The deferred tax charge in the income statement comprises the following temporary differences:
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Accelerated tax depreciation
|
(133 | ) | 24 | 1 | ||||||||
|
Pensions and other post-retirement benefits
|
(104 | ) | (63 | ) | (4 | ) | ||||||
|
Provision for loan impairment and other provisions
|
— | — | — | |||||||||
|
IAS 32 & IAS 39 transition adjustments
|
(11 | ) | (20 | ) | (23 | ) | ||||||
|
Tax losses carried forward
|
(63 | ) | (100 | ) | (48 | ) | ||||||
|
Other temporary differences
|
(127 | ) | 37 | (14 | ) | |||||||
|
|
(438 | ) | (122 | ) | (88 | ) | ||||||
144
Financial Statements
Notes to the Financial Statements
continued
26. Other assets
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Trade and other receivables
|
881 | 1,061 | 515 | 831 | ||||||||||||
|
Prepayments
|
75 | 122 | 48 | 47 | ||||||||||||
|
Accrued income
|
30 | 30 | — | — | ||||||||||||
|
General insurance assets
|
88 | 109 | 88 | 109 | ||||||||||||
|
|
1,074 | 1,322 | 651 | 987 | ||||||||||||
27. Deposits by banks
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Items in the course of transmission
|
652 | 1,100 | 570 | 895 | ||||||||||||
|
Sale and repurchase agreements
|
— | 8,816 | — | 3,620 | ||||||||||||
|
Amounts due to subsidiaries
|
— | — | 115,564 | 120,285 | ||||||||||||
|
Amounts due to fellow subsidiaries
|
1,846 | 1,443 | 20 | — | ||||||||||||
|
Amounts due to ultimate parent
|
644 | 667 | 29 | — | ||||||||||||
|
Other deposits
|
2,669 | 2,462 | 231 | 46 | ||||||||||||
|
|
5,811 | 14,488 | 116,414 | 124,846 | ||||||||||||
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Repayable:
|
||||||||||||||||
|
On demand
|
3,716 | 2,375 | 3,333 | 2,907 | ||||||||||||
|
In not more than 3 months
|
1,916 | 8,519 | 23,732 | 17,600 | ||||||||||||
|
In more than 3 months but not more than 1 year
|
24 | 661 | 10,203 | 18,575 | ||||||||||||
|
In more than 1 year but not more than 5 years
|
155 | 2,933 | 71,927 | 53,245 | ||||||||||||
|
In more than 5 years
|
— | — | 7,219 | 32,519 | ||||||||||||
|
|
5,811 | 14,488 | 116,414 | 124,846 | ||||||||||||
28. Deposits by customers
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Retail deposits
|
127,992 | 120,483 | 89,436 | 85,150 | ||||||||||||
|
Amounts due to subsidiaries
|
— | — | 64,531 | 67,801 | ||||||||||||
|
Amounts due to fellow subsidiaries
|
473 | — | 79 | — | ||||||||||||
|
Wholesale deposits by customers
|
15,428 | 9,762 | 5,141 | 2,515 | ||||||||||||
|
|
143,893 | 130,245 | 159,187 | 155,466 | ||||||||||||
|
Repayable:
|
||||||||||||||||
|
On demand
|
105,157 | 102,170 | 77,240 | 67,856 | ||||||||||||
|
In no more than 3 months
|
7,046 | 9,202 | 15,611 | 14,204 | ||||||||||||
|
In more than 3 months but no more than 1 year
|
18,059 | 14,982 | 12,028 | 13,506 | ||||||||||||
|
In more than 1 year but not more than 5 years
|
13,017 | 3,165 | 13,029 | 8,804 | ||||||||||||
|
In more than 5 years
|
614 | 726 | 41,279 | 51,096 | ||||||||||||
|
|
143,893 | 130,245 | 159,187 | 155,466 | ||||||||||||
Retail deposits and wholesale deposits by customers are interest-bearing.
29. Trading liabilities
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Deposits by banks
|
40,824 | 34,341 | — | — | ||||||||||||
|
Deposits by customers
|
4,115 | 4,622 | — | — | ||||||||||||
|
Short positions in securities and unsettled trades
|
1,071 | 751 | — | 739 | ||||||||||||
|
Debt securities in issue
|
142 | 1,024 | — | — | ||||||||||||
|
|
46,152 | 40,738 | — | 739 | ||||||||||||
The total fair value of equity index-linked deposits included above at the balance sheet date
was £2,144m (2008: £2,205m).
145
Financial Statements
Notes to the Financial Statements
continued
30. Financial liabilities designated at fair value
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Deposits by banks
|
45 | 153 | — | — | ||||||||||||
|
Deposits by customers
|
12 | 252 | — | — | ||||||||||||
|
Debt securities in issue — US$4bn Euro Commercial Paper Programme
|
662 | — | — | — | ||||||||||||
|
— US$20bn Euro Medium Term Note Programme
|
3,577 | 4,274 | — | — | ||||||||||||
|
— Other bonds
|
127 | 994 | — | — | ||||||||||||
|
|
4,423 | 5,673 | — | — | ||||||||||||
Financial liabilities are designated at fair value through profit or loss where this results in
more relevant information because it significantly reduces a measurement inconsistency that would
otherwise arise from measuring assets and liabilities or recognising the gains or losses on them on
a different basis. The ‘fair value option’ has been used where deposits by banks, deposits by
customers and debt securities in issue would otherwise be measured at amortised cost, and the
associated derivatives used to economically hedge the risk are held at fair value.
Of the movements in the fair value of the above debt securities in issue £27m (2008: £88m)
result from changes in the Group’s own credit risk. This was calculated by applying current spreads
at the next call date or maturity date to the nominal value of the debt security to determine the
extra cost of the debt for the remaining period of the debt security were it to have been issued at
current spreads.
The amount that would be required to be contractually paid at maturity of the deposits by
banks, deposits by customers, and debt securities in issue above is £129m (2008: £53m) higher than
the carrying value.
US$4bn Euro Commercial Paper Programme
Abbey National Treasury Services plc may from time to time issue the commercial paper under the
US$4bn Euro Commercial Paper Programme that may be denominated in any currency as agreed between
Abbey National Treasury Services plc and the relevant dealer. The Notes rank at least pari passu
with all other unsecured and unsubordinated obligations of Abbey National Treasury Services plc.
The payments of all amounts due in respect of the Notes have been unconditionally and irrevocably
guaranteed by the Company.
The Notes are issued in bearer form, subject to a minimum maturity of 1 day and a maximum
maturity of 364 days. The Notes may be issued on a discounted basis or may bear fixed or floating
rate interest or a coupon calculated by reference to an index or formula. The maximum aggregate
nominal amount of all Notes outstanding from time to time under the Programme will not exceed
US$4bn (or its equivalent in other currencies). The Notes are not listed on any stock exchange.
US$20bn Euro Medium Term Note Programme
Abbey National Treasury Services plc and the Company may from time to time issue notes denominated
in any currency as agreed between the relevant Issuer and the relevant dealer under the US$20bn
Euro Medium Term Note Programme. The payment of all amounts payable in respect of the Senior Notes
is unconditionally and irrevocably guaranteed by the Company. The Programme provides for issuance
of Fixed Rate Notes, Floating Rate Notes, Index Linked Notes, Credit Linked Notes, Equity Linked
Notes and any other structured Notes, and also Dual Currency Notes, Zero Coupon/Discount Notes and
Non-Interest Bearing Notes.
The maximum aggregate nominal amount of all Notes outstanding under the Programme may not
exceed US$20bn (or its equivalent in other currencies) subject to any modifications in accordance
with the terms of the Programme agreement. Notes may be issued in bearer or registered form and can
be listed on the London Stock Exchange or any other or further stock exchange(s) or may be
unlisted, as agreed.
31. Debt securities in issue
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Bonds and medium term notes:
|
||||||||
|
- Euro 25bn Global Covered Bond Programme
|
5,268 | 3,963 | ||||||
|
- Euro 10bn Global Covered Bond Programme
|
— | 2,800 | ||||||
|
- US$20bn euro Medium Term Note Programme (see Note 30)
|
1,566 | 3,313 | ||||||
|
- US$40bn euro Medium Term Note Programme
|
5,876 | 9,683 | ||||||
|
- US$20bn Commercial Paper Programme
|
6,366 | 4,234 | ||||||
|
- Euro 2bn structured notes
|
600 | — | ||||||
|
- Certificates of deposit in issue
|
9,188 | 9,214 | ||||||
|
|
28,864 | 33,207 | ||||||
|
|
||||||||
|
Securitisation programmes:
|
||||||||
|
- Holmes
|
14,704 | 20,269 | ||||||
|
- Fosse
|
4,103 | 4,331 | ||||||
|
|
||||||||
|
Other debt securities in issue
|
87 | 704 | ||||||
|
|
47,758 | 58,511 | ||||||
146
Financial Statements
Notes to the Financial Statements
continued
The Company did not have any outstanding debt securities in issue as at 31 December 2008 and
2009.
Euro 25bn Global Covered Bond Programme
Abbey National Treasury Services plc issues the Covered Bonds under the euro 25bn Global Covered
Bond Programme that may be denominated in any currency as agreed between Abbey National Treasury
Services plc and the relevant dealers under the Programme. The Programme provides that Covered
Bonds may be listed or admitted to trading, on the official list of the UK Listing Authority and on
the London Stock Exchange’s Regulated Market or any other stock exchanges or regulated or
unregulated markets. Abbey National Treasury Services plc may also issue unlisted Covered Bonds
and/or Covered Bonds not admitted to trading on any regulated or unregulated market.
The payments of all amounts due in respect of the Covered Bonds have been unconditionally
guaranteed by the Company. Abbey Covered Bonds LLP (“LLP”), together with the Company have
guaranteed payments of interest and principal under the Covered Bonds pursuant to a guarantee which
is secured over its portfolio of mortgages and its other assets. Recourse against the LLP under
its guarantee is limited to its portfolio of mortgages and such assets.
Covered Bonds may be issued in bearer or registered form. The maximum aggregate nominal amount
of all Covered Bonds from time to time outstanding under the Programme will not exceed euro 25bn
(or its equivalent in other currencies), subject to increase in accordance with the Programme.
On 2 July 2008, the size of the global covered bond programme established in 2005 was
increased from euro 12bn to euro 25bn. On 8 July 2008, the Group issued a series of Covered Bonds
totalling approximately £13bn. All notes were denominated in sterling and were subscribed for by
the Company.
On 11 November 2008, Abbey National Treasury Services plc was admitted to the register of
issuers and the Programme and the Covered Bonds issued previously under the Programme were admitted
to the register of regulated covered bonds, pursuant to Regulation 14 of the Regulated Covered
Bonds Regulations 2008 (SI 2008/346).
Euro 10bn Global Covered Bond Programme
Alliance & Leicester plc previously issued certain Covered Bonds under the euro 10bn Global Covered
Bond Programme. On 17 November 2009, the outstanding Covered Bonds issued under the Programme were
redeemed and the Programme was discontinued.
The Programme provided that Covered Bonds may be listed or admitted to trading, on the
official list of the UK Listing Authority and on the London Stock Exchange’s Regulated Market or
any other stock exchanges or regulated or unregulated markets. The Programme also provided for the
issue of unlisted Covered Bonds and/or Covered Bonds not admitted to trading on any regulated or
unregulated market.
Alliance & Leicester Covered Bonds LLP (“LLP”) guaranteed payments of interest and principal
under the Covered Bonds pursuant to a guarantee which was secured over its portfolio of mortgages
and its other assets. Recourse against LLP under its guarantee was limited to its portfolio of
mortgages and such assets.
US$40bn Euro Medium Term Note Programme
In January 2009, it was decided that no further issuance would be made under the US$40bn Euro
Medium Term Note Programme. Outstanding notes will remain in issue until maturity.
Alliance & Leicester plc issued both senior notes and subordinated notes and from time to time
issued notes denominated in any currency as agreed with the relevant dealer under the US$40bn Euro
Medium Term Notes Programme. The notes are direct, unsecured and unconditional obligations of
Alliance & Leicester plc. The Programme provided for issuance of Fixed Rate Notes, Floating Rate
Notes, Index Linked Notes, Dual Currency Notes and Zero-Coupon Notes. The notes are listed on the
London Stock Exchange or may be listed on any other or further stock exchange(s) or may be
unlisted, as agreed.
The notes were issued in bearer form. The maximum aggregate nominal amount of all notes from
time to time outstanding under the Programme did not exceed US$40bn (or its equivalent in other
currencies), subject to any modifications in accordance with the terms of the Programme agreement.
US$20bn Commercial Paper Programme
Abbey National North America LLC may from time to time issue unsecured notes denominated in United
States dollars as agreed between Abbey National North America LLC and the relevant dealers under
the US$20bn US commercial paper programme. The Notes will rank at least pari passu with all
other unsecured and unsubordinated indebtedness of Abbey National North America LLC and the
Company. The payments of all amounts due in respect of the Notes have been unconditionally and
irrevocably guaranteed by the Company.
The Notes are not redeemable prior to maturity or subject to voluntary prepayment. The maximum
aggregate nominal amount of all Notes from time to time outstanding under the Programme will not
exceed US$20bn (or its equivalent in other currencies).
Euro 2bn structured notes
Abbey National Treasury Services plc may from time to time issue structured notes denominated in
any currency as agreed between Abbey National Treasury Services plc and the relevant dealers under
the euro 2bn structured note programme. Structured notes are direct, unsecured and unconditional
obligations of Abbey National Treasury Services plc that rank pari passu without preference among
themselves and, subject as to any applicable statutory provisions or judicial order, at least
equally with all other present and future unsecured and unsubordinated obligations of Abbey
National Treasury Services
plc. The payments of all amounts due in respect of the structured notes have been unconditionally
and irrevocably guaranteed by the Company.
147
Financial Statements
Notes to the Financial Statements
continued
The structured note programme provides for the issuance of Commodity Linked Notes, Credit
Linked Notes, Currency Linked Notes, Equity Linked Notes, Equity Index Linked Notes, Fixed Rate
Notes, Floating Rate Notes, Fund Linked Notes, Inflation Linked Notes, Property Linked Notes, Zero
Coupon/Discount Notes and any other structured notes as agreed between Abbey National Treasury
Services plc and the relevant dealers. Structured notes may be issued in bearer or registered (or
inscribed) form and may be listed on the London Stock Exchange or any other or further stock
exchange(s) or may be unlisted, as agreed between Abbey National Treasury Services plc and the
relevant dealers. Structured notes issued in bearer form may also be issued in new global note
form.
The maximum aggregate nominal amount of all structured notes from time to time outstanding
under the Programme will not exceed euro 2bn (or its equivalent in other currencies).
Securitisation Programmes
The Group has provided prime retail mortgage-backed securitised products to a diverse investor base
through its mortgage backed funding programmes, as described in Note 17. Funding has historically
been raised via mortgage-backed notes, both issued to third parties and retained (the latter being
central bank eligible collateral, both via the Bank of England’s Special Liquidity Scheme facility
and for contingent funding purposes in other Bank of England, European Central Bank, Swiss National
Bank and US Federal Reserve facilities).
An analysis of the above debt securities in issue by issue currency is as follows:
| Group | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Issue currency | Interest rate | Maturity | £m | £m | ||||||||||||
|
Euro
|
0.00% - 3.99 | % | Up to 2010 | 2,452 | 4,818 | |||||||||||
|
|
2011 - 2019 | 5,415 | 3,898 | |||||||||||||
|
|
2020 - 2029 | 1,600 | — | |||||||||||||
|
|
2040 - 2059 | 3,976 | — | |||||||||||||
|
|
4.00% - 4.99 | % | Up to 2010 | — | 525 | |||||||||||
|
|
2011 - 2019 | — | 193 | |||||||||||||
|
|
2020 - 2029 | 1,362 | 1,469 | |||||||||||||
|
|
5.00% - 7.99 | % | Up to 2010 | 276 | 406 | |||||||||||
|
|
2011 - 2029 | — | 2,982 | |||||||||||||
|
|
2030 - 2039 | — | 2,722 | |||||||||||||
|
|
2040 - 2059 | — | 2,105 | |||||||||||||
|
US dollar
|
0.00% - 3.99 | % | Up to 2010 | 14,676 | 9,184 | |||||||||||
|
|
2011 - 2019 | 618 | 95 | |||||||||||||
|
|
2020 - 2029 | 3,841 | — | |||||||||||||
|
|
2030 - 2039 | 556 | — | |||||||||||||
|
|
2040 - 2059 | 3,194 | — | |||||||||||||
|
|
4.00% - 5.99 | % | Up to 2010 | 20 | 985 | |||||||||||
|
|
2011 - 2019 | 49 | 743 | |||||||||||||
|
|
2020 - 2029 | — | 4,340 | |||||||||||||
|
|
2030 - 2039 | — | 4,916 | |||||||||||||
|
|
2040 - 2059 | — | 1,650 | |||||||||||||
|
|
7.00% - 8.99 | % | Up to 2010 | — | 221 | |||||||||||
|
Pounds sterling
|
0.00% - 3.99 | % | Up to 2010 | 963 | 3,930 | |||||||||||
|
|
2011 - 2019 | 1,643 | 1,411 | |||||||||||||
|
|
2020 - 2029 | 838 | — | |||||||||||||
|
|
2040 - 2059 | 3,739 | — | |||||||||||||
|
|
5.00% - 5.99 | % | Up to 2010 | 155 | 2,485 | |||||||||||
|
|
2011 - 2019 | 815 | 18 | |||||||||||||
|
|
6.00% - 6.99 | % | Up to 2010 | 471 | 1,407 | |||||||||||
|
|
2011 - 2019 | 351 | 976 | |||||||||||||
|
|
2020 - 2029 | — | 856 | |||||||||||||
|
|
2030 - 2039 | — | 3,460 | |||||||||||||
|
|
2040 - 2060 | — | 1,388 | |||||||||||||
|
|
7.00% - 8.99 | % | 2011 - 2040 | — | 73 | |||||||||||
|
Other currencies
|
0.00% - 5.99 | % | Up to 2010 | 337 | 852 | |||||||||||
|
|
2011 - 2019 | 47 | 40 | |||||||||||||
|
|
2020 - 2029 | 352 | 337 | |||||||||||||
|
|
6.00% - 6.87 | % | 2011 - 2019 | 12 | 11 | |||||||||||
|
|
2011 - 2040 | — | 15 | |||||||||||||
|
|
47,758 | 58,511 | ||||||||||||||
148
Financial Statements
Notes to the Financial Statements
continued
32. Other borrowed funds
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
£300m Step Up Callable Perpetual Reserve Capital Instruments
|
— | 356 | — | 356 | ||||||||||||
|
£175m Fixed/Floating Rate Tier One Preferred Income Capital Securities
|
195 | 205 | 195 | 205 | ||||||||||||
|
US$1,000m Non-Cumulative Trust Preferred Securities
|
813 | 1,171 | — | — | ||||||||||||
|
£325m sterling Preference Shares
|
344 | 344 | 344 | 344 | ||||||||||||
|
|
1,352 | 2,076 | 539 | 905 | ||||||||||||
During the year the £300m Step Up Callable Perpetual Reserve Capital Instruments were
reclassified to equity as described in Note 39.
£175m Fixed/Floating Rate Tier One Preferred Income Capital Securities
The Tier One Preferred Income Capital Securities were issued on 9 August 2002 by the Company. The
Tier One Preferred Income Capital Securities are redeemable by the Company in whole but not in part
on 9 February 2018 or on any coupon payment date thereafter, subject to the prior approval of the
UK Financial Services Authority. The Tier One Preferred Income Capital Securities bear interest at
a rate of 6.984% per annum, payable semi-annually in arrears. From (and including) 9 February 2018,
the Tier One Preferred Income Capital Securities will bear interest, at a rate reset semi-annually
of 1.86% per annum above the six-month sterling LIBOR rate, payable semi-annually in arrears.
Interest payments may be deferred in limited circumstances, such as when the payment would cause
the Company to become insolvent or breach applicable Capital Regulations.
The Tier One Preferred Income Capital Securities are not redeemable at the option of the
holders and the holders do not have any rights against other Group companies. Where interest
payments have been deferred, the Company may not declare or pay dividends on or redeem or
repurchase any junior securities until it next makes a scheduled payment on the Tier One Preferred
Income Capital Securities and the Reserve Capital Instruments.
The Tier One Preferred Income Capital Securities are unsecured securities of the Company and
are subordinated to the claims of unsubordinated creditors and subordinated creditors holding loan
capital of the Company. Upon the winding up of the Company, holders of Tier One Preferred Income
Capital Securities will rank pari passu with the holders of the most senior class or classes of
preference shares (if any) of the Company then in issue and in priority to all other Company
shareholders.
US$1,000m Non-Cumulative Trust Preferred Securities
Abbey National Capital Trust I and Abbey National Capital LP I are 100% owned finance subsidiaries
of the Company. On 7 February 2000, Abbey National Capital Trust I issued US$1bn of 8.963%
Non-cumulative Trust Preferred Securities, which have been registered under the US Securities Act
of 1933, as amended. Abbey National Capital Trust I serves solely as a passive vehicle holding the
partnership preferred securities issued by Abbey National Capital LP I and each has passed all the
rights relating to such partnership preferred securities to the holders of trust preferred
securities issued by Abbey National Capital Trust I. All of the trust preferred securities and the
partnership preferred securities have been fully and unconditionally guaranteed on a subordinated
basis by the Company. The terms of the securities do not include any significant restrictions on
the ability of the Company to obtain funds, by dividend or loan, from any subsidiary. After 30 June
2030, the distribution rate on the preferred securities will be 2.825% per annum above the
three-month US dollar LIBOR rate for the relevant distribution period.
The trust preferred securities are not redeemable at the option of the holders and the holders
do not have any rights against other Group companies. The partnership preferred securities may be
redeemed by the partnership, in whole or in part, on 30 June 2030 and on each distribution payment
date thereafter. Redemption by the partnership of the partnership preferred securities may also
occur in the event of a tax or regulatory change. Generally, holders of the preferred securities
will have no voting rights.
Upon the return of capital or distribution of assets in the event of the winding up of the
partnership, holders of the partnership preferred securities will be entitled to receive, for each
partnership preferred security, a liquidation preference of US $1,000, together with any due and
accrued distributions and any additional amounts, out of the assets of the partnership available
for distribution.
£325m sterling Preference Shares
| Size of shareholding | Shareholders | Preference shares of £1 each | ||||||
|
1-100
|
1 | 100 | ||||||
|
101-1,000
|
52 | 38,160 | ||||||
|
1,001+
|
1,908 | 324,961,740 | ||||||
|
|
1,961 | 325,000,000 | ||||||
Holders of sterling preference shares are entitled to receive a biannual non-cumulative
preferential dividend payable in sterling out of the distributable profits of the Company. The rate
per annum will ensure that the sum of the dividend payable on such date and the associated tax
credit (as defined in the terms of the sterling preference shares) represents an annual
rate of 8 5/8% per annum of the nominal amount of shares issued in 1997, and an annual rate of 10
3/8% for shares issued in 1995 and 1996.
149
Financial Statements
Notes to the Financial Statements
continued
On a return of capital or on a distribution of assets on a winding up, the sterling preference
shares shall rank pari passu with any other shares that are expressed to rank pari passu therewith
as regards participation in assets, and otherwise in priority to any other share capital of the
Company. On such a return of capital or winding up, each sterling preference share shall, out of
the surplus assets of the Company available for distribution amongst the members after payment of
the Company’s liabilities, carry the right to receive an amount equal to the amount paid up or
credited as paid together with any premium paid on issue and the full amount of any dividend
otherwise due for payment. Other than as set out above, no sterling preference share confers any
right to participate on a return of capital or a distribution of assets of the Company.
Holders of the sterling preference shares are not entitled to receive notice of or attend,
speak and vote at general meetings of the Company unless the business of the meeting includes the
consideration of a resolution to wind up the Company or any resolution varying, altering or
abrogating any of the rights, privileges, limitations or restrictions attached to the sterling
preference shares or if the dividend on the sterling preference shares has not been paid in full
for the three consecutive dividend periods immediately prior to the relevant general meeting. In
any such case, the sterling preference shareholders are entitled to receive notice of and attend
the general meeting at which such resolution is proposed and will be entitled to speak and vote on
such a resolution but not on any other resolution.
33. Subordinated liabilities
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Dated subordinated liabilities:
|
||||||||||||||||
|
5.00% Subordinated bond 2009 (euro 511m)
|
— | 515 | — | 515 | ||||||||||||
|
4.625% Subordinated notes 2011 (euro 500m)
|
478 | 515 | 478 | 515 | ||||||||||||
|
10.125% Subordinated guaranteed bond 2023
|
220 | 231 | — | — | ||||||||||||
|
11.50% Subordinated guaranteed bond 2017
|
226 | 238 | — | — | ||||||||||||
|
11.59% Subordinated loan stock 2017
|
— | — | 226 | 221 | ||||||||||||
|
10.18% Subordinated loan stock 2023
|
— | — | 220 | 217 | ||||||||||||
|
7.57% Subordinated notes 2029 (US$1,000m)
|
805 | 1,141 | 805 | 1,142 | ||||||||||||
|
6.50% Subordinated notes 2030
|
174 | 194 | 174 | 194 | ||||||||||||
|
8.9% Subordinated notes 2030 (US$1,000m)
|
— | — | 813 | 1,170 | ||||||||||||
|
5.25% Subordinated notes 2015
|
210 | 215 | 210 | 215 | ||||||||||||
|
Subordinated floating rate EURIBOR notes 2015
|
445 | 485 | 445 | 485 | ||||||||||||
|
Subordinated floating rate EURIBOR notes 2016
|
— | — | 65 | 65 | ||||||||||||
|
5.875% Subordinated notes 2031
|
80 | 97 | — | — | ||||||||||||
|
5.25% Subordinated notes 2023
|
119 | 122 | — | — | ||||||||||||
|
Subordinated floating rate EURIBOR notes 2017
|
134 | 145 | — | — | ||||||||||||
|
Subordinated floating rate US$ LIBOR notes 2015
|
92 | 102 | — | — | ||||||||||||
|
Subordinated floating rate EURIBOR notes 2017
|
88 | 97 | — | — | ||||||||||||
|
9.625% Subordinated notes 2023
|
382 | 399 | — | — | ||||||||||||
|
|
3,453 | 4,496 | 3,436 | 4,739 | ||||||||||||
|
Undated subordinated liabilities:
|
||||||||||||||||
|
10.0625% Exchangeable subordinated capital securities
|
204 | 204 | 204 | 204 | ||||||||||||
|
5.56% Subordinated guaranteed notes (Yen 15,000m)
|
123 | 143 | 123 | 143 | ||||||||||||
|
5.50% Subordinated guaranteed notes (Yen 5,000m)
|
41 | 47 | 41 | 47 | ||||||||||||
|
Fixed/Floating rate subordinated notes (Yen 5,000m)
|
39 | 45 | 39 | 45 | ||||||||||||
|
7.50% 10 Year step-up perpetual subordinated notes
|
344 | 354 | 344 | 354 | ||||||||||||
|
7.50% 15 Year step-up perpetual subordinated notes
|
497 | 514 | 497 | 514 | ||||||||||||
|
7.38% 20 Year step-up perpetual subordinated notes
|
209 | 223 | 209 | 223 | ||||||||||||
|
7.13% 30 Year step-up perpetual subordinated notes
|
311 | 348 | 311 | 348 | ||||||||||||
|
7.13% Fixed to floating rate perpetual subordinated notes
|
376 | 413 | 376 | 413 | ||||||||||||
|
|
2,144 | 2,291 | 2,144 | 2,291 | ||||||||||||
|
Total subordinated liabilities
|
5,597 | 6,787 | 5,580 | 7,030 | ||||||||||||
The subordinated floating rate notes pay a rate of interest related to the LIBOR of the
currency of denomination.
The 10.0625% exchangeable subordinated capital securities are exchangeable into fully paid
10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of the
Company. Exchange may take place on any interest payment date providing that between 30 and 60 days
notice has been given to the holders. The holders will receive one new sterling preference share
for each £1 principal amount of capital securities held. Note 32 details the rights attaching to
these shares, as they are the same.
The 5.56% Subordinated guaranteed notes are redeemable at par, at the option of the Company,
on 31 January 2015 and each fifth anniversary thereafter.
The 5.50% Subordinated guaranteed notes are redeemable at par, at the option of the Company,
on 27 June 2015 and each fifth anniversary thereafter.
The Fixed/Floating rate subordinated notes are redeemable at par, at the option of the
Company, on 27 December 2016 and each interest payment date anniversary thereafter.
The 7.50% 10 Year step-up perpetual subordinated notes are redeemable at par, at the option of
the Company, on 28 September 2010 and each fifth anniversary thereafter.
150
Financial Statements
Notes to the Financial Statements
continued
The 7.50% 15 Year step-up perpetual subordinated notes are redeemable at par, at the option of
the Company, on 28 September 2015 and each fifth anniversary thereafter.
The 7.38% 20 Year step-up perpetual subordinated notes are redeemable at par, at the option of
the Company, on 28 September 2020 and each fifth anniversary thereafter.
The 7.13% 30 Year step-up perpetual subordinated notes are redeemable at par, at the option of
the Company, on 30 September 2030 and each fifth anniversary thereafter.
The 7.13% Fixed to Floating rate perpetual subordinated notes are redeemable at par, at the
option of the Company, on 28 September 2010 and each fifth anniversary thereafter.
In common with other debt securities issued by Group companies, the subordinated liabilities
are redeemable in whole at the option of the Company, on any interest payment date, in the event of
certain tax changes affecting the treatment of payments of interest on the subordinated liabilities
in the UK, at their principal amount together with any accrued interest.
In 2009, the 5.00% subordinated bonds 2009 (euro 511m) were redeemed in full.
Subordinated liabilities including convertible debt securities in issue are repayable:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
In no more than 3 months
|
— | 515 | — | 515 | ||||||||||||
|
In more than 3 months but no more than 1 year
|
— | — | — | — | ||||||||||||
|
In more than 1 year but no more than 5 years
|
478 | 515 | 478 | 515 | ||||||||||||
|
In more than 5 years
|
2,975 | 3,466 | 2,958 | 3,709 | ||||||||||||
|
Undated
|
2,144 | 2,291 | 2,144 | 2,291 | ||||||||||||
|
|
5,597 | 6,787 | 5,580 | 7,030 | ||||||||||||
34. Other liabilities
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Trade and other payables
|
2,263 | 2,303 | 1,611 | 1,283 | ||||||||||||
|
Deferred income
|
60 | 39 | — | — | ||||||||||||
|
|
2,323 | 2,342 | 1,611 | 1,283 | ||||||||||||
Trade and other payables include £37m (2008: £40m) of finance lease obligations mainly relating
to a lease and leaseback of Group property.
The maturity of net obligations under finance leases are as follows:
| Group | ||||||||
| 2009 | 2008 | |||||||
| Leases which expire | £m | £m | ||||||
|
Within 1 year
|
5 | 4 | ||||||
|
Between 1-5 years
|
20 | 21 | ||||||
|
In more than 5 years
|
12 | 15 | ||||||
|
|
37 | 40 | ||||||
Future minimum lease payments are:
| Group | ||||||||
| 2009 | 2008 | |||||||
| Leases which expire | £m | £m | ||||||
|
Within 1 year
|
7 | 6 | ||||||
|
Between 1-5 years
|
25 | 27 | ||||||
|
In more than 5 years
|
13 | 17 | ||||||
|
|
45 | 50 | ||||||
At the balance sheet date, the Group had contracted with lessees for the following future
minimum lease payments on sub-leases:
| Group | ||||||||
| 2009 | 2008 | |||||||
| Leases which expire | £m | £m | ||||||
|
Within 1 year
|
— | 1 | ||||||
|
Between 1-5 years
|
— | 2 | ||||||
|
|
— | 3 | ||||||
During the year, £3m (2008: £nil) was incurred as a finance lease interest charge.
151
Financial Statements
Notes to the Financial Statements
continued
35. Provisions
| Group | ||||||||||||
| Misselling | Other | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January 2009
|
141 | 66 | 207 | |||||||||
|
Additional provisions
|
13 | 46 | 59 | |||||||||
|
Provisions released
|
(3 | ) | — | (3 | ) | |||||||
|
Used during the year
|
(108 | ) | (81 | ) | (189 | ) | ||||||
|
Reclassifications
|
— | 17 | 17 | |||||||||
|
At 31 December 2009
|
43 | 48 | 91 | |||||||||
|
|
||||||||||||
|
To be settled:
|
||||||||||||
|
Within 12 months
|
43 | 47 | 90 | |||||||||
|
In more than 12 months
|
— | 1 | 1 | |||||||||
|
|
43 | 48 | 91 | |||||||||
| Company | ||||||||||||
| Misselling | Other | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January 2009
|
41 | 58 | 99 | |||||||||
|
Additional provisions
|
9 | 35 | 44 | |||||||||
|
Acquired through business combinations
|
16 | 14 | 30 | |||||||||
|
Provisions released
|
(3 | ) | — | (3 | ) | |||||||
|
Used during the year
|
(20 | ) | (76 | ) | (96 | ) | ||||||
|
At 31 December 2009
|
43 | 31 | 74 | |||||||||
|
|
||||||||||||
|
To be settled:
|
||||||||||||
|
Within 12 months
|
43 | 30 | 73 | |||||||||
|
In more than 12 months
|
— | 1 | 1 | |||||||||
|
|
43 | 31 | 74 | |||||||||
| Group | ||||||||||||
| Misselling | Other | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January 2008
|
95 | 36 | 131 | |||||||||
|
Additional provisions
|
— | 58 | 58 | |||||||||
|
Acquired through business combinations
|
100 | — | 100 | |||||||||
|
Provisions released
|
(40 | ) | (1 | ) | (41 | ) | ||||||
|
Disposal of subsidiary undertakings
|
— | (2 | ) | (2 | ) | |||||||
|
Used during the year
|
(14 | ) | (25 | ) | (39 | ) | ||||||
|
At 31 December 2008
|
141 | 66 | 207 | |||||||||
|
|
||||||||||||
|
To be settled:
|
||||||||||||
|
Within 12 months
|
136 | 63 | 199 | |||||||||
|
In more than 12 months
|
5 | 3 | 8 | |||||||||
|
|
141 | 66 | 207 | |||||||||
| Company | ||||||||||||
| Misselling | Other | Total | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January 2008
|
95 | 5 | 100 | |||||||||
|
Additional provisions
|
— | 56 | 56 | |||||||||
|
Provisions released
|
(39 | ) | — | (39 | ) | |||||||
|
Used during the year
|
(14 | ) | (4 | ) | (18 | ) | ||||||
|
At 31 December 2008
|
42 | 57 | 99 | |||||||||
|
To be settled:
|
||||||||||||
|
Within 12 months
|
37 | 57 | 94 | |||||||||
|
In more than 12 months
|
5 | — | 5 | |||||||||
|
|
42 | 57 | 99 | |||||||||
The charge disclosed in the income statement in respect of provisions for other liabilities and
charges of £56m (2008: £17m), comprises the additional provisions of £59m (2008: £58m), less the
provisions released of £3m (2008: £41m) in the table above.
The misselling provision comprises various claims with respect to product misselling. In
calculating the misselling provision, management’s best estimate of the provision was calculated
based on conclusions regarding the number of claims that will be received, of those, the number
that will be upheld, and the estimated average settlement per case.
Further information on misselling provisions can be found in ‘Critical Accounting Policies’
within the Accounting Policies on page 122.
Other provisions comprise amounts in respect of litigation and related expenses, restructuring
expenses and other post retirement benefits.
152
Financial Statements
Notes to the Financial Statements
continued
36. Retirement benefit obligations
The amounts recognised in the balance sheet were as follows:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Assets/(Liabilities)
|
||||||||||||||||
|
Funded defined benefit pension scheme
|
1 | 4 | — | — | ||||||||||||
|
Funded defined benefit pension scheme
|
(1,048 | ) | (796 | ) | (922 | ) | (797 | ) | ||||||||
|
Unfunded defined benefit pension scheme
|
(13 | ) | (11 | ) | — | — | ||||||||||
|
Net defined benefit obligation
|
(1,060 | ) | (803 | ) | (922 | ) | (797 | ) | ||||||||
|
Post-retirement medical benefits (unfunded)
|
(10 | ) | (10 | ) | — | — | ||||||||||
|
Total net liabilities
|
(1,070 | ) | (813 | ) | (922 | ) | (797 | ) | ||||||||
Defined Contribution Pension schemes
The Group operates a number of defined contribution pension schemes. The Stakeholder scheme
introduced in 2001 was the principal scheme until 1 December 2009 when the Santander Retirement
Plan, an occupational defined contribution scheme was introduced, into which eligible employees
were enrolled automatically. From 1 April 1998, employees of the Alliance & Leicester group were
eligible to join a defined contribution section of the Alliance & Leicester Pension Scheme.
The assets of the schemes are held and administered separately from those of the Company. In
the case of the Stakeholder scheme the assets are held in an independently administered fund, and
in the case of the Santander Retirement Plan and the Alliance & Leicester Pension Scheme, the
assets are held in separate trustee-administered funds.
An expense of £20m (2008: £8m, 2007: £7m) was recognised for defined contribution plans in the
year, and is included in staff costs classified within administration expenses in the Income
Statement. None of this amount was recognised in respect of key management personnel for the years
ended 31 December 2009, 2008 and 2007.
Defined Benefit Pension schemes
The Group operates a number of defined benefit pension schemes. The Abbey National Amalgamated
Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund,
the National & Provincial Building Society Pension Fund, the Scottish Mutual Assurance Staff
Pension Scheme, the Scottish Provident Institution Staff Pension Fund and the Alliance & Leicester
Pension Scheme are the principal pension schemes within the Group, covering 27% (2008: 38%, 2007:
45%) of the Group’s employees, and are all funded defined benefit schemes. All are closed schemes,
and under the projected unit method, the current service cost when expressed as a percentage of
pensionable salaries will gradually increase over time.
Formal actuarial valuations of the assets and liabilities of the schemes are carried out on a
triennial basis (and currently a biennial basis for the Alliance & Leicester Pension Scheme) by an
independent professionally qualified actuary and valued for accounting purposes at each balance
sheet date. The latest formal actuarial valuation was made as at 31 March 2007 for the Abbey
National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated
Bodies Pension Fund and the National & Provincial Building Society Pension Fund; as at 31 December
2006 for the Scottish Mutual Assurance Staff Pension Scheme and the Scottish Provident Institution
Staff Pension Fund; and as at 31 March 2008 for the Alliance & Leicester Pension Scheme.
The total amount charged to the income statement, including amounts classified as redundancy costs,
was determined as follows:
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
Current service cost
|
44 | 55 | 67 | |||||||||
|
Past service cost
|
50 | 16 | 14 | |||||||||
|
Gain on settlements or curtailments
|
— | (2 | ) | (10 | ) | |||||||
|
Expected return on pension scheme assets
|
(285 | ) | (237 | ) | (194 | ) | ||||||
|
Interest cost
|
326 | 264 | 220 | |||||||||
|
|
135 | 96 | 97 | |||||||||
The net liability recognised in the balance sheet is determined as follows:
| Group | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Present value of defined benefit obligation
|
(6,308 | ) | (5,175 | ) | (4,581 | ) | (4,264 | ) | (4,354 | ) | ||||||||||
|
Fair value of plan assets
|
5,248 | 4,372 | 3,602 | 3,230 | 2,974 | |||||||||||||||
|
Net defined benefit obligation
|
(1,060 | ) | (803 | ) | (979 | ) | (1,034 | ) | (1,380 | ) | ||||||||||
| Company | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Present value of defined benefit obligation
|
(4,805 | ) | (3,944 | ) | (4,559 | ) | (4,241 | ) | (3,822 | ) | ||||||||||
|
Fair value of plan assets
|
3,883 | 3,147 | 3,577 | 3,208 | 2,582 | |||||||||||||||
|
Net defined benefit obligation
|
(922 | ) | (797 | ) | (982 | ) | (1,033 | ) | (1,240 | ) | ||||||||||
153
Financial Statements
Notes to the Financial Statements
continued
Movements in the defined benefit obligations during the year were as follows:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Balance at 1 January
|
(5,175 | ) | (4,581 | ) | (3,944 | ) | (4,559 | ) | ||||||||
|
Current service cost
|
(44 | ) | (55 | ) | (26 | ) | (42 | ) | ||||||||
|
Interest cost
|
(326 | ) | (264 | ) | (249 | ) | (262 | ) | ||||||||
|
Employee contributions
|
(11 | ) | (7 | ) | (6 | ) | (7 | ) | ||||||||
|
Past service cost
|
(50 | ) | (16 | ) | (35 | ) | (16 | ) | ||||||||
|
Actuarial (loss)/gain
|
(935 | ) | 818 | (723 | ) | 793 | ||||||||||
|
Actual benefit payments
|
233 | 148 | 178 | 147 | ||||||||||||
|
Settlement/curtailment
|
— | 2 | — | 2 | ||||||||||||
|
Assumed through business combinations
|
— | (1,220 | ) | — | — | |||||||||||
|
Balance at 31 December
|
(6,308 | ) | (5,175 | ) | (4,805 | ) | (3,944 | ) | ||||||||
Movements in the present value of fair value of scheme assets during the year were as follows:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Balance at 1 January
|
4,372 | 3,602 | 3,147 | 3,577 | ||||||||||||
|
Expected return on scheme assets
|
285 | 237 | 209 | 236 | ||||||||||||
|
Actuarial gain/(loss) on scheme assets
|
329 | (862 | ) | 309 | (836 | ) | ||||||||||
|
Company contributions paid
|
484 | 323 | 390 | 310 | ||||||||||||
|
Employee contributions
|
11 | 7 | 6 | 7 | ||||||||||||
|
Actual benefit payments
|
(233 | ) | (148 | ) | (178 | ) | (147 | ) | ||||||||
|
Acquired through business combinations
|
— | 1,213 | — | — | ||||||||||||
|
Balance at 31 December
|
5,248 | 4,372 | 3,883 | 3,147 | ||||||||||||
The amounts recognised in the Consolidated Statement of Comprehensive Income for each of the
five years indicated were as follows:
| Group | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Actuarial (gain)/loss on scheme assets
|
(329 | ) | 862 | (33 | ) | 9 | (282 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Experience (gain)/loss on scheme liabilities
|
(34 | ) | 51 | 80 | (25 | ) | — | |||||||||||||
|
Loss/(gain) from changes in actuarial assumptions
|
969 | (869 | ) | 66 | (203 | ) | 436 | |||||||||||||
|
Actuarial loss/(gain)/ on scheme liabilities
|
935 | (818 | ) | 146 | (228 | ) | 436 | |||||||||||||
|
Total net actuarial loss/(gain)
|
606 | 44 | 113 | (219 | ) | 154 | ||||||||||||||
| Company | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Actuarial (gain)/loss on scheme assets
|
(309 | ) | 836 | (33 | ) | — | (242 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Experience (gain)/loss on scheme liabilities
|
(33 | ) | 51 | 81 | (20 | ) | 7 | |||||||||||||
|
Loss/(gain) from changes in actuarial assumptions
|
756 | (844 | ) | 68 | (160 | ) | 387 | |||||||||||||
|
Actuarial loss/(gain) on scheme liabilities
|
723 | (793 | ) | 149 | (180 | ) | 394 | |||||||||||||
|
Total net actuarial loss/(gain)
|
414 | 43 | 116 | (180 | ) | 152 | ||||||||||||||
The actual gain/(loss) on scheme assets was £614m (2008: £(625)m, 2007: £227m). Cumulative net
actuarial losses of £768m (2008: £162m, 2007: £118m) were recognised in the Consolidated Statement
of Comprehensive Income. The Group’s pension schemes did not directly hold any equity securities of
the Company or any of its related parties at 31 December 2009, 2008 and 2007. In addition, the
Group does not hold insurance policies over the schemes, and has not entered into any significant
transactions with the schemes.
The assets of the funded plans are held independently of the Group’s assets in separate
trustee administered funds. The principal duty of the trustees is to act in the best interests of
the members of the schemes. Ultimate responsibility for investment strategy rests with the
trustees of the schemes who are required under the Pensions Act 2004 to prepare a statement of
investment principles.
The trustees of the Group’s schemes have developed the following investment principles:
| • | To maintain a portfolio of suitable assets of appropriate quality, suitability and liquidity which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future benefits which the pension scheme provides, as set out in the trust deed and rules. | |
| • | To limit the risk of the assets failing to meet the liabilities, over the long-term and on a shorter-term basis as required by prevailing legislation. | |
| • | To minimise the long-term costs of the pension scheme by maximising the return on the assets whilst having regard to the objectives shown above. |
154
Financial Statements
Notes to the Financial Statements
continued
Asset allocation strategies were reviewed in 2008 and 2009, and automatic rebalancing to the
central benchmark positions was suspended as a result of the unprecedented volatility in asset
markets during this period. Future allocation strategies will be set to allow for a more dynamic
approach. Implementation of these strategies began in 2009 and will continue during 2010 whilst
taking into account market conditions.
Previously, the statement of investment principles for the main schemes (other than the
Alliance & Leicester Pension Scheme) had set the long-term target allocation of plan assets during
2006-2008 as 48% Equities, 30% Bonds and 22% Gilts. The statement of investment principles for the
Alliance & Leicester Pension Scheme had set the long-term target allocation of plan assets at 25%
Equities, 25% alternative return-seeking assets (including Property), 25% Bonds and 25% Gilts for
2009 and 2008. Movement towards this long-term target commenced during 2009, and progress will
depend upon market conditions.
The categories of assets in the scheme by value and as a percentage of total scheme assets,
and the expected rates of return are as follows:
| Group and Company | ||||||||||||||||||||||||
| Expected rate | Expected rate | |||||||||||||||||||||||
| Fair value of scheme assets | of return | Fair value of scheme assets | of return | |||||||||||||||||||||
| 2009 | 2009 | 2009 | 2008 | 2008 | 2008 | |||||||||||||||||||
| £m | % | % | £m | % | % | |||||||||||||||||||
|
UK equities
|
1,045 | 20 | 8.1 | 911 | 21 | 8.2 | ||||||||||||||||||
|
Overseas equities
|
1,027 | 20 | 8.5 | 821 | 19 | 8.5 | ||||||||||||||||||
|
Corporate bonds
|
1,503 | 29 | 6.2 | 1,155 | 26 | 5.7 | ||||||||||||||||||
|
Government Fixed Interest
|
686 | 13 | 3.9 | 657 | 15 | 4.6 | ||||||||||||||||||
|
Government Index Linked
|
664 | 13 | 3.9 | 616 | 14 | 4.4 | ||||||||||||||||||
|
Property funds
|
58 | 1 | 6.3 | 64 | 1 | 6.4 | ||||||||||||||||||
|
Cash
|
177 | 3 | 4.1 | 24 | 1 | 5.3 | ||||||||||||||||||
|
Other
|
88 | 1 | 8.3 | 124 | 3 | 8.3 | ||||||||||||||||||
|
|
5,248 | 100 | 6.4 | 4,372 | 100 | 6.7 | ||||||||||||||||||
Other assets consist of asset-backed securities, annuities, funds and derivatives that are used
to protect against exchange rate, inflation and interest rate movements.
The expected return on plan assets is determined by considering the expected returns available
on the assets underlying the current investment policy, as follows:
|
•
|
Equities | Long-term median real rate of return experienced after considering projected movements in asset indices | ||
|
•
|
Corporate bonds | Gross redemption yields as at the balance sheet date, less a margin for default risk | ||
|
•
|
Government bonds | Gross redemption yields as at the balance sheet date | ||
|
•
|
Property funds | Average of returns for UK equities and government bonds | ||
|
•
|
Cash | Expected long term bank rate, after considering projected inflation rate |
The following tables summarise the fair values at 31 December 2009 and 2008 of the financial asset
classes accounted for at fair value, by the valuation methodology used by the investment managers
of the schemes assets to determine their fair value. The table also discloses the percentages that
the recorded fair values of financial assets represent of the schemes’ total financial assets that
are recorded at fair value.
At 31 December 2009
| Internal models based on | ||||||||||||||||||||||||
| Quoted prices in active markets | market observable data | Total | ||||||||||||||||||||||
| Category of plan assets | £m | % | £m | % | £m | % | ||||||||||||||||||
|
UK equities
|
1,045 | 21 | — | — | 1,045 | 21 | ||||||||||||||||||
|
Overseas equities
|
1,028 | 20 | — | — | 1,028 | 20 | ||||||||||||||||||
|
Corporate bonds
|
1,503 | 30 | — | — | 1,503 | 30 | ||||||||||||||||||
|
Government Fixed Interest
|
686 | 14 | — | — | 686 | 14 | ||||||||||||||||||
|
Government Index Linked
|
663 | 13 | — | — | 663 | 13 | ||||||||||||||||||
|
Other
|
— | — | 88 | 2 | 88 | 2 | ||||||||||||||||||
|
Total
|
4,925 | 98 | 88 | 2 | 5,013 | 100 | ||||||||||||||||||
At 31 December 2008
| Internal models based on | ||||||||||||||||||||||||
| Category of plan assets | Quoted prices in active markets | market observable data | Total | |||||||||||||||||||||
| £m | % | £m | % | £m | % | |||||||||||||||||||
|
UK equities
|
911 | 21 | — | — | 911 | 21 | ||||||||||||||||||
|
Overseas equities
|
821 | 19 | — | — | 821 | 19 | ||||||||||||||||||
|
Corporate bonds
|
1,155 | 27 | — | — | 1,155 | 27 | ||||||||||||||||||
|
Government Fixed Interest
|
657 | 15 | — | — | 657 | 15 | ||||||||||||||||||
|
Government Index Linked
|
616 | 15 | — | — | 616 | 15 | ||||||||||||||||||
|
Other
|
— | — | 124 | 3 | 124 | 3 | ||||||||||||||||||
|
Total
|
4,160 | 97 | 124 | 3 | 4,284 | 100 | ||||||||||||||||||
155
Financial Statements
Notes to the Financial Statements
continued
Plan assets are stated at fair value based upon quoted prices in active markets with the exception
of those classified under “Other”. Assets in the “Other” category comprise investments in absolute
return funds and foreign exchange, equity and interest rate derivatives valued by investment
managers by reference to market observable data. Private equity funds were valued by reference to
their latest published accounts whilst the insured annuities were valued by scheme actuaries based
on the liabilities insured.
Actuarial assumptions
The principal actuarial assumptions used were as follows:
| Group and Company | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| % | % | % | ||||||||||
|
To determine benefit obligations:
|
||||||||||||
|
- Discount rate for scheme liabilities
|
5.8 | 6.4 | 5.8 | |||||||||
|
- General price inflation
|
3.4 | 3.0 | 3.5 | |||||||||
|
- General salary increase
|
3.4 | 3.5 | 4.0 | |||||||||
|
- Expected rate of pension increase
|
3.3 | 3.0 | 3.5 | |||||||||
|
To determine net periodic benefit cost:
|
||||||||||||
|
- Discount rate
|
6.4 | 5.8 | 5.2 | |||||||||
|
- Expected rate of pension increase
|
3.0 | 3.5 | 3.0 | |||||||||
|
- Expected rate of return on plan assets
|
6.4 | 6.7 | 6.1 | |||||||||
|
Medical cost trend rates:
|
||||||||||||
|
- Initial rate
|
5.5 | 6.0 | 6.5 | |||||||||
|
- Ultimate rate
|
4.5 | 4.5 | 4.5 | |||||||||
|
- Year of ultimate rate
|
2013 | 2013 | 2013 | |||||||||
| Years | Years | Years | ||||||||||
|
Longevity at 60 for current pensioners, on the valuation date:
|
||||||||||||
|
- Males
|
27.6 | 27.5 | 27.2 | |||||||||
|
- Females
|
30.0 | 29.9 | 29.8 | |||||||||
|
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
|
||||||||||||
|
- Males
|
29.7 | 29.6 | 29.3 | |||||||||
|
- Females
|
31.3 | 31.2 | 31.1 | |||||||||
The rate used to discount the retirement benefit obligation is determined to reflect duration
of the liabilities based on the annual yield at 31 December of the sterling 15+ year AA Corporate
Bond iBoxx Index, representing the market yield of high quality corporate bonds on that date,
adjusted to match the terms of the scheme liabilities. The inflation assumption is set based on the
Bank of England projected inflation rates over the duration of scheme liabilities weighted by
projected scheme cash flows.
The mortality assumption used in preparation of the valuation was the Continuous Mortality
Investigation Table PXA 92MCC 2009 with a future improvement underpin of 1% for males and 0.5% for
females. The table above shows that a participant retiring at age 60 as at 31 December 2009 is
assumed to live for, on average, 27.6 years in the case of a male and 30.0 years in the case of a
female. In practice, there will be variation between individual members but these assumptions are
expected to be appropriate across all participants. It is assumed that younger members will live
longer in retirement than those retiring now. This reflects the expectation that mortality rates
will continue to fall over time as medical science and standards of living improve. To illustrate
the degree of improvement assumed the table also shows the life expectancy for members aged 40 now,
when they retire in 20 years time at age 60.
The Group determined its expense measurements above based upon long-term assumptions taking
into account target asset allocations of assets set at the beginning of the year, offset by actual
returns during the year. Year-end obligation measurements are determined by reference to market
conditions at the balance sheet date. Assumptions are set in consultation with third party advisors
and in-house expertise
The following table shows the effect of changes in actuarial assumptions on the principal
pension schemes of the Group:
| Increase/(decrease) | ||||||||||
| 2009 | 2008 | |||||||||
| £m | £m | |||||||||
|
Discount rate
|
Change in pension obligation at year end from a 25 bps increase | (345 | ) | (263 | ) | |||||
|
|
Change in 2010 pension cost from a 25 bps increase | (6 | ) | (6 | ) | |||||
|
General price inflation
|
Change in pension obligation at year end from a 25 bps increase | 332 | 255 | |||||||
|
|
Change in 2010 pension cost from a 25 bps increase | 21 | 17 | |||||||
|
Expected rate of return on plan assets
|
Change in 2010 pension cost from a 25 bps increase | 13 | 11 | |||||||
|
Mortality
|
Change in pension obligation from each additional year of | 141 | 102 | |||||||
|
|
longevity assumed | |||||||||
The Group currently expects to contribute £128m to its defined benefit pension schemes in 2010.
156
Financial Statements
Notes to the Financial Statements
continued
The benefits expected to be paid in each of the next five years, and in the aggregate for the five
years thereafter are:
| Year ending 31 December: | £m | |||
|
2010
|
248 | |||
|
2011
|
264 | |||
|
2012
|
282 | |||
|
2013
|
301 | |||
|
2014
|
322 | |||
|
Five years ended 2019
|
1,975 | |||
Participation of Group companies in the principal pension schemes is governed by the Pensions
Acts 1995 and 2004. Under the 1995 Pensions Act, a company ceasing to participate in a pension
scheme is required under section 75 to pay a deficit reduction contribution certified by the scheme
actuary, of any deficit relating to its employees, assessed on the basis of the cost of securing
accrued benefits with an insurance company unless other arrangements are agreed with the trustees.
As part of revised arrangements relating to the funding of the Group’s defined benefit pension
schemes, £814m (2008: £970m) of securities classified as available-for-sale have been pledged
during the year to cover the Group’s obligations.
Post Retirement Medical Benefit Plans
The Group also operates unfunded post retirement medical benefit plans for certain of its former
employees. The post retirement medical benefit plans in operation are accounted for in the same
manner as defined benefit pension plans.
Formal actuarial valuations of the liabilities of the schemes are carried out on a triennial
basis by an independent professionally qualified actuary and updated for accounting purposes at
each balance sheet date. The latest formal actuarial valuation was made as at 31 December 2006 and
updated to 31 December 2009 by a qualified independent actuary.
Actuarial assumptions used for the Group’s post retirement medical benefit plans are the same
as those used for the Group’s defined benefit pension schemes. There was an actuarial loss during
the year of £1m (2008: £1m) on the Group’s post-retirement medical benefits liability. A one
percentage point movement in medical cost trends would increase or decrease the post-retirement
medical benefit liability and interest cost by £1m (2008: £1m).
37. Contingent liabilities and commitments
The estimated maximum exposure in respect of contingent liabilities and commitments granted is:
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Guarantees given to subsidiaries
|
— | — | 156,580 | 109,022 | ||||||||||||
|
Guarantees given to third parties
|
194 | 571 | — | — | ||||||||||||
|
Formal standby facilities, credit lines and other commitments with original term to maturity of:
|
||||||||||||||||
|
- One year or less
|
5,570 | 2,263 | 3,423 | 1,883 | ||||||||||||
|
- More than one year
|
4,982 | 8,267 | 1,738 | 3,688 | ||||||||||||
|
|
10,746 | 11,101 | 161,741 | 114,593 | ||||||||||||
| Group | Company | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Other contingent liabilities
|
8 | 8 | 8 | 8 | ||||||||||||
Unauthorised overdraft fees
The Company, along with seven other financial institutions, has been involved in legal proceedings
with the Office of Fair Trading (“OFT”), regarding the legal status and enforceability of
unarranged overdraft fees (the “OFT Proceedings”). The OFT Proceedings were concerned with whether
certain of the financial institutions’ terms and conditions are subject to the fairness test in the
Unfair Terms in Consumer Contract Regulations 1999 (the “Regulations”) and whether they are capable
of being ‘penalties’ at common law.
In April 2008 the High Court confirmed that the Company’s then current terms and conditions
were not capable of being penalties at common law. This finding was not appealed by the OFT. The
High Court also found that the relevant terms were assessable for fairness under the Regulations.
On 26 February 2009, the Court of Appeal dismissed the appeal against the High Court’s judgment
made by the relevant financial institutions and held that unarranged overdraft fees were assessable
for fairness under the Regulations.
The House of Lords gave the relevant financial institutions permission to appeal this
judgment. The hearing before the House of Lords took place on 23 to 25 June 2009. The Supreme
Court (previously The House of Lords) gave its
judgment on 25 November 2009 and ruled that the level of the unauthorised overdraft fees of
the relevant financial institutions could not be assessed for fairness under the Regulations (to
the extent that the terms pursuant to which the fees are levied are in plain and intelligible
language), although they may be assessed for fairness on some other basis.
On 22 December 2009, the OFT announced that it would not be continuing with its
investigation into the fairness of unarranged overdraft fees.
157
Financial Statements
Notes to the Financial Statements
continued
The Company has rejected the vast majority of complaints which remained in respect of unarranged
overdraft fees after the Supreme Court decision, and it is understood that the Financial Ombudsman
Service has also rejected the vast majority of complaints that it had had on hold since the
commencement of the OFT Proceedings. The Company has started to invite County Courts to dismiss
those claims against them which have been stayed since the commencement of the OFT Proceedings and
which relate to the issues covered in the OFT Proceedings. It is presently anticipated that the
Company will continue with this approach.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (‘FSCS’), the UK’s statutory fund of last resort for
customers of authorised financial services firms, pays compensation if a firm is unable to meet its
obligations as they fall due. As a result of the failure of a number of deposit-taking
institutions during the second half of 2008, the FSCS now stands as a creditor of Bradford &
Bingley plc and the administrations of Heritable Bank, Kaupthing Singer & Friedlander and
Landsbanki ‘Icesave’. The FSCS has borrowed from HM Treasury to fund the compensation costs
associated with those failures. These borrowings are currently on an interest-only basis until 31
March 2012.
The FSCS fulfils its obligations by raising management expenses levies and compensation levies
on the industry. In relation to compensation relating to protected deposits, each deposit-taking
institution contributes towards these levies in proportion to their share of total protected
deposits, subject to a threshold set by the Financial Services Authority establishing the maximum
that FSCS can levy for compensation in any one year. The limit on the FSCS management expenses for
the three years from September 2008 in relation to the above-mentioned failures has been capped at
£1bn per annum. The FSCS has the power to raise levies on firms who have ceased to participate in
the scheme and are in the process of ceasing to be authorised (so called ‘exit levies’) for the
amount that the firm would otherwise have been asked to pay during the relevant levy year. The
Group has an accrual for its share of management expenses levies for the 2009/10 and 2010/11 levy
years as at 31 December 2009 of £101m (2008: £84m).
The FSCS will receive funds from asset sales, surplus cashflow, or other recoveries from each
of the above-named banks. These recoveries will be used to reduce the principal amount outstanding
on the FSCS’s borrowings. Only after the interest only period, which is expected to end on 31
March 2012, will a schedule for repayment of any remaining principal outstanding (after recoveries)
on the borrowings be agreed between the FSCS and HM Treasury. It is expected that, from that point,
the FSCS will begin to raise compensation levies (principal repayments) relating to the above-named
banks. No provision for compensation levies, which could be significant, has been made in these
Consolidated Financial Statements.
Overseas tax claim
Abbey National Treasury Services plc has received a demand from an overseas tax authority relating
to the repayment of certain tax credits and related charges. Following modifications to the demand,
its nominal amount stands at £74m at the balance sheet exchange rate (2008: £80m). At 31 December
2009, additional interest in relation to the demand could amount to £34m at the balance sheet
exchange rate (2008: £34m). Abbey National Treasury Services plc received legal advice that it had
strong grounds to challenge the validity of the demand. In September 2006, Abbey National Treasury
Services plc won its case at the first stage of the litigation process. In January 2007, the tax
authority appealed this decision. However, in December 2006, a ruling was published of a similar
case unconnected to the Group but which might affect Abbey National Treasury Services plc’s
position. In this instance, the courts ruled against the taxpayer.
Regulatory
The Group engages in discussion, and fully co-operates with the UK Financial Services Authority in
their enquiries, including those exercised under statutory powers, regarding its interaction with
past and present customers and policyholders both as part of the UK Financial Services Authority’s
general thematic work and in relation to specific products and services.
Other
As part of the sale of subsidiaries, and as is normal in such circumstances, the Group has given
warranties and indemnities to the purchasers.
Obligations under stock borrowing and lending agreements
Obligations under stock borrowing and lending agreements represent contractual commitments to
return stock borrowed. These obligations totalling £37,525m at 31 December 2009 (2008: £19,934m)
are offset by a contractual right to receive stock under other contractual agreements.
Other off-balance sheet commitments
The Group has commitments to lend at fixed interest rates which expose it to interest rate risk.
Operating lease commitments
| Group | Company | |||||||
| £m | £m | |||||||
|
Rental commitments under operating leases expiring:
|
||||||||
|
- No later than 1 year
|
115 | 94 | ||||||
|
- Later than 1 year but no later than 5 years
|
383 | 322 | ||||||
|
- Later than 5 years
|
470 | 412 | ||||||
|
|
968 | 828 | ||||||
158
Financial Statements
Notes to the Financial Statements
continued
At 31 December 2009, the Group held various leases on land and buildings, many for extended
periods, and other leases for equipment, which require the following aggregate minimum lease
payments:
| Group | Company | |||||||
| Year ended 31 December: | £m | £m | ||||||
|
2010
|
115 | 94 | ||||||
|
2011
|
112 | 95 | ||||||
|
2012
|
103 | 87 | ||||||
|
2013
|
87 | 72 | ||||||
|
2014
|
81 | 68 | ||||||
|
Total thereafter
|
470 | 412 | ||||||
Under the terms of these leases, the Group has the opportunity to extend its occupation of
properties by a minimum of three years subject to 12 months’ notice and lease renewal being
available from external landlords during the term of the lease. At expiry, the Group has the option
to reacquire the freehold of certain properties.
Group rental expense comprises:
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
In respect of minimum rentals
|
116 | 107 | 96 | |||||||||
|
Less: sub-lease rentals
|
— | (1 | ) | — | ||||||||
|
|
116 | 106 | 96 | |||||||||
Appropriate provisions are maintained to cover the above matters.
38. Non-controlling Interests
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Non-controlling interest in subsidiary
|
125 | 106 | ||||||
|
£300m Innovative Tier 1 Capital Securities
|
297 | 311 | ||||||
|
£300m fixed/floating rate non-cumulative callable preference shares
|
294 | 294 | ||||||
|
|
716 | 711 | ||||||
Non-controlling interests represent the 49% shareholding in Santander Private Banking UK
Limited not owned by the Company, Innovative Tier 1 capital securities issued by Alliance &
Leicester plc, a subsidiary of the Company, and preference shares issued by Alliance & Leicester
plc.
£300m Innovative Tier 1 Capital Securities
The Tier 1 securities issued by Alliance & Leicester plc are perpetual securities and pay a coupon
on 22 March each year. At each payment date, Alliance & Leicester plc can decide whether to declare
or defer the coupon indefinitely. If a coupon is deferred then Alliance & Leicester plc may not pay
a dividend on any share until it next makes a coupon payment. Alliance & Leicester plc can be
obliged to make payment in the event of winding up. The coupon is 5.827% per annum until 22 March
2016. Thereafter the coupon steps up to a rate, reset every five years, of 2.13% per annum above
the gross redemption yield on a UK Government Treasury Security. The Tier 1 securities are
redeemable at the option of Alliance & Leicester plc on 22 March 2016 or on each payment date
thereafter. No such redemption may be made without the consent of the UK Financial Services
Authority. In 2009, 2008 and 2007 the coupon was paid.
£300m fixed/floating rate non-cumulative callable preference shares
On 24 May 2006, Alliance & Leicester plc issued £300m fixed/floating rate non-cumulative callable
preference shares, resulting in net proceeds of £294m. The preference shares entitle the holders to
a fixed non-cumulative dividend, at the discretion of Alliance & Leicester plc, of 6.22% per annum
payable annually from 24 May 2007 until 24 May 2019 and quarterly thereafter at a rate of 1.13% per
annum above three month sterling LIBOR. The preference shares are redeemable only at the option of
Alliance & Leicester plc on 24 May 2019 or on each quarterly dividend payment date thereafter. No
such redemption may be made without the consent of the UK Financial Services Authority.
Movements in non-controlling interests were as follows:
| Group | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
At 1 January
|
711 | 98 | ||||||
|
Share of profit
|
55 | 8 | ||||||
|
Distributions
|
(50 | ) | — | |||||
|
Acquired through business combinations
|
— | 605 | ||||||
|
At 31 December
|
716 | 711 | ||||||
159
Financial Statements
Notes to the Financial Statements
continued
39. Share capital
| Group and Company | ||||||||
| 2009 | 2008 | |||||||
| £m | £m | |||||||
|
Ordinary share capital
|
2,412 | 1,148 | ||||||
|
£300m Step-up Callable Perpetual Reserve Capital Instruments
|
297 | — | ||||||
|
|
2,709 | 1,148 | ||||||
Share capital consists of ordinary shares and the £300m Step-up Callable Perpetual Reserve
Capital Instruments. The Company’s preference shares are classified as Other Borrowed Funds under
IFRS.
| Ordinary shares of 10 | Preference shares | Preference shares | Preference shares | |||||||||||||||||
| pence each | of £1 each | of US$0.01 each | of euro0.01 each | Total | ||||||||||||||||
| Issued and fully paid share capital | £m | £m | £m | £m | £m | |||||||||||||||
|
At 1 January 2008
|
148 | 325 | — | — | 473 | |||||||||||||||
|
Shares issued
|
1,000 | — | — | — | 1,000 | |||||||||||||||
|
At 31 December 2008
|
1,148 | 325 | — | — | 1,473 | |||||||||||||||
|
Shares issued
|
1,264 | — | — | — | 1,264 | |||||||||||||||
|
At 31 December 2009
|
2,412 | 325 | — | — | 2,737 | |||||||||||||||
| Group | ||||||||
| 2009 | 2008 | |||||||
| Share Premium | £m | £m | ||||||
|
At 1 January
|
3,121 | 1,857 | ||||||
|
Capital contribution
|
— | 1,264 | ||||||
|
Transfer to ordinary shares
|
(1,264 | ) | — | |||||
|
At 31 December
|
1,857 | 3,121 | ||||||
| Company | ||||||||
| 2009 | 2008 | |||||||
| Share Premium | £m | £m | ||||||
|
At 1 January and 31 December
|
1,857 | 1,857 | ||||||
The Company has one class of ordinary shares which carry no right to fixed income.
On 12 October 2008, Banco Santander, S.A. agreed to inject capital of £1bn into the Company
fulfilling its agreed commitment to the UK Government’s banking support scheme announced on 8
October 2008. Consequently, on 12 October 2008, the Company issued ten billion ordinary shares of
£0.10 each at par, to Banco Santander, S.A..
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares of
the Company of £0.10 each. As described earlier, the Group accounted for the transfer of Alliance &
Leicester plc with effect from 10 October 2008 in a manner consistent with the requirements of
group reconstruction relief under UK GAAP. The fair value of Alliance & Leicester plc’s tangible
and intangible net assets transferred was accounted for by the Group as a capital contribution on
10 October 2008. This was transferred to ordinary share capital on 9 January 2009 when the shares
were actually issued. The Company accounted for the transfer of Alliance & Leicester plc with
effect from 9 January 2009.
£300m Step-up Callable Perpetual Reserve Capital Instruments
During the year, the Group changed its accounting for its £300m Step-up Callable Perpetual Reserve
Capital Instruments in order to align its accounting with that of its subsidiary Alliance &
Leicester plc. The effect of this change was to reclassify the balance as equity rather than
liabilities, and to account for the coupon as dividends rather than interest expense. The change
was adjusted prospectively from 1 January 2009 as the effect was qualitatively and quantitatively
immaterial to the prior years’ financial statements, liquidity and regulatory measures taken as a
whole.
The Reserve Capital Instruments were issued in 2001 by the Company. Reserve Capital
Instruments are redeemable by the Company on 14 February 2026 or on any coupon payment date
thereafter, subject to the prior approval of the UK Financial Services Authority and provided that
the auditors have reported to the trustee within the previous six months that the solvency
condition is met. The Reserve Capital Instruments bear interest at a rate of 7.037% per annum,
payable annually in arrears, from 14 February 2001 to 14 February 2026. Thereafter, the reserve
capital instruments will bear interest at a rate, reset every five years, of 3.75% per annum above
the gross redemption yield on the UK five year benchmark gilt rate. Interest payments may be
deferred by the Company.
The Reserve Capital Instruments are not redeemable at the option of the holders and the
holders do not have any rights against other Group companies. Upon the occurrence of certain tax or
regulatory events, the Reserve Capital Instruments may be exchanged, their terms varied, or
redeemed. Where interest payments have been deferred, the Company may not declare or pay dividends
on or redeem or repurchase any junior securities until it next makes a scheduled payment on the
Reserve Capital Instruments and Tier One Preferred Income Capital Securities.
The Reserve Capital Instruments are unsecured securities of the Company and are subordinated
to the claims of unsubordinated creditors and subordinated creditors holding loan capital of the
Company. Upon the winding up of the Company, holders of Reserve Capital Instruments will rank
pari passu
with the holders of the
most senior class or classes of preference shares (if any) of the Company then in issue and in
priority to all other Company shareholders.
160
Financial Statements
Notes to the Financial Statements
continued
40. Dividends
Analysis of dividends paid is as follows:
| Group | Company | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| Pence per | Pence per | Pence per | Pence per | Pence per | Pence per | |||||||||||||||||||
| Share | Share | Share | Share | Share | Share | |||||||||||||||||||
|
Ordinary shares (equity):
|
||||||||||||||||||||||||
|
2007 interim
|
— | 13.46 | — | — | 13.46 | — | ||||||||||||||||||
|
2007 interim
|
— | 11.44 | — | — | 11.44 | — | ||||||||||||||||||
|
2008 interim
|
— | 15.14 | — | — | 15.14 | — | ||||||||||||||||||
|
2009 interim
|
0.93 | — | — | 0.93 | — | |||||||||||||||||||
|
|
0.93 | 40.04 | — | 0.93 | 40.04 | — | ||||||||||||||||||
The dividend of 0.93 pence per ordinary share equated to a total ordinary dividend payment of
£225m. In addition, £21m of dividends were paid on the Step-up Callable Perpetual Reserve Capital
Instruments during 2009.
41. Cash flow statement
a) Reconciliation of profit after tax to net cash inflow/(outflow) from operating activities:
| Group | Company | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Profit for the year
|
1,245 | 819 | 685 | 747 | 1,328 | 351 | ||||||||||||||||||
|
Non-cash items included in net profit
|
||||||||||||||||||||||||
|
Decrease/(increase) in prepayments and accrued income
|
262 | (126 | ) | (105 | ) | 1,024 | (902 | ) | (353 | ) | ||||||||||||||
|
(Decrease)/increase in accruals and deferred income
|
(2,171 | ) | 346 | 531 | (2,016 | ) | 1,260 | 411 | ||||||||||||||||
|
Depreciation and amortisation
|
260 | 202 | 205 | 132 | 81 | 72 | ||||||||||||||||||
|
Profit on sale of subsidiary and associated undertakings
|
— | (40 | ) | — | — | — | — | |||||||||||||||||
|
Amortisation of premiums/(discounts) on debt securities
|
(8 | ) | (21 | ) | — | — | — | — | ||||||||||||||||
|
Provisions for liabilities and charges
|
56 | 17 | — | 41 | 16 | — | ||||||||||||||||||
|
Provision for impairment
|
897 | 394 | 388 | 830 | 302 | 346 | ||||||||||||||||||
|
Corporation
tax charge
|
445 | 275 | 179 | 288 | 126 | 69 | ||||||||||||||||||
|
Other non-cash items
|
235 | 250 | 109 | (506 | ) | 1,155 | (99 | ) | ||||||||||||||||
|
|
1,221 | 2,116 | 1,992 | 540 | 3,366 | 797 | ||||||||||||||||||
| Group | Company | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| Changes in operating assets and liabilities | £m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Net (increase)/ decrease in trading assets
|
(1,636 | ) | 9,398 | (695 | ) | — | — | — | ||||||||||||||||
|
Net decrease/(increase) in derivative assets
|
12,298 | (23,096 | ) | (1,615 | ) | 196 | (2,046 | ) | (43 | ) | ||||||||||||||
|
Net (increase)/decrease in financial assets designated at fair value
|
(981 | ) | 465 | (3,107 | ) | 10,218 | (39,863 | ) | (7,434 | ) | ||||||||||||||
|
Net (increase)/decrease in loans and advances to banks & customers
|
(3,008 | ) | (16,959 | ) | (8,908 | ) | (10,146 | ) | (38,835 | ) | (1,641 | ) | ||||||||||||
|
Net decrease/(increase) in other assets
|
1,103 | (189 | ) | 1,914 | 835 | 108 | 357 | |||||||||||||||||
|
Net increase/(decrease) in deposits by banks and customers
|
6,647 | (3,652 | ) | 4,104 | (2,731 | ) | 123,614 | 13,813 | ||||||||||||||||
|
Net (decrease)/increase in derivative liabilities
|
(8,847 | ) | 16,979 | (287 | ) | (2,041 | ) | 4,342 | 370 | |||||||||||||||
|
Net increase/(decrease) in trading liabilities
|
5,533 | (14,054 | ) | (2,850 | ) | (739 | ) | 739 | — | |||||||||||||||
|
Net (decrease)/increase in financial liabilities designated at fair value
|
(1,238 | ) | (3,284 | ) | (619 | ) | — | — | — | |||||||||||||||
|
Net (decrease)increase in debt issued
|
(3,077 | ) | 5,027 | 368 | 1 | — | (3 | ) | ||||||||||||||||
|
Net (decrease)/increase in other liabilities
|
(1,369 | ) | (807 | ) | (20 | ) | (656 | ) | (586 | ) | (315 | ) | ||||||||||||
|
Effects of exchange rate differences
|
(3,719 | ) | 6,569 | 396 | (268 | ) | 897 | — | ||||||||||||||||
|
Net cash flow from/(used in) operating activities before tax
|
2,927 | (21,487 | ) | (9,327 | ) | (4,791 | ) | 51,736 | 5,901 | |||||||||||||||
|
Income tax received/(paid)
|
2 | 43 | (5 | ) | 21 | 80 | 48 | |||||||||||||||||
|
Net cash flow from/(used in) operating activities
|
2,929 | (21,444 | ) | (9,332 | ) | (4,770 | ) | 51,816 | 5,949 | |||||||||||||||
b) Analysis of the balances of cash and cash equivalents in the balance sheet
| Group | Company | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Cash and balances with central banks
|
4,163 | 4,017 | 1,038 | 3,266 | 2,456 | 1,032 | ||||||||||||||||||
|
Debt securities
|
1,966 | 5,208 | 5,819 | — | — | — | ||||||||||||||||||
|
Loans and advances to banks
|
4,881 | 5,763 | — | — | — | — | ||||||||||||||||||
|
Net trading other cash equivalents
|
8,827 | 532 | 24,989 | — | — | — | ||||||||||||||||||
|
Net non trading other cash equivalents
|
6,527 | 12,155 | 2,210 | 52,132 | 58,747 | 9,562 | ||||||||||||||||||
|
Cash and cash equivalents
|
26,364 | 27,675 | 34,056 | 55,398 | 61,203 | 10,594 | ||||||||||||||||||
161
Financial Statements
Notes to the Financial Statements
continued
c) Sale of subsidiaries
| Group | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net assets disposed of: | £m | £m | £m | |||||||||
|
Operating lease assets
|
— | 2,134 | — | |||||||||
|
Current tax accounts
|
— | 8 | — | |||||||||
|
Other assets
|
— | 60 | — | |||||||||
|
Deposits by banks
|
— | (8 | ) | — | ||||||||
|
Other liabilities
|
— | (163 | ) | — | ||||||||
|
Other provisions
|
— | (2 | ) | — | ||||||||
|
Current tax liabilities
|
— | (19 | ) | — | ||||||||
|
Deferred tax liabilities
|
— | (446 | ) | — | ||||||||
|
Retirement benefit obligations
|
— | 1 | — | |||||||||
|
|
— | 1,565 | — | |||||||||
|
Profit/ (loss) on disposal
|
— | 40 | — | |||||||||
|
|
— | 1,605 | — | |||||||||
|
Satisfied by:
|
||||||||||||
|
Cash and cash equivalents
|
— | 1,605 | — | |||||||||
|
Less: Cash and cash equivalents in subsidiary sold
|
— | — | — | |||||||||
|
Net cash inflow of sale
|
— | 1,605 | — | |||||||||
On 8 December 2008, the Group completed the disposal of Porterbrook, its rolling stock leasing
business, by the sale of 100% of Porterbrook Leasing Company Limited and its subsidiaries to a
consortium of investors including Antin Infrastructure Partners (the BNP Paribas sponsored
infrastructure fund), Deutsche Bank and Lloyds Banking Group plc, for a cash consideration of
approximately £1.6bn, with the Group providing £0.6bn medium term, senior loan funding to the
acquisition vehicle.
In addition, as described in Note 20, on 17 December 2007, the Company sold 49% of its
shareholding in Santander Private Banking UK Limited to a direct subsidiary of Banco Santander,
S.A. for a total cash consideration of £203m. Further, in 2007, recoveries of £5m were received in
respect of subsidiaries sold in 2003.
d) Acquisitions of subsidiaries and businesses
2008
| Group | ||||||||||||
| Bradford & | ||||||||||||
| Alliance & | Bingley savings | |||||||||||
| Leicester | business | Total | ||||||||||
| Net assets acquired: | £m | £m | £m | |||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
666 | 18,613 | 19,279 | |||||||||
|
Derivative financial instruments
|
2,111 | — | 2,111 | |||||||||
|
Financial assets designated at fair value
|
492 | — | 492 | |||||||||
|
Loans and advances to banks
|
423 | 1,549 | 1,972 | |||||||||
|
Loans and advances to customers
|
50,349 | — | 50,349 | |||||||||
|
Available-for-sale securities
|
1,658 | 3 | 1,661 | |||||||||
|
Loans and receivables securities
|
14,253 | — | 14,253 | |||||||||
|
Intangible assets
|
17 | 4 | 21 | |||||||||
|
Property, plant and equipment
|
273 | 44 | 317 | |||||||||
|
Other assets
|
2,051 | 449 | 2,500 | |||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
(10,216 | ) | — | (10,216 | ) | |||||||
|
Deposits by customers
|
(39,765 | ) | (20,434 | ) | (60,199 | ) | ||||||
|
Derivative financial instruments
|
(933 | ) | — | (933 | ) | |||||||
|
Financial liabilities designated at fair value
|
(1,421 | ) | — | (1,421 | ) | |||||||
|
Debt securities in issue
|
(17,146 | ) | — | (17,146 | ) | |||||||
|
Subordinated liabilities
|
(1,296 | ) | — | (1,296 | ) | |||||||
|
Other liabilities
|
(1,009 | ) | (11 | ) | (1,020 | ) | ||||||
|
Net identified assets and liabilities
|
507 | 217 | 724 | |||||||||
|
Goodwill
|
774 | 395 | 1,169 | |||||||||
|
Consideration
|
1,281 | 612 | 1,893 | |||||||||
|
|
||||||||||||
|
Satisfied by:
|
||||||||||||
|
Cash and cash equivalents
|
— | 612 | 612 | |||||||||
|
Less: Cash and cash equivalents in businesses acquired
|
(666 | ) | (18,613 | ) | (19,279 | ) | ||||||
|
Net cash (inflow) acquired
|
(666 | ) | (18,001 | ) | (18,667 | ) | ||||||
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares of the Company. There was no other consideration.
Accordingly, the Company is now the immediate parent company of Alliance & Leicester plc.
162
Financial Statements
Notes to the Financial Statements
continued
The transfer of Alliance & Leicester plc to the Company from Banco Santander, S.A. in exchange for
ordinary shares of the Company represents a combination of entities under common control.
Transactions between entities under common control are outside the scope of IFRS 3 — Business
Combinations, and there is no other guidance for such situations under IFRS. In the absence of
authoritative guidance under IFRS, the transfer has been accounted for by the Group in a manner
consistent with group reconstruction relief under UK GAAP. As a result, the transfer of Alliance &
Leicester plc has been accounted for by the Group with effect from 10 October 2008, the date on
which Banco Santander, S.A. acquired Alliance & Leicester plc. For further information see Note
47.
In September 2008, following the announcement by HM Treasury to take Bradford & Bingley plc
into public ownership, the retail deposits, branch network and its related employees transferred,
under the provisions of the UK Banking (Special Provisions) Act 2008, to the Company. All of
Bradford & Bingley plc’s customer loans and treasury assets, including all its mortgage assets,
were taken into public ownership. The transfer to the Company consisted of the £20bn retail
deposit base with 2.7 million customers, as well as Bradford & Bingley plc’s direct channels
including 197 retail branches, 141 agencies (distribution outlets in third party premises) and
related employees. The acquisition price was £612m, including the transfer of £208m of capital
relating to offshore entities.
42. Collateral pledged and received
The Group provides assets as collateral in the following areas of the business.
The Company and certain of its subsidiaries enter into securitisation transactions whereby
portfolios of residential mortgage loans are purchased by or assigned to special purpose
securitisation companies, and have been funded through the issue of mortgage backed securities.
Holders of the securities are only entitled to obtain payments of principal and interest to the
extent that the resources of the securitisation companies are sufficient to support such payments
and the holders of the securities have agreed in writing not to seek recourse in any other form. At
31 December 2009 £58,479m (2008: £63,451m) of residential mortgage loans were so assigned.
The Company and certain of its subsidiaries have also established covered bond programmes,
whereby securities are issued to investors and are secured by a pool of ring-fenced residential
mortgages. At 31 December 2009 £15,150m (2008: £24,101m) of residential mortgage loans had been so
secured.
Collateral is also provided in the normal course of derivative business to counterparties. At
31 December 2009 £2,035m (2008: £1,842m) of such collateral in the form of cash had been provided.
As part of structured transactions entered into by subsidiaries of the Company, assets are
pledged or received as collateral. At 31 December 2009 £253m (2008: £844m) of assets had been
received (2008: pledged) in relation to these transactions.
Subsidiaries of the Company enter into sale and repurchase agreements and similar transactions
of equity and debt securities, which are accounted for as secured borrowings. Upon entering into
such transactions, the subsidiaries provide collateral equal to 100%-131% of the borrowed amount.
The carrying amount of assets that were so provided at 31 December 2009 was £42,389m (2008:
£51,267m).
Subsidiaries of the Company also enter into purchase and resale agreements and similar
transactions of equity and debt securities, which are accounted for as collateralised loans. Upon
entering into such transactions, the subsidiaries receive collateral equal to 100%-105% of the loan
amount. The level of collateral held is monitored daily and if required, further calls are made to
ensure the market values of collateral remains equal to the loan balance. The subsidiaries are
permitted to sell or repledge the collateral held. At 31 December 2009, the fair value of such
collateral was £42,039m (2008: £29,782m) of which £42,039m (2008: £29,782m) was sold or repledged.
The subsidiaries have an obligation to return the collateral that it has sold or pledged with a
fair value of £42,039m (2008: £29,782m).
As part of revised arrangements relating to the funding of the Group’s defined benefit pension
schemes, £814m (2008: £970m) of securities classified as available-for-sale have been pledged
during the year to cover the Group’s obligations.
43. Share-based compensation
Santander UK schemes
The Group granted share options to executive officers and employees under the Executive Share
Option scheme, Sharesave scheme and the Employee Share Option scheme prior to being acquired by
Banco Santander, S.A. on 12 November 2004. Options granted under the Executive Share Option scheme
are generally exercisable between the third and tenth anniversaries of the grant date, provided
that certain performance criteria are met. Under the Sharesave scheme, eligible employees can elect
to exercise their options either three, five or seven years after the grant date. All of the share
options prior to 12 November 2004 relate to shares in the Company. After 12 November 2004, all
share options relate to shares in Banco Santander, S.A.. On 12 November 2004 all holders of options
in ordinary shares of the Company were given the option to exercise their options, to cancel their
options in return for a cash payment or to transfer their options to options in shares of Banco
Santander, S.A.. The options over Banco Santander, S.A. shares are accounted for as cash settled
share-based transactions. On acquisition of the Company by Banco Santander, S.A. there was no fair
value adjustment of options modified to rights over Banco Santander, S.A. shares. From 12 November
2004 the Group has purchased Banco Santander, S.A. shares on the open market in order to settle
these share based compensation obligations.
163
Financial Statements
Notes to the Financial Statements
continued
The Group introduced its second Sharesave Scheme under Banco Santander, S.A. ownership. The HM
Revenue & Customs approved Sharesave Scheme was launched in September 2009. Employees were given
the option of saving between £5 and £250 per month for a three or five year savings period. The
option price was set at a 20% discount on the average middle market quotation of Banco Santander,
S.A. shares over the first three dealing days in September 2009.
The total carrying amount at the end of the period for liabilities arising from share-based
payment transactions was £7m (2008: £3m, 2007: £68m), none of which had vested as at 31 December
2009 (2008: nil). Cash received from the exercise of share options and the actual tax benefits
realised from tax deductions were £1m (2008: £14m, 2007: £6m) and £nil (2008: £4m, 2007: £2m),
respectively.
The fair value of each option for 2009, 2008 and 2007 has been estimated at the date of
acquisition or grant using a partial differential equation model with the following assumptions:
| 2009 | 2008 | 2007 | ||||||||||
|
Risk free interest rate
|
2.5%-3.5 | % | 2.9%-6.5 | % | 5.0%-5.8 | % | ||||||
|
Dividend growth, based solely upon average growth since 1989
|
10 | % | 10 | % | 10 | % | ||||||
|
Volatility of underlying shares based upon historical volatility over five years
|
29.0%-34.4 | % | 20.2%-29.6 | % | 19.80%-26.90 | % | ||||||
|
Expected lives of options granted under:
|
||||||||||||
|
- Employee Sharesave 3, 5 & 7 year schemes
|
3, 5 & 7 years | 3, 5 & 7 years | 3, 5 & 7 years | |||||||||
|
- Executive Share Option scheme
|
10 years | 10 years | 10 years | |||||||||
|
- Medium term incentive plan
|
— | — | 3 years | |||||||||
|
- Long term incentive plans
|
3 years | 3 years | 3 years | |||||||||
With the exception of those that include terms related to market conditions, vesting conditions
included in the terms of the grant are not taken into account in estimating fair value. 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 the 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. Share price volatility has been based upon the
range of implied volatility for the Banco Santander, S.A. shares at the strikes and tenors in which
the majority of the sensitivities lie.
The following table summarises the movement in the number of share options between those
outstanding at the beginning and end of the year, together with the changes in weighted average
exercise price over the same period.
| Executive Share Option scheme | Employee Sharesave scheme | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| average | average | |||||||||||||||
| Number of | exercise | Number of | exercise | |||||||||||||
| options | price | options | price | |||||||||||||
| ’000s | £ | ’000s | £ | |||||||||||||
|
2009
|
||||||||||||||||
|
Options outstanding at the start of the year
|
12 | 4.54 | 6,142 | 7.00 | ||||||||||||
|
Options granted during the year
|
— | — | 4,528 | 7.26 | ||||||||||||
|
Options exercised during the year
|
— | — | (679 | ) | 3.85 | |||||||||||
|
Options forfeited during the year
|
— | — | (1,278 | ) | 7.48 | |||||||||||
|
Options outstanding at the end of the year
|
12 | 4.54 | 8,713 | 7.24 | ||||||||||||
|
Options exercisable at the end of the year
|
12 | 4.54 | 8,713 | 7.24 | ||||||||||||
|
2008
|
||||||||||||||||
|
Options outstanding at the start of the year
|
144 | 4.15 | 5,684 | 3.18 | ||||||||||||
|
Options granted during the year
|
— | — | 5,197 | 7.69 | ||||||||||||
|
Options exercised during the year
|
(11 | ) | 4.14 | (4,507 | ) | 3.07 | ||||||||||
|
Options forfeited during the year
|
(121 | ) | 4.11 | (231 | ) | 5.91 | ||||||||||
|
Options expired during the year
|
— | — | (1 | ) | 8.07 | |||||||||||
|
Options outstanding at the end of the year
|
12 | 4.54 | 6,142 | 7.00 | ||||||||||||
|
Options exercisable at the end of the year
|
12 | 4.54 | — | — | ||||||||||||
| Executive Share Option scheme | Employee Sharesave scheme | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| average | average | |||||||||||||||
| Number of | exercise | Number of | exercise | |||||||||||||
| options | price | options | price | |||||||||||||
| ’000s | £ | ’000s | £ | |||||||||||||
|
2007
|
||||||||||||||||
|
Options outstanding at the start of the year
|
178 | 4.11 | 7,638 | 3.32 | ||||||||||||
|
Options exercised during the year
|
(34 | ) | 3.96 | (1,501 | ) | 3.81 | ||||||||||
|
Options forfeited during the year
|
— | — | (419 | ) | 3.25 | |||||||||||
|
Options expired during the year
|
— | — | (34 | ) | 5.92 | |||||||||||
|
Options outstanding at the end of the year
|
144 | 4.15 | 5,684 | 3.18 | ||||||||||||
|
Options exercisable at the end of the year
|
144 | 4.15 | — | — | ||||||||||||
The intrinsic value of the options exercised and the fair value of the options vested during
the year were £3m (2008: £31m, 2007: £3m) and £5m (2008: £6m, 2007: £3m), respectively.
164
Financial Statements
Notes to the Financial Statements
continued
Executive Share Option scheme
The following table summarises information about the options outstanding at 31 December 2009.
| Options outstanding | Options exercisable | |||||||||||||||||||
| Weighted average | Weighted average | Weighted average | ||||||||||||||||||
| Number | remaining contractual life | exercise price | Number | exercise price | ||||||||||||||||
| Range of exercise prices | ’000s | years | £ | ’000s | £ | |||||||||||||||
|
Between £4 and £5
|
12 | 4 | 4.54 | 12 | 4.54 | |||||||||||||||
The following table summarises information about the options outstanding at 31 December 2008.
| Options outstanding | Options exercisable | |||||||||||||||||||
| Weighted average | Weighted average | Weighted average | ||||||||||||||||||
| Number | remaining contractual life | exercise price | Number | exercise price | ||||||||||||||||
| Range of exercise prices | ’000s | years | £ | ’000s | £ | |||||||||||||||
|
Between £4 and £5
|
12 | 5 | 4.54 | 12 | 4.54 | |||||||||||||||
Employee Sharesave scheme
Under the Employee Sharesave scheme, the weighted-average exercise prices of options are less than
the market prices of the shares on the relevant grant dates.
The Group introduced its second Sharesave Scheme under Banco Santander, S.A. ownership. The HM
Revenue & Customs approved Sharesave Scheme was launched in September 2009. Employees were given
the option of saving between £5 and £250 per month for a three or five year savings period. The
option price was set at a 20% discount on the average middle market quotation of Banco Santander,
S.A. shares over the first three dealing days of September 2009.
Medium Term Incentive Plan
See Note 45 for details of conditional share grants awarded to certain Executive Directors, Other
Key Management Personnel and other nominated individuals under the Medium Term Incentive Plan.
2008
| Number of awards | ||||
| granted | ||||
| 000s | ||||
|
Conditional awards outstanding at the beginning of the year
|
2,220 | |||
|
Conditional awards forfeited during the year
|
(29 | ) | ||
|
Conditional awards vested during the year
|
(2,191 | ) | ||
|
Conditional awards outstanding at the end of the year
|
— | |||
2007
| Number of awards | ||||
| granted | ||||
| 000s | ||||
|
Conditional awards outstanding at the beginning of the year
|
2,537 | |||
|
Conditional awards forfeited during the year
|
(317 | ) | ||
|
Conditional awards outstanding at the end of the year
|
2,220 | |||
Awards with a value of £nil vested during the year (2008: £19m, 2007: £nil), as the scheme
matured in 2008.
Long Term Incentive Plan
See Note 45 for details of conditional share grants awarded to certain Executive Directors, Other
Key Management Personnel and other nominated individuals under the Long Term Incentive Plan.
2009
| Number of awards | ||||
| granted | ||||
| 000s | ||||
|
Conditional awards outstanding at the beginning of the year
|
4,680 | |||
|
Conditional awards granted during the year
|
2,274 | |||
|
Conditional awards exercised during the year
|
(1,243 | ) | ||
|
Conditional awards outstanding at the end of the year
|
5,711 | |||
2008
| Number of awards | ||||
| granted | ||||
| 000s | ||||
|
Conditional awards outstanding at the beginning of the year
|
3,092 | |||
|
Conditional awards granted during the year
|
1,803 | |||
|
Conditional awards forfeited during the year
|
(215 | ) | ||
|
Conditional awards outstanding at the end of the year
|
4,680 | |||
The weighted average grant-date fair value of conditional awards granted during the year was
£3.85 (2008: £4.24). At 31 December 2009, the weighted average remaining contractual life was two
years (2008: two years).
165
Financial Statements
Notes to the Financial Statements
continued
Alliance & Leicester schemes
During the year ended 31 December 2009, the Alliance & Leicester group had four share-based payment
arrangements, including Share Incentive Plan (SIP) partnership shares. The Share Incentive Plan
(SIP) was available to all employees. Prior to Alliance & Leicester plc’s acquisition by Banco
Santander, S.A., participants could elect to invest up to £125 per month from pre-tax salary to
purchase shares at the prevailing market price. Shares can be released from Trust after five years
free of income tax and national insurance contributions. On the acquisition of Alliance & Leicester
plc by Banco Santander, S.A., Alliance & Leicester plc shares held in the SIP were converted to
Banco Santander shares on the same three for one basis as was applicable to all other shareholders
upon acquisition by Banco Santander S.A. These will remain in the SIP Trust under the terms of the
SIP rules. 195,454 SIP partnership shares were issued during 2008 prior to acquisition, at the then
prevailing market rate of Alliance & Leicester plc shares, at a weighted average price of 428p per
share. All were converted to Banco Santander, S.A. shares on acquisition. No Banco Santander SIP
shares have been issued since acquisition.
Options held under the ShareSave Plan, share option plan and senior manager deferred bonus
scheme became exercisable on 7 October 2008 and lapsed, if unexercised, on 7 April 2009.
Restricted share plan shares vested and were converted to Banco Santander, S.A. shares on
acquisition in accordance with the scheme rules. Under the senior manager deferred bonus scheme,
new Alliance & Leicester plc shares were issued to satisfy deferred bonus scheme options that
remained unexercised prior to 7 April 2009, after which all options lapsed.
The following table summarises the movement in the number of options between those outstanding at
the beginning and end of the year, together with the changes in weighted average exercise price
over the same period:
2009
| Share | Senior manager | |||||||||||
| ShareSave | option plan | deferred bonus (1) | ||||||||||
| No. of shares | No. of shares | No. of shares | ||||||||||
|
Outstanding at 1 January
|
564,675 | 2,232,426 | 64,726 | |||||||||
|
Lapsed
|
(564,675 | ) | (2,232,426 | ) | — | |||||||
|
Exercised
|
— | — | (64,726 | ) | ||||||||
|
Outstanding at 31 December 2009
|
— | — | — | |||||||||
|
Weighted average exercise price in 2009
|
— | — | 285.5p | |||||||||
2008
| Share | Senior manager | |||||||||||
| ShareSave | option plan | deferred bonus (1) | ||||||||||
| No. of shares | No. of shares | No. of shares | ||||||||||
|
Outstanding and exercisable at 31 December 2008
|
564,675 | 2,232,426 | 64,726 | |||||||||
|
Weighted average exercise price in 2008
|
630.2p | n/a | 285.5p | |||||||||
|
Range of exercise prices for options
|
632p - 815p | 544p - 1,093p | n/a | |||||||||
|
Weighted average fair value options
|
n/a | 84p | 1,553p | (2) | ||||||||
| 1. | The figures in the table relate to the level of bonus deferred, i.e. excluding the matching element. | |
| 2. | The option value includes the deferred share and the fair value of the matched element less the cash bonus foregone. |
For these schemes, the estimated fair value is calculated as the value of the share price
option plus the present value of any deferred dividends.
The assumptions used in the model are as follows:
| Input | Assumption | |
|
Share price
|
Price at date of grant | |
|
Exercise price
|
Per scheme rules | |
|
Expected volatility
|
Estimated by calculating the annualised, exponential weighted monthly volatility of share price over prior two years | |
|
Option life
|
Per scheme rules | |
|
Risk free rate
|
Generated from LIBOR swap curve | |
44. Directors’ emoluments and interests
Ex gratia pensions paid to former Directors of the Company in 2009, which have been provided
for previously, amounted to £22,341 (2008: £22,341, 2007: £21,524). In 1992, the Board decided not
to award any new such ex gratia pensions.
There were no loans, quasi loans and credit transactions entered into or agreed by the Company
or its subsidiaries with persons who are or were Directors, Other Key Management Personnel and each
of their connected persons during the year except as described below:
| Aggregate amount | ||||||||
| Number of | outstanding | |||||||
| Other Key Management Personnel* — Loans | persons | £000 | ||||||
|
2009
|
2 | 835 | ||||||
|
2008
|
2 | 647 | ||||||
| * | Other Key Management Personnel are defined as the Executive Committee of the Company and the Board and Executive Committee of its parent company, Banco Santander, S.A. who served during the year. The above excludes any overdraft facilities provided to Directors, Other Key Management Personnel and their connected persons in the ordinary course of business. |
166
Financial Statements
Notes to the Financial Statements
continued
Secured and unsecured loans are made to Directors, Other Key Management Personnel and their
connected persons in the ordinary course of business, with terms prevailing for comparable
transactions and on the same terms and conditions as applicable to other employees within the
Group. Such loans do not involve more than the normal risk of collectability or present any
unfavourable features.
45. Related party disclosures
Transactions with Directors, Other Key Management Personnel and each of their connected persons
Directors, Other Key Management Personnel and their connected persons have undertaken the following
transactions with the Group in the course of normal banking and life assurance business.
2009
| Amounts in respect of directors, | ||||||||
| Number of directors and | Other Key Management Personnel (1) | |||||||
| Other Key Management | and their connected persons | |||||||
| Personnel (1) | £000 | |||||||
|
Secured loans, unsecured loans and overdrafts
|
||||||||
|
Loans outstanding at 1 January
|
5 | 647 | ||||||
|
Net movements in the year
|
(1 | ) | 191 | |||||
|
Loans outstanding at 31 December
|
4 | 838 | ||||||
|
Deposit, bank and instant access accounts and investments
|
||||||||
|
Deposits, bank instant access accounts and investments at 1 January
|
16 | 4,463 | ||||||
|
Net movements in the year
|
(1 | ) | 2,916 | |||||
|
Deposit, bank and instant access accounts and investments at 31 December
|
15 | 7,379 | ||||||
|
Life assurance policies
|
||||||||
|
Life assurance policies at 1 January
|
1 | 1,026 | ||||||
|
Net movements in the year
|
2 | 862 | ||||||
|
Life assurance policies at 31 December
|
3 | 1,888 | ||||||
2008
| Amounts in respect of directors, | ||||||||
| Number of directors | Other Key Management Personnel (1) | |||||||
| and Other Key | and their connected persons | |||||||
| Management Personnel (1) | £000 | |||||||
|
Secured loans, unsecured loans and overdrafts
|
||||||||
|
Loans outstanding at 1 January
|
1 | 806 | ||||||
|
Net movements in the year
|
4 | (159 | ) | |||||
|
Loans outstanding at 31 December
|
5 | 647 | ||||||
|
Deposit, bank and instant access accounts and investments
|
||||||||
|
Deposits, bank instant access accounts and investments at 1 January
|
12 | 5,565 | ||||||
|
Net movements in the year
|
4 | (1,102 | ) | |||||
|
Deposit, bank and instant access accounts and investments at 31 December
|
16 | 4,463 | ||||||
|
Life assurance policies
|
||||||||
|
Life assurance policies at 1 January
|
2 | 1,600 | ||||||
|
Net movements in the year
|
(1 | ) | (574 | ) | ||||
|
Life assurance policies at 31 December
|
1 | 1,026 | ||||||
| (1) | Other Key Management Personnel are defined as the Executive Committee of the Company and the Board and Executive Committee of its parent company, Banco Santander, S.A., who served during the year. |
In 2009, one Director undertook sharedealing transactions through the Group’s execution only
stockbroker (2008: two Directors) with an aggregate net value of £269,561 (2008: £680,096). Any
transactions were on normal business terms and standard commission rates were payable.
Secured and unsecured loans are made to Directors, Other Key Management Personnel and their
connected persons, in the ordinary course of business, with terms prevailing for comparable
transactions and on the same terms and conditions as applicable to other employees within the
Group. Such loans do not involve more than the normal risk of collectability or present any
unfavourable features. Amounts deposited by Directors, Other Key Management Personnel and their
connected persons earn interest at the same rates as those offered to the market or on the same
terms and conditions applicable to other employees within the Group.
Life assurance policies and investments are entered into by Directors, Other Key Management
Personnel and their connected persons on normal market terms and conditions, or on the same terms
and conditions as applicable to other employees within the Group.
Remuneration of Key Management Personnel
The remuneration of the Directors, and Other Key Management Personnel of the Group, is set out in
aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further
information about the aggregate remuneration of the Directors is provided in the ‘Directors’
Remuneration’ table in the Directors’ Report on page 92.
167
Financial Statements
Notes to the Financial Statements
continued
| 2009 | 2008 | 2007 | ||||||||||
| Key management compensation | £ | £ | £ | |||||||||
|
Short-term employee benefits
|
12,172,113 | 13,016,060 | 11,602,405 | |||||||||
|
Post employment benefits
|
319,319 | 306,902 | 77,814 | |||||||||
|
Other long term benefits
|
— | — | — | |||||||||
|
Termination benefits
|
1,162,500 | — | — | |||||||||
|
Share-based payments
|
2,192,509 | 1,572,973 | 1,101,786 | |||||||||
|
|
15,846,441 | 14,895,935 | 12,782,005 | |||||||||
Medium-Term Incentive Plan
Under the Medium-Term Incentive Plan granted on 20 October 2005, certain Executive Directors, Other
Key Management Personnel and other nominated individuals were granted a conditional award of shares
in Banco Santander, S.A.. The amount of shares participants would receive at the end of the
three-year period depended on the performance of the Group in this period. The performance
conditions were linked to the Group’s three-year plan. Performance was measured in two ways, half
of the award depended on the Group achieving an attributable profit target for the 2007 financial
year, and the remainder depended on the achievement of a revenue target for the 2007 financial
year. Both performance conditions were achieved, resulting in a full award of shares to
participants in March 2008.
Long-Term Incentive Plan
In 2009, four Executive Directors (2008: two) and six Other Key Management Personnel (2008: six)
were granted conditional awards of shares in Banco Santander, S.A. under the Santander Long-Term
Incentive Plan for a total fair value of £1,605,268 (2008: £1,325,592) based on a price of euro
8.14 (2008: euro 11.96). The value attributable to the current year of these conditional awards is
included in share based payments above. Under the Santander Long-Term Incentive Plans granted on 1
July 2009, 21 June 2008 and 31 December 2007, certain Executive Directors, Key Management Personnel
(as defined in Note 44 to the Consolidated Financial Statements) and other nominated individuals
were granted conditional awards of shares in Banco Santander, S.A.. The amount of shares
participants will receive depends on the performance of Banco Santander, S.A. during this period.
All awards under the Santander Long-Term Incentive Plan will depend on Santander’s Total
Shareholder Return performance against a competitor benchmark group. Awards made prior to 2009 also
depend on Santander’s Earnings Per Share performance against a competitor benchmark group. 90.79%
of the 40% of the 2007 conditional award of shares vested in July 2009. Subject to performance
conditions being met, the remaining 60% of the 2007 conditional award will vest in July 2010, 100%
of the 2008 conditional award will vest in July 2011 and 100% of the 2009 conditional award will
vest in July 2012.
Parent undertaking and controlling party
The Company’s immediate and ultimate parent and controlling party is Banco Santander, S.A.. The
smallest and largest group into which the Group’s results are included is the group accounts of
Banco Santander, S.A., copies of which may be obtained from Santander Shareholder Department, 2
Triton Square, Regent’s Place, London NW1 3AN.
Transactions with related parties
Transactions with related parties during the year and balances outstanding at the year end:
| Group | ||||||||||||||||||||||||||||||||||||||||
| Interest, fees and | Interest, fees and | Amounts owed by | Amounts owed | |||||||||||||||||||||||||||||||||||||
| other income received | other expenses paid | related parties | to related parties | |||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
|
Parent company
|
(99 | ) | (537 | ) | (293 | ) | 47 | 509 | 327 | 7,809 | 11,021 | (2,965 | ) | (2,337 | ) | |||||||||||||||||||||||||
|
Fellow subsidiaries
|
(563 | ) | (383 | ) | (171 | ) | 412 | 377 | 24 | 7,113 | 6,214 | (4,567 | ) | (1,767 | ) | |||||||||||||||||||||||||
|
Associates
|
(26 | ) | (23 | ) | (19 | ) | 1 | 2 | 5 | 2,092 | 632 | (13 | ) | (150 | ) | |||||||||||||||||||||||||
|
|
(688 | ) | (943 | ) | (483 | ) | 460 | 888 | 356 | 17,014 | 17,867 | (7,545 | ) | (4,254 | ) | |||||||||||||||||||||||||
| Company | ||||||||||||||||||||||||||||||||||||||||
| Interest, fees and | Interest, fees and | Amounts owed by | Amounts owed | |||||||||||||||||||||||||||||||||||||
| other income received | other expenses paid | related parties | to related parties | |||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
|
Parent company
|
(32 | ) | (55 | ) | (91 | ) | 5 | — | — | 1 | 1,004 | (632 | ) | (230 | ) | |||||||||||||||||||||||||
|
Subsidiaries
|
(4,229 | ) | (6,654 | ) | (2,072 | ) | 6,399 | 8,312 | 4,532 | 149,175 | 165,557 | (184,460 | ) | (198,369 | ) | |||||||||||||||||||||||||
|
Fellow subsidiaries
|
(224 | ) | (261 | ) | (106 | ) | 307 | 253 | 17 | 71 | 352 | (1,839 | ) | (320 | ) | |||||||||||||||||||||||||
|
Associates
|
— | (2 | ) | — | — | — | — | 1 | 334 | — | (2 | ) | ||||||||||||||||||||||||||||
|
|
(4,485 | ) | (6,972 | ) | (2,269 | ) | 6,711 | 8,565 | 4,549 | 149,248 | 167,247 | (186,931 | ) | (198,921 | ) | |||||||||||||||||||||||||
The balances above include debt securities in issue and non-controlling interests held by
related parties. In addition, transactions with pension schemes operated by the Group are described
in Note 36.
During the year, euro 315m of the Group’s holdings of AAA rated prime mortgage backed
securities were sold to the issuer, Banco Santander Totta, S.A.. Although Banco Santander Totta,
S.A. is a related party of the Group, the transactions are considered to be commercial deals, with a normal sharing of profits.
168
Financial Statements
Notes to the Financial Statements
continued
On 17 December 2007, the Company sold 100% of its shareholdings in James Hay, Cater Allen and Abbey
Sharedealing to Santander Private Banking UK Limited, at the time of the transaction a 100% owned
direct subsidiary of the Company, for a total cash consideration of £414m. The companies sold were
Cater Allen Limited, Abbey Stockbrokers Limited, Abbey Stockbrokers (Nominees) Limited, James Hay
Holdings Limited, James Hay Wrap Managers Limited, James Hay Insurance Company Limited, James Hay
Administration Company Limited, James Hay Pension Trustees Limited and Sarum Trustees Limited.
Subsequently, on 17 December 2007, the Company sold 49% of its shareholding in Santander Private
Banking UK Limited to Santander PB UK (Holdings) Limited, a direct subsidiary of Banco Santander,
S.A. for a total cash consideration of £203m.
The above transactions were made in the ordinary course of business and substantially on the
same terms as for comparable transactions with third party counterparties.
As described in Note 47, on 9 January 2009, in order to optimise the capital, liquidity
funding and overall financial efficiency of the Santander group, Banco Santander, S.A. transferred
all of its Alliance & Leicester plc shares to the Company in exchange for newly issued ordinary
shares of the Company. Accordingly, the Company is now the immediate parent company of Alliance &
Leicester plc.
46. Events after the balance sheet date
On 25 February 2010 it was announced that Alliance & Leicester plc intends to transfer its
business into the Company later this year under a scheme allowed by Part VII of the Financial
Services and Markets Act 2000. This transfer is subject to UK Financial Services Authority support
and the Court approval. The transfer will provide benefits for Alliance & Leicester plc customers
and for the Company. For Alliance & Leicester plc customers this includes access to Santander UK’s
full product range plus use of over 1,300 branches, four times as many branches currently available
for Alliance & Leicester plc customers. By rationalising systems and improving the sales and risk
management processes through having a single view of customers’ dealings, the Company will also
benefit from the significant synergies that were announced to the market at the time of the
acquisition of Alliance & Leicester plc by Banco Santander, S.A. in 2008.
On 26 February 2010 it was announced that as the Alliance & Leicester plc preference shares
will not transfer to the Company under the proposed Part VII Transfer, Alliance & Leicester plc and
Santander UK plc have agreed that the holders of the Alliance & Leicester plc preference shares
should be given the opportunity to exchange their Alliance & Leicester plc preference shares for
new preference shares to be issued by the Company. It is intended that the exchange will be carried
out by a scheme of arrangement under Part 26 of the Companies Act 2006, which, if approved by the
Court as well as holders of the Alliance & Leicester plc preference shares and the Company (as
holder of the ordinary shares of Alliance & Leicester plc), the Alliance & Leicester plc preference
shares would be substituted with a new issue of preference shares by Santander UK plc on
substantially similar terms.
In March 2010 the Group issued through the Fosse Master Trust the first publicly-placed
mortgage-backed securitisation transaction from a UK bank since 2007. The transaction was
denominated in both pounds sterling and euro and raised approximately £1.4bn.
47. Transfer of Alliance & Leicester plc
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares of
the Company. There was no other consideration. Accordingly, the Company is now the immediate
parent company of Alliance & Leicester plc.
The transfer of Alliance & Leicester plc to the Company from Banco Santander, S.A. in exchange
for ordinary shares of the Company represents a combination of entities under common control.
Transactions between entities under common control are outside the scope of IFRS 3 — Business
Combinations, and there is no other guidance for such situations under IFRS. In the absence of
authoritative guidance under IFRS, the transfer has been accounted for by the Group in a manner
consistent with group reconstruction relief under UK GAAP. As a result, the transfer of Alliance &
Leicester plc has been accounted for by the Group with effect from 10 October 2008, the date on
which Banco Santander, S.A. acquired Alliance & Leicester plc.
The consolidated financial statements and related notes of the Group for the year ended 31
December 2008 have been updated to reflect this treatment, as follows.
Updated consolidated income statement for the year ended 31 December 2008
The effect of the acquisition of Alliance & Leicester plc on the Group’s consolidated income
statement for the period from 10 October 2008 to 31 December 2008 is both quantitatively and
qualitatively immaterial. The inclusion of Alliance & Leicester plc for the period from 10 October
2008 to 31 December 2008 would have resulted in: (a) a decrease in the profit before tax and profit
after tax of the Group by 1% and 2% respectively; (b) no change in compliance with regulatory
measures and loan covenants; and; (c) an immaterial impact on key financial trends and performance
indicators. Consequently, the Group has concluded that it will not recast the consolidated income
statement, or the consolidated statement of comprehensive income for the year ended 31 December
2008, to reflect the application of group reconstruction relief.
169
Financial Statements
Notes to the Financial Statements
continued
Updated consolidated balance sheet at 31 December 2008
The updated consolidated balance sheet of the Group set out below is based on the original audited
consolidated balance sheet of the Group at 31 December 2008 and the audited consolidated balance
sheet of the Alliance & Leicester group at 31 December 2008 which have been prepared in accordance
with IFRS as issued by the IASB in addition to being consistent with IFRS as adopted for use in the
European Union. Inter-company balances between Group companies and Alliance & Leicester group
companies have been eliminated. Finally, the acquisition adjustments originally recognised by Banco
Santander, S.A. have been applied.
As at 31 December 2008
| Santander UK | Alliance & Leicester | Inter-company | Acquisition | |||||||||||||||||
| Group (1) | Group | eliminations | adjustments | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and balances at central banks
|
2,464 | 1,553 | — | — | 4,017 | |||||||||||||||
|
Trading assets
|
26,264 | — | — | — | 26,264 | |||||||||||||||
|
Derivative financial instruments
|
32,281 | 2,876 | (32 | ) | — | 35,125 | ||||||||||||||
|
Financial assets designated at fair value
|
11,314 | 63 | — | — | 11,377 | |||||||||||||||
|
Loans and advances to banks
|
24,226 | 1,239 | (9,464 | ) | — | 16,001 | ||||||||||||||
|
Loans and advances to customers
|
129,023 | 51,402 | — | (249 | ) | 180,176 | ||||||||||||||
|
Available-for-sale securities
|
1,005 | 1,658 | — | — | 2,663 | |||||||||||||||
|
Loans and receivables securities
|
— | 14,250 | (146 | ) | 3 | 14,107 | ||||||||||||||
|
Macro hedge of interest rate risk
|
1,475 | 713 | — | — | 2,188 | |||||||||||||||
|
Investments in associated undertakings
|
735 | — | — | (700 | ) | 35 | ||||||||||||||
|
Intangible assets
|
556 | 17 | — | 774 | 1,347 | |||||||||||||||
|
Property, plant and equipment
|
581 | 223 | — | 50 | 854 | |||||||||||||||
|
Operating lease assets
|
— | 348 | — | — | 348 | |||||||||||||||
|
Current tax assets
|
195 | 17 | — | — | 212 | |||||||||||||||
|
Deferred tax assets
|
560 | 626 | — | 88 | 1,274 | |||||||||||||||
|
Other assets
|
1,063 | 259 | — | — | 1,322 | |||||||||||||||
|
Total assets
|
231,742 | 75,244 | (9,642 | ) | (34 | ) | 297,310 | |||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Deposits by banks
|
3,337 | 11,516 | (365 | ) | — | 14,488 | ||||||||||||||
|
Deposits by customers
|
99,246 | 39,765 | (8,766 | ) | — | 130,245 | ||||||||||||||
|
Derivative financial instruments
|
26,309 | 1,533 | (32 | ) | — | 27,810 | ||||||||||||||
|
Trading liabilities
|
40,738 | — | — | — | 40,738 | |||||||||||||||
|
Financial liabilities designated at fair value
|
4,945 | 728 | — | — | 5,673 | |||||||||||||||
|
Debt securities in issue
|
41,178 | 17,477 | (144 | ) | — | 58,511 | ||||||||||||||
|
Other borrowed funds
|
2,076 | — | — | — | 2,076 | |||||||||||||||
|
Subordinated liabilities
|
5,826 | 1,436 | (335 | ) | (140 | ) | 6,787 | |||||||||||||
|
Other liabilities
|
1,770 | 631 | — | (59 | ) | 2,342 | ||||||||||||||
|
Provisions
|
107 | 34 | — | 66 | 207 | |||||||||||||||
|
Current tax liabilities
|
517 | 1 | — | — | 518 | |||||||||||||||
|
Deferred tax liabilities
|
86 | 278 | — | 41 | 405 | |||||||||||||||
|
Retirement benefit obligations
|
796 | 17 | — | — | 813 | |||||||||||||||
|
Total liabilities
|
226,931 | 73,416 | (9,642 | ) | (92 | ) | 290,613 | |||||||||||||
|
Equity
|
||||||||||||||||||||
|
Share capital
|
1,148 | 328 | — | (328 | ) | 1,148 | ||||||||||||||
|
Share premium account
|
1,857 | 724 | — | 540 | 3,121 | |||||||||||||||
|
Preference shares and innovative Tier 1
|
— | 605 | — | (605 | ) | — | ||||||||||||||
|
Retained earnings
|
1,678 | 210 | — | (210 | ) | 1,678 | ||||||||||||||
|
Other reserves
|
22 | (39 | ) | — | 56 | 39 | ||||||||||||||
|
|
4,705 | 1,828 | — | (547 | ) | 5,986 | ||||||||||||||
|
Non-controlling interest
|
106 | — | — | 605 | 711 | |||||||||||||||
|
Total shareholders equity
|
4,811 | 1,828 | — | 58 | 6,697 | |||||||||||||||
|
Total liabilities and equity
|
231,742 | 75,244 | (9,642 | ) | (34 | ) | 297,310 | |||||||||||||
| (1) | The Santander UK Group figures include final acquisition adjustments for Bradford & Bingley savings business as described in Note 48. |
Updated consolidated cash flow statement for the year ended 31 December 2008
The updated consolidated cash flow statement of the Group set out below is based on the original
audited consolidated cash flow statement of the Group for the year ended 31 December 2008 and the
post-acquisition consolidated cash flows of the Alliance & Leicester group for the period from 10
October to 31 December 2008 which have been prepared in accordance with IFRS as issued by the IASB
in addition to being consistent with IFRS as adopted for use in the European Union. Inter-company
transactions between Group companies and Alliance & Leicester group companies have been eliminated.
170
Financial Statements
Notes to the Financial Statements
continued
For the year ended 31 December 2008
| Santander UK | Alliance & | Inter-company | Acquisition | |||||||||||||||||
| Group | Leicester Group | eliminations | adjustments | Total | ||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net cash flow (used in)/from operating activities
|
||||||||||||||||||||
|
Profit for the year
|
819 | — | — | — | 819 | |||||||||||||||
|
Adjustments for:
|
||||||||||||||||||||
|
Non cash items included in net profit
|
1,297 | — | — | — | 1,297 | |||||||||||||||
|
Change in operating assets
|
(40,978 | ) | 1,463 | 9,134 | — | (30,381 | ) | |||||||||||||
|
Change in operating liabilities
|
8,135 | 1,539 | (9,465 | ) | — | 209 | ||||||||||||||
|
Income taxes received/(paid)
|
43 | — | — | — | 43 | |||||||||||||||
|
Effects of exchange rate differences
|
8,569 | (2,000 | ) | — | — | 6,569 | ||||||||||||||
|
Net cash flow (used in)/from operating activities
|
(22,115 | ) | 1,002 | (331 | ) | — | (21,444 | ) | ||||||||||||
|
Net cash flows from/(used in) investing activities
|
||||||||||||||||||||
|
Acquisition of businesses, net of cash acquired
|
18,001 | — | — | 666 | 18,667 | |||||||||||||||
|
Dividends received from associates
|
2 | — | — | — | 2 | |||||||||||||||
|
Investment in associates
|
(708 | ) | — | 700 | — | (8 | ) | |||||||||||||
|
Disposal of subsidiaries, net of cash disposed
|
1,605 | — | — | — | 1,605 | |||||||||||||||
|
Purchase of tangible and intangible fixed assets
|
(278 | ) | — | — | — | (278 | ) | |||||||||||||
|
Proceeds from sale of tangible and intangible fixed assets
|
15 | — | — | — | 15 | |||||||||||||||
|
Purchase of non-trading securities
|
(1,222 | ) | — | 331 | — | (891 | ) | |||||||||||||
|
Proceeds from sale of non-trading securities
|
290 | — | — | — | 290 | |||||||||||||||
|
Net cash flow from/(used in) investing activities
|
17,705 | — | 1,031 | 666 | 19,402 | |||||||||||||||
|
Net cash flow (used in)/from financing activities
|
||||||||||||||||||||
|
Issue of ordinary share capital
|
1,000 | 701 | (700 | ) | — | 1,001 | ||||||||||||||
|
Repayment of loan capital
|
(7,787 | ) | — | — | — | (7,787 | ) | |||||||||||||
|
Dividends paid
|
(595 | ) | — | — | — | (595 | ) | |||||||||||||
|
Net cash flow (used in)/from financing activities
|
(7,382 | ) | 701 | (700 | ) | — | (7,381 | ) | ||||||||||||
|
Net (decrease)/increase in cash and cash equivalents
|
(11,792 | ) | 1,703 | — | 666 | (9,423 | ) | |||||||||||||
|
Cash and cash equivalents at beginning of the year
|
34,056 | 666 | — | (666 | ) | 34,056 | ||||||||||||||
|
Effects of exchange rates on cash and cash equivalents
|
3,042 | — | — | — | 3,042 | |||||||||||||||
|
Cash and cash equivalents at the end of the year
|
25,306 | 2,369 | — | — | 27,675 | |||||||||||||||
Acquisition adjustments
The initial computation of the purchase price, the allocation of the purchase price to the net
assets of Alliance & Leicester plc based on fair values estimated by Banco Santander, S.A. at 10
October 2008, and the resulting amount of goodwill were:
| £m | £m | £m | ||||||||||
|
Purchase price:
|
||||||||||||
|
Fair value of shares issued by Banco Santander, S.A. in exchange for Alliance & Leicester plc
|
1,281 | |||||||||||
|
Less:
|
||||||||||||
|
Alliance & Leicester’s shareholders’ funds at 10 October 2008
|
523 | |||||||||||
|
Fair value adjustments:
|
||||||||||||
|
- Loans and advances to customers
|
(249 | ) | ||||||||||
|
- Loans and receivables securities
|
3 | |||||||||||
|
- Property, plant and equipment
|
50 | |||||||||||
|
- Subordinated liabilities
|
140 | |||||||||||
|
- Other liabilities
|
59 | |||||||||||
|
- Provisions
|
(66 | ) | ||||||||||
|
- Deferred tax (tax effect of the above adjustments)
|
47 | |||||||||||
|
|
||||||||||||
|
|
(16 | ) | ||||||||||
|
|
||||||||||||
|
|
507 | |||||||||||
|
Goodwill
|
774 | |||||||||||
The acquisition of Alliance & Leicester plc strengthened the Group’s market position and
critical mass. Intangible assets in respect of brands, customer relationships (known as core
deposit intangibles) and customer lists were identified. The values of these intangible assets were
determined to be immaterial; accordingly, no separate intangible assets for these items were
recognised. No other intangible assets were identified, including any relating to key employees,
patents or intellectual property rights.
The computation of the purchase price was based on the fair value (i.e. the published price)
of 140,950,944 new Banco Santander, S.A. shares of euro 0.50 par value each, with a share premium
of euro 10.73 per share that were issued in exchange for Alliance & Leicester plc common shares on
10 October 2008. The share capital, share premium and pre-acquisition reserves (retained earnings
and other reserves) of Alliance & Leicester plc have also been eliminated on
acquisition. The Company’s existing holding of 35.6% of Alliance & Leicester plc’s equity
voting interests at 31 December 2008 was also eliminated.
Financial effect of the Transfer
The amounts of total operating income and profit before tax of Alliance & Leicester included in the
Group’s income statement for the year ended 31 December 2009 were £1,253m and £420m, respectively.
171
Financial Statements
Notes to the Financial Statements
continued
48. Acquisition of the Bradford & Bingley savings business, and transfer of Alliance &
Leicester plc — initial accounting
Bradford & Bingley savings business
The Consolidated Balance Sheet as at 31 December 2008 reflected the acquisition of the Bradford &
Bingley savings business with effect from September 2008, under the purchase method of accounting.
The total cost of the acquisition was allocated to the assets acquired and the liabilities assumed
based upon their estimated fair values at the date of the acquisition. The preliminary allocation
resulted in an excess of fair value of acquired net assets over cost. The estimated purchase price
allocation was preliminary and has now been completed.
The following table presents the preliminary and final allocations of the aggregate purchase
price at the acquisition date:
Net assets acquired:
| Revised allocation | Initial allocation | Change | ||||||||||
| £m | £m | £m | ||||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
18,613 | 18,613 | — | |||||||||
|
Loans and advances to banks
|
1,549 | 1,624 | (75 | ) | ||||||||
|
Available-for-sale securities
|
3 | 3 | — | |||||||||
|
Intangible assets
|
4 | 4 | — | |||||||||
|
Property, plant and equipment
|
44 | 44 | — | |||||||||
|
Other assets, tax assets and lease assets
|
449 | 428 | 21 | |||||||||
|
Liabilities
|
||||||||||||
|
Deposits by customers
|
(20,434 | ) | (20,434 | ) | — | |||||||
|
Other liabilities, tax liabilities and lease obligations
|
(11 | ) | (11 | ) | — | |||||||
|
Net identified assets and liabilities
|
217 | 271 | (54 | ) | ||||||||
|
Goodwill
|
395 | 341 | 54 | |||||||||
|
Consideration
|
612 | 612 | — | |||||||||
The adjustment since the initial allocation wrote off the value of the £75m investment in
Bradford & Bingley plc subordinated debt held by Bradford & Bingley International Limited to
reflect its impairment as a result of the outcome of discussions between the Company and HM
Treasury. The tax effect of the adjustment was £21m.
Alliance & Leicester plc
The Consolidated Balance Sheet as at 31 December 2008 did not originally reflect the transfer of
Alliance & Leicester plc to the Company. As described in Note 47, the transfer has now been
reflected with effect from 10 October 2008. The amended Consolidated Balance Sheet as at 31
December 2008 reflecting the transfer with effect from 10 October 2008 was included in the Group’s
2009 Half Yearly Financial Report published on 28 August 2009. In that Financial Report, the total
cost of the acquisition was allocated to the assets acquired and the liabilities assumed based upon
their estimated fair values at the effective date of the transfer. The preliminary allocation
resulted in an excess of fair value of acquired net assets over cost. The estimated purchase price
allocation was preliminary and has now been completed by Banco Santander, S.A.. Banco Santander
S.A.’s final acquisition accounting has been reflected by the Group, in accordance with group
reconstruction relief.
The following table presents the preliminary and final allocations of the aggregate purchase
price at 10 October 2008:
Net assets acquired:
| Revised | Initial | |||||||||||
| allocation | allocation | Change | ||||||||||
| £m | £m | £m | ||||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
666 | 666 | — | |||||||||
|
Derivative financial instruments
|
2,111 | 2,111 | — | |||||||||
|
Financial assets designated at fair value
|
492 | 492 | — | |||||||||
|
Loans and advances to banks
|
423 | 423 | — | |||||||||
|
Loans and advances to customers
|
50,349 | 50,598 | (249 | ) | ||||||||
|
Available-for-sale securities
|
1,658 | 1,658 | — | |||||||||
|
Loans and receivables securities
|
14,253 | 14,253 | — | |||||||||
|
Intangible assets
|
17 | 17 | — | |||||||||
|
Property, plant and equipment
|
273 | 273 | — | |||||||||
|
Other assets, tax assets and lease assets
|
2,051 | 1,963 | 88 | |||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
(10,216 | ) | (10,216 | ) | — | |||||||
|
Deposits by customers
|
(39,765 | ) | (39,765 | ) | — | |||||||
|
Derivative financial instruments
|
(933 | ) | (933 | ) | — | |||||||
|
Financial liabilities designated at fair value
|
(1,421 | ) | (1,421 | ) | — | |||||||
|
Debt securities in issue
|
(17,146 | ) | (17,146 | ) | — | |||||||
|
Subordinated liabilities
|
(1,296 | ) | (1,296 | ) | — | |||||||
|
Other liabilities, tax liabilities, provisions and retirement benefit obligations
|
(1,009 | ) | (956 | ) | (53 | ) | ||||||
|
Net identified assets and liabilities
|
507 | 721 | (214 | ) | ||||||||
|
Goodwill
|
774 | 560 | 214 | |||||||||
|
Consideration
|
1,281 | 1,281 | — | |||||||||
The adjustment to reduce Loans and advances to customers by £249m reflected the final
assessment of the losses in the Retail and Corporate Banking portfolios, which were higher than
originally estimated.
172
Financial Statements
Notes to the Financial Statements
continued
The adjustment to increase Other liabilities by £53m represents the updated view of the cost of
settling misselling claims with respect to products sold by Alliance & Leicester prior to its
acquisition. The adjustment to increase Other assets by £88m represents the deferred tax effect of
the above adjustments.
49. Financial instruments
Financial assets and financial liabilities are measured on an ongoing basis either at fair
value or at amortised cost. The Accounting Policies Note describes how the classes of financial
instruments are measured, and how income and expenses, including fair value gains and losses, are
recognised. The following tables analyse the Group’s financial instruments into those measured at
fair value and those measured at amortised cost in the balance sheet:
31 December 2009
| Group | ||||||||||||||||||||||||||||||||
| Held at fair value | Held at amortised cost | Non- | ||||||||||||||||||||||||||||||
| Derivatives | Designated | Financial | financial | |||||||||||||||||||||||||||||
| held for | at fair value | Available- | Loans and | liabilities at | assets / | |||||||||||||||||||||||||||
| Trading | hedging | through P&L | for-sale | Receivables | amortised cost | liabilities | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash & balances at central banks
|
— | — | — | — | 4,163 | — | — | 4,163 | ||||||||||||||||||||||||
|
Trading assets
|
33,290 | — | — | — | — | — | — | 33,290 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
21,472 | 1,355 | — | — | — | — | — | 22,827 | ||||||||||||||||||||||||
|
Financial assets designated at FV
|
— | — | 12,358 | — | — | — | — | 12,358 | ||||||||||||||||||||||||
|
Loans and advances to banks
|
— | — | — | — | 9,151 | — | — | 9,151 | ||||||||||||||||||||||||
|
Loans and advances to cust.s
|
— | — | — | — | 186,804 | — | — | 186,804 | ||||||||||||||||||||||||
|
Available-for-sale securities
|
— | — | — | 797 | — | — | — | 797 | ||||||||||||||||||||||||
|
Loans and receivables securities
|
— | — | — | — | 9,898 | — | — | 9,898 | ||||||||||||||||||||||||
|
Macro hedge of interest rate risk
|
— | — | — | — | 1,127 | — | — | 1,127 | ||||||||||||||||||||||||
|
Investment in associates
|
— | — | — | — | — | — | 75 | 75 | ||||||||||||||||||||||||
|
Intangible assets
|
— | — | — | — | — | — | 1,446 | 1,446 | ||||||||||||||||||||||||
|
Property, plant and equipment
|
— | — | — | — | — | — | 938 | 938 | ||||||||||||||||||||||||
|
Operating lease assets
|
— | — | — | — | — | — | 312 | 312 | ||||||||||||||||||||||||
|
Current tax assets
|
— | — | — | — | — | — | 85 | 85 | ||||||||||||||||||||||||
|
Deferred tax assets
|
— | — | — | — | — | — | 946 | 946 | ||||||||||||||||||||||||
|
Other assets
|
— | — | — | — | 999 | — | 75 | 1,074 | ||||||||||||||||||||||||
|
|
54,762 | 1,355 | 12,358 | 797 | 212,142 | — | 3,877 | 285,291 | ||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by banks
|
— | — | — | — | — | 5,811 | — | 5,811 | ||||||||||||||||||||||||
|
Deposits by customers
|
— | — | — | — | — | 143,893 | — | 143,893 | ||||||||||||||||||||||||
|
Derivative financial liabilities
|
16,775 | 2,188 | — | — | — | — | — | 18,963 | ||||||||||||||||||||||||
|
Trading liabilities
|
46,152 | — | — | — | — | — | — | 46,152 | ||||||||||||||||||||||||
|
Financial liabilities at FVTPL
|
— | — | 4,423 | — | — | — | — | 4,423 | ||||||||||||||||||||||||
|
Debt securities in issue
|
— | — | — | — | — | 47,758 | — | 47,758 | ||||||||||||||||||||||||
|
Other borrowed funds
|
— | — | — | — | — | 1,352 | — | 1,352 | ||||||||||||||||||||||||
|
Subordinated liabilities
|
— | — | — | — | — | 5,597 | — | 5,597 | ||||||||||||||||||||||||
|
Other liabilities
|
— | — | — | — | — | 2,263 | 60 | 2,323 | ||||||||||||||||||||||||
|
Provisions
|
— | — | — | — | — | — | 91 | 91 | ||||||||||||||||||||||||
|
Current tax liabilities
|
— | — | — | — | — | — | 300 | 300 | ||||||||||||||||||||||||
|
Deferred tax liabilities
|
— | — | — | — | — | — | 336 | 336 | ||||||||||||||||||||||||
|
Retirement benefit obligations
|
— | — | — | — | — | — | 1,070 | 1,070 | ||||||||||||||||||||||||
|
|
62,927 | 2,188 | 4,423 | — | — | 206,674 | 1,857 | 278,069 | ||||||||||||||||||||||||
31 December 2009
| Company | ||||||||||||||||||||||||||||||||
| Held at fair value | ||||||||||||||||||||||||||||||||
| Designated | Held at amortised cost | Non- | ||||||||||||||||||||||||||||||
| Derivatives | at fair value | Financial | financial | |||||||||||||||||||||||||||||
| held for | through | Available | Loans and | liabilities at | assets / | |||||||||||||||||||||||||||
| Trading | hedging | P&L | -for-sale | Receivables | amortised cost | liabilities | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash & balances at central banks
|
— | — | — | — | 3,266 | — | — | 3,266 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
1,256 | 1,283 | — | — | — | — | — | 2,539 | ||||||||||||||||||||||||
|
Financial assets designated at FV
|
— | — | 37,145 | — | — | — | — | 37,145 | ||||||||||||||||||||||||
|
Loans and advances to banks
|
— | — | — | — | 109,658 | — | — | 109,658 | ||||||||||||||||||||||||
|
Loans and advances to cust.s
|
— | — | — | — | 131,749 | — | — | 131,749 | ||||||||||||||||||||||||
|
Available-for-sale securities
|
— | — | — | 30 | — | — | — | 30 | ||||||||||||||||||||||||
|
Loans and receivables securities
|
— | — | — | — | 2 | — | — | 2 | ||||||||||||||||||||||||
|
Investment in associates
|
— | — | — | — | — | — | 76 | 76 | ||||||||||||||||||||||||
|
Investment in subsidiaries
|
— | — | — | — | — | — | 7,038 | 7,038 | ||||||||||||||||||||||||
|
Intangible assets
|
— | — | — | — | — | — | 552 | 552 | ||||||||||||||||||||||||
|
Property, plant and equipment
|
— | — | — | — | — | — | 561 | 561 | ||||||||||||||||||||||||
|
Deferred tax assets
|
— | — | — | — | — | — | 428 | 428 | ||||||||||||||||||||||||
|
Other assets
|
— | — | — | — | 513 | — | 138 | 651 | ||||||||||||||||||||||||
|
|
1,256 | 1,283 | 37,145 | 30 | 245,188 | — | 8,793 | 293,695 | ||||||||||||||||||||||||
173
Financial Statements
Notes to the Financial Statements
continued
31 December 2009
| Company | ||||||||||||||||||||||||||||||||
| Held at fair value | ||||||||||||||||||||||||||||||||
| Designated | Held at amortised cost | Non- | ||||||||||||||||||||||||||||||
| Derivatives | at fair value | Financial | financial | |||||||||||||||||||||||||||||
| held for | through | Available | Loans and | liabilities at | assets / | |||||||||||||||||||||||||||
| Trading | hedging | P&L | -for-sale | Receivables | amortised cost | Liabilities | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by banks
|
— | — | — | — | — | 116,414 | — | 116,414 | ||||||||||||||||||||||||
|
Deposits by customers
|
— | — | — | — | — | 159,187 | — | 159,187 | ||||||||||||||||||||||||
|
Derivative financial liabilities
|
3,001 | 352 | — | — | — | — | — | 3,353 | ||||||||||||||||||||||||
|
Other borrowed funds
|
— | — | — | — | — | 539 | — | 539 | ||||||||||||||||||||||||
|
Subordinated liabilities
|
— | — | — | — | — | 5,580 | — | 5,580 | ||||||||||||||||||||||||
|
Other liabilities
|
— | — | — | — | — | 1,611 | — | 1,611 | ||||||||||||||||||||||||
|
Provisions
|
— | — | — | — | — | — | 74 | 74 | ||||||||||||||||||||||||
|
Current tax liabilities
|
— | — | — | — | — | — | 92 | 92 | ||||||||||||||||||||||||
|
Retirement benefit obligations
|
— | — | — | — | — | — | 922 | 922 | ||||||||||||||||||||||||
|
|
3,001 | 352 | — | — | — | 283,331 | 1,088 | 287,772 | ||||||||||||||||||||||||
|
31 December 2008
|
||||||||||||||||||||||||||||||||
| Group | ||||||||||||||||||||||||||||||||
| Held at fair value | Held at amortised cost | Non- | ||||||||||||||||||||||||||||||
| Derivatives | Designated at | Financial | financial | |||||||||||||||||||||||||||||
| held for | fair value | Available- | Loans and | liabilities at | assets / | |||||||||||||||||||||||||||
| Trading | hedging | through P&L | for-sale | Receivables | amortised cost | Liabilities | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash & balances at central banks
|
— | — | — | — | 4,017 | — | — | 4,017 | ||||||||||||||||||||||||
|
Trading assets
|
26,264 | — | — | — | — | — | — | 26,264 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
31,713 | 3,412 | — | — | — | — | — | 35,125 | ||||||||||||||||||||||||
|
Financial assets designated at FV
|
— | — | 11,377 | — | — | — | — | 11,377 | ||||||||||||||||||||||||
|
Loans and advances to banks
|
— | — | — | — | 16,001 | — | — | 16,001 | ||||||||||||||||||||||||
|
Loans and advances to customers
|
— | — | — | — | 180,176 | — | — | 180,176 | ||||||||||||||||||||||||
|
Available-for-sale securities
|
— | — | — | 2,663 | — | — | 2,663 | |||||||||||||||||||||||||
|
Loans and receivables securities
|
— | — | — | — | 14,107 | — | — | 14,107 | ||||||||||||||||||||||||
|
Macro hedge of interest rate risk
|
— | — | — | — | 2,188 | — | — | 2,188 | ||||||||||||||||||||||||
|
Investment in associates
|
— | — | — | — | — | — | 35 | 35 | ||||||||||||||||||||||||
|
Intangible assets
|
— | — | — | — | — | — | 1,347 | 1,347 | ||||||||||||||||||||||||
|
Property, plant and equipment
|
— | — | — | — | — | — | 854 | 854 | ||||||||||||||||||||||||
|
Operating lease assets
|
— | — | — | — | — | — | 348 | 348 | ||||||||||||||||||||||||
|
Current tax assets
|
— | — | — | — | — | — | 212 | 212 | ||||||||||||||||||||||||
|
Deferred tax assets
|
— | — | — | — | — | — | 1,274 | 1,274 | ||||||||||||||||||||||||
|
Other assets
|
— | — | — | — | 1,200 | — | 122 | 1,322 | ||||||||||||||||||||||||
|
|
57,977 | 3,412 | 11,377 | 2,663 | 217,689 | — | 4,192 | 297,310 | ||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by banks
|
— | — | — | — | — | 14,488 | — | 14,488 | ||||||||||||||||||||||||
|
Deposits by customers
|
— | — | — | — | — | 130,245 | — | 130,245 | ||||||||||||||||||||||||
|
Derivative financial liabilities
|
25,420 | 2,390 | — | — | — | — | — | 27,810 | ||||||||||||||||||||||||
|
Trading liabilities
|
40,738 | — | — | — | — | — | — | 40,738 | ||||||||||||||||||||||||
|
Financial liabilities at FVTPL
|
— | — | 5,673 | — | — | — | — | 5,673 | ||||||||||||||||||||||||
|
Debt securities in issue
|
— | — | — | — | — | 58,511 | — | 58,511 | ||||||||||||||||||||||||
|
Other borrowed funds
|
— | — | — | — | — | 2,076 | — | 2,076 | ||||||||||||||||||||||||
|
Subordinated liabilities
|
— | — | — | — | — | 6,787 | — | 6,787 | ||||||||||||||||||||||||
|
Other liabilities
|
— | — | — | — | — | 2,303 | 39 | 2,342 | ||||||||||||||||||||||||
|
Provisions
|
— | — | — | — | — | — | 207 | 207 | ||||||||||||||||||||||||
|
Current tax liabilities
|
— | — | — | — | — | — | 518 | 518 | ||||||||||||||||||||||||
|
Deferred tax liabilities
|
— | — | — | — | — | — | 405 | 405 | ||||||||||||||||||||||||
|
Retirement benefit obligations
|
— | — | — | — | — | — | 813 | 813 | ||||||||||||||||||||||||
|
|
66,158 | 2,390 | 5,673 | — | — | 214,410 | 1,982 | 290,613 | ||||||||||||||||||||||||
174
Financial Statements
Notes to the Financial Statements
continued
31 December 2008
| Company | ||||||||||||||||||||||||||||||||
| Held at fair value | ||||||||||||||||||||||||||||||||
| Designated | Held at amortised cost | Non- | ||||||||||||||||||||||||||||||
| Derivatives | at fair value | Financial | financial | |||||||||||||||||||||||||||||
| held for | through | Available- | Loans and | liabilities at | assets / | |||||||||||||||||||||||||||
| Trading | hedging | profit or loss | for-sale | Receivables | amortised cost | Liabilities | Total | |||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash & balances at central banks
|
— | — | — | — | 2,456 | — | — | 2,456 | ||||||||||||||||||||||||
|
Derivative financial instruments
|
2,112 | 623 | — | — | — | — | — | 2,735 | ||||||||||||||||||||||||
|
Financial assets designated at FV
|
— | — | 47,525 | — | — | — | — | 47,525 | ||||||||||||||||||||||||
|
Loans and advances to banks
|
— | — | — | — | 116,486 | — | — | 116,486 | ||||||||||||||||||||||||
|
Loans and advances to cust.s
|
— | — | — | — | 123,319 | — | — | 123,319 | ||||||||||||||||||||||||
|
Available-for-sale securities
|
— | — | — | 25 | — | — | — | 25 | ||||||||||||||||||||||||
|
Investment in associates
|
— | — | — | — | — | — | 741 | 741 | ||||||||||||||||||||||||
|
Investment in subsidiaries
|
— | — | — | — | — | — | 5,147 | 5,147 | ||||||||||||||||||||||||
|
Intangible assets
|
— | — | — | — | — | — | 484 | 484 | ||||||||||||||||||||||||
|
Property, plant and equipment
|
— | — | — | — | — | — | 569 | 569 | ||||||||||||||||||||||||
|
Current tax assets
|
— | — | — | — | — | — | 194 | 194 | ||||||||||||||||||||||||
|
Deferred tax assets
|
— | — | — | — | — | — | 458 | 458 | ||||||||||||||||||||||||
|
Other assets
|
— | — | — | — | 940 | — | 47 | 987 | ||||||||||||||||||||||||
|
|
2,112 | 623 | 47,525 | 25 | 243,201 | — | 7,640 | 301,126 | ||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by banks
|
— | — | — | — | — | 124,846 | — | 124,846 | ||||||||||||||||||||||||
|
Deposits by customers
|
— | — | — | — | — | 155,466 | — | 155,466 | ||||||||||||||||||||||||
|
Derivative financial liabilities
|
3,672 | 1,721 | — | — | — | — | — | 5,393 | ||||||||||||||||||||||||
|
Trading liabilities
|
739 | — | — | — | — | — | — | 739 | ||||||||||||||||||||||||
|
Other borrowed funds
|
— | — | — | — | — | 905 | — | 905 | ||||||||||||||||||||||||
|
Subordinated liabilities
|
— | — | — | — | — | 7,030 | — | 7,030 | ||||||||||||||||||||||||
|
Other liabilities
|
— | — | — | — | — | 1,283 | — | 1,283 | ||||||||||||||||||||||||
|
Provisions
|
— | — | — | — | — | — | 99 | 99 | ||||||||||||||||||||||||
|
Current tax liabilities
|
— | — | — | — | — | — | 128 | 128 | ||||||||||||||||||||||||
|
Deferred tax liabilities
|
— | — | — | — | — | — | 6 | 6 | ||||||||||||||||||||||||
|
Retirement benefit obligations
|
— | — | — | — | — | — | 797 | 797 | ||||||||||||||||||||||||
|
|
4,411 | 1,721 | — | — | — | 289,530 | 1,030 | 296,692 | ||||||||||||||||||||||||
The following tables analyse the fair value of financial instruments not measured at fair value
in the balance sheet:
| Group | ||||||||||||
| Carrying value | Fair value | Surplus/(deficit) | ||||||||||
| 2009 | £m | £m | £m | |||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
4,163 | 4,163 | — | |||||||||
|
Loans and advances to banks
|
9,151 | 9,151 | — | |||||||||
|
Loans and advances to customers
|
186,804 | 192,164 | 5,360 | |||||||||
|
Loans and receivables securities
|
9,898 | 9,447 | (451 | ) | ||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
5,811 | 5,811 | — | |||||||||
|
Deposits by customers
|
143,893 | 144,608 | (715 | ) | ||||||||
|
Debt securities in issue
|
47,758 | 47,483 | 275 | |||||||||
|
Other borrowed funds
|
1,352 | 1,729 | (377 | ) | ||||||||
|
Subordinated liabilities
|
5,597 | 6,173 | (576 | ) | ||||||||
| Company | ||||||||||||
| Carrying value | Fair value | Surplus/(deficit) | ||||||||||
| 2009 | £m | £m | £m | |||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
3,266 | 3,266 | — | |||||||||
|
Loans and advances to banks
|
109,658 | 111,131 | 1,473 | |||||||||
|
Loans and advances to customers
|
131,749 | 136,518 | 4,769 | |||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
116,414 | 119,341 | (2,927 | ) | ||||||||
|
Deposits by customers
|
159,187 | 159,814 | (627 | ) | ||||||||
|
Other borrowed funds
|
539 | 565 | (26 | ) | ||||||||
|
Subordinated liabilities
|
5,580 | 6,494 | (914 | ) | ||||||||
175
Financial Statements
Notes to the Financial Statements
continued
| Group | ||||||||||||
| Carrying value | Fair value | Surplus/(deficit) | ||||||||||
| 2008 | £m | £m | £m | |||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
4,017 | 4,017 | — | |||||||||
|
Loans and advances to banks
|
16,001 | 16,202 | 201 | |||||||||
|
Loans and advances to customers
|
180,176 | 186,233 | 6,057 | |||||||||
|
Loans and receivables securities
|
14,107 | 13,010 | (1,097 | ) | ||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
14,488 | 14,473 | 15 | |||||||||
|
Deposits by customers
|
130,245 | 130,818 | (573 | ) | ||||||||
|
Debt securities in issue
|
58,511 | 57,530 | 981 | |||||||||
|
Other borrowed funds
|
2,076 | 926 | 1,150 | |||||||||
|
Subordinated liabilities
|
6,787 | 5,137 | 1,650 | |||||||||
| Company | ||||||||||||
| Carrying value | Fair value | Surplus/(deficit) | ||||||||||
| 2008 | £m | £m | £m | |||||||||
|
Assets
|
||||||||||||
|
Cash and balances at central banks
|
2,456 | 2,456 | — | |||||||||
|
Loans and advances to banks
|
116,411 | 116,777 | 366 | |||||||||
|
Loans and advances to customers
|
123,319 | 128,148 | 4,829 | |||||||||
|
Liabilities
|
||||||||||||
|
Deposits by banks
|
124,846 | 126,612 | (1,766 | ) | ||||||||
|
Deposits by customers
|
155,466 | 156,016 | (550 | ) | ||||||||
|
Other borrowed funds
|
905 | 485 | 420 | |||||||||
|
Subordinated liabilities
|
7,030 | 4,708 | 2,322 | |||||||||
The surplus/(deficit) in the table above represents the surplus/(deficit) of fair value
compared to the carrying amount of those financial instruments for which fair values have been
estimated. The carrying value above of any financial assets and liabilities that are designated as
hedged items in a portfolio (or macro) fair value hedge relationship excludes gains and losses
attributable to the hedged risk, as this is presented as a single separate line item on the balance
sheet.
Fair value measurement
The fair value of financial instruments is the estimated amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation
sale. If a quoted market price is available for an instrument, the fair value is calculated based
on the market price. Where quoted market prices are not available, fair value is determined using
pricing models which use a mathematical methodology based on accepted financial theories, depending
on the product type and its components. Further information on fair value measurement can be found
in the Group’s Accounting Policies from pages 109 to 123 and the Valuation techniques section below
on page 179 to the Consolidated Financial Statements.
Fair value management
The fair value exposures, as tabled above, are managed by using a combination of hedging
derivatives and offsetting on balance sheet positions. The approach to specific categories of
financial instruments is described below.
Assets:
Cash and balances at central banks
The carrying amount of cash and balances at central banks is deemed a reasonable approximation of
the fair value.
Loans and advances to banks
The fair value of loans and advances to banks has been estimated using the same valuation technique
for financial instruments accounted for at fair value as described in the Valuation techniques
section below on page 179 to the Consolidated Financial Statements.
Loans and advances to customers
Loans and advances to personal customers are made both at variable and at fixed rates. As there is
no active secondary market in the UK for such loans and advances, there is no reliable market value
available for such a significant portfolio.
a) Variable rate
The Directors believe that the carrying value of the variable rate loans may be assumed to be their
fair value.
b) Fixed rate
Certain of the loans secured on residential properties are at a fixed rate for a limited period,
typically two to five years from their commencement. At the end of this period these loans revert
to the relevant variable rate. The excess of fair value over carrying value of each of these loans
has been estimated by reference to the market rates available at the balance sheet date for similar
loans of maturity equal to the remaining fixed period.
176
Financial Statements
Notes to the Financial Statements
continued
Loan and receivable securities
These debt securities are valued with the assistance of valuations prepared by an independent,
specialist valuation firm.
Liabilities:
Deposits by banks
The carrying amount is deemed a reasonable approximation of the fair value, because they are short
term in nature.
Deposits by customers
The majority of deposit liabilities are payable on demand and therefore can be deemed short term in
nature with the fair value equal to the carrying value. However, given the long-term and continuing
nature of the relationships with the Group’s customers, the Directors believe there is significant
value to the Group in this source of funds. Certain of the deposit liabilities are at a fixed rate
until maturity. The deficit of fair value over carrying value of these liabilities has been
estimated by reference to the market rates available at the balance sheet date for similar deposit
liabilities of similar maturities.
The fair value of such deposits liabilities has been estimated using the same valuation technique
for financial instruments accounted for at fair value as described in the Valuation techniques
section below on page 179 to the Consolidated Financial Statements.
Debt securities in issue and subordinated liabilities
Where reliable prices are available, the fair value of debt securities in issue and subordinated
liabilities has been calculated using quoted market prices. Other market values have been
determined using the same valuation technique for financial instruments accounted for at fair value
as described in the Valuation techniques section below on page 179 to the Consolidated Financial
Statements.
Intra Group balances
Included in the asset and liability categories on the Company balance sheet are outstanding intra
group balances. The fair value of these balances has been determined using the same valuation
technique for financial instruments accounted for at fair value as described in the Valuation
techniques section below on page 179 to the Consolidated Financial Statements.
Fair value valuation bases
The following tables summarise the fair values at 31 December 2009 and 2008 of the financial asset
and liability classes accounted for at fair value, analysed by the valuation methodology used by
the Group to determine their fair value. The tables also disclose the percentages that the recorded
fair values of financial assets and liabilities represent of the total assets and liabilities,
respectively, that are recorded at fair value in the balance sheet:
At 31 December 2009
| Internal models based on | |||||||||||||||||||||||||||||||||||||||||
| Quoted prices in | Market observable | Significant | |||||||||||||||||||||||||||||||||||||||
| active markets | data | unobservable data | Total | Valuation | |||||||||||||||||||||||||||||||||||||
| Balance sheet category | £m | % | £m | % | £m | % | £m | % | technique | ||||||||||||||||||||||||||||||||
|
Assets
|
|||||||||||||||||||||||||||||||||||||||||
|
Trading assets
|
Loans and advances to banks | — | — | 5,252 | 8 | — | — | 5,252 | 8 | A | |||||||||||||||||||||||||||||||
|
|
Loans and advances to customers | — | — | 10,628 | 15 | — | — | 10,628 | 15 | A | |||||||||||||||||||||||||||||||
|
|
Debt securities | 15,932 | 23 | — | — | — | — | 15,932 | 23 | — | |||||||||||||||||||||||||||||||
|
|
Equity securities | 1,471 | 2 | — | — | 7 | — | 1,478 | 2 | B | |||||||||||||||||||||||||||||||
|
Derivative assets
|
Exchange rate contracts | — | — | 4,088 | 6 | 37 | — | 4,125 | 6 | A | |||||||||||||||||||||||||||||||
|
|
Interest rate contracts | 4 | — | 17,223 | 25 | — | — | 17,227 | 25 | A & C | |||||||||||||||||||||||||||||||
|
|
Equity & credit contracts | 258 | — | 1,060 | 2 | 157 | — | 1,475 | 2 | B | |||||||||||||||||||||||||||||||
|
Financial assets at FVTPL
|
Loans and advances to customers | — | — | 6,116 | 9 | 263 | — | 6,379 | 9 | A | |||||||||||||||||||||||||||||||
|
|
Debt securities | — | — | 4,498 | 7 | 1,481 | 2 | 5,979 | 9 | A | |||||||||||||||||||||||||||||||
|
Available-for-sale financial
|
Debt securities | 747 | 1 | — | — | — | — | 747 | 1 | — | |||||||||||||||||||||||||||||||
|
Assets
|
Equity securities | 20 | — | 30 | — | — | — | 50 | — | B | |||||||||||||||||||||||||||||||
|
Total assets at fair value
|
18,432 | 26 | 48,896 | 72 | 1,945 | 2 | 69,273 | 100 | |||||||||||||||||||||||||||||||||
|
Liabilities
|
|||||||||||||||||||||||||||||||||||||||||
|
Trading liabilities
|
Deposits by banks | — | — | 40,824 | 59 | — | — | 40,824 | 59 | A | |||||||||||||||||||||||||||||||
|
|
Deposits by customers | — | — | 4,115 | 6 | — | — | 4,115 | 6 | A | |||||||||||||||||||||||||||||||
|
|
Short positions | 1,071 | 2 | — | — | — | — | 1,071 | 2 | — | |||||||||||||||||||||||||||||||
|
|
Debt securities in issue | — | — | 142 | — | — | — | 142 | — | A | |||||||||||||||||||||||||||||||
|
Derivative liabilities
|
Exchange rate contracts | — | — | 521 | 1 | — | — | 521 | 1 | A | |||||||||||||||||||||||||||||||
|
|
Interest rate contracts | — | — | 16,208 | 23 | — | — | 16,208 | 23 | A & C | |||||||||||||||||||||||||||||||
|
|
Equity & credit contracts | 29 | — | 1,945 | 3 | 260 | — | 2,234 | 3 | B | |||||||||||||||||||||||||||||||
|
Financial liabilities at FVTPL
|
Deposits by banks | — | — | 45 | — | — | — | 45 | — | A | |||||||||||||||||||||||||||||||
|
|
Deposits by customers | — | — | 12 | — | — | — | 12 | — | A | |||||||||||||||||||||||||||||||
|
|
Debt securities in issue | — | — | 4,257 | 6 | 109 | — | 4,366 | 6 | A | |||||||||||||||||||||||||||||||
|
Total liabilities at fair value
|
1,100 | 2 | 68,069 | 98 | 369 | — | 69,538 | 100 | |||||||||||||||||||||||||||||||||
177
Financial Statements
Notes to the Financial Statements
continued
At 31 December 2008
(1)
| Internal models based on | ||||||||||||||||||||||||||||||||||||||
| Quoted prices in | Market | Significant | Valuation | |||||||||||||||||||||||||||||||||||
| active markets | observable data | unobservable data | Total | technique | ||||||||||||||||||||||||||||||||||
| Balance sheet category | £m | % | £m | % | £m | % | £m | % | ||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||||
|
Trading assets
|
Loans and advances to banks | — | — | 4,947 | 7 | — | — | 4,947 | 7 | A | ||||||||||||||||||||||||||||
|
|
Loans and advances to customers | — | — | 1,310 | 2 | — | — | 1,310 | 2 | A | ||||||||||||||||||||||||||||
|
|
Debt securities | 16,801 | 23 | — | — | — | — | 16,801 | 23 | — | ||||||||||||||||||||||||||||
|
|
Equity securities | 671 | 1 | — | — | 37 | — | 708 | 1 | B | ||||||||||||||||||||||||||||
|
Derivative assets
|
Exchange rate contracts | — | — | 10,788 | 15 | 5 | — | 10,793 | 15 | A | ||||||||||||||||||||||||||||
|
|
Interest rate contracts | 232 | — | 21,549 | 29 | — | — | 21,781 | 29 | A & C | ||||||||||||||||||||||||||||
|
|
Equity & credit contracts | 843 | 1 | 1,559 | 2 | 149 | — | 2,551 | 3 | B | ||||||||||||||||||||||||||||
|
Financial assets at FVTPL
|
Loans and advances to customers | — | — | 6,405 | 9 | 282 | — | 6,687 | 9 | A | ||||||||||||||||||||||||||||
|
|
Debt securities | — | — | 343 | — | 4,347 | 7 | 4,690 | 7 | A | ||||||||||||||||||||||||||||
|
Available-for-sale financial
|
Debt securities | 2,618 | 4 | — | — | — | — | 2,618 | 4 | — | ||||||||||||||||||||||||||||
|
assets
|
Equity securities | 10 | — | 35 | — | — | — | 45 | — | B | ||||||||||||||||||||||||||||
|
Total assets at fair value
|
21,175 | 29 | 46,936 | 64 | 4,820 | 7 | 72,931 | 100 | ||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||||
|
Trading liabilities
|
Deposits by banks | — | — | 34,341 | 47 | — | — | 34,341 | 47 | A | ||||||||||||||||||||||||||||
|
|
Deposits by customers | — | — | 4,622 | 6 | — | — | 4,622 | 6 | A | ||||||||||||||||||||||||||||
|
|
Short positions | 751 | 1 | — | — | — | — | 751 | 1 | — | ||||||||||||||||||||||||||||
|
|
Debt securities in issue | — | — | 1,024 | 1 | — | — | 1,024 | 1 | A | ||||||||||||||||||||||||||||
|
Derivative liabilities
|
Exchange rate contracts | — | — | 1,680 | 2 | — | — | 1,680 | 2 | A | ||||||||||||||||||||||||||||
|
|
Interest rate contracts | — | — | 21,489 | 30 | — | — | 21,489 | 30 | A & C | ||||||||||||||||||||||||||||
|
|
Equity & credit contracts | 803 | 1 | 3,669 | 5 | 169 | — | 4,641 | 6 | B | ||||||||||||||||||||||||||||
|
Financial liabilities at FVTPL
|
Deposits by banks | — | — | 153 | — | — | — | 153 | — | A | ||||||||||||||||||||||||||||
|
|
Deposits by customers | — | — | 252 | — | — | — | 252 | — | A | ||||||||||||||||||||||||||||
|
|
Debt securities in issue | — | — | 5,021 | 7 | 247 | — | 5,268 | 7 | A | ||||||||||||||||||||||||||||
|
Total liabilities at fair value
|
1,554 | 2 | 72,251 | 98 | 416 | — | 74,221 | 100 | ||||||||||||||||||||||||||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47. |
The following tables presents the fair values at 31 December 2009 and 2008 of the above
financial assets and liabilities by product, analysed by the valuation methodology used by the
Group to determine their fair value. The tables also disclose the percentages that the recorded
fair values of products represent of the total assets and liabilities, respectively, that are
recorded at fair value in the balance sheet:
At 31 December 2009
| Internal models based on | ||||||||||||||||||||||||||||||||
| Significant | ||||||||||||||||||||||||||||||||
| Quoted prices in | Market | unobservable | ||||||||||||||||||||||||||||||
| active markets | observable data | data | Total | |||||||||||||||||||||||||||||
| Product | £m | % | £m | % | £m | % | £m | % | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Government and government-guaranteed debt securities
|
3,061 | 5 | — | — | — | — | 3,061 | 5 | ||||||||||||||||||||||||
|
Asset-backed securities
|
— | — | 4,498 | 7 | 1,481 | 2 | 5,979 | 9 | ||||||||||||||||||||||||
|
Floating rate notes
|
11,128 | 16 | — | — | — | — | 11,128 | 16 | ||||||||||||||||||||||||
|
Other debt securities
|
2,490 | 4 | — | — | 263 | — | 2,753 | 4 | ||||||||||||||||||||||||
|
UK Social housing association loans
|
— | — | 6,116 | 9 | — | — | 6,116 | 9 | ||||||||||||||||||||||||
|
Term deposits and money market instruments
|
— | — | 15,881 | 23 | — | — | 15,881 | 23 | ||||||||||||||||||||||||
|
Exchange rate derivatives
|
— | — | 4,088 | 6 | 37 | — | 4,125 | 6 | ||||||||||||||||||||||||
|
Interest rate derivatives
|
4 | — | 17,223 | 25 | — | — | 17,227 | 25 | ||||||||||||||||||||||||
|
Equity & credit derivatives
|
258 | — | 1,060 | 1 | 157 | — | 1,475 | 1 | ||||||||||||||||||||||||
|
Ordinary shares and similar securities
|
1,491 | 2 | 30 | — | 7 | — | 1,528 | 2 | ||||||||||||||||||||||||
|
|
18,432 | 27 | 48,895 | 71 | 1,945 | 2 | 69,272 | 100 | ||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Exchange rate derivatives
|
— | — | 521 | 1 | — | — | 521 | 1 | ||||||||||||||||||||||||
|
Interest rate derivatives
|
— | — | 16,208 | 23 | — | — | 16,208 | 23 | ||||||||||||||||||||||||
|
Equity & credit derivatives
|
29 | — | 1,945 | 3 | 260 | — | 2,234 | 3 | ||||||||||||||||||||||||
|
Ordinary shares and similar securities
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Deposits and debt securities in issue
|
1,071 | 2 | 49,395 | 71 | — | — | 50,466 | 73 | ||||||||||||||||||||||||
|
Debt securities in issue
|
— | — | — | — | 109 | — | 109 | — | ||||||||||||||||||||||||
|
|
1,100 | 2 | 68,069 | 98 | 369 | — | 69,538 | 100 | ||||||||||||||||||||||||
178
Financial Statements
Notes to the Financial Statements
continued
At 31 December 2008
(1)
| Internal models based on | ||||||||||||||||||||||||||||||||
| Significant | ||||||||||||||||||||||||||||||||
| Quoted prices in | Market | Unobservable | ||||||||||||||||||||||||||||||
| active markets | observable data | data | Total | |||||||||||||||||||||||||||||
| Product | £m | % | £m | % | £m | % | £m | % | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Government and government-guaranteed debt securities
|
9,804 | 14 | — | — | — | — | 9,804 | 14 | ||||||||||||||||||||||||
|
Asset-backed securities
|
— | — | 343 | — | 4,347 | 6 | 4,690 | 6 | ||||||||||||||||||||||||
|
Floating rate notes
|
5,101 | 7 | — | — | — | — | 5,101 | 7 | ||||||||||||||||||||||||
|
Other debt securities
|
4,514 | 7 | — | — | 282 | — | 4,796 | 7 | ||||||||||||||||||||||||
|
UK Social housing association loans
|
— | — | 6,405 | 8 | — | — | 6,405 | 8 | ||||||||||||||||||||||||
|
Term deposits and money market instruments
|
— | — | 6,257 | 9 | — | — | 6,257 | 9 | ||||||||||||||||||||||||
|
Exchange rate derivatives
|
— | — | 10,788 | 15 | 5 | — | 10,793 | 15 | ||||||||||||||||||||||||
|
Interest rate derivatives
|
232 | — | 21,549 | 30 | — | — | 21,781 | 30 | ||||||||||||||||||||||||
|
Equity & credit derivatives
|
843 | 1 | 1,559 | 2 | 149 | — | 2,551 | 3 | ||||||||||||||||||||||||
|
Ordinary shares and similar securities
|
681 | 1 | 35 | — | 37 | — | 753 | 1 | ||||||||||||||||||||||||
|
|
21,175 | 30 | 46,936 | 64 | 4,820 | 6 | 72,931 | 100 | ||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Exchange rate derivatives
|
— | — | 1,680 | 3 | — | — | 1,680 | 3 | ||||||||||||||||||||||||
|
Interest rate derivatives
|
— | — | 21,489 | 29 | — | — | 21,489 | 29 | ||||||||||||||||||||||||
|
Equity & credit derivatives
|
803 | 1 | 3,669 | 5 | 169 | — | 4,641 | 6 | ||||||||||||||||||||||||
|
Ordinary shares and similar securities
|
751 | 1 | — | — | — | — | 751 | 1 | ||||||||||||||||||||||||
|
Deposits and debt securities in issue
|
— | — | 45,413 | 61 | 247 | — | 45,660 | 61 | ||||||||||||||||||||||||
|
Debt securities in issue
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
1,554 | 2 | 72,251 | 98 | 416 | — | 74,221 | 100 | ||||||||||||||||||||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47. |
Valuation techniques
The main valuation techniques employed in the Group’s internal models to measure the fair value of
the financial instruments disclosed above at 31 December 2009 and 2008 are set out below. In
substantially all cases, the principal inputs into these models are derived from observable market
data. The Group did not make any material changes to the valuation techniques and internal models
it used during the years ended 31 December 2009, 2008 and 2007, except for the technique applied in
2009 to the holdings of Portuguese mortgage-backed securities classified as FVTPL — Debt
securities, described on page 182 for Instrument 7.
| A | In the valuation of financial instruments requiring static hedging (for example interest rate and currency derivatives) and in the valuation of loans and advances and deposits, the ‘present value’ method is used. Expected future cash flows are discounted using the interest rate curves of the applicable currencies. The interest rate curves are generally observable market data and reference yield curves derived from quoted interest rates in appropriate time bandings, which match the timings of the cashflows and maturities of the instruments. | |
| B | In the valuation of equity financial instruments requiring dynamic hedging (principally equity securities, options and other structured instruments), proprietary stochastic volatility models are used. These types of models are widely accepted in the financial services industry. Observable market inputs are used in these models to generate variables such as the bid-offer spread, foreign currency exchange rates, credit risk, volatility, correlation between indices and market liquidity as appropriate. In limited circumstances, other inputs may be used in these models that are based on data other than observable market data, such as the Halifax’s UK House Price Index (‘HPI’) volatility, HPI forward growth, HPI spot rate, and mortality. | |
| C | In the valuation of financial instruments exposed to interest rate risk that require either static or dynamic hedging (such as interest rate futures, caps and floors, and options), the present value method (futures), Black’s model (caps/floors) and the Hull/White and Markov functional models (Bermudan options) are used. These types of models are widely accepted in the financial services industry. The significant inputs used in these models are observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates. In limited circumstances, other inputs may be used in these models that are based on data other than observable market data, such as the Halifax’s UK House Price Index (‘HPI’) volatility, HPI forward growth, HPI spot rate, mortality, and the specific credit spread for that instrument. |
In determining fair value, the Group also considers the credit risk of its counterparties, as well
as its own creditworthiness, on all over-the-counter (OTC) derivatives in the trading book. The
Group attempts to mitigate credit risk to third parties by entering into netting and collateral
arrangements. Net counterparty exposure (counterparty positions netted by offsetting transactions
and both cash and securities collateral) is then valued for counterparty creditworthiness and this
resultant value is incorporated into the fair value of the respective instruments.
The credit risk adjustment is measured as a lifetime expected loss for each counterparty based
on the probability of default, the loss given default and the expected exposure of the OTC
derivative position with the counterparty.
The probability of default is calculated at the counterparty level through the use of internal
rating models. The loss given default (“LGD”) is calculated at the facility level and takes into
account the counterparty characteristics as well as the instrument traded. Credit ratings and LGD
are updated by the credit team as new relevant information becomes available and at periodic
reviews performed at least annually.
The expected exposure is calculated on a portfolio level and is based on the underlying risks
of the portfolio. The main drivers of the expected exposure are the size of the risk position with
the counterparty along with the prevailing market environment. The total credit risk adjustment on
the Group’s counterparties was £7m (2008: £6m).
179
Financial Statements
Notes to the Financial Statements
continued
Residential property derivative contracts, where the underlying is a specific property, are
referenced to regional property indices for valuation. The indexing of the contracts is appropriate
due to the number and wide geographical dispersion of the portfolio. In these circumstances, an
adjustment to fair value is made to take account of specific risk against the index. Illiquid
commercial property assets are written down with reference to actual and anticipated declines in
the commercial property index to reflect a realistic estimate of realisable value.
Broker quotes and external consensus market data are used for validating the fair values of
some items in the trading portfolio, or designated at fair value through profit or loss. All
derivatives pricing models are validated independently by the Quantitative Risk Group (‘QRG’). A
validation report is produced for each model-derived payment that assesses the mathematical
assumptions behind the model and the implementation of the model and its integration within the
trading system. Where there is observable market data the models calibrate to market. Where pricing
data is unobservable then the input parameters are regularly reviewed by QRG. The source of
pricing data is considered as part of the process that determines the classification of the level
of a financial instrument.
The Group also considers its own creditworthiness when determining the fair value of an
instrument, including over-the-counter (‘OTC’) derivative instruments and financial liabilities
held at fair value through profit or loss if the Group believes market participants would take that
into account when transacting the respective instrument. The approach to measuring the impact of
the Group’s credit risk on an instrument is done in the same manner as for third party credit risk.
The impact of the Group’s credit risk is considered when calculating the fair value of an
instrument, even when credit risk is not readily observable such as in OTC derivatives contracts.
The Group has not realised any profit or loss on revaluing fair values of derivatives to reflect
its own creditworthiness. If the Group had reflected such adjustments it would not have had a
material impact on the valuations.
The fair values of the financial instruments arising from the Group’s internal models take into
account, among other things, contract terms and observable market data, which include such factors
as bid-offer spread, interest rates, credit risk, exchange rates, the quoted market price of raw
materials and equity securities, volatility and prepayments. The main assumptions taken into
account when internal models use information other than market data can be found in the table
below. In all cases, when it is not possible to derive a valuation for a particular feature of an
instrument, management uses judgement to determine the fair value of the particular feature. In
exercising this judgement, a variety of tools are used including proxy observable data, historical
data and extrapolation techniques. Extrapolation techniques take into account behavioural
characteristics of equity markets that have been observed over time, and for which there is a
strong case to support an expectation of a continuing trend in the future. Estimates are
calibrated to observable market prices when they become available.
The estimates thus obtained could vary if other valuation methods or assumptions were used.
The Group believes its valuation methods are appropriate and consistent with other market
participants. Nevertheless, the use of different valuation methods or assumptions, including
imprecision in estimating unobservable market inputs, to determine the fair value of certain
financial instruments could result in different estimates of fair value at the reporting date and
the amount of gain or loss recorded for a particular instrument. Most of the valuation models are
not significantly subjective, because they can be tested and, if necessary, recalibrated by the
internal calculation of and subsequent comparison to market prices of actively traded securities,
where available.
Internal models based on observable market data
During 2008 and 2009, there were no transfers between Level 1 and Level 2 financial instruments.
Internal models based on information other than market data
The table below provides an analysis of financial instruments valued using internal models based on
information other than market data together with the subsequent valuation technique used for each
type of instrument. Each instrument is initially valued at transaction price:
| Amount recognised in | ||||||||||||||||||||||||
| Balance sheet value | income/(expense) | |||||||||||||||||||||||
| 2009 | 2008 (1) | 2009 | 2008 | 2007 | ||||||||||||||||||||
| Balance sheet line item | Category | Financial instrument product type | £m | £m | £m | £m | £m | |||||||||||||||||
|
1. Trading assets
|
Equity securities | Property unit trusts | 7 | 37 | (1 | ) | 16 | — | ||||||||||||||||
|
2. Derivative assets
|
Exchange rate contracts | Cross-currency swaps | 37 | 5 | 14 | 5 | 4 | |||||||||||||||||
|
3. Derivative assets
|
Equity and credit contracts | Reversionary property interests | 73 | 77 | (4 | ) | 3 | 17 | ||||||||||||||||
|
4. Derivative assets
|
Equity contracts | Options and forwards | 84 | 72 | (5 | ) | 91 | 11 | ||||||||||||||||
|
5. FVTPL
|
Loans and advances to customers | Roll-up mortgage portfolio | 262 | 282 | (36 | ) | 58 | 12 | ||||||||||||||||
|
6. FVTPL
|
Debt securities | Reversionary property securities | 263 | 265 | (4 | ) | 1 | 33 | ||||||||||||||||
|
7. FVTPL
|
Debt securities | Portuguese mortgage-backed securities | — | 2,474 | — | (144 | ) | (62 | ) | |||||||||||||||
|
|
Other asset-backed securities | 1,169 | 1,608 | 62 | (184 | ) | (10 | ) | ||||||||||||||||
|
8. FVTPL
|
Debt securities | Collateralised synthetic obligations (CSOs) | 50 | — | — | — | — | |||||||||||||||||
|
9. Derivative liabilities
|
Equity contracts | Options and forwards | (260 | ) | (169 | ) | (82 | ) | (94 | ) | (14 | ) | ||||||||||||
|
10. FVTPL
|
Debt securities in issue | Non-vanilla debt securities | (109 | ) | (247 | ) | (23 | ) | (5 | ) | (4 | ) | ||||||||||||
|
Total net assets
|
1,576 | 4,404 | — | — | — | |||||||||||||||||||
|
Total income/(expense)
|
— | — | (79 | ) | (253 | ) | (13 | ) | ||||||||||||||||
| (1) | Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47. |
180
Financial Statements
Notes to the Financial Statements
continued
Valuation technique
1. Trading assets — Equity securities
These unit trusts are valued using Net Asset Values, which are regular third party asset
valuations, with an adjustment for the estimated discount to asset value inherent in current
similar market prices, reflecting the specific asset characteristics and degree of leverage in each
unit trust.
2. Derivative assets — Exchange rate contracts
These derivatives are valued using a valuation model with interest rates, foreign exchange rates
and long-dated foreign exchange volatility as inputs to derive valuations. Long-dated foreign
exchange volatility is extrapolated from the shorter-dated foreign exchange volatilities which are
directly observable in the market.
3. Derivative assets — Equity and credit contracts
These reversionary property derivatives are valued using a probability weighted set of the
Halifax’s UK House Price Index (‘HPI’) forward prices. These are determined using HPI Spot Rates
adjusted to reflect estimated forward growth. Launched in 1984, the Halifax House Price Index is
based on the lending of the UK’s largest mortgage lender and provides the longest unbroken monthly
data series of any UK housing index. The indices calculated are standardised and represent the
price of a typically transacted house. Regional and national HPI indices are published, which are
similar except that the former reflects the national HPI indices disaggregated into 12 UK regions
and is published quarterly. The national indices are published monthly.
The inputs used to determine the value of the reversionary property derivatives are HPI spot, HPI
forward growth and mortality rates. The principal pricing parameter is HPI forward growth.
HPI Spot Rate
The regional HPI spot rate (which is observable market data) is only published on specific
quarterly dates. In between these dates, its value is estimated by applying the changes in the
national HPI spot rate (which is also observable market data and published monthly) to the most
recently available regional HPI spot rate. An adjustment is made to reflect the specific property
risk i.e. the difference in the actual regional composition of the property underlying the Group’s
reversionary interest portfolio and the composition of the published regional indices. This
adjustment is based on the average historical deviation of price changes of the Group’s actual
property portfolio from that of the published indices.
HPI Forward Growth Rate
Long-dated HPI forward growth rate is not directly observable in the market but is estimated from
broker quotes and traded forward contracts. A specific spread is applied to the long-dated forward
growth rate to reflect the uncertainty surrounding long-dated data. This spread is calculated by
analysing the historical volatility of the HPI, whilst incorporating mean reversion. An adjustment
is made to reflect the specific property risk as for the HPI spot rate above.
Mortality Rate
Mortality rates are obtained from the PNMA00 and PNFA00 Continuous Mortality Investigation Tables
published by the UK Institute and Faculty of Actuaries. These mortality rates are adjusted by
acceleration rates to reflect the mortality profile of the holders of Group’s reversionary property
products underlying the derivatives.
4. Derivative assets — Equity contracts
There are three types of derivatives within this category:
European derivatives (vanilla call and put options)
These derivatives are valued using a modified Black-Scholes model where the HPI index is
log-normally distributed with the forward rates determined from the HPI forward growth.
Asian options
Asian (or average value) options are valued using a modified Black-Scholes model, with an amended
strike price and volatility assumption to account for the average exercise period, through a closed
form adjustment that reflects the strike price relative to the distribution of stock prices at each
relevant date. This is also known as the Curran model.
Forward contracts
Forward contracts are valued using a standard forward pricing model.
The inputs used to determine the value of the above instruments are HPI spot rate, HPI forward
growth rate and HPI volatility. The principal pricing parameter is HPI forward growth rate.
Discussion of the HPI spot and HPI forward growth rates for these financial instruments is the same
as for Instrument 3 above.
HPI Volatility
Long-dated HPI volatility is not directly observable in the market but is estimated from the most
recent traded values. An adjustment is applied to the long-dated HPI volatility rate to reflect the
uncertainty surrounding long-dated data. This adjustment is based on the empirical standard
deviation of historical volatility over a range of time horizons.
181
Financial Statements
Notes to the Financial Statements
continued
5. FVTPL — Loans and advances to customers
Roll-up mortgages are an equity release scheme, where the property owner takes out a loan secured
against their home. The loan is repaid upon the owner’s vacation of the property. The value of the
loan is only repaid from the value of the property. This is known as a “no negative pledge”. The
Group suffers a loss if the sale proceeds from the property are insufficient to repay loan. These
roll-up mortgages are valued using a probability-weighted set of European option prices (puts)
determined using the Black-Scholes model, where the put represents the values of the no negative
pledges.
The inputs used to determine the value of these instruments are HPI spot, HPI forward growth,
HPI volatility, mortality rates and repayment rates. The principal pricing parameter is HPI forward
growth. Discussion of the HPI spot rate, HPI forward growth rate, and mortality rates for this
financial instrument is the same as for Instrument 3 above. Discussion of the HPI volatility rate
is the same as for Instrument 4 above.
Repayment rates
The costs to the Group arising from early repayment by customers (inherent specifically to this
financial instrument) are estimated from prices of swaptions which reflect the costs associated
with unwinding the swap hedges held by the Group against these roll-up mortgages in the event of
early repayment. Early repayment most typically occurs following a fall in market interest rates.
Prepayment rates were taken from the academic paper ‘Pricing and Risk Capital in the Equity Release
Market’, presented to the Institute and Faculty of Actuaries in 2007.
6. FVTPL — Debt securities
Reversionary property securities are an equity release scheme, where the property owner receives an
upfront lump sum in return for paying a fixed percentage of the sales proceeds of the property when
the owner vacates the property. These reversionary property securities are valued using a
probability-weighted set of HPI forward prices.
The inputs used to determine the value of these instruments are HPI spot, HPI forward growth
and mortality rates. The principal pricing parameter is HPI forward growth. The valuation
methodology for these securities is similar to Instrument 3 above.
7. FVTPL — Debt securities
There are three types of debt securities within this category:
Portuguese mortgage-backed securities
In December 2009, Euro 190m of the Group’s holdings of these securities were purchased by the
issuer. As a result, the Group’s remaining positions in these securities have been transferred to
Level 2. Prior to 2009, these securities were valued using a valuation model with reference to the
most relevant generic curve (in this case, Portuguese residential mortgage-backed securities) from
a consensus pricing service and an assumption with respect to the specific credit spread for that
instrument as inputs to derive valuations.
Other asset-backed securities
These other asset-backed securities consist of residential mortgage backed securities, securities
backed by small business and automotive loans and other collateralised debt obligations almost all
of which are AAA rated, and issued by Santander entities. Each instrument was valued with reference
to the price from a consensus pricing service. This is then corroborated against the price from
another consensus pricing service due to the lack of depth in the number of available market
quotes. An average price is used where there is a more than an insignificant difference between the
two sources.
8. FVTPL — Debt securities
These debt securities are valued using valuations prepared by an independent, specialist valuation
firm.
9. Derivative liabilities — Equity and credit contracts
These derivatives are the same as Instrument 4 with the exception that they have a negative fair
value.
10. FVTPL — Debt securities in issue
These debt securities in issue are valued using a three-factor Gaussian Model. The three factors
used in the valuation are domestic interest rates, foreign interest rates and foreign exchange
rates. The correlations between the factors are assumed to be zero within the valuation.
The Hull-White approach is used for estimating the future distribution of domestic and foreign
zero-coupon rates, constructed from the relevant yield curves. A Geometric Brownian Motion model is
used for estimating the future distribution of spot foreign exchange rates. The foreign exchange
and interest rate volatilities are the most crucial pricing parameters; the model calibrates to the
relevant swaption volatility surface.
Unrecognised gains as a result of the use of valuation models using unobservable inputs (“Day One
profits”)
The table below shows the amount that has yet to be recognised in the income statement that relates
to the difference between the transaction price (i.e. the fair value at initial recognition) and
the amount that would have arisen had valuation models using unobservable inputs been used on
initial recognition, less amounts subsequently recognised. This is calculated and reported on a
portfolio basis:
| 2009 | 2008 | 2007 | ||||||||||
| £m | £m | £m | ||||||||||
|
At 1 January
|
55 | 45 | 18 | |||||||||
|
New transactions
|
42 | 12 | 27 | |||||||||
|
Amounts recognised in profit or loss during the year
|
(5 | ) | (2 | ) | — | |||||||
|
At 31 December
|
92 | 55 | 45 | |||||||||
182
Financial Statements
Notes to the Financial Statements
continued
Internal valuation review
In all instances, risk control teams review positions to assess a realistic realisable value for
the position and develop a methodology for any adjustment to fair value which marks the position to
that value using information relevant to that asset. Consideration is given to the quality of the
information available that provides the current mark-to-model valuation and estimates of how
different these valuations could be on an actual trade, taking into consideration how active the
market is. For spot assets that cannot be sold due to illiquidity, forward estimates are
discounted to provide an estimate of a realisable value over time. All adjustments for illiquid
positions are regularly reviewed to reflect changing market conditions.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
The following table provides a reconciliation of the movement between opening and closing balances
of Level 3 financial instruments, measured at fair value using a valuation technique with
significant unobservable inputs:
| Assets | Liabilities | |||||||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||||||
| Trading | through profit | through profit | ||||||||||||||||||||||||||
| Assets | Derivatives | or loss | Total | Derivatives | or loss | Total | ||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
|
At 1 January 2009
|
37 | 154 | 4,629 | 4,820 | (169 | ) | (247 | ) | (416 | ) | ||||||||||||||||||
|
Total gains/(losses) recognised in profit/(loss):
|
||||||||||||||||||||||||||||
|
- Fair value movements
|
(1 | ) | 5 | 22 | 26 | (82 | ) | (23 | ) | (105 | ) | |||||||||||||||||
|
- Foreign exchange and other movements
|
(3 | ) | 43 | (106 | ) | (66 | ) | (18 | ) | 5 | (13 | ) | ||||||||||||||||
|
Purchases/issues
|
— | — | 30 | 30 | — | — | — | |||||||||||||||||||||
|
Sales
|
(26 | ) | — | (121 | ) | (147 | ) | — | — | — | ||||||||||||||||||
|
Settlements
|
— | (8 | ) | (499 | ) | (507 | ) | 9 | 156 | 165 | ||||||||||||||||||
|
Transfers in
|
— | — | 50 | 50 | — | — | — | |||||||||||||||||||||
|
Transfers out
|
— | — | (2,261 | ) | (2,261 | ) | — | — | — | |||||||||||||||||||
|
At 31 December 2009
|
7 | 194 | 1,744 | 1,945 | (260 | ) | (109 | ) | (369 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total gains/(losses) recognised in profit/(loss)
relating to those assets and liabilities held at
the end of the year
|
(4 | ) | 48 | (84 | ) | (40 | ) | (100 | ) | (18 | ) | (118 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||||||||||
| Fair value | Fair value | |||||||||||||||||||||||||||
| Trading | through profit | through profit | ||||||||||||||||||||||||||
| Assets | Derivatives | or loss | Total | Derivatives | or loss | Total | ||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
|
At 1 January 2008
|
— | 118 | 4,515 | 4,633 | (148 | ) | (276 | ) | (424 | ) | ||||||||||||||||||
|
Total gains/(losses) recognised in profit/(loss):
|
||||||||||||||||||||||||||||
|
- Fair value movements
|
16 | 99 | (269 | ) | (154 | ) | (94 | ) | (5 | ) | (99 | ) | ||||||||||||||||
|
- Foreign exchange and other movements
|
— | (88 | ) | 286 | 198 | 73 | 17 | 90 | ||||||||||||||||||||
|
Purchases
|
21 | 49 | 139 | 209 | — | — | — | |||||||||||||||||||||
|
Settlements
|
— | (24 | ) | (42 | ) | (66 | ) | — | 17 | 17 | ||||||||||||||||||
|
At 31 December 2008
|
37 | 154 | 4,629 | 4,820 | (169 | ) | (247 | ) | (416 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total gains/(losses) recognised in profit/(loss)
relating to those assets and liabilities held at
the end of the year
|
16 | 11 | 17 | 44 | (21 | ) | 12 | (9 | ) | |||||||||||||||||||
Financial instrument assets and liabilities at 31 December 2009
Financial instrument assets valued using internal models based on information other than market
data were 2% (2008: 7%) of total assets measured at fair value and 0.7% (2008: 2%) of total assets
at 31 December 2009.
Trading assets valued using internal models based on information other than market data
decreased in 2009 principally due to assets being sold.
Derivatives valued using internal models based on information other than market data increased
in 2009 principally due to gains reflecting changes in foreign exchange rates.
Assets designated at fair value through profit or loss valued using internal models based on
information other than market data decreased in 2009 principally due to settlements and transfers
to Level 2. During December 2009, euro 190m of the Group’s holdings of AAA-rated prime
mortgage-backed securities were sold to the issuer. As a result, the Group’s remaining positions in
these securities of £2,261m were transferred to Level 2. During 2009, there were acquisitions of
£30m of financial instrument assets valued using internal models based on information other than
market data.
Financial instrument liabilities valued using internal models based on information other than
market data were 0.5% (2008: 0.6%) of total liabilities measured at fair value and 0.1% (2008:
0.1%) of total liabilities at 31 December 2009.
Derivative liabilities valued using internal models based on information other than market
data increased in 2009 principally due to losses reflecting changes in credit spreads, the HPI
index and foreign exchange rates.
Liabilities designated at fair value through profit or loss valued using internal models based
on information other than market data decreased in 2009 principally due to maturities of debt
securities in issue.
183
Financial Statements
Notes to the Financial Statements
continued
Financial instrument assets and liabilities at 31 December 2008
Financial instrument assets valued using internal models based on information other than market
data were 7% (2007: 6%) of total assets measured at fair value and 2% (2007: 2%) of total assets at
31 December 2008.
Financial instrument assets valued using internal models based on information other than
market data increased in 2008 principally due to exchange rate movements on euro-denominated
investments. During 2008, there were no sales of financial instrument assets valued using internal
models based on information other than market data.
Financial instrument liabilities valued using internal models based on information other than
market data were 0.6% (2007: 1%) of total liabilities measured at fair value and 0.1% (2007: 0.2%)
of total liabilities at 31 December 2008.
Liabilities designated at fair value through profit or loss valued using internal models based
on information other than market data decreased in 2008 principally due to maturities of debt
securities in issue and changes in foreign exchange rates.
Gains and losses for the year ended 31 December 2009
Losses of £4m in respect of trading assets valued using internal models based on information other
than market data principally reflected the lack of market liquidity during the year.
Gains of £48m in respect of derivatives assets valued using internal models based on
information other than market data principally reflected movements in foreign exchange rates.
Losses of £84m in respect of assets designated at fair value through profit or loss valued
using internal models based on information other than market data principally reflected changes in
foreign exchange rates partly offset by an increase in the value of the prime securities due to
tightening of credit spreads of asset-backed and mortgage-backed securities.
Losses of £100m in respect of derivatives liabilities valued using internal models based on
information other than market data principally reflected changes in credit spreads, the HPI index
and foreign exchange rates.
Losses of £18m in respect of liabilities designated at fair value through profit or loss
valued using internal models based on information other than market data principally reflected
changes in foreign exchange and interest rates. They are fully matched with derivatives.
Gains and losses on assets and liabilities classified as held for trading are presented in the
income statement under “Net trading and other income”. Fair value changes on long-term debt
designated at fair value and related derivatives are presented in the income statement under
‘Changes in fair value of long-term debt issued and related derivatives’. The income statement line
item ‘Net income/(expense) from other financial instruments designated at fair value’ captures fair
value movements on all other financial instruments designated at fair value and related
derivatives.
Gains and losses for the year ended 31 December 2008
The value of the prime securities classified as FVTPL — Debt securities (Instrument 7) decreased
due to an increase in credit spreads reflecting a general lack of demand for asset-backed and
mortgage-backed securities, exacerbated by the collapse of wholesale funding activity which led to
a significant decline in wider asset demand. The Group believes that the fair values of these
instruments have diverged materially from the amounts it currently anticipates realising on
maturity, because the mortgages underlying these securities continue to perform adequately.
The values of the HPI-related loans and advances to customers, debt securities and associated
derivatives declined due to a further lack of market liquidity.
The terms of the instruments presented as FVTPL — debt securities in issue (instrument 9) and
related exchange rate derivatives (instrument 2) are fully matched. The movement in these
financial instruments reflects changes in foreign exchange rates and interest rates.
The Group risk manages the unit trusts using derivative positions valued using quoted prices
in active markets, or internal models based on observable market data. The effects of these risk
management activities are not reflected in the gains and losses included in the table above.
Gains and losses for the year ended 31 December 2007
The value of the prime securities classified as FVTPL — Debt securities (Instrument 7) decreased
due to an increase in credit spreads reflecting reduced demand for asset-backed and mortgage-backed
securities.
The values of the HPI-related loans and advances to customers, debt securities and associated
derivatives increased/(decreased) due to a lack of market liquidity.
The terms of the instruments presented as FVTPL — debt securities in issue (instrument 9) and
related exchange rate derivatives (instrument 2) are fully matched. The movement in these
financial instruments reflects changes in foreign exchange rates and interest rates.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
As discussed above, the fair value of financial instruments are, in certain circumstances, measured
using valuation techniques that incorporate assumptions that are not evidenced by prices from
observable current market transactions in the same instrument and are not based on observable
market data and, as such require the application of a degree of judgement. Changing one or more of
the inputs to the valuation models to reasonably possible alternative assumptions would change the
fair values significantly. The following table shows the sensitivity of these fair values to
reasonably possible alternative assumptions.
Favourable and unfavourable changes are determined on the basis of changes in the value of the
instrument as a result of varying the levels of the unobservable input as described in the table
below. The potential effects do not take into effect any offsetting or hedged positions.
184
Financial Statements
Notes to the Financial Statements
continued
At 31 December 2009
| Reflected in income statement | ||||||||||||||||||||
| Favourable | Unfavourable | |||||||||||||||||||
| Fair value | changes | changes | ||||||||||||||||||
| Balance sheet note line item and product | £m | Assumptions | Shift | £m | £m | |||||||||||||||
|
1.
Trading assets
— Equity securities:
— Property unit trusts |
7 | Estimated discount to asset value | 10 | % | 1 | (1 | ) | |||||||||||||
|
3. Derivative assets
— Equity and credit contracts:
|
73 | HPI Forward growth rate | 1 | % | 11 | (11 | ) | |||||||||||||
|
—
Reversionary property derivatives
|
HPI Spot rate | 10 | % | 8 | (8 | ) | ||||||||||||||
|
|
Mortality rate | 2 yrs | 1 | (1 | ) | |||||||||||||||
|
4. Derivative assets
— Equity and credit contracts:
|
84 | HPI Forward growth rate | 1 | % | 3 | (3 | ) | |||||||||||||
|
— Options and forwards
|
HPI Spot rate | 10 | % | 3 | (2 | ) | ||||||||||||||
|
|
HPI Volatility | 1 | % | 1 | (1 | ) | ||||||||||||||
|
5. FVTPL
— Loans and advances to customers:
|
263 | HPI Forward growth rate | 1 | % | 28 | (28 | ) | |||||||||||||
|
— Roll-up mortgage portfolio
|
HPI Spot rate | 10 | % | 9 | (11 | ) | ||||||||||||||
|
|
HPI Volatility | 1 | % | 5 | (5 | ) | ||||||||||||||
|
|
Mortality rate | 2 yrs | 7 | (6 | ) | |||||||||||||||
|
6. FVTPL
— Debt securities:
|
263 | HPI Forward growth rate | 1 | % | 24 | (24 | ) | |||||||||||||
|
— Reversionary property securities
|
HPI Spot rate | 10 | % | 27 | (27 | ) | ||||||||||||||
|
|
Mortality rate | 2 yrs | 5 | (5 | ) | |||||||||||||||
|
7. FVTPL
— Debt securities:
— Other asset-backed securities |
1,169 | Credit spread | 75 bps | 15 | (15 | ) | ||||||||||||||
|
9.
Derivative liabilities
— Equity and credit contracts:
|
(260 | ) | HPI Forward growth rate | 1 | % | 14 | (14 | ) | ||||||||||||
|
— Options and forwards
|
HPI Spot rate | 10 | % | 32 | (37 | ) | ||||||||||||||
|
|
HPI Volatility | 1 | % | 2 | (2 | ) | ||||||||||||||
No sensitivities are presented for the FVTPL — debt securities in issue (instrument 10) per
page 182 and related exchange rate derivatives (instrument 2) per page 181, as the terms of these
instruments are fully matched. As a result, any changes in the valuation of the debt securities in
issue would be exactly offset by an equal and opposite change in the valuation of the exchange rate
derivatives. In addition, no sensitivities are presented for the FVTPL — debt securities
(instrument 8) as they have been valued by an independent, specialist valuation firm.
50. Capital management and resources
This note reflects the transactions and amounts reported on a basis consistent with the Group’s
regulatory filings, and therefore has not been amended to reflect the application of group
reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company as
reflected elsewhere in the financial statements.
Capital management and capital allocation
The Board is responsible for capital management strategy and policy and ensuring that capital
resources are appropriately monitored and controlled within regulatory and internal limits.
Authority for capital management flows to the Chief Executive and from him to specific individuals
who are members of the Group’s Asset and Liability Management Committee (‘ALCO’).
ALCO adopts a centralised capital management approach that is driven by the Group’s corporate
purpose and strategy. This approach takes into account the regulatory and commercial environment in
which the Group operates, the Group’s risk appetite, the management strategy for each of the
Group’s material risks (including whether or not capital provides an appropriate risk mitigant) and
the impact of appropriate adverse scenarios and stresses on the Group’s capital requirements. This
approach is reviewed annually as part of the Group’s Internal Capital Adequacy Assessment Process
(‘ICAAP’).
The Group manages its capital requirements, debt funding and liquidity on the basis of
policies and plans reviewed regularly at ALCO and as part of the ICAAP process. To support its
capital and senior debt issuance programmes, the Group is rated on a stand alone basis.
On an ongoing basis, and in accordance with the latest ICAAP review, the Group forecasts its
regulatory and internal capital requirements based on the approved capital volumes allocated to
business units as part of the corporate planning process and the need to have access to a capital
buffer. Capital allocation decisions are made as part of planning based on the relative returns on
capital using both economic and regulatory capital measures. Capital allocations are reviewed in
response to changes in risk appetite and risk management strategy, changes to the commercial
environment, changes in key economic indicators or when additional capital requests are received.
This combination of regulatory and economic capital ratios and limits, internal buffers and
restrictions, together with the relevant costs of differing capital instruments and a consideration
of the various other capital management techniques are used to shape the most cost-effective
structure to fulfil the Group’s capital needs.
Capital adequacy
From 1 January 2008, the Group has managed its capital on a Basel II basis. Throughout 2009, the
Group held capital over and above its regulatory requirements, and managed internal capital
allocations and targets in accordance with its capital and risk management policies.
185
Financial Statements
Notes to the Financial Statements
continued
Group Capital
| 31 December 2009 | 31 December 2008 | |||||||
| £m | £m | |||||||
|
Core Tier 1 capital
|
6,520 | 4,694 | ||||||
|
Deductions from Core Tier 1 capital
|
(1,941 | ) | (792 | ) | ||||
|
Total Core Tier 1 capital after deductions
|
4,579 | 3,902 | ||||||
|
Other Tier 1 capital
|
1,859 | 1,485 | ||||||
|
Total Tier 1 capital after deductions
|
6,438 | 5,387 | ||||||
|
Tier 2 capital
|
5,832 | 4,766 | ||||||
|
Deductions from Tier 2 capital
|
(400 | ) | (284 | ) | ||||
|
Total Tier 2 capital after deductions
|
5,432 | 4,482 | ||||||
|
Deductions from Tier 1 and Tier 2
|
— | (988 | ) | |||||
|
Total Capital Resources
|
11,870 | 8,881 | ||||||
Tier 1 includes audited profits for the years ended 31 December 2009 and 31 December 2008
respectively after adjustment to comply with UK Financial Services Authority rules.
The Group and Banco Santander, S.A. recognise the additional security inherent in Tier 1
capital in the current commercial and regulatory environment. Consequently, on 12 October 2008,
the Company issued ten billion ordinary shares of 10 pence each and these shares were issued at par
to Banco Santander, S.A. on the same date.
These ordinary shares qualified as Tier 1 capital for the Group. This capital was, in turn,
transferred to Alliance & Leicester plc in late December 2008 as planned. At 31 December 2008 Tier
1 includes the Tier 1 capital of Alliance & Leicester plc on a proportional consolidation basis.
On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial
efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance &
Leicester plc shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares of
the Company of £0.10 each.
Tier 1 deductions primarily relate to goodwill and expected losses. In addition, the Group has
elected to deduct certain securitisation positions from capital rather than treat these exposures
as a risk weighted asset.
The expected loss deduction represents the difference between expected loss calculated in
accordance with the Group’s IRB models, and the impairment provisions calculated in accordance with
IFRS. Details of the Group’s accounting policy for credit provisions are set out in the Accounting
Policies Note on page 116. Expected losses are higher than the impairment provision as the expected
loss amount includes all losses that are anticipated to arise over the twelve months following the
balance sheet date, not just those incurred at the balance sheet date.
The increase in Tier 1 deductions primarily relate to additional goodwill following the
transfer of Alliance & Leicester on 9 January 2009, and software capitalised during the year.
Increases in Tier 2 relate to interest rate and exchange rate fluctuations and the inclusion
of the Tier 2 capital of Alliance & Leicester plc. Deductions from Tier 2 represent expected
losses and securitisation positions described above.
At 31 December 2008, deductions from Tier 1 and Tier 2 represent lending which is capital in
nature. This was repaid during 2009.
The overall changes in the fair value of assets and liabilities during 2008 did not have a
significant impact on the capital position reported by the Group.
51. Consolidating financial information
Abbey National Treasury Services plc (‘ANTS plc’) is a wholly owned subsidiary of the Company
and was able to offer and sell certain securities in the US from time to time pursuant to a
registration statement on Form F-3 filed with the SEC (the ‘Registration Statement’). The
Registration Statement expired in December 2008. The possibility of filing a new registration
statement is being kept under review. The Company has fully and unconditionally guaranteed the
obligations of ANTS plc that have been, or will be incurred before 31 July 2012: this guarantee
includes all securities issued by ANTS plc pursuant to the Registration Statement.
ANTS plc utilises an exception provided in Rule 3-10 of Regulation S-X, and therefore does not
file its financial statements with the SEC. In accordance with the requirements to qualify for the
exception, presented below is condensed consolidating financial information for (i) the Company on
a stand-alone basis as guarantor; (ii) ANTS plc on a stand-alone basis; (iii) other subsidiaries of
the Company on a combined basis (‘Other’); (iv) consolidation adjustments (‘Adjustments’); and (v)
total consolidated amounts (‘Consolidated’).
Under IAS 27, the Company and ANTS plc account for investments in their subsidiaries at cost
subject to impairment. Rule 3-10 of Regulation S-X requires a company to account for its
investments in subsidiaries using the equity method, which would increase/(decrease) the results
for the year of the Company and ANTS plc in the information below by £443m and £(178)m,
respectively (2008: £517m and £127m, 2007: £334m and £218m).
The net assets of the Company and ANTS plc in the information below would also be increased by
£584m and £316m, respectively (2008: £1,552m and £497m).
186
Financial Statements
Notes to the Financial Statements
continued
Income statements
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| For the year ended 31 December 2009 | £m | £m | £m | £m | £m | |||||||||||||||
|
Net interest income
|
1,985 | 41 | 1,396 | (10 | ) | 3,412 | ||||||||||||||
|
Fee, commission, net trading, and other income
|
963 | 721 | 138 | (538 | ) | 1,284 | ||||||||||||||
|
Total operating income
|
2,948 | 762 | 1,534 | (548 | ) | 4,696 | ||||||||||||||
|
Administration expenses
|
(1,136 | ) | (144 | ) | (547 | ) | (21 | ) | (1,848 | ) | ||||||||||
|
Depreciation and amortisation
|
(132 | ) | (3 | ) | (129 | ) | 4 | (260 | ) | |||||||||||
|
Impairment and provisions
|
(645 | ) | (30 | ) | (650 | ) | 427 | (898 | ) | |||||||||||
|
Profit/(loss) before tax
|
1,035 | 585 | 208 | (138 | ) | 1,690 | ||||||||||||||
|
Taxation (charge)/credit
|
(288 | ) | (29 | ) | 63 | (191 | ) | (445 | ) | |||||||||||
|
Profit/(loss) for the year
|
747 | 556 | 271 | (329 | ) | 1,245 | ||||||||||||||
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| For the year ended 31 December 2008 | £m | £m | £m | £m | £m | |||||||||||||||
|
Net interest income
|
1,185 | 198 | 391 | (2 | ) | 1,772 | ||||||||||||||
|
Fee, commission, net trading, and other income
|
1,807 | 180 | 490 | (1,245 | ) | 1,232 | ||||||||||||||
|
Total operating income
|
2,992 | 378 | 881 | (1,247 | ) | 3,004 | ||||||||||||||
|
Administration expenses
|
(1,114 | ) | (136 | ) | (92 | ) | (1 | ) | (1,343 | ) | ||||||||||
|
Depreciation and amortisation
|
(81 | ) | (3 | ) | (118 | ) | — | (202 | ) | |||||||||||
|
Impairment and provisions
|
(343 | ) | (26 | ) | 27 | (23 | ) | (365 | ) | |||||||||||
|
Profit/(loss) before tax
|
1,454 | 213 | 698 | (1,271 | ) | 1,094 | ||||||||||||||
|
Taxation charge
|
(126 | ) | (10 | ) | (204 | ) | 65 | (275 | ) | |||||||||||
|
Profit/(loss) for the year
|
1,328 | 203 | 494 | (1,206 | ) | 819 | ||||||||||||||
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| For the year ended 31 December 2007 | £m | £m | £m | £m | £m | |||||||||||||||
|
Net interest income
|
1,101 | 241 | 162 | (5 | ) | 1,499 | ||||||||||||||
|
Fee, commission, net trading, and other income
|
900 | 22 | 623 | (262 | ) | 1,283 | ||||||||||||||
|
Total operating income
|
2,001 | 263 | 785 | (267 | ) | 2,782 | ||||||||||||||
|
Administration expenses
|
(1,163 | ) | (129 | ) | (92 | ) | 15 | (1,369 | ) | |||||||||||
|
Depreciation and amortisation
|
(72 | ) | (2 | ) | (131 | ) | — | (205 | ) | |||||||||||
|
Impairment and provisions
|
(346 | ) | 4 | 24 | (26 | ) | (344 | ) | ||||||||||||
|
Profit/(loss) before tax
|
420 | 136 | 586 | (278 | ) | 864 | ||||||||||||||
|
Taxation charge
|
(69 | ) | (29 | ) | (89 | ) | 8 | (179 | ) | |||||||||||
|
Profit/(loss) for the year
|
351 | 107 | 497 | (270 | ) | 685 | ||||||||||||||
Balance sheets
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| At 31 December 2009 | £m | £m | £m | £m | £m | |||||||||||||||
|
Cash and balances at central banks
|
3,266 | 448 | 449 | — | 4,163 | |||||||||||||||
|
Trading assets
|
— | 24,976 | 30,321 | (22,007 | ) | 33,290 | ||||||||||||||
|
Derivative financial instruments
|
2,539 | 23,129 | 8,422 | (11,263 | ) | 22,827 | ||||||||||||||
|
Financial assets designated at fair value
|
37,145 | 12,000 | 313 | (37,100 | ) | 12,358 | ||||||||||||||
|
Loans and advances to banks
|
109,658 | 166,020 | 156,075 | (422,602 | ) | 9,151 | ||||||||||||||
|
Loans and advances to customers
|
131,749 | 20,266 | 105,421 | (70,632 | ) | 186,804 | ||||||||||||||
|
Available-for-sale securities
|
30 | — | 767 | — | 797 | |||||||||||||||
|
Loans and receivables securities
|
2 | 896 | 12,244 | (3,244 | ) | 9,898 | ||||||||||||||
|
Macro hedge of interest rate risk
|
— | 682 | 504 | (59 | ) | 1,127 | ||||||||||||||
|
Investment in associated undertakings
|
76 | — | — | (1 | ) | 75 | ||||||||||||||
|
Investment in subsidiary undertakings
|
7,038 | 2,185 | 2,291 | (11,514 | ) | — | ||||||||||||||
|
Intangible assets
|
552 | 8 | 132 | 754 | 1,446 | |||||||||||||||
|
Property, plant and equipment
|
561 | 6 | 270 | 101 | 938 | |||||||||||||||
|
Operating lease assets
|
— | — | 313 | (1 | ) | 312 | ||||||||||||||
|
Current tax assets
|
— | 3 | 82 | — | 85 | |||||||||||||||
|
Deferred tax assets
|
428 | 21 | 401 | 96 | 946 | |||||||||||||||
|
Other assets
|
651 | 67 | 548 | (192 | ) | 1,074 | ||||||||||||||
|
Total assets
|
293,695 | 250,707 | 318,553 | (577,664 | ) | 285,291 | ||||||||||||||
|
Deposits by banks
|
116,414 | 166,169 | 81,097 | (357,869 | ) | 5,811 | ||||||||||||||
|
Deposits by customers
|
159,187 | 17,601 | 110,834 | (143,729 | ) | 143,893 | ||||||||||||||
|
Derivative financial instruments
|
3,352 | 24,330 | 2,711 | (11,430 | ) | 18,963 | ||||||||||||||
|
Trading liabilities
|
— | 13,315 | 47,159 | (14,322 | ) | 46,152 | ||||||||||||||
|
Financial liabilities designated at fair value
|
— | 4,282 | 141 | — | 4,423 | |||||||||||||||
|
Debt securities in issue
|
1 | 21,631 | 63,888 | (37,762 | ) | 47,758 | ||||||||||||||
|
Other borrowed funds
|
539 | — | 958 | (145 | ) | 1,352 | ||||||||||||||
|
Subordinated liabilities
|
5,580 | — | 1,975 | (1,958 | ) | 5,597 | ||||||||||||||
|
Other liabilities
|
1,611 | 135 | 762 | (185 | ) | 2,323 | ||||||||||||||
|
Other provisions
|
74 | — | 17 | — | 91 | |||||||||||||||
|
Current tax liabilities
|
92 | 57 | 151 | — | 300 | |||||||||||||||
|
Deferred tax liabilities
|
— | — | 272 | 64 | 336 | |||||||||||||||
|
Retirement benefit obligations
|
922 | — | 148 | — | 1,070 | |||||||||||||||
|
Total liabilities
|
287,772 | 247,520 | 310,113 | (567,336 | ) | 278,069 | ||||||||||||||
|
Total shareholders’ equity
|
5,923 | 3,187 | 8,440 | (10,328 | ) | 7,222 | ||||||||||||||
|
Total liabilities and equity
|
293,695 | 250,707 | 318,553 | (577,664 | ) | 285,291 | ||||||||||||||
187
Financial Statements
Notes to the Financial Statements
continued
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| At 31 December 2008 | £m | £m | £m | £m | £m | |||||||||||||||
|
Cash and balances at central banks
|
2,456 | 8 | 1,553 | — | 4,017 | |||||||||||||||
|
Trading assets
|
— | 27,146 | 19,675 | (20,557 | ) | 26,264 | ||||||||||||||
|
Derivative financial instruments
|
2,735 | 32,160 | 14,089 | (13,859 | ) | 35,125 | ||||||||||||||
|
Financial assets designated at fair value
|
47,525 | 11,005 | 339 | (47,492 | ) | 11,377 | ||||||||||||||
|
Loans and advances to banks
|
116,486 | 128,035 | 104,448 | (332,968 | ) | 16,001 | ||||||||||||||
|
Loans and advances to customers
|
123,319 | 24,501 | 98,973 | (66,617 | ) | 180,176 | ||||||||||||||
|
Available-for-sale securities
|
25 | — | 2,638 | — | 2,663 | |||||||||||||||
|
Loans and advances securities
|
— | 526 | 14,250 | (669 | ) | 14,107 | ||||||||||||||
|
Macro hedge of interest rate risk
|
— | 1,475 | 713 | — | 2,188 | |||||||||||||||
|
Investment in associated undertakings
|
741 | — | — | (706 | ) | 35 | ||||||||||||||
|
Investment in subsidiary undertakings
|
5,147 | 2,335 | 2,050 | (9,532 | ) | — | ||||||||||||||
|
Intangible assets
|
484 | 6 | 375 | 482 | 1,347 | |||||||||||||||
|
Property, plant and equipment
|
569 | 9 | 226 | 50 | 854 | |||||||||||||||
|
Operating lease assets
|
— | — | 348 | — | 348 | |||||||||||||||
|
Current tax assets
|
194 | — | 18 | — | 212 | |||||||||||||||
|
Deferred tax assets
|
458 | 75 | 744 | (3 | ) | 1,274 | ||||||||||||||
|
Other assets
|
987 | 21 | 332 | (18 | ) | 1,322 | ||||||||||||||
|
Total assets
|
301,126 | 227,302 | 260,771 | (491,889 | ) | 297,310 | ||||||||||||||
|
Deposits by banks
|
124,846 | 123,366 | 32,728 | (266,452 | ) | 14,488 | ||||||||||||||
|
Deposits by customers
|
155,466 | 9,743 | 97,185 | (132,149 | ) | 130,245 | ||||||||||||||
|
Derivative financial instruments
|
5,393 | 33,511 | 2,926 | (14,020 | ) | 27,810 | ||||||||||||||
|
Trading liabilities
|
739 | 22,996 | 36,672 | (19,669 | ) | 40,738 | ||||||||||||||
|
Financial liabilities designated at fair value
|
— | 4,898 | 775 | — | 5,673 | |||||||||||||||
|
Debt securities in issue
|
— | 29,692 | 76,089 | (47,270 | ) | 58,511 | ||||||||||||||
|
Other borrowed funds
|
905 | — | 1,028 | 143 | 2,076 | |||||||||||||||
|
Subordinated liabilities
|
7,030 | — | 2,558 | (2,801 | ) | 6,787 | ||||||||||||||
|
Other liabilities
|
1,283 | 83 | 1,034 | (58 | ) | 2,342 | ||||||||||||||
|
Other provisions
|
99 | — | 108 | — | 207 | |||||||||||||||
|
Current tax liabilities
|
128 | 236 | 154 | — | 518 | |||||||||||||||
|
Deferred tax liabilities
|
6 | — | 408 | (9 | ) | 405 | ||||||||||||||
|
Retirement benefit obligations
|
797 | — | 16 | — | 813 | |||||||||||||||
|
Total liabilities
|
296,692 | 224,525 | 251,681 | (482,285 | ) | 290,613 | ||||||||||||||
|
Total shareholders’ equity
|
4,434 | 2,777 | 9,090 | (9,604 | ) | 6,697 | ||||||||||||||
|
Total liabilities and equity
|
301,126 | 227,302 | 260,771 | (491,889 | ) | 297,310 | ||||||||||||||
Cash flow statements
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| For the year ended 31 December 2009 | £m | £m | £m | £m | £m | |||||||||||||||
|
Net cash flow from / (used in) operating activities
|
(4,770 | ) | 12,150 | (4,532 | ) | 81 | 2,929 | |||||||||||||
|
Net cash flow from / (used in) investing activities
|
(232 | ) | 126 | 1,539 | — | 1,433 | ||||||||||||||
|
Net cash flow from / (used in) financing activities
|
(803 | ) | — | (3,737 | ) | (81 | ) | (4,621 | ) | |||||||||||
|
Net (decrease) in cash and cash equivalents
|
(5,805 | ) | 12,276 | (6,730 | ) | — | (259 | ) | ||||||||||||
|
Cash and cash equivalents at beginning of the year
|
61,203 | 38,020 | (71,548 | ) | — | 27,675 | ||||||||||||||
|
Effects of exchange rate changes on cash and cash equivalents
|
— | (969 | ) | (83 | ) | — | (1,052 | ) | ||||||||||||
|
Cash and cash equivalents at end of the year
|
55,398 | 49,327 | (78,361 | ) | — | 26,364 | ||||||||||||||
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| For the year ended 31 December 2008 | £m | £m | £m | £m | £m | |||||||||||||||
|
Net cash flow from / (used in) operating activities
|
51,816 | 6,658 | (79,918 | ) | — | (21,444 | ) | |||||||||||||
|
Net cash flow (used in) / from investing activities
|
(1,359 | ) | 38 | 20,723 | — | 19,402 | ||||||||||||||
|
Net cash flow from / (used in) financing activities
|
152 | (161 | ) | (7,372 | ) | — | (7,381 | ) | ||||||||||||
|
Net increase/ (decrease) in cash and cash equivalents
|
50,609 | 6,535 | (66,567 | ) | — | (9,423 | ) | |||||||||||||
|
Cash and cash equivalents at beginning of the year
|
10,594 | 29,137 | (5,675 | ) | — | 34,056 | ||||||||||||||
|
Effects of exchange rate changes on cash and cash equivalents
|
— | 2,348 | 694 | — | 3,042 | |||||||||||||||
|
Cash and cash equivalents at end of the year
|
61,203 | 38,020 | (71,548 | ) | — | 27,675 | ||||||||||||||
| The Company | ANTS plc | Other | Adjustments | Consolidated | ||||||||||||||||
| For the year ended 31 December 2007 | £m | £m | £m | £m | £m | |||||||||||||||
|
Net cash flow from / (used in) operating activities
|
5,949 | (1,874 | ) | (13,407 | ) | — | (9,332 | ) | ||||||||||||
|
Net cash flow from / (used in) investing activities
|
14 | (9 | ) | (201 | ) | — | (196 | ) | ||||||||||||
|
Net cash flow from / (used in) financing activities
|
(576 | ) | — | 5,352 | — | 4,776 | ||||||||||||||
|
Net increase/ (decrease) in cash and cash equivalents
|
5,387 | (1,883 | ) | (8,256 | ) | — | (4,752 | ) | ||||||||||||
|
Cash and cash equivalents at beginning of the year
|
5,207 | 31,020 | 2,855 | — | 39,082 | |||||||||||||||
|
Effects of exchange rate changes on cash and cash equivalents
|
— | — | (274 | ) | — | (274 | ) | |||||||||||||
|
Cash and cash equivalents at end of the year
|
10,594 | 29,137 | (5,675 | ) | — | 34,056 | ||||||||||||||
188
Selected Financial Data
Selected Financial Data
The financial information set forth below for the years ended 31 December 2009, 2008 and 2007
and as at 31 December 2009 and 2008 has been derived from the audited Consolidated Financial
Statements of Santander UK plc (formerly Abbey National plc) (the ‘Company’) and its subsidiaries
(together, the ‘Group’) prepared in accordance with IFRS included elsewhere in this Annual Report
and Accounts. The information should be read in connection with, and is qualified in its entirety
by reference to, the Group’s Consolidated Financial Statements and the notes thereto. Financial
information set forth below for the years ended 31 December 2006 and 2005, and as at 31 December
2007, 2006 and 2005, has been derived from the audited Consolidated Financial Statements of the
Group for 2007, 2006 and 2005 not included in this Annual Report and Accounts. The financial
information in this selected consolidated financial and statistical data does not constitute
statutory accounts within the meaning of the Companies Act 2006. The auditors’ report on the
Consolidated Financial Statements for each of the five years ended 31 December 2009 was unmodified
and did not include a statement under sections 237(2) and 237(3) of the Companies Act 1985 or
sections 498(2) and 498(3) of the Companies Act 2006, as applicable. The Consolidated Financial
Statements of the Group for the years ended 31 December 2009, 2008, 2007, 2006 and 2005 were
audited by Deloitte LLP, chartered accountants and registered auditors.
Balance sheets
| 2009 (1) | 2009 | 2008 (2)(3) | 2007 | 2006 (4) | 2005 | |||||||||||||||||||
| $m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash and balances at central banks
|
6,730 | 4,163 | 4,017 | 1,038 | 888 | 991 | ||||||||||||||||||
|
Trading assets
|
53,821 | 33,290 | 26,264 | 56,427 | 62,314 | 58,231 | ||||||||||||||||||
|
Derivative financial instruments
|
36,905 | 22,827 | 35,125 | 9,951 | 8,336 | 11,855 | ||||||||||||||||||
|
Financial assets designated at fair value
|
19,979 | 12,358 | 11,377 | 11,783 | 8,713 | 30,597 | ||||||||||||||||||
|
Loans and advances to banks
|
14,794 | 9,151 | 16,001 | 3,441 | 2,242 | 444 | ||||||||||||||||||
|
Loans and advances to customers
|
302,007 | 186,804 | 180,176 | 112,147 | 103,146 | 95,467 | ||||||||||||||||||
|
Available for sale securities
|
1,289 | 797 | 2,663 | 40 | 23 | 13 | ||||||||||||||||||
|
Loans and receivables securities
|
16,002 | 9,898 | 14,107 | — | — | — | ||||||||||||||||||
|
Macro hedge of interest rate risk
|
1,822 | 1,127 | 2,188 | 217 | — | — | ||||||||||||||||||
|
Investment in associated undertakings
|
121 | 75 | 35 | 29 | 22 | 24 | ||||||||||||||||||
|
Intangible assets
|
2,338 | 1,446 | 1,347 | 90 | 90 | 171 | ||||||||||||||||||
|
Value of in-force business
|
— | — | — | — | — | 1,721 | ||||||||||||||||||
|
Property, plant and equipment
|
1,516 | 938 | 854 | 528 | 415 | 314 | ||||||||||||||||||
|
Operating lease assets
|
504 | 312 | 348 | 2,164 | 2,082 | 2,172 | ||||||||||||||||||
|
Current tax assets
|
137 | 85 | 212 | 197 | 223 | 235 | ||||||||||||||||||
|
Deferred tax assets
|
1,529 | 946 | 1,274 | 665 | 804 | 796 | ||||||||||||||||||
|
Other assets
|
1,736 | 1,074 | 1,322 | 906 | 2,507 | 4,003 | ||||||||||||||||||
|
Total assets
|
461,230 | 285,291 | 297,310 | 199,623 | 191,805 | 207,034 | ||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits by banks
|
9,395 | 5,811 | 14,488 | 7,923 | 6,656 | 5,617 | ||||||||||||||||||
|
Deposits by customers
|
232,630 | 143,893 | 130,245 | 69,650 | 66,519 | 65,889 | ||||||||||||||||||
|
Derivative financial instruments
|
30,657 | 18,963 | 27,810 | 9,931 | 10,218 | 11,264 | ||||||||||||||||||
|
Trading liabilities
|
74,614 | 46,152 | 40,738 | 54,916 | 57,604 | 52,664 | ||||||||||||||||||
|
Financial liabilities designated at fair value
|
7,151 | 4,423 | 5,673 | 7,538 | 8,151 | 7,948 | ||||||||||||||||||
|
Debt securities in issue
|
77,210 | 47,758 | 58,511 | 35,712 | 28,998 | 21,276 | ||||||||||||||||||
|
Other borrowed funds
|
2,186 | 1,352 | 2,076 | 1,419 | 1,655 | 2,244 | ||||||||||||||||||
|
Subordinated liabilities
|
9,049 | 5,597 | 6,787 | 4,732 | 5,020 | 6,205 | ||||||||||||||||||
|
Insurance and reinsurance liabilities
|
— | — | — | — | — | 21,501 | ||||||||||||||||||
|
Macro hedge of interest rate risk
|
— | — | — | — | 174 | 13 | ||||||||||||||||||
|
Other liabilities
|
3,756 | 2,323 | 2,342 | 2,337 | 1,616 | 3,190 | ||||||||||||||||||
|
Investment contract liabilities
|
— | — | — | — | — | 3,306 | ||||||||||||||||||
|
Provisions
|
147 | 91 | 207 | 131 | 180 | 253 | ||||||||||||||||||
|
Current tax liabilities
|
485 | 300 | 518 | 369 | 300 | 288 | ||||||||||||||||||
|
Deferred tax liabilities
|
543 | 336 | 405 | 544 | 564 | 886 | ||||||||||||||||||
|
Retirement benefit obligations
|
1,730 | 1,070 | 813 | 979 | 1,034 | 1,380 | ||||||||||||||||||
|
Total liabilities
|
449,553 | 278,069 | 290,613 | 196,181 | 188,689 | 203,924 | ||||||||||||||||||
|
Share capital
|
4,380 | 2,709 | 1,148 | 148 | 148 | 148 | ||||||||||||||||||
|
Share premium account
|
3,002 | 1,857 | 3,121 | 1,857 | 1,857 | 1,857 | ||||||||||||||||||
|
Retained earnings
|
3,090 | 1,911 | 1,678 | 1,333 | 1,116 | 1,102 | ||||||||||||||||||
|
Other reserves
|
47 | 29 | 39 | 6 | (5 | ) | 3 | |||||||||||||||||
|
|
10,519 | 6,506 | 5,986 | 3,344 | 3,116 | 3,110 | ||||||||||||||||||
|
Non-controlling interest
|
1,158 | 716 | 711 | 98 | — | — | ||||||||||||||||||
|
Total shareholders equity
|
11,677 | 7,222 | 6,697 | 3,442 | 3,116 | 3,110 | ||||||||||||||||||
|
Total liabilities and equity
|
461,230 | 285,291 | 297,310 | 199,623 | 191,805 | 207,034 | ||||||||||||||||||
| (1) | Amounts stated in dollars have been translated from sterling at the rate of £1.00 - $1.6167, the noon buying rate on 31 December 2009. | |
| (2) | Amended for the Transfer of Alliance & Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements. | |
| (3) | From 2008, issuances of commercial paper and certificates of deposit have been used to fund commercial banking operations. As a result, such issuances have been classified as debt securities in issue. In previous years, similar debt issuances were used to fund the Group’s trading operations and therefore were classified as trading liabilities. | |
| (4) | In the third quarter of 2006 the Group sold its life insurance business. |
189
Selected Financial Data
Selected Financial Data
continued
Income statements
| 2009 (1) | 2009 | 2008 | 2007 | 2006 (2) | 2005 | |||||||||||||||||||
| $m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Net interest income
|
5,516 | 3,412 | 1,772 | 1,499 | 1,228 | 1,172 | ||||||||||||||||||
|
Net fee and commission income
|
1,332 | 824 | 671 | 695 | 699 | 644 | ||||||||||||||||||
|
Dividend income
|
— | — | — | 1 | 1 | 1 | ||||||||||||||||||
|
Net trading and other income
|
744 | 460 | 561 | 587 | 542 | 538 | ||||||||||||||||||
|
Total operating income
|
7,592 | 4,696 | 3,004 | 2,782 | 2,470 | 2,355 | ||||||||||||||||||
|
Administration expenses
|
(2,988 | ) | (1,848 | ) | (1,343 | ) | (1,369 | ) | (1,420 | ) | (1,577 | ) | ||||||||||||
|
Depreciation and amortisation
|
(420 | ) | (260 | ) | (202 | ) | (205 | ) | (215 | ) | (195 | ) | ||||||||||||
|
Total operating expenses, exc provisions and charges
|
(3,408 | ) | (2,108 | ) | (1,545 | ) | (1,574 | ) | (1,635 | ) | (1,772 | ) | ||||||||||||
|
Impairment losses on loans and advances
|
(1,361 | ) | (842 | ) | (348 | ) | (344 | ) | (344 | ) | (218 | ) | ||||||||||||
|
Provisions for other liabilities and charges
|
(91 | ) | (56 | ) | (17 | ) | — | (63 | ) | (3 | ) | |||||||||||||
|
Total operating provisions and charges
|
(1,452 | ) | (898 | ) | (365 | ) | (344 | ) | (407 | ) | (221 | ) | ||||||||||||
|
Profit on continuing operations before tax
|
2,732 | 1,690 | 1,094 | 864 | 428 | 362 | ||||||||||||||||||
|
Tax on profit on continuing operations
|
(719 | ) | (445 | ) | (275 | ) | (179 | ) | (115 | ) | (108 | ) | ||||||||||||
|
Profit on continuing operations after tax
|
2,013 | 1,245 | 819 | 685 | 313 | 254 | ||||||||||||||||||
|
Profit/(loss) on discontinued operations after tax
|
— | — | — | — | (245 | ) | 166 | |||||||||||||||||
|
Profit for the year
|
2,013 | 1,245 | 819 | 685 | 68 | 420 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Attributable to:
|
||||||||||||||||||||||||
|
Equity holders of the parent
|
1,924 | 1,190 | 811 | 685 | 68 | 420 | ||||||||||||||||||
|
Non-controlling interest
|
89 | 55 | 8 | — | — | — | ||||||||||||||||||
Selected statistical information
| 2009 | 2008 (2) | 2007 | 2006 (3) | 2005 | ||||||||||||||||
| % | % | % | % | % | ||||||||||||||||
|
Profitability ratios:
|
||||||||||||||||||||
|
Return on average total assets
(4)
|
0.43 | 0.37 | 0.34 | 0.03 | 0.21 | |||||||||||||||
|
Return on average ordinary shareholders’ funds
(5)
|
22.31 | 20.45 | 22.08 | 2.20 | 19.56 | |||||||||||||||
|
Net interest margin
(6)
|
1.62 | 1.19 | 1.34 | 1.19 | 1.19 | |||||||||||||||
|
Santander UK trading cost income ratio
(7)
|
42 | 50 | 50 | 55 | 60 | |||||||||||||||
|
PFS trading cost income ratio
(8)
|
42 | 50 | 50 | 55 | 61 | |||||||||||||||
|
Dividend payout ratio
(9)
|
40 | 55 | 54 | 304 | — | |||||||||||||||
|
Capital ratios:
|
||||||||||||||||||||
|
Average ordinary shareholders’ funds as percentage of ave total assets
|
1.95 | 1.83 | 1.52 | 1.54 | 1.07 | |||||||||||||||
|
Total capital
(10)
|
17.6 | 14.0 | 11.4 | 12.6 | 12.5 | |||||||||||||||
|
Tier 1 capital
(10)
|
9.5 | 8.5 | 7.3 | 8.0 | 10.0 | |||||||||||||||
|
Ratio of earnings to fixed charges:
(11)
|
||||||||||||||||||||
|
Excluding interest on retail deposits
|
202.42 | 136.61 | 132.74 | 122.57 | 121.45 | |||||||||||||||
|
Including interest on retail deposits
|
143.27 | 117.81 | 115.58 | 109.70 | 108.52 | |||||||||||||||
| (1) | Amounts stated in dollars have been translated from sterling at the rate of £1.00 - $1.6167, the noon buying rate on 31 December 2009. | |
| (2) | Amended for the Transfer of Alliance & Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements. The calculations of Group capital are prepared on a basis consistent with the Group’s regulatory filings, and therefore the comparatives have not been amended to reflect application of group reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company. | |
| (3) | In the third quarter of 2006 the Group sold its life insurance business. | |
| (4) | Profit after tax divided by average total assets. | |
| (5) | Profit after tax divided by average equity shareholders’ funds. | |
| (6) | Net interest margin represents net interest income as a percentage of average interest-earning assets. | |
| (7) | The Santander UK trading cost income ratio is defined as trading expenses from continuing operations divided by trading income from continuing operations. The Company’s board of directors reviews discrete financial information for each of its segments that includes measures of operating results and assets, which are measured on a “trading” basis. The trading basis differs from the statutory basis as a result of the application of various adjustments. See Note 1 to the Consolidated Financial Statements. | |
| (8) | The PFS trading cost income ratio is defined as trading expenses divided by trading income of the Personal Financial Services businesses. The Personal Financial Services businesses represent the continuing operations of the Group, except for the businesses, assets and portfolios that were inconsistent with the Group’s strategy to focus on Personal Financial Services and were sold during 2004 and 2005. The excluded businesses were known as the Portfolio Business Unit (‘PBU’). As the PBU businesses were inconsistent with the Group’s strategy, management believes that presentation of this financial measure provides useful information to investors regarding the Group’s financial condition and results of operations. As there were no longer any businesses, assets or portfolios remaining in the PBU by the end of 2005, there is no difference between the PFS cost income ratio and the Santander UK cost income ratio from 2006 onwards. A reconciliation between the Santander UK trading cost income ratio and the PFS trading cost income ratio is as follows: |
| 2005 | ||||
| £m | ||||
|
PFS trading costs
|
1,431 | |||
|
PBU trading costs
|
2 | |||
|
Santander UK trading costs
|
1,433 | |||
|
PFS trading income
|
2,334 | |||
|
PBU trading income
|
70 | |||
|
Santander UK trading income
|
2,404 | |||
|
Santander UK trading cost income
ratio
|
60 | % | ||
|
PFS trading cost income ratio
|
61 | % | ||
| (9) | Ordinary equity dividends proposed divided by profit after tax. | |
| (10) | From 1 January 2008, the Group has managed its capital requirements on a Basel II basis, as described in Note 50 to the Consolidated Financial Statements. Prior years have been presented on a Basel I basis. | |
| (11) | For the purpose of calculating the ratios of earnings to fixed charges, earnings consist of profit on continuing operations before tax plus fixed charges. Fixed charges consist of interest payable, including the amortisation of discounts and premiums on debt securities in issue. |
190
Selected Financial Data
Selected Financial Data
continued
Exchange rates
The following tables set forth, for the periods indicated, certain information concerning the
exchange rate for pounds sterling based on the noon buying rate in New York City for cable
transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of
New York, expressed in US dollars per £1.00. No representation is made that amounts in pounds
sterling have been, could have been or could be converted into US dollars at the noon buying rate
or at any other rate. The noon buying rate for US dollars on 23 April 2010 was US$1.54.
| High | Low | Average (1) | Period end | |||||||||||||
| Calendar period | US$ Rate | US$ Rate | US$ Rate | US$ Rate | ||||||||||||
|
Years ended 31 December:
|
||||||||||||||||
|
2009
|
1.70 | 1.37 | 1.57 | 1.62 | ||||||||||||
|
2008
|
2.03 | 1.44 | 1.85 | 1.46 | ||||||||||||
|
2007
|
2.11 | 1.92 | 2.00 | 1.98 | ||||||||||||
|
2006
|
1.98 | 1.73 | 1.84 | 1.96 | ||||||||||||
|
2005
|
1.93 | 1.72 | 1.81 | 1.72 | ||||||||||||
|
Months ended:
|
||||||||||||||||
|
April 2010
(2)
|
1.55 | 1.52 | 1.53 | 1.54 | ||||||||||||
|
March 2010
|
1.53 | 1.49 | 1.51 | 1.52 | ||||||||||||
|
February 2010
|
1.60 | 1.52 | 1.56 | 1.52 | ||||||||||||
|
January 2010
|
1.64 | 1.59 | 1.62 | 1.60 | ||||||||||||
|
December 2009
|
1.66 | 1.59 | 1.62 | 1.62 | ||||||||||||
|
November 2009
|
1.68 | 1.64 | 1.66 | 1.64 | ||||||||||||
|
October 2009
|
1.66 | 1.59 | 1.62 | 1.65 | ||||||||||||
|
September 2009
|
1.67 | 1.59 | 1.63 | 1.60 | ||||||||||||
| (1) | The average of the noon buying rates on the last business day of each month during the relevant period. | |
| (2) | With respect to April 2010 for the period from 1 April to 23 April. |
191
Shareholder Information
Risk Factors
An investment in Santander UK plc (formerly Abbey National plc) (the ‘Company’) and its
subsidiaries (together, ‘Santander UK’ or the ‘Group’) involves a number of risks, the material
ones of which are set forth below.
Santander UK’s risk management measures may not be successful
The management of risk is an integral part of all Santander UK’s activities. Risk constitutes
Santander UK’s exposure to uncertainty and the consequent variability of return. Specifically, risk
equates to the adverse impacts on profitability arising from different sources of uncertainty
including Credit Risk (Retail), Credit Risk (Wholesale), Credit Risk (Corporate and Commercial),
Market Risk (Traded and non-Traded), Operational Risk, Asset Backed Funding Risk, Concentration
Risk, Liquidity Risk, Reputational Risk, Business and Strategic Risk, Pension Obligation Risk,
Residual Value Risk and Regulatory Risk. Santander UK seeks to monitor and manage its risk exposure
through a variety of separate but complementary financial, credit, market, operational, compliance
and legal reporting systems. While Santander UK employs a broad and diversified set of risk
monitoring and risk mitigation techniques, such techniques, and the judgements that accompany their
application, cannot anticipate every unfavourable event or the specifics and timing of every
outcome. Accordingly, Santander UK’s ability to successfully identify and balance risks and
rewards, and to manage all material risks, is an important factor that can significantly affect
results of operations.
Risks concerning borrower credit quality and general economic conditions are inherent in Santander
UK’s business
Risks arising from changes in credit quality and the recoverability of loans and amounts due from
borrowers and counterparties are inherent in a wide range of Santander UK’s businesses. Adverse
changes in the credit quality of Santander UK’s borrowers and counterparties or a general
deterioration in UK or global economic conditions, or arising from systemic risks in the financial
system, could reduce the recoverability and value of Santander UK’s assets and require an increase
in Santander UK’s level of provisions for bad and doubtful debts. Likewise, a significant reduction
in the demand for Santander UK’s products and services could negatively impact Santander UK’s
business and financial condition. Since August 2007, the global financial system has experienced
difficult credit and liquidity conditions and disruptions leading to less liquidity, greater
volatility, an increase in general fraud and money laundering activity (first and third party), and
general widening of spreads.
In September 2008, global financial markets deteriorated sharply following the bankruptcy
filing by Lehman Brothers Holdings Inc. Since then a number of other major financial institutions,
including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage
guarantors and insurance companies, have experienced significant difficulties.
Governments and central banks took concerted action to make substantial funds and guarantees
available to boost liquidity and confidence in their financial systems, stimulate lending and
support important institutions at risk of failing, in addition to cutting taxes and lowering
interest rates. As a consequence, conditions eased in 2009 and most leading developed economies,
including the United Kingdom, began to emerge from recession, although the pace and depth of
recovery was uneven across asset markets. However, the financial services industry continued to
face an unusually high degree of uncertainty.
Despite the stabilisation in conditions experienced in 2009, dramatic declines in the previous
two years in the housing markets in the UK combined with increasing unemployment continue to
adversely affect the credit performance of real estate related exposures, resulting in significant
write-downs of asset values by financial institutions, including Santander UK. These write-downs,
initially of asset backed securities but spreading to other securities and loans, caused many
financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with
larger and stronger competitors or, in some cases, to fail.
This market turmoil and reduction of available credit have contributed to decreasing consumer
confidence, increased market volatility, reduced business activity and, consequently, increasing
commercial and consumer loan delinquencies. These market developments may further affect consumer
confidence levels and may cause adverse changes in payment patterns, causing further increases in
delinquencies and default rates, which may impact Santander UK’s write-offs/charge-offs and
provision for credit losses. These market conditions could materially and adversely affect
Santander UK’s financial condition and results of operations.
In the United Kingdom, the contraction in economic output appears to have ceased with the
country emerging slowly from recession in the last quarter of 2009. However, economic indicators
remain weak and the risk of the country slipping back into recession in 2010, prolonging the
recovery, remains. Government measures to tackle the record levels of national debt, including
taxation rises and public spending cuts, are also likely to result in a slower recovery than other
recent recessions. Political involvement in the regulatory environment and the major financial
institutions in which the state has a direct financial interest will continue. Government demands
for increased credit to support the economic recovery will increase competition for deposits,
narrowing margins. The combination of slow economic recovery, government intervention and
competition for deposits will maintain the pressure on Santander UK’s retail business model. Credit
quality should improve in some sectors as the economy returns to growth but could be adversely
affected by any increase in unemployment into 2010.
The soundness of other financial institutions could materially and adversely affect Santander UK’s
business
Santander UK’s ability to engage in routine funding transactions could be adversely affected by the
actions and commercial soundness of other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty or other relationships. Santander
UK has exposure to many different industries and counterparties, and routinely executes
transactions with counterparties in the financial industry, including brokers and dealers,
commercial banks, investment banks, mutual funds, and other institutional clients. As a result,
defaults by, or even rumours or questions about, one or more financial services institutions, or
the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by Santander UK or by other institutions.
Many of these transactions expose Santander UK to credit risk in the event of default of Santander
UK’s counterparty or client. In addition, Santander UK’s credit risk may be increased when the
collateral held by Santander UK cannot be realised or is liquidated at prices not sufficient to
recover the full amount of the loan or derivative exposure due to Santander UK. There is no
assurance that any such losses would not materially and adversely affect Santander UK’s results of
operations.
192
Shareholder Information
Risk Factors
continued
Risks associated with liquidity and funding are inherent in Santander UK’s business
Liquidity risks are inherent in any retail and commercial bank. Whilst Santander UK has implemented
liquidity management processes to mitigate and control these risks, unforeseen systemic market
factors in particular make it difficult to eliminate these risks completely. Adverse and continued
constraints in the supply of liquidity, including inter-bank lending, may materially and adversely
affect the cost of funding the business and extreme liquidity constraints may impact Santander UK’s
current operations as well as limit growth possibilities. These events may also have a material
adverse effect on the market value and liquidity of bonds issued by Santander UK in the secondary
markets. From 2007 to date, the prime residential mortgage securitisation and covered bond markets
have experienced severe disruption as a result of a material reduction in investor demand for these
securities. These severe disruptions have resulted in extraordinary government intervention into
the financial services sector as a whole. These markets, which are important sources of funding for
Santander UK, were effectively closed to new external issuances of securities. Global investor
confidence also remains low and credit remains relatively scarce.
Continued or worsening disruption and volatility in the global financial markets could have a
material adverse effect on Santander UK’s ability to access capital and liquidity on financial
terms acceptable to it, if at all. If capital markets financing ceases to become available, or
becomes excessively expensive, Santander UK may be forced to raise the rates it pays on deposits to
attract more customers. While central banks around the world have taken coordinated efforts to
increase liquidity in the financial markets by taking measures such as increasing the amounts they
lend directly to financial institutions, lowering interest rates and significantly increasing
temporary reciprocal currency arrangements (or ‘swap lines’), it is not known how long these market
conditions will continue, or whether they will worsen, or how long central bank schemes will
continue or on what terms. The persistence of these adverse market conditions could have a
material adverse effect on Santander UK’s liquidity and funding.
Any reduction in Santander UK’s credit rating could increase its cost of funding and adversely
affect its interest margins
Credit ratings affect the cost and other terms upon which Santander UK is able to obtain funding.
Rating agencies regularly evaluate Santander UK and their ratings of Santander UK’s short-term and
long-term debt are based on a number of factors, including Santander UK’s financial strength as
well as conditions affecting the financial services industry generally. In light of the
difficulties in the financial services industry and the financial markets, there can be no
assurance that the rating agencies will maintain Santander UK’s current ratings or outlooks. Any
reduction in those ratings and outlooks could increase the cost of Santander UK’s funding,
adversely affect Santander UK’s interest margins and/or impact its liquidity position.
Market risks associated with fluctuations in interest rates, bond and equity prices and other
market factors are inherent in Santander UK’s business
The most significant market risks Santander UK faces are interest rates and bond and equity price
risks. Changes in the general level of interest rates, as well as changes in the shape of yield
curves and basis spreads may adversely affect the interest rate margin realised between lending
rates and borrowing costs in Santander UK’s banking operation. Significant declines in housing
markets over the past two years have negatively impacted the credit performance of real estate
related loans and resulted in significant write-downs of asset values by many financial
institutions. These write-downs, initially of asset-backed securities but spreading to other
securities and loans, have caused many financial institutions to seek additional capital, to reduce
or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced or ceased providing funding
to borrowers, including to other financial institutions.
As a result of these market forces, volatility in interest rates and basis spreads has
increased, which has increased Santander UK’s borrowing costs, while decreasing values of global
debt and equity markets have had an adverse effect on the value of Santander UK’s investment
portfolio. Any increase in capital markets funding costs or deposit rates could entail a
re-pricing of loans, which would result in a reduction of volumes, and may also have an adverse
effect on Santander UK’s interest margins. Santander UK also sponsors a number of defined benefit
staff pension schemes, and its obligations to those schemes may increase depending on the
performance of financial markets. Although Santander UK is undertaking measures to mitigate and
control the effects of these conditions, there can be no assurances that such controls will
insulate Santander UK from deteriorating market conditions.
Risks associated with strategic decisions regarding organic growth, and potential acquisitions and
disposals
Santander UK allocates management and planning resources to develop strategic plans for organic
growth and to identify possible acquisitions and disposals and the potential restructuring of
Santander UK’s businesses. If the outcomes of these plans do not match expectations, Santander UK’s
earnings may not develop as forecast.
Santander UK may incur unanticipated losses related to its business combinations
The Company acquired the Bradford & Bingley savings business in September 2008. In January
2009, Banco Santander, S.A. transferred its shares in Alliance & Leicester plc to the Company.
Santander UK’s assessment of these business combinations is based on limited and potentially
inexact information and on assumptions with respect to operations, profitability, asset quality and
other matters that may prove to be incorrect. The aforementioned financial institutions have been
adversely affected by the financial crisis and Alliance & Leicester plc has material portfolios of
securities that have suffered losses and could decline meaningfully in value. There can be no
assurance that these businesses will not incur substantial further losses or that Santander UK will
not be exposed to currently unknown liabilities resulting from these business combinations. Any
such losses or liabilities could have a material adverse effect on Santander UK’s business,
financial condition and results of operations.
193
Shareholder Information
Risk Factors
continued
Santander UK may fail to realise the anticipated benefits of its business combinations
The success of Santander UK’s business combinations will depend, in part, on Santander UK’s
ability to realise the anticipated benefits from combining Santander UK’s business with the
businesses of Alliance & Leicester plc and the Bradford & Bingley savings business it has acquired.
It is possible that the integration process could take longer or be more costly than anticipated or
could result in the loss of key employees, the disruption of each company’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that adversely affect the ability
of each company to maintain relationships with clients, customers or employees. In addition, these
businesses are currently run by management and employees who have not previously been exposed to
Santander UK’s business culture or philosophy. Santander UK’s efforts to integrate these companies
are also likely to divert management attention and resources. If Santander UK takes longer than
anticipated or is not able to integrate the aforementioned businesses, the anticipated benefits of
Santander UK’s business combinations may not be realised fully or at all, or may take longer to
realise than expected.
Santander UK’s business is concentrated in the UK and on the offering of mortgage related products
and services
Santander UK’s business is principally concentrated in the UK and on the offering of mortgage
related products and services. As a consequence, Santander UK’s financial condition and results of
operations are highly dependent on economic conditions in the UK, generally, and the UK property
market, in particular. Beginning in the second half of 2008, UK and global economic conditions
deteriorated significantly and global financial markets experienced acute turbulence. The UK
economy contracted further in 2009 overall, though it returned to slight positive GDP growth in the
last quarter. In 2008 and much of 2009, the UK property market suffered a significant correction as
a consequence of housing demand being constrained by a combination of subdued earnings growth,
greater pressure on housing finances, rising unemployment, changes in interest rates, a decline in
the availability of mortgage finance and the continued effect of global market volatility.
UK and global economic conditions and uncertainties may have an adverse effect on the quality
of Santander UK’s loan portfolio and may result in a rise in delinquency and default rates and
write-offs/charge-offs. There can be no assurance that Santander UK will not have to increase its
provisions for loan losses in the future as a result of future increases in non-performing loans or
for other reasons beyond its control. Any increases in Santander UK’s provisions for loan losses
could materially and adversely affect Santander UK’s financial condition and results of operations.
Santander UK’s business is conducted in a highly competitive environment
The market for UK financial services is highly competitive and the financial crisis has re-shaped
the banking landscape in the United Kingdom, reinforcing both the importance of a retail deposit
funding base and strong capitalisation. The financial industry’s renewed focus on building retail
deposit bases has resulted in greater pricing competition in terms of interest rates offered, and
management expects such competition to intensify in response not only to regulatory actions but to
other factors, including competitor behaviour, consumer demand, technological changes, the impact
of consolidation. If financial markets remain unstable, financial institution consolidation may
continue. Moreover, the UK government has effectively nationalised some of the country’s largest
banks and has implemented a preferred equity programme open to all financial institutions and
another programme to guarantee short-term and certain medium-term debt of financial institutions,
among other measures. These measures could lead to increased government ownership and control over
financial institutions in the UK and further consolidation in the financial industry, all of which
could adversely affect Santander UK’s business, financial condition and results of operations.
Santander UK’s financial condition and results of operations may be materially and adversely
affected by competition, including declining lending margins or competition for savings driving up
funding costs that cannot be recovered from borrowers. If Santander UK is not successful in
retaining and strengthening customer relationships, it may lose market share, incur losses on some
or all of its activities or fail to attract new deposits and retain existing deposits, which could
materially and adversely affect its financial position and results of operations.
Operational risks are inherent in Santander UK’s business
Operational losses can result from fraud, criminal acts, errors by employees, failure to document
transactions properly or to obtain proper authorisation, failure to comply with regulatory
requirements and conduct of business rules, failure or breakdown of accounting, data processing and
other record keeping systems, natural disasters, or failure or breakdown of external systems,
including those of Santander UK’s suppliers or counterparties.
Santander UK’s business could be affected if its capital is not managed effectively
Effective management of Santander UK’s capital position is important to its ability to operate its
business, to continue to grow organically and to pursue its strategy. Any future change that limits
Santander UK’s ability to manage its balance sheet and capital resources effectively or to access
funding on commercially acceptable terms could have a material adverse effect on Santander UK’s
financial condition and regulatory capital position.
Santander UK relies on recruiting, retaining and developing appropriate senior management and
skilled personnel
Santander UK’s continued success depends in part on the continued service of key members of its
management team. The ability to continue to attract, train, motivate and retain highly qualified
professionals is a key element of Santander UK’s strategy. The successful implementation of
Santander UK’s growth strategy depends on the availability of skilled management, both at its head
office and at each of its business units. If Santander UK or one of its business units or other
functions fails to staff their operations appropriately or loses one or more of its key senior
executives and fails to replace them in a satisfactory and timely manner, its business, financial
condition and results of operations, including control and operational risks, may be adversely
affected. Likewise, if Santander UK fails to attract and appropriately train, motivate and retain
qualified professionals, its business may also be affected.
194
Shareholder Information
Risk Factors
continued
Reputational risk could cause harm to Santander UK and its business prospects
Santander UK’s ability to attract and retain customers and conduct business transactions with its
counterparties could be adversely affected to the extent that its reputation, or the reputation of
affiliates operating under the Santander brand, is damaged. Failure to address, or appearing to
fail to address, various issues that could give rise to reputational risk could cause harm to
Santander UK and its business prospects. Reputational issues include, but are not limited to
appropriately addressing potential conflicts of interest; legal and regulatory requirements;
ethical issues; adequacy of anti-money laundering processes; privacy issues; record-keeping; sales
and trading practices; proper identification of the legal, reputational, credit, liquidity and
market risks inherent in products offered; and general company performance. The failure to address
these issues appropriately could make customers unwilling to do business with Santander UK, which
could adversely affect its results of operations.
Santander UK’s businesses are subject to substantial legislation, regulatory and governmental
oversight
Santander UK is subject to financial services laws, regulations, administrative actions and
policies in each location in which it operates and, indirectly, in Spain, as a result of being part
of Banco Santander, S.A.. During the recent market turmoil, there have been unprecedented levels of
government and regulatory intervention and scrutiny, and changes to the regulations governing
financial institutions. In addition, in light of the financial crisis, regulatory and governmental
authorities are considering, or may consider, further enhanced or new legal or regulatory
requirements intended to prevent future crises or otherwise ensure the stability of institutions
under their supervision in addition to those measures that have already been announced. For
instance, the UK Government published a White Paper on 8 July 2009 (HM Treasury paper “Reforming
Financial Markets” (CM 7667)) which contained a number of proposals for reforming the UK financial
system, including more stringent capital and liquidity requirements for systemically significant
firms, requirements for banks to develop detailed plans for winding down their businesses and
enhanced regulatory powers for the UK Financial Services Authority. A number of the proposals set
out in the White Paper now form part of the Financial Services Bill that was published on 19
November 2009 and which is currently going through the UK Parliamentary approval process. In
November 2009, the UK Financial Services Authority also released the Banking Conduct of Business
sourcebook, a set of rules and guidance that regulate how authorised banks conduct business with
their customers, including rules relating to communications, cancellation rights and information
rights of customers.
Recent proposals and measures taken by governmental and regulatory authorities and future
changes in supervision and regulation, in particular in the UK, which are beyond Santander
UK’s control, could materially affect Santander UK’s business, the products and services offered or
the value of assets as well as Santander UK’s operations and result in significant increases in
operational costs. Changes in UK legislation and regulation to address the stability of the
financial sector may also affect the competitive position of the UK banks, including Santander UK,
particularly if such changes are implemented before international consensus is reached on key
issues affecting the industry, for instance in relation to the UK Financial Services Authority’s
proposals on liquidity risk management (see the risk factor “Santander UK is subject to regulatory
capital and liquidity requirements that could limit its operations” below for further details).
Certain proposed regulatory changes in the area of asset-backed securitisation, which has
historically been a major source of funding for Santander UK, may impact the ability to use
securitisation as a source of funding in the future. Although Santander UK works closely with its
regulators and continually monitors the situation, future changes in regulation, fiscal or other
policies can be unpredictable and are beyond the control of Santander UK. No assurance can be given
generally that laws or regulations will be adopted, enforced or interpreted in a manner that will
not have an adverse effect on Santander UK’s business. The resolution of a number of issues,
including regulatory investigations and reviews and court cases affecting the UK financial services
industry, including Santander UK, could have a negative impact on Santander UK’s results of
operations or on its relations with some of its customers and potential customers.
Santander UK is subject to regulatory capital and liquidity requirements that could limit its
operations
Santander UK is subject to capital adequacy requirements adopted by the UK Financial Services
Authority for banks, which provide for a minimum ratio of total capital to risk-adjusted assets
both on a consolidated basis and on a solo basis, expressed as a percentage. If Santander UK fails
to maintain its ratios this may result in administrative actions or sanctions against it which may
impact Santander UK’s ability to fulfil its obligations.
However, in response to the recent financial crises, the UK Financial Services Authority will
impose more stringent capital adequacy requirements, including increasing the minimum regulatory
capital requirements imposed on Santander UK. For instance, the UK Financial Services Authority has
adopted a supervisory approach in relation to certain UK banks, including Santander UK, under which
those banks are expected to maintain tier 1 capital in excess of the minimum levels required by
existing UK Financial Services Authority rules. The UK Financial Services Authority is also
consulting on changes to the eligibility criteria for tier 1 capital as well as requirements that
may result in banks increasing the level of regulatory capital held in respect of trading book
risks, implementing the recent amendments to the EU-wide capital adequacy requirements (as set out
in the amended Directive 2006/48/EC and Directive 2006/49/EC, collectively referred to as the
“Capital Requirements Directive”).
In December 2009, the Basel Committee on Banking Supervision also published and is currently
consulting on a number of proposals to reform international capital adequacy and liquidity
standards in order to increase resilience in the banking sector to financial and economic stresses.
Proposals include phasing out innovative tier 1 instruments with incentives to redeem and
implementing a leverage ratio on institutions in addition to current risk-based regulatory capital
requirements. Measures are also proposed to promote the building of counter-cyclical capital
buffers that may be drawn upon in stress scenarios, such as limiting the ability of institutions to
distribute capital (dividend payments, discretionary bonus payments, share repurchases) in the
event that the institution’s capital (over and above minimum capital adequacy requirements) fall
under prescribed thresholds, thereby conserving capital in stress scenarios.
195
Shareholder Information
Risk Factors
continued
On 5 October 2009, the UK Financial Services Authority published its new liquidity rules which
significantly broaden the scope of the existing liquidity regime and are designed to enhance
regulated firms’ liquidity risk management practices. As part of these reforms, the UK Financial
Services Authority is also expected to gradually implement requirements for financial institutions
to hold prescribed levels of liquid assets and have in place other sources of liquidity to address
the institution-specific and market-wide liquidity risks that institutions may face in short-term
and prolonged stress scenarios.
These measures could have a material adverse effect on Santander UK’s results of operations,
financial condition and prospects. There is a risk that changes to the UK capital adequacy regime
may result in increased minimum capital requirements, which could reduce available capital and
thereby affect Santander UK’s ability to pay dividends, continue organic growth or pursue
acquisitions or other strategic opportunities. In addition, changes to the eligibility criteria for
tier 1 capital may impact Santander UK’s ability to raise tier 1 capital or the eligibility of
existing tier 1 capital resources (although this risk may be mitigated if the UK Financial Services
Authority adopt measures to grandfather the regulatory capital treatment of existing tier 1
resources that do not comply with any revised criteria).
There is also a risk that implementing and maintaining enhanced liquidity risk management
systems may incur significant costs and more stringent requirements to hold liquid assets and
liquidity facilities may materially impact Santander UK’s lending business as more funds may be
required to acquire or maintain liquidity resources.
In the United Kingdom Santander UK is responsible for contributing to compensation schemes in
respect of banks and other authorised financial services firms that are unable to meet their
obligations to customers
In the United Kingdom, the Financial Services Compensation Scheme (the “FSCS”) was established
under FSMA and is the UK’s statutory fund of last resort for customers of authorised financial
services firms. The FSCS can pay compensation to customers if a UK Financial Services Authority
authorised firm is unable, or likely to be unable, to pay claims against it (for instance, an
authorised bank is unable to pay claims by depositors). The FSCS is funded by levies on firms
authorised by the UK Financial Services Authority, including Santander UK and other members of the
Group.
In the event that the FSCS raises funds from authorised firms, raises those funds more
frequently or significantly increases the levies to be paid by such firms, the associated costs to
Santander UK may have a material impact on its results of operations or financial condition. The
recent measures taken to protect the depositors of deposit-taking institutions involving the FSCS
have resulted in a significant increase in the levies made by the FSCS on the industry and may do
so in the future if similar measures are required to protect depositors of other institutions.
In addition, regulatory reform initiatives in the UK and internationally may result in further
changes to the FSCS, which could result in additional costs and risks for Santander UK. For
instance, the UK Government has proposed a consultation on pre-funding the FSCS, which may affect
the profitability of Santander UK (and other members of the Group required to contribute to the
FSCS), although it has made clear that pre-funding would not be introduced before 2012.
Furthermore, the UK Financial Services Authority has proposed that UK deposit-taking institutions
develop systems by 31 December 2010 to enable the institution to produce an aggregated view of each
customer’s eligibility for compensation in the event of a failure (a “Single Customer View”), which
may require Santander UK to incur significant costs arising from the development and implementation
of systems and controls that would enable Single Customer Views to be produced.
To the extent that other jurisdictions where Santander UK operates have introduced or plan to
introduce similar compensation, contributory or reimbursement schemes, the Group may incur
additional costs and liabilities which may negatively impact its results of operations or financial
condition.
The UK Banking Act 2009 may adversely affect the Group’s business
The UK Banking Act 2009 (the “Act”) came into force on 21 February 2009. The Act creates a special
resolution regime (“SRR”) which provides the UK HM Treasury, the Bank of England and the UK
Financial Services Authority (the ‘Authorities’) with a variety of tools for dealing with UK
institutions which are authorised deposit takers (such as the Company) which are failing, and in
certain circumstances, their holding companies. The Act replaced the emergency powers contained in
the Banking (Special Provisions) Act 2008 (which powers ceased to be exercisable on 21 February
2009, when the Act came into force).
The Act enables the Authorities, in specified circumstances, to: (i) take a bank or a bank
holding company into temporary public ownership (“TPO”); (ii) transfer all or part of the business
of a bank to a private sector purchaser (‘PSP’); or (iii) transfer all or part of the business of a
bank to a bridge bank owned by the Bank of England (‘Bridge Bank’). The SRR also comprises a new
insolvency procedure and a new administration procedure, each of specific application to banks.
TPO and PSP transfers may be effected via a compulsory transfer of securities in the affected
entity (which includes bonds). PSP and Bridge Bank transfers may be effected via a compulsory
transfer of the affected entity’s assets and liabilities.
SRR transfers are subject to the satisfaction of two general conditions. In summary, the UK
Financial Services Authority must determine that (i) the bank is failing or likely to fail to meet
its regulatory threshold conditions (within the meaning of section 41(1) of the UK Financial
Services and Markets Act 2000); and (ii) having regard to timing and other relevant circumstances,
it is not reasonably likely that (ignoring the stabilisation powers under the Act), action will be
taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions
(ignoring for this purpose, UK HM Treasury or Bank of England financial assistance). There are
additional trigger conditions which must be satisfied, the nature of which depends on the nature of
the transfer and certain statutory objectives to which the Authorities must have regard in
operating the SRR.
196
Shareholder Information
Risk Factors
continued
SRR transfers under the Act may impact the rights of transferors and third parties in relation to
the affected institution. Legal or contractual rights which would operate to inhibit the transfer
or which would otherwise be triggered by the transfer (and in certain other circumstances) can be
disregarded and SRR transfers can take effect free from trusts, liabilities or other encumbrances.
A PSP or Bridge Bank transfer may involve a partial transfer of the affected institution’s property
which could lead to the rights and obligations of counterparties of the affected institution being
split between the transferor and transferee entity (although the Act and the Banking Act 2009
(Restriction of Partial Property Transfers) Order 2009 do restrict partial property transfers to
some extent including protection such that certain partial property transfers may not provide for
the transfer of some, but not all, of the property, rights and liabilities which are, or form part
of, a “capital market arrangement” (as that expression is currently defined in the UK Insolvency
Act 1986) to which the relevant institution is a party).
The Act confers wide-ranging ancillary powers on the Authorities to enable SRR transfers and to
ensure the continuity of the transferred business. In particular, the UK HM Treasury is given the
power to change the law, either generally or specifically and with immediate or with retrospective
effect, if the UK HM Treasury feels it is necessary or desirable in order to make a power under the
SRR more effective. The Act includes provisions to effect the payment of compensation to
transferors under an SRR transfer and third parties. In general, there is considerable uncertainty
about the scope of the powers afforded to the Authorities under the Act and how the Authorities may
choose to exercise them.
If an instrument or order were made under the Act in respect of Santander UK, such instrument
or order (as the case may be) may (amongst other things) (i) result in a compulsory transfer of
securities or property of Santander UK and/or (ii) impact on the rights of holders of securities
and/or result in the nullification or modification of the terms and conditions of such securities
and/or (iii) result in the de-listing of the securities.
At present, no instruments or orders have been made under the Act in respect of Santander UK
and there has been no indication that any such order will be made, but there can be no assurance
that this will not change and/or that holders of securities will not be adversely affected by any
such order if made in the future.
Risks concerning enforcement of judgements made in the United States
Santander UK plc is a public limited company registered in England and Wales. All of the
Company’s Directors live outside the United States of America. As a result, it may not be possible
to serve process on such persons in the United States of America or to enforce judgements obtained
in US courts against them or Santander UK based on the civil liability provisions of the US federal
securities laws or other laws of the United States of America or any state thereof. The Directors’
Report on pages 88 to 98 has been prepared and presented in accordance with and in reliance upon
English company law and the liabilities of the Directors in connection with that Report shall be
subject to the limitations and restrictions provided by such law. Under the UK Companies Act 2006,
a safe harbour limits the liability of Directors in respect of statements in and omissions from the
Directors’ Report on pages 88 to 98. Under this safe harbour, the Directors would be liable to the
Company (but not to any third party) if the Directors’ Report contains errors as a result of
recklessness or knowing misstatement or dishonest concealment of a material fact, but would not
otherwise be liable.
197
Shareholder Information
Taxation for US investors
The following is a summary, under current law, of the principal UK and US federal income tax
considerations relating to the beneficial ownership by a US taxpayer of the 8.963% Non-Cumulative
Perpetual Preferred Limited Partnership Interests and the 8.963% Non-Cumulative Trust Preferred
Securities. The following summary is provided for general guidance and does not address investors
that are subject to special rules or that do not hold the perpetual securities as capital assets.
US residents should consult their local tax advisers, particularly in connection with any potential
liability to pay US taxes on disposal, lifetime gift or bequest of their perpetual securities.
United Kingdom taxation on dividends
Under UK law, income tax is not withheld from dividends paid by UK companies. Shareholders,
whether resident in the UK or not, receive the full amount of the dividend actually declared.
United Kingdom taxation on capital gains
Under UK law, when you sell shares you may be liable to pay either capital gains tax or
corporation tax on chargeable gains. However if you are either:
| • | an individual who is neither resident nor ordinarily resident in the UK; or | |
| • | a company which is not resident in the UK. |
you will not be liable to UK tax on any capital gains made on disposal of your shares. The
exception is if the shares are held in connection with a trade or business that is conducted in the
UK through a branch or agency (for capital gains tax purposes) or a permanent establishment (for
corporation tax purposes).
United Kingdom inheritance tax
Under the current estate and gift tax convention between the US and the UK, shares held by an
individual shareholder who is:
| • | domiciled for the purposes of the convention in the US; and | |
| • | is not for the purposes of the convention a national of the UK; |
will not be subject to UK inheritance tax on:
| • | the individual’s death; or | |
| • | on a gift of the shares during the individual’s lifetime. |
The exception is if the shares are part of the business property of a permanent establishment of
the individual in the UK or, in the case of a shareholder who performs independent personal
services, pertain to a fixed base situated in the UK.
Share Information
Sterling-denominated preference shares
At 31 December 2009, the Company had outstanding 325,000,000 sterling denominated preference
shares, nominal value of £1.00 each. The sterling denominated preference shares were issued on 23
October 1995, 13 February 1996 and 9 June 1997. Currently, the only trading market for these
sterling denominated preference shares is the London Stock Exchange.
Major shareholders
As at 31 December 2009, the Company was a wholly owned subsidiary of Banco Santander, S.A.. The
acquisition was effected by means of a scheme of arrangement under Section 425 Companies Act 1985
on 12 November 2004. The ordinary shares in the Company were cancelled and holders of the Company’s
shares who were on the shareholders’ register at 4.30pm on 12 November 2004 received one Banco
Santander, S.A. share for each Company share.
Exchange controls
There are no UK laws, decrees or regulations that restrict Santander UK’s export or import of
capital, including the availability of cash and cash equivalents for use by Santander UK, or that
affect the remittance of dividends or other shareholder payments to non-UK holders of Company
shares, except as outlined in the section on Taxation for US investors above.
198
Shareholder Information
Contact Information
Santander UK plc registered office, principal office and investor relations department
2 Triton Square
Regent’s Place
London
NW1 3AN
Registered Number 2294747
Registered in England and Wales
Regent’s Place
London
NW1 3AN
Registered Number 2294747
Registered in England and Wales
Santander shareholder department
Banco Santander, S.A.
2 Triton Square
Regent’s Place
London
NW1 3AN
2 Triton Square
Regent’s Place
London
NW1 3AN
Phone numbers
Santander UK Switchboard
0870-607-6000
0870-607-6000
Santander Shareholder Services
0871-384-2000
+44 (0) 121-415-7188 (overseas)
0871-384-2000
+44 (0) 121-415-7188 (overseas)
Documents on display
The Company is subject to the information requirements of the US Securities Exchange Act of
1934. In accordance with these requirements, the Company files its Annual Report and Accounts and
other related documents with the US Securities and Exchange Commission. These documents may be
inspected by US investors at the US Securities and Exchange Commission’s public reference rooms,
which are located at 100 F Street, NE, Room 1580, Washington, DC 20549-0102. Information on the
operation of the public reference rooms can be obtained by calling the US Securities and Exchange
Commission on +1-202-551-8090 or by looking at the US Securities and Exchange Commission’s website
at www.sec.gov.
199
Shareholder Information
Articles of Association
Pursuant to the requirements of Item 10(B) of Form 20-F, the following is a summary of the Articles
of Association of the Company.
Santander UK plc is a public company registered in England and Wales, registered number
2294747. The Articles of Association do not specifically state or limit the objects of the
Company and they are therefore unrestricted.
A Director shall not vote on, or be counted in the quorum in relation to any resolution of the
Directors in respect of any contract in which he has an interest, or any resolution of the
Directors concerning his own appointment, or the settlement or variation of the terms or the
termination of is appointment.
Preference shares entitle the holder to receive a preferential dividend payment at a fixed
or variable rate, such dividend to be payable on a date determined by the Board prior to the
allotment of the shares. The Board will also determine whether these dividend rights are cumulative
or non-cumulative. If dividends are unclaimed for twelve years, the right to the dividend ceases.
The holders of any series of preference shares will only be entitled to receive notice of and to
attend any general meeting of the Company if the preference dividend on the preference shares of
such series has not, at the date of the notice of the general meeting, been paid in full in respect
of such dividend periods as the Board may prior to allotment determine, in which case the holders
of the preference shares will be entitled to speak and/or vote upon any resolution proposed; or, if
a resolution is proposed at the general meeting, for, or in relation to, the winding-up of the
Company; or varying, altering or abrogating any of the rights, privileges, limitations or
restrictions attached to the preference shares of such series, in which case the holders of the
preference shares of such series will be entitled to speak and/or vote only upon such resolution;
or in such other circumstances, and upon and subject to such terms, as the Board may determine
prior to allotment.
Unless the Board determines, prior to allotment, that the series of preference shares shall be
non-redeemable, each series shall be redeemable at the option of the Company on any date as the
Board may determine prior to the date of allotment. On redemption the Company shall pay the amount
due. The formula for calculation of any relevant redemption premium is set out in the Articles of
Association.
There are no sinking fund provisions. Where the preference shares are partly paid, the Board
may make further calls upon the holders. There are no provisions discriminating against any
existing or prospective shareholder as a result of such shareholder owning a substantial number of
shares.
Dividends are payable to the holders of ordinary shares. These ordinary shares are
transferable. If dividends are unclaimed for twelve years, the right to the dividend ceases.
Subject to any special terms as to voting upon which any ordinary shares may be issued or may
for the time being be held or any suspension or any abrogation of voting rights as set out in the
Articles of Association, on a show of hands every member who is present in person at a general
meeting of the Company shall have one vote and every proxy present who has been duly appointed by a
member shall have one vote. On a poll every member who is present in person or by proxy shall have
one vote for every share of which he is the holder.
Subject to the prior rights of holders of preference shares, the Company pays dividends on its
ordinary shares only out of its distributable profits and not out of share capital. Dividends are
determined by the Board.
The Company’s Articles of Association authorise it to issue redeemable shares, but the
Company’s ordinary shares are not redeemable. There are no sinking fund provisions. The Board may
from time to time make calls upon the members in respect of any monies unpaid on their shares.
There are no provisions discriminating against any existing or prospective shareholder as a result
of such shareholder owning a substantial number of ordinary shares.
Subject to the provisions of the UK Companies Act 2006, all or any of the rights attached to
any class of shares (whether or not the Company is being wound up) may be varied with the consent
in writing of the holders of not less than three-fourths in nominal value of the issued shares of
that class or with the sanction of a special resolution passed at a separate general meeting of the
holders of those shares. Additional quorum and voting requirements apply to such meeting.
General meetings shall be called by at least 14 clear days’ notice (that is, excluding the day
of the General Meeting and the day on which the notice is given). A general meeting may be called
by shorter notice if it is so agreed, in the case of an annual general meeting, by all the
shareholders having a right to attend and vote, or in other cases, by a majority in number of the
shareholders having a right to attend and vote, being a majority together holding not less than 95
per cent in nominal value of the shares giving the right. The notice shall specify the date, time
and place of the meeting and the general nature of the business to be transacted.
There are no restrictions on the rights to own securities for either resident or non-resident
shareholders, other than those to which they may be subject as a result of the laws and regulations
in their home jurisdiction.
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Shareholder Information
Glossary of Financial Services Industry Terms
| Term used in the Annual Report | US equivalent or brief description of meaning | |
|
Accounts
|
Financial statements | |
|
Allotted
|
Issued | |
|
Attributable profit
|
Net income | |
|
Balance sheet
|
Statement of financial position | |
|
Bills
|
Notes | |
|
Called up share capital
|
Ordinary shares or common stock and preferred stock, issued and fully paid | |
|
Capital allowances
|
Tax depreciation allowances | |
|
Combined Code
|
UK-derived principles of good corporate governance and code of best practice | |
|
Creditors
|
Payables | |
|
Current account
|
Checking account | |
|
Dealing
|
Trading | |
|
Debtors
|
Receivables | |
|
Deferred tax
|
Deferred income tax | |
|
Depreciation
|
Write-down of tangible fixed assets over their estimated useful lives | |
|
Fees and commissions payable
|
Fees and commissions expense | |
|
Fees and commissions receivable
|
Fees and commissions income | |
|
Finance lease
|
Capital lease | |
|
Freehold
|
Ownership with absolute rights in perpetuity | |
|
Interest payable
|
Interest expense | |
|
Interest receivable
|
Interest income | |
|
Loans and advances
|
Lendings | |
|
Loan capital
|
Long-term debt | |
|
Long-term assurance fund
|
Long-term insurance fund | |
|
Members
|
Shareholders | |
|
Articles of Association
|
Bylaws | |
|
Net asset value
|
Book value | |
|
Nominal value
|
Par value | |
|
One-off
|
Non-recurring | |
|
Ordinary shares
|
Common stock | |
|
Preference shares
|
Preferred stock | |
|
Premises
|
Real estate | |
|
Profit
|
Income | |
|
Provisions
|
Allowances | |
|
Share capital
|
Ordinary shares, or common stock, and preferred stock | |
|
Shareholders’ funds
|
Stockholders’ equity | |
|
Share premium account
|
Additional paid-in capital | |
|
Shares in issue
|
Shares outstanding | |
|
Tangible fixed assets
|
Property, plant and equipment | |
|
Undistributable reserves
|
Restricted surplus | |
|
Write-offs
|
Charge-offs | |
201
Shareholder Information
Glossary of Financial Services Industry Terms
continued
| Term used in the Annual Report | Definition | |
|
Alt-A
|
Loans regarded as lower risk than sub-prime, but with higher risk characteristics than lending under normal criteria. | |
|
|
||
|
Arrears
|
Customers are said to be in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Such a customer is also said to be in a state of delinquency. When a customer is in arrears, his entire outstanding balance is said to be delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue. Corporate customers may also be considered non-performing prior to being behind in fulfilling their obligations. This can happen when a significant restructuring exercise begins. | |
|
|
||
|
Asset backed products
|
Asset backed products are debt and derivative products that are linked to the cash flow of a referenced asset. This category includes asset backed loans; collateralised debt obligations (CDOs); collateralised loan obligations (CLOs); asset backed credit derivatives (ABS CDS); asset backed and mortgage backed securities. | |
|
|
||
|
Asset Backed Securities (ABS)
|
Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages and, in the case of Collateralised Debt Obligations (CDOs), the referenced pool may be ABS or other classes of assets. | |
|
|
||
|
Average balances
|
Average balances which make up the average balance sheet are based upon monthly averages. | |
|
|
||
|
Basis point
|
One hundredth of a per cent (0.01%), so 100 basis points is 1%. Used in quoting movements in interest rates or yields on securities. | |
|
|
||
|
Collateralised Debt Obligation (CDO)
|
Securities issued by a third party which reference Asset Backed Securities (ABSs) (defined above) and/or certain other related assets purchased by the issuer. | |
|
|
||
|
Collateralised Loan Obligation (CLO)
|
A security backed by the repayments from a pool of commercial loans. The payments may be made to different classes of owners (in tranches). | |
|
|
||
|
Collateralised Synthetic Obligation
(CSO) |
A form of synthetic collateralised debt obligation (CDO) that does not hold assets like bonds or loans but invests in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets. | |
|
|
||
|
Commercial Mortgage Backed
Securities (CMBS) |
Securities that represent interests in a pool of commercial mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal). | |
|
|
||
|
Commercial Real Estate
|
Includes office buildings, industrial property, medical centres, hotels, malls, retail stores, shopping centres, farm land, multifamily housing buildings, warehouses, garages, and industrial properties. Commercial real estate loans are those backed by a package of commercial real estate assets. | |
|
|
||
|
Commercial Paper
|
An unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date. | |
|
|
||
|
Conduit
|
A financial vehicle that holds asset-backed debt such as mortgages, vehicle loans, and credit card receivables, all financed with short-term loans (generally commercial paper) that use the asset-backed debt as collateral. The profitability of a conduit depends on the ability to roll over maturing short-term debt at a cost that is lower than the returns earned from asset-backed securities held in the portfolio. | |
|
|
||
|
Core Tier 1 capital
|
Called-up share capital and eligible reserves plus equity non-controlling interests, less intangible assets and deductions relating to the excess of expected loss over regulatory impairment allowance and securitisation positions as specified by the UK Financial Services Authority. | |
|
|
||
|
Core Tier 1 capital ratio
|
Core Tier 1 capital as a percentage of risk weighted assets. | |
|
|
||
|
Cost:income ratio
|
Operating expenses compared to total income. | |
|
|
||
|
Coverage ratio
|
Impairment allowances as a percentage of total non-performing loans and advances. | |
|
|
||
|
Credit conversion factors (CCFs)
|
The portion of an off-balance sheet commitment drawn in the event of a future default. The conversion factor is expressed as a percentage. The conversion factor is used to calculate the exposure at default (EAD). | |
|
|
||
|
Credit Default Swaps (CDS)
|
A credit derivative is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. A credit default swap is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer in the event of a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency. | |
|
|
||
|
Credit market exposures
|
Relates to commercial real estate and leveraged finance businesses that have been significantly impacted by the continued deterioration in the global credit markets. The exposures include positions subject to fair value movements in the Income Statement, positions that are classified as loans and advances and available for sale. | |
|
|
||
|
Credit spread
|
The yield spread between securities with the same coupon rate and maturity structure but with different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to accept a lower credit quality. | |
|
|
||
|
Customer deposits
|
Money deposited by all individuals and companies that are not credit institutions. Such funds are recorded as liabilities in the Group’s balance sheet under Deposits by Customers, Trading Liabilities or Financial Liabilities designated at Fair Value. | |
|
|
||
|
Debt restructuring
|
This occurs when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as reducing the debt or interest charged on the loan. | |
|
|
||
|
Delinquency
|
See ‘Arrears’. | |
|
|
||
|
Economic capital
|
An internal measure of the minimum equity and preference capital required for the Group to maintain its credit rating based upon its risk profile. | |
202
Shareholder Information
Glossary of Financial Services Industry Terms
continued
| Term used in the Annual Report | Definition | |
|
Equity products
|
These products are linked to equity markets. This category includes listed equities, exchange traded derivatives, equity derivatives, preference shares and contract for difference (CFD) products. | |
|
|
||
|
Equity structural hedge
|
An interest rate hedge which functions to reduce the impact of the volatility of short-term interest rate movements on equity positions on the balance sheet that do not reprice with market rates. | |
|
|
||
|
Expected loss
|
The Group measure of anticipated loss for exposures captured under an internal ratings based credit risk approach for capital adequacy calculations. It is measured as the Group-modelled view of anticipated loss based on Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD), with a one-year time horizon. | |
|
|
||
|
Exposure at default (EAD)
|
The estimation of the extent to which the Group may be exposed to a customer or counterparty in the event of, and at the time of, that counterparty’s default. At default, the customer may not have drawn the loan fully or may already have repaid some of the principal, so that exposure is typically less than the approved loan limit. | |
|
|
||
|
First/Second Charge
|
First charge (also known as first lien): debt that places its holder first in line to collect compensation from the sale of the underlying collateral in the event of a default on the loan. Second charge (also known as second lien): debt that is issued against the same collateral as higher charge debt but that is subordinate to it. In the case of default, compensation for this debt will only be received after the first charge has been repaid and thus represents a riskier investment than the first charge. | |
|
|
||
|
Full time equivalent
|
Full time equivalent employee units are the on-job hours paid for employee services divided by the number of ordinary-time hours normally paid for a full-time staff member when on the job (or contract employee where applicable). | |
|
|
||
|
Funded/unfunded
|
Exposures where the notional amount of the transaction is either funded or unfunded. Represents exposures where a commitment to provide future funding has been made and the funds have been released/not released. | |
|
|
||
|
FX products
|
These products are derivatives linked to the foreign exchange market. This category includes FX spot and forward contracts; FX swaps; FX options. | |
|
|
||
|
Gain on acquisition
|
The amount by which the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities, recognised in a business combination, exceeds the cost of the combination. | |
|
|
||
|
Home Loans
|
A loan to purchase a residential property which is then used as collateral to guarantee repayment of the loan. The borrower gives the lender a lien against the property, and the lender can foreclose on the property if the borrower does not repay the loan per the agreed terms. Also known as a residential mortgage. | |
|
|
||
|
Impaired loans
|
Loans are reported as Credit Risk Loans (defined above) and comprise loans where individual identified impairment allowance has been raised and also include loans which are fully collateralised or where indebtedness has already been written down to the expected realisable value. The impaired loan category may include loans, which, while impaired, are still performing. | |
|
|
||
|
Impairment allowances
|
A provision held on the balance sheet as a result of the raising of a charge against profit for the incurred loss inherent in the lending book. An impairment allowance may either be identified or unidentified and individual or collective. | |
|
|
||
|
Individually/Collectively Assessed
|
Impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises homogenous assets and where appropriate statistical techniques are available. | |
|
|
||
|
Interest rate products
|
Products with a payoff linked to interest rates. This category includes interest rate swaps, swaptions, caps and exotic interest rate derivatives. | |
|
|
||
|
Investment grade
|
A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of AAA to BBB. | |
|
|
||
|
Jaws
|
The difference between the growth in cost and the growth in income | |
|
|
||
|
Leveraged Finance
|
Loans or other financing agreements provided to companies whose overall level of debt is high in relation to their cash flow (net debt: EBITDA) typically arising from private equity sponsor led acquisitions of the businesses concerned. | |
|
|
||
|
Liquidity and Credit enhancements
|
Credit enhancement facilities are used to enhance the creditworthiness of financial obligations and cover losses due to asset default. Two general types of credit enhancement are third-party loan guarantees and self-enhancement through over collateralization. Liquidity enhancement makes funds available if required, for other reasons than asset default, e.g. to ensure timely repayment of maturing commercial paper. | |
|
|
||
|
Loan to deposit ratio
|
The ratio of the book value of the Group’s commercial assets (i.e. retail, corporate and private banking assets) divided by its commercial liabilities (i.e. retail, corporate and private banking deposits, and shareholders’ funds). | |
|
|
||
|
Loan to value ratio (LTV)
|
The amount of a first mortgage charge as a percentage of the total appraised value of real property. The LTV ratio is used in determining the appropriate level of risk for the loan and therefore the price of the loan to the borrower. LTV ratios may be expressed in a number of ways, including origination LTV and indexed LTV. Origination LTVs use the current outstanding loan balance and the value of the property at origination of the loan. Indexed LTVs use the current outstanding loan value and the current value of the property (which is estimated using one or more external house price indices). | |
|
|
||
|
Loans past due
|
Loans are past due when a counterparty has failed to make a payment when contractually due. | |
|
|
||
|
Loss Given Default (LGD)
|
The fraction of Exposure at Default (EAD) (defined above) that will not be recovered following default. LGD comprises the actual loss (the part that is not expected to be recovered), together with the economic costs associated with the recovery process. | |
203
Shareholder Information
Glossary of Financial Services Industry Terms
continued
| Term used in the Annual Report | Definition | |
|
Medium Term Notes (MTNs)
|
Corporate notes continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years. | |
|
|
||
|
Monoline
|
An entity which specialises in providing credit protection to the holders of debt instruments in the event of default by a debt security counterparty. This protection is typically held in the form of derivatives such as credit default swaps (CDS) referencing the underlying exposures held. | |
|
|
||
|
Monoline Wrapped
|
Debt instruments for which credit enhancement or protection by a monoline insurer has been obtained. The wrap is credit protection against the notional and principal interest cash flows due to the holders of debt instruments in the event of default in payment of these by the underlying counterparty. Therefore, if a security is monoline wrapped its payments of principal and interest are guaranteed by a monoline insurer. | |
|
|
||
|
Mortgage Backed Securities (MBS)
|
Securities that represent interests in a group of mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal). | |
|
|
||
|
Mortgage vintage
|
The year the mortgage was issued. | |
|
|
||
|
Mortgage related securities
|
Securities which are referenced to underlying mortgages. See RMBS, CMBS and MBS. | |
|
|
||
|
Net Equity
|
The change in shareholders’ equity between one period and another. | |
|
|
||
|
Net Interest Income
|
The difference between interest received on assets and interest paid on liabilities. | |
|
|
||
|
Non-asset backed debt instruments
|
These products are debt instruments. This category includes government bonds; US agency bonds; corporate bonds; commercial paper; certificates of deposit; convertible bonds; corporate bonds and issued notes. | |
|
|
||
|
Non-investment grade
|
A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of BB+ or below. | |
|
|
||
|
Notional Collateral
|
Collateral based on the notional amount of a financial instrument. | |
|
|
||
|
Overdraft
|
A line of credit established through a customer’s current account and contractually repayable on demand | |
|
|
||
|
Over the counter derivatives (OTC)
|
Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They offer flexibility because, unlike standardised exchange-traded products, they can be tailored to fit specific needs. | |
|
|
||
|
Own Credit
|
The effect of the Group’s own credit standing on the fair value of financial liabilities. | |
|
|
||
|
Prime
|
Loans of a higher credit quality and would be expected to satisfy the criteria for inclusion into Government programmes. | |
|
|
||
|
Principal transactions
|
Principal transactions comprise net trading income and net investment income. | |
|
|
||
|
Private equity investments
|
Private equity is equity securities in operating companies not quoted on a public exchange. Investment in private equity often involves the investment of capital in private companies or the acquisition of a public company that results in the delisting of public equity. Capital for private equity investment is raised by retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. | |
|
|
||
|
Probability of default (PD)
|
The likelihood that a loan will not be repaid and will fall into default. PD may be calculated for each client who has a loan (normally applicable to wholesale customers/clients) or for a portfolio of clients with similar attributes (normally applicable to retail customers). To calculate PD, the Group assesses the credit quality of borrowers and other counterparties and assigns them an internal risk rating. Multiple rating methodologies may be used to inform the rating decision on individual large credits, such as internal and external models, rating agency ratings, and for wholesale assets market information such as credit spreads. For smaller credits, a single source may suffice such as the result from an internal rating model. | |
|
|
||
|
Renegotiated loans
|
Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be individually impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. In other cases, renegotiation will lead to a new agreement, which is treated as a new loan. | |
|
|
||
|
Repo/Reverse repo
|
A repurchase agreement that allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell a security to the lender subject to a commitment to repurchase the asset at a specified price on a given date. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement or reverse repo. | |
|
|
||
|
Residential Mortgage Backed
Securities (RMBS) |
Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal). | |
|
|
||
|
Restructured loans
|
Loans where, for economic or legal reasons related to the debtor’s financial difficulties, a concession has been granted to the debtor that would not otherwise be considered. Where the concession results in the expected cash flows discounted at the original effective interest rate being less than the loan’s carrying value, an impairment allowance will be raised. | |
204
Shareholder Information
Glossary of Financial Services Industry Terms
continued
| Term used in the Annual Report | Definition | |
|
Retail Loans
|
Loans to individuals rather than institutions. This includes both secured and unsecured loans such as mortgages and credit card balances. | |
|
|
||
|
Return on average
shareholders’ equity
|
Calculated as profit for the year attributable to equity holders of the Parent divided by the average shareholders’ equity for the year, excluding non-controlling interests. | |
|
|
||
|
Risk asset ratio
|
A measure of the risk attached to the assets of a business using definitions of capital and risk weightings established in accordance with the Basel Capital Accord as implemented by the UK Financial Services Authority. | |
|
|
||
|
Risk weighted assets
|
A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as implemented by the UK Financial Services Authority. | |
|
|
||
|
Securitisation
|
A process by which debt instruments are aggregated into a pool, which is used to back new securities. A company sells assets to an SPV (special purpose vehicle) who then issues securities backed by the assets based on their value. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors. | |
|
|
||
|
Special Purpose Entities (SPEs) or Special Purpose Vehicles (SPVs)
|
Entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their ongoing activities. Transactions with SPEs/SPVs take a number of forms, including: | |
|
|
||
|
|
- The
provision of financing to fund asset purchases, or commitments to provide finance for future purchases.
|
|
|
|
||
|
|
- Derivative transactions to provide
investors in the SPE/SPV with a specified exposure.
|
|
|
|
||
|
|
- The provision of liquidity or backstop facilities which may be drawn upon if the SPE/SPV experiences
future funding difficulties.
|
|
|
|
||
|
|
- Direct
investment in the notes issued by SPEs/SPVs.
|
|
|
|
||
|
Structured Investment
Vehicles (SIVs) |
SPEs (Special Purpose Entities) which invest in diversified portfolios of interest earning assets to take advantage of the spread differentials between the assets in the SIV and the funding cost. | |
|
|
||
|
Structural liquidity
|
The liquidity available from current positions — principally unpledged marketable assets and holdings of term liabilities with long remaining lives. | |
|
|
||
|
Structured finance/notes
|
A structured note is an investment tool which pays a return linked to the value or level of a specified asset or index and sometimes offers capital protection if the value declines. Structured notes can be linked to equities, interest rates, funds, commodities and foreign currency. | |
|
|
||
|
Subordination
|
The state of prioritising repayments of principal and interest on debt to a creditor lower than repayments to other creditors by the same debtor. That is, claims of a security are settled by a debtor to a creditor only after the claims of securities held by other creditors of the same debtor have been settled. | |
|
|
||
|
Subordinated liabilities
|
Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. | |
|
|
||
|
Sub-Prime
|
Defined as loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as court judgements and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, high debt-to-income ratios, or other criteria indicating heightened risk of default. | |
|
|
||
|
Tier 1 capital
|
A measure of a bank’s financial strength defined by the UK Financial Services Authority. It captures Core Tier 1 capital plus other Tier 1 securities in issue, but is subject to a deduction in respect of material holdings in financial companies. ‘Tier 1 capital ratio’ The ratio expresses Tier 1 capital as a percentage of risk weighted assets. | |
|
|
||
|
Tier 2 capital
|
Defined by the UK Financial Services Authority. Broadly, it includes qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available for sale equity gains and revaluation reserves. It is subject to deductions relating to the excess of expected loss over regulatory impairment allowance, securitisation positions and material holdings in financial companies. | |
|
|
||
|
Total shareholder return
|
Defined as the value created for shareholders through share price appreciation, plus reinvested dividend payments. | |
|
|
||
|
Value at Risk (VaR)
|
An estimate of the potential loss which might arise from market movements under normal market conditions, if the current positions were to be held unchanged for one business day, measured to a confidence level. | |
|
|
||
|
Write-Down
|
After an advance has been identified as impaired and is subject to an impairment allowance, the stage may be reached whereby it is concluded that there is no realistic prospect of further recovery. Write-downs will occur when, and to the extent that, the whole or part of a debt is considered irrecoverable. | |
205
Shareholder Information
Directors’ Responsibility Statement
We confirm to the best of our knowledge:
| 1. | The financial statements, prepared in accordance with International Financial Reporting Standards, 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 undertakings included in the consolidation taken as a whole; and | |
| 2. | 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 undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. |
By Order of the Board
|
|
|
|
|
António Horta-Osório
|
Antonio Lorenzo | |
|
Chief Executive
|
Chief Financial Officer | |
|
27 April 2010
|
27 April 2010 |
206
Cross-reference to Form 20-F
Cross-reference to Form 20-F
|
|
||||||||
| 1 | Identity of Directors, Senior Management and Advisers | * | ||||||
| 2 | Offer Statistics and Expected Timetable | * | ||||||
|
3
|
Key Information | Selected Financial Data | 189 | |||||
|
|
Capitalisation and Indebtedness | * | ||||||
|
|
Reasons for the Offer and use of Proceeds | * | ||||||
|
|
Risk Factors | 192 | ||||||
|
4
|
Information on the Company | History and Development of the Company | 6 | |||||
|
|
Business Overview | 6 | ||||||
|
|
Organisational Structure | 7 | ||||||
|
|
Property, Plant and Equipment | 36 | ||||||
| 4A | Unresolved Staff Comments | N/a | ||||||
|
5
|
Operating and Financial Review and Prospects | Operating Results | 11 | |||||
|
|
Liquidity and Capital Resources | 41 | ||||||
|
|
Research and Development, Patents and Licenses, etc | N/a | ||||||
|
|
Trend Information | 2 | ||||||
|
|
Off- Balance Sheet Arrangements | 40 | ||||||
|
|
Contractual Obligations | 40 | ||||||
|
6
|
Directors, Senior Management and Employees | Directors and senior management | 86 | |||||
|
|
Compensation | 92 | ||||||
|
|
Board Practices | 91 | ||||||
|
|
Employees | 93 | ||||||
|
|
Share Ownership | 93 | ||||||
|
7
|
Major Shareholders and Related Party Transactions | Major Shareholders | 198 | |||||
|
|
Related Party Transactions | 92, 166 | ||||||
|
|
Interests of Experts and Counsel | * | ||||||
|
8
|
Financial Information | Consolidated Statements and Other Financial Information | 102 | |||||
|
|
Significant Changes | 10, 88 | ||||||
|
9
|
The Offer and Listing | Offer Listing and Details | * | |||||
|
|
Plan of Distribution | * | ||||||
|
|
Markets | N/a | ||||||
|
|
Selling shareholders | * | ||||||
|
|
Dilution | * | ||||||
|
|
Expenses of the Issue | * | ||||||
|
10
|
Additional Information | Share Capital | * | |||||
|
|
Articles of Association | 200 | ||||||
|
|
Material Contracts | 28 | ||||||
|
|
Exchange Controls | N/a | ||||||
|
|
Taxation | 198 | ||||||
|
|
Dividends and Paying Agents | * | ||||||
|
|
Statements by Experts | * | ||||||
|
|
Documents on Display | 199 | ||||||
|
|
Subsidiary Information | N/a | ||||||
| 11 | Quantitative and Qualitative Disclosures about Market Risk | 49 | ||||||
|
12
|
Description of Securities Other Than Equity Securities | Debt Securities | * | |||||
|
|
Warrants and Rights | * | ||||||
|
|
Other Securities | * | ||||||
|
|
American Depositary Shares | * | ||||||
|
|
||||||||
| 13 | Defaults, Dividend Arrearages and Delinquencies | N/a | ||||||
| 14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | N/a | ||||||
|
15
|
Controls and Procedures | Disclosure Controls and Procedures | 96 | |||||
|
|
Management’s Annual Report on Internal Control over Financial Reporting | 97 | ||||||
|
|
Attestation Report of the Registered Public Accounting Firm | N/a | ||||||
|
|
Changes in Internal Control Over Financial Reporting | 97 | ||||||
| 15T | Controls and Procedures | N/a | ||||||
| 16A | Audit Committee Financial Expert | 91 | ||||||
| 16B | Code of Ethics | 94 | ||||||
| 16C | Principal Accountant Fees and Services | 128 | ||||||
| 16D | Exemptions from the Listing Standards for Audit Committees | N/a | ||||||
| 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | N/a | ||||||
| 16F | Change in Registrant’s Certifying Accountant | N/a | ||||||
| 16G | Corporate Governance | N/a | ||||||
|
|
||||||||
| 17 | Financial Statements | N/a | ||||||
| 18 | Financial Statements | 102 | ||||||
| 19 | Exhibits | Filed with SEC | ||||||
| * | Not required for an Annual Report. |
207
SIGNATURE
The registrant hereby certifies that it meets all the requirements for filing on Form
20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
SANTANDER UK plc
|
||||
| By: | /s/ Antonio Lorenzo | |||
|
Antonio Lorenzo
Chief Financial Officer |
||||
Dated: 27 April 2010
EXHIBIT INDEX
Exhibits
1
| 1.1 | Articles of Association of Santander UK plc 2 | |
| 4.1 | Share subscription agreement between Banco Santander, S.A. and Abbey National plc dated 8 January 2009 3 | |
| 4.2 | Cross guarantee agreement between Abbey National plc and Alliance & Leicester plc dated 19 March 2009 4 | |
| 7.1 | Statement of ratio of earnings to fixed charges 5 | |
| 8.1 | List of Subsidiaries of Santander UK plc | |
| 12.1 | CEO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 12.2 | CFO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 13.1 | Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 15.1 | Consent of Deloitte LLP 5 |
| 1 | Documents concerning Santander UK plc referred to within the Annual Report on Form 20-F 2009 may be inspected at 2 Triton Square, Regent’s Place, London NW1 3AN, the principal executive offices and registered address of Santander UK plc. | |
| 2 | As previously furnished with the Securities and Exchange Commission on the Form 6-K dated 10 March 2010 of Santander UK plc. | |
| 3 | As previously filed with the Securities and Exchange Commission as an exhibit to the Form 20-F dated 19 March 2009 of Abbey National plc. | |
| 4 | As previously filed with the Securities and Exchange Commission on pages 148 through 150 of the Form 20-F dated 19 March 2009 of Abbey National plc. | |
| 5 | Incorporated by reference into Registration Statement Nos. 333-10232, 333-11320 on Forms F-3. |
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