Santander UK plc
STNDF 20-F Report ended Dec. 31, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM
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(Mark One)
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31
,
2023
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
For the transition period from
to
Commission file number
001-14928
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(Exact name of Registrant as specified in its charter)
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(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Tel:
+44
(0)
800 085 1491
E-mail:
lee.grant@santander.co.uk
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Trading
Symbol(s)
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Name of each exchange
on which registered
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*
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From June 1, 2016 Santander UK plc became the issuer in respect of the outstanding notes issued by Abbey National Treasury Services plc under its US
SEC registered debt shelf. All notes transferred to Santander UK plc by Abbey National Treasury Services plc under its US SEC registered debt shelf and
all notes issued by Santander UK plc in the future under its US SEC registered debt shelf will be the sole liability of Santander UK plc and are not
guaranteed by any other entity.
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
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.
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Ordinary shares of nominal value of £0.10 each*
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10 3/8% Non-cumulative Preference Shares of nominal value of £1 each
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8 5/8% Non-cumulative Preference Shares of nominal value of £1 each
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*
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All of the issued and outstanding ordinary shares of Santander UK plc are held by Santander UK Group Holdings plc.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☒
No
☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. Yes ☐
No
☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files).
Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth
company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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☒
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Emerging growth company
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new or revised financial accounting standards
†
provided pursuant to
Section 13(a) of the Exchange Act. ☐
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†
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The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.
☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based
compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP
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☐
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issued by the International Accounting
Standards Board
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☒
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Other
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☐
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
☐
No ☒
Santander UK plc
2023 Annual Report
Part of the Banco Santander group
Important information for readers
Santander UK plc and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of the Banco Santander
group (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial
Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA and the PRA.
This Annual Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in
Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy,
albeit the principal business activities of the Santander UK Group Holdings plc group are carried on by Santander UK plc and its subsidiaries.
The Santander UK Group Holdings plc Corporate Governance and Risk Frameworks have been adopted by the Company and its subsidiaries to ensure
consistency of application.
None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2023 (the Form 20-F), including where a link is provided,
nor any of the information contained on such websites, is incorporated by reference in the Form 20-F.
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Strategic report
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Contents
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About this report
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The Strategic Report outlines the key elements of the Annual Report and
provides context for the related financial statements. It is also designed to
help members of the Company assess how the Directors have performed
their duty under section 172 of the Companies Act 2006. The report highlights
key financial and non-financial metrics which help to explain our performance
over the past year. It also highlights the external environmental factors
affecting the business along with Santander UK’s position in the UK banking
market.
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Sustainability
review
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By Order of the Board.
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William Vereker
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Chair, 29 February 2024
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Strategic Report
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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Financial
statements
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Shareholder
information
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Annual Report 2023
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Santander UK plc
1
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At a glance
Understanding our business
Our business model is focused on building customer loyalty, through being
digital first with a human touch
Our Purpose
is to help people and businesses prosper
We help our customers
at moments that matter most
We champion
British businesses and help them to grow sustainably
Our customer focus
helps us to develop more loyal and lasting relationships
We provide
high quality financial products and services across our digital, branch and telephony channels.
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14 million
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c19,500
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444
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active UK customers
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Full time equivalent employees
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Branches
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£172.9bn
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5th largest
(1)
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£187.4bn
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in mortgage lending
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commercial lender
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in customer deposits
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(1) Santander UK industry analysis of latest available bank and building society reports as at Q4 23.
Our competitive advantages
Scaled
and established bank in the UK
Strong
balance sheet with a prudent approach to risk
Part of a
global banking group
, with international expertise and technological synergies
A
talented
and
motivated
team
Our strategic priorities
Be
customer centric
and increase
customer activity
Focus on
simplification
,
automation
and
digitalisation
Create
value
and be
disciplined with capital allocation
Become a more
sustainable
and
responsible bank
Simple, Personal and Fair
We live
our values of
Simple, Personal and Fair
through great behaviours and our people leaders
Sustainability Responsible banking strategy
through considering the pillars of
ESG
Environment -
Fighting climate change supporting the green transition
Social -
Building a more inclusive society through delivering on our purpose
Governance -
Doing business the right way with robust governance
A significant part of the Santander UK Group Holdings plc group
The Company and its subsidiaries represent almost all the business and operations of its immediate parent Santander UK Group Holdings plc, comprising
approximately
98%
of its immediate parent group's consolidated profit from continuing operations before tax for the year ended 31 December 2023 and
approximately
98%
of its consolidated net assets at 31 December 2023. More information on the Santander UK Group Holdings plc group, including the role of
the Company as a ring-fenced bank, can be found in the Santander UK Group Holdings plc 2023 Annual Report, which does not form part of this report.
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Strategic Report
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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Financial
statements
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Shareholder
information
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Annual Report 2023
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Santander UK plc
2
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Market overview
Five major forces continue to shape the UK banking market.
Uncertain economic environment
What we have seen
In 2023, the UK economy saw weak economic growth (0.1% based off latest data available), as UK consumers experienced increases in the cost of living
following two years of high inflation. This led to the Monetary Policy Committee (MPC) increasing the Base Rate five times in 2023 to 5.25% (175bps above 2022).
As a result, the housing market slowed, with approvals below 2022 levels and prices reducing by around 0.8% in the year.
Our response and looking ahead
While our performance is closely linked to the performance of the UK economy, our mortgage focus and prudent approach to risk saw income benefits from a high
rate environment. We continued to focus on supporting our customers and invest in improving efficiency to offset inflationary pressures on expenses. In 2023, we
contacted 2.5 million customers to assist with cost of living pressures and provided tools to help them manage their money. We invested further in our recently
completed transformation programme, which helped offset inflationary pressures. Looking ahead, in 2024 we expect the Bank of England to begin easing rates
should inflation continue to fall. As this occurs, we expect to see mortgage lending begin to stabilise as our customers’ real income improves. We will continue to
support our customers when they need it.
Increased competition and margin pressure
What we have seen
The UK banking sector continues to be a highly competitive mature market. In addition to our traditional competitors, we have continued to see international and
digital challengers compete for lending and deposits. Most large UK banks saw mortgage lending and deposits either reduce or slow in growth with disciplined
pricing in this highly competitive and high rate environment, as customers shopped around for best offerings. Cost of retail and wholesale funding rose over 2023,
leading to increased pressure on margins and spread.
Our response and looking ahead
In 2023, we took a strategic decision to deleverage our portfolio through being disciplined in pricing and maintaining our prudent approach to risk. We continued to
monitor competitors’ products, develop partnerships and invest in our offerings (both traditional and digital) throughout the year to bring customers to Santander
UK and meet their needs. Looking forward, we expect international and digital challengers to continue their pursuit of market share, however we foresee this being
challenging for them due to current funding costs. We will continue to invest in our products and offerings to attract and retain customers, leveraging from our
significant variety of resources.
Changing customer behaviours
What we have seen
2023 continued to see customers move towards digital banking over traditional banking methods. Over 90% of our current account and credit card openings were
made through digital channels, with our digital customer base growing 3% to over 7.2 million users. We also saw a shift in customer deposits from current
accounts into savings as customers took advantage of higher rates on savings accounts, especially term deposits.
Our response and looking ahead
With a refreshed commitment of becoming a digital first bank with a human touch, we digitised key customer journeys in 2023, allowing us to compete with
challenger and online-only banks and simplifying our onboarding experience. While we understand the increasing importance of digital banking, we continued to
ensure that our branch and human contact for customers is market leading and available to those who need it most. Looking ahead to 2024 we are looking
forward to the release of OneApp in the UK, our new mobile banking app. OneApp will give our customers an improved mobile banking experience. We will also
continue to modernise our branches, with c.50 refurbishments planned for 2024, and continue to explore new ways of banking, like Work Cafés, with two planned
openings in 2024. Investment in our products will continue to ensure the products and services we offer meet our customers’ needs and attract new customers.
Intensifying regulatory pressures
What we have seen
The regulatory agenda continued to be intense in 2023, with significant policy and supervisory activity from both regulators and the UK Government. We are now
seeing regulators implement a range of new policies, including a new secondary competitiveness and growth objective for the UK’s financial services sector. HM
Treasury has also been consulting on reforms to ring-fencing.
Our response and looking ahead
In 2023, we began to address the PRA's expectations on model risk management ahead of the 2024 deadline, whilst also preparing for the finalisation of Basel
3.1, which will impact our capital requirements. The centrepiece of regulatory activity in 2023 was the introduction of Consumer Duty. We have been focused on its
effective implementation and ongoing embedding across the business, which has been successful. We are now focused on preparing for the implementation of
Phase 2 in 2024. Authorised Push Payment (APP) fraud continues to be a major challenge impacting the industry, with the Payment Systems Regulator (PSR)
introducing a mandatory reimbursement requirement. Whilst we have implemented several changes to prevent fraud from occurring, we continue to encourage
policymakers to consider how we can better prevent fraud from occurring. We anticipate regulatory activity will intensify in 2024 and we will continue to work with
industry, trade bodies and policymakers to support the appropriate regulation of the UK’s financial services industry.
ESG activity under the spotlight
What we have seen
Customers, governments, regulators and investors alike placed more scrutiny on ESG activities than ever before in 2023. Companies are expected to play their
part in creating a sustainable and diverse operating environment, as more customers and investors make decisions based on ESG factors.
Our response and looking ahead
In 2023, we updated our climate strategy to better align with our parent Banco Santander. In the UK, we have provided over £13bn in green financing since 2020
(2025 target: £20bn), helping our customers reduce their carbon footprint. We continued to make strong progress against our financial empowerment ambition,
having exceeded both 2025 financial empowerment and education targets. Internally, we continued to celebrate diversity and encourage our culture of belonging
throughout 2023. Looking ahead, we will continue to evolve how we report on ESG matters. This involves updating our targets as we reach those set previously
and improving disclosure. Our customers and people should expect to see benefits of Santander UK continuing to be a champion of sustainable and responsible
banking in the UK.
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Strategic Report
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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Financial
statements
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Shareholder
information
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Annual Report 2023
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Santander UK plc
3
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Our business model
We follow
The Santander Way
Our aim
To be the
best
open financial services platform
, by acting
responsibly
and earning the
lasting
loyalty
of our people, customers, shareholders and
communities
Our purpose
To help
people
and
businesses
prosper
Our how
Everything we do should be
Simple, Personal and Fair
We create value for all
An engaged talented
team
generates...
customer
loyalty
leading to...
strong financial results for our
shareholders
so we deliver...
support for our
communities
which motivates...
an engaged talented
team...
Santander UK
We provide financial products and services
Mortgages, consumer auto finance, unsecured loans, credit cards, banking and savings accounts, investment and insurance products for individuals and growth-
focused support and services for companies
Our competitive advantage
Scaled
and
established
bank in the UK - Scale in our core banking businesses combined with an innovative mindset
Part of a
global
banking
group
- Synergies received from Banco Santander’s operating model and technology
Strong balance sheet
with a prudent approach to risk - High asset quality across all portfolios and capital metrics well above regulatory requirements
A
talented
and
motivated
team
- A highly talented and engaged team, with the right skills in place to support our customers and transform the bank
Our strategic priorities
Focused on customer loyalty, improved efficiency and sustainable growth.
Customer centric customer activity
Initiatives focused to better serve and engage our customers by leveraging technological and operations synergies from the global Banco Santander group,
enabling access to financial services for our customers through several channels.
2023 progress:
launched new digital current accounts (Edge Edge Plus) and market leading easy access saver. For our corporate customers we launched
Santander Navigator to connect them with overseas markets.
Simplification, automation digitalisation
We aim to reduce complexity, decrease friction and increase automation to streamline our products and processes. This is supported by becoming a ‘digital bank
with a human touch’.
2023 progress:
migrated our contact centre platform to the cloud. CCB adopted Banco Santander’s Gravity platform, an in-house digital cloud-native core
banking system. Our retail banking customer pilot for ‘OneApp’ launched in the UK ahead of H124 migration.
Value creation disciplined capital allocation
Focus on value creation for all (customers, employees, shareholders and communities) while managing risk and profitability and being disciplined with capital
allocation.
2023 progress:
strategic deleveraging of our balance sheet delivering record profits for our shareholders. We maintained significant headroom on regulatory
capital requirements.
Sustainable responsible banking
Initiatives aimed at helping our customers with their net zero transition and to help grow the number of people with the skills they need to thrive in the future.
2023 progress:
completed a full review and update to our ESG operating model, which included a refreshed climate strategy and ongoing work to update our
social strategy.
Our performance and key performance indicators
The directors of the Company’s immediate parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group
(which includes the Santander UK group) on a business division basis. Key performance indicators are not set, monitored or managed at the Santander UK group
level. As a result, the Company’s Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an
understanding of the development, performance or position of the Company.
The development, performance and position of the business of the Santander UK group is set out in the Financial review.
The key performance indicators of the Santander UK Group Holdings plc group can be found in its 2023 Annual Report, which does not form part of this report.
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Strategic Report
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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Financial
statements
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Shareholder
information
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Annual Report 2023
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Santander UK plc
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Risk management overview
Top risks
We monitor our Top risks regularly at the Executive Risk Control Committee (ERCC) and Board Risk Committee (BRC).
Highlighted below are our Top risks in 2023 and associated management actions. Many of these risks are likely to remain in focus in 2024.
Inflationary supply chain pressures
This is the risk facing our retail customers from cost of living increases and higher interest rates; and on our corporate customers from business cost increases
and supply chain pressures along with remaining Covid-19 and Brexit related risk issues post pandemic and exit from the EU. We have taken actions to adjust
affordability criteria in our lending decisions and increased our customer support capacity, whilst ensuring close and continuous monitoring of our credit portfolios.
To date our credit portfolio performance has remained relatively resilient, although we are seeing some signs of customer stress emerging, albeit from a relatively
low base. We anticipate some further deterioration in credit metrics in 2024, as more customers refinance onto higher mortgage rates.
Building and maintaining capital strength
We saw sustained resilience in our Regulatory Capital in 2023, with the Common Equity Tier 1 ratio remaining significantly above the regulatory minimum.
Regulatory uncertainty remains the top capital risk for the bank. The UK implementation of Basel 3.1 is set for 1 July 2025, with a four and a half year transition
period to full implementation by 1 January 2030, and will likely impact our regulatory capital requirements.
Climate change
We continue to progress our transition planning to set baselines and net zero pathways for our residential mortgage, auto loan, and commercial real estate
portfolios. We are also progressing our Climate Internal Scenario Analysis programme. This is expected to deliver capability to meet regulatory climate stress test
requirements, enhanced assessment of our risk exposures, further supporting targeting of our lending decisions and facilitating achievement of our net zero
ambitions. Increasing disclosure requirements for climate change and broader ESG reporting required us to enhance our data strategy, which is reflected in our
assessment of Data Management as a Top Risk. Supporting our customers is a key focus of our climate change plans along with managing related risks and
reducing emissions in our operations.
Economic Crime
Financial crime is a high priority risk, and addressing it remains a key priority for us. In 2023, we further developed our compliance oversight and operations, and
updated our policies and standards reflecting latest external requirements and best practice.
We also improved our operations and processes to respond to increasingly complex sanctions regimes, and introduced enhanced Customer Due Diligence
processes and controls to support new business onboarding.
We considered the likely impact of government announcements on account closures. We only close accounts after a thorough review of all circumstances in line
with legal and regulatory obligations and customer communication. Our Fraud losses were lower in 2023 compared to 2022, with design and implementation of
new fraud prevention tools to complement our existing prevention and detection systems. Authorised Push Payment (APP) fraud remains the most significant
single contributor to fraud losses. There are regulatory and consumer body considerations, with further PSR policy statements published in December 2023,
which we are reviewing carefully for any further potential impacts. We are taking actions under our Fraud Transformation Programme to reduce losses and case
volumes.
IT and Cybersecurity
The importance of IT risk management and control remains at the centre of our activities and we continue to progress a bank-wide programme to address
increasing obsolescence, partly due to the fast pace of technological evolution. The programme is expected to deliver further risk reduction, over a three-year
period, which we monitor closely.
We experienced no material data or cybersecurity incidents in 2023, although we responded to a number of third-party incidents. We continue to enhance our
threat prevention controls, address IT obsolescence, and test our business area recovery plans against a range of scenarios. We continue to see increasing
ransomware attacks across all sectors, driven by compromises in supply chain tools and we expect this trend to remain. We continue to invest in the right skills
and resources to manage data and cybersecurity risks, and constantly monitor cybersecurity threats, particularly with evolving and elevated risks in the
geopolitical environment.
People
People risk continues to be impacted by changes in our operating models and execution of our business strategies. We continue to adapt and respond to these
risks, including those associated with the phased relocation of our Head Office to Unity Place in Milton Keynes across 2023 and 2024. We saw improvements in
the year including reductions in levels of wellbeing related absence, and a stabilisation of attrition rates. Our wellbeing and inclusion strategy focuses on helping
colleagues through change and supports productivity. We continue to support hybrid working but focused our messaging on encouraging colleagues to attend
regularly in the office. We also provide support in response to the impact of external economic factors on our colleagues.
Conduct and Regulatory
In 2023, we remained vigilant in taking a customer-focused approach in developing strategy, products, services and policies that support fair customer outcomes
and market integrity. As part of this, we proactively contacted customers at risk of experiencing financial stress to support them. We are supporting business
customers with payment difficulties rolling off government loan schemes. We are also evolving our Financial Support team and SME support by investing more in
people and IT, and we continue to focus on ensuring good customer outcomes.
Managing complex change
We have a challenging change agenda including continued aspirations for transformation and growth and well-established change control processes, as well as a
strong oversight framework and related risk-based prioritisation. We continued our transformation to simplify the bank, which includes digitalising processes and
customer journeys, reducing costs, extending internal capabilities and ensuring a resilient operating model
.
Data management
Data Management including data privacy remains a key focus for us, reflecting the importance of data in supporting our business plans and strategy, the rising
cybersecurity threat landscape, and the importance of controls over personal data. We continue to monitor and manage data risk through enhanced governance
structures and processes. Our Data Programme is progressing with clearly defined deliverables that will improve our ability to manage data and enhance our
capabilities, in line with our Data Strategy.
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Strategic Report
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Sustainability and
Responsible Banking
|
Financial review
|
Governance
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Risk review
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Financial
statements
|
Shareholder
information
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|||||||
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Annual Report 2023
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Santander UK plc
5
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Third Party Risk Management (TPRM)
We rely extensively on third parties, both Banco Santander and external suppliers, for a range of goods and services. The heightened geopolitical environment
puts an increased risk focus on supply chains. In 2023, we continue to progress work to enhance our controls and governance arrangements. We reassessed our
highest risk suppliers against a revised set of criteria and implemented new metrics to monitor and manage our risk exposure. Our Procurement transformation
also continues to operationalise our updated TPRM policies and processes.
Ring-Fencing
This was covered in 2023 as a Top Risk in our regular updates to ERCC and BRC. We focused on the continued refinement and enhancement of the quality and
maturity of controls, and consideration of the HMT consultations on potential changes to the ring-fencing regime. We have removed this as a Top risk in 2024,
given the progress we made in 2023.
Emerging risks
We monitor these risks using our Emerging risks radar and regularly provide updates to the ERCC and BRC.
Highlighted below are our emerging risks in 2023 and our associated management actions. Most of these risks are systemic issues which will likely also impact
our peers and remain relevant in 2024.
Uncertain macroeconomic and geopolitical environment
These risks remain in our top areas of concern. UK political risks increased significantly in 2023, as the focus is drawn to an upcoming General Election. We
monitor the political landscape closely, and our Public Affairs team provides specialist insights and analysis which we use to assess potential impacts on the bank.
Key areas of policy focus include: the fiscal position; spending policy approach and related markets (rates) and economic impacts; taxation (including bank
specific related); climate-related policies (including Net Zero); bank regulation; and post Brexit trade relations with the EU.
2024 is also an election year in the US, and we will consider the potential impacts on the geopolitical environment from this that could arise. Broader
considerations include conflicts in Ukraine and the Middle East, as well as the strengthening of political, trade and security ties between a number of developing
nations with large and growing economies. These developments can have significant impacts on inflationary pressures, supply chains, and the cybersecurity
threat environment.
Rapid technological change, customer behaviour, and Artificial Intelligence (AI)
Our overall approach to managing these risks reflects the continued acceleration of strong trends towards customer digital adoption via mobile and online banking.
Our commitment is to become a digital bank with a human touch, whilst also ensuring that we remain competitive in a market which is experiencing an increase in
digital-led market challenger entrants.
We continue to focus on investment in our products to ensure we are meeting customers’ needs, with our OneApp mobile banking experience platform due for
release in 2024. At the same time, we remain cognisant of cybersecurity, cloud technology and operational resilience issues which we take into account in our
development strategy.
AI and associated risks and opportunities featured prominently in broader strategic business decisions across industries in 2023. Our strategy team formed a
working group to co-ordinate a review of potential uses and touch-points of AI in the bank and other considerations such as governance, enterprise architecture,
software implications and data usage.
Intense market competition
Against the backdrop of a highly competitive UK banking market, most large banks experienced either a reduction or slowdown in mortgage lending and in
deposits, with customers able to select for value across a range of offerings. As well as taking a strategic decision to deleverage our mortgage portfolio, whilst
maintaining prudent risk management, we continue to develop partnerships and invest in our products and offerings to attract and retain customers, leveraging
Banco Santander’s technology and support.
Demanding regulatory agenda
Like all UK banks, we will continue to face a demanding and complex regulatory agenda in 2024 and beyond focused on consumer outcomes, customer
vulnerability, competition, and climate change. Our Compliance team continues to evaluate the evolving regulatory environment, and support the business in
understanding and implementing regulatory change requirements. Many of these risks have, to a large degree, crystallised and we address them as part of our
regular reporting across a range of risk types.
However, external developments are increasing the specific challenges being faced by banks in implementing climate change risk plans and fulfilling climate-
related commitments. Costs associated with the climate change agenda have risen significantly, at the same time as cost of living has become a key focal point.
Other external factors also remain uncertain and challenging including long-term UK government commitments, pace of technological developments, behavioural
changes in society and business model transition risks.
These issues are likely to feature heavily in UK political debate in 2024 as part of the General Election. We are monitoring these external developments closely for
any emerging reputational risks that could arise, either from failure to deliver our own climate-related plans, claims of ‘greenwashing’ or from a change in public
perception of such initiatives given increased costs of implementation.
The FCA announced in January 2024 that it intends to use its s166 FSMA powers to review historical motor finance commission arrangements and sales across
several firms. The review could imply some form of redress scheme, but the extent of our exposure under such a scheme remains uncertain at this stage. We are
considering the immediate implications of the FCA announcement.
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Annual Report 2023
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Santander UK plc
6
|
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Extended Government involvement in banking markets
In 2023, we saw a continuation of this trend, with the Mortgage Charter and the focus on banks’ decisions with respect to customers savings rates. These types of
initiatives create additional challenges and uncertainty for strategic plan forecasting and balance sheet management. UK political risks arising from the 2024
election could also have further impacts going forwards.
The issue of debanking which came to prominence in a high profile case in 2023, also highlighted the speed with which an emerging risk can crystallise into an
operational and conduct event, as well as increased reputational risk and investor concerns.
It is paramount to us that customers have access to banking services and are treated fairly and transparently. Along with UK political risks, we also proactively
monitor the potential for external interventions in the banking industry, and the likely impacts on the business, both regulatory and governmental.
Central Bank Digital Currencies Crypto
assets
Depending upon how these are implemented, there is a risk of a significant transfer of commercial bank deposits into these Central Bank Digital Currencies over
time, increasing wholesale funding requirements and costs, and reducing the 'stickiness' of deposits in a stress. There are also broader potential impacts on
regulatory frameworks, and monetary and fiscal policy. We continue to monitor these developments as they evolve.
We are also addressing the risk of crypto asset exposure through our client onboarding policies and procedures, which are part of our Financial Crime framework.
We introduced crypto currency fraud controls, including limits applied for digital personal faster payments across telephone, branch and open banking channels.
Environmental and Social risks
Risks related to the environment have been increasing, including extreme weather conditions, bio-diversity loss, pollution, water and food crises, as well as the
potential for new pandemics and diseases to emerge. There have also been mass-migration movements to Europe. These issues can impact business resilience
either directly or indirectly. As a result, we have added this to our emerging risks.
The UK Government refreshed its National Risk Register in 2023, which also highlighted a number of these risks and others. Our business recovery teams run
risk scenarios and develop response playbooks to test the bank’s resilience to a range of potential external events, which are refreshed regularly so that they
remain relevant in the context of the current external threat landscape.
Eurozone/Sovereign Bank contagion
Energy and commodity price shocks have increased risks to post-pandemic growth and financial conditions in the Euro area and globally. Euro area sovereigns,
corporates and households face higher interest rates and cost pressures that could test debt sustainability for more highly indebted entities.
The most relevant risks for Santander UK could be reflected in wider credit spreads which could increase wholesale funding costs. Credible funding plans and
liability strategies to support our aspired business growth will be key, which are regularly reviewed and challenged at our Asset and Liability Committee (ALCO).
Financial overview
Development and performance of our business in 2023
Information on the development and performance of our business in the year is set out in the ‘Income statement review’ section of the Financial review.
Our position at 31 December 2023
Information on our position at the end of the year is set out in the ‘Balance sheet review’ section of the Financial review.
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Annual Report 2023
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Santander UK plc
7
|
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Sustainability review
Our Sustainability and Responsible Banking (SRB) strategy aligns to Banco Santander’s and sets out Santander UK’s approach to tackling the key sustainability
challenges, identified by our materiality assessment, while also supporting our core purpose to help people and businesses prosper. The SRB embeds
Environmental, Social, and Governance (ESG) considerations into our business strategy and culture. More information on each of these pillars is shown below.
Environment
At Santander UK, we recognise that climate change is one of the biggest challenges of our times. Through our updated climate change strategy, our goal is to
support the UK in tackling climate change. We’ll do this through a four-pronged approach by: decarbonising our portfolios in line with the goals of the Paris
Agreement; supporting our customers in the green transition; reducing our own environmental impact; and embedding climate in risk management. We’re also
fully committed to Banco Santander’s ambition to achieve net zero carbon emissions by 2050.
Streamlined Energy and Carbon Reporting (SECR)
We continue to monitor and evaluate our energy and carbon footprint in line with the Streamlined Energy and Carbon Reporting (SECR) regulation. In 2023, we
used
92,907,880 kWh of energy, a 10% reduction against 2022 (102,882,982 kWh).
This change was a result of significant reductions in our electricity and gas
consumption. Our GHG emissions (market-based) were
5,299tCO
2
e compared to 5,895tCO
2
e
in 2022. 'Market based' reflects the emissions from the renewable
electricity purchased. Emissions per employee equate to
0.27 tCO2e, a decrease from 0.32 tCO
2
e in 2022.
Santander UK’s emissions are calculated using the
UK Government Department for Energy Security and Net Zero (DESNZ) conversion factors.
Our total Scope 1, 2 and 3 emissions for 2023 are as shown in the
table below.
The basis of reporting for our SECR data can be found in the Climate-related financial disclosures section of the Santander UK Group Holdings plc
Annual Report under Reducing our own environmental impact.
The amount of business travel continues to increase as we spend more time in our offices and branches post Covid-19. This resulted in greater Scope 3
emissions compared to 2022. However, the distance travelled, and resulting emissions, remain significantly lower than pre-pandemic levels. Despite this
increase, total emissions reduced in 2023 because of reductions in gas and electricity consumption. This is largely due to the rationalisation across the head
office estate, with the removal of several sites from the Santander Head Office Estate including Bootle and Newcastle, The old Milton Keynes sites were vacated
in Q4 2023 with the opening of Unity Place.
The current refurbishments underway at Triton Square, which include replacing lower efficiency mechanical, electrical, and plumbing assets (pumps, passenger
lifts, LED lighting, HVAC upgrades, air handling units, fan coil units) are still ongoing. Several floors of the site were completed in 2022/2023. In 2023, a further
three head office sites also started refurbishments.
Across the retail estate upgrades to HVAC units have also been rolled out. Santander UK works with a specialist third party to monitor energy consumption
across the estate, optimising energy use through improving controls. Santander UK’s environmental staff engagement initiative, Go Green, delivers a broad
range of sustainability focused campaigns and initiatives to encourage colleagues to adopt sustainable behaviours as well as provide practical energy savings
tips. All these measures contribute towards reducing Santander UK’s overall energy consumption.
|
2023
|
2022
|
2021
|
|
|
Scope 1 tCO
2
e
|
2,814
|
4,512
|
6,074
|
|
Scope 2 tCO
2
e - Location-based
|
16,127
|
15,571
|
18,860
|
|
Scope 2 tCO
2
e - Market-based
|
0.34
|
0.40
|
-
|
|
Scope 3 tCO
2
e - business travel only
1
|
2,485
|
1,383
|
289
|
|
Total (market-based)
1
|
5,299
|
5,895
|
6,363
|
|
YoY (%)
1
|
(10)
%
|
(7)
%
|
-
|
|
Total emissions per employee (tCO
2
e/
|
0.27
|
0.32
|
0.35
|
1.
Employees that had left Santander UK or were temporarily absent during each reporting period for 2021-2023 had been excluded from Scope 3 business travel, but should have been included. For 2023 we have
estimated this exclusion based on available data. We have made the assumption that the profile of employees and the nature of the travel has not materially changed in 2022 and 2021 and we have used the
2023 estimated uplift to restate 2022 and 2021 business travel. This estimation also impacts the Total CO
2
e emissions, CO
2
e emissions per employee, and year-on-year percentage for 2021-2023. Business
travel for the excluded population will be reviewed as part of planned enhancements for future reporting periods.
Social
Our social agenda focuses on our customers, our communities, and our people. Education, employability, and entrepreneurship alongside financial inclusion,
financial health, social mobility, and diversity and inclusion are essential to build our social impact ambitions. We are currently developing a new social strategy,
which will launch in 2024. This brings together all of our initiatives that are designed to generate positive impact for our customers (with a particular focus on
Consumer Duty), our communities, and our people. As part of our community engagement, we also focus on empowering students through our Santander
Universities Programme, volunteering opportunities for our people, our charity partnership with Macmillan Cancer Support, and the Santander Foundation.
Governance
Robust governance ensures we get the basics right. High standards of ethics, conduct, and integrity sit at the foundation of all prosperous and equitable
businesses and societies. They are also a clear priority in how customers choose their bank. Our commitment is to be a fair, transparent, and responsible bank.
At the heart of this is good customer outcomes and fair value. We deal with any form of fraud against our customers or other economic crime as a priority. We
uphold the highest standards of governance, including applying the UK Corporate Governance Code. You can read more about our governance practices in the
Chair's Report on Corporate Governance and the Directors' Report.
Human Rights and Modern Slavery
Banco Santander's sustainability policy sets out its commitment to protect human rights. This policy takes into account the UN Guiding Principles on Business and
Human Rights and expresses Banco Santander’s opposition to forced labour and child exploitation. We adopted this policy for Santander UK, strengthening our
commitment to tackling human rights.
Since the introduction of the Modern Slavery Act 2015, each year we also reviewed how we prevent modern slavery and human trafficking (MSHT) in our
business and supply chain.
Our key focus areas, each of which we cover in our annual MSHT statements, are customer due diligence, collaboration and information sharing, risks associated
with third-party suppliers, pension providers and employee training.
Fair pay and transparency
In 2023, we took further action to relieve cost of living pressures on our people. This included a one-time payment of £400 to all colleagues below senior leader
level in February, separate to the 2023 annual pay review. We continue to check that salary reviews and changes to reward policies do not have an adverse
impact on any employee groups. We are transparent about pay and benefits and are proud to have been an accredited Real Living Wage employer since 2015.
We voluntarily publish our Ethnicity Pay Gap in our annual Everyday Inclusion and Pay Gap Report. We also voluntarily disclose our CEO pay ratio in the
Remuneration Implementation Report in this Annual Report.
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|
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Stakeholder voice
The Boards of the Company and Santander UK Group Holdings plc (the Boards)
have identified our customers, employees, regulators, communities and
investors as our key stakeholder groups on th
e basis of their importance in ensuring the continuing success of Santander UK. While not a stakeholder in the
strictest sense, we also take into account our impact on the environment and climate given its criticality to life and business in general.
Balancing the interests of these
stakeholder groups alongside the interests of Santander UK is key to ensuring that we operate as a sustainable, responsible and
profitable business, and we therefore seek to ensure that this is embedded in our strategy. To support the Boards and their Committees in their considerations, in
2023 the Corporate Governance team refreshed the training on how to write good board papers, offering it to all members of management who prepare board
papers. The training, a video of which has also been made available to management online, includes a specific focus on the directors' duties arising from s172
and how management's preparation of their papers plays a key role in ensuring that the Directors can discharge their responsibilities in a fully informed manner.
In 2023, the Boards continued to spend time, inside and outside of formal meetings, engaging with stakeholders and discussing their interests, including visiting
branches, contact centres and offices around the UK to better understand the needs of our customers, employees and communities. Each Director meets with our
principal regulators, the PRA and FCA, on a periodic basis to understand their views, and they also attend our Board meetings from time to time. The Board meets
regularly with members of management and the directors of Banco Santander SA, the Company’s shareholder, and in February 2023, the Board held a full
meeting cycle in Madrid to strengthen relations and encourage collaboration.
|
Consumer Duty
|
||||
|
Stakeholders considered
|
Customers, Employees, Regulators
|
|||
|
Background
In creating the Consumer Duty (the Duty), the FCA challenged firms to not only raise the bar in terms of the minimum standard of outcomes and value
expected for their customers', but to also achieve a cultural shift to ensure consistent delivery of those outcomes.
|
||||
|
How the Board approached it
As required by the FCA, the Board approved the Consumer Duty implementation plan and appointed Nicky Morgan, independent Non-executive Director
and Santander UK plc RBC Chair, as Consumer Duty Champion in October 2022. Since then, the RBC has overseen our implementation and compliance
with the Duty on a holistic basis, with the aim of ensuring that our employees are appropriately empowered to put our customers at the heart of everything
we do, that Santander UK is therefore able to ensure good customer outcomes, and that our regulatory relationships remain strong.
|
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|
Outcome
Culture is a key element of the Duty and we have satisfied ourselves that our strategy and employee value proposition (including our purpose and
behaviours) are aligned to the spirit of the Duty and fully embedded across the business. The Directors’ individual employee engagement programmes
have allowed us to assure ourselves, firsthand, that our employees have our customers at the heart of their decision making, and that they feel proud to do
so. The results of our employee engagement survey, which are reported to the RBC quarterly, also support this conclusion.
In July 2023, we formally assessed the delivery of the first phase of the Duty, in line with the deadline set by the FCA. In preparation for this, we held a
workshop during which management gave examples of how they had approached the implementation of the Duty, including the Fair Value Assessment
process, the findings of the reviews they had completed and the proposed actions arising from them. As a result of management’s thorough approach, we
were able to agree that Santander UK is on track to meet the requirements of the Duty.
|
||||
Sustainability and Responsible Banking
Banco Santander has set out commitments to be a net zero bank by 2050. We are implementing the recommendations of the Task Force on Climate-related
Financial Disclosures (TCFD), and taking action to meet the expectations set by the PRA, BoE and FCA. This requires wide-ranging collaboration both within the
bank and externally to develop the tools and methodologies needed. As such, we adopted a unified approach across the Santander UK Group Holdings plc group
and therefore present TCFD disclosures on that basis in the Santander UK Group Holdings plc Annual Report.
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Annual Report 2023
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|
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Income statement review
SUMMARISED CONSOLIDATED INCOME STATEMENT
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Net interest income
|
4,658
|
4,425
|
|
Non-interest income
(1)
|
438
|
531
|
|
Total operating income
|
5,096
|
4,956
|
|
Operating expenses before credit impairment charges, provisions and charges
|
(2,456)
|
(2,343)
|
|
Credit impairment charges
|
(205)
|
(320)
|
|
Provisions for other liabilities and charges
|
(335)
|
(419)
|
|
Total operating credit impairment charges, provisions and charges
|
(540)
|
(739)
|
|
Profit from continuing operations before tax
|
2,100
|
1,874
|
|
Tax on profit from continuing operations
|
(559)
|
(480)
|
|
Profit from continuing operations after tax
|
1,541
|
1,394
|
|
Profit after tax
|
1,541
|
1,394
|
|
Attributable to:
|
||
|
Equity holders of the parent
|
1,541
|
1,394
|
|
Profit after tax
|
1,541
|
1,394
|
A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.
2023
compared to
2022
Profit before tax up
12%
.
–
Net interest income up
5%
largely due to the impact of higher base rates alongside active balance sheet management including disciplined deposit pricing.
–
Non-interest income
down
18%
, largely due to lower fees volume, as well as unrealised gains in 2022 which were not repeated.
–
Operating expenses before credit impairment charges, provisions and charges
up
5%
as inflationary pressures on costs were only partially offset by ongoing
savings from the transformation programme which began in 2019 as well as cost management discipline.
–
Credit impairment charges down
36%
reflecting an improved macroeconomic outlook in Q423, which benefited ECL despite a modest increase in arrears and
Stage 3 ratio.
–
Provisions for other liabilities and charges down
20%
as the 2022 FCA fine related to historical shortcomings in our AML controls was not repeated this year.
Fraud losses were also lower in
2023
.
–
Tax on profit increased by
£79m
, largely due to higher profits and an increase in underlying tax rates. This was partially offset by a reduction in the Bank
Corporation Tax Surcharge rate.
Please refer to the Financial review section of our Annual Report on Form 20-F for the year ended 31 December 2022 for a comparative discussion of 2022
financial results compared to 2021.
1.
Comprises ‘Net fee and commission income’ and ‘Other operating income’.
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Annual Report 2023
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|
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Balance sheet review
CUSTOMER BALANCES
This section analyses customer loans and customer deposits at a consolidated level and by business segment. The customer balances below exclude Joint
ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the
customer's account, and cash collateral.
A reconciliation between the customer balances below and the total assets as presented in the Consolidated Balance
Sheet is set out in the Risk review.
Consolidated
|
2023
|
2022
|
|
|
£bn
|
£bn
|
|
|
Customer loans
|
203.1
|
215.7
|
|
Other assets
|
72.3
|
69.5
|
|
Total assets
|
275.4
|
285.2
|
|
Customer deposits
|
187.4
|
189.9
|
|
Total wholesale funding
|
55.6
|
62.9
|
|
Other liabilities
|
17.8
|
18.0
|
|
Total liabilities
|
260.8
|
270.8
|
|
Shareholders' equity
|
14.6
|
14.4
|
|
Total liabilities and equity
|
275.4
|
285.2
|
Further analysis of credit risk on customer loans is set out in the Credit risk section of the Risk review.
2023
compared to
2022
–
Our
structural hedge position decreased, with
£106.0bn
at
31 December 2023
(
2022
:
£108.0bn
), and a duration of
2.4
years (
2022
:
2.5
years).
–
The balance on the
structural hedge fell in 2023 reflecting lower non-rate sensitive liabilities. The overall contribution to income has, however, increased as
maturities were replaced with higher yielding assets offsetting the lower balance. Going forward, we expect the overall contribution of the structural hedge to
continue to increase.
Summary segmental information
SEGMENTAL ANALYSIS
|
Customer
loans
|
Customer
deposits
|
RWA
|
Profit/(loss)
before tax
|
|
|
2023
|
£bn
|
£bn
|
£bn
|
£m
|
|
Retail Business Banking
|
180.0
|
158.3
|
1,703
|
|
|
Consumer Finance
|
5.2
|
—
|
174
|
|
|
Corporate Commercial Banking
(1)
|
17.9
|
24.1
|
570
|
|
|
Corporate Centre
|
—
|
5.0
|
(347)
|
|
|
Total
|
203.1
|
187.4
|
67.8
|
2,100
|
|
2022
|
£bn
|
£bn
|
£bn
|
£m
|
|
Retail Business Banking
|
191.8
|
161.8
|
1,542
|
|
|
Consumer Finance
|
5.4
|
—
|
198
|
|
|
Corporate Commercial Banking
(1)
|
18.5
|
24.8
|
345
|
|
|
Corporate Centre
|
—
|
3.3
|
(211)
|
|
|
Total
|
215.7
|
189.9
|
70.1
|
1,874
|
(1)
CCB customer loans included
£4.6bn
of CRE loans (
2022
:
£4.5bn
).
Retail Business Banking
–
Lower lending with reduced mortgage balance alongside a reduction in customer deposits. Profitability increased significantly as a result of balance sheet
optimisation and increases in base rate with disciplined deposit pricing.
Consumer Finance
–
Lower lending than 2022, as a decision was made to exit from two small business streams, with a focus on value and capital generation.
Corporate and Commercial Banking
–
Delivered strong financial performance in 2023 with client growth, balance sheet management and higher profitability with the impact of higher base rates.
Focus on clients' international needs, connecting 1,500 companies to our global network to support their international growth in 2023.
Corporate Centre
–
The impact of
unrealised gains in 2022 which were not repeated
contributed to higher loss before tax.
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Annual Report 2023
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Santander UK plc
14
|
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|
Santander UK plc Board
|
||||||||||||||
|
Board Nomination
Governance Committee
|
Board Risk
Committee
|
Board Audit
Committee
|
Board Responsible
Banking Committee
|
Board Remuneration
Committee
|
||||||||||
|
Executive level committees
|
||||||||||||||
|
Due to the overlap in Board membership, the Santander UK Group Holdings plc and Santander UK plc Board and Board Committees meet substantively
simultaneously. As such, this report details the governance arrangements, practices and activities of both Santander UK Group Holdings plc's and Santander
UK plc's Boards (the Boards) and Board Committees. The Santander UK plc Board and Board Committees also met independently from the Santander UK
Group Holdings plc Board and Board Committees twice in 2023.
|
||||||||||||||
|
Board changes in 2023
|
|||||||||||
|
1 June
|
31 August
|
1 September
|
27 September
|
30 September
|
15 December
|
||||||
|
Michelle Hinchliffe
and José María
Roldán appointed
|
Antonio Simoes
resigned
|
Pedro Castro e
Almeida appointed
|
Duke Dayal resigned
|
Chris Jones
resigned
|
Annemarie Durbin
resigned*
|
||||||
|
*Santander UK plc only
|
|||||||||||
|
Compliance with the UK Corporate Governance Code
|
|||||
|
The UK Corporate Governance Code 2018 (the Code) sets out the framework for premium listed companies in the UK. Although the Company does not have
premium listed shares on the London Stock Exchange, compliance with the Code is appropriate for a Company of our size and systemic importance to the
UK economy. This Governance section details how the Company has applied and complied with the principles and provisions of the Code. Any principles and
provisions of the Code that are not complied with are explained in the Directors’ Report.
|
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|
Governance at a glance
|
|
|
Annual Report 2023
|
Santander UK plc
15
|
|||
Our Board and governance structure
Maintaining high standards of corporate
governance is an essential element to ensure the
long-term sustainable success of the Company. In
addition to the Code (the standard against which
we measure ourselves), we also have internal
governance practices and rules, principally:
–
The UK Group Framework, which defines
clearly our responsibilities and relationship with
Banco Santander SA, our
ultimate
shareholder,
taking account of our fiduciary and regulatory
responsibilities. This gives us the autonomy to
discharge our responsibilities in the UK in line
with best practice as an independent board
while giving Banco Santander SA the oversight
it needs. Clarity of roles and responsibilities is
key to ensuring proper accountability for
decisions and outcomes.
–
The Corporate Governance Framework (CGF),
which is designed to assist the Boards of
Directors in discharging their responsibilities and
ensuring an appropriate degree of delegation
throughout the Santander UK group.
We review the CGF regularly to confirm that
governance arrangements remain effective and
appropriate. The corporate governance structure is
supported by the internal control and risk
management systems. An important principle,
applied throughout the CGF, is that delegation of
executive authority is to individual office holders,
who may delegate aspects of their authority to
others, as appropriate. Executive level committees
have been established to support individuals in
discharging their responsibilities.
Santander UK group structure and ring-
fencing governance arrangements
The substantive business of the Santander UK
group continues to be conducted by Santander UK
plc, our principal ring-fenced bank (RFB). Ring-
fenced banks operate within governance rules
defined and overseen by the PRA who granted
Santander UK plc certain ring-fencing governance
rule modifications, recognising our ownership
structure and chosen ring-fencing business model.
With effect from 1 January 2024, the PRA
approved a number of revisions to our ring-fencing
rule modifications which simplify our governance
arrangements, including the ability to have
common Santander UK Group Holdings plc and
Santander UK plc Board and Board Committee
memberships, subject to various safeguards. As
such, Mark Lewis, Dirk Marzluf and Nicky Morgan
were appointed to the Board of Santander UK
Group Holdings plc, with a number of changes to
Board Committee composition to ensure complete
alignment with Santander UK plc. One of the
safeguards agreed is that if a conflict matter (as
defined by the PRA) were to arise between the two
companies, three INEDs holding PRA senior
management functions (SMF) will have veto rights
on Board decisions. These three SMF INEDs are
Nicky Morgan, Mark Lewis and Ed Giera. Nicky
Morgan will chair the RFB Board meeting in the
event of a conflict matter decision.
The role and responsibilities of the Board
The Boards are collectively responsible for
promoting the success of Santander UK for the
benefit of its stakeholders, taking into account the
likely impact of our decisions in the long-term, as
well as balancing the interests of our other
stakeholders and our contribution to wider society.
The key decisions and matters reserved for the
Boards' approval, such as the long-term strategy
and priorities, are set out in the CGF. A copy of the
Schedule of Matters Reserved for the Board is also
available on our website at aboutsantander.co.uk,
which does not form part of this Annual Report.
As Chair, I have overall responsibility for the
leadership of the Boards and for ensuring their
effectiveness in all aspects of operation. These
responsibilities are formalised in the CGF. The
composition of the Boards helps to ensure that no
one individual or small group of individuals
dominates the Boards' decision-making. The
diversity of skills, experience and background on
the Boards enables them to provide constructive
challenge and strategic guidance and to offer
specialist advice.
There is a clear division of responsibilities between
the leadership of the Boards and the executive
leadership of the business. The responsibilities of
the Chair, CEO, SID and Non-Executive Directors
(NEDs) are agreed by the Boards and set out in
separate role statements as part of our CGF and
are available on our website at
aboutsantander.co.uk, which does not form part of
this Annual Report. The Boards are also supported
by their Committees, who make decisions and
recommendations on specific responsibilities
delegated to them. This enables the Boards to
spend a greater proportion of their time on
strategic, forward-looking matters.
Board Committees
The Committees play an essential role in
supporting the Boards, giving focused oversight of
key areas and aspects of the business. Their roles
and responsibilities are set out in their Terms of
Reference which are available at
aboutsantander.co.uk and which do not form part
of this Annual Report. The Terms of Reference are
regularly reviewed by each Committee to make
sure they remain appropriate. Cross-Committee
memberships provide visibility and awareness of
matters relevant across the Committees.
Each Committee is chaired by and comprised of
only Independent Non-Executive Directors
(INEDs), with the exception of the Board
Nomination Governance and Board Risk
Committees, which have one member who is a
Banco Santander group appointed Non-Executive
Director (GNED). Having assessed committee
membership in light of the Code recommendations
we are satisfied that the Committees will continue
to be able to discharge their duties effectively and
efficiently.
How governance contributes to the delivery of
our strategy
Our governance arrangements contribute to the
development and delivery of our strategy in various
ways, including by promoting accountability and
responsibility, and ensuring information flows and
independent insight from the NEDs.
All Directors are collectively responsible for the
success of the Company. The NEDs exercise
objective judgement in respect of Board decisions,
and scrutinise and challenge management
constructively. They also have responsibilities
concerning the integrity of financial information,
internal controls and risk management.
As a Board, we are responsible for ensuring that
the business is purpose-led and that our decision
making and activities reflect our core purpose to
help people and businesses prosper. We do this by
overseeing and developing our strategy and
policies, including risk and corporate governance
arrangements, monitoring progress towards
meeting our objectives and reviewing the
implementation of them by the CEO and his wider
executive management team. In 2023, we
refreshed our Strategic Blueprint, which defines
our future direction, and sets out our 'why', our
'what', and our 'how', all underpinned by a set of
clear strategic goals. The Board is accountable to
our shareholders for the proper conduct of the
business and seeks to represent the interests of all
stakeholders.
The Boards identified the following key
stakeholders: Customers, Employees, Regulators,
Communities and Investors. More information on
how the Boards balance the interests of these
stakeholders can be found in
our Stakeholder
Voice statement in the Strategic Report.
Culture and hearing the views of the
workforce at the Board
The Boards recognise the importance of culture as
a mechanism to support the long-term sustainable
success of the companies. The Boards are
responsible for setting and overseeing our culture,
as well as monitoring progress on its development,
which comes to life through our core values of
simple, personal and fair.
Our Code of Conduct contributes to our culture,
setting out how we should act and behave towards
everyone we encounter through our work. It sits
alongside our Strategic Blueprint, which outlines
the importance of our TEAMS behaviours - Think
Customer, Embrace Change, Act Now, Move
Together and Speak Up. The Code of Conduct
reinforces these elements to come together to
drive our culture and maintain the standards that
underpin it. All new colleagues are required to
complete training on the Code of Conduct and
annual refresher training is required for all
colleagues.
Our employees are a key stakeholder, central to
the delivery of our strategy, and the Boards are
committed to ensuring continuous engagement
with them to create a culture of inclusivity and
belonging and, a healthy working environment.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
|
|
|
Annual Report 2023
|
Santander UK plc
16
|
|||
Throughout the year, the Board received feedback
from colleagues via a number of mechanisms
including reports from Peakon employee voice
surveys, considering matters such as future ways
of working and wellbeing. Directors also engaged
with colleagues directly, participating in employee
listening forums, management forums and
development workshops. These activities were led
by the designated workforce NED (Lisa Fretwell
succeeding Annemarie Durbin in this role on 1
March 2023) who also had regular meetings with
the Chief People Officer and Head of Culture and
Experience to discuss results and emerging
themes from the employee voice surveys. These
activities help to ensure that the views of the
workforce are made known to the Board and that
workforce policies and practices are consistent
with the Company's values, supporting its long-
term sustainable success.
Board membership
At 31 December 2023, the Board of Santander UK
Group Holdings plc consisted of the Chair
(independent on appointment), four INEDs, one
Executive Director (ED) and two GNEDs. The
Santander UK plc Board, at 31 December 2023,
consisted of the Chair (independent on
appointment), six INEDs, one ED and three
GNEDs. As a result of revisions made to our ring-
fencing governance rule modifications, from 1
January 2024 the membership of the Board and
Board Committees of Santander UK Group
Holdings plc are now fully aligned with those of
Santander UK plc. The Boards currently consist of
the Chair (independent on appointment), six
INEDs, one ED and three GNEDs. Angel
Santodomingo will be appointed as an ED once
regulatory approval has been received.
Biographies of the Directors are included in the
Shareholder information section. The letters of
appointment for INEDs and GNEDs are available
at the Company’s registered office and at the
Annual General Meeting.
Through the Board Nomination Governance
Committees, we make sure there is the right mix of
individuals on the Boards, giving an appropriate
balance of knowledge, skills, experience and
perspectives. Our aim to ensure orderly
succession for Board positions is supported by
continuous and proactive processes. We take into
account our strategic priorities and the main trends
and factors affecting the sustainability and success
of the business. We oversee and regularly review
the development of a diverse pipeline for
succession.
In 2023, we appointed Angel Santodomingo as
incoming CFO (subject to regulatory approval)
following Duke Dayal's departure and welcomed
Michelle Hinchliffe, Jose Maria Roldan and Pedro
Castro e Almeida as NEDs. Antonio Simoes, Chris
Jones and Annemarie Durbin resigned as NEDs
during the year, and I'd like to thank them all for
their commitment and invaluable contributions
during their time on the Boards.
All aspects of diversity form part of our Board
succession planning process.
Board meetings in 2023
We held 11 Board meetings in 2023. Meetings of
the Company were held concurrently with
Santander UK
Group Holdings
plc. The Santander
UK plc Board and Board Committees also met
independently from the Santander UK Group
Holdings plc Board and Board Committees twice in
2023.
Regular updates are provided to the Boards by
me, each of the Committee Chairs, the CEO, CFO
and CRO. I also held a number of meetings with
the NEDs without the EDs present. We have a
comprehensive and continuous agenda setting
and escalation process to ensure the Boards have
the right information at the right time and in the
right format to enable the Directors to make the
right decisions. As Chair, I lead the process,
assisted by the CEO and Company Secretary, and
this ensures enough time is set aside for strategic
discussions and business critical items. Together
with the Committee Chairs, we ensure Board and
Committee meetings are structured to facilitate
open discussion, debate and challenge. The NEDs
also receive regular updates from management to
give context to current issues.
Board activities
I, together with the CEO and Company Secretary,
and supported by the Directors and senior
management, make sure that the Boards have an
appropriate schedule for the year. This is focused
on the opportunities to drive growth and profitability
of the business, transformation to support the
future success of the business, business
performance and risk management, customer
experience and outcomes and remaining apprised
of the external operating environment. It includes
the Company's digital strategy, ensuring the
Company is run in a responsible and sustainable
way in the interests of its stakeholders, and
ensuring that the Company’s culture is aligned with
its purpose, values, and strategy.
The Boards ensure regular contact with
management and colleagues through several
means. These include inviting relevant business
and function heads to present to the Board or its
Committees on latest developments; supporting
senior management development plans by
welcoming them as observers; scheduling regular
meetings for Committee Chairs with relevant
senior managers; site visits by NEDs; and topical
or technical workshops. Senior leaders are also
available to the NEDs for advice and support.
The Boards regularly monitor progress against the
strategic priorities and performance targets of the
business, and in 2023, once again held a separate
Board Strategy Day. This ensures that our strategy
remains consistent with that of the wider Banco
Santander group and presentations considered the
current macro environment, the ambition for the
Company over a five-year time horizon, customer
sentiment, evolving our value proposition, and
opportunities to further grow the business. The day
concluded with a presentation by the CEO on
potential investments and the financial impact,
recognising the trade-off between returns and
market share/revenue growth.
Alignment with Banco Santander group strategy is
also strengthened by holding one board cycle in
Madrid each year, providing the Boards with
opportunities to interact with executives and the
senior management of Banco Santander SA.
In 2023, the Boards and Board Committees
participated in workshops to consider important
topics in depth and to engage with key
stakeholders. These are listed in the table overleaf.
To ensure the most effective use of the time at
Board meetings, in addition to the delegation of
certain responsibilities to the Board Committees,
held informal discussions with Board members.
More details of the Board activities in 2023 are set
out on the next page.
Succession Planning
The Board Nomination Governance Committees
are responsible for ensuring plans are in place for
orderly succession to both Board and senior
management positions and oversees the
development of a diverse pipeline for succession.
Effective succession planning supports the
Company in delivering on its strategic objectives by
ensuring we have the right balance of skills and
experience on the Board, Board Committees and
in senior management roles taking into account
current and anticipated future business needs.
Director induction and training
The Company Secretary supports the Chair in
designing individual inductions for NEDs, which
include site visits and cover topics like strategy,
balance sheet and capital, key risks and current
issues including the legal and regulatory
landscape.
Directors who take on new roles or change roles in
the year (such as becoming a member of a new
Board Committee) attend induction or handover
meetings as appropriate. Committee Chairs, with
the Committee secretaries, agree Committee
specific training, as appropriate. Directors are also
given the opportunity to undertake further training
so that they are fully comfortable with their role on
the Board and to enable them to contribute to the
long-term success of the Company.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
17
|
|||
Summary of Board activities in 2023
The Board aims to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole, as set out in
the Stakeholder Voice statement in the Strategic report. Activities in 2023 included:
|
Theme
|
Action taken by the Board and outcomes
|
Stakeholders
considered
|
|
|
Business and
Customer
Strategy
|
–
As part of the Board Strategy Day, reviewed our customer strategy and proposition across the Retail Business
Banking and Corporate Commercial Banking businesses. The Board considered management’s proposed Initiatives
to drive revenue growth and enhance the customer proposition and experience across these business segments.
–
Reviewed and approved the goals and metrics to measure the delivery of the Strategic Blueprint.
–
Considered reports on the external competitor environment, MA activity, and market trends.
–
Reviewed, challenged, and approved the 3-year business plan (2024-2026) and the annual budget, including
assumptions underpinning the plan.
–
Given the rapidly evolving macroeconomic environment throughout the year, particularly in respect of interest and
inflation rates, adjusted strategies as necessary to support a resilient and sustainable operating environment and
associated risk assessments.
–
Conducted a deep dive into Fraud identification and management focusing on those initiatives which would have the
most impact in minimising fraud related loss for our customers and Santander UK.
–
Discussed Management’s proposed IT and Digital Strategy and the roadmap of initiatives to enhance these enablers.
–
Board members also visited the Financial Crime and Financial Support Centres of Excellence in Bradford to gain
deeper insight into financial crime risk mitigation and initiatives to provide support to our customers experiencing
hardship.
|
Customers
Investors
Employees
|
|
|
Transformatio
n including
leveraging
Banco
Santander
scale
|
–
Reviewed initiatives and opportunities to collaborate and leverage resources and capability across the Europe region
and the Banco Santander group, including the Banco Santander group-wide transformation agenda (One
Transformation) and the implications of the Banco Santander group’s new operating model structured across five global
business lines.
–
Received regular reports on progress with driving operational efficiencies through the Transforming for Success
programme and management’s revised approach to strategic change management and investment prioritisation.
–
Board members participated in workshops covering agile work practices, cybersecurity risk management, and artificial
intelligence.
|
Customers
Investors
Employees
|
|
|
Regulation,
Balance Sheet
and Capital
|
–
Reviewed, challenged, and approved the ICAAP, ILAAP, adequacy and effectiveness of stress-testing and capital
management, AT1 payments and ordinary and preference share dividend payments in line with PRA guidance. The
Board followed the methodology set out in the Board-approved Surplus Capital Allocation Framework to determine the
assessment and utilisation of surplus capital.
–
Approved the Resolvability Assessment Framework Self-Assessment for submission to the Bank of England, and
Santander UK plc's Recovery Plan for submission to Banco Santander as part of its Banco Santander group-wide
submission to the European Central Bank.
–
Considered the future regulatory landscape and implications, including confirmation that the Company was on track to
meet the first phase of the Consumer Duty regulation for new and existing products. Considered regular reports from
the General Counsel on legislative developments and other legal matters in progress.
–
Board members also participated in workshops on Asset and Liability management and the evolution of the IFRS 9
approach and supporting models.
–
|
Customers
Investors
Regulators
|
|
|
Risk and
control
|
–
Received regular enterprise wide risk updates from the CRO, together with updates on specific risks, such as third-party
outsourcing, IT, data management, financial crime compliance, fraud, climate change and inflation. The Board closely
monitored overall operational risk given the ongoing execution of the extensive transformation agenda.
–
Considered financial crime, including oversight of programmes to accelerate controls enhancement and regulatory
engagement, back book remediation, and the progress made to return the Company to Board Risk Appetite on a
sustainable basis. The Board also approved the Anti Money Laundering and Counter Terrorist Policy as part of its
annual review.
–
Approved the Company’s Risk Appetite Statement as part of the annual review. The Board subsequently approved
changes to three financial crime risk indicators, fraud risk appetite metrics, and material outsourcing risk appetite.
–
Approved the Risk Framework as part of the annual review.
–
Received annual reports on whistleblowing.
–
Reviewed and approved relevant submissions related to the Operational Resilience Programme.
–
Received regular reports on recovery and resolution including conducting a fire drill exercise.
|
Customers
Employees
Regulators
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
18
|
|||
|
Theme
|
Action taken by the Board and outcomes
|
Stakeholders
considered
|
|
|
People and
Culture
|
–
Received reports on various people matters including the Company’s HR Operating model, talent management and
succession planning and gender pay gap.
–
Conducted a deep dive on culture to agree the desired culture for the organisation to support the execution of the
Strategic Blueprint which informed the development of the Culture Strategy. In addition to reports from the Board
Responsible Banking Committee (RBC) on delivery of the culture strategy, the Board participated in several informal
activities to assess the culture and sentiment of employee cohorts including our Young Leaders.
–
Considered colleagues' ways of working and opportunities to optimise the real estate portfolio.
–
Considered succession planning across all key control, support functions and business functions.
–
Approved the Diversity and Inclusion Strategy on recommendation from the RBC.
–
Board members also participated in a workshop to define our Employee Value Proposition.
|
Customers
Employees
|
|
|
Governance
and
Responsible
Banking
|
–
Approved four appointments to the Board to succeed Group, Executive and Independent Directors who had stepped
down from the Board. Approved common membership across the Santander UK Group Holdings plc and Santander UK
plc Boards upon receipt of the PRA’s approval of the Company’s ring-fencing governance submission.
–
Reviewed, challenged, and approved the 2022 Annual Report.
–
Received regular verbal updates of Board Committee activity from their respective Committee Chairs.
–
Approved a revised Banco Santander Subsidiary Governance Model.
–
Approved the recommendations and resulting action plan for the 2023 internally facilitated Board evaluation.
–
Approved the Company’s climate strategy and transition plan on recommendation of the RBC.
–
Approved the Modern Slavery report and updated the Employee Code of Conduct.
–
Board members also participated in workshops delivered to the RBC to discuss the specific elements of the Company’s
approach to comply with the Consumer Duty.
–
Board members attended the Chairman’s annual event where the Company’s education programme for 2024 was
launched.
|
Communities
Regulators
Climate
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
19
|
|||
Board and Board Committee attendance
The Directors’ attendance at the Board and Board Committee meetings held in the year is set out below. Board and Board Committee meetings are generally held
concurrently with Santander UK
Group Holdings
plc, with business specific to each company identified and recorded as appropriate, reflecting the decisions taken
by the Board or Board Committee of the relevant entity.
|
Board
|
Board Audit
Committee
|
Board Nomination
Governance
Committee (i)
|
Board
Remuneration
Committee (ii)
|
Board Responsible
Banking Committee
|
Board Risk
Committee
|
||||||||
|
Scheduled
|
Ad hoc
|
Scheduled
|
Ad hoc
|
Scheduled
|
Ad hoc
|
Scheduled
|
Ad hoc
|
Scheduled
|
Ad hoc
|
Scheduled
|
Ad hoc
|
||
|
Chair
|
William Vereker
|
8/8
|
3/3
|
-
|
-
|
6/6
|
2/2
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Independent Non-
Executive Directors
|
Annemarie Durbin
*
|
8/8
|
2/3
|
11/11
|
-
|
6/6
|
2/2
|
6/6
|
3/3
|
9/9
|
-
|
7/7
|
1/2
|
|
Lisa Fretwell
|
8/8
|
3/3
|
11/11
|
-
|
-
|
-
|
2/2
|
1/1
|
9/9
|
-
|
7/7
|
2/2
|
|
|
Ed Giera
|
8/8
|
3/3
|
11/11
|
-
|
6/6
|
2/2
|
6/6
|
2/3
|
9/9
|
-
|
7/7
|
2/2
|
|
|
Michelle Hinchliffe
*
|
5/5
|
2/2
|
7/7
|
-
|
2/2
|
1/1
|
-
|
-
|
5/5
|
-
|
4/4
|
1/1
|
|
|
Chris Jones
*
|
6/6
|
1/1
|
8/8
|
-
|
-
|
-
|
4/4
|
2/2
|
9/9
|
-
|
5/5
|
2/2
|
|
|
Mark Lewis
|
8/8
|
3/3
|
11/11
|
-
|
-
|
-
|
6/6
|
3/3
|
9/9
|
-
|
7/7
|
2/2
|
|
|
Nicky Morgan
|
8/8
|
3/3
|
10/11
|
-
|
2/2
|
1/1
|
-
|
-
|
8/9
|
-
|
7/7
|
2/2
|
|
|
Jose Maria Roldan
*
|
5/5
|
2/2
|
-
|
-
|
-
|
-
|
-
|
-
|
9/9
|
-
|
4/4
|
1/1
|
|
|
Banco Santander
Group nominated
Non-Executive
Directors
|
Pedro Castro e Almeida
*
|
3/3
|
1/2
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Dirk Marzluf
|
8/8
|
2/3
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Antonio Simoes
*
|
5/5
|
1/1
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Pamela Walkden
|
8/8
|
3/3
|
-
|
-
|
6/6
|
2/2
|
-
|
-
|
-
|
-
|
7/7
|
2/2
|
|
|
Executive Directors
|
Mike Regnier
|
8/8
|
3/3
|
-
|
-
|
-
|
-
|
-
|
|||||
|
Duke Dayal
*
|
6/6
|
1/1
|
-
|
-
|
-
|
-
|
-
|
||||||
|
*
|
For dates of Board appointments or resignations during the year, see the timeline on the Governance at a glance page. Appointments to, or resignations from, the relevant Board Committees were aligned to
these dates unless stated otherwise.
|
|
(i)
|
Michelle Hinchliffe and Nicky Morgan joined the Board Nomination Governance Committee on 1 October 2023.
|
|
(ii)
|
Lisa Fretwell joined the Board Remuneration Committee on 1 October 2023.
|
Monitoring independence
The Board Nomination Governance Committees
monitor whether there are relationships or
circumstances which may affect a Director's
independence, and have concluded that all NEDs
are independent in character and judgement. I, as
Chair, was independent on appointment when
assessed against the circumstances set out in
Provision 10 of the Code. No INEDs have a
material relationship with the Company nor receive
additional remuneration to Directors' fees. In
addition, no INEDs serve as directors of any
external companies or affiliates in which any other
Director is also a director.
Monitoring Director interests, time
commitment, and fees
The Board Nomination Governance Committees
are responsible for oversight of conflicts of interest.
Each Director has a duty under the Companies Act
2006 to avoid a situation in which they have or
may have, a direct or indirect interest that conflicts,
or may conflict, with the interests of the Company.
This duty is in addition to the existing duty
Directors owe to the Company to disclose to the
Board any interest in a transaction or arrangement
under consideration by the Company.
In 2023, the Board Nomination Governance
Committees continued to review the time
commitment and Directors' potential conflicts of
interest to ensure that any such conflicts are
managed appropriately and in compliance with
CRD IV and ring-fencing requirements. In
accordance with Provision 15 of the Code,
Directors are required to seek prior approval from
the Board before taking up external appointments.
External appointments are disclosed to the Board,
before appointment, with an indication of time
commitment expected. All Directors continue to
devote sufficient time to their roles at the Company.
No significant external appointments were
undertaken by any Directors. The Articles of
Association contain provisions that allow the Board
to consider and, if it sees fit, authorise situational
conflicts.
These powers have operated effectively and the
formal system for Directors to declare their
interests and for the non-conflicted Directors to
authorise situational conflicts continues to be in
place. Any authorisations given are recorded by
the Company Secretary and Directors are asked to
certify, on an annual basis, that the information in
the register is correct.
During the year, the CEO and I reviewed the level
of fees paid to INEDs for Board and Board
Committee chair and membership. In doing so, we
considered whether INED fees were at an
appropriate level, having regard to factors including
the associated time commitments for INEDs and
benchmarking against peers. In light of this,
increases to the INED base fee, both the Board
Audit and Board Risk Committee Chair and
member fees, and both the Board Remuneration
and Board Responsible Banking Committee
member fees were approved. The Board
Remuneration Committee also approved an
increase to the Chair fee. For more, see the
Remuneration Implementation Report.
The right information and support
The Chair, supported by the Company Secretary,
ensures that all Board members receive
appropriate and timely information. All Directors
have access to the advice of the Company
Secretary and the Company provides access, at its
expense, to the services of independent
professional advisers in order to help the Directors
discharge their role.
Appointment and retirement of Directors
The Company's Articles of Association require
each Director to retire every year at the Annual
General Meeting and any Director may offer
themselves for re-election by members. For more,
see the Directors’ report.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
20
|
|||
Board and Committee effectiveness
The annual evaluation, which is typically facilitated externally at least once every three years, highlights areas of further development to enable the Boards to
continuously improve their performance. I, with the support of the Board Nomination Governance Committees, lead the Board in considering and responding to
the annual review of the Board and Committees' effectiveness, including the performance of individual Directors.
The Board Nomination Governance
Committees also review the progress made on the areas of improvement identified.
An update on the findings identified in the 2022 evaluation is set out below.
Progress against 2022 evaluation findings
|
Opportunities for improvement
|
Update on actions
|
|
Oversight of ESG and
Responsible Banking
|
The RBC assist the Boards with their strategic ambition for Santander UK to be a sustainable, customer centric and
responsible bank. Andrew Wilson, Director of Communications and Responsible Banking, is now responsible for overseeing
the coordination of materials into the RBC and the execution of the climate change strategy.
|
|
Agenda planning, Board time
and Board materials
|
Agendas have been refined to focus on fewer items. Matters proposed for discussion are routinely challenged by the
Corporate Governance Office to ensure that the Boards' and Board Committees’ time is spent on the most material and
strategic matters which fall within their remit. Board paper templates and guidance were updated and targeted training to
further improve Board paper writing was delivered by the Corporate Governance Office.
|
|
Board Committee composition
|
The Board Nomination Governance Committees reviewed the composition of the Board Committees with a number of
committee membership changes subsequently approved by the Boards to ensure knowledge was spread among Directors
while meeting regulatory requirements.
|
|
Emerging market themes and
competitor benchmarking
|
One of the key areas of focus at the 2023 Board Strategy Day was customer strategy and proposition. The Boards also
received a competitor update in September, providing insights into peer performance, strategic investment and MA activity.
Regular updates have been scheduled throughout 2024.
|
|
Strengthening our alignment
with the Banco Santander
group
|
Regular Board and individual Director visits to Madrid, including one scheduled Board cycle of meetings each year, plus
attendance at UK meetings of Banco Santander group directors as appropriate, have strengthened relationships with the
Banco Santander group.
|
In 2023, I asked the Company Secretary to undertake an internally facilitated review of the effectiveness of the Boards and Board Committees (the Review). The
process included the completion of various questionnaires, covering the Boards and each Board Committee, issued by Lintstock, an independent service provider
with no other connection to the Company or any individual Directors. The questionnaires focused on a number of key areas: Board composition; stakeholder
oversight; Board dynamics; focus of meetings; strategic oversight; risk oversight; succession planning and people oversight; Board Committees; Board support
and priorities for change.
Overall, the Review concluded that the Board and all Committees continue to operate effectively and are rated highly. The key strengths
identified were the relationships between the Board and its Committees, the relationship between the NEDs and the CEO and the annual cycle of work.
The Review also identified some opportunities for improvement, set out in the table below. The Boards fully considered the recommendations from the internal
evaluation and agreed an action plan which will be regularly reviewed by the Board Nomination Governance Committees in 2024.
As part of the Review, I also conducted individual Directors’ assessments. Each Director completed a questionnaire to reflect on their performance, their
relationships with other Board members and identify any areas of development, which we then discussed privately. I am satisfied with the performance of all Board
members. Ed Giera, as Senior Independent Director, also undertook an assessment of my performance as Chair, seeking feedback from each Director which was
then discussed at a meeting without me present.
In accordance with the Corporate Governance Code, it is anticipated that in 2024 an external review will be undertaken.
2023 evaluation findings
|
Opportunities for
improvement
|
Commentary and actions
|
|
Improving Board-level
information
|
Although there has been an improvement in the length of the Board packs and the timeliness in which they are provided, and
although the length of packs is in line with the financial services’ benchmark, the length of the Board packs still create a challenge
for Directors to adequately review the materials in the time available. The Forward-Looking Agendas for the Boards and the
Committees will continue to be reviewed to check that items are not presented more often than they need to be. The Board
Schedule of Matters Reserved will also be revised so that a more appropriate materiality/significance threshold is applied to
ensure the Board’s time is maximised on matters of strategic relevance. The Corporate Governance Office will continue to hold
training sessions and provide guidance on Board paper writing and presentations.
|
|
Forward leaning strategic
topics for the board
agenda
|
Feedback showed that the Boards would welcome more updates on strategic topics such as customer strategy and sentiment,
market outlook and competitor environment, and external perspectives including digitisation and innovation. These topics will be
addressed through Board updates, workshops or sessions with external speakers across 2024.
|
|
Managing Board
transition and roles
|
There were a number of changes to Board composition in the year and ensuring each new Board member settles into their role
quickly has been acknowledged as a priority. At management level, succession planning of key positions, particularly at Executive
Committee level, should focus on potential internal successors and the effectiveness of Santander UK’s talent management
processes. Induction plans, ongoing training requirements and succession planning are already key areas of focus for the Board
Nomination Governance Committees and this will continue in 2024.
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
21
|
|||
Summary of Board Committee activities in 2023
Our Board Committees conduct their business concurrently with the Santander UK Group Holdings plc Board Committees to ensure alignment of practices,
policies and procedures. The following reports detail the governance arrangements, practices and activities of both committees. More information can be found in
each of the Board Committee Chair's Reports in the Santander UK Group Holdings plc 2023 Annual Report, which does not form part of this Annual Report.
Board Nomination Governance Committee
|
Committee responsibilities
|
|
Lead the process for Board and Board
Committee appointments and oversee
succession planning for the Board and senior
management positions.
|
|
Oversee the evaluation of the performance and
composition of the Board and Board
Committees.
|
|
Monitor the governance arrangements for
Santander UK and make appropriate
recommendations to the Board to ensure that
those arrangements remain adequate.
|
|
Committee members
At 29 February 2024
|
|
William Vereker (Chair)
|
|
Ed Giera
|
|
Michelle Hinchliffe
|
|
Mark Lewis
*
|
|
Nicky Morgan
|
|
Pamela Walkden
|
*Joined on 1 January 2024
Key activities in the year
Succession planning
The Committees oversee a formal, rigorous and
transparent process to identify, nominate and
recommend candidates for appointment to the
Board, and consider and approve senior
management positions.
Part of this process is to ensure there are
succession plans in place for Board, the CEO and
key management positions encompassing internal
and external candidates, and that there is a skills,
experiences and diversity matrix which maps each
Director's attributes against those which are most
relevant for the Board, taking into account the
future strategic direction of the Company and its
needs. As well as tracking the Board's strengths,
this matrix is used to identify gaps in its desired
collective skills profile. For all key Santander UK
senior management positions the Committees
coordinate with the Banco Santander group to
ensure that there are suitable candidates ‘Ready
Now’, ‘Ready in 1-3 years’ and ‘Future Ready’.
While appointments are based on the merit of the
individual candidates and objective criteria, we also
aim to promote diversity in its broadest sense. This
complements and strengthens the overall Board
and its Committees' skills, knowledge and
experience. Any appointments also take account of
all legal and regulatory requirements.
In 2023, a significant proportion of the Committees'
time was devoted to search and selection
processes and the implementation of our
succession plans due to:
–
the retirement of Chris Jones
(
Chair of the
Board
Audit Committee) after nine years on the Boards,
–
the forthcoming retirement of Ed Giera (Senior
Independent Director,
Chair of the
Board Risk
Committee), who will have served for nine years
in late 2024,
–
the resignation of Duke Dayal as CFO with effect
from October 2023,
–
the earlier than planned retirement of Annemarie
Durbin
(Chair of the
Board Remuneration
Committee and the
Senior Ring-fencing Director)
with effect from December 2023.
Hedley May and Spencer Stuart, external search
consultants with whom the Company and
individual Directors have no other relationship,
were engaged to assist with the search and
selection process to identify two new NEDs who
could serve as the Chairs of the Board Audit and
Risk Committees respectively.
For each appointment, the Committees agreed the
personal attributes including cultural fit, and ability
to lead and manage change which were desirable
for the role together with the skills and experience
which were needed. A database of potential
candidates was created in line with our Board
Diversity and Inclusion Policy.
A longlist of those felt to be most suitable for
consideration was prepared and considered by the
Committees as a whole before a shortlist was
drawn up with candidates invited to interview with
me and other Board members. During both
processes, the Boards were regularly informed on
progress. Following detailed feedback from these
interviews the Committees then selected which
individuals should progress to interviews with key
Banco Santander individuals. This led to Michelle
Hinchliffe being recommended by the Committee
as the preferred candidate to succeed Chris Jones
as Chair of the Board Audit
Committee
, which was
subsequently approved by the Boards.
During this selection process, José María Roldán
was also identified as an individual who would
bring strength to the Boards, particularly due to his
banking experience across Europe. As such, the
Committees recommended his appointment to the
Boards.
The search for a candidate for the Board
Risk Committee
Chair role is ongoing.
Both an internal and external search was
conducted for Duke Dayal's successor as CFO
and ED, with the process taking into consideration
the established succession plan as well as the
depth of talent across Santander UK and the
Banco Santander group. An external exercise to
review the UK market for potential candidates was
completed in parallel. The short-listed internal and
external candidates were initially interviewed by
me, the CEO, Michelle Hinchliffe and the Chief
People Officer with further input from key Banco
Santander group individuals and members of the
Executive Committee. Following this appointment
process, Angel Santodomingo was identified as
the preferred candidate given his skill set,
experience with the role and familiarity with the
Banco Santander group and was recommended
for approval by the Committees to their respective
Boards.
Also in the year, Antonio Simoes, one of our
GNEDs stepped down and was succeeded by
Pedro Castro e Almeida. An external search was
not performed as this is a Banco Santander
nominated position drawn from the pool of internal
Banco Santander executives. In accordance with
our UK Group Framework, the INED members of
the Committees and the Board have a reasonable
veto right over the appointments of GNEDs.
Following a review of his skills and experience, the
Committees recommended the appointment of
Pedro Castro e Almeida to the Boards.
The Committee also considered who would
succeed Annemarie Durbin as Chair of the
Board
Remuneration Committee (RemCo). It was agreed
that appointing Mark Lewis, an existing member of
the RemCo, would ensure the incoming Chair had
an in-depth understanding of both the business
and RemCo matters, supporting a seamless
transition.
The Committees also reviewed the composition of
each of the Board Committees, recommending a
number of changes to committee membership in
the year.
In addition to Board level appointments, the
Committees oversaw and approved changes to
Executive Committee membership and other
management key position holders in 2023. Andrew
Wilson was appointed as Director of Corporate
Communications and Responsible Banking on
1 March 2023. Alison Webdale was promoted to
Chief Compliance Officer, joining the Executive
Committee on 14 June 2023. Reza Attar-Zadeh
and Tracie Pearce left in the year.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
22
|
|||
Promoting diversity and inclusion
We believe that our success is integrally linked to
the diverse composition of our people and the
promotion of an inclusive culture. The basis of this
premise applies to our Boards and Board
Committees as much as it does to any other area
of our organisation. Diverse views, combined with
inclusion, encourages the sharing of a wide range
of perspectives and ideas alongside challenging
and raising concerns. As a Board, we approve the
Santander UK Diversity, Equity and Inclusion
strategy and monitor its progress through our
Board Responsible Banking Committees, holding
management to account for promoting diversity
and inclusion to see a healthy working culture and
positive outcomes in risk management, good
conduct, innovation and delivering good customer
outcomes. Progress against this can be found in
our 2023 Diversity, Equity Inclusion and Pay Gap
Report, which does not form part of this Annual
Report.
We recognise that a diverse and inclusive Board
should result in more effective and prudent
decision-making and risk management. We want a
Board that reflects a combination of diversity in its
broadest sense, embracing different perspectives
and dynamics through demographic diversity and
diversity of experience to foster diversity of
thought, valuing the input of every Director. Due
regard is given to this when identifying and
selecting candidates for Board appointments and
is considered through Board succession planning.
Our Board Diversity and Inclusion Policy sets out
the aspirational targets we've set for achieving
Board diversity. The Boards aim to maintain at
least two female members and have 40% female
representation by 2025. At 31 December 2023,
38% of the Board of Santander UK Group
Holdings plc and 36% of the Board of Santander
UK plc were female. We also aim to maintain at
least one member from an ethnic minority
background, which due to the changes in Board
composition in 2023, we do not currently meet. We
do however remain committed to these targets and
the Boards and the Committees will continue to
challenge external search consultants where
necessary, ensuring that diversity is always
considered when drawing up candidate shortlists
balanced against the need for specific skills and
experience.
At 31 December 2023, 25% of Executive
Committee members were female, 35% of our
Leadership Group (the level below the Executive
Committee) were female and 41% of our senior
manager population (mid to senior manager roles)
were female.
Board Risk Committee
|
Committee responsibilities
|
|
Advise the Board on the Enterprise Wide Risk
profile, Risk Appetite and strategy.
|
|
Provide advice, oversight and challenge to
embed and maintain a supportive risk culture.
|
|
Review the Risk Framework and recommend it
to the Board for approval.
|
|
Review and approve the key risk type and risk
activity frameworks in the Risk Framework.
|
|
Review the capability in the organisation to
identify and manage new risks and risk types.
|
|
Review risks and issues escalated by the CRO,
and their associated action plans.
|
|
Oversee and challenge the day-to-day risk
management, oversight and adherence to risk
frameworks and policies.
|
|
Oversee the adequacy of governance
arrangements.
|
|
Committee members
At 29 February 2024
|
|
Ed Giera (Chair)
|
|
Lisa Fretwell
|
|
Michelle Hinchliffe
|
|
Mark Lewis
|
|
Nicky Morgan
|
|
Jose Maria Roldan
|
|
Pamela Walkden
|
Key activities in the year
The Committee undertook a thorough assessment
of the Company's emerging and top risks,
including financial, operational, and compliance
controls. Our top risks and emerging risks are
discussed in the Risk Review section of this report.
The process for identifying, evaluating, and
managing the Company's emerging and top risks
is integrated into the overall risk governance
framework. Regularly, the Committee reviews and
discusses a consolidated enterprise wide risk
report to ensure that they are satisfied with the
overall risk profile, risk accountabilities, and
mitigating measures.
Board Audit Committee
|
Committee responsibilities
|
||
|
Oversight of the integrity of the financial
statements of the Company and any formal
announcements relating to its financial
performance, including underlying significant
financial reporting judgements and estimates.
|
||
|
Oversight of internal financial control
effectiveness.
|
||
|
Oversight of the relationship with our external
auditors including their independence and
objectivity, audit scope and effectiveness of the
audit process in respect of their statutory audit of
the annual financial statements.
|
||
|
Oversight of the Internal Audit function.
|
||
|
Oversight of Recovery and Resolution planning
|
||
|
Oversight of Whistleblowing arrangements.
|
||
|
Committee members
At 29 February 2024
|
||
|
Michelle Hinchliffe (Chair)
|
||
|
Ed Giera
|
||
|
Lisa Fretwell
|
||
|
Nicky Morgan
|
||
|
Mark Lewis
|
||
Key activities in the year
Internal Audit
–
Considered the 2024 Audit Plan and annual
report for recommendation to the Board.
–
Monitored progress against the 2023 Audit Plan.
Financial reporting
Significant financial reporting issues
including judgements and estimates
The use of assumptions or estimates and the
application of management judgement is an
essential part of financial reporting. This is
considered by the Committee on at least a
quarterly basis. The External Auditors also
consider these areas as part of their audit of the
annual financial statements. More information on
the External Auditors' work is set out in their audit
report.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
23
|
|||
In 2023, we focused on the following significant
reporting matters in relation to financial accounting
and disclosures:
Credit impairment charges
–
Noted the challenges in applying management
judgements on IFRS 9 ECL provisioning given
the cost of living crisis and higher base rate
environment. Concurred with management's
judgement on the level of impairment charges.
Monitored governance and progress on the
implementation of new ECL models which are
due to go live in H124.
Provisions and Contingent Liabilities
–
Continued to scrutinise the level and adequacy
of customer remediation, litigation and other
regulatory provisions. Reviewed the risks related
to historical Motor Finance commissions
arrangements and concurred with
management's assessment that it was not yet
probable that a legal obligation had been met to
recognise a provision.
Defined benefit pension schemes
–
Reviewed management's approach to illiquid
assets valuation, including the proposal to
continue to use the unaudited flash valuations
provided by our private equity advisors.
Goodwill
–
Reviewed the outcome of management’s annual
impairment assessments for goodwill and
agreed that no impairment should be recognised
in 2023.
Other Areas
–
Reviewed results of the reviews of cybersecurity
risk and controls performed by the Internal Audit
function.
Oversight of external auditors
External Auditors
PwC were appointed in 2016 and their
independence was considered and monitored
throughout the year. We were satisfied that PwC
continued to meet the independence requirements.
Ian Godsmark has been lead audit engagement
partner since June 2022.
A Banco Santander group wide external audit
tender will be undertaken in the first half of 2024 for
the appointment of financial years 2026, 2027 and
2028. The Committee will oversee the process
locally with selected candidate firms and will be
focusing on audit quality and expertise to ensure
high quality audit standards are retained. A
recommendation will be made for the preferred
firm to Banco Santander based on a robust review
of the selected firms’ proposals.
Based on
a formalised assessment, the
Committee satisfied itself as to the rigour and
quality of PwC’s audit process.
Non-audit fees
We have a robust policy on non-audit services
provided by our external auditors. Non-audit
services were under continuous review throughout
2023 to determine that they were permitted by
reference to their nature, assessing potential
threats and safeguards to auditor independence as
well as the overall ratio of audit to non-audit fees.
All assignments require advance approval, either
by the Chair (or in their absence their alternate),
under delegated authority for amounts under
£250,000 plus VAT or, if larger, by the Committee.
This process is in addition to the requirement for all
non-audit fees to be approved by the Banco
Santander Audit Committee.
Internal Audit
The Committee has approved the Internal Audit
Charter and receives regular updates on the
quality assurance, capabilities and capacity of the
Internal Audit function to ensure its operational
effectiveness and adequate independence.
Relevant changes in the organisational structure of
the Internal Audit function were also presented to
and discussed by the Committee. This is
supplemented by regular interactions between the
Chief Internal Auditor and the Committee Chair.
We also receive feedback on interactions between
Internal Audit, management and our external
auditors.
An External Quality Assessment (EQA), as
required every five years, was undertaken by
Deloitte in the first half of the year. The objective of
the EQA was to evaluate conformance of the
Internal Audit function with the Institute of Internal
Auditors (IIA) International Professional Practices
Framework which includes the IIA Standards and
Code of Ethics. Deloitte concluded that Internal
Audit is operating as a mature function compared
to its peers and 'Generally Conforms' with the IIA
Standards which is the highest rating attainable.
Whistleblowing
The Committee oversees Santander UK's
whistleblowing arrangements including continuous
refinement of our processes to align with evolving
best practice. Santander UK recognises the
importance of creating an environment where
colleagues feel safe and able to Speak Up.
Speaking Up is a core behaviour at Santander UK
and there are a number of ways colleagues can do
this, including raising a concern via Santander
UK's Whistleblowing arrangements.
The Disclosure Committee
reports on whether the
Annual Report is fair, balanced, and
understandable and whether it provides the
information necessary for readers to assess
Santander UK's position and performance,
business model and strategy.
Board Responsible Banking Committee
|
Committee responsibilities
|
|
Support management in shaping, driving and
delivering the responsible banking agenda of
the business across a broad spectrum of areas
including customers, culture, diversity and
inclusion, conduct, communities and climate
change and the environment (the Board Risk
Committee is responsible for overseeing the
risks associated with climate change).
|
|
Committee members
At 29 February 2024
|
|
Nicky Morgan (Chair)
|
|
Lisa Fretwell
|
|
Ed Giera
|
|
Michelle Hinchliffe
|
|
Mark Lewis
|
|
Jose Maria Roldan
|
Board Remuneration Committee
|
Committee responsibilities
|
||
|
Overseeing the implementation of remuneration
policy, including approving individual
remuneration packages and the bonus
framework and outcomes for EDs and other
senior executives
|
||
|
Approving the framework for identifying Material
Risk Takers (MRTs) and overseeing their
remuneration arrangements
|
||
|
Reviewing the remuneration arrangements for all
colleagues
|
||
|
Committee members
At 29 February 2024
|
||
|
Mark Lewis (Chair)
|
||
|
Lisa Fretwell
|
||
|
Ed Giera
|
||
Details of the structure of our remuneration
arrangements and the activities of the Board
Remuneration Committee in the year are provided
in the Remuneration Policy and Implementation
Reports.
William Vereker
Chair
29 February 2024
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Chair’s report on corporate governance
continued
|
|
|
Annual Report 2023
|
Santander UK plc
24
|
|||
Basis of preparation
This report has been prepared on behalf of the
Board by the Board Remuneration Committee. We
comply with the statutory reporting obligations for
large private companies. We applied the UK
Corporate Governance Code 2018 (the Code) and
complied with the Provisions other than where
stated in the Directors' Report. Several voluntary
remuneration disclosures are also presented in this
report.
Remuneration policy for Executive Directors
(EDs)
Our remuneration policy, which applies to EDs, is
below. Remuneration is structured in two elements:
fixed and variable pay. Fixed pay is set at market
competitive levels appropriate for the role. Variable
pay rewards the delivery of internal financial
targets, key strategic priorities and individual
performance, and is subject to risk adjustment.
Remuneration policy applicable to Executive Directors in the year
|
Fixed pay
|
Principle and description
|
Policy
|
|
Base salary
|
–
To attract and retain EDs of sufficient calibre
and with the skills to deliver our strategy,
taking into account the demands and
complexity of the role.
|
–
Base salaries are normally reviewed annually. In reviewing base salaries the
Committee considers a number of factors, including:
–
the skills required, the role responsibilities and the market value of both;
–
the requirement for base salaries to be set at a level that avoids
inappropriate risk taking;
–
base salary increases for other employees; and
–
market conditions.
|
|
Pension arrangements
|
–
To provide a discrete element of the package
to contribute towards retirement.
|
–
EDs receive a cash allowance in lieu of pension, at 9% of salary. This aligns
to the wider workforce average.
|
|
Other benefits
|
–
To offer a competitive package and to
support employee wellbeing.
|
–
Including: private medical insurance for EDs and their dependants, life
assurance, health screening, and relocation allowances where relevant.
–
Access to Santander UK’s share schemes on the same terms as other
employees.
|
|
Variable pay
|
Principle and description
|
Policy
|
|
Variable pay plans
|
–
The Variable Pay Plan motivates EDs to
achieve and exceed annual internal targets
within Santander UK’s Risk Appetite and
aligned with our strategy and values.
–
Multi-year deferral and delivery in Banco
Santander SA shares or share options aligns
EDs’ interests to the long-term interests of
Santander UK. Further performance testing
applies for the CEO.
–
Part of the award is deferred according to
the requirements of the PRA Rulebook.
–
The long-term Transformation Incentive Plan
is a one-off plan which recognises the
collective achievement of key financial and
non-financial targets associated with the
bank's transformation.
–
The long-term PagoNxt Incentive Plan
recognises the contribution of employees
critical to the success of PagoNxt, one of
Banco Santander's strategic priorities.
|
–
Bonus awards under the Variable Pay Plan are discretionary and
determined by performance against a scorecard of financial and non-
financial goals, as well as individual performance.
–
40% of any bonus awarded is paid upfront after the performance year-
ends, and delivered at least half in shares or share options
–
60% of the bonus awarded is deferred and delivered in equal tranches
over years three to seven, with each tranche delivered at least half in
shares or share options.
–
For the CEO, the first three of five deferred award tranches are subject to
further performance testing which may reduce or increase the payout.
–
The Transformation Incentive Plan is based on performance assessed over
a three year period with further deferral and delivery in cash and share-
linked awards in line with regulatory requirements.
–
Awards under the PagoNxt Incentive Plan are made part in restricted share
units of PagoNxt and part in premium priced options of PagoNxt, and vest in
line with regulatory requirements.
–
Shares or share instruments are subject to a minimum one-year retention
period following vesting.
–
Malus and clawback can be applied to variable pay for up to ten years
following the grant of an award.
–
The structure of variable pay awards means EDs acquire a meaningful
shareholding in Banco Santander SA which may extend for a significant
period post-employment. In addition, the CEO is subject to a Shareholding
Policy, which aligns long-term interests with Banco Santander shareholders.
The requirement under the policy is set at two times the incumbent’s net
salary on appointment. A formal post-employment shareholding requirement
is therefore not in place.
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration policy report
|
|
|
Annual Report 2023
|
Santander UK plc
25
|
|||
Our remuneration policy continues to meet
regulatory requirements. Santander UK applies a
2:1 variable to fixed pay cap in line with approvals
granted to Banco Santander SA by its
shareholders. For control function roles, a lower
ratio of 1:1 is normally applied.
Executive remuneration policies
and principles
Our core values of Simple, Personal and Fair drive
our remuneration policy. We focus on delivering a
framework that is easy to understand, tailored to
individual roles, competitive and fair.
The key drivers of our Remuneration Policy
Alignment to culture
–
To design policies aligned to our long-term
success, which support the delivery of our
strategy and reinforce our values.
–
To base variable pay on a balanced scorecard
of quantitative and qualitative metrics across
Customers, Shareholders and Responsible
Banking. This aligns to Santander UK’s strategic
priorities, with a focus on good customer
outcomes, simplification, improved efficiency
and sustainable growth.
Simplicity
–
To ensure our approach to remuneration is
transparent and easily understood.
–
To operate clear structures so our employees
can link their contribution to the success of the
organisation.
Risk
–
A consistent approach to reward for all our
employees upholds our prudent approach to
Risk Appetite set as part of a Santander UK-
wide framework. Risk adjustment takes place at
an individual and collective level.
–
To provide a package that is balanced between
fixed and variable pay, and short-term and long-
term horizons, which promotes prudent risk
management.
–
To ensure remuneration complies with
applicable regulations and legislation.
Fairness
–
To take into account an assessment of the EDs'
performance against goals set at the start of the
year, which cover financial, non-financial,
quantitative and qualitative criteria.
–
To set robust and stretching targets and reward
exceptional performance.
–
To attract, retain and motivate employees of the
highest calibre by providing total remuneration
which reflects individual and Company
performance, is competitive, and reflects the
responsibilities of the role.
–
To consider wider employee pay and conditions
when determining Executive pay.
Clarity
–
The Committee reviews remuneration reporting
on an annual basis against best practice and
developments in corporate governance,
including the Code. Our reporting is designed to
be transparent, whilst reflective of our structure.
Predictability
–
The Committee annually reviews variable pay
levels for certain individuals and the basis of the
bonus pool calculation. Due to commercial
sensitivity, bonus opportunities and targets are
not disclosed as per the provisions of the Code.
Directors’ remuneration is within the variable
pay cap as approved by Banco Santander SA
shareholders and set out above.
On recruitment
When appointing a new ED, base salary is set at a
market competitive level appropriate for the role,
taking into consideration a range of factors
including role responsibilities, internal and external
peer groups, and experience.
Unless determined otherwise, new EDs receive a
pension allowance of 9% of salary, aligned to the
wider workforce average. Benefits will typically be
aligned to the wider employee population.
Remuneration will be established in line with the
Remuneration Policy, as set out in the table on the
previous page.
Relocation support and international mobility
benefits may also be given. Relocation assistance
will normally be a capped amount for a limited
time. In cases of international mobility, the
Committee will have discretion to offer benefits and
pension provisions which reflect home country
market practice and align to relevant legislation.
Buy-out awards
Compensation may be provided to EDs who forfeit
awards on leaving their previous employer. The
Committee retains discretion to make such
compensation as deemed appropriate to secure
the relevant individual’s employment and will
ensure any such payments align with both the
long-term interests of Santander UK and the
regulatory framework.
Such payments will be in line with the awards
foregone on leaving the previous employer taking
into account value, form of awards, vesting dates
and the extent to which performance conditions
applied to the original awards.
Service agreements
The key terms and conditions of employment are
set out in individual service agreements. These
agreements include a notice period of six months
from both the ED and the Company.
The agreement reserves a right for the Company
to terminate employment immediately with a
payment in lieu equal to the ED's fixed pay for the
notice period. In the event of termination for gross
misconduct, neither notice nor payment in lieu of
notice is required.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration policy report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
26
|
|||
Termination payments
The remuneration impact of an ED leaving the
Company, including treatment of variable pay and/
or any termination payment will reflect the terms of
the service agreements, relevant scheme rules,
regulatory requirements and the Committee’s
policy relevant to the reason for leaving.
Outstanding variable pay awards will generally
lapse on termination, other than where an
individual is considered a ‘good leaver’. Where an
ED is a good leaver, eligibility to variable pay
awards will normally subsist until the relevant
scheduled payment dates and will remain subject
to performance where relevant.
The Committee determines whether an ED is a
good leaver. Usual good leaver circumstances
include but are not limited to: injury, ill-health,
disability, redundancy, retirement and death. The
Committee may, at its discretion, determine an ED
a good leaver in any other circumstances.
A framework is in place to guide the Committee to
determine the discretionary circumstances when
good leaver status is appropriate. Other than a
payment in the event of redundancy, there are
generally no other payments upon termination of
employment for EDs.
In the event of a change in control, any outstanding
variable pay awards will be treated in line with the
relevant scheme rules, taking into account
applicable regulatory requirements.
Risk and Performance adjustment
We continue to meet the regulatory requirements
in respect of risk and performance adjustment. All
variable remuneration can be adjusted for current
and future risks through our Additional Risk
Adjustment Standard which is linked to our Board
approved Risk Appetite.
The Standard provides both a formula-based
assessment against Santander UK’s Risk Appetite
and an additional qualitative risk event assessment
that can reduce the bonus pool or individual
awards to nil at the Committee’s discretion.
Our Individual Remuneration Adjustment Standard
provides a framework for the process, governance
and standards relevant for decisions in relation to
individual performance adjustments following an
incident, including the application of malus and
clawback.
Performance adjustments may include, but are not
limited to:
–
reducing an award for the current year;
–
reducing the amount of any unvested deferred
variable remuneration;
–
requiring an award which has not yet been paid
to be forfeited; and
–
requiring repayment on demand (on a net basis)
of any cash and share awards received at any
time for a period of up to ten years following the
date of award.
The Committee has full discretion to prevent
vesting of all or part of an amount of deferred
remuneration and/or to freeze an award during an
ongoing investigation in a number of
circumstances, including:
–
colleague misbehaviour, misconduct or material
error;
–
material downturn in the performance of
Santander UK or a relevant business unit; and
–
Santander UK or a relevant business unit
suffering a material failure of risk management.
We have an NYSE-compliant policy in place which
enables variable remuneration to be recovered
from Executive Officers in the case of an
accounting restatement that would have impacted
that remuneration.
When determining variable pay awards for
individuals performing roles across Santander UK
plc and Santander UK Group Holdings plc, the
Santander UK Group Holdings plc Board
Remuneration Committee will apply any necessary
discretion based on factors related to UK group
entities outside of Santander UK plc. This
discretion is subject to validation by the Santander
UK plc Board Remuneration Committee.
The Committee seeks input from the Chair of the
Board, Chair of the Board Risk Committee, Chair
of the Board Audit Committee, Chief Risk Officer,
Chief Compliance Officer, Chief People Officer and
Chief Internal Auditor when determining whether
any performance or risk adjustments are required.
Policy for all employees
Our performance and reward approach across the
Company supports our business strategy, rewards
strong performance and reinforces our values
within our risk management framework. The
general principles of the Remuneration Policy
broadly apply across all colleagues where
appropriate. They are designed to attract, retain,
motivate and drive performance.
The structure of remuneration packages for EDs is
aligned with the broader colleague population,
comprising salary, benefits, pension provision and
discretionary variable pay dependent on role and
responsibility.
The Committee annually approves the operation of
variable reward schemes (as well as share
schemes) for all our colleagues to ensure they
reward appropriate behaviour and do not
incentivise activities which are outside risk
appetite.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration policy report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
27
|
|||
Introduction
This section of the report outlines how our
Remuneration Policy was implemented for 2023.
Variable Pay Plan
The Committee reviews and approves
remuneration governance and frameworks
annually. This ensures continued compliance with
the relevant regulatory rules, including those for
ring-fencing.
To incentivise and reward EDs for achieving
superior and sustained performance, our Directors
participate in an annual variable incentive plan. A
balance of financial and non-financial performance
metrics are selected annually by the Committee
and are aligned with our strategy as measured
over the financial year. Multi-year deferral and
delivery in Banco Santander SA shares and share
options ensure that EDs’ interests are aligned to
the long-term interests of the business. Further
long-term performance testing also applies for the
CEO.
Both upfront and deferred awards are made at
least half in shares or share options. The deferred
element is delivered over seven years. For the
CEO only, the first three tranches of deferred
awards are subject to further performance testing
against long-term metrics. Awards delivered in
shares or share options are subject to an additional
one-year retention period from the point of delivery.
The 2023 Variable Pay Plan pool was determined
based on a series of stages as follows:
Quantitative assessment
A quantitative assessment against a balanced
scorecard of financial and non-financial metrics
that are key to our strategy. Performance metrics
are reviewed annually to ensure continued
alignment with strategy and, for 2023 the
scorecard included:
–
Customers (Net Promoter Score, Active
Customers and Total Customers)
–
Shareholders (ROTE and Capital Generation)
–
Sustainability and Responsible Banking
(Climate Strategy Transition Plan, Employee
Engagement, Diversity and Inclusion).
A profit underpin applies, requiring Profit after Tax
to remain positive in order to pay any award, with a
reduced pool should profit reduce substantially
from the prior year.
Relative Performance
A Relative Performance Modifier applies, which
assesses our performance against a range of
metrics as compared to our closest peers.
Qualitative assessment
A qualitative assessment adds context to the
quantitative assessment and ensures a balanced
view of performance is taken. Performance is
assessed across compliance, risk management,
network collaboration and responsible banking.
Banco Santander Group Multiplier
The Committee has the discretion to adjust the
pool upwards or downwards to reflect overall
Banco Santander performance, if appropriate.
Regional Adjustment
A Regional Adjustment reflects the UK's
contribution to performance of the Banco
Santander group's European Region.
Exceptional Adjustment
Exceptional adjustments allow for unexpected
factors or additional internal targets not covered by
the quantitative or qualitative assessments to be
reflected in variable pay outcomes.
UK-focused risk adjustment
This provides both a formula-based assessment
against our Risk Appetite and an additional
qualitative overlay. Consideration is given to risk
appetite breaches including, but not limited to:
customers, conduct, operational, reputational and
financial crime risk. This can result in downward
adjustment of up to 100% of the pool or individual
awards at the discretion of the Committee.
Individual assessment
The allocation of the pool is based on an
individual's performance, taking into account a
range of factors. Performance is assessed against
the delivery of priorities (the 'What'), the behaviours
shown in delivering those priorities (the 'How'), and
also Risk.
Deferred long-term awards
Performance testing applies to a portion of the
deferred awards for the CEO. This applies to the
first three deferred tranches of the 2023 award
(36% of the total award) which are payable in
2027, 2028 and 2029. Performance is measured
over a three-year period 2024 to 2026.
The performance measures for 2023 awards are
relative TSR, ROTE and ESG metrics. Following
the performance assessment, the level of awards
will be adjusted accordingly. The assessment
could reduce or increase the overall value of the
deferred awards.
Transformation Incentive Plan
This is a one-off long-term incentive plan which
was designed to recognise the achievement of
financial targets and an enhanced customer
experience, whilst maintaining appropriate conduct
controls and risk management, over the course of
our transformation period.
Awards under the plan were assessed over the
period 1 January 2021 to 31 December 2023.
Awards were granted half in cash and half in
share-based units (linked to the Banco Santander
SA share price), and will vest in accordance with
regulatory requirements.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration implementation report
|
|
|
Annual Report 2023
|
Santander UK plc
28
|
|||
2023 Business Performance and Impact
on Remuneration
During 2023 our focus has been on supporting our
customers through the higher cost of living and
increased interest rates. We have continued to
offer the right products and services, underlining
our commitment to Consumer Duty.
Despite the difficult backdrop, our prudent
approach to risk and the hard work of everyone at
Santander UK delivered a strong set of results for
2023. Strong profit performance was driven by
higher base interest rates and prudent balance
sheet management. Our multi-year transformation
programme concluded with a £794m reduction in
costs.
The Committee acknowledged this strong financial
performance, alongside the experience of our
customers, our employees and our communities,
in determining variable pay awards for the 2023
performance year.
Context for decision making
The Committee ensures that pay policies and
practices for employees across Santander UK are
taken into account when setting policy for
executive remuneration. The Committee reviews
trends across Santander UK group, including the
outcome of any pay negotiations with our
recognised trade unions. It considers the
relationship between executive remuneration and
that of other Santander UK group employees, as
well as remuneration in the wider UK market, when
making decisions on executive pay.
The Committee oversees broader workforce
remuneration policies and practices, the
implementation of remuneration and related
employment policies across Santander UK and the
salary and variable pay awards for all Material Risk
Takers. It also approves the design of any material
performance-related pay plans.
As part of the monitoring of pay, the following is
considered:
–
Santander UK’s engagement with its recognised
trade unions on pay and benefits matters for all
colleagues;
–
Annual pay reviews for the general employee
population;
–
Santander UK group-wide pension and other
benefit provisions;
–
The design of and overall spend on variable
incentive arrangements; and
–
An assessment of conduct across the business.
The Committee is focused on ensuring that
colleagues are not subject to undue pressures or
inappropriately incentivised. This is monitored
using existing employee engagement indicators
including engagement surveys.
The Committee always considers the broader
stakeholder environment when setting policy or
reaching decisions on executive pay.
|
Executive Directors’ remuneration
Total remuneration of each ED for the years ended 31 December 2023 and 2022.
|
|||||
|
Mike Regnier
(4)
|
Duke Dayal
(5)
|
||||
|
2023
|
2022
|
2023
|
2022
|
||
|
£000
|
£000
|
£000
|
£000
|
||
|
Salary and fees
|
1,500
|
1,123
|
740
|
1,000
|
|
|
Taxable benefits
(1)
|
3
|
2
|
16
|
522
|
|
|
Pension
|
135
|
101
|
67
|
88
|
|
|
Total fixed pay
|
1,638
|
1,226
|
823
|
1,610
|
|
|
Bonus (paid and deferred)
(2)
|
1,003
|
1,139
|
—
|
1,901
|
|
|
Long-term incentive plan
(3)
|
669
|
—
|
—
|
—
|
|
|
Total variable pay
|
1,672
|
1,139
|
—
|
1,901
|
|
|
Total remuneration
|
3,310
|
2,365
|
823
|
3,511
|
|
|
(1)
|
Taxable benefits for the Executive Directors comprise a range of benefits including, but not limited to, private health care. Included in the 2022 figure for Duke Dayal is a relocation allowance of £500,000.
|
|
(2)
|
Effective 2022, 36% of the Chief Executive Officer's Variable Pay Plan award is subject to long-term performance metrics assessed over three years, which can increase the value of this element by up to
125% or decrease the award to 0%. No other executive will be subject to long-term performance metrics. The value of the current Chief Executive Officer's 2023 Variable Pay Plan awards not subject to
performance conditions, i.e. 64%, is disclosed above. The value subject to further performance conditions (currently £563,967) will be disclosed at the close of the performance period upon vesting.
|
|
(3)
|
The Long Term Incentive Plan value represents the value of awards made under the Transformation Incentive Plan, following the testing of the Plan's performance conditions. The value of awards made
in share-linked instruments has been calculated with reference to Banco Santander’s share price over the final three months of the 2023 year. Nathan Bostock, former Chief Executive Officer, received
an award with a value of £553,545.
|
|
(4)
|
Mike Regnier was appointed as Chief Executive Officer on 1 April 2022. Upon appointment, Mike was awarded guaranteed variable remuneration of £660,648 to compensate for remuneration foregone
from his previous employer. This has not been included in the Total Remuneration value above.
|
|
(5)
|
Duke Dayal stepped down as a Board Director on 25 September 2023. The figures above reflect remuneration received whilst serving as a Board Director. All outstanding awards lapsed on cessation of
employment.
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration implementation report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
29
|
|||
Stakeholder views
During 2023, Santander UK continued to engage
with key stakeholders on remuneration related
matters including its main regulators, the PRA and
FCA.
Regular engagement takes place with our
shareholders to align remuneration across the
Banco Santander group, while meeting all local
regulatory requirements. The outcome of these
discussions drives our bonus pool construct.
Lisa Fretwell, a member of the Committee,
succeeded Annemarie Durbin on 1 March 2023 as
the designated NED with responsibility to further
enhance the employee voice in the boardroom on
matters associated with organisational culture.
Frequent colleague pulse surveys were conducted
throughout 2023. The 'Your Voice' function has
enabled colleagues to share thoughts and ideas
frequently and anonymously all year round, giving
an immediate gauge of employee sentiment.
Additionally, we discuss business performance and
reward matters with union representatives during
the annual pay review cycle and on a frequent
basis throughout the year.
CEO pay ratio
Santander UK is committed to delivering fair pay
which attracts, retains and motivates colleagues of
the highest calibre across all grades. In line with
this commitment, the Committee has oversight of
compensation across the organisation, including
pay ratios, and considers this when determining
reward outcomes. We continue to voluntarily
disclose the ratio of the CEO’s total remuneration
to that of colleagues.
The CEO's pay mix is weighted more heavily
towards variable pay to incentivise the
achievement of stretching internal targets and
long-term value creation. This can lead to greater
variability in total remuneration. In contrast, the
typical pay mix of our less senior colleagues places
more emphasis on fixed pay, to offer security and
certainty, and to meet our commitment to
colleagues' financial wellbeing.
Changes in the ratio are therefore influenced by
the differences in remuneration structure, rather
than an increase in pay disparity. The ratio has
decreased from 84:1 in 2022 to 75:1 in 2023. The
reduction in pay ratio is mainly due to an increase
in average total remuneration amongst all
employees. In assessing the pay ratio, the
Committee is confident that the Company's policy
on remuneration is fair and consistent with our all-
employee pay policies.
Advice and support provided to the
Committee
As permitted by its Terms of Reference, the
Committee has engaged the advice and support of
Deloitte LLP (Deloitte) as independent
remuneration consultants at the expense of the
Company. Total fees (excluding VAT) for advice
and support provided to the Committee in 2023
were £121,150 (2022: £176,600). Deloitte was
initially appointed as Adviser to the Committee
following a formal tender process conducted in
2015 and was reappointed after a further tender
process in 2022.
In 2023, Deloitte also provided unrelated tax,
advisory, risk, assurance and consulting services
to Santander UK.
Deloitte's independence and effectiveness as the
Committee adviser is reviewed annually. The
Committee is satisfied that the Deloitte
engagement partner and team that provides
remuneration advice to the Committee do not have
connections with Santander UK that may impair
their independence. Deloitte is a founding member
of the Remuneration Consultants Group and
voluntarily operates under the Code of Conduct in
relation to executive remuneration consulting in the
UK.
By Committee invitation, the Chair, CEO and
designated representatives from business
functions attend meetings as appropriate to advise
on HR, Risk, Legal and Regulatory matters in
support of the Committee's work. Attendees
included the Chief People Officer, Performance
Reward Director, CRO and Company Secretary.
|
CEO pay ratio
|
||||
|
Methodology
(1)
|
25th percentile
|
Median
|
75th percentile
|
|
|
2023 CEO pay ratio
(5)
|
Option A
|
106:1
|
75:1
|
45:1
|
|
2022 CEO pay ratio
(4)
|
Option A
|
119:1
|
84:1
|
48:1
|
|
2021 CEO pay ratio
|
Option A
|
140:1
|
96:1
|
54:1
|
|
2020 CEO pay ratio
|
Option A
|
88:1
|
64:1
|
37:1
|
|
CEO remuneration
|
25th percentile
(2)
|
Median
(2)
|
75th percentile
(2)
|
|
|
2023 CEO pay ratio
|
£
|
£
|
£
|
£
|
|
Total salary
|
£1,500,000
|
£25,446
|
£35,450
|
£54,600
|
|
Total remuneration
|
£3,309,477
|
£31,314
|
£44,032
|
£74,226
|
|
(1)
|
Employee pay is calculated based on the 'Option A' methodology. We chose Option A as it gives the most reliable and accurate result by calculating a comparable single figure for each employee.
|
|
(2)
|
Employee pay data is based on full time equivalent pay for Santander UK plc employees. This excludes a small number of employees in the rest of the Santander UK group. Including those employees results
in a ratio consistent with the above. For each employee, total remuneration is calculated based on fixed pay accrued in the 2023 financial year, and variable pay is either based on actual bonuses in respect of
the 2023 year (where these are available) or modelled target bonuses where actuals are not yet available.
|
|
(3)
|
The CEO's total remuneration is aligned to that disclosed in the Executive Directors' remuneration table on the previous page.
|
|
(4)
|
The 2022 ratios are re-stated above. These were originally calculated based on fixed pay accrued within the 2022 year, in addition to target bonuses for eligible colleagues. The 2022 ratios have now been
recalculated using 2022 fixed pay and bonuses paid in 2023 in respect of 2022 for all employees.
|
|
(5)
|
The values used for the CEO's 2023 Variable Pay Plan awards are the same as those stated in the Executive Directors’ remuneration table i.e. the component which is not subject to performance conditions is
used for the CEO pay ratio calculation above. The calculation also includes the vesting value of Transformation Incentive Plan awards made to the CEO, as shown in the Executive Directors' remuneration
table.
|
|
Relative importance of spend on pay
|
|||
|
2023
|
2022
|
Change
|
|
|
£m
|
£m
|
%
|
|
|
Profit before tax
|
2,100
|
1,874
|
12
|
|
Total employee costs
|
1,241
|
1,159
|
7
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration implementation report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
30
|
|||
Chair and Non-Executive Director
remuneration
The Chair’s fee is reviewed and approved by the
Committee. The fees paid to NEDs are reviewed
and approved by the CEO and the Chair. Fees are
reviewed annually taking into account the market
rate and time commitment for the role. The Chair is
paid an all-inclusive base fee. NEDs are paid a
base fee, with a supplement for serving on or
chairing a Board Committee, except for the Board
Nomination Governance Committee.
All NEDs and the Chair serve under letters of
appointment. In respect of the NEDs appointed
prior to 2021, either party can terminate the
appointment by giving three months’ written notice.
From 2021, we increased the notice period for
NEDs to six months to support orderly succession
planning. For the Chair, 12 months’ written notice is
required.
Neither the Chair nor the NEDs have the right to
compensation on the early termination of their
appointment beyond payments in lieu of notice at
the option of Santander UK. In addition, neither the
Chair nor the NEDs are eligible for pension
scheme membership or incentive arrangements.
|
Chair and Board Committee member fees
|
||
|
2023
|
2022
|
|
|
£000
|
£000
|
|
|
Chair (inclusive of membership fee)
|
725
|
675
|
|
Board member
|
100
|
95
|
|
Additional responsibilities
|
||
|
Senior Independent Director
|
45
|
45
|
|
Chair of Board Risk Committee
|
70
|
65
|
|
Chair of Board Audit Committee
|
70
|
60
|
|
Chair of Board Responsible Banking Committee
|
60
|
60
|
|
Chair of Board Remuneration Committee
|
60
|
60
|
|
Membership of Board Risk Committee
|
35
|
30
|
|
Membership of Board Audit Committee
|
30
|
25
|
|
Membership of Board Responsible Banking Committee
|
30
|
25
|
|
Membership of Board Remuneration Committee
|
30
|
25
|
|
Chair of Litigation and Contentious Regulatory Board Sub-Committee
|
15
|
8
|
|
Consumer Duty Champion
|
8
|
8
|
|
Designated NED to represent views of the workforce
|
8
|
8
|
(1)
With effect from 1 April 2023, the following changes were made: The Chair fee increased from £675,000 to £725,000. The fee for Board Members increased from £95,000 to £100,000. The fee for the Chair of the
Board Risk Committee increased from £65,000 to £70,000. The fee for the Chair of the Board Audit Committee increased from £60,000 to £70,000. The fee for membership of the Board Risk Committee
increased from £30,000 to £35,000. The fee for membership of Board Audit Committee, Board Responsible Banking Committee and Board Remuneration Committee increased from £25,000 to £30,000. The fee
for the Chair of the Litigation and Contentious Regulatory Board Sub-Committee increased from £7,500 to £15,000.
|
2023
Fees
|
2022
Fees
|
2023
Expenses
(8)
|
2022
Expenses
|
2023
Benefits
|
2022
Benefits
|
2023
Total
|
2022
Total
|
|
|
Non-Executive Directors
|
£000
|
£000
|
£000
|
£000
|
£000
|
£000
|
£000
|
£000
|
|
Chair
|
||||||||
|
William Vereker
(1)
|
712
|
675
|
—
|
—
|
2
|
2
|
714
|
677
|
|
Independent Non-Executive Directors
|
||||||||
|
Annemarie Durbin
(9)
|
262
|
265
|
—
|
1
|
—
|
—
|
262
|
266
|
|
Lisa Fretwell
|
204
|
175
|
—
|
10
|
—
|
—
|
204
|
185
|
|
Ed Giera
|
299
|
280
|
—
|
—
|
—
|
—
|
299
|
280
|
|
Chris Jones
(2)
|
201
|
239
|
—
|
2
|
—
|
—
|
201
|
241
|
|
Michelle Hinchliffe
(3)
|
124
|
—
|
—
|
—
|
—
|
—
|
124
|
—
|
|
Jose Maria Roldan
(4)
|
97
|
—
|
—
|
—
|
—
|
—
|
97
|
—
|
|
Mark Lewis
(10)
|
230
|
183
|
—
|
8
|
—
|
—
|
230
|
191
|
|
Nicky Morgan
|
233
|
211
|
—
|
6
|
—
|
—
|
233
|
217
|
|
Banco Santander Group nominated Non-Executive Directors
(5)
|
||||||||
|
Dirk Marzluf
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Antonio Simoes
(6)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
Pamela Walkden
|
132
|
125
|
—
|
2
|
—
|
—
|
132
|
127
|
|
Pedro Castro e Almeida
(7)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(1)
William Vereker's taxable benefit relates to private health care.
(2)
Chris Jones stood down on 30 September 2023.
(3)
Michelle Hinchliffe was appointed on 1 June 2023. Fees received are in respect of services from that date.
(4)
Jose Maria Roldan was appointed on 1 June 2023. Fees received are in respect of services from that date.
(5)
With the exception of Pamela Walkden, none of the Banco Santander Group nominated Non-Executive Directors received any fees or expenses.
(6)
Antonio Simoes stood down on 31 August 2023.
(7)
Pedro Castro e Almeida was appointed on 1 September 2023.
(8)
Only true business expenses have been incurred in the course of Non-Executive Directors’ duties. In prior years, these expenses were processed via payroll and as such attracted tax and were declared.
(9)
Annemarie Durbin's fees include £15,000 per annum in relation to her services as Chair of Cater Allen Ltd. Annemarie stood down on 15 December 2023.
(10)
Mark Lewis' fees include £10,000 in relation to his services as a Non-Executive Director of Santander Consumer (UK) plc.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Remuneration implementation report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
31
|
|||
Introduction
The Directors submit their report together with the
financial statements for the year ended
31
December 2023
. The information in the Directors’
Report is unaudited, except where indicated.
Corporate structure, Subsidiaries and
Branches
The Company (incorporated on
12 September
1988
) is a subsidiary of
Santander UK Group
Holdings plc whose ultimate parent is
Banco
Santander SA, a Spanish retail and commercial
bank with a market share in ten core countries in
Europe and the Americas.
Santander UK was formed from two former
building societies, Abbey National and Alliance
Leicester, together with the branch network and
savings business of Bradford Bingley, and has
operated under a single brand since 2010.
All of Santander UK
plc's
ordinary shares are
unlisted and held
by Santander UK Group
Holdings plc, which is a wholly owned subsidiary of
Banco Santander SA.
The Company’s
preference shares are listed on
the London Stock Exchange and
both the
Company and Santander UK
Group Holdings
plc
have other equity instruments in the form of AT1
securities listed on various securities exchange
markets, including the London Stock Exchange
and Euronext Dublin.
In addition, the Company and Santander UK
Group Holdings
plc are subject to US Securities
Exchange Act reporting requirements as they have
debt securities registered in the US.
The Santander UK
group consists of a parent
company, Santander UK
plc, incorporated in
England and Wales, and a number of directly and
indirectly held subsidiaries and associates. The
Company directly or indirectly holds 100% of the
issued ordinary share capital of its principal
subsidiaries. All companies operate principally in
their country of incorporation or registration.
As a result of ring-fencing implementation in 2018,
and requirements set out in the Financial Services
(Banking Reform) Act 2013, Santander UK plc and
its subsidiaries comprise of only entities whose
business is permitted under the Act as a ring-
fenced bank.
For more information, see Note
19
.
Results and dividends
For details of the results for the year, see the
Income Statement in the Consolidated Financial
Statements. For more on dividends, see Note
10
.
Details of Santander UK’s activities and business
performance in
2023
, together with an indication of
the outlook, are set out in the Strategic report and
the Financial review.
Events after the balance sheet date
There have been no material post balance sheet
events, except as set out in Note 43.
Directors
A list of the Directors that served in the year can be
found in the Board and Board Committee
Attendance table in the Chair's report on Corporate
Governance. Details of their emoluments and
interests in shares are outlined in the
Remuneration implementation report. For more on
changes to the composition of the Board, see the
Chair’s report on Corporate Governance
.
Between
31 December 2023 and 29 February 2024,
there
were no changes made to the Board.
Appointment and retirement of Directors
All Directors are appointed and retire in
accordance with the Company’s Articles of
Association, the UK Companies Act 2006 and the
UK Group Framework. The Directors are required
to retire each year at the Annual General Meeting
and may offer themselves for re-election.
Directors’ indemnities
Directors’ and Officers’ liability insurance cover was
in place throughout the year, in addition to a deed
of indemnity to provide cover to the Directors for
liabilities to the maximum extent permitted by law.
These remain in force for the duration of the
Directors’ period of office from the date of
appointment until such time as any limitation
periods for bringing claims against the Directors
have expired. The Directors, including former
Directors who resigned in the year, benefit from
these deeds of indemnity which
constitute
qualifying third party indemnity provisions for the
purposes of the Companies Act 2006. Deeds for
existing Directors are available for inspection at the
Company’s registered office.
The Company has also granted an indemnity
which constitutes ‘qualifying third party indemnity
provisions’ to the Directors of its subsidiary and
affiliated companies, including former Directors
who resigned in the year and since the year-end.
Qualifying pension scheme indemnities were also
granted to the Trustees of the Santander UK
group’s pension schemes.
Employees
We continue to ensure that Santander UK’s
remuneration policies are consistent with its
strategic objectives and are designed with its long-
term success in mind.
Communication
Santander UK aims to involve and inform
employees on matters that affect them. The
intranet is a focal point for communications and the
‘AskHR’ website connects employees to all the
information they need about working for Santander
UK. We also use face-to-face communication,
such as team meetings and roadshows for
updates.
Santander UK regularly considers employees’
opinions and asks for their views on a range of
issues through regular engagement and surveys.
For more on colleague engagement and initiatives,
see the Strategic report
.
Employee Designated Non-Executive Director
Lisa Fretwell was appointed the Santander UK
Employee Designated NED on 1 March 2023,
succeeding Annemarie Durbin. Lisa represents the
views of employees in the Boardroom. For more
information see the Stakeholder voice section in
the Strategic report.
Consultation with Employees
Santander UK has a successful history of working
in partnership with its recognised trade unions,
Advance and the Communication Workers Union
(CWU), who collectively negotiate on behalf of
approximately 99.5% of our UK workforce. Both
trade unions are affiliated to the Trades Union
Congress. We consult Advance and the CWU on
significant proposals including those relating to
change across the business at both national and
local levels
.
Employee share ownership
Santander UK continues to operate two all-
employee, HMRC approved share schemes: a
Save-As-You-Earn (Sharesave) Scheme and a
Share Incentive Plan (SIP). Those employees who
are designated as Material Risk Takers receive
part of their annual bonus awards in Banco
Santander SA shares/share linked instruments.
Details of the plans and the related costs and
obligations can be found in the Share-based
payments and compensation sections in Notes 1
and 36.
Diversity and Inclusion
Information on our diversity and inclusion policies
can be found in
the Chair's report on Corporate
Governance
and the 2023 Diversity, Equity
Inclusion and Pay Gap Report, which does not
form part of this Annual Report.
Disability
Santander UK is committed to equality of
employment, access and quality of service for
disabled people and complies with the UK Equality
Act 2010 throughout its business operations.
Santander UK has processes in place to help train,
develop, retain and promote employees with
disabilities. We are a Disability Confident Employer
achieving the 'Leader' level. We are committed to
giving full and fair consideration to employment
applications by disabled people, having regard to
their particular aptitudes and abilities, and for
continuing the employment of employees who
have become disabled by arranging appropriate
training and making reasonable adjustments in the
workplace.
Engagement with stakeholders and
employees
Santander UK recognises the importance of
fostering relationships with its principal
stakeholders and that this is key to the long-term
success of our business. We understand the
importance of acting fairly and responsibly and
actively engage with our stakeholders and
employees. For more, see the Stakeholder voice
section in the Strategic report
.
Streamlined Energy Carbon Reporting
(SECR)
F
or details on our energy use, carbon emissions
and efficiency measures implemented in
2023
,
including Scope 1, 2 and 3 data, see the SECR
section in the Sustainability review.
Political contributions
In
2023
and
2022
, no contributions were made for
political purposes and no political expenditure was
incurred by the Company.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Directors' report
|
|
|
Annual Report 2023
|
Santander UK plc
32
|
|||
Share capital
Details about the structure of the Company’s
capital can be found in Note
32
.
For details of employee share schemes and how
rights are exercisable, see Note
36
.
The powers of the Directors in relation to share
capital are set out in the Company’s Articles of
Association. These are available for inspection on
request.
Financial instruments
The financial risk management objectives and
policies of Santander UK and the policy for
hedging, along with details of Santander UK's
exposure to credit risk, market risk and liquidity risk
are set out in the Risk review.
Research and development
Santander UK has a comprehensive product
approval process and policy. New products,
campaigns and business initiatives are reviewed
by Santander UK’s Proposition Approval Forum,
for more information please see the Strategic
Report.
Supervision and regulation
The Company is authorised by the PRA and
regulated by the FCA and the PRA (dual
regulated).
Some of
its
subsidiaries and joint
venture companies are
also
authorised by the FCA
and the PRA (dual regulated) or the PRA or the
FCA (solo regulated)
.
While Santander UK operates primarily in the UK,
it is also subject to the laws and regulations of
other jurisdictions in which it operates or has listed
debt securities such as the US.
Internal controls
Risk management and internal controls
The Board and its Committees are responsible for
reviewing and ensuring the effectiveness of
management’s system of risk management and
internal controls.
We carried out a robust assessment of the
principal and emerging risks facing Santander UK
including those that would threaten its business
model, future performance, solvency or liquidity.
Details of our principal risks, our procedures to
identify emerging risks, and how these are being
managed or mitigated are set out in the Risk
review.
A summary of our Top and Emerging Risks
is also set out in the Strategic report.
Management’s report on internal control over
financial reporting
Internal control over financial reporting is a
component of an overall system of internal control.
Santander UK’s internal control over financial
reporting is designed to provide reasonable
assurance regarding the reliability of financial
reporting and the preparation of financial
statements for external purposes in accordance
with UK-adopted international accounting
standards (IAS) and International Financial
Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB).
Santander UK’s internal control over financial
reporting includes:
–
Policies and procedures that pertain to the
maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and
dispositions of assets.
–
Controls providing reasonable assurance that
transactions are recorded as necessary to permit
the preparation of financial statements in
accordance with UK-adopted IAS and IFRS, and
that receipts and expenditures are being made
only in accordance with authorisations of
management.
–
Controls providing reasonable assurance
regarding prevention or timely detection of
unauthorised acquisition, use or disposition of
assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. In addition, projections of any
evaluation of effectiveness to future periods are
subject to the risk that controls may become
inadequate because of changes in conditions, or
because the degree of compliance with policies or
procedures may deteriorate.
Management is responsible for establishing and
maintaining adequate internal control over the
financial reporting of Santander UK. Management
assessed the effectiveness of Santander UK’s
internal control over financial reporting at
31
December 2023
based on the criteria established
in the Internal Control – Integrated Framework
issued by the Committee of Sponsoring
Organisations of the Treadway Commission
(COSO) in May 2013.
As a registrant under the US Securities Exchange
Act of 1934, Santander UK's management is
responsible for establishing and maintaining an
adequate system of internal control over financial
reporting in order to ensure the accuracy and
reliability of Santander UK's Financial Statements
and the Form 20-F submitted to the SEC.
In line with COSO and SEC requirements, controls
recognised as Sarbanes-Oxley applicable are
subject to annual testing and certification by
management including an attestation by the CEO
and the CFO that they are operating effectively and
that the internal control over financial reporting can
be relied on.
All Sarbanes-Oxley control weaknesses identified
are captured, assessed and included in the year-
end assessment of the reliability of the Internal
Control environment. They are reported on an
ongoing basis to the Board Audit Committee to
ensure the control environment is continuously
improved.
Based on this assessment, management
concluded, at
31 December 2023
, that Santander
UK’s internal control over financial reporting was
effective.
Disclosure controls and procedures over
financial reporting
Santander UK’s management has evaluated, with
the participation of its CEO and CFO, the
effectiveness of its disclosure controls at
31
December 2023
. There are inherent limitations to
the effectiveness of any system of disclosure
controls and procedures, including the possibility of
human error, and the circumvention or overriding
of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can
only provide reasonable assurance of achieving
their control objectives.
Based upon this evaluation, the CEO and the CFO
concluded that, at
31 December 2023
, Santander
UK’s disclosure controls and procedures were
effective to provide reasonable assurance that
information required to be disclosed by Santander
UK in the reports that it files and submits under the
US Securities Exchange Act of 1934 is recorded,
processed, summarised and reported within the
time periods specified in the applicable rules and
forms, and that it is accumulated and
communicated to Santander UK’s management,
including the CEO and CFO, as appropriate, to
allow timely decisions regarding disclosure.
Changes in internal control over financial
reporting
There were no changes to our internal control over
financial reporting during the period covered by this
report that have materially affected, or are
reasonably likely to materially affect, our internal
control over financial reporting.
Statements of Compliance
The UK Corporate Governance Code 2018 (the
Code)
Santander UK complies with the Code wherever
applicable in order to achieve the best standards of
corporate governance.
The Code applied to the
financial year ended
31 December 2023
and the
Board confirms that it applied the principles and
complied with those provisions of the Code
throughout the year, except as follows:
–
Provision 17: From 1 January to
1 October 2023
,
the Company did not comply with the
requirement that for the Board Nomination
Governance Committee (BNC) membership to
comprise a majority of INEDs, following the
appointment of Pamela Walkden, as a GNED, to
the Committee in October 2021. The Board
considered that Pamela's credentials and
experience were of value to the BNC and during
the period of non-compliance, we assessed the
implications and believed that the approach
followed was appropriate for the size and
ownership of our structure
.
However, on 1
October 2023
two independent directors were
appointed to the BNC resulting in compliance
with this provision from that date.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Directors' report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
33
|
|||
–
Provision 25: The Board Risk Committee (BRC),
since the appointment of Pamela Walkden as a
GNED in October 2021, the BRC has not been
composed of only INEDs. We assessed the
implications and believe that the approach we
follow is appropriate for our size and ownership
structure, recognising the experience and
expertise that the GNED brings to BRC.
–
Provision 36: The Board Remuneration
Committee has not developed a policy for post-
e
mployment shareholding requirements.
However, the structure of variable pay for EDs
and other senior executives ensures that they
acquire a meaningful shareholding in Banco
Santander SA which extends for a significant
period post employment. For details, see the
Remuneration policy report.
–
Provisions 40 and 41: Due to commercial
sensitivity, we opted not to provide all of the
disclosures required by Provision 41. The details
not provided relate to (1) the extent to which
discretion has been applied to remuneration
outcomes and the reasons why and (2) a
description, with examples, of how the
Board
Remuneration Committee
has addressed the
factors in Provision 40 (specifically predictability
as we do not provide the range of possible
values of rewards to individual directors).
Specific engagement does not take place with
the workforce to explain how executive
remuneration aligns with wider company pay
policy. However, an explanation is available for
employees in the Directors’ Remuneration
report. Details of the structure of our
remuneration arrangements and key
considerations of the Board Remuneration
Committee in the year are included in the
Remuneration policy and Remuneration
implementation reports.
UK Finance Disclosure Code for Financial
Reporting
Santander UK’s financial statements for the year
ended
31 December 2023
have been prepared in
compliance with the principles of the UK Finance
Disclosure Code for Financial Reporting.
Going concern
The going concern of Santander UK is reliant on
preserving a sufficient level of capital and
adequately funding the balance sheet. In making
their going concern assessment in connection with
preparing the financial statements, the Directors
considered a wide range of information including
Santander UK’s business and strategic plans, top
and emerging risks, including those associated
with climate change, capital position and liquidity
and funding profile, stress scenarios, and
contingent liabilities, and the reasonably possible
changes in trading performance arising from
potential economic, market and product
developments. The Directors' assessment included
consideration of the potential impacts arising from
higher living costs.
Having assessed this information and the principal
risks and uncertainties, the Directors are satisfied
that the Santander UK group has adequate
resources to continue operations for a period of at
least 12 months from the date of this report and
therefore consider it appropriate to adopt the going
concern basis of accounting in preparing the
financial statements.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Directors' report
continued
|
|
|
Annual Report 2023
|
Santander UK plc
34
|
|||
Code of Conduct
Santander UK is committed to ensuring we hold
ourselves to high ethical standards. This means
adhering to laws, regulations, policies including our
Code of Conduct (which was refreshed in October
2023) and also carrying out business in a
responsible way. High standards of professional
and personal conduct help Santander identify,
manage and respond to risks, create a positive,
collaborative working environment and ensure
positive customer interactions and outcomes.
The Santander Way determines how we deliver on
our purpose, to help people and businesses
prosper. How we deliver that purpose is as
important as the end result. Our conduct and our
culture matters. Our aim is to be the best open
financial services platform by acting responsibly
and earning the lasting loyalty of our colleagues,
customers and communities.
How we do business is intrinsically linked to our
behaviours and values and supports our aim.
Santander UK’s Code of Conduct sets the
standards expected of all colleagues and forms
part of the terms and conditions of employment.
It makes clear our corporate values, our
expectations regarding corporate behaviours and
general principles and standards we expect with
regard to customers, colleagues, conflicts of
interest, data, media and our approach to
sustainability.
There are numerous policies and processes, as
well as support and guidance, that help colleagues
meet these expectations and do the right thing to
ensure Santander UK remains a Simple, Personal
and Fair bank for its colleagues, customers,
shareholders and the communities it serves.
The Code of Conduct applies to all colleagues
including permanent and temporary colleagues as
well as EDs and NEDs. The SEC requires
companies to disclose whether they have a code
of ethics that applies to the CEO and senior
financial officers which promotes honest and
ethical conduct, full, fair, accurate, timely and
understandable disclosures, compliance with
applicable governmental laws, rules and
regulations, prompt internal reporting of violations,
and accountability for adherence to a code of
ethics.
Santander UK meets these requirements through
its Code of Conduct and supporting policies,
including but not limited to the Anti-Bribery and
Corruption Policy, the Whistleblowing Policy, the
FCA’s Principles for Businesses, and the FCA’s
Statements of Principle and Code of Practice for
Approved Persons, with which the CEO and senior
financial officers comply. The Company has not
granted any waivers to its principle executives,
financial or accounting officers.
Copies of these documents are available on
application to Santander UK
plc, 2 Triton Square,
Regent’s Place, London NW1 3AN The Code of
Conduct can be found on our website.
Disclosure of information to Auditors
Each of the Directors at the date of approval of this
report confirms that:
–
So far as the Director is aware, there is no
relevant audit information of which Santander
UK’s auditor is unaware
–
The Director has taken all steps that they ought
to have taken as a Director to make themselves
aware of any relevant audit information and to
establish that Santander UK’s auditor is aware of
that information.
This confirmation is given and should be
interpreted in accordance with the provisions of
Section 418 of the UK Companies Act 2006.
Auditor
PricewaterhouseCoopers LLP will continue in the
office of auditor. A resolution to reappoint them will
be proposed at the Company’s forthcoming Annual
General Meeting.
By Order of the Board
John Mills
Company Secretary
29 February 2024
2 Triton Square, Regent’s Place,
London NW1 3AN
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Strategic Report
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Financial review
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Governance
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Risk review
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Financial
statements
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Shareholder
information
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Directors' report
continued
|
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Risk review
|
Contents
|
||||
|
|
|
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|
The Risk review consists of unaudited financial information unless otherwise
stated. The audited financial information is an integral part of our Consolidated
Financial Statements.
|
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|
Credit risk
management
|
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|
Non Financial Risks:
|
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|
Financial crime risk
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Financial review
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Governance
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Risk review
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Financial
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Risk governance
INTRODUCTION
As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we
understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial
performance, withstand stresses, and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our
business model. This is key to achieving our strategic objectives.
RISK FRAMEWORK
How we define risk
Risk is any uncertainty about us being able to achieve our business objectives. It covers both financial and non financial risks (NFRs). NFR is a broad term usually
defined by exclusion, i.e. any risks other than the traditional financial risks of Credit, Liquidity, Capital, Market and Pension, Strategic and business, and
Reputational. Risk can be split into a set of key risk types, each of which could affect our results and our financial resources. Enterprise risk is the aggregate view
of all the key risk types.
Top and emerging risks
Several of our risk types also have Top risks associated with them. We regularly review the Top risks that could impact our business, customers and shareholders,
and they are monitored at each meeting of the Executive Risk Control Committee (ERCC) and Board Risk Committee (BRC). The Top risks we actively monitored
in
2023
are set out in the relevant section of this Risk review
and summarised in the 'Top risks' section of the Risk management overview in the Strategic report.
Our Top risks included risks arising from Inflationary and supply chain pressures, Climate change, Financial crime, Fraud, IT, Cybersecurity, Third Parties, People
risk, Data Management, Conduct and regulatory, Model risk and execution of change being key priorities for Santander UK and our regulators.
We also regularly review emerging risks that could impact our business, customers and shareholders, including regular review and discussion at the ERCC and
BRC. The identification of emerging risks is co-ordinated by the Risk Division.
A key part of the process is continual scanning of the external environment, focusing
on emerging risk drivers such as broader geo-political, environmental and social risks, technological change including artificial intelligence, customer behaviour,
market competition, regulatory and government interventions, central bank digital currencies and other digital assets and disruption of UK macroeconomic factors.
Emerging risks actively monitored in
2023
are set out in the relevant section of this Risk review
and summarised in the ‘Emerging risks’ section of the Risk
management overview in the Strategic report.
In
2023
,
we added Environmental and Social risks as an emerging risk area that could impact on us and our customers. We actively monitor Disruption of UK
macroeconomic factors as a crystallised risk through regular updates to ERCC and BRC. For more, see the Risk management overview in the Strategic report.
Key elements
Our Risk Framework sets out how we manage and control risk.
How we approach risk – our culture and principles
|
Risk Culture Statement
|
|
Santander UK places good customer outcomes at the heart of our decision-making and our people take personal responsibility for doing the right thing. We are
thoughtful about taking risk, meaning we only take risks that we understand, we balance risk and reward when making decisions and are proportionate in our
approach.
|
The Board reviews and approves our Risk Culture Statement every year. Senior executives are responsible for promoting our risk culture from the top. They drive
cultural change and increased accountability across the business. We reinforce our Risk Culture Statement and embed our risk culture in all our business units
through our Risk Framework, Risk Certifications and other initiatives. This includes highlighting that:
–
It is everyone’s personal responsibility to play their part in managing risk
–
We must Identify, Assess, Manage and Report risk quickly and accurately
–
We make risk part of how we assess our people’s performance and how we recruit, develop and reward them
–
Our internal control system is essential to ensure we manage and control risk in line with our principles, standards, Risk Appetite and policies.
We use Risk Certifications to confirm how we manage and control risks in line with our Risk Framework and within our Risk Appetite. As an example, every year,
each member of our Executive Committee confirms that they have managed risks effectively in line with the Risk Framework in the part of the business for which
they are responsible. Their certification lists any exceptions and the agreed actions to be taken to correct them. This is a tangible sign of the personal responsibility
that is such a key part of our risk culture.
Our risk culture programme
Through communications, training and awareness, we are evolving our approach to focus on the risk culture behaviour we expect of our people. Our I AM Risk
approach aims to make sure our people:
|
–
Identify
risks and opportunities
–
Assess
their probability and impact
–
Manage
the risks and suggest alternatives
–
Report
, challenge, review, learn and ‘speak up’.
|
I AM Risk is the process by which we make risk management part of everyone’s life as a Santander UK employee from how we recruit them and manage their
performance to how we develop and reward them. It is also how we encourage people to take personal responsibility for risk, to speak up and to come up with
ideas. We use I AM Risk in our Risk Certifications, policies, frameworks and governance, and risk-related communications. We also include it in reward
arrangements and in mandatory training, to support general awareness, our learning websites include videos and factsheets.
As part of I AM Risk, we include mandatory risk objectives for all our people in our performance management processes. The Executive Committee leads our
culture initiatives under the CEO’s sponsorship and we use monthly staff surveys to give insight into our culture.
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We are committed to the highest standards of corporate governance in every part of our business, including risk management. For details of our governance,
including the Board and its Committees, see the ‘Governance’ section of this Annual Report.
The Board delegates certain responsibilities to Board Level
Committees as needed and where appropriate.
Our risk governance structure strengthens our ability to identify, assess, manage and report risks, as follows:
–
Committees:
A number of Board and Executive committees are responsible for specific parts of our Risk Framework
–
Key senior management roles:
A number of senior roles have specific responsibilities for risk management
–
Risk organisational structure:
We have the ‘three lines of defence’ model built into the way we run our business.
Committees
The Board and Board Level Committee responsibilities for risk are:
|
Board Level Committee
|
Main risk responsibilities
|
|
The Board
|
–
Has overall responsibility for business execution and for managing risk
|
|
–
Reviews and approves the Risk Framework and Risk Appetite
|
|
|
Board Risk Committee (BRC)
|
–
Assesses the Risk Framework and recommends it to the Board for approval
|
|
–
Advises the Board on our overall Risk Appetite, tolerance and strategy
|
|
|
–
Oversees our exposure to risk and our strategy and advises the Board on both
|
|
|
–
Reviews the effectiveness of our risk management systems and internal controls
|
|
|
–
Reviews reports from the Chief Compliance Officer (CCO) on the adequacy and effectiveness of the compliance function
|
|
|
–
Responsible for oversight of cybersecurity risks and receives regular updates on cybersecurity risk position including
cybersecurity incidents
|
|
|
–
Receives regular updates on financial crime compliance and risks including money laundering, bribery and corruption and
sanctions compliance and monitors KPIs in line with approved Board risk appetite
|
|
|
Board Responsible Banking
Committee
|
–
Responsible for culture and operational risk from conduct, compliance, competition legal matters
|
|
–
Ensures that adequate and effective control processes are in place to identify and manage reputational risks
|
|
|
–
Oversees our Sustainability and Responsible Banking programme and how it impacts on employees, communities, the
environment including sustainability and climate change, reputation, brand and market positioning
|
|
|
–
Reviews updates on key risk issues, customer, reputational and conduct matters
|
|
|
Board Audit Committee
|
–
Monitors and reviews the financial statements integrity, and any formal announcements on financial performance
|
|
–
Reviews the adequacy and effectiveness of the internal financial controls and whistleblowing arrangements
|
|
|
–
Monitors and reviews the effectiveness of the internal audit function
|
|
|
–
Receives regular updates from the internal audit function which performs reviews of cybersecurity risk and controls
|
|
|
–
Oversees the independence and performance of the external auditors
|
|
|
Board Remuneration Committee
|
–
Oversees implementation of remuneration policies, ensuring they promote sound and effective risk management
|
The Executive Level Committee responsibilities for risk are:
|
Executive Level Committee
|
Main risk responsibilities
|
|
Executive Committee (ExCo)
|
–
Reviews business plans in line with our Risk Framework and Risk Appetite before they are sent to the Board to approve
|
|
–
Receives updates on key risk issues managed by CEO-level committees and monitors the actions taken
|
|
|
Senior Management Committee
|
–
Focuses on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged
|
|
–
Reviews updates on key risk issues, customer, reputational and conduct matters
|
|
|
Executive Risk Control
Committee (ERCC)
|
–
Reviews Risk Appetite proposals before they are sent to the BRC and the Board to approve
|
|
–
Ensures that we comply with our Risk Framework, Risk Appetite and risk policies
|
|
|
–
Reviews and monitors our risk exposures and approves any corrective steps we need to take
|
|
|
Asset and Liability Committee
(ALCO)
|
–
Reviews liquidity risk appetite (LRA) proposals
|
|
–
Ensures we measure and control structural balance sheet risks, including capital, funding and liquidity, in line with the policies,
strategies and plans set by the Board
|
|
|
–
Reviews and monitors key asset and liability management activities to ensure we keep our exposures within our Risk Appetite
|
|
|
Pensions Committee
|
–
Reviews pension risk appetite proposals
|
|
–
Approves actuarial valuations and reviews the impact they may have on our contributions, capital and funding
|
|
|
–
Consults with the pension scheme trustees on the scheme’s investment strategy
|
|
|
Capital Committee
|
–
Puts in place reporting systems and risk control processes to make sure capital risks are managed within our Risk Framework
|
|
–
Reviews capital adequacy and capital plans, including the ICAAP, before they are sent to the Board to approve
|
|
|
Incident Accountability
Committee
|
–
Considers, calibrates, challenges and agrees any appropriate individual remuneration adjustments
|
|
–
Presents recommendations to the Board Remuneration Committee
|
|
|
Credit Approval Committee
|
–
Approves corporate and wholesale credit transactions which exceed levels delegated to lower level forums or individuals
|
|
Economic Crime Committee
|
–
Ensures due reporting, consideration, oversight and informed decision making regarding compliance with financial crime laws
and regulations, fraud, and best industry practice aligned to our Risk Appetite
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Strategic Report
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Responsible Banking
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Governance
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Risk review
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Key senior management roles
Senior roles with specific responsibilities for risk management are:
|
Role
|
Main risk responsibilities
|
|
Chief Executive Officer
(CEO)
|
The Board delegates responsibility for our business activities and managing risk on a day-to-day basis to the CEO. The CEO proposes
our strategy and business plan, puts them into practice and manages the risks involved. The CEO must also ensure we have a suitable
system of controls to manage risks and report to the Board on them.
|
|
Chief Risk Officer (CRO)
|
Oversees and challenges risk activities, and ensures that the business activity is conducted within our risk appetite. Responsible for
control and oversight of all risk types with regulatory responsibility to report on these risk types to Executive and Board Committees.
|
|
Chief Financial Officer
(CFO)
|
Responsible for developing strategy, leadership and management of the CFO Division. The CFO is responsible for managing interest
rate, liquidity, pension and capital risks. The CFO also aims to maximise the return on Regulatory and Economic Capital.
|
|
Chief Internal Auditor (CIA)
|
Designs and uses an audit system that identifies key risks and evaluates controls. The CIA also develops an audit plan to assess
existing risks that involve producing audit, assurance and monitoring reports.
|
|
Chief Compliance Officer
(CCO)
|
Responsible to the CRO for control and oversight of conduct regulatory, reputational and economic crime risk, but has direct
responsibility to report on conduct regulatory and reputational risk to Executive and Board Committees and the regulator.
|
|
Money Laundering
Reporting Officer (MLRO)
|
Responsible to the CCO for control and oversight of economic crime risk but has regulatory responsibility to report on this risk type to
Executive and Board Committees and the regulator.
|
Risk organisational structure
We use the ‘three lines of defence’ model to manage risk. This model is widely used in the banking industry and has a clear set of principles to put in place a
cohesive operating model across an organisation. It does this by separating risk management, risk control and risk assurance.
The reporting lines to the Board
with respect to risk are as follows:
|
Line 1: Risk management
|
|
Business Units and Business Support Units identify, assess and manage the risks which originate and exist in their area, within our Risk Appetite. It is under the
executive responsibility of the CEO.
|
|
Line 2: Risk control oversight
|
|
Risk Control Units are independent monitoring, control and oversight functions. They make sure Business Units and Business Support Units manage risks
effectively and within our Risk Appetite. The Risk Control units are: Risk - responsible for controlling credit, liquidity, capital, market, pension, strategic and
business, operational, model and enterprise risks; Financial Crime; and Compliance, responsible for controlling reputational and conduct and regulatory risks. It
is under the executive responsibility of the CEO, but responsible to the CRO for overseeing the first line of defence.
|
|
Line 3: Risk assurance
|
|
Internal Audit is an independent corporate function. It gives assurance on the design and effectiveness of our risk management and control processes. It is
responsible to the CIA.
|
Internal control system
Our Risk Framework is an overarching view of our internal control system that helps us manage risk across the business. It sets out at a high level the principles,
standards, roles and responsibilities, and governance for internal control. Our Risk Framework covers the categories below:
|
Category
|
Description
|
|
Risk Frameworks
|
Set out how we should manage and control risk across the business, our risk types and our risk activities.
|
|
Risk Management Responsibilities
|
Set out the Line 1 risk management responsibilities for Business Units and Business Support Units.
|
|
Strategic Commercial Plans
|
Plans produced by business areas, at least annually, which describe the forecasted objectives, volumes and risk
profile of new and existing business, within the limits defined in our Risk Appetite.
|
|
Risk Appetite
|
See our Risk Appetite section that follows.
|
|
Delegated Authorities/Mandates
|
Define who can do what under the authority delegated to the CEO by the Board.
|
|
Risk Certifications
|
Business Units, Business Support Units or Risk Control Units set out each year how they managed/controlled risks in
line with our risk frameworks and Risk Appetite, and explain any action to be taken. This helps drive personal
accountability.
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Strategic Report
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Responsible Banking
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Financial review
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Governance
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Risk review
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statements
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Annual Report 2023
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|
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RISK APPETITE
How we control the risks we are prepared to take
When our Board sets our strategic objectives, it is important that we are clear about the risks we are prepared to take to achieve them. We express this through
our Risk Appetite Statement, which defines the amount and kind of risk we are willing to take. Our Risk Appetite and strategy are closely linked, and our strategy
must be achievable within the limits set out in our Risk Appetite.
Our Risk Appetite Statement establishes principles that we use to set our Risk Appetite and
defines our overall approach to risk management.
How we describe the limits in our Risk Appetite
Our Risk Appetite sets out detailed limits across all types of risk, using metrics and qualitative statements.
Metrics
We use metrics to set limits across most risk types including a set of metrics focused on losses, capital, liquidity and concentration. We set:
–
Limits for losses for our most important risks, including credit, market, operational and conduct risk
–
Capital limits, reflecting both the capital that regulators expect us to hold (regulatory capital) and our own internal measure economic capital (EC)
–
Liquidity limits according to a range of plausible stress scenarios for our business
–
Concentration limits, to determine the maximum concentration level that we are willing to accept.
These limits apply in normal business conditions, but also when we might be experiencing a far more difficult economic environment. We refer to conditions like
this as being under stress.
For more on EC and stress scenarios, see the Stress Testing section that follows.
Qualitative statements
For some types of risk, we also use qualitative statements that describe in words the appetite we want to set.
We also use them to prohibit or restrict exposure to
certain sectors, types of customer and activities.
How we set our Risk Appetite, and stay within it
We control our Risk Appetite through our Risk Appetite Framework. Our Board approves and oversees our Risk Appetite Statement every year. This ensures it is
consistent with our strategy and reflects changes in the markets and economic environment in which we operate.
Our ERCC
is responsible for ensuring that our
risk profile (the level of risk we are prepared to accept) is consistent with our Risk Appetite Statement. To do this, they monitor our performance against our Risk
Appetite
, business plans and budgets.
We also use stress testing to review how our business plan performs against our Risk Appetite Statement. This shows us if we would stay within our Risk Appetite
under stress conditions. It also helps us to identify any adverse trends or inconsistencies.
We embed our Risk Appetite by setting more detailed risk limits for each business unit and key portfolios. These are set in a way so that if we stay within each
detailed limit, we will stay within our overall Risk Appetite. When we use qualitative statements to describe our appetite for a risk, we link them to lower-level key
risk indicators, so that we can monitor and report our performance against them.
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Risk review
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STRESS TESTING
Stress testing helps us understand how different events and economic conditions could affect our business plan, earnings and risk profile. This helps us plan and
manage our business.
Scenarios for stress testing
To see how we might cope with difficult conditions, we regularly develop challenging scenarios that we might face. We consult a broad range of internal
stakeholders, including Board members, when we design and choose our most important scenarios. The scenarios cover a wide range of outcomes, risk factors,
time horizons and market conditions. They are designed to test:
–
The impact of shocks affecting the economy as a whole or the markets we operate in
–
Key potential vulnerabilities of our business model, and the processes and systems which support it
–
Potential impacts on specific risk types.
We describe each scenario using a narrative setting out how events might unfold, as well as a market and/or economic context. For example, the key economic
factors we reflect in our ICAAP scenarios include house prices, interest rates, unemployment levels, inflation, and the size of the UK economy. We also explore
sensitivities around several macro variables where there may be concerns or levels of uncertainty.
In 2023, we completed the Bank of England’s (BoE) Annual Cyclical Scenario. The purpose of this exercise was to explore a 'tail risk' scenario designed to be
severe and broad enough to assess the resilience of UK banks to a range of adverse shocks. In the scenario, weaker household real income growth, lower
confidence and tighter financial conditions resulted in severe domestic and global recessions.
Following our 2022 Climate Internal Scenario Analysis (CISA) assessment of potential short-term transition risks on our business portfolios, we performed a
review of our exposures to physical risk
. We continue to enhance our scenario analysis capability with a view to performing long-horizon assessments in 2024.
How we use stress testing
We use stress testing to estimate the effect of these scenarios on our business and financial performance, including:
–
Our business plan, and its assessment against our Risk Appetite
–
Our capital strength, through our ICAAP
–
Our liquidity position, through our ILAAP
–
Our long term impacts of climate change, through regulatory exercises and CISA
–
Impacts on other risk types.
We use a wide range of models, approaches and assumptions supported by robust governance. These help us interpret the links between factors in markets and
the economy, and our financial performance. For example, one model looks at how changes to key macroeconomic variables like unemployment rates might
affect the number of customers who might fall into arrears on their mortgage or other loans.
Our stress testing models are subject to a formal review, independent validation and approval process. We highlight the key weaknesses and related model
assumptions in the approval process for each stress test. In some cases, we overlay expert judgement onto the results of our models. Where this is material to the
outcome of the stress test, the approving governance committee reviews it. We take a multi-layered approach to stress testing to capture risks at various levels.
This ranges from sensitivity analysis of a single factor to a portfolio, to wider exercises that cover all risks across our entire business. We use stress test outputs to
design business plans that aim to mitigate potential impacts of possible stress scenarios.
We also conduct reverse stress tests. These are tests in which we identify and assess scenarios that are most likely to cause our business model to fail.
Board oversight of stress testing
The ERCC approves the design of the scenarios in our ICAAP, ILAAP and CISA. The BRC approves the stress testing framework. The Board reviews stress test
outputs as part of the approval processes for the ICAAP, ILAAP, Bank Recovery and Resolution Directive (BRRD), our Risk Appetite and regulatory stress tests,
including CBES.
Regulatory stress tests
We take part in a number of external stress testing exercises. These can include stress tests of the UK banking system conducted by the PRA and the BoE. We
also contribute to stress tests of Banco Santander conducted by the European Banking Authority (EBA).
For more on capital and liquidity stress testing, see the ‘Capital risk’ and ‘Liquidity risk’ sections.
HOW RISK IS DISTRIBUTED ACROSS OUR BUSINESS
Economic capital
As well as assessing how much regulatory capital we need to hold, we use an internal EC model to measure our risk. We use EC to get a consistent measure
across different risk types. EC also takes account of how concentrated our portfolios are, and how much diversification there is between our various businesses
and risk types. As a consequence, we can use EC for a range of risk management activities. For example, we can use it to help us compare requirements in our
ICAAP or to get a risk-adjusted comparison of income from different activities.
Regulatory capital – risk-weighted assets
We hold regulatory capital against our credit, market and operational risks. In
2023
, over half of our total risk-weighted assets accounted for credit risk in Retail
and Business Banking. This reflects our business strategy and balance sheet.
For more on this, see ‘Risk-weighted assets’ in the ‘Capital risk’ section.
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Overview
Credit risk is the risk of financial loss due to the default or credit quality deterioration of a
customer or counterparty to which we provided credit, or for whom we have assumed a
financial obligation.
We set out how our exposures arise and our approach to credit risk across the credit
risk lifecycle. We discuss our ECL approach and the key inputs to our ECL model. We
then analyse our key metrics, credit performance and forbearance.
|
Key metrics
Stage 3 ratio of
1.51%
(
2022
:
1.26%
).
Loss allowances of
£992m
(
2022
:
£1,005m
).
Balance weighted average LTV of
66%
(
2022
:
69%
) on
new mortgage lending.
|
Exposures
(audited)
|
Retail and Business Banking
|
Consumer Finance
|
Corporate Commercial Banking
|
Corporate Centre
|
|
In Mortgages:
–
Residential mortgages for customers
with good credit quality (prime
lending).
–
We provide these mostly for owner-
occupiers, with buy-to-let mortgages
for non-professional landlords.
In Everyday Banking:
–
Unsecured lending to individuals, such
as loans, credit cards and overdrafts.
–
Banking services to businesses with
turnover up to £
simpler borrowing needs. We offer
loans, credit cards and overdrafts.
|
–
Financing for cars, vans, motorbikes
and leisure vehicles through
Santander Consumer (UK) plc
(SCUK).
–
Through our joint ventures, Hyundai
Capital UK Ltd and Volvo Car
Financial Services UK Limited, we
provide retail point of sale customer
finance and wholesale finance facilities
(stock finance).
|
–
Loans, bank accounts, treasury
services, invoice discounting, cash
transmission, trade finance and asset
finance.
–
We provide these to SMEs and mid-
sized corporates with turnover up to
£
Estate and Social Housing
associations.
|
–
Asset and liability management of our
balance sheet.
–
Exposures include financial institutions
(derivatives and other treasury
products), structured products, and
sovereign and supranational assets
chosen for diversification and liquidity.
|
We manage our portfolios across the credit risk lifecycle, from drawing up our risk strategy and planning, through assessment and origination, monitoring, arrears
management and debt recovery. We make sure the actual risk profile of our exposures stays in line with our business plans and within our Risk Appetite. We tailor
the way we manage risk to the type of product and regularly review our approach and refine it when we need to.
1. Risk strategy and planning
(
audited)
All relevant areas of the business work together to create our business plans. We aim to balance our strategy, goals, and financial and technical resources with
our Risk Appetite. To do this, we focus on economic and market conditions and forecasts, regulations, conduct matters, profitability, returns and market share.
2. Assessment and origination
(audited)
Managing credit risk begins with lending responsibly. That means only lending to customers who are committed to paying us back and can afford to, even if their
circumstances change. We perform a thorough risk assessment to make sure a customer can meet their obligations before we approve a loan. We take
proportionate steps to assess whether a customer will be able to repay the money borrowed. We do this by a series of initial affordability and credit risk
assessments. We access each customer’s credit profile and signs of how reliable they are at repaying credit. When a customer applies, we assess the data they
provide, plus data from credit reference agencies (for Retail and Business Banking and Consumer Finance) and performance on their other Santander UK
accounts (if they have any) against our Credit Policy.
Retail and Business Banking
In Mortgages, for secured loans, we assess affordability by reviewing the customer’s income and spending, their other credit commitments, and what would
happen if interest rates went up. Many of our decisions are automated as we use data available to us. We tailor our process and application assessment based on
the product. More complex transactions often need greater manual assessment using our credit underwriters’ skill and experience.
In Everyday Banking and Business Banking, many of our decisions are automated. We assess affordability by reviewing the customer’s income and spending,
including other credit commitments and adjusting for future inflation and expected interest rates.
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Credit risk mitigation
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Portfolio
|
Description
|
|
Residential mortgages
|
Collateral is in the form of a first legal charge over the property. Before we grant a mortgage, the property is valued either by a
surveyor or using automated valuation methodologies where our confidence in the accuracy of this method is high.
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|
Unsecured lending
|
There is no collateral or security tied to the loan that can be used to mitigate any potential loss if the customer does not pay us
back.
|
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Business banking
services
|
Business banking lending is unsecured. When lending to incorporated businesses, we typically obtain personal guarantees from each
director, but we do not treat these as collateral. We consider the UK Government guarantee supporting losses on amounts lent under its
Coronavirus Loan Schemes as collateral with 100% for Bounce Back Loan Scheme (BBLS) and 80% for Coronavirus Business
Interruption Loan Scheme (CBILS).
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Consumer Finance
In Consumer Finance, similar to Retail and Business Banking, many decisions are automated and we tailor the process to the product. Residual value risk is one
of our top risks.
Credit risk mitigation
|
Portfolio
|
Description
|
|
Consumer (auto) finance
|
Collateral is in the form of legal ownership of the vehicle for most loans, with the customer being the registered keeper. Only a very small
proportion of business is underwritten as a personal loan. In these cases, there is no collateral or security tied to the loan. We use a leading
vehicle valuation company to assess the LTV at the proposal stage to ensure the value of the vehicle is appropriate.
|
Corporate Commercial Banking
We assign each customer a credit rating according to the internal rating threshold, using our internal rating scale (see ‘Credit quality’ in ‘Santander UK group level
– credit risk review’ section). To do this, we look at the customer’s financial history and trends in the economy, backed up by the expert judgement of a risk analyst.
We review our internal ratings on a dynamic basis and at least once a year for those clients that are rated. We also assess the underlying risk of the transaction,
taking account of any mitigating factors (see the tables below) and how it fits with our risk policies, limits and Risk Appetite.
Responsible lending, including climate change and the transition to a low carbon economy
As part of the Banco Santander group, we comply with the Equator Principles to factor social, ethical and environmental impacts into our risk analysis and
decision making for qualifying financial transactions. We are committed to supporting clients and economies in their transition to a low carbon economy, providing
financial products and/or services to business activities that are environmentally and socially responsible. Our Environmental, Social and Climate Change (ESCC)
policy sets out how we identify, assess, monitor and manage environmental and social risks and other climate change related activities in the Oil and Gas, Power
Generation and Mining and Metals sectors and those arising from businesses engaged in soft commodities. Our ESCC policy prohibits project-related financing
for new coal-fired power plants (CFPP) worldwide and we will only work with new clients with CFPPs to provide specific financing for renewable energy projects.
In line with Banco Santander's commitment, by 2030 we will eliminate all exposure to thermal coal mining and stop providing financial services to power
generation clients with more than 10% of revenue from thermal coal.
Credit risk mitigation
significant risk transfer transactions, which typically reduce RWAs.
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Portfolio
|
Description
|
|
SME and mid corporate
|
Includes secured and unsecured lending. We can take mortgage debentures or a first charge on commercial property as collateral. Before agreeing
the loan, we get an independent professional valuation of the property. Loan agreements typically allow us to obtain revaluations during the term of
the loan. We can also take guarantees, but we do not treat them as collateral unless they are supported by a tangible asset charged to us. We also
lend against assets (like vehicles and equipment) and invoices for some customers. We value assets before we lend. For invoices, we review the
customers' ledgers regularly and lend against debtors who meet agreed criteria.
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|
Commercial Real Estate
|
We take a first charge on commercial property as collateral. The loan is subject to criteria such as the property condition, age and location, tenant
quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before advancing the loan and where appropriate, a bank
representative visits the property. We also get an independent professional valuation which typically includes a site visit. Loan agreements typically
allow us to obtain revaluations during the term of the loan.
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Social Housing
|
We take a first charge on portfolios of residential real estate owned and let by UK Housing Associations as collateral, in most cases. We revalue this
every three to five years (in line with industry practice), using the standard methods for property used for Social Housing.
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Credit risk mitigation
significant risk transfer transactions, which typically reduce RWAs.
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Portfolio
|
Description
|
|
Sovereign and
Supranational
|
In line with market practice, there is no collateral against these assets.
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Structured Products
|
These are our High Quality Liquid Assets (HQLA) in our Eligible Liquidity Pool. They are mainly Asset Backed Securities (ABS) and covered bonds,
which hold senior positions in the creditor hierarchy. Their credit rating reflects over-collateralisation in the structure and the assets that underpin their
cash flows.
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|
Financial Institutions
|
We use standard legal agreements to reduce credit risk via netting and collateralisation on derivatives, repos and reverse repos, and stock
borrowing/lending. We also reduce risk by clearing trades through central counterparties (CCPs) where possible.
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We measure and monitor changes in our credit risk profile on a regular and systematic basis against our budgets, limits and benchmarks.
Credit concentrations
A core part of our monitoring and management is a focus on credit concentrations, such as the proportion of our lending that goes to specific borrowers, groups or
industries. We set and monitor concentration limits in line with our Risk Appetite and review them on a regular basis.
–
Geographical concentrations: We set exposure limits to countries and geographies, with reference to the country limits set by Banco Santander and our own
Risk Appetite. For more geographical information, see ‘Country risk exposures’.
–
Industry concentrations: We also set exposure limits by industry sector. We set these limits based on the industry outlook, our strategic aims and desired level
of concentration, and relevant limits set by Banco Santander. We analyse committed exposures in the ‘Credit risk review’ section that follows.
Retail and Business Banking
We use IT systems and data available to us to monitor accounts. The main parts are:
–
Behavioural scoring:
we use statistical models that help predict whether a customer will have problems repaying, based on how they use their accounts
–
Credit reference agencies:
we often use data from agencies on how the borrower is handling credit from other lenders in our behaviour scoring models
–
Other Santander UK accounts:
each month, we also look at how the customer uses their other accounts with us, so we can identify problems early.
Our day-to-day retail credit risk monitoring relies on a mix of product, customer and portfolio performance measures as described above. However, changes in the
wider UK economy also impact our Mortgages and Everyday Banking portfolios. As part of our day-to-day risk monitoring, we use a Retail Risk Playbook
tolerance framework that sets out the most relevant macroeconomic variables to retail portfolio performance. We monitor these variables against our forecasts. If
the economy deviates materially from our forecasts, such as due to the effects of the cost of living crisis or high inflation, we formally review our retail risk
management policy and strategy.
We also use the Retail Risk Playbook tolerance framework and management judgements to ensure that portfolio quality remains within our Risk Appetite by
measuring against trigger values for key risk profile and performance metrics.
For secured lending, our monitoring also takes account of changes in property prices. We estimate the property’s value every three months. In most cases, we
use statistical models based on recent sales prices and valuations in that local area. Use of this model is subject to Model Risk Governance. Where a lack of data
means the model’s valuation is not available, we use the original surveyor valuation with a House Price Index (HPI) adjustment as needed.
For unsecured personal lending like credit cards and overdrafts, monitoring might lead us to raise or lower credit limits. For business banking services, we review
revolving credit facilities each year to ensure the facilities remain appropriate for the customer's financial circumstances.
Consumer Finance
In Consumer Finance, similar to Retail and Business Banking, we use IT systems and data available to us to monitor accounts, and we use the Retail Risk
Playbook tolerance framework and management judgements to ensure that portfolio quality remains within Risk Appetite. We also check the Residual Value of our
portfolio each month, using triggers set to identify any material change in trends.
Corporate Commercial Banking and Corporate Centr
e
We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We monitor detailed analyses of our credit exposures and
risk trends each month. We also report our larger exposures and risks to the BRC each month.
Our Watchlist
We also use a Watchlist for exposures subject to annual reviews to help identify potential problem debt early. Just because a customer is on our Watchlist does
not mean they have defaulted. It just means that their probability of default has increased, such as they have breached a covenant or lost a major contract.
We classify Watchlist cases as:
–
Enhanced monitoring: for less urgent cases. We monitor these cases more often and where appropriate may consider more collateral.
–
Pr
oactive management: for more urgent or serious cases. We may take steps to restructure debt including extending the term, taking more collateral, agreeing
a lower credit limit, or seeking repayment of the loan through refinancing or other means.
We assess Watchlist cases for impairment as set out in the ‘Significant Increase in Credit Risk (SICR)’ section. When a customer is in enhanced monitoring, we
do not consider it has suffered a SICR for ECL purposes, so it remains in Stage 1 for our loss allowance calculations. When a customer is in proactive
management, we consider it has suffered a SICR, so we transfer it to Stage 2 and apply a lifetime ECL for our loss allowance calculations. We take into account
any forbearance we offer. This includes any extra security, guarantees or equity available and the potential to enhance value by asset management.
In Corporate Commercial Banking, as part of our annual reviews, for loans nearing maturity, we look at the prospect of refinancing the loan on current market
terms and applicable credit policy. If this is unlikely, we put the case on our Watchlist. We manage exposures not subject to annual reviews, mainly high volume
and low value cases, using early warning indicators including credit reference agency data, supported by teams of expert analysts.
In Corporate Centre, we typically monitor the credit quality of our exposures daily. We use internal and third-party data to detect any potential credit deterioration.
4. Arrears management
(
audited)
Retail and Business Banking and Consumer Finance
We have several strategies to manage arrears that we can use as early as the day after a missed payment. We also reach out to up-to-date customers who may
be at risk of going into arrears for support purposes. We assess the financial difficulties a customer is having, so we can offer them the right support to manage
their agreement whilst in arrears. The strategy we use depends on the risk and the customer’s circumstances.
Corporate Commercial Banking and Corporate Centre
We identify problem debt by close monitoring, supported by our Watchlist process for exposures subject to annual review. We aim to identify warning signs early
by monitoring customers’ financial and trading data, checking to see they do not breach covenants, and having regular dialogue with them. We tailor our strategy
to the type of customer, their circumstances and the level of risk. We try to help our customers find their own way out of financial difficulty and agree on a plan that
works for both of us. We engage our Restructuring Recoveries team as needed on Watchlist cases and we may hand over more serious cases to them. For
exposures not subject to annual review, we have strategies to manage arrears that we can use as early as the day of the missed payment. If a case becomes
more urgent or needs specialist attention, and if it transfers to Stage 3, we transfer it to our Restructuring Recoveries team.
For more, see the Forbearance section.
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Sometimes, even when we have taken all reasonable and responsible steps to manage arrears in our Financial Support area, they are not effective. If this
happens, we may choose to end our agreement with the customer and try to recover the outstanding balance (with recourse to any associated collateral), or as
much of it as we can.
Retail and Business Banking
In Mortgages and Everyday Banking, we may use a debt collection agency, sell the debt, or take the customer to court. For retail mortgages, we may repossess
the property as a last resort or to protect it from damage or third-party claims. We make sure our estimated losses from repossessed properties are realistic by
getting two independent valuations and the estimated selling costs, and using them in our loss allowances calculations. Where we repossess a property, we do
not take ownership. We use agents to realise the value and settle the debt. Any surplus funds are returned to the borrower or dealt with in line with insolvency
rules.
Consumer Finance
In Consumer Finance, similar to Retail and Business Banking, we may use a debt collection agency or a specialist law firm to recover the balance outstanding.
We may also consider the sale of debt where all avenues have been explored.
Corporate Commercial Banking and Corporate Centre
Where we look for an exit, we aim to do this, if we can, by agreeing with the borrower that they will sell some or all their assets on a voluntary basis or agreeing to
give them time to refinance their debt with another lender. Where we cannot reach an agreement, we consider recovery options. This can be through an
insolvency proceeding, enforcing over any collateral or selling debt on the secondary market. We may also consider other legal action to recover what we are
owed. If there is a shortfall, we write it off against our loss allowances. In very rare cases, we may act as mortgagee in possession of assets held as collateral
against non-performing commercial lending. In such cases, we carry the assets on our balance sheet and classify them in line with our accounting policies.
Loan modifications
(audited)
We sometimes change the terms of a loan when a customer gets into financial difficulty (this is known as forbearance), or for other commercial reasons.
Forbearance
(audited)
We can change the terms of a customer's loan, temporarily or permanently, to help them through temporary periods of difficulty so they can get back on to
sustainable terms. We assess what we offer to make sure the customer can afford it. Forbearance improves our customer relationships and we review our
approach regularly to make sure it is still effective. We try to offer forbearance before a customer defaults and we only foreclose or repossess as a last resort.
|
Action
|
Description
|
|
Term extension
|
We can extend the loan term, making each monthly payment smaller. We may offer this if the customer is up to date with payments but shows
signs of financial difficulties. We may also offer this if the loan is about to mature and refinancing is not possible on market terms.
|
|
Interest-only
|
Historical interest-only payments due to financial difficulties are classed as forborne.
For corporate customers, interest-only concessions are considered on a case by case basis. Concessions are only granted if the nature of the
financial difficulties is assessed to be temporary. Counterparties are expected to recover in full and resume making full capital and interest
payments once they are in a stronger financial position.
|
|
Other payment
rescheduling, including
capitalisation
|
For retail customers, we may add the arrears to the mortgage balance (this is known as capitalisation) if they cannot afford to increase their
monthly payment to pay off their arrears in a reasonable time but have been making their monthly payments, usually for at least six months.
We can also capitalise property charges due to a landlord. We pay them for the customer to avoid the lease being forfeited. We may combine
this help with term extensions and, in the past, interest-only concessions. In certain cases, we may offer interest rate concessions.
For corporate customers, we may lower or stop their payments until they have time to recover. We may reschedule payments to better match
the customer’s cash flow – for example if the business is seasonal - or provide a temporary increase in facilities to cover peak demand ahead
of their trading improving. We might do this by arrears capitalisation or drawing from an overdraft. We may also offer to provide new facilities,
interest rate concessions and interest roll-up. In rare cases, we agree to forgive or reduce part of the debt.
|
When we agree forbearance, we consider the account has suffered a significant increase in credit risk (SICR), as we explain later on, and we classify it as Stage 2
or 3. A non-performing forborne account is one that has forbearance carried out in Stage 3, and a performing forborne account is one that has forbearance carried
out in Stage 2. If an account is already in Stage 2, we keep it in Stage 2 unless the account is deemed unlikely to pay, involves forgiving fees and interest or debt,
or is being granted multiple forbearances. In these cases, we move it into Stage 3. If an account is already in Stage 3, we keep it in Stage 3. A loan moves out of
forbearance once the exit criteria below are met. We monitor the performance of all forborne loans.
We signed up to the HM Treasury Mortgage Charter published in June 2023, that aims to provide more support for customers who may be struggling to maintain
their mortgage repayments. We made more customer support solutions available from July 2023, allowing customers who are up-to-date with their payments to
make interest-only payments for six months or extend their mortgage term to reduce their monthly payments. Volumes of accounts seeking more support were
less than 1% of active mortgage account stock. Mortgage Charter support solutions are not automatically classed as forbearance, unless other forbearance
criteria are met.
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Exit from forbearance criteria
|
Exit from
|
Conditions to be met
|
|
|
Cure
|
Stage 3 to Stage 2
|
For an account in Stage 3 to exit non-performing forbearance, all the following conditions must be met:
|
|
If the account was classed as Stage 3 due to being more than 90 days past due, then the account should be 90 days or less past
due
|
||
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The customer has no other material default debt with us more than 90 days past due
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If the account was classed as Stage 3 due to being unlikely to pay, then the account should no longer be deemed unlikely to pay
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Account has exited its forbearance trigger for 12 consecutive months
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If all the conditions are met, the account is re-classed as Stage 2 forbearance until the Stage 2 forbearance exit conditions set out
below are also met
|
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|
Stage 2 to Stage 1
|
For an account in Stage 2 to exit forbearance, all the following conditions must be met:
|
|
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The account is no longer in arrears, and the customer has no other material debts with us which are more than 30 days in arrears
|
||
|
The account no longer triggers SICR
|
||
|
The account has been classed as Stage 2 for at least two years since the end of the latest forbearance strategy
|
If an account fails whilst in probation to cure, i.e. in the 12 months backstop in Stage 3 or the two years in Stage 2, the probation period is reset and the account is
moved back to Stage 3.
Other forms of debt management and modifications
Retail and Business Banking
In Mortgages, apart from forbearance, we have sometimes changed the contract terms to keep a good relationship with a customer. In Mortgages and Everyday
Banking, we do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines.
Consumer Finance
We do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines.
Corporate Commercial Banking and Corporate Centre
|
Action
|
Description
|
|
Waiving or changing
covenants
|
If a borrower breaks a covenant, we can either waive it or change it, taking their latest and future financial position into account. We may
also add a condition on the use of any surplus cash (after operating costs) to pay down their debt to us.
|
|
Asking for more collateral
or guarantees
|
If a borrower has unencumbered assets, we may accept more collateral in return for revised financing terms. We may also take a
guarantee from companies in the same group and/or major shareholders. We only do this where we believe the guarantor can meet their
commitment.
|
|
Asking for more equity
|
Where a borrower can no longer pay the interest on their debt, we may accept fresh equity capital from new or existing investors to change
the capital structure in return for better terms on the existing debt.
|
We measure and control credit risk at all stages across the credit risk lifecycle. We have a range of tools, processes and approaches.
Retail and Business Banking and Consumer Finance
These businesses involve managing large numbers of accounts, so they produce a huge amount of data. This allows us to take a more analytical and data
intense approach to measuring risk. This is reflected in the wide range of statistical models we use across the credit risk lifecycle. We use:
–
Risk strategy and planning:
econometric models
–
Assessment and origination:
application scorecards, and attrition, pricing, loss allowance and capital models
–
Monitoring:
behavioural scorecards and profitability models
–
Arrears management:
models to estimate the proportion of cases that will result in possession (known as roll rates)
–
Debt recovery:
recovery models.
We assess and review our loss allowances regularly and have them independently reviewed. We look at factors such as the cash flow available to service debt.
We also use an agency to value any collateral – mainly mortgages.
Corporate Commercial Banking and Corporate Centre
We measure the credit risk on treasury products by adding their potential future exposure to market movements over their lives to their fair value. Then we add it
to any other exposure and measure the total against our credit limits for each client.
We assess our loss allowances regularly by looking at factors such as the
cash flow available to service debt and the value of collateral based on third-party professiona
l
valuations.
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Metric
|
Description
|
|
Expected Credit Loss
(ECL)
|
ECL tells us what credit risk is expected to cost us either over the next 12 months or over the lifetime of the exposure where there is
evidence of a SICR since origination. We explain how we calculate ECL below.
|
|
|
We assess each facility’s credit risk profile to determine which stage to allocate them to, and we monitor where there is a SICR and
transfers between the Stages including monitoring of coverage ratios for each stage.
|
|
|
The Stage 3 ratio
is the sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn
assets.
The Stage 3 ratio is a key indicator used to monitor underlying asset performance.
|
|
|
EL is based on the CRD IV regulatory capital rules and gives us another view of credit risk. It is the product of the probability of default,
exposure at default and loss given default, and we include direct and indirect costs. We base it on our risk models and our assessment
of each customer’s credit quality. The rest of our Risk review, impairments, losses and loss allowances refer to calculations in
accordance with IFRS, unless we specifically say they relate to CRD IV. For our IFRS impairment accounting policy, see Note 1 to the
Consolidated Financial Statements.
|
We also assess risks from other perspectives, such as geography, business area, product and process to identify areas to focus on. We also use stress testing to
establish vulnerabilities to economic deterioration. Our business segments tailor their approach to credit risk to their customers, as we explain later on.
The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure
where there is evidence of a Significant Increase in Credit Risk (SICR) since the origination date. The ECL approach
considers forward-looking data, including a
range of possible outcomes, which should be unbiased and probability-weighted to reflect the risk of a loss being incurred even when it is unlikely.
The application of the ECL impairment methodology for calculating credit impairment allowances is susceptible to change from period to period. The methodology
requires management to make judgmental assumptions in determining the estimates.
For more on our approach to making critical judgements and accounting estimates applied in calculating ECL see 'Critical judgements and accounting estimates'
Note
1
to the Consolidated Financial Statements.
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For all our portfolios,
we use five forward-looking economic scenarios.
For
2023
, they consisted of a central base case, one upside scenario and three downside
scenarios. We use five scenarios to reflect a wide range of possible outcomes for the UK economy.
We
derive our scenarios in part by using a set of parameters in GDP fan charts published by the Office for Budget Responsibility (OBR). These fan charts reflect
the probability distribution of a deviation from the OBR’s central forecast to show the uncertainty about the outcome of a variable, in this case GDP.
Once we have established the GDP paths for each scenario, we run them through the Oxford Global Economic Model (OGEM) to derive the other
macroeconomic variables, such as unemployment and house prices. These variables are the product of the GDP growth paths we have forecast and the output of
the OGEM for these growth paths. We then review them to ensure consistency with the narrative of each scenario and so changes to the variables may be
needed in some cases.
We then impose a Bank Rate profile for each scenario using expert judgement with the base case as the starting point and then adjusting this for each of the four
other scenarios based on the narratives. We produce a range of Bank Rate profiles to reflect a range of possible outcomes the Bank of England may follow
depending on how it sees the trade-off between growth and inflation evolving over the forecast period. For example, this might consist of higher rates initially in
response to inflationary concerns followed by lower rates as inflation falls towards target, and that this may be sharper in the event of a deep recession.
We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three-year planning processes, or sooner if there is a
material change in current or expected economic conditions. We refresh all our economic scenarios quarterly to reflect the latest data and OBR fan charts if these
changed, which are then reviewed and approved by the Credit Risk Provisions Forum (CRPF). The CRPF also assesses the probability weights at least once a
quarter.
We do not use consensus forecasts as inputs to our models, but we do compare the outputs of our models against consensus views for the base case, to make
sure that we understand any significant differences and address them where needed. At 31 December 2023, there were no significant differences between our
base case forecasts and the consensus views.
In 2023, we undertook a further peer benchmarking analysis of the economic scenarios, which for Q423 included the mean weighted analysis for a selection of
economic variables, including GDP, unemployment rate and HPI. This meant that we could compare our weighted scenarios against the average of our peers to
understand what differences there may be. The conclusion of this analysis demonstrated that our economic scenarios were in line with our peers although, on a
weighted basis, our house price inflation assumption reflected a more conservative view.
In 2023, we also considered any likely impact from climate risk on our forecasting approach and concluded that no adjustment to the multiple economic scenarios
for climate risk was required. This is because climate change effects are generally regarded to be relevant over a longer timeframe than our forecast period of five
years.
Our use of five scenarios is designed to reflect different possible outcomes to the base case, highlighting the upside and downside risks associated with the
central scenario. The downside risks for the UK economy include a sharp downturn in global growth, a return to upside inflation surprises which raises the cost of
living, a continuation of the very low productivity growth seen in the UK, a move to a more protectionist agenda for trade and further geopolitical events adding to
challenging economic conditions. The upside risks were more muted at the end of 2023 and include a stronger recovery in global growth, a faster fall in inflation,
coupled with further trade agreements with other countries.
Our forecasting period for GDP is five years and then we revert to the average trend growth over three years based on the OBR’s long-run GDP forecast
assumption. The reversion to mean for all macroeconomic variables is expected to take three years after the initial five-year forecast period.
Key changes to our forecasting approach in
2023
In
2023
, there were no specific changes to our forecasting approach. We incorporated the OBR's March 2023 fan chart parameters to generate the GDP paths
(excluding the base case).
We review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances and UK Government
policy which is subject to change.
In summary, the outlook for the UK economy in 2024 remains challenging due to a lack of growth, weak investment and with continuing risks to the 2% inflation
target, particularly if the situations in the Middle East and Ukraine trigger a renewed surge in oil and gas prices. Inflationary pressures could be further exacerbated
by a tight UK labour market maintaining pressure on wage growth at a time when firms are struggling to match appropriately skilled workers to available
vacancies.
|
Base case key macroeconomic assumptions
|
|
–
House price growth:
The sharp rise in mortgage rates triggered a slowdown in house price growth in recent months. With survey indicators pointing to a slump in
buyer demand as confidence is hit by a squeeze on affordability from the sharp rise in mortgage rates, house prices are expected to continue declining in the near-term.
However, as the supply of housing is also weak this has helped to limit the overall fall in house prices compared to previous downturns despite the sharp rise in interest
rates. We forecast a c.2% year-on-year decline in house prices by the end of 2023, with a further fall of 1% by the end of 2024. Looser monetary policy from the second
half of 2024 enables house price growth to recover with growth back to average levels by the end of the forecast period.
|
|
–
GDP:
While the monthly GDP estimate for October 2023 showed the economy shrinking marginally with a 0.3% month-on-month fall, this aligns to the picture of a
stagnating UK economy. The PMI data for November 2023 is marginally above 50 and suggests growth to be modest in Q423. As such, the near-term outlook for
growth remains broadly flat - but as the effects of higher interest rates filter through the economy this year and the bulk of fixed rate mortgages are renewed, consumer
spending growth could fall back sharply and with business insolvencies expected to increase, there are still downside risks to our forecast of 0.4% growth in 2024.
|
|
–
Unemployment rate:
Unemployment remained flat in October 2023 at 4.2% based on the ONS experimental data and combined with other surveys such as REC,
suggest that the labour market is slowly loosening. With companies under pressure from rising debt servicing costs and higher wages, it is likely that some will become
insolvent and others find that demand for their goods and services reduces as households restrict their spending. We do not envisage a large rise in unemployment
compared to previous recessions. The rate peaks at 4.8% by the end of 2024, in part impacted by the ongoing return of previously inactive workers to the labour force.
|
|
–
Bank Rate:
The Monetary Policy Committee (MPC) kept rates at 5.25% at the December 2023 meeting. Our base case assumes no further rate rises with the MPC
expected to start loosening monetary policy in Q224, with rates ending 2024 at 4.50%. Further cuts through the rest of the 5-year forecast period leaves bank rate at
3.00% by the end of 2028.
|
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|
|||
In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. For
instance, it is likely that the reduction in the UK workforce will continue and this will have a knock-on impact for the economy, particularly if there are shortages of
skilled workers in particular sectors. This is reflected in an average annual growth expectation of 1.6%, in line with the OBR’s latest estimate of the UK’s long run
average growth rate.
Key changes to our base case in
2023
For our base case, we no longer expect a short recession given that the economy has been more resilient than expected in 2023. However, risks around this
assumption remain as the full effects of higher interest rates have yet to be felt across the UK economy which keeps growth in 2024 significantly below average.
Our base case was updated to reflect the latest market data and to broadly align with the latest consensus estimates. The most notable change was to HPI with
expected house price falls now lower in 2023 and 2024.
Other scenarios
Based on this revised base case, we reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These
include (i) persistent above target inflation over the forecast period; (ii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iii) labour market
frictions due to skills mismatches and a shrinking workforce as some discouraged workers leave altogether (for example older UK-born workers retiring early and
longer term sickness levels remaining above pre-pandemic levels); and (iv) the global economy recovering more swiftly from higher inflation.
To reflect these potential outcomes, we continue to use the base case and four additional scenarios, which we consider sufficient to reflect all the above potential
outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we concluded that only one upside scenario would be
needed to reflect the upside risks to the base case. As with the base case, the scenarios are forecast over a five-year period and then mean revert over the next
three years to the OBR's latest estimate of the UK's long run average growth rate.
The other scenarios are:
One upside scenario
This scenario has a quicker recovery than the Baseline and is a bull case to the base forecasts. It assumes that inflation falls back more swiftly than in the base
case, helped by lower growth in wages and pass through of lower commodity prices. This allows the Bank of England to cut rates earlier, bringing them back
towards what might be considered the neutral rate. This results in higher consumer and business confidence enabling higher levels of spending with savings rates
returning to levels consistent with economic growth as real earnings growth returns. Unemployment peaks at a slightly lower level than the base case and drops
more quickly than the base, ending the 5-year forecast period at 3%. The Bank Rate profile is lower than the base case as inflation returns to target at a faster
pace.
Three downside scenarios
The downside scenarios capture a range of risks, including continuing weaker investment, a larger negative impact from the EU trade deal and a continuing and
significant mismatch between job vacancies and skills, as well as a smaller labour force.
Downside 1
- This scenario is a bear case to the baseline. It assumes that the fall in economic growth is sharper and that there is a recession. In this scenario,
consumers keep savings rather than spend as consumer confidence remains extremely low while households are worried about the prospect of losing their jobs.
House prices fall further than in the base case as more households look to downsize in order to lower their mortgage repayments. With inflation remaining above
target, Bank Rate continues to increase as core inflation remains above the baseline view before cuts start as inflation falls back.
Stubborn inflation
- This scenario considers the effect on the UK economy of a persistent inflationary environment. Here inflation remains above target for much
of the forecast period. This persistent inflation is created by a combination of factors, including higher energy costs exacerbated by the Ukraine/Russia crisis and
curtailment of oil supply by OPEC countries; continuous wage rises resulting in a spiral effect pushed by increasing numbers of strikes and falling productivity.
Despite the peak in inflation having already passed in Q422, inflation remains slightly above the 2% target over the 5-year forecast period. The 2.8% peak to
trough fall in GDP is similar to the early 1980s recession due to inflation remaining higher for longer, which in turn reduces households' real incomes and therefore
consumption. This is despite higher wage settlements due to increased strike action. Unemployment peaks at 6.2% in 2026 as although inflation eventually
returns to target, Bank Rate remains at higher levels compared to recent history and growth is still muted due to weak productivity as investment levels remain
low. The large increases in Bank Rate and falling real incomes result in house prices falling by c.26%.
Downside 2 -
The scenario shows a marked fall in GDP, with rising unemployment and falling house prices
reflecting the ongoing issues of a higher interest rate
environment and above target inflation, which feeds across the whole economy
. It also reflects the ongoing strike action by various unions pushing for stronger pay
growth, alongside dealing with potential blackouts
caused by an increase in
energy shortage over the winter months in Q423 and into early 2024. It also assumes
that major risk events continue to occur exposing risks to countries’ fiscal position and the means to respond to such events. For this scenario, an overlay to the
unemployment rate was also made to the model output from the OGEM. This was to account for the possibility of a recession of similar magnitude to that of
2008/09 where the unemployment rate peaked at 8.5%.
Key changes to our alternative scenarios in
2023
In 2023 we did not make any methodological changes to the scenarios.
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|
Annual Report 2023
|
Santander UK plc
49
|
|||
Our macroeconomic assumptions and their evolution throughout the forecast period for each of the scenarios at
31 December 2023
were:
|
Upside
|
Base case
|
Downside 1
|
Stubborn
Inflation
|
Downside 2
|
Weighted
(4)
|
||
|
%
|
%
|
%
|
%
|
%
|
%
|
||
|
GDP
(1)
|
2022 (actual)
|
|
|
|
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
2024
|
|
|
(
|
(
|
(
|
(
|
|
|
2025
|
|
|
|
(
|
(
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
2027
|
|
|
|
|
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
5-year average increase/decrease
|
|
|
|
(
|
|
N/A
|
|
|
Peak/(trough) at
(2)(3)
|
|
|
(
|
(
|
(
|
(
|
|
|
Bank Rate
(1)
|
2022 (actual)
|
|
|
|
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
2024
|
|
|
|
|
|
|
|
|
2025
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
2027
|
|
|
|
|
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
5-year end period
|
|
|
|
|
|
N/A
|
|
|
Peak/(trough) at
|
|
|
|
|
|
|
|
|
HPI
(1)
|
2022 (actual)
|
|
|
|
|
|
|
|
2023
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
2024
|
|
(
|
(
|
(
|
(
|
(
|
|
|
2025
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
2027
|
|
|
|
|
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
5-year average increase/decrease
|
|
|
(
|
(
|
(
|
N/A
|
|
|
Peak/(trough) at
(2)
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
Unemployment
(1)
|
2022 (actual)
|
|
|
|
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
2024
|
|
|
|
|
|
|
|
|
2025
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
2027
|
|
|
|
|
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
5-year end period
|
|
|
|
|
|
N/A
|
|
|
Peak/(trough) at
|
|
|
|
|
|
|
(1)
GDP is the calendar year annual growth rate, HPI is Q4 annual growth rate and all other data points are at 31 December in the year indicated.
(2)
GDP peak taken from GDP level at Q2-23 and HPI peak taken from HPI level at Q3-22.
(3)
Reported as Peak/(trough) from 2023 to align with other metrics.
(4)
The weighted peak to trough and 5 year peak calculations are based on the annual profiles shown.
|
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|
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statements
|
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information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
50
|
|||
The table below sets out our macroeconomic assumptions and their evolution throughout the forecast period for each of the five scenarios at
31 December 2022
:
|
Upside
|
Base case
|
Downside 1
|
Stubborn
Inflation
|
Downside 2
|
Weighted
(5)
|
||
|
%
|
%
|
%
|
%
|
%
|
%
|
||
|
GDP
(1)
|
2021 (actual)
|
|
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
2023
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
2024
|
|
|
(
|
(
|
(
|
|
|
|
2025
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
5-year average increase/decrease
|
|
|
(
|
(
|
(
|
|
|
|
Cumulative growth/(fall) to peak/(trough)
(2)(4)
|
|
|
(
|
(
|
(
|
|
|
|
Bank Rate
(1)
|
2021 (actual)
|
|
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
2024
|
|
|
|
|
|
|
|
|
2025
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
5-year end period
|
|
|
|
|
|
|
|
|
Peak/(trough) at
(3)
|
|
|
|
|
|
|
|
|
HPI
(1)
|
2021 (actual)
|
|
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
2023
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
2024
|
(
|
|
(
|
(
|
(
|
(
|
|
|
2025
|
|
|
(
|
(
|
(
|
(
|
|
|
2026
|
|
|
(
|
(
|
|
|
|
|
5-year average increase/decrease
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
Peak/(trough) at
(3)
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
Unemployment
(1)
|
2021 (actual)
|
|
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
2024
|
|
|
|
|
|
|
|
|
2025
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
5-year end period
|
|
|
|
|
|
|
|
|
Peak/(trough) at
(3)
|
|
|
|
|
|
|
(1)
GDP is the calendar year annual growth rate, HPI is Q4 annual growth rate and all other data points are at 31 December in the year indicated.
(2)
This is the cumulative growth for the 5-year period.
(3)
For GDP and house price growth it is the peak to trough change within the 5-year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.
(4)
If we had calculated GDP on the peak/(trough) basis as adopted for 2023 our upside scenario would have been (1.5%); base case scenario (1.9%); downside 1 (2.7%); stubborn inflation (4.0%); downside 2
(8.8%).
(5)
The weighted peak to trough and 5-year peak calculations are based on the annual profiles shown.
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|
Annual Report 2023
|
Santander UK plc
51
|
|||
Each quarter, we undertake a full review of the scenario weights we apply. We consider the weighting of the economic scenarios as a whole, while ensuring that
the scenarios capture the non-linear distribution of losses across a reasonable range. To support our initial assessment of the weighting of a scenario, we
undertake a Monte Carlo analysis to ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed
average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring based on
past experience and therefore assign a weight to that scenario.
|
Upside
|
Base case
|
Downside
1
|
Stubborn
Inflation
|
Downside
2
|
Weighted
|
|
|
Scenario weights
|
%
|
%
|
%
|
%
|
%
|
%
|
|
2023
|
|
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
2023
compared to
2022
We continue to use both the entire historical GDP data set available for the Monte Carlo analysis to smooth out the large GDP data swings seen in the pandemic
as well as the data set from 2009 onwards. The CAGRs are now returning to more 'normal' levels associated with our scenarios as the economy unwinds from the
2020 shock. For H223, the base case using the 2009 data set show that the base case sits around the 50th probability path and that the downside scenarios sit
between the 60th to 80th probability paths suggesting that a lower weight than the base case remains appropriate.
We also need to consider the UK economic and political environment when applying weights. Given the current cost of living crisis, we remain of the view that the
risks to UK growth are still biased to the downside and include: further geopolitical events creating more challenges for economies both in the UK and abroad; the
potential for further upside inflation surprises causing inflation to stay above target for longer, raising the cost of living and so reducing consumer demand;
continuing weak investment reflecting the uncertain nature of the economic environment; and a continuing and significant mismatch between vacancies and skills
along with a smaller labour force, which may bring disruption to any recovery in the latter years of the forecast.
In 2023, we increased the weight on the Upside scenario by 5% with a corresponding decrease in our Downside 1 to rebalance the overall weighted ECL. It was
also to reflect both the change in the fan chart parameters used to determine the Upside and Downside 1 scenarios and the fact that the economic growth outlook
has improved slightly since the end of 2022.
that suggests the customer is unlikely to pay. The data we have on customers varies across our business segments. It typically includes where:
|
Retail and Business Banking and Consumer Finance
|
|
–
They have been reported bankrupt or insolvent and are in arrears
|
|
–
Their loan term has ended, but they still owe us money more than three months later
|
|
–
They have had forbearance while in default and have failed to perform under the new arrangement terms, or have had multiple forbearance. Performing forborne
accounts while not in default are reported in Stage 2
|
|
–
We have suspended their fees and interest because they are in financial difficulties
|
|
–
We have repossessed the property.
|
|
Corporate Commercial Banking and Corporate Centre
|
|
–
They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as another lender calls in a loan
|
|
–
Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract
|
|
–
They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default
|
|
–
Their loan is unlikely to be refinanced or repaid in full on maturity
|
|
–
Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increase in market value
|
|
–
Loans restructured under financial difficulties, classified as forborne transactions, in last 12 months.
|
Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, there are differences with the default definitions for ECL
purposes. The main differences are as follows:
–
Performing forborne accounts while not in default are in Stage 2 until they cure their forbearance status (measured as 12 consecutive months of successful
payments).
–
Performing non-forborne accounts, which under our internal rating-based basis are subject to a 3-month cure period. For accounting purposes, we classify
them in Stage 2 until they cure all SICR triggers.
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|
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Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual term of the loan, or
the behavioural term for a revolving facility. Loans which have not experienced a SICR are provided for on a 12-month basis. We assess the credit risk profile of
each facility to determine which of three stages to allocate them to:
–
Stage 1:
when there has been no SICR since initial recognition. We apply a loss allowance equal to a 12-month ECL i.e. the proportion of lifetime expected
losses that relate to that default event expected in the next 12 months
–
Stage 2:
when there has been a SICR since initial recognition, but the exposure is not considered credit impaired. We apply a loss allowance equal to the
lifetime ECL i.e. the expected loss resulting from all possible defaults throughout the residual life of a facility
–
Stage 3:
when the exposure is considered credit impaired. We apply a loss allowance equal to the lifetime ECL. Objective evidence of credit impairment is
required. For more, see the section ‘Definition of default (Credit impaired)’ above.
We use quantitative, qualitative and backstop criteria to identify exposures that suffer a SICR.
The
Credit Risk Provisions Forum (CRPF) reviews and approves
our SICR thresholds periodically.
The
Board Audit Committee reviews and challenges their appropriateness each year, or more often if we change them.
Quantitative criteria
We use quantitative criteria to identify where an exposure has increased in credit risk. We base our criteria on whether any increase in the lifetime PD since
origination exceeds a threshold in relative and absolute terms. We base the value anticipated at origination on similar assumptions and data to the ones we use at
the reporting date, adjusted to reflect the account surviving to that date. The comparison uses either an annualised lifetime PD, where the lifetime PD is divided by
the forecast period, or the absolute change in lifetime PD since origination. These two sets of criteria are used to determine whether a significant increase of credit
risk has concurred since origination.
The criteria for
2023
and
2022
were:
|
Retail and Business Banking
|
Consumer Finance
(2)
|
Corporate
Commercial Banking
|
Corporate Centre
|
|||
|
Mortgages
|
Everyday Banking
(1)
|
|||||
|
Personal loans
|
Credit cards
|
Overdrafts
|
||||
|
|
|
|
|
|
|
Internal rating method
|
(1)
For larger business banking customers, we apply the same criteria that we use for Corporate Commercial Banking.
(2)
Consumer Finance
use the comparison of lifetime PDs to determine Stage allocation, unlike other products which first turn the lifetime PD into an average yearly PD (annualised) and then do the comparison.
Qualitative criteria
|
Retail and Business Banking
|
Consumer Finance
|
Corporate
Commercial Banking
|
Corporate Centre
|
|||
|
Mortgages
|
Everyday Banking
(1)
|
|||||
|
Personal loans
|
Credit cards
|
Overdrafts
|
||||
|
– In forbearance
– Default in last 24m
– 30 Days past due
(DPD) in last 12m
– Bankrupt
– £100+ arrears
|
– In Collections
– Default in last 12m
– £50+ arrears
|
– In forbearance
– Default in last 12m
– In Collections
– £100+ arrears
– Behaviour score
indicators
|
– Fees suspended
– Default in last 12m
– Debit dormant 35
days
– Any excess in month
|
– In forbearance
– Deceased or
Insolvent
– Court ‘Return of
goods’ order or
Police watchlist
– Agreement
terminated
– Payment holiday
– Cash Collection
|
– In forbearance
– Default in last 12m
– Watchlist: proactive
management
– Default at proxy
origination
|
– Watchlist: proactive
management
|
(1)
For larger business banking customers, we apply the same criteria that we use for Corporate Commercial Banking.
We continue to apply the additional qualitative assessment that was introduced as part of a Judgemental Adjustment that commenced during 2022 in response to
the cost of living crisis. Exposures that were deemed more significantly impacted by cost of living pressures based on indebtedness and disposable income
thresholds were migrated to Stage 2. See 'Judgemental Adjustments (JAs)' below for more details.
Backstop criteria
As a backstop, we classify all exposures more than 30 or 90 DPD in at least Stage 2 or in Stage 3, respectively. This means that we do not rebut the backstop
presumptions in IFRS 9 (i.e. credit risk has significantly increased if contractual payments are more than 30 DPD) relating to either a SICR or default.
Improvement in credit risk or cure
We transfer Stage 3 exposures to Stage 2 or Stage 1 when we no longer consider them to be credit impaired. We transfer Stage 2 exposures to Stage 1 when
they no longer meet the stage 2 SICR criteria. Where we identified a SICR using quantitative criteria, we transfer the exposures to Stage 1 when they no longer
meet the original PD-based transfer criteria. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before we
transfer the exposure to Stage 1. For a loan to exit forbearance, it must meet the conditions set out in the section ‘Forbearance’.
|
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|
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|
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|
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53
|
|||
comparisons against forecasts, and inputs from expert teams who manage key portfolio risks. We only recognise a JA if its expected impact is over
£
1
m
and keep
it in place until we no longer need it. This is usually when we build it into our core credit model or the conditions that led to raising the JA no longer exist.
Our Risk Provisions Forecasting team calculate JAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a
consistent and controlled manner. We apply standard end-user computing controls to JAs expected to be in place for more than six months.
The CRPF reviews
and approves all JAs on a quarterly basis.
|
Retail and Business Banking
|
|||||||
|
Everyday Banking
|
Consumer
Finance
|
CCB
|
Corporate
Centre
|
Total
|
|||
|
Mortgages
|
Credit Cards
|
Other
|
|||||
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Modelled ECL
|
|
|
|
|
|
|
|
|
Individually assessed
|
|
|
|
|
|
|
|
|
ECL before JAs
|
|
|
|
|
|
|
|
|
JAs (excluding Affordability and Cost of Living JAs)
|
|||||||
|
Long-term indeterminate arrears
|
|
|
|
|
|
|
|
|
12+ months in arrears
|
|
|
|
|
|
|
|
|
UPL loss floor
|
|
|
|
|
|
|
|
|
Model underestimation
|
|
|
|
|
|
|
|
|
Corporate single large exposure
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
(
|
|
(
|
|
Total JAs (excluding Affordability and Cost of Living
JAs)
|
|
|
|
|
(
|
|
|
|
Affordability and Cost of Living JAs
|
|||||||
|
Corporate lending to segments affected by supply chain
pressures
|
|
|
|
|
|
|
|
|
Secured affordability
|
|
|
|
|
|
|
|
|
Unsecured affordability
|
|
|
|
|
|
|
|
|
Mortgage refinancing risk
|
|
|
|
|
|
|
|
|
SME debt burden
|
|
|
|
|
|
|
|
|
Total Affordability and Cost of Living JAs
|
|
|
|
|
|
|
|
|
Total JAs
|
|
|
|
|
|
|
|
|
Total ECL
|
|
|
|
|
|
|
|
|
2022
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Modelled ECL
|
|
|
|
|
|
|
|
|
Individually assessed
|
|
|
|
|
|
|
|
|
ECL before JAs
|
|
|
|
|
|
|
|
|
JAs (excluding Affordability and Cost of Living JAs)
|
|||||||
|
Long-term indeterminate arrears
|
|
|
|
|
|
|
|
|
12+ months in arrears
|
|
|
|
|
|
|
|
|
UPL loss floor
|
|
|
|
|
|
|
|
|
Model underestimation
|
|
|
|
|
|
|
|
|
Corporate single large exposure
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total JAs (excluding Affordability and Cost of Living
JAs)
|
|
|
|
|
|
|
|
|
Affordability and Cost of Living JAs
|
|||||||
|
Corporate lending to segments affected by supply chain
pressures
|
|
|
|
|
|
|
|
|
Mortgage affordability
|
|
|
|
|
|
|
|
|
Retail Unsecured Affordability
|
|
|
|
|
|
|
|
|
SME debt burden
|
|
|
|
|
|
|
|
|
Total Affordability and Cost of Living JAs
|
|
|
|
|
|
|
|
|
Total JAs
|
|
|
|
|
|
|
|
|
Total ECL
|
|
|
|
|
|
|
|
|
Strategic Report
|
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|
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|
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|
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|
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|
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|
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|
|||
–
Long-term indeterminate arrears:
To mitigate the risk of model underestimation, we fully provide for accounts in arrears which have neither repaid (cured)
nor been written-off after a period of two years for unsecured portfolios or five years for secured portfolios. For our secured portfolios, we use expected security
valuations at the point of repossession to estimate the adjustment. At
31 December 2023
, we only had to make an adjustment for mortgages. When calculating
this JA, we assume a two year delay in the time to repossessions which reflects experience and ensures the LTVs are impacted by our multiple scenario
forecasts for HPI. Over the medium term, as we continue to address long-term arrears in the portfolio, we expect the need for this JA will reduce.
Had
management assumed no delay in repossessions, the JA would be
£
12
m
.
–
12+ months in arrears:
To mitigate the risk of model underestimation, we fully provide for mortgage accounts more than 12 months past due after deducting a
historically observed self-cure rate. When calculating this JA, we assume a two year delay in the time to repossessions which reflects experience and ensures
the LTVs are impacted by our multiple scenario forecasts for HPI. Over the medium term, as we continue to address long-term arrears in the portfolio, we expect
the need for this JA will reduce.
Had management assumed no delay in repossessions, the JA would be
£
6
m
.
–
UPL loss floor:
We use this JA to address the perceived macroeconomic insensitivity in our Unsecured Personal Loans (UPL) models. This arises where
historical analysis of losses shows a larger correlation to the International Labour Organisation (ILO) unemployment forecast than the model gives. The JA then
uplifts the lifetime losses expected in each of the
macroeconomic scenarios in the model to meet the expected losses the historical analysis predicts.
–
Model underestimation:
During the pandemic, the government introduced various support schemes which resulted in built up savings and subdued arrears
and defaults. This JA reduces the risk of potential ECL underestimation caused by the artificially low modelled PDs.
Had management applied the same PD
uplift on the upside scenario, the JA would be
£
13
m
. Had management applied the same PD uplift on the Downside 3 scenario as the Base case, Upside and
Downside 1 scenarios, the JA would be
£
65
m
.
–
Corporate single large exposure:
This JA safeguards against individual large exposures defaulting. We currently use the JA to safeguard against two
historically observed single name large losses in CCB. We continue to assess this risk over the medium term based on actual experience and refine the
estimate based on changes in our portfolio credit quality and loan size mix.
Had management assumed only one average loss was incurred, the JA would be
£
12
m
. The JA would be
£
35
m
assuming three average losses were incurred. This JA is still needed given UK corporate insolvencies have risen to a 30-year
high. In the current high-interest rate environment, the risk of single name defaults which incur high losses is considered greater than before as government
support schemes ceased.
–
Other:
This includes adjustments for CCB and mortgages. In CCB, we calibrate our corporate model PDs based on a historical model development
observation period. We hold a JA to recalibrate these PDs to reflect more recent experience. This JA will be embedded into the model in 2024 with no material
net impact expected. In mortgages, this JA includes a similar adjustment to recalibrate the PD and LGDs to exclude the period impacted by Covid-19.
Affordability and Cost of Living JAs
–
Corporate lending to segments affected by supply chain pressures:
This JA reflects the corporate lending risks to those sectors susceptible to high
inflation and energy prices, higher input costs, potential for lower consumer and business demand and exposure to supply chain pressures. We updated the
assumptions of this JA to reflect the available historical default emergence of the sectors in scope of the JA. This JA calculates ECL depending on customers'
risk profiles in stage 1 and transfers the customers into stage 2. In the case of those customers already in stage 2 the JA is calculated by stressing PD levels
according to the risk profile of those customers.
The range for this JA can be between
£
16
m
to
£
58
m
depending on PD assumptions of high and severe
sectors.
–
Secured affordability:
We use this JA to identify over-indebted customers who, in the current high-interest rate environment, are more susceptible to stress.
The JA uses available bureau information (Consumer Indebtedness Index (CII) 40) and classifies over-indebted customers as Stage 2, which are
subsequently provided for on a lifetime basis. The JA
reflects the most recent available performance information for customers in scope of the judgement. At
31
December 2023
, these accounts made up a significant amount of the total mortgage Stage 2 population as
£
2.9
bn
mortgages were moved from Stage 1 into
Stage 2 as a result.
Had management lowered the CII threshold to
30
, the JA would be
£
21
m
. Had management increased the CII threshold to
50
, the JA
would be
£
8
m
.
–
Unsecured affordability
:
The JA accounts for repayment affordability risk amongst customers with low disposable income. We use a combination of
performance indicators and forward-looking estimated disposable income to identify the number of unsecured customers that may struggle to meet their
contractual obligations in the current macroeconomic environment. Their overall level of unsecured debt is also considered (for Credit Cards and Banking
products) to determine whether they can absorb additional financial stress.
Had management not considered the total level of unsecured debt as an additional
filter to identify customers in scope of the JA, the JA would be
£
47
m
. Had management considered the same level of Total Unsecured Debt (TUD) for UPL
exposures as for Cards and Banking, the JA would be
£
31
m
.
–
Mortgage refinancing risk:
We introduced this JA in December
2023
. It considers the risk of mortgage customers being unable to afford their new mortgage
instalment after re-mortgaging in the current high-interest rate environment. The JA assesses the likely mortgage payment against the stressed interest rate that
customers had been assessed against at the point of application. Customers that are likely to secure rates above their stress levels are considered at risk of not
being able to afford their new mortgage. Their respective PDs are uplifted to account for the elevated levels of defaults observed for the most recent cohorts of
refinanced mortgages. The JA transfers
£
6.8
bn
of exposures into Stage 2. The JA was designed using some profiling characteristics of customers that took
advantage of the Mortgage Charter government scheme as some of these accounts are considered to be at higher risk of arrears. Had management replaced
the probability weighted interest rate view with a flat
5
%
forecast, the JA would be
£
9
m
. Had management assumed a flat
6
%
forecast, the JA would be
£
22
m
.
–
SME debt burden:
This JA takes account of the potential debt burden risk of unsecured lending to our SME customers who also took a BBL. This does not
incorporate the credit risk on BBLs as these are government guaranteed, but instead considers the possible impact on repayment of other lending with us.
2023
compared to
2022
JAs reduced from
£
296
m
to
£
184
m
.
The proportion of JAs to total ECL decreased from
29%
to
19%
. This was mainly due to the models reacting to the economic
environment normalising post Covid-19, reducing the need for JAs. In 2023, we expanded the scope of the Mortgage Affordability JA to include Consumer
Finance (previously included in Other) and renamed it as the Secured Affordability JA. We also renamed the Retail Unsecured Affordability JA as the Unsecured
Affordability JA with no change in the scope. In addition, we introduced a Mortgage Refinancing risk JA to target customers susceptible to refinance risk in
response to the cost of living crisis and increased interest rates. In 2023, in response to increasing regulatory requirements under SS1/23, we introduced a JA
framework to further enhance the governance around judgements.
In 2023 and 2022, we assessed the risks to asset valuations in the customer loan book from both transitional and physical risks associated with climate change. At 31 December 2023
and 2022, we did not consider it appropriate to recognise a climate risk related JA for the following reasons:
–
The behavioural life of the loan book is less than five years. Any material transitional risks are generally regarded to be relevant over a longer timeframe than five years and, as such,
the risk predominantly relates to assets yet to be written;
–
There have been no observed default events or SICRs due to climate change for any part of the loan book;
–
The absolute exposure to fossil fuel industries is not material. On an individually assessed basis, clients in these industries are highly rated and their markets remain highly liquid;
–
The residual value of automotive vehicles might be impacted by diesel obsolescence and the transition to electric vehicles. The residual value risk is already set at the more cautious
end of the acceptable range to capture the inherent risk of diesel obsolescence and measurement uncertainty of electric vehicles;
–
ECL calculations are based on multiple forward-looking economic scenarios developed by management covering a period of
5
years
, during which timeframe climate change risks
may crystallise;
–
The proportion of mortgage loans subject to flood and subsidence risk is not material. The terms of our mortgage lending also require homeowners to have an active flood protection
at any point of the contract.
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|
|||
We assign each corporate borrower an internal credit rating based on our internal rating scale. To do this, we look at the customer’s financial history and trends in
the economy backed up by the expert judgement of a risk analyst. We review our internal ratings on a dynamic basis and at least once a year. The internal risk
rating is used to determine the Probability of Default for a client.
We assess the ECL requirement for large single name corporate exposures on an individual basis when they meet our definition of default and are transferred into
Stage 3. This assessment takes into consideration the latest specific information about the counterparty to determine a probability weighted ECL based on a best,
worst and mid case outcome.
For those loans that were in default (i.e. Stage 3), the ECL net of government guarantee was
£
124
m
at 31 December 2023 (2022:
£
112
m
). Had management assumed the best or worst outcome in terms of loss estimates, the ECL could have been within a range of
£
42
m
to
£
209
m
.
The ECL allowance is sensitive to the methods, assumptions and estimates underlying its calculation. For example, management could have applied different
probability weights to the economic scenarios. In addition, the ECL for residential mortgages is significantly affected by the HPI assumptions which determine the
valuation of collateral used in the calculations.
Had management used different assumptions on probability weights and HPI, a larger or smaller ECL charge would have resulted that may have had a material
impact on the ECL allowance and profit before tax.
The tables below show the ECL allowances that would have arisen had management applied a 100% weight to each economic scenario. The allowances were
calculated using a stage allocation appropriate to each scenario and differs from the probability-weighted stage allocation used to determine the ECL allowance
shown above. For exposures subject to individual assessment, the distribution of ECL which could reasonably be expected has also been considered, assuming
no change in the number of cases subject to individual assessment, and within the context of a potential best to worst case outcome.
|
Upside
|
Base case
|
Downside 1
|
Stubborn
Inflation
|
Downside 2
|
Weighted
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Exposure
|
|
|
|
|
|
|
|
Retail and Business Banking
|
|
|
|
|
|
|
|
Of which:
|
||||||
|
–
Mortgages
|
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
|
ECL
|
|
|
|
|
|
|
|
Retail and Business Banking
|
|
|
|
|
|
|
|
Of which:
|
||||||
|
–
Mortgages
|
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
|
2022
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Exposure
|
|
|
|
|
|
|
|
Retail and Business Banking
|
|
|
|
|
|
|
|
Of which:
|
||||||
|
–
Mortgages
|
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
|
ECL
|
|
|
|
|
|
|
|
Retail and Business Banking
|
|
|
|
|
|
|
|
Of which:
|
||||||
|
–
Mortgages
|
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
ECL was broadly flat in 2023. In Retail and Business Banking, Mortgages ECL decreased as house prices held up better than expected and Unsecured lending
ECL increased in line with arrears. These are yet to rise above pre Covid-19 levels. CCB ECL decreased due to a small number of default cases that were exited
late in 2023. The value of JAs decreased in 2023 with models better reflecting the economic environment as the economic distortion caused by Covid-19 reduced.
|
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|
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|
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|
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|
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|
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|
|||
Given the relative size of our residential mortgage portfolio, management considers that changes in HPI assumptions used to calculate the ECL allowance for
residential mortgages would have the most significant impact on the ECL allowance. The table below shows the ECL impact on the profit before tax of applying an
immediate and permanent house price increase/decrease to our unweighted base case scenario, and assumes no changes to the stage allocation of exposures.
|
Increase/decrease in house prices
|
||||
|
+20%
|
+10%
|
-10%
|
-20%
|
|
|
Increase/(decrease) in profit before tax
|
£m
|
£m
|
£m
|
£m
|
|
2023
|
|
|
(
|
(
|
|
2022
|
|
|
(
|
(
|
2023
compared to
2022
The sensitivity to decreases in house prices was similar to
2022
, but the sensitivity to increases in house prices was higher than in 2022. This is a function of the
model and JA interaction under a more benign economic environment. The drop in the average property value in
2023
resulted in a bigger potential benefit of
future house price increases, which was the main driver for the higher sensitivity towards +10/+20% house price increases.
Both the modelled ECL and the JAs were stressed in the sensitivity analysis to assess the potential impact on ECL from housing market volatility.
the sum of the monthly ECLs over the forecast period, while the 12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted
value for the relevant forecast month of the product of the following factors:
|
Factor
|
Description
|
|
|
|
|
Probability of default
(PD)
|
The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in
the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes
less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing
economics. We support this with historical data analysis.
|
|
Exposure at default
(EAD)
|
The amount we expect to be owed if a default event occurs. We determine EAD for each month of the forecast period by the expected payment
profile, which varies by product. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust
this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default.
For revolving products, or amortising products with an off-balance sheet element, we determine EAD using the balance at default and the
contractual exposure limit. We vary these assumptions by product and base them on analysis of recent default data.
|
|
Loss given default
(LGD)
|
Our expected loss if a default event were to occur. We express it as a percentage and calculate it based on factors that we have observed to
affect the likelihood and/or value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product
is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type.
|
We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD
to reflect the default status of the account, considering the current DPD and loan-to-value. PD and SR are not required for accounts in default.
Forecast period
We base the forecast period for amortising facilities on the remaining contract term. For revolving facilities, we base it on the behavioural, rather than contractual,
characteristics of the facility type. In some cases, we shorten the period to simplify the calculation. If we do this, we apply a Judgemental Adjustment to reflect our
view of the full lifetime ECL.
Forward-looking information
Our assessments of a SICR and the calculation of ECL incorporate forward-looking data. We perform historical analysis and identify the key economic variables
that impact credit risk and ECL for each portfolio. These can include house price growth, GDP, unemployment rate and BoE Bank Rate. Where applicable, we
incorporate these economic variables and their associated impacts into our models.
Economic forecasts have the most impact on ECL measurement for residential mortgages and, to a lesser extent, corporate loans. This is due to the long
behavioural lives and large size of these portfolios. Economic forecasts have less impact on ECL for other portfolios due to their shorter lives and smaller size.
Grouping of instruments for losses measured on a collective basis
We measure ECL at the individual financial instrument level. However, where we have used internal capital or similar models as the basis for our ECL models, this
typically results in a large number of relatively small homogenous groups. We typically group instruments where they share risk characteristics using statistical
models and assess them for impairment collectively.
We use this approach for all our Retail and Business Banking and Consumer Finance portfolios,
and
SME
customers in Corporate Commercial Banking
.
We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed.
For all our portfolios (whether we assess them for impairment individually or collectively) we use five forward-looking economic scenarios.
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|
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|
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|
|||
Our Risk Methodology team developed our ECL models (except for the external models we use, such as OGEM which we described earlier in ‘Our forecasting
approach’), and our Independent Validations team reviews all material models.
As model owners, our
Risk Provisioning Forecasting team run the models to
calculate our ECL each month. The models are sensitive to changes in credit conditions and reflect management judgements that give rise to measurement
uncertainty in our ECL as set out above.
The following
committees and forums review the provision drivers and ensure that the ECL remains appropriate:
–
Model Risk Control Forum
(MRCF) reviews and approves new models and model changes. It also reviews the use of OGEM as a reliable model on which to
base our other forecast macroeconomic variables. We use it across all stress testing and planning so it is subject to model risk criteria
.
–
ALCO
reviews and approves the base case used in the economic scenarios we use to calculate forward-looking scenarios.
–
CRPF
reviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. It also reviews management
judgements and approves ECL impairment allowances.
–
Board Audit Committee
reviews and challenges the appropriateness of the estimates and judgements made by management.
For more on the governance around specific elements of the ECL impairment allowances, including the frequency of, and thresholds for, reviews, including by
these committees and forums, see the detailed sections above.
How we assess the performance of our ECL estimation process
We assess the reasonableness of our ECL provisions and the results of our Staging analysis using a range of methods. These include:
–
Benchmarking:
we compare our coverage levels with our peers
–
Stand-back testing:
we monitor the level of our coverage against actual write-offs
–
Back-testing:
we compare key drivers periodically as part of model monitoring practices
–
Monitoring trends:
we track ECL and Staged assets over time and against our internal budgets and forecasts, with triggers set accordingly.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
58
|
|||
mitigate our exposure.
The tables only show the financial assets that credit risk affects and to which the impairment requirements in IFRS 9 are applied.
For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances. Off-balance sheet exposures are mortgage
offers, guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum
amount that we would have to pay if the guarantees were called on. For formal standby facilities, credit lines and other commitments that are irrevocable over the
life of the facility, the maximum exposure is the total amount of the commitment.
|
Maximum exposure
|
|||||||||||||
|
Balance sheet asset
|
Off-balance sheet
|
Collateral
(1)
|
|||||||||||
|
Gross
amounts
|
Loss
allowance
|
Net
amounts
|
Gross
amounts
|
Loss
allowance
|
Net
amounts
|
Cash
|
Non-cash
|
Netting
(2)
|
Net
exposure
|
||||
|
2023
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|||
|
Cash and balances at central banks
|
|
|
|
|
|
|
|
|
|
|
|||
|
Financial assets at amortised cost:
|
|||||||||||||
|
–
Loans and advances to customers:
(3)
|
|||||||||||||
|
–
Retail Mortgages
(4)
|
|
(
|
|
|
|
|
|
(
|
|
|
|||
|
–
Corporate loans
|
|
(
|
|
|
|
|
(
|
(
|
|
|
|||
|
–
Finance leases
|
|
(
|
|
|
|
|
|
(
|
|
|
|||
|
–
Accrued interest and other adjustments
|
|
|
|
|
|
|
|
|
|
|
|||
|
–
Other unsecured loans
|
|
(
|
|
|
(
|
|
|
|
|
|
|||
|
–
Amounts due from fellow Banco Santander
group subsidiaries and JVs
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total loans and advances to customers
|
|
(
|
|
|
(
|
|
(
|
(
|
|
|
|||
|
–
Loans and advances to banks
|
|
|
|
|
|
|
|
|
|
|
|||
|
–
Reverse repurchase agreements – non trading
|
|
|
|
|
|
|
|
(
|
(
|
|
|||
|
–
Other financial assets at amortised cost
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total financial assets at amortised cost
|
|
(
|
|
|
(
|
|
(
|
(
|
(
|
|
|||
|
Financial assets at fair value at FVOCI:
|
|||||||||||||
|
–
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total financial assets at FVOCI
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total
|
|
(
|
|
|
(
|
|
(
|
(
|
(
|
|
|||
|
2022
|
|||||||||||||
|
Cash and balances at central banks
|
|
|
|
|
|
|
|
|
|
|
|||
|
Financial assets at amortised cost:
|
|||||||||||||
|
–
Loans and advances to customers:
(3)
|
|||||||||||||
|
–
Retail Mortgages
(4)
|
|
(
|
|
|
|
|
|
(
|
|
|
|||
|
–
Corporate loans
|
|
(
|
|
|
|
|
(
|
(
|
|
|
|||
|
–
Finance leases
|
|
(
|
|
|
|
|
|
(
|
|
|
|||
|
–
Accrued interest and other adjustments
|
|
|
|
|
|
|
|
|
|
|
|||
|
–
Other unsecured loans
|
|
(
|
|
|
(
|
|
|
|
|
|
|||
|
–
Amounts due from fellow Banco Santander
group subsidiaries and JVs
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total loans and advances to customers
|
|
(
|
|
|
(
|
|
(
|
(
|
|
|
|||
|
–
Loans and advances to banks
|
|
|
|
|
|
|
|
|
|
|
|||
|
–
Reverse repurchase agreements – non trading
|
|
|
|
|
|
|
|
(
|
|
|
|||
|
–
Other financial assets at amortised cost
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total financial assets at amortised cost
|
|
(
|
|
|
(
|
|
(
|
(
|
|
|
|||
|
Financial assets at FVOCI:
|
|||||||||||||
|
–
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total financial assets at FVOCI
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total
|
|
(
|
|
|
(
|
|
(
|
(
|
|
|
|||
(1)
The forms of collateral we take to reduce credit risk include: residential and commercial property; other physical assets, including motor vehicles; liquid securities, including those transferred under reverse
repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. Charges on residential property are most of the collateral we take.
(2)
We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives and securities finance transactions, we use
standard master netting agreements. For more on this, see ‘Credit risk mitigation’ in the ‘Credit risk - Credit risk management’ section.
(3)
Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet.
(4)
The collateral value shown against advances secured on residential property is limited to the balance of each associated individual loan. It does not include the impact of over–collateralisation (where the
collateral has a higher value than the loan balance) and includes collateral we would receive on draw down of certain off–balance sheet commitments.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
59
|
|||
impairment requirements in IFRS 9 are not applied.
|
Balance
sheet
asset
gross
amount
|
Collateral
(1)
|
Netting
(2)
|
Net
exposure
|
|||
|
Cash
|
Non-cash
|
|||||
|
2023
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
|
Financial assets at FVTPL:
|
||||||
|
–
Derivative financial instruments
|
|
(
|
|
(
|
|
|
|
–
Other financial assets at FVTPL
|
|
|
|
|
|
|
|
Total
|
|
(
|
|
(
|
|
|
|
2022
|
||||||
|
Financial assets at FVTPL:
|
||||||
|
–
Derivative financial instruments
|
|
|
(
|
(
|
|
|
|
–
Other financial assets at FVTPL
|
|
|
|
|
|
|
|
Total
|
|
|
(
|
(
|
|
|
(1)
The forms of collateral we take to reduce credit risk include: liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions;
and receivables.
(2)
We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives and securities finance transactions, we use
standard master netting agreements. They allow us to set off our credit risk exposure to a counterparty against our obligations to the counterparty in relation to transactions under the master netting agreement in
the event of default. This gives us a lower net credit exposure. They may also reduce settlement exposure. For more on this, see ‘Credit risk mitigation’ in the ‘Credit risk – Credit risk management’ section.
In the table below, we have used a single rating scale to ensure we are consistent across all our credit risk portfolios in how we report the risk of default. It has
eight grades for non–defaulted exposures, from 9 (lowest risk) to 2 (highest risk). We define each grade by an upper and lower PD value and we scale the grades
so that the default risk increases by a factor of ten every time the grade number drops by two steps. For example, grade 9 has an average PD of 0.010%, and
grade 7 has an average PD of 0.100%. We give defaulted exposures a grade 1 and a PD value of 100%
.
In the final column of the table we show the approximate
equivalent credit rating grade used by Standard Poor’s Ratings Services (SP).
|
Santander UK risk grade
|
PD range
|
|||
|
Mid
|
Lower
|
Upper
|
SP
equivalent
|
|
|
%
|
%
|
%
|
||
|
9
|
|
|
|
AAA to AA+
|
|
8
|
|
|
|
AA to AA-
|
|
7
|
|
|
|
A+ to BBB
|
|
6
|
|
|
|
BBB- to BB
|
|
5
|
|
|
|
BB-
|
|
4
|
|
|
|
B+ to B
|
|
3
|
|
|
|
B-
|
|
2
|
|
|
|
CCC to C
|
|
1 (Default)
|
|
|
|
D
|
The PDs in the table above are based on Economic Capital (EC) PD mappings, calculated based on the average PD over an economic cycle. This is different to
the IFRS 9 PDs which are calculated at a point in time using forward looking economic scenarios. Where possible, the EC PD values are aligned to the regulatory
capital models; however, any regulatory floors are removed and PDs are defined at every possible rating rather than grouped into rating buckets.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
60
|
|||
are not included and are all investment grade.
JAs are incorporated in the balances.
For more on the credit rating profiles of key portfolios, see the credit risk
review section for each business segment.
|
Santander UK risk grade
|
Loss
allowance
|
Total
|
||||||||
|
9
|
8
|
7
|
6
|
5
|
4
|
3 to 1
|
Other
(1)(2)
|
|||
|
2023
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
Exposures - On balance sheet
|
||||||||||
|
Financial assets at amortised cost:
|
||||||||||
|
–
Loans and advances to customers
(2)
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
(
|
|
|
Of which mortgages:
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
(
|
|
|
Total off–balance sheet
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Santander UK risk grade
|
Total
|
Coverage
Ratio
|
||||||||
|
9
|
8
|
7
|
6
|
5
|
4
|
3 to 1
|
Other
(1)(2)
|
|||
|
2023
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
%
|
|
ECL - On balance sheet
|
||||||||||
|
Financial assets at amortised cost:
|
||||||||||
|
–
Loans and advances to customers
(2)
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Of which mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Total off–balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
61
|
|||
|
Santander UK risk grade
|
Loss
allowance
|
|||||||||
|
9
|
8
|
7
|
6
|
5
|
4
|
3 to 1
|
Other
(1)(2)
|
Total
|
||
|
2022
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
Exposures - On balance sheet
|
||||||||||
|
Financial assets at amortised cost:
|
||||||||||
|
–
Loans and advances to customers⁽²⁾
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
(
|
|
|
Of which mortgages:
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
(
|
|
|
Total off–balance sheet
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
(
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Santander UK risk grade
|
Coverage
Ratio
|
|||||||||
|
9
|
8
|
7
|
6
|
5
|
4
|
3 to 1
|
Other
(1)(2)
|
Total
|
||
|
2022
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
%
|
|
ECL - On balance sheet
|
||||||||||
|
Financial assets at amortised cost:
|
||||||||||
|
–
Loans and advances to customers⁽²⁾
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Of which mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
Total off–balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes Joint Ventures and Business Banking (including BBLs balances)
. We use scorecards for these items, rather than rating models. Off-balance sheet exposures also include residential mortgage offers in
the pipeline.
(2)
Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet.
|
31 December 2023
|
31 December 2022
|
||
|
%
|
%
|
||
|
Mortgages
|
|
|
|
|
Credit Cards
|
|
|
|
|
UPL
|
|
|
|
|
Overdrafts
|
|
|
|
|
Business Banking
|
|
|
|
|
Consumer Finance
|
|
|
2023
compared to
2022
With a slower housing market and higher mortgage rates, applications fell in 2023. Our decision to optimise the balance sheet given higher funding costs
contributed to a reduction in mortgage lending.
In 2023, early and late arrears remained at low levels despite a slight increase across the portfolio.
For more on the credit performance of our key portfolios by business segment, see the credit risk review section for each business segment.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
62
|
|||
assets measured at amortised cost,
£
8.5
bn of assets measured at FVOCI, and
£
38.2
bn of cash and balances at central banks.
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
|
Exposures
|
||||
|
On-balance sheet
|
||||
|
Retail and Business Banking
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
CCB
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
Total on-balance sheet
|
|
|
|
|
|
Off-balance sheet
|
||||
|
Retail and Business Banking
(1)
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
CCB
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
Total off-balance sheet
(2)
|
|
|
|
|
|
Total exposures
|
|
|
|
|
|
ECL
|
||||
|
On-balance sheet
|
||||
|
Retail and Business Banking
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
CCB
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
Total on-balance sheet
|
|
|
|
|
|
Off-balance sheet
|
||||
|
Retail and Business Banking
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
CCB
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
Total off-balance sheet
|
|
|
|
|
|
Total ECL
|
|
|
|
|
|
Coverage ratio
(3)
|
%
|
%
|
%
|
%
|
|
On-balance sheet
|
||||
|
Retail and Business Banking
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
CCB
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
Total on-balance sheet
|
|
|
|
|
|
Off-balance sheet
|
||||
|
Retail and Business Banking
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
CCB
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
Total off-balance sheet
|
|
|
|
|
|
Total coverage
|
|
|
|
|
(1)
Off-balance sheet exposures include
£
3.3
bn of residential mortgage offers in the pipeline.
(2)
Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note
31
.
(3)
ECL as a percentage of the related exposure.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
63
|
|||
Total on-balance sheet exposures at
31 December 2022
comprised
£
215.7
bn of customer loans, loans and advances to banks of
£
1.0
bn,
£
7.5
bn of sovereign
assets measured at amortised cost,
£
6.0
bn of assets measured at FVOCI, and
£
44.2
bn of cash and balances at central banks.
|
Gross write-offs
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
|
2022
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Exposures
|
|||||
|
On-balance sheet
|
|||||
|
Retail and Business Banking
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
Total on-balance sheet
|
|
|
|
|
|
|
Off-balance sheet
|
|||||
|
Retail and Business Banking
(1)
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
Total off-balance sheet
(2)
|
|
|
|
|
|
|
Total exposures
|
|
|
|
|
|
|
ECL and Gross Write-offs
|
|||||
|
On-balance sheet
|
|||||
|
Retail and Business Banking
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
Total on-balance sheet
|
|
|
|
|
|
|
Off-balance sheet
|
|||||
|
Retail and Business Banking
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
Total off-balance sheet
|
|
|
|
|
|
|
Total ECL
|
|
|
|
|
|
|
Coverage ratio
(3)
|
%
|
%
|
%
|
%
|
|
|
On-balance sheet
|
|||||
|
Retail and Business Banking
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
Total on-balance sheet
|
|
|
|
|
|
|
Off-balance sheet
|
|||||
|
Retail and Business Banking
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
CCB
|
|
|
|
|
|
|
Total off-balance sheet
|
|
|
|
|
|
|
Total coverage
|
|
|
|
|
(1)
Off-balance sheet exposures include
£
2.8
bn of residential mortgage offers in the pipeline.
(2)
Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note
31
.
(3)
ECL as a percentage of the related exposure.
The ECL provision at 31 December 2023 decreased by
£13m
to
£992m
(
2022
:
£1,005m
)
largely due to updated economic assumptions.
Gross write-off utilisation of
£232m
in CCB and unsecured retail (
2022
:
£157m
).
Key movements in exposures and ECL in the year by Stage were:
–
The reduction in Stage 1 exposures was mainly driven by reduced Mortgage new business due to slowing of the housing market, and customers reducing debt
in response to increasing rates. The Stage 1 ECL was broadly flat as reduced Mortgage Stage 1 exposures had little impact on ECL due to their secured
nature.
–
Stage 2 exposures increased reflecting current economic conditions, but levels of arrears are yet to increase above the long-term average. Stage 2 ECL
reduced primarily due to the reduced requirement for mortgages, driven by house prices performing better than expected, and in CCB where expected loss
rates improved.
–
Stage 3 exposures rose due to the economic environment with increases across all portfolios. ECL increased, driven by CCB and Mortgages.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
64
|
|||
|
2023
|
PD
deterioration
|
Forbearance
|
Other
|
30 DPD
|
Secured
affordability
|
Unsecured
affordability
|
Mortgage
Refinancing
|
High risk
corporate
|
Total
|
|
|
Retail and Business
Banking - Mortgages
|
Exposure £m
|
|
|
|
|
|
|
|
|
|
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Finance
|
Exposure £m
|
|
|
|
|
|
|
|
|
|
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
|
CCB
|
Exposure £m
|
|
|
|
|
|
|
|
|
|
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Centre
|
Exposure £m
|
|
|
|
|
|
|
|
|
|
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
|
Total Drawn
|
Exposure £m
|
|
|
|
|
|
|
|
|
|
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
|
Undrawn
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
Total Reported
|
Exposure £m
|
|
|
|
|
|
|
|
|
|
|
ECL £m
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
||||||||||
|
Retail and Business
Banking - Mortgages
|
Exposure £m
|
|
|
|
|
|
|
n/a
|
|
|
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
|
Consumer Finance
|
Exposure £m
|
|
|
|
|
|
|
n/a
|
|
|
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
|
CCB
|
Exposure £m
|
|
|
|
|
|
|
n/a
|
|
|
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
|
Corporate Centre
|
Exposure £m
|
|
|
|
|
|
|
n/a
|
|
|
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
|
Total Drawn
|
Exposure £m
|
|
|
|
|
|
|
n/a
|
|
|
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
|
Undrawn
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
Total Reported
|
Exposure £m
|
|
|
|
|
|
|
n/a
|
|
|
|
ECL £m
|
|
|
|
|
|
|
n/a
|
|
|
|
Where balances satisfy more than one of the criteria above for determining a SICR, we have assigned the corresponding gross carrying amount and ECL in order
of the categories presented.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
65
|
|||
total assets as presented in the Consolidated Balance Sheet. The Credit risk review disclosures exclude Joint ventures, as they carry low credit risk and therefore
have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the customer's account, and cash collateral.
|
On-balance sheet
|
Off-balance sheet
|
|||||
|
Exposures
|
Loss
allowance
|
Net carrying
amount
|
Exposures
|
Loss
allowance
|
||
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Retail and Business Banking
(1)(2)
|
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
|
Corporate Commercial Banking
|
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
|
Total exposures presented in Credit Quality tables
|
|
|
|
|
|
|
|
Joint ventures
|
|
|||||
|
Other items
|
|
|||||
|
Adjusted net carrying amount
|
|
|||||
|
Assets classified at FVTPL
|
|
|||||
|
Non-financial assets
(3)
|
|
|||||
|
Total assets per the Consolidated Balance Sheet
|
|
|||||
|
2022
|
||||||
|
Retail and Business Banking
(1)(2)
|
|
|
|
|
|
|
|
Consumer Finance
|
|
|
|
|
|
|
|
Corporate Commercial Banking
|
|
|
|
|
|
|
|
Corporate Centre
|
|
|
|
|
|
|
|
Total exposures presented in Credit Quality tables
|
|
|
|
|
|
|
|
Joint ventures
|
|
|||||
|
Other items
|
|
|||||
|
Adjusted net carrying amount
|
|
|||||
|
Assets classified at FVTPL
|
|
|||||
|
Non-financial assets
(3)
|
|
|||||
|
Total assets per the Consolidated Balance Sheet
|
|
|||||
(1)
Off-balance sheet exposures include offers in the pipeline and undrawn flexible mortgages products.
(2)
Off-balance sheet exposures include credit cards.
(3)
Non-financial assets include £
632
m (2022: £
2,657
m
) of Macro hedge of interest rate risk.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
66
|
|||
presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
||||||||
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||
|
At 1 January 2023
|
|
|
|
|
|
|
|
|
|||
|
Transfers from Stage 1 to Stage 2
(3)
|
(
|
(
|
|
|
|
|
|
|
|||
|
Transfers from Stage 2 to Stage 1
(3)
|
|
|
(
|
(
|
|
|
|
|
|||
|
Transfers to Stage 3
(3)
|
(
|
(
|
(
|
(
|
|
|
|
|
|||
|
Transfers from Stage 3
(3)
|
|
|
|
|
(
|
(
|
|
|
|||
|
Transfers of financial instruments
|
(
|
|
|
(
|
|
|
|
|
|||
|
Net ECL remeasurement on stage transfer
(4)
|
|
(
|
|
|
|
|
|
|
|||
|
Change in economic scenarios
(2)
|
|
|
|
(
|
|
|
|
|
|||
|
New lending and assets purchased
(5)
|
|
|
|
|
|
|
|
|
|||
|
Redemptions, repayments and assets sold
(7)
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
|||
|
Changes in risk parameters and other movements
(6)
|
(
|
(
|
|
(
|
|
|
|
|
|||
|
Assets written off
(7)
|
|
|
|
|
(
|
(
|
(
|
(
|
|||
|
At 31 December 2023
|
|
|
|
|
|
|
|
|
|||
|
Net movement in the period
|
(
|
|
|
(
|
|
|
(
|
(
|
|||
|
ECL (release)/charge to the Income Statement
|
|
(
|
|
|
|||||||
|
Less: Discount unwind
|
|
|
(
|
(
|
|||||||
|
Less: Recoveries net of collection costs
|
|
|
|
|
|||||||
|
Total ECL (release)/charge to the Income Statement
|
|
(
|
|
|
|||||||
|
At 1 January 2022
|
|
|
|
|
|
|
|
|
||
|
Transfers from Stage 1 to Stage 2
(3)
|
(
|
(
|
|
|
|
|
|
|
||
|
Transfers from Stage 2 to Stage 1
(3)
|
|
|
(
|
(
|
|
|
|
|
||
|
Transfers to Stage 3
(3)
|
(
|
(
|
(
|
(
|
|
|
|
|
||
|
Transfers from Stage 3
(3)
|
|
|
|
|
(
|
(
|
|
|
||
|
Transfers of financial instruments
|
(
|
|
|
|
|
(
|
|
|
||
|
Net ECL remeasurement on stage transfer
(4)
|
|
(
|
|
|
|
|
|
|
||
|
Change in economic scenarios
(2)
|
|
|
|
|
|
|
|
|
||
|
New lending and assets purchased
(5)
|
|
|
|
|
|
|
|
|
||
|
Redemptions, repayments and assets sold
(7)
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
||
|
Changes in risk parameters and other movements
(6)
|
|
(
|
|
(
|
|
|
|
|
||
|
Assets written off
(7)
|
|
|
|
|
(
|
(
|
(
|
(
|
||
|
At 31 December 2022
|
|
|
|
|
|
|
|
|
||
|
Net movement in the period
|
(
|
|
|
|
(
|
(
|
(
|
|
||
|
ECL charge/(release) to the Income Statement
|
|
|
|
|
||||||
|
Less: Discount unwind
|
|
|
(
|
(
|
||||||
|
Less: Recoveries net of collection costs
|
|
|
|
|
||||||
|
Total ECL charge/(release) to the Income Statement
|
|
|
|
|
(1)
Exposures that have attracted an ECL, and as reported in the Credit Quality table above.
(2)
Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, the scenarios themselves, and the probability weights from all other movements.
Also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in Transfers of financial instruments.
(3)
Total impact of facilities that moved Stage(s) in the period. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full
impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the period. Transfers between Stages are based on opening balances and ECL
at the start of the period.
(4)
Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.
(5)
Exposures and ECL of facilities that did not exist at the start of the period but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.
(6)
Residual movements on existing facilities that did not change Stage in the period, and which were not acquired in the period. Includes the net increase or decrease in the period of the mortgage pipeline, cash at
central banks, the impact of changes in risk parameters in the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the period.
(7)
Exposures and ECL for facilities that existed at the start of the period but not at the end.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
67
|
|||
We manage our country risk exposure under our global limits framework. We set our Risk Appetite for each country, considering factors that may affect its risk
profile. These can include political events, macroeconomics and the nature of the risk. We actively manage exposures if we need to.
IFRS (i.e. after netting allowed under IAS 32) except for credit provisions which we add back.
Off–balance sheet values are undrawn facilities and letters of credit.
We classify location by country of risk – the country where each client has its main business or assets. That is unless there is a full risk transfer guarantee in place.
If so, we use the guarantor’s country of domicile. If a client has operations in many countries, we use their country of incorporation.
The table below excludes
balances with other Banco Santander group members. We show them separately in the section that immediately follows.
|
2023
|
2022
|
||||||||||||
|
Financial
institutions
|
Financial
institutions
|
||||||||||||
|
Governments
|
Banks
(1)
|
Other
|
Retail
|
Corporate
|
Total
(2)
|
Governments
|
Banks
(1)
|
Other
|
Retail
|
Corporate
|
Total
(2)
|
||
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
||
|
Eurozone
|
|||||||||||||
|
Ireland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
France
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luxembourg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other countries
|
|||||||||||||
|
UK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Switzerland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Excludes balances with central banks.
(2)
Excludes cash at hand, interests in other entities, intangible assets, property, plant and equipment, tax assets, retirement benefit assets and other assets.
(3)
Includes The Netherlands
£
0.3
bn (
2022
:
£
0.1
bn),
Belgium
£
0.5
bn (
2022
:
£
0.6
bn), and Finland
£
0.1
bn (
2022
:
£
0.1
bn
).
Balances with other Banco Santander group members
(audited)
We deal with other Banco Santander group members in the ordinary course of business. We do this where we have a particular business advantage or expertise
and where they can offer us commercial opportunities.
These transactions also arise where we support the activities of, or with, larger multinational corporate
clients and financial institutions which may deal with other Banco Santander group members.
We conduct these activities on the same terms as for similar
transactions with third parties, and in a way that manages the credit risk within limits acceptable to the Board and the PRA.
|
2023
|
2022
|
||||||||
|
Financial institutions
|
Financial institutions
|
||||||||
|
Banks
|
Other
|
Corporate
|
Total
|
Banks
|
Other
|
Corporate
|
Total
|
||
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
||
|
Assets
|
|||||||||
|
Spain
|
|
|
|
|
|
|
|
|
|
|
UK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Liabilities
|
|||||||||
|
Spain
|
|
|
|
|
|
|
|
|
|
|
UK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
68
|
|||
We provide detailed credit risk analysis for Retail and Business Banking in separate sections below for Mortgages, our largest portfolio, and our Everyday Banking
portfolio.
RETAIL AND BUSINESS BANKING: MORTGAGES – CREDIT RISK REVIEW
We offer mortgages to people who want to buy a property and offer additional borrowing (known as further advances) to existing mortgage customers. The
property must be in the UK
.
|
Stock
|
New business
|
||||||||||
|
2023
|
2022
|
2023
|
2022
|
||||||||
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
||||
|
Home movers
(1)
|
|
|
|
|
|
|
|
|
|||
|
Remortgagers
(2)
|
|
|
|
|
|
|
|
|
|||
|
First-time buyers
|
|
|
|
|
|
|
|
|
|||
|
Buy-to-let
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
||||
(1)
'Home movers’ include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house.
(2)
'Remortgagers’ are new customers who are taking a new mortgage with us.
As well as the new business in the table above, there were
£
31.2
bn (
2022
:
£
24.9
bn) of remortgages where we moved our customers with maturing mortgages
onto new ones. We also provided
£
0.7
bn (
2022
:
£
1.2
bn) of further advances and flexible mortgage drawdowns.
77
%
(
2022
:
81
%
) of customers with a maturing
mortgage were retained, which applied to mortgages four months post maturity, based on a 12-month average of retention rates to September 2023 and
December 2022 respectively.
2023
compared to
2022
In
2023
, mortgage asset stock decreased across all sectors, with the stock borrower profile unchanged. Our new business also decreased, particularly in the Buy-
to-Let sector reflecting market conditions where landlords' appetite to expand their portfolios reduced.
In
2023
, we helped first-time buyers buy their new home
with
£3.0
bn of gross lending (
2022
:
£8.1
bn).
|
2023
|
2022
|
||||
|
£m
|
%
|
£m
|
%
|
||
|
Fixed rate
|
|
|
|
|
|
|
Of which maturing:
|
|||||
|
–
12 months
|
|
|
|
|
|
|
–
Later than 1 year but no later than 3 years
|
|
|
|
|
|
|
–
Later than 3 years but no later than 4 years
|
|
|
|
|
|
|
–
Later than 4 years but no later than 5 years
|
|
|
|
|
|
|
–
Later than 5 years
|
|
|
|
|
|
|
Variable rate
|
|
|
|
|
|
|
Standard Variable Rate (SVR)
|
|
|
|
|
|
|
Follow on Rate (FoR)
|
|
|
|
|
|
|
|
|
|
|
||
2023
compared to
2022
In
2023
, we continued to see customers refinance from reversion to fixed rate products influenced by rapid increases in interest rates, with a slight increase in
demand for variable rate products tracking the Bank of England base rate. We also saw more customers choosing shorter-term fixed rate products in
2023
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
69
|
|||
|
Stock
|
New business
|
||||
|
2023
|
2022
|
2023
|
2022
|
||
|
Region
|
£bn
|
£bn
|
£bn
|
£bn
|
|
|
London
|
|
|
|
|
|
|
Midlands and East Anglia
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
Northern Ireland
|
|
|
|
|
|
|
Scotland
|
|
|
|
|
|
|
South East excluding London
|
|
|
|
|
|
|
South West, Wales and other
|
|
|
|
|
|
|
|
|
|
|
||
2023
compared to
2022
The portfolio's geographical distribution continued to represent a broad footprint across the UK, with a concentration around London and the South East. The loan-
to-income multiple of mortgage lending in the year, based on average earnings of new business at inception, was
2.98
(
2022
:
3.35
).
The split of our mortgage asset by size was:
|
Mortgage loan size
|
2023
|
2022
|
|
£1.0m
|
|
|
|
£0.5m to £1.0m
|
|
|
|
£0.25m to £0.5m
|
|
|
|
£0.25m
|
|
|
|
Average loan size (stock)
(1)
|
£
|
£
|
|
Average loan size (new business)
|
£
|
£
|
(1) Average initial advance of existing stock.
We also show the collateral value and average LTV.
We use our estimate of the property value at the balance sheet date and include fees that have been added
to the loan. For flexible products, we only include the drawn amount, not undrawn limits.
|
2023
|
2022
|
||||||||||
|
Stock
|
Stage 3
|
New
|
Stock
|
Stage 3
|
New
|
||||||
|
Total
|
ECL
|
Total
|
ECL
|
Business
|
Total
|
ECL
|
Total
|
ECL
|
Business
|
||
|
LTV
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Up to 50%
|
|
|
|
|
|
|
|
|
|
|
|
|
50-60%
|
|
|
|
|
|
|
|
|
|
|
|
|
60-70%
|
|
|
|
|
|
|
|
|
|
|
|
|
70-80%
|
|
|
|
|
|
|
|
|
|
|
|
|
80-90%
|
|
|
|
|
|
|
|
|
|
|
|
|
90-100%
|
|
|
|
|
|
|
|
|
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Collateral value
(1)
|
|
|
|
|
|
|
|||||
|
%
|
%
|
%
|
%
|
%
|
%
|
||||||
|
Average LTV - Balance weighted
(2)
|
|
|
|
|
|
|
|||||
(1)
Collateral value is limited to the balance of each loan and excludes the impact of any over-collateralisation. Includes collateral against loans in negative equity of
£
389
m
(
2022
:
£
323
m
).
The balance weighted average LTV of new business in the period in London was
65
%
(
2022
:
66
%
).
£
45
bn
of new business and internal transfers were re-priced
in
2023
and a further
£
39
bn
will reach the end of the incentive period by the end of 2024. Arrears from recent internal transfers remain low, with less than
1
%
of
customers entering arrears within 12 months.
85
%
of lending is prime UK retail mortgages with an
aver
age new loan size of
£
228
k
(
2022
:
£
237
k
). Unsecured
retail constitutes
3
%
of lending.
2023
compared to
2022
There were no significant changes in collateral quality in 2023. Despite economic pressures, balance weighted average LTVs of stock were broadly flat over the
period. Balance weighted average LTVs of new business reduced in 2023 driven by proportionally more lending at LTV=60%. We monitor the profile of new
lending and take action as needed to ensure the LTV mix of completions is in line with our risk appetite.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
70
|
|||
|
2023
|
2022
|
||
|
£m
|
£m
|
||
|
Mortgage loans and advances to customers
|
|
|
|
|
of which:
|
|||
|
–
Stage 1
|
|
|
|
|
–
Stage 2
|
|
|
|
|
–
Stage 3
|
|
|
|
|
Loss allowances
(1)
|
|
|
|
%
|
%
|
||
|
Stage 1 ratio
(2)
|
|
|
|
|
Stage 2 ratio
(2)
|
|
|
|
|
Stage 3 ratio
|
|
|
(1)
The ECL allowance is for both on and off–balance sheet exposures.
(2)
Stage 1/Stage 2 exposures as a percentage of customer loans.
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|||||
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
At 1 January 2023
|
|
|
|
|
|
|
|
|
|
Transfers from Stage 1 to Stage 2
(3)
|
(
|
(
|
|
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1
(3)
|
|
|
(
|
(
|
|
|
|
|
|
Transfers to Stage 3
(3)
|
(
|
(
|
(
|
(
|
|
|
|
|
|
Transfers from Stage 3
(3)
|
|
|
|
|
(
|
(
|
|
|
|
Transfers of financial instruments
|
(
|
|
|
(
|
|
|
|
|
|
Net ECL remeasurement on stage transfer
(4)
|
|
(
|
|
|
|
|
|
|
|
Change in economic scenarios
(2)
|
|
|
|
(
|
|
|
|
|
|
New lending and assets purchased
(5)
|
|
|
|
|
|
|
|
|
|
Redemptions, repayments and assets sold
(7)
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
|
Changes in risk parameters and other movements
(6)
|
|
|
|
(
|
|
|
|
(
|
|
Assets written off
(7)
|
|
|
|
|
(
|
(
|
(
|
(
|
|
At 31 December 2023
|
|
|
|
|
|
|
|
|
|
Net movement in the period
|
(
|
(
|
|
(
|
|
|
(
|
(
|
|
ECL (release)/charge to the Income Statement
|
(
|
(
|
|
|
||||
|
Less: Discount unwind
|
|
|
(
|
(
|
||||
|
Less: Recoveries net of collection costs
|
|
|
|
|
||||
|
Total ECL (release)/charge to the Income Statement
|
(
|
(
|
|
|
||||
|
At 1 January 2022
|
|
|
|
|
|
|
|
|
|
Transfers from Stage 1 to Stage 2
(3)
|
(
|
(
|
|
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1
(3)
|
|
|
(
|
(
|
|
|
|
|
|
Transfers to Stage 3
(3)
|
(
|
(
|
(
|
(
|
|
|
|
|
|
Transfers from Stage 3
(3)
|
|
|
|
|
(
|
(
|
|
|
|
Transfers of financial instruments
|
(
|
|
|
(
|
|
|
|
|
|
Net ECL remeasurement on stage transfer
(4)
|
|
(
|
|
|
|
|
|
|
|
Change in economic scenarios
(2)
|
|
|
|
|
|
|
|
|
|
New lending and assets purchased
(5)
|
|
|
|
|
|
|
|
|
|
Redemptions, repayments and assets sold
(7)
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
|
Changes in risk parameters and other movements
(6)
|
(
|
|
|
(
|
|
|
|
|
|
Assets written off
(7)
|
|
|
|
|
(
|
(
|
(
|
(
|
|
At 31 December 2022
|
|
|
|
|
|
|
|
|
|
Net movement in the period
|
(
|
|
|
|
|
|
|
|
|
ECL charge/(release) to the Income Statement
|
|
|
|
|
||||
|
Less: Discount unwind
|
|
|
(
|
(
|
||||
|
Less: Recoveries net of collection costs
|
|
|
(
|
(
|
||||
|
Total ECL charge/(release) to the Income Statement
|
|
|
|
|
||||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
71
|
|||
Forbearance
(1)
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Financial assets modified in the period:
|
||
|
–
Amortised cost before modification
|
|
|
|
–
Net modification loss
|
|
|
|
Financial assets modified since initial recognition:
|
||
|
–
Gross carrying amount of financial assets for which the loss allowance changed to 12 months ECL in the period
|
|
|
|
Capitalisation
|
Term extension
|
Interest-only
|
Concessionary
interest rate
|
Total
|
Loss
allowances
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Stage 2
|
|
|
|
|
|
|
|
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportion of portfolio
|
|
|
|
|
|
|
|
2022
|
||||||
|
Stage 2
|
|
|
|
|
|
|
|
Stage 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportion of portfolio
|
|
|
|
|
|
(1)
We base forbearance type on the first forbearance on the accounts.
At
31 December 2023
, the proportion of the mortgage portfolio in forbearance remained flat at
0.9
%
(
2022
:
0.9
%
) and
the proportion of accounts in forbearance
for more than six months that had made their last six months’ contractual payments was
81
%
(
2022
:
85
%
).
The weighted average LTV of all accounts in
forbearance was
44
%
(
2022
:
43
%
) compared to the weighted average portfolio LTV of
51
%
(
2022
:
50
%
)
At
31 December 2023
, the carrying value of mortgages classified as multiple forbearance decreased to
£
121
m
(
2022
:
£
152
m
).
Other loan modifications
Santander UK supports the Mortgage Charter which was published in July 2023. There were
no
modification gains or losses arising from the Charter.
We have made additional customer support solutions available since then, allowing customers who are up-to-date with their payments to make interest-only
payments for six months or extend their mortgage term to reduce their monthly payments. The following table provides information on such loan modifications.
|
2023
|
2022
|
|||
|
Term extension
|
Interest-only
|
Term extension
|
Interest-only
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Stage 1
|
|
|
n/a
|
n/a
|
|
Stage 2
|
|
|
n/a
|
n/a
|
|
Stage 3
|
|
|
n/a
|
n/a
|
|
|
|
n/a
|
n/a
|
|
2023
, the average LTV was
24
%
(
2022
:
24
%
), and
93
%
(
2022
:
94
%
) of accounts had made their last six months’ contractual payments.
The proportion of
accounts that were 90 days or more in arrears was
1.74
%
(
2022
:
1.53
%
).
There were
no
other loan modifications made in
2023
and
2022
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
72
|
|||
PARTICULAR INTEREST
We are mainly a residential prime lender and we do not originate sub-prime or second charge mortgages.
Despite that, some types of mortgages have higher
risks and others stand out for different reasons. These are:
|
Product
|
Description
|
|
Interest-only loans
|
With an interest-only mortgage, the customer pays interest every month, but the principal is only repaid at the end of the mortgage term.
Some mortgages have a part that is interest-only, with the rest being a normal repayment mortgage.
We mitigate the risk from new interest-only mortgages by having lower maximum LTVs. For most applicants, the maximum LTV is 50%.
For high net worth customers, it can be up to 75%. When a customer plans to repay their mortgage by selling the property, we require a
minimum equity buffer of £250k. We also remind customers that they have to arrange to repay the principal at the end of the mortgage. We
send them messages with their annual mortgage statements, and we contact them throughout the mortgage term to encourage them to
tell us how they plan to repay. We increase the frequency of contact as the loan approaches maturity. If customers know they will not be
able to repay their mortgage when it ends, or if their mortgage has already passed the date when it should have ended, we talk to them. If
we think it is in their interests and they can afford it, we look at other ways to manage it, such as turning the mortgage into a repayment
one and extending it. If the customer is waiting for their way to repay it, such as an investment plan, to mature, we may permit an
extension.
|
|
Part interest-only, part
repayment loans
|
Customers with part interest-only, part repayment mortgages still have to pay back a lump sum at the end of their mortgage for the interest-
only part. This means these loans have a higher credit risk as we depend on the customers to pay back a lump sum. We design new
account LTV maximums to mitigate this risk. We also make sure the customer has a plausible repayment plan before we lend to them and
stays on track for the loan term.
We mitigate the risk from these loans in similar ways to those used for interest-only mortgages. The maximum LTV for new loans is 85%.
For most applicants, up to 50% of that can be interest-only. For high net worth customers, it can be up to 75%. When a customer plans to
repay the interest-only element of their mortgage by selling the property, we require a minimum equity buffer of £250k. We manage
communications and extension options in similar ways to those used for interest-only mortgages.
|
|
Flexible loans
|
Flexible mortgages allow customers to pay more or less than their usual amount each month, or even to take ‘payment holidays’ when
they pay nothing at all. There are conditions on when and how much customers can draw down, and they do not have to take or draw
down the whole loan all at once. A customer can ask us to raise their credit limit, but that means we will go through our full credit approval
process. We can also lower a customer’s credit limit at any time, so it never goes above 90% of the property’s current market value. We no
longer offer flexible loans for new mortgages. This is an area of interest if any customers might be using these facilities to self-forbear, such
as regularly drawing down small amounts. We reflect signs that the credit risk has significantly increased in our ECL calculations.
|
|
Loans with an LTV 100%
|
In some cases, property prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs greater than 100%. Where
the mortgage balance is more than the property is now worth, we cannot recover the full value of the loan by repossessing and selling the
property. This means there is a higher credit risk on these loans, so we monitor them as part of our assessment of ongoing portfolio
performance. We design new account LTV maximums to mitigate an increase in accounts with an LTV 100%.
|
|
Buy-to-Let (BTL) loans
|
We have specific policies for BTL and focus on non-professional landlords. We have prudent lending criteria and the maximum LTV is
75%. The first applicant must earn a minimum of £25,000 per year, and we require proof of income in all cases. We also use a BTL
affordability rate as part of our lending assessment. This means that the rental income must cover the monthly mortgage interest payments
by a prescribed amount when calculated using a stressed interest rate. We regularly review the prescribed amount and adjust it as
needed.
|
Climate change
The value of property collateral for mortgages might be affected by physical impacts related to the frequency and scale of extreme weather events, such as flood
and subsidence risk or changing environmental performance standards for property. In 2023 we reviewed the proportion of mortgage loans subject to flood and
subsidence risk and concluded that the risk was not material. The terms of our mortgage lending require homeowners to buy suitable insurance which transfers
the majority of the risk to asset valuations to third party insurers.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
73
|
|||
|
Portfolio of particular interest
(1)
|
|||||||
|
Total
|
Interest-only
|
Part interest-
only, part
repayment
(2)
|
Flexible
|
LTV 100%
|
Buy-to-let
|
Other
portfolio
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Mortgage portfolio
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
Stage 3 ratio
|
|
|
|
|
|
|
|
|
Properties in possession
|
|
|
|
|
|
|
|
|
Balance weighted LTV (indexed)
|
|
|
|
|
|
|
|
|
2022
|
|||||||
|
Mortgage portfolio
|
|
|
|
|
|
|
|
|
–
Stage 1
|
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
|
Stage 3 ratio
|
|
|
|
|
|
|
|
|
Properties in possession
|
|
|
|
|
|
|
|
|
Balance weighted LTV (indexed)
|
|
|
|
|
|
|
|
(1)
Where a loan falls into more than one category, we include it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to the
total mortgage portfolio.
(2)
Mortgage balance includes both the interest-only part of
£
9,531
m
(
2022
:
£
10,010
m
)
and the non-interest-only part of the loan.
2023
compared to
2022
In
2023
, the combined total proportion of interest-only loans, part interest-only, part repayment loans and flexible loans was broadly stable at
32.9%
(2022:
33.1%
).
BTL mortgage balances
decreased
£1.2
bn to
£15.6
bn (
2022
:
£16.8
bn
) driven by our strategy to deleverage our mortgage portfolio and changes in the market
dynamic. In
2023
, the balance weighted average LTV of mortgage total new BTL lending was
58%
(
2022
:
67%
).
|
Interest-only
(2)
|
Flexible
|
LTV 100%
|
Buy-to-Let
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
|
Total
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
2022
|
||||
|
Total
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
(1)
Where a loan falls into more than one category, we have included it in all the categories that apply.
(2)
Comprises full interest-only loans and part interest-only, part repayment loans.
2023
compared to
2022
Forbearance levels increased slightly although were lower than expected in 2023, with customers having the option to move to a temporary interest-only
conversion under the Mortgage Charter.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
74
|
|||
|
Business
banking
|
Other unsecured
|
|||||
|
Personal
loans
|
Credit
cards
|
Overdrafts
|
Total other
unsecured
|
Total
|
||
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Loans and advances to customers
|
|
|
|
|
|
|
|
of which:
|
||||||
|
–
Stage 1
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
Loss allowances
(1)
|
|
|
|
|
|
|
|
Stage 3 undrawn exposures
|
|
|
|
|||
|
Stage 3 ratio
|
|
|
|
|||
|
Gross write-offs (12 months)
|
|
|
|
|||
|
2022
|
||||||
|
Loans and advances to customers
|
|
|
|
|
|
|
|
of which:
|
||||||
|
–
Stage 1
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
Loss allowances
(1)
|
|
|
|
|
|
|
|
Stage 3 undrawn exposures
|
|
|
|
|||
|
Stage 3 ratio
|
|
|
|
|||
|
Gross write-offs (12 months)
|
|
|
|
|||
(1)
The ECL allowance is for both on and off–balance sheet exposures.
2023
compared to
2022
Business Banking balances were lower, mainly due to reductions in the Bounce Back Loans (BBL) portfolio. Stage 3 assets reduced, although this had a minimal
impact on write-offs as the reduction in assets was mainly due to the BBLs where the 100% government guarantee was claimed. Stage 2 and 3 unsecured assets
and write-offs increased reflecting the current economic environment. However, these rates are yet to exceed long run averages.
55% (2022: 55%) of credit card
customers repay their balance in full each month and UPL average customer balances remained unchanged at £6,000.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
75
|
|||
Forbearance
|
Business
banking
|
Credit
cards
|
Overdrafts
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
|
Financial assets modified in the period:
|
||||
|
–
Amortised cost before modification
|
|
|
|
|
|
–
Net modification loss
|
|
|
|
|
|
Financial assets modified since initial recognition:
|
||||
|
–
Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period
|
|
|
|
|
|
2022
|
||||
|
Financial assets modified in the period:
|
||||
|
–
Amortised cost before modification
|
|
|
|
|
|
–
Net modification loss
|
|
|
|
|
|
Financial assets modified since initial recognition:
|
||||
|
–
Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period
|
|
|
|
|
|
Other unsecured
|
||||||
|
Business
banking
|
Personal
loans
|
Credit cards
|
Overdrafts
|
Total other
unsecured
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Total
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
2022
|
||||||
|
Total
|
|
|
|
|
|
|
|
–
Stage 2
|
|
|
|
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
Other loan modifications
There were
no
other loan modifications made in
2023
and
2022
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
76
|
|||
|
2023
|
2022
|
||
|
£m
|
£m
|
||
|
Loans and advances to customers
|
|
|
|
|
of which:
|
|||
|
–
Stage 1
|
|
|
|
|
–
Stage 2
|
|
|
|
|
–
Stage 3
|
|
|
|
|
Loss allowances
(1)
|
|
|
|
|
Stage 3 ratio
|
|
|
|
|
Gross write-offs
|
|
|
(1)
The ECL allowance is for both on and off–balance sheet exposures.
In 2023, we maintained our prudent Consumer (auto) finance underwriting criteria. The product mix was broadly unchanged, with wholesale balances increasing
slightly.
At
31 December 2023
, Consumer (auto) finance gross lending (new business) was
£2,055m
(
2022
:
£2,519m
)
. Wholesale loans (Stock finance) to car dealerships
at
31 December 2023
were approximately
9.9%
(
2022
:
10.1%
)
of the Consumer loan book. A
t
31 December 2023
, the average Consumer (auto) finance loan
size was
£17,308
(
2022
:
£17,256
).
The risk profile was stable in terms of our credit scoring acceptance policies.
The overall risk performance was good with the vast majority of customers paying.
Forbearance
There were
no
accounts in forbearance at
31 December 2023
and
31 December 2022
.
There were
no
other loan modifications made in
2023
and
2022
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
77
|
|||
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|||||
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
At 1 January 2023
|
|
|
|
|
|
|
|
|
|
Transfers from Stage 1 to Stage 2
(3)
|
(
|
(
|
|
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1
(3)
|
|
|
(
|
(
|
|
|
|
|
|
Transfers to Stage 3
(3)
|
(
|
(
|
(
|
(
|
|
|
|
|
|
Transfers from Stage 3
(3)
|
|
|
|
|
(
|
(
|
|
|
|
Transfers of financial instruments
|
(
|
|
|
(
|
|
|
|
|
|
Net ECL remeasurement on stage transfer
(4)
|
|
(
|
|
|
|
|
|
|
|
Change in economic scenarios
(2)
|
|
|
|
(
|
|
|
|
|
|
New lending and assets purchased
(5)
|
|
|
|
|
|
|
|
|
|
Redemptions, repayments and assets sold
(7)
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
|
Changes in risk parameters and other movements
(6)
|
(
|
(
|
|
(
|
|
|
(
|
(
|
|
Assets written off
(7)
|
|
|
|
|
(
|
(
|
(
|
(
|
|
At 31 December 2023
|
|
|
|
|
|
|
|
|
|
Net movement in the period
|
(
|
(
|
|
(
|
|
|
(
|
(
|
|
ECL (release)/charge to the Income Statement
|
(
|
(
|
|
|
||||
|
Less: Discount unwind
|
|
|
(
|
(
|
||||
|
Less: Recoveries net of collection costs
|
|
|
(
|
(
|
||||
|
Total ECL (release)/charge to the Income Statement
|
(
|
(
|
|
|
||||
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|||||
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
Exposures
(1)
|
ECL
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
At 1 January 2022
|
|
|
|
|
|
|
|
|
|
Transfers from Stage 1 to Stage 2
(3)
|
(
|
(
|
|
|
|
|
|
|
|
Transfers from Stage 2 to Stage 1
(3)
|
|
|
(
|
(
|
|
|
|
|
|
Transfers to Stage 3
(3)
|
(
|
(
|
(
|
(
|
|
|
|
|
|
Transfers from Stage 3
(3)
|
|
|
|
|
(
|
(
|
|
|
|
Transfers of financial instruments
|
|
|
(
|
|
(
|
(
|
|
|
|
Net ECL remeasurement on stage transfer
(4)
|
|
(
|
|
(
|
|
|
|
(
|
|
Change in economic scenarios
(2)
|
|
|
|
|
|
|
|
|
|
New lending and assets purchased
(5)
|
|
|
|
|
|
|
|
|
|
Redemptions, repayments and assets sold
(7)
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
|
Changes in risk parameters and other movements
(6)
|
|
(
|
(
|
(
|
|
(
|
|
(
|
|
Assets written off
(7)
|
|
|
|
|
(
|
(
|
(
|
(
|
|
At 31 December 2022
|
|
|
|
|
|
|
|
|
|
Net movement in the period
|
|
|
(
|
|
(
|
(
|
|
(
|
|
ECL charge/(release) to the Income Statement
|
|
|
(
|
(
|
||||
|
Less: Discount unwind
|
|
|
(
|
(
|
||||
|
Less: Recoveries net of collection costs
|
|
|
|
|
||||
|
Total ECL charge/(release) to the Income Statement
|
|
|
(
|
|
||||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
78
|
|||
derivative and other treasury product exposures (classified under 'Financial Institutions') are also typically lower than the asset balances, because we show our
overall risk exposure which takes into account our procedures to mitigate credit risk including netting. The balances on our balance sheet only reflect the more
restrictive netting permitted by IAS 32.
On this scale, the higher the rating, the better the quality of the counterparty.
|
Santander UK risk grade
|
|||||||||
|
9
|
8
|
7
|
6
|
5
|
4
|
3 to 1
|
Other
(1)
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
SME and mid corporate
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
Social Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
|||||||||
|
Stage 1
|
|
|
|
|
|
|
|
|
|
|
Stage 2
|
|
|
|
|
|
|
|
|
|
|
Stage 3
|
|
|
|
|
|
|
|
|
|
|
2022
|
|||||||||
|
SME and mid corporate
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
Social Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
|||||||||
|
Stage 1
|
|
|
|
|
|
|
|
|
|
|
Stage 2
|
|
|
|
|
|
|
|
|
|
|
Stage 3
|
|
|
|
|
|
|
|
|
|
(1)
Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.
In 2023, committed exposure
reduced by
5.7%
, driven by reductions in the SME and mid corporate portfolios, which was down by
10.2%
.
The rating distribution
saw an improvement in the SME and mid corporate portfolios, with Commercial Real Estate broadly stable.
the guarantor’s country of domicile instead. At
31 December 2023
and
31 December 2022
this is mainly focused in the UK.
|
Gross exposure
|
Collateral
|
Net exposure
|
|
|
Stage 3
|
Stage 3
|
Stage 3
|
|
|
2023
|
£m
|
£m
|
£m
|
|
SME and mid corporate
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
2022
|
|||
|
SME and mid corporate
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
79
|
|||
we classify as Stage 3 by portfolio at
31 December 2023
and
31 December 2022
.
|
Committed exposure
|
||||||
|
Watchlist
|
||||||
|
Fully
performing
|
Enhanced
monitoring
|
Proactive
management
|
Stage 3
|
Total
(1)
|
Loss
allowances
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
SME and mid corporate
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Social Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
||||||
|
SME and mid corporate
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Social Housing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes committed facilities and derivatives.
2023
compared to
2022
In 2023, Watchlist exposures increased, however the overall quality improved with reductions seen in Enhanced Monitoring of
18.6%
. An increase in Proactive
Management of
14.6%
was driven by a small number of larger exposures in Social Housing which have been downgraded to Proactive Management following
concerns raised by the Social Housing regulators rather than credit concerns.
Forbearance
|
2023
|
2022
|
||
|
£m
|
£m
|
||
|
Financial assets modified in the period:
|
|||
|
–
Amortised cost before modification
|
|
|
|
|
–
Net modification loss
|
|
|
|
|
Financial assets modified since initial recognition:
|
|||
|
–
Gross carrying amount of financial assets for which the loss allowance changed to 12-month ECL in the period
|
|
|
period–end and the forbearance we applied, were:
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Stock
(1)
|
||
|
–
Term extension
|
|
|
|
–
Interest-only
|
|
|
|
–
Other payment rescheduling
|
|
|
|
|
|
|
|
Of which:
|
||
|
–
Stage 1
|
|
|
|
–
Stage 2
|
|
|
|
–
Stage 3
|
|
|
|
|
|
|
|
Proportion of portfolio
|
|
|
(1)
We base forbearance type on the first forbearance we applied. Tables only show accounts open at the period-end. Amounts are drawn balances and include off balance sheet balances.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
80
|
|||
On this scale, the higher the rating, the better the quality of the counterparty.
|
Santander UK risk grade
|
|||||||||
|
9
|
8
|
7
|
6
|
5
|
4
|
3 to 1
|
Other
(1)
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Sovereign and Supranational
|
|
|
|
|
|
|
|
|
|
|
Structured Products
|
|
|
|
|
|
|
|
|
|
|
Financial Institutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
|||||||||
|
Stage 1
|
|
|
|
|
|
|
|
|
|
|
Stage 2
|
|
|
|
|
|
|
|
|
|
|
Stage 3
|
|
|
|
|
|
|
|
|
|
|
2022
|
|||||||||
|
Sovereign and Supranational
|
|
|
|
|
|
|
|
|
|
|
Structured Products
|
|
|
|
|
|
|
|
|
|
|
Financial Institutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
|||||||||
|
Stage 1
|
|
|
|
|
|
|
|
|
|
|
Stage 2
|
|
|
|
|
|
|
|
|
|
|
Stage 3
|
|
|
|
|
|
|
|
|
|
(1)
Smaller exposures mainly in the commercial mortgage portfolio
.
We use scorecards for them, instead of a rating model.
Committed exposures reduced by
6.8%
mainly driven by UK Sovereign and Supranational exposures, as part of normal liquid asset portfolio management, which
reduced by
7.6%
. The portfolio profile remained short-term, reflecting the purpose of the holdings.
the guarantor’s country of domicile instead.
|
2023
|
2022
|
||||||||||
|
UK
|
Europe
|
US
|
Rest of
World
|
Total
|
UK
|
Europe
|
US
|
Rest of
World
|
Total
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Sovereign and Supranational
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Institutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
We monitor exposures that show potentially higher risk characteristics using our Watchlist process. In Corporate Centre, committed exposures were all fully
performing at
31 December 2023
and
31 December 2022
.
There were
no
loan modifications made in
2023
and
2022
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
81
|
|||
|
Overview
Liquidity risk is the risk that we do not have sufficient liquid financial resources available to
meet our obligations when they fall due, or we can only secure such resources at
excessive cost.
In this section, we describe our sources and uses of liquidity and how we manage liquidity
risk. We also analyse our key liquidity metrics, including our LCRs and our eligible liquidity
pools.
We then explain our funding strategy and structure and we analyse our wholesale
funding. Finally, we analyse how we have encumbered some of our assets to support our
funding activities.
|
Key metrics
LCR of
159%
(
2022
:
157%
)
RFB DoLSub NSFR of
136%
(
2022
:
135%
)
RFB DoLSub LCR of
157%
(
2022
:
152%
)
Wholesale funding with maturity 1 year £
11.9
bn (
2022
:
£
11.0
bn)
RFB DoLSub LCR eligible liquidity pool of £
48.3
bn (
2022
:
£
46.3
bn)
|
Through our Liquidity Risk Appetite (LRA) framework, we manage our funding or structural contingent and market liquidity risks wherever they arise. This can be
in retail and corporate deposit outflows, wholesale secured and unsecured liquidity outflows and off-balance sheet activities. Other risks our framework covers
include funding concentrations, intra-day cash flows, intra-group commitments and support, franchise retention and cross currency risk.
Our main sources of liquidity
Customer deposits finance most of our customer lending. Although these funds are mostly callable, in practice they give us a stable and predictable core of
funding. This is due to the nature of retail accounts and the breadth of our retail customer relationships.
We have a strong wholesale funding investor base, diversified across product types and geographies. Through the wholesale markets, we have active
relationships in many sectors including banks, other financial institutions, corporates, pensions and investment funds. We access the wholesale funding markets
through the issuance of capital, senior unsecured debt, covered bonds, structured notes and short-term funding. We also access these markets through
securitisations of certain assets of Santander UK plc and our operating subsidiaries. For more on our programmes, see Notes
14
,
26
and
27
in the Consolidated
Financial Statements.
We generate funding on the strength of our own balance sheet, our own profitability and our own network of investors. In addition, we have access to UK
Government funding schemes. We comply with rules set by the PRA, other regulators, and Banco Santander standards. While we manage, consolidate and
monitor liquidity risk centrally, we also manage and monitor it in the business area it comes from.
Our main uses of liquidity
Our main uses of liquidity are to fund our lending in Retail and Business Banking, Consumer Finance and Corporate Commercial Banking, to pay interest and
dividends, and to repay debt. Our ability to pay dividends depends on various factors. These include our regulatory capital needs, the level of our distributable
reserves, and our financial performance. We also use liquidity to pay for business combinations.
LIQUIDITY RISK MANAGEMENT
Introduction
We manage liquidity risk on a consolidated basis in our CFO division, which is our centralised function for managing funding, liquidity and capital. We created our
governance, oversight and control frameworks, and our LRA, on the same consolidated basis.
Under
the PRA’s liquidity rules, Santander UK plc and its subsidiary Cater Allen Limited form the RFB Domestic Liquidity Sub-group (the RFB DoLSub), which
allows them to collectively meet regulatory requirements to manage liquidity risk. Each member of the RFB DoLSub will support the other by transferring surplus
liquidity in times of stress.
Risk appetite
Our LRA is based on the principles of liquidity management we use to manage our balance sheet. It also supports our need to meet or exceed regulatory rules.
In
line with our liquidity management principles, we avoid an over-reliance on funding from a single product, customer or counterparty. We also maintain enough
unencumbered customer assets to support current and future funding and collateral requirements and maintain enough capacity to monetise liquid assets and
other counterbalancing capacity on a timely basis.
Our LRA is proposed to the Risk division
and the Board, which is then approved under advice from the Board Risk Committee. Our LRA, in the context of our
overall Risk Appetite, is
reviewed and approved by the Board each year, or more often if needed.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
82
|
|||
Risk measurement
We use a number of metrics to manage liquidity risk. These include metrics that show the difference between cash and collateral inflows and outflows in different
periods.
They also include structural metrics, such as our level of encumbered assets.
Ongoing business management
Within our framework of prudent funding and liquidity management, we manage our activities to our liquidity risk appetite. We have clear responsibilities for short-
term funding, medium-term funding, encumbrance, collateral and liquid asset management. This ensures we manage liquidity risks as part of our daily operations,
strategy and planning.
Our liquidity management framework is split between short-term and strategic activities. Our short-term activities focus on intra-day collateral management and
maintaining liquid assets to cover unexpected demands on cash in a stress, such as large and unexpected deposit withdrawals by customers and loss of
wholesale funding. Our strategic activities focus on ensuring we are not over reliant on any one source for funding and that we avoid excessive concentrations in
the maturity of our funding.
We regularly test the liquidity of our eligible liquidity pool, in line with PRA rules and Basel guidelines. We do this by realising some of the assets by repurchase or
outright sale to the market. We make sure that over any 12-month period we realise a significant part of our eligible liquidity pool. As well as our eligible liquidity
pool, we always hold a portfolio of unencumbered liquid assets. Our LRA and PRA requirements determine the size and composition of this portfolio. These
assets give us a source of contingent liquidity, as we can realise some of them in a stress to create liquidity by repurchase or outright sale to the market.
Stress testing
Our liquidity stress testing framework is central to our LRA measurement and monitoring. To fit with our Risk Appetite, the liquidity outflows that come from these
stress tests must be fully covered with high-quality liquid assets, other liquid assets and appropriate management actions.
Our Risk division runs a range of stress tests. Our LRA stress test consists of three tests that cover idiosyncratic, market-wide and combined scenarios.
Our other tests consider scenarios such as a global economic slowdown that results in reduced confidence in banks, a slowdown in a major economy or a decline
in access to liquidity. These are considered on both an acute and protracted basis. We also run severe combined stress tests which look at both a deep and
prolonged UK recession that results in a reduction in wholesale funding availability and an idiosyncratic shock that would lead to retail and commercial outflows.
We run climate change stresses, these include severe physical risks which result in a reduction in retail deposits, increased use of corporate lending facilities and
an increase in mortgage defaults and a scenario where there is disorderly transition to net zero, resulting in supply shocks and data transparency concerns.
We also conduct sensitivity analysis and reverse stress testing for instant liquidity shocks by each key liquidity risk. We do this to understand the impacts they
would have on our LRA and our regulatory liquidity metrics.
We monitor our
LCR
and our Net Stable Funding Ratio (NSFR) to ensure we continue to meet the requirements.
Risk mitigation
(audited)
The Board aims to make our balance sheet resilient at all times and for it to be perceived as such by stakeholders. This preserves our short and long-term viability.
The Board recognises that as we are involved in maturity transformation, we cannot hold enough liquidity to cover all possible stress scenarios. The Board
requires us to hold enough liquidity to make sure we will survive three plausible but severe stress scenarios (our LRA stress test, described above). We do this by
maintaining a prudent balance sheet structure and approved liquid resources.
Recovery and Resolution framework
The CFO is the accountable SMF for recovery and resolution and the related work is managed by the CFO division. They are overseen by the Board Audit
Committee and the Board.
We review and refresh our recovery plan each year. It sets out the risks, the indicators we use to monitor those risks, and the actions
that are available to mitigate capital, liquidity or combined stress event. We are confident that we have sufficient credible and executable options to respond to a
wide range of stresses, be they market-wide or idiosyncratic, in a timely and effective manner. Recovery indicators are both qualitative and quantitative and we
have embedded them into our risk frameworks. We monitor recovery capacity, headroom to recovery triggers and recovery indicators regularly. If needed, we
would invoke recovery early to mitigate the effects of a stress and restore our financial position and balance sheet strength.
Our resolution capabilities are underpinned by comprehensive governance, testing and assurance arrangements, which seek to ensure that our resolution
readiness is maintained and enhanced on an ongoing basis. In October 2023, we submitted our second resolvability self-assessment report to the PRA. This
builds on the first self-assessment report submitted in October 2021, as summarised in our June 2022 resolvability public disclosure. The next resolvability public
disclosures by the Bank of England and Santander UK are due in June 2024.
Risk monitoring and reporting
(audited)
We monitor liquidity risk daily, weekly and monthly. We do this through different committees and levels of management, including
ALCO and the BRC.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
83
|
|||
Liquidity Coverage Ratio
This table shows our LCR at
31 December 2023
and
31 December 2022
.
|
2023
|
2022
|
||
|
RFB DoLSub LCR
(2)
|
£bn
|
£bn
|
|
|
Eligible liquidity pool (liquidity value)
(1)
|
47.8
|
46.2
|
|
|
Net stress outflows
|
(30.4)
|
(30.4)
|
|
|
Surplus
|
17.4
|
15.8
|
|
|
Eligible liquidity pool as a percentage of anticipated net cash flows
|
157
%
|
152
%
|
(1)
The liquidity value is calculated as applying an applicable haircut to the carrying value.
(2)
The RFB LCR was
159%
(
2022
:
157%
).
This table shows the carrying value of our eligible liquidity pool assets at
31 December 2023
and
31 December 2022
. It also shows the weighted average carrying
value in the year.
|
RFB DoLSub
|
Carrying value
|
Weighted average
carrying
value in the year
|
||||||
|
2023
|
2022
|
2023
|
2022
|
|||||
|
Level 1
|
Level 2
|
Total
|
Level 1
|
Level 2
|
Total
|
Total
|
Total
|
|
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
|
Cash and balances at central banks
|
36.1
|
—
|
36.1
|
42.1
|
—
|
42.1
|
38.6
|
43.5
|
|
Government bonds
|
8.7
|
0.3
|
9.0
|
2.9
|
—
|
2.9
|
6.8
|
3.8
|
|
Supranational bonds and multilateral development banks
|
0.3
|
—
|
0.3
|
0.3
|
—
|
0.3
|
0.1
|
0.1
|
|
Covered bonds
|
1.2
|
1.0
|
2.2
|
0.1
|
0.9
|
1.0
|
1.7
|
0.9
|
|
Asset-backed securities
|
—
|
0.7
|
0.7
|
—
|
—
|
—
|
0.4
|
0.1
|
|
46.3
|
2.0
|
48.3
|
45.4
|
0.9
|
46.3
|
47.6
|
48.4
|
|
Term duration in the LCR eligible liquidity pool is hedged with swaps to offset mark to market movements from interest rate changes.
This table shows the
carrying value of our eligible liquidity pool
by major currencies at
31 December 2023
and
31 December 2022
. The composition of the pool is
consistent with the currency profile of our net liquidity outflows.
|
RFB DoLSub
|
US Dollar
|
Euro
|
Sterling
|
Other
|
Total
|
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
|
2023
|
2.4
|
1.1
|
44.0
|
0.8
|
48.3
|
|
2022
|
0.8
|
1.3
|
44.2
|
—
|
46.3
|
|
2023
|
2022
|
||
|
%
|
%
|
||
|
RFB DoLSub NSFR
|
136
|
135
|
2023
compared to
2022
We remain in a strong liquidity position.
We hold sufficient liquid resources and have adequate governance and controls in place to manage the liquidity risks
arising from our business and strategy.
At
31 December 2023
and
31 December 2022
, the LCR and NSFR
significantly exceeded regulatory requirements.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
84
|
|||
Funding strategy
Our funding strategy continues to be based on maintaining a conservatively structured balance sheet and diverse sources of funding to meet the needs of our
business strategy and plans. The CFO Division maintains a funding plan that complies with the LRA and regulatory liquidity and capital requirements.
Most of our funding comes from customer deposits. We source the rest from a mix of secured and unsecured funding in the wholesale markets. Overall, this
means that we do not rely too heavily on wholesale funds. We manage funding requirements by targeting a specific Liquidity Coverage Ratio, we ensure
maturities are prefunded and capital/Minimum Requirements for Eligible Liabilities (MREL) requirements are prioritised. We also have checks and controls to limit
our asset encumbrance from our secured funding operations.
As part of maintaining a diverse funding base, we raise funding in a number of currencies, including EUR and USD, and convert it into sterling through currency
swaps to fund our commercial assets which are largely sterling denominated.
Our base of stable retail and corporate deposits is a key funding source for us. We leverage our large and diverse customer base to offer products that give us a
long-term sustainable source of funding. We do this by focusing on building long-term relationships. At 31 December 2023, 86% of our total core retail customer
liabilities were covered by the Financial Services Compensation Scheme (the FSCS).
Behavioural maturities
The contractual maturity of our balance sheet assets and liabilities highlights the maturity transformation that underpins the role of banks to lend long term, but to
fund themselves mainly with shorter-term liabilities, like customer deposits. We do this by diversifying our funding operations across a wide customer base, both in
numbers and by type of depositor. In practice, the behavioural profiles of many liabilities show more stability and longer maturity than their contractual maturity.
This is especially true of many retail and corporate deposits that, while they may be repayable on demand or at short notice, have shown good stability even in
times of stress. We model behaviour profiles using our experience of customer behaviour. We use this data to determine the funds transfer pricing rates at which
we reward and charge our business units for sources and uses of funds. We apply this rate until a customer changes to a different product or service offered by us
or by one of our competitors.
We continue to maintain the quality of our retail, commercial and wholesale deposits. We aim to deepen our customer relationships across all customer segments.
We do this to lengthen the contractual and behavioural profile of our liability base.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
85
|
|||
business strategy and plans. The CFO Division maintains a funding plan that complies with our LRA and regulatory liquidity and capital requirements.
|
Balance sheet line item
|
||||||||
|
Funding
analysis
|
Deposits
by banks
(1)
|
Deposits
by
customers
(2)
|
Repurchase
agreements
- non
trading
|
Financial
liabilities
designated
at fair
value
|
Debt
securities
in issue
|
Subordinated
liabilities
|
Other equity
instruments
(3)
|
|
|
2023
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
Deposits by banks
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and commercial paper
|
|
|
|
|
|
|
|
|
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
|
–
privately placed
|
|
|
|
|
|
|
|
|
|
Covered bonds
|
|
|
|
|
|
|
|
|
|
Securitisation and structured issuance
|
|
|
|
|
|
|
|
|
|
TFSME
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities and equity
|
|
|
|
|
|
|
|
|
|
Total wholesale funding
|
|
|
|
|
|
|
|
|
|
Repos
|
|
|
|
|
|
|
|
|
|
Foreign exchange and hedge accounting
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Balance sheet total
|
|
|
|
|
|
|
|
|
|
2022
|
||||||||
|
Deposits by banks
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and commercial paper
|
|
|
|
|
|
|
|
|
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
|
–
privately placed
|
|
|
|
|
|
|
|
|
|
Covered bonds
|
|
|
|
|
|
|
|
|
|
Securitisation and structured issuance
|
|
|
|
|
|
|
|
|
|
TFSME
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities and equity
|
|
|
|
|
|
|
|
|
|
Total wholesale funding
|
|
|
|
|
|
|
|
|
|
Repos
|
|
|
|
|
|
|
|
|
|
Foreign exchange and hedge accounting
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Balance sheet total
|
|
|
|
|
|
|
|
|
(1)
Consists of
Perpetual Capital Securities
. See Note
33
to the Consolidated Financial Statements.
(2)
This is included in our balance sheet total of
190,850
m(
2022
:
£
195,568
m
).
(3)
Other consists of items in the course of transmission and other deposits. See Note
24
to the Consolidated Financial Statements.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
86
|
|||
This table shows our main sources of wholesale funding. It does not include securities finance agreements. The table is based on exchange rates at issue and
scheduled repayments and call dates. It does not reflect the final contractual maturity of the funding.
For details of the maturities of financial liabilities and off-balance sheet commitments, see Note
39
to the
Consolidated Financial Statements
.
|
≤ 1
month
|
1 and ≤ 3
months
|
3 and ≤ 6
months
|
6 and ≤ 9
months
|
9 and ≤
12 months
|
Sub-total
≤ 1 year
|
1 and
≤ 2 years
|
2 and
≤ 5 years
|
5 years
|
Total
|
|
|
2023
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
Downstreamed from Santander UK Group Holdings plc to Santander UK plc
(1)
|
||||||||||
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
|
|
|
–
privately placed
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities and equity (incl. AT1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Santander UK plc
|
||||||||||
|
Deposits by banks
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and commercial paper
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
|
|
|
–
privately placed
|
|
|
|
|
|
|
|
|
|
|
|
Covered bonds
|
|
|
|
|
|
|
|
|
|
|
|
Securitisation structured issuance
(2)
|
|
|
|
|
|
|
|
|
|
|
|
TFSME
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other group entities
|
||||||||||
|
Securitisation structured issuance
(3)
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2023
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
||||||||||
|
–
Secured
|
|
|
|
|
|
|
|
|
|
|
|
–
Unsecured
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
||||||||||
|
Total at 31 December 2022
|
|
|
|
|
|
|
|
|
|
|
|
Of which:
|
||||||||||
|
–
Secured
|
|
|
|
|
|
|
|
|
|
|
|
–
Unsecured
|
|
|
|
|
|
|
|
|
|
|
(1)
96
%
of senior unsecured debt issued from Santander UK Group Holdings plc has been downstreamed to Santander UK plc as ‘secondary non-preferential debt’ in line with the guidelines from the Bank of
England for Internal MREL.
(2)
Includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator.
(3)
Includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator.
Together with our immediate parent, Santander UK Group Holdings plc, o
ur overall funding strategy remains to develop and sustain a diversified funding base. We
also need to fulfil regulatory requirements as well as support our credit ratings. We have stable and diversified wholesale funding programmes.
We repaid
£8.0bn
of TFSME in 2023 as planned, with
£17.0bn
outstanding.
At
31 December 2023
,
79%
(2022:
83%
) of wholesale funding had a maturity of greater than one year, with an overall residual duration of
35
months (2022:
37
months).
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
87
|
|||
|
2023
|
2022
|
||||||||
|
Sterling
|
US Dollar
|
Euro
|
Other
|
Sterling
|
US Dollar
|
Euro
|
Other
|
||
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
%
|
||
|
Downstreamed from Santander UK Group Holdings plc to Santander UK plc
|
|||||||||
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
|
|
–
privately placed
|
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities and equity (incl. AT1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other Santander UK plc
|
|||||||||
|
Deposits by banks
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and commercial paper
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
|
|
–
privately placed
|
|
|
|
|
|
|
|
|
|
|
Covered bonds
|
|
|
|
|
|
|
|
|
|
|
Securitisation structured issuance
|
|
|
|
|
|
|
|
|
|
|
TFSME
|
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other group entities
|
|||||||||
|
Securitisation structured issuance
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Sterling
|
US Dollar
|
Euro
|
Other
|
2023
|
2022
|
||
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
||
|
Downstreamed from Santander UK Group Holdings plc to Santander UK plc
|
|||||||
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
Subordinated debt and equity (inc. AT1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other Santander UK plc
|
|||||||
|
Securitisations and other secured funding
|
|
|
|
|
|
|
|
|
Covered bonds
|
|
|
|
|
|
|
|
|
Senior unsecured – public benchmark
|
|
|
|
|
|
|
|
|
Senior unsecured – privately placed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other group entities
|
|||||||
|
Securitisations
|
|
|
|
|
|
|
|
|
Total gross issuances
|
|
|
|
|
|
|
In
2023
we issued
c£
5.6
bn
medium-term funding across a range of currencies, including
c£
1.5
bn
of
issuance
to Santander UK Group Holdings plc
and
c£
4.1
bn
of
other secured issuance
. We also issued
£
1.1
bn
of Tier 2 securities which were bought by
Santander UK Group Holdings plc
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
88
|
|||
be sold to reduce funding needs. Being able to pledge or transfer assets as collateral is a key part of a bank’s operations. The main ways we encumber assets are
that we: enter into securitisation, covered bonds, and repurchase agreements to access medium and long-term funding; enter into short-term funding transactions
(including repurchase agreements and stock borrowing) as part of our liquidity management; pledge collateral as part of participating in payment and settlement
systems; and post collateral as part of derivatives activity. We control levels of encumbrance by setting a minimum level of unencumbered assets after we factor in
our funding plans, whether we can use our assets for our future collateral needs, the impact of a stress and our current encumbrance level.
Assets classified as readily available for encumbrance include cash and securities in our eligible liquidity pool. They also include other unencumbered assets that
give us a source of contingent liquidity. We do not rely on these extra unencumbered assets in our LRA, but we might use them in a stress. We can create liquidity
by using them as collateral for secured funding or through outright sale. This includes excess collateral already in a secured funding structure and collateral pre-
positioned at central banks that is available for use in secured funding. All other loans and advances are classified as not readily available for encumbrance,
however, they may still be suitable for use in secured funding structures.
We issued securitised products to a diverse investor base through our prime mortgage-backed and other asset-backed funding programmes. We raised funding
with mortgage-backed notes, both issued to third parties and retained – the latter being central bank eligible collateral for funding purposes in other Bank of
England facilities. We also have a covered bond programme, under which we issue securities to investors secured by a pool of residential mortgages. For more
on these programmes, see Notes
14
and
26
to the
Consolidated Financial Statements
.
|
Encumbered with counterparties other than central banks
|
Assets
positioned
at central
banks
(3)
|
||||
|
Covered
bonds
|
Securitis-
ations
|
Other
|
Total
|
||
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Cash and balances at central banks
(1)(2)
|
|
|
|
|
|
|
Financial assets at FVTPL:
|
|||||
|
–
Derivative financial instruments
|
|
|
|
|
|
|
–
Other financial assets at FVTPL
|
|
|
|
|
|
|
Financial assets at amortised cost:
|
|||||
|
–
Loans and advances to customers
|
|
|
|
|
|
|
–
Loans and advances to banks
|
|
|
|
|
|
|
–
Repurchase agreements – non trading
|
|
|
|
|
|
|
–
Other financial assets at amortised cost
|
|
|
|
|
|
|
Financial assets at FVOCI
|
|
|
|
|
|
|
Interests in other entities
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
Current tax assets
|
|
|
|
|
|
|
Retirement benefit assets
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
2022
|
|||||
|
Cash and balances at central banks
(1)(2)
|
|
|
|
|
|
|
Financial assets at FVTPL:
|
|||||
|
–
Derivative financial instruments
|
|
|
|
|
|
|
–
Other financial assets at FVTPL
|
|
|
|
|
|
|
Financial assets at amortised cost:
|
|||||
|
–
Loans and advances to customers
|
|
|
|
|
|
|
–
Loans and advances to banks
|
|
|
|
|
|
|
–
Repurchase agreements – non trading
|
|
|
|
|
|
|
–
Other financial assets at amortised cost
|
|
|
|
|
|
|
Financial assets at FVOCI
|
|
|
|
|
|
|
Interests in other entities
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
Current tax assets
|
|
|
|
|
|
|
Retirement benefit assets
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
(1)
Encumbered cash and balances at central banks include minimum cash balances we have to hold at central banks for regulatory purposes.
(2)
Readily realisable cash and balances at central banks are amounts held at central banks as part of our liquidity management activities.
(3)
Comprises pre-positioned assets and encumbered assets.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
89
|
|||
|
Overview
Capital risk is the risk that we do not have an adequate amount or quality of capital to
meet our business objectives, regulatory requirements and market expectations.
In this section, we set out how we are regulated. We explain how we manage capital on
a standalone basis as a subsidiary in the Banco Santander group. We then analyse our
capital resources and key capital ratios including our RWAs.
|
Key metrics
CET1 capital ratio of
15.4%
(
2022
:
15.4%
)
Total qualifying regulatory capital of £
14.6
bn (
2022
: £
14.3
bn)
|
Regulatory supervision
For capital purposes, we are subject to prudential supervision by the PRA, as a UK
banking group,
and by the European Central Bank (ECB) as part of the Banco
Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM). Although we are part of the Banco Santander
group, we do not have a guarantee from
Banco Santander SA
and we operate as a standalone subsidiary. As we are part of the UK sub-group regulated by the
PRA,
we have to meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the
support of our
parent.
Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior
management appointments.
Santander UK Group Holdings plc is the holding company of
Santander UK plc
and is the head of the Santander UK group
for regulatory capital and leverage
purposes.
Santander UK plc is the head of the ring-fenced bank sub-group and is subject to regulatory capital and leverage rules in relation to that sub-group. Our
basis of consolidation for our capital disclosures is substantially the same as for our Consolidated Financial Statements.
The Board is responsible for capital management strategy and policy and ensuring that we monitor and control our capital within regulatory and internal limits.
We
manage our funding and maintain capital adequacy on a standalone basis.
We operate within the capital risk framework and appetite approved by
our Board.
This
reflects the environment we operate in, our strategy for each material risk and the potential impact of adverse scenarios or stresses on our capital.
Management of capital requirements
(audited)
Our capital risk appetite aims to maintain capital levels appropriate to the level of stress applied, and the expected regulatory response. In:
–
An adverse economic stress, which we expect once in
20
years, the firm should remain profitable and exceed all regulatory capital minimums at all times.
–
A very severe economic stress, which we expect once in
100
years, and which has been designed to test any specific weaknesses of a firm’s business model,
the firm should meet all regulatory capital minimums at all times. This is subject to using regulatory buffers designed to absorb losses in such a stress.
Management of capital resources
(audited)
We use a mix of regulatory and
EC
ratios and limits, internal buffers and restrictions to manage our capital resources. We also take account of the costs of
differing capital instruments and capital management techniques. We also use these to shape the best structure for our capital needs. We decide how to allocate
our capital resources as part of our strategic planning process. We base this in part on the relative returns on capital using both EC and regulatory capital
measures. We plan for severe stresses and we set out what action we would take if an extremely severe stress threatened our viability and solvency. This could
include not paying dividends, selling assets, reducing our business and issuing more capital.
Risk measurement
We apply Banco Santander’s approach to capital measurement and risk management for CRD IV.
Santander UK
plc is classified as a significant subsidiary of
Banco Santander SA.
For more on the CRD IV risk measurement of our exposures, see Banco Santander’s Pillar 3 report.
Key metrics
The main metrics we use to measure capital risk are CET1 capital ratio
and
total capital ratio
.
We continue to be in excess of overall capital requirements,
minimum leverage requirements and minimum requirements for own funds and eligible liabilities (MREL).
Stress testing
Each year we create a capital plan, as part of our ICAAP. We share our ICAAP with the PRA. The PRA then tells us how much capital (Pillar 2A), and of what
quality, it thinks we should hold on top of our Pillar 1 requirements and buffer levels. We also develop a series of economic scenarios to stress test our capital
needs and confirm that we have enough regulatory capital to meet our projected and stressed capital needs and to meet our obligations as they fall due.
In 2022, we developed a Climate Internal Scenario Analysis (CISA) to help understand better the potential impact of climate change on our business portfolios and
balance sheet. Since then, we have invested in a strategic solution to deliver capability to run long-term horizon multi-scenario assessments which will inform
future strategic decisions and enhance risk management capabilities (CISA Development). The model capability will support in exploring scenarios which would
reflect a range of climate outcomes, covering shorter and longer-term (30-year) horizons and reflect physical and transition risks. The CISA outputs will form the
basis of our future ICAAP exercises for climate risk and will help us prioritise our actions for the next five years.
We augment our regulatory minimum capital with internal buffers. We hold buffers to ensure we have enough time to take action against unexpected changes.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
90
|
|||
Risk mitigation
We designed our capital risk framework, policies and procedures to ensure that we operate within our Risk Appetite. We manage capital transferability between
our subsidiaries in line with our business strategy, our risk and capital management policies, UK laws and regulations. There are no legal restrictions on us moving
capital resources promptly, or repaying liabilities, between the Company and its subsidiaries except for distributions between Santander UK entities in the ring-
fenced bank sub-group and Santander UK entities that are not members of the ring-fenced bank sub-group, where the PRA is required to assess the impact of
proposed distribution prior to payment. For details on our Recovery framework in the event of a capital stress, see 'risk mitigation' in the ‘Liquidity risk’ section.
At
31 December 2023
, Santander UK plc, Cater Allen Limited, Santander ISA Managers Limited and certain other non-regulated subsidiaries of Santander UK plc
were party to a capital support deed entered into on 17 December 2021 and effective from 1 January 2022 (the RFB Sub-Group Capital Support Deed). These
parties were permitted by the PRA to form a core UK group as defined in the PRA Rulebook, a permission which expires on 31 December 2024. Exposures of
each of the regulated entities to other members of the core UK group are exempt from large exposure limits that would otherwise apply and these exposures are
risk-weighted at
0
%
. Where applicable this permission also provides for intra-group exposures to be excluded from the leverage exposure measure. The purpose
of the RFB Sub-Group Capital Support Deed is to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the non-regulated
parties to any of the regulated parties in the event that one of the regulated parties breached or was at risk of breaching its capital resources or risk concentrations
requirements.
Risk monitoring and reporting
We monitor and report regularly against our capital plan. We do this to identify any change in our business performance that might affect our capital. Each month,
we also review the economic assumptions we use to create and stress test our capital plan. We do this to identify any potential reduction in our capital.
We target a CET1 management buffer of sufficient size to absorb volatility in CET1 deductions, capital supply and capital demand whilst remaining above the
current and expected future regulatory CET1 requirement. Distribution restrictions would be expected to be applied if we were unable to meet both our minimum
requirement, which consists of the Pillar 1 minimum plus Pillar 2A, the CRD IV buffers consisting of the Capital Conservation Buffer (CCB), the Countercyclical
Capital Buffer (CCyB), and the Other Systemically Important Institutions Buffer (O-SII)
.
Our ECL methodology takes account of forward-looking data and covers a range of possible economic outcomes, and so provision movements may result in
increased pro-cyclicality of risk-based capital and leverage ratios. However, the impact is currently mitigated by our surplus of IRB model regulatory expected
losses over provisions for exposures using the IRB approach. For such exposures (which include residential mortgages) the adverse impact on CET1 capital of
provision increases from reserve movements is offset by the related reduction of the negative CET1 capital adjustment for regulatory expected loss amounts. Also,
the UK CRR transitional rules for the capital impact of IFRS 9 mean that adverse CET1 effects from increases in ECL-based provisions from the level of such
provisions at 1 January 2018 are partly reduced until the end of 2024.
We reflect projections of ECL provisions in our capital position forecasting under base case and stress scenarios for ICAAP and capital management purposes.
We also consider the dynamics of ECL in how we assess and manage capital risk. A period of economic instability, such as that seen in early 2020 due to the
impacts of the Covid-19 pandemic, could significantly impact our results and our financial assets. It could also impact the amount of capital we have to hold. We
take into account the volatility of ECL in our capital planning strategy.
|
2023
|
2022
|
||
|
%
|
%
|
||
|
CET1 capital ratio
|
15.4
|
15.4
|
|
|
AT1
|
2.9
|
2.8
|
|
|
Tier 2
|
3.2
|
2.2
|
|
|
Total capital ratio
|
21.5
|
20.4
|
The total subordination available to
Santander UK plc
senior unsecured bondholders was
21.5%
(
2022
:
20.4%
) of RWAs.
Return on assets - profit after tax divided by average total assets was
0.55
% (
2022
:
0.49
%).
2023
compared to
2022
The CET1 capital ratio remained stable at
15.4%
. Higher profit and a reduction in RWA exposure was partially offset by the dividends paid in 2023.
|
2023
|
2022
|
||
|
£m
|
£m
|
||
|
CET1 capital
|
|
|
|
|
AT1 capital
|
|
|
|
|
Tier 1 capital
|
|
|
|
|
Tier 2 capital
|
|
|
|
|
Total regulatory capital
(1)
|
|
|
Total RWAs at
31 December 2023
were
£67.8bn
(
2022
:
£70.1bn
) which are consistent with our regulatory filings.
RWAs decreased with lower mortgage lending
and active balance sheet management.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
91
|
|||
Market risk
|
Overview
Market risk comprises non-traded market risk and traded market risk.
Non-traded market risk is the risk of loss of income, economic or market value due to
changes to interest rates in the non-trading book or to changes in other market risk
factors (e.g. credit spread and inflation risk), where such changes would affect our net
worth through an adjustment to revenues, assets, liabilities, and off-balance sheet
exposures in the non-trading book.
Traded market risk is the risk of changes in market factors that affect the value of the
positions in the trading book. We have no significant traded market risk exposure.
In this section, we set out which of our assets and liabilities are exposed to non-traded
and traded market risk. Then we explain how we manage these risks and discuss our
key market risk metrics.
|
Key metrics
Net Interest Income (NII) sensitivity to +100bps was
£220m
and to ‑100bps was
£(220)m
(
2022
:
£241m
and
£(197)m
).
Economic Value of Equity (EVE) sensitivity to +100bps was
£(299)m
and to ‑100bps was
£265m
(
2022
:
£(487)m
and
£635m
).
|
We classify all our assets and liabilities exposed to market risk as non-traded market risk, except for certain portfolios that we must classify as trading books for
regulatory purposes (such as selling derivatives or derivative-based products to clients), of which we must fair value for accounting reasons (such as assets in the
eligible liquidity pool). For accounting purposes, we classify all derivatives as held for trading unless they are designated as being in a hedging relationship. For
more, see Note
11
to the Consolidated Financial Statements.
OUR KEY NON-TRADED MARKET RISKS
(audited)
Non-traded market risk mainly comes from providing banking products and services to our customers, as well as our structural balance sheet exposures. It arises
in all our business segments.
In Retail and Business Banking, Consumer Finance and Corporate Commercial Banking, it is a by-product of us writing customer
business and we transfer most of these risks to Corporate Centre to manage. The only types of non-traded market risk that we keep in Retail and Business
Banking, Consumer Finance and Corporate Commercial Banking are short-term mismatches due to forecasting variances in prepayment and launch risk. This
is where customers repay their loans earlier than their expected maturity date or do not take the expected volume of new products.
Corporate Centre also
manages our structural balance sheet exposures, such as foreign exchange and Income Statement volatility risk.
|
Key risks
|
Description
|
|
Interest rate risk
|
Yield curve risk:
comes from timing mismatches in repricing fixed and variable rate assets, liabilities and off-balance sheet instruments.
It also comes from investing non-rate sensitive liabilities in interest-earning assets.
Basis risk:
comes from pricing assets using a different rate index to the liabilities that fund them. We are exposed to basis risks
associated with Bank of England bank rate, reserve rate linked assets we deposit with central banks, and the Sterling Overnight Index
Average (SONIA) rate. Since the cessation of LIBOR at the end of 2021, basis risk exposure has been immaterial.
|
|
Spread risk
|
Spread risk arises when the value of assets or liabilities which are accounted for at fair value (either through Other
Comprehensive Income or through Profit and Loss) are affected by changes in the credit spread. We measure these spreads as
the difference between the discount rate we use to value the asset or liability, and an underlying interest rate curve.
|
|
Foreign exchange risk
|
Our banking businesses operate mainly in sterling markets, so we do not create significant foreign exchange exposures. The only
exception to this is money we raise in foreign currencies. For more on this, see ‘Wholesale funding’ in the ‘Liquidity risk’ section.
|
|
Income statement
volatility risk
|
We measure most of the assets and liabilities in our banking book balance sheet at amortised cost. We sometimes manage their
risk profile by using derivatives. As all derivatives are accounted for at fair value, the mismatch in their accounting treatment can
lead to volatility in our Income Statement. This happens even if the derivative is an economic hedge of the asset or liability.
|
NON-TRADED MARKET RISK MANAGEMENT
Risk appetite
Our Structural and Market Risk framework sets out our high-level arrangements and standards to manage, control and oversee non-traded market risk, and is part
of our overall Risk Framework.
Our
Risk Appetite sets the controls, risk limits and key risk metrics for non-traded market risk. We show risk appetite by the income
and value sensitivity limits we set in
our
Risk Appetite, at both Santander UK and Banco Santander group levels.
Risk measurement
We mainly measure our exposures with NII and EVE sensitivity analysis. We support this with VaR risk measures and stress testing. We also monitor our interest
rate repricing gap. We regularly review our risk models and metrics including underlying model assumptions to ensure they continue to reflect the risks inherent in
the current rate environment and regulatory expectations.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
92
|
|||
The calculations for NII and EVE sensitivities to interest rate moves involve many assumptions, including expected customer behaviour (such as early repayment
of loans) and the projected evolution and repricing of our balance sheet. These assumptions are a key part of our overall control framework, so we update and
review them regularly.
Our NII and EVE sensitivities include the interest rate risk from all our banking book positions. Our banking book positions generate almost
all our reported net interest income.
|
Net Interest Income (NII) sensitivity
|
|
–
NII sensitivity is an income-based measure we use to forecast the changes to interest income and interest expense in different scenarios. It gives us a combined impact
on net interest income over a given period – usually
12
or
36
months.
|
|
–
We calculate NII sensitivity as the change in NII for a defined set of instantaneous parallel and non-parallel shifts in the yield curve.
|
|
EVE sensitivity
|
|
–
We calculate EVE sensitivity as the change in the net present value of all the interest rate sensitive items in the banking book balance sheet for a defined set of
instantaneous parallel and non-parallel shifts in the yield curve.
|
We use sensitivities to measure the impact of standard, instantaneous, parallel shifts in relevant yield curves. The advantage of using standard parallel shifts is
they generally give us a constant measure of the size of our market risk exposure, with a simple and consistent stress.
We also run non-parallel stress tests, to
calculate the impact of some plausible non-parallel scenarios, and over various time periods for income stresses, usually one or three years.
|
VaR
|
|
–
VaR indicates the losses that we might suffer because of unfavourable changes in the markets under normal (non-stressed) market conditions.
|
|
–
We run a historical simulation using historical daily price moves to find how much we might lose, normally at a
|
The limitations of VaR
VaR is a useful and important market standard measure of risk, but it does have some limitations. These include:
–
VaR assumes what happened in the past is a reliable way to predict what will happen in the future. This may not always be the case
–
VaR is based on positions at the end of the business day so it doesn’t include intra-day positions
–
VaR does not predict how big the loss could be on the
1
% of trading days that it is greater than the VaR
–
Using a time horizon of one day means VaR does not tell us everything about exposures that we cannot liquidate or hedge within a day, or products with
infrequent pricing.
Back-testing – comparing VaR estimates with reality
To check that the way we estimate VaR is reasonable, we back-test our VaR by comparing it against both actual and hypothetical profits and losses, using a one-
day time horizon. Back-testing allows us to identify exceptions – times when the predictions were out of line with what happened. We can then look for trends in
these exceptions, which can help us decide whether we need to recalibrate our VaR model.
Stress testing
Stress testing is an essential part of our risk management. It helps us to measure and evaluate the potential impact on portfolio values of more extreme, although
plausible, events or market moves. We express limits as on how much we could lose in a stress event, and this restricts how much risk we take.
Stress testing scenarios
Simple stress tests (like parallel shifts in relevant curves) give us clear measures of risk and a consistent starting point for setting limits. More complex, multi-factor
and multi-time period stress tests give us information about specific potential events. They can also test outcomes that we might not capture through parallel
stresses or VaR-type measures. We use stress tests to estimate losses in extreme market events beyond the confidence level used in VaR models.
We can adapt our stress tests to reflect concerns such as climate change risk, other macroeconomic and geopolitical events or changing market conditions. We
run individual business area stresses and Santander UK-wide scenarios.
Other ways of measuring risk
As well as using sensitivities and stress tests, we can measure non-traded market risk using net notional positions. This can give us a simple view of our
exposure, although we generally need to combine it with other risk measures to cover all aspects of a risk profile, such as projected changes over time.
Other
metrics we can use include Earnings at Risk (EaR). EaR is like VaR but captures changes in income rather than value.
We typically hedge the interest rate risk of the securities we hold for liquidity and investment purposes with interest rate swaps. We retain spread exposures, and
these are the key drivers of the VaR and stress tests we use to assess the risk of the portfolio. We mitigate Income Statement volatility mainly through hedge
accounting. We monitor any hedge accounting ineffectiveness that might lead to Income Statement volatility with a VaR measure and trigger, reported monthly.
For our accounting policies for derivatives and hedge accounting, see Note
1
to the Consolidated Financial Statements.
We hedge our foreign currency funding positions back to sterling, so our foreign exchange positions tend to be residual exposures that remain after hedging.
These exposures could be, for example, to ‘spot’ foreign exchange rates or to cross currency basis. We monitor foreign exchange risk against absolute net
exposures and VaR-based limits and triggers.
For more on this, see ‘Funding strategy‘ and ‘Term issuance’ in the ‘Liquidity risk’ section.
Risk monitoring and reporting
(audited)
We monitor our non-traded market risks using NII and EVE sensitivities, VaR and stress tests. We report them against limits and triggers to senior management
daily and to ALCO and ERCC each month. The VaR we report captures all key sources of volatility (including interest rate and spread risks) to fully reflect potential
volatility.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
93
|
|||
NON-TRADED MARKET RISK REVIEW
Interest rate risk
Yield curve risk
31 December 2023
and
31 December 2022
. Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable.
|
2023
|
2022
|
||||
|
+100bps
|
-100bps
|
+100bps
|
-100bps
|
||
|
£m
|
£m
|
£m
|
£m
|
||
|
NII sensitivity (audited)
(1)
|
220
|
(220)
|
241
|
(197)
|
|
|
EVE sensitivity
|
(299)
|
265
|
(487)
|
635
|
|
(1)
Based on modelling assumptions of repricing behaviour.
Interest rate repricing gap
The table below shows the interest rate repricing gap of our balance sheet by repricing buckets.
|
3 months
|
1 year
|
3 years
|
5 years
|
5years
|
Not sensitive
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Assets
|
104,985
|
48,416
|
79,635
|
40,553
|
5,650
|
14,640
|
293,879
|
|
Liabilities
|
117,154
|
49,904
|
54,127
|
46,107
|
2,558
|
24,908
|
294,758
|
|
Off-balance sheet
|
12,345
|
1,429
|
(14,771)
|
(278)
|
2,154
|
—
|
879
|
|
Net gap
|
176
|
(59)
|
10,737
|
(5,832)
|
5,246
|
(10,268)
|
—
|
|
2022
|
|||||||
|
Assets
|
106,980
|
44,748
|
79,006
|
52,489
|
5,249
|
14,123
|
302,595
|
|
Liabilities
|
135,801
|
30,262
|
58,526
|
51,161
|
3,833
|
25,023
|
304,606
|
|
Off-balance sheet
|
31,378
|
(16,133)
|
(16,972)
|
723
|
3,015
|
—
|
2,011
|
|
Net gap
|
2,557
|
(1,647)
|
3,508
|
2,051
|
4,431
|
(10,900)
|
—
|
Spread risk
The table below shows the risk metrics covering the portfolios of securities we hold for liquidity and investment purposes.
|
2023
|
2022
|
||
|
£m
|
£m
|
||
|
VaR
|
5
|
3
|
|
|
Worst three month stressed loss
|
86
|
46
|
We regularly review our risk models and metrics including the scenarios and underlying modelling assumptions we use, to ensure they continue to reflect the risks
in the current economic environment, and incorporate regulatory expectations.
2023
compared to
2022
NII Sensitivity is adversely exposed to down-shock scenarios driven by margin compression of core liabilities, offset by the structural position. The 1 year NII
sensitivity to a -100bps stress increased slightly to
£(220)m
(
2022
:
£(197)m
).
EVE sensitivity is adversely exposed to rising interest rate scenarios. The sensitivity to a +100bps stress reduced to
£(299)m
(
2022
:
£(487)m
) mainly reflecting the
overall reduction in the structural position relative to non-rate sensitive liabilities.
Spread risks are from the Eligible Liquidity Pool. The increase in the stress result was mainly from increases in covered bond positions. These increased spread
income compared with government bonds, and we penalise the increased risk they present by applying larger shocks in our stress scenarios.
TRADED MARKET RISK
We have no significant traded market risk exposure. Our only exposure to traded market risk comes from providing permitted financial services to permitted
customers
. Our exposures are affected by market movements in interest rates, credit spreads, and foreign exchange rates. Traded market risk can reduce our net
income. We hedge risks from client trades, and our books are as close to back-to-back as possible, with market risk hedged with Banco Santander SA or CCPs.
This is required by Banking Reform legislation.
We have
two trading desks. The Link Desk transacts derivatives with our corporate clients that are permitted under
the ring-fencing regime. The Retail Structured Products desk (RSP) sells investments to retail investors, through our UK branches and other channels. We
calculate market risk capital using standard rules.
The Internal VaR for exposure to traded market risk at
31 December 2023
was less than £1m (2022: less than £1m).
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
94
|
|||
Pension risk
|
Overview
Pension risk is the risk caused by our statutory contractual or other liabilities with
respect to a pension scheme (whether set up for our employees or those of a related
company or otherwise). It also refers to the risk that we will need to make payments or
other contributions with respect to a pension scheme due to some other reason.
In this section, we explain how we manage and mitigate pension risk, including our
investment and hedging strategies. We also discuss our key metrics and developments
in the year.
|
Key metrics
Funding Deficit at Risk was
£980m
(
2022
:
£860m
)
Funded defined benefit pension scheme accounting
surplus was
£723m
(
2022
:
£1,050m
)
|
OUR KEY PENSION RISKS
Sources of risk
Pension risk is one of our key financial risks. Santander UK plc is the sponsor of the Santander (UK) Group Pension Scheme (the Scheme), a defined benefit
scheme. Our risk is that over the long-term the Scheme’s assets are not enough to meet its liabilities as they fall due. If this happens, we could have to (or choose
to) make extra contributions. We might also need to hold more capital to reflect this risk.
The Scheme, risk metrics and regulatory capital can be sensitive to changes in the assumptions of the key risk factors shown below.
|
Key risks
|
Description
|
|
Interest rate risk
|
The risk that a decrease in (long-term) interest rates causes an increase in the value of the Scheme’s liabilities that are not matched
by an increase in the value of its assets.
|
|
Inflation risk
|
Annual pension increases are directly linked to RPI or CPI. The risk is that an increase in inflation causes an increase in the value of
the Scheme’s liabilities that are not matched by an increase in the value of its assets.
|
|
Longevity risk
|
The Scheme’s liabilities are in respect of current and past employees and are expected to stretch beyond 2080 due to the long-term
nature of the obligation. Therefore, the Scheme’s liabilities are also impacted by changes to the life expectancy of Scheme members
over time.
|
|
Investment risk
|
The risk that the return on the Scheme’s assets is insufficient to meet the liabilities.
|
For more on our defined benefit schemes, including sensitivity analysis of our key actuarial assumptions, see Note
30
to the Consolidated Financial Statements.
Defined contribution schemes
We also have defined contribution schemes for some of our employees. These schemes carry far less market risk for us, although we are still exposed to
operational and reputational risks.
For more on our defined contribution schemes, see Note
30
to the Consolidated Financial Statements.
The impact of our defined benefit schemes on capital
We take account of the impact of pension risk on our capital as part of our planning and stress testing process, considering measures such as the impact on
CET1 and Pillar 2A, and also where relevant the impact on the related measures such as the leverage ratio.
Our defined benefit pension schemes affect capital in two ways:
–
We treat an IAS 19 deficit as a liability on our balance sheet. We recognise deficit movements in Other Comprehensive Income, so this reduces shareholders’
equity and CET1 capital. We treat an IAS 19 surplus as an asset. This increases shareholders’ equity, but it is deducted in determining CET1 capital. An IAS 19
surplus/deficit is partially offset by a deferred tax liability/asset. These may be recognised for calculating CET1 capital depending on our overall tax position.
–
The PRA takes pension risk into account in the Pillar 2A capital assessment in the annual ICAAP exercise. Pillar 2A is part of our overall regulatory requirement
for CET1 capital, Tier 1 capital and total capital. For more on our regulatory requirements, see the ‘Capital risk’ section.
PENSION RISK MANAGEMENT
Scheme governance
For details of how the Scheme is governed and operates, see Note
30
to the Consolidated Financial Statements.
Risk appetite
Our Risk Appetite is a key consideration in all decisions and risk management activities related to the Scheme. Our pension risk appetite is reviewed by our
Pensions Committee at least once a year. It is then sent to the Board for approval. We measure pension risk on both a technical provisions (funding) basis and an
accounting (IAS 19) basis. We manage pension risk on both the accounting and the funding basis. Both bases are inputs into our capital calculations.
Risk measurement
Our key risk metrics include:
|
Key risk metrics
|
Description
|
|
Funding Deficit at Risk
|
We use a VaR and a forward-looking stress testing framework to model the Scheme’s assets and liabilities to show the potential
deterioration in the funding position.
|
|
Required Return
|
This estimates the return required from the Scheme’s assets each year to reach a pre-defined funding target by a fixed date in the
future.
|
|
Pensions Volatility
|
We use a VaR and a forward-looking stress testing framework to model the volatility in the pension-related capital deduction.
|
The Scheme invests in certain assets whose values are not based on market observable data, such as investments in private equity funds and property. See Note
30
to the Consolidated Financial Statements for more details. The risks of these assets are included in the metrics described above.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
95
|
|||
We perform stress tests for regulators, including for ICAAPs and PRA stress tests. For more on our stress testing, see the 'Risk governance' section.
Climate change scenario testing was developed in 2021 giving us the capacity to simulate risk exposures over an extended time horizon. We are making further
refinements, planned for delivery in 2024. The Trustee adopted a target of net zero by 2050. This target is factored into Trustee decision making.
Risk mitigation
The key tools we use to maintain the above key risk metrics within appetite are:
|
Key tools
|
Description
|
|
Investment strategies
|
The Trustee developed the following investment objectives to reflect their main duty to act in the best interests of Scheme
beneficiaries:
–
To maintain a diversified portfolio of assets of appropriate quality, security, liquidity and profitability to generate income and capital
growth to meet, with new contributions from members and employers, the cost of current and future benefits that the Scheme
provides
–
To limit the risk that the assets fail to meet the liabilities
–
To invest in a manner appropriate to the nature and duration of the expected future retirement benefit payments under the
Scheme
|
|
Hedging strategies
|
The Trustee employs asset-liability matching arrangements including the use of liability driven investment strategies, and has a
hedging strategy to reduce key market risks, mainly interest rate and inflation risk, but also currency risk. We monitor available
collateral and liquidity with the objective of ensuring we have sufficient collateral and/or liquidity available to meet any margin calls.
|
|
Environmental, social
and governance (ESG)
|
The Trustee has established a Sustainability Committee which is responsible for overseeing the Scheme’s policies, regulatory
obligations and priorities in respect of climate change and wider ESG related matters.
|
We look at the impact on our risk metrics when determining the appropriateness of the investment and hedging strategies.
Risk monitoring and reporting
We monitor pension risk each month and report on it at Pension Risk Forum, ERCC, Pensions Committee and, where thresholds are exceeded (or likely to be), to
the Board Risk Committee and the Board in line with our pension risk appetite. This also includes quarterly monitoring of corporate credit exposures to assess any
concentrations of risk. We discuss any remedial action with the Trustee.
In addition, we monitor the performance of third parties who support the valuation of the
Scheme’s assets and liabilities.
PENSION RISK REVIEW
2023
compared to
2022
The underlying level of risk in the Scheme was broadly unchanged in 2023. The Scheme gradually reduced illiquid assets and purchased corporate bonds. The
reduction in illiquid assets is expected to continue in 2024.
Collateral and liquidity reporting enhancements started in 2022 and continued into 2023. In the second half of 2023, long-term gilt yields reached similar levels to
those seen during the gilt market turmoil in the autumn of 2022. The Scheme's collateral and liquidity position were monitored closely. They remained well above
trigger levels that would have required consideration of asset sales or other actions.
We also monitor the potential impact from variations in the IAS 19 position of CET1 capital. There was a moderate impact on CET1 capital caused by movements
in the IAS 19 position in the year. For more on the impact of our defined benefit schemes on capital, see the 'Capital risk' section.
Accounting position
The accounting position deteriorated in 2023. The Scheme sections in surplus had an aggregate surplus of
£723m
at
31 December 2023
(
2022
:
£1,050m
) while
there was
one
section which had a deficit of
£41m
at
31 December 2023
(
2022
:
none
). The overall funded position was a
£682m
surplus (
2022
:
£1,050m
surplus). There were also unfunded liabilities of
£25m
at
31 December 2023
(
2022
:
£25m
).
The overall deterioration was mainly due to the decrease in credit
spreads in 2023, which increased the value of the liabilities. There remains considerable market uncertainty and our position could change materially over a short
period.
For more on our pension schemes, including the asset allocation and our accounting assumptions, see Note
30
to the
Consolidated Financial Statements
.
Maturity profile of undiscounted benefit payments
The Scheme’s obligation to make benefit payments extends over the long-term. This is expected to stretch beyond 2080. The graph below shows the maturity
profile of the undiscounted benefit payments expected to be paid from the Scheme over its life at
31 December 2023
:
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
96
|
|||
Strategic and business risk
|
Overview
Strategic and business risk is the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their
poor implementation; an inability to adapt to external developments that impact the long-term interests of our key stakeholders.
In this section, we describe our key strategic and business risks and explain how we manage them. We also describe developments in the year.
|
OUR KEY STRATEGIC AND BUSINESS RISKS
Strategic and business risk could impact our long-term success if it caused our business model to become out of date, ineffective, or inconsistent with our goals.
This could happen if we fail to identify threats arising from the economy, regulation, competitors and/or changes in technology and customer expectations. It could
also arise if we misjudge our capabilities, or the ability to implement our strategy, or pursue initiatives that do not fit with our business model or miss opportunities
we could benefit from.
STRATEGIC AND BUSINESS RISK MANAGEMENT
|
Risk management
|
Description
|
|
Risk appetite
|
We have a low to moderate appetite for strategic and business risk. This limits the risks we are prepared to take to achieve our
strategic objectives and is aligned to our balanced, customer-centric business model.
|
|
Risk measurement
|
Our Board and senior management regularly review potential risks in our operations and plans to ensure we stay within risk appetite.
|
|
Risk mitigation
|
We manage strategic and business risk by having a clear and consistent strategy that takes account of external factors and our own
capabilities. We have an effective planning process which ensures we adapt our strategy to reflect changes in key risks and
opportunities.
|
|
Risk monitoring and
reporting
|
We closely track our business environment, including long-term trends that might affect us in the future. As part of this, we report a
range of indicators.
|
STRATEGIC AND BUSINESS RISK REVIEW
2023
compared to
2022
These risks remain challenging to manage, due to the competitive market environment in both mortgage and savings markets, alongside elevated Government
and regulatory focus, given cost of living issues facing customers. In 2024 our focus is shifting from Inflationary and Supply Chain Pressures to the risk of Margin
Compression as a Top Risk. Markets are currently indicating a peak in the bank rate cycle, and our ALCO has approved a strategy to manage and mitigate this
risk.
Our business environment is constantly changing, and this affects how we do business.
In 2023, there were multiple macro challenges, such as low growth
worsened by geo-political tensions in Ukraine and the Middle East, high inflation and interest rates. These continued to put pressure on households and caused
house prices to fall. Against this backdrop, we proactively contacted 2.5 million customers in 2023 to offer support with the increased cost of living. We also
continued to provide help through our Financial Support Hub, financial health checks, budget planning and management tools. We also completed our
Transformation programme, which was one of the most ambitious savings programmes in the UK market, with a focus on efficiency to compensate for inflationary
pressures. We will now begin the next phase of our transformation with focus on improved customer experience, simplification, automation and digitalisation.
Competitive pressure increased in 2023 as asset and deposit growth stalled. We managed the business for margin and profitability, deleveraging mortgages in a
softer market while carefully managing liabilities volumes and pricing. We launched multiple new products taking into account the needs of our customers. These
included Edge Up, the only current account in the market to offer cashback on both debit card spending and direct debits, the market leading Easy Access Saver
Pulse, the cahoot simple saver, and the new Private current account. We also enhanced our apps so that mortgage customers can track their mortgage
application and manage their homes through the My Home Manager function. In Corporate and Commercial Banking, we now support over 1,200 clients with their
international growth aspirations through Santander Navigator. This is a portal that allows our clients to identify growth opportunities, navigate bureaucratic
challenges and optimises logistics, connecting them with industry experts and key businesses.
We successfully delivered the Consumer Duty mandate for our front book products and are on track to do the same for back book products by July 2024. We
continue to face a demanding regulatory agenda and have started multiple projects to ensure regulatory compliance, while keeping good customer outcomes at
the heart of everything we do.
We have an ambition to be net zero by 2050. We are working with our customers to ensure that we support them to make the green transition in a fair and
equitable way. In 2023, we updated our climate strategy and created a Transition Plan that highlights the action required to reach net zero target by 2050. We also
set up a Green Finance taskforce to combine ongoing and future Green Finance initiatives and ensure delivery of our green finance public commitments.
As a result, throughout 2023 we kept our customers at the centre of everything that we do, while building a responsible and sustainable business.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
97
|
|||
Reputational risk
|
Overview
Reputational risk is the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors, or any
other interested party.
In this section, we describe our key reputational risks and explain how we manage them. We also describe developments in the year.
|
OUR KEY REPUTATIONAL RISKS
Reputational risks can arise from internal and external factors. We seek to manage our reputation proactively, underpinned by our aim to be a responsible bank,
and through our reputational risk framework.
Reputational risk is not static; today’s decisions may be judged by different standards tomorrow. We build this into our
risk culture, evaluation and sanction procedures.
REPUTATIONAL RISK MANAGEMENT
|
Risk management
|
Description
|
|
Risk appetite
|
We have a low appetite for reputational risk, which is agreed by the Board at least each year.
|
|
Risk measurement
|
We assess our exposure to reputational risk daily. We base this on expert judgement and analysis of social, print, and broadcast
media, and the views of political and market commentators. We also commission independent third parties to analyse our activities
and those of our UK peers to identify reputational events, a decline in our reputation, and sector or thematic issues that impact our
business. We also measure the perception of Santander UK by key stakeholders through regular interactions and review staff
sentiment each year.
|
|
Risk mitigation
|
Our business units consider reputational risk as part of their operational risk and control assessments. We also consider it as part of our
new product reviews. Our Corporate Communications and Responsible Banking, Legal and Compliance and Marketing teams help
business units to mitigate the risk and agree action plans as needed, as part of their role to protect our brand and reputation.
|
|
Risk monitoring and
reporting
|
We monitor and report reputational risks and issues on a timely basis. Our Reputational Risk Forum reviews and escalates key
issues to ERCC, RBC and the Board. We also report regularly to ExCo on Sustainability and Responsible Banking, and Public
Affairs policies.
|
Our Reputational and ESCC risk policies define how we create long-term value while managing those risks. Our ESCC policy covers Oil Gas, Power
Generation Transmission, Mining Metals and Soft Commodities. For example, financing is prohibited for project-related financing for new CFPP projects
worldwide and we will only work with new clients with CFPPs to provide specific financing for renewable energy projects.
REPUTATIONAL RISK REVIEW
2023
compared to
2022
Key reputational risks related to the uncertain economic environment and its continued impact on the cost of living. Increased mortgage payments remained a
significant issue for our customers so, alongside the measures we put in place for mortgage holders, we also supported the government's Mortgage Charter. More
broadly, we continued to proactively contact customers to offer support and help. There was criticism that banks were failing to pass on the increases in the Bank
of England base rate to savers. We, therefore, ran campaigns and issued direct communications to customers to advise them of the various products and rates
we had available, several of which were market leading.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
98
|
|||
Operational risk and resilience
|
Overview
Operational risk is the risk of loss or adverse impact due to inadequate or failed internal
processes, people and systems, or external events. Operational resilience is the ability
to prevent disruption occurring to the extent practicable; adapt systems and processes
to continue to provide services and functions in the event of an incident; return to
normal running promptly when a disruption is over; and learn and evolve from both
incidents and near misses. Operational Resilience is the outcome of executing sound
Operational Risk practices.
In this section, we describe our key operational risks and explain how we manage
them, with a focus on our top operational risks. We also describe our operational risk
event losses and developments in the year.
|
Key metrics
Operational risk losses (over £10,000) decreased by
64%
in value compared to
2022
.
|
OUR KEY OPERATIONAL RISKS
Operational risk is inherent in our business. As a result, we aim to manage it down to as low a level as possible, in line with our Risk Appetite, rather than eliminate
it entirely. Operational risk events can have a financial impact and can also affect our business objectives, customer service and regulatory obligations. These
events can include product misselling, fraud, process failures, system downtime and damage to assets or external events.
Our key operational risks are divided into 11 principal risks:
|
Key risks
|
Description
|
|
|
Business
disruption
|
Business disruption risk refers to risks of our ability to maintain and/or recover the normal day-to-day operation of the organisation, to secure
the tangible assets of the bank, and to support continued delivery of good customer outcomes.
|
|
|
Cybersecurity
|
Cybersecurity risk refers to the risk that Santander UK and its customers' data is not secured from internal and external threats. This could
cause operational disruption, unauthorised access, loss or misuse of data, breach of regulations, negative customer outcomes, financial loss
or reputational damage. Our extensive reliance on technology to support customers and operate our business requires a strong focus on
cybersecurity and data security. This is because cyber criminals target personal data of our customers and employees, and cause disruptions
to normal business operations. This focuses the need for resilience against cybersecurity incidents, and our ability to respond and recover
swiftly.
|
|
|
Data
management
|
Data management risk refers to the potential threats and challenges related to quality and integrity of data, which can impact business
decisions and our strategic outcomes. We use data to serve customers, satisfy our regulatory requirements and run our operations, and if our
data is not accurate and timely, this could impact our ability to serve customers, operate with resiliency or meet regulatory requirements.
|
|
|
Financial
reporting and
Tax
|
Financial Reporting and Tax risk relates to the risks associated with producing complete and accurate internal and external financial
statements, Financial regulatory reporting (including liquidity capital) as well as the risk that we fail to comply with domestic and international
tax regulations, or we report to the tax authorities inaccurately or late.
|
|
|
Fraud
|
Fraud can be committed by first parties (our customers), second parties (people known to our customers or us), third parties (people unknown
to our customers or us), and internally by our staff. We are committed to protecting ourselves and our customers from fraud and to mitigating
our fraud risk in an ever-evolving external fraud environment.
|
|
|
IT
|
As noted in Cybersecurity, technology is vital to our processes and operations, and in providing service to our customers. IT risk arises from
any event related to the use of technology supporting business processes, where the event may result in the unavailability or failure of systems
or in processing errors that impact our customers or operations. This includes hardware or software failures, or issues caused by change.
|
|
|
Legal
|
Legal Risk can arise from legal deficiencies in contracts and failures in protecting assets, managing legal disputes, interpretation and
compliance with existing laws and regulations or implementation and compliance with new ones. Failure to manage legal risk may expose
Santander UK to financial loss, litigation costs, fines, higher capital or liquidity requirements, criminal sanctions, regulatory action or censure,
customer complaints, and/or reputational damage.
|
|
|
Outsourcing
and Third
party
|
Third party risk refers to risks to our operational arrangements due to the engagement of third party entities supplying goods or services. Third
party risks can arise from both Outsourcing and Non-Outsourcing arrangements.
|
|
|
People
|
People risks include all risks related to employees and third parties working for us, covering resource management, health, safety and
wellbeing and employee relations. People risk is a transverse risk as resource capacity, capability, and engagement challenges impact all risk
types. As we develop our working practices and adapt to changing circumstances, people impacts and risks continue to be key considerations.
|
|
|
Transaction
and payments
processing
|
The processing of transactions and payments is a critical service to our customers, and failure to process payments and transactions in a
complete, accurate and timely manner could result in material customer harm, regulatory scrutiny and material financial loss. We are required
to comply with the rules of the payment schemes that we participate in, as well as significant regulatory and legal requirements.
|
|
|
Transformatio
n and Change
|
Transformation and change risk arises in any activity that transforms our business strategy, operating environment, or products and services
we provide to our customers. Management of change risks is an integral part of our governance and our focus, given the potential for impacts
across all areas of non financial risk. Failure to manage and execute effectively an appropriate and complete change portfolio to the business
could result in operational disruption, poor customer outcomes, financial loss, reputational damage and may impeded our ability to meet
regulatory requirements.
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
99
|
|||
OPERATIONAL RISK MANAGEMENT
Our Non Financial Risk (NFR) framework (formerly known as the Operational Risk and Resilience framework) sets out our high-level arrangements and standards
to manage operational risks, and is part of our overall Risk Framework. Our Risk Appetite sets the risk limits and key risk metrics for non financial risks.
Risk appetite
We maintain NFR appetite across Santander UK through Board approved Risk Appetite Statements. These are in place for all principal risks and describe the
extent and type of activities that can be undertaken. The Risk Appetite statements consist of qualitative statements of appetite supported by risk limits and triggers
which operate as a defence against excessive risk taking. Risk measures and their associated limits are an integral part of embedding risk appetite in day-to-day
risk management decisions.
We set a clear tolerance in line with business activities, and we also set lower level triggers, parameters and quantitative thresholds across our business areas.
We monitor our risk profile and performance against the risk appetite, and we have processes to identify, assess, manage, and report risks and events. We
incorporate Banco Santander group principles and standards, regulatory requirements, and best practice, where applicable. Coverage across the seven CRD IV
loss event types is comprehensive and aligns to the principal risks approved by ERCC.
Our policies directly support the qualitative aspects of Risk Appetite. They define expectations, guidance and standards and support consistency of permissible
risk taking across the business.
Risk measurement
The key components of the operational risk toolset we use to measure risks under our NFR framework are:
|
NFR risk toolset
|
Description
|
|
Operational risk and
control assessments
|
Our business units identify and assess their operational risks to ensure they manage and control them within our operational risk appetite,
and prioritise actions needed. Every area must identify and record their material risks, assess their controls for adequacy and then accept the
risk or plan to address any deficiencies. We perform independent control testing of our most important controls to ensure enhanced rigour
and challenge of how effectively they are mitigating our largest risks. We also use operational risk assessments and risk rating tools as key
parts of change risk management.
|
|
Risk scenario analysis
|
We perform this across business units. It involves a top down assessment of our key operational risks. We update our scenarios each year.
The analysis gives us insight into rare but high impact events and allows us to understand potential impacts and address issues.
|
|
Key indicators (metrics)
|
Key indicators and their tolerance levels give us an objective view of risk exposure or the strength of a control at any point in time. They also
show trends and give us early warning of potential increasing risk exposures. Of primary importance are our business-wide risk appetite
indicators which show adherence to our Risk Appetite statements.
|
|
Operational risk event
and loss management
|
Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory
impacts and/or damage to our reputation. We use data from these processes to identify and correct any control weaknesses. We also use
root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments,
scenario analysis and risk reporting. Our operational risk loss appetite sets the level of total operational risk loss (expected and unexpected)
in any given year (on a 12-month rolling basis) that we consider to be acceptable. We track actual losses against our appetite, and we
escalate as needed.
|
Risk mitigation
Mitigation Is a critical aspect of ensuring that our risk profile remains within our Risk Appetite. Risk mitigation strategies are discussed and agreed at various Risk
committees within Santander.
When we consider strategies, cost and benefits, we also consider residual risks (those retained) and secondary risks (which may be consequential). Monitoring
and review processes are in place to evaluate results. Early identification and effective management are critical to successful mitigation. We assess the effects of
changes for materiality impact and those assessed as high or medium high impact are managed closely.
|
Mitigation tools
|
Description
|
|
Training and
competence
|
We train our staff and require them to maintain a suitable level of competence to ensure customers can achieve appropriate outcomes. We
invest in all our people to ensure that we achieve our mandatory risk objectives and that everyone acknowledges their personal responsibility
to manage risk. We place focus on ensuring our colleagues are trained to recognise and support customers who may be vulnerable, or who
may be experiencing financial stress, financial difficulty or financial abuse. We also have a dedicated Specialist Support Team that offers
guidance to colleagues helping customers who may need more tailored solutions
|
|
Action management
|
Where risk exposures are outside our Risk Appetite, our business units identify, assess, manage and monitor material actions to reduce the
exposure back to within appetite.
|
|
Event root cause
analysis
|
Where new material and significant events are reported, steps are taken to identify the root cause of the event. This enables a read across and
the sharing of lessons learned with appropriate mitigating actions taken to address the root cause and successfully resolve the event, and
enhancements made to the control environment to prevent re-occurrence.
|
|
Emerging risk
monitoring
|
We monitor key threats, developments, and risks, including consideration of which principal risk types or Business areas may be impacted or
stressed by them.
|
|
Risk based insurance
|
Where appropriate, we use insurance to complement other risk mitigation measures.
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
100
|
|||
We manage our operational risks in line with our NFR framework, as outlined earlier. In addition, to mitigate specific cybersecurity risks, we have the following
tailored approach:
|
Key risks
|
Risk mitigation
|
|
Cybersecurity
|
Protecting our customers, systems and data remains a top priority for us. We operate a layered information and cybersecurity defence which is
aligned to the National Institute of Standards and Technology (NIST).
We constantly look to adapt our capabilities to the evolving threats. We do this by gathering intelligence on threat actors, motives, and their attack
techniques. We protect our most critical people, assets, and data with preventative controls in line with the identified threats. We also assume that
breaches will happen in any case, and so we seek to mitigate these by ensuring their timely detection and that appropriate response and recovery
activities are in place. We do this by leveraging industry standard threat analysis, identifying specific real-life scenarios, developing detailed response
playbooks, and testing them regularly using bank-wide simulation exercises involving up to the CEO. Cybersecurity controls are also thoroughly
captured in policies, standards, guidelines and procedures available to all staff.
Third parties are vital for the functioning and resilience of our business. As such, we operate a dedicated risk and control assessment prior to, and
during, the lifecycle of engagements. This ensures the controls operated by the third party are in line with our policies and integrated with our
processes as needed. These include, amongst others, business continuity, incident reporting and regulatory compliance.
We regularly assess the state of our environment by reviewing the maturity of our controls in line with our internal risk management framework. We
engage with regulatory authorities through regular oversight meetings and we participate in the CBEST programme. The CBEST programme aims to
evaluate the resilience of firms and financial market infrastructures through testing performed by accredited and independent specialist firms. We also
have a team of penetration testers in our Internal Audit function, that reviews our cybersecurity risks and controls, and reports the results to the BAC.
We participate in industry recognised intelligence sharing groups with other banks (e.g. Cyber Defence Alliance), and we speak regularly to
government agencies.
We campaign to raise awareness and give customers the knowledge they need to avoid becoming victims of cybersecurity incidents. As part of this,
we run customer education campaigns and offer advice through our online security operations centre. We also have a cybersecurity insurance policy
to give us comprehensive cover to respond to and recover losses and damages from security breaches.
We appointed a Chief Information Security Officer (CISO). The CISO is responsible for the day-to-day running of security operations and the
immediate response to information and cybersecurity incidents. The CISO relies on a comprehensive specialist team, supported by cybersecurity
controls and capabilities available from the Banco Santander group CISO team in Spain.
The CISO and most staff who manage cybersecurity risk across all lines of defence are industry specialists with substantial experience in leadership
and technical aspects. This experience is gained via previous cybersecurity related roles in top global financial organisations, global multinationals,
UK government security agencies, UK regulators, such as the PRA, industry leading cybersecurity risk management suppliers, and relevant university
education. Many hold specialist security certifications that are kept relevant by attending dedicated training and specialist conferences.
The CISO is responsible for cybersecurity risk operations and risk management and falls under the COO SMF accountability framework. The CRO is
responsible for overseeing and challenging the risk management activities enacted by the CISO and the COO to ensure they remain within appetite.
The CISO and the COO report regularly and frequently to the Board, ExCo, BRC and ERCC. They provide detailed commentaries on the threat
environment, key incidents across the industry, geopolitical considerations, the overall residual risk, progress on key projects, the control environment
position, and appetite going forward. In addition, BRC and ERCC receive monthly cybersecurity updates as part of the standard risk reporting suite.
The CISO and the COO escalate material cybersecurity incidents affecting us and our suppliers via our internal incident escalation and management
procedure with direct notifications to the CRO and other executive management.
The Board and BRC include members who have substantial experience of technology risk, including Non-Executive Directors and the Chief
Operating and Technology Officer. We also provide targeted training for Board members, senior management and other employees to enhance their
knowledge per the evolving and emerging threat landscape.
|
Risk monitoring and reporting
Regulators continue to emphasise the importance of effective risk culture, personal accountability and the adoption and enforcement of risk-based requirements
and adequate internal reporting processes and procedures. Monitoring and Reporting is a key part of how we manage risk. We can identify exposures through our
Non-financial Risk and control assessments, risk scenario analysis, key indicators, change risk assessments and incidents and events.
Subject matter experts across the business engage on all risk management and monitoring activities and support effective communication of policy changes. We
report exposures for each business unit through regular risk and control forums. These include details of the risks, level of exposure and how we plan to mitigate
them. We prioritise and highlight events that have a material impact on our customers, reputation or finance by reporting them to key executives and committees.
We use The Standardised Approach (TSA) to calculate our Pillar 1 operational risk capital. We use an internal model aligned to the CRD IV advanced
measurement approach to validate our Pillar 2 capital needs.
Our crisis management framework covers all levels of the business. It sets out possible triggers and how we will manage a crisis, and we test it at least annually. If
an event occurs, our business continuity plans help us recover as quickly as possible and we undertake post incident reviews to identify learnings.
Emerging threats that could affect future operations and performance are also closely monitored. We take action to mitigate potential risks as and when required.
We also carry out further in depth analysis, including stress testing of exposures.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
101
|
|||
OPERATIONAL RISK REVIEW
2023
compared to
2022
Operational risk event losses
The table below shows our operational losses in
2023
and
2022
for reportable events with an impact over £10,000, by CRD IV loss event types:
|
2023
|
2022
|
||||
|
Value
£m
|
Volume
%
|
Value
£m
|
Volume
%
|
||
|
External fraud
|
42.7
|
95
|
59.2
|
95
|
|
|
Clients, products and business practices
|
6.7
|
1
|
52.1
|
1
|
|
|
Business disruption and systems failures
|
—
|
—
|
—
|
—
|
|
|
Execution, delivery, and process management
|
1.5
|
4
|
28.6
|
4
|
|
|
50.9
|
100
|
139.9
|
100
|
||
Our operational risk losses (events over £10,000) decreased in
2023
. We saw a
64%
reduction in value and a 29% reduction in volume. In line with general
industry trends, the value and volume of losses due to cases of external fraud decreased. We continue to enhance our anti-fraud measures to help protect our
customers.
Business disruption
We committed by March 2025 to address the vulnerabilities identified, approved by the Board and submitted to our regulators as part of our operational resilience
self-assessments. Achieving this will enhance our resilience, i.e. the ability of Santander UK to recover its Important Business Services (IBS) within Impact
Tolerance levels to avoid intolerable harm to customers, or pose a risk to the safety and soundness of the firm, or to the wider market. In 2023, we made progress
in identifying the technology assets that are critical to deliver our IBS. We conduct scenario testing and analyse events and incidents directly impacting our IBS.
These enable us to identify resilience vulnerabilities among the underlying assets of technology, data, people, third parties, and premises. As we mature and
embed our resilience capability, we contributed to industry working groups and actively responded to regulators, providing clear information on our progress.
Cybersecurity
Information and cybersecurity remain a key focus. We experienced no significant data or cybersecurity incidents in 2023, although we responded to a number of
third-party incidents affecting our suppliers. We continue to enhance our threat prevention controls and test our business area recovery plans against a range of
scenarios. We continue to see increasing ransomware attacks across all sectors, driven by compromises in supply chain tools, and we expect this trend to remain.
We also continue to invest in the right skills and resources to manage data and cybersecurity risks, and constantly monitor cybersecurity threats, including from
the geopolitical environment. Our business strategy, financial results and position have not been significantly affected by cybersecurity threats, including from
previous cybersecurity incidents. However, we cannot provide assurance that they will not be significantly affected by such risks and significant incidents in the
future.
Data management
In 2023, we continued to monitor and mitigate data risk through enhanced governance structures and processes. Our Data Programme made positive progress
with clearly defined deliverables that will improve our ability to manage data and enhance our capabilities, in line with the Data Strategy driven by the Chief Data
Officer.
Fraud
Authorised Push Payment (APP) fraud is our largest fraud type, and we are focused on preventative measures in response to increasing fraud attacks. In 2023,
our Fraud Transformation Program enabled us to deploy new fraud prevention tools to enhance our controls, including configurable payment limits for digital
banking. We deployed dynamic 'scam warnings' in our online banking payment process and added new controls to manage purchase scams on social media.
Social engineering used by fraudsters is a significant threat to customers and outside of our controls. We continue to focus on combining technical solutions with
public campaigns to educate customers. We also play a leading, collaborative role in fraud management with industry partners, through UK Finance and Stop
Scams UK.
IT
The importance of IT remains at the centre of our activities. We continue to progress a bank-wide programme to address key IT risks, including increasing
obsolescence, partly due to the fast pace of technological evolution. We expect the programme to deliver risk reduction over a three year period and we closely
monitor improvements through our risk governance framework.
Legal
Our legal risk profile remained heightened but broadly stable in 2023, reflecting the high number and value of legal risks that we continue to manage. We
continued to evaluate the evolving legal and regulatory environment, including the introduction of the Consumer Duty, the Financial Services and Markets Act
2023, the Economic Crime and Corporate Transparency Act 2023, and proposals to reform the ring-fencing regime. We continue to align material third party
contracts to PRA Supervisory Statement 2/21, and in relation to international data transfers pursuant to the Schrems II judgement. While litigated PPI claim
volumes remained stable, on-going large scale complex PPI related litigation brought by AXA, and a German criminal and tax investigation relating to historical
dividend tax arbitrage transactions remain. We also managed legal risk relating to litigation and complaints relating to historical motor finance discretionary
commission arrangements which matters are also subject to the FCA’s announcement on 11 January 2024. We continue to manage our legal risk in relation to
thematic Court actions and FOS complaints related to fraud, mortgages and commissions. For more, see Note
31
to the Consolidated Financial Statements.
Outsourcing Third Party Supplier
We rely extensively on third parties for a range of goods and services, provided by both Banco Santander and external suppliers. In 2023, we reassessed the
majority of our suppliers against a revised set of controls and implemented new metrics to monitor and manage our risk exposure. We continue to progress work
to address the key risks in our Third Party Supplier estate.
People
People risk continues to be impacted by changes in our operating models and the execution of our strategies. We continue to adapt and respond to these risks. In
2023, wellbeing-related absence reduced and attrition rates improved. Our wellbeing and inclusion strategy focuses on helping colleagues through change and
supports productivity. We continue to advocate hybrid working and encourage colleagues to attend the office regularly. We also provide support in response to the
impact of external economic factors on some colleagues.
Transformation and change
We continue our transformation to simplify the bank, digitise processes and customer journeys, reduce costs, extend internal capabilities and ensure a resilient
operating model. This includes delivery against a diverse transformation agenda with specific focus on cloud migration, further digitalisation and managing
obsolescence. Ensuring change does not result in unacceptable impacts on our risk profile underpins our strategic decisions and is robustly managed.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
102
|
|||
Financial crime risk
|
Overview
Financial crime risk is the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, facilitation of tax
evasion, bribery and corruption. We recognise that financial crime and associated illegal activity poses a threat to the UK's national security, economy and
its institutions and causes serious harm to the customers and communities we serve.
In this section, we describe our key financial crime risks and explain how we manage them. We also describe developments in the year.
|
OUR KEY FINANCIAL CRIME RISKS
We consider financial crime to be a high priority risk for us, and addressing it is a key priority for senior management. We remain committed to countering it by
maintaining robust systems and controls, conducting business in line with regulatory and legal requirements. We adopt a risk-based approach in line with UK and
international laws and standards. We work with government, law enforcement and the private sector to help meet our commitments and to inform our anti financial
crime (AFC) strategy which sets out the principles of 'Deter, Detect and Disrupt'. We believe that having a comprehensive and effective financial crime risk
management framework is imperative and a positive investment that protects us from legal, regulatory and reputational risks. Due to the complexity and number of
financial crime threats, we continually assess, develop, and improve our capability and capacity to address the changing risk landscape. This includes through our
policies, procedures, systems and controls used to prevent and detect financial crime. We have minimal tolerance for residual financial crime risk, and zero
tolerance for non- compliance with sanctions laws and regulations. We require staff and third parties acting on our behalf to act with integrity, due diligence and
care. We have no appetite for non-compliance with financial crime laws or regulations by staff or persons acting on our behalf.
Our key financial crime risks are:
|
Key risks
|
Description
|
|
Money laundering
|
We are used by criminals to transform the proceeds of crime into seemingly legitimate money or other assets.
|
|
Terrorist financing
|
We are used by terrorists to deposit, distribute or collect funds that are used to fund their activity.
|
|
Sanctions
|
We do not identify payments, customers or entities that are subject to economic or financial sanctions.
|
|
Bribery and corruption
|
We fail to put in place effective controls to prevent or detect bribery and corruption.
|
|
Facilitation of tax
evasion
|
We fail to put in place effective systems and controls to prevent the facilitation of tax evasion.
|
FINANCIAL CRIME RISK MANAGEMENT
We manage our Financial crime risks in line with our NFR framework, as outlined earlier. In addition, we continue to
partner with public authorities, the Home Office
and the wider financial services industry to pool expertise and data to mitigate specific financial crime risks. We are also involved in partnerships such as the Joint
Money Laundering Intelligence Taskforce (JMLIT) which supports public-private collaboration to tackle financial crime.
FINANCIAL CRIME RISK REVIEW
2023
compared to
2022
We understand the importance of protecting the communities we serve from the social and economic impacts of financial crime. We recognise that the financial
crime landscape is constantly evolving, influenced by regulatory changes, legal requirements, geopolitical factors and changing criminal methods. As a result, we
continue to prioritise and remain vigilant in addressing financial crime risks and actively partner with industry, law enforcement and government to deter, detect and
disrupt financial crime and terrorist financing. In 2023 we:
–
Played an active role across the public-private partnership, working closely with government, trade bodies and industry on issues that may impact our Financial
Crime Compliance capabilities. This included work on major pieces of legislation, such as the Economic Crime Corporate Transparency Act 2023 and related
secondary legislation, and the assessment of Politically Exposed Persons.
–
Continued to invest in our financial crime systems and controls to ensure they remain robust, fit for purpose, and can appropriately respond to the constantly
evolving external legislative environment and to emerging risks.
–
Adapted our financial crime policies to reflect the latest external requirements, best practice and with Banco Santander policy requirements.
–
Played an active role externally in the development of policy and related strategies, such as in government engagement on the Suspended Accounts Scheme
now being legislated for in the Criminal Justice Bill, and in our continued engagement on the implementation of, and outcomes measurement for, the Economic
Crime Plan 2 (2023-2026).
–
Maintained our focus on providing colleagues with the appropriate skills, knowledge and qualifications to support our efforts to fight financial crime through
enhanced and targeted training. Our Economic Crime Academy provides training modules covering high risk Financial Crime areas in line with industry
standards, and these modules are endorsed by the International Compliance Association (ICA).
–
Remained a committed member of the JMLIT, to exchange and analyse information relating to high-end money laundering and wider economic threats.
Financial crime risk management remains one of our top risks and a key focus area for senior management and the Board. We continue to enhance our risk
management capabilities with key activity planned in 2024 including:
–
Accelerating risk mitigation responses and controls to new or evolving financial crime risk threats.
–
Continuing to enhance our sanctions systems and controls in response to internal and external lessons learned from the external sanctions developments in
2023, notably the continued impacts of the Russia sanctions and increased OFSI powers.
–
Maturing our financial crime operations, including continuing to improve our customer data records to help increase the effectiveness and sustainability of our
efforts to manage financial crime risks.
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Model risk
|
Overview
Model risk is the risk that the predictions from models may be inaccurate, causing sub-optimal decisions to be made; or that a model may be used
inappropriately. These potential adverse consequences can lead to reputational damage, regulatory non-compliance, a deterioration in prudential position,
or financial losses.
In this section, we describe our key model risks and explain how we manage them. We also describe developments in the year.
|
OUR KEY MODEL RISKS
We consider a model to be a quantitative repeatable method or system that relies on assumptions to process input data into estimates of uncertain outcomes. Our
key model risks arise from inadequate or flawed design leading to weaknesses and limitations in our models, implementation errors or poor deployment of the
models, or the incorrect or inappropriate use of a model. The most material models we use help us calculate our regulatory capital and credit losses, and perform
stress tests. In 2023 we saw increasing interest in assessing Artificial Intelligence (AI) use cases which create new model risks such as explainability - the ability to
understand why an algorithm made a particular prediction.
MODEL RISK MANAGEMENT
Risk mitigation
We manage our Model risks in line with our NFR framework, as outlined earlier. In addition, to mitigate specific model risks, we have the following tailored policies:
–
Model Risk Policy – details the action, outcome or standard of behaviour expected to manage and control model risk and remain within risk appetite
–
Tiering and Materiality Policy – ensures the consistent methodology in determining the significance of models used across the business
–
Change Classification Policy – explains how model changes are managed and controlled
–
Material Changes to IRB Models Policy – sets the criteria for assessing the materiality of extensions and changes to IRB models
–
Validation Policy – sets out the general criteria for internal validation activities, with the aim to provide an objective, unbiased and critical opinion on the
adequacy of models we use.
MODEL RISK REVIEW
2023
compared to
2022
This remains a significant focus in the bank, with a heavy regulatory models agenda in 2023 focusing on capital adequacy to comply with new regulatory technical
standards for banks. The PRA’s Model Risk Supervisory Statement (SS1/23) policy comes into effect in May 2024. We expect the trend of regulatory focus on
models to continue over the next two years in line with supervisory expectations.
We continue to recognise model risk as a key risk and maintain a strong model risk management and oversight framework. The model team sets a clear
framework and related policies and provides oversight, governance and control activities across all model types.
The independent valuation function reviews new
models, model changes, and recurrent reviews for our most material models, particularly capital adequacy, provisions and stress testing, which all have regulatory
focus.
In 2023, we continued to redevelop key regulatory capital and provision models. This work continues in 2024 for our unsecured portfolios and consumer finance.
As part of our ongoing focus on improving customer outcomes, we also changed all our decision scorecards in 2023 to use a new multi bureau capability. In 2024,
we expect to focus on our new climate change stress test models, new mortgage IRB capital models and our pension risk model redevelopment.
We expect
Machine Learning/AI models to gradually become the next key area of interest.
In 2023, we conducted an in-depth gap analysis against the principles of SS1/23 on model risk practices.
As the existing principles, current framework and
internal practices are largely aligned,
we are now able to focus on the design and embedding of the enhancements needed across the full model lifecycle.
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Conduct and regulatory risk
|
Overview
We manage conduct and non-financial regulatory risk types in one framework due to the
overlapping nature and similarities.
Conduct risk is the risk where our decisions and behaviours could lead to detriment or
poor outcomes for our customers. It also refers to the risk that we fail to maintain high
standards of market behaviour and integrity.
Regulatory risk is the risk of financial or reputational loss, or imposition of our conditions
on regulatory permission, due to failing to comply with applicable codes, regulator’s
rules, guidance and regulatory expectations.
In this section, we describe our key conduct and regulatory risks and explain how we
manage them. We also describe our main conduct and regulatory provisions.
|
Key metrics
Customer remediation provision was
£106m
(
2022
:
£90m
)
Litigation and other regulatory provision was
£132m
(
2022
:
£136m
)
|
OUR KEY CONDUCT AND REGULATORY RISKS
We are committed to ensuring conduct strategy is embedded in our business, as good outcomes for our customers are at the heart of what we do. Our proposition
and initiative approval process, systems, operation and controls are well designed and delivering our customers' needs.
We see our key exposure to conduct and
regulatory risk through the risk of errors in our product design, sales practices, post-sale servicing, operational processes, complaint handling, and the failure to
supervise, monitor or control the activities of our employees.
All of these may result in the risk that we do not deliver good customer outcomes, align to the
expectations of our regulators or observe required standards of market behaviour.
Our Conduct and Regulatory framework is built on the following risks:
|
Key risks
|
Description
|
|
Conduct
|
The risk that our decisions and behaviours lead to a detrimental or poor outcome for our customers and clients and/or fail to
uphold and maintain high standards of market integrity.
|
|
Regulatory
|
The risk of non-compliance with applicable regulatory requirements, including supervisory expectations, which may result in regulatory
sanctions (financial or reputational - including fines, other economic consequences including remediation costs, and the imposition of
conditions on regulatory permissions). We take a risk averse approach to managing personal data, understanding that we are
accountable for the data we collect and hold and will process it within the law, respecting individuals' rights and complying with
regulatory and legal requirements.
|
CONDUCT AND REGULATORY RISK MANAGEMENT
We manage our Conduct and regulatory risks in line with our NFR framework, as outlined earlier.
In addition, to mitigate specific Conduct and Regulatory risks, we have the following tailored policies:
|
Policies
|
Description
|
|
Fair Value policy for
regulated products (Retail
customers)
|
Our fair value policy details our approach to assessing whether a regulated product provides fair value to our retail customers,
considering all stages of value during the product design phase, and on a regular basis.
|
|
Fair treatment of vulnerable
customers
|
Some customers may be impacted financially or personally as a result of their circumstances. Our Vulnerable Customer Policy gives
business units a clear and consistent view of what vulnerability can mean and situations when customers may need more support. Our
guidelines focus on identifying characteristics of vulnerability, understanding customer needs and the support and flexibility we can give
to help. In addition to mandatory training, we train our customer-facing staff using real customer scenarios to enable our colleagues to
deal with a wide range of sensitive issues. Our online Vulnerable Customer Support Tool gives our people more guidance and support,
and our Specialist Support Team provides guidance for the most complex situations. We also consider vulnerability in every initiative and
adapt our technology to the needs of customers with vulnerability characteristics in our design and testing stages. We work with
charities, authorities, trade associations and other specialists to develop our understanding of vulnerability.
|
|
Conduct Regulatory risk
policy for regulated
products (Retail
customers)
|
The Policy sets out the actions that we must take and the standards of behaviour we comply with to deliver good outcomes for retail
customers, to comply with applicable regulatory requirements and expectations, and to deliver a strong conduct and compliance culture.
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CONDUCT AND REGULATORY RISK REVIEW
2023
compared to
2022
The Conduct and Regulatory environment is expected to see a continued demanding agenda. To fully consider customer and conduct impacts across our
business, our customers remain at the centre of our culture and purpose. We monitor and regularly review our customers' experiences in practice and take action
to address outcomes. As part of this, we:
–
Proactively contacted 2.5 million customers who may be at risk of experiencing early signs of financial stress, to support them and try to help avoid longer
term financial difficulty. As part of this, we referred them to internal and external sources of support alongside ongoing customer engagement and support
plans.
–
Are working with the government and regulators to enhance help for customers struggling with higher mortgage rates and we have agreed to the
commitments in the Mortgage Charter.
–
Continued to focus on financial support for business customers with payment difficulties as they roll off their government scheme loans.
–
Further evolved our Financial Support team and SME support, with more investment in people and IT to ensure we continue to drive good outcomes for
customers and can provide tailored support, whilst managing the anticipated increased inflow of customers affected by the rising cost of living.
–
Reviewed our products and services to ensure our customers receive communications they understand, products and services that meet their needs, and
that offer fair value. Also, that they get the support they need, when they need it, in order to deliver good customer outcomes required by the FCA's Consumer
Duty.
–
Continued to actively participate in schemes to ensure the long-term future of access to cash, including supporting the setup of shared banking hubs and
wider engagement with LINK and industry partners.
–
Assessed ongoing and new policy areas in the FCA's 2023/24 Business Plan. The key focus continues to be on reducing and preventing serious consumer
harm; setting and testing higher standards; and promoting competition and positive change. We continue to address these in our controls, product and service
processes and frameworks, and we continue to adapt in line with the evolution of a digital economy.
We are actively working with the Payment Systems Regulator (PSR), UK Finance, Pay.UK and other industry partners on the PSR’s upcoming Mandatory
Reimbursement regulations which come into force in October 2024. Our focus is to ensure consistent standards can be agreed across the industry. At the same
time, we need to ensure that our operational environment is ready in time and that we meet our obligations. We continue to consult with the Lending Standards
Board (LSB) on the future of the Contingent Reimbursement Model (CRM) code and how that will be part of the Fraud response ecosystem beyond 2024. In
2023, the LSB upgraded our status in relation to our compliance of the CRM code and we continue to adhere to this, providing protection for consumers against
APP scams.
We will continue to monitor the regulatory landscape and contribute to debates on regulatory issues. We expect the key areas of regulatory focus in 2024 to
include the ongoing embedding of the FCA’s Consumer Duty, the FCA’s proposals for new rules to maintain reasonable access to cash for personal and business
customers across the UK, and the ongoing activity from the government and regulators to implement HM Treasury’s Smarter Regulatory Framework, including the
Edinburgh Reforms and the transfer of retained EU Law. We will also see the implementation of Basel 3.1 rules, reform to the UK’s ring-fencing regime and the
implementation of the PRA’s expectations in relation to model risk management. The publication of the Future of Payments review in late 2023 will also lead to
potential reform of the various inflight payments projects in the UK as HM Treasury publishes its National Payments Vision.
We also managed conduct and regulatory risk relating to historical motor finance discretionary commission arrangements which were subject to an FCA
announcement on 11 January 2024. For more, see Note
31
to the
Consolidated Financial Statements
.
The outlook for the economic environment continues to remain challenging and conduct risks are therefore likely to rise, as banks deal with households that
continue to face pressures from increases in the cost of living, and higher interest rates.
We will maintain a strong focus on robust oversight and control of the customer journey across all our products. We will also ensure our strategy, leadership,
governance arrangements, and approach to managing and rewarding staff do not lead to a detrimental impact on customers, competition, or to market integrity.
For key movements in our financial crime risk profile, see the 'Financial crime risk review' section.
Accounting position
For more on our provisions, see Note
29
to the
Consolidated Financial Statements
. For more on our contingent liabilities, see Note
31
to the
Consolidated
Financial Statements
.
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Financial statements
|
Contents
|
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|
|
|
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|
Report of Independent Registered Public Accounting Firm
(PCAOB ID
|
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|
Primary financial statements
|
||||
|
Consolidated Income Statement
|
||||
|
Consolidated Statement of Comprehensive Income
|
||||
|
Consolidated Balance Sheet
|
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|
Consolidated Cash Flow Statement
|
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|
Consolidated Statement of Changes in Equity
|
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Notes to the financial statements
|
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Santander UK plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Santander UK
pl
c and its subsidiaries (the “Company”) as of 31 December 2023 and 2022,
and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and
consolidated cash flow statements for each of the three years in the period ended 31 December 2023, including the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of 31 December 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended 31 December
2023 in conformity with i) International Financial Reporting Standards as issued by the International Accounting Standards Board, and ii) UK-adopted International
Accounting Standards.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated
or required to be communicated to the Board Audit Committee and that (i) relate to accounts or disclosures that are material to the consolidated financial
statements and (ii) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way
our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Credit impairment loss allowance on loans and advances to customers
As described in Notes 1 and 13 to the consolidated financial statements, an expected credit loss (“ECL”) is recognised for financial assets measured at amortised
cost. The measurement of ECL reflects: a probability weighted amount that is determined by evaluating a range of possible outcomes; the time value of money;
and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts
of future economic conditions. The application of the ECL impairment methodology for calculating credit impairment loss allowances is susceptible to change from
period to period and requires management to make judgemental assumptions in determining the estimates. The key judgements made by management in
applying the ECL impairment methodology are: (i) the forward looking multiple economic scenarios; (ii) the probability weights assigned to multiple economic
scenarios; (iii) assessing individual corporate stage 3 exposures; and (iv) determining judgemental adjustments. The Company’s ECL allowance was £914 million
as of 31 December 2023.
The principal considerations for our determination that performing procedures relating to the credit impairment loss allowance on loans and advances to
customers is a critical audit matter are due to the significant judgements being applied by management in determining (i) the forward looking economic scenarios;
(ii) the probability weights applied to those scenarios; (iii) individual corporate stage 3 provisions; and (iv) judgemental adjustments. This in turn led to a high
degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence related to the methodology and judgement in
assumptions used to determine the allowance; and the audit effort involved the use of professionals with specialised skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to the credit impairment loss allowance. These procedures also included,
among others, testing management’s process for estimating expected credit losses; evaluating the appropriateness of model methodologies; testing the
underlying data used in the model and evaluating the reasonableness of management’s assumptions related to (i) forward looking multiple economic scenarios;
(ii) the probability weights applied to multiple economic scenarios; (iii) expected future cash flows and collateral valuations of individually assessed corporate stage
3 exposures; and (iv) determining the need for any judgemental adjustments. Professionals with specialised skill and knowledge were used to assist in evaluating
the reasonableness of the forward-looking economic scenarios, probability weight assumptions, the sufficiency and appropriateness of the judgemental
adjustments, and corporate real estate collateral valuations.
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Valuation of defined benefit pension surplus
As described in Notes 1 and 30 to the consolidated financial statements, the Company operates a number of defined benefit pension schemes. The main scheme
is the Santander (UK) Group Pension Scheme (the "Scheme"). The funded defined benefit pension surplus was £657 million as of 31 December 2023. Any
surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). Management estimates the present
value of the defined benefit obligation by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of
pension payment. This is then discounted to present value. In determining the value of scheme liabilities, demographic and financial assumptions are made by
management about life expectancy, inflation and discount rates. The scheme invests in certain assets whose values are not based on market observable data.
These assets include investments in unquoted equities and bonds, as well as investments in property, infrastructure and hedge funds, which are valued by
reference to the latest manager statements provided by the managers, adjusted for any cash movements since the latest valuation, with the exception of directly
held property where the underlying asset valuations are determined by an independent expert.
The principal considerations for our determination that performing procedures relating to the valuation of defined benefit pension surplus is a critical audit matter
are the significant judgements made by management in determining: (i) the life expectancy, inflation and discount rate assumptions; and (ii) the fair value of the
assets with no market observable data, including adjustments for any potential fair value movements since the last valuation date. This, in turn, led to significant
auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence. The audit effort involved the use of professionals with
specialised skill or knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to the valuation of the defined benefit pension obligation and the valuation of
assets with no market observable data. These procedures also included, among others, evaluating the defined benefit pension obligation by; (1) testing the
completeness, accuracy and relevance of the underlying data; and (2) involving professionals with specialised skill and knowledge to assist in; (a) developing an
independent range of the inflation rate, the discount rate and life expectancy assumptions; (b) comparing the independent range of assumptions to management's
assumptions to evaluate the reasonableness of management’s assumptions and; (c) assessing the appropriateness of the methodologies used by management
to determine these assumptions. Procedures over directly held property included, among others: (i) the involvement of professionals with specialised skill and
knowledge to assist in assessing the appropriateness of the methodology and reasonableness of the key assumptions used by management’s expert valuer for
property and; (ii) evaluating the reasonableness of the valuation for a sample of properties. For the other assets with no market observable data, the procedures
included, among others, (I) obtaining third-party confirmations of the valuation directly from investment managers and comparing these against management’s
reported values; (II) recalculating management’s valuation calculations and comparing our recalculation to the third-party confirmations and, if applicable, testing
material capital changes in the period between the valuation and the entity’s balance sheet date, where there was a time lag; and (III) assessing other evidence
regarding the valuations, such as performing back testing of historical valuations used by management against the audited fund financial statements as at the
equivalent date and reviewing controls reports for the investment managers, where available.
Goodwill impairment assessment for the personal financial services cash generating unit
As described in Notes 1 and 20 to the consolidated financial statements, the carrying value of goodwill relating to the personal financial services (‘PFS’) cash
generating unit (“CGU”) was £1.2 billion as of December 31, 2023. Management undertakes an annual assessment to evaluate whether the carrying value of
goodwill is impaired, carrying out this assessment more frequently if reviews identify indicators of impairment or when events or changes in circumstances dictate.
Impairment is required where the carrying amount of goodwill exceeds its recoverable amount. The recoverable amount of the CGU was determined based on the
value in use (“VIU”) methodology at each testing date. The VIU is calculated by discounting the cash flow projections for the CGU. The goodwill impairment
assessment is based on key judgements including the testing methodology, planning assumptions and internal capital allocations. The estimation of future cash
flows and the level to which they are discounted is inherently uncertain and requires significant judgement and is subject to potential change over time. Estimates
include forecast cash flows for the CGU, including estimated allocations of regulatory capital, the growth rate for the period beyond the initial cash flow projections
and discount rates which factor in risk-free rates and applicable risk premiums.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment for the personal financial services
cash generating unit is a critical audit matter are due to the significant judgements by management in developing (i) the amount of regulatory capital and carrying
amount of the PFS CGU; (ii) the forecast cash flows; and (iii) the discount rate. This, in turn, led to significant auditor judgement, subjectivity and effort in
performing procedures and evaluating audit evidence related to management’s judgements and assumptions. In addition, the audit effort involved the use of
professionals with specialised skill or knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included, among others; (i) testing management’s process for determining the carrying value of the CGU including internal capital
allocations; (ii) evaluating the appropriateness of the methodology used to estimate the VIU; (iii) testing the completeness and accuracy of underlying data used in
the model; (iv) comparing an independent range of assumptions for the discount rate to management's rate to evaluate the reasonableness of management’s
assumptions; (v) evaluating the reasonableness of the forecasted cash flows including comparing performance in recent years to the budgets and 3-year plans for
the equivalent periods; and (vi) assessing the appropriateness of the related disclosures. Professionals with specialised skill and knowledge assisted in the
evaluation of the reasonableness of the discount rate and assessing the determination of the carrying value of the PFS CGU.
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|
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Specific litigation and regulatory matters
As described in Notes 1, 29 and 31 to the consolidated financial statements, as of 31 December 2023, the provision for litigation and other regulatory matters of
£132 million includes, among other items, a provision relating to a legal dispute regarding allocation of responsibility for a specific Payment Protection Insurance
(“PPI”) portfolio of complaints. There are also ongoing investigations in relation to the historical involvement of Santander UK plc, Santander Financial Services plc
and Cater Allen International Limited in German dividend tax arbitrage transactions, and the involvement of Santander Consumer (UK) plc in the historical use of
certain commission arrangements in respect of car financing, for which management has determined that there are uncertainties that mean either it is not
considered that a legal or constructive obligation has been incurred or it is not currently possible to make a reliable assessment of the size of any potential
liabilities. Significant judgement may be required when accounting for provisions, including in determining whether a present obligation exists, determining the
likely outcome of future legal decisions and in estimating the probability, timing, nature and amount of any outflows that may arise from past events. These
judgements are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and
uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters.
The principal considerations for our determination that performing procedures relating to the specific litigation and regulatory matters is a critical audit matter are
due to the significant judgements made by management when estimating the probability, timing, nature and amount of any outflows for the legal dispute for a
specific PPI portfolio of complaints, the German dividend tax arbitrage investigation, and the involvement of Santander Consumer (UK) plc in the historical use of
certain commission arrangements in respect of car financing. This in turn led to a high degree of auditor judgement, subjectivity and effort in performing
procedures and evaluating audit evidence related to management's assessment of the specific litigation and regulatory matters.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to management’s assessment of the specific litigation and regulatory matters
against the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. These procedures also included, among others, (i) inquiries of
internal legal counsel on the developments in respect to the significant cases; (ii) obtaining and evaluating letters of audit inquiry from external legal counsel; (iii)
evaluating the reasonableness of management’s assessment regarding the probability of an outflow and the estimated amount of the obligation, where a reliable
estimate can be formed; and (iv) evaluating the sufficiency of the group’s disclosures made in relation to each of these specific matters.
/s/
PricewaterhouseCoopers LLP
5 March, 2024
We have served as the Company's auditor since 2016.
|
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|
|||
Consolidated Income Statement
For the
year ended
31 December
|
2023
|
2022
|
2021
|
||
|
Notes
|
£m
|
£m
|
£m
|
|
|
Interest and similar income
|
3
|
|
|
|
|
Interest expense and similar charges
|
3
|
(
|
(
|
(
|
|
Net interest income
|
|
|
|
|
|
Fee and commission income
|
4
|
|
|
|
|
Fee and commission expense
|
4
|
(
|
(
|
(
|
|
Net fee and commission income
|
|
|
|
|
|
Other operating income
|
5
|
|
|
|
|
Total operating income
|
|
|
|
|
|
Operating expenses before credit impairment charges, provisions and charges
|
6
|
(
|
(
|
(
|
|
Credit impairment (charges)/write-backs
|
8
|
(
|
(
|
|
|
Provisions for other liabilities and charges
|
8
|
(
|
(
|
(
|
|
Total operating credit impairment charges, provisions and charges
|
(
|
(
|
(
|
|
|
Profit from continuing operations before tax
|
|
|
|
|
|
Tax on profit from continuing operations
|
9
|
(
|
(
|
(
|
|
Profit from continuing operations after tax
|
|
|
|
|
|
Profit from discontinued operations after tax
|
42
|
|
|
|
|
Profit after tax
|
|
|
|
|
|
Attributable to:
|
||||
|
Equity holders of the parent
|
|
|
|
|
|
Non-controlling interests
|
|
|
|
|
|
Profit after tax
|
|
|
|
The accompanying Notes to the Financial Statements form an integral part of these
Consolidated Financial Statements
.
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|
Annual Report 2023
|
Santander UK plc
117
|
|||
Consolidated Statement of Comprehensive Income
For the
year ended
31 December
|
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Profit after tax
|
|
|
|
|
Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently:
|
|||
|
Movement in fair value reserve (debt instruments):
|
|||
|
- Change in fair value
|
|
(
|
(
|
|
- Income statement transfers
|
(
|
|
|
|
- Taxation
|
|
|
(
|
|
(
|
(
|
(
|
|
|
Cash flow hedges:
|
|||
|
- Effective portion of changes in fair value
|
(
|
|
(
|
|
- Income statement transfers
|
|
(
|
|
|
- Taxation
|
(
|
|
|
|
|
(
|
(
|
|
|
Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently
|
|
(
|
(
|
|
Other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently:
|
|||
|
Pension remeasurement:
|
|||
|
- Change in fair value
|
(
|
(
|
|
|
- Taxation
|
|
|
(
|
|
(
|
(
|
|
|
|
Own credit adjustment:
|
|||
|
- Change in fair value
|
(
|
|
|
|
- Taxation
|
|
(
|
|
|
(
|
|
|
|
|
Net other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently
|
(
|
(
|
|
|
Total other comprehensive income/(expense) net of tax
|
|
(
|
|
|
Total comprehensive income/(expense)
|
|
(
|
|
|
Attributable to:
|
|||
|
Equity holders of the parent
|
|
(
|
|
|
Non-controlling interests
|
|
|
|
|
Total comprehensive income/(expense)
|
|
(
|
|
The accompanying Notes to the Financial Statements form an integral part of these
Consolidated Financial Statements
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
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|
Governance
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|
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statements
|
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information
|
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|
Annual Report 2023
|
Santander UK plc
118
|
|||
Consolidated Balance Sheet
At
31 December 2023
|
2023
|
2022
|
||
|
Notes
|
£m
|
£m
|
|
|
Assets
|
|||
|
Cash and balances at central banks
|
|
|
|
|
Derivative financial instruments
|
11
|
|
|
|
Other financial assets at fair value through profit or loss
|
12
|
|
|
|
Loans and advances to customers
|
13
|
|
|
|
Loans and advances to banks
|
|
|
|
|
Reverse Repurchase agreements - non-trading
|
16
|
|
|
|
Other financial assets at amortised cost
|
17
|
|
|
|
Macro hedge of interest rate risk
|
(
|
(
|
|
|
Financial assets at fair value through other comprehensive income
|
18
|
|
|
|
Interests in other entities
|
19
|
|
|
|
Intangible assets
|
20
|
|
|
|
Property, plant and equipment
|
21
|
|
|
|
Current tax assets
|
9
|
|
|
|
Retirement benefit assets
|
30
|
|
|
|
Other assets
|
|
|
|
|
Assets held for sale
|
42
|
|
|
|
Total assets
|
|
|
|
|
Liabilities
|
|||
|
Derivative financial instruments
|
11
|
|
|
|
Other financial liabilities at fair value through profit or loss
|
22
|
|
|
|
Deposits by customers
|
23
|
|
|
|
Deposits by banks
|
24
|
|
|
|
Repurchase agreements - non-trading
|
25
|
|
|
|
Debt securities in issue
|
26
|
|
|
|
Subordinated liabilities
|
27
|
|
|
|
Macro hedge of interest rate risk
|
|
|
|
|
Other liabilities
|
28
|
|
|
|
Provisions
|
29
|
|
|
|
Deferred tax liabilities
|
9
|
|
|
|
Retirement benefit obligations
|
30
|
|
|
|
Total liabilities
|
|
|
|
|
Equity
|
|||
|
Share capital
|
32
|
|
|
|
Share premium
|
32
|
|
|
|
Other equity instruments
|
33
|
|
|
|
Retained earnings
|
|
|
|
|
Other reserves
|
(
|
(
|
|
|
Total equity
|
|
|
|
|
Total liabilities and equity
|
|
|
The accompanying Notes to the Financial Statements form an integral part of these
Consolidated Financial Statements
.
The Financial Statements were approved and authorised for issue by the Board on 29 February 2024 and signed on its behalf by:
|
Mike Regnier
|
William Vereker
|
|
Chief Executive Officer
|
Chair
|
|
Company Registered Numb
er: 02294747
|
|
Strategic Report
|
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Responsible Banking
|
Financial review
|
Governance
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|
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statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
119
|
|||
Consolidated Cash Flow Statement
For the
year ended
31 December
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Cash flows from operating activities
|
|||
|
Profit before tax
|
|
|
|
|
Adjustments for:
|
|||
|
Non-cash items included in profit
|
|||
|
– Depreciation and amortisation
|
|
|
|
|
– Provisions for other liabilities and charges
|
|
|
|
|
– Impairment losses
|
|
|
(
|
|
– Other non-cash items
|
(
|
|
(
|
|
– Pension charge for defined benefit pension schemes
|
|
|
|
|
|
|
|
|
|
Net change in operating assets and liabilities:
|
|||
|
– Cash and balances at central banks
|
(
|
|
(
|
|
– Derivative assets
|
|
(
|
|
|
– Other financial assets at fair value through profit or loss
|
|
|
|
|
– Loans and advances to banks and customers
|
|
(
|
(
|
|
– Reverse repurchase agreements - non-trading
|
(
|
|
|
|
– Other assets
|
(
|
(
|
|
|
– Deposits by banks and customers
|
(
|
(
|
|
|
– Repurchase agreements - non-trading
|
|
(
|
(
|
|
– Derivative liabilities
|
(
|
|
(
|
|
– Other financial liabilities at fair value through profit or loss
|
|
(
|
(
|
|
– Debt securities in issue
|
|
|
(
|
|
– Other liabilities
|
(
|
(
|
(
|
|
(
|
(
|
|
|
|
Corporation taxes paid
|
(
|
(
|
(
|
|
Effects of exchange rate differences
|
(
|
|
(
|
|
Net cash flows from operating activities
|
(
|
(
|
|
|
Cash flows from investing activities
|
|||
|
Purchase of property, plant and equipment and intangible assets
|
(
|
(
|
(
|
|
Proceeds from sale of property, plant and equipment and intangible assets
|
|
|
|
|
Purchase of financial assets at amortised cost and financial assets at FVOCI
|
(
|
(
|
(
|
|
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at FVOCI
|
|
|
|
|
Net cash flows from investing activities
|
(
|
(
|
|
|
Cash flows from financing activities
|
|||
|
Issue of other equity instruments
|
|
|
|
|
Issue of debt securities and subordinated notes
|
|
|
|
|
Issuance costs of debt securities and subordinated notes
|
(
|
(
|
(
|
|
Repayment of debt securities and subordinated notes
|
(
|
(
|
(
|
|
Disposal of non-controlling interests
|
|
|
(
|
|
Repurchase of other equity instruments
|
|
(
|
(
|
|
Dividends paid on ordinary shares
|
(
|
(
|
(
|
|
Dividends paid on preference shares and other equity instruments
|
(
|
(
|
(
|
|
Principal elements of lease payments
|
(
|
(
|
(
|
|
Net cash flows from financing activities
|
|
|
(
|
|
Change in cash and cash equivalents
|
(
|
(
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
|
|
Effects of exchange rate changes on cash and cash equivalents
|
(
|
|
(
|
|
Cash and cash equivalents at the end of the year
|
|
|
|
|
Cash and cash equivalents consist of:
|
|||
|
Cash and balances at central banks
|
|
|
|
|
Less: restricted balances
|
(
|
(
|
(
|
|
|
|
|
|
|
Other cash equivalents: Loans and advances to banks - Non-trading
|
|
|
|
|
Other cash equivalents: Reverse repurchase agreements
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
|
The accompanying Notes to the Financial Statements form an integral part of these
Consolidated Financial Statements
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
120
|
|||
Consolidated Statement of Changes in Equity
|
Other reserves
|
Non-
controlling
interests
|
|||||||||
|
Share
capital
|
Share
premium
|
Other equity
instruments
|
Fair value
|
Cash flow
hedging
|
Currency
translation
|
Retained
earnings
|
||||
|
Total
|
Total
|
|||||||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
At 1 January 2023
|
|
|
|
|
(
|
|
|
|
|
|
|
Profit after tax
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
—
|
|
|
Other comprehensive (expense)/income, net of tax:
|
||||||||||
|
- Fair value reserve (debt instruments)
|
—
|
—
|
—
|
(
|
—
|
—
|
—
|
(
|
—
|
(
|
|
- Cash flow hedges
|
—
|
—
|
—
|
—
|
|
—
|
—
|
|
—
|
|
|
- Pension remeasurement
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
- Own credit adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
Total other comprehensive (expense)/income
|
—
|
—
|
—
|
(
|
|
—
|
(
|
|
—
|
|
|
Total comprehensive (expense)/income
|
—
|
—
|
—
|
(
|
|
—
|
|
|
|
|
|
Other
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
—
|
|
|
Dividends on ordinary shares
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
Dividends on preference shares and other equity
instruments
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
At 31 December 2023
|
|
|
|
(
|
(
|
|
|
|
|
|
|
At 1 January 2022
|
|
|
|
|
|
|
|
|
|
|
|
Profit after tax
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
—
|
|
|
Other comprehensive (expense)/income, net of tax:
|
||||||||||
|
- Fair value reserve (debt instruments)
|
—
|
—
|
—
|
(
|
—
|
—
|
—
|
(
|
—
|
(
|
|
- Cash flow hedges
|
—
|
—
|
—
|
—
|
(
|
—
|
—
|
(
|
—
|
(
|
|
- Pension remeasurement
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
- Own credit adjustment
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
—
|
|
|
Total other comprehensive (expense)
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
(
|
—
|
(
|
|
Total comprehensive (expense)/income
|
—
|
—
|
—
|
(
|
(
|
—
|
|
(
|
|
(
|
|
Issue of other equity instruments
|
—
|
—
|
|
—
|
—
|
—
|
—
|
|
—
|
|
|
Repurchase of other equity instruments
|
—
|
—
|
(
|
—
|
—
|
—
|
—
|
(
|
—
|
(
|
|
Dividends on ordinary shares
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
Dividends on preference shares and other equity
instruments
|
—
|
—
|
—
|
—
|
—
|
—
|
(
|
(
|
—
|
(
|
|
At 31 December 2022
|
|
|
|
|
(
|
|
|
|
|
|
|
At 1 January 2021
|
|
|
|
|
|
|
|
|
|
|
|
Profit after tax
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
Other comprehensive (expense)/income, net of tax:
|
||||||||||
|
- Fair value reserve (debt instruments)
|
—
|
—
|
—
|
(
|
—
|
—
|
—
|
(
|
—
|
(
|
|
- Cash flow hedges
|
—
|
—
|
—
|
—
|
(
|
—
|
—
|
(
|
—
|
(
|
|
- Pension remeasurement
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
Total other comprehensive (expense)/income
|
—
|
—
|
—
|
(
|
(
|
—
|
|
|
—
|
|
|
Total comprehensive (expense)/income
|
—
|
—
|
—
|
(
|
(
|
—
|
|
|
|
|
|
Issue of other equity instruments
|
—
|
—
|
|
—
|
—
|
—
|
—
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Repurchase of other equity instruments
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—
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—
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(
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—
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—
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—
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—
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(
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(
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Disposal of non-controlling interests
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—
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—
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—
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—
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—
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—
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—
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—
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(
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(
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Dividends on ordinary shares
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—
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—
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—
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—
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—
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—
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(
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(
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—
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(
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Dividends on preference shares and other equity
instruments
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—
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—
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—
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—
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—
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—
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(
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(
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—
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(
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At 31 December 2021
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The accompanying Notes to the Financial Statements form an integral part of these
Consolidated Financial Statements
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Companies Act 2006.
The principal activity of the Santander UK group is the provision of a wide range of banking and financial services to personal, business and
corporate customers.
Santander UK
plc is a
public company, limited by shares
and incorporated in
England and Wales
having a registered office at
2 Triton
These financial statements incorporate the financial statements of the Company and entities it controls (its subsidiaries) made up to 31 December each year.
The
consolidated financial statements have been prepared on the going concern basis using the historical cost convention, except for financial assets and liabilities
that have been measured at fair value. An assessment of the appropriateness of the adoption of the going concern basis of accounting is disclosed in the
statement of going concern in the Directors’ report.
Compliance with International Financial Reporting Standards (IFRS)
The consolidated financial statements of the Santander UK group and the separate financial statements of the Company comply with UK-adopted International
Accounting Standards (IAS). The financial statements are also prepared in accordance with IFRS as issued by the International Accounting Standards Board
(IASB), including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRS as issued by the IASB for the
periods presented.
Disclosures required by IFRS 7 ‘Financial Instruments: Disclosure’ relating to the nature and extent of risks arising from financial instruments, and IAS 1
‘Presentation of Financial Statements’ relating to objectives, policies and processes for managing capital, have been included in the Risk review section of this
Annual Report. This information forms an integral part of these financial statements by this cross reference, is marked as audited, and is covered by the
Independent auditors' report.
Climate change
Santander UK continues to develop its assessment of the potential impacts that climate change and the transition to a low carbon economy may have on the
assets and liabilities recognised and presented in its financial statements.
Santander UK is mindful of its responsibilities as a responsible lender and is focused on ways to meet the objectives of the Paris Agreement on climate change
and to support the UK’s transition to a climate-resilient, net zero economy.
Santander UK's current climate change strategy focuses on
three
main areas to achieve Banco Santander's ambition to reach net zero emissions by 2050:
1. Managing climate risks by integrating climate considerations into risk management frameworks, screening and stress testing our portfolio for climate related
financial risks, and setting risk appetites to help steer our portfolio in line with the Paris Agreement,
2. Supporting our customers’ transition by developing products and services that promote a reduction in CO
2
emissions, and
3. Reducing emissions in our operations and supply chain by focusing on continuous improvement in our operations, and environmental and energy management
systems in accordance with ISO14001 and 15001, promoting responsible procurement practices and employee engagement.
Santander UK's current climate change strategy and its view of the risks associated with climate change and the transition to a low carbon economy are reflected
in its critical judgements and accounting estimates, although climate change risk did not have a material impact at 31 December 2023 and 2022, consistent with
management's assessment that climate change and the transition to a low carbon economy are not currently expected to have a meaningful impact on the viability
of the Santander UK group in the medium term.
At 31 December 2023 and 2022, management specifically considered the potential impact of climate change and the transition to a low carbon economy on:
–
Loans and advances to customers (
see Note
13 and the credit risk section of the Risk review). Some climate change risks arise due to the requirements of
IFRS 9 and others relate to specific portfolios and sectors:
–
ECL calculations are based on multiple forward-looking economic scenarios developed by management covering a period of
5
years
, during which timeframe
climate change risks may crystallise;
–
For mortgages in Retail Business Banking and commercial real estate lending in Corporate Commercial Banking, the value of property collateral might
be affected by physical impacts related to the frequency and scale of extreme weather events, such as flood and subsidence risk, or changing environmental
performance standards for property.
–
For automotive loans in Consumer Finance, the residual value of automotive vehicles might be impacted by diesel obsolescence and the transition to electric
vehicles.
–
For corporate lending in Corporate Commercial Banking, certain sectors give rise to fossil fuel exposures, such as Oil Gas, Mining Extraction and
Power Generation.
–
Goodwill impairment assessment (see Note 20). Estimates underpinning the determination of whether or not goodwill balances are impaired are partly based
on forecast business performance beyond the time horizon for management's detailed plans.
Future changes to Santander UK's climate change strategy may impact Santander UK's critical judgements and accounting estimates and result in material
changes to financial results and the carrying values of certain assets and liabilities in future reporting periods.
At
31 December 2023
, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have
been issued but which are not yet effective, or which have otherwise not been early adopted where permitted.
As required by US public company reporting requirements, these financial statements include two years of comparative information for the consolidated income
statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related
notes.
Material accounting policy information
The following material accounting policies have been applied in preparing these financial statements. For material accounting policies which involve the
application of judgements or accounting estimates that are determined to be critical to the preparation of these financial statements see 'Critical judgements and
accounting estimates'.
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The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by it and its
subsidiaries.
The acquisition method of accounting is used to account for the acquisition of subsidiaries which meet the definition of a business.
Business combinations between entities under common control (i.e. fellow subsidiaries of Banco Santander SA, the ultimate parent) are outside the scope of
IFRS 3 – ‘Business Combinations’, and there is no other guidance for such transactions under IFRS. The Santander UK group elects to account for business
combinations between entities under common control at their book values in the acquired entity by including the acquired entity’s results from the date of the
business combination and not restating comparatives. Reorganisations of entities within the Santander UK group are also accounted for at their book values.
Credit protection entities established as part of significant risk transfer (SRT) transactions are not consolidated by the Santander UK group in cases where third
party investors have the exposure, or rights, to all of the variability of returns from the performance of the entities.
a) Interest income and expense
Interest and similar income and expense are recognised in the income statement using the effective interest rate method for: all financial instruments measured at
amortised cost; debt instruments measured at FVOCI; and the effective part of any related accounting hedging instruments.
Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have
subsequently become credit-impaired (i.e. Stage 3), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of
the ECL provision). For more information on stage allocations of credit risk exposures, see ‘Significant increase in credit risk’ in the ‘Santander UK group level –
credit risk management’ section of the Risk review.
b) Fee and commission income and expense
Fees and commissions that are not an integral part of the effective interest rate are recognised when the service is performed. Most fee and commission income is
recognised at a point in time. Certain commitment, upfront and management fees are recognised over time but are not material. For retail and corporate products,
fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers
for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK
group’s branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial products.
For insurance products, fee and commission income consists principally of commissions and profit share arising from the sale of building and contents insurance
and life protection insurance. Commissions arising from the sale of buildings and contents insurance are recognised over the period of insurance cover, adjusted
to take account of cancelled policies. Profit share income from the sale of buildings and contents insurance which is not subject to any adjustment is recognised
when the profit share income is earned. Commissions and profit share arising from the sale of life protection insurance is subject to adjustment for cancellations of
policies within 3 years from inception.
Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (for example certain loan commitment fees) is
recognised as an adjustment to the effective interest rate and recorded in ‘Interest income’.
c) Other operating income
Other operating income includes all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss
(comprising financial assets and liabilities held for trading, trading derivatives and other financial assets and liabilities at fair value through profit or loss), together
with related interest income, expense, dividends, and changes in fair value of any derivatives managed in conjunction with these assets and liabilities. Other
operating income also includes hedge ineffectiveness arising from fair value and cash flow hedging, income from operating lease assets, and profits and losses
arising on the sales of property, plant and equipment and subsidiary undertakings.
A defined benefit scheme is a pension scheme that guarantees an amount of pension benefit to be provided, usually as a function of one or more factors such as
age, years of service or compensation. Pension costs are charged to ‘Administration expenses’, within the line item ‘Operating expenses before impairment
losses, provisions and charges’ with the net interest on the defined benefit asset or liability included within ‘Net interest income’ in the income statement. The asset
or liability recognised in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date, less the fair
value of scheme assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The assets of the
schemes are measured at their fair values at the balance sheet date.
The present value of the defined benefit obligation is estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary
growth to the date of pension payment, then discounted to present value using the yield applicable to high-quality AA rated corporate bonds of the same currency
and which have terms to maturity closest to the terms of the scheme liabilities, adjusted where necessary to match those terms. In determining the value of
scheme liabilities, demographic and financial assumptions are made by management about life expectancy, inflation, discount rates, pension increases and
earnings growth, based on past experience and future expectations. Financial assumptions are based on market conditions at the balance sheet date and can
generally be derived objectively.
Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data. Any surplus or deficit of scheme assets
over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be
recovered through reduced contributions in the future or through refunds from the scheme.
The Santander UK group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its
employees. Shares of the Santander UK group’s parent, Banco Santander SA are purchased in the open market by the Santander UK group (for the Employee
Sharesave scheme) or are purchased by Banco Santander SA or another Banco Santander subsidiary (including awards granted under the Long-Term Incentive
Plan and the Deferred Shares Bonus Plan) to satisfy share options or awards as they vest.
Options granted under the Employee Sharesave scheme and awards granted under the Transformation Incentive Plan are accounted for as cash-settled share-
based payment transactions. Awards granted under the Long-Term Incentive Plan and Deferred Shares Bonus Plan are accounted for as equity-settled share-
based payment transactions.
The fair value of the options granted under the Employee Sharesave scheme is determined using an option pricing model, which takes into account the exercise
price of the option, the current share price, the risk-free interest rate, the expected volatility of the Banco Santander SA share price over the life of the option and
the dividend growth rate. The fair value of the awards granted for the Long-Term Incentive Plan was determined at the grant date using an option pricing model,
which takes into account the share price at grant date, the risk-free interest rate, the expected volatility of the Banco Santander SA share price over the life of the
award and the dividend growth rate.
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Goodwill represents the excess of the cost of an acquisition, as well as the fair value of any interest previously held, over the fair value of the share of the
identifiable net assets of the acquired subsidiary, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in
intangible assets. Goodwill is tested for impairment annually, or more frequently when events or changes in circumstances dictate and carried at cost less
accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business
sold.
Other intangible assets are recognised if they arise from contractual or other legal rights or if they are capable of being separated or divided from Santander UK
and sold, transferred, licensed, rented or exchanged. The value of such intangible assets, where they are available for use, is amortised on a straight-line basis
over their useful economic life of
three
to
seven
years and the assets are reviewed annually for impairment indicators and tested for impairment where indicators
are present. Other intangible assets that are not yet available for use are tested for impairment annually or more frequently when events or changes in
circumstances dictate.
Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide
future economic benefits and the cost of those products can be measured reliably. These costs include payroll, materials, services and directly attributable
overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and
amortised on a straight-line basis over their useful life of three to seven years, unless the software is an integral part of the related computer hardware, in which
case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended.
Costs of maintaining software are expensed as incurred.
Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software. Property,
plant and equipment also includes operating leases where the Santander UK group is the lessor and right-of-use assets where the Santander UK group is the
lessee. Internally developed software meeting the criteria set out in ‘Goodwill and other intangible assets’ above and externally purchased software are classified
in property, plant and equipment where the software is an integral part of the related computer hardware (for example, the operating system of a computer).
|
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Office fixtures and equipment
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Computer software
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Right-of-use assets
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Shorter of the lease term or the useful life of the underlying asset
|
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Operating lease assets - vehicles
|
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Depreciation is not charged on freehold land. Depreciation of operating lease assets where the Santander UK group is the lessor is described in 'Leases' below.
losses')
a) Initial recognition and measurement
Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander
UK group determines the classification of its financial assets and liabilities at initial recognition and measures a financial asset or financial liability at its fair value
plus or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are incremental and directly attributable to the acquisition or
issue of the financial asset or financial liability. Transaction costs of financial assets and financial liabilities carried at FVTPL are expensed in profit or loss.
Immediately after initial recognition, an expected credit loss (ECL) allowance is recognised for financial assets measured at amortised cost and investments in
debt instruments measured at FVOCI.
A regular way purchase or sale is a purchase or sale 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 marketplace concerned. Regular way purchases and sales of financial assets measured at amortised cost
are recognised on settlement date; all other regular way purchases and sales of financial assets are recognised on trade date.
b) Financial assets and liabilities
i) Classification and subsequent measurement
The Santander UK group classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL.
Financial assets and financial liabilities are classified as FVTPL where there is a requirement to do so or where they are otherwise designated at FVTPL on initial
recognition. Financial assets and financial liabilities which are required to be held at FVTPL include:
–
Financial assets and financial liabilities held for trading.
–
Debt instruments that do not have solely payments of principal and interest (SPPI) characteristics. Otherwise, such instruments are measured at amortised cost
or FVOCI, and
–
Equity instruments that have not been designated as held at FVOCI.
Financial assets and financial liabilities are classified as held for trading if they are derivatives or if they are acquired or incurred principally for the purpose of
selling or repurchasing in the near-term, or form part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term
profit taking.
In certain circumstances, other financial assets and financial liabilities are designated at FVTPL where this results in more relevant information. This may arise
because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on
them on a different basis, where the assets and liabilities are managed and their performance evaluated on a fair value basis or, in the case of financial liabilities,
where it contains one or more embedded derivatives which are not closely related to the host contract.
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The classification and measurement requirements for financial asset debt and equity instruments and financial liabilities are set out below.
Financial assets: debt instruments
Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as loans and government and corporate
bonds. Classification and subsequent measurement of debt instruments depend on the Santander UK group’s business model for managing the asset, and the
cash flow characteristics of the asset.
Business model
The business model reflects how the Santander UK group manages the assets in order to generate cash flows and, specifically, whether the Santander UK
group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale
of the assets. If neither of these is applicable, such as where the financial assets are held for trading purposes, then the financial assets are classified as part of an
‘other’ business model and measured at FVTPL. Factors considered in determining the business model for a group of assets include past experience on how the
cash flows for these assets were collected, how the assets’ performance is evaluated and reported to key management personnel, and how risks are assessed
and managed.
SPPI
Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Santander UK group assesses
whether the assets’ cash flows represent SPPI. In making this assessment, the Santander UK group considers whether the contractual cash flows are consistent
with a basic lending arrangement (i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that
is consistent with a basic lending arrangement). Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending
arrangement, the related asset is classified and measured at FVTPL.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.
Based on these factors, the Santander UK group classifies its debt instruments into one of the following measurement categories:
–
Amortised cost – Financial assets that are held for collection of contractual cash flows where those cash flows represent SPPI, and that are not designated at
FVTPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any ECL recognised and measured as presented in Note
13
.
Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method. When estimates of future cash
flows are revised, the carrying amount of the respective financial assets is adjusted to reflect the new estimate discounted using the original effective interest
rate. Any changes are recognised in the income statement.
–
FVOCI – Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent SPPI, and that
are not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are recognised in OCI, except for the recognition of impairment
gains or losses, interest revenue and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the
cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Other operating income’. Interest income from
these financial assets is included in ‘Interest and similar income’ using the effective interest rate method.
–
FVTPL – Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument that is
subsequently measured at FVTPL, including any debt instruments designated at fair value, is recognised in profit or loss and presented in the income statement
in ‘Other operating income’ in the period in which it arises.
The Santander UK group reclassifies financial assets when and only when its business model for managing those assets changes. The reclassification takes
place from the start of the first reporting period following the change. Such changes are expected to be very infrequent.
Financial assets: equity instruments
Equity instruments are instruments that meet the definition of equity from the issuer’s perspective, being instruments that do not contain a contractual obligation to
pay cash and that evidence a residual interest in the issuer’s net assets. All equity investments are subsequently measured at FVTPL; management may elect, at
initial recognition, to irrevocably designate an equity investment at FVOCI but has not currently done so. When this election is used, fair value gains and losses are
recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal. ECLs (and reversal of ECLs) are not reported separately from
other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the right
to receive payments is established. Gains and losses on equity investments at FVTPL are included in ‘Other operating income’ in the income statement.
Financial liabilities
Financial liabilities, which include deposits by banks, deposits by customers, debt securities in issue and subordinated liabilities, are classified as subsequently
measured at amortised cost, except for:
–
Financial liabilities at FVTPL (see Note
22
): this classification is applied to derivatives and other financial liabilities designated as such at initial recognition.
Gains or losses on financial liabilities designated at FVTPL are presented partially in other comprehensive income (the amount of change in the fair value of the
financial liability that is attributable to changes in the credit risk of that liability) and partially in profit or loss (the remaining amount of change in the fair value of
the liability)
–
Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the
consideration received for the transfer. In subsequent periods, the Santander UK group recognises any expense incurred on the financial liability, and
–
Financial guarantee contracts and loan commitments.
Preference shares which carry a contractual obligation to transfer economic benefits are classified as financial liabilities and are presented in subordinated
liabilities. The coupon on these preference shares is recognised in the income statement as interest expense on an amortised cost basis using the effective
interest method.
Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits. The principal products
are Capital Guaranteed/Protected Products which give the customers a limited participation in the upside growth of an equity index. In the event the index falls in
price, a cash principal element is guaranteed/protected. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in
combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with
customers. The cash principal element is accounted for as deposits by customers at amortised cost. The embedded derivatives are separated from the host
instrument and are separately accounted for as derivatives.
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Sale and repurchase agreements (including stock borrowing and lending)
Securities sold subject to a commitment to repurchase them at a predetermined price (repos) under which substantially all the risks and rewards of ownership are
retained by the Santander UK group remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under
commitments to resell (reverse repos) are not recognised on the balance sheet and the consideration paid is recorded as an asset. The difference between the
sale and repurchase price is treated as trading income in the income statement, except where the repo is not treated as part of the trading book, in which case the
difference is recorded in interest income or expense.
Securities lending and borrowing transactions are generally secured, with collateral in the form of securities or cash advanced or received. Securities borrowed are
not reflected on the balance sheet. Collateral in the form of cash received or advanced is recorded as a deposit or a loan. Collateral in the form of securities is not
recognised.
Day One profit adjustments
The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However,
sometimes the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a
valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When
such evidence exists, the Santander UK group recognises a trading gain or loss at inception (Day One gain or loss), being the difference between the transaction
price and the fair value. When significant unobservable parameters are used, the entire Day One gain or loss is deferred and is recognised in the income
statement over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable, or an offsetting transaction is entered
into.
ii) Impairment of debt instrument financial assets
The Santander UK group assesses on a forward-looking basis the ECL associated with its debt instrument assets carried at amortised cost and FVOCI and with
the exposure arising from financial guarantee contracts and loan commitments. The Santander UK group recognises a loss allowance for such losses at each
reporting date. The measurement of ECL reflects:
–
An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes.
–
The time value of money, and
–
Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts
of future economic conditions.
Grouping of instruments for losses measured on a collective basis
We typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in the Credit risk section of the
Risk review) using one or more statistical models. Where we have used internal capital or similar models as the basis for our ECL models, this typically results in a
large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models. We
calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed, as described below.
Individually assessed impairments (IAIs)
We assess significant Stage 3 cases individually. We do this for Corporate Commercial Banking cases, but not for Business Banking cases in Retail Business
Banking which we assess collectively. To calculate the estimated loss, we estimate the future cash flows under several scenarios each of which uses case-specific
factors and circumstances. We then probability-weight the net present value of the cash flows under each scenario to arrive at a weighted average provision
requirement. We update our assessment process every quarter and more frequently if there are changes in circumstances that might affect the scenarios, cash
flows or probabilities we apply.
For more on how ECL is calculated, see the Credit risk section of the Risk review.
–
Write-off
For secured loans, a write-off is only made when all collection procedures have been exhausted and the security has been sold and/or a claim made on any
mortgage indemnity guarantee or other insurance. In the corporate loan portfolio, there may be occasions where a write-off occurs for other reasons, such as
following a consensual restructure or refinancing of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than its
face value.
There is no threshold based on past due status beyond which all secured loans are written off as there can be significant variations in the time needed to
enforce possession and sale of the security, especially due to the different legal frameworks that apply in different regions of the UK. For unsecured loans, a
write-off is only made when all internal avenues of collecting the debt have been exhausted. Where appropriate the debt is passed over to external collection
agencies. A past due threshold is applied to unsecured debt where accounts that are
180
days past due are written off unless there is a dispute awaiting
resolution. Contact is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security
is usually carried out only when the steps described above have been undertaken without success.
All write-offs are assessed / made on a case-by-case basis, taking account of the exposure at the date of write-off, after accounting for the value from any
collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once investigations
have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an
impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances.
–
Recoveries
Recoveries of credit impairment charges are not included in the impairment loss allowance but are taken to income and offset against credit impairment
charges. Recoveries of credit impairment charges are classified in the income statement as ‘Credit impairment charges’.
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iii) Modifications of financial assets
The treatment of a renegotiation or modification of the contractual cash flows of a financial asset normally depends upon whether the renegotiation or modification
is due to financial difficulties of the borrower or for other commercial reasons.
–
Contractual modifications due to financial difficulties of the borrower:
where the Santander UK group modifies the contractual conditions to enable the
borrower to fulfil their payment obligations, the asset is not derecognised. The gross carrying amount of the financial asset is recalculated as the present value
of the renegotiated/modified contractual cash flows that are discounted at the financial asset’s original EIR and any gain or loss arising from the modification is
recognised in the income statement.
–
Contractual modifications for other commercial reasons:
an assessment is performed to determine whether the terms of the new agreement are substantially
different from the terms of the existing agreement, after considering changes in the cash flows arising from the modified terms and the overall instrument risk
profile. Where terms are substantially different, such modifications are treated as a new transaction resulting in derecognition of the original financial asset, and
the recognition of a ‘new’ financial asset with any difference between the carrying amount of the derecognised asset and the fair value of the new asset is
recognised in the income statement as a gain or loss on derecognition. Where terms are not substantially different, the carrying value of the financial asset is
adjusted to reflect the present value of modified cash flows discounted at the original EIR with any gain or loss arising from modification recognised immediately
in the income statement.
Any other contractual modifications, such as where a regulatory authority imposes a change in certain contractual terms or due to legal reasons, are assessed on
a case-by-case basis to establish whether or not the financial asset should be derecognised. For IBOR reform see Note
41
.
iv) Derecognition other than on a modification
Financial assets are derecognised when the rights to receive cash flows have expired or the Santander UK group has transferred its contractual right to receive
the cash flows from the assets and either: (1) substantially all the risks and rewards of ownership have been transferred; or (2) the Santander UK group has
neither retained nor transferred substantially all of the risks and rewards but has transferred control.
Financial liabilities are derecognised when extinguished, cancelled or expired.
c) Financial guarantee contracts and loan commitments
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified
debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions
and others on behalf of customers to secure loans, overdrafts and other banking facilities.
Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of the amount of the loss allowance, and the premium
received on initial recognition less income recognised in accordance with the principles of IFRS 15. Loan commitments are measured as the amount of the loss
allowance (determined in accordance with IFRS 9 as described in Credit risk section of the Risk review). The Santander UK group has not provided any
commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument.
For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision and charged to credit impairment charges in the income
statement. The loss allowance in respect of revolving facilities is classified in loans and advances to customers to the extent of any drawn balances. The loss
allowance in respect of undrawn amounts is classified in provisions. When amounts are drawn, any related loss allowance is transferred from provisions to loans
and advances to customers.
Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which
require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property and
other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest
rate futures, and equity index options.
Derivatives are held for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge accounting
relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described in
‘Hedge accounting’ below.
Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of
exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are estimated using valuation techniques,
including discounted cash flow and option pricing models.
Certain derivatives may be embedded in hybrid contracts. If the hybrid contract contains a host that is a financial asset, then the Santander UK group assesses
the entire contract as described in the financial asset section above for classification and measurement purposes. Otherwise, embedded derivatives are treated as
separate derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative
would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated
at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Contracts containing
embedded derivatives are not subsequently reassessed for separation unless either there has been a change in the terms of the contract which significantly
modifies the cash flows (in which case the contract is reassessed at the time of modification) or the contract has been reclassified (in which case the contract is
reassessed at the time of reclassification).
All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, except where netting is permitted. The
method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments and, if the latter,
the nature of the risks being hedged. Gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement and
included in Other operating income.
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Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off
the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Santander UK group is
party to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in
jurisdictions where netting agreements are recognised and have legal force. These 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.
The Santander UK group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of
its risk management strategies. Derivatives are used to hedge exposures to interest rates
and
exchange rates
.
At the time a financial instrument is designated as a hedge (i.e. at the inception of the hedge), the Santander UK group formally documents the relationship
between the hedging instrument(s) and hedged item(s), its risk management objective and strategy for undertaking the hedge. The documentation includes the
identification of each hedging instrument and respective hedged item, the nature of the risk being hedged (including the benchmark interest rate being hedged in a
hedge of interest rate risk) and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the
hedged risk is to be assessed. Accordingly, the Santander UK group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the
hedging derivatives have been and will be highly effective in offsetting changes in the fair value attributable to the hedged risk during the period that the hedge is
designated. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Santander UK group can expect, and actual results indicate,
that changes in the fair value or cash flow of the hedged items are effectively offset by changes in the fair value or cash flow of the hedging instrument. If at any
point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.
Where derivatives are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the
derivatives may be designated as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (fair value hedges); (ii)
hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedges); or (iii) a
hedge of a net investment in a foreign operation (net investment hedges). The Santander UK group applies fair value and cash flow hedge accounting, but not
hedging of a net investment in a foreign operation.
a) Fair value hedge accounting
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in
the fair value of the hedged asset or liability that are attributable to the hedged risk. Where the hedged item is measured at amortised cost, the fair value changes
due to the hedged risk adjust the carrying amount of the hedged asset or liability. Changes in the fair value of portfolio hedged items are presented separately in
the consolidated balance sheet in macro hedge of interest rate risk and recognised in the income statement. If the hedge no longer meets the criteria for hedge
accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. For fair value hedges of
interest rate risk, the cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the
effective interest method over the period to maturity. For portfolio hedged items, the cumulative adjustment is amortised to the income statement using the
straight-line method over the period to maturity.
b) Cash flow hedge accounting
The effective portion of changes in the fair value of qualifying cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve.
The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the
income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets
the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the
forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that
was reported in equity is immediately transferred to the income statement. The Santander UK group is exposed to cash flow interest rate risk on its floating rate
assets, foreign currency risk on its fixed rate debt issuances denominated in foreign currency and equity price risk arises from the Santander UK group operating
the Employee Sharesave scheme. Cash flow hedging is used to hedge the variability in cash flows arising from these risks.
The Santander UK group has entered into arrangements where undertakings have issued mortgage-backed and other asset-backed securities or have entered
into funding arrangements with lenders in order to finance specific loans and advances to customers. The Santander UK group has also entered into synthetic
securitisation arrangements, as part of significant risk transfer (SRT) transactions to reduce its risk-weighted assets, where undertakings have issued credit-linked
notes, and in some cases deposited the funds raised as collateral, for credit protection in respect of specific loans and advances to customers. As the Santander
UK group has retained substantially all the risks and rewards of the underlying assets, such financial instruments continue to be recognised on the balance sheet,
and a liability recognised for the proceeds of the funding transaction, or in the case of SRT transactions, collateral deposited.
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 value of the asset or cash generating unit with its recoverable amount: the higher of the asset’s or
cash-generating unit’s fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at which non-financial assets, including
goodwill, are monitored for internal management purposes and is not larger than an operating segment.
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Value in use is calculated by discounting management’s expected future cash flows obtainable as a result of the asset’s continued use (after
making allowance for increases in regulatory capital requirements), including those resulting from its ultimate disposal, at a market-based discount rate on a pre-
tax basis. The recoverable amounts of goodwill have been based on value in use calculations.
For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.
Operating lease assets are recorded at cost and the difference between cost and residual value (RV) is depreciated over the life of the asset. Operating lease
rental income and depreciation is recognised on a straight-line basis over the life of the asset. After initial recognition, residual values are reviewed regularly, and
any changes are recognised prospectively through remaining depreciation charges.
Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Santander UK group’s net
investment in the leases. Finance lease income is allocated to accounting periods to reflect a constant periodic rate of return on the Santander UK group’s net
investment outstanding in respect of the leases and hire purchase contracts. A provision is recognised to reflect a reduction in any anticipated unguaranteed RV. A
provision is also recognised for voluntary termination of the contract by the customer, where appropriate.
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The tax expense represents the sum of the income tax currently payable and deferred income tax.
A current tax liability for the current or prior period is measured at the amount expected to be paid to the tax authorities. Where the amount of the final tax liability is
uncertain or where a position is challenged by a taxation authority, the liability recognised is the most likely outcome. Where a most likely outcome cannot be
determined, a weighted average basis is applied.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised based on rates enacted or
substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other
comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity.
Deferred 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.
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition,
including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks, reverse repurchase agreements
and short-term investments in securities. Balances with central banks represent amounts held at the Bank of England as part of the Santander UK group’s liquidity
management activities. It includes certain minimum cash ratio deposits held for regulatory purposes and reserves collateralised accounts in respect of Santander
UK’s participation in certain payments schemes which are required to be maintained with the Bank of England and are restricted balances.
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.
Customer remediation provisions are made for the estimated cost of making redress payments with respect to the past sales of products, using conclusions such
as the number of claims the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the
anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal
plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main
features.
When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are
expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.
Loan commitments are measured as the amount of the loss allowance, determined in line with IFRS 9 as set out in the Credit risk section of the Risk review.
Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic
benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.
The preparation of Santander UK's consolidated
financial statements in accordance with IFRS requires management to make judgements and assumptions in
applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates,
actual results reported in future periods may be based on amounts which differ from those estimates. Estimates, judgements and assumptions are continually
evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the
circumstances. There has been no change in the inherent sensitivity of the areas of judgement in the period. Management have considered the impact of
developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting estimates.
statements (key judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying
amount of assets and liabilities within the next financial year (key estimates), which together are considered critical to Santander UK's results and financial
position, are as follows:
methodology requires management to make judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and
actual amounts could have a material impact on the future financial results and financial condition. The impact of the cost of living crisis has increased the
uncertainty around ECL impairment calculations and has required management to make additional judgements and accounting estimates that affect the amount of
assets and liabilities at the reporting date and the amount of income and expenses in the reporting period. The key additional judgements due to the impact of the
cost of living crisis mainly reflect the increased uncertainty around forward-looking economic data and the need for additional judgemental adjustments.
|
Key judgements
|
–
Determining an appropriate definition of default
|
|
–
Establishing the criteria for a significant increase in credit risk (SICR) and, for corporate borrowers, internal credit risk rating
|
|
|
–
Determining the need for any judgemental adjustments
|
|
|
–
Determining the need to assess corporate Stage 3 exposures individually
|
|
|
Key estimates
|
–
Forward-looking multiple economic scenario assumptions
|
|
–
Probability weights assigned to multiple economic scenarios
|
For more on each of these key judgements and estimates, see 'Critical judgements and accounting estimates applied in calculating ECL' in the ‘Credit risk – credit
risk management’ section of the Risk review.
Sensitivity of ECL allowance
For detailed disclosures, see 'Sensitivity of ECL allowance' in the ‘Credit risk – credit risk management’ section of the Risk review.
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|
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|
Key judgements
|
–
Determining whether a present obligation exists
|
|
–
Determining the likely outcome of future legal decisions
|
|
|
Key estimates
|
–
Probability, timing, nature and amount of any outflows that may arise from past events
|
Included in Litigation and other regulatory provisions in Note
29
are amounts in respect of management’s best estimates of liability relating to a legal dispute
regarding allocation of responsibility for a specific PPI portfolio of complaints. Note
31
provides disclosure relating to ongoing factual issues and reviews that could
impact the timing and amount of any outflows.
Note
31
includes disclosure relating to an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater
Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions. It also includes disclosure relating
to the historical use of discretionary commission arrangements in Santander Consumer (UK) plc.
These judgements are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and
uncertainties, particularly in relation to legal actions, and regulatory and consumer credit matters. As a result, it is often not possible to make reliable estimates of
the likelihood and amount of any potential outflows, or to calculate any resulting sensitivities. For more on these key judgements and estimates, see Notes
29
and
31
.
accounting policy ‘Pensions and other post retirement benefits’.
|
Key judgements
|
–
Setting the criteria for constructing the corporate bond yield curve used to determine the discount rate
|
|
–
Determining the methodology for setting the inflation assumption
|
|
|
Key estimates
|
–
Discount rate applied to future cash flows
|
|
–
Rate of price inflation
|
|
|
–
Expected lifetime of the schemes' members
|
|
|
–
Valuation of pension fund assets whose values are not based on market observable data
|
For more on each of these key judgements and estimates, see Note
30
.
Sensitivity of defined benefit pension scheme estimates
For detailed disclosures, see ‘Actuarial assumption sensitivities’ in Note
30
.
The Scheme is invested in certain assets whose values are not based on market
observable data, such as investments in private equity funds and property. Due diligence has been conducted to support the values obtained in respect of these
assets are appropriate and represent fair value. Given the nature of these investments, we are unable to prepare sensitivities on how their values could vary as
market conditions or other variables change.
undertakes an annual assessment to evaluate whether the carrying amount of goodwill is impaired, carrying out this assessment more frequently if reviews
identify indicators of impairment or when events or changes in circumstances dictate.
|
Key judgements:
|
–
Determining the basis of goodwill impairment testing and the methodology for determining the carrying value of CGUs, including the need for
planning assumptions and internal capital allocations
|
|
Key estimates:
|
–
Forecast cash flows for cash generating units, including estimated allocations of regulatory capital
|
|
–
Growth rate beyond initial cash flow projections
|
|
|
–
Discount rates which factor in risk-free rates and applicable risk premiums
|
|
|
All of these variables are subject to fluctuations in external market rates and economic conditions beyond management’s control
|
Santander UK Group undertakes an annual assessment to evaluate whether the carrying amount of goodwill is impaired, carrying out this assessment more
frequently if reviews identify indicators of impairment or when events or changes in circumstances dictate.
The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires significant judgement and is subject to potential
change over time.
For more on each of these key judgements and estimates, see Note
20
.
Sensitivity of goodwill
For detailed disclosures, see ‘Sensitivities of key assumptions in calculating VIU’ in Note
20
.
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|
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Santander UK’s principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of
four
segments, which are strategic
business units that offer different products and services, have different customers and require different technology and marketing strategies. Geographical
information is not provided, as substantially all of Santander UK’s activities are in the UK.
–
Retail Business Banking
(formerly Retail Banking) consists of
two
business units, Mortgages and Everyday Banking. Mortgages provides prime UK
mortgage lending to owner occupiers and buy-to-let landlords with small portfolios. Everyday Banking provides banking services and unsecured lending to
individuals and small businesses as well alongside wealth management for high-net-worth clients.
–
Consumer Finance
provides prime auto consumer financing for individuals, businesses, and automotive distribution networks.
–
Corporate Commercial Banking
provides banking products and services to SMEs, mid-sized and larger corporates, typically with annual turnovers of
between
£
2
m
and
£
500
m
as well as to Local Authorities and Housing Associations.
–
Corporate Centre
provides treasury services for asset and liability management of our balance sheet.
Retail Business Banking delivers products through our omni-channel presence comprising branches, ATMs, telephony, digital and intermediary channels.
Consumer Finance business is primarily introduced by car dealerships acting as our intermediary along with a small amount of new business introduced via digital
channels. Corporate and Commercial Banking expertise is provided by relationship managers, product specialists and through digital and telephony channels,
and cover clients' needs both in the UK and overseas. In addition, Corporate and Investment Banking (CIB) provided services to corporate clients with an annual
turnover of
£
500
m
and above. Santander UK transferred a significant part of the CIB business to the London branch of Banco Santander SA under a part VII
banking business transfer scheme which completed on 11 October 2021. The residual parts of the business were wound down or transferred to other segments.
normal commercial terms and conditions. Internal charges and internal UK transfer pricing adjustments are reflected in the results of each segment, and eliminate
on consolidation. Revenue sharing agreements are used to allocate external customer revenues to a segment on a reasonable basis. Funds are ordinarily
reallocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on Santander UK’s cost
of wholesale funding. Interest income and interest expense have not been reported separately. The majority of segment revenues are interest income in nature
and net interest income is relied on primarily to assess segment performance and to make decisions on the allocation of segment resources.
For the
year ended
31 December
|
Retail
Business
Banking
|
Consumer
Finance
|
Corporate
Commercial
Banking
|
Corporate
Centre
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Net interest income/(expense)
|
|
|
|
(
|
|
|
Non-interest income/(expense)
|
|
|
|
(
|
|
|
Total operating income/(expense)
|
|
|
|
(
|
|
|
Operating expenses before credit impairment charges, provisions and charges
|
(
|
(
|
(
|
(
|
(
|
|
Credit impairment charges
|
(
|
(
|
(
|
(
|
(
|
|
Provisions for other liabilities and charges
|
(
|
(
|
(
|
(
|
(
|
|
Total operating credit impairment charges, provisions and charges
|
(
|
(
|
(
|
(
|
(
|
|
Profit/(loss) from continuing operations before tax
|
|
|
|
(
|
|
|
Revenue from external customers
|
|
|
|
|
|
|
Inter-segment revenue/(expense)
|
|
(
|
|
(
|
|
|
Total operating income/(expense)
|
|
|
|
(
|
|
|
Revenue from external customers includes the following fee and commission income:
(1)
|
|||||
|
–
Current account and debit card fees
|
|
|
|
|
|
|
–
Insurance, protection and investments
|
|
|
|
|
|
|
–
Credit cards
|
|
|
|
|
|
|
–
Non-banking and other fees
(2)
|
|
|
|
|
|
|
Total fee and commission income
|
|
|
|
|
|
|
Fee and commission expense
|
(
|
(
|
(
|
(
|
(
|
|
Net fee and commission income/(expense)
|
|
|
|
(
|
|
|
Customer loans
|
|
|
|
|
|
|
Customer deposits
|
|
|
|
|
|
|
Average number of full-time equivalent staff
|
|
|
|
|
|
(1)
The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2)
Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)
Total assets and total liabilities are no longer included in reports provided to the chief operating decision maker.
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
134
|
|||
|
Retail
Business
Banking
|
Consumer
Finance
|
Corporate
Commercial
Banking
|
Corporate
Centre
|
Total
|
|
|
2022
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Net interest income/(expense)
|
|
|
|
(
|
|
|
Non-interest income/(expense)
|
|
|
|
(
|
|
|
Total operating income
|
|
|
|
(
|
|
|
Operating expenses before credit impairment charges, provisions and charges
|
(
|
(
|
(
|
(
|
(
|
|
Credit impairment charges
|
(
|
(
|
(
|
|
(
|
|
Provisions for other liabilities and charges
|
(
|
(
|
(
|
(
|
(
|
|
Total operating credit impairment charges, provisions and charges
|
(
|
(
|
(
|
(
|
(
|
|
Profit/(loss) from continuing operations before tax
|
|
|
|
(
|
|
|
Revenue/(expense) from external customers
|
|
|
|
(
|
|
|
Inter-segment revenue/(expense)
|
(
|
(
|
(
|
|
|
|
Total operating income/(expense)
|
|
|
|
(
|
|
|
Revenue from external customers includes the following fee and commission income:
(1)
|
|||||
|
–
Current account and debit card fees
|
|
|
|
|
|
|
–
Insurance, protection and investments
|
|
|
|
|
|
|
–
Credit cards
|
|
|
|
|
|
|
–
Non-banking and other fees
(2)
|
|
|
|
|
|
|
Total fee and commission income
|
|
|
|
|
|
|
Fee and commission expense
|
(
|
(
|
(
|
(
|
(
|
|
Net fee/(expense) and commission income
|
|
|
|
(
|
|
|
31 December 2022
|
|||||
|
Customer loans
|
|
|
|
|
|
|
Customer deposits
|
|
|
|
|
|
|
Average number of full-time equivalent staff
|
|
|
|
|
|
|
Retail
Business
Banking
|
Consumer
Finance
|
Corporate
Commercial
Banking
|
Corporate
Investment
Banking
|
Corporate
Centre
|
Total
|
|
|
2021
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Net interest income/(expense)
|
|
|
|
|
(
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
Total operating income
|
|
|
|
|
|
|
|
Operating expenses before credit impairment (charges)/write-backs, provisions
and charges
|
(
|
(
|
(
|
|
(
|
(
|
|
Credit impairment (charges)/write-backs
|
|
|
|
|
|
|
|
Provisions for other liabilities and charges
|
(
|
|
(
|
|
(
|
(
|
|
Total operating credit impairment (charges)/write-backs, provisions and charges
|
(
|
|
|
|
(
|
(
|
|
Profit/(loss) from continuing operations before tax
|
|
|
|
|
(
|
|
|
Revenue from external customers
|
|
|
|
|
(
|
|
|
Inter-segment revenue
|
(
|
(
|
(
|
|
|
|
|
Total operating income
|
|
|
|
|
|
|
|
Revenue from external customers includes the following fee and commission income:
(1)
|
||||||
|
–
Current account and debit card fees
|
|
|
|
|
|
|
|
–
Insurance, protection and investments
|
|
|
|
|
|
|
|
–
Credit card fees
|
|
|
|
|
|
|
|
–
Non-banking and other fees
(2)
|
|
|
|
|
|
|
|
Total fee and commission income
|
|
|
|
|
|
|
|
Fee and commission expense
|
(
|
|
(
|
|
(
|
(
|
|
Net fee and commission income
|
|
|
|
|
(
|
|
|
Customer loans
|
|
|
|
|
|
|
|
Customer deposits
|
|
|
|
|
|
|
|
Average number of full-time equivalent staff
|
|
|
|
|
|
|
(1)
The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.
(2)
Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
(3)
Total assets and total liabilities are no longer included in reports provided to the chief operating decision maker.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
135
|
|||
Customer assets exclude Joint ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we
have not yet charged to the customer's account, and cash collateral. It also shows the relationship between customer liabilities (see above) and Deposits by
customers as presented in the Consolidated Balance Sheet.
|
Assets
|
Liabilities
|
|||
|
2023
|
2022
|
2023
|
2022
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
Customer balances (gross)
|
|
|
|
|
|
Loan loss allowance
|
(
|
(
|
—
|
—
|
|
Customer balances (net)
|
|
|
|
|
|
Intercompany balances
|
|
|
|
|
|
Accrued interest
|
|
|
|
|
|
Other items
|
|
|
(
|
(
|
|
Loans and advances to customers / Deposits by customers
|
|
|
|
|
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Interest and similar income:
|
|||
|
Loans and advances to customers
|
|
|
|
|
Loans and advances to banks
|
|
|
|
|
Reverse repurchase agreements – non-trading
|
|
|
|
|
Other
|
|
|
|
|
Total interest and similar income
(1)
|
|
|
|
|
Interest expense and similar charges:
|
|||
|
Deposits by customers
|
(
|
(
|
(
|
|
Deposits by banks
|
(
|
(
|
(
|
|
Repurchase agreements – non-trading
|
(
|
(
|
(
|
|
Debt securities in issue
|
(
|
(
|
(
|
|
Subordinated liabilities
|
(
|
(
|
(
|
|
Other
|
(
|
(
|
(
|
|
Total interest expense and similar charges
(2)
|
(
|
(
|
(
|
|
Net interest income
|
|
|
|
(1)
Includes
£
230
m
(
2022
:
£
87
m
,
2021
:
£
22
m
) of interest income on financial assets at FVOCI.
(2)
Includes
£
706
m
(
2022
:
£
6
m
,
2021
:
£
317
m
) of interest expense on the effective part of derivatives hedging debt issuances and
£
3
m
(
2022
:
£
3
m
,
2021
:
£
3
m
) of interest expense on lease liabilities.
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Fee and commission income:
|
|||
|
Current account and debit card fees
|
|
|
|
|
Insurance, protection and investments
|
|
|
|
|
Credit cards
|
|
|
|
|
Non-banking and other fees
(1)
|
|
|
|
|
Total fee and commission income
|
|
|
|
|
Total fee and commission expense
|
(
|
(
|
(
|
|
Net fee and commission income
|
|
|
|
(1) Non-banking and other fees include mortgages (except mortgage account fees), consumer finance, commitment commission, asset finance, invoice finance and trade finance.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
136
|
|||
|
|
Group
|
||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Net (losses)/gains on financial instruments designated at fair value through profit or loss
(1)
|
(
|
|
(
|
|
Net (losses) on financial instruments mandatorily at fair value through profit or loss
(2)
|
(
|
(
|
(
|
|
Hedge ineffectiveness
|
|
|
|
|
Net profit on sale of financial assets at fair value through other comprehensive income
|
|
|
|
|
Income from operating lease assets
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
(1)
Net
gains/
(losses) on financial instruments designated at fair value through profit or loss include losses of
£
24
m
on deposits (
2022
:
£
35
m
gains,
2021
£
18
m
losses), losses of
£
32
m
on debt securities (
2022
:
£
31
m
gains,
2021
:
£
nil
).
(2)
Net gains
/(losses)
on financial instruments mandatorily at fair value through profit or loss include gains of
£
5
m
on debt securities (
2022
:
£
13
m
gains,
2021
:
£
10
m
losses).
Net gains on financial instruments mandatorily at FVTPL includes fair value losses of
£
12
m
(
2022
: gains of
£
14
m
,
2021
: losses of
£
15
m
) on embedded
derivatives bifurcated from certain equity index-linked deposits, as described in the derivatives accounting policy in Note
1
. The embedded derivatives are
economically hedged, the results of which are also included in this line item and amounted to gains of
£
12
m
(
2022
: losses of
£
14
m
,
2021
: gains of
£
15
m
). As a
result, the net fair value movements recognised on the equity index-linked deposits and the related economic hedges were net gains of
£
nil
(
2022
:
£
nil
,
2021
:
£
nil
).
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Exchange rate differences in the consolidated income statement on items not at fair value through profit and loss
|
|
(
|
|
|
These are principally offset by related releases from the cash flow hedge reserve
|
(
|
|
(
|
In
2023
, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises. For more, see
Note
27
.
In 2022, Other includes
£
7
m
of losses on the sale of property under our transformation programme.
In 2021, Other includes
£
73
m
of property gains from the sale
of our London head office and branch properties.
AND CHARGES
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Staff costs:
|
|||
|
Wages and salaries
|
|
|
|
|
Performance-related payments
|
|
|
|
|
Social security costs
|
|
|
|
|
Pensions costs: – defined contribution plans
|
|
|
|
|
–
defined benefit plans
|
|
|
|
|
Other personnel costs
|
|
|
|
|
|
|
|
|
|
Other administration expenses
|
|
|
|
|
Depreciation, amortisation and impairment
|
|
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
137
|
|||
Performance-related payments’ include bonuses paid in cash and share awards granted under the arrangements described in Note
36
. Included in this are equity-
settled share-based payments, none of which related to option-based schemes. These are disclosed in the table below as ‘Shares awards’. Performance-related
payments above include amounts related to deferred performance awards as follows:
|
Costs recognised in 2023
|
Costs expected to be recognised in 2024 or later
|
||||||
|
Arising from
awards in
current year
|
Arising from
awards in prior
year
|
Total
|
Arising from
awards in
current year
|
Arising from
awards in prior
year
|
Total
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Cash
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
The following table shows the amount of bonus awarded to employees for the performance year
2023
. In the case of deferred cash and shares awards, the final
amount paid to an employee is influenced by forfeiture provisions and any performance conditions to which the awards are subject. The deferred shares award
amount is based on the fair value of the awards at the date of grant.
|
Expenses charged in the year
|
Expenses deferred to future
periods
|
Total
|
||||||
|
2023
|
2022
|
2023
|
2022
|
2023
|
2022
|
|||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|||
|
Cash award – not deferred
|
|
|
|
|
|
|
||
|
–
deferred
|
|
|
|
|
|
|
||
|
Shares award – not deferred
|
|
|
|
|
|
|
||
|
–
deferred
|
|
|
|
|
|
|
||
|
Total discretionary bonus
|
|
|
|
|
|
|
||
Other share-based payments’ consist of options granted under the Employee Sharesave scheme which comprise the Santander UK group’s cash-settled share-
based payments. For more, see Note
36
.
The average number of full-time equivalent staff was
19,546
(
2022
:
18,123
,
2021
:
19,704
)
.
Depreciation, amortisation and impairment
In
2023
, depreciation, amortisation and impairment included depreciation of
£
64
m
(
2022
:
£
73
m
,
2021
:
£
81
m
) on operating lease assets (where the Santander UK
group is the lessor) with a carrying amount of
£
488
m
at
31 December 2023
(
2022
:
£
577
m
,
2021
:
£
595
m
). It also included depreciation of
£
30
m
(
2022
:
£
19
m
,
2021
:
£
19
m
)
on right-of-use assets with a carrying amount of
£
90
m
at
31 December 2023
(
2022
:
£
112
m
,
2021
:
£
117
m
)
.
site closures as part of the transformation programme. For more, see Note
21
.
|
Group
|
|||
|
|
2023
|
2022
|
2021
|
|
£m
|
£m
|
£m
|
|
|
Audit fees:
|
|||
|
Fees payable to the Company’s auditor and its associates for the audit of the Santander UK group’s annual accounts
|
|
|
|
|
Fees payable to the Company’s auditor and its associates for other services to the Santander UK group:
|
|||
|
–
Audit of the Santander UK group's subsidiaries
|
|
|
|
|
Total audit fees
(1)
|
|
|
|
|
Non-audit fees:
|
|||
|
Audit-related assurance services
|
|
|
|
|
Other assurance services
|
|
|
|
|
Other non-audit services
|
|
|
|
|
Total non-audit fees
|
|
|
|
(1)
2023
audit fees included
£
0.7
m
(
2022
:
£
0.6
m
,
2021
:
£
1.2
m
) which related to the prior year.
Audit-related assurance services mainly comprised services performed in connection with review of the financial information of the Company and reporting to the
Company's UK regulators.
Other assurance services mainly comprised services performed in support of various debt issuance programmes.
Of the total non-audit fees,
£
0.3
m
(
2022
:
£
0.2
m
,
2021
:
£
0.4
m
) accords with the definition of 'Audit Fees' per US Securities and Exchange Commission (SEC)
guidance,
£
1.0
m
(
2022
:
£
0.7
m
,
2021
:
£
0.7
m
) accords with the definition of 'Audit related fees' per that guidance and
£
12,550
(
2022
:
£
nil
,
2021
:
£
nil
) accords with
the definition of 'All other fees' per that guidance.
In
2023
, the Company’s auditors earned
no
fees (
2022
:
£
nil
,
2021
:
£
27,000
fees) payable by entities outside the Santander UK group for the review of the
financial position of corporate and other borrowers.
In
2023
, the Company's auditors earned
£
1.6
m
(
2022
:
£
1.6
m
,
2021
:
£
1.4
m
), in relation to incremental work undertaken in support of the audit of Banco Santander
SA.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
138
|
|||
For the
year ended
31 December
|
|
Group
|
||
|
|
2023
|
2022
|
2021
|
|
£m
|
£m
|
£m
|
|
|
Credit impairment charges/(write-backs):
|
|||
|
Loans and advances to customers
|
|
|
(
|
|
Recoveries of loans and advances, net of collection costs
|
|
|
(
|
|
Off-balance sheet credit exposures (See Note 29)
|
|
|
(
|
|
|
|
(
|
|
|
Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 29)
|
|
|
|
|
Releases for residual value and voluntary termination
|
|
(
|
(
|
|
|
|
|
|
|
|
|
|
In
2023
,
2022
and
2021
there were
no
material credit impairment charges on loans and advances to banks, non-trading reverse repurchase agreements, other
financial assets at amortised cost and financial assets at FVOCI.
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Current tax:
|
|||
|
UK corporation tax on profit for the year
|
|
|
|
|
Adjustments in respect of prior years
|
(
|
(
|
(
|
|
Total current tax
|
|
|
|
|
Deferred tax:
|
|||
|
Charge/(credit) for the year
|
|
(
|
|
|
Adjustments in respect of prior years
|
(
|
|
|
|
Total deferred tax
|
|
|
|
|
Tax on profit from continuing operations
|
|
|
|
The standard rate of UK corporation tax was
28
%
for banking entities and
24
%
for non-banking entities (
2022
:
27
%
for banking entities and
19
%
for non-banking
entities;
2021
:
27
%
for banking entities and
19
%
for non-banking entities) following the introduction of a surcharge on banking companies in 2016.
Taxation for
other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
139
|
|||
the theoretical amount that would arise using the basic corporation tax rate as follows:
For the
year ended
31 December
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Profit from continuing operations before tax
|
|
|
|
|
Tax calculated at a tax rate of 23.5% (2022:19%, 2021: 19%)
|
|
|
|
|
Bank surcharge on profits
|
|
|
|
|
Non-deductible preference dividends paid
|
|
|
|
|
Non-deductible UK Bank Levy
|
|
|
|
|
Non-deductible conduct remediation, fines and penalties
|
|
|
|
|
Other non-deductible costs and non-taxable income
|
|
|
|
|
Effect of change in tax rate on deferred tax provision
|
|
(
|
|
|
Tax relief on dividends in respect of other equity instruments
|
(
|
(
|
(
|
|
Adjustment to prior year provisions
|
(
|
(
|
|
|
Tax on profit from continuing operations
|
|
|
|
minimum effective tax rate of
15%
with effect from 1 January 2024. Santander UK will therefore fall within the scope of these rules from 2024.
It is not anticipated that the rules will impact Santander UK but the position will be kept under review.
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Assets
|
|
|
|
At 1 January
|
|
|
|
Income statement charge (including discontinued operations)
|
(
|
(
|
|
Other comprehensive income (charge)/credit
|
(
|
|
|
Corporate income tax received
|
|
|
|
Other movements
|
|
|
|
|
|
|
|
Assets
|
|
|
|
At 31 December
|
|
|
The amount of corporation income tax paid differs from the tax charge for the period as a result of the timing of payments due to the tax authorities, the effects of
movements in deferred tax, adjustments to prior period current tax provisions and current tax recognised directly in other comprehensive income.
Santander UK proactively engages and cooperates with relevant tax authorities in their oversight of the company's tax matters. The accounting policy for
recognising provisions for any tax risks identified is described in Note
1
. It is not expected that there will be any material movement in such provisions within the
next 12 months.
The Santander UK group has applied the UK’s Code of Practice on Taxation for Banks following its adoption in 2010. For more information, see our Taxation
Strategy on our website aboutsantander.co.uk.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
140
|
|||
Deferred tax
balance sheet after offsetting assets and liabilities where the Santander UK group
has the legal right to offset and intends to settle on a net basis.
|
Group
|
||||||||
|
Fair value of
financial
instruments
|
Pension
remeasurement
|
Cash flow
hedges
|
Fair value
reserve
|
Tax losses
carried
forward
|
Accelerated
tax
depreciation
|
Other
temporary
differences
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
At 1 January 2023
|
|
(
|
|
(
|
|
|
(
|
(
|
|
Income statement (charge)/credit
|
(
|
(
|
|
|
|
(
|
|
(
|
|
Transfers/reclassifications
|
|
|
(
|
(
|
|
|
|
|
|
Credited/(charged) to other comprehensive income
|
|
|
(
|
|
|
|
|
(
|
|
At 31 December 2023
|
(
|
(
|
|
|
|
|
(
|
(
|
|
At 1 January 2022
|
(
|
(
|
(
|
(
|
|
|
(
|
(
|
|
Income statement credit/(charge)
|
|
(
|
|
|
(
|
(
|
(
|
(
|
|
Transfers/reclassifications
|
|
|
|
|
(
|
|
(
|
|
|
Credited/(charged) to other comprehensive income
|
|
|
|
|
|
|
(
|
|
|
At 31 December 2022
|
|
(
|
|
(
|
|
|
(
|
(
|
the foreseeable future, in excess of the profits arising from the reversal of existing taxable temporary differences, to allow for the utilisation of the assets as they
reverse. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions underlying
the estimated future taxable profits in the Santander UK group’s three-year plan (described in Note
20
) would not cause a reduction in the deferred tax assets
recognised.
There are
£
nil
unrecognised deferred tax assets on capital losses carried forward (
2022
:
£
nil
).
|
Group
|
Group
|
||||||
|
2023
|
2022
|
2021
|
2023
|
2022
|
2021
|
||
|
Pence per
share
|
Pence per
share
|
Pence per
share
|
£m
|
£m
|
£m
|
||
|
In respect of current year – first interim
|
|
|
|
|
|
|
|
|
– second interim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
In 2023 an interim dividend of
£
1,530
m
(
2022
:
£
1,014
m
,
2021
:
£
1,358
m
) was paid on the Company's ordinary shares in issue. In 2023,
£750m
(
2022
:
£300m
) of
the dividend was a special dividend. These were paid following review and approval by the Board in line with our dividend policy.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
141
|
|||
Santander UK undertakes derivative activities primarily to provide customers with risk management solutions and to manage and hedge its own risks.
These
derivative activities do not give rise to significant open positions in portfolios of derivatives. Any residual position is managed to ensure that it remains within
acceptable risk levels, with matching transactions used to achieve this where necessary. When entering into derivatives, Santander UK employs the same credit
risk management procedures to assess and approve potential credit exposures that are used for traditional lending.
b) Analysis of derivatives
|
Group
|
|||||||
|
2023
|
2022
|
||||||
|
Fair value
|
Fair value
|
||||||
|
Notional
amount
|
Assets
|
Liabilities
|
Notional
amount
|
Assets
|
Liabilities
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Derivatives held for trading:
|
|||||||
|
Exchange rate contracts
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
Equity and credit contracts
|
|
|
|
|
|
|
|
|
Total derivatives held for trading
|
|
|
|
|
|
|
|
|
Derivatives held for hedging
|
|||||||
|
Designated as fair value hedges:
|
|||||||
|
Exchange rate contracts
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Designated as cash flow hedges:
|
|||||||
|
Exchange rate contracts
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total derivatives held for hedging
|
|
|
|
|
|
|
|
|
Derivative netting
(1)
|
—
|
(
|
(
|
—
|
(
|
(
|
|
|
Total derivatives
|
|
|
|
|
|
|
|
(1)
Derivative netting excludes the effect of cash collateral, which is offset against the gross derivative position. The amount of cash collateral received that had been offset against the gross derivative assets was
At
31 December 2023
, the fair value of derivative assets included amounts due from Banco Santander group entities of
£
762
m
(
2022
:
£
1,319
m
) and the fair value
of derivative liabilities included amounts due to Banco Santander group entities of
£
230
m
(
2022
:
£
207
m
).
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
142
|
|||
The table below analyses the notional and fair values of derivatives by trading and settlement method.
|
Notional
|
|||||||
|
Traded over the counter
|
Asset
|
Liability
|
|||||
|
Settled by
central
counterparties
|
Not settled by
central
counterparties
|
Total
|
Traded over
the counter
|
Traded over
the counter
|
|||
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Exchange rate contracts
|
|
|
|
|
|
||
|
Interest rate contracts
|
|
|
|
|
|
||
|
Equity and credit contracts
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
2022
|
|||||||
|
Exchange rate contracts
|
|
|
|
|
|
||
|
Interest rate contracts
|
|
|
|
|
|
||
|
Equity and credit contracts
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
143
|
|||
c) Analysis of derivatives designated as hedges
Santander UK applies hedge accounting on both a fair value and cash flow basis depending on the nature of the underlying exposure. We establish the hedge
ratio by matching the notional of the derivative with the underlying position being hedged. Only the designated risk is hedged and therefore other risks, such as
credit risk are managed but not hedged. For interest rate hedges, the designated hedged risk is determined with reference to the underlying benchmark rate.
Fair value hedges
Portfolio hedges of interest rate risk
Santander UK holds portfolios of fixed rate assets and liabilities which expose it to changes in fair value due to movements in market interest rates. We manage
these exposures by entering into interest rate swaps. Each portfolio contains assets or liabilities that are similar in nature and share the risk exposure that is
designated as being hedged.
The interest rate risk component is the change in fair value of fixed rate instruments for changes in the designated benchmark rate. Such changes are usually the
largest component of the overall change in fair value. Separate hedges are maintained for each underlying currency. Effectiveness is assessed by comparing
changes in the fair value of the hedged item attributable to changes in the designated benchmark interest rate, with changes in the fair value of the interest rate
swaps.
Micro hedges of interest rate risk and foreign currency risk
Santander UK accesses international markets to obtain funding, to issue fixed rate debt or to invest in fixed rate debt of other issuers as part of maintaining a
portfolio of HQLA (High Quality Liquid Assets) in its functional currency and other currencies. We are therefore exposed to changes in fair value due to changes in
market interest rates and/or foreign exchange rates, principally in USD and EUR, which we mitigate through the use of receive fixed/pay floating rate interest rate
swaps and/or receive fixed/pay floating rate cross currency swaps.
The interest rate risk component is the change in fair value of the fixed rate debt due to changes in the benchmark rate. The foreign exchange component is the
change in the fair value of the fixed rate debt issuance due to changes in foreign exchange rates prevailing from the time of execution. Effectiveness is assessed
by using linear regression techniques to compare changes in the fair value of the debt caused by changes in the benchmark interest rate and foreign exchange
rates, with changes in the fair value of the interest rate swaps and/or cross currency swaps.
Cash flow hedges
Hedges of interest rate risk
Santander UK manages its exposure to the variability in cash flows of floating rate assets and liabilities attributable to movements in market interest rates by
entering into interest rate swaps. The interest rate risk component is determined with reference to the underlying benchmark rate attributable to the floating rates
asset or liability. Designated benchmark rates referenced are currently SONIA or BoE base rate. Effectiveness is assessed by comparing changes in the fair value
of the interest rate swap with changes in the fair value of the hedged item attributable to the hedged risk, applying a hypothetical derivative method using linear
regression techniques.
Hedges of foreign currency risk
As Santander UK obtains funding in international markets, we assume significant foreign currency risk exposure, mainly in USD and EUR. In addition, Santander
UK also holds debt securities for liquidity purposes which assumes foreign currency exposure, principally in JPY and CHF.
Santander UK manages the exposures to the variability in cash flows of foreign currency denominated assets and liabilities to movements in foreign exchange
rates by entering into either foreign exchange contracts (spot, forward and swaps) or cross currency swaps. These instruments are entered into to match the cash
flow profile and maturity of the estimated interest and principal repayments of the hedged item.
The foreign currency risk component is the change in cash flows of the foreign currency debt arising from changes in the relevant foreign currency forward
exchange rate. Such changes constitute a significant component of the overall changes in cash flows of the instrument. Effectiveness is assessed by comparing
changes in the fair value of the foreign exchange contracts (spot, forward and swaps) or cross currency swaps with changes in the fair value of the hedged debt
attributable to the hedged risk applying a hypothetical derivative method using linear regression techniques.
For both fair value and cash flow hedges, hedge ineffectiveness can arise from hedging derivatives with a non-zero fair value at the date of initial designation. In
addition, for:
Fair value hedges
Hedge ineffectiveness can also arise due to differences in discounting between the hedged item and the hedging instrument as cash collateralised swaps
discount using Overnight Indexed Swaps discount curves not applied to the hedged item; and where counterparty credit risk impacts the fair value of the derivative
but not the hedged item. For portfolio hedges of interest rate risk, it can also arise due to differences in the expected and actual volume of prepayments.
Cash flow hedges
Hedge ineffectiveness can also arise due to differences in the timing of cash flows between the hedged item and the hedging instrument. For micro hedges of
interest rate risk, it can also arise due to differences in the basis of cash flows between the hedged item and the hedging instrument.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
144
|
|||
Maturity profile and average price/rate of hedging instruments
|
Group
|
|||||||
|
2023
|
Hedging Instruments
|
≤1 month
|
1 and ≤3
months
|
3 and ≤12
months
|
1 and ≤5
years
|
5 years
|
Total
|
|
Fair value hedges:
|
|||||||
|
Interest rate risk
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Average fixed interest rate - GBP
|
|
|
|
|
|
||
|
Average fixed interest rate - EUR
|
|
|
|
|
|
||
|
Average fixed interest rate - USD
|
|
|
|
|
|
||
|
Interest rate/FX risk
|
Exchange rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
|
Average GBP - EUR exchange rate
|
|
|
|
|
|
||
|
Average GBP - USD exchange rate
|
|
|
|
|
|
||
|
Average fixed interest rate - EUR
|
|
|
|
|
|
||
|
Average fixed interest rate - USD
|
|
|
|
|
|
||
|
Cash flow hedges:
|
|||||||
|
Interest rate risk
|
Interest rate contracts – Nominal amount (£m)
|
|
|
|
|
|
|
|
Average fixed interest rate - GBP
|
|
|
|
|
|
||
|
FX risk
|
Exchange rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
|
Average GBP - JPY exchange rate
|
|
|
|
|
|
||
|
Average GBP - CHF exchange rate
|
|
|
|
|
|
||
|
Average GBP - EUR exchange rate
|
|
|
|
|
|
||
|
Average GBP - USD exchange rate
|
|
|
|
|
|
||
|
Interest rate/FX risk
|
Exchange rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
|
Average GBP - EUR exchange rate
|
|
|
|
|
|
||
|
Average GBP - USD exchange rate
|
|
|
|
|
|
||
|
Average fixed interest rate - GBP
|
|
|
|
|
|
||
|
2022
|
|||||||
|
Fair value hedges:
|
|||||||
|
Interest rate risk
|
Interest rate contracts- Nominal amount (£m)
|
|
|
|
|
|
|
|
Average fixed interest rate - GBP
|
|
|
|
|
|
||
|
Average fixed interest rate - EUR
|
|
|
|
|
|
||
|
Average fixed interest rate - USD
|
|
|
|
|
|
||
|
Interest rate/FX risk
|
Exchange rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
|
Average GBP - EUR exchange rate
|
|
|
|
|
|
||
|
Average GBP - USD exchange rate
|
|
|
|
|
|
||
|
Average fixed interest rate - EUR
|
|
|
|
|
|
||
|
Average fixed interest rate - USD
|
|
|
|
|
|
||
|
Cash flow hedges:
|
|||||||
|
Interest rate risk
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Average fixed interest rate - GBP
|
|
|
|
|
|
||
|
FX risk
|
Exchange rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
|
Average GBP - JPY exchange rate
|
|
|
|
|
|
||
|
Average GBP - CHF exchange rate
|
|
|
|
|
|
||
|
Average GBP - EUR exchange rate
|
|
|
|
|
|
||
|
Average GBP - USD exchange rate
|
|
|
|
|
|
||
|
Interest rate/FX risk
|
Exchange rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
Interest rate contracts - Nominal amount (£m)
|
|
|
|
|
|
|
|
|
Average GBP - EUR exchange rate
|
|
|
|
|
|
||
|
Average GBP - USD exchange rate
|
|
|
|
|
|
||
|
Average fixed interest rate - GBP
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
145
|
|||
This page left intentionally blank
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
146
|
|||
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Fair value hedging:
|
|||
|
(Losses)/gains on hedging instruments
|
(
|
|
|
|
Gains/(losses) on hedged items attributable to hedged risks
|
|
(
|
(
|
|
Fair value hedging ineffectiveness
|
|
|
|
|
Cash flow hedging ineffectiveness
|
|
(
|
(
|
|
|
|
|
|
Group
|
|||||||||||
|
2023
|
2022
|
2021
|
|||||||||
|
Change in
FV of
hedging
instruments
|
Change in
FV of
hedged
items
|
Recognised
in income
statement
|
Change in FV
of hedging
instruments
|
Change in FV
of hedged
items
|
Recognised
in income
statement
|
Change in FV
of hedging
instruments
|
Change in FV
of hedged
items
|
Recognised
in income
statement
|
|||
|
Fair value hedges:
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Interest rate risk
|
(
|
|
|
|
(
|
|
|
(
|
|
||
|
Interest rate/FX risk
|
(
|
|
|
(
|
|
|
(
|
|
|
||
|
(
|
|
|
|
(
|
|
|
(
|
|
|
Group
|
|||||
|
Hedging Instruments
|
Recognised in
Income
Statement
|
Reclassified
from reserves
to income
|
|||
|
Income statement line item affected by reclassification
|
Change in FV
|
Recognised in
OCI
|
|||
|
Cash flow hedges:
|
£m
|
£m
|
£m
|
£m
|
|
|
2023
|
|||||
|
Interest rate risk
|
Net interest income
|
|
(
|
|
(
|
|
FX risk
|
Net interest income/other operating income
|
(
|
|
(
|
(
|
|
Interest rate/FX risk
|
Net interest income/other operating income
|
(
|
|
|
(
|
|
(
|
|
|
(
|
||
|
2022
|
|||||
|
Interest rate risk
|
Net interest income
|
(
|
|
(
|
(
|
|
FX risk
|
Net interest income/other operating income
|
|
(
|
|
|
|
Interest rate/FX risk
|
Net interest income/other operating income
|
(
|
|
(
|
|
|
|
(
|
(
|
|
||
|
2021
|
|||||
|
Interest rate risk
|
Net interest income
|
(
|
|
(
|
|
|
FX risk
|
Net interest income/other operating income
|
(
|
|
|
(
|
|
Interest rate/FX risk
|
Net interest income/other operating income
|
(
|
|
(
|
(
|
|
(
|
|
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statements
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Santander UK plc
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|
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Annual Report 2023
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Santander UK plc
148
|
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|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Balance at 1 January
|
(
|
|
|
Effective portion of changes in fair value:
|
||
|
– Interest rate risk
|
|
(
|
|
– Foreign currency risk
|
(
|
|
|
– Interest rate/foreign currency risk
|
(
|
(
|
|
(
|
|
|
|
Income statement transfers:
|
||
|
– Interest rate risk
|
|
|
|
– Foreign currency risk
|
|
(
|
|
– Interest rate/foreign currency risk
|
|
(
|
|
|
(
|
|
|
Balance at 31 December
|
(
|
(
|
Santander UK hedges its exposures to various risks, including interest rate risk and foreign currency risk, as set out in the following table.
|
Group
|
|||||||||||
|
2023
|
2022
|
||||||||||
|
Accumulated amount of FV hedge
adjustments
|
Change in
value to
calculate
hedge
ineffective
ness
|
Accumulated amount of FV hedge
adjustments
|
Change in
value to
calculate
hedge
ineffectiven
ess
|
||||||||
|
Carrying
value
|
Hedged
item
|
Portfolio
hedge of
interest
rate risks
|
Of which
Discontinued
hedges
|
Carrying
value
|
Hedged
item
|
Portfolio
hedge of
interest
rate risks
|
Of which
Discontinued
hedges
|
||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Fair value hedges
|
|||||||||||
|
Interest rate risk:
|
|||||||||||
|
Loans and advances to customers
|
|
|
(
|
(
|
|
|
|
(
|
(
|
(
|
|
|
Other financial assets at amortised cost
|
|
|
(
|
(
|
|
|
|
(
|
|
(
|
|
|
Reverse repurchase agreements – non
trading
|
|
|
|
|
|
|
|
(
|
(
|
|
|
|
Other financial assets at FVOCI
|
|
(
|
|
(
|
|
|
(
|
|
|
(
|
|
|
Deposits by customers
|
(
|
|
(
|
|
(
|
(
|
|
|
|
|
|
|
Deposits by banks
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in issue
|
(
|
|
(
|
(
|
(
|
(
|
|
(
|
(
|
|
|
|
Subordinated liabilities
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
(
|
|
|
|
Interest rate/FX risk:
|
|||||||||||
|
Other financial assets at FVOCI
|
|
|
|
|
|
|
(
|
|
|
(
|
|
|
Debt securities in issue
|
(
|
(
|
|
(
|
|
(
|
(
|
|
(
|
|
|
|
Subordinated liabilities
|
|
|
|
|
(
|
|
|
|
|
(
|
|
|
|
|
(
|
(
|
|
|
|
(
|
(
|
(
|
||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
149
|
|||
|
Group
|
|||||||
|
2023
|
2022
|
||||||
|
Change in value
to calculate
hedge
ineffectiveness
|
Cash flow hedge
reserve
|
Balances on cash
flow hedge
reserve for
discontinued
hedges
|
Change in value to
calculate hedge
ineffectiveness
|
Cash flow hedge
reserve
|
Balances on cash
flow hedge reserve
for discontinued
hedges
|
||
|
Hedged item balance sheet line item
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Cash flow hedges:
|
|||||||
|
Interest rate risk:
|
|||||||
|
Loans and advances to customers
|
(
|
(
|
|
|
(
|
(
|
|
|
Cash and balances at central banks
|
(
|
|
(
|
|
(
|
(
|
|
|
Deposits by banks
|
(
|
(
|
|
(
|
|
|
|
|
FX risk:
|
|||||||
|
Other financial assets at FVOCI
|
(
|
|
|
|
(
|
|
|
|
Not applicable – highly probable forecast
transactions
|
|
|
|
(
|
|
|
|
|
Deposits by customers
|
(
|
|
|
(
|
(
|
|
|
|
Debt securities in issue
|
|
(
|
|
(
|
(
|
(
|
|
|
Repurchase agreements - non trading
|
(
|
|
|
(
|
|
|
|
|
Interest rate/FX risk:
|
|||||||
|
Debt securities in issue/loans and advances to
customers
|
|
(
|
|
|
(
|
(
|
|
|
Deposits by customers
|
|
(
|
|
|
(
|
|
|
|
Subordinated liabilities/loans and advances to
customers
|
|
(
|
|
(
|
(
|
|
|
|
|
(
|
(
|
(
|
(
|
(
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
150
|
|||
|
Group
|
||
|
|
2023
|
2022
|
|
|
£m
|
£m
|
|
Loans and advances to customers:
|
||
|
Loans to housing associations
|
|
|
|
Other loans
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
Other debt instruments
|
|
|
|
|
|
financial assets mandatorily held at FVTPL.
Loans and advances to customers principally represent other loans, being a portfolio of roll-up mortgages
. These are managed, and have their performance
evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them is provided on that basis to management.
Since 2009, the Santander UK group’s policy has been not to designate similar new loans at FVTPL.
The net loss in the year attributable to changes in credit risk for loans and advances at FVTPL was
£
nil
(
2022
:
£
1
m
,
2021
:
£
nil
). The cumulative net loss
attributable to changes in credit risk for loans and advances at FVTPL at
31 December 2023
was
£
3
m
(
2022
:
£
3
m
,
2021
:
£
2
m
).
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
151
|
|||
|
Group
|
||
|
|
2023
|
2022
|
|
£m
|
£m
|
|
|
Loans secured on residential properties
|
|
|
|
Corporate loans
|
|
|
|
Finance leases
|
|
|
|
Other unsecured loans
|
|
|
|
Accrued interest and other adjustments
|
|
|
|
Amounts due from fellow Banco Santander subsidiaries and joint ventures
|
|
|
|
Amounts due from Santander UK Group Holdings plc
|
|
|
|
Amounts due from subsidiaries
|
|
|
|
Loans and advances to customers
|
|
|
|
Credit impairment loss allowances on loans and advances to customers
|
(
|
(
|
|
Residual value and voluntary termination provisions on finance leases
|
(
|
(
|
|
Net loans and advances to customers
|
|
|
For movements in expected credit losses, see the 'Movement in total exposures and the corresponding ECL' table in the Santander UK group level - Credit risk
review section of the Risk review.
|
Group
|
|||||||
|
2023
|
2022
|
||||||
|
Gross
investment
|
Unearned
finance
income
|
Net
investment
|
Gross
investment
|
Unearned
finance
income
|
Net
investment
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
No later than one year
|
|
(
|
|
|
(
|
|
|
|
Later than one year and not later than two years
|
|
(
|
|
|
(
|
|
|
|
Later than two years and not later than three years
|
|
(
|
|
|
(
|
|
|
|
Later than three years and not later than four years
|
|
(
|
|
|
(
|
|
|
|
Later than four years and not later than five years
|
|
(
|
|
|
(
|
|
|
|
Later than five years
|
|
(
|
|
|
(
|
|
|
|
|
(
|
|
|
(
|
|
||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
152
|
|||
Included in the carrying value of net investment in finance leases and hire purchase contracts is
£
1,830
m
(
2022
:
£
1,761
m
) of unguaranteed RV at the end of the
current lease terms, which is expected to be recovered through re-payment, re-financing or sale. Contingent rent income of
nil
(
2022
:
£
nil
,
2021
:
£
nil
) was earned
in the year, which was classified in ‘Interest and similar income’. Finance income on the net investment in finance leases was
£
266
m
(
2022
:
£
230
m
,
2021
:
£
243
m
).
Finance lease receivable balances are secured over the asset leased. The Santander UK group is not permitted to sell or repledge the asset in the absence of
default by the lessee. The Directors consider that the carrying amount of the finance lease receivables approximates to their fair value.
Included within loans and advances to customers are advances assigned to bankruptcy remote structured entities and Abbey Covered Bonds LLP. These loans
provide security to issues of covered bonds and mortgage-backed or other asset-backed securities issued by the Santander UK group. For more, see Note
14
.
under operating leases.
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
No later than one year
|
|
|
|
Later than one year and not later than two years
|
|
|
|
Later than two years and not later than three years
|
|
|
|
Later than three years and not later than four years
|
|
|
|
Later than four years and not later than five years
|
|
|
|
Later than five years
|
|
|
|
|
|
|
The information in this Note relates to securitisations and covered bonds for consolidated structured entities, used to obtain funding or collateral. It excludes
structured entities relating to credit protection transactions.
issues covered bonds, which are guaranteed by, and secured against, a pool of the Santander UK group’s mortgage loans transferred to Abbey Covered Bonds
LLP. The Santander UK group issues mortgage-backed securities, other asset-backed securities and covered bonds mainly in order to obtain diverse, low-cost
funding, but also to use as collateral for raising funds via third party bilateral secured funding transactions or for liquidity purposes in the future. The Santander UK
group has successfully used bilateral secured transactions as an additional form of medium-term funding; this has allowed the Santander UK group to further
diversify its medium-term funding investor base.
Loans and advances to customers include portfolios of residential mortgage loans, and receivables derived from credit agreements with retail customers for the
purchases of financed vehicles, which are subject to non-recourse finance arrangements. These loans and receivables have been purchased by, or assigned to,
structured entities or Abbey Covered Bonds LLP, and have been funded primarily through the issue of mortgage-backed securities, other asset-backed securities
or covered bonds. No gain or loss has been recognised as a result of these sales. The structured entities and Abbey Covered Bonds LLP are consolidated as
subsidiary undertakings. The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the structured entities.
a) Securitisations
i) Master trust structures
The Santander UK group makes use of master trust structures, whereby a pool of residential mortgage loans is assigned to a trust company by the asset
originator. A funding entity acquires a beneficial interest in the pool of assets held by the trust company with funds borrowed from qualifying structured entities,
which at the same time issue asset-backed securities to third-party investors or the Santander UK group.
Santander UK plc and its subsidiaries receive payments from the securitisation companies in respect of fees for administering the loans, and payment of deferred
consideration for the sale of the loans. Santander UK plc and its subsidiaries have no right or obligation to repurchase any securitised loan, except if certain
representations and warranties given by Santander UK plc or its subsidiaries at the time of transfer are breached and, in certain cases, if there is a product switch
or further advance, if a securitised loan is in arrears for over two months or if a securitised loan does not comply with regulatory requirements.
ii) Other securitisation structures
The Santander UK group also makes use of auto loan securitisations, whereby a pool of auto loans originated by a member of the Santander UK group is sold to
a special purpose vehicle by the asset originator. The special purpose vehicle funds the purchase of the auto loans by issuing asset-backed securities to third-
party investors. A proportion of the securities are also retained by members of the Santander UK group. Members of the Santander UK group also receive
payments from the special purpose vehicle in respect of fees for administering the auto loans, and payment of deferred consideration for the sale of the auto
loans. The seller has no right or obligation to repurchase any securitised loan, except if certain representations and warranties given by the seller at the time of
transfer are breached and, in certain cases, if there has been a subsequent variation in the terms of the underlying auto loan not permitted under the sale
agreement.
b) Covered bonds
Santander UK plc also issues covered bonds, which are its direct, unsecured and unconditional obligation. The covered bonds benefit from a guarantee from
Abbey Covered Bonds LLP. Santander UK plc makes a term advance to Abbey Covered Bonds LLP equal to the sterling proceeds of each issue of covered
bonds. Abbey Covered Bonds LLP uses the proceeds of the term advance to purchase portfolios of residential mortgage loans and their security from Santander
UK plc. Under the terms of the guarantee, Abbey Covered Bonds LLP has agreed to pay an amount equal to the guaranteed amounts when the same shall
become due for payment, but which would otherwise be unpaid by Santander UK plc.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
153
|
|||
c) Analysis of securitisations and covered bonds
The Santander UK group’s principal securitisation programmes and covered bond programme, together with the balances of the advances subject to
securitisation (or for the covered bond programme assigned) and the carrying value of the notes in issue at
31 December 2023
and
2022
are listed below.
|
Group
|
||||||||
|
Gross assets
|
External notes in issue
|
Notes issued to Santander UK
plc/subsidiaries as collateral
|
||||||
|
2023
|
2022
|
2023
|
2022
|
2023
|
2022
|
|||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|||
|
Mortgage-backed master trust structures:
|
||||||||
|
–
Holmes
|
|
|
|
|
|
|
||
|
–
Fosse
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|||
|
Other asset-backed securitisation structures:
|
||||||||
|
–
Motor
|
|
|
|
|
|
|
||
|
–
Repton
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|||
|
Total securitisation programmes
|
|
|
|
|
|
|
||
|
Covered bond programme:
|
||||||||
|
–
Euro
|
|
|
|
|
|
|
||
|
Total securitisation and covered bond programmes
|
|
|
|
|
|
|
||
|
Group
|
|||||||||||
|
Internal issuances
|
External issuances
|
Internal redemptions
|
External redemptions
|
||||||||
|
2023
|
2022
|
2023
|
2022
|
2023
|
2022
|
2023
|
2022
|
||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||
|
Mortgage-backed master trust structures:
|
|||||||||||
|
–
Holmes
|
|
|
|
|
|
|
|
|
|||
|
–
Fosse
|
|
|
|
|
|
|
|
|
|||
|
Other asset-backed securitisation structures:
|
|||||||||||
|
–
Motor
|
|
|
|
|
|
|
|
|
|||
|
–
Repton
|
|
|
|
|
|
|
|
|
|||
|
Covered bond programme:
|
|||||||||||
|
–
Euro
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
||||
During
2023
, the remaining asset-backed notes from the Motor securitisation structure were redeemed. In
2023
Repton
2023-1
Limited borrowed
£
550
m
through
an asset-backed variable funding note facility. Repayment of this will begin in
2025
.
the beneficial interest in residential mortgage loans held by Holmes Trustees Ltd belongs to Santander UK plc.
Fosse Funding (No.1) Ltd has a beneficial interest of
£
1,393
m
(
2022
:
£
1,465
m
) in the residential mortgage loans held by Fosse Trustee (UK) Ltd. The remaining
share of the beneficial interest in residential mortgage loans held by Fosse Trustee (UK) Ltd belongs to Santander UK plc.
The Holmes securitisation companies have cash deposits of
£
80
m
(
2022
:
£
112
m
), which have been accumulated to finance the redemption of a number of
securities issued by the Holmes securitisation companies. The share of Holmes Funding Ltd in the trust assets is therefore reduced by this amount.
securities issued by Fosse securitisation companies. The share of Fosse Funding (No.1) Ltd’s beneficial interest in the assets held by Fosse Trustee (UK) Ltd is
therefore reduced by this amount.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
154
|
|||
The Santander UK group enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to
structured entities. These transfers may give rise to the full or partial derecognition of those financial assets. Transferred financial assets that do not qualify for
derecognition consist of (i) securities held by counterparties as collateral under repurchase agreements, (ii) securities lent under securities lending agreements,
and (iii) loans that have been securitised under arrangements by which the Santander UK group retains a continuing involvement in such transferred assets.
As a result of these sale and repurchase and securities lending transactions, the Santander UK group is unable to use, sell or pledge the transferred assets for the
duration of the transaction. The Santander UK group remains exposed to interest rate risk and credit risk on these pledged instruments. The counterparty’s
recourse is not limited to the transferred assets.
The Santander UK group securitisation transfers do not qualify for derecognition. The Santander UK group remains exposed to credit risks arising from the
mortgage loans or credit agreements and has retained control of the transferred assets. Circumstances in which the Santander UK group has continuing
involvement in the transferred assets may include retention of servicing rights over the transferred assets (the servicing fee in respect of which is dependent on the
amount or timing of the cash flows collected from, or the non-performance of, the transferred assets), entering into a derivative transaction with the securitisation
vehicle, retaining an interest in the securitisation vehicle or providing a cash reserve fund. Where the Santander UK group has continuing involvement, it continues
to recognise the transferred assets to the extent of its continuing involvement and recognises an associated liability. The net carrying amount of the transferred
assets and associated liabilities reflects the rights and obligations that the Santander UK group has retained.
|
Group
|
|||||
|
2023
|
2022
|
||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
||
|
Nature of transaction
|
£m
|
£m
|
£m
|
£m
|
|
|
Sale and repurchase agreements
|
|
(
|
|
(
|
|
|
Securities lending agreements
|
|
(
|
|
(
|
|
|
Securitisations (See Notes 14 and 26)
|
|
(
|
|
(
|
|
|
|
(
|
|
(
|
||
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Agreements with banks
|
|
|
|
Agreements with customers
|
|
|
|
|
|
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Asset backed securities
|
|
|
|
Debt securities
|
|
|
|
0
|
|
|
A significant portion of the debt securities are held in our eligible liquidity pool and consist mainly of government bonds and covered bonds. Detailed disclosures
can be found in the 'Liquidity risk' section of the Risk review.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
155
|
|||
INCOME
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Debt securities
|
|
|
|
|
|
can be found in the 'Liquidity risk' section of the Risk review.
|
Group
|
||
|
|
2023
|
2022
|
|
£m
|
£m
|
|
|
Subsidiaries
|
|
|
|
Joint Ventures
|
|
|
|
0
|
|
|
The Santander UK group consists of a parent company, Santander UK
plc, incorporated and domiciled in the
UK
and a number of subsidiaries and joint ventures
held directly and indirectly by it.
a) Interests in subsidiaries
The Company holds directly or indirectly
100
%
of the issued ordinary share capital of its principal subsidiaries. All companies operate principally in their country of
incorporation or registration.
|
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|
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|
Annual Report 2023
|
Santander UK plc
156
|
|||
Structured entities are formed by Santander UK to accomplish specific and well-defined objectives. Santander UK consolidated these structured entities when the
substance of the relationship indicates control, as described in Note
1
. In addition to the structured entities disclosed in Note
14
which are used for securitisation
and covered bond programmes, the only other structured entities consolidated by Santander UK are described below. All the external assets and liabilities in these
entities are included in the financial statements and in relevant Notes. Other than as set out below, no significant judgements were required with respect to control
or significant influence.
Motor Securities 2018-1 Designated Activity Company (Motor 2018)
Motor 2018 is a credit protection entity, and a Designated Activity Company limited by shares, incorporated in Ireland. It issued a series of credit linked notes
varying in seniority which referenced a portfolio of Santander UK group auto loans. Concurrently, this entity sold credit protection to SCUK in respect of the
referenced loans and, in return for a fee, was liable to make protection payments to SCUK upon the occurrence of a credit event in relation to any of the
referenced loans. Motor 2018 is consolidated as Santander UK held a variable interest by retaining the junior tranche of notes issued by the entity. The
outstanding notes were redeemed and the transaction terminated in 2023
.
b) Interests in joint ventures
Santander UK does not have any individually material interests in joint ventures.
In
2023
, Santander UK’s share in the profit after tax of its joint ventures was
£
43
m
(
2022
:
£
36
m
) before elimination of transactions between Santander UK and the joint ventures. At
31 December 2023
, the carrying amount of Santander UK’s
interest was
£
245
m
(
2022
:
£
252
m
). At
31 December 2023
and
2022
, the joint ventures had
no
commitments and contingent liabilities.
c) Interests in unconsolidated structured entities
Structured entities sponsored by the Santander UK group
Santander UK has interests in structured entities which it sponsors but does not control. Santander UK considers itself a sponsor of a structured entity when it
facilitates the establishment of the structured entity. Other than as set out below, no significant judgements were required with respect to control or significant
influence. The structured entities sponsored but not consolidated by Santander UK are as follows:
i) Santander (UK) Common Investment Fund (the Fund)
The Fund
is a common investment fund that was established to hold the assets of the Santander (UK) Group Pension Scheme. The Fund is not consolidated by
Santander UK, but its assets of
£
8,551
m
(
2022
:
£
8,646
m
) are accounted for as part of the defined benefit assets and obligations recognised on Santander UK’s
balance sheet. For more on the Fund, see Note
30
. As the Fund holds the assets of the pension scheme, it is outside the scope of IFRS 10. Santander UK’s
maximum exposure to loss is the carrying amount of the assets held.
ii) Credit protection entities
Santander UK has established
four
(
2022
:
four
) unconsolidated credit protection entities, which are Designated Activity Companies limited by shares, incorporated
in Ireland. Each entity has issued a series of credit linked notes varying in seniority which reference portfolios of Santander UK group loans. Concurrently, these
entities sell credit protection to Santander UK in respect of the referenced loans and, in return for a fee, are liable to make protection payments to Santander UK
upon the occurrence of a credit event in relation to any of the referenced loans.
Santander UK has
no
holdings in senior credit linked notes (
2022
:
£
180
m
). Junior credit linked notes, which amounted to
£
185
m
(
2022
:
£
465
m
), are all held by
third party investors and suffer the first losses incurred in the referenced portfolios. Funds raised by the sale of the credit linked notes are deposited with
Santander UK as collateral for the credit protection.
The senior credit linked notes, along with the deposits and associated guarantees, are presented on a net basis, to reflect a legal right of set-off between the
principal amounts of senior notes and the cash deposits. Deposits and associated guarantees in respect of the junior credit linked notes are included in ‘Deposits
by customers’ (see Note
23
).
The entities are not consolidated by Santander UK because the third-party investors have the exposure, or rights, to all of the variability of returns from the
performance of the entities. No assets are transferred to, or income received from, these entities. Since the credit linked notes (including those held by Santander
UK) are fully cash collateralised, Santander UK’s maximum exposure to loss is equal to any unamortised fees paid to the entities in connection with the credit
protection outlined above.
Structured entities not sponsored by the Santander UK group
Santander UK also has interests in structured entities which it does not sponsor or control. These consist of holdings of mortgage and other asset backed
securities issued by entities that were established and/or sponsored by other unrelated financial institutions. These securities comprise the asset backed securities
included in Note
17
. Management has concluded that the Santander UK group has no control or significant influence over these entities and that the carrying
value of the interests held in these entities represents the maximum exposure to loss.
|
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|
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
157
|
|||
|
Group
|
|||
|
Cost
|
Accumulated
impairment
|
Carrying
amount
|
|
|
£m
|
£m
|
£m
|
|
|
At 31 December 2022 and 1 January 2023 and 31 December 2023
|
|
(
|
|
Impairment of goodwill
In
2023
and
2022
,
no
impairment of goodwill was recognised. Goodwill is tested for impairment annually, or more frequently, if reviews identify an impairment
indicator or when events or changes in circumstances dictate. Goodwill is tested for impairment annually at 31 December, with a review for impairment indicators
at 30 June.
The annual review identified that the risks of ongoing global conflicts, places increasing uncertainty on the UK economic trajectory, and its potential impact on the
carrying value of goodwill as impairment indicators for all cash-generating units (CGUs). As a result, management updated the impairment test at 31 December
2023 for all CGUs.
The recoverable amount of all CGUs was determined based on its value in use (VIU) methodology at each testing date.
For each CGU, the VIU is calculated by
discounting management’s cash flow projections for the CGU. The cash flow projections also take account of increased internal capital allocations needed to
achieve internal and regulatory capital targets including the leverage ratio. The key assumptions used in the VIU calculation for each CGU are set out below. The
Retail Business Banking segment consists of the Private Banking CGU and the rest of Retail Business Banking, known as the Personal Financial Services
CGU.
Carrying amount of Goodwill by CGU and key assumptions in the VIU calculation
|
Goodwill
|
Discount rate
|
Growth rate beyond initial cash
flow projections
|
||||||
|
2023
|
2022
|
2023
|
2022
|
2023
|
2022
|
|||
|
CGU
|
£m
|
£m
|
%
|
%
|
%
|
%
|
||
|
Personal Financial Services
|
|
|
|
|
|
|
||
|
Private Banking
|
|
|
|
|
|
|
||
|
|
|
|||||||
The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives.
Management’s judgement in estimating the cash flows of a CGU
The cash flow projections for the purpose of impairment testing for each CGU are derived from the latest 3-year plan presented to the Board. The Board
challenges and endorses management’s planning assumptions in light of internal capital allocations needed to support Santander UK’s strategy, current market
conditions and the macroeconomic outlook. For the goodwill impairment tests conducted at
31 December 2023
, the determination of the carrying amount of the
Personal Financial Services CGU was based on an allocation of regulatory capital and management’s cash flow projections until the end of 2026. The
assumptions included in the cash flow projections reflect an allocation to the cost of capital to support future growth, as well as the expected impact of recent
events in the UK economic environment on the financial outlook within which the CGUs operate. The cash flow projections are supported by Santander UK’s base
case economic scenario. For more on the base case economic scenario, including our forecasting approach and the assumptions in place at
31 December 2023
,
see the Credit risk – Santander UK group level section of the Risk review. The cash flow projections take into account the likely impact of recent changes to the
BoE Bank Rate, inflation and also consider the impact of future climate change.
Cash flow projections for the purpose of impairment testing do not take account of any adverse outcomes arising from contingent liabilities (see Note
31
), whose
existence will be confirmed by uncertain future events or where any obligation is not probable or otherwise cannot be measured reliably, nor do they take account
of the benefits arising from Santander UK’s transformation plans that had not yet been implemented or committed at
31 December 2023
.
Discount rate
The rate used to discount the cash flows is based on the cost of equity assigned to each CGU, which is derived using a capital asset pricing model (CAPM) and
calculated on a post-tax basis. The CAPM depends on a number of inputs reflecting financial and economic variables, including the risk-free rate and a premium
to reflect the inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic variables and management’s
judgement. The inputs to the CAPM are observable on a post-tax basis. In determining the discount rate, management has identified the cost of equity associated
with market participants that closely resemble our CGUs and adjusted them for tax to arrive at the pre-tax equivalent rate. The Private Banking CGU has a
different discount rate compared to the Personal Financial Services CGU because different market participants closely resemble each CGU.
Growth rate beyond initial cash flow projections
The growth rate for periods beyond the initial cash flow projections is used to extrapolate the cash flows in perpetuity because of the long-term perspective of
CGUs. In line with the accounting requirements, management uses the UK Government’s official estimate of UK long-term average GDP growth rate, as this is
lower than management's estimate of the long-term average growth rate of the business. The estimated UK long-term average GDP growth rate has regard to the
long-term impact of inherent uncertainties, such as Brexit, climate change and higher living costs, driven by high inflation and rising interest rates.
The VIU of each CGU remains higher than the carrying value of the related goodwill. The VIU review at
31 December 2023
did not indicate the need for an
impairment in the Company’s goodwill balances. Management considered the level of headroom and the uncertainty relating to the respective estimates of the
VIU for those CGUs but determined that there was a sufficient basis to conclude that no impairment was required.
|
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|
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|
Financial review
|
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|
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|
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
158
|
|||
At
31 December 2023
and
31 December 2022
, the VIU of the Personal Financial Services CGU was sensitive to reasonably possible changes in the key
assumptions supporting the recoverable amount.
The table below presents a summary of the key assumptions underlying the most sensitive inputs to the model for the Personal Financial Services CGU, the key
risks associated with each and details of a reasonably possible change in assumptions, such as a decrease in mortgage new business.
The sensitivity analysis
presented below has been prepared on the basis that a change in each key assumption would not have a consequential impact on other assumptions used in the
impairment review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might impact one or more of the
other assumptions and could result in a larger or smaller overall impact.
|
CGU
|
Input
|
Key assumptions
|
Associated risks
|
Reasonably possible
change
|
|
Personal Financial
Services
|
Cash flow projections
|
–
BoE Bank Rate
–
UK house price growth
–
UK mortgage loan market growth
–
UK unemployment rate
–
Position in the market
–
Regulatory capital levels.
|
–
Uncertain market outlook
–
Higher interest rate environment
impact on customer affordability
–
Customer remediation and
regulatory action outcomes
–
Uncertain regulatory capital
requirements.
|
–
Cash flow projections
decrease by
(
2022
:
|
|
Discount rate
|
–
Discount rate used is a reasonable
estimate of a suitable market rate for the
profile of the business.
|
–
Market rates of interest rise.
|
–
Discount rate increases
by
(
2022
:
points
)
.
|
|
|
GDP growth rate
|
–
High oil / gas prices
–
Elevated wage growth
–
Weak productivity
–
Large government debt burden
–
Fragile business and consumer confidence
|
–
Inflation and interest rates stay higher
for longer, hitting the disposable
income of our customers
–
Affects the profitability of our
customers
–
Limits the scope for tax cuts, hitting
the disposable income of our
customers
–
Affects business and consumer
spending decisions of our customers
|
–
GDP Growth rate
decreases by
(
2022
:
|
the Personal Financial Services CGU would have resulted in a reduction in headroom as follows.
|
Reduction in headroom
|
|||
|
2023
|
2022
|
||
|
CGU
|
Reasonably possible change
|
£m
|
£m
|
|
Personal Financial Services
|
Cash flow projections decrease by
|
(
|
(
|
|
Discount rate increases by
|
(
|
(
|
|
|
GDP Growth rate decreases by
|
(
|
(
|
|
Although there was
no
impairment of goodwill relating to the Personal Financial Services CGU or the Private Banking CGU at
31 December 2023
, the test for the
Personal Financial Services CGU remains sensitive to some of the assumptions used, as described above. In addition, the changes in assumptions detailed
below for the discount rate and cash flow projections would eliminate the current headroom. As a result, there is a risk of impairment in the future should business
performance or economic factors diverge from forecasts.
In
2023
, there was a decrease in headroom arising from a decline in cash flow forecasts, this is partially offset by a decrease to RWAs which has led to a
reduction in the required CET1 capital requirement.
assumptions used in the impairment review. However, due to the interrelationships between some of the assumptions, a change in one of the assumptions might
impact one or more of the other assumptions and could result in a larger or smaller overall impact.
|
2023
|
Carrying
value
|
Value in use
|
Headroom
|
Increase in
discount rate
|
Decrease in
GDP growth
rate
|
Decrease in
cash flows
|
|
CGU
|
£m
|
£m
|
£m
|
bps
|
%
|
%
|
|
Personal Financial Services
|
|
|
|
|
|
|
|
2022
|
||||||
|
Personal Financial Services
|
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
159
|
|||
|
Group
|
|||
|
Cost
|
Accumulated
amortisation/
impairment
|
Carrying
amount
|
|
|
£m
|
£m
|
£m
|
|
|
At 1 January 2023
|
|
(
|
|
|
Additions
|
|
|
|
|
Disposals
|
(
|
|
|
|
Charge
|
|
(
|
(
|
|
At 31 December 2023
|
|
(
|
|
|
At 1 January 2022
|
|
(
|
|
|
Additions
|
|
|
|
|
Disposals
|
(
|
|
|
|
Charge
|
|
(
|
(
|
|
Impairment
|
|
(
|
(
|
|
At 31 December 2022
|
|
(
|
|
Other intangibles which consist of computer software, include computer software under development of
£
157
m
(
2022
:
£
149
m
), of which
£
35
m
is internally
generated (
2022
:
£
33
m
).
The impairment charge of
£
nil
(
2022
:
£
3
m
) relates to computer software no longer expected to yield future economic benefits as it has become obsolete.
|
Group
|
||||||
|
Property
|
Office fixtures and
equipment
|
Computer
software
|
Operating lease
assets
|
Right-of-use
assets
|
Total
(1)
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Cost:
|
||||||
|
At 1 January 2023
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
Reclassification (to)/from assets held for sale
|
|
|
|
|
|
|
|
Disposals
|
(
|
(
|
(
|
(
|
(
|
(
|
|
At 31 December 2023
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
||||||
|
At 1 January 2023
|
|
|
|
|
|
|
|
Charge for the period
|
|
|
|
|
|
|
|
Impairment during the period
|
|
|
|
|
(
|
(
|
|
Disposals
|
(
|
(
|
(
|
(
|
(
|
(
|
|
At 31 December 2023
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
|
Group
|
||||||
|
Property
|
Office fixtures and
equipment
|
Computer
software
|
Operating lease
assets
|
Right-of-use
assets
|
Total
(1)
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Cost:
|
||||||
|
At 1 January 2022
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
Reclassification to assets held for sale
|
(
|
(
|
|
|
|
(
|
|
Disposals
|
(
|
(
|
(
|
(
|
(
|
(
|
|
At 31 December 2022
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
||||||
|
At 1 January 2022
|
|
|
|
|
|
|
|
Charge for the year
|
|
|
|
|
|
|
|
Impairment during the year
|
|
|
|
|
|
|
|
Reclassification to assets held for sale
|
(
|
(
|
|
|
|
(
|
|
Disposals
|
(
|
(
|
(
|
(
|
(
|
(
|
|
At 31 December 2022
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
(1)
Property includes investment properties of
£
17
m
(
2022
:
£
17
m
) and assets under construction of
£
nil
(
2022
:
£
204
m
). In September 2023, we completed the construction of a new head office in Milton Keynes.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
160
|
|||
our branch network restructuring programme and head office sites which are either closing or consolidating.
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Structured Notes Programmes
|
|
|
|
Structured deposits
|
|
|
|
Zero Amortising Guaranteed Notes
|
|
|
|
|
|
Gains and losses arising from changes in the credit spread of securities issued by the Santander UK group reverse over the contractual life of the debt, provided
that the debt is not repaid at a premium or a discount. The net loss during the year attributable to changes in the Santander UK group’s own credit risk on the
above securities was
£
21
m
(
2022
:
£
25
m
gain,
2021
:
£
12
m
loss). The cumulative net loss attributable to changes in the Santander UK group’s own credit risk on
the above securities at
31 December 2023
was
£
6
m
(
2022
:
£
15
m
gain,
2021
:
£
10
m
loss).
At
31 December 2023
, the amount that would be required to be contractually paid at maturity of the securities above was
£
97
m
(
2022
:
£
138
m
) higher than the
carrying value.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
161
|
|||
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Demand and time deposits
(1)
|
|
|
|
Amounts due to other Santander UK Group Holdings plc subsidiaries
|
|
|
|
Amounts due to Santander UK Group Holdings plc
(2)
|
|
|
|
Amounts due to fellow Banco Santander subsidiaries and joint ventures
|
|
|
|
|
|
(1)
Includes capital amount guaranteed / protected equity index-linked deposits of
£
304
m
(
2022
:
£
408
m
).
(2)
Includes downstreamed funding from our immediate parent company Santander UK Group Holdings plc.
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Items in the course of transmission
|
|
|
|
Deposits held as collateral
|
|
|
|
Other deposits
(1)
|
|
|
|
Amounts due to Santander UK subsidiaries
|
|
|
|
|
|
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Agreements with banks
|
|
|
|
Agreements with customers
|
|
|
|
|
|
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Medium-term notes:
|
||
|
– US
$
|
|
|
|
– Euro
|
|
|
|
- US SEC-registered Debt Programme - Santander UK plc
|
|
|
|
Medium-term notes
|
|
|
|
Euro
|
|
|
|
US
$
|
|
|
|
Certificates of deposit
|
|
|
|
Credit linked notes
|
|
|
|
Securitisation programmes
|
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
162
|
|||
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
£
|
|
|
|
Undated subordinated liabilities
|
|
|
|
Dated subordinated liabilities
|
|
|
|
|
|
|
In
2023
, certain subordinated liabilities were repurchased as part of ongoing liability management exercises, resulting in a profit of
£
4
m
(
2022
: a loss of
£
5
m
).
creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination amongst each of the
subordinated liabilities upon a winding up of the issuer is specified in their respective terms and conditions.
In
2023
and
2022
, the Santander UK group had
no
defaults of principal, interest or other breaches with respect to its subordinated liabilities.
No
repayment or
purchase by the issuer of the subordinated liabilities may be made prior to their stated maturity without the consent of the PRA.
|
Group
|
|||
|
2023
|
2022
|
||
|
First call date
|
£m
|
£m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In common with other debt securities issued by Santander UK group companies and notwithstanding the issuer’s first call dates in the table above, in the event of
certain tax changes affecting the treatment of payments of interest on subordinated liabilities in the UK,
the
7.125
%
30 Year Step-up perpetual callable
subordinated notes are redeemable at any time, and the
10.0625
%
Exchangeable capital securities are redeemable on any interest payment date – each in whole
at the option of Santander UK, at their principal amount together with any accrued interest.
The
10.0625
%
Exchangeable capital securities are exchangeable into fully paid
10.375
%
non-cumulative non-redeemable sterling preference shares of
£
1
each,
at the option of Santander UK, on the business day immediately following any interest payment date.
|
Group
|
|||
|
2023
|
2022
|
||
|
Maturity
|
£m
|
£m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
The dated subordinated liabilities are redeemable in whole at the option of Santander UK 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.
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Lease liabilities
|
|
|
|
Other
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
163
|
|||
|
Group
|
||||||||
|
Customer
remediation
|
Litigation
and other
regulatory
|
Bank Levy
|
Property
|
ECL on
undrawn
facilities
and
guarantees
|
Restructuring
|
Other
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
At 1 January 2023
|
|
|
|
|
|
|
|
|
|
Additional provisions (See Note 8)
|
|
|
|
|
|
|
|
|
|
Provisions released (See Note 8)
|
(
|
|
(
|
(
|
|
|
|
(
|
|
Utilisation and other
|
(
|
(
|
(
|
(
|
|
(
|
(
|
(
|
|
Recharge
(1)
|
|
|
|
|
|
|
|
|
|
Reclassification from provisions to other assets
|
|
|
|
|
|
|
|
|
|
At 31 December 2023
|
|
|
|
|
|
|
|
|
(1)
Recharge in respect of the UK Bank Levy paid on behalf of other UK entities in the Banco Santander group
Provisions expected to be settled within no more than 12 months after
31 December 2023
were
£
217
m
(
2022
:
£
130
m
).
Net provisions of
£
37
m
were recognised in
2023
for customer remediations.
An additional provision of
£
45
m
was recognised in
2023
for customer remediation
exercises relating to our mortgage book.
£
30
m
of this relates to the proposed refund of interest inconsistently charged on mortgage products for customers in
Financial Support, and
£
10
m
relates to the proposed refund of early repayment charges paid by a specific group of customers who historically switched mortgage
products. The provisions remain subject to change as additional data becomes available and remediation boundaries are finalised.
Litigation and other regulatory provisions principally comprised amounts in respect of litigation and other regulatory charges, operational loss and operational risk
provisions, and related expenses. A number of uncertainties exist with respect to these provisions given the uncertainties inherent in litigation and other regulatory
matters, that affect the amount and timing of any potential outflows with respect to which provisions have been established. These provisions are reviewed at least
quarterly.
In
2023
there were charges of
£
12
m
for legal provisions and
£
16
m
for regulatory fees and other issues.
The balance also included an amount in respect of our best estimate of liability relating to a legal dispute regarding allocation of responsibility for a specific PPI
portfolio of complaints, further described in Note
31
. No further information on the best estimate is provided on the basis that it would be seriously prejudicial.
c) Bank Levy
In
2023
, a rate of
0.05
%
(
2022
:
0.05
%
) was charged on long term chargeable equity and liabilities and
0.10
%
on short-term chargeable liabilities
(
2022
:
0.10
%
).
and disposal costs relating to vacant freehold properties. Leasehold vacant property provisions are made by reference to an estimate of any expected sub-let
income, compared to the head rent, and the possibility of disposing of Santander UK’s interest in the lease, taking into account conditions in the property market.
decommissioning costs relating to freehold head office sites which are either closing or consolidating.
Provisions include expected credit losses relating to guarantees given to third parties and undrawn loan commitments.
f) Restructuring
Restructuring provisions relate to severance costs associated with transformation and organisational changes. The provision includes a charge of
£
51
m
as part of
our multi-year transformation programme to improve future returns, focused on simplifying, digitising and automating the bank.
g) Other
Other provisions include provisions that do not fit into any of the other categories, such as fraud losses and some categories of operational losses.
In
2023
, other
provisions included charges for operational risk provisions of
£
163
m
, including fraud losses of
£
136
m
.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
164
|
|||
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Assets/(liabilities)
|
||
|
Funded defined benefit pension scheme - surplus
|
|
|
|
Funded defined benefit pension scheme - deficit
|
(
|
|
|
Unfunded pension and post-retirement medical benefits
|
(
|
(
|
|
Total net assets
|
|
|
The assets of LifeSight are held in separate trustee-administered funds. Funds arising from Additional Voluntary Contributions (AVCs) are largely held within the
main defined benefit scheme operated by the Santander UK group.
6
).
b) Defined benefit pension schemes
Scheme). It comprises
seven
legally segregated sections. The Scheme covers
7
%
(
2022
:
10
%
) of the Santander UK group’s current employees and is a funded
defined benefit scheme which is closed to new members. Members accrue final salary benefits for each year of service in the Scheme, according to a salary
definition which varies across the sections.
The corporate trustee of the Scheme is Santander (UK) Group Pension Scheme Trustees Limited (the Trustee), a private limited company incorporated in 1996
and a wholly owned subsidiary of Santander UK Group Holdings plc. The principal duty of the Trustee is to act in the best interests of the members of the Scheme.
The Trustee board comprises
six
(
2022
:
six
) Directors selected by Santander UK Group Holdings plc, plus
four
(
2022
:
four
) member-nominated Directors selected
from eligible members who apply for the role.
The assets of the funded schemes including the Scheme are held independently of the Santander UK group’s assets in separate trustee administered funds.
Investment strategy across the sections of the Scheme remains under regular review.
Responsibility for investment decisions, policy and strategy rests with the
Trustee of the Scheme who is required under the Pensions Act 2004 to prepare a statement of investment principles. The defined benefit pension schemes
expose the Santander UK group to risks such as investment risk, interest rate risk, longevity risk and inflation risk. The Santander UK group does not hold any
insurance policies over the defined benefit pension schemes and has not entered into any significant transactions with them.
For IAS 19, an accounting valuation of the assets and liabilities of the defined benefits schemes is prepared at each balance sheet date. For funding purposes,
formal actuarial valuations are carried out on at least a triennial basis. Both valuations are carried out by independent professionally qualified actuaries. The
Scheme Trustee is responsible for the funding actuarial valuations and in doing so considers, or relies in part on, a report of a third-party expert. The latest triennial
funding valuation for the Scheme at 31 March 2022 was finalised in November 2022, with an overall scheme deficit of
£
183
m
. The next scheduled triennial
funding valuation will be at 31 March 2025. Any funding surpluses can be recovered by Santander UK plc from the Scheme through refunds as the Scheme is run
off over time or could be used to pay for the cost of benefits which are accruing.
The main differences between the assumptions used for assessing the defined benefit liabilities for the funding valuation and those used for IAS 19 are that the
financial and demographic assumptions used for the funding valuation are generally more prudent than those used for the IAS 19 valuation.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
165
|
|||
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Net interest income
|
(
|
(
|
(
|
|
Current service cost
|
|
|
|
|
Past service and GMP costs
|
|
|
|
|
Past service curtailment costs
|
|
|
|
|
Administration costs
|
|
|
|
|
(
|
|
|
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Return on plan assets (excluding amounts included in net interest expense)
|
|
|
(
|
|
Actuarial (gains) arising from changes in demographic assumptions
|
(
|
(
|
(
|
|
Actuarial losses/(gains) arising from experience adjustments
|
|
|
(
|
|
Actuarial losses/(gains) arising from changes in financial assumptions
|
|
(
|
(
|
|
Pension remeasurement
|
|
|
(
|
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
At 1 January
|
(
|
(
|
|
Current service cost paid by Santander UK plc
|
(
|
(
|
|
Current service cost paid by subsidiaries
|
|
(
|
|
Interest cost
|
(
|
(
|
|
Employer salary sacrifice contributions
|
(
|
(
|
|
Past service cost
|
(
|
|
|
Remeasurement due to actuarial movements arising from:
|
||
|
–
Changes in demographic assumptions
|
|
|
|
– Experience adjustments
|
(
|
(
|
|
–
Changes in financial assumptions
|
(
|
|
|
Benefits paid
|
|
|
|
At 31 December
|
(
|
(
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
166
|
|||
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
At 1 January
|
|
|
|
Interest income
|
|
|
|
Contributions paid by employer and scheme members
|
|
|
|
Administration costs paid
|
(
|
(
|
|
Return on plan assets (excluding amounts included in net interest expense)
|
(
|
(
|
|
Benefits paid
|
(
|
(
|
|
At 31 December
|
|
|
|
Group
|
||||||||||
|
Quoted prices in active markets
|
Prices not quoted in active markets
|
Total
|
Valuation
|
|||||||
|
2023
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
technique
|
|||
|
Overseas equities
|
|
|
|
|
|
|
A,C
|
|||
|
Corporate bonds
|
|
|
|
|
|
|
A,C
|
|||
|
Government fixed interest bonds
|
|
|
|
|
|
|
A
|
|||
|
Government index-linked bonds
|
|
|
|
|
|
|
A
|
|||
|
Property
|
|
|
|
|
|
|
B
|
|||
|
Derivatives
|
|
|
(
|
|
(
|
|
A
|
|||
|
Cash
|
|
|
|
|
|
|
A
|
|||
|
Repurchase agreements
(1)
|
|
|
(
|
(
|
(
|
(
|
A
|
|||
|
Infrastructure
|
|
|
|
|
|
|
B,C
|
|||
|
Annuities
|
|
|
|
|
|
|
D
|
|||
|
Longevity swap
|
|
|
(
|
|
(
|
|
D
|
|||
|
Other
|
|
|
|
|
|
|
C
|
|||
|
|
|
|
|
|
|
|||||
|
2022
|
||||||||||
|
Overseas equities
|
|
|
|
|
|
|
A,C
|
|||
|
Corporate bonds
|
|
|
|
|
|
|
A,C
|
|||
|
Government fixed interest bonds
|
|
|
|
|
|
|
A
|
|||
|
Government index-linked bonds
|
|
|
|
|
|
|
A
|
|||
|
Property
|
|
|
|
|
|
|
B
|
|||
|
Derivatives
|
|
|
(
|
(
|
(
|
(
|
A
|
|||
|
Cash
|
|
|
|
|
|
|
A
|
|||
|
Repurchase agreements
(1)
|
|
|
(
|
(
|
(
|
(
|
A
|
|||
|
Infrastructure
|
|
|
|
|
|
|
B,C
|
|||
|
Annuities
|
|
|
|
|
|
|
D
|
|||
|
Longevity swap
|
|
|
(
|
|
(
|
|
D
|
|||
|
Other
|
|
|
|
|
|
|
C
|
|||
|
|
|
|
|
|
|
|||||
(1)
Sale and repurchase agreements net of purchase and resale agreements.
The main methods for measuring the fair value of the Scheme’s assets at 31 December 2023 and 2022 are set out below.
A.
The asset valuation is provided by the asset manager. The valuation is based on observable market data, and where relevant is typically based on bid price
values, or the single price if only one price is available.
B.
The underlying asset valuations are prepared by an independent expert, adjusted for any cash movements where necessary since the latest valuation.
C.
Assets are valued by reference to the latest manager statements provided by the managers, adjusted for any cash movements since the latest valuation.
D.
Assets relating to insured liabilities are valued by the actuaries based on our year-end accounting assumptions.
The ‘Other’ category includes hedge fund investments.
A number of insurance transactions have been entered into that have been included in the asset valuation under annuities and Longevity swap. The transactions
were as follows:
–
In May 2020 a pensioner buy-in was entered into by the Trustee. This transaction insured
100
%
of the SMA section pensioner liabilities and
50
%
of the SPI
section pensioner liabilities based on membership in the Scheme at 31 December 2018.
–
In March 2021, the Trustee entered into a longevity swap. Approximately
85
%
of pensioner liabilities were covered by the longevity swap at inception, excluding
pensioners in the SMA and SPI sections.
–
In 2022, a pensioner buy-in was entered into by the Trustee covering pensioners in the SMA and SPI sections who were uninsured at 30 June 2021.
–
In July 2022, the Trustee entered into a second longevity swap, extending the insurance over uninsured pensioners in the same membership groups covered
by the first swap transacted in March 2021, based on membership in the Scheme at 31 December 2021.
At 31 December 2023, as highlighted above, the Scheme was invested in certain assets whose values are not based on market observable data, such as the
investments in unquoted equities and bonds, as well as property, infrastructure and hedge funds. The valuation of these assets relies on unobservable data as
these assets do not have a readily available quoted price in an active market. A large proportion of the property is directly held and valued using a bespoke
|
Strategic Report
|
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|
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|
Governance
|
Risk review
|
Financial
statements
|
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information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
167
|
|||
valuation method taking both the nature of the properties and the tenancy schedules as inputs to derive the fair value. Where there is a time lag between the net
asset value and the balance sheet date, management adjusts the value of the assets for any cash movements. Due diligence has been conducted to ensure the
values obtained in respect of these assets are appropriate and represent fair value. Given the nature of these investments, we are unable to prepare sensitivities
on how their values could vary as market conditions or other variables change.
A strategy is in place to manage interest rate and inflation risk relating to the liabilities. The Scheme also hedges a proportion of its foreign exchange exposure to
manage currency risk. At
31 December 2023
the currency forwards had a notional value of
£
859
m
(
2022
:
£
985
m
). There have been no significant changes to the
asset allocation over
2023
.
The Santander UK group’s pension schemes did not directly hold any equity securities of the Company or any of its related parties at
31 December 2023
and
2022
.
The Santander UK group’s pension scheme assets do not include any property or other assets that are occupied or used by the Santander UK group.
Funding
In November 2022, in compliance with the Pensions Act 2004, the Trustee and the Santander UK group agreed to a new recovery plan in respect of the Scheme
and a schedule of contributions following the finalisation of the 31 March 2022 actuarial valuation. The funding target for this actuarial valuation is for the Scheme
to have sufficient assets to make payments to members in respect of the accrued benefits as and when they fall due. In accordance with the terms of the Trustee
agreement in place at the time, the Santander UK group contributed
£
195
m
in
2023
(
2022
:
£
218
m
) to the Scheme, of which
£
164
m
(
2022
:
£
178
m
) was in respect
of agreed deficit repair contributions. The agreed schedule of the Santander UK group’s contributions to the Scheme covers the period up to
31 March 2026
, and
comprises contingent contributions which become due if the funding position of any section falls behind the agreed plan
.
The Santander UK group also meets
Scheme administration expenses. The funding valuation is used to judge the amount of cash contributions the Santander UK group needs to put into the pension
scheme. It will always be different to the IAS 19 accounting position, which is an accounting rule concerning employee benefits and shown on the balance sheet of
our financial statements.
|
Group
|
|||
|
2023
|
2022
|
2021
|
|
|
%
|
%
|
%
|
|
|
To determine benefit obligations
(1)
:
|
|||
|
–
Discount rate for scheme liabilities
|
|
|
|
|
–
General price inflation
|
|
|
|
|
–
General salary increase
|
|
|
|
|
–
Expected rate of pension increase
|
|
|
|
|
Years
|
Years
|
Years
|
|
|
Longevity at 60 for current pensioners, on the valuation date:
|
|||
|
–
Males
|
|
|
|
|
–
Females
|
|
|
|
|
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
|
|||
|
–
Males
|
|
|
|
|
–
Females
|
|
|
|
(1)
The discount rate and inflation related assumptions set out in the table above reflect the assumptions calculated based on the Scheme’s duration and cash flow profile as a whole. The actual assumptions used
were determined for each section independently based on each section’s duration and cash flow profile.
The majority of the liability movement in
2023
was due to the reduction in credit spreads over the year.
The rate used to discount the retirement benefit obligation for accounting purposes is based on the annual yield at the balance sheet date of high-quality corporate
bonds on that date. There are only a limited number of higher quality Sterling-denominated corporate bonds, particularly those that are longer-dated. Therefore, in
order to set a suitable discount rate, we need to construct a corporate bond yield curve. The model which we use to construct the curve uses corporate bond data
but excludes convertible bonds, asset-backed bonds and government related bonds. The curve is then constructed from this data by extrapolating the spot rates
from
30
years
to
50
years
by holding the spread above nominal gilt spot rates constant. From
50
years
onwards, it is assumed that spot rates remain constant.
When considering an appropriate assumption, we project forward the expected cash flows of each section of the Scheme and adopt a single equivalent cash flow
weighted discount rate for each section, subject to management judgement.
|
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|
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|
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|
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|
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statements
|
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information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
168
|
|||
General price inflation
Consistent with our discount rate methodology, we set the inflation assumption using the expected cash flows for each section of the Scheme, fitting them to an
inflation curve to give a weighted average inflation assumption. We then deduct an inflation risk premium to reflect the compensation holders of fixed rate
instruments expect to receive for taking on the inflation risk. This premium is subject to a cap, to better reflect management’s view of inflation expectations.
General salary increase
From 1 March 2015, a cap on pensionable pay increases of
1
%
each year was applied to staff in the Scheme.
Expected rate of pension increase
The pension increase assumption methodology uses a stochastic model, which is calibrated to consider both the observed historical volatility term structure and
derivative pricing. The model allows for the likelihood that high or low inflation in one year, feeds into inflation remaining high or low in the next year.
Mortality assumptions
The mortality assumptions are based on an independent analysis of the Scheme’s actual mortality experience, carried out as part of the triennial actuarial
valuation, together with recent evidence from the Continuous Mortality Investigation. An allowance is then made for expected future improvements to life
expectancy based on the Continuous Mortality Investigation Tables. Following this review the S3 Medium all pensioner mortality table was adopted with
appropriate adjustments to reflect the actual mortality experience. At 31 December 2023 the assumption for future improvements was updated and the CMI 2022
projection model was adopted, with model parameters selected having had regard to the Scheme’s membership profile with an initial addition to improvements of
In 2022, the methodology for setting the demographic assumptions was changed to better represent current expectations, following a review carried out by the
Trustee as part of the 2022 triennial valuation. These reviews resulted in changes in the assumptions for family statistics, early retirement and the withdrawal
assumption, which were retained at 31 December 2023.
period, while holding all other assumptions constant.
|
Group
|
|||
|
(Decrease)/increase
|
|||
|
2023
|
2022
|
||
|
Assumption
|
Change in pension obligation at period end from
|
£m
|
£m
|
|
Discount rate
|
|
(
|
(
|
|
General price inflation
|
|
|
|
|
Mortality
|
|
|
|
retirement. The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the
changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the sensitivity
analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is
the same method used to calculate the defined benefit obligation recognised in the balance sheet. There were no changes in the methods and assumptions used
in preparing the sensitivity analyses from prior years.
|
Year ending 31 December
|
£m
|
|
2024
|
|
|
2025
|
|
|
2026
|
|
|
2027
|
|
|
2028
|
|
|
Five years ending 2033
|
|
The average duration of the defined benefit obligation at
31 December 2023
was
13.8 years
(
2022
:
14.2 years
).
Emerging risks
The focus in 2023 shifted to the risks arising from the Scheme’s private market assets, rising interest rates and cybersecurity risk. The Santander UK group
collaborated with the Trustee to identify and monitor such risks to ensure they are adequately managed. The Trustee has engaged an independent cybersecurity
advisor to review the cybersecurity arrangements of its most critical suppliers and provide recommendations on potential improvements.
The Trustee has established the Sustainability Committee which is responsible for overseeing the Scheme’s policies, regulatory obligations and priorities in
respect of climate change and wider Environmental, Social and Governance (ESG) related matters. This includes the monitoring of climate change related risks
and opportunities, scenario analysis and monitoring of investments from an ESG perspective.
The Santander UK group's employee pension funds recognise the magnitude of the challenges that climate and energy transition pose to governments,
companies and civil society. They are also aware of their impact on the ability to comply with their fiduciary duty providing long-term risk-adjusted returns to their
members. They have committed to a target of net zero by 2050, showing their full support for the Santander UK group's vision, commitment to sustainability and
climate change.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
169
|
|||
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Guarantees given to third parties
|
|
|
|
Formal standby facilities, credit lines and other commitments
|
|
|
|
|
|
commitments. See Note
29
for more details.
Guarantees given to third parties consist primarily of letters of credit, bonds and guarantees granted as part of normal product facilities which are offered to
customers.
Standby facilities, credit lines and other commitments are also granted as part of normal product facilities which are offered to customers. Retail facilities comprise
undrawn facilities granted on flexible mortgages, bank overdrafts and credit cards. On flexible mortgages, the credit limit is set at the point of granting the loan
through property value and affordability assessments.
Ongoing assessments are made to ensure that credit limits remain appropriate considering any change in the security value or the customer’s financial
circumstances. For unsecured overdraft facilities and credit cards, the facilities are granted based on new business risk assessment and are reviewed more
frequently based on internal, as well as external data. Corporate facilities can comprise standby and revolving facilities which are subject to ongoing compliance
with covenants and may require the provision of agreed security.
The FSCS is the UK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to
pay certain claims against it. The FSCS is funded by levies on the industry and recoveries and borrowings where appropriate.
In connection with the securitisations and covered bond transactions described in Note
14
, the Santander UK group entities selling the relevant loans into the
applicable securitisation or covered bond portfolios make representations and warranties with respect to such loans, in each case as of the date of the sale of the
loans into the applicable portfolio. These representations and warranties cover, among other things, the ownership of the loan by the relevant Santander UK group
entity, absence of a material breach or default by the relevant borrower under the loan, the loan’s compliance with applicable laws and absence of material
disputes with respect to the relevant borrower, asset and loan. The specific representations and warranties made by Santander UK group companies which act as
sellers of loans in these securitisations and covered bond transactions depend in each case on the nature of the transaction and the requirements of the
transaction structure.
In the event that there is a material breach of the representations and warranties given by Santander UK plc as seller of loans under the residential mortgage-
backed securitisations or the covered bond programmes included in Note
14
, or if such representations and warranties prove to be materially untrue at the date
when they were given (being the sale date of the relevant mortgage loans), Santander UK plc may be required to repurchase the affected mortgage loans
(generally at their outstanding principal balance plus accrued interest). These securitisations and covered bond programmes are collateralised by prime residential
mortgage loans. Santander UK plc is principally a retail prime lender and has no appetite or product offering for any type of sub-prime business.
Similarly, under the auto loan securitisations in Note
14
, in the event that there is a breach or inaccuracy in respect of a representation or warranty relating to the
loans, the relevant Santander UK group entity who sold the auto loans into the securitisation portfolio will be required to repurchase such loans from the structure
(also at their outstanding principal balance plus accrued interest). In addition to breaches of representation and warranties, under the auto loan securitisations, the
seller may also have a repurchase obligation if certain portfolio limits are breached (which include, amongst other things, limits as to the size of a loan given to an
individual customer, LTV ratio, average term to maturity and average seasoning).
In the case of a repurchase of a loan from the relevant securitisation or covered bond programmes, the Santander UK group may bear any subsequent credit loss
on such loan. The Santander UK group manages and monitors its securitisation and covered bond activities closely to minimise potential claims.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
170
|
|||
Santander UK
engages in discussion, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their
supervision and review of
Santander UK
including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as
part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business,
Santander UK
is also subject to
complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to
legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings by relevant regulators or government agencies
in various
jurisdictions. All such matters are assessed periodically to determine the likelihood of
Santander UK
incurring a liability.
In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further
time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition, where it is not currently
practicable to estimate the possible financial effect of these matters, no provision is made.
Payment Protection Insurance
AXA France IARD and AXA France Vie (former GE Capital Corporation Group entities (GE Capital), known as Financial Insurance Company Ltd (FICL) and
Financial Assurance Company Ltd (FACL), acquired by AXA SA in 2015) (together, AXA France) have brought a claim for
£
552
m
(plus interest) against (i)
Santander Cards UK Limited (former GE Capital entity known as GE Capital Bank Limited (GECB), which was acquired by Banco Santander SA in 2008 and
subsequently transferred to Santander UK plc); and (ii) Santander Insurance Services UK Limited (a Banco Santander SA subsidiary) (together the Santander
Entities). The claim relates to the allocation of liability for compensation and associated costs in respect of a large number of PPI policies distributed by GECB
pre-2005, which were underwritten by FICL and FACL. AXA France reduced their claim from
£
670
m
(plus interest) to
£
552
m
(plus interest) in their Re-Re-
Amended Particulars of Claim dated 29 June 2023. The Santander Entities strongly refute the claim. Trial has been fixed for six weeks, beginning on 3 March
2025.
There are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which
mean that it is difficult to reliably predict the outcome or the timing of the resolution of the matter. The litigation and other regulatory provision in Note
29
includes
our best estimate of the Santander Entities’ liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously
prejudicial to the Santander Entities’ interests in connection with the dispute.
In addition, and in relation to PPI more generally, the PPI provision includes an amount relating to legal claims challenging the FCA’s industry guidance on the
treatment of Plevin / recurring non-disclosure assessments. This provision is based on current stock levels, future projected claims, and average redress. There
remains a risk that volumes received in future may be higher than forecast. The provision in Note
29
includes our best estimate of Santander UK’s liability for the
specific issue. The actual cost of customer compensation could differ from the amount provided. It is not currently practicable to provide an estimate of the risk and
amount of any further financial impact.
German dividend tax arbitrage transactions
In June 2018 the Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of
Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German
dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a loophole of a specific German settlement mechanism
through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been
paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and
practices which may be found to be illegal under German law.
During
2023
we continued to cooperate with the German authorities and, with the assistance of external experts, to progress an internal investigation into the
matters in question.
From Santander UK plc’s perspective, t
he investigation is focused principally on the period 2009-2011 and remains on-going. There remain
factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean
that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact. These uncertainties mean it is not currently
practicable to make a reliable assessment of the size of any related potential liability.
SCUK - Motor Finance Broker Commissions
Following the FCA’s Motor Market review in 2019 which resulted in a change in rules in January 2021, Santander Consumer (UK) plc (SCUK) has received a
number of county court claims and complaints in respect of its historical use of discretionary commission arrangements (DCAs) prior to the 2021 rule changes. In
the context of the complaints made to the Financial Ombudsman Service relating to such commission arrangements, the FCA announced on 11 January 2024
that it intends to use its powers under s166 of the Financial Services and Markets Act 2000 to review the historical use of DCAs between lenders and credit
brokers (the “FCA Review”) and whether redress should be payable. In line with the FCA's announcement, we have paused the response to customer complaints
until at least 20 November 2024. A claim has been issued against SCUK, Santander UK plc and others in the Competition Appeal Tribunal (CAT), alleging that
SCUK’s historical commission arrangements in respect of used car financing operated in breach of the Competition Act 1998. While it is possible that certain
charges may be incurred in relation to existing or future county court claims, Financial Ombudsman Service (FOS) complaints and the CAT proceedings, it is not
considered that a legal or constructive obligation has been incurred in relation to these matters that would require a provision to be recognised at this stage. The
resolution of such matters is not possible to predict with any certainty and there remain significant inherent uncertainties regarding the existence, scope and timing
of any possible outflow which make it impracticable to disclose the extent of any potential financial impact.
On 2 November 2015, Visa Europe Ltd agreed to sell
100
%
of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of
Visa Europe Ltd, Santander UK received upfront consideration made up of cash and convertible preferred stock.
Conversion of the preferred stock into Class A
Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK Ireland multilateral interchange fees (UKI MIFs).
The convertible
preferred
stock is now held by Santander Equity Investments Limited (SEIL), outside the ring-fenced bank.
In addition, Santander UK plc and certain other UKI banks have agreed to indemnify Visa Inc. in the event that the preferred stock is insufficient to meet the costs
of this litigation. Visa Inc. has recourse to this indemnity once more than
€
1
bn
of losses relating to UKI MIFs have arisen or once the total value of the preferred
stock issued to UKI banks on closing has been reduced to
nil
. Santander UK plc's liability under this indemnity is capped at
€
39.85
m
. At this stage, it is unclear
whether the litigation will give rise to more than
€
1
bn
of losses relating to UKI MIFs which means it is not practicable to predict the resolution of the matter
including the timing or the significance of the possible impact.
As part of the sale of subsidiaries, businesses and other entities, and as is normal in such circumstances, entities within the Santander UK group have given
warranties and/or indemnities to the purchasers.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
171
|
|||
Obligations under stock borrowing and lending agreements represent contractual commitments to return stock borrowed. These obligations are offset by a
contractual right to receive stock under other contractual agreements. See Note
35
.
The Santander UK group has commitments to lend at fixed interest rates which expose us to interest rate risk. For more, see the Risk review.
Under the PRA’s liquidity rules, Santander UK plc and its subsidiary Cater Allen Limited form the RFB Domestic Liquidity Sub-group (the RFB DoLSub), which
allows the entities to collectively meet regulatory requirements for the purpose of managing liquidity risk. Each member of the RFB DoLSub will support the other
by transferring surplus liquidity in times of stress.
|
Group
|
||||
|
Ordinary shares of
£
|
Total
|
|||
|
Issued and fully paid share capital
|
No.
|
£m
|
£m
|
|
|
At 31 December 2022, 1 January 2023 and 31 December 2023
|
|
|
|
|
|
Group
|
||
|
2023
|
2022
|
|
|
Share premium
|
£m
|
£m
|
|
At 1 January and 31 December
|
|
|
|
Group
|
||||
|
Interest rate
|
2023
|
2022
|
||
|
%
|
Next call date
|
£m
|
£m
|
|
|
AT1 securities:
|
||||
|
-
£
|
|
|
|
|
|
-
£
|
|
|
|
|
|
-
£
|
|
|
|
|
|
-
£
|
|
|
|
|
|
|
|
|||
The AT1 securities issued by the Company were subscribed for by its immediate parent company, Santander UK Group Holdings plc.
The AT1 securities are
perpetual and pay a quarterly distribution. At each distribution payment date, the Company can decide whether to pay the distribution, which is non-cumulative, in
whole or in part. The distribution rate resets every
five years
. The securities will be automatically written down and the investors will lose their entire investment in
the securities should the CET1 capital ratio of the Santander UK prudential consolidation group
, or the Company (calculated on a solo basis),
fall below
7
%
.
All AT1 securities are redeemable at the option of the Company, and only with the consent of the PRA.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
172
|
|||
Changes in liabilities arising from financing activities
Consolidated Statement of Changes in Equity.
|
Group
|
||||||
|
Balance sheet line item
|
||||||
|
Debt securities in
issue
|
Subordinated
liabilities
|
Other equity
instruments
|
Lease liabilities
|
Dividends paid
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
At 1 January
|
|
|
|
|
|
|
|
Proceeds from issue of debt securities
|
|
—
|
—
|
—
|
—
|
|
|
Repayment of debt securities
|
(
|
—
|
—
|
—
|
—
|
(
|
|
Proceeds from issue of subordinated liabilities
|
—
|
|
—
|
—
|
—
|
|
|
Repayment of subordinated liabilities
|
—
|
(
|
—
|
—
|
—
|
(
|
|
Principal elements of lease payments
|
—
|
—
|
—
|
(
|
—
|
(
|
|
Dividends paid
|
—
|
—
|
—
|
—
|
(
|
(
|
|
Liability-related other changes
|
|
|
—
|
|
—
|
|
|
Non-cash changes:
|
||||||
|
– Unrealised foreign exchange
|
(
|
(
|
—
|
—
|
—
|
(
|
|
– Other changes
|
|
(
|
—
|
—
|
|
|
|
At 31 December
|
|
|
|
|
|
|
|
2022
|
||||||
|
At 1 January
|
|
|
|
|
|
|
|
Proceeds from issue of debt securities
|
|
—
|
—
|
—
|
—
|
|
|
Repayment of debt securities
|
(
|
—
|
—
|
—
|
—
|
(
|
|
Repayment of subordinated liabilities
|
—
|
(
|
—
|
—
|
—
|
(
|
|
Issue of other equity instruments
|
—
|
—
|
|
—
|
—
|
|
|
Repurchase of other equity instruments
|
—
|
—
|
(
|
—
|
—
|
(
|
|
Principal elements of lease payments
|
—
|
—
|
—
|
(
|
—
|
(
|
|
Dividends paid
|
—
|
—
|
—
|
—
|
(
|
(
|
|
Liability-related other changes
|
|
|
—
|
|
—
|
|
|
Non-cash changes:
|
||||||
|
– Unrealised foreign exchange
|
|
|
—
|
—
|
—
|
|
|
– Other changes
|
(
|
|
—
|
—
|
|
|
|
At 31 December
|
|
|
|
|
|
|
|
2021
|
||||||
|
At 1 January
|
|
|
|
|
|
|
|
Proceeds from issue of debt securities
|
|
—
|
—
|
—
|
—
|
|
|
Repayment of debt securities
|
(
|
—
|
—
|
—
|
—
|
(
|
|
Repayment of subordinated liabilities
|
—
|
(
|
—
|
—
|
—
|
(
|
|
Issue of other equity instruments
|
—
|
—
|
|
—
|
—
|
|
|
Repurchase of other equity instruments
|
—
|
—
|
(
|
—
|
—
|
(
|
|
Principal elements of lease payments
|
—
|
—
|
—
|
(
|
—
|
(
|
|
Dividends paid
|
—
|
—
|
—
|
—
|
(
|
(
|
|
Liability-related other changes
|
(
|
(
|
—
|
|
—
|
(
|
|
Non-cash changes:
|
||||||
|
– Unrealised foreign exchange
|
(
|
|
—
|
—
|
—
|
(
|
|
– Other changes
|
|
(
|
—
|
—
|
|
|
|
At 31 December
|
|
|
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
173
|
|||
Net cash flows from operating activities includes interest received of
£
11,395
m
(
2022
:
£
6,508
m
,
2021
:
£
4,806
m
),
interest paid of
£
6,326
m
(
2022
:
£
2,089
m
,
2021
:
£
1,064
m
)
and dividends received of
£
nil
(
2022
:
£
nil
,
2021
:
£
nil
).
Total cash outflow for leases was
£
50
m
(
2022
:
£
28
m
,
2021
:
£
28
m
).
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
174
|
|||
COLLATERAL ACCEPTED AS SECURITY FOR ASSETS
lending and repurchase agreements.
a) Assets charged as security for liabilities
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
On-balance sheet:
|
||
|
Cash and balances at central banks
|
|
|
|
Loans and advances to banks
|
|
|
|
Loans and advances to customers - securitisations and covered bonds (See Note 14)
|
|
|
|
Loans and advances to customers - other
|
|
|
|
Other financial assets at amortised cost
|
|
|
|
Financial assets at fair value through other comprehensive income
|
|
|
|
Total on-balance sheet
|
|
|
|
Total off-balance sheet
|
|
|
Santander UK provides assets as collateral in the following areas of the business.
Sale and repurchase agreements
Santander UK also enters into sale and repurchase agreements and similar transactions of debt securities. Upon entering into such transactions, Santander UK
provides collateral in excess of the borrowed amount. The carrying amount of assets that were so provided at
31 December 2023
was
£
13,291
m
(
2022
:
£
11,553
m
), of which
£
909
m
(
2022
:
£
900
m
) was classified in ‘Loans and advances to customers – securitisations and covered bonds’ in the table above.
As described in Note
14
, Santander UK plc and certain of its subsidiaries issue securitisations and covered bonds. At
31 December 2023
, there were
£
27,927
m
(
2022
:
£
24,984
m
) of gross assets in these secured programmes and
£
839
m
(
2022
:
£
829
m
) of these related to internally retained issuances that were available
for use as collateral for liquidity purposes in the future.
At
31 December 2023
,
£
2,928
m
(
2022
:
£
1,725
m
) of notes issued under securitisation and covered bond programmes had been retained internally, a proportion of
which had been used as collateral via third party bilateral secured funding transactions, which totalled
£
1,500
m
at
31 December 2023
(
2022
:
£
500
m
), or for use
as collateral for liquidity purposes in the future.
Asset balances under stock borrowing and lending agreements represent stock lent by Santander UK. These balances amounted to
£
23,644
m
at
31 December
2023
(
2022
:
£
34,861
m
) and are offset by contractual commitments to return stock borrowed or cash received.
Derivatives business
In addition to the arrangements described above, collateral is also provided in the normal course of derivative business to counterparties. At
31 December 2023
£
1,726
m
(
2022
:
£
1,506
m
) of such collateral in the form of cash had been provided by Santander UK and is included in the table.
b) Collateral accepted as security for assets
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
On-balance sheet:
|
||
|
Deposits by banks
|
|
|
|
Total on-balance sheet
|
|
|
|
Total off-balance sheet
|
|
|
Purchase and resale agreements
Santander UK also enters into purchase and resale agreements and similar transactions of debt securities. Upon entering into such transactions, Santander UK
receives collateral in excess of the loan amount. The level of collateral held is monitored daily and if required, further calls are made to ensure the market values of
collateral remains at least equal to the loan balance. The subsidiaries are permitted to sell or repledge the collateral held in the absence of default. At
31
December 2023
, the fair value of such collateral received was
£
12,982
m
(
2022
:
£
8,628
m
). Of the collateral received, almost all was sold or repledged. The
subsidiaries have an obligation to return collateral that they have sold or pledged.
Stock borrowing and lending agreements
Obligations representing contractual commitments to return stock borrowed by Santander UK amounted to
£
2,010
m
at
31 December 2023
(
2022
:
£
1,513
m
) and
are offset by a contractual right to receive stock lent.
Derivatives business
In addition to the arrangements described, collateral is also received from counterparties in the normal course of derivative business. At
31 December 2023
,
£
860
m
(
2022
:
£
1,741
m
) of such collateral in the form of cash had been received by Santander UK and is included in the table.
Lending activities
In addition to the collateral held as security for assets, Santander UK may obtain a charge over a customer’s property in connection with its lending activities.
Details of these arrangements are set out in the ‘Credit risk’ section of the Risk review.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
175
|
|||
The Santander UK group operates share schemes and arrangements for eligible employees. The main current schemes are the Sharesave Schemes, the
Deferred Shares Bonus Plan, the Partnership Shares scheme and the Transformation Incentive Plan. All the share options and awards relate to shares in Banco
Santander SA.
The amount charged to the income statement in respect of share-based payment transactions is set out in Note
6
.
At
31 December 2023
, the carrying amount of liabilities arising from share-based payment transactions, excluding any cash element was
£
14.7
m
(
2022
:
£
6.6
m
),
of which
£
1.1
m
had vested at
31 December 2023
(
2022
:
£
0.1
m
).
a) Sharesave Schemes
The Santander UK group launched its
sixteen
th
HM Revenue Customs approved Sharesave invitation under Banco Santander SA sponsorship in September
2023
. Sharesave invitations have been offered since 2008
under broadly similar terms. Under the Sharesave Scheme’s HMRC-approved savings limits, eligible
employees may enter into contracts to save between
£
5
and
£
500
per month. For all schemes, at the end of a fixed term of
three
or
five years
after the grant date,
the employees can use these savings to buy shares in Banco Santander SA at a discount, calculated in accordance with the rules of the scheme. The option price
is calculated as the average middle market quoted price of Banco Santander SA shares over the first
three
dealing days prior to invitation and discounted by up to
Participants in the scheme have
six months
from the date of vesting to exercise the option.
|
2023
|
2022
|
||||
|
Number of
options
|
Weighted average
exercise price
|
Number of options
|
Weighted average
exercise price
|
||
|
‘000
|
£
|
‘000
|
£
|
||
|
Outstanding at 1 January
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
Exercised
|
(
|
|
(
|
|
|
|
Forfeited/expired
|
(
|
|
(
|
|
|
|
Outstanding at 31 December
|
|
|
|
|
|
|
Exercisable at 31 December
|
|
|
|
|
The weighted average share price at the date the options were exercised was
£
3.22
(
2022
:
£
2.34
).
|
2023
|
2022
|
||||
|
Range of exercise prices
|
Weighted average
remaining
contractual life
|
Weighted average
exercise price
|
Weighted average
remaining
contractual life
|
Weighted average
exercise price
|
|
|
Years
|
£
|
Years
|
£
|
||
|
£
|
|
|
|
|
|
|
£
|
|
|
|
|
|
|
£
|
|
|
|
|
|
|
£
|
|
|
|
|
The fair value of each option at the date of grant is estimated using an analytical model that also reflects the correlation between EUR and GBP. This model uses
assumptions on the share price, the EUR/GBP FX rate, the EUR/GBP risk-free interest rate, dividend yields, the expected volatilities of both the underlying shares
and EUR/GBP for the expected lives of options granted. The weighted average grant-date fair value of options granted during the year was
£
0.33
(
2022
:
£
0.23
).
b) Deferred shares bonus plan
Deferred bonus awards are designed to align employee performance with shareholder value and encourage increased retention of senior employees. Those
employees who are designated as Material Risk Takers
receive part of their annual bonus as a deferred award comprising
50
%
in shares and
50
%
in cash.
Either
period from the anniversary of the initial award. Deferred bonus awards in shares or share options are subject to an additional
one
-year retention period from the
point of delivery. Any deferred awards are dependent on continued employment and subject to Santander UK's discretion, and the vesting of deferred bonus
awards is subject to potential performance adjustment.
c) Partnership Shares scheme
A Partnership Shares scheme is operated for eligible employees under the Share Incentive Plan (SIP) umbrella. Participants can choose to invest up to
£
1,800
per tax year (or no more than
10
%
of an employee’s salary for the tax year) from pre-tax salary to buy Banco Santander SA shares. Shares are held in trust for the
participants. There are no vesting conditions attached to these shares, and no restrictions as to when the shares can be removed from the trust. However, if a
participant chooses to sell the shares before the end of
five years
, they will be liable for the taxable benefit received when the shares are taken out of the trust. The
shares can be released from trust after
five years
free of income tax and national insurance contributions.
3,937,473
shares were outstanding at
31 December
2023
(
2022
:
3,974,698
shares).
d)
Transformation Incentive Plan
This one-off long-term incentive plan was designed to recognise the achievement of financial targets and an enhanced customer experience, whilst maintaining
appropriate conduct controls and risk management, over the course of our transformation period.
Awards under the plan were granted in
2021
,
2022
and
2023
with performance assessed over the period
1 January 2021
to
31 December 2023
. Awards for
Material Risk Takers were granted half in cash and half in share based awards (linked to the Banco Santander SA share price), and will vest in accordance with
regulatory requirements.
The total value of share-based awards granted in
2023
was
£
1.3
m
(
2022
:
£
1
m
) and the liability arising from share-based payment
transactions, excluding any cash element was
£
3.8
m
(
2022
:
£
1.8
m
).
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
176
|
|||
PERSONNEL
a) Remuneration of Directors and Other Key Management Personnel
|
2023
|
2022
|
2021
|
|
|
Directors’ remuneration
|
£
|
£
|
£
|
|
Salaries and fees
|
|
|
|
|
Performance-related payments
|
|
|
|
|
Other fixed remuneration (pension and other allowances non-cash benefits)
|
|
|
|
|
Expenses
|
|
|
|
|
Total remuneration
|
|
|
|
|
Compensation for loss of office
(1)
|
|
|
|
|
2023
|
2022
|
2021
|
|
|
Directors' and Other Key Management Personnel compensation
|
£
|
£
|
£
|
|
Short-term employee benefits
|
|
|
|
|
Post-employment benefits
|
|
|
|
|
Compensation for loss of office
(1)
|
|
|
|
|
Total compensation
|
|
|
|
(1)
Compensation for loss of office was
not
paid to Directors or KMPs in
2023
(
2022
:
two
Directors,
£
172,856
and
three
KMPs,
£
1,540,400
;
2021
:
two
Directors,
£
356,054
).
In
2023
, the remuneration, excluding pension contributions, of the highest paid Director, was
£
2,640,491
(
2022
:
£
3,510,441
,
2021
:
£
3,740,810
) of which
£
1,002,607
(
2022
:
£
1,900,506
,
2021
:
£
1,864,320
) was performance related. In
2023
, the accrued defined benefit pension relating to the highest paid director was
£
nil
(
2022
:
£
nil
,
2021
:
£
22,119
per annum for a different individual).
b) Retirement benefits
Defined benefit pension schemes are provided to certain employees. See Note
30
for details of the schemes and the related costs and obligations.
No
director
has a deferred pension benefit accruing under a defined benefit scheme. Ex-gratia pensions paid to former Directors of Santander UK plc in
2023
, which have
been provided for previously, amounted to
£
327,462
(
2022
:
£
379,945
;
2021
:
£
370,668
). Since the Company became part of the Banco Santander group, the
Board has not awarded any new ex-gratia pensions.
c) Transactions with Directors, Other Key Management Personnel and each of their connected persons
following transactions with the Santander UK group in the ordinary course of business.
|
2023
|
2022
|
||||
|
No.
|
£000
|
No.
|
£000
|
||
|
Secured loans, unsecured loans and overdrafts
|
|||||
|
At 1 January
|
|
|
|
|
|
|
Net movements
|
(
|
|
|
|
|
|
At 31 December
|
|
|
|
|
|
|
Deposit, bank and instant access accounts and investments
|
|||||
|
At 1 January
|
|
|
|
|
|
|
Net movements
|
(
|
(
|
|
(
|
|
|
At 31 December
|
|
|
|
|
In
2023
and
2022
,
no
Director held any interest in the shares of any company in the Santander UK group and
no
Director exercised or was granted any rights to
subscribe for shares in any company in the Santander UK group. In addition, in
2023
and
2022
,
no
Directors exercised share options over shares in Banco
Santander SA, the ultimate parent company of the Company.
Secured loans, unsecured loans and overdrafts are made to Directors, Other KMP and their connected persons, in the ordinary course of business, with terms
prevailing for comparable transactions and on the same terms and conditions as applicable to other employees in the Santander UK group. Such loans do not
involve more than the normal risk of collectability or present any unfavourable features. Amounts deposited by Directors, Other KMP and their connected persons
earn interest at the same rates as those offered to the market or on the same terms and conditions applicable to other employees in the Santander UK group.
Deposits, bank and instant access accounts and investments are entered into by Directors, Other KMP and their connected persons on normal market terms and
conditions, or on the same terms and conditions as applicable to other employees in Santander UK group.
In
2023
, loans were made to
two
Directors (
2022
:
six
Directors), with a principal amount of
£
495,281
outstanding at
31 December 2023
(
2022
:
£
540,450
). In
2023
, loans were made to
six
Other KMP (
2022
:
four
), with a principal amount of
£
579,383
outstanding at
31 December 2023
(
2022
:
£
330,972
).
In
2023
and
2022
, there were
no
other transactions, arrangements or agreements with Santander UK in which Directors, Other KMP or their connected persons
had a material interest. In addition, in
2023
and
2022
,
no
Director had a material interest in any contract of significance with Santander UK other than a service
contract or appointment letter, as appropriate.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
177
|
|||
a) Parent undertaking and controlling party
The Company’s immediate
parent is
Santander UK Group Holdings plc
, a company incorporated in England and Wales. Its
ultimate parent and controlling party is
Banco Santander SA
, a company incorporated in Spain. The smallest and largest groups into which the Santander UK group’s results are included are the group
accounts of
Santander UK Group Holdings plc
and
Banco Santander SA
respectively
, copies of which may be obtained from Shareholder Relations, 2 Triton
Square, Regent’s Place, London NW1 3AN.
b) Transactions with related parties
|
Group
|
|||||||||||||
|
Interest, fees and
other income received
|
Interest, fees and
other expenses paid
|
Amounts owed by
related parties
|
Amounts owed to
related parties
|
||||||||||
|
2023
|
2022
|
2021
|
2023
|
2022
|
2021
|
2023
|
2022
|
2023
|
2022
|
||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||
|
Ultimate parent
|
(
|
(
|
(
|
|
|
|
|
|
(
|
(
|
|||
|
Immediate parent
|
(
|
(
|
(
|
|
|
|
|
|
(
|
(
|
|||
|
Fellow subsidiaries
|
(
|
(
|
(
|
|
|
|
|
|
(
|
(
|
|||
|
Joint ventures
|
(
|
(
|
(
|
|
|
|
|
|
(
|
(
|
|||
|
(
|
(
|
(
|
|
|
|
|
|
(
|
(
|
||||
by customers and Note 33. Other Equity Instruments. In addition, transactions with pension schemes operated by the Santander UK group are described in Note
30
.
The above transactions were made in the ordinary course of business,
on substantially the same terms as for comparable transactions with third party
counterparties, and within limits acceptable to the PRA. Such transactions do not involve more than the normal risk of collectability or present any unfavourable
features.
In 2021, SCUK sold its entire
50
%
shareholding in PSA Finance UK Limited to PSA Financial Services Spain EFC SA, a joint venture between Santander
Consumer Finance SA, a fellow subsidiary of Banco Santander SA, and Banque PSA Finance SA.
In 2021
, a significant part of the CIB business of Santander UK
was transferred to the London branch of Banco Santander SA by way of a Part VII banking business transfer scheme. For more details, see Note
42
.
In 2021, we sold our then head office site in Triton Square, London to Santander UK Investments Ltd, a wholly owned subsidiary of our ultimate parent. Santander
UK occupies space within the building and paid fees of
£
9
m
(
2022
:
£
6
m
) under an occupational licence arrangement.
In May 2022, Santander UK plc transferred a portfolio of mortgage assets with a carrying amount of
£
624
m
to Santander Financial Services plc for a cash
consideration of
£
631
m
, including a purchase price premium of
£
7
m
.
In November 2022, Santander (UK) Group Pension Scheme Trustees Limited entered into an unsecured committed liquidity facility with Santander UK plc for
£
600
m
with a maturity date of 31 December 2024. This facility provides an alternate source of short-term liquidity for day-to-day operational needs. At the balance
sheet date, no drawings had been made from this facility and the entire facility remained undrawn.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
178
|
|||
(i) Fair value measurement
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal, or in its absence, the most advantageous market to which Santander UK has access at that date. The fair
value of a liability reflects its non-performance risk.
Financial instruments valued using observable market prices
If a quoted market price in an active market is available for an instrument, the fair value is calculated as the current bid price multiplied by the number of units of
the instrument held.
Financial instruments valued using a valuation technique
In the absence of a quoted market price in an active market, management uses internal models to make its best estimate of the price that the market would set for
that financial instrument. In order to make these estimations, various techniques are employed, including extrapolation from observable market data and
observation of similar financial instruments with similar characteristics. Wherever possible, valuation parameters for each product are based on prices directly
observable in active markets or that can be derived from directly observable market prices. Chosen valuation techniques incorporate all the factors that market
participants would take into account in pricing transactions.
Santander UK manages certain groups of financial assets and liabilities on the basis of its net exposure to either market risks or credit risk. As a result, it has
elected to use the exception under IFRS 13 which permits the fair value measurement of a group of financial assets and financial liabilities on the basis of the price
that would be received to sell a net long position for a particular risk exposure or paid to transfer a net short position for a particular risk exposure in an orderly
transaction between market participants at the measurement date under current market conditions.
(ii) Fair value hierarchy
Santander UK applies the following fair value hierarchy that prioritises the inputs to valuation techniques used in measuring fair value. The hierarchy establishes
three categories for valuing financial instruments, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The three categories are: quoted prices in active markets (Level 1), internal models based on observable market data
(Level 2) and internal models based on other than observable market data (Level 3). If the inputs used to measure an asset or a liability fall to different levels
within the hierarchy, the classification of the entire asset or liability will be based on the lowest level input that is significant to the overall fair value measurement of
the asset or liability.
Santander UK categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as follows:
Level 1
Unadjusted quoted prices for identical assets or liabilities in an active market that Santander UK can access at the measurement date. Active markets
are assessed by reference to average daily trading volumes in absolute terms and, where applicable, by reference to market capitalisation for the instrument.
Level 2
Quoted prices in inactive markets, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for
the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from
or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability.
Level 3
Significant inputs to the pricing or valuation techniques are unobservable. These unobservable inputs reflect the assumptions that market participants
would use when pricing assets or liabilities and are considered significant to the overall valuation.
Changes in the observability of significant valuation inputs during the reporting period may result in a transfer of assets and liabilities within the fair value hierarchy.
The Santander UK group recognises transfers between levels of the fair value hierarchy when there is a significant change in either its principal market or the level
of observability of the inputs to the valuation techniques at the end of the reporting period.
b) Valuation techniques
The main valuation techniques employed in internal models to measure the fair value of the financial instruments at
31 December 2023
and
2022
are set out
below. In substantially all cases, the principal inputs into these models are derived from observable market data. Santander UK did not make any material
changes to the valuation techniques and internal models it used in
2023
,
2022
and
2021
.
A.
In the valuation of financial instruments requiring static hedging (for example interest rate, currency derivatives and property derivatives) and in the valuation
of loans and advances and deposits, the ‘present value’ method is used. Expected future cash flows are discounted using the interest rate curves of the
applicable currencies or forward house price index levels, as well as credit spreads. The interest rate curves are generally observable market data and
reference yield curves derived from quoted interest rates in appropriate time bandings, which match the timings of the cash flows and maturities of the
instruments.
B.
In the valuation of equity financial instruments requiring dynamic hedging (principally equity securities, options and other structured instruments), proprietary
local volatility and stochastic volatility models are used. These types of models are widely accepted in the financial services industry. Observable market
inputs used in these models include the bid-offer spread, foreign currency exchange rates, volatility and correlation between indices. In limited circumstances,
other inputs may be used in these models that are based on unobservable market data, such as the Halifax’s UK HPI volatility, HPI forward growth, HPI spot
rate, mortality
and
mean reversion
.
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 unobservable market data, such as HPI volatility, HPI forward growth, HPI spot rate and mortality.
D.
In the valuation of linear instruments such as credit risk and fixed-income derivatives, credit risk is measured using dynamic models similar to those used in
the measurement of interest rate risk. In the case of non-linear instruments, if the portfolio is exposed to credit risk such as credit derivatives, the probability of
default is determined using the credit default spread market. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted
credit risk premiums and the correlation between the quoted credit derivatives of various issuers.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
179
|
|||
The fair values of the financial instruments arising from Santander UK’s internal models take into account, among other things, contract terms and observable
market data, which include such factors as bid-offer spread, interest rates, credit risk, exchange rates, the quoted market price of equity securities, volatility and
prepayments. In all cases, when it is not possible to derive a valuation for a particular feature of an instrument, management uses judgement to determine the fair
value of the particular feature. In exercising this judgement, a variety of tools are used including proxy observable data, historical data and extrapolation
techniques. Extrapolation techniques take into account behavioural characteristics of equity markets that have been observed over time, and for which there is a
strong case to support an expectation of a continuing trend in the future. Estimates are calibrated to observable market prices when they become available.
Santander UK believes its valuation methods are appropriate and consistent with other market participants. Nevertheless, the use of different valuation methods
or assumptions, including imprecision in estimating unobservable market inputs, to determine the fair value of certain financial instruments could result in different
estimates of fair value at the reporting date and the amount of gain or loss recorded for a particular instrument. Most of the valuation models are not significantly
subjective, because they can be tested and, if necessary, recalibrated by the internal calculation of and subsequent comparison to market prices of actively traded
securities, where available.
c) Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk-taker. To this
end, ultimate responsibility for the determination of fair values lies with the Risk Department. For all financial instruments where fair values are determined by
reference to externally quoted prices or observable pricing inputs to models, independent price determination or verification is utilised. In inactive markets, direct
observation of a traded price may not be possible. In these circumstances, Santander UK will source alternative market information to validate the financial
instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable.
The factors that are considered in this regard include:
–
The extent to which prices may be expected to represent genuine traded or tradeable prices
–
The degree of similarity between financial instruments
–
The degree of consistency between different sources
–
The process followed by the pricing provider to derive the data
–
The elapsed time between the date to which the market data relates and the balance sheet date
–
The manner in which the data was sourced.
The source of pricing data is considered as part of the process that determines the classification of the level of a financial instrument. Consideration is given to the
quality of the information available that provides the current mark-to-model valuation and estimates of how different these valuations could be on an actual trade,
taking into consideration how active the market is. For spot assets that cannot be sold due to illiquidity, forward estimates are discounted to estimate a realisable
value over time. Adjustments for illiquid positions are regularly reviewed to reflect changing market conditions.
For fair values determined using a valuation model, the control framework may include as applicable, independent development and / or validation of: (i) the logic
within the models; (ii) the inputs to those models; and (iii) any adjustments required outside the models. Internal valuation models are validated independently
within the Risk Department. A validation report is produced for each model-derived valuation that assesses the mathematical assumptions behind the model, the
implementation of the model and its integration within the trading system.
value hierarchy - Level 1, Level 2 and Level 3. Cash and balances at central banks, which consist of demand deposits with the Bank of England, together with
cash in tills and ATMs, have been excluded from the table as the carrying amount is deemed an appropriate approximation of fair value.
|
Group
|
|||||||||||
|
2023
|
2022
|
||||||||||
|
Fair value
|
Fair
|
Carrying
|
Fair value
|
Fair
|
Carrying
|
||||||
|
Level 1
|
Level 2
|
Level 3
|
value
|
value
|
Level 1
|
Level 2
|
Level 3
|
value
|
value
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Assets
|
|||||||||||
|
Loans and advances to customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to banks
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements - non
trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial assets at amortised
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Liabilities
|
|||||||||||
|
Deposits by customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits by banks
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements - non trading
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in issue
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
gains and losses attributable to the hedged risk, as this is included as a separate line item on the balance sheet.
Valuation methodology for financial instruments carried at amortised cost
The valuation approach to specific categories of financial instruments is described below.
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|
Annual Report 2023
|
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180
|
|||
Assets:
Loans and advances to customers
The approach to estimating the fair value of loans and advances to customers has been determined by discounting expected cash flows to reflect either current
market rates or credit spreads relevant to the specific industry of the borrower. The determination of their fair values is an area of considerable estimation and
uncertainty as there is no observable market and values are significantly affected by customer behaviour.
i) Advances secured on residential property
The fair value of the mortgage portfolio is calculated by discounting contractual cash flows by different spreads for each LTV Band, after taking account of
expected customer prepayment rates. The spread is based on new business interest rates derived from publicly available competitor market information.
ii) Corporate loans
The determination of the fair values of performing loans is calculated by discounting the contractual cash flows and also deducting other costs relating to expected
credit losses, cost of capital, credit risk capital, operational risk capital, cost of funding and operating costs.
iii) Other loans
These consist of unsecured personal loans, credit cards, overdrafts and consumer (auto) finance. The weighted average lives of these portfolios are typically short
and relate to relatively new business. For unsecured personal loans and consumer (auto) finance loans, a small surplus or deficit has been recognised based on
the differential between existing portfolio margins and the current contractual interest rates.
Loans and advances to banks
These comprise secured loans, short-term placements with banks including collateral and unsettled financial transactions. The secured loans have been valued
based on a discounted spread for the term of the loans using valuation technique A as described above. The carrying amount of the other items is deemed a
reasonable approximation of their fair value, as the transactions are very short-term in duration.
Reverse repurchase agreements - non-trading
The fair value of the reverse repurchase agreements - non trading has been estimated using valuation technique A as described above, using a spread
appropriate to the underlying collateral.
Other financial assets at amortised cost
These consist of asset backed securities and debt securities. The asset backed securities can be complex products and in some instances are valued with the
assistance of an independent, specialist valuation firm. These fair values are determined using industry-standard valuation techniques, including discounted cash
flow models. The inputs to these models used in these valuation techniques include quotes from market makers, prices of similar assets, adjustments for
differences in credit spreads, and additional quantitative and qualitative research. The debt security investments consist of a portfolio of government debt
securities. The fair value of this portfolio has been determined using quoted market prices.
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|
Santander UK plc
181
|
|||
Liabilities:
Deposits by customers
The majority of deposit liabilities are payable on demand and therefore can be deemed short-term in nature with the fair value equal to the carrying value. Certain
of the deposit liabilities are at a fixed rate until maturity. The deficit/surplus of fair value over carrying value of these liabilities has been estimated by reference to
the market rates available at the balance sheet date for similar deposit liabilities of similar maturities. The fair value of such deposit liabilities has been estimated
using valuation technique A as described above.
Deposits by banks
The fair value of deposits by banks, including repos, has been estimated using valuation technique A as described above, discounted at the appropriate credit
spread.
Repurchase agreements - non trading
The fair value of the repurchase agreements - non trading has been estimated using valuation technique A as described above, discounted at a spread
appropriate to the underlying collateral.
Debt securities in issue and subordinated liabilities
Where reliable prices are available, the fair value of debt securities in issue and subordinated liabilities has been calculated using quoted market prices. Where
reliable prices are not available, internal models have been used to determine fair values, which take into account, among other things, contract terms and
observable market data, which include such factors as interest rates, credit risk and exchange rates. In all cases, when it is not possible to derive a valuation for a
particular feature of an instrument, management uses judgement to determine the fair value of the particular feature. In exercising this judgement, a variety of tools
are used including proxy observable data.
analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.
|
Group
|
|||||||||||
|
2023
|
2022
|
||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Valuation
|
|||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
technique
|
|||
|
Assets
|
|||||||||||
|
Derivative financial instruments
|
Exchange rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
||
|
Equity and credit contracts
|
|
|
|
|
|
|
|
|
|
||
|
Netting
|
|
(
|
|
(
|
|
(
|
|
(
|
|||
|
|
|
|
|
|
|
|
|
||||
|
Other financial assets at FVTPL
|
Loans and advances to customers
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||||
|
Financial assets at FVOCI
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total assets at fair value
|
|
|
|
|
|
|
|
|
|||
|
Liabilities
|
|||||||||||
|
Derivative financial instruments
|
Exchange rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
||
|
Equity and credit contracts
|
|
|
|
|
|
|
|
|
|
||
|
Netting
|
|
(
|
|
(
|
|
(
|
|
(
|
|||
|
|
|
|
|
|
|
|
|
||||
|
Other financial liabilities at FVTPL
|
Debt securities in issue
|
|
|
|
|
|
|
|
|
|
|
|
Structured deposits
|
|
|
|
|
|
|
|
|
|
||
|
Zero Amortising Guaranteed
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||||
|
Total liabilities at fair value
|
|
|
|
|
|
|
|
|
|||
|
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|
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|
Financial review
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
182
|
|||
In
2023
there were
£
22
m
(
2022
:
no
significant)
transfers of financial instruments between levels of the fair value hierarchy.
|
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Financial review
|
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|
Risk review
|
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
183
|
|||
The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments
are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the
valuation model.
Santander UK classifies fair value adjustments as either ‘risk-related’ or ‘model-related’. The fair value adjustments form part of the portfolio fair value and are
included in the balance sheet values of the product types to which they have been applied.
|
Group
|
||
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Risk-related:
|
||
|
- Bid-offer and trade specific adjustments
|
(
|
(
|
|
- Uncertainty
|
|
|
|
- Credit risk adjustment
|
|
|
|
- Funding fair value adjustment
|
|
|
|
|
|
|
|
Day One profit
|
|
|
|
|
|
|
Risk-related adjustments are driven, in part, by the magnitude of Santander UK’s market or credit risk exposure, and by external market factors, such as the size
of market spreads.
(i) Bid-offer and trade specific adjustments
Portfolios are marked at bid or offer, as appropriate. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the cost that
would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the
position. For debt securities, the bid-offer spread is based on a market price at an individual security level. For other products, the major risk types are identified.
For each risk type, the net portfolio risks are first classified into buckets, and then a bid-offer spread is applied to each risk bucket based upon the market bid-offer
spread for the relevant hedging instrument.
(ii) Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more subjective. In these circumstances, a
range of possible values exists that the financial instrument or market parameter may assume, and an adjustment may be needed to reflect the likelihood that in
estimating the fair value of the financial instrument, market participants would adopt more conservative values for uncertain parameters and/or model assumptions
than those used in the valuation model.
(iii) Credit risk adjustment
Credit risk adjustments comprise credit and debit valuation adjustments. The credit valuation adjustment (CVA) is an adjustment to the valuation of OTC derivative
contracts to reflect within fair value the possibility that the counterparty may default, and Santander UK may not receive the full market value of the transactions.
The debit valuation adjustment (DVA) is an adjustment to the valuation of the OTC derivative contracts to reflect within the fair value the possibility that Santander
UK may default, and that Santander UK may not pay full market value of the transactions.
Santander UK calculates a separate CVA and DVA for each Santander UK legal entity, and within each entity for each counterparty to which the entity has
exposure. Santander UK calculates the CVA by applying the probability of default of the counterparty to the expected positive exposure to the counterparty, and
multiplying the result by the loss expected in the event of default i.e. LGD. Conversely, Santander UK calculates the DVA by applying the PD of the Santander UK
group, to the expected positive exposure of the counterparty to Santander UK and multiplying the result by the LGD. Both calculations are performed over the life
of the potential exposure.
For most products Santander UK uses a simulation methodology to calculate the expected positive exposure to a counterparty. This incorporates a range of
potential exposures across the portfolio of transactions with the counterparty over the life of the portfolio. The simulation methodology includes credit mitigants
such as counterparty netting agreements and collateral agreements with the counterparty.
(iv) Funding fair value adjustment (FFVA)
The FFVA is an adjustment to the valuation of OTC derivative positions to include the net cost of funding uncollateralised derivative positions. This is calculated by
applying a suitable funding cost to the expected future funding exposure of any uncollateralised component of the OTC derivative portfolio.
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|
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|
Santander UK plc
184
|
|||
Model-related adjustments
Models used for portfolio valuation purposes may be based upon a simplifying set of assumptions that do not capture all material market characteristics.
Additionally, markets evolve, and models that were adequate in the past may require development to capture all material market characteristics in current market
conditions. In these circumstances, model limitation adjustments are adopted. As model development progresses, model limitations are addressed within the core
revaluation models and a model limitation adjustment is no longer needed.
Day One profit adjustments
Day One profit adjustments are adopted where the fair value estimated by a valuation model is based on one or more significant unobservable inputs. Day One
profit adjustments are calculated and reported on a portfolio basis.
The timing of recognition of deferred Day One profit and loss is determined individually. It is deferred until either the instrument’s fair value can be determined
using market observable inputs or is realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred Day
One profit and loss. Subsequent changes in fair value are recognised immediately in the Income Statement without immediate reversal of deferred Day One
profits and losses.
details on the valuation techniques used for each type of instrument. Each instrument is initially valued at transaction price:
|
Group
|
||||||||
|
Balance sheet value
|
Fair value movements
recognised in profit/(loss)
|
|||||||
|
2023
|
2022
|
2023
|
2022
|
2021
|
||||
|
Balance sheet line item
|
Category
|
Financial instrument product type
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
1. Derivative assets
|
Equity and credit contracts
|
Reversionary property interests
|
|
|
|
(
|
|
|
|
2. FVTPL assets
|
Loans and advances to customers
|
Roll-up mortgage portfolio
|
|
|
(
|
(
|
(
|
|
|
3. FVTPL assets
|
Loans and advances to customers
|
Other loans
|
|
|
|
(
|
(
|
|
|
4. FVTPL assets
|
Debt securities
|
Reversionary property securities
|
|
|
(
|
|
|
|
|
|
|
|
(
|
(
|
||||
|
Other Level 3 assets
|
|
|
(
|
|
(
|
|||
|
Other Level 3 liabilities
|
(
|
(
|
(
|
|
|
|||
|
Total net assets
|
|
|
|
|
|
|||
|
Total income/(expense)
|
|
(
|
(
|
|||||
Valuation techniques
(Group)
1. Derivative assets – Equity and credit contracts
These are valued using a probability weighted set of HPI forward prices, which are assumed to be a reasonable representation of the increase in value of the
Santander UK group’s reversionary interest portfolio underlying the derivatives. The probability used reflects the likelihood of the homeowner vacating the property
and is calculated from mortality rates and acceleration rates which are a function of age and gender, obtained from the relevant mortality tables. Indexing is felt to
be appropriate due to the size and geographical dispersion of the reversionary interest portfolio. These are determined using HPI Spot Rates adjusted to reflect
estimated forward growth. Non-seasonally adjusted (NSA) national and regional HPI are used in the valuation model to avoid any subjective judgement in the
adjustment process, which is made by Markit, which publishes the Halifax House Price Index.
The inputs used to determine the value of the reversionary property derivatives are HPI spot, HPI forward growth and mortality rates. The principal pricing
parameter is HPI forward growth.
2. FVTPL assets – Loans and advances to customers – roll-up mortgage portfolio
These represent roll-up mortgages (sometimes referred to as lifetime mortgages), which are an equity release scheme under which a property owner takes out a
loan secured against their home. The owner does not have to make any interest payments during their lifetime in which case the fixed interest payments are rolled
up into the mortgage. The loan or mortgage (capital and rolled-up interest) is repaid upon the owner’s vacation of the property and the value of the loan is only
repaid from the value of the property. This is known as a ‘no negative equity guarantee’. Santander UK suffers a loss if the sale proceeds from the property are
insufficient to repay the loan, as it is unable to pursue the homeowner’s estate or beneficiaries for the shortfall.
The value of the mortgage ‘rolls up’ or accretes until the owner vacates the property. In order to value the roll-up mortgages, Santander UK uses a probability-
weighted set of European option prices (puts) determined using the Black-Scholes model, in which the ‘no negative equity guarantee’ are valued as short put
options. The probability weighting applied is calculated from mortality rates and acceleration rates as a function of age and gender, taken from mortality tables.
The inputs used to determine the value of these instruments are HPI spot, HPI forward growth, HPI volatility, mortality rates and repayment rates. The principal
pricing parameter is HPI forward growth. The HPI forward growth rate used is unobservable and is the same as used in the valuation of Instrument 1 above. The
other parameters do not have a significant effect on the value of the instruments.
3. FVTPL assets – Loans and advances to customers – other loans
These relate to loans to transport and education companies. The fair value of these loans is estimated using the ‘present value’ model based on a credit curve
derived from current market spreads. Loan specific credit data is unobservable, so a proxy population is applied based on industry sector and credit rating.
4. FVTPL assets – Debt securities
These consist of reversionary property securities and are an equity release scheme, where the property owner receives an upfront lump sum in return for paying a
fixed percentage of the sales proceeds of the property when the owner vacates the property. These reversionary property securities are valued using a probability-
weighted set of HPI forward prices which are assumed to be a reasonable representation of the increase in value of Santander UK’s reversionary interest portfolio
underlying the derivatives. The probability weighting used reflects the probability of the homeowner vacating the property through death or moving into care and is
calculated from mortality rates and acceleration factors which are a function of age and gender, obtained from the relevant mortality table.
The inputs used to determine the value of these instruments are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward
growth. Discussion of the HPI spot rate, HPI forward growth rate and mortality rates for this financial instrument is the same as Instrument 1 above. An adjustment
is also made to reflect the specific property risk. Specific property risk is from the difference between the specific properties in the portfolio, and the average price
as expressed in the regionally weighted house price index.
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
185
|
|||
|
Group
|
||||||||
|
Assets
|
Liabilities
|
|||||||
|
Derivatives
|
Other
financial
assets at
FVTPL
|
Financial
assets at
FVOCI
|
Total
|
Derivatives
|
Other
financial
liabilities
at FVTPL
|
Total
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
At 1 January 2023
|
|
|
|
|
(
|
(
|
(
|
|
|
Total gains/(losses) recognised:
|
||||||||
|
Fair value movements
(2)
|
|
|
|
|
(
|
|
(
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
Netting
(1)
|
|
(
|
|
(
|
|
|
|
|
|
Settlements
|
(
|
(
|
|
(
|
|
|
|
|
|
At 31 December 2023
|
|
|
|
|
(
|
|
(
|
|
|
Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets
and liabilities held at the end of the year
(2)
|
|
|
|
|
(
|
|
(
|
|
|
At 1 January 2022
|
|
|
|
|
(
|
(
|
(
|
|
|
Total (losses)/gains recognised:
|
||||||||
|
Fair value movements
(2)
|
(
|
(
|
|
(
|
|
|
|
|
|
Transfers in
|
|
|
|
|
(
|
|
(
|
|
|
Netting
(1)
|
|
(
|
|
(
|
|
|
|
|
|
Sales
|
|
(
|
|
(
|
|
|
|
|
|
Settlements
|
(
|
(
|
(
|
(
|
|
|
|
|
|
At 31 December 2022
|
|
|
|
|
(
|
(
|
(
|
|
|
(Losses)/gains recognised in profit or loss/other comprehensive income relating to assets
and liabilities held at the end of the year
(2)
|
(
|
(
|
|
(
|
|
|
|
(1)
This relates to the effect of netting on the fair value of the credit linked notes due to a legal right of set-off between the principal amounts of the senior notes and the associated cash deposits. For more, see ‘ii)
Credit protection entities’ in Note
19
(2)
Fair value movements relating to derivatives and other financial assets at FVTPL are recognised in other operating income in the income statement.
|
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|
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|
Financial review
|
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|
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|
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statements
|
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information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
186
|
|||
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|
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|
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|
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
187
|
|||
Effect of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3)
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 hedged positions.
|
Group
|
|||||||
|
Significant unobservable input
|
Sensitivity
|
||||||
|
Assumption value
|
Favourable
changes
|
Unfavourable
changes
|
|||||
|
Fair value
|
Range
(1)
|
Weighted
average
|
Shift
|
||||
|
2023
|
£m
|
Assumption
description
|
£m
|
£m
|
|||
|
1. Derivative assets – Equity and credit contracts:
|
|
|
-
|
(
|
|
|
(
|
|
– Reversionary property derivatives
|
HPI Spot rate
(2)
|
n/a
|
|
|
|
(
|
|
|
2. FVTPL – Loans and advances to customers:
|
|
|
-
|
|
|
|
|
|
– Roll-up mortgage portfolio
|
|||||||
|
3. FVTPL – Loans and advances to customers:
|
|
|
|
|
|
|
|
|
– Other loans
|
|||||||
|
4. FVTPL – Debt securities:
|
|
|
-
|
-
|
|
|
|
|
– Reversionary property securities
|
HPI Spot rate
(2)
|
n/a
|
|
|
|
(
|
|
|
2022
|
|||||||
|
1. Derivative assets – Equity and credit contracts:
|
|
|
-
|
|
|
|
(
|
|
– Reversionary property derivatives
|
HPI Spot rate
(2)
|
n/a
|
|
|
|
(
|
|
|
2. FVTPL – Loans and advances to customers:
|
|
|
-
|
|
|
|
(
|
|
– Roll-up mortgage portfolio
|
|||||||
|
3. FVTPL – Loans and advances to customers:
|
|
|
|
|
|
|
|
|
– Other loans
|
|||||||
|
4. FVTPL – Debt securities:
|
|
|
-
|
|
|
|
(
|
|
– Reversionary property securities
|
HPI Spot rate
(2)
|
n/a
|
|
|
|
(
|
|
|
5. Derivative liabilities – Equity contracts:
|
(
|
|
-
|
(
|
|
|
(
|
|
– Property-related options and forwards
|
HPI Spot rate
(2)
|
n/a
|
|
|
|
(
|
|
(1)
The range of actual assumption values used to calculate the weighted average disclosure.
No sensitivities are presented for FVTPL assets – Debt securities (credit linked securities) or FVTPL liabilities - Financial guarantees
, as the terms of these
instruments are fully matched. As a result, any changes in the valuation of the credit linked notes would be offset by an equal and opposite change in the valuation
of the financial guarantees.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
188
|
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|
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|
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Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
189
|
|||
The table below analyses the maturities of the undiscounted cash flows relating to financial liabilities and off-balance sheet commitments of Santander UK based
on the remaining period to the contractual maturity date at the balance sheet date. Deposits by customers largely consist of retail deposits. This table is not
intended to show the liquidity of Santander UK.
|
Group
|
||||||
|
On demand
|
Not later than
3 months
|
Later than 3
months and
not later than
1 year
|
Later than 1
year and not
later than 5
years
|
Later than 5
years
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Financial liabilities
|
||||||
|
Derivative financial instruments
|
|
|
|
|
|
|
|
Other financial liabilities at fair value through profit or loss
|
|
|
|
|
|
|
|
Deposits by customers
|
|
|
|
|
|
|
|
Deposits by banks
|
|
|
|
|
|
|
|
Repurchase agreements – non trading
|
|
|
|
|
|
|
|
Debt securities in issue
|
|
|
|
|
|
|
|
Subordinated liabilities
|
|
|
|
|
|
|
|
Lease liabilities
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
|
|
|
|
|
|
Off-balance sheet commitments given
|
|
|
|
|
|
|
|
2022
|
||||||
|
Financial liabilities
|
||||||
|
Derivative financial instruments
|
|
|
|
|
|
|
|
Other financial liabilities at fair value through profit or loss
|
|
|
|
|
|
|
|
Deposits by customers
|
|
|
|
|
|
|
|
Deposits by banks
|
|
|
|
|
|
|
|
Repurchase agreements – non trading
|
|
|
|
|
|
|
|
Debt securities in issue
|
|
|
|
|
|
|
|
Subordinated liabilities
|
|
|
|
|
|
|
|
Lease liabilities
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
|
|
|
|
|
|
Off-balance sheet commitments given
|
|
|
|
|
|
|
debt securities may be accelerated in line with relevant covenants. Further, no account is taken of the possible early repayment of Santander UK’s mortgage-
backed non-recourse finance which is redeemed by Santander UK as funds become available from redemptions of the residential mortgages. Santander UK has
no control over the timing and amount of redemptions of residential mortgages.
|
Strategic Report
|
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|
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|
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|
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|
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
190
|
|||
The following table shows the impact of netting arrangements on:
–
All financial assets and liabilities that are reported net on the balance sheet
–
All derivative financial instruments and repurchase agreements and other similar secured lending and borrowing agreements that are subject to enforceable
master netting arrangements or similar agreements, but do not qualify for balance sheet netting.
The table identifies the amounts that have been offset in the balance sheet and also those amounts that are covered by enforceable netting arrangements
(offsetting arrangements and financial collateral) but do not qualify for netting under the requirements described above.
For derivative contracts, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements, such as the
ISDA Master Agreement or derivative exchange or clearing counterparty agreements, whereby all outstanding transactions with the same counterparty can be
offset and close-out netting applied across all outstanding transactions covered by the agreements if an event of default or other predetermined events occur.
Financial collateral refers to cash and non-cash collateral obtained, typically daily or weekly, to cover the net exposure between counterparties by enabling the
collateral to be realised in an event of default or if other predetermined events occur. For repurchase and reverse repurchase agreements and other similar
secured lending and borrowing, the ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements,
such as global master repurchase agreements and global master securities lending agreements, whereby all outstanding transactions with the same counterparty
can be offset and close-out netting applied across all outstanding transactions covered by the agreements if an event of default or other predetermined events
occur. Financial collateral typically comprises highly liquid securities which are legally transferred and can be liquidated if a counterparty defaults.
Santander UK engages in a variety of counterparty credit mitigation strategies in addition to netting and collateral arrangements. Therefore, the net amounts
presented in the tables below do not purport to represent Santander UK’s actual credit exposure.
|
Group
|
|||||||||
|
Amounts subject to enforceable netting arrangements
|
Assets not
subject to
enforceable
netting
arrangements
(2)
|
||||||||
|
Effects of offsetting on balance sheet
|
Related amounts not offset
|
||||||||
|
Gross
amounts
|
Amounts
offset
|
Net amounts
on balance
sheet
|
Financial
instruments
|
Financial
collateral
(1)
|
Net
amount
|
Balance
sheet
total
(3)
|
|||
|
2023
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Assets
|
|||||||||
|
Derivative financial assets
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Reverse repurchase, securities borrowing similar
agreements:
|
|||||||||
|
–
Amortised cost
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Loans and advances to customers and banks⁽⁴⁾
|
|
(
|
|
|
|
|
|
|
|
|
|
(
|
|
(
|
(
|
|
|
|
||
|
Liabilities
|
|||||||||
|
Derivative financial liabilities
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Repurchase, securities lending similar agreements:
|
|||||||||
|
–
Amortised cost
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Deposits by customers and banks⁽⁴⁾
|
|
(
|
|
|
|
|
|
|
|
|
|
(
|
|
(
|
(
|
|
|
|
||
|
2022
|
|||||||||
|
Assets
|
|||||||||
|
Derivative financial assets
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Reverse repurchase, securities borrowing similar
agreements:
|
|||||||||
|
–
Amortised cost
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Loans and advances to customers and banks⁽⁴⁾
|
|
(
|
|
|
|
|
|
|
|
|
|
(
|
|
(
|
(
|
|
|
|
||
|
Liabilities
|
|||||||||
|
Derivative financial liabilities
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Repurchase, securities lending similar agreements:
|
|||||||||
|
–
Amortised cost
|
|
(
|
|
(
|
(
|
|
|
|
|
|
Deposits by customers and banks⁽⁴⁾
|
|
(
|
|
|
|
|
|
|
|
|
|
(
|
|
(
|
(
|
|
|
|
||
(1)
Financial collateral is reflected at its fair value but has been limited to the net balance sheet exposure so as not to include any over-collateralisation.
(2)
This column includes contractual rights of set-off that are subject to uncertainty under the laws of the relevant jurisdiction.
(3)
The balance sheet total is the sum of ‘Net amounts reported on the balance sheet’ that are subject to enforceable netting arrangements and ‘Amounts not subject to enforceable netting arrangements’.
(4)
The amounts offset within loans and advances to customers/banks or deposits by customers/banks relate to offset mortgages which are classified as either and that are subject to netting.
|
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|
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|
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|
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|
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|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
191
|
|||
.
This page left intentionally blank
|
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|
Sustainability and
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|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
192
|
|||
Santander UK continues to work with customers and counterparties to transition any remaining agreements referencing 3-month synthetic LIBOR before that
setting ends on 31 March 2024. A
t
31 December 2023
,
these represent an insignificant element of Santander UK’s exposures and there are no remaining
exposures which reference other LIBOR settings
.
The following tables show the notional amounts of assets, liabilities and off-balance sheet commitments at
31 December 2023
and
31 December 2022
affected by
IBOR reform that have yet to transition to an alternative benchmark interest rate.
|
Group
|
|||
|
GBP
LIBOR
|
USD
LIBOR
|
Total
|
|
|
2023
|
£m
|
£m
|
£m
|
|
Assets
|
|||
|
Financial assets at amortised cost
|
|
|
|
|
|
|
|
|
2022
|
|||
|
Assets
|
|||
|
Derivatives
|
|
|
|
|
Financial assets at amortised cost
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|||
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Off-balance sheet commitments given
|
|
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
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|
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|
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statements
|
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information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
193
|
|||
Transfer of the CIB Business
Santander UK plc transferred a significant part of its CIB business to the London branch of Banco Santander SA under a Part VII banking business transfer
scheme, which completed on 11 October 2021. The residual parts of the CIB business were wound down or transferred to other segments. For the periods prior to
its sale, the CIB business met the requirements for presentation as discontinued operations.
For the
year ended
31 December
|
|
2023
|
2022
|
2021
|
|
£m
|
£m
|
£m
|
|
|
Net interest income
|
|
|
|
|
Net fee and commission income
|
|
|
|
|
Other operating income
|
|
|
|
|
Total operating income
|
|
|
|
|
Operating expenses before credit impairment (charges)/write-backs, provisions and charges
|
|
|
(
|
|
Credit impairment (charges)/write-backs
|
|
|
|
|
Provisions for other liabilities and charges
|
|
|
(
|
|
Total operating credit impairment (charges)/write-backs, provisions and charges
|
|
|
|
|
Profit from discontinued operations before tax
|
|
|
|
|
Tax on profit from discontinued operations
|
|
|
(
|
|
Profit from discontinued operations after tax
|
|
|
|
There were
no
gains or losses recognised on the measurement to fair value less costs to sell or on the disposal of the asset groups constituting the discontinued
operations.
In
2023
, the net cash flows attributable to the operating activities in respect of discontinued operations were
£
nil
outflow (
2022
:
£
nil
ou
tflow,
2021
:
£
3,612
m
outflow). There were no investing or financing activities in respect of discontinued operations.
Sale of property
Management considered the sale of part of Santander House (Milton Keynes) under a proposed transaction with the developer for the construction of Unity Place
and Buckingham House (Bletchley), to be highly probable at the balance sheet date. As such, the Santander UK group classified these properties, which are
included in the Corporate Centre segment and carried at their sales prices, as held for sale. The sale is expected to complete in 2024 with no gain or loss.
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Assets
|
||
|
Property, plant and equipment
|
|
|
|
Total assets held for sale
|
|
|
|
Strategic Report
|
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|
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|
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|
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|
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information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
194
|
|||
|
Shareholder information
|
Contents
|
|||
|
|
|
|||
|
Subsidiaries and related undertakings
|
||||
|
Forward-looking statements
|
||||
|
Risk factors
|
||||
|
Regulation of the Santander UK group
|
||||
|
Articles of Association
|
||||
|
Board of Directors
|
||||
|
New York Stock Exchange (NYSE) Corporate Governance
|
||||
|
Other information
|
||||
|
Additional balance sheet and cash flow analysis
|
||||
|
Taxation for US investors
|
||||
|
Glossary of financial services industry terms
|
||||
|
Iran Threat Reduction and Syria Human Rights Act (ITRA)
|
||||
|
Cross-reference to Form 20-F
|
||||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
195
|
|||
Subsidiaries and related undertakings
In accordance with Section 409 of the Companies Act 2006, details of the Company’s subsidiaries and related undertakings at
31 December 2023
are set out
below.
Subsidiaries
All subsidiaries are owned 100% and consolidated by Santander UK.
Incorporated and registered in England and Wales:
|
Registered
office
(1)
|
Direct/Indirect
ownership
|
Share class
through which
ownership is held
|
Proportion of
ownership
interest
|
|
|
Name of subsidiary
|
%
|
|||
|
2 3 Triton Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
A L CF June (3) Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
A L CF September (4) Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
Abbey National Nominees Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Abbey National Property Investments
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Alliance Leicester Personal Finance Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Cater Allen Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
First National Tricity Finance Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
Santander Asset Finance (December) Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
Santander Asset Finance plc
|
A
|
Direct
|
Ordinary £0.10
|
100
|
|
Santander Cards Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
Santander Cards UK Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Santander Consumer (UK) plc
|
B
|
Direct
|
Ordinary £1
|
100
|
|
Santander Consumer Credit Services Limited
|
A
|
Indirect
|
Ordinary £1
|
—
|
|
Santander Estates Limited
|
F
|
Direct
|
Ordinary £1
|
100
|
|
Santander Global Consumer Finance Limited
|
A
|
Indirect
|
Ordinary £0.0001
|
—
|
|
Santander Guarantee Company
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Santander Lending Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Santander Private Banking UK Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Santander UK Operations Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Santander UK (Structured Solutions) Limited
|
A
|
Direct
|
Ordinary £0.01
|
100
|
|
Preference £0.01
|
100
|
|||
|
Santander UK Technology Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
The Alliance Leicester Corporation Limited
|
A
|
Direct
|
Ordinary £1
|
100
|
|
Time Retail Finance Limited (In liquidation)
|
E
|
Indirect
|
Ordinary £1
|
—
|
|
Ordinary £0.0001
|
(1) Refer to the key at the end of this section for the registered office address.
Incorporated and registered outside England and Wales:
|
Registered
office
(1)
|
Share class
through which
ownership is held
|
Proportion of
ownership
interest
|
||
|
Name of subsidiary
|
||||
|
Santander Cards Ireland Limited
|
H
|
Indirect
|
Ordinary €1
|
|
|
Ordinary €1.27
|
||||
|
Santander ISA Managers Limited
|
G
|
Direct
|
Ordinary £1
|
100
|
(1) Refer to the key at the end of this section for the registered office address, including the country.
Subsidiaries benefitting from an audit exemption according to section 479A of the Companies Act 2006
|
Name of subsidiary
|
Company number
|
|
2 3 Triton Limited
|
06024916
|
|
Santander Asset Finance (December) Limited
|
01562865
|
|
Santander Estates Limited
|
02304569
|
|
Santander Global Consumer Finance Limited
|
00048468
|
|
Santander UK Operations Limited
|
04137550
|
|
Santander UK Technology Limited
|
05212726
|
|
The Alliance Leicester Corporation Limited
|
02304511
|
|
Strategic Report
|
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|
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|
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|
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|
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|
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|
|||||||
|
Annual Report 2023
|
Santander UK plc
196
|
|||
Other subsidiary undertakings
All entities are registered in England and Wales except for Motor Securities 2018-1 Designated Activity Company which is registered in Ireland.
The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the entities, however they are consolidated by the Santander
UK group because the substance of the relationship indicates control, as described in Note
1
to the Consolidated Financial Statements.
|
Registered
|
Registered
|
||
|
Name of entity
|
office
(1)
|
Name of entity
|
office
(1)
|
|
Abbey Covered Bonds (Holdings) Limited
|
D
|
Holmes Master Issuer plc
|
A
|
|
Abbey Covered Bonds (LM) Limited
|
D
|
Holmes Trustees Limited
|
A
|
|
Abbey Covered Bonds LLP
|
A
|
MAC No.1 Limited
|
A
|
|
Fosse (Master Issuer) Holdings Limited
|
C
|
Motor 2016-1 Holdings Limited
|
C
|
|
Fosse Funding (No.1) Limited
|
C
|
Motor 2016-1 plc
|
C
|
|
Fosse Master Issuer plc
|
C
|
Motor 2017-1 Holdings Limited
|
C
|
|
Fosse Trustee (UK) Limited
|
A
|
Motor Securities 2018-1 Designated Activity Company (in liquidation)
|
J
|
|
Holmes Funding Limited
|
A
|
Repton 2023-1 Limited
|
C
|
|
Holmes Holdings Limited
|
A
|
(1) Refer to the key at the end of this section for the registered office address.
Related undertakings
All of these entities, which are registered in England and Wales, are accounted for by the equity method of accounting, with 50% ownership being held.
|
Registered
office
(1)
|
Direct/
Indirect
ownership
|
Share
class
through
which
ownership
is held
|
Proportion
of
ownership
interest
|
|
|
Name of entity
|
%
|
|||
|
Hyundai Capital UK Limited
|
I
|
Indirect
|
Ordinary
|
—
|
|
Volvo Car Financial Services UK Limited
|
K
|
Indirect
|
Ordinary
|
—
|
(1) Refer to the key at the end of this section for the registered office address.
Overseas branches
The Company has no overseas branches.
Key of registered office addresses
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A
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2 Triton Square, Regent’s Place, London NW1 3AN
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B
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Santander House, 86 Station Road, Redhill RH1 1SR
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C
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1 Bartholomew Lane, London EC2V 2AX
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D
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Wilmington Trust SP Services (London) Limited, 1 Kings Arms Yard, London EC2R 7AF
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E
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Griffins Tavistock House North, Tavistock Square, London, WC1H 9HR
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F
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Carlton Park, Narborough, Leicester LE19 0AL
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G
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287 St. Vincent Street, Glasgow, Scotland G2 5NB
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H
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3 Dublin Landings, North Wall Quay, Dublin 1, Ireland
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I
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London Court, 39 London Road, Reigate RH2 9AQ
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J
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Trinity House, Charleston Road, Ranelagh, Dublin 6, Dublin, Ireland
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K
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Scandinavia House, Norreys Drive, Maidenhead, Berkshire SL6 4FL
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Forward-looking statements
The Company and its subsidiaries (together Santander UK) may from time to time make written or oral forward-looking statements. The Company makes written
forward-looking statements in this Annual Report and may also make forward-looking statements in its periodic reports to the SEC on Forms 20-F and 6-K, in its
offering circulars and prospectuses, in press releases and in other written materials and in oral statements made by its officers, directors or employees to third
parties. Examples of such forward-looking statements include, but are not limited to:
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projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios
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statements of plans, objectives or goals of Santander UK or its management, including those related to products or services
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statements of future economic performance, and
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statements of assumptions underlying such statements
Words such as ‘believes’, ‘anticipates’, ‘expects’, ‘intends’, ‘aims’, ‘plans’, ‘targets’ and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements.
By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve
inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not
be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on its behalf. Some of these factors, which could
affect Santander UK’s business, financial condition and/or results of operations, are considered in detail in the Risk review, and include:
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the effects of regional conflicts and wars
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the effects of UK economic conditions and disruptions in the global economy and global financial markets
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the effects of the UK’s withdrawal from the European Union
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the effects of climate change
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the effects of competition from other financial institutions, including new entrants into the financial services sector
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Santander UK’s ability to maintain its competitive position depending, in part, on the success of new products and services it offers its customers and its ability to
continue offering products and services from third parties
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t
he extent to which Santander UK’s loan portfolio is subject to risk of prepayment
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the risk of damage to Santander UK's reputation
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the risk that Santander UK is unable to manage the growth of its operations
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the extent to which regulatory capital, liquidity and leverage requirements, and any changes to these requirements may affect Santander UK
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liquidity constraints and Santander UK’s ability to access funding on acceptable financial terms
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the effects of an adverse movement in external credit ratings assigned to Santander UK or any of its debt securities
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the effects of any changes in the pension liabilities and obligations of Santander UK
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the effects of fluctuations in interest rates and other market risks
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the extent to which Santander UK may be required to record negative changes in positions recorded at fair value for its financial assets due to changes in
market conditions
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Santander UK’s ability to control the level of non-performing or poor credit quality loans and whether Santander UK’s loan loss reserves are sufficient to cover
loan losses
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the risk that the value of the collateral, including real estate, securing Santander UK’s loans may not be sufficient and that Santander UK may be unable to
realise the full value of the collateral securing its loan portfolio
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the effects of the financial services laws, regulations, government oversight, administrative actions and policies and any changes thereto in each location or
market in which Santander UK operates
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the risk that Santander UK may become subject to the provisions of the Banking Act 2009, including the bail-in and write-down powers thereunder
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the effects of any failure to comply with laws and regulations relating to anti-money laundering, anti-terrorism, anti-bribery and corruption, sanctions and
preventing the facilitation of tax evasion, or the risk of any failure to prevent, detect or deter any illegal or improper activities
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the effects of taxation (and any changes to tax), in each location in which Santander UK operates
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Santander UK’s exposure to any risk of loss and damage from civil litigation and/or criminal legal and regulatory proceedings
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the risk of failing to successfully apply or to improve Santander UK’s credit risk management systems
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the risk that Santander UK’s data management policies and procedures are not sufficiently robust
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the effect of cybersecurity on Santander UK’s business
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the risks arising from any non-compliance with Santander UK’s regulations, policies, from any employee misconduct, human error, negligence and deliberate
acts of harm or dishonesty, including fraud
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the risk of failing to effectively manage changes in Santander UK’s information technology infrastructure and management information systems in a timely
manner
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Santander UK’s exposure to unidentified or unanticipated risks despite its risk management policies, procedures and methods and Santander UK’s exposure to
risks related to errors in its risk modelling
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the risks arising from Santander UK’s reliance on third parties for important infrastructure support, products and services
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the ability of Santander UK to recruit, retain and develop appropriate senior management and skilled personnel
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the effects of any inaccuracy within the judgements and accounting estimates which underpin aspects of the financial statements, and the consequent risk of
any material misstatement of Santander UK’s financial results
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the effect of any change in accounting standards
Please refer to our latest filings with the SEC (including, without limitation, the Risk Factors section in this Annual Report on Form 20-F for the year ended 31
December 2023) for a discussion of certain risk factors and forward-looking statements. Undue reliance should not be placed on forward-looking statements when
making decisions with respect to any Santander UK member and/or its securities. Investors and others should take into account the inherent risks and
uncertainties of forward-looking statements and should carefully consider the foregoing non-exhaustive list of important factors. Forward-looking statements speak
only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such
knowledge, information and views may change at any time. Santander UK does not undertake any obligation to update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
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Risk factors
An investment in Santander UK
plc (the Company) and its subsidiaries (us, we or Santander UK) involves a number of risks, the material ones of which are set
out below.
Geopolitical and macroeconomic risks
Regional conflicts and wars have had and could continue to have a material adverse effect on our operations and financial position
In February 2022, Russia launched a large-scale military action against Ukraine and in October 2023, conflict escalated in the Middle East between Israel and
Hamas, which threatens to spread to other Middle Eastern countries. The war in Ukraine and the escalation of the armed conflict between Israel and Hamas have
caused ongoing humanitarian crises in Europe and the Middle East. The war in Ukraine has also significantly impacted global commodity and financial markets,
leading to supply chain disruptions and increases in the prices of energy, oil, gas and raw materials. This has led to heightened inflation, which has created further
challenges for monetary authorities and our customers. The armed conflict between Israel and Hamas, especially if it spreads to other Middle Eastern countries,
and/ or other future regional conflicts and wars that have a global impact, may also further adversely impact global commodity and financial markets.
We do not have a presence in Russia, Ukraine or the Middle East and our direct exposure to markets and assets in Russia, Ukraine and the Middle East is
negligible. However, the effect of these regional wars on global commodity and financial markets and general macroeconomic conditions remains uncertain, and
there is a risk that the economic effects of these regional wars will continue to affect the global economic outlook, which would adversely affect our businesses,
results of operations and financial position.
The continuation or escalation of the conflicts between Russia and Ukraine or between Israel and Hamas, including the extension of the conflicts to other
countries in the regions, and/or the emergence of other future regional conflicts and wars that have a global impact, could lead to further increases in energy
prices (particularly gas prices, if supplies to Europe remain interrupted) and heightened inflationary pressures. This could lead to further increases in interest rates,
impact financial market stability in the Eurozone and worsen the current cost of living crisis our customers are facing. Such developments would negatively affect
the payment capacity of some of our customers, whose likely need for increased support will place additional pressures on the staff in our financial support and
call centres.
In response to the Russian military action against Ukraine, the United States (US), the European Union (EU), the United Kingdom (UK) and other UN member
states and jurisdictions, have imposed, and may impose additional, severe financial and economic sanctions and export controls against Russia, Belarus and
certain regions in Ukraine. Such sanctions have included freezing/blocking assets, targeting major Russian banks, the Russian Central Bank, and certain Russian
companies and individuals, imposing import and export controls against Russia and Russian interests, as well as disconnecting certain Russian banks from the
SWIFT system (Society for Worldwide Interbank Financial Telecommunication). In addition, the sanctions imposed also include a ban on trading in Russian
sovereign debt and other securities. Russia has implemented certain countermeasures in response. The scale of sanctions is unprecedented, complex and
rapidly evolving, and poses continuously increasing operational and compliance risks to Santander UK. Our corporate framework and policies are designed to
ensure compliance with applicable laws, regulations and economic sanctions, including US, UK, EU and UN economic sanctions, in the countries in which we
operate. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions
and military actions, have resulted in an increasingly fragmented macroeconomic, trade and regulatory environment. Currently, we do not have any loans, credits
or contingencies affected by the recent sanctions imposed on Russia. However, we cannot predict whether any of the countries in which we operate will enact
additional economic sanctions or trade restrictions in response to the Russian military action against Ukraine or the impact such additional sanctions or restrictions
may have on us which may include increased costs and regulatory burdens associated with compliance with the evolving and complex sanctions landscape.
There is also an increasing risk that the US, the UK, the EU, the UN and other jurisdictions will begin imposing restrictions on countries, such as China or Turkey,
who are viewed as supportive of Russian military action or who are aiding circumvention of existing sanctions on Russia. Compliance with any such restrictions
imposed on China, Turkey or other jurisdictions, would pose a regulatory and cost burden and would greatly increase our exposure to sanctions risks. The
heightened regulatory, political and media focus on our response to this crisis, the Israel-Hamas armed conflict or other future regional conflicts and wars that have
a global impact may also increase our exposure to conduct and reputational risks.
Furthermore, the disruption and volatility in the global financial markets caused by the war in Ukraine and further intensified by the Israel-Hamas armed conflict
and the potential of further tightening of financial market conditions due to the regional wars or other future regional conflicts and wars have had and could
continue to have a material adverse effect on Santander UK’s ability to access funding, capital and liquidity on financial terms acceptable to it and result in an
increase in Santander UK’s cost of funding due to widening of credit spreads. This could have a material adverse effect on Santander UK’s operations, financial
condition and prospects.
In addition, the risk of cyberattacks on companies and institutions could increase as a result of geopolitical turmoil. For example, Santander UK has faced a
heightened risk of cyberattacks as a result of Russia’s military action against Ukraine, and the Israel-Hamas armed conflict and/or other future regional conflicts
and wars that have a global impact serve to further heighten such risk. Such attacks could adversely affect our ability to maintain or enhance our cybersecurity
and data protection measures. While we continue to see increasing ransomware attacks across sectors driven by supply chain tool compromises, and expect this
trend to continue, we have not experienced any notable information or cybersecurity incidents as a result of these regional wars. We continue to actively monitor
the situations in Ukraine, the Middle East and globally and assess their potential impacts on our business.
Santander UK’s operations, financial condition and prospects are materially impacted by economic conditions in the UK and disruptions in the
global economy and global financial markets
Santander UK’s business activities are concentrated in the UK, where it offers a range of banking and financial products and services to UK retail and corporate
customers. As a consequence, Santander UK’s operations, financial condition and prospects are significantly affected by general economic conditions in the UK.
Although the UK economy has recovered to pre-pandemic growth levels, the UK's economic growth in 2023 stagnated. As such, there remains a risk that the UK
economy will fall into a period of economic contraction as the effects of higher interest rates, Brexit, and higher and more persistent inflation continue to affect
supply chains and business and household confidence and finances. Interest rates have risen sharply since 2022 and although it is predicted that the peak has
been reached there remains a risk that further increases will be needed particularly if rising energy inflation returns. This would put further pressure on household
finances for some of our customers due to a sharp rise of the costs for refinancing their mortgage and significantly higher costs of borrowing overall. Higher
mortgage rates could dampen demand in the housing market, leading to further drops in new business or steeper falls in house prices, reducing the value of the
collateral we hold against mortgages. These risks could create further downward pressure on the economy; for example: a large surge in business failures with
knock-on effects for the labour market resulting in high rates of unemployment that affect the ability of customers to pay their debts, which could also contribute to
negative multiplier effects through delayed investment and spending; and a stronger push towards protectionism as governments look to protect home industries.
This could also lead to a longer-term turn in the credit cycle with a broader contraction of credit as lenders attempt to protect themselves from increased losses.
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In particular, Santander UK faces, among others, the following risks in this period of economic uncertainty (including the effect of those risks on gross domestic
product, inflation, unemployment and house prices):
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Reduced demand for Santander UK’s products and services - particularly the potential for reduced mortgage market volumes.
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Inability of Santander UK’s borrowers to make payments on their loans in full or on time.
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The degree of uncertainty concerning economic conditions may adversely affect the accuracy of Santander UK’s estimates, which may, in turn, impact the
reliability of the IFRS 9 model and process to determine the sufficiency of Santander UK’s loan loss allowances.
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Lower house or other asset prices, reducing the value of collateral Santander UK holds on mortgage and other lending.
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Higher and more persistent inflation, reducing Santander UK’s profitability and increasing the cost of living for Santander UK's borrowers.
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The value and liquidity of the portfolio of investment securities that Santander UK holds may be adversely affected.
Santander UK is also exposed to:
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Broader geopolitical issues, which remain heightened with the potential for a further pushback against globalism. Further moves towards unilateralism may also
cause increased tension and/or hostilities between nations, which could negatively impact the global economy and financial markets. In addition, Russia's
invasion of Ukraine has impacted the UK economy, in particular by pushing up energy and oil prices and increasing inflation further and the armed conflict
between Israel and Hamas, including the risk of the conflict spreading more broadly in the region, could escalate geopolitical tensions, which may continue to
adversely affect the global economy and financial markets;
– Further waves or new strains of Covid-19 or unforeseen new diseases or infections, which could cause social disruption and a material economic downturn in
the UK and globally;
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Climate change risks which could result in material damage to our customers’ property or businesses or have a material impact on our customers' business
models under a transition to a low carbon economy; and
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Social unrest as a result of severe economic disruption.
Adverse changes in the credit quality of Santander UK’s borrowers or counterparties or a general deterioration in UK economic conditions could reduce the
recoverability and value of Santander UK’s assets and require an increase in its level of provisions for expected credit losses. There can be no assurance that
Santander UK will not have to increase its provisions for loan losses in the future as a result of increases in non-performing loans or for other reasons beyond its
control. Material increases in Santander UK’s provision for loan losses and write-off or charge-offs have had and could again have a material adverse effect on its
operations, financial condition and prospects. Any significant reduction in the demand for Santander UK products and services, a sustained downturn in the UK
economy or changes in central bank interest rates could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Inflation peaked in October 2022 and since then the growth rate has continually fallen and should be near the target level in 2024. Monetary policy in the UK
remains tight and whilst peak interest rates may have been reached, interest rates are likely to remain high throughout 2024. Economic instability and downturns
beyond the UK may also impact the UK economy as a whole. Europe’s manufacturing base is heavily dependent upon natural gas, and restriction in supply and
significantly increased costs are expected to have a material adverse impact on the Eurozone economy, which could lead to disruption and volatility in the global
financial markets, as a result of debt sustainability concerns. This could have a material adverse impact on Santander UK, including Santander UK’s ability to
access capital and liquidity on financial terms acceptable to Santander UK, which could have a material adverse effect on Santander UK’s operations, financial
condition and prospects.
A recessionary economic environment could also lead to rating downgrades affecting the UK, Santander UK or its customers, investments and/or instruments,
causing capital impacts due to increased RWAs, an increase in the volatility of wholesale markets and the cost of funding.
The UK’s withdrawal from the European Union (Brexit) has had and could continue to have a material adverse effect on Santander UK’s
operations, financial condition and prospects
On 31 January 2020 the UK ceased to be a member of the EU and a limited trade deal was agreed between the UK and the EU with the relevant new regulations
coming into force on 1 January 2021.
The trade deal, however, does not include agreements on certain areas such as financial services and data adequacy. The European Commission (the
Commission) will decide in 2024 whether to extend the data adequacy decision(s) for the UK for a further period up to a maximum of another four years. If the
Commission does not extend the decisions, then the decisions will expire on 27 June 2025. As a result, Santander UK has, and will continue to have, a limited
ability to provide cross-border services to EU customers and to trade with EU counterparties.
Following a consultation on the optimal structure for UK financial services post-Brexit, the Financial Services and Markets Act 2023 (FSMA 2023) received royal
assent on 29 June 2023. FSMA 2023 establishes a framework for HM Treasury (HMT) to revoke EU-derived financial services legislation and for it to be replaced
by Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) rules, with the intention of delivering a "comprehensive FSMA model of
regulation" under which the regulators have extensive rule-making powers. This process of revoking and replacing retained EU law may result in material changes
to the UK regulatory regime and the impact of these reforms on Santander UK is difficult to predict.
The wider and continuing impact of Brexit on financial markets through market fragmentation, reduced access to finance and funding, and a lack of access to
certain financial market infrastructure, may affect Santander UK's operations, financial condition and prospects and those of its customers.
Residual risks remain around the impact on the UK’s economy. Brexit has contributed to global Covid-19 pandemic-related supply and labour market constraints
and reduced economic output and exports as businesses attempt to adapt the new cross-border procedures and rules applicable in the UK and in the EU to their
activities, products, customers and suppliers.
While the long-term effects of the UK’s withdrawal from the EU are difficult to assess, this has also been hampered by overlay of and development of economic
risks from the Covid-19 pandemic, the Russian invasion of Ukraine and the armed conflict between Israel and Hamas. Further, there is ongoing political and
economic uncertainty, such as increased friction with the EU and EU countries, which could negatively affect Santander UK’s customers and counterparties and
have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK faces risks from the impact of climate change, which could materially affect Santander UK’s business operations, reputation, clients
and customers, as well as the creditworthiness of its counterparties
Climate risk is a risk that manifests through other principal risks, primarily enterprise risk, credit risk and operational risk. Climate change could expose Santander
UK to financial risk either through its physical (e.g., climate or weather-related events) or transitional (e.g., changes in climate policy or in the regulation of financial
institutions and corporates with respect to climate change risks) effects. Transition risks could be further accelerated by the occurrence of changes in the physical
climate.
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Physical risks from climate change arise from climate and weather-related events, such as heatwaves, droughts, floods, landslides, storms, sea level rise, coastal
erosion and subsidence. These risks could impact our customers in the form of lower revenues due to transport problems, supply chain disruption and other
impacts that strain production and lower revenues and higher costs for our customers owing to workers’ health, safety, absenteeism and other workforce-related
problems. These risks could also lead to damage to our customers’ property or operations, which could impair asset values and the creditworthiness of customers
leading to increased default rates, delinquencies, write-offs and impairment charges in Santander UK’s portfolios. In addition, Santander UK’s premises and
resilience may also suffer physical damage due to weather-related events leading to increased costs for Santander UK.
Transition risks arise from the process of adjustment towards a low-carbon economy. Santander UK may face significant and rapid developments in stakeholder
expectations, policy, law and regulation which could impact the lending activities Santander UK undertakes, as well as the risks associated with its lending
portfolios, and the value of Santander UK’s financial assets. Reputation risk could arise from a failure to meet changing societal, investor or regulatory demands.
In particular, the last year has seen an increase in upcoming climate-related disclosure requirements that Santander UK and Banco Santander SA (as the ultimate
parent of Santander UK) will need to comply with (for example, the IFRS Sustainability Disclosure Standards as developed by the International Sustainability
Standards Board (ISSB), the European Banking Authority's (EBA) Environmental, Social, and Governance (ESG) Pillar 3 disclosures rules and the EU Corporate
Sustainability Reporting Directive (CSRD)).
Banco Santander SA is a founding member of the UN-convened Net Zero Banking Alliance committing Santander UK Group Holdings plc to set and disclose
decarbonisation targets for most greenhouse gas intensive sectors and to becoming a net zero bank by 2050. As such, Santander UK Group Holdings plc is
implementing and reporting at a group level (including Santander UK plc) against the TCFD recommendations and has disclosed targets to manage climate-
related risks and opportunities. We continue to enhance our disclosures to ensure they become fully aligned with the TCFD recommendations. In order to fulfil
these ambitions and reach the relevant targets or any other climate-related ambitions or targets Santander UK may commit to in the future, Santander UK
continues to embed climate considerations into its strategy, business model, the products and services it provides to customers and its financial and non-financial
risk management processes (including processes to measure and manage the various financial and non-financial risks Santander UK faces as a result of climate
change). Failure to adequately embed risks associated with climate change into its risk framework to appropriately measure, manage and disclose the various
financial and operational risks it faces as a result of climate change, or failure to adapt Santander UK’s strategy and business model to the changing regulatory
requirements and market expectations on a timely basis, may have a material and adverse impact on Santander UK’s level of business growth, competitiveness,
profitability, capital requirements, cost of funding, and financial condition. Achieving Santander UK’s climate-related ambitions and targets will also depend on a
number of factors outside its control, including (among other things) availability of data to measure and assess the climate impact on Santander UK’s customers,
advancements of low-carbon transition technologies and public policies to support the energy transition in the markets where Santander UK operates. We
continue to assess this as part of our transition planning process. If these external factors and other changes do not occur, or do not occur on a timely basis,
Santander UK may fail to achieve its climate-related ambitions and targets and this could have a material adverse effect on Santander UK’s business growth,
competitiveness, profitability, financial condition and reputation.
For further details on Santander UK’s approach to climate change see “Sustainability Responsible Banking – Taskforce on Climate-related Financial Disclosures
(TCFD)" in the Santander UK Group Holdings plc Annual Report on Form 20-F.
Business model risks
Santander UK is exposed to competition from other financial institutions, including new entrants into the financial services sector
The markets for UK financial services are very competitive and Santander UK has seen strong competition from banks, building societies and other established
financial service providers. In addition, Santander UK faces competition from a number of new entrants, non-banks and other providers, including technology
companies and large retail companies with strong brand recognition, particularly in payments.
The UK government and regulators are actively supporting the emergence of new entrants into the UK financial services market. The internet and mobile
technologies are also changing customer behaviour and the competitive environment. There has been a steep rise in customer use of mobile banking in recent
years and the Covid-19 pandemic accelerated the strong trends towards customer digital adoption, commercial and customer uptake of Open Banking which is a
data sharing initiative making certain customer account balance and transaction data available to third parties through use of application programming interfaces,
and regulatory and industry initiatives to develop commercial variable recurring payments, Open Finance which extends the Open Banking ecosystem to enable
data sharing related to additional financial services products and services and Smart Data which will establish data sharing initiatives in various sectors outside of
financial services, are likely to significantly change the technological and competitive landscape.
Santander UK is investing in a multi-year transformation programme, including digitalisation of channels and services and automation of physical channels, to both
meet customer preferences and protect its competitive position. There can be no assurance that the transformation programme will deliver the benefits sought
from it.
Management expects such competition to continue or intensify as a result of customer behaviour and trends, technological changes, competitor behaviour, the
growth in digital banking, new lending models and changes in regulation including the expansion of Open Banking. As a result of any restructuring or evolution in
the market, there may emerge one or more new viable competitors in the UK banking market or a material strengthening of one or more of Santander UK’s
existing competitors in that market, limiting Santander UK’s ability to increase its customer base and expand its operations, increasing competition for investment
opportunities and potentially reducing Santander UK’s market share.
Any of these competition-related factors or a combination thereof could result in a significant reduction in the profit of Santander UK. Santander UK gives
consideration to the competitive position in its management actions, such as pricing, product decisions and our business model. Increasing competition could
mean that Santander UK increases rates offered on deposits or lowers the rates it charges on loans, or changes its cost base, any of which could have a material
adverse effect on its operations, financial condition and prospects.
The rising rate environment and cost of living crisis may result in competitors reacting quite differently in relation to, amongst other factors, loan pricing, availability,
deposit pricing and investment decisions. This has already had, and will continue to have, an impact on the competitive environment and future decisions of
Santander UK.
Santander UK’s ability to maintain its competitive position depends, in part, on the success of new products and services it offers its customers
and its ability to continue offering products and services from third parties
The success of Santander UK’s operations and its profitability depends, in part, on the success of new products and services it offers to customers and the way in
which it offers and provides its products and services. The increasing availability of a wide range of digital or online products and services for customers requires
banks like Santander UK to enhance their offerings in order to retain and attract customers. However, Santander UK cannot guarantee that its products and
services or the way in which it offers or provides its products and services will continue to meet the needs or preferences of Santander UK’s customers which may
change over time, and Santander UK may not take appropriate action to change or withdraw products when they become obsolete, outdated or unattractive.
Santander UK may not be able to develop new products that meet its customers’ changing needs in a timely manner. As Santander UK expands the range of its
products and services, some of which may be at an early stage of development in the UK market, it will be exposed to known, new and potentially increasingly
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complex risks, including conduct risk, and development expenses. Santander UK’s employees and risk management systems, as well as its experience and that
of its partners, may not be sufficient or adequate to enable it to properly handle or manage such risks. In addition, the cost of developing products that are not
launched is likely to affect its operating results.
Any or all of the above factors, individually or collectively, could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s loan portfolio is subject to risk of prepayment
Santander UK’s loan portfolio is subject to prepayment risk resulting from the ability of a borrower or issuer to prepay a debt obligation prior to maturity. As a result,
Santander UK could be required to amortise net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net
interest income and there is a risk that Santander UK is not able to accurately forecast amortisation schedules for these purposes which may affect its profitability.
Prepayment risk also has a significant adverse impact on credit card and mortgage loans, since prepayments could shorten the weighted average life of these
assets, which may result in a mismatch with Santander UK’s funding obligations and reinvestment at lower yields. The risk of prepayment and its impact on
Santander UK's ability to accurately forecast amortisation schedules is inherent in Santander UK’s commercial activity and an increase in prepayments or a failure
to accurately forecast amortisation schedules could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Damage to Santander UK’s reputation could cause harm to its business prospects
Maintaining a positive reputation is critical to attracting and retaining customers, investors and employees and conducting business transactions with
counterparties. Damage to Santander UK’s reputation could materially and adversely affect Santander UK’s perception among current and potential clients,
investors, vendors, partners, regulators and other third parties, which in turn could have a material adverse effect on Santander UK’s operating results, financial
condition, and prospects as well as damage Santander UK’s customers' and investors' confidence and the market price of Santander UK’s securities. Damage to
the reputation of Santander UK or Banco Santander SA (as the ultimate parent of Santander UK), the reputation of affiliates operating under the ‘Santander’ brand
or any of its other brands could therefore cause significant harm to Santander UK’s business and prospects. Harm to Santander UK’s reputation can arise directly
or indirectly from numerous sources, including, among others, employee misconduct (including the possibility of employee fraud), litigation, regulatory
interventions and enforcement action, failure to deliver minimum standards of service and quality, loss or compromise of customer data, disruption to service due
to a cyberattack, wider IT failures, compliance failures, third-party fraud, financial crime, breach of legal or regulatory requirements, unethical behaviour (including
adopting inappropriate sales and trading practices), and the activities of customers, suppliers and counterparties and the perception of the financial services
industry as a whole. Further, negative publicity regarding Santander UK, whether true or not, may result in harm to Santander UK’s operations, financial condition
and prospects. Santander UK’s reputation could also suffer if we are the subject of negative coverage in the media, whether it has merit or not.
If Santander UK is unable to manage the growth of its operations, this could have a material adverse impact on its profitability
Santander UK allocates management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals
and areas for restructuring its businesses when necessary. From time to time, Santander UK evaluates acquisition, disposal, and partnership opportunities that it
believes could offer additional value to its shareholders and customers and are consistent with its business strategy. However, Santander UK may not be able to
identify suitable acquisition or partnership candidates and may not be able to acquire promising targets or form partnerships on favourable terms, or at all.
Furthermore, preparations for acquisitions that Santander UK does not complete can be disruptive. Santander UK bases its assessment of potential acquisitions
and partnerships on limited and potentially inexact information and on assumptions with respect to value, operations, profitability and other matters that may prove
to be incorrect. Santander UK’s ability to benefit from any such acquisitions and partnerships will depend in part on its successful integration of those businesses.
Such integration entails significant risks such as challenges in retaining the customers and employees of the acquired businesses, unforeseen difficulties in
integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims and regulatory
investigations. Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are
beyond Santander UK’s control. Santander UK can give no assurances that its expectations with regard to integration and synergies will materialise.
Santander UK cannot provide assurance that it will, in all cases, be able to manage its growth effectively or to implement its strategic growth decisions, including
its ability to:
–
Manage efficiently the operations and employees of expanding businesses
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Maintain or grow its existing customer base
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Successfully execute its strategy
–
Fully due diligence and assess the value, strengths and weaknesses of investment or acquisition candidates
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Finance strategic opportunities, investments or acquisitions
–
Fully integrate strategic investments, or newly-established entities or acquisitions, in line with its strategy
–
Align its current information technology systems adequately with those of an enlarged group
–
Apply its risk management policy effectively to an enlarged group
Any or all of these factors, individually or collectively, could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Capital and liquidity risk
Santander UK is subject to regulatory capital, liquidity and leverage requirements that could limit its operations, and changes to these
requirements may further limit and could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Capital Requirements Regulation and Capital Requirements Directive IV
Santander UK is subject to capital adequacy requirements applicable to banks and banking groups under retained EU law and as adopted by the PRA in the UK.
Santander UK is required to maintain a minimum ratio of Common Equity Tier 1 (CET1) capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, total
capital to risk-weighted assets and Tier 1 capital (leverage) to total adjusted assets for leverage purposes. Any failure by Santander UK to maintain such ratios
above prescribed regulatory minimum levels may result in administrative actions or sanctions. These could potentially include requirements on Santander UK to
cease all or certain lines of new business, to raise new capital resources or, in certain circumstances, a requirement for Santander UK's existing capital
instruments (potentially including Santander UK’s debt securities) to be subjected to bail-in or write-down (for more information, see the risk factor entitled
‘Santander UK may become subject to the provisions of the Banking Act 2009 (the Banking Act), including bail-in and write-down powers’).
The EU Capital Requirements Directive IV (CRD IV Directive) and the Capital Requirements Regulation (the CRR and together with the CRD IV Directive, CRD
IV) implemented changes proposed by the Basel Committee on Banking Supervision (the Basel Committee) to the capital adequacy framework, known as ‘Basel
III’ in the EU. The CRR has been amended through a series of EU regulations, including the Capital Requirements Regulation 2 (CRR 2) and the CRD IV
Directive amended by the Capital Requirements Directive V (CRD V Directive). The European Union (Withdrawal) Act 2018 converted the directly applicable
elements of CRD IV into UK law on 31 December 2020 and preserved existing UK law implementing the CRD IV directive. Certain elements of the CRR which
were ‘onshored’ in this way have now been transposed into the PRA rules.
In implementing CRD IV and the revised versions of CRD IV, the PRA has required the capital resources of UK banks to be maintained at levels which exceed the
base capital requirements prescribed by CRD IV and to cover relevant risks in their business. In addition, a series of capital buffers have been established under
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CRD IV and PRA rules to ensure a bank can withstand a period of stress. Though the results of the Bank of England (BoE) 2022/23 stress test (the most recent
exercise undertaken to set UK bank capital buffers) did not impact on the level of capital that Santander UK is required to hold, the PRA could, in the future, as a
result of stress testing exercises and as part of the exercise of UK macro-prudential capital regulation tools, or through supervisory actions, require Santander UK
to increase its capital resources further, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)
The LCR is intended to ensure that a bank maintains an adequate level of unencumbered, high quality liquid assets which can be used to offset the net cash
outflows the bank could encounter under a short-term significant liquidity stress scenario. The current minimum requirement for LCR is set at 100%. Santander
UK is also required to maintain available stable funding equal to at least 100% of its required stable funding under the NSFR. Santander UK’s current liquidity
position is in excess of the minimum requirements set by the PRA, however there can be no assurance that future changes to the applicable liquidity requirements
would not have an adverse effect on Santander UK’s financial performance.
Leverage ratios
The Financial Services Act 2012 (the FS Act) also provides the Financial Policy Committee (FPC) of the BoE with certain macro-prudential tools for the
management of systemic risk including quarterly setting of the countercyclical capital buffer rate and powers of direction relating to leverage ratios. All major UK
banks and banking groups (including Santander UK) are required to hold enough Tier 1 capital (75% of which must be CET1 capital) to satisfy a minimum
leverage ratio requirement of 3.25% and enough CET1 capital to satisfy a countercyclical leverage ratio buffer of 35% of each bank’s institution-specific
countercyclical capital buffer rate. The PRA requires UK globally systemically important banks (G-SIBs) and Ring Fenced Bodies to hold enough CET1 capital to
meet an Additional Leverage Ratio Buffer (ALRB) of 35% of the institution-specific G-SIB buffer rate or Other Systemically Important Institutions (O-SII) buffer rate
following the implementation of the CRD V Directive on 28 December 2020 (previously the Systemic Risk Buffer rate) and for consolidated groups which include a
Ring Fenced Body (as defined in the Financial Services and Markets Act 2000 (FSMA)) to hold enough CET1 capital to meet the ALRB. The FPC can also direct
the PRA to adjust capital requirements in relation to particular sectors through the imposition of sectoral capital requirements. Action taken in the future by the FPC
in exercise of any of its powers could result in the regulatory capital requirements applied to Santander UK being further increased, which could have a material
adverse effect on Santander UK’s operations, financial condition and prospects.
Further regulatory changes
Regulators in the UK and worldwide have proposed that additional loss absorbency requirements should be applied to systemically important institutions to ensure
that there is sufficient loss absorbing and recapitalisation capacity available in resolution. The BoE is required to set the Minimum Requirement for Eligible
Liabilities (MREL) for all institutions. The BoE required most banks, since 1 January 2022, to be in compliance with the end-state MREL requirements, which
Santander UK plc and Santander UK Group Holdings plc are.
Regulators and legislators in the UK have produced a range of proposals for future legislative and regulatory reform which could force Santander UK to comply
with certain operational restrictions or take steps to raise further capital or increase Santander UK’s expenses and could therefore have a material adverse effect
on Santander UK’s operations, financial condition and prospects. These changes, which could affect Santander UK as a whole, include the UK's implementation
of the remaining Basel III standards. The Basel Committee on Banking Supervision has approved a series of significant changes to the Basel regulatory capital
framework subsequent to Basel III from 7 December 2017, colloquially known as Basel IV or Basel 3.1 which revise the process for determining capital
requirements. On 30 November 2022, the PRA published a consultation paper (CP 16/22) on the implementation of the Basel IV standards (which the PRA refers
to as Basel 3.1) in the UK, which on 12 December 2023 was followed by a Policy Statement (PS17/23) and the first of two sets of new near-final rules. The
remaining rules are expected to be published in the second quarter of 2024 and together these new rules will revise the CRD IV framework already implemented
in the UK. The PRA has proposed a four-and-a-half-year transitional period for implementation that will commence on 1 July 2025. CRD IV requirements adopted
in the UK may change further and there may be further changes to the way in which the PRA continues to interpret and apply these requirements to UK banks
(including with regard to individual model approvals or otherwise).
There is a risk that changes to the UK’s capital adequacy regime (including any increase to minimum leverage ratios) may result in increased minimum capital
requirements, which could reduce available capital for new business purposes and adversely affect Santander UK’s cost of funding, profitability and ability to pay
dividends, or other discretionary payments on its capital instruments, continued organic growth (including increased lending), or pursue acquisitions or other
strategic opportunities. Alternatively, Santander UK could be required to restructure its balance sheet to reduce capital charges incurred pursuant to the PRA’s
rules or raise additional capital, but at increased cost and subject to prevailing market conditions. In addition, any changes to the eligibility criteria for Tier 1 and
Tier 2 capital may affect Santander UK’s ability to raise Tier 1 and Tier 2 capital and impact the recognition of existing Tier 1 and Tier 2 capital resources in the
calculation of Santander UK’s capital position. Furthermore, increased capital requirements may negatively affect Santander UK’s return on equity and other
financial performance indicators.
Santander UK’s business could be affected if its capital is not managed effectively or if these measures limit Santander UK’s ability to manage its balance sheet
and capital resources effectively or to access funding on commercially acceptable terms. Effective management of Santander UK’s capital position is important to
Santander UK’s ability to operate its business, to continue to grow organically and to pursue its business strategy. There is a risk that implementing and
maintaining existing and new liquidity requirements, such as through enhanced liquidity risk management systems, may incur significant costs, and more stringent
requirements to hold liquid assets may materially affect Santander UK’s lending business as more funds may be required to acquire or maintain a liquidity buffer,
thereby reducing future profitability. This could in turn adversely impact Santander UK’s operations, financial condition and prospects.
Liquidity and funding risks are inherent in Santander UK’s business and could have a material adverse effect on Santander UK’s operations,
financial condition and prospects
Liquidity risk is the risk that Santander UK either does not have available sufficient financial resources to meet its obligations as they fall due or can secure them
only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of factors such as over-reliance on
a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. Santander UK performs comprehensive internal
stress testing in order to ensure that it maintains funding profiles and holds a liquid asset buffer in order to manage this risk. However, unforeseen systemic market
factors like those experienced during the last financial crisis make it difficult to eliminate these risks completely. There can be no assurance that such
circumstances will not reoccur or that they will occur in the same way, but past experience and comprehensive stress testing regimes help Santander UK to
consider and manage the potential impacts on its liquidity position. Liquidity constraints may affect Santander UK’s operations and its ability to meet regulatory
liquidity requirements or may limit growth possibilities. Disruption and volatility in the global financial markets could have a material adverse effect on Santander
UK’s ability to access capital and liquidity on financial terms acceptable to it and in addition to increased funding costs, may result in a shortening in the term of
funding it raises.
Santander UK’s cost of funding is related to prevailing interest rates and to its credit spreads. Increases in interest rates and Santander UK’s credit spreads can
significantly increase the cost of its funding. Changes in Santander UK’s credit spreads can be market-driven or idiosyncratic in nature and may be influenced by
perceptions of its creditworthiness rather than any underlying change in Santander UK’s financial position. Changes to interest rates and Santander UK’s credit
spreads occur continuously and may be unpredictable and highly volatile. Market predictions of future central bank policy rate paths may impact Santander UK’s
cost of funding, even if central bank actions do not ultimately follow market predictions.
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If wholesale markets financing ceases to be available, or becomes excessively expensive, Santander UK may be forced to raise the rates it pays on deposits, with
a view to attracting more customers and/or to sell assets, potentially at depressed prices or to reduce growth plans. Santander UK’s cost of funding might also be
impacted by increased competition for retail and corporate deposits.
In response to the Covid-19 pandemic, the BoE introduced the Term Funding Scheme with additional incentives for Small and Medium-Sized Enterprises
(TFSME). Santander UK has begun repaying drawings ahead of the 2025 contractual maturities and as at 31 December 2023, Santander UK had £17bn of
drawings outstanding having repaid £8bn in 2023.
Santander UK will have to replace these remaining drawings via wholesale market issuance or through
management of the customer funding gap
.
Each of the factors described above could have a material adverse effect on Santander UK, including its ability to access capital and liquidity on financial terms
acceptable to it and, more generally, on its operations, financial condition and prospects.
Further, Santander UK aims for a funding structure that is consistent with its assets, avoids excessive reliance on short-term wholesale funding, attracts enduring
retail and commercial deposits and provides diversification in products and tenor. Santander UK therefore relies, and will continue to rely, on retail and commercial
deposits to fund a significant proportion of lending activities. The on-going availability of this type of funding is sensitive to a variety of factors outside Santander
UK’s control, such as general economic conditions and the confidence of depositors in the economy and in the financial services industry in general, confidence in
Santander UK specifically, Santander UK’s credit rating and the availability and extent of deposit guarantees, as well as competition between banks for deposits or
competition with other products, such as mutual funds or, if launched, central bank digital currency. A change in any of these factors could significantly increase the
amount of commercial deposit withdrawals in a short period of time, thereby reducing its ability to access deposit funding on appropriate terms, or at all, in the
future, and therefore have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s liquidity planning assumes that customers will continue to make a volume of deposits with Santander UK (particularly demand deposits and short-
term time deposits), and Santander UK intends to maintain its emphasis on the use of deposits as a source of funds. The short-term nature of some deposits
could cause liquidity problems for Santander UK in the future if deposits are not made in the volumes anticipated or are withdrawn at short notice or are not
renewed. If a substantial number of depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, there may be a material
adverse effect on Santander UK’s operations, financial condition and prospects. This might increase Santander UK’s requirements for wholesale funding or
require the execution of contingent options to raise additional liquidity, including the potential curtailing of growth plans.
An adverse movement in Santander UK’s external credit rating would likely increase its cost of funding, require Santander UK to post additional
collateral or take other actions under some of its derivative contracts and adversely affect Santander UK’s operations, financial condition and
prospects
Credit ratings affect the cost and other terms upon which Santander UK is able to obtain funding. Credit rating agencies regularly evaluate Santander UK, and
their credit ratings of Santander UK and Santander UK’s issued debt are based on a number of factors, including Santander UK’s financial strength, the strength
of the UK economy and conditions affecting the financial services industry generally.
Any downgrade in the external credit ratings assigned to Santander UK or any of Santander UK’s debt securities could have an adverse impact on Santander UK.
In particular, a downgrade in Santander UK’s credit ratings could increase its borrowing costs and could require it to post additional collateral or take other actions
under some of its derivatives, loan facilities or other financial contracts, and could limit its access to capital markets and have a material adverse effect on its
operations, financial condition and prospects. For example, a credit rating downgrade could have a material adverse effect on Santander UK’s ability to sell or
market certain products, engage in certain longer-term or derivatives transactions and retain its customers or investors, particularly those who need a minimum
rating threshold in order to transact or invest.
Any of these effects of a credit rating downgrade could, in turn, result in outflows and reduce Santander UK’s liquidity and have an adverse effect on Santander
UK, including its operations, financial condition and prospects. For example, Santander UK estimates that at 31 December 2023, if Fitch, Moody’s and Standard
Poor’s were concurrently to downgrade the long-term credit ratings of Santander UK plc by one notch, and thereby trigger a short-term credit rating downgrade,
this could result in an outflow of £1.2bn of cash and collateral. A hypothetical two notch downgrade would result in a further outflow of £0.8bn of cash and collateral
at 31 December 2023. Under the LCR we hold sufficient liquidity to cover these potential outflows. However, while certain potential impacts are contractual and
quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related
factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates
downgrades to its short-term credit rating, whether any downgrade precipitates changes to the way that the financial institutions sector is rated, and assumptions
about the ratings of other financial institutions and the potential behaviours of various customers, investors and counterparties. Actual outflows will also depend
upon certain other factors including any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from a
loss of unsecured funding (such as from money market funds) or loss of secured funding capacity.
There can be no assurance that the credit rating agencies will maintain Santander UK’s current credit ratings or outlooks. A failure to maintain favourable credit
ratings or outlooks could increase Santander UK’s cost of funding, adversely affect Santander UK’s interest margins, and reduce its ability to secure both long-
term and short-term funding. If a downgrade of a Santander UK member’s long-term credit ratings were to occur, it could also impact the short-term credit ratings
of other members of Santander UK. The occurrence of any of these events could have a material adverse effect on Santander UK’s operations, financial condition
and prospects.
Negative changes to the UK sovereign credit rating, or the perception that further negative changes may occur, could have a material adverse effect on Santander
UK’s operations, financial condition, prospects and the marketability and trading value of its securities. This might also have an impact on Santander UK’s own
credit rating, borrowing costs and ability to secure funding. Negative changes to the UK sovereign credit rating, or the perception that further negative changes
may occur, could also have a material effect in depressing consumer confidence, restricting the availability, and increasing the cost, of funding for individuals and
companies, further depressing economic activity, increasing unemployment and reducing asset prices, which could in turn have a material adverse effect on
Santander UK’s operations, financial condition and prospects.
Changes in Santander UK’s pension liabilities and obligations could have a materially adverse effect on Santander UK’s operations, financial
condition and prospects
The majority of current employees are provided with pension benefits through defined contribution arrangements. Under these arrangements Santander UK’s
obligation is limited to the cash contributions paid. Santander UK provides retirement benefits for many of its former and current employees in the UK through a
defined benefit pension scheme established under trust. Santander UK plc is the principal employer under this scheme, but it has only limited control over the rate
at which it pays into the scheme. Under the UK statutory pension funding requirements employers are usually required to contribute to the schemes at the rate
they agree with the scheme trustees although, if they cannot agree, the rate can be set by the Pensions Regulator. The scheme trustees may, in the course of
discussions about future valuations, seek higher employer contributions. The scheme trustees’ power in relation to the payment of pension contributions depends
on the terms of the trust deed and rules governing the scheme, but, in some cases, the trustees may have the unilateral right to set the employer’s relevant
contribution.
The Pensions Regulator has the power to issue a financial support direction to companies within a group in respect of the liability of employers participating in UK
defined benefit pension schemes where, amongst other things, that employer is ‘insufficiently resourced’ (as defined for the purposes of the relevant legislation).
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Such a financial support direction could require the companies to guarantee or provide security for the pension liabilities of those employers or could require
additional amounts to be paid into the relevant pension schemes in respect of them
.
The Pensions Regulator can also issue contribution notices if it is of the opinion that an employer has taken actions, or failed to take actions, deliberately designed
to avoid meeting its pension promises or which are materially detrimental to the scheme’s ability to meet its pension promises. A contribution notice can be issued
to any company or individual that is connected with or an associate of such employer in circumstances where the Pensions Regulator considers it reasonable to
issue it and multiple notices could be issued to connected companies or individuals for the full amount of the debt. The risk of a contribution notice being imposed
may inhibit Santander UK’s freedom to restructure or to undertake certain corporate activities. There is a risk that Santander UK could incur an obligation to make
a contribution to the scheme by virtue of section 75 or 75A of the Pensions Act 1995 as a result of a reorganisation or disposal of Santander UK’s businesses.
Should the value of assets to liabilities in respect of the defined benefit schemes operated by Santander UK record a deficit or an increased deficit (as
appropriate), due to either a reduction in the value of the pension scheme assets (depending on the performance of financial markets) not matched by a fall in the
pension scheme liabilities and/or an increase in the pension scheme liabilities (for example due to changes in legislation, mortality assumptions, discount rate
assumptions, inflation, or other factors) not matched by an increase in the pension scheme assets, this could result in Santander UK having to make increased
contributions to reduce or satisfy the deficits which would divert resources from other areas of Santander UK's business and reduce its capital resources. Changes
in inflation and interest rates in particular pose significant risks to the pension scheme as liabilities would be adversely impacted by an increase in long-term
inflation or reduction in interest rates, and it is inherently problematic to find assets that exactly match inflation and interest rate movements in the liabilities. The
pension scheme assets are also invested in illiquid assets consisting primarily of unlisted credit, private equity and property. The value of these investments can
only be known when they are realised. The value in the accounts is an estimate of the fair value of these investments but the final realised value could be
materially different. Although the trustee of the scheme is obliged to consult with Santander UK before changing the pension scheme's investment strategy, the
trustee has the final say and the ultimate responsibility for investment strategy rests with the trustee. A change in the actual or perceived strength of the employer’s
covenant could also result in Santander UK having to make increased contributions to the scheme. While Santander UK can control a number of the above
factors, there are some over which Santander UK has no or limited control.
Changes in UK legislation and regulation through the Pension Schemes Act 2021 to address perceived failings in pension protection following recent high profile
company insolvencies with large pension deficits may also affect Santander UK’s position, Specific areas where concerns have been raised are levels of
dividends where there is a pension scheme with a deficit and the length of time taken to address deficits. These changes in legislation or regulation could result in
Santander UK having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of its business and
reduce its capital resources.
Any increase in Santander UK’s pension liabilities and obligations as a result of the foregoing factors could have a material adverse effect on Santander UK’s
operations, financial conditions and prospects. There is also a risk of reputational damage if the scheme fails to comply with legislation or if there are any issues
with members or the trustee being dissatisfied.
Market risks
Santander UK is subject to fluctuations in interest rates and other market risks, which could have a material adverse effect on Santander UK’s
operations, financial condition and prospects
Market risk refers to the probability of variations in Santander UK’s net interest income or in the market value of its assets and liabilities due to volatility of interest
rates, credit spreads, exchange rates or equity prices.
Changes in interest rates would affect the following areas, among others, of Santander UK’s business:
–
Net interest income
–
The value of Santander UK’s derivatives transactions
–
The value of Santander UK’s securities holdings
–
The value of Santander UK’s loans and deposits
–
The volume of loans originated
Interest rates are highly sensitive to many factors beyond Santander UK’s control, including increased regulation of the financial sector, inflation, monetary policies,
domestic and international economic and political conditions. Variations in interest rates could affect the interest earned on Santander UK’s assets and the interest
paid on its borrowings, thereby affecting its net interest income, which comprises the majority of its revenue, reducing its growth rate and profitability and
potentially resulting in losses. In addition, costs Santander UK incurs putting into place strategies to reduce interest rate exposure could increase in the future,
which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Increases in interest rates may reduce the volume of loans originated by Santander UK. Sustained high interest rates have historically discouraged customers
from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets.
Reductions in interest rates could lead to margin compression if such changes are passed on to customer liabilities to a lesser extent than they are passed on to
customer assets.
Changes in interest rates may also affect the ability of Santander UK’s customers to prepay or refinance fixed-rate loans, affect the value of its financial assets and
reduce gains or require Santander UK to record losses on sales of Santander UK’s loans or securities, which could have a material adverse effect on Santander
UK’s operations, financial condition and prospects.
Negative changes in positions recorded at fair value could have a material adverse effect on Santander UK’s operations, financial condition and
prospects
Santander UK has material exposures to securities, derivatives and other investments that are recorded at fair value and are therefore exposed to potential
negative market changes. A widening of market credit spreads, reflecting the prevailing market conditions would negatively impact asset valuations in future
periods and may result in negative changes in the fair values of Santander UK's financial assets. A tightening of Santander UK’s own credit spreads would
increase the magnitude of liabilities, thereby reducing net assets.
In addition, the value ultimately realised by Santander UK on disposal of assets and liabilities recorded at fair value may be lower than their current fair value; for
example, during the last global financial crisis, financial markets were subject to periods of significant stress resulting in steep falls in perceived or actual financial
asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads.
Santander UK is also exposed to changes in the market value of credit and funding spreads for the valuation of certain derivative contracts, the estimated value of
which is negatively exposed to increases in the Credit Valuation Adjustment (CVA) spread and the Funding Fair Valuation Adjustment (FVA) spread over the
lifetime of the transaction.
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Any of these factors could require Santander UK to record negative changes in fair value which could have a material adverse effect on its operations, financial
condition and prospects.
Santander UK is also exposed to changes in UK residential house price index levels, future index growth assumptions and house price index volatility. These
impact the valuations of the portfolios of home reversion plans, lifetime mortgages and associated hedges held by Santander UK. In addition, the home reversion
assets and mortgages are exposed to any changes in underlying mortality assumptions as maturity dates on these are not fixed and are driven by the vacation of
the underlying property on a permanent basis by the plan holder. Specific property risk exists for each individual asset versus the indexed growth assumption at
the point of maturity. Lifetime mortgages additionally have prepayment risk which is managed via a FVA based on historic data.
In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by
such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic
instability. In such circumstances, Santander UK’s valuation methodologies require it to make assumptions, judgements and estimates in order to establish fair
value.
Reliable assumptions are difficult to make and are inherently uncertain. Moreover, valuation models are complex, making them inherently imperfect predictors of
actual results. Any consequential impairments or write-downs could have a material adverse effect on Santander UK’s operations, financial condition and
prospects.
Santander UK invests in debt securities of the UK government largely for liquidity management purposes. At 31 December 2023, approximately 5% of Santander
UK’s total assets and 7% of Santander UK’s securities portfolio were comprised of debt securities issued by the UK government. Any failure by the UK
government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on
Santander UK’s operations, financial condition and prospects.
Credit risks
If the level of non-performing loans increases or the credit quality of Santander UK’s loans deteriorates in the future, or if Santander UK’s loan loss
reserves are insufficient to cover loan losses, this could have a material adverse effect on Santander UK’s operations, financial condition and
prospects
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of Santander UK’s
businesses. Non-performing or low credit quality loans have in the past, and could continue to, have a material adverse effect on Santander UK’s operations,
financial condition and prospects.
In particular, the amount of Santander UK’s reported non-performing loans may increase in the future as a result of growth in Santander UK’s total loan portfolio,
including as a result of loan portfolios that Santander UK may acquire in the future (the credit quality of which may turn out to be worse than Santander UK had
anticipated), or factors beyond Santander UK’s control, such as adverse changes in the credit quality of Santander UK’s borrowers and counterparties, a general
deterioration in the UK or global economic conditions (including without limitation, rising interest rates), the impact of political events, events affecting certain
industries or events affecting financial markets and global economies. Broader inflationary pressures that impact a customer's ability to service debt payments
could also lead to increased arrears in both unsecured and secured products.
There can be no assurance that Santander UK will be able to effectively control the level of impaired loans in, or the credit quality of, its total loan portfolio, which
could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Interest rates payable on a significant portion of Santander UK’s outstanding mortgage loan products fluctuate over time due to, among other factors, changes in
the BoE base rate. As a result, borrowers with variable interest rate mortgage loans are exposed to increased monthly payments when the related mortgage
interest rate adjusts upward. Similarly, borrowers of mortgage loans with fixed or introductory rates adjusting to variable rates after an initial period are exposed to
the risk of increased monthly payments at the end of this period. Over the last two years, interest rates attached to both variable and fixed rate mortgages have
increased from historic lows. Customers with variable rates or those whose fixed rate terms have ended during this time period have faced increased monthly
payments. These events, alone or in combination, may contribute to higher delinquency rates and losses for Santander UK, which could have a material adverse
effect on Santander UK’s operations, financial condition and prospects.
Santander UK’s current loan loss reserves may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the
overall credit quality of Santander UK’s total loan portfolio. Santander UK’s loan loss reserves are based on Santander UK’s current assessment of various factors
affecting the quality of its loan portfolio, including its borrowers’ financial condition, repayment abilities, the realisable value of any collateral, the prospects for
support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. Many of these factors are beyond
Santander UK’s control. As a result, there is no precise method for predicting loan and credit losses, and no assurance can be provided that Santander UK’s
current or future loan loss reserves will be sufficient to cover actual losses.
If Santander UK’s assessment of and expectations concerning the above-mentioned factors differ from actual developments Santander UK may need to increase
its loan loss reserves, which may adversely affect Santander UK’s operations, financial condition and prospects. Additionally, in calculating its loan loss reserves,
Santander UK employs qualitative tools and statistical models which may not be reliable in all circumstances and which are dependent upon data that may not be
complete. If Santander UK is unable to control or reduce the level of its non-performing or poor credit quality loans, this could have a material adverse effect on
Santander UK’s operations, financial condition and prospects.
The value of the collateral, including real estate, securing Santander UK’s loans may not be sufficient, and Santander UK may be unable to realise
the full value of the collateral securing Santander UK’s loan portfolio
The value of the collateral securing Santander UK’s loan portfolio may significantly fluctuate or decline due to factors beyond Santander UK’s control, including
macroeconomic factors affecting the UK’s economy. Santander UK’s residential mortgage loan portfolio is one of its principal assets, comprising 85% of
Santander UK’s loan portfolio at 31 December 2023. As a result, Santander UK is highly exposed to developments in the residential property market in the UK.
Following the peak in aggregate UK house prices in 2022, these fell slightly in 2023 with ongoing uncertainty in the outlook for house prices for 2024 and beyond.
UK experience of other episodes of house price declines as well as the continuing uncertainty as to the extent and sustainability of any UK economic downturn
and recovery, will mean that losses could be incurred on high LTV (loan to value) loans should they go into possession.
The value of the collateral securing Santander UK’s loan portfolio may also be adversely affected by force majeure events such as natural disasters like floods or
landslides exacerbated by climate change trends. Any force majeure event may cause widespread damage and could have an adverse impact on the economy of
the affected region and may therefore impair the asset quality of Santander UK’s loan portfolio in that area.
Santander UK may also not have sufficiently up-to-date information on the value of collateral, which may result in an inaccurate assessment for impairment losses
on loans secured by such collateral.
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If any of the above events were to occur, Santander UK may need to make additional provisions to cover actual impairment losses of its loans, which could have a
material adverse effect on Santander UK’s operations, financial condition and prospects.
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Legal and regulatory risks
Santander UK is subject to substantial and evolving regulation and governmental oversight
As a financial services group, Santander UK is subject to extensive financial services laws, regulations, administrative actions and policies in the UK, and in each
other location in which Santander UK operates. For a discussion of the principal laws and regulations to which Santander UK is subject, see 'Regulation of the
Santander UK group'. The sector continues to face unprecedented levels of government and regulatory intervention and scrutiny, and changes to the regulations
governing financial institutions and the conduct of business. In addition, regulatory and governmental authorities have continued to consider further enhanced or
new legal or regulatory requirements intended to reduce the probability and impact of future crises (or otherwise assure the stability and operational resilience of
institutions under their supervision), enhance consumer protection, address climate change risks, the risk of greenwashing and environmental, social and
governance risks generally, and improve controls in relation to financial crime-related risks. For example, Santander UK is now a participant lender in the UK
government’s Mortgage Charter initiative, which was launched in June 2023, by HMT in light of the pressures on households following interest rate rises and the
cost of living crisis pursuant to which Santander UK has agreed to take additional steps to support residential mortgage borrowers experiencing financial
difficulties. Santander UK expects regulatory and government intervention in the banking sector to remain high for the foreseeable future. An intensive approach to
supervision is maintained in the UK by the BoE as resolution authority, the PRA, the FCA, the Competition and Markets Authority (CMA), the Payment Systems
Regulator (PSR), the Information Commissioner’s Office (ICO), the Serious Fraud Office (SFO) and the Lending Standards Board (LSB).
As well as being subject to UK regulation, as part of the Banco Santander group, Santander UK is also affected by other regulators such as the Banco de España
(the Bank of Spain) and the European Central Bank (ECB), as well as various legal and regulatory regimes (including the US) that have extra-territorial effect.
Extensive legislation and implementing regulations affecting the financial services industry have recently been adopted in regions that directly or indirectly affect
Santander UK’s business, including Spain, the US, the EU and other jurisdictions. Because Santander UK is subject to oversight by multiple regulators or
government bodies related to the same conduct or activity, this can increase business uncertainty and the amount of resources needed to ensure Santander UK’s
compliance with the different legal and regulatory regimes.
The manner in which financial services laws, regulations and policies are applied to the operations of financial institutions has gone through great change which is
still being implemented and reviewed. Recent proposals and measures taken by governmental, tax and regulatory authorities and further future changes in
supervision and regulation (in particular in the UK), are beyond Santander UK’s control and could materially affect Santander UK’s business.
Changes in UK legislation and regulation applicable to the financial sector may also affect Santander UK’s competitive position, particularly if such changes are
implemented before international consensus is reached on key issues affecting the industry. For example, in December 2022, the chancellor of the exchequer
announced a package of financial services regulatory reforms – known as the Edinburgh Reforms – designed to strengthen the international competitiveness of
the UK’s financial services sector and drive economic growth. Furthermore, as set out above (see, ‘The UK’s withdrawal from the European Union (Brexit) has
had and could continue to have a material adverse effect on Santander UK’s operations, financial condition and prospects’), FSMA 2023 enables HMT to revoke
retained EU legislation and empowers the PRA and the FCA to replace it with their own rules. Further, in July 2023 HMT began to set out its programme of
secondary legislation to replace repealed retained EU law as part of its intention to deliver a "Smarter Regulatory Framework" for financial services tailored to the
UK. There is a risk that this initiative results in UK financial services regulation materially diverging from EU regulation, and accordingly that the strategy of
Santander UK and the group in relation to products/initiatives that have a cross-border element could be materially impacted.
To the extent these laws, regulations and policies apply to it, Santander UK may face higher compliance costs and the need to carefully manage capacity to
readily respond to multiple regulatory or government policy changes simultaneously. Any legislative or regulatory actions and any required changes to Santander
UK’s business operations resulting from such laws, regulations and policies as well as any deficiencies in Santander UK’s compliance with such laws, regulations
and policies could result in significant loss of revenue, could have an impact on Santander UK’s strategy, limit its ability to pursue business opportunities in which
Santander UK might otherwise consider engaging, limit Santander UK’s ability to provide certain products and services and/or result in enforcement action
(including the imposition of financial and other penalties). They may also affect the value of assets that Santander UK holds, requiring Santander UK to increase
its prices thereby reducing demand for Santander UK’s products or otherwise have a material adverse effect on its operations, financial condition and prospects.
Accordingly, there can be no assurance that future changes in laws, regulations and policies or in their interpretation or application by Santander UK or by
regulatory authorities will not adversely affect Santander UK.
Specific examples of areas where regulatory changes and increased regulatory scrutiny could have a material adverse effect on Santander UK’s operations,
financial condition and prospects include, but are not limited to, the following:
–
Banking Reform:
In accordance with the provisions of the Financial Services (Banking Reform) Act 2013 UK banking groups that hold significant retail
deposits (more than £25 billion of “core deposits”), including Santander UK, were required to separate or ‘ring-fence’ their retail banking activities from their
wholesale banking activities by 1 January 2019. Santander UK completed its ring-fencing plans in advance of the legislative deadline of 1 January 2019.
However, given the complexity of the ring-fencing regulatory regime and the material impact on the way Santander UK conducts its business operations in the
UK, there is a risk that Santander UK and/or Santander UK plc may be found to be in breach of one or more ring-fencing requirements. This might occur, for
example, if prohibited business activities are found to be taking place within the ring-fence, mandated retail banking activities are found being carried on in a UK
entity outside the ring-fenced part of the group or Santander UK breached a PRA ring-fencing rule. If Santander UK were found to be in breach of any of the
ring-fencing requirements placed upon it under the ring-fencing regime, it could be subject to supervisory or enforcement action by the PRA, the consequences
of which might include substantial financial penalties, imposition of a suspension or restriction on Santander UK’s UK activities or, in the most serious of cases,
the forced restructuring of the UK group, entitling the PRA (subject to the consent of the UK government) to require the sale of a Santander ring-fenced bank or
other parts of the UK group. Following the publication of the final report of the Independent Panel on Ring-Fencing and Proprietary Trading on 15 March 2022,
HMT announced its intention to implement certain limited reforms to the ring-fencing regime, including increasing the ring-fencing core deposit threshold from
£25 billion to £35 billion, introducing a de minimis threshold to allow ring-fenced banks to incur an exposure to relevant financial institutions (RFIs) of up to
£100,000 per RFI at any one time, and allowing ring-fenced banks to establish operations outside of the UK or the European Economic Area, have exposure to
RFIs that qualify as small and medium sized enterprises (SMEs) and undertake a wider range of activities such as market standard trade finance activities or
inflation swaps. In September 2023, HMT published a consultation on the reforms, as well as draft secondary legislation which the government intends to lay
before Parliament in early 2024. These proposed reforms of the ring-fencing regime may lead to further review or amendment of Santander UK’s operational
and compliance arrangements in relation to the regime.
–
Competition:
Competition authorities (which in the UK include the CMA, the FCA and the PSR) can run reviews and investigations into any aspect of
Santander UK’s operations or the functioning of any markets in which Santander UK operates, which could lead to Santander UK being required to change the
markets in which it operates. In addition, the CMA’s widening focus on market outcomes may also result in increased reviews by the CMA of the markets in
which Santander UK operates. On 25 April 2023, the UK government introduced the draft Digital Markets, Competition and Consumers Bill (DMCC) to the UK
Parliament, which proposes significant reforms to the powers of competition authorities in relation to the aforementioned investigations, including substantial
new fining powers. The DMCC also introduces other wide-ranging reforms to the UK’s competition, consumer protection and digital markets regulatory
landscape some of which could impact Santander UK’s business. For instance, the DMCC grants the CMA the power to directly determine whether certain
consumer protection laws have been infringed without needing to go through the courts.
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Payments:
Santander UK has been required to make systems changes and update processes to comply with a number of new payment regulations at a
European as well as domestic UK level. Within the UK, the PSR has mandated Santander UK to build systems and processes for both Confirmation of Payee
as well as the Contingent Reimbursement Model Code (CRM) which both aim to reduce the level of customer fraud (particularly through our customers'
manipulation into making payments known as 'Authorised Push Payment' (APP) fraud). Under these standards, Santander UK assumes responsibility for
certain categories of customer losses and any inherent failing in system design may lead to fines from regulators and/or compensation being paid to customers.
Further, from October 2024 Santander UK will be subject to the PSR's reimbursement requirement, requiring it to reimburse APP scam victims subject to
certain exceptions, excesses and maximums, adding to Santander UK's obligations in this space. Santander UK also expects to see significant developments
in the key UK payment systems architecture - with systems update of the high value Clearing House Automated Payment System (CHAPS) system through the
Real Time Gross Settlement (RTGS) renewal as well as the 'New Payments Architecture' for faster payments, BACS and the other lower value retail payment
schemes. Transitioning to the ‘New Payments Architecture’ will generate short-term challenges, including in successfully adopting the ISO20022 messaging
standard while ensuring payment message completeness in alignment with regulatory requirements. PSD2 has been implemented and transposed into UK
legislation in the Payment Services Regulations 2017 and the UK continues to build upon the requirements within the EBA Regulatory Technical Standards via
the Open Banking API industry standard and build. Open Banking and PSD2 both have shown that they have the potential to exacerbate a number of existing
risks including data loss/data protection, cybersecurity, fraud and wider financial crime risk, which in turn could give rise to increased costs, litigation risk and risk
of regulatory investigation and enforcement activity.
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Data Privacy:
In connection with its processing of personal data, Santander UK is subject to data protection laws and regulations – in particular, the UK
GDPR (as defined and interpreted in accordance with the Data Protection Act 2018) and the Data Protection Act 2018 (DPA). In the event Santander UK
breaches any such data protection laws, it could face significant enforcement action and/or financial penalties as well as reputational damage, which could
ultimately have a material adverse effect on Santander UK’s operations, financial condition and prospects. The Data Protection and Digital Information (No 2)
Bill (DPDI Bill 2) was introduced on 8 March 2023 and proposes a number of changes to the UK GDPR and the DPA. As at January 2024, the DPDI Bill 2 is
being considered by the House of Lords. Whilst the final form of the DPDI Bill 2 remains subject to change as it progresses though the legislative process, if it
becomes law, it may result in Santander UK having to make changes to its current data protection compliance programme which could result in compliance
and operational costs. The proposed reforms set out in the DPDI Bill 2 may also pose a risk to the EU Commission’s adequacy decision for the UK. This is
because the European Commission may consider that the UK’s data protection laws are no longer essentially equivalent to those of the EU. If the EU
Commission’s adequacy decision for the UK is withdrawn, this could impact personal data flows from entities in the EU to Santander UK in the UK. In the
event this occurs, it may result in additional costs to Santander UK in order to facilitate those data flows, to the extent those data flows are impacted, with the
UK being subject to EU transfer rules as a non-adequate jurisdiction.
–
Cybersecurity:
Santander UK is subject to cybersecurity regulations and cybersecurity incident reporting requirements. Cybersecurity incident reporting
often require short timeframes and there is a risk that Santander UK will fail to meet the reporting deadlines for any given cybersecurity incident. There will be
legal, reputational and regulatory risks in the event we, or the third-party providers we work with, are found to be out of compliance with these regulations and
reporting requirements.
–
Consumer Duty:
The FCA’s rules and guidance on a broad consumer duty that firms undertaking regulated activities with retail clients must observe (the
Consumer Duty) have been in force for open products and services since 31 July 2023. The Consumer Duty has three elements: (i) a "Consumer Principle",
which reflects the overall standards of behaviour the FCA expects from firms (a firm must act to deliver good outcomes for retail customers), (ii) three cross-
cutting rules that articulate the standards of conduct expected under the Consumer Principle (firms must act in good faith towards retail customers, avoid
causing foreseeable harm to retail customers and enable and support retail customers to pursue their financial objectives), and (iii) four outcomes that build on
the Consumer Principle and cross-cutting rules, comprising a suite of rules and guidance setting more detailed expectations for a firm's conduct in four areas
that represent the key elements of the firm-consumer relationship (product design and governance, price and value, consumer understanding and consumer
support). The expectations of the Consumer Duty require firms to end unfair charges and fees, make it as easy to switch or cancel products as it was to take
them out in the first place, provide helpful and accessible customer support, act quickly to respond to customer queries, provide timely, clear and easily
understandable information to customers regarding products and services, provide products and services that are appropriate for their customers, and focus on
the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction. The Consumer Duty also
requires firms to monitor, evidence and report against many of the requirements. Santander UK has completed the first phase of the implementation of the
Consumer Duty, which required a review of, and changes to, Santander UK’s products, services, policies, systems and procedures against the FCA
requirements. The second phase of the implementation of the Consumer Duty is due by 31 July 2024, being the date on which the Consumer Duty applies to
closed products and services, and accordingly focuses on such products and services. The Consumer Duty affects elements of Santander UK’s business model
and strategy, the products and services it offers and the pricing or costs of those products and services, which may in turn affect the revenue and profits that
Santander UK is able to generate. It may result in an increase in civil litigation or claims to the Financial Ombudsman Service (FOS) by customers alleging a
breach of the standards of the Consumer Duty or in regulatory action by the FCA. The FCA has indicated that an early area of focus for them will be to look at
firms’ complaints data in order to identify where the FOS uphold high numbers of complaints, and that it will hold firms accountable to ensure complaints are
dealt with fairly and that robust mechanisms are in place to learn from the root causes of complaints. The FCA will continue to work across sectors to test how
the Consumer Duty has been implemented and embedded within firms and will be looking for changes in culture across firms and evidence on how firms
ensure customers receive good outcomes at any point when they interact with a firm. Where the FCA identifies serious breaches of the Consumer Duty, it has
stated that it will take robust action, including interventions, investigations and possibly disciplinary sanctions. If Santander UK is not able to demonstrate
continuous learning and improvement when it comes to customer experience and outcomes, and compliance with the Consumer Duty more broadly, it could
lead to regulatory actions by the FCA and reputational damage arising from adverse publicity.
–
Insolvency:
Changes to the UK corporate insolvency regime were introduced through the Corporate Insolvency and Governance Act 2020, including a pre-
insolvency moratorium process for corporates in financial difficulty to give a period of time to seek a rescue or restructure and a new restructuring plan
insolvency procedure to enable debt restructures. The Finance Act 2020 re-established certain tax debts owed by corporates as secondary preferential debts,
ranking ahead of debts owed to floating charge holders. The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium)
(England and Wales) Regulations 2020 (Breathing Space Regulations) (which came into force on 4 May 2021) give eligible individuals in England and Wales
the ability to apply for a breathing space or mental health crisis moratorium during which creditors may not demand payment of interest or fees that accrue or
enforce a debt owed by the applicant. The impact these changes will have in relation to the collection and recovery of loans to retail and corporate customers
who are in financial difficulty or default continues to evolve.
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Outsourcing and Third-Party Risk Management:
In March 2021, the PRA published Supervisory Statement 2/21 on outsourcing and third-party risk
management (SS2/21). SS2/21 is the primary source of reference for Santander UK when interpreting and complying with its requirements on outsourcing and
third-party risk management, although it should be read alongside the EBA guidelines on outsourcing arrangements, and PRA and FCA rules and guidance on
outsourcing. The scope of contracts required to meet the PRA requirements on outsourcing and third-party risk management extends beyond that set out in the
EBA guidelines on outsourcing and also captures material non-outsourcing. SS2/21 also requires that intragroup outsourcing be subject to the same
requirements and expectations as external outsourcing and should not be treated as being inherently less risky. If Santander UK is unable to meet the PRA or
FCA requirements on outsourcing and third-party risk management, it may face supervisory measures, which could in turn have a material adverse effect on
Santander UK’s operations, financial condition and prospects.
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Operational Resilience:
In March 2021, the PRA and the FCA published
Supervisory Statement 1/21 (SS1/21) and Policy Statement 21/3 (PS21/3), which set
out their final rules and guidance intended
to strengthen operational resilience in the financial services sector. The operational resilience rules require Santander
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UK to identify its ‘important business services’, being those services which, if disrupted, could cause intolerable harm to clients or pose a risk to that firm’s safety
and soundness or to the stability of the UK financial system. Once Santander UK has identified these, it must set impact tolerances for all important business
services and ensure it is able to remain within these tolerances in severe but plausible disruption scenarios. Santander UK must comply with these requirements
by no later than the end of a three-year transitional period on 31 March 2025. If Santander UK is unable to meet the PRA and FCA requirements relating to
operational resilience, it may face supervisory measures, which could in turn have a material adverse effect on Santander UK’s operations, financial condition
and prospects.
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Climate Change:
The UK government has announced its intention to roll out new sustainability disclosure requirements, which will expand on those required
under the TCFD framework, including transition plans to align to net-zero, as well as a new UK green taxonomy. Santander UK Group Holdings plc is
implementing the recommendations of TCFD on a group level: further reporting will require additional gathering of data and digitalisation of reporting and there
will be legal, reputational and regulatory risks should Santander UK Group Holdings plc fail to adequately report, or to demonstrate appropriate capabilities to
transition and support its customers to transition to a low carbon economy.
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National Security and Investment Act:
The National Security and Investment Act 2021 (NSIA) came into force on 4 January 2022 in the UK, introducing a
new national security screening regime with mandatory suspensory notifications required for corporate and financial transactions in certain sectors which meet
the prescribed thresholds. The NSIA also grants the UK government wide-ranging powers to intervene in transactions on national security grounds, even where
the transaction is outside of the scope of the mandatory notification regime. The UK government can impose heavy criminal and civil penalties under the NSIA
for non-compliance. In the event that the UK government intervenes in any of Santander UK's transactions and/or imposes any related penalties on Santander
UK, this could result in reputational damage and could have a material adverse effect on Santander UK's operations, financial condition and prospects.
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Access to Cash:
FSMA 2023 grants the BoE supervisory powers to regulate the UK wholesale cash distribution market, including powers to impose fines and
empowers HMT to designate firms to be subject to FCA oversight for the purpose of ensuring the reasonable provision of cash access (including free cash
access). We expect Santander UK to be a designated firm for these purposes. The FCA intends to make rules to ensure the reasonable provision of cash
withdrawal and deposit facilities and in its consultation paper (CP23/29) outlined how it intends to use its powers, for example, by limiting the availability of
designated firms to close cash facilities, including bank branches, until any additional cash services identified as needed are available. The new access to cash
regime is likely to have implications for Santander UK's business decisions and strategy, in particular in relation to our branch network and our participation in
the wholesale cash distribution market generally. The new access to cash regime is expected to be finalised in 2024. In the event that the BoE imposes any
fines with respect to Santander UK’s participation in the wholesale cash distribution market
or the FCA imposes requirements on Santander UK in relation to
retail cash access
, this could result in reputational damage and have a material adverse effect on Santander UK’s operations, financial condition and prospects.
–
Financial Crime:
The UK financial crime legislative
framework has been updated significantly in recent years and is subject to regular change
. The Economic
Crime (Transparency and Enforcement) Act 2022 (ECTEA)
significantly streamlined the process of making sanctions and empowered
the Office of Financial
Sanctions Implementation (OFSI) to enforce sanctions on a strict liability basis. ECTEA also introduced a Register of Overseas Entities at Companies House
with the aim of providing greater transparency in the UK property market by requiring overseas entities to register with Companies House. ECTEA was followed
by the Economic Crime and Corporate Transparency Act 2023 (ECCTA). ECCTA includes reforms to Companies House over a multi-year period, a reform of
the identification doctrine (broadening the scope of corporate criminal liability by making corporates criminally liable for the conduct of senior managers
acting
within the scope of their authority
), the introduction of a new offence of failure to prevent fraud and the expansion creation of inter-bank information sharing for
the purposes of detecting and preventing economic crime. Many of these provisions are due to come into force in 2024. 2024 may also see a number of other
financial services legal and regulatory changes. These include changes to the treatment of domestic politically exposed persons, as set out in FSMA 2023, new
proposals for a ‘Suspended Accounts Scheme’ as set out in the Criminal Justice Bill 2023-24, possible changes to account closure rules, mandatory APP scam
reimbursement rules (as mentioned above under "Payments") and potential changes to the
Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 2017 (MLRs)
. The UK government is also expected to continue to take forward a series of non-legislative reforms that will
impact the financial crime landscape, as committed to in keynote strategic publications, such as the Economic Crime Plan 2 and Fraud Strategy. The expansion
of criminal liability under these reforms brings with it financial risk in the form of penalties and reputational risk
, while continued compliance with the changing UK
financial crime framework may expose Santander UK to increased operational and compliance costs, each of which would in turn have a material adverse effect
on Santander UK’s operations, financial condition and pr
ospects.
Santander UK may become subject to the provisions of the Banking Act, including bail-in and write-down powers
The special resolution regime set out in the Banking Act provides HMT, the BoE, the PRA and the FCA with a variety of powers for dealing with UK deposit taking
institutions (and, in certain circumstances, their holding companies) that are failing or likely to fail, including: (i) to take a bank or bank holding company into
temporary public ownership; (ii) to transfer all or part of the business of a bank to a private sector purchaser; or (iii) to transfer all or part of the business of a bank
to a ‘bridge bank’. The special resolution regime also comprises a separate insolvency procedure and administration procedure each of which is of specific
application to banks. These insolvency and administration measures may be invoked prior to the point at which an application for insolvency proceedings with
respect to a relevant institution could be made.
If an instrument or order were made under the Banking Act in respect of an entity in Santander UK, such instrument or order (as the case may be) may, among
other things: (i) result in a compulsory transfer of shares or other securities or property of such entity; (ii) have an impact on the rights of the holders of shares or
other securities issued by Santander UK or such entity or result in the nullification or modification of the terms and conditions of such shares or securities; or (iii)
result in the de-listing of the shares and/or other securities of such entity. In addition, such an order may affect matters in respect of Santander UK or such entity
and/or other aspects of the shares or other securities of Santander UK or such entity, which may negatively affect the ability of Santander UK or such entity to
meet its obligations in respect of such shares or securities.
Further, amendments to the Insolvency Act 1986 and secondary legislation have introduced changes to the treatment and ranking of certain debts with the result
that certain eligible deposits will rank in priority to the claims of ordinary (i.e. non-preferred) unsecured creditors in the event of an insolvency. This may negatively
affect the ability of unsecured creditors to recover sums due to them in an insolvency scenario.
If a ‘bail-in’ order were made under the Banking Act as amended by The Financial Services (Banking Reform) Act 2013 (see further ‘Regulation of Santander UK -
The Banking Act 2009’), such an order would be based on the principle that any creditors affected by the 'bail-in' order should receive no less favourable treatment
than they would have received had the bank entered into insolvency immediately before the coming into effect of the bail-in power. The bail-in power includes the
power to cancel or write-down (in whole or in part) certain liabilities or to modify the terms of certain contracts for the purposes of reducing or deferring the liabilities
of a bank under resolution and the power to convert certain liabilities into shares (or other instruments of ownership) of the bank. The bail-in power under the
Banking Act may potentially be exercised in respect of any unsecured debt securities issued by a bank under resolution or an entity in Santander UK, regardless
of when they were issued. Accordingly, the bail-in power under the Banking Act could be exercised in respect of Santander UK’s debt securities. Public financial
support would only be used as a last resort, if at all, after having assessed and utilised, to the maximum extent practicable, the resolution tools including the bail-in
tool and the occurrence of circumstances in which bail-in powers would need to be exercised in respect of Santander UK or any entity in Santander UK would
have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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The PRA also has the power to make rules requiring a parent undertaking of a bank to make arrangements to facilitate the exercise of resolution powers, including
a power to require a member of a banking group to issue debt instruments. The exercise of such powers could have an impact on the liquidity of Santander UK’s
debt instruments and could materially increase Santander UK’s cost of funding.
In addition, the resolution authorities have the power to require institutions and groups to make structural changes to ensure legal and operational separation of
‘critical functions’ from other functions where necessary, or to require institutions to limit or cease existing or proposed activities in certain circumstances. As a
result, Santander UK is required to identify such ‘critical functions’ as part of its resolution and recovery planning. If used in respect of Santander UK, these ex ante
powers could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK must comply with laws and regulations relating to anti-money laundering, anti-terrorism, anti-bribery and corruption, sanctions and
preventing the facilitation of tax evasion. Failure to prevent, detect or deter any illegal or improper activities could have a material adverse effect
on Santander UK’s operations, financial condition or prospects
Santander UK is required to comply with applicable laws and regulations relating to anti-money laundering (AML), counter-terrorism financing (CTF), anti-bribery
and corruption, sanctions, preventing the facilitation of tax evasion and other laws and regulations in the jurisdictions in which Santander UK operates. These laws
and regulations require Santander UK, among other things, to conduct customer due diligence (including in respect of sanctions and politically-exposed person
screening), ensure customer and transaction information is appropriately recorded, monitored and kept up to date and implement effective financial crime policies
and procedures detailing what is required from those responsible in order to counter financial crime risks with the aim to prevent the facilitation of bribery, tax
evasion and fraud by its employees or associated persons. Santander UK's staff are obligated to report suspicious transactions and activity to appropriate law
enforcement. The policies and procedures require the implementation and embedding of effective controls and monitoring within the businesses of Santander UK,
which in turn requires ongoing changes to systems, technology and operational activities.
Santander UK is also required to conduct financial crime training for its staff. Comprehensive and risk based financial crime training at a group-wide and business
unit level is a key element of effective controls, with the FCA providing guidance on expectations within its Financial Crime Guide and the Joint Money Laundering
Steering Group (JMLSG) providing guidance on the practical interpretation of UK AML and CTF legislation. Financial crime is continually evolving and this requires
proactive and adaptable responses from Santander UK so that it is able to deter, detect and disrupt threats and criminality effectively. Even known threats can
never be fully eliminated, and there may be instances where Santander UK could be used by other parties to engage in money laundering and other illegal or
improper activities. Santander UK’s staff, whom Santander UK rely heavily upon to identify such activities and report them, have varying degrees of experience in
recognising criminal tactics, making effective, bank-wide mandatory and specialist training provided by the Santander UK Economic Crime Academy more
pertinent.
Where Santander UK outsources any of its customer due diligence, customer screening or anti-financial crime operations, it remains responsible and accountable
for full compliance and any breaches. If Santander UK is unable to apply the necessary scrutiny and oversight, or if such oversight proves insufficient to detect
illegal or improper activities, there remains a risk of regulatory breach and this could have a material adverse effect on Santander UK's operations, financial
condition and prospects.
Over the last decade, laws and regulations relating to financial crime have become, and may continue to become, increasingly complex and detailed.
Consequently, financial crime risk has become the subject of enhanced regulatory scrutiny and supervision by regulators globally which continues to intensify. To
manage regulatory scrutiny, Santander UK continues to improve its systems, adopt more sophisticated monitoring and enhance the skill set of its compliance
personnel. Navigating the increasing complexity of financial crime regulation is a significant challenge, involving overlapping requirements between different
legislation, and, in some instances, conflicts of laws. The divergence of policy approaches between the EU, UK and US in the area of economic sanctions and the
evolving financial and trade sanctions imposed on Russia and Belarus due to the war in Ukraine, require additional immediate and longer-term sanctions risk
management and compliance efforts for Santander UK.
UK AML and CTF legislation continues to change (for instance through the enactment of the ECCTA, the introduction of requirements regarding proliferation
financing as introduced by the UK’s money laundering regulations and regular updates to the UK’s list of third countries identified as high-risk countries), recent
updates to beneficial ownership discrepancy reporting requirements detailed in the UK’s money laundering regulations, or the recent launch of the Register of
Overseas Entities and the associated compliance regime, which is reflected where appropriate within Santander UK's AML and CTF policies and procedures, with
additional training and guidance required for employees. While legislative changes can offer opportunities to increase effectiveness and efficiency in the overall
anti-financial crime system, there are also risks of divergence from Banco Santander group, legislative and regulatory requirements via Banco Santander and the
EU. Significant change could adversely impact Santander UK’s business by increasing its operational and compliance costs and reducing the value of its assets
and operations, which would in turn have a material adverse effect on Santander UK’s operations, financial condition and prospects.
If Santander UK is unable to fully comply with applicable laws, regulations and expectations, its regulators and relevant law enforcement agencies have the ability
and authority to pursue civil and criminal proceedings against it, to impose significant fines and other penalties on it, including requiring a complete review of
Santander UK’s business systems, day-to-day supervision by external consultants, imposing restrictions on the conduct of Santander UK’s business and
operations and ultimately the revocation of Santander UK’s banking licence. The reputational damage to its business and brand could be severe if Santander UK
was found to have materially breached AML, CTF, anti-bribery and corruption, anti-tax evasion or sanctions requirements. Santander UK’s reputation could also
suffer if it were unable to protect its customers or its business from being used by criminals for illegal or improper purposes. Criminal penalties could be imposed
upon individuals employed by Santander UK. Any of these outcomes could have a material adverse effect on Santander UK’s operations, financial condition and
prospects.
Santander UK has been, and may in the future be, subject to negative coverage in the media about Santander UK or Santander UK’s clients, including with
respect to alleged conduct such as failure to detect and/or prevent any financial crime activities or comply with financial crime compliance regulations. Negative
media coverage of this type about Santander UK, whether it has merit or not, could materially and adversely affect Santander UK’s reputation and perception
among current and potential clients, investors, vendors, partners, regulators and other third parties, which in turn could have a material adverse effect on
Santander UK’s operating results, financial condition and prospects as well as damage Santander UK’s customers’ and investors’ confidence and the market price
of Santander UK’s securities.
At an operational level, geopolitical, economic, social and technological changes can provide opportunities to financial criminals and alter the risks posed to banks.
Effective intelligence and monitoring systems within strengthened public/private partnerships supported by improved national capabilities to share knowledge on
emerging risks and information pre-suspicion are required to help manage these risks. However, there can be no guarantee that any intelligence shared by public
authorities or other financial institutions will be accurate or effective in helping Santander UK to combat financial crime, and if, despite such efforts, Santander UK
fails to combat financial crime effectively then this could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, while Santander UK reviews its relevant counterparties’ internal policies and procedures (for example, under its correspondent banking relationships)
with respect to such matters, Santander UK, to a large degree, requires relevant counterparties to maintain and properly apply their own appropriate anti-financial
crime procedures to reduce the risk of being used as a conduit for money laundering without its knowledge. There are also risks that other third parties, such as
suppliers and those considered ‘associated parties’ under the UK Bribery Act, could be involved in financial crime. If Santander UK is associated with, or even
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accused of being associated with, financial crime (or a business involved in financial crime), then its reputation could suffer and it could become subject to civil or
criminal proceedings that could result in penalties, sanctions and legal enforcement (including being added to 'black lists' that would prohibit certain parties from
engaging in transactions with it), any one of which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK is subject to tax-related risks
Santander UK is subject to the substance and interpretation of UK tax laws and is subject to routine review and audit by tax authorities in relation thereto.
Santander UK’s interpretation or application of these tax laws may differ from those of the relevant tax authorities. While Santander UK provides for potential tax
liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities, the amounts ultimately paid may differ materially from the amounts
provided depending on the ultimate resolution of such matters. In general, changes to tax laws and tax rates, including as a result of policy changes by
governments and/or regulators, and penalties for failing to comply with such changes, could have a material adverse effect on Santander UK’s operations,
financial condition and prospects. Some of these changes may be specific to the banking/financial services sectors and therefore result in Santander UK incurring
an additional tax burden when compared to other industry sectors.
Santander UK is exposed to risk of loss and damage from civil litigation and/or criminal legal and regulatory proceedings
Santander UK faces various legal and regulatory issues that have given rise and may give rise to civil or criminal litigation, arbitration, and/or criminal, tax,
administrative and/or regulatory investigations, inquiries or proceedings. Failure to adequately manage the risks arising in connection with legal and regulatory
issues, including Santander UK’s obligations under existing applicable laws and regulations or its contractual obligations, including arrangements with its
customers and suppliers, or failure to properly implement applicable laws and regulations could result in significant loss or damage including reputational damage,
all of which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Additionally, the current regulatory environment, with the continuing heightened supervisory focus, combined with the forthcoming regulatory change initiatives, will
lead to material operational and compliance costs. Relevant risks include
:
–
Regulators, agencies and authorities with jurisdiction over Santander UK, including the BoE, the PRA and the FCA, HMT, HM Revenue Customs (HMRC), the
CMA, the Information Commissioner’s Office, the FOS, the PSR, the SFO, the National Crime Agency (NCA), OFSI or the courts, may determine that certain
aspects of Santander UK’s business have not been or are not being conducted in compliance with applicable laws or regulations (or that policies and
procedures are inadequate to ensure compliance), or, in the case of the FOS, with what is fair and reasonable in the FOS’s opinion. Changes in policy, laws and
regulations including in relation to SME dispute resolution and liability for APP fraud and unauthorised payment fraud, may have significant consequences and
lead to material implementation, operational and compliance costs.
–
An adverse finding by a regulator, agency or authority could result in the need for extensive changes in systems and controls, business policies, and practices
coupled with suspension of sales, restrictions on conduct of business and operations, withdrawal of services, customer redress, fines and reputational damage.
–
The increased focus on competition law in financial services and concurrent competition enforcement powers for the FCA and PSR may increase the likelihood
of competition law related inquiries or investigations initiated by either the CMA or these authorities. Santander UK may be liable for damages to third parties
harmed by Santander UK’s conduct of business. For competition law, there are efforts by governments across Europe to promote private enforcement as a
means of obtaining redress for harm suffered as a result of competition law breaches. Under the Consumer Rights Act 2015, there is scope for class actions to
be used to allow the claims of a whole class of claimants to be heard in a single action in both follow-on and standalone competition cases. The UK has seen a
sharp increase in recent years in the number of class action claims being issued in the Competition Appeals Tribunal on this basis.
–
The alleged historical or current misselling of, or misconduct in relation to, financial products, including the alleged misselling of Payment Protection Insurance
(PPI), the alleged overcharging of interest, the alleged inappropriate sale of interest-only mortgages, the alleged unfair use of the standard variable rate in
connection with mortgages, the alleged non-disclosure of commission, including auto finance related commission giving rise to an alleged unfair relationship, or
alleged misconduct as a result of having sales practices and/or rewards structures that are deemed to have been inappropriate, has given rise to and may in the
future give rise to a risk of complaints to FOS and/or civil litigation (including claims management company driven legal or complaints campaigns)(see Note 31
to the Consolidated Financial Statements for legal actions and regulatory matters). Such matters may in the future give rise to the risk of regulatory enforcement
action requiring Santander UK to amend sales processes, withdraw products or provide restitution to affected customers, any of which may require additional
provisions to be recorded in Santander UK’s financial statements and could adversely impact future revenues from affected products.
–
Santander UK may have held and may continue to hold bank accounts for entities or have relationships with entities such as third parties that might be or are
subject to scrutiny from various regulators and authorities, including the SFO, the NCA and regulators in the US and elsewhere, which has led and could in the
future lead to Santander UK’s conduct being reviewed as part of any such scrutiny.
–
Santander UK is (and will continue from time to time to be) subject to certain legal or regulatory investigations, inquiries and proceedings, both civil and criminal
including in connection with Santander UK’s lending and payment activities, treatment of customers, relationships with Santander UK’s employees, financial
crime, and other commercial or tax matters (see Note 31 to the Consolidated Financial Statements for legal actions and regulatory matters). These may be
brought against Santander UK under UK legal or regulatory processes, or under legal or regulatory processes in other jurisdictions, such as the EU and the US,
in circumstances where overseas regulators and authorities may have jurisdiction by virtue of its activities or operations.
–
In view of the inherent difficulty of predicting the outcome of legal or regulatory proceedings, particularly where opportunistic claimants seek very large or
indeterminate damages, cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, or where the approaches of
regulators or authorities to legal or regulatory issues and sanctions applied are subject to change, Santander UK cannot state with confidence what the eventual
outcome of any pending matters will be and any such pending matters are not disclosed by name because they are under assessment. Santander UK’s
provisions in respect of any pending legal or regulatory proceedings are made in accordance with relevant accounting requirements. These provisions are
reviewed periodically. However, in light of the uncertainties involved in such legal or regulatory proceedings, there can be no assurance that the ultimate
resolution of these matters will not exceed the provisions currently accrued by Santander UK. As a result, the outcome of a particular matter (whether currently
provided or otherwise) could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
–
The developing legal and regulatory regime in which Santander UK operates requires it to be compliant across all aspects of its business, including the training,
authorisation and supervision of personnel and the development of systems, processes and documentation. If Santander UK fails to be compliant with relevant
law or regulation, there is a risk of an adverse impact on its business from more proactive regulatory intervention (including by any overseas regulator which
establishes jurisdiction), investigation and enforcement activity leading to sanctions, fines, civil or criminal penalties, or other action imposed by or agreed with
the regulatory authorities, as well as increased costs associated with responding to regulatory inquiries and defending regulatory actions. Customers of financial
services institutions, including Santander UK’s customers, may seek redress if they consider that they have suffered loss for example as a result of the
misselling of a particular product, or through incorrect application or enforcement of the terms and conditions of a particular product or in connection with a
competition law infringement and Santander UK’s rights under a contract with its customers may in certain circumstances be unenforceable or otherwise
impaired.
–
The Financial Services and Markets Act 2000 (Designated Consumer Bodies) Order 2013 (the Designated Consumer Bodies Order) was made on 16
December 2013 and came into force on 1 January 2014. The Designated Consumer Bodies Order designates the National Association of Citizens Advice
Bureaux, the Consumers’ Association, the General Consumer Council for Northern Ireland and the National Federation of Self Employed and Small Businesses
as consumer bodies that may submit a ‘super-complaint’ to the FCA. A ‘super-complaint’ is a complaint made by any of these designated consumer bodies to
the FCA on behalf of consumers of financial services where it considers that a feature, or a combination of features, of the market for financial services in the UK
is seriously damaging the interests of these customers. Complaints about damage to the interests of individual consumers will continue to be dealt with by the
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FOS. If a ‘super-complaint’ were to be made against a Santander UK entity by a designated consumer body under the Designated Consumer Bodies Order, any
response published or action taken by the FCA could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Given the: (i) requirement for compliance with an increasing volume of relevant laws and regulations; (ii) more proactive regulatory intervention and enforcement
and more punitive sanctions and penalties for infringement; (iii) inherent unpredictability of litigation; (iv) evolution of the jurisdiction of FOS and CMA and related
impacts; (v) development of a voluntary dispute resolution service to oversee the resolution of historic complaints from SMEs that meet the relevant eligibility
criteria and new complaints from SMEs that would be outside the FOS’ proposed revised jurisdiction; (vi) introduction of a voluntary code to enhance protection for
customers who are victims of APP fraud; and (vii) high volume of new regulations or policy changes from multiple regulators and authorities which Santander UK
is mandated to implement within compressed timescales; it is possible that related costs or liabilities could have a material adverse effect on Santander UK’s
operations, financial condition and prospects.
Operational risks
Failure to successfully apply or to improve Santander UK’s credit risk management systems could have a material adverse effect on Santander
UK’s operations, financial condition and prospects
As a commercial banking group, one of the main types of risks inherent in Santander UK’s business is credit risk. For example, an important feature of Santander
UK’s credit risk management system is to employ Santander UK’s own credit rating system to assess the particular risk profile of a customer. This system is
primarily generated internally, but, in the case of counterparties with a global presence, also builds off the credit assessment assigned by other Banco Santander
group members. As this process involves detailed analysis of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to
human and IT systems errors. Where exercising their judgement on current or future credit risk behaviour of Santander UK’s customers, Santander UK’s
employees may not always be able to assign a correct credit rating, which may result in a larger exposure to higher credit risks than indicated by Santander UK’s
risk rating system. Santander UK may not be able to detect all possible risks before they occur, or its employees may not be able to effectively apply its credit
policies and guidelines due to limited tools available to Santander UK, which may increase its credit risk.
Any failure to effectively apply, consistently monitor and refine Santander UK’s credit risk management systems may result in an increase in the level of non-
performing loans and higher losses than expected, which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK‘s business is subject to risks related to data and adverse impacts on operations if data management policies and procedures are
not sufficiently robust
Santander UK's operations rely on the effective use of data to manage and grow its business and deliver the overall strategy. Santander UK uses data to serve its
customers, satisfy its regulatory requirements and run its operations. If Santander UK's data is not accurate and timely, this could impact its ability to serve
customers, operate with resiliency or meet regulatory requirements. From a business perspective, accurate and detailed customer data is critical for delivering
customer expectations in terms of new and improved products and services. Lack of good quality data could also result in competitive disadvantages by
increasing costs in terms of manual interventions, adjustments, and reconciliations. Investment is continuously being made in data tools and in maturing a strong
data culture across the organisation to address some of the data challenges and prepare a strong foundation for the future.
Any such failure to effectively use data
or maintain effective data management policy and procedures could have a material adverse effect on Santander UK’s operations, financial condition and
prospects
.
Santander UK’s business is subject to risks related to cybersecurity
Santander UK’s systems, software and networks may be vulnerable to unauthorised access, misuse, computer viruses or other malicious code and other events
that could have a security impact. The interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client,
vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm, and therefore have a material adverse
impact on Santander UK’s operations, financial condition and prospects.
In particular, in recent years the computer systems of companies and organisations have been targeted by cyber criminals, activists and nation-state-sponsored
groups. Like other financial institutions, Santander UK manages and holds confidential personal information of customers in the conduct of its banking operations,
as well as a large number of assets. Consequently, Santander UK has been, and continues to be, subject to a range of cybersecurity threats, such as
ransomware, malware via the supply chain, phishing and denial of service.
Cybersecurity incidents could result in the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets
(including cash). In addition, cybersecurity incidents could give rise to the disablement of Santander UK’s digital systems used to service its customers. Any
material disruption or degradation of Santander UK’s systems could cause information, including data related to customer requests, to be lost or to be delivered to
Santander UK’s clients with delays or errors, which could reduce demand for Santander UK’s services and products. As attempted attacks continue to evolve in
both scope and sophistication, Santander UK may incur significant costs to modify or enhance its protective measures against such attacks, or to investigate or
remediate any vulnerability or resulting breach, or in communicating any cybersecurity incidents to its customers. If Santander UK fails to effectively manage its
cybersecurity risk, by, for example, failing to adhere to its cybersecurity policies, procedures or controls, the impact could be significant and may include harm to
Santander UK reputation and make Santander UK liable for the payment of customer compensation, regulatory penalties and fines. Factors such as failing to
apply critical security patches from its technology providers, to manage out obsolete technology or to update Santander UK’s processes in response to new
threats could also give rise to these consequences, which, if they occur, could have a material adverse effect on Santander UK’s operations, financial condition
and prospects. This might also include significant increases in the premiums paid on cyber insurance policies or changes to policy limits and cover.
In addition, Santander UK may also be affected by cybersecurity incidents against national critical infrastructures in the UK or elsewhere, for example, the
telecommunications network or cloud computing service providers used by Santander UK. In common with other financial institutions Santander UK is dependent
on such networks to provide digital banking services to its customers, connect its systems to suppliers and counterparties, and allow its staff to work remotely. Any
cybersecurity incidents against these networks could negatively affect its ability to service its customers. As Santander UK does not operate these networks it has
limited ability to protect Santander UK’s business from the adverse effects of cybersecurity incidents against it or against its counterparties and key national and
financial market infrastructure. Further, the domestic and global financial services industry, including key financial market infrastructure, may be the target of
cybersecurity disruption and attack by cyber criminals, activists or geopolitical activists looking to cause economic instability.
Santander UK is exposed to risk from potential non-compliance with regulations, policies, employee misconduct, human error, negligence and
deliberate acts of harm or dishonesty, including fraud
Santander UK is exposed to risk from potential non-compliance with policies, employee misconduct, human error, negligence and deliberate acts of harm or
dishonesty, including fraud. It is not always possible to deter or prevent employee misconduct or non-compliance with policies and such errors, acts, omissions
and failures and the precautions Santander UK takes to detect and prevent this activity may not always be effective. Any instances could result in regulatory
sanctions and cause reputational or financial harm, and therefore have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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Any failure to effectively manage changes in Santander UK’s information technology infrastructure and management information systems in a
timely manner could have a material adverse effect on Santander UK’s operations, financial condition and prospects
Santander UK’s businesses and its ability to remain competitive depends to a significant extent upon the functionality of its information technology systems and on
its ability to upgrade, evolve and expand the capacity of its information technology infrastructure on a timely and cost-effective basis. The proper functioning of
Santander UK’s financial control, risk management, credit analysis and reporting, accounting, customer service, financial crime, conduct and compliance and
other information technology systems, as well as the communication networks between branches and main data processing centres, are critical to its customers,
businesses and its ability to compete. Investments and improvements in Santander UK’s information technology infrastructure are regularly reviewed with a view
to retain competitive advantage and to ensure that resilience remains within acceptable levels. Conversely any failure to effectively improve, evolve, expand or
upgrade its information technology infrastructure and management information systems in a timely manner could have a material adverse effect on Santander
UK’s operations, financial condition and prospects, and could cause reputational damage to Santander UK.
From time-to-time Santander UK is required to migrate information relating to its customers to new information technology systems. Any failure to manage such
migration effectively and efficiently could have a negative impact on Santander UK’s ability to provide services to its customers and could cause financial and
reputational damage to Santander UK, along with regulatory scrutiny and potential enforcement action.
Santander UK expects changes to its programmes of systems to have an impact on its risk profile, from a technology, environmental, social and corporate
governance and regulatory perspective. Whether it is the opportunities from adoption of cloud technology, systems to support important regulatory initiatives, or
the desire to identify, prioritise and remove obsolete systems from operations, the operational risk associated with changes to programmes of systems is likely to
increase and this will therefore remain an area of key focus in Santander UK’s risk management. While internal controls aim to reduce the risk to acceptable
levels, there can be no assurance that Santander UK will not suffer material losses from such operational risks in the future, which could have a material adverse
impact on Santander UK’s operations, financial condition and prospects.
Santander UK may be exposed to unidentified or unanticipated risks despite its risk management policies, procedures and methods and may be
exposed to risk related to errors in Santander UK’s risk modelling
The management of risk is an integral part of Santander UK’s activities. Santander UK seeks to monitor and manage its risk exposure through a variety of risk
reporting systems. For a further description of our risk management framework see the ‘Risk review’. While Santander UK employs a broad and diversified set of
risk monitoring and risk mitigation techniques and strategies, they may not be fully effective in mitigating Santander UK’s risk exposure in all economic market
environments or against all types of risk, including risks that Santander UK fails to identify or anticipate.
Some of Santander UK’s tools and metrics for managing risk are based upon its use of observed historical market behaviour. Santander UK applies statistical and
other tools to these observations to arrive at quantifications of its risk exposures. These tools and metrics may fail to predict future risk exposures. These risk
exposures could, for example, arise from factors Santander UK did not anticipate or correctly evaluate in its statistical models. This would limit its ability to manage
its risks. Santander UK’s losses thus could be significantly greater than the historical measures indicate. In addition, Santander UK’s quantified modelling does not
take all risks into account. Santander UK’s more qualitative approach to managing those risks could prove insufficient, exposing it to material, unanticipated losses.
Santander UK could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that include errors or are
otherwise inadequately developed, implemented or used, or as a result of the modelled outcome being misunderstood. If existing or potential customers or
counterparties believe its risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with Santander UK. These
occurrences could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK relies on third parties for important infrastructure support, products and services
Third-party providers provide key components of Santander UK’s business infrastructure such as loan and deposit servicing systems, back office and business
process support, information technology production and support, internet connections and network access. Relying on these third-party providers is a source of
operational risk, including with respect to security breaches affecting our third parties and other parties that interact with these providers. As the use and depth of
Santander UK’s relationship with third parties increases, including the use of artificial intelligence and cloud-based services, Santander UK increasingly faces the
risk of operational failure with respect to its systems. Santander UK may be required to take steps to protect the integrity of its operational systems, thereby
increasing its operational costs. In addition, any problems caused by these third parties, including as a result of them not providing Santander UK their services for
any reason, or performing their services poorly, could adversely affect Santander UK’s ability to deliver products and services to customers and otherwise conduct
its business, which could lead to reputational damage, litigation and regulatory investigations and intervention. Replacing these third-party vendors or affiliates
could also entail significant delays and expense. Further, the operational and regulatory risk Santander UK faces as a result of these arrangements may be
increased to the extent that it restructures such arrangements. Any restructuring could involve significant expense to Santander UK and entail significant delivery
and execution risk which could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
Santander UK relies on recruiting, retaining and developing appropriate senior management and skilled personnel
Santander UK’s continued success depends in part on the continued service of key members of its senior executive team and other key employees. The ability to
continue to attract, develop, train, motivate and retain highly qualified and talented professionals is a key element of Santander UK’s strategy. The successful
implementation of Santander UK’s strategy depends on the availability of skilled and appropriate management, both at Santander UK’s head office and in each of
its business units. There is also an increasing demand for Santander UK to hire individuals with STEM skills. Such individuals are very sought after by all
organisations, not just the banking industry, and thus Santander UK’s ability to attract and hire this talent will determine how quickly the bank is able to respond to
technological change. In light of a shortage of skills currently being seen across the UK, it is increasingly challenging to recruit and retain talent for all roles, with
subject matter expert and technology roles offering the biggest challenges.
If Santander UK fails to staff its operations appropriately or loses one or more of its key senior executives or other key employees and fails to replace them in a
satisfactory and timely manner, it could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
In addition, the financial services industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse
effect on Santander UK’s ability to hire or retain the most qualified employees. If Santander UK fails or is unable to attract and appropriately develop, motivate and
retain qualified professionals, it could have a material adverse effect on Santander UK’s operations, financial condition and prospects.
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Financial reporting risk
Santander UK’s financial statements are based in part on judgements and accounting estimates which, if inaccurate, could cause material
misstatement of Santander UK’s future financial results and financial condition.
The preparation of Santander UK's consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and
assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in
making estimates, actual results reported in future periods may be based on amounts which differ from those estimates. Estimates, judgements and assumptions
are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable
under the circumstances. There has been no change in the inherent sensitivity of the areas of judgement in the period. Management has considered the impact of
developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting estimates.
The significant judgements, apart from those involving estimation, made by management in applying Santander UK's accounting policies in these financial
statements (key judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying
amount of assets and liabilities within the next financial year (key estimates), which together are considered critical to Santander UK's results and financial
position, are set out in Note
1
to the Consolidated Financial Statements in 'Critical judgements and accounting estimates'. Any material differences between
estimates and actual results reported in any given financial period, or any material adjustments to the carrying amount of assets and liabilities, could result in
reputational damage to Santander UK and could have a material adverse effect on its future financial results and financial condition.
Changes in accounting standards could affect reported earnings
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of
Santander UK’s Consolidated Financial Statements. These changes can materially affect how Santander UK records and reports its financial condition and
financial results. In some cases, Santander UK could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period
financial statements. Any change in reported earnings as a result of the foregoing could have a material adverse effect on Santander UK’s future financial results
and financial condition.
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Regulation of the Santander UK group
As a financial services group, Santander UK is subject to extensive financial services laws, regulations, administrative actions and policies in the UK and in each
other location in which Santander UK operates. This intensive approach to supervision is maintained in the UK by the PRA and the FCA. As well as being subject
to UK regulation, as a result of forming part of the Banco Santander group, Santander UK is also affected by other regulators, such as the Banco de España and
the ECB, as well as various legal and regulatory regimes (including in the US) that have extra-territorial effect. Extensive legislation and implementing regulations
affecting the financial services industry have recently been adopted in regions that directly or indirectly affect Santander UK’s business, including Spain, the US,
the EU and other jurisdictions. In the UK and elsewhere, there is continuing political, competitive and regulatory scrutiny of the banking industry. Political
involvement in the regulatory process, in the behaviour and governance of the UK banking sector and in the major financial institutions in which the UK
government has a direct financial interest is likely to continue.
Approach of the FCA
As per FSMA, the FCA's strategic objective is to ensure that the relevant markets function well. In support of this, the FCA has three operational objectives: to
secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system and to promote effective competition in
the interests of consumers. Following the entry into force of FSMA 2023, the FCA also has a secondary competitiveness and growth objective, to facilitate the
international competitiveness and medium- to long-term growth of the UK economy.
The FCA Handbook sets out rules and guidance across a range of issues with which financial institutions are required to comply including high level principles of
business and detailed conduct of business standards and reporting standards.
Approach of the PRA
As per FSMA, the PRA's general objective is to promote the safety and soundness of the firms which it regulates (with respect to insurance, the PRA also has a
second objective of contributing to the securing of an appropriate degree of protection for policyholders). The PRA also has a secondary objective to facilitate
effective competition in the markets for services provided by PRA authorised firms and, following the entry into force of FSMA 2023, is subject to the same
secondary competitiveness and growth objective as the FCA.
The PRA Rulebook includes rules relating to capital adequacy and liquidity, among several other things.
US regulation
Within the Dodd-Frank Act, the so-called Volcker Rule, prohibits ‘banking entities’, including the Santander UK group, from engaging in certain forms of proprietary
trading or from sponsoring or investing in certain covered funds, in each case subject to certain exemptions, including exemptions permitting foreign banking
entities to engage in trading and fund activities that take place solely outside of the US. The Volcker Rule also contains exclusions and certain exemptions for
market-making, hedging, underwriting, trading in US government and agency obligations as well as certain foreign government obligations, and also permits
ownership interests in certain types of funds to be retained such as new exclusions for credit funds, venture capital funds, family wealth management vehicles and
client facilitation vehicles. The Santander UK group has policies, procedures and controls in place designed to achieve compliance with the Volcker Rule.
The Banking Act 2009
The special resolution regime set out in the Banking Act 2009 provides HMT, the BoE, the PRA and the FCA with a variety of powers for dealing with UK deposit
taking institutions (and, in certain circumstances, their holding companies) that are failing or likely to fail, including: (i) to take a bank or bank holding company into
temporary public ownership; (ii) to transfer all or part of the business of a bank to a private sector purchaser; or (iii) to transfer all or part of the business of a bank
to a bridge bank. The special resolution regime also comprises a separate insolvency procedure and administration procedure each of which is of specific
application to banks. These insolvency and administration measures may be invoked prior to the point at which an application for insolvency proceedings with
respect to a relevant institution could be made.
The Financial Services (Banking Reform) Act 2013 further amended the Banking Act 2009 to introduce a UK ‘bail-in power’ to implement the BRRD, which
contains a bail-in power similar to that contained in the Banking Act and requires EU Member States to provide resolution authorities with the power to write-down
the claims of unsecured creditors of a failing institution and to convert unsecured claims to equity (subject to certain parameters). The UK bail-in power is an
additional power available to the UK resolution authorities under the special resolution regime provided for in the Banking Act 2009. This enables them to
recapitalise a failed institution by allocating losses to such institution’s shareholders and unsecured creditors, subject to the rights of such shareholders and
unsecured creditors to be compensated under a bail-in compensation order.
Competition
The CMA is the UK’s main competition authority responsible for ensuring that competition and markets work well for consumers. In addition, under the Banking
Reform Act, as of 1 April 2015, the FCA has the power to enforce against breaches of the Competition Act 1998 and to refer markets to the CMA for in-depth
investigation in the areas of financial services in the UK. As of 1 April 2015, the PSR also has an objective and powers equivalent to those of the FCA to promote
competition in the payments industry.
Payments
Within the UK the PSR has mandated that Santander UK builds systems and processes for both Confirmation of Payee as well as the Contingent Reimbursement
Model Code (CRM) both of which aim to reduce the level of customer fraud (particularly through our customers' manipulation into making payments known as
'Authorised Push Payment' (APP) fraud). These standards have been implemented by Santander UK.
From October 2024, Santander UK will also be subject to
the PSR's mandatory reimbursement requirement, requiring it to reimburse APP scam victims subject to certain exceptions, excesses and maximums.
Under these
standards and rules, Santander UK assumes responsibility for certain categories of customer losses, and inherent failings in system design may lead to fines from
regulators and/or compensation being paid to customers.
Santander UK also expects to see significant developments in the key UK payment systems architecture, with systems update of the high value CHAPS system
through Real Time Gross Settlement (RTGS) renewal as well as the 'New Payments Architecture' for FPS, BACS and the other lower value retail payment
schemes. The Payment Services Regulation 2017 (PSR 2017) has been implemented within the UK and Santander UK has built open access to third-party
providers via the Open Banking API industry standard.
Finally, Santander UK remains within the SEPA Payment Scheme and continues to send SEPA Euro Payments via Madrid to EEA beneficiaries. However, as it is
not domiciled in the EU, it has needed to exit the other (high value) Euro payment schemes, such as EURO1 and Target 2. It has negotiated arrangements to
access those systems via Madrid and an agreement has been agreed and is operational.
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Financial crime
On 9 July 2018, Directive (EU) 2018/843 (MLD5), amending the Fourth Money Laundering Directive (EU) 2015/849 (MLD4), entered into force.
MLD5 brought in increased corporate transparency rules, introduced the application of AML rules to firms providing services associated with virtual currencies and
further extended enhanced due diligence (EDD) requirements to all transactions with natural persons or legal entities established in third countries identified as
high-risk countries (HRTCs).
The UK transposed MLD5 into UK law on 20 December 2019, amending the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the
Payer) Regulations 2017 (MLRs) through the Money Laundering and Terrorist Financing (Amendment) Regulations 2019. The latter came into effect on 10
January 2020 and, among other changes, introduced a requirement to report beneficial ownership discrepancies to Companies House. Further amendments to
the MLRs were made by, among other instruments the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020.
On 26 March 2021, a new statutory instrument published by HMT, the Money Laundering and Terrorist Financing (Amendment) (High Risk Countries) Regulations
2021 entered into force, amending the MLRs by replacing references to the European Commission's list of HRTCs (in respect of which EDD and additional
specific EDD measures must be taken under the MLRs) with a UK list identified in a new Schedule 3ZA to the MLRs. This was the first exercise of the powers in
section 49 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). Following the entry into force of the Money Laundering and Terrorist Financing (High-
Risk Countries) (Amendment) Regulations 2024 on 23 January 2024, the UK no longer maintains this separate list of HRTCs. Instead, the MLRs definition of an
HRTC implements, and is updated automatically with reference to, two lists published by the Financial Action Task Force (FATF) being the “High-Risk Jurisdictions
subject to a Call for Action” and the “Jurisdictions under Increased Monitoring”.
In July 2021, the UK government launched two consultations on the MLRs. The first targeted specific changes to align the UK’s AML/CTF regime with
amendments to FATF standards and to introduce certain technical changes. The second was a 'Call for Evidence' examining the effectiveness and future state of
the UK’s AML/CTF regime. Both consultations closed in October 2021. On 24 June 2022, the UK government published a forward-looking review of the UK’s
AML/CTF regime in response to the ‘Call for Evidence’ focusing on systemic effectiveness, regulatory effectiveness and supervisory effectiveness. Following the
publication of the Money Laundering and Terrorist Financing (Amendment) Regulations 2022 which came into force on 9 March 2022 and served to make certain
time-sensitive updates to ensure the UK continued to meet international standards, the UK government published the Money Laundering and Terrorist Financing
(Amendment) (No. 2) Regulations 2022 in response to their 2021 consultation, which came into force on 1 September 2022, (with specific measures coming into
force on 1 April 2023). These amendments include, amongst others, specific obligations in respect of addressing proliferation financing risk and amendments to
the beneficial ownership discrepancy reporting regime, including discrepancy reporting obligations in respect of the Register of Overseas Entities introduced by
ECTEA, which came into force on 15 March 2022. Additional key changes introduced by ECTEA included strengthening aspects of the unexplained wealth orders
(UWO) regime, streamlining the process of making sanctions and introducing ‘strict liability’ for breaches of sanctions. On 26 October 2023, ECCTA gained royal
assent. ECCTA aims to deliver long-awaited reforms to tackle economic crime and improve transparency over corporate entities, such as reforms to Companies
House over a multi-year period, reform of the identification doctrine (broadening the scope of corporate criminal liability), the introduction of an offence of failure to
prevent and the expansion of intra-private sector information sharing rules for the purposes of preventing and detecting of economic crime. Many of ECCTA’s
provisions are due to come into force in 2024.
F
urther legal and regulatory changes are expected during 2024, including the management of domestic politically exposed persons and their associates, as set out
in FSMA 2023, new proposals for a ‘Suspended Accounts Scheme’ as set out in the Criminal Justice Bill 2023-24, possible changes to account closure rules,
mandatory APP scam reimbursement rules, and potential changes to the MLRs. The government is expected to also continue to take forward a series of non-
legislative reforms that will impact the financial crime landscape, as committed to in keynote strategic publications such as the Economic Crime Plan 2 and Fraud
Strategy.
To ensure regulatory continuity post-Brexit, the government introduced SAMLA to provide a legal framework through which it can impose and update sanctions
following the UK's departure from the EU. SAMLA grants the UK government the authority to introduce statutory instruments to enable compliance with United
Nations (UN) sanctions and other international obligations, and to meet defined discretionary purposes such as promoting national and international peace and
security. SAMLA broadly mirrors the EU sanctions regime but enables the UK to act independently by imposing sanctions regulations swiftly without the need to
reach a consensus with other EU member states.
The US government has continued to actively apply and enforce sanctions against individuals, entities and countries. US sanctions are subject to change without
warning and may affect Santander UK’s ability to transact with certain individuals and entities and to operate in certain jurisdictions.
The UK, EU and US are expected to continue to use sanctions to pursue their foreign policy interests and objectives, and the imposition of new, additional, and/or
enhanced sanctions is and will remain unpredictable. Any changes in UK, EU and/or US sanctions could affect Santander UK’s business.
The banking sector in the UK continues to be subject to the Suspicious Activity Reporting (SAR) regime laid out in the Proceeds of Crime Act 2002. The regime is
one of the key tools to inform law enforcement agencies and the National Crime Agency of suspicious (potentially money laundering or terrorist financing) activity.
In 2018, the UK government asked the Law Commission to conduct a review of the legislation underpinning the regime. The review was completed in July 2019
and concluded that the breadth of the legal framework, including the pressure to submit SARs that is driven by individual criminal liability for failing to submit one
when ‘suspicious’, means that the SARs regime suffers from very large reporting volumes.
The UK’s SARs Reform Programme, which operates within the confines of the government’s Economic Crime Plans (1 and 2),
has increased staff in the UK
Financial Intelligence Unit (UKFIU) and Regional Organised Crime Units and delivered the release of the SAR Portal which opened to all firms during September
2023, replacing the SARs Online System. The SARs Reform Programme also aims to enhance UKFIU’s analytical capabilities, and to increase engagement with
and feedback to the private sector.
Anti-corruption continues to be a key focus of the UK government's approach to economic crime. ECTEA contains provisions which seek to tackle corruption
through increased transparency of overseas ownership of UK land and real estate and the strengthening of UWOs.
The UK government's previous anti-corruption
strategy lasted from 2017 to 2022, and it may release a new strategy in 2024.
Anti-corruption remains a topic of global focus, as illustrated by President Biden's ‘Protecting Democracy’ summit in December 2021 during which the US released
its first strategy on Countering Corruption and more recently US National Security Advisor Jake Sullivan's speech at the December 2022 International Anti-
Corruption Conference (IACC). Sullivan reiterated President Biden and the US administration's commitment to working with other countries to champion
democracy and fight corruption. To implement the US anti-corruption strategy, the US Department of State issued the
US Strategy on Countering Corruption
Implementation Plan, further strengthening President Biden’s commitment to the anti-corruption agenda.
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Consumer Duty
The FCA has introduced a new Consumer Duty that aims to enhance and improve consumer protections. The Consumer Duty has three elements: (i) a “Consumer
Principle” which reflects the overall standards of behaviour the FCA expects from firms (a firm must act to deliver good outcomes for retail customers), (ii) three
cross-cutting rules that articulate the standards of conduct expected under the Consumer Principle (firms must act in good faith towards retail customers, avoid
causing foreseeable harm to retail customers and enable and support retail customers to pursue their financial objectives) and (iii) four outcomes that build on the
Consumer Principle and cross-cutting rules, comprising a suite of rules and guidance setting more detailed expectations for a firm’s conduct in four areas that
represent the key elements of the firm-consumer relationship (product design and governance, price and value, consumer understanding and consumer support).
Since 31 July 2023, the Consumer Duty has applied to all open products and services offered by firms, banks and financial institutions. For closed products and
services, the Consumer Duty rules come into force on 31 July 2024.
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Articles of Association
The following is a summary of the Articles of Association (the Articles) of the Company.
Santander UK
plc is a public limited company incorporated and registered in England and Wales under the Companies Act 2006, with registered number
2294747
.
The Articles specifically state and limit the objects of the Company which are therefore restricted.
A Director shall not vote on, or be counted in the quorum in relation to, any resolution of the Directors in respect of any contract in which he has an interest, except
if no conflict of interest could reasonably be expected to arise from that interest, or any resolution of the Directors concerning his own appointment, or the
settlement or variation of the terms or the termination of his or her appointment. Directors are entitled to such remuneration as the directors determine for their
services to the Company as directors and for any other service which they undertake for the Company. Directors may delegate to a person or committee the
determination of any fee, remuneration or other benefit which may be paid or provided to any Director. No Director is required to retire by reason of his or her age,
nor do any special formalities apply to the appointment or re-election of any Director who is over any age limit. No shareholding qualification for Directors is
required.
The Company may issue shares with such rights or restrictions as may be determined by ordinary resolution or, if no such resolution has been passed or so far as
the resolution does not make specific provision, as the Directors may decide. The Company may by ordinary resolution declare dividends, and the Directors may
decide to declare or pay interim dividends. No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. If dividends are
unclaimed for twelve years, the right to the dividend ceases. All dividends or other sums which are payable in respect of shares, and unclaimed after having been
declared or become payable, may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.
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. 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.
On a distribution of assets on winding up of the Company or return of capital (other than on a redemption or purchase by the Company of any of its share capital),
members holding preference shares shall in respect thereof be entitled to receive, out of the surplus assets remaining after payment of the Company’s liabilities,
an amount equal to the amount paid up or credited as paid up on the preference shares together with such premium (if any) as may be determined by the Board
prior to allotment thereof (and so that the Board may determine that such premium is payable only in specified circumstances).
Ordinary shares are transferable. Holders of ordinary shares are entitled to receive notice of and to attend any general meeting of the Company. Subject to any
special terms as to voting upon which any shares may be issued or may for the time being be held, or any suspension or any abrogation of special rights, as set
out in the Articles of Association, on a show of hands every member who is present in person at a general meeting of the Company shall have one vote and every
proxy present who has been duly appointed by a member shall have one vote. On a poll every member who is present in person or by proxy shall have one vote
for every share of which he is the holder.
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.
Where the shares are
partly paid, the Board may make further calls upon the holders in respect of any sum whether in respect of nominal value or premium that is unpaid on their
shares. There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of
shares of any class.
Subject
to the provisions of the UK Companies Act 2006, all or any of the rights attached to any class of shares (whether or not the Company
is being wound up) may be varied with the consent in writing of the holders of not less than three-quarters in nominal value of the issued shares of that class or
with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. Additional quorum and voting requirements apply to
such meeting.
General meetings shall be called by at least 14 clear days’ notice (that is, excluding the day of the general meeting and the day on which the notice is given). A
general meeting may be called by shorter notice if it is so agreed, in the case of an annual general meeting, by all the shareholders having a right to attend and
vote, or in other cases, by a majority in number of the shareholders having a right to attend and vote, being a majority together holding not less than 95% in
nominal value of the shares giving the right. The notice shall specify the date, time and place of the meeting and the general nature of the business to be
transacted.
There are no restrictions on the rights to own securities for either resident or non-resident shareholders, other than those to which they may be subject as a result
of laws and regulations in their home jurisdiction.
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Board of Directors
1 William Vereker
Chair
Appointed on 1 November 2020 (Board Chair), previously Independent Non-Executive Director from 1 October 2020
.
Skills and experience
William is an experienced banker, previously having served as Global Head of Investment Banking for UBS (2013 – 2018), and prior to that holding a number of
leadership roles at Nomura, Lehman Brothers and Morgan Stanley. From 2018 to 2019, he served as the Prime Minister’s Business Envoy. He was a Vice
Chairman at JP Morgan until October 2020.
Other principal appointments
Chair of the Board of Santander UK
Group Holdings
plc*. Non-Executive Director of the London Stock Exchange Group Plc. Member of the UK Prime Minister's
Investment Council. Member and Special Advisor of the Investment Committee at Delancey Credit and Income Fund GP. William sits on the Advisory Board of
Celonis GmbH and also chairs the Advisory Board of Gonville Caius College, Cambridge.
Board Committee memberships
Board Nomination Governance Committee (Chair).
2 Mike Regnier
Executive Director and Chief Executive Officer
Appointed Chief Executive Officer on 1 April 2022.
Skills and experience
Mike joined Santander UK from Yorkshire Building Society, where he was a Board member since 2014 and Chief Executive since 2017. He previously held the
posts of Chief Commercial Officer and Chief Customer Officer. Mike began his career in strategic management consulting with a focus on Retail and Retail
Financial Services. After management positions at Asda, he joined the banking sector and held a number of senior positions at Lloyds Banking Group, including
Personal Current Accounts and Credit Cards Director, and Products and Marketing Director for TSB.
Mike has served as a Board Director of Visa UK, and Chairman of the merchant acquirer LTSB Cardnet. He was also Chair of the Building Societies Association
from 2019 – 2021. Mike holds an MEng in Engineering, Economics Management from Oxford University, together with an MBA from INSEAD.
Other principal appointments
Chief Executive Officer and Executive Director of Santander UK
Group Holdings
plc*.
3 Angel Santodomingo
Executive Director and Chief Financial Officer
Appointment subject to regulatory approval
(i)
Skills and experience
Angel joined the Banco Santander group in 2005 as Head of International Development in the Asset Management unit, and subsequently became Head of
Investor Relations. In 2014, he became CFO and Investor Relations Officer of Banco Santander Brazil, a role he held for nine years, as well as Board Director. In
2023, Angel returned to Spain, becoming Group Head of Strategy and Chief of Staff to the Banco Santander Group Executive Chair, President of CFA Spain, and
authored a series of books and articles about Markets, Finance Analysis and Equity Valuation.
Angel is an experienced board director, having held positions as a Board Director of a number of commercial entities including Credito de la Casa, PSA Banque
Brazil (Chairman) and Getnet Brazil. He has a Bachelor’s degree in Economics Finance and is a Chartered Financial Analyst (CFA).
Other principal appointments
Chief Financial Officer and Executive Director of Santander UK
Group Holdings
plc*
(i)
. Board Director of Banco Santander Brazil*.
(i)
Angel's appointment as Executive Director and Chief Financial Officer is subject to approval by the Financial Conduct Authority.
4 Pedro Castro e Almeida
Banco Santander Nominated Non-Executive Director
Appointed 1 September 2023.
Skills and experience
Pedro joined Banco Santander Totta SA (also known as Banco Santander (Portugal)) in 1993, holding senior roles in various areas. From 2007 to 2009, he was a
member of the boards of Banco Santander Totta and Banco Santander de Negócios Portugal. Since 2009, Pedro has been a member of the Banco Santander
(Portugal) Executive Committee, and since 2010, he has been a member of the Board of Banco Santander (Portugal). In January 2019, he was appointed CEO of
Banco Santander (Portugal) and Vice Chairman of its Board. He is also Regional Head of Europe for Banco Santander SA.
Other principal appointments
Non-Executive Director of Santander UK
Group Holdings
plc*. Director of PagoNxt SL*.
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5 Lisa Fretwell
Independent Non-Executive Director
and Employee Designated Director
Appointed Independent Non-Executive Director on 1 January 2022
and Designated NED chosen to represent the views of the workforce on 1 March 2023
.
Skills and experience
Lisa has 25 years’ experience within the financial services, technology, retail, and manufacturing industries in both business and consulting roles. She holds a first-
class honours degree in Chemical engineering from the University of Birmingham and an MBA from Cranfield Business School. She was awarded Business
Leader of the Year by Women in Credit in 2020. Lisa joined Santander from Experian, where she was Managing Director of Experian UK’s Data Business from
2019 - 2021. Prior to this, she held various senior roles at Cisco for over 10 years, including Vice President of Software and Operations and Managing Director of
Consulting Services and Internet Business Solutions. Lisa also held roles at Capgemini and Procter Gamble before joining Cisco.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Non-Executive Director at Restore plc since 20 April 2022 (and Chair of its Board Risk
Committee, ESG Committee and Remuneration Committee, and member of its Audit Committee and Nomination Committee). Member of the Council at the
University of Birmingham (and member of its Audit Committee). Senior Advisor at Tresmares Capital.
Board Committee memberships
Board Audit Committee, Board Risk Committee, Board Responsible Banking Committee, and Board Remuneration Committee.
6 Ed Giera
Independent Non-Executive Director and Senior Independent Director
Appointed Independent Non-Executive Director on 19 August 2015 and Senior Independent Non-Executive Director on 15 October 2020.
Skills and experience
Ed’s executive career was with JP Morgan Securities, the investment banking affiliate of JP Morgan Chase Co., where he held positions as Global Head of
Pension Advisory, Head of Capital Markets for the EMEA region, and other senior roles. Ed is currently a Partner and Manager of Boscobel Place Capital LLC, a
private investment partnership focused on the global financial services sector, and Principal of E.J. Giera LLC, providing corporate finance advisory and fiduciary
services. Ed was formerly a Non-Executive Director at the Pension Corporation Group Limited, a holding company for the Pension Insurance Corporation
Holdings Limited, where he chaired the Board Audit Risk Committee. He has also served as a Non-Executive Director for ICBC Standard Bank plc; for the
Renshaw Bay Real Estate Fund and Renshaw Bay Structured Finance Opportunity Fund; and for NovaTech LLC.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Non-Executive Director (and Chair of the Risk Committee, member of the Audit
Committee, and member of the Nomination Committee) of Rothesay Life Plc. Director of Rothesay Limited. Partner of Boscobel Place Capital LLC and Founder
and Principal of E.J. Giera LLC.
Board Committee memberships
Board Audit Committee, Board Nomination Governance Committee, Board Responsible Banking Committee, Board Risk Committee (Chair), and Board
Remuneration Committee.
7 Michelle Hinchliffe
Independent Non-Executive Director and Whistleblowers' Champion
Appointed on 1 June 2023.
Skills and experience
Michelle has extensive experience in the financial services sector, with particular focus on Banking and Capital Markets, following a 37-year career with KPMG,
including being Lead Partner for Barclays, ANZ, Standard Chartered Bank, HSBC, Investment Banking Markets, and Citigroup UK. Michelle qualifies as the
Board Audit Committee financial expert as defined in item 16A of Form 20-F and by reference to the NYSE listing standards.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Independent Non-Executive Director of BHP Group Limited, Macquarie Group Limited
and Macquarie Bank Limited.
Board Committee memberships
Board Audit Committee (Chair), Board Responsible Banking Committee, Board Risk Committee, and Board Nomination Governance Committee.
8 Mark Lewis
Independent Non-Executive Director
Appointed on
16 December 2020
.
Skills and experience
Mark brings a track record of digital transformation and growth across multiple consumer businesses and sectors. He was CEO of Moneysupermarket Group plc,
operating regulated marketplaces across financial services, travel and home services, and helping UK households save over £7bn from their bills.
Prior to this, Mark sat on the John Lewis Management Board as Retail Director, responsible for sales and operations across 48 UK department stores and online
channels serving 37 countries. He previously served as Managing Director of eBay UK and CEO of Collect+.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Mark is Group Chairman of Iamproperty, Independent Non-Executive Director of
Direct Line Insurance Group plc, and Non-Executive Director of Santander Consumer (UK) plc*.
Board Committee memberships
Board Audit Committee, Board Remuneration Committee (Chair), Board Responsible Banking Committee, Board Risk Committee, and Board Nomination
Governance Committee.
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|
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9 Dirk Marzluf
Banco Santander Nominated Non-Executive Director
Appointed on
7 May 2019
.
Skills and experience
Dirk joined Banco Santander as Group Head of Technology and Operations in September 2018. He joined Banco Santander from AXA Group, where he served
as Group Chief Information Officer, leading the insurance group’s technology and information security transformation, and overseeing its overall project portfolio
and acting as co-sponsor of its digital strategy. His global technology leadership roles include previous work at Accenture, Daimler Chrysler and Winterthur Group.
As Banco Santander Group Head of Technology and Operations, Dirk leads the information technology and operations function and its strategic development.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Chairman of Santander Global Technology and Operations SL*, Director of PagoNxt
Merchant Solutions SL*, Director of PagoNxt Trade Solutions SL*, Director of Ebury Partners Limited*, Director of Santander Digital Assets SL* and Santander
Consumer Holding GmbH*, and Director of Gravity Cloud Technology Sl*.
10 The Rt Hon. the Baroness Morgan of Cotes (Nicola (Nicky) Morgan)
Independent Non-Executive Director
and Consumer Duty Champion
Appointed on
10 August 2021
.
Skills and experience
Former MP, Cabinet Minister and Chair of the House of Commons Treasury Committee and a member of the House of Lords. She is a qualified solicitor and
before being elected to Parliament, spent 16 years with City law firms, focused on mergers and acquisitions and advisory work. Nicky possesses significant
experience as a senior leader of high-profile large organisations, responsible for setting and overseeing implementation of strategy, and communicating the
organisation’s narrative and capabilities. She brings a wealth of experience from both a public and private perspective of the financial services sector,
communications and media, and digital technology.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Non-Executive Director of the Financial Services Compensation Scheme, Chair of the
Careers Enterprise Company, and Chair of the Association of British Insurers.
Board Committee memberships
Board Audit Committee, Board Responsible Banking Committee (Chair), Board Risk Committee, and Board Nomination Governance Committee.
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|
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11 José María Roldán
Independent Non-Executive Director
Appointed on 1 June 2023.
Skills and experience
José María has extensive depth of knowledge and expertise in banking supervision, financial stability and public policy. He was Chairman and CEO of the
Spanish Banking Association (2014-2022) and spent 13 years as Director-General at the Banking Regulation and Financial Stability department of the Bank of
Spain and member of its Executive Board. He was also a Board Member and Vice-President to the European Banking Federation; founded and Chaired the
Committee of European Banking Supervisors (CEBS) (the forerunner of the European Banking Authority); was President of the Financial Action Task Force on
Money Laundering (FATF); and chaired the former Banking Advisory Committee of the EU.
Other principal appointments
Independent Non-Executive Director of Santander UK
Group Holdings
plc*. Non-Executive Director and Chair of Cater Allen Limited*. Independent Non-Executive
Director of EBN Banco de Negocios SA*.
Board Committee memberships
Board Risk Committee and Board Responsible Banking Committee.
12 Pamela Walkden
Banco Santander Nominated Non-Executive Director
Appointed on 1 October 2021.
Skills and experience
Pamela has served in a number of senior management positions predominantly at Standard Chartered Bank, including as Group Head of Human Resources,
Chief Risk Officer, Group Treasurer, Group Head of Asset and Liability Management and Regional Markets, Group Head of Internal Audit, Group Head of
Corporate Affairs and Group Manager of Investor Relations. She also served as an independent member of the UK Prudential Regulation Authority Regulatory
Reform Panel and as a member of the European Banking Authority Stakeholder Group.
Other principal appointments
Non-Executive Director of Santander UK
Group Holdings
plc*. Independent Non-Executive Director and Chair of the Audit Committee in Banco Santander SA*.
Member of the Advisory Board at JD Haspel Limited.
Board Committee memberships
Board
Risk
Committee and Board Nomination Governance Committee.
* Part of the Banco Santander group.
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New York Stock Exchange (NYSE) Corporate Governance –
differences in UK and NYSE corporate governance practice
The Company issues notes in the US from time to time pursuant to a shelf registration statement filed with the SEC. As these notes are listed on the NYSE, the
Company is required to comply with NYSE corporate governance standards. Under the NYSE corporate governance standards, the Company must disclose any
significant ways in which its corporate governance practices differ from those followed by US companies under the NYSE corporate governance standards. We
believe the following to be the significant differences between our current corporate governance practices and those applicable to US companies under the NYSE
corporate governance standards.
Under the NYSE corporate governance standards, independent Directors must comprise a majority of the Board. As at 31 December 2023, our Board was
comprised of a Chair, (who is also a Non-Executive Director), one Executive Director and
nine Non-Executive Directors. The Chair, William Vereker, and six of the
other Non-Executive Directors, (Lisa Fretwell, Ed Giera, Michelle Hinchliffe, Mark Lewis, Nicky Morgan and José María Roldán), were independent as defined in
the NYSE corporate governance standards. The other three Non-Executive Directors (Pedro Castro e Almeida, Dirk Marzluf and Pamela Walkden) were not
independent according to NYSE corporate governance standards as they are representatives of the ultimate parent company, Banco Santander SA. Michelle
Hinchliffe and José María Roldán were appointed as independent Non-Executive Directors on 1 June 2023. Pedro Castro e Almeida was appointed as a Non-
Executive Director on 1 September 2023.
The NYSE corporate governance standards require that listed US companies have a nominating or corporate governance committee composed entirely of
independent Directors and with a written charter addressing certain corporate governance matters. Applicable UK rules do not require companies without equity
shares listed on the London Stock Exchange, such as the Company, to have a nominating committee. However, the Company has a Board Nomination
Governance Committee, which leads the process for Board appointments. This Committee has written Terms of Reference setting out its role to identify and
nominate candidates for Board and Board Committee appointments. As at 31 December 2023, the following Directors made up the Board Nomination
Governance Committee: William Vereker (Chair), Ed Giera, Michelle Hinchliffe
, Nicky Morgan and Pamela Walkden. Four of the Directors were independent
according to NYSE corporate governance standards. The other Director (Pamela Walkden) was not independent according to NYSE corporate governance
standards as she is a representative of the ultimate parent company, Banco Santander SA.
In addition, the Board is responsible for monitoring the effectiveness of the Company’s governance practices and making changes as needed to ensure the
alignment of the Company’s governance system with current best practices. The Board monitors and manages potential conflicts of interest of management,
Board members, shareholders, external advisers and other service providers, including misuse of corporate assets and abuse in related party transactions.
The NYSE corporate governance standards require that listed US companies have a compensation committee composed entirely of independent directors and
with a written charter addressing certain corporate governance matters. Under its written Terms of Reference, the Company’s Board Remuneration Committee is
primarily responsible for overseeing and supervising Santander UK’s policies and frameworks covering remuneration and reward. As at 31 December 2023, the
following Directors were on the Board Remuneration Committee:
Mark Lewis (Chair), Lisa Fretwell and Ed Giera. All Directors were independent according to
NYSE corporate governance standards.
The NYSE corporate governance standards require that listed US companies have an audit committee that satisfies the requirements of Rule 10A-3 under the US
Securities Exchange Act of 1934, as amended (Rule 10A-3), with a written charter addressing certain corporate governance matters, and having a minimum of
three members who are all independent as defined in Rule 10A-3. As a wholly-owned subsidiary of a parent that satisfies the requirements of Rule 10A-3(c)(2),
the Company is exempt from the requirements of Rule 10A-3. However, the Company does have a Board Audit Committee. As at 31 December 2023, the Board
Audit Committee was made up of
five Non-Executive Directors: Michelle Hinchliffe (Chair), Lisa Fretwell, Ed Giera, Mark Lewis and Nicky Morgan. All members
were independent in 2023 as defined in Rule 10A-3.
The scope of the Board Audit Committee’s Terms of Reference as well as the duties and responsibilities of such committee are more limited than that required of
audit committees under the NYSE corporate governance standards. For example, the Board Audit Committee does not provide an audit committee report as
required by the NYSE corporate governance standards to be included in the Company’s annual proxy statement.
The NYSE corporate governance standards require that listed US companies adopt and disclose corporate governance guidelines, including with respect to the
qualification, training and evaluation of their Directors. The NYSE corporate governance standards also require that the Board conducts a self-evaluation at least
annually to determine whether it and its committees are functioning effectively. The Board has undertaken regular reviews of Board effectiveness primarily through
an internal process led by the Chair. During the year the Board considered feedback gained from the 2023 Board effectiveness review, which concluded that the
performance of the Board and its Committees continues to be effective.
A CEO of a US company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate government
standards. In accordance with NYSE corporate governance standards applicable to foreign private issuers, our CEO is not required to provide the NYSE with
such an annual compliance certification.
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Other information
Designated agent
The designated agent for service of process on Santander UK in the United States is C T Corporation System, 111 Eighth Avenue, New York, New York.
Trustee/paying agent
The names and addresses of the Trustee/paying agent for each class of security registered with the US Securities and Exchange Commission (the SEC) are set
out below:
–
Senior: Citibank NA, 388 Greenwich Street, New York, New York 10013, United States
–
With respect to outstanding senior notes (US80283LAJ26): The Bank of New York Mellon, One Canada Square, London E14 5AL, United Kingdom
–
With respect to 7.95% Term Subordinated Securities due October 26, 2029 (US002920AC09): Trustee: The Bank of New York Mellon, One Canada Square,
London, E14 5AL and Paying Agent: Citibank NA, 13th Floor, Citigroup Centre, Canada Square, London E14 5LB
Documents on display
The Company is subject to the information requirements of the US Securities Exchange Act of 1934. In accordance with these requirements, the Company files its
Annual Report and other related documents with the SEC, and which may be accessed at the SEC's website. Information on the operation of the public reference
rooms can be obtained by calling the SEC on +1-202-551-8090 or by looking at the SEC’s website. The SEC maintains an internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with it. This is accessible at the website: http://www.sec.gov.
None of the websites referred to in this Annual Report on Form 20-F for the year ended 31 December 2023 (the Form 20-F), including where a link is provided,
nor any of the information contained on such websites is incorporated by reference in the Form 20-F.
Legal proceedings
We are party to various legal proceedings in the ordinary course of business. See Notes
29
and
31
the Consolidated Financial Statements.
Material contracts
We are party to various contracts in the ordinary course of business. For the two years immediately preceding publication of this annual report, there have been no
material contracts entered into outside the ordinary course of business.
Audit fees
See Note
7
to the Consolidated Financial Statements.
Accounting developments under IFRS
See Note
1
to the Consolidated Financial Statements.
Share capital
Details of the Company’s share capital are set out in the Notes to the Consolidated Financial Statements.
Major shareholders
At 31 December 2023, the Company was a subsidiary of Santander UK Group Holdings plc. On 12 November 2004, Banco Santander SA acquired the then
entire issued ordinary share capital of 1,485,893,636 ordinary shares of 10 pence each. On 12 October 2008, a further 10 billion ordinary shares of 10 pence each
were issued to Banco Santander SA and an additional 12,631,375,230 ordinary shares of 10 pence each were issued to Banco Santander SA on 9 January 2009.
On 3 August 2010, 6,934,500,000 ordinary shares of 10 pence each were issued to Santusa Holding SL. With effect from 10 January 2014, Santander UK Group
Holdings Limited, a subsidiary of Banco Santander SA and Santusa Holding SL, became the beneficial owner of 31,051,768,866 of 10 pence each, being the
entire issued ordinary share capital of the Company, by virtue of a share exchange agreement between Santander UK Group Holdings Limited, Banco Santander
SA and Santusa Holding SL. Santander UK Group Holdings Limited became the legal owner of the entire issued ordinary share capital of the Company on 1 April
2014 and on 25 March 2015 became a public limited company and changed its name to Santander UK Group Holdings plc.
Exchange controls
There are no UK laws, decrees or regulations that restrict our export or import of capital, including the availability of cash and cash equivalents for use by us, or
that affect the remittance of dividends or other shareholder payments to non-UK holders of Company shares, except as outlined in the section on Taxation for US
Investors below.
Additional balance sheet and cash flow analysis
SECURITIES
Securities are classified in the consolidated balance sheet as other financial assets at fair value through profit or loss, other financial assets at amortised cost and
financial assets at fair value through other comprehensive income.
Debt securities at amortised cost - Yields
The following table shows the weighted average yields for debt securities not held at fair value at
31 December 2023
.
|
Not later than
one year
|
Later than one
year and not
later than five
years
|
Later than five
years and not
later than ten
years
|
Later than ten
years
|
Total
|
|
|
%
|
%
|
%
|
%
|
%
|
|
|
Weighted average yield
|
|||||
|
– Debt securities at amortised cost
|
—
|
—
|
3.52
|
—
|
3.52
|
Weighted average yield is calculated using Total clean price x yield for each maturity bucket / Total clean price for each maturity bucket.
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LOANS AND ADVANCES TO BANKS
Loans and advances to banks are classified in the consolidated balance sheet as financial assets at amortised cost and in the following tables also include loans
and advances to banks classified as reverse repurchase agreements – non trading.
Reconciliation to classifications in the consolidated balance sheet
|
2023
|
2022
|
||
|
Note
|
£m
|
£m
|
|
|
Financial assets at amortised cost:
|
|||
|
Loans and advances to banks
|
1,080
|
992
|
|
|
Reverse repurchase agreements - non trading
|
16
|
2,397
|
885
|
|
3,477
|
1,877
|
Maturity analysis
The following table shows loans and advances to banks by maturity at
31 December 2023
.
|
Not later than one
year
|
Later than one year
and not later than
five years
|
Later than five
years and not later
than fifteen years
|
Later than fifteen
years
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Fixed interest rate
|
3,159
|
—
|
—
|
—
|
3,159
|
|
Variable interest rate
|
306
|
4
|
8
|
—
|
318
|
|
3,465
|
4
|
8
|
—
|
3,477
|
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Strategic Report
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LOANS AND ADVANCES TO CUSTOMERS
Loans and advances to customers are classified in the consolidated balance sheet as financial assets at fair value through profit or loss, financial assets at
amortised cost (including loans and advances to customers classified as reverse repurchase agreements – non trading) and financial assets at fair value through
other comprehensive income. Reverse repurchase agreements represent business with professional non-bank customers as part of the liquidity risk management
function. The balances below are stated before deducting impairment loss allowances and RV and voluntary termination provisions.
Reconciliation to classifications in the consolidated balance sheet
|
2023
|
2022
|
||
|
Note
|
£m
|
£m
|
|
|
Financial assets at fair value through profit or loss:
|
|||
|
– Other financial assets at fair value through profit or loss
|
12
|
46
|
45
|
|
Financial assets at amortised cost:
|
|||
|
– Loans and advances to customers
|
13
|
207,435
|
219,716
|
|
– Reverse repurchase agreements – non trading
|
16
|
10,071
|
6,463
|
|
Financial assets at fair value through other comprehensive income
|
|||
|
217,552
|
226,224
|
Maturity analysis
The following table shows financial assets at amortised cost: Loans and advances to customers by maturity at
31 December 2023
.
Overdrafts are included as ‘on-
demand’. Loans and advances are included at their contractual maturity; no account is taken of a customer’s ability to repay early where it exists.
|
|
Not later than one
year
|
Later than one
year and not later
than five years
|
Later than five
years and not later
than fifteen years
|
Later than fifteen
years
|
Total
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Loans secured on residential properties
|
1,189
|
8,289
|
43,067
|
120,309
|
172,854
|
|
Corporate loans
|
2,989
|
11,675
|
3,194
|
409
|
18,267
|
|
Finance leases
|
1,286
|
3,193
|
51
|
—
|
4,530
|
|
Other unsecured advances
|
3,529
|
2,924
|
749
|
30
|
7,232
|
|
Accrued interest and other adjustments
|
19
|
92
|
229
|
603
|
943
|
|
Amounts due from immediate parent
|
26
|
—
|
—
|
29
|
55
|
|
Amounts due from fellow subsidiaries and joint ventures
|
2,158
|
—
|
—
|
2,331
|
4,489
|
|
Loans and advances to customers
|
11,196
|
26,173
|
47,290
|
123,711
|
208,370
|
We manage our balance sheet on a behavioural basis, rather than on the basis of contractual maturity. Many loans are repaid before their legal maturity,
particularly advances secured on residential property.
Interest rate sensitivity
The following table shows the interest rate sensitivity of Financial assets at amortised cost: Loans and advances to customers due after one year at
31 December
2023
.
|
Fixed rate
|
Variable rate
|
Total
|
|
|
£m
|
£m
|
£m
|
|
|
Loans secured on residential properties
|
152,722
|
20,132
|
172,854
|
|
Corporate loans
|
4,605
|
13,662
|
18,267
|
|
Finance leases
|
4,529
|
1
|
4,530
|
|
Other unsecured advances
|
2,918
|
4,314
|
7,232
|
|
Accrued interest and other adjustments
|
776
|
167
|
943
|
|
Amounts due from immediate parent
|
55
|
—
|
55
|
|
Amounts due from fellow subsidiaries and joint ventures
|
4,483
|
6
|
4,489
|
|
Loans and advances to customers
|
170,088
|
38,282
|
208,370
|
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SUMMARY OF LOAN LOSS EXPERIENCE
Loans accounted for on a non-accrual basis are credit impaired loans.
We define a loan as in default (i.e. credit impaired) for purposes of calculating ECL if it is
more than three months past due, or if we have data to make us doubt they can keep up with their payments i.e. they are unlikely to pay. We classify credit
impaired loans as Stage 3. For details of loans classified as Stage 3, see the ‘Credit risk’ section of the Risk review. Interest income on financial assets that have
become credit-impaired (or Stage 3) is calculated by applying the effective interest rate to their amortised cost (i.e. net of the ECL provision).
In
2023
and
2022
there were
no
material credit impairment charges on loans and advances to banks, non-trading reverse repurchase agreements, other financial
assets at amortised cost and financial assets at FVOCI.
As a result, the following tables present Loans and Advances to customers only.
The following tables show additional ratios and the components used in their calculation for the years ended
31 December 2023
,
2022
, and
2021
.
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Allowance for credit losses to total loans
|
0.46
%
|
0.44
%
|
|
Allowance for credit losses
|
935
|
953
|
|
Total loans outstanding
|
203,100
|
215,700
|
|
Non-accrual loans to total loans
|
1.48
%
|
1.16
%
|
|
Non-accrual loans outstanding
|
3,000
|
2,500
|
|
Total loans outstanding
|
203,100
|
215,700
|
|
Allowance for credit losses to non-accrual loans
|
31.17
%
|
38.12
%
|
|
Allowance for credit losses
|
935
|
953
|
|
Non-accrual loans outstanding
|
3,000
|
2,500
|
|
2023
|
2022
|
2021
|
|
|
£m
|
£m
|
£m
|
|
|
Loans secured on residential properties
|
0.01
%
|
—
%
|
—
%
|
|
Net charge-off during the period
|
11
|
3
|
5
|
|
Average amount outstanding
|
177,689
|
182,094
|
170,430
|
|
Corporate loans
|
0.36
%
|
0.13
%
|
—
%
|
|
Net charge-off during the period
|
68
|
24
|
58
|
|
Average amount outstanding
|
18,662
|
19,170
|
21,876
|
|
Finance leases
|
0.50
%
|
0.44
%
|
—
%
|
|
Net charge-off during the period
|
23
|
19
|
25
|
|
Average amount outstanding
|
4,612
|
4,281
|
5,235
|
|
Other unsecured advances
|
1.74
%
|
1.28
%
|
1.00
%
|
|
Net charge-off during the period
|
130
|
110
|
102
|
|
Average amount outstanding
|
7,452
|
8,573
|
9,669
|
|
Amounts due from immediate parent
|
—
%
|
—
%
|
—
%
|
|
Net charge-off during the period
|
—
|
—
|
—
|
|
Average amount outstanding
|
28
|
3
|
7
|
|
Amounts due from fellow subsidiaries and joint ventures
|
—
%
|
—
%
|
—
%
|
|
Net charge-off during the period
|
—
|
—
|
—
|
|
Average amount outstanding
|
4,355
|
3,698
|
2,800
|
|
Loans and advances to customers
|
0.11
%
|
0.07
%
|
0.09
%
|
|
Net charge-off during the period
|
232
|
156
|
190
|
|
Average amount outstanding
|
212,798
|
217,819
|
210,017
|
Discussion of the factors driving material changes in the ratios above or their components
The factors driving significant changes are discussed as follows:
–
Allowance for credit losses, exposures, expected credit losses, Stage 3 exposures and related ratios at a consolidated Santander UK group level can be found
in the commentary sections in 'Credit performance', 'Credit quality' 'Stage 2 analysis' in 'Santander UK group level - credit risk review' in the Risk review
–
More detailed discussion by business segment can be found in the 'Retail Business Banking: Mortgages - credit risk review', 'Retail Business Banking:
Everyday Banking - credit risk review', 'Corporate Commercial Banking - credit risk review' and 'Corporate Centre - credit risk review' sections of the Risk
review.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
229
|
|||
DEPOSITS BY CUSTOMERS
The following table shows the average balances and interest rates for deposits by customers by product for the years ended
31 December 2023
,
2022
, and
2021
.
|
2023
|
2022
|
2021
|
||||||
|
Average
Balance
|
Average
Interest
Rate
(1)
|
Average
Balance
|
Average
Interest Rate
(1)
|
Average
Balance
|
Average
Interest Rate
(1)
|
|||
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
|||
|
Demand deposits (including savings and current accounts)
|
161,403
|
1.33
|
171,349
|
0.34
|
172,673
|
0.12
|
||
|
Time deposits
|
23,236
|
3.93
|
12,167
|
1.34
|
11,363
|
0.37
|
||
|
Other deposits
|
15,169
|
4.23
|
16,659
|
1.74
|
23,327
|
0.80
|
||
|
Total average balance
(1)
|
199,808
|
1.85
|
200,175
|
0.52
|
207,363
|
0.21
|
||
(1)
Calculated using monthly data.
Some deposits by customers are covered by depositor guarantee arrangements, as follows:
|
Scheme
|
Definition
|
|
Financial Services
Compensation Scheme
(FSCS)
|
The FSCS is the UK’s independent statutory compensation fund for customers of PRA authorised financial services firms and pays compensation, up
to certain limits, if a firm is unable, or likely to be unable to pay claims against it, for example by depositors. The FSCS is funded by levies on the
industry, and recoveries and borrowings where appropriate.
|
The following table shows the amounts of insured and uninsured total deposits and time deposits excluding intercompany deposits at
31 December 2023
and
2022
. The table also shows the amount of time deposits that are uninsured, either because they exceed depositor guarantee scheme compensation limits or
because they are otherwise uninsured.
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Insured deposits
|
130,753
|
131,235
|
|
Uninsured deposits
|
57,251
|
58,352
|
|
Total deposits
|
188,004
|
189,587
|
|
of which:
|
||
|
Insured time deposits
|
18,395
|
9,158
|
|
Uninsured time deposits
|
9,748
|
7,615
|
|
– Excess over guaranteed limit
|
4,774
|
4,828
|
|
– Otherwise uninsured
|
4,974
|
2,787
|
|
Total time deposits
|
28,143
|
16,773
|
For the proportion of Retail Business Banking customer deposits covered by the FSCS, see the Funding risk management section of the Risk review.
The following table shows the maturity of uninsured time deposits at
31 December 2023
.
|
Under 3
months
|
3 to 6
months
|
6 to 12
months
|
Over 12
months
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Deposits by customers
|
5,151
|
1,059
|
2,211
|
1,327
|
9,748
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
230
|
|||
DEPOSITS BY BANKS
Deposits by banks are classified in the consolidated balance sheet as financial liabilities at amortised cost and include deposits by banks classified as repurchase
agreements – non trading.
Reconciliation to classifications in the consolidated balance sheet
|
2023
|
2022
|
||
|
Note
|
£m
|
£m
|
|
|
Financial liabilities at amortised cost:
|
|||
|
- Deposits by banks
|
24
|
20,332
|
28,525
|
|
- Repurchase agreements - non trading
|
25
|
551
|
50
|
|
20,883
|
28,575
|
The following table shows the average balances of and interest rates for deposits by banks for the years ended
31 December 2023
,
2022
, and
2021
.
|
2023
|
2022
|
2021
|
||||||
|
Average
Balance
|
Average
Interest
Rate
(1)
|
Average
Balance
|
Average
Interest
Rate
(1)
|
Average
Balance
|
Average
Interest
Rate
(1)
|
|||
|
£m
|
%
|
£m
|
%
|
£m
|
%
|
|||
|
Deposits by banks
|
27,878
|
4.42
|
35,070
|
1.44
|
23,679
|
0.11
|
(1)
Calculated using monthly data.
At
31 December 2023
deposits by foreign banks were
£2,010m
(
2022
:
£2,192m
,
2021
:
£1,169m
).
All bank deposits are uninsured, as depositor guarantee arrangements do not cover deposits by financial institutions.
The following table shows the maturity of uninsured deposits by banks at
31 December 2023
.
|
Under 3 months
|
3 to 6 months
|
6 to 12 months
|
Over 12 months
|
Total
|
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
Deposits by banks
|
3,619
|
15
|
11
|
17,238
|
20,883
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
231
|
|||
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between interest rates and net interest income caused by the periodic repricing of assets and liabilities. Our largest
administered rate items are residential mortgages and retail deposits, many of which bear interest at variable rates.
We mitigate the impact of interest rate movements on net interest income by repricing our variable rate mortgages and variable rate retail deposits separately,
subject to competitive pressures. We also offer fixed-rate mortgages and savings products on which the interest rate is fixed for an agreed period at the start of the
contract. We manage the margin on fixed-rate products by using derivatives matching the fixed-rate profiles. We reduce the risk of prepayment by imposing early
termination charges if the customers end their contracts early.
We manage the risks from movements in interest rates as part of our overall non-trading position. We do this within limits as set out in the Risk review.
Changes in net interest income – volume and rate analysis
The following table shows changes in interest income, interest expense and net interest income, and is presented using asset and liability classifications in the
Consolidated Balance Sheet. It allocates the effects between changes in volume and changes in rate. Volume and rate changes have been calculated on the
movement in the average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities. The changes
caused by movements in both volume and rate have been allocated to rate changes.
|
2023 / 2022
|
2022 / 2021
|
||||||
|
Changes due to increase/
(decrease) in
|
Changes due to increase/
(decrease) in
|
||||||
|
Total change
|
Volume
|
Rate
|
Total change
|
Volume
|
Rate
|
||
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||
|
Interest income
|
|||||||
|
Loans and advances to customers
|
3,378
|
(55)
|
3,433
|
1,269
|
41
|
1,228
|
|
|
of which reverse repurchase agreements
|
385
|
48
|
337
|
114
|
(11)
|
125
|
|
|
Loans and advances to banks
|
1,225
|
(41)
|
1,266
|
566
|
3
|
563
|
|
|
of which reverse repurchase agreements
|
92
|
17
|
75
|
—
|
(2)
|
2
|
|
|
Debt securities and other interest earning assets
|
306
|
75
|
231
|
111
|
(12)
|
123
|
|
|
Total interest income
|
4,909
|
(21)
|
4,930
|
1,946
|
32
|
1,914
|
|
|
Interest expense
|
|||||||
|
Deposits by customers - demand
|
1,570
|
(34)
|
1,604
|
373
|
2
|
371
|
|
|
Deposits by customers - time
|
750
|
148
|
602
|
121
|
(3)
|
124
|
|
|
Deposits by customers - other
|
356
|
(26)
|
382
|
98
|
54
|
44
|
|
|
of which repurchase agreements
|
351
|
28
|
323
|
117
|
1
|
116
|
|
|
Deposits by banks
|
736
|
(104)
|
840
|
471
|
(12)
|
483
|
|
|
of which repurchase agreements
|
67
|
—
|
67
|
—
|
—
|
—
|
|
|
Debt securities
|
1,065
|
110
|
955
|
324
|
(1)
|
325
|
|
|
Commercial paper
|
137
|
(13)
|
150
|
74
|
1
|
73
|
|
|
Subordinated liabilities
|
61
|
2
|
59
|
16
|
4
|
12
|
|
|
Other interest-bearing financial liabilities
|
1
|
—
|
1
|
(7)
|
6
|
(13)
|
|
|
Total interest expense
|
4,676
|
83
|
4,593
|
1,470
|
51
|
1,419
|
|
|
Net interest income
|
233
|
(104)
|
337
|
476
|
(19)
|
495
|
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
232
|
|||
AVERAGE BALANCE SHEET
Year-end balances may not reflect activity throughout the year, so we present average balance sheets below, using asset and liability classifications from the
Consolidated Balance Sheet. They show averages for our significant categories of assets and liabilities, and the related interest income and expense.
|
2023
|
2022
|
2021
|
|||||||||
|
Average
balance
(1)
|
Interest
|
Average
rate
|
Average
balance
(1)
|
Interest
|
Average
rate
|
Average
balance
(1)
|
Interest
|
Average
rate
|
|||
|
£m
|
£m
|
%
|
£m
|
£m
|
%
|
£m
|
£m
|
%
|
|||
|
Assets
|
|||||||||||
|
Loans and advances to customers
(2)
|
224,267
|
9,294
|
4.14
|
226,377
|
5,916
|
2.61
|
224,395
|
4,647
|
2.07
|
||
|
of which reverse repurchase agreements
|
11,469
|
527
|
4.59
|
8,558
|
142
|
1.66
|
14,378
|
28
|
0.19
|
||
|
Loans and advances to banks
|
43,043
|
1,850
|
4.30
|
46,051
|
625
|
1.36
|
43,727
|
59
|
0.13
|
||
|
of which reverse repurchase agreements
|
2,763
|
99
|
3.58
|
816
|
7
|
0.86
|
1,138
|
7
|
0.62
|
||
|
Debt securities and other interest earning assets
|
8,589
|
473
|
5.51
|
5,934
|
167
|
2.81
|
7,547
|
56
|
0.74
|
||
|
Total average interest-earning assets, interest income
|
275,899
|
11,617
|
4.21
|
278,362
|
6,708
|
2.41
|
275,669
|
4,762
|
1.73
|
||
|
Credit impairment loss allowances and RV VT
|
(1,068)
|
—
|
—
|
(1,034)
|
—
|
—
|
(1,303)
|
—
|
—
|
||
|
Derivatives and other non-interest-earning assets
|
7,601
|
—
|
—
|
9,819
|
—
|
—
|
11,272
|
—
|
—
|
||
|
Other financial assets at FVTPL
|
264
|
—
|
—
|
153
|
—
|
—
|
198
|
—
|
—
|
||
|
Total average assets
|
282,696
|
—
|
—
|
287,300
|
—
|
—
|
285,836
|
—
|
—
|
||
|
Liabilities
|
|||||||||||
|
Deposits by customers - demand
|
(161,403)
|
(2,148)
|
1.33
|
(171,349)
|
(578)
|
0.34
|
(172,673)
|
(205)
|
0.12
|
||
|
Deposits by customers - time
|
(23,236)
|
(913)
|
3.93
|
(12,167)
|
(163)
|
1.34
|
(11,363)
|
(42)
|
0.37
|
||
|
Deposits by customers - other
|
(14,787)
|
(640)
|
4.33
|
(16,309)
|
(284)
|
1.74
|
(23,028)
|
(186)
|
0.81
|
||
|
of which repurchase agreements
|
(10,567)
|
(471)
|
4.46
|
(8,568)
|
(120)
|
1.40
|
(12,372)
|
(3)
|
0.02
|
||
|
Deposits by banks
|
(27,308)
|
(1,232)
|
4.51
|
(34,533)
|
(496)
|
1.44
|
(23,208)
|
(25)
|
0.11
|
||
|
of which repurchase agreements
|
(1,445)
|
(67)
|
4.64
|
(5)
|
—
|
—
|
(5)
|
—
|
—
|
||
|
Debt securities
|
(28,762)
|
(1,633)
|
5.68
|
(24,117)
|
(568)
|
2.36
|
(24,046)
|
(244)
|
1.01
|
||
|
Commercial paper
|
(4,312)
|
(219)
|
5.08
|
(5,121)
|
(82)
|
1.60
|
(6,013)
|
(8)
|
0.13
|
||
|
Subordinated liabilities
|
(2,022)
|
(169)
|
8.36
|
(1,991)
|
(108)
|
5.42
|
(2,076)
|
(92)
|
4.43
|
||
|
Other interest-bearing liabilities
|
(130)
|
(5)
|
3.85
|
(141)
|
(4)
|
2.84
|
(305)
|
(11)
|
3.61
|
||
|
Total average interest-bearing liabilities, interest expense
|
(261,960)
|
(6,959)
|
2.66
|
(265,728)
|
(2,283)
|
0.86
|
(262,712)
|
(813)
|
0.31
|
||
|
Derivatives and other non interest-bearing liabilities
|
(4,609)
|
—
|
—
|
(4,578)
|
—
|
—
|
(5,328)
|
—
|
—
|
||
|
Other financial liabilities at FVTPL
|
(854)
|
—
|
—
|
(833)
|
—
|
—
|
(1,050)
|
—
|
—
|
||
|
Equity
|
(15,273)
|
—
|
—
|
(16,161)
|
—
|
—
|
(16,746)
|
—
|
—
|
||
|
Total average liabilities and equity
|
(282,696)
|
—
|
—
|
(287,300)
|
—
|
—
|
(285,836)
|
—
|
—
|
(1) Average balances are based on monthly data.
(2) Loans and advances to customers include Stage 3 assets. See the ‘Credit risk’ section of the Risk review.
Margin and average spread
|
2023
|
2022
|
2021
|
|
|
%
|
%
|
%
|
|
|
Interest spread
(1)
|
1.55
|
1.55
|
1.42
|
|
Net interest margin
(2)
|
1.69
|
1.59
|
1.43
|
|
Average spread
(3)
|
105
|
105
|
105
|
(1) Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.
(2) NIM is calculated as net interest income divided by average interest earning assets
(3) Average spread is the ratio of average interest-earning assets to interest-bearing liabilities
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
233
|
|||
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
|
2023
|
2022
|
|
|
£m
|
£m
|
|
|
Net cash flows from operating activities
|
(1,133)
|
(2,970)
|
|
Net cash flows from investing activities
|
(2,747)
|
(198)
|
|
Net cash flows from financing activities
|
19
|
277
|
|
Change in cash and cash equivalents
|
(3,861)
|
(2,891)
|
A more detailed Consolidated Cash Flow Statement is contained in the Consolidated Financial Statements.
The major activities and transactions that affected cash flows in
2023
and
2022
were as follows:
In
2023
, the net cash
outflows
from operating activities of
£1,133m
resulted from
outflows
generated from a decrease in
deposits by banks and customers and an
increase in reverse repurchase agreements
, partially offset by cash inflows from a decrease in loans and advances to banks and customers, derivative assets,
and an increase in debt securities in issue and repurchase agreements
.
The net cash outflows from investing activities of
£2,747m
mainly reflected the net
purchase of certain asset backed securities and debt securities as part of normal liquid asset portfolio management. The net cash
inflows
from financing activities
mainly reflected net cash flows relating to debt securities in issue. These resulted in cash and cash equivalents decreasing by
£3,861m
in the year.
In
2022
, the net cash outflows from operating activities of
£2,970m
resulted from outflows generated from an increase in loans and advances to banks and
customers, and a decrease in
deposits by banks and customers and
repurchase agreements, partially offset by net cash inflows from a decrease in reverse
repurchase agreements
. The net cash outflows from investing activities of
£198m
mainly reflected the net disposal of certain asset backed securities as part of
normal liquid asset portfolio management. The net cash inflows from financing activities mainly reflected net cash inflows relating to debt securities in issue. These
resulted in cash and cash equivalents decreasing by
£2,891m
in the year.
Cash flow requirements
For details of our cash flow requirements over the next 12 months and in the longer term and how we plan to meet them, see the Liquidity risk section of the Risk
review.
Material cash requirements
Our material commitments under commercial contracts at
31 December 2023
were as follows:
–
For cash flows and maturities relating to Derivatives, Deposits by customers, Deposits by banks, Debt securities in issue, Subordinated liabilities and Lease
obligations, see Note
39
to the Consolidated Financial Statements. The maturities of financial liabilities and off-balance sheet commitments table analyses the
maturities of the cash flows based on the remaining period to the contractual maturity date at the balance sheet date. In practice, the behavioural profiles of
many liabilities show more stability and longer maturity than their contractual maturity. This is especially true of many types of retail and corporate deposits that,
while they may be repayable on demand or at short notice, have shown good stability even in times of stress. For further details, see the Liquidity risk section of
the Risk review.
–
For details of cash flows and maturities relating to Retirement benefit obligations including employer contributions and funding, see Note 30 to the Consolidated
Financial Statements.
–
Purchase obligations: We have entered into outsourcing contracts where, in some cases, there is no minimum specified spending requirement. In these cases,
anticipated spending volumes have been included in purchase obligations. Total purchase obligations, all of which are due within 1 year, were
£385m
.
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statements
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Taxation for US investors
The following is a summary, under current law, of the main UK tax considerations relating to the beneficial ownership by a US taxpayer of the shares of the
Company. This summary is provided for general guidance and does not address investors that are subject to special rules or that do not hold the shares as capital
assets. US residents should consult their local tax advisers, particularly in connection with any potential liability to pay US taxes on disposal, lifetime gift or bequest
of their shares.
UK taxation on dividends
Under UK law, income tax is not withheld from dividends paid by UK companies. Shareholders, whether resident in the UK or not, receive the full amount of the
dividend actually declared.
UK taxation on capital gains
Under UK law, when you sell shares you may be liable to pay either capital gains tax or corporation tax on chargeable gains. However, if you are either:
–
An individual who is not resident in the UK or
–
A company which is not resident in the UK,
you will not be liable to UK tax on any capital gains made on disposal of your shares. The exception is if the shares are held in connection with a trade or business
that is conducted in the UK through a branch or agency (for capital gains tax purposes) or a permanent establishment (for corporation tax purposes).
UK inheritance tax
Under the current estate and gift tax convention between the US and the UK, shares held by an individual shareholder who is:
–
Domiciled for the purposes of the convention in the US and
–
Is not for the purposes of the convention a national of the UK will not be subject to UK inheritance tax on:
–
The individual’s death or
–
On a gift of the shares during the individual’s lifetime.
The exception is if the shares are part of the business property of a permanent establishment of the individual in the UK or, in the case of a shareholder who
performs independent personal services, pertain to a fixed base situated in the UK.
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Glossary of financial services industry terms
|
Term
|
Definition
|
|
Active customers
|
Active customers are defined as those having an open account, with more than a set minimum balance along with certain specified transactions
in the prior month.
|
|
Alternative performance
measures (APMs)
|
A financial measure of historical or future financial performance, financial position or cashflows, other than a financial measure defined or
specified under International Financial Reporting Standards.
|
|
Anti-Money Laundering (AML)
|
A set of policies and practices to ensure that financial institutions and other regulated entities prevent, detect, and report financial crime and
especially money laundering activities
|
|
Arrears
|
Customers are said to be in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or
overdue. Such a customer is also said to be in a state of delinquency. When a customer is in arrears, his entire outstanding balance is said to be
delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue.
|
|
Asset Backed Securities (ABS)
|
Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set
of associated cash flows but are commonly pools of residential or commercial mortgages but could also include leases, credit card receivables,
motor vehicles or student loans.
|
|
Balance weighted Loan to
Value (LTV) ratio
|
(Loan 1 balance x (Loan 1 Balance/Loan 1 latest property valuation) + (Loan 2 balance x (loan 2 balance/Loan 2 latest property valuation)+ ...) /
(Loan 1 balance + Loan 2 balance+...)
|
|
UK Bank Levy
|
The government levy that applies to certain UK banks, UK building societies and the UK operations of foreign banks from 1 January 2011. The
levy is payable based on a percentage of the chargeable equity and liabilities of the bank at the balance sheet date.
|
|
Basel III
|
In December 2010, the Basel Committee on Banking Supervision issued the Basel III rules text, which presents the details of strengthened global
regulatory standards on bank capital adequacy and liquidity. The standards were implemented in the EU in January 2014.
|
|
Basis point (bp)
|
One hundredth of a per cent (i.e. 0.01%), so 100 basis points is 1%. Used in quoting movements in interest rates or yields on securities.
|
|
Brexit
|
The withdrawal of the United Kingdom from the European Union.
|
|
Business Banking
|
Division, managed under Retail Business Banking, serving enterprises with a turnover of up to £6.5m per annum.
|
|
Colleague engagement
|
Colleague engagement is measured on annual basis in the Group Engagement Survey (GES), conducted by Mercer for Banco Santander.
Results are benchmarked against other firms in the UK financial sector and other high performing firms.
|
|
Commercial Paper
|
An unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date.
Commercial paper can be issued as an unsecured obligation of Santander UK and is usually issued for periods ranging from one week up to
nine months. However, the depth and reliability of some CP markets means that issuers can repeatedly roll over CP issuance and effectively
achieve longer term funding. CP can be issued in a range of denominations and can be discounted or interest-bearing.
|
|
Commercial Real Estate (CRE)
|
Lending to UK customers, primarily on tenanted property assets, with a focus on the office, retail, industrial and residential sectors.
|
|
Common Equity Tier 1
(CET1) capital
|
The called-up share capital and eligible reserves less deductions calculated in accordance with the CRD IV implementation rules as per the PRA
Policy Statement PS7/13. CET1 capital ratio is CET1 capital as a percentage of risk-weighted assets.
|
|
CET1 capital ratio
|
CET1 capital as a percentage of risk-weighted assets.
|
|
Consumer Finance
|
Provides prime auto consumer financing for individuals, businesses, and automotive distribution networks.
|
|
Contractual maturity
|
The final payment date of a loan or other financial instrument, at which point all the remaining outstanding principal will be repaid and interest is
due to be paid.
|
|
Corporate Centre
|
Provides treasury services for asset and liability management of our balance sheet, as well as management of non-core and legacy portfolios.
|
|
Corporate Commercial
Banking (CCB)
|
Provides banking products and services to SMEs, mid-sized and larger corporates, typically with annual turnovers of between £2m and £500m,
as well as to Local Authorities and Housing Associations.
|
|
Cost of risk
|
Cost of risk is credit impairment charge for the 12 month period as a percentage of average gross customer loans. This is a useful measure of
the relationship between the size of the credit impairment charge and the book size which investors use as a proxy to compare relative credit risk.
|
|
Countercyclical capital buffer
|
A capital buffer required under Basel III to ensure that capital requirements take account of the macro-financial environment in which banks
operate.
|
|
Counterparty credit risk
|
The risk that the counterparty to a transaction may default before completing the satisfactory settlement of the transaction.
|
|
Covered bonds
|
Debt securities backed by a portfolio of mortgages that is segregated from the issuer’s other assets solely for the benefit of the holders of the
covered bonds. The Santander UK group issues covered bonds as part of its funding activities.
|
|
Credit Default Swap (CDS)
|
A credit derivative contract where the protection seller receives premium or interest-related payments in return for contracting to make payments
to the protection buyer in the event of a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or
assets, or downgrades by a rating agency.
|
|
Credit spread
|
The yield spread between securities with the same coupon rate and maturity structure but with different associated credit risks, with the yield
spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to accept a lower credit
quality.
|
|
Credit Valuation Adjustment
(CVA)
|
Adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty.
|
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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statements
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Shareholder
information
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Term
|
Definition
|
|
Capital Requirements Directive
IV (CRD IV)
|
An EU legislative package covering prudential rules for banks, building societies and investment firms.
|
|
Currency swap
|
An arrangement in which two parties exchange specific principal amounts of different currencies at inception and subsequently interest payments
on the principal amounts. Often, one party will pay a fixed interest rate, while the other will pay a floating exchange rate (though there are also
fixed-fixed and floating-floating arrangements). At the maturity of the swap, the principal amounts are usually re-exchanged.
|
|
Customer funding gap
|
Customer loans less customer deposits.
|
|
Debt restructuring
|
This occurs when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and
the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as reducing the debt or interest charged on the
loan.
|
|
Debt securities
|
Transferable instruments creating or acknowledging indebtedness. They include debentures, bonds, certificates of deposit, notes and
commercial paper. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights
under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable
by the issuer at the end of that term. Debt securities can be secured or unsecured.
|
|
Debt securities in issue
|
Transferable certificates of indebtedness of the Santander UK group to the bearer of the certificates. These are liabilities of the Santander UK
group and include commercial paper, certificates of deposit, bonds, and medium-term notes.
|
|
Default
|
Financial assets in default represent those that are at least 90 days past due in respect of principal or interest and/or where the assets are
otherwise considered to be unlikely to pay, including those that are credit impaired.
|
|
Default at proxy origination
|
IFRS 9 requires us to compare lifetime probability of default at origination with our view of lifetime probability of default now. If we do not have
data at origination, then a proxy origination is defined.
|
|
Defined benefit obligation
|
The present value of expected future payments required to settle the obligations of a defined benefit plan resulting from employee service.
|
|
Defined benefit plan
|
A pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of
service or compensation. The employer's obligation can be more or less than its contributions to the fund.
|
|
Defined contribution plan
|
A pension plan under which the Santander UK group pays fixed contributions as they fall due into a separate entity (a fund) and will have no legal
or constructive obligations to pay further contributions, i.e. the employer's obligation is limited to its contributions to the fund.
|
|
Derivative
|
A contract or agreement whose value changes with changes in an underlying index such as interest rates, foreign exchange rates, share prices
or indices and which requires no initial investment or an initial investment that is smaller than would be required for other types of contracts with a
similar response to market factors. The principal types of derivatives are: swaps, forwards, futures and options.
|
|
Economic capital
|
An internal measure of the minimum equity and preference capital required for the Santander UK group to maintain its credit rating based upon
its risk profile.
|
|
Effective tax rate
|
The tax on profit/(losses) on ordinary activities as a percentage of profit/(loss) on ordinary activities before taxation.
|
|
Energy performance certificate
(EPC)
|
A scheme to summarise the energy efficiency of buildings and apply a rating between A – G.
|
|
Everyday Banking
|
Provides banking services and unsecured lending to individuals and small businesses as well alongside wealth management for high-net-worth
clients.
|
|
Expected credit loss (ECL)
|
Represents what the credit risk is likely to cost us either over the next 12 months on qualifying exposures, or defaults over the lifetime of the
exposure where there is evidence of a significant increase in credit risk since origination.
|
|
Expected loss
|
The product of the probability of default, exposure at default and loss given default. We calculate each factor in accordance with CRD IV and
include direct and indirect costs. We base them on our risk models and our assessment of each customer’s credit quality.
|
|
Exposure at default (EAD)
|
The maximum loss that a financial institution might suffer if a borrower, counterparty or group defaults on their obligations or assets and off-
balance sheet positions have to be realised.
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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statements
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Shareholder
information
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Term
|
Definition
|
|
Fair value adjustment
|
An adjustment to the fair value of a financial instrument which is determined using a valuation technique (level 2 and level 3) to include additional
factors that would be considered by a market participant that are not incorporated within the valuation model.
|
|
Financial Conduct Authority
(FCA)
|
The Financial Conduct Authority is a financial regulatory body in the United Kingdom.
|
|
Financial Services
Compensation Scheme (FSCS)
|
The Financial Services Compensation Scheme is the UK's statutory deposit insurance and investors compensation scheme for customers of
authorised financial services firms.
|
|
First / Second Charge
|
First charge (also known as first lien): debt that places its holder first in line to collect compensation from the sale of the underlying collateral in the
event of a default on the loan. Second charge (also known as second lien): debt that is issued against the same collateral as a higher charge
debt but that is subordinate to it. In the case of default, compensation for this debt will only be received after the first charge has been repaid and
thus represents a riskier investment than the first charge.
|
|
Follow-on Rate (FoR)
|
A mortgage product that tracks and is directly linked to the Bank of England base rate.
|
|
Forbearance
|
Forbearance takes place when a concession is made on the contractual terms of a loan in response to an obligor’s financial difficulties.
|
|
Full time equivalent
|
Full time equivalent employee units are the on-job hours paid for employee services divided by the number of ordinary-time hours normally paid
for a full-time staff member when on the job (or contract employee where applicable).
|
|
Government lending schemes
|
Lending provided by banks with some element of government guarantee, including Bounce Back Loan Scheme (BBLS), Coronavirus Business
Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).
|
|
Impairment loss allowance
(Loan loss allowance)
|
An impairment loss allowance held on the balance sheet as a result of the raising of a charge against profit for an expected credit loss in the
lending book. An impairment loss allowance may be either individual or collective.
|
|
Individually assessed loan
impairment provisions
|
Impairment is measured individually for assets that are individually significant. For these assets, the Santander UK group measures the amount
of the impairment loss as the difference between the carrying amount of the asset or group of assets and the present value of the estimated
future cash flows from the asset or group of assets discounted at the original effective interest rate of the asset.
|
|
Internal Capital Adequacy
Assessment Process (ICAAP)
|
The Santander UK group’s own assessment of its regulatory capital requirements, as part of CRD IV. It takes into account the regulatory and
commercial environment in which the Santander UK group operates, the Santander UK group’s Risk Appetite, the management strategy for each
of the Santander UK group’s material risks and the impact of appropriate adverse scenarios and stresses on the Santander UK group’s capital
requirements.
|
|
Internal Liquidity Adequacy
Assessment Process (ILAAP)
|
The Santander UK group’s own assessment of the prudent level of liquidity that is consistent with the Santander UK group’s LRA. It documents
and demonstrates the Santander UK group’s overall liquidity adequacy – an appropriate level of liquid resources, a prudent funding profile and
comprehensive management and control of liquidity and funding risks.
|
|
Internal ratings-based
approach (IRB)
|
The Santander UK group's method, under the CRD IV framework, for calculating credit risk capital requirements using the Santander UK group’s
internal Probability of Default models but with supervisory estimates of Loss Given Default and conversion factors for the calculation of Exposure
at Default.
|
|
International Financial
Reporting Standards (IFRS)
|
A set of international accounting standards developed and issued by the International Accounting Standards Board, consisting of principles-
based guidance.
|
|
Investment grade
|
A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of AAA to BBB.
|
|
ISDA Master agreement
|
Standardised contract developed by ISDA (International Swaps and Derivatives Association) used as an umbrella under which bilateral
derivatives contracts are entered into.
|
|
Judgemental Adjustments
|
Adjustments made to the ECL estimate outside of the ECL models to reflect management judgements.
|
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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statements
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|
Term
|
Definition
|
|
Level 1
|
The fair value of these financial instruments is based on unadjusted quoted prices for identical assets or liabilities in an active market that the
Santander UK group has the ability to access at the measurement date.
|
|
Level 2
|
The fair value of these financial instruments is based on quoted prices in markets that are not active or quoted prices for similar assets or
liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly
for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data
through correlation or other statistical means for substantially the full term of the asset or liability.
|
|
Level 3
|
The fair value of these financial instruments is based on inputs to the pricing or valuation techniques that are significant to the overall fair value
measurement of the asset or liability are unobservable.
|
|
Liquid assets coverage of
wholesale funding of less than
one year
|
LCR eligible liquidity pool divided by wholesale funding with a residual maturity of less than one year.
|
|
Liquidity Coverage Ratio (LCR)
|
The LCR is intended to ensure that a bank maintains an adequate level of unencumbered, high quality liquid assets which can be used to offset
the net cash outflows the bank could encounter under a short-term significant liquidity stress scenario.
|
|
LCR eligible liquidity pool
|
Assets eligible for inclusion in the LCR as high-quality liquid assets. The LCR eligible liquidity pool also covers both Pillar 1 and Pillar 2 risks.
|
|
Loan to value ratio (LTV)
|
The amount of a first mortgage charge as a percentage of the total appraised value of real property. The LTV ratio is used in determining the
appropriate level of risk for the loan and therefore the price of the loan to the borrower. LTV ratios may be expressed in a number of ways,
including origination LTV and indexed LTV.
|
|
Loss Given Default (LGD)
|
The fraction of Exposure at Default that will not be recovered following default. LGD comprises the actual loss (the part that is not recovered),
together with the economic costs associated with the recovery process. It is calculated as the expected loss divided by EAD for each month of
the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether
the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/
book values due to forced sales type.
|
|
Master netting agreement
|
An industry standard agreement which facilitates netting of transactions (such as financial assets and liabilities including derivatives) in
jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of
balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.
|
|
Maximum Distributable
Amount (MDA)
|
The amount of interim or year-end profits not yet incorporated in CET1.
|
|
Medium-Term Funding (MTF)
|
Shown at a sterling equivalent value. Consists of senior debt issuance, asset-backed issuance (including securitisation and covered bond
issuance) and structured issuance (including firm financing repurchase agreements).
|
|
Medium-Term Notes (MTNs)
|
Corporate notes (or debt securities) continuously offered by a company to investors through a dealer. Investors can choose from differing
maturities, ranging from nine months to 30 years. They can be issued on a fixed or floating coupon basis or with an exotic coupon; with a fixed
maturity date (non-callable) or with embedded call or put options or early repayment triggers. MTNs are most generally issued as senior,
unsecured debt.
|
|
Minimum requirement for own
funds and eligible liabilities
(MREL)
|
A requirement under the Bank Recovery and Resolution Directive for EU resolution authorities to set a minimum requirement for own funds and
eligible liabilities for banks, implementing the Financial Stability Board’s Total Loss Absorbing Capacity (TLAC) standard. The purpose of MREL is
to help ensure that when banks, building societies and investment firms fail, that failure can be managed in an orderly way while minimising risks
to financial stability, disruption to critical economic functions, and risks to public funds.
|
|
Mortgages
|
Refers to residential and buy to let retail mortgages only and excludes Social Housing and commercial mortgage properties.
|
|
Mortgage-Backed Securities
(MBS)
|
Securities that represent interests in groups of mortgages, which may be on residential or commercial properties. Investors in these securities
have the right to cash received from future mortgage payments (interest and / or principal). When the MBS references mortgages with different
risk profiles, the MBS is classified according to the highest risk class.
|
|
Net fee and commission
income
|
Fee and commission income minus other fees paid that are not an integral part of the effective interest rate. For retail and corporate products, fee
and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received
from retailers for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers
through the Santander UK group’s branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial
products.
|
|
Net interest income
|
The difference between interest received on assets and interest paid on liabilities.
|
|
Net Interest Margin (NIM)
|
Net interest income as a percentage of average interest-earning assets.
|
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Sustainability and
Responsible Banking
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Financial review
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Governance
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Risk review
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Financial
statements
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Shareholder
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Term
|
Definition
|
|
Net Stable Funding Ratio
(NSFR)
|
The ratio of available stable funding resources to stable funding requirements over a one-year time horizon, assuming a stressed scenario. The
Basel III rules require this ratio to be over 100%.
|
|
Over the counter (OTC)
derivatives
|
Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They
offer flexibility because, unlike standardised exchange-traded products, they can be tailored to fit specific needs.
|
|
Own credit
|
The effect of the Santander UK group’s own credit standing on the fair value of financial liabilities.
|
|
Past due
|
A financial asset such as a loan is past due when the counterparty has failed to make a payment when contractually due.
|
|
Payment holiday
|
A period in which a customer has relief from making repayments on a loan. Also known as a payment deferral.
|
|
People Supported
|
People supported through our charity partnerships and sponsored programmes. Employee volunteer activities are organised through our flagship
Discovery Project programme, the Santander Foundation and Santander Universities.
|
|
Pillar 1
|
The first pillar of the Basel III approach which provides the approach to the calculation of the minimum capital requirements. This is 8% of the
bank's risk-weighted assets.
|
|
Pillar 2
|
The part of the CRD IV Accord which sets out the process by which a bank should review its overall capital adequacy and the processes under
which the supervisors evaluate how well financial institutions are assessing their risks and take appropriate actions in response to the
assessments.
|
|
Pillar 3
|
The part of the CRD IV Accord which sets out the disclosure requirements for firms to publish details of their risks, capital and risk management.
The aims are greater transparency and strengthening market discipline.
|
|
Prime / prime mortgage loans
|
A description for mortgages granted to the most creditworthy category of borrowers.
|
|
Probability of default (PD)
|
The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in
the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes
less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing
economics. We support this with historical data analysis.
|
|
Prudential Regulation
Authority (PRA)
|
The UK financial services regulator formed as one of the successors to the FSA. The PRA is part of the Bank of England and is responsible for
the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It sets standards and
supervises financial institutions at the level of the individual firm.
|
|
Regulatory capital
|
The amount of capital that the Santander UK group holds, determined in accordance with rules established by the UK PRA for the consolidated
Santander UK group and by local regulators for individual Santander UK group companies.
|
|
Repurchase agreement (Repo)
|
In a sale and repurchase agreement one party, the seller, sells a financial asset to another party, the buyer, under commitments to reacquire the
asset at a later date. The buyer at the same time agrees to resell the asset at the same later date. From the seller's perspective such agreements
are securities sold under repurchase agreements (repos) and from the buyer's securities purchased under commitments to resell (reverse
repos).
|
|
Residential Mortgage-Backed
Securities (RMBS)
|
Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future
mortgage payments (interest and / or principal).
|
|
Retail deposit spread
|
Retail Business Banking customer deposit spreads against the relevant swap rate or LIBOR. Retail Business Banking customer deposits
include savings and bank accounts for personal and business banking customers.
|
|
Risk Appetite
|
The level of risk (types and quantum) that the Santander UK group is willing to accept (or not accept) to safeguard the interests of shareholders
whilst achieving business objectives.
|
|
Risk-weighted assets (RWA)
|
A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as
implemented by the PRA.
|
|
Securitisation
|
A process by which a group of assets, usually loans, are aggregated into a pool, which is used to back the issuance of new securities. A
company sells assets to a structured entity which then issues securities backed by the assets, based on their value. This allows the credit quality
of the assets to be separated from the credit rating of the original company and transfers risk to external investors. Assets used in securitisations
include mortgages to create mortgage-backed securities. Santander UK has established securitisation structures as part of its funding and capital
management activities.
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|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
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Term
|
Definition
|
|
Significant increase in credit
risk (SICR)
|
Assessed by comparing the risk of default of an exposure at the reporting date to the risk of default at origination (after considering the passage
of time).
|
|
SME 1
|
SME 1 supports any business with turnover of up to £6.5m who have up to 2 Directors/Shareholders/Partners or who have simple banking needs
such as current account, savings or unsecured lending of up to £25,000.
|
|
Sovereign exposures
|
Exposures to local and central governments, and government guaranteed counterparties.
|
|
Stage 1
|
Assets have not experienced a significant increase in credit risk since origination. A loss allowance equal to a 12-month ECL is applied.
|
|
Stage 2
|
Assets have experienced a significant increase in credit risk since origination, but no credit impairment has materialised. A loss allowance equal
to the lifetime ECL is applied.
|
|
Stage 3
|
Assets that are in default and considered credit impaired. A loss allowance equal to the lifetime ECL is applied. Objective evidence of credit
impairment is required.
|
|
Standardised approach
|
In relation to credit risk, a method for calculating credit risk capital requirements under CRD IV, using External Credit Assessment Institutions
ratings and supervisory risk weights. The Standardised approach is less risk-sensitive than IRB (see 'IRB' above). In relation to operational risk, a
method of calculating the operational capital requirement under CRD IV, by the application of a supervisory defined percentage charge to the
gross income of eight specified business lines.
|
|
Stress testing
|
Stress testing is a management tool that facilitates a forward-looking perspective on risk management, strategic planning, capital, and liquidity
and funding planning.
|
|
Structured entity
|
An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any
voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
|
|
Structured finance/notes
|
A structured note is an instrument which pays a return linked to the value or level of a specified asset or index and sometimes offers capital
protection if the value declines. Structured notes can be linked to a range of underlying assets, including equities, interest rates, funds,
commodities and foreign currency.
|
|
Subordinated liabilities
|
Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the
issuer.
|
|
Sub-prime
|
Loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as
court judgements and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, high debt-to-income
ratios, or other criteria indicating heightened risk of default.
|
|
Supranational
|
An international organisation where member states transcend national boundaries or interests to share in decision-making and vote on issues
relating to the organisation’s geographical focus.
|
|
Standard Variable Rate (SVR)
|
A mortgage product managed by Santander and not directly linked to the Bank of England base rate.
|
|
Term Funding Scheme with
additional incentives for SMEs
(TFSME)
|
The TFSME allows eligible banks and building societies to access four-year funding at rates very close to Bank Rate.
|
|
Tier 1 capital
|
A measure of a bank's financial strength defined by the PRA. It captures Core Tier 1 capital plus other Tier 1 securities in issue but is subject to a
deduction in respect of material holdings in financial companies.
|
|
Tier 2 capital
|
Defined by the PRA. Broadly, it includes qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment
allowances, unrealised available for sale equity gains and revaluation reserves. It is subject to deductions relating to the excess of expected loss
over regulatory impairment allowance, securitisation positions and material holdings in financial companies.
|
|
Total loss absorbing capacity
(TLAC)
|
An international standard for TLAC issued by the Financial Stability Board, which requires global systemically important banks (G-SIBs) to have
sufficient loss-absorbing and recapitalisation capacity available in resolution, to minimise impacts on financial stability, maintain the continuity of
critical functions and avoid requiring taxpayer support.
|
|
Total wholesale funding
|
Comprises the sum of all outstanding debt securities, structured issuance (including firm financing repurchase agreements), subordinated debt
and capital issuance, TFS and noncustomer deposits. Total wholesale funding excludes any collateral received as part of the FLS.
|
|
Trading book
|
Positions in financial instruments held either with trading intent or in order to hedge other elements of the trading book, which must be free of
restrictive covenants on their tradability or ability to be hedged.
|
|
Unencumbered assets
|
Assets on our balance sheet not used to secure liabilities or otherwise pledged.
|
|
Value at Risk (VaR)
|
An estimate of the potential loss which might arise from market movements under normal market conditions, if the current positions were to be
held unchanged for one business day, measured to a confidence level.
|
|
Wholesale funding with a
residual maturity of less than
one year
|
Wholesale funding which has a residual maturity of less than one year at the balance sheet date.
|
|
Write-down
|
After an advance has been identified as impaired and is subject to an impairment allowance, the stage may be reached whereby it is concluded
that there is no realistic prospect of further recovery. Write-downs will occur when, and to the extent that, the whole or part of a debt is considered
irrecoverable.
|
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
241
|
|||
Disclosure pursuant to Section 219 of the Iran Threat Reduction and
Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as
amended (the Exchange Act), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged
in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally
required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to the Santander UK group and its affiliates in the Banco Santander group. During
the period covered by this report:
(a) Santander UK holds seven blocked accounts for five customers that are currently designated by the US under the Specially Designated Global Terrorist
(SDGT) sanctions programme. Revenues and profits generated by Santander UK on these accounts in the year ended 31 December 2023 were negligible
relative to the overall profits of Banco Santander SA.
(b) Santander Consumer Finance, SA holds through its Belgian branch seven blocked correspondent accounts for an Iranian bank that is currently designated by
the US under the SDGT sanctions programme. The accounts have been blocked since 2008. No revenues or profits were generated by the Belgian branch
on these accounts in the year ended 31 December 2023.
(c) Santander Brasil holds three blocked accounts for three customers with domicile in Brazil designated by the US under the SDGT sanctions programme.
Revenues and profits generated by Santander Brasil on these accounts in the year ended 31 December 2023 were negligible relative to the overall profits of
Banco Santander SA.
(d) The Banco Santander group also has certain legacy performance guarantees for the benefit of an Iranian bank that is currently designated by the US under
the SDGT sanctions programme (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of
contractors who participated in public bids in Iran) that were in place prior to 27 April 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended 31 December 2023 which were negligible
relative to the overall revenues and profits of the Banco Santander group. The Banco Santander group has undertaken significant steps to withdraw from the
Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from
Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Banco Santander group is not contractually permitted
to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding
amounts due to it (in the case of the export credits). As such, Banco Santander group intends to continue to provide the guarantees and hold these assets in
accordance with company policy and applicable laws.
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
242
|
|||
Cross-reference to Form 20-F
|
Form 20-F Item Number and Caption
|
Page
|
||
|
PART I
|
|||
|
1
|
Identity of Directors, Senior Management and Advisers
|
*
|
|
|
2
|
Offer Statistics and Expected Timetable
|
*
|
|
|
3
|
Key Information
|
Capitalisation and indebtedness
|
*
|
|
Reasons for the offer and use of proceeds
|
*
|
||
|
Risk factors
|
200-216
|
||
|
4
|
Information on the Company
|
History and development of the company
|
32, 120, 125, 194, 226
|
|
Business overview
|
3, 5, 12, 33, 68, 70, 79, 81, 105-106,
134-136, 172, 209-211, 217-219, 228
|
||
|
Organisational structure
|
32, 156-157, 196-197
|
||
|
Property, plant and equipment
|
119, 127, 160-161
|
||
|
4A
|
Unresolved Staff Comments
|
Not applicable
|
|
|
5
|
Operating and Financial Review and Prospects
|
Operating results
|
11, 92-93, 96, 144, 200-216
|
|
Liquidity and capital resources
|
34, 82-92, 120, 144-150, 234
|
||
|
Research and development, patents and licenses, etc.
|
33
|
||
|
Trend information
|
3, 5-7, 12
|
||
|
Critical accounting estimates
|
132-133
|
||
|
6
|
Directors, Senior Management and Employees
|
Directors and senior management
|
16-24, 221-224
|
|
Compensation
|
25-31, 119, 126, 165-169, 176-177
|
||
|
Board practices
|
16-27, 177, 221-225
|
||
|
Employees
|
2, 32, 137-138
|
||
|
Share ownership
|
32, 176-177
|
||
|
Disclosure of a registrant’s action to recover erroneously
awarded compensation
|
Not applicable
|
||
|
7
|
Major Shareholders and Related Party Transactions
|
Major shareholders
|
226
|
|
Related party transactions
|
68, 177-178
|
||
|
Interests of experts and counsel
|
*
|
||
|
8
|
Financial Information
|
Consolidated Statements and Other Financial Information
|
107-194, 220
|
|
Significant Changes
|
32, 194
|
||
|
9
|
The Offer and Listing
|
*
|
|
|
10
|
Additional Information
|
Share capital
|
*
|
|
Memorandum and articles of association
|
220
|
||
|
Material contracts
|
226
|
||
|
Exchange controls
|
226
|
||
|
Taxation
|
235
|
||
|
Dividends and paying agents
|
*
|
||
|
Statements by experts
|
*
|
||
|
Documents on display
|
226
|
||
|
Subsidiary Information
|
*
|
||
|
Annual Report to Security Holders
|
Not applicable
|
||
|
11
|
Quantitative and Qualitative Disclosures about Market Risk
|
92-94
|
|
|
12
|
Description of Securities Other Than Equity Securities
|
Exhibit 2.1
|
|
|
PART II
|
|||
|
13
|
Defaults, Dividend Arrearages and Delinquencies
|
Not applicable
|
|
|
14
|
Material Modifications to the Rights of Security Holders and Use of Proceeds
|
Not applicable
|
|
|
15
|
Controls and Procedures
|
33
|
|
|
16A
|
Audit Committee financial expert
|
222, 225
|
|
|
16B
|
Code of Ethics
|
35
|
|
|
16C
|
Principal Accountant Fees and Services
|
24, 138
|
|
|
16D
|
Exemptions from the Listing Standards for Audit Committees
|
Not applicable
|
|
|
16E
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
Not applicable
|
|
|
16F
|
Change in Registrant’s Certifying Accountant
|
Not applicable
|
|
|
16G
|
Corporate Governance
|
225
|
|
|
16H
|
Mine Safety Disclosure
|
Not applicable
|
|
|
16I
|
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
|
Not applicable
|
|
|
16J
|
Insider Trading Policies
|
Not applicable
|
|
|
16K
|
Cybersecurity
|
5, 38, 101-102, 214
|
|
|
PART III
|
|||
|
17
|
Financial Statements
|
Not applicable
|
|
|
18
|
Financial Statements
|
117-121
|
|
|
19
|
Exhibits
|
Filed with SEC
|
|
|
* Not required for an Annual Report.
|
|||
|
Strategic Report
|
Sustainability and
Responsible Banking
|
Financial review
|
Governance
|
Risk review
|
Financial
statements
|
Shareholder
information
|
|||||||
|
Annual Report 2023
|
Santander UK plc
243
|
|||
EXHIBIT INDEX
|
Exhibits1
|
|
|
1.1
|
|
|
2.1
|
|
|
8.1
|
|
|
12.1
|
|
|
12.2
|
|
|
13.1
|
|
|
15.1
|
|
|
97.1
|
|
|
101.INS*
|
XBRL Instance Document
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
1
Documents concerning Santander UK
plc referred to in the
2023
Annual Report on Form 20-F may be inspected at 2 Triton Square, Regent’s Place, London
NW1 3AN, its principal executive offices and registered address.
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
SANTANDER UK
plc
|
By:
|
/s/ Mike Regnier
|
|
|
Mike Regnier
|
||
|
Chief Executive Officer
|
Dated:
5 March, 2024
TABLE OF CONTENTS
Part IPart IIPart III