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Half-year Report - 30 June 2021

13 Aug 2021 07:15

RNS Number : 5223I

Santander UK Plc

13 August 2021

Santander UK plc

Announcement of Half Yearly Financial Report for the six months ended 30 June 2021

Santander UK plc (the Company) is pleased to announce the publication of its Half Yearly Financial Report for the six months ended 30 June 2021 (the Half Yearly Financial Report), in compliance with Disclosure Guidance & Transparency Rule (DTR) 4.1.

The Half Yearly Financial Report may be accessed via the Investor Relations section of Santander UK's website at www.aboutsantander.co.uk. A copy of the Half Yearly Financial Report has also been submitted to the National Storage Mechanism.

The following information is extracted from the Half Yearly Financial Report.

This announcement constitutes the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the Half Yearly Financial Report in full.

Form 6-K

It should be noted that the financial results for the six months ended 30 June 2021 will be included in the Half Yearly Financial Report on Form 6-K that will be filed with the SEC and will be available online at www.sec.gov.

Forward-Looking Statements

The Company and its ultimate parent Banco Santander SA both caution that this announcement may contain forward-looking statements. Such forward-looking statements are found in various places throughout this announcement with respect to our financial condition, results, operations and business, including future business development and economic performance.

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

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

Directors' responsibilities statement

The Directors confirm that to the best of their knowledge these Condensed Consolidated Interim Financial Statements have been prepared in accordance with UK-adopted International Accounting Standard 34, 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and IAS 34 'Interim Financial Reporting' as adopted by the EU, and that the half-year management report herein includes a fair review of the information required by Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA), namely:

- An indication of important events that have occurred during the six months ended 30 June 2021 and their impact on the Condensed Consolidated Interim Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and

- Material related party transactions in the six months ended 30 June 2021 and any material changes in the related party transactions described in the last Annual Report.

Principal risks

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, such as the impacts of the Covid-19 pandemic, 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.

Detailed discussions of the impact of Covid-19 on specific risk types are set out in the relevant sections of this Risk review and summarised in the 'Risk management overview' in the Strategic report in the 2020 Annual Report.

30 June 2021 compared to 31 December 2020

In H121, there were no significant changes in our risk governance, including how we define risk and our key risk types, as described in the 2020 Annual Report, except that we updated our climate-related risk minimum standard to consider the impact of environmental and climate-related risk drivers, whether physical or transition-led, which could affect existing risks in the medium and long term.

SANTANDER UK GROUP LEVEL - CREDIT RISK REVIEW

	Customer Loans				Gross write- offs	Loan Loss Allowance
	Total	Stage 1	Stage 2	Stage 3	Gross write- offs	Loan Loss Allowance
30 June 2021	£bn	£bn	£bn	£bn	£m	£m
Retail Banking	186.6	174.9	9.7	2.0	72	603
Corporate & Commercial Banking	17.1	11.3	4.9	0.9	19	534
Corporate & Investment Banking	1.9	1.7	0.2	-	-	19
Corporate Centre	2.7	2.7	-	-	-	36
	208.3	190.6	14.8	2.9	91	1,192
Undrawn Balances		40.2	1.4	0.1
Stage 1, Stage 2 and Stage 3(1) ratios %		91.55	7.11	1.43

31 December 2020	£bn	£bn	£bn	£bn	£m	£m
Retail Banking	183.4	170.2	11.3	1.9	180	706
Corporate & Commercial Banking	17.6	11.1	5.5	1.0	51	603
Corporate & Investment Banking	2.8	2.6	0.2	-	22	33
Corporate Centre	3.2	3.2	-	-	-	35
	207.0	187.1	17.0	2.9	253	1,377
Undrawn Balances		41.8	1.3	0.1
Stage 1, Stage 2 and Stage 3(1) ratios %		90.34	8.26	1.45

(1) Stage3 ratio = (Stage3 drawn + Stage3 undrawn assets)/(total drawn assets + Stage3 undrawn assets)

Movement in total exposures and the corresponding ECL

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

	Stage 1		Stage 2		Stage 3		Total
	Exposures(1)	ECL	Exposures(1)	ECL	Exposures(1)	ECL	Exposures(1)	ECL
	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2021	301,413	216	18,336	592	2,996	569	322,745	1,377
Transfers from Stage 1 to Stage 2(3)	(3,680)	(9)	3,680	9	-	-	-	-
Transfers from Stage 2 to Stage 1(3)	4,961	140	(4,961)	(140)	-	-	-	-
Transfers to Stage 3(3)	(156)	(5)	(475)	(30)	631	35	-	-
Transfers from Stage 3(3)	10	1	287	23	(297)	(24)	-	-
Transfers of financial instruments	1,135	127	(1,469)	(138)	334	11	-	-
Net ECL remeasurement on stage transfer(4)	-	(122)	-	108	-	40	-	26
Change in economic scenarios(2)	-	(6)	-	(86)	-	(12)	-	(104)
New lending and assets purchased(5)	28,910	25	623	10	11	9	29,544	44
Redemptions, repayments and assets sold(7)	(34,471)	(29)	(1,781)	(55)	(285)	(31)	(36,537)	(115)
Changes in risk parameters and other movements(6)	(653)	(28)	450	68	69	15	(134)	55
Assets written off(7)	-	-	-	-	(147)	(91)	(147)	(91)
At 30 June 2021	296,334	183	16,159	499	2,978	510	315,471	1,192
Net movement in the period	(5,079)	(33)	(2,177)	(93)	(18)	(59)	(7,274)	(185)

ECL charge/(release) to the Income Statement		(33)		(93)		32		(94)
Less: Discount unwind		-		-		(6)		(6)
Less: Recoveries net of collection costs		-		-		23		23
ECL charge/(release) to the Income Statement from continued operations		(33)		(93)		49		(77)
Discontinued operations ECL adjustment		-		7		-		7
Total ECL charge/(release) to the Income Statement		(33)		(86)		49		(70)


At 1 January 2020	295,438	147	12,351	348	2,367	368	310,156	863
Transfers from Stage 1 to Stage 2(3)	(9,922)	(37)	9,922	37	-	-	-	-
Transfers from Stage 2 to Stage 1(3)	2,161	80	(2,161)	(80)	-	-	-	-
Transfers to Stage 3(3)	(244)	(2)	(517)	(38)	761	40	-	-
Transfers from Stage 3(3)	5	-	246	17	(251)	(17)	-	-
Transfers of financial instruments	(8,000)	41	7,490	(64)	510	23	-	-
Net remeasurement of ECL on stage transfer(4)	-	(75)	-	222	-	83	-	230
Change in economic scenarios(2)	-	9	-	129	-	10	-	148
New lending and assets purchased(5)	31,045	21	693	26	63	17	31,801	64
Redemptions, repayments and assets sold(7)	(28,485)	(17)	(1,508)	(32)	(283)	(20)	(30,276)	(69)
Changes in risk parameters and other movements(6)	7,237	32	568	(42)	105	78	7,910	68
Assets written off(7)	-	-	-	-	(191)	(123)	(191)	(123)
At 30 June 2020	297,235	158	19,594	587	2,571	436	319,400	1,181
Net movement in the period	1,797	11	7,243	239	204	68	9,244	318

ECL charge/(release) to the Income Statement		11		239		191		441
Less: Discount unwind		-		-		(6)		(6)
Less: Recoveries net of collection costs		-		-		(59)		(59)
ECL charge/(release) to the Income Statement from continued operations		11		239		126		376
Discontinued operations ECL adjustment		(5)		(2)		(5)		(12)
Total ECL charge/(release) to the Income Statement		6		237		121		364

(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 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.

Covid-19 support measures

A summary of the Covid-19 financial support measures that were in place at 30 June 2021 and 31 December 2020 is set out below:

	Customers supported	Breakdown of total PH granted				Outstanding PH
	Customers supported	Up to date after PH	Ongoing PH	New to arrears after PH ends	In arrears before PH	Outstanding PH
30 June 2021		%	%	%	%	£bn
Payment holidays (PH)(1)
Mortgages	256,000	96	-	2	2	0.1
Consumer (auto) finance(2)	58,000	90	-	6	4
Unsecured Personal Loans (UPLs)	36,000	92	-	5	3	-
Credit Cards	34,000	86	-	11	3	-
Business and corporates	3,000	98	-	2	-	-

31 December 2020
Payment holidays (PH)(1)
Mortgages	251,000	88	8	2	2	2.5
Consumer (auto) finance(2)	54,000	77	11	8	4	0.1
Unsecured Personal Loans (UPLs)	34,000	77	13	4	6
Credit Cards	32,000	76	12	8	4
Business and corporates	2,500	98	2	-	-	0.1

	Number of customers	Loan balance	% of relevant loan book
30 June 2021		£bn	%
Government lending schemes
BBLS - 100% government guaranteed	153,000	3.9	19
CBILS	2,000	0.7	3
CLBILS	36	0.2	4

31 December 2020
Government lending schemes
BBLS - 100% government guaranteed	148,000	4.0	19
CBILS	2,000	0.4	2
CLBILS	30	0.2	3

(1) Retail balances are stock positions for customers supported and loans at period end date that have had, or currently have, PHs granted.

(2) Includes customers supported by PSA Finance UK Limited.

Financial review

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT

	H121	H120
	£m	£m
Net interest income	1,905	1,528
Non-interest income(1)	286	300
Total operating income	2,191	1,828
Operating expenses before credit impairment losses, provisions and charges	(1,328)	(1,212)
Credit impairment losses	70	(364)
Provisions for other liabilities and charges	(190)	(64)
Total operating credit impairment losses, provisions and charges	(120)	(428)
Profit after tax	562	139

Attributable to:
Equity holders of the parent	545	128
Non-controlling interests	17	11
Profit after tax	562	139

(1) Comprises 'Net fee and commission income' and 'Other operating income'.

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

H121 compared to H120

Profit from continuing operations before tax was up 295% to £743m due to the factors outlined below. By income statement line item, the movements were:

- Net interest income was up 25%, with repricing actions on the 1I2I3 Current Account and other deposits offsetting base rate cuts and back book mortgage margin pressure, including £1.2bn net attrition on SVR and Follow on Rate products (2020: £1.8bn).

- Non-interest income was flat, with the gain on sale of our UK head office offset by significantly lower banking and transaction fees in our retail business largely due to the implementation of regulatory changes to overdrafts.

- Operating expenses before credit impairment losses, provisions and charges were up 10% largely related to the transformation programme.

- Credit impairment write back of £70m, mainly due to a £104m release related to the improved economic outlook. This compared to H120 when we made a significant charge for Covid-19 related ECL build, which was not repeated. New to arrears flows and Stage 3 defaults remain low as all portfolios perform resiliently.

- Provisions for other liabilities and charges were up £126m to £190m, largely related to the transformation programme.

- Tax on profit from continuing operations increased £157m to £205m with increased profit. The H121 Effective Tax rate (ETR) of 27.6% (H120: 25.5%) also increased as a result of the increase in profit subject to the bank surcharge.

PROFIT BEFORE TAX BY SEGMENT

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

Half year to(3)	Retail Banking(2)	Corporate & Commercial Banking(2)	Corporate & Investment Banking(2)	Corporate Centre(2)	Total
30 June 2021	£m	£m	£m	£m	£m
Net interest income/(expense)	1,741	203	-	(39)	1,905
Non-interest income(1)	189	51	-	46	286
Total operating income/(expense)	1,930	254	-	7	2,191
Operating expenses before credit impairment losses, provisions and charges	(922)	(177)	-	(229)	(1,328)
Credit impairment losses	48	22	-	-	70
Provisions for other liabilities and charges	(67)	(5)	-	(118)	(190)
Total operating credit impairment losses, provisions and charges	(19)	17	-	(118)	(120)
Profit from continuing operations before tax	989	94	-	(340)	743

Half year to(3)
30 June 2020
Net interest income/(expense)	1,369	181	-	(22)	1,528
Non-interest income(1)	227	49	-	24	300
Total operating income/(expense)	1,596	230	-	2	1,828
Operating expenses before credit impairment losses, provisions and charges	(983)	(161)	-	(68)	(1,212)
Credit impairment losses	(214)	(150)	-	0	(364)
Provisions for other liabilities and charges	(56)	3	-	(11)	(64)
Total operating credit impairment losses, provisions and charges	(270)	(147)	-	(11)	(428)
Profit from continuing operations before tax	343	(78)	-	(77)	188

(1) Comprises 'Net fee and commission income' and 'Other operating income'.

(2) The segmental basis of presentation has changed following a management review of our structure and segmental income statements and customer balances for 2020 have been restated accordingly. See Note 2 to the Condensed Consolidated Interim Financial Statements.

(3) Adjusted to reflect the presentation of discontinued operations as set out in Note 33 to the Condensed Consolidated Interim Financial Statements.

H121 compared to H120

- For Retail Banking, profit from continuing operations before tax increased largely due to higher net interest income following 1I2I3 Current Account and other deposit repricing. Operating expenses were lower, and Covid-19 related credit impairment provisions were released, partially offset by lower non-interest income which was impacted by reduced banking and transaction fees because of regulatory changes to overdrafts.

- For Corporate & Commercial Banking, profit from continuing operations before tax increased largely due to lower credit impairment losses following Covid-19 related provision releases because of the improved economic outlook and lower charges related to corporate staging.

- For Corporate & Investment Banking, profit from continuing operations before tax of £nil (H120: £nil), reflecting the presentation of the Corporate & Investment Banking segment as a single discontinued operations line in the Consolidated Income Statement with any residual amounts remaining being transferred to the Corporate Centre. Prior periods have been restated accordingly.

- For Corporate Centre, loss from continuing operations before tax increased largely due to higher transformation charges which impacted operating expenses and provisions for other liabilities and charges. Operating income improved as a result of the gain on sale of our London head office.

Discontinued operations

CIB summary income statement

	Half year to	Half year to
	30 June 2021	30 June 2020
	£m	£m
Net interest income	24	25
Non-interest income(1)	27	22
Operating income	51	47
Operating expenses before impairment losses, provisions and charges	(22)	(33)
Credit Impairment losses	7	(12)
Provisions for other liabilities and charges	(3)	(4)
Profit/ (loss) from discontinued operations before tax	33	(2)
Tax on profit/ (loss) from discontinued operations	(9)	1
Profit/ (loss) from discontinued operations after tax	24	(1)

(1) Comprises 'Net fee and commission income' and 'Other operating income'.

Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET

	June 302021	December 312020
	£m	£m
Assets
Cash and balances at central banks	39,021	41,250
Financial assets at fair value through profit or loss	2,181	3,614
Financial assets at amortised cost	228,037	231,194
Financial assets at fair value through other comprehensive income	6,368	8,950
Interest in other entities	183	172
Property, plant and equipment	1,596	1,734
Retirement benefit assets	1,083	495
Tax, intangibles and other assets	4,500	4,923
Assets held for sale	2,645	-
Total assets	285,614	292,332
Liabilities
Financial liabilities at fair value through profit or loss	2,086	3,018
Financial liabilities at amortised cost	259,561	270,063
Retirement benefit obligations	152	403
Tax, other liabilities and provisions	3,195	2,912
Liabilities held for sale	3,912	-
Total liabilities	268,906	276,396
Equity
Total shareholders' equity	16,528	15,774
Non-controlling interests	180	162
Total equity	16,708	15,936
Total liabilities and equity	285,614	292,332

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

30 June 2021 compared to 31 December 2020

Assets

Cash and balances at central banks

Cash and balances at central banks decreased by 5% to £39,021m at 30 June 2021 (2020: £41,250m). This was driven by cash outflows generated from a decrease in repurchase agreements, deposits by customers, deposits by banks and other financial liabilities at fair value through profit or loss, partially offset by lower reverse repurchase agreements.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss decreased by 40% to £2,181m at 30 June 2021 (2020: £3,614m), mainly due to a £1.3bn decrease in derivative exchange rate and interest rate contracts held for hedging.

Financial assets at amortised cost

Financial assets at amortised cost decreased by 1% to £228,037m at 30 June 2021 (2020: £231,194m), largely driven by a £3.0bn decrease in non-bounce back corporate loans and non-mortgage related lending, the reclassification of £0.6bn of residential mortgages and £2.0bn of CIB customer loans as held for sale, a £1.4bn decrease in reverse repurchase agreements driven by normal business activities, and the disposal of UK Government Gilts, partially offset by a net increase in residential mortgages.

Financial assets at fair value through other comprehensive income

Financial assets at fair value through other comprehensive income decreased by 29% to £6,368m at 30 June 2021 (2020: £8,950m) mainly due to the settlement of Japanese Government bonds and US Treasury bonds.

Property, plant and equipment

Property, plant and equipment decreased by 8% to £1,596m at 30 June 2021 (2020: £1,734m) reflecting freehold and leasehold property sales including the sale of our UK head office.

Retirement benefit assets

Retirement benefit assets increased by 119% to £1,083m at 30 June 2021 (2020: £495m). This was mainly due to actuarial gains in the period driven by an increase in the discount rate as a result of higher corporate bond yields, partially offset by actuarial losses due to higher inflation.

Tax, intangibles and other assets

Tax, intangibles and other assets decreased by 9% to £4,500m at 30 June 2021 (2020: £4,923m), mainly due to hedge adjustments resulting from an increase in the 5 year GBP SONIA rate over the period.

Assets held for sale

Assets held for sale comprise £0.6bn of residential mortgages and £2.0bn of CIB assets. For more, see 'Assets and liabilities classified as held for sale' in the Customer balances section that follows, and Note 33 to the Condensed Consolidated Interim Financial Statements.

Liabilities

Financial liabilities at amortised cost

Financial liabilities at amortised cost decreased by 4% to £259,561m at 30 June 2021 (2020: £270,063m). This was mainly due to maturities and buybacks across a range of debt securities partially offset by new structured notes issuances £6.4bn, a decrease in non-trading repurchase agreements as part of normal business activities, a decrease in deposits by banks due to decreased cash collateral partially offset by an increase in time deposits, and a £1.8bn decrease in customer deposits comprising an increase in retail deposits due to customers continuing to remain cautious with their spending during the Covid-19 pandemic, more than offset by a reduction in financial corporates time deposits and household time deposit balances and the reclassification of £3.8bn of CIB customer deposits as held for sale.

Retirement benefit obligations

Retirement benefit obligations decreased by 62% to £152m at 30 June 2021 (2020: £403m). This was driven by actuarial losses resulting from higher inflation, partially offset by actuarial gains in the period due to an increase in the discount rate as a result of higher corporate bond yields.

Liabilities held for sale

Liabilities held for sale comprise £3.9bn of CIB deposits. For more, see 'Assets and liabilities classified as held for sale' in the Customer balances section that follows, and Note 33 to the Condensed Consolidated Interim Financial Statements.

Equity

Total shareholders' equity

Total shareholders' equity increased by 5% to £16,528m at 30 June 2021 (2020: £15,774m). This increase was principally due to retained profits for the period, pension remeasurement and the issue and redemption of other equity instruments, partially offset by decreases in the fair value of cash flow hedges, and dividends paid.

CUSTOMER BALANCES

Consolidated

	June 30, 2021	December 31, 2020
	£bn	£bn
Customer loans(1)	208.4	207.0
Other assets	77.2	85.3
Total assets	285.6	292.3
Customer deposits(1)	189.4	185.7
Total wholesale funding	56.8	63.1
Other liabilities	22.7	27.5
Total liabilities	268.9	276.3
Shareholders' equity	16.5	15.8
Non-controlling interest	0.2	0.2
Total liabilities and equity	285.6	292.3

(1) Customer loans includes £2.5bn of loans classified as assets held for sale. Customer deposits includes £3.8bn of deposits classified as liabilities held for sale. See 'Assets and liabilities classified as held for sale' on the page that follows for details.

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

30 June 2021 compared to 31 December 2020

- Customer loans increased £1.4bn, with £3.6bn increase in mortgages with strong application volumes and £17.2bn of gross lending. This was partially offset by lower retail unsecured, consumer (auto) finance and corporate lending including the effect of a migration of customers to SLB in H121.

- Customer deposits increased £3.7bn, with £4.5bn growth in Retail Banking partially offset by lower corporate deposits including the effect of a migration of customers to SLB in H121. Growth in 1|2|3 Current account balances to £59bn (H120: £55bn, 2020: £57bn), despite repricing actions taken during 2020 and 2021.

- Other assets and other liabilities fell, as part of liquidity management during H121.

Retail Banking

	June 30, 2021	December 31, 2020
	£bn	£bn
Mortgages	170.6	166.7
Business banking	3.9	3.9
Consumer (auto) finance	7.7	8.0
Other unsecured lending	4.5	4.8
Customer loans	186.7	183.4
Current accounts	80.0	75.6
Savings	58.2	57.4
Business banking accounts	13.1	13.4
Other retail products	5.4	5.8
Customer deposits	156.7	152.2

Corporate & Commercial Banking

	June 30, 2021	December 31, 2020
	£bn	£bn
Non-Commercial Real Estate trading businesses	12.7	12.9
Commercial Real Estate	4.4	4.7
Customer loans	17.1	17.6
Customer deposits	25.3	25.0

Corporate & Investment Banking

	June 30, 2021	December 31, 2020
	£bn	£bn
Customer loans	1.9	2.8
Customer deposits	3.8	6.5

At 30 June 2021, these customer loans and deposits were classified as held for sale, as described below.

Corporate Centre

	June 30, 2021	December 31, 2020
	£bn	£bn
Social Housing	2.6	3.0
Non-core	0.1	0.2
Customer loans	2.7	3.2

Customer deposits	3.6	2

Assets and liabilities classified as held for sale

Customer loans

	30 June 2021
	£bn
CIB Part VII banking business transfer scheme	1.9
Retail Mortgages	0.6
Customer loans held for sale	2.5

Customer deposits

	30 June 2021
	£bn
CIB Part VII banking business transfer scheme	3.8
Customer deposits held for sale	3.8

Capital and funding

	30 June 2021		31 December 2020
	£bn		£bn
Capital
CET1 capital	11.3		11.1
Total qualifying regulatory capital	15.0		15.2
CET1 capital ratio	15.8	%	15.4	%
Total capital ratio	21.0	%	21.2	%
Risk-weighted assets	71.7		71.9
Funding
Total wholesale funding and AT1	59.0		65.3
- of which with a residual maturity of less than one year	17.0		21.1

Liquidity

	30 June 2021		31 December 2020
	£bn		£bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)	144	%	150	%
LCR eligible liquidity pool	47.0		51.5

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

30 June 2021 compared to 31 December 2020

- CET1 capital ratio increased 40 basis points to 15.8% with capital accretion through retained profits, Risk-Weighted Assets (RWA) management and market driven improvements in the defined benefit pensions scheme.

- Total capital ratio reduced by c20bps to 21.0%, reflecting the reduction in AT1 securities in issue and the increased effect from January 2021 of the CRD IV Grandfathering Cap rules that reduce the recognition of grandfathered capital instruments issued by Santander UK plc.

- We issued £2.1bn of MREL eligible senior unsecured securities and repaid £3.0bn of Term Funding Scheme (TFS), leaving £3.3bn outstanding and drew £3.5bn of Term Funding Scheme with additional incentives for SMEs (TFSME), with £15.2bn outstanding. Wholesale funding costs improved in H121 with buy backs and debt maturities being refinanced at lower cost, this is expected to continue in H221.

- The RFB DoLSub LCR of 144% reduced from 150% at year end, remains significantly above regulatory requirements.

- Following the announcement from the PRA on 13 July 2021 regarding the return to normalised shareholder distribution framework, we paid a half year ordinary share dividend to our parent in July 2021.

- Our structural hedge position remained broadly stable at circa £98bn, with an average duration of circa 2.5 years.

Financial statements

Condensed Consolidated Income Statement

For the half year to 30 June 2021 and the half year to 30 June 2020

		June 30, 2021	June 30, 2020
	Notes	£m	£m
Interest and similar income		2,355	2,592
Interest expense and similar charges		(450)	(1,064)
Net interest income		1,905	1,528
Fee and commission income		305	380
Fee and commission expense		(154)	(180)
Net fee and commission income		151	200
Other operating income	3	135	100
Total operating income		2,191	1,828
Operating expenses before credit impairment losses, provisions and charges	4	(1,328)	(1,212)
Credit impairment losses	5	70	(364)
Provisions for other liabilities and charges	5	(190)	(64)
Total operating credit impairment losses, provisions and charges		(120)	(428)
Profit from continuing operations before tax		743	188
Tax on profit from continuing operations	6	(205)	(48)
Profit from continuing operations after tax		538	140
Profit/(loss) from discontinued operations after tax	33	24	(1)
Profit after tax		562	139

Attributable to:
Equity holders of the parent		545	128
Non-controlling interests	28	17	11
Profit after tax		562	139

Condensed Consolidated Statement of Comprehensive Income

For the half year to 30 June 2021 and the half year to 30 June 2020

	Half year to	Half year to
	June 30, 2021	June 30, 2020
	£m	£m
Profit after tax	562	139
Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently:
Movement in fair value reserve (debt instruments):
- Change in fair value	(62)	146
- Income statement transfers	59	(166)
- Taxation	(1)	5
	(4)	(15)
Cash flow hedges:
- Effective portion of changes in fair value	(618)	2,607
- Income statement transfers	377	(2,041)
- Taxation	41	(161)
	(200)	405
Currency translation on foreign operations	-	(1)
Net other comprehensive income/(expense) that may be reclassified to profit or loss subsequently	(204)	389
Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently:
Pension remeasurement:
- Change in fair value	745	(376)
- Taxation	(248)	97
	497	(279)
Own credit adjustment:
- Change in fair value	-	20
- Taxation	-	(5)
	-	15
Net other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently	497	(264)
Total other comprehensive income net of tax	293	125
Total comprehensive income	855	264

Attributable to:
Equity holders of the parent	837	254
Non-controlling interests	18	10
Total comprehensive income	855	264

Condensed Consolidated Balance Sheet

At 30 June 2021 and 31 December 2020

		June 30, 2021	December 31, 2020
	Notes	£m	£m
Assets
Cash and balances at central banks		39,021	41,250
Financial assets at fair value through profit or loss:
- Derivative financial instruments	8	2,002	3,406
- Other financial assets at fair value through profit or loss	9	179	208
Financial assets at amortised cost:
- Loans and advances to customers	10	207,998	208,750
- Loans and advances to banks		1,312	1,682
- Reverse repurchase agreements - non trading	12	18,197	19,599
- Other financial assets at amortised cost	13	530	1,163
Financial assets at fair value through other comprehensive income	14	6,368	8,950
Interests in other entities	15	183	172
Intangible assets	16	1,589	1,646
Property, plant and equipment		1,596	1,734
Current tax assets		282	264
Retirement benefit assets	25	1,083	495
Other assets		2,629	3,013
Assets held for sale	33	2,645	-
Total assets		285,614	292,332
Liabilities
Financial liabilities at fair value through profit or loss:
- Derivative financial instruments	8	1,063	1,584
- Other financial liabilities at fair value through profit or loss	18	1,023	1,434
Financial liabilities at amortised cost:
- Deposits by customers	19	193,317	195,135
- Deposits by banks	20	20,502	20,958
- Repurchase agreements - non trading	21	14,089	15,848
- Debt securities in issue	22	29,140	35,566
- Subordinated liabilities	23	2,513	2,556
Other liabilities		2,365	2,337
Provisions	24	444	464
Deferred tax liabilities		386	111
Retirement benefit obligations	25	152	403
Liabilities held for sale	33	3,912	-
Total liabilities		268,906	276,396
Equity
Share capital		3,105	3,105
Share premium		5,620	5,620
Other equity instruments	27	2,191	2,191
Retained earnings		5,306	4,348
Other reserves		306	510
Total shareholders' equity		16,528	15,774
Non-controlling interests	28	180	162
Total equity		16,708	15,936
Total liabilities and equity		285,614	292,332

Condensed Consolidated Cash Flow Statement

For the half year to 30 June 2021 and the half year to 30 June 2020

	June 30, 2021	June 30, 2020
	£m	£m
Cash flows from operating activities
Profit after tax	562	139

Adjustments for:
Non-cash items included in profit	645	778
Change in operating assets	251	(4,172)
Change in operating liabilities(1)	2,725	10,697
Corporation taxes paid	(153)	(110)
Effects of exchange rate differences	(534)	891
Net cash flows from operating activities	3,496	8,223
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets	(350)	(151)
Proceeds from sale of property, plant and equipment and intangible assets	272	92
Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income	(1,016)	(2,626)
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income	3,789	2,581
Net cash flows from investing activities	2,695	(104)
Cash flows from financing activities
Issue of other equity instruments	210	-
Issue of debt securities and subordinated notes	36	4,097
Issuance costs of debt securities and subordinated notes	(3)	(10)
Repayment of debt securities and subordinated notes	(8,031)	(6,133)
Repurchase of preference shares and other equity instruments	(210)	-
Dividends paid on preference shares and other equity instruments	(83)	(82)
Principal elements of lease payments(1)	(13)	(28)
Net cash flows from financing activities	(8,094)	(2,156)
Change in cash and cash equivalents	(1,903)	5,963
Cash and cash equivalents at beginning of the period	45,582	27,817
Effects of exchange rate changes on cash and cash equivalents	(10)	94
Cash and cash equivalents at the end of the period	43,669	33,874

Cash and cash equivalents consist of:
Cash and balances at central banks	39,021	30,276
Less: regulatory minimum cash balances	(897)	(772)
	38,124	29,504
Other cash equivalents	5,545	4,370
Cash and cash equivalents at the end of the period	43,669	33,874

(1) For H121, Principal elements of lease payments are included as a separate line item in the Condensed Consolidated Cash Flow Statement. As a result, cash flows of £28m for H120 have been reclassified from 'Change in operating liabilities' within operating activities to 'Principal elements of lease payments' within financing activities.

Condensed Consolidated Statement of Changes in Equity

For the half year to 30 June 2021 and the half year to 30 June 2020

				Other reserves					Non-controlling interests
	Share capital	Share premium	Other equity instruments	Fair value	Cash flow hedging	Currency translation	Retained earnings
	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 2021	3,105	5,620	2,191	28	481	1	4,348	15,774	162	15,936
Profit after tax	-	-	-	-	-	-	545	545	17	562
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	-	-	-	(4)	-	-	-	(4)	-	(4)
- Cash flow hedges	-	-	-	-	(200)	-	-	(200)	-	(200)
- Pension remeasurement	-	-	-	-	-	-	496	496	1	497
Total comprehensive income	-	-	-	(4)	(200)	-	1,041	837	18	855
Issue of other equity instruments	-	-	210	-	-	-	-	210	-	210
Repurchase of other equity instruments	-	-	(210)	-	-	-	-	(210)	-	(210)
Dividends on preference shares and other equity instruments	-	-	-	-	-	-	(83)	(83)	-	(83)
At 30 June 2021	3,105	5,620	2,191	24	281	1	5,306	16,528	180	16,708

At 1 January 2020	3,105	5,620	2,191	23	371	1	4,546	15,857	160	16,017
Profit after tax	-	-	-	-	-	-	128	128	11	139
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	-	-	-	(15)	-	-	-	(15)	-	(15)
- Cash flow hedges	-	-	-	-	405	-	-	405	-	405
- Pension remeasurement	-	-	-	-	-	-	(278)	(278)	(1)	(279)
- Own credit adjustment	-	-	-	-	-	-	15	15	-	15
- Currency translation on foreign operations	-	-	-	-	-	(1)	-	(1)	-	(1)
Total comprehensive income	-	-	-	(15)	405	(1)	(135)	254	10	264
Dividends on preference shares and other equity instruments	-	-	-	-	-	-	(82)	(82)	-	(82)
At 30 June 2020	3,105	5,620	2,191	8	776	-	4,329	16,029	170	16,199

1. ACCOUNTING POLICIES

The financial information in these Condensed Consolidated Interim Financial Statements is unaudited and does not constitute statutory accounts as defined in section 434 of the UK Companies Act 2006. Statutory accounts for the year ended 31 December 2020 have been delivered to the Registrar of Companies.

The Condensed Consolidated Interim Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of operations for the interim period. All such adjustments to the financial information are of a normal, recurring nature. Because the results from common banking activities are so closely related and responsive to changes in market conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the year.

On 31 December 2020, International Financial Reporting Standards (IFRSs) as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards (IAS), with future changes being subject to endorsement by the UK Endorsement Board. Santander UK plc (the Company) and its subsidiaries (collectively Santander UK or the Santander UK group) transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework.

The Condensed Consolidated Interim Financial Statements have been prepared in accordance with UK adopted IAS 34 'Interim Financial Reporting', IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB), IAS 34 'Interim Financial Reporting' as adopted by the EU, and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA). They do not include all the information and disclosures normally required for full annual financial statements and should be read in conjunction with the Consolidated Financial Statements of Santander UK for the year ended 31 December 2020 which were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. Those consolidated financial statements were also prepared in accordance with IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, as there were no applicable differences from IFRSs as issued by the IASB for the periods presented. At 30 June 2021, there were no differences between IFRSs adopted by the UK, IFRSs issued by the IASB, and IFRSs adopted by the EU in terms of their application to Santander UK. The financial statements for Santander UK for the year ended 31 December 2021 will be prepared in accordance with IFRS as adopted by the UK, IFRSs as issued by the IASB, including interpretations issued by the IFRS Interpretations Committee, and IFRSs as adopted by the EU. Except as noted below, the same accounting policies, presentation and methods of computation are followed in these Condensed Consolidated Interim Financial Statements as were applied in the presentation of Santander UK's 2020 Annual Report.

Non-current assets held for sale

Non-current assets (or disposal groups) are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction rather than continuing use. In order to be classified as held for sale, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary and the sale must be highly probable. Non-current assets (or disposal groups) held for sale are measured at the lower of carrying amount and fair value less cost to sell, with the exception of financial instruments which remain governed by the requirements of IFRS 9, and are held at their IFRS 9 carrying value. For details of the disposal of assets and liabilities in connection with the transfer of the Corporate & Investment Banking (CIB) business to the London Branch of Banco Santander SA (SLB), and for details on the sale of Retail Banking residential mortgage assets, see Note 33.

Discontinued operations

A discontinued operation is a component of the Santander UK group that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the Condensed Consolidated Income Statement. Prior periods have been restated accordingly.

Future accounting developments

At 30 June 2021, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued, including those which are not yet effective or which have otherwise not been early adopted where permitted.

Going concern

In light of the continuing economic uncertainty, the Directors updated their going concern assessment in preparing these Condensed Consolidated Interim Financial Statements. After making enquiries, the Directors have a reasonable expectation that Santander UK has adequate resources to continue in operational existence for at least twelve months from the date of this report and, therefore, having reassessed the principal risks and uncertainties, the Directors consider it appropriate for the Condensed Consolidated Interim Financial Statements to be prepared on a going concern basis.

In making their going concern assessment in connection with preparing the Condensed Consolidated Interim Financial Statements, the Directors considered a wide range of information that included Santander UK's long-term business and strategic plans, forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities and the reasonably possible changes in trading performance arising from potential economic, market and product developments. The Directors' assessment specifically considered the impacts of Covid-19, including for the following areas:

- Economic scenarios and probability weights: These underpin our ECL impairment allowances and are discussed in detail in the Credit risk section of the Risk review. The Directors reviewed the economic scenarios to ensure that they captured the wide range of potential outcomes for the UK economy. Whereas the outlook for 2021 is more positive following the success of the vaccination programme and cautious optimism that the worst of the health crisis has passed, the downside scenarios continue to encapsulate different potential outcomes including higher-for-longer unemployment, and emergence of Covid-19 variants that are more resistant to existing vaccines leading to further lockdowns and a slower recovery that is more akin to the 'U' shape of past recessions.

- Liquidity: Santander UK remains in a strong liquidity position and Covid-19 did not trigger a liquidity stress.

- Capital: Santander UK remains strongly capitalised and Covid-19 did not trigger a capital stress.

- Customers: Santander UK has supported many thousands of individuals and businesses affected by Covid-19 with a range of measures, including payment holidays on mortgages, personal loans and credit cards as well as taking an active part in UK Government loan schemes to help businesses. The majority of customers who took payment holidays have resumed payments. We continue to work with those customers who remain affected to understand their individual situations and, where necessary, help them resume payments.

- Operations: All our operations continue to operate effectively with a significant majority of staff working from home and the majority of branches remaining open and returning to more normal hours. The current operating model could be sustained indefinitely with additional resilience being continuously implemented and is not affecting our ability to operate all our services, or raising concerns about our Business Continuity Planning, and

- Key suppliers: Suppliers continue to be closely monitored in line with our Third Party Risk Management Framework. No significant service issues have been reported across our cohort of critical suppliers, and no material issues have been reported across our broader (non-critical) supply chain. Isolated supplier impacts have been seen, but these are being managed.

CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATES

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

In the course of preparing the Condensed Consolidated Interim Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, provisions and contingent liabilities, pensions and goodwill.

There have been no significant changes in the basis upon which judgements and accounting estimates have been determined compared to that applied in the 2020 Annual Report, except as described below. Management have considered the impact of Covid-19 on critical judgements and accounting estimates.

a) Credit impairment losses

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
	- Applying post model adjustments
	- Assessing individual corporate Stage 3 exposures
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, including the impact of Covid-19 on them, see 'Management judgements and estimates applied in calculating ECL' in the 'Credit risk - Santander UK group level - credit risk management' section of the Risk review.

Sensitivity of ECL allowance

For detailed disclosures, see 'Sensitivity of ECL allowance' in the 'Credit risk - Santander UK group level - credit risk management' section of the Risk review.

b) Provisions and contingent liabilities

Key judgements	- Determining whether a present obligation exists
	- Assessing the likely outcome of future legal decisions
Key estimates	- Probability, timing, nature and amount of any outflows that may arise from past events

Note 26 'Contingent liabilities and commitments' 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, as well as an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. It also includes disclosure relating to certain leases in which current and former Santander UK group members were the lessor that are currently under review by HMRC in connection with claims for tax allowances.

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 each of these key judgements and estimates, see Notes 24 and 26.

c) Pensions

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

For more on each of these key judgements and estimates, including the impact of Covid-19 on them, see Note 25.

Sensitivity of defined benefit pension scheme estimates

For detailed disclosures see 'Actuarial assumption sensitivities' in Note 25.

d) Goodwill

Key judgements:	- Determining the basis of goodwill impairment calculation assumptions, including management's planning assumptions considering internal capital allocations needed to support Santander UK's strategy, current market conditions and the macro-economic outlook.
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
	These are variables subject to fluctuations in external market rates and economic conditions beyond management's control

For more on each of these key judgements and estimates, see Note 16.

Sensitivity of goodwill

For detailed disclosures, see 'Sensitivities of key assumptions in calculating VIU' in Note 20 to the Consolidated Financial Statements in the 2020 Annual Report.

2. SEGMENTS

Santander UK's principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of 4 segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies.

As reflected in the 2020 Annual Report, the segmental basis of presentation in these Condensed Consolidated Interim Financial Statements changed following a management review of our structure. At 31 December 2020 this resulted in customer assets of £2.0bn and customer deposits of £3.1bn being transferred from Business Banking (in Retail Banking) to CCB, non-core corporate mortgages of £0.4bn transferring from Corporate Centre to CCB, and a number of smaller business lines transferring from CIB to Corporate Centre. For H120, this resulted in an increase in profit before tax in Retail Banking of £28m, a decrease in CCB of £31m, a decrease in CIB of £4m, and an increase of £7m in Corporate Centre. The net impact for Santander UK was nil.

Proposed transfer of the CIB business to SLB

Following a hearing held on 23 June 2021, the High Court of England and Wales has sanctioned the transfer of substantially all the CIB business of Santander UK to SLB by way of a Part VII banking business transfer scheme. The transfers of CIB business to SLB under the scheme are scheduled to take place before the end of 2021.

Management considered the related business transfers to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the assets and liabilities relating to the CIB business. For more details, see Note 33.

At 30 June 2021, the CIB business met the requirements for presentation as discontinued operations. For more details, see Note 33.

Results by segment

Half year to	Retail Banking	Corporate & Commercial Banking	Corporate & Investment Banking	Corporate Centre	Total
30 June 2021	£m	£m	£m	£m	£m
Net interest income/(expense)	1,741	203	-	(39)	1,905
Non-interest income	189	51	-	46	286
Total operating income	1,930	254	-	7	2,191
Operating expenses before credit impairment losses, provisions and charges	(922)	(177)	-	(229)	(1,328)
Credit impairment losses	48	22	-	-	70
Provisions for other liabilities and charges	(67)	(5)	-	(118)	(190)
Total operating credit impairment losses, provisions and charges	(19)	17	-	(118)	(120)
Profit/(loss) before tax					-

Revenue from external customers	2,197	273	-	(279)	2,191
Inter-segment revenue	(267)	(19)	-	286	-
Total operating income	1,930	254	-	7	2,191

Revenue from external customers includes the following fee and commission income disaggregated by income type:(1)
- Current account and debit card fees	185	23	-	-	208
- Insurance, protection and investments	33	-	-	-	33
- Credit cards	29	-	-	-	29
- Non-banking and other fees(2)	6	29	-	-	35
Total fee and commission income	253	52	-	-	305
Fee and commission expense	(140)	(10)	-	(4)	(154)
Net fee and commission income/(expense)	113	42	-	(4)	151

30 June 2021
Customer loans	186,706	17,055	1,913	2,673	208,347
Total assets(3)	195,480	17,055	2,057	71,022	285,614
Of which assets held for sale	608	-	2,037	-	2,645
Customer deposits	156,713	25,244	3,817	3,596	189,370
Total liabilities	157,268	25,263	3,912	82,463	268,906
Of which liabilities held for sale	-	-	3,912	-	3,912

(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) Includes customer loans, net of credit impairment loss allowances.

Half year to(4)(5)	Retail Banking	Corporate & Commercial Banking	Corporate & Investment Banking	Corporate Centre	Total
30 June 2020	£m	£m	£m	£m	£m
Net interest income/(expense)	1,369	181	-	(22)	1,528
Non-interest income	227	49	-	24	300
Total operating income/(expense)	1,596	230	-	2	1,828
Operating expenses before credit impairment losses, provisions and charges	(983)	(161)	-	(68)	(1,212)
Credit impairment losses	(214)	(150)	-	-	(364)
Provisions for other liabilities and charges	(56)	3	-	(11)	(64)
Total operating credit impairment losses, provisions and charges	(270)	(147)	-	(11)	(428)
Profit/(loss) before tax	315	(47)	(24)	(57)	187

Revenue from external customers	1,973	278	-	(424)	1,827
Inter-segment revenue	(377)	(48)	-	426	1
Total operating income/(expense)	1,596	230	-	2	1,828

Revenue from external customers includes the following fee and commission income disaggregated by income type:(1)
- Current account and debit card fees	245	21	-	-	266
- Insurance, protection and investments	31	-	-	-	31
- Credit cards	35	-	-	-	35
- Non-banking and other fees(2)	20	24	-	4	48
Total fee and commission income	331	45	-	4	380
Fee and commission expense	(164)	(12)	-	(4)	(180)
Net fee and commission income	167	33	-	-	200

31 December 2020
Customer loans	183,404	17,626	2,784	3,196	207,010
Total assets(3)	192,070	17,626	2,784	79,852	292,332
Customer deposits	152,167	24,985	6,506	2,049	185,707
Total liabilities	152,715	25,011	6,517	92,153	276,396

(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) Includes customer loans, net of credit impairment loss allowances

(4) Restated, as reflected in Note 2 to the Consolidated Financial Statements in the 2020 Annual Report, following a management review of our structure.

(5) Restated to reflect the presentation of discontinued operations, as set out in Note 33.

3. OTHER OPERATING INCOME

In H121, the Santander UK group repurchased certain debt securities as part of ongoing liability management exercises, resulting in a loss of £27m. In H120, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £17m.

In H121, the Santander UK group sold its UK head office site in Triton Square, London to a wholly owned subsidiary of its parent, Banco Santander SA, given the decision to invest in a new Milton Keynes campus. Other operating income includes a £71m gain on sale of the UK head office site. The net gain reflects a sale price based on independent valuations.

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

	Half year to	Half year to(1)
	June 30, 2021	June 30, 2020
	£m	£m
Staff costs:
Staff costs	577	576
Other administration expenses	431	367
Depreciation, amortisation and impairment	320	269
Total	1,328	1,212

(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.

5. CREDIT IMPAIRMENT LOSSES AND PROVISIONS

	Half year to	Half year to(1)
	June 30, 2021	June 30, 2020
	£m	£m
Credit impairment loss/(release):
Loans and advances to customers	(33)	384
Recoveries of loans and advances, net of collection costs	(13)	(15)
Off-balance sheet exposures (See Note 24)	(24)	(5)
	(70)	364
Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 24)	191	64
Provisions for residual value and voluntary termination	(1)	-
	190	64
	120	428

(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.

6. TAXATION

The Santander UK group's effective tax rate for H121 was 27.6% (H120: 25.5%). The tax on profit before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows:

	Half year to	Half year to(1)
	30 June 2021	30 June 2020
	£m	£m
Profit from continuing operations before tax	743	188
Tax calculated at a tax rate of 19% (H120: 19%)	141	36
Bank surcharge on profits	49	9
Non-deductible preference dividends paid	6	3
Non-deductible UK Bank Levy	14	6
Other non-deductible costs and non-taxable income	14	4
Effect of change in tax rate on deferred tax provision	13	7
Tax relief on dividends in respect of other equity instruments	(32)	(13)
Adjustment to prior year provisions	-	(4)
Tax on profit from continuing operations	205	48

(1) Adjusted to reflect the presentation of discontinued operations as set out in Note 33.

The UK government announced in its budget on 3 March 2021 that it would increase the main rate of corporation tax by 6% to 25% with effect from 1 April 2023. This change was substantively enacted on 24 May 2021 and, as a result, the effect has been reflected in the closing deferred tax position included in these financial statements. The comparative 2020 results reflected an increase in tax rates by 2% following an announcement in the 2020 budget to reverse a previously planned rate reduction from April 2020.

7. DIVIDENDS ON ORDINARY SHARES

No interim dividend was declared on the Company's ordinary shares in issue (H120: £0).

8. DERIVATIVE FINANCIAL INSTRUMENTS

	June 30, 2021			December 31, 2020
		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	12,227	229	215	14,951	395	418
Interest rate contracts	31,912	545	440	40,160	888	542
Equity and credit contracts	1,106	141	53	1,140	123	55
Total derivatives held for trading	45,245	915	708	56,251	1,406	1,015
Derivatives held for hedging
Designated as fair value hedges:
Exchange rate contracts	598	52	1	789	84	6
Interest rate contracts	84,311	981	1,319	93,748	1,225	1,885
	84,909	1,033	1,320	94,537	1,309	1,891
Designated as cash flow hedges:
Exchange rate contracts	23,756	1,131	381	27,020	1,978	409
Interest rate contracts	26,609	307	38	19,407	467	23
	50,365	1,438	419	46,427	2,445	432
Total derivatives held for hedging	135,274	2,471	1,739	140,964	3,754	2,323
Derivative netting(1)		(1,384)	(1,384)		(1,754)	(1,754)
Total derivatives	180,519	2,002	1,063	197,215	3,406	1,584

(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 £401m (2020: £330m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £245m (2020: £651m).

9. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

	June 30, 2021	December 31, 2020
	£m	£m
Loans and advances to customers:
Loans to housing associations	12	13
Other loans	62	86
	74	99
Debt securities	105	109
	179	208

10. LOANS AND ADVANCES TO CUSTOMERS

	June 30, 2021	December 31, 2020
	£m	£m
Net loans and advances to customers	207,998	208,750

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.

The balance at 30 June 2021 excludes loans and advances to customers classified as assets held for sale. For more, see Note 33.

11. SECURITISATIONS AND COVERED BONDS

The gross assets securitised, or for the covered bond programme assigned, at 30 June 2021 and 31 December 2020 were:

	June 30, 2021	December 31, 2020
	£m	£m
Mortgage-backed master trust structures:
- Holmes	2,566	3,073
- Fosse	2,170	2,258
- Langton	0	2,782
	4,736	8,113
Other asset-backed securitisation structures:
- Motor	103	189
- Auto ABS UK Loans	1,325	1,460
	1,428	1,649
Total securitisation programmes	6,164	9,762
Covered bond programmes
- Euro 35bn Global Covered Bond Programme	19,000	23,670
Total securitisation and covered bond programmes	25,164	33,432

The following table sets out the internal and external issuances and redemptions in H121 and H120 for each securitisation and covered bond programme.

	Internal issuances		External issuances		Internal redemptions		External redemptions
	H121	H120	H121	H120	H121	H120	H121	H120
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Mortgage-backed master trust structures:
- Holmes	-	-	-	-	-	0.1	0.3	0.5
- Langton	-	-	-	-	2.4	-	-	-
Other asset-backed securitisation structures:
- Motor	-	-	-	-	0.1	0.1	-	0.1
- Auto ABS UK Loans	-	-	-	-	0.1	-	0.1	0.1
Covered bond programme	-	-	-	3	-	-	4.5	1.8
	-	-	-	3	2.6	0.2	4.9	2.5

In H121, the remaining Langton bonds were redeemed and the associated mortgages were repurchased by Santander UK plc.

16. INTANGIBLE ASSETS

Intangible assets comprise goodwill and computer software.

Goodwill

The following CGUs include in their carrying values goodwill that comprises the goodwill reported by Santander UK. The CGUs do not carry on their balance sheets any other intangible assets with indefinite useful lives. For key assumptions used in the value in use (VIU) calculation, as the basis of the recoverable amount of each CGU, see Note 20 to the Consolidated Financial Statements in the 2020 Annual Report. At H121 a review was performed to identify any potential impairment indicators. No indicators of impairment were identified and so a full impairment test was not performed for the half year. The key assumptions are set out in the table below.

	Goodwill		Discount rate		Growth rate beyond initial cash flow projections
	30 June 2021	31 December 2020	30 June 2021	31 December 2020	30 June 2021	31 December 2020
CGU	£m	£m	%	%	%	%
Personal financial services	1,169	1,169	14.6	13.6	1.6	1.6
Private banking	30	30	11.0	8.9	1.6	1.6
Other	4	4	14.6	13.6	1.6	1.6
	1,203	1,203

17. PROPERTY, PLANT AND EQUIPMENT

	Property	Office fixtures and equipment	Computer software	Operating lease assets	Right-of-use assets	Total(2)
	£m	£m	£m	£m	£m	£m
Cost:
At 1 January 2021	1,272	1,375	436	720	218	4,021
Additions	23	12	-	194	59	288
Disposals	(306)	(267)	-	(122)	(20)	(715)
At 30 June 2021	989	1,120	436	792	257	3,594
Accumulated depreciation:
At 1 January 2021	489	1,068	434	178	118	2,287
Charge for the period(1)	17	46	-	48	10	121
Impairment during the period	57	29	-	-	19	105
Disposals	(210)	(236)	-	(50)	(19)	(515)
At 30 June 2021	353	907	434	176	128	1,998
Net book value	636	213	2	616	129	1,596

Cost:
At 1 January 2020	1,270	1,436	439	738	212	4,095
Additions	61	43	2	185	8	299
Disposals	(59)	(104)	(5)	(203)	(2)	(373)
At 31 December 2020	1,272	1,375	436	720	218	4,021
Accumulated depreciation:
At 1 January 2020	454	1,016	434	164	60	2,128
Charge for the year(1)	55	111	-	92	58	316
Impairment during the year	24	-	-	-	-	24
Disposals	(44)	(59)	-	(78)	-	(181)
At 31 December 2020	489	1,068	434	178	118	2,287
Net book value	783	307	2	542	100	1,734

(1) Following a review of the estimated useful lives of property as part of Santander UK's transformation program, the charge for the period includes accelerated property depreciation of £4m (2020: £9m).

(2) Property, plant and equipment includes assets under construction of £72m (2020: £55m

Property, office fixtures and equipment and right-of-use assets were impaired in the period as a result of our multi-year transformation project. The impairment relates to leasehold properties within the scope of our branch network restructuring programme and head office sites which are either closing or consolidating.

24. PROVISIONS

	Conduct remediation
	PPI	Other products	Bank Levy	Property	Off balance sheet ECL	Regulatory and other	Total
	PPI	Other products	Bank Levy	Property	Off balance sheet ECL	Regulatory and other	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2021	76	8	34	45	75	226	464
Additional provisions (See Note 5)	-	-	-	43	-	148	191
Provisions released (See Note 5)	-	-	-	-	(24)	-	(24)
Utilisation and other	(39)	-	(34)	(9)	-	(105)	(187)
Recharge	-	-	-	-	-	-	-
At 30 June 2021	37	8	-	79	51	269	444

Conduct remediation

Payment Protection Insurance (PPI)

At 30 June 2021, the remaining provision for PPI redress and related costs was £37m (2020: £76m). There was no additional provision in H121.

At 30 June 2021, the outstanding activities which drive the ongoing provision requirement relate to the final aspects of complaints close down activity and the commercial settlement with the Official Receiver.

Customers continue to commence litigation concerning the historical sale of PPI. Provision has been made for the best estimate of any obligation to pay compensation in respect of current stock and estimated future claims. The extent of the potential liability and amount of any compensation to be paid remains uncertain.

The provision for conduct remediation recognised represents management's best estimate of Santander UK's liability in respect of mis-selling of PPI policies.

Property

Property provisions were impacted by £43m of transformation charges in H121. These relate to a multi-year project to deliver on our strategic priorities and enhance efficiency in order for us to better serve our customers and meet our medium-term targets. These charges consist of costs relating to leasehold properties within the scope of our branch network restructuring programme and decommissioning costs relating to head office sites which are either closing or consolidating.

Regulatory and other

In H121 there was a charge of £69m as part of our multi-year transformation programme to improve future returns, focused on simplifying, digitising and automating the bank, comprising mainly of redundancy costs of £57m relating to branch and head office site closures. There was also a charge for operational risk provisions of £50m, due to an increase in Push Payment fraud volumes and losses, £13m for legal provisions and smaller charges for other provisions.

In H121 we did not experience any material operational risk losses. The losses were in line with H120 and remained comfortably within our forecast and 2021 risk appetite. Aligned to the rest of the industry, we continue to experience losses related to Push Payment fraud. In addition, provisions are being managed to cover existing customer remediation programmes and associated costs.

25. RETIREMENT BENEFIT PLANS

The amounts recognised in the balance sheet were as follows:

	June 30, 2021	December 31, 2020
	£m	£m
Assets/(liabilities)
Funded defined benefit pension scheme - surplus	1,083	495
Funded defined benefit pension scheme - deficit	(113)	(361)
Unfunded pension and post retirement medical benefits	(39)	(42)
Total net assets	931	92

a) Defined contribution pension plans

An expense of £33m (H120: £33m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 4).

b) Defined benefit pension schemes

The total amount charged to the income statement was £23m (H120: £17m).

The amounts recognised in other comprehensive income were as follows:

	H121	H120
	£m	£m
Return on plan assets (excluding amounts included in net interest expense)	383	(1,115)
Actuarial losses arising from changes in demographic assumptions	-	38
Actuarial gains arising from experience adjustments	(30)	(10)
Actuarial (gains)/losses arising from changes in financial assumptions	(1,098)	1,463
Pension remeasurement	(745)	376

The net assets recognised in the balance sheet were determined as follows:

	30 June 2021	31 December 2020
	£m	£m
Present value of defined benefit obligations	(12,675)	(13,887)
Fair value of scheme assets	13,606	13,979
Net defined benefit assets	931	92

Actuarial assumptions

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

	June 30, 2021	December 31, 2020
	%	%
To determine benefit obligations:
- Discount rate for scheme liabilities	1.9	1.3
- General price inflation	3.2	3.0
- General salary increase	1.0	1.0
- Expected rate of pension increase	3.1	2.9

	Years	Years
Longevity at 60 for current pensioners, on the valuation date:
- Males	27.5	27.5
- Females	30.1	30.0
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
- Males	29.1	29.0
- Females	31.6	31.5

In March 2021, the Trustee entered into a longevity swap. Approximately 85% of pensioner liabilities were covered by the longevity swap at inception. The value of the swap at 30 June 2021 was nil.

Actuarial assumption sensitivities

The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.

		(Decrease)/increase
		30 June 2021	31 December 2020
Assumption	Change in pension obligation at period end from	£m	£m
Discount rate	25 bps increase	(573)	(662)
General price inflation(1)	25 bps increase	411	480
Mortality	Each additional year of longevity assumed	453	515

(1) The comparative figure for general price inflation sensitivity of £365m as at 31 December 2020 has been restated. This was due to an error and does not impact the actual reported assumption value.

26. CONTINGENT LIABILITIES AND COMMITMENTS

	June 30, 2021	December 31, 2020
	£m	£m
Guarantees given to third parties	739	939
Formal standby facilities, credit lines and other commitments	40,957	42,221
	41,696	43,160

Other legal actions and regulatory matters

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

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

Payment Protection Insurance

In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is in its early stages. The dispute relates to the liability for PPI mis-selling complaints relating to pre-2005 PPI policies underwritten by AXA France IARD and AXA France Vie (together, AXA France - previously Financial Insurance Company Ltd and Financial Assurance Company Ltd respectively) and involves Santander Cards UK Limited (a former GE Capital Corporation entity and distributor of pre-2005 PPI known as GE Capital Bank Limited which was acquired by Banco Santander SA in 2008 and subsequently transferred to Santander UK plc) and a Banco Santander SA subsidiary Santander Insurance Services UK Limited (together the Santander Entities). During the relevant period, AXA France were owned by Genworth Financial International Holdings, Inc (Genworth).

In September 2015 AXA S.A. acquired AXA France from Genworth. In July 2017, the Santander Entities notified AXA France that they did not accept liability for losses on PPI policies relating to this period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with AXA France pursuant to which it agreed to handle complaints on their behalf, and AXA France agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis. A standstill agreement was entered into between the Santander Entities and AXA France as a condition of the CHA.

In July 2020, Genworth announced that it had agreed to pay AXA circa £624m in respect of PPI mis-selling losses in settlement of the related dispute concerning obligations under the sale and purchase agreement pursuant to which Genworth sold AXA France to AXA. The CHA between Santander UK plc and AXA France terminated on 26 December 2020. On 30 December 2020, AXA France provided written notice to the Santander Entities to terminate the standstill agreement. During H121, AXA France commenced litigation against the Santander Entities seeking recovery of £636 m and any further losses relating to pre-2005 PPI. The Santander Entities acknowledged service indicating their intention to defend the claim in full and have now issued an application for AXA France's claim to be struck out/summarily dismissed. This dispute is at an early stage and 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 regulatory and other provision in Note 24 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 24 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 H121 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, the investigation is focused principally on the period 2009-2011 and remains on-going. There remain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact. Any potential losses, claims or expenses suffered or incurred by Santander Financial Services plc in respect of these matters have been fully indemnified by Santander UK plc, as part of the ring-fencing transfer scheme between Santander UK plc, Santander Financial Services plc and Banco Santander SA.

Consumer credit

The Santander UK group's unsecured lending and other consumer credit business is governed by consumer credit law and related regulations, including the CCA. Claims brought by customers in relation to these requirements, including potential breaches, could result in costs to the Santander UK group where such potential breaches are not found to be de minimis. The CCA includes very detailed and prescriptive requirements for lenders, including in relation to post contractual information.

Other provisions include an amount of £41m (2020: £47m) arising from a systems-related historical issue identified by Santander UK, relating to compliance with certain requirements of the CCA. This provision has been based on detailed reviews of relevant systems related to consumer credit business operations, supported by external legal and regulatory advice. The Regulatory and other provision in Note 24 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 practicable to provide an estimate of the risk and amount of any further financial impact.

FCA civil regulatory investigation into Santander UK plc financial crime systems, processes and controls and compliance with the Money Laundering Regulations 2007

Santander UK plc is cooperating with an FCA civil regulatory investigation which commenced in July 2017 into our compliance with the Money Laundering Regulations 2007 and potential breaches of FCA principles and rules relating to anti-money laundering and financial crime systems and controls. The FCA's investigation focuses primarily on the period 2012 to 2017 and includes consideration of high risk customers including Money Service Businesses. It is not currently possible to make a reliable assessment of any liability resulting from the investigation including any financial penalty.

Taxation

The Santander UK group engages in discussion, and co-operates, with HM Revenue & Customs (HMRC) in their oversight of the Santander UK group's tax matters. The Santander UK group adopted the UK's Code of Practice on Taxation for Banks in 2010.

Certain leases in which the Santander UK group is or was the lessor have been under review by HMRC in connection with claims for tax allowances. Under the terms of the lease agreements, the Santander UK group is fully indemnified in all material respects by the respective lessees for any liability arising from the disallowance of tax allowances plus accrued interest.

During H121, an outline agreement in principle in respect of a number of these lease arrangements was reached directly between the lessee and HMRC.

Certain other lease arrangements, where the tax liabilities are considered immaterial, remain under review. Whilst legal opinions have been obtained to support the Santander UK group's position, the matter remains uncertain pending formal resolution with HMRC and any subsequent litigation. These matters moved to formal litigation in 2020, as required under the terms of the leases, and it is currently anticipated that hearings will be held at the First Tier Tax Tribunal in 2022.

Other

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. The convertible preferred stock is now held by Santander Equity Investments Limited (SEIL), outside the ring fenced bank. Conversion of the preferred stock into Class A Common Stock of Visa Inc. depends on the outcome of litigation against Visa involving UK & Ireland (UK&I) multilateral interchange fees (MIFs). In June 2020, the Supreme Court issued a judgement finding that MIFs restricted competition.

In addition, Santander UK and certain other UK&I 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 €1bn of losses relating to UK&I MIFs have arisen or once the total value of the preferred stock issued to UK&I banks on closing has been reduced to nil. Whilst Santander UK's liability under this indemnity is capped at €39.85m, Visa Inc. may have recourse to a general indemnity in place under Visa Europe Operating Regulations for damages not satisfied through the above mechanism. At this stage, it is unclear whether the litigation will give rise to more than €1bn of losses relating to UK&I MIFs which means it is difficult 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, Santander UK has given warranties and indemnities to the purchasers.

31. FINANCIAL INSTRUMENTS

a) Measurement basis of financial assets and liabilities

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 to the Consolidated Financial Statements in the 2020 Annual Report describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.

b) Fair values of financial instruments carried at amortised cost

The following tables analyse the fair value of the financial instruments carried at amortised cost at 30 June 2021 and 31 December 2020. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Details of the valuation methodology of the financial assets and financial liabilities carried at amortised cost can be found in Note 40(e) to the Consolidated Financial Statements in the 2020 Annual Report.

	June 30, 2021		December 31, 2020
		Carrying		Carrying
	Fair value	value	Fair value	value
	£m	£m	£m	£m
Assets
Loans and advances to customers	210,815	207,998	211,279	208,750
Loans and advances to banks	1,312	1,312	1,682	1,682
Reverse repurchase agreements - non trading	18,198	18,197	19,608	19,599
Other financial assets at amortised cost	539	530	1,192	1,163
Assets held for sale(1)	2,493	2,486	-	-
	233,357	230,523	233,761	231,194
Liabilities
Deposits by customers	193,389	193,317	195,242	195,135
Deposits by banks	20,503	20,502	20,967	20,958
Repurchase agreements - non trading	14,088	14,089	15,847	15,848
Debt securities in issue	29,890	29,140	36,397	35,566
Subordinated liabilities	3,080	2,513	3,069	2,556
Liabilities held for sale(1)	3,790	3,790	-	-
	264,740	263,351	271,522	270,063

(1) Assets and liabilities classified as held for sale are measured in accordance with IFRS 9. Any assets and liabilities held for sale which are measured at fair value are included in the fair value table in section (c) below.

c) Fair values of financial instruments measured at fair value

The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 30 June 2021 and 31 December 2020, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.

		June 30, 2021				December 31, 2020
		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	-	1,403	1	1,404	-	2,455	2	2,457	A
	Interest rate contracts	-	1,841	-	1,841	-	2,566	14	2,580	A & C
	Equity and credit contracts	-	93	48	141	-	71	52	123	B & D
	Netting	-	(1,384)	-	(1,384)	-	(1,754)	-	(1,754)
		-	1,953	49	2,002	-	3,338	68	3,406
Other financial assets at FVTPL	Loans and advances to customers	-	-	74	74	-	-	99	99	A
	Debt securities	-	-	105	105	-	-	109	109	A, B & D
		-	-	179	179	-	-	208	208
Financial assets at FVOCI	Debt securities	6,160	188	-	6,348	8,501	428	-	8,929	D
	Loans and advances to customers	-	-	20	20	-	-	21	21	D
		6,160	188	20	6,368	8,501	428	21	8,950
Assets held for sale(1)		-	143	16	159	-	-	-	-

Total assets at fair value		6,160	2,284	264	8,708	8,501	3,766	297	12,564

Liabilities
Derivative financial instruments	Exchange rate contracts	-	565	-	565	-	833	-	833	A
	Interest rate contracts	-	1,827	2	1,829	-	2,447	3	2,450	A & C
	Equity and credit contracts	-	23	30	53	-	26	29	55	B & D
	Netting	-	(1,384)	-	(1,384)	-	(1,754)	-	(1,754)
		-	1,031	32	1,063	-	1,552	32	1,584
Other financial liabilities at FVTPL	Debt securities in issue	-	666	5	671	-	1,051	6	1,057	A
	Structured deposits	-	347	-	347	-	375	-	375	A
	Collateral and associated financial guarantees	-	3	2	5	-	-	2	2	D
		-	1,016	7	1,023	-	1,426	8	1,434
Liabilities held for sale(1)		-	122	-	122	-	-	-	-

Total liabilities at fair value		-	2,169	39	2,208	-	2,978	40	3,018

(1) Includes assets and liabilities held for sale which are measured at fair value.

Transfers between levels of the fair value hierarchy

In H121 there were no significant (H120: no significant) transfers of financial instruments between levels of the fair value hierarchy.

d) Valuation techniques

The main valuation techniques employed in internal models to measure the fair value of the financial instruments are disclosed in Note 40(c) to the Consolidated Financial Statements in the 2020 Annual Report. The Santander UK group did not make any material changes to the valuation techniques and internal models it used during H121.

e) Fair value adjustments

The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model.

Santander UK classifies fair value adjustments as either 'risk-related' or 'model-related'. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table:

	30 June 2021	31 December 2020
	£m	£m
Risk-related:
- Bid-offer and trade specific adjustments	(7)	(8)
- Uncertainty	21	23
- Credit risk adjustment	7	11
- Funding fair value adjustment	2	3
	23	29

Risk-related adjustments

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. For more details, see 'Risk-related adjustments' in Note 40(g) to the Consolidated Financial Statements in the 2020 Annual Report.

f) Internal models based on information other than market data (Level 3)

Reconciliation of fair value measurement in Level 3 of the fair value hierarchy

The following table sets out the movements in Level 3 financial instruments in H121 and H120:

	Assets					Liabilities
	Derivatives	Other financial assets at FVTPL	Financial assets at FVOCI	Assets held for sale	Total	Derivatives	Other financial liabilities at FVTPL	Liabilities held for sale	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2021	68	208	21	-	297	(32)	(8)	-	(40)
Total (losses)/gains recognised:
- Fair value movements	(1)	(7)	(1)	-	(9)	-	3	-	3
Transfers to held for sale	-	(16)	-	16	-	-	(2)	-	(2)
Netting(1)	-	5	-	-	5	-	-	-	-
Settlements	(18)	(11)	-	-	(29)	-	-	-	-
At 30 June 2021	49	179	20	16	264	(32)	(7)	-	(39)

Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period	(1)	(7)	(1)	-	(9)	-	3	-	3

At 1 January 2020	75	386	56	-	517	(32)	(61)	-	(93)
Total gains/(losses) recognised:
- Fair value movements	6	(2)	1	-	5	(1)	15	-	14
- Foreign exchange and other movements	-	(2)	-	-	(2)	-	2	-	2
Transfers out	-	-	-	-	-	-	28	-	28
Netting(1)	-	(37)	-	-	(37)	-	-	-	-
Additions	-	-	-	-	-	-	(1)	-	(1)
Sales	-	(11)	(19)	-	(30)	-	-	-	-
Settlements	(17)	(110)	(8)	-	(135)	3	1	-	4
At 30 June 2020	64	224	30	-	318	(30)	(16)	-	(46)

Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period	6	(4)	1	-	3	(1)	17	-	16

(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 to the Consolidated Financial Statements in the 2020 Annual Report.

Effect of changes in significant unobservable assumptions to reasonably possible alternatives (Level 3)

There has been no significant change to the unobservable inputs and sensitivities used in Level 3 fair values as set out in Note 40(h) to the Consolidated Financial Statements in the 2020 Annual Report.

32. INTEREST RATE BENCHMARK REFORM

The following tables show the notional amounts of assets, liabilities and off-balance sheet commitments at 30 June 2021 and 31 December 2020 affected by IBOR reform that have yet to transition to an alternative benchmark interest rate as provided internally to key management personnel.

	June 30, 2021
	GBP(2) LIBOR	USD(2) LIBOR	Other(2)	Total
	£m	£m	£m	£m
Assets
Derivatives(1)	21,893	2,580	653	25,126
Other financial assets at fair value through profit and loss	808	20	-	828
Financial assets at amortised cost	12,706	157	83	12,946
Financial assets at fair value through comprehensive income	189	-	-	189
	37,198	2,918	736	40,852
Liabilities
Derivatives(1)	26,227	2,558	56	28,841
Other financial liabilities at fair value through profit and loss	967	41	-	1,008
Financial liabilities at amortised cost	895	567	-	1,462
	28,089	3,193	56	31,338
Off-balance sheet commitments given	10,277	803	198	11,278

	December 31, 2020
	GBP(2) LIBOR	USD(2) LIBOR	Other(2)	Total
	£m	£m	£m	£m
Assets
Derivatives(1)	33,486	4,514	2,149	40,149
Other financial assets at fair value through profit and loss	968	22	-	990
Financial assets at amortised cost	15,062	1,191	90	16,343
Financial assets at fair value through comprehensive income	428	-	-	428
	49,944	5,727	2,239	57,910
Liabilities
Derivatives(1)	35,217	5,205	88	40,510
Other financial liabilities at fair value through profit and loss	1,129	69	-	1,198
Financial liabilities at amortised cost	2,354	1,319	-	3,673
	38,700	6,593	88	45,381
Off-balance sheet commitments given	11,400	2,126	573	14,099

(1) Many of the Santander UK group's derivatives subject to IBOR reform are governed by ISDA definitions. In October 2020 ISDA issued an IBOR fallbacks supplement setting out how the amendments to new alternative benchmark rates will be accomplished, the effect of which is to create fallback provisions in derivatives that describe what floating rates will apply on the permanent discontinuation of certain key IBORs or upon ISDA declaring a non-representative determination of an IBOR. The Santander UK group has adhered to the protocol to implement the fallbacks to derivative contracts that were entered into before the effective date of the supplement (25 January 2021). If derivative counterparties also adhere to the protocol, new fallbacks will automatically be implemented in existing derivative contracts when the supplement becomes effective. Following the announcement by the FCA on 5 March 2021 that certain LIBOR settings will permanently cease immediately after 31 December 2021 (and for overnight and 12-month US dollar LIBOR after 30 June 2023), the ISDA fallback spread adjustment is fixed as of the date of the FCA announcement.

(2) Cessation dates are: GBP, JPY, NOK LIBOR 31/12/21, USD LIBOR 30/06/23, EONIA 3/1/22

IBOR Reform

The table below shows the notional amount of derivatives in hedging relationships directly affected by uncertainties related to IBOR reform.

	30 June 2021				31 December 2020
	GBP LIBOR	USD LIBOR	Other	Total	GBP LIBOR	USD LIBOR	Other	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Total notional value of hedging instruments:
- Cash flow hedges	11,610	2,894	-	14,504	15,198	5,119	-	20,317
- Fair value hedges	20,758	160	696	21,614	32,223	1,077	778	34,078
	32,368	3,054	696	36,118	47,421	6,196	778	54,395
Maturing after cessation date(1)
- Cash flow hedges	9,788	2,533	-	12,321	10,553	2,562	-	13,115
- Fair value hedges	16,232	160	696	17,088	12,477	162	720	13,359
	26,020	2,693	696	29,409	23,030	2,724	720	26,474

(1) Cessation dates are: GBP, JPY, NOK LIBOR 31/12/21, USD LIBOR 30/06/23, EONIA 3/1/22

33. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE

Discontinued operations

Proposed transfer of the CIB business to SLB

Following a hearing held on 23 June 2021 , the High Court of England and Wales has sanctioned the transfer of substantially all the CIB business of Santander UK to SLB by way of a Part VII banking business transfer scheme. The transfers of CIB business to SLB under the scheme are scheduled to take place before the end of 2021.

At 30 June 2021, the CIB business met the requirements for presentation as discontinued operations. The financial performance and cash flow information relating to the discontinued operations were as follows:

	Half year to	Half year to
	30 June 2021	30 June 2020
	£m	£m
Net interest income	24	25
Net fee and commission income	27	22
Total operating income	51	47
Operating expenses before credit impairment losses, provisions and charges	(22)	(33)
Credit impairment losses	7	(12)
Provisions for other liabilities and charges	(3)	(4)
Total operating credit impairment losses, provisions and charges	4	(16)
Profit/(loss) from discontinued operations before tax	33	(2)
Tax on profit/(loss) from discontinued operations	(9)	1
Profit/(loss) from discontinued operations after tax	24	(1)

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 H121, the net cash flows attributable to the operating activities, investing activities and financing activities in respect of discontinued operations were £1,754m outflow (H120: £524m inflow), £nil (H120: £nil) and £nil (H120: £nil), respectively.

Assets and liabilities held for sale

Proposed transfer of the CIB business to SLB

These business transfers will be made for a cash consideration equivalent to the book value of the associated assets and liabilities, which represents a fair value for the Santander UK group. Costs to sell are expected to be immaterial.

Sale of Retail Banking mortgage assets

At 30 June 2021, Santander UK was in the process of selling a portfolio of Retail Banking residential mortgage assets and expected to complete the transaction on 16 August 2021. Management considered the sale to be highly probable at 30 June 2021. As such, the Santander UK group reclassified as held for sale the mortgage assets.

The sale is expected to be made for a cash consideration exceeding the book value of the mortgage assets, resulting in a gain on disposal. Costs to sell are expected to be immaterial.

Assets and liabilities held for sale

At 30 June 2021, the assets and liabilities held for sale comprised of:

	Net assets/liabilities held for sale
	CIB business transfer to SLB	Sale of residential mortgages	Total
	£m	£m	£m
Assets
Derivative financial instruments	143	-	143
Other financial assets at fair value through profit or loss	16	-	16
Loans and advances to customers	1,878	608	2,486
Total assets held for sale	2,037	608	2,645
Liabilities
Derivative financial instruments	95	-	95
Other financial liabilities at fair value through profit or loss	27	-	27
Deposits by customers	3,769	-	3,769
Deposits by banks	21	-	21
Total liabilities held for sale	3,912	-	3,912
Net assets/liabilities held for sale	(1,875)	608	(1,267)

34. EVENTS AFTER THE BALANCE SHEET DATE

There have been no significant events between 30 June 2021 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial statements, except for the following non-adjusting event:

On 30 July 2021, the Santander UK group through Santander Consumer (UK) plc sold its entire 50% shareholding in PSA Finance UK Limited (PSA) 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, the auto finance arm of Group PSA Peugeot Citroën. The impact of the sale was to derecognise total assets of £3.2bn, total liabilities of £2.9bn and a non-controlling interest of £0.15bn. No material gain or loss arose on sale. For more information on PSA, including summary financial information, see Note 19 to the Consolidated Financial Statements in the 2020 Annual Report.

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END

IR KZGMRLZMGMZM

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