Sant Uk.10te% Regulatory News (SAN)

Santander UK plc

16 March 2012

Annual Report and Accounts 2011

The Company announces that a copy of the above document has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do

In fulfilment of its obligations under the Disclosure and Transparency Rules, Santander UK plc hereby releases the unedited full text of its Annual Report & Accounts. Accordingly, page references in the text refer to page numbers in the Annual Report and Accounts 2011.

A printer-friendly PDF version of the accounts will also be made available on the Company's website:

www.aboutsantander.co.uk

For further details, please contact:

Anthony Frost (Head of UK Corporate Communications) 020 7756 5536

James S Johnson (Head of Investor Relations) 020 7756 5014

The full text of the accounts follows:

Santander UK plc

2011 Annual Report on Form 20-F

Contents

Chief Executive Officer's Review and Forward-looking Statements

Chief Executive Officer's Review 2

Forward-looking Statements 6

Business and Financial Review

Business Overview 7

Business Review - Summary 12

Business Review - Key Performance Indicators 17

Business Review - Divisional Results 19

Other Material Items 30

Balance Sheet Business Review 32

Risk Management Report 62

Report of the Directors

Directors 136

Directors' Report 138

FSA Remuneration Disclosures 152

Financial Statements

Independent Auditor's Report to the Members of Santander UK plc - UK opinion 158

Primary Financial Statements 160

Notes to the Financial Statements 167

Selected Financial Data

Selected Financial Data 275

Shareholder Information

Risk Factors 278

Taxation for US Investors 291

Share Information 291

Contact Information 292

Articles of Association 293

Glossary of Financial Services Industry Terms 294

Directors' Responsibility Statement 302

Cross-reference to Form 20-F

Cross-reference to Form 20-F 303

Business Review and Forward-looking Statements

Chief Executive Officer's Review

Overview

In 2011, Santander UK maintained its solid track record with a statutory profit after tax of £903m and with a robust balance sheet, despite a fragile economic recovery as well as a challenging regulatory and market environment. In common with other UK banks, a provision for payment protection insurance remediation was made, which was the most significant driver of the 43% reduction in statutory profit compared to 2010. Excluding this item, Santander UK's trading profit before tax for 2011 was 4% lower than 2010, impacted by greater regulatory costs including liquidity requirements, the impact of higher funding costs as well as persistently low interest rates.

Despite weaker demand, Santander UK continued to be a consistent lender to homeowners with a market share of gross mortgage lending of more than 17% in 2011. In addition, lending to small and medium-sized enterprises ('SMEs') grew by 25% in 2011 and our share of lending commitments made under the UK Government's Project Merlin agreement were exceeded with £4.3bn of lending. The planned acquisition of the Royal Bank of Scotland retail and corporate banking businesses, which we announced in 2010, is well underway, and upon completion will further accelerate the delivery of our strategic goals and the transformation of the businesses.

Santander UK continues to offer good value and innovative products for retail customers, and is achieving improved levels of service satisfaction as well as an improved performance in the treatment of complaints. We have acted upon customer feedback and have repatriated our international call centres to improve our services and continue to support the UK economy through job creation.

On 6 March 2012 Santander UK announced changes in its executive management structure. We appointed a Chief Financial Officer, promoting Stephen Jones to the position which includes responsibilities for the Finance, Pension and Group Infrastructure functions, and with a key role in managing the relationships with regulators and investors. We have extended the existing responsibilities of Steve Pateman, now Head of UK Banking, to also include Retail Banking and Retail Products and Marketing. This aligns the responsibilities for UK retail and corporate banking operations. In addition, we have formalised the role of the Chief Operating Officer, Juan Olaizola, and have added the responsibility for operational Human Resources. Javier Maldonado has been appointed to take responsibility for Strategy and Corporate Development, including key parts of the Royal Bank of Scotland acquisition. Overall, these changes reflect the next stage of development for the management team structure at Santander UK and will provide the best support for the ambitious development plans we have in place to build the business.

Strategic focus

On 29 September 2011, at the Banco Santander group Investor Day, Santander UK management presented its three year strategic plan. The strategy is directed towards the commercial turnaround of the businesses and Santander UK's transformation into a market-leading retail and corporate bank in the UK.

Our goal remains to develop Santander UK into a full service, diversified, customer-centred franchise and we intend to make further progress against this goal in 2012. The strategy has three principles:

Our proprietary market-leading IT platform is integral to meeting these goals. We plan to invest £490m over the next three years to further improve its functionality and capabilities, at which point the ability to differentiate and grow the businesses faster will be in place.

In 2012 the first priority will be to ensure that we further strengthen Santander UK's balance sheet, in terms of funding, credit quality and capital. This will provide the foundations for sustainable profit growth in the future through the commercial transformation of the business.

Business performance

With a distribution network of almost 1,400 branches and agencies and 28 regional corporate banking centres, Santander UK has a firm foundation on which to build a full-service commercial bank. Despite weaker demand in key markets, increased competitive pressures and a fragile economic outlook, we achieved good levels of new business in both SME and mortgage lending. SME lending balances were £2.1bn higher than at the end of 2010 at £10.7bn, whilst mortgage gross lending was £23.7bn in the year ended 31 December 2011. This equated to a gross mortgage market share of more than 17%, which was in excess of our stock market share of around 14%, totalling £173.5bn. Risk management and affordability measures are an important part of our lending decisions and the success of our focus on low LTV and prime segments is demonstrated by our ongoing low levels of mortgage arrears relative to the market.

In 2011 we opened 836,000 new bank accounts and 543,000 credit cards through our retail network, broadly maintaining our market share of stock. As part of the transformation to a customer focus, our Retail Banking proposition is seeking to develop and build deeper customer relationships through increased current account primacy and customer segmentation.

Customer loyalty is being rewarded through a range of special deals and incentives and was supported by the launch of new products and campaigns during the year. These were well received by the market and in the final four months of 2011 included:

Competition in the deposit acquisition market intensified and margins were at very low levels as a result. We continued to offer a mix of best-buy products and special offers targeted at existing customers and continued to reward our customers for doing more business with us. We restricted our exposure to negative margin deposit acquisition, preferring medium-term wholesale funding of a higher liquidity value. As a result, net deposit flows in the year were negative and commercial deposits were 3% lower than at 31 December 2010. This was possible due to a successful funding programme where we were able to issue over £25bn of medium-term wholesale funding at attractive rates, exceeding our internal target for the year.

The organic growth of Corporate Banking continued through 2011, supported by the opening of new business centres. Lending to our SME customers continued to grow with loan balances 25% ahead of 31 December 2010; this underlines our commitment to this sector as well as helping fulfil our commitments to the UK Government under the Project Merlin agreement. Merlin-related SME gross lending totalled £4.3bn, exceeding our share of the commitment of £4.0bn. The ongoing growth of the Corporate Banking business was supported by the launch of several new initiatives in 2011, notably, our £200m 'Breakthrough' programme which provides fast-growth small companies with the resources and knowledge they need to develop, including access to mezzanine funding and a support framework of expert advice. In addition, the launch of our new business banking proposition, with new product offerings being supported by the recruitment of 200 new advisors who are integral to our relationship management based model.

Markets produced a satisfactory result in the year ended 31 December 2011, reflecting transaction volumes lower than in 2010 and in line with the reduced activity levels seen in the market in 2011.

Improving customer service

We remain committed to tackling service issues within our business and a management priority is to improve the customer service experience. To this end, 1,100 new UK based customer-facing roles were announced in 2010. The new staff were in place by March 2011, ahead of the repatriation of our overseas Retail Banking call centres to the UK in July 2011. Complaints handling processes were re-engineered and a range of other initiatives and processes introduced to address the root cause of service quality issues.

The impact of these actions was evident, notwithstanding the greater impact of PPI related complaints in the second half of 2011. The overall number of FSA reportable complaints received in the full year 2011 was 19% lower than in 2010. The Santander UK share of Financial Ombudsman Service customer complaints in the second half of 2011 remained below its general market share of retail banking services whilst Santander UK had a lower share of cases upheld against it than the UK financial service market as a whole. Internal monthly customer surveys also indicate an improvement in service levels; by the end of the 2011 almost 90% of customers were satisfied or better and 80% of complaints were resolved within 48 hours.

Whilst we have made some progress, there remains more to do if all areas of the business are to reach the high levels of customer service and satisfaction which we are consistently delivering in the intermediary and Corporate Banking businesses.

Funding, liquidity and capital

Santander UK remains a UK-focused institution with approximately 85% of the balance sheet UK-related and around 85% of customer loans made up of residential mortgages to UK customers.

In the year ended 31 December 2011, the commercial asset stock increased 2% to £206bn, driven by modest growth in residential mortgages, of 1%, and strong growth in SME loans, of 25%. The commercial liability stock of £149bn fell 3% compared to 31 December 2010. The combined effect of these flows was a 6 percentage point rise in the customer loan-to-deposit ratio to 138%.

The increase in the customer loan to deposit ratio reflected our commitment to profitability whilst maintaining loan availability in the UK. Intense competition in the retail deposits market throughout 2011 led to significantly increased acquisition costs and negative margins. In this context the relative cost and duration of medium-term wholesale funding has at times compared more favourably to commercial deposits. Our conscious decision to reduce our holdings of rate-sensitive and shorter term commercial deposits was more than offset by an increase in medium-term wholesale funding. During 2011, £25bn was raised through new issues at attractive rates across a range of products and geographies, compared to £21bn in 2010, with the average residual duration for wholesale funding extended to almost three years from approximately two years. The ratio of customer assets to customer deposits plus medium-term funding was 99%, an increase from 95% at the end of 2010. The ratio continued to reflect the strength of the commercial franchise and the focus of our business. Deleveraging of the legacy portfolios also continued in 2011, with asset balances down by £3.6bn in total.

Sovereign exposures to eurozone countries at 31 December 2011 were not significant, at less than 0.1% of total assets. Other sovereign exposures primarily related to UK, US and Swiss government securities. Total exposure to periphery eurozone countries (excluding group companies) was less than 0.4% of total assets. Total gross exposures to other Santander group entities amounted to only 1.7% of total assets at 31 December 2011, the greater part of which was mitigated by collateral held. These exposures to other Santander group entities arose in the ordinary course of business and are within limits acceptable to the UK Financial Services Authority.

Total liquid assets reduced from £62bn to £56bn with core liquid assets falling from £40bn to £28bn. The decrease was primarily due to a reduction in short term funding against which core liquid assets need to be held. Capital ratios remained strong with a Core Tier 1 of 11.4%, a Total Tier 1 capital ratio of over 14.8% and a Total capital ratio in excess of 20%.

Key financial highlights

For 2011, Santander UK's trading profit before tax (management's preferred profit measure, described in the Business Review - Summary on page 12) was £2,112m, 4% lower than 2010. Statutory profit after tax of £903m for 2011 was £680m lower than in 2010, primarily due to the customer remediation provision in relation to payment protection insurance raised in June 2011.

The economy and UK regulation

After quite rapid quarterly growth in most of 2010, UK economic activity slowed markedly in 2011. Initial official figures showed that GDP fell by 0.2% in the final quarter of 2011, and although output in the year was 0.9% higher than a year earlier, this was slower growth than was achieved in 2010. The unemployment rate, which had held relatively steady through 2010 and into 2011, started to rise in the second half of 2011, reaching 8.4% in December. During the year consumer price inflation ran above earlier expectations and significantly above the 2% target level, reaching a high of 5.2% in September 2011. This high rate of price inflation meant that the real value of average earnings fell and, as a result, consumer spending was very subdued. Subsequently, the rate of inflation eased, falling to 3.6% annualised in January 2012.

As a consequence, the economic environment remains challenging. Public expenditure cuts are being implemented as part of the process of reducing the high level of public sector borrowing and demand for credit has remained subdued. In the housing market, the number of loans approved for house purchase has picked up from its low point in the recession, with activity up by just under 4% in 2011. The mortgage market also saw stronger remortgage activity. Overall, the level of housing market activity remains low relative to the experience of the previous decade.

The UK Government's recent announcements on regulatory reform, particularly the Independent Commission on Banking ('ICB'), imply considerable change might lie ahead for the banking industry. We believe that Santander UK is well placed to respond to these challenges.

Looking ahead

We believe that 2012 is likely to be a tough year for the UK banking industry. Macro-economic prospects have deteriorated markedly in recent months, and even since the Investor Day last September. This has inevitably affected the outlook for our profitability in 2012. Notably increased regulatory burdens, continued low interest rates and funding costs are expected to impact our results further. Management will seek to mitigate the effects of these challenges as well as tackle costs in the forthcoming quarters. A priority of our strategy for 2012 will be to build further on our balance sheet strength and stability. We will be focused on maintaining the high quality of our lending, improving further our capital base and tightly managing the liquidity and funding positions.

We will continue to invest in the commercial transformation of the UK business. Our strategy remains for Santander UK to be a full-service, diversified, customer-centred commercial banking franchise and to emerge as the best bank in the country for our customers and our people. The progress we have made in becoming a full-service commercial bank is due to the effort and commitment of all our staff and I would like to extend my thanks for their hard work.

We also continue to innovate. In March 2012 we launched a new retail banking product, the 123 current account offering both cashback and in-credit interest. This product is designed to build and reinforce a long-term primary account relationship with retail customers.

We continue to work on the execution of our planned acquisition of 314 bank branches, 44 SME banking centres and 4 corporate banking centres from the Royal Bank of Scotland group. We expect to acquire some 2 million personal and corporate and business banking customers as a result of this transaction. This is a key step in fulfilling our ambition to be a full-service commercial bank as we complement our strong retail offering with an increased presence for SMEs and mid-sized companies. UK SME businesses are an important part of Santander UK's strategy and a vital sector for the growth of the economy. Our aim is to increase our lending to UK SMEs and create new jobs as we open more business centres to serve them. The transfer is complex and it is important that we seek to minimise disruption. With this in mind the current expectation is that the transaction will not complete before the fourth quarter of 2012, subject to certain conditions.

Putting customers at the forefront of our business is a key part of our focus and we plan to further improve and deepen our customer relationships by providing a tailored proposition and a competitive product range. We have made significant investment in improving our service quality and have further initiatives planned for the second half of the year and hope to see further improvements to customer satisfaction as a result.

Ana Botín

Chief Executive Officer

Forward looking Statements

Santander UK plc (the 'Company') and its subsidiaries (together 'Santander UK' or the 'Group') may from time to time make written or oral forward-looking statements. Examples of such forward-looking statements include, but are not limited to:

Words such as 'believes', 'anticipates', 'expects', 'intends', 'aims', 'plans', 'targets' and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

By their very nature, forward-looking statements are not statements of historical or current facts; they cannot be objectively verified, are speculative and involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Santander UK cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Santander UK or on Santander UK's behalf. Some of these factors, which could affect the Group's business, financial condition and/or results of operations, are considered in detail in the Risk Management Report on page 62 and the Risk Factors section on page 278 and they include:

Undue reliance should not be placed on forward-looking statements when making decisions with respect to Santander UK and/or its securities. Investors and others should take into account the inherent risks and uncertainties of forward-looking statements and should carefully consider the foregoing non-exhaustive list of important factors. Forward-looking statements speak only as of the date on which they are made and are based on the knowledge, information available and views taken on the date on which they are made; such knowledge, information and views may change at any time. Santander UK does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Written forward-looking statements may appear in documents filed with the US Securities and Exchange Commission, including this Annual Report and Accounts, reports to shareholders and other communications. The US Private Securities Litigation Reform Act of 1995 contains a safe harbour for forward-looking statements on which Santander UK relies in making such disclosures.

Business and Financial Review

Business Overview

This Business and Financial Review contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See "Forward-looking Statements" on page 6.

GENERAL

Santander UK plc (the 'Company') and its subsidiaries (together, 'Santander UK' or the 'Group') operate primarily in the UK, under UK law and regulation and are part of the Banco Santander, S.A. group (together with its subsidiaries, 'Santander'). Santander UK is a significant financial services provider in the UK, being the second largest residential mortgage lender and a top three savings brand[i], operating across the full range of personal financial services, as well as being active in corporate and commercial banking services.

The principal executive office and registered office of Santander UK plc is 2 Triton Square, Regent's Place, London NW1 3AN. Santander UK's telephone number is +44 (0) 870-607-6000. The designated agent for service of process on Santander UK in the United States is Abbey National Treasury Services plc (Connecticut branch), 400 Atlantic Street, Stamford, CT 06901. See "Business and Financial Review - Tangible fixed assets" for information on our properties.

SUMMARY HISTORY

The Abbey National Building Society (the 'Society') was formed in 1944 with the merger of two long-standing building societies. Abbey National plc was incorporated in 1988 and in 1989 the Society transferred its business to Abbey National plc as part of the conversion and listing on the London Stock Exchange. In 2003, the brand name was shortened to Abbey. In 2010, the Company changed its name to Santander UK plc and now operates under the Santander brand name. A list of the Company's principal subsidiaries and their country of incorporation can be found on page 216.

On 12 November 2004, Banco Santander, S.A. completed the acquisition of the entire issued ordinary share capital of the Company, implemented by means of a scheme of arrangement under Section 425 of the Companies Act 1985, making the Company a wholly-owned subsidiary of Banco Santander, S.A., a company incorporated in Spain. Banco Santander, S.A. is one of the largest banks in the world by market capitalisation. Founded in 1857, Banco Santander, S.A., at the close of 2011, had more than 102 million customers and over 14,760 branches.

In September 2008, following the announcement by HM Treasury to take Bradford & Bingley plc into public ownership, the retail deposits, branch network and related employees transferred, under the provisions of the Banking (Special Provisions) Act 2008, to the Company. All of Bradford & Bingley plc's customer loans and treasury assets, including all its mortgage assets, were taken into public ownership.

The transfer to the Company consisted of the £20bn retail deposit base with 2.7 million customers, as well as Bradford & Bingley plc's direct channels including 197 retail branches, 141 agencies (distribution outlets in third party premises) and related employees. The acquisition price was £612m, including the transfer of £208m of capital relating to offshore entities. The transfer further strengthened the Group's retail customer deposit base and franchise.

In December 2008, following the acquisition by Banco Santander, S.A. of Alliance & Leicester plc, the Company injected £950m of capital into Alliance & Leicester plc through a subscription for new Alliance & Leicester plc ordinary shares and undated subordinated notes. Previously, in October 2008, the Company subscribed for US$100m undated floating rate subordinated notes issued by Alliance & Leicester plc. As a result of the subscription for ordinary shares, the Company held 35.6% of the issued ordinary share capital of Alliance & Leicester plc at 31 December 2008.

On 9 January 2009, in order to optimise the capital, liquidity, funding and overall financial efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance & Leicester plc shares to the Company in exchange for newly issued ordinary shares of the Company. Accordingly, the Company became the immediate parent company of Alliance & Leicester plc. The Company accounted for the transfer of Alliance & Leicester plc with effect from 10 October 2008, the date on which Alliance & Leicester plc was acquired by Banco Santander, S.A..

These business combinations allow the Group to deliver increased critical mass in the UK through a greater market share in key financial products such as mortgages and savings, and an expanded branch network. In January 2010, the Company was rebranded as Santander. In December 2010, the rebranding of Alliance & Leicester branches was completed. The change reflected Santander's policy to operate under a single brand.

On 28 May 2010, Alliance & Leicester plc transferred its business and certain associated liabilities to the Company pursuant to a court-approved business transfer scheme under Part VII of the Financial Services and Markets Act 2000.

On 3 August 2010, Banco Santander S.A., through a wholly-owned Spanish-based subsidiary Santusa Holding, S.L., injected £4,456m of equity capital into Santander UK plc. The capital was used to support the reorganisation of certain Banco Santander, S.A. group companies in the UK and will be used to support further growth, including the transaction with the Royal Bank of Scotland group described below.

On 4 August 2010, the Company announced its agreement to acquire (subject to certain conditions) bank branches and business banking centres and associated assets and liabilities from the Royal Bank of Scotland group for a premium of £350m to net assets at closing. The consideration will be paid in cash and is subject to certain closing adjustments. The transaction now includes: 308 Royal Bank of Scotland branches in England and Wales; 6 NatWest branches in Scotland; the retail and SME customer accounts attached to these branches; the Direct SME business; and certain mid-corporate businesses. EC/UK merger control clearance was received on 15 October 2010 and HMRC clearance was also received during the fourth quarter. The separation and transfer process is underway with the current expectation that the transaction will not complete before the fourth quarter of 2012, subject to certain conditions.

The acquisition will be a key step in fulfilling our ambition to be a full-service commercial bank as we complement our strong retail offering with an increased presence with SMEs. For Santander UK, the result over the medium term will be a far more balanced business mix, with approximately 70% of our business being retail banking, against 80% currently, and the balance being an expanded business and corporate banking presence along with the existing Markets business. The acquisition will add to our retail banking business but importantly will double our market share in SMEs and in mid-corporate banking.

In October and November 2010, the Group acquired for a total consideration of £1,451m:

The principal purpose of the acquisitions was to bring these interests of Banco Santander, S.A. in the UK under the corporate structure of the Group in furtherance of the Group's objective. Our goal remains to develop Santander UK into a full-service, diversified, customer-centred commercial bank and we intend to make further progress against this goal in 2012.

In 2011, the Company was awarded 'Bank of the Year in the UK' by The Banker for the third year in succession, as well as Moneyfacts awards for 'Best Personal Finance Provider of the Year', 'Best Service from a Commercial Mortgage Lender' and 'Best Business Bank 2011'. Additionally, Abbey for Intermediaries won 10 awards in 2011, including the 'Most Improved' award from FT Adviser magazine for the quality of service they provide to customers. In 2011, the Company was also included in the list of 'The Times Top 50 Employers for Women'.

CORPORATE PURPOSE AND STRATEGY

Santander UK's purpose is to maximise value for its shareholders, Banco Santander, S.A. and its subsidiary company Santusa Holding, S.L., by focusing on offering a diversified, customer-centred, full commercial banking service in the UK. A key feature of our strategy is to develop and build deeper customer relationships through increased current account primacy and customer segmentation. With the continuing support of Banco Santander, S.A., Santander UK aims to be the best commercial bank in the UK for our customers, our shareholders and our people.

The Santander group operates a 'subsidiary model' under which the Group is autonomous and self-sufficient in capital, funding and liquidity. The subsidiary model gives Santander UK considerable financial flexibility, yet enables it to continue to take advantage of the significant operational synergies and strengths that come from being part of Santander group, in brand, products, systems, platforms and management capability. The Santander UK corporate governance model ensures that the Board and the management of Santander UK make their own decisions on liquidity, funding and capital, having regard to what is appropriate for Santander UK's business and strategy.

EXECUTIVE RESPONSIBILITY

Santander UK's management structure is headed by Ana Botín, Chief Executive Officer. The management structure consists of a number of business and support divisions. The business divisions consist of:

The support divisions consist of:

In addition there are a number of corporate units:

COMPETITIVE ENVIRONMENT, FUTURE TRENDS AND OUTLOOK

The economic environment in the UK in 2011 remained challenging, with UK GDP growing by 0.9%, a lower rate than in 2010. Inflation rose, however, in part due to the increase in value added tax at the start of the year. In the second half of the year the unemployment rate started to rise again, reaching 8.4% in December, up from 7.9% a year earlier. House prices were relatively stable, with the Halifax index showing house prices ending the year 1.3% lower than a year earlier.

2012 is expected to be another challenging year for the UK economy, but one in which lower inflation is expected to support the real earnings growth of households compared to 2011 as the year progresses. However, unemployment is predicted to remain high, resulting in continuing challenges for banks, homeowners and savers. The Bank of England's Base Rate has remained at a record low of 0.5% since March 2009 and, at the present time, markets expect interest rates to remain very low, and monetary policy to continue to be supportive of the economy, for an extended period.

In terms of the competitive landscape, Santander UK's main competitors are other UK retail banks, building societies and other financial services providers such as insurance companies, supermarket chains and large retailers. The market remains competitive, driven largely by market incumbents but with new entrants emerging. Management expects that such competition will continue in response to consumer demand, technological changes, the impact of consolidation within the financial sector, regulatory developments and actions and other factors.

Management remains confident of Santander UK's strength despite continuing challenging conditions in some of its core personal financial services markets. A detailed description of management's basis for concluding that Santander UK remains a going concern is set out in the "Directors' Report - Going Concern" on page 140.

BUSINESS DIVISIONS

The information below reflects the reporting structure in place at the reporting date in accordance with which the segmental information in the Business and Financial Review and in Note 2 to the Consolidated Financial Statements has been presented.

Retail Banking

Retail Banking offers a comprehensive range of banking products and related financial services (residential mortgages, savings and banking, and other personal financial services products) to customers throughout the UK. It serves customers through the Santander UK network of branches and ATMs, as well as through telephone, internet channels and intermediaries. It also includes the private banking business which offers private banking and other specialist banking services in the UK and international banking.

Residential Mortgages

Santander UK is the second largest provider of residential mortgages in the UK measured by outstanding balancesi, providing mortgage loans for house purchases as well as home improvement loans to new and existing mortgage customers.

Mortgage loans are offered in two payment types. Repayment mortgages require both principal and interest to be repaid in monthly instalments over the life of the mortgage. Interest-only mortgages require monthly interest payments and the repayment of principal at the end of the mortgage term. This can be arranged via a number of investment products including Individual Savings Accounts and pension policies, or by the sale of the property.

Santander UK's mortgage loans are usually secured by a first ranking mortgage over property and are typically available over a 25-year term, although there is no minimum term. Variable rate products charge interest at variable rates, including trackers which track the Bank of England base rate and those determined at the discretion of Santander UK by reference to the general level of market interest rates and competitive forces in the UK mortgage market. Fixed rate products offer a predetermined interest rate, generally fixed for between two and five years, after which they bear interest at standard variable rates. In 2011, almost half of the new mortgage business was variable rate products, typically with an incentive period for the first two to five years. In line with the rest of the UK market, a significant proportion of mortgages are repaid at the end of the fixed or incentive period, with the customer moving to a new incentive product. The remainder stay on Santander UK's standard variable rate.

Savings

Santander UK is a top three deposit taker in the UKi and provides a wide range of retail savings accounts in the UK, including on-demand, notice and investment accounts, Individual Savings Accounts ('ISAs') and capital guaranteed products. Interest rates on savings in the UK are primarily set with reference to the general level of market interest rates and the level of competition for such funds.

Banking and Consumer Credit

Santander UK offers a range of personal banking services including current accounts, credit cards and unsecured personal loans. Credit scoring is used for initial lending decisions. Behavioural scoring is used for certain products for further lending decisions. In November 2010, the Group acquired Santander Consumer (UK) plc (in which the Group already held a 49.9% shareholding), which carries on Santander's provision of finance facilities and the contract purchase of motor vehicles and equipment in the UK and provides wholesale funding facilities to preferential dealers in the UK.

Credit Cards

Santander UK credit cards are issued through Santander Cards Limited. Prior to October 2010, Santander Cards Limited was a Banco Santander, S.A. subsidiary outside the Group and the Retail Banking division earned a commission from Santander Cards Limited on every credit card sold. In October 2010, Santander Cards Limited was acquired by the Group.

cahoot

cahoot is the Group's separately branded, e-commerce retail banking and financial services provider.

General Insurance

The range of non-life insurance products distributed by Santander UK includes property (buildings and contents) and payment protection. Residential home insurance remains the primary type of policy offered and is sold through the branch network, the internet and over the telephone, as well as being sold by mortgage intermediaries, often at the time a mortgage is taken out.

Private Banking

Santander UK offers private banking and other specialist banking services in the UK, through Cater Allen and Abbey Sharedealing, and international banking through Abbey National International Limited and Alliance & Leicester International Limited. In August 2011, the international banking business previously offered through Bradford & Bingley International Limited was transferred to Alliance & Leicester International Limited, after which Bradford & Bingley International Limited changed its name to A&L Services Limited.

Prior to 2010, Santander UK also offered other specialist banking services in the UK through James Hay. On 10 March 2010, Santander Private Banking UK Limited completed the disposal of James Hay Holdings Limited, together with its five subsidiary companies, by the sale of 100% of James Hay Holdings Limited's shares to IFG UK Holdings Limited, a subsidiary of IFG Group plc, for a cash consideration of approximately £29m. The IFG Group provides independent financial advisory, fund management and pension administration services in Ireland, the UK and internationally.

On 17 December 2007, Santander UK sold 49% of its shareholding in Santander Private Banking UK Limited (consisting of James Hay, Cater Allen Limited and Abbey Stockbrokers Limited) to Santander PB UK (Holdings) Limited, a direct subsidiary of Banco Santander, S.A., for a total cash consideration of £203m. The companies affected were Cater Allen Limited, Abbey Stockbrokers Limited, James Hay Holdings Limited and their subsidiaries. Subsequently, on 29 October 2010, Santander UK plc acquired 100% of Santander PB UK (Holdings) Limited.

Asset Management

Retail Banking earns a commission on products sold through its agreement with another subsidiary of Banco Santander, S.A. outside of the Group, Santander Asset Management UK Limited.

Corporate Banking

Santander UK started to develop its corporate banking capability in 2006, and with the acquisition of Alliance & Leicester plc significantly increased this capacity from 2008. The investment in, and development of, these operations has been significant, with good progress being made ahead of the acquisition of certain customers from the Royal Bank of Scotland Group.

Corporate Banking provides a range of banking services principally to UK companies, with a focus on services for SMEs, providing a broad range of banking products including loans, bank accounts, deposits, treasury services, invoice discounts, cash transmission and asset finance. Small businesses with a turnover of less than £250,000 are serviced through the Business Banking division, while a network of 28 regionally-based Corporate Business Centres offers services to businesses with a turnover of £250,000 to £150m. In addition, Corporate Banking includes specialist teams servicing Real Estate, Social Housing and UK infrastructure clients.

Within Corporate Banking, the Large Corporates business is responsible for larger multinational corporate clients, including related activities, principally comprising foreign exchange, money market and credit activities. These related activities are structured into two main product areas: Foreign exchange and money markets, and Credit. Foreign exchange offers a range of foreign exchange products and money markets runs the securities lending/borrowing and repo businesses. Credit originates loan and bond transactions in primary markets as well as their intermediation in secondary markets.

Legacy portfolios in run-off are also managed within Corporate Banking.

Markets

Markets is a financial markets business focused on providing value added financial services to financial institutions, as well as to the rest of Santander UK's business. It is structured into two main product areas: Fixed income; and Equity. Fixed Income covers sales and trading activity for fixed income products. Equity covers equity derivatives, property derivatives and commodities. Equity derivatives activities include the manufacture of structured products sold to both the Group and other financial institutions who sell or distribute them on to their customers.

Group Infrastructure

Group Infrastructure consists of Asset and Liability Management ('ALM'), which is responsible for the Group capital and funding, the Treasury asset portfolio and Investor Relations for the Group. ALM is responsible for managing the Group's structural balance sheet composition and strategic and tactical liquidity risk management. This includes short-term and medium-term funding, covered bond and securitisation programmes. ALM's responsibilities also include Santander UK's banking product and structural exposure to interest rates. ALM recommends and helps to implement Board, Strategic Risk & Financial Management Committee, Asset and Liability Management Committee and Risk Committee (For further information, see the Risk Management Report) policies for all aspects of balance sheet management - formulating guidance for, and monitoring, the overall balance sheet shape, including maturity profile. It is also responsible for the return on the Group's capital, reserves, preference shares and subordinated debt. The Treasury asset portfolio assets were acquired as part of the transfer of Alliance & Leicester plc to the Group in 2008 and as part of an alignment of portfolios across the Banco Santander, S.A. group in 2010. The Treasury asset portfolio is being run down. Furthermore, Group Infrastructure is responsible for managing the Investor Relations activities of the Group.

Santander UK plc, as guarantor, and its subsidiary Abbey National Treasury Services plc, as issuer, have a shelf registration statement on file with the US Securities and Exchange Commission in relation to issuances of SEC-registered debt securities. Additionally, as part of its prudent contingent funding arrangements, ALM ensures that Santander UK has access to the central bank facilities made available by the Bank of England, the Swiss National Bank, and the US Federal Reserve. Further information is set out in "Sources of Funding and Liquidity" in the Balance Sheet Business Review on page 57.

Business Review - Summary

The results discussed below are not necessarily indicative of Santander UK's results in future periods. The following information contains certain forward-looking statements. See "Forward-looking Statements" on page 6. The following discussion is based on and should be read in conjunction with the Consolidated Financial Statements elsewhere in this Annual Report and Accounts.

EXECUTIVE SUMMARY

Santander UK has prepared this Business and Financial Review in a manner consistent with the way management views the business as a whole. As a result, we present the following key sections to the Business and Financial Review:

Basis of results presentation

The information in this Business and Financial Review reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented. There were no changes to that basis in the year ended 31 December 2011 except that, as the Group moves towards becoming a full-service commercial bank, management wanted a fuller view in Corporate Banking of the results of the range of services offered to corporate customers; a view which management sees as increasingly valuable. As a result Santander Business Banking, which offers a range of banking services to small businesses in the UK, was managed and reported as part of Corporate Banking in 2011 rather than Retail Banking as in 2010. In addition, large multinationals were also managed and reported as part of Corporate Banking in 2011, rather than Global Banking & Markets as in 2010. As a result of the changes, Global Banking & Markets was renamed Markets.

Critical Factors Affecting Results

Critical accounting policies and areas of significant management judgement

The preparation of our Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the balance sheet date and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in "Critical Accounting Policies" in Note 1 to the Consolidated Financial Statements.

Financial instruments of special interest

Further information about financial instruments of special interest is set out in the Risk Management Report on page 135.

Profit on part sale and revaluation of subsidiaries

No profits arose on sales of Group undertakings in the year (2010: £39m, 2009: £nil). In 2010, a gain of £87m arose on the revaluation of the Group's original holding in Santander Consumer (UK) plc on the Group's acquisition of the remaining shares.

Significant acquisitions and disposals

The results were not materially affected by the acquisition of the Santander Cards and Santander Consumer businesses acquired in October and November 2010, respectively, as described in "Business Overview".

Current and future accounting developments under IFRS

Details can be found in Note 1 to the Consolidated Financial Statements.

GROUP SUMMARY

SUMMARISED CONSOLIDATED INCOME STATEMENT AND SELECTED RATIOS

2011 compared to 2010

Profit before tax decreased by £864m to £1,261m (2010: £2,125m). In common with other UK banks, a provision for customer remediation of £751m before tax has been made, principally in relation to payment protection insurance. Notwithstanding this, Santander UK remained profitable in 2011, maintaining the strong track record of profitability and strengthening of the balance sheet. Profit before tax was also impacted by the full year effects of UK regulatory requirements to hold higher levels of liquid assets introduced in June 2010, higher funding costs and the low interest rate environment.

Material movements by line include:

2010 compared to 2009

Profit before tax increased by £435m to £2,125m (2009: £1,690m). Material movements by line include:

Taxation

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the basic corporation tax rate of the Company as follows:

2011 compared to 2010

The effective tax rate for 2011, based on profit before tax was 28.4% (2010: 25.5%). The effective tax rate differed from the UK corporation tax rate of 26.5% (2010: 28%) principally because of the reduction in the deferred tax asset as a result of the change in the UK corporation tax rate and the impact of the non-deductible UK Bank Levy.

2010 compared to 2009

The effective tax rate for 2010, based on profit before tax was 25.5% (2009: 26.3%). The effective tax rate differed from the UK corporation tax rate of 28% (2009: 28%) principally because of the non-taxable profit of £87m that arose on the revaluation of the Group's original holding in Santander Consumer (UK) plc on the acquisition of the remaining shares by the Group, adjustment to prior year provisions, non-taxable gains on sales of subsidiary undertakings, and the reduction in deferred tax asset as a result of the change in the UK corporation tax rate.

CAPITAL

Discussion and analysis of the Core Tier 1 capital ratio, the Tier 1 capital ratio and risk-weighted assets is set out in the "Balance Sheet Business Review - Capital management and resources" on pages 54 to 56.

ADJUSTMENTS BETWEEN THE STATUTORY BASIS AND THE TRADING BASIS

Santander UK's Board reviews discrete financial information for each of its reporting segments that includes measures of operating results, assets and liabilities which are measured on a 'trading' basis. The trading basis differs from the statutory basis as a result of the application of various adjustments, as presented below. Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business.

The nature of the adjustments is described in Note 2 to the Consolidated Financial Statements. For a detailed explanation of movements in the adjustments, see "Other Material Items" in the Business and Financial Review.

Note 2 to the Consolidated Financial Statements provides a reconciliation of the segment measures to the consolidated totals and totals the income statement line items for individual segments as part of the reconciliation required under IFRS 8, such as trading profit before tax. These total segment measures are also presented and discussed as part of the supplementary summary of the results in the "Business Review - Divisional results" section that follows. Outside the reconciliation required by IFRS 8 in Note 2 to the Consolidated Financial Statements, these totals are non-GAAP financial measures. A body of generally accepted accounting principles such as IFRS is commonly referred to as 'GAAP'. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measures. These non-GAAP financial measures are not a substitute for GAAP measures, for which management has responsibility.

During 2011, the strategic objectives and key performance indicators for the Group for the medium term were set. The information below reflects the Group's performance as measured by those key performance indicators for the years ended, and at, 31 December 2011, 2010 and 2009. This information describes the key measures used by management in assessing the success of the business against its strategies and objectives.

The management objectives set forth below are subject to significant change and uncertainties including as described in "Shareholder Information - Risk Factors" and may not be achieved. In particular, macro-economic factors such as UK unemployment and property values, and regulatory changes are outside of management's control, and could prevent achievement of these objectives.

Business and Financial Review

Business Review - Divisional Results

This section contains a summary of the results, and commentary thereon, by Income Statement line item on a trading basis for each segment within the business, together with reconciliations from the trading basis to the statutory basis. Commentary on the movements in the adjustments between the trading basis and the statutory basis is set out in the "Business Review - Other Material Items".

TRADING PROFIT BEFORE TAX BY SEGMENT

BUSINESS VOLUMES

Business volumes are used by management to assess the sales performance of the Group, both absolutely and relative to its peer group, and to inform management of product trends in the market.

(1) Includes Social Housing loans.

(2) Gross mortgage lending in the year comprises only new loan contracts and does not include loan modifications.

(3) Estimated by the Group for each year having regard to individual lending data published by the Bank of England for the first eleven months of each year.

(4) Excludes overdrafts and credit cards.

(5) Market share of SME lending stock determined on an asset basis of SME businesses with turnover of up to £150m, is estimated by the Group for each year having regard to corporate lending data published by the Bank of England for the first eleven months of each year.

(6) Annualised equivalent of monthly premiums generated from new business during the year.

(7) Market share of bank account stock is estimated by the Group for each year having regard to market research published by CACI Ltd.

(8) Santander-branded cards only.

Mortgages

2011 compared to 2010

Gross mortgage lending in 2011 was £23.7bn, representing an estimated market share of 17.3%. During 2011, focus remained on the quality of new lending, based on affordability and lower loan-to-value ('LTV') segments. The average LTV on new business completions in 2011 was 64% compared to 62% in 2010.

Capital repayments of £22.6bn were higher than in 2010, with an estimated market share of repayments of 17.5%. This performance reflected a significant increase in maturing assets, reflecting gross lending two years previously and was against a market backdrop of continued heightened competition in low LTV segments. Net mortgage lending of £1.1bn was lower (2010: £5.6bn), largely reflecting a weaker performance in the first half of 2011 stemming from a lower pipeline in the last quarter of 2010 when market pricing became less attractive in the lower LTV segments.

2010 compared to 2009

Gross mortgage lending in 2010 was £24.2bn, representing an estimated market share of 18%. The average LTV on new business completions in 2010 was 62% compared to 61% in 2009.

Capital repayments of £18.6bn were broadly in line with 2009, with an estimated market share of capital repayments of 14.6%. This performance reflected a market backdrop of continued heightened competition in low LTV segments, offset by effective retention strategies in key segments. Net mortgage lending of £5.6bn was lower (2009: £7.6bn).

Unsecured Personal Lending

2011 compared to 2010

The unsecured personal lending ('UPL') stock balance decreased by 13% to £2.9bn at 31 December 2011. Despite this overall deleveraging, UPL gross lending was up 14% and £1.5bn of new loans were issued at good risk-adjusted margins to high quality customer segments.

2010 compared to 2009

Total gross UPL lending decreased by 15% to £1.3bn at 31 December 2010 as a result of our ongoing focus of restricting unsecured lending to high quality customer segments. The deleveraging of the UPL portfolio resulted in a 22% reduction in the stock balance to £3.3bn.

SME Lending

2011 compared to 2010

SME lending balances were higher than at the end of 2010 as a result of a strong performance via our 28 Corporate Business Centres. Lending stock balances totalled £10.7bn at 31 December 2011, up 25% in the year equating to an estimated 4.3% market share. SME lending commitments to the UK Government under our share of the Project Merlin agreement were exceeded.

2010 compared to 2009

SME lending issued through the Corporate Business Centres (25 by the year-end) was higher than 2009. SME lending balances were £8.5bn, up more than 26% in the year, equating to a 3.6% market share.

Deposits and Investments

2011 compared to 2010

Customer deposit flows were £(4.3)bn. In 2011, the acquisition of deposits slowed in what was a smaller market and where increased competition led to unattractive pricing and negative margins. A managed outflow of these more rate sensitive and shorter term deposits was more than offset through the issuance of additional medium-term wholesale funding. Investments and pensions performance was down 21% largely reflecting market conditions.

2010 compared to 2009

Net deposit inflows of £9.6bn were achieved through a strong performance across all business units. Retail Banking delivered strong inflows, in increasingly competitive market conditions, including a 22% increase in private banking deposits and a 7% increase in bank account liabilities. Corporate Banking net inflows were lower than in 2009, though still positive despite a difficult economic environment, and benefitted from longer term deposits being taken and an improvement in customer mix.

Banking

2011 compared to 2010

Approximately 836,000 bank accounts were opened in 2011, building on the success of the last two years where more than 2 million accounts were opened. The focus in 2011 was on improving the proportion of new bank accounts that represent the customer's primary account, leading to an improvement in overall primacy. The decline in bank account balances reflected pressures on "real" income in the UK, with inflation running ahead of earnings growth.

2010 compared to 2009

More than 1 million bank accounts were opened in each of 2010 and 2009. Strong Retail Banking personal bank account balance growth of approximately 9% was a result of not only the larger stock of accounts but also a focus on increasing the quality of account openings and more primary account customers.

Credit Card sales

2011 compared to 2010

Credit card sales through the Santander brand of approximately 543,000 cards grew by 25% with a continued focus on existing customers, and benefiting from approximately 145,000 new "123" credit cards which have been opened since the product's launch in the latter part of the year.

2010 compared to 2009

Credit card sales through the Santander brand were 12% higher than in 2009, driven by a strong performance in the telephone and internet channels, and the success achieved with the Zero credit card.

RETAIL BANKING

Retail Banking offers a comprehensive range of banking products and related financial services (residential mortgages, savings and banking, and other personal financial services products) to customers throughout the UK. It serves customers through the Santander UK network of branches and ATMs, as well as through telephone, internet channels and intermediaries. It also includes the private banking business which offers private banking and other specialist banking services in the UK and international banking.

(1) Accrued interest is excluded for purposes of these analyses.

(2) Mortgage NPLs as a percentage of mortgage assets.

(3) Mortgage impairment loss allowances as a percentage of mortgage NPLs.

Retail Banking trading profit before tax

2011 compared to 2010

Trading profit before tax increased by £372m to £2,025m (2010: £1,653m). By income statement line, the movements were:

2010 compared to 2009

Trading profit before tax increased by £439m to £1,653m (2009: £1,214m). Of the total increase, £109m represented the inclusion of the Perimeter companies trading profit before tax in 2010. By income statement line, the movements were:

Retail Banking segment balances

2011 compared to 2010

2010 compared to 2009

CORPORATE BANKING

Santander UK started to develop its corporate banking capability in 2006 and, with the acquisition of Alliance & Leicester plc, significantly increased this capacity from 2008. The investment in, and development of, these operations has been significant, with good progress being made ahead of the acquisition of certain customers from the Royal Bank of Scotland Group.

Corporate Banking provides a range of banking services principally to UK companies, with a focus on services for SMEs, providing a broad range of banking products including loans, bank accounts, deposits, treasury services, invoice discounts, cash transmission and asset finance. Small businesses with a turnover of less than £250,000 are serviced through the Business Banking division, while a network of 28 regionally-based Corporate Business Centres offers services to businesses with a turnover of £250,000 to £150m. In addition, Corporate Banking includes specialist teams servicing Real Estate, Social Housing and UK infrastructure clients.

Within Corporate Banking, the Large Corporates business is responsible for larger multinational corporate clients, including related activities principally comprising foreign exchange, money market and credit activities. These related activities are structured into two main product areas: Foreign exchange and money markets, and Credit. Foreign exchange offers a range of foreign exchange products and money markets runs the securities lending/borrowing and repo businesses. Credit originates loan and bond transactions in primary markets as well as their intermediation in secondary markets.

Legacy portfolios in run-off are also managed within Corporate Banking.

(1) Excludes legacy portfolios in run-off

Corporate Banking trading profit before tax

2011 compared to 2010

Trading profit before tax increased by £68m to £347m (2010: £279m). By income statement line, the movements were:

2010 compared to 2009

Trading profit before tax decreased by £55m to £279m (2009: £334m). By income statement line, the movements were:

Corporate Banking segment balances

2011 compared to 2010

2010 compared to 2009

MARKETS

Markets is a financial markets business focused on providing value added financial services to financial institutions, as well as to the rest of Santander UK's business. It is structured into two main product areas: Fixed income and Equity. Fixed Income covers sales and trading activity for fixed income products. Equity covers equity derivatives, property derivatives and commodities. Equity derivatives activities include the manufacture of structured products sold to both the Group and other financial institutions who sell or distribute them on to their customers.

Markets trading profit before tax

2011 compared to 2010

Trading profit before tax decreased by £100m to £45m (2010: £145m). By income statement line, the movements were:

2010 compared to 2009

Trading profit before tax increased by £1m to £145m (2009: £144m). By income statement line, the movements were:

Markets segment balances

2011 compared to 2010

2010 compared to 2009

GROUP INFRASTRUCTURE

Group Infrastructure consists of Asset and Liability Management ('ALM'), which is responsible for the Group's capital and funding and the Treasury asset portfolio. ALM is responsible for managing the Group's structural balance sheet composition and strategic and tactical liquidity risk management. This includes short-term and medium-term funding, covered bond and securitisation programmes. ALM's responsibilities also include management of Santander UK's banking products and structural exposure to interest rates. The Treasury asset portfolio is being run down.

Group Infrastructure trading profit before tax

2011 compared to 2010

Trading (loss)/profit before tax decreased by £439m to £(305)m (2010: £134m). By income statement line, the movements were:

2010 compared to 2009

Trading profit before tax decreased by £86m to £134m (2009: £220m). Of the total decrease, £25m represented the removal of income produced by the Santander Consumer which was accounted for as an associate in our statutory accounts prior to becoming a wholly-owned subsidiary in November 2010, due to the inclusion of the Perimeter companies' pre-acquisition trading profit before tax in 2010 in Retail Banking. By income statement line, the movements were:

Business and Financial Review

Other Material Items

ADJUSTMENTS BETWEEN THE STATUTORY BASIS AND THE TRADING BASIS

Santander UK's Board reviews discrete financial information for each of its segments that includes measures of operating results, assets and liabilities, which are measured on a 'trading' basis. The trading basis differs from the statutory basis as a result of the application of various adjustments, as presented below, and described in Note 2 to the Consolidated Financial Statements. Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business.

The trading adjustments consist of:

Perimeter companies pre-acquisition trading basis results

The pre-acquisition trading basis results of the Perimeter companies for the year ended 31 December 2010 are included in the trading basis results discussed in the "Business Review - Divisional Results" as described in Note 2 to the Consolidated Financial Statements. The pre-acquisition non-trading adjustments of the Perimeter companies for the year ended 31 December 2010 have not been included. This adjustment applies only to 2010.

Reorganisation, customer remediation and other costs

These costs comprise implementation costs in relation to the strategic change and cost reduction process, costs in respect of customer remediation, certain write-offs and impairment losses taken centrally.

2011 compared to 2010

Total reorganisation, customer remediation and other costs of £937m increased by £822m (2010: £115m).

Reorganisation and customer remediation costs increased by £610m largely reflecting the charge for customer remediation, principally payment protection insurance, as described in Note 36 to the Consolidated Financial Statements and in "Shareholder Information - Risk Factors".

Non-trading impairment losses of £172m in 2011 principally resulted from the write-off of software assets of £112m as a result of a reduction in the related expected future economic benefits, and the write-off of Cater Allen Private Bank goodwill of £60m as a result of a reassessment of the value of certain parts of the business in light of recent market conditions and regulatory developments. In 2010, releases of £40m represented the release of impairment losses recognised in prior years, with assets previously held in the Group's conduit vehicles sold at better than expected prices.

2010 compared to 2009

Total reorganisation, customer remediation and other costs decreased by £71m to £115m (2009: £186m).

Reorganisation and customer remediation costs increased by £9m reflecting a decrease in costs relating to the strategic change and cost reduction process as it nears completion being more than offset by an increase in customer remediation costs.

Other non-trading items of £40m in 2010 represented the release of impairment losses recognised in prior years, with assets previously held in the Group's conduit vehicles sold at better than expected prices.

Profit on part sale and revaluation of subsidiaries

These profits are excluded from the trading results to allow management to understand the underlying performance of the business. In 2010, the £87m gain that arose on the revaluation of the Group's original holding in Santander Consumer (UK) plc on the acquisition of the remaining shares by the Group was excluded from the trading results. In addition, profits of £39m on the sale of certain businesses, including James Hay, were excluded. In 2011 and 2009, there were no such profits.

Hedging and other variances

The Balance Sheet and Income Statement are subject to mark-to-market volatility including that arising from the accounting for elements of derivatives deemed under IFRS rules to be ineffective as hedges. Volatility also arises on certain assets previously managed on a fair value basis, and hence classified as fair value through profit or loss under IFRS, that are now managed on an accruals basis. In addition, other variances include the reversal of coupon payments on certain equity instruments which are treated as an interest expense in the trading results but are reported below the profit after tax line for statutory purposes.

2011 compared to 2010

In 2011, hedging and other variance gains of £86m were excluded from the trading basis results, compared with losses of £27m that were excluded from the trading basis results in 2010. In 2011, hedge ineffectiveness resulted in gains compared to losses reported in 2010. In addition, other variances include £57m reversal of coupon payments on certain preference shares, Perpetual Preferred Securities and Reserve Capital Instruments, which were treated as an interest expense in the trading results but were accounted for as dividends for statutory purposes in both 2011 and 2010.

2010 compared to 2009

In 2010 and 2009, hedging and other variance losses of £27m and £36m, respectively, were excluded from the trading basis results. In 2010 and 2009, this largely consisted of hedge ineffectiveness, partially offset by the reversal of £57m of coupon payments on certain preference shares, Perpetual Preferred Securities and Reserve Capital Instruments, which were treated as interest expense in the trading results but were accounted for as dividends for statutory purposes in both 2010 and 2009. In addition, in 2009 substantial mark-to-market gains which arose in the second half of 2008 from movements in interest rates reversed.

Capital and other charges

Capital charges/(credits) principally comprise internal nominal charges/(credits) for capital invested in the Group's businesses. Management implemented this charge/(credit) to assess if capital is invested effectively. On a consolidated basis, the total of these internal reallocations is £nil.

LEGAL PROCEEDINGS

Santander UK is party to various legal proceedings in the ordinary course of business, the ultimate resolution of which is not expected to have a material adverse effect on the financial position or the results of operations of Santander UK. See Notes 36 and 38 to the Consolidated Financial Statements.

MATERIAL CONTRACTS

Santander UK is party to various contracts in the ordinary course of business. For the three years ended 31 December 2011 there have been no material contracts entered into outside the ordinary course of business, except for the contracts described below.

On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial efficiency of the enlarged group, Banco Santander, S.A. transferred all of its Alliance & Leicester plc shares to the Company in exchange for newly issued ordinary shares of the Company.

On 30 August 2011, the Company entered into an amended sale and purchase agreement with the Royal Bank of Scotland plc, National Westminster Bank plc, National Westminster Home Loans Limited which replaced the sale and purchase agreement between the same parties dated 4 August 2010. Under this contract the Company has agreed to acquire (subject to certain conditions) bank branches and business banking centres and associated assets and liabilities from the Royal Bank of Scotland group. For further information see Note 46 to the Consolidated Financial Statements.

AUDIT FEES

See Note 8 to the Consolidated Financial Statements.

Business and Financial Review

Balance Sheet Business Review

Throughout this section, references to UK and non-UK, in the geographic analysis, refer to the location of the office where the transaction is recorded.

SUMMARY

This balance sheet business review describes the Group's significant assets and liabilities and its strategy and reasons for entering into such transactions. The balance sheet business review is divided into the following sections:

SUMMARISED CONSOLIDATED BALANCE SHEET

A more detailed consolidated balance sheet is contained in the Consolidated Financial Statements.

31 December 2011 compared to 31 December 2010

Assets

Cash and balances at central banks

Cash and balances held at central banks decreased slightly by 2% to £25,980m (2010: £26,502m).

Trading assets

Trading assets decreased by 38% to £21,891m (2010: £35,461m). The decrease principally reflected changes in holdings of UK and Organisation of Economic Co-operation and Development ('OECD') government securities as part of the Group's liquidity management activity, including the maturity of approximately half of the Group's holdings of Government guaranteed fixed and floating rate notes.

Derivative assets

Derivative assets increased by 26% to £30,780m (2010: £24,377m). The increase was driven by an increase in the fair values of interest rate derivatives as a result of downward moves in yield curves. There was a corresponding increase in derivative liabilities.

Financial assets designated at fair value through profit and loss

Financial assets designated at fair value through profit and loss decreased by 26% to £5,005m (2010: £6,777m). The decrease was primarily attributable to the maturity of loans to UK Social Housing associations, as new loans are no longer designated at fair value, in accordance with Group policy.

Loans and advances to banks

Loans and advances to banks increased by 16% to £4,487m (2010: £3,852m). The increase was due to higher reverse repurchase agreement activity with Banco Santander S.A. as disclosed in Note 17 to the Consolidated Financial Statements.

Loans and advances to customers

Loans and advances to customers increased by 3% to £201,069m (2010: £195,132m), principally due to growth in corporate lending, particularly SMEs, as a result of a strong performance via the 28 Corporate Business Centres and modest growth in mortgage lending.

Available for sale securities

Available for sale securities decreased by 74% to £46m (2010: £175m). The decrease reflected the sale of available-for-sale debt securities as part of the restructuring of the Company's contributions to the defined benefit pension schemes.

Loans and receivable securities

Loans and receivable securities decreased by 51% to £1,771m (2010: £3,610m). The decrease principally reflected the continuing run-down of the Treasury asset portfolio.

Macro hedge of interest rate risk

The macro (or portfolio) hedge increased by 12% to £1,221m (2010: £1,091m). The increase was mainly due to decreases in LIBOR interest rates.

Property, plant and equipment

Property, plant and equipmentdecreased by 6% to £1,596m (2010: £1,705m). The decrease was principally due to the depreciation charge for the year.

Retirement benefit assets

Retirement benefit assets increased to £241m (2010:£nil). For the Group's defined benefit pension schemes which had surpluses, the key drivers of the increase were Company contributions during the year together with some improvements in asset values, partly offset by a reduction in the net discount rate which generated an actuarial loss on liabilities.

Tax, intangibles and other assets

Tax, intangibles and other assets decreased by 17% to £3,487m (2010: £4,178m). The decrease was primarily driven by depreciation and amortisation of intangible and tangible assets combined with a decrease in tax assets.

Liabilities

Deposits by banks

Deposits by banks increased by 49% to £11,626m (2010: £7,784m). The increase was driven by the increase in medium-term repurchase agreements as part of the Group's funding strategy.

Deposits by customers

Deposits by customers decreased by 3% to £148,342m (2010: £152,643m). The decrease reflected the slower acquisition of deposits in what was a smaller market and where increased competition led to negative pricing and margins. A managed outflow of more rate-sensitive and shorter-term deposits was more than offset by the additional issuance of medium-term funding described below.

Derivatives

Derivative liabilities increased by 30% to £29,180m (2010: £22,405m). The increase was driven by an increase in the fair values of interest rate derivatives as a result of downward moves in yield curves.

Trading liabilities

Trading liabilities decreased by 40% to £25,745m (2010: £42,827m). The decrease reflected lower repo activity and the funding of lower holdings of UK and OECD government securities as part of the Group's liquidity management activity.

Financial liabilities designated at fair value

Financial liabilities designated at fair value increased by 85% to £6,837m (2010: £3,687m). The increase reflected new issuances in the US$20bn Euro Medium Term Note Programme and the euro 10bn Structured Notes Programme.

Debt securities in issue

Debt securities in issue increased by 2% to £52,651m (2010: £51,783m). The increase reflected the Group's strategy of increasing the level of medium-term funding through the issuance of debt under the Fosse securitisation and Covered Bond programmes. These increases were partially offset by significant decreases in short-term funding in the US$20bn Commercial Paper Programme and in Certificates of Deposit in issue. In addition, there were further maturities of debt outstanding under the US$40bn EMTN programme.

Subordinated liabilities

Subordinated liabilities increased by 2% to £6,499m (2010: £6,372m). The increase was primarily driven by increases of fair value hedge adjustments on the subordinated debt in issue as a result of downward moves in yield curves partially offset by the scheduled redemption of the euro 500m 4.625% Subordinated Notes.

Retirement benefit obligations

Retirement benefit obligations increased by 25% to £216m (2010: £173m). For the Group's defined benefit pension schemes which had deficits, the key driver of the increase was a reduction in the net discount rate which generated an actuarial loss on liabilities, partly offset by Company contributions during the year and some improvements in asset values.

Tax, other liabilities and provisions

Tax, other liabilities and provisions increased by 31% to £3,812m (2010: £2,912m). The increase principally reflected the additional provision in the year for customer remediation, including payment protection insurance, as described in Note 36 to the Consolidated Financial Statements.

Equity

Total shareholders equity increased by 3% to £12,666m (2010: £12,274m). The increase was principally attributable to the retained profit for the year of £903m, partly offset by dividends declared of £482m.

31 December 2010 compared to 31 December 2009

Assets

Cash and balances at central banks

Cash and balances held at central banks increased by 537% to £26,502m (2009: £4,163m). Higher balances were maintained with the Bank of England and the US Federal Reserve as part of the increase in the Group's stock of liquid assets.

Trading assets

Trading assets increased by 7% to £35,461m (2009: £33,290m). The increase reflected higher holdings of debt securities and even greater repurchase agreement ('reverse repo') activity relating to OECD government securities as part of the Group's liquidity management activities. Other reverse repo activity reduced in view of the focus on government security repo activity.

Derivative assets

Derivative assets increased by 7% to £24,377m (2009: £22,827m). The increase was driven by an increase in interest rate derivatives as a result of downward shifts in yield curves.

Financial assets designated at fair value through profit and loss

Financial assets designated at fair value through profit and loss decreased by 45% to £6,777m (2009: £12,358m). The decrease principally reflected the maturity of £2,220m of bank certificates of deposit and the sale of euro 3,265m of Santander UK's holdings of AAA-rated prime mortgage-backed securities.

Loans and advances to banks

Loans and advances to banks decreased by 58% to £3,852m (2009: £9,151m) due to the repayment of substantially all of Santander UK's loans to other members of the Santander group.

Loans and advances to customers

Loans and advances to customers increased by 4% to £195,132m (2009: £186,804m), reflecting net mortgage lending of £5.6bn, growth in corporate lending of £1.3bn and the impact of the acquisition of the Perimeter companies with aggregate customer balances of £5.7bn. In addition, loans to non-bank Santander group companies decreased by 99% to £57m (2009: £4,457m). This was due to the acquisition of the Perimeter companies which resulted in the loans funding these companies in 2009 being eliminated on consolidation.

Available for sale securities

Available for sale securities decreased by 78% to £175m (2009: £797m). The decrease was due to the sale of the available-for-sale securities as part of the injection of funds directly into the defined benefit pension scheme in 2010.

Loans and receivable securities

Loans and receivable securities decreased by 64% to £3,610m (2009: £9,898m). The decrease principally reflected the run-down of the Treasury asset portfolio as part of the ongoing de-leveraging process.

Macro hedge of interest rate risk

The macro (or portfolio) hedge decreased by 3% to £1,091m (2009: £1,127m) mainly due to increases in interest rates.

Property, plant and equipment

Property, plant and equipmentincreased by 36% to £1,705m (2009: £1,250m). The increase principally reflected the Group's acquisition of freehold and leasehold properties for a consideration of £526m in the year. The properties consisted of retail branches that the Group had previously leased. See Note 26 to the Consolidated Financial Statements. The remaining capital expenditure during the year was principally incurred by Retail Banking (mostly consisting of computer infrastructure, computer software and furniture and fittings for branches) and by Corporate Banking (consisting of operating lease assets). These increases were partly offset by the depreciation charge for the year.

Tax, intangibles and other assets

Tax, intangibles and other assets increased by 15% to £4,178m (2009: £3,626m). The increase was principally driven by higher goodwill as a result of the acquisition of the Perimeter companies. This was partly offset by a reduction in tax assets associated with the retirement benefit obligation liability.

Liabilities

Deposits by banks

Deposits by banks increased by 34% to £7,784m (2009: £5,811m). The increase was driven by the issuance of new medium-term repurchase agreements as part of the Group's medium to long-term funding.

Deposits by customers

Deposits by customers increased by 6% to £152,643m (2009: £143,893m) due to inflows across core savings, banking, private banking and corporate customers.

Derivatives

Derivative liabilities increased by 18% to £22,405m (2009: £18,963m). The increase was driven by an increase in interest rate derivatives as a result of downward shifts in yield curves.

Trading liabilities

Trading liabilities decreased by 7% to £42,827m (2009: £46,152m). The decrease reflected lower non-government security repo activity.

Financial liabilities designated at fair value

Financial liabilities designated at fair value decreased by 17% to £3,687m (2009: £4,423m). The decrease reflected repayments in the US$20bn euro Medium Term Note ('EMTN') programme partly offset by currency movements.

Debt securities in issue

Debt securities in issue increased by 8% to £51,783m (2009: £47,758m). The increase reflected the Group's strategy of increasing the level of medium-term funding through the issuance of debt in the Fosse securitisation and Covered Bond programmes. These increases were partially offset by the maturity of debt within the former Alliance & Leicester US$40bn EMTN programme as a decision was taken in 2009 that no further issuances would be made under this programme. 

Subordinated liabilities

Subordinated liabilities decreased by 8% to £6,372m (2009: £6,949m). The decrease reflected the scheduled redemption of subordinated notes.

Retirement benefit obligations

Retirement benefit obligations decreased by 84% to £173m (2009: £1,070m). The principal reason for the reduction was the payment of contributions to the defined benefit pension schemes of £955m by the Group and fellow Santander subsidiaries, with significant improvements in market values since June 2010.

Tax, other liabilities and provisions

Tax, other liabilities and provisions decreased by 5% to £2,912m (2009: £3,050m). The decrease reflected a reduction in trade and other payables, partly offset by an increase in current tax liabilities.

Equity

Total shareholders equity, including non-controlling interests, increased by 70% to £12,274m (2009: £7,222m), primarily as a result of the injection of equity of £4,456m by the Santander group, as well as the inclusion of profits after tax of £1,583m. This was partly offset by dividends declared of £832m.

RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET

The classifications of assets and liabilities in the Group's consolidated balance sheet, including the note reference, and in the balance sheet business review may be reconciled as follows: