Last checked at 15 Mar 2013 07:30
Summary Risk Report
RISK MANAGEMENT
As a significant financial services provider, risk is at the core of Santander UK's day-to-day activities. The understanding and control of risk is critical for the effective management of the business.
In managing risk, Santander UK aims to:
> | Maintain a predictable medium-low risk profile; |
> | Employ effective and advanced risk management techniques; and |
> | Deliver robust financial performance, and ultimately build sustainable value for all our stakeholders. |
RISK FRAMEWORK
During 2012, the Board approved a new risk management framework, setting out enhancements to the management, control and oversight of all risk types in Santander UK. This framework aims to ensure that risk is properly managed and controlled on behalf of all stakeholders.
The key components of this framework include:
> | Risk definition and structure In carrying out its business Santander UK is exposed to various risks. To aid their identification and assessment, these risk types are categorised as either | |
> | Financial risks (credit risk, traded market risk, and structural risks), and | |
Non-financial risks (including operational risk, conduct risk, and reputational risk). | ||
> | Core principles Underpinning the framework is a set of core risk management principles. These cover the: | |
> | Accountability for risk management, its governance, and system of internal control, | |
> | Requirement to identify, assess, manage and report all material risks, | |
> | Relationships between risk, performance management and remuneration | |
> | Governance, roles and responsibilities Setting out clear responsibilities by role and by business area and a comprehensive committee structure to facilitate effective governance and decision making. | |
> | System of internal control Comprising a hierarchy of risk frameworks, policies and limits for each specific risk type. | |
To deliver against this framework, the Santander UK group is organised into three 'lines of defence'. This allows a distinction between risk execution, risk control and risk oversight, and ultimately aims to ensure that risk is a clear area of focus for all our people.
ALLOCATION OF RISKS ACROSS SANTANDER UK
A main facet of Santander UK's business model is a focus on retail and commercial lending. As such, the Santander UK group's key source of risk is credit risk. This is illustrated in the diagram, which sets out the allocation of risk across the Santander UK group based on the economic capital requirement for each risk type at 31 December 2012.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_-2013-3-15.pdf
Note. The allocation is limited to risks for which capital is considered a mitigant, and does not take account of diversification effects across risks.
TOP AND EMERGING RISKS
A 'top risk' is defined as being a current, emerged risk within our business which could potentially have a material impact on our financial results, reputation and the sustainability of the long-term business model. It may develop or crystallise within one year. An 'emerging risk' is defined as being one with large uncertain outcomes and may develop or crystallise beyond one year. Crystallisation of an emerging risk could have a material effect on long term strategy.
Santander UK uses risk factors to identify and monitor top and emerging risks. All of our activities involve, to varying degrees, identification, assessment, management and reporting of risk or combinations of risks. During 2012, senior management focused on certain top and emerging risks and their causes. These included:
Capital risk is the risk that the Santander UK does not have an adequate amount, or quality of capital to meet internal and external requirements. The finalisation of regulatory capital rules in the European Union currently remains under discussion. When these eventually come into force they may differ from the current Basel III proposals in certain areas. Moreover, the timing of their implementation is still subject to uncertainty. This has ramifications for the level of capital we are required to hold.
See "Capital Risk" in the Risk Management Report and "Capital management and resources" in the Business Review for more information. Details of Santander UK's capital management and resources are set out in Note 47 to the Consolidated Financial Statements.
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| Conduct risk is a key risk to Santander UK in view of the evolving regulatory environment and the requirement to make significant conduct remediation provisions. Changes have been made to specific business processes, as well as to the way the business considers, manages and reports conduct risks. Santander UK is continuing to place significant focus in seeking to ensure that customers receive the right outcome in every instance and that the necessary controls are in place to mitigate the associated risks. This has been embodied in Santander UK's approach of ensuring that its products and its dealings with customers are simple, personal and fair.
See "Conduct Risk" in the Risk Management Report for more information. Details of Santander UK's provision for conduct remediation are set out in Note 36 to the Consolidated Financial Statements. Further information on conduct remediation provision sensitivities is set out in "Critical accounting policies" in Note 1 to the Consolidated Financial Statements.
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| Credit risk is a key risk to Santander UK as lending represents our most significant activity and because of the consequent risk of loss.
Details of Santander UK's credit risk exposures (by business segment and key product), how credit risk is managed and mitigated, higher risk loans, credit quality, arrears, non-performing loans and forbearance activities are set out in the Credit Risk sections of the Risk Management Report starting on pages 74 and 140. Information on impairment loss sensitivities is set out in "Critical accounting policies" in Note 1 to the Consolidated Financial Statements.
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| Liquidity risk is the risk that Santander UK, although solvent, either does not have available sufficient financial resources to meet its obligations as they fall due, or can secure them only at excessive cost.
In common with many other UK banks, Santander UK faced multiple reviews from our credit rating agencies, mostly in the first half of 2012. Following the affirmation of our ratings by the main credit rating agencies, and regulatory developments, we started to reduce liquidity balances in the fourth quarter of 2012, reflecting a reduced risk of outflows arising from this.
See "Liquidity Risk" in the Risk Management Report for more information.
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| Pension risk is both the risk of the change in the accounting position and the risk of an unplanned increase in funding required by Santander UK's defined benefit pension schemes. Pension risk can also directly affect Santander UK's capital position.
Key risk factors that affect pension risk include long term interest rates, inflation expectations, salary growth, longevity of the scheme members, investment performance as well as changes in the regulatory environment.
Further information on Santander UK's pension obligations, including the current asset allocation and sensitivity to key risk factors can be found in 'Critical Accounting Policies' in Note 1 and in Note 37 to the Consolidated Financial Statements.
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| Strategic risk is the risk of material deviations in expected/target shareholder value as a result of poor definition or implementation of Santander UK's strategy.
Senior management assesses the strategic risks which might emerge as a consequence of the plans for the growth of Santander UK's corporate business over the next few years. Management's strategy is set out on page 7 of the Chief Executive Officer's Review.
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PREDICTABLE, MEDIUM-LOW RISK PROFILE
Credit risk highlights - residential mortgages
2012 £m | 2011 £m | 2010 £m | |
Mortgage non-performing loans ('NPLs')(1)(2) - UK | 2,719 | 2,434 | 2,343 |
Mortgage loans and advances to customers(2) | 156,583 | 166,201 | 165,772 |
Mortgage impairment loan loss allowances | 552 | 478 | 526 |
Mortgage NPLs ratio(3) | 1.74% | 1.46% | 1.41% |
Coverage ratio(4) | 20% | 20% | 22% |
(1) Mortgages are classified as non-performing when the counterparty fails to make a payment when contractually due for typically three months or longer.
(2) Excludes accrued interest.
(3) Mortgage NPLs as a percentage of total mortgage loans and advances to customers
(4) Impairment loan loss allowances as a percentage of NPLs.
During 2012, the mortgage NPLs ratio increased to 1.74% (2011: 1.46%). This was primarily due to regulatory-driven changes in collections policies introduced at the beginning of 2012 and the consequent change in the level of NPLs. The mortgage NPLs ratio was also adversely affected by the managed reduction of the mortgage portfolio which decreased to £156.6bn at 31 December 2012 (2011: £166.2bn). Excluding the impact of these changes, the mortgage NPLs ratio remained broadly stable.
The collections policy changes included tightening of forbearance policies in line with regulatory guidance, and increasing the use of affordability assessments in arrears situations to ensure all arrangements are affordable and sustainable. This resulted in some instances of slower account rehabilitation. Whilst the rate of accounts entering NPLs did not increase, the effect of these changes was to slow the rate of improvement and cures, resulting in cases remaining longer in NPLs. While these changes reflect a more conservative approach to the assessment of NPLs, they are not expected to lead to a significant increase in write-offs.
In 2012, mortgage write-offs decreased to £87m from £103m in 2011. The graph opposite shows mortgage write-offs as a percentage of loan loss allowances at the year-end over the last five years. This demonstrates the relative predictability of the performance of the mortgage portfolio and its quality.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_1-2013-3-15.pdf
Credit risk highlights - Corporate Banking
2012 £m | 2011 £m | 2010 £m | |
Corporate Banking NPLs(1)(2) | 835 | 745 | 643 |
Corporate Banking loans and advances to customers(2) | 19,605 | 18,856 | 14,615 |
Corporate Banking impairment loan loss allowances | 407 | 296 | 202 |
Corporate Banking NPLs ratio | 4.26% | 3.95% | 4.40% |
Coverage ratio | 49% | 40% | 31% |
(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed unlikely that the counterparty will be able to maintain payments.
(2) Excludes accrued interest.
During 2012, the Corporate Banking NPLs ratio increased to 4.26% (2011: 3.95%). This largely arose from the performance of a small number of older vintage loans which were acquired with Alliance & Leicester. At the same time, the growth in the portfolio was slower than in 2011 which impacted the ratio.
The level of new NPLs also increased during the year, particularly within the mid corporate and SME sectors where certain customers and sub-sectors (e.g. leisure and care) found revenue under pressure due to lower consumer spending despite the low interest rate environment.
The graph opposite shows Corporate Banking NPL stock by deal vintage over the last few years. This demonstrates that Corporate Banking lending in the last four years has performed well, with a much lower NPL ratio in these vintages.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_2-2013-3-15.pdf
Divisional Results
GROUP SUMMARY
SUMMARISED CONSOLIDATED INCOME STATEMENT
Year ended 31 December 2012 £m | Year ended 31 December 2011 £m | Year ended 31 December 2010 £m | |
Net interest income | 2,915 | 3,830 | 3,814 |
Non-interest income | 1,986 | 1,355 | 1,220 |
Total operating income | 4,901 | 5,185 | 5,034 |
Administrative expenses | (1,976) | (1,995) | (1,793) |
Depreciation, amortisation and impairment | (246) | (447) | (275) |
Total operating expenses excluding provisions and charges | (2,222) | (2,442) | (2,068) |
Impairment losses on loans and advances | (1,009) | (565) | (712) |
Provisions for other liabilities and charges | (439) | (917) | (129) |
Total operating provisions and charges | (1,448) | (1,482) | (841) |
Profit before tax | 1,231 | 1,261 | 2,125 |
Taxation charge | (292) | (358) | (542) |
Profit for the year | 939 | 903 | 1,583 |
Attributable to: | |||
Equity holders of the parent | 939 | 903 | 1,544 |
Non-controlling interest | - | - | 39 |
2012 compared to 2011
Profit before tax decreased by £30m to £1,231m in 2012 (2011: £1,261m), whilst profit after tax rose 4% to £939m. Profit before tax continued to be adversely impacted by structural market conditions, primarily low interest rates and increased term funding costs. 2012 benefitted from the non-recurrence of the significant customer remediation provision, principally in relation to payment protection insurance ('PPI'), of £751m before tax made in 2011. There were a number of significant items in 2012 resulting in a net gain of £84m profit before tax, including a gain on a capital management exercise and provisions relating to the non-core corporate and legacy portfolios, conduct remediation and costs arising from the termination of the acquisition of businesses from RBS.
Material movements by line:
> | Net interest income decreased by £915m to £2,915m in 2012 (2011: £3,830m). The key drivers of the decrease were sustained lower interest rates which reduced income earned on the structural hedges put in place in 2008-2009 and now maturing in a much lower, static rate environment, and the higher cost of funding (both retail deposits and wholesale term funding). In addition, lower mortgage business volumes, as we selectively reduced parts of our mortgage book, negatively impacted net interest income.
These decreases were partly offset by the favourable impact of improved lending margins as more customers reverted to standard variable rate mortgages in the current low interest rate environment, and improved margins on new business in both the mortgage and corporate loan portfolios, even though the launch of the Funding for Lending Scheme in the last quarter of 2012 reduced funding costs and had a negative impact on asset pricing.
In addition, net interest income increased as a result of growth in corporate customer loans, with much of this growth generated through the network of 35 regional Corporate Business Centres which serve our SME clients. SME lending balances increased by 18% compared to 31 December 2011. |
> | Non-interest income increased by £631m to £1,986m in 2012 (2011: £1,355m), principally due to the significant gain earned on the repurchase of certain debt capital instruments completed on 16 July 2012. The net impact of the purchase and crystallisation of mark-to-market positions on associated derivatives resulted in a gain of £705m.
The remaining decrease of £74m was principally due to increased repo costs relating to the management of the liquid asset portfolio being reported in net trading and other income, lower non-interest income reflecting reduced assets in the non-core corporate and legacy portfolios in run-off.
In addition, the replacement of overdraft net interest income with daily fees as a result of the new pricing structure for current accounts resulted in higher fees, but these were more than offset by a decrease in monthly overdraft fees charged to customers and a higher volume of fees waived as we promoted our 1|2|3 credit card. Fees from unsecured lending and mortgages were also lower driven by reduced customer volumes.
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Volume growth in the SME business resulted in increases in income from treasury services, banking and cash transmission services, invoice discounting and asset finance. This was partially offset by lower income in retail structured products and money markets.
Markets delivered a solid performance, with a much improved performance in the fixed income and equity businesses, partly offset by lower market volumes principally affecting the financial institutions business.
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> | Administrative expenses decreased by £19m to £1,976m in 2012 (2011: £1,995m). Reduced costs were driven by further efficiencies, lower Markets variable staff remuneration costs and lower technology costs relating to regulatory projects in Corporate Centre. These were in part offset by investment in new Retail Banking products, including the 1|2|3 product range and the continued investment in the growth of the SME, Large Corporates and Markets (relating to new products, markets and customer segments) businesses. During 2012, we increased our regional Corporate Business Centres by seven (net) and significantly increased our capacity to serve SMEs by recruiting 113 customer-facing staff into our business.
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> | Depreciation, amortisation and impairment costs decreased by £201m to £246m (2011: £447m). The decrease reflected the write-off of certain intangible assets in December 2011 and lower software depreciation costs following the impairment of these intangible assets in December 2011. In addition, lower operating lease depreciation resulted from lower balances in the legacy portfolio in run-off following the continued deleveraging process. This was partially offset by the continued investment in the IT systems to support growth in Corporate Banking.
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> | Impairment losses on loans and advances increased by £444m to £1,009m in 2012 (2011: £565m). The increase was mainly due to the £335m provision made following the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off. The provision related to assets acquired from Alliance & Leicester plc (particularly the shipping portfolio) as well as certain assets within the old Abbey Commercial Mortgages book. The provision raised reflects the increasing losses experienced in these portfolios.
The remaining increase of £109m largely reflects the increase in the level of non-performing mortgage loans affected by the regulatory collection process changes. The underlying performance on mortgages remains broadly stable due to the continued low interest rate environment and the high quality of the book. In addition, provisions increased as a result of provisions raised in the first half of 2012 relating to the non-core portfolio. The increase was partly offset by lower losses experienced in the commercial real estate portfolio as transactions that originated at the peak of the market have begun to work their way out of the book and a reduction in unsecured products charges, mainly in the cards and consumer finance portfolios.
Secured retail loan coverage remained conservative at 20%, whilst the stock of properties in possession ('PIP') reduced to 924 cases at 31 December 2012 from 965 at 31 December 2011. This level of PIP represented only 0.06% of the portfolio and remained well below the industry average.
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> | Provisions for other liabilities and charges reduced by £478m to £439m in 2012 (2011 £917m). 2012 included a net provision for conduct remediation of £232m, relating to retail products and to interest rate derivatives sold to corporate customers. In addition, there was a £55m write off of costs arising from the termination of the acquisition of the RBS businesses. In 2011, Santander UK made a customer remediation provision relating principally to PPI of £751m. No additional provision relating to PPI was required in 2012.
The UK Bank Levy and Financial Services Compensation Scheme ('FSCS') fees were £58m lower than in 2011, largely reflecting the impact of ongoing deleveraging on the balance sheet. This was partially offset by restructuring costs of £45m incurred in 2012 in relation to the closure of certain properties and redundancies.
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> | The effective tax rate for 2012, based on profit before tax was 23.7% (2011: 28.4%) which is broadly in line with the UK standard corporation tax rate of 24.5% (2011: 26.5%).
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2011 compared to 2010
Profit before tax decreased by £864m to £1,261m in 2011 (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 PPI. 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:
> | Net interest income increased by £16m to £3,830m in 2011 (2010: £3,814m). Net interest income increased by £397m as a result of the inclusion of the additional ten months in 2011 of net interest income of the companies previously owned by Banco Santander, S.A. (the 'Perimeter Companies') that were acquired in October and November 2010, as described in Note 45 to the Consolidated Financial Statements. The remaining decrease of £381m was largely due to the full year impact of the cost of higher liquid asset balances in response to UK regulatory requirements introduced in June 2010, higher cost of retail deposits and new wholesale medium-term funding, and the ongoing impact of a low interest rate environment. In addition, interest on overdraft accounts was lower with interest charges replaced by daily fees, which are accounted for as non-interest income. There was also a reduced contribution from the run down Treasury asset portfolio.
These decreases were partly offset by the favourable impact of improved lending margins and growth in customer loans. The improved lending margins were due to an increased proportion of customers reverting to standard variable rate mortgages in the current low interest rate environment, and improved margins on new business in both Retail Banking and Corporate Banking.
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> | Non-interest income increased by £135m to £1,355m in 2011 (2010: £1,220m). Of the total increase, £36m represented the inclusion of the Perimeter Companies' non-interest income for the full year in 2011. The remaining increase of £99m was due to an increase in banking fees of £99m as a result of a new pricing structure for current accounts, replacing overdraft net interest income with daily fees. In addition, Corporate Banking non-interest income increased, generated by growing the loan markets and SME business, supported by the short-term markets business and interest rate related sales. Hedge ineffectiveness also resulted in gains in 2011 compared to losses reported in 2010. There were also lower losses on disposals of assets in the Treasury asset portfolio which is being run down.
These positive drivers were partially offset by the non-recurrence in 2011 of an £87m gain reported in 2010 arising on the revaluation of Santander UK's original holding in Santander Consumer (UK) plc on the acquisition of the remaining shares by Santander UK, and profits of £39m on the sale of certain businesses, including James Hay, in 2010. In addition, investment fees were lower driven by a decline in the market for investment products, a shift in the mix of sales, and lower margins on structured investment products. The Markets business reported lower income largely due to reduced market activity.
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> | Administrative expenses increased by £202m to £1,995m in 2011 (2010: £1,793m). Of the total increase, £170m represented the inclusion of the Perimeter Companies' administrative expenses for the full year in 2011. The remaining increase of £32m was largely due to investment in the business, offset by further efficiencies. In Retail Banking, the investment included increased headcount costs due to the recruitment of additional customer-facing staff relating to customer service initiatives, whilst in Corporate Banking, investment focused on extending the Corporate Business Centre network and product capability for customers. This increase was partly offset by a reduction in costs driven by further ongoing efficiency initiatives. In addition, the Corporate Banking legacy portfolios in run-off reported lower costs as a result of activity being reduced and disposals.
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> | Depreciation, amortisation and impairment costs increased by £172m to £447m in 2011 (2010: £275m). Of the total increase, £12m represented the inclusion of the Perimeter Companies' depreciation and amortisation costs for the full year in 2011. The remaining increase of £160m was largely due to the write-off of £112m of software assets 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.
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> | Impairment losses on loans and advances decreased by £147m to £565m in 2011 (2010: £712m). Impairment losses on loans and advances increased by £132m as a result of the inclusion of the Perimeter Companies' impairment losses on loans and advances in 2011. This increase was offset by a decrease of £279m due to lower retail product charges due to largely stable arrears resulting from the continued low interest rate environment, a high quality mortgage book and effective collection handling, as well as the higher quality of business written on unsecured personal loans and a stable banking portfolio. The decrease with respect to retail products was partially offset by higher impairment losses in the corporate portfolios primarily a result of increased stress in the legacy portfolios in run-off of shipping, structured finance and real estate, as well as other legacy commercial real estate exposures written before 2008, particularly within the care home and leisure industry sectors.
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> | Provisions for other liabilities and charges increased by £788m to £917m in 2011 (2010: £129m). Of the total increase, £11m represented the inclusion of the Perimeter Companies' provisions for other liabilities and charges for the full year in 2011.The remaining increase of £777m primarily reflected a £751m charge for customer remediation principally in relation to payment protection insurance as described in Note 36 to the Consolidated Financial Statements and in "Shareholder Information - Risk Factors". The increase also reflected the introduction of the UK Bank Levy of £48m and the inclusion here of FSCS fees.
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> | The taxation charge decreased by £184m to £358m in 2011 (2010: £542m). The reduction was largely due to the reduction in taxable profits, partly offset by the effect of the non-deductable UK Bank Levy introduced in 2011 and the non-chargeable gain in 2010 on the revaluation of Santander UK's holding in Santander Consumer (UK) plc. |
Critical factors affecting results
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.
The rest of this section contains a summary of the results, and commentary thereon, by Income Statement line item for each segment.
Basis of results presentation
The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Consolidated Financial Statements has been presented. The Company's board of directors (the 'Board') is the chief operating decision maker for Santander UK. The segmental information below is presented on the basis used by the Board to evaluate performance and allocate resources. The Board reviews discrete financial information for each segment of the business which follows Santander UK's normal accounting policies and principles, including measures of operating results, assets and liabilities. The prior years' segmental analyses have been adjusted to reflect the fact that reportable segments have changed, as described in Note 2 to the Consolidated Financial Statements.
PROFIT BEFORE TAX BY SEGMENT
| 31 December 2012 | Retail Banking £m | Corporate Banking £m | Markets £m | Corporate Centre £m | Total£m |
Net interest income/(expense) | 2,855 | 329 | (6) | (263) | 2,915 |
Non-interest income | 720 | 381 | 184 | 701 | 1,986 |
Total operating income | 3,575 | 710 | 178 | 438 | 4,901 |
Administration expenses | (1,604) | (255) | (98) | (19) | (1,976) |
Depreciation, amortisation and impairment | (186) | (15) | (2) | (43) | (246) |
Total operating expenses excluding provisions and charges | (1,790) | (270) | (100) | (62) | (2,222) |
Impairment losses on loans and advances | (440) | (109) | - | (460) | (1,009) |
Provisions for other liabilities and charges | (5) | (2) | (2) | (430) | (439) |
Total operating provisions and charges | (445) | (111) | (2) | (890) | (1,448) |
Profit/(loss) before tax | 1,340 | 329 | 76 | (514) | 1,231 |
| 31 December 2011 | Retail Banking £m | Corporate Banking £m | Markets £m | Corporate Centre£m | Total£m |
Net interest income/(expense) | 3,192 | 296 | (3) | 345 | 3,830 |
Non-interest income | 776 | 358 | 162 | 59 | 1,355 |
Total operating income | 3,968 | 654 | 159 | 404 | 5,185 |
Administration expenses | (1,615) | (212) | (109) | (59) | (1,995) |
Depreciation, amortisation and impairment | (208) | (11) | (2) | (226) | (447) |
Total operating expenses excluding provisions and charges | (1,823) | (223) | (111) | (285) | (2,442) |
Impairment losses on loans and advances | (345) | (120) | - | (100) | (565) |
Provisions for other liabilities and charges | - | (3) | (3) | (911) | (917) |
Total operating provisions and charges | (345) | (123) | (3) | (1,011) | (1,482) |
Profit/(loss) before tax | 1,800 | 308 | 45 | (892) | 1,261 |
| 31 December 2010 | Retail Banking £m | Corporate Banking £m | Markets £m | Corporate Centre £m | Total £m |
Net interest income | 2,768 | 238 | - | 808 | 3,814 |
Non-interest income | 619 | 300 | 221 | 80 | 1,220 |
Total operating income | 3,387 | 538 | 221 | 888 | 5,034 |
Administration expenses | (1,464) | (210) | (74) | (45) | (1,793) |
Depreciation, amortisation and impairment | (165) | (10) | (2) | (98) | (275) |
Total operating expenses excluding provisions and charges | (1,629) | (220) | (76) | (143) | (2,068) |
Impairment losses on loans and advances | (551) | (103) | - | (58) | (712) |
Provisions for other liabilities and charges | - | - | - | (129) | (129) |
Total operating provisions and charges | (551) | (103) | - | (187) | (841) |
Profit before tax | 1,207 | 215 | 145 | 558 | 2,125 |
RETAIL BANKING
Retail Banking offers a wide range of products and financial services to customers through a network of branches, agencies and ATMs, as well as through telephony, e-commerce and intermediary channels. It principally serves personal banking customers, but also services small businesses with a turnover of less than £250,000 per annum. Retail Banking products include residential mortgage loans, savings and current accounts, credit cards and personal loans as well as a range of insurance policies.
Summarised income statement
Year ended 31 December 2012 £m | Year ended 31 December 2011 £m | Year ended 31 December 2010 £m | |
Net interest income | 2,855 | 3,192 | 2,768 |
Non-interest income | 720 | 776 | 619 |
Total operating income | 3,575 | 3,968 | 3,387 |
Administration expenses | (1,604) | (1,615) | (1,464) |
Depreciation, amortisation and impairment | (186) | (208) | (165) |
Total operating expenses excluding provisions and charges | (1,790) | (1,823) | (1,629) |
Impairment losses on loans and advances | (440) | (345) | (551) |
Provisions for other liabilities and charges | (5) | - | - |
Total operating provisions and charges | (445) | (345) | (551) |
Profit before tax | 1,340 | 1,800 | 1,207 |
Balances and ratios
31 December 2012 £bn | 31 December 2011 £bn | 31 December 2010 £bn | |
Total assets | 169.5 | 180.4 | 180.7 |
Customer assets | 165.3 | 175.5 | 175.5 |
Risk-weighted assets | 38.8 | 39.7 | 37.9 |
Customer deposits | 127.2 | 121.4 | 126.4 |
Mortgage NPLs ratio(1)(2) | 1.74% | 1.46% | 1.41% |
Mortgage coverage ratio(1)(3) | 20% | 20% | 22% |
(1) Accrued interest is excluded for purposes of these analyses.
(2) Mortgage NPL's as a percentage of mortgage assets.
(3) Mortgage impairment loss allowance as a percentage of mortgage NPL's.
Business volumes
Business volumes are used by management to assess the performance of Santander UK, both absolutely and relative to its peer group, and to inform management of product trends in the market.
31 December 2012 £bn | 31 December 2011 £bn | 31 December 2010 £bn | |
Mortgage gross lending (1) | £14.6bn | £23.7bn | £24.2bn |
Mortgage net lending (1) | £(9.4)bn | £1.1bn | £5.6bn |
UPL gross lending | £1.1bn | £1.5bn | £1.3bn |
Retail deposit flows | £5.8bn | £(5.0)bn | £6.5bn |
Investment sales Annual Premium Income ('API') (2) | £2.0bn | £2.8bn | £3.5bn |
Residential retail mortgage loans | £156.6bn | £166.2bn | £165.8bn |
Unsecured personal loans ('UPLs') | £2.3bn | £2.9bn | £3.3bn |
Bank account openings (3) (000's) | 895 | 836 | 1,005 |
Credit card sales (4) (000's) | 618 | 543 | 435 |
Market share (5) | |||
Mortgage gross lending | 10.2% | 16.8% | 17.9% |
Mortgage stock | 13.1% | 13.9% | 13.9% |
Bank account stock | 9.3% | 9.1% | 9.2% |
(1) Includes social housing loans held within Corporate Banking and Corporate Centre, to align with CML reporting.
(2) Annualised equivalent of monthly premiums generated from new business during the year.
(3) Bank account openings include personal, SME and private banking current accounts.
(4) Credit card sales only include personal credit cards distributed through the branches.
(5) Market share of mortgage gross lending and mortgage stock estimated by Santander UK for each year, having regard to individual lending data published by the Bank of England for the first eleven months of each year. Historic data is adjusted to reflect actual data published for the year. Market share of bank account stock estimated by Santander UK for each year, having regard to market research published by CACI.
Retail Banking profit before tax
2012 compared to 2011
Profit before tax decreased by £460m to £1,340m (2011: £1,800m). By income statement line, the movements were:
> | Net interest income decreased by £337m to £2,855m in 2012 (2011: £3,192m). The key driver of the decrease in net interest income was the higher cost of funding (both retail deposits and wholesale term funding). In addition, lower mortgage new business volumes, as we selectively reduced parts of our mortgage book, negatively impacted net interest income, as did interest on overdraft accounts being lower with interest charges being replaced by daily fees, which are included within non-interest income.
These decreases were partly offset by the favourable impact of improved lending margins as more customers reverted to standard variable rate mortgages in the current low interest rate environment, and improved margins on new business in both the mortgage and unsecured loan portfolios.
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> | Non-interest income decreased by £56m to £720m in 2012 (2011: £776m). The replacement of overdraft net interest income with daily fees as a result of the new pricing structure for current accounts resulted in higher fees, but these were more than offset by a decrease in monthly overdraft fees charged to customers and a higher volume of fees waived as we promoted our 1|2|3 credit card. Fees from unsecured lending and mortgages were also lower driven by reduced customer volumes.
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> | Administration expenses decreased by £11m to £1,604m in 2012 (2011: £1,615m). Reduced costs driven by further efficiencies were in part offset by investment in new products, including the 1|2|3 product range.
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> | Depreciation and amortisation expenses decreased by £22m to £186m in 2012 (2011: £208m). The decrease reflected lower software depreciation costs following the impairment of certain intangible assets in December 2011.
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> | Impairment losses on loans and advances increased by £95m to £440m in 2012 (2011: £345m). This was largely due to the increase in the level of non-performing mortgage loans affected by several collection policy and reporting changes. The underlying performance on mortgages remains broadly stable due to the continued low interest rate environment and the high quality of the book. The increase was partly offset by a reduction in unsecured products charges, mainly in the cards and consumer finance portfolios.
Secured coverage remained conservative at 20%, whilst the stock of properties in possession ('PIP') reduced to 924 cases from 965 at 31 December 2011. This level of PIP represented only 0.06% of the portfolio and remained well below the industry average.
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> | Provisions for other liabilities and charges increased by £5m to £5m in 2012 (2011: £nil).
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2011 compared to 2010
Profit before tax increased by £593m to £1,800m (2010: £1,207m). By income statement line, the movements were:
> | Net interest income increased by £424m to £3,192m in 2011 (2010: £2,768m). Net interest income increased by £397m as a result of the inclusion of the additional ten months in 2011 of the net interest income of the Perimeter Companies.
The remaining increase of £27m included the favourable impact of improved lending margins as more customers reverted to standard variable rate mortgages in the current low interest rate environment, and improved margins on new business in both the mortgage and unsecured loan portfolios. These increases were partly offset by the higher cost of retail deposits reflecting the very competitive market for customer funds. In addition, interest on overdraft accounts was lower with interest charges replaced by daily fees, which are accounted for as non-interest income.
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> | Non-interest income increased by £157m to £776m in 2011 (2010: £619m). Of the total increase, £36m represented the inclusion of the additional ten months in 2011 of the non-interest income of the Perimeter Companies.
The remaining increase of £121m was principally due to an increase in banking fees of £99m as a result of a new pricing structure for current accounts, replacing overdraft net interest income with daily fees. This was partially offset by lower investment fees driven by a decline in the market and the mix of sales shifting away from structured investment products towards managed funds (which will yield a trail income in future periods rather than an upfront commission), and lower margins on structured investment products.
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> | Administration expenses increased by £151m to £1,615m in 2011 (2010: £1,464m). Administration expenses increased by £170m due to the inclusion of the additional ten months in 2011 of the administrative expenses of the Perimeter Companies.
The remaining decrease of £19m reflected reduced costs driven by further efficiencies largely offset by increased headcount costs due to the recruitment of additional customer-facing staff relating to customer service initiatives, including an additional 1,100 full time employees.
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> | Depreciation and amortisation expenses increased by £43m to £208m in 2011 (2010: £165m). Of the total increase, £12m represented the inclusion of the additional ten months in 2011 of the depreciation and amortisation costs of the Perimeter Companies. The remaining increase of £31m reflected continued investment in the IT systems to support growth.
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> | Impairment losses on loans and advances decreased by £206m to £345m in 2011 (2010: £551m). Impairment losses increased by £132m as a result of the inclusion of the additional ten months in 2011 of the impairment losses of the Perimeter Companies. Of the remaining decrease of £338m, the most significant reduction related to mortgages and unsecured loans. The lower mortgage charge resulted from largely stable arrears due to the continued low interest rate environment, a high quality mortgage book and effective collection handling. Similarly, performance across the unsecured portfolios improved in the year due to the higher quality of business written on unsecured personal loans over the previous two years, and a stable banking portfolio.
Secured coverage remained conservative at 20%, whilst the stock of properties in possession ('PIP') increased to 965 cases from 873 at 31 December 2010. This level of PIP still only represented 0.06% of the book and remained well below the industry average based on Council of Mortgage Lenders ('CML') published data. The mortgage non-performing loan ratio increased slightly to 1.46% from 1.41% at 31 December 2010.
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Retail Banking balances and ratios
2012 compared to 2011
> | Total assets decreased by 6% to £169.5bn in 2012 (2010: £180.4bn) driven by the decrease in customer assets described below.
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> | Customer assets decreased by 6% to £165.3bn in 2012 (2011: £175.5bn), largely due to management actions taken to tighten the lending criteria associated with higher loan-to-value and interest-only mortgages.
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> | Risk-weighted assets decreased by 2% to £38.8bn in 2012 (2011: £39.7bn), reflecting the reduction in mortgage assets partially offset by an increase due to a change to a higher risk-weighted model.
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> | Customer deposits increased by 5% to £127.2bn in 2012 (2011: £121.4bn). 2012 benefited from a strong cross tax year ISA campaign where we attracted £9.1bn (net) of deposits, and £3.8bn of current account balance growth following the launch in March 2012 of the new 1|2|3 account. This was partially offset by a reduction in short-term and rate-sensitive deposits that offered limited long-term relationship opportunities.
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> | The mortgage NPL ratio increased to 1.74% in 2012 (2011: 1.46%). The rise in the mortgage NPL ratio was largely attributable to several collection policy and reporting changes, which meant more cases remained classified as NPLs for longer. The calculation of the NPL ratio was also adversely affected by the impact of the managed reduction of the mortgage portfolio over the year, which decreased to £156.6bn from £166.2bn. Excluding the policy and definitional changes, mortgage NPLs balances decreased slightly over the year.
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> | The mortgage coverage ratio was unchanged at 20% in 2012 (2011: 20%), with the increase in NPLs offset by a corresponding increase in the loan loss allowance balance.
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2011 compared to 2010
> | Total assets remained broadly flat at £180.4bn in 2011 (2010: £180.7bn). This was consistent with customer assets, as described below.
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> | Customer assets of £175.5bn remained flat year on year reflecting modest mortgage book growth, offset by the continued reduction in unsecured personal lending ('UPL') balances, which decreased by 13%.
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> | Risk-weighted assets increased by 5% to £39.7bn in 2011 (2010: £37.9bn). Although the total portfolio remained largely unchanged, the mix of business moved from legacy internal risk models (with lower risk weightings) to newer higher risk-weighted models. In addition risk-weighted assets increased as a result of a higher operational risk charge driven by higher income over the previous three years.
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> | Customer deposits decreased by 4% to £121.4bn in 2011 (2010: £126.4bn). This decrease was due to lower acquisition of deposits in 2011 driven by a smaller market in the UK combined with increased competition which led to unattractive pricing and negative margins in the market relative to medium-term wholesale funding.
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> | The mortgage NPL ratio increased slightly to 1.46% in 2011 (2010: 1.41%). However, the underlying performance remained stable, with the overall increase due to a change in NPL definition resulting in more cases classified as NPLs. Excluding the impact of the change in NPL definition, the mortgage NPL ratio would have been 1.39%, reflecting stable underlying performance. The mortgage NPL ratio of 1.46% remained considerably below the UK industry average based on Council of Mortgage Lenders ('CML') published data. The mortgage non-performing loan and advances performance reflects the high quality of the mortgage book, a lower than anticipated increase in unemployment and prolonged low interest rates.
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> | The mortgage coverage ratio remained robust at 20% in 2011 (2010: 22%) as a result of stable non-performing loans. |
Retail Banking business volumes
2012 compared to 2011
> | Mortgage gross lending in 2012 was £14.6bn, equivalent to a market share of 10.2%, with £9.4bn negative net lending due to a managed reduction in the mortgage stock. A 50% loan-to-value ('LTV') cap placed on new interest only mortgages limited the amount of lending in 2012 and as a result interest only mortgage balances decreased £6.2bn in the year. The average LTV on new business completions in 2012 decreased to 63% compared to 64% in 2011. Further managed reductions in the mortgage stock and a lower market share are expected in the future, although this reduction is likely to be smaller than in 2012. We intend to lend at favourable margins with a good risk profile.
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> | Total gross unsecured personal lending ('UPL') in 2012 decreased by 24% to £1.1bn due to a continued focus on higher credit quality customers. The de-leveraging of the unsecured personal loans book resulted in a 19% reduction in the asset to £2.3bn.
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> | Customer net deposit flows were £5.8bn in 2012 resulting from a successful cross tax year ISA campaign and a material growth in current accounts following the launch of the 1|2|3 current account. This provided flexibility to reduce our short-term and rate-sensitive deposits which offer limited opportunities to build further relationships with our customers.
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> | Bank account openings were up 7% to 895,000 in 2012, primarily due to the new 1|2|3 current account launched in March 2012. This included 240,000 switchers from other UK banks.
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> | Credit card sales through the Santander brand of approximately 618,000 cards grew by 14% in 2012 with a continued focus on existing customers, and benefiting from approximately 542,000 new 1|2|3 credit cards opened in 2012.
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2011 compared to 2010
> | Gross mortgage lending in 2011 was £23.7bn, representing an estimated market share of 16.8%. During 2011, focus remained on the quality of new lending, based on affordability and lower 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.
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> | The UPL stock balance decreased by 12% 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.
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> | Customer deposit flows were £(5.0)bn in 2011. 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 20% largely reflecting market conditions.
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> | Approximately 836,000 bank accounts were opened in 2011, building on the success of the previous two years during which time 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.
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> | Credit card sales through the Santander brand of approximately 543,000 cards grew by 25% in 2011 with a continued focus on existing customers, and benefiting from approximately 145,000 new 1|2|3 credit cards which have been opened since the product's launch in the latter part of the year. |
CORPORATE BANKING
Corporate Banking offers a wide range of products and financial services to customers through a network of 35 regional CBCs and through telephony and e-commerce channels. It principally serves companies with annual turnover of more than £250,000 including Small and Medium Enterprises ('SMEs'). Corporate Banking products and services include loans, bank accounts, deposits, treasury services, invoice discounting, cash transmission and asset finance.
Within Corporate Banking, the Large Corporates business offers specialist treasury services in fixed income and foreign exchange, lending, transactional banking services, capital markets and money markets to large multinational corporate customers. Lending includes syndicated loans and structured finance. Transactional banking includes trade finance and cash management. Money market activities include securities lending/borrowing and repos.
Summarised income statement
Year ended 31 December 2012 £m | Year ended 31 December 2011 £m | Year ended 31 December 2010 £m | |
Net interest income | 329 | 296 | 238 |
Non-interest income | 381 | 358 | 300 |
Total operating income | 710 | 654 | 538 |
Administration expenses | (255) | (212) | (210) |
Depreciation, amortisation and impairment | (15) | (11) | (10) |
Total operating expenses excluding provisions and charges | (270) | (223) | (220) |
Impairment losses on loans and advances | (109) | (120) | (103) |
Provisions for other liabilities and charges | (2) | (3) | - |
Total operating provisions and charges | (111) | (123) | (103) |
Profit before tax | 329 | 308 | 215 |
Balances
31 December 2012 £bn | 31 December 2011 £bn | 31 December 2010 £bn | |
Total assets | 35.6 | 38.1 | 37.7 |
Total customer assets | 19.6 | 18.9 | 14.6 |
- of which Corporate SMEs | 10.6 | 9.0 | 6.9 |
Risk-weighted assets | 24.8 | 22.9 | 19.4 |
Customer deposits | 12.8 | 12.1 | 10.5 |
Corporate Banking profit before tax
2012 compared to 2011
Profit before tax increased by £21m to £329m in 2012 (2011: £308m). By income statement line, the movements were:
> | Net interest income increased by £33m to £329m in 2012 (2011: £296m) as a result of growth in customer loans, with much of this growth generated through the network of 35 regional Corporate Business Centres which serve our SME clients. SME lending balances increased by 18% compared to 31 December 2011. Interest margins on loans continued to improve as market pricing better reflected incremental higher funding and liquidity costs, even though the launch of the Funding for Lending Scheme in the last quarter of 2012 reduced funding costs and had a negative impact on asset pricing.
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> | Non-interest income increased by £23m to £381m in 2012 (2011: £358m). Volume growth in both the SME and Large Corporate businesses resulted in increases in income from treasury services, banking and cash transmission services, invoice discounting and asset finance. This was partially offset by lower income in retail structured products and money markets.
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> | Administration expenses increased by £43m to £255m in 2012 (2011: £212m). The increase reflected the continued investment in the growth of both the SME and Large Corporates business. During 2012 we increased our regional Corporate Business Centres by seven and significantly increased our capacity to serve SMEs by recruiting 113 customer-facing staff into our business.
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> | Depreciation and amortisation increased by £4m to £15m in 2012 (2011: £11m) due to the continued investment in the IT systems to support growth.
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> | Impairment losses on loans and advances decreased by £11m to £109m in 2012 (2011: £120m), due to lower losses experienced in the commercial real estate portfolio as transactions that originated at the peak of the market have begun to work their way out of the book. This was partially offset by ongoing stresses within the commercial mortgage portfolio especially care home and leisure sectors where the prolonged weak economic conditions are proving challenging for operators with a consequent impact on refinancing options and asset values.
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> | Provisions for other liabilities and charges of £2m remained at a very low level in 2012 (2011: £3m).
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2011 compared to 2010
Profit before tax increased by £93m to £308m in 2011 (2010: £215m). By income statement line, the movements were:
> | Net interest income increased by £58m to £296m in 2011 (2010: £238m). Net interest income increased as a result of growth in customer loans and deposits, with much of this growth generated through our network of 28 Corporate Business Centres which serve SME clients (SME lending balances increased by 31% and total deposit balances increased by 16% compared to 31 December 2010). Interest margins on loans continued to improve as market pricing better reflected incremental higher funding and liquidity costs.
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> | Non-interest income increased by £58m to £358m in 2011 (2010: £300m), generated by growing the loan markets and SME business, supported by the short-term markets business and interest rate related sales. In addition, underlying volume growth in core businesses, particularly new business activity in relation to SMEs, resulted in increased income from the sale of ancillary products such as treasury services, banking and cash transmission services, invoice discounting and asset finance.
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> | Administrative expenses increased by £2m to £212m in 2011 (2010: £210m). The increase reflected investment focused on extending the Corporate Business Centre network and product capability for customers, partially offset by operating cost savings.
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> | Depreciation and amortisation expenses were broadly flat at £11m in 2011 (2010: £10m).
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> | Impairment losses on loans and advances increased by £17m to £120m in 2011 (2010: £103m). The increase was primarily a result of increased stress in the pre-2008 commercial mortgage portfolio particularly within the care home and leisure industry sectors. Restructuring options generally became more difficult against a backdrop of weakening markets and reducing commercial property prices, giving rise to higher losses. Commercial Real Estate exposures written before 2008 remained a contributory factor but on a slightly reduced level.
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> | Provisions for other liabilities and charges of £3m remained at a very low level in 2011 (2010: £nil). |
Corporate Banking balances
2012 compared to 2011
> | Total assets comprise customer assets and assets relating to short-term markets activities including liquid assets, repos and derivatives. Total assets decreased by 7% to £35.6bn in 2012 (2011: £38.1bn) with an increase in customer assets (described below) more than offset by lower balances within our short-term markets business reflecting weaker markets.
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> | Customer assets increased by 4% to £19.6bn in 2012 (2011: £18.9bn) driven by a strong performance via our 35 regional Corporate Business Centres and a broader product offering. We continued to build our growing Corporate SME franchise, with lending to this group totalling £10.6bn, an increase of 18% compared to 31 December 2011. This was largely offset by the early repayment of a significant Large Corporate loan in 2012.
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> | Risk-weighted assets increased by 8% to £24.8bn in 2012 (2011: £22.9bn) due to higher lending to customers described above and includes undrawn facilities not on the balance sheet.
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> | Customer deposits increased by 6% to £12.8bn in 2012 (2011: £12.1bn) with strong inflows in the second half of the year recovering significant outflows from the first half, following ratings agency downgrades and eurozone economic uncertainty. This net increase provided confidence in the resilience of the deposit customer base. We continued to focus on maintaining strong relationships with our core clients. |
2011 compared to 2010
> | Total assets comprise customer assets and assets relating to short-term markets activities including liquid assets, repos and derivatives. Total assets increased by 1% to £38.1bn (2010: £37.7bn) driven by the increase in customer assets described below, largely offset by reduced repo activity in the short-term markets business.
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> | Customer assets increased by 29% to £18.9bn in 2011 (2010: £14.6bn) driven by a strong performance via the 28 Corporate Business Centres and a broader product offering. We continued to build our growing SME franchise, with lending to this group increasing by 31% to £9.0bn (2010: £6.9bn).
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> | Risk-weighted assets increased by 18% to £22.9bn in 2011 (2010: £19.4bn) reflecting the asset growth described above.
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> | Customer deposits increased by 16% to £12.1bn in 2011 (2010: £10.5bn), despite increased competition in the market, with net inflows achieved while increasing our proportion of deposits from SME customers. |
MARKETS
Markets offers risk management and other services to financial institutions, as well as other Santander UK divisions. Its main product areas are fixed income and foreign exchange, equity, capital markets and institutional sales.
Summarised income statement
Year ended 31 December 2012 £m | Year ended 31 December 2011 £m | Year ended 31 December 2010 £m | |
Net interest expense | (6) | (3) | - |
Non-interest income | 184 | 162 | 221 |
Total operating income | 178 | 159 | 221 |
Administration expenses | (98) | (109) | (74) |
Depreciation, amortisation and impairment | (2) | (2) | (2) |
Total operating expenses excluding provisions and charges | (100) | (111) | (76) |
Provision for other liabilities and charges | (2) | (3) | - |
Total operating provisions and charges | (2) | (3) | - |
Profit before tax | 76 | 45 | 145 |
Balances
31 December 2012 £bn | 31 December 2011 £bn | 31 December 2010 £bn | |
Total assets | 28.2 | 28.7 | 22.1 |
Risk-weighted assets | 4.9 | 3.9 | 4.4 |
Markets profit before tax
2012 compared to 2011
Profit before tax increased by £31m to £76m in 2012 (2011: £45m). By income statement line, the movements were:
> | Net interest expense increased by £3m to £6m in 2012 (2011: £3m) primarily due to a small increase in funding costs.
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> | Non-interest income increased by £22m to £184m in 2012 (2011: £162m), largely due to a solid performance in Market Making businesses. There was a much improved performance from the fixed income and equity businesses which was partly offset by lower market volumes principally affecting the financial institutions businesses.
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> | Administration expenses decreased by £11m to £98m in 2012 (2011: £109m). The decrease was largely due to lower staff remuneration costs. |
> | Depreciation and amortisation was unchanged at £2m in 2012.
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> | Provisions for other liabilities and charges remained at a very low level at £2m in 2012 (2011: £3m). |
2011 compared to 2010
Profit before tax decreased by £100m to £45m in 2011 (2010: £145m). By income statement line, the movements were:
> | Net interest expense increased by £3m to £3m in 2011 (2010: £nil) due to increased funding costs reflecting the higher cost of new wholesale medium-term funding and holding higher liquid asset balances.
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> | Non-interest income decreased by £59m to £162m in 2011 (2010: £221m), largely due to reduced results in the market making desks driven by weak trading activities. A weaker trading environment reduced the results of the Rates derivatives and Equity business due to reduced volumes (linked to the sale of retail structured products through the branch network). This was partially offset by growth with institutional clients.
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> | Administration expenses increased by £35m to £109m in 2011 (2010: £74m), reflecting ongoing investment in growth initiatives relating to new products, markets and customer segments. There was a 42% headcount increase across the customer transaction businesses compared to 31 December 2010.
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> | Depreciation and amortisation was unchanged at £2m in 2011.
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> | Provisions for other liabilities and charges of £3m remained at a very low level in 2011 (2010: £nil). |
Markets balances
2012 compared to 2011
> | Total assets decreased by 2% to £28.2bn in 2012 (2011: £28.7bn), primarily reflecting a decrease in fair values of interest rate derivatives as a result of upward shifts in yield curves.
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> | Risk-weighted assets increased by 31% to £4.9bn in 2012 (2011: £3.8bn) due to higher levels of trading activity increasing the stressed VaR combined with the enhancement of dataset inputs to the VaR model. |
2011 compared to 2010
> | Total assets increased by 30% to £28.7bn in 2011 (2010: £22.1bn), primarily reflecting an increase in the fair values of interest rate derivatives due to a flattening of the yield curve.
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> | Risk-weighted assets decreased by 11% to £3.8bn in 2011 (2010: £4.2bn) due to lower levels of trading activity decreasing the VaR, partially offset by the introduction of stressed VaR in 2011. |
CORPORATE CENTRE
Corporate Centre (formerly known as Group Infrastructure), includes Financial Management & Investor Relations ('FMIR', formerly known as Asset and Liability Management) and the non-core corporate and legacy portfolios. FMIR is responsible for managing capital and funding, balance sheet composition, structural market risk and strategic liquidity risk for the rest of the Santander UK group. The non-core corporate and legacy portfolios include aviation, shipping, infrastructure, commercial mortgages, social housing loans and structured credit assets, all of which are being run down and/or managed for value.
Summarised income statement
Year ended 31 December 2012 £m | Year ended 31 December 2011 £m | Year ended 31 December 2010 £m | |
Net interest (expense)/income | (263) | 345 | 808 |
Non-interest income | 701 | 59 | 80 |
Total operating income | 438 | 404 | 888 |
Administration expenses | (19) | (59) | (45) |
Depreciation, amortisation and impairment | (43) | (226) | (98) |
Total operating expenses excluding provisions and charges | (62) | (285) | (143) |
Impairment losses on loans and advances | (460) | (100) | (58) |
Provision for other liabilities and charges | (430) | (911) | (129) |
Total operating provisions and charges | (890) | (1,011) | (187) |
(Loss)/profit before tax | (514) | (892) | 558 |
Balances
31 December 2012 £bn | 31 December 2011 £bn | 31 December 2010 £bn | |
Total assets | 59.6 | 50.4 | 62.4 |
Core liquid assets | 37.6 | 28.4 | 39.5 |
Total customer assets | 11.0 | 11.9 | 12.0 |
Risk-weighted assets | 8.0 | 11.1 | 12.1 |
Customer deposits | 8.6 | 15.7 | 16.6 |
Non-core assets
31 December 2012 £bn | 31 December 2011 £bn | 31 December 2010 £bn | |
Social housing | 7.5 | 7.5 | 6.8 |
Commercial mortgages | 1.4 | 1.7 | 1.6 |
Shipping | 0.7 | 0.9 | 1.2 |
Aviation | 0.6 | 0.8 | 0.9 |
Other | 0.8 | 1.0 | 1.5 |
Non-core customer assets | 11.0 | 11.9 | 12.0 |
Treasury asset portfolio | 1.9 | 2.6 | 5.2 |
Total non-core assets | 12.9 | 14.5 | 17.2 |
Corporate Centre profit/(loss) before tax
2012 compared to 2011
Loss before tax increased by £378m to £(514)m in 2012 (2011: £(892)m). By income statement line, the movements were:
> | Net interest income decreased by £608m to an expense of £(263)m in 2012 (2011: £345m). The key drivers of the decrease were sustained lower interest rates which reduced income earned on the structural hedges put in place in 2008-2009 and now maturing in a much lower, static environment and the increased cost of term funding both via higher issuance volumes and higher costs. The latter was partially offset by the allocation of funding and liquidity costs to the other business units in line with their funding and liquidity requirements.
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> | Non-interest income increased by £642m to £701m in 2012 (2011: £59m), principally due to the gain earned on the repurchase of certain debt capital instruments as part of a capital management exercise in July 2012. The net impact of the purchase and crystallisation of mark-to-market positions on associated derivatives was a gain of £705m. This increase was partially offset by a decrease of £63m that was principally due to increased repo costs relating to the management of the portfolio of liquid assets, lower non-interest income reflecting reduced assets in the non-core and legacy portfolios in run-off.
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> | Administration expenses decreased by £40m to £19m in 2012 (2011: £59m) due to 2011 including technology costs relating to regulatory projects and the delivery of efficiency savings.
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> | Depreciation and amortisation decreased by £183m to £43m in 2012 (2011: £226m), due to the write-off of certain intangible assets in December 2011 and lower operating lease depreciation resulting from lower balances in the legacy portfolio in run-off following the continued deleveraging process.
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> | Impairment losses on loans and advances increased by £360m to £460m in 2012 (2011: £100m). The increase was mainly due to the £335m provision made following the review and full re-assessment of the assets held in the non-core corporate and legacy portfolio in run-off. The provision relates to assets acquired from Alliance & Leicester plc (especially the shipping and property portfolios) as well as certain assets taken on as part of the old Abbey Commercial Mortgages book. The provision raised reflects the increased losses experienced in these portfolios. The remaining £25m increase reflects provisions raised in the first half of 2012 relating to the non-core portfolio.
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> | Provisions for other liabilities and charges reduced by £481m to £430m in 2012 (2011 £911m). In 2012, provisions for other liabilities and charges included a net provision for conduct remediation of £232m, relating to retail products and to interest rate derivatives sold to corporate customers. In addition, there was a £55m write off of costs arising from the termination of the acquisition of the RBS businesses. In 2011, Santander UK made a customer remediation provision relating principally to PPI of £751m. No additional provision relating to PPI was required in 2012. The UK Bank Levy and FSCS fees were £58m lower than 2011, largely reflecting the impact of ongoing deleveraging on the balance sheet. This was partially offset by restructuring costs of £45m incurred in 2012. |
2011 compared to 2010
(Loss)/profit before tax decreased by £1,450m to £(892)m in 2011 (2010: £558m). By income statement line, the movements were:
> | Net interest income decreased by £463m to £345m in 2011 (2010: £808m). The key drivers of the decrease were the increased cost of new term funding (issuances of £25bn in 2011) and the full year effect of higher liquid asset balances (an increase of over 30% in average liquid asset balances in 2011) in response to UK regulatory requirements introduced in June 2010. In addition, sustained lower interest rates reduced net interest income as the structural hedging yield decreased, while the non-core portfolio contributed less in line with lower balances.
This decrease was partially offset by the allocation of funding and liquidity costs to the other business units in line with their funding and liquidity requirements.
|
> | Non-interest income decreased by £21m to £59m in 2011 (2010: £80m), driven by the non-recurrence of the £87m gain in 2010 that arose on the revaluation of Santander UK's original holding in Santander Consumer (UK) plc on the acquisition of the remaining shares by Santander UK, as well as £39m profits on the sale of certain businesses, including James Hay in 2010. This was largely offset by lower losses on disposals of assets in the Treasury asset portfolio and hedge ineffectiveness gains in 2011 compared to losses reported in 2010.
|
> | Administration expenses increased by £14m to £59m (2010: £45m), driven by increased project-related technology costs.
|
> | Depreciation and amortisation increased by £128m to £226m in 2011 (2010: £98m). The increase 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. The increase was partially offset by lower operating lease depreciation due to lower balances in legacy portfolios in run-off following continued de-leveraging process.
|
> | Impairment losses on loans and advances increased by £42m to £100m in 2011 (2010: £58m). The increase was due to increased charges as a result of increased stress in the non-core portfolios in run-off of shipping, structured finance and real estate, as well as other legacy commercial real estate exposures written before 2008, particularly within the care home and leisure industry sectors. Restructuring options generally became more difficult against a backdrop of weakening markets and reducing commercial property prices, giving rise to higher losses.
|
> | Provisions for other liabilities and charges increased by £782m to £911m in 2011 (2010: £129m), primarily reflecting a £751m charge for conduct remediation principally in relation to payment protection insurance. The increase also reflected the introduction of the UK Bank Levy and the inclusion here of the FSCS fees in 2011. |
Corporate Centre balances
2012 compared to 2011
> | Total assets increased by 18% to £59.6bn (2011: £50.4bn) largely driven by increases of £2.9bn of cash at central banks, £5.1bn of new government securities held as available for sale and £1.8bn of derivatives. This was partially offset by the decrease in customer assets described below. Core liquid assets increased by 32% to £37.6bn (2011: £28.4bn), driven primarily by a reduction in the customer funding gap (customer liabilities less customer assets) as a result of deleveraging and increased debt issuance.
|
> | Customer assets decreased by 8% to £11.0bn (2011: £11.9bn) due to the run down of the non-core portfolios.
|
> | Risk-weighted assets decreased by 28% to £8.0bn (2011: £11.1bn) due to the reduction in customer assets combined with the continued run down of the Treasury asset portfolio.
|
> | Customer deposits decreased by 45% to £8.6bn (2011: £15.7bn), as we have reduced reliance on rate sensitive deposits and achieved a better mix of wholesale funding. |
2011 compared to 2010
> | Total assets decreased by 19% to £50.4bn in 2011 (2010: £62.4bn) largely driven by decreases of £2.6bn in the Treasury asset portfolio acquired as part of Alliance & Leicester plc, reduction in collateral balances as well as the slight decrease in customer assets described below.
Core liquid assets decreased by 28% to £28.4bn in 2011 (2010: £39.5bn), primarily due to a reduction in short term funding against which core liquid assets need to be held.
|
> | Customer assets reduced slightly to £11.9bn in 2011 (2010: £12.0bn) due to the run down of the non-core portfolios.
|
> | Risk-weighted assets decreased by 8% to £11.1bn in 2011 (2010: £12.1bn) due to the continued run down of the Treasury asset portfolio.
|
> | Customer deposits decreased by 6% to £15.7bn in 2011 (2010: £16.6bn), due to reduced reliance on funding from short term wholesale markets. |
Business and Financial Review
Balance Sheet Review
This Balance Sheet Review describes Santander UK's significant assets and liabilities and its strategy and reasons for entering into such transactions. 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. The Balance Sheet Review is divided into the following sections:
INDEX
Page | ||
Summarised consolidated balance sheet ………………………………………………………………………………… | 37 | |
In the remaining sections of the Balance Sheet Review, the principal assets and liabilities are summarised by their nature, rather than by their classification in the Consolidated Balance Sheet. | ||
Reconciliation to classifications in the Consolidated Balance Sheet………………………………………………… | 41 | |
Securities: ……………………………………………………………………………………………………………………… | 42 | |
> | Analysis by type of issuer ………………………………………………………………………………………. | 42 |
> | Significant exposures …………………………………………………………………………………………… | 43 |
Loans and advances to banks: | ||
> | Geographical analysis …………………………………………………………………………………………... | 43 |
> | Maturity analysis ………………………………………………………………………………………………... | 44 |
Loans and advances to customers: ………………………………………………………………………..……………… | 44 | |
> | Geographical analysis …………………………………………………………………………………………... | 44 |
> | Maturity analysis ………………………………………………………………………………………………... | 45 |
> | Impairment loss allowances on loans and advances to customers ………………………………………….. | 45 |
> | Risk elements in the loan portfolio…………………………………………………………………………….. | 46 |
Derivative assets and liabilities ………………………………………………………………………..………………….. | 48 | |
Tangible fixed assets………………………………………………………………………..…………………………..…… | 48 | |
Deposits by banks ………………………………………………………………………..…………………………..……… | 48 | |
Deposits by customers ………………………………………………………………………..…………………………..… | 49 | |
Short-term borrowings ………………………………………………………………………..……………………………. | 50 | |
Debt securities in issue ………………………………………………………………………..……………………………. | 51 | |
Retirement benefit assets and obligations ………………………………………………………..…………………….. | 51 | |
Contractual obligations ………………………………………………………………………..…………………………… | 52 | |
Off-balance sheet arrangements ………………………………………………………………………..………………… | 52 | |
Capital management and resources ………………………………………………………………..…………………….. | 53 | |
Liquidity and Funding: ………………………………………………………………………..…………………………..… | 57 | |
> | Sources of funding and liquidity…………………………………………………..………………………... | 57 |
> | UK government schemes……………….……………………………………..…………………………..… | 57 |
> | Uses of funding and liquidity ……………….…………………………………..…………………………..… | 58 |
> | Cash flows ………………………………………………………………………..…………………………..… | 58 |
Interest rate sensitivity ………………………………………………………………………..……………………………. | 60 | |
Average balance sheet...………………………………………………………………………..…………………………… | 61 | |
SUMMARISED CONSOLIDATED BALANCE SHEET
| 2012 £m | 2011 £m | 2010 £m |
| Assets | |||
Cash and balances at central banks | 29,282 | 25,980 | 26,502 |
Trading assets | 22,498 | 21,891 | 35,461 |
Derivative financial instruments | 30,146 | 30,780 | 24,377 |
Financial assets designated at fair value | 3,811 | 5,005 | 6,777 |
Loans and advances to banks | 2,438 | 4,487 | 3,852 |
Loans and advances to customers | 191,907 | 201,069 | 195,132 |
Available for sale securities | 5,483 | 46 | 175 |
Loans and receivables securities | 1,259 | 1,771 | 3,610 |
Macro hedge of interest rate risk | 1,222 | 1,221 | 1,091 |
Property, plant and equipment | 1,541 | 1,596 | 1,705 |
Retirement benefit assets | 254 | 241 | - |
Tax, intangibles and other assets | 3,203 | 3,487 | 4,178 |
Total assets | 293,044 | 297,574 | 302,860 |
Liabilities | |||
Deposits by banks | 9,935 | 11,626 | 7,784 |
Deposits by customers | 149,037 | 148,342 | 152,643 |
Derivative financial instruments | 28,861 | 29,180 | 22,405 |
Trading liabilities | 21,109 | 25,745 | 42,827 |
Financial liabilities designated at fair value | 4,002 | 6,837 | 3,687 |
Debt securities in issue | 59,621 | 52,651 | 51,783 |
Subordinated liabilities | 3,781 | 6,499 | 6,372 |
Retirement benefit obligations | 305 | 216 | 173 |
Tax, other liabilities and provisions | 3,444 | 3,812 | 2,912 |
Total liabilities | 280,095 | 284,908 | 290,586 |
Equity | |||
Total shareholders' equity | 12,949 | 12,666 | 12,274 |
Total equity | 12,949 | 12,666 | 12,274 |
Total liabilities and equity | 293,044 | 297,574 | 302,860 |
A more detailed consolidated balance sheet is contained in the Consolidated Financial Statements.
31 December 2012 compared to 31 December 2011
Assets
Cash and balances at central banks
Cash and balances held at central banks increased by 13% to £29,282m at 31 December 2012 (2011: £25,980m), principally reflecting an increase in Santander UK's holding of liquid assets.
Trading assets
Trading assets increased by 3% to £22,498m at 31 December 2012 (2011: £21,891m). The increase is attributable to higher activity relating to securities purchased under resale agreements to both banks and customers offsetting lower debt security positions as new liquid assets are held as available-for-sale.
Derivative assets
Derivative assets were relatively stable at £30,146m at 31 December 2012 (2011: £30,780m).
Financial assets designated at fair value through profit and loss
Financial assets designated at fair value through profit and loss decreased by 24% to £3,811m at 31 December 2012 (2011: £5,005m). The decrease is primarily attributable to the maturity of loans to UK Social Housing associations and new loans no longer being designated at fair value in accordance with Santander UK's policy.
Loans and advances to banks
Loans and advances to banks decreased by 46% to £2,438m at 31 December 2012 (2011: £4,487m). The decrease was due to lower 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 decreased by 5% to £191,907m (2011: £201,069m) principally due to managed reductions across the retail, non-core corporate and legacy portfolios. These reductions were partially offset by increases in SME lending.
Available for sale securities
Available for sale securities increased to £5,483m at 31 December 2012 (2011: £46m), reflecting the acquisition of debt securities as part of its liquidity management activities.
Loans and receivable securities
Loans and receivable securities decreased by 29% to £1,259m at 31 December 2012 (2011: £1,771m). The decrease principally reflects the continuing run-down of the Treasury asset portfolio.
Macro hedge of interest rate risk
The macro (or portfolio) hedge of £1,222m at 31 December 2012, was broadly unchanged from the prior year (2011: £1,221m).
Property, plant and equipment
Property, plant and equipment decreased by 3% to £1,541m at 31 December 2012 (2011: £1,596m). The decrease was attributable to the depreciation charge for the year, partially offset by additions during the year.
Retirement benefit assets
Retirement benefit assets increased to £254m at 31 December 2012 (2011: £241m). For Santander UK's defined benefit pension schemes which had surpluses, the key drivers of the increase were contributions by Santander UK 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 8% to £3,203m at 31 December 2012 (2011: £3,487m). The decrease was primarily driven by a decrease in tax assets due to the realisation of deferred tax assets and a decrease in other assets partially offset by an increase in capitalised software development costs.
Liabilities
Deposits by banks
Deposits by banks decreased by 15% to £9,935m at 31 December 2012 (2011: £11,626m). The decrease was driven by lower repurchase agreement activity with Banco Santander, S.A. as disclosed in Note 29 to the Consolidated Financial Statements.
Deposits by customers
Deposits by customers increased to £149,037m at 31 December 2012 (2011: £148,342m). The increase reflected strong retail deposit inflows as a result of the successful cross tax year ISA campaign and 1|2|3 Current Account.
Derivatives
Derivative liabilities were relatively stable at £28,861m at 31 December 2012 (2011: £29,180m).
Trading liabilities
Trading liabilities decreased by 18% to £21,109m at 31 December 2012 (2011: £25,745m). The decrease was attributable to lower activity relating to securities sold under resale agreements to both banks and customers and lower short-term deposits.
Financial liabilities designated at fair value
Financial liabilities designated at fair value decreased to £4,002m at 31 December 2012 (2011: £6,837m). The decrease reflected new issuances in the US$20bn Medium Term Note Programme being accounted for at amortised cost.
Debt securities in issue
Debt securities in issue increased by 13% to £59,621m at 31 December 2012 (2011: £52,651m). The increase reflected Santander UK's strategy of increasing the level of medium-term funding through the issuance of debt in the Fosse securitisation and Covered Bond programme. These increases were partially offset by decreases in short term funding in the US$20bn Commercial Paper Programme. In addition, there were further maturities of debt outstanding under the US$40bn EMTN programme.
Subordinated liabilities
Subordinated liabilities decreased by 42% to £3,781m at 31 December 2012 (2011: £6,499m). The decrease was attributable to the capital management exercise undertaken during the year.
Retirement benefit obligations
Retirement benefit obligations increased by 41% to £305m at 31 December 2012 (2011: £216m). For Santander UK'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, partially offset by Santander UK contributions during the year and some improvements in asset values.
Tax, other liabilities and provisions
Tax, other liabilities and provisions decreased by 10% to £3,444m at 31 December 2012 (2011: £3,812m). The decrease principally reflected the decrease in tax liabilities due to the settlement of prior year tax liabilities.
Equity
Total shareholders equity, including non-controlling interests, increased by 2% to £12,949m at 31 December 2012 (2011: £12,666m). The increase was principally attributable to the retained profit for the year of £939m, partially offset by dividends declared of £508m.
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 Santander UK's liquidity management activity, including the maturity of approximately half of Santander UK'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 Santander UK's 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 Santander UK'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 equipment decreased 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 Santander UK'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 Santander UK'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 Santander UK'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 13% to £59,621m (2010: £52,651m). The increase reflected Santander UK'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 decreased by 72% to £3,781m (2010: £6,499m). 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 Santander UK'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 Santander UK 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.
RECONCILIATION TO CLASSIFICATIONS IN THE CONSOLIDATED BALANCE SHEET
The classifications of assets and liabilities in Santander UK's consolidated balance sheet, including the note reference, and in the balance sheet review may be reconciled as follows:
31 December 2012 | Balance sheet review section | ||||||||
Balance sheet line item and note | Note | Loans and advances to banks | Loans and advances to customers | Securities | Derivatives | Tangible fixed assets | Retirement benefit assets | Other | Balance sheet total |
£m | £m | £m | £m | £m | £m | £m | £m | ||
Assets | |||||||||
Cash and balances at central banks | 12 | - | - | - | - | - | - | 29,282 | 29,282 |
Trading assets | 14 | 9,988 | 7,552 | 4,958 | - | - | - | - | 22,498 |
Derivative financial instruments | 15 | - | - | - | 30,146 | - | - | - | 30,146 |
Financial assets designated at fair value | 16 | - | 3,248 | 563 | - | - | - | - | 3,811 |
Loans and advances to banks | 17 | 2,438 | - | - | - | - | - | - | 2,438 |
Loans and advances to customers | 18 | - | 191,907 | - | - | - | - | - | 191,907 |
Available for sale securities | 22 | - | - | 5,483 | - | - | - | - | 5,483 |
Loans and receivables securities | 23 | 490 | 769 | - | - | - | - | - | 1,259 |
Macro hedge of interest rate risk | - | - | - | - | - | - | 1,222 | 1,222 | |
Property, plant and equipment | 26 | - | - | - | - | 1,541 | - | - | 1,541 |
Retirement benefit assets | 37 | - | - | - | - | - | 254 | - | 254 |
Tax, intangibles and other assets | - | - | - | - | - | - | 3,203 | 3,203 | |
Total assets | 12,916 | 203,476 | 11,004 | 30,146 | 1,541 | 254 | 33,707 | 293,044 | |
Deposits by banks | Deposits by customers | Debt securities in issue | Derivatives | Retirement benefit obligations | Other | Balance sheet total | |||
£m | £m | £m | £m | £m | £m | £m | |||
Liabilities | |||||||||
Deposits by banks | 29 | 9,935 | - | - | - | - | - | 9,935 | |
Deposits by customers | 30 | - | 149,037 | - | - | - | - | 149,037 | |
Derivative financial instruments | 15 | - | - | - | 28,861 | - | - | 28,861 | |
Trading liabilities | 31 | 9,742 | 7,248 | 4,119 | - | - | - | 21,109 | |
Financial liabilities designated at fair value | 32 | - | - | 4,002 | - | - | - | 4,002 | |
Debt securities in issue | 33 | - | - | 59,621 | - | - | - | 59,621 | |
Subordinated liabilities | 34 | - | - | 3,781 | - | - | - | 3,781 | |
Retirement benefit obligations | 37 | - | - | - | - | 305 | - | 305 | |
Tax, other liabilities and provisions | - | - | - | - | - | 3,444 | 3,444 | ||
Total liabilities | 19,677 | 156,285 | 71,523 | 28,861 | 305 | 3,444 | 280,095 | ||
31 December 2011 | Balance sheet review section |
| |||||||||||
Balance sheet line item and note | Note | Loans and advances to banks | Loans and advances to customers | Securities | Derivatives | Tangible fixed assets | Retirement benefit assets | Other | Balance sheet total | ||||
£m | £m | £m | £m | £m | £m | £m | £m | ||||||
Assets | |||||||||||||
Cash and balances at central banks | 12 | - | - | - | - | - | - | 25,980 | 25,980 | ||||
Trading assets | 14 | 6,144 | 6,687 | 9,060 | - | - | - | - | 21,891 | ||||
Derivative financial instruments | 15 | - | - | - | 30,780 | - | - | - | 30,780 | ||||
Financial assets designated at fair value | 16 | - | 4,376 | 629 | - | - | - | - | 5,005 | ||||
Loans and advances to banks | 17 | 4,487 | - | - | - | - | - | - | 4,487 | ||||
Loans and advances to customers | 18 | - | 201,069 | - | - | - | - | - | 201,069 | ||||
Available for sale securities | 22 | - | - | 46 | - | - | - | - | 46 | ||||
Loans and receivables securities | 23 | 957 | 814 | - | - | - | - | - | 1,771 | ||||
Macro hedge of interest rate risk | - | - | - | - | - | - | 1,221 | 1,221 | |||||
Property, plant and equipment | 26 | - | - | - | - | 1,596 | - | - | 1,596 | ||||
Retirement benefit assets | 37 | - | - | - | - | - | 241 | - | 241 | ||||
Tax, intangibles and other assets | - | - | - | - | - | - | 3,487 | 3,487 | |||||
Total assets | 11,588 | 212,946 | 9,735 | 30,780 | 1,596 | 241 | 30,688 | 297,574 | |||||
Deposits by banks | Deposits by customers | Debt securities in issue | Derivatives | Retirement benefit obligations | Other | Balance sheet total | |||||||
£m | £m | £m | £m | £m | £m | £m | |||||||
Liabilities | |||||||||||||
Deposits by banks | 29 | 11,626 | - | - | - | - | - | 11,626 | |||||
Deposits by customers | 30 | - | 148,342 | - | - | - | - | 148,342 | |||||
Derivative financial instruments | 15 | - | - | - | 29,180 | - | - | 29,180 | |||||
Trading liabilities | 31 | 14,508 | 10,482 | 755 | - | - | - | 25,745 | |||||
Financial liabilities designated at fair value | 32 | - | - | 6,837 | - | - | - | 6,837 | |||||
Debt securities in issue | 33 | - | - | 52,651 | - | - | - | 52,651 | |||||
Subordinated liabilities | 34 | - | - | 6,499 | - | - | - | 6,499 | |||||
Retirement benefit obligations | 37 | - | - | - | - | 216 | - | 216 | |||||
Tax, other liabilities and provisions | - | - | - | - | - | 3,812 | 3,812 | ||||||
Total liabilities | 26,134 | 158,824 | 66,742 | 29,180 | 216 | 3,812 | 284,908 | ||||||
SECURITIES
Santander UK's holdings of securities only represent a small proportion of its total assets. Santander UK holds securities principally in its trading portfolio or classified as available-for-sale. These securities primarily consist of Government and Government-guaranteed securities held for liquidity purposes.
Securities analysis by type of issuer
The following table sets out the book and market values of securities at 31 December 2012, 2011 and 2010. For further information, see the Notes to the Consolidated Financial Statements.
2012 £m | 2011 £m | 2010 £m | |
Trading portfolio | |||
Debt securities: | |||
UK Government | 1,817 | 1,078 | 3,120 |
US Treasury and other US Government agencies and corporations | 31 | 65 | 130 |
Other OECD governments | 2,069 | 1,800 | 3,380 |
Bank and building society: | |||
- Certificates of deposit - Other | 13 | - | 290 |
Other issuers: | |||
- Fixed and floating rate notes - Government guaranteed | 426 | 5,754 | 10,586 |
- Fixed and floating rate notes - Other | 138 | 14 | 315 |
Ordinary shares and similar securities | 464 | 349 | 700 |
4,958 | 9,060 | 18,521 | |
Available for sale securities | |||
Debt securities: | |||
UK Government | 3,844 | - | 125 |
US Treasury and other US Government agencies and corporations | 363 | - | - |
Other OECD governments - Germany and Japan | 906 | - | - |
Bank and building society: | |||
- Certificates of deposit and bonds | 346 | - | - |
Ordinary shares and similar securities | 24 | 46 | 50 |
5,483 | 46 | 175 | |
Financial assets designated at fair value through profit and loss | |||
Debt securities: | |||
Other issuers: | |||
- Mortgage-backed securities | 250 | 279 | 859 |
- Other asset-backed securities | 78 | 100 | 187 |
- Other securities | 235 | 250 | 252 |
563 | 629 | 1,298 | |
Total | 11,004 | 9,735 | 19,994 |
UK Government securities
UK Government securities represent Treasury Bills and UK Government guaranteed issues by other UK banks. These securities are held for trading and liquidity purposes. For further information, see "Country Risk Exposure" in the Risk Management Report.
US Treasury and other US Government agencies and corporations
US Treasury and other US Government agencies' and corporations' securities represent US Treasury Bills, including cash management bills. These securities are held for trading and liquidity purposes. For further information, see "Country Risk Exposure" in the Risk Management Report.
Other OECD governments
Other OECD government securities represent issues by OECD governments other than the US and UK Governments, principally Switzerland, Germany and Japan (2011: principally Switzerland). These securities are held for trading and liquidity management purposes. For further information, see "Country Risk Exposure" in the Risk Management Report.
Bank and building society certificates of deposit and bonds
Bank and building society certificates of deposit are fixed-rate securities with relatively short maturities issued by banks in UK, France, Switzerland and the Netherlands. These are managed within the overall position for the relevant book. These securities are held for trading and liquidity purposes.
Fixed and floating rate notes
Fixed and floating rate notes have regular interest rate profiles and are either managed within the overall position for the relevant book or are hedged into one of the main currencies. Government-guaranteed fixed and floating rate notes almost all relate to the UK Government. These securities are held for trading and yield purposes. For further information on Government-guaranteed fixed and floating rate notes, see "Country Risk Exposure" in the Risk Management Report.
Mortgage-backed securities
This category principally comprises UK residential mortgage-backed securities. These securities are of good quality and contain no sub-prime element. These securities are held as part of the FMIR portfolio. See Note 16 to the Consolidated Financial Statements.
Other asset-backed securities
This category comprises a range of mostly floating-rate asset-backed securities including home equity loans, commercial mortgages, loans to car dealers, lease and credit card debtors and student loans, as well as a small balance of collateralised synthetic obligations. Some credit card debtors incorporate cap features. These securities are held as part of the FMIR portfolio. See Note 16 to the Consolidated Financial Statements.
Other securities
This category comprises a number of structured transactions which are hedged, as appropriate, either on an individual basis or as part of the overall management of the portfolios. See Note 16 to the Consolidated Financial Statements.
Contractual maturities of securities
Contractual maturities for available-for-sale debt securities and contractual maturities of investments held for trading or classified as fair value through profit or loss are set out in Notes 22 and 46 to the Consolidated Financial Statements, respectively.
Significant exposures
The following table sets forth the book value (which equals market value) of securities of individual counterparties where the aggregate amount of those securities exceeded 10% of Santander UK's shareholders' funds at 31 December 2012 as set out in the Consolidated Balance Sheet on page 202. The table also sets forth the classification of the securities in the Consolidated Balance Sheet.
Trading assets | Available-for-sale | Total | |
£m | £m | £m | |
UK Government and UK Government guaranteed | 2,243 | 3,844 | 6,087 |
LOANS AND ADVANCES TO BANKS
Loans and advances to banks include loans to banks and building societies and balances with central banks (excluding those central bank balances which can be withdrawn on demand).
Loans and advances to banks geographical analysis
The geographical analysis of loans and advances presented in the following table is based on the location of the office from which the loans and advances are made, rather than the domicile of the borrower. The balances below include loans and advances to banks that are classified in the balance sheet as trading assets, financial assets designated at fair value, or loans and receivables securities.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
UK | 11,763 | 10,727 | 13,561 | 21,606 | 28,859 |
Non-UK | 1,153 | 861 | 118 | 87 | 3,031 |
12,916 | 11,588 | 13,679 | 21,693 | 31,890 |
Further geographical analysis of loans and advances to banks based on the country of domicile of the borrower rather than the office of lending is contained in "Country Risk Exposure" in the Risk Management Report, including details of balances with other Banco Santander group companies.
Loans and advances to banks maturity analysis
The following table sets forth loans and advances to banks by maturity at 31 December 2012.
On demand £m | In not more than three months £m | In more than three months but not more than one year £m | In more than one year but not more than five years £m | In more than five years but not more than ten years £m | In more than ten years £m | Total £m | |
UK | 3,782 | 5,802 | 822 | 248 | 70 | 1,039 | 11,763 |
Non-UK | 521 | 632 | - | - | - | - | 1,153 |
Total | 4,303 | 6,434 | 822 | 248 | 70 | 1,039 | 12,916 |
Of which: | |||||||
- Fixed interest rate | 937 | 6,108 | 822 | 50 | - | 137 | 8,054 |
- Variable interest rate | 2,733 | 8 | - | 198 | 70 | 902 | 3,911 |
- Non interest-bearing | 633 | 318 | - | - | - | - | 951 |
Total | 4,303 | 6,434 | 822 | 248 | 70 | 1,039 | 12,916 |
LOANS AND ADVANCES TO CUSTOMERS
Santander UK provides lending facilities primarily to personal customers in the form of mortgages secured on residential properties and lending facilities to corporate customers. Purchase and resale agreements represent sale and repurchase activity with professional non-bank customers by the short term markets business.
Loans and advances to customers geographical analysis
The geographical analysis of loans and advances presented in the following table is based on the location of the office from which the loans and advances are made. Further geographical analysis of loans and advances to customers based on the country of domicile of the borrower rather than the office of lending is contained in "Country Risk Exposure" in the Risk Management Report, including details of balances with other Banco Santander group companies.
The balances below are stated before the deduction for impairment loss allowances and include loans and advances to customers that are classified in the balance sheet as trading assets, financial assets designated at fair value, or loans and receivables securities.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
UK | |||||
Advances secured on residential property | 157,304 | 166,841 | 166,065 | 160,457 | 159,168 |
Corporate loans | 26,560 | 26,278 | 21,796 | 18,886 | 13,181 |
Finance leases | 3,061 | 2,944 | 2,653 | 1,602 | 1,792 |
Other secured advances | 3,011 | 3,710 | 3,941 | 4,079 | 4,206 |
Other unsecured advances | 6,826 | 7,545 | 7,734 | 5,249 | 6,745 |
Purchase and resale agreements | 2,512 | 6,150 | 8,641 | 8,827 | 1,310 |
Loans and receivables securities | 769 | 814 | 2,075 | 4,147 | 5,663 |
Amounts due from fellow subsidiaries | 347 | 32 | 57 | 4,457 | 2,652 |
Total UK | 200,390 | 214,314 | 212,962 | 207,704 | 194,717 |
Non-UK | |||||
Advances secured on residential property | 6 | 6 | 8 | 9 | 12 |
Corporate loans | - | - | - | 2 | 103 |
Other secured advances | - | 1 | 1 | 2 | 3 |
Other unsecured advances | 25 | - | - | 1 | 2 |
Purchase and resale agreements | 4,950 | 188 | 18 | - | - |
Total non-UK | 4,981 | 195 | 27 | 14 | 120 |
Total | 205,371 | 214,509 | 212,989 | 207,718 | 194,837 |
Less: impairment loss allowances | (1,895) | (1,563) | (1,655) | (1,299) | (1,001) |
Total, net of impairment loss allowances | 203,476 | 212,946 | 211,334 | 206,419 | 193,836 |
Detailed analysis of the loans and receivables securities included in the table above is set out in Note 23 to the Consolidated Financial Statements. Further analysis of the impairment loss allowance is set out on page 158 of the Risk Management Report.
No single concentration of loans and advances, with the exception of advances secured on residential properties and corporate loans, as disclosed above, accounts for more than 10% of total loans and advances and no individual country, other than the UK accounts for more than 5% of total loans and advances.
Loans and advances to customers maturity analysis
The following table sets forth loans and advances to customers by maturity at 31 December 2012. Overdrafts are included in the "on-demand" category. Loans and advances are included at their contractual maturity; no account is taken of a customer's ability to repay early where it exists.
|
On demand £m | In not more than three months £m | In more than three months but not more than one year £m | In more than one year but not more than five years £m | In more than five years but not more than ten years £m | In more than ten years £m |
Total £m |
UK | |||||||
Advances secured on residential property | - | 1,264 | 3,276 | 18,519 | 22,053 | 112,192 | 157,304 |
Corporate loans | 20 | 3,135 | 1,937 | 11,813 | 2,822 | 6,833 | 26,560 |
Finance leases | - | 315 | 735 | 1,598 | 168 | 245 | 3,061 |
Other secured advances | 403 | 93 | 295 | 423 | 562 | 1,235 | 3,011 |
Other unsecured advances | 890 | 555 | 1,295 | 2,972 | 480 | 634 | 6,826 |
Purchase and resale agreements | 1 | 2,466 | 45 | - | - | - | 2,512 |
Loans and receivables securities | - | - | 1 | 65 | 95 | 608 | 769 |
Amounts due from fellow subsidiaries | - | 347 | - | - | - | - | 347 |
Total UK | 1,314 | 8,175 | 7,584 | 35,390 | 26,180 | 121,747 | 200,390 |
Non-UK | |||||||
Advances secured on residential property | 1 | - | - | 1 | 1 | 3 | 6 |
Other unsecured advances | 24 | - | 1 | - | - | - | 25 |
Purchase and resale agreements | 25 | 4,925 | - | - | - | - | 4,950 |
Total non-UK | 50 | 4,925 | 1 | 1 | 1 | 3 | 4,981 |
Total | 1,364 | 13,100 | 7,585 | 35,391 | 26,181 | 121,750 | 205,371 |
Of which: | |||||||
- Fixed interest rate | 454 | 8,500 | 2,893 | 10,819 | 9,053 | 40,599 | 72,318 |
- Variable interest rate | 910 | 4,600 | 4,692 | 24,572 | 17,128 | 81,151 | 133,053 |
Total | 1,364 | 13,100 | 7,585 | 35,391 | 26,181 | 121,750 | 205,371 |
Of which: | |||||||
- Interest-only advances secured | |||||||
on residential property | 40 | 99 | 611 | 4,647 | 8,946 | 42,900 | 57,243 |
Santander UK's policy is to hedge all fixed-rate loans and advances to customers using derivative instruments, or by matching with other on-balance sheet interest rate exposures.
The balance sheet is managed on a behavioural basis, rather than on the basis of contractual maturity, with many loans being prepaid prior to their legal maturity. This applies in particular to advances secured on residential property.
Impairment loss allowances on loans and advances to customers
Details of Santander UK's impairment loss allowances policy are set out in Note 1 to the Consolidated Financial Statements. An analysis of end-of-year impairment loss allowances on loans and advances to customers, movements in impairment loss allowances, and non-performing loans and advances are set out in the "Loans and Advances" section of the Risk Management Report on page 153 and Note 18 to the Consolidated Financial Statements.
Risk elements in the loan portfolio
The disclosure of credit risk elements in this section reflects US accounting practice and classifications. The purpose of the disclosure is to present within the US disclosure framework those elements of the loan portfolios with a greater risk of loss. The main classifications of credit risk elements presented are:
> | Impaired loans; |
> | Unimpaired loans contractually past due 90 days or more as to interest or principal; |
> | Forbearance; |
> | Troubled debt restructurings; |
> | Potential problem loans and advances; and |
> | Cross border outstandings. |
Impaired loans
Loans are classified as impaired when there is objective evidence that not all contractual cash flows will be received. Under IFRS, separate disclosure is required of loans that are: neither past due nor impaired; past due but not impaired; and impaired. This disclosure may be found in the "Loans and Advances" section of the Risk Management Report.
In accordance with IFRS, Santander UK recognises interest income on assets after they have been written down as a result of an impairment loss. Interest continues to be accrued on all loans and the element of interest that is not anticipated to be recovered is provided for. Interest income recognised on impaired loans is set out in the Consolidated Financial Statements. The income adjustment in respect of interest that is not anticipated to be recovered was £46m (2011: £61m, 2010: £60m).
Unimpaired loans contractually past due 90 days or more as to interest or principal
In the Retail Banking business, loans and advances are classified as non-performing typically when the customer fails to make payments when contractually due for three months or longer. In the Corporate Banking business, loans and advances are classified as non-performing either when payments are three months or more past due or where there are reasonable doubts about full repayment (principal and interest) under the contractual terms.
Details of Santander UK's non-performing loans and advances, including separate disclosure about unimpaired loans contractually past due 90 days or more as to interest or principal, are set out on page 158 in the "Non-performing loans and advances" table in the "Credit Risk" section of the Risk Management Report.
Forbearance
To support customers that encounter difficulties, Santander UK operates forbearance programmes to amend contractual amounts or timings where a customer's financial distress indicates the potential that satisfactory repayment may not be made within the original terms and conditions of the contract. A range of forbearance strategies are employed in order to improve the management of customer relationships, maximise collection opportunities within customers' affordability and, if possible, avoid foreclosure or repossession. Further information can be found on page 80 and in the "Credit Risk - Retail Banking", "Credit Risk - Corporate Banking" and "Credit Risk - Corporate Centre" sections of the Risk Management Report.
Troubled debt restructurings
The US Securities and Exchange Commission requires separate disclosure of any loans whose terms have been modified by the lender because of the borrower's financial difficulties, as a concession that the lender would not otherwise consider. These are classified as troubled debt restructurings ('TDR's). Under IFRS, disclosure is required of loans that would otherwise have been classified as past due or impaired whose terms have been renegotiated. This disclosure may be found on page 74 in the "Credit Risk" section of the Risk Management Report.
Potential problem loans and advances
Credit risk elements also cover potential problem loans. These are loans where information on possible credit problems among borrowers causes management to seriously doubt their ability to comply with the loan repayment terms. There are no potential problem loans other than those discussed above, and as discussed in disclosures by division given in the "Credit Risk" section of the Risk Management Report.
Cross border outstandings
Cross border outstandings, as defined by bank regulatory rules, are amounts payable to Santander UK by residents of foreign countries, regardless of the currency in which the claim is denominated, and local country claims in excess of local country obligations. Cross border outstandings consist mainly of loans and advances to customers and banks, finance lease debtors, interest-bearing investments and other monetary assets.
In addition to credit risk, cross border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual payment obligations of principal and or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. These cross border outstandings are controlled through a well-developed system of country limits, which are reviewed to avoid concentrations of transfer, economic or political risks.
For further analysis of the Santander UK's country risk exposures, including eurozone and peripheral eurozone exposures and redenomination risk, see the "Country Risk Exposure" section in the Risk Management Report on pages 140 to 150.
(i) Cross border outstandings exceeding 1% of total assets
At 31 December 2012, 2011 and 2010, Santander UK had cross border outstandings exceeding 1% of total assets as follows:
31 December 2012 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
US | 0.8 | 15.2 | 0.8 | 16.8 |
Germany | 1.3 | 3.5 | 0.2 | 5.0 |
Switzerland | 0.5 | 2.3 | 0.5 | 3.3 |
31 December 2011 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
US | 7.1 | 11.0 | 1.4 | 19.5 |
Spain | - | 5.5 | 0.1 | 5.6 |
Switzerland | 1.2 | 2.7 | 0.5 | 4.4 |
Germany | 0.1 | 3.2 | 0.2 | 3.5 |
31 December 2010 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
US | 5.2 | 7.8 | 1.6 | 14.6 |
Switzerland | 3.2 | 1.9 | - | 5.1 |
Spain | 0.2 | 3.2 | 0.6 | 4.0 |
(ii) Cross border outstandings between 0.75% and 1% of total assets
At 31 December 2012, 2011 and 2010, Santander UK had cross border outstandings between 0.75% and 1% of total assets as follows:
31 December 2012 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
Spain | - | 2.8 | 0.1 | 2.9 |
France | - | 2.2 | 0.2 | 2.4 |
Denmark | - | 2.3 | - | 2.3 |
31 December 2011 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
France | 0.1 | 2.4 | 0.3 | 2.8 |
31 December 2010 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
Germany | 0.1 | 2.3 | 0.2 | 2.6 |
France | 0.2 | 1.8 | 0.3 | 2.3 |
(iii) Cross border outstandings between 0.5% and 0.75% of total assets
At 31 December 2012, 2011 and 2010, Santander UK had cross border outstandings between 0.5% and 0.75% of total assets as follows:
31 December 2012 | Governments and official institutions £bn | Banks and other financial institutions £bn | Other £bn | Total £bn |
Japan | 1.2 | 0.2 | 0.2 | 1.6 |
31 December 2011
None.
31 December 2010
None.
DERIVATIVE ASSETS AND LIABILITIES
2012 £m | 2011 £m | 2010 £m | ||
Assets | ||||
- held for trading | 28,064 | 27,394 | 21,951 | |
- held for fair value hedging | 2,082 | 3,386 | 2,426 | |
30,146 | 30,780 | 24,377 | ||
Liabilities | ||||
- held for trading | 27,415 | 27,787 | 20,390 | |
- held for fair value hedging | 1,446 | 1,393 | 2,015 | |
28,861 | 29,180 | 22,405 |
Derivatives are held for trading or for risk management purposes. All derivatives are classified as held at fair value through profit or loss. For accounting purposes, Santander UK chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria. The main hedging derivatives are interest rate and cross-currency swaps, which are used to hedge fixed-rate lending and structured savings products and medium-term note issuances, capital issuances and other capital markets funding.
Corporate Banking deals with commercial customers who wish to enter into derivative contracts. Any market risk arising from such transactions is hedged by Markets. Markets is responsible for implementing Santander UK derivative hedging with the external market together with its own trading activities. Further details about market risk are set out in the Risk Management Report.
A summary of Santander UK's derivative activities, the related risks associated with such activities and the types of hedging derivatives used in managing such risks, as well as notional amounts and assets and liabilities analysed by contract type are contained in Note 15 of the Consolidated Financial Statements.
TANGIBLE FIXED ASSETS
2012 £m | 2011 £m | 2010 £m | |
Property, plant and equipment | 1,541 | 1,596 | 1,705 |
Capital expenditure incurred during the year | 230 | 205 | 759 |
Details of capital expenditure contracted but not provided for in respect of tangible fixed assets are set out in Note 26 to the Consolidated Financial Statements. Santander UK had 1,557 property interests at 31 December 2012 (2011: 1,570). The total consisted of 400 freeholds (2011: 401) and 1,157 operating lease interests (2011: 1,169), occupying a total floor space of 513,437 square metres (2011: 558,501 square metres).
The number of property interests is more than the number of individual properties as Santander UK has more than one interest in some properties. The majority of Santander UK's property interests are retail branches. Included in the above total are 161 properties (2011: 31 properties) that were not occupied by Santander UK at 31 December 2012. Of Santander UK's individual properties, 1,070 are located in the UK (2011: 1,241), one in Europe (2011: five) and two in the US (2011: two). There are no material environmental issues associated with the use of the above properties.
At 31 December 2012, Santander UK had 14 principal sites including its headquarters (2011: 14). They are used for its significant business operations, including Manufacturing; Human Resources; Retail Banking; Corporate Banking; Markets; Telephone Sales and Servicing; Complaints handling; Credit Card operations; Debt management; Finance; Compliance; Marketing; and IT operations including Data Centres.
Management believes its existing properties and those under construction, together with those it leases, are adequate and suitable for its business as presently conducted and to meet future business needs. All properties are adequately maintained.
DEPOSITS BY BANKS(1)
The balances below include deposits by banks that are classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
2012 £m | 2011 £m | 2010 £m | |
Year-end balance(1) | 19,677 | 26,134 | 33,522 |
Average balance(2) | 26,714 | 33,628 | 37,626 |
Average interest rate(2) | 1.27% | 0.79% | 0.68% |
(1) The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £340m (2011: £1,045m, 2010: £1,274m).
(2)Calculated using monthly data.
At 31 December 2012, deposits by foreign banks amounted to £12,280m (2011: £7,912m, 2010: £18,306m).
The following tables set forth the average balances of deposits by banks by geography.
Average: year ended 31 December | |||
2012 £m | 2011 £m | 2010 £m | |
UK | 26,592 | 32,553 | 36,087 |
Non-UK | 122 | 1,075 | 1,539 |
26,714 | 33,628 | 37,626 | |
DEPOSITS BY CUSTOMERS
The balances below include deposits by customers that are classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
2012 £m | 2011 £m | 2010 £m | |
Year-end balance | 156,285 | 158,824 | 168,619 |
Average balance(1) | 159,611 | 165,871 | 155,612 |
Average interest rate(1) | 1.93% | 1.68% | 1.59% |
(1) Calculated using monthly data.
The following tables set forth the average balances of deposits by geography and customer type.
Average: year ended 31 December | |||
2012 £m | 2011 £m | 2010 £m | |
UK | |||
Retail demand deposits | 73,832 | 70,887 | 73,367 |
Retail time deposits | 46,256 | 50,581 | 49,780 |
Wholesale deposits | 31,118 | 33,241 | 24,002 |
151,206 | 154,709 | 147,149 | |
| Non-UK | |||
Retail demand deposits | 1,375 | 2,104 | 2,979 |
Retail time deposits | 5,818 | 6,566 | 4,914 |
Wholesale deposits | 1,212 | 2,492 | 570 |
8,405 | 11,162 | 8,463 | |
159,611 | 165,871 | 155,612 | |
Retail demand and time deposits are obtained either through the branch network, cahoot or remotely (such as postal accounts). Retail demand and time deposits are also obtained outside the UK, principally through Abbey National International Limited and Alliance & Leicester International Limited. They are all interest bearing and interest rates are varied from time to time in response to competitive conditions.
Demand deposits
Demand deposits consist of savings and current accounts. Savings products comprise Individual Savings Accounts, instant saver accounts, remote access accounts, such as those serviced by post, and a number of other accounts which allow the customer a limited number of notice-free withdrawals per year depending on the balance remaining in the account. These accounts are treated as demand deposits because the entire account balance may be withdrawn on demand without penalty as one of the notice-free withdrawals.
Time deposits
Time deposits consist of notice accounts, which require customers to give notice of an intention to make a withdrawal, and bond accounts, which have a minimum deposit requirement. In each of these accounts early withdrawal incurs an interest penalty.
Wholesale deposits
Wholesale deposits are those which either are obtained through the money markets or for which interest rates are quoted on request rather than being publicly advertised. These deposits are of fixed maturity and bear interest rates that reflect the inter-bank money market rates.
SHORT-TERM BORROWINGS
Santander UK includes short-term borrowings within deposits by banks, trading liabilities, financial liabilities designated at fair value and debt securities in issue and does not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the US Securities and Exchange Commission as amounts payable for short-term obligations that are US Federal funds purchased and securities sold under repurchase agreements, commercial paper, borrowings from banks, borrowings from factors or other financial institutions and any other short-term borrowings reflected on Santander UK's balance sheet. Santander UK's only significant short-term borrowings are securities sold under repurchase agreements, commercial paper, borrowings from banks, negotiable certificates of deposit, and certain other debt securities in issue. Additional information on short-term borrowings is provided in the table below for each of the years ended 31 December 2012, 2011 and 2010.
2012 £m | 2011 £m | 2010 £m | |
Securities sold under repurchase agreements | |||
- Year-end balance | 24,583 | 17,490 | 32,922 |
- Year-end interest rate | 0.40% | 0.49% | 0.29% |
- Average balance(1) | 30,336 | 30,551 | 28,414 |
- Average interest rate(1) | 0.39% | 0.97% | 0.64% |
- Maximum balance(1) | 37,621 | 36,842 | 32,922 |
Commercial paper | |||
- Year-end balance | 3,697 | 3,500 | 5,331 |
- Year-end interest rate | 0.72% | 0.85% | 0.52% |
- Average balance(1) | 3,742 | 4,787 | 5,434 |
- Average interest rate(1) | 0.98% | 0.97% | 0.46% |
- Maximum balance(1) | 3,921 | 6,908 | 6,703 |
Borrowings from banks (Deposits by banks)(2) | |||
- Year-end balance | 2,372 | 3,141 | 8,202 |
- Year-end interest rate | 0.29% | 0.31% | 0.70% |
- Average balance(1) | 2,923 | 3,368 | 10,038 |
- Average interest rate(1) | 0.31% | 0.29% | 0.51% |
- Maximum balance(1) | 4,606 | 4,177 | 12,211 |
Negotiable certificates of deposit | |||
- Year-end balance | 4,499 | 2,671 | 8,925 |
- Year-end interest rate | 1.97% | 1.38% | 1.31% |
- Average balance(1) | 2,208 | 5,222 | 11,093 |
- Average interest rate(1) | 1.39% | 1.36% | 1.41% |
- Maximum balance(1) | 4,499 | 8,083 | 14,694 |
Other debt securities in issue | |||
- Year-end balance | 2,789 | 3,722 | 3,595 |
- Year-end interest rate | 2.99% | 2.14% | 1.64% |
- Average balance(1) | 5,644 | 5,754 | 6,023 |
- Average interest rate(1) | 2.70% | 1.91% | 1.99% |
- Maximum balance(1) | 7,049 | 7,517 | 7,269 |
(1)Calculated using monthly data.
(2) The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £340m (2011: £1,045m, 2010: £1,274m).
Santander UK issues commercial paper generally in denominations of not less than US$50,000, with maturities of up to 365 days. Commercial paper is issued by Abbey National Treasury Services plc and Abbey National North America LLC.
Certificates of deposit and certain time deposits
The following table sets forth the maturities of Santander UK's certificates of deposit and other large wholesale time deposits from non-bank counterparties in excess of £50,000 (or the non-sterling equivalent of £50,000) at 31 December 2012. A proportion of Santander UK's retail time deposits also exceeds £50,000 at any given date; however, the ease of access and other terms of these accounts means that they may not have been in excess of £50,000 throughout 2012.
Furthermore, the customers may withdraw their funds on demand upon payment of an interest penalty. For these reasons, no maturity analysis is presented for such deposits.
Not more than three months £m | In more than three months but not more than six months £m | In more than six months but not more than one year £m | In more than one year £m | Total £m | |
Certificates of deposit: | |||||
- UK | 2,728 | 12 | 64 | 11 | 2,815 |
- Non-UK | 839 | 815 | 41 | - | 1,695 |
Wholesale time deposits: | |||||
- UK | 1,183 | 252 | 134 | 209 | 1,778 |
4,750 | 1,079 | 239 | 220 | 6,288 |
At 31 December 2012, an additional £12m (2011: £12m) of wholesale deposits were repayable on demand.
DEBT SECURITIES IN ISSUE
Santander UK has issued debt securities in a range of maturities, interest rate structures and currencies, for purposes of meeting liquidity, funding and capital needs.
Note | 2012 £m | 2011 £m | 2010 £m | |
Trading liabilities | 31 | 4,119 | 755 | 1,118 |
Financial liabilities designated at fair value | 32 | 4,002 | 6,837 | 3,687 |
Debt securities in issue | 33 | 59,621 | 52,651 | 51,783 |
Subordinated liabilities | 34 | 3,781 | 6,499 | 6,372 |
71,523 | 66,742 | 62,960 |
Most of the debt securities that Santander UK has issued are classified as "Debt securities in issue" in the balance sheet. The remaining debt securities issued by Santander UK are classified separately in the balance sheet, either because they qualify as "Trading liabilities" or were designated upon initial recognition as "Financial liabilities designated at fair value", or there are key differences in the legal terms of the securities, such as liquidation preferences, or subordination of the rights of holders to the rights of holders of certain other liabilities ('Subordinated liabilities'). Further information is set out in Notes 31 to 34 to the Consolidated Financial Statements.
Santander UK enters into cross-currency derivatives in connection with all funding raised through the issuance of debt securities in currencies other than sterling (principally euro, US dollars and Japanese yen) which swap foreign currency liabilities back into sterling as Santander UK's commercial balance sheet is almost entirely denominated in sterling.
RETIREMENT BENEFIT ASSETS AND OBLIGATIONS
| 2012 £m | 2011 £m | 2010 £m |
Retirement benefit assets | 254 | 241 | - |
Retirement benefit obligations | (305) | (216) | (173) |
Santander UK operates a number of defined contribution and defined benefit pension schemes, and post retirement medical benefit plans. Detailed disclosures of Santander UK's retirement benefit assets and obligations are contained in Note 37 to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The amounts and maturities of contractual obligations in respect of guarantees are described in Note 38 to the Consolidated Financial Statements. Other contractual obligations, including payments of principal and interest where applicable, are set out in the table below. Interest payments are included in the maturity column of the interest payments themselves, and are calculated using current interest rates.
Payments due by period | |||||
Total £m | Less than 1 year £m | 1-3 years £m | 3-5 years £m | Over 5 years £m | |
Deposits by banks (1) (2) | 19,677 | 13,690 | 1,739 | 3,892 | 356 |
Deposits by customers - repos(1) | 1,230 | 1,230 | - | - | - |
Deposits by customers - other(2) | 155,055 | 141,654 | 11,056 | 1,503 | 842 |
Derivative financial instruments | 28,861 | 2,677 | 2,610 | 4,123 | 19,451 |
Debt securities in issue(3) | 67,742 | 14,828 | 10,469 | 6,357 | 36,088 |
Subordinated liabilities | 3,781 | 57 | - | 72 | 3,652 |
Retirement benefit obligations | 3,056 | 223 | 492 | 561 | 1,780 |
Operating lease obligations | 635 | 87 | 157 | 134 | 257 |
Purchase obligations | 466 | 466 | - | - | - |
Total | 280,503 | 174,912 | 26,523 | 16,642 | 62,426 |
(1) Securities sold under repurchase agreements.
(2) Includes deposits by banks and deposits by customers that are classified in the balance sheet as trading liabilities.
(3) Includes debt securities in issue that are classified in the balance sheet as trading liabilities and financial liabilities designated at fair value.
As the above table is based on contractual maturities, no account is taken of call features related to Subordinated liabilities. The repayment terms of the debt securities may be accelerated in line with the covenants contained within the individual loan agreements. Details of deposits by banks and deposits by customers can be found in Notes 29 and 30 to the Consolidated Financial Statements. Santander UK has entered into outsourcing contracts where, in some circumstances, there is no minimum specified spending requirement. In these cases, anticipated spending volumes have been included within purchase obligations.
Under current conditions, Santander UK's working capital is expected to be sufficient for its present requirements and to pursue its planned business strategies.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, Santander UK issues guarantees on behalf of customers. The significant types of guarantees are:
> | Prior to 30 June 2011, it was customary for the UK banks to issue cheque guarantee cards to current account customers holding chequebooks, as historically retailers did not generally accept cheques without such form of guarantee. In order for the guarantee to be effective, the retailer had to see the cheque guarantee card at the time the purchase was made. The issuing bank was liable to honour these cheques even where the customer did not have sufficient funds in his or her account. The issuing bank's guarantee liability was in theory the number of cheques written and deposited with retailers multiplied by the amount guaranteed per cheque, which could be between £50 and £100. In practice most customers only wrote cheques when they had funds in their account to meet the cheque, and cheques were frequently presented without the benefit of the cheque guarantee.
Following years of declining cheque usage, extensive research and reducing acceptance amongst retailers, in 2009 the UK Payments Council agreed to a UK industry-wide withdrawal of the UK Cheque Guarantee Scheme from 30 June 2011. In line with this announcement, we have phased out cheque guarantee cards on replacement cards and card renewals. Customers can continue to use unguaranteed cheques, and cheque books will continue to be available in the usual way.
As a result, Santander UK's guarantee exposure is decreasing as new cards are issued without the guarantee logo, meaning that Santander UK will no longer be liable to honour cheques where the customer does not have sufficient funds in his or her account. On this basis, management have assessed the risk with respect to this guarantee as highly remote and decreasing. We consider the risk of loss as part of the impairment loss allowance requirement on bank accounts. |
> | Standby letters of credit also represent the taking on of credit on behalf of customers when actual funding is not required, normally because a third party is not prepared to accept the credit risk of Santander UK's customer. These are also included in the normal impairment loss allowance assessment alongside other forms of credit exposure. |
Santander UK, as is normal in such activity, gives representations, indemnities and warranties on the sale of subsidiaries, businesses and other assets. The maximum potential amount of any claims made against these is usually significantly higher than actual settlements. Provisions are made with respect to management's best estimate of the likely outcome, either at the time of sale, or subsequently if additional information becomes available.
See Note 20 to the Consolidated Financial Statements for further information regarding off-balance sheet arrangements. See Note 38 to the Consolidated Financial Statements for additional information regarding Santander UK's guarantees, commitments and contingencies. In the ordinary course of business, Santander UK also enters into securitisation transactions as described in Note 19 to the Consolidated Financial Statements. The securitisation companies are consolidated and the assets continue to be administered by Santander UK. The securitisation companies provide Santander UK with an important source of long-term funding.
CAPITAL MANAGEMENT AND RESOURCES
Capital management and capital allocation
Santander UK adopts a centralised capital management approach, based on an assessment of both regulatory requirements and the economic capital impacts of our businesses. Details of Santander UK's objectives, policies and processes for managing capital, including the capital table, can be found in Note 47 to the Consolidated Financial Statements.
Capital and risk management disclosures required by Pillar 3
Banco Santander, S.A. is supervised by the Banco de España (the Bank of Spain) on a consolidated basis. Santander UK has applied Banco Santander, S.A.'s approach to capital measurement and risk management in its implementation of Basel II. As a result, Santander UK has been classified as a significant subsidiary of Banco Santander, S.A. at 31 December 2012. The relevant Pillar 3 disclosure requirements for Santander UK are set out below. Further information on the Basel II risk measurement of Santander UK's exposures is included in Banco Santander, S.A.'s Pillar 3 report.
Scope of Santander UK's capital adequacy
Santander UK plc and its subsidiaries are a UK banking group effectively subject to two tiers of supervision. Santander UK is subject to prudential supervision by both the FSA (as a UK authorised bank) and the Banco de España (as a member of the Banco Santander group). As an FSA regulated entity, Santander UK is expected to satisfy the FSA capital requirements on a standalone basis. Similarly, Santander UK must demonstrate to the FSA that it can withstand capital stress tests without parental support. Reinforcing the corporate governance framework adopted by Santander UK, the FSA exercises oversight through its rules and regulations on the Santander UK Board and senior management appointments.
The basis of consolidation for prudential purposes is the same as the basis of consolidation for financial statement purposes. Consequently, the results of significant subsidiaries regulated by the FSA are included in Santander UK's capital adequacy disclosures. Capital transferability between Santander UK's subsidiaries is managed in accordance with Santander UK's corporate purpose and strategy, its risk and capital management policies and with regard to UK legal and regulatory requirements. There are no other current or foreseen material practical or legal impediments to the prompt transfer of capital resources or repayment of liabilities when due between the Company and its subsidiaries.
Regulatory capital resources
The table below analyses the composition of Santander UK's regulatory capital resources. The calculations reflect the amounts prepared on a basis consistent with Santander UK's regulatory filings.
Note | 2012 £m | 2011 £m | |
Shareholders' equity: | |||
Shareholders equity per consolidated balance sheet | 12,949 | 12,666 | |
Preference shares | 39 | (597) | (597) |
Other equity instruments | 39 | (297) | (297) |
12,055 | 11,772 | ||
Regulatory adjustments: | |||
Own credit | (6) | (70) | |
Defined benefit pension adjustment | (164) | (216) | |
Unrealised profits on available-for-sale securities | (1) | (9) | |
Other | 6 | - | |
(165) | (295) | ||
Core Tier 1 deductions: | |||
Goodwill and intangible assets | (2,325) | (2,225) | |
50% excess of expected losses over impairment (net of tax) | (224) | (353) | |
50% of securitisation positions | (39) | (38) | |
(2,588) | (2,616) | ||
Core Tier 1 capital | 9,302 | 8,861 | |
Other Tier 1 capital: | |||
Preference shares | 859 | 860 | |
Innovative/hybrid Tier 1 securities | 969 | 1,659 | |
50% tax benefit on excess of expected losses over impairment | 73 | 118 | |
1,901 | 2,637 | ||
Total Tier 1 capital | 11,203 | 11,498 | |
Qualifying Tier 2 capital: | |||
Undated subordinated debt | 34 | 2,199 | 2,250 |
Dated subordinated debt | 632 | 2,738 | |
Unrealised gains on available-for-sale equity securities | - | 9 | |
Collective provisions on standardised portfolios in accordance with regulatory requirements | 261 | - | |
3,092 | 4,997 | ||
Tier 2 deductions: | |||
50% of securitisation positions | (39) | (38) | |
50% excess of expected losses over impairment (gross of tax) | (297) | (470) | |
(336) | (508) | ||
Total regulatory capital | 13,959 | 15,987 |
Santander UK's Core Tier 1 capital consists of shareholders' equity at 31 December 2012 and 2011 after adjustment to comply with the FSA's rules. For capital management purposes and in accordance with the FSA's rules, Innovative Tier 1 capital instruments are treated as Tier 1 capital. The FSA's capital gearing rules restrict the amount of Innovative Tier 1 capital included in Tier 1 capital to 15% of Core Tier 1 capital after deductions. The excess is classified as Tier 2.
Total regulatory capital consists of:
Shareholders' equity
Santander UK's shareholders' equity at 31 December 2012 was £12,949m (2011: £12,666m) as per the Consolidated Balance Sheet. Preference Shares of £597m (2011: £597m) deducted from shareholders' equity consist of the £300m Fixed/Floating Rate Non-Cumulative Callable Preference Shares and the £300m Step-up Callable Perpetual Preferred Securities. These are included within Other Tier 1 capital preference shares and Innovative/hybrid Tier 1 Instruments, respectively, as described below. Other equity instruments of £297m (2011: £297m) deducted from shareholders' equity consist of the £300m Step-up Callable Perpetual Reserve Capital Instruments.
Regulatory adjustments
Santander UK's own credit adjustment of £6m (2011: £70m) relates to changes in liabilities designated at fair value through profit or loss resulting from changes in Santander UK's own credit risk. Valuation adjustments relating to liabilities designated at fair value through profit or loss which are not attributable to changes in benchmark interest rates are excluded from regulatory capital resources. The defined benefit pension adjustment of £164m (2011: £216m) removes the pension surpluses and deficits calculated in accordance with IFRS and replaces it (in the case of schemes in deficit), in Santander UK's regulatory filings, with the next five years' contributions.
Core Tier 1 deductions
Goodwill and intangible assets of £2,325m (2011: £2,225m) deducted from Core Tier 1 capital represent goodwill arising on the acquisition of businesses and certain capitalised computer software costs. The regulatory value of goodwill and intangible assets deducted is different from the accounting value in Note 25 to the Consolidated Financial Statements as certain regulatory adjustments are made. During 2012 and 2011, accounting valuation adjustments to Tier 1 and Tier 2 instruments (see below) were also included in capital as permitted in accordance with FSA rules. Santander UK has elected to deduct certain securitisation positions of £39m (2011: £38m) from Tier 1 capital and of £39m (2011: £38m) from Tier 2 capital rather than treat these exposures as a risk-weighted asset. The excess expected losses deduction of £224m (2011: £353m) net of tax from Tier 1 capital and of £297m (2011: £470m) gross of tax from Tier 2 capital represents the difference between expected loss calculated in accordance with Santander UK's Retail Internal Rating-Based ('IRB') and Advanced Internal Rating-Based ('AIRB') models, and the impairment loss allowances calculated in accordance with IFRS. Santander UK's accounting policy for impairment loss allowances is set out in Note 1 to the Consolidated Financial Statements. Expected losses are calculated using risk parameters based on either through-the-cycle, or economic downturn estimates, and are subject to conservatism due to the imposition of regulatory floors. They are therefore currently higher than the impairment loss allowances under IFRS which only reflect losses incurred at the balance sheet date.
Other Tier 1 capital
Preference Shares of £859m (2011: £860m) within Other Tier 1 capital consist of the £325m Sterling Preference Shares, the £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities and the £300m Fixed/Floating Rate Non-Cumulative Callable Preference Shares. Details of these instruments are set out in Notes 34 and 39 to the Consolidated Financial Statements.
Innovative/hybrid Tier 1 Instruments of £969m (2011: £1,659m) within Other Tier 1 capital consist of the US$1,000m Non-Cumulative Trust Preferred Securities, £300m Step-up Callable Perpetual Reserve Capital Instruments and the £300m Step Up Callable Perpetual Preferred Securities. Details of these instruments are set out in Notes 34 and 39 to the Consolidated Financial Statements.
The reduction in Innovative/hybrid Tier 1 Instruments in 2012 was due to a capital management exercise, as described in Note 34 to the Consolidated Financial Statements.
Qualifying Tier 2 capital
Details of the undated subordinated debt of £2,199m (2011: £2,250m) and the dated subordinated debt of £632m (2011: £2,738m) that meet the FSA's definition of Tier 2 capital are set out in Note 34 to the Consolidated Financial Statements. In accordance with the FSA's rules, in the last five years to maturity, dated subordinated debt isamortised on a straight-line basis. During 2012 and 2011, accounting valuation adjustments to Tier 1 and Tier 2 instruments were also included in capital as permitted in accordance with FSA rules. In addition, collective provisions on standardised portfolios of £261m (2011: £nil) have been included.
The reduction in dated subordinated debt in 2012 was due to a capital management exercise, as described in Note 34 to the Consolidated Financial Statements.
Tier 2 deductions
Santander UK has elected to deduct certain securitisation positions as described in "Core Tier 1 deductions" above. In addition expected losses gross of tax of £297m (2011: £470m) have been deducted from Tier 2 capital.
Risk-weighted assets
The tables below analyse the composition of Santander UK's risk-weighted assets. The calculations reflect the amounts prepared on a basis consistent with Santander UK's regulatory filings.
Risk-weighted assets by risk | 2012 £m | 2011 £m |
Credit risk | 62,034 | 64,167 |
Counterparty risk | 2,243 | 2,226 |
Market risk | 4,071 | 2,813 |
Operational risk | 8,176 | 8,249 |
Total risk-weighted assets | 76,524 | 77,455 |
Risk-weighted assets by division | 2012 £bn | 2011 £bn |
Retail Banking | 38.8 | 39.7 |
Corporate Banking | 24.8 | 22.9 |
Markets | 4.9 | 3.8 |
Corporate Centre | 8.0 | 11.1 |
Total risk-weighted assets | 76.5 | 77.5 |
Risk-weighted assets by division may be further analysed as follows:
2012 | 2011 | |||||||
Balance sheet amount £bn |
Regulatory exposure £bn |
Risk weighting % | Risk weighted assets £bn | Balance sheet amount £bn |
Regulatory exposure £bn |
Risk weighting % | Risk weighted assets £bn | |
Retail Banking | ||||||||
- Secured lending | 156.6 | 164.4 | 14.4 | 23.6 | 166.2 | 176.1 | 14.0 | 24.6 |
- Unsecured lending | 8.7 | 11.9 | 81.5 | 9.7 | 9.3 | 11.7 | 82.2 | 9.6 |
- Operational risk | 5.5 | 5.5 | ||||||
Corporate Banking | ||||||||
- Customer assets | 19.6 | 25.1 | 86.8 | 21.8 | 18.9 | 23.4 | 86.1 | 20.1 |
- Non-customer assets(1) | 16.0 | 1.3 | 33.8 | 0.4 | 19.4 | 1.6 | 34.4 | 0.6 |
- Market risk | 1.3 | 1.1 | ||||||
- Operational risk | 1.3 | 1.2 | ||||||
Markets | ||||||||
- Credit risk | 0.1 | 0.1 | 39.8 | - | 0.1 | 0.1 | 35.8 | - |
- Counterparty risk | 28.1 | 6.2 | 29.5 | 1.8 | 28.6 | 5.2 | 32.0 | 1.7 |
- Market risk | 2.7 | 1.6 | ||||||
- Operational risk | 0.4 | 0.4 | ||||||
Corporate Centre | ||||||||
- Customer assets(2) | 11.0 | 12.8 | 25.3 | 3.2 | 11.9 | 14.5 | 29.8 | 4.3 |
- Core liquid assets(3) | 37.6 | 34.8 | - | - | 28.4 | 26.1 | - | - |
- Operational risk | 1.0 | 1.1 | ||||||
Intangible assets & securitisation deductions | 2.4 | 2.2 | ||||||
Other assets(4) | 12.9 | 8.6 | 43.9 | 3.8 | 12.6 | 10.7 | 53.1 | 5.7 |
293.0 | 265.2 | 76.5 | 297.6 | 269.4 | 77.5 | |||
(1) Non-customer assets principally consist of the securities lending/borrowing and repo businesses of the money markets product area.
(2) Customer assets in Corporate Centre largely comprise social housing.
(3) Regulatory exposure of liquid assets includes reverse repurchase agreements collateralised by UK Government securities.
(4) The balance sheet amounts of other assets have not been allocated segmentally, although the RWA's have been allocated to Corporate Centre.
Regulatory exposure represents the Exposure at Default ('EAD') calculated in accordance with the FSA Prudential sourcebook for Banks, Building Societies and Investment Firms (known as 'BIPRU'). EAD for customer assets includes unutilised credit facilities and is adjusted for a credit conversion factor ('CCF'). EAD for repurchase, reverse repurchase, securities financing and derivative transactions are calculated net of any associated collateral and are adjusted for regulatory changes and potential future exposure adjustments ('PFE') where applicable.
Santander UK applies Basel II to the calculation of its capital requirement. In addition, Santander UK applies the Retail IRB and AIRB approaches to its credit portfolios. See the "Supervision and Regulation" section of the Directors' Report on pages 187 to 191 for discussion of future regulatory changes, including Basel III. Residential lending capital resources requirements include securitised residential mortgages. During 2012, risk-weighted assets ('RWAs') remained reasonably consistent reflecting a fall in credit risk RWA's as a result of managed reductions in the retail mortgage and unsecured personal loan portfolios which was partially offset by an increase in market risk RWA's.
Key capital ratios
The calculations of capital are prepared on a basis consistent with Santander UK's regulatory filings. Ratios are calculated by taking the relevant capital resources as a percentage of risk-weighted assets.
The table below summarises Santander UK's capital ratios:
2012 % | 2011 % | |
Core Tier 1 | 12.2 | 11.4 |
Total capital | 18.2 | 20.6 |
Movements in regulatory capital
Movements in regulatory capital during 2012 and 2011 were as follows:
2012 £m | 2011 £m | |
Core Tier 1 capital | ||
Opening amount | 8,861 | 8,496 |
Contribution to Core Tier 1 capital from profit for the year: | ||
- Consolidated profits attributable to shareholders of the Company | 939 | 903 |
- Other comprehensive income for the year | (183) | (37) |
- Tax on comprehensive income | 42 | 9 |
- Removal of own credit spread (net of tax) | 64 | (49) |
| ||
Net dividends | (507) | (482) |
Decrease/(increase) in goodwill and intangible assets deducted | (100) | 40 |
Pensions | 52 | 5 |
Other: | ||
- (Increase)/decrease in securitisation positions | (1) | 55 |
- Decrease/(increase) in expected losses | 129 | (79) |
Other | 6 | - |
Closing amount | 9,302 | 8,861 |
Other Tier 1 capital | ||
Opening amount | 2,637 | 2,394 |
Other: | ||
- (Decrease)/increase in preference shares | (1) | 15 |
- (Decrease)/increase in innovative/hybrid Tier 1 securities | (690) | 196 |
- (Decrease)/increase in tax benefit on expected losses | (45) | 32 |
Closing amount | 1,901 | 2,637 |
Tier 2 capital | ||
Opening amount | 4,489 | 4,278 |
Other: | ||
- (Decrease)/increase in undated subordinated debt | (51) | 99 |
- (Decrease)/increase in dated subordinated debt | (2,106) | 168 |
- Decrease in unrealised gains and losses on available-for-sale equity securities | (9) | (1) |
- Increase in collective provisions on standardised portfolios | 261 | - |
Tier 2 deductions: | ||
- (Increase)/decrease in securitisation positions | (1) | 55 |
- Decrease/(increase) in expected losses | 173 | (110) |
Closing amount | 2,756 | 4,489 |
Total regulatory capital | 13,959 | 15,987 |
The changes in Santander UK's Core Tier 1 capital reflect movements in ordinary share capital, share premium and audited profits for the years ended 31 December 2012 and 2011 after adjustment to comply with the FSA's rules. Santander UK complied with the FSA's capital adequacy requirements during 2012 and 2011.
During 2012, Core Tier 1 capital increased by £441m to £9,302m (2011: £8,861m). This increase was largely due to audited profits for the year of £939m, less dividends declared of £507m. During 2011, Core Tier 1 capital increased by £365m to £8,861m (2010: £8,496m). This increase was largely due to audited profits for the year of £903m, less dividends declared of £482m.
The significant reduction in Santander UK's Other Tier 1 capital and Tier 2 capital during 2012 principally reflected the capital management exercise undertaken in July 2012.
LIQUIDITY AND FUNDING
The Board's risk objective is to be a risk resilient institution at all times, and to be perceived as such by stakeholders, preserving the short and long-term viability of Santander UK. While recognising that a bank engaging in maturity transformation cannot hold sufficient liquidity to cover all possible stress scenarios, the Board requires Santander UK to hold sufficient liquidity to cover extreme situations. The requirements arising from the FSA's regulatory liquidity regime are reflected in the Board's Liquidity Risk Appetite. Liquidity risk is the risk that Santander UK, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. In Santander UK's opinion, working capital is sufficient for its present requirements.
Santander UK primarily generates funding and liquidity through UK retail and corporate deposits, as well as in the financial markets through its own debt programmes and facilities to support its business activities and liquidity requirements. It does this with reliance on the strength of its balance sheet and profitability and its own network of investors. It does not rely on a guarantee from Banco Santander, S.A. or any other member of the Banco Santander group to generate this funding or liquidity. Santander UK does not raise funds to finance other members of the Banco Santander group or guarantee the debts of other members of the Banco Santander group (other than certain of Santander UK plc's own subsidiaries). As an FSA regulated group, Santander UK is expected to satisfy the FSA liquidity and capital requirements on a standalone basis. Similarly, Santander UK must demonstrate to the FSA that it can withstand liquidity and capital stress tests without parental support.
See the "Liquidity and Funding Risk" section of the Risk Management Report for more information.
Sources of funding and liquidity
Santander UK is primarily funded by retail deposits. This, together with corporate deposits, forms its commercial bank franchise, which attracts deposits through a variety of entities. More than three quarters of Santander UK's commercial bank customer lending is financed by commercial bank customer deposits. The retail sources primarily originate from the Retail Banking savings business. Although largely callable, these funds provide a stable and predictable core of funding due to the nature of the retail accounts and the breadth of personal customer relationships. Additionally, Santander UK has a strong wholesale funding base, which is diversified across product types and geography.
Through the wholesale markets, Santander UK has active relationships with more than 300 counterparties across a range of sectors, including banks, other financial institutions, corporates and investment funds. Other sources of funding include collateralised borrowings, mortgage securitisations and long-term debt issuance. Short-term funding is accessed through money market instruments, including time deposits, certificates of deposit and commercial paper. Medium to long-term funding is accessed primarily through asset securitisation and covered bond arrangements and Santander UK's euro medium-term note programmes. The major debt issuance programmes are managed by, and in the name of, Abbey National Treasury Services plc on its own behalf (except for the US commercial paper programme, which is managed by, and in the name of, Abbey National North America LLC, a guaranteed subsidiary of Santander UK plc) and are set out in Note 33 to the Consolidated Financial Statements.
The ability to sell assets quickly is also an important source of liquidity for Santander UK. Santander UK holds marketable investment securities, such as central bank, eligible government and other debt securities, which could be disposed of either by entering into sale and repurchase agreements or by being sold to provide additional funding should the need arise.
Within the framework of prudent funding and liquidity management, Santander UK manages its commercial banking activities to minimise liquidity risk. Medium-term funding issuances of £14bn more than matched maturities in the year.
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 companies in the UK in 2010 and will be used to meet regulatory requirements and to support further growth (both organic and potential acquisitions).
UK Government schemes
i) Funding for Lending Scheme ('FLS')
The Bank of England and HM Treasury launched the FLS in July 2012. The FLS is designed to boost lending to UK households and non-financial companies, by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to the net lending to the UK non-financial sector over the 18-month period.
The FLS will allow participants to borrow UK Treasury bills in exchange for eligible collateral during a drawdown window spanning the 18-month period from 1 August 2012 to 31 January 2014. Eligible collateral consists of all collateral eligible in the Bank of England's Discount Window Facility.
Santander UK had an outstanding FLS drawing of £1bn at 31 December 2012.
ii) Extended Collateral Term Repo Facility ('ECTR')
The ECTR was announced in June 2012, in order to provide short-term liquidity to the market. This is provided through monthly auctions and using eligible collateral as security. Eligible collateral consists of all collateral eligible in the Bank of England's Discount Window Facility.
iii) Bank of England Special Liquidity Scheme ('SLS')
Along with other major UK banks and building societies, Santander UK participated in the SLS whereby it exchanged self-subscribed for asset-backed security issuances for highly liquid Treasury Bills. All major UK banks and building societies were required to participate as part of the measures designed to improve the liquidity position of the UK banking system in general. Under the terms of the scheme, the extent of usage was confidential. Santander UK's balances outstanding under the SLS were repaid in January 2012.
Encumbrance - Securitisation of assets and covered bonds
Santander UK has provided prime retail mortgage-backed securitised products to a diverse investor base through its mortgage- backed funding programmes. Funding has historically been raised via mortgage-backed notes, both issued to third parties and retained (the latter being central bank eligible collateral for funding purposes in other Bank of England, Swiss National Bank, and US Federal Reserve facilities). Santander UK has an established a covered bond programme, whereby securities are issued to investors and are guaranteed by a pool of ring-fenced residential mortgages.
Santander UK's level of encumbrance arising from external issuance of securitisations and covered bonds decreased slightly in 2012 reflecting Santander UK's strategy to utilise this form of term funding in place of shorter-term wholesale funding.
At 31 December 2012, total notes issued externally from secured programmes (securitisations and covered bonds) increased to £43,322m (2011: £41,007m), reflecting gross issuance of £10.9bn (2011: £17.2bn) in 2012. At 31 December 2012, a total of £17,634m (2011: £46,111m) of notes issued under securitisation and covered bond programmes had also been retained internally, a proportion of which had been used as collateral for raising funds via third party bilateral secured funding transactions, which totalled £11.0bn at 31 December 2012 (2011: £6.6bn).
It is expected that outstanding issues to third parties will decrease relative to the proportion of retained issuances in Santander UK's overall funding in 2013 and 2014 as redemptions of existing, externally issued transactions exceed planned issuance. In January and February 2013, there were no further issuances under Santander UK's securitisation and covered bond programmes.
Uses of funding and liquidity
The principal uses of liquidity for Santander UK are the funding of the lending of Retail Banking and Corporate Banking, payment of interest expenses, dividends paid to shareholders, the repayment of debt and consideration for business combinations. Santander UK's ability to pay dividends depends on a number of factors, including Santander UK's regulatory capital requirements, distributable reserves and financial performance.
Cash flows
2012 £m | 2011 £m | 2010 £m | |
Net cash inflow/(outflow) from operating activities | 4,024 | (7,052) | 11,384 |
Net cash (outflow)/inflow from investing activities | (5,808) | (104) | (1,324) |
Net cash inflow from financing activities | 1,101 | 4,947 | 8,935 |
(Decrease)/increase in cash and cash equivalents | (683) | (2,209) | 18,995 |
The major activities and transactions that affected Santander UK's cash flows during 2012, 2011 and 2010 were as follows:
In 2012, the net cash inflow from operating activities of £4,024m resulted from Santander UK's continued de-leveraging process of legacy portfolios in run-off, partially offset by a reduction in trading liabilities. In 2011, the net cash outflow from operating activities of £7,052m resulted from Santander UK's lending activities, principally corporate lending (particularly SMEs), offset by the continued de-leveraging process of legacy portfolios in run-off. During 2010, the net cash inflow from operating activities of £11,384m resulted from Santander UK's lending activities and the continued de-leveraging process which saw significant disposals and maturities in the Treasury asset portfolio as well as the sale of the majority of Santander UK's holdings of AAA-rated prime mortgage-backed securities.
In 2012, the net cash outflow from investing activities of £5,808m resulted primarily from the acquisition of UK Treasury bills and the purchase of property, plant and equipment. In 2011, the net cash outflow from investing activities of £104m resulted from a net outflow of £304m from the purchase and sale of property, plant and equipment and intangible assets, offset by an inflow of £76m from the disposal of subsidiaries and £124m from the redemption of debt securities. In 2010, the net cash outflow from investing activities of £1,324m resulted from the acquisition and disposal of subsidiaries of £1,168m and the net outflow of £782m from the purchase of property, plant and equipment and intangible assets offset by the net inflow of £626m from the purchase, sale and redemption of debt securities.
In 2012, the net cash inflow from financing activities of £1,101m reflected new issues of loan capital of £37,219m offset by repayments of loan capital maturing in the year of £35,636m and payment of £425m dividends on ordinary shares. In 2011, the net cash inflow from financing activities of £4,947m reflected new issues of loan capital of £48,449m offset by repayments of loan capital maturing in the year of £43,070m. In 2010, the net cash inflow from financing activities of £8,935m reflected new issues of loan capital of £21,409m offset by repayments of loan capital maturing in the year of £15,973m and the receipt of £4,456m from the injection of additional equity capital into the Company.
In 2012, cash and cash equivalents decreased by £683m principally from the continued de-leveraging process of legacy portfolios in run-off offset by the purchase of Treasury bills. In 2011, cash and cash equivalents decreased by £2,209m, principally due to the increase from Santander UK's lending activities offset by the continued de-leveraging process of legacy portfolios in run-off and issuing of new loan capital. In 2010, cash and cash equivalents increased by £18,995m, principally due to Santander UK holding significantly more high quality liquid assets in response to new UK regulatory requirements.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the relationship between interest rates and net interest income resulting from the periodic repricing of assets and liabilities. The largest administered rate items in Santander UK's balance sheet are residential mortgages and retail deposits, the majority of which bear interest at variable rates. Santander UK is able to mitigate the impact of interest rate movements on net interest income in Retail Banking by repricing separately the variable rate mortgages and variable rate retail deposits, subject to competitive pressures.
Santander UK also offers fixed-rate mortgages and savings products on which the interest rate paid by or to the customer is fixed for an agreed period of time at the start of the contract. Santander UK manages the margin on fixed-rate products by the use of derivatives matching the fixed-rate profiles. The risk of prepayment is reduced by imposing early termination charges if the customers terminate their contracts early.
Santander UK seeks to manage the risks associated with movements in interest rates as part of its management of the overall non-trading position. This is done within limits as described in the Risk Management Report beginning on page 63.
Changes in net interest income - volume and rate analysis
The following table allocates changes in interest income, interest expense and net interest income between changes in volume and changes in rate for Santander UK for the years ended 31 December 2012, 2011 and 2010. Volume and rate variances have been calculated on the movement in the average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities. The variance caused by changes in both volume and rate has been allocated to rate changes.
2012/2011 | 2011/2010 | |||||
| Total change | Changes due to increase/(decrease) in | Total change | Changes due to increase/(decrease) in | ||
|
£m | Volume £m | Rate £m |
£m | Volume £m | Rate £m |
Interest income | ||||||
Loans and advances to banks: | ||||||
- UK | 67 | 47 | 20 | (49) | (3) | (46) |
- Non-UK | (20) | (23) | 3 | 15 | 21 | (6) |
Loans and advances to customers: | ||||||
- UK | (49) | 9 | (58) | 627 | 292 | 335 |
- Non-UK | - | - | - | (1) | - | (1) |
Other interest earning financial assets: | ||||||
- UK | 4 | 102 | (98) | (21) | (64) | 43 |
- Non UK | 1 | - | 1 | - | - | - |
Total interest income | ||||||
- UK | 22 | 158 | (136) | 557 | 225 | 332 |
- Non-UK | (19) | (23) | 4 | 14 | 21 | (7) |
3 | 135 | (132) | 571 | 246 | 325 | |
Interest expense | ||||||
Deposits by banks: | ||||||
- UK | 31 | 46 | (15) | 77 | 88 | (11) |
- Non-UK | (4) | (4) | - | 4 | 4 | - |
Deposits by customers - retail demand deposits: | ||||||
- UK | 452 | 52 | 400 | 96 | (39) | 135 |
- Non-UK | (14) | (19) | 5 | (21) | (22) | 1 |
Deposits by customers - retail time deposits: | ||||||
- UK | (240) | (81) | (159) | 14 | 15 | (1) |
- Non-UK | (7) | (18) | 11 | 64 | 33 | 31 |
Deposits by customers - wholesale deposits: | ||||||
- UK | 22 | 30 | (8) | 134 | 18 | 116 |
Subordinated debt: | ||||||
- UK | (21) | (23) | 2 | (63) | (21) | (42) |
- Non-UK | (19) | (18) | (1) | 1 | (2) | 3 |
Debt securities in issue: | ||||||
- UK | 718 | 143 | 575 | 349 | 93 | 256 |
- Non-UK | (13) | (22) | 9 | (15) | (26) | 11 |
Other interest-bearing liabilities: | ||||||
- UK | 13 | 4 | 9 | (85) | (84) | (1) |
Total interest expense | ||||||
- UK | 975 | 171 | 804 | 522 | 70 | 452 |
- Non-UK | (57) | (81) | 24 | 33 | (13) | 46 |
918 | 90 | 828 | 555 | 57 | 498 | |
Net interest income | (915) | 45 | (960) | 16 | 189 | (173) |
AVERAGE BALANCE SHEET
As year-end statements may not be representative of Santander UK's activity throughout the year, average balance sheets for Santander UK are presented below. The average balance sheets summarise the significant categories of assets and liabilities, together with average interest rates.
2012 | 2011 | 2010 | |||||||
Average Balance(1) £m |
Interest(4,5) £m | Average rate % | Average balance(1) £m |
Interest £m | Average rate % | Average balance(1) £m |
Interest £m | Average rate % | |
Assets |
| ||||||||
Loans and advances to banks: |
| ||||||||
- UK | 28,941 | 158 | 0.55 | 19,144 | 91 | 0.48 | 19,561 | 140 | 0.72 |
- Non-UK | 2,339 | 9 | 0.38 | 10,791 | 29 | 0.27 | 4,345 | 14 | 0.32 |
Loans and advances to customers:(3) | |||||||||
- UK | 198,657 | 7,376 | 3.71 | 198,416 | 7,425 | 3.74 | 190,239 | 6,798 | 3.57 |
- Non-UK | 7 | - | 4.01 | 10 | - | 3.92 | 12 | 1 | 8.33 |
Debt securities: | |||||||||
- UK | 5,093 | 77 | 1.51 | 2,129 | 73 | 3.43 | 6,656 | 94 | 1.41 |
- Non-UK | 92 | 1 | 1.09 | ||||||
Total average interest-earning assets, | 235,129 | 7,621 | 3.24 | 230,490 | 7,618 | 3.31 | 220,813 | 7,047 | 3.19 |
interest income(2) | |||||||||
Impairment loss allowances | (1,707) | - | - | (1,639) | - | - | (1,526) | - | - |
Trading business | 26,445 | - | - | 36,205 | - | - | 28,593 | - | - |
Assets designated at FVTPL | 4,439 | - | - | 5,801 | - | - | 8,171 | - | - |
Other non-interest-earning assets | 42,624 | - | - | 37,763 | - | - | 39,708 | - | - |
Total average assets | 306,930 | - | - | 308,620 | - | - | 295,759 | - | - |
Non-UK assets as a % of total | 0.79% | - | - | 3.50% | - | - | 1.47% | - | - |
Liabilities | |||||||||
Deposits by banks: | |||||||||
- UK | (11,945) | (195) | 1.63 | (9,347) | (164) | 1.75 | (4,651) | (87) | 1.87 |
- Non-UK | (65) | - | - | (153) | (4) | 2.61 | - | - | - |
Deposits by customers - retail demand: | |||||||||
- UK | (73,832) | (1,715) | 2.32 | (70,887) | (1,263) | 1.78 | (73,367) | (1,167) | 1.59 |
- Non-UK | (1,375) | (40) | 2.91 | (2,104) | (54) | 2.57 | (2,979) | (75) | 2.52 |
Deposits by customers - retail time: | |||||||||
- UK | (46,256) | (708) | 1.53 | (50,581) | (948) | 1.87 | (49,780) | (934) | 1.88 |
- Non-UK | (5,818) | (154) | 2.65 | (6,566) | (161) | 2.45 | (4,914) | (97) | 1.97 |
Deposits by customers - wholesale: | |||||||||
- UK | (22,506) | (307) | 1.36 | (20,349) | (285) | 1.40 | (18,159) | (151) | 0.83 |
- Non-UK | (52) | - | - | - | - | - | - | - | - |
Bonds and medium-term notes: | |||||||||
- UK | (55,567) | (1,374) | 2.47 | (45,641) | (656) | 1.44 | (35,073) | (307) | 0.88 |
- Non-UK | (3,043) | (25) | 0.82 | (7,019) | (38) | 0.54 | (13,825) | (53) | 0.38 |
Dated and undated loan capital and other subordinated liabilities: | |||||||||
- UK | (4,722) | (135) | 2.86 | (5,557) | (156) | 2.81 | (6,158) | (219) | 3.56 |
- Non-UK | (438) | (39) | 8.90 | (633) | (58) | 9.16 | (661) | (57) | 8.62 |
Other interest-bearing liabilities: | |||||||||
- UK | (129) | (14) | 10.85 | (24) | (1) | 4.17 | (1,197) | (86) | 7.18 |
Total average interest-bearing liabilities, interest expense(2) | (225,747) | (4,706) | 2.08 | (218,861) | (3,788) | 1.73 | (210,764) | (3,233) | 1.53 |
Trading business | (28,962) | - | - | (41,615) | - | - | (39,673) | - | - |
Liabilities designated at FVTPL | (5,152) | - | - | (6,307) | - | - | (5,740) | - | - |
Non-interest-bearing liabilities: | |||||||||
- Other | (33,770) | - | - | (29,373) | - | - | (29,991) | - | - |
Shareholders' funds | (13,299) | - | - | (12,464) | - | - | (9,591) | - | - |
Total average liabilities and shareholders' funds | (306,930) | - | - | (308,620) | - | - | (295,759) | - | - |
Non-UK liabilities as a % of total | 3.52% | - | - | 5.34% | - | - | 7.57% | - | - |
(1) Average balances are based upon monthly data.
(2) The ratio of average interest-earning assets to interest-bearing liabilities for the year ended 31 December 2012 was 104.16% (2011: 105.31%, 2010: 104.77%).
(3) Loans and advances to customers include non-performing loans. See the "Credit Risk" section of the Risk Management Report.
(4) The net interest margin for the year ended 31 December 2012 was 1.24% (2011: 1.66%, 2010: 1.73%). Net interest margin is calculated as net interest income divided by average interest earning assets. This differs from the Banking Net Interest Margin, discussed on page 9, which is calculated as net interest income (adjusted to remove net interest income from the Treasury asset portfolio) divided by average commercial assets (including mortgages, unsecured personal loans, corporate loans and overdrafts).
(5) The interest spread for the year ended 31 December 2012 was 1.16% (2011: 1.57%, 2010: 1.66%). Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.
Risk Management Report
THE RISK MANAGEMENT REPORT
This Risk Management Report contains audited financial information and forms an integral part of the Consolidated Financial Statements, except as marked as unaudited in the non-financial risk sections and on pages 63, 70, 71, 73,119 and 120.
The Risk Management Report consists of:
> | A description of Santander UK's approach to the management of risk, including its Risk Framework, and | |
> | Further detail on Santander UK's key risks, with separate discussions of: | |
> | Financial risks, and | |
> | Non-financial risks. | |
This Risk Management Report should be read in conjunction with the Summary Risk Report on pages 16 to 18.
INDEX
Page | ||||
RISK MANAGEMENT (unaudited) | ||||
> | Introduction ………………………………………………………………………………………………………… | 63 | ||
> | Risk framework ……………………………………………………………………………………………………… | 63 | ||
> | Risk appetite …………………………….……..…………………………………………………………………… | 70 | ||
> | Key tools and techniques ………………………………………………………………………………………… | 72 | ||
> | Risk culture …………………………………………………………………………………………………………… | 73 | ||
FINANCIAL RISKS | ||||
> | Credit Risk……….. …………………………………………………………………………………………………… | 74 | ||
> | Measurement across the credit cycle …………………………………………………………………. | 75 | ||
> | Retail Banking …………………………….…….…………………………………………….………… | 80 | ||
> | Corporate Banking…………………………….…….………………………………………..………… | 98 | ||
> | Markets …..…………………………….…….……………………………………………….………… | 108 | ||
> | Corporate Centre …………………………….…….…………………………………………………… | 111 | ||
> | Market Risk…………………………………………………………………………………………………………… | 117 | ||
> | Traded market risk ……………………….…….……….…………………………………………… | 118 | ||
> | Structural Risk………………………………………………………………………………………………………… | 121 | ||
> | Non-traded market risk …………………. ………………………………………………………… | 121 | ||
> | Pension risk …………………………………………………………………………………………… | 123 | ||
> | Liquidity and Funding risk ………………………………………………………………….……… | 124 | ||
> | Capital risk ……………………………………………………………………………………………… | 134 | ||
NON-FINANCIAL RISKS (unaudited) | ||||
> | Conduct Risk………….….…………………………………………………………………………………………… | 135 | ||
> | Operational Risk ………. .……………….…….…………………………………………………………………… | 136 | ||
> | Other Risks ……………..……………….…….……………………………………………………………………… | 138 | ||
ADDITIONAL FINANCIAL RISK DISCLOSURES | ||||
> | Credit Risk - Areas of focus and other items………………………………………………………………... | 140 | ||
1. | Country risk exposure.............................................................................................................. | 140 | ||
> | Peripheral eurozone countries………………………………………………………… | 145 | ||
> | Balances with other Banco Santander group companies……………………………. | 147 | ||
2. | Significant concentrations of credit risk……………………………………………………………… | 151 | ||
3. | Financial instruments of special interest………………………………………………………………. | 152 | ||
4. | Loans and advances……………………………………………………………………………………. | 153 | ||
5. | Impairment loss allowances on loans and advances to customers and non-performing loans…… | 158 | ||
RISK MANAGEMENT
Introduction (unaudited)
As a significant financial services provider, risk is at the core of Santander UK's day-to-day activities. The understanding and control of risk is critical for the effective management of the business. Santander UK aims to employ a prudent approach and advanced risk management techniques to facilitate the delivery of robust financial performance, and ultimately build sustainable value for all our stakeholders, including our staff, customers, fixed income investors, shareholders and the communities in which we operate.
Santander UK aims to maintain a predictable medium-low risk profile, consistent with its business model, which is key to the successful achievement of our strategic objectives set out in "Our Business and our Strategy" on page 4.
Risk framework (unaudited)
During 2012, the Board approved a new Risk Framework, setting out enhancements to the management, control and oversight of all risk types in Santander UK. The Risk Framework aims to continue to ensure that risk is managed and controlled on behalf of all our stakeholders.
The key components of this framework include:
> | Risk definition and structure, |
> | Core principles, |
> | Governance, roles and responsibilities, and |
> | System of internal control. |
Risk definition and structure
Risk is defined as the uncertainty around Santander UK's ability to achieve its business objectives, and specifically equates to a number of risk factors that have the potential to adversely impact on profitability. | ||
The key risk types for the Santander UK group are defined in the next section. As set out in the diagram opposite, the key risk types are classified as:
| ||
> | Financial, and | |
> | Non-financial. |
|
http://www.rns-pdf.londonstockexchange.com/rns/0886A_3-2013-3-15.pdf
Financial Risk Types | Definition |
Credit Risk | Credit Risk is the risk of financial loss arising from the default or credit quality deterioration of a customer or counterparty to which Santander UK has directly provided credit, or for which Santander UK has assumed a financial obligation. |
Traded Market Risk | Traded Market Risk is the risk of losses in on- and off-balance sheet positions within Santander UK's trading books, arising from movements in market prices.
|
Structural Risks | Non-traded Market Risk is Santander UK's risk of loss of income or loss of economic value arising from changes to interest rates in the banking book or to changes in exchange rates, where such changes would affect Santander UK's net worth through an adjustment to revenues, assets, liabilities and off balance sheet exposures in the banking book.
Pension Risk is both the risk of the change in the accounting position and the risk of an unplanned increase in funding required by Santander UK's defined benefit pension schemes, either because of a loss of net asset value or because of changes in legislation or regulatory action.
Liquidity Risk is the risk that Santander UK, although solvent, either does not have available sufficient liquid financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost.
Funding Risk is the risk that Santander UK does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient or a funding programme such as debt issuance subsequently fails.
Capital Risk is defined as the risk of Santander UK not having an adequate amount or quality of capital to meet its internal business objectives, regulatory requirements and market expectations.
|
Non Financial Risks | Definition | |
Conduct Risk | The risk that the business and operational decisions Santander UK takes and the behaviours displayed lead to detriment or poor outcome for our customers. | |
Operational Risk | The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. | |
Regulatory Risk | The risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with applicable codes and regulatory rules. | |
Strategic Risk | The risk of material deviations in expected/target shareholder value as a result of poor definition or implementation of Santander UK's strategy. | |
Reputational Risk | The risk that the reputation of Santander UK prevents the achievement of its strategic objectives. | |
Human Resources Risk | The risk of not having the sufficient number and quality of people to deliver Santander UK's strategy or comply with legislative requirements. | |
Accounting and Reporting Risk | The failure to comply with regulatory and legal requirements for accounting and reporting of financial disclosures, which may lead to fines and/or restrictions and/or reputational damage. | |
Legal Risk | The risk of unexpected loss arising from a: | |
> | defective transaction; or | |
> | failure to take appropriate measures to protect assets; or | |
> | claim being made or some other event occurring which results in a liability for Santander UK or other loss; or | |
> | change in law. | |
Core principles
The following statements are the core principles which underpin the Risk Framework:
> | Each business area is held accountable for the management of the risks arising from its activities;
|
> | Risk should be considered as part of the governance around every business decision;
|
> | All material risk exposures must be identified, assessed, managed and reported in a timely and accurate manner;
|
> | An internal control system should be in place to ensure that risk management and controls are executed in accordance with the guiding principles, minimum standards, risk appetite, limits and mandates; and
|
> | Risk management should be included within objective setting, performance management and remuneration to ensure a balanced approach to risk taking at all levels and in all parts of Santander UK. |
Governance, roles and responsibilities
Committee structure
The diagram below sets out the main Board and management committees which underpin the Risk Framework.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_4-2013-3-15.pdf
In addition, for larger value credit transactions and other significant risk exposures, reference is made to the "Comision delegada de riesgos" ('CDR' or Delegated Risk Committee) in the Banco Santander group.
Key responsibilities
The key risk responsibilities of the Board and its committees include:
Board/Board Committees | Main risk responsibilities (within overall responsibilities) | |
The Board | > | Overall responsibility for business execution and risk management. |
> | Approval of the risk framework and Risk Appetite. | |
Board Risk Committee | > | Advise the Board on Santander UK's overall Risk Appetite, tolerance and strategy, taking account of the current and prospective macroeconomic and financial environment. |
> | Oversee and advise the Board on current risk exposure and future risk strategy. | |
> | Review Risk Appetite for submission to Board. | |
> | Review and recommend the Santander UK risk framework for the Board's approval. | |
> | Review and approve specific risk frameworks. | |
> | Consider and recommend actions in respect of all risk issues escalated by the Chief Risk Officer. | |
> | Review the effectiveness of risk management systems and internal controls. | |
> | Review significant transactions from a risk perspective. | |
Board Audit Committee | > | Monitor and review the integrity of Santander UK's financial statements, and any formal announcements relating to Santander UK's financial performance, including significant financial reporting judgements contained in them. |
> | Review Santander UK's internal financial controls. | |
> | Assess the external auditor's independence and objectivity and monitor the effectiveness of the audit process. | |
> | Monitor and review the effectiveness of Santander UK's internal audit function. | |
> | Review whistle-blowing arrangements. | |
Board Remuneration Oversight Committee | > | Oversee and supervise policies and frameworks covering remuneration and reward for Santander UK. |
> | Review new or changed short-term or long-term incentive plans. | |
> | Ensure that measurement of performance includes adjustments for all types of current and future risks. | |
Board Nomination Committee | > | Identify and nominate candidates to fill Board vacancies. |
> | Recommend membership of the Board Risk Committee and Board Audit Committee to the Board. | |
> | Consider succession planning for directors and senior executives. | |
The key risk responsibilities of the executive committees include:
Executive Committees | Main risk responsibilities | |
Executive Committee | > | Consider and approve business plans aligned with Risk Appetite and risk framework prior to submission to the Board for approval. |
> | Receive updates from CEO-level committees on key risk issues and monitor actions taken. | |
Strategic Risk and Financial Management Committee ('SRFM') | > | Ensure proactive measurement and control of structural balance sheet risks, capital, funding and liquidity, in accordance with the policies, strategies and future plans set by the Board. |
> | Review and monitor FMIR and ensure any exposures in excess of appetite are appropriately dealt with. | |
Executive Risk Committee | > | Review Santander UK's Risk Appetite proposal prior to submission to the Board. |
> | Monitor compliance with Risk Framework, Risk Appetite and risk policies. | |
> | Review and monitor risk exposures and approve any corrective action required. | |
> | Approve credit and market risk transactions for exposures above £70m. | |
Strategic Pensions Committee ('SPC') | > | Review pension risk appetite proposals. |
> | Approve actuarial valuations and related impacts on Santander UK's contributions, capital and funding arrangements. | |
> | Consult with the pension scheme Trustees on scheme investment strategy. | |
Risk Oversight Committee | > | Challenge and monitor Risk Appetite consumption. |
> | Review Risk Appetite framework, prior to submission to the Board. | |
> | Review and challenge risk frameworks from an oversight perspective. | |
> | Provide advice on risk management, risk strategy and risk policy matters. | |
The key risk responsibilities of other committees include:
Other committees | Main risk responsibilities |
Asset and Liability Management Committee | Support SRFM by recommending the non-traded market risk exposure of Santander UK's balance sheet, the composition of Santander UK's capital structure and assessing the management of funding and liquidity. |
Risk Management Committee | Establish adequate and effective risk control processes, policies and reporting systems to ensure all financial risks are managed within the Risk Framework approved by the Board. |
Credit & Investment Approvals Committee | Approve corporate and wholesale credit and investment transactions over and above the levels delegated to individuals and below levels required to be submitted to Executive Risk Committee. |
Internal Control Committee | Establish adequate and effective risk control processes, policies and reporting systems to ensure all non-financial risks are managed within the Risk Framework approved by the Board. |
Capital Committee | Establish adequate and effective risk control processes, reporting systems and processes to ensure that all material capital risks are managed within the Risk Framework approved by the Board. |
Operational Pension Committee | Support the SPC by recommending material amendments to Trust Deeds and Rules, significant changes to pension arrangements and funding strategies. Approve forward-looking plans, projects and initiatives, referring material matters to the SPC. |
Product Approval and Oversight Committee | Approve customer, conduct, governance, operational, reputational, risk and control aspects relating to the external launch of new products and campaigns across all businesses and to material changes in existing products. |
Pricing Committee | Approve pricing decisions for retail and corporate products. Understand the financial risks inherent in these products, ensuring they are adequately mitigated. This committee was established in January 2013. |
Disclosure Committee | Ensure the adequacy and effectiveness of Santander UK's disclosure controls and procedures and review and evaluate material financial information and announcements to be disclosed to the London Stock Exchange, US Securities and Exchange Commission and other recognised bodies. |
The Chief Executive Officer
The Board delegates responsibility to the Chief Executive Officer for the execution of business activities and the management of risk on a day-to-day basis. The key responsibilities of the Chief Executive Officer relating to risk are to:
> | Propose and execute Santander UK's business plan and strategy, and manage the risks that arise in the execution of this strategy with a delegated authority from the Board for this purpose.
|
> | Propose to the Board the Risk Appetite to gain their agreement on the maximum level and type of risk Santander UK is willing and able to accept to achieve its strategic objectives and business plan.
|
> | Delegate authority to executives to enable the discharge of responsibilities for the management and control of risk.
|
> | Oversee the establishment and maintenance of appropriate risk management systems and controls.
|
> | Report on a regular basis to the Board on the management of the key risks to achieving Santander UK's strategic objectives and business plan.
|
> | Promote a corporate culture ensuring ethical practices and social responsibility are fostered, and that the policies and corporate values approved by the Board are effectively communicated throughout Santander UK. |
The Chief Risk Officer
As the leader of the risk function for Santander UK, the Chief Risk Officer provides oversight and challenge. The Chief Risk Officer reports to the Board and also has a reporting line to the Chief Executive Officer for operational purposes. The key responsibilities of the Chief Risk Officer are to:
> | Propose to the Board (via the Board Risk Committee) a Risk Framework, which sets out how the risks arising from Santander UK's activities are managed within Board-approved Risk Appetite and limits.
|
> | Provide assurance to the Board that all material risks incurred by Santander UK are appropriately identified measured and reported and that the systems, controls and delegated authorities for the management of these risks are both adequate and effective.
|
> | Provide assessment on key risks to the Chief Executive Officer, Board Risk Committee and Board, escalating any issue or breach of appetite or limit as necessary. |
The Chief Risk Management Officer
The Chief Risk Management Officer has dual reporting lines to both the Chief Executive Officer and the Chief Risk Officer. The Chief Risk Management Officer assists the Chief Executive Officer in proposing the Risk Appetite and overall risk policy. The other main responsibilities of the Chief Risk Management Officer are to:
> | Establish and maintain adequate processes and controls to ensure that all financial risks are managed within the Risk Appetite, and in accordance with the principles established in the respective specific risk frameworks.
|
> | Ensure all financial risks are properly identified, assessed, managed and reported.
|
> | Control and manage financial risks by proposing risk limits and policies for review and agreement.
|
> | Monitor risk exposure and utilisation against risk limits; report and action as required.
|
> | Ensure the risk culture is embedded throughout the business.
|
Risk organisational structure
Santander UK is structured into three lines of defence with clearly defined and segregated responsibilities with respect to risk:
Business Units which, through the execution of their business activities, originate risk. The head of each business unit is responsible for these risks and their primary management including:
| |||
> | Their identification, assessment, measurement and reporting, and
| ||
> | Management in line with Risk Appetite statements, policies and controls.
| ||
Specialised Risk Units which support the business in the management of complex and specialised risk.
| |||
Risk Control Units are independent from risk origination functions. They are under the executive responsibility of the Chief Executive Officer and also report to the Chief Risk Officer. They comprise the Chief Risk Management Officer ('CRMO') Unit, the Internal Control Unit, and Legal and Secretariat. The risk control units are responsible for effectively controlling risks and ensuring they are managed within the risk limits and mandates approved by the Board and Chief Executive Officer for which they: | |||
> | Define and propose Risk Appetite and policies, ensuring an adequate link between them,
| ||
> | Use stress tests and scenario analysis to inform and assess Santander UK's resilience with respect to its business objectives and risk statements and limits,
| ||
> | Measure and monitor risk exposures and profiles, and generate risk management information for senior management and committees,
| ||
> | Identify, assess and report risks including limit/threshold breaches and ensuring remedial actions are in place,
| ||
> | Define comprehensive but appropriate controls and ensure these are embedded, and
| ||
> | Maintain appropriate management information and risk reporting systems.
| ||
The Risk Oversight Unit assists the Chief Risk Officer in ensuring that risk management and control operates under the risk mandates and limits defined by the Board and:
| |||
> | Provides independent risk assessment and advice to the Chief Risk Officer, Chief Executive Officer, Board Risk Committee and Board,
| ||
> | Defines and proposes the Risk Frameworks for Board and Board Risk Committee approval,
| ||
> | Oversees and challenges risk management and risk control, including the oversight of the Risk Appetite proposed, and the associated business plan,
| ||
> | Conducts and co-ordinates Risk Appetite stress testing,
| ||
> | Verifies the adequacy and completeness of the systems of controls,
| ||
> | Identifies and assesses key enterprise-wide risks and potential emerging and future risks, and
| ||
> | Validates models and methodologies used for risk management.
| ||
The third line of defence is carried out by the Internal Audit Unit, which reports to the Board Audit Committee and the Board Risk Committee. Its main functions are:
| |||
> | Independently supervise the fulfilment, effectiveness and efficiency of internal control systems, as well as the reliability and quality of the accounting,
| ||
> | Verify that the units responsible for exercising control over risks fulfil their purpose and respect the policies set by senior management, the procedures and the relevant internal and external regulations, and
| ||
> | Independently assure the adequacy and effectiveness of implementing risk policies.
| ||
The reporting lines of these units with respect to the management of risk are set out below:
http://www.rns-pdf.londonstockexchange.com/rns/0886A_5-2013-3-15.pdf
System of Internal Control
Santander UK's system of internal control for risk comprises a hierarchy of risk frameworks, policies and limits for each specific risk type. Specific risk frameworks establish the principles, standards, rules and governance requirements for the management and control of each risk type. In support of these frameworks, each specific risk type has its own suite of policies and limits. These set out the rules and risk limits for the management of risk at a more granular level (e.g. credit portfolios). The risk limits employed in the management of each specific risk type are linked to the Santander UK's overall Risk Appetite, as set out in the next section.
RISK APPETITE (unaudited)
The Risk Appetite defines the type and the level of risk that Santander UK is willing and able to accept in pursuit of its strategic objectives under a severe but plausible stress scenario. The Risk Appetite and the Santander UK strategy are inter-related. The strategy must be achievable within the agreed boundaries determined by the Board-approved Risk Appetite statements.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_6-2013-3-15.pdf
The Risk Appetite is expressed through three types of mechanism:
> | Primary metrics - These are the primary articulation of the Risk Appetite and cover losses, capital and liquidity.
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> | Complementary metrics - These support the primary metrics with the aim of controlling risk concentrations.
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> | Qualitative Statements - These express the Risk Appetite for risks that do not lend themselves to expression through a metric, for example in the area of reputational risk. |
The table below sets out further detail on the nature of metrics employed.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_7-2013-3-15.pdf
Santander UK defines its Risk Appetite in accordance with the following principles:
> | Maintain the trust of its customers, shareholders and employees,
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> | Maintain a predictable, medium-low risk profile,
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> | Maintain a moderate overall market risk appetite,
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> | Maintain a stable policy of profit generation and dividend pay-out,
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> | Preserve strong capital and liquidity ratios,
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> | Provide effective diversification in the sources and tenor of funding,
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> | Control large concentrations to customers and industries,
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> | Comply with regulatory requirements,
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> | Deliver target capital returns, driven by a strong risk culture, and
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> | Maintain a remuneration policy that contains the necessary incentives to ensure that the individual interests of employees and executives are aligned to the Risk Appetite. |
KEY TOOLS AND TECHNIQUES (unaudited)
In managing risk, Santander UK employs a number of tools and techniques. Certain of these are described in further detail in the later sections of this report. In summary, they comprise the following:
> | Internal rating and scoring models which, by assessing the qualitative and quantitative risk components by customer and transaction or product, make it possible to measure risk.
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> | Self-assessment techniques employed, for example, in operational risk and supplemented by use of loss data.
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> | Market risk models, including Value at Risk ('VaR'), used for controlling market risk and setting the market risk limits for the trading portfolios.
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Economic capital requirements are a homogeneous measure of risk and the capital required to maintain the desired risk profile. They enable Santander UK to:
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> | Quantify the consolidated risk profile taking into account the significant risks of the business, as well as the diversification effect inherent in a multi-business group such as Santander UK.
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> | Prepare economic capital forecasts as part of its internal capital adequacy assessment.
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> | Consider the concentration risk for corporate and markets portfolios, in terms of both the size of their exposure and their sector or geographic concentration. Product concentration in retail portfolios is captured through the application of an appropriate correlation model.
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> | Monitor the economic capital position on a monthly basis.
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Santander UK employs a return on risk-adjusted capital ('RORAC') methodology with the following activities and objectives:
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> | Calculation of economic capital requirement and of the return thereon for Santander UK's business units and for business segments and portfolios in order to facilitate an optimal allocation of economic capital.
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> | Budgeting of capital requirement and RORAC of Santander UK's business units.
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> | Analysis and setting of prices in the decision-making process for transactions or products, such as loan approval.
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RORAC facilitates the comparison of the performance of transactions, customers, portfolios and businesses. It also identifies those which achieve a risk-adjusted return higher than the cost of capital, aligning risk management and business management with the aim of maximising value creation.
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The main objective of scenario analysis and stress testing at Santander UK is to enhance senior management's understanding of the sensitivity of Santander UK's business plan, risk profile and financial resources to stress and scenario events. Scenario analysis and stress testing outputs form the basis for developing appropriate action plans that are ready to be deployed to mitigate as much of the impacts of the events as possible. | |||
The Board views scenario analysis and stress testing as an intrinsic component of risk governance and has ultimate responsibility for its application and embedding it throughout Santander UK. The Stress Testing Framework aims to ensure that consistent and comprehensive stress testing is undertaken throughout Santander UK and that scenario analysis and stress testing is an integral part of:
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> | The setting and review of Santander UK's Risk Appetite;
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> | The three year planning process;
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> | The capital planning process;
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> | Liquidity and contingency planning; and
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> | Santander UK's compliance with prevailing regulatory requirements. | ||
The on-going independent validation of our risk models provides assurance in respect of their appropriateness and reliability. | |||
> | The validation is conducted independently of the teams responsible for the development of the models, and has a separate reporting line.
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> | It is specialised and expert, and reviews both the methodological aspects of the models, but also the technical environment and data employed.
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> | Validation is undertaken to ensure all our regulatory obligations are met.
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Allocation of risk across Santander UK
As a homogenous measure of risk, economic capital can be used to illustrate the distribution of risk across those risk types for which capital is considered an effective mitigant.
The diagram opposite sets out the distribution of economic capital requirements at 31 December 2012 by key risk type. This allocation does not make allowance for the effects of diversification across risks or assets. Figures are derived from the economic capital consumption at 31 December 2012.
http://www.rns-pdf.londonstockexchange.com/rns/0886A_8-2013-3-15.pdf
Structural Risk includes Non Traded Market Risk allocation of 8%. Non Financial Risk includes Operational Risk allocation of 10%.
RISK CULTURE (unaudited)
Our risk culture is founded on the core principles described above and is embedded into all business units through the implementation of the Santander UK Risk Framework:
> | The Chief Executive Officer and Chief Risk Officer are responsible for promoting a corporate culture, promoting ethical practices and fostering social responsibility. Policies and corporate values, approved by the Board, are communicated throughout Santander UK.
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> | The Santander UK Risk Framework, implemented in 2012, provides a common acceptance throughout the organisation of the importance of continuous risk management, including clear accountability and ownership of risk areas. Minimum standards apply to each of the five core principles and are monitored through a documented attestation process.
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> | The committee structure and governance process allows for timely risk information flow, challenge and escalation.
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> | In 2012, new Santander UK corporate values were launched. These align behaviours to four key values in support of our risk culture: Teamwork, Excellence, Innovation and Commitment.
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> | In 2012, risk training and briefings were given to Board members, Executive Committee members and Operational Risk officers.
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> | An established 'Risk School' supports learning and professional development across Risk whilst engendering risk understanding and capability across other areas of Santander UK. The Risk School's objectives include sharing of risk best practice and the provision of quality risk training. In 2012:
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> | 15,648 training hours were delivered to risk professionals by the Risk School.
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> | A training programme aimed at non-risk professionals resulted in an increased level of risk knowledge and understanding across other Santander UK business areas.
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> | 147 non-risk professionals received face-to-face training and 11,500 undertook e-learning development across a variety of risk-related topics.
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> | From a communication perspective, policies and procedures articulate the application of risk management techniques to Risk Framework principles.
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> | The Santander UK employee handbook documents expectations of employees in relation to business and financial integrity. | |
During 2013, further work is planned as follows:
> | A comprehensive risk awareness campaign is planned to be launched in 2013 to further strengthen and embed a risk management culture across Santander UK.
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> | Risk awareness training and communication programme for all staff and face-to-face workshops for risk controllers and Directors.
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> | Inclusion of risk behavioural competencies within job profiles and mandatory risk objectives within the performance management process. |
FINANCIAL RISKS |
CREDIT RISK
INTRODUCTION
Credit risk is the risk of financial loss arising from the default or credit quality deterioration of a customer or counterparty to which Santander UK has directly provided credit, or for which the Santander UK has assumed a financial obligation.
This section sets out further detail on:
> | Credit risk classification,
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> | Measurement across the credit cycle, |
> | Approach to forbearance, and
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> | Credit risk exposure at a Santander UK level.
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Credit risk classification
Santander UK's exposures to credit risk arise in the following businesses:
RETAIL BANKING | CORPORATE BANKING | MARKETS | CORPORATE CENTRE | ||||
> | Exposures consist of residential mortgages, banking, and other personal financial services products.
| > | Exposures consist of loans, bank accounts, treasury instruments, asset finance, cash transmission, trade finance and invoice discounting. These services are provided to large corporates, UK SMEs and specialist businesses.
| > | Exposures arise from financial services and treasury products provided to financial institutions and large corporates.
| > | Exposures result from asset and liability management of the balance sheet. This area is also responsible for managing credit risk on the non-core and legacy portfolios being run down.
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The credit risk arising in each of these businesses is covered in further detail in subsequent sections. Across these business segments, the management of credit risk is tailored according to the type of customer. These are typically classified as either non-standardised or standardised customers as follows:
STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | Consists primarily of individuals and small businesses. Risk management is based on internal risk assessment and automatic decision-making models, supported by teams of analysts specialising in this type of risk.
| > | Consist mostly of medium and large corporate customers and financial institutions where risk management is performed through expert analysis supplemented by decision-making support tools based on internal risk assessment models. | |
> | As a general rule, the following businesses deal with standardised customers: Retail Banking, Corporate Banking, and Corporate Centre (for certain non-core portfolios).
| > | As a general rule, the following businesses deal with non-standardised customers: Corporate Banking, Markets and the Corporate Centre.
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Measurement across the credit cycle
The credit cycle comprises the following elements. Each element is described in further detail below:
http://www.rns-pdf.londonstockexchange.com/rns/0886A_9-2013-3-15.pdf
1. Risk limit planning and setting
This phase involves setting risk limits which:
> | Are aligned to Santander UK's business plan and strategic aims,
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> | Ensure adherence to Santander UK's Risk Appetite, and
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> | Control the risk associated with any new product proposals. |
Risk limit planning and setting is a dynamic process involving the discussion of business proposals and the attitude to risk. This process is defined in the risk limit plan, a comprehensive document for the integrated management of the balance sheet and its inherent risks. The way in which risk limits are set is tailored to each risk classification as follows:
STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | The risk limits are planned and set on a portfolio basis. | > | A high-level risk limit is approved to support the customer's overall financing needs.
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> | For each portfolio, a credit management programme is produced. These documents contain the expected results of the portfolio in terms of risk and return, as well as the limits applicable to various activities and the related risk management.
| > | This limit covers a variety of products (such as lending, trade finance or derivatives) enabling Santander UK to define a total risk tolerance with the customer based on current and expected financial requirements. | |
> | For global corporate groups, a system of pre-agreed limits (pre-classification) is used, based on an economic capital measurement and monitoring system. For large corporate customers, a simplified pre-classification model is applied. | |||
2. Risk analysis and credit rating process
Risk analysis is performed to establish the customer's ability to meet its obligations. The analysis includes a review of customer credit quality, associated operational risk, and risk adjusted returns.
To aid this analysis, Santander UK uses a number of proprietary internal measurement tools including statistical models and rating systems. These are used for internal credit risk assessments, informing lending decisions, and for calculating regulatory and economic capital requirements. These are tailored to each risk classification as follows:
STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | For standardised customers, Santander UK typically employs statistical models that automatically assign a score to the proposed transaction or customer. Such scorecards typically work in conjunction with other policy rules.
| > | For many non-standardised counterparties with a global footprint, Santander UK employs rating tools, co-ordinated on a global basis by the Banco Santander group. Portfolios of this nature include sovereigns, large corporate and certain financial institutions. Ratings for non-standardised customers and financial institutions employ specific proprietary rating systems.
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STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | Most decisions are made via an automated route. There are cases however where additional qualification and manual intervention is necessary. Risk assessment is not constrained to decisions at origination, as often scorecards exist across the customer lifecycle. | > | The tools utilised have both quantitative and qualitative components. The qualitative stage involves the analysis of the relative financial performance of the customer, together with macro-economic data. This is supplemented in the qualitative stage with an analyst's expert judgement.
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> | Scorecards and policies are monitored frequently, with both quantitative and qualitative triggers embedded. | > | The ratings are reviewed at least annually or more frequently in cases where monitoring indicates this is appropriate.
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> | The rating tools are also reviewed in order to progressively fine-tune the ratings they provide | |||
Credit risk parameters
The Santander UK group uses a number of internal measures and measurement tools for the purposes of making internal credit risk assessments and lending decisions and for calculating regulatory capital in accordance with Basel II requirements but these are not used in the calculation of impairment loss allowances for accounting purposes under IFRS. For details of the accounting policies for impairment calculated in accordance with IFRS refer to pages 219 to 224. The assessment of customers or transactions using rating or scoring systems constitutes a judgement of their credit quality, which is quantified through the probability of default ('PD'). In addition to PD, the quantification of credit risk requires the estimation of other parameters, such as exposure at default ('EAD') and the percentage of EAD that will not be recovered (loss given default or 'LGD'). PD, EAD and LGD are all calculated in accordance with the requirements of Basel II and include direct and indirect costs. In estimating the risk involved in transactions, other factors such as any off-balance sheet exposure and collateral valuations are also taken into account. The combination of these risk parameters (i.e. PD, LGD and EAD) enables calculation of the expected loss ('EL'). The risk parameters are used to calculate the Basel II regulatory capital.
For portfolios with limited internal default experience (e.g. banks) parameter estimates are based on alternative sources, such as market prices or studies conducted by external agencies. These portfolios are known as "low default portfolios". For all other portfolios, parameter estimates are based on internal risk models.
> | PD is calculated by observing the cases of new defaults in relation to the final rating assigned to customers or to the scoring assigned to the related transactions.
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> | EAD is calculated by comparing the use of committed facilities at the time of default and their use under normal (i.e. performing) circumstances, so as to estimate the eventual extent of use of the facilities in the event of default.
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> | LGD is calculated by observing the recoveries of defaulted loans, taking into account not only the income and expenses associated with the recovery process, but also the timing and the indirect costs arising from the recovery process. |
The parameters estimated for global portfolios (e.g. banks) are the same throughout the Banco Santander group. Therefore, a financial institution will have the same PD for a specific rating, regardless of the Banco Santander group entity in which the exposure is booked. By contrast, local portfolios (e.g. residential mortgages) have specific score and rating systems. PDs are assessed specifically for each borrower within the portfolio.
3. Transaction decision-making
Having analysed the transactions and rated the customer, a decision is then made about whether or not to approve the transaction. This decision-making process takes account of:
> | The credit quality of the customer, the underlying risk of the transaction and the extent of any risk mitigation (e.g. collateral),
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> | Associated risk policy, limits and appetite, and
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> | Achievement of the correct balance between risk and associated return.
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All decisions to approve credit transactions are made under authority delegated by the Board. The approach to the decision-making process differs according to risk classification as follows:
STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | In the standardised risk environment, automated decision models are used to facilitate the management of large volumes of credit transactions. | > | Credit approval decisions are made under a system of delegated authorities to individuals. Larger transactions above pre-defined limits are referred to governance committees. These include the Credit & Investment Approvals Committee and, for higher value transactions, the Executive Risk Committee. | |
STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | In certain cases this is supplemented by the use of manual underwriting to ensure adherence to risk policy and that the appropriate decision is made for both the customer and Santander UK. | > | This decision-making process is followed both for transactions under pre-classified limits and those which receive specific approval.
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4. Risk monitoring
The Risk Division has a specific monitoring function to enable early detection of issues. Monitoring is conducted at a portfolio, segment, customer and transactional level. Mitigating actions are proposed if deterioration is detected. Credit concentrations are also monitored. Concentration limits as defined by the Risk Appetite are reviewed and approved as necessary.
A specialised approach to monitoring is adopted for each risk classification:
STANDARDISED CUSTOMERS | NON-STANDARDISED CUSTOMERS | |||
> | For exposures to standardised customers, key indicators are monitored in order to detect any variance in the performance of portfolio compared to the forecasts contained in the credit management programmes.
| > | For Corporate and some other specific lines of business, a 'watchlist' system is employed of companies under special watch. For brevity, this is referred to by the internal Spanish acronym 'FEVE'.
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> | The scorecards, rating systems (including those necessary for Basel II), and associated policy are also monitored to check for stability and performance. | |||
The four stages in the 'FEVE' system are:
http://www.rns-pdf.londonstockexchange.com/rns/0886A_10-2013-3-15.pdf
A customer can be classified as FEVE as a result of the monitoring process itself, a decision made by the manager responsible for that customer or the triggering of the automatic warning system. There are a range of indicators that may trigger a case being added to FEVE, including downturn in trade, covenant breaches, major contract loss, and resignation of key management. Such cases are assessed to determine the potential financial implications of these trigger events. Inclusion in the FEVE system does not automatically mean there has been a default, but will result in the following action:
> | A specific and time-bound action plan will be put in place for this customer, together with the assignment of specific individuals for management.
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> | Customers are reviewed monthly and the assigned rating is reviewed at least every six months, |
5. Risk measurement and control
Changes in Santander UK's credit risk position are measured and controlled on an ongoing and systematic basis against budgets, limits and benchmarks. The potential future impact of these changes, both of an external nature and those arising from strategic decisions, is assessed in order to establish the required mitigating action needed.
Several metrics are used to measure and control credit risk during this phase. The two key metrics are:
KEY METRICS | ||
> | Expected loss ('EL') | EL is defined as the product of the three parameters: PD, EAD and LGD. It is an indication of the likely future costs of credit risk.
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> | Net movement in non-performing loans ('NPLs')
| Defined as net movement in NPL stock over a period (closing balance less opening balance) plus write-offs, minus assets recovered during the same period. This metric and its components play a decisive role as tracking variables used to detect early changes in the behaviour of portfolios.
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The risk control function assesses risks from various complementary perspectives, including geographical location, business area, management model and product and process, thus facilitating the detection of specific areas of action requiring remediation. Stress testing techniques are also employed to establish vulnerabilities to economic deterioration.
6. Recovery management
The macroeconomic environment directly affects the number of customers who default on an obligation. Recovery management is therefore critical to the success of our business, and is deployed through special recovery units.
Recovery management is a strategic, integrated business activity. The Banco Santander group has a global model which is applied and implemented by Santander UK. The objectives of the recovery process are as follows:
CREDIT RISK OBJECTIVES | ||
> | Customer Relationship | To maintain and strengthen the relationship with customers, paying attention to customer payment behaviour. Specifically to ensure that the individual circumstances and reasons for arrears are carefully considered when agreeing solutions with customers to ensure that arrangements are affordable and sustainable.
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> | Payment Collection | To collect payments in arrears so that accounts return to performing status. If this is not possible within a reasonable time period, the aim is to fully or partially recover debts, regardless of their status for accounting or management purposes.
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Effective collections and recoveries activity is dependent on:
ACTION | DESCRIPTION | |
| > | Supporting the customer | Effective collections management is focussed on assisting customers in finding affordable and sustainable repayment solutions based on their individual circumstances.
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| > | Predicting customer behaviours and treating customers fairly | By monitoring and modelling customer profiles, and designing and implementing appropriate customer communication and repayment strategies, to enable effective support of customers in financial difficulty.
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| > | Negotiation | Ongoing dialogue and negotiation with the customer to return the account to normal status in the shortest affordable and sustainable period.
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| > | Monitoring customer repayment promises | It is essential that repayment agreements are monitored and evaluated to ensure they are reducing the customer's indebtedness in line with agreed terms.
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Approach to forbearance
To support customers that encounter actual or apparent financial difficulties, Santander UK may enter into forbearance arrangements. Forbearance arrangements include the granting of temporary or permanent concessions to customers to amend contractual payment amounts or timings. These are made where a customer's financial position indicates the possibility that satisfactory repayment may not be made within the original terms and conditions of the contract but where analysis suggests that repayment is possible within the revised terms of the loan.
A range of forbearance strategies are employed in order to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession.
Santander UK's policies and practices are based on criteria which, in the judgement of management, indicate that repayment is likely to continue and that after the initial period of financial difficulties the customer can revert to the previous terms, with appropriate support where necessary. These agreements may be initiated by the customer, Santander UK or by a third party.
Further detail on the approaches and extent of forbearance in each business segment is set out in the subsequent sections.
Credit risk exposure at a Santander UK level
The following table presents the Santander UK's estimated maximum exposure to credit risk at 31 December 2012 and 2011 without taking account of any collateral held or other credit enhancements:
| 2012 £m | 2011 £m |
Balances with central banks | 28,161 | 24,956 |
Trading assets | 7,789 | 12,497 |
Securities purchased under resale agreements | 14,941 | 11,464 |
Derivative financial instruments | 30,146 | 30,780 |
Financial assets designated at fair value | 3,811 | 5,005 |
Available-for-sale securities | 5,483 | 46 |
Loan and receivable securities | 1,259 | 1,771 |
Loans and advances to customers | 191,907 | 201,069 |
Loans and advances to banks | 2,205 | 2,417 |
Other | 889 | 1,281 |
Total exposure(1) | 286,591 | 291,286 |
(1) In addition, Santander UK is exposed to credit risk in respect of guarantees granted, loan commitments and stock borrowing and lending agreements. The estimated maximum exposure to credit risk is described in Note 38 of the Consolidated Financial Statements.
The table below analyses the composition of the Santander UK Consolidated Balance Sheet compared to the equivalent regulatory exposure. The regulatory exposure represents the exposure at default ("EAD") calculated in accordance with regulatory requirements.
The main differences between Santander UK's balance sheet amounts and its regulatory exposures are as follows:
> | For Retail Banking and Corporate Banking customer assets, the regulatory exposure is larger than the balance sheet amount as the regulatory exposure includes unutilised credit facilities, which are adjusted for using a credit conversion factor ('CCF').
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> | For counterparty risk, the regulatory exposure is smaller than the balance sheet amount as regulatory exposures for repurchase, reverse repurchase, securities financing and derivative transactions are calculated net of any associated collateral and netting agreements.
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> | For liquid assets, the regulatory exposure is smaller than the balance sheet amount as the regulatory exposure for reverse repurchase transactions are calculated net of collateral received.
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> | For other assets, the regulatory exposure is smaller than the balance sheet amount as the regulatory exposure for derivatives hedging Santander UK debt issuances is calculated net of any associated collateral and netting agreements.
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> | Intangible assets are deducted from capital resources and therefore no regulatory exposure is recognised.
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2012 | Balance sheet amount £bn | Regulatory exposure (unaudited) £bn |
Retail Banking | ||
Secured lending | 156.6 | 164.4 |
Unsecured lending | 8.7 | 11.9 |
Total | 165.3 | 176.3 |
Corporate Banking | ||
Customer assets | 19.6 | 25.1 |
Counterparty risk | 16.0 | 1.3 |
Total | 35.6 | 26.4 |
Markets | ||
Credit risk | 0.1 | 0.1 |
Counterparty risk | 28.1 | 6.2 |
Total | 28.2 | 6.3 |
Corporate Centre | ||
Customer assets | 11.0 | 12.8 |
Liquid assets | 37.6 | 34.8 |
Total | 48.6 | 47.6 |
Intangible and other assets | 15.3 | 8.6 |
Total | 293.0 | 265.2 |
CREDIT RISK - RETAIL BANKING
INTRODUCTION
Retail Banking offers a wide range of products and financial services to customers through a network of branches, agencies and ATMs, as well as through telephony, e-commerce and intermediary channels. It principally serves personal banking customers, but also services small businesses with a turnover of less than £250,000 per annum. Retail Banking products include residential mortgage loans, savings and current accounts, credit cards and personal loans as well as a range of insurance policies. Credit risk is the risk of financial loss arising from the default of a customer or counterparty to which Santander UK has directly provided credit, or for which Santander UK has assumed a financial obligation, after realising collateral held.
This section sets out further detail on credit risk in Retail Banking as follows:
> | Management's approach,
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> | Customer assets;
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> | Residential mortgages: | |
> | Managing credit risk; | |
> | Higher risk loans; | |
> | Credit quality and credit risk mitigation; | |
> | Arrears, including non-performing loans; | |
> | Forbearance; and | |
> | Litigation and recovery.
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> | Banking and consumer credit;
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> | Finance leases; and
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> | Non-performing loans and advances, and restructured/refinanced loans.
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MANAGEMENT'S APPROACH TO CREDIT RISK IN RETAIL BANKING | |
> | Santander UK is principally a retail prime lender and has no appetite or product offering for any type of sub-prime business. Our credit policy explicitly prohibits such lending and is specifically designed to ensure that any business written is responsible, affordable (both initially and on an on-going basis) and of a good credit quality.
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> | Credit risk in Retail Banking is managed through the use of a set of Board approved risk appetite limits to cover credit risk arising in Retail Banking.
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> | Within these limits, credit mandates and policies are approved with respect to products sold by Santander UK.
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> | The largest area of exposure to credit risk in Retail Banking is in residential lending on mortgages. Residential lending is subject to lending policy and lending authority levels.
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> | Criteria for assessment include credit references, credit score, borrower status, affordability and, where applicable, Loan-to-Value ('LTV') ratio. Santander UK also employs quantitative limits that relate to both internal approval levels and that above which applications will be declined. |
RETAIL BANKING - CUSTOMER ASSETS
An analysis of Retail Banking customer assets is presented below.
2012 £bn | 2011 £bn | 2010 £bn | |
Advances secured on residential properties(1) | 156.6 | 166.2 | 165.8 |
Other secured advances | - | - | 0.4 |
Unsecured loans: | |||
- Overdrafts(2) | 0.5 | 0.5 | 0.5 |
- Unsecured lending(2,3) | 2.3 | 2.9 | 3.3 |
- Credit cards (2) | 2.6 | 2.7 | 2.9 |
Finance leases(4) | 1.9 | 1.8 | 1.6 |
Other loans | 1.4 | 1.4 | 1.0 |
Total | 165.3 | 175.5 | 175.5 |
(1) Excludes loans to UK social housing associations, which are managed within Corporate Banking, accrued interest and other items.
(2) Overdrafts, UPLs and other loans relating to cards are disclosed within unsecured loans and other loans in Note 18.
(3) Includes cahoot UPLs of £0.1bn (2011: £0.1bn, 2010: £0.2bn).
(4) Additional finance leases of £1.1bn (2011: £1.1bn, 2010:£1.2bn) are managed and classified within Corporate Banking.
RESIDENTIAL MORTGAGES
Retail Banking grants mortgage loans for house purchases as well as home improvement loans to new and existing mortgage customers. The property on which the mortgage is secured must always be located within the UK regardless of the destination of the funds.
Geographically, whilst Santander UK has a diverse footprint across the UK, our mortgage exposure is more prevalent in Greater London and Southeast England, representing 50% by value of the total book. Despite the economic downturn, these regions show a more stable behaviour against national house price indices.
RESIDENTIAL MORTGAGE LENDING(1)
An analysis of movements in Retail Banking mortgage balances is presented below.
2012 £bn | 2011 £bn | 2010 £bn | |
At 1 January | 166.2 | 165.8 | 160.6 |
Gross mortgage lending in the year | 14.4 | 23.0 | 23.9 |
Redemptions and repayments in the year | (24.0) | (22.6) | (18.7) |
At 31 December | 156.6 | 166.2 | 165.8 |
(1) Excludes loans to UK social housing associations, which are managed within Corporate Banking, accrued interest and other items.
MANAGING CREDIT RISK
Retail Banking lends on many types of property but only after a credit risk assessment of the borrower, including affordability modelling (i.e. an assessment of the customer's capacity to repay) and an assessment of the property is undertaken. The quality of the mortgage assets are monitored to ensure that they are within agreed portfolio limits. Residential lending is subject to lending policy and lending authority levels. The approval process uses credit scorecards, supported by manual underwriting, which involves a review of the applicant's credit history using information held by credit reference agencies. Affordability of the customer's borrowings is also assessed under stressed scenarios, including increased interest rates. Additional controls are used, such as product limits, loan to income and loan to value ratios.
Collateralisation
Prior to granting any first mortgage loan on a property, Santander UK has the property valued by an approved and qualified surveyor. The valuation is based on Santander UK guidelines, which build upon the Royal Institution of Chartered Surveyors ('RICS') guidance on valuation methods. In the case of re-mortgages, where the LTV is 75% or lower, the risk judged by the size of the advance requested is medium to low, the credit score of the applicant is considered medium or high, and an accurate, reputable automated valuation is available, this may substitute for a surveyor's valuation.
For existing mortgages, the current values of the properties on which individual mortgages are secured are assessed quarterly. For each individual property, details such as address, type of property and number of bedrooms are supplied to an independent agency that estimates current property valuations using information from recent property transactions and valuations in that local area. All additional loans require an automated valuation or surveyor's valuation. The use of an automated valuation depends upon the availability of a reliable automated valuation, and the level of credit risk posed by the proposed loan.
31 December | 2012 £m | 2011 £m | 2010 £m |
Book value of advances secured on residential properties(1) | 156,583 | 166,201 | 165,772 |
Collateral value of residential properties (2) (4) | 155,737 | 165,206 | 164,434 |
(1) Includes £7,613m (2011: £7,867m, 2010: £7,084m) of loans where the LTV is greater than 100% (i.e. negative equity).
(2) Includes £6,767m (2011: £6,872m, 2010: £5,971m) of collateral against loans in negative equity.
(3) Of the loans in negative equity, the total which is effectively uncollateralised is £846m (2011: £995m, 2010: £1,113m).
(4) The collateral value excludes the impact of over-collateralisation - where the collateral held is of a higher value than the loan balance held.
HIGHER RISK LOANS
Santander UK is principally a retail prime lender and does not originate sub-prime or second charge mortgages. The portfolio's arrears performance has continued to be relatively stable with arrears and loss rates remaining low. Nonetheless, there are some mortgage types that present higher risks than others. These products consist of:
> | Interest-only, |
> | Flexible loans, |
> | Loans with loan-to-value >100%, and |
> | Buy-to-let. |
PRODUCT | DESCRIPTION | |
| > | Interest-only | Interest-only mortgages require monthly interest payments and the repayment of principal only at maturity. Santander UK requires that the customer has made arrangements to repay the principal at maturity via FSA-regulated investment products which must have been running for a minimum of twelve months, including Individual Savings Accounts and pension policies (i.e. repayment vehicles), or by the sale of the property. It is the customer's responsibility to ensure that they have sufficient funds to repay the principal in full at maturity.
Interest-only mortgages are well-established and common in the UK market. The legal structure of the UK mortgage market means that, unlike in other jurisdictions such as the United States, it is not possible for a borrower in financial difficulties to "walk away" from their obligations under a mortgage loan contract as the borrower remains liable for any outstanding debt after the realisation of the security. In addition, the consequences of credit defaults for a UK borrower are typically more severe and of longer duration than in some other jurisdictions. As a result, the risks inherent in interest-only mortgages in the UK are not as high as in some other jurisdictions. Lending policies to mitigate the risks inherent in this repayment structure are in place and mature. Since March 2008, all interest-only mortgages have been assessed for affordability as if they were a capital repayment mortgage payable over a 25 year term. Since 2009, additional policies aimed at reducing the risk associated with interest only mortgages have been implemented, including the reduction of the maximum term from 35 years to 25 years. In 2010, the maximum LTV on new interest-only mortgages was reduced from 90% to 75% to mitigate against the risk of falling house prices and increases were made in the minimum credit score acceptable resulting in higher quality loans. In 2012, the maximum LTV on new interest-only mortgages was further reduced to 50%. In addition restrictions were added so that sale of the property is now only an acceptable repayment plan in limited circumstances where the amount of equity exceeds a predefined minimum.
Performance of interest-only mortgages While the risks with respect to interest-only mortgages are higher than capital repayment mortgages, they are only modestly so. The performance of this significant sub-portfolio has been below that of our standard capital repayment mortgage sub-portfolio, but in line with expectations, as described on pages 84 to 87.
On maturity of interest-only mortgages, a significant majority are repaid in full. The remaining mortgages are restructured/refinanced, with only a small proportion remaining on an interest-only basis.
In addition, there are loans which have been restructured/refinanced as interest-only loans as part of our forbearance strategy for customers in financial difficulty. Accordingly, the performance of these mortgages is significantly worse than other interest-only mortgages.
Restructuring/refinancing of interest-only mortgages For interest-only mortgages prior to maturity that are performing, the Santander UK group may offer the facility to convert to a standard capital repayment mortgage. For interest-only mortgages that are in arrears or where the customer is up-to-date but has indicated that they are experiencing financial difficulties, the only option that is likely to be viable is a reduced payment arrangement. Such agreements are only of short-term duration, typically five months.
For interest-only mortgages reaching maturity, Santander UK may consider a range of options subject to an affordability assessment (i.e. evidence that the customer has the financial resources available to meet the proposed payments). These options can include conversion to a standard capital repayment mortgage or temporarily extending the maturity of the loan in order to reach a solution, such as to allow the sale of the property or await the maturity of a repayment vehicle.
Approximately 31% of loans which enter forbearance were originally on an interest-only mortgage at 31 December 2012 compared to stock of 35%.
|
PRODUCT | DESCRIPTION | ||
| > | Flexible loans | A flexible mortgage permits customers to "drawdown" additional funds at any time up to a predefined credit limit. By utilising the drawdown on their available funds customers are able to vary their monthly payments, or take payment holidays. A customer's ability to drawdown is subject to certain predetermined conditions. These include: | |
> | The drawdown must not exceed the available limit. | ||
> | The total number of drawdowns made in any month must not exceed the limit (if any) specified in the current tariff of charges. | ||
> | The customer must not be more than two payments in arrears. | ||
> | The customer must not have had any insolvency events, which can include County Court Judgements, Bankruptcies, Individual Voluntary Arrangements, Administration Orders and Debt Relief Orders. | ||
Customers are allowed to request credit limit reviews, but any increase request will be subject to the standard full credit approval process. Additionally, Santander UK can lower the credit limit at any time to ensure that the total of the mortgage balance and the available limit does not exceed 90% of the current market value of the property.
Performance of flexible loans While the risks with respect to flexible loans can be higher than more traditional capital repayment mortgage loans, the performance of this significant sub-portfolio has been stable and has exhibited a lower level of defaults than Santander UK's more traditional capital repayment mortgage loans.
Typically, in each of month of 2012, less than 1% (2011: less than 1%) of flexible loan customers will have taken a payment holiday and approximately 0.8% (2011: 0.8%) of flexible loan customers are more than three payments in arrears.
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| > | Loans with loan-to-value >100% | Loans with higher loan-to-value ratios carry a higher risk due to the increased likelihood that liquidation of the collateral will not yield sufficient funds to cover the loan advanced, arrears and the costs of liquidation. Prior to 2009 customers, in limited circumstances, were able to borrow more than 100% of the value of the property against which the loan was secured. Additionally, decreases in house prices have resulted in the current LTV of some loans increasing to over 100%.
Since 2009, progressively stricter lending criteria have been applied to mortgages at LTVs above 75%. Since 2009, no loans were made with a loan-to-value of more than 100%. During 2011, 2010 and 2009, less than 0.1% of new secured loan advances were made with a loan-to-value of more than 90%. This increased slightly to 0.3% in 2012 with the introduction of the UK Government-backed New Buy scheme - a guarantee scheme that aims to help buyers who have a deposit of at least 5% to buy a new-build home, designed to help more borrowers to secure up to a 95% loan-to-value mortgage on new-build properties (houses and flats) from participating builders in England.
| |
| > | Buy-to-let
| In December 2011, Santander UK re-entered the buy-to-let market via the Intermediary channel only, targeting new or small volume investor landlords. The buy-to-let proposition has its own suite of policies against which every application is manually assessed by an underwriter unless it is declined by an automated system decision and the general principle behind the proposition is that it is self-financing. Buy-to-let mortgages accounted for only 1.4% by value of new mortgages during 2012.
| |
Mortgage credit quality and credit risk mitigation
Loan-to-value analysis(1) (2)
2012 | 2011 | 2010 | |
New business | |||
< 75% | 67% | 70% | 74% |
75% - 90% | 33% | 30% | 26% |
100% | 100% | 100% | |
Simple average(3) loan-to-value of new business (at inception) | 63% | 64% | 62% |
Value weighted average(4) loan-to-value of new business (at inception) | 59% | ||
Stock | |||
< 75% | 67% | 66% | 67% |
75% - 90% | 21% | 22% | 22% |
90% - 100% | 7% | 7% | 7% |
>100% i.e. negative equity | 5% | 5% | 4% |
100% | 100% | 100% | |
Simple average loan-to-value of stock (indexed) | 52% | 52% | 51% |
Value weighted average loan-to-value of stock | 49% | ||
Simple average loan-to-value of impaired loans | 64% | 67% | 67% |
Value weighted average loan-to-value of impaired loans | 62% | ||
Simple average loan-to-value of unimpaired loans | 52% | 52% | 51% |
Value weighted average loan-to-value of unimpaired loans | 48% |
(1) Excludes any fees added to the loan, and only includes the drawn loan amount, not drawdown limits.
(2) Based on HPI indexed values or the results of automated valuation modelling, as appropriate.
(3) Unweighted average of loan-to-value of all accounts.
(4) Sum of all loan values divided by sum of all valuations.
2012 compared to 2011
During 2012, the percentage of new business with an LTV of greater than 75% increased from 30% to 33% due to a focus on first time buyers who generally have higher LTVs than other customers. However, the average LTV on all completions decreased from 64% to 63%. The value weighted average LTV (calculated by taking the sum of all loan amounts and dividing by the sum of all the valuations) is lower than the simple average at 59%.
At 31 December 2012, 5% of the retail mortgage portfolio was over 100% LTV. This remained broadly level from 2011 due to relatively stable house prices across the country as a whole. The percentage of the portfolio with an LTV greater than 90% also remained constant, while the percentage of the portfolio with an LTV greater than 75% decreased from 34% to 33%.
At 31 December 2012, the simple average indexed stock LTV remained at 52%, and the value weighted average LTV was 49%. The simple average LTV of impaired loans decreased significantly from 67% to 64%. This was because the 2012 impaired figure now includes cases that are three or more months past maturity and these cases tend to have a lower balance and hence a lower LTV. The vast majority of the mortgage loan portfolio is unimpaired, reflected by the fact that the LTV of unimpaired loans is very similar to that of the entire portfolio.
2011 compared to 2010
During 2011, LTV on new business completions rose from 62% to 64%, due to policy and price changes allowing high quality, higher LTV applications to be accepted. At 31 December 2011, 4.8% of the retail mortgage portfolio was over 100% LTV compared with 4.3% at 31 December 2010. This increase was due to a decrease in house prices; however, both the >100% and 90-100% LTV stock was considerably lower than in 2009. Additionally, the percentage of the portfolio with LTV greater than 90% (12%) remained well below the UK industry average of 17% (CACI Mortgage Market Data).
During 2011, the indexed stock LTV increased to 52% from 51%, mainly due to decreasing house prices. The average LTV of impaired loans was higher than that of unimpaired loans due to higher LTV business being inherently riskier and hence more likely to go into arrears. The simple average LTV of impaired loans was unchanged at 67%.
Borrower profile(1)
2012 | 2011 | 2010 | |
New business | |||
First-time buyers | 23% | 21% | 21% |
Home movers | 54% | 48% | 47% |
Remortgagers | 23% | 31% | 32% |
100% | 100% | 100% | |
Of which:(2) | |||
- Full Interest-only loans(3) | 19% | 29% | 34% |
- Part interest-only, part repayment loans | 2% | - | - |
- Flexi loans | 14% | 9% | 19% |
- Loans with original LTV >100% | - | - | - |
Stock | |||
First-time buyers | 19% | 19% | 18% |
Home movers | 42% | 39% | 39% |
Remortgagers | 39% | 42% | 43% |
100% | 100% | 100% | |
Of which: (2) | |||
- Full Interest-only loans(3) | 35% | 36% | 42% |
- Part interest-only, part repayment loans | 11% | 12% | - |
- Flexi loans | 17% | 18% | 19% |
- Loans with original LTV >100% | - | - | - |
(1) Excludes any fees added to the loan, and only includes the drawn loan amount, not drawdown limits.
(2) Where a loan exhibits more than one of the higher risk criteria, it is included in all the applicable categories.
(3) For 2012 and 2011, the percentage of full interest-only loans was reported separately from those loans on a part interest-only basis. In 2010, only loans with the largest loan part on interest-only were reported as interest-only.
2012 compared to 2011
During 2012, the proportion of new business via remortgages reduced significantly due to the targeted desire to reduce lending in this sector. Consequently, lending to first-time buyers and home movers increased. A lower percentage of new interest-only were written in 2012 compared with 2011, mainly due to restricting interest-only applications to an LTV no greater than 50%. The percentage of flexible loans increased from 9% to 14% but still remained well below the 2010 level of 19%. Approximately 5% of new mortgages were both interest-only and flexible.
In 2012, the change in new business mix led to a change in the borrower profile of the stock with home movers increasing from 39% to 42% and remortgages decreasing from 42% to 39%. In 2012, the way in which interest-only mortgages are reported was changed to show separately the value of loans on a full interest-only basis and the value of loans on part interest-only basis. In previous years, only loans that had the largest loan part on an interest-only basis were reported as interest-only. On this new basis the percentage by value of full interest-only loans decreased from 36% in 2011 to 35% in 2012, and the value of part-part loans has decreased from 12% in 2011 to 11% in 2012, reflecting changes to credit policies in the year. Approximately 10% of mortgages are both interest-only and flexible.
2011 compared to 2010
During 2011, the proportion of new business from first-time buyers, home movers and re-mortgagers was relatively unchanged compared to 2010, due to conditions in the market remaining relatively static. A lower percentage of new interest-only and flexible loans were written in 2011 compared with 2010. For interest-only loans this was, in part, due to no longer accepting interest-only applications with an LTV greater than 75% (previously, the maximum LTV accepted was 90%).
Average earnings multiple (at inception)
2012 | 2011 | 2010 | |
Average earnings multiple (at inception) | 3.1 | 3.0 | 2.9 |
The average earnings multiple of new business (at inception) increased marginally during 2012. This was because a larger proportion of borrowers were first time buyers during 2012 compared with 2011, and these customers tend to have a higher income multiple on average than other buyer types.
Mortgages - Arrears
The following table analyses mortgage arrears status at 31 December 2012, 2011 and 2010 by volume and value.
2012 | 2011 | 2010 | ||||
Volume '000 | Value(1) £m | Volume '000 | Value(1) £m | Volume '000 | Value(1) £m | |
Performing | 1,468 | 151,084 | 1,558 | 161,145 | 1,588 | 160,867 |
Early arrears(2) | 26 | 2,733 | 24 | 2,488 | 23 | 2,439 |
Late arrears(3) | 26 | 2,638 | 26 | 2,434 | 21 | 2,343 |
Properties in possession | 1 | 128 | 1 | 134 | 1 | 123 |
1,521 | 156,583 | 1,609 | 166,201 | 1,633 | 165,772 |
(1) Excludes accrued interest.
(2) Early arrears refer to mortgages that are between 31 days and 90 days in arrears.
(3) Late arrears refer to mortgages that are typically over 90 days in arrears.
2012 compared to 2011
In 2012, arrears levels have increased mainly due to collections and recoveries process and policy changes made to meet FSA regulatory guidance. In addition, there has been a definition change to include in NPLs 610 accounts (£81m value) that are more than 1 month but less than 3 months in arrears that also have a bankruptcy indicator.
2011 compared to 2010
In 2011, arrears and repossession levels remained better than UK industry benchmarks from the CML. Mortgage arrears increased slightly, supported by continued low interest rates and a high quality book coupled with effective handing procedures. Properties in possession increased slightly but remained stable at 0.06% of the total mortgage book by volume. Properties in possession by value increased slightly during the year and the ratio of properties in possession to the total mortgage book was considerably better than the industry average. This was due to stable sales performance of repossessed assets and strong rehabilitation rates for the cases in litigation.
The following table sets forth mortgage arrears by volume of accounts (separately for higher risk loans and the remaining loan portfolio) at 31 December 2012, 2011 and 2010 compared to the industry average as provided by the CML.
Group(1) | CML(2) (unaudited) | |||||
Higher risk loans(2) | Remaining portfolio | Total(3) | ||||
Mortgage arrears | Interest-only(3) | Flexible | Original LTV > 100% | |||
(Percentage of total mortgage loans by number) | ||||||
31 to 60 days in arrears: | ||||||
31 December 2010 | 0.41 | 0.06 | - | 0.47 | 0.92 | - |
31 December 2011 | 0.44 | 0.07 | 0.01 | 0.49 | 0.95 | - |
31 December 2012 | 0.49 | 0.07 | - | 0.53 | 1.10 | - |
61 to 90 days in arrears: | ||||||
31 December 2010 | 0.23 | 0.03 | - | 0.26 | 0.51 | - |
| 31 December 2011 | 0.27 | 0.04 | - | 0.28 | 0.56 | - |
| 31 December 2012 | 0.28 | 0.04 | - | 0.32 | 0.63 | - |
3 to 6 months in arrears: | ||||||
31 December 2010 | 0.36 | 0.05 | - | 0.33 | 0.72 | 0.90 |
| 31 December 2011 | 0.40 | 0.06 | - | 0.36 | 0.77 | 0.86 |
| 31 December 2012 | 0.43 | 0.06 | - | 0.41 | 0.89 | 0.87 |
6 to 12 months in arrears: | ||||||
31 December 2010 | 0.20 | 0.03 | - | 0.15 | 0.37 | 0.70 |
| 31 December 2011 | 0.24 | 0.04 | - | 0.17 | 0.42 | 0.63 |
| 31 December 2012 | 0.25 | 0.04 | - | 0.22 | 0.50 | 0.62 |
Over 12 months in arrears: | ||||||
31 December 2010 | 0.11 | 0.02 | - | 0.08 | 0.20 | 0.55 |
31 December 2011 | 0.13 | 0.02 | - | 0.10 | 0.23 | 0.48 |
31 December 2012 | 0.14 | 0.03 | - | 0.09 | 0.29 | 0.43 |
(1) Council of Mortgage Lenders data is not available for arrears less than three months. 2010 and 2011 data has been restated by CML since 2011 was reported.
(2) Where a loan exhibits more than one of the higher risk criteria, it is included in all the applicable categories. As a result, the total of the mortgage arrears for higher risk loans and remaining loan portfolio will not agree to the total mortgage arrears percentages.
(3) Interest-only loan segment contains both full interest-only and part-interest-only loans as both of these are considered to be higher risk.
2012 compared to 2011
During 2012, arrears rates increased across all categories. The increases were mainly due to process changes made within Collections & Recoveries to meet FSA regulatory requests. Additionally, in 2012 unlike in previous years, any loans that had a capital balance outstanding after the contractual maturity date were included in the relevant arrears category even if the loan was not in payment arrears. Accounts that were in early arrears (31-90 days) and had a bankruptcy indicator are now considered to be NPLs, but for the purposes of the table above these accounts remained in their actual arrears category. Overall, the arrears rate remained below the industry average as provided by the CML.
2011 compared to 2010
During 2011, arrears increased slightly across all time categories, although the arrears rate remained below the industry average as provided by the CML for most arrears categories.
Mortgages - Non-performing loans and advances ('NPLs')
| 2012 £m | 2011 £m | 2010 £m |
Mortgage NPLs(1)(2) - UK | 2,719 | 2,434 | 2,343 |
Mortgage loans and advances to customers(2) | 156,583 | 166,201 | 165,772 |
Mortgage impairment loan loss allowances - UK | 552 | 478 | 526 |
% | % | % | |
Mortgages NPLs as a percentage of total mortgage loans and advances to customers | 1.74 | 1.46 | 1.41 |
Coverage ratio(3) | 20 | 20 | 22 |
(1) Mortgages are classified as non-performing when the counterparty fails to make a payment when contractually due for typically three months or longer.
(2) Excludes accrued interest.
(3) Impairment loan loss allowances as a percentage of NPLs.
2012 compared to 2011
At 31 December 2012, NPLs as a percentage of mortgage loans and advances to customers increased to 1.74% (2011: 1.46%), in part reflecting the decrease in the stock of mortgage loans and advances in the year. The increase was also due to a change in the collection policy implemented in late 2011 that holds accounts in NPLs for longer, and changes in the NPLs definition, both resulting in more cases classified as NPLs.
The change in collections policy was driven by a regulatory review of our processes, which resulted in us being required to expand our affordability assessment process to gather more detail of the customer's financial position, which forms the basis of the final arrangement reached with the customer. As a result of this expanded process, it now takes longer to finalise a collections arrangement with a customer. The change in collection policy included tightening of forbearance policies. Whilst the rate of accounts entering NPLs did not increase, the effect of these changes was to slow the rate of improvement and cures resulting in cases remaining longer in NPLs.
The additional NPLs arose from cases past maturity and sole deceased, where the mortgage or part of the mortgage was still outstanding. (Past maturity loans refer to loans that have reached the maturity date when the mortgage should have been repaid but still remain outstanding, with the customer continuing to pay the normal monthly instalments. Sole deceased cases fall into arrears as the sole mortgage account holder has deceased and the monthly instalments continue to accrue resulting in arrears until the customer's estate settles the outstanding mortgage and the associated arrears). Excluding the impact of the change in NPLs definition, the NPLs ratio at 31 December 2012 was 1.40%, reflecting stable underlying performance. Comparatives in the table above are not restated for the change.
The mortgage NPLs ratio of 1.74% remained below the UK industry average based on Council of Mortgage Lenders ('CML') published data. The mortgage NPLs performance reflected the high quality of the mortgage book, a lower than anticipated increase in unemployment and prolonged low interest rates. Impairment loss allowances increased to £552m (2011: £478m) with the coverage ratio remaining relatively strong at 20% (2011: 20%) as a result of stable NPLs.
2011 compared to 2010
At 31 December 2011, mortgage NPLs as a percentage of mortgage loans and advances to customers increased to 1.46% (2010: 1.41%). However, the underlying performance remained stable with the overall increase due to a change in the NPLs definition resulting in more cases classified as NPLs. The additional NPLs arose from cases past maturity and sole deceased, where the mortgage or part of the mortgage was still outstanding. Excluding the impact of the change in NPLs definition, the NPLs ratio at 31 December 2011 was 1.39%, reflecting stable underlying performance. Comparatives in the table above are not restated for the change.
The mortgage NPLs ratio of 1.46% remained considerably below the UK industry average based on CML published data. The mortgage NPLs performance reflected the high quality of the mortgage book, a lower than anticipated increase in unemployment and prolonged low interest rates. Impairment loss allowances decreased to £478m (2010: £526m) with the coverage ratio remaining relatively strong at 20% (2010: 22%) as a result of stable NPLs. Given the favourable underlying NPLs performance and the early performance of new business written in 2011, the impairment reserves have decreased, resulting in a reduction in coverage.
Mortgages - NPLs by higher risk loan type(1)
2012 £m | 2011 £m | 2010 £m | |
Total mortgages NPLs | 2,719 | 2,434 | 2,343 |
Of which: | |||
- Interest only loans | 1,736 | 1,557 | 1,608 |
- Flexi loans | 232 | 232 | 226 |
- Loans with original LTV > 100% | 13 | 20 | 22 |
(1) Where a loan exhibits more than one of the higher risk criteria, it is included in all the applicable categories.
Mortgages - arrears management
The Collections & Recoveries Department is responsible for all debt management activities on the Retail Banking secured loan portfolio. The overall aim is to minimise losses by helping customers repay their debts in a timely but affordable and sustainable manner whilst not adversely affecting brand, customer loyalty, or compliance with relevant legal and regulatory standards.
The general principles of collections consist of:
| > | Wherever possible, rehabilitation tools are used to encourage customers to find their own way out of difficulties but this solution should be agreeable to Santander UK;
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| > | Santander UK will be sympathetic and not make unreasonable demands of the customer;
|
| > | Customer retention, where appropriate, is important and helping customers through difficult times can improve loyalty;
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| > | Guarantors are pursued only after it is established that the borrower is unable or unwilling to fulfil their contractual arrangements or if contact with the borrower cannot be made; and
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| > | Litigation and repossession is the last resort. |
Effective collections and recoveries activity is dependent on:
ACTION | DESCRIPTION | |
| > | Predicting customer behaviours and treating customers fairly | By monitoring and modelling customer profiles and designing and implementing appropriate customer communication and repayment strategies, to enable effective support of customers in financial difficulty.
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| > | Negotiation | Ongoing dialogue and negotiation with the customer to return the account back to order in the shortest affordable and sustainable period.
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| > | Monitoring customer repayment promises | It is essential that repayment agreements reached with the customer are monitored and evaluated to ensure that they are reducing the indebtedness of the customer in line with agreed terms.
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| > | Supporting the customer | Effective collections management is focussed on assisting customers in finding affordable and sustainable repayment solutions based on their individual circumstances.
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Santander UK sells the repossessed property in a reasonable time frame for the best possible price based on fair market value and uses the sale proceeds, net of costs, to pay off the outstanding value of the mortgage. The stock of repossessed properties held by Santander UK varies according to the number of new possessions and the buoyancy of the housing market.
Forbearance - mortgages RESTRUCTURED/REFINANCED
Forbearance on mortgage accounts occurs where the business grants a temporary or permanent concession of contractually agreed terms and conditions to a borrower who has been identified as being in financial difficulty. The aim of this concession is to bring the account back on to sustainable terms where the mortgage can be full serviced over its lifetime. Concessions are only granted where the customer is able to meet contractual interest payments. In certain limited circumstances, it may be possible for a customer to have their loan restructured/refinanced more than once. However, the impairment loss allowance on these accounts is calculated based on their highest arrears status in the forbearance period, just by reference to the original contractual terms.
The factors considered when concluding whether a borrower is experiencing financial difficulties can include significant changes in economic circumstances such as the loss of income or employment, and significant changes in personal circumstances such as divorce.
A range of forbearance strategies are employed in order to improve the management of customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession. In the retail portfolios, forbearance strategies can include approved debt counselling plans, payment arrangements, capitalisation, term extensions and switches from capital and interest repayments to interest-only payments. Santander UK's policies and practices are based on criteria which, in the judgement of management, indicate that repayment is likely to continue and that after the initial period of financial difficulties the customer can revert to the previous terms, with appropriate support where necessary. These agreements may be initiated by the customer, Santander UK or by a third party.
Debt management strategies, which include affordability assessment, use of collection tools, negotiation of appropriate repayment arrangements and debt counselling, can start prior to actual payment default or as early as the day after a repayment is past due and can continue until legal action. Different collection strategies are applied to different segments of the portfolio subject to the perceived levels of risk.
Many of these accounts remain in the performing portfolio but are separately reported and subject to higher provisioning rates. Once forbearance activity has been carried out, the account will exit the forbearance state once sustainability has been evidenced and no incremental material maturity risk has resulted from the forbearance activity.
The aim of this concession is to bring the account back onto sustainable terms where the mortgage can be fully serviced over its lifetime. Outstanding arrears can be added to the loan balance to be repaid over the remaining loan term. This is known as capitalisation, and can be offered to borrowers under the forms of payment arrangements and refinancing (either a term extension or an interest only concession). Term extensions, interest-only conversions and capitalisations, excluding those where a party to the mortgage is deceased, are only granted due to financial difficulties and are reported as restructures/refinancings.
There are other loan modifications that have been carried out historically, however these are not included as forbearance as there was no financial difficulty evident at the time of modification and the majority of those modified subsequently continue to perform satisfactorily.
| ACTION | DESCRIPTION |
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| > | Payment arrangements | Discretion exists to vary the repayment schedule to allow customers to bring the account up to date. The objective is to bring the account up to date as soon as possible. |
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| > | Restructuring/refinancing | Collections & Recoveries may offer to pay off an existing mortgage and replace it with a new one, only to accounts in arrears or with significant financial difficulties or if a customer is up to date but states they are experiencing financial difficulties. Alternatively, Collections & Recoveries may offer a term extension or interest only concession. The eligibility criteria for restructuring/refinancing are: (i) If the account is at least one instalment in arrears; or (ii) If the customer has been consistently underpaying their instalment; or (iii) If the customer claims a medium-term temporary change in financial circumstances has caused financial difficulties. |
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> | Term extensions | The repayment period/program may be extended to reduce monthly repayments if all other collections tools have been exhausted. Customers may be offered a term extension where they are up-to-date but showing evidence of financial difficulties, or are already in the Collections & Recoveries process. The term can be extended to no more than 40 years and the customer must be no more than 75 years old at the end of the revised term of the mortgage. | |||
> | Interest-only concessions | The monthly repayment may be reduced to interest payment only with capital repayment deferred if all other collections tools have been exhausted and a term extension is either not possible or affordable. Customers may be offered an interest only concession where they are up-to-date but showing evidence of financial difficulties, or are already in the Collections & Recoveries process. Interest only concessions are offered up to a two year maximum period, after which a review is carried out. The expectation is that the customer will return to repayment on a capital and interest basis after the expiry of this concession. Agreements are made through the use of a data driven tool including such factors as affordability and customer indebtedness. Periodic reviews of the customer financial situation are undertaken to assess when the customer can afford to return to the repayment method. | |||
> | Capitalisations | The customer's arrears may be capitalised and added to the mortgage balance where the customer is consistently repaying the agreed monthly amounts (typically for a minimum period of 6 months) but where they are unable to increase repayments to repay these arrears over a reasonable period. Term extensions and interest-only concessions can be combined with capitalisation. | |||
Overall, the level of forbearance activity reduced in 2012 compared to 2011. In 2012, the forbearance definition was expanded to include those up-to-date accounts where the term was extended within 6 months of loan maturity. This increased the overall level of reported term extensions within forbearance activity in 2012.
In addition, in 2012, the definition of forbearance was revised, reflecting current regulatory guidance, resulting in an increase in the cumulative value of mortgage accounts currently under forbearance. At 31 December 2012, the value of mortgage accounts defined as forborne was £4.2bn, compared with £2.6bn at 31 December 2011.
At 31 December 2012, of the accounts that had been in forbearance for over 6 months old, 58% had made their last six months' contractual payments. Furthermore, just under £3.0bn (i.e. 70% by value) of all the accounts in forbearance were classified as performing. The weighted average LTV of all accounts in forbearance was 43.6% compared to the weighted average portfolio LTV of 48.5%.
Forbearance commenced during the year
The incidence of the main types of mortgage forbearance arrangements described above which commenced during the year ended 31 December 2012 and 2011 was:
2012 | 2012 | 2011 | 2011 | |
£m | % of loans by value | £m | % of loans by value | |
Capitalisation | 147 | 21 | 386 | 51 |
Term extensions | 355 | 49 | 53 | 7 |
Interest only concessions | 219 | 30 | 318 | 42 |
721 | 100 | 757 | 100 | |
Of which(3): | ||||
- Interest only loans(4) | 337 | 47 | 430 | 57 |
- Flexi loans | 132 | 18 | 63 | 8 |
- Loans with original LTV >100% | 1 | - | 2 | - |
(1) All mortgages originated by Santander UK are first charge.
(2) Mortgages are included within the year that they were forborne.
(3) Where a loan exhibits more than one of the higher risk criteria, it is included in all the applicable categories.
(4) Only loans which are fully interest-only are included
(5) The figures by year reflect the amount of forbearance activity undertaken during the year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.
At 31 December 2012, the stock of mortgage accounts that had either had their term extended or converted to interest only amounted to less than 3% of all mortgage accounts, both by number and value (2011: less than 1%).
Levels of adherence to revised payment terms remained high during 2012 and in line with the level seen during 2011 at approximately 67% (2011: 71%) by value.
Forbearance cumulative number and value of accounts
a) Payment status when entering forbearance
The status of the cumulative number of accounts in forbearance at 31 December 2012 when they originally entered forbearance, analysed by type of forbearance applied, was:
2012(1) | Interest only | Term extension | Capitalisation | Total | ||||
No. | £m | No. | £m | No. | £m | No. | £m | |
Restructuring/refinancing in NPL | 3,227 | 341 | 1,057 | 78 | 3,219 | 280 | 7,503 | 699 |
Other restructuring/refinancing | 10,390 | 1,131 | 19,440 | 953 | 14,878 | 1,466 | 44,708 | 3,550 |
Total | 13,617 | 1,472 | 20,497 | 1,031 | 18,097 | 1,746 | 52,211 | 4,249 |
2011(1) | Interest only | Term extension | Capitalisation | Total | ||||
No. | £m | No. | £m | No. | £m | No. | £m | |
Restructuring/refinancing in NPL | 2,847 | 303 | 502 | 42 | 2,927 | 250 | 6,276 | 595 |
Other restructuring/refinancing | 6,173 | 654 | 1,756 | 157 | 12,323 | 1,201 | 20,252 | 2,012 |
Total | 9,020 | 957 | 2,258 | 199 | 15,250 | 1,451 | 26,528 | 2,607 |
(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
b) Payment status at the year-end
The current status of accounts in forbearance analysed by type of forbearance applied at 31 December 2012 and 2011 was:
2012(1) | Interest only | Term extension | Capitalisation | Total | Impairment allowance | ||||||
No. | £m | No. | £m | No. | £m | No. | £m | £m |
| ||
In arrears | 5,005 | 555 | 2,627 | 206 | 5,527 | 514 | 13,159 | 1,275 | 68 |
| |
Performing | 8,612 | 917 | 17,870 | 825 | 12,570 | 1,232 | 39,052 | 2,974 | 51 |
| |
Total | 13,617 | 1,472 | 20,497 | 1,031 | 18,097 | 1,746 | 52,211 | 4,249 | 119 |
| |
Proportion of portfolio | 0.9% | 0.9% | 1.4% | 0.7% | 1.2% | 1.1% | 3.4% | 2.7% | - |
| |
2011(1) | Interest only | Term extension | Capitalisation | Total | Impairment allowance | ||||||
No. | £m | No. | £m | No. | £m | No. | £m | £m |
| ||
In arrears | 4,080 | 439 | 963 | 79 | 3,857 | 337 | 8,900 | 855 | 45 |
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Performing | 4,940 | 518 | 1,295 | 120 | 11,393 | 1,114 | 17,628 | 1,752 | 47 |
| |
Total | 9,020 | 957 | 2,258 | 199 | 15,250 | 1,451 | 26,528 | 2,607 | 92 |
| |
Proportion of portfolio | 0.6% | 0.6% | 0.1% | 0.1% | 0.9% | 0.9% | 1.6% | 1.6% | - |
| |
(1) Forbearance type categorisation is based on the first forbearance activity undertaken on the accounts. Tables contain only open accounts at the end of the year.
In 2012, a change to the loan restructures/refinancings definition was applied. Term extensions that took place within six months of maturity and all accounts in arrears at the point of modification have now been classified as restructures/refinancings. The change resulted in approximately £1bn of additional mortgages being included in the term extension restructures/refinancings stock at 31 December 2012. This was partially offset by loans redeeming. This change is reflected in the 2012 tables.
At 31 December 2012, 75% of the accounts in forbearance were performing in accordance with the revised terms agreed under Santander UK's forbearance arrangements. When forbearance activities began, only 58% of these accounts, including other accounts that were in early arrears (rather than in NPL) when they entered restructuring/refinancing, were performing in accordance with the original contractual terms. The improvement in the percentage of accounts performing supports Santander UK's view that its forbearance arrangements provide an important tool to improve the prospects of recovery of amounts owed. In addition, it is likely that some of the accounts which were in early arrears at the time of the initial restructuring/refinancing would have otherwise deteriorated into NPL. A customer's ability to adhere to any revised terms agreed is an indicator of the sustainability of Santander UK's forbearance arrangements.
Those accounts that reach the end of the concessionary forbearance period show a good propensity to return to full repayments in accordance with the original contractual terms after the period of financial difficulty has passed.
At 31 December 2012, impairment loss allowances as a percentage of the balance of accounts for Santander UK's overall mortgage portfolio was 0.35%. The equivalent ratio for accounts in forbearance which were performing was 1.71%, and for accounts in forbearance which were in arrears was 5.33%. The higher ratios for accounts in forbearance reflected the higher levels of impairment loss allowances held against such accounts, as a result of the higher risk characteristics inherent in such accounts.
c) Performing accounts by duration of forbearance activities
The tables below provide a further analysis of the accounts in forbearance at 31 December 2012 and 2011 that are classified as performing by length of time since they entered forbearance.
2012 - Values | 0 to 6 months | > 6 to 12 months | > 12 to 18 months | > 18 to 24 months | More than 24 months | Total |
£m | £m | £m | £m | £m | £m | |
Capitalisation | 11 | 36 | 110 | 147 | 928 | 1,232 |
Term extensions | 85 | 131 | 114 | 101 | 394 | 825 |
Interest only concessions | 18 | 68 | 70 | 74 | 687 | 917 |
Total | 114 | 235 | 294 | 322 | 2,009 | 2,974 |
Proportion of forborne performing accounts (%) | 4% | 8% | 10% | 11% | 67% | 100% |
2012 - Volumes | 0 to 6 months | > 6 to 12 months | > 12 to 18 months | > 18 to 24 months | More than 24 months | Total |
No. | No. | No. | No. | No. | No. | |
Capitalisation | 122 | 306 | 981 | 1,294 | 9,867 | 12,570 |
Term extensions | 2,041 | 2,870 | 2,443 | 2,315 | 8,201 | 17,870 |
Interest only concessions | 152 | 632 | 634 | 709 | 6,485 | 8,612 |
Total | 2,315 | 3,808 | 4,058 | 4318 | 24,553 | 39,052 |
Proportion of forborne performing accounts (%) | 6% | 10% | 10% | 11% | 63% | 100% |
2011 - Values | 0 to 6 months | > 6 to 12 months | > 12 to 18 months | > 18 to 24 months | More than 24 months | Total |
£m | £m | £m | £m | £m | £m | |
Capitalisation | 143 | 173 | 197 | 126 | 475 | 1,114 |
Term extensions | 8 | 17 | 28 | 40 | 27 | 120 |
Interest only concessions | 54 | 66 | 100 | 98 | 200 | 518 |
Total | 205 | 256 | 325 | 264 | 702 | 1,752 |
Proportion of forborne performing accounts (%) | 12% | 15% | 18% | 15% | 40% | 100% |
2011 - Volumes | 0 to 6 months | > 6 to 12 months | > 12 to 18 months | > 18 to 24 months | More than 24 months | Total |
No. | No. | No. | No. | No. | No. | |
Capitalisation | 1,277 | 1,495 | 1,737 | 1,234 | 5,650 | 11,393 |
Term extensions | 98 | 174 | 304 | 404 | 315 | 1,295 |
Interest only concessions | 455 | 620 | 871 | 907 | 2,087 | 4,940 |
Total | 1,830 | 2,289 | 2,912 | 2,545 | 8,052 | 17,628 |
Proportion of forborne performing accounts (%) | 10% | 13% | 17% | 14% | 46% | 100% |
The sustainability of Santander UK's forbearance arrangements was further demonstrated by the fact that 74% and 78% by volume and value, respectively, of the accounts in forbearance classified as performing arose from forbearance undertaken more than 18 months previously (2011: 60% by volume and 55% by value).
MORTGAGES - LITIGATION AND RECOVERY
The account is escalated to the litigation and recovery phase when a customer is unwilling or unable to adhere to an acceptable agreement regarding arrears. Santander UK will consider delaying referral to litigation, or delaying action once in litigation under certain circumstances, such as where the customer presents evidence that the mortgage will be redeemed or the arrears cleared, or where the mortgage has a very low balance and arrears, or where the customer is making a regular payment of at least the instalment amount. These policies exist to ensure that repossession is only used as a last resort.
Repossessed collateral
The following tables set forth information on properties in possession, at 31 December 2012, 2011 and 2010 for Retail Banking compared to the industry average as provided by the Council of Mortgage Lenders, as well as the carrying amount of assets obtained as collateral. Two independent valuations are requested on all possessions and form the basis for impairment reserving. Where the valuations are still pending, the latest losses experienced are used to assess the impairment reserves. This, together with the additional disposal costs considered, ensures that anticipated losses inherent in the stock of possession are realistic in relation to the current economic conditions.
Industry average CML (unaudited) | ||||
Properties in possession | Number of properties | Value £m | Percentage of total mortgage loans by number | |
% | % | |||
31 December 2010 | 873 | 123 | 0.05 | 0.12 |
31 December 2011 | 965 | 134 | 0.06 | 0.12 |
31 December 2012 | 924 | 128 | 0.06 | 0.10 |
Application of impairment loss methodology to accounts in arrears and collection
A detailed description of the application of Santander UK's impairment loss methodology to accounts in arrears and collection is set out in Note 1 of the Consolidated Financial Statements.
BANKING AND CONSUMER CREDIT
Retail Banking also provides current account facilities and overdrafts, and unsecured personal loans ('UPLs'), credit cards, finance leases, business loans, together with other loans.
UNSECURED LENDING(1)
Retail Banking uses a range of systems, risk tools and information sources to manage the risks involved in unsecured personal lending. These include the use of application and behavioural scoring systems as part of the assessment and granting of credit facilities as well as regular monitoring of scorecard performance and the quality of the unsecured lending portfolios.
An analysis of movements in unsecured lending balances is presented below.
2012 £bn | 2011 £bn | 2010 £bn | |
At 1 January | 2.9 | 3.3 | 4.2 |
Gross lending in the year | 1.1 | 1.5 | 1.3 |
Redemptions and repayments in the year | (1.7) | (1.9) | (2.2) |
At 31 December | 2.3 | 2.9 | 3.3 |
(1) Excludes overdrafts and credit cards.
Non-performing loans and advances
| 2012 £m | 2011 £m | 2010 £m |
Unsecured NPLs - UK (1,2) | 112 | 164 | 169 |
Unsecured loans and advances to customers(2) | 4,214 | 4,814 | 5,261 |
Unsecured loans impairment loan loss allowances - UK | 228 | 302 | 458 |
% | % | % | |
NPLs as a percentage of unsecured loans and advances to customers | 2.65 | 3.40 | 3.21 |
Coverage ratio(3) | 204 | 185 | 271 |
(1) Includes UPLs, overdrafts, consumer finance (excluding finance leases) and business loans. Accrued interest is excluded for purposes of these analyses. Also excludes credit cards.
(2) Unsecured personal lending is classified as non-performing when the counterparty fails to make a payment when contractually due for three months or longer.
(3) Impairment loan loss allowances as a percentage of non-performing loans and advances. The coverage ratio, as recognised across the industry, is based on the total impairment loan loss allowances relative to the stock of NPLs. Total loan loss allowances will relate to early arrears as well as performing assets and hence, the ratio exceeds 100%.
2012 compared to 2011
During 2012, NPLs as a percentage of unsecured loans and advances to customers decreased to 2.65% (2011: 3.40%) reflecting the continued good performance of the unsecured portfolios, and the higher credit quality of more recent vintages, as older portfolios with higher loss levels mature. The level of NPLs decreased to £112m at 31 December 2012 (2011: £164m), reflecting the improved quality of the unsecured lending book. The coverage ratio increased to 204% at 31 December 2012 (2011: 185%) as increased impairment loss allowances were established on restructured/refinanced cases in performing or early arrears status given the uncertain near term economic outlook.
2011 compared to 2010
In 2011, NPLs as a percentage of unsecured loans and advances to customers increased slightly to 3.40% (2010: 3.21%) as a result of lower asset balances held. The level of NPLs decreased to £164m at 31 December 2011 (2010: £169m), reflecting the improved quality of the unsecured lending book. The coverage ratio decreased to 185% at 31 December 2011 (2010: 271%) due to a marked improvement in the quality of new business.
Forbearance
Forbearance arrangements allow customers to manage repayments when they experience financial difficulties. The forbearance arrangements that may be available are:
| ACTION | DESCRIPTION | |
| > | Reduced repayments via a Debt Management Plan | Where customers experience financial difficulty, collection activities and fees and interest can be frozen for up to 60 days while a reduced payment plan is agreed. If payments are maintained then the fees and interest will not be reinstated.
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| > | Informal reduced payment arrangements | The same flexibility as noted above is offered where a customer does not have a formal debt management plan in place but is experiencing financial difficulties.
|
| > | Reduced settlement | A reduced lump sum payment may be accepted with the remaining balance written off.
|
At 31 December 2012 and 2011, the proportion of the stock of unsecured personal loans for which term extensions had been agreed was less than 2% by number and value. Forbearance options for the unsecured portfolio are focused on agreeing an affordable repayment plan taking into account an individual customer's particular circumstances. See the accounting policy "Impairment of Financial Assets" in Note 1 to the Consolidated Financial Statements for details of how impairment losses are calculated for the unsecured portfolio subject to forbearance.
CREDIT CARDS
Credit card applications are assessed via a combination of credit policy rules and scoring models to determine acceptance decisions and assign appropriate credit limits. Behavioural scoring and trigger events identified through a wide variety of internal performance and credit bureau data are utilised to inform ongoing portfolio management decisions such as credit line management and transaction authorisation.
Santander UK has reached an agreement in principle for the sale of the £1.2bn of customers assets in its store cards business. Discussions continue with all parties to complete the transaction, which is expected to close in the first half of 2013.
Non-performing loans and advances
| 2012 £m | 2011 £m | 2010 £m |
Credit cards NPLs - UK (1,2) | 74 | 48 | 68 |
Credit cards loans and advances to customers(2) | 2,637 | 2,733 | 2,918 |
Credit card impairment loan loss allowances - UK | 179 | 212 | 186 |
% | % | % | |
NPLs as a % of credit cards loans and advances to customers | 2.82 | 1.75 | 2.31 |
Coverage ratio(3) | 241 | 441 | 275 |
(1) Credit card loans and advances are classified as non-performing when the counterparty fails to make a payment when contractually due for three months or longer, or is part of a financial difficulty arrangement.
(2) Accrued interest is excluded for purposes of these analyses.
(3) Impairment loan loss allowances as a percentage of NPLs. The coverage ratio as recognised across the industry is based on the total impairment loan loss allowances relative to the stock of NPLs. Total loan loss allowances will relate to early arrears as well as performing assets and hence, the ratio exceeds 100%.
2012 compared to 2011
During 2012, credit cards NPLs as a percentage of loans and advances to customers increased to 2.82% (2011: 1.75%). This was mainly due to a change in NPLs definition to include customers that are on financial difficulty arrangements and may be less than three months in arrears. The coverage ratio decreased to 241% (2011: 441%) mainly due to the inclusion of financial difficulty accounts within NPLs. Excluding this change in definition, coverage was stable compared to the prior year.
2011 compared to 2010
During 2011, credit cards NPLs as a percentage of the loans and advances to customers decreased to 1.75% (2010: 2.31%) mainly due to reduced levels of NPLs following risk initiatives that improved the quality of the book. The coverage ratio increased to 441% (2010: 275%) due to lower NPLs and higher reserves as post-acquisition reserves were recognised in the companies acquired in 2010.
Forbearance
Forbearance arrangements for credit card customers are consistent with other unsecured products. In addition to these forbearance strategies, Santander UK complies with insolvency solutions which are governed by relevant regulations and codes of practice. Insolvency solutions are not considered forbearance as they are not at the discretion of Santander UK but rather are complied with when applicable.
The accounts to which forbearance is applied are a small proportion of the total loan portfolio, with just over 1% by volume and just over 2% by value of accounts being in forbearance at 31 December 2012.
FINANCE LEASES
Retail Banking enters into finance leasing arrangements primarily for the financing of motor vehicles. The leasing arrangements are collateralised on the vehicles themselves. In addition, customers pay a cash deposit, so the majority of the loans are over-collateralised. In arrangements where Santander UK retains an interest in the residual value of a vehicle then industry standard valuations for the value of the vehicle at the end of the lease period are used to ensure that the collateral value is appropriate.
Non-performing loans and advances
| 2012 £m | 2011 £m | 2010 £m |
Total finance leases non-performing loans and advances(1,2) - UK | 9 | 7 | 7 |
Total finance leases loans and advances to customers(2) | 1,908 | 1,760 | 1,559 |
Total impairment loan loss allowances for finance leases loans and advances - UK | 42 | 36 | 18 |
% | % | % | |
Non-performing loans as a % of finance leases loans and advances to customers | 0.48 | 0.39 | 0.46 |
Coverage ratio(3) | 457 | 532 | 249 |
(1) Finance leases are classified as non-performing when the counterparty fails to make a payment when contractually due for three months or longer.
(2) Accrued interest is excluded for purposes of these analyses.
(3) Impairment loan loss allowances as a percentage of non-performing loans and advances. The coverage ratio as recognised across the industry is based on the total impairment loan loss allowances relative to the stock of NPLs. Total loan loss allowances will relate to early arrears as well as performing assets and hence, the ratio exceeds 100%.
2012 compared to 2011
During 2012, NPLs as a percentage of loans and advances to customers increased to 0.48% (2011: 0.39%) as a result of an adjustment in the classification on NPL. In 2012, specific balances were treated as NPLs where the chance of collection is considered unlikely even though they did not meet the definition of NPLs.
The coverage ratio reduced to 457% (2011: 532%) due to the change in NPLs classification, resulting in more cases categorised as NPLs. Despite this change, the provision remained at a similar level to 2011.
2011 compared to 2010
During 2011, NPLs as a percentage of loans and advances to customers decreased to 0.39% (2010: 0.46%) as a result of asset growth and the increasing quality of the book where the business mix changed more towards new cars.
The coverage ratio increased to 532% (2010: 249%) due to higher reserves as post-acquisition reserves were recognised with respect to the companies acquired in 2010.
Forbearance
There is no significant forbearance activity within the finance lease business.
RETAIL BANKING - NON-PERFORMING LOANS AND ADVANCES (1, 3)
An analysis of Retail Banking NPLs is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Retail Banking NPLs that are impaired(2) | 882 | 843 | 1,062 | 936 | 653 |
Retail Banking NPLs that are not impaired | 2,032 | 1,812 | 1,525 | 1,768 | 1,234 |
Retail Banking NPLs(3,4) | 2,914 | 2,655 | 2,587 | 2,704 | 1,887 |
Retail Banking loans and advances to customers(4) | 165,343 | 175,509 | 175,510 | 165,588 | 159,594 |
Retail Banking impairment loan loss allowances | 1,001 | 1,028 | 1,188 | 878 | 653 |
% | % | % | % | % | |
NPLs ratio | 1.76 | 1.51 | 1.47 | 1.63 | 1.18 |
Coverage ratio(5) | 34 | 39 | 46 | 32 | 35 |
(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or longer.
(2) NPLs against which an impairment loss allowance has been established.
(3) All NPLs are UK and continue accruing interest.
(4) Excludes accrued interest.
(5) Impairment loan loss allowances as a percentage of NPLs.
Movements in NPLs during the year are set out in the table below. Transfers 'in' represent loans which have fallen into arrears during the year and have missed three or more monthly payments. Transfers 'out' represent loans that have returned to performing status, or have been redeemed in full, or have proceeded to litigation and the property repossessed and sold, and the loan written off.
2012 £m | 2011 £m | |
Non performing loans at 1 January | 2,655 | 2,587 |
Transfers in to NPL | 1,480 | 1,323 |
Transfers out of NPL: | ||
- Forbearance | (54) | (111) |
- Change in arrears/Return to performing status | (654) | (731) |
- Loan repayments/redemptions | (173) | (156) |
- Write-offs | (437) | (446) |
Effect of changes in policies (1,2) | 97 | 189 |
Non performing loans at 31 December | 2,914 | 2,655 |
(1) Changes in policies in 2012 consisted of (i) the inclusion of cases in early arrears where the customer has been declared bankrupt in the last two years, and (ii) the inclusion of cards accounts in forbearance.
(2) Changes in policies in 2011 consisted of (i) no longer automatically capitalising unpaid instalments where the mortgage holder is deceased and instead allowing arrears to accrue pending settlement of the estate, (ii) the inclusion of cases >90 days past maturity as overdue, (iii) change in the collections negotiation approach from requesting repayment of arrears in full to establishing a repayment plan only after assessing a customer's circumstances to ensure it is affordable, and (iv) refinement in the calculation method of arrears.
2012 compared to 2011
During 2012, the NPLs ratio increased to 1.76% (2011: 1.51%), in part reflecting the decrease in the stock of loans and advances in the year. NPLs also increased due to a change in mortgage NPLs collections policy resulting in fewer cases curing from NPLs and a further mortgage technical definition change in policy to include in NPLs accounts in early arrears where the customer has been declared bankrupt in the last two years and the inclusion of cards forbearance in NPLs. The change in mortgage collections policy was driven by a regulatory review of our processes, which resulted in us being required to expand our affordability assessment process to gather more detail of the customer's financial position, which forms the basis of the final arrangement reached with the customer. As a result of this expanded process, it now takes longer to finalise a collections arrangement with a customer. The change in collection policy included tightening of forbearance policies. Whilst the rate of accounts entering NPLs did not increase, the effect of these changes was to slow the rate of improvement and cures resulting in cases remaining longer in NPLs.
In 2012, impairment loss allowances reduced slightly to £1,001m (2011: £1,028m) mainly due to the favourable performance of unsecured portfolios. The coverage ratio decreased to 34% (2011: 39%) due to lower impairment loss allowances, offset slightly by the increase in NPLs. Excluding the impact of the change in NPLs definition and collection policy changes, the NPLs ratio at 31 December 2012 of 1.76% would have been 1.43% (2011: Actual 1.51%). Performance reflected a stable secured and unsecured portfolio, a result of both the quality of the portfolio and stable economic variables.
2011 compared to 2010
During 2011, the NPLs ratio increased to 1.51% (2010: 1.47%). The increase in NPLs was driven by the changes in policy in mortgage NPLs definition that resulted in more cases classified as NPLs and a refinement of the calculation method of arrears. The additional NPLs arose from sole deceased and cases past maturity. Sole deceased cases fall into arrears as the sole mortgage account holder has deceased and the monthly instalments continue to accrue resulting in arrears until the customer's estate settles the outstanding mortgage and the associated arrears. Past maturity cases refer to loans that have reached the maturity date when the mortgage should have been repaid but still remain outstanding, with the customer continuing to pay the normal monthly instalments.
Impairment loss allowances reduced slightly to £1,028m (2010: £1,188m). The coverage ratio decreased to 39% (2010: 46%) due to lower impairment loss allowances, offset slightly by the increase in NPLs. Excluding the impact of the change in NPLs definition, the NPLs ratio at 31 December 2011 would be 1.45%. Performance reflected the high quality of the mortgage portfolio, a lower than anticipated increase in unemployment and persistently low interest rates.
2010 compared to 2009
During 2010, impairment loss allowances increased to £1,188m (2009: £878m), principally due to the higher number of loans and advances subject to Santander UK's forbearance process, which require higher levels of impairment loss allowances to reflect their increased risk characteristics. The coverage ratio increased to 46% (2009: 32%) due to both higher impairment loss allowances and the decrease in NPLs. The amounts written off on unsecured advances increased from £399m to £448m at 31 December 2010 reflecting the effect of the Alliance & Leicester portfolio transferred in 2009 and further acquisitions in 2010.
2009 compared to 2008
During 2009, the NPLs ratio increased to 1.63% (2008: 1.18%). This primarily reflected the impact of the continued market deterioration on the performance of the residential mortgage portfolio. This also further increased the proportion of NPLs secured against residential property in the NPLs balance, which in turn further reduced the overall impairment loss allowances coverage as the distribution shifted towards mortgages that require a lower level of coverage due to inherent securities held against the NPLs.
In 2012, interest income recognised on impaired loans amounted to £97m (2011: £86m, 2010: £125m).
RETAIL BANKING - RESTRUCTURED/REFINANCED LOANS
At 31 December 2012, the carrying amount of financial assets that are currently performing and have been forborne was £3,007m (2011: £1,784m, 2010: £1,435m).
CREDIT RISK - CORPORATE BANKING
INTRODUCTION
Corporate Banking offers a wide range of products and financial services to customers through a network of 35 regional CBCs and through telephony and e-commerce channels. It principally serves companies with annual turnover of more than £250,000 including Small and Medium Enterprises ('SMEs'). Its products and services include loans, bank accounts, deposits, treasury services, invoice discounting, cash transmission and asset finance. The Large Corporates business offers specialist treasury services in fixed income and foreign exchange, lending, transactional banking services, capital markets and money markets to large multinational corporate customers. Lending includes syndicated loans and structured finance. Transactional banking includes trade finance and cash management. Money market activities include securities lending/borrowing and repos. Credit risk arises by Corporate Banking making loans, investing in other financial instruments or entering into financing transactions or derivatives.
This section sets out further detail on credit risk in Corporate Banking as follows:
> | Management's approach;
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> | Assets;
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> | Committed facilities;
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> | Credit risk mitigation;
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> | Monitoring and recovery management;
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> | Arrears;
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> | Forbearance;
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> | Other forms of debt management; and
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> | Non-performing loans and advances, and restructured/refinanced loans.
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MANAGEMENT'S APPROACH TO CREDIT RISK IN CORPORATE BANKING | |
> | Corporate Banking aims to achieve controlled corporate growth through the expansion of a CBC network. It supports lending to the Mid-Corporate, SME and Real Estate sectors, as well as the large corporate market. Based on robust credit policies and risk appetite models, Corporate Banking focuses on the control of credit risks within its portfolio. |
> | All transactions are considered using credit limits approved by the appropriate credit authority. The top Risk Committee in Santander UK in this respect is the Executive Risk Committee and it delegates authority to the Credit & Investment Approvals Committee (See 'Key responsibilities' on page 66). All transactions over £70m (and certain others) are approved by the Executive Risk Committee. Santander UK has a delegated authority framework which defines transaction submission levels for escalation to global committees. However, final sign-off is derived from the Executive Risk Committee whilst the portfolio is controlled by the respective credit risk portfolio team. |
> | A set of risk appetite limits covering different types of risk (e.g. credit risk arising in Corporate Banking) are used to measure and control economic capital value. Santander UK's credit risk appetite is measured and controlled by a maximum level of unexpected loss that Santander UK is willing to sustain over a one-year period. In addition, specific limits are set by the Board in relation to single counterparty risk. |
> | Analysis of credit exposures and credit risk trends are analysed on a monthly basis, with key issues escalated to the senior risk committees as required. Larger exposures are reported monthly to the Board Risk Committee. |
CORPORATE BANKING - ASSETS
2012 £bn | 2011 £bn | 2010 £bn | |
Large Corporate - repos | 9.9 | 10.4 | 6.2 |
Sovereign | 3.8 | 7.7 | 14.3 |
Structured Finance | 0.4 | 0.5 | 0.6 |
Customer Assets: | |||
- Large Corporate loans (excluding repos) | 2.2 | 4.3 | 2.1 |
- Mid Corporate & SME(1) | 13.2 | 8.7 | 8.6 |
- Social housing(2) | 0.2 | - | - |
- Real estate(1) | 3.7 | 3.9 | 3.3 |
Other(1)(3) | 2.2 | 2.6 | 2.6 |
Total (4) | 35.6 | 38.1 | 37.7 |
(1) Includes corporate loans classified as Loans and advances to customers in Note 18.
(2) Consists of bonds classified as financial assets designated at fair value in Note 16.
(3) Includes finance leases classified as Loans and advances to customers in Note 18.
(4) Includes Operating lease assets in Note 26.
In Corporate Banking, credit risk arises on assets and off-balance sheet transactions. Consequently, the credit risk exposure below arises from on balance sheet assets, and off-balance sheet transactions such as committed and undrawn credit facilities or guarantees.
CORPORATE BANKING - COMMITTED FACILITIES
COMMITTED FACILITIES BY CREDIT RATING OF THE ISSUER OR COUNTERPARTY(1)(2)
2012 | Sovereign £m | Large Corporate £m | Structured Finance £m | Mid Corporate and SME £m | Real Estate (4) £m | Social Housing £m | Total £m |
AAA | 1,132 | 25 | - | - | - | - | 1,157 |
AA | 960 | 361 | - | 197 | 164 | 39 | 1,721 |
A | 66 | 3,324 | - | 1,033 | 1,321 | 261 | 6,005 |
BBB | - | 5,244 | 32 | 4,863 | 2,981 | 115 | 13,235 |
BB | - | 471 | 158 | 4,168 | 3,592 | - | 8,389 |
B | - | 1 | 72 | 277 | 277 | - | 627 |
CCC | - | - | 101 | 69 | 113 | - | 283 |
D | - | - | - | 157 | 389 | - | 546 |
Other(3) | - | - | - | 1,586 | 963 | - | 2549 |
Total | 2,158 | 9,426 | 363 | 12,350 | 9,800 | 415 | 34,512 |
2011 | Sovereign £m | Large Corporate £m | Structured Finance £m | Mid Corporate and SME £m | Real Estate (4) £m | Social Housing £m | Total £m |
AAA | 6,965 | 63 | - | 42 | - | - | 7,070 |
AA | 819 | 511 | 25 | 147 | 219 | - | 1,721 |
A | 25 | 3,045 | - | 1,063 | 1,395 | - | 5,528 |
BBB | - | 4,770 | 83 | 4,608 | 2,904 | - | 12,365 |
BB | - | 108 | 276 | 2,989 | 3,088 | - | 6,461 |
B | - | - | 105 | 125 | 176 | - | 406 |
CCC | - | - | - | 24 | 23 | - | 47 |
D | - | - | - | 136 | 284 | - | 420 |
Other(3) | - | - | - | 2,392 | 563 | - | 2,955 |
Total | 7,809 | 8,497 | 489 | 11,526 | 8,652 | - | 36,973 |
(1) The committed facilities exposure includes OTC derivatives.
(2) All exposures are internally rated. External ratings are taken into consideration in the rating process, where available.
(3) Individual exposures of £1m or less.
(4) In this table commercial mortgages are included within Real Estate, which reflects the type of risk being monitored, whereas in the table on the previous page they are included within SME to reflect the status of the borrower.
COMMITTED FACILITIES BY GEOGRAPHICAL AREA
2012 | Sovereign £m | Large Corporate £m | Structured Finance £m | Mid Corporate and SME £m | Real Estate £m | Social Housing £m | Total £m |
UK | - | 7,519 | 153 | 11,948 | 9,800 | 415 | 29,835 |
Peripheral eurozone | - | 263 | 22 | 78 | - | - | 363 |
Rest of Europe | 1,132 | 1,269 | 82 | 96 | - | - | 2,579 |
US | - | 266 | 106 | - | - | - | 372 |
Other, including non-OECD | 1,026 | 109 | - | 228 | - | - | 1,363 |
Total | 2,158 | 9,426 | 363 | 12,350 | 9,800 | 415 | 34,512 |
2011 | Sovereign £m | Large Corporate £m | Structured Finance £m | Mid Corporate and SME £m | Real Estate £m | Social Housing £m | Total £m |
UK | 5,477 | 5,907 | 233 | 11,166 | 8,652 | - | 31,435 |
Peripheral eurozone | - | 300 | 24 | 60 | - | - | 384 |
Rest of Europe | 1,591 | 1,277 | 120 | 48 | - | - | 3,036 |
US | - | 577 | 112 | 1 | - | - | 690 |
Other, including non-OECD | 741 | 436 | - | 251 | - | - | 1,428 |
Total | 7,809 | 8,497 | 489 | 11,526 | 8,652 | - | 36,973 |
(1) The geographic location is classified by country of domicile of the counterparty.
The increases in Large Corporate, Mid Corporate and SME, and Real Estate exposures in 2012 arose from the continued development of a UK corporate banking franchise. The decrease in sovereign exposures principally reflected changes in holdings of UK and other Organisation of Economic Co-operation and Development ('OECD') government securities as part of Santander UK's liquidity management activity.
Commercial Real Estate loans
For the non-standardised commercial real estate portfolio of £9.8bn at 31 December 2012 the average loan to value ratio, weighted by exposure, was 52% (2011: 59%) with only 3% (2011: 4%) of cases having loan exposures in excess of the value of collateral.
Real estate non-performing loans and weighted average LTVs at 31 December 2012 and 2011 may be further analysed between loans originated pre-2009 and thereafter as follows:
2012 | Original vintage | ||
Pre-2009 | 2009 onwards | Total | |
Total loans | £2,463m | £7,337m | £9,800m |
NPLs ratio | 19.5% | 0.2% | 5.0% |
Weighted average LTV | 64% | 49% | 52% |
2011 | Original vintage | ||
Pre-2009 | 2009 onwards | Total | |
Total loans | £3,499m | £5,153m | £8,652m |
NPLs ratio | 13.2% | - | 5.4% |
Weighted average LTV | 74% | 52% | 59% |
The pre-2009 vintage loans were written on terms prevailing in the market at that time which, compared to more recent times, included higher original LTVs, lower interest coverage and exposure to development or letting risk. Following the significant downturn in the commercial real estate market in 2008 and 2009 some of these customers suffered financial stresses resulting in their inability to meet the contractual payment terms or to comply with covenants or to achieve refinancing/repayment at maturity. As a result, the pre-2009 sub-portfolio has experienced higher NPLs rates in recent years.
In light of the market deterioration, Santander UK's lending criteria were significantly tightened from 2009 onwards, with lower LTVs and the avoidance of transactions with any material letting or development risks. In addition, while the market remains challenging, prices have not declined significantly further since Santander UK's lending criteria were tightened. As a result, the sub-portfolio representing loans originating from 2009 onwards has performed significantly better than the pre-2009 sub-portfolio.
CORPORATE BANKING - CREDIT RISK MITIGATION
At 31 December 2012, collateral held against impaired loans amounted to 55% (2011: 45%) of the carrying amount of impaired loan balances.
PORTFOLIO | DESCRIPTION | |
> | Sovereigns
| Assets held with Sovereign counterparties are mainly with issuers or counterparties with a AAA or AA rating. It is normal market practice that there is no collateral associated with these assets.
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> | Large Corporates
| Primarily unsecured but credit agreements are underpinned by both financial and non-financial covenants. Typically for this type of business the initial, and ongoing, lending decision is based upon factors relating to the financial strength of the client, its position within its industry, its management strengths and other factors as evaluated by the specialised analyst assigned to each customer.
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> | Structured Finance
| A small number of acquisition or project finance transactions where collateral is held in the form of a charge over the assets being acquired. This type of assignment of all assets is combined with other covenants to provide security to the lenders.
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> | Mid- Corporate and SME
| Typically incorporates guarantee structures underpinned by both financial and non-financial covenants and debenture security. Guarantees are not classified as collateral and value is not attributed to them unless supported by tangible security. Lending decisions are assessed against trading cash flows and in the event of a default Santander UK does not typically take possession of the assets of the business, although an Administrator may be appointed in more severe cases.
The portfolio includes commercial mortgage lending where collateral is taken in the form of a charge over the property being mortgaged. A professional valuation of the real estate security is undertaken at the point of lending but no contractual right of revaluation exists. Revaluations are undertaken in the event that cases become distressed. Collateral is rarely taken into possession. Santander UK seeks to ensure the disposal of the collateral, either consensually or via an insolvency process, as early as practical in order to minimise the loss to Santander UK.
Santander UK provides asset finance as well as invoice finance to certain UK corporate clients. Financed assets (typically vehicles and equipment) are reviewed prior to lending and their value assessed. For invoice finance, companies' ledgers are subject to periodic reviews with funding provided against eligible debtors meeting pre-agreed criteria. In the event of a default, assets and debtors will be repossessed and sold, or collected out respectively.
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> | Real Estate | Collateral is in the form of commercial real estate assets. Lending to commercial real estate is undertaken against an approved policy setting minimum criteria including such aspects as the quality (e.g. condition and age) and location of the property, the quality of the tenant, the terms and length of the lease, and the experience and creditworthiness of the sponsors. Properties are viewed by Santander UK prior to lending and annually thereafter. An independent professional valuation is obtained prior to lending, providing both a value and an assessment of the property, the tenant and future demand for the property (e.g. market rent compared to the current rent). Loan agreements typically permit bi-annual valuations thereafter or more frequently if it is likely that the covenants may be breached.
When a commercial real estate loan is transferred to FEVE (described in the section "Risk monitoring" in "Measurement across the credit cycle" on page 75) or Restructuring & Recoveries, Santander UK typically undertakes a revaluation of the collateral as part of the process for determining the strategy to be pursued (e.g. whether to restructure/refinance the loan or to realise the collateral). An assessment is made of the need to establish an impairment loss allowance based on the valuation in relation to the loan amount outstanding while also taking into consideration any loan restructuring/refinancing solution to be adopted (e.g. whether provision of additional security or guarantees is available, the prospects of additional equity and the ability to enhance value through asset management initiatives etc.).
Collateral is rarely taken into possession. Where collateral has been taken into possession, Santander UK would seek to dispose of the collateral as early as practical in order to minimise the loss to Santander UK.
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CORPORATE BANKING - Monitoring and recovery management
Cases exhibiting potentially higher risk characteristics are subject to risk monitoring under the FEVE system (described in the section "Risk monitoring" in "Measurement across the credit cycle" on page 75). There are a range of indicators that may trigger a case being added to FEVE, including downturn in trade, covenant breaches, major contract loss, and resignation of key management. Such cases are assessed to determine the potential financial implications of these trigger events and in consultation with the borrower, a range of options available is considered which may include temporary forbearance.
In addition, cases that require specialist risk management expertise, including all NPLs, are transferred to a dedicated restructuring/refinancing team and are categorised as 'Workouts'.
Cases subject to risk monitoring under the FEVE system or in Workouts by portfolio and assessment of risk at 31 December 2012 and 2011 were:
Impairment loss allowances | |||||||||||
2012 |
Portfolio£m | Enhanced Monitoring£m | Enhanced Monitoring % | Pro- active £m | Pro- active % |
Workout £m |
Workout % |
NPL(1) £m |
NPL % |
Observed £m |
IBNO £m |
Large Corporates (including Sovereign) | 11,584 | 163 | 1.4 | - | - | - | - | - | - | - | - |
Structured Finance | 363 | 72 | 19.8 | 161 | 44.4 | 25 | 6.9 | 18 | 5.0 | 24 | 62 |
Mid Corporate and SME | 12,350 | 798 | 6.5 | 397 | 3.2 | 497 | 4.0 | 347 | 2.8 | 157 | 3 |
Real Estate | 9,800 | 376 | 3.8 | 397 | 4.1 | 607 | 6.2 | 496 | 5.1 | 159 | 2 |
Social housing | 415 | - | - | - | - | - | - | - | - | - | - |
Total | 34,512 | 1,409 | 4.1 | 955 | 2.8 | 1,129 | 3.3 | 861 | 2.5 | 340 | 67 |
Impairment loss allowances | |||||||||||
2011 |
Portfolio£m | Enhanced Monitoring£m | Enhanced Monitoring % | Pro- active £m | Pro- active % |
Workout £m |
Workout % |
NPL(1) £m |
NPL % |
Observed £m |
IBNO £m |
Large Corporates (including Sovereign) | 16,306 | 87 | 0.5 | 29 | 0.2 | - | - | - | - | - | - |
Structured Finance | 489 | 152 | 31.1 | 144 | 29.4 | - | - | - | - | 17 | - |
Mid Corporate and SME | 11,526 | 531 | 4.6 | 300 | 2.6 | 279 | 2.4 | 263 | 2.3 | 66 | 48 |
Real Estate | 8,652 | 243 | 2.8 | 401 | 4.6 | 573 | 6.6 | 497 | 5.7 | 143 | 22 |
Total | 36,973 | 1,013 | 2.7 | 874 | 2.4 | 852 | 2.3 | 760 | 2.1 | 226 | 70 |
(1) Includes committed facilities and swaps.
In 2012, assets across all monitoring and recovery categories increased as entries rose due to challenging economic conditions especially within the Mid Corporate and SME portfolio combined with restructurings/refinancings and exits becoming more difficult to achieve in the current market.
CORPORATE BANKING - ARREARS
2012 £m | 2011 £m | 2010 £m | |
Total Corporate Banking loans and advances to customers in arrears | 795 | 652 | 526 |
Total Corporate Banking loans and advances to customers(1) | 19,605 | 18,856 | 14,615 |
Corporate Banking loans and advances to customers in arrears as a % of Corporate Banking loans and advances to customers | 4.06% | 3.46% | 3.60% |
(1) Corporate Banking loans and advances to customers include social housing loans and finance leases.
(2) Accrued interest is excluded for purposes of these analyses.
2012 compared to 2011
Loans and advances to customers in arrears increased to £795m (2011: £652m) due to difficult UK economic conditions across the corporate market. Consequently, loans and advances to customers in arrears as a percentage of loans and advances to customers increased to 4.06% (2011: 3.46%).
2011 compared to 2010
Loans and advances to customers in arrears increased to £652m (2010: £526m) due to ongoing stress in the commercial mortgage and real estate exposures written pre-2009, particularly within the care home and leisure industry sectors. Loans and advances to customers in arrears as a percentage of loans and advances to customers decreased to 3.46% (2010: 3.60%) as a result of the growth in the book exceeding the growth in arrears.
Arrears management
The Restructuring & Recoveries department are responsible for debt management initiatives on the Corporate Banking loan portfolio.
> | Debt management strategies, which include negotiating restructuring/refinancing arrangements, often commence prior to actual payment default. Different collection strategies are applied to different segments of the portfolio in accordance with the perceived levels of risk and the individual circumstances of each case.
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> | Restructuring & Recoveries activities aim to ensure customers who have failed or are likely to fail to make their contractual payments when due or have exceeded their agreed credit limits are encouraged to pay back the required amounts, and in the event they are unable to do so to pursue recovery of the debt in order to maximise the net recovered balance. |
The overall aim is to minimise losses whilst not adversely affecting brand, customer loyalty, or compliance with relevant legal and regulatory standards.
Problem debt management activity is performed within Santander UK:
| > | Initially by the relationship manager and, for non standardised cases, the credit partner, and for standardised cases, the Business Support Unit; then
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| > | Subsequently by Restructuring & Recoveries where the circumstances of the case become more critical or specialist expertise is required. |
Santander UK seeks to detect weakening financial performance early through close monitoring of regular financial and trading information, periodic testing to ensure compliance with both financial and non-financial covenants and regular dialogue with corporate clients.
The FEVE process is used proactively on cases which need enhanced management activity ranging from increased frequency and intensity of monitoring through to more specific activities to reduce Santander UK's exposure, enhance Santander UK's security or in some cases seek to exit the position altogether.
Once categorised as FEVE, a strategy is agreed with Credit Risk and this is monitored through monthly FEVE meetings for each portfolio. Where circumstances dictate a more dedicated debt management expertise is required or where the case has been categorised as non-performing (be that through payment arrears or through management judgement that a payment default is likely), the case is transferred to Restructuring & Recoveries.
Forbearance - loans RESTRUCTURED/REFINANCED
The factors considered when concluding whether a borrower is experiencing financial difficulties can include the results of covenant testing, reviews of trading and management information provided under the loan terms or directly from the customer as part of the Santander UK's ongoing relationship dialogue.
Restructurings/refinancings allow a customer, by negotiation, to vary the terms of their contractual obligations for an agreed period (such as interest-only period or term extensions). Santander UK also aims to ensure that after the initial period of financial difficulties the customer can revert to the previous terms, with appropriate support where necessary. These agreements may be initiated by the customer, Santander UK or by a third party.
Restructurings/refinancings are only granted due to financial difficulties and are reported as restructures/refinancings.
| ACTION | DESCRIPTION | ||
| Restructuring/ refinancing | Solutions in a restructuring/refinancing may include: | ||
> | Term extensions | The term of the credit facility may be extended to reduce the regular periodic repayments, and where as a minimum, the interest can be serviced and there is a realistic prospect of full or improved recoveries in the foreseeable future. Customers may be offered a term extension where they are up-to-date but showing evidence of financial difficulties, or where the maturity of the loan is about to fall due and near term refinancing is not possible on current market terms. | |
> | Interest-only concessions
| Regular periodic repayment may be reduced to interest payment only for a limited period with capital repayment deferred where other options are not appropriate and the issues are viewed as temporary. Customers may be offered an interest only concession where they are up-to-date but showing evidence of financial difficulties, or are already in the Restructuring & Recoveries process. Periodic reviews of the customer's financial situation are undertaken to assess when the customer can afford to return to the repayment method. | |
> | Capitalisations | The customer's arrears may be capitalised and added to the loan balance. Capitalisation is always combined with term extensions and interest-only concessions. | |
Santander UK may offer a term extension or interest only concession provided that the forecasts indicate that the borrower will be able to meet the revised payment arrangements. This applies particularly in the rare circumstances where a second restructuring/refinancing is required as the borrower needs a further term extension but is otherwise meeting revised terms.
The effectiveness of our restructuring/refinancing approach is kept under review. The programmes offered to customers may be adjusted to reflect market conditions, although the range of options is limited to term extensions and interest only concessions, together with other forms of debt management as described in "Other forms of debt management".
Where a restructuring/refinancing in NPLs has been agreed, the case is initially retained in the 'non-performing' loan category, until evidence of consistent compliance with the new terms is demonstrated (typically a minimum of three months) before being reclassified out of NPLs.
For other restructured/refinanced loans, the case is reclassified out of NPLs. Once a reclassified case has demonstrated continued compliance with the new terms and the risk profile is deemed to have improved, it may be reclassified as fully performing. Under Santander UK's restructuring/refinancing methodology, a case will remain as a restructured/refinanced asset even when full repayments are recommenced until full repayment is achieved.
The majority of restructuring/refinancing to date have been by way of term extensions and payment re-profiling (e.g. interest only concessions), with only a limited number of debt-for-equity swaps. Loan loss allowances are assessed on a case-by-case basis taking into account amongst other factors, the value of collateral held as confirmed by third party professional valuations as well as the cash flow available to service debt over the period of the restructuring/refinancing. These loan loss allowances are assessed regularly and are independently reviewed. In the case of a debt-for-equity conversion, the converted debt is written off against the existing loan loss allowance upon completion of the restructuring/refinancing. The value of the equity acquired is initially held at nil value and reassessed periodically in light of subsequent performance of the restructured company.
Restructuring/refinancing commenced during the year
No arrangements have been entered into with respect to sovereign or large corporate counterparties. The accounts that entered restructuring/refinancing during the years ended 31 December 2012 and 2011 were:
2012 | Mid Corporate and SMEs | Real Estate | Total |
£m | £m | £m | |
Restructured/refinanced in NPLs | 46 | 21 | 67 |
Other restructured/refinanced | 94 | 161 | 255 |
140 | 182 | 322 |
2011 | Mid Corporate and SMEs | Real Estate | Total |
£m | £m | £m | |
Restructured/refinanced in NPLs | 45 | 70 | 115 |
Other restructured/refinanced | 85 | 94 | 179 |
130 | 164 | 294 |
Restructuring/refinancing cumulative number and value of accounts
a) Performance status when entering restructuring/refinancing
The status of the cumulative number of accounts in restructuring/refinancing at 31 December 2012 and 2011 when they originally entered restructuring/refinancing, analysed by type of restructuring/refinancing applied, was:
2012 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | - | - | 371 | 956 | 371 | 956 | 89 |
In arrears | 75 | 144 | - | - | 75 | 144 | 32 |
Total | 75 | 144 | 371 | 956 | 446 | 1,100 | 121 |
2011 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | - | - | 262 | 677 | 262 | 677 | 28 |
In arrears | 71 | 208 | - | - | 71 | 208 | 24 |
Total | 71 | 208 | 262 | 677 | 333 | 885 | 52 |
Debt-for-equity swaps
In addition to the restructuring/refinancing above, Santander UK has entered into a small number of debt-for-equity swaps where, on occasion, Santander UK may agree to exchange a proportion of the amount owed by the borrower for equity in that borrower. In circumstances where a borrower's balance sheet is materially over-leveraged but the underlying business is viewed as capable of being turned around, Santander UK may agree to reduce the debt by exchanging a portion of it for equity in the company. This will typically only be done alongside new cash equity being raised, the implementation of a detailed business plan to effect a turnaround in the prospects of the business, and satisfaction with management's ability to deliver the strategy.
These debt-for-equity swaps amounted to £46m at 31 December 2012 (2011: £48m) and in view of their small size are not included in these analyses.
b) Performance status at the year-end
The current status of accounts in restructuring/refinancing analysed by type of restructuring/refinancing applied, at 31 December 2012 and 2011 was:
2012 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 38 | 76 | 290 | 644 | 328 | 720 | 13 |
In arrears | 37 | 68 | 81 | 312 | 118 | 380 | 108 |
Total | 75 | 144 | 371 | 956 | 446 | 1,100 | 121 |
2011 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 55 | 125 | 242 | 573 | 297 | 698 | 1 |
In arrears | 16 | 83 | 20 | 103 | 36 | 187 | 51 |
Total | 71 | 208 | 262 | 676 | 333 | 885 | 52 |
This data may be further analysed by portfolio, as follows:
Mid Corporate and SMEs
2012 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 16 | 40 | 160 | 228 | 176 | 268 | 40 |
In arrears | 16 | 42 | 54 | 98 | 70 | 140 | 5 |
Total | 32 | 82 | 214 | 328 | 246 | 408 | 45 |
2011 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 25 | 30 | 164 | 211 | 189 | 242 | 1 |
In arrears | 9 | 47 | 17 | 32 | 26 | 79 | 17 |
Total | 34 | 77 | 181 | 243 | 215 | 321 | 18 |
Commercial Real Estate
2012 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 22 | 36 | 130 | 416 | 152 | 452 | 7 |
In arrears | 21 | 26 | 27 | 214 | 48 | 240 | 69 |
Total | 43 | 62 | 157 | 630 | 200 | 692 | 76 |
2011 | Restructured/refinanced in NPLs | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 30 | 94 | 78 | 362 | 108 | 456 | - |
In arrears | 7 | 36 | 3 | 71 | 10 | 108 | 34 |
Total | 37 | 130 | 81 | 433 | 118 | 564 | 34 |
Accounts that are in restructuring/refinancing continue to be closely monitored as described above, to ensure that the restructuring/refinancing arrangements are sustainable. At 31 December 2012, 74% (2011: 89%) of the accounts in restructuring/refinancing were performing in accordance with the revised terms agreed under Santander UK's restructuring/refinancing arrangements. At 31 December 2012, 51% (2011: 77%) of the accounts that were in NPL's at the time of restructure/refinancing, were performing in accordance with the revised terms agreed under Santander UK's restructuring/refinancing arrangements. The decrease reflects the impact of the current challenging market conditions which resulted in it taking longer for cases to return to performing status after restructuring/refinancing.
In rare circumstances, these market conditions may, and may continue to, lead to a second term extension, for example in the case of commercial real estate where it remains difficult to sell or refinance the property. These loans are individually assessed for observed impairment loss allowances. The greater probability of ultimate loss in these circumstances is reflected in the calculation of impairment loss allowances.
A customer's ability to adhere to any revised terms agreed is an indicator of the sustainability of Santander UK's restructuring/refinancing arrangements, although the restructuring/refinancing is unlikely to be successful in all cases.
2012 compared to 2011
The level of restructuring/refinancing (i.e. of cases in NPL) decreased particularly in the commercial real estate portfolio as the volume of pre-2009 cases reduced. The level of other restructuring/refinancing increased, particularly within commercial real estate as restructuring/refinancing strategies were being executed earlier in the credit cycle.
2011 compared to 2010
The level of restructuring/refinancing increased which reflected the increasingly challenging economic environment with more limited options to achieve consensual outcomes giving rise to more cases requiring forbearance, especially in the care home sector. The level of other restructuring/refinancing however decreased slightly over the year as a result of a number of cases being successfully repaid and higher incidence of NPLs cases due to the economic conditions resulting in restructuring/refinancing in NPLs rather than other restructuring/refinancing.
OTHER FORMS OF DEBT MANAGEMENT
In addition to restructurings/refinancings, Santander UK uses other forms of debt management which can include:
| ACTION | DESCRIPTION | |
| > | Payment arrangements (including debt-for-equity swaps) | Discretion exists to vary the repayment schedule to allow customers to bring the account up to date. The objective is to bring the account up to date as soon as possible. This can involve the partial forgiveness of debt and/or debt-for-equity swaps. At 31 December 2012 there were no outstanding loans where debt forgiveness had been applied.
|
| > | Obtaining additional security or guarantees | Where a borrower has unencumbered assets, these may be charged as new or additional security in return for Santander UK restructuring/refinancing existing facilities. Alternatively, Santander UK may take a guarantee from other companies within the borrower's group and/or major shareholders provided it can be established the proposed guarantor has the resources to support such a commitment.
|
| > | Resetting of covenants and trapping surplus cash flow | Financial covenants may be reset at levels which more accurately reflect the current and forecast trading position of the borrower. This may also be accompanied by a requirement for all surplus cash after operating costs to be trapped and used in reduction of Santander UK's lending.
|
| > | Seeking additional equity | Where a business is over-leveraged, fresh equity capital will be sought from existing or new investors to adjust the capital structure in conjunction with Santander UK agreeing to restructure/refinance the residual debt.
|
EXIT THE POSITION CONSENSUALLY
Where it is not possible to agree a restructuring/refinancing, Santander UK may seek to exit the position consensually by:
| > | Agreeing with the borrower an orderly sale of assets outside insolvency to pay down Santander UK's debt;
|
| > | Arranging for the refinance of the debt with another lender; or
|
| > | Sale of the debt where a secondary market exists (either individual loans or on occasion as a portfolio sale). |
LITIGATION AND RECOVERY
Where it is not possible to agree a restructuring/refinancing or to exit the position consensually, Santander UK will pursue recovery by:
| > | Pursuing its rights through an insolvency process;
|
| > | Optimising the sale proceeds of any collateral held; and
|
| > | Seeking compensation from third parties, as appropriate. |
Where Santander UK has to pursue recovery through the appointment of an Administrator (or a Receiver under the Law of Property Act in the case of real estate security), Santander UK's shortfall is assessed against the Administrator's estimate of the outcome and an appropriate loan loss allowance is raised. In cases where a sale of the debt is deemed to offer the optimum recovery outcome, the shortfall, if the debt is sold below its par value, is written off upon sale.
Corporate Banking - non-performing loans and advances(1)
An analysis of Corporate Banking NPLs is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Corporate Banking NPLs that are impaired - UK | 835 | 442 | 411 | 315 | 419 |
Corporate Banking NPLs that are not impaired - UK | - | 303 | 232 | 116 | 1 |
Corporate Banking NPLs(1)(2) | 835 | 745 | 643 | 431 | 420 |
Corporate Banking loans and advances to customers(2) | 19,605 | 18,856 | 14,615 | 12,087 | 10,670 |
Corporate Banking impairment loan loss allowances | 407 | 296 | 202 | 171 | 73 |
% | % | % | % | % | |
NPLs ratio | 4.26 | 3.95 | 4.40 | 3.57 | 3.94 |
Coverage ratio | 49 | 40 | 31 | 40 | 17 |
(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed unlikely that the counterparty will be able to maintain payments.
(2) Excludes accrued interest.
Movements in NPLs during the year are set out in the table below. Transfers 'in' represent loans which have fallen into arrears during the year and have missed three or more monthly payments. Transfers 'out' represent loans that have returned to performing status, or have been redeemed in full, or have proceeded to litigation and the property repossessed and sold, and the loan written off.
2012 £m | 2011 £m | |
Non-performing loans at 1 January | 745 | 643 |
Transfers in to NPL | 515 | 426 |
Transfers out of NPL: | ||
- Loan repayments/redemptions | (357) | (273) |
- Write-offs | (68) | (51) |
Non-performing loans at 31 December | 835 | 745 |
2012 compared to 2011
During 2012, the NPLs ratio increased to 4.26% (2011: 3.95%). This largely arose from the performance of a small number of older vintage loans which were acquired with Alliance & Leicester. At the same time, the growth in the portfolio was slower than in 2011 which impacted the ratio. The level of new NPLs also increased during the year, particularly within the mid Corporate and SME sectors where certain customers and sub-sectors (e.g. leisure and care) found revenue under pressure due to lower consumer spending despite the low interest rate environment.
2011 compared to 2010
During 2011, the NPLs ratio decreased to 3.95% (2010: 4.40%). This reflected the growth of the book exceeding the growth in stressed cases with several larger real estate loans moving out of non-performing status either via a full exit by way of a sale of the underlying collateral or the debt or a successful restructuring/refinancing and return to performing status. However there were continuing challenges faced by corporate clients due to economic conditions particularly in the care home sector and certain parts of the commercial real estate market. The level of new NPLs increased as the options available for managing them, particularly the ability to raise equity capital, to sell assets or to conclude refinancing, remained limited. The real estate market continued to be challenging with reduced sales activity, especially for development finance and land-bank transactions and for older transactions underwritten near the market peak. Santander UK's real estate development finance exposure represented less than 8% (2010: less than 8%) of the total core real estate book.
2010 compared to 2009
During 2010, the NPLs ratio increased to 3.95% (2009: 3.57%) due to deterioration arising from market conditions. This particularly affected customers in the real estate sector. Both NPLs and impairment loss allowances increased. While the level of new NPLs was broadly in line with expectations, the options available for managing them were reduced compared to 2009. The real estate market became more challenging as the year progressed, with reduced sales activity, especially for development finance and land-bank transactions and for older transactions underwritten in 2008 and earlier years. The year-end position was also influenced by a small number of large value transactions which defaulted late in the year but were expected to be restructured/refinanced during 2011.
In 2012, interest income recognised on impaired loans amounted to £14m (2011: £13m, 2010: £9m).
CORPORATE BANKING - RESTRUCTURED/REFINANCED LOANS
As previously described, loans may be restructured/refinanced. At 31 December 2012, the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been restructured/refinanced was £76m (2011: £125m).
CREDIT RISK - MARKETS
INTRODUCTION
Markets offers risk management and other services to financial institutions, as well as other Santander UK divisions. Its main product areas are fixed income and foreign exchange, equity, capital markets and institutional sales. Credit risk arises by Markets entering into derivatives or financing transactions, or investing in other financial instruments.
This section sets out further detail on credit risk in Markets as follows:
> | Management's approach;
|
> | Assets;
|
> | Commitments;
|
> | Credit risk mitigation;
|
> | Monitoring and recovery management; and
|
> | Restructured/refinanced loans.
|
MANAGEMENT'S APPROACH TO CREDIT RISK IN MARKETS | |
> | Credit risk on derivative instruments (OTC derivatives, repos and stock borrowing/lending) is taken under specific limits approved for each counterparty. This credit risk is controlled by the Wholesale Credit Risk department, and managed and reported on a counterparty basis, regardless of whether the exposure is incurred by Markets or by Santander UK through its Corporate Centre activities.
|
> | Credit risk on derivative instruments is calculated using the potential future mark-to-market exposure ('PFE') of the instruments at a 97.5% statistical confidence level and adding this value to the current mark-to-market value. The resulting PFE or credit risk is then included against the credit limits approved for individual counterparties along with other non-derivative exposures.
|
> | In addition, there is a policy around the collateralisation of derivative instruments. If collateral is deemed necessary to reduce credit risk, any unsecured risk threshold, and the nature of any collateral to be accepted, is determined by the Wholesale Credit Risk department's credit evaluation of the counterparty.
|
> | All exposures are accommodated under credit limits approved by the appropriate credit authority. The relevant senior approving authorities are the Executive Risk Committee and the Credit & Investment Approvals Committee. Exposures which exceed a pre-defined limit are also referred to Banco Santander S.A., although the ultimate approval remains within Santander UK. Exposures and credit risk trends are analysed regularly, with key issues escalated to the Executive Risk Committee or to the Board Risk Committee, as required. Key developments in large exposures are also reported to these committees.
|
MARKETS - ASSETS
2012 £bn | 2011 £bn | 2010 £bn | |
Derivatives | 26.2 | 27.5 | 19.8 |
UK Treasury bills, equities and other | 1.9 | 1.2 | 2.3 |
Total | 28.2 | 28.7 | 22.1 |
Derivative risk exposures are set out in the tables below. Derivatives in the asset table above relate to the derivative assets held on the balance sheet, where only netting permitted by IAS 39 is applied. The derivative risk exposures in the tables below are lower than the balance sheet position because the overall risk exposure is monitored and therefore consideration is taken of margin posted, CSA's and master netting agreements and instruments such as reverse repos which reduce the Santander UK group's exposures.
Markets - commitments
DERIVATIVE commitments by credit rating of the issuer or counterparty (1)
2012 | Total £m | |||
AAA | 38 | |||
AA | 222 | |||
A | 4,135 | |||
BBB and below | 357 | |||
Total | 4,752 |
2011 | Total £m | |||
AAA | 97 | |||
AA | 1,574 | |||
A | 3,447 | |||
BBB and below | 260 | |||
Total | 5,378 |
(1) External ratings are applied to all exposures where available. External ratings are taken into consideration in the rating process, where available.
DERIVATIVE commitments by geographical area
2012 | Total £m | |||
UK | 1,635 | |||
Peripheral eurozone | 364 | |||
Rest of Europe | 1,409 | |||
US | 1,012 | |||
Rest of the world | 332 | |||
Total | 4,752 |
2011 | Total £m | |||
UK | 1,296 | |||
Peripheral eurozone | 597 | |||
Rest of Europe | 1,597 | |||
US | 1,480 | |||
Rest of the world | 408 | |||
Total | 5,378 |
MARKETS - CREDIT RISK MITIGATION
Markets continued to focus its activities on derivative products, supported by increased collateralisation and use of central counterparties.
PORTFOLIO | DESCRIPTION | |
| > | Derivatives | Netting arrangements Santander UK restricts its credit risk by entering into transactions under industry standard agreements which facilitate netting of transactions in the jurisdictions where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis.
However, there is scope for the credit risk associated with favourable contracts to be reduced by netting arrangements embodied in the agreements to the extent that if an event of default occurs, all amounts with the counterparty under the specific agreement can be terminated and settled on a net basis. In line with industry practice, Santander UK executes the standard documentation according to the type of contract being entered into. For example, derivatives will be contracted under the International Swaps and Derivatives Association ('ISDA') Master Agreements, repurchase and reverse repurchase transactions will be governed by Global Master Repurchase Agreement ('GMRA'), stock borrowing/lending transactions and other securities financing transactions are covered by Global Master Securities Lending Agreement ('GMSLA').
|
Collateralisation Santander UK also mitigates its credit risk to counterparties with which it primarily transacts financial instruments through collateralisation, using industry standard collateral agreements (i.e. the Credit Support Annex ('CSA')) in conjunction with the ISDA Master Agreement. Under these agreements, net exposures with counterparties are collateralised with cash, securities or equities. Exposures and collateral are generally re-valued daily and collateral is adjusted accordingly to reflect deficits/surpluses. Collateral taken must comply with Santander UK's collateral parameters policy. This policy is designed to control the quality and concentration risk of collateral taken such that collateral held can be liquidated when a counterparty defaults. Cash collateral in respect of derivatives held at 31 December 2012 was £0.9bn (2011: £1.3bn), not all derivative arrangements being subject to collateral agreements. Collateral obtained during the period in respect of purchase and resale agreements (including securities financing) is equal to at least 100% of the amount of the exposure.
| ||
Use of Central Counterparties ('CCPs') Santander UK continues to use CCPs as an additional means to mitigate counterparty credit risk in derivative transactions. At 31 December 2012, CCPs were used in connection with 6.3% (2011: 0.3%) of Santander UK's OTC derivatives.
| ||
MARKETS - Monitoring and recovery management
Cases exhibiting potentially higher risk characteristics are subject to risk monitoring under the FEVE system (described in "Risk monitoring" in "Measurement across the credit cycle" on page 75). At 31 December 2012, there were no impaired or non-performing loans or exposures (2011: none) and the assets in the FEVE Active category amounted to only £33m (2011: £40m).
MARKETS - RESTRUCTURED/REFINANCED LOANS
At 31 December 2012 and 2011, there were no financial assets that would otherwise be past due or impaired whose terms have been restructured/refinanced.
CREDIT RISK - CORPORATE CENTRE
INTRODUCTION
Corporate Centre includes FMIR and the non-core corporate and legacy portfolios. FMIR is responsible for managing capital and funding, balance sheet composition, structural market risk and strategic liquidity risk for the rest of the Santander UK group. The non-core corporate and legacy portfolios include aviation, shipping, infrastructure, commercial mortgages, social housing loans and structured credit assets, all of which are being run-down and/or managed for value. Credit risk arises by Corporate Centre making loans (including to other businesses within Santander UK) and investing in debt securities. Credit risk also arises by Corporate Centre investing in other financial instruments (including assets held for liquidity purposes) or entering into financing transactions or derivative contracts.
This section sets out further detail on credit risk in Corporate Centre as follows:
> | Management's approach;
|
> | Assets;
|
> | Exposures;
|
> | Credit risk mitigation;
|
> | Monitoring and recovery management;
|
> | Arrears;
|
> | Forbearance; and
|
> | Non-performing loans and advances, and restructured/refinanced loans.
|
MANAGEMENT'S APPROACH TO CREDIT RISK IN CORPORATE CENTRE | |
> | Credit risk in Corporate Centre is actively controlled by the Wholesale Credit Risk Department and the Corporate and Commercial Credit Risk Department. This is done in accordance with the relevant policies, limits, asset quality plans and aspects of Board-approved risk appetite. All exposures, including intra-group items, are captured in the risk management systems and fall within limits approved by the appropriate credit authority. For Corporate Centre exposures, the relevant senior approving authorities are the Executive Risk Committee and the Credit & Investment Approvals Committee. All transactions over £70m (and certain others) are approved by the Executive Risk Committee. Exposures which exceed a pre-defined limit are also referred to Banco Santander, S.A., although the ultimate approval remains within Santander UK.
|
> | The non-core corporate and legacy portfolios include older social housing assets and commercial mortgage loans together with the residual legacy assets from the acquisition of Alliance & Leicester plc which were not consistent with Santander UK's business strategy. These assets are managed in a manner consistent with the Corporate Banking assets as described in the section "Credit Risk - Corporate Banking".
|
Corporate Centre - assets
2012 £bn | 2011 £bn | |
Sovereign - Balances at central banks (UK and US) | 27.9 | 25.0 |
- other | 5.1 | - |
Structured Products(1) | 1.9 | 2.6 |
Derivatives | 3.2 | 1.4 |
Collateral(2) | 4.5 | 3.5 |
Other assets(3) | 6.0 | 6.0 |
Customer assets(4) | 11.0 | 11.9 |
Total | 59.6 | 50.4 |
(1) Includes the Treasury Asset Portfolio. These assets were acquired as part of the transfer of Alliance & Leicester plc to Santander UK in 2008 and as part of an alignment of portfolios across the Banco Santander group in 2010 and are being run down. The assets in the Treasury Asset Portfolio are principally classified as loan and receivable securities, as set out in Note 23 to the Consolidated Financial Statements, and debt securities designated at fair value through profit or loss, as set out in Note 16 to the Consolidated Financial Statements.
(2) Includes inter-segmental collateral balances. This balance represents collateral held and therefore is not included in the tables of exposures below.
(3) Other assets consist primarily of cash, trading assets and other assets.
(4) See customer assets table below for additional detail of the portfolios within this balance.
Corporate Centre customer assets
2012 £bn | 2011 £bn | 2010 £bn | |
Social housing(1) | 7.5 | 7.5 | 6.8 |
Commercial mortgages | 1.4 | 1.7 | 1.6 |
Legacy portfolios in run-off: | |||
- Aviation | 0.6 | 0.8 | 0.9 |
- Shipping | 0.7 | 0.9 | 1.2 |
- Other | 0.8 | 1.0 | 1.5 |
Total | 11.0 | 11.9 | 12.0 |
(1) Social housing Includes loans held at amortised cost and loans designated at fair value through profit or loss. Excludes social housing bonds of £0.2bn (2011: £0.3bn) designated at fair value through profit or loss.
The Corporate Centre assets tables above comprise gross asset balances. The table below shows the exposures in Corporate Centre after taking into account the credit mitigation procedures described in Markets on page 110 above. In addition, on lending to customers, credit risk arises on assets and off-balance sheet transactions. Consequently, the credit risk exposure below arises from on balance sheet assets, and off-balance sheet transactions such as committed and undrawn credit facilities or guarantees.
Corporate Centre - exposureS
Corporate Centre exposure by credit rating of the issuer or counterparty(1)
2012 | Sovereign £m | Structured Products £m | Derivatives £m | Legacy Portfolios in run-off £m | Social Housing £m | Total £m |
AAA | 32,740 | 257 | - | - | - | 32,997 |
AA | 283 | 305 | - | - | 2,305 | 2,893 |
A | - | 599 | 1,443 | 64 | 6,049 | 8,155 |
BBB and below | - | 412 | 126 | 2,724 | 1,258 | 4,520 |
Other | - | - | - | 1,385 | - | 1,385 |
Total | 33,023 | 1,573 | 1,569 | 4,173 | 9,612 | 49,950 |
2011 | Sovereign £m | Structured Products £m | Derivatives £m | Legacy Portfolios in run-off £m | Social Housing £m | Total £m |
AAA | 25,720 | 704 | - | - | - | 26,424 |
AA | - | 348 | 587 | - | 2,651 | 3,586 |
A | - | 380 | 1,123 | 195 | 5,990 | 7,688 |
BBB and below | - | 319 | - | 3,508 | 1,300 | 5,127 |
Other | - | - | - | 1,636 | - | 1,636 |
Total | 25,720 | 1,751 | 1,710 | 5,339 | 9,941 | 44,461 |
(1) External ratings are applied to all exposures where available.
Corporate Centre exposure by geographical area(1)
2012 | Sovereign £m | Structured Products £m | Derivatives £m | Legacy Portfolios in run-off £m | Social Housing £m | Total £m |
UK | 31,350 | 426 | 437 | 2,991 | 9,612 | 44,816 |
Peripheral eurozone | - | 352 | - | 90 | - | 442 |
Rest of Europe | 627 | 376 | 676 | 292 | - | 1,971 |
US | 763 | 382 | 456 | 193 | - | 1,794 |
Rest of world | 283 | 37 | - | 607 | - | 927 |
Total | 33,023 | 1,573 | 1,569 | 4,173 | 9,612 | 49,950 |
2011 | Sovereign £m | Structured Products £m | Derivatives £m | Legacy Portfolios in run-off £m | Social Housing £m | Total £m |
UK | 18,671 | 227 | - | 3,586 | 9,941 | 32,425 |
Peripheral eurozone | - | 828 | 457 | 121 | - | 1,406 |
Rest of Europe | - | 306 | 654 | 571 | - | 1,531 |
US | 7,049 | 285 | 599 | 273 | - | 8,206 |
Rest of world | - | 105 | - | 788 | - | 893 |
Total | 25,720 | 1,751 | 1,710 | 5,339 | 9,941 | 44,461 |
(1) The geographic location is classified by country of domicile of the counterparty.
The exposure to Sovereigns in the UK and US principally reflect the holdings of liquid assets.
CORPORATE CENTRE - CREDIT RISK MITIGATION
The specialist businesses in Corporate Centre service customers in various business sectors including Real Estate and social housing. Corporate Centre is also responsible for certain legacy portfolios in run-off, including aviation and shipping. At 31 December 2012, collateral held against impaired loans amounted to 42% (2011: 53%) of the carrying amount of impaired loan balances.
PORTFOLIO | DESCRIPTION | |
| > | Sovereigns | Assets held with sovereign counterparties are mainly with issuers or counterparties with a AAA or AA rating. It is normal market practice that there is no collateral associated with these assets.
|
| > | Structured products | Assets held within the Treasury asset portfolio include floating rate notes ('FRNs'), asset-backed securities ('ABS') (including mortgage-backed securities ('MBS')), Collateralised Loan Obligations ('CLOs'), loans to banks, certain credit derivatives and off-balance sheet entities. The instruments held are unsecured but benefit from senior positions in the creditor cascade and, in the case of structured products, their rating reflects the over collateralisation inherent in the structure and the assets that underpin the cashflows and repayment schedules.
The Treasury Asset Portfolio is monitored for potential impairment through a detailed expected cashflow analysis taking into account the structure and underlying assets of each individual security. Once specific events give rise to a reasonable expectation that future anticipated cash flows may not be received, the asset originating these doubtful cash flows will be deemed to be impaired. Objective evidence of loss events includes significant financial difficulties of the issuer and default or delinquency in interest and principal payments (breach of contractual terms).
|
| > | Derivatives | Credit risk in derivatives is mitigated by netting agreements, collateralisation and the use of Central Counterparties. For more details, see "Markets -Credit Risk Mitigation" on page 110.
|
| > | Legacy portfolios in run-off | Portfolio in run-off, which comprises assets inconsistent with Santander UK's future strategy, collateral is regularly held through a charge over the underlying asset and in some circumstances in the form of cash. At 31 December 2012, Santander UK held £741m (2011: £744m) of cash collateral. There are also a small number of Private Finance Initiative ('PFI') transactions where collateral is held in the form of a charge over the underlying concession contract.
Santander UK obtains independent third party valuations on other fixed charge security such as aircraft or shipping assets. These valuations are undertaken in accordance with industry guidelines. An assessment is made of the need to establish an impairment loss allowance based on the valuation in relation to the loan balance outstanding (i.e. the LTV). This takes into account a range of factors including the future cashflow generation capability and the age of the assets as well as whether the loan in question continues to perform satisfactorily, whether or not the reduction in value is assessed to be temporary and whether other forms of recourse exist.
At 31 December 2012, of the aviation portfolio of £748m, £690m was asset-backed and £58m was receivables-backed. Of the asset-backed loans, 90% had a collateral value in excess of the loan value. Where a borrower gets into difficulty Santander UK would seek to ensure the disposal of the collateral, either consensually or via an insolvency process, as early as practical in order to minimise the loss to Santander UK but has not to date taken any planes into possession. At 31 December 2012, of the shipping portfolio of £744m, £647m was asset-backed and £97m was backed cash or bank guaranteed. Of the asset-backed loans, 37% had a collateral value in excess of the loan value. Collateral is rarely taken into possession, (2012: £28m, 2011: £34m) and Santander UK seeks to ensure the disposal of any collateral, either consensually or via an insolvency process, as early as practical in order to minimise its loss.
The portfolio includes commercial mortgage lending where collateral is taken in the form of a charge over the property being mortgaged. A professional valuation of the real estate security is undertaken at the point of lending but no contractual right of revaluation exists. Revaluations are undertaken in the event that cases become distressed. Collateral is rarely taken into possession. Santander UK seeks to ensure the disposal of any collateral, either consensually or via an insolvency process, as early as practical in order to minimise its loss.
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| > | Social housing | The portfolio is secured on residential real estate owned and let by UK Housing Associations. This collateral is revalued at least every five years and the valuation is based on standard housing methodologies, which generally involve the properties' continued use as social housing. If the valuation were based upon normal residential use the value would be considerably higher. To date, Santander UK has suffered no defaults or losses on this type of lending and has not had to take possession of any collateral.
The value of the collateral is in all cases in excess of the loan balance. Typically, the loan balance represents between 25% and 50% of the implied market value of collateral using Santander UK's LGD methodology.
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CORPORATE CENTRE - MONITORING AND RECOVERY MANAGEMENT
Cases exhibiting potentially higher risk characteristics are subject to risk monitoring under the FEVE system (described in the section "Risk monitoring" in "Credit Risk Cycle" on page 77).
Cases subject to risk monitoring under the FEVE system or in Workouts by portfolio and assessment of risk at 31 December 2012 and 2011 were:
Impairment loss allowances | |||||||||||
2012 |
Portfolio£m | Enhanced Monitoring£m | Enhanced Monitoring % | Pro- active £m | Pro- active % |
Workout £m |
Workout % |
NPL(1) £m |
NPL % |
Observed £m |
IBNO £m |
Sovereign | 33,023 | - | - | - | - | - | - | - | - | - | - |
Structured Products | 1,573 | 188 | 12.0 | - | - | - | - | - | - | - | - |
Derivatives | 1,569 | - | - | - | - | - | - | - | - | - | - |
Legacy portfolios in run-off | 4,173 | 283 | 6.8 | 207 | 5.0 | 576 | 13.8 | 518 | 12.4 | 422 | 66 |
Social housing | 9,612 | 632 | 6.6 | - | - | - | - | - | - | - | - |
Total | 49,950 | 1,103 | 1.9 | 207 | 0.4 | 576 | 1.2 | 518 | 1.0 | 422 | 66 |
Impairment loss allowances | |||||||||||
2011 |
Portfolio£m | Enhanced Monitoring£m | Enhanced Monitoring % | Pro- active £m | Pro- active % |
Workout £m |
Workout % |
NPL(1) £m |
NPL % |
Observed £m |
IBNO £m |
Sovereign | 25,720 | - | - | - | - | - | - | - | - | - | - |
Structured Products | 1,750 | 244 | 13.9 | - | - | - | - | - | - | - | - |
Derivatives | 1,721 | - | - | - | - | - | - | - | - | - | - |
Legacy portfolios in run-off | 5,339 | 543 | 10.2 | 249 | 4.7 | 668 | 12.5 | 624 | 11.7 | 181 | 57 |
Social housing | 9,941 | 212 | 2.1 | - | - | - | - | - | - | - | - |
Total | 44,471 | 999 | 2.2 | 249 | 0.6 | 668 | 1.5 | 624 | 1.4 | 181 | 57 |
(1) Includes committed facilities and swaps.
In 2012, total portfolio exposure as well as amount of the exposure in proactive management, workouts and NPLs all reduced during the year as the strategy to exit these exposures continued to be successfully implemented across a range of the portfolios. The value of cases in enhanced monitoring increased, although this was influenced by a few large value cases in the social housing book where the concerns were more around service standards and governance rather than financial matters and these are expected to return to the performing book in due course. Within the legacy portfolios, the level of provision was increased during the year to recognise that the residual assets have become more difficult to exit.
Corporate Centre - arrears
2012 £m | 2011 £m | 2010 £m | |
Corporate Centre loans and advances to customers in arrears | 490 | 579 | 450 |
Corporate Centre loans and advances to customers(1) | 11,002 | 11,946 | 11,965 |
Corporate Centre loans and advances to customers in arrears as a % of Corporate Centre loans and advances to customers | 4.45% | 4.85% | 3.76% |
(1) Includes social housing loans and finance leases.
Accrued interest is excluded for purposes of these analyses.
In 2012, loans and advances to customers in arrears decreased to £490m (2011: £579m) as Santander UK continued to execute the strategy of exiting these cases through sale of the debt or through sale of the collateral. Loans and advances to customers in arrears as a percentage of loans and advances to customers decreased to 4.46% (2011: 4.85%) as a result of the decrease in arrears described above.
Forbearance - loans RESTRUCTURED/refinanced
Restructuring/refinancing allow a customer, by negotiation, to vary the terms of their contractual obligations for an agreed period (such as interest-only period or term extensions). Santander UK also aims to ensure that after the initial period of financial difficulties the customer can revert to the previous terms, with appropriate support where necessary. These agreements may be initiated by the customer, Santander UK or by a third party.
No restructuring/refinancing arrangements have been entered into with respect to sovereign, structured products, derivatives or social housing counterparties.
The accounts that entered restructuring/refinancing during the years ended 31 December 2012 and 2011 were:
2012 | Total |
£m | |
Restructured/refinanced in NPL | 4 |
Other restructured/refinanced | 160 |
164 |
2011 | Total |
£m | |
Restructured/refinanced in NPL | 41 |
Other restructured/refinanced | 48 |
89 |
The status of the cumulative number of accounts in restructuring/refinancing at 31 December 2012 and 2011 when they originally entered restructuring/refinancing, analysed by type of restructuring/refinancing applied, was:
Legacy Portfolios in run-off
2012 | Restructured/refinanced in NPL | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | - | - | 436 | 550 | 436 | 551 | 71 |
In arrears | 56 | 63 | - | - | 56 | 63 | 28 |
Total | 56 | 63 | 436 | 550 | 492 | 614 | 99 |
2011 | Restructured/refinanced in NPL | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | - | - | 298 | 349 | 298 | 349 | 72 |
In arrears | 67 | 220 | - | - | 67 | 220 | 13 |
Total | 67 | 220 | 298 | 349 | 365 | 569 | 85 |
The current status of accounts in restructuring/refinancing analysed by type of restructuring/refinancing applied, at 31 December 2012 and 2011 was:
Legacy Portfolios in run-off
2012 | Restructured/refinanced in NPL | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 23 | 10 | 349 | 410 | 372 | 420 | 8 |
In arrears | 33 | 53 | 87 | 140 | 120 | 194 | 91 |
Total | 56 | 63 | 436 | 550 | 492 | 614 | 99 |
2011 | Restructured/refinanced in NPL | Other restructured/refinanced | Total | Impairment allowance | |||
No. | £m | No. | £m | No. | £m | £m | |
Performing | 36 | 23 | 290 | 307 | 326 | 330 | 3 |
In arrears | 31 | 197 | 8 | 42 | 39 | 239 | 82 |
Total | 67 | 220 | 298 | 349 | 365 | 569 | 85 |
Accounts that are in restructuring/refinancing continue to be closely monitored as described above, to ensure that the restructuring/refinancing arrangements are sustainable. At 31 December 2012, 76% (2011: 89%) of the accounts in restructuring/refinancing were performing in accordance with the revised terms agreed under Santander UK's restructuring/refinancing arrangements. A customer's ability to adhere to any revised terms agreed is an indicator of the sustainability of Santander UK's restructuring/refinancing arrangements. The decrease reflected the impact of the current challenging market conditions which resulted in it taking longer for cases to return to performing status after a restructuring/refinancing.
Corporate Centre - non-performing loans and advances (1)
An analysis of Corporate Centre NPLs is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Corporate Centre NPLs that are impaired - UK | 494 | 439 | 369 | 362 | 74 |
Corporate Centre NPLs that are not impaired - UK | - | 140 | 117 | 115 | - |
Corporate Centre NPLs(2) | 494 | 579 | 486 | 477 | 74 |
Corporate Centre loans and advances to customers(3) | 11,002 | 11,946 | 11,965 | 12,392 | 13,080 |
Corporate Centre impairment loan loss allowances | 488 | 239 | 265 | 250 | 278 |
% | % | % | % | % | |
NPLs ratio | 4.49 | 4.85 | 4.06 | 3.85 | 0.56 |
Coverage ratio | 99 | 41 | 55 | 52 | 377 |
(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed unlikely that the counterparty will be able to maintain payments.
(2) All NPLs continue accruing interest.
(3) Corporate Centre loans and advances to customers include social housing loans and finance leases.
(4) Accrued interest is excluded for purposes of these analyses.
Movements in NPLs during the year are set out in the table below. Transfers 'in' represent loans which have fallen 90 days past due during the year or are judged to be unlikely to meet their obligations to Santander UK. Transfers 'out' represent loans that have returned to performing status, or have been redeemed in full, or have proceeded to litigation and the collateral repossessed and sold, and the loan written off.
2012 £m | 2011 £m | |
Non performing loans at 1 January | 579 | 486 |
Transfers in to NPL | 239 | 355 |
Transfers out of NPL: | ||
- Loan repayments/redemptions | (177) | (148) |
- Write-offs | (147) | (114) |
Non performing loans at 31 December | 494 | 579 |
2012 compared to 2011
At 31 December 2012, the NPLs ratio decreased to 4.49% (2011: 4.85%). This decrease reflected the continuing strategy to exit exposures where possible for this portfolio. This was in part through debt sales or realisation of collateral but also involved an increased level of write-offs in the year. The market remained very challenging especially for legacy development finance and shipping deals acquired with Alliance & Leicester which are still working through the book.
In 2012, coverage increased to 99% (2011: 41%) as a result of additional provisions made in the third quarter of the year, following a review and full reassessment of the assets held in the non-core corporate and legacy portfolios, reflecting increasing losses experienced in these portfolios.
2011 compared to 2010
At 31 December 2011, the NPLs ratio increased to 4.85% (2011: 4.06%). This increase reflected the fact that the market remained challenging especially for legacy development finance and shipping deals acquired with Alliance & Leicester. The shipping sector continued to experience stress with regards to the older vessels and tanker segments, where achieving sufficiently profitable re-employment on expiry of charters proved to be challenging and the limited number of buyers and the shortage of finance which impacted on potential recovery levels for distressed assets.
2010 compared to 2009
The increase in write-offs in 2010 compared to 2009 principally reflected the maturing of the former Alliance & Leicester corporate lending business which included assets with generally higher risk characteristics as well as the continued challenging economic environment. In the aviation sector, 'incurred but not yet observed' impairment losses were associated with an anticipated reduction in the value of collateral at the maturity of deals where the final bullet repayment was dependent on refinance or sale of the aircraft.
In 2012, interest income recognised on impaired loans amounted to £13m (2011: £7m, 2010: £8m).
CORPORATE CENTRE - RESTRUCTURED/REFINANCED LOANS
As previously described, loans may be restructured/refinanced. At 31 December 2012, the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been restructured/refinanced was £10m (2011: £23m).
MARKET RISK
INTRODUCTION
Market risk is the risk of a variation to the capital, economic value or reported income resulting from changes in the variables of financial instruments including interest rate, inflation, equity, credit spread, property and foreign currency. Traded market risk is the risk of losses in on- and off-balance sheet positions arising from movements in market prices. Non-traded market risk includes exposures arising as a result of the structure of portfolios of assets and liabilities, or where the liquidity of the market is such that the exposure could not be closed out over a short-time horizon.
This section sets out further detail on:
> | Traded market risk,
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> | Non-traded market risk (which is classified as a structural risk and presented in the Structural Risks section).
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MANAGEMENT'S APPROACH TO MARKET RISK | |
> | Santander UK actively manages and controls traded market risk within clearly defined parameters by limiting the impact of adverse market movements whilst seeking to enhance earnings. The organisational structure ensures a segregation of responsibilities between the functions responsible for market risk origination, risk management and control, and risk oversight.
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> | A comprehensive set of Santander UK-wide policies, procedures and processes have been developed and implemented to identify, monitor and manage market risk.
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> | All material risk exposures must be measured and subject to monitoring against limits and triggers for management action and/or escalation. Market risk limits are approved under Board-delegated authority, and within the market risk appetite.
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Balance sheet allocation by market risk classification
Where appropriate, the Risk Framework applies to both traded and non-traded market risk. Santander UK's assets and liabilities that are subject to market risk may be analysed between traded and non-traded market risk classification as follows:
Market risk (measure) | ||||
Balance sheet 31 December 2012 £m | Traded risk (VaR) £m | Non-traded Risk (Other measures) £m | Non-traded risk primary risk sensitivity | |
Assets subject to market risk | ||||
Cash and balances at central banks | 28,161 | - | 28,161 | Interest rate |
Trading assets | 22,498 | 22,498 | - | - |
Derivatives | 30,146 | 28,064 | 2,082 | Equity, foreign exchange, interest rate |
Financial assets designated to fair value | 3,811 | - | 3,811 | Interest rate |
Loans and advances to banks | 2,438 | - | 2,438 | Foreign exchange, interest rate |
Loans and advances to customers | 191,907 | - | 191,907 | Interest rate |
Available-for-sale securities | 5,483 | - | 5,483 | Foreign exchange, interest rate |
Loans and receivables securities | 1,259 | - | 1,259 | Equity, foreign exchange, interest rate |
Macro hedge of interest rate risk | 1,222 | - | 1,222 | Interest rate |
Retirement benefit assets | 254 | - | 254 | Equity, foreign exchange, interest rate, inflation |
287,179 | 50,562 | 236,617 | ||
Liabilities subject to market risk | ||||
Deposits by banks | 9,935 | - | 9,935 | Foreign exchange, interest rate |
Deposits by customers | 149,037 | - | 149,037 | Interest rate |
Derivatives | 28,861 | 27,415 | 1,446 | Equity, foreign exchange, interest rate |
Trading liabilities | 21,109 | 21,109 | - | - |
Financial liabilities designated at fair value | 4,002 | - | 4,002 | Interest rate |
Debt securities in issue | 59,621 | - | 59,621 | Foreign exchange, interest rate |
Subordinated liabilities | 3,781 | - | 3,781 | Foreign exchange, interest rate |
Retirement benefit liabilities | 305 | - | 305 | Equity, foreign exchange, interest rate, inflation |
276,651 | 48,524 | 228,127 | ||
TRADED MARKET RISK
INTRODUCTION
Traded market risk arises in connection with financial services for customers and the buying, selling and positioning mainly in fixed income, equities, foreign exchange and property markets. This trading activity may lead to a potential decline in net income due to variations in market factors including interest rates, inflation rates, equity, exchange rates, credit spreads and bond prices, property and other instruments.The most significant risk exposures in traded market risk are sensitivities to moves in interest rates, interest rate basis and the equities market.
The key areas where traded market risk is generated, controlled and managed are:
> | Corporate Banking, and |
> | Markets |
Market risks arising from structured products, including exposure to changes in the levels of equity markets, are managed within Markets.
Risk measures
Value at Risk ('VaR') | |
> | One of the main tools to measure and control market risks is a statistical risk measure, VaR. VaR estimates the potential loss arising from unfavourable market moves and is calculated using a historical simulation method with two-years of daily price history, equally weighted. In accordance with the standard used throughout the Banco Santander group, the VaR calculation uses a one day time horizon and a 99% confidence level. This means that conditional on today's positions, Santander UK would expect to incur losses exceeding the predicted VaR estimate one in every 100 trading days, or about two to three times a year.
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> | VaR is calculated daily and includes all major risk exposures including interest rates and equities, and is subjected to governance, controls, regular reviews and internal assessments.
|
> | Among the benefits of VaR is that it incorporates the majority of the material market risk factors and provides a comprehensive and consistent risk measure across the various factors and trading books.
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> | Limitations of VaR arise from the use of historical changes and the assumption that these historical changes are an indicator of the future distribution of potential market moves. VaR does not capture intra-day risk taking as it is based on positions as at close of business. Further, it does not indicate the potential loss beyond the 99th percentile. This risk is addressed by monitoring stress testing measures across the different business areas.
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> | The main risk exposures are monitored against limits at different levels: aggregated Santander UK; business, asset class and individual desk levels. All limit breaches are reported and escalated in accordance with the Risk Framework.
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> | Daily back-testing is performed of VaR against its market risk related revenue. This back-testing does address the limitation with the intra-day trading activity revenues.
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> | Stressed VaR is an additional VaR measure calculated on a daily basis. The calculation methodology is approved by the FSA and uses a specific 250 day time window instead of the most recent two-year history.
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Stress scenarios | |
> | Stress scenarios and reverse stress scenarios are important tools for Santander UK to increase transparency, and measure and control risk of losses in stressed markets.
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> | Bespoke scenarios are considered to replicate past events but also to create plausible events of abnormal market conditions from changes in financial prices including interest rates, equity, exchange rates and credit spreads. Various degrees of severity are considered which, together with VaR, make it possible to obtain a more complete spectrum of the risk profile. Scenario shocks assuming different holding periods are used to illustrate stress exposures to various degrees of market liquidity.
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> | Limits are used to manage Santander UK's exposure and restrict the impact of stressed market conditions. Stress testing is also employed in cross-business risk management. The results of the stress calculations, trends and explanations based on current market risk positions are communicated to Santander UK's senior management on a regular basis.
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Additional risk measures | |
> | Non-statistical risk measures as well as stress testing include sensitivities to variables used to value positions including credit spread sensitivities, interest rate basis point values and market values.
|
> | All quantitative models are subject to an extensive review and approval process and any uncertainty factors are addressed with fair value adjustments.
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TRADED MARKET RISK - CORPORATE BANKING
For trading activities, market risk is incorporated under the VaR risk measure as well as complimentary sensitivity and stress testing metrics. The following table shows the VaR-based consolidated exposures for the major risk classes at 31 December 2012, 2011 and 2010, together with the highest, lowest and average exposures for the year. Exposures within each risk class reflect a range of exposures associated with movements in that financial market. The main exposure is due to interest rate risks, e.g. the impact of absolute rate movements, and movements between interest rate bases.
The amounts below represent the potential change in market values of trading instruments. Since trading instruments are recorded at market value, these amounts also represent the potential effect on income.
Actual exposure at 31 December | |||
Trading instruments | 2012 £m | 2011 £m | 2010 £m |
Interest rate risks | 2.3 | 1.9 | 2.1 |
Equity risks | 1.0 | 0.5 | 0.7 |
Spread risks | - | 0.2 | 1.1 |
Correlation offsets(1) | (0.6) | (0.7) | (0.3) |
Total correlated one-day VaR | 2.6 | 2.0 | 3.1 |
Exposure for the year ended 31 December | |||||||||
Average exposure | Highest exposure | Lowest exposure | |||||||
Trading instruments | 2012 £m | 2011 £m | 2010 £m | 2012 £m | 2011 £m | 2010 £m | 2012 £m | 2011 £m | 2010 £m |
Interest rate risks | 2.3 | 1.9 | 2.1 | 3.8 | 2.6 | 4.4 | 1.7 | 1.4 | 0.9 |
Equity risks | 1.0 | 0.5 | 0.7 | 1.4 | 0.7 | 0.7 | 0.6 | 0.2 | 0.7 |
Spread risks | 0.2 | 0.6 | 1.1 | 0.8 | 0.9 | 1.6 | - | 0.2 | 0.6 |
Correlation offsets(1) | (0.9) | (0.6) | (0.9) | - | - | - | - | - | - |
Total correlated one-day VaR | 2.6 | 2.4 | 3.0 | 3.9 | 3.6 | 5.0 | 1.9 | 1.6 | 2.2 |
(1) The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest total correlated one-day Value-at-Risk. A corresponding correlation offset effect cannot be calculated and is therefore omitted from the above tables.
Corporate Banking daily VaR (unaudited)
http://www.rns-pdf.londonstockexchange.com/rns/0886A_11-2013-3-15.pdf
Movements in Total VaR and Interest Rates Risks during 2012 were driven by changing interest rate views taken by the desks.
TRADED MARKET RISK - MARKETS
Market risk-taking is performed only within the constraints of the Market Risk Framework. The majority of the exposure is due to interest rate and equity exposure. Interest rate exposure is generated through trading activities. The main equity exposures are generated by the creation and risk management of structured products by Markets for the personal financial services market. Spread exposure arises indirectly from trading activities within Markets.
The following table shows the VaR-based consolidated exposures for the major risk classes at 31 December 2012, 2011 and 2010, together with the highest, lowest and average exposures for the year. Exposures within each risk class reflect a range of exposures associated with movements in that financial market.
The amounts below represent the potential change in market values of trading instruments. Since trading instruments are recorded at market value, these amounts also represent the potential effect on income.
Actual Exposure at 31 December | |||
Trading instruments | 2012 £m | 2011 £m | 2010 £m |
Interest rate risks | 3.3 | 1.6 | 2.0 |
Equity risks | 4.4 | 5.3 | 1.1 |
Property risks | 2.3 | 2.1 | 2.9 |
Spread risks | 0.2 | - | - |
Other risks(1) | 0.5 | 1.9 | 0.2 |
Correlation offsets(2) | (1.9) | (2.4) | (0.8) |
Total correlated one-day VaR | 8.7 | 8.5 | 5.5 |
Exposure for the year ended 31 December | |||||||||
Average exposure | Highest exposure | Lowest exposure | |||||||
Trading instruments | 2012 £m | 2011 £m | 2010 £m | 2012 £m | 2011 £m | 2010 £m | 2012 £m | 2011 £m | 2010 £m |
Interest rate risks | 3.0 | 2.3 | 2.4 | 5.2 | 3.8 | 5.2 | 1.7 | 1.2 | 1.2 |
Equity risks | 5.0 | 2.6 | 1.2 | 8.0 | 6.9 | 1.8 | 3.5 | 0.6 | 0.7 |
Property risks | 2.1 | 2.2 | 5.5 | 2.5 | 2.9 | 9.1 | 1.3 | 1.9 | 2.9 |
Spread risks | 0.1 | - | - | 0.4 | - | - | - | - | - |
Other risks(1) | 0.9 | 0.4 | 0.3 | 2.3 | 1.9 | 0.8 | 0.4 | 0.2 | 0.2 |
Correlation offsets(2) | (2.4) | (1.1) | (0.9) | - | - | - | - | - | - |
Total correlated one-day VaR | 8.8 | 6.4 | 8.5 | 12.9 | 10.0 | 14.6 | 6.9 | 3.9 | 4.8 |
(1) Other risks include foreign exchange risk.
(2) The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest total correlated one-day Value-at-Risk. A corresponding correlation offset effect cannot be calculated and is therefore omitted from the above tables.
Markets daily VaR (unaudited)
http://www.rns-pdf.londonstockexchange.com/rns/0886A_12-2013-3-15.pdf
Movements in Total Risk and Equity Risks during 2012 were driven by changing trading volumes within the Equity Derivatives desk.
STRUCTURAL RISK
INTRODUCTION
Structural risk includes exposures arising as a result of the structure of portfolios of assets and liabilities, or where the liquidity of the market is such that the exposure could not be closed out over a short-time horizon. The risk exposure is generated by features inherent in either a product or portfolio and normally presented over the life of the product or portfolio. Such exposures are a result of the decision to undertake specific business activities, can take a number of different forms, and are generally managed over a longer-time horizon.
Through the internal transfer pricing mechanism, material structural risks arising from divisions are transferred from the originating business to FMIR in Corporate Centre where they are monitored, controlled and managed holistically in conjunction with exposures arising from the funding, liquidity or capital management activities of FMIR.
There are four key areas of structural risk within Santander UK, which are discussed in the sections that follow. These are:
> | Non-traded market risk;
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> | Pensions risk;
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> | Liquidity and funding risk; and
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> | Capital risk.
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NON-TRADED MARKET RISK
Non-traded market risk mainly arises through the provision of banking products and services to personal and corporate/business customers, as well as structural exposures arising in Santander UK's balance sheet.
The most significant non-traded market risk on a gross basis is interest rate risk, which includes both yield curve and basis risks. Yield curve risk arises from the timing mismatch in the re-pricing of fixed and variable rate assets, liabilities and off-balance sheet instruments, as well as the investment of non-interest-bearing liabilities in interest-bearing assets. Basis risk arises, to the extent that the underlying market rates impacting pricing within variable rate assets and liabilities are not precisely matched. This exposes the balance sheet to changes in the relationship between market rates, for example between LIBOR and Bank of England Base Rate.
Santander UK is also exposed to behavioural risks arising from features in retail products that give customers the right to alter the expected cash flows of a financial contract. For example prepayment risk where customers may prepay loans before their contractual maturity. Santander UK is also exposed to product launch risk, where the customers may not take the expected volume of new mortgages or other products.
There are three areas where non-traded market risk is permitted, controlled and managed:
> | Retail Banking;
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> | Corporate Banking; and
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> | Corporate Centre. |
All non-traded market risks arising from Retail Banking and Corporate Banking are substantially transferred from the originating business to FMIR in Corporate Centre.
Risk measures
For non-traded market risk, Santander UK predominantly measures its market risk exposures with both Net Interest Margin ('NIM') and Economic Value of Equity ('EVE') analysis supplemented by the risk measures described in the Market Risk section.
NIM and EVE measures are commonly used throughout the financial services industry as measures for managing market risk across non-traded portfolios. The calculations for NIM and EVE sensitivities involve many assumptions, including expected customer behaviour (e.g. early repayment of loans) and how interest rates may evolve. The behavioural assumptions form a key part of the overall control framework and are updated and reviewed on an ongoing basis.
Net Interest Margin ('NIM') Sensitivity | |
> | NIM sensitivity is an income-based measure and is used to forecast the changes to the interest income and interest expense of Santander UK in different scenarios to provide a combined impact on margin over a specified time horizon, the most common being over an annual (i.e. 12 month) period.
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> | Typically scenarios compare the impact of an immediate parallel shift to interest rates (both up and down) from a specific expected path of interest rates, usually determined by the market's expectation of interest rates. This method is adopted to provide an illustration or index as to the level of interest rate risk.
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> | NIM sensitivity analysis is also used to demonstrate the impact on income of contractual product features such as re-pricing and maturity dates and non-contractual features such as early product redemption. |
Economic Value of Equity ('EVE') Sensitivity | |
> | EVE sensitivities forecast the difference between scenarios, in a manner similar to NIM sensitivities but over the entire life of instruments currently within the balance sheet. Typically, scenarios compare the impact of an immediate parallel shift to interest rates (both up and down) from the market expected interest rates to give an illustration or index as to the level of interest rate risk.
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> | EVE sensitivity analysis is also used to demonstrate the whole life, or value impact of contractual product features such as re-pricing and maturity dates and non-contractual features such as early product redemption. |
NON-TRADED MARKET RISK - RETAIL BANKING
Non-traded market risks are originated in Retail Banking only as a by-product of writing customer business and are transferred from the originating business to FMIR in Corporate Centre. Funds received with respect to deposits taken are lent on to Corporate Centre on matching terms as regards interest rate re-pricing and maturity; in a similar manner loans are funded through matching borrowings. Market risks arising from structured products, including exposure to changes in the levels of equity markets, are hedged with Markets. Only short-term mismatches due to forecasting variances in prepayment and launch risk exposures are retained within Retail Banking. As these behavioural risks are influenced by internal marketing and pricing activity, they are managed by the Head of Products and Marketing.
NON-TRADED MARKET RISK - CORPORATE BANKING
Non-traded market risks originated in Corporate Banking are transferred from the originating business to FMIR in Corporate Centre. Funds received with respect to deposits taken are lent on to Corporate Centre on matching terms as regards interest rate re-pricing and maturity; in a similar manner loans are funded through matching borrowings. Any permitted retained market risk exposure is minimal, and is monitored against limits approved through the Market Risk Framework.
NON-TRADED MARKET RISK - CORPORATE CENTRE
As a consequence of the transfer processes described above, all material non-trading market risk exposures are substantially transferred to and reside within Corporate Centre. Non-traded market risk is managed in line with the Risk Framework. The exposures at 31 December 2012 and 2011 are outlined below.
Analysis of non-traded market risk exposures
NIM and EVE measures are two of the key measures used by Santander UK that illustrate its exposure to yield curve risk. The following table reflects how the base case valuations would be affected by a 100 basis point parallel shift applied instantaneously to the yield curve. For comparison purposes these measures are shown at 31 December 2012, 2011 and 2010:
2012 £m | 2011 £m | 2010 £m | |
Net Interest Margin sensitivity to +100 basis points shift in yield curve | 343 | 225 | 309 |
Economic Value of Equity sensitivity to +100 basis points shift in yield curve | 405 | 387 | 410 |
The change in the sensitivities between 2011 and 2012 was largely attributable to the run off of the hedging strategy implemented during 2011 to lessen the impact of margin compression. Due to the protracted period of historically low interest rates, Santander UK remains exposed to a degree of margin compression. It is attributable to the combination of the historically low level of central bank base rates and to reduced earnings from the assets funded by Santander UK's non-dated liabilities.
PENSION RISK
INTRODUCTION
Pension risk is the risk to a company caused by its contractual or other liabilities to or with respect to a pension scheme (whether established for its employees or those of a related company or otherwise). It also refers to the risk that a company will make payments or other contributions to or with respect to a pension scheme because of a moral obligation or because the company considers that it needs to do so for some other reason. Pension risk arises from the defined benefit schemes to the extent that the assets of the schemes do not fully match the timing and amount of the schemes' liabilities. This introduces volatility into the accounting position and the funding level of the schemes, which in turn may require additional contributions to be made to the schemes by Santander UK.
Key risk factors that affect pension risk include long term interest rates, inflation expectations, salary growth, longevity of the scheme members, investment performance as well as changes in the regulatory environment.
MANAGEMENT'S APPROACH TO PENSION RISK | |
> | Within the wider Risk Framework, Santander UK has articulated a risk appetite for pensions. Pension risk is monitored on a monthly basis by the Chief Risk Management Officer and reported against the appetite on a regular basis to the Risk Management Committee, Executive Risk Committee, Operational Pensions Committee and the Strategic Pensions Committee. The Strategic Pensions Committee and Operational Pensions Committee are established to help the Chief Executive Officer and Chief Financial Officer respectively to discharge their primary executive responsibility and delegated responsibility for pensions.
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> | Reporting takes the form of a number of different risk metrics, including forward-looking and historic stress test scenarios, risk factor sensitivities and a stochastic VaR measure. In line with market practice the primary VaR measurement is carried out at 95% confidence interval over a one-year time horizon, calibrated to 10 years of historic data.
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> | The assets of the defined benefit pension scheme are held separately from the assets of Santander UK. The trustees of the pension scheme have the ultimate responsibility for the investment strategy of the scheme's assets and maintain a Statement of Investment Principles that is agreed with Santander UK.
Responsibility for investment and hedging decisions within the scheme has been delegated to a common investment fund company by the pension scheme trustees. The common investment fund company has two independent trustee directors, one member-nominated trustee and four directors selected by Santander UK. This common investment fund trustee board meets on a monthly basis and is the primary forum for Santander UK and the trustees to propose, discuss, analyse and agree investment and risk management strategies within the pension scheme, taking into account amongst other things the Statement of Investment Principles, the key risk factors and the risk appetite mentioned. In these discussions, Santander UK group's views from the Operational Pensions Committee and Strategic Pensions Committee are represented principally by the Director of Pensions. |
Further information on Santander UK's pension obligations, including the current asset allocation and sensitivity to key risk factors can be found in 'Critical Accounting Policies' in Note 1 and in Note 37 to the Consolidated Financial Statements.
LIQUIDITY AND FUNDING RISK
INTRODUCTION
Santander UK views the essential elements of liquidity and funding risk management as managing potential cash outflows, maintaining prudent levels of highly liquid assets and ensuring that access to funding is available from a diverse range of sources. The Board targets a funding strategy that avoids excessive reliance on wholesale funding and attracts enduring commercial deposits by understanding the behavioural aspects of customer deposits under different scenarios, appropriately reflecting product features and types of customers. The funding strategy aims to provide effective diversification in the sources and tenor of funding as well as establishing the capacity to raise additional unplanned funding from those sources quickly. An excessive concentration in either liquid assets or contractual liabilities also contributes to potential liquidity risk, and so limits on these have been defined under the Liquidity Risk Framework.
Santander UK primarily generates funding and liquidity through UK retail and corporate deposits, as well as in the financial markets through its own debt programmes and facilities to support its business activities and liquidity requirements. It does this in reliance on the strength of its balance sheet and profitability and its own network of investors. It does not rely on a guarantee from Banco Santander, S.A. or any other member of the Banco Santander group (other than certain of Santander UK plc's own subsidiaries) to generate this funding or liquidity. Santander UK does not raise funds to finance other members of the Banco Santander group or guarantee the debts of other members of the Banco Santander group (other than certain of Santander UK plc's own subsidiaries).
Whilst Santander UK manages its funding and maintains adequate liquidity on a stand-alone basis, Santander UKco-ordinates issuance plans with the Banco Santander group where appropriate. In addition to Santander UK's liquidity risk being consolidated and centrally controlled, liquidity risk is also measured, monitored and controlled within the specific business area or the subsidiary where it arises.
Liquidity and funding risks are identified and encompassed within Santander UK's Risk Framework and subject to Santander UK's three-tier risk governance framework. The Board delegates day-to-day responsibility for liquidity risk to the Chief Executive Officer. The Chief Executive Officer has in turn delegated the responsibilities for liquidity and funding risk management to the Chief Financial Officer (who in turn delegates to the Finance Director), and for risk oversight to the Chief Risk Officer.
Adherence to Santander UK's liquidity and funding risk appetite is monitored on a daily, weekly and monthly basis through different committees and levels of management including the Strategic Risk and Financial Management Committee and the Risk Management Committee, and the Board Risk Committee. The Strategic Risk and Financial Management Committee is responsible for overseeing the management of Santander UK's balance sheet in accordance with the Board-approved funding plan and for ensuring that the adequacy of liquidity and appropriateness of funding are consistent with risk appetite. This includes consideration of relevant macro-economic factors and conditions in the financial markets.
DEFINITIONS
LIQUIDITY RISK | FUNDING RISK | |||
> | Liquidity risk is the risk that Santander UK, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. Liquidity risks arise throughout Santander UK. Santander UK's primary business activity is commercial banking and, as such, it engages in maturity transformation, whereby callable and short-term commercial deposits (including retail and corporate) are invested in longer-term customer loans.
| > | Funding risk is the risk that Santander UK does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient or a funding programme such as debt issuance subsequently fails. For example, a securitisation arrangement may fail to operate as anticipated or the values of the assets transferred to a funding vehicle do not emerge as expected creating additional risks for Santander UK and its depositors. Risks arising from the encumbrance of assets are also included within this definition. | |
LIQUIDITY RISK
Santander UK's key ongoing liquidity risks are:
KEY LIQUIDITY RISK | DEFINITION | |
> | Retail funding risk
| Risk of loss of retail deposits. |
> | Corporate funding risk
| Risk of loss of corporate deposits. |
> | Wholesale secured and unsecured funding risk
| Risk of wholesale unsecured and secured deposits failing to roll over. |
> | Derivatives and contingent liquidity risks | Risk of ratings downgrades that could trigger events leading to increased outflows of financial resources, for example, to cover additional margin or collateral requirements. |
LIQUIDITY RISK APPETITE
The Board's risk objective is to be a risk resilient institution at all times, and to be perceived as such by stakeholders, preserving the short and long-term viability of Santander UK. While recognising that a bank engaging in maturity transformation cannot hold sufficient liquidity to cover all possible stress scenarios, the Board requires Santander UK to hold sufficient liquidity to cover stress situations as set out in the stress testing section below. The requirements arising from the FSA's regulatory liquidity regime are reflected in the Board's Liquidity Risk Appetite.
> | The liquidity risk appetite has been recommended by the Chief Executive Officer and approved by the Board, under advice from the Board Risk Committee. The liquidity risk appetite, within the context of the overall Risk Appetite, is reviewed and approved by the Board at least annually or more frequently if necessary (e.g. in the case of significant methodological or business change). This is designed to ensure that the liquidity risk appetite will continue to be consistent with Santander UK's current and planned business activities.
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> | The Chief Executive Officer, under advice from the Board Risk Committee, approves more detailed allocation of liquidity risk limits. The Chief Risk Officer, supported by the Risk Division (including the Deputy Chief Risk Officer, Chief Risk Management Officer, and the Director of Liquidity and Banking Market Risk), is responsible for monitoring the ongoing compliance with the liquidity risk appetite. |
MANAGEMENT'S APPROACH TO LIQUIDITY RISK | |
> | Liquidity risk is managed under a comprehensive and prudent liquidity risk management framework.
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> | The primary objective of the framework is to ensure that Santander UK is liquidity risk resilient by holding sufficient financial resources to withstand a series of stresses as well as complying with internal Liquidity Risk Appetite ('LRA') and regulatory requirements.
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> | Liquidity management is the responsibility of the Chief Financial Officer, who delegates day-to-day responsibility to the Finance Director.
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> | Liquidity risk control and oversight are provided by the Chief Risk Officer, supported by the CRMO and the Risk Division.
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LIQUIDITY RISK MANAGEMENT
The key element of Santander UK's liquidity risk management is focused on holding sufficient liquidity to withstand a series of stress tests. Within the framework of prudent funding and liquidity management, Santander UK manages its activities to minimise liquidity risk, differentiating between short-term and strategic activities.
Short-term, tactical liquidity management | ||
> | Liquid assets | A portfolio of liquid assets is held to cover unexpected demands on cash in extreme but plausible stress scenarios. In Santander UK's case, the most significant stress events include large and unexpected deposit withdrawals by retail customers and a loss of unsecured wholesale funding.
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> | Funding profile | Metrics to help control the level of outflow within different maturity buckets.
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> | Intra-day collateral management | To ensure that adequate collateral is available to support payments in each payment or settlement system in which Santander UK participates, as they fall due.
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Strategic funding management | ||
> | Structural balance sheet shape | To manage the extent of maturity transformation (investment of shorter term funding in longer term assets), the funding of non-marketable assets with wholesale funding and the extent to which non-marketable assets can be used to generate liquidity.
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> | Wholesale funding strategy | To avoid over-reliance on any individual counterparty, currency, market or product, or group of counterparties, currencies, markets or products that may become highly correlated in a stress scenario; and to avoid excessive concentrations in the maturity of wholesale funding.
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> | Wholesale funding capacity | To maintain and promote counterparty relationships, monitor line availability and ensure funding capacity is maintained through ongoing use of lines and markets.
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Collateral calls on derivatives positions can pose a significant liquidity risk. Collateral calls may arise at times of market stress and when asset liquidity may be tightening. The timing of the cash flows on a derivative hedging an asset may be different to the timing of the cash flows of the asset being hedged, even if they are similar in all other respects. Collateral calls may be triggered by a credit downgrading. Santander UK manages these risks by including collateral calls in stress tests on liquidity, and by maintaining a portfolio of assets held for managing liquidity risk.
Risk limits and triggers are set for the key tactical and strategic liquidity risk drivers. These are monitored by the Risk Division and reported monthly to ALCO, SRFM, Risk Management Committee and the Board.
Operational management of liquidity risk
Santander UK maintains, as part of its overall liquidity and funding risk management framework, strong operational and management governance that seeks to make the Santander UK strategy as resilient as possible to potential liquidity stresses by structuring the balance sheet in a prudent and sensible way. The Board's Liquidity Risk Appetite defines the balance sheet principles that operational management is tasked to deliver:
> | Implementation of a funding structure that is consistent with the composition of Santander UK's assets.
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> | Well balanced growth of assets and liabilities.
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> | Implementation of a funding strategy that: | |
> | Avoids excessive reliance on short-term wholesale funding and attracts sustainable commercial deposits, and | |
> | Provides effective diversification in the sources, products and tenor of funding.
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> | Maintenance of an appropriate mix of 'sticky' and 'non-sticky' commercial deposit balances.
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> | Use of short-term funding to manage short-term fluctuations in funding and the funding of short-term wholesale assets.
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> | Use of Term funding to provide diversification of stable funding as well as an aid to help manage the liquidity structure of the balance sheet. | |
The Chief Financial Officer has delegated responsibility for day-to-day management of liquidity risk to the Finance Director who in turn delegates to the Director, ALM; the Director, Funding; and the Head of Short Term Funding. These management processes are reviewed and challenged by the independent Risk function and overseen by the Asset and Liabilities Committee ('ALCO'), Strategic Risk and Financial Management Committee ('SRFM') and Risk Management Committee.
The Director, ALM is responsible for strategic liquidity management including:
> | The externalisation of liquidity risks from the business into the Term Funding and Short Term Funding desks where it is operationally managed,
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> | The internal liquidity transfer pricing that ensures the costs of liquidity are accurately reflected at business line and product level,
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> | The production of the three year funding plan in line with strategic goals and taking account of the economic and market environment; this process incorporates the implementation where necessary of liquidity or funding risk actions arising from the tracking and delivery of the plan,
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> | Forward liquidity gap analysis to ensure that future potential funding or liquidity risks are managed pro-actively,
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> | The formulation and proposal of the Liquidity Risk Appetite to executive management and the Board,
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> | The design and maintenance of the Liquidity Recovery Framework that incorporates contingent actions that can be implemented to offset the potential impacts of a liquidity stress event; and
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> | Detailed balance sheet analysis with contributions from the business areas supports the projection of daily stressed liquidity outflows for the purposes of the stress testing of risks. These stress outflow assumptions are subject to ongoing assessment and revision in line with market and economic developments. |
The Director, Funding covers all aspects of short and term funding in both secured and unsecured markets, delivering Santander UK's strategic funding requirements in line with its detailed funding plan and risk appetite principles. The Director, Funding ensures that Santander UK has active involvement in a range of wholesale funding markets ensuring that sources of funding can be maximised and so a conservative level of diversification of the balance sheet across product and appropriate maturity profile maintained.
The Head of Short Term Funding is in charge of operational liquidity. This encompasses collateral management, the efficient maintenance of a portfolio of liquid assets to counter potential liquidity stress; the maintenance of Bank of England and US Federal Reserve accounts; and efficient operational intra-day liquidity management.
STRESS TESTING
In addition to regulatory requirements, Santander UK runs stress tests on a frequent basis to ensure it is holding sufficient financial resources. These stress tests consist of:
ACTIVITY | DESCRIPTION | |
> | Santander UK Liquidity Risk Appetite stress | A comprehensive stress test considering all risk drivers applicable to Santander UK during an idiosyncratic shock experienced during a protracted market-wide stress.
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> | Funding plan review | A thorough review and identification of vulnerabilities in Santander UK's strategic funding plan aimed at assessing the sensitivity of Santander UK's structural funding position to the different growth assumptions applied to each funding source and the impact of undershooting the targets set.
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> | Overseas operations stress | Stress tests examining the impact of liquidity stresses originating from Santander UK's overseas entities or operations, in particular the effects on the rest of Santander UK.
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> | Acute and protracted retail stress | Stress tests designed to examine the impact of short-term acute as well as longer-term protracted idiosyncratic retail stress, where there are retail deposit outflows of varying severity over different time periods.
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> | Wholesale stress | A stress test that considers the wholesale and corporate risk drivers as they related to Santander UK during an idiosyncratic stress that results in a protracted leakage of deposits.
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> | Santander UK credit ratings downgrade | Santander UK assesses the impact on it of a downgrade of its credit ratings, including the effects on its collateral requirements and liquidity position, on both a standalone basis and as part of its suite of other stress tests that it runs.
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> | Eurozone stress | Given the continuing uncertainty in the eurozone, Santander UK also stress tests a more extreme scenario where eurozone contagion or collapse results in significant retail, corporate and wholesale deposit outflows, combined with a reduction in the management actions available.
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These stress tests are supplemented with sensitivity analysis for instantaneous liquidity shocks by each major liquidity risk driver to understand the impact on internal liquidity risk appetite and regulatory liquidity metrics.
LIQUID ASSETS
Santander UK holds, at all times, a portfolio of unencumbered liquid assets to mitigate liquidity risk. The size and composition of this portfolio is determined both by internal stress tests as well as the FSA's liquidity regime.
The table below shows the carrying value and liquidity value of liquid assets held by Santander UK at 31 December 2012 and 2011 and the weighted average carrying value during the year:
Carrying value | Liquidity value | Weighted average carrying value during the year | ||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |
£bn | £bn | £bn | £bn | £bn | £bn | |
Cash at central banks | 28 | 25 | 28 | 25 | 28 | 25 |
Government bonds | 9 | 3 | 9 | 3 | 7 | 11 |
Core liquid assets (FSA eligible) | 37 | 28 | 37 | 28 | 35 | 36 |
High quality bonds | 2 | 2 | 2 | 1 | 2 | 2 |
Other liquid assets: | ||||||
- Whole loans and own debt securities(1)(2) | 36 | 24 | 21 | 15 | 25 | 25 |
- Other securities | 1 | 2 | - | - | 2 | 2 |
Total liquid assets | 76 | 56 | 60 | 44 | 64 | 65 |
(1) Whole loans are loans acceptable on an unsecuritised basis to the Bank of England as collateral for its various funding arrangements.
(2) Includes own debt securities (i.e. retained issuances) held by Santander UK of £1bn at 31 December 2012 (2011: £24bn).
The classification of the assets in the liquid asset portfolio in the Consolidated Balance Sheet, or their treatment as off-balance sheet at 31 December 2012 was as follows:
| On balance sheet | Off balance sheet | ||||||
Total liquid assets 2012 | Cash | Loans and advances to customers | Available-for-sale securities | Loans and receivables securities | Collateral for reverse repos | Retained issuances of own debt securities | ||
£bn | £bn | £bn | £bn | £bn | £bn | £bn | ||
Cash at central banks | 28 | 28 | - | - | - | - | - | |
Government bonds | 9 | - | - | 5 | - | 4 | - | |
Core liquid assets (FSA eligible) | 37 | 28 | - | 5 | - | 4 | - | |
High quality bonds | 2 | - | - | 1 | 1 | - | - | |
Other liquid assets: | ||||||||
- Whole loans and own debt securities | 36 | - | 35 | - | - | - | 1 | |
- Other securities | 1 | - | - | - | 1 | - | - | |
Total liquid assets | 76 | 28 | 35 | 6 | 2 | 4 | 1 | |
The following tables set forth liquid assets by the geographic location of the issuer or counterparty at 31 December 2012 and 31 December 2011:
31 December 2012 £bn | 31 December 2011 £bn | |
Core liquid assets (FSA eligible): Cash at central banks: | ||
- UK | 28 | 18 |
- US | - | 7 |
28 | 25 | |
Government bonds: | ||
- UK | 4 | 2 |
- US | 3 | - |
- Japan | 1 | - |
- Germany | 1 | - |
- Other countries, each less than £1bn(1) | - | 1 |
9 | 3 | |
Total core liquid assets (FSA eligible) | 37 | 28 |
High quality(2) corporate bonds and asset-backed securities: | ||
- UK | 1 | 1 |
- US | 1 | 1 |
2 | 2 | |
Other liquid assets: | ||
- UK - Whole loans and own debt securities | 36 | 24 |
- UK - Other debt securities, bonds, and equities included in major indices | 1 | 1 |
- US - Debt securities and bonds | - | 1 |
37 | 26 | |
Total liquid assets | 76 | 56 |
(1) Consists of US, Switzerland, France and Denmark.
(2) A- rated or above.
Core liquid assets are convertible into cash on demand. High quality bonds are convertible into cash through normal market channels. Whole loans and own debt securities are convertible into cash via discount at central banks, a process that, while it varies by asset class, typically takes four weeks. A significant proportion of these whole loans and own debt securities have been pre-positioned for discount at central banks and are therefore almost immediately convertible into cash.
The UK FSA's liquidity regulatory regime requires the actual liquidity of assets classified as core liquid assets to be demonstrated through evidence of the actual ability to convert the assets into cash, rather than by restricting the permissible maximum contractual maturity of such assets. Santander UK periodically tests the liquidity of the core liquid assets portfolio, in accordance with the FSA requirement to realise a proportion of these assets through repo or outright sale to the market. In accordance with the FSA's regulations, Santander UK ensures that the cumulative effect of its periodic realisation over any twelve month period is that a significant proportion of the assets in its core liquid assets portfolio is realised.
Santander UK also maintains a written policy setting out its approach to the periodic realisation of its assets, and ensures that it periodically tests its operational ability to raise funds, through the use of central bank liquidity facilities to which Santander UK has access, by using a proportion of those of its assets not in its liquid asset portfolio.
In deciding on the precise composition of its liquid asset portfolio, Santander UK ensures that it tailors the contents of the portfolio to the needs of its business and the liquidity risk that it potentially faces. In particular, Santander UK ensures that it holds assets in its liquid asset portfolio which can be realised with the speed necessary to meet its liabilities as they fall due.
Core liquid assets consist of assets that meet the definition of liquid assets for purposes of the FSA's liquidity regime, as set out in the FSA's Prudential Sourcebook for Banks, Building Societies and Investment Firms, known as BIPRU. Such assets comprise cash at central banks and government bonds, but only the central government or central bank of a highly-rated European Economic Area state, Canada, Australia, Japan, Switzerland or the United States of America, subject to minimum credit ratings.
Liquidity developments in 2012
2012 represented another very challenging year for UK banks in terms of funding and liquidity risk management. Continued concerns about the eurozone kept risk premiums on the sovereign debt of many European countries in the first half of 2012 at the highest levels since the euro's creation. This market disruption was felt by Santander UK both in terms of market-wide elevated wholesale, unsecured medium-term and secured medium-term funding rates and, as with other UK banks in terms of credit rating downgrades. However, the second half of 2012 saw a gradual but significant reduction in funding rates, an easing of recent market liquidity constraints and a general improvement in market confidence.
Throughout 2012, Santander UK continued to strengthen its liquidity position despite the impact of the eurozone crisis. During 2012, Santander UK:
> | Reduced reliance on specific short term and wholesale funds. During 2012 Santander UK has reduced the level of short term, less stable, corporate deposits in its funding mix by 24%.
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> | Increased the level of medium funding in the funding mix by from 21.3% to 22.6%.
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> | Developed and expanded Santander UK's liquidity management capabilities through a revision of its risk management framework, imposition of a revised liquidity risk appetite with associated limits and controls, and the imposition of new policy covering such risks as balance sheet encumbrance.
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> | Developed and tested an extensive rapid response framework of which Recovery and Resolution Plans form a part. The rapid response framework is designed to ensure that executive management and the Board are able to react to any unforeseen liquidity stresses and that there are effective mechanisms of communication and response to such a stress. As part of this process a series of specific management actions that could be leveraged in the event of a stress event are maintained in an ongoing basis.
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> | Maintained a conservative portfolio of liquid assets that can be utilised to counter the potential impact of a liquidity stress on Santander UK balance sheet.
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> | Increased total liquid assets to £76bn (2011: £56bn). The increase of core liquid assets was driven primarily by a reduction in the customer funding gap (customer liabilities less customer assets) as a result of deleveraging and increased debt issuance. Whole loans and own debt securities increased with the availability of "whole loans" pre-positioned at central banks pursuant to the Bank of England's decision to accept loans on an unsecuritised basis (i.e. whole loans) as collateral for its various funding arrangements such as the Funding for Lending Scheme, the Extended Collateral Term Repo Facility and the Discount Window Facility. It was more efficient for Santander UK to use whole loans rather than securitisations as Santander UK is required to include the effect of a downgrade on its securitisation structures for the purposes of calculating liquidity requirements, which is not the case with whole loans.
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FUNDING RISK
Santander UK's primary sources of funding include:
> | Customer deposits;
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> | Secured and unsecured money-market funding (including unsecured cash, repo, certificates of deposit and commercial paper issuance);
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> | Senior debt issuance (including discrete bond issues and medium term notes);
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> | Asset-backed funding (including securitisation and covered bond issuance); and
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> | Subordinated debt and capital issuance (although the primary purpose is not funding).
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Retail Banking and Corporate Banking funding primarily comprises deposits by customers.
MANAGEMENT'S APPROACH TO FUNDING RISK | |
> | Funding risk is managed by the Finance Director, who is responsible for the production of strategic and tactical funding plans as part of Santander UK's planning process.
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> | Funding plans are approved by the Board and the SRFM Committee and are controlled on a day-to-day basis by the Finance Director and within the framework of the Liquidity Risk Manual.
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> | The plans are stressed to ensure adverse conditions can be accommodated via a range of management levers.
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FUNDING STRATEGY
Santander UK's funding strategy continues to be based upon the maintenance of a conservatively structured balance sheet avoiding over-reliance on wholesale and short term funds whilst ensuring that sources of funding are not overly concentrated. Santander UKalso maintains checks and controls to ensure that sources of secured funding are leveraged whilst managing and limiting the level of asset encumbrance that results from this.
The quality of retail, commercial and wholesale deposits continues to be enhanced with Santander UK focused on increasing the average maturity of deposits whilst de-emphasising transient balances. Across all customer segments, Santander UK looks to deepen customer relationships and so lengthen the contractual and behavioural profile of the liability base. In the retail bank this is complemented by the successful introduction of such market leading products as the 1|2|3 Current Account.
Throughout 2012, in response to the uncertainty surrounding the eurozone and associated market challenges, Santander UK held a high level of liquid assets to mitigate the short term impacts of any potential stress event. Santander UK seeks to hold adequate liquid resources at all times, to manage these efficiently and, as far as possible, not to impede the ability of the business to extend credit to the customer base.
FUNDING RISK MANAGEMENT
Operational management of funding risk
Santander UK maintains, as part of its overall liquidity and funding risk management framework, strong operational and management governance that seeks to make Santander UK's strategy as resilient as possible to potential funding stresses by structuring the balance sheet in a prudent and sensible way. The framework applies to all aspects of both funding and liquidity risk to ensure that the two are managed in a consistent and complimentary way - in line with the Board's Liquidity Risk Appetite. As with liquidity risk, operational management is tasked to deliver Santander UK's strategy in line with the following principles that define the desired conservative balance sheet structure:
> | Implementation of a funding structure that is consistent with the composition of assets.
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> | Well balanced growth of assets and liabilities.
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> | Implementation of a funding strategy that: > Avoids excessive reliance on short-term wholesale funding and attracts sustainable commercial deposits, and
> Provides effective diversification in the sources, products and tenor of funding.
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> | Maintenance of an appropriate mix of 'sticky' and 'non-sticky' retail deposit balances.
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> | Use of short-term funding to manage short-term fluctuations in funding and the funding of short-term wholesale assets, and
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> | Use of long-term funding to provide diversification of stable funding as well as an aid to help manage the liquidity structure of the balance sheet. |
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Within Santander UK, the same operational management structure that manages funding risks is responsible for liquidity risk management because of the very close affinity of the two areas. The Chief Financial Officer has delegated responsibility for day-to-day management of Funding Risk to the Finance Director who in turn delegates to the Director, ALM, and the Director, Funding. These management processes are reviewed and challenged by the independent risk function and overseen by the ALCO, SRFM and Risk Management Committee.
The Director, Funding and the Head of Short Term Funding together cover all aspects of short and term funding in both secured and unsecured markets, delivering Santander UK's strategic funding requirements in line with its detailed funding plan and risk appetite principles. The Director, Funding ensures that Santander UK has active involvement in a range of wholesale funding markets ensuring that sources of funding can be maximised and so a conservative level of diversification of the balance sheet across product and average maturity maintained.
The Director, ALM is responsible for strategic liquidity management and funding risk analysis and carries out this responsibility through:
> | The externalisation of funding risk from the business into the Term Funding and Short Term Funding desks where it is operationally managed.
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> | the internal funding transfer pricing that ensures the costs of funding are accurately reflected at business line and product level;
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> | The production of the three year funding plan in line with strategic goals and taking account of the economic and market environment; this process incorporates the implementation where necessary of liquidity or funding risk actions arising from the tracking and delivery of the plan;
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> | Forward liquidity gap analysis to ensure that future potential funding or liquidity risks are managed pro-actively;
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> | The formulation and proposal of the Liquidity Risk Appetite to executive management and the Board;
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> | The design and maintenance of the Liquidity Recovery Framework that incorporates contingent actions to raise funds quickly and that can be implemented to offset the potential funding impacts of a liquidity stress event; and
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> | Detailed balance sheet analysis with contributions from the business areas supports the projection of daily stressed liquidity outflows for the purposes of the stress testing of risks. These stress outflow assumptions are subject to ongoing assessment and revision in line with market and economic developments and provide control in terms of the minimum level of liquid assets that Santander UK desires to maintain at all times. |
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The Head of Short Term Funding is in charge of operational liquidity. This encompasses collateral management, the maintenance of a portfolio of liquid assets to counter potential liquidity stress; the maintenance of Bank of England and US Federal Reserve accounts; and the efficient operation of intra-day liquidity management.
Financial adaptability
Santander UK also considers its ability to take effective action to alter the amounts and timing of cash flows so that it can respond to unexpected needs or opportunities. In determining its financial adaptability, Santander UK has considered its ability to:
| ACTION | DESCRIPTION | ||
| > | Obtain new sources of finance | Santander UK minimises refinancing risk by sourcing funds from a variety of markets as appropriate and subject to consideration of the appropriate leverage ratio and funding mix for Santander UK, and in particular customer deposit levels and medium-term funding. Santander UK actively manages its relationships with existing providers of funding and considers new sources of funds as and when they arise. | |
Day-to-day sources of finance consist primarily of retail deposits. To the extent that wholesale funding is required, a variety of sources are usually available from a range of markets, including: | |||
> | money markets: both unsecured (including interbank and customer deposits, and issuances of certificates of deposit and commercial paper) and secured (including repos in open market operations); | ||
> | debt capital markets (including discrete bond issues and medium term notes); | ||
> | mortgage-backed funding (including securitisation and covered bond issuance); and | ||
> | capital instruments (although primarily issued to maintain capital ratios). | ||
In addition to day-to-day funding sources, Santander UK has access to contingent sources from central banks, including the Bank of England, the US Federal Reserve and the Swiss National Bank. Santander UK ensures that it has access to these contingent facilities as part of its prudent liquidity risk management. Santander UK minimises reliance on any one market by maintaining a diverse funding base, and avoiding concentrations by maturity, currency and institutional type.
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| > | Obtain financial support from other Banco Santander group companies | For capital, funding and liquidity purposes, Santander UK operates on a stand-alone basis. However, in case of stress conditions, it would consult with its ultimate parent company, Banco Santander, S.A. about financial support. | |
| > | Continue business by making limited reductions in operations or using alternative resources | Santander UK maintains, within its Recovery and Resolution Plan, contingency funding plans to cover potential extreme scenarios. This includes the maintenance of specific management actions that can be executed in the event of a stress to rapidly raise funds. These actions are updated on a monthly basis.
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WHOLESALE FUNDING
The tables below show Santander UK's primary wholesale funding sources excluding short-term repurchase agreements.
2012 | On demand | Within 1 month | Over 1m but not more than 3m | Over 3m but not more than 1 year | Sub total less than 1 year | Over 1 year but not more than 3 years | Over 3 years but not more than 5 years | Over 5 years | Total | |
£bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
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Deposits by banks | - | 0.5 | 0.7 | 0.6 | 1.8 | 1.7 | 3.7 | 0.2 | 7.4 |
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Deposits by customers | - | - | - | - | - | 0.4 | - | 0.6 | 1.0 |
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Debt securities in issue: |
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- securitisations | - | 0.4 | - | 0.2 | 0.6 | - | - | 22.8 | 23.4 |
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- covered bonds | - | - | 1.4 | 1.6 | 3.0 | 4.6 | 4.6 | 9.9 | 22.1 |
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- other debt securities | - | 4.7 | 1.0 | 2.5 | 8.2 | 4.9 | 1.0 | - | 14.1 |
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- | 5.6 | 3.1 | 4.9 | 13.6 | 11.6 | 9.3 | 33.5 | 68.0 |
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Financial liabilities at fair value | - | 0.7 | 0.3 | 0.6 | 1.6 | 1.0 | 0.6 | 0.8 | 4.0 |
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Trading liabilities | 0.1 | 0.5 | 0.1 | 0.3 | 1.0 | - | 0.1 | - | 1.1 |
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Subordinated liabilities | - | - | - | - | - | - | - | 3.8 | 3.8 |
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Total wholesale funding | 0.1 | 6.8 | 3.5 | 5.8 | 16.2 | 12.6 | 10.0 | 38.1 | 76.9 |
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2011 | On demand | Within 1 month | Over 1m but not more than 3m | Over 3m but not more than 1 year | Sub total less than 1 year | Over 1 year but not more than 3 years | Over 3 years but not more than 5 years | Over 5 Years | Total | ||
£bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn | £bn |
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Deposits by banks | - | - | 0.5 | - | 0.5 | 2.9 | 3.2 | - | 6.6 |
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Debt securities in issue: |
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- securitisations | - | 0.4 | - | 0.9 | 1.3 | - | - | 21.0 | 22.3 |
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- covered bonds | - | 0.5 | 0.1 | 2.0 | 2.6 | 5.8 | 1.2 | 7.0 | 16.6 |
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- other debt securities | - | 2.7 | 1.8 | 1.9 | 6.4 | 3.7 | 1.3 | 0.4 | 11.8 |
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- | 3.6 | 2.4 | 4.8 | 10.8 | 12.4 | 5.7 | 28.4 | 57.3 |
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Financial liabilities at fair value | - | 1.2 | - | 1.3 | 2.5 | 2.3 | 1.3 | 0.7 | 6.8 |
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Trading liabilities | 0.1 | 4.0 | 0.3 | 0.1 | 4.5 | 0.1 | - | - | 4.6 |
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Subordinated liabilities | - | - | - | - | - | - | - | 5.9 | 5.9 |
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Total wholesale funding | 0.1 | 8.8 | 2.7 | 6.2 | 17.8 | 14.8 | 7.0 | 35.0 | 74.6 |
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Reconciliation of wholesale funding to the balance sheet
2012 | Funding analysis | Repos | Other | Balance sheet |
£bn | £bn | £bn | £bn | |
Deposits by banks | 7.4 | 0.1 | 2.4(1) | 9.9 |
Deposits by customers(2) | 1.0 | - | - | 1.0 |
Debt securities in issue: | ||||
- securitisations | 23.4 | - | - | 23.4 |
- covered bonds | 22.1 | - | - | 22.1 |
- other debt securities | 14.1 | - | 0.1 | 14.2 |
68.0 | 0.1 | 2.5 | 70.6 | |
Financial liabilities at fair value | 4.0 | - | - | 4.0 |
Trading liabilities | 1.1 | 11.7 | 8.3(3) | 21.1 |
Subordinated liabilities | 3.8 | - | - | 3.8 |
Total wholesale funding | 76.9 | 11.8 | 10.8 | 99.5 |
2011 | Funding analysis | Repos | Other(1) | Balance sheet |
£bn | £bn | £bn | £bn | |
Deposits by banks | 6.6 | 1.5 | 3.5 | 11.6 |
Debt securities in issue: | ||||
- securitisations | 22.3 | - | - | 22.3 |
- covered bonds | 16.6 | - | - | 16.6 |
- other debt securities | 11.8 | - | 2.0 | 13.8 |
57.3 | 1.5 | 5.5 | 64.3 | |
Financial liabilities at fair value | 6.8 | - | - | 6.8 |
Trading liabilities | 4.6 | 15.6 | 5.6 | 25.7 |
Subordinated liabilities | 5.9 | - | 0.6 | 6.5 |
Total wholesale funding | 74.6 | 17.1 | 11.7 | 103.4 |
(1) Principally consists of items in the course of transmission and other deposits. See Note 29 to the Consolidated Financial Statements.
(2) Included in the balance sheet total of £149,037m (2011: £148,340m).
(3) Consists of short positions in securities and unsettled trades, cash collateral and short-term deposits. See Note 31 to the Consolidated Financial Statements.
Funding developments in 2012
The challenging year that UK banks experienced in 2012 in terms of liquidity risk management is equally true of funding risk. Throughout 2011 and the first half of 2012 wholesale unsecured medium term and secured medium term funding rates were elevated whilst investor confidence and risk appetite was significantly impacted.
Despite the difficult market and economic environment, in terms of medium term secured funding issuance, appetite of Santander UK's investor base for both secured notes and covered bonds has been consistent throughout the eurozone stress. By 30 June 2012, 90% of the planned medium term funding requirement for 2012 had been reached and the full requirement was raised in the second half of the year.
Senior unsecured funding markets were much reduced in terms of volume throughout the second half of 2011 and 2012. Secured funding was used in preference to these sources as these markets remained fully open. During the second half of 2012 there was a marked reduction in senior unsecured funding spreads. This made the prospect of raising funds in the senior unsecured markets more attractive than at anytime since 2007.
During 2012, Santander UK maintained a sound liquidity profile, reducing its dependence on short-term wholesale markets.
Term issuance
In 2012, Santander UK continued to attract deposits in unsecured money markets and raise additional secured and unsecured term funding in a variety of markets. During the year, Santander UK's term issuance (sterling equivalent) comprised:
2012 | 2011 | |
£bn | £bn | |
Securitisations | 7.2 | 10.5 |
Covered bonds | 3.7 | 6.6 |
Structured notes | 0.9 | 0.8 |
Private placements | - | 0.3 |
Senior unsecured | 0.6 | 3.6 |
Structured issuance | 1.5 | 3.3 |
Total gross issuances | 13.9 | 25.1 |
In 2012, £14bn (2011: £25bn) of medium-term funding was issued, which more than funded maturities of medium-term funding of £10bn. At 31 December 2012, 67% (2011: 70%) of wholesale funding had a maturity of greater than one year with an overall residual duration for wholesale funding of 1,039 days (2011: 1,073 days).
CAPITAL RISK
DEFINITION
Capital risk is defined as the risk that the Santander UK does not have an adequate amount, or quality of, capital to:
> | Adhere to the Board's Risk Appetite and support its internal business objectives;
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> | Support market expectations and its credit rating; and
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> | Meet regulatory requirements in the UK and other jurisdictions (such as the United States) where regulated activities are undertaken. |
Whilst Santander UK is part of the wider Banco Santander group, Santander UK plc is incorporated in the UK, regulated by the FSA and does not benefit from parental guarantees and operates as an autonomous subsidiary. As such, responsibility for the management, control and assurance of capital risk lies with the Santander UK plc Board and, when applicable, certain subsidiary boards.
The Capital Management Framework, reviewed by the Board annually, describes the high level arrangements for the management, control and assurance of Santander UK capital risk. Santander UK adopts a centralised capital management approach that is driven by its strategy and delivers the Board approved Risk Appetite. This approach takes into account the regulatory and commercial environment in which Santander UK operates the management strategy for each of its material risks and the impact of appropriate adverse scenarios and stresses on its capital position.
The key elements of Santander UK's capital management are:
MANAGEMENT'S APPROACH TO CAPITAL RISK |
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> | Strategic capital risk management where, in the form of an annual capital plan (contained within the Internal Capital Adequacy Assessment Process), the regulatory and internal capital requirements and capital resources are forecasted based on the medium term business plan. Alongside this capital plan, Santander UK stresses the capital requirements and resources using a suite of macroeconomic scenarios.
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> | Short term, tactical capital risk management, where frequent monitoring and reporting against the capital plan is performed to detect where any deterioration or change in the planned business performance may impact the capital levels. Additionally, monthly monitoring of the economic assumptions used to create and stress the capital plan against economic reality is undertaken to detect potential deterioration in the capital levels.
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> | Decisions on the allocation of capital resources are conducted as part of Santander UK's strategic planning process based on the relative returns on capital using both economic and regulatory capital measures.
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> | Santander UK also defines management actions in the event that an extremely severe period of stress threatens its viability and solvency.
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Santander UK manages its capital on a Basel II basis and in anticipation of the finalisation and adoption of Basel III. Capital demand is quantified for credit, traded market, non-traded market, operational, pension obligation and securitisation risk in accordance with FSA requirements. Santander UK produces and shares with the FSA its Internal Capital Adequacy Assessment Process document, which informs the supervisory and evaluation process by the FSA Pillar 2 of Basel II and can result in additional capital requirements.
NON-FINANCIAL RISKS (unaudited) |
The key non-financial risks consist of:
> | Conduct risk,
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> | Operational risk,
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> | Regulatory risk,
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> | Strategic risk,
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> | Reputational risk,
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> | Human Resource risk,
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> | Accounting and reporting risk, and
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> | Legal risk.
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CONDUCT RISK (unaudited)
Conduct risk is the risk that the business and operational decisions Santander UK takes and the behaviours displayed lead to poor outcomes for our customers.This is a key risk to Santander UK in view of the evolving regulatory environment and the requirement to make significant conduct remediation provisions in 2011 (principally related to payment protection insurance) and in 2012 (related to other retail products and interest rate derivative products sold to corporate customers).
The Santander UK group engages in discussion, and co-operates, with the FSA in its supervision of the Santander UK group, including reviews exercised under statutory powers, regarding its interaction with past and present customers and policyholders, both as part of the FSA's general thematic work and in relation to specific products and services. The position is monitored with particular reference to those reviews currently in progress where it is not yet possible to reliably determine their outcome.
MANAGEMENT'S APPROACH TO CONDUCT RISK | |
> | Santander UK takes a robust approach to managing conduct risk in accordance with the risk framework.
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> | Santander UK has noted the significant change in the regulatory environment in recent years. Furthermore, with the transition from the FSA to the Financial Conduct Authority there is a further increase in the attention of the regulators on conduct risk to ensure firms demonstrate that they are providing appropriate outcomes for customers. Specific focus is being seen on how firms evidence that they actually deliver the right outcomes for customers and that this is in line with expectations, moving away from a focus on processes and procedures.
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> | In line with all other banks, Santander UK initiated a series of activities to enhance the management of its conduct risks, which culminated in the Conduct Risk Programme. This has focused on the development of four key elements: Risk Policy, Products, Governance and Reporting and Culture. Changes have been made to specific business processes, as well as to the way the business considers, manages and reports conduct risks. In particular, all new products have to be approved by the Product Approval and Oversight Committee which seeks to ensure that new products are appropriately designed.
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> | Santander UK will continue to place significant attention and resource on seeking to ensure that customers receive the right outcome in every instance and that the necessary controls are in place to mitigate the associated risks and this has been embodied in Santander UK's approach of ensuring that its products and its dealings with customers are simple, personal and fair.
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OPERATIONAL RISK (unaudited)
Operational risk is the risk of loss to Santander UK resulting from inadequate or failed internal processes, people and systems, or from external events. As operational risk is inherent in the processes Santander UK operates, in order to provide services to customers and generate profit for investors, an objective of operational risk management is not to remove operational risk altogether, but to manage the risk to an acceptable level, taking into account the cost/benefits of minimisation as opposed to the inherent risk levels. When such risks materialise they can have not only immediate financial consequences for Santander UK, but also an effect on its business objectives, customer service and regulatory responsibilities. Examples of operational risks include fraud, process failures, system downtime or damage to assets due to fire or floods.
The Operational Risk Framework
Operational risk exposures arise across Santander UK's business divisions and operating units, and are managed on a consistent basis. Santander UK aims to identify, measure/assess, control/mitigate and inform regarding this risk. Santander UK's priority is to identify and minimise the risk of loss wherever appropriate, irrespective of whether losses have occurred. Measurement of the risk contributes to the establishment of priorities in operational risk management.
The Operational Risk Framework creates the consistent approach to how Santander UK controls and manages its operational risks and helps everyone understand their responsibilities within this approach. It is a core component of the overall Risk Framework and facilitates the ongoing reassessment of risk, appetites and controls, in order to ensure that Santander UK manages its risks at all times in line with its business objectives.
The Operational Risk Framework defines the operational risk requirements and adopts the following principles:
> | The Board must understand the main aspects of operational risk and approve and review the management framework.
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> | The operational risk framework must be subject to reviews by the Internal Audit Department.
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> | Operational risk management is part of senior management's responsibility across the business. They must ensure it is introduced into management frameworks throughout Santander UK.
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> | All Santander UK's personnel are managers of the operational risk that is intrinsic to the products, processes and systems they work with every day.
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> | Directly and actively managing operational risk is the responsibility of all Santander UK's entities, divisions and areas.
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> | Operational risk control is a separate function from operational risk management. Operational risk control is carried out by operational risk areas, which use qualitative and quantitative tools to identify, assess, track, measure and mitigate operational risk.
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> | Operational risk managers must have adequate organisation, policies, methodologies and support to hedge the risks.
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> | Business areas must have contingency plans in place to ensure continued operations and minimise losses should their business be interrupted.
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> | Business areas must ensure they have the information available that is needed by the Board and the rest of the business. |
Santander UK obtains assurance that the appropriate standards of risk management are being maintained through the application of its "three lines of defence" Risk Governance Framework.
The management and oversight of Operational Risk is also covered by the "three lines of defence" model as described in the Risk Framework section. Within the first line of defence, all heads of business and management support units are accountable to the Chief Executive Officer for managing operational risks inherent in their products, activities, processes and systems and from external events. This is further supported by operational risk managers within the business areas and a specialised Operational Risk Unit under the office of the Chief Operating Officer. Within the second line there is the Operational Risk Control Unit ('ORC'). The executive responsibility for the management of the ORC lies with the Head of Strategy & Internal Control who has responsibility for the overall Internal Control Unit. The Internal Control Unit is responsible for effectively controlling risks and ensuring they are managed within the risk limits and mandates approved by the Board and Chief Executive Officer. Operational Risks are reported in conjunction with all key non financial risk information firstly through to the Internal Control Committee which then escalates though to the Executive Risk, Risk Oversight and Board Risk Committees.
Operational risk management
The "three lines of defence" model applies throughout Santander UK and is implemented taking account of the materiality and perceived risk of the different business areas by following the Operational Risk Management process and using the following key operational risk management tools:
KEY TOOLS | DESCRIPTION | ||
> | Scenario Analysis | Santander UK performs simulations of control failures that may cause the most extreme loss events. Simulations are developed around high impact risks likely to exceed Santander UK's future appetite. The analysis allows management to better understand the potential impacts and remediate issues by: | |
> | identifying the high impact events that would cause most damage to Santander UK, both from a financial and reputational perspective; | ||
> | ensuring that the business is focused on its most critical risks; and | ||
> | facilitating the assessment of capital adequacy.
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> | Risk and Control Self Assessments | Business units identify and assess their operational risks to ensure they are being effectively managed and controlled, and actions prioritised and aligned to Santander UK's risk appetite.
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> | Key Risk Indicators | Key Risk Indicator performance is monitored against tolerances and trigger points that prompt an early warning to potential exposures, whilst the creation of mitigation strategies help address potential concerns. Indicator metrics are used to provide insight into the changing risk profile of the organisation and are also used to assess the performance of key controls.
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> | Loss Data Management
| Loss data capture and analysis processes exist to capture all operational risk loss events. The data is used to identify and correct control weaknesses using events as opportunities to prevent or reduce the impacts of recurrence, identify emerging themes, inform risk and control assessments, scenario analysis and risk reporting. Escalation of single or aggregated events to senior management and appropriate committees is determined by threshold breaches.
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> | Reporting | Reporting forms an integral part of operational risk management ensuring that issues are identified, escalated and managed on a timely basis. Exposures for each business area are reported through monthly risk and control reports which include details on risk exposures and mitigating plans. Events that have a material impact on Santander UK's finances, reputation, or customers are prioritised and reported immediately to key executives.
| |
During 2012, Santander UK continued to manage its key operational risks in the interest of all its stakeholders, responding to critical developments both within Santander UK and in the environment in which it operates. Risk and any required changes to management controls are reported through the Risk Committee governance structure.
KEY RISKS | DESCRIPTION | |
> | Operations and Technology Risk
| Santander UK continues to invest in electronic information systems to protect customer, employee and other information to effectively manage the evolving risks associated with the loss of confidentiality, integrity and of availability of this information.
Appropriate security is applied to protect all customer, employee and other data. Measures taken to reduce the risks include staff education, data encryption and the deployment of specialist software which identifies when customers are at risk of disclosing information to unauthorised parties.
The Faster Payments Directive has introduced significant challenges in the payments operations environment. During 2012, Santander UK successfully implemented the UK industry initiative for Faster Payments and, in a very dynamic environment, continues to invest in the appropriate financial and control systems to ensure that Santander UK and all its customers are protected from payments risk, including compliance with all relevant regulatory requirements.
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> | Fraud Risk
| Santander UK has continued to invest in staff education and improved fraud detection and prevention systems, in order to counter the increasing threat of financial crime and to safeguard the investments of Santander UK's customers and assets. The introduction of sophisticated internet fraud prevention solutions and use of mandatory identification numbers for payments has reduced the risk of fraudulent account takeovers by organised criminals, enhancing our customer identification protocols in a customer friendly manner.
The fraud oversight functions continually monitor emerging fraud trends and losses on a case by case basis. Action plans are formulated and tracked to ensure root causes have been identified and effective remediation conducted.
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KEY RISKS cont.d | DESCRIPTION | |
> | Supplier Risk
| Supplier risk is the risk of reductions in earnings and/or value, through financial or reputational loss associated with the failure of a service or goods provision by a third party organisation.
Santander UK has arrangements with both Banco Santander group companies (including the provision of IT infrastructure, software development and banking operations) and external outsourced service providers. A comprehensive supplier risk management and control framework applies to the management of all suppliers contracted by Santander UK to provide services or goods.
Santander UK uses written service level agreements with these entities that include key service performance metrics to support this governance. The high-level governance processes include relationship management, service delivery management and contract management. Across these, there are a number of more detailed processes.
Santander UK works closely, and continues to enhance its interaction with outsourced service providers via the application of appropriate risk frameworks. These frameworks include processes and procedures designed to ensure continuity of critical services up to and including disaster scenarios and that these plans are regularly validated through testing.
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Operational loss profile
During 2012, 82% of Santander UK's £341m non-financial risk losses arose within the clients, products and business practices category. These principally represented payouts on the sales of payment protection insurance ('PPI') products. See Note 36 to the Consolidated Financial Statements for more information on PPI.
The following chart sets out the major categories of Santander UK's non-financial risk loss profiel in 2012. The operational loss classifications in the chart cover all the Basel categories of loss, although within the Santander UK Risk Framework the management of some of these risks may fall within other risk types (for example, Conduct Risk).
http://www.rns-pdf.londonstockexchange.com/rns/0886A_13-2013-3-15.pdf
REGULATORY RISK (unaudited)
Regulatory risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with applicable codes and regulatory rules.
Santander UK seeks to ensure it fully meets all of its regulatory obligations. There are a number of legislative and regulatory developments both in the UK and abroad, going through a consultation and implementation process, which may have some effect on Santander UK's approach to regulatory risk. Details of the changes expected to have the greatest impact on the Santander UK group's operations are set out in the Supervision and Regulation section of the Directors' Report on page 187.
There has been continued regulatory change following the financial crisis and the regulatory landscape continues to evolve. Santander UK maintains a proactive approach to regulation and aims to provide constructive feedback on policy consultations and engage across the banking sector. Santander UK takes compliance with regulatory requirements seriously and manages its arrangements accordingly.
STRATEGIC RISK (unaudited)
Strategic Risk is the risk of material deviations in expected/target shareholder value as a result of poor definition or implementation of Santander UK's strategy.
Santander UK takes a robust approach to managing strategic risk in full alignment with the Strategic Risk Framework. In setting the business's strategy, risk policies are taken into consideration at all times and the strategy is stress tested against risk appetite statements. Both the strategy and Risk Appetite are approved by the Santander UK Board.
Strategic risk is managed on a monthly basis through the risk governance structure including the Strategic Risk and Financial Management Committee and the Board. Management assessment takes into consideration any relevant information across the whole business which may highlight either risks to the implementation of the bank's strategy or where risks are being created due to poor definition of the strategy in order to inform the Executive Committee and Board of what further actions may be required.
REPUTATIONAL RISK (unaudited)
Santander UK rigorously manages risks that may affect Santander UK's reputation and which may in turn impact upon its ability to achieve its strategic objectives. Reputational considerations are built into all the key risk and issue assessment tools.
HUMAN RESOURCES RISK (unaudited)
Human Resources ('HR') risk is defined in Santander UK as the risk of not having the sufficient number and quality of people to deliver Santander UK's strategy, whilst complying with legislative requirements. In managing HR risk, Santander UK has established a set of policies which outline our minimum standards in relation to the management of people issues. In 2012:
> | Executive remuneration - As in previous years, pay levels and bonuses have continued to be a significant issue for the financial services sector and Santander UK has ensured that all policies, processes, governance and practices are compliant with the FSA Remuneration Code.
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> | Succession Plans - Santander UK continues to have in place robust succession plans for Executive Committee members and their staff who report directly to them. |
In addition, in 2012, Santander UK made significant improvements to its management of HR Risk. In particular, Santander UK developed and implemented a HR Risk Framework in accordance with Santander UK's risk framework approach. This in turn has further strengthened the controls and monitoring mechanisms.
ACCOUNTING AND REPORTING RISK (unaudited)
Accounting and reporting risk is defined as the failure to comply with regulatory and legal requirements for accounting and reporting of financial disclosures, which may lead to fines and/or restrictions and/or reputational damage.
In order to facilitate the identification, measurement, monitoring and reporting of accounting and reporting risks, a comprehensive business-wide framework of controls has been established, supported by a programme of regular assessment and reporting designed to identify and remedy any deficiencies in process or practice. This includes the systems and controls developed to support management's attestation on the effectiveness of disclosure controls and controls over financial reporting.
LEGAL RISK (unaudited)
Santander UK takes a robust approach to managing legal risk in full alignment with the Legal Risk Framework. This framework has been developed through Santander UK's overall Risk Framework and Operational Risk Framework, which include the core principles of risk management and control activities.
The Legal Risk Framework defines the overriding principles and responsibilities for the identification, management, measurement, monitoring, control, reporting and oversight of legal risk. It is the operation of, and outputs from, these risk management activities that enables Santander UK to manage legal risk exposures within the tolerances outlined in the Santander UK Risk Appetite, Limits and Triggers Statement. It is expected that all Business Units will manage their team activities and processes to follow the principles and guidelines set out in the Legal Risk Framework, and with those detailed in the Santander UK Risk and Operational Risk Frameworks.
Santander UK continues to monitor, assess and respond to developments concerning legal requirements intended to prevent future financial crises or otherwise assure the stability of financial institutions.
CREDIT RISK - AREAS OF FOCUS AND OTHER ITEMS
Certain areas and/or specific views of credit risk deserve specialist attention, complementary to global risk management. These are described in the following section and consist of:
1. | Country risk exposure;
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2. | Significant concentrations of credit risk;
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3. | Financial instruments of special interest;
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4. | Loans and advances; and
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5. | Impairment loss allowances on loans and advances, and NPLs.
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1. COUNTRY RISK EXPOSURE
Santander UK manages its country risk exposure under its global limits framework. Within this framework, Santander UK sets its individual risk appetite for each country, taking into account any factors that may influence the risk profile of each country, including political events, the macro-economic situation and the nature of the risk incurred. Exposures are actively managed if it is considered appropriate. Accordingly, and over recent years, Santander UK has intensified its monitoring of exposures to sovereigns and counterparties in eurozone countries, and has proceeded to selectively divest assets directly or indirectly affected by events in those countries. Banco Santander group-related risk is considered separately.
The country risk tables below show Santander UK's exposures to central and local governments, government guaranteed counterparties, banks, other financial institutions, retail customers and corporate customers at 31 December 2012 and 31 December 2011. Total exposures consist of the total of balance sheet values and off-balance sheet values. Balance sheet values are calculated in accordance with IFRS (i.e. after the effect of netting agreements recognised in accordance with the requirements of IFRS, principally with respect to derivatives) except for credit provisions which have been added back. Off balance sheet values consist of undrawn facilities and letters of credit.
The country of exposure has been assigned based on the counterparty's country of incorporation except where Santander UK is aware that a guarantee is in place, in which case the country of incorporation of the guarantor has been used. The exposures are presented by type of counterparty other than where the specific exposures have been guaranteed by a sovereign counterparty in which case they are presented within the "Government guaranteed" category.
Separate disclosure is presented individually for each country where the exposure exceeds £50m, and aggregated for exposures of less than £50m. Given the ongoing interest in eurozone economies, disclosures relating to those economies are presented first and highlighted separately.
The tables exclude credit risk exposures to other Banco Santander group companies, which are presented separately on pages 147 to 150.
31 December 2012 | Central and local governments £bn | Government guaranteed £bn | Banks (2) £bn | Other financial institutions £bn |
Retail £bn |
Corporate £bn |
Total(1) £bn |
Eurozone: | |||||||
Peripheral eurozone countries: | |||||||
Ireland | - | - | - | - | - | 0.3 | 0.3 |
Spain (excluding Santander) | - | - | 0.2 | - | - | 0.1 | 0.3 |
Italy | - | - | 0.2 | - | - | - | 0.2 |
Portugal | - | - | - | - | - | 0.1 | 0.1 |
Other eurozone countries: | |||||||
Germany | 1.3 | - | 3.5 | - | - | 0.2 | 5.0 |
France | - | - | 2.2 | - | - | 0.2 | 2.4 |
The Netherlands | - | - | 0.3 | 0.1 | - | 0.6 | 1.0 |
Luxembourg | - | - | - | 0.1 | - | 0.9 | 1.0 |
Belgium | - | - | 0.5 | - | - | - | 0.5 |
All other eurozone, each < £50m(3) | - | - | - | - | - | 0.1 | 0.1 |
1.3 | - | 6.9 | 0.2 | - | 2.5 | 10.9 | |
All other countries: | |||||||
UK | 33.5 | 0.4 | 14.5 | 11.8 | 180.6 | 43.8 | 284.6 |
US | 0.8 | - | 15.2 | - | 0.1 | 0.7 | 16.8 |
Switzerland | 0.5 | - | 1.8 | 0.5 | - | 0.5 | 3.3 |
Denmark | - | - | 2.3 | - | - | - | 2.3 |
Japan | 1.2 | - | 0.2 | - | - | 0.2 | 1.6 |
Australia | - | - | 0.1 | - | 0.1 | 0.3 | 0.5 |
Canada | - | - | 0.4 | - | - | - | 0.4 |
Isle of Man | - | - | - | - | 0.2 | 0.1 | 0.3 |
Norway | - | - | 0.1 | - | - | 0.1 | 0.2 |
Cayman Islands | - | - | - | - | - | 0.1 | 0.1 |
Lichtenstein | - | - | - | - | - | 0.1 | 0.1 |
Guernsey | - | - | - | - | - | 0.1 | 0.1 |
Liberia | - | - | - | - | - | 0.1 | 0.1 |
All others, each < £50m | - | - | 0.1 | - | 0.1 | 0.6 | 0.8 |
36.0 | 0.4 | 34.7 | 12.3 | 181.1 | 46.7 | 311.2 |
(1) Credit exposures exclude the macro hedge of interest rate risk, intangible assets, property, plant and equipment, current and deferred tax assets, retirement benefit assets and other assets. Loans and advances to customers are included gross of loan loss allowances.
(2) Excludes balances with central banks.
(3) Includes Greece of £3m and Cyprus of £nil.
31 December 2011 | Central and local governments(2) £bn | Government guaranteed £bn | Banks (3) £bn | Other financial institutions £bn |
Retail £bn |
Corporate £bn |
Total(1) £bn |
Eurozone: | |||||||
Peripheral eurozone countries: | |||||||
Spain (excluding Santander) | - | - | 0.3 | - | 0.1 | - | 0.4 |
Ireland | - | - | 0.1 | - | - | 0.2 | 0.3 |
Italy | - | - | 0.2 | - | - | - | 0.2 |
Portugal | - | - | - | - | - | 0.1 | 0.1 |
Other eurozone countries: | |||||||
Germany | - | 0.1 | 3.2 | - | - | 0.2 | 3.5 |
France | - | 0.1 | 1.4 | 1.0 | - | 0.3 | 2.8 |
Luxembourg | - | - | - | 0.4 | - | 0.6 | 1.0 |
The Netherlands | - | - | 0.2 | 0.1 | - | 0.6 | 0.9 |
Belgium | - | - | 0.1 | - | - | - | 0.1 |
All other eurozone, each < £50m(4) | - | - | - | - | - | - | - |
- | 0.2 | 5.5 | 1.5 | 0.1 | 2.0 | 9.3 | |
All other countries: | |||||||
UK | 19.0 | 5.2 | 15.6 | 5.6 | 196.6 | 40.2 | 282.2 |
US | 7.1 | - | 9.9 | 1.1 | 0.1 | 1.3 | 19.5 |
Switzerland | 1.2 | - | 2.3 | 0.4 | - | 0.5 | 4.4 |
Japan | 0.6 | - | - | 0.4 | - | - | 1.0 |
Australia | - | 0.1 | 0.1 | - | 0.1 | 0.4 | 0.7 |
Denmark | - | 0.3 | 0.3 | - | - | 0.1 | 0.7 |
Canada | - | - | 0.5 | - | - | - | 0.5 |
Isle of Man | - | - | - | - | 0.2 | - | 0.2 |
Lichtenstein | - | - | - | - | - | 0.2 | 0.2 |
Cayman Islands | - | - | - | - | - | 0.1 | 0.1 |
China | - | - | - | - | - | 0.1 | 0.1 |
Jersey | - | - | - | - | - | 0.1 | 0.1 |
Liberia | - | - | - | - | - | 0.1 | 0.1 |
Norway | - | - | 0.1 | - | - | - | 0.1 |
All others, each < £50m | - | - | 0.1 | - | 0.2 | 0.1 | 0.4 |
27.9 | 5.6 | 28.9 | 7.5 | 197.2 | 43.2 | 310.3 |
(1) Credit exposures exclude the macro hedge of interest rate risk, intangible assets, property, plant and equipment, current and deferred tax assets, retirement benefit assets and other assets. Loans and advances to customers are included gross of loan loss allowances.
(2) Excludes the exposure on margin given with respect to the Bank of England's Special Liquidity Scheme. Includes balances with central banks.
(3) Excludes balances with central banks.
(4) Includes Greece of £3m and Cyprus of £nil.
31 December 2012 compared to 31 December 2011
Key changes in sovereign and other country risk exposures during the year ended 31 December 2012 were as follows:
> | An increase of £2.4bn in exposure to the UK to £284.6bn. This was due to an increase in deposits with the Bank of England reserve account instead of at the US Federal Reserve, partially offset by lower retail business.
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> | A decrease of £2.7bn in exposure to the US to £16.8bn. This was primarily due to reduced deposits at the US Federal Reserve as deposits were placed at the Bank of England instead. This was partially offset by increased securities purchased under resale activity.
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> | An increase of £1.6bn in exposures to Denmark to £2.3bn. This was primarily due to increased securities purchased under resale activity.
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> | A decrease of £1.1bn in exposure to Switzerland to £3.3bn. This was primarily due to reduced holdings of government securities as alternative securities were held.
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> | An increase of £1.5bn in exposures to Germany to £5.0bn. This was primarily due to new holdings of government securities as part of the Santander UK group's liquidity position.
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> | An increase of £0.6bn in exposures to Japan to £1.6bn. This was primarily due to new holdings of government securities as part of the Santander UK group's liquidity position.
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> | Movements in the remaining country risk exposures were minimal and exposures to these countries remained at low levels. |
Further analysis of sovereign debt, other country risk exposures, including peripheral eurozone countries
Presented below separately for sovereign debt and other country risk exposures is additional analysis of exposures into those that are accounted for on-balance sheet (further analysed into those measured at amortised cost and those measured at fair value) and those that are off-balance sheet.
The assets held at amortised cost are principally classified as loans to banks, loans to customers and loans and receivables securities. Santander UK has no held-to-maturity securities.
The assets held at fair value are classified as either trading assets or have been designated as held at fair value through profit or loss, with the exception of UK, US, German, Swiss and Japanese Government debt held for liquidity purposes, which are classified as available-for-sale securities.
Santander UK has made no reclassifications to/from the assets which are held at fair value from/to any other category.
Sovereign debt
31 December 2012 | Assets held at Amortised Cost | Assets held at Fair Value | |||||||||||
Central and local governments £bn | Government guaranteed £bn | Total at amortised cost £bn | Central and local governments (1) £bn | Government guaranteed £bn | Total at fair value £bn | Total on Balance Sheet Asset £bn | Commitments and undrawn facilities £bn | Total(1)£bn | |||||
Eurozone countries: | |||||||||||||
Germany | - | - | - | 1.3 | - | 1.3 | 1.3 | - | 1.3 | ||||
- | - | - | 1.3 | - | 1.3 | 1.3 | - | 1.3 | |||||
All other countries: | |||||||||||||
UK | 27.8 | - | 27.8 | 5.7 | 0.4 | 6.1 | 33.9 | - | 33.9 | ||||
Japan | - | - | - | 1.2 | - | 1.2 | 1.2 | - | 1.2 | ||||
US | 0.4 | - | 0.4 | 0.4 | - | 0.4 | 0.8 | - | 0.8 | ||||
Switzerland | - | - | - | 0.5 | - | 0.5 | 0.5 | - | 0.5 | ||||
28.2 | - | 28.2 | 7.8 | 0.4 | 8.2 | 36.4 | - | 36.4 | |||||
(1) There are no sovereign debt commitments and undrawn facilities.
(2) There are no impairment losses against sovereign debt at amortised cost.
31 December 2011 | Assets held at Amortised Cost | Assets held at Fair Value | |||||||||||
Central and local governments(2) £bn | Government guaranteed £bn | Total at amortised cost £bn | Central and local governments(1) £bn | Government guaranteed £bn | Total at fair value £bn | Total on Balance Sheet Asset £bn | Commitments and undrawn facilities £bn | Total(1) £bn | |||||
Eurozone countries: | |||||||||||||
France | - | - | - | - | 0.1 | 0.1 | 0.1 | - | 0.1 | ||||
Germany | - | - | - | - | 0.1 | 0.1 | 0.1 | - | 0.1 | ||||
- | - | - | - | 0.2 | 0.2 | 0.2 | - | 0.2 | |||||
All other countries: | |||||||||||||
UK | 18.0 | - | 18.0 | 1.0 | 5.2 | 6.2 | 24.2 | - | 24.2 | ||||
US | 7.0 | - | 7.0 | 0.1 | - | 0.1 | 7.1 | - | 7.1 | ||||
Switzerland | - | - | - | 1.2 | - | 1.2 | 1.2 | - | 1.2 | ||||
Japan | - | - | - | 0.6 | - | 0.6 | 0.6 | - | 0.6 | ||||
Denmark | - | - | - | - | 0.3 | 0.3 | 0.3 | - | 0.3 | ||||
Australia | - | - | - | - | 0.1 | 0.1 | 0.1 | - | 0.1 | ||||
25.0 | - | 25.0 | 2.9 | 5.6 | 8.5 | 33.5 | - | 33.5 | |||||
(1) There are no sovereign debt commitments and undrawn facilities.
(2) Excludes the exposure on margin given with respect to the Bank of England's Special Liquidity Scheme.
Santander UK has no direct sovereign exposures to any other countries. Santander UK has not recognised any impairment losses against sovereign debt which is held at amortised cost, as all of this sovereign debt was issued by the UK Government, US Government and governments of other OECD countries with strong credit ratings. Santander UK has no exposures to credit default swaps (either written or purchased) which are directly referenced to sovereign debt or other instruments that are directly referenced to sovereign debt.
Other country risk exposures(1)
2012 | Assets held at Amortised Cost | Assets held at Fair Value(2) |
| |||||||||||||||||||||
Banks £bn | Other financial institutions £bn |
Retail £bn |
Corporate £bn |
Total £bn | Banks £bn | Other financial institutions £bn |
Corporate £bn |
Total £bn | Total on Balance Sheet Asset £bn | Commitments and undrawn facilities(3) £bn | Total £bn |
| ||||||||||||
Eurozone: | ||||||||||||||||||||||||
Peripheral eurozone countries: |
| |||||||||||||||||||||||
Ireland | - | - | - | 0.2 | 0.2 | - | - | - | - | 0.2 | 0.1 | 0.3 |
| |||||||||||
Spain | 0.2 | - | - | 0.1 | 0.3 | - | - | - | - | 0.3 | - | 0.3 |
| |||||||||||
Italy | 0.1 | - | - | - | 0.1 | 0.1 | - | - | 0.1 | 0.2 | - | 0.2 |
| |||||||||||
Portugal | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 |
| |||||||||||
Other eurozone countries: |
| |||||||||||||||||||||||
Germany | - | - | - | 0.2 | 0.2 | 3.5 | - | - | 3.5 | 3.7 | - | 3.7 |
| |||||||||||
France | - | - | - | 0.1 | 0.1 | 2.2 | - | 0.1 | 2.3 | 2.4 | - | 2.4 |
| |||||||||||
The Netherlands | - | 0.1 | - | 0.1 | 0.2 | 0.3 | - | - | 0.3 | 0.5 | 0.5 | 1.0 |
| |||||||||||
Luxembourg | - | 0.1 | - | 0.8 | 0.9 | - | - | - | - | 0.9 | 0.1 | 1.0 |
| |||||||||||
Belgium | - | - | - | - | - | 0.5 | - | - | 0.5 | 0.5 | - | 0.5 |
| |||||||||||
Other | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 |
| |||||||||||
0.3 | 0.2 | - | 1.7 | 2.2 | 6.6 | - | 0.1 | 6.7 | 8.9 | 0.7 | 9.6 |
| ||||||||||||
All other countries: |
| |||||||||||||||||||||||
UK | 0.8 | 4.8 | 154.5 | 30.7 | 190.8 | 13.4 | 7.0 | 3.4 | 23.8 | 214.6 | 36.1 | 250.7 |
| |||||||||||
US | 1.3 | - | 0.1 | 0.6 | 2.0 | 13.9 | - | 0.1 | 14.0 | 16.0 | - | 16.0 |
| |||||||||||
Switzerland | - | - | - | 0.3 | 0.3 | 1.8 | 0.5 | - | 2.3 | 2.6 | 0.2 | 2.8 |
| |||||||||||
Denmark | - | - | - | - | - | 2.3 | - | - | 2.3 | 2.3 | - | 2.3 |
| |||||||||||
Japan | - | - | - | - | - | 0.2 | - | 0.2 | 0.4 | 0.4 | - | 0.4 |
| |||||||||||
Australia | - | - | 0.1 | 0.2 | 0.3 | 0.1 | - | - | 0.1 | 0.4 | 0.1 | 0.5 |
| |||||||||||
Canada | 0.1 | - | - | - | 0.1 | 0.3 | - | - | 0.3 | 0.4 | - | 0.4 |
| |||||||||||
Isle of Man | - | - | 0.2 | 0.1 | 0.3 | - | - | - | - | 0.3 | - | 0.3 |
| |||||||||||
Cayman Is. | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 |
| |||||||||||
Lichtenstein | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 |
| |||||||||||
Norway | - | - | - | - | - | 0.1 | - | - | 0.1 | 0.1 | 0.1 | 0.2 |
| |||||||||||
Guernsey | - | - | - | - | - | - | - | 0.1 | 0.1 | 0.1 | - | 0.1 |
| |||||||||||
Liberia | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 |
| |||||||||||
Other | - | - | 0.1 | 0.5 | 0.6 | - | - | - | - | 0.6 | 0.2 | 0.8 |
| |||||||||||
2.2 | 4.8 | 155.0 | 32.7 | 194.7 | 32.1 | 7.5 | 3.8 | 43.4 | 238.1 | 36.7 | 274.8 |
| ||||||||||||
2011 | Assets held at Amortised Cost | Assets held at Fair Value(2) | ||||||||||||||
Banks £bn | Other financial institutions £bn |
Retail £bn |
Corporate £bn |
Total £bn | Banks £bn | Other financial institutions £bn |
Corporate £bn |
Total £bn | Total on Balance Sheet Asset £bn | Commitments and undrawn facilities(3) £bn | Total £bn | |||||
Eurozone: | ||||||||||||||||
Peripheral eurozone countries: | ||||||||||||||||
Spain | 0.3 | - | 0.1 | - | 0.4 | - | - | - | - | 0.4 | - | 0.4 | ||||
Ireland | - | - | - | 0.1 | 0.1 | 0.1 | - | - | 0.1 | 0.2 | 0.1 | 0.3 | ||||
Italy | 0.1 | - | - | - | 0.1 | 0.1 | - | - | 0.1 | 0.2 | - | 0.2 | ||||
Portugal | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 | ||||
Other eurozone countries: | ||||||||||||||||
Germany | 0.1 | - | - | 0.1 | 0.2 | 3.1 | - | 0.1 | 3.2 | 3.4 | - | 3.4 | ||||
France | - | - | - | 0.1 | 0.1 | 1.4 | 1.0 | - | 2.4 | 2.5 | 0.2 | 2.7 | ||||
Luxembourg | - | 0.4 | - | 0.6 | 1.0 | - | - | - | - | 1.0 | - | 1.0 | ||||
The Netherlands | 0.1 | 0.1 | - | 0.1 | 0.3 | 0.1 | - | - | 0.1 | 0.4 | 0.5 | 0.9 | ||||
Belgium | - | - | - | - | - | 0.1 | - | - | 0.1 | 0.1 | - | 0.1 | ||||
Other < £50m | - | - | - | - | - | - | - | - | - | - | - | - | ||||
0.6 | 0.5 | 0.1 | 1.1 | 2.3 | 4.9 | 1.0 | 0.1 | 6.0 | 8.3 | 0.8 | 9.1 | |||||
All other countries: | ||||||||||||||||
UK | 2.3 | - | 174.7 | 24.1 | 201.1 | 13.3 | 5.6 | 5.9 | 24.8 | 225.9 | 32.1 | 258.0 | ||||
US | - | - | 0.1 | 1.3 | 1.4 | 9.9 | 1.1 | - | 11.0 | 12.4 | - | 12.4 | ||||
Switzerland | - | - | - | 0.3 | 0.3 | 2.3 | 0.4 | - | 2.7 | 3.0 | 0.2 | 3.2 | ||||
Australia | - | - | 0.1 | 0.3 | 0.4 | 0.1 | - | - | 0.1 | 0.5 | 0.1 | 0.6 | ||||
Canada | - | - | - | - | - | 0.5 | - | - | 0.5 | 0.5 | - | 0.5 | ||||
Denmark | - | - | - | 0.1 | 0.1 | 0.3 | - | - | 0.3 | 0.4 | - | 0.4 | ||||
Japan | - | - | - | - | - | - | 0.4 | - | 0.4 | 0.4 | - | 0.4 | ||||
Isle of Man | - | - | 0.2 | - | 0.2 | - | - | - | - | 0.2 | - | 0.2 | ||||
Lichtenstein | - | - | - | 0.2 | 0.2 | - | - | - | - | 0.2 | - | 0.2 | ||||
Cayman Is. | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 | ||||
China | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 | ||||
Jersey | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 | ||||
Liberia | - | - | - | 0.1 | 0.1 | - | - | - | - | 0.1 | - | 0.1 | ||||
Norway | - | - | - | - | - | 0.1 | - | - | 0.1 | 0.1 | - | 0.1 | ||||
Other < £50m | - | - | 0.2 | - | 0.2 | 0.1 | - | - | 0.1 | 0.3 | 0.1 | 0.4 | ||||
2.3 | - | 175.3 | 26.7 | 204.3 | 26.6 | 7.5 | 5.9 | 40.0 | 244.3 | 32.5 (3) | 276.8 | |||||
(1) Excluding other Banco Santander group companies.
(2) The assets held at fair value were classified as either trading assets or designated as held at fair value through profit or loss. Santander UK did not hold any significant available-for-sale securities, with the exception of government debt held for liquidity purposes, as described on the previous page.
(3) Of which £21.9bn is classified as Retail and the remainder is classified as Corporate.
Commitments and undrawn facilities principally consist of formal standby facilities and credit lines in Santander UK's Retail Banking and Corporate Banking operations. Within Retail Banking, these represent credit card, mortgage and overdraft facilities. Within Corporate Banking, these represent standby loan facilities. A summary of the key terms and a maturity analysis of formal standby facilities, credit lines and other commitments are set out in Note 38 to the Consolidated Financial Statements.
Maturity analyses of loans and advances to banks and customers, which represent almost all of Santander UK's assets held at amortised cost (excluding cash and balances at central banks) by country, are set out on page 45.
Peripheral eurozone countries
The tables below further analyseSantander UK's direct exposure to peripheral eurozone countries at 31 December 2012 by type of financial instrument. The tables below exclude balances with other Banco Santander group companies which are presented separately on pages 147 to 150. This section also discusses our indirect exposures to peripheral eurozone countries
Direct and indirect risk exposures via large multinational companies and financial institutions are monitored on a regular basis by the Wholesale Credit Risk Department as part of the overall risk management process. Indirect exposures via other corporates are monitored on a regular basis by the Corporate Credit Risk Department.
The large corporates portfolio is mainly comprised of multinational UK companies which are considered to be geographically well diversified in terms of their assets, operations and profits. This enables them to mitigate any country risk concentration that they may have in peripheral eurozone countries. In addition, the risk is further mitigated by the fact that credit agreements are underpinned by both financial and non-financial covenants.
The risk arising from indirect exposures from our transactions with financial institutions is mitigated by the short-term tenor of the transactions, and by the fact that many such transactions contain margin calls and/or collateral requirements, and are subject to standard ISDA Master Agreements permitting offsetting.
The risk arising from indirect exposures from our transactions with other corporates is mitigated by standard financial and non-financial guarantees and the fact that the companies are geographically well diversified in terms of their assets, operations and profits.
Direct exposures to peripheral eurozone countries
(i) Spain
31 December 2012 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and advances to customers | - | - | - | 0.1 | 0.1 |
Loans and receivables securities | 0.2 | - | - | - | 0.2 |
Total | 0.2 | - | - | 0.1 | 0.3 |
31 December 2011 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and advances to customers | - | - | 0.1 | 0.1 | 0.2 |
Loans and receivables securities | 0.3 | - | - | - | 0.3 |
Total | 0.3 | - | 0.1 | 0.1 | 0.5 |
(ii) Ireland
31 December 2012 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and advances to customers | - | - | - | 0.1 | 0.1 |
Loans and receivables securities | - | - | - | 0.1 | 0.1 |
Total | - | - | - | 0.2 | 0.2 |
Commitments and undrawn facilities | - | - | - | 0.1 | 0.1 |
31 December 2011 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Trading assets | 0.1 | - | - | - | 0.1 |
Loans and advances to banks | - | - | - | - | - |
Loans and receivables securities | - | - | - | 0.1 | 0.1 |
Total | 0.1 | - | - | 0.1 | 0.2 |
Commitments and undrawn facilities | - | - | - | 0.1 | 0.1 |
(iii) Italy
31 December 2012 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and receivables securities | 0.1 | - | - | - | 0.1 |
Derivatives | |||||
- Derivative assets | 0.1 | - | - | - | 0.1 |
- Derivative liabilities | (0.1) | - | - | - | (0.1) |
Net derivatives position | - | - | - | - | - |
Total | 0.1 | - | - | - | 0.1 |
31 December 2011 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and receivables securities | 0.1 | - | - | - | 0.1 |
Derivatives | |||||
- Derivative assets | 0.1 | - | - | - | 0.1 |
- Derivative liabilities | (0.1) | - | - | - | (0.1) |
Net derivatives position | - | - | - | - | - |
Total | 0.1 | - | - | - | 0.1 |
(iv) Portugal
31 December 2012 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and advances to customers | - | - | - | 0.1 | 0.1 |
Total | - | - | - | 0.1 | 0.1 |
31 December 2011 | Banks £bn | Other financial institutions £bn | Retail £bn | Corporate £bn | Total £bn |
Loans and advances to customers | - | - | - | 0.1 | 0.1 |
Total | - | - | - | 0.1 | 0.1 |
Indirect exposures to peripheral eurozone countries
Indirect exposures to peripheral eurozone countries are considered to exist where our direct counterparties outside the peripheral eurozone countries themselves have a direct exposure to one or more peripheral eurozone countries.
Indirect exposures are identified as part of our ongoing credit analysis and monitoring of our counterparty base by the review of available financial information to determine the countries where the material parts of a counterparty's assets, operations or profits arise. Our indirect exposures to peripheral eurozone countries consist of:
> | A small number of corporate loans to large multinational companies based in the UK that derive a proportion of their profits from one or more peripheral eurozone countries.
|
> | Trading transactions and hedging transactions with financial institutions based in the UK and Europe that derive a proportion of their profits from or have a proportion of their assets in one or more peripheral eurozone countries. |
> | A small number of loans to other corporate entities which have either a proportion of their operations within, or profits from, one or more peripheral eurozone countries.
|
> | We have no significant indirect exposure to peripheral eurozone countries in our retail business. |
Balances with other Banco Santander group companies
Santander UK enters into transactions with other Banco Santander group companies in the ordinary course of business. Such transactions are undertaken in areas of business where Santander UK has a particular advantage or expertise and where other Banco Santander group companies can offer commercial opportunities, substantially on the same terms as for comparable transactions with third party counterparties. These transactions also arise in support of the activities of, or with, larger multinational corporate clients and financial institutions which may have relationships with a number of entities in the Banco Santander group. In early 2012, Santander UK raised funding directly from certain members of the Banco Santander group through repo transactions and debt issuance to take advantage of the commercial opportunities available at the time, and in accordance with the subsidiary model set out on page 5.All such activities are conducted in a manner that manages the credit risk arising against such other Santander companies and within limits acceptable to the FSA. The repo balances have now been repaid, and the remaining debt issuances will mature or be repaid in 2013.
At 31 December 2012 and 31 December 2011, Santander UK had gross balances (without taking account of netting, collateral or any other credit risk mitigants) with other Banco Santander group companies as follows:
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Assets: | ||||
- Spain | 2.5 | 0.1 | - | 2.6 |
- UK | - | 0.3 | - | 0.3 |
- Chile | 0.1 | - | - | 0.1 |
- Other < £50m | - | 0.1 | - | 0.1 |
2.6 | 0.5 | - | 3.1 | |
Liabilities: | ||||
- Spain | (4.9) | (1.0) | (0.1) | (6.0) |
- UK | - | (1.7) | (0.1) | (1.8) |
- Belgium | - | - | - | - |
- Ireland | - | (0.2) | - | (0.2) |
- Chile | (0.1) | - | - | (0.1) |
- USA | (0.1) | - | - | (0.1) |
- Italy | - | (0.6) | - | (0.6) |
- Germany | - | (0.8) | - | (0.8) |
- Other < £50m | (0.1) | (0.1) | - | (0.2) |
(5.2) | (4.4) | (0.2) | (9.8) |
31 December 2011 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Assets: | ||||
- Spain | 5.0 | 0.2 | - | 5.2 |
- Other < £50m | - | 0.1 | - | 0.1 |
5.0 | 0.3 | - | 5.3 | |
Liabilities: | ||||
- Spain | (6.5) | (0.2) | - | (6.7) |
- UK | - | (2.1) | - | (2.1) |
- Belgium | - | (0.6) | - | (0.6) |
- Ireland | - | (0.2) | - | (0.2) |
- Other < £50m | - | (0.3) | - | (0.3) |
(6.5) | (3.4) | - | (9.9) |
The above balances with other Banco Santander group companies at 31 December 2012 principally consisted of:
> | Reverse repos of £233m (2011: £2,071m), all of which were collateralised by OECD Government (but not peripheral eurozone) securities. The reverse repos were classified as "Loans and Advances to banks" in the balance sheet. See Note 17 to the Consolidated Financial Statements. This was partially offset by repo liabilities of £140m (2011: £3,082m) with a wider range of collateral being given by Santander UK. See Note 29 'Deposits by banks' to the Consolidated Financial Statements.
| |
> | Derivative assets of £2,197m (2011: £2,710m) subject to International Swaps and Derivatives Association ('ISDA') Master Agreements including the Credit Support Annex. These balances were partially offset by derivative liabilities of £2,033m (2011: £2,179m) and cash collateral received, as described below. These derivatives are included in Note 15 to the Consolidated Financial Statements.
| |
> | Cash collateral of £206m (2011: £270m) given in relation to derivatives futures contracts. The cash collateral was classified as "Trading assets" in the balance sheet. This was more than offset by cash collateral received in relation to other derivatives of £225m (2011: £671m) which was classified as "Trading liabilities" in the balance sheet. See Notes 14 and 31 to the Consolidated Financial Statements. | |
> | Floating rate notes of £23m (2011: £123m), which were classified within "Trading assets" and "Loans and receivables securities" in the balance sheet. See Notes 14 and 23 to the Consolidated Financial Statements.
| |
> | Asset-backed securities of £47m (2011: £51m), which were classified as "Financial assets designated at fair value" in the balance sheet. See Note 16 to the Consolidated Financial Statements.
| |
> | Deposits by customers of £1,520m (2011: £531m), which were classified as "Deposits by Customers" in the balance sheet. See Note 30 to the Consolidated Financial Statements.
| |
> | Debt securities in issue of £3,290m (2011: £244m), which were classified as "Debt Securities in Issue" in the balance sheet. See Note 33 to the Consolidated Financial Statements. These balances represent holdings of debt securities by the wider Santander group as a result of market purchases and for liability management purposes.
| |
> | Other liabilities of £459m (2011: £464m), principally represented dividends payable which were classified as "Other Liabilities" in the balance sheet. See Note 35 to the Consolidated Financial Statements.
| |
> | Subordinated liabilities of £1,879m (2011: £2,697m), which were classified as "Subordinated Liabilities" in the balance sheet. See Note 34 to the Consolidated Financial Statements. These balances represent holdings of debt securities by the wider Banco Santander group as a result of market purchases and for liability management purposes. |
|
The above activities are conducted in a manner that appropriately manages the credit risk arising against such other Banco Santander group companies within limits acceptable to the FSA. The tables below further analyse the balances with other Banco Santander group companies at 31 December 2012 and 2011 by type of financial instrument and country of the counterparty, including the additional mitigating impact of collateral arrangements (which are not included in the summary tables above, as they are accounted for off-balance sheet) and the resulting net credit exposures:
(i) Spain
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Repurchase agreements | ||||
- Asset balance - reverse repo | 0.3 | - | - | 0.3 |
- Impact of collateral held (off balance sheet) | (0.2) | - | - | (0.2) |
- Net repo asset | 0.1 | - | - | 0.1 |
- Liability balance - repo | (0.1) | - | - | (0.1) |
- Impact of collateral placed (off balance sheet) | 0.1 | - | - | 0.1 |
- Net repo liability | - | - | - | - |
Net repurchase agreement position | 0.1 | - | - | 0.1 |
Derivatives | ||||
- Derivative assets | 2.0 | - | - | 2.0 |
- Derivative liabilities | (1.9) | - | - | (1.9) |
Cash collateral in relation to derivatives: - placed | 0.2 | - | - | 0.2 |
- held | (0.2) | - | - | (0.2) |
Net derivatives position | 0.1 | - | - | 0.1 |
Floating rate notes and asset-backed securities | - | - | - | - |
Asset-backed securities | - | 0.1 | - | 0.1 |
Total assets, after the impact of collateral | 0.2 | 0.1 | - | 0.3 |
Deposits by customers | - | (0.8) | (0.1) | (0.9) |
Debt securities in issue | (2.1) | (0.1) | - | (2.2) |
Other liabilities | (0.3) | (0.1) | - | (0.4) |
Subordinated liabilities | (0.3) | - | - | (0.3) |
Total liabilities | (2.7) | (1.0) | (0.1) | (3.8) |
Net balance | (2.5) | (0.9) | (0.1) | (3.5) |
31 December 2011 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Repurchase agreements | ||||
- Asset balance - reverse repo | 2.1 | - | - | 2.1 |
- Impact of collateral held (off balance sheet) | (2.1) | - | - | (2.1) |
- Net repo asset | - | - | - | - |
- Liability balance - repo | (2.5) | - | - | (2.5) |
- Impact of collateral given (off balance sheet) | 2.7 | - | - | 2.7 |
- Net repo liability | 0.2 | - | - | 0.2 |
Net repurchase agreement position | 0.2 | - | - | 0.2 |
Derivatives | ||||
- Derivative assets | 2.7 | - | - | 2.7 |
- Derivative liabilities | (2.2) | - | - | (2.2) |
Cash collateral in relation to derivatives | ||||
- Cash collateral held | 0.3 | - | - | 0.3 |
- Cash collateral given | (0.6) | - | - | (0.6) |
Net derivatives position | 0.2 | - | - | 0.2 |
Floating rate notes | - | 0.1 | - | 0.1 |
Asset-backed securities | - | 0.1 | - | 0.1 |
Total assets, after the impact of collateral | 0.4 | 0.2 | - | 0.6 |
Debt securities in issue | (0.1) | (0.1) | - | (0.2) |
Other liabilities | (0.3) | (0.1) | - | (0.4) |
Subordinated liabilities | (0.9) | - | - | (0.9) |
Total liabilities | (1.3) | (0.2) | - | (1.5) |
Net balance | (0.9) | - | - | (0.9) |
(ii) Belgium
At 31 December 2012, Santander UK had no balances with other Banco Santander group companies in Belgium.
31 December 2011 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Repurchase agreements | ||||
- Liability balance - repo | - | (0.6) | - | (0.6) |
- Impact of collateral given (off balance sheet) | - | 0.8 | - | 0.8 |
Net repurchase agreement position | - | 0.2 | - | 0.2 |
Total assets, after the impact of collateral | - | 0.2 | - | 0.2 |
(iii) Ireland
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Deposits by customers | - | (0.2) | - | (0.2) |
31 December 2011 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Deposits by customers | - | (0.2) | - | (0.2) |
(iv) UK
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Other assets | - | 0.3 | - | 0.3 |
Deposits by customers | - | (0.1) | (0.1) | (0.2) |
Subordinated liabilities | - | (1.6) | - | (1.6) |
Total liabilities | - | (1.7) | (0.1) | (1.8) |
Net balance | - | (1.4) | (0.1) | (1.5) |
31 December 2011 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Deposits by customers | - | (0.3) | - | (0.3) |
Subordinated liabilities | - | (1.8) | - | (1.8) |
Total liabilities | - | (2.1) | - | (2.1) |
(v) Chile
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Derivatives | ||||
- Derivative assets | 0.1 | - | - | 0.1 |
- Derivative liabilities | (0.1) | - | - | (0.1) |
Net derivatives position | - | - | - | - |
Total assets after impact of collateral | - | - | - | - |
At 31 December 2011, Santander UK had no balances with other Banco Santander group companies in Chile.
(vi) US
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Deposits by banks | (0.1) | - | - | (0.1) |
At 31 December 2011, Santander UK had no balances with other Banco Santander group companies in the US.
(vii) Italy
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Debt securities in issue (purchased in secondary market) | - | (0.6) | - | (0.6) |
At 31 December 2011, Santander UK had no balances with other Banco Santander group companies in Italy.
(viii) Germany
31 December 2012 | Banks £bn | Other financial institutions £bn | Corporate £bn | Total £bn |
Deposits by customers | - | (0.3) | - | (0.3) |
Debt securities in issue | - | (0.5) | - | (0.5) |
Total liabilities | - | (0.8) | - | (0.8) |
At 31 December 2011, Santander UK had no balances with other Banco Santander group companies in Germany.
Redenomination risk
Santander UK considers the total dissolution of the eurozone to be extremely unlikely and therefore believes widespread redenomination of its euro-denominated assets and liabilities to be highly improbable. However, for contingency planning purposes it has analysed the redenomination risk that might arise from an exit of a member state from the euro or a total dissolution of the euro and how that exit or dissolution would be implemented. It is not possible to predict what the total financial impact on Santander UK might be of a eurozone member state exit or the dissolution of the euro. The determination of which assets and liabilities would be legally redenominated is potentially complex and depends on a numbers of factors, including the precise exit scenario, as the consequences on external contracts of a disorderly exit or one sanctioned under EU law may be different. Santander UK has already identified and is monitoring these risks and has taken steps to mitigate them and/or reduce Santander UK's overall exposure to losses that might arise in the event of a redenomination by reducing its balances and funding mismatches.
As part of its objective of maintaining a diversified funding base, Santander UK raises funding in a number of currencies, including euro, and converts these back into sterling, to fund its commercial assets which are largely sterling denominated. Santander UK's net position denominated in euro, reflecting assets and liabilities and associated swaps (which primarily comprise cross-currency derivatives entered into to swap funding raised in euro back into sterling for reasons set out above) arising in connection with contracts denominated in euro, amounted to £0.1bn at 31 December 2012. This comprised debt securities (covered bonds and securitisations) of £26.1bn issued by Santander UK as part of its medium term funding activities, medium-term repos of £3.0bn, other deposits of £0.9bn, other loans and securities of £2.8bn, net trading repos of £2.2bn and related cross-currency swaps of £25.1bn which swap the resultant euro exposures back into sterling in order to ensure that assets and liabilities are currency matched in sterling. Disclosures of Santander UK's exposure to individual eurozone countries and total exposures to counterparties in those countries, which amounts include any euro-denominated contracts with those counterparties, are set out on pages 141 to 150.
2. Significant concentrations of credit risk
The management of risk concentration is a key part of risk management. Santander UK tracks the degree of concentration of its credit risk portfolios using various criteria, including geographic areas and countries, economic sectors, products and groups of customers.
During 2012, Santander UK's most significant exposures to credit risk derived from:
> | the residential mortgage portfolio and unsecured personal lending portfolio in Retail Banking;
|
> | secured lending and derivatives exposures to companies in Corporate Banking;
|
> | derivatives exposure to financial institutions in Markets; and
|
> | the non-core corporate and legacy portfolios in Corporate Centre. |
In Retail Banking, the business consists of a relatively large number of homogenous loans where a problem with one customer will have a relatively small impact. In Corporate Banking, the business consists of a relatively small number of high value balances where a problem with one customer may cause a relatively large impact.
The residential mortgage portfolio comprises loans to private individuals secured against residential properties in the UK. This is a prime portfolio with total exposure of £157.3bn at 31 December 2012 (2011: £166.8bn). The unsecured personal loan portfolio comprises unsecured loans to private individuals in the UK. Total exposure stood at £2.4bn at 31 December 2012 (2011: £2.9bn). Details of the committed facilities exposure to the other portfolios are set out in the "Corporate Banking - committed facilities", "Markets - commitments" and "Corporate Centre - exposures" sections of the Risk Management Report.
Details of credit risk mitigation techniques employed by the Santander UK group, including the holding of collateral, are set out in the "Retail Banking - mortgage credit quality and credit risk mitigation", "Corporate Banking - Credit Risk mitigation", "Markets - Credit Risk mitigation" and "Corporate Centre - Credit Risk mitigation" sections of the Risk Management Report.
Although the operations of Corporate Banking, Markets and Corporate Centre are based mainly in the UK, they have built up exposures to various entities around the world and are therefore exposed to concentrations of risk related to geographic area. These are further analysed below:
2012 | 2011 | |||||||
Country | Corporate Banking | Markets | Corporate Centre | Corporate Banking | Markets | Corporate Centre | ||
Non derivatives |
Derivatives | Non derivatives |
Derivatives | |||||
% | % | % | % | % | % | % | % | |
UK | 87 | 16 | 34 | 90 | 85 | 68 | 23 | 73 |
Peripheral eurozone | 1 | 10 | 8 | 1 | 1 | 6 | 11 | 3 |
Rest of Europe | 7 | 25 | 30 | 4 | 8 | 12 | 30 | 4 |
US | 1 | - | 21 | 3 | 2 | 14 | 28 | 18 |
Other, including non-OECD | 4 | 49 | 7 | 2 | 4 | - | 8 | 2 |
100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | |
Geographical exposures are governed by country limits set by Banco Santander, S.A. centrally and determined according to the classification of the country (whether it is a developed OECD country or not), the rating of the country, its gross domestic product and the type of business activities and products the Banco Santander group wishes to engage in within that country. Santander UK is constrained in its country risk exposure, within the Banco Santander group limits, and by its capital base. Detailed disclosures of the Santander UK group's geographical exposures are set out in the preceding section "Country risk exposures".
3. FINANCIAL INSTRUMENTS OF SPECIAL INTEREST
This section summarises the types of financial instruments which have been of special interest as a result of the economic environment of the last few years. The table below shows the type of financial instrument and where they are classified on Santander UK's Consolidated Balance Sheet. It also provides cross references to the Notes to the Consolidated Financial Statements containing additional analysis of the significant assets.
Santander UK's financial instruments which are considered to have been most affected by the current credit environment include floating rate notes ('FRNs'), asset-backed securities ('ABS') (including mortgage-backed securities ('MBS') and Santander UK's exposures to monoline insurers), Collateralised Debt Obligations ('CDOs'), Collateralised Loan Obligations ('CLOs'), loans to banks, certain credit derivatives in the Treasury asset portfolio, and off-balance sheet entities. Santander UK has no holdings in Structured Investment Vehicles.
Santander UK aims to actively manage these exposures. Additional information on Santander UK's exposures by country is disclosed in the preceding section 'Country Risk Exposure'.
Classification in the Consolidated Balance Sheet
The classification of these assets in Santander UK's Consolidated Balance Sheet, and cross references to the Notes to the Consolidated Financial Statements containing additional analysis of the significant assets, is as follows:
2012 | Type of Financial Instruments | |||||||
Note | FRN | ABS | CLO | Loans | OECD Govt debts | Other | Total | |
Balance sheet line item | £m | £m | £m | £m | £m | £m | £m | |
Trading assets - debt securities | 14 | 564 | - | - | - | 3,917 | 13 | 4,494 |
Derivatives - equity & credit contracts | 15 | - | - | - | - | - | 17 | 17 |
Financial assets designated at fair value - debt securities | 16 | - | 328 | - | - | - | 235 | 563 |
Loans and advances to banks | 17 | - | - | - | 2,438 | - | - | 2,438 |
Available-for-sale - debt securities | 22 | - | - | - | - | 5,113 | 346 | 5,459 |
Loans and receivables securities | 23 | 168 | 978 | 85 | - | - | 28 | 1,259 |
732 | 1,306 | 85 | 2,438 | 9,030 | 639 | 14,230 | ||
2011 | Type of Financial Instruments | |||||||
Note | FRN | ABS | CLO | Loans | OECD Govt debts | Other | Total | |
Balance sheet line item | £m | £m | £m | £m | £m | £m | £m | |
Trading assets - debt securities | 14 | 5,768 | - | - | - | 2,943 | - | 8,711 |
Derivatives - equity & credit contracts | 15 | - | - | - | - | - | 16 | 16 |
Financial assets designated at fair value - debt securities | 16 | - | 379 | - | - | - | 250 | 629 |
Loans and advances to banks | 17 | - | - | - | 4,487 | - | - | 4,487 |
Loans and receivables securities | 23 | 515 | 1,142 | 90 | - | - | 24 | 1,771 |
6,283 | 1,521 | 90 | 4,487 | 2,943 | 290 | 15,614 | ||
EXPOSURE TO OFF-BALANCE SHEET ENTITIES SPONSORED BY SANTANDER UK
Certain Special Purpose Entities ('SPEs') are formed by Santander UK to accomplish specific and well-defined objectives, such as securitising financial assets. Santander UK consolidates these SPEs when the substance of the relationship indicates control, as described in Note 1 of the Consolidated Financial Statements. Details of SPEs sponsored by Santander UK (including SPEs not consolidated by Santander UK) are set out in Note 20 and Note 21 to the Consolidated Financial Statements.
The only SPEs sponsored but not consolidated by Santander UK are SPEs which issue shares that back retail structured products. Santander UK's arrangements with these entities comprise the provision of equity derivatives and a secondary market-making service to those retail customers who wish to exit early from these products.
4. LOANS AND ADVANCES
The following tables categorise Santander UK's loans and advances into three categories as:
> | neither past due nor impaired; |
> | past due but not individually impaired; or |
> | individually impaired. |
For certain homogeneous portfolios of loans and advances, impairment is assessed on a collective basis and each loan is not individually assessed for impairment. Loans in this category are classified as neither past due nor impaired, or past due but not individually impaired, depending upon their arrears status. The impairment loss allowances include allowances against financial assets that have been individually assessed for impairment and those that are subject to collective assessment for impairment.
2012 | Group | |||||
Neither past due nor impaired | Past due but not individually impaired | Individually impaired | Total | Impairment loss allowances | Total carrying value | |
Statutory balance sheet line items | £m | £m | £m | £m | £m | £m |
Trading assets | ||||||
- Loans and advances to banks | 9,988 | - | - | 9,988 | - | 9,988 |
- Loans and advances to customers | 7,552 | - | - | 7,552 | - | 7,552 |
Financial assets designated at fair value through profit and loss | ||||||
- Loans and advances to customers | 3,248 | - | - | 3,248 | - | 3,248 |
Loans and advances to banks | ||||||
- Placements with other banks | 2,201 | - | - | 2,201 | - | 2,201 |
- Amounts due from parent | 237 | - | - | 237 | - | 237 |
Loans and advances to customers | ||||||
- Advances secured on residential property
| 151,784 | 4,384 | 1,142 | 157,310 | (552) | 156,758 |
- Corporate loans | 19,801 | - | 3,510 | 23,311 | (727) | 22,584 |
- Finance leases
| 3,053 | - | 9 | 3,062 | (40) | 3,022 |
- Other secured advances | 2,527 | - | 482 | 3,009 | (169) | 2,840 |
- Other unsecured advances | 6,369 | 155 | 239 | 6,763 | (407) | 6,356 |
- Amounts due from fellow subsidiaries | 347 | - | - | 347 | - | 347 |
Loans and receivables securities
| 1,240 | - | 25 | 1,265 | (6) | 1,259 |
Total loans and advances | 208,347 | 4,539 | 5,407 | 218,293 | (1,901) | 216,392 |
Company |
| |||||||||||||
| 2012 | Neither past due nor impaired | Past due but not individually impaired | Individually impaired | Total | Impairment loss allowances | Total carrying value | |||||||
| Statutory balance sheet line items | £m | £m | £m | £m | £m | £m | |||||||
| Financial assets designated at fair value through profit and loss | |||||||||||||
| - Loans and advances to customers | 44 | - | - | 44 | - | 44 | |||||||
| Loans and advances to banks |
| ||||||||||||
| - Placements with other banks | 707 | - | - | 707 | - | 707 | |||||||
| - Amounts due from subsidiaries | 97,139 | - | - | 97139 | - | 97,139 | |||||||
| Loans and advances to customers |
| ||||||||||||
| - Advances secured on residential property | 151,779 | 4,384 | 1,142 | 157305 | (551) | 156,754 | |||||||
| - Corporate loans | 6,539 | - | 2,768 | 9307 | (178) | 9,129 | |||||||
| - Other secured advances
| 2,098 | - | 482 | 2580 | (169) | 2,411 | |||||||
| - Other unsecured advances | 3,150 | 77 | 118 | 3345 | (185) | 3,160 | |||||||
| - Amounts due from fellow subsidiaries | 13 | - | - | 13 | - | 13 | |||||||
| - Amounts due from subsidiaries
| 462 | - | - | 462 | (232) | 230 | |||||||
| Loans and receivables securities | 5,922 | - | 25 | 5947 | (6) | 5,941 | |||||||
| Total loans and advances | 267,853 | 4,461 | 4,535 | 276,849 | (1,321) | 275,528 | |||||||
2011 | Group | |||||
Neither past due nor impaired | Past due but not individually impaired | Individually impaired | Total | Impairment loss allowances | Total carrying value | |
Statutory balance sheet line items | £m | £m | £m | £m | £m | £m |
Trading assets | ||||||
- Loans and advances to banks | 6,144 | - | - | 6,144 | - | 6,144 |
- Loans and advances to customers | 6,687 | - | - | 6,687 | - | 6,687 |
Financial assets designated at fair value through profit and loss | ||||||
- Loans and advances to customers | 4,376 | - | - | 4,376 | - | 4,376 |
Loans and advances to banks | ||||||
- Placements with other banks | 2,405 | - | - | 2,405 | - | 2,405 |
- Amounts due from parent | 2,082 | - | - | 2,082 | - | 2,082 |
Loans and advances to customers | ||||||
- Advances secured on residential property | 161,767 | 4,143 | 937 | 166,847 | (478) | 166,369 |
- Corporate loans | 20,746 | 306 | 850 | 21,902 | (432) | 21,470 |
- Finance leases | 2,937 | - | 7 | 2,944 | (37) | 2,907 |
- Other secured advances | 3,411 | 144 | 155 | 3,710 | (107) | 3,603 |
- Other unsecured advances | 6,745 | 186 | 266 | 7,197 | (509) | 6,688 |
- Amounts due from fellow subsidiaries | 32 | - | - | 32 | - | 32 |
Loans and receivables securities
| 1,756 | - | 21 | 1,777 | (6) | 1,771 |
Total loans and advances | 219,088 | 4,779 | 2,236 | 226,103 | (1,569) | 224,534 |
Company |
| |||||||||||||
| 2011 | Neither past due nor impaired | Past due but not individually impaired | Individually impaired | Total | Impairment loss allowances | Total carrying value | |||||||
| Statutory balance sheet line items | £m | £m | £m | £m | £m | £m | |||||||
| Financial assets designated at fair value through profit and loss | |||||||||||||
| - Loans and advances to customers | 45 | - | - | 45 | - | 45 | |||||||
| Loans and advances to banks | |||||||||||||
| - Placements with other banks | 1,192 | - | - | 1,192 | - | 1,192 | |||||||
| - Amounts due from subsidiaries | 89,524 | - | - | 89,524 | - | 89,524 | |||||||
| Loans and advances to customers | |||||||||||||
| - Advances secured on residential property | 161,741 | 4,142 | 937 | 166,820 | (477) | 166,343 | |||||||
| - Corporate loans | 7,687 | 211 | 589 | 8,487 | (134) | 8,353 | |||||||
| - Other secured advances | 2,847 | 144 | 155 | 3,146 | (107) | 3,039 | |||||||
| - Other unsecured advances | 3,433 | 91 | 208 | 3,732 | (249) | 3,483 | |||||||
| - Amounts due from fellow subsidiaries | 27 | - | - | 27 | - | 27 | |||||||
| - Amounts due from subsidiaries | 727 | - | 244 | 971 | (244) | 727 | |||||||
| Loans and receivables securities | 5,187 | - | 21 | 5,208 | (6) | 5,202 | |||||||
| Total loans and advances | 272,410 | 4,588 | 2,154 | 279,152 | (1,217) | 277,935 | |||||||
Credit quality of loans and advances that are neither past due nor individually impaired
The credit quality of loans and advances that are neither past due nor individually impaired is as follows:
2012 | Group | |||
Good | Satisfactory | Higher Risk | Total | |
£m | £m | £m | £m | |
Trading assets | ||||
- Loans and advances to banks | 9,781 | 190 | 17 | 9,988 |
- Loans and advances to customers | 7,552 | - | - | 7,552 |
Financial assets designated at fair value through profit and loss | 0 | |||
- Loans and advances to customers | 3,248 | - | - | 3,248 |
Loans and advances to banks | 0 | |||
- Placements with other banks | 2,201 | - | - | 2,201 |
- Amounts due from parent | 237 | - | - | 237 |
Loans and advances to customers | 0 | |||
- Advances secured on residential property | 130,768 | 20,515 | 501 | 151,784 |
- Corporate loans | 12,633 | 7,099 | 69 | 19,801 |
- Finance leases | 2,701 | 350 | 2 | 3,053 |
- Other secured advances | 517 | 1,991 | 19 | 2,527 |
- Other unsecured advances | 813 | 5,426 | 130 | 6,369 |
- Amounts due from fellow subsidiaries | 347 | - | - | 347 |
Loans and receivables securities | 995 | 70 | 175 | 1,240 |
Total loans and advances | 171,793 | 35,641 | 913 | 208,347 |
2012 | Company | |||
Good | Satisfactory | Higher Risk | Total | |
£m | £m | £m | £m | |
Financial assets designated at fair value through profit and loss | ||||
- Loans and advances to customers | 44 | - | - | 44 |
Loans and advances to banks |
| |||
- Placements with other banks | 707 | - | - | 707 |
- Amounts due from subsidiaries | 97,139 | - | - | 97,139 |
Loans and advances to customers |
| |||
- Advances secured on residential property | 130,764 | 20,514 | 501 | 151,779 |
- Corporate loans | 79 | 6,398 | 62 | 6,539 |
- Other secured advances | 88 | 1,991 | 19 | 2,098 |
- Other unsecured advances | 402 | 2,684 | 64 | 3,150 |
- Amounts due from fellow subsidiaries | 13 | - | - | 13 |
- Amounts due from subsidiaries | 462 | - | - | 462 |
Loans and receivables securities | 5,677 | 70 | 175 | 5,922 |
Total loans and advances | 235,375 | 31,657 | 821 | 267,853 |
2011 | Group | |||
Good | Satisfactory | Higher Risk | Total | |
£m | £m | £m | £m | |
Trading assets | ||||
- Loans and advances to banks | 5,647 | 486 | 11 | 6,144 |
- Loans and advances to customers | 6,678 | 9 | - | 6,687 |
Financial assets designated at fair value through profit and loss | ||||
- Loans and advances to customers | 4,376 | - | - | 4,376 |
Loans and advances to banks | ||||
- Placements with other banks | 2,405 | - | - | 2,405 |
- Amounts due from parent | 2,082 | - | - | 2,082 |
Loans and advances to customers | ||||
- Advances secured on residential property | 148,799 | 12,537 | 431 | 161,767 |
- Corporate loans | 12,831 | 7,701 | 214 | 20,746 |
- Finance leases | 2,582 | 351 | 4 | 2,937 |
- Other secured advances | 1,662 | 1,671 | 78 | 3,411 |
- Other unsecured advances | 972 | 5,580 | 193 | 6,745 |
- Amounts due from fellow subsidiaries | 32 | - | - | 32 |
Loans and receivables securities | 1,208 | 153 | 395 | 1,756 |
Total loans and advances | 189,274 | 28,488 | 1,326 | 219,088 |
2011 | Company | ||||
Good | Satisfactory | Higher Risk | Total |
| |
£m | £m | £m | £m |
| |
Financial assets designated at fair value through profit and loss | |||||
- Loans and advances to customers | 45 | - | - | 45 | |
Loans and advances to banks | |||||
- Placements with other banks | 1,192 | - | - | 1,192 | |
- Amounts due from parent | - | - | - | - | |
- Amounts due from subsidiaries | 89,524 | - | - | 89,524 | |
Loans and advances to customers | |||||
- Advances secured on residential property | 148,775 | 12,535 | 431 | 161,741 | |
- Corporate loans | 6,843 | 802 | 42 | 7,687 | |
- Other secured advances | 1,387 | 1,395 | 65 | 2,847 | |
- Other unsecured advances | 495 | 2,840 | 98 | 3,433 | |
- Amounts due from fellow subsidiaries | 27 | - | - | 27 | |
- Amounts due from subsidiaries | 727 | - | - | 727 | |
Loans and receivables securities | 4,756 | 105 | 326 | 5,187 | |
Total loans and advances | 253,771 | 17,677 | 962 | 272,410 | |
Internal measures of credit quality have been used in the table analysing credit quality, above. Different measures are applied to retail and corporate lending, as follows:
Retail Lending | Corporate Lending | ||||
Expected loss | Probability of default | Probability of default | |||
Financial statements description | Unsecured(1) | Secured(2) | |||
Good | 0.0 - 0.5% | 0.0 - 0.5%(3) | 0.0 - 0.5% | ||
Satisfactory | 0.5 - 12.5% | 0.5 - 12.5% | 0.5 - 12.5% | ||
Higher Risk | 12.5%+ | 12.5%+ | 12.5%+ |
(1) Unsecured consists of other unsecured advances to individuals.
(2) Secured consists of advances to individuals secured on residential property.
(3) Or a loan-to-value ('LTV') ratio of less than 75%.
Summarised descriptions of credit quality used in the financial statements relating to retail and corporate lending are as follows:
RATING | DESCRIPTION |
Good | There is a very high likelihood that the asset will not default and will be recovered in full. The exposure has a negligible or low probability of default. Such exposure also exhibits a strong capacity to meet financial commitments and only exceptionally shows any period of delinquency. |
Satisfactory | There is a high likelihood that the asset will be recovered and is therefore of no cause for concern to Santander UK. The asset has low to moderate probability of default, strong recovery rates and may typically show only short periods of delinquency. Moderate to high application scores, credit bureau scores or behavioural scores characterise this credit quality. |
Higher Risk | All rated accounts that are not viewed as Good or Satisfactory are rated as Higher Risk. The assets are characterised by some concern over the obligor's ability to make payments when due. There may also be doubts over the value of collateral or security provided. However, the borrower or counterparty is continuing to make payments when due i.e. the assets have not yet converted to actual delinquency and is expected to settle all outstanding amounts of principal and interest. |
Maturity analysis of loans and advances that are past due but not individually impaired
A maturity analysis of loans and advances that are past due but not individually impaired is set out below.
In the retail loan portfolio, a loan or advance is considered past due when any contractual payments have been missed and for secured loans, when they are more than 30 days in arrears. The amounts disclosed in the table are the total financial asset of the account, not just the past due payments. All retail accounts are classified as non-impaired as impairment loss allowances are raised collectively with the exception of properties in possession, where an impairment loss allowance is raised on a case by case basis and hence are not included in the table below.
In the corporate loan portfolio, a loan or advance is considered past due when it is 90 days or more in arrears, and also when Santander UK has reason to believe that full repayment of the loan is in doubt.
2012 | Group | |||||
Past due up to 1 month | Past due 1-2 months | Past due 2-3 months | Past due 3-6 months | Past due 6 months and over | Total | |
£m | £m | £m | £m | £m | £m | |
Loans and advances to customers | ||||||
- Advances secured on residential property | - | 1,545 | 908 | 1,141 | 790 | 4,384 |
- Corporate loans | - | - | - | - | - | - |
- Finance leases | - | - | - | - | - | - |
- Other secured advances | - | - | - | - | - | - |
- Other unsecured advances | 40 | 81 | 12 | 14 | 8 | 155 |
Total loans and advances | 40 | 1,626 | 920 | 1,155 | 798 | 4,539 |
Company | ||||||
2012 | Past due up to 1 month | Past due 1-2 months | Past due 2-3 months | Past due 3-6 months | Past due 6 months and over | Total |
£m | £m | £m | £m | £m | £m | |
Loans and advances to customers | ||||||
- Advances secured on residential property | - | 1,545 | 908 | 1,141 | 790 | 4,384 |
- Corporate loans | - | - | - | - | - | - |
- Other secured advances | - | - | - | - | - | - |
- Other unsecured advances | 41 | 17 | 7 | 7 | 5 | 77 |
Total loans and advances | 41 | 1,562 | 915 | 1,148 | 795 | 4,461 |
2011 | Group | |||||
Past due up to 1 month | Past due 1-2 months | Past due 2-3 months | Past due 3-6 months | Past due 6 months and over | Total | |
£m | £m | £m | £m | £m | £m | |
Loans and advances to customers | ||||||
- Advances secured on residential property | - | 1,451 | 899 | 1,121 | 672 | 4,143 |
- Corporate loans | - | - | - | 306 | - | 306 |
- Other secured advances | - | 24 | 25 | 71 | 24 | 144 |
- Other unsecured advances | 47 | 81 | 23 | 24 | 11 | 186 |
Total loans and advances | 47 | 1,556 | 947 | 1,522 | 707 | 4,779 |
Company | ||||||
2011 | Past due up to 1 month | Past due 1-2 months | Past due 2-3 months | Past due 3-6 months | Past due 6 months and over | Total |
£m | £m | £m | £m | £m | £m | |
Loans and advances to customers | ||||||
- Advances secured on residential property | - | 1,451 | 899 | 1,120 | 672 | 4,142 |
- Corporate loans | - | - | - | 211 | - | 211 |
- Other secured advances | - | 24 | 25 | 71 | 24 | 144 |
- Other unsecured advances | 43 | 18 | 8 | 12 | 10 | 91 |
Total loans and advances | 43 | 1,493 | 932 | 1,414 | 706 | 4,588 |
Impairment loss allowances on loans and advances to customers
Santander UK's impairment loss allowances policy is set out in Note 1 of the Consolidated Financial Statements.
Restructured/refinanced loans and advances to customers
The following tables provide a breakdown of the population of loans and advances to customers which have been subject to forbearance programmes and are included in the previous tables. For further detail regarding these programmes refer to page 78.
2012 | Neither past due nor impaired | Past due but not individually impaired | Individually impaired | Total | Impairment loss allowances | Total carrying value |
£m | £m | £m | £m | £m | £m | |
Loans and advances to customers | ||||||
- Advances secured on residential property | 2,974 | 1,107 | 167 | 4,248 | (119) | 4,129 |
- Corporate loans | 548 | 308 | 499 | 1,355 | (188) | 1,167 |
- Finance leases | 10 | - | - | 10 | - | 10 |
- Other secured advances | 218 | 66 | 64 | 348 | (31) | 317 |
- Other unsecured advances | 25 | 21 | 41 | 87 | (32) | 55 |
Total restructured/refinanced loans and advances to customers | 3,775 | 1,502 | 771 | 6,048 | (370) | 5,678 |
2011 | Neither past due nor impaired | Past due but not individually impaired | Individually impaired | Total | Impairment loss allowances | Total carrying value |
£m | £m | £m | £m | £m | £m | |
Loans and advances to customers | ||||||
- Advances secured on residential property | 718 | 1,617 | 261 | 2,596 | (71) | 2,525 |
- Corporate loans | 532 | 278 | 359 | 1,169 | (123) | 1,046 |
- Finance leases | 1 | 10 | - | 11 | - | 11 |
- Other secured advances | 140 | 47 | 43 | 230 | (20) | 210 |
- Other unsecured advances | 25 | 31 | 57 | 113 | (48) | 65 |
Total restructured/refinanced loans and advances to customers | 1,416 | 1,983 | 720 | 4,119 | (262) | 3,857 |
5. impairment loss allowances on loans and advances to customers, and NPLs
Impairment loss allowances on loans and advances to customers
An analysis of Santander UK's impairment loss allowances on loans and advances to customers is presented below. The geographical analysis is based on the location of the office from which the loans and advances to customers are made, rather than the domicile of the borrower. Further geographical analysis, showing the country of domicile of the borrower rather than the office of lending is contained within the "Country Risk Exposure" tables on page 140.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Observed impairment loss allowances | |||||
Advances secured on residential properties - UK | 385 | 381 | 369 | 313 | 174 |
Corporate loans - UK | 602 | 324 | 271 | 185 | 13 |
Finance leases - UK | 6 | 6 | 2 | 1 | - |
Other secured advances - UK | 159 | 83 | 55 | 50 | 37 |
Unsecured personal advances - UK | 262 | 330 | 381 | 341 | 227 |
Total observed impairment loss allowances | 1,414 | 1,124 | 1,078 | 890 | 451 |
Incurred but not yet observed impairment loss allowances | |||||
Advances secured on residential properties - UK | 167 | 97 | 157 | 171 | 184 |
Corporate loans - UK | 125 | 103 | 125 | 172 | 289 |
Finance leases - UK | 34 | 31 | 17 | 1 | 1 |
Other secured advances - UK | 10 | 24 | 22 | 12 | 11 |
Unsecured personal advances - UK | 145 | 184 | 256 | 53 | 65 |
Total incurred but not yet observed impairment loss allowances | 481 | 439 | 577 | 409 | 550 |
Total impairment loss allowances | 1,895 | 1,563 | 1,655 | 1,299 | 1,001 |
Movements in impairment loss allowances on loans and advances to customers
An analysis of movements in Santander UK's impairment loss allowances on loans and advances is presented below.
| 2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m |
Impairment loss allowances at 1 January | 1,563 | 1,655 | 1,299 | 1,001 | 551 |
Amounts written off | |||||
Advances secured on residential properties - UK | (75) | (92) | (42) | (84) | (32) |
Corporate loans - UK | (162) | (124) | (68) | - | - |
Finance leases - UK | (13) | (9) | (5) | (4) | - |
Other secured advances - UK | (53) | (48) | (48) | (17) | (9) |
Unsecured personal advances - UK | (448) | (458) | (448) | (425) | (262) |
Total amounts written off | (751) | (731) | (611) | (530) | (303) |
Observed impairment losses charged against profit | |||||
Advances secured on residential properties - UK | 78 | 104 | 98 | 223 | 132 |
Corporate loans - UK | 440 | 178 | 154 | 172 | 13 |
Finance leases - UK | 12 | 14 | 6 | 5 | - |
Other secured advances - UK | 129 | 76 | 53 | 30 | 14 |
Unsecured personal advances - UK | 379 | 407 | 488 | 539 | 239 |
| Total observed impairment losses charged against profit | 1,038 | 779 | 799 | 969 | 398 |
Incurred but not yet observed impairment losses charged against profit | 45 | (140) | (53) | (141) | (4) |
Total impairment losses charged against profit | 1,083 | 639 | 746 | 828 | 394 |
Assumed through transfers of entities under common control | - | - | 221 | - | 359 |
Impairment loss allowances at 31 December | 1,895 | 1,563 | 1,655 | 1,299 | 1,001 |
Recoveries
An analysis of Santander UK's recoveries is presented below.
| 2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m |
Advances secured on residential properties - UK | 2 | 3 | 1 | 1 | 1 |
Corporate loans - UK | - | 2 | 12 | 23 | - |
Finance leases - UK | 2 | 3 | 1 | 1 | - |
Other secured advances - UK | 6 | 10 | - | - | 12 |
Unsecured personal advances - UK | 64 | 56 | 20 | 30 | 33 |
Total amount recovered | 74 | 74 | 34 | 55 | 46 |
Non-performing loans and advances(1,3)
An analysis of Santander UK's NPLs is presented below.
| 2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m |
NPLs that are impaired - UK | 2,211 | 1,725 | 1,843 | 1,613 | 1,143 |
NPLs that are not impaired - UK | 2,031 | 2,254 | 1,874 | 2,000 | 1,235 |
Total NPLs(2) | 4,242 | 3,979 | 3,717 | 3,613 | 2,378 |
Total loans and advances to customers(3,4) | 195,949 | 206,311 | 202,090 | 190,067 | 183,345 |
Total impairment loss allowances | 1,896 | 1,563 | 1,655 | 1,299 | 1,001 |
% | % | % | % | % | |
NPL ratio(5) | 2.17 | 1.93 | 1.84 | 1.90 | 1.30 |
Coverage ratio(6) | 45 | 39 | 45 | 36 | 42 |
(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or longer.
(2) All NPLs continue accruing interest.
(3) Accrued interest is excluded for purposes of these analyses.
(4) Loans and advances to customers include social housing loans and finance leases, and exclude trading assets.
(5) NPLs as a percentage of loans and advances to customers
(6) Impairment loan loss allowances as a percentage of NPLs.
2012 compared to 2011
In 2012, the value of NPLs increased to £4,242m (2011: £3,978m) and the NPLs ratio increased to 2.17% (2011: 1.93%). NPLs increased in part due to regulatory-driven changes in the mortgage collections policy resulting in fewer NPLs returning to performing status (i.e. "curing") and a further mortgage technical definition change of including accounts where customers who have been declared bankrupt in the last two years and are in early arrears. The change in mortgage collections policy was driven by a regulatory review of our processes, which resulted in us being required to expand our affordability assessment process to gather more detail of the customer's financial position, which forms the basis of the final arrangement reached with the customer. As a result of this expanded process, it now takes longer to finalise a collections arrangement with a customer. The change in collection policy included tightening of forbearance policies. Whilst the rate of accounts entering NPLs did not increase, the effect of these changes was to slow the rate of improvement and cures resulting in cases remaining longer in NPLs. The remaining increase in NPLs was due to the performance of a small number of older vintage corporate loans which were acquired with Alliance & Leicester. The NPL ratio was also adversely affected by the impact of the managed reduction of the mortgage portfolio over the year. In 2012, the overall coverage ratio increased to 45% from 39% mainly due to the provision raised following the review and re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off to reflect the increasing losses experienced in these portfolios. Mortgage coverage was unchanged at 20%.
2011 compared to 2010
In 2011, the value of NPLs increased to £3,979m (2010: £3,717m) and the NPLs ratio increased to 1.93% (2010: 1.84%). NPLs increased as a result of further stress in the legacy portfolio of shipping, structured finance and real estate, as well as other legacy commercial real estate exposures written pre 2008 and residential mortgages, where a technical definition change resulted in more cases being classified as NPLs. The additional NPLs arose from cases where the mortgage (or part of the mortgage) was still outstanding after the contractual maturity date, or where the mortgage account holder had died. When a mortgage account holder dies, the monthly installments continue to accrue (resulting in arrears), until the customer's estate settles the outstanding mortgage and the associated arrears.
Past maturity refers to loans that have reached the maturity date when the mortgage should have been repaid but still remains outstanding. Past maturity NPLs amounted to £38m at 31 December 2011. Where an account is past maturity, interest continues to be charged at the contractual rate. Past maturity accounts are considered impaired and are reported as non-performing loans once they reach 90 days past maturity. Actions are undertaken by Collections & Recoveries to recover the overdue balance consistent with the approach to all other accounts that are 90 days overdue. For capital repayment mortgages, the only circumstances in which an account goes past maturity are because of payment arrears. These are treated as any other payment arrears. For interest-only mortgages, the failure to repay the capital at maturity can be caused by the lack of, or shortfall in, a repayment vehicle. However, there are circumstances when the lack of repayment of the full balance of the loan at maturity is not due to the inability of the borrower to repay the loan in accordance with the contractual terms. These circumstances typically occur where the lack of repayment is due to a short-term mismatch in the timing of the release of funds from a repayment vehicle through which the customer intends to repay the loan.
The overall coverage ratio decreased to 39% from 45% due to lower impairment loss allowances, offset slightly by the increase in NPLs. Despite a decrease from 2010, secured coverage remained relatively strong at 20% (2010: 22%) as a result of stable NPLs. Further analyses of NPLs are set out in the Retail Banking and Corporate Banking credit risk discussions.
Restructured/refinanced loans
At 31 December 2012, the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been restructured/refinanced was £3,093m (2011: £1,932m, 2010: £1,595m).
Ratio of write-offs to average loans
| 2012 % | 2011 % | 2010 % | 2009 % | 2008 % |
Ratio of write-offs to average loans during the year | 0.37 | 0.36 | 0.31 | 0.27 | 0.20 |
Retail Banking analysis of impairment loss allowances on loans and advances to customers
An analysis of the Retail Banking impairment loss allowances on loans and advances to customers is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Observed impairment loss allowances | |||||
Advances secured on residential properties - UK | 385 | 381 | 369 | 313 | 174 |
Finance leases - UK | 6 | 6 | 2 | - | - |
Unsecured advances - UK | 262 | 330 | 384 | 341 | 227 |
Total observed impairment loss allowances (1) | 653 | 717 | 755 | 654 | 401 |
Incurred but not yet observed impairment loss allowances | |||||
Advances secured on residential properties - UK | 167 | 97 | 157 | 171 | 184 |
Finance leases - UK | 34 | 31 | 16 | - | - |
Unsecured advances - UK | 145 | 183 | 260 | 53 | 65 |
Total incurred but not yet observed impairment loss allowances | 346 | 311 | 433 | 224 | 249 |
Total impairment loss allowances | 999 | 1,028 | 1,188 | 878 | 650 |
(1) The Observed Impairment loss allowance consists of the required level of provisioning on accounts in early arrears as well as NPLs and hence the total can be higher than the absolute value of NPLs.
Retail Banking movements in impairment loss allowances on loans and advances
An analysis of movements in the Retail Banking impairment loss allowances on loans and advances is presented below.
| 2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m |
Impairment loss allowances at 1 January | 1,028 | 1,188 | 878 | 650 | 511 |
Amounts written off | |||||
Advances secured on residential properties - UK | (75) | (92) | (42) | (84) | (32) |
Finance leases - UK | (13) | (9) | (2) | - | - |
Unsecured advances - UK | (448) | (466) | (441) | (399) | (262) |
Total amounts written off | (536) | (567) | (485) | (483) | (294) |
Observed impairment losses charged against profit | |||||
Advances secured on residential properties - UK | 80 | 104 | 98 | 223 | 132 |
Finance leases - UK | 12 | 14 | 4 | - | - |
Unsecured advances - UK | 379 | 412 | 483 | 513 | 239 |
| Total observed impairment losses charged against profit | 471 | 530 | 585 | 736 | 371 |
Incurred but not yet observed impairment losses charged against profit | 37 | (123) | (12) | (25) | (20) |
Total impairment losses charged against profit | 508 | 407 | 573 | 711 | 351 |
Assumed through transfers of entities under common control | - | - | 221 | - | 82 |
Impairment loss allowances at 31 December | 999 | 1,028 | 1,188 | 878 | 650 |
Retail Banking recoveries
An analysis of the Retail Banking recoveries is presented below.
| 2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m |
Advances secured on residential properties - UK | 2 | 3 | 1 | 1 | 1 |
Finance leases - UK | 2 | 3 | 1 | - | - |
Unsecured advances - UK | 64 | 56 | 20 | 30 | 33 |
Total amount recovered | 68 | 62 | 22 | 31 | 34 |
Corporate Banking analysis of impairment loss allowances on loans and advances to customers
An analysis of the Corporate Banking impairment loss allowances on loans and advances to customers is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Observed impairment loss allowances | |||||
Corporate loans - UK | 336 | 194 | 122 | 107 | 44 |
Finance leases - UK | - | - | - | 1 | - |
Other secured advances - UK | 66 | 26 | 17 | 15 | 9 |
Total observed impairment loss allowances | 402 | 220 | 139 | 123 | 53 |
Incurred but not yet observed impairment loss allowances | |||||
Corporate loans - UK | 5 | 60 | 52 | 41 | 12 |
Finance leases - UK | - | 1 | 1 | 1 | 1 |
Other secured advances - UK | - | 13 | 11 | 6 | 6 |
Total incurred but not yet observed impairment loss allowances | 5 | 74 | 64 | 48 | 19 |
Total impairment loss allowances | 407 | 295 | 203 | 171 | 72 |
Corporate Banking movements in impairment loss allowances on loans and advances
An analysis of movements in the Corporate Banking impairment loss allowances on loans and advances is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Impairment loss allowances at 1 January | 295 | 203 | 171 | 72 | 33 |
Amounts written off: | |||||
Corporate loans - UK | (61) | (47) | (76) | - | - |
Finance leases - UK | - | - | (3) | (4) | - |
Other secured advances - UK | (7) | (4) | (4) | (5) | (9) |
Total amounts written off | (68) | (51) | (83) | (9) | (9) |
Observed impairment losses charged against profit: | |||||
Corporate loans - UK | 133 | 102 | 96 | 92 | (1) |
Finance leases - UK | - | - | 2 | 5 | - |
Other secured advances - UK | 46 | 13 | 1 | 6 | 9 |
Total observed impairment losses charged against profit | 179 | 115 | 99 | 103 | 8 |
Incurred but not yet observed impairment losses charged against/ (released into) profit | (69) | 11 | 16 | 5 | 15 |
Total impairment losses charged against profit | 110 | 126 | 115 | 108 | 23 |
Segmental asset transfer | 70 | 17 | - | - | - |
Acquisition of business | - | - | - | - | 25 |
Impairment loss allowances at 31 December | 407 | 295 | 203 | 171 | 72 |
Corporate Banking recoveries
An analysis of Corporate Banking recoveries is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Corporate loans - UK | - | 2 | 12 | 23 | - |
Finance Leases - UK | - | - | - | 1 | - |
Other secured advances - UK | 1 | 4 | - | - | 12 |
Total amount recovered | 1 | 6 | 12 | 24 | 12 |
Corporate Centre analysis of impairment loss allowances on loans and advances to customers
An analysis of Corporate Centre impairment loss allowances on loans and advances to customers is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Observed impairment loss allowances | |||||
Corporate loans - UK | 266 | 130 | 147 | 78 | (32) |
Other secured advances - UK | 93 | 57 | 38 | 35 | 28 |
Total observed impairment loss allowances | 359 | 187 | 185 | 113 | (4) |
Incurred but not yet observed impairment loss allowances | |||||
Corporate loans - UK | 120 | 43 | 69 | 131 | 277 |
Finance leases - UK | - | (1) | - | - | - |
Other secured advances - UK | 10 | 11 | 11 | 6 | 5 |
Total incurred but not yet observed impairment loss allowances | 130 | 53 | 80 | 137 | 282 |
Total impairment loss allowances | 489 | 240 | 265 | 250 | 279 |
Corporate Centre movements in impairment loss allowances on loans and advances
An analysis of movements in Corporate Centre impairment loss allowances on loans and advances is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Impairment loss allowances at 1 January | 241 | 265 | 250 | 279 | 7 |
Amounts written off: | |||||
Corporate loans - UK | (101) | (70) | 1 | - | - |
Other secured advances - UK | (46) | (44) | (44) | (12) | - |
Total amounts written off | (147) | (114) | (43) | (12) | - |
Observed impairment losses charged against profit: | |||||
Corporate loans - UK | 305 | 71 | 63 | 80 | 14 |
Other secured advances - UK | 82 | 63 | 52 | 24 | 5 |
Total observed impairment losses charged against profit | 387 | 134 | 115 | 104 | 19 |
Incurred but not yet observed impairment losses charged against/ (released into) profit | 78 | (28) | (57) | (121) | 2 |
Total impairment losses charged against profit | 467 | 106 | 58 | (17) | 21 |
Segmental asset transfer | (70) | (17) | - | - | - |
Acquisition of business | - | - | - | - | 252 |
Impairment loss allowances at 31 December | 489 | 240 | 265 | 250 | 279 |
Corporate Centre recoveries
An analysis of Corporate Centre recoveries is presented below.
2012 £m | 2011 £m | 2010 £m | 2009 £m | 2008 £m | |
Corporate loans - UK | - | - | - | - | - |
Other secured advances - UK | 5 | 6 | - | - | - |
Total amount recovered | 5 | 6 | - | - | - |