Sant Uk.10te% Regulatory News (SAN)

Half Yearly Financial Report 2018

Santander UK Group Holdings plc

PART OF THE BANCO SANTANDER GROUP

Important information for readers

Santander UK Group Holdings plc and its subsidiaries (collectively Santander UK or the Santander UK group) operate primarily in the UK, and are part of Banco Santander (comprising Banco Santander SA and its subsidiaries). Santander UK plc is regulated by the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and certain other companies within the Santander UK group are regulated by the FCA.

This Half Yearly Financial Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See 'Forward-looking statements' in the Shareholder information section.

Santander UK Group Holdings plc

Half Yearly Financial Report 2018

Chief Executive Officer's review

Delivering for customers in a competitive and uncertain operating environment

"We have continued to deliver for our customers in a competitive market with strong net mortgage growth to UK homeowners and focused lending growth to trading businesses, driven by an emphasis on customer experience and loyalty.

"The competitive and uncertain operating environment has resulted in profit before tax of £903m, down 15% year-on-year. However, we still continued to deliver attractive shareholder returns.

"The progress made recently is encouraging with Q2 profit before tax of £489m, up 18% quarter-on-quarter, importantly with some improvement in costs. Our investment in business transformation initiatives also continued despite significantly higher regulatory, risk and control spend for projects, such as GDPR, PSD2 and MiFID II.

Strong and sustainable foundations

"We have strong and sustainable foundations in place and the right approach to succeed. Our focus remains on long-term customer loyalty, with our retail customer satisfaction in line with the average of our three highest performing peers and our corporate customer satisfaction now 11pp above the market average.

"We maintained our robust balance sheet and prudent approach to risk and continued to build CET1 capital, up 50bps in the first half to 12.7%. Credit quality remained strong, with a low NPL ratio of 1.25%.

Taking action to transform the bank for the future

 "Cost discipline is a key priority for management. We are progressing with our 2018 efficiency initiatives and expect the benefits of our actions to come through in the second half of the year. By further simplifying our organisation and continuing to harness digital technology going forward, we will improve our operational efficiency and deliver on our purpose - to help people and businesses prosper."

Nathan Bostock

Chief Executive Officer

Strategic review progress update

Delivering on our 2016-18 commitments (1)

Our purpose remains unchanged, to help people and businesses prosper. We aim to be the best retail and commercial bank, earning the lasting loyalty of our people, customers, shareholders and communities, while delivering a culture that is Simple Personal and Fair.

Our strategic priorities remain focused on customer loyalty, operational and digital excellence, and steady and sustainable profit growth, while being the best bank for our people and the communities in which we operate. With the publication of our 2017 Sustainability Report, released on 25 July 2018, we have made the first step on our journey to better understand and explain the impact we have on society beyond profit generation. We intend to continue the evolution of our Corporate Social Responsibility and sustainability approach to deliver the maximum value to our business and society.

Chief Financial Officer's review

Consistently profitable, sustainable business

We delivered solid business performance and sustainable profitability in the first half of 2018, although our results have been impacted by a competitive and uncertain operating environment. Profit before tax decreased 15% to £903m (H117: £1,063m) with lower income and higher costs, partially offset by lower provisions for other liabilities and charges.

Net interest income was down 6%, impacted by the fall in average new mortgage pricing in 2017 and SVR attrition3 (H118: £2.4bn; H117: £2.5bn), partially offset by liability margin improvement.

Non-interest income was down 15%, largely due to the absence of the £48m gain on sale of Vocalink Holdings Limited shareholdings in H117 as well as lower income in Corporate & Investment Banking (CIB - formerly known as Global Corporate Banking). Additionally, income was impacted by the absence of mark-to-market movements on asset portfolios in the Corporate Centre in H117, partially offset by increases in Retail Banking and Commercial Banking income.

Operating expenses before credit impairment losses, provisions and charges were up 6% due to a number of regulatory, risk and control projects, such as GDPR, PSD2 and MiFID II, which were implemented in the first half of 2018. The impact of these projects increased costs which were only partially offset by operational and digital efficiencies.

Credit impairment losses2 were up 90%. This was primarily due to a charge for a single CIB customer, which moved to non-performing in 2017 and was materially provided for in Q118, as well as a charge for a 2018 drawdown by Carillion plc. Overall credit quality remained good across all customer loan books. In addition, mortgage releases were lower year-on-year.

Provisions for other liabilities and charges were down 82%, largely due to the absence of the £69m PPI and £35m other conduct charges in H117 and an £11m release in other conduct provisions relating to interest rate derivatives.

Tax on profit decreased 21% to £256m largely as a result of lower taxable profits and conduct provisions that were disallowed for tax purposes in H117. The effective tax rate was 28%.

Maintaining balance sheet strength

Customer loans increased to £201.0bn, with strong lending growth of £2.3bn in mortgages, partially offset by decreases of £0.7bn in non-core loans. Lending to corporates decreased by £1.0bn with a managed reduction of £0.6bn in Commercial Real Estate (CRE) and a transfer of £0.7bn of customer assets from CIB to Banco Santander London Branch in June 2018, as part of our ring-fencing implementation.

Customer deposits decreased £3.3bn, with management pricing actions driving a reduction in retail savings products of £1.9bn, corporate deposits of £1.5bn and other retail products of £0.7bn. Deposits also decreased due to continued demand for higher interest rate retail products, and working capital use by corporate customers. This was only partially offset by an increase in personal current accounts of £0.7bn.

We continue to build capital towards higher requirements, with the CET1 capital ratio up 50bps to 12.7%, reflecting higher CET1 capital from retained earnings and lower RWAs. RWAs decreased £1.9bn, through enhanced focus on risk-weighted assets and the widening of the scope of our model for large corporates. The total capital ratio increased to 18.1%, with higher CET1 capital, partially offset by the transitional impact of CRD IV Minority Interest rules that reduces recognition of grandfathered capital instruments issued by Santander UK plc. The LCR increased 18 percentage points to 138%, reflecting management of requirements and liquidity planning.

Medium term funding balances were higher, with issuance of £8.2bn, of which £1.9bn (sterling equivalent) were senior unsecured notes by Santander UK Group Holdings plc, £2.9bn by Santander UK plc, £2.4bn were covered bonds and £1.0bn from securitisations. The Term Funding Scheme total outstanding was £10.8bn.

Ring-fencing progress to date

We have made significant progress in the implementation of our ring-fence structure this year ahead of the 1 January 2019 ring-fencing legislation deadline.

Our model ensures minimal customer disruption and maintains longer-term flexibility. The majority of our customer loans and assets as well as customer deposits and liabilities will remain within Santander UK plc, our principal ring-fenced bank. Prohibited businesses which cannot be transacted within the ring-fence include our derivatives business with financial institutions and certain corporates and elements of our short-term markets business, will be transferred to Banco Santander London Branch or Banco Santander. A small amount of residual activity or businesses which, for legal or operational reasons cannot remain inside the ring-fence and cannot be transferred, will remain in the Santander UK group, outside the ring-fence bank. This includes legacy contracts, the employee sharesave scheme and offshore deposits.

Our transition to a 'wide' ring-fence structure to serve our retail, commercial and corporate customers is now approaching completion following the achievement of several major milestones. We received Court approval of our Ring-Fence Transfer Scheme at the Part VII Sanctions Hearing, which took place on 11 and 12 June 2018. Following the approval we reclassified £22.9bn of assets, and £20.7bn of liabilities, as held for sale in the balance sheet as at 30 June.

In June 2018, we transferred customer loans totalling £0.7bn from CIB to Banco Santander London Branch. Remaining transfers to Banco Santander London Branch or Banco Santander, relating to the assets and liabilities classified as held for sale, were completed in July 2018. Furthermore, planned novations were finalised before the Part VII migrations, and short-term funding activity has now been transferred to Santander UK plc from Abbey National Treasury Services plc.

International Financial Reporting Standard 9 (IFRS 9)

On 1 January 2018, Santander UK transitioned to IFRS 9 from the former standard IAS 39. The initial impact on the CET1 capital ratio was 8bps before the application of any regulatory transitional arrangements, which we are adopting and which are expected to reduce the amount impacting CET1 in 2018. The accounting policy changes for IFRS 9, as set out in Note 1 to the Condensed Consolidated Interim Financial Statements, have been applied from 1 January 2018. Comparatives have not been restated.

2018 outlook

We expect our gross mortgage lending and lending to UK companies to be broadly in line with market growth for the rest of the year. Our lending growth to trading business customers is expected to remain strong, and we will continue to actively manage our CRE exposures.

As previously guided, Banking NIM for 2018 is expected to be lower than in 2017, as a result of ongoing competition in new mortgage pricing and SVR attrition. SVR attrition is expected to be broadly in line with the net £5.5bn reduction in 2017, with increased customer refinancing into fixed rate products influenced by low mortgage rates and the competitive mortgage market.

We expect costs for 2018 to be higher than in 2017, however we are progressing with our efficiency programme and expect the benefits of our actions to come through in the second half of the year. We will also continue to invest in business transformation initiatives, which will improve our customer experience and deliver operational efficiencies.

We will continue to actively manage growth in certain business areas, in line with our proactive risk management policies and medium-low risk profile. These actions will help deliver sustainable results while supporting our customers in an uncertain environment.

Since 30 June 2018, trends evident in the business operating results have not changed significantly.

Antonio Roman

Chief Financial Officer

Directors' responsibilities statement

The Directors confirm that to the best of their knowledge these Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union, and that the half-year management report herein includes a fair review of the information required by Disclosure Guidance and Transparency Rules 4.2.7R and 4.2.8R, namely:

By Order of the Board

Nathan Bostock

Chief Executive Officer

9 August 2018

Risk review

Risk overview

All our activities involve identifying, assessing, managing and reporting risks. Sound risk management is at the centre of our day-to-day activities. It benefits our business and our customers by helping to ensure balanced and responsible growth.

Risk Types

Our key risk types help us define the risks to which we are exposed. For key risk type definitions, see 'How we define risk' on page 70 of the 2017 Annual Report. We set out below the main changes in our risk profile across H118 in terms of these key risk types.

TOP RISKS

A top risk is a current risk within our business that could have a material impact on our financial results, reputation and the sustainability of our business model. In 2017, we identified our top risks as follows, and discussed them on page 14 of the 2017 Annual Report:

- UK's future relationship with the EU

- Mitigating the impact of a low rate environment

- Ring-fencing

- Building and maintaining capital strength

- Pension scheme

- Financial crime

- Managing a complex change agenda

- Cyber-attacks

- Conduct risks

- Third party risks.

For how our top risks are linked to our 2016-2018 strategic priorities, see pages 16 and 17 of the 2017 Annual Report.

In H118, our top risks remained largely the same. However, we have seen an improvement in the risk associated with the continued low interest rate environment and as a result, this is no longer considered one of our top risks.

Emerging risks

An emerging risk is a risk with largely uncertain outcomes which may develop or crystallise in the future. Crystallisation of an emerging risk could have a material effect on long-term strategy. In 2017, we identified our emerging risks as follows, and discussed them on page 15 of the 2017 Annual Report:

- Changing customer behaviour

- Rapid technological change

- Strong market competition

- Demanding regulatory agenda

- Uncertain macro environment.

In H118, we saw further competitive pressure build in our key mortgage market, set against a backdrop of growing regulatory capital requirements.

Risk governance

As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance and build sustainable value for our stakeholders.

We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.

There were no significant changes in our risk governance as described in the 2017 Annual Report. We are reviewing and updating our risk governance arrangements in line with the changes we are making to our legal and operational structures, as required under banking reform regulation.

Credit risk

THE INTRODUCTION OF IFRS 9

IFRS 9 Financial Instruments replaced IAS 39 Financial Instruments: Recognition and Measurement on 1 January 2018. IFRS 9 introduced a new impairment methodology and rules around classification and measurement of financial assets. As published in our Transition to IFRS 9 document on 28 February 2018, the initial adoption of IFRS 9 decreased our shareholders' equity by £192m (net of £68m of deferred tax), driven by an increase in the loss allowance provision of £211m, and reclassifications of financial assets of £49m.

As a result of the change from IAS 39 to IFRS 9, some disclosures presented within certain tables in this section are not comparable because the methodologies for the calculation of incurred losses under IAS 39 and ECLs under IFRS 9 are fundamentally different. This means that some IFRS 9 disclosures do not have prior period comparatives and some disclosures that relate to information presented on an IAS 39 basis are no longer relevant in the current period.

The impact of new ECL rules on our credit risk management

We do not expect the adoption of the new ECL impairment methodology to materially change our credit risk policies in the short term. Our credit risk appetite in terms of target markets, market share and the credit quality of customers to whom we wish to lend is not directly impacted by IFRS 9 and we expect this to remain broadly the same.

IFRS 9 impacts the timing of recognition of credit impairment charges, but not the amount of credit write-offs. Our retail collections and recoveries procedures are unchanged. We may review risk-adjusted hurdle rates for corporate lending, but we do not expect this to lead to a significant change in credit policy.

Measuring ECL

The ECL approach estimates the credit losses on qualifying exposures arising from defaults in the next 12 months, or defaults over the lifetime of the exposure where there is evidence of significant increase in credit risk at the measurement date relative to the origination date. This ECL estimate should take into account forward looking information which is unbiased and probability weighted in order to consider the likelihood of a loss being incurred even when it is considered unlikely.

For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month until the end of the forecast period. We calculate each monthly ECL as the discounted product of the survival rate (SR), probability of default (PD), exposure at default (EAD) and loss given default (LGD) for the relevant forecast month. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof. The lifetime ECL is the sum of the monthly ECLs over the forecast period while the 12-month ECL is limited to the first 12 months. For accounts that are in default at the reporting date, we use the EAD as the reporting date balance. We also calculate an LGD value to reflect the default status of the exposure, considering the current days past due and loan to value. PD and SR values are not required for accounts in default.

We classify an account as default, for the purposes of calculating the ECL, if it is more than 90 days past due or meets an 'unlikeliness to pay' criterion. The criterion for unlikeliness to pay varies across portfolios and where the advanced internal ratings-based basis is used for that portfolio in capital calculations, we use the same default definitions for IFRS 9 purposes.

An assessment of each facility's credit risk profile will determine whether they are to be allocated to one of three stages:

Survival rate

SR is the probability that the exposure has not closed or defaulted since the reporting date. We estimate it for each month of the forecast period.

Probability of default

PD is the likelihood of a borrower defaulting on their financial obligation in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which become less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis.

Exposure at default

We base EAD on the amount we expect to be owed if a default event was to occur. We determine the EAD for each month of the forecast period by the expected payment profile, which varies by product type:

Loss given default

LGD is our expected loss if a default event were to occur. We express the LGD as a percentage and calculate it as the expected loss divided by EAD for each month of the forecast period. We base LGD on factors that impact the likelihood and value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type.

Forecast period

We base the forecast period for amortising facilities on the remaining contractual term. For revolving facilities, we use an analytical approach based on the behavioural, rather than contractual, characteristics of the facility type. In some cases, we shorten the period to simplify the calculation, in which case we apply a post model adjustment to reflect our view of the full lifetime ECL.

Significant Increase in Credit Risk (SICR)

We consider exposures to have experienced a SICR due to quantitative, qualitative or backstop reasons.

Quantitative criteria

The quantitative criteria we apply is based on whether the increase in the lifetime PD at the reporting date from the recognition date exceeds a set threshold both in relative and absolute terms.

We produce the lifetime PD for each exposure using the values we describe above under "Measuring ECL". We base the value anticipated from the initial recognition on a similar set of assumptions and data to the ones we used at the reporting date, adjusted to reflect the account surviving to that date. The comparison uses an annualised lifetime PD, where the lifetime PD is divided by the forecast period.

For revolving retail products, we use a lifetime period of 5 years for determining the SICR. This period is broadly aligned to the observed behavioural lifetimes. This is different to the lifetime period applied in the ECL calculation set out above.

We apply a relative threshold of 100% (doubling the PD) across all portfolios, and we tailor absolute increase thresholds to each portfolio. We choose them after considering the characteristics of the accounts we identify as having deteriorated and their subsequent performance.

Qualitative criteria

For each portfolio, there are specific criteria that indicate an exposure has increased in credit risk, independent of any changes in PD. We select these criteria reflecting portfolio management practices and the performance of the exposures they identify.

Backstop criteria

We are not rebutting the presumptions in IFRS 9 relating to either a SICR or default. Therefore, all exposures more than 30 or 90 days past due (DPD) will be placed in at least stages 2 and 3 respectively.

Forward-looking multiple economic scenarios and probability weights

For all portfolios, except for our CIB portfolio, we use five forward-looking economic scenarios. These consist of a central base case, two upside scenarios and two downside scenarios. We have used five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy, for example for the most severe downside scenario the possibility of a recessionary period occurring.

For our CIB portfolio, the IFRS 9 approach was developed centrally by Banco Santander to ensure consistent treatment of these large and/or international counterparties across the organisation.

To determine the correct decile paths to follow for GDP for the upside and downside scenarios, we use the Office of Budget Responsibility (OBR) fan charts, the PRA Baseline and the Annual Cyclical Scenario GDP paths. The GDP for the upside scenarios was informed by the PRA indicative upside scenarios (0.6 & 0.7), which were imposed on the OBR fan chart. For the downside scenarios, judgement dictated that more moderate GDP end points were required from the fan chart distribution (0.3). For the worst scenario downside, we then imposed a recessionary path on this distribution, which is followed by a period of rapid recovery so that the GDP path converged with that in the more moderate downside scenario in the long run.

We used the OGEM to derive the other macroeconomic variables with the imposition of the bank rate. The forecasting period for GDP is 5 years and then is mean-reverting over 3 years based on the OBR's forecast. To determine our initial scenario probability weightings, we award the highest weight to the base case, whilst the extreme scenarios typically attract lower weights than the more moderate ones. In addition, due to the current economic position and policy concerns evidenced by the PRA and Financial Policy Committee (FPC), and due to political concerns we have applied a higher weighting to the downside scenarios. We consider this appropriate in light of the consensus view of future performance of the UK economy, including projections for UK GDP growth.

For CIB, we use three scenarios (base, upside and downside) based on a composite global GDP weighted to reflect regions where Banco Santander has operations. Consideration of both upside and downside meets the "unbiased" requirement and we consider these scenarios sufficient to account for any non-linearity in our credit losses. For non CIB portfolios, we create our macroeconomic scenarios by imposing the chosen paths for UK Gross Domestic Product (GDP) on the Oxford Global Economic Model (OGEM) in order to generate other macroeconomic variables, such as House Price Index (HPI) and unemployment rates.

Grouping of instruments for losses measured on a collective basis

Instruments collectively assessed for impairment are typically grouped on the basis of shared risk characteristics using one or more statistical models. Where internal capital or similar models have been leveraged as the basis of IFRS 9 models, this will typically result in a large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models.

Individually assessed impairments (IAIs)

The IAI process is applied to individually significant stage 3 cases (e.g. CIB and Commercial Banking cases but not Business Banking cases). The process involves calculating an estimated loss, taking into account anticipated future cash flows under several different scenarios each of which utilises case-specific factors and circumstances. The net present value of the cash flows under each of these scenario is then probability weighted to arrive at a weighted average provision requirement. This assessment process is refreshed at a minimum every quarter but will take place more frequently if there are changes in circumstances that might affect the scenarios, the cash flows or the probabilities applied.

SANTANDER UK GROUP LEVEL - CREDIT RISK REVIEW

Credit performance

The customer loans in the tables below and in the remainder of the 'Credit risk' section are presented differently from the balances in the Consolidated Balance Sheet. The main difference is that customer loans exclude interest we have accrued but not charged to customers' accounts yet.

Corporate lending comprises the customer loans in business banking portfolio of our Retail Banking segment, and our Commercial Banking and Corporate & Investment Banking segments.

30 June 2018 compared to 31 December 2017

The NPL ratio improved 17bps to 1.25%, supported by our medium-low risk profile, proactive management actions and the ongoing resilience of the UK economy. The improvement in the ratio was also driven by the write-off of the Carillion plc exposures in Q118.

For more on the credit performance of our key portfolios by business segment, see the 'Retail Banking - credit risk review' and 'Other segments - credit risk review' sections.

IFRS 9 credit quality

Total drawn exposures are made up of £201.0bn of customer loans; loans and advances to banks of £6.0bn (reported as a Corporate & Investment Banking exposure); and £6.5bn of sovereign assets measured at amortised cost, £9.7bn of assets measured at FVOCI, and £21.4bn of cash and balances at central banks (all reported as Corporate Centre exposures).

Reconciliation of exposures, ECL and net carrying amounts

The table below shows the relationships between disclosures in this Half Yearly Financial Report which refer to drawn and undrawn exposures and ECL and the total assets as presented in the Consolidated Balance Sheet.

The following table illustrates the changes in drawn exposures subject to ECL assessment, and the corresponding ECL, during the reporting period.

RETAIL BANKING - CREDIT RISK REVIEW

The following table shows changes in exposures subject to ECL assessment, and the corresponding ECL in the period. The footnotes to the Santander UK group level analysis on page 15 are also applicable to this table.

RESIDENTIAL MORTGAGES

The following table shows changes in exposures subject to ECL assessment, and the corresponding ECL, for residential mortgages in the period. The footnotes to the Santander UK group level analysis on page 15 are also applicable to this table.

Borrower profile

In this table, 'home movers' include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house. 'Remortgagers' are external customers who are remortgaging with us. We have not included internal remortgages, further advances and any flexible mortgage drawdowns in the new business figures.

In addition to the new business included in the table above, there were £14.2bn (H117: £11.6bn) of internal remortgages where we kept existing customers with maturing products on new mortgages. We also provided £0.7bn (H117: £0.7bn) of further advances and flexible mortgage drawdowns.

The mortgage stock borrower mix remained broadly unchanged, reflecting underlying stability in target market segments, product pricing and distribution strategy. The increase in new business Remortgagers was driven by a specific remortgage campaign that was undertaken in H217.

Buy-to-Let (BTL) mortgage balances increased £0.9bn to £7.7bn (2017: £6.8bn). We continue to focus on non-professional landlords, as this segment is closely aligned with residential mortgages and accounts for most of the volume in the BTL market. In H118, we completed 6,500 BTL mortgages (H117: 2,700), representing 10% of the value of our new business flow (H117: 4%), at an average LTV of 62% (H117: 62%).

We helped 11,700 first-time buyers (£2.0bn of gross lending) purchase their new home. Average loan size for new business was slightly lower than in 2017 at £198,000 for the UK overall (2017: £196,000), £263,000 for the South East including London (2017: £260,000) and £146,000 for the rest of the UK (2017: £146,000). The loan-to-income multiple of mortgage lending in H118 was stable at 3.13 (2017: 3.16).

Interest rate profile

The interest rate profile of our mortgage asset stock was:

The proportion of SVR loan balances decreased to 13%, including attrition of £2.4bn (H117: £2.5bn). The calculation of SVR attrition includes balances relating to our Follow-on-Rate product, which was introduced in January 2018. Around 78% of mortgages reaching the end of their incentive period were retained. We continue to see increased customer refinancing into fixed rate products, influenced by low mortgage rates and the competitive mortgage market, where average two year fixed mortgage prices fell by 25bps in 2017.

Geographical distribution

The geographical distribution of our mortgage asset stock was:

The geographical distribution of the lending profile of the portfolio continued to represent a broad footprint across the UK, whilst maintaining a concentration around London and the South East.

Loan-to-value analysis

This table shows the LTV distribution for our mortgage stock, NPL stock and new business. We use our estimate of the property value at the balance sheet date. We include fees added to the loan in the calculation. For flexible products, we only include the drawn amount, not undrawn limits.

At 30 June 2018, the parts of the loans in negative equity which were effectively uncollateralised before taking account of impairment loss allowances decreased to £209m (2017: £223m).

Credit performance

Forbearance(1)

Balances at 30 June 2018 and 31 December 2017, analysed by their payment status at the period-end and the forbearance we applied, were:

In 2018, the accounts in forbearance decreased, with the proportion of the mortgage portfolio in forbearance reducing slightly to 0.9% (2017: 1.0%).

residential mortgages - PORTFOLIOS of particular interest

For a description of the types of mortgage that have higher risk or stand out for different reasons, see the 'Credit risk' section of the Risk review of the 2017 Annual Report.

Loan portfolios of particular interest - credit performance

In H118, the value and proportion of interest-only loans together with part interest-only, part repayment loans reduced, reflecting our strategy to manage down the overall exposure to this lending profile. In addition the value and proportion of flexible mortgages also reduced as they are no longer offered on new mortgages.

Forbearance

Total accounts in forbearance decreased by £55m to £1,420m (2017: £1,475m). We keep the performance and profile of the accounts under review.

business banking

Credit performance