Sant Uk.10te% Regulatory News (SAN)

Financial Statements

Notes to the Condensed Financial Statements

Disclosures required by IFRS 7 'Financial Instruments: Disclosure' relating to the nature and extent of risks arising from financial instruments can be found in the Risk Management section on pages 39 to 109 which form part of these Condensed Consolidated Interim Financial Statements.

Going Concern

The Directors have assessed the ability of Santander UK plc (the 'Company') and its subsidiaries (together the 'Group') to continue as a going concern, in the light of uncertain current and anticipated economic conditions, including analysing the financial resources available to it and stress testing performance forecasts through various scenarios. The Directors confirm they are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the 'going concern' basis of accounting for preparing financial statements.

General information

These Condensed Consolidated Interim Financial Statements are not a form of statutory accounts. The information for the year ended 31 December 2010 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard ('IAS') 34 'Interim Financial Reporting', as issued by the International Accounting Standards Board ('IASB') and as adopted for use in the European Union. Accordingly, certain information and disclosures normally required to be included in the notes to the annual financial statements have been omitted or condensed. The Condensed Consolidated Interim Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Group for the year ended 31 December 2010 which were prepared in accordance with International Financial Reporting Standards ('IFRS') as issued by the IASB in addition to being consistent with IFRS as adopted for use in the European Union.

The same accounting policies, presentation and methods of computation are followed in these Condensed Consolidated Interim Financial Statements as were applied in the presentation of the Group's 2010 Annual Report except as described below:

Recent accounting developments

In the six months ended 30 June 2011, the Group adopted the following significant new or revised standards or amendments to standards:

Future accounting developments

The Group has not yet adopted the following significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective for the Group:

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

Basis of preparation

The Condensed Consolidated Interim Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities held at fair value through profit or loss and all derivative contracts.

Critical accounting policies and areas of significant management judgement

The preparation of the Group's Condensed Consolidated Interim Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the date of the financial statements 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 on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following estimates and judgements are considered important to the portrayal of the Group's financial results and financial condition.

(a) Impairment loss allowances for loans and advances

The Group estimates impairment losses based on the accounting policies described on pages 169 and 175 of the 2010 Annual Report.

The Group considers accounting estimates related to impairment loss allowances for loans and advances 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between the Group's estimated losses (as reflected in the impairment loss allowances) and actual losses would require the Group to take impairment loss allowances which, if significantly different, could have a material impact on its future income statement and its balance sheet. The Group's assumptions about estimated losses are based on past performance, past customer behaviour, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.

For individually assessed assets, the Group measures the amount of the loss as the difference between the carrying amount of the asset and the present value of the estimated future cash flows of the asset discounted at the original effective interest rate.

For each portfolio which is collectively assessed, the impairment loss allowance is calculated as the product of the number of accounts in the portfolio, the estimated proportion of accounts that will be written off, or repossessed in the case of mortgage loans (the 'loss propensity'), the estimated proportion of such cases that will result in a loss (the 'loss factor') and the average loss incurred (the 'loss per case'). Separate assessments are performed with respect to observed losses and incurred but not observed ('IBNO') losses.

In calculating the retail and corporate lending impairment loss allowances, principally within the Retail Banking and Corporate Banking segments, a range of outcomes was calculated based principally on management's conclusions regarding the most probable current economic outlook relative to historic experience within the range of reasonable possible assumptions. Had management used different assumptions regarding the current economic outlook, a larger or smaller impairment loss allowance for loans and advances would have resulted that could have had a material impact on the Group's reported profit before tax in 2011.

Specifically, if management's conclusions as to the current economic outlook were different, but within the range of what management deemed to be reasonably possible economic outlooks, the impairment loss for loans and advances in the Retail Banking segment could have decreased in the first half of 2011 from an actual impairment loss of £172m (Six months ended 30 June 2010: £427m) by up to £72m (six months ended 30 June 2010: £92m), with a potential corresponding increase in the Group's profit before tax in the first half of 2011 of up to 13% (Six months ended 30 June 2010: 8%), or increased by up to £52m (Six months ended 30 June 2010: £23m), with a potential corresponding decrease in the Group's profit before tax in 2011 of up to 9% (2010: 2%).

The impairment loss for loans and advances in the Corporate Banking segment could have decreased in the first half of 2011 from an actual impairment loss of £87m (six months ended 30 June 2010: £56m) by up to £13m (six months ended 30 June 2010: £13m), with a potential corresponding increase in the Group's profit before tax in the first half of 2011 of up to 2% (six months ended 30 June 2010: 1%), or increased by up to £27m (six months ended 30 June 2010: £13m), with a potential corresponding decrease in the Group's profit before tax in the first half 2011 of up to 5% (six months ended 30 June 2010: 1%).

The impairment loss for loans and receivables securities of £nil (six months ended 30 June 2010: £nil) in the first half of 2011 was based on management's assessment of impairment of each individual asset based on data available at 30 June 2011. A detailed analysis of the loans and receivables securities is disclosed in the Risk Management Report - Impact of the Current Credit Environment on pages 97 to 109.

Where loans and advances are restructured or renegotiated the policies described on pages 95, 96, 170 and 171 of the 2010 Annual Report are applied and the loan and advances are segregated from the main portfolio for monitoring purposes.

(b) Valuation of financial instruments

The Group considers that the accounting estimate related to the valuation of financial assets and financial liabilities including derivatives where quoted market prices are not available is a 'critical accounting estimate' because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific features of the transactions; and (ii) the impact that recognising a change in the valuations would have on the assets reported on its balance sheet as well as its net profit/(loss) could be material.

Changes in the valuation of financial assets and financial liabilities including derivatives where quoted market prices are not available are included in the line item 'Net trading and other income' in the income statement and the 'Trading assets', 'Financial assets designated at fair value', 'Trading liabilities', 'Financial liabilities designated at fair value' and 'Derivative financial instruments' line items in the Group's balance sheet.

The Group trades in a wide variety of financial instruments in the major financial markets and therefore considers a range of interest rates, volatility, exchange rates, counterparty credit ratings, valuation adjustments and other similar inputs, all of which vary across maturity bands. These are chosen to best reflect the particular characteristics of each transaction. Had management used different assumptions regarding the interest rates, volatility, exchange rates, the credit rating of the counterparty, and valuation adjustments, a larger or smaller change in the valuation of financial assets and financial liabilities including derivatives where quoted market prices are not available would have resulted that could have had a material impact on the Group's reported profit before tax in 2011.

Detailed disclosures on financial instruments, including sensitivities, can be found in Note 29. Further information about sensitivities (including Value-at-Risk) to market risk arising from financial instrument trading activities can be found in the Risk Management Report on page 85.

(c) Goodwill impairment

The Group evaluates whether the carrying value of goodwill is impaired and performs impairment testing annually or more frequently if there are impairment indicators present. The carrying amount of goodwill was £1,894m at 30 June 2011 (31 December 2010: £1,894m). Details of the Group's approach to identifying and quantifying impairment of goodwill are set out in Note 25 of the 2010 Annual Report.

The Group considers accounting estimates related to goodwill impairment losses 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period as the assumptions about the measurement of the estimated recoverable amount are based on management's estimates of future cash flows and growth rates of the cash-generating units and (ii) if the carrying amount of the cash generating unit is significantly higher than the estimated recoverable amount it would require the Group to take an impairment loss which could have a material impact on its income statement and its balance sheet. The Group's assumptions about estimated future cash flows and growth rates are based on management's view of future business prospects at the time of the assessment and are subject to a high degree of uncertainty.

Goodwill impairment losses are charged to the line item 'Impairment losses on goodwill' in the income statement. The accumulated impairment losses are deducted from the 'Intangible assets' line item on the balance sheet. If the Group believes that additions to the goodwill impairment losses are required, then the Group records additional impairment losses, which would be treated as a charge in the line item 'Impairment losses on goodwill' in the income statement. The Condensed Consolidated Interim Financial Statements for the six months ended 30 June 2011 included a goodwill impairment loss for an amount equal to £nil (six months ended 30 June 2010: £nil).

In calculating the goodwill impairment losses for each of the Group's cash-generating units, a range of outcomes was calculated based principally on management's conclusions regarding the future cash flows and growth rates of the cash generating units. Had management used different assumptions regarding the estimates of the future cash flows and growth rates of the cash-generating units, a larger or smaller goodwill impairment loss would have resulted, that could have had a material impact on the Group's reported profit before tax in 2011.

Except as set out below, based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of goodwill arising on the Group's business combinations. However, due to an increase in the discount rate at 30 June 2011, the amount by which the maximum supportable value of goodwill relating to the Santander Cards business exceeded its £456m book value at 30 June 2011 reduced to £20m.

The actual goodwill impairment loss of £nil (six months ended 30 June 2010: £nil) in the first half of 2011 was based on what management estimated to be the most probable future cash flows and growth rates within the range of reasonably possible assumptions.

(d) Provisions for other liabilities and charges 

The Group estimates provisions for other liabilities and charges with the objective of maintaining provision levels believed by management to be sufficient to absorb the current estimated costs in respect of vacant property, restructuring, litigation and customer remediation relating to products sold. Vacant property costs are based on the estimated rent for the remainder of the expected lease period. Restructuring costs are estimated based on the number and roles of the employees affected. Litigation costs are based on the estimated number of claims that will be received, including the number of those that will be upheld, and the estimated settlement per case. Customer remediation costs are based on the estimated number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case.

The Group considers the overall quantum of accounting estimates related to provisions for other liabilities and charges taken together to be 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period, and (ii) any significant difference between the Group's estimated costs as reflected in the provisions and actual costs would require the Group to take provisions which, if significantly different, could have a material impact on its future income statement and its balance sheet.

Provisions for other liabilities and charges are charged to the line item 'Provisions for other liabilities and charges' in the income statement and included in the 'Provisions' line item on the balance sheet. If the Group believes that additions to the provisions for other liabilities and charges are required, then the Group records additional provisions, which would be treated as a charge in the line item 'Provisions for other liabilities and charges' in the income statement.

The Condensed Consolidated Interim Financial Statements for the six months ended 30 June 2011 include a provision charge for other liabilities and charges for an amount equal to £736m (six months ended 30 June 2010: £39m). The balance sheet provision amounted to £975m (31 December 2010: £185m).

In calculating the provisions for other liabilities and charges, management's best estimate was calculated based on conclusions regarding the factors described above. Had management used different assumptions regarding these factors, larger or smaller provisions for other liabilities and charges would have resulted that could have had a material impact on the Group's reported profit before tax in 2011.

Specifically, if management's conclusions as to the factors were different, but within the range of what management deemed to be reasonably possible, the provision charge for other liabilities and charges could have decreased in 2011 by up to £431m (six months ended 30 June 2010: £10m), with a potential corresponding increase in the Group's profit before tax in the first half of 2011 of up to 79% (six months ended 30 June 2010: 1%), or increased by up to £19m (six months ended 30 June 2010: £11m), with a potential corresponding decrease in the Group's profit before tax in 2011 of up to 3% (six months ended 30 June 2010: 1%). The actual charge in 2011 was based on what management estimated to be the most probable outcome within the range of reasonably possible outcomes.

However, there are still a number of uncertainties as to the eventual costs from any customer remediation given the inherent difficulties of assessing the impact of detailed implementation of the FSA Policy Statement of 10 August 2010 for all Payment Protection Insurance complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.

There are a large number of assumptions under-pinning the provision. The sensitivity is, therefore, hypothetical and should be used with caution. The Group will re-evaluate the assumptions underlying its analysis at each reporting date as more information becomes available. It is reasonably possible that, on the basis of existing knowledge, outcomes within the next financial year could differ from the amount provided.

(e) Pensions

The Group operates a number of defined benefit pension schemes as described in Note 22. The assets of the schemes are measured at their fair values at the balance sheet date. The liabilities of the schemes are estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, discounted to present value using the interest rate applicable to high-quality AA rated corporate bonds of the same currency and term as the scheme liabilities. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme. In determining the value of scheme liabilities, assumptions are made by management as to mortality, price inflation, discount rates, pensions increases, and earnings growth. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively. Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data.

The Group considers accounting estimates related to pension obligations 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period, and (ii) any significant difference between the Group's estimates of the scheme liabilities and actual liabilities could significantly alter the amount of the surplus or deficit recognised in the balance sheet and the pension cost charged to the income statement. The Group's assumptions principally about mortality, but also about price inflation, discount rates, pensions increases, and earnings growth are based on past experience and current economic trends, which are not necessarily an indication of future experience. Pension costs are charged to the line item 'Administration expenses', with the interest cost on liabilities and the expected return on scheme assets included within 'Net trading and other income' in the income statement. The pension obligations are included in the Retirement benefit obligations line item in the balance sheet. If the Group believes that increases to the pensions cost are required, then the Group records additional costs that would be treated as a charge in the line item Administration expenses in the income statement.

The Condensed Consolidated Interim Financial Statements for the six months ended 30 June 2011 include current period defined benefit service cost of £13m and a pension scheme surplus of £111m. The current service cost of £13m (six months ended 30 June 2010: £17m) decreased, reflecting reductions in active scheme membership, reduction in rates of accrual benefit, salary reviews, changes in pension increases, changes in mortality assumptions, changes in price inflation assumptions and changes in discount rate. The current period pension scheme surplus was £111m (31 December 2010: £160m deficit).

In calculating the current period service cost and deficit, a range of outcomes was calculated based principally on management's estimates regarding mortality, price inflation, discount rates, pensions increases, and earnings growth. Had management used different assumptions principally regarding mortality, but also price inflation, discount rate, pensions increases, and earnings growth, a larger or smaller charge for pension costs would have resulted that could have had a material impact on the Group's reported profit before tax in the six months ended 30 June 2011.

Detailed disclosures on the current period service cost and deficit and the date of the last formal actuarial valuations of the assets and liabilities of the schemes can be found in Note 22. Sensitivities of actuarial assumptions can be found in Note 37 of the Group's 2010 Annual Report.

2. Segments

The principal activity of the Group is financial services. The Group's business is managed and reported on the basis of the following segments:

In the six months ended 30 June 2011, Santander Business Banking, which offers a range of banking services to small businesses in the UK, was managed and reported as part of Corporate Banking rather than Retail Banking as in 2010.

In the second half of 2010, the results of the businesses that previously comprised the Private Banking operating segment ceased being reported separately to the Board. The results of the James Hay business that was sold in March 2010 were reclassified from Private Banking to Group Infrastructure, and the results of the remaining businesses in Private Banking were reported as part of Retail Banking.

In addition, a new transfer pricing mechanism was implemented in 2009 to calculate the profitability of customer assets and deposits in each business segment to reflect the market environment and rates at that point. The changes applied a higher funding cost/return to new customer assets/deposits respectively, taking into consideration both customer type and term. In the second half of 2010, a further refinement of these adjustments was made to reflect the persistently low interest rates, higher cost of new term funding and the increased cost of higher regulatory liquidity balances. These changes have been applied to all periods. The impact was to improve income reported in Group Infrastructure, offset by reduced income in Retail Banking and Corporate Banking. The positive earnings reported in Group Infrastructure include the benefit of higher historic medium-term interest rates being earned on capital. This was previously reported in Retail Banking and Corporate Banking. The positive earnings reported in Group Infrastructure also include the impact of the application of marginal medium-term funding rates to new business and an increasing proportion of the back book to the extent that there has been customer repricing activity by the business. In addition, the cost allocations process has been further refined to recharge more costs previously held centrally from Group Infrastructure to the other business segments.

Further, in the second half of 2010, the management of services to small and medium-sized companies was refined to ensure that companies with revenues of up to £25m, along with other large UK based companies, were principally managed within Corporate Banking, and large multinationals and financial institutions were managed within Global Banking & Markets.

The prior period's segmental analysis has been adjusted to reflect the fact that reportable segments have changed.

The Company's board of directors (the 'Board') has been determined to be the chief operating decision maker for the Group. The segment information below is presented on the basis used by the Board to evaluate performance. The Board reviews discrete financial information for each segment of the business, including measures of operating results, assets and liabilities.

The segments are managed primarily on the basis of their results, which are measured on a 'trading' basis. The trading basis differs from the statutory basis (described in Note 1 of the 2010 Annual Report) as a result of the application of various adjustments. Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business. The adjustments are:

Transactions between the business segments are on normal commercial terms and conditions. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Internal charges and transfer pricing adjustments have been reflected in the performance of each business. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in total trading income. Interest charged for these funds is based on the Group's cost of capital.

Interest receivable and interest payable have not been reported separately. The majority of the revenues from the segments presented below are interest income in nature and the Board relies primarily on net interest revenues to both assess the performance of the segment and to make decisions regarding allocation of segmental resources.

(1) Includes customer assets, net of impairment loss allowances.

The non-trading adjustments between the trading basis and the statutory basis may be analysed further as follows:

Included within the Group Total above are the following statutory results from the Perimeter companies which were included on a statutory basis in 2011 following their acquisition in 2010:

Perimeter companies statutory basis results for the six months ended 30 June 2011

(1) Includes customer assets, net of impairment loss allowances.

The non-trading adjustments between the trading basis and the statutory basis may be analysed further as follows:

The trading basis segmental results analyses above for the six months ended 30 June 2010 include the pre-acquisition trading basis results for the Perimeter companies for the reasons described in the section entitled 'Perimeter companies pre-acquisition trading basis results' on the previous pages. The Perimeter companies were not part of the Group at that time, and the inclusion of these pre-acquisition trading basis results in the 2010 comparatives in the internal segmental information reviewed by the Board is intended only to enhance the comparability of the trading basis results for 2011 and 2010. These pre-acquisition trading basis results do not form part of the statutory results of the Group for the six months ended 30 June 2010. The inclusion of these results in the internal segmental information reviewed by the Board is not intended to imply that the Perimeter companies were part of the Group at that time, and should not be interpreted as attempting to do so.

Details of the pre-acquisition financial information included above, by segment, are as follows:

Perimeter companies trading basis results for the six months ended 30 June 2010

3. Net trading and other income

4. Impairment losses and provisions

5. Administration expenses

Bank levy

The Finance (No 3) Act 2011 introduced a UK annual bank levy. The levy will be collected through the existing quarterly Corporation Tax collection mechanism and the first payment is due on 14 October 2011.

The levy will be based upon the total chargeable equity and liabilities as reported in the balance sheet at the end of a chargeable period. In determining the chargeable equity and liabilities, the following amounts are excluded: adjusted Tier 1 capital; certain "protected deposits" (for example those protected under the Financial Services Compensation Scheme); liabilities that arise from certain insurance business within banking groups; liabilities in respect of currency notes in circulation; Financial Services Compensation Scheme liabilities; liabilities representing segregated client money; and deferred tax liabilities, current tax liabilities, liabilities in respect of the levy, revaluation of property liabilities, liabilities representing the revaluation of business premises and defined benefit retirement liabilities. It will also be permitted in specified circumstances to reduce certain liabilities: by netting them against certain assets; offsetting assets on the relevant balance sheets that would qualify as high quality liquid assets (in accordance with the UK Financial Services Authority definition); and repo liabilities secured against sovereign and supranational debt.

The levy will be set at a rate of 0.075% from 2011. Three different rates apply at 31 December 2011, these average to 0.075%. Certain liabilities will be subject to only a half rate, namely any deposits not otherwise excluded (except for those from financial institutions and financial traders) and liabilities with a maturity greater than one year at the balance sheet date. The levy will not be charged on the first £20bn of chargeable liabilities.

If the levy had been applied to the balance sheet at 30 June 2011, the annual cost of the levy to the Group would be approximately £65m in 2011.

6. Taxation charge

Interim period corporation tax is accrued based on the estimated average annual effective corporation tax rate for the year of 25% (2010: 25%). The standard rate of UK corporation tax was 26.5% (2010: 28%).

The Finance Bill 2011 proposed a reduction in the main rate of UK corporation tax from 28% to 26% effective from 1 April 2011. This reduction in the rate to 26% was enacted on 29 March 2011 under the Provisional Collection of Taxes Act 1968. As this change in rate was substantively enacted prior to 30 June 2011, it has been reflected in the deferred tax balance at 30 June 2011. The UK Government has also indicated that it intends to enact further 1% reductions each year down to 23% by 1 April 2014. These changes in rate had not been substantively enacted at the Balance Sheet date and, therefore, are not included in these financial statements. The estimated financial effect of these changes is insignificant.

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

The effective tax rate for the first six months of 2011 based on profit before tax was 24.8% (30 June 2010: 25.2%). The effective tax rate differed from the UK corporation tax rate of 26.5% (30 June 2010: 28%) principally because of the effect of non-allowable impairment losses, provisions and other non-equalised items, and the reduction in the deferred tax asset as a result of the change in the tax rate.

7. Trading assets

Debt securities can be analysed by type of issuer as follows:

8. Derivative financial instruments

(1) A swaption is an option on a swap that gives the holder the right but not the obligation to buy or sell a swap.

(1) A swaption is an option on a swap that gives the holder the right but not the obligation to buy or sell a swap.

Net gains or losses arising from fair value hedges included in net trading and other income

9. Financial assets designated at fair value

Debt securities can be analysed by type of issuer as follows:

10. Loans and advances to customers

Movement in impairment loss allowances:

11. Securitisations and covered bonds

a) Securitisations

In February and March 2011, the Group issued £2.8bn mortgage-backed securitisation notes through Holmes Master Issuer plc and in May 2011, issued £4.7bn mortgage-backed securitisation notes through Fosse Master Issuer plc. Of the notes issued through Holmes Master Issuer plc and Fosse Master Issuer plc, £0.4bn and £1.0bn, respectively, are held by the Group.

In addition, in April 2011, the Group issued £1.3bn notes through Motor 2011 plc, a pass-through stand-alone vehicle for the securitisation of auto loan receivables. Of the notes issued, £0.8bn is held by the Group for collateral purposes.

During the first six months of the year, mortgage backed notes totalling £3.7bn (2010: £5.4bn) from previous programmes were redeemed. Of the redemptions, £nil (2010: £0.5bn) were notes previously held by the Group for collateral purposes.

b) Covered Bonds

In the first six months of 2011, the Group raised £6bn from issuances of covered bonds. During the first six months of the year, covered bonds totalling £1bn (2010: £nil) were redeemed.

12. Special purpose entities

Special Purpose Entities are formed by the Group to accomplish specific and well-defined objectives. The Group consolidates these SPEs when the substance of the relationship indicates control.

Consolidated special purpose entities

In addition to the SPE's which are used for securitisation and covered bond programmes, the only other SPEs that have external assets and are sponsored and consolidated by the Group aredescribed below. All the external assets in these entities are included in the relevant Notes in these Condensed Consolidated Interim Financial Statements.

a) Santander UK Foundation Limited

Santander UK Foundation Limited supports disadvantaged people throughout the UK through the following three charitable priorities: education, financial capability and community regeneration. The total consolidated external assets held by Santander UK Foundation Limited at 30 June 2011 were £13m (31 December 2010: £11m).

b) Abbey National Pension (Escrow Services) Limited

Abbey National Pension (Escrow Services) Limited is an investment company, holding investments to collateralise certain obligations of Santander UK plc in terms of agreed future funding of pension schemes. The total consolidated external assets held by Abbey National Pension (Escrow Services) Limited at 30 June 2011 were £nil (31 December 2010: £128m).

Off balance sheet special purpose entities

The only SPEs sponsored but not consolidated by the Group are SPEs which issue shares that back retail structured products. As at 30 June 2011, the total value of products issued by these SPEs was £73m (31 December 2010: £111m). The Group'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.

13. Available-for-sale securities

The movement in available-for-sale securities can be summarised as follows:

14. Loan and receivable securities

15. Intangible assets

a) Goodwill

Impairment of goodwill

During the period, there was no impairment of goodwill (2010: £nil). Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions used in assessing whether or not goodwill is impaired would not cause any impairment to be recognised in respect of goodwill arising on the Group's business combinations.

The following cash-generating units include in their carrying values goodwill that comprises the goodwill reported by the Group. The cash-generating units do not carry on their balance sheets any other intangible assets with indefinite useful lives.

30 June 2011

31 December 2010

 (1) For three years, with a terminal growth rate of nil applied thereafter.

b) Other intangibles

During the period, the Group spent approximately £56m (2010: £31m) on computer software. The Group disposed of £2m (2010: £1m) of computer software and £nil (2010: £3m) of intangible assets in relation to the disposal of a business.

16. Property, plant and equipment

During the period, the Group spent approximately £13m (2010: £9m) on the refurbishment of its branches and its new office premises, £16m (2010: £40m) on additions to its office fixtures and equipment, £1m (2010: £9m) on computer software and £46m (2010: £37m) on the acquisition of operating lease assets. The Group disposed of £2m (2010: £nil) of property, £nil (2010: £19m) of office fixtures and equipment and £46m (2010: £37m) of operating lease assets during the period.

17. Trading liabilities

18. Financial liabilities designated at fair value

US$10bn Euro Commercial Paper Programme

The maximum aggregate nominal amount of all Notes outstanding from time to time under the Programme will not exceed US$10bn (or its equivalent in other currencies). This was increased from US$4bn in January 2011. The Notes are not listed on any stock exchange.

Euro 10bn structured notes

The maximum aggregate nominal amount of all structured notes from time to time outstanding under the Programme will not exceed euro 10bn (or its equivalent in other currencies). This was increased from euro 2bn in March 2011.

19. Debt securities in issue

20. Subordinated liabilities

On 11 February 2011, all of the outstanding euro 500m 4.625% Subordinated Notes were redeemed at a redemption price equal to 100% of the principal amount thereof, together with accrued interest thereon.

21. Provisions

The charge disclosed in the income statement in respect of provisions for other liabilities and charges of £736m comprises the additional provisions of £744m less the provisions released of £8m in the table above.

Provisions comprise amounts in respect of customer remediation, litigation and related expenses, restructuring expenses and vacant property costs. The amounts in respect of customer remediation comprise the estimated cost of making redress payments with respect to the past sales of products. In calculating the customer remediation provision, management's best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. Further information on provisions can be found in 'Critical Accounting Policies' in Note 1.

Customer remediation including Payment Protection Insurance ('PPI')

Payment protection insurance is an insurance product offering payment protection on unsecured personal loans (and credit cards). The nature and profitability of the product has changed materially since 2008, in part due to customer and regulatory pressure. The product was sold by all UK banks - the mis-selling issues are predominantly related to business written before 2009.

On 1 July 2008, the UK Financial Ombudsman Service ('FOS') referred concerns regarding the handling of PPI complaints to the UK Financial Services Authority ('FSA') as an issue of wider implication. On 29 September 2009 and 9 March 2010, the FSA issued consultation papers on PPI complaints handling. The FSA published its Policy Statement on 10 August 2010, setting out evidential provisions and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by 1 December 2010.

On 8 October 2010, the British Bankers' Association ('BBA'), the principal trade association for the UK banking and financial services sector, filed an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The Judicial Review was heard in January 2011 and on 20 April 2011 judgment was handed down by the High Court dismissing the BBA's application.

Santander UK did not participate in the legal action undertaken by other UK banks and has been consistently making a provision and settling claims with regards to PPI complaints liabilities since they began to increase in recent years. However, a detailed review of the provision was performed in the first half of the year in light of current conditions, including the High Court ruling in April 2011, the BBA's subsequent decision not to appeal it and the consequent increase in actual claims levels. As a result, the provision has been revised to reflect the new information.

The overall effect of the above was a substantial increase in the provision requirement with a charge for the six months ended 30 June 2011 of £731m.

There are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of detailed implementation of the Policy Statement for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.

22. Retirement benefit assets and obligations

The amounts recognised in the balance sheet were as follows:

Actuarial (gains)/losses recognised in other comprehensive income during the six month periods were as follows:

a) Defined Contribution Pension schemes

The Group operates a number of defined contribution pension schemes. From 1 December 2009 the Santander Retirement Plan, an occupational defined contribution scheme was introduced, and has been the principal plan into which eligible employees are enrolled automatically. The defined contribution section of the Alliance & Leicester Pension Scheme was closed to new members employed from 29 May 2010.

The assets of the schemes are held and administered separately from those of the Company. For both the Santander Retirement Plan and the Alliance & Leicester Pension Scheme, the assets are held in separate trustee-administered funds.

An expense of £15m (six months ended 30 June 2010: £14m) was recognised for defined contribution plans in the period, and is included in staff costs classified within administration expenses in the Income Statement. None of this amount was recognised in respect of key management personnel for the six months ended 30 June 2011 and 30 June 2010.

b) Defined Benefit Pension schemes

The Group operates a number of defined benefit pension schemes. The principal pension schemes are the Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund, the National & Provincial Building Society Pension Fund, the Scottish Mutual Assurance Staff Pension Scheme, the Scottish Provident Institution Staff Pension Fund and the Alliance & Leicester Pension Scheme (DB Section). The schemes cover 20% (31 December 2010: 20%) of the Group's employees, are all funded defined benefit schemes and are all closed schemes. Under the projected unit method, the current service cost when expressed as a percentage of pensionable salaries will gradually increase over time.

Formal actuarial valuations of the assets and liabilities of the schemes are carried out on at least a triennial basis by independent professionally qualified actuaries and valued for accounting purposes at each balance sheet date. The latest formal actuarial valuation was made at 31 March 2010 for the Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund, the National & Provincial Building Society Pension Fund and the Alliance & Leicester Pension Scheme; and at 31 December 2009 for the Scottish Mutual Assurance Staff Pension Scheme and the Scottish Provident Institution Staff Pension Fund.

The total amount (credited)/charged to the income statement, including amounts classified as redundancy costs was as follows:

The net asset/(liability) recognised in the balance sheet was determined as follows:

Movements in the present value of defined benefit obligations during the period were as follows:

(1) The current service cost above includes £3m recharged to fellow subsidiaries who participate in the Santander UK defined benefit pension schemes.

Movements in the fair value of scheme assets during the period were as follows:

The amounts recognised in the Consolidated Statement of Comprehensive Income for each of the six months periods indicated were as follows:

Cumulative net actuarial losses were £689m (31 December 2010: £743m). The movement for the period is recognised in the Consolidated Statement of Comprehensive Income. The actual gain/(loss) on scheme assets was £187m (six months ended 30 June 2010: £115m).

The Group's pension schemes did not directly hold any equity securities of the Company or any of its related parties at 30 June 2011 and 31 December 2010. The Group's pension scheme assets do not include any property or other assets that are occupied or used by the Group. In addition, the Group does not hold insurance policies over the schemes, and has not entered into any significant transactions with the schemes.

The assets of the funded plans are held independently of the Group's assets in separate trustee administered funds. The principal duty of the trustees is to act in the best interests of the members of the schemes. Ultimate responsibility for investment strategy rests with the trustees of the schemes who are required under the Pensions Act 2004 to prepare a statement of investment principles.

The trustees of the Group's schemes have developed the following investment principles:

The special contributions of approximately £1bn made by the Company in late 2010 and early 2011 were invested during the first half of 2011 in a combination of liability matching and return seeking investments, broadly in line with the strategic asset allocation of each scheme. Following this, the overall asset allocation was Bonds 52%, Equities 36%, and Other 12%.

The focus within fixed interest investment has been to improve liability matching and over £500m was invested into longer dated conventional and index linked gilts to this end. In addition, the existing gilts portfolio is being restructured to further enhance the portfolio matching characteristics.

Although the current low level of nominal bond yields and the historically low level of long term real interest rates remain a challenge, the possibility of further hedging liability risks continues to be actively investigated. In addition, the restructuring of the equity portfolios was completed during the first half of 2011, diversifying the portfolio on a more global basis using a mix of index tracking and actively managed portfolios, together with various derivative overlays. These include a futures position backed by cash to replicate equity market exposure, and an option structure to manage equity volatility.

In addition to improving the liability hedge position, the fixed interest portfolio is being reviewed with a focus on diversifying the sources of return and risk. Further diversification is also being made into property and other assets.

The categories of assets in the scheme by value and as a percentage of total scheme assets, and the expected rates of return were:

Other assets consist of asset-backed securities, annuities, funds (including private equity funds) and derivatives that are used to protect against exchange rate, equity market, inflation and interest rate movements. Private equity funds are classified as equities.

The expected return on plan assets is determined by considering the expected returns available on the assets underlying the current investment policy, as follows:

The following tables summarise the fair values at 30 June 2011 and 31 December 2010 of the financial asset classes accounted for at fair value, by the valuation methodology used by the investment managers of the schemes assets to determine their fair value. The tables also disclose the percentages that the recorded fair values of financial assets represent of the schemes' total financial assets that are recorded at fair value.

At 30 June 2011

At 31 December 2010

Plan assets are stated at fair value based upon quoted prices in active markets with the exception of property funds and those classified under "Other". The property funds were valued using market valuations prepared by an independent expert. Of the assets in the "Other" category, investments in absolute return funds and foreign exchange, equity and interest rate derivatives were valued by investment managers by reference to market observable data. Private equity funds were valued by reference to their latest published accounts whilst the insured annuities were valued by scheme actuaries based on the liabilities insured.

Actuarial assumptions

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