Sant Uk.10te% Regulatory News (SAN)

Contacts

Bojana Flint

Head of Investor Relations

020 7756 6474

Andy Smith

Head of Media Relations

020 7756 4212

For more information:

www.aboutsantander.co.uk

ir@santander.co.uk

§

Profit before tax of £1,914m, up 43%; adjusted profit before tax 2 of £2,031m, up 13%

§

483,000 new 1I2I3 World customers and growth in retail current account balances of £11.6bn

§

Net mortgage lending of £1.5bn and net lending to corporates of £0.9bn

§

NIM of 1.48% and Banking NIM of 1.79% down 5bps and 4bps on FY15, respectively, with retail liability margin improvement in Q416 partially offsetting continued SVR attrition and asset margin pressure

§

Non-interest income of £1,213m, up 22%, with higher 1I2I3 Current Account fees; adjusted for the £119m gain on sale of our Visa Europe Limited shareholding in Q216, up 10%

§

Operating costs of £2,417m were well controlled, with digitalisation and product simplification supporting improvements in customer experience and operational efficiency; adjusted for £122m of Banking Reform costs including intangible asset write-downs in the year, down 4%

§

CET1 capital ratio of 11.6% and leverage ratio of 4.1%, with steady capital generation and RWA management offset by long-term rates volatility impact on the defined benefit pension scheme accounting position

Income statement highlights

FY16

FY15

£m

£m

Net interest income

3,582

3,575

Non-interest income 3

1,213

998

Operating expenses before impairment losses, provisions and charges

(2,417)

(2,403)

Impairment losses on loans and advances

(67)

(66)

Provisions for other liabilities and charges

(397)

(762)

Profit before tax

1,914

1,342

Adjusted profit before tax 2

2,031

1,792

Balance sheet highlights

31.12.16

31.12.15

£bn

£bn

Customer loans

200.2

198.6

- of which mortgages

154.3

152.8

- of which corporates

27.4

26.5

Customer deposits

172.4

162.3

CET1 capital ratio

11.6%

11.6%

PRA end-point Tier 1 leverage ratio 4

4.1%

4.0%

1.

See Appendix 1 for notes.

2.

A number of specific gains, expenses and charges impacted the financial results for 2016 and 2015, with an aggregate impact on profit before tax of £117m and £450m, respectively. See Appendix 2 for reconciliation to the nearest IFRS measure.

3.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

4.

The leverage ratio at 31.12.16 was calculated applying the amended definition, as published in the Jul16 PRA statement. Using the previous definition the leverage ratio would have been 3.8%.

Customers

2018 target

31.12.16

31.12.15

Loyal retail customers (million)

4.7

3.7

3.7

Loyal SME and Corporate customers

308,000

290,000

266,000

Retail customer satisfaction (FRS) 2

Top 3

62.9%

62.9%

Average of 3 highest performing peers

62.5%

62.0%

Digital customers (million)

6.5

4.6

3.9

Net fee and commission income CAGR 3

5% - 10%

8%

N/A

§

Our loyal retail customer base continues to grow, although at a slower rate, impacted by lower demand for savings products and 1I2I3 Credit Card changes, key loyalty drivers. Loyal customers increased by 90k and total deposits by customers with a primary banking relationship were up 10% to £94.6bn. We are investing in client relationship management capability and other innovative technologies for deeper and more personalised relationships and a seamless experience across all channels.

§

Our client-centric infrastructure and award-winning international proposition continued to improve the depth of customer relationships and to drive business growth with UK companies.

§

FRS reported our retail customer satisfaction was in line with the average of our three highest performing peers on a rolling 12-month basis at Dec16, 62.9% versus 62.5%. Further improvement remains at the heart of our plans.

§

Digital customers increased strongly, with more than two million customers using our mobile apps each month, as we continue to deploy several innovative propositions to enhance our customer experience. 

§

Net fee and commission income grew 8%, driven by higher 1I2I3 Current Account fees in Retail Banking and international, digital and payment fees in Commercial Banking.

Shareholders

2018 target

31.12.16

31.12.15

Return on Tangible Equity (RoTE) 4

8% - 10%

10.9%

8.2%

Cost-to-income ratio (CIR)

50% - 52%

50%

53%

Non-performing loan (NPL) ratio

< 2.00%

1.50%

1.54%

CET1 capital ratio

c12%

11.6%

11.6%

Dividend payout ratio

50%

51%

50%

§

RoTE 4 of 10.9% was supported by solid income growth, strong cost discipline and lower PPI charges, offsetting the impact of the bank corporation tax surcharge. The dividend payout ratio was maintained and we declared £593m of ordinary dividends for the year.

§

CIR improved to 50% with operational and digital efficiencies absorbing ongoing investment and Banking Reform costs.

§

The NPL ratio improved to 1.50%, with all loan books performing well.

§

The CET1 capital ratio was 11.6% at Dec16, with steady capital generation and RWA management, offset by long-term rates volatility impact of c(30)bps on the defined benefit pension scheme accounting position.  

People

2018 target

31.12.16

31.12.15

Colleague engagement (Korn Ferry) 5

Top 3 UK Bank

72%

71%

§

We believe a highly motivated and engaged workforce provides the best customer service and are targeting incremental improvement every year. In 2016 overall engagement score improved to 72% with Santander UK above the average of other UK financial sector companies that also participate in these studies.

Communities

2018 target

31.12.16

31.12.15

People supported 6

600,000

196,300

N/A

§

We provided support to 196,300 people in our communities through employee participation in a wide range of programmes designed to build skills, knowledge, and experience and encourage innovation. Santander Universities also awarded 8,000 scholarships.

1.

See Appendix 1 for notes.

2.

Customer satisfaction as measured by the Financial Research Survey (FRS) run by GfK. See Appendix 1 for further information.

3.

Compound annual growth rate (CAGR) is measured between FY15 and FY18.

4.

See Appendix 2 for reconciliation to Return on ordinary shareholders' equity, which is the nearest IFRS measure.

5.

Colleague engagement is the percentage of colleagues that feel favourably engaged working for Santander UK. Survey conducted by Korn Ferry.

6.

The target for people supported is cumulative from 2016 to 2018.

Summarised consolidated income statement

FY16

FY15

Change

£m

£m

%

Net interest income

3,582

3,575

-

Non-interest income 1

1,213

998

22

Total operating income

4,795

4,573

5

Total operating expenses before impairment losses, provisions and charges

(2,417)

(2,403)

1

Impairment losses on loans and advances

(67)

(66)

2

Provisions for other liabilities and charges

(397)

(762)

(48)

Total operating impairment losses, provisions and charges

(464)

(828)

(44)

Profit before tax

1,914

1,342

43

Tax on profit

(597)

(380)

57

Profit after tax for the year

1,317

962

37

§

Net interest income was up £7m, driven by strong retail liability margin improvement in Q416 and increased lending that offset continued SVR attrition and asset margin pressure. NIM was 1.48% and Banking NIM was 1.79% for the year, compared to 1.53% and 1.83% in 2015, respectively.

§

Non-interest income at £1,213m, up 22%, benefited from a £119m gain on the sale of our Visa Europe Limited shareholding in Q216 and higher 1I2I3 Current Account fees. Adjusting for this gain, non-interest income was up 10% 2.

§

Operating expenses before impairment losses, provisions and charges were broadly flat at £2,417m, with operational efficiency absorbing investment in business growth, regulatory costs, and the ongoing enhancements to our digital channels. Adjusting for £122m Banking Reform costs including intangible asset write-downs for the year, operating expenses were down 4% 2. Intangible asset write-downs primarily relate to a multi-entity banking platform developed for our non-ring-fenced bank under the original Banking Reform structure.

§

Impairment losses on loans and advances were broadly flat at £67m, with a single loan in Global Corporate Banking that moved to non-performance in Q216 offset by lower write-offs and charges. Overall, all loan portfolios continued to perform well.

§

Provisions for other liabilities and charges decreased 48%, mainly due to lower PPI, including Plevin, provision charges. Adjusting for the charges of £114m in 2016 and £450m in 2015, provisions for other liabilities and charges were down

9% 2.

§

Profit before tax was up 43% at £1,914m, with solid income growth, strong cost discipline and lower conduct costs. Adjusting for specific gains and charges as outlined above, profit before tax was up 13% at £2,031m 2.

§

Tax on profit increased 57% to £597m with the effective tax rate up from 28% to 31%. These increases are primarily driven by the 8% bank corporation tax surcharge and higher profits, partially offset by the tax impact of lower conduct provision charges in 2016.

§

We made an additional £114m provision charge in Q416, which represents our best estimate of future PPI, including Plevin related claim costs. With the FCA consultation expected to close in Q117, we have assessed the adequacy of our provision and applied the principles published in the Aug16 FCA consultation paper to our current assumptions.

The remaining provision for PPI redress and related costs amounted to £457m, which includes a £30m charge made in Q316 for a specific portfolio under a past business review and £114m in Q416 mentioned above. Monthly utilisation during the year, excluding the impact of past business review activity, was slightly higher than the 2015 average and in line with our assumptions.

We will continue to review our provision levels in respect of recent claims experience and once the final FCA guidance is published.

§

Existing non-PPI related conduct provisions amounted to £36m, relating predominantly to wealth and investment products.

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

2.

A number of specific gains, expenses and charges impacted the financial results for 2016 and 2015, with an aggregate impact on profit before tax of £117m and £450m, respectively. See Appendix 2 for reconciliation to the nearest IFRS measure.

§

On 22 December 2016, the Board of Santander UK approved a revised business model and legal entity structure to comply with the ring-fencing requirements in the UK. The revised model provides greater certainty for our customers while ensuring minimal disruption and a smooth transition for those customers impacted.

§

With the provisions of the Banking Reform Act due for implementation by 1 January 2019, and in light of the changeable macro environment, the Board concluded that we can better serve our customers with a 'wide' ring-fence structure, rather than the 'narrow' ring-fence originally envisaged. Under this model Santander UK plc, the ring-fenced bank, will serve our retail, commercial and corporate customers. This also maintains longer term flexibility and leads to lower overall programme implementation cost with the migration now impacting fewer customers.

§

Abbey National Treasury Services (ANTS) will no longer constitute the non ring-fenced bank and its activities will be revised as part of the new ring-fencing model.

§

We intend to complete the implementation of our ring-fence plans in advance of the legislative deadline of 1 January 2019, with implementation subject to regulatory and court approvals and various other authorisations.

§

The basis of presentation in this results announcement has been changed, and the prior period restated to reflect a transfer of customers between our Retail Banking and Commercial Banking business segments, in line with how we now manage our customers.

§

Small business customers with turnover up to £6.5m per annum (previously up to £250,000) are now served as business banking customers in Retail Banking. The balances transferred from the Commercial Banking to Retail Banking were £2.2bn in customer loans and £3.2bn in customer deposits for Dec16 and £2.3bn and £3.0bn, respectively, for Dec15. Medium and large business customers with annual turnover between £6.5m and £500m will continue to be served by Commercial Banking and those with annual turnover above £500m by Global Corporate Banking.

§

The latest PRA stress test results were released on 30 November 2016. We significantly exceeded the PRA's stress test CET1 threshold requirement of 7.3%, with a stressed CET1 ratio of 9.9%. Additionally, we exceeded the leverage threshold requirement of 3.0%, with a stressed leverage ratio of 3.6% after allowed management actions. We were the most resilient of the UK banks with a maximum drawdown of (170)bps on our CET1 ratio. The outcome of the stress test underlines the quality and strength of our UK-based balance sheet as well as our strong risk management practices.

§

The Bank of England's CET1 hurdle rate comprises the CRR Pillar 1 minimum of 4.5% and the Pillar 2A CET1 minimum of 2.8%. The latter minimum came into effect on 1 January 2017 and represents an increase of 0.6 percentage points over the previous Pillar 2A CET1 minimum of 2.2%, which was applicable until 31 December 2016.

§

The PRA stress test focused on the resilience of UK banks to a synchronised downturn in global economies, particularly those in developing markets. It also included a severe stress scenario for the UK property market, coupled with rising unemployment and the Bank of England bank rate remaining at 0% for five years. There were also conduct and market risk stresses layered on top of the economic stress.

§

The UK's decision to leave the EU has led to economic uncertainty and financial market volatility. The lower value of sterling, when combined with higher oil prices over the past year, we believe, is likely to lead to higher inflation. In the near-term, the effects of this and continued economic uncertainty could result in slower UK economic growth in 2017 than experienced in the past three years.

§

We expect Banking NIM 1 for 2017 to remain broadly stable from that in 2016, predicated on no change to the Bank of England Base Rate in 2017. Improvements in liability margin are expected to offset continued SVR attrition and competitive pressures on new asset margins.

§

Cost management remains a key focus, with a comprehensive programme of cost initiatives targeting a £100m reduction in the cost base by 2018. Key initiatives include digitalisation, organisational simplification and streamlining to further improve customer experience and operational efficiency.

§

Impairment charges could be slightly higher than the cyclically low levels experienced in recent years.

§

We expect our net mortgage lending to be broadly in line with the market as we continue to focus on customer service in what remains a highly competitive market. The decline in the SVR balance is likely to be lower than the net £7.0bn reduction in 2016.

§

We expect our corporate lending to be slower than in recent years, consistent with forecasted slowdown in the UK economic growth and as we manage exposures to certain segments in line with proactive risk management practices.

§

Since 31 December 2016, trends evident in the business operating results have not changed significantly.

1.

Non-IFRS measure. See Appendix 2.

Summary of segmental balance sheet assets and liabilities

31.12.16

31.12.15

£bn

£bn

Customer loans

Retail Banking

168.6

167.0

Commercial Banking

19.4

18.7

Global Corporate Banking

5.7

5.5

Corporate Centre

6.5

7.4

Total customer loans

200.2

198.6

Other assets

102.9

82.8

Total assets

303.1

281.4

Customer deposits

Retail Banking

148.1

140.3

Commercial Banking

17.2

15.1

Global Corporate Banking

4.1

3.0

Corporate Centre

3.0

3.9

Total customer deposits

172.4

162.3

Medium Term Funding (MTF)

46.1

50.4

Other liabilities

68.5

53.0

Total liabilities

287.0

265.7

Shareholders' equity

15.7

15.3

Non-controlling interests 1

0.4

0.4

Total liabilities and equity

303.1

281.4

Loan-to-deposit ratio (LDR)

116%

121%

Summarised consolidated capital, leverage, liquidity and funding

31.12.16

31.12.15

£bn

£bn

Capital and leverage

CET1 capital

10.2

10.0

Total qualifying regulatory capital

15.2

14.9

Risk-weighted assets (RWAs)

87.6

85.8

CET1 capital ratio

11.6%

11.6%

Total capital ratio 2, 3

17.3%

17.4%

PRA end-point Tier 1 leverage ratio 4

4.1%

4.0%

Liquidity

Liquidity Coverage Ratio (LCR)

139%

120%

LCR eligible liquidity pool

50.7

38.7

Funding

Total wholesale funding

65.2

64.7

- of which with a residual maturity of less than one year

21.4

21.1

Liquid assets coverage of wholesale funding with a residual maturity of less than one year

237%

183%

1.

Non-controlling interests refers to other equity instruments issued by Santander UK plc and PSA Finance UK Limited (PSA cooperation), a cooperation between Santander Consumer (UK) plc and Banque PSA Finance SA (accounted for as a subsidiary).

2.

Total capital ratio at 31.12.16 of 17.3% was adversely impacted by CRD IV Minority Interest and grandfathering rules.

3.

Total capital ratio uses total qualifying capital and RWAs rounded to millions, causing a difference to the ratio.

4.

The leverage ratio at 31.12.16 was calculated applying the amended definition, as announced by the FPC in Jul16. Using the previous definition the leverage ratio would have been 3.8%.

§

Customer loans grew £1.6bn to £200.2bn, primarily driven by £1.5bn net increase in residential mortgage balances and £0.9bn in loans to UK companies, partially offset by a managed decrease of £0.9bn in the non-core portfolio.

§

Other assets increased £20.1bn to £102.9bn, primarily reflecting higher assets held for liquidity purposes, including a new portfolio of assets held to maturity, as well as the rise in fair value of derivatives resulting from market volatility. Our deposit balance with central banks was £17.1bn. (Dec15: £16.8bn)

§

Customer deposits increased £10.1bn to £172.4bn, with continued net positive inflows to the 1I2I3 Current Account. Retail Banking current account balances grew £11.6bn to a total of £64.8bn, partially offset by lower savings balances.

§

The LDR improved to 116%, driven by growth in Retail Banking current account balances.

§

CET1 capital increased by £0.2bn to £10.2bn, with higher profits and steady capital generation, partially offset by long-term rates volatility on the accounting position of the defined benefit pension scheme. The net accounting surplus of our funded defined benefit pension scheme was £175m (2015: £483m).

§

RWAs were up 2% to £87.6bn, with asset growth and the impact of market volatility, which increased credit and counterparty risk, partially offset by RWA management, including securitisation transactions.

§

The CET1 capital ratio of 11.6% at Dec16 reflects CET1 capital and RWAs as outlined above, offset by the adverse impact of the long-term rates volatility of c(30)bps on the defined benefit pension scheme accounting position. Previously announced pension valuation methodology changes had a 39bps positive impact on the CET 1 capital ratio as at Dec16.

§

The total capital ratio decreased to 17.3%, due to the transitional impact of the CRD IV Minority Interest and grandfathering rules.

§

The leverage ratio of 4.1% was calculated applying the amended definition announced by the FPC in Jul16. Using the previous definition, the leverage ratio would have been 3.8%.

§

Our strong credit ratings were affirmed by all three rating agencies throughout the course of 2016, with a revised ratings outlook by S&P and Moody's for most major UK banks post EU referendum. In addition, Moody's upgraded the long term issuer rating for Santander UK plc in Dec16 .

§

The LCR eligible liquidity pool increased £12.0bn to £50.7bn, reflecting prudent liquidity planning and an increase in the collateral received on derivatives used to hedge our foreign currency MTF issuance post EU referendum. Furthermore, some of the increase was driven by anticipation of the greater requirements expected when the EU adopts Regulatory Technical Standards (RTS) for assessing additional collateral outflows on derivative contracts.

§

MTF issuance was £8.4bn (sterling equivalent). It includes £5.6bn of senior unsecured debt, of which £3.2bn was issued by Santander UK.

§

We now have greater clarity on our Minimum Requirements for Eligible Liabilities (MREL) recapitalisation amount. We will meet the majority of our MREL recapitalisation requirements via the issuance of senior unsecured debt from the holding company. The debt will then be downstreamed to the operating company in a compliant form. MREL transitional requirements are applicable from 1 January 2020, we currently estimate a £7bn transitional MREL recapitalisation requirement.

§

The total drawdown from the Term Funding Scheme amounted to £4.5bn and £3.2bn under Funding for Lending Schemes.

31.12.16

Customer loans

NPLs

NPL

ratio

NPL coverage

Grosswrite-offs

Loan loss allowance

£bn

£m

%

%

£m

£m

Retail Banking

168.6

2,340

1.39

28

210

651

Residential mortgages

154.3

2,110

1.37

13

33

279

Business banking

2.3

108

4.70

53

24

57

Consumer finance

6.8

32

0.47

456

30

146

Other unsecured lending

5.2

90

1.73

188

123

169

Commercial Banking

19.4

518

2.67

42

10

220

Global Corporate Banking

5.7

63

1.11

90

-

57

Corporate Centre

6.5

73

1.12

84

51

61

200.2

2,994

1.50

33

271

989

31.12.15

Customer loans

NPLs

NPL

ratio

NPL coverage

Grosswrite-offs

Loan loss allowance

£bn

£m

%

%

£m

£m

Retail Banking

167.0

2,520

1.51

33

248

823

Residential mortgages

152.8

2,252

1.47

19

40

424

Business banking

2.3

155

6.74

48

43

75

Consumer finance

6.3

28

0.44

486

22

136

Other unsecured lending

5.6

85

1.52

221

143

188

Commercial Banking

18.7

439

2.35

45

47

199

Global Corporate Banking

5.5

10

0.18

330

28

33

Corporate Centre

7.4

87

1.18

117

45

102

198.6

3,056

1.54

38

368

1,157

§

Lower NPL and coverage ratios in Retail Banking were driven by the improving quality of our mortgage portfolio, the positive impact on our collateral from the continued rise in house prices, as well as an update to our mortgage model.

§

The NPL ratio for Commercial Banking increased to 2.67%, with a loan of £50m that moved to non-performance in Q116. An agreement to sell the collateral was completed and repayment of the full loan is expected in 2017.

§

In Global Corporate Banking, the NPL ratio increased with a loan of £43m that also moved to non-performance in Q216.

§

The loan loss rate in Retail Banking decreased to 0.01% (2015: 0.05%) and the Commercial Banking loan loss rate was steady at 0.15% (2015: 0.14%).

Commercial Real Estate (CRE)

Customer loans

NPLs

NPL ratio

NPL coverage

 Gross write-offs

Loan loss allowance

£bn

£m

%

%

£m

£m

31.12.16

9.0

180

2.00

32

1

58

31.12.15

9.2

168

1.83

43

13

72

§

The portfolio is well diversified across sectors, with no significant regional or single name concentration, representing 33% of our total lending to corporates and 4% of total customer loans. Customer loans decreased by 2% as we actively manage exposures to certain segments in line with our proactive risk management practices.

§

We maintained a prudent lending approach, with no new business written above 70% LTV (2015: nil) and 95% written at or below 60% LTV (2015: 84%). The weighted average LTV on the CRE portfolio is 50%. (2015: 52%) 1

§

The NPL ratio increased to 2.00%, due to the £50m loan in Commercial Banking that moved to non-performance, partially offset by some impaired loan redemptions. The portfolio remains well covered with an NPL coverage ratio of 32% and low write-offs of £1m.

1.

Excludes standardised portfolio, which is mainly smaller value commercial mortgage transactions, and accounts for 7% of exposures.

Mortgage interest rate profile

31.12.16

31.12.15

£bn

%

£bn

%

Fixed rate

91.8

59

82.6

54

Variable rate

33.7

22

34.4

23

Standard Variable Rate

28.8

19

35.8

23

Total residential mortgages

154.3

100

152.8

100

§

SVR attrition was driven by customer refinancing, either internally or through remortgaging, repayments and customer sentiment over expected lower for longer interest rates. The SVR attrition was £7.0bn (2015: £8.1bn).

§

The mortgage borrower mix remained broadly unchanged, reflecting underlying stability in target market segments, product pricing and our distribution strategy. Home movers and remortgagers represented 44% and 33% of total stock, respectively, with first-time buyers at 19% and buy-to-let (BTL) at 4%.

§

We continued to build our BTL book by focusing on non-professional landlords, as this segment is closely aligned with residential mortgages and accounts for the majority of the volume in the BTL market. In 2016, we completed 12,400 BTL mortgages, representing 9% of the value of our new business flow, at an average LTV of 67%. In line with the market, we saw a spike in BTL mortgages ahead of the Apr16 stamp duty increase. BTL net lending was lower in the quarters following the stamp duty increase, but remained positive.

Mortgage geographical distribution

31.12.16

31.12.15

£bn

%

£bn

%

London

37.2

24

35.6

23

Midlands and East Anglia

20.6

13

20.8

13

North

22.8

15

23.3

15

Northern Ireland

3.8

2

4.0

3

Scotland

7.0

5

7.3

5

South East excluding London

46.1

30

44.8

30

South West, Wales and Other

16.8

11

17.0

11

Total residential mortgages

154.3

100

152.8

100

§

Average loan size for new business increased in line with the overall rise in house prices, at £198,000 for the UK overall, £264,000 for the South East including London and £144,000 for the rest of the UK. The loan-to-income multiple 1 of mortgage lending in 2016 was 3.16 (Dec15: 3.10).

Mortgage loan-to-value (LTV)

31.12.16

31.12.15

New business%

Stock

%

New business%

Stock

%

Up to 50%

17

46

16

40

>50-75%

43

41

41

42

>75-85%

23

8

27

10

>85-100%

17

4

16

6

>100%

-

1

-

2

Simple average LTV

65

43

65

45

§

We maintained our prudent lending criteria, with an average LTV of 65% on new lending. Our lending with an LTV of over 85% accounted for 17% of new business flow. Stock LTV was lower at 43%.

1.

Average earnings multiple of new business at inception in the year ended 31 Dec16 and 31 Dec15.

Summary income statement

FY16

FY15

Change

£m

£m

%

Net interest income

3,153

3,077

2

Non-interest income 1

580

536

8

Operating income

3,733

3,613

3

Operating expenses before impairment losses, provisions and charges

(1,800)

(1,898)

(5)

Impairment losses on loans and advances

(20)

(90)

(78)

Provisions for other liabilities and charges

(338)

(728)

(54)

Profit before tax

1,575

897

76

§

Net interest income increased 2%, with higher asset volumes and liability margin improvement offsetting continued SVR mortgage attrition and pressure on new lending margins.

§

Non-interest income increased 8%, with higher 1I2I3 Current Account fees, partially offset by reduced investment fees and lower credit card interchange income.

§

Operating expenses before impairment losses, provisions and charges were down 5% with operational efficiencies, partially offset by continued investment in business growth and digital enhancements.

§

Impairment losses on loans and advances decreased 78%, with lower mortgage impairment releases and write-offs. Mortgage releases of £120m (FY15:£125m) were driven by the continued rise in house prices and improving quality of the portfolio, as well as an update to our model.

§

Provisions for other liabilities and charges decreased 54%, mainly due to lower conduct costs and FSCS charge in FY16.

Balances

31.12.16

31.12.15

£bn

£bn

Customer loans

168.6

167.0

- of which mortgages

154.3

152.8

- of which business banking

2.3

2.3

- of which consumer finance

6.8

6.3

- of which other unsecured lending

5.2

5.6

RWAs

43.6

44.3

Customer deposits

148.1

140.3

- of which savings

64.7

70.3

- of which current accounts

64.8

53.2

- of which business banking accounts

10.0

8.9

- of which other retail products

8.6

7.9

§

Mortgage net lending was £1.5bn, compared to £2.7bn in 2015. Strong net inflows in Q116 and Q416 were driven by BTL lending and lower redemptions, respectively. These flows were partially offset by management pricing actions that impacted new mortgage approvals as we continue to focus on customer service. Mortgage retention was c80%.

§

Business banking balances were flat, impacted by the economic uncertainty and resulting slowdown in activity.

§

Consumer finance balances rose 8% with higher retail loans and car dealer funding, in contrast to other unsecured lending balances, down 7% in an increasingly competitive market.

§

Customer deposits increased £7.8bn as current account balances continued to grow, mainly through 1I2I3 Current Account, with a net inflow of £11.6bn in total current account balances. This growth was partially offset by lower demand for savings products with balances reducing £5.6bn.

§

Retail Banking deposit spread improved to (0.57)% when compared to (0.63)% in Dec15.

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

Business volumes 1

FY16

FY15

Mortgage gross lending

£25.8bn

£26.5bn

Mortgage net lending

£1.5bn

£2.7bn

Business banking net lending

-

£(300)m

Consumer finance gross lending

£3,111m

£2,958m

Consumer finance net lending

£473m

£526m

Other unsecured net lending

£(297)m 2

£571m

§

Mortgage gross lending was £25.8bn and we helped 25,300 first-time buyers (£4.2bn of gross lending) purchase their new home. Interest-only mortgage balances decreased £2.8bn to £52.3bn (Dec15: £55.1bn) while BTL mortgage balances increased £1.6bn to £6.6bn (Dec15: £5.0bn).

§

Business banking net lending was impacted by the continued competitive environment and economic uncertainty.

§

Consumer finance gross lending was £3,111m and net lending £473m, with higher retail loans and car dealer funding.

§

Other unsecured net lending balances, decreased due to lower new credit card sales in an increasingly competitive environment.

§

Our digital transformation programme continues with the Jul16 release of an enhanced online credit card application process. Additionally, in Sep16 we launched Android Pay, to complement our existing Apple Pay service, and the Spendlytics app for Android. We also simplified our customer processes with an online mortgage application tool that works on any device. Furthermore, in Nov16 we improved our mobile app, so that customers can make and amend payments to new or existing payees and create new standing orders on their mobiles. We continue to work with a number of Fintech companies to identify innovative solutions. One such example is our partnership with Kabbage, who provide the technology platform for our Working Capital Loans solution that gives UK SMEs access to same day funding.

§

We continued to grow our digital customer base, gaining an average of 1,400 new active mobile users per day for a total of 2.2 million mobile customers, of which 1.4 million exclusively use our mobile app in their transactions with us. In the same period 41% of our mortgages were retained online, 36% of total openings of current accounts and 40% of credit card openings were made through digital channels. Additionally, 26% of Business Current Accounts were opened via a digital channel, following the successful launch of a shorter and digitalised business banking application form.

§

1I2I3 World customers continued to increase, although at a slower rate, with 483,000 new customers in the year. A reduction in 1I2I3 openings has been partially offset by an increase in openings of alternative products, whilst, as anticipated, there was an increase in 1I2I3 account closures following the fee and interest rate changes which took effect in Jan16 and Nov16, respectively. We believe the 1I2I3 Current Account continues to be an outstanding proposition for many customers.

§

In Oct16, we launched the All in One Credit Card and the Zero Credit Card to meet a wider range of customers' needs and renamed the Santander Credit Card the Everyday Credit Card. The 1I2I3 Credit Card is no longer available to new customers.

§

We are growing our Wealth Management business, building on existing foundations, and expanding our digital proposition to improve customer loyalty further. In Jun16 we launched Investment Hub, a new digital platform which enables customers to service their investments online, and gives them access to over 1,500 funds from Santander Asset Management and other leading fund managers. Furthermore, in Nov16 we migrated c200,000 investment customers and over £5bn of assets under management onto the Investment Hub. The investment platform complements our Financial Planning service that offers investment advice to customers on a range of products via our branch network.

1.

Gross and net lending figures exclude any assets purchased or transferred during the year.

2.

Balances are rounded to £bn, causing a rounding difference in the net lending balance, which is rounded to £m.

Summary income statement

FY16

FY15

Change

£m

£m

%

Net interest income

405

368

10

Non-interest income 1

84

94

(11)

Operating income

489

462

6

Operating expenses before impairment losses, provisions and charges

(215)

(217)

(1)

Impairment losses on loans and advances

(29)

(25)

16

Provisions for other liabilities and charges

(26)

(23)

13

Profit before tax

219

197

11

§

Net interest income increased 10%, with continued growth in customer lending and improved cost of funding from higher deposits that were driven by the enhanced franchise and broader range of services.

§

Non-interest income decreased 11%, with lower asset restructuring and rates management fees partially offset by growth in international fees, up 9%, and digital and payment fees, up 26%, the latter two driven by more loyal customer relationships.

§

Operating expenses before impairment losses, provisions and charges decreased 1%, demonstrating our strong cost management focus.

§

Impairment losses on loans and advances increased £4m, with the loan book continuing to perform well, supported by our prudent lending policy.

§

Provisions for other liabilities and charges increased by £3m and include restructuring costs.

Balances

31.12.16

31.12.15

£bn

£bn

Customer loans 2

19.4

18.7

- of which SMEs

10.7

11.4

- of which mid corporate

8.7

7.3

RWAs

20.4

19.0

Customer deposits 2

17.2

15.1

§

Customer loans increased 4% to £19.4bn, despite a competitive environment, economic uncertainty and the resulting slowdown in SME activity this year. Furthermore, we actively managed our exposures to certain segments in line with our proactive risk management practices.

§

RWAs increased 7% with asset growth, and in part due to a model recalibration in one of our commercial banking portfolios.

§

We continue to attract deposit balances, with customer deposits growing faster than customer loans through our strong customer relationships, supported by a comprehensive product range and competitive pricing.

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

2.

The balance transferred from the Commercial Banking to Retail Banking segment was £2.2bn in customer loans and £3.2bn in customer deposits for Dec16, £2.3bn and £3.0bn, respectively, for Dec15.

Business volumes

FY16

FY15

New facilities

£7,400m

£8,500m

Bank account openings

2,470

3,160

Online banking (Connect) active users 1

26,970

25,120

§

We continue to open bank accounts and extend new facilities, despite a competitive environment and economic uncertainty. Our Relationship Managers (RMs) continue to build their portfolios by leveraging our comprehensive suite of products and services. We will continue to focus on growing more loyal customer relationships and on better diversification across the sectors, driving primacy through more capital efficient growth whilst utilising international expertise and economic corridors via Banco Santander.

§

There was a continuation in the pickup of our corporate banking platform 'Connect', with active users increasing 7% year on year.

§

The focus of the Commercial Banking division is to expand its franchise by both growing the overall customer base as well as increasing the number of loyal customers. We aim to build the loyal customer base by leveraging our international reach and proposition as well continuing to further develop our product capabilities to meet our customers' needs. We will also build on the expertise and global presence of Banco Santander, offering international solutions so that our clients can develop and manage their business through our global network.

§

Coverage of our commercial clients is organised by local relationship teams or by sectors. Our sector team support our clients by using specialist knowledge of the individual business and its operating environment to recommend solutions. Target clients can leverage our international presence and connectivity to access on-the-ground support overseas, connect to potential new business partners and enter global supply chains.

§

We are also working with Banco Santander and key strategic partners to develop trade initiatives that make it easier for clients to grow their business internationally. These initiatives allow us to attract new clients and deepen existing relationships, as well as compliment some of our existing services. For example, Santander Trade Club, an online community that connect Santander clients with clients of our strategic partners, and Santander Passport that help our clients establish a business subsidiary overseas.

§

Breakthrough Growth Capital provides new funding and identifies key partnerships at milestones in the development of our clients' business and this year assisted 33 businesses in accessing £93m of facilities. Since inception, the Growth

Capital team has completed 126 funding solutions for 94 companies, providing £348m of facilities, which will create over 6,250 jobs

§

Our continued efforts and innovative offering were recognised at the 2016 Business Moneyfacts Awards. We won a number of prestigious awards including: 'Business Bank of the Year' for the second consecutive year and the 'Innovation in the SME Finance Sector'. This industry recognition is a testament to Santander UK's commitment to become the bank of choice for UK companies and shows the strength and value of our overall proposition for businesses, built on our relationship banking approach.

1.

Online banking (Connect) active users include both business banking and Commercial Banking customers.

Summary income statement

FY16

FY15

Change

£m

£m

%

Net interest income

81

72

13

Non-interest income 1

320

307

4

Operating income

401

379

6

Operating expenses before impairment losses, provisions and charges

(280)

(287)

(2)

Impairment losses on loans and advances

(21)

13

n.m.

Provisions for other liabilities and charges

(12)

(14)

(14)

Profit before tax

88

91

(3)

§

Net interest income increased 13% to £81m, with ongoing demand for project and acquisition finance, transactional services and factoring products offsetting continued asset margin compression.

§

Non-interest income increased 4% to £320m, underpinned by ongoing demand for derivative and cash sales activities as well as market making activities.

§

Operating expenses before impairment losses, provisions and charges decreased 2% to £280m, as we continue to improve the efficiency of our operating model.

§

Impairment losses on loans and advances increased due to the impairment of a single loan that moved to non-performance in Q216 and the absence of releases in the year.

§

Provisions for other liabilities and charges decreased by £2m to £12m.

Balances

31.12.16

31.12.15

£bn

£bn

Customer loans

5.7

5.5

RWAs

16.9

15.4

Customer deposits

4.1

3.0

§

Customer loans increased to £5.7bn, driven by our refinancing and origination activities relating to project and acquisition finance and transactional services, partially offset by lower client drawdowns in Q416.

§

RWAs were significantly impacted by market volatility which increased credit and counterparty risk. RWAs attributable to customer loans were £7.5bn (Dec15: £7.8bn), with asset growth offset by capital management.

§

Customer deposits were higher at £4.1bn, as we continue to focus on deeper customer relationships.

§

In 2016, we further refined our business model to deepen relationship with clients and increase loyalty. Specific initiatives were undertaken to improve the overall customer experience, including the rollout of the Client Management Service function, which streamlines the on-boarding process.

§

Strong 2016 results demonstrate 8pp positive jaws between revenue and expense growth rates, with greater Commercial Banking collaboration and more cross-border business. We also increased commercial activity with FIG clients and benefitted from strong demand in the Emerging Markets business.

§

We continue to focus on opportunities to drive fee income and maximise our return on capital by effectively leveraging our transactional products, FX and advisory services.

§

Effective cost management remains a key priority, while we continue to strengthen our governance oversight to ensure that the business is well positioned to support its current and future growth plans. In 2016, we made significant progress towards meeting all our regulatory and compliance obligations.

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

Summary income statement

FY16

FY15

Change

£m

£m

%

Net interest (expense) / income

(57)

58

n.m.

Non-interest income 1

229

61

n.m.

Operating income

172

119

45

Operating expenses before impairment losses, provisions and charges

(122)

(1)

n.m.

Impairment releases on loans and advances

3

36

(92)

Provisions for other liabilities and charges

(21)

3

n.m.

Profit before tax

32

157

(80)

§

Net interest expense of £57m down from £58m income in 2015, reflects changes in the commercial balance sheet profile and in part an increase in wholesale funding cost. This cost increased with the commencement of senior unsecured issuance from the holding company to meet our MREL recapitalisation requirements.

Due to the lower interest rate environment, we envisage that net interest income from the structural hedge will decrease as a result of maturing positions being reinvested at lower prevailing rates. The majority of new mortgage flows are left un-hedged to provide stable returns on equity and current accounts. The average term of our new mortgage flows is about 2.5 years, with a total structural hedge position of c£80bn.

§

Non-interest income benefited from a £119m gain on the sale of our Visa Europe Limited shareholding in Q216, and mark-to-market movements on economic hedges.

§

Operating expenses before impairment losses, provisions and charges represent £122m of regulatory compliance and project costs relating to Banking Reform, including intangible asset write-downs.

§

Impairment releases on loans and advances decreased to £3m, with lower releases from asset disposals than in 2015.

§

Provisions for other liabilities include restructuring costs.

Balances

31.12.16

31.12.15

£bn

£bn

Non-core customer loans

6.5

7.4

- of which Social Housing

5.4

6.2

RWAs

6.7

7.1

Customer deposits

3.0

3.9

§

Non-core customer loans decreased for the year, as we continue to implement our ongoing exit strategy from individual loans and leases to run-down the non-core corporate and legacy portfolios.

§

RWAs decreased with the reduction in non-core customer loans and the sale of our Visa Europe Limited shareholding, partially offset by the impact of higher market volatility on counterparty credit risk. RWAs attributable to non-core customer loans amounted to £1.3bn (Dec15: £1.5bn).

§

Customer deposits decreased £0.9bn, as we continued to rebalance the deposit base tenor.

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

Summarised consolidated quarterly trends

Q416

Q316

Q216

Q116

Q415

£m

£m

£m

£m

£m

Net interest income

926

883

888

885

900

Non-interest income 1, 2

278

264

401

270

244

Total operating income

1,204

1,147

1,289

1,155

1,144

Total operating expenses before impairment losses, provisions and charges 2

(625)

(586)

(607)

(599)

(604)

Impairment losses on loans and advances

36

(40)

(50)

(13)

(14)

Provisions for other liabilities and charges 2

(256)

(44)

(86)

(11)

(608)

Total operating impairment losses, provisions and charges

(220)

(84)

(136)

(24)

(622)

Profit / (loss) before tax

359

477

546

532

(82)

Tax on profit / (loss)

(138)

(152)

(153)

(154)

(73)

Profit / (loss) after tax for the year

221

325

393

378

(155)

NIM

1.47%

1.47%

1.50%

1.50%

1.52%

Banking NIM

1.83%

1.75%

1.78%

1.78%

1.80%

§

Net-interest income increased 5%, driven by retail liability margin improvement following the 1I2I3 Current Account interest rate change that took effect in Nov16.

§

The 7% increase in operating expenses before impairment losses, provisions and charges was driven by intangible asset write-downs, primarily relate to a multi-entity banking platform developed for our non-ring-fenced bank under the original Banking Reform structure.

§

Impairment losses on loans and advances benefited from a mortgage release of £57m in Q416 for Retail Banking.

§

Provisions for other liabilities and charges include PPI, including Plevin, and Bank Levy charges for Q416.

§

Profit before tax was lower, primarily due to PPI, including Plevin, and Bank Levy charges, partially offset by higher net interest income.

§

The tax on profit decreased slightly due to lower profits, partially offset by higher conduct provisions in Q416 that are disallowed for tax purposes.

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

2.

A number of specific gains, expenses and charges impacted the financial results for 2016 and 2015, with an aggregate impact on profit before tax of £117m and £450m, respectively. See Appendix 2 for reconciliation to the nearest IFRS measure.

§

Bacs - Current Account Switch Service (CASS) guarantee

The published Bacs branded data referenced is for switches completed between 1 April 2015 and 31 March 2016 and shows Santander UK gained 250,786 switchers, with a net gain of 138,610. Bacs branded data is published six months in arrears. Bacs industry data shows 3,222,221 full switches were completed between 16 September 2013 and 30 November 2016. Santander UK management information identifies 799,621 full switchers in the same period, representing approximately one-in-four full switches since the launch of CASS.

§

Corporate customer satisfaction

Our corporate customer satisfaction of 62%, versus 56% for the market, continued to improve. The Charterhouse UK Business Banking Survey is an ongoing telephone based survey designed to monitor usage and attitude of UK businesses towards banks. 17,000 structured telephone interviews are conducted each year among businesses of all sizes from new start-ups to large corporates with annual sales of £1bn. The data is based upon 5,796 interviews made in the year ending Dec16 with businesses turning over £250k to £50m per annum and are weighted by region and turnover to be representative of businesses in Great Britain. Satisfaction is based on a five point scale (% Excellent / Very good). The competitor set included in this analysis is Barclays, RBS, HSBC, Lloyds Bank, TSB and NatWest.

§

Corporate lending

Total lending to corporates is defined as the combined lending of business banking in our Retail Banking segment, Commercial Banking and Global Corporate Banking.

31.12.16

Customer loans

NPLs

NPL ratio

NPL coverage

Gross

write-offs

Loan loss allowance

£bn

£m

%

%

£m

£m

Business banking

2.3

108

4.70

53

24

57

Commercial Banking

19.4

518

2.67

42

10

220

Global Corporate Banking

5.7

63

1.11

90

-

57

Total corporate lending

27.4

689

2.51

48

34

334

31.12.15

Customer loans

NPLs

NPL ratio

NPL coverage

Gross write-offs

Loan loss allowance

£bn

£m

%

%

£m

£m

Business banking

2.3

155

6.74

48

43

75

Commercial Banking

18.7

439

2.35

45

47

199

Global Corporate Banking

5.5

10

0.18

330

28

33

Total corporate lending

26.5

604

2.28

51

118

307

§

Credit Ratings

The credit ratings for Santander UK Group Holdings plc and Santander UK plc are outlined in the table below at Dec16:

Santander UK Group Holdings plc

Santander UK plc

Senior

Unsecured

Outlook

Senior

Unsecured

Outlook

Short-term

Stand Alone

S&P

BBB

Stable

A

Negative

A-1

bbb+

Fitch

A

Positive

A

Positive

F-1

baa1

Moody's

Baa1

Negative

Aa3

Negative

P-1

a3

-

Following the results of the UK referendum on EU membership, S&P and Moody's changed the ratings outlook on most major UK banks due to the medium-term impact of political and market uncertainty.

-

S&P affirmed the long-term rating for Santander UK Group Holdings plc at BBB with a stable outlook. The long-term rating for Santander UK plc was affirmed at A, and outlook changed to negative from stable.

-

Moody's affirmed the rating for Santander UK Group Holdings plc, with a change to the senior unsecured outlook to stable. In Dec16, the senior unsecure and long-term issuer rating for Santander UK plc was upgraded to Aa3 from A1, with the outlook changed to negative from stable. The rating upgrade was a result of loss-absorbing capital issuance in 2016, with a negative outlook due to the expectation of a prolonged period of uncertainty in the UK.

-

Fitch affirmed the long-term credit rating for Santander UK plc to A with a positive outlook in May16.

§

Retail customer satisfaction

The Financial Research Survey (FRS) is a monthly personal finance survey of around 5,000 consumers prepared by the independent market research agency, GfK.

The 'retail customer satisfaction' score refers to the proportion of extremely and very satisfied customers across mortgages, savings, main current accounts, home insurance, UPLs and credit cards, based on a weighting of those products calculated to reflect the average product distribution across Santander UK and competitor brands. Data shown is for the twelve months ended 31 December 2016 and compared against twelve months ended data for the period as indicated.

The competitor set used to calculate the product weights is made up of Barclays, Halifax, HSBC, Lloyds Bank, Nationwide and NatWest. The competitor set included in this analysis for the ranking and highest performing peers is Barclays, Halifax, HSBC, Lloyds Bank, and NatWest.

§

Strategic priorities, Key Performance Indicators (KPIs) and targets 2016-2018

Our focus for the next two years will remain centred on the following strategic priorities.  

§

Customer loyalty and market share growth

§

Operational and digital excellence

§

Consistent and growing profitability and a strong balance sheet

§

Live The Santander Way through our behaviours

§

Support communities through skills, knowledge and innovation

The achievement of our goals is measured by the KPIs established at the 2015 Banco Santander Investor Day and set for the period 2016-2018, based on the forecast and outlook then in place. Three of our 2018 'shareholder' targets were revised to reflect new economic environment at the 2016 Group Strategy Update on 30 September 2016.

§

RoTE 1 target was revised down from 12%-14% to 8%-10%, driven by lower expected net interest margin and balance sheet growth, as a result of slower GDP growth. Our previous assumption that the base rate would be 2% by 2018 was significantly higher than the current forecast of 0.25%.

§

Cost-to-income ratio (CIR) was revised from

§

NPL ratio was revised from

All KPIs are presented at 31 December 2016. We will report annually on people, communities, and net fee income CAGR KPIs. Reported KPIs are based on spot balances at these dates with the exception of the CIR, RoTE, and customer satisfaction, which are based on performance in the relevant period or year. Customer satisfaction is based on a rolling 12-month average calculated for the twelve months ended 31 December 2016. The target for people supported is the cumulative of 1 January 2016 to 31 December 2018. Loyal SME and Corporate customers includes business banking customers reported in the Retail Banking segment.

We continue to embed the values of a Simple, Personal and Fair culture across the organisation, with an ongoing programme to reinforce the set of behaviours which we launched in 2015. The nine behaviours that our people defined last year embody these values and have also been adopted throughout the wider Banco Santander group.

§

Visa Europe Limited shareholding sale

On 2 November 2015, Visa Europe Limited agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Limited, Santander UK received upfront consideration made up of cash and convertible preferred stock. Additional deferred cash consideration is also payable following the third anniversary of closing. The gain on sale (£119m sterling equivalent) is reported in Corporate Centre non-interest income for 2016.

§

1I2I3 World customer profile and metrics

1I2I3 World continues to transform our customer profile, building deeper, more durable and more valuable relationships: 96% of 1I2I3 Current Account holders have a primary banking relationship (vs. 46% for our non-1I2I3 Current Account); 68% of 1I2I3 Current Account holders are loyal and 34% are affluent customers (vs. 23% and 6% respectively for our non-1I2I3 Current Account); on average 1I2I3 Current Account customers hold 2.1 products (vs. 1.5); and average liabilities (banking and savings) held by 1I2I3 Current Account holders are 5.4x 2 higher than for non-1I2I3 Current Account customers.

1.

Return on ordinary shareholders' equity is the nearest IFRS measure to RoTE, which is our key performance indicator.

2.

Average account balances are combined savings and banking liability balances.

1.

RoTE

2.

Banking NIM

3

Adjusted profit before tax

1. RoTE 1

31.12.16

31.12.15

£m

£m

Profit after tax

1,317

962

Less non-controlling interests

(45)

(48)

Profit due to equity holders of the parent (A)

1,272

914

Average shareholders' equity

15,873

14,928

Less average Additional Tier 1 (AT1) securities

(1,545)

(1,172)

Less average non-controlling interests

(395)

(366)

Average ordinary shareholders' equity (B)

13,390

Average goodwill and intangible assets

(2,209)

Average tangible equity (C)

11,181

Return on ordinary shareholders' equity (A/B)

9.1%

6.8%

RoTE (A/C)

10.9%

8.2%

2. Banking net interest margin 1

31.12.16

31.12.15

£m

£m

Net interest income (A)

3,582

3,575

Average interest earning assets (B)

242,408

232,918

Average customer assets (C)

200,562

195,529

Net interest margin (A/B)

1.48%

1.53%

Banking net interest margin (A/C)

1.79%

1.83%

1.

A glossary of Santander UK specific terms used in the Quarterly Management Statement is available on our website at www.santander.co.uk/uk/about-santander-uk/investor-relations-glossary.

3. Adjusted Profit before tax

2016

2015

£m

£m

Non-interest income

Reported

1,213

998

Adjust for gain on sale of Visa Europe Limited shareholding

(119)

-

Adjusted

1,094

998

Operating expenses before impairment losses, provisions and charges

Reported

(2,417)

(2,403)

Adjust for Banking Reform costs and intangible asset write-downs

122

-

Adjusted

(2,295)

(2,403)

Provisions for other liabilities and charges

Reported

(397)

(762)

Adjust for PPI, including Plevin, provision charge

114

450

Adjusted

(283)

(312)

Profit before tax

1,914

1,342

Specific gains, expenses and charges:

117

450

- Non-interest income

(119)

-

- Operating expenses before impairment losses, provisions and charges

122

-

- Provision for other liabilities and charges

114

450

Adjusted profit before tax

2,031

1,792

§

Gain on sale of Visa Europe Limited shareholding

On 2 November 2015, Visa Europe Limited agreed to sell 100% of its share capital to Visa Inc. The deal closed on 21 June 2016. As a member and shareholder of Visa Europe Limited, Santander UK received upfront consideration made up of cash and convertible preferred stock. Additional deferred cash consideration is also payable following the third anniversary of closing. The gain on sale (£119m sterling equivalent) is reported in Corporate Centre non-interest income for 2016.

§

Banking Reform costs and intangible asset write-downs

Banking Reform costs relate to multi-year projects and investments needed to comply with the Banking Reform Act due for implementation by 1 January 2019. Intangible asset write-downs primarily relate to a multi-entity banking platform developed for our non-ring-fenced bank under the original Banking Reform structure. Banking Reform costs and intangible asset write-downs are reported in Corporate Centre operating expenses before impairment losses, provisions and charges for 2016.

§

PPI, including Plevin, provision charge

Provisions for other liabilities and charges of £114m in FY16 and £450m in FY15 represent our best estimate of future PPI, including Plevin related claim costs. Our estimate for FY16 applies the principles published in the Aug16 consultation paper that is expected to close in Q117. Similarly, the estimate for FY15 applied principles published in the Nov15 consultation paper, which also addressed the probable two-year deadline and prevailing guidance on the Plevin case.

The 2016 results are not adjusted for the £30m provision charge made in Q316 for a specific portfolio under a past business review.

Summarised consolidated income statement

2016

2015

£m

£m

Net interest income

3,582

3,575

Non-interest income 1

1,213

998

Total operating income

4,795

4,573

Operating expenses before impairment losses, provisions and charges

(2,417)

(2,403)

Impairment losses on loans and advances

(67)

(66)

Provisions for other liabilities and charges

(397)

(762)

Total operating impairment losses, provisions and charges

(464)

(828)

Profit before tax

1,914

1,342

Tax on profit

(597)

(380)

Profit after tax for the year

1,317

962

Summary of segmental balance sheet assets and liabilities

31.12.16

31.12.15

£bn

£bn

Customer loans

Retail Banking

168.6

167.0

Commercial Banking

19.4

18.7

Global Corporate Banking

5.7

5.5

Corporate Centre

6.5

7.4

Total customer loans

200.2

198.6

Other assets

102.9

82.8

Total assets

303.1

281.4

Customer deposits

Retail Banking

148.1

140.3

Commercial Banking

17.2

15.1

Global Corporate Banking

4.1

3.0

Corporate Centre

3.0

3.9

Total customer deposits

172.4

162.3

Medium Term Funding

46.1

50.4

Other liabilities

68.5

53.0

Total liabilities

287.0

265.7

Shareholders' equity

15.7

15.3

Non-controlling interest

0.4

0.4

Total liabilities and equity

303.1

281.4

Summarised consolidated capital

31.12.16

31.12.15

£bn

£bn

Capital - CRD IV

Total qualifying regulatory capital

15.2

14.9

Risk-weighted assets (RWAs)

87.6

85.8

Total capital ratio

17.3%

17.4%

Distributable items (CRR / CRD IV)

4.2

4.2

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'

Summarised consolidated income statement

2016

2015

£m

£m

Net interest income

3,582

3,575

Non-interest income 1

1,213

998

Total operating income

4,795

4,573

Operating expenses before impairment losses, provisions and charges

(2,414)

(2,400)

Impairment losses on loans and advances

(67)

(66)

Provisions for other liabilities and charges

(397)

(762)

Total operating impairment losses, provisions and charges

(464)

(828)

Profit before tax

1,917

1,345

Tax on profit

(598)

(381)

Profit after tax for the year

1,319

964

Summary of segmental balance sheet assets and liabilities

31.12.16

31.12.15

£bn

£bn

Customer loans

Retail Banking

168.6

167.0

Commercial Banking

19.4

18.7

Global Corporate Banking

5.7

5.5

Corporate Centre

6.5

7.4

Total customer loans

200.2

198.6

Other assets

102.9

82.8

Total assets

303.1

281.4

Customer deposits

Retail Banking

148.1

140.3

Commercial Banking

17.2

15.1

Global Corporate Banking

4.1

3.0

Corporate Centre

3.0

3.9

Total customer deposits

172.4

162.3

Medium Term Funding 2

46.1

50.4

Other liabilities

68.5

53.0

Total liabilities

287.0

265.7

Shareholders' equity

15.9

15.6

Non-controlling interests

0.2

0.1

Total liabilities and equity

303.1

281.4

Summarised consolidated capital

31.12.16

31.12.15

£bn

£bn

Capital - CRD IV

Total qualifying regulatory capital

16.2

15.6

Risk-weighted assets (RWAs)

87.6

85.8

Total capital ratio

18.5%

18.2%

1.

Comprised of 'Net fee and commission income' and 'Net trading and other income'.

2.

Medium Term Funding includes downstreamed funding, in the form of loans that rank pari passu with existing senior unsecured liabilities, from Santander UK Group Holdings plc.