Quarterly Management Statement - 30 June 2020

Contacts

Bojana Flint

Director of Investor Relations & Strategic Initiatives

07720 733 819

Paul Sharratt

Head of Debt Investor Relations

07715 087 829

Stewart Todd

Head of External Affairs

07711 776 286

Miranda Seymour

Head of Media Relations

07860 857 999

For more information:

santander.co.uk/about-santander

ir@santander.co.uk

Nathan Bostock, Chief Executive Officer, commented:

"The Covid-19 crisis has been a huge challenge for all of us and our top priority throughout has been the welfare of our people, our customers and the communities in which we operate. I am extremely proud of how our people have worked at extraordinary pace to substantially change the way we operate so we can continue to provide essential banking services for all our customers, despite the material impact the crisis has had on our business operations and our colleagues themselves. We understand how hard it has been for our customers and we have supported many thousands of individuals and businesses with a range of measures including payment holidays on mortgages, personal loans and credit cards as well as taking an active part in Government loan schemes to help businesses through these uncertain times." 

"Having quickly and successfully adapted our operating model as the crisis developed, we have created a safe working environment with more flexibility for our colleagues - I am incredibly grateful for how they have worked tirelessly in recent months to support one another, our customers and communities."

"Decisive management actions have helped us to mitigate some of the impact this crisis could have had on our results and business operations and ensure we are well positioned as the UK emerges from the lockdown. With strong foundations and a resilient balance sheet, we remain fully committed to our purpose - to help people and businesses prosper."

§

Statutory PBT of £147m, down 74% year on year, adjusted PBT 1 of £225m, down 70% and adjusted RoTE 1 of 1.9% (2019: 7.8%). Results include £376m (H119: £69m) of credit impairment charges, largely due to Covid-19, as well as related income pressures.

§

Income impacted by H120 base rate reductions and regulatory changes to overdraft income; partially offset by the 50bps 1I2I3 current account repricing effective in May20.

§

Continued focus on cost management; operating expenses down 1%, when adjusted down 4%, through realised efficiency savings.

§

Loan loss allowances up c37% from Dec19; portfolio performance remains resilient with low write-offs.

§

Working with our customers who took a payment holiday to understand their individual situations and help them resume payments.

§

Over £3.2bn drawn under government lending schemes by our business and corporate customers.

§

Leveraging enhanced remote working capability for our people to continue to work productively and with greater flexibility.

§

Donated £7.5m for Covid-19 research, hardship funds and community activities and to support the most vulnerable. 2

§

Prime retail mortgage book with an average LTV of 42%. Relatively limited exposure to unsecured retail, c2% of our loan portfolio.

§

Corporate loan portfolio of £25.4bn (2019: £22.3bn) with reduced CRE exposure over recent years and diversified sector profile.

§

CET1 capital ratio of 14.5% (2019: 14.3%), with significant buffers above regulatory minimums.

§

LCR of 147% (2019: 142%), with strong deposit growth driving an improved funding gap.

§

Multi-year transformation programme continues, with £203m investment and c£150m of savings in the last 18 months.

§

Evaluating learnings from the Covid-19 crisis, including accelerated customer digital adoption, property strategy, streamlined governance and processes with a renewed focus on digitalisation, automation and restructuring initiatives.

§

Well positioned balance sheet with c90% of our loan portfolio secured with collateral, a cautious approach to growth in retail unsecured lending and an ambitious transformation programme.

Income statement highlights

H120

£m

H119

£m

Operating income

1,848

2,117

Operating expenses before credit impairment losses, provisions and charges

(1,257)

(1,267)

Credit impairment losses

(376)

(69)

Provisions for other liabilities and charges

(68)

(206)

Profit before tax

147

575

Adjusted profit before tax 1

225

743

Balance sheet and capital highlights

30.06.20

31.12.19

£bn

£bn

Customer loans

209.5

205.3

- of which retail mortgages

167.4

165.4

- of which corporates

25.4

22.3

Customer deposits

185.7

177.8

CET1 capital ratio

14.5%

14.3%

UK leverage ratio

4.7%

4.7%

1.

The financial results and adjusted RoTE were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £78min H120 and £168m in H119. See Appendix 1 for details and reconciliation to the nearest IFRS measure.

2.

Charitable donations via Santander UK and Santander Foundation, part of Banco Santander's global response, All Together Now.

Payment holidays 1

Number ofcustomers

Loan balance

% of relevant loan book

Mortgages

239,000

£37.1bn

22

- of which outstanding at 15 July

72,000

£11.8bn

7

Unsecured Personal Loans (UPLs)

28,000

£0.2bn

10

Credit cards

26,000

£0.1bn

4

Consumer (auto) finance

33,000

£0.5bn

6

Businesses and corporates

2,400

£2.2bn

9

Government lending schemes 2

Number ofcustomers

Loan balance 

% of relevant loan book

Bounce Back Loan Scheme (BBLS) 3

107,000

£2.9bn

14

Coronavirus Business Interruption Loan Scheme (CBILS)

2,000

£0.2bn

1

Coronavirus Large Business Interruption Loan Scheme (CLBILS)

7

£0.1bn

1

§

The operating environment deteriorated dramatically in 2020 with the unprecedented impact of the Covid-19 crisis on the UK and global economies.

§

The extent of the economic downturn and future recovery path remain highly uncertain despite the significant support by the UK authorities. Further uncertainty remains with regard to the UK's future trading relationship with the EU. These are reflected in our economic scenarios for ECL purposes, which capture a wide range of possible outcomes, including a second Covid-19 wave and resulting lockdown, making us cautious in our outlook.

§

Our base case, including for ECL purposes, assumes that the UK economy will experience a short, sharp recession in H120 and a slow recovery for the rest of the year and into 2021, driven by the gradual easing of lockdown restrictions and a return to more normalised trading conditions.

§

We expect our net mortgage lending to be in line with the market, as we continue to focus on customer service and retention. Through our participation in the various government schemes, such as BBLS and CBILS, we continue to support our business and corporate customers and expect growth in this segment to be broadly in line with our market share while improving returns in this business.

§

Lower spending and active liquidity management by our customers have significantly increased deposit balances which we expect to gradually return to more normalised levels.

§

We expect Banking NIM to stabilise in H220 supported by liability margin improvement from the 1I2I3 Current Account interest rate changes in May20 and Aug20, down 50bps and 40bps respectively. Furthermore, the implementation of regulatory changes regarding the high cost of credit will also increase net interest income, partially mitigating the impact of H120 asset-repricing, continued SVR attrition and mortgage back book margin pressure.

§

We expect operating expenses to continue their downward trend, predominantly driven by transformation programme cost savings, as well as lower programme spend and bonus accrual, both part of our Covid-19 response.

§

Credit impairment charge outlook remains highly uncertain. For example, a more severe economic outturn than forecast, with a significant rise in unemployment after the government support schemes wind down, could increase our credit impairment losses.

§

Since 30 June 2020, trends evident in the business operating results have not changed significantly.

1.

Also known as payment deferrals. Applications granted to 30 June 2020.

2.

Applications drawn to 30 June 2020.

3.

100% government guaranteed.

Summarised consolidated income statement

Adjusted 2

H120

H119

Change

H120

H119

Change

£m

£m

%

£m

£m

%

Net interest income

1,542

1,671

(8)

1,542

1,671

(8)

Non-interest income 1

306

446

(31)

253

380

(33)

Total operating income

1,848

2,117

(13)

1,795

2,051

 (12)

Operating expenses before credit impairment losses, provisions and charges

(1,257)

(1,267)

(1)

(1,149)

(1,203)

(4)

Credit impairment losses

(376)

(69)

n.m.

(376)

(69)

n.m.

Provisions for other liabilities and charges

(68)

(206)

(67)

(45)

(36)

25

Profit before tax

147

575

(74)

225

743

(70)

Tax on profit

(35)

(164)

(79)

Profit after tax

112

411

(73)

Banking NIM

1.50%

1.69%

-19bps

n.a.

n.a.

n.a.

CIR/Adjusted CIR 2

68%

60%

8pp

64%

59%

5pp

§

Net interest income was down 8%, largely impacted by the immediate repricing of assets following the base rate cut, lower back book mortgage margins and £1.9bn of SVR attrition (H119: £2.1bn), partially offset by the 50bps repricing on the 1I2I3 current account £55bn portfolio effective in May20.

§

Non-interest income was down 31%, with significantly lower banking and transaction fees in our retail business largely due to expected reductions following the implementation of regulatory changes to overdraft income as well as the Covid-19 crisis impact.

When adjusted for £47m operating lease depreciation and a £6m one-off gain from property exits as part of the transformation programme, non-interest income was down 33%.

§

Operating expenses before credit impairment losses, provisions and charges were down 1%, with efficiency savings, lower transformation programme spend and bonus accrual, partially offset by higher IT costs, staff expenses and increased site cleaning as a result of Covid-19 3.

When adjusted for £47m operating lease depreciation, £37m of transformation costs and £24m of expenses as a result of Covid-19 3, operating expenses were down 4%.

§

Credit impairment losses were up £307m to £376m. This includes £267m arising from changes to economic scenarios and weights, the staging reclassification under IFRS 9 of certain loans following an in-depth sectoral review and the treatment of payment holidays. Excluding the effects outlined above, portfolio performance remains resilient with low write-offs and only a few single name corporate cases.

§

Provisions for other liabilities and charges were down 67% to £68m, largely due to lower H120 transformation programme charges, the absence of an additional PPI charge and a release of other conduct provisions related to the sale of interest rate derivatives (IRD). This was partially offset by a previously reported provision in our Retail Banking business for breaches of certain requirements to provide SMS warning alerts to customers regarding overdraft charges.

When adjusted for £11m of transformation programme charges and £5m release of other conduct provisions, along with a £17m provision for SMS warning alerts detailed above, provisions were up £9m.

§

Profit before tax was down 74% to £147m and adjusted profit before tax was down 70% to £225m, due to factors outlined above.

§

Tax on profit decreased £129m to £35m, as a result of lower taxable profits in H120.

1.

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

2.

The financial results and adjusted CIR were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of£78m in H120 and £168m in H119. See Appendix 1 for details and reconciliation to the nearest IFRS measure.

3.

Further details on page 13.

Summarised income statement

Adjusted 2

Q220

Q120

Change

Q220

Q120

Change

£m

£m

%

£m

£m

%

Net interest income

772

770

-

772

770

-

Non-interest income 1

112

194

(42)

90

163

(45)

Total operating income

884

964

(8)

862

933

(8)

Operating expenses before credit impairment losses, provisions and charges

(626)

(631)

(1)

(565)

(584)

(3)

Credit impairment losses

(211)

(165)

28

(211)

(165)

28

Provisions for other liabilities and charges

(14)

(54)

(74)

(16)

(29)

(45)

Profit before tax

33

114

(71)

70

155

(55)

Tax on profit

(6)

(29)

(79)

Profit after tax

27

85

(68)

Banking NIM

1.49%

1.52%

-3bps

n.a.

n.a.

n.a.

CIR

71%

65%

6pp

66%

63%

3pp

§

Net interest income was up £2m due to the repricing of the 1I2I3 current account £55bn portfolio which took effect in early May20, partially offsetting the impact of late Mar20 asset repricing.

Summarised balance sheet

30.06.20

31.12.19

£bn

£bn

Customer loans

209.5

205.3

Other assets

93.3

83.2

Total assets

302.8

288.5

Customer deposits

185.7

177.8

Total wholesale funding

66.5

65.3

Other liabilities

34.1

29.1

Total liabilities

286.3

272.2

Shareholders' equity

16.1

15.9

Non-controlling interest

0.4

0.4

Total liabilities and equity

302.8

288.5

§

Customer loans increased £4.2bn, with a £4.5bn increase in Retail Banking, largely due to the take-up of BBLS by business banking customers and participation in other Covid-19 related government schemes by corporate customers. Unsecured retail lending fell £0.8bn due to lower consumer spending during lockdown.

§

Customer deposits increased £7.9bn, with £6.0bn growth in Retail Banking as consumer spending fell during the Covid-19 lockdown period and as business banking customers deposited BBLS funds with us. Corporate deposits increased £2.0bn as businesses focused on active liquidity management. `

1.

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

2.

The financial results and adjusted CIR were impacted by a number of specific income, expenses and charges with an aggregate impact on profit before tax of £78m in H120 and £168m in H119. See Appendix 1 for details and reconciliation to the nearest IFRS measure.

Customer loans

6M Gross

Loan loss

30 June 2020 1

Total

Stage 1

Stage 2

Stage 3

write-offs

allowances

£bn

£bn

£bn

£bn

£m

£m

Retail Banking:

184.9

169.9

13.0

2.0

101

762

- of which mortgages

167.4

154.2

11.4

1.8

7

286

- of which business banking

4.8

4.1

0.6

0.1

12

89

- of which consumer (auto) finance

8.0

7.5

0.4

0.1

13

106

- of which other unsecured lending

4.7

4.1

0.6

-

69

281

Corporate & Commercial Banking

16.6

10.8

5.3

0.5

22

335

Corporate & Investment Banking

4.0

3.7

0.3

-

-

62

Corporate Centre

4.0

3.9

0.1

-

-

22

209.5

188.3

18.7

2.5

123

1,181

Undrawn balances

36.9

0.9

0.1

Stage 1, Stage 2 and Stage 32ratios %

89.90

8.93

1.23

§

In Q120, given a lack of official data, our approach was to change the weighting of our five economic scenarios and introduce two additional economic sensitivities for Covid-19. We also added a management judgement overlay to the scenario weights and reviewed our corporate portfolios for any signs of deterioration. In Q220, recognising that the downside risk and negative impact on the UK economy had increased, we revised our five economic scenarios, from two upside, a base and two downside, to one upside, a base and three downside, reflecting the lower base rate outlook and the longer path to recovery for the UK, the net impact of which significantly weighted our ECL towards the downside. The overall impact was an increase in ECL of £151m, of which an additional £81m was booked in Q220.

§

In Q120, we moved £2.4bn of corporate Stage 1 loans into Stage 2 lifetime ECL based on initial review of the sectors most at risk due to Covid-19. In Q220, this increased to £3.2bn following contact with customers regarding possible concessions, review of the existing judgment perimeter and categorisation of sectors as Low, Medium or High Risk based on the Standard Industrial Classification (SIC) codes for H120 reporting. We also reviewed Stage 3 corporate and SME coverage. The overall impact was an increase in ECL of £78m, of which an additional £26m was booked in Q220.

§

In Mar20, we offered customers a three month mortgage payment holiday if their financial position was affected by Covid-19, subsequently extended by a further three months for customers in need. In Apr20, payment holidays were extended to all lending portfolios. As of Q120, over 95% of mortgage customers taking a payment holiday were up to date with repayments. The granting of a payment holiday on its own was not considered to be a Significant Increase in Credit Risk (SICR) event, nor was it considered a default under regulatory definitions. In Q220, based on a sample mortgage customer contact exercise, as well as additional Stage 1 customer data profiling, we transferred £1.6bn of mortgage assets from Stage 1 into Stage 2 lifetime ECL. The overall impact of the mortgage payment holiday review, together with a review of unsecured and consumer (auto) finance portfolios, was an increase in ECL of £38m, all booked in Q220.

1.

See Appendix 3 for 31 March 2020 position.

2.

Stage3 ratio= (Stage3 drawn + Stage3 undrawn assets)/(total drawn assets + Stage3 undrawn assets).

Downside 3%

Downside 2%

Downside 1%

Base case%

Upside 1

%

GDP (annual

2020

(14.9)

(8.5)

(4.5)

(9.5)

(4.0)

growth rate) 2

2021

0.8

(3.1)

(1.4)

5.8

(0.2)

2022

3.5

3.8

2.6

3.0

4.0

Base rate

2020

0.10

0.10

0.10

0.10

0.10

2021

0.10

1.00

0.10

0.10

0.25

2022

0.10

2.00

0.10

0.10

0.75

House price

2020

(7.7)

(11.1)

(0.6)

(6.0)

(0.1)

inflation (HPI) 3

2021

(19.9)

(16.4)

(9.7)

0.5

(7.0)

5yr CAGR4

(5.6)

(5.5)

(3.6)

0.0

1.8

Unemployment

2020

11.9

6.8

5.4

9.3

5.2

2021

8.9

10.4

7.0

6.9

6.3

5yr Peak

11.9

10.4

7.0

9.3

6.5

Q220 weights

5

15

15

50

15

§

Base case: a short sharp recession in H120, but with a slower recovery over the rest of the year and into 2021, with Brexit trade negotiations leading to further uncertainty and dampening growth. The new base case is worse than the Covid-19 sensitivity scenarios used in Q120 in terms of GDP, Unemployment and HPI. From an ECL perspective, the lower for longer bank rate environment is expected to provide some offset against higher unemployment.

§

Upside 1: reflects a more comprehensive Brexit trade deal being negotiated, an extension given to the trade negotiation process or a Covid-19 vaccine being produced quicker than expected.

§

Downside 1: reflects consumers and businesses responding to the changes required for re-opening from the lifting of restrictions by adopting a more conservative return to spending and investing compared to the base case. It also reflects a moderate downturn that is less severe than the base case in terms of GDP for 2020, but reflects a material decrease in consumer demand in the housing market leading to significant downward price corrections over the next five years with a peak to trough of negative 19%. In terms of Brexit, it assumes no initial trade agreement, but trade agreements with other countries being negotiated relatively quickly over the forecast period.

§

Downside 2: severe downturn with a longer recovery needed ('U' shape) reflecting even more conservatism in terms of spending by consumers with the higher levels of unemployment and for businesses a slower return to profitability and so greater insolvencies. It retains a rising bank rate profile to ensure there is a scenario which encapsulates rising inflation. As with Downside 1 and 3, the UK fails to agree a trade deal with the EU but it then takes many years to negotiate trade deals with other countries.

§

Downside 3: Covid-19 stress scenario which has a double dip in economic activity ('W' shape), where a second lockdown is imposed to deal with the re-emergence of the virus in H220 and no Brexit trade deal. While the bank rate remains low, HPI falls significantly by 31% peak to trough and unemployment peaks at 11.9% in 2020.

1.

See appendix 3 for prior periods.

2.

GDP is shown as an annual average and all other data points are at 31 December in the year indicated.

3.

Q4 annual growth rate.

4.

Compound annual growth rate.

Capital, funding and liquidity

30.06.20

31.12.19

£bn

£bn

Capital

CET1 capital

10.6

10.4

Total qualifying regulatory capital

15.5

15.8

CET1 capital ratio

14.5%

14.3%

Total capital ratio

21.3%

21.6%

UK leverage ratio

4.7%

4.7%

RWAs

72.7

73.2

Funding

Total wholesale funding and AT1

69.0

67.8

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

28.0

22.5

Liquidity

Santander UK plc Domestic Liquidity Sub-group (RFB DoLSub)

Liquidity Coverage Ratio (LCR)

147%

142%

LCR eligible liquidity pool

47.8

42.0

Santander Financial Services (SFS)

LCR

316%

471%

LCR eligible liquidity pool

6.1

5.7

§

CET1 capital increased to £10.6bn, with ongoing capital accretion through retained profits and a lower deduction from the excess of regulatory expected loss amounts over credit provisions. These improvements were partially offset by adverse market driven movements in the defined pension schemes.

§

CET1 capital ratio increased 20bps to 14.5%, with a 4.8p.p. buffer to Maximum Distributable Amount (MDA) restrictions. UK leverage ratio at 4.7%, was 1.1p.p. above the regulatory requirement.

§

Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17bps to the CET1 ratio. The majority of the benefit came through the implementation of the RWA reduction factors for certain SME and infrastructure exposures.

§

The PRA announced in May 2020 that they would be converting Pillar 2A capital requirements from RWA percentage to nominal amount at a future point. As at 30 June 2020 our P2A capital requirement remained with an RWA percentage based element.

§

As previously announced, quarterly or interim dividend payments and share buybacks on ordinary shares have been suspended until the year end when the Board will decide on 2020 dividend policy.

§

Total wholesale funding increased with issuance of £4.6bn, including £0.6bn MREL eligible senior unsecured issued from Santander UK and £4.0bn of core funding, consisting of covered bonds and senior unsecured, issued from the RFB.

§

We have £10.8bn outstanding under the 2016 Term Funding Scheme (TFS) and £2.2bn outstanding under the new Term Funding Scheme with additional benefits for SMEs (TFSME).

§

LCR at 147% reflects our prudent approach in an uncertain operating environment and is significantly above regulatory requirements.

Summary income statement

H120

H119

Change

£m

£m

%

Net interest income

1,393

1,465

(5)

Non-interest income 1

235

353

(33)

Operating income

1,628

1,818

(10)

Operating expenses before credit impairment losses, provisions and charges

(1,010)

(1,011)

-

Credit impairment losses

(247)

(63)

n.m.

Provisions for other liabilities and charges

(56)

(95)

(41)

Profit before tax

315

649

(51)

§

Profit before tax decreased 51%, with an increase in credit impairment charges largely due to Covid-19. In addition, income was impacted by reduced banking and transaction fees as a result of regulatory changes to overdrafts, as well as the effects of the base rate reductions on asset repricing, which were partially offset by the 1I2I3 current account repricing in early May20.

Customer balances

30.06.20

31.12.19

£bn

£bn

Mortgages

167.4

165.4

Business banking

4.8

1.8

Consumer (auto) finance

8.0

7.7

Other unsecured lending

4.7

5.5

Customer loans

184.9

180.4

Current accounts

71.8

68.7

Savings

57.5

57.2

Business banking accounts

15.8

12.9

Other retail products

6.0

6.3

Customer deposits

151.1

145.1

Summary income statement

H120

H119

Change

£m

£m

%

Net interest income

150

189

(21)

Non-interest income 1

40

38

5

Operating income

190

227

(16)

Operating expenses before credit impairment losses, provisions and charges

(134)

(138)

(3)

Credit impairment losses

(106)

(9)

n.m.

Provisions for other liabilities and charges

3

(1)

n.m.

(Loss)/profit before tax

(47)

79

n.m.

§

Loss before tax of £47m, with an increase in credit impairment charges largely due to Covid-19, as well as a few single name exposures. Net interest income was impacted by the asset repricing effects of the base rate reductions.

Customer balances

30.06.20

31.12.19

£bn

£bn

Trading businesses

11.7

11.2

CRE

4.9

5.1

Customer loans

16.6

16.3

Customer deposits

19.5

18.2

1.

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

Summary income statement

H120

H119

Change

£m

£m

%

Net interest income

26

32

(19)

Non-interest income 1

28

47

(40)

Operating income

54

79

(32)

Operating expenses before credit impairment losses, provisions and charges

(62)

(83)

(25)

Credit impairment losses

(12)

4

n.m.

Provisions for other liabilities and charges

(4)

(11)

(64)

Loss before tax

(24)

(11)

n.m.

§

Loss before tax increased to £24m, with lower income and higher credit impairment charges largely due to Covid-19, partially offset by lower operating expenses, driven by transformation programme efficiencies.

Customer balances

30.06.20

31.12.19

£bn

£bn

Customer loans

4.0

4.1

Customer deposits

6.8

6.1

Summary income statement

H120

H119

Change

£m

£m

%

Net interest income/(expense)

(27)

(15)

80

Non-interest income/(expense) 1

3

8

(63)

Operating income/(expense)

(24)

(7)

n.m.

Operating expenses before credit impairment losses, provisions and charges

(51)

(35)

46

Credit impairment losses

(11)

(1)

n.m.

Provisions for other liabilities and charges

(11)

(99)

(89)

Loss before tax

(97)

(142)

(32)

§

Loss before tax decreased £45m, largely due to lower transformation programme charges as activity slowed temporarily during lockdown. Our structural hedge position has remained stable at c£98bn, with an average duration of c2.4 years.

Customer balances

30.06.20

31.12.19

£bn

£bn

Social Housing

3.2

3.6

Crown Dependencies (Isle of Man and Jersey)

0.3

0.3

Non-core

0.5

0.6

Customer loans

4.0

4.5

Customer deposits

8.3

8.4

- of which Crown Dependencies

6.4

6.1

1.

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

Residential mortgage portfolio analysis

Corporate loan portfolio analysis

§

The corporate loan book is well-diversified with limited sectoral concentration.

§

Social housing is lending and treasury services for UK housing association groups (mainly charitable entities) secured by tenanted UK residential property. We have not had a default, loss or repossession in this portfolio.

§

Other real estate lending increased £0.3bn, predominantly through the government lending schemes.

Sector split of loans moved from Stage 1 to Stage 2

30.06.20

£bn

Hotels

1.1

Care homes

0.5

Real estate

0.4

Retail

0.3

Hospitality and leisure

0.3

Travel, transportation and others

0.4

High risk Stage 1 counterparties

0.2

Total

3.2

 §

 In H120 we moved £3.2bn of loans in sectors which have experienced an increase in credit risk from Stage 1 to Stage 2.

1.

Total corporate loans includes £25.4bn of Corporate lending (CCB, CIB and Business Banking), £3.2bn of non-core social housing and £0.5bn of non-core loans in Corporate Centre.

H120

H119

£m

£m

Net interest income

Reported

1,542

1,671

Adjusted

1,542

1,671

Non-interest income

Reported

306

446

Adjust for transformation

(6)

-

Adjust for operating lease depreciation 1

(47)

(51)

Adjust for Vocalink Holdings Limited shareholding 1

-

(15)

Adjusted

253

380

Operating expenses before credit impairment losses, provisions and charges

Reported

(1,257)

(1,267)

Adjust for transformation

37

13

Adjust for operating lease depreciation 1

47

51

Adjust for higher IT costs, staff expenses and increased site cleaning as a result of Covid-19

24

-

Adjusted

(1,149)

(1,203)

Provisions for other liabilities and charges

Reported

(68)

(206)

Adjust for transformation

11

100

Adjust for PPI

-

70

Adjust for regulatory and other

17

-

Adjust for other conduct

(5)

-

Adjusted

(45)

(36)

Profit before tax

Reported

147

575

Specific income, expenses and charges

78

168

Adjusted profit before tax

225

743

H120

H119

£m

£m

Adjusted net interest income

1,542

1,671

Adjusted non-interest income

253

380

Adjusted total operating income

1,795

2,051

Adjusted operating expenses before credit impairment losses, provisions and charges

(1,149)

(1,203)

Adjusted cost-to-income ratio

64%

59%

Cost-to-income ratio

68%

60%

1.

Explanations of these adjustments were disclosed in previous Quarterly Management Statements

H120

Specific income, expenses and charges

As adjusted

£m

£m

£m

Profit after tax for H120

112

56

168

Annualised profit after tax

225

338

Phasing adjustments

-

(69)

Less non-controlling interests of annual profit

(40)

(40)

Profit due to equity holders of the parent (A)

185

229

H120

£m

Equity phasing adjustments

£m

As adjusted

£m

Average shareholders' equity

16,411

Less average Additional Tier 1 (AT1) securities

(2,243)

Less average non-controlling interests

(400)

Average ordinary shareholders' equity (B)

13,768

Average goodwill and intangible assets

(1,751)

Average tangible equity (C)

12,017

15

12,032

Return on ordinary shareholders' equity (A/B)

1.3%

-

RoTE (A/C)

-

 1.9%

2019

Specific income, expenses and charges

As adjusted

£m

£m

£m

Profit after tax for 2019

709

270

979

Less non-controlling interests of annual profit

(37)

(37)

Profit due to equity holders of the parent (A)

672

942

2019

£m

Equity adjustments

£m

As adjusted

£m

Average shareholders' equity

16,281

Less average Additional Tier 1 (AT1) securities

(2,141)

Less average non-controlling interests

(398)

Average ordinary shareholders' equity (B)

13,742

Average goodwill and intangible assets

(1,795)

Average tangible equity (C)

11,947

68

12,015

Return on ordinary shareholders' equity (A/B)

4.9%

-

Adjusted RoTE (A/C)

-

 7.8%

§

Specific income, expenses, charges

Details of these items are outlined on the previous page with a total impact on profit before tax of £78m. The tax on these items is c£22m and profit after tax on these items is £56m.

§

Phasing adjustments

To facilitate comparison with the full year ratio we adjust profit due to equity holders of the parent and average tangible equity for charges, releases or accounting changes which only relate to this period. The most significant of these adjustments is the UK Bank Levy which is charged on 31 December annually, as required under IFRS.

§

Equity adjustments

These adjustments are made to reflect the impact of adjustments to profit on average tangible equity.

Summarised consolidated income statement

H120

H119

£m

£m

Net interest income

1,554

1,668

Non-interest income 1

322

453

Total operating income

1,876

2,121

Operating expenses before credit impairment losses, provisions and charges

(1,245)

(1,257)

Credit impairment losses

(376)

(69)

Provisions for other liabilities and charges

(68)

(206)

Total operating impairment losses, provisions and charges

(444)

(275)

Profit before tax

187

589

Tax on profit

(48)

(170)

Profit after tax for the period

139

419

Summary of segmental balance sheet assets and liabilities

30.06.20

31.12.19

£bn

£bn

Customer loans

Retail Banking

184.9

180.4

Corporate & Commercial Banking

16.6

16.3

Corporate & Investment Banking

4.0

4.1

Corporate Centre

3.7

4.2

Total customer loans

209.2

205.0

Other assets

86.5

76.7

Total assets

295.7

281.7

Customer deposits

Retail Banking

151.1

145.1

Corporate & Commercial Banking

19.5

18.2

Corporate & Investment Banking

6.8

6.1

Corporate Centre

1.9

2.3

Total customer deposits

179.3

171.7

Total wholesale funding

66.4

65.2

Other liabilities

33.8

28.7

Total liabilities

279.5

265.6

Shareholders' equity

16.0

15.9

Non-controlling interests

0.2

0.2

Total liabilities and equity

295.7

281.7

Summarised consolidated capital

30.06.20

31.12.19

£bn

£bn

Total qualifying regulatory capital

15.5

15.8

Risk-weighted assets (RWAs)

72.2

72.6

Total capital ratio

21.4%

21.7%

1.

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

Customer loans

Gross

Loan loss

31 March 2020

Total

Stage 1

Stage 2

Stage 3

write-offs

allowances

£bn

£bn

£bn

£bn

£m

£m

Retail Banking:

182.9

171.3

9.7

1.9

53

614

- of which mortgages

167.8

157.8

8.3

1.7

4

222

- of which business banking

1.9

1.6

0.2

0.1

6

62

- of which consumer (auto) finance

8.1

7.4

0.7

-

8

94

- of which other unsecured lending

5.1

4.5

0.5

0.1

35

236

Corporate & Commercial Banking

16.5

11.8

4.4

0.3

6

254

Corporate & Investment Banking

5.0

4.9

0.1

-

-

48

Corporate Centre

4.4

4.4

-

-

-

73

208.8

192.4

14.2

2.2

59

989

Undrawn balances

37.5

0.9

0.1

Stage 1, Stage 2 and Stage 31 ratios %

92.15

6.78

1.10

Core scenarios

Covid-19 scenarios

Downside 2

%

Downside 1

%

Q4 Base Case %

Upside 1

%

Upside 2

%

Sensitivity2 %

Sensitivity1 %

GDP (annual

2020

(3.6)

0.6

1.2

1.4

1.6

(2.7)

(2.5)

growth rate)

2021

0.1

0.7

1.6

2.0

2.4

1.8

2.7

Base rate

2020

1.50

0.75

0.25

0.50

0.75

0.75

0.10

2021

3.00

1.25

0.25

1.25

1.75

1.50

0.25

House price

2020

(1.5)

2.1

0.5

2.5

2.7

(1.3)

(1.9)

inflation (HPI)

2021

(10.9)

0.4

1.3

3.1

3.8

(2.4)

(0.2)

5yr CAGR1

(7.3)

(1.1)

1.7

4.4

6.0

(1.1)

0.8

Unemployment

2020

6.5

4.0

4.1

3.6

3.4

5.2

5.0

(ILO)

2021

7.7

4.5

4.1

3.4

3.1

5.3

4.5

5yr Peak

7.7

5.8

4.1

3.7

3.7

5.4

5.5