6-Kfalse30 June, 20202020Q2Santander UK plc0001087711--12-3141919164no35000000000350000000001,1691,16911.99.83.4303011.99.83.64411.99.83.41,2031,2031.61.630000000000300000000003500000000035000000000171510000001890000001700000010000000398500001300300500500750750500500500500There have been no significant events between 30 June 2020 and the date of approval of these financial statements which would require a change to or additional disclosure in the financial 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 under the
Securities Exchange Act of 1934

For the month of August, 2020

SANTANDER UK PLC
(Translation of registrant's name into English)

2 Triton Square,
Regent's Place,
London NW1 3AN, England
(Address of principal executive office)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F . . . .X. . . . Form 40-F . . . . . . . .

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  



THE REGISTRANT HEREBY INCORPORATES ALL PARTS OF THIS REPORT ON FORM 6-K BY REFERENCE INTO REGISTRATION STATEMENT NO. 333-232887 FILED BY THE REGISTRANT WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM F-3ASR UNDER THE SECURITIES ACT OF 1933.

This Report on Form 6-K contains references to websites of the registrant and its affiliates. The registrant is not incorporating by reference any information posted on such websites.





Half Yearly Financial Report 2020




























































Santander UK plc






















































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

This Half Yearly Financial Report contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See ‘Forward-looking statements’ in the Shareholder information section.
None of the websites referred to in this Half Yearly Financial Report on Form 6-K for the six months ended 30 June 2020 (the Form 6-K), including where a link is provided, nor any of the information contained on such websites, is incorporated by reference into the Form 6-K.



Santander UK plc
Half Yearly Financial Report 2020
Contents
Chief Executive Officer's review2
Financial overview3
Operating environment and stakeholder update5
Financial review7
Risk review14
Financial statements50
Shareholder information72
Santander UK plc 1


> Chief Executive Officer’s review
Chief Executive Officer’s review
Nathan Bostock 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."
Our H120 results and business performance were materially impacted by Covid-19
Statutory profit before tax of £147m was down 74% year-on-year. Our results included £376m of impairment charges, up from £69m in H119, largely due to Covid-19 as well as related income pressure. Income was impacted by H120 base rate reductions and regulatory changes to overdraft income, partially offset by the 50bps 1I2I3 current account repricing effective in May 2020. We continued to focus on cost management and operating expenses were down 1% year on year through realised efficiency savings. Loan loss allowances were up c37% from 31 December 2019 although the portfolio performance remains resilient with low write-offs.
Supporting our customers and looking after our people and communities remains our top priority
We have been working closely with our customers who took a payment holiday to understand their individual situations and help them resume payments. Approvals for the various business interruption loans(1) exceeded £3.2bn through government lending schemes for our business and corporate customers. We enhanced our remote working capability for our people so they could continue to work productively and with greater flexibility. We also supported Banco Santander's global programme 'Santander All. Together. Now.', with a £7.5m charitable donation for Covid-19 research, hardship funds and community activities and to support the most vulnerable.
Confident in the resilience of our balance sheet with prudent approach to risk, liquidity and cautious business growth
Our approach to risk is prudent, demonstrated by our focus on prime retail mortgage lending with an average LTV: 42% as well as a relatively limited exposure to unsecured retail (c2% of customer loans). Our corporate loan portfolio of £25.4bn (2019: £22.3bn) with reduced CRE exposure over recent years, and diversified sector profile leaves us well positioned. Our CET1 capital ratio increased to 14.7% (2019: 14.3%), with significant buffers above regulatory minimums following changes announced by the PRA in response to the crisis. Our LCR of 147% (2019: 142%) remained very good, with strong deposit growth driving an improved funding gap.
Transforming and actively managing the business
Our multi-year transformation programme continued, with £203m investment and c£150m of savings to date. We are 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. We have a well-positioned balance sheet with c.90% of our loan portfolio secured with collateral, a cautious approach to growth in retail unsecured and an ambitious transformation programme.
Board changes
As announced on 7 August 2020, Shriti Vadera will leave Santander UK on 31 October 2020. She will be succeeded by William Vereker who will join the Board on 1 October 2020 and take over as Non-Executive Chair on 1 November 2020.
Looking ahead
The impact of the Covid-19 crisis has been unprecedented and, as a result, the operating environment remains highly uncertain, both in the UK and globally. This will undoubtedly put pressure on bank returns for the foreseeable future despite the significant support programmes introduced by the UK authorities. Further uncertainty remains with regard to the outcome of current negotiations regarding the UK’s future trading position following its departure from the EU.
Despite these challenges, we have long held a cautious approach to risk and our focus on prime residential mortgages, low appetite for growth in unsecured lending and deleveraged commercial real estate exposure leaves us prudently positioned. The way we have quickly and effectively handled the developing Covid-19 crisis gives us confidence in evaluating and applying those learnings while transforming the bank for success.



Nathan Bostock
Chief Executive Officer














(1) Includes the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS). See pages 23 and 31 for details.
2 Santander UK plc


> Financial Overview
Financial overview
Duke Dayal commented
"Our results for the first six months of 2020 have been significantly affected by the impact of the Covid-19 crisis. While we have yet to see a material change in write-offs, we did increase our provisions for expected credit losses by £318m or 37% since 31 December 2019 to £1,181m. We have also seen an adverse impact on income with variable assets repricing immediately following the two base rate cuts this year, while deposit repricing lags."
"Despite these pressures, and the highly uncertain operating environment, I believe our strong balance sheet and good credit quality should stand us in good stead. Our loan portfolios are 90% secured overall and benefit from a focus on prime UK mortgage lending. Our exposure to unsecured retail lending is fairly limited, at 2% of our customer balance sheet, and we have deleveraged our commercial real estate portfolio over recent years. These lead to greater resiliency which we anticipate should allow us to experience lower losses through the cycle - as repeatedly demonstrated by our performance in the Bank of England stress tests."
"Our capital position has improved - CET1 capital ratio remains above regulatory thresholds. Our liquidity position has also strengthened in the last six months. Consumer spending has been lower during lockdown and, as a consequence our deposits have increased, improving our commercial funding gap."
"One of the key features of this crisis compared to the annual Bank of England stress test has been the scale and scope of the response by the UK authorities. This response includes a wide range of measures to deal with both the health and economic crises. Along with the rest of the banking sector, we have supported these measures and played our part in keeping the financial system running smoothly, while helping our customers access essential banking services, payment holidays and lending through a number of different government-supported schemes."
"Going forward we will focus on continuing to support our customers and the ongoing transformation of our business which, together with learnings from the last six months, should improve returns over the medium-term."
Our results and business operations were materially impacted by Covid-19
30 June 202030 June 2019
Income statement highlights£m£m
Net interest income1,5541,668
Non-interest income(1)
322453
Total operating income1,8762,121
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 credit impairment losses, provisions and charges(444)(275)
Profit before tax187589
Tax on profit(48)(170)
Profit after tax 139419
(1) Comprised of Net fee and commission income and Net trading and other income.

Profit before tax was down 68% to £187m due to the factors outlined below. By income statement line item, the movements were:
Net interest income was down 7%, 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 May 2020.
Non-interest income was down 29%, 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.
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.
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.
Tax on profit decreased £122m to £48m, as a result of lower taxable profits in H120.
A resilient balance sheet, well-positioned for the crisis
30 June 202031 December 2019
£bn£bn
Customer loans209.2205.0
- of which retail mortgages167.4165.4
- of which consumer (auto) finance and unsecured lending8.07.7
- of which corporates25.422.3
Customer deposits179.3171.7

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.
Santander UK plc 3

2020 Half Yearly Financial Report
Customer deposits increased £7.6bn, 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.
30 June 202031 December 2019
Capital and funding£bn£bn
CET1 capital10.6  10.4  
Risk-weighted assets72.2  72.6  
CET1 capital ratio14.7 %14.3 %
Total wholesale funding and AT168.6  67.4  
- of which with a residual maturity of less than one year28.0  22.5  

30 June 202031 December 2019
Liquidity£bn£bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)147 %142 %
LCR eligible liquidity pool47.8  42.0  

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 40 basis points to 14.7% with a 4.0% buffer to Maximum Distributable Amount (MDA) restrictions.
Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17 basis points to the CET1 ratio. The majority of the benefit came through the implementation of the RWA reduction factors for certain Small and Medium-sized Enterprise (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 downstreamed from Santander UK Group Holdings plc and £4.0bn of core funding, consisting of covered bonds and senior unsecured, issued from Santander UK plc.
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.
Maintaining a cautious outlook
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 liability margin improvement from the 1I2I3 Current Account interest rate changes in May 2020 and August 2020, 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.
Duke Dayal
Chief Financial Officer

4 Santander UK plc


> Financial Overview
Operating environment and stakeholder update

The operating environment deteriorated significantly as a result of the Covid-19 pandemic
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.
The UK authorities have taken unprecedented actions to support the economy
The Covid-19 pandemic spread rapidly during the first quarter of 2020 and urgent measures affecting all aspects of society and the economy were rapidly introduced to limit the spread and impact on the economy. The UK authorities introduced a wide-ranging programme of regulatory, monetary and fiscal measures which were larger than at any other time in recent history and outweighed those taken during the global financial crisis.
In particular, a number of measures have had a material impact on both banks' customers and shareholder returns. Early in the crisis, payment holidays and then the furlough scheme were introduced to keep people in employment and to act as a bridge for their personal finances, which has curtailed loan losses. Keeping people in employment helped businesses to be ready for recovery but they also needed a bridge to support their financial position during lockdown which was provided through a number of government-backed, bank lending schemes. Further support to the economy came through two base rate cuts and these together with direct support for the financial system through the Bank of England TFSME ensured the availability of low cost funding to support bank lending to the real economy, which was very important given the low rate environment and change in the credit cycle.
Our top priority is to support our customers and look after our people and communities
The financial sector has had to change how it operates in an incredibly short period of time – showing what can be done when the sector, government and regulators work together to the same goal. We have worked closely with all our stakeholders, alongside our parent, to demonstrate that banks can be an important part of the solution to this crisis.

Customers
The pandemic has changed how we work and how we serve our customers. We have played a central role in providing critical support to our customers and businesses, and by extension to the UK economy as the Treasury and Bank of England have sought to insulate the country as best they can from the effects of the lockdown.
Despite some localised staff shortages in our branch network and contact centres we have continued to support customers throughout lockdown. As restrictions eased, branch openings and hours have been gradually extended. During lockdown, branch staff provided additional support for customers remotely, through live chat, inbound and outbound calls. Our live chat and chatbot services proved essential during the Covid-19 outbreak, enabling us to deal with a significant increase in non-branch customer enquires. Monthly volumes of live chat and chatbot services in June 2020 were more than 16 times greater than in January 2020. We asked most of our office-based colleagues to work from home in late March 2020, which allowed us to offer a consistent and reliable service for our customers and continue to provide essential banking services.
In common with other banks we have also offered customers affected by the crisis extensive support, including more than 320,000 payments holidays across mortgages and consumer (auto) finance and other unsecured products. In addition, late payment fees on credit cards were waived and an interest free buffer was provided for overdraft customers. We also suspended all property possession orders for a three-month period. With reduced branch access during lockdown, we also introduced interactive virtual scam awareness events, an alternative way of reaching and continuing to support our customers. We have also provided support to our business and corporate customers through the government's BBL, CBIL and CLBIL schemes. Most notable of these has been the take up of the BBL with £2.9bn of lending all with a 100% government guarantee.
Whilst introducing the various schemes to help customers and businesses presented operational challenges for everyone in the sector, it showed how we were determined to go above and beyond in order to deliver the help that our customers and businesses needed in a relatively short period of time. This response has encouraged us to look at how we work in the future – not just in terms of physical locations, but our ability to make decisions quickly, empower our colleagues to implement their ideas and find the most effective and efficient way to get things done for our customers.
People
In just a number of weeks, we leveraged enhanced remote working capability for our people to continue to work productively and with greater flexibility. For colleagues who became home-based, we introduced a process to provide them with additional equipment where required. We know that childcare was a challenge for many of our people during this period so we committed to be as flexible as possible to find the best solution for our people and the business. We also committed to continue to pay contracted hours as normal during the period of the pandemic, including throughout any periods of self-isolation. We did not utilise any government funds through the furlough scheme.
For our people who continued to work in our branches and offices, we complied with all the Government’s workplace Covid-19 guidance and supplemented these with additional protocols that have worked well in other countries in which Banco Santander operates. These included providing personal protective equipment as well as additional ATM and counter screening, signage, queue barriers and sanitising gel for colleagues and customers. A daily survey is in place to guide each colleague on whether to travel to work and temperature checking is in place for those who work in an office or branch.
We have also had to look at how we communicate with our people, as well as our customers. Ensuring that we retain that sense of purpose across the business, without the usual rhythms of how we used to work and interact, such as face-to-face meetings, talking over a coffee or popping out for lunch. The challenge for leaders has been to maintain a consistent dialogue with our colleagues throughout so they still feel part of the business and part of the ongoing discussion about what is next for them and for our business.
We provide wellbeing support to our people across four pillars: Physical, Mental, Financial and Social, coordinated through an online hub. We supplemented the wellbeing hub to help our people deal with additional Covid-19 related matters including the challenges of working from home and access to live chat with psychologists for mental health issues. We want to ensure our colleagues maintain positive wellbeing each day at work, and at home, and ensure that anyone who needs it can find the right support for them at the right time. We are extremely proud of all our people for their ongoing support and dedication. To recognise their contribution and to say thank you, we made an exceptional payment to front-line colleagues who directly supported our customers throughout the initial crisis period.

Santander UK plc 5

2020 Half Yearly Financial Report
Communities
In March 2020, the Santander Foundation announced a £1m donation to Age UK and Alzheimer’s Society to support some of the most vulnerable people in the community. The funding allowed both charities to continue providing vital support as they faced urgent demands for resources as the Covid-19 crisis unfolded. Age UK and Alzheimer’s Society have a long history of helping vulnerable people in the community and the donation will go towards both existing and new initiatives launched to support those who are now at even greater risk of isolation.
We also doubled the available time that our people can volunteer during work time, from 35 hours to 70 hours in 2020. This enables our people to dedicate time to our charity partners, community groups as well as the NHS volunteering appeal. We launched 'QuaranTea', a new initiative to help colleagues to make a difference to people in our communities. Activities include making phone calls to isolated people to have an informal chat and leaflet drops to connect the vulnerable to available help in the community. For every one of our people that participates, the Santander Foundation will donate £1,000, to be split equally between Alzheimer's Society and Age UK, up to a maximum of £1m in total.
Through Santander Universities, we’ve provided £4.5m of funding to our 85 university partners to support their array of initiatives to contribute to the national effort to combat the outbreak of Covid-19. We repurposed and provided additional funding to ensure immediate support was available to alleviate health and educational challenges for students and universities caused by the crisis.
We made Santander Cycles rental-free for critical and key workers to make travelling to work safer for those who had to travel in London. At the end of June 2020 over 27,000 free hire codes had been used for journeys on Santander Cycles in London.
Banco Santander have established a global aid programme, called 'Santander All. Together. Now.', which includes a fund of at least EUR 25m for medical equipment and supplies, liquidity facilities for businesses, and payment holidays to lessen the economic impact of the coronavirus. As part of our support for this programme we made charitable donations via Santander UK and the Santander Foundation of £7.5m for Covid-19 research, hardship funds and community activities and to support the most vulnerable.

Shareholders
The Covid-19 crisis had a material impact on shareholder returns through increased credit impairment losses as we built provisions to cover higher expected credit losses. While the situation remains highly uncertain, the level of future losses will benefit from our prudent approach to risk, with c90% of our loan portfolio secured as well as our cautious approach to growth in consumer lending and CRE over recent years.
Income has also been affected by the crisis through lower lending volumes, as most activity ceased during the lockdown, and the reduction in the base rate. These pressures are likely to be somewhat offset by lower funding rates through TFSME which provides bank funding at close to base rate and the 1I2I3 Current Account interest rate reductions in May and August 2020.
In line with other UK banks, we have also announced that we will not pay quarterly or interim dividends, or make share buybacks on ordinary shares until the end of 2020. We have reduced our 2020 bonus accrual, although we made a one-off exceptional payment to our front-line people to say thank you for their efforts in supporting our customers during the crisis.
Despite the pressures on returns we remain strongly capitalised with CET1 growing 20bps in the first six months of 2020, with ongoing capital accretion through retained profits and in part benefitting by no ordinary dividend being paid in the period. In addition, changes announced by the PRA in March and July 2020 had the effect of increasing our Minimum Distributable Amount headroom by c2.3% compared to our expected December 2020 position. As part of the Bank of England Interim Financial Stability Report (May 2020), the PRA developed a desktop stress scenario, which had less of an impact on the core banking system than their 2019 Annual Cyclical Scenario (ACS), where our CET1 drawdown was the lowest across UK banks.
As part of our wider response to the Covid-19 crisis, and to support the increase in remote working, we amended a small number of internal controls to maintain the integrity of our control environment. We also conducted a control review of the product processes related to Government Covid-19 initiatives alongside close monitoring of operational risk incidents. To minimise the impact of the additional pressures on our systems we also implemented a temporary freeze on system changes for all non-Covid-19 related changes.
Principal risks and uncertainties
A description of our principal risks and uncertainties for the remaining six months of the financial year is set out in the Risk overview section of the Risk review, including a discussion of how the relevant risks and uncertainties have changed since our 2019 Annual Report on Form 20-F (the 2019 Annual Report) was published.

6 Santander UK plc

2020 Half Yearly Financial Report | Financial review
Financial review
Contents
Income statement review
8
Summarised Consolidated Income Statement
8
Profit before tax by segment
9
Balance sheet review
10
Summarised Consolidated Balance Sheet
10
Customer balances
12
Capital and funding
13
Liquidity
13
Santander UK plc 7

Strategic reportFinancial reviewRisk reviewFinancial statementsShareholder information
Income statement review
SUMMARISED CONSOLIDATED INCOME STATEMENT
Half year toHalf year to
30 June 202030 June 2019
£m£m
Net interest income1,554  1,668  
Non-interest income(1)
322  453  
Total operating income1,876  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 credit impairment losses, provisions and charges(444) (275) 
Profit before tax187  589  
Tax on profit(48) (170) 
Profit after tax 139  419  
Attributable to:
Equity holders of the parent128  410  
Non- controlling interests11   
Profit after tax139  419  
(1)Comprised of Net fee and commission income and Net trading and other income.
A more detailed Consolidated Income Statement is contained in the Condensed Consolidated Interim Financial Statements.
H120 compared to H119
Profit before tax was down 68% to £187m due to the factors outlined below. By income statement line item, the movements were:
Net interest income was down 7%, 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 May 2020.
Non-interest income was down 29%, 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.
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.
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.
Tax on profit decreased £122m to £48m, as a result of lower taxable profits in H120.
8 Santander UK plc

2020 Half Yearly Financial Report | Financial review
PROFIT BEFORE TAX BY SEGMENT
The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in Note 2 to the Condensed Consolidated Interim Financial Statements.
Half year toRetail
Banking
Corporate & Commercial
Banking
Corporate & Investment
Banking
Corporate
Centre
Total
30 June 2020£m£m£m£m£m
Net interest income/(expense)1,393  150  26  (15) 1,554  
Non-interest income(1)
235  40  28  19  322  
Total operating income1,628  190  54   1,876  
Operating expenses before credit impairment losses, provisions and charges(1,010) (134) (62) (39) (1,245) 
Credit impairment losses(247) (106) (12) (11) (376) 
Provisions for other liabilities and (charges)/releases(56)  (4) (11) (68) 
Total operating credit impairment losses, provisions and charges(303) (103) (16) (22) (444) 
Profit/(loss) before tax315  (47) (24) (57) 187  
Half year to
30 June 2019
Net interest income/(expense)1,465  189  32  (18) 1,668  
Non-interest income(1)
353  38  47  15  453  
Total operating income/(expense)1,818  227  79  (3) 2,121  
Operating expenses before credit impairment losses, provisions and charges(1,011) (138) (83) (25) (1,257) 
Credit impairment (losses)/releases(63) (9)  (1) (69) 
Provisions for other liabilities and charges(95) (1) (11) (99) (206) 
Total operating credit impairment losses, provisions and charges(158) (10) (7) (100) (275) 
Profit/(loss) before tax649  79  (11) (128) 589  
Comprised of Net fee and commission income and Net trading and other income.

H120 compared to H119

For Retail Banking, 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 May 2020.
For Corporate & Commercial Banking, 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.
For Corporate & Investment Banking, 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.
For Corporate Centre, loss before tax decreased £71m, 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.
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Balance sheet review
SUMMARISED CONSOLIDATED BALANCE SHEET
30 June 202031 December 2019
£m£m
Assets
Cash and balances at central banks30,276  21,180  
Financial assets at fair value through profit or loss 5,469  3,702  
Financial assets at amortised cost 241,767  239,834  
Financial assets at fair value through other comprehensive income 10,338  9,747  
Interest in other entities127  117  
Property, plant and equipment1,819  1,967  
Retirement benefit assets521  669  
Tax, intangibles and other assets5,391  4,486  
Total assets295,708  281,702  
Liabilities
Financial liabilities at fair value through profit or loss 3,039  3,161  
Financial liabilities at amortised cost272,612  259,179  
Retirement benefit obligations402  280  
Tax, other liabilities and provisions3,456  3,065  
Total liabilities279,509  265,685  
Equity
Total shareholders’ equity16,029  15,857  
Non-controlling interests170  160  
Total equity16,199  16,017  
Total liabilities and equity295,708  281,702  
A more detailed Consolidated Balance Sheet is contained in the Condensed Consolidated Interim Financial Statements.
30 June 2020 compared to 31 December 2019

Assets
Cash and balances at central banks
Cash and balances at central banks increased by 43% to £30,276m at 30 June 2020 (2019: £21,180m). This was mainly driven by cash inflows from higher customer deposits, the drawdown of TFSME funding and normal liquidity management, partially offset by increased Retail Banking customer lending.
Financial assets at fair value through profit or loss:
Financial assets at fair value through profit or loss increased by 48% to £5,469m at 30 June 2020 (2019: £3,702m), mainly due to mark to market increases in exchange rate hedging derivatives, reflecting sterling foreign exchange movements.
Financial assets at amortised cost:
Financial assets at amortised cost increased by 1% to £241,767m at 30 June 2020 (2019: £239,834m):
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.
Other financial assets at amortised cost decreased by £2.2bn mainly due to the sale of UK Government securities.
Financial assets at fair value through other comprehensive income
Financial assets at fair value through other comprehensive income increased by 6% to £10,338m at 30 June 2020 (2019: £9,747m) as part of normal liquid asset portfolio management.
Property, plant and equipment
Property, plant and equipment decreased by 8% to £1,819m at 30 June 2020 (2019: £1,967m) reflecting freehold and leasehold property sales and lower contract hire sales.
Retirement benefit assets
Retirement benefit assets decreased by 22% to £521m at 30 June 2020 (2019: £669m), due to a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme). This was principally due to a decrease in the discount rate in the period due to falling corporate bond yields which increased the value of liabilities in the Scheme and reflected the unprecedented uncertainty created by Covid-19. This was partially offset by a rise in overall asset values.
Tax, intangibles and other assets
Tax, intangibles and other assets increased by 20% to £5,391m at 30 June 2020 (2019: £4,486m), mainly due to changes in interest rates impacting the macro hedge of interest rate risk.

10 Santander UK plc

2020 Half Yearly Financial Report | Financial review
Liabilities
Financial liabilities at amortised cost
Financial liabilities at amortised cost increased by 5% to £272,612m at 30 June 2020 (2019: £259,179m). This was mainly due to:
Customer deposits increased, 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.
Deposits by banks increased, reflecting £2.2bn of funding received through TFSME, as well as £1.7bn additional amounts deposited as collateral.
Repurchase agreements – non trading increasing by £2.5bn reflecting normal liquidity management.
Subordinated liabilities reduced by £0.3bn following the repurchase of certain subordinated liabilities as part of ongoing liability management exercises.
Retirement benefit obligations
Retirement benefit obligations increased by 44% to £402m at 30 June 2020 (2019: £280m), due to a decrease in the overall accounting surplus of the Santander (UK) Group Pension Scheme (the Scheme). This was principally due to a decrease in the discount rate in the period due to falling corporate bond yields which increased the value of liabilities in the Scheme and reflected the unprecedented uncertainty created by Covid-19. This was partially offset by a rise in overall asset values.
Equity
Total shareholders’ equity
Total shareholders’ equity increased by 1% to £16,029m at 30 June 2020 (2019: £15,857m). This was principally due to increases in the cash flow hedging reserve and the profit after tax for the period, partially offset by downward defined benefit pension remeasurements.
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CUSTOMER BALANCES
Consolidated
30 June 202031 December 2019
£bn£bn
Customer loans209.2  205.0  
Other assets86.5  76.7  
Total assets295.7  281.7  
Customer deposits179.3  171.7  
Total wholesale funding66.4  65.2  
Other liabilities33.8  28.7  
Total liabilities279.5  265.6  
Shareholders' equity16.0  15.9  
Non-controlling interest0.2  0.2  
Total liabilities and equity295.7  281.7  

Further analyses of credit risk on customer loans, and on our funding strategy, are included in the Credit risk and Liquidity risk sections of the Risk review.
30 June 2020 compared to 31 December 2019
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 £7.6bn, 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.

Retail Banking
30 June 202031 December 2019
£bn£bn
Mortgages167.4  165.4  
Business banking4.8  1.8  
Consumer (auto) finance8.0  7.7  
Other unsecured lending4.7  5.5  
Customer loans184.9  180.4  
Current accounts71.8  68.7  
Savings57.5  57.2  
Business banking accounts15.8  12.9  
Other retail products6.0  6.3  
Customer deposits151.1  145.1  

Corporate & Commercial Banking
30 June 202031 December 2019
£bn£bn
Non-Commercial Real Estate trading businesses11.7  11.2  
Commercial Real Estate4.9  5.1  
Customer loans16.6  16.3  
Customer deposits19.5  18.2  

Corporate & Investment Banking
30 June 202031 December 2019
£bn£bn
Customer loans4.0  4.1  
Customer deposits6.8  6.1  

Corporate Centre
30 June 202031 December 2019
£bn£bn
Social Housing3.2  3.6  
Non-core0.5  0.6  
Customer loans3.7  4.2  
Customer deposits1.9  2.3  

12 Santander UK plc

2020 Half Yearly Financial Report | Financial review
Capital and funding
30 June 202031 December 2019
£bn£bn
Capital
CET1 capital10.6  10.4  
Total qualifying regulatory capital15.5  15.8  
CET1 capital ratio14.7 %14.3 %
Total capital ratio21.4 %21.7 %
Risk-weighted assets72.2  72.6  
Funding
Total wholesale funding and AT168.6  67.4  
- of which with a residual maturity of less than one year28.0  22.5  

Liquidity
30 June 202031 December 2019
£bn£bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)147 %142 %
LCR eligible liquidity pool47.8  42.0  

Further analysis of capital, funding and liquidity is included in the Capital risk and Liquidity risk sections of the Risk review.
30 June 2020 compared to 31 December 2019

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 40 basis points to 14.7% with a 4.0% buffer to Maximum Distributable Amount (MDA) restrictions.
Amendments to Capital Requirements Regulation (CRR), which were published in the Official Journal on 26 June 2020, contributed 17 basis points to the CET1 ratio. The majority of the benefit came through the implementation of the RWA reduction factors for certain Small and Medium-sized Enterprise (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 downstreamed from Santander UK Group Holdings plc and £4.0bn of core funding, consisting of covered bonds and senior unsecured, issued from Santander UK plc.
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.




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Strategic reportFinancial reviewRisk reviewFinancial statementsShareholder information
Risk review
Contents
Risk overview15
Risk governance17
Credit risk18
Santander UK group level18
Retail Banking33
Other business segments38
Market risk40
Liquidity risk41
Capital risk44
Pension risk46
Conduct and regulatory risk
47
Operational risk48
Other key risks49
14 Santander UK plc

> Risk governance
Risk overview
All our activities involve identifying, assessing, managing and reporting risks. Sound risk management is at the centre of our day-to-day activities. It benefits our business and our customers by helping to ensure balanced and responsible growth.
Risk Types
Our key risk types help us define the risks to which we are exposed. For key risk type definitions, see ‘How we define risk’ on page 65 of the 2019 Annual Report. We set out below the main changes in our risk profile across H120 in terms of these key risk types.
CreditMarket (Banking market)CapitalPension
Stage 3 ratio (%)
30 June 2020: 1.23
31 December 2019: 1.15

Loan loss provisions were up £318m to £1,181m. This includes £267m arising from changes to economic scenarios and weights, the staging reclassification under IFRS 9 of certain loans following an in-depth 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 names corporate cases.
NIM sensitivity +50 bps (£m)
30 June 2020: 62
31 December 2019: 99

The Santander UK plc group NIM sensitivity reduced in H120 largely due to further margin compression risk as a result of lower levels of the yield curve and growth in administered rate liability volumes,
The UK interest rate environment has remained low for a prolonged period. As a commercial bank we are positioned to benefit from rising rates, although the pace and scale of expected change will moderate any impact on income.
CET1 capital ratio (%)
30 June 2020: 14.7
31 December 2019: 14.3

CET1 capital ratio increased 40bps to 14.7%, with a 4.0p.p. buffer to Maximum Distributable Amount (MDA) restrictions.
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.
Funded defined benefit pension
scheme accounting surplus (£m)
30 June 2020: 163
31 December 2019: 430

We continue to focus on achieving the right balance between risk and reward. In H120, overall asset returns were positive with strong performance from liability-matching assets (mainly bonds).
In H120, the pension fund surplus, measured on an accounting basis, decreased, largely as a result of a lower discount rate, resulting from falling corporate bond yields which increased the value of liabilities.
Conduct & RegulatoryOperationalFinancial crime
Conduct provision (£m)
30 June 2020: 171
31 December 2019: 214

The remaining provision for PPI redress and related costs was £151m (2019: £189m). There were no additional provisions in H120. Cumulative complaints from the inception of the PPI complaints process to 30 June 2020, regardless of the likelihood of Santander UK incurring a liability, were 4.5m. This included c290,000 that were still being reviewed, which reflected the temporary scaling back of non-critical remediation activity as we focused on supporting our customers through the Covid-19 pandemic.
In H120, we continued to build on our progress in 2019 and remained vigilant in taking a customer-focused approach in developing strategy, products and policies that support fair customer outcomes and market integrity, in particular within the context of regulator and government driven Covid-19 initiatives.
Low operational risk losses (over £10,000, and excluding PPI)

In H120, we prioritised risk management of the need to deploy remote working rapidly for most of the bank’s workforce as a result of the Covid-19 pandemic. We also continued to focus on managing risks associated with cyber and with change initiatives, in the context of the continuing digital initiative and the rapid delivery of initiatives required to meet Government Covid-19 lending schemes. We are working on our strategy for developing our operational resilience.
£68m investment in financial crime enhancements planned for 2020, of which £28m has been spent in H120

In H120, we continued embedding our anti-financial crime strategy, policies, and training across the business. We also built upon promoting the Anti-Financial Crime (AFC) Strategy by embedding the Anti Financial Crime Culture across the bank through a defined framework.
We pro-actively identified potential risks posed by criminal exploitation of Government funding schemes, such as Bounce Back Loans and other Covid -19 related Government loans, and took mitigating actions.


Santander UK plc 15

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TOP RISKS
A top risk is a current risk within our business that could have a material impact on our financial results, reputation and the sustainability of our business model. In 2019, we identified our top risks as follows, and discussed them on page 6 of the 2019 Annual Report:
Brexit
Ring-fencing implementation
Building and maintaining capital strength
Pension risk
Financial crime
Managing a complex change agenda
Cyber-attacks
Conduct risks
Third party risks.
We continue to pro-actively monitor and manage these risks through our various governance committees.
30 June 2020 compared to 31 December 2019
In H120, Government and Central Bank responses to Covid-19, including lending and financial stability measures and significant restrictions on people's movement, resulted in significant operational and financial impacts for the bank and its customers. Consequently, we introduced two new top risks, (i) Coronavirus first order impacts and (ii) Cost and Revenue pressures.

Coronavirus first order impacts: we are yet to see the full impacts of the economic contraction in H120, as new arrears levels have been suppressed in particular by the effects of payment holidays in our retail and consumer businesses; financial support for our business customers from Bounce Back loans; and the furlough scheme which has mitigated unemployment in the short-term. We expect arrears volumes will increase more significantly later in the year. We have made modest adjustments to our lending policies, which we continue to review. We have taken actions, including customer contact and profiling, which will help us to understand which customers will be in a position to resume payments once the payment holiday arrangements expire, and those who might need additional short or longer term support. Credit losses are also an important risk in our corporate lending business, where we are seeing stress in sectors such as consumer, hospitality, and travel, together with commercial real estate particularly with retail sector tenants. Our Commercial Clients and Corporate and Commercial Business have processed a large volume of credit support measures such as payment holidays and we have supported our customers via the various government lending schemes. These measures and schemes have significantly cushioned the impact of Covid-19 for our customers but Stage 3 loans are expected to increased materially throughout this year. Our relationship teams support clients whilst retaining a focus on risk control, with ongoing individual client engagement plans particularly as government schemes start to unwind and lending schemes are scheduled to cease availability. We are proactively managing the impacts on our Non-financial risk profile arising from changes to products and processes from the introduction of the government's support schemes. We have implemented additional controls as we have proven the ability for a significant proportion of our office-based staff to work remotely. We continue to focus on investing in, and enhancing our business continuity plans, to ensure operational stability through wider remote working. We are also on heightened alert with respect to any potential cyber activity, particularly as global cyber threat levels remain elevated.

Revenue and cost pressures: Covid-19 has already had a detrimental impact upon our financial performance in H120. We have assessed the likely full adverse effects during 2020 under IFRS 9, however it is too early to know the overall outcome. We have been updating our IFRS 9 scenarios and assessing the impacts as more data becomes available on the severity and duration of the crisis, including the potential for a sustained second wave outbreak. Gross domestic product, unemployment, house prices and base rate are key components affecting expected credit losses. Our loan loss allowances have increased by c.37% since the year ended 31 December 2019. We currently assume that the mortgage lending market will remain flat in 2020, with both borrower demand and house prices lower than long-term trend levels. The cut in base rate to 10bps from 75bps will, if sustained, provide further challenges to net interest income management over our plan period. The Covid-19 crisis also had an impact on our expenses, including higher IT costs, remote network, staff expenses, mail outs and increased site cleaning. These expenses were identified as being incurred as a direct result of Covid-19 actions as the crisis emerged.We continue to focus on cost management and driving cost savings predominantly through the impacts of our transformation programme.

The more notable movements in our other top risks across the period were as follows:
Brexit: our Brexit planning considers the risk of a ‘no deal’ scenario, with limited time remaining to negotiate a free trade agreement, and currently no agreement in place to extend the status quo transition period beyond the year end. The plans we developed previously remain relevant and we are reviewing them in the light of possible Covid-19 impacts. In the event of ‘no trade deal’ there could be additional downside risks to the UK economy, which we have reflected in stress scenarios that we run across our business plans. Overall, we are focused on remaining operationally ready and ensuring that we have mitigated any residual legal and regulatory risks that might arise in 2021. Our customer business with EEA residents and legal entities domiciled in the EEA is not material as we are a UK-focused business. Our Brexit Working Group, chaired by the CFO, and comprised of representatives from across the business and support functions, co-ordinates planning across the business. Oversight is provided by the Board, Board Risk Committee and Senior Management Committee.

Conduct risk: the implementation of various government sponsored lending schemes such as CBILS, CLBILS and BBLS carries both conduct and reputational risks. We have put in place a robust process to provide assurance that risks are being managed and actions monitored across the various schemes, focused on ensuring fair customer outcomes, and a full review of all applications that are declined, decline appeals, and any scheme-related complaints. We along with the industry have been in close dialogue with HM Treasury and our regulators to ensure there is full transparency on the scheme rules and operational delivery.

Pension risk: there has been substantial volatility in both the funding position and the IAS 19 accounting position in H120, with both being worse than the 2019 year-end position at 31 December 2019. The volatility of AA rated UK Corporate credit spreads has been a major driver of the accounting position which impacts capital. Equity and interest rate markets were also volatile as the crisis unfolded. The de-risking actions we have taken during the past two years, including executing various hedging strategies and strategic asset reallocation have reduced exposure to pro-cyclical assets and improved the fund's resilience.

Building and maintaining capital strength: the CET1 capital ratio has increased since the year-end, with the CET1 capital base being impacted in H120 as a result of the volatility in the pension scheme valuation. Our CET1 capital forecasts for the year-end are expected to remain significantly in excess of the regulatory minimum and buffer levels.
16 Santander UK plc

> Risk governance
EMERGING RISKS
An emerging risk is a risk with largely uncertain outcomes which may develop or crystallise in the future. Crystallisation of an emerging risk could have a material effect on long-term strategy. In 2019, we identified our emerging risks as follows, and discussed them on page 7 of the 2019 Annual Report:
Changing customer behaviour
Rapid technological change
Strong market competition
Demanding regulatory agenda
Uncertain economic and geopolitical environment
LIBOR transition
Climate change risk.
We continue to pro-actively monitor and manage these risks, as well as other potential economic and geopolitical scenarios, through our various governance committees.
30 June 2020 compared to 31 December 2019
In H120, our existing emerging risks were also affected by the Covid-19 crisis. We have identified new emerging risks from Extended Government involvement in the banking industry; an Extended period of economic contraction; Negative interest rates; and High inflation.

The more notable movements in our previously-identified emerging risks across the period were as follows:

Changing customer behaviour, Rapid technological change and Strong market competition: existing trends towards the use of digital platforms by our customers have accelerated following the Covid-19 outbreak. There is a continued focus on cost containment in the industry, and redesigning bank business models towards a more agile approach with reduced complexity and increased resilience under stress. Successful management of both transitory and transformational responses to the crisis may secure a longer-term competitive advantage. We are actively managing the business for recovery, with our multi-year transformation programme regaining momentum, including a renewed focus on investment in digitalisation, automation and restructuring initiatives. We are developing a new strategic model to apply our learnings from the crisis, including accelerated customer digital adoption, re-evaluation of our property strategy, and streamlining of governance and processes.

Uncertain economic and geopolitical environment: we are monitoring the evolution of credit cycle risks, in particular due to Covid-19, which have the potential to result in a more sustained adverse impact on credit quality generally. Existing fragilities in the global financial system have been further exposed in H120, with elevated financial market volatility.

Climate change risk: we reviewed the terms of reference for the Board Risk Committee and Responsible Banking Committee to reflect the consideration of climate-related issues. The CRO was identified as the relevant Senior Management Function holder for climate change. The Climate Change Working Group was also re-launched. We conducted a review of the appropriate sections of the Risk Framework, Risk Type Frameworks (in particular Credit and Operation Risk) and the Risk Appetite Statement to explicitly include climate-related risks.

In H120, we identified the following four new emerging risks:
Extended Government involvement in the banking industry: a risk for banks to consider in developing future business models and plans, potentially impacting financial performance and investor perceptions. The government and central banks could face pressure to further extend the provision of special support to the economy.
Extended period of economic contraction/deflation: certain factors could amplify downside risks to the economy. These include negative multiplier effects from the economic shock, such as delayed spending and investment; and a larger surge in business failures and unemployment than anticipated. Coupled with deflation and lower or negative rates, this could prove even more challenging for banks' profitability.

High inflation: the injection of significant government and central bank stimulus will further elevate the UK’s sovereign debt levels. For the immediate future, Covid-19 is considered to be deflationary, but there are concerns that in the longer run higher inflation could emerge, which would be detrimental to the economy. We regularly run and review a range of economic stress scenarios across our business plans to ensure that we fully understand the impacts and any actions that we might need to take.

Negative interest rates: recently, intermediate-term UK government securities have been trading with negative yields. A further rate cut to 0% may become necessary should other tools become exhausted in an extended period of economic contraction. This could result in operational and financial impacts upon the bank and its customers, and we have been revisiting our plans for operational and systems readiness.
Risk governance
As a financial services provider, managing risk is a core part of our day-to-day activities. To be able to manage our business effectively, it is critical that we understand and control risk in everything we do. We aim to use a prudent approach and advanced risk management techniques to help us deliver robust financial performance and build sustainable value for our stakeholders. We aim to keep a predictable medium-low risk profile, consistent with our business model. This is key to achieving our strategic objectives.

30 June 2020 compared to 31 December 2019
There were no significant changes in our risk governance, including how we define risk and our key risk types, as described in the 2019 Annual Report.
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2020 Half Yearly Financial Report| Risk review
Credit risk
Overview
Credit risk is the risk of loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for which we assumed a financial obligation.
In this section we begin by reviewing the latest forward-looking information used in our Expected Credit Loss (ECL) assessments. We then analyse our credit risk profile and performance at a Santander UK group level followed by Retail Banking, which is covered separately from our other business segments: Corporate & Commercial Banking, Corporate & Investment Banking and Corporate Centre.
Key metrics
Stage 3 ratio deteriorated slightly to 1.23% (2019: 1.15%).

Loss allowances increased to £1,181m (2019: £863m).

Average LTV of 62% (2019: 65%) on new mortgage lending.

Credit risk – Santander UK group level

Introduction
We manage credit risk across all our business segments in line with the credit risk lifecycle. We tailor the way we manage risk across the lifecycle to the type of customer. There have been no significant changes in the way we manage credit risk as described in the 2019 Annual Report.
We provide an update on the key changes to the inputs to our ECL model below.

Recognising ECL
The ECL approach estimates the credit losses arising from defaults in the next 12 months on qualifying exposures, or defaults over the lifetime of the exposure where there is evidence of a SICR since the origination date. The ECL approach takes into account forward-looking data, including a range of possible outcomes, which should be unbiased and probability-weighted in order to reflect the risk of a loss being incurred even when it is considered unlikely.

Multiple economic scenarios and probability weights
For all our portfolios, except CIB, we use five forward-looking economic scenarios. For H120, they consist of a central base case, one upside scenario and three downside scenarios. We use five scenarios to reflect a wide range of possible outcomes in the performance of the UK economy.
Base case
Two key assumptions underpin the base case. The first is that majority of the lockdown restrictions will have been lifted through June 2020 with the rest continuing throughout 2020. The second is that the UK negotiates some form of a limited trade deal with the EU along with discussions around trade continuing post 2020. It is normal practice to review the scenarios and associated weights every quarter to ensure they appropriately reflect the current economic circumstances and we will continue to follow that approach particularly given that the advice government issues is subject to change in this fluid environment.
Base case key macroeconomic assumptions for H120
House price growth: House price growth is forecast to decline by 6% for 2020 with growth returning in 2022, but remaining at the lower levels of house price growth seen over the last few years as the housing market recovers from the impact of the lockdown.
GDP: GDP is forecast to decline by 9.5% in 2020 encompassing the fall in growth as a result of the lockdown measures put in place. Growth returns in Q3 2020 but at a weaker pace than might otherwise be expected due to the continuing uncertainty over the UK’s future trading relationship with the EU, with 2019 growth levels returning in early 2023.
Unemployment rate: Unemployment is expected to peak in Q4 2020 at just over 9% as the furlough schemes come to an end. Unemployment remains at elevated levels compared to recent figures over the remaining forecast period.
Bank of England Base Rate (Base Rate): For Bank of England base rate forecast, the base case currently assumes a flat profile of 10bps with a hike to 25bps at the beginning of 2024. This is based on the view that we have a limited trade deal by the end of 2020, with inflation expected to remain near target over the five year forecast period. The Monetary Policy Committee will wait to understand how the economy responds to the new economic environment before changing the Base Rate.

In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. This is reflected in an average growth expectation of 1.5% pa, the OBR’s latest estimate of the UK’s long run average growth rate.
We expect the low value of sterling to continue throughout 2020. However, we would expect some improvement if the economic data recovers more strongly than expected and there continues to be a constructive dialogue between the UK and the EU on agreeing additional terms of any trade deal.
CPI inflation is forecast to be below the 2% target rate in the initial forecast period but returning to target by the end. Nominal earnings growth will fall in 2020 before starting to recover in 2021. However, even with low inflation this will mean negative earnings growth in 2020 but return to positive real growth in 2021. This will then support household spending power as we move into 2022. However, the effect of limited business investment on growth will continue as firms look to repay debt that they have taken on due to the lockdown.
In summary, the base case assumes that activity starts to recover as the restrictions are lifted, but that progress will be tempered by the uncertainty of the trade negotiations.

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Credit risk
Key changes to our base case at 30 June 2020
The key changes to our base case assumptions in H120 were we lowered the GDP projection for 2020 reflecting the impact of Covid-19 and the uncertainty surrounding the outcome of trade negotiations with the EU; the unemployment rate across the 5 year forecast period is significantly higher to reflect the impact of Covid-19 on job creation; there is negative house price growth for 2020 and lower growth for 2021 to reflect the uncertainty caused by Covid-19; and there is a change to the Base Rate profile where it was cut to 0.10% in Q1 2020 then held flat to Q1 2024 when there is a rise to 0.25% and remains flat over the rest of the forecast period.
Other scenarios
Based on this revised base case, we have reviewed the suite of IFRS 9 scenarios to ensure that they capture the wide range of potential outcomes for the UK economy. These include (i) a return of Covid-19 and further lockdown measures being imposed; (ii) no trade deal being agreed with the EU by the end of 2020; (iii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iv) higher inflation; (v) hysteresis effects caused by higher and longer unemployment rates or higher and longer unemployment rate persisting increasing the natural rate of unemployment; (vi) a vaccine or treatments being developed at a quicker pace; and (vii) the global economy bouncing back more swiftly than expected.

In order to reflect these potential outcomes, for Q2 2020, it was decided to continue to use the base case and four additional scenarios, which management consider provide a range wide enough to reflect all of the above potential outcomes. However, given that the risks remain to the downside, to reflect these outcomes sufficiently, it was concluded that only one proposed upside scenario would be appropriate to encapsulate the upside risks to the base case. As with the base case, the scenarios are forecast over a five-year period and then mean revert over the next three years to the OBR's latest estimate of the UK's long run average growth rate.
The four scenarios are as follows:
One upside scenario
All Q2 2020 scenarios reflect deterioration and a recession in 2020, although a modest upside scenario remains appropriate based on a more comprehensive Brexit trade deal being negotiated, or a vaccine or treatments being produced quicker than expected. In this scenario, GDP is expected to fall by c4% in 2020 but recover at a faster pace over the medium term. House prices remain relatively stable in 2020 despite a modest increase in unemployment and the Base Rate returns to pre-crisis levels by the end of 2022 as inflation returns to normal levels as consumer confidence and spending returns.
Three downside scenarios
A moderate ‘downside 1’ reflects a difference to the base case in how consumers and businesses respond to the changes required for re-opening from the lifting of restrictions with them 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 trade agreement initially, but with trade agreements with other countries being negotiated relatively quickly over the forecast period.

A severe ‘downside 2’ is 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 Base 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.
The final scenario is a Covid-19 stress scenario which has a double dip ‘W’ in terms of GDP, where a second lockdown is imposed to deal with the re-emergence of the virus in H2 2020 and a no trade deal with the EU. While the Base Rate remains low, house prices collapse by 30% peak to trough and unemployment peaks at 11.9% in 2020.

The table sets out the house price growth and unemployment rate for 2020 and 2021, and GDP and Base Rate for 2020-2022 for each of the five scenarios.
Upside 1Base caseDownside 1Downside 2Downside 3
%%%%%
House price growth(1)
2020(0.10) (6.00) (0.60) (11.10) (7.70) 
2021(7.00) 0.50  (9.70) (16.40) (19.90) 
GDP(2)
2020(4.00) (9.50) (4.50) (8.50) (14.90) 
2021(0.20) 5.80  (1.40) (3.10) 0.80  
20224.00  3.00  2.60  3.80  3.50  
Unemployment rate20205.20  9.30  5.40  6.80  11.90  
20216.30  6.90  7.00  10.40  8.90  
Bank of England base rate20200.10  0.10  0.10  0.10  0.10  
20210.25  0.10  0.10  1.00  0.10  
20220.75  0.10  0.10  2.00  0.10  
1.Q4 annual growth rate.
2.GDP is shown as an annual average and all other data points are at 31 December in the year indicated.

Scenario weights
Given the change in scenarios for Q2 2020, we undertook a full review of the probability weights applied to the scenarios. The setting of probability weights needs to consider both the probability of the forecast economic scenarios occurring whilst ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support the initial assessment of how likely a scenario is to occur, we would typically undertake a Monte Carlo analysis which would ascertain the likelihood of a five-year average GDP forecast growth rate occurring based on the long run historically observed average. Creating a standard distribution bell curve around this long run average allows us to estimate the probability of a given GDP scenario occurring and therefore assign a probability weight to that scenario. However, a key challenge with this approach in a stressed environment is that the extreme GDP forecasts for the downside scenarios all fall in the last percentile which results in all of the new downside scenarios attracting very low probability weights.
Given this issue, we performed a similar analysis on a more limited time period relating to the global financial crisis 2007-2012 as this was able to reflect better the current UK outlook. In this case, the base case 5 year compound annual growth rate (CAGR) sat in the middle of the distribution which is what is expected to occur. It also showed a ranking in terms of the weights to apply to the additional downside scenarios which, coupled with external survey data on
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2020 Half Yearly Financial Report| Risk review
the likelihoods of different scenarios occurring, was able to demonstrate that the downside 2 scenario should have a higher weighting than that of downside 3. To determine the upside weighting, we reviewed the weighting applied to the Q4 2019 upside scenarios and allocated the combined weighting of the two upside scenarios to the single upside.

The scenario weights we applied for 30 June 2020 and 31 December 2019 were:
Upside 1Base caseDownside 1Downside 2Downside 3
Scenario weights % % % % %
30 June 202015  50  15  15   
Upside 2Upside 1Base CaseDownside 1Downside 2
Scenario weights%%%%%
31 December 2019 10  40  30  15  

Our macroeconomic assumptions and their evolution throughout the forecast period for 30 June 2020 and 31 December 2019 were:
Upside 1Base caseDownside 1Downside 2Downside 3
30 June 2020 % % % % %
House price growth5-year average increase/decrease1.78  (0.04) (3.65) (5.47) (5.59) 
Peak/(trough) (1) at
(7.89) (6.02) (16.95) (33.00) (29.77) 
GDP5-year average increase/decrease0.82  0.43  (0.44) (0.95) (1.79) 
Cumulative growth/(fall) to peak/(trough) (2)
(5.88) (18.86) (6.94) (12.76) (21.58) 
Unemployment rate5-year end period3.76  5.50  6.81  8.13  6.80  
Peak/(trough) at6.47  9.30  7.02  10.35  11.90  
Bank of England base rate5-year end period1.75  0.25  0.25  2.50  0.10  
Peak/(trough) at1.75  0.25  0.25  3.00  0.10  
Upside 2Upside 1Base CaseDownside 1Downside 2
31 December 2019%%%%%
House price growth5-year average increase/decrease4.90  3.70  1.60  (1.20) (9.30) 
Peak/(trough) at8.10  5.80  2.00  (2.80) (13.50) 
GDP5-year average increase/decrease2.40  2.00  1.60  0.70  0.20  
Cumulative growth/(fall) to peak/(trough)1.50  1.00  0.70  (1.10) (5.60) 
Unemployment rate5-year end period1.90  2.70  4.00  5.60  7.40  
Peak/(trough) at1.88  2.73  4.10  5.64  7.84  
Bank of England base rate5-year end period2.00  2.00  0.75  2.00  2.25  
Peak/(trough) at2.00  2.00  0.75  2.00  3.00  
(1)(Peak/(trough) refers to the peak that the variable will reach in the upside scenario and the trough that the variable will reach in the downside scenario.
(2)Cumulative growth/(fall) refers to the cumulative change from the last historical data point for GDP growth to the peak (for Upside scenarios) or to the trough (for Downside scenarios)

CIB portfolio

Scenario weights
For our CIB portfolios, to determine our initial scenario probability weights, we give the highest weight to the Base case. As set out above, the GDP path associated with the positive scenario is based on the distribution probability of GDP consistent with the symmetric percentile selected on the Downside. This allows us to maintain the asymmetry of the scenarios that has been introduced in the probabilities of distribution and to assign centred weights.
The scenario weights we applied to the scenarios for our CIB portfolio for 30 June 2020 and 31 December 2019 were:
UpsideBase caseDownside
Scenario weights % % %
30 June 202030  40  30  
31 December 201930  40  30  
For our CIB portfolios, we use three scenarios (Base case, Upside and Downside). We review our approach to check it is aligned with Banco Santander's to ensure consistent treatment of these large and/or international counterparties across the Banco Santander group. The Base case is also consistent with the one used in other work that Banco Santander performs for planning and stress testing purposes. To develop the Downside scenario, the path of GDP is calculated using the distribution probability of GDP estimated using a Monte Carlo simulation. The path used is the one that falls into a percentile that sits halfway between the baseline and global stress we use for our ICAAP. For the Upside, the distribution probability of GDP is again used, where the GDP path is consistent with the symmetric percentile selected on the Downside. This means that the scenarios maintain the asymmetry that comes with the probabilities of distribution.

Key changes to our forecasting approach
The scenarios used for the CIB portfolio for Q2 2020 reflect lockdowns as well as the substantive public support measures, and consider a potential rebound of the economy to the long-term trend. Our scenarios incorporate information covering at least one or more full economic cycles or that we otherwise adjust to avoid biases. This is in line with the ECB guidelines regarding the Covid-19 impact on provisions and the need to mitigate the volatility that this brings to provisions. This is different to how the UK scenarios outlined above have been modelled.