RNS Number : 7128V

Santander UK Plc

11 August 2020

Santander UK plc

Announcement of Half Yearly Financial Report for the six months ended 30 June 2020

Santander UK plc (the Company) is pleased to announce the publication of its Half Yearly Financial Report for the six months ended 30 June 2020 (the Half Yearly Financial Report), in compliance with Disclosure Guidance & Transparency Rule (DTR) 4.1.

The Half Yearly Financial Report may be accessed via the Investor Relations section of Santander UK's website at www.aboutsantander.co.uk. A copy of the Half Yearly Financial Report has also been submitted to the National Storage Mechanism.

The following information is extracted from the Half Yearly Financial Report.

This announcement constitutes the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the Half Yearly Financial Report in full.

Form 6-K

It should be noted that the financial results for the six months ended 30 June 2020 will be included in the Half Yearly Financial Report on Form 6-K that will be filed with the SEC and will be available online at www.sec.gov.

Forward- Looking Statements

The Company and its ultimate parent Banco Santander SA both caution that this announcement may contain forward-looking statements. Such forward looking-statements are found in various places throughout this announcement with respect to our financial condition, results, operations and business, including future business development and economic performance.

Such forward-looking statements are based on management's current expectations, estimates and projections, and both the Company and Banco Santander SA caution that these statements are not guarantees of future performance. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by any forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Nothing in this announcement constitutes, or should be construed as constituting, a profit forecast.

Statement of Directors' responsibilities

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

- An indication of important events that have occurred during the six months ended 30 June 2020 and their impact on the Condensed Consolidated Interim Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year, and

- Material related party transactions in the six months ended 30 June 2020 and any material changes in the related party transactions described in the last Annual Report.

Principal risks

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.

SANTANDER UK GROUP LEVEL - CREDIT RISK REVIEW

Movement in total exposures and the corresponding ECL

The following table shows changes in total on and off-balance sheet exposures, subject to ECL assessment, and the corresponding ECL, in the period. The table presents total gross carrying amounts and ECLs at a Santander UK group level. We present segmental views in the sections below.

	Stage 1				Stage 2				Stage 3				Total
	Exposures(1)		ECL		Exposures(1)		ECL		Exposures(1)		ECL		Exposures(1)		ECL
	£m		£m		£m		£m		£m		£m		£m		£m
At 1 January 2020	295,438		147		12,351		348		2,367		368		310,156		863
Transfer from Stage 1 to Stage 2(3)	(9,922)		(37)		9,922		37		-		-		-		-
Transfer from Stage 2 to Stage 1(3)	2,161		80		(2,161)		(80)		-		-		-		-
Transfer to Stage 3(3)	(244)		(2)		(517)		(38)		761		40		-		-
Transfer from Stage 3(3)	5		-		246		17		(251)		(17)		-		-
Transfer of financial instruments	(8,000)		41		7,490		(64)		510		23		-		-
Net ECL remeasurement on stage transfer(4)	-		(75)		-		222		-		83		-		230
Change in economic scenarios(2)	-		9		-		129		-		10		-		148
New lending and assets purchased(5) (8)	31,045		21		693		26		63		17		31,801		64
Other(6)	7,237		32		568		(42)		105		78		7,910		68
Redemptions and repayments(7)	(28,485)		(17)		(1,508)		(32)		(283)		(20)		(30,276)		(69)
Assets written off (7)	-		-		-		-		(191)		(123)		(191)		(123)
At 30 June 2020	297,235		158		19,594		587		2,571		436		319,400		1,181
Net movement in the period	1,797		11		7,243		239		204		68		9,244		318
ECL charge/(release) to the Income Statement			11				239				191				441
Less: Discount unwind			-				-				(6)				(6)
Less: Recoveries net of collection costs			-				-				(59)				(59)
Total ECL charge/(release) to the Income Statement			11				239				126				376

At 1 January 2019	290,882		143		12,011		307		2,571		357		305,464		807
Transfer from Stage 1 to Stage 2(3)	(3,290)		(10)		3,290		10		-		-		-		-
Transfer from Stage 2 to Stage 1(3)	2,959		69		(2,959)		(69)		-		-		-		-
Transfer to Stage 3(3)	(224)		(3)		(504)		(26)		728		29		-		-
Transfer from Stage 3(3)	3		1		348		16		(351)		(17)		-		-
Transfer of financial instruments	(552)		57		175		(69)		377		12		-		-
Net remeasurement of ECL on stage transfer(4)	-		(61)		-		75		-		66		-		80
Change in economic scenarios(2)	-		2		-		(6)		-		(4)		-		(8)
New lending and assets purchased(5) (8)	28,809		18		544		11		3		1		29,356		30
Other(6)	9,957		6		814		(4)		11		57		10,782		59
Redemptions and repayments(7)	(33,910)		(18)		(965)		(14)		(279)		(18)		(35,154)		(50)
Assets written off (7)	-		-		-		-		(119)		(101)		(119)		(101)
At 30 June 2019	295,186		147		12,579		300		2,564		370		310,329		817
Net movement in the period	4,304		4		568		(7)		(7)		13		4,865		10
ECL charge/(release) to the Income Statement			4				(7)				114				111
Less: Discount unwind			-				-				(4)				(4)
Less: Recoveries net of collection costs			-				-				(38)				(38)
Total credit impairment charge/(release)			4				(7)				72				69

(1)        Exposures that have attracted an ECL, and as reported in the Credit Quality table above.

(2)        Changes to assumptions in the period. Isolates the impact on ECL from changes to the economic variables for each scenario, changes to the scenarios themselves as well as changes in the probability weights from all other movements. This also includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown within Transfers of financial instruments.

(3)        Total impact of facilities that moved Stage(s) in the period. This means, for example, that where risk parameter changes (model inputs) or model changes (methodology) result in a facility moving Stage, the full impact is reflected here (rather than in Other). Stage flow analysis only applies to facilities that existed at both the start and end of the period. Transfers between Stages are based on opening balances and ECL at the start of the period.

(4)        Relates to the revaluation of ECL following the transfer of an exposure from one Stage to another.

(5)        Exposures and ECL of facilities that did not exist at the start of the period but did at the end. Amounts in Stage 2 and 3 represent assets which deteriorated in the period after origination in Stage 1.

(6)        Residual movements on facilities that did not change Stage in the period, and which were neither acquired nor purchased in the period. Includes the impact of changes in risk parameters in the period, unwind of discount rates and increases in ECL requirements of accounts which ultimately were written off in the period.

(7)        Exposures and ECL for facilities that existed at the start of the period, but not at the end.

(8)        Basis of preparation for this line item is changed to report new lending for corporate loans at the opening balance rather than the period-end closing balance and non-customer assets in Corporate Centre on a net basis rather than a gross basis.

Financial review

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT

	Half year to		Half year to
	30 June 2020		30 June 2019
	£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 credit impairment losses, provisions and charges	(444)		(275)
Profit before tax	187		589
Tax on profit	(48)		(170)
Profit after tax	139		419
Attributable to:
Equity holders of the parent	128		410
Non-controlling interests	11		9
Profit after tax	139		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.

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 to	Retail 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 income	1,628		190		54		4		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)		3		(4)		(11)		(68)
Total operating credit impairment losses, provisions and charges	(303)		(103)		(16)		(22)		(444)
Profit/(loss) before tax	315		(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)		4		(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 tax	649		79		(11)		(128)		589

(1)        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.

Balance sheet review

SUMMARISED CONSOLIDATED BALANCE SHEET

	30 June 2020		31 December 2019
	£m		£m
Assets
Cash and balances at central banks	30,276		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 entities	127		117
Property, plant and equipment	1,819		1,967
Retirement benefit assets	521		669
Tax, intangibles and other assets	5,391		4,486
Total assets	295,708		281,702
Liabilities
Financial liabilities at fair value through profit or loss	3,039		3,161
Financial liabilities at amortised cost	272,612		259,179
Retirement benefit obligations	402		280
Tax, other liabilities and provisions	3,456		3,065
Total liabilities	279,509		265,685
Equity
Total shareholders' equity	16,029		15,857
Non-controlling interests	170		160
Total equity	16,199		16,017
Total liabilities and equity	295,708		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.

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.

CUSTOMER BALANCES

Consolidated

	30 June 2020		31 December 2019
	£bn		£bn
Customer loans	209.2		205.0
Other assets	86.5		76.7
Total assets	295.7		281.7
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 interest	0.2		0.2
Total liabilities and equity	295.7		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 2020		31 December 2019
	£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

Corporate & Commercial Banking

	30 June 2020		31 December 2019
	£bn		£bn
Non-Commercial Real Estate trading businesses	11.7		11.2
Commercial Real Estate	4.9		5.1
Customer loans	16.6		16.3
Customer deposits	19.5		18.2

Corporate & Investment Banking

	30 June 2020		31 December 2019
	£bn		£bn
Customer loans	4.0		4.1
Customer deposits	6.8		6.1

Corporate Centre

	30 June 2020		31 December 2019
	£bn		£bn
Social Housing	3.2		3.6
Non-core	0.5		0.6
Customer loans	3.7		4.2
Customer deposits	1.9		2.3

Capital and funding

	30 June 2020		31 December 2019
	£bn		£bn
Capital
CET1 capital	10.6		10.4
Total qualifying regulatory capital	15.5		15.8
CET1 capital ratio	14.7	%	14.3	%
Total capital ratio	21.4	%	21.7	%
Risk-weighted assets	72.2		72.6
Funding
Total wholesale funding and AT1	68.6		67.4
- of which with a residual maturity of less than one year	28.0		22.5

Liquidity

	30 June 2020		31 December 2019
	£bn		£bn
Santander UK Domestic Liquidity Sub Group (RFB DoLSub)
Liquidity Coverage Ratio (LCR)	147	%	142	%
LCR eligible liquidity pool	47.8		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 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.

Financial statements

Condensed Consolidated Income Statement (unaudited)

For the half year to 30 June 2020 and the half year to 30 June 2019

		Half year to		Half year to
		30 June 2020		30 June 2019
	Notes	£m		£m
Interest and similar income		2,633		2,970
Interest expense and similar charges		(1,079)		(1,302)
Net interest income		1,554		1,668
Fee and commission income		407		539
Fee and commission expense		(186)		(204)
Net fee and commission income		221		335
Net trading and other income	3	101		118
Total operating income		1,876		2,121
Operating expenses before credit impairment losses, provisions and charges	4	(1,245)		(1,257)
Credit impairment losses	5	(376)		(69)
Provisions for other liabilities and charges	5	(68)		(206)
Total operating credit impairment losses, provisions and charges		(444)		(275)
Profit before tax		187		589
Tax on profit	6	(48)		(170)
Profit after tax		139		419
Attributable to:
Equity holders of the parent		128		410
Non-controlling interests	27	11		9
Profit after tax		139		419

Condensed Consolidated Statement of Comprehensive Income (unaudited)

For the half year to 30 June 2020 and the half year to 30 June 2019

	Half year to		Half year to
	30 June 2020		30 June 2019
	£m		£m
Profit after tax	139		419
Other comprehensive income/(expense) that may be reclassified to profit or loss subsequently:
Movement in fair value reserve (debt instruments):
-          Change in fair value	146		167
-          Income statement transfers	(166)		(152)
-          Taxation	5		(4)
	(15)		11
Cash flow hedges:
-          Effective portion of changes in fair value	2,607		360
-          Income statement transfers	(2,041)		(42)
-          Taxation	(161)		(82)
	405		236
Currency translation on foreign operations	(1)		-
Net other comprehensive income that may be reclassified to profit or loss subsequently	389		247
Other comprehensive income/(expense) that will not be reclassified to profit or loss subsequently:
Pension remeasurement:
-          Change in fair value	(376)		(280)
-          Taxation	97		70
	(279)		(210)
Own credit adjustment:
-          Change in fair value	20		(58)
-          Taxation	(5)		15
	15		(43)
Net other comprehensive expense that will not be reclassified to profit or loss subsequently	(264)		(253)
Total other comprehensive income/(expense) net of tax	125		(6)
Total comprehensive income	264		413
Attributable to:
Equity holders of the parent	254		1,528
Non-controlling interests	10		21
Total comprehensive income	264		413

Condensed Consolidated Balance Sheet (unaudited)

At 30 June 2020 and 31 December 2019

		30 June 2020		31 December 2019
	Notes	£m		£m
Assets
Cash and balances at central banks		30,276		21,180
Financial assets at fair value through profit or loss:
-          Derivative financial instruments	8	5,245		3,316
-          Other financial assets at fair value through profit or loss	9	224		386
Financial assets at amortised cost:
-          Loans and advances to customers	10	211,007		207,287
-          Loans and advances to banks		1,980		1,855
-          Reverse repurchase agreements - non-trading	12	23,901		23,636
-          Other financial assets at amortised cost	13	4,879		7,056
Financial assets at fair value through other comprehensive income	14	10,338		9,747
Interests in other entities	15	127		117
Intangible assets	16	1,716		1,766
Property, plant and equipment		1,819		1,967
Current tax assets		249		200
Retirement benefit assets	24	521		669
Other assets		3,426		2,520
Total assets		295,708		281,702
Liabilities
Financial liabilities at fair value through profit or loss:
-          Derivative financial instruments	8	1,419		1,448
-          Other financial liabilities at fair value through profit or loss	17	1,620		1,713
Financial liabilities at amortised cost:
-          Deposits by customers	18	190,018		181,883
-          Deposits by banks	19	17,993		14,353
-          Repurchase agreements - non-trading	20	20,786		18,286
-          Debt securities in issue	21	40,558		41,129
-          Subordinated liabilities	22	3,257		3,528
Other liabilities		2,772		2,344
Provisions	23	481		572
Deferred tax liabilities		203		149
Retirement benefit obligations	24	402		280
Total liabilities		279,509		265,685
Equity
Share capital		3,105		3,105
Share premium		5,620		5,620
Other equity instruments	26	2,191		2,191
Retained earnings		4,329		4,546
Other reserves		784		395
Total shareholders' equity		16,029		15,857
Non-controlling interests	27	170		160
Total equity		16,199		16,017
Total liabilities and equity		295,708		281,702

Condensed Consolidated Cash Flow Statement (unaudited)

For the half year to 30 June 2020 and the half year to 30 June 2019

	Half year to		Half year to
	30 June 2020		30 June 2019
	£m		£m
Cash flows from operating activities
Profit after tax	139		419
Adjustments for:
Non-cash items included in profit	778		86
Change in operating assets	(4,172)		1,135
Change in operating liabilities	10,669		1,328
Corporation taxes paid	(110)		(166)
Effects of exchange rate differences	891		(334)
Net cash flows from operating activities	8,195		2,468
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets	(151)		(66)
Proceeds from sale of property, plant and equipment and intangible assets	92		32
Purchase of financial assets at amortised cost and financial assets at fair value through other comprehensive income	(2,626)		(4,141)
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at fair value through other comprehensive income	2,581		4,259
Net cash flows from investing activities	(104)		84
Cash flows from financing activities
Issue of debt securities and subordinated notes	4,097		2,770
Issuance costs of debt securities and subordinated notes	(10)		(9)
Repayment of debt securities and subordinated notes	(6,133)		(4,693)
Repurchase of preference shares and other equity instruments	-		(14)
Dividends paid on ordinary shares	-		(164)
Dividends paid on preference shares and other equity instruments	(82)		(80)
Net cash flows from financing activities	(2,128)		(2,190)
Change in cash and cash equivalents	5,963		362
Cash and cash equivalents at beginning of the period	27,817		26,029
Effects of exchange rate changes on cash and cash equivalents	94		3
Cash and cash equivalents at the end of the period	33,874		26,394
Cash and cash equivalents consist of:
Cash and balances at central banks	30,276		21,936
Less: regulatory minimum cash balances	(772)		(670)
	29,504		21,266
Net trading other cash equivalents	-		-
Net non-trading other cash equivalents	4,370		5,128
Cash and cash equivalents at the end of the period	33,874		26,394

Consolidated Statement of Changes in Equity (unaudited)

For the half year to 30 June 2020 and the half year to 30 June 2019

							Other reserves										Non-controlling interests
	Share capital		Share premium		Other equity instruments		Fair value		Cash flow hedging		Currency translation		Retained earnings
															Total				Total
	£m		£m		£m		£m		£m		£m		£m		£m		£m		£m
At 1 January 2020	3,105		5,620		2,191		23		371		1		4,546		15,857		160		16,017
Profit after tax	-		-		-		-		-		-		128		128		11		139
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	-		-		-		(15)		-		-		-		(15)		-		(15)
- Cash flow hedges	-		-		-		-		405		-		-		405		-		405
- Pension remeasurement	-		-		-		-		-		-		(278)		(278)		(1)		(279)
- Own credit adjustment	-		-		-		-		-		-		15		15		-		15
- Currency translation on foreign operations	-		-		-		-		-		(1)		-		(1)		-		(1)
Total comprehensive income	-		-		-		(15)		405		(1)		(135)		254		10		264
Dividends on preference shares and other equity instruments	-		-		-		-		-		-		(82)		(82)		-		(82)
At 30 June 2020	3,105		5,620		2,191		8		776		-		4,329		16,029		170		16,199
At 1 January 2019	3,119		5,620		1,991		23		256		5		4,744		15,758		151		15,909
Profit after tax	-		-		-		-		-		-		410		410		9		419
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	-		-		-		11		-		-		-		11		-		11
- Cash flow hedges	-		-		-		-		236		-		-		236		-		236
- Pension remeasurement	-		-		-		-		-		-		(209)		(209)		(1)		(210)
- Own credit adjustment	-		-		-		-		-		-		(43)		(43)		-		(43)
Total comprehensive income	-		-		-		11		236		-		158		405		8		413
Repurchase of preference shares and other equity instruments	(14)		-		-		-		-		-		-		(14)		-		(14)
Dividends on ordinary shares	-		-		-		-		-		-		(164)		(164)		-		(164)
Dividends on preference shares and other equity instruments	-		-		-		-		-		-		(80)		(80)		-		(80)
At 30 June 2019	3,105		5,620		1,991		34		492		5		4,658		15,905		159		16,064

1. ACCOUNTING POLICIES

The financial information in these Condensed Consolidated Interim Financial Statements does not constitute statutory accounts as defined in section 434 of the UK Companies Act 2006. Statutory accounts for the year ended 31 December 2019 have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) of the UK Companies Act 2006.

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

The Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting', as issued by the International Accounting Standards Board (IASB) and adopted by the European Union, and the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority (FCA). They do not include all the information and disclosures normally required for full annual financial statements and should be read in conjunction with the Consolidated Financial Statements of Santander UK plc (the Santander UK group) for the year ended 31 December 2019 which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union. Those Consolidated Financial Statements were also prepared in accordance with International Financial Reporting Standards as issued by the IASB including interpretations issued by the IFRS Interpretations Committee (IFRIC) of the IASB (together IFRS). The Santander UK group has also complied with its legal obligation to comply with International Financial Reporting Standards as adopted by the European Union as there are no applicable differences between the two frameworks for the periods presented.

The same accounting policies, presentation and methods of computation are followed in these Condensed Consolidated Interim Financial Statements as were applied in the presentation of the Santander UK group's 2019 Annual Report.

At 30 June 2020, for the Santander UK group, there were no significant new or revised standards and interpretations, and amendments thereto, which have been issued but which are not yet effective or which have otherwise not been early adopted where permitted.

Going concern

In light of the current economic uncertainty, the Directors updated their going concern assessment in preparing these Condensed Consolidated Interim Financial Statements. After making enquiries, the Directors have a reasonable expectation that Santander UK has adequate resources to continue in operational existence for at least twelve months from the date of this report and, therefore, having reassessed the principal risks and uncertainties, the Directors consider it appropriate for the Condensed Consolidated Interim Financial Statements to be prepared on a going concern basis.

In making their going concern assessment in connection with preparing the Condensed Consolidated Interim Financial Statements, the Directors considered a wide range of information that included Santander UK's long-term business and strategic plans, forecasts and projections, estimated capital, funding and liquidity requirements, contingent liabilities and the reasonably possible changes in trading performance arising from potential economic, market and product developments. The Directors' assessment specifically considered the impacts of Covid-19, including for the following areas:

Economic scenarios: These underpin our IFRS 9 ECL impairment allowances and are discussed in detail in the Credit risk section of the Risk review. The Directors reviewed the economic scenarios, revised as a result of Covid-19, to ensure that they captured the wide range of potential outcomes for the UK economy. These include a re-emergence of the virus and further lockdown measures being imposed, a slower recovery that is more akin to the 'U' shape of past recessions, and hysteresis effects caused by higher and longer unemployment rates.

Liquidity: Although the key aim of the UK Government financial support measures introduced in H120 was to limit damage to the wider economy from Covid-19, they had the side-effect of reducing any potential liquidity risks arising due to Covid-19. Although Covid-19 did not trigger a liquidity stress, its immediate negative impacts on liquidity, such as the drawing of committed credit and liquidity facilities, were largely offset by deposits from those same drawings as corporates reduced their spending. Similarly, the impact of the initial effective shutdown of the mortgage market and the payment holidays granted to customers was offset by better than expected retail deposit balances as customers reduced their spending.

Capital: Santander UK remains strongly capitalised and Covid-19 did not trigger a capital stress. 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 over the first two years of the scenario on the core banking system than their 2019 Stress Test, where our CET1 drawdown was the lowest across UK banks and we exceeded CET1 capital ratio and Tier 1 Leverage ratio hurdle rates across the projection horizon. In line with other UK banks, we also announced that we will not pay quarterly or interim dividends, accrue for dividends, or make share buybacks on ordinary shares until the end of 2020.

Customers: Santander UK has supported many thousands of individuals and businesses affected by Covid-19 with a range of measures, including payment holidays on mortgages, personal loans and credit cards as well as taking an active part in UK Government loan schemes to help businesses. We are working with those customers who took a payment holiday to understand their individual situations and help them resume payments.

Operations: All our operations continue to operate effectively with a significant majority of staff working from home and the majority of branches remaining open and returning to more normal hours. The current operating model could be sustained indefinitely with additional resilience being continuously implemented and is not affecting our ability to operate all our services, or raising concerns about our Business Continuity Planning, and

Key suppliers: Suppliers are being closely monitored in line with our Third Party Risk Management Framework. No significant service issues have been reported across our cohort of critical suppliers, and no material issues have been reported across our broader (non-critical) supply chain. Isolated supplier impacts have been seen, but these are being managed.

CRITICAL JUDGEMENTS AND ACCOUNTING ESTIMATES

The preparation of the Condensed Consolidated Interim Financial Statements requires management to make judgements and accounting estimates that affect the reported amount of assets and liabilities at the date of the Condensed Consolidated Interim Financial Statements and the reported amount of income and expenses during the reporting period. Management evaluates its judgements and accounting estimates, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, on an ongoing basis. Actual results may differ from these accounting estimates under different assumptions or conditions.

In the course of preparing the Condensed Consolidated Interim Financial Statements, no significant judgements have been made in the process of applying the accounting policies, other than those involving estimations about credit impairment losses, provisions, contingent liabilities and pensions.

There have been no significant changes in the basis upon which judgements and accounting estimates have been determined compared to that applied in the 2019 Annual Report, except as described below. Management have considered the impact of Covid-19 on critical judgements and accounting estimates.

a) Credit impairment allowance

The application of the ECL impairment methodology for calculating credit impairment allowances is highly susceptible to change from period to period. The methodology requires management to make a number of judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts and actual amounts could have a material impact on the Santander UK group's future financial results and financial condition.

The impact of Covid-19 has increased the uncertainty around ECL impairment calculations, and has required management to make additional judgements and accounting estimates that affect the reported amount of assets and liabilities at the reporting date and the reported amount of income and expenses during the reporting period. The key additional judgements arising from the impact of Covid-19 mainly reflect the increased uncertainty around forward-looking economic information and the need for additional post model adjustments.

Key areas of judgement in accounting estimates

The key judgements made by management in applying the ECL impairment methodology are set out below.

-          Definition of default

-          Forward-looking information

-          Probability weights

-          SICR

-          Post model adjustments.

For more on each of these key judgements, including the impact of Covid-19 on them, see the 'Credit risk - Santander UK group level - credit risk management' section of the Risk review.

Sensitivity of ECL allowance

For detailed disclosures, see the 'Credit risk - Santander UK group level - credit risk management' section of the Risk review.

b) Pensions

The Santander UK group operates a number of defined benefit pension schemes as described in Note 28 of the Consolidated Financial Statements in the 2019 Annual Report.

Key areas of judgement in accounting estimates

In H120 management amended the general price inflation assumptions to reflect the expectation that the Retail Price Index would be brought in line with the Consumer Price Index from 2030. For more see the 'Actuarial assumptions' section in Note 24.

Sensitivity of defined benefit pension scheme estimates

Detailed disclosures on the actuarial assumption sensitivities of the schemes can be found in the 'Actuarial assumption sensitivities' section of Note 24.

2. SEGMENTS

Santander UK's principal activity is financial services, mainly in the UK. The business is managed and reported on the basis of four segments, which are strategic business units that offer different products and services, have different customers and require different technology and marketing strategies.

There has been no change to the descriptions of these segments and segmental accounting as set out in Note 2 to the Consolidated Financial Statements in the 2019 Annual Report.

Results by segment

Half year to	Retail 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	235		40		28		19		322
Total operating income	1,628		190		54		4		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)		3		(4)		(11)		(68)
Total operating credit impairment losses, provisions and charges	(303)		(103)		(16)		(22)		(444)
Profit/(loss) before tax	315		(47)		(24)		(57)		187
Revenue from external customers	2,004		237		55		(420)		1,876
Inter-segment revenue	(376)		(47)		(1)		424		-
Total operating income	1,628		190		54		4		1,876
Revenue from external customers includes the following fee and commission income disaggregated by income type:(1)
-          Current account and debit card fees	253		13		5		-		271
-          Insurance, protection and investments	31		-		-		-		31
-          Credit cards	33		-		-		-		33
-          Non-banking and other fees(2)	26		22		23		1		72
Total fee and commission income	343		35		28		1		407
Fee and commission expense	(169)		(9)		(4)		(4)		(186)
Net fee and commission income/(expense)	174		26		24		(3)		221
30 June 2020
Customer loans	184,862		16,604		4,040		3,748		209,254
Total assets(3)	193,692		16,604		4,949		80,463		295,708
Customer deposits	151,091		19,538		6,784		1,855		179,268
Total liabilities	152,171		19,563		7,230		100,545		279,509

(1)        The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.

(2)        Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance.

(3)        Includes customer loans, net of credit impairment loss allowances.

Half year to	Retail Banking		Corporate & Commercial Banking		Corporate & Investment Banking		Corporate Centre		Total
30 June 2019	£m		£m		£m		£m		£m
Net interest income/(expense)	1,465		189		32		(18)		1,668
Non-interest income	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)		4		(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 tax	649		79		(11)		(128)		589
Revenue from external customers	2,166		281		85		(411)		2,121
Inter-segment revenue	(348)		(54)		(6)		408		-
Total operating income/(expense)	1,818		227		79		(3)		2,121
Revenue from external customers includes the following fee and commission income disaggregated by income type:(1)
-          Current account and debit card fees	345		15		14		-		374
-          Insurance, protection and investments	37		-		-		-		37
-          Credit cards	42		-		-		-		42
-          Non-banking and other fees(2)	36		26		24		-		86
Total fee and commission income	460		41		38		-		539
Fee and commission expense	(184)		(12)		(7)		(1)		(204)
Net fee and commission income/(expense)	276		29		31		(1)		335
31 December 2019
Customer loans	180,398		16,297		4,114		4,199		205,008
Total assets(3)	187,556		16,297		4,727		73,122		281,702
Customer deposits	145,050		18,234		6,101		2,331		171,716
Total liabilities	145,917		18,260		6,500		95,008		265,685

(1)        The disaggregation of fees and commission income as shown above is not included in reports provided to the chief operating decision maker but is provided to show the split by reportable segments.

(2)        Non-banking and other fees include mortgages, consumer finance, commitment commission, asset finance, invoice finance and trade finance.

(3)        Includes customer loans, net of credit impairment loss allowances.

3. NET TRADING AND OTHER INCOME

In H120, the Santander UK group repurchased certain debt securities and subordinated liabilities as part of ongoing liability management exercises, resulting in a loss of £17m. In H119, the Santander UK group did not repurchase any of its debt securities or subordinated liabilities.

Included in net trading and other income in H119 is additional consideration of £15m in connection with the 2017 Vocalink Holdings Limited shareholding sale.

4. OPERATING EXPENSES BEFORE CREDIT IMPAIRMENT LOSSES, PROVISIONS AND CHARGES

	Half year to		Half year to
	30 June 2020		30 June 2019
	£m		£m
Staff costs	599		641
Other administration expenses	376		356
Depreciation, amortisation and impairment	270		260
	1,245		1,257

5. CREDIT IMPAIRMENT LOSSES AND PROVISIONS

	Half year to		Half year to
	30 June 2020		30 June 2019
	£m		£m
Credit impairment losses:
Loans and advances to customers	396		108
Recoveries of loans and advances, net of collection costs	(15)		(38)
Off-balance sheet exposures (See Note 23)	(5)		(1)
	376		69
Provisions for other liabilities and charges (excluding off-balance sheet credit exposures) (See Note 23)	68		205
Provisions for residual value and voluntary termination	-		1
	68		206
	444		275

7. DIVIDENDS ON ORDINARY SHARES

No interim dividend was declared on the Company's ordinary shares in issue (H119: £164m).

8. DERIVATIVE FINANCIAL INSTRUMENTS

	30 June 2020						31 December 2019
			Fair value						Fair value
	Notional amount		Assets		Liabilities		Notional amount		Assets		Liabilities
	£m		£m		£m		£m		£m		£m
Derivatives held for trading:
Exchange rate contracts	20,738		624		375		14,149		134		200
Interest rate contracts	47,116		823		216		46,564		718		315
Equity and credit contracts	2,121		161		102		2,474		283		160
Total derivatives held for trading	69,975		1,608		693		63,187		1,135		675
Derivatives held for hedging
Designated as fair value hedges:
Exchange rate contracts	1,758		148		11		1,482		166		2
Interest rate contracts	99,899		1,218		2,235		94,550		1,022		1,488
	101,657		1,366		2,246		96,032		1,188		1,490
Designated as cash flow hedges:
Exchange rate contracts	32,145		3,370		121		28,502		2,023		462
Interest rate contracts	21,500		567		25		17,451		184		35
Equity derivative contracts	-		-		-		-		-		-
	53,645		3,937		146		45,953		2,207		497
Total derivatives held for hedging	155,302		5,303		2,392		141,985		3,395		1,987
Derivative netting(1)			(1,666)		(1,666)				(1,214)		(1,214)
Total derivatives	225,277		5,245		1,419		205,172		3,316		1,448

(1)        Derivative netting excludes the effect of cash collateral, which is offset against the gross derivative position. The amount of cash collateral received that had been offset against the gross derivative assets was £465m (2019: £222m) and the amount of cash collateral paid that had been offset against the gross derivative liabilities was £1,047m (2019: £629m).

9. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

	30 June 2020		31 December 2019
	£m		£m
Loans and advances to customers:
Loans to housing associations	13		12
Other loans	90		80
	103		92
Debt securities	121		294
	224		386

10. LOANS AND ADVANCES TO CUSTOMERS

	30 June 2020		31 December 2019
	£m		£m
Net loans and advances to customers	211,007		207,287

For movements in expected credit losses, see the Credit risk section of the Risk review.

11. SECURITISATIONS AND COVERED BONDS

The gross assets securitised, or for the covered bond programme assigned, at 30 June 2020 and 31 December 2019 were:

	30 June 2020		31 December 2019
	£m		£m
Mortgage-backed master trust structures:
-          Holmes	3,603		4,262
-          Fosse	3,000		3,708
-          Langton	3,142		3,076
	9,745		11,046
Other asset-backed securitisation structures:
-          Motor	321		490
-          Auto ABS UK Loans	1,490		1,532
	1,811		2,022
Total securitisation programmes	11,556		13,068
Covered bond programmes
-          Euro 35bn Global Covered Bond Programme	26,709		23,323
Total securitisation and covered bond programmes	38,265		36,391

The following table sets out the internal and external issuances and redemptions in H120 and H119 for each securitisation and covered bond programme.

	Internal issuances				External issuances				Internal redemptions				External redemptions
	H120		H119		H120		H119		H120		H119		H120		H119
	£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn
Mortgage-backed master trust structures:
-          Holmes	-		-		-		-		0.1		-		0.5		0.8
Other asset-backed securitisation structures:
-          Motor	-		-		-		-		0.1		0.1		0.1		0.2
-          Auto ABS UK Loans	-		-		-		-		-		-		0.1		0.1
Covered bond programme	-		-		3.0		1.9		-		-		1.8		-
	-		-		3.0		1.9		0.2		0.1		2.5		1.1

23. PROVISIONS

 

	Conduct remediation
	PPI		Other products		Bank Levy		Property		Off balance sheet ECL		Regulatory and other		Total
£m															£m		£m		£m		£m		£m		£m
At 1 January 2020	189		25		46		59		78		175		572
Additional provisions	-		-		-		1		-		82		83
Provisions released	-		(5)		-		(2)		(5)		(8)		(20)
Utilisation	(38)		-		(39)		(7)		-		(70)		(154)
At 30 June 2020	151		20		7		51		73		179		481

Conduct remediation

At 30 June 2020, the remaining provision for Payment Protection Insurance (PPI) redress and related costs was £151m (2019: £189m). There was no additional provision 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 c 290,000 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.

The provision for conduct remediation recognised represents management's best estimate of Santander UK's liability in respect of mis-selling of PPI policies.

Regulatory and other

In H120 there was a charge of £17m relating to breaches of certain requirements to provide SMS warning alerts to customers regarding overdraft charges in our Retail Banking business. It also included a charge for operational risk provisions of £37m, and smaller charges for legal and redundancy provisions.

24. RETIREMENT BENEFIT PLANS 

The amounts recognised in the balance sheet were as follows:

	30 June 2020		31 December 2019
	£m		£m
Assets/(liabilities)
Funded defined benefit pension scheme - surplus	521		669
Funded defined benefit pension scheme - deficit	(358)		(239)
Unfunded pension and post retirement medical benefits	(44)		(41)
Total net assets	119		389

a) Defined contribution pension plans

An expense of £33m (H119: £34m) was recognised for defined contribution plans in the period and is included in staff costs classified within operating expenses (see Note 4).

b) Defined benefit pension schemes

Actuarial assumptions

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

	30 June 2020	31 December 2019
	%	%
To determine benefit obligations:
-          Discount rate for scheme liabilities	1.4	2.1
-          General price inflation	2.9	3.0
-          General salary increase	1.0	1.0
-          Expected rate of pension increase	2.8	2.9

	Years	Years
Longevity at 60 for current pensioners, on the valuation date:
-          Males	27.3	27.3
-          Females	29.8	29.8
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
-          Males	28.9	28.9
-          Females	31.3	31.3

25. CONTINGENT LIABILITIES AND COMMITMENTS

	30 June 2020		31 December 2019
	£m		£m
Guarantees given to third parties	1,026		1,198
Formal standby facilities, credit lines and other commitments with original term to maturity of:
- One year or less	16,585		18,248
- Later than one year	21,029		22,149
	38,640		41,595

Other legal actions and regulatory matters

Santander UK engages in discussion, and co-operates, with the FCA, PRA, CMA and other regulators and government agencies in various jurisdictions in their supervision and review of Santander UK including reviews exercised under statutory powers, regarding its interaction with past and present customers, both as part of general thematic work and in relation to specific products, services and activities. During the ordinary course of business, Santander UK is also subject to complaints and threatened legal proceedings brought by or on behalf of current or former employees, customers, investors or other third parties, in addition to legal and regulatory reviews, challenges and tax or enforcement investigations or proceedings in various jurisdictions. All such matters are assessed periodically to determine the likelihood of Santander UK incurring a liability.

In those instances where it is concluded that it is not yet probable that a quantifiable payment will be made, for example because the facts are unclear or further time is required to fully assess the merits of the case or to reasonably quantify the expected payment, no provision is made. In addition, where it is not currently practicable to estimate the possible financial effect of these matters, no provision is made.

Payment Protection Insurance

In relation to a specific PPI portfolio of complaints, a legal dispute regarding allocation of liability is ongoing and remains in its early stages. The dispute relates to the liability for PPI mis-selling complaints relating to pre-2005 PPI policies underwritten by Financial Insurance Company Ltd (FICL) and Financial Assurance Company Ltd (FACL) and involves two Santander UK plc subsidiaries, Santander Cards UK Limited and Santander Insurance Services Limited (the Santander Entities). During the relevant period, FICL and FACL were owned by Genworth Financial International Holdings, Inc. In July 2015 AXA S.A. (AXA) acquired FICL and FACL from Genworth. In July 2017, Santander UK plc notified AXA that the Santander Entities did not accept liability for losses on PPI policies relating to this period. Santander UK plc entered into a Complaints Handling Agreement (CHA) with FICL and FACL pursuant to which it agreed to handle complaints on their behalf, and FICL and FACL agreed to pay redress assessed to be due to relevant policyholders on a without prejudice basis.

A related dispute between AXA and (1) Genworth Financial International Holdings, Inc. and (2) Genworth Financial, Inc. (Genworth) concerning, inter alia, the proper construction of an alleged obligation to make payment on demand of a sum equal to 90% of all applicable PPI mis-selling losses (the Construction Issue) in a sale and purchase agreement dated 17 September 2015 (SPA) was determined by the High Court (Court) in December 2019. The Santander Entities were joined as third parties in connection with an application for declaratory relief by Genworth. This application related to Genworth's assertion that upon any payment to AXA under the SPA, Genworth would have rights of subrogation against the Santander Entities (the Subrogation Issue). The Court found against Genworth and in favour of AXA on the Construction Issue, and against Genworth and in favour of the Santander Entities in relation to the Subrogation Issue. Genworth subsequently failed in its application for permission on appeal.

On 20 July 2020 Genworth issued a press release stating that it had reached a settlement with AXA. Genworth has agreed to pay AXA £624m in aggregate for losses incurred by AXA or its subsidiaries relating to the subject of the dispute. This sum is broken down into: (i) £100m that has already been paid by Genworth as an interim payment; (ii) a £100m payment due to be paid on 23 July 2020; (iii) two payments deferred until 2022, totalling £317m and (iv) an estimated £107m for claimed mis-selling losses that are still being processed.

More generally, there are ongoing factual issues to be resolved which may have legal consequences including in relation to liability. These issues create uncertainties which mean that it is not currently practicable to reliably predict the resolution of the matter including timing or the significance of the possible impact. The Regulatory and other provision in Note 23 includes our best estimate of Santander UK's liability to the specific portfolio. Further information has not been provided on the basis that it would be seriously prejudicial to Santander UK's interests in connection with the dispute.

In addition, and in relation to PPI more generally, there are legal claims being made by Claims Management Companies challenging the FCA's industry guidance on the treatment of Plevin /recurring non-disclosure assessments. No provision has been made as it is not possible to make a reliable estimate of the possible outflow of economic resource relating to this risk.

German dividend tax arbitrage transactions

In June 2018 the Cologne Criminal Prosecution Office and the German Federal Tax Office commenced an investigation in relation to the historical involvement of Santander UK plc, Santander Financial Services plc and Cater Allen International Limited (all subsidiaries of Santander UK Group Holdings plc) in German dividend tax arbitrage transactions (known as cum/ex transactions). These transactions allegedly exploited a feature of a specific German settlement mechanism through short-selling and complex derivative structuring which resulted in the German government either refunding withholding tax where such tax had not been paid or refunding it more than once. The German authorities are investigating numerous institutions and individuals in connection with alleged transactions and practices which may be found to be illegal under German law.

Since commencement of the investigation we have cooperated with the German authorities and, with the assistance of external experts, to progress an internal investigation into the matters in question. From Santander UK plc's perspective the investigation is focused principally on the period 2009-2011 and remains on-going. There remain factual issues to be resolved which may have legal consequences including potentially material financial penalties. These issues create uncertainties which mean that it is difficult to predict the resolution of the matter including timing or the significance of the possible impact. Any potential losses, claims or expenses suffered or incurred by Santander Financial Services plc in respect of these matters have been fully indemnified by Santander UK plc, as part of the ring-fencing transfer scheme between Santander UK plc, Santander Financial Services plc and Banco Santander SA.

30. FINANCIAL INSTRUMENTS

a) Measurement basis of financial assets and liabilities

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. Note 1 to the Consolidated Financial Statements in the 2019 Annual Report describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.

b) Fair values of financial instruments carried at amortised cost

The following tables analyse the fair value of the financial instruments carried at amortised cost at 30 June 2020 and 31 December 2019. It does not include fair value information for financial assets and financial liabilities carried at amortised cost if the carrying amount is a reasonable approximation of fair value. Details of the valuation methodology of the financial assets and financial liabilities carried at amortised cost can be found in Note 38(e) to the Consolidated Financial Statements in the 2019 Annual Report.

	30 June 2020				31 December 2019
	Fair Value		Carrying value		Fair Value		Carrying value
	£m		£m		£m		£m
Assets
Loans and advances to customers	215,178		211,007		211,796		207,287
Loans and advances to banks	1,980		1,980		1,855		1,855
Reverse repurchase agreements - non-trading	23,921		23,901		23,634		23,636
Other financial assets at amortised cost	5,064		4,879		7,110		7,056
	246,143		241,767		244,395		239,834
Liabilities
Deposits by customers	190,182		190,018		182,013		181,883
Deposits by banks	18,004		17,993		14,363		14,353
Repurchase agreements - non-trading	20,773		20,786		18,292		18,286
Debt securities in issue	41,395		40,558		42,694		41,129
Subordinated liabilities	3,707		3,257		4,220		3,528
	274,061		272,612		261,582		259,179

c) Fair values of financial instruments measured at fair value

The following tables summarise the fair values of the financial assets and liabilities accounted for at fair value at 30 June 2020 and 31 December 2019, analysed by their levels in the fair value hierarchy - Level 1, Level 2 and Level 3.

		30 June 2020								31 December 2019
		Level 1		Level  2		Level 3		Total		Level 1		Level 2		Level 3		Total		Valuation
		£m		£m		£m		£m		£m		£m		£m		£m		technique
Assets
Derivative financial instruments	Exchange rate contracts	-		4,140		2		4,142		-		2,317		6		2,323		A
	Interest rate contracts	-		2,595		13		2,608		-		1,915		9		1,924		A & C
	Equity and credit contracts	-		112		49		161		-		223		60		283		B & D
	Netting	-		(1,666)		-		(1,666)		-		(1,214)		-		(1,214)
		-		5,181		64		5,245		-		3,241		75		3,316
Other financial assets at FVTPL	Loans and advances to customers	-		-		103		103		-		-		92		92		A
	Debt securities	-		-		121		121		-		-		294		294		A, B & D
		-		-		224		224		-		-		386		386
Financial assets at FVOCI	Debt securities	9,855		453		-		10,308		9,209		482		-		9,691		D
	Loans and advances to customers	-		-		30		30		-		-		56		56		D
		9,855		453		30		10,338		9,209		482		56		9,747
Total assets at fair value		9,855		5,634		318		15,807		9,209		3,723		517		13,449
Liabilities
Derivative financial instruments	Exchange rate contracts	-		507		-		507		-		660		4		664		A
	Interest rate contracts	-		2,474		2		2,476		-		1,836		2		1,838		A & C
	Equity and credit contracts	-		74		28		102		-		134		26		160		B & D
	Netting	-		(1,666)		-		(1,666)		-		(1,214)		-		(1,214)
		-		1,389		30		1,419		-		1,416		32		1,448
Other financial liabilities at FVTPL	Debt securities in issue	-		1,189		6		1,195		-		1,099		6		1,105		A
	Structured deposits	-		415		-		415		-		406		29		435		A
	Collateral and associated financial guarantees	-		-		10		10		-		147		26		173		D
		-		1,604		16		1,620		-		1,652		61		1,713
Total liabilities at fair value		-		2,993		46		3,039		-		3,068		93		3,161

d) Fair value adjustments

The internal models incorporate assumptions that Santander UK believes would be made by a market participant to establish fair value. Fair value adjustments are adopted when Santander UK considers that there are additional factors that would be considered by a market participant that are not incorporated in the valuation model.

Santander UK classifies fair value adjustments as either 'risk-related' or 'model-related'. The fair value adjustments form part of the portfolio fair value and are included in the balance sheet values of the product types to which they have been applied. The magnitude and types of fair value adjustment are listed in the following table:

	30 June 2020		31 December 2019
	£m		£m
Risk-related:
- Bid-offer and trade specific adjustments	(18)		(12)
- Uncertainty	25		17
- Credit risk adjustment	9		6
- Funding fair value adjustment	9		6
	25		17
Model-related	1		-
Day One profit	1		-
	27		17

e) Internal models based on information other than market data (Level 3)

Reconciliation of fair value measurement in Level 3 of the fair value hierarchy

The following table sets out the movements in Level 3 financial instruments in H120 and H119:

							Assets			Liabilities
	Derivatives		Other financial assets at FVTPL		Financial assets at FVOCI		Total			Derivatives		Other financial liabilities at FVTPL		Total
	£m		£m		£m		£m			£m		£m		£m
At 1 January 2020	75		386		56		517			(32)		(61)		(93)
Total gains/(losses) recognised in profit or loss:
- Fair value movements	6		(2)		1		5			(1)		15		14
- Foreign exchange and other movements	-		(2)		-		(2)			-		2		2
Transfers out	-		-		-		-			-		28		28
Netting(1)	-		(37)		-		(37)			-		-		-
Additions	-		-		-		-			-		(1)		(1)
Sales	-		(11)		(19)		(30)			-		-		-
Settlements	(17)		(110)		(8)		(135)			3		1		4
At 30 June 2020	64		224		30		318			(30)		(16)		(46)
Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period	6		(4)		1		3			(1)		17		16
At 1 January 2019	94		976		73		1,143			(66)		(49)		(115)
Total gains/(losses) recognised in profit or loss:
- Fair value movements	7		1		-		8			(3)		(5)		(8)
- Foreign exchange and other movements	-		3		-		3			-		(3)		(3)
Transfers in	-		11		-		11			-		-		-
Netting(1)	-		(254)		-		(254)			-		-		-
Additions	3		188		-		191			-		(2)		(2)
Settlements	(15)		(269)		(4)		(288)			31		2		33
At 30 June 2019	89		656		69		814			(38)		(57)		(95)
Gains/(losses) recognised in profit or loss/other comprehensive income relating to assets and liabilities held at the end of the period	7		4		-		11			(3)		(8)		(11)

(1)        This relates to the effect of netting on the fair value of the credit linked notes due to a legal right of set-off between the principal amounts of the senior notes and the associated cash deposits. For more, see 'ii) Credit protection entities' in Note 19 in the 2019 Annual Report.

31. EVENTS AFTER THE BALANCE SHEET DATE

There 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 statements.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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